FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER 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
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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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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
the 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 May 6, 1994 87,413,597
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
APS - Arizona Public Service Company
cents/kWh - Cents per kilowatt-hour
Company - Pinnacle West Capital Corporation
DOL - U. S. Department of Labor
El Dorado - El Dorado Investment Company
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 - Pinnacle West Capital Corporation Annual Report on Form 10-K
for the fiscal year ended December 31, 1993
Malapai - Malapai Resources Company
MeraBank - MeraBank, A Federal Savings Bank
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 Post-retirement 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 APS and the ACC
Staff dated April 20, 1994
SunCor - SunCor Development Company
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
1994 1993
---------- ----------
Operating Revenues
Electric $ 365,176 $ 371,303
Real estate 9,424 3,799
---------- ----------
Total 374,600 375,102
---------- ----------
Fuel Expenses
Fuel for electric generation 57,968 55,008
Purchased power 10,063 10,496
---------- ----------
Total 68,031 65,504
---------- ----------
Operating Expenses
Utility operations and maintenance 97,621 91,111
Real estate operations 8,661 3,870
Depreciation and amortization 58,195 55,726
Taxes other than income taxes 53,622 51,556
---------- ----------
Total 218,099 202,263
---------- ----------
Operating Income 88,470 107,335
---------- ----------
Other Income (Deductions)
Allowance for equity funds used
during construction 846 652
Palo Verde accretion income 19,980 17,990
Interest on long-term debt (56,364) (61,418)
Other interest (3,987) (3,888)
Allowance for borrowed funds used
during construction 1,167 886
Preferred stock dividend requirements
of APS (7,510) (7,889)
Other--net 230 288
---------- ----------
Total (45,638) (53,379)
---------- ----------
Income From Continuing Operations
Before Income Taxes 42,832 53,956
Income Tax Expense 21,213 26,482
---------- ----------
Income From Continuing Operations 21,619 27,474
Cumulative Effect of Change
in Accounting for Income Taxes -- 19,252
---------- ----------
Net Income $ 21,619 $ 46,726
========== ==========
Average Common Shares Outstanding 87,418,161 87,159,530
Earnings Per Average Common Share
Outstanding:
Continuing Operations $ 0.25 $ 0.32
Accounting Change -- 0.22
---------- ----------
Total $ 0.25 $ 0.54
========== ==========
Dividends Declared Per Share $ 0.20 --
========== ==========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
Twelve Months Ended
March 31,
1994 1993
Operating Revenues ---------- ----------
Electric $1,680,163 $1,696,035
Real estate 37,873 21,435
---------- ----------
Total 1,718,036 1,717,470
---------- ----------
Fuel Expenses
Fuel for electric generation 234,394 239,240
Purchased power 68,679 57,604
---------- ----------
Total 303,073 296,844
---------- ----------
Operating Expenses
Utility operations and maintenance 407,726 385,219
Real estate operations 43,011 28,402
Depreciation and amortization 226,027 221,219
Taxes other than income taxes 224,411 218,382
---------- ----------
Total 901,175 853,222
---------- ----------
Operating Income 513,788 567,404
---------- ----------
Other Income (Deductions)
Allowance for equity funds used
during construction 2,520 3,049
Palo Verde accretion income 76,870 69,213
Interest on long-term debt (240,907) (259,971)
Other interest (16,604) (14,071)
Allowance for borrowed funds used
during construction 4,434 4,151
Preferred stock dividend requirements
of APS (30,461) (32,017)
Other--net (2,340) (12,369)
---------- ----------
Total (206,488) (242,015)
---------- ----------
Income From Continuing Operations
Before Income Taxes 307,300 325,389
Income Tax Expense 143,177 155,238
---------- ----------
Income From Continuing Operations 164,123 170,151
Income From Discontinued Operations -
Net of Income Tax -- 6,000
Cumulative Effect of Change
in Accounting for Income Taxes -- 19,252
---------- ----------
Net Income $ 164,123 $ 195,403
========== ==========
Average Common Shares Outstanding 87,305,670 87,078,775
Earnings Per Average Common Share
Outstanding:
Continuing Operations $ 1.88 $ 1.95
Discontinued Operations -- 0.07
Accounting Change -- 0.22
---------- ----------
Total $ 1.88 $ 2.24
========== ==========
Dividends Declared Per Share $ .40 --
========== ==========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
(Thousands of Dollars)
March 31, December
31,
1994 1993
----------- -----------
Current Assets
Cash and cash equivalents $ 75,489 $ 52,127
