FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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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 August 12, 1994: 71,264,947
Glossary
ACC - Arizona Corporation Commission
ACC Order - Final order of the ACC dated June 1, 1994 approving the 1994
Settlement Agreement
ACC Staff - Staff of the Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
cents/kWh - Cents per kilowatt-hour
Company - Arizona Public Service Company
ITCs - Investment tax credits
1991 Settlement - December 1991 retail rate case settlement
1993 10-K - Arizona Public Service Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1993
1994 Settlement Agreement - Rate Settlement Agreement between the Company and
the ACC Staff dated May 27, 1994
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"
<AUDIT-REPORT>
INDEPENDENT ACCOUNTANTS' REPORT
Arizona Public Service Company:
We have reviewed the accompanying condensed balance sheet of Arizona Public
Service Company as of June 30, 1994 and the related condensed statements of
income for the three-month, six-month and twelve-month periods ended June 30,
1994 and 1993 and cash flows for the six-month periods ended June 30, 1994 and
1993. These condensed 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 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
August 11, 1994
</AUDIT-REPORT>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months
Ended June 30,
--------------------------
1994 1993
--------- ---------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES .................. $ 417,588 $ 407,375
--------- ---------
FUEL EXPENSES:
Fuel for electric generation ............... 60,090 55,029
Purchased power ............................ 16,304 16,577
--------- ---------
Total ................................... 76,394 71,606
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES ........ 341,194 335,769
--------- ---------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ......... 76,107 67,379
Maintenance ................................ 32,337 26,812
Depreciation and amortization .............. 57,664 55,574
Income taxes - current ..................... 15,250 26,495
Income taxes - deferred .................... 19,192 12,817
Other taxes ................................ 57,037 54,428
--------- ---------
Total ................................... 257,587 243,505
--------- ---------
OPERATING INCOME ............................. 83,607 92,264
--------- ---------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ............................. 977 758
Palo Verde accretion income ................ 13,616 18,469
Other - net ................................ 19,572 (853)
Income taxes - current ..................... 1,411 1,028
Income taxes - deferred .................... (10,118) (6,373)
--------- ---------
Total ................................... 25,458 13,029
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS ............ 109,065 105,293
--------- ---------
INTEREST DEDUCTIONS:
Interest on long-term debt ................. 40,564 41,082
Interest on short-term borrowings .......... 1,539 1,619
Debt discount, premium and expense ......... 2,461 2,308
AFUDC - debt ............................... (1,350) (1,080)
--------- ---------
Total ................................... 43,214 43,929
--------- ---------
NET INCOME ................................... 65,851 61,364
PREFERRED STOCK DIVIDEND REQUIREMENTS ........ 6,972 7,648
--------- ---------
EARNINGS FOR COMMON STOCK .................... $ 58,879 $ 53,716
========= =========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)
Six Months
Ended June 30,
---------------------------
1994 1993
--------- ---------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES ................ $ 782,764 $ 778,678
--------- ---------
FUEL EXPENSES:
Fuel for electric generation ............. 118,058 110,037
Purchased power .......................... 26,367 27,073
--------- ---------
Total ................................. 144,425 137,110
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES ...... 638,339 641,568
--------- ---------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses ....... 142,443 130,553
Maintenance .............................. 63,622 54,749
Depreciation and amortization ............ 115,574 111,063
Income taxes - current ................... 28,194 45,872
Income taxes - deferred .................. 27,384 21,963
Other taxes .............................. 110,368 105,663
--------- ---------
Total ................................. 487,585 469,863
--------- ---------
OPERATING INCOME ........................... 150,754 171,705
--------- ---------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ........................... 1,823 1,410
Palo Verde accretion income .............. 33,596 36,459
Other - net .............................. 19,176 (1,383)
Income taxes - current ................... 1,917 1,590
Income taxes - deferred .................. (17,417) (12,650)
--------- ---------
Total ................................. 39,095 25,426
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS .......... 189,849 197,131
--------- ---------
INTEREST DEDUCTIONS:
Interest on long-term debt ............... 80,040 82,893
