-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EECPmMSaTBQKF9yMAv4raEoycPfiwzJHNo9jtVjvsftTENGuzy7SghMz+7IP6PuQ aCBpBbx/qIzKjxjD7VrFtA== 0000950147-97-000334.txt : 19970522 0000950147-97-000334.hdr.sgml : 19970522 ACCESSION NUMBER: 0000950147-97-000334 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE 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: 97609692 BUSINESS ADDRESS: STREET 1: 400 E VAN BUREN ST PO BOX 52132 STREET 2: 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: PO 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 PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 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 1-8962 ---------------- PINNACLE WEST CAPITAL CORPORATION ------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Arizona 86-0512431 - - ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 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 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, no par value, outstanding as of May 13, 1997: 85,094,326 - i - Glossary -------- ACC........................Arizona Corporation Commission ACC Staff..................Staff of the Arizona Corporation Commission Affected Utilities.........Utilities affected by the ACC's Proposed Rules on retail electric competition in Arizona APS........................Arizona Public Service Company Company....................Pinnacle West Capital Corporation El Dorado..................El Dorado Investment Company FERC.......................Federal Energy Regulatory Commission ITCs.......................Investment tax credits 1996 10-K..................Pinnacle West Capital Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1996 Palo Verde.................Palo Verde Nuclear Generating Station 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" Pinnacle West..............Pinnacle West Capital Corporation SunCor.....................SunCor Development Company PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Financial Statements. - - ----------------------------- PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (Unaudited) (Dollars in thousands, except per share amounts)
Three Months Ended March 31, 1997 1996 ------------ ------------ Operating Revenues Electric $ 379,021 $ 345,261 Real estate 19,543 15,994 ------------ ------------ Total 398,564 361,255 ------------ ------------ Fuel Expenses Fuel for electric generation 51,122 42,334 Purchased power 34,347 13,938 ------------ ------------ Total 85,469 56,272 ------------ ------------ Operating Expenses Utility operations and maintenance 88,016 87,743 Real estate operations 19,762 17,542 Depreciation and amortization 92,602 58,935 Taxes other than income taxes 30,244 34,201 ------------ ------------ Total 230,624 198,421 ------------ ------------ Operating Income 82,471 106,562 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction -- 1,675 Interest on long-term debt (39,451) (45,909) Other interest (4,501) (4,846) Capitalized interest 3,834 3,237 Preferred stock dividend requirements of APS (3,626) (4,477) Other-net 4,223 1,667 ------------ ------------ Total (39,521) (48,653) ------------ ------------ Income Before Income Tax and Extraordinary Charge 42,950 57,909 Income Tax Expense 17,568 23,050 ------------ ------------ Income Before Extraordinary Charge 25,382 34,859 Extraordinary Charge for Early Retirement of Debt, Net of Income Tax of $2,437 -- (3,597) ------------ ------------ Net Income $ 25,382 $ 31,262 ============ ============ Average Common Shares Outstanding 87,418,663 87,450,355 Earnings Per Average Common Share Outstanding: Income before extraordinary charge $ 0.29 $ 0.40 Extraordinary charge -- (0.04) ------------ ------------ Total $ 0.29 $ 0.36 ============ ============ Dividends Declared Per Share $ 0.275 $ 0.250 ============ ============
See Notes to Condensed Consolidated Financial Statements. 1 PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (Unaudited) (Dollars in thousands, except per share amounts)
Twelve Months Ended March 31, 1997 1996 ------------ ------------ Operating Revenues Electric $ 1,752,032 $ 1,623,245 Real estate 103,037 61,694 ------------ ------------ Total 1,855,069 1,684,939 ------------ ------------ Fuel Expenses Fuel for electric generation 239,181 204,552 Purchased power 115,539 66,598 ------------ ------------ Total 354,720 271,150 ------------ ------------ Operating Expenses Utility operations and maintenance 430,987 397,125 Real estate operations 98,300 60,391 Depreciation and amortization 333,174 242,077 Taxes other than income taxes 118,120 140,909 ------------ ------------ Total 980,581 840,502 ------------ ------------ Operating Income 519,768 573,287 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction 3,534 5,471 Interest on long-term debt (165,000) (200,282) Other interest (23,419) (18,585) Capitalized interest 10,106 10,306 Preferred stock dividend requirements of APS (16,241) (18,804) Other-net (4,192) (6,421) ------------ ------------ Total (195,212) (228,315) ------------ ------------ Income From Continuing Operations Before Income Tax 324,556 344,972 Income Tax Expense 122,974 135,128 ------------ ------------ Income From Continuing Operations 201,582 209,844 Loss on Discontinued Operations, Net of Income Tax of $6,461 (9,539) -- Extraordinary Charge for Early Retirement of Debt, Net of Income Tax of $11,341 and $10,271 (16,743) (15,168) ------------ ------------ Net Income $ 175,300 $ 194,676 ============ ============ Average Common Shares Outstanding 87,433,676 87,433,201 Earnings Per Average Common Share Outstanding: Continuing operations $ 2.30 $ 2.40 Discontinued operations (0.11) -- Extraordinary charge (0.19) (0.17) ------------ ------------ Total $ 2.00 $ 2.23 ============ ============ Dividends Declared Per Share $ 1.050 $ 0.950 ============ ============
