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 March 31, 1994
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 1-4473
ARIZONA PUBLIC SERVICE COMPANY
______________________________
(Exact name of registrant as specified in its charter)
Arizona 86-0011170
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999
___________________________________________________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 250-1000
______________
___________________________________________________________________
(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, $2.50 par value,
outstanding as of May 13, 1994: 71,264,947
Glossary
ACC - Arizona Corporation Commission
ACC Order - Final order of the ACC approving the Settlement
Agreement
ACC Staff - Staff of the Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
ALJ - DOL Administrative Law Judge
cents/kWh - Cents per kilowatt-hour
Company - Arizona Public Service Company
DOL - U. S. Department of Labor
EPEC - El Paso Electric Company
Four Corners - Four Corners Power Plant
ITCs - Investment tax credits
1991 Settlement - December 1991 rate case settlement
1993 10-K - Arizona Public Service Company Annual Report on Form 10-K for
the fiscal year ended December 31, 1993
NRC - Nuclear Regulatory Commission
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
SFAS No. 106 - Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other
Than Pensions"
SFAS No. 112 - Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits"
Settlement Agreement - Rate Settlement Agreement between the Company and
the ACC Staff dated April 20, 1994
<AUDIT-REPORT>
INDEPENDENT ACCOUNTANTS' REPORT
Arizona Public Service Company:
We have reviewed the accompanying condensed balance sheet of Arizona Public
Service Company as of March 31, 1994 and the related condensed statements
of income for the three-month and twelve-month periods ended March 31, 1994
and 1993 and cash flows for the three-month periods ended March 31, 1994
and 1993. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and of making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Arizona Public Service Company as of
December 31, 1993 and the related statements of income, retained earnings,
and cash flows for the year then ended (not presented herein); and in our
recent report dated February 21, 1994, we expressed an unqualified opinion
on those financial statements. In our opinion, the information set forth
in the condensed balance sheet as of December 31, 1993 is fairly stated, in
all material respects, in relation to the balance sheet from which it has
been derived.
DELOITTE & TOUCHE
Phoenix, Arizona
May 13, 1994
</AUDIT-REPORT>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended March 31,
------------------------
1994 1993
---------- ----------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . $ 365,176 $ 371,303
---------- ----------
FUEL EXPENSES:
Fuel for electric generation . . . . . 57,968 55,008
Purchased power . . . . . . . . . . . 10,063 10,496
---------- ----------
Total . . . . . . . . . . . . . . . 68,031 65,504
---------- ----------
OPERATING REVENUES LESS FUEL EXPENSES . . 297,145 305,799
---------- ----------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . 66,336 63,174
Maintenance . . . . . . . . . . . . . . 31,285 27,937
Depreciation and amortization . . . . . 57,910 55,489
Income taxes - current . . . . . . . . 12,944 19,377
Income taxes - deferred . . . . . . . . 8,192 9,146
Other taxes . . . . . . . . . . . . . . 53,331 51,235
---------- ----------
Total . . . . . . . . . . . . . . . 229,998 226,358
---------- ----------
OPERATING INCOME . . . . . . . . . . . . 67,147 79,441
---------- ----------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . 846 652
Income taxes - current . . . . . . . . 506 562
Income taxes - deferred . . . . . . . . (7,299) (6,277)
Palo Verde accretion income . . . . . . 19,980 17,990
Other - net . . . . . . . . . . . . . . (396) (530)
---------- ----------
Total . . . . . . . . . . . . . . . 13,637 12,397
---------- ----------
INCOME BEFORE INTEREST DEDUCTIONS . . . . 80,784 91,838
---------- ----------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . 39,476 41,811
Interest on short-term borrowings . . . 1,595 1,481
Debt discount, premium and expense . . 2,412 2,266
AFUDC - debt . . . . . . . . . . . . . (1,167) (886)
---------- ----------
Total . . . . . . . . . . . . . . . 42,316 44,672
---------- ----------
