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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
______ to ______
Commission File Number 1-8962.
PINNACLE WEST CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
ARIZONA
(State or other jurisdiction 86-0512431
of incorporation or organization) (I.R.S. Employer Identification No.)
400 East Van Buren Street, Suite 700
Phoenix, Arizona 85004 (602) 379-2500
(Address of principal executive (Registrant's telephone number,
offices, including zip code) including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
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Common Stock, ................................. New York Stock Exchange
No Par Value Pacific Stock Exchange
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Aggregate Market Value
of Shares Held by
Title of Each Class Shares Outstanding as Non-affiliates as of
of Voting Stock of March 25, 1999 March 25, 1999
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Common Stock, No Par Value.... 84,644,979 $3,211,218,891(a)
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(a) Computed by reference to the closing price on the composite tape on
March 25, 1999, as reported by the Wall Street Journal.
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its Annual
Meeting of Shareholders to be held on May 19, 1999 are incorporated by reference
into Part III hereof.
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TABLE OF CONTENTS
Page
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GLOSSARY ........................................................... 1
PART I
Item 1. Business................................................... 3
Item 2. Properties................................................. 14
Item 3. Legal Proceedings.......................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........ 19
Supplemental Item.
Executive Officers of the Registrant....................... 19
PART II
Item 5. Market for Registrant's Common Stock and Related
Security Holder Matters.................................... 20
Item 6. Selected Consolidated Financial Data....................... 21
Item 7. Financial Review........................................... 23
Item 7A Quantitative and Qualitative Disclosures about
Market Risk................................................ 30
Item 8. Financial Statements and Supplementary Data................ 31
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 57
PART III
Item 10. Directors and Executive Officers of the Registrant......... 57
Item 11. Executive Compensation..................................... 57
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 57
Item 13. Certain Relationships and Related Transactions............. 57
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement
Schedules, and Reports on Form 8-K......................... 58
SIGNATURES............................................................... 76
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GLOSSARY
ACC -- Arizona Corporation Commission
ACC STAFF -- Staff of the Arizona Corporation Commission
AFUDC -- Allowance for Funds Used During Construction
AMENDMENTS -- Clean Air Act Amendments of 1990
ANPP -- Arizona Nuclear Power Project, also known as Palo Verde
APS -- Arizona Public Service Company
CC&N -- Certificate of convenience and necessity
CHOLLA -- Cholla Power Plant
CHOLLA 4 -- Unit 4 of the Cholla Power Plant
COMPANY -- Pinnacle West Capital Corporation
CUC -- Citizens Utilities Company
DOE -- United States Department of Energy
EITF -- Emerging Issues Task Force
EITF 97-4 -- Emerging Issues Task Force Issue No. 97-4, "Deregulation of the
Pricing of Electricity -- Issues Related to the Applications of FASB Statements
No. 71, Accounting for the Effects of Certain Types of Regulation, and No. 101,
Regulated Enterprises -- Accounting for the Discontinuation of Application of
FASB Statement No. 71"
EITF 98-10 -- Emerging Task Force Issue No. 98-10, "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities"
EL DORADO -- El Dorado Investment Company
ENERGY ACT -- National Energy Policy Act of 1992
EPA -- United States Environmental Protection Agency
FASB -- Financial Accounting Standards Board
FERC -- Federal Energy Regulatory Commission
FOUR CORNERS -- Four Corners Power Plant
GAAP -- Generally accepted accounting principles
ITC -- Investment tax credit
KW -- Kilowatt, one thousand watts
KWH -- Kilowatt-hour, one thousand watts per hour
MORTGAGE -- Mortgage and Deed of Trust, dated as of July 1, 1946, as
supplemented and amended
MW -- Megawatt hours, one million watts
MWH -- Megawatt hours, one million watts per hour
1935 ACT -- Public Utility Holding Company Act of 1935
NGS -- Navajo Generating Station
NRC -- Nuclear Regulatory Commission
PACIFICORP -- An Oregon-based utility company
PALO VERDE -- Palo Verde Nuclear Generating Station
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SEC -- Securities and Exchange Commission
SFAS NO. 34 -- Statement of Financial Accounting Standards No. 34,
"Capitalization of Interest Cost"
SFAS NO. 71 -- Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation"
SFAS NO. 123 -- Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation"
SFAS NO. 130 -- Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income"
SFAS NO. 133 -- Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities"
SALT RIVER PROJECT -- Salt River Project Agricultural Improvement and Power
District
SUNCOR -- SunCor Development Company
USEC -- United States Enrichment Corporation
WASTE ACT -- Nuclear Waste Policy Act of 1982, as amended
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PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
We were incorporated in 1985 under the laws of the State of Arizona and
are engaged, through our subsidiaries, in the generation and distribution of
electricity; in real estate development; and in venture capital investment. Our
principal executive offices are located at 400 East Van Buren Street, Suite 700,
Phoenix, Arizona 85004 (telephone 602-379-2500).
At December 31, 1998, we employed approximately 7,333 people, including
the employees of our subsidiaries. Of these employees, 6,075 were employees of
our major subsidiary, APS, and employees assigned to joint projects of APS where
APS serves as a project manager, and approximately 1,258 were our employees and
employees of our other subsidiaries.
Our other subsidiaries, in addition to APS, include SunCor and El
Dorado. See "Business of SunCor Development Company" and "Business of El Dorado
Investment Company" in this Item for further information regarding SunCor and El
Dorado.
This document contains "forward-looking statements" that involve risks
and uncertainties. Words such as "estimates," "expects," "anticipates," "plans,"
"believes," "projects," and similar expressions identify forward-looking
statements. These risks and uncertainties include, but are not limited to, the
ongoing restructuring of the electric industry; the outcome of the regulatory
proceedings relating to the restructuring; regulatory, tax, and environmental
legislation; the ability of APS to successfully compete outside its traditional
regulated markets; regional economic conditions, which could affect customer
growth; the cost of debt and equity capital; weather variations affecting
customer usage; technological developments in the electric industry; Year 2000
issues; and the strength of the real estate market. See "Business of Arizona
Public Service Company -- Competition" for a discussion of some of these
factors.
ARIZONA CORPORATION COMMISSION AFFILIATED INTEREST RULES. On March 14,
1990, the ACC issued an order adopting certain rules purportedly applicable only
to a certain class of public utilities regulated by the ACC, including APS. The
rules define the terms "public utility holding company" and "affiliate" with
respect to public service corporations regulated by the ACC in such a manner as
to include us and all of our non-public service corporation subsidiaries. By
their terms, the rules, among other things, require public utilities, such as
APS, to receive ACC approval prior to (1) obtaining an interest in, or
guaranteeing or assuming the liabilities of, any affiliate not regulated by the
ACC; (2) lending to any such affiliate (except for short-term loans in an amount
less than $100,000); or (3) using utility funds to form a subsidiary or divest
itself of any established subsidiary. The rules also prevent a utility from
transacting business with an affiliate unless the affiliate agrees to provide
the ACC "access to the books and records of the affiliate to the degree required
to fully audit, examine or otherwise investigate transactions between the public
utility and the affiliate." In addition, the rules provide that an "affiliate or
holding company may not divest itself of, or otherwise relinquish control of, a
public utility without thirty (30) days prior written notification to the [ACC]"
and requires all public utilities subject to them and all public utility holding
companies to annually "provide the [ACC] with a description of diversification
plans for the current calendar year that have been approved by the Boards of
Directors." The rules have not had, nor do we expect the rules to have, a
material adverse impact on our business or operations.
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BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
Following is a discussion of the business of APS, our major subsidiary.
GENERAL
APS was incorporated in 1920 under the laws of Arizona and is engaged
principally in serving electricity in the State of Arizona. The principal
executive offices of APS are located at 400 North Fifth Street, Phoenix, Arizona
85004 (telephone 602-250-1000). We own all of the outstanding shares of APS'
common stock.
APS is Arizona's largest electric utility, with 799,000 customers, and
provides wholesale or retail electric service to the entire state of Arizona
with the exception of Tucson and about one-half of the Phoenix area. During
1998, no single purchaser or user of energy accounted for more than 2% of total
electric revenues. At December 31, 1998, APS employed 6,075 people, which
includes employees assigned to joint projects where APS is project manager.
COMPETITION
RETAIL
GENERAL. Under current law, APS is not in direct competition with any other
regulated electric utility for electric service in APS' retail service
territory. Nevertheless, APS is subject to varying degrees of competition in
certain territories adjacent to or within areas that it serves that are also
currently served by other utilities in our region (such as Tucson Electric Power
Company, Southwest Gas Corporation, and Citizens Utility Company) as well as
cooperatives, municipalities, electrical districts, and similar types of
governmental organizations (principally Salt River Project).
APS faces competitive challenges from low-cost hydroelectric power and
natural gas fuel, as well as the access of some utilities to preferential
low-priced federal power and other subsidies. In addition, some customers,
particularly industrial and large commercial, may own and operate facilities to
generate their own electric energy requirements. Such facilities may be operated
by the customers themselves or by other entities engaged for such purpose.
ARIZONA ELECTRIC INDUSTRY RESTRUCTURING. See Note 3 of Notes to
Consolidated Financial Statements in Item 8 for a discussion of the electric
industry restructuring in Arizona, including ACC rules for the introduction of
retail electric competition; stranded cost recovery; and Arizona legislative
initiatives. See also "Financial Review - Competition and Industry
Restructuring" in Item 7.
WHOLESALE
GENERAL. APS competes with other utilities, power marketers, and
independent power producers in the sale of electric capacity and energy in the
wholesale market. APS expects that competition to sell capacity will remain
vigorous. APS' rates for wholesale power sales and transmission services are
subject to regulation by the FERC. During 1998, approximately 16% of APS'
electric operating revenues resulted from such sales and charges.
The National Energy Policy Act of 1992 (the "Energy Act") has promoted
increased competition in the wholesale electric power markets. The Energy Act
reformed provisions of the Public Utility Holding Company Act of 1935 (the "1935
Act") and the Federal Power Act to remove certain barriers to competition for
the supply of electricity. For example, the Energy Act permits the FERC to order
transmission access for third parties to transmission facilities owned by
another entity so that independent suppliers and other third parties can sell at
wholesale to customers wherever located. The Energy Act does not, however,
permit the FERC to issue an order requiring transmission access to retail
customers.
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Effective July 9, 1996, a FERC decision requires all electric utilities
subject to the FERC's jurisdiction to file transmission tariffs which provide
competitors with access to transmission facilities comparable to the
transmission owners' access for wholesale transactions, establishes information
requirements, and provides for recovery of certain wholesale stranded costs.
Retail stranded costs resulting from a state-authorized retail direct-access
program are the responsibility of the states, unless a state lacks authority to
impose rates to recover such costs, in which case FERC will consider doing so.
APS has filed a revised open access tariff in accordance with this decision. APS
does not believe that this decision will have a material adverse impact on its
results of operations or financial position.
REGULATORY ASSETS
APS' major regulatory assets are deferred income taxes and rate
synchronization cost deferrals. These items, combined with miscellaneous
regulatory assets and liabilities, amounted to approximately $900 million at
December 31, 1998. Under a 1996 regulatory agreement, the ACC accelerated the
amortization of substantially all of APS' regulatory assets to an eight-year
period that will end June 30, 2004. APS' existing regulatory orders and the
current regulatory environment support APS' accounting practices related to
regulatory assets. If rate recovery of these assets is no longer probable,
whether due to competition or regulatory action, APS would be required to write
off the remaining balance as an extraordinary charge to expense. This could have
a material impact on APS' financial statements. See Notes 1, 3, and 4 of Notes
to Consolidated Financial Statements in Item 8 for additional information.
COMPETITIVE STRATEGIES
APS is pursuing strategies to maintain and enhance its competitive
position. These strategies include (i) cost management, with an emphasis on the
reduction of variable costs (fuel, operations, and maintenance expenses) and on
increased productivity through technological efficiencies; (ii) a focus on APS'
core business through customer service, distribution system reliability,
business segmentation, and the anticipation of market opportunities; (iii) an
emphasis on good regulatory relationships; (iv) asset maximization (e.g., higher
capacity factors and lower forced outage rates); (v) expanding APS' generation
asset base to support growth in the competitive power marketing arena; (vi)
strengthening APS' capital structure and financial condition; (vii) leveraging
core competencies into related areas, such as energy management products and
services; and (viii) establishing a trading floor and implementing a risk
management program to provide for more stability of prices and the ability to
retain or grow incremental margin through more competitive pricing and risk
management. Underpinning APS' competitive strategies are the strong growth
characteristics of APS' service territory. As competition in the electric
utility industry continues to evolve, APS will continue to evaluate strategies
and alternatives that will position us to compete effectively in a more
competitive, restructured industry.
GENERATING FUEL AND PURCHASED POWER
1998 ENERGY MIX
APS' sources of energy during 1998 were: coal - 36.2%; nuclear - 27.5%;
purchased power - 32.3%; and other - 4.0%.
COAL SUPPLY
APS believes that Cholla has sufficient reserves of low sulfur coal
committed to the plant through 2005. In 1998, the current supplier agreed to
allow Cholla to test burn coal from other sources, which led to coal purchases
on the spot market. The current supplier is expected to continue to provide
substantially all of Cholla's low sulfur coal requirements. APS believes there
are sufficient reserves of low sulfur coal available to allow the continued
operation of Cholla for its useful life. APS also believes that Four Corners and
NGS have sufficient reserves of low sulfur coal available for use by those
plants to continue operating them for their useful lives.
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The current sulfur content of coal being used at Four Corners, NGS, and
Cholla is approximately 0.77%, 0.54%, and 0.44%, respectively. In 1998, average
prices paid for coal supplied from the reserves dedicated under existing
contracts were slightly lower, but still comparable to 1997. Escalation
components of existing long-term coal contracts impact future coal prices. In
addition, major price adjustments can occur from time to time as a result of
contract renegotiation.
NGS and Four Corners are located on the Navajo Reservation and held under
easements granted by the federal government as well as leases from the Navajo
Nation. See "Properties- Plant Sites Leased from the Navajo Nation" in Item 2.
APS purchases all of the coal which fuels Four Corners from a coal supplier with
a long-term lease of coal reserves owned by the Navajo Nation and for NGS from a
coal supplier with a long-term lease with the Navajo Nation and the Hopi Tribe.
Coal is supplied to Cholla from a coal supplier who mines all of the coal under
a long-term lease of coal reserves owned by the Navajo Nation, the federal
government, and private landholders. See Note 12 of Notes to Consolidated
Financial Statements in Item 8 for information regarding APS' obligation for
coal mine reclamation.
NATURAL GAS SUPPLY
APS is a party to contracts with a number of natural gas operators and
marketers which allow APS to purchase natural gas in the method APS determines
to be most economic. Currently, APS is purchasing the majority of its natural
gas requirements from 25 companies pursuant to contracts. APS' natural gas
supply is transported pursuant to a firm transportation service contract with El
Paso Natural Gas Company. APS continues to analyze the market to determine the
most favorable source and method of meeting its natural gas requirements.
NUCLEAR FUEL SUPPLY
The fuel cycle for Palo Verde is comprised of the following stages:
+ the mining and milling of uranium ore to produce uranium concentrates,
+ the conversion of uranium concentrates to uranium hexafluoride,
+ the enrichment of uranium hexafluoride,
+ the fabrication of fuel assemblies,
+ the utilization of fuel assemblies in reactors and
+ the storage of spent fuel and the disposal thereof.
The Palo Verde participants have made contractual arrangements to obtain
quantities of uranium concentrates anticipated to be sufficient to meet
operational requirements through 2001. Existing contracts and options could be
utilized to meet approximately 93% of requirements in 2002, 62% of requirements
in 2003, 51% of requirements in 2004, and 44% of requirements from 2005 through
2007. Spot purchases on the uranium market will be made, as appropriate, in lieu
of any uranium that might be obtained through contractual options.
The Palo Verde participants have contracted for 85% of conversion services
required through 2002. The Palo Verde participants have an enrichment services
contract and an enriched uranium product contract that furnish enrichment
services required for the operation of the three Palo Verde units through 2003.
In addition, existing contracts will provide fuel assembly fabrication services
until at least 2003 for each Palo Verde unit, and through contract options,
approximately fifteen additional years are available.
SPENT NUCLEAR FUEL AND WASTE DISPOSAL. Pursuant to the Nuclear Waste Policy
Act of 1982, as amended in 1987 (the "Waste Act"), DOE is obligated to accept
and dispose of all spent nuclear fuel and other high-level radioactive wastes
generated by all domestic power reactors. The NRC, pursuant to the Waste Act,
requires operators of nuclear power reactors to enter into spent fuel disposal
contracts with DOE. APS has done so on its behalf and on behalf of the other
Palo Verde participants. Under the Waste Act, DOE was to develop the facilities
necessary for the storage and disposal of spent nuclear fuel and to have the
first such facility in operation by 1998. That facility was to be a permanent
repository. DOE has announced that such a repository now cannot be
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completed before 2010. In July 1996, the United States Court of Appeals for the
District of Columbia Circuit (D.C. Circuit) ruled that the DOE has an obligation
to start disposing of spent nuclear fuel no later than January 31, 1998. By way
of letter dated December 17, 1996, DOE informed APS and other contract holders
that DOE anticipates that it will be unable to begin acceptance of spent nuclear
fuel for disposal in a repository or interim storage facility by January 31,
1998. In November 1997, the D.C. Circuit issued a Writ of Mandamus precluding
DOE from excusing its own delay on the grounds that DOE has not yet prepared a
permanent repository or interim storage facility. On May 5, 1998, the D.C.
Circuit issued a ruling refusing to order DOE to begin moving spent nuclear
fuel. On July 24, 1998, APS filed a Petition for Review regarding DOE's
obligation to begin accepting spent nuclear fuel. ARIZONA PUBLIC SERVICE COMPANY
V. DEPARTMENT OF ENERGY AND UNITED STATES OF AMERICA, No. 98-1346 (D.C. Cir.).
See "Palo Verde Nuclear Generating Station" in Note 12 of Notes to Financial
Statements in Item 8 for a discussion of interim spent fuel storage costs.
Several bills have been introduced in Congress contemplating the
construction of a central interim storage facility; however, there is resistance
to certain features of these bills both in Congress and the Administration.
Facility funding is a further complication. While all nuclear utilities pay
into a so-called nuclear waste fund an amount calculated on the basis of the
output of their respective plants, the annual Congressional appropriations for
the permanent repository have been for amounts less than the amounts paid into
the waste fund (the balance of which is being used for other purposes).
According to DOE spokespersons, the fund may now be at a level less than needed
to achieve a 2010 operational date for a permanent repository. No funding will
be available for a central interim facility until one is authorized by Congress.
APS has storage capacity in existing fuel storage pools at Palo Verde
which, with certain modifications, could accommodate all fuel expected to be
discharged from normal operation of Palo Verde through about 2002. APS also
believes it could augment that wet storage with new facilities for on-site dry
storage of spent fuel for an indeterminate period of operation beyond 2002,
subject to obtaining any required governmental approvals. One way or another,
APS currently believes that spent fuel storage or disposal methods will be
available for use by Palo Verde to allow its continued operation beyond 2002.
A new low-level waste facility was built in 1995 on-site which could store
an amount of waste equivalent to ten years of normal operation at Palo Verde.
Although some low-level waste has been stored on-site, APS is currently shipping
low-level waste to off-site facilities. APS currently believes that interim
low-level waste storage methods are or will be available for use by Palo Verde
to allow its continued operation and to safely store low-level waste until a
permanent disposal facility is available.
APS believes that scientific and financial aspects of the issues of spent
fuel and low-level waste storage and disposal can be resolved satisfactorily.
However, APS also acknowledges that their ultimate resolution in a timely
fashion will require political resolve and action on national and regional
scales which APS is less able to predict.
PURCHASED POWER AGREEMENTS
In addition to that available from APS' own generating capacity (see
"Properties" in Item 2), APS purchases electricity from other utilities under
various arrangements. One of the most important of these is a long-term contract
with Salt River Project. This contract may be canceled by Salt River Project on
three years' notice and requires Salt River Project to make available, and APS
to pay for, certain amounts of electricity. The amount of electricity is based
in large part on customer demand within certain areas now served by APS pursuant
to a related territorial agreement. The generating capacity available to APS
pursuant to the contract was 292 MW January through May 1998, and starting June
1998 increased to 316 MW. In 1998, APS received approximately 943,354 MWh of
energy under the contract and paid about $43 million for capacity availability
and energy received. See Note 3 of Notes to Consolidated Financial Statements
for a discussion of amendments to agreements with Salt River Project.
In September 1990, APS entered into certain agreements with PacifiCorp
relating principally to sales and purchases of electric power and electric
utility assets. In July 1991 APS sold Cholla 4 to PacifiCorp. As part of the
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transaction, PacifiCorp agreed to make a firm system sale to APS for thirty
years during our summer peak season. The amount of the sale for the first seven
years was 175 MW and it increases after that at APS' option, up to a maximum
amount of 380 MW. APS converted the firm system sales to one-for-one seasonal
capacity exchanges with PacifiCorp on October 31, 1997. On January 1, 1999 APS'
agreements with PacifiCorp provide for 275 MW capacity exchange and beginning in
May 1999, an additional 205 MW capacity exchange begins. In 1998, APS had 275 MW
of generating capacity available from PacifiCorp. APS received approximately
281,217 MWh of energy under the exchange.
During 1996, APS entered into an agreement with Citizens Utilities Company
to build, own, operate, and maintain a combustion turbine in northwest Arizona.
CUC terminated the combustion turbine project in February 1999. APS has notified
CUC that it will retain the rights to the combustion turbine project.
CONSTRUCTION PROGRAM
During the years 1996 through 1998, APS incurred approximately $899 million
in capitalized expenditures. Utility capitalized expenditures for the years 1999
through 2001 are expected to be primarily for expanding transmission and
distribution capabilities to meet customer growth, upgrading existing
facilities, and for environmental purposes. Capitalized expenditures, including
expenditures for environmental control facilities, for the years 1999 through
2001 have been estimated as follows:
(MILLIONS OF DOLLARS)
BY YEAR BY MAJOR FACILITIES
- ----------------------------------- ------------------------------------
1999 $328 Production $236
2000 317 Transmission and Distribution 564
2001 300 General 113
---- Other Projects 32
Total $945 ----
==== Total $945
====
The amounts for 1999 through 2001 exclude capitalized interest costs and
include capitalized property taxes and about $30-$35 million each year for
nuclear fuel. APS conducts a continuing review of its construction program. APS
is considering expanding certain of its operations over the next several years,
which may result in additional expenditures. APS currently believes that there
will be opportunities to expand its investment in generating assets in the next
five years. It is expected that these generating assets would be organized in a
newly-created, non-regulated affiliate under us.
MORTGAGE REPLACEMENT FUND REQUIREMENTS
So long as any of APS' first mortgage bonds are outstanding, APS is
required for each calendar year to deposit with the trustee under its Mortgage
cash in a formularized amount related to net additions to APS' mortgaged utility
plant. APS may satisfy all or any part of this "replacement fund" requirement by
utilizing redeemed or retired bonds, net property additions, or property
retirements. For 1998, the replacement fund requirement amounted to
approximately $138 million. Certain of the bonds APS has issued under the
Mortgage that are callable prior to maturity are redeemable at their par value
plus accrued interest with cash APS deposits in the replacement fund. This is
subject in many cases to a period of time after the original issuance of the
bonds during which they may not be so redeemed.
