-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kR9i7/q+jnlw/QWzndnvpOEaK9X1NF6k77daLQiDgYna+Td683TiQ6IEPbDdfr40 evvqXmYRVhStuYnuX+rTBQ== 0000950147-94-000087.txt : 19940816 0000950147-94-000087.hdr.sgml : 19940816 ACCESSION NUMBER: 0000950147-94-000087 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINNACLE WEST CAPITAL CORP CENTRAL INDEX KEY: 0000764622 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 860512431 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08962 FILM NUMBER: 94544319 BUSINESS ADDRESS: STREET 1: 400 E VAN BUREN ST P.O. BOX 52132 CITY: PHOENIX STATE: AZ ZIP: 85072-2132 BUSINESS PHONE: 6023792616 MAIL ADDRESS: STREET 1: 400 E VAN BUREN ST STREET 2: P.O. BOX 52132 CITY: PHOENIX STATE: AZ ZIP: 85072-2132 FORMER COMPANY: FORMER CONFORMED NAME: AZP GROUP INC DATE OF NAME CHANGE: 19870506 10-Q 1 QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 ------------------------- 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 1-8962 PINNACLE WEST CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Arizona 86-0512431 (State or other jurisdiction I.R.S. Employer Identification No.) of incorporation or organization) 400 E. Van Buren St., P. O. Box 52132, Phoenix, Arizona 85072-2132 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 602-379-2500 ---------------------------------------------------------------------------- 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 the 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, no par value, outstanding as August 11, 1994 87,409,486 Glossary ACC - Arizona Corporation Commission ACC Order - Final order of the ACC dated June 1, 1994 approving the 1994 Settlement Agreement ACC Staff - Staff of the Arizona Corporation Commission AFUDC - Allowance for funds used during construction APS - Arizona Public Service Company cents/kWh - Cents per kilowatt-hour Company - Pinnacle West Capital Corporation El Dorado - El Dorado Investment Company ITCs - Investment tax credits 1991 Settlement - December 1991 retail rate case settlement 1993 10-K - Pinnacle West Capital Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1993 1994 Settlement Agreement - Rate Settlement Agreement between APS and the ACC Staff dated May 27, 1994 NRC - Nuclear Regulatory Commission Palo Verde - Palo Verde Nuclear Generating Station Pinnacle West - Pinnacle West Capital Corporation SFAS No. 106 - Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" SFAS No. 112 - Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" SunCor - SunCor Development Company PART 1. FINANCIAL INFORMATION Item 1. Financial Statements. PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) Three Months Ended June 30, 1994 1993 ------------ ------------ Operating Revenues Electric $ 417,588 $ 407,375 Real estate 15,436 6,277 ------------ ------------ Total 433,024 413,652 ------------ ------------ Fuel Expenses Fuel for electric generation 60,090 55,029 Purchased power 16,304 16,577 ------------ ------------ Total 76,394 71,606 ------------ ------------ Operating Expenses Utility operations and maintenance 108,444 94,191 Real estate operations 15,602 8,209 Depreciation and amortization 57,953 55,822 Taxes other than income taxes 57,302 54,669 ------------ ------------ Total 239,301 212,891 ------------ ------------ Operating Income 117,329 129,155 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction 977 758 Palo Verde accretion income 13,616 18,469 Interest on long-term debt (57,202) (63,933) Other interest (3,977) (4,055) Allowance for borrowed funds used during construction 1,350 1,080 Preferred stock dividend requirements of APS (6,972) (7,648) Other-net 20,095 164 ------------ ------------ Total (32,113) (55,165) ------------ ------------ Income From Continuing Operations Before Income Taxes 85,216 73,990 Income Tax Expense 36,514 35,091 ------------ ------------ Net Income $ 48,702 $ 38,899 ============ ============ Average Common Shares Outstanding 87,418,627 87,193,004 Earnings Per Average Common Share Outstanding: $ 0.56 $ 0.45 ============ ============ Dividends Declared Per Share $ 0.20 -- ============ ============ See Notes to Consolidated Financial Statements PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) Six Months Ended June 30, 1994 1993 ------------ ------------ Operating Revenues Electric $ 782,764 $ 778,678 Real estate 24,860 10,076 ------------ ------------ Total 807,624 788,754 ------------ ------------ Fuel Expenses Fuel for electric generation 118,058 110,037 Purchased power 26,367 27,073 ------------ ------------ Total 144,425 137,110 ------------ ------------ Operating Expenses Utility operations and maintenance 206,065 185,302 Real estate operations 24,263 12,079 Depreciation and amortization 116,148 111,548 