NET INCOME . . . . . . . . . . . . . . . 38,468 47,166
PREFERRED STOCK DIVIDEND REQUIREMENTS . . 7,510 7,889
---------- ----------
EARNINGS FOR COMMON STOCK . . . . . . . . $ 30,958 $ 39,277
========== ==========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)
Twelve Months
Ended March 31,
-------------------------
1994 1993
----------- -----------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . $ 1,680,163 $ 1,696,035
----------- -----------
FUEL EXPENSES:
Fuel for electric generation . . . . . 234,394 239,240
Purchased power . . . . . . . . . . . . 68,679 57,604
----------- -----------
Total . . . . . . . . . . . . . . . 303,073 296,844
----------- -----------
OPERATING REVENUES LESS FUEL EXPENSES . . 1,377,090 1,399,191
----------- -----------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . 285,822 273,518
Maintenance . . . . . . . . . . . . . . 121,904 111,701
Depreciation and amortization . . . . . 225,031 220,265
Income taxes - current . . . . . . . . 91,090 119,385
Income taxes - deferred . . . . . . . . 69,579 56,230
Other taxes . . . . . . . . . . . . . . 223,470 217,260
----------- -----------
Total . . . . . . . . . . . . . . . 1,016,896 998,359
----------- -----------
OPERATING INCOME . . . . . . . . . . . . 360,194 400,832
----------- -----------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . 2,520 3,049
Income taxes - current . . . . . . . . 4,309 5,601
Income taxes - deferred . . . . . . . . (26,238) (23,045)
Palo Verde accretion income . . . . . . 76,870 69,213
Other - net . . . . . . . . . . . . . . (2,001) (6,135)
----------- -----------
Total . . . . . . . . . . . . . . . 55,460 48,683
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS . . . . 415,654 449,515
----------- -----------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . 162,275 177,177
Interest on short-term borrowings . . . 6,776 4,798
Debt discount, premium and expense . . 9,349 8,631
AFUDC - debt . . . . . . . . . . . . . (4,434) (4,151)
----------- -----------
Total . . . . . . . . . . . . . . . 173,966 186,455
----------- -----------
NET INCOME . . . . . . . . . . . . . . . 241,688 263,060
PREFERRED STOCK DIVIDEND REQUIREMENTS . . 30,461 32,017
----------- -----------
EARNINGS FOR COMMON STOCK . . . . . . . . $ 211,227 $ 231,043
=========== ===========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)
March 31, December 31,
1994 1993
----------- ----------
(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for
future use . . . . . . . . . . . . . . $ 6,383,317 $ 6,333,884
Less accumulated depreciation and
amortization . . . . . . . . . . . . . 2,005,419 1,991,143
----------- -----------
Total . . . . . . . . . . . . . . . . 4,377,898 4,342,741
----------- -----------
Construction work in progress . . . . . . 166,431 197,556
Nuclear fuel, net of amortization . . . . 72,629 60,953
----------- -----------
Utility plant - net . . . . . . . . . 4,616,958 4,601,250
----------- -----------
INVESTMENTS AND OTHER ASSETS: . . . . . . . . 66,066 63,224
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . 8,607 7,557
Accounts receivable:
Service customers . . . . . . . . . . 86,337 102,745
Other . . . . . . . . . . . . . . . . 11,095 21,091
Allowance for doubtful accounts . . . (1,492) (2,569)
Accrued utility revenues . . . . . . . . 48,241 60,356
Materials and supplies (at average cost) 96,150 96,174
Fossil fuel (at average cost) . . . . . . 29,832 34,220
Deferred income taxes . . . . . . . . . . 27,019 29,117
Other . . . . . . . . . . . . . . . . . 14,955 12,653
----------- -----------
Total current assets . . . . . . . . . 320,744 361,344
----------- -----------
DEFERRED DEBITS:
Regulatory asset for income taxes . . . . 580,761 585,294
Palo Verde Unit 3 cost deferral . . . . . 299,457 301,748
Palo Verde Unit 2 cost deferral . . . . . 176,483 177,998
Unamortized costs of reacquired debt . . 61,306 63,147
Unamortized debt issue costs . . . . . . 18,413 17,999
Other . . . . . . . . . . . . . . . . . . 186,099 185,258
----------- -----------
Total deferred debits . . . . . . . . 1,322,519 1,331,444
----------- -----------
TOTAL . . . . . . . . . . . . . . . . $ 6,326,287 $ 6,357,262
=========== ===========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
LIABILITIES
(Unaudited)
March 31, December 31,
1994 1993
----------- -----------
(Thousands of Dollars)
CAPITALIZATION:
Common stock . . . . . . . . . . . . . . $ 178,162 $ 178,162