ENVIRONMENTAL MATTERS
EPA ENVIRONMENTAL REGULATION
CLEAN AIR ACT. APS is subject to a number of requirements under the Clean
Air Act. Pursuant to the 1977 amendments to the Clean Air Act, the EPA adopted
regulations that address visibility impairment in certain federally-protected
areas which can be reasonably attributed to specific sources. In September 1991,
the EPA issued a final rule that limited sulfur dioxide emissions at NGS. One
NGS unit had to comply with this rule in 1997, one in 1998, and the last unit in
1999. Salt River Project is the NGS operating agent. Salt River Project
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estimates a capital cost of $430 million and annual operations and maintenance
costs of approximately $14 million for all three units, for NGS to meet these
requirements. APS is required to fund 14% of these expenditures. Approximately
93% of these capital costs have been incurred through 1998.
The Clean Air Act Amendments of 1990 (the "Amendments") address, among
other things:
+ "acid rain,"
+ visibility in certain specified areas,
+ hazardous air pollutants and
+ areas that have not attained national ambient air quality standards.
With respect to "acid rain," the Amendments establish a system of sulfur dioxide
emissions "allowances." Each existing utility unit is granted a certain number
of "allowances." For Phase II plants, which include APS' plants, allowances will
be required beginning in the year 2000 to operate the plants. On March 5, 1993,
the EPA promulgated rules listing allowance allocations applicable to APS'
plants. Based on those allocations, APS will have sufficient allowances to
permit continued operation of its plants at current levels without installing
additional equipment.
In addition, the Amendments require the EPA to set nitrogen oxides
emissions limitations. These limitations require certain plants to install
additional pollution control equipment. In December 1996, the EPA issued rules
for nitrogen oxides emissions limitations that may require APS to install
additional pollution control equipment at Four Corners by January 1, 2000. On
February 14, 1997, APS filed a Petition for Review in the United States Court of
Appeals for the District of Columbia. APS alleged that the EPA improperly
classified Four Corners Unit 4 in these rules, thereby subjecting Unit 4 to a
more stringent emission limitation. ARIZONA PUBLIC SERVICE COMPANY V. UNITED
STATES ENVIRONMENTAL PROTECTION AGENCY, No. 97-1091. In February 1998, the Court
vacated the Unit 4 emission limitation and remanded the issue to EPA for
reconsideration. APS cannot currently predict how the EPA will respond. However,
based on APS' initial evaluation, APS currently estimates its capital cost of
complying with the rules may be approximately $4 million.
With respect to protection of visibility in certain specified areas, the
Amendments require the EPA to conduct a study concerning visibility impairment
in those areas and to identify sources contributing to such impairment. Interim
findings of this study indicate that any beneficial effect on visibility as a
result of the Amendments would be offset by expected population and industry
growth. The Amendments also require EPA to establish a "Grand Canyon Visibility
Transport Commission" to complete a study on visibility impairment in the
"Golden Circle of National Parks" in the Colorado Plateau. NGS, Cholla, and Four
Corners are located near the Golden Circle of National Parks. The Commission
completed its study and on June 10, 1996 submitted its final recommendations to
the EPA. The Commission recommended that, beginning in 2000 and every 5 years
thereafter, if actual sulfur dioxide emissions from all stationary sources in an
eight-state region (including Arizona, New Mexico, Utah, Nevada, and California)
exceed the projected emissions, which are projected to decline under the current
regulatory scheme, the projected total emissions will be changed to a "regional
emissions cap" and an emissions trading program would be implemented to limit
total sulfur dioxide emissions in the region. The EPA will consider these
recommendations before promulgating final requirements on a regional haze
regulatory program which the EPA proposed in July 1997 and which is expected to
be finalized by mid-1999.
Under EPA's proposed regional haze program, states would be required to
submit plans to meet "presumptive reasonable progress targets" for achieving
perceptible improvements in visibility conditions in Federal Class I areas
(e.g., national parks) every 10-15 years. The proposal also calls for states to
conduct three year "best available retrofit technology" ("BART") reviews on
point sources which became operational between 1962 and 1977 and which may
normally be anticipated to contribute to regional haze visibility impairment.
Also, in July 1997, EPA promulgated final National Ambient Air Quality
Standards for ozone and particulate matter. Pursuant to the rules, the ozone
standard is more stringent and a new ambient standard for very fine particles
has been established. Congress has enacted legislation that could delay the
implementation of regional
9
<PAGE>
haze requirements and the particulate matter ambient standard. Because the
actual level of emissions controls, if any, for any unit cannot be determined at
this time, APS currently cannot estimate the capital expenditures, if any, which
would result from the final rules. However, APS does not currently expect these
rules to have a material adverse effect on its financial position or results of
operations.
With respect to hazardous air pollutants emitted by electric utility steam
generating units, the Amendments require two studies. The results of the first
study indicated an impact from mercury emissions from such units in certain
unspecified areas. The EPA has not yet stated whether or not mercury emissions
limitations will be imposed. Secondly, the EPA will complete a general study in
the next several years concerning the necessity of regulating hazardous air
pollutant emissions from such units under the Amendments. Because APS cannot
speculate as to the ultimate requirements by the EPA, APS cannot currently
estimate the capital expenditures, if any, which may be required as a result of
these studies.
Certain aspects of the Amendments may require related expenditures by APS,
such as permit fees. APS does not expect any of these to have a material impact
on its financial position or results of operations.
SUPERFUND. The Comprehensive Environmental Response, Compensation, and
Liability Act ("Superfund") establishes liability for the cleanup of hazardous
substances found contaminating the soil, water, or air. Those who generated,
transported, or disposed of hazardous substances at a contaminated site are
among those who are potentially responsible parties ("PRPs"). PRPs may be
strictly, and often jointly and severally, liable for the cost of any necessary
remediation of the substances. The EPA had previously advised APS that the EPA
considers APS to be a PRP in the Indian Bend Wash Superfund Site, South Area.
APS' Ocotillo Power Plant is located in this area. APS is in the process of
conducting an investigation to determine the extent and scope of contamination
at the plant site. Based on the information to date, including available
insurance coverage and an EPA estimate of cleanup costs, APS does not expect
this matter to have a material impact on its financial position or results of
operations.
MANUFACTURED GAS PLANT SITES. APS is currently investigating properties
which APS now owns or which were at one time owned by APS or its corporate
predecessor, that were at one time sites of, or sites associated with,
manufactured gas plants. The purpose of this investigation is to determine if:
+ waste materials are present
+ such materials constitute an environmental or health risk and
+ APS has any responsibility for remedial action.
Where appropriate, APS has begun remediation of certain of these sites. APS does
not expect these matters to have a material adverse effect on its financial
position or results of operations.
PURPORTED NAVAJO ENVIRONMENTAL REGULATION
Four Corners and NGS are located on the Navajo Reservation and are held
under easements granted by the federal government as well as leases from the
Navajo Nation. APS is the Four Corners operating agent. APS owns a 100% interest
in Four Corners Units 1, 2, and 3, and a 15% interest in Four Corners Units 4
and 5. APS owns a 14% interest in NGS Units 1, 2, and 3.
In July 1995, the Navajo Nation enacted the Navajo Nation Air Pollution
Prevention and Control Act, the Navajo Nation Safe Drinking Water Act, and the
Navajo Nation Pesticide Act (collectively, the "Acts"). Pursuant to the Acts,
the Navajo Nation Environmental Protection Agency is authorized to promulgate
regulations covering air quality, drinking water, and pesticide activities,
including those that occur at Four Corners and NGS. By separate letters dated
October 12 and October 13, 1995, the Four Corners participants and the NGS
participants requested the United States Secretary of the Interior to resolve
their dispute with the Navajo Nation regarding whether or not the Acts apply to
operations of Four Corners and NGS. On October 17, 1995, the Four Corners
10
<PAGE>
participants and the NGS participants each filed a lawsuit in the District Court
of the Navajo Nation, Window Rock District, seeking, among other things, a
declaratory judgment that
+ their respective leases and federal easements preclude the application of
the Acts to the operations of Four Corners and NGS and
+ the Navajo Nation and its agencies and courts lack adjudicatory
jurisdiction to determine the enforceability of the Acts as applied to Four
Corners and NGS.
On October 18, 1995, the Navajo Nation and the Four Corners and NGS participants
agreed to indefinitely stay these proceedings so that the parties may attempt to
resolve the dispute without litigation. The Secretary and the Court have stayed
these proceedings pursuant to a request by the parties. APS cannot currently
predict the outcome of this matter.
In February 1998, the EPA promulgated regulations specifying those
provisions of the Clean Air Act for which it is appropriate to treat Indian
tribes in the same manner as states. The EPA indicated that it believes that the
Clean Air Act generally would supersede pre-existing binding agreements that may
limit the scope of tribal authority over reservations. On April 10, 1998, APS
filed a Petition for Review in the United States Court of Appeals for the
District of Columbia. ARIZONA PUBLIC SERVICE COMPANY V. UNITED STATES
ENVIRONMENTAL PROTECTION AGENCY, No. 98-1196. On February 19, 1999, the EPA
promulgated regulations setting forth the EPA's approach to issuing Federal
operating permits to covered stationary sources on Indian reservations, pursuant
to the Amendments. APS is currently evaluating the impact of these regulations.
WATER SUPPLY
Assured supplies of water are important for APS' generating plants. At the
present time, APS has adequate water to meet its needs. However, conflicting
claims to limited amounts of water in the southwestern United States have
resulted in numerous court actions in recent years.
Both groundwater and surface water in areas important to APS' operations
have been the subject of inquiries, claims, and legal proceedings which will
require a number of years to resolve. APS is one of a number of parties in a
proceeding before a state court in New Mexico to adjudicate rights to a stream
system from which water for Four Corners is derived. (STATE OF NEW MEXICO, IN
THE RELATION OF S.E. REYNOLDS, STATE ENGINEER VS. UNITED STATES OF AMERICA, CITY
OF FARMINGTON, UTAH INTERNATIONAL, INC., ET AL., San Juan County, New Mexico,
District Court No. 75-184). An agreement reached with the Navajo Nation in 1985,
however, provides that if Four Corners loses a portion of its rights in the
adjudication, the Navajo Nation will provide, for a then-agreed upon cost,
sufficient water from its allocation to offset the loss.
A summons served on APS in early 1986 required all water claimants in the
Lower Gila River Watershed in Arizona to assert any claims to water on or before
January 20, 1987, in an action pending in Maricopa County Superior Court. (IN RE
THE GENERAL ADJUDICATION OF ALL RIGHTS TO USE WATER IN THE GILA RIVER SYSTEM AND
SOURCE, Supreme Court Nos. WC-79-0001 through WC 79-0004 (Consolidated) [WC-1,
WC-2, WC-3 and WC-4 (Consolidated)], Maricopa County Nos. W-1, W-2, W-3 and W-4
(Consolidated)). Palo Verde is located within the geographic area subject to the
summons. APS' rights and the rights of the Palo Verde participants to the use of
groundwater and effluent at Palo Verde is potentially at issue in this action.
As project manager of Palo Verde, APS filed claims that dispute the court's
jurisdiction over the Palo Verde participants' groundwater rights and their
contractual rights to effluent relating to Palo Verde. Alternatively, APS seeks
confirmation of such rights. Three of APS' less-utilized power plants are also
located within the geographic area subject to the summons. APS' claims dispute
the court's jurisdiction over APS' groundwater rights with respect to these
plants. Alternatively, APS seeks confirmation of such rights. Issues important
to the claims are pending on appeal to the Arizona Supreme Court. No trial date
concerning APS' water rights claims has been set in this matter.
APS has also filed claims to water in the Little Colorado River Watershed
in Arizona in an action pending in the Apache County Superior Court. (IN RE THE
GENERAL ADJUDICATION OF ALL RIGHTS TO USE WATER IN THE LITTLE
11
<PAGE>
COLORADO RIVER SYSTEM AND SOURCE, Supreme Court No. WC-79-0006 WC-6, Apache
County No. 6417). APS' groundwater resource utilized at Cholla is within the
geographic area subject to the adjudication and is therefore potentially at
issue in the case. APS' claims dispute the court's jurisdiction over APS'
groundwater rights. Alternatively, APS seeks confirmation of such rights. The
parties are in the process of settlement negotiations with respect to this
matter. No trial date concerning APS' water rights claims has been set in this
matter.
Although the foregoing matters remain subject to further evaluation, APS
expects that the described litigation will not have a material adverse impact on
its financial position or results of operations.
BUSINESS OF SUNCOR DEVELOPMENT COMPANY
SunCor was incorporated in 1965 under the laws of the State of Arizona
and is engaged primarily in the acquisition, ownership, development, operation,
and sale of land and other real property, including homes and commercial
buildings. The principal executive offices of SunCor are located at 3838 North
Central, Suite 1500, Phoenix, Arizona 85012 (telephone 602-285-6800). SunCor and
its subsidiaries, excluding SunCor Resort & Golf Management, Inc. ("Resort
Management"), employ approximately 140 persons. Resort Management, which manages
the Wigwam Resort and Country Club (the "Wigwam"), employs between 620 and 750
persons at the Wigwam, depending on the Wigwam's operating season. In addition,
Resort Management operates three golf courses and family entertainment
operations which together employ about 300 people.
Effective January 1, 1996, SunCor's homebuilding subsidiary, SunCor
Homes, Inc., purchased the assets of Golden Heritage Homes. Subsequent to
December 31, 1996, SunCor Homes, Inc. changed its name to Golden Heritage Homes,
Inc.
SunCor's projects consist primarily of land and improvements and other
real estate investments. SunCor's major asset is the Palm Valley project which
consists of over 9,000 acres and is located west of Phoenix in the area of
Goodyear/Litchfield Park, Arizona ("Palm Valley"). SunCor has completed the
master plan for developing Palm Valley. There has been significant residential
and commercial development at Palm Valley by SunCor and by other developers that
have acquired land from SunCor or entered into joint ventures with SunCor.
Development at Palm Valley currently includes residential communities, including
a retirement community, with golf courses, hotels, restaurants, commercial and
retail outlets, hospitals, and assisted-care facilities.
Other SunCor projects under development include seven master-planned
communities and four commercial projects. The four commercial projects and four
of the master-planned communities are located in the Phoenix area. Other
master-planned communities are located near Sedona, Arizona, near St. George,
Utah, and near Santa Fe, New Mexico. Several of the master-plan and commercial
projects are joint ventures with other developers, financial partners, or
landowners.
For the past three years, SunCor's operating revenues were about: 1998,
$124.2 million; 1997, $116.5 million; and 1996, $99.5 million. For those same
periods SunCor's net income was about: 1998, $44.7 million; 1997, $5.3 million;
and 1996, $4.2 million. About $37.2 million of SunCor's 1998 net income
represents income related to the recognition of a deferred tax asset. The
deferred tax asset relates to net operating losses and book/tax basis
differences. SunCor is expected to realize these benefits in subsequent periods
pursuant to an intercompany tax allocation agreement. On a consolidated basis,
there was no impact to consolidated net income. SunCor's capital needs consist
primarily of capital expenditures for land development and home construction. On
the basis of projects now under development, SunCor expects capital needs over
the next three years to be: 1999, $58 million; 2000, $53 million; and 2001, $43
million.
At December 31, 1998, SunCor had total assets of about $407 million.
See Note 6 of Notes to the Consolidated Financial Statements in Item 8 for
information regarding SunCor's long-term debt. SunCor intends to continue its
focus on real estate development in homebuilding and the development of
residential, commercial, and industrial projects.
12
<PAGE>
BUSINESS OF EL DORADO DEVELOPMENT COMPANY
El Dorado was incorporated in 1983 under the laws of the State of
Arizona and is engaged principally in the business of making equity investments
in other companies. El Dorado's short-term goal is to convert its venture
capital portfolio to cash as quickly and as advantageously as possible. On a
long-term basis, we may use El Dorado, when appropriate, as our subsidiary for
new ventures that are strategically close to our principal business of
generating, distributing, and marketing electricity. El Dorado's offices are
located at 400 East Van Buren Street, Suite 750, Phoenix, Arizona 85004
(telephone 602-379-2662).
El Dorado had investments in venture capital partnerships totaling
approximately $7 million at December 31, 1998. In addition to the foregoing
investments, at December 31, 1998, El Dorado had direct investments of
approximately $17 million in other private and public companies and
partnerships. These investments include a 56% interest in NAC International, a
company that specializes in nuclear spent fuel storage and transportation
technology, as well as nuclear fuel cycle and international energy policy
consulting.
For the past three years, El Dorado's net income was: 1998, $4.5
million; 1997, $8.2 million; and 1996, $0.4 million. At December 31, 1998, El
Dorado had total assets of about $27 million.
13
<PAGE>
ITEM 2. PROPERTIES
ACCREDITED CAPACITY
APS' present generating facilities have an accredited capacity as follows:
CAPACITY(KW)
Coal:
Units 1, 2, and 3 at Four Corners............................ 560,000
15% owned Units 4 and 5 at Four Corners...................... 222,000
Units 1, 2, and 3 at Cholla Plant............................ 615,000
14% owned Units 1, 2, and 3 at the Navajo Plant.............. 315,000
---------
1,712,000
---------
Gas or Oil:
Two steam units at Ocotillo and two steam units at Saguaro... 435,000(1)
Eleven combustion turbine units.............................. 493,000
Three combined cycle units................................... 255,000
---------
1,183,000
---------
Nuclear:
29.1% owned or leased Units 1, 2, and 3 at Palo Verde........ 1,086,300
---------
Other............................................................. 5,600
---------
Total........................................................ 3,986,900
=========
- ---------------
(1) West Phoenix steam units (108,300 kW) are currently mothballed.
-----------------------------------------------------
RESERVE MARGIN
APS' peak one-hour demand on its electric system was recorded on July 16,
1998 at 5,072,000 kW, compared to the 1997 peak of 4,608,600 kW recorded on
August 22. Taking into account additional capacity then available to APS under
purchase power contracts as well as APS' own generating capacity, APS'
capability of meeting system demand on July 16, 1998, computed in accordance
with accepted industry practices, amounted to 5,139,600 kW, for an installed
reserve margin of 3.1%. The power actually available to APS from its resources
fluctuates from time to time due in part to planned outages and technical
problems. The available capacity from sources actually operable at the time of
the 1998 peak amounted to 4,862,600 kW, for a margin of (3.9%). Firm purchases
from neighboring utilities totaling 1,467,000 kW were in place at the time of
the peak ensuring the ability to meet the load requirement, with an actual
reserve margin of 7.4%.
14
<PAGE>
PLANT SITES LEASED FROM NAVAJO NATION
NGS and Four Corners are located on land held under easements from the
federal government and also under leases from the Navajo Nation. We do not
believe that the risk with respect to enforcement of these easements and leases
is material. The lease for Four Corners waives until 2001 the requirement that
APS, as well as its fuel supplier, pay certain taxes to the Navajo Nation. In
September 1997, a settlement agreement was finalized between the coal supplier
to Four Corners, the Navajo Nation, and APS which settled certain issues in the
Four Corners lease regarding the obligation of the fuel supplier to pay taxes
prior to the expiration of tax waivers in 2001. Pursuant to the agreement, in
1997 APS recognized approximately $14 million of pretax earnings related to a
partial refund of possessory interest taxes paid by the fuel supplier. The
parties also agreed to renegotiate their business relationship before 2001 in an
effort to permit the electricity generated at Four Corners to be priced
competitively. APS cannot currently predict the outcome of this matter. Certain
of APS' transmission lines and almost all of its contracted coal sources are
also located on Indian reservations. See "Generating Fuel and Purchased Power --
Coal Supply" in Item 1.
PALO VERDE NUCLEAR GENERATING STATION
PALO VERDE LEASES
See Note 10 of Notes to Consolidated Financial Statements in Item 8 for a
discussion of three sale and leaseback transactions related to Palo Verde Unit
2.
REGULATORY
Operation of each of the three Palo Verde units requires an operating
license from the NRC. The NRC issued full power operating licenses for Unit 1 in
June 1985, Unit 2 in April 1986, and Unit 3 in November 1987. The full power
operating licenses, each valid for a period of approximately 40 years, authorize
APS, as operating agent for Palo Verde, to operate the three Palo Verde units at
full power.
NUCLEAR DECOMMISSIONING COSTS
The NRC recently amended its rules on financial assurance requirements for
the decommissioning of nuclear power plants. The amended rules became effective
on November 23, 1998. The amended rules provide that a licensee may use an
external sinking fund as the exclusive financial assurance mechanism if the
licensee recovers estimated total decommissioning costs through cost of service
rates or through a "non-bypassable charge." Other mechanisms are prescribed,
including prepayment, if the requirements for exclusive reliance on the external
sinking fund mechanism are not met. APS currently relies on the external sinking
fund mechanism to meet the NRC financial assurance requirements for its
interests in Palo Verde Units 1, 2, and 3. The decommissioning costs of Palo
Verde Units 1, 2, and 3 are currently included in ACC jurisdictional rates.
Proposed ACC rules regarding the introduction of retail electric competition in
Arizona (see Note 3) currently provide that decommissioning costs would be
recovered through a non-bypassable "system benefits" charge, which would allow
APS to maintain its external sinking fund mechanism. See Note 13 of Notes to
Consolidated Financial Statements in Item 8 for additional information about
nuclear decommissioning costs.
PALO VERDE LIABILITY AND INSURANCE MATTERS
See "Palo Verde Nuclear Generating Station" in Note 12 of Notes to
Consolidated Financial Statements in Item 8 for a discussion of the insurance
maintained by the Palo Verde participants, including APS, for Palo Verde.
15
<PAGE>
OTHER INFORMATION REGARDING PROPERTIES
See "Environmental Matters" and "Water Supply" in Item 1 with respect to
matters having possible impact on the operation of certain of APS' power plants.
See "Construction Program" in Item 1 and "Financial Review -- Capital Needs
and Resources" in Item 7 for a discussion of APS' construction plans.
See Notes 6, 10, and 11 of Notes to Consolidated Financial Statements in
Item 8 with respect to property of the Company not held in fee or held subject
to any major encumbrance.
INFORMATION REGARDING SUNCOR'S AND EL DORADO'S PROPERTIES
See "Business of SunCor Development Company" and "Business of El Dorado
Investment Company" for information regarding SunCor's and El Dorado's
properties.
16
<PAGE>
[MAP PAGE]
In accordance with Item 304 of Regulation S-T of the Securities Exchange
Act of 1934, APS' Service Territory map contained in this Form 10-K is a map of
the State of Arizona showing APS' service area, the location of its major power
plants and principal transmission lines, and the location of transmission lines
operated by APS for others. The major power plants shown on such map are the
Navajo Generating Station located in Coconino County, Arizona; the Four Corners
Power Plant located near Farmington, New Mexico; the Cholla Power Plant, located
in Navajo County, Arizona; the Yucca Power Plant, located near Yuma, Arizona;
and the Palo Verde Nuclear Generating Station, located about 55 miles west of
Phoenix, Arizona (each of which plants is reflected on such map as being jointly
owned with other utilities), as well as the Ocotillo Power Plant and West
Phoenix Power Plant, each located near Phoenix, Arizona, and the Saguaro Power
Plant, located near Tucson, Arizona. APS' major transmission lines shown on such
map are reflected as running between the power plants named above and certain
major cities in the State of Arizona. The transmission lines operated for others
shown on such map are reflected as running from the Four Corners Plant through a
portion of northern Arizona to the California border.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
APS
See "Environmental Matters" and "Water Supply" in Item 1 in regard to
pending or threatened litigation and other disputes. See "Regulatory Matters" in
Note 3 of Notes to Consolidated Financial Statements in Item 8 for a discussion
of competition and the rules regarding the instruction of retail electric
competition in Arizona. On February 28, 1997 and October 16, 1998, APS filed
lawsuits to protect its legal rights regarding the rules and the amended rules,
respectively, and in each complaint APS asked the Court for (i) a judgment
vacating the retail electric competition rules, (ii) a declaratory judgment that
the rules are unlawful because, among other things, they were entered into
without proper legal authorization, and (iii) a permanent injunction barring the
ACC from enforcing or implementing the rules and from promulgating any other
regulations without lawful authority. ARIZONA PUBLIC SERVICE COMPANY V. ARIZONA
CORPORATION COMMISSION, CV 97-03753 (consolidated under CV 97-03748.) ARIZONA
PUBLIC SERVICE COMPANY V. ARIZONA CORPORATION COMMISSION, CV98-18896. On August
28, 1998, APS filed two lawsuits to protect its legal rights under the stranded
cost order and in its complaints the Company asked the Court to vacate and set
aside the order. ARIZONA PUBLIC SERVICE COMPANY V. ARIZONA CORPORATION
COMMISSION, CV 98-15728. ARIZONA PUBLIC SERVICE COMPANY V. ARIZONA CORPORATION
COMMISSION, 1-CA-CC-98-0008.