Taxes other than income taxes 110,924 106,225 ------------ ------------ Total 457,400 415,154 ------------ ------------ Operating Income 205,799 236,490 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction 1,823 1,410 Palo Verde accretion income 33,596 36,459 Interest on long-term debt (113,566) (125,351) Other interest (7,964) (7,943) Allowance for borrowed funds used during construction 2,517 1,966 Preferred stock dividend requirements of APS (14,482) (15,537) Other-net 20,325 452 ------------ ------------ Total (77,751) (108,544) ------------ ------------ Income From Continuing Operations Before Income Taxes 128,048 127,946 Income Tax Expense 57,727 61,573 ------------ ------------ Income From Continuing Operations 70,321 66,373 Cumulative Effect of Change in Accounting for Income Taxes -- 19,252 ------------ ------------ Net Income $ 70,321 $ 85,625 ============ ============ Average Common Shares Outstanding 87,418,395 87,176,359 Earnings Per Average Common Share Outstanding: Continuing Operations $ 0.80 $ 0.76 Accounting Change -- 0.22 ------------ ------------ Total $ 0.80 $ 0.98 ============ ============ Dividends Declared Per Share $ 0.40 -- ============ ============ See Notes to Consolidated Financial Statements PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share amounts) Twelve Months Ended June 30, 1994 1993 ------------ ------------ Operating Revenues Electric $ 1,690,376 $ 1,694,398 Real estate 47,032 23,818 ------------ ------------ Total 1,737,408 1,718,216 ------------ ------------ Fuel Expenses Fuel for electric generation 239,455 241,227 Purchased power 68,406 60,472 ------------ ------------ Total 307,861 301,699 ------------ ------------ Operating Expenses Utility operations and maintenance 421,979 385,766 Real estate operations 50,404 30,518 Depreciation and amortization 228,158 222,272 Taxes other than income taxes 227,044 219,481 ------------ ------------ Total 927,585 858,037 ------------ ------------ Operating Income 501,962 558,480 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction 2,739 2,961 Palo Verde accretion income 72,017 71,054 Interest on long-term debt (234,176) (253,926) Other interest (16,526) (14,849) Allowance for borrowed funds used during construction 4,704 4,022 Preferred stock dividend requirements of APS (29,785) (31,572) Other-net 17,591 (9,854) ------------ ------------ Total (183,436) (232,164) ------------ ------------ Income From Continuing Operations Before Income Taxes 318,526 326,316 Income Tax Expense 144,600 155,992 ------------ ------------ Income From Continuing Operations 173,926 170,324 Income From Discontinued Operations -- Net of Income Tax -- 6,000 Cumulative Effect of Change in Accounting for Income Taxes -- 19,252 ------------ ------------ Net Income $ 173,926 $ 195,576 ============ ============ Average Common Shares Outstanding 87,361,921 87,116,077 Earnings Per Average Common Share Outstanding: Continuing Operations $ 1.99 $ 1.96 Discontinued Operations -- 0.07 Accounting Change -- 0.22 ------------ ------------ Total $ 1.99 $ 2.25 ============ ============ Dividends Declared Per Share $ 0.60 -- ============ ============ See Notes to Consolidated Financial Statements PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS (Thousands of Dollars) June 30, December 31, 1994 1993 ----------- ----------- Current Assets Cash and cash equivalents $ 50,796 $ 52,127 Customer and other receivables--net 116,372 126,343 Accrued utility revenues 70,472 60,356 Material and supplies 95,031 96,174 Fossil fuel 24,577 34,220 Deferred income taxes 109,519 100,234 Other current assets 16,372 13,782 ----------- ----------- Total current assets 483,139 483,236 ----------- ----------- Investments and Other Assets Real estate investments--net 398,127 402,873 Other assets 138,092 136,074 ----------- ----------- Total investments and other assets 536,219 538,947 ----------- ----------- Utility Plant Electric plant in service, including nuclear fuel 6,560,403 6,462,589 Construction work in progress 156,104 197,556 ----------- ----------- Total utility plant 6,716,507 6,660,145 Less accumulated depreciation and amortization 2,094,255 2,058,895 ----------- ----------- Net utility plant 4,622,252 4,601,250 ----------- ----------- Deferred Debits Regulatory asset for income taxes 564,841 585,294 Palo Verde Unit 3 cost deferral 297,167 301,748 Palo Verde Unit 2 cost deferral 174,967 177,998 Other deferred debits 274,170 268,326 ----------- ----------- Total deferred debits 1,311,145 1,333,366 ----------- ----------- Total Assets $ 6,952,755 $ 6,956,799 =========== =========== See Notes to Consolidated Financial Statements. PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND EQUITY (Thousands of Dollars) June 30, December 