See Notes to Condensed Consolidated Financial Statements. 2 PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Unaudited) ASSETS ------ (Thousands of Dollars)
March 31, December 31, 1997 1996 ---------- ------------ Current Assets Cash and cash equivalents $ 52,592 $ 26,686 Customer and other receivables--net 144,519 169,237 Accrued utility revenues 49,226 55,470 Material and supplies 73,213 74,120 Fossil fuel 12,639 13,928 Deferred income taxes 69,688 69,688 Other current assets 42,273 41,140 ---------- ---------- Total current assets 444,150 450,269 ---------- ---------- Investments and Other Assets Real estate investments--net 394,837 398,527 Other assets 178,881 173,109 ---------- ---------- Total investments and other assets 573,718 571,636 ---------- ---------- Utility Plant Electric plant in service and held for future use 6,830,092 6,803,211 Less accumulated depreciation and amortization 2,486,345 2,426,143 ---------- ---------- Total 4,343,747 4,377,068 Construction work in progress 251,753 226,935 Nuclear fuel, net of amortization 60,326 51,137 ---------- ---------- Net utility plant 4,655,826 4,655,140 ---------- ---------- Deferred Debits Regulatory asset for income taxes 502,356 516,722 Rate synchronization cost deferrals 400,279 414,082 Other deferred debits 369,241 381,440 ---------- ---------- Total deferred debits 1,271,876 1,312,244 ---------- ---------- Total Assets $6,945,570 $6,989,289 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 3 PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Unaudited) LIABILITIES AND EQUITY ---------------------- (Thousands of Dollars)
March 31, December 31, 1997 1996 ---------- ------------ Current Liabilities Accounts payable $ 119,530 $ 184,095 Accrued taxes 133,851 82,413 Accrued interest 28,752 39,652 Short-term borrowings 216,300 16,900 Current maturities of long-term debt 106,166 156,277 Customer deposits 34,350 34,222 Other current liabilities 25,375 37,056 ---------- ---------- Total current liabilities 664,324 550,615 ---------- ---------- Long-Term Debt Less Current Maturities 2,233,299 2,372,113 ---------- ---------- Deferred Credits and Other Deferred income taxes 1,349,354 1,359,312 Deferred investment tax credit 72,027 74,379 Unamortized gain - sale of utility plant 85,795 86,939 Other 377,227 356,935 ---------- ---------- Total deferred credits and other 1,884,403 1,877,565 ---------- ---------- Commitments and Contingencies (Notes 5, 6 and 7) Minority Interests Non-redeemable preferred stock of APS 149,387 165,673 ---------- ---------- Redeemable preferred stock of APS 43,000 53,000 ---------- ---------- Common Stock Equity Common stock, no par value 1,635,847 1,636,354 Retained earnings 335,310 333,969 ---------- ---------- Total common stock equity 1,971,157 1,970,323 ---------- ---------- Total Liabilities and Equity $6,945,570 $6,989,289 ========== ==========
See Notes to Condensed Consolidated Financial Statements. 4 PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) (THOUSANDS OF DOLLARS)
Three Months Ended March 31, 1997 1996 ---------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Income before extraordinary charge $ 25,382 $ 34,859 Items not requiring cash Depreciation and amortization 100,322 67,538 Deferred income taxes--net (8,816) 1,319 Allowance for equity funds used during construction -- (1,675) Deferred investment tax credit (2,352) (4,427) Other--net (5,661) (1,432) Changes in current assets and liabilities Customer and other receivables--net 24,718 22,528 Accrued utility revenues 6,244 9,429 Materials, supplies and fossil fuel 2,196 1,049 Other current assets (1,133) (441) Accounts payable (51,383) (34,440) Accrued taxes 51,438 57,389 Accrued interest (10,900) (18,047) Other current liabilities (11,916) 13,013 Decrease (increase) in land held 1,673 2,975 Other--net 28,286 9,539 --------- --------- Net Cash Flow Provided By Operating Activities 148,098 159,176 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (77,129) (60,138) Capitalized interest (3,834) (3,237) Other--net 1,797 (8,028) --------- --------- Net Cash Flow Used For Investing Activities (79,166) (71,403) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt 2,507 33,511 Short-term borrowings--net 199,400 (18,200) Dividends paid on common stock (24,042) (21,857) Repayment of long-term debt (194,098) (97,398) Redemption of preferred stock (25,980) (23,410) Extraordinary charge for early retirement of debt -- (3,597) Other--net (813) 750 --------- --------- Net Cash Flow Used For Financing Activities (43,026) (130,201) --------- --------- Net Cash Flow 25,906 (42,428) Cash and Cash Equivalents at Beginning of Period 26,686 79,539 --------- --------- Cash and Cash Equivalents at End of Period $ 52,592 $ 37,111 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest, net of amounts capitalized $ 50,096 $ 63,039 Income taxes $ 4,001 $ --