Premiums and expense - net . . . . . . . 1,037,929 1,037,681
Retained earnings . . . . . . . . . . . . 295,292 307,098
----------- -----------
Common stock equity . . . . . . . . . 1,511,383 1,522,941
Non-redeemable preferred stock . . . . . 193,561 193,561
Redeemable preferred stock . . . . . . . 183,400 197,610
Long-term debt less current maturities 2,163,966 2,124,654
----------- -----------
Total capitalization . . . . . . . . . 4,052,310 4,038,766
----------- -----------
CURRENT LIABILITIES:
Commercial paper . . . . . . . . . . . . 79,000 148,000
Current maturities of long-term debt . . 3,288 3,179
Accounts payable . . . . . . . . . . . . 52,342 81,772
Accrued taxes . . . . . . . . . . . . . . 156,894 112,293
Accrued interest . . . . . . . . . . . . 37,988 45,729
Other . . . . . . . . . . . . . . . . . . 68,145 60,737
----------- -----------
Total current liabilities . . . . . . 397,657 451,710
----------- -----------
DEFERRED CREDITS AND OTHER:
Deferred income taxes . . . . . . . . . . 1,401,133 1,391,184
Deferred investment tax credit . . . . . 148,730 149,819
Unamortized gain - sale of utility plant 105,146 107,344
Customer advances for construction . . . 16,106 15,578
Other . . . . . . . . . . . . . . . . . . 205,205 202,861
----------- -----------
Total deferred credits and other . . . 1,876,320 1,866,786
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
TOTAL . . . . . . . . . . . . . . . . $ 6,326,287 $ 6,357,262
=========== ===========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Ended March 31,
-------------------------
1994 1993
------------ -----------
(Thousands of Dollars)
CASH FLOWS FROM OPERATIONS:
Net income . . . . . . . . . . . . . . . . $ 38,468 $ 47,166
Items not requiring cash:
Depreciation and amortization . . . . . . 57,910 55,489
Nuclear fuel amortization . . . . . . . . 6,433 10,552
AFUDC - equity . . . . . . . . . . . . . (846) (652)
Deferred income taxes - net . . . . . . . 16,580 16,573
Deferred investment tax credit - net . . (1,089) (1,150)
Refund obligation - net . . . . . . . . . (5,344) (5,344)
Palo Verde accretion income . . . . . . . (19,980) (17,990)
Changes in certain current assets and
liabilities:
Accounts receivable - net . . . . . . . . 25,327 39,694
Accrued utility revenues . . . . . . . . 12,115 7,084
Materials, supplies and fossil fuel . . . 4,412 5,831
Other current assets . . . . . . . . . . (2,302) (51,999)
Accounts payable . . . . . . . . . . . . (17,920) (30,292)
Accrued taxes . . . . . . . . . . . . . . 44,601 49,391
Accrued interest . . . . . . . . . . . . (7,759) (851)
Other current liabilities . . . . . . . . 12,863 3,151
Other - net . . . . . . . . . . . . . . . 2,993 137
----------- -----------
Net cash provided from operations . . . 166,462 126,790
----------- -----------
CASH FLOWS FROM FINANCING:
Long-term debt . . . . . . . . . . . . . . 98,899 147,069
Short-term borrowings - net . . . . . . . . (69,000) (171,000)
Dividends paid on common stock . . . . . . (42,500) --
Dividends paid on preferred stock . . . . . (7,621) (7,922)
Repayment of preferred stock . . . . . . . (14,225) (4,510)
Repayment and reacquisition of long-term
debt . . . . . . . . . . . . . . . . . . (60,285) (37,000)
----------- -----------
Net cash used for financing . . . . . . (94,732) (73,363)
----------- -----------
CASH FLOWS FROM INVESTING:
Capital expenditures . . . . . . . . . . . (68,684) (43,533)
AFUDC - equity . . . . . . . . . . . . . . 846 652
Other . . . . . . . . . . . . . . . . . . . (2,842) (2,890)
----------- -----------
Net cash used for investing . . . . . . (70,680) (45,771)
----------- -----------
Net increase in cash and cash equivalents 1,050 7,656
Cash and cash equivalents at beginning of
period . . . . . . . . . . . . . . . . . . 7,557 1,152
----------- -----------
Cash and cash equivalents at end of period $ 8,607 $ 8,808
=========== ===========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest (excluding capitalized interest) $ 47,246 $ 42,729
Income taxes . . . . . . . . . . . . . . $ -- $ --
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of
March 31, 1994, the results of operations for the three months and twelve
months ended March 31, 1994 and 1993, and the cash flows for the three
months ended March 31, 1994 and 1993. It is suggested that these financial
statements and notes to financial statements be read in conjunction with the
financial statements and notes to financial statements included in the 1993
10-K.
