FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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 86-0512431
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 E. Van Buren St., P.O. Box 52132, Phoenix, Arizona 85072-2132
------------------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 379-2500
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of common stock, no par value,
outstanding as of August 11, 2000: 84,738,337
<PAGE>
Glossary
ACC - Arizona Corporation Commission
ACC Staff - Staff of the Arizona Corporation Commission
APS - Arizona Public Service Company, a Pinnacle West subsidiary
APS Energy Services - APS Energy Services Company, Inc., a Pinnacle West
subsidiary
Company - Pinnacle West Capital Corporation
CPUC - California Public Utilities Commission
DOE - United States Department of Energy
EITF 97-4 - Emerging Issues Task Force Issue No. 97-4, "Deregulation of the
Pricing of Electricity -- Issues Related to the Application 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"
El Dorado - El Dorado Investment Company, a Pinnacle West subsidiary
EPA - United States Environmental Protection Agency
FERC - United States Federal Energy Regulatory Commission
Four Corners - Four Corners Power Plant
ITC - Investment tax credit
MW - Megawatts
NGS - Navajo Generating Station
1999 10-K - Pinnacle West Capital Corporation Annual Report on Form 10-K for the
fiscal year ended December 31, 1999
Settlement Agreement - APS' Settlement Agreement approved by the ACC in 1999
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
Pinnacle West Energy - Pinnacle West Energy Corporation, a Pinnacle West
subsidiary
Reliant - Reliant Energy Power Generation, Inc.
SCE - Southern California Edison Company
SFAS No. 71 - Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation"
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, a Pinnacle West subsidiary
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
June 30,
---------------------------
2000 1999
--------- ---------
Operating Revenues
Electric $ 720,174 $ 511,434
Real estate 36,374 32,697
--------- ---------
Total 756,548 544,131
--------- ---------
Operating Expenses
Fuel and purchased power 289,785 134,756
Utility operations and maintenance 107,485 108,264
Real estate operations 34,574 29,401
Depreciation and amortization 97,941 97,383
Taxes other than income taxes 25,610 25,359
--------- ---------
Total 555,395 395,163
--------- ---------
Operating Income 201,153 148,968
Other Income (Expense) (6,980) 399
--------- ---------
Income Before Interest and Income Taxes 194,173 149,367
--------- ---------
Interest Expense
Interest charges 43,446 41,105
Capitalized interest (4,786) (4,189)
--------- ---------
Total 38,660 36,916
--------- ---------
Income Before Income Taxes 155,513 112,451
Income Taxes 65,612 43,749
--------- ---------
Net Income $ 89,901 $ 68,702
========= =========
Average Common Shares Outstanding - Basic 84,730 84,716
Average Common Shares Outstanding - Diluted 84,891 85,093
Earnings Per Average Common Share Outstanding
Net Income - Basic $ 1.06 $ 0.81
Net Income - Diluted $ 1.06 $ 0.81
Dividends Declared Per Share $ 0.35 $ 0.65
See Notes to Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Six Months Ended
June 30,
----------------------------
2000 1999
----------- -----------
Operating Revenues
Electric $ 1,166,402 $ 925,417
Real estate 78,263 57,230
----------- -----------
Total 1,244,665 982,647
----------- -----------
Operating Expenses
Fuel and purchased power 415,782 235,101
Utility operations and maintenance 218,084 210,206
Real estate operations 67,394 51,636
Depreciation and amortization 194,979 194,293
Taxes other than income taxes 51,002 50,844
----------- -----------
Total 947,241 742,080
----------- -----------
Operating Income 297,424 240,567
----------- -----------
Other Income (Expense)
Preferred stock dividend requirements of APS -- (1,016)
Net other income and expense 28,563 (1,938)
----------- -----------
Total 28,563 (2,954)
----------- -----------
Income Before Interest and Income Taxes 325,987 237,613
----------- -----------
Interest Expense
Interest charges 84,223 81,874
Capitalized interest (8,635) (8,263)
----------- -----------
Total 75,588 73,611
----------- -----------
Income Before Income Taxes 250,399 164,002
Income Taxes 106,428 64,610
----------- -----------
Net Income $ 143,971 $ 99,392
=========== ===========
Average Common Shares Outstanding - Basic 84,729 84,693
Average Common Shares Outstanding - Diluted 84,859 85,135
Earnings Per Average Common Share Outstanding
Net Income - Basic $ 1.70 $ 1.17
Net Income - Diluted $ 1.70 $ 1.17
Dividends Declared Per Share $ 0.70 $ 0.975
See Notes to Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Twelve Months Ended
June 30,
-------------------------
2000 1999
---------- ----------
Operating Revenues
Electric $2,534,169 $2,109,677
Real estate 151,202 118,341
---------- ----------
Total 2,685,371 2,228,018
---------- ----------
Operating Expenses
Fuel and purchased power 976,790 607,758
Utility operations and maintenance 454,655 426,961
Real estate operations 135,274 110,518
Depreciation and amortization 386,254 387,557
Taxes other than income taxes 96,764 100,971
---------- ----------
Total 2,049,737 1,633,765
---------- ----------
Operating Income 635,634 594,253
---------- ----------
Other Income (Expense)
Preferred stock dividend requirements of APS -- (5,406)
Net other income and expense 41,294 (5,880)
---------- ----------
Total 41,294 (11,286)
---------- ----------
Income From Continuing Operations Before
Interest and Income Taxes 676,928 582,967
---------- ----------
Interest Expense
Interest charges 164,730 165,656
Capitalized interest (12,036) (17,329)
---------- ----------
Total 152,694 148,327
---------- ----------
Income From Continuing Operations Before
Income Taxes 524,234 434,640
Income Taxes 209,883 172,439
---------- ----------
Income From Continuing Operations 314,351 262,201
Income Tax Benefit From Discontinued Operations 38,000 --
Extraordinary Charge - Net of Income Taxes of $94,115 (139,885) --
---------- ----------
Net Income $ 212,466 $ 262,201
========== ==========
Average Common Shares Outstanding - Basic 84,735 84,722
Average Common Shares Outstanding - Diluted 84,902 85,232
Earnings Per Average Common Share Outstanding
Continuing Operations - Basic $ 3.71 $ 3.09
Net Income - Basic $ 2.51 $ 3.09
Continuing Operations - Diluted $ 3.70 $ 3.08
Net Income - Diluted $ 2.50 $ 3.08
Dividends Declared Per Share $ 1.05 $ 1.30
See Notes to Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(Thousands of Dollars)
June 30, December 31,
2000 1999
---------- ------------
(Unaudited)
Current Assets
Cash and cash equivalents $ 70,400 $ 20,705
Customer and other receivables--net 352,354 244,599
Accrued utility revenues 112,261 72,919
Materials and supplies 73,038 69,977
Fossil fuel 18,727 21,869
Deferred income taxes 9,663 8,163
Other current assets 78,641 60,562
---------- ----------
