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 September 30, 1996
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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
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(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
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(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 November 13, 1996: 71,264,947
i
Glossary
--------
ACC - Arizona Corporation Commission
ACC Order - ACC Order commencing a formal rulemaking process for the adoption
of Proposed Rules regarding the introduction of retail electric
competition in Arizona
ACC Staff - Staff of the Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
Affected Utilities - Utilities affected by the ACC's Proposed Rules on retail
electric competition in Arizona
CC&N - Certificate of convenience and necessity
Company - Arizona Public Service Company
EPA - Environmental Protection Agency
ITC - Investment tax credit
June 10-Q - Arizona Public Service Company Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996
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
Proposed Rules - Proposed rules issued by the ACC regarding the introduction of
retail electric competition in Arizona
Pinnacle West - Pinnacle West Capital Corporation
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 September 30,
-----------------------------------------------
1996 1995
--------------------- ---------------------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 566,899 $ 549,082
--------------------- ---------------------
FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 68,243 68,715
Purchased power . . . . . . . . . . . . . . . . . . . . 39,793 23,539
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 108,036 92,254
--------------------- ---------------------
OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 458,863 456,828
--------------------- ---------------------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . . . . . . . . . . 74,816 75,807
Maintenance . . . . . . . . . . . . . . . . . . . . . . 25,570 21,758
Depreciation and amortization . . . . . . . . . . . . . 90,431 61,157
Income taxes . . . . . . . . . . . . . . . . . . . . . . 90,994 100,282
Other taxes . . . . . . . . . . . . . . . . . . . . . . 24,745 35,222
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 306,556 294,226
--------------------- ---------------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 152,307 162,602
--------------------- ---------------------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . 1,942 1,111
Other - net . . . . . . . . . . . . . . . . . . . . . . (1,988) (14,393)
Income taxes . . . . . . . . . . . . . . . . . . . . . . 14,922 21,305
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 14,876 8,023
--------------------- ---------------------
INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 167,183 170,625
--------------------- ---------------------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 36,100 39,063
Interest on short-term borrowings . . . . . . . . . . . 2,597 3,275
Debt discount, premium and expense . . . . . . . . . . . 2,023 2,072
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . (2,021) (2,130)
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 38,699 42,280
--------------------- ---------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 128,484 128,345
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 4,153 4,775
--------------------- ---------------------
EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 124,331 $ 123,570
===================== =====================
See Notes to Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Nine Months
Ended September 30,
-----------------------------------------------
1996 1995
--------------------- ---------------------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 1,338,818 $ 1,266,228
--------------------- ---------------------
FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 167,866 160,248
Purchased power . . . . . . . . . . . . . . . . . . . . 76,197 49,563
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 244,063 209,811
--------------------- ---------------------
OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 1,094,755 1,056,417
--------------------- ---------------------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . . . . . . . . . . 213,156 207,167
Maintenance . . . . . . . . . . . . . . . . . . . . . . 75,269 76,081
Depreciation and amortization . . . . . . . . . . . . . 207,612 181,996
Income taxes . . . . . . . . . . . . . . . . . . . . . . 172,017 160,817
Other taxes . . . . . . . . . . . . . . . . . . . . . . 93,894 105,821
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 761,948 731,882
--------------------- ---------------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 332,807 324,535
--------------------- ---------------------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . 5,620 3,645
Other - net . . . . . . . . . . . . . . . . . . . . . . (5,030) (10,862)
Income taxes . . . . . . . . . . . . . . . . . . . . . . 30,111 29,830
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 30,701 22,613
--------------------- ---------------------
INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 363,508 347,148
--------------------- ---------------------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 110,860 120,986