2. The Company's operations are subject to seasonal fluctuations, with
variations occurring in energy usage by customers from season to season and
from month to month within a season, primarily as a result of changing
weather conditions. For this and other reasons, the results of operations
for interim periods are not necessarily indicative of the results to be
expected for the full year.
3. All the outstanding shares of common stock of the Company are owned by
Pinnacle West. Pursuant to a Pledge Agreement, dated as of January 31,
1990, and as part of a restructuring of substantially all of its outstanding
indebtedness, Pinnacle West granted certain of its lenders a security
interest in all of the Company's outstanding common stock.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report
for changes in capitalization since December 31, 1993.
5. On April 20, 1994, the Company and the ACC Staff entered into a Rate
Settlement Agreement (the "Settlement Agreement"). Pursuant to the terms of
the Settlement Agreement, the Company's annual retail rates would be reduced
by approximately $32.3 million, or approximately 2.2%. The rate decrease
would be effective on the date the ACC issues a final order approving the
Settlement Agreement (the "ACC Order"); if the ACC Order is appealed or
judicial review of the ACC Order is sought, the parties would no longer be
bound by the terms of the Settlement Agreement, in which case the rate
reduction would cease and the Company would be entitled to recover any
revenue reduction experienced by the Company to that point. If the ACC does
not issue the ACC Order on or before June 1, 1994, the Settlement Agreement
will be deemed to be automatically withdrawn. The following description of
the Settlement Agreement is a summary, and is qualified in its entirety by
the Settlement Agreement, a copy of which is attached to this filing as an
exhibit.
Future Retail Rate Changes
Neither the Company nor the ACC Staff would file for a permanent change
to the Company's general rates and charges prior to December 31, 1996 (the
"Rate Moratorium Period"), except (i) in the event of an emergency, such as
the Company's inability to finance on reasonable terms or material increases
in the Company's cost of service as a result of federal, tribal, state or
local laws, regulatory requirements or orders; (ii) for changes relating to
specific rate schedules or terms and conditions of service that do not
significantly affect the overall earnings of the Company; and (iii) in the
case of certain individual large customers, the ACC Staff will expeditiously
review any Company tariff or contract filing for such customers and
recommend that such filings be decided promptly by the ACC.
If the Company files its next general rate application before January
1, 1998, the ACC would render its decision no later than twelve (12) months
after the filing, subject to certain exceptions, and the Company and the ACC
Staff would use their best efforts to settle the rate request within six (6)
months of the filing.
If the next general rate proceeding results in no increase in
residential rates, the ACC would compare the Company's costs of service
during the test period under review for fuel expense and operation and
maintenance for all sales (including sales for resale, but excluding
interchange and non-traditional sales) to a target cost of service index of
3.63 cents/kWh. Forty-five percent (45%) of any cost savings below the
target cost of 3.63 cents/kWh would be added to the Company's otherwise
appropriate revenue requirement in such rate proceeding. The Company's cost
of service index for these items during 1993 was 3.71 cents/kWh.
All three Palo Verde units are, and in future rate cases would be,
included in the Company's rate base as "used and useful," less the net
prudence disallowance required by the December 1991 rate case settlement
(the "1991 Settlement"). The ACC could re-examine this position in future
general rate cases in the event of significant changes in the operating
characteristics, reliability, or efficiency of any or all of the Palo Verde
units, or if any unit is derated. In addition, the "in-lieu" refund
obligation resulting from the 1991 Settlement would be deemed fully
discharged as of the date of the ACC Order. See Note 2 of Notes to
Financial Statements in Part II, Item 8 of the 1993 10-K for additional
information regarding the 1991 Settlement.
Decommissioning Funding
The rates authorized by the Settlement Agreement would include an
annual jurisdictional allowance for decommissioning funding for all three
Palo Verde units at the following levels: Unit 1 ($3.621 million); Unit 2
($3.877 million); and Unit 3 ($3.405 million). See Note 1.e of Notes to
Financial Statements in Part II, Item 8 of the 1993 10-K for additional
information regarding the Company's decommissioning obligations.
