FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
---------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-4473
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ARIZONA PUBLIC SERVICE COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Arizona 86-0011170
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999
- -------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (602) 250-1000
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Number of shares of common stock, $2.50 par value,
outstanding as of August 12, 1997: 71,264,947
Glossary
--------
ACC - Arizona Corporation Commission
ACC Staff - Staff of the Arizona Corporation Commission
Cholla - Cholla Power Plant
Company - Arizona Public Service Company
EPA - United States Environmental Protection Agency
FERC - Federal Energy Regulatory Commission
Four Corners - Four Corners Power Plant
ITC - Investment tax credit
1996 10-K - Arizona Public Service Company Annual Report on Form 10-K for the
fiscal year ended December 31, 1996
NGS - Navajo Generating Station
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
Rules - Rules adopted by the ACC for the introduction of retail electric
competition in Arizona
SFAS No. 71 - Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation"
SFAS No. 130 - Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income"
SFAS No. 131 - Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information"
-2-
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
- ----------------------------
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Three Months
Ended June 30,
----------------------
1997 1996
--------- ---------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES .............................$ 458,751 $ 426,658
--------- ---------
FUEL EXPENSES:
Fuel for electric generation .......................... 55,626 57,289
Purchased power ....................................... 43,684 22,466
--------- ---------
Total .............................................. 99,310 79,755
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES ................... 359,441 346,903
--------- ---------
OTHER OPERATING EXPENSES:
Operations and maintenance excluding fuel expenses .... 89,162 100,296
Depreciation and amortization ......................... 91,138 58,795
Income taxes .......................................... 49,579 49,664
Other taxes ........................................... 29,856 35,170
--------- ---------
Total .............................................. 259,735 243,925
--------- ---------
OPERATING INCOME ........................................ 99,706 102,978
--------- ---------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ........................................ 0 2,003
Other - net ........................................... (910) (2,751)
Income taxes .......................................... 6,550 9,539
--------- ---------
Total .............................................. 5,640 8,791
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS ....................... 105,346 111,769
--------- ---------
INTEREST DEDUCTIONS:
Interest on long-term debt ............................ 35,262 37,360
Interest on short-term borrowings ..................... 3,095 4,129
Debt discount, premium and expense .................... 2,056 2,004
Capitalized interest .................................. (4,560) (2,164)
--------- ---------
Total .............................................. 35,853 41,329
--------- ---------
NET INCOME .............................................. 69,493 70,440
PREFERRED STOCK DIVIDEND REQUIREMENTS ................... 3,195 4,326
--------- ---------
EARNINGS FOR COMMON STOCK ...............................$ 66,298 $ 66,114
========= =========
See Notes to Condensed Financial Statements.
-3-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Six Months
Ended June 30,
----------------------
1997 1996
--------- ---------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES .............................$ 837,772 $ 771,919
--------- ---------
FUEL EXPENSES:
Fuel for electric generation .......................... 106,748 99,623
Purchased power ....................................... 78,031 36,404
--------- ---------
Total .............................................. 184,779 136,027
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES ................... 652,993 635,892
--------- ---------
OTHER OPERATING EXPENSES:
Operations and maintenance excluding fuel expenses .... 177,178 188,039
Depreciation and amortization ......................... 183,153 117,181
Income taxes .......................................... 71,871 81,023
Other taxes ........................................... 59,646 69,149
--------- ---------
Total .............................................. 491,848 455,392
--------- ---------
OPERATING INCOME ........................................ 161,145 180,500
--------- ---------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ........................................ 0 3,678
Other - net ........................................... (3,119) (3,042)
Income taxes .......................................... 10,890 15,189
--------- ---------
Total .............................................. 7,771 15,825
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS ....................... 168,916 196,325
--------- ---------
INTEREST DEDUCTIONS:
Interest on long-term debt ............................ 69,691 74,760
Interest on short-term borrowings ..................... 5,423 6,799
Debt discount, premium and expense .................... 4,058 4,121
Capitalized interest .................................. (8,394) (5,401)
--------- ---------
Total .............................................. 70,778 80,279
--------- ---------
NET INCOME .............................................. 98,138 116,046
PREFERRED STOCK DIVIDEND REQUIREMENTS ................... 6,821 8,803
--------- ---------
EARNINGS FOR COMMON STOCK ...............................$ 91,317 $ 107,243
========= =========
See Notes to Condensed Financial Statements.