Interest on short-term borrowings . . . . . . . . . . . 9,396 6,932
Debt discount, premium and expense . . . . . . . . . . . 6,144 6,082
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . (7,422) (6,481)
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 118,978 127,519
--------------------- ---------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 244,530 219,629
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 12,956 14,358
--------------------- ---------------------
EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 231,574 $ 205,271
===================== =====================
See Notes to Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Twelve Months
Ended September 30,
-----------------------------------------------
1996 1995
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(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 1,687,542 $ 1,608,308
--------------------- ---------------------
FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 216,546 209,258
Purchased power . . . . . . . . . . . . . . . . . . . . 87,504 61,250
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 304,050 270,508
--------------------- ---------------------
OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 1,383,492 1,337,800
--------------------- ---------------------
OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . . . . . . . . . . 290,831 279,461
Maintenance . . . . . . . . . . . . . . . . . . . . . . 115,160 106,699
Depreciation and amortization . . . . . . . . . . . . . 267,714 243,703
Income taxes . . . . . . . . . . . . . . . . . . . . . . 190,065 181,011
Other taxes . . . . . . . . . . . . . . . . . . . . . . 129,696 139,827
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Total . . . . . . . . . . . . . . . . . . . . . . . . 993,466 950,701
--------------------- ---------------------
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 390,026 387,099
--------------------- ---------------------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . 6,957 4,749
Other - net . . . . . . . . . . . . . . . . . . . . . . (11,200) (11,823)
Income taxes . . . . . . . . . . . . . . . . . . . . . . 37,879 31,399
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 33,636 24,325
--------------------- ---------------------
INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 423,662 411,424
--------------------- ---------------------
INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 149,906 160,617
Interest on short-term borrowings . . . . . . . . . . . 10,607 8,147
Debt discount, premium and expense . . . . . . . . . . . 8,684 8,136
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . (10,006) (8,005)
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 159,191 168,895
--------------------- ---------------------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 264,471 242,529
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 17,732 19,242
--------------------- ---------------------
EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 246,739 $ 223,287
===================== =====================
See Notes to Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
ASSETS
(Unaudited)
September 30, December 31,
1996 1995
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(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for future use . . . $ 6,683,761 $ 6,544,860
Less accumulated depreciation and amortization . . . . . 2,389,447 2,231,614
--------------------- ---------------------
Total . . . . . . . . . . . . . . . . . . . . . . . . 4,294,314 4,313,246
Construction work in progress . . . . . . . . . . . . . 307,251 281,757
Nuclear fuel, net of amortization . . . . . . . . . . . 49,829 52,084
--------------------- ---------------------
Utility plant - net . . . . . . . . . . . . . . . . . 4,651,394 4,647,087
--------------------- ---------------------
INVESTMENTS AND OTHER ASSETS :. . . . . . . . . . . . . . . 113,221 97,742
--------------------- ---------------------
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . 17,815 18,389
Accounts receivable:
Service customers . . . . . . . . . . . . . . . . . . 145,341 100,433
Other . . . . . . . . . . . . . . . . . . . . . . . . 18,848 28,107
Allowance for doubtful accounts . . . . . . . . . . . (1,862) (1,656)
Accrued utility revenues . . . . . . . . . . . . . . . . 74,008 53,519
Materials and supplies, at average cost . . . . . . . . 75,871 78,271
Fossil fuel, at average cost . . . . . . . . . . . . . 15,188 21,722
Deferred income taxes . . . . . . . . . . . . . . . . . 5,614 5,653
Other . . . . . . . . . . . . . . . . . . . . . . . . . 16,132 17,839
--------------------- ---------------------
Total current assets . . . . . . . . . . . . . . . . 366,955 322,277
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DEFERRED DEBITS:
Regulatory asset for income taxes . . . . . . . . . . . 520,910 548,464
Palo Verde Unit 3 cost deferral . . . . . . . . . . . . 270,131 283,426
Palo Verde Unit 2 cost deferral . . . . . . . . . . . . 157,754 165,873
Unamortized costs of reacquired debt . . . . . . . . . . 71,520 63,518
Unamortized debt issue costs . . . . . . . . . . . . . . 16,204 17,772
Other . . . . . . . . . . . . . . . . . . . . . . . . . 267,872 272,103
--------------------- ---------------------
Total deferred debits . . . . . . . . . . . . . . . . 1,304,391 1,351,156
--------------------- ---------------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 6,435,961 $ 6,418,262
