SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year
ended December 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 ______
Commission File Number 1-4473
Arizona Public Service Company
(Exact name of registrant as specified in its charter)
ARIZONA 86-0011170
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 North Fifth Street, P.O. Box 53999
Phoenix, Arizona 85072-3999 (602) 250-1000
(Address of principal executive (Registrant's telephone number,
offices, including area code)
including zip code)
- ------------------------------------------------------------------------------ --------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ------------------------------------------------------------------------------ --------------------------------------
Adjustable Rate Cumulative Preferred Stock,
Series Q, $100 Par Value.............................................. New York Stock Exchange
$1.8125 Cumulative Preferred Stock,
Series W, $25 Par Value............................................... New York Stock Exchange
10% Junior Subordinated Deferrable Interest
Debentures, Series A, Due 2025........................................ New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Cumulative Preferred Stock
(Title of class)
(See Note 3 of Notes to Financial Statements in
Item 8 for dividend rates, series designations (if
any), and par values)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Aggregate Market Value
of Voting Stock Held by
Non-affiliates of the
Title of Each Class Shares Outstanding registrant as of
of Voting Stock as of February 26, 1997 February 26, 1997
- --------------------------------------- -------------------------------------- --------------------------------------
Cumulative Preferred Stock........ 4,095,373 $198,000,000(a)
- --------------------------------------- -------------------------------------- --------------------------------------
(a) Computed, with respect to shares listed on the New York Stock Exchange, by reference to the closing price on the
composite tape on February 26, 1997, as reported by The Wall Street Journal, and with respect to non-listed shares, by
determining the yield on listed shares and assuming a market value for non-listed shares which would result in that
same yield.
As of February 26, 1997, there were issued and outstanding 71,264,947 shares of the registrant's common stock, $2.50
par value, all of which were held beneficially and of record by Pinnacle West Capital Corporation.
Documents Incorporated by Reference Portions of the registrant's definitive proxy statement relating to its annual
meeting of shareholders to be held on May 20, 1997, are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
----
GLOSSARY ....................................................................................... 1
PART I
Item 1. Business............................................................................... 2
Item 2. Properties............................................................................. 11
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 14
Supplemental Item.
Executive Officers of the Registrant................................................... 15
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters............... 16
Item 6. Selected Financial Data................................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................. 18
Item 8. Financial Statements and Supplementary Data............................................ 21
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure............................................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... 46
Item 11. Executive Compensation................................................................. 46
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 46
Item 13. Certain Relationships and Related Transactions......................................... 46
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules,
and Reports on Form 8-K................................................................ 47
SIGNATURES ..........................................................................................65
i
GLOSSARY
ACC --- Arizona Corporation Commission
ACC Staff --- Staff of the Arizona Corporation Commission
AFUDC --- Allowance for Funds Used During Construction
Amendments --- Clean Air Act Amendments of 1990
ANPP --- Arizona Nuclear Power Project, also known as Palo Verde
APB Opinion No. 25 --- Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees"
APS --- Arizona Public Service Company
CC&N --- Certificate of convenience and necessity
Cholla --- Cholla Power Plant
Cholla 4 --- Unit 4 of the Cholla Power Plant
Company --- Arizona Public Service Company
CUC --- Citizens Utilities Company
DOE --- United States Department of Energy
EPA --- United States Environmental Protection Agency
Energy Act --- National Energy Policy Act of 1992
FASB --- Financial Accounting Standards Board
FERC --- Federal Energy Regulatory Commission
Four Corners --- Four Corners Power Plant
GAAP --- Generally accepted accounting principles
ITC --- Investment tax credit
kW --- Kilowatt, one thousand watts
kWh --- Kilowatt-hour, one thousand watts per hour
Mortgage --- Mortgage and Deed of Trust, dated as of July 1, 1946, as
supplemented and amended
MWh --- Megawatt hours, one million watts per hour
1935 Act --- Public Utility Holding Company Act of 1935
NGS --- Navajo Generating Station
NRC --- Nuclear Regulatory Commission
PacifiCorp --- An Oregon-based utility company
Palo Verde --- Palo Verde Nuclear Generating Station
Pinnacle West --- Pinnacle West Capital Corporation, an Arizona corporation, the
Company's parent
SEC --- Securities and Exchange Commission
SFAS No. 34 --- Statement of Financial Accounting Standards No. 34,
"Capitalization of Interest Cost"
SFAS No. 71 --- Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation"
SFAS No. 123 --- Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
SRP --- Salt River Project Agricultural Improvement and Power District
USEC --- United States Enrichment Corporation
Waste Act --- Nuclear Waste Policy Act of 1982, as amended
1
PART I
ITEM 1. BUSINESS
The Company
The Company was incorporated in 1920 under the laws of Arizona and is
engaged principally in serving electricity in the State of Arizona. The
principal executive offices of the Company are located at 400 North Fifth
Street, Phoenix, Arizona 85004 (telephone 602-250-1000). Pinnacle West owns all
of the outstanding shares of the Company's common stock.
The Company is Arizona's largest electric utility, with 738,000 customers,
and provides wholesale or retail electric service to the entire state of Arizona
with the exception of Tucson and about one-half of the Phoenix area. During
1996, no single purchaser or user of energy accounted for more than 3% of total
electric revenues. At December 31, 1996, the Company employed 6,365 people,
which includes employees assigned to joint projects where the Company is project
manager.
This document may contain "forward-looking statements" that involve risks
and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in such forward-looking statements. The
following factors are among the factors that could cause actual results to
differ materially from the forward-looking statements: regulatory developments;
competitive developments; regional economic conditions; the cost of debt and
equity capital; regulatory, tax and environmental legislation; weather
variations affecting customer usage; and technological developments in the
electricity industry. See "Competition" in this Item for a discussion of some of
these factors. Any forward-looking statements should be considered in light of
these factors.
Competition
Retail
General. Under current law, the Company is not in direct competition with
any other regulated electric utility for electric service in the Company's
retail service territory. Nevertheless, the Company is subject to varying
degrees of competition in certain territories adjacent to or within areas that
it serves that are also currently served by other utilities in its region (such
as Tucson Electric Power Company, Southwest Gas Corporation, and Citizens
Utility Company) as well as cooperatives, municipalities, electrical districts
and similar types of governmental organizations (principally SRP).
The Company faces competitive challenges from low-cost hydroelectric power
and natural gas fuel, as well as the access of some utilities to preferential
low-priced federal power and other subsidies. In addition, some customers,
particularly industrial and large commercial, may own and operate facilities to
generate their own electric energy requirements. Such facilities may be operated
by the customers themselves or by other entities engaged for such purpose. The
legislatures and/or the regulatory commissions in most states have considered or
are considering "retail wheeling." This requirement to transmit directly to
retail customers could have the result of allowing retail customers to choose to
purchase electric capacity and energy from the electric utility in whose service
area they are located or from other electric utilities or independent power
producers or power marketers.
ACC Rules Regarding Arizona Electric Industry Restructuring. The ACC Staff
has been conducting an ongoing investigation into the restructuring of the
Arizona electric industry in an open competition docket involving many parties.
In December 1996, the ACC adopted rules for introduction of retail electric
competition in Arizona in phases from 1999 through 2003. The Rules establish a
framework for introducing competition; however, with respect to certain matters,
they also contain requirements for further workshops and ACC consideration prior
to implementation. Recommendations to the ACC from the workshops are expected in
late 1997. The Rules indicate that the ACC will allow recovery of unmitigated
stranded costs, but do not set forth the mechanisms for determining or
recovering such costs. The Company believes that state legislation will
ultimately be
2
required before significant implementation of retail electric competition can
lawfully occur in Arizona. See Note 2 of Notes to Financial Statements in Item 8
for further discussion of these Rules and of the lawsuits filed by the Company
challenging certain provisions of the Rules.
Wholesale
General. The Company competes with other utilities, power marketers, and
independent power producers in the sale of electric capacity and energy in the
wholesale market. The Company expects that competition to sell capacity will
remain vigorous, and that wholesale prices will remain depressed for at least
the next several years due to increased competition and surplus capacity in the
western United States. The Company's rates for wholesale power sales and
transmission services are subject to regulation by the FERC. During 1996,
approximately 6% of the Company's electric operating revenues resulted from such
sales and charges.
The National Energy Policy Act of 1992 (the "Energy Act") has promoted
increased competition in the wholesale electric power markets. The Energy Act
reformed provisions of the Public Utility Holding Company Act of 1935 (the "1935
Act") and the Federal Power Act to remove certain barriers to competition for
the supply of electricity. For example, the Energy Act permits the FERC to order
transmission access for third parties to transmission facilities owned by
another entity so that independent suppliers and other third parties can sell at
wholesale to customers wherever located. The Energy Act does not, however,
permit the FERC to issue an order requiring transmission access to retail
customers.
Effective July 9, 1996, a FERC decision requires all electric utilities
subject to the FERC's jurisdiction to file transmission tariffs which provide
competitors with access to transmission facilities comparable to the
transmission owners' facilities for wholesale transactions, establishes
information requirements and provides recovery for certain wholesale stranded
costs. Retail stranded costs resulting from a state-authorized retail
direct-access program are the responsibility of the states, unless a state lacks
authority to impose rates to recover such costs in which case FERC will consider
doing so. The Company has filed its revised open access tariff in accordance
with this decision. The Company does not believe that this decision will have a
material adverse impact on its results of operations or financial position.
Federal Regulation
Several electric utility reform bills have been introduced during the
current legislative session, which as currently written, would allow consumers
to choose their electric supplier by 2000 or 2003. These bills, other bills that
are expected to be introduced, and ongoing discussions at the federal level
suggest a wide range of opinion that will need to be narrowed before any
substantial restructuring of the electric utility industry can occur.
Regulatory Assets
The Company's major regulatory assets are rate synchronization cost
deferrals and deferred taxes. These items, combined with miscellaneous
regulatory assets and liabilities, amounted to approximately $1.1 billion at
December 31, 1996. In accordance with a 1996 regulatory agreement between the
Company and the ACC Staff, the ACC accelerated the amortization of substantially
all of the Company's regulatory assets to an eight-year period beginning July 1,
1996. The Company's existing regulatory orders and current regulatory
environment support its accounting practices related to regulatory assets. If
rate recovery of these assets is no longer probable, whether due to competition
or regulatory action, the Company would no longer be able to apply the
provisions of SFAS No. 71 to all or some part of its operations which could have
a material impact on the Company's financial statements. See Notes 1, 2, and 9
of Notes to Financial Statements in Item 8 for additional information.
3
Competitive Strategies
The Company is pursuing strategies to maintain and enhance its competitive
position. These strategies include (i) cost management, with an emphasis on the
reduction of variable costs (fuel, operations, and maintenance expenses) and on
increased productivity through technological efficiencies; (ii) a focus on the
Company's core business through customer service, distribution system
reliability, business segmentation and the anticipation of market opportunities;
(iii) an emphasis on good regulatory relationships; (iv) asset maximization
(e.g., higher capacity factors and lower forced outage rates); (v) strengthening
the Company's capital structure and financial condition; (vi) leveraging core
competencies into related areas, such as energy management products and
services; and (vii) building a trading floor and implementing a risk management
program to provide for more stability of prices and the ability to retain or
grow incremental margin through more competitive pricing and risk management.
Underpinning the Company's competitive strategies are the strong growth
characteristics of the Company's service territory. As competition in the
electric utility industry continues to evolve, the Company will continue to
pursue strategies to enhance its competitive position.
Generating Fuel and Purchased Power
Generating Fuel and Purchased Power Costs
Fuel and purchased power costs were approximately $326 million during 1996,
a 20.7% increase over 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations ___ Results of Operations" in Item
7 for a discussion of the factors contributing to this increase.
1996 Energy Mix
The Company's sources of energy during 1996 were: purchased power - 17.1%;
coal - 43.9%; nuclear - 35.4%; and other - 3.6%.
Generating Fuel Mix
Coal, nuclear, gas and other contributions to total net generation of
electricity by the Company in 1996, 1995 and 1994, and the average cost to the
Company of those fuels (in dollars per MWh), were as follows:
Coal Nuclear Gas Other All Fuels
------------------- -------------------- ------------------- ------------------- ---------
Percent of Average Percent of Average Percent of Average Percent of Average Average
Generation Cost Generation Cost Generation Cost Generation Cost Cost
---------- ---- ---------- ---- ---------- ---- ---------- ---- ----
1996 (estimate). 52.5% $14.83 42.7% $5.20 4.3% $38.43 0.5% $11.46 $11.72
1995............ 54.7 13.83 40.1 5.21 5.0 19.52 0.2 11.84 10.66
1994............ 59.7 13.84 33.8 6.09 6.3 24.64 0.2 16.26 11.90
Other includes oil and hydro generation.
Coal Supply
The Company believes that Cholla has sufficient reserves of low sulfur coal
committed to that plant for the next four years, the term of the existing coal
contract. Sufficient reserves of low sulfur coal are available to continue
operating Cholla for its useful life. The Company also believes that Four
Corners and NGS have sufficient reserves of low sulfur coal available for use by
those plants to continue operating them for their useful lives. The current
sulfur content of coal being used at Four Corners, NGS and Cholla is
approximately 0.73%, 0.60% and 0.44%, respectively. In 1996, average prices paid
for coal supplied from reserves dedicated under the
4
existing contracts increased as a result of power market conditions that changed
the mix of coal. In addition, major price adjustments can occur from time to
time as a result of contract renegotiation.
NGS and Four Corners are located on the Navajo Reservation and held under
easements granted by the federal government as well as leases from the Navajo
Nation. See "Properties ___ Plant Sites Leased from Navajo Nation" in Item 2.
The Company purchases all of the coal which fuels Four Corners from a coal
supplier with a long-term lease of coal reserves owned by the Navajo Nation and
for NGS from a coal supplier with a long-term lease with the Navajo Nation and
the Hopi Tribe. The Company purchases all of the coal which fuels Cholla from a
coal supplier who mines all of the coal under a long-term lease of coal reserves
owned by the Navajo Nation, the federal government, and private landholders. See
Note 11 of Notes to Financial Statements in Item 8 for information regarding the
Company's obligation for coal mine reclamation.
Natural Gas Supply
The Company is a party to contracts with forty natural gas operators and
marketers which allow the Company to purchase natural gas in the method it
determines to be most economic. During 1996, the principal sources of the
Company's natural gas generating fuel were twenty of these companies. The
Company is currently purchasing the majority of its natural gas requirements
from fifteen companies pursuant to contracts. During 1996 the price of natural
gas increased primarily due to a significant increase in the transportation
costs as well as increased natural gas prices. The Company's natural gas supply
is transported pursuant to a firm transportation service contract between the
Company and El Paso Natural Gas Company. The Company continues to analyze the
market to determine the source and method of meeting its natural gas
requirements.
Nuclear Fuel Supply
The fuel cycle for Palo Verde is comprised of the following stages: (1) the
mining and milling of uranium ore to produce uranium concentrates, (2) the
conversion of uranium concentrates to uranium hexafluoride, (3) the enrichment
of uranium hexafluoride, (4) the fabrication of fuel assemblies, (5) the
utilization of fuel assemblies in reactors and (6) the storage of spent fuel and
the disposal thereof. The Palo Verde participants have made arrangements through
contract flexibilities to obtain quantities of uranium concentrates anticipated
to be sufficient to meet operational requirements through 2000. Existing
contracts and options could be utilized to meet approximately 80% of
requirements in 2001 and 2002 and 50% of requirements from 2003 through 2007.
Spot purchases in the uranium market will be made, as appropriate, in lieu of
any uranium that might be obtained through contract flexibilities and options.
The Palo Verde participants have contracted for all conversion services required
through 2000 and with options for up to 70% through 2002. The Palo Verde
participants, including the Company, have an enrichment services contract with
USEC which obligates USEC to furnish enrichment services required for the
operation of the three Palo Verde units over a term expiring in September 2002,
with options to continue through September 2007. In addition, existing contracts
will provide fuel assembly fabrication services until at least 2003 for each
Palo Verde unit, and through contract options, approximately fifteen additional
years are available.
Spent Nuclear Fuel and Waste Disposal. Pursuant to the Nuclear Waste Policy
Act of 1982, as amended in 1987 (the "Waste Act"), DOE is obligated to accept
and dispose of all spent nuclear fuel and other high-level radioactive wastes
generated by all domestic power reactors. The NRC, pursuant to the Waste Act,
requires operators of nuclear power reactors to enter into spent fuel disposal
contracts with DOE, and the Company, on its own behalf and on behalf of the
other Palo Verde participants, has done so. Under the Waste Act, DOE was to
develop the facilities necessary for the storage and disposal of spent nuclear
fuel and to have the first such facility in operation by 1998. That facility was
to be a permanent repository, but DOE has announced that such a repository now
cannot be completed before 2010. In July 1996, the United States Court of
Appeals for the District of Columbia Circuit ruled that the DOE has an
obligation to start disposing of spent nuclear fuel no later than January 31,
1998. By way of letter dated December 17, 1996, DOE informed contract holders,
including the Company, that DOE anticipates that it will be unable to begin
acceptance of spent nuclear fuel for disposal in a
5
repository or interim storage facility by January 31, 1998. Several bills have
been introduced in Congress contemplating the construction of a central interim
storage facility which could be available in the latter part of the current
decade; however, there is resistance to certain features of these bills both in
Congress and the Administration.