-4-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Twelve Months
Ended June 30,
--------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES .........................$ 1,784,125 $ 1,669,725
----------- -----------
FUEL EXPENSES:
Fuel for electric generation ...................... 237,518 217,018
Purchased power ................................... 136,757 71,250
----------- -----------
Total .......................................... 374,275 288,268
----------- -----------
OPERATING REVENUES LESS FUEL EXPENSES ............... 1,409,850 1,381,457
----------- -----------
OTHER OPERATING EXPENSES:
Operations and maintenance excluding fuel expenses 419,853 403,170
Depreciation and amortization ..................... 363,182 238,440
Income taxes ...................................... 169,361 199,353
Other taxes ....................................... 111,601 140,173
----------- -----------
Total .......................................... 1,063,997 981,136
----------- -----------
OPERATING INCOME .................................... 345,853 400,321
----------- -----------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity .................................... 1,531 6,126
Other - net ....................................... (15,621) (23,605)
Income taxes ...................................... 41,253 44,262
----------- -----------
Total .......................................... 27,163 26,783
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS ................... 373,016 427,104
----------- -----------
INTEREST DEDUCTIONS:
Interest on long-term debt ........................ 142,597 152,869
Interest on short-term borrowings ................. 9,245 11,285
Debt discount, premium and expense ................ 8,113 8,733
Capitalized interest .............................. (12,502) (10,115)
----------- -----------
Total .......................................... 147,453 162,772
----------- -----------
NET INCOME .......................................... 225,563 264,332
PREFERRED STOCK DIVIDEND REQUIREMENTS ............... 15,110 18,354
----------- -----------
EARNINGS FOR COMMON STOCK ...........................$ 210,453 $ 245,978
=========== ===========
See Notes to Condensed Financial Statements.
-5-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
ASSETS
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for future use ...... $ 6,855,873 $ 6,803,211
Less accumulated depreciation and amortization ......... 2,547,552 2,426,143
----------- -----------
Total ............................................... 4,308,321 4,377,068
Construction work in progress .......................... 309,659 226,935
Nuclear fuel, net of amortization ...................... 51,953 51,137
----------- -----------
Utility plant - net ................................. 4,669,933 4,655,140
----------- -----------
INVESTMENTS AND OTHER ASSETS : ............................. 142,295 113,666
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents .............................. 7,347 12,521
Accounts receivable:
Service customers ................................... 137,430 111,715
Other ............................................... 29,983 49,898
Allowance for doubtful accounts ..................... (1,393) (1,685)
Accrued utility revenues ............................... 69,517 55,470
Materials and supplies, at average cost ................ 74,499 74,120
Fossil fuel, at average cost ........................... 12,396 13,928
Deferred income taxes .................................. 8,460 8,424
Other .................................................. 29,731 22,767
----------- -----------
Total current assets ................................ 367,970 347,158
----------- -----------
DEFERRED DEBITS:
Regulatory asset for income taxes ...................... 488,058 516,722
Rate synchronization cost deferral ..................... 386,476 414,082
Unamortized costs of reacquired debt ................... 68,989 69,554
Unamortized debt issue costs ........................... 15,406 16,692
Other .................................................. 259,403 290,208
----------- -----------
Total deferred debits ............................... 1,218,332 1,307,258
----------- -----------
TOTAL ............................................... $ 6,398,530 $ 6,423,222
=========== ===========
See Notes to Condensed Financial Statements.