31, 1994 1993 ---------- ---------- Current Liabilities Accounts payable $ 94,572 $ 97,489 Accrued taxes 99,043 96,303 Accrued interest 56,817 57,674 Short-term borrowings 119,500 148,000 Current maturities of long-term debt 71,252 78,841 Other current liabilities 62,853 60,845 ---------- ---------- Total current liabilities 504,037 539,152 ---------- ---------- Non-Current Liabilities Long-term debt less current maturities 2,668,052 2,633,620 Other liabilities 8,003 8,246 ---------- ---------- Total non-current liabilities 2,676,055 2,641,866 ---------- ---------- Deferred Credits and Other Deferred income taxes 1,311,170 1,278,673 Deferred investment tax credit 124,585 127,331 Unamortized gain - sale of utility plant 102,948 107,344 Other deferred credits 209,898 221,762 ---------- ---------- Total deferred credits and other 1,748,601 1,735,110 ---------- ---------- Commitments and Contingencies (Notes 6 and 7) Minority Interests Non-redeemable preferred stock of APS 193,561 193,561 ---------- ---------- Redeemable preferred stock of APS 145,000 197,610 ---------- ---------- Common Stock Equity Common stock, no par value 1,643,430 1,642,783 Retained earnings 42,071 6,717 ---------- ---------- Total common stock equity 1,685,501 1,649,500 ---------- ---------- Total Liabilities and Equity $6,952,755 $6,956,799 ========== ========== See Notes to Consolidated Financial Statements. PINNACLE WEST CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (THOUSANDS OF DOLLARS) Six Months Ended June 30, 1994 1993 --------- --------- Cash Flows From Operating Activities Income from continuing operations before cumulative effect of accounting change $ 70,321 $ 66,373 Items not requiring cash Depreciation and amortization 129,799 131,150 Deferred income taxes--net 43,665 65,889 Provision for rate refund (9,308) (10,687) Palo Verde accretion income (33,596) (36,459) Other--net (2,255) (3,291) Changes in current assets and liabilities Accounts receivable--net 9,971 40,713 Accrued utility revenues (10,116) (11,505) Materials, supplies and fossil fuel 10,786 5,102 Other current assets (2,590) (5,242) Accounts payable 11,116 (23,574) Accrued taxes 2,740 (10,148) Accrued interest (857) 913 Other current liabilities 11,316 (8,058) Additions to real estate (12,277) (11,009) Sales of real estate 15,512 6,273 Other--net (20,786) 27,145 --------- --------- Net Cash Flow Provided By Operating Activities 213,441 223,585 --------- --------- Cash Flows From Investing Activities Capital expenditures (121,691) (99,942) Allowance for equity funds used during construction 1,823 1,410 Other--net (1,699) (5,386) --------- --------- Net Cash Flow Used For Investing Activities (121,567) (103,918) --------- --------- Cash Flows From Financing Activities Issuance of long-term debt 426,418 147,264 Short-term debt--net (28,500) (48,000) Dividends paid on common stock (34,967) -- Repayment of long-term debt (404,193) (224,846) Redemption of preferred stock (54,096) (28,040) Other--net 2,133 2,421 --------- --------- Net Cash Flow Used For Financing Activities (93,205) (151,201) --------- --------- Net Cash Flow (1,331) (31,534) Cash and Cash Equivalents at Beginning of Period 52,127 87,926 --------- --------- Cash and Cash Equivalents at End of Period $ 50,796 $ 56,392 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest, net of amounts capitalized $ 113,924 $ 124,314 Income taxes $ 14,350 $ 17,724 See Notes to Consolidated Financial Statements. PINNACLE WEST CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements include the accounts of Pinnacle West and its subsidiaries: APS, SunCor and El Dorado. All significant intercompany balances have been eliminated. Certain prior-year balances have been reclassified to conform to the 1994 presentation. 2. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of Pinnacle West and its subsidiaries as of June 30, 1994, the results of their operations for the three months, six months and twelve months ended June 30, 1994 and 1993, and their cash flows for the six months ended June 30, 1994 and 1993. It is suggested that these consolidated financial statements and notes to consolidated financial statements be read in conjunction with the consolidated financial statements and notes to consolidated financial statements included in the 1993 10-K. 3. The operations of APS are subject to seasonal fluctuations, with variations occurring in energy usage by customers from season to season and from month to month within a season, primarily as a result of changing weather conditions. For this and other reasons, Pinnacle West's consolidated results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. 4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for changes in capitalization since December 31, 1993. 