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): January 15, 2003
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)
ITEM 5. OTHER EVENTS.
NAC INTERNATIONAL INC. LOSSES
Pinnacle West Capital Corporation ("Pinnacle West"), through an unregulated
wholly-owned subsidiary, owns a majority interest in NAC International Inc.
("NAC"), a company that develops, markets and contracts for the manufacture of
cask designs for spent nuclear fuel storage and transportation. As previously
reported, prior to the third quarter of 2002, Pinnacle West's investment in NAC
was accounted for under the equity method and Pinnacle West's share of NAC's
earnings and losses were recorded in other income or expense in the consolidated
income statement. Beginning in the third quarter of 2002, Pinnacle West fully
consolidated NAC's financial statements after acquiring a controlling interest
in NAC as a result of increased voting representation on NAC's board of
directors. During the second and third quarters of 2002, Pinnacle West recorded
cumulative losses of approximately $21 million before income taxes ($13 million
after income taxes, $0.15 per share) related to NAC, primarily as a result of
expected losses under contracts with two customers, including a contract between
NAC and Maine Yankee Atomic Power Company ("Maine Yankee"). See Note 14 of Notes
to Condensed Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations in Pinnacle West's
Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 2002 and
September 30, 2002 (the "September Form 10-Q") for additional information about
NAC.
On January 15, 2003, Maine Yankee notified NAC of its intention to
terminate its contract with NAC. Although NAC is currently in negotiations with
Maine Yankee regarding this matter, Pinnacle West expects to record additional
NAC losses in the range of approximately $33 million to $40 million before
income taxes ($20 million to $24 million after income taxes, or $0.24 to $0.28
per share) in the fourth quarter of 2002, the substantial majority of which
relate to the termination of the Maine Yankee contract. As a result, for the
year 2002, Pinnacle West expects to record NAC losses in the range of
approximately $54 million to $61 million before income taxes ($32 million to $37
million after income taxes, or $0.38 to $0.44 per share).
PINNACLE WEST EARNINGS 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
Pinnacle West previously reported that management was not uncomfortable
with a reasonable range around the October 17, 2002 First Call consensus of
$3.46 per share for 2002, before deducting the 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
were expected to total up to $37 million before income taxes ($22 million after
income taxes, $0.26 per share) and were expected to be recorded in the second
half of 2002. See "Financial Outlook - 2002 Earnings Outlook" in Item 5 of the
Arizona Public Service Company (the "Company" or "APS") Current Report on Form
8-K dated October 17, 2002 (the "October 8-K").
As previously reported, on November 22, 2002, Pinnacle West Energy
Corporation, Pinnacle West's unregulated generation subsidiary, announced the
decision to cancel Units 3 and 4 of the Redhawk Power Plant. As a result of the
plant cancellation, Pinnacle West expected to record a cancellation charge of
approximately $50 million before income taxes ($30 million after income taxes,
$0.35 per share) in the fourth quarter of 2002 (the "Redhawk 3 and 4
Cancellation Charges"). See "Pinnacle West Energy Corporation" in Item 5 of the
Company's Report on Form 8-K dated November 22, 2002.
As previously reported, Pinnacle West also expects its 2002 results to
include the cumulative effect of a change in accounting for energy trading
activities. Effective October 1, 2002, Pinnacle West and APS adopted EITF 02-03,
"Issues Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities." As a result, Pinnacle West expects to report, in the fourth quarter
of 2002, a loss of approximately $70 million after income taxes ($0.82 per
share) as a cumulative effect of a change in accounting for trading activities,
which represents the previously recorded accumulated unrealized mark-to-market
gains, net of tax on energy trading contracts that do not meet the definition of
a derivative under Statement of Financial Accounting Standards No. 133,
"Accounting for Derivatives and Hedging Activities." See "Accounting Matters" in
Item 5 of Pinnacle West's Report on Form 8-K dated November 15, 2002, which
Pinnacle West filed in December 2002 (the "December 8-K").