-6-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
LIABILITIES
(Unaudited)
June 30, December 31,
1997 1996
---------- ----------
(Thousands of Dollars)
CAPITALIZATION:
Common stock ......................................$ 178,162 $ 178,162
Premiums and expenses - net ....................... 1,092,082 1,091,122
Retained earnings ................................. 423,925 460,106
---------- ----------
Common stock equity ............................ 1,694,169 1,729,390
Non-redeemable preferred stock .................... 143,493 165,673
Redeemable preferred stock ........................ 29,110 53,000
Long-term debt less current maturities ............ 1,963,960 2,029,482
---------- ----------
Total capitalization ........................... 3,830,732 3,977,545
---------- ----------
CURRENT LIABILITIES:
Commercial paper .................................. 198,000 16,900
Current maturities of long-term debt .............. 103,921 153,780
Accounts payable .................................. 133,540 174,394
Accrued taxes ..................................... 94,490 86,327
Accrued interest .................................. 32,217 39,115
Common dividends payable .......................... 42,500 0
Customer deposits ................................. 31,182 32,137
Other ............................................. 26,509 21,150
---------- ----------
Total current liabilities ...................... 662,359 523,803
---------- ----------
DEFERRED CREDITS AND OTHER:
Deferred income taxes ............................. 1,385,821 1,414,242
Deferred investment tax credit .................... 77,797 87,723
Unamortized gain - sale of utility plant .......... 84,651 86,939
Customer advances for construction ................ 28,912 24,044
Other ............................................. 328,258 308,926
---------- ----------
Total deferred credits and other ............... 1,905,439 1,921,874
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, and 7)
TOTAL ..........................................$6,398,530 $6,423,222
========== ==========
See Notes to Condensed Financial Statements.
-7-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
Six Months
Ended June 30,
----------------------
1997 1996
--------- ---------
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income ............................................$ 98,138 $ 116,046
Items not requiring cash:
Depreciation and amortization ....................... 183,153 117,181
Nuclear fuel amortization ........................... 16,186 15,788
AFUDC - equity ...................................... 0 (3,678)
Deferred income taxes - net ......................... (25,107) 3,399
Deferred investment tax credit - net ................ (9,926) (13,262)
Changes in certain current assets and liabilities:
Accounts receivable - net ........................... (6,092) 8,452
Accrued utility revenues ............................ (14,047) (10,413)
Materials, supplies and fossil fuel ................. 1,153 5,329
Other current assets ................................ (6,964) 365
Accounts payable .................................... (37,099) (6,014)
Accrued taxes ....................................... 8,163 12,904
Accrued interest .................................... (6,898) (2,967)
Other current liabilities ........................... 2,826 7,590
Other - net ........................................... 50,172 12,889
--------- ---------
Net cash flow provided by operating activities .... 253,658 263,609
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures .................................. (145,203) (120,810)
Capitalized interest .................................. (8,394) (5,401)
Other ................................................. (28,629) (10,147)
--------- ---------
Net cash flow used for investing activities ....... (182,226) (136,358)
--------- ---------
Cash Flows from Financing Activities:
Long-term debt ........................................ 99,875 100,000
Short-term borrowings - net ........................... 181,100 16,465
Dividends paid on common stock ........................ (85,000) (85,000)
Dividends paid on preferred stock ..................... (7,345) (8,994)
Repayment of preferred stock .......................... (46,044) (30,603)
Repayment and reacquisition of long-term debt ......... (219,192) (137,173)
--------- ---------
Net cash flow used for financing activities ....... (76,606) (145,305)
--------- ---------
Net increase (decrease) in cash and cash equivalents .... (5,174) (18,054)
Cash and cash equivalents at beginning of period ........ 12,521 18,389
--------- ---------
Cash and cash equivalents at end of period ..............$ 7,347 $ 335
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) ...........$ 74,291 $ 78,178
Income taxes ........................................$ 84,432 $ 60,499
See Notes to Condensed Financial Statements.
-8-
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of June 30,
1997, the results of operations for the three months, six months and twelve
months ended June 30, 1997 and 1996, and the cash flows for the six months ended
June 30, 1997 and 1996. It is suggested that these condensed financial
statements and notes to condensed financial statements be read in conjunction
with the financial statements and notes to financial statements included in the
1996 10-K.
2. The Company's operations are subject to seasonal fluctuations, with
variations in energy usage by customers occurring from season to season and from
month to month within a season, primarily as a result of changing weather
conditions. For this and other reasons, the results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year.