Interest on short-term borrowings ........ 3,134 3,100
Debt discount, premium and expense ....... 4,873 4,574
AFUDC - debt ............................. (2,517) (1,966)
--------- ---------
Total ................................. 85,530 88,601
--------- ---------
NET INCOME ................................. 104,319 108,530
PREFERRED STOCK DIVIDEND REQUIREMENTS ...... 14,482 15,537
--------- ---------
EARNINGS FOR COMMON STOCK .................. $ 89,837 $ 92,993
========= =========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Unaudited)
Twelve Months
Ended June 30,
--------------------------------
1994 1993
----------- -----------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES ............... $ 1,690,376 $ 1,694,398
----------- -----------
FUEL EXPENSES:
Fuel for electric generation ............ 239,455 241,227
Purchased power ......................... 68,406 60,472
----------- -----------
Total ................................ 307,861 301,699
----------- -----------
OPERATING REVENUES LESS FUEL EXPENSES 1,382,515 1,392,699
----------- -----------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses 294,550 276,793
Maintenance ............................. 127,429 108,973
Depreciation and amortization ........... 227,121 221,308
Income taxes - current .................. 79,845 115,825
Income taxes - deferred ................. 75,954 59,512
Other taxes ............................. 226,079 218,414
----------- -----------
Total ................................ 1,030,978 1,000,825
----------- -----------
OPERATING INCOME .......................... 351,537 391,874
----------- -----------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity .......................... 2,739 2,961
Palo Verde accretion income ............. 72,017 71,054
Other - net ............................. 18,424 (6,360)
Income taxes - current .................. 4,692 5,586
Income taxes - deferred ................. (29,983) (23,567)
----------- -----------
Total ................................ 67,889 49,674
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS ......... 419,426 441,548
----------- -----------
INTEREST DEDUCTIONS:
Interest on long-term debt .............. 161,757 169,701
Interest on short-term borrowings ....... 6,696 5,299
Debt discount, premium and expense 9,502 8,919
AFUDC - debt ............................ (4,704) (4,022)
----------- -----------
Total ................................ 173,251 179,897
----------- -----------
NET INCOME ................................ 246,175 261,651
PREFERRED STOCK DIVIDEND REQUIREMENTS 29,785 31,572
----------- -----------
EARNINGS FOR COMMON STOCK ................. $ 216,390 $ 230,079
=========== ===========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)
June 30, December 31,
1994 1993
----------- -----------
(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for
future use..................................... $ 6,432,779 $ 6,333,884
Less accumulated depreciation and amortization .. 2,033,180 1,991,143
----------- -----------
Total ....................................... 4,399,599 4,342,741
Construction work in progress ................... 156,104 197,556
Nuclear fuel, net of amortization ............... 66,549 60,953
----------- -----------
Utility plant - net ......................... 4,622,252 4,601,250
----------- -----------
INVESTMENTS AND OTHER ASSETS (at cost): ........... 67,887 63,224
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ....................... 7,286 7,557
Accounts receivable:
Service customers ........................... 94,673 102,745
Other ....................................... 17,617 21,091
Allowance for doubtful accounts ............. (1,568) (2,569)
Accrued utility revenues ........................ 70,472 60,356
Materials and supplies (at average cost) ........ 95,031 96,174
Fossil fuel (at average cost) ................... 24,577 34,220
Deferred income taxes ........................... 25,478 29,117
Other ........................................... 14,995 12,653
----------- -----------
Total current assets ........................ 348,561 361,344
----------- -----------
DEFERRED DEBITS:
Regulatory asset for income taxes ............... 564,841 585,294
Palo Verde Unit 3 cost deferral ................. 297,167 301,748
Palo Verde Unit 2 cost deferral ................. 174,967 177,998
Unamortized costs of reacquired debt ............ 64,975 63,147
Unamortized debt issue costs .................... 16,385 17,999
Other ........................................... 189,417 185,258
----------- -----------
Total deferred debits ....................... 1,307,752 1,331,444
----------- -----------
TOTAL ....................................... $ 6,346,452 $ 6,357,262
=========== ===========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
LIABILITIES
(Unaudited)
June 30, December 31,
1994 1993
----------- -----------
(Thousands of Dollars)
CAPITALIZATION:
Common stock ........................... $ 178,162 $ 178,162
Premiums and expense - net ............. 1,038,322 1,037,681
Retained earnings ...................... 268,760 307,098
----------- -----------
Common stock equity ................. 1,485,244 1,522,941
Non-redeemable preferred stock ......... 193,561 193,561