Total current assets 715,084 498,794
---------- ----------
Investments and Other Assets
Real estate investments--net 340,682 344,293
Other assets 304,195 267,458
---------- ----------
Total investments and other assets 644,877 611,751
---------- ----------
Property, Plant and Equipment
Plant in service and held for future use 7,675,652 7,546,314
Less accumulated depreciation and amortization 3,139,840 3,026,194
---------- ----------
Total 4,535,812 4,520,120
Construction work in progress 251,602 209,281
Nuclear fuel, net of amortization 47,864 49,114
---------- ----------
Net property, plant and equipment 4,835,278 4,778,515
---------- ----------
Deferred Debits
Regulatory assets 545,622 613,729
Other deferred debits 102,887 105,717
---------- ----------
Total deferred debits 648,509 719,446
---------- ----------
Total Assets $6,843,748 $6,608,506
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND EQUITY
(Thousands of Dollars)
June 30, December 31,
2000 1999
---------- ----------
(Unaudited)
Current Liabilities
Accounts payable $ 242,838 $ 186,524
Accrued taxes 197,081 70,510
Accrued interest 33,603 33,253
Short-term borrowings 200,875 38,300
Current maturities of long-term debt 114,886 114,798
Customer deposits 26,476 26,098
Other current liabilities 404 26,007
---------- ----------
Total current liabilities 816,163 495,490
---------- ----------
Long-Term Debt Less Current Maturities 2,075,951 2,206,052
---------- ----------
Deferred Credits and Other
Deferred income taxes 1,153,827 1,183,855
Unamortized gain - sale of utility plant 70,924 73,212
Other 436,285 444,164
---------- ----------
Total deferred credits and other 1,661,036 1,701,231
---------- ----------
Commitments and contingencies (Notes 6, 7, 9 and 10)
Common Stock Equity
Common stock, no par value 1,537,652 1,537,449
Retained earnings 752,946 668,284
---------- ----------
Total common stock equity 2,290,598 2,205,733
---------- ----------
Total Liabilities and Equity $6,843,748 $6,608,506
========== ==========
See Notes to Condensed Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(THOUSANDS OF DOLLARS)
Six Months Ended
June 30,
------------------------
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 143,971 $ 99,392
Items not requiring cash
Depreciation and amortization 194,979 194,293
Nuclear fuel amortization 15,124 15,673
Deferred income taxes--net (8,518) (21,477)
Other--net (3,623) (6,577)
Changes in current assets and liabilities
Customer and other receivables--net (107,755) 48,175
Accrued utility revenues (39,342) (30,306)
Materials, supplies and fossil fuel 81 (5,653)
Other current assets (18,079) (8,329)
Accounts payable 60,918 (25,465)
Accrued taxes 126,571 95,675
Accrued interest 350 1,106
Other current liabilities (25,178) (5,307)
Change in El Dorado partnership investment (26,794) --
Decrease (increase) in land held 4,314 (4,642)
Other--net (6,035) (16,382)
--------- ---------
Net Cash Flow Provided By Operating Activities 310,984 330,176
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (223,361) (153,730)
Capitalized interest (8,635) (8,263)
Other--net (1,541) 1,282
--------- ---------
Net Cash Flow Used For Investing Activities (233,537) (160,711)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 139,000 193,691
Short-term borrowings--net 162,575 45,120
Dividends paid on common stock (59,307) (55,101)
Repayment of long-term debt (270,223) (235,755)
Redemption of preferred stock -- (96,499)
Other--net 203 (8,948)
--------- ---------
Net Cash Flow Used For Financing Activities (27,752) (157,492)
--------- ---------
Net Cash Flow 49,695 11,973
Cash and Cash Equivalents at Beginning of Period 20,705 20,538
--------- ---------
Cash and Cash Equivalents at End of Period $ 70,400 $ 32,511
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 72,475 $ 68,341
Income taxes $ 6,361 $ 940
See Notes to Condensed Consolidated Financial Statements.
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-8-
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements include the accounts of
Pinnacle West and its subsidiaries: APS, Pinnacle West Energy, APS Energy
Services, SunCor, and El Dorado . All significant intercompany balances have
been eliminated. We have reclassified certain prior year amounts to conform to
the current year presentation.
2. Our unaudited condensed consolidated financial statements reflect all
adjustments which we believe are necessary for the fair presentation of our
financial position and results of operations for the periods presented. These
adjustments are of a normal recurring nature with the exception of the
extraordinary charge and the tax benefit from discontinued operations. We
suggest that these Condensed Consolidated Financial Statements and Notes to
Condensed Consolidated Financial Statements be read along with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements included in
our 1999 10-K.
3. Weather conditions and wholesale power marketing and trading activities can
have significant impacts on our results for interim periods. El Dorado's
earnings are subject to stock market volatility (see Note 12). For these and
other reasons, results for interim periods do not necessarily represent results
to be expected for the year.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for
changes in capitalization for the six months ended June 30, 2000.
5. Regulatory Accounting
For regulated operations, 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.
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 write-downs 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.
The Settlement Agreement was approved by the ACC in September 1999 (see Note 6
for a discussion of the agreement). Consequently, APS has discontinued the
application of SFAS No. 71 for its generation operations. This means that the
generation assets were tested for impairment and the portion of regulatory
assets deemed to be unrecoverable through ongoing regulated cash flows was
eliminated. APS determined that the generation assets were not impaired. A
regulatory disallowance removed $234 million pretax ($183 million net present
value) from ongoing regulatory cash flows and was recorded as a net
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reduction of regulatory assets. This reduction ($140 million after income taxes)
was reported as an extraordinary charge on the income statement during the third
quarter of 1999. Prior to the Settlement Agreement, under the 1996 regulatory
agreement (see Note 6), the ACC accelerated the amortization of substantially
all of APS' regulatory assets to an eight-year period ending June 30, 2004.
The regulatory assets to be recovered under the 1999 Settlement Agreement are
now being amortized as follows (millions of dollars):
1/1 - 6/30
1999 2000 2001 2002 2003 2004 Total
---- ---- ---- ---- ---- ---- -----
$164 $158 $145 $115 $86 $18 $686
The majority of APS' regulatory assets relate to deferred income taxes and rate
synchronization cost deferrals.