See Notes to Condensed Consolidated Financial Statements. 5 PINNACLE WEST CAPITAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. The condensed consolidated financial statements include the accounts of Pinnacle West and its subsidiaries: APS, SunCor and El Dorado. All significant intercompany balances have been eliminated. 2. In the opinion of the Company, the accompanying unaudited condensed 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 March 31, 1997, the results of operations for the three months and twelve months ended March 31, 1997 and 1996, and the cash flows for the three months ended March 31, 1997 and 1996. It is suggested that these condensed consolidated financial statements and notes to condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes to consolidated financial statements included in the 1996 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, the 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 for the three months ended March 31, 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 APS. 6 o Each affected utility would be required to make available at least 20 percent of its 1995 system retail peak demand for competitive generation supply to all customer classes not later than January 1, 1999; at least 50 percent not later than January 1, 2001; and all of its retail demand not later than January 1, 2003. o Electric service providers that obtain a Certificate of Convenience and Necessity (CC&N) from the ACC would be allowed to supply, market, and/or broker specified electric services at retail. These services would include electric generation but exclude electric transmission and distribution. o On or before December 31, 1997, each affected utility is required to file with the ACC proposed tariffs for bundled service and unbundled service. Bundled service means electric service elements (i.e., generation, transmission, distribution, and ancillary services) provided as a package to consumers within an affected utility's current service area. Unbundled service means electric service elements provided and priced separately. o The Rules indicate that the ACC will allow recovery of unmitigated stranded costs. Each affected utility would be required to file with the ACC estimates of unmitigated stranded costs. The ACC would then, after hearing and consideration of various factors, determine the magnitude of stranded cost and appropriate stranded cost recovery mechanisms and charges. The Company continues to focus on working with the ACC to bring competitive benefits to Arizona but believes that certain provisions of the Rules are deficient. In February 1997, APS filed lawsuits to protect its legal rights regarding the Rules. A joint legislative committee has been appointed to study electric utility industry restructuring issues and report back to the Arizona legislature by the end of 1997. The Company believes that legislation will ultimately be required before significant implementation of the Rules can lawfully occur. Until it has been further determined how competition will be implemented in Arizona, the Company cannot accurately predict the impact of full retail competition on its financial position or results of operations. FEDERAL The Energy Policy Act of 1992 and recent rulemakings by FERC have promoted increased competition in the wholesale electric power markets. The Company does not expect these rulemakings to have a material impact on its financial statements. Several electric utility reform bills have been introduced during the current 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 7 opinion that will need to be narrowed before any substantial restructuring of the electric utility industry can occur. Regulatory Accounting APS 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. APS' existing regulatory orders and current regulatory environment support its accounting practices related to regulatory assets, which amounted to approximately $1.1 billion at March 31, 1997. In accordance with the 1996 regulatory agreement (see below), the ACC accelerated the amortization of substantially all of APS' regulatory assets over an eight-year period. If rate recovery of these assets is no longer probable, whether due to competition or regulatory action, APS 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 APS and the ACC Staff. The major provisions of this agreement are: o An annual rate reduction of approximately $48.5 million ($29 million after income taxes), or 3.4% on average for all customers except certain contract customers, effective July 1, 1996. o Recovery of substantially all of APS' 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 APS by Pinnacle West, in annual payments of $50 million starting in 1996. Pursuant to the price reduction formula, in May 1997, the ACC approved an annual retail rate reduction of approximately $17.6 million ($11 million after income taxes), or 1.2%, to become effective July 1, 1997. An amendment to the proposed order, approved by two of the three commissioners, created some confusion as to the status of the 1996 regulatory agreement. As interpreted by the Chairman of the ACC in a concurring opinion, his vote in favor of the amendment was to authorize the ACC Staff to determine how property taxes are recognized and accounted for under the 1996 regulatory agreement. The Company cannot currently predict the outcome of this matter. 