18
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS
OF THE REGISTRANT
Our executive officers are as follows:
Age at
Name March 1, 1999 Position(s) at March 1, 1999
- ---- ------------- ----------------------------
Jack E. Davis 52 President, APS Energy Delivery & Sales
James L. Kunkel 61 Vice President
Michael V. Palmeri 40 Treasurer
William J. Post 48 Chief Executive Officer(1)
George A. Schreiber, Jr. 50 President and Chief Financial Officer(1)
Richard Snell 68 Chairman of the Board of Directors (1)
William L. Stewart 55 President, APS Generation
Faye Widenmann 50 Vice President of Corporate Relations and
Administration and Secretary
(1) member of the Board of Directors
The executive officers of the Company are elected no less often than
annually and may be removed by the Board of Directors at any time. The terms
served by the named officers in their current positions and the principal
occupations (in addition to those stated in the table) of such officers for the
past five years have been as follows:
Mr. Davis was elected to his present position in October 1998. Prior to
that time he was Executive Vice President, Commercial Operations (September
1996-October 1998) and Vice President, Generation and Transmission (June
1993-September 1996) of APS. Mr. Davis is a director of APS.
Mr. Kunkel was elected Vice President effective December 15, 1997.
Prior to December 1997, he was a partner with the accounting firm
PricewaterhouseCoopers, successor to Coopers & Lybrand, in both their Los
Angeles and Phoenix offices. Mr. Kunkel is also a director of Aztar Corporation.
Mr. Palmeri was elected to the position of Treasurer of both the
Company and APS effective July 23, 1997. From February 1994 to July 1997, he was
Assistant Treasurer of the Company. From June 1990 to February 1994, he was
Manager of Finance.
Mr. Post was elected Chief Executive Officer of the Company effective
February 1999. Prior to that time he was President (February 1997 - February
1999) and Executive Vice President (June 1995 - February 1997). He was also
elected President and Chief Executive Officer of APS in February 1997. In
October 1998, he resigned as President and maintained the position of Chief
Executive Officer of APS. He has been APS' Chief Operating Officer (September
1994 - February 1997), as well as a Senior Vice President since June 1993. Mr.
Post is also a director of APS.
Mr. Schreiber was elected President in February 1999 and Chief
Financial Officer in February 1997. He also held the position of Executive Vice
President (February 1997 - February 1999). Mr. Schreiber has also been Executive
Vice President and Chief Financial Officer of APS since February 1997. From 1990
to January 1997, he was Managing Director at PaineWebber, Inc. He is also a
director of APS.
Mr. Snell has been Chairman of the Board of the Company and Chairman of
the Board of APS since February 1990. Until February 1999, he was also Chief
Executive Officer of the Company, and until February 1997, he was President of
the Company. Mr. Snell is also a director of Aztar Corporation and Central
Newspapers, Inc.
19
<PAGE>
Mr. Stewart was elected to his present position in October 1998. Prior
to that time he was Executive Vice President, Generation (September 1996 -
October 1998), Executive Vice President, Nuclear of APS (May 1994 - September
1996) and Senior Vice President -- Nuclear for Virginia Power (since 1989). Mr.
Stewart is a director of APS.
Ms. Widenmann was elected Secretary of the Company in 1985 and Vice
President of Corporate Relations and Administration in November 1986.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
STOCK AND RELATED SECURITY HOLDER MATTERS
Our common stock is publicly held and is traded on the New York and
Pacific Stock Exchanges. At the close of business on March 12, 1999, our common
stock was held of record by approximately 44,968 shareholders.
The chart below sets forth the common stock price ranges on the
composite tape, as reported in the Wall Street Journal for 1998 and 1997. The
chart also sets forth the dividends declared and paid per share during each of
the four quarters for 1998 and 1997.
COMMON STOCK PRICE RANGES AND DIVIDENDS
- --------------------------------------------------------------------------------
1998 HIGH LOW DIVIDEND PER SHARE(a)
- --------------------------------------------------------------------------------
1st Quarter 45 39 3/8 $ .300
2nd Quarter 46 3/16 42 .600
3rd Quarter 45 9/16 40 1/16 --
4th Quarter 49 1/4 41 5/8 .325
- --------------------------------------------------------------------------------
1997
- --------------------------------------------------------------------------------
1st Quarter 32 7/8 30 1/8 $ .275
2nd Quarter 30 3/4 27 5/8 .550
3rd Quarter 34 7/8 29 13/16 --
4th Quarter 42 3/4 33 3/16 .300
- --------------------------------------------------------------------------------
(a) Dividends for the third quarter of 1998 and 1997 were declared in June.
20
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in Thousands, Except
Per Share Amounts) 1998 1997 1996 1995 1994
- ----------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Operating revenues
Electric $ 2,006,398 $ 1,878,553 $ 1,718,272 $ 1,614,952 $ 1,626,168
Real estate 124,188 116,473 99,488 54,846 59,253
Income from continuing operations $ 242,892 $ 235,856 $ 211,059(a) $ 199,608 $ 200,619(b)
Loss from discontinued operations -
net of income tax (c) -- -- (9,539) -- --
Extraordinary charge for early
retirement of debt - net of
income tax (d) -- -- (20,340) (11,571) --
----------- ----------- ------------ ------------ -----------
Net income $ 242,892 $ 235,856 $ 181,180 $ 188,037 $ 200,619
=========== =========== ============ ============ ===========
COMMON STOCK DATA
Book value per share - year- end $ 25.50 $ 23.90 $ 22.51 $ 21.49 $ 20.32
Earnings (loss) per average common
share outstanding
Continuing operations - basic $ 2.87 $ 2.76 $ 2.41(a) $ 2.28 $ 2.30(b)
Discontinued operations -- -- (0.11) -- --
Extraordinary charge -- -- (0.23) (0.13) --
----------- ----------- ------------ ------------ -----------
Net income - basic $ 2.87 $ 2.76 $ 2.07 $ 2.15 $ 2.30
----------- ----------- ------------ ------------ -----------
Continuing operations - diluted $ 2.85 $ 2.74 $ 2.40(a) $ 2.27 $ 2.29(b)
Net income - diluted $ 2.85 $ 2.74 $ 2.06 $ 2.14 $ 2.29
Dividends declared per share $ 1.225 $ 1.125 $ 1.025 $ 0.925 $ 0.825
Indicated annual dividend rate -
year- end $ 1.30 $ 1.20 $ 1.10 $ 1.00 $ 0.90
Average common shares
outstanding - basic 84,774,218 85,502,909 87,441,515 87,419,300 87,410,967
Average common shares
outstanding - diluted 85,345,946 86,022,709 88,021,920 87,884,226 87,671,451
----------- ----------- ------------ ------------ -----------
TOTAL ASSETS $ 6,824,546 $ 6,850,417 $ 6,989,289 $ 6,997,052 $ 6,909,752
----------- ----------- ------------ ------------ -----------
LIABILITIES AND EQUITY
Long- term debt less current
maturities $ 2,048,961 $ 2,244,248 $ 2,372,113 $ 2,510,709 $ 2,588,525
Other liabilities 2,516,993 2,407,572 2,428,180 2,336,695 2,276,249
----------- ----------- ------------ ------------ -----------
4,565,954 4,651,820 4,800,293 4,847,404 4,864,774
Minority interests
Non-redeemable preferred stock of APS 85,840 142,051 165,673 193,561 193,561
Redeemable preferred stock of APS 9,401 29,110 53,000 75,000 75,000
Common stock equity 2,163,351 2,027,436 1,970,323 1,881,087 1,776,417
----------- ----------- ------------ ------------ -----------
Total liabilities and equity $ 6,824,546 $ 6,850,417 $ 6,989,289 $ 6,997,052 $ 6,909,752
=========== =========== ============ ============ ===========
</TABLE>
(a) Includes an after-tax charge of $18.9 million ($0.22 per share) for a
voluntary severance program and about $12 million ($0.13 per share) of
income tax benefits related to capital loss carryforwards.
(b) Includes after-tax Palo Verde Unit 3 accretion income of $20.3 million
($0.23 per share) and a non-recurring income tax benefit of $26.8 million
($0.31 per share) related to a change in tax law.
(c) Charges associated with the settlement of a legal matter related to
MeraBank, A Federal Savings Bank.
(d) Charges associated with the repayment or refinancing of the parent
company's high-coupon debt.
21
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands, Except
Per Share Amounts) 1998 1997 1996 1995 1994
- ----------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ELECTRIC OPERATING REVENUES
Residential $ 766,378 $ 746,937 $ 721,877 $ 669,762 $ 675,153
Commercial 699,016 687,988 678,130 653,425 631,212
Industrial 172,296 164,696 162,324 156,501 166,457
Irrigation 7,288 8,706 9,448 9,596 10,538
Other 10,644 11,842 13,078 12,631 12,729
----------- ----------- ----------- ----------- -----------
Total retail 1,655,622 1,620,169 1,584,857 1,501,915 1,496,089
Sales for resale 300,698 226,828 98,560 86,510 95,158
Transmission for others 11,058 10,295 10,240 9,390 9,506
Miscellaneous services 39,020 21,261 24,615 17,137 16,107
----------- ----------- ----------- ----------- -----------
Electric operating revenues 2,006,398 1,878,553 1,718,272 1,614,952 1,616,860
Retail rate refund reversal -- -- -- -- 9,308
----------- ----------- ----------- ----------- -----------
Net electric operating revenues $ 2,006,398 $ 1,878,553 $ 1,718,272 $ 1,614,952 $ 1,626,168
=========== =========== =========== =========== ===========
ELECTRIC SALES (MWH)
Residential 8,310,689 7,970,309 7,541,440 6,848,905 6,873,300
Commercial 8,697,397 8,524,882 8,233,762 7,768,289 7,456,049
Industrial 3,279,430 3,123,283 3,039,357 2,933,459 2,926,318
Irrigation 84,640 112,363 121,775 119,580 132,340
Other 90,927 86,090 84,362 78,478 76,827
----------- ----------- ----------- ----------- -----------
Total retail 20,463,083 19,816,927 19,020,696 17,748,711 17,464,834
Sales for resale 10,317,391 9,233,573 3,367,234 2,720,704 2,764,223
----------- ----------- ----------- ----------- -----------
Total electric sales 30,780,474 29,050,500 22,387,930 20,469,415 20,229,057
========== ========== ========== ========== ==========
ELECTRIC CUSTOMERS - END OF YEAR
Residential 709,111 680,478 654,602 625,352 603,989
Commercial 84,745 81,246 78,178 75,105 72,740
Industrial 3,159 3,192 3,055 2,913 2,976
Irrigation 710 764 841 837 897
Other 895 851 828 786 762
----------- ----------- ----------- ----------- -----------
Total retail 798,620 766,531 737,504 704,993 681,364
Sales for resale 67 50 48 39 44
----------- ----------- ----------- ----------- -----------
Total electric customers 798,687 766,581 737,552 705,032 681,408
========== ========== ========== ========== ==========
</TABLE>
See "Financial Review" on pages 23-30 for a discussion of certain information in
the table above.
QUARTERLY STOCK PRICES AND DIVIDENDS
Stock Symbol: PNW
<TABLE>
<CAPTION>
Dividends Dividends
Per Per
1998 High Low Close Share(a) 1997 High Low Close Share(a)
---- ---- --- ----- -------- ---- ---- --- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1st Quarter 45 39 3/8 44 7/16 $0.300 1st Quarter 32 7/8 30 1/8 30 1/8 $0.275
2nd Quarter 46 3/16 42 45 $0.600 2nd Quarter 30 3/4 27 5/8 30 1/16 $0.550
3rd Quarter 45 9/16 40 1/16 44 13/16 $ -- 3rd Quarter 34 7/8 29 13/16 33 5/8 $ --
4th Quarter 49 1/4 41 5/8 42 3/8 $0.325 4th Quarter 42 3/4 33 3/16 42 3/8 $0.300
</TABLE>
(a) Dividends for the 3rd quarter of 1998 and 1997 were declared in June.
22
<PAGE>
ITEM 7. FINANCIAL REVIEW
In this section, we explain the results of operations, general financial
condition, and outlook for Pinnacle West and our subsidiaries: APS, SunCor, and
El Dorado, including:
+ the changes in our earnings from 1997 to 1998 and from 1996 to 1997
+ the factors impacting our business, including competition and electric
industry restructuring
+ the effects of regulatory agreements on our results and outlook
+ our capital needs and resources - both for APS and our non-utility
operations and
+ Year 2000 technology issues.
Throughout this Financial Review, we refer to specific "Notes" in the Notes to
Consolidated Financial Statements that begin on page 37. These Notes add further
details to the discussion.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997 Our 1998 consolidated net income was $242.9 million
compared with $235.9 million in 1997 - a 3.0% increase. Net income increased by
$7.0 million primarily because of increased earnings at the subsidiaries and
lower financing costs as we paid down debt and took advantage of lower interest
rates.
APS' 1998 earnings increased $6.9 million - a 2.9% increase - over 1997 earnings
primarily because of an increase in customers, expanded power marketing and
trading activities, and lower financing costs. In the comparison, these positive
factors more than offset the effects of milder weather, two fuel-related
settlements recorded in 1997, and two retail price reductions. See Note 3 for
additional information about the price reductions.
In 1998, electric operating revenues increased $128 million primarily because
of:
+ increased power marketing and trading revenues ($94 million)
+ increases in the number of customers and the amount of electricity used by
customers ($77 million) and
+ miscellaneous factors ($8 million).
As mentioned above, these positive factors were partially offset by the effects
of milder weather ($33 million) and reductions in retail prices ($18 million).
Power marketing and trading activities are predominantly short-term opportunity
wholesale sales. The increase in power marketing revenues resulted from higher
prices, increased activity in Western bulk power markets, and increased sales to
large customers in California. The increase in power marketing and trading
revenues was accompanied by related increases in purchased power expenses.
The two fuel-related settlements increased 1997 pretax earnings by about $21
million. The income statement reflects these settlements as reductions in fuel
expense and as other income.
Operations and maintenance expense increased $15 million because of customer
growth, initiatives related to competition, and expansion of our power marketing
and trading function.
Depreciation and amortization expense increased $11 million because APS had more
plant in service.
APS decreased its financing costs by $9 million primarily because of lower
amounts of outstanding debt and preferred stock.
Our real estate subsidiary, SunCor Development, and our investment subsidiary,
El Dorado, contributed a combined $12.0 million to consolidated net income in
1998 compared with $13.5 million in 1997. SunCor's contribution increased $2.2
million as a result of an increase in land sales. El Dorado's contribution
decreased $3.7 million as a result of a decrease in investment sales.
SunCor's stand-alone net income was $44.7 million, of which $37.2 million
represents income related to the recognition of a deferred tax asset. The
deferred tax asset relates to net operating losses and book/tax basis
differences. SunCor is expected to realize these benefits in subsequent periods
pursuant to an intercompany tax allocation agreement. On a consolidated basis,
Pinnacle West had already recognized the income tax benefits, therefore, there
was no impact on consolidated net income in 1998.
23
<PAGE>
1997 COMPARED WITH 1996
Our 1997 consolidated net income was $235.9 million compared with $181.2 million
in 1996. The following is a summary:
(Thousands of Dollars) 1997 1996
- ---------------------- ---- ----
Income from continuing operations $235,856 $ 211,059
Loss from discontinued operations - net
of income tax -- (9,539)
Extraordinary charge for early retirement
of debt - net of income tax -- (20,340)
-------- ---------
Net income $235,856 $ 181,180
======== =========
Our earnings from continuing operations increased from 1996 to 1997 by $24.8
million, or 11.7%, primarily because of increased earnings at the subsidiaries
and lower financing costs as we paid down debt and took advantage of lower
interest rates. The 1996 loss from discontinued operations related to remnants
of MeraBank legal matters.
APS' 1997 earnings increased $12.3 million - a 5.4% increase - over 1996
earnings primarily because of:
+ an increase in customers
+ a $32 million pretax charge in 1996 for a voluntary severance program
+ two fuel-related settlements in 1997 and
+ lower financing costs.
These positive factors more than offset the effects of the 1996 regulatory
agreement with the Arizona Corporation Commission (ACC), which during 1997
resulted in about $60 million of additional regulatory asset amortization and a
$35 million revenue decrease caused by two retail price reductions. See Note 3
and "Results of Operations - Regulatory Agreements" below for additional
information. In addition, APS recognized $12 million of income tax benefits in
1996 that were not repeated in 1997.
In 1997, electric operating revenues increased $160 million primarily because
of:
+ increased power marketing revenues ($128 million)
+ an increase in the number of customers ($58 million) and
+ weather effects ($7 million).
As mentioned above, these positive factors were partially offset by a $35
million revenue decrease caused by retail price reductions. The increase in
power marketing revenues resulted from increased activity in Western bulk power
markets. This did not significantly affect our earnings because the increase was
substantially offset by higher purchased power expenses.
Two fuel-related settlements in 1997 increased pretax earnings by about $21
million. The income statement shows these settlements as reductions in fuel
expense and as other income. About $16 million of the settlements related to
years prior to 1997 and $5 million related to 1997. APS expects the total annual
savings from the settlements for at least the next several years to be about $10
million before income taxes. APS does not have a fuel adjustment clause as part
of its retail rate structure. As a result, APS shows changes in fuel and
purchased power expenses in current earnings.
APS lowered its operations and maintenance expenses in 1997 by putting in place
a voluntary severance program in late 1996, with related savings reflected in
1997. These savings were partially offset by increased expenses for marketing,
information technology, and power plant maintenance.
APS decreased its financing costs by $12 million during 1997 by lowering the
amounts of outstanding debt and preferred stock.
SunCor Development and El Dorado contributed a combined $13.5 million to
consolidated net income in 1997 compared with $4.6 million in 1996. SunCor's
contribution increased as a result of increased land and home sales. El Dorado's
contribution increased as a result of an increase in investment sales.
24
<PAGE>
REGULATORY AGREEMENTS
Regulatory agreements with the ACC affect the results of APS' operations. The
following discussion focuses on two agreements: a 1996 agreement to accelerate
the amortization of APS' regulatory assets and a 1994 settlement to accelerate
amortization of APS' deferred investment tax credits (ITCs).
Under the 1996 agreement with the ACC, APS is recovering substantially all of
its present regulatory assets through accelerated amortization. The recovery of
these assets is taking place over an eight-year period that will end June 30,
2004. For more details, see Note 3. This accelerated amortization increased
annual amortization expense by approximately $120 million ($72 million after
taxes).
Also, as part of the 1996 regulatory agreement, APS reduced its retail prices by
3.4% effective July 1, 1996. This reduces revenue by about $48.5 million
annually ($29 million after taxes). APS also agreed to share future cost savings
with its customers, which resulted in the following additional retail price
reductions:
+ $17.6 million annually ($10.5 million after income taxes), or 1.2%,
effective July 1, 1997, and
+ $17 million annually ($10 million after income taxes), or 1.1%, effective
July 1, 1998.
APS expects to file with the ACC for another retail price decrease of
approximately $10.8 million annually ($6.5 million after income taxes) to become
effective July 1, 1999. The amount and timing of the price decrease are subject
to ACC approval. This will be the last price decrease under the 1996 regulatory
agreement.
We discuss above, in "Results of Operations," the factors that offset the
earnings impact of the accelerated regulatory asset amortization and the price
decreases.
As part of the 1994 rate settlement, APS accelerated amortization of
substantially all deferred investment tax credits (ITCs) over a five-year period
that ends on December 31, 1999. The amortization of ITCs decreases annual
consolidated income tax expense by approximately $24 million. Beginning in 2000,
no further benefits will be reflected in income tax expense. See Note 4.
CAPITAL NEEDS AND RESOURCES
PINNACLE WEST (PARENT COMPANY)
We have reduced our debt over the last three years as follows: 1998, $113
million; 1997, $45 million; and 1996, $60 million. We have a $250 million line
of credit, under which we had $42 million of borrowings outstanding at December
31, 1998. We do not have any debt repayment obligations until 2001.
During the past three years, our primary cash needs were for:
+ dividends for our shareholders
+ interest payments and
+ optional and mandatory repayment of principal on our long-term debt.
In addition, as part of the 1996 agreement with the ACC, we invested $50 million
in APS in 1998, 1997, and 1996 and will invest the same amount in 1999. This
will be the last payment under the 1996 regulatory agreement. See Note 3. During
1997, we repurchased $80 million of common stock, reducing our shares
outstanding at year-end by 2.7 million shares.
Our primary source of cash is from APS dividends. During 1998, APS paid $170
million in dividends. In 1998, SunCor provided cash of $30 million and El Dorado
provided cash of $12 million. We expect both SunCor and El Dorado to contribute
to our cash flow in 1999. Tax allocation payments from our subsidiaries, in
excess of payments we made to taxing authorities, were an additional source of
cash in 1998, 1997, and 1996. This is not expected to be a source of cash for
Pinnacle West in the future.
APS
APS' capital requirements consist primarily of capital expenditures and optional
and mandatory redemptions of long-term debt and preferred stock. APS pays for
its capital requirements with:
+ cash from operations
+ annual cash payments from Pinnacle West of $50 million annually from 1996
through 1999 (see Note 3) and
+ to the extent necessary, external financing.
25
<PAGE>
During the period from 1996 through 1998, APS paid for all of its capital
expenditures with cash from operations. APS expects to do so in 1999 through
2001, as well.
APS' capital expenditures in 1998 were $327 million. APS' projected capital
expenditures for the next three years are: 1999, $328 million; 2000, $317
million; and 2001, $300 million. These amounts include about $30-$35 million
each year for nuclear fuel. In general, most of the projected capital
expenditures are for:
+ expanding transmission and distribution capabilities to meet customer
growth
+ upgrading existing utility property and
+ environmental purposes.
In addition, APS is considering expanding certain of its operations over the
next several years, which may result in additional expenditures. APS currently
believes that there will be opportunities to expand its investment in generating
assets in the next five years. It is expected that these generating assets would
be organized in a newly created non-regulated affiliate under the parent.
During 1998, APS redeemed about $145 million of long-term debt and $76 million
of preferred stock, including premiums, with cash from operations and long- and
short-term debt. APS' long-term debt and preferred stock redemption requirements
and payment obligations on a capitalized lease for the next three years are:
1999, $260 million; 2000, $115 million; and 2001, $2 million. On March 1, 1999,
APS redeemed all $95 million of its outstanding preferred stock. Based on market
conditions and optional call provisions, APS may make optional redemptions of
long-term debt from time to time.
As of December 31, 1998, APS had credit commitments from various banks totalling
about $400 million, which were available either to support the issuance of
commercial paper or to be used as bank borrowings. At the end of 1998, APS had
about $179 million of commercial paper and $125 million of long-term bank
borrowings outstanding.
In 1998, APS issued $100 million of unsecured long- term debt and in February
1999, APS issued $125 million of unsecured long-term debt.
Although provisions in APS' first mortgage bond indenture, articles of
incorporation, and ACC financing orders establish maximum amounts of additional
first mortgage bonds that APS may issue, APS does not expect any of these
provisions to limit its ability to meet its capital requirements.
