FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
-----------------------------
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 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 November 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 September 30,
-------------------------
1997 1996
--------- ---------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES ........................ $ 632,821 $ 566,899
--------- ---------
FUEL EXPENSES:
Fuel for electric generation ..................... 48,379 68,243
Purchased power .................................. 110,151 39,793
--------- ---------
Total ......................................... 158,530 108,036
--------- ---------
OPERATING REVENUES LESS FUEL EXPENSES .............. 474,291 458,863
--------- ---------
OTHER OPERATING EXPENSES:
Operations and maintenance excluding fuel expenses 110,102 100,386
Depreciation and amortization .................... 90,874 90,431
Income taxes ..................................... 92,195 90,994
Other taxes ...................................... 30,228 24,745
--------- ---------
Total ......................................... 323,399 306,556
--------- ---------
OPERATING INCOME ................................... 150,892 152,307
--------- ---------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ................................... -- 1,942
Other - net ...................................... 445 (1,988)
Income taxes ..................................... 14,052 14,922
--------- ---------
Total ......................................... 14,497 14,876
--------- ---------
INCOME BEFORE INTEREST DEDUCTIONS .................. 165,389 167,183
--------- ---------
INTEREST DEDUCTIONS:
Interest on long-term debt ....................... 35,699 36,100
Interest on short-term borrowings ................ 2,163 2,597
Debt discount, premium and expense ............... 1,825 2,023
Capitalized interest ............................. (3,997) (2,021)
--------- ---------
Total ......................................... 35,690 38,699
--------- ---------
NET INCOME ......................................... 129,699 128,484
PREFERRED STOCK DIVIDEND REQUIREMENTS .............. 2,984 4,153
--------- ---------
EARNINGS FOR COMMON STOCK .......................... $ 126,715 $ 124,331
========= =========
See Notes to Condensed Financial Statements
-3-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Nine Months
Ended September 30,
-----------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES .................... $ 1,470,593 $ 1,338,818
----------- -----------
FUEL EXPENSES:
Fuel for electric generation ................. 155,127 167,866
Purchased power .............................. 188,182 76,197
----------- -----------
Total ..................................... 343,309 244,063
----------- -----------
OPERATING REVENUES LESS FUEL EXPENSES .......... 1,127,284 1,094,755
----------- -----------
OTHER OPERATING EXPENSES:
Operations and maintenance excluding fuel expenses 287,280 288,425
Depreciation and amortization ................ 274,027 207,612
Income taxes ................................. 164,066 172,017
Other taxes .................................. 89,874 93,894
----------- -----------
Total ..................................... 815,247 761,948
----------- -----------
OPERATING INCOME ............................... 312,037 332,807
----------- -----------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ............................... -- 5,620
Other - net .................................. (2,674) (5,030)
Income taxes ................................. 24,942 30,111
----------- -----------
Total ..................................... 22,268 30,701
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS .............. 334,305 363,508
----------- -----------
INTEREST DEDUCTIONS:
Interest on long-term debt ................... 105,390 110,860
Interest on short-term borrowings ............ 7,586 9,396
Debt discount, premium and expense ........... 5,883 6,144
Capitalized interest ......................... (12,391) (7,422)
----------- -----------
Total ..................................... 106,468 118,978
----------- -----------
NET INCOME ..................................... 227,837 244,530
PREFERRED STOCK DIVIDEND REQUIREMENTS .......... 9,805 12,956
----------- -----------
EARNINGS FOR COMMON STOCK ...................... $ 218,032 $ 231,574