3. All the outstanding shares of common stock of the Company are owned by
Pinnacle West.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for
changes in capitalization for the six months ended June 30, 1997.
5. Regulatory Matters
Electric Industry Restructuring
State The ACC has been conducting an ongoing investigation into the
restructuring of the Arizona electric industry. 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.
-9-
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 separately.
o The Rules indicate that the ACC will allow recovery of unmitigated stranded
costs. Stranded costs are the costs of generating plants, other assets and
contract commitments that were prudently incurred to serve power customers
that could go unrecovered if these customers are allowed to use open access
to move to another supplier. 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, a lawsuit was filed by the Company to protect its
legal rights regarding the Rules.
The Arizona legislature has appointed a joint legislative committee to study
electric utility industry restructuring issues and report back to them by the
end of 1997. The Company believes that legislation will ultimately be required
before significant implementation of retail electric competition 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 rulemakings to have a material impact on its
financial statements.
Several electric utility reform bills have been introduced during the recent
congressional 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
-10-
opinion that will need to be narrowed before any substantial restructuring of
the electric utility industry can occur.
Regulatory Accounting 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 $1.0
billion at June 30, 1997. In accordance with the 1996 regulatory agreement (see
below), 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.
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 retail price 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).
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.
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 May 1997, the ACC approved a retail
price reduction of approximately $17.6 million annually ($11 million after
income taxes), or 1.2%, effective July 1, 1997.
6. The Palo Verde participants have insurance for public liability payments
resulting from nuclear energy hazards to the full limit of liability under
federal law. This
-11-
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 is approximately $69 million, with an annual
payment limitation of approximately $9 million.
The Palo Verde participants maintain "all risk" (including nuclear
hazards) insurance for property damage to, and decontamination of, property at
Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of
which must first be applied to stabilization and decontamination. The Company
has also secured insurance against portions of any increased cost of generation
or purchased power and business interruption resulting from a sudden and
unforeseen outage of any of the three units. The insurance coverage discussed in
this and the previous paragraph is subject to certain policy conditions and
exclusions.
7. The Company has encountered tube cracking in the Palo Verde steam generators
and has taken, and will continue to take, remedial actions that it believes have
slowed the rate of tube degradation. The projected service life of the steam
generators is reassessed periodically 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 1997 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.
8. The Financial Accounting Standards Board recently issued SFAS No. 130 on
"Reporting Comprehensive Income" and SFAS No. 131 on "Disclosures about Segments
of an Enterprise and Related Information." The "Reporting Comprehensive Income"
standard is effective for fiscal years beginning after December 15, 1997. The
standard changes the reporting of certain items currently reported in the common
stock equity section of the balance sheet and is not expected to have a material
effect on the Company's financial statements. The "Disclosures about Segments of
an Enterprise and Related Information" standard is effective for fiscal years
beginning after December 15, 1997. This standard requires that public companies
report certain information about operating segments in their financial
statements. It also establishes related disclosures about products and services,
geographic areas, and major customers. The Company is currently evaluating what
impact this standard will have on its disclosures.
-12-
ARIZONA PUBLIC SERVICE COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
- --------------
Operating Results
- -----------------
The following table summarizes the Company's revenues and earnings for
the three-month, six-month and twelve-month periods ended June 30, 1997 and
1996:
Periods ended June 30
(Thousands of Dollars)
Three Months Six Months Twelve Months
----------------------- ----------------------- -----------------------
1997 1996 1997 1996 1997 1996
---------- ---------- ---------- ---------- ---------- ----------
Operating
revenues $ 458,751 $ 426,658 $ 837,772 $ 771,919 $1,784,125 $1,669,725
Earnings for
common stock $ 66,298 $ 66,114 $ 91,317 $ 107,243 $ 210,453 $ 245,978
Operating Results - Three-month period ended June 30, 1997 compared
-----------------------------------------------------------------------
with three-month period ended June 30, 1996
-------------------------------------------
Earnings were flat in the three-month comparison as strong customer
growth, cost savings, and increased sales due to weather offset the effects of
the 1996 regulatory agreement (see Note 5 of Notes to Condensed Financial
Statements).