NON-UTILITY SUBSIDIARIES
During the past three years, SunCor and El Dorado each funded all of their cash
requirements with cash from operations and their own financing.
SunCor's capital needs consist primarily of capital expenditures for land
development and home construction. On the basis of projects now under
development, SunCor expects capital needs over the next three years to be: 1999,
$58 million; 2000, $53 million; and 2001, $43 million. Capital resources to meet
these requirements include funds from operations and SunCor's own external
financings.
As of December 31, 1998, SunCor had a $55 million line of credit, under which
$38 million of borrowings were outstanding. SunCor's debt repayment requirements
for the next three years are: 1999, $4 million; 2000, $26 million; and 2001, $51
million.
COMPETITION AND INDUSTRY RESTRUCTURING
The electric industry is undergoing significant change. It is moving to a
competitive, market-based structure from a highly-regulated, cost-based
environment in which companies have been entitled to recover their costs and to
earn fair returns on their invested capital in exchange for commitments to serve
all customers within designated service territories. In December 1996, the ACC
adopted rules that provide a framework for the introduction of retail electric
competition in Arizona and adopted amendments to the rules in August 1998. On
January 11, 1999, the ACC issued an order which stayed the amended rules and
granted waivers from compliance with the rules to all affected utilities
(including APS) pending further ACC decisions. On February 5, 1999, ACC hearing
officers issued recommendations for changes to the amended rules. These
recommended changes were further amended by an ACC Procedural Order dated March
12, 1999. See Note 3 for additional information about these rules and other
competitive developments, including an agreement with Salt River Project
Agricultural Improvement and Power District (Salt River Project). We cannot
currently
26
<PAGE>
predict when or if the amended rules will be further modified, when the stay of
the amended rules will be lifted, or when retail electric competition will be
introduced in Arizona with respect to affected utilities.
The rules as recommended indicate that the ACC will allow affected utilities the
opportunity to fully recover unmitigated stranded costs, but do not set forth
the mechanisms for determining and recovering such costs. On June 22, 1998, the
ACC issued an order on stranded cost determination and recovery and on February
5, 1999, an ACC hearing officer issued recommended changes to that order. These
recommended changes were further amended by an ACC Procedural Order dated March
12, 1999. See Note 3 for additional information on proposed modifications to the
stranded cost order.
An Arizona joint legislative committee studied electric utility restructuring
issues in 1996 and 1997. In May 1998, a law was enacted to facilitate
implementation of retail electric competition in the state. Additionally,
legislation related to electric competition has been proposed in the United
States Congress. See Note 3 for a discussion of legislative developments.
We believe that further ACC decisions, legislation at the Arizona and federal
levels, and perhaps amendments to the Arizona Constitution will ultimately be
required before significant implementation of retail electric competition can
lawfully occur in Arizona. Until it has been determined how competition will be
implemented in Arizona, including the manner in which stranded costs will be
addressed, we cannot accurately predict the impact of full retail competition on
our financial position, cash flows, or results of operations. As competition in
the electric industry continues to evolve, we will continue to evaluate
strategies and alternatives that will position us to compete effectively in a
restructured industry.
APS prepares its financial statements in accordance with Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." SFAS No. 71 requires a cost-based, rate-regulated enterprise to
reflect the impact of regulatory decisions in its financial statements. APS'
existing regulatory orders and the current regulatory environment support its
accounting practices related to regulatory assets, which amounted to about $900
million at December 31, 1998. Under the 1996 regulatory agreement, the ACC
accelerated the amortization of substantially all of APS' regulatory assets to
an eight-year period that will end June 30, 2004. If APS ceases to be cost-based
regulated, it would no longer be able to apply the provisions of SFAS No. 71 to
part or all of its operations, which could have a material impact on our
financial statements. See Note 1 for additional information on regulatory
accounting.
YEAR 2000 READINESS DISCLOSURE
OVERVIEW
As the year 2000 approaches, many companies face problems because many computer
systems and equipment will not properly recognize calendar dates beginning with
the year 2000. We are addressing the Year 2000 issue as described below. APS
initiated a comprehensive company-wide Year 2000 program during 1997 to review
and resolve all Year 2000 issues in mission critical systems (systems and
equipment that are key to business function, health, and safety) in a timely
manner to ensure the reliability of electric service to our customers. This
included a company-wide awareness program of the Year 2000 issue.
The following chart shows Year 2000 readiness of our mission critical systems as
of January 31, 1999:
Inventory Assessment Remediation & Testing
--------- ---------- ---------------------
APS 100% 100% 70%(1)
Pinnacle West and
other subsidiaries
(excluding APS) 100% 100% 80%(2)
(1) Estimated to be at 100% by June 30, 1999, except one Palo Verde unit as
discussed below.
(2) Estimated to be at 100% by June 30, 1999.
DISCUSSION
APS has been actively implementing and replacing systems and technology since
1995 for general business reasons unrelated to the Year 2000, and these actions
have resulted in substantially all of its major information technology (IT)
systems becoming Year 2000 ready. The major IT systems that were, and are being,
implemented and replaced include the following:
+ Work Management
+ Materials Management
+ Energy Management
27
<PAGE>
+ Payroll
+ Financial
+ Human Resources
+ Trouble Call Management
+ Computer and Communications Network Upgrades
+ Geographic Information Management
+ Customer Information System and
+ Palo Verde Site Work Management.
We and our subsidiaries have made, and will continue to make, certain
modifications to computer hardware and software systems and applications,
including IT and non-IT systems, in an effort to ensure they are capable of
handling changing business needs, including dates in the year 2000 and
thereafter. In addition, other APS IT systems and non-IT systems, including
embedded technology and real-time process control systems, are being analyzed
for potential modifications.
Pinnacle West, APS, SunCor, and El Dorado have inventoried and assessed
essentially all mission critical IT and non-IT systems and equipment. APS is 70%
complete and Pinnacle West and its other subsidiaries are 80% complete with the
remediation and testing of these systems. Remediation and testing is expected to
be completed by June 30, 1999 for all mission critical systems, except for those
items that can only be completed during maintenance outages at Palo Verde, which
will be completed for the last unit, which is substantially identical to the
other two units, during the last half of 1999. APS has an internal audit/quality
review team that is periodically reviewing the individual Year 2000 projects and
their Year 2000 readiness.
APS currently estimates that it will spend approximately $5 million relating to
Year 2000 issues, about $3 million of which has been spent to date. This
includes an estimated allocation of payroll costs for APS employees working on
Year 2000 issues, and costs for consultants, hardware, and software. We do not
separately track other internal costs. This does not include any expenditures
incurred since 1995 to implement and replace systems for reasons unrelated to
the Year 2000, as discussed above. Our cost to address the Year 2000 issue is
charged to operating expenses as incurred and has not had, and is not expected
to have, a material adverse effect on our financial position, cash flows, or
results of operations. We expect to fund this cost with available cash balances
and cash provided by operations.
Pinnacle West and its subsidiaries are communicating with their significant
suppliers, business partners, other utilities, and large customers to determine
the extent to which they may be affected by these third parties' plans to
remediate their own Year 2000 issues in a timely manner. These companies have
been interfacing with suppliers of systems, services, and materials in order to
assess whether their schedules for analysis and remediation of Year 2000 issues
are timely and to assess their ability to continue to supply required services
and materials.
APS is also working with the North American Electric Reliability Council (NERC)
through the Western Systems Coordinating Council (WSCC) to develop operational
plans for stable grid operation that will be utilized by APS and other utilities
in the western United States. These plans are expected to be completed by June
30, 1999. However, APS cannot currently predict the effect on APS if the systems
of these other companies are not Year 2000 ready.
We currently expect that our most reasonably likely worst case Year 2000
scenario would be intermittent loss of power to APS customers, similar to an
outage during a severe weather disturbance. In this situation, APS would restore
power as soon as possible by, among other things, re-routing power flows. We do
not currently expect that this scenario would have a material adverse effect on
our financial position, cash flows, or results of operations.
We are working to develop our own contingency plans to handle Year 2000 issues,
including the most reasonably likely worst case scenario discussed above, and we
expect these plans to be completed by June 30, 1999. As discussed above, APS has
also been working with NERC and WSCC to develop contingency plans related to
grid operation.
ACCOUNTING MATTERS
We describe two new accounting rules in Note 2. First, the new rule on energy
trading and risk management is effective in 1999. We do not expect it to have a
material impact on our financial results. Secondly, the new standard on
derivatives is effective for us in 2000. We are
28
<PAGE>
currently evaluating what impact it will have on our financial statements. Also,
see Note 13 for a description of a proposed standard on accounting for certain
liabilities related to closure or removal of long-lived assets.
RISK MANAGEMENT
Our operations include managing market risks related to changes in interest
rates, commodity prices, and investments held by the nuclear decommissioning
trust fund.
INTEREST RATE AND EQUITY RISK
Our major financial market risk exposure is changing interest rates. Changing
interest rates will affect interest paid on variable rate debt and interest
earned by the nuclear decommissioning trust fund. Our policy is to manage
interest rates through the use of a combination of fixed and floating rate debt.
The nuclear decommissioning fund also has risks associated with changing market
values of equity investments. Nuclear decommissioning costs are recovered in
rates.
The tables below present contractual balances of our long-term and short-term
debt at the expected maturity dates as well as the fair value of those
instruments on December 31, 1998 and December 31, 1997. The weighted average
interest rates for the various debt presented are actual as of December 31, 1998
and December 31, 1997.
EXPECTED MATURITY/ PRINCIPAL REPAYMENT - DECEMBER 31, 1998
<TABLE>
<CAPTION>
Short-Term Variable Long-Term Fixed Long-Term
(Thousands of Dollars) Interest Rates Amount Interest Rates Amount Interest Rates Amount
- ---------------------- -------------- ------ -------------- ------ -------------- ------
<S> <C> <C> <C> <C> <C> <C>
1999 6.21% $178,830 7.30% $ 3,268 7.24% $ 164,777
2000 -- -- 7.32% 25,756 5.79% 114,711
2001 -- -- 6.57% 93,472 6.70% 27,488
2002 -- -- 10.25% 119 8.13% 125,000
2003 -- -- 5.69% 125,131 6.87% 25,000
Years thereafter -- -- 3.43% 459,803 7.75% 1,058,963
-------- -------- ----------
Total $178,830 $707,549 $1,515,939
-------- -------- ----------
Fair Value $178,830 $707,549 $1,577,365
-------- -------- ----------
EXPECTED MATURITY/ PRINCIPAL REPAYMENT - DECEMBER 31, 1997
Short-Term Variable Long-Term Fixed Long-Term
(Thousands of Dollars) Interest Rates Amount Interest Rates Amount Interest Rates Amount
- ---------------------- -------------- ------ -------------- ------ -------------- ------
1998 6.27% $130,750 7.95% $ 3,064 7.59% $ 105,631
1999 -- -- 7.98% 28,598 7.25% 164,378
2000 -- -- 7.99% 54,133 5.83% 104,711
2001 -- -- 6.25% 155,079 6.70% 27,488
2002 -- -- 6.25% 150,088 8.13% 125,000
Years thereafter -- -- 3.67% 443,178 7.89% 998,628
-------- -------- ----------
Total $130,750 $834,140 $1,525,836
-------- -------- ----------
Fair Value $130,750 $834,140 $1,556,697
-------- -------- ----------
</TABLE>
29
<PAGE>
COMMODITY PRICE RISK
APS utilizes a variety of derivative instruments including exchange-traded
futures, options, and swaps as part of its overall risk management strategies
and for trading purposes. In order to reduce the risk of adverse price
fluctuations in the electricity and natural gas markets, APS enters into futures
and/or option transactions to hedge certain natural gas held in storage as well
as certain expected purchases and sales of natural gas and electricity. The
changes in market value of such contracts have a high correlation to the price
changes in the hedged commodity. Gains and losses related to derivatives that
qualify as hedges of expected transactions are recognized in income when the
underlying hedged physical transaction closes (deferral method). Gains and
losses on derivatives utilized for trading are recognized in income on a current
basis (the mark to market method).
APS has prepared a sensitivity analysis to estimate its exposure to the market
risk of its derivative position for natural gas and electricity. With respect to
these derivatives, a potential adverse price movement of 10% in the market price
of natural gas and electricity from the December 31, 1998 levels would decrease
the fair value of these instruments by approximately $1 million. This analysis
does not include the favorable impact that the same hypothetical price movement
would have on expected physical purchases and sales of natural gas and
electricity.
APS is exposed to credit losses in the event of non-performance or non-payment
by counterparties. APS uses a credit management process to assess and monitor
the financial viability of its counterparties. APS does not expect counterparty
defaults to materially impact its financial condition, results of operations, or
net cash flows.
FORWARD-LOOKING STATEMENTS
The above discussion contains forward-looking statements that involve risks and
uncertainties. Words such as "estimates," "expects," "anticipates," "plans,"
"believes," "projects," and similar expressions identify forward-looking
statements. These risks and uncertainties include, but are not limited to, the
ongoing restructuring of the electric industry; the outcome of the regulatory
proceedings relating to the restructuring; regulatory, tax, and environmental
legislation; the ability of APS to successfully compete outside its traditional
regulated markets; regional economic conditions, which could affect customer
growth; the cost of debt and equity capital; weather variations affecting
customer usage; technological developments in the electric industry; Year 2000
issues; and the strength of the real estate market.
These factors and the other matters discussed above may cause future results to
differ materially from historical results, or from results or outcomes we
currently expect or seek.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Financial Review" in Item 7 for a discussion of quantitative and
qualitative disclosures about market risk.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Report of Management ....................................................... 32
Independent Auditors' Report ............................................... 32
Consolidated Statements of Income for 1998, 1997 and 1996 .................. 33
Consolidated Balance Sheets as of December 31, 1998 and 1997 ............... 34
Consolidated Statements of Cash Flows for 1998, 1997 and 1996 .............. 36
Consolidated Statements of Retained Earnings for 1998, 1997 and 1996 ....... 37
Notes to Consolidated Financial Statements ................................. 37
Financial Statement Schedule for 1998, 1997 and 1996
Schedule II - Valuation and Qualifying
Accounts for 1998, 1997 and 1996 ............................ 56
See Note 14 of Notes to Financial Statements for the selected quarterly
financial data required to be presented in this Item.
31
<PAGE>
REPORT OF MANAGEMENT AND INDEPENDENT AUDITORS' REPORT
REPORT OF MANAGEMENT
The primary responsibility for the integrity of the Company's financial
information rests with management, which has prepared the accompanying financial
statements and related information. Such information was prepared in accordance
with generally accepted accounting principles appropriate in the circumstances,
and based on management's best estimates and judgments. Materiality was given
due consideration. These financial statements have been audited by independent
auditors and their report is included.
Management maintains and relies upon systems of internal accounting controls. A
limiting factor in all systems of internal accounting control is that the cost
of the system should not exceed the benefits to be derived. Management believes
that the Company's system provides the appropriate balance between such costs
and benefits.
Periodically the internal accounting control system is reviewed by both the
Company's internal auditors and its independent auditors to test for compliance.
Reports issued by the internal auditors are released to management, and such
reports or summaries thereof are transmitted to the Audit Committee of the Board
of Directors and the independent auditors on a timely basis.
The Audit Committee, composed solely of outside directors, meets periodically
with the internal auditors and independent auditors (as well as management) to
review the work of each. The internal auditors and independent auditors have
free access to the Audit Committee, without management present, to discuss the
results of their audit work.
Management believes that the Company's systems, policies and procedures provide
reasonable assurance that operations are conducted in conformity with the law
and with management's commitment to a high standard of business conduct.
William J. Post George A. Schreiber, Jr.
William J. Post George A. Schreiber, Jr.
Chief Executive Officer President
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Pinnacle West
Capital Corporation and its subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of income, retained earnings and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Pinnacle West Capital Corporation
and its subsidiaries at December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Deloitte & Touche LLP
Phoenix, Arizona
March 4, 1999
32
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands, Except
Per Share Amounts) 1998 1997 1996
- ----------------------------- ---- ---- ----
OPERATING REVENUES
<S> <C> <C> <C>
Electric $ 2,006,398 $ 1,878,553 $ 1,718,272
Real estate 124,188 116,473 99,488
------------ ------------ ------------
Total 2,130,586 1,995,026 1,817,760
------------ ------------ ------------
OPERATING EXPENSES
Fuel and purchased power 537,501 436,627 325,523
Utility operations and maintenance 414,041 399,434 430,714
Real estate operations 115,331 111,628 96,080
Depreciation and amortization (Note 1) 379,679 368,285 299,507
Taxes other than income taxes 116,906 121,546 122,077
------------ ------------ ------------
Total 1,563,458 1,437,520 1,273,901
------------ ------------ ------------
OPERATING INCOME 567,128 557,506 543,859
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Allowance for equity funds
used during construction -- -- 5,209
Preferred stock dividend requirements
of APS (9,703) (12,803) (17,092)
Net other income and expense 609 4,569 (6,748)
------------ ------------ ------------
Total (9,094) (8,234) (18,631)
------------ ------------ ------------
INCOME BEFORE INTEREST AND INCOME TAXES 558,034 549,272 525,228
------------ ------------ ------------
INTEREST EXPENSE
Interest charges 169,145 182,838 198,569
Capitalized interest (18,596) (19,703) (12,856)
------------ ------------ ------------
Total 150,549 163,135 185,713
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 407,485 386,137 339,515
INCOME TAXES (NOTE 4) 164,593 150,281 128,456
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 242,892 235,856 211,059
Loss from discontinued operations -
net of income tax of $6,461 -- -- (9,539)
Extraordinary charge for early
retirement of debt - net of
income tax of $13,777 -- -- (20,340)
------------ ------------ ------------
NET INCOME $ 242,892 $ 235,856 $ 181,180
============ ============ ============
AVERAGE COMMON SHARES
OUTSTANDING - BASIC 84,774,218 85,502,909 87,441,515
AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 85,345,946 86,022,709 88,021,920
EARNINGS PER AVERAGE COMMON
SHARE OUTSTANDING
Continuing operations - basic $ 2.87 $ 2.76 $ 2.41
Net income - basic 2.87 2.76 2.07
Continuing operations - diluted 2.85 2.74 2.40
Net income - diluted 2.85 2.74 2.06
DIVIDENDS DECLARED PER SHARE $ 1.225 $ 1.125 $ 1.025
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
33
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31,
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 20,538 $ 27,484
Customer and other receivables - net 233,876 183,507
Accrued utility revenues 67,740 58,559
Materials and supplies (at average cost) 69,074 70,634
Fossil fuel (at average cost) 13,978 9,621
Deferred income taxes (Note 4) 3,999 57,887
Other current assets 47,594 41,408
---------- ----------
Total current assets 456,799 449,100
---------- ----------
INVESTMENTS AND OTHER ASSETS
Real estate investments - net (Note 6) 331,021 365,921
Other assets (Note 13) 236,562 215,027
---------- ----------
Total investments and other assets 567,583 580,948
---------- ----------
UTILITY PLANT (NOTES 6, 10 AND 11)
Electric plant in service and held for future use 7,265,604 7,009,059
Less accumulated depreciation and amortization 2,814,762 2,620,607
---------- ----------
Total 4,450,842 4,388,452
Construction work in progress 228,643 237,492
Nuclear fuel, net of amortization of $68,569 and $66,081 51,078 51,624
---------- ----------
Net utility plant 4,730,563 4,677,568
---------- ----------
DEFERRED DEBITS
Regulatory asset for income taxes (Note 4) 400,795 458,369
Rate synchronization cost deferral 303,660 358,871
Other deferred debits 365,146 325,561
---------- ----------
Total deferred debits 1,069,601 1,142,801
---------- ----------
TOTAL ASSETS $6,824,546 $6,850,417
========== ==========
See Notes to Consolidated Financial Statements.
34
<PAGE>
December 31,
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable $ 155,800 $ 117,429
Accrued taxes 62,520 84,610
Accrued interest 31,866 32,974
Short- term borrowings (Note 5) 178,830 130,750
Current maturities of long- term debt (Note 6) 168,045 108,695
Customer deposits 28,510 30,672
Other current liabilities 14,632 18,534
---------- ----------
Total current liabilities 640,203 523,664
---------- ----------
LONG- TERM DEBT LESS CURRENT MATURITIES (NOTE 6) 2,048,961 2,244,248
---------- ----------
DEFERRED CREDITS AND OTHER
Deferred income taxes (Note 4) 1,343,536 1,363,461
Deferred investment tax credit (Note 4) 27,345 50,861
Unamortized gain - sale of utility plant 77,787 82,363
Other 428,122 387,223
---------- ----------
Total deferred credits and other 1,876,790 1,883,908
---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 12)
MINORITY INTERESTS (NOTE 7)
Non- redeemable preferred stock of APS 85,840 142,051
---------- ----------
Redeemable preferred stock of APS 9,401 29,110
---------- ----------
COMMON STOCK EQUITY (NOTE 8)
Common stock, no par value; authorized
150,000,000 shares; issued and outstanding
84,824,947 at end of 1998 and 1997 1,550,643 1,553,771
Retained earnings 612,708 473,665
---------- ----------
Total common stock equity 2,163,351 2,027,436
---------- ----------
TOTAL LIABILITIES AND EQUITY $6,824,546 $6,850,417
========== ==========
35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
(THOUSANDS OF DOLLARS) 1998 1997 1996
- ---------------------- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Income from continuing operations $ 242,892 $ 235,856 $ 211,059
Items not requiring cash
Depreciation and amortization 379,679 368,285 299,507
Nuclear fuel amortization 32,856 32,702 33,566
Deferred income taxes - net 41,262 24,809 13,392
Allowance for equity funds used
during construction -- -- (5,209)
Deferred investment tax credit (23,516) (23,518) (23,518)
Other - net 1,190 (3,854) 1,370
Changes in current assets and liabilities
Customer and other receivables - net (50,369) (14,270) (38,106)
Accrued utility revenues (9,181) (3,089) (1,951)
Materials, supplies and fossil fuel (2,797) 7,793 11,945
Other current assets (6,186) (109) (8,949)
Accounts payable 34,386 (54,882) 65,586
Accrued taxes (22,090) 2,197 (7,088)
Accrued interest (1,108) (6,678) (9,306)
Other current liabilities (5,235) (23,087) 1,515
Decrease in land held 33,405 33,010 19,894
Other - net (39,350) 48,254 2,576
--------- --------- ---------
Net Cash Flow Provided By
Operating Activities 605,838 623,419 566,283
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (319,142) (307,876) (258,598)
Capitalized interest (18,596) (19,703) (12,856)
Other - net (2,144) (3,124) (6,345)
--------- --------- ---------
Net Cash Flow Used For
Investing Activities (339,882) (330,703) (277,799)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long- term debt 148,229 146,013 557,067
Short- term borrowings - net 48,080 113,850 (160,900)
Dividends paid on common stock (103,849) (96,160) (89,614)
Repurchase and retirement of
common stock -- (79,997) --
Repayment of long- term debt (286,314) (325,526) (575,332)
Redemption of preferred stock (75,517) (47,201) (50,360)
Extraordinary charge for early
retirement of debt -- -- (20,340)
Other - net (3,531) (2,897) (1,858)
--------- --------- ---------
Net Cash Flow Used For
Financing Activities (272,902) (291,918) (341,337)
--------- --------- ---------
NET CASH FLOW (6,946) 798 (52,853)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 27,484 26,686 79,539
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 20,538 $ 27,484 $ 26,686
========= ========= =========
See Notes to Consolidated Financial Statements.
36
<PAGE>
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
(Thousands of Dollars) 1998 1997 1996
- ---------------------- ---- ---- ----
Retained Earnings at Beginning of Year $ 473,665 $ 333,969 $ 242,403
Net Income 242,892 235,856 181,180
Common Stock Dividends (103,849) (96,160) (89,614)
--------- --------- ---------
Retained Earnings at End of Year $ 612,708 $ 473,665 $ 333,969
========= ========= =========
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION AND NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Pinnacle West and
our subsidiaries: APS, SunCor, and El Dorado.