Facility funding is a further complication. While all nuclear utilities pay
into a so-called nuclear waste fund an amount calculated on the basis of the
output of their respective plants, the annual Congressional appropriations for
the permanent repository have been for amounts less than the amounts paid into
the waste fund (the balance of which is being used for other purposes) and,
according to DOE spokespersons, may now be at a level less than needed to
achieve a 2010 operational date for a permanent repository. No funding will be
available for a central interim facility until one is authorized by Congress.
The Company has storage capacity in existing fuel storage pools at Palo
Verde which, with certain modifications, could accommodate all fuel expected to
be discharged from normal operation of Palo Verde through about 2002, and
believes it could augment that wet storage with new facilities for on-site dry
storage of spent fuel for an indeterminate period of operation beyond 2002,
subject to obtaining any required governmental approvals. One way or another,
the Company currently believes that spent fuel storage or disposal methods will
be available for use by Palo Verde to allow its continued operation beyond 2002.
A new low-level waste facility was built in 1995 on-site which could store
an amount of waste equivalent to ten years of normal operation at Palo Verde.
Although some low-level waste has been stored on-site, the Company is currently
shipping low-level waste to off-site facilities. The Company currently believes
that interim low-level waste storage methods are or will be available for use by
Palo Verde to allow its continued operation and to safely store low-level waste
until a permanent disposal facility is available.
While believing that scientific and financial aspects of the issues of
spent fuel and low-level waste storage and disposal can be resolved
satisfactorily, the Company acknowledges that their ultimate resolution in a
timely fashion will require political resolve and action on national and
regional scales which it is less able to predict.
Purchased Power Agreements
In addition to that available from its own generating capacity (see
"Properties" in Item 2), the Company purchases electricity from other utilities
under various arrangements. One of the most important of these is a long-term
contract with SRP which may be canceled by SRP on three years' notice and which
requires SRP to make available, and the Company to pay for, certain amounts of
electricity that are based in large part on customer demand within certain areas
now served by the Company pursuant to a related territorial agreement. The
generating capacity available to the Company pursuant to the contract was 305 MW
through May 1996, at which time the capacity decreased to 297 MW. In 1996, the
Company received approximately 557,998 MWh of energy under the contract and paid
approximately $35 million for capacity availability and energy received.
In September 1990, the Company and PacifiCorp entered into certain
agreements relating principally to sales and purchases of electric power and
electric utility assets, and in July 1991 the Company sold Cholla 4 to
PacifiCorp. As part of the transaction, PacifiCorp agreed to make a firm system
sale to the Company for thirty years during the Company's summer peak season in
the amount of 175 megawatts for the first five years, increasing thereafter, at
the Company's option, up to a maximum amount equal to the rated capacity of
Cholla 4 (380 megawatts). The Company also had the option to convert these firm
system sales to one-for-one seasonal capacity exchanges with PacifiCorp. The
Company's agreements with PacifiCorp currently provide for the following Company
purchases and one-for-one seasonal capacity exchanges during the indicated
years: 1997 (175 megawatt firm capacity purchase; and 100 megawatt capacity
exchange effective May 15, 1997); 1998 (175 megawatt firm capacity purchase,
converting to capacity exchange in the summer of 1998; and 100 megawatt capacity
exchange); 1999 and beyond (275 megawatt capacity exchange; and 205 megawatt
capacity exchange beginning in the summer of 1999). In 1996, the generating
capacity available to the Company from PacifiCorp
6
was 175 MW. The Company received approximately 404,000 MWh of energy and paid
approximately $18.5 million for capacity availability and the energy received.
During 1996, the Company entered into an agreement with Citizens Utilities
Company to build, own, operate and maintain a combustion turbine in northwest
Arizona. Pursuant to a twenty-year purchase power agreement, the Company will
recover the cost of the turbine and CUC will pay for the output requested by
CUC. The Company has the right to secondary use of the output for cost of fuel
and variable operations and maintenance. The Company expects that the combustion
turbine will be in service during the first quarter of 1999.
Construction Program
During the years 1994 through 1996, the Company incurred approximately $824
million in capitalized expenditures. Utility capitalized expenditures for the
years 1997 through 1999 are expected to be primarily for expanding transmission
and distribution capabilities to meet customer growth, upgrading existing
facilities, and for environmental purposes. Capitalized expenditures, including
expenditures for environmental control facilities, for the years 1997 through
1999 have been estimated as follows:
(Millions of Dollars)
By Year By Major Facilities
- -------------------------------- -------------------------------
1997 $296 Electric generation $267
1998 283 Electric transmission 64
1999 262 Electric distribution 412
---- General facilities 98
$841 ----
==== $841
====
The amounts for 1997 through 1999 exclude capitalized interest costs and
include capitalized property taxes and about $30 million each year for nuclear
fuel. The Company conducts a continuing review of its construction program.
Mortgage Replacement Fund Requirements
So long as any of the Company's first mortgage bonds are outstanding, the
Company is required for each calendar year to deposit with the trustee under its
Mortgage, cash in a formularized amount related to net additions to the
Company's mortgaged utility plant; however, the Company may satisfy all or any
part of this "replacement fund" requirement by utilizing redeemed or retired
bonds, net property additions, or property retirements. For 1996, the
replacement fund requirement amounted to approximately $129 million. All of the
bonds issued by the Company under the Mortgage which are callable prior to
maturity are redeemable at their par value plus accrued interest with cash
deposited by the Company in the replacement fund, subject in many cases to a
period of time after the original issuance of the bonds during which they may
not be so redeemed and/or to other restrictions on any such redemption.
Environmental Matters
EPA Environmental Regulation
Clean Air Act. Pursuant to the Clean Air Act, the EPA has adopted
regulations that address visibility impairment in certain federally-protected
areas which can be reasonably attributed to specific sources. In September 1991,
the EPA issued a final rule that would limit sulfur dioxide emissions at NGS.
Compliance with the emission limitation becomes applicable to NGS Units 3, 2,
and 1 in 1997, 1998 and 1999, respectively. SRP, the NGS operating agent, has
estimated a capital cost of $470 million, most of which will be incurred through
1998, and annual operations and maintenance costs of approximately $14 million
for all three units, for NGS to meet these requirements. The Company is required
to fund 14% of these expenditures.
7
The Clean Air Act Amendments of 1990 (the "Amendments") address, among
other things, "acid rain," visibility in certain specified areas, toxic air
pollutants and the nonattainment of national ambient air quality standards. With
respect to "acid rain," the Amendments establish a system of sulfur dioxide
emissions "allowances." Each existing utility unit is granted a certain number
of "allowances." On March 5, 1993, the EPA promulgated rules listing allowance
allocations applicable to Company-owned plants, which allocations will begin in
the year 2000. Based on those allocations, the Company will have sufficient
allowances to permit continued operation of its plants at current levels without
installing additional equipment. In addition, the Amendments require the EPA to
set nitrogen oxides emissions limitations which would require certain plants to
install additional pollution control equipment. In December 1996, the EPA issued
rules for nitrogen oxides emissions limitations, which may require the Company
to install additional pollution control equipment at Four Corners by January 1,
2000. Based on its initial evaluation, the Company currently estimates its
capital cost of complying with the rules may be approximately $4 million. On
February 14, 1997, the Company filed a Petition for Review in the United States
Court of Appeals for the District of Columbia challenging the classification of
Four Corners Unit 4 in these rules. Arizona Public Service Company v. United
States Environmental Protection Agency, No.
97-1091.
With respect to protection of visibility in certain specified areas, the
Amendments require the EPA to conduct a study concerning visibility impairment
in those areas and identification of sources contributing to such impairment.
Interim findings of this study have indicated that any beneficial effect on
visibility as a result of the Amendments would be offset by expected population
and industry growth. The EPA has established a "Grand Canyon Visibility
Transport Commission" to complete a study on visibility impairment in the
"Golden Circle of National Parks" in the Colorado Plateau. NGS, Cholla and Four
Corners are located near the "Golden Circle of National Parks." The Commission
completed its study and on June 10, 1996 submitted its final recommendations to
the EPA. The Commission recommended that, beginning in 2000 and every 5 years
thereafter, if actual sulfur dioxide emissions from all stationary sources in an
eight-state region (including Arizona, New Mexico, Utah, Nevada and California)
exceed the projected emissions, which are projected to decline under the current
regulatory scheme, the projected total emissions will be changed to a "regional
emissions cap" and an emissions trading program would be implemented to limit
total sulfur dioxide emissions in the region. The EPA will consider these
recommendations before promulgating final requirements on a regional haze
regulatory program which is under EPA review (see "Air Quality Standards"
below), which is expected by December 1997. If such a program were implemented,
industry, including the Company's coal plants, could be subject to further
emissions limits. The Company cannot currently estimate the capital
expenditures, if any, which may be required as a result of the EPA studies and
the Commission's recommendations.
With respect to hazardous air pollutants emitted by electric utility steam
generating units, the Amendments require two studies. The results of the first
study indicated an impact from mercury emissions from such units in certain
unspecified areas; however, the EPA has not yet stated whether or not emissions
limitations will be imposed. Next, the EPA will complete a general study by 1999
concerning the necessity of regulating such units under the Amendments. Due to
the lack of historical data, and because the Company cannot speculate as to the
ultimate requirements by the EPA, the Company cannot currently estimate the
capital expenditures, if any, which may be required as a result of these
studies.
Certain aspects of the Amendments may require related expenditures by the
Company, such as permit fees, none of which the Company expects to have a
material impact on its financial position or results of operations.
Superfund. 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
8
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.
Air Quality Standards. In December 1996, the EPA proposed revised National
Ambient Air Quality Standards ("NAAQS") for ozone and particulate matter, and
related implementing regulations. The comment period for the proposed NAAQS
rules ended on March 12, 1997, and the final rules are expected by July 1997.
The EPA is also expected to propose rules to deal with regional haze by June
1997, and final rules are expected by December 1997. Due to these standards the
Company could be required to install additional pollution control equipment at
certain of its plants. The Company cannot currently estimate the capital
expenditures, if any, which may be required as a result of the final rules.
MGP Sites. The Company currently is investigating properties, either
presently or previously owned by the Company, which were at one time sites of,
or sites associated with, manufactured gas plants. The purpose of this
investigation is to determine if waste materials are present, if such materials
constitute an environmental or health risk, and if the Company has any
responsibility for remedial action. Where appropriate, the Company has begun
remediation of certain of these sites. The Company does not expect these matters
to have a material adverse effect on its financial position or results of
operations.
Purported Navajo Environmental Regulation
Four Corners and NGS are located on the Navajo Reservation and are held
under easements granted by the federal government as well as leases from the
Navajo Nation. The Company is the Four Corners operating agent and owns a 100%
interest in Four Corners Units 1, 2 and 3, and a 15% interest in Four Corners
Units 4 and 5. The Company owns a 14% interest in NGS Units 1, 2 and 3. In July
1995, the Navajo Nation enacted the Navajo Nation Air Pollution Prevention and
Control Act, the Navajo Nation Safe Drinking Water Act, and the Navajo Nation
Pesticide Act (collectively, the "Acts").
Pursuant to the Acts, the Navajo Nation Environmental Protection Agency is
authorized to promulgate regulations covering air quality, drinking water and
pesticide activities, including those that occur at Four Corners and NGS. By
separate letters dated October 12 and October 13, 1995, the Four Corners
participants and the NGS participants requested the United States Secretary of
the Interior to resolve their dispute with the Navajo Nation regarding whether
or not the Acts apply to operations of Four Corners and NGS. On October 17,
1995, the Four Corners participants and the NGS participants each filed a
lawsuit in the District Court of the Navajo Nation, Window Rock District,
seeking, among other things, a declaratory judgment that (i) their respective
leases and federal easements preclude the application of the Acts to the
operations of Four Corners and NGS, and (ii) the Navajo Nation and its agencies
and courts lack adjudicatory jurisdiction to determine the enforceability of the
Acts as applied to Four Corners and NGS. On October 18, 1995, the Navajo Nation
and the Four Corners and NGS participants agreed to indefinitely stay the
proceedings referenced in the preceding two sentences so that the parties may
attempt to resolve the dispute without litigation, and the Secretary and the
Court have stayed these proceedings pursuant to a request by the parties. The
Company cannot currently predict the outcome of this matter.
Water Supply
Assured supplies of water are important both to the Company (for its
generating plants) and to its customers and, at the present time, the Company
has adequate water to meet its needs. However, conflicting claims to limited
amounts of water in the southwestern United States have resulted in numerous
court actions in recent years.
Both groundwater and surface water in areas important to the Company's
operations have been the subject of inquiries, claims and legal proceedings
which will require a number of years to resolve. The Company is one of a number
of parties in a proceeding before a state court in New Mexico to adjudicate
rights to a stream system from
9
which water for Four Corners is derived. (State of New Mexico, in the relation
of S.E. Reynolds, State Engineer vs. United States of America, City of
Farmington, Utah International, Inc., et al., San Juan County, New Mexico,
District Court No. 75-184). An agreement reached with the Navajo Nation in 1985,
however, provides that if Four Corners loses a portion of its rights in the
adjudication, the Navajo Nation will provide, for a then-agreed upon cost,
sufficient water from its allocation to offset the loss.
A summons served on the Company in early 1986 required all water claimants
in the Lower Gila River Watershed in Arizona to assert any claims to water on or
before January 20, 1987, in an action pending in Maricopa County Superior Court.
(In re The General Adjudication of All Rights to Use Water in the Gila River
System and Source, Supreme Court Nos. WC-79-0001 through WC 79-0004
(Consolidated) [WC-1, WC-2, WC-3 and WC-4 (Consolidated)], Maricopa County Nos.
W-1, W-2, W-3 and W-4 (Consolidated)). Palo Verde is located within the
geographic area subject to the summons, and the rights of the Palo Verde
participants, including the Company, to the use of groundwater and effluent at
Palo Verde is potentially at issue in this action. The Company, as project
manager of Palo Verde, filed claims that dispute the court's jurisdiction over
the Palo Verde participants' groundwater rights and their contractual rights to
effluent relating to Palo Verde and, alternatively, seek confirmation of such
rights. Three of the Company's less-utilized power plants are also located
within the geographic area subject to the summons. The Company's claims dispute
the court's jurisdiction over the Company's groundwater rights with respect to
these plants and, alternatively, seek confirmation of such rights. On December
10, 1992, the Arizona Supreme Court heard oral argument on certain issues in
this matter which are pending on interlocutory appeal. Issues important to the
Company's claims were remanded to the trial court for further action and the
trial court certified its decision for interlocutory appeal to the Arizona
Supreme Court. On September 28, 1994, the Arizona Supreme Court granted review
of the trial court decision. No trial date concerning the water rights claims of
the Company has been set in this matter.
The Company has also filed claims to water in the Little Colorado River
Watershed in Arizona in an action pending in the Apache County Superior Court.
(In re The General Adjudication of All Rights to Use Water in the Little
Colorado River System and Source, Supreme Court No. WC-79-0006 WC-6, Apache
County No. 6417). The Company's groundwater resource utilized at Cholla is
within the geographic area subject to the adjudication and is therefore
potentially at issue in the case. The Company's claims dispute the court's
jurisdiction over the Company's groundwater rights and, alternatively, seek
confirmation of such rights. The parties are in the process of settlement
negotiations with respect to this matter. No trial date concerning the water
rights claims of the Company has been set in this matter.
Although the foregoing matters remain subject to further evaluation, the
Company expects that the described litigation will not have a material adverse
impact on its financial position or results of operations.
10
ITEM 2. PROPERTIES
Accredited Capacity
The Company's present generating facilities have an accredited capacity
aggregating 4,026,700 kW, comprised as follows:
Capacity(kW)
------------
Coal:
Units 1, 2 and 3 at Four Corners, aggregating............................................... 560,000
15% owned Units 4 and 5 at Four Corners, representing....................................... 222,000
Units 1, 2 and 3 at Cholla Plant, aggregating............................................... 615,000
14% owned Units 1, 2 and 3 at the Navajo Plant, representing................................ 315,000
---------
1,712,000
=========
Gas or Oil:
Two steam units at Ocotillo, two steam units at Saguaro, and one
steam unit at Yucca, aggregating.......................................................... 463,400(1)
Eleven combustion turbine units, aggregating................................................ 500,600
Three combined cycle units, aggregating..................................................... 253,500
---------
1,217,500
=========
Nuclear:
29.1% owned or leased Units 1, 2 and 3 at Palo Verde, representing.......................... 1,091,600
=========
Other............................................................................................ 5,600
=========
- ---------------
(1) West Phoenix steam units (108,300 kW) are currently mothballed.