=========== ===========
See Notes to Condensed Financial Statements
-4-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
------------------------------
(Unaudited)
Twelve Months
Ended September 30,
-----------------------------
1997 1996
----------- -----------
(Thousands of Dollars)
ELECTRIC OPERATING REVENUES ........................ $ 1,850,047 $ 1,687,542
----------- -----------
FUEL EXPENSES:
Fuel for electric generation ..................... 217,654 216,546
Purchased power .................................. 207,115 87,504
----------- -----------
Total ......................................... 424,769 304,050
----------- -----------
OPERATING REVENUES LESS FUEL EXPENSES .............. 1,425,278 1,383,492
----------- -----------
OTHER OPERATING EXPENSES:
Operations and maintenance excluding fuel expenses 429,569 405,991
Depreciation and amortization .................... 363,625 267,714
Income taxes ..................................... 170,562 190,065
Other taxes ...................................... 117,084 129,696
----------- -----------
Total ......................................... 1,080,840 993,466
----------- -----------
OPERATING INCOME ................................... 344,438 390,026
----------- -----------
OTHER INCOME (DEDUCTIONS):
AFUDC - equity ................................... (411) 6,957
Other - net ...................................... (13,188) (11,200)
Income taxes ..................................... 40,383 37,879
----------- -----------
Total ......................................... 26,784 33,636
----------- -----------
INCOME BEFORE INTEREST DEDUCTIONS .................. 371,222 423,662
----------- -----------
INTEREST DEDUCTIONS:
Interest on long-term debt ....................... 142,196 149,906
Interest on short-term borrowings ................ 8,811 10,607
Debt discount, premium and expense ............... 7,915 8,684
Capitalized interest ............................. (14,478) (10,006)
----------- -----------
Total ......................................... 144,444 159,191
----------- -----------
NET INCOME ......................................... 226,778 264,471
PREFERRED STOCK DIVIDEND REQUIREMENTS .............. 13,941 17,732
----------- -----------
EARNINGS FOR COMMON STOCK .......................... $ 212,837 $ 246,739
=========== ===========
See Notes to Condensed Financial Statements.
-5-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
ASSETS
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for future use $ 6,930,706 $ 6,803,211
Less accumulated depreciation and amortization .. 2,616,756 2,426,143
----------- -----------
Total ........................................ 4,313,950 4,377,068
Construction work in progress ................... 299,166 226,935
Nuclear fuel, net of amortization ............... 59,268 51,137
----------- -----------
Utility plant - net .......................... 4,672,384 4,655,140
----------- -----------
INVESTMENTS AND OTHER ASSETS: ................... 156,099 113,666
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents ....................... 34,376 12,521
Accounts receivable:
Service customers ............................ 189,713 111,715
Other ........................................ 56,823 49,898
Allowance for doubtful accounts .............. (1,839) (1,685)
Accrued utility revenues ........................ 82,067 55,470
Materials and supplies, at average cost ......... 74,583 74,120
Fossil fuel, at average cost .................... 11,388 13,928
Deferred income taxes ........................... 8,459 8,424
Other ........................................... 27,308 22,767
----------- -----------
Total current assets ......................... 482,878 347,158
----------- -----------
DEFERRED DEBITS:
Regulatory asset for income taxes ............... 471,653 516,722
Rate synchronization cost deferral .............. 372,674 414,082
Unamortized costs of reacquired debt ............ 65,866 69,554
Unamortized debt issue costs .................... 15,394 16,692
Other ........................................... 258,043 290,208
----------- -----------
Total deferred debits ........................ 1,183,630 1,307,258
----------- -----------
TOTAL ........................................ $ 6,494,991 $ 6,423,222
=========== ===========
See Notes to Condensed Financial Statements.