Customer and other receivables--net 104,127 126,343
Accrued utility revenues 48,241 60,356
Material and supplies 96,150 96,174
Fossil fuel 29,832 34,220
Deferred income taxes 98,136 100,234
Other current assets 15,996 13,782
----------- -----------
Total current assets 467,971 483,236
----------- -----------
Investments and Other Assets
Real estate investments--net 400,169 402,873
Other assets 137,141 136,074
----------- -----------
Total investments and other assets 537,310 538,947
----------- -----------
Utility Plant
Electric plant in service, including
nuclear fuel 6,530,130 6,462,589
Construction work in progress 166,431 197,556
----------- -----------
Total utility plant 6,696,561 6,660,145
Less accumulated depreciation and
amortization 2,079,603 2,058,895
----------- -----------
Net utility plant 4,616,958 4,601,250
----------- -----------
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
Other deferred debits 268,300 268,326
----------- -----------
Total deferred debits 1,325,001 1,333,366
----------- -----------
Total Assets $ 6,947,240 $ 6,956,799
=========== ===========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND EQUITY
(Thousands of Dollars)
March 31, December 31,
1994 1993
----------- -----------
Current Liabilities
Accounts payable $ 66,626 $ 97,489
Accrued taxes 134,189 96,303
Accrued interest 47,918 57,674
Short-term borrowings 79,000 148,000
Current maturities of long-term debt 75,278 78,841
Other current liabilities 67,944 60,845
----------- -----------
Total current liabilities 470,955 539,152
----------- -----------
Non-Current Liabilities
Long-term debt less current maturities 2,693,066 2,633,620
Other liabilities 7,798 8,246
----------- -----------
Total non-current liabilities 2,700,864 2,641,866
----------- -----------
Deferred Credits and Other
Deferred income taxes 1,288,622 1,278,673
Deferred investment tax credit 126,242 127,331
Unamortized gain - sale of utility plant 105,146 107,344
Other deferred credits 224,634 221,762
----------- -----------
Total deferred credits and other 1,744,644 1,735,110
----------- -----------
Commitments and Contingencies
(Notes 6 and 7)
Minority Interests
Non-redeemable preferred stock of APS 193,561 193,561
----------- -----------
Redeemable preferred stock of APS 183,400 197,610
----------- -----------
Common Stock Equity
Common stock, no par value 1,642,965 1,642,783
Retained earnings 10,851 6,717
----------- -----------
Total common stock equity 1,653,816 1,649,500
----------- -----------
Total Liabilities and Equity $ 6,947,240 $ 6,956,799
=========== ===========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(THOUSANDS OF DOLLARS)
Three Months Ended
March 31,
1994 1993
--------- ---------
Cash Flows From Operating Activities
Income from continuing operations
before cumulative effect of
accounting change $ 21,619 $ 27,474
Items not requiring cash
Depreciation and amortization 65,030 67,054
Deferred income taxes--net 16,580 45,130
Provision for rate refund (5,344) (5,344)
Palo Verde accretion income (19,980) (17,990)
Other--net (1,665) (930)
Changes in current assets and
liabilities
Accounts receivable--net 22,216 38,461
Accrued utility revenues 12,115 7,084
Materials, supplies and fossil fuel 4,412 5,831
Other current assets (2,214) (51,009)
Accounts payable (18,785) (33,156)
Accrued taxes 37,886 12,554
Accrued interest (9,756) 618
Other current liabilities 12,443 (4,947)
Additions to real estate (3,666) (4,359)
Sales of real estate 5,988 2,393
Other--net 860 4,918
--------- ---------
Net Cash Flow Provided By Operating
Activities 137,739 93,782
--------- ---------
Cash Flows From Investing Activities
Capital expenditures (68,684) (43,533)
Allowance for equity funds used during
construction 846 652
Other--net (1,101) (4,684)
--------- ---------
Net Cash Flow Used For Investing Activities (68,939) (47,565)
--------- ---------
Cash Flows From Financing Activities
Issuance of long-term debt 123,899 147,264
Short-term debt--net (69,000) (171,000)
Dividends paid on common stock (17,486) --
Repayment of long-term debt (68,823) (37,000)
Redemption of preferred stock (14,225) (4,510)
Other--net 197 (522)
--------- ---------
Net Cash Flow Used For Financing Activities (45,438) (65,768)
--------- ---------
Net Cash Flow 23,362 (19,551)
Cash and Cash Equivalents at Beginning of
Period 52,127 87,926
--------- ---------
Cash and Cash Equivalents at End of Period $ 75,489 $ 68,375
========= =========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 65,889 $ 60,744
Income taxes -- $ 575
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements include the accounts of Pinnacle
West and its subsidiaries: APS, SunCor and El Dorado. All significant
intercompany balances and transactions have been eliminated. Certain prior-
year balances have been reclassified to conform to the 1994 presentation.
2. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position of Pinnacle
West and its subsidiaries as of March 31, 1994, the results of their
operations for the three months and twelve months ended March 31, 1994 and
1993, and their cash flows for the three months ended March 31, 1994 and
1993. It is suggested that these consolidated financial statements and
notes to consolidated financial statements be read in conjunction with the
consolidated financial statements and notes to consolidated financial
statements included in the 1993 10-K.
3. The operations of APS 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, Pinnacle West's
consolidated results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
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, APS and the ACC Staff entered into a Rate Settlement
Agreement. Pursuant to the terms of the Settlement Agreement, APS' 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 APS would be
entitled to recover any revenue reduction experienced by it 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, which is incorporated
herein by reference to Exhibit 10.1 to APS' Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 1994.
Future Retail Rate Changes
Neither APS 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 APS'
inability to finance on reasonable terms or material increases in APS' 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 APS; and (iii) in the case of certain individual large
customers, the ACC Staff will expeditiously review any APS tariff or
contract filing for such customers and recommend that such filings be
decided promptly by the ACC.
If APS 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 APS 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 APS' 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 APS' otherwise appropriate revenue requirement
in such rate proceeding. APS' 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 APS' 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 3 of Notes to Consolidated 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.G of Notes to
Consolidated Financial Statements in Part II, Item 8 of the 1993 10-K for
additional information regarding APS' decommissioning obligations.
Renewable Resources/Demand Side Management
APS 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
APS would, upon the receipt of a favorable ruling from the Internal
Revenue Service, amortize below the line 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 APS' rate base in any future
ratemaking proceedings. Because of the non-cash earnings that would result
from APS' (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, APS 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 APS 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 APS 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. APS 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 APS' 29.1% interest
in the three Palo Verde units, APS' maximum potential assessment per
incident is approximately $69 million, with an annual payment limitation of
$8.73 million.
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. 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.
7. Tube cracking in the steam generators of Palo Verde adversely affected
APS' 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. APS 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 APS
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. APS' 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, APS 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. APS expects that the expanded inspection in
the other steam generator will be completed within the next week. APS
currently expects that Unit 3 will be restarted in June. However, in light
of the axial cracking that APS has found to date, APS 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 APS 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, APS 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, APS 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. APS 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%).
APS 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, APS
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, APS incurred
additional fuel and purchased power costs totaling about $10 million (before
income taxes). During the last nine months of 1994, APS 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.
APS 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. APS 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.
PINNACLE WEST CAPITAL CORPORATION
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Three Months and Twelve Months Ended March 31,
1994 as Compared with Corresponding Periods Ended March 31, 1993.
The following discussion relates to Pinnacle West and its subsidiaries:
APS, SunCor and El Dorado.
LIQUIDITY AND CAPITAL RESOURCES
Pinnacle West
Pinnacle West's cash requirements and its ability to fund those requirements
are discussed under "Liquidity and Capital Resources" in Management's
Discussion and Analysis of Financial Condition and Results of Operations in
Part II, Item 7 of the 1993 10-K and under "Business -- The Company --
Capital Requirements" in Part I, Item 1 of the 1993 10-K.
During April 1994, Pinnacle West prepaid $24.2 million of its debt, reducing
the aggregate principal amount of its outstanding debt to approximately $540
million.
The Board declared a quarterly dividend of 20 cents per share of common
stock, payable on March 1, 1994 to shareholders of record on February 1,
1994, totalling approximately $17.5 million.
APS
For the three months ended March 31, 1994, APS incurred approximately $56
million in construction expenditures, accounting for approximately 20% of
the most recently estimated 1994 construction expenditures. APS 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, APS refunded approximately $75 million (45%) of the estimated 1994
total.
On March 1, 1994, APS 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, APS 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, APS 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, APS 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, APS 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 APS' mortgage bond indenture and articles of incorporation
require certain coverage ratios to be met before APS 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, APS
estimates that the mortgage bond indenture and the articles of incorporation
would have allowed APS 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 APS with respect to the issuance of long-term
debt and equity securities. Existing ACC orders allow APS to have up to
approximately $2.6 billion in long-term debt and approximately $501 million
of preferred stock outstanding at any one time. APS does not expect any of
the foregoing restrictions to limit its ability to meet its capital
requirements.
