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, 1996
---------------------------
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 1-4473
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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
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(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 14, 1996: 71,264,947
-i-
Glossary
--------
ACC - Arizona Corporation Commission
ACC Staff - Staff of the Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
Company - Arizona Public Service Company
EPA - Environmental Protection Agency
ITC - Investment tax credit
1995 10-K - Arizona Public Service Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1995
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
PRP's - Potentially Responsible Parties
SEC - Securities and Exchange Commission
Superfund - Comprehensive Environmental Response,
Compensation, and Liability Act
INDEPENDENT ACCOUNTANTS' REPORT
Arizona Public Service Company:
We have reviewed the accompanying condensed balance sheet of Arizona Public
Service Company as of March 31, 1996 and the related condensed statements of
income for the three-month and twelve-month periods ended March 31, 1996 and
1995 and cash flows for the three-month periods ended March 31, 1996 and 1995.
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, 1995 and the related statements of income, retained earnings, and cash
flows for the year then ended (not presented herein); and in our report dated
March 1, 1996, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of December 31, 1995, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
May 2, 1996
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Three Months
Ended March 31,
-------------------------------------
1996 1995
---------------- -----------------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 345,261 $ 336,968
---------------- -----------------
FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 42,334 46,710
Purchased power . . . . . . . . . . . . . . . . . . . . 13,938 8,210
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 56,272 54,920
---------------- -----------------
OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 288,989 282,048
---------------- -----------------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . . . . . . . . . . 63,769 65,566
Maintenance . . . . . . . . . . . . . . . . . . . . . . 23,974 25,866
Depreciation and amortization . . . . . . . . . . . . . 58,386 60,426
Income taxes . . . . . . . . . . . . . . . . . . . . . . 31,359 21,622
Other taxes . . . . . . . . . . . . . . . . . . . . . . 33,979 35,354
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 211,467 208,834
---------------- -----------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 77,522 73,214
---------------- -----------------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . 1,675 1,186
Other - net . . . . . . . . . . . . . . . . . . . . . . (291) 4,784
Income taxes . . . . . . . . . . . . . . . . . . . . . 5,650 1,722
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 7,034 7,692
---------------- -----------------
INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 84,556 80,906
---------------- -----------------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 37,400 41,872
Interest on short-term borrowings . . . . . . . . . . . 2,670 1,224
Debt discount, premium and expense . . . . . . . . . . . 2,117 1,974
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . (3,237) (1,996)
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 38,950 43,074
---------------- -----------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 45,606 37,832
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 4,477 4,807
---------------- -----------------
EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 41,129 $ 33,025
================ =================
See Notes to Condensed Financial Statements.
-3-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Twelve Months
Ended March 31,
-------------------------------------
1996 1995
---------------- -----------------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 1,623,245 $ 1,617,087
---------------- -----------------
FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 204,552 225,845
Purchased power . . . . . . . . . . . . . . . . . . . . 66,598 61,733
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 271,150 287,578
---------------- -----------------
OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 1,352,095 1,329,509
---------------- -----------------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . . . . . . . . . . 283,045 291,522
Maintenance . . . . . . . . . . . . . . . . . . . . . . 114,080 114,210
Depreciation and amortization . . . . . . . . . . . . . 240,058 238,624
Income taxes . . . . . . . . . . . . . . . . . . . . . 188,602 168,688
Other taxes . . . . . . . . . . . . . . . . . . . . . . 140,248 141,965
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 966,033 955,009
---------------- -----------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 386,062 374,500
---------------- -----------------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . 5,471 4,281
Palo Verde accretion income . . . . . . . . . . . . . -- 13,616
Other - net . . . . . . . . . . . . . . . . . . . . . . (22,107) 21,195
Income taxes . . . . . . . . . . . . . . . . . . . . . 41,526 (527)
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 24,890 38,565
---------------- -----------------
INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 410,952 413,065
---------------- -----------------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 155,560 162,236
Interest on short-term borrowings . . . . . . . . . . . 9,589 5,834
Debt discount, premium and expense . . . . . . . . . . . 8,765 8,416
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . (10,306) (6,271)
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 163,608 170,215
---------------- -----------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 247,344 242,850
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 18,804 22,571
---------------- -----------------
EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 228,540 $ 220,279
================ =================
See Notes to Condensed Financial Statements.