-6-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
------------------------
LIABILITIES
(Unaudited)
September 30, December 31,
1997 1996
------------- ------------
(Thousands of Dollars)
CAPITALIZATION:
Common stock ..................................... $ 178,162 $ 178,162
Premiums and expenses - net ...................... 1,092,182 1,091,122
Retained earnings ................................ 550,641 460,106
---------- ----------
Common stock equity ........................... 1,820,985 1,729,390
Non-redeemable preferred stock ................... 142,927 165,673
Redeemable preferred stock ....................... 29,110 53,000
Long-term debt less current maturities ........... 1,970,262 2,029,482
---------- ----------
Total capitalization .......................... 3,963,284 3,977,545
---------- ----------
CURRENT LIABILITIES:
Commercial paper ................................. 117,750 16,900
Current maturities of long-term debt ............. 103,921 153,780
Accounts payable ................................. 187,806 174,394
Accrued taxes .................................... 179,542 86,327
Accrued interest ................................. 25,836 39,115
Customer deposits ................................ 30,451 32,137
Other ............................................ 34,659 21,150
---------- ----------
Total current liabilities ..................... 679,965 523,803
---------- ----------
DEFERRED CREDITS AND OTHER:
Deferred income taxes ............................ 1,347,937 1,414,242
Deferred investment tax credit ................... 63,632 87,723
Unamortized gain - sale of utility plant ......... 83,507 86,939
Customer advances for construction ............... 28,651 24,044
Other ............................................ 328,015 308,926
---------- ----------
Total deferred credits and other .............. 1,851,742 1,921,874
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, and 7)
TOTAL ......................................... $6,494,991 $6,423,222
========== ==========
See Notes to Condensed Financial Statements.
-7-
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
(Unaudited)
Nine Months
Ended September 30,
-------------------------
1997 1996
--------- ---------
(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income ....................................... $ 227,837 $ 244,530
Items not requiring cash:
Depreciation and amortization .................. 274,027 207,612
Nuclear fuel amortization ...................... 24,077 25,166
AFUDC - equity ................................. -- (5,620)
Deferred income taxes - net .................... (58,675) 2,768
Deferred investment tax credit - net ........... (24,091) (25,328)
Changes in certain current assets and liabilities:
Accounts receivable - net ...................... (84,769) (35,443)
Accrued utility revenues ....................... (26,597) (20,489)
Materials, supplies and fossil fuel ............ 2,077 8,934
Other current assets ........................... (4,541) 1,707
Accounts payable ............................... 23,270 13,340
Accrued taxes .................................. 93,215 87,545
Accrued interest ............................... (13,279) (15,930)
Other current liabilities ...................... 12,171 17,277
Other - net ...................................... 57,212 12,515
--------- ---------
Net cash flow provided by operating activities ..... 501,934 518,584
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures ............................. (229,608) (196,641)
Sale of property ................................. 667 3,008
Capitalized interest ............................. (12,391) (7,422)
Other ............................................ (42,433) (16,699)
--------- ---------
Net cash flow used for investing activities .. (283,765) (217,754)
--------- ---------
Cash Flows from Financing Activities:
Long-term debt ................................... 109,906 100,000
Short-term borrowings - net ...................... 100,850 (43,300)
Dividends paid on common stock ................... (127,500) (127,500)
Dividends paid on preferred stock ................ (10,334) (13,456)
Repayment of preferred stock ..................... (46,511) (46,083)
Repayment and reacquisition of long-term debt .... (222,725) (171,065)
--------- ---------
Net cash flow used for financing activities .. (196,314) (301,404)
--------- ---------
Net increase (decrease) in cash and cash equivalents 21,855 (574)
Cash and cash equivalents at beginning of period ... 12,521 18,389
--------- ---------
Cash and cash equivalents at end of period ......... $ 34,376 $ 17,815
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) ...... $ 114,070 $ 127,492
Income taxes ................................... $ 161,228 $ 102,144
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
September 30, 1997, the results of operations for the three months, nine months
and twelve months ended September 30, 1997 and 1996, and the cash flows for the
nine months ended September 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 nine months ended September 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 numerous issues, including reliability,
stranded cost measurement and recovery, the phase-in process, bundled, unbundled
and metering services, and Independent System Operator and spot market
development, 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. Some of the working group reports have recently been
issued and the balance are scheduled to be issued by year end. These issued
reports recommend that further ACC consideration of the Rules is necessary prior
to implementation of retail electric competition. Some parties that participated
in the working groups also indicated that state legislation and possibly
amendments to the Arizona Constitution may be necessary. The Rules include the
following major provisions:
* The Rules are intended to apply to virtually all of the Arizona electric
utilities regulated by the ACC, including the Company.