===================== =====================
See Notes to Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
LIABILITIES
(Unaudited)
September 30, December 31,
1996 1995
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(Thousands of Dollars)
CAPITALIZATION:
Common stock . . . . . . . . . . . . . . . . . . . . . . $ 178,162 $ 178,162
Premiums and expenses - net . . . . . . . . . . . . . . . 1,040,681 1,039,550
Retained earnings . . . . . . . . . . . . . . . . . . . 507,801 403,843
--------------------- ---------------------
Common stock equity . . . . . . . . . . . . . . . . . 1,726,644 1,621,555
Non-redeemable preferred stock . . . . . . . . . . . . . 170,391 193,561
Redeemable preferred stock . . . . . . . . . . . . . . . 53,000 75,000
Long-term debt less current maturities . . . . . . . . . 1,924,507 2,132,021
--------------------- ---------------------
Total capitalization . . . . . . . . . . . . . . . . . 3,874,542 4,022,137
--------------------- ---------------------
CURRENT LIABILITIES:
Commercial paper . . . . . . . . . . . . . . . . . . . . 134,500 177,800
Current maturities of long-term debt . . . . . . . . . . 153,643 3,512
Accounts payable . . . . . . . . . . . . . . . . . . . . 116,280 106,583
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 170,372 82,827
Accrued interest . . . . . . . . . . . . . . . . . . . . 25,619 41,549
Customer deposits . . . . . . . . . . . . . . . . . . . 32,130 32,746
Other . . . . . . . . . . . . . . . . . . . . . . . . . 38,729 21,134
--------------------- ---------------------
Total current liabilities . . . . . . . . . . . . . . 671,273 466,151
--------------------- ---------------------
DEFERRED CREDITS AND OTHER:
Deferred income taxes . . . . . . . . . . . . . . . . . . 1,417,881 1,429,482
Deferred investment tax credit . . . . . . . . . . . . . 90,025 115,353
Unamortized gain - sale of utility plant . . . . . . . . 88,083 91,514
Customer advances for construction . . . . . . . . . . . 23,673 19,846
Other . . . . . . . . . . . . . . . . . . . . . . . . . 270,484 273,779
--------------------- ---------------------
Total deferred credits and other . . . . . . . . . . 1,890,146 1,929,974
--------------------- ---------------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 7)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 6,435,961 $ 6,418,262
===================== =====================
See Notes to Condensed Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
Nine Months
Ended September 30,
-----------------------------------------------
1996 1995
--------------------- ---------------------
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 244,530 $ 219,629
Items not requiring cash:
Depreciation and amortization . . . . . . . . . . . . 207,612 181,996
Nuclear fuel amortization . . . . . . . . . . . . . . 25,166 24,354
AFUDC - equity . . . . . . . . . . . . . . . . . . . . (5,620) (3,645)
Deferred income taxes - net . . . . . . . . . . . . . 2,768 27,609
Deferred investment tax credit - net . . . . . . . . . (25,328) (24,469)
Changes in certain current assets and liabilities:
Accounts receivable - net . . . . . . . . . . . . . . (35,443) (34,010)
Accrued utility revenues . . . . . . . . . . . . . . . (20,489) (23,419)
Materials, supplies and fossil fuel . . . . . . . . . 8,934 9,154
Other current assets . . . . . . . . . . . . . . . . . 1,707 (1,731)
Accounts payable . . . . . . . . . . . . . . . . . . . 13,340 (65)
Accrued taxes . . . . . . . . . . . . . . . . . . . . 87,545 86,763
Accrued interest . . . . . . . . . . . . . . . . . . . (15,930) (13,557)
Other current liabilities . . . . . . . . . . . . . . 17,277 18,360
Other - net . . . . . . . . . . . . . . . . . . . . . . 12,515 11,999
--------------------- ---------------------
Net cash flow provided by operating activities . . . 518,584 478,968
--------------------- ---------------------
Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . (196,641) (209,471)
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . . (7,422) (6,481)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (13,691) (13,354)
--------------------- ---------------------
Net cash flow used for investing activities. . . . . (217,754) (229,306)
--------------------- ---------------------
Cash Flows from Financing Activities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . 100,000 82,863
Short-term borrowings - net . . . . . . . . . . . . . . (43,300) (69,300)
Dividends paid on common stock . . . . . . . . . . . . . (127,500) (112,500)
Dividends paid on preferred stock . . . . . . . . . . . (13,456) (14,358)
Repayment of preferred stock . . . . . . . . . . . . . . (46,083) (4)
Repayment and reacquisition of long-term debt . . . . . (171,065) (119,707)
--------------------- ---------------------
Net cash flow used for financing activities . . . . (301,404) (233,006)
--------------------- ---------------------
Net increase (decrease) in cash and cash equivalents . . . (574) 16,656
Cash and cash equivalents at beginning of period . . . . . 18,389 6,532
--------------------- ---------------------
Cash and cash equivalents at end of period . . . . . . . . $ 17,815 $ 23,188
===================== =====================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) . . . . . . $ 127,492 $ 135,034
Income taxes . . . . . . . . . . . . . . . . . . . . . $ 102,144 $ 84,599
See Notes to Condensed Financial Statements.