The condensed consolidated balance sheets include the amounts listed below for
generation assets not subject to SFAS No. 71 (thousands of dollars):
June 30, December 31,
2000 1999
----------- -----------
Electric plant in service & held for future use $ 3,761,855 $ 3,770,234
Accumulated depreciation and amortization (1,678,752) (1,641,855)
Construction work in progress 140,037 87,819
Nuclear fuel, net of amortization 47,864 49,114
6. Regulatory Matters -- Electric Industry Restructuring
STATE
SETTLEMENT AGREEMENT. On May 14, 1999, APS entered into a comprehensive
Settlement Agreement with various parties, including representatives of major
consumer groups, related to the implementation of retail electric competition.
On September 23, 1999, the ACC voted to approve the Settlement Agreement, with
some modifications. On December 13, 1999, two parties filed lawsuits challenging
the ACC's approval of the Settlement Agreement. One of the parties questioned
the authority of the ACC to approve the Settlement Agreement and both parties
challenged several specific provisions of the Settlement Agreement. A decision
on the appeals to the Settlement Agreement is not expected until later this year
or next year.
The following are the major provisions of the Settlement Agreement, as approved:
* APS will reduce rates for standard offer service for customers with loads
less than 3 megawatts in a series of annual retail electric price
reductions of 1.5% beginning
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July 1, 1999 through July 1, 2003, for a total of 7.5%. The first reduction
of approximately $24 million ($14 million after income taxes) included the
July 1, 1999 retail price decrease of approximately $11 million annually
($7 million after income taxes) related to the 1996 regulatory agreement.
See "1996 Regulatory Agreement" below. Based on the price reduction
authorized in the Settlement Agreement, there was a retail price decrease
of approximately $28 million ($17 million after taxes), or 1.5%, effective
July 1, 2000. For customers having loads 3 megawatts or greater, standard
offer rates will be reduced in varying annual increments that total 5%
through 2002.
* Unbundled rates being charged by APS for competitive direct access service
(for example, distribution services) became effective upon approval of the
Settlement Agreement, retroactive to July 1, 1999, and also will be subject
to annual reductions beginning January 1, 2000, that vary by rate class,
through January 1, 2004.
* There will be a moratorium on retail price changes for standard offer and
unbundled competitive direct access services until July 1, 2004, except for
the price reductions described above and certain other limited
circumstances. Neither the ACC nor APS will be prevented from seeking or
authorizing rate changes prior to July 1, 2004 in the event of conditions
or circumstances that constitute an emergency, such as an inability to
finance on reasonable terms, or material changes in APS' cost of service
for ACC-regulated services resulting from federal, tribal, state or local
laws, regulatory requirements, judicial decisions, actions or orders.
* APS will be permitted to defer for later recovery prudent and reasonable
costs of complying with the ACC electric competition rules, system benefits
costs in excess of the levels included in current rates, and costs
associated with APS' "provider of last resort" and standard offer
obligations for service after July 1, 2004. These costs are to be recovered
through an adjustment clause or clauses commencing on July 1, 2004.
* APS' distribution system opened for retail access effective September 24,
1999. Customers will be eligible for retail access in accordance with the
phase-in adopted by the ACC under the electric competition rules (see
"Retail Electric Competition Rules" below), with an additional 140
megawatts being made available to eligible non-residential customers.
Unless subject to judicial or regulatory restraint, APS will open its
distribution system to retail access for all customers on January 1, 2001.
* Prior to the Settlement Agreement, APS was recovering substantially all of
its regulatory assets through July 1, 2004, pursuant to the 1996 regulatory
agreement. In addition, the Settlement Agreement states that APS has
demonstrated that its allowable stranded costs, after mitigation and
exclusive of regulatory assets, are at least $533 million net present
value. APS will not be allowed to recover $183 million net present value of
the above amounts. The Settlement Agreement provides that APS will have the
opportunity to recover $350 million net present value through a competitive
transition charge (CTC) that will remain in effect through December 31,
2004, at which time it will terminate. Any over/under-recovery will be
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credited/debited against the costs subject to recovery under the adjustment
clause described above.
* APS will form a separate corporate affiliate or affiliates and transfer to
that affiliate(s) its generating assets and competitive services at book
value as of the date of transfer, which transfer shall take place no later
than December 31, 2002. APS will be allowed to defer and later collect,
beginning July 1, 2004, sixty-seven percent of its costs to accomplish the
required transfer of generation assets to an affiliate.
* When the Settlement Agreement approved by the ACC is no longer subject to
judicial review, APS will move to dismiss all of its litigation pending
against the ACC as of the date it entered into the Settlement Agreement. To
protect APS' rights, it has several lawsuits pending on ACC orders relating
to stranded cost recovery and the adoption and amendment of the ACC's
electric competition rules, which would be voluntarily dismissed at the
appropriate time under this provision.
As discussed in Note 5 above, APS has discontinued the application of SFAS No.
71 for its generation operations.
RETAIL ELECTRIC COMPETITION RULES. On September 21, 1999, the ACC voted to
approve the rules that provide a framework for the introduction of retail
electric competition in Arizona (Rules). If any of the Rules conflict with the
Settlement Agreement, the terms of the Settlement Agreement govern. On December
8, 1999, APS filed a lawsuit to protect its legal rights regarding the Rules.
This lawsuit is pending, along with several other lawsuits on ACC orders
relating to stranded cost recovery and the adoption or amendment of the Rules,
but two related cases filed by other utilities have been partially decided in a
manner adverse to those utilities' positions.
On July 12, 2000, a Maricopa County Superior Court judge issued a preliminary
ruling in favor of the ACC and denied substantive challenges to the Rules that
had been made by the electric cooperatives. However, he concluded that some of
the Rules were invalid because of procedural deficiencies. Specifically, the
judge concluded that several non-ratemaking Rules were required to be presented
to the Arizona Attorney General for certification. Additionally, the judge
determined that the Arizona Constitution requires the ACC to make findings
regarding the fair value of property in Arizona of competitive electric service
providers. We do not believe that the ruling affects the Settlement Agreement
with the ACC. The Settlement Agreement was not at issue in the consolidated
cases before the judge. Further, the ACC made findings related to fair value of
APS' property in the order approving the APS Settlement Agreement.
The ruling does not immediately affect the Rules. APS expects that, in the next
few weeks, the court will consider proposed forms of judgment which will
establish the specific impact of the ruling. Although the ACC has not yet
indicated what steps it intends to take after a judgment is issued, the ACC
could appeal the ruling to the Court of Appeals or could elect to take
corrective action to correct the procedural deficiencies identified in the
judge's ruling. The cooperatives may also appeal the ruling. There is authority
indicating that if the order is appealed by the ACC, it will be automatically
stayed pending further judicial review. Certain
<PAGE>
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other appeals of the Rules are still pending in the Maricopa County Superior
Court. We believe that the court may rule on the remaining appeals later this
year or next year.