-----------------------------------------------------
Reserve Margin
The Company's peak one-hour demand on its electric system was recorded on
July 31, 1996 at 4,574,700 kW, compared to the 1995 peak of 4,420,400 kW
recorded on July 28. Taking into account additional capacity then available to
it under purchase power contracts as well as its own generating capacity, the
Company's capability of meeting system demand on July 31, 1996, computed in
accordance with accepted industry practices, amounted to 4,680,300 kW, for an
installed reserve margin of 2.7%. The power actually available to the Company
from its resources fluctuates from time to time due in part to planned outages,
technical problems and short-term purchases. The available capacity from sources
actually operable at the time of the 1996 peak amounted to 4,909,300 kW, for a
margin of 8.5%. Firm purchases from neighboring utilities totaling 650,000 kW
were in place at the time of the peak ensuring the ability to meet the load
requirement.
Plant Sites Leased from Navajo Nation
NGS and Four Corners are located on land held under easements from the
federal government and also under leases from the Navajo Nation. The risk with
respect to enforcement of these easements and leases is not deemed by the
Company to be material. The lease for Four Corners contains a waiver until 2001
of the requirement that the Company pay certain taxes to the Navajo Nation. The
Company and the Navajo Nation are currently negotiating an agreement that would
settle certain issues regarding this waiver and other matters, including the
computation of royalties due on the sales of coal and possessory interest taxes
paid by the fuel supplier to Four Corners. If this settlement is consummated,
the fuel supplier, the Navajo Nation and the Four Corners participants
11
would agree as a part of their settlement to restructure their relationships in
an effort to permit the power and energy generated at Four Corners to be priced
competitively. The Company cannot currently predict the outcome of these
settlement negotiations. Certain of the Company's transmission lines and almost
all of its contracted coal sources are also located on Indian reservations. See
"Generating Fuel and Purchased Power --- Coal Supply" in Item 1.
Palo Verde Nuclear Generating Station
Palo Verde Leases
On August 18, 1986 and December 19, 1986, the Company entered into a total
of three sale and leaseback transactions under which it sold and leased back
approximately 42% of its 29.1% ownership interest in Palo Verde Unit 2. The
leases under each of the sale and leaseback transactions have initial lease
terms expiring on December 31, 2015. Each of the leases also allows the Company
to extend the term of the lease and/or to repurchase the leased Unit 2 interest
under certain circumstances at fair market value. The leases in the aggregate
require annual payments of approximately $40 million through 1999, approximately
$46 million in 2000 and approximately $49 million through 2015 (see Note 8 of
Notes to Financial Statements in Item 8).
Regulatory
Operation of each of the three Palo Verde units requires an operating
license from the NRC. Full power operating licenses for Units 1, 2 and 3 were
issued by the NRC in June 1985, April 1986 and November 1987, respectively. The
full power operating licenses, each valid for a period of approximately 40
years, authorize the Company, as operating agent for Palo Verde, to operate the
three Palo Verde units at full power.
Nuclear Decommissioning Costs
See Note 12 of Notes to Financial Statements in Item 8 for a discussion of
the Company's nuclear decommissioning costs.
Steam Generators
See "Palo Verde Nuclear Generating Station" in Note 11 of Notes to
Financial Statements in Item 8 for a discussion of issues relating to the Palo
Verde steam generators.
Palo Verde Liability and Insurance Matters
See "Palo Verde Nuclear Generating Station" in Note 11 of Notes to
Financial Statements in Item 8 for a discussion of the insurance maintained by
the Palo Verde participants, including the Company, for Palo Verde.
Other Information Regarding the Company's Properties
See "Environmental Matters" and "Water Supply" in Item 1 with respect to
matters having possible impact on the operation of certain of the Company's
power plants.
See "Construction Program" in Item 1 and "Management's Discussion and
Analysis of Financial Condition and Results of Operations ___ Capital Needs and
Resources" in Item 7 for a discussion of the Company's construction plans.
See Notes 4, 7 and 8 of Notes to Financial Statements in Item 8 with
respect to property of the Company not held in fee or held subject to any major
encumbrance.
12
[MAP PAGE]
In accordance with Item 304 of Regulation S-T of the Securities Exchange
Act of 1934, the Company's Service Territory map contained in this Form 10-K is
a map of the State of Arizona showing the Company's service area, the location
of its major power plants and principal transmission lines, and the location of
transmission lines operated by the Company for others. The major power plants
shown on such map are the Navajo Generating Station located in Coconino County,
Arizona; the Four Corners Power Plant located near Farmington, New Mexico; the
Cholla Power Plant, located in Navajo County, Arizona; the Yucca Power Plant,
located near Yuma, Arizona; and the Palo Verde Nuclear Generating Station,
located about 55 miles west of Phoenix, Arizona (each of which plants is
reflected on such map as being jointly owned with other utilities), as well as
the Ocotillo Power Plant and West Phoenix Power Plant, each located near
Phoenix, Arizona, and the Saguaro Power Plant, located near Tucson, Arizona. The
Company's major transmission lines shown on such map are reflected as running
between the power plants named above and certain major cities in the State of
Arizona. The transmission lines operated for others shown on such map are
reflected as running from the Four Corners Plant through a portion of northern
Arizona to the California border.
13
ITEM 3. LEGAL PROCEEDINGS
Property Taxes
On June 29, 1990, a new Arizona state property tax law was enacted,
effective as of December 31, 1989, which adversely impacted the Company's
earnings before income taxes in tax years 1990 through 1995 by an aggregate
amount of approximately $21 million per year. On December 20, 1990, the Palo
Verde participants, including the Company, filed a lawsuit in the Arizona Tax
Court, a division of the Maricopa County Superior Court, against the Arizona
Department of Revenue, the Treasurer of the State of Arizona, and various
Arizona counties, claiming, among other things, that portions of the new tax law
are unconstitutional. (Arizona Public Service Company, et al. v. Apache County,
et al., No. TX 90-01686 (Consol.), Maricopa County Superior Court). On April 23,
1996, the parties reached an agreement to settle the litigation and on July 18,
1996, the Governor signed a new Arizona property tax law that reduced the
aggregate property tax of the Company by approximately $18 million (before
income taxes) in 1996, with slightly lower amounts expected in future years.
Under the formula for potential future rate reduction pursuant to the 1996
regulatory agreement (see "1996 Regulatory Agreement" in Note 2 of Notes to
Financial Statements in Item 8 of this report), the property tax reduction is
expected to reduce future retail rates. The parties to the litigation have
reached a settlement pursuant to which the Company will relinquish its claims
for retrospective relief provided that the prospective relief provided by the
new law is not changed (other than by changes in law affecting taxpayers
generally) for a period of three years.
See "Environmental Matters" and "Water Supply" in Item 1 in regard to
pending or threatened litigation and other disputes. See "Regulatory Matters" in
Note 2 of Notes to Financial Statements in Item 8 for information regarding
lawsuits filed by the Company challenging certain provisions of rules adopted by
the ACC for the phased-in introduction of retail electric competition in Arizona
(Arizona Public Service Company v. The Arizona Corporation Commission, in the
Superior Court of the State of Arizona in and for the County of Maricopa, No.
CV97-03753, and Arizona Public Service Company v. The Arizona Corporation
Commission, in the Court of Appeals, State of Arizona, Division One, No. 1
CA-CC-97-0002, ACC Docket No. R-0000-94-165).
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report, through the solicitation of
proxies or otherwise.
14
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS
OF THE REGISTRANT
The Company's executive officers are as follows:
Age At
Name March 1, 1997 Position(s) At March 1, 1997
- ---- ------------- ----------------------------
Richard Snell 66 Chairman of the Board of Directors(1)
William J. Post 46 President and Chief Executive Officer(1)
Jack E. Davis 50 Executive Vice President, Commercial Operations
George A. Schreiber, Jr. 48 Executive Vice President and Chief Financial Officer(1)
William L. Stewart 53 Executive Vice President, Generation
Armando B. Flores 53 Senior Vice President, Human Resources and Corporate Services
James M. Levine 47 Senior Vice President, Nuclear
Jan H. Bennett 49 Vice President, Customer Service
Edward Z. Fox 43 Vice President, Environmental, Health and Safety
William E. Ide 50 Vice President, Nuclear Engineering
Nancy C. Loftin 43 Vice President, Chief Legal Counsel and Secretary
Leslie M. Mesh 50 Vice President, Marketing and Economic Development
Gregg R. Overbeck 50 Vice President, Nuclear Production
Nancy E. Felker 45 Treasurer
William J. Hemelt 43 Controller
- ---------------
(1) Member of the Board of Directors.
The executive officers of the Company are elected no less often than
annually and may be removed by the Board of Directors at any time. The terms
served by the named officers in their current positions and the principal
occupations (in addition to those stated in the table and exclusive of
directorships) of such officers for the past five years have been as follows:
Mr. Snell was elected to his present position as of February 1990. He was
also elected Chairman of the Board, President and Chief Executive Officer of
Pinnacle West at that time, and he retired as President in February 1997.
Previously, he was Chairman of the Board (1989-1992) and Chief Executive Officer
(1989-1990) of Aztar Corporation.
Mr. Post assumed his present position in February 1997. Prior to that time
he was Senior Vice President and Chief Operating Officer (since September 1994),
Senior Vice President, Planning, Information and Financial Services (since June
1993), and Vice President, Finance & Rates (since April 1987). In February 1997,
Mr. Post became President of Pinnacle West.
Mr. Davis was elected to his present position in September 1996. Prior to
that time he was Vice President, Generation and Transmission (June
1993-September 1996); Director, Transmission Systems (January 1993-June 1993);
Director, Fossil Generation (June 1992-December 1992); and Director, System
Development and Power Operations (May 1990-May 1992).
Mr. Schreiber was elected to his present position in February 1997. Prior
to that time he was Managing Director at PaineWebber, Inc. (since February
1990).
Mr. Stewart was elected to his present position in September 1996. Prior to
that time he was Executive Vice President, Nuclear (since May 1994) and Senior
Vice President --- Nuclear for Virginia Power (since 1989).
15
Mr. Flores was elected to his present position in September 1996. Prior to
that time, he was Vice President, Human Resources (1991-1996) of the Company.
Mr. Levine was elected to his present position in September 1996. Prior to
that time he was Vice President, Nuclear Production (since September 1989).
Mr. Bennett was elected to his present position in May 1991.
Mr. Fox was elected to his present position in October 1995. Prior to that
time he was Director, Arizona Department of Environmental Quality and Chairman,
Wastewater Management Authority of Arizona (July 1991-September 1995).
Mr. Ide was elected to his present position in September 1996. Prior to
that time he was Director, Palo Verde Operations (1994-1996) and Palo Verde Unit
1 Plant Manager (1988-1994).
Ms. Loftin was elected to the positions of Vice President and Chief Legal
Counsel in September 1996 and has been Secretary since April 1987. Prior to that
time, in addition to Secretary, she was Corporate Counsel (since February 1989).
Mr. Mesh was elected to his current position in October 1995. Prior to that
time he was Vice President, Marketing and Business Development, Electronic Data
Systems (November 1993-October 1995) and Vice President, Northern Telecom, Inc.
(April 1984-October 1993).
Mr. Overbeck was elected to his current position in July 1995. Prior to
that time he was Assistant to Vice President of the Company (January 1994-July
1995) and Director, Nuclear Production Site Technical Support of the Company
(January 1991-January 1994).
Ms. Felker was elected to her present position in June 1993. Prior to that
time she was Assistant Treasurer (since October 1992). She is also Treasurer
(since June 1990) and Vice President (since February 1994) of Pinnacle West.
Mr. Hemelt was elected to his present position in June 1993. Prior to that
time he was Treasurer and Assistant Secretary (since April 1987).
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is wholly-owned by Pinnacle West and is not
listed for trading on any stock exchange. As a result, there is no established
public trading market for the Company's common stock.
16
The chart below sets forth the dividends declared on the Company's common
stock for each of the four quarters for 1996 and 1995.
Common Stock Dividends
(Thousands of Dollars)
- --------------------------------------- -------------------------------------- --------------------------------------
Quarter 1996 1995
- --------------------------------------- -------------------------------------- --------------------------------------
1st Quarter $42,500 $42,500
2nd Quarter 42,500 42,500
3rd Quarter 42,500 42,500
4th Quarter 42,500 42,500
- --------------------------------------- -------------------------------------- --------------------------------------
After payment or setting aside for payment of cumulative dividends and
mandatory sinking fund requirements, where applicable, on all outstanding issues
of preferred stock, the holders of common stock are entitled to dividends when
and as declared out of funds legally available therefor. See Notes 3 and 4 of
Notes to Financial Statements in Item 8 for restrictions on retained earnings
available for the payment of common stock dividends.
ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
Electric Operating Revenues.................. $1,718,272 $1,614,952 $1,626,168 $1,602,413 $1,587,582
Fuel and Purchased Power..................... 325,523 269,798 300,689 300,546 287,201
Operating Expenses........................... 1,027,541 963,400 957,046 929,379 908,123
---------- ---------- ---------- ---------- ----------
Operating Income.......................... 365,208 381,754 368,433 372,488 392,258
Other Income................................. 35,217 25,548 44,510 54,220 48,801
Interest Deductions --- Net.................. 156,954 167,732 169,457 176,322 194,254
---------- ---------- ---------- ---------- ----------
Net Income................................ 243,471 239,570 243,486 250,386 246,805
Preferred Dividends....................... 17,092 19,134 25,274 30,840 32,452
---------- ---------- ---------- ---------- ----------
Earnings for Common Stock................. $ 226,379 $ 220,436 $ 218,212 $ 219,546 $ 214,353
========== ========== ========== ========== ==========
Total Assets................................. $6,423,222 $6,418,262 $6,348,261 $6,357,262 $5,629,432
========== ========== ========== ========== ==========
Capital Structure:
Common Stock Equity....................... $1,729,390 $1,621,555 $1,571,120 $1,522,941 $1,476,390
Non-Redeemable Preferred Stock............ 165,673 193,561 193,561 193,561 168,561
Redeemable Preferred Stock................ 53,000 75,000 75,000 197,610 225,635
Long-Term Debt Less Current Maturities.... 2,029,482 2,132,021 2,181,832 2,124,654 2,052,763
---------- ---------- ---------- ---------- ----------
Total Capitalization.................... 3,977,545 4,022,137 4,021,513 4,038,766 3,923,349
Current Maturities of Long-Term Debt...... 153,780 3,512 3,428 3,179 94,217
Short-Term Debt........................... 16,900 177,800 131,500 148,000 195,000
---------- ---------- ---------- ---------- ----------
Total................................... $4,148,225 $4,203,449 $4,156,441 $4,189,945 $4,212,566
========== ========== ========== ========== ==========
- ---------------
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 for a discussion of certain information in
the foregoing table.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1996 Compared with 1995 Earnings in 1996 were $226.4 million compared with
$220.4 million in 1995. Earnings increased primarily due to increased operating
revenues, lower property taxes, the recognition of $12 million of income tax
benefits associated with capital loss carryforwards and lower interest expense.
The comparison of 1996 to 1995 was also positively impacted by asset write-downs
of $21 million before income taxes in 1995. Operating revenues were higher due
to increased sales resulting from customer growth, warmer weather in 1996 and
higher usage, particularly by residential customers. Property taxes decreased
primarily due to a change in tax law. Interest expense was lower due to lower
average interest rates and lower amounts of debt outstanding.
Partially offsetting these positive factors were $60 million of accelerated
regulatory asset amortization, higher fuel expenses, a pretax charge of $31.7
million for a voluntary severance program and a retail rate reduction. Also
negatively affecting the comparison of 1996 with 1995 was a gain on the sale of
a small subsidiary in 1995. The accelerated regulatory asset amortization and
the rate reduction were part of a regulatory agreement which became effective
July 1, 1996 (see Note 2 of Notes to Financial Statements). Fuel expenses were
up primarily due to higher natural gas costs, increased retail sales and higher
coal prices. The Company does not have a fuel adjustment clause as part of its
retail rate structure; therefore, changes in fuel and purchased power expenses
are reflected currently in earnings.
1995 Compared with 1994 Earnings in 1995 were $220.4 million compared with
$218.2 million in 1994. Earnings increased primarily due to customer growth,
lower fuel expenses, accelerated amortization of investment tax credits, lower
operations and maintenance expenses, lower preferred stock dividends and a gain
recognized on the sale of a small subsidiary. Fuel expenses decreased due to
lower fuel prices and a more favorable mix resulting from increased nuclear
generation. The accelerated amortization of investment tax credits was a result
of a 1994 rate settlement (see Note 2 of Notes to Financial Statements) and is
reflected as a $21 million decrease in income tax expense. Operations and
maintenance expense decreased as a result of lower fossil plant overhaul costs,
improved nuclear operations and severance costs incurred in 1994. Preferred
stock dividends decreased due to less preferred stock outstanding.