APS, our major subsidiary and Arizona's largest electric utility, with 799,000
customers, provides wholesale or retail electric service to the entire state
with the exception of Tucson and about one-half of the Phoenix area. SunCor is a
developer of residential, commercial, and industrial projects on some 12,400
acres in Arizona, New Mexico, and Utah. El Dorado is a venture capital firm with
a diversified portfolio.
ACCOUNTING RECORDS
Our accounting records are maintained in accordance with generally accepted
accounting principles (GAAP). The preparation of financial statements in
accordance with GAAP requires the use of estimates by management. Actual results
could differ from those estimates.
REGULATORY ACCOUNTING
APS is regulated by the Arizona Corporation Commission (ACC) and the Federal
Energy Regulatory Commission (FERC). The accompanying financial statements
reflect the ratemaking policies of these commissions. APS prepares its financial
statements in accordance with Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS No. 71
requires a cost-based, rate-regulated enterprise to reflect the impact of
regulatory decisions in its financial statements. APS' major regulatory assets
are deferred income taxes (see Note 4) and rate synchronization cost deferrals
(see "Rate Synchronization Cost Deferrals" in this Note). These items, combined
with miscellaneous regulatory assets and liabilities, amounted to approximately
$900 million at December 31, 1998 and $1.0 billion at December 31, 1997. Most of
these items are included in "Deferred Debits" on the Balance Sheets. Under the
1996 regulatory agreement (see Note 3), the ACC accelerated the amortization of
substantially all of APS' regulatory assets to an eight-year period that will
end June 30, 2004. APS records the accelerated portion of the regulatory asset
amortization, approximately $120 million pretax in 1998 and 1997 and $60 million
pretax in 1996, in depreciation and amortization expense on the Statements of
Income.
During 1997, the Emerging Issues Task Force (EITF) of the Financial Accounting
Standards Board (FASB) issued EITF 97-4. EITF 97-4 requires that SFAS No. 71 be
discontinued no later than when legislation is passed or a rate order is issued
that contains sufficient detail to determine its effect on the portion of the
business being deregulated, which could result in writedowns or write-offs of
physical and/or regulatory assets. Additionally, the EITF determined that
regulatory assets should not be written off if they are to be recovered from a
portion of the entity which continues to apply SFAS No. 71.
Although rules have been proposed for transitioning generation services to
competition, there are many unresolved issues. APS continues to apply SFAS No.
71 to its generation operations. If rate recovery of regulatory assets is no
longer probable, whether due to competition or regulatory action, APS would be
required to write off the remaining balance as an extraordinary charge to
expense.
UTILITY PLANT AND DEPRECIATION
Utility plant is the term APS uses to describe the business property and
equipment that supports electric service. APS reports utility plant at its
original cost, which includes:
+ material and labor
+ contractor costs
+ construction overhead costs (where applicable) and
+ capitalized interest or an allowance for funds used during construction.
37
<PAGE>
APS charges retired utility plant, plus removal costs less salvage realized, to
accumulated depreciation. See Note 13 for information on a proposed accounting
standard that impacts accounting for removal costs.
APS records depreciation on utility property on a straight-line basis. For the
years 1996 through 1998 the rates, as prescribed by our regulators, ranged from
a low of 1.51% to a high of 20%. The weighted-average rate for 1998 was 3.32%.
APS depreciates non-utility property and equipment over the estimated useful
lives of the related assets, ranging from 3 to 50 years.
CAPITALIZED INTEREST
In 1997, APS began capitalizing interest in accordance with SFAS No. 34,
"Capitalization of Interest Cost." Capitalized interest represents the cost of
debt funds used to finance construction of utility plant. Plant construction
costs, including capitalized interest, are recovered in authorized rates through
depreciation when completed projects are placed into commercial operation.
Capitalized interest does not represent current cash earnings. The rate used to
calculate capitalized interest for 1998 was 6.88% and for 1997 was 7.25%.
Prior to 1997, APS accrued an allowance for funds used during construction
(AFUDC). AFUDC represented the cost of debt and equity funds used to finance
construction of utility plant. AFUDC did not represent current cash earnings.
AFUDC has been calculated using a composite rate of 7.75% for 1996.
REVENUES
APS records electric operating revenues on the accrual basis, which includes
estimated amounts for service rendered but unbilled at the end of each
accounting period.
RATE SYNCHRONIZATION COST DEFERRALS
As authorized by the ACC, operating costs (excluding fuel) and financing costs
of Palo Verde Units 2 and 3 were deferred from the commercial operation dates
(September 1986 for Unit 2 and January 1988 for Unit 3) until the date the units
were included in a rate order (April 1988 for Unit 2 and December 1991 for Unit
3). Beginning July 1, 1996, the deferrals are being amortized over an eight-year
period in accordance with the 1996 regulatory agreement (see Note 3). Prior to
July 1, 1996, the deferrals were amortized over thirty-five year periods.
Amortization of the deferrals is included in depreciation and amortization
expense on the Statements of Income.
NUCLEAR FUEL
APS charges nuclear fuel to fuel expense by using the unit-of-production method.
The unit-of-production method is an amortization method that is based on actual
physical usage. APS divides the cost of the fuel by the estimated number of
thermal units that APS expects to produce with that fuel. APS then multiplies
that rate by the number of thermal units that it produces within the current
period. This provides APS with current period nuclear fuel expense.
APS also charges nuclear fuel expense for the permanent disposal of spent
nuclear fuel. The United States Department of Energy (DOE) is responsible for
the permanent disposal of spent nuclear fuel, and it charges APS $0.001 per kWh
of nuclear generation. See Note 12 for information about spent nuclear fuel
disposal. In addition, Note 13 has information on nuclear decommissioning costs.
INCOME TAXES
We file our federal income tax return on a consolidated basis and we file our
state income tax returns on a consolidated or unitary basis. In accordance with
our intercompany tax sharing agreement, federal and state income taxes are
allocated to each subsidiary as though each subsidiary filed a separate income
tax return. Any difference between the aforementioned allocations and the
consolidated (and unitary) income tax liability is attributed to the parent
company.
REACQUIRED DEBT COSTS
When APS incurs gains or losses on debt that it retires prior to maturity, APS
amortizes those gains or losses over the remaining original life of the debt. In
accordance with the 1996 regulatory agreement (see Note 3), the ACC accelerated
APS' amortization of the regulatory asset for reacquired debt costs to an
eight-year period that will end June 30, 2004. The accelerated portion of the
regulatory asset amortization is included in depreciation and amortization
expense in the Statements of Income.
STATEMENTS OF CASH FLOWS
We consider temporary cash investments and marketable securities to be cash
equivalents for purposes of reporting cash flows. During 1998, 1997, and 1996 we
paid interest, net of amounts capitalized, income taxes, and dividends on
preferred stock of APS.
Interest paid, net of amounts capitalized, was:
+ $143.9 million in 1998
+ $163.0 million in 1997 and
+ $185.9 million in 1996.
38
<PAGE>
Income taxes paid were:
+ $164.9 million in 1998
+ $146.2 million in 1997 and
+ $121.0 million in 1996.
Dividends paid on preferred stock of APS were:
+ $10.3 million in 1998
+ $13.3 million in 1997 and
+ $17.4 million in 1996.
SEGMENTS
APS is Pinnacle West's only reportable segment. Unless otherwise identified, APS
represents substantially all of the consolidated information being reported.
RECLASSIFICATIONS
We have reclassified certain prior year amounts for comparison purposes with
1998.
2. ACCOUNTING MATTERS
In 1998 we adopted SFAS No. 130, "Reporting Comprehensive Income." This standard
changes the reporting of certain items previously reported in the common stock
equity section of the balance sheet. The effects of adopting SFAS No. 130 were
not material to our financial statements.
In November 1998, the Financial Accounting Standards Board's Emerging Issues
Task Force issued EITF 98-10, "Accounting for Contracts Involved in Energy
Trading and Risk Management Activities," which is effective for us in 1999. EITF
98-10 requires energy trading contracts to be measured at fair value as of the
balance sheet date with the gains and losses included in earnings and separately
disclosed in the financial statements or footnotes. We have evaluated the impact
of this rule and believe the effects are not material to our financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for us in 2000. SFAS No. 133 requires that entities recognize all
derivatives as either assets or liabilities on the balance sheet and measure
those instruments at fair value. The standard also provides specific guidance
for accounting for derivatives designated as hedging instruments. We are
currently evaluating what impact this standard will have on our financial
statements.
3. REGULATORY MATTERS
ELECTRIC INDUSTRY RESTRUCTURING
STATE
In December 1996, the ACC adopted rules that provide a framework for the
introduction of retail electric competition in Arizona. The rules, as amended,
became effective on August 10, 1998, and on December 10, 1998, the ACC adopted
the amended rules without any modifications that would have a significant impact
on us. We believe that certain provisions of the 1996 ACC rules and the amended
rules are deficient and APS has filed lawsuits to protect its legal rights
regarding the 1996 rules and the amended rules. These lawsuits are pending but
two related cases filed by other utilities have been partially decided in a
manner adverse to those utilities' positions.
On January 11, 1999, the ACC issued an order which stayed the amended rules,
granted reconsideration of the decision to make the rules permanent, and
directed the hearing division of the ACC to establish a procedural order for
further action on these rules. The order also granted waivers from compliance
with the rules for APS, and all affected utilities.
On February 5, 1999, the ACC Hearing Division issued recommendations for changes
to the amended rules. The recommended changes to the amended rules were further
modified by a Procedural Order of the ACC Hearing Division dated March 12, 1999.
The recommended rules include the following major provisions:
+ They would apply to virtually all Arizona electric utilities regulated by
the ACC, including APS.
+ Each utility must make at least 20% of its 1995 retail peak demand
available for competitive generation supply.
+ The rules become effective when the ACC makes a final decision on each
utility's stranded costs and unbundled rates (Final Decision Date) or
January 1, 2001, whichever comes first.
+ Subject to the 20% requirement, all utility customers with single premise
loads of one megawatt or greater will be eligible for competitive electric
services on the Final Decision Date. Customers with single premise loads of
40 kilowatts or greater may aggregate loads to meet this one megawatt
requirement.
+ When effective, residential customers will be phased in at 1-1/4% per
quarter calculated beginning on January 1, 1999, subject to the 20%
requirement above.
+ Electric service providers that get Certificates of Convenience and
Necessity (CC&Ns) from the ACC can supply only competitive services,
including electric generation, but not electric transmission and
distribution.
+ Affected utilities must file ACC tariffs with separate pricing for electric
services provided for noncompetitive services.
39
<PAGE>
+ ACC shall allow a reasonable opportunity for recovery of unmitigated
stranded costs (see "Stranded Costs" below).
+ Absent an ACC waiver, prior to January 1, 2001, each affected utility must
transfer all competitive generation assets and services either to an
unaffiliated party or to a separate corporate affiliate.
+ Affiliate transaction rules prohibit a utility and its competitive electric
affiliates from sharing certain assets, employees, and information.
If approved by the ACC, the rules would be subject to the formal rulemaking
process under Arizona statute. In compliance with statutory procedural
requirements, ACC oral proceedings on the matter would be scheduled no sooner
than 30 days after the proposed rules are published by the Secretary of State.
We cannot currently predict when or if the amended rules will be further
modified, when the stay of the amended rules will be lifted, or when retail
electric competition will be introduced in Arizona.
STRANDED COSTS
On June 22, 1998, the ACC issued an order on stranded cost determination and
recovery. APS believes that certain provisions of the stranded cost order are
deficient and in August 1998, APS filed two lawsuits to protect its legal rights
relating to the order.
On February 5, 1999, the ACC Hearing Division issued recommended changes to the
June 1998 stranded cost order. These recommended changes were further amended by
an ACC Procedural Order dated March 12, 1999. The recommended changes to the
stranded cost order would be effective upon approval of the ACC. The recommended
order, as amended on March 12, 1999, allows each affected utility to choose from
five options for the recovery of stranded costs:
+ Net Revenues Lost Methodology is the difference between generation revenues
under traditional regulation and generation revenues under competition.
This option provides for declining recovery percentages for stranded costs
over a five-year recovery period. Regulatory assets are to be fully
recovered under their presently authorized amortization schedule. In
accordance with a 1996 regulatory agreement, the ACC accelerated the
amortization of substantially all of APS' regulatory assets to an
eight-year period that ends June 30, 2004.
+ Divestiture/Auction Methodology allows a utility to divest all or
substantially all of its generating assets, including regulatory assets
associated with generation, in order to collect 100 percent of the
difference between net sales price and book value of generating assets
divested over a ten-year period, with no return on the unamortized balance.
+ Financial Integrity Methodology allows a utility "sufficient revenues to
meet minimum financial ratios" for a period of ten years.
+ Settlement Methodology allows a settlement to be agreed upon by the ACC and
a utility.
+ Any combination of the above is shown to be in the best interest of all
affected parties.
LEGISLATIVE INITIATIVES
An Arizona joint legislative committee studied electric utility industry
restructuring issues in 1996 and 1997. In conjunction with that study, the
Arizona legislative counsel prepared memoranda in late 1997 related to the legal
authority of the ACC to deregulate the Arizona electric utility industry. The
memoranda raise a question as to the degree to which the ACC may, under the
Arizona Constitution, deregulate any portion of the electric utility industry
and allow rates to be determined by market forces. This latter issue has been
subsequently decided by lower courts in favor of the ACC in four separate
lawsuits, two of which are unrelated.
In May 1998, a law was enacted to facilitate implementation of retail electric
competition in Arizona. The law includes the following major provisions:
+ Arizona's largest government-operated electric utility (Salt River Project)
and, at their option, smaller municipal electric systems must (i) make at
least 20% of their 1995 retail peak demand available to electric service
providers by December 31, 1998 and for all retail customers by December 31,
2000; (ii) decrease rates by at least 10% over a ten-year period beginning
as early as January 1, 1991; (iii) implement procedures and public
processes comparable to those already applicable to public service
corporations, for establishing the terms, conditions, and pricing of
electric services as well as certain other decisions affecting retail
electric competition;
+ describes the factors which form the basis of consideration by Salt River
Project in determining stranded costs; and
+ metering and meter reading services must be provided on a competitive basis
during the first two years of competition only for customers having demands
in excess of one megawatt (and that are eligible for competitive generation
services), and thereafter for all customers receiving competitive electric
generation.
40
<PAGE>
In addition, the Arizona legislature will review and make recommendations for
the 1999 legislature on certain competitive issues.
AGREEMENT WITH SALT RIVER PROJECT
On April 25, 1998, APS entered into a Memorandum of Agreement with Salt River
Project in anticipation of, and to facilitate, the opening of the Arizona
electric industry. The Agreement contains the following major components:
+ Both parties would amend the Territorial Agreement to remove any barriers
to the provision of competitive electricity supply and non-distribution
services.
+ Both parties would amend the Power Coordination Agreement to lower the
price that APS will pay Salt River Project for purchased power by
approximately $17 million (pretax) during the first full year that the
Agreement is effective and by lesser annual amounts during the next seven
years.
+ Both parties agreed on certain legislative positions regarding electric
utility restructuring at the state and federal level.
Certain provisions of the Agreement (including those relating to the amendments
of the Territorial Agreement and the Power Coordination Agreement) are affected
by the timing of the introduction of competition. See "ACC Rules" above. On
February 18, 1999, the ACC approved the Agreement.
GENERAL
We believe that further ACC decisions, legislation at the Arizona and federal
levels, and perhaps amendments to the Arizona Constitution (which would require
a vote of the people) will ultimately be required before significant
implementation of retail electric competition can lawfully occur in Arizona.
Until the manner of implementation of competition, including addressing stranded
costs, is determined, we cannot accurately predict the impact of full retail
competition on our financial position, cash flows, or results of operation. As
competition in the electric industry continues to evolve, we will continue to
evaluate strategies and alternatives that will position us to compete in the new
regulatory environment.
FEDERAL
The Energy Policy Act of 1992 and recent rulemakings by FERC have promoted
increased competition in the wholesale electric power markets. APS does not
expect these rules to have a material impact on its financial statements.
Several electric utility reform bills have been introduced during recent
congressional sessions, which as currently written would allow consumers to
choose their electricity suppliers by 2000 or 2003. These bills, other bills
that are expected to be introduced, and ongoing discussions at the federal level
suggest a wide range of opinion that will need to be narrowed before any
substantial restructuring of the electric utility industry can occur.
1996 REGULATORY AGREEMENT
In April 1996, the ACC approved a regulatory agreement between the ACC Staff and
APS. The major provisions of this agreement are:
+ An annual rate reduction of approximately $48.5 million ($29 million after
income taxes), or 3.4% on average for all customers except certain contract
customers, effective July 1, 1996.
+ Recovery of substantially all of APS' present regulatory assets through
accelerated amortization over an eight-year period that will end June 30,
2004, increasing annual amortization by approximately $120 million ($72
million after income taxes). See Note 1.
+ A formula for sharing future cost savings between customers and
shareholders (price reduction formula) referencing a return on equity (as
defined) of 11.25%.
+ A moratorium on filing for permanent rate changes prior to July 2, 1999,
except under the price reduction formula and under certain other limited
circumstances.
+ Infusion of $200 million of common equity into APS by the parent company,
in annual payments of $50 million starting in 1996.
Based on the price reduction formula, the ACC approved retail price decreases of
approximately $17.6 million ($10.5 million after income taxes), or 1.2%,
effective July 1, 1997, and approximately $17 million ($10 million after income
taxes), or 1.1%, effective July 1, 1998. APS expects to file with the ACC for
another retail price decrease of approximately $10. 8 million annually ($6.5
million after income taxes) to become effective July 1, 1999. The amount and
timing of the price decrease are subject to ACC approval. This will be the last
price decrease under the 1996 regulatory agreement.
41
<PAGE>
4. INCOME TAXES
INVESTMENT TAX CREDIT
Because of a 1994 rate settlement agreement, we are amortizing almost all of our
investment tax credits (ITCs) over 5 years (1995-1999).
INCOME TAXES
Certain assets and liabilities are reported differently for income tax purposes
than they are for financial statements. The tax effect of these differences is
recorded as deferred taxes. We calculate deferred taxes using the current income
tax rates.
APS has recorded a regulatory asset on its Balance Sheet in accordance with SFAS
No. 71. This regulatory asset is for certain temporary differences, primarily
AFUDC equity. APS amortizes this amount as the differences reverse. APS has been
able to accelerate its amortization of the regulatory asset for income taxes to
an eight-year period that will end June 30, 2004. This is a result of a 1996
regulatory agreement with the ACC. We are including this accelerated
amortization in depreciation and amortization expense on the Statements of
Income. The components of income tax expense are:
Year Ended December 31,
(Thousands of Dollars) 1998 1997 1996
- ---------------------- ---- ---- ----
Current
Federal $ 105,922 $ 105,818 $ 105,312
State 40,621 43,172 35,052
--------- --------- ---------
Total current 146,543 148,990 140,364
Deferred 41,566 28,729 23,752
Change in valuation allowance -- (3,920) (12,142)
ITC amortization (23,516) (23,518) (23,518)
--------- --------- ---------
Total expense $ 164,593 $ 150,281 $ 128,456
========= ========= =========
Multiplying income before income taxes by the statutory federal income tax rate
does not equal the amount recorded as income tax expense because of the
following:
Year Ended December 31,
(Thousands of Dollars) 1998 1997 1996
- ---------------------- ---- ---- ----
Federal income tax expense at 35%
statutory rate $ 142,620 $ 135,148 $ 118,830
Increases (reductions) in tax expense
resulting from:
Tax under book depreciation 17,848 14,694 19,229
Preferred stock dividends of APS 3,396 4,481 5,982
ITC amortization (23,516) (23,518) (23,518)
State income tax net of federal income
tax benefit 22,764 24,497 19,565
Change in valuation allowance -- (3,400) (10,525)
Other 1,481 (1,621) (1,107)
--------- --------- ---------
Income tax expense $ 164,593 $ 150,281 $ 128,456
========= ========= =========
42
<PAGE>
The components of the net deferred income tax liability were as follows:
December 31,
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
DEFERRED TAX ASSETS
Alternative minimum tax $ -- $ 53,601
Deferred gain on Palo Verde
Unit 2 sale/leaseback 31,285 33,257
Other 86,795 91,701
---------- ----------
Total deferred tax assets 118,080 178,559
---------- ----------
DEFERRED TAX LIABILITIES
Plant- related 1,112,897 1,096,222
Regulatory asset for income taxes 161,836 185,084
Rate synchronization deferrals 122,130 144,908
Other 60,754 57,919
---------- ----------
Total deferred tax liabilities 1,457,617 1,484,133
---------- ----------
Accumulated deferred income taxes - net $1,339,537 $1,305,574
========== ==========
5. LINES OF CREDIT
APS had committed lines of credit with various banks of $400 million at 1998 and
1997, which were available either to support the issuance of commercial paper or
to be used for bank borrowings.The commitment fees at December 31, 1998 and 1997
for these lines of credit ranged from .07% to .15% per annum.APS had long-term
bank borrowings of $125 million outstanding at December 31, 1998, and $150
million outstanding at December 31, 1997.
APS had commercial paper borrowings outstanding of $178.8 million at December
31, 1998, and $130.8 million at December 31, 1997. The weighted average interest
rate on commercial paper borrowings was 6.21% on December 31, 1998, and 6.27% on
December 31, 1997. By Arizona statute, APS' short-term borrowings cannot exceed
7% of its total capitalization unless approved by the ACC.
Pinnacle West had a revolving line of credit of $250 million at December 31,
1998 and 1997. The commitment fees were 0.10% in 1998 and ranged from 0.10% to
0.125% in 1997. Outstanding amounts at December 31, 1998 were $42 million and at
December 31, 1997 were $155 million.
SunCor had revolving lines of credit totalling $55 million at December 31, 1998
and 1997. The commitment fees were 0.125% in 1998 and 1997. SunCor had $38.1
million outstanding at December 31, 1998, and $40.6 million outstanding at
December 31,1997.
43
<PAGE>
6. LONG-TERM DEBT
Borrowings under the APS mortgage bond indenture are secured by substantially
all utility plant; SunCor's debt is collateralized by interests in certain real
property; Pinnacle West's debt is unsecured.The following table presents the
components of consolidated long-term debt:
December 31, Maturity Interest
(Thousands of Dollars) Dates (a) Rates 1998 1997
- ---------------------- --------- ----- ---- ----
APS
First Mortgage Bonds 1998 7.625% $ -- $100,000
1999 7.625% 100,000 100,000
2000 5.75% 100,000 100,000
2002 8.125% 125,000 125,000
2004 6.625% 85,000 85,000
2020 10.25% 100,550 109,550
2021 9.5% 45,140 45,140
2021 9% 72,370 72,370
2023 7.25% 91,900 97,150
2024 8.75% 121,668 121,918
2025 8% 88,300 88,500
2028 5.5% 25,000 25,000
2028 5.875% 154,000 154,000
Unamortized discount
and premium (6,482) (7,033)
Pollution control bonds 2024-2033 Adjustable 456,860 439,990
rate (b)
Collateralized Loan 1999-2000 5.375% - 20,000 10,000
6.125%
Unsecured Note 2005 6.25% 100,000 --
Senior notes (c) 1999 6.72% 50,000 50,000
Senior notes (c) 2006 6.75% 100,000 100,000
Debentures 2025 10% 75,000 75,000
Bank loans 2003 Adjustable 125,000 150,000
rate (d)
Capitalized lease
obligation 1998-2001 7.48% (e) 11,612 15,645
---------- ----------
2,040,918 2,057,230
---------- ----------
SUNCOR
Revolving credit 2001 (f) 38,139 40,600
Bank loan 2001 (g) 42,061 45,000
Notes payable 1998-2006 (h) 3,888 5,113
---------- ----------
84,088 90,713
---------- ----------
PINNACLE WEST
Revolving credit 2001 (i) 42,000 155,000
Senior notes 2001- 2003 (j) 50,000 50,000
---------- ----------
92,000 205,000
---------- ----------
Total long- term debt 2,217,006 2,352,943
Less current maturities 168,045 108,695
---------- ----------
Total long- term debt less current maturities $2,048,961 $2,244,248
========== ==========
(a) This schedule does not reflect the timing of redemptions that may occur
prior to maturity.