Redeemable preferred stock ............. 145,000 197,610
Long-term debt less current maturities . 2,163,173 2,124,654
----------- -----------
Total capitalization ................ 3,986,978 4,038,766
----------- -----------
CURRENT LIABILITIES:
Commercial paper ....................... 119,500 148,000
Current maturities of long-term debt ... 3,402 3,179
Accounts payable ....................... 81,646 81,772
Accrued taxes .......................... 110,016 112,293
Accrued interest ....................... 45,081 45,729
Common dividends payable ............... 65,000 --
Other .................................. 63,594 60,737
----------- -----------
Total current liabilities .......... 488,239 451,710
----------- -----------
DEFERRED CREDITS AND OTHER:
Deferred income taxes .................. 1,414,639 1,391,184
Deferred investment tax credit ......... 147,073 149,819
Unamortized gain - sale of utility plant 102,948 107,344
Customer advances for construction ..... 16,702 15,578
Other .................................. 189,873 202,861
----------- -----------
Total deferred credits and other ... 1,871,235 1,866,786
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
TOTAL ............................... $ 6,346,452 $ 6,357,262
=========== ===========
See Notes to Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months
Ended June 30,
-----------------------
1994 1993
--------- ---------
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income........................................ $ 104,319 $ 108,530
Items not requiring cash: ........................
Depreciation and amortization .................. 115,574 111,063
Nuclear fuel amortization ...................... 12,848 18,069
AFUDC - equity ................................. (1,823) (1,410)
Deferred income taxes - net .................... 47,547 37,332
Deferred investment tax credit - net ........... (2,746) (2,719)
Refund obligation - net ........................ (9,308) (10,687)
Palo Verde accretion income (33,596) (36,459)
Changes in certain current assets and liabilities:
Accounts receivable - net ...................... 10,545 40,605
Accrued utility revenues ....................... (10,116) (11,505)
Materials, supplies and fossil fuel ............ 10,786 5,102
Other current assets ........................... (2,342) (6,013)
Accounts payable ............................... 13,339 (19,645)
Accrued taxes .................................. (2,277) 10,196
Accrued interest ............................... (666) 813
Other current liabilities ...................... 8,485 4,743
Other - net ...................................... (10,392) 17,712
--------- ---------
Net cash flow provided by operating activities 250,177 265,727
--------- ---------
Cash Flows from Financing Activities:
Long-term debt ................................... 401,168 147,069
Short-term borrowings - net ...................... (28,500) (48,000)
Dividends paid on common stock ................... (62,500) (42,500)
Dividends paid on preferred stock ............... (14,945) (15,748)
Repayment of preferred stock ..................... (54,096) (28,040)
Repayment and reacquisition of long-term debt .... (367,044) (168,231)
--------- ---------
Net cash flow used for financing activities (125,917) (155,450)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures.............................. (121,691) (99,942)
AFUDC - equity ................................... 1,823 1,410
Other............................................. (4,663) (4,837)
--------- ---------
Net cash flow used for investing activities... (124,531) (103,369)
--------- ---------
Net increase (decrease) in cash and cash equivalents (271) 6,908
Cash and cash equivalents at beginning of period ... 7,557 1,152
--------- ---------
Cash and cash equivalents at end of period ......... $ 7,286 $ 8,060
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) ...... $ 81,106 $ 82,419
Income taxes ................................... $ 29,047 $ 38,479
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 June 30,
1994, the results of operations for the three months, six months and twelve
months ended June 30, 1994 and 1993, and the cash flows for the six months ended
June 30, 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. By order dated June 1, 1994 (the "ACC Order"), the ACC approved a Settlement
Agreement dated May 27, 1994 (the "1994 Settlement Agreement"), between the
Company and ACC Staff. The 1994 Settlement Agreement replaces the agreement
dated April 20, 1994. Pursuant to the terms of the 1994 Settlement Agreement,
the Company's annual retail rates were reduced by approximately $38.3 million,
or approximately 2.7%, effective June 1, 1994. The Company will also be allowed
to recover through a surcharge up to an additional $6 million for demand side
management and renewable resource programs, effective upon ACC approval of the
Company's application for such programs. The reduction in retail rates offset by
the demand side management surcharge would result in a net rate reduction of
approximately 2.2%. The ACC Order is final and non-appealable. The following
description of the ACC Order is a summary and is qualified in its entirety by
the ACC Order, a copy of which is attached to this filing as an exhibit.