On January 14, 2000, a special action was filed requesting the Arizona Supreme
Court to enjoin implementation of the Rules and decide whether the ACC can allow
the competitive marketplace, rather than the ACC, to set just and reasonable
rates under the Arizona Constitution. The issue of competitively set rates has
been decided by lower Arizona courts in favor of the ACC in four separate
lawsuits, two of which relate to telecommunications companies. The Supreme Court
denied to hear the case as a special action on March 17, 2000. The lower court
litigation will continue.
The Rules approved by the ACC include the following major provisions:
* They apply to virtually all Arizona electric utilities regulated by the
ACC, including APS.
* The Rules require each affected utility, including APS, to make available
at least 20% of its 1995 system retail peak demand for competitive
generation supply beginning when the ACC makes a final decision on each
utility's stranded costs and unbundled rates (Final Decision Date) or
January 1, 2001, whichever is earlier, and 100% beginning January 1, 2001.
Under the Settlement Agreement, APS will provide retail access to customers
representing the minimum 20% required by the ACC and an additional 140
megawatts of non-residential load in 1999, and to all customers as of
January 1, 2001, or such other dates as approved by the ACC.
* 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, which for APS' customers was the
approval of the Settlement Agreement. Customers may also aggregate smaller
loads to meet this one megawatt requirement.
* When effective, residential customers will be phased in at 1.25% 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 that unbundle rates for
non-competitive services.
* The ACC shall allow a reasonable opportunity for recovery of unmitigated
stranded costs.
* Absent an ACC waiver, prior to January 1, 2001, each affected utility
(except certain electric cooperatives) must transfer all competitive
generation assets and services either to an unaffiliated party or to a
separate corporate affiliate. Under the
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Settlement Agreement, APS received a waiver to allow transfer of its
competitive generation assets and services to affiliates no later than
December 31, 2002.
1996 REGULATORY AGREEMENT. In April 1996, the ACC approved a regulatory
agreement between the ACC Staff and APS. Based on the price reduction formula
authorized in the agreement, the ACC approved retail price decreases
(approximate) as follows (millions of dollars):
Annual Electric Percentage
Revenue Decrease Decrease Effective Date
---------------- -------- --------------
$49 3.4% July 1, 1996
$18 1.2% July 1, 1997
$17 1.1% July 1, 1998
$11 0.7% July 1, 1999 (a)
(a) Included in the first rate reduction under the Settlement Agreement (see
above).
The regulatory agreement also required the parent company to infuse $200 million
of common equity into APS in annual payments of $50 million from 1996 through
1999. All of these equity infusions were made by December 31, 1999.
LEGISLATION. 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.
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GENERAL
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 the Company and our subsidiaries 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 industry restructuring bills have been introduced
during the current congressional session. Several of these bills are written to
allow consumers to choose their electricity suppliers beginning in 2000 and
beyond. 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 comprehensive restructuring of the electric utility
industry can occur.
7. Nuclear Insurance
The Palo Verde participants have insurance for public liability payments
resulting from nuclear energy hazards to the full limit of liability under
federal law. This potential liability is covered by primary 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 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.
<PAGE>
-15-
8. Business Segments
We have two principal business segments (determined by products, services and
regulatory environment) which consist of the transmission and distribution of
electricity and wholesale power marketing and trading activities (delivery
business segment) and the generation of electricity (generation business
segment). We plan to move our wholesale power marketing and trading activities
from APS to the parent company by the end of 2000. The other amounts include
activity relating to the parent company and other subsidiaries including APS
Energy Services, SunCor and El Dorado. Eliminations primarily relate to
intersegment sales of electricity. Segment information for the three, six and
twelve months ended June 30, 2000 and 1999 is as follows (millions of dollars):
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
-------------- --------------- ----------------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues:
Delivery $ 719 $ 511 $ 1,165 $ 925 $ 2,533 $ 2,110
Generation 249 220 428 396 886 877
Other 38 33 80 58 152 118
Eliminations (249) (220) (428) (396) (886) (877)
----- ----- ------- ----- ------- -------
Total $ 757 $ 544 $ 1,245 $ 983 $ 2,685 $ 2,228
===== ===== ======= ===== ======= =======
Income from Continuing Operations:
Delivery $ 55 $ 34 $ 80 $ 55 $ 172 $ 144
Generation 40 36 48 47 121 125
Other (5) (1) 16 (3) 21 (7)
----- ----- ------- ----- ------- -------
Total $ 90 $ 69 $ 144 $ 99 $ 314 $ 262
===== ===== ======= ===== ======= =======
As of June 30, As of December 31,
2000 1999
---- ----
Assets:
Delivery $3,938 $3,796
Generation 2,381 2,342
Other 525 471
------ ------
Total $6,844 $6,609
====== ======
</TABLE>
9. Accounting Matters
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
which is effective for us in 2001. 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.
<PAGE>
-16-
10. Generation Expansion
Pinnacle West Energy has announced plans to build and acquire up to 4,000 MW of
generating capacity from 2001-2006 at an estimated cost of about $2 billion,
assuming all of the announced plants are built or acquired.
Pinnacle West Energy is also considering additional expansion over the next
several years, which may result in additional expenditures. Pinnacle West
Energy's expenditures are expected to be funded through debt issued directly by
Pinnacle West Energy, as well as capital infusions from the parent company's
internally generated cash and debt proceeds.
Pinnacle West Energy is currently planning a 650-megawatt expansion of the West
Phoenix Power Plant and the construction of a natural gas-fired electric
generating station of up to 2,120 megawatts near Palo Verde, called Redhawk (see
discussion in the following paragraph). Construction at West Phoenix began in
July 2000, with commercial operation of the first unit expected in the summer of
2001. Pinnacle West Energy also expects that construction will begin on the
first two units of Redhawk near the end of 2000, with commercial operation
scheduled for the summer of 2002.
Pinnacle West Energy and Reliant have terminated discussions on joint
development of the first two Redhawk units and three units in Nevada. Pinnacle
West Energy currently plans to keep the first two units (1,060 megawatts) of the
Redhawk project on schedule.
Projected capital expenditures for the above expansion plans on the current
schedule are estimated to be $277 million in 2000, $392 million in 2001, and
$141 million in 2002.