(b) The weighted-average rate for the year ended December 31, 1998 was 3.39%
and for December 31, 1997 was 3.62%. Changes in short-term interest rates
would affect the costs associated with this debt.
(c) APS has issued $150 million of first mortgage bonds ("senior note mortgage
bonds") to the senior note trustee as collateral for the senior notes. The
senior note mortgage bonds have the same interest rate, interest payment
dates, maturity, and redemption provisions as the senior notes. APS'
payments of principal, premium, and/or interest on the senior notes satisfy
its corresponding payment obligations on the senior note mortgage bonds. As
long as the senior note mortgage bonds secure the senior notes, the senior
notes will effectively rank equally with the first mortgage bonds. On the
date that APS has repaid all of its first mortgage
44
<PAGE>
bonds, other than those that secure senior notes, the senior note mortgage
bonds will no longer secure the senior notes and will cease to be
outstanding.
(d) The weighted-average rate at December 31, 1998 was 5.69% and at December
31, 1997 was 6.25%. Changes in short-term interest rates would affect the
costs associated with this debt.
(e) Represents the present value of future lease payments (discounted at an
interest rate of 7.48%) on a combined cycle plant that was sold and leased
back (see Note 10).
(f) The weighted-average rate at December 31, 1998 was 8.21% and at December
31, 1997 was 8.60%. Interest for 1998 and 1997 was based on LIBOR plus 2%
or prime plus 0.5%.
(g) The weighted-average rate at December 31, 1998 was 7.76% and at December
31, 1997 was 8.44%. Interest for 1998 and 1997 was based on LIBOR plus 2%
or prime plus 0.5%.
(h) Multiple notes primarily with variable interest rates based mostly on the
lenders' prime.
(i) The weighted-average rate at December 31, 1998 was 5.66% and at December
31, 1997 was 6.25%.Interest for 1998 was based on LIBOR plus 0.33% and for
1997 was LIBOR plus 0.33%-0.4%.
(j) Includes two series of notes: $25 million at 6.62% due 2001, and $25
million at 6.87% due 2003.
The following is a list of principal payments due on total long-term debt and
sinking fund requirements through 2003:
+ $168.0 million in 1999
+ $140.4 million in 2000
+ $121.0 million in 2001
+ $125.1 million in 2002 and
+ $150.1 million in 2003.
First mortgage bondholders share a lien on substantially all utility plant
assets (other than nuclear fuel, transportation equipment, and the combined
cycle plant). The mortgage bond indenture includes provisions that would
restrict the payment of common stock dividends under certain conditions. These
conditions did not exist at December 31, 1998.
7. PREFERRED STOCK OF APS
On March 1, 1999, APS redeemed all of its preferred stock. Preferred stock
balances of APS at December 31, 1998 and 1997 are shown below:
<TABLE>
<CAPTION>
Number of Shares Outstanding Par Value Outstanding
December 31, December 31, Call
(Dollars in Thousands, Par Value Price Per
Except Per Share Amount) Authorized 1998 1997 Per Share 1998 1997 Share (a)
- ------------------------ ---------- ---- ---- --------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
NON-REDEEMABLE:
$1.10 preferred 160,000 139,030 145,559 $ 25.00 $ 3,476 $ 3,639 $ 27.50
$2.50 preferred 105,000 86,440 97,252 50.00 4,322 4,863 51.00
$2.36 preferred 120,000 32,520 38,506 50.00 1,626 1,925 51.00
$4.35 preferred 150,000 62,986 68,386 100.00 6,299 6,839 102.00
Serial preferred: 1,000,000
$2.40 Series A 200,587 234,839 50.00 10,029 11,742 50.50
$2.625 Series C 214,895 231,572 50.00 10,745 11,579 51.00
$2.275 Series D 90,691 164,101 50.00 4,534 8,205 50.50
$3.25 Series E 304,475 312,991 50.00 15,224 15,649 51.00
Serial preferred: 4,000,000(b)
Adjustable rate
Series Q 295,851 352,851 100.00 29,585 35,285 (c)
Serial preferred: 10,000,000
$1.8125 Series W -- 1,693,016 25.00 -- 42,325
--------- --------- ------- --------
Total 1,427,475 3,339,073 $ 85,840 $142,051
========= ========= ======== ========
REDEEMABLE:
Serial preferred:
$10.00 Series U 94,011 291,098 $100.00 $ 9,401 $ 29,110
========= ========= ======== ========
</TABLE>
(a) The actual call price per share is the indicated amount plus any accrued
dividends.
(b) This authorization covers all outstanding redeemable preferred stock.
(c) Dividend rate adjusted quarterly to 2% below that of certain United States
Treasury securities, but in no event less than 6% or greater than 12% per
annum. Redeemable at par.
45
<PAGE>
APS cannot pay common stock dividends or acquire shares of common stock if
preferred stock dividends or sinking fund requirements are in arrears.
Redeemable preferred stock transactions of APS during each of the three years in
the period ended December 31, 1998 are as follows:
Number of Par Value
(Dollars in Thousands) Shares Amount
- ---------------------- ------ ------
Balance, December 31, 1995 750,000 $ 75,000
Retirements
$10.00 Series U (90,000) (9,000)
$7.875 Series V (130,000) (13,000)
-------- --------
Balance, December 31, 1996 530,000 53,000
Retirements
$10.00 Series U (118,902) (11,890)
$7.875 Series V (120,000) (12,000)
-------- --------
Balance, December 31, 1997 291,098 29,110
Retirements
$10.00 Series U (197,087) (19,709)
-------- --------
Balance, December 31, 1998 94,011 $ 9,401
======== ========
8. COMMON STOCK
Our common stock issued during each of the three years in the period ended
December 31, 1998 is as follows:
Number of
(Dollars in Thousands) Shares Amount (a)
- ---------------------- ------ ----------
Balance, December 31, 1995 87,515,847 $ 1,638,684
Common stock issued -- (2,330)
---------- -----------
Balance, December 31, 1996 87,515,847 1,636,354
Common stock issued -- (2,586)
Common stock retired (2,690,900) (79,997)
---------- -----------
Balance, December 31, 1997 84,824,947 1,553,771
Common stock issued -- (3,128)
---------- -----------
Balance, December 31, 1998 84,824,947 $ 1,550,643
========== ===========
(a) Including premiums and expenses of preferred stock issues of APS.
46
<PAGE>
9. RETIREMENT PLANS AND OTHER BENEFITS
VOLUNTARY SEVERANCE PLAN
APS sponsored a voluntary severance plan in 1996. There was a pretax charge of
$31.7 million in 1996 recorded mostly as operations and maintenance expense.
This pretax charge included additional pension and postretirement benefit
expense. Employees who participated in the plan were credited with an additional
year of age and service when their pension and postretirement benefits were
calculated. The additional expenses recorded in 1996 for this plan were $2.3
million for pension and $5.4 million for postretirement benefits.
PENSION PLANS
Pinnacle West and its subsidiaries sponsor defined benefit pension plans for
their employees. A defined benefit plan specifies the amount of benefits a plan
participant is to receive using information about the participant. The plan
covers nearly all of our employees. Our employees do not contribute to this
plan. Generally, we calculate the benefits under these plans based on age, years
of service, and pay. We fund the plan by contributing at least the minimum
amount required under Internal Revenue Service regulations but no more than the
maximum tax-deductible amount. The assets in the plan at December 31, 1998 were
mostly domestic and international common stocks and bonds and real estate.
Pension expense, including administrative and severance costs, was:
+ $10.5 million in 1998
+ $9.3 million in 1997 and
+ $15.5 million in 1996.
The following table shows the components of net pension cost before
consideration of amounts capitalized or billed to others and excluding severance
costs of $2.9 million in 1996:
(Thousands of Dollars) 1998 1997 1996
- ---------------------- ---- ---- ----
Service cost - benefits earned
during the period $ 24,817 $ 20,435 $ 23,397
Interest cost on projected benefit
obligation 51,524 48,402 45,124
Expected return on plan assets (54,513) (47,959) (42,404)
Amortization of:
Transition asset (3,226) (3,226) (3,226)
Prior service cost 2,078 2,078 1,735
Net actuarial losses -- -- 728
-------- -------- --------
Net periodic pension cost $ 20,680 $ 19,730 $ 25,354
======== ======== ========
The following table shows a reconciliation of the funded status of the plans to
the amounts recognized in the balance sheets:
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
Funded status - pension plan assets
less than projected benefit obligation $(41,034) $(88,732)
Unrecognized net transition asset (23,235) (26,462)
Unrecognized prior service cost 22,715 24,792
Unrecognized net actuarial losses/(gains) (38,668) 16,943
-------- --------
Net pension amount recognized in the
balance sheets $(80,222) $(73,459)
======== ========
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<PAGE>
The following table sets forth the defined benefit pension plans' change in
projected benefit obligation for the plan years 1998 and 1997:
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
Projected pension benefit obligation
at beginning of year $ 708,144 $ 608,675
Service cost 24,817 20,435
Interest cost 51,524 48,402
Benefit payments (29,636) (29,965)
Plan amendments -- 5,537
Actuarial losses/(gains) (23,544) 55,060
--------- ---------
Projected pension benefit obligation
at end of year $ 731,305 $ 708,144
========= =========
The following table sets forth the defined benefit pension plans' change in the
fair value of plan assets for the plan years 1998 and 1997:
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
Fair value of pension plan assets at
beginning of year $ 619,412 $ 539,179
Actual return on plan assets 86,527 88,620
Employer contributions 13,968 21,578
Benefit payments (29,636) (29,965)
--------- ---------
Fair value of pension plan assets at
end of year $ 690,271 $ 619,412
========= =========
We made the assumptions below to calculate the pension liability:
1998 1997
---- ----
Discount rate 7.00% 7.25%
Rate of increase in compensation levels 3.50% 4.50%
Expected long- term rate of return on assets 10.00% 9.00%
EMPLOYEE SAVINGS PLAN BENEFITS
We also sponsor a defined contribution savings plan that is offered to nearly
all employees. In a defined contribution plan, the benefits a participant is to
receive result from regular contributions to a participant account. Under this
plan, we make matching contributions to participant accounts. We recorded
expenses for this plan of:
+ $4.1 million in 1998
+ $3.9 million in 1997 and
+ $3.6 million in 1996.
POSTRETIREMENT PLANS
We provide medical and life insurance benefits to retired employees. Employees
must retire to become eligible for these retirement benefits, which are based on
years of service and age. For the medical insurance plans, retirees make
contributions to cover a portion of the plan costs. For the life insurance plan,
retirees do not make contributions to cover a portion of the plan costs. We
retain the right to change or eliminate these benefits.
Funding is based upon actuarially determined contributions that take tax
consequences into account. Plan assets consist primarily of domestic stocks and
bonds. The postretirement benefit expense was:
+ $9.1 million for 1998
+ $9.8 million for 1997 and
+ $16.2 million for 1996.
The following table shows the components of net periodic postretirement benefit
costs before consideration of amounts capitalized or billed to others and
excluding severance costs of $9.6 million in 1996:
48
<PAGE>
(Thousands of Dollars) 1998 1997 1996
- ---------------------- ---- ---- ----
Service cost - benefits earned
during the period $ 7,890 $ 7,046 $ 8,168
Interest cost on accumulated benefit
obligation 15,763 14,441 13,525
Expected return on plan assets (12,001) (8,706) (6,696)
Amortization of:
Transition obligation 7,698 7,698 8,269
Net actuarial gains (2,952) (2,685) (1,345)
-------- -------- --------
Net periodic postretirement benefit cost $ 16,398 $ 17,794 $ 21,921
======== ======== ========
The following table shows a reconciliation of the funded status of the plan to
the amounts recognized in the balance sheets:
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
Funded status - postretirement plan assets
less than projected benefit obligation $ (24,269) $ (48,202)
Unrecognized net obligation at transition 107,842 115,541
Unrecognized net actuarial gains (86,692) (79,013)
--------- ---------
Net postretirement amount recognized
in the balance sheets $ (3,119) $ (11,674)
========= =========
The following table sets forth the postretirement benefit plans' change in
accumulated benefit obligation for the plan years 1998 and 1997:
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
Accumulated postretirement benefit
obligation at beginning of year $ 199,348 $ 181,405
Service cost 7,890 7,046
Interest cost 15,763 14,441
Benefit payments (10,378) (6,745)
Actuarial losses 25,056 3,201
--------- ---------
Accumulated postretirement benefit
obligation at end of year $ 237,679 $ 199,348
========= =========
The following table sets forth the postretirement benefit plans' change in the
fair value of plan assets for the plan years 1998 and 1997:
(Thousands of Dollars) 1998 1997
- ---------------------- ---- ----
Fair value of postretirement plan assets at
beginning of year $ 151,146 $ 109,763
Actual return on plan assets 47,284 30,846
Employer contributions 25,327 17,269
Benefit payments (10,347) (6,732)
--------- ---------
Fair value of postretirement plan assets at
the end of year $ 213,410 $ 151,146
========= =========
49
<PAGE>
We made the assumptions below to calculate the postretirement liability:
1998 1997
---- ----
Discount rate 7.00% 7.25%
Expected long- term rate of return
on assets - after tax 8.73% 7.75%
Initial health care cost trend rate -
under age 65 7.50% 8.00%
Initial health care cost trend rate -
age 65 and over 6.50% 7.00%
Ultimate health care cost trend rate
(reached in the year 2002) 5.00% 5.00%
Assuming a 1% increase in the health care cost trend rate, the 1998 cost of
postretirement benefits other than pensions would increase by approximately $4.6
million and the accumulated benefit obligation as of December 31, 1998 would
increase by approximately $37.8 million.
Assuming a 1% decrease in the health care cost trend rate, the 1998 cost of
postretirement benefits other than pensions would decrease by approximately $3.8
million and the accumulated benefit obligation as of December 31, 1998 would
decrease by approximately $31.9 million.
10. LEASES
In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common
facilities in three separate sale leaseback transactions. APS accounts for these
leases as operating leases. The gain of approximately $140.2 million was
deferred and is being amortized to operations expense over 29.5 years, the
original term of the leases. There are options to renew the leases for two
additional years and to purchase the property for fair market value at the end
of the lease terms. Consistent with the ratemaking treatment, an amount equal to
the annual lease payments is included in rent expense. A regulatory asset is
recognized for the difference between lease payments and rent expense calculated
on a straight-line basis.
The average amounts to be paid for the Palo Verde Unit 2 leases are as follows:
Year (In Millions)
---- -------------
1999 $ 40. 1
2000 46. 3
2001-2015 49. 0
In accordance with the 1996 regulatory agreement (see Note 3), the ACC
accelerated APS' amortization of the regulatory asset for leases to an
eight-year period that will end June 30, 2004. The accelerated amortization is
included in depreciation and amortization expense on the Statements of Income.
The balance of this regulatory asset at December 31, 1998 was $48.5 million.
Lease expense was approximately $42 million in each of the years 1996 through
1998.
APS has a capital lease on a combined cycle plant, which it sold and leased
back. The lease requires semiannual payments of $2.6 million through June 2001,
and includes renewal and purchase options based on fair market value. The plant
is included in plant in service at its original cost of $54.4 million;
accumulated amortization at December 31, 1998 was $48.6 million.
In addition, we lease certain land, buildings, equipment, and miscellaneous
other items through operating rental agreements with varying terms, provisions,
and expiration dates. Approximate miscellaneous lease expense was:
+ $13.1 million in 1998
+ $11.2 million in 1997 and
+ $12.8 million in 1996.
Estimated future minimum lease commitments, excluding the Palo Verde and
combined cycle leases, are as follows:
Year (In Millions)
- ---- -------------
1999 $ 16.4
2000 16.4
2001 18.3
2002 19.3
2003 18.2
Thereafter 151.2
------
Total future commitments $239.8
======
50
<PAGE>
11. JOINTLY-OWNED FACILITIES
APS shares ownership of some of its generation and transmission facilities with
other companies. The following table shows APS' interest in those jointly-owned
facilities at December 31, 1998. APS' share of operating and maintaining the
facilities is included in the Income Statement in utility operations and
maintenance expense.
<TABLE>
<CAPTION>
Percent Plant Construction
Owned by in Accumulated Work in
(Dollars in Thousands) APS Service Depreciation Progress
---------------------- --- ------- ------------ --------
<S> <C> <C> <C> <C>
Generating Facilities
Palo Verde Nuclear Generating Station Units 1 and 3 29.1% $1,821,620 $670,403 $20,152
Palo Verde Nuclear Generating Station
Unit 2 (see Note 10) 17.0% 568,184 224,502 9,839
Four Corners Steam Generating Station Units 4 and 5 15.0% 150,165 69,764 312
Navajo Steam Generating Station Units 1, 2, and 3 14.0% 203,356 90,237 25,560(a)
Cholla Steam Generating Station Common Facilities (b) 62.8%(c) 67,513 37,096 267
Transmission Facilities
ANPP 500 KV System 35.8%(c) 66,547 20,282 1,384
Navajo Southern System 31.4%(c) 26,918 17,285 21
Palo Verde - Yuma 500 KV System 23.9%(c) 11,376 4,215 --
Four Corners Switchyards 27.5%(c) 3,071 1,780 143
Phoenix - Mead System 17.1%(c) 36,324 536 --
</TABLE>
(a) The construction costs at Navajo are primarily related to the installation
of scrubbers required by environmental legislation.
(b) PacifiCorp owns Cholla Unit 4 and APS operates the unit for them. The
common facilities at the Cholla Plant are jointly-owned.
(c) Weighted average of interests.
12. COMMITMENTS AND CONTINGENCIES
LITIGATION
We are party to various claims, legal actions, and complaints arising in the
ordinary course of business. In our opinion, the ultimate resolution of these
matters will not have a material adverse effect on our financial statements.
PALO VERDE NUCLEAR GENERATING STATION
Under the Nuclear Waste Policy Act, the Department of Energy (DOE) was to
develop the facilities necessary for the storage and disposal of spent fuel and
to have the first such facility in operation by 1998. That facility was to be a
permanent repository, but DOE has announced that such a repository now cannot be
completed before 2010. In response to lawsuits filed over DOE's obligation to
accept used nuclear fuel, the United States Court of Appeals for the D.C.
Circuit has ruled that DOE had an obligation to begin accepting used nuclear
fuel in 1998. However, the Court refused to issue an order compelling DOE to
begin moving used fuel. Instead, the Court ruled that any damages to utilities
should be sought under the standard contract signed between DOE and utilities,
including APS. The United States Supreme Court has refused to grant review of
the D. C. Circuit's decision. In July 1998, APS filed a Petition for Review
regarding DOE's obligation to begin accepting spent nuclear fuel.
APS has capacity in existing fuel storage pools at Palo Verde which, with
certain modifications, could accommodate all fuel expected to be discharged from
normal operation of Palo Verde through 2002, and believes it could augment that
wet storage with new facilities for on-site dry storage of spent fuel for an
indeterminate period of operation beyond 2002, subject to obtaining any required
governmental approvals. APS currently estimates that it will incur $113 million
(in 1998 dollars) over the life of Palo Verde for its share of the costs related
to the on-site interim storage of spent nuclear fuel. Beginning in 1999, APS
will accrue these costs as a component of fuel expense, meaning the charges will
be accrued as the fuel is burned. During 1998, APS recorded a liability and a
regulatory asset of $35 million for on-site interim nuclear fuel storage costs
related to nuclear fuel burned prior to 1999. APS currently believes that spent
fuel storage or disposal methods will be available for use by Palo Verde to
allow its continued operation beyond 2002.
The Palo Verde participants have insurance for public liability resulting from
nuclear energy hazards to the full limit of liability under federal law. This
potential liability is covered by primary
51
<PAGE>
liability insurance provided by commercial insurance carriers in the amount of
$200 million and the balance by an industry-wide retrospective assessment
program. If losses at any nuclear power plant covered by the programs exceed the
accumulated funds, APS could be assessed retrospective premium adjustments. The
maximum assessment per reactor under the program for each nuclear incident is
approximately $88 million, subject to an annual limit of $10 million per
incident. Based upon APS' 29.1% interest in the three Palo Verde units, APS'
maximum potential assessment per incident for all three units is approximately
$77 million, with an annual payment limitation of approximately $9 million.
The Palo Verde participants maintain "all risk"(including nuclear hazards)
insurance for property damage to, and decontamination of, property at Palo Verde
in the aggregate amount of $2.75 billion, a substantial portion of which must
first be applied to stabilization and decontamination. APS has also secured
insurance against portions of any increased cost of generation or purchased
power and business interruption resulting from a sudden and unforeseen outage of
any of the three units. The insurance coverage discussed in this and the
previous paragraph is subject to certain policy conditions and exclusions.
FUEL AND PURCHASED POWER COMMITMENTS
APS is a party to various fuel and purchased power contracts with terms expiring
from 1999 through 2020 that include required purchase provisions. APS estimates
its 1999 contract requirements to be about $132 million. However, this amount
may vary significantly pursuant to certain provisions in such contracts that
permit APS to decrease its required purchases under certain circumstances.
APS must reimburse certain coal providers for amounts incurred for coal mine
reclamation. APS estimates its share of the total obligation to be about $103
million. The portion of the coal mine reclamation obligation related to coal
already burned is about $62 million at December 31, 1998 and is included in
"Deferred Credits-Other" in the Balance Sheet. A regulatory asset has been
established for amounts not yet recovered from ratepayers. In accordance with
the 1996 regulatory agreement (see Note 3), the ACC began accelerated
amortization of APS' regulatory asset for coal mine reclamation costs over an
eight- year period that will end June 30, 2004. Amortization is included in
depreciation and amortization expense on the Statements of Income. The balance
of the regulatory asset at December 31, 1998 was about $51 million.
CONSTRUCTION PROGRAM
Consolidated capital expenditures in 1999 are estimated at $386 million.
13. NUCLEAR DECOMMISSIONING COSTS
APS recorded $11.4 million for decommissioning expense in each of the years
1998, 1997, and 1996. APS estimates it will cost about $1.8 billion ($452
million in 1998 dollars) to decommission its 29.1% share of the three Palo Verde
units. The decommissioning costs are expected to be incurred over a 14-year
period beginning in 2024. APS charges decomissioning costs to expense over each
unit's operating license term and includes them in the accumulated depreciation
balance until each unit is retired. Nuclear decommissioning costs are recovered
in rates.
APS' current estimates are based on a 1998 site-specific study for Palo Verde
that assumes the prompt removal/dismantlement method of decommissioning. An
independent consultant prepared this study. APS is required to update the study
every three years.
To fund the costs APS expects to incur to decommission the plant, APS
established external decommissioning trusts in accordance with Nuclear
Regulatory Commission (NRC) regulations. The trust accounts are reported in
"Investments and Other Assets" on the Consolidated Balance Sheets at their
market value of $145.6 million at December 31, 1998 and $124.6 million at
December 31, 1997. APS invests the trust funds primarily in fixed income
securities and domestic stock and classifies them as available for sale.
Realized and unrealized gains and losses are reflected in accumulated
depreciation.