5. By order dated June 1, 1994 (the "ACC Order"), the ACC approved a Settlement Agreement dated May 27, 1994 (the "1994 Settlement Agreement"), between APS and ACC Staff. The 1994 Settlement Agreement replaces the agreement dated April 20, 1994. Pursuant to the terms of the 1994 Settlement Agreement, APS' annual retail rates were reduced by approximately $38.3 million, or approximately 2.7%, effective June 1, 1994. APS will also be allowed to recover through a surcharge up to an additional $6 million for demand side management and renewable resource programs, effective upon ACC approval of its application for such programs. The reduction in retail rates offset by the demand side management surcharge would result in a net rate reduction of approximately 2.2%. The ACC Order is final and non-appealable. The following description of the ACC Order is a summary and is qualified in its entirety by the ACC Order, incorporated herein by reference. Future Retail Rate Changes Neither APS nor the ACC Staff will file for a permanent change to APS' general rates and charges prior to December 31, 1996 (the "Rate Moratorium Period"), except (i) in the event of an emergency, such as APS' inability to finance on reasonable terms, or material increases in APS' cost of service as a result of federal, tribal, state or local laws, regulatory requirements or orders; (ii) for changes relating to specific rate schedules or terms and conditions of service that do not significantly affect the overall earnings of APS; and (iii) in the case of certain individual large customers, the ACC Staff will expeditiously review any APS tariff or contract filing for such customers and recommend that such filings be decided promptly by the ACC. If APS files its next general rate application before January 1, 1998, the ACC will render its decision no later than twelve (12) months after the filing, subject to certain exceptions. If the next general rate proceeding results in no increase in residential rates, the ACC will compare APS' costs of service during the test period under review for fuel expense and operation and maintenance for all sales (including sales for resale, but excluding interchange and non-traditional sales for resale) to a target cost of service index of 3.63 cents/kWh. Forty-five percent (45%) of any cost savings below the target cost of 3.63 cents/kWh would be added to APS' otherwise appropriate revenue requirement in such rate proceeding. APS' cost of service index for these items during 1993 was 3.71 cents/kWh. All three Palo Verde units are, and in future rate cases will be, included in APS' rate base as "used and useful," less the net prudence disallowance required by the December 1991 rate case settlement (the "1991 Settlement"). As with any of APS' generating facilities, the ACC can re-examine this position in future general rate cases in the event of significant changes in the operating characteristics, reliability or efficiency of any or all of the Palo Verde units, or if any unit is derated. In addition, the "in-lieu" refund obligation resulting from the 1991 Settlement was deemed fully discharged as of the date of the ACC Order. See Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8 of the 1993 10-K for additional information regarding the 1991 Settlement. Decommissioning Funding The rates authorized by the ACC Order would include an annual jurisdictional allowance for decommissioning funding for all three Palo Verde units at the following levels: Unit 1 ($3.621 million); Unit 2 ($3.877 million); and Unit 3 ($3.405 million). See Note 1.G of Notes to Consolidated Financial Statements in Part II, Item 8 of the 1993 10-K for additional information regarding APS' decommissioning obligations. Renewable Resources/Demand Side Management APS will spend specified annual amounts over an indefinite period on renewable resources and demand side management projects and, on or before December 31, 1994, will submit to the ACC Staff a three-year renewable resource plan containing specified elements. See Paragraph K of the ACC Order, incorporated herein by reference, for further details regarding renewable resources and demand side management. Investment Tax Credits; Depreciation Reversal APS will, upon the receipt of a favorable ruling from the Internal Revenue Service, amortize below the line approximately $137 million of its jurisdictional unamortized investment tax credits ("ITCs") over a five year period beginning with calendar year 1995 instead of the current remaining amortization schedule of approximately twenty-five years. After this five year period all such amortized ITCs will be treated as fully restored to APS' rate base in any future ratemaking proceedings. The ACC