On April 27, 2000, Pinnacle West Energy entered into two separate agreements
with SCE to purchase SCE's 15.8% ownership interest in Palo Verde and its 48%
ownership interest in Units 4 and 5 of the Four Corners Power Plant (Four
Corners). The purchase price is $550 million in cash to be paid at closing,
subject to certain adjustments. The interests to be acquired represent 1,310 MW
of generating capacity (600 MW associated with SCE's Palo Verde interest, and
710 MW associated with SCE's Four Corners interest). The transactions are
expected to close in mid-2001, subject to the approval of various governmental
authorities, including the CPUC, the FERC, the Nuclear Regulatory Commission,
the Internal Revenue Service, and the Navajo Nation.
The agreements between Pinnacle West Energy and SCE include the following
additional terms:
* Prior to and up to 90 days following SCE's filing with the CPUC seeking
approval of the transactions, which was made on May 15, 2000, SCE was
allowed to solicit offers for, or indications of interest in, (a) its Four
Corners interest or (b) its Four Corners interest and its Palo Verde
interest. SCE's sale of its interest in Four Corners is also subject to a
right of first refusal on the part of the other Four Corners participants,
including APS. Pinnacle West Energy had the right to match any offer or
indication of interest that SCE
<PAGE>
-17-
received during this period. This period has expired without Pinnacle West
Energy matching an indication of interest.
* The Agreements permit SCE, for a period of up to 120 days (until early
December), to engage in further negotiations and discussions with any party
who submitted an indication of interest. Subject to CPUC approval, Pinnacle
West Energy retains the right under the Agreements to match the terms of
any binding agreement that SCE elects to enter into.
* Pinnacle West Energy is not obligated to purchase SCE's Four Corners
interest unless SCE also sells its Palo Verde interest to Pinnacle West
Energy. SCE is not obligated to sell its Palo Verde interest to Pinnacle
West Energy unless Pinnacle West Energy (or some other third party)
purchases SCE's Four Corners interest.
* SCE will transfer the assets of its Palo Verde decommissioning fund to
Pinnacle West Energy, and Pinnacle West Energy will assume SCE's Palo Verde
decommissioning obligations.
* Pinnacle West Energy will assume SCE's obligations and liabilities
associated with ownership of its interests in Palo Verde and Four Corners,
subject to specified exceptions.
* We guaranteed Pinnacle West Energy's obligations under each of the
agreements, including Pinnacle West Energy's purchase price obligations.
The Utility Reform Network, which represents the interests of SCE's residential
and small commercial customers, has filed a protest with the CPUC recommending
that the CPUC reject the sale and require SCE to retain the generating
facilities. The California Office of Ratepayer Advocates has also filed
objections regarding various aspects of the proposed transactions. There can be
no assurance that other protests will not be filed with the CPUC.
<PAGE>
-18-
11. Income Tax Benefit
In September 1999, we recorded a tax benefit of $38 million, or $0.45 per basic
or diluted share, which stemmed from the resolution of income tax matters
related to a former subsidiary, MeraBank, A Federal Savings Bank. This amount is
reflected as a tax benefit from discontinued operations in the income statement.
12. El Dorado Partnership Investment Income
Net other income consists primarily of El Dorado's share in the earnings of a
venture capital partnership. The partnership adjusts the value of its investment
at the end of each fiscal quarter. The value of El Dorado's investment in the
partnership is determined by various factors beyond our control, including
equity market conditions. Most of the partnership's investments are in
technology-related companies whose share prices are highly volatile.
Prior to June 2000, we recorded our share of the earnings from the partnership,
as the partnership adjusted the value of its investment, on a one-quarter lag.
This was done due to time constraints in obtaining and analyzing such results
for inclusion in our consolidated financial statements on a current basis.
During the second quarter of 2000, we requested a distribution of our share of
the investments held by the partnership. There is some disagreement with the
general partner regarding the distribution of those shares, but we believe we
have legal authority to request and receive our share of the investments. We are
pursuing that distribution and accordingly have adjusted our investment to
reflect the current market value. In the second quarter of 2000, we recognized
earnings net of tax of $28 million on the one-quarter lag basis offset by a $31
million decline net of tax in the value of our investment for the fiscal quarter
ended June 30, 2000 for a total net loss of $3 million for the quarter.
Upon receipt, we will account for the securities as available for sale with
changes in value recorded in other comprehensive income. Gains and losses from
the ultimate sale of such securities will be reflected in our net earnings. The
book value of El Dorado's investment in the partnership at June 30, 2000 was
approximately $38 million.
<PAGE>
-19-
PINNACLE WEST CAPITAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
In this section, we explain our results of operations, general financial
condition, and outlook for Pinnacle West and our subsidiaries: APS, Pinnacle
West Energy, APS Energy Services, SunCor, and El Dorado including:
* the changes in our earnings for the periods presented
* the factors impacting our business, including competition
* the effects of regulatory decisions on our results and outlook
* our capital needs and resources and
* our management of market risks.
APS, our major subsidiary and Arizona's largest electric utility, provides
retail and wholesale electric service to the entire state with the exception of
Tucson and about one-half of the Phoenix area. APS also generates, sells, and
delivers electricity to wholesale customers in the western United States. SunCor
is a developer of residential, commercial, and industrial real estate projects
in Arizona, New Mexico, and Utah. El Dorado is primarily a venture capital firm.
APS Energy Services was formed in 1998 and sells energy and energy-related
products and services in competitive retail markets in the western United
States. Pinnacle West Energy, which was formed in 1999, is the subsidiary
through which we intend to conduct our unregulated generation operations.
The following table summarizes net income for the three-month, six-month and
twelve-month periods ended June 30, 2000 and the comparable prior-year periods
for Pinnacle West and each of its subsidiaries:
<TABLE>
<CAPTION>
3 Months Ended 6 Months Ended 12 Months Ended
June 30, June 30, June 30,
--------------- ----------------- -----------------
(Millions of Dollars) 2000 1999 2000 1999 2000 1999 (a)
---- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
APS $ 96 $ 70 $ 129 $ 102 $ 294 $ 269
Pinnacle West Energy (1) -- (1) -- (1) --
APS Energy Services (2) (2) (4) (3) (10) (3)
SunCor 1 3 6 4 8 6
El Dorado (3) -- 16 -- 27 --
Parent Company (1) (2) (2) (4) (4) (10)
---- ---- ----- ----- ----- -----
Income From Continuing Operations 90 69 144 99 314 262
Income Tax Benefit From Discontinued
Operations -- -- -- -- 38 --
Extraordinary Charge - Net of Income
Taxes of $94 -- -- -- -- (140) --
---- ---- ----- ----- ----- -----
Net Income $ 90 $ 69 $ 144 $ 99 $ 212 $ 262
==== ==== ===== ===== ===== =====
</TABLE>
(a) SunCor's 1999 earnings have been restated here to exclude a $37 million
deferred tax benefit. In accordance with our intercompany tax sharing
agreement, the offset resides with the parent company. There is no
consolidated earnings effect as these tax benefits had already been
reflected on a consolidated basis.