In February 1996, the FASB issued an exposure draft, "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets." This proposed
standard would require the estimated present value of the cost of
decommissioning and certain other removal costs to be recorded as a liability,
along with an offsetting plant asset when a decommissioning or other removal
obligation is incurred. The FASB has indicated that a revised exposure draft
will be issued in 1999.
52
<PAGE>
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly financial information for 1998 and 1997 is as follows:
(Dollars in Thousands, Except Per Share Amounts)
1998
- --------------------------------------------------------------------------------
Quarter Ended March 31 June 30 September 30 December 31
Operating revenues
Electric $380,423 $441,715 $740,734 $443,526
Real estate 34,161 28,916 18,276 42,835
Operating income (a) $ 90,837 $122,605 $251,838 $101,848
Net income $ 31,086 $ 48,997 $127,281 $ 35,528
Earnings per average common
share outstanding
Net income - basic $ 0.37 $ 0.58 $ 1.50 $ 0.42
Net income - diluted $ 0.36 $ 0.57 $ 1.49 $ 0.42
Dividends declared per share (b) $ 0.30 $ 0.60 $ -- $ 0.325
(Dollars in Thousands, Except Per Share Amounts)
1997
- --------------------------------------------------------------------------------
Quarter Ended March 31 June 30 September 30 December 31
Operating revenues
Electric $379,021 $458,751 $632,821 $407,960
Real estate 19,543 30,166 30,929 35,835
Operating income (a) $ 82,471 $150,024 $243,454 $ 81,557
Net income $ 25,382 $ 67,182 $124,340 $ 18,952
Earnings per average common
share outstanding
Net income - basic $ 0.29 $ 0.79 $ 1.47 $ 0.21
Net income - diluted $ 0.29 $ 0.78 $ 1.46 $ 0.21
Dividends declared per share (b) $ 0.275 $ 0.55 $ -- $ 0.30
(a) APS' utility business is seasonal in nature, with the peak sales periods
generally occurring during the summer months. Comparisons among quarters of
a year may not represent overall trends and changes in operations.
(b) Dividends for the quarters ending September 30, 1998 and September 30, 1997
were declared in June.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
We believe that the carrying amounts of our cash equivalents and commercial
paper are reasonable estimates of their fair values at December 31, 1998 and
1997 due to their short maturities.
We hold investments in debt and equity securities for purposes other than
trading. The December 31, 1998 and 1997 fair values of such investments, which
we determine by using quoted market values or by discounting cash flows at rates
equal to our cost of capital, approximate their carrying amount.
The carrying value of our long-term debt (excluding a capitalized lease
obligation) was $2.21 billion on December 31, 1998, with an estimated fair value
of $2.28 billion. On December 31, 1997, the carrying value of our long-term debt
(excluding a capitalized lease obligation) was $2.34 billion, with an estimated
fair value of $2.38 billion. The fair value estimates are based on quoted market
prices of the same or similar issues.
53
<PAGE>
16. EARNINGS PER SHARE
In 1997 we adopted SFAS No. 128, "Earnings Per Share." This statement requires
the presentation of both basic and diluted earnings per share on the financial
statements. The following table presents earnings per average common share
outstanding (EPS):
1998 1997 1996
---- ---- ----
Basic EPS:
Continuing operations $2.87 $2.76 $ 2.41
Discontinued operations -- -- (0.11)
Extraordinary charge -- -- (0.23)
----- ----- ------
Net income $2.87 $2.76 $ 2.07
===== ===== ======
Diluted EPS:
Continuing operations $2.85 $2.74 $ 2.40
Discontinued operations -- -- (0.11)
Extraordinary charge -- -- (0.23)
----- ----- ------
Net income $2.85 $2.74 $ 2.06
===== ===== ======
Dilutive stock options increased average common shares outstanding by 571,728
shares in 1998, 519,800 shares in 1997, and 580,405 shares in 1996. Total
average common shares outstanding for the purposes of calculating diluted
earnings per share were 85,345,946 shares in 1998, 86,022,709 shares in 1997,
and 88,021,920 shares in 1996.
Options to purchase 244,200 shares of common stock at $46.78 per share were
outstanding during the last quarter of 1998 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the common shares.
17. STOCK OPTIONS
We offer several stock incentive plans for our officers, APS officers, and key
employees.
The plans provide for the granting of new options or awards of up to 3.5 million
shares at a price per option not less than fair market value on the date the
option is granted. The plans also provide for the granting of any combination of
stock appreciation rights or dividend equivalents. The awards outstanding under
the various incentive plans at December 31, 1998 approximate 1,497,012
non-qualified stock options, 158,121 restricted shares, and no dividend
equivalent shares, incentive stock options, or stock appreciation rights.
The FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" which
was effective for 1996. The statement encourages, but does not require, that a
company record compensation expense based on the fair value method. We continue
to recognize expense based on Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." If we had recorded compensation
expense based on the fair value method, our net income would have been reduced
to the following pro forma amounts:
(Dollars in Thousands,
Except Per Share Amounts) 1998 1997 1996
---- ---- ----
Net income
As reported $242,892 $235,856 $181,180
Pro forma (fair value method) $242,177 $235,446 $180,969
Net income per share - basic
As reported $ 2.87 $ 2.76 $ 2.07
Pro forma (fair value method) $ 2.86 $ 2.75 $ 2.07
54
<PAGE>
We did not consider compensation costs for stock options granted before January
1, 1995. Therefore, future reported net income may not be representative of this
compensation cost calculation. In order to present the pro forma information
above, we calculated the fair value of each fixed stock option in the incentive
plans using the Black-Scholes option-pricing model. The fair value was
calculated based on the date the option was granted. The following
weighted-average assumptions were also used in order to calculate the fair value
of the stock options:
1998 1997 1996
---- ---- ----
Risk- free interest rate 4.54% 5.66% 5.77%
Dividend yield 3.03% 4.50% 4.50%
Volatility 18.80% 15.63% 17.10%
Expected life (months) 60 60 58
The following table is a summary of the status of our stock option plans as of
December 31, 1998, 1997, and 1996 and changes during the years ending on those
dates:
<TABLE>
<CAPTION>
1998 Weighted 1997 Weighted 1996 Weighted
1998 Average 1997 Average 1996 Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,488,131 $24.60 1,673,076 $21.59 1,807,900 $19.78
Granted 244,200 46.78 260,450 39.56 260,500 31.44
Exercised (217,317) 23.09 (409,975) 21.60 (363,400) 19.41
Forfeited (18,002) 33.42 (35,420) 27.10 (31,924) 24.35
--------- --------- ---------
Outstanding at end of year 1,497,012 28.34 1,488,131 24.60 1,673,076 21.59
--------- --------- ---------
Options exercisable at year- end 1,039,664 22.21 1,008,514 19.53 1,135,032 18.60
--------- --------- ---------
Weighted average fair value of
options granted during the year 8.15 5.83 4.24
</TABLE>
The following table summarizes information about our stock option plans at
December 31, 1998:
Weighted Average
Range of Exercise Remaining Options
Prices Per Share Outstanding Contract Life Exercisable
---------------- ----------- ------------- -----------
$11.25 16,500 1.90 16,500
11.50 270,000 1.10 270,000
15.75 42,500 2.90 42,500
17.68 13,275 3.10 13,275
19.00 116,537 5.90 116,537
19.56 58,500 3.90 58,500
22.13 109,584 5.00 109,584
27.44 175,090 6.90 175,090
31.44 205,292 8.00 142,230
39.75 245,534 9.00 88,665
46.78 244,200 9.90 6,783
--------- ---------
$11.25 - $46.78 1,497,012 6.29 1,039,664
========= =========
55
<PAGE>
PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II - VALUATION AND QUALIYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
----------------------
Balance at Charged to Charged Balance
beginning cost and to other at end of
Description of period expenses accounts Deductions (a) Period
----------- --------- -------- -------- ---------- ------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Real Estate Valuation Reserves $23,000 $ -- $ -- $ 8,000 $15,000
YEAR ENDED DECEMBER 31, 1997
Real Estate Valuation Reserves $41,000 $ -- $ -- $18,000 $23,000
YEAR ENDED DECEMBER 31, 1996
Real Estate Valuation Reserves $47,000 $ -- $ -- $ 6,000 $41,000
</TABLE>
(a) REPRESENTS PRO-RATA ALLOCATIONS FOR SALE OF LAND.
56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
Reference is hereby made to "Election of Directors" in the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be held on May
19, 1999 (the "1999 Proxy Statement") and to the Supplemental Item ---"Executive
Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Reference is hereby made to the fourth and fifth paragraphs under the
heading "The Board and its Committees," to "Executive Compensation," to "Human
Resources Committee Report," to "Stock Performance Comparisons" and to
"Executive Benefit Plans" in the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to "Certain Securities Ownership" in the 1999
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to "Executive Benefit Plans --- Employment and
Severance Agreements" and "General-Business Relationships" in the 1999 Proxy
Statement.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
See the Index to Consolidated Financial Statements and Financial
Statement Schedule in Part II, Item 8.
EXHIBITS FILED
EXHIBIT NO. DESCRIPTION
10.1a -- Summary of the Pinnacle West Capital Corporation 1999 Bonus Plan
10.2a -- Letter Agreement between the Company and George A. Schreiber, Jr.
21 -- Subsidiaries of the Company
23.1 -- Consent of Deloitte & Touche LLP
27.1 -- Financial Data Schedule
In addition to those Exhibits shown above, the Company hereby
incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and
Regulation ss.229.10(d) by reference to the filings set forth below:
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
3.2 Articles of Incorporation, 19.1 to the Company's 1-8962 11-14-88
restated as of July 29, 1988 September 1988 Form 10-Q
Report
3.3 Bylaws, amended as of 3.1 to the Company's 1995 1-8962 4-1-96
February 21, 1996 Form 10-K Report
4.1 Mortgage and Deed of Trust 4.1 to APS' September 1992 1-4473 11-9-92
Relating to APS' First Form 10-Q Report
Mortgage Bonds, together
with forty-eight indentures
supplemental thereto
4.2 Forty-ninth Supplemental 4.1 to APS' 1992 Form 10-K 1-4473 3-30-93
Indenture Report
4.3 Fiftieth Supplemental 4.2 to APS' 1993 Form 10-K 1-4473 3-30-94
Indenture Report
4.4 Fifty-first Supplemental 4.1 to APS' August 1, 1993 1-4473 9-27-93
Indenture Form 8-K Report
4.5 Fifty-second Supplemental 4.1 to APS' September 30, 1993 1-4473 11-15-93
Indenture Form 10-Q Report
4.6 Fifty-third Supplemental 4.5 to APS' Registration 1-4473 3-1-94
Indenture Statement No. 33-61228 by
means of February 23, 1994
Form 8-K Report
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
4.7 Fifty-fourth Supplemental 4.1 to APS' Registration 1-4473 11-22-96
Indenture Statements Nos. 33-61228,
33-55473, 33-64455 and
333-15379 by means of
November 19, 1996 Form 8-K
Report
4.8 Fifty-fifth Supplemental 4.8 to APS' Registration 1-4473 4-9-97
Indenture Statement Nos. 33-55473, 33-
64455 and 333-15379 by means
of April 7, 1997 Form 8-K
Report
4.9 Agreement, dated March 21, 4.1 to APS' 1993 Form 10-K 1-4473 3-30-94
1994, relating to the filing of Report
instruments defining the
rights of holders of APS
long-term debt not in excess
of 10% of APS' total assets
4.10 Indenture dated as of January 4.6 to APS' Registration 1-4473 1-11-95
1, 1995 among APS and The Statement Nos. 33-61228 and
Bank of New York, as 33-55473 by means of January
Trustee 1, 1995 Form 8-K Report
4.11 First Supplemental Indenture 4.4 to APS' Registration 1-4473 1-11-95
dated as of January 1, 1995 Statement Nos. 33-61228 and
33-55473 by means of January
1, 1995 Form 8-K Report
4.12 Indenture dated as of 4.5 to APS' Registration 1-4473 11-22-96
November 15, 1996 among Statements Nos. 33-61228,
APS and The Bank of New 33-55473, 33-64455 and 333-
York, as Trustee 15379 by means of November
19, 1996 Form 8-K Report
4.13 First Supplemental Indenture 4.6 to APS' Registration 1-4473 11-22-96
Statements Nos. 33-61228,
33-55473, 33-64455 and 333-
15379 by means of November
19, 1996 Form 8-K Report
4.14 Second Supplemental 4.10 to APS' Registration 1-4473 4-9-97
Indenture Statement Nos. 33-55473, 33-
64455 and 333-15379 by means
of April 7, 1997 Form 8-K
Report
4.15 Agreement of Resignation, 4.1 to APS' September 25, 1995 1-4473 10-24-95
Appointment, Acceptance Form 8-K Report
and Assignment dated as of
August 18, 1995 by and
among APS, Bank of
America National Trust and
Savings Association and The
Bank of New York
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
4.16 Rights Agreement, amended 4.1 to the Company's 1990 1-8962 3-28-91
as of November 14, 1990, Form 10-K Report
between the Company and
The Valley National Bank of
Arizona, as Rights Agent,
which includes the Certificate
of Designation of Series A
Participating Preferred Stock
as Exhibit A, the form of
Rights Certificate as Exhibit
B and the Summary of Rights
as Exhibit
4.17 Specimen Certificate of 4.2 to the Company's 1988 1-8962 3-31-89
Pinnacle West Capital Form 10-K Report
Corporation Common Stock,
no par value
4.18 Agreement, dated March 29, 4.1 to the Company's 1987 1-8962 3-30-88
1988, relating to the filing of Form 10-K Report
instruments defining the
rights of holders of long-term
debt not in excess of 10% of
the Company's total assets
4.19 Indenture dated as of January 4.10 to APS' Registration 1-4473 1-16-98
15, 1998 among APS and The Statement Nos. 333-15379 and
Chase Manhattan Bank, as 333-27551 by means of January
Trustee 13, 1998 Form 8-K Report
4.20 First Supplemental Indenture 4.3 to APS' Registration 1-4473 1-16-98
dated as of January 15, 1998 Statement Nos. 333-15379 and
333-27551 by means of January
13, 1998 Form 8-K Report
4.21 Second Supplemental 4.3 to APS' Registration 1-4473 2-22-99
Indenture dated as of Statement Nos. 333-27551
February 15, 1999 and 333-58445 by means of
February 18, 1999
Form 8-K Report
10.3 Agreement, dated December 4.1 to the Company's December 1-8962 12-7-89
6, 1989, between the 6, 1989 Form 8-K Report
Company and the Office of
Thrift Supervision, United
States Department of
Treasury, and related
documents
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.4 Release from the Office of 10.1 to the Company's 1989 1-8962 3-31-89
Thrift Supervision, United Form 10-K Report
States Department of
the Treasury, to the
Company, dated March 22,
1990, releasing the Company
from its purported obligations
under the Stipulation and
under any other source of
alleged obligation of the
Company to infuse equity
capital into MeraBank
10.5 Release from the Federal 10.2 to the Company's 1989 1-8962 3-31-89
Deposit Insurance Form 10-K Report
Corporation to the Company,
dated March 22, 1990,
releasing the Company from
its purported obligations
under the Stipulation and
under any other source of
alleged obligation of the
Company to infuse equity
capital into MeraBank
10.6 Release from the Resolution 10.3 to the Company's 1989 1-8962 3-31-89
Trust Corporation (in its Form 10-K Report
corporate capacity) to the
Company, dated March 21,
1990, releasing the Company,
from its purported obligation
under the Stipulation and
under any other source of
alleged obligation of the
Company to infuse equity
capital into MeraBank
10.7 Release from the Resolution 10.4 to the Company's 1989 1-8962 3-31-89
Trust Corporation (in its Form 10-K Report
capacity as Receiver of
MeraBank) to the Company,
dated March 21, 1990,
releasing the Company from
its purported obligations
under the Stipulation and
under any other source of
alleged obligation to the
Company to infuse equity
capital into MeraBank
10.8ad Form of Key Executive 10.5 to the Company's 1989 1-8962 3-31-89
Employment and Severance Form 10-K Report
Agreement between the
Company and each of its
executive officers
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.9a Employment Agreement, 10.1 to the Company's 1990 2-96386 3-28-91
effective as of February 5, Form 10-K Report
1990, between Richard Snell
and the Company
10.10 Two separate 10.2 to APS' September 1991 1-4473 11-14-91
Decommissioning Trust Form 10-Q Report
Agreements (relating to
PVNGS Units 1 and 3,
respectively), each dated July
1, 1991, between APS and
Mellon Bank, N.A., as
Decommissioning Trustee
10.11 Amendment No. 1 to 10.1 to APS' 1994 Form 10- K 1-4473 3-30-95
Decommissioning Trust Report
Agreement (PVNGS Unit 1),
dated as of December 1, 1994
10.12 Amendment No. 1 to 10.2 to APS' 1994 Form 10-K 1-4473 3-30-95
Decommissioning Trust Report
Agreement (PVNGS Unit 3),
dated as of December 1, 1994
10.13 Amendment No. 2 to APS 10.4 to APS' 1996 Form 10-K 1-4473 3-28-97
Decommissioning Trust Report
Agreement (PVNGS Unit 1)
dated as of July 1, 1991
10.14 Amendment No. 2 to APS 10.6 to APS' 1996 Form 10-K 1-4473 3-28-97
Decommissioning Trust Report
Agreement (PVNGS Unit 3)
dated as of July 1, 1991
10.15 Amended and Restated 10.1 to the Company's 1991 1-8962 3-26-92
Decommissioning Trust Form 10-K Report
Agreement (PVNGS Unit 2)
dated as of January 31, 1992,
among APS, Mellon Bank,
N.A., as Decommissioning
Trustee, and State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee under two
separate Trust Agreements,
each with a separate Equity
Participant, and as Lessor
under two separate Facility
Leases, each relating to an
undivided interest in PVNGS
Unit 2
10.16 First Amendment to 10.2 to APS' 1992 Form 10-K 1-4473 3-30-93
Amended and Restated Report
Decommissioning Trust
Agreement (PVNGS Unit 2),
dated as of November 1, 1992
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.17 Amendment No. 2 to 10.2 to APS' 1994 Form 10-K 1-4473 3-30-95
Amended and Restated Report
Decommissioning Trust
Agreement (PVNGS Unit 2),
dated as of November 1, 1994
10.18 Amendment No. 3 to 10.1 to APS' June 1996 Form 1-4473 8-9-96
Amended and Restated 10-Q Report
Decommissioning Trust
Agreement (PVNGS Unit 2),
dated as of November 1, 1994
10.19 Amendment No. 4 to APS 10.5 to APS' 1996 Form 10-K 1-4473 3-28-97
Amended and Restated Report
Decommissioning Trust
Agreement (PVNGS Unit 2)
dated as of January 31, 1992
10.20 Asset Purchase and Power 10.1 to APS' June 1991 Form 1-4473 8-8-91
Exchange Agreement dated 10-Q Report
September 21, 1990 between
APS and PacifiCorp, as
amended as of October 11,
1990 and as of July 18, 1991
10.21 Long-Term Power 10.2 to APS' June 1991 Form 1-4473 8-8-91
Transaction Agreement dated 10-Q Report
September 21, 1990 between
APS and PacifiCorp, as
amended as of October 11,
1990, and as of July 8, 1991
10.22 Amendment No. 1 dated 10.3 to APS' 1995 Form 10-K 1-4473 3-29-96
April 5, 1995 to the Report
Long-Term Power
Transaction Agreement and
Asset Purchase and Power
Exchange Agreement
between PacifiCorp and APS
10.23 Restated Transmission 10.4 to APS' 1995 Form 10-K 1-4473 3-29-96
Agreement between Report
PacifiCorp and APS dated
April 5, 1995
10.24 Contract among PacifiCorp, 10.5 to APS' 1995 Form 10-K 1-4473 3-29-96
APS and United States Report
Department of Energy
Western Area Power
Administration, Salt Lake
Area Integrated Projects for
Firm Transmission Service
dated May 5, 1995
10.25 Reciprocal Transmission 10.6 to APS' 1995 Form 10-K 1-4473 3-29-86
Service Agreement between Report
APS and PacifiCorp dated as
of March 2, 1994
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.26 Contract, dated July 21, 1984, 10.31 to the Company's Form 2-96386 3-13-85
with DOE providing for the S-14 Registration Statement
disposal of nuclear fuel
and/or high-level radioactive
waste, ANPP
10.27 Indenture of Lease with 5.01 to APS' Form S-7 2-59644 9-1-77
Navajo Tribe of Indians, Four Registration Statement
Corners Plant
10.28 Supplemental and Additional 5.02 to APS' Form S-7 2-59644 9-1-77
Indenture of Lease, including Registration Statement
amendments and supplements
to original lease with Navajo
Tribe of Indians, Four
Corners Plant
10.29 Amendment and Supplement 10.36 to the Company's 1-8962 7-25-85
No. 1 to Supplemental and Registration Statement on Form
Additional Indenture of Lease 8-B Report
Four Corners, dated April 25,
1985
10.30 Application and Grant of 5.04 to APS' Form S-7 2-59644 9-1-77
10.31 multi-party Registration Statement
rights-of-way and easements,
Four Corners Plant Site
10.31 Application and Amendment 10.37 to the Company's 1-8962 7-25-85
No. 1 to Grant of multi-party Registration Statement on Form
rights-of-way and easements, 8-B
Four Corners Power Plant
Site dated April 25, 1985
10.32 Application and Grant of 5.05 to APS' Form S-7 2-59644 9-1-77
Arizona Public Service Registration Statement
Company rights-of-way and
easements, Four Corners
Plant Site
10.33 Application and Amendment 10.38 to the Company's 1-8962 7-25-85
No. 1 to Grant of Arizona Registration Statement on Form
Public Service Company 8-B
rights-of-way and easements,
Four Corners Power Plant Site
dated April 25, 1985
10.34 Indenture of Lease, Navajo 5(g) to APS' Form S-7 2-36505 3-23-70
Units 1, 2, and 3 Registration Statement
10.35 Application and Grant of 5(h) to APS' Form S-7 2-36505 3-23-70
rights-of-way and easements, Registration Statement
Navajo Plant
10.36 Water Service Contract 5(1) to APS' Form S-7 2-394442 3-16-71
Assignment with the United Registration Statement
States Department of Interior,
Bureau of Reclamation,
Navajo Plant
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.37 Arizona Nuclear Power 10. 1 to APS' 1988 Form 10-K 1-4473 3-8-89
Project Participation
Agreement, dated August 23,
1973, among APS Salt River
Project Agricultural
Improvement and Power
District, Southern California
Edison Company, Public
Service Company of New
Mexico, El Paso Electric
Company, Southern
California Public Power
Authority, and Department of
Water and Power of the City
of Los Angeles, and
amendments 1-12 thereto
10.38 Amendment No. 13, dated as 10.1 to APS' March 1991 Form 1-4473 5-15-91
of April 22, 1991, to Arizona 10-Q
Nuclear Power Project
Participation Agreement,
dated August 23, 1973,
among APS, Salt River
Project Agricultural
Improvement and Power
District, Southern California
Edison Company, Public
Service Company of New
Mexico, El Paso Electric
Company, Southern
California Public Power
Authority, and Department of
Water and Power of the City
of Los Angeles
10.39c Facility Lease, dated as of 4.3 to APS' Form S-3 33-9480 10-24-86
August 1, 1986, between Registration Statement
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its capacity as
Owner Trustee, as Lessor,
and APS, as Lessee
10.40c Amendment No. 1, dated as 10.5 to APS' September 1986 1-4473 12-4-86
of November 1, 1986, to Form 10-Q Report by means of
Facility Lease, dated as of Amendment No. on December
August 1, 1986, between 3, 1986 Form 8
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its capacity as
Owner Trustee, as Lessor,
and APS, as Lessee
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.41c Amendment No. 2 dated as of 10.3 to APS' 1988 Form 10-K 1-4473 3-8-89
June 1, 1987 to Facility Lease Report
dated as of August 1, 1986
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Lessor, and APS, as Lessee
10.42c Amendment No. 3, dated as 10.3 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Facility Report
Lease, dated as of August 1,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Lessor, and APS, as Lessee
10.43 Facility Lease, dated as of 10.1 to APS' November 18 1-4473 1-20-87
December 15, 1986, between 1986 Form 8-K Report
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its capacity as
Owner Trustee, as Lessor,
and APS, as Lessee
10.44 Amendment No. 1, dated as 4.13 to APS' Form S-3 1-4473 8-24-87
of August 1, 1987, to Facility Registration Statement No.