Order also allowed APS to reverse certain depreciation related to Palo Verde (associated with the 1991 Settlement), which resulted in approximately $15 million of after-tax income during the three-month period ended June 30, 1994. Pricing and Operating Procedures The ACC Staff and APS will meet in a good faith attempt to develop new pricing and operating procedures that are responsive to market conditions, competitive pressures in the electric utility industry, and the ACC's relationship to regulated utilities and their customers. The parties will submit quarterly updates and a final report to the ACC within twelve months of the ACC Order and seek prompt ACC approval of recommendations that will assist APS in achieving its residential price stability goals and enhancing its competitiveness related to non-residential customers. 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 industrywide retrospective assessment program. The maximum assessment per reactor under the retrospective rating program for each nuclear incident is approximately $79 million, subject to an annual limit of $10 million per incident. Based upon APS' 29.1% interest in the three Palo Verde units, APS' maximum potential assessment per incident is approximately $69 million, with an annual payment limitation of $8.73 million. The insureds under this liability insurance include the Palo Verde participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard." The Palo Verde participants maintain "all risk" (including nuclear hazards) insurance for property damage to, and decontamination and decommissioning 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. APS 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. APS has encountered axial tube cracking in the upper regions of the two steam generators in Unit 2 and, to a lesser degree, in Unit 3. This form of tube degradation is uncommon in the industry and, in March 1993, led to a tube rupture in Unit 2 resulting in the extension of a scheduled refueling outage through September 1993. Although its analysis is not yet completed, APS believes that the axial cracking in the Unit 2 and Unit 3 steam generator tubes is due to the susceptibility of tube materials to a combination of deposits on the tubes and the relatively high temperatures at which all three units are currently designed to operate. APS also believes that it can retard further tube degradation to acceptable levels by remedial actions, which include chemically cleaning the generators and performing analyses and adjustments that will allow the units to be operated at lower temperatures without appreciably reducing their power output. Chemical cleaning has been completed in Units 2 and 3, and APS expects to chemically clean the Unit 1 steam generators during its refueling outage in 1995. APS began operating the units at approximately 86% capacity in October 1993 to reduce the operating temperature, pending the completion of the temperature analyses and appropriate modification of operating procedures. The temperature analyses have been concluded for Units 1 and 3, and these units are operating at or near 100% capacity. APS anticipates that Unit 2, which is currently operating at 88% capacity, will be returned to full power by late 1994. In March 1994, a mid-cycle inspection outage was completed at Unit 2 to assess the status of the unit's steam generators' tubes and to continue implementing a program of improvements. Unit 2 is scheduled for another mid-cycle inspection outage beginning in September 1994 and a refueling and maintenance outage in early 1995. Palo Verde Unit 3 completed a refueling outage in June 1994 and, in light of the axial cracking that APS has found to date, Unit 3 is scheduled for a mid-cycle inspection outage beginning in November 1994. Palo Verde Unit 1 is scheduled for a refueling outage beginning in April 1995. In late 1993 APS concluded that Unit 1 could be safely operated until the 1995 outage and submitted its supporting analysis to the NRC. However, the potential need for a mid-cycle steam generator tube inspection outage in Unit 1 late in 1994 is currently being evaluated. During the six months ended June 30, 1994, APS incurred replacement power costs totalling approximately $17 million (before income taxes) above normal levels as a result of the Unit 2 mid-cycle outage and operating the units at reduced power. Because a Unit 2 refueling and maintenance outage which was scheduled to begin in late 1994 is now scheduled for 1995, APS does not expect to incur any additional replacement power costs above normal levels during the remainder of the year. In the event that a mid-cycle inspection outage is necessary in late 1994 for Unit 1, and assuming that such an outage would