Future Retail Rate Changes
Neither the Company nor the ACC Staff will 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 will render its decision no later than twelve (12) months after
the filing, subject to certain exceptions.
If the next general rate proceeding results in no increase in
residential rates, the ACC will 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 for resale) 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 will 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"). As with any of the Company's generating facilities, the ACC can
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 was 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 ACC Order 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 will spend specified annual amounts over an indefinite
period on renewable resources and demand side management projects and, on or
before December 31, 1994, will submit to the ACC Staff a three-year renewable
resource plan containing specified elements. See Paragraph K of the ACC Order,
incorporated by reference herein, for further details regarding renewable
resources and demand side management.
Investment Tax Credits; Depreciation Reversal
The Company will, 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 remaining
amortization schedule of approximately twenty-five (25) years. After this five
(5) year period all such amortized ITCs will be treated as fully restored to the
Company's rate base in any future ratemaking proceedings. The ACC Order also
allowed the Company to reverse certain depreciation related to Palo Verde
(associated with the 1991 Settlement), which resulted in approximately $15
million of after-tax income during the three-month period ended June 30, 1994.
Pricing and Operating Procedures
The ACC Staff and the Company will 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 will
submit quarterly updates and a final report to the ACC within twelve (12) months
of the ACC Order and seek prompt ACC approval of recommendations that will
assist the Company in achieving its residential price stability goals and
enhancing its competitiveness related to non-residential customers.
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. The Company has encountered axial tube cracking in the upper regions of the
two steam generators in Unit 2 and, to a lesser degree, in Unit 3. This form of
tube degradation is uncommon in the industry and, in March 1993, led to a tube
rupture in Unit 2 resulting in the extension of a scheduled refueling outage
through September 1993. 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 Units 2 and
3, and the Company expects to chemically clean the Unit 1 steam generators
during its refueling outage in 1995. The Company began operating the units at
approximately 86% capacity in October 1993 to reduce the operating temperature,
pending the completion of the temperature analyses and appropriate modification
of operating procedures. The temperature analyses have been concluded for Units
1 and 3, and these units are operating at or near 100% capacity. The Company
anticipates that Unit 2, which is currently operating at 88% capacity, will be
returned to full power by late 1994.
In March 1994, a mid-cycle inspection outage was completed at Unit 2 to
assess the status of the unit's steam generators' tubes and to continue
implementing a program of improvements. Unit 2 is scheduled for another
mid-cycle inspection outage beginning in September 1994 and a refueling and
maintenance outage in early 1995. Palo Verde Unit 3 completed a refueling outage
in June 1994 and, in light of the axial cracking that the Company has found to
date, Unit 3 is scheduled for a mid-cycle inspection outage beginning in
November 1994. Palo Verde Unit 1 is scheduled for a refueling outage beginning
in April 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, the potential need for a mid-cycle steam generator tube inspection
outage in Unit 1 late in 1994 is currently being evaluated.
During the six months ended June 30, 1994, the Company incurred
replacement power costs totalling approximately $17 million (before income
taxes) above normal levels as a result of the Unit 2 mid-cycle outage and
operating the units at reduced power. Because a Unit 2 refueling and maintenance
outage which was scheduled to begin in late 1994 is now scheduled for 1995, the
Company does not expect to incur any additional replacement power costs above
normal levels during the remainder of the year. In the event that a mid-cycle
inspection outage is necessary in late 1994 for Unit 1 and assuming that such an
outage would last about a month, the incremental replacement power costs and
operation and maintenance expenses related to the outage are estimated to be
approximately $5 million, before income taxes. In comparison, replacement power
costs exceeded normal levels in 1993 by approximately $15.5 million (before
income taxes) due to Palo Verde outages and reduced power operations.
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 its program to
control the tube degradation, the rate of plugging will slow to a manageable
level.