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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
September 30, 1996, the results of operations for the three months, nine months
and twelve months ended September 30, 1996 and 1995, and the cash flows for the
nine months ended September 30, 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.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for
changes in capitalization for the nine months ended September 30, 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:
O 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.
O 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).
-8-
O A formula for sharing future cost savings between customers and
shareholders, referencing a return on equity (as defined) of 11.25%.
O A moratorium on filing for permanent rate changes, except under the
sharing formula and under certain other limited circumstances, prior to
July 2, 1999.
O Infusion of $200 million of common equity into the Company by Pinnacle
West, in annual increments of $50 million starting in 1996.
Competition and Electric Industry Restructuring
In recognition of evolving competition in the electric utility
industry, there has been an ongoing investigation by the ACC Staff into industry
restructuring in an open competition docket involving many parties. 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. On October 9, 1996, the ACC issued an
order (the "ACC Order"), attached hereto and incorporated herein by reference,
initiating a formal rulemaking process for the adoption of rules ("Proposed
Rules") regarding the introduction of retail electric competition in Arizona.
The ACC will hold public comment meetings on the Proposed Rules on December 2,
3, and 4, 1996. The ACC has indicated that, even if it then adopts the Proposed
Rules, issues such as reliability, stranded cost recovery, the phase-in process,
and bundled, unbundled and metering services, as well as legal issues, will
require additional consideration and will be addressed through workshops and
working groups which will issue recommendations to the ACC during 1997.
Commissioner Carl Kunasek, the sole Republican on the three-member ACC, provided
a concurring statement to the ACC Order in which he expressed concerns about the
Proposed Rules and his intent to make substantive changes in them. As a result
of the recent election, Mr. Kunasek will be joined on the ACC in January 1997 by
Republican Jim Irvin, which will impact the leadership of the ACC and the
composition of the ACC Staff. The positions on the rulemaking that will
actually be taken by the members of the ACC, as evidenced by recently reported
comments, are by no means clear at this time.
The Proposed Rules include the following major provisions:
O The Proposed Rules are intended to apply to virtually all of the
Arizona electric utilities regulated by the ACC (the "Affected
Utilities"), including the Company.
O Each Affected Utility would be required to make available at least 20
percent of its 1995 system retail peak demand for competitive
generation supply to all customer classes not later than January 1,
1999, at least 50 percent not later than January 1, 2001, and all of
its retail demand not later than January 1, 2003.
O "Electric Service Providers" that obtain a "Certificate of Convenience
and Necessity" ("CC&N") from the ACC would be allowed to supply,
market, and or broker specified electric services at retail. These
services would not include most
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electric distribution services. Affected Utilities would not be
required to apply for CC&N's for any services provided in their
existing service territories.
O On or before December 31, 1997, each Affected Utility would file with
the ACC proposed tariffs for "Standard Offer Bundled Service" and
"Unbundled Service." "Standard Offer Bundled Service" means electric
service elements (i.e., generation, transmission, distribution, and
ancillary services) provided and priced as a package to consumers
within a designated area. "Unbundled Service" means electric service
elements provided and priced separately.
The Proposed Rules indicate that the ACC shall allow recovery by Affected
Utilities of unmitigated Stranded Cost, defined as "the verifiable net
difference between (a) the value of all prudent jurisdictional assets and
obligations necessary to furnish electricity (such as generating plants,
purchased power contracts, fuel contracts, and regulatory assets), acquired or
entered into prior to the adoption of the [Proposed Rules], and (b) the market
value of those assets and obligations directly attributable to the introduction
of competition under the [Proposed Rules]." Each Affected Utility would be
required to take "every feasible, cost-effective measure" to mitigate or offset
Stranded Cost and to file with the ACC estimates of unmitigated Stranded Cost.