last about a month, the incremental replacement power costs and operation and maintenance expenses related to the outage are estimated to be approximately $5 million before income taxes. In comparison, replacement power costs exceeded normal levels in 1993 by approximately $15.5 million before income taxes due to Palo Verde outages and reduced power operations. When tube cracks are detected during any outage, the affected tubes are taken out of service by plugging. That has occurred in a number of tubes in all three units, particularly in Unit 2, which is by far the most affected by cracking and plugging. APS expects that because of its program to control the tube degradation, the rate of plugging will slow to a manageable level. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Months, Six Months and Twelve Months Ended June 30, 1994 as Compared with Corresponding Periods Ended June 30, 1993. The following discussion relates to Pinnacle West and its subsidiaries: APS, SunCor and El Dorado. LIQUIDITY AND CAPITAL RESOURCES Pinnacle West Pinnacle West's cash requirements and its ability to fund those requirements are discussed under "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 1993 10-K and under "Business -- The Company -- Capital Requirements" in Part I, Item 1 of the 1993 10-K. The Board declared a quarterly dividend of 20 cents per share of common stock, payable on September 1, 1994 to shareholders of record on August 1, 1994, totalling approximately $17.5 million. APS For the six months ended June 30, 1994, APS incurred approximately $106 million in construction expenditures, accounting for approximately 39% of the most recently estimated 1994 construction expenditures. APS has estimated total construction expenditures for the years 1994, 1995 and 1996 to be approximately $272 million, $298 million and $257 million, respectively. Refunding obligations for preferred stock and long-term debt, a capitalized lease obligation, and certain actual and anticipated early redemptions, including premiums thereon, are expected to total approximately $582 million (of which $513 million are optional), $111 million and $4 million for the years 1994, 1995 and 1996, respectively. During the first six months of 1994, APS refunded approximately $421 million (72%) of the estimated 1994 total. This amount includes the redemption, refunding or repurchase of approximately $367 million of long-term debt and the redemption of approximately $54 million of preferred stock, including premiums thereon. During August 1994 APS purchased on the open market approximately $24 million in aggregate principal amount of its First Mortgage Bonds, 10-1/4% Series due 2000 (the "10-1/4% Bonds"). On September 1, 1994 APS will redeem at maturity all outstanding shares of its $8.50 Cumulative Preferred Stock, Series T ($100 Par Value) (the "Series T Stock") in the amount of $50 million. Since December 31, 1993 APS has issued $100 million of its First Mortgage Bonds and incurred approximately $303 million of long-term debt consisting of borrowings from governmental authorities which had funded that amount through the issuance of pollution control bonds. Provisions in APS' mortgage bond indenture and articles of incorporation require certain coverage ratios to be met before it can issue additional first mortgage bonds or preferred stock. In addition, the mortgage bond indenture limits the amount of additional bonds which may be issued to a percentage of net property additions, to property previously pledged as security for certain bonds that have been redeemed or retired and/or cash deposited with the mortgage bond trustee. As of June 30, 1994, and (i) adjusting for the purchase of approximately $24 million of the 10-1/4% Bonds, and (ii) assuming the redemption on September 1, 1994 of $50 million of the Series T Stock, APS estimates that the mortgage bond indenture and the articles of incorporation would have allowed it to issue up to approximately $1.26 billion and $1.04 billion of additional first mortgage bonds and preferred stock, respectively. The ACC has authority over APS with respect to the issuance of long-term debt and equity securities. Existing ACC orders allow APS to have up to approximately $2.6 billion in long-term debt and approximately $501 million of preferred stock outstanding at any one time. Management does not expect any of the foregoing restrictions to limit the APS' ability to meet its capital requirements. Non-Utility Subsidiaries On July 6, 1994 SunCor amended the Collateralized Mortgage Bond Agreement to increase the principal amount from $25 million to $30 million. RESULTS OF OPERATIONS The following table shows the income and/or loss of Pinnacle West and its subsidiaries for the three-month, six-month and twelve-month periods ended June 30, 1994 and 1993: INCOME (LOSS) (Unaudited) Dollars in Thousands)