In the three-month comparison, the regulatory agreement, which became
effective July 1, 1996, resulted in $29 million (before income taxes) of
accelerated regulatory asset amortization and a retail price reduction which
reduced pretax revenues by $13 million.
Results were favorably impacted by increased operating revenues (net of
related fuel expenses), lower operations and maintenance expenses, and a
decrease in other taxes. Operating revenues increased $32 million primarily due
to a $24 million increase in sales for resale, $15 million from retail customer
growth, and $6 million attributable to weather effects, partially offset by the
1996 retail price reduction impact of $13 million. Sales for resale are sales of
electricity at wholesale to other electric utilities, power marketers, or public
authorities for resale to their customers. The increase in sales for resale was
a result of increased activity in competitive bulk power markets and was
accompanied by significant increases in related purchased power.
-13-
These bulk power activities did not result in a significant variance in earnings
due to market pressures on prices. Operation and maintenance expenses were lower
by $11 million primarily due to the timing of nuclear refueling, charges for
employee incentive plans in 1996, and savings from a 1996 voluntary severance
program. Other taxes decreased $5 million primarily due to a 1996 change in
property tax law. The impact of this tax law change for the first half of 1996
was recorded in the third quarter of 1996.
Operating Results - Six-month period ended June 30, 1997 compared with
-----------------------------------------------------------------------
six-month period ended June 30, 1996
------------------------------------
Earnings decreased in the six-month comparison due to the effects of
the 1996 regulatory agreement (see Note 5 of Notes to Condensed Financial
Statements). These effects were partially offset by customer growth, cost
savings, and increased sales due to weather.
In the six-month comparison, the regulatory agreement, which became
effective July 1, 1996, resulted in $59 million (before income taxes) of
accelerated regulatory asset amortization and a retail price reduction which
reduced pretax revenues by $24 million.
Partially offsetting these negative factors were increased operating
revenues (net of related fuel expenses), lower operations and maintenance
expenses, a decrease in other taxes, and lower interest expense. Operating
revenues increased $66 million primarily due to a $46 million increase in sales
for resale, $32 million of retail customer growth and higher usage, and $9
million attributable to weather effects, partially offset by the $24 million
impact of the retail price reduction. Sales for resale are sales of electricity
at wholesale to other electric utilities, power marketers, or public authorities
for resale to their customers. The increase in sales for resale was a result of
increased activity in competitive bulk power markets and was accompanied by
significant increases in related purchased power. These bulk power activities
did not result in a significant variance in earnings due to market pressures on
prices. Operations and maintenance expenses were $11 million lower primarily due
to improved nuclear operations, charges for employee incentive plans in 1996,
and savings from a 1996 voluntary severance program. Other taxes decreased $10
million primarily due to a 1996 change in property tax law. The impact of this
tax law change for the first half of 1996 was recorded in the third quarter of
1996. Interest expense decreased $6 million due to lower average interest rates
and lower amounts of debt outstanding.
Operating Results - Twelve-month period ended June 30, 1997 compared
-----------------------------------------------------------------------
with twelve-month period ended June 30, 1996
--------------------------------------------
Earnings decreased in the twelve-month comparison ended June 30, 1997
due to the effects of the 1996 regulatory agreement (see Note 5 of Notes to
Condensed Financial Statements), a $32 million pretax charge in the fourth
quarter of 1996 for a
-14-
voluntary severance program, and an increase in fuel expenses. These effects
were partially offset by strong customer growth, cost savings, increased sales
due to weather, and the recognition of $8 million of income tax benefits
associated with capital loss carryforwards. The twelve-month comparison was also
positively impacted by $21 million of pretax asset write-downs in the twelve
months ended June 30, 1996.
In the twelve-month comparison, the regulatory agreement, which became
effective July 1, 1996, resulted in $119 million of accelerated regulatory asset
amortization and a retail price reduction which reduced revenues by $54 million.