Substantially offsetting these positive factors were the absence of non-cash
income related to a 1991 rate settlement, milder weather, the reversal in 1994
of certain previously recorded depreciation, a retail rate reduction which
became effective June 1, 1994 and in 1995 a $13 million pretax write-down of an
office building and an $8 million pretax write-down of certain inventory.
Operating Revenues Operating revenues reflect changes in both the volume of
units sold and price per kilowatt-hour of electric sales. An analysis of the
increases (decreases) in 1996 and 1995 electric operating revenues compared with
the prior year follows (in millions of dollars):
1996 1995
---- ----
Volume variance:
Customer growth and usage $ 75.1 $ 57.9
Weather 40.1 (42.0)
Other --- (1.7)
Rate reductions (29.7) (11.4)
Interchange sales 8.5 (7.2)
Other 9.3 (6.8)
------ ------
Total change $103.3 $(11.2)
18
Other Income Net 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 (see Statements of
Cash Flows and Note 1 of Notes to Financial Statements). The after-tax accretion
income recorded in 1994 was $20.3 million. Also in 1994 was a one-time
depreciation reversal of $15 million, after income taxes, which was included in
"Other ___ net" in the Statements of Income (see Note 2 of Notes to Financial
Statements).
Capital Needs and Resources
During 1996, the Company redeemed approximately $223 million of long-term debt
and preferred stock. Required and optional redemptions of preferred stock and
repayments of long-term debt, including premiums thereon, and payments for a
capitalized lease obligation are expected to total approximately $222 million,
$114 million and $114 million for the years 1997, 1998 and 1999, respectively.
The Company's capital requirements consist primarily of capital expenditures and
optional and mandatory repayments of long-term debt and preferred stock. The
resources available to meet these requirements include funds provided by
operations, external financings and annual equity infusions from the parent
company of $50 million from 1997 through 1999 (see Note 2 of Notes to Financial
Statements).
Present construction plans through the year 2006 do not include any major
baseload generating plants. In general, most of the capital expenditures are for
expanding transmission and distribution capabilities to meet customer growth,
for upgrading existing facilities and for environmental purposes. Capital
expenditures are anticipated to be approximately $296 million, $283 million and
$262 million for 1997, 1998 and 1999, respectively. These amounts include about
$30 million each year for nuclear fuel.
During the period 1994 through 1996, the Company funded all capital expenditures
with funds from operations. The Company expects to have adequate resources to
meet its capital requirements for the period 1997 through 1999.
Although provisions in the Company's bond indenture, articles of incorporation,
and ACC financing orders establish maximum amounts of additional first mortgage
bonds and preferred stock that the Company may issue, management does not expect
any of these provisions to limit the Company's ability to meet its capital
requirements.
As of December 31, 1996, the Company had credit commitments from various banks
totaling approximately $400 million, which were available either to support the
issuance of commercial paper or to be used as bank borrowings. At the end of
1996, there were $16.9 million of commercial paper and $100 million of bank
borrowings outstanding.
Accounting Matters
See Note 12 of Notes to Financial Statements for a description of a proposed
standard on accounting for certain liabilities related to closure or removal of
long-lived assets.
Current Issues
The Company's ability to maintain and improve its current level of earnings will
depend on several factors. As the electric industry becomes more competitive,
the Company's ability to reduce costs and increase productivity and asset
utilization will be an important factor in maintaining a price structure that is
both attractive to customers and profitable to the Company. Other important
factors that could affect the Company's future earnings levels and any
forward-looking statements contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" include regulatory
developments; competitive developments; regional economic conditions;
19
the cost of debt and equity capital; regulatory, tax and environmental
legislation; weather variations affecting customer usage; and technological
developments in the electricity industry.
Competition Competition continues to evolve in the electric utility industry. In
December 1996, the ACC adopted rules for the introduction of retail electric
competition in Arizona in phases from 1999 through 2003. The Rules establish a
framework for introducing competition; however, with respect to certain matters,
they also contain requirements for further workshops and ACC consideration prior
to implementation. Recommendations to the ACC from the workshops are expected in
late 1997. The Rules indicate that the ACC will allow recovery of unmitigated
stranded costs, but do not set forth the mechanisms for determining or
recovering such costs. Separately, the Arizona legislature established a joint
legislative committee to study retail electric competition and to report to the
legislature by the end of 1997. The Company believes that state legislation will
ultimately be required before significant implementation of retail electric
competition can lawfully occur in Arizona. Additionally, legislation related to
electric competition has been proposed in the U.S. Congress. See Note 2 of Notes
to Financial Statements for further discussion of competitive developments.
Until it has been determined how competition will be implemented in Arizona, the
Company cannot accurately predict the impact of full retail electric competition
on its financial position or results of operations.
The Company prepares its financial statements in accordance with the provisions
of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." SFAS No. 71 requires a cost-based,
rate-regulated enterprise to reflect the impact of regulatory decisions in its
financial statements. The Company's existing regulatory orders and current
regulatory environment support its accounting practices related to regulatory
assets which amounted to approximately $1.1 billion at December 31, 1996. In
accordance with the 1996 regulatory agreement, the ACC accelerated the
amortization of substantially all of the Company's regulatory assets over an
eight-year period. If rate recovery of these assets is no longer probable,
whether due to competition or regulatory action, the Company would no longer be
able to apply the provisions of SFAS No. 71 to all or some part of its
operations which could have a material impact on the Company's financial
statements. See Note 1 of Notes to Financial Statements for additional
information on regulatory accounting.
Rate Matters Pursuant to the price reduction formula in the 1996 regulatory
agreement (see Note 2 of Notes to Financial Statements), in March 1997, the
Company filed with the ACC its calculation of an annual retail rate reduction of
approximately $18 million ($11 million after income taxes) or 1.2%,to become
effective July 1, 1997. The amount and timing of the rate decrease is subject to
ACC approval.
20
ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Management.......................................................................................... 22
Independent Auditors' Report.................................................................................. 23
Statements of Income for each of the three years in the period ended December 31, 1996........................ 25
Balance Sheets --- December 31, 1996 and 1995................................................................. 26
Statements of Cash Flows for each of the three years in the period ended December 31, 1996.................... 28
Statements of Retained Earnings for each of the three years in the period ended December 31, 1996............. 29
Notes to Financial Statements................................................................................. 29
See Note 13 of Notes to Financial Statements for the selected quarterly
financial data required to be presented in this Item.
21
REPORT OF MANAGEMENT
The primary responsibility for the integrity of the Company's financial
information rests with management, which has prepared the accompanying financial
statements and related information. Such information was prepared in accordance
with generally accepted accounting principles appropriate in the circumstances,
based on management's best estimates and judgments and giving due consideration
to materiality. These financial statements have been audited by independent
auditors and their report is included.
Management maintains and relies upon systems of internal accounting controls. A
limiting factor in all systems of internal accounting control is that the cost
of the system should not exceed the benefits to be derived. Management believes
that the Company's system provides the appropriate balance between such costs
and benefits.
Periodically the internal accounting control system is reviewed by both the
Company's internal auditors and its independent auditors to test for compliance.
Reports issued by the internal auditors are released to management, and such
reports or summaries thereof are transmitted to the Audit Review Committee of
the Board of Directors and the independent auditors on a timely basis.
The Audit Review Committee, composed solely of outside directors, meets
periodically with the internal auditors and independent auditors (as well as
management) to review the work of each. The internal auditors and independent
auditors have free access to the Audit Review Committee, without management
present, to discuss the results of their audit work.
Management believes that the Company's systems, policies and procedures provide
reasonable assurance that operations are conducted in conformity with the law
and with management's commitment to a high standard of business conduct.
William J. Post George A. Schreiber, Jr.
William J. Post George A. Schreiber, Jr.
President and Executive Vice President
Chief Executive Officer and Chief Financial Officer
22
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of Arizona Public Service
Company as of December 31, 1996 and 1995 and the related statements of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and 1995
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Deloitte & Touche LLP
Phoenix, Arizona
February 28, 1997
23
[THIS PAGE INTENTIONALLY LEFT BLANK]
24
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
(Thousands of Dollars)
Electric Operating Revenues......................... $ 1,718,272 $ 1,614,952 $ 1,626,168
----------- ----------- -----------
Fuel Expenses:
Fuel for electric generation..................... 230,393 208,928 237,103
Purchased power.................................. 95,130 60,870 63,586
----------- ----------- -----------
Total.......................................... 325,523 269,798 300,689
----------- ----------- -----------
Operating Revenues Less Fuel Expenses............... 1,392,749 1,345,154 1,325,479
----------- ----------- -----------
Other Operating Expenses:
Operations excluding fuel expenses............... 321,959 284,842 292,292
Maintenance...................................... 108,755 115,972 119,629
Depreciation and amortization (Note 1)........... 297,210 242,098 236,108
Income taxes (Note 9)............................ 178,513 178,865 168,202
Other taxes...................................... 121,104 141,623 140,815
----------- ----------- -----------
Total.......................................... 1,027,541 963,400 957,046
----------- ----------- -----------
Operating Income.................................... 365,208 381,754 368,433
----------- ----------- -----------
Other Income (Deductions):
Allowance for equity funds used during
construction................................... 5,209 4,982 3,941
Income taxes (Note 9)............................ 45,552 37,598 (9,042)
Palo Verde accretion income (Note 1)............. --- --- 33,596
Other --- net.................................... (15,544) (17,032) 16,015
----------- ----------- -----------
Total.......................................... 35,217 25,548 44,510
----------- ----------- -----------
Income Before Interest Deductions................... 400,425 407,302 412,943
----------- ----------- -----------
Interest Deductions:
Interest on long-term debt....................... 147,666 160,032 159,840
Interest on short-term borrowings................ 10,621 8,143 6,205
Debt discount, premium and expense............... 8,176 8,622 8,854
Allowance for borrowed funds used during
construction................................... (9,509) (9,065) (5,442)
----------- ----------- -----------
Total.......................................... 156,954 167,732 169,457
----------- ----------- -----------
Net Income.......................................... 243,471 239,570 243,486
Preferred Stock Dividend Requirements............... 17,092 19,134 25,274
----------- ----------- -----------
Earnings for Common Stock........................... $ 226,379 $ 220,436 $ 218,212
============ ============ ============
See Notes to Financial Statements.
25
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
ASSETS
December 31,
------------------------------------
1996 1995
----------- -----------
(Thousands of Dollars)
Utility Plant (Notes 4, 7 and 8):
Electric plant in service and held for future use........................ $ 6,803,211 $ 6,544,860
Less accumulated depreciation and amortization........................... 2,426,143 2,231,614
----------- -----------
Total.................................................................. 4,377,068 4,313,246
Construction work in progress............................................ 226,935 281,757
Nuclear fuel, net of amortization of $63,892
and $68,275............................................................ 51,137 52,084
----------- -----------
Utility Plant --- net.................................................. 4,655,140 4,647,087
----------- -----------
Investments and Other Assets (Note 12)...................................... 113,666 97,742
----------- -----------
Current Assets:
Cash and cash equivalents................................................ 12,521 18,389
Accounts receivable:
Service customers...................................................... 111,715 100,433
Other.................................................................. 49,898 28,107
Allowance for doubtful accounts........................................ (1,685) (1,656)
Accrued utility revenues (Note 1)........................................... 55,470 53,519
Materials and supplies (at average cost).................................... 74,120 78,271
Fossil fuel (at average cost)............................................... 13,928 21,722
Deferred income taxes (Note 9).............................................. 8,424 5,653
Other....................................................................... 22,767 17,839
----------- -----------
Total Current Assets..................................................... 347,158 322,277
----------- -----------
Deferred Debits:
Regulatory asset for income taxes (Note 9)............................... 516,722 548,464
Rate synchronization cost deferral (Note 1).............................. 414,082 449,299
Unamortized costs of reacquired debt..................................... 69,554 63,518
Unamortized debt issue costs............................................. 16,692 17,772
Other.................................................................... 290,208 272,103
----------- -----------
Total Deferred Debits.................................................. 1,307,258 1,351,156
----------- -----------
Total.................................................................. $ 6,423,222 $ 6,418,262
=========== ===========
See Notes to Financial Statements.
26
ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
LIABILITIES
December 31,
------------------------------------
1996 1995
----------- -----------
(Thousands of Dollars)
Capitalization (Notes 3 and 4):
Common stock............................................................. $ 178,162 $ 178,162
Premiums and expenses --- net............................................ 1,091,122 1,039,550
Retained earnings........................................................ 460,106 403,843
------------ ------------
Common stock equity.................................................... 1,729,390 1,621,555
Non-redeemable preferred stock........................................... 165,673 193,561
Redeemable preferred stock............................................... 53,000 75,000
Long-term debt less current maturities................................... 2,029,482 2,132,021
------------ ------------
Total Capitalization................................................... 3,977,545 4,022,137
------------ ------------
Current Liabilities:
Commercial paper (Note 5)................................................ 16,900 177,800
Current maturities of long-term debt (Note 4)............................ 153,780 3,512
Accounts payable......................................................... 174,394 106,583
Accrued taxes............................................................ 86,327 82,827
Accrued interest......................................................... 39,115 41,549
Customer deposits........................................................ 32,137 32,746
Other.................................................................... 21,150 21,134
------------ ------------
Total Current Liabilities.............................................. 523,803 466,151
------------ ------------
Deferred Credits and Other:
Deferred income taxes (Note 9)........................................... 1,414,242 1,429,482
Deferred investment tax credit (Note 9).................................. 87,723 115,353
Unamortized gain ___ sale of utility plant (Note 8)...................... 86,939 91,514
Customer advances for construction....................................... 24,044 19,846
Other.................................................................... 308,926 273,779
------------ ------------
Total Deferred Credits and Other....................................... 1,921,874 1,929,974
------------ ------------
Commitments and Contingencies (Note 11)
Total.................................................................... $ 6,423,222 $ 6,418,262
=========== ===========
27
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------
1996 1995 1994
--------- ---------- ---------
(Thousands of Dollars)
Cash Flows from Operations:
Net income...................................................... $ 243,471 $ 239,570 $ 243,486
Items not requiring cash:
Depreciation and amortization................................. 297,210 242,098 236,108
Nuclear fuel amortization..................................... 33,566 31,587 32,564
Allowance for equity funds used during construction........... (5,209) (4,982) (3,941)
Deferred income taxes --- net................................. (12,717) 15,344 83,249
Deferred investment tax credit --- net........................ (27,630) (27,641) (6,825)
Rate refund reversal.......................................... --- --- (9,308)
Palo Verde accretion income................................... --- --- (33,596)
Changes in certain current assets and liabilities:
Accounts receivable --- net................................... (33,044) 1,659 (7,276)
Accrued utility revenues...................................... (1,951) 1,913 4,924
Materials, supplies and fossil fuel........................... 11,945 25,606 4,795
Other current assets.......................................... (4,928) (3,677) (1,509)
Accounts payable.............................................. 68,788 6,333 21,666
Accrued taxes................................................. 3,500 (6,585) (22,881)
Accrued interest.............................................. (2,565) (3,621) (577)
Other current liabilities..................................... (522) 3,393 (9)
Other --- net................................................... 17,216 21,328 (418)
--------- --------- ---------
Net cash provided............................................. 587,130 542,325 540,452
--------- --------- ---------
Cash Flows from Investing:
Capital expenditures............................................ (258,598) (295,772) (245,925)
Allowance for borrowed funds used during construction........... (9,509) (9,065) (5,442)
Other........................................................... (9,702) (22,645) (7,251)
--------- --------- ---------
Net cash used................................................. (277,809) (327,482) (258,618)
--------- --------- ---------
Cash Flows from Financing:
Long-term debt.................................................. 205,830 87,130 516,612
Short-term borrowings --- net................................... (160,900) 46,300 (16,500)
Equity infusion................................................. 50,000 --- ---
Dividends paid on common stock.................................. (170,000) (170,000) (170,000)
Dividends paid on preferred stock............................... (17,416) (19,134) (26,232)
Repayment of preferred stock.................................... (50,360) --- (124,096)
Repayment and reacquisition of long-term debt................... (172,343) (147,282) (462,643)
--------- --------- ---------
Net cash used................................................. (315,189) (202,986) (282,859)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............... (5,868) 11,857 (1,025)
Cash and cash equivalents at beginning of year..................... 18,389 6,532 7,557
--------- --------- ---------
Cash and cash equivalents at end of year........................... $ 12,521 $ 18,389 $ 6,532
========== ========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest (excluding capitalized interest)..................... $ 150,603 $ 163,592 $ 161,294
Income taxes.................................................. $ 158,553 $ 164,261 $ 121,578
See Notes to Financial Statements.