Renewable Resources/Demand Side Management
The Company would spend specified amounts over a three year period on
renewable resources and demand side management projects and, on or before
December 31, 1994, would submit to the ACC Staff a three-year renewable
resource plan containing specified elements. See Paragraph K of the
Settlement Agreement, incorporated by reference herein, for further details
regarding renewable resources and demand side management.
Investment Tax Credits
The Company would, upon the receipt of a favorable ruling from the
Internal Revenue Service, amortize below the line approximately $137 million
of its jurisdictional unamortized investment tax credits ("ITCs") over a
five (5) year period beginning with calendar year 1995 instead of the
current amortization schedule of twenty-five (25) years. After such five
(5) year period all such amortized ITCs would be treated as fully restored
to the Company's rate base in any future ratemaking proceedings. Because of
the non-cash earnings that would result from the Company's (i) accelerated
amortization of ITCs during the 1995-1999 period; and (ii) recognition of
the removal of a regulatory liability (associated with the 1991 Settlement)
as income during 1994, the Company does not expect its earnings would be
significantly affected if the Settlement Agreement were to become effective.
Pricing and Operating Procedures
The ACC Staff and the Company would meet in a good faith attempt to
develop new pricing and operating procedures that are responsive to market
conditions, competitive pressures in the electric utility industry, and the
ACC's relationship to regulated utilities and their customers. The parties
would submit a report to the ACC within twelve (12) months of the ACC Order
and seek prompt ACC approval of recommendations that would assist the
Company in achieving its residential price stability goals and enhancing its
competitiveness related to non-residential customers.
The ACC has scheduled a public hearing on the Settlement Agreement to
be held on May 13, 1994. The Company cannot currently predict whether, or
when, the Settlement Agreement will be approved by the ACC and become
effective.
6. 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 industrywide retrospective assessment program.
The maximum assessment per reactor under the retrospective rating program
for each nuclear incident is approximately $79 million, subject to an annual
limit of $10 million per incident. Based upon the Company's 29.1% interest
in the three Palo Verde units, the Company's maximum potential assessment
per incident is approximately $69 million, with an annual payment limitation
of $8.73 million. The insureds under this liability insurance include the
Palo Verde participants and "any other person or organization with respect
to his legal responsibility for damage caused by the nuclear energy hazard."
The Palo Verde participants maintain "all risk" (including nuclear
hazards) insurance for property damage to, and decontamination and
decommissioning 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. The Company 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.
7. Tube cracking in the steam generators of Palo Verde adversely affected
operations in 1993, and will continue to do so in 1994 and probably into
1995, because of the cost of replacement power and maintenance expense
associated with unit outages and corrective actions required to deal with
the issue.
Palo Verde Unit 2
The operation of Palo Verde Unit 2 has been particularly affected by
this issue. The Company has encountered axial tube cracking in the upper
regions of the two steam generators in Unit 2. This form of tube
degradation is uncommon in the industry and, in March 1993, led to a tube
rupture and an outage of the unit that extended to September 1993, during
which the unit was refueled. In March 1994, a mid-cycle inspection outage
was completed which revealed further tube degradation in Unit 2. The outage
included, among other things, inspecting and chemically cleaning each of
Unit 2's steam generators, and subsequently starting the unit up using boric
acid in the secondary water system. Unit 2 is scheduled for another mid-
cycle inspection outage in the fall of 1994. The Unit 2 refueling and
maintenance outage which was originally planned for the fall of 1994 is now
scheduled to be completed in early 1995.
Palo Verde Unit 3
Palo Verde Unit 3 is currently in a refueling outage, during which the
Company is inspecting and has chemically cleaned each of Unit 3's two steam
generators, and the unit will be started up with boric acid in the secondary
water system. The Company's inspection of these generators has revealed
axial cracking in a small number of tubes in the upper regions of each of
the generators. As a result, the Company has expanded the scope of its
inspections of these steam generators to obtain additional information about
the extent and severity of the axial cracking. The expanded inspection in
one of the steam generators has been completed. The Company expects that
the expanded inspection in the other steam generator will be completed
within the next week. The Company currently expects that Unit 3 will be
restarted in June. However, in light of the axial cracking that the Company
has found to date, the Company anticipates that Unit 3 would be removed from
service in late 1994 for a mid-cycle inspection of steam generators.