The ACC would then, after hearing and consideration of various factors,
determine the magnitude of Stranded Cost and appropriate Stranded Cost recovery
mechanisms and charges on a case-by-case basis.
In comments submitted to the ACC, the Company has stated that certain
provisions of the Proposed Rules are deficient, legally and otherwise, because,
among other things, (i) the ACC has no authority to require or authorize retail
competition between electric utilities or to regulate non-public service
corporations; (ii) the rules fail to address the vested property rights of
Affected Utilities, including the Company, to receive adequate compensation for
the amendment or rescission of CC&N's or for stranded costs; (iii) the rules are
discriminatory because they favor newly-certificated competitors over Affected
Utilities; (iv) the rules do not provide for the fundamental statutory and due
process rights of the Company and other Affected Utilities; (v) specific
measures of the Proposed Rules, including the proposed phase-in, could affect
the Company's ability to maintain system reliability in a cost-effective manner;
and (vi) the status of certain of the Company's potential competitors, including
public power entities and out-of-state utilities, is unclear.
In April 1996, an Arizona law established legislative and advisory
committees to study electric utility industry restructuring issues and report
back to the legislature by the end of 1997. The committees include
representatives of the ACC and the Company.
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The Company believes that legislation will ultimately be required
before significant implementation of the Proposed Rules (or whatever they may
evolve into) can lawfully occur.
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 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
approximately $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.
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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, nine-month and twelve-month periods ended September 30, 1996
and 1995:
Periods ended September 30
(Thousands of Dollars)
Three Months Nine Months Twelve Months
------------------------------- ------------------------------------ ----------------------------------
1996 1995 1996 1995 1996 1995
--------------- --------------- ----------------- ------------------ ---------------- -----------------
Operating
revenues $566,899 $549,082 $1,338,818 $1,266,228 $1,687,542 $1,608,308
Earnings for
common stock $124,331 $123,570 $ 231,574 $ 205,271 $ 246,739 $ 223,287
Operating Results - Three-month period ended September 30, 1996
-----------------------------------------------------------------------
compared with three-month period ended September 30, 1995
---------------------------------------------------------
Earnings were flat in the three-month period ended September 30, 1996.
Results were favorably impacted by increased operating revenues, the write-down
of an office building in 1995, lower property taxes, and lower interest expense.
Operating revenues were higher due to customer growth, warmer weather, and
higher residential usage. Property tax estimates for 1996 were reduced in the
third quarter to reflect a change in tax law. See "Property Taxes" in Part II,
Item 1 of the June 10-Q. Interest expense decreased due to lower average
interest rates and lower debt balances.
Substantially offsetting these positive factors were the accelerated
amortization of regulatory assets, a retail rate reduction, and an increase in
fuel expenses. The accelerated regulatory asset amortization and the rate
reduction were part of a regulatory agreement which became effective July 1,
1996. See Note 5 of Notes to Condensed Financial Statements. Fuel expenses were
higher primarily due to higher natural gas costs, a less favorable mix of fuel
and purchased power, and increased retail sales.
Operating Results - Nine-month period ended September 30, 1996 compared
-----------------------------------------------------------------------
with nine-month period ended September 30, 1995
-----------------------------------------------
Earnings increased in the nine-month period ended September 30, 1996
primarily due to increased operating revenues, the
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write-down of an office building in 1995, a reduction in property taxes (see
"Property Taxes" in Part II, Item 1 of the June 10-Q), and lower interest
expense. Operating revenues were higher due to customer growth, warmer weather,
and higher residential usage. Interest expense decreased due to lower average
interest rates and lower debt balances.