-4-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
ASSETS
(Unaudited)
March 31, December 31,
1996 1995
-------------- --------------
(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for future use . . . $ 6,559,022 $ 6,544,860
Less accumulated depreciation and amortization . . . . . 2,279,736 2,231,614
---------------- -----------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 4,279,286 4,313,246
Construction work in progress . . . . . . . . . . . . . 300,552 281,757
Nuclear fuel, net of amortization . . . . . . . . . . . 59,788 52,084
---------------- -----------------
Utility plant - net . . . . . . . . . . . . . . . . . 4,639,626 4,647,087
---------------- -----------------
INVESTMENTS AND OTHER ASSETS :. . . . . . . . . . . . . . . 104,355 97,742
---------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . 20,300 18,389
Accounts receivable:
Service customers . . . . . . . . . . . . . . . . . . 86,595 100,433
Other . . . . . . . . . . . . . . . . . . . . . . . . 18,753 28,107
Allowance for doubtful accounts . . . . . . . . . . . (1,288) (1,656)
Accrued utility revenues . . . . . . . . . . . . . . . . 44,090 53,519
Materials and supplies, at average cost . . . . . . . . 77,660 78,271
Fossil fuel, at average cost . . . . . . . . . . . . . 21,284 21,722
Deferred income taxes . . . . . . . . . . . . . . . . . 5,637 5,653
Other . . . . . . . . . . . . . . . . . . . . . . . . . 17,412 17,839
---------------- -----------------
Total current assets . . . . . . . . . . . . . . . . 290,443 322,277
---------------- -----------------
DEFERRED DEBITS:
Regulatory asset for income taxes . . . . . . . . . . . 546,881 548,464
Palo Verde Unit 3 cost deferral . . . . . . . . . . . . 281,135 283,426
Palo Verde Unit 2 cost deferral . . . . . . . . . . . . 164,358 165,873
Unamortized costs of reacquired debt . . . . . . . . . . 67,431 63,518
Unamortized debt issue costs . . . . . . . . . . . . . . 17,483 17,772
Other . . . . . . . . . . . . . . . . . . . . . . . . . 273,713 272,103
---------------- -----------------
Total deferred debits . . . . . . . . . . . . . . . . 1,351,001 1,351,156
---------------- -----------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 6,385,425 $ 6,418,262
================ =================
See Notes to Condensed Financial Statements.
-5-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
LIABILITIES
(Unaudited)
March 31, December 31,
1996 1995
-------------- --------------
(Thousands of Dollars)
CAPITALIZATION:
Common stock . . . . . . . . . . . . . . . . . . . . . . $ 178,162 $ 178,162
Premiums and expense - net . . . . . . . . . . . . . . . 1,039,515 1,039,550
Retained earnings . . . . . . . . . . . . . . . . . . . 402,472 403,843
---------------- -----------------
Common stock equity . . . . . . . . . . . . . . . . . 1,620,149 1,621,555
Non-redeemable preferred stock . . . . . . . . . . . . . 174,089 193,561
Redeemable preferred stock . . . . . . . . . . . . . . . 72,000 75,000
Long-term debt less current maturities . . . . . . . . . 1,961,679 2,132,021
---------------- -----------------
Total capitalization . . . . . . . . . . . . . . . . . 3,827,917 4,022,137
---------------- -----------------
CURRENT LIABILITIES:
Commercial paper . . . . . . . . . . . . . . . . . . . . 159,600 177,800
Current maturities of long-term debt . . . . . . . . . . 153,512 3,512
Accounts payable . . . . . . . . . . . . . . . . . . . . 73,457 106,583
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 146,474 82,827
Accrued interest . . . . . . . . . . . . . . . . . . . . 29,430 41,549
Customer deposits . . . . . . . . . . . . . . . . . . . 32,819 32,746
Other . . . . . . . . . . . . . . . . . . . . . . . . . 30,377 21,134
---------------- -----------------
Total current liabilities . . . . . . . . . . . . . . 625,669 466,151
---------------- -----------------
DEFERRED CREDITS AND OTHER:
Deferred income taxes . . . . . . . . . . . . . . . . . . 1,429,059 1,429,482
Deferred investment tax credit . . . . . . . . . . . . . 109,898 115,353
Unamortized gain - sale of utility plant . . . . . . . . 90,371 91,514
Customer advances for construction . . . . . . . . . . . 20,730 19,846
Other . . . . . . . . . . . . . . . . . . . . . . . . . 281,781 273,779
---------------- -----------------
Total deferred credits and other . . . . . . . . . . 1,931,839 1,929,974
---------------- -----------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 6,385,425 $ 6,418,262
================ =================
See Notes to Condensed Financial Statements.