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 8 potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $200 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by this program exceed the accumulated funds for this program, APS 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 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 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. 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 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 APS to replace the Unit 2 steam generators between 2003 and 2008. APS 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, APS estimates that the Unit 1 and Unit 3 steam generators should operate for the license periods (until 2025 and 2027, respectively), although APS will continue its normal periodic assessment of these steam generators. 8. Financial Accounting Standards Board recently issued a new standard, SFAS 128, "Earnings per Share". The standard is effective for fiscal years ending after December 15, 1997. The standard will not have a material effect on the Company's earnings per share. 9 PINNACLE WEST CAPITAL CORPORATION Item 2. Management's Discussion and Analysis of Financial Condition and Results - - -------------------------------------------------------------------------------- of Operations. - - -------------- The following discussion relates to Pinnacle West and its subsidiaries: APS, SunCor and El Dorado. LIQUIDITY AND CAPITAL RESOURCES Parent Company - - -------------- The parent company's cash requirements and its ability to fund those requirements are discussed under "Capital Needs and Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 1996 10-K. As a result of the 1996 regulatory agreement (see Note 5 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report), the parent company will infuse $200 million into APS, in annual increments of $50 million which started in 1996. In March, the Board approved a program for the repurchase of up to $80 million of the Company's common stock. The Board declared a quarterly dividend of 27.5 cents per share of common stock, payable June 1, 1997 to shareholders of record on May 2, 1997, totaling approximately $23.4 million. APS For the three months ended March 31, 1997, APS incurred approximately $66 million in capital expenditures, which is approximately 22% of the most recently estimated 1997 capital expenditures. APS estimates total capital expenditures for the years 1997, 1998, and 1999 to be approximately $296 million, $283 million, and $263 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 $263 million, $114 million, and $114 million for the years 1997, 1998, and 1999, respectively. During the three months ended March 31, 1997, APS redeemed approximately $193 million of its long-term debt and approximately $26 million of its preferred stock. 10 Although provisions in APS' 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 APS' ability to meet its capital requirements. OPERATING RESULTS The following table shows the income and/or loss of Pinnacle West and its subsidiaries for the three-month and twelve-month periods ended March 31, 1997 and 1996: Income (Loss) (Unaudited) (Thousands of Dollars) Three Months Ended Twelve Months Ended March 31, March 31, 1997 1996 1997 1996 --------- --------- ---------- -------- APS $ 25,019 $ 41,129 $ 210,269 $228,540 SunCor 1,088 (1,210) 6,452 1,701 El Dorado 3,270 (136) 3,777 9,228 Pinnacle West (1) (3,995) (8,521) (45,198) (44,793) --------- --------- ---------- -------- NET INCOME $ 25,382 $ 31,262 $ 175,300 $194,676 ========= ========= ========== ======== (1) Includes Pinnacle West's interest expense, operating expenses, loss on discontinued operations and extraordinary charges for early retirement of debt net of income tax benefits. Income tax benefits are as follows (in thousands): $386 and $5,098 for the three months ended March 31, 1997 and 1996, respectively; and $20,033 and $22,211 for the twelve months end March 31, 1997 and 1996, respectively. 