Three Months Ended Six Months Ended Twelve Months Ended June 30, June 30, June 30, 1994 1993 1994 1993 1994 1993 ---- ---- ---- ---- ---- ---- APS $ 58,879 $ 53,716 $ 89,837 $ 92,993 $ 216,390 $ 230,079 SunCor (400) (1,494) 564 (1,156) (2,270) (5,305) El Dorado (457) (142) (883) (327) (4,459) (811) Pinnacle West (9,320) (13,181) (19,197) (25,137) (35,735) (53,639) -------- -------- -------- -------- --------- --------- INCOME FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 48,702 38,899 70,321 66,373 173,926 170,324 INCOME FROM DISCONTINUED OPERATIONS -- -- -- -- -- 6,000 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAX -- -- -- 19,252 -- 19,252 -------- -------- -------- -------- --------- --------- NET INCOME $ 48,702 $ 38,899 $ 70,321 $ 85,625 $ 173,926 $ 195,576 ======== ======== ======== ======== ========= ========= Includes the parent company's interest expense and operating expenses net of income tax benefits. Income tax benefits are as follows (in thousands): $6,638 and $9,569 for the three months ended June 30, 1994 and 1993, respectively; $13,364 and $17,326 for the six months ended June 30, 1994 and 1993, respectively; and $36,516 and $37,331 for the twelve months ended June 30, 1994 and 1993, respectively.
APS OPERATING RESULTS - THREE-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED TO THREE-MONTH PERIOD ENDED JUNE 30, 1993 APS' earnings increased in the three-month period ended June 30, 1994 primarily due to the reversal of certain previously recorded depreciation related to Palo Verde and increased revenues. Pursuant to the ACC Order, APS reversed accumulated depreciation related to the portion of Palo Verde written off as a result of the 1991 Settlement. See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for a detailed discussion of the ACC Order. Operating revenues increased primarily due to customer growth. These positive factors were partially offset by increases in both operation and maintenance expenses and fuel costs. Operation and maintenance expenses were higher primarily due to employee severance costs resulting from various APS cost reduction efforts and fossil plant maintenance costs. Fuel costs were higher primarily due to replacement power related to reduced nuclear generation. OPERATING RESULTS - SIX-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED TO SIX-MONTH PERIOD ENDED JUNE 30, 1993 APS' earnings decreased in the six-month period ended June 30, 1994 primarily due to increases in operation and maintenance expenses and fuel costs. Operation and maintenance expenses increased due to higher power plant maintenance costs and employee severance costs. Fuel costs were higher primarily due to replacement power related to reduced nuclear generation, offset partially by the effect of lower interchange sales. These negative factors were partially offset by the depreciation reversal related to Palo Verde and increased revenues. Revenues increased due to retail customer growth and higher usage per customer, partially offset by lower interchange sales due to reduced nuclear generation. OPERATING RESULTS - TWELVE-MONTH PERIOD ENDED JUNE 30, 1994 COMPARED TO TWELVE-MONTH PERIOD ENDED JUNE 30, 1993 APS' earnings decreased in the twelve-month period ended June 30, 1994 primarily due to increased operation and maintenance expenses, higher fuel costs and lower operating revenues. Operation and maintenance expenses increased due to higher power plant maintenance costs, the implementation of SFAS No. 106 and SFAS No. 112 in 1993 (see Note 9 of Notes to Consolidated Financial Statements in Part II, Item 8 of the 1993 10-K), and employee severance costs. Fuel costs were higher primarily because of replacement power costs due to reduced nuclear generation, partially offset by the effect of lower interchange sales. Operating revenues were down due to lower interchange sales and milder weather partially offset by customer growth. These negative factors were partially offset by the depreciation reversal related to Palo Verde and lower interest costs. Non-utility Operations The parent company's interest expense decreased in the three-month, six-month and twelve-month periods as a result of continuing debt prepayment. SunCor's earnings in the three-month, six-month and twelve-month periods were positively impacted by increased land sales. El Dorado's earnings decreased in the three-month, six-month and twelve-month periods due to lower earnings on venture capital investments. Other Income Net income reflects accounting practices required for regulated public utilities and represents a composite of cash and noncash