-6-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
Three Months
Ended March 31,
-------------------------------------
1996 1995
---------------- -----------------
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 45,606 $ 37,832
Items not requiring cash:
Depreciation and amortization . . . . . . . . . . . . 58,386 60,426
Nuclear fuel amortization . . . . . . . . . . . . . . 8,357 7,723
AFUDC - equity . . . . . . . . . . . . . . . . . . . . (1,675) (1,186)
Deferred income taxes - net . . . . . . . . . . . . . 1,176 4,531
Deferred investment tax credit - net . . . . . . . . . (5,455) (3,858)
Changes in certain current assets and liabilities:
Accounts receivable - net . . . . . . . . . . . . . . 22,824 26,895
Accrued utility revenues . . . . . . . . . . . . . . . 9,429 9,885
Materials, supplies and fossil fuel . . . . . . . . . 1,049 (1,035)
Other current assets . . . . . . . . . . . . . . . . . 427 (2,829)
Accounts payable . . . . . . . . . . . . . . . . . . . (29,941) (26,184)
Accrued taxes . . . . . . . . . . . . . . . . . . . . 63,647 53,529
Accrued interest . . . . . . . . . . . . . . . . . . . (12,119) (10,719)
Other current liabilities . . . . . . . . . . . . . . 9,617 10,302
Other - net . . . . . . . . . . . . . . . . . . . . . . 12,608 (12,566)
---------------- -----------------
Net cash flow provided by operating activities . . . 183,936 152,746
---------------- -----------------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . (60,138) (69,548)
Sale of Property . . . . . . . . . . . . . . . . . . . . 2,824 --
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . . (3,237) (1,996)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (6,613) (1,449)
---------------- -----------------
Net cash flow used for investing activities. . . . . (67,164) (72,993)
---------------- -----------------
Cash Flows from Financing Activities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . 25,006 73,811
Short-term borrowings - net . . . . . . . . . . . . . . (18,200) (51,000)
Dividends paid on common stock . . . . . . . . . . . . . (42,500) (42,500)
Dividends paid on preferred stock . . . . . . . . . . . (4,778) (4,827)
Repayment of preferred stock . . . . . . . . . . . . . . (23,410) (4)
Repayment and reacquisition of long-term debt . . . . . (50,979) (51,867)
---------------- -----------------
Net cash flow used for financing activities . . . . (114,861) (76,387)
---------------- -----------------
Net increase in cash and cash equivalents . . . . . . . . 1,911 3,366
Cash and cash equivalents at beginning of period . . . . . 18,389 6,532
---------------- -----------------
Cash and cash equivalents at end of period . . . . . . . . $ 20,300 $ 9,898
================ =================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) . . . . . . $ 48,444 $ 51,900
Income taxes . . . . . . . . . . . . . . . . . . . . . $ -- $ --
See Notes to Condensed Financial Statements.
-7-
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of March
31, 1996, the results of operations for the three months and twelve months ended
March 31, 1996 and 1995, and the cash flows for the three months ended March 31,
1996 and 1995. It is suggested that these condensed financial statements and
notes to condensed financial statements be read in conjunction with the
financial statements and notes to financial statements included in the 1995
10-K. Certain prior year balances have been restated to conform to the current
year presentation.
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 for the three months ended March 31, 1996.
5. Regulatory Matters
Regulatory Agreement
In April 1996, the ACC approved a regulatory agreement between the
Company and the ACC Staff. This agreement is substantially the same as the
agreement proposed by the Company and the ACC Staff in December 1995. The major
provisions of the 1996 regulatory agreement are:
* An annual rate reduction of approximately $48.5 million ($29 million after
income taxes), or an average 3.4% for all customers except certain
contract customers, effective July 1, 1996.
* Recovery of substantially all of the Company's present regulatory assets
through accelerated amortization over an eight-year period beginning July
1, 1996, increasing annual amortization by approximately $120 million ($72
million after income taxes).
* A formula for sharing future cost savings between customers and
shareholders, referencing a return on equity (as defined) of 11.25%.