<PAGE>
-20-
We suggest this section be read along with the 1999 10-K. Throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, we refer to specific "Notes" in the Notes to Condensed Consolidated
Financial Statements. These Notes add further details to the discussion.
OPERATING RESULTS
OPERATING RESULTS - THREE-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED WITH
THREE-MONTH PERIOD ENDED JUNE 30, 1999
Consolidated net income for the three months ended June 30, 2000 was $90 million
compared with $69 million for the same period in the prior year. Consolidated
net income increased for the three-month period primarily because of an increase
in the profitability of wholesale power marketing and trading activities, and
increases in the number of customers and in the average amount of electricity
used by customers. These positive factors more than offset decreases due to the
effects of increased fuel and purchased power costs, the completion of the
amortization of ITCs in 1999, an electricity price reduction, and a decrease in
El Dorado's earnings. See Note 6 for information on the price reduction. See
"Income Taxes" below for a discussion of the ITC amortization.
Electric operating revenues increased $209 million because of:
* increased power marketing and trading revenues ($150 million)
* increases in the number of customers and the average amount of
electricity used by customers ($44 million)
* warmer weather impacts ($18 million) and
* miscellaneous factors ($4 million).
As mentioned above, these positive factors were partially offset by the effect
of a reduction in retail electricity prices ($7 million).
The increase in power marketing and trading revenues resulted from higher prices
and increased activity in the western U.S. wholesale power markets. The revenues
were accompanied by an increase in purchased power and fuel expenses of $105
million.
Fuel and purchased power expenses were also higher because of higher retail
sales volumes and increased fuel prices.
Other income (expense) decreased $7 million primarily because of a quarterly
adjustment of the value of El Dorado's investment in a technology-related
venture capital partnership. See Note 12.
OPERATING RESULTS - SIX-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED WITH
SIX-MONTH PERIOD ENDED JUNE 30, 1999
Consolidated net income for the six months ended June 30, 2000 was $144 million
compared with $99 million for the same period in the prior year. The increase
primarily relates to an increase in El Dorado's earnings, an increase in the
profitability of wholesale
<PAGE>
-21-
power marketing and trading activities, and increases in the number of customers
and in the average amount of electricity used by customers. These positive
factors more than offset decreases due to the effects of increased fuel and
purchased power costs, the completion of the amortization of ITCs in 1999, an
electricity price reduction, and higher utility operations and maintenance
expense. See Note 6 for information on the price reduction. See "Income Taxes"
below for a discussion of the ITC amortization.
Electric operating revenues increased $241 million because of:
* increased power marketing and trading revenues ($173 million)
* increases in the number of customers and the average amount of
electricity used by customers ($55 million)
* warmer weather impacts ($19 million) and
* miscellaneous factors ($7 million).
These positive factors were partially offset by the effect of a reduction in
retail electricity prices ($13 million).
The increase in power marketing and trading revenues resulted from higher prices
and increased activity in the western U.S. wholesale power markets. The revenues
were accompanied by an increase in purchased power and fuel expenses of $129
million.
Fuel and purchased power expenses were also higher because of higher retail
sales volumes and increased fuel prices.
Utility operations and maintenance expenses increased primarily because of
higher costs related to customer growth.
Net other income increased $31 million primarily because of quarterly
adjustments of the value of El Dorado's investment in a technology-related
venture capital partnership. See Note 12.
OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED JUNE 30, 2000 COMPARED WITH
TWELVE-MONTH PERIOD ENDED JUNE 30, 1999
Consolidated net income for the twelve months ended June 30, 2000 was $212
million compared with $262 million for the same period in the prior year. The
decrease primarily relates to an extraordinary charge recorded in the third
quarter of 1999, partially offset by higher income from continuing operations,
as well as an income tax benefit from discontinued operations also recorded in
the third quarter of 1999.
The extraordinary charge related to a regulatory disallowance that resulted from
APS' comprehensive Settlement Agreement that was approved by the ACC in
September 1999. See Notes 5 and 6 for additional information about the
regulatory disallowance and the Settlement Agreement.
The income tax benefit from discontinued operations resulted from the resolution
of income tax matters related to a former subsidiary, MeraBank. See Note 11.
<PAGE>
-22-
Income from continuing operations increased $52 million over the comparable
prior period primarily because of an increase in El Dorado's earnings, increases
in the number of customers and in the average amount of electricity used by
customers, and an increase in the profitability of wholesale power marketing and
trading activities. These positive factors more than offset decreases due to a
reduction in retail electricity prices, higher utility operations and
maintenance expense, and the completion of the amortization of ITCs in 1999. See
Note 6 for information on the price reduction. See "Income Taxes" below for a
discussion of the ITC amortization.
Electric operating revenues increased $424 million because of:
* increased power marketing and trading revenues ($338 million)
* increases in the number of customers and the average amount of
electricity used by customers ($94 million) and
* miscellaneous factors ($19 million).
These positive factors were partially offset by the effect of a reduction in
retail prices ($27 million).
The increase in power marketing and trading revenues resulted primarily from
increased activity in western U.S. wholesale power markets and higher prices.
The revenues were accompanied by increases in purchased power and fuel expenses
of $306 million.
Fuel and purchased power expenses were also higher because of higher retail
sales volumes and increased fuel prices.
Utility operations and maintenance expenses increased primarily because of $16
million of non-recurring items recorded in the current twelve-month period,
including a provision for certain environmental costs. Other increases primarily
related to customer growth, power marketing costs, and technology related costs.
Net other income increased $47 million primarily because of quarterly
adjustments of the value of El Dorado's investment in a technology-related
venture capital partnership. See Note 12.
INCOME TAXES
As part of a 1994 rate settlement with the ACC, APS accelerated amortization of
substantially all deferred ITCs over a five-year period that ended on December
31, 1999. The ITC amortization decreased annual income tax expense by
approximately $24 million. Beginning in 2000, no further benefits from these
deferred ITCs will be reflected in income tax expense.
<PAGE>
-23-
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL EXPENDITURE REQUIREMENTS
The following table summarizes the actual capital expenditures for the six-month
period ended June 30, 2000 and estimated capital expenditures for the next three
years:
CAPITAL EXPENDITURES
(millions of dollars)
Six months ended Twelve months ended
June 30, 2000 December 31,
(actual) (estimated)
---------------- ------------------------------
2000 2001 2002
---- ---- ----
APS (a) $181 $380 $395 $373
Pinnacle West Energy (b) 34 277 392 141
SunCor 61 53 43 51
---- ---- ---- ----
Total $276 $710 $830 $565
==== ==== ==== ====
(a) Includes about $30 - $35 million each year for nuclear fuel expenditures.