11 APS - - --- Operating Results - Three-month period ended March 31, 1997 compared to three-month period ended March 31, 1996 Earnings decreased in the three-month period ended March 31, 1997, primarily due to the accelerated amortization of regulatory assets and a retail price reduction, both of which were part of a regulatory agreement which became effective July 1, 1996. See Note 5 of Notes to Condensed Consolidated Financial Statements. Partially offsetting these negative factors were increased operating revenues (net of related fuel expenses), lower property taxes and lower interest expense. Operating revenues (net of related fuel expenses) were higher primarily due to retail customer growth and weather effects, partially offset by the 1996 retail price reduction. Revenues from sales for resale increased $22 million, accompanied by significant increases in related fuel expenses, as 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. Property taxes decreased due to a 1996 change in tax law. Interest expense decreased due to lower amounts of debt outstanding and lower average interest rates. Operating Results - Twelve-month period ended March 31, 1997 compared to twelve-month period ended March 31, 1996 Earnings decreased in the twelve-month period ended March 31, 1997, primarily due to the accelerated amortization of regulatory assets, a retail price reduction, a $31.7 million pretax charge in the fourth quarter of 1996 for a voluntary severance program and an increase in fuel expenses. The accelerated regulatory asset amortization and the retail price reduction were part of a regulatory agreement which became effective July 1, 1996. See Note 5 of Notes to Condensed Consolidated Financial Statements. Fuel expenses were higher primarily due to increased retail and wholesale sales volumes, higher natural gas costs and a less favorable mix of generation and purchased power, particularly during a regional power outage in August 1996. Partially offsetting these negative factors were increased operating revenues (net of related fuel expenses), lower property taxes, the recognition of $11 million of income tax benefits associated with capital loss carryforwards and lower interest expense. The twelve-month comparison was also positively impacted by $21 million of pretax asset write-downs in the twelve months ended March 31, 1996. Operating revenues (net of related fuel expenses) were higher due to retail customer growth, warmer weather and higher residential usage, partially offset by the retail price reduction. Revenues from sales for resale increased $35 million, 12 accompanied by significant increases in related fuel expenses, as 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. Property taxes decreased due to a 1996 change in tax law. Interest expense decreased due to lower average interest rates and lower amounts of debt outstanding. Non-utility Operations - - ---------------------- The parent company incurred extraordinary charges for the retirement of debt in the three-month and twelve-month periods and a loss from discontinued operations on legal matters related to MeraBank (a former subsidiary) in the twelve-month period. Interest expense decreased in all periods due primarily to debt reduction. SunCor's earnings increased in the three-month and twelve-month periods due to an increase in net home sales and the sale of joint venture investments. El Dorado's increase in earnings in the three-month period was the result of two partial investment sales. Earnings in the twelve-month period decreased due to the sale of an investment in the fourth quarter of 1995 partially offset by current year gains on sales. 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 consolidated income tax expense of approximately $18 million. 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. 13 Competition ----------- See Note 5 of Notes to Condensed Consolidated 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 Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of a proposed rate reduction. 14 PART II. OTHER INFORMATION -------------------------- The following information relates primarily to Pinnacle West and its principal subsidiary, APS. ITEM 5. Other Information - - -------------------------- Palo Verde Nuclear Generating Station ------------------------------------- See Note 7 of Notes to Condensed Consolidated 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 APS' construction and financing programs. Competition and Electric Industry Restructuring ----------------------------------------------- See Note 5 of Notes to Condensed Consolidated 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. ITEM 6. Exhibits and Reports on Form 8-K - - ----------------------------------------- (a) Exhibits Exhibit No. Description ----------- ----------- 27 Financial Data Schedule (b) Reports on Form 8-K During the quarter ended March 31, 1997, and the period ended May 14, 1997, the Company filed no reports on Form 8-K. 15 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. PINNACLE WEST CAPITAL CORPORATION (Registrant) Dated: May 15, 1997 By: /s/ 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) 16 EX-27 2 FINANCIAL DATA SCHEDULE
UT 1,000 U.S. Dollars 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 1 PER-BOOK 4,655,826 573,718 444,150 1,271,876 0 6,945,570 1,635,847 0 335,310 1,971,157 43,000 149,387 2,233,299 0 0 216,300 106,166 0 0 0 2,226,261 4,782,026 398,564 17,568 230,624 316,093 82,471 (39,521) 0 40,118 25,382 0 25,382 24,042 31,963 164,098 0.29 0
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