items, including AFUDC. In accordance with the 1991 Settlement, during the six months ended June 30, 1994, APS recorded $20.3 million of after-tax accretion income on Palo Verde Unit 3 and $5.6 million of after-tax income resulting from Palo Verde refund obligation reversals. APS has now recorded all of the Unit 3 accretion income and Palo Verde refund obligation reversals related to the 1991 Settlement. See Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8 of the 1993 10-K. In accordance with the ACC Order, during the three months ended June 30, 1994, APS also recorded a one-time depreciation reversal related to Palo Verde in the amount of approximately $15.0 million after tax. See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report. Tax Legislation On April 4, 1994, a comprehensive tax package was signed into Arizona law that, among other things, reduces the assessment ratio for utility property from the current assessment ratio of 30% to 25%. This reduction will be phased in over a five-year period at one percent per year beginning in 1995. This legislation is expected to reduce or offset the historical rate of growth of property tax expense. 1994 Settlement Agreement See Note 5 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of the ACC Order. Because of the non-cash earnings (1) that APS expects to result from the accelerated amortization of ITCs during the 1995-1999 period (subject to Internal Revenue Service approval); and (2) that resulted from the reversal of depreciation related to Palo Verde (associated with the 1991 Settlement), APS does not expect its earnings to be significantly affected as a result of the ACC Order. PART II. OTHER INFORMATION The following information relates primarily to Pinnacle West and its principal subsidiary, APS. ITEM 4. Submission of Matters to a Vote of Security-Holders At the Company's Annual Meeting of Shareholders held on May 19, 1994 shareholder proposals were submitted as to the following matters: Abstentions Votes Votes and Broker For Against Non Votes ----- ------- ----------- Proposal to approve the Company's 60,634,762 17,501,461 1,128,747 1994 Long-Term Incentive Plan 77% 22% 1% Proposal to approve the Company's 62,001,609 16,054,155 1,209,206 Director Equity Participation Plan 78% 21% 1% In addition, at the same annual meeting the following persons were elected Class III Directors with a term to expire at the 1997 annual meeting of shareholders: Votes Abstentions Votes Against or and Broker For Withheld Non Votes ----- ---------- ----------- Pamela Grant 77,544,042 1,680,147 N/A Martha O. Hesse 77,684,986 1,592,549 N/A William S. Jamieson, Jr. 77,625,646 1,639,062 N/A Richard Snell 77,656,379 1,637,069 N/A ITEM 5. Other Information Palo Verde Nuclear Generating Station See Note 7 of Notes to Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of the tube cracking in 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 APS' construction and financing programs. Water Supply As previously reported, in an action pending in Maricopa County Superior Court relating to claims to water in the Lower Gila Watershed, issues important to APS' claims were remanded to the trial court for further action. See "Business of Arizona Public Service Company -- Water Supply" in Part I, Item 1 of the 1993 10-K. On June 30, 1994 the trial court rendered its decision with respect to these issues. The trial court has certified its decision for interlocutory appeal to the Arizona Supreme Court, and the Supreme Court has not yet rendered its decision. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits The Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation ss. 201.24 by reference to the filings set forth below: Originally Filed Date Exhibit No. Description as Exhibit File No. Effective - ----------- ----------- ---------------- -------- --------- 10.1 ACC Order dated 10.1 to APS' 1-4473 8/15/94 June 1, 1994 June 1994 Form 10-Q Report (b) Reports on Form 8-K During the quarter ended June 30, 1994 and for the period ended August 12, 1994, the Company filed the following Reports on Form 8-K: Report filed May 10, 1994 regarding the inspection of the Palo Verde Unit 3 steam generators and related issues. Report filed May 26, 1994 regarding the rescission by the Secretary of Labor of a final order approving a settlement agreement between APS and a former contract employee. SIGNATURE 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. PINNACLE WEST CAPITAL CORPORATION (Registrant) By: /s/ Henry Sargent --------------------------------- Henry Sargent Executive Vice President and Chief Financial Officer (Principal Financial Officer and Officer Duly Authorized to sign this Report) Dated: August 15, 1994 -----END PRIVACY-ENHANCED MESSAGE-----