28
ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF RETAINED EARNINGS
Year Ended December 31,
--------------------------------------------
1996 1995 1994
--------- ---------- ---------
(Thousands of Dollars)
Retained earnings at beginning of year............................. $ 403,843 $ 353,655 $ 307,098
Add: Net income................................................... 243,471 239,570 243,486
--------- --------- ---------
Total........................................................... 647,314 593,225 550,584
--------- --------- ---------
Deduct:
Dividends:
Common stock (Notes 3 and 4).................................. 170,000 170,000 170,000
Preferred stock (at required rates) (Note 3).................. 17,092 19,134 25,274
Other........................................................... 116 248 1,655
--------- --------- ---------
Total deductions.............................................. 187,208 189,382 196,929
--------- --------- ---------
Retained earnings at end of year................................... $ 460,106 $ 403,843 $ 353,655
========= ========= =========
See Notes to Financial Statements.
APS
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations The Company is Arizona's largest electric utility, with
738,000 customers, and provides wholesale or retail electric service to the
entire state of Arizona with the exception of Tucson and about one-half of the
Phoenix area.
Accounting Records The accounting records are maintained in accordance with
generally accepted accounting principles (GAAP). The preparation of financial
statements in accordance with GAAP requires the use of estimates by management.
Actual results could differ from those estimates.
Regulatory Accounting The Company is regulated by the ACC and the FERC and the
accompanying financial statements reflect the rate-making policies of these
commissions. The Company prepares its financial statements in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." SFAS No. 71
requires a cost-based, rate-regulated enterprise to reflect the impact of
regulatory decisions in its financial statements.
The Company's major regulatory assets are rate synchronization cost deferrals
(see "Rate Synchronization Cost Deferrals" in this note) and deferred taxes (see
Note 9). These items, combined with miscellaneous regulatory assets and
liabilities, amounted to approximately $1.1 billion and $1.2 billion at December
31, 1996 and 1995, respectively, most of which are included in "Deferred Debits"
on the Balance Sheets. In accordance with the 1996 regulatory agreement (see
Note 2), the ACC accelerated the amortization of substantially all of the
Company's regulatory assets to an eight-year period beginning July 1, 1996. The
accelerated portion of the regulatory asset amortization, approximately $60
million pretax in 1996, is included in depreciation and amortization expense on
the Statements of Income.
The Company's existing regulatory orders and current regulatory environment
support its accounting practices related to regulatory assets. If rate recovery
of these assets is no longer probable, whether due to competition or
29
APS
NOTES TO FINANCIAL STATEMENTS
regulatory action, the Company would no longer be able to apply the provisions
of SFAS No. 71 to all or some part of its operations which could have a material
impact on the Company's financial statements.
Common Stock All of the outstanding shares of common stock of the Company are
owned by Pinnacle West. See Note 3.
Utility Plant and Depreciation Utility plant represents the buildings, equipment
and other facilities used to provide electric service. The cost of utility plant
includes labor, materials, contract services, other related items and an
allowance for funds used during construction. The cost of retired depreciable
utility plant, plus removal costs less salvage realized, is charged to
accumulated depreciation. See Note 12 for information on a proposed accounting
standard which impacts accounting for removal costs.
Depreciation on utility property is recorded on a straight-line basis. The
applicable rates for 1994 through 1996 ranged from 1.51% to 20%, which resulted
in an annual composite rate of 3.32% for 1996.
Allowance for Funds Used During Construction AFUDC represents the cost of debt
and equity funds used to finance construction of utility plant. Plant
construction costs, including AFUDC, are recovered in authorized rates through
depreciation when completed projects are placed into commercial operation. AFUDC
does not represent current cash earnings.
AFUDC has been calculated using composite rates of 7.75% for 1996; 8.52% for
1995; and 7.70% for 1994. The Company compounds AFUDC semiannually and ceases to
accrue AFUDC when construction is completed and the property is placed in
service. Effective in 1997, the Company will no longer accrue AFUDC. In place of
AFUDC, the Company will capitalize interest in accordance with SFAS No. 34,
"Capitalization of Interest Cost."
Revenues Operating revenues are recognized on the accrual basis and include
estimated amounts for service rendered but unbilled at the end of each
accounting period.
Palo Verde Accretion Income In 1991, the carrying value of Palo Verde Unit 3 was
discounted to reflect the present value of lost cash flows resulting from a 1991
rate settlement agreement deeming a portion of the unit to temporarily be excess
capacity. In accordance with generally accepted accounting principles, accretion
income was recorded over a thirty-month period ended May 1994 in the aggregate
amount of the original discount. The after-tax accretion income recorded in 1994
was $20.3 million.
Rate Synchronization Cost Deferrals As authorized by the ACC, operating costs
(excluding fuel) and financing costs of Palo Verde Units 2 and 3 were deferred
from the commercial operation date (September 1986 and January 1988,
respectively) until the date the units were included in a rate order (April 1988
and December 1991, respectively). Beginning July 1, 1996, the deferrals are
being amortized over an eight-year period in accordance with the 1996 regulatory
agreement (see Note 2). Prior to July 1, the deferrals were amortized over
thirty-five year periods. Amortization of the deferrals is included in
depreciation and amortization expense on the Statements of Income.
Nuclear Fuel Nuclear fuel is charged to fuel expense using the
unit-of-production method under which the number of units of thermal energy
produced in the current period is related to the total thermal units expected to
be produced over the remaining life of the fuel.
30
APS
NOTES TO FINANCIAL STATEMENTS
Under federal law, the DOE is responsible for the permanent disposal of spent
nuclear fuel and assesses $0.001 per kWh of nuclear generation. This amount is
charged to nuclear fuel expense. See Note 11 for information on spent fuel
disposal and Note 12 for information on nuclear decommissioning costs.
Reacquired Debt Costs The Company amortizes gains and losses on reacquired debt
over the remaining life of the original debt, consistent with ratemaking. In
accordance with the 1996 regulatory agreement (see Note 2), the ACC accelerated
the Company's amortization of the regulatory asset for reacquired debt costs to
an eight-year period beginning July 1, 1996. The accelerated portion of the
regulatory asset amortization is included in depreciation and amortization
expense on the Statements of Income.
Stock-Based Compensation The FASB issued a new statement on "Accounting for
Stock-Based Compensation" which was effective for 1996. The statement encourages
but does not require companies to recognize compensation expense based on the
fair value method. The Company continues to recognize expense based on APB
Opinion No. 25. The effects on net income of applying the fair value method
would not be material.
Cash and Cash Equivalents For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an initial
maturity of three months or less to be cash equivalents.
Reclassifications Certain prior year balances have been restated to conform to
the 1996 presentation.
2. Regulatory Matters
Electric Industry Restructuring
State The ACC has been conducting an ongoing investigation into the
restructuring of the Arizona electric industry in an open competition docket
involving many parties. In December 1996, the ACC adopted rules that provide a
framework for the introduction of retail electric competition. The ACC has
ordered that 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. The rules
include the following major provisions:
o The Rules are intended to apply to virtually all of the Arizona electric
utilities regulated by the ACC, 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 include
electric generation but exclude electric transmission and distribution.
o On or before December 31, 1997, each affected utility is required to file
with the ACC proposed tariffs for bundled service and unbundled service.
Bundled service means electric service elements (i.e., generation,
transmission, distribution, and ancillary services) provided as a package
to consumers within an affected utility's current service area. Unbundled
service means electric service elements provided and priced
31
APS
NOTES TO FINANCIAL STATEMENTS
separately. Affected utilities would be required to provide bundled
service, as well as unbundled transmission, distribution and miscellaneous
other services, at regulated, cost-based rates.
o The Rules indicate that the ACC will allow recovery of unmitigated stranded
costs. Each affected utility would be required to file with the ACC
estimates of unmitigated stranded costs. 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.
The Company continues to focus on working with the ACC to bring competitive
benefits to Arizona but believes that certain provisions of the Rules are
deficient. In February 1997, the Company filed lawsuits to protect its legal
rights regarding the Rules.
A joint legislative committee has been appointed to study electric utility
industry restructuring issues and report back to the legislature by the end of
1997. The Company believes that legislation will ultimately be required before
significant implementation of the Rules can lawfully occur.
Until it has been further determined how competition will be implemented in
Arizona, the Company cannot accurately predict the impact of full retail
competition on its financial position or results of operations.
Federal The Energy Policy Act of 1992 and recent rulemakings by FERC have
promoted increased competition in the wholesale electric power markets. The
Company does not expect these rules to have a material impact on its financial
statements.
Several electric utility reform bills have been introduced during the current
legislative session, which as currently written, would allow consumers to choose
their electric supplier by 2000 or 2003. These bills, other bills that are
expected to be introduced, and ongoing discussions at the federal level suggest
a wide range of opinion that will need to be narrowed before any substantial
restructuring of the electric utility industry can occur.
1996 Regulatory Agreement
In April 1996, the ACC approved a regulatory agreement between the Company and
the ACC Staff. The major provisions of this agreement are:
o An annual rate reduction of approximately $48.5 million ($29 million after
income taxes), or 3.4% on average 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). See Note 1.
o A formula for sharing future cost savings between customers and
shareholders (price reduction formula) referencing a return on equity (as
defined) of 11.25%.
o A moratorium on filing for permanent rate changes prior to July 2, 1999,
except under the price reduction formula and under certain other limited
circumstances.
32
APS
NOTES TO FINANCIAL STATEMENTS
o Infusion of $200 million of common equity into the Company by Pinnacle
West, in annual payments of $50 million starting in 1996.
Pursuant to the price reduction formula, in March 1997 the Company filed with
the ACC its calculation of an annual retail rate reduction of approximately $18
million ($11 million after income taxes), or 1.2%, to become effective July 1,
1997. The amount and timing of the rate decrease is subject to ACC approval.
1994 Settlement Agreement
In May 1994, the ACC approved a retail rate settlement agreement which provided
for a net annual retail rate reduction of 2.2% on average, or approximately $32
million ($19 million after income taxes), 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. It also provided for the accelerated amortization of substantially
all deferred investment tax credits over a five-year period beginning in 1995.
33
APS
NOTES TO FINANCIAL STATEMENTS
3. Common and Preferred Stocks
Non-redeemable preferred stock is not redeemable except at the option of the
Company. Redeemable preferred stock is redeemable through sinking fund
obligations. In addition, Series V redeemable preferred stock is callable by the
Company. Common and preferred stock balances at December 31 are shown below:
Number
of Shares Par Par Value Call
Outstanding Value Outstanding Price
----------- Per ----------- Per
Authorized 1996 1995 Share 1996 1995 Share(a)
----------- ---------- ---------- -------- --------- --------- ---------
(Thousands of Dollars)
Common Stock................. 100,000,000 71,264,947 71,264,947 $ 2.50 $ 178,162 $ 178,162 ---
========== ========== ========= =========
Preferred Stock:
Non-Redeemable:
$1.10..................... 160,000 152,740 155,945 $ 25.00 $ 3,818 $ 3,898 $ 27.50
$2.50..................... 105,000 102,532 103,254 50.00 5,127 5,163 51.00
$2.36..................... 120,000 40,000 40,000 50.00 2,000 2,000 51.00
$4.35..................... 150,000 75,000 75,000 100.00 7,500 7,500 102.00
Serial preferred.......... 1,000,000
$2.40 Series A.......... 239,900 240,000 50.00 11,995 12,000 50.50
$2.625 Series C......... 240,000 240,000 50.00 12,000 12,000 51.00
$2.275 Series D......... 199,655 200,000 50.00 9,983 10,000 50.50
$3.25 Series E.......... 320,000 320,000 50.00 16,000 16,000 51.00
Serial preferred.......... 4,000,000(b)
Adjustable rate ---
Series Q.............. 372,851 500,000 100.00 37,285 50,000 (c)
Serial preferred.......... 10,000,000
$1.8125 Series W........ 2,398,615 3,000,000 25.00 59,965 75,000 (d)
---------- ---------- --------- --------
Total................. 4,141,293 4,874,199 $ 165,673 $ 193,561
========== ========== ========= =========
Redeemable:
Serial preferred:
$10.00 Series U......... 410,000 500,000 $100.00 $ 41,000 $ 50,000 ---
$7.875 Series V......... 120,000 250,000 100.00 12,000 25,000 (e)
---------- ---------- --------- --------
Total................. 530,000 750,000 $ 53,000 $ 75,000
========== ========== ========= =========
- ---------------
(a) In each case plus accrued dividends.
(b) This authorization also covers all outstanding redeemable preferred stock.
(c) Dividend rate adjusted quarterly to 2% below that of certain United States
Treasury securities, but in no event less than 6% or greater than 12% per
annum. Redeemable at par.
(d) Redeemable at par after December 1, 1998.
(e) Redeemable at $104.73 through May 31, 1997, and thereafter declining by a
predetermined amount each year to par after May 31, 2002.
34
APS
NOTES TO FINANCIAL STATEMENTS
If there were to be any arrearage in dividends on any of its preferred stock or
in the sinking fund requirements applicable to any of its redeemable preferred
stock, the Company could not pay dividends on its common stock or acquire any
shares thereof for consideration. The redemption requirements for the above
issues for the next five years are: $10.0 million in each of the years 1997
through 2000, and $1.0 million in 2001.
Redeemable preferred stock transactions during each of the three years in the
period ended December 31 are as follows:
Number of Shares Par Value
Outstanding Outstanding
----------------------------------- -----------------------------------
(Thousands of Dollars)
Description 1996 1995 1994 1996 1995 1994
- -------------------------------- -------- ------- --------- -------- ------- ---------
Balance, January 1.............. 750,000 750,000 1,976,100 $75,000 $75,000 $ 197,610
Retirements:
$8.80 Series K............. --- --- (142,100) --- --- (14,210)
$11.50 Series R............ --- --- (284,000) --- --- (28,400)
$8.48 Series S............. --- --- (300,000) --- --- (30,000)
$8.50 Series T............. --- --- (500,000) --- --- (50,000)
$10.00 Series U............ (90,000) --- --- (9,000) --- ---
$7.875 Series V............ (130,000) --- --- (13,000) --- ---
-------- ------- --------- -------- ------- ---------
Balance, December 31............ 530,000 750,000 750,000 $53,000 $75,000 $ 75,000
======= ======= ======= ======= ======= =========
4. Long-Term Debt
The following table presents long-term debt outstanding:
December 31,
------------------------
Maturity Dates Interest Rates 1996 1995
-------------- -------------- ---------- ----------
(Thousands of Dollars)
First mortgage bonds 1997-2028 5.5%-10.25% (a) $1,448,848 $1,604,317
Pollution control indebtedness 2024-2031 Adjustable (b) 439,990 433,280
Senior notes 2006 6.75% 100,000 ---
Debentures 2025 10% 75,000 75,000
Bank loans 2001 Adjustable (c) 100,000 ---
Capitalized lease obligation (d) 1996-2001 7.48% 19,424 22,936
---------- ----------
Total long-term debt 2,183,262 2,135,533
Less current maturities 153,780 3,512
---------- ----------
Total long-term debt less current maturities $2,029,482 $2,132,021
========== ==========
- ---------------
(a) The weighted-average rate at December 31, 1996 and 1995 was 7.66% and
7.79%, respectively. The weighted-average years to maturity at December 31,
1996 and 1995 was 18 years and 19 years, respectively.
(b) The weighted-average rates for the years ended December 31, 1996 and 1995
were 3.40% and 4.31%, respectively. Changes in short-term interest rates
would affect the costs associated with this debt.
(c) The weighted-average rate for the year ended December 31, 1996 was 5.76%.
Changes in short-term interest rates would affect the costs associated with
this debt.
(d) Represents the present value of future lease payments (discounted at an
interest rate of 7.48%) on a combined cycle plant sold and leased back from
the independent owner-trustee formed to own the facility (see Note 8).
35
APS
NOTES TO FINANCIAL STATEMENTS
Aggregate annual principal payments due on long-term debt and for sinking fund
requirements through 2001 are as follows: 1997, $153.8 million; 1998, $104.1
million; 1999, $104.4 million; 2000, $104.7 million; and 2001, $102.5 million.
See Note 3 for redemption and sinking fund requirements of redeemable preferred
stock of the Company.
Substantially all utility plant (other than nuclear fuel, transportation
equipment and the combined cycle plant) is subject to the lien of the mortgage
bond indenture. The mortgage bond indenture includes provisions which would
restrict the payment of common stock dividends under certain conditions which
did not exist at December 31, 1996.