Palo Verde Unit 1
Palo Verde Unit 1 is scheduled for a refueling outage beginning in
March 1995. In late 1993 the Company concluded that Unit 1 could be safely
operated until the 1995 outage and submitted its supporting analysis to the
NRC. However, in light of the axial cracking found in the Unit 3 steam
generators, the Company is currently evaluating the potential need for a
mid-cycle steam generator tube inspection outage in Unit 1 late in 1994.
General
Although its analysis is not yet completed, the Company believes that
the axial cracking in the Unit 2 and Unit 3 steam generator tubes is due to
the susceptibility of tube materials to a combination of deposits on the
tubes and the relatively high temperatures at which all three units are
currently designed to operate. The Company also believes that it can retard
further tube degradation to acceptable levels by remedial actions, which
include chemically cleaning the generators and performing analyses and
adjustments that will allow the units to be operated at lower temperatures
without appreciably reducing their power output. Chemical cleaning has been
completed in Unit 2 and was completed in Unit 3 during its current refueling
outage. The temperature analyses should be concluded within the next
several months. In the meantime, the lower temperatures will be achieved by
operating the units at less than full power (86%).
The Company previously reported that all three units should be returned
to full power by mid-1995, and one or more of the units could be returned to
full power during 1994. However due to the axial cracking found in Unit 3,
the Company cannot currently predict when one or more of the units will be
returned to full power.
As a result of the Unit 2 mid-cycle outage and operating the units at
reduced power during the three months ended March 31, 1994, the Company
incurred additional fuel and purchased power costs totaling about $10
million (before income taxes). During the last nine months of 1994, the
Company expects to incur replacement power costs related to a mid-cycle
inspection outage at Unit 2 and operating the three units at 86% power
averaging approximately $1.5 million (before income taxes) a month, which
costs may continue into 1995. In the event that mid- cycle inspection
outages are necessary in late 1994 for Units 1 and 3 and assuming that each
such outage will last forty (40) days, the replacement power costs for both
outages are estimated to total approximately $7 million (before income
taxes). Fuel and purchased power costs increased $15.5 million (before
income taxes) in 1993 due to Palo Verde outages and reduced power operations
related to steam generator tube cracking.
The Company estimates that additional operations and maintenance
expenses totaling approximately $6 million (before income taxes) will be
incurred if mid-cycle inspection outages are performed at Units 1 and 3 in
late 1994.
When tube cracks are detected during any outage, the affected tubes are
taken out of service by plugging. That has occurred in a number of tubes in
all three units, particularly in Unit 2, which is by far the most affected
by cracking and plugging. The Company expects that because of the foregoing
remedial actions the rate of plugging will slow considerably and that, while
it may ultimately reach some limit on plugging, it can operate the present
steam generators over a number of years.
ARIZONA PUBLIC SERVICE COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OPERATING RESULTS
The following table summarizes the Company's revenues and earnings for the
three-month and twelve-month periods ended March 31, 1994 and 1993:
Periods ended March 31
(Thousands of Dollars)
Three Months Twelve Months
---------------- ----------------
1994 1993 1994 1993
---- ---- ---- ----
Operating
Revenues $365,176 $371,303 $1,680,163 $1,696,035
Earnings $ 30,958 $ 39,277 $ 211,227 $ 231,043
OPERATING RESULTS - THREE-MONTH PERIOD ENDED MARCH 31, 1994 COMPARED TO
THREE-MONTH PERIOD ENDED MARCH 31, 1993
Earnings decreased in the three-month period ended March 31, 1994
primarily due to increased operations and maintenance expenses and lower
operating revenues. Operations and maintenance expenses increased primarily
due to a mid-cycle outage at Palo Verde Unit 2 (see Note 7 of Notes to
Financial Statements in Part I, Item 1 of this report). Interchange sales
to other utilities decreased due to reduced generation availability at Palo
Verde and increased hydroelectric power availability in the Pacific
Northwest. Partially offsetting these factors was a revenue increase due to
customer growth.
OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED MARCH 31, 1994 COMPARED TO
TWELVE-MONTH PERIOD ENDED MARCH 31, 1993
Earnings decreased in the twelve-month period ended March 31, 1994
primarily due to increased operations and maintenance expenses, lower
operating revenues, and higher purchased power costs, partially offset by
lower interest expense. Operations and maintenance expenses increased
largely as a result of the implementation of SFAS No. 106 and SFAS No. 112
(see Note 9 of Notes to Financial Statements in Part II, Item 8 of the 1993
10-K). Purchased power expense increased due to reduced generation
availability at Palo Verde, partially offset by lower fuel costs related to
lower interchange sales. Interchange sales to other utilities decreased due
to reduced generation availability at Palo Verde and increased hydroelectric
power availability in the Pacific Northwest. Retail sales decreased due to
the effects of milder weather. Partially offsetting these decreases was a
revenue increase due to customer growth. Interest expense decreased due to
refinancing debt at lower rates, lower debt balances, and lower rates on
variable-rate debt.
OTHER INCOME
Net income reflects accounting practices required for regulated public
utilities and represents a composite of cash and noncash items, including
AFUDC, accretion income on Palo Verde Unit 3 and the reversal of a refund
obligation related to the Palo Verde write-off in December, 1991. See Note
2 of Notes to Financial Statements in Part II, Item 8 of the 1993 10-K for
additional information regarding Palo Verde Unit 3 accretion income and the
reversal of the refund obligation. The Company recorded after-tax accretion
income and refund obligation reversals in the three months ended March 31,
1994 of $12.1 million and $3.2 million respectively. The Company will
record the remaining after-tax accretion income and refund obligation
reversals of $8.2 million and $2.4 million respectively by June 5, 1994.
TAX LEGISLATION
On April 4, 1994, a comprehensive tax package was signed into Arizona
law that, among other things, reduces the assessment ratio for utility
property from the current assessment ratio of 30% to 25%. This reduction
will be phased in over a five-year period at one percent per year beginning
in 1995. This legislation is expected to reduce or offset the historical
rate of growth of property tax expense.
1994 RATE SETTLEMENT AGREEMENT
See Note 5 of Notes to Financial Statements in Part I, Item 1 of this
report for a discussion of the Company's Rate Settlement Agreement with the
ACC Staff.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1994, the Company incurred
approximately $56 million in construction expenditures, accounting for
approximately 20% of the most recently estimated 1994 construction
expenditures. The Company has estimated total construction expenditures for
the years 1994, 1995, and 1996 to be approximately $279 million, $302
million, and $293 million, respectively.
Refunding obligations for preferred stock and long-term debt, a
capitalized lease obligation, and certain anticipated early redemptions are
expected to total approximately $167 million, $145 million, and $14 million
for the years 1994, 1995, and 1996, respectively. During the first three
months of 1994, the Company refunded approximately $75 million (45%) of the
estimated 1994 total.
On March 1, 1994, the Company redeemed all of the outstanding shares of
its $8.80 Cumulative Preferred Stock, Series K ($100 Par Value) in the
amount of $14.21 million. On April 4, 1994, the Company redeemed all
$60.264 million of its outstanding First Mortgage Bonds, 10 3/4% Series due
2019; for financial reporting purposes, this debt was considered
extinguished as of March 31, 1994. On March 2, 1994, the Company issued
$100 million of its First Mortgage Bonds, 6 5/8% Series due 2004, and
applied the net proceeds to the repayment of short term debt that had been
incurred for the redemption of preferred stock and for general corporate
purposes. On June 1, 1994, pursuant to sinking fund requirements, the
Company will redeem 100,000 shares of its $8.48 Cumulative Preferred Stock,
Series S, and 35,250 shares of its $11.50 Cumulative Preferred Stock, Series
R ("Series R Preferred Stock"), both at a redemption price of $100 per
share, plus accrued and unpaid dividends. On June 2, 1994, the Company will
redeem all 248,750 outstanding shares of its Series R Preferred Stock at a
redemption price of $105.45 per share, plus accrued and unpaid dividends.
Provisions in the Company's mortgage bond indenture and articles of
incorporation require certain coverage ratios to be met before the Company
can issue additional first mortgage bonds or preferred stock. In addition,
the mortgage bond indenture limits the amount of additional bonds which may
be issued to a percentage of net property additions, to property previously
pledged as security for certain bonds that have been redeemed or retired
and/or cash deposited with the mortgage bond trustee. As of March 31, 1994,
the Company estimates that the mortgage bond indenture and the articles of
incorporation would have allowed the Company to issue up to approximately
$1.21 billion and $892 million of additional first mortgage bonds and
preferred stock, respectively.