(b) Excludes the SCE purchase agreements of approximately $550 million in 2001.
See Note 10 and "Capital Resources and Debt Financing - Pinnacle West
Energy" below.
CAPITAL RESOURCES AND DEBT FINANCING
PINNACLE WEST
The parent company's cash requirements and its ability to fund those
requirements are discussed under "Capital Needs and Resources" in Management's
Discussion and Analysis of Financial Condition and Results of Operation in Part
II, Item 7 of the 1999 10-K.
During the six-months ended June 30, 2000, the parent company increased
long-term borrowings by about $94 million.
APS
APS' long-term debt redemption requirements, optional repayments on long-term
debt, and payment obligations on a capitalized lease are: $354 million in 2000;
$252 million in 2001; and $125 million in 2002. During the six months ended June
30, 2000, APS redeemed approximately $242 million of its long-term debt with
cash from operations and short-term borrowings. On August 7, 2000, APS issued
$300 million of its 7 5/8% Notes Due 2005.
In 2001 APS will purchase Units 1, 2 and 3 of the West Phoenix Power Plant at
the expiration of its lease term.
<PAGE>
-24-
Although provisions in APS' first mortgage bond indenture, articles of
incorporation, and ACC financing orders establish maximum amounts of additional
first mortgage bonds and preferred stock that APS may issue, APS does not expect
any of these provisions to limit its ability to meet its capital requirements.
PINNACLE WEST ENERGY
Pinnacle West Energy has announced plans to build and acquire up to 4,000 MW of
generating capacity from 2001-2006 at an estimated cost of about $2 billion,
assuming all announced plants are built or acquired.
Pinnacle West Energy is also considering additional expansion over the next
several years, which may result in additional expenditures. Pinnacle West
Energy's expenditures are expected to be funded through capital infusions from
debt issued directly by Pinnacle West Energy, as well as the parent company's
internally generated cash and debt proceeds.
Pinnacle West Energy is currently planning a 650-megawatt expansion of the West
Phoenix Power Plant and the construction of a natural gas-fired electric
generating station of up to 2,120 megawatts near Palo Verde, called Redhawk (see
discussion in the following paragraph). Construction at West Phoenix began in
July 2000, with commercial operation of the first unit expected in the summer of
2001. Pinnacle West Energy also expects that construction will begin on the
first two units of Redhawk near the end of 2000, with commercial operation
scheduled for the summer of 2002.
Pinnacle West Energy and Reliant have terminated discussions on joint
development of the first two Redhawk units and three units in Nevada. Pinnacle
West Energy currently plans to keep the first two units (1,060 megawatts) of the
Redhawk project on schedule.
See the above table for expected capital expenditures for these expansions on
the current schedule.
Pinnacle West Energy has signed two separate agreements with SCE to acquire
SCE's interest in the Palo Verde Nuclear Generating Station west of Phoenix and
the Four Corners Power Plant near Farmington, New Mexico. Pursuant to the
agreements, Pinnacle West Energy will acquire SCE's 15.8% interest in the three
unit Palo Verde plant and SCE's 48% interest in Four Corners Units 4 and 5, for
a total of approximately 1,300 MW at both plants. The total purchase price is
$550 million, subject to certain adjustments. The transactions are expected to
close in mid-2001 following the approval of various governmental authorities,
including the CPUC, the FERC, the Nuclear Regulatory Commission, the Internal
Revenue Service, and the Navajo Nation.
Prior to and up to 90 days following SCE's filing with the CPUC seeking approval
of the transactions, which was made on May 15, 2000, SCE was allowed to solicit
offers for, or indications of interest in, (a) its Four Corners interest or (b)
its Four Corners interest and its Palo Verde interest. Pinnacle West Energy had
the right to match any offer or indication of interest that SCE received during
this period. This period has expired without Pinnacle West Energy matching an
indication of interest. The Agreements permit SCE, for a period of up to 120
days (until early December), to engage in further negotiations and discussions
with any party who submitted an indication of interest. Subject to CPUC
approval,
<PAGE>
-25-
Pinnacle West Energy retains the right under the Agreements to match the terms
of any binding agreement that SCE elects to enter into. For additional
information about the transactions, see Note 10.
SUNCOR
SunCor's capital needs consist primarily of capital expenditures for land
development, retail and office building construction, and home construction.
Capital resources to meet these requirements include funds from operations and
SunCor's own external financings.
COMPETITION AND ELECTRIC INDUSTRY RESTRUCTURING
See Note 5 for a discussion of regulatory accounting. See Note 6 for a
discussion of a Settlement Agreement related to the implementation of retail
electric competition and to Arizona and federal legal and regulatory
developments.
RATE MATTERS
See Note 6 for a discussion of a price reduction effective as of July 1, 2000,
and for a discussion of a Settlement Agreement that will, among other things,
result in five annual price reductions over a four-year period ending July 1,
2003.
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; our ability to successfully compete outside 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; the successful completion
of large-scale construction projects; the value of El Dorado's investment in a
technology-related venture capital partnership; successfully managing market
risks; 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 3. MARKET RISKS
Our operations include managing market risks related to changes in commodity
prices, interest rates, and investments held by the nuclear decommissioning
trust fund.
We are exposed to the impact of market fluctuations in the price and
transportation costs of electricity, natural gas, coal, and emissions
allowances. We employ established procedures to manage our risks associated with
these market fluctuations by utilizing various commodity derivatives, including
exchange-traded futures and options and over-the-counter forwards, options, and
swaps. As part of our overall risk management program, we enter
<PAGE>
-26-
into these derivative transactions to hedge purchases and sales of electricity,
fuels and emissions allowances/credits. In addition, we engage in trading
activities intended to profit from favorable movements of market prices.
As of June 30, 2000, a hypothetical adverse price movement of 10% in the market
price of our commodity derivative portfolio would decrease the fair market value
of these contracts by approximately $53 million. This analysis does not include
the favorable impact this same hypothetical price move would have on the
underlying physical exposures being hedged with the commodity derivative
portfolio. We plan to move our wholesale power marketing and trading activities
from APS to the parent company by the end of 2000.
We are exposed to credit losses in the event of non-performance or non-payment
by counterparties. We use a credit management process to assess and monitor the
financial exposure of counterparties. Despite the fact that the great majority
of our trading counterparties are rated as investment grade by the credit rating
agencies, there is still a possibility that one or more of these companies could
default, resulting in a material impact on earnings for a given period.
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-rate 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 regulated electricity prices.