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, six-month and twelve-month periods ended June 30, 1994 and 1993:
Periods ended June 30
(Thousands of Dollars)
Three Months Six Months Twelve Months
----------------- ------------------- ----------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
Operating
Revenues $417,588 $407,375 $782,764 $778,678 $1,690,376 $1,694,398
Earnings for
common stock $ 58,879 $ 53,716 $ 89,837 $ 92,993 $ 216,390 $ 230,079
OPERATING RESULTS - THREE-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED
TO THREE-MONTH PERIOD ENDED JUNE 30, 1993
Earnings increased in the three-month period ended June 30, 1994
primarily due to the reversal of certain previously recorded depreciation
related to Palo Verde and increased revenues. Pursuant to the ACC Order, the
Company reversed accumulated depreciation related to the portion of Palo Verde
written off as a result of the 1991 Settlement. See Note 5 of Notes to Financial
Statements in Part I, Item 1 of this report for a detailed discussion of the ACC
Order. Operating revenues increased primarily due to customer growth. These
positive factors were partially offset by increases in both operation and
maintenance expenses and fuel costs. Operation and maintenance expenses were
higher primarily due to employee severance costs resulting from various Company
cost reduction efforts and fossil plant maintenance costs. Fuel costs were
higher primarily due to replacement power related to reduced nuclear generation.
OPERATING RESULTS - SIX-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED TO
SIX-MONTH PERIOD ENDED JUNE 30, 1993
Earnings decreased in the six-month period ended June 30, 1994
primarily due to increases in operation and maintenance expenses and fuel costs.
Operation and maintenance expenses increased due to higher power plant
maintenance costs and employee severance costs. Fuel costs were higher primarily
due to replacement power related to reduced nuclear generation, offset partially
by the effect of lower interchange sales. These negative factors were partially
offset by the depreciation reversal related to Palo Verde and increased
revenues. Revenues increased due to retail customer growth and higher usage per
customer, partially offset by lower interchange sales due to reduced nuclear
generation.
OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED
TO TWELVE-MONTH PERIOD ENDED JUNE 30, 1993
Earnings decreased in the twelve-month period ended June 30, 1994
primarily due to increased operation and maintenance expenses, higher fuel costs
and lower operating revenues. Operation and maintenance expenses increased due
to higher power plant maintenance costs, the implementation of SFAS No. 106 and
SFAS No. 112 in 1993 (see Note 9 of Notes to Financial Statements in Part II,
Item 8 of the 1993 10-K), and employee severance costs. Fuel costs were higher
primarily because of replacement power costs due to reduced nuclear generation,
partially offset by the effect of lower interchange sales. Operating revenues
were down due to lower interchange sales and milder weather partially offset by
customer growth. These negative factors were partially offset by the
depreciation reversal related to Palo Verde and lower interest costs.
OTHER INCOME
Net income reflects accounting practices required for regulated public
utilities and represents a composite of cash and noncash items, including AFUDC.
In accordance with the 1991 Settlement, during the six months ended June 30,
1994, the Company recorded $20.3 million of after-tax accretion income on Palo
Verde Unit 3 and $5.6 million of after-tax income resulting from Palo Verde
refund obligation reversals. The Company has now recorded all of the Unit 3
accretion income and Palo Verde refund obligation reversals related to the 1991
Settlement. See Note 2 of Notes to Financial Statements in Part II, Item 8 of
the 1993 10-K. In accordance with the ACC Order, during the three months ended
June 30, 1994, the Company also recorded a one-time depreciation reversal
related to Palo Verde in the amount of approximately $15.0 million after tax.
See Note 5 of Notes to Financial Statements in Part I, Item 1 of this report.
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 SETTLEMENT AGREEMENT
See Note 5 of Notes to Financial Statements in Part I, Item 1 of this
report for a discussion of the ACC Order. Because of the non-cash earnings (1)
that the Company expects to result from the accelerated amortization of ITCs
during the 1995-1999 period (subject to Internal Revenue Service approval); and
(2) that resulted from the reversal of depreciation related to Palo Verde
(associated with the 1991 Settlement), the Company does not expect its earnings
to be significantly affected as a result of the ACC Order.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1994, the Company incurred
approximately $106 million in construction expenditures, accounting for
approximately 39% 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 $272 million, $298 million, and $257 million,
respectively.