5. Lines of Credit
The Company had committed lines of credit with various banks of $400 million at
December 31, 1996 and $300 million at December 31, 1995, which were available
either to support the issuance of commercial paper or to be used for bank
borrowings. The commitment fees at December 31, 1996 and 1995 for these lines of
credit ranged from .10% to .15% per annum. The Company had long-term bank
borrowings of $100 million outstanding at December 31, 1996 and commercial paper
borrowings outstanding of $16.9 million and $177.8 million at December 31, 1996
and 1995, respectively, under these lines of credit. The weighted average
interest rate on commercial paper borrowings was 6.40% and 6.06% on December 31,
1996 and 1995, respectively. By Arizona statute, the Company's short-term
borrowings cannot exceed 7% of its total capitalization without the consent of
the ACC.
6. Fair Value of Financial Instruments
The Company estimates that the carrying amounts of its cash equivalents and
commercial paper are reasonable estimates of their fair values at December 31,
1996 and 1995 due to their short maturities. Investments in debt and equity
securities are held for purposes other than trading. The December 31, 1996 and
1995 fair values of such investments, determined by using quoted market values
or by discounting cash flows at rates equal to the Company's cost of capital,
approximate their carrying amounts.
The carrying value of long-term debt (excluding a capitalized lease obligation)
on December 31, 1996 and 1995 was $2.16 billion and $2.11 billion, respectively,
and the estimated fair value was $2.13 billion and $2.14 billion, respectively.
The fair value estimates are based on quoted market prices of the same or
similar issues.
36
APS
NOTES TO FINANCIAL STATEMENTS
7. Jointly-Owned Facilities
At December 31, 1996, the Company owned interests in the following jointly-owned
electric generating and transmission facilities. The Company's share of related
operating and maintenance expenses is included in operating expenses.
Percent Construction
Owned by Plant in Accumulated Work in
Company Service Depreciation Progress
----------- ----------- ------------ ------------
(Thousands of Dollars)
Generating Facilities:
Palo Verde Nuclear Generating Station
Units 1 and 3 29.1% $1,825,459 $547,750 $15,130
Palo Verde Nuclear Generating Station
Unit 2 (see Note 8) 17.0% 568,647 175,926 7,109
Four Corners Steam Generating Station
Units 4 and 5 15.0% 144,080 58,447 674
Navajo Steam Generating Station
Units 1, 2 and 3 14.0% 141,178 82,430 61,289(a)
Cholla Steam Generating Station
Common Facilities (b) 62.8%(c) 71,154 37,962 549
Transmission Facilities:
ANPP 500KV System 35.8%(c) 62,593 17,848 1,469
Navajo Southern System 31.4%(c) 27,113 16,135 46
Palo Verde-Yuma 500KV System 23.9%(c) 11,376 3,727 ---
Four Corners Switchyards 27.5%(c) 3,068 1,634 3
Phoenix-Mead System 17.1%(c) 36,089 (876) 325
- ---------------
(a) The construction costs at Navajo are primarily related to the installation
of scrubbers required by recent environmental legislation.
(b) The Company is the operating agent for Cholla Unit 4, which is owned by
PacifiCorp. The common facilities at the Cholla Plant are jointly-owned.
(c) Weighted average of interests.
8. Leases
In 1986, the Company entered into sale and leaseback transactions under which it
sold approximately 42% of its share of Palo Verde Unit 2 and certain common
facilities. The gain of approximately $140.2 million has been deferred and is
being amortized to operations expense over the original lease term. The leases
are being accounted for as operating leases. The amounts to be paid each year
approximate $40.1 million through 1999, $46.3 million in 2000 and $49.0 million
through 2015. Options to renew for two additional years and to purchase the
property at fair market value at the end of the lease terms are also included.
Consistent with the ratemaking treatment, an amount equal to the annual lease
payments is included in rent expense. A regulatory asset is recognized for the
37
APS
NOTES TO FINANCIAL STATEMENTS
difference between lease payments and rent expense calculated on a straight-line
basis. In accordance with the 1996 regulatory agreement (see Note 2), the ACC
accelerated the Company's amortization of the regulatory asset for leases to an
eight-year period beginning July 1, 1996. The accelerated amortization is
included in depreciation and amortization expense on the Statements of Income.
The balance of this regulatory asset at December 31, 1996 was $57.3 million.
Lease expense for 1996, 1995 and 1994 was $41.8 million, $41.7 million and $42.2
million, respectively.
The Company has a capital lease on a combined cycle plant which it sold and
leased back. The lease requires semiannual payments of $2.6 million through June
2001, and includes renewal and purchase options based on fair market value. This
plant is included in plant in service at its original cost of $54.4 million;
accumulated amortization at December 31, 1996 was $44.6 million.
In addition, the Company leases certain land, buildings, equipment and
miscellaneous other items through operating rental agreements with varying
terms, provisions and expiration dates. Rent expense for 1996, 1995 and 1994 was
approximately $9.7 million, $9.9 million and $10.1 million, respectively. Annual
future minimum rental commitments, excluding the Palo Verde and combined cycle
leases, for the period 1997 through 2001 range between $12 million and $13
million. Total rental commitments after the year 2001 are estimated at $107
million.
9. Income Taxes
The Company is included in the consolidated income tax returns of Pinnacle West.
Income taxes are allocated to the Company based on its separate company taxable
income or loss. Beginning in 1995, substantially all ITCs are being amortized
over a five-year period in accordance with the 1994 rate settlement agreement
(see Note 2). Prior to 1995, ITCs were deferred and amortized to other income
over the estimated lives of the related assets as directed by the ACC.
The Company follows the liability method of accounting for income taxes which
requires that deferred income taxes be recorded for all temporary differences
between the tax bases of assets and liabilities and the amounts recognized for
financial reporting. Deferred taxes are recorded using currently enacted tax
rates. In accordance with SFAS No. 71, a regulatory asset has been established
for certain temporary differences, primarily AFUDC equity, to reflect the
ratemaking treatment. This regulatory asset is being amortized as the related
differences reverse. In accordance with the 1996 regulatory agreement (see Note
2), the ACC accelerated the Company's amortization of the regulatory asset for
income taxes to an eight-year period beginning July 1, 1996. The accelerated
portion of the regulatory asset amortization is included in depreciation and
amortization expense on the Statements of Income.
38
APS
NOTES TO FINANCIAL STATEMENTS
The components of income tax expense are as follows:
Year Ended December 31,
--------------------------------------------
1996 1995 1994
--------- ---------- ---------
(Thousands of Dollars)
Current:
Federal......................................................... $137,531 $120,196 $ 74,272
State........................................................... 35,777 33,368 26,447
-------- -------- ---------
Total current................................................. 173,308 153,564 100,719
Deferred........................................................... (869) 17,933 83,350
Change in valuation allowance...................................... (11,848) (2,589) ---
Investment tax credit amortization................................. (27,630) (27,641) (6,825)
-------- -------- ---------
Total expense................................................. $132,961 $141,267 $177,244
======== ======== ========
Income tax expense differed from the amount computed by multiplying income
before income taxes by the statutory federal income tax rate due to the
following:
Year Ended December 31,
--------------------------------------------
1996 1995 1994
--------- ---------- ---------
(Thousands of Dollars)
Federal income tax expense at statutory rate, 35%.................. $131,751 $133,293 $147,256
Increases (reductions) in tax expense resulting from:
Tax under book depreciation..................................... 19,229 18,186 17,236
ITC amortization................................................ (27,630) (27,641) (6,825)
State income tax ___ net of federal income tax benefit.......... 20,790 21,770 24,947
Change in valuation allowance................................... (10,269) (2,245) ---
Other........................................................... (910) (2,096) (5,370)
-------- -------- ---------
Income tax expense............................................ $132,961 $141,267 $177,244
======== ======== ========
39
APS
NOTES TO FINANCIAL STATEMENTS
The components of the net deferred income tax liability were as follows:
December 31,
-----------------------------
1996 1995
----------- -----------
(Thousands of Dollars)
Deferred tax assets:
Deferred gain on Palo Verde Unit 2 sale/leaseback................................ $ 35,105 $ 36,945
Other............................................................................ 71,725 77,539
Valuation allowance.............................................................. --- (12,483)
----------- -----------
Total deferred tax assets...................................................... 106,830 102,001
----------- -----------
Deferred tax liabilities:
Plant related.................................................................... 1,104,902 1,081,290
Income taxes recoverable through future rates --- net............................ 208,647 221,418
Rate synchronization deferrals................................................... 167,202 181,384
Other............................................................................ 31,897 41,738
----------- -----------
Total deferred tax liabilities................................................. 1,512,648 1,525,830
----------- -----------
Accumulated deferred income taxes --- net........................................... $1,405,818 $1,423,829
========== ==========
10. Retirement Plans and Other Benefits
Voluntary Severance Plan The Company sponsored a voluntary severance plan in
1996 which resulted in a before income tax charge of $31.7 million (including
pension and postretirement benefit expense) recorded primarily as operations and
maintenance expense. Employees participating in the plan were credited with an
additional year of age and service for purposes of calculating pension and
postretirement benefits. The total additional pension and postretirement benefit
expense recorded for this program was $2.3 million and $5.4 million,
respectively.
Pension Plan The Company sponsors a defined benefit pension plan covering
substantially all employees. Benefits are based on years of service and
compensation utilizing a final average pay benefit formula. Company policy is to
fund not less than the minimum required contribution nor greater than the
maximum tax-deductible contribution. Plan assets consist primarily of domestic
and international common stocks and bonds and real estate. Pension expense,
including administrative and severance costs, for 1996, 1995 and 1994 was
approximately $14.9 million, $9.6 million and $11.9 million, respectively.
40
APS
NOTES TO FINANCIAL STATEMENTS
The components of net periodic pension costs before consideration of amounts
capitalized or billed to others and excluding severance costs of $2.9 million in
1996 and $1.4 million in 1994 are as follows:
1996 1995 1994
--------- ---------- ---------
(Thousands of Dollars)
Service cost --- benefits earned during the period................. $22,861 $16,038 $20,345
Interest cost on projected benefit obligation...................... 44,602 39,328 39,377
Return on plan assets.............................................. (62,460) (82,209) 6,105
Net amortization and deferral...................................... 19,734 45,976 (44,000)
------- ------- -------
Net periodic pension cost.......................................... $24,737 $19,133 $21,827
======= ======= =======
A reconciliation of the funded status of the plan to the amounts recognized in
the balance sheets is presented below:
1996 1995
----------- -----------
(Thousands of Dollars)
Plan assets at fair value........................................................... $ 533,444 $ 469,820
--------- ---------
Less:
Accumulated benefit obligation, including vested benefits
of $413,004 and $396,138 in 1996 and 1995, respectively........................ 467,037 428,258
Effect of projected future compensation increases................................ 134,057 149,836
--------- ---------
Total projected benefit obligation.................................................. 601,094 578,094
--------- ---------
Plan assets less than projected benefit obligation.................................. (67,650) (108,274)
Plus:
Unrecognized net loss from past experience
different from that assumed.................................................... 2,818 44,614
Unrecognized prior service cost.................................................. 20,478 23,800
Unrecognized net transition asset................................................ (29,593) (32,809)
--------- ---------
Accrued pension liability........................................................... $ (73,947) $ (72,669)
========= =========
Principal actuarial assumptions used were:
Discount rate.................................................................... 7.75% 7.25%
Rate of increase in compensation levels.......................................... 4.50% 4.50%
Expected long-term rate of return on assets...................................... 9.00% 9.00%
In addition to the defined benefit pension plan, the Company also sponsors
qualified defined contribution plans. Collectively, these plans cover
substantially all employees. The plans provide for employee contributions and
partial employer matching contributions after certain eligibility requirements
are met. Expenses related to these plans for 1996, 1995 and 1994 were $3.4
million, $3.1 million and $3.2 million, respectively.
Postretirement Plans The Company provides medical and life insurance benefits to
its retired employees. Employees must retire to become eligible for these
retirement benefits which are based on years of service and age. The retiree
medical insurance plans are contributory; the retiree life insurance plans are
noncontributory. In accordance with the governing plan documents, the Company
retains the right to change or eliminate these benefits.
41
APS
NOTES TO FINANCIAL STATEMENTS
Funding is based upon actuarially determined contributions that take tax
consequences into account. Plan assets consist primarily of domestic stocks and
bonds. The postretirement benefit expense for 1996, 1995 and 1994 was
approximately $16 million, $13 million and $13 million, respectively.
The components of net periodic postretirement benefit costs before consideration
of amounts capitalized or billed to others and excluding severance costs of $9.6
million in 1996 are as follows:
1996 1995 1994
--------- ---------- ---------
(Thousands of Dollars)
Service cost --- benefits earned during the period................. $ 7,974 $ 6,735 $ 8,785
Interest cost on accumulated benefit obligation.................... 13,395 13,743 14,026
Return on plan assets.............................................. (12,550) (15,133) (6,459)
Net amortization and deferral...................................... 12,733 17,142 11,619
-------- -------- --------
Net periodic postretirement benefit cost........................... $ 21,552 $ 22,487 $ 27,971
======== ======== ========
A reconciliation of the funded status of the plan to the amounts recognized in
the balance sheet is presented below:
1996 1995
----------- -----------
(Thousands of Dollars)
Plan assets at fair value........................................................... $109,763 $ 81,309
-------- ---------
Less accumulated postretirement benefit obligation:
Retirees......................................................................... 86,747 90,222
Fully eligible plan participants................................................. 3,351 15,497
Other active plan participants................................................... 89,452 106,568
-------- ---------
Total accumulated postretirement benefit obligation............................ 179,550 212,287
-------- ---------
Plan assets less than accumulated benefit obligation................................ (69,787) (130,978)
Plus:
Unrecognized transition obligation............................................... 122,439 155,481
Unrecognized net gain from past experience different from that
assumed........................................................................ (62,299) (24,561)
-------- ---------
Accrued postretirement liability.................................................... $ (9,647) $ (58)
======== =========
Principal actuarial assumptions used were:
Discount rate.................................................................... 7.75% 7.25%
Annual salary increases for life insurance obligation............................ 4.50% 4.50%
Expected long-term rate of return on assets ___ after tax........................ 7.75% 7.64%
Initial health care cost trend rate ___ under age 65............................. 9.00% 9.50%
Initial health care cost trend rate ___ age 65 and over.......................... 8.00% 8.50%
Ultimate health care cost trend rate (reached in the year 2002).................. 5.50% 5.50%
Assuming a one percent increase in the health care cost trend rate, the 1996
cost of postretirement benefits other than pensions would increase by
approximately $5 million and the accumulated benefit obligation as of December
31, 1996 would increase by approximately $31 million.
42
APS
NOTES TO FINANCIAL STATEMENTS
11. Commitments and Contingencies
Litigation The Company is a party to various claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial statements.
Palo Verde Nuclear Generating Station The Company has encountered tube cracking
in 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 and these analyses
indicate that it will be economically desirable for the Company to replace the
Unit 2 steam generators between 2003 and 2008. 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. 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.
Under the Nuclear Waste Policy Act, DOE was to develop the facilities necessary
for the storage and disposal of spent fuel and to have the first such facility
in operation by 1998. That facility was to be a permanent repository, but DOE
has announced that such a repository now cannot be completed before 2010. The
Company has capacity in existing fuel storage pools at Palo Verde which, with
certain modifications, could accommodate all fuel expected to be discharged from
normal operation of Palo Verde through about 2002, and believes it could augment
that wet storage with new facilities for on-site dry storage of spent fuel for
an indeterminate period of operation beyond 2002, subject to obtaining any
required governmental approvals. The Company currently believes that spent fuel
storage or disposal methods will be available for use by Palo Verde to allow its
continued operation beyond 2002.
The Palo Verde participants have insurance for public liability 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 the programs exceed the accumulated funds, 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 for all three units 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.
Fuel and Purchased Power Commitments The Company is a party to various fuel and
purchased power contracts with terms expiring from 1997 through 2020 that
include required purchase provisions. The Company estimates its 1997 contract
requirements to be approximately $120 million. However, this amount may vary
significantly
43
APS
NOTES TO FINANCIAL STATEMENTS
pursuant to certain provisions in such contracts which permit the Company to
decrease its required purchases under certain circumstances.
The Company is contractually obligated to reimburse certain coal providers for
amounts incurred for coal mine reclamation. The Company's share of the total
obligation is estimated at $114 million. The portion of the coal mine
reclamation obligation related to coal already burned is approximately $68
million at December 31, 1996 and is included in "Deferred Credits ___ Other" in
the Balance Sheet. A regulatory asset has been established for amounts not yet
recovered from ratepayers. In accordance with the 1996 regulatory agreement (see
Note 2), the ACC began accelerated amortization of the Company's regulatory
asset for coal mine reclamation costs over an eight-year period beginning July
1, 1996. Amortization is included in depreciation and amortization expense on
the Statements of Income. The balance of the regulatory asset at December 31,
1996 was approximately $69 million.
Construction Program Total capital expenditures in 1997 are estimated at $296
million.