<PAGE>
-27-
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At our annual Meeting of Shareholders held on May 17, 2000 the following
shareholder proposal was submitted to shareholders:
Abstentions
Votes Votes and Broker
For Against Non Votes
--------- ---------- ---------
Proposal that Pinnacle 4,385,706 59,481,837 3,723,107
West provide shareholders
with an energy report
In addition, at the same annual meeting, the following persons were elected as
directors:
Votes Votes
For Against Abstain
--------- ---------- ---------
CLASS I (TERM TO EXPIRE AT
2001 ANNUAL MEETING)
Robert G. Matlock 81,027,360 942,017 N/A
Kathryn L. Munro 80,935,718 1,033,659 N/A
CLASS II (TERM TO EXPIRE AT
2002 ANNUAL MEETING)
Bruce J. Nordstrom 81,036,103 933,274 N/A
CLASS III (TERM TO EXPIRE AT
2003 ANNUAL MEETING)
Pamela Grant 81,007,066 962,311 N/A
Martha O. Hesse 81,028,539 940,838 N/A
William S. Jamieson, Jr. 81,020,766 948,611 N/A
Richard Snell 81,017,840 951,537 N/A
<PAGE>
-28-
ITEM 5. OTHER INFORMATION
CONSTRUCTION AND FINANCING PROGRAMS
See "Liquidity and Capital Resources" in Part I, Item 2 of this report for a
discussion of construction and financing programs of the Company and its
subsidiaries.
COMPETITION AND ELECTRIC INDUSTRY RESTRUCTURING
See Note 6 of Notes to Condensed Consolidated Financial Statements in Part I,
Item 1 of this report for a discussion of competition and the rules regarding
the introduction of retail electric competition in Arizona and a settlement
agreement with the ACC.
ENVIRONMENTAL MATTERS
EPA ENVIRONMENTAL REGULATION - CLEAN AIR ACT
As previously reported, EPA's final National Ambient Air Quality Standards for
ozone and particulate matter were challenged, and the court determined that
EPA's promulgation of the standards violated the constitutional prohibition on
delegation of legislative power. See "Environmental Matters--EPA Environmental
Regulation--Clean Air Act" in Part I, Item 1 of the 1999 10-K. The court
remanded the ozone and fine particulate standards and vacated the coarse
particulate matter standard. The U.S. Supreme Court recently agreed to review
these decisions. We cannot currently predict the outcome of this matter.
PURPORTED NAVAJO ENVIRONMENTAL REGULATION
In April 2000, the Navajo Tribal Council approved operating permit regulations
under the Navajo Nation Air Pollution Prevention and Control Act. APS believes
that the regulations do not recognize that the Tribe did not intend to assert
jurisdiction over Four Corners and NGS. On July 12, 2000, the Four Corners
participants and the NGS participants each filed a petition with the Navajo
Supreme Court for review of the operating permit regulations. We cannot
currently predict the outcome of this matter.
As previously reported, in April 1999, APS filed a Petition for Review of EPA's
regulations regarding issuing Federal operating permits to cover stationary
sources on Indian reservations. See "Environmental Matters--Purported Navajo
Environmental Regulation" in Part I, Item 1 of the 1999 10-K. On June 29, 2000,
at the request of the Court, APS filed a motion to dismiss Four Corners from
this petition on the grounds that the impact of the regulations on pre-existing
binding agreements was not "ripe" for judicial resolution based on EPA's
issuance of an official notice indicating that it had not yet determined whether
the pre-existing binding agreements with Four Corners and NGS were abrogated by
the Clean Air Act.
WATER SUPPLY
As previously reported, APS and other parties petitioned the U.S. Supreme Court
for review of the decision confirming that certain groundwater rights may be
available to the federal
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government and Indian tribes. See "Water Supply" in Item I, Part 1 of the 1999
10-K. This petition was denied, and the pending lower court litigation will
continue.
PURCHASED POWER AGREEMENTS
As previously reported, in September 1990, APS entered into a thirty year
agreement under which APS and PacifiCorp engage in a one-for-one seasonal
capacity exchange. APS is entitled to receive up to 480 MW of capacity from
PacifiCorp during APS' summer peak season (through September 15). See
"Generating Fuel and Purchased Power - Purchased Power Agreements" in Part I,
Item 1 of the 1999 10-K. There is currently a dispute under the Long-Term Power
Transaction Agreement (the "Agreement") relating to the value of power delivered
to PacifiCorp under the Supplemental Energy provisions of the Agreement. As a
result of the dispute, APS understands that PacificCorp believes it is owed
monies by APS and, since August 8, 2000, has been withholding power due to APS
under the terms of Agreement. APS believes PacificCorp is in breach of the
Agreement, and the breach has been and is resulting in damage claims against
PacifiCorp which are accruing daily in an amount dependent upon daily energy
cost rates. The parties are currently attempting to resolve the dispute and no
litigation or arbitration has been commenced.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
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27.1 Financial Data Schedule
99.1 Amendment No. 14 to the ANPP Participation Agreement
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.(a) Date Effective
----------- ----------- ---------------------------- -------- --------------
<S> <C> <C> <C> <C>
10.1 Articles of Incorporation 19.1 to the Company's 1-8962 11-14-88
restated as of July 29, 1988 September 30, 1988
Form 10-Q Report
10.2 Bylaws, amended as of 4.1 to the Company's 1-8962 1-20-00
December 15, 1999 Registration Statement
on Form S-8 No. 333-95035
10.3 Pinnacle West Capital 99.1 to the Company's 1-8962 7-3-00
Corporation 2000 Director Registration Statement
Equity Plan on Form S-8 (No. 333-40796)
10.4 Pinnacle West Capital 99.2 to the Company's 1-8962 7-3-00
Corporation and Arizona Registration Statement
Public Service Company on Form S-8 (No. 333-40796)
Directors' Retirement Plan
(as Amended and Restated)
</TABLE>
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, and the period from July 1 through
August 14, 2000, we filed the following report on Form 8-K:
Report dated July 12, 2000, relating to a preliminary ruling issued by a
Maricopa County Superior Court judge on cross-motions for summary judgment in
connection with lawsuits filed relating to the adoption or amendment of the
retail electric competition rules.
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(a) Reports filed under File Nos. 1-4473 and 1-8962 were filed in the office of
the Securities and Exchange Commission located in Washington, D.C.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PINNACLE WEST CAPITAL CORPORATION
(Registrant)
Dated: August 14, 2000 By: Chris N. Froggatt
------------------------------------
Chris N. Froggatt
Vice President and Controller
(Principal Accounting Officer
and Officer Duly Authorized
to sign this Report)