-8-
* A moratorium on filing for permanent rate changes, except under the
sharing formula and under certain other limited circumstances, prior to
July 2, 1999.
* Infusion of $200 million of common equity into the Company by Pinnacle
West, in annual increments of $50 million starting in 1996.
In recognition of evolving competition in the electric utility industry
and an ongoing investigation by the ACC Staff into industry restructuring in an
open competition docket involving many parties, the agreement also includes an
element setting out a number of issues which the Company and the ACC Staff agree
the ACC should be requested to consider in developing restructuring policies.
See Note 3 of Notes to Financial Statements in Part II, Item 8 of the 1995 10-K
for further discussion of the industry restructuring element of the agreement.
1994 Settlement Agreement
In May 1994, the ACC approved a retail rate settlement agreement which
provided for a net annual retail rate reduction of approximately $32 million
($19 million after income taxes), or 2.2% on average, effective June 1, 1994. As
part of the settlement, in 1994 the Company reversed approximately $20 million
of depreciation ($15 million after income taxes) related to a 1991 Palo Verde
write-off. The 1994 rate settlement also provided for the accelerated
amortization of substantially all deferred ITCs over a five-year period
beginning in 1995, resulting in a decrease in annual income tax expense of
approximately $21 million.
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 industry-wide retrospective assessment program. If losses at any
nuclear power plant covered by this program exceed the accumulated funds for
this program, the Company could be assessed retrospective premium adjustments.
The maximum assessment per reactor under the 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 approximately $9 million.
The Palo Verde participants maintain "all risk" (including nuclear
hazards) insurance for property damage to, and decontamination 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 tube cracking in the Palo Verde steam generators
and has taken, and will continue to take, remedial actions that
-9-
it believes have slowed the rate of tube degradation. The projected service life
of the steam generators is reassessed periodically in conjunction with
inspections made during scheduled outages of the Palo Verde units. The Company's
ongoing analyses indicate that it will be economically desirable for the Company
to replace the Unit 2 steam generators, which have been most affected by tube
cracking, in five to ten years. The Company expects that the steam generator
replacement can be accomplished within financial parameters established before
replacement was a consideration, and the Company estimates that its share of the
replacement costs (in 1996 dollars and including installation and replacement
power costs) will be between $30 million and $50 million, most of which will be
incurred after the year 2000. The Company expects that the replacement would be
performed in conjunction with a normal refueling outage in order to limit
incremental outage time to approximately 50 days. Based on the latest available
data, the Company estimates that the Unit 1 and Unit 3 steam generators should
operate for the license periods (until 2025 and 2027, respectively), although
the Company will continue its normal periodic assessment of these steam
generators.
-10-
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, 1996 and 1995:
Periods ended March 31
(Thousands of Dollars)
Three Months Twelve Months
---------------------------------- ----------------------------------------
1996 1995 1996 1995
----------------- ---------------- ------------------- --------------------
Operating revenues $345,261 $336,968 $1,623,245 $1,617,087
Earnings for common stock $ 41,129 $ 33,025 $ 228,540 $ 220,279
Operating Results - Three-month period ended March 31, 1996 compared
-----------------------------------------------------------------------
with three-month period ended March 31, 1995
--------------------------------------------
Earnings increased in the three-month period ended March 31, 1996
primarily due to customer growth, lower operations and maintenance expenses, and
lower interest expense. Operations and maintenance expenses decreased due to
fewer nuclear refueling outage days. Interest expense decreased due to lower
rates and lower average debt balances. Partially offsetting these positive
factors was a decrease in other income caused by the recognition of a gain on
the sale of a small subsidiary in 1995.
Operating Results - Twelve-month period ended March 31, 1996 compared
-----------------------------------------------------------------------
with twelve-month period ended March 31, 1995
---------------------------------------------
Earnings increased in the twelve-month period ended March 31, 1996
primarily due to customer growth, accelerated investment tax credit
amortization, lower fuel costs, and lower operations and maintenance expenses.
The accelerated investment tax credit amortization was a result of the 1994 rate
settlement (see Note 5 of Notes to Condensed Financial Statements in Part I,
Item 1 of this report) and is reflected as a decrease in income tax expense.
Fuel expense decreased due largely to lower fuel prices. Operations and
maintenance expenses decreased due to employee severance costs incurred in 1994,
lower fossil plant overhaul costs, and improved nuclear operations.