12. Nuclear Decommissioning Costs
In 1996, the Company recorded $11.4 million for decommissioning expense. The
Company estimates it will cost approximately $2.0 billion ($440 million in 1996
dollars), over a fourteen year period beginning in 2024, to decommission its
29.1% interest in the three Palo Verde units. Decommissioning costs are charged
to expense over the respective unit's operating license term and are included in
the accumulated depreciation balance until each unit is retired. Nuclear
decommissioning costs are currently recovered in rates.
The Company is utilizing a 1995 site-specific study for Palo Verde, prepared for
the Company by an independent consultant, that assumes the prompt
removal/dismantlement method of decommissioning. The Company is required to
update the study every three years.
As required by regulation, the Company has established external trust accounts
into which quarterly deposits are made for decommissioning. As of December 31,
1996, the Company had deposited a total of $68.1 million. The trust accounts are
included in "Investments and Other Assets" on the Balance Sheets at a market
value of $95.5 million on December 31, 1996. The trust funds are invested
primarily in fixed-income securities and domestic stock and are classified as
available for sale. Realized and unrealized gains and losses are reflected in
accumulated depreciation.
In February 1996, the FASB issued an exposure draft "Accounting for Certain
Liabilities Related to Closure or Removal of Long-Lived Assets" which would
require the estimated present value of the cost of decommissioning and certain
other removal costs to be recorded as a liability, along with an offsetting
plant asset when a decommissioning or other removal obligation is incurred. The
FASB has indicated a revised exposure draft or a final statement will be issued
in the second quarter of 1997.
44
APS
NOTES TO FINANCIAL STATEMENTS
13. Selected Quarterly Financial Data (Unaudited)
Quarterly financial information for 1996 and 1995 is as follows:
Electric
Operating Operating Net Earnings for
Quarter Revenues Income(a) Income Common Stock
- ------- -------- --------- ------ ------------
(Thousands of Dollars)
1996
First $345,261 $ 77,522 $ 45,606 $ 41,129
Second 426,658 102,978 70,440 66,114
Third 566,899 152,307 128,484 124,331
Fourth (b) 379,454 32,401 (1,059) (5,195)
1995
First $336,968 $ 73,214 $ 37,832 $ 33,025
Second 380,178 88,719 53,452 48,676
Third 549,082 162,602 128,345 123,570
Fourth 348,724 57,219 19,941 15,165
- ---------------
(a) The Company's operations are subject to seasonal fluctuations primarily as
a result of weather conditions. The results of operations for interim
periods are not necessarily indicative of the results to be expected for
the full year.
(b) Net income for the fourth quarter of 1996 includes an after-tax charge of
$18.9 million for a voluntary severance program.
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
Reference is hereby made to "Election of Directors" in the Company's Proxy
Statement relating to the annual meeting of shareholders to be held on May 20,
1997 (the "1997 Proxy Statement") and to the Supplemental Item --- "Executive
Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Reference is hereby made to the fourth, fifth and sixth paragraphs under
the heading "The Board and its Committees," to "Executive Compensation," to
"Report of the Human Resources Committee," to "Performance Graph" and to
"Executive Benefit Plans" in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to "Principal Holders of Voting Securities" and
"Ownership of Pinnacle West Securities by Management" in the 1997 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to the last paragraph under the heading "The Board
and its Committees" and to "Executive Benefit Plans --- Employment and Severance
Agreements" in the 1997 Proxy Statement.
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
See the Index to Financial Statements in Part II, Item 8 on page 21.
Exhibits Filed
Exhibit No. Description
- ----------- -----------
10.1(a) --- 1997 Senior Management Variable Pay Plan
10.2(a) --- 1997 Officers Variable Pay Plan
10.3(a) --- Fifth Amendment to the Arizona Public Service Company Deferred
Compensation Plan
10.4 --- Amendment No. 2 to Decommissioning Trust Agreement (PVNGS
Unit 1) dated as of July 1, 1991
10.5 --- Amendment No. 4 to Amended and Restated Decommissioning Trust
Agreement (PVNGS Unit 2) dated as of January 31, 1992
10.6 --- Amendment No. 2 to Decommissioning Trust Agreement (PVNGS
Unit 3) dated as of July 1, 1991
10.7 --- Letter Agreement dated October 9, 1996 between the Company and
Jaron B. Norberg
10.8 --- Letter Agreement dated August 16, 1996 between the Company and
William L. Stewart
10.9 --- Letter Agreement dated November 27, 1996 between the Company
and George A. Schreiber, Jr.
23.1 --- Consent of Deloitte & Touche LLP
27.1 --- Financial Data Schedule
99.1 --- Arizona Corporation Commission Order, Decision No. 59943,
dated December 26, 1996, including the Rules regarding the
introduction of retail competition in Arizona
In addition to those Exhibits shown above, the Company hereby incorporates
the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation
ss.229.10(d) by reference to the filings set forth below:
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
3.1 Bylaws, amended as of 3.1 to 1995 Form 10-K 1-4473 3-29-96
February 20, 1996 Report
3.2 Resolution of Board of 3.2 to 1994 Form 10-K 1-4473 3-30-95
Directors temporarily Report
suspending Bylaws in part
47
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
3.3 Articles of Incorporation, 4.2 to Form S-3 1-4473 9-29-93
restated as of May 25, 1988 Registration Nos.
33-33910 and 33-55248 by
means of September 24,
1993 Form 8-K Report
3.4 Certificates pursuant to 4.3 to Form S-3 1-4473 9-29-93
Sections 10-152.01 and Registration Nos.
10-016, Arizona Revised 33-33910 and 33-55248 by
Statutes, establishing Series A means of September 24,
through V of the Company's 1993 Form 8-K Report
Serial Preferred Stock
3.5 Certificate pursuant to 4.4 to Form S-3 1-4473 9-29-93
Section 10-016, Arizona Registration Nos.
Revised Statutes, establishing 33-33910 and 33-55248 by
Series W of the Company's means of September 24,
Serial Preferred Stock 1993 Form 8-K Report
4.1 Mortgage and Deed of Trust 4.1 to September 1992 1-4473 11-9-92
Relating to the Company's Form 10-Q Report
First Mortgage Bonds,
together with forty-eight
indentures supplemental
thereto
4.2 Forty-ninth Supplemental 4.1 to 1992 Form 10-K 1-4473 3-30-93
Indenture Report
4.3 Fiftieth Supplemental 4.2 to 1993 Form 10-K 1-4473 3-30-94
Indenture Report
4.4 Fifty-first Supplemental 4.1 to August 1, 1993
Indenture Form 8-K Report 1-4473 9-27-93
4.5 Fifty-second Supplemental 4.1 to September 30, 1993 1-4473 11-15-93
Indenture Form 10-Q Report
4.6 Fifty-third Supplemental 4.5 to Registration 1-4473 3-1-94
Indenture Statement No. 33-61228
by means of February 23,
1994 Form 8-K Report
4.7 Fifty-fourth Supplemental 4.1 to Registration 1-4473 11-22-96
Indenture Statements Nos. 33-61228,
33-55473, 33-64455 and
333-15379 by means of
November 19, 1996
Form 8-K Report
48
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
4.8 Agreement, dated March 21, 4.1 to 1993 Form 10-K 1-4473 3-30-94
1994, relating to the filing of Report
instruments defining the
rights of holders of long-term
debt not in excess of 10% of
the Company's total assets
4.9 Indenture dated as of January 4.6 to Registration 1-4473 1-11-95
1, 1995 among the Company Statement Nos. 33-61228
and The Bank of New York, and 33-55473 by means of
as Trustee January 1, 1995 Form 8-K
Report
4.10 First Supplemental Indenture 4.4 to Registration 1-4473 1-11-95
dated as of January 1, 1995 Statement Nos. 33-61228
and 33-55473 by means of
January 1, 1995 Form 8-K
Report
4.11 Indenture dated as of 4.5 to Registration 1-4473 11-22-96
November 15, 1996 among Statements Nos. 33-61228,
the Company and The Bank 33-55473, 33-64455 and
of New York, as Trustee 333-15379 by means of
November 19, 1996
Form 8-K Report
4.12 First Supplemental Indenture 4.6 to Registration 1-4473 11-22-96
Statements Nos. 33-61228,
33-55473, 33-64455 and
333-15379 by means of
November 19, 1996
Form 8-K Report
4.13 Agreement of Resignation, 4.1 to September 25, 1995
Appointment, Acceptance and Form 8-K Report 1-4473 10-24-95
Assignment dated as of
August 18, 1995 by and
among the Company, Bank of
America National Trust and
Savings Association and The
Bank of New York
10.10 Two separate 10.2 to September 1991 1-4473 11-14-91
Decommissioning Trust Form 10-Q
Agreements (relating to
PVNGS Units 1 and 3,
respectively), each dated July
1, 1991, between the Company
and Mellon Bank, N.A., as
Decommissioning Trustee
49
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.11 Amendment No. 1 to 10.1 to 1994 Form 10-K 1-4473 3-30-95
Decommissioning Trust Report
Agreement (PVNGS Unit 1)
dated as of December 1, 1994
10.12 Amendment No. 1 to 10.2 to 1994 Form 10-K 1-4473 3-30-95
Decommissioning Trust Report
Agreement (PVNGS Unit 3)
dated as of December 1, 1994
10.13 Amended and Restated 10.1 to Pinnacle West 1-8962 3-26-92
Decommissioning Trust 1991 Form 10-K Report
Agreement (PVNGS Unit 2)
dated as of January 31, 1992,
among the Company, Mellon
Bank, N.A., as
Decommissioning Trustee, and
State Street Bank and Trust
Company, as successor to The
First National Bank of
Boston, as Owner Trustee
under two separate Trust
Agreements, each with a
separate Equity Participant,
and as Lessor under two
separate Facility Leases, each
relating to an undivided
interest in PVNGS Unit 2
10.14 First Amendment to Amended 10.2 to 1992 Form 10-K 1-4473 3-30-93
and Restated Report
Decommissioning Trust
Agreement (PVNGS Unit 2),
dated as of November 1, 1992
10.15 Amendment No. 2 to Amended 10.3 to 1994 Form 10-K 1-4473 3-30-95
and Restated Report
Decommissioning Trust
Agreement (PVNGS Unit 2)
dated as of November 1, 1994
10.16 Amendment No. 3 to Amended 10.1 to June 1996 Form 1-4473 8-9-96
and Restated 10-Q Report
Decommissioning Trust
Agreement (PVNGS Unit 2)
dated as of January 31, 1992
50
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.17 Asset Purchase and Power 10.1 to June 1991 Form 1-4473 8-8-91
Exchange Agreement dated 10-Q Report
September 21, 1990 between
the Company and PacifiCorp,
as amended as of October 11,
1990 and as of July 18, 1991
10.18 Long-Term Power 10.2 to June 1991 Form 1-4473 8-8-91
Transactions Agreement dated 10-Q Report
September 21, 1990 between
the Company and PacifiCorp,
as amended as of October 11,
1990 and as of July 8, 1991
10.19 Contract, dated July 21, 1984, 10.31 to Pinnacle West's 2-96386 3-13-85
with DOE providing for the Form S-14 Registration
disposal of nuclear fuel and/or Statement
high-level radioactive waste,
ANPP
10.20 Amendment No. 1 dated 10.3 to 1995 Form 10-K 1-4473 3-29-96
April 5, 1995 to the Long-Term Report
Power Transactions Agreement
and Asset Purchase and Power
Exchange Agreement between
PacifiCorp and the Company
10.21 Restated Transmission 10.4 to 1995 Form 10-K 1-4473 3-29-96
Agreement between PacifiCorp Report
and the Company dated
April 5, 1995
10.22 Contract among PacifiCorp, 10.5 to 1995 Form 10-K 1-4473 3-29-96
the Company and United Report
States Department of Energy
Western Area Power
Administration, Salt Lake
Area Integrated Projects
for Firm Transmission
Service dated May 5, 1995
10.23 Reciprocal Transmission 10.6 to 1995 Form 10-K 1-4473 3-29-96
Service Agreement between Report
the Company and PacifiCorp
dated as of March 2, 1994
10.24 Indenture of Lease with 5.01 to Form S-7 2-59644 9-1-77
Navajo Tribe of Indians, Four Registration Statement
Corners Plant
51
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.25 Supplemental and Additional 5.02 to Form S-7 2-59644 9-1-77
Indenture of Lease, including Registration Statement
amendments and supplements
to original lease with Navajo
Tribe of Indians, Four Corners
Plant
10.26 Amendment and Supplement 10.36 to Registration 1-8962 7-25-85
No. 1 to Supplemental and Statement on Form 8-B of
Additional Indenture of Lease, Pinnacle West
Four Corners, dated April 25,
1985
10.27 Application and Grant of 5.04 to Form S-7 2-59644 9-1-77
multi-party rights-of-way and Registration Statement
easements, Four Corners
Plant Site
10.28 Application and Amendment 10.37 to Registration 1-8962 7-25-85
No. 1 to Grant of multi-party Statement on Form 8-B of
rights-of-way and easements, Pinnacle West
Four Corners Power Plant
Site, dated April 25, 1985
10.29 Application and Grant of 5.05 to Form S-7 2-59644 9-1-77
Arizona Public Service Registration Statement
Company rights-of-way and
easements, Four Corners
Plant Site
10.30 Application and Amendment 10.38 to Registration 1-8962 7-25-85
No. 1 to Grant of Arizona Statement on Form 8-B of
Public Service Company Pinnacle West
rights-of-way and easements,
Four Corners Power Plant
Site, dated April 25, 1985
10.31 Indenture of Lease, Navajo 5(g) to Form S-7 2-36505 3-23-70
Units 1, 2, and 3 Registration Statement
10.32 Application and Grant of 5(h) to Form S-7 2-36505 3-23-70
rights-of-way and easements, Registration Statement
Navajo Plant
10.33 Water Service Contract 5(l) to Form S-7 2-39442 3-16-71
Assignment with the United Registration Statement
States Department of Interior,
Bureau of Reclamation,
Navajo Plant
52
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.34 Arizona Nuclear Power 10.1 to 1988 Form 10-K 1-4473 3-8-89
Project Participation Report
Agreement, dated August 23,
1973, among the Company,
Salt River Project Agricultural
Improvement and Power
District, Southern California
Edison Company, Public
Service Company of New
Mexico, El Paso Electric
Company, Southern California
Public Power Authority, and
Department of Water and
Power of the City of Los
Angeles, and amendments
1-12 thereto
10.35 Amendment No. 13 dated as 10.1 to March 1991 Form 1-4473 5-15-91
of April 22, 1991, to Arizona 10-Q Report
Nuclear Power Project
Participation Agreement,
dated August 23, 1973, among
the Company, Salt River
Project Agricultural
Improvement and Power
District, Southern California
Edison Company, Public
Service Company of New
Mexico, El Paso Electric
Company, Southern California
Public Power Authority, and
Department of Water and
Power of the City of Los
Angeles
10.36(c) Facility Lease, dated as of 4.3 to Form S-3 33-9480 10-24-86
August 1, 1986, between Registration Statement
State Street Bank and Trust
Company, as successor to The
First National Bank of
Boston, in its capacity as
Owner Trustee, as Lessor, and
the Company, as Lessee
53
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.37(c) Amendment No. 1, dated as of 10.5 to September 1986 1-4473 12-4-86
November 1, 1986, to Facility Form 10-Q Report by
Lease, dated as of August 1, means of Amendment No.