Partially offsetting these positive factors were an increase in fuel
expenses, the accelerated amortization of regulatory assets, a retail rate
reduction, and a gain on the sale of a small subsidiary in the first quarter of
1995. Fuel expenses were higher primarily due to higher natural gas costs,
increased retail sales, higher coal prices, and a less favorable mix of fuel and
purchased power. The accelerated regulatory asset amortization and the rate
reduction were part of a regulatory agreement which became effective July 1,
1996. See Note 5 of Notes to Condensed Financial Statements.
Operating Results - Twelve-month period ended September 30, 1996
-----------------------------------------------------------------------
compared with twelve-month period ended September 30, 1995
----------------------------------------------------------
Earnings increased in the twelve-month period ended September 30, 1996
primarily due to increased operating revenues, the write-down of an office
building in 1995, a reduction in property taxes (see "Property Taxes" in Part
II, Item 1 of the June 10-Q), and lower interest expense. Operating revenues
were higher due to customer growth, warmer weather, and higher residential
usage. Interest expense decreased due to lower average interest rates and lower
debt balances.
Partially offsetting these positive factors were an increase in fuel
expenses, the accelerated amortization of regulatory assets, increased operation
and maintenance expenses, a retail rate reduction, and a gain on the sale of a
small subsidiary in the first quarter of 1995. Fuel expenses were higher
primarily due to increased retail sales, higher natural gas costs, a less
favorable mix of fuel and purchased power, and higher coal prices. The
accelerated regulatory asset amortization and the rate reduction were part of a
regulatory agreement which became effective July 1, 1996. See Note 5 of Notes to
Condensed Financial Statements. Operations and maintenance expenses were higher
primarily due to the write-down of certain inventory in the fourth 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. See Note 1 of Notes to Financial Statements in Part II, Item 8
of the 1995 10-K.
As part of a 1994 rate settlement agreement with the ACC, the Company
accelerated amortization of substantially all
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deferred ITCs over a five-year period beginning in 1995, resulting in a decrease
in annual income tax expense of approximately $21 million.
Voluntary Severance Program
- ---------------------------
The Company will take a charge in the fourth quarter of 1996 for a
voluntary severance program. Employees may submit their request to participate
in the program from October 15 through November 15, 1996. The Company cannot
currently estimate the financial impact of this program.
Regulatory Matters
- ------------------
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 and the
Proposed Rules regarding the introduction of retail electric competition in
Arizona.
Liquidity and Capital Resources
- -------------------------------
For the nine months ended September 30, 1996, the Company incurred
approximately $197 million in capital expenditures, accounting for approximately
76% 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 $260 million, $284 million, and $284 million, respectively. These
amounts include about $30 million each year for nuclear fuel expenditures.
Required and optional redemptions of preferred stock and long-term
debt, including premiums thereon, and a capitalized lease obligation are
expected to total approximately $217 million, $164 million, and $114 million for
the years 1996, 1997, and 1998, respectively. During the nine months ended
September 30, 1996, the Company redeemed approximately $171 million of its
long-term debt and approximately $46 million of its preferred stock, and
incurred $100 million of long-term debt under a revolving credit agreement. As a
result of the 1996 regulatory agreement (see Note 5 of Notes to Condensed
Financial Statements), Pinnacle West will invest $50 million in the Company in
each of the years 1996 through 1999. It is the Company's intention over the next
several years to use excess cash flow primarily 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.
-14-
PART II - OTHER INFORMATION
---------------------------
ITEM 5. Other Information
- ------------------------------
Environmental Matters
---------------------
As previously reported, the Clean Air Act Amendments of 1990 required
two studies with respect to hazardous air pollutants emitted by electric utility
steam generating units. See "Environmental Matters - EPA Environmental
Regulation" in Part I, Item 1 of the 1995 10-K. The EPA has postponed, for up to
three years, the general study concerning the necessity of regulating such units
and has deferred promulgating regulations relating to mercury emissions.
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.
Competition and Electric Industry Restructuring
-----------------------------------------------
See Note 5 of the Notes to Condensed Financial Statements in Part I,
Item 1 of this report for a discussion of competition and the Proposed Rules
regarding the introduction of retail electric competition in Arizona.
-15-
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Arizona Corporation Commission Order, Decision No. 59870,
dated October 9, 1996, including the Proposed Rules regarding
the introduction of retail electric competition in Arizona
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended September 30, 1996, and the period ended
November 13, 1996, the Company filed the following report on Form 8-K:
Report dated August 28, 1996 regarding draft rules of the ACC Staff
relating to the introduction of retail electric competition in Arizona.
-16-
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: November 13, 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)