-9-
* 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.
* Electric service providers that obtain Certificates 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.
* On or before December 31, 1997, each affected utility is required to file
with the ACC proposed tariffs for bundled service, if different than
current tariffs, 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.
* 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 Arizona legislature has appointed a joint legislative committee to study
electric utility industry restructuring issues and report back to it by the end
of 1997. Arizona legislative counsel recently prepared a memorandum related to
the legal authority of the ACC to deregulate the Arizona electric utility
industry. This memorandum raises a question as to the degree to which the ACC
may deregulate any portion of the electric utility industry under the Arizona
Constitution. The Company continues to believe that state legislation will
ultimately be required before significant implementation of retail electric
competition can lawfully occur in Arizona. The Company cannot accurately predict
the impact, if any, of the regulatory and legislative activities and of possible
amendments to the Arizona Constitution (which amendments would require a vote of
the people) on the timing or manner of implementation of retail electric
competition in Arizona.
The Company continues to focus on working with the ACC and the Arizona
legislature 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.
-10-
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 recent
congressional sessions, which as currently written, would allow consumers to
choose their electricity suppliers 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 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 September 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 beginning July 1, 1996. 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:
* 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.
* Recovery of substantially all of the Company's present regulatory assets
through accelerated amortization over an eight-year period beginning July
1, 1996, increasing annual amortization by approximately $120 million ($72
million after income taxes).
* A formula for sharing future cost savings between customers and
shareholders (price reduction formula) referencing a return on equity (as
defined) of 11.25%.
-11-
* 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.
* 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 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
-12-
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.
-13-
ARIZONA PUBLIC SERVICE COMPANY
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations.
- --------------
Operating Results
- -----------------
The following table summarizes the Company's revenues and earnings for
the three-month, nine-month and twelve-month periods ended September 30, 1997
and 1996:
Periods ended September 30
(Thousands of Dollars)
Three Months Nine Months Twelve Months
----------------------- ----------------------- -----------------------
1997 1996 1997 1996 1997 1996
----------------------- ----------------------- -----------------------
Operating
Revenues $ 632,821 $ 566,899 $1,470,593 $1,338,818 $1,850,047 $1,687,542
Earnings for
Common stock $ 126,715 $ 124,331 $ 218,032 $ 231,574 $ 212,837 $ 246,739
Operating Results - Three-month period ended September 30, 1997
-----------------------------------------------------------------------
compared with three-month period ended September 30, 1996
---------------------------------------------------------
Earnings increased slightly in the three-month comparison as the
impacts of two settlements related to coal and gas used for electric generation
and strong customer growth offset the effects of higher operating costs, milder
weather, and a rate reduction which became effective July 1, 1997 (see Note 5 of
Notes to Condensed Financial Statements).
The fuel-related settlements contributed to earnings approximately $21
million before income taxes and were reflected on the income statement as
reductions in fuel expense and as other income. Approximately $16 million of
these settlements related to prior years.
Operating revenues increased $66 million primarily due to a $67 million
increase in sales for resale and $18 million from retail customer growth and
higher usage, partially offset by an $11 million decrease attributable to
weather effects and the 1997 retail price reduction impact of $6 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. These bulk power activities did not result in a significant
variance in earnings due to market pressures on prices.
-14-
Operation and maintenance expenses increased $10 million primarily due
to the timing of charges for employee incentive plans, nuclear refueling
outages, and other expenses, partially offset by the cost savings from a 1996
voluntary severance program. Other taxes increased $5 million primarily due to
an adjustment in the third quarter of 1996 to reflect the impacts of a tax law
change on the first half of 1996.
Operating Results - Nine-month period ended September 30, 1997 compared
-----------------------------------------------------------------------
with nine-month period ended September 30, 1996
-----------------------------------------------
Earnings decreased in the nine-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, two
settlements related to coal and gas used for electric generation, and lower
financing costs.