Lease, dated as of December 33-9480 by means of August 1,
15, 1986, between State 1987 Form 8-K Report
Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, as Lessor, and APS,
as Lessee
10.45 Amendment No. 2, dated as 10.4 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Facility Lease, dated as of
December 15, 1986, between
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, as Lessor, and APS,
as Lessee
10.46a Directors' Deferred 10.1 to APS' June 1986 Form 1-4473 8-13-86
Compensation Plan, as 10-Q Report
restated, effective January 1,
1986
10.47a Second Amendment to the 10.2 to APS' 1993 Form 10-K 1-4473 3-30-94
Arizona Public Service Report
Company Deferred
Compensation Plan, effective
as of January 1, 1993
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.48a Third Amendment to the 10.1 to APS' September 1994 1-4473 11-10-94
Arizona Public Service Form 10-Q
Company Directors' Deferred
Compensation Plan, effective
as of May 1, 1993
10.49a Arizona Public Service 10.4 to APS' 1988 Form 10-K 1-4473 3-8-89
Company Deferred Report
Compensation Plan, as
restated, effective January 1,
1984, and the second and
third amendments thereto,
dated December 22, 1986,
and December 23, 1987
respectively
10.50 Third Amendment to the 10.3 to APS' 1993 Form 10-K 1-4473 3-30-94
Arizona Public Service Report
Company Deferred
Compensation Plan, effective
as of January 1, 1993
10.51a Fourth Amendment to the 10.2 to APS' September 1994 1-4473 11-10-94
Arizona Public Service Form 10-Q Report
Company Deferred
Compensation Plan effective
as of May 1, 1993
10.52a Fifth Amendment to the 10.3 to APS' 1996 Form 10-K 1-4473 3-28-97
Arizona Public Service Report
Company Deferred
Compensation Plan
10.53a 1999 APS Management 10.1 to APS' 1998 Form 10-K 1-4473 3-31-99
Variable Pay Plan Report
10.54a 1999 APS Senior 10.2 to APS' 1998 Form 10-K 1-4473 3-31-99
Management Variable Pay Report
Plan
10.55a 1999 APS Officers Variable 10.3 to APS' 1998 Form 10-K 1-4473 3-31-99
Pay Plan Report
10.56a Pinnacle West Capital 10.10 to APS' 1995 Form 10-K 1-4473 3-29-86
Corporation, Arizona Public Report
Service Company, SunCor
Development Company and
El Dorado Investment
Company Deferred
Compensation Plan as
amended and restated
effective January 1, 1996
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.57a Arizona Public Service 10.11 to APS' 1995 Form 10-K 1-4473 3-29-86
Company Supplemental Report
Excess Benefit Retirement
Plan as amended and restated
on December 20, 1995
10.58a Pinnacle West Capital 10.7 to APS' 1994 Form 10-K 1-4473 3-30-95
Corporation and Arizona Report
Public Service Company
Directors' Retirement Plan,
effective as of January 1,
1995
10.59a Letter Agreement dated 10.7 to APS' 1994 Form 10-K 1-4473 3-30-96
December 21, 1993, between Report
APS and William L. Stewart
10.60a Letter Agreement, dated April 10.7 to APS' 1988 Form 10-K 1-4473 3-8-89
3, 1978, between APS and O. Report
Mark DeMichele, regarding
certain retirement benefits
granted to Mr. DeMichele
10.61a Letter Agreement dated as of 10.8 to APS' 1995 Form 10-K 1-4473 3-29-96
January 1, 1996 between APS Report
and Robert G. Matlock &
Associates, Inc. for
consulting services
10.62 Letter Agreement dated 10.8 to APS' 1996 Form 10-K 1-4473 3-28-97
August 16, 1996 between Report
APS and William L. Stewart
10.63 Letter Agreement between 10.2 to APS' September 1997 1-4473 11-12-97
APS and William L. Stewart Form 10-Q Report
10.64 Letter Agreement dated 10.9 to APS' 1996 Form 10-K 1-4473 3-28-97
November 27, 1996 between Report
APS and George A.
Schreiber, Jr.
10.65ad Key Executive Employment 10.3 to APS' 1989 Form 10-K 1-4473 3-8-90
and Severance Agreement Report
between APS and certain
executive of officers of APS
10.66ad Revised form of Key 10.5 to APS' 1993 Form 10-K 1-4473 3-30-94
Executive' Employment and Report
Severance Agreement
between APS and certain
executive officers of APS
10.67ad Second revised form of Key 10.9 to APS' 1994 Form 10-K 1-4473 3-30-95
Executive Employment and Report
Severance Agreement
between APS and certain
executive officers of APS
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.68ad Key Executive Employment 10.4 to APS' 1989 Form 10-K 1-4473 3-8-90
and Severance Agreement Report
between APS and certain
managers of APS
10.69ad Revised form of Key 10.4 to APS' 1993 Form 10-K 1-4473 3-30-94
Executive Employment and Report
Severance Agreement
between APS and certain key
employees of APS
10.70ad Second revised Form of Key 10.8 to APS' 1994 Form 10-K 1-4473 3-30-95
Executive Employment and Report
Severance Agreement
between APS and certain key
employees of APS
10.71a Pinnacle West Capital 10.1 to APS' 1992 Form 10-K 1-4473 3-30-93
Corporation Stock Option and Report
Incentive Plan
10.72a Pinnacle West Capital A to the Proxy Statement for the 1-8962 4-16-94
Corporation 1994 Long-Term Plan Report for the Company's
Incentive Plan, effective as of 1994 Annual Meeting of
March 23, 1994 Shareholders
10.73a Pinnacle West Capital B to the Proxy Statement for the 1-8962 4-16-94
Corporation Director Equity Plan Report for the Company's
Participation Plan 1994 Annual Meeting of
Shareholders
10.74 Agreement No. 13904 10.3 to APS' 1991 Form 10-K 1-4473 3-19-92
(Option and Purchase of Report
Effluent) with Cities of
Phoenix, Glendale, Mesa,
Scottsdale, Tempe, Town of
Youngtown, and Salt River
Project Agricultural
Improvement and Power
District, dated April 23, 1973
10.75 Agreement for the Sale and 10.4 to A PS' 1991 Form 10-K 1-4473 3-19-92
purchase of Wastewater Report
Effluent with City of Tolleson
and Salt River Agricultural
Improvement and Power
District, dated June 12, 1981,
including Amendment No. 1
dated as of November 12,
1981 and Amendment No. 2
dated as of June 4, 1986
10.76a First Amendment to 10.2 to the Company's 1995 1-8962 4-1-96
Employment Agreement, Form 10-K Report
effective March 31, 1995,
between Richard Snell and
the Company
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
10.77a Second Amendment to 10.2 to the Company's 1996 1-8962 3-31-97
Employment Agreement, Form 10-K Report
effective February 5, 1997,
between Richard Snell and
the Company
10.78a APS Director Equity Plan 10.1 to September 1997 Form 1-4473 11-12-97
10-Q Report
10.79 Territorial Agreement 10.1 to APS' March 1998 1-4473 5-15-98
between the Company Form 10-Q Report
and Salt River Project
10.80 Power Coordination 10.2 to APS' March 1998 1-4473 5-15-98
Agreement between Form 10-Q Report
the Company and Salt
River Project
10.81 Memorandum of Agreement 10.3 to APS' March 1998 1-4473 5-15-98
between the Company and Form 10-Q Report
Salt River Project
10.82 Addendum to Memorandum 10.2 to APS' May 19, 1998 1-4473 6-26-98
of Agreement between APS Form 8-K Report
and Salt River Project dated
as of May 19, 1998
99.1 Collateral Trust Indenture 4.2 to APS' 1992 Form 10 K 1-4473 3-30-93
among PVNGS II Funding Report
Corp., Inc., APS and
Chemical Bank, as Trustee
99.2 Supplemental Indenture to 4.3 to APS' 1992 Form 10 K 1-4473 3-30-93
Collateral Trust Indenture Report
among PVNGS II Funding
Corp., Inc., APS and
Chemical Bank, as Trustee
99.3c Participation Agreement, 28.1 to APS' September 1992 1-4473 11-9-92
dated as of August 1, 1986, Form 10-Q Report
among PVNGS Funding
Corp., Inc., Bank of America
National Trust and Savings
Association, State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, in
its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual
capacity and as Indenture
Trustee, APS, and the Equity
Participant named therein
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.4c Amendment No. 1 dated as of 10.8 to APS' September 1986 1-4473 12-4-86
November 1, 1986, to Form 10-Q Report by means of
Participation Agreement, Amendment No. 1, on
dated as of August 1, 1986, December 3, 1986 Form 8
among PVNGS Funding
Corp., Inc., Bank of America
National Trust and Savings
Association, State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, in
its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual
capacity and as Indenture
Trustee, APS, and the Equity
Participant named therein
99.5c Amendment No. 2, dated as 28.4 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Participation Agreement,
dated as of August 1, 1986,
among PVNGS Funding
Corp., Inc., PVNGS II
Funding Corp., Inc., State
Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its individual
capacity and as Owner
Trustee, Chemical Bank, in
its individual capacity and as
Indenture Trustee, APS, and
the Equity Participant named
therein
99.6c Trust Indenture, Mortgage, 4.5 to APS' Form S-3 33-9480 10-24-86
Security Agreement and Registration Statement
Assignment of Facility Lease,
dated as of August 1, 1986,
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
99.7c Supplemental Indenture No. 10.6 to APS' September 1986 1-4473 12-4-86
1, dated as of November 1, Form 10-Q Report by means of
1986 to Trust Indenture, Amendment No. 1 on December
Mortgage, Security 3, 1986 Form 8
Agreement and Assignment
of Facility Lease, dated as of
August 1, 1986, between
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, as Owner Trustee,
and Chemical Bank, as
Indenture Trustee
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.8c Supplemental Indenture No. 2 28.14 to APS' 1992 Form 10-K 1-4473 3-30-93
to Trust Indenture, Mortgage, Report
Security Agreement and
Assignment of Facility Lease,
dated as of August 1, 1986,
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Lease Indenture
Trustee
99.9c Assignment, Assumption and 28.3 to APS' Form S-3 33-9480 10-24-86
Further Agreement, dated as Registration Statement
of August 1, 1986, between
APS and State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.10c Amendment No. 1, dated as 10.10 to APS' September 1986 1-4473 12-4-86
of November 1, 1986, to Form 10-Q Report by means of
Assignment, Assumption and Amendment No. l on December
Further Agreement, dated as 3, 1986 Form 8
of August 1, 1986, between
APS and State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.11c Amendment No. 2, dated as 28.6 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Assignment, Assumption and
Further Agreement, dated as
of August 1, 1986, between
APS and State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.12 Participation Agreement, 28.2 to APS' September 1992 1-4473 11-9-92
dated as of December 15, Form 10-Q Report
1986, among PVNGS
Funding Report Corp., Inc.,
State Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its individual
capacity and as Owner
Trustee, Chemical Bank, in
its individual capacity and as
Indenture Trustee under a
Trust Indenture, APS, and the
Owner Participant named
therein
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.13 Amendment No. 1, dated as 28.20 to APS' Form S-3 1-4473 8-10-87
of August 1, 1987, to Registration Statement No.
Participation Agreement, 33-9480 by means of a
dated as of December 15, November 6, 1986 Form 8-K
1986, among PVNGS Report
Funding Corp., Inc. as
Funding Corporation, State
Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, as Owner Trustee,
Chemical Bank, as Indenture
Trustee, APS, and the Owner
Participant named therein
99.14 Amendment No. 2, dated as 28.5 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Participation Agreement,
dated as of December 15,
1986, among PVNGS
Funding Corp., Inc., PVNGS
II Funding Corp., Inc., State
Street Bank and Trust
Company, as successor to
The First National Bank of
Boston, in its individual
capacity and as Owner
Trustee, Chemical Bank, in
its individual capacity and as
Indenture Trustee, APS, and
the Owner Participant named
therein
99.15 Trust Indenture, Mortgage, 10.2 to APS' November 18, 1-4473 1-20-87
Security Agreement and 1986 Form 10-K Report
Assignment of Facility Lease,
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
99.16 Supplemental Indenture No. 4.13 to APS' Form S-3 1-4473 8-24-87
1, dated as of August 1, 1987, Registration Statement No.
to Trust Indenture, Mortgage, 33-9480 by means of August 1,
Security Agreement and 1987 Form 8-K Report
Assignment of Facility Lease,
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.17 Supplemental Indenture No. 2 4.5 to APS' 1992 Form 10-K 1-4473 3-30-93
to Trust Indenture Mortgage, Report
Security Agreement and
Assignment of Facility Lease,
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Lease Indenture
Trustee
99.18 Assignment, Assumption and 10.5 to APS' November 18, 1-4473 1-20-87
Further Agreement, dated as 1986 Form 8-K Report
of December 15, 1986,
between APS and State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.19 Amendment No. 1, dated as 28.7 to APS' 1992 Form 10-K 1-4473 3-30-93
of March 17, 1993, to Report
Assignment, Assumption and
Further Agreement, dated as
of December 15, 1986,
between APS and State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.20c Indemnity Agreement dated 28.3 to APS' 1992 Form 10-K 1-4473 3-30-93
as of March 17, 1993 by APS Report
99.21 Extension Letter, dated as of 28.20 to APS' Form S-3 1-4473 8-10-87
August 13, 1987, from the Registration Statement No.
signatories of the 33-9480 by means of a
Participation Agreement to November 6, 1986 Form 8-K
Chemical Bank Report
99.22 Arizona Corporation 28.1 to APS' 1991 Form 10-K 1-4473 3-19-92
Commission Order dated Report
December 6, 1991
99.23 Arizona Corporation 10.1 to APS' June 1994 form 1-4473 8-12-94
Commission Order dated 10-Q Report
June 1, 1994
99.24 Rate Reduction Agreement 10.1 to APS' December 4, 1995 1-4473 12-14-95
dated December 4, 1995 8-K Report
between APS and the ACC
Staff
99.25 ACC Order dated April 24, 10.1 to APS' March 1996 Form 1-4473 5-14-96
1996 10-Q Report
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
<S> <C> <C> <C> <C>
99.26 Arizona Corporation 99.1 to APS' 1996 Form 10-K 1-4473 3-28-97
Commission Order, Decision Report
No. 59943, dated December
26, 1996, including the Rules
regarding the introduction of
retail competition in Arizona
99.27 Retail Electric 10.1 to APS' June 1998 1-4473 8-14-98
Competition Rules Form 10-Q Report
</TABLE>
- ----------------
(a) Management contract or compensatory plan or arrangement to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) Reports filed under File No. 1-4473 and 1-8962 were filed in the
office of the Securities and Exchange Commission located in Washington, D.C.
(c) An additional document, substantially identical in all material
respects to this Exhibit, has been entered into, relating to an additional
Equity Participant. Although such additional document may differ in other
respects (such as dollar amounts, percentages, tax indemnity matters, and dates
of execution), there are no material details in which such document differs from
this Exhibit.
(d) Additional agreements, substantially identical in all material
respects to this Exhibit have been entered into with additional persons.
Although such additional documents may differ in other respects (such as dollar
amounts and dates of execution), there are no material details in which such
agreements differ from this Exhibit.
REPORTS ON FORM 8-K
During the quarter ended December 31, 1998, and the period ended March 30, 1999,
the Company filed the following Reports on Form 8-K.
Report dated December 1, 1998 relating to an order by the Arizona Supreme Court
staying ACC hearings regarding APS' settlement agreement with the ACC Staff.
Report dated December 9, 1998 relating to (1) a Notice of Withdrawal of
Settlement filed by the ACC Staff, (2) terms of expiration of a memorandum of
understanding, (3) ACC adoption of the amended rules, and (4) issues affecting
the agreement between APS and Salt River Project.
Report dated January 11, 1999 relating to (i) the ACC hearing officers'
recommended changes to the amended rules regarding the introduction of retail
electric competition in Arizona and to the June 1998 stranded cost order and
(ii) action by the Arizona Supreme Court vacating its order staying ACC hearings
on the proposed settlement agreement and dismissing the Attorney General's
action.
75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PINNACLE WEST CAPITAL CORPORATION
(Registrant)
Date: March 30, 1999 William J. Post
------------------------------------------
(William J. Post, Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
William J. Post Principal Executive Officer March 30, 1999
- ---------------------------------------- and Director
(William J. Post, Chief Executive
Officer)
George A. Schreiber, Jr. Principal Financial Officer, March 30, 1999
- ---------------------------------------- Principal Accounting Officer,
(George A. Schreiber, Jr., President and and Director
Chief Financial Officer)
Richard Snell Director March 30, 1999
- ----------------------------------------
(Richard Snell, Chairman of the Board of
Directors)
Pamela Grant Director March 30, 1999
- ----------------------------------------
(Pamela Grant)
Roy A. Herberger, Jr. Director March 30, 1999
- ----------------------------------------
(Roy A. Herberger, Jr.)
Martha O. Hesse Director March 30, 1999
- ----------------------------------------
(Martha O. Hesse)
William S. Jamieson, Jr. Director March 30, 1999
- ----------------------------------------
(William S. Jamieson, Jr.)
Humberto S. Lopez Director March 30, 1999
- ----------------------------------------
(Humberto S. Lopez)
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
John R. Norton, III Director March 30, 1999
- ----------------------------------------
(John R. Norton, III)
Douglas J. Wall Director March 30, 1999
- ----------------------------------------
(Douglas J. Wall)
</TABLE>
77
<PAGE>
Commission File Number 1-8962
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
--------------------
Pinnacle West Capital Corporation
(Exact name of registrant as specified in charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ---------- -----------
10.1a --- Summary of the Pinnacle West Capital Corporation 1999
Bonus Plan
10.2a --- Letter of Agreement between the Company and George A.
Schreiber, Jr.
21 --- Subsidiaries of the Company
23.1 --- Consent of Deloitte & Touche LLP
27.1 --- Financial Data Schedule
- ------------------
(a) Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
For a description of the Exhibits incorporated in this filing by
reference, see Part IV, Item 14.
Exhibit 10.1a
Summary of the Pinnacle West Capital Corporation 1999 Bonus Plan
Under the Pinnacle West Capital Corporation 1999 Bonus Plan, upon the
recommendation of the Human Resources Committee, the Board establishes on an
annual basis certain financial and other goals to be met, designating parameters
of performance and assigning relative weights. The principal measures of
performance during 1999 include per-share earnings and the development and
implementation of long-term strategies for the Company and its subsidiaries.
Pinnacle West Capital Corporation
February 9, 1999
Dear George
As we have discussed, your participation in the strategic direction at Pinnacle
West is important to the achievement of our goals to increase shareholder value
and grow the company. Therefore, I am pleased to offer you the following:
+ PROMOTION
Effective Wednesday, February 10, 1999 you will be promoted to
President of Pinnacle West Capital Corporation and also retain your
title of Chief Financial Officer of APS and Pinnacle West.
+ BASE SALARY
In conjunction with the effective date of your promotion, you will
receive a base salary increase of twenty five thousand dollars
resulting in a new annual base salary of $400,000.
+ PINNACLE WEST CAPITAL CORPORATION INCENTIVE
In 1999, you will have the opportunity to participate in the Pinnacle
West Incentive Plan, which includes a maximum incentive opportunity of
67.5% of base salary, subject to board approval.
Details of the entire plan will be available once the current plan
document has been reviewed and revised where appropriate.
+ STOCK OPTIONS
In recognition of your promotion to President of Pinnacle West Capital
Corporation you will receive 35,000 Pinnacle West options issued at a
stock price in effect at the close of business on Wednesday, February
10, 1999.
The vesting will be at the rate of twenty percent per year beginning
February 10, 1999 for five years.
The options will expire on December 31, 2009.
<PAGE>
+ PENSION BENEFIT
The Company will credit you with fifteen years of service for pension
purposes. This will result in your ability to reach the 60% maximum
pension benefit. This letter replaces our previous agreement of
November 25, 1996.
Congratulations on your new role and I look forward to working with you on the
many business opportunities we will face in 1999 and beyond.
Sincerely,
William J. Post
- ------------------------------
William J. Post
Chief Executive Officer
The foregoing is agreed to and accepted:
George A. Schreiber, Jr.
- ----------------------------------------
George A. Schreiber, Jr.
SUBSIDIARIES OF
PINNACLE WEST CAPITAL CORPORATION
Arizona Public Service Company
State of Incorporation: Arizona
Axiom Power Solutions, Inc.
State of Incorporation: Arizona
Bixco, Inc.
State of Incorporation: Arizona
APS Energy Services Company, Inc.
State of Incorporation: Arizona
SunCor Development Company
State of Incorporation: Arizona
SunCor Resort & Golf Management, Inc.
State of Incorporation: Arizona
Litchfield Park Service Company
State of Incorporation: Arizona
Golden Heritage Homes, Inc.
State of Incorporation: Arizona
Golden Heritage Construction, Inc.
State of Incorporation: Arizona
SCM, Inc.
State of Incorporation: Arizona
Golf de Mexico, S.A. DE C.V.
Incorporation: Tijuana, Baja California, Mexico
SunCor Realty & Management Company
State of Incorporation: Arizona
Palm Valley Golf Club, Inc.
State of Incorporation: Arizona
Rancho Viejo de Santa Fe, Inc.
State of Incorporation: New Mexico
Ranchland Utility Company
State of Incorporation: New Mexico
El Dorado Investment Company
State of Incorporation: Arizona
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective
Amendment No. 2 to Registration Statement No. 33-15190 on Form S-3, Registration
Statement Nos. 33-39208, 33-47534, 33-54287, 33-54307, 33-58372 and 333-30819 on
Form S-8, Post-Effective Amendment No. 1 to Registration Statement No. 33-1720
on Form S-8, Post Effective Amendment No. 2 to Registration Statement No.
33-10442 on Form S-8, and Post-Effective Amendment No. 3 on Form S-3 to
Registration Statement No. 2-96386 on Form S-14, all of Pinnacle West Capital
Corporation, of our report dated March 4, 1999 appearing in this Annual Report
on Form 10-K of Pinnacle West Capital Corporation for the year ended December
31, 1998.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 26, 1999
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<OTHER-PROPERTY-AND-INVEST> 567,583
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<TOTAL-DEFERRED-CHARGES> 1,069,601
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,824,546
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<CAPITAL-SURPLUS-PAID-IN> 0
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<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,163,351
9,401
85,840
<LONG-TERM-DEBT-NET> 2,048,961
<SHORT-TERM-NOTES> 0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,170,118
<TOT-CAPITALIZATION-AND-LIAB> 6,824,546
<GROSS-OPERATING-REVENUE> 2,130,586
<INCOME-TAX-EXPENSE> 164,593
<OTHER-OPERATING-EXPENSES> 1,025,957
<TOTAL-OPERATING-EXPENSES> 1,563,458
<OPERATING-INCOME-LOSS> 567,128
<OTHER-INCOME-NET> (9,094)
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 150,549
<NET-INCOME> 242,892
0
<EARNINGS-AVAILABLE-FOR-COMM> 242,892
<COMMON-STOCK-DIVIDENDS> 103,849
<TOTAL-INTEREST-ON-BONDS> 116,213
<CASH-FLOW-OPERATIONS> 605,838
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