1986, between State Street 1 on December 3, 1986
Bank and Trust Company, as Form 8
successor to The First
National Bank of Boston, in
its capacity as Owner Trustee,
as Lessor, and the Company,
as Lessee
10.38(c) Amendment No. 2 dated as of 10.3 to 1988 Form 10-K 1-4473 3-8-89
June 1, 1987 to Facility Lease Report
dated as of August 1, 1986
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Lessor, and APS, as Lessee
10.39(c) Amendment No. 3, dated as of 10.3 to 1992 Form 10-K 1-4473 3-30-93
March 17, 1993, to Facility Report
Lease, dated as of August 1,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Lessor, and the Company, as
Lessee
10.40 Facility Lease, dated as of 10.1 to November 18, 1986 1-4473 1-20-87
December 15, 1986, between Form 8-K Report
State Street Bank and Trust
Company, as successor to The
First National Bank of
Boston, in its capacity as
Owner Trustee, as Lessor, and
the Company, as Lessee
10.41 Amendment No. 1, dated as of 4.13 to Form S-3 1-4473 8-24-87
August 1, 1987, to Facility Registration Statement
Lease, dated as of December No. 33-9480 by means of
15, 1986, between State Street August 1, 1987 Form 8-K
Bank and Trust Company, as Report
successor to The First
National Bank of Boston, as
Lessor, and the Company, as
Lessee
54
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.42 Amendment No. 2, dated as of 10.4 to 1992 Form 10-K 1-4473 3-30-93
March 17, 1993, to Facility Report
Lease, dated as of December
15, 1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Lessor, and the Company, as
Lessee
10.43(a) Directors' Deferred 10.1 to June 1986 Form 1-4473 8-13-86
Compensation Plan, as 10-Q Report
restated, effective January 1,
1986
10.44(a) Second Amendment to the 10.2 to 1993 Form 10-K 1-4473 3-30-94
Arizona Public Service Report
Company Directors' Deferred
Compensation Plan, effective
as of January 1, 1993
10.45(a) Third Amendment to the 10.1 to September 1994 1-4473 11-10-94
Arizona Public Service Form 10-Q
Company Directors' Deferred
Compensation Plan effective
as of May 1, 1993
10.46(a) Arizona Public Service 10.4 to 1988 Form 10-K 1-4473 3-8-89
Company Deferred Report
Compensation Plan, as
restated, effective January 1,
1984, and the second and
third amendments thereto,
dated December 22, 1986, and
December 23, 1987,
respectively
10.47(a) Third Amendment to the 10.3 to 1993 Form 10-K 1-4473 3-30-94
Arizona Public Service Report
Company Deferred
Compensation Plan, effective
as of January 1, 1993
10.48(a) Fourth Amendment to the 10.2 to September 1994 1-4473 11-10-94
Arizona Public Service Form 10-Q Report
Company Deferred
Compensation Plan effective
as of May 1, 1993
55
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.49(a) Pinnacle West Capital 10.10 to 1995 Form 10-K 1-4473 3-29-96
Corporation, Arizona Public Report
Service Company, SunCor
Development Company
and El Dorado Investment
Company Deferred
Compensation Plan as
amended and restated
effective January 1, 1996
10.50(a) Arizona Public Service 10.11 to 1995 Form 10-K 1-4473 3-29-96
Company Supplemental Report
Excess Benefit Retirement
Plan as amended and
restated on December 20, 1995
10.51(a) Pinnacle West Capital 10.7 to 1994 Form 10-K 1-4473 3-30-95
Corporation and Arizona Report
Public Service Company
Directors' Retirement Plan
effective as of January 1, 1995
10.52(a) Letter Agreement dated 10.6 to 1994 Form 10-K 1-4473 3-30-95
December 21, 1993, between Report
the Company and William L.
Stewart
10.53(a) Agreement for Utility 10.6 to 1988 Form 10-K 1-4473 3-8-89
Consulting Services, dated Report
March 1, 1985, between the
Company and Thomas G.
Woods, Jr., and Amendment
No. 1 thereto, dated January
6, 1986
10.54(a) Letter Agreement, dated April 10.7 to 1988 Form 10-K 1-4473 3-8-89
3, 1978, between the Company Report
and O. Mark DeMichele,
regarding certain retirement
benefits granted to Mr.
DeMichele
10.55(a) Letter Agreement dated July 10.1 to September 1995 1-4473 11-14-95
28, 1995, between the 10-Q Report
Company and Jaron B.
Norberg regarding certain of
Mr. Norberg's retirement
benefits
56
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.56(a) Letter Agreement dated as 10.8 to 1995 Form 10-K 1-4473 3-29-96
of January 1, 1996 between Report
the Company and Robert G.
Matlock & Associates, Inc.
for consulting services
10.57(a)(d) Key Executive Employment 10.3 to 1989 Form 10-K 1-4473 3-8-90
and Severance Agreement Report
between the Company and
certain executive officers of
the Company
10.58(a)(d) Revised form of Key Executive 10.5 to 1993 Form 10-K 1-4473 3-30-94
Employment and Severance Report
Agreement between the
Company and certain
executive officers of the
Company
10.59(a)(d) Second revised form of Key 10.9 to 1994 Form 10-K 1-4473 3-30-95
Executive Employment and Report
Severance Agreement between
the Company and certain
executive officers of the
Company
10.60(a)(d) Key Executive Employment 10.4 to 1989 Form 10-K 1-4473 3-8-90
and Severance Agreement Report
between the Company and
certain managers of the
Company
10.61(a)(d) Revised form of Key Executive 10.4 to 1993 Form 10-K 1-4473 3-30-94
Employment and Severance Report
Agreement between the
Company and certain key
employees of the Company
10.62(a)(d) Second revised form of Key 10.8 to 1994 Form 10-K 1-4473 3-30-95
Executive Employment and Report
Severance Agreement between
the Company and certain key
employees of the Company
10.63(a) Pinnacle West Capital 10.1 to 1992 Form 10-K 1-4473 3-30-93
Corporation Stock Option and Report
Incentive Plan
57
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
10.64(a) Pinnacle West Capital A to the Proxy Statement 1-8962 4-16-94
Corporation 1994 Long-Term for the Plan Report
Incentive Plan effective as of Pinnacle West 1994
March 23, 1994 Annual Meeting of
Shareholders
10.65 Agreement No. 13904 (Option 10.3 to 1991 Form 10-K 1-4473 3-19-92
and Purchase of Effluent) Report
with Cities of Phoenix,
Glendale, Mesa, Scottsdale,
Tempe, Town of Youngtown,
and Salt River Project
Agricultural Improvement and
Power District, dated April 23,
1973
10.66 Agreement for the Sale and 10.4 to 1991 Form 10-K 1-4473 3-19-92
Purchase of Wastewater Report
Effluent with City of Tolleson
and Salt River Agricultural
Improvement and Power
District, dated June 12, 1981,
including Amendment No. 1
dated as of November 12,
1981 and Amendment No. 2
dated as of June 4, 1986
99.2 Collateral Trust Indenture 4.2 to 1992 Form 10-K 1-4473 3-30-93
among PVNGS II Funding Report
Corp., Inc., the Company and
Chemical Bank, as Trustee
99.3 Supplemental Indenture to 4.3 to 1992 Form 10-K 1-4473 3-30-93
Collateral Trust Indenture Report
among PVNGS II Funding
Corp., Inc., the Company and
Chemical Bank, as Trustee
99.4(c) Participation Agreement, 28.1 to September 1992 1-4473 11-9-92
dated as of August 1, 1986, Form 10-Q Report
among PVNGS Funding
Corp., Inc., Bank of America
National Trust and Savings
Association, State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, in
its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual
capacity and as Indenture
Trustee, the Company, and
the Equity Participant named
therein
58
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
99.5(c) Amendment No. 1 dated as of 10.8 to September 1986 1-4473 12-4-86
November 1, 1986, to Form 10-Q Report by
Participation Agreement, means of Amendment No.
dated as of August 1,1986, 1, on December 3, 1986
among PVNGS Funding Form 8
Corp., Inc., Bank of America
National Trust and Savings
Association, State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, in
its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual
capacity and as Indenture
Trustee, the Company, and
the Equity Participant named
therein
99.6(c) Amendment No. 2, dated as of 28.4 to 1992 Form 10-K 1-4473 3-30-93
March 17, 1993, to Report
Participation Agreement,
dated as of August 1, 1986,
among PVNGS Funding
Corp., Inc., PVNGS II
Funding Corp., Inc., State
Street Bank and Trust
Company, as successor to The
First National Bank of
Boston, in its individual
capacity and as Owner
Trustee, Chemical Bank, in its
individual capacity and as
Indenture Trustee, the
Company, and the Equity
Participant named therein
99.7(c) Trust Indenture, Mortgage, 4.5 to Form S-3 33-9480 10-24-86
Security Agreement and Registration Statement
Assignment of Facility Lease,
dated as of August 1, 1986,
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
59
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
99.8(c) Supplemental Indenture No. 10.6 to September 1986 1-4473 12-4-86
1, dated as of November 1, Form 10-Q Report by
1986 to Trust Indenture, means of Amendment No.
Mortgage, Security Agreement 1 on December 3, 1986
and Assignment of Facility Form 8
Lease, dated as of August 1,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
99.9(c) Supplemental Indenture No. 2 4.4 to 1992 Form 10-K 1-4473 3-30-93
to Trust Indenture, Mortgage, Report
Security Agreement and
Assignment of Facility Lease,
dated as of August 1, 1986,
between State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
99.10(c) Assignment, Assumption and 28.3 to Form S-3 33-9480 10-24-86
Further Agreement, dated as Registration Statement
of August 1, 1986, between
the Company and State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.11(c) Amendment No. 1, dated as of 10.10 to September 1986 1-4473 12-4-86
November 1, 1986, to Form 10-Q Report by
Assignment, Assumption and means of Amendment No.
Further Agreement, dated as 1 on December 3, 1986
of August 1, 1986, between Form 8
the Company and State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
60
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
99.12(c) Amendment No. 2, dated as of 28.6 to 1992 Form 10-K 1-4473 3-30-93
March 17, 1993, to Report
Assignment, Assumption and
Further Agreement, dated as
of August 1, 1986, between
the Company and State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee
99.13 Participation Agreement, 28.2 to September 1992 1-4473 11-9-92
dated as of December 15, Form 10-Q Report
1986, among PVNGS Funding
Corp., Inc., State Street Bank
and Trust Company, as
successor to The First
National Bank of Boston, in
its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual
capacity and as Indenture
Trustee under a Trust
Indenture, the Company, and
the Owner Participant named
therein
99.14 Amendment No. 1, dated as of 28.20 to Form S-3 1-4473 8-10-87
August 1, 1987, to Registration Statement
Participation Agreement, No. 33-9480 by means of a
dated as of December 15, November 6, 1986 Form
1986, among PVNGS Funding 8-K Report
Corp., Inc. as Funding
Corporation, State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, Chemical
Bank, as Indenture Trustee,
the Company, and the Owner
Participant named therein
61
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
99.15 Amendment No. 2, dated as of 28.5 to 1992 Form 10-K 1-4473 3-30-93
March 17, 1993, to Report
Participation Agreement,
dated as of December 15,
1986, among PVNGS Funding
Corp., Inc., PVNGS II
Funding Corp., Inc., State
Street Bank and Trust
Company, as successor to The
First National Bank of
Boston, in its individual
capacity and as Owner
Trustee, Chemical Bank, in its
individual capacity and as
Indenture Trustee, the
Company, and the Owner
Participant named therein
99.16 Trust Indenture, Mortgage, 10.2 to November 18, 1986 1-4473 1-20-87
Security Agreement and Form 8-K Report
Assignment of Facility Lease,
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
99.17 Supplemental Indenture No. 4.13 to Form S-3 1-4473 8-24-87
1, dated as of August 1, 1987, Registration Statement
to Trust Indenture, Mortgage, No. 33-9480 by means of
Security Agreement and August 1, 1987 Form 8-K
Assignment of Facility Lease, Report
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
62
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
99.18 Supplemental Indenture No. 2 4.5 to 1992 Form 10-K 1-4473 3-30-93
to Trust Indenture, Mortgage, Report
Security Agreement and
Assignment of Facility Lease,
dated as of December 15,
1986, between State Street
Bank and Trust Company, as
successor to The First
National Bank of Boston, as
Owner Trustee, and Chemical
Bank, as Indenture Trustee
99.19 Assignment, Assumption and 10.5 to November 18, 1986 1-4473 1-20-87
Further Agreement, dated as Form 8-K Report
of December 15, 1986,
between the Company and
State Street Bank and Trust
Company, as successor to The
First National Bank of
Boston, as Owner Trustee
99.20 Amendment No. 1, dated as of 28.7 to 1992 Form 10-K 1-4473 3-30-93
March 17, 1993, to Report
Assignment, Assumption and
Further Agreement, dated as
of December 15, 1986,
between the Company and
State Street Bank and Trust
Company, as successor to The
First National Bank of
Boston, as Owner Trustee
99.21(c) Indemnity Agreement dated 28.3 to 1992 Form 10-K 1-4473 3-30-93
as of March 17, 1993 by the Report
Company
99.22 Extension Letter, dated as of 28.20 to Form S-3 1-4473 8-10-87
August 13, 1987, from the Registration Statement
signatories of the No. 33-9480 by means of a
Participation Agreement to November 6, 1986 Form
Chemical Bank 8-K Report
99.23 Arizona Corporation 28.1 to 1991 Form 10-K 1-4473 3-19-92
Commission Order dated Report
December 6, 1991
99.24 Arizona Corporation 10.1 to June Form 10-Q 1-4473 8-12-94
Commission Order dated Report
June 1, 1994
63
Exhibit No. Description Originally Filed as Exhibit: File No.(b) Date Effective
- ----------- ----------- ---------------------------- ----------- --------------
99.25 Rate Reduction Agreement 10.1 to December 4, 1995 1-4473 12-14-95
dated December 4, 1995 Form 8-K Report
between the Company and the
ACC Staff
99.26 Arizona Corporation Commission 10.1 to March 1996 Form 1-4473 5-14-96
Order dated April 24, 1996 10-Q Report
- ---------------
(a)Management contract or compensatory plan or arrangement to be filed as
an exhibit pursuant to Item 14(c) of Form 10-K.
(b)Reports filed under File No. 1-4473 were filed in the office of the
Securities and Exchange Commission located in Washington, D.C.
(c)An additional document, substantially identical in all material respects
to this Exhibit, has been entered into, relating to an additional Equity
Participant. Although such additional document may differ in other respects
(such as dollar amounts, percentages, tax indemnity matters, and dates of
execution), there are no material details in which such document differs from
this Exhibit.
(d)Additional agreements, substantially identical in all material respects
to this Exhibit have been entered into with additional officers and key
employees of the Company. Although such additional documents may differ in other
respects (such as dollar amounts and dates of execution), there are no material
details in which such agreements differ from this Exhibit.
Reports on Form 8-K
During the quarter ended December 31, 1996, and the period ended March 27,
1997, the Company did not file any Reports on Form 8-K.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
Date: March 27, 1997 William J. Post
------------------------------
(William J. Post, President
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
William J. Post Principal Executive Officer March 27, 1997
- -------------------------------------------------- and Director
(William J. Post, President
and Chief Executive Officer)
George A. Schreiber, Jr. Principal Accounting Officer, March 27, 1997
- -------------------------------------------------- Principal Financial Officer
(George A. Schreiber, Jr.) and Director
O. Mark DeMichele Director March 27, 1997
- --------------------------------------------------
(O. Mark DeMichele)
Martha O. Hesse Director March 27, 1997
- --------------------------------------------------
(Martha O. Hesse)
Marianne Moody Jennings Director March 27, 1997
- --------------------------------------------------
(Marianne Moody Jennings)
Robert G. Matlock Director March 27, 1997
- --------------------------------------------------
(Robert G. Matlock)
Jaron B. Norberg Director March 27, 1997
- --------------------------------------------------
(Jaron B. Norberg)
65
Signature Title Date
--------- ----- ----
John R. Norton III Director March 27, 1997
- --------------------------------------------------
(John R. Norton III)
Donald M. Riley Director March 27, 1997
- --------------------------------------------------
(Donald M. Riley)
Wilma W. Schwada Director March 27, 1997
- --------------------------------------------------
(Wilma W. Schwada)
Richard Snell Director March 27, 1997
- --------------------------------------------------
(Richard Snell)
Dianne C. Walker Director March 27, 1997
- --------------------------------------------------
(Dianne C. Walker)
Ben F. Williams, Jr. Director March 27, 1997
- --------------------------------------------------
(Ben F. Williams, Jr.)
Thomas G. Woods, Jr. Director March 27, 1997
- --------------------------------------------------
(Thomas G. Woods, Jr.)
66
Commission File Number 1-4473
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
EXHIBITS TO
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
-----------------
Arizona Public Service Company
(Exact name of registrant as specified in charter)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
10.1(a) --- 1997 Senior Management Variable Pay Plan
10.2(a) --- 1997 Officers Variable Pay Plan
10.3(a) --- Fifth Amendment to the Arizona Public Service Company Deferred
Compensation Plan
10.4 --- Amendment No. 2 to Decommissioning Trust Agreement (PVNGS
Unit 1) dated as of July 1, 1991
10.5 --- Amendment No. 4 to Amended and Restated Decommissioning Trust
Agreement (PVNGS Unit 2) dated as of January 31, 1992
10.6 --- Amendment No. 2 to Decommissioning Trust Agreement (PVNGS
Unit 3) dated as of July 1, 1991
10.7 --- Letter Agreement dated October 9, 1996 between the Company and
Jaron B. Norberg
10.8 --- Letter Agreement dated August 16, 1996 between the Company and
William L. Stewart
10.9 --- Letter Agreement dated November 27, 1996 between the Company
and George A. Schreiber, Jr.
23.1 --- Consent of Deloitte & Touche LLP
27.1 --- Financial Data Schedule
99.1 --- Arizona Corporation Commission Order, Decision No. 59943, dated
December 26, 1996, including the Rules regarding the
introduction of retail competition in Arizona
- ---------------
(a)Management contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
For a description of the Exhibits incorporated in this filing by
reference, see Part IV, Item 14.