Fuel expenses increased $86 million primarily due to increased retail and
wholesale sales volumes and a less favorable mix of generation and purchased
power, particularly during a regional power outage in August 1996.
Operating revenues increased $114 million primarily due to $72 million
of customer growth and higher usage, a $61 million increase in sales for resale,
and $26 million attributable to weather effects, partially offset by the $54
million impact of the retail price reduction. Sales for resale are sales of
electricity at wholesale to other electric utilities, power marketers, or public
authorities for resale to their customers. The increase in sales for resale was
accompanied by significant increases in related purchased power and was a result
of increased activity in competitive bulk power markets. These bulk power
activities did not result in a significant variance in earnings due to market
pressures on prices. Other taxes decreased $29 million primarily due to a 1996
change in property tax law. The impact of this tax law change for the first half
of 1996 was recorded in the third quarter of 1996. Interest expense decreased
$12 million due to lower average interest rates and lower amounts of debt
outstanding.
Other Income
------------
As part of a 1994 rate settlement agreement with the ACC, the Company
accelerated amortization of substantially all deferred ITCs over a five-year
period beginning in 1995, resulting in a decrease in annual income tax expense
of approximately $21 million.
Liquidity and Capital Resources
- -------------------------------
For the six months ended June 30, 1997, the Company incurred
approximately $146 million in capital expenditures, which is approximately 49%
of the most recently estimated 1997 capital expenditures. The Company estimates
total capital expenditures for the years 1997, 1998, and 1999 to be
approximately $296 million, $290 million, and $265 million, respectively. These
amounts include about $30 million each year for nuclear fuel expenditures.
Required and optional redemptions of preferred stock and repayment of
long-term debt, including premiums thereon, and payments for a capitalized lease
obligation are expected to total approximately $268 million, $114 million, and
$114 million for the
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years 1997, 1998, and 1999, respectively. During the six months ended June 30,
1997, the Company redeemed approximately $219 million of its long-term debt and
approximately $46 million of its preferred stock with funds from internal cash
from operations and long- and short-term debt. The Company's cash flow from
operations is cyclical, with the highest cash flows generated in the summer. As
a result, the Company expects to pay down a significant portion of its
short-term debt balance in the third quarter of the year using cash flow from
operations. As a result of the 1996 regulatory agreement (see Note 5 of Notes to
Condensed Financial Statements), Pinnacle West invested $50 million in the
Company in 1996 and will invest similar amounts annually in 1997 through 1999.
During the six months ended June 30, 1997, the Company incurred $50
million of long-term debt under a revolving credit agreement and issued $50
million of its senior notes. Simultaneously with the issuance of the senior
notes, the Company issued $50 million of its first mortgage bonds ("senior note
mortgage bonds") to the senior note trustee as collateral for the senior notes.
The senior note mortgage bonds have the same interest rate, interest payment
dates, maturity, and redemption provisions as the senior notes. The Company's
payments of principal, premium, and/or interest on the senior notes satisfy the
Company's corresponding payment obligation on the senior note mortgage bonds. As
long as the senior note mortgage bonds secure the senior notes, the senior notes
will effectively rank pari passu with the first mortgage bonds. On the date that
the Company has repaid all of its first mortgage bonds, other than those that
secure senior notes, the senior note mortgage bonds will no longer secure the
senior notes and will cease to be outstanding.
Although provisions in the Company's bond indenture, articles of
incorporation, and financing orders from the ACC establish maximum amounts of
additional first mortgage bonds and preferred stock, management does not expect
any of these restrictions to limit the Company's ability to meet its capital
requirements.
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
resource utilization will be important factors 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; the cost
of debt and equity capital; regulatory, tax and environmental legislation;
weather variations affecting customer usage; and technological developments in
the electricity industry.
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Competition
-----------
See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1
of this report for discussions of competitive developments and regulatory
accounting.
Rate Matters
------------
See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1
of this report for a discussion of a price reduction, which became effective on
July 1, 1997.