RESULTS OF OPERATIONS
The following table shows the income and/or loss of Pinnacle West and its
subsidiaries for the three-month and twelve-month periods ended March 31,
1994 and 1993:
INCOME (LOSS)
(Unaudited)
(Dollars in Thousands)
Three Months Ended Twelve Months Ended
March 31, March 31,
1994 1993 1994 1993
---- ---- ---- ----
APS $30,958 $ 39,277 $211,227 $231,043
SunCor 964 338 (3,364) (5,732)
El Dorado (426) (185) (4,145) (2,862)
Pinnacle West <1> (9,877) (11,956) (39,595) (52,298)
------- ------- -------- -------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 21,619 27,474 164,123 170,151
INCOME FROM DISCONTINUED
OPERATIONS -- -- -- 6,000
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING FOR INCOME TAXES -- 19,252 -- 19,252
------- ------- -------- -------
NET INCOME (LOSS) $21,619 $46,726 $164,123 $195,403
======= ======= ======== =======
APS
<1> Includes Pinnacle West's interest expense and operating
expenses net of income tax benefits. Income tax benefits are as
follows (in thousands): $6,726 and $7,757 for the three months
ended March 31, 1994 and 1993, respectively; and $39,447 and
$37,824 for the twelve months ended March 31, 1994 and 1993,
respectively.
Operating Results - Three-month period ended March 31, 1994 compared to
three-month period ended March 31, 1993
APS' income 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
Consolidated 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
APS' income 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 Consolidated 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.
Non-utility Operations
Pinnacle West's interest expense decreased in the three-month and twelve-
month periods as it continued to prepay its outstanding debt.
SunCor's earnings in the three-month and twelve-month periods were
positively impacted by increased land sales.
El Dorado's earnings decreased in the twelve-month period due to lower
earnings on venture capital investments.
Non-cash Income
Consolidated net income reflects accounting practices unique to
regulated public utilities and represents a composite of cash and noncash
items, including allowance for funds used during construction, 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 3 of Notes to
Consolidated 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. APS 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. APS 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 APS' property tax expense.
1994 Rate Settlement Agreement
See Note 5 of Notes to Consolidated Financial Statements in Part I,
Item 1 of this report for a discussion of APS' Rate Settlement Agreement
with the ACC Staff.
PART II. OTHER INFORMATION
The following information relates primarily to Pinnacle West and
its principal subsidiary, APS.
ITEM 5. Other Information
Palo Verde Nuclear Generating Station
By letter dated July 7, 1993 the NRC advised APS that, as a result of a
Recommended Decision and Order by a Department of Labor Administrative Law
Judge (the "ALJ") finding that APS 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 APS. Following the ALJ's finding, APS
investigated various elements of both the substantive allegations and the
manner in which the DOL proceedings were conducted. As a result of that
investigation, APS 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 APS. APS provided the results of its investigation to the ALJ,
who referred matters relating to the conduct of two former employees of APS
to the U.S. Attorney's office in Phoenix, Arizona. A review by that office
is continuing. On December 15, 1993 APS 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 APS also provided the results of its
investigation to the NRC, and advised the NRC that, as a result of APS'
investigation, APS had changed its position opposing the finding of
discrimination. The NRC is investigating this matter and APS 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 APS, 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 APS-identified violations of NRC
regulatory requirements and Palo Verde security procedures involving
failure to ensure that a contractor of APS (1) conducted adequate
background investigations before APS 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 APS 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 APS' construction and financing programs.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Company hereby incorporates the following Exhibits pursuant to
Exchange Act Rule 12b-32 and Regulation Section 201.24 by reference to the
filings set forth below:
Originally Filed Date
Exhibit No. Description as Exhibit File No. Effective
- - ----------- ----------- ---------------- -------- ---------
10.1 Rate Settlement 10.1 to APS' 1-4473 5/13/94
Agreement dated March 1994
April 20, 1994 Form 10-Q Report
between APS and
the ACC Staff
(b) Reports on Form 8-K
During the quarter ended March 31, 1994 and for the period ended May
13, 1994, the Company filed the following Reports on Form 8-K:
Report filed January 24, 1994 regarding the settlement of pending
litigation.
Report filed February 22, 1994 regarding (i) inspections of the steam
generators of the Palo Verde units and related issues, and (ii) APS'
settlement agreement with a former contract employee.
Report filed May 10, 1994 regarding the inspection of the Palo Verde
Unit 3 steam generators and related issues.
SIGNATURE
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)
By: Henry Sargent
--------------------------------
Henry Sargent
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Officer Duly Authorized to sign
this Report)
Dated: May 13, 1994