SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 17, 2002
ARIZONA PUBLIC SERVICE COMPANY
(Exact name of registrant as specified in its charter)
Arizona 1-4473 86-0011170
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification Number)
400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85004
(Address of principal executive offices) (Zip Code)
(602) 250-1000
(Registrant's telephone number, including area code)
NONE
(Former name or former address, if changed since last report)
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ITEM 5. OTHER EVENTS
FINANCIAL OUTLOOK
In this discussion, earnings per share amounts will be after income taxes
and will be based on diluted common shares outstanding.
2002 EARNINGS OUTLOOK
The earnings outlook for Pinnacle West Capital Corporation ("Pinnacle
West") for 2002 has not changed since Pinnacle West released its second quarter
earnings in July 2002. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Business Outlook" in Item 7 of Pinnacle
West's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2002
(the "June 10-Q"). Pinnacle West management is not uncomfortable with a
reasonable range around the October 17, 2002 First Call consensus of $3.46 per
share and believes that Pinnacle West's earnings for the year will be near that
amount, before deducting the one-time costs related to implementation of a
voluntary workforce reduction as part of the cost reduction program announced in
July 2002 ("2002 Severance Charges"). The 2002 Severance Charges are expected to
total up to $37 million before income taxes ($0.26 per share) and will be
recorded in the second half of 2002. To Pinnacle West's knowledge, the analysts'
estimates on First Call have not been adjusted to reflect the 2002 Severance
Charges.
For the year 2001, Pinnacle West reported earnings per share from
continuing operations of $3.85. Pinnacle West continues to believe that the
major items that will affect the 2002 results compared with its 2001 results
are: (a) an improvement related to the absence of reliability expenses for APS,
that Pinnacle West incurred in 2001 and that Pinnacle West does not expect to
recur in 2002 ($140 million before income taxes, $1.00 per share) and (b) lower
contributions from Pinnacle West's power marketing and trading operations due to
weak wholesale power market conditions in the western United States, including a
lack of market liquidity, fewer creditworthy counterparties, lower wholesale
market prices and resulting decreases in sales volumes (approximately $1.50 per
share). Other factors will also affect the earnings comparison, including, but
not limited to: benefits of customer growth of about 3.1%; improved results from
APS Energy Services Company, Inc., Pinnacle West's competitive retail energy
services subsidiary, related to multiyear contracts that began in 2001; higher
pension and post-employment benefit expense; losses from Pinnacle West's
unregulated generation operations; and the 2002 Severance Charges.
2003 EARNINGS OUTLOOK
For the year 2003, Pinnacle West estimates that its consolidated earnings
per share will be comparable to its expected reported earnings per share for
2002, after the effects of the 2002 Severance Charges.
Pinnacle West estimates that its regulated utility operations will continue
to contribute about 90% of its net income for 2003, with the remaining 10% being
contributed by its unregulated operations -- about the same proportions as
expected in 2002.
Pinnacle West estimates that net income from us in 2003 will be comparable
to our results in 2002. Pinnacle West expects that the comparison will be
favorably affected by the benefits of strong customer growth of approximately
3.4% and lower operations and maintenance expenses resulting from our cost
reduction program. The cost reduction program effects include estimated annual
savings for 2003 of approximately $30 million before income taxes ($18 million
after income taxes, $0.21 per share) and the absence of the 2002 Severance
Charges. We expect that the positive factors will be offset by higher natural
gas prices for our power plants relating to our 2001 hedging of gas volumes and
prices for 2003 and 2004 ($20 million after income taxes, $0.24 per share);
higher operations and maintenance expenses related to pension and other
post-employment benefits ($10 million to $15 million after income taxes, $0.12
to $0.18 per share); and higher purchased power prices.
The net contribution from Pinnacle West's unregulated activities in 2003 is
expected to be comparable with its combined results in 2002. Pinnacle West
expects the combined earnings from its non-energy subsidiaries, SunCor
Development Company ("SunCor") and El Dorado Investment Company, to improve
significantly. In the case of SunCor, the real estate subsidiary, Pinnacle West
is undertaking an aggressive effort to accelerate asset sales activities to
approximately double SunCor's annual earnings in the 2003-2005 period compared
to the approximate $20 million in earnings expected for 2002. These expected
improvements will offset higher interest expense and other costs at the parent
company primarily due to the absence of capitalized interest on construction
projects and estimated lower combined contributions from Pinnacle West's
unregulated generation and Pinnacle West's marketing and trading function.
2004 EARNINGS OUTLOOK
Pinnacle West currently estimates that earnings growth will again resume in
2004, based on an expected increase in our earnings above our five-year average
annual growth rate for 1996 through 2001 of 9.8%, driven primarily by customer
growth and cost management. Again, Pinnacle West anticipates that its regulated
utility operations will contribute about 90% of its net income for 2004, with
the remaining 10% being contributed by its unregulated operations.