In the nine-month comparison, the regulatory agreement, which became
effective July 1, 1996, resulted in $58 million (before income taxes) of
accelerated regulatory asset amortization and retail price reductions which
reduced pretax revenues by $30 million.
Operating revenues increased $132 million primarily due to a $113
million increase in sales for resale and $53 million of retail customer growth
and higher usage, partially offset by the $30 million impact of the retail price
reductions. 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. The
fuel-related settlements contributed to earnings approximately $21 million
before income taxes and were reflected on the income statement as reductions in
fuel expense and as other income. Approximately $16 million of these settlements
related to prior years. Financing costs decreased $10 million due to lower
amounts of debt and preferred stock outstanding and lower average interest
rates.
Operating Results - Twelve-month period ended September 30, 1997
-----------------------------------------------------------------------
compared with twelve-month period ended September 30, 1996
----------------------------------------------------------
Earnings decreased in the twelve-month comparison ended September 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 voluntary severance program, and an increase in fuel
expenses. These effects were partially offset by strong customer growth,
property tax and financing cost savings, two settlements related to coal and gas
used for electric generation, and $6 million related to the recognition of
income tax benefits associated with capital loss carryforwards.
-15-
The twelve-month comparison was also positively impacted by $8 million of pretax
asset write-downs in the twelve months ended September 30, 1996.
In the twelve-month comparison, the regulatory agreement, which became
effective July 1, 1996, resulted in $88 million of accelerated regulatory asset
amortization and retail price reductions which reduced revenues by $42 million.
Fuel expenses increased $121 million primarily due to increased retail and
wholesale sales volumes, partially offset by the effects of the fuel-related
settlements. These settlements contributed to earnings approximately $21 million
before income taxes and were reflected on the income statement as reductions in
fuel expense and as other income. Approximately $16 million of these settlements
related to prior years.
Operating revenues increased $163 million primarily due to a $125
million increase in sales for resale and $77 million of customer growth and
higher usage, partially offset by the $42 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 $13 million primarily due to a 1996 change in property tax law and
adjustments to property tax estimates to reflect the actual amounts billed.
Financing costs decreased $13 million due to lower amounts of debt and preferred
stock outstanding and lower average interest rates.
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 nine months ended September 30, 1997, the Company incurred
approximately $221 million in capital expenditures, which is approximately 75%
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 $272 million, $114 million, and
$114 million for the
-16-
years 1997, 1998, and 1999, respectively. During the nine months ended September
30, 1997, the Company redeemed approximately $223 million of its long-term debt
and approximately $47 million of its preferred stock with funds from internal
cash from operations and long-term and short-term debt. 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 nine months ended September 30, 1997, the Company incurred
$60 million of long-term debt under credit agreements 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.
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.
-17-
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.
-18-
PART II - OTHER INFORMATION
---------------------------
ITEM 5. Other Information
- --------------------------
Plant Sites Leased from Navajo Nation
- -------------------------------------
In September 1997, a settlement agreement was finalized between the
Company, the coal supplier to Four Corners and the Navajo Nation which settled
certain issues in the Four Corners lease regarding the obligation of the fuel
supplier to pay taxes prior to the expiration of tax waivers in 2001. See
"Properties - Plant Sites Leased from the Navajo Nation" in Part I, Item 2 of
the 1996 10-K. Pursuant to the agreement, the Company recognized approximately
$14 million of pretax earnings related to a refund of possessory interest taxes
paid by the fuel supplier. The parties also agreed to renegotiate their business
relationship before 2001 in an effort to permit the electricity generated at
Four Corners to be priced competitively. The Company cannot currently predict
the outcome of this matter.
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.
-19-
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Arizona Public Service Company Director Equity Plan
10.2 Letter Agreement between the Company and William L. Stewart
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 September 30, 1997, and the period from
October 1 through November 12, 1997, the Company filed no reports on Form 8-K.
- ---------------------------
(a) Reports filed under File No. 1-4473 were filed in the office of the
Securities and Exchange Commission located in Washington, D.C.
-20-
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
Dated: November 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)