The ACC has authority over the Company with respect to the issuance of
long-term debt and equity securities. Existing ACC orders allow the Company
to have up to approximately $2.6 billion in long-term debt and approximately
$501 million of preferred stock outstanding at any one time.
Management does not expect any of the foregoing restrictions to limit
the Company's ability to meet its capital requirements.
PART II - OTHER INFORMATION
ITEM 5. Other Information
Palo Verde Nuclear Generating Station
By letter dated July 7, 1993, the NRC advised the Company that, as a
result of a Recommended Decision and Order by a Department of Labor
Administrative Law Judge (the "ALJ") finding that the Company discriminated
against a former contract employee at Palo Verde because he engaged in
"protected activities" (as defined under federal regulations), the NRC
intended to schedule an enforcement conference with the Company. Following
the ALJ's finding, the Company investigated various elements of both the
substantive allegations and the manner in which the U.S. Department of
Labor (the "DOL") proceedings were conducted. As a result of that
investigation, the Company determined that one of its employees had falsely
testified during the proceedings, that there were inconsistencies in the
testimony of another employee, and that certain documents were requested
in, but not provided during, discovery. The two employees in question are
no longer with the Company. The Company provided the results of its
investigation to the ALJ, who referred matters relating to the conduct of
two former employees of the Company to the U.S. Attorney's office in
Phoenix, Arizona. A review by that office is continuing. On December 15,
1993, the Company and the former contract employee who had raised the DOL
claim entered into a settlement agreement, a part of which was subject to
approval by the Secretary of Labor. On March 21, 1994, the Secretary of
Labor issued a final order approving the settlement. By letter dated
August 10, 1993, the Company also provided the results of its investigation
to the NRC, and advised the NRC that, as a result of the Company's
investigation, the Company had changed its position opposing the finding of
discrimination. The NRC is investigating this matter and the Company is
fully cooperating with the NRC in this regard.
By letter dated April 1, 1994, the NRC sent a Notice of Violation and
Proposed Imposition of Civil Penalty notifying the Company, as Palo Verde
operating agent, that the NRC proposes to impose a civil penalty in the
amount of $100,000 for two violations aggregated into one "Severity Level
III" problem. The notice relates to two Company-identified violations of
NRC regulatory requirements and Palo Verde security procedures involving
failure to ensure that a contractor of the Company (1) conducted adequate
background investigations before the Company granted certain individuals
unescorted site access to Palo Verde and (2) required annual audits of
private investigative agencies that assisted the contractor in conducting
background investigations. On April 29, 1994, the Company responded to the
notice and paid the $100,000 penalty.
See Note 7 of Notes to Financial Statements in Part I, Item 1 of this
report for a discussion of the Unit 2 steam generator tube rupture event
and related issues, including inspections of the Unit 1 and Unit 3 steam
generators. See also "Palo Verde Nuclear Generating Station" in Item 5 in
the Company's Current Report on Form 8-K dated April 30, 1994 for
additional information regarding these issues.
Construction and Financing Programs
See "Liquidity and Capital Resources" in Part I, Item 2 of this report
for a discussion of the Company's construction and financing programs.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
10.1 Rate Settlement Agreement dated
April 30, 1994 between the
Company and the ACC Staff
15.1 Letter in Lieu of Consent
Regarding Unaudited Interim
Financial Information
(b) Reports on Form 8-K
During the quarter ended March 31, 1994, and the period ended May 13,
1994 the Company filed the following reports on Form 8-K:
Report filed February 17, 1994, regarding (i) inspections of the steam
generators of the Palo Verde units and related issues, and (ii) the
Company's settlement agreement with a former contract employee.
Report filed March 1, 1994 comprised of exhibits to the Company's
Registration Statement (Registration No. 33-61228) relating to the Company's
offering of $100 million of its First Mortgage Bonds.
Report filed May 9, 1994 regarding the inspection of the Palo Verde
Unit 3 steam generators and related issues.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
Dated: May 13, 1994 By Jaron B. Norberg
----------------- ----------------
Jaron B. Norberg
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Officer Duly Authorized
to sign this Report)