Pinnacle West's 2003 and 2004 earnings outlooks assume the continuation of
the rate plan included in the 1999 settlement agreement, the approval by the
Arizona Corporation Commission (the "ACC") of our financing request in a timely
manner (see "Financing Application" below), the "Track B" issues being resolved
and approved by the ACC in a form reasonably similar to that currently proposed,
and the initiation, but not completion, of a full base rate case in 2003, which
would include recovery after 2004 of all costs incurred as a result of the ACC's
recent reversal of its direction on asset transfers and competitive bidding. See
"Arizona Electric Industry Restructuring" in Item 5 of the Company's Report on
Form 8-K dated September 10, 2002 (the "September 10 Form 8-K") for information
regarding the 1999 settlement agreement and recent and pending regulatory
proceedings before the ACC. In the event the actual outcomes of any of the
regulatory proceedings differ from those assumed by the Company as outlined
above, Pinnacle West's earnings for 2003 and 2004 may differ significantly from
Pinnacle West's current expectation.
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COMMON DIVIDENDS
Management expects to recommend to Pinnacle West's board of directors at
its October 23, 2002 meeting that the board increase the common dividend to
$1.70 per share per year from its current annual indicated rate of $1.60 per
share, effective with the December 1, 2002 dividend payment. Such an increase
would be similar in amount to prior increases. The previous dividend increase
was $0.10 per share per year and was approved in October 2001.
SUNCOR CASH DISTRIBUTIONS TO PARENT
Pinnacle West expects SunCor to make cash distributions to the parent
company of $80 million to $100 million annually in 2003 through 2005 due to
anticipated accelerated asset sales activity.
FINANCING APPLICATION
As previously reported, on September 16, 2002, we filed an application (the
"Financing Application") with the ACC requesting the ACC to allow us to borrow
up to $500 million and to lend the proceeds to Pinnacle West Energy Corporation
("PWEC"); to guarantee up to $500 million of PWEC's debt; or a combination of
both, not to exceed $500 million. In the Financing Application, we explained
that PWEC had previously received investment grade credit ratings contingent
upon its receipt of our generation assets. The loan and/or the guarantee would
be used to refinance debt incurred to fund the construction of PWEC generation
assets that were built to serve our load since we were prohibited from
constructing any new plants under the ACC's electric competition rules. The
Financing Application was filed in response to the ACC's September 10, 2002
order on "Track A" issues that resulted in a bifurcation of generation assets
between us and PWEC, which prevents PWEC from being able to attain investment
grade ratings and that could adversely affect Pinnacle West's credit ratings if
PWEC is unable to finance its capital requirements. See "Arizona Electric
Industry Restructuring - Financing Application" in Item 5 of our September 10
Form 8-K.
In mid-2003, Pinnacle West will need to refinance approximately $550
million of its indebtedness. If the ACC grants the approvals requested in the
Financing Application in a timely fashion, Pinnacle West believes that it would
not be required to issue additional equity to support its current credit ratings
or to meet its liquidity requirements.
If the ACC does not grant the approvals requested in the Financing
Application, Pinnacle West would anticipate taking the following steps, to the
extent necessary, in priority order:
* The reduction of capital expenditures through plant delay and
cancellation;
* The sale of non-core assets; and
* The issuance of new debt and, if appropriate, new equity.
Although Pinnacle West believes it would be inappropriate to discuss
specific numbers for each of the foregoing categories, Pinnacle West estimates
the sum of these steps to be approximately equivalent to the current outstanding
debt at the parent company, which totaled approximately one billion dollars as
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of September 30, 2002. Pinnacle West believes, even in this scenario, that its
common dividend would remain intact.
TRACK A ORDER
On September 10, 2002, the ACC issued its written order on "Track A" issues
(the "Track A Order") related to the generic docket established by the ACC in
January 2002. See "Arizona Electric Industry Restructuring - Track A Order" in
the September 10 Form 8-K. On September 30, 2002, we filed a Motion for
Reconsideration of the Track A Order and on October 17, 2002 the ACC voted to
deny that motion.
FORWARD-LOOKING STATEMENT
The above discussion contains forward-looking statements based on current
expectations and we assume no obligation to update these statements, except as
required by applicable laws. Because actual results may differ materially from
expectations, we caution readers not to place undue reliance on these
statements. A number of factors could cause future results to differ materially
from historical results, or from results or outcomes currently expected or
sought by us. These factors include the ongoing restructuring of the electric
industry, including the introduction of retail electric competition in Arizona;
the outcome of regulatory and legislative proceedings relating to the
restructuring; state and federal regulatory and legislative decisions and
actions, including the price mitigation plan adopted by the FERC; regional
economic and market conditions, including the California energy situation and
completion of generation construction in the region, which could affect customer
growth and the cost of power supplies; the cost of debt and equity capital;
weather variations affecting local and regional customer energy usage;
conservation programs; power plant performance; the successful completion of
Pinnacle West's generation expansion program; regulatory issues associated with
generation expansion, such as permitting and licensing; our ability to compete
successfully outside traditional regulated markets (including the wholesale
market); technological developments in the electric industry; the performance of
the stock market, which affects the amount of Pinnacle West required
contributions to its pension plan; and the strength of the real estate market in
SunCor's market areas, which include Arizona, New Mexico and Utah.
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.
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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 hereunto duly authorized.
ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
Dated: October 17, 2002 By: /s/ Barbara M. Gomez
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Barbara M. Gomez
Treasurer
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