Pinnacle West is updating its guidance for the year 2002 to reflect the
effects of the losses at NAC disclosed above under " NAC International Inc.
Losses." Accordingly, Pinnacle West estimates that its diluted earnings per
share for income before accounting change will be approximately $2.50 to $2.60,
after deducting the items that it considers to be non-recurring or unusual.
These items include the 2002 Severance Charges, the Redhawk 3 and 4 Cancellation
Charges, and the NAC-related losses.
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2003 Earnings Outlook
Pinnacle West previously indicated its expectation that its consolidated
earnings per share for 2003 would be within a reasonable range of $3.20 per
share. See "Financial Outlook" in Item 5 of the October 8-K.
Pinnacle West is updating its outlook for the year 2003. Pinnacle West
currently estimates that its consolidated earnings per share for 2003 will be
within a reasonable range of $3.00 per share. This change in its 2003 guidance
relates primarily to previously announced factors:
* A 264 basis point interest differential that the Staff of the Arizona
Corporation Commission (the "ACC") has proposed to be capitalized as a
deferred credit and used to affect retail electricity rates in the
future in conjunction with $500 million financing application of APS
that is currently under consideration by the ACC. This differential
would effectively create a reduction of earnings if the $500 million
financing application is approved and the intercompany loan is
implemented as requested in mid-2003. See "Track A Order Matters;
Financing Application" in the December 8-K.
* The effects of Pinnacle West's issuance of approximately 6.6 million
shares of common stock on December 23, 2002.
* An increase in earnings of approximately $14 million after income
taxes ($0.16 per share) in 2003 as certain energy trading contracts
are accounted for on the accrual basis as a result of adoption of EITF
02-3. See "Accounting Matters" in Item 5 of the December 8-K.
* An increase of approximately $29 million before income taxes in
pension and other post-employment benefits costs as compared with its
previous estimate of $22 million due primarily to actual investment
performance of its pension funds during 2002.
Pinnacle West's 2003 earnings outlook assumes the continuation of the rate
plan included in the 1999 settlement agreement, the ACC's approval of APS' $500
million financing request in a timely manner, the "Track B" issues being
resolved and approved by the ACC in a form reasonably similar to that proposed
by the ACC Staff (see Note 5 of Notes to Condensed Consolidated Financial
Statements in the September 10-Q), and the initiation, but not completion, of a
full general 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. In the event the actual outcomes of any
of the regulatory proceedings differ from those assumed by Pinnacle West as
outlined above, Pinnacle West's earnings for 2003 may differ significantly from
Pinnacle West's current expectation.
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FORWARD-LOOKING STATEMENTS
This Report on Form 8-K contains forward-looking statements based on
current expectations, and the Company assumes no obligation to update these
statements. Because actual results may differ materially from expectations, the
Company cautions 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
the Company. These factors include the ongoing restructuring of the electric
industry, including the introduction of retail electric competition in Arizona
and decisions impacting wholesale competition; the outcome of regulatory and
legislative proceedings relating to the restructuring; state and federal
regulatory and legislative decisions and actions, including price caps and other
market constraints imposed 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 and access to the capital
markets; weather variations affecting local and regional customer energy usage;
the effect of conservation programs on energy usage; power plant performance;
the successful completion of our 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); our ability to manage our marketing and trading
activities and the use of derivative contracts in our business; technological
developments in the electric industry; the performance of the stock market,
which affects the amount of our required contributions to our pension plan and
nuclear decommissioning trust funds; the strength of the real estate market in
the market areas of SunCor Development Company, Pinnacle West's real estate
subsidiary, which include Arizona, New Mexico and Utah; and other uncertainties,
all of which are difficult to predict and many of which are beyond our control.
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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: January 30, 2003 By: Barbara M. Gomez
------------------------------------
Barbara M. Gomez
Treasurer
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