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PART II - OTHER INFORMATION
---------------------------
ITEM 4. Submission of Matters to a Vote of Security Holders
- ----------------------------------------------------------------
At the Annual Meeting of Shareholders held on May 20, 1997, the
shareholders elected all of the directors of the Company, each of whom will
serve for the ensuing year or until his or her successor is elected or
qualified, as follows:
Votes
Against Broker
Votes and Non-
Director For Withheld Abstentions Votes
-------- --- -------- ----------- -----
O. Mark De Michele 74,907,283 13,512 N/A N/A
Martha O. Hesse 74,907,283 13,512 N/A N/A
Marianne M. Jennings 74,901,258 18,990 N/A N/A
Robert G. Matlock 74,907,190 13,597 N/A N/A
John R. Norton III 74,905,953 14,722 N/A N/A
William J. Post 74,907,080 13,697 N/A N/A
Donald M. Riley 74,906,378 14,335 N/A N/A
George A. Schreiber, Jr. 74,907,300 13,497 N/A N/A
Richard Snell 74,906,761 13,987 N/A N/A
Dianne C. Walker 74,903,666 16,801 N/A N/A
Ben F. Williams, Jr. 74,906,035 14,647 N/A N/A
ITEM 5. Other Information
- ------------------------------
Environmental Matters
- ---------------------
EPA Environmental Regulation
----------------------------
Air Quality Standards. In July 1997 the EPA proposed regulations on
regional haze. See "Environmental Matters - EPA Environmental Regulation - Air
Quality Standards" in Part I, Item 1 of the 1996 10-K. The proposal would
require states to submit plans to meet "presumptive reasonable progress targets"
for achieving perceptible improvements in visibility conditions in Federal Class
I areas (e.g., national parks) every 10-15 years. The proposal also calls for
states to conduct three year "best available retrofit technology" ("BART")
review on point sources which became operational between 1962 and 1977 and which
may normally be anticipated to contribute to regional haze visibility
impairment. Because the actual level of emissions controls, if any, for any unit
cannot be determined at this time, the Company currently cannot estimate the
capital expenditures, if any, which would result from the final rules.
Also in July 1997 EPA promulgated final National Ambient Air Quality
Standards for ozone and particulate matter. See "Environmental Matters - EPA
Environmental
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Regulation - Air Quality Standards" in Part I, Item 1 of the 1996 10-K. Pursuant
to the rules, the ozone standard is more stringent and a new ambient standard
for very fine particles has been established. The Company does not currently
expect these rules to have a material adverse effect on its financial position
or results of operations.
Palo Verde Nuclear Generating Station
-------------------------------------
See Note 7 of Notes to Condensed Financial Statements in Part I, Item 1
of this report for a discussion of issues regarding the Palo Verde steam
generators.
Construction and Financing Programs
-----------------------------------
See "Liquidity and Capital Resources" in Part I, Item 2 of this report
for a discussion of the Company's construction and financing programs.
Competition and Electric Industry Restructuring
-----------------------------------------------
See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1
of this report for a discussion of competition and the Rules regarding the
introduction of retail electric competition in Arizona. On February 28, 1997, a
lawsuit was filed by the Company to protect its legal rights regarding the Rules
and in its complaint the Company asked the Court for (i) a judgment vacating the
retail electric competition rules, (ii) a declaratory judgment that the rules
are unlawful because, among other things, they were entered into without proper
legal authorization, and (iii) a permanent injunction barring the ACC from
enforcing or implementing the rules and from promulgating any other regulations
without lawful authority.
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ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
- -----------------------------
27.1 Financial Data Schedule
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. a 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
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
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, and the period from July 1
through August 12, 1997, the Company filed the following report on Form 8-K:
Report dated April 7, 1997 comprised of Exhibits to its Registration
Statements on Form S-3 (No. 33-55473, 33-64455 and 333-15379) relating to the
Company's offering of $50 million of its Senior Notes.
- ------------------------
a Reports filed under File No. 1-4473 were filed in the office of the Securities
and Exchange Commission located in Washington, D.C.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
Dated: August 12, 1997 By: George A. Schreiber, Jr.
-------------------------------------
George A. Schreiber, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Officer Duly Authorized to
sign this Report)