Refunding obligations for preferred stock and long-term debt, a
capitalized lease obligation, and certain actual and anticipated early
redemptions, including premiums thereon, are expected to total approximately
$582 million (of which $513 million are optional), $111 million, and $4 million
for the years 1994, 1995, and 1996, respectively. During the first six months of
1994, the Company refunded approximately $421 million (72%) of the estimated
1994 total. This amount includes the redemption, refunding, or repurchase of
approximately $367 million of long-term debt and the redemption of approximately
$54 million of preferred stock, including premiums thereon. During August 1994,
the Company purchased on the open market approximately $24 million in aggregate
principal amount of its First Mortgage Bonds, 10 1/4% Series due 2000 (the "10
1/4% Bonds"). On September 1, 1994, the Company will redeem at maturity all
outstanding shares of its $8.50 Cumulative Preferred Stock, Series T ($100 Par
Value) (the "Series T Stock") in the amount of $50 million. Since December 31,
1993, the Company has issued $100 million of its First Mortgage Bonds and
incurred approximately $303 million of long-term debt consisting of borrowings
from governmental authorities which had funded that amount through the issuance
of pollution control bonds.
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 June 30, 1994, and (i) adjusting
for the purchase of approximately $24 million of the 10 1/4% Bonds, and (ii)
assuming the redemption on September 1, 1994 of $50 million of the Series T
Stock, the Company estimates that the mortgage bond indenture and the articles
of incorporation would have allowed the Company to issue up to approximately
$1.26 billion and $1.04 billion 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 4. Submission of Matters to a Vote of Security-Holders
At the Annual Meeting of Shareholders held on April 19, 1994, the
shareholders elected all of its directors who will serve for the ensuing year or
until their successors are elected or qualified, as follows:
Votes
Against Broker
and Non-
Director Votes For Withheld Abstentions Votes
- -------- ---------- -------- ----------- ------
Kenneth M. Carr 76,119,727 20,853 N/A N/A
O. Mark De Michele 76,125,414 16,501 N/A N/A
Martha O. Hesse 76,126,096 15,541 N/A N/A
Marianne M. Jennings 76,119,854 20,457 N/A N/A
Robert G. Matlock 76,123,863 17,171 N/A N/A
Jaron B. Norberg 76,125,690 16,271 N/A N/A
John R. Norton III 76,125,560 16,135 N/A N/A
Donald M. Riley 76,125,604 15,850 N/A N/A
Henry B. Sargent 76,066,353 67,401 N/A N/A
Wilma W. Schwada 76,123,990 16,890 N/A N/A
Verne D. Seidel 76,123,724 17,272 N/A N/A
Richard Snell 76,063,698 69,356 N/A N/A
Ben F. Williams, Jr. 76,127,545 14,771 N/A N/A
Thomas G. Woods, Jr. 76,126,377 15,686 N/A N/A
ITEM 5. Other Information
Palo Verde Nuclear Generating Station
See Note 7 of Notes to Financial Statements in Part I, Item 1 of this
report for a discussion of the tube cracking in the Palo Verde steam
generators.
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.
Water Supply
As previously reported, in an action pending in Maricopa County
Superior Court relating to claims to water in the Lower Gila Watershed, issues
important to the Company's claims were remanded to the trial court for further
action. See "Water Supply" in Part I, Item 1 of the 1993 10-K. On June 30,
1994, the trial court rendered its decision with respect to these issues. The
trial court has certified its decision for interlocutory appeal to the Arizona
Supreme Court, and the Supreme Court has not yet rendered its decision.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 ACC Order dated June 1, 1994
15.1 Letter in Lieu of Consent
Regarding Unaudited Interim
Financial Information
(b) Reports on Form 8-K
During the quarter ended June 30, 1994, and the period ended August 12,
1994 the Company filed the following reports on Form 8-K:
Report filed May 9, 1994 regarding the inspection of the Palo Verde
Unit 3 steam generators and related issues.
Report filed May 24, 1994 regarding the rescission by the Secretary of
Labor of a final order approving a settlement agreement between the Company and
a former contract employee.
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: August 12, 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)