Partially offsetting these positive factors were milder weather, the
reversal in 1994 of certain previously-recorded depreciation related to Palo
Verde, the absence of non-cash accretion income and revenue refund reversals
related to a 1991 rate settlement (see Note 1 of Notes to Financial Statements
in Part II, Item 8 of the 1995 10-K), write-downs of an office building and
certain inventory, and a decrease in other income
-11-
caused by the recognition of a gain on the sale of a small subsidiary in the
first quarter of 1995.
Other Income
------------
Other income reflects accounting practices required for regulated
public utilities and represents a composite of cash and non-cash items,
including AFUDC and accretion income on Palo Verde Unit 3, which the Company
completed recording in May 1994. See Note 1 of Notes to Financial Statements in
Part II, Item 8 of the 1995 10-K.
Regulatory Agreement
- --------------------
See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1
of this report and Note 3 of Notes to Financial Statements in Part II, Item 8 of
the 1995 10-K for a discussion of the Company's regulatory agreement.
Liquidity and Capital Resources
- -------------------------------
For the three months ended March 31, 1996, the Company incurred
approximately $58 million in capital expenditures, accounting for approximately
24% of the most recently estimated 1996 capital expenditures. The Company has
estimated total capital expenditures for the years 1996, 1997 and 1998 to be
approximately $246 million, $242 million, and $244 million, respectively. These
amounts include about $30 million each year for nuclear fuel expenditures.
Obligations for redemptions of 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
$123 million, $164 million, and $114 million for the years 1996, 1997, and 1998,
respectively. During the three months ended March 31, 1996, the Company redeemed
approximately $51 million of its long-term debt and approximately $23 million of
its preferred stock, and incurred $25 million of long-term debt under a
revolving credit agreement. It is the Company's present intention over the next
several years to use excess cash flow to retire debt and preferred stock.
Although provisions in the Company's bond indenture, articles of
incorporation, and financing orders from the ACC restrict the issuance of
additional first mortgage bonds and preferred stock, management does not expect
any of these restrictions to limit the Company's ability to meet its capital
requirements.
-12-
PART II - OTHER INFORMATION
---------------------------
ITEM 1. Legal Proceedings
------------------------------
Property Taxes
--------------
As previously reported, in November 1995, the Arizona Court of Appeals
held that an Arizona state property tax law, effective December 31, 1989, is
unconstitutional and a lawsuit filed by the Palo Verde participants, including
the Company, was returned to the Arizona Tax Court for determination of the
appropriate remedy consistent with that decision. See "Property Taxes" in Part
I, Item 3 of the 1995 10-K. On April 23, 1996, the parties reached an agreement
to settle the pending litigation. Pursuant to the tentative settlement, the
Company will relinquish its claims for relief with respect to prior years and
the defendants will not challenge the Court of Appeals' decision concerning
prospective relief (for tax years 1996 and thereafter). The Company does not
expect this matter to have a material impact on its financial position or
results of operations.
ITEM 5. Other Information
------------------------------
Palo Verde Nuclear Generating Station
-------------------------------------
See Note 7 of Notes to Condensed Financial Statements in Part I, Item 1
of this report for a discussion of issues regarding 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.
Environmental Matters
---------------------
The Comprehensive Environmental Response, Compensation, and Liability
Act ("Superfund") establishes liability for the cleanup of hazardous substances
found contaminating the soil, water, or air. Those who generated, transported or
disposed of hazardous substances at a contaminated site are among those who are
potentially responsible parties ("PRP's") and may be each strictly, and often
jointly and severally, liable for the cost of any necessary remediation of the
substances. The EPA had previously advised the Company that the EPA considers
the Company to be a PRP in the Indian Bend Wash Superfund Site, South Area,
where the Company's Ocotillo Power Plant is located. The Company is in the
process of conducting a voluntary investigation to determine the extent and
scope of contamination at the Plant site. Based on the information to date, the
Company does not expect this matter to have a material impact on its financial
position or results of operations.
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ITEM 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Arizona Corporation Commission Order dated April 24, 1996
15.1 Letter in Lieu of Consent Regarding Unaudited Interim Financial
Information
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1996, and the period ended May 14,
1996, the Company did not file any reports on Form 8-K.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
Dated: May 14, 1996 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)