-----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, Cbntzf8JP3w+y5oSDKLce9XbXTia/UdWEeMGPPT5TtiYD/aYaka3WobkqpbCPWn5 SSsacayLQtg/3ZI/i8qfLQ== 0000950147-97-000555.txt : 19970815 0000950147-97-000555.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950147-97-000555 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PINNACLE WEST CAPITAL CORP CENTRAL INDEX KEY: 0000764622 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [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: 97663868 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 June 30, 1997 --------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- ------------------ 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 August 12, 1997: 84,741,597 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 Cholla.....................Cholla Power Plant Company....................Pinnacle West Capital Corporation El Dorado..................El Dorado Investment Company EPA........................United States Environmental Protection Agency FERC.......................Federal Energy Regulatory Commission Four Corners...............Four Corners Power Plant 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 NGS........................Navajo Generating Station 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" SFAS No. 128...............Statement of Financial Accounting Standards No. 128, "Earnings per Share" SFAS No. 130...............Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ii SFAS No. 131...............Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" 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 June 30, 1997 1996 ------------ ------------ Operating Revenues Electric $ 458,751 $ 426,658 Real estate 30,166 26,150 ------------ ------------ Total 488,917 452,808 ------------ ------------ Fuel Expenses Fuel for electric generation 55,627 57,289 Purchased power 43,683 22,466 ------------ ------------ Total 99,310 79,755 ------------ ------------ Operating Expenses Utility operations and maintenance 89,162 100,296 Real estate operations 28,301 25,811 Depreciation and amortization 91,809 59,342 Taxes other than income taxes 30,311 35,510 ------------ ------------ Total 239,583 220,959 ------------ ------------ Operating Income 150,024 152,094 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction -- 2,003 Interest on long-term debt (40,453) (44,675) Other interest (5,973) (6,201) Capitalized interest 4,560 2,164 Preferred stock dividend requirements of APS (3,195) (4,326) Other-net 4,823 (980) ------------ ------------ Total (40,238) (52,015) ------------ ------------ Income Before Income Tax and Extraordinary Charge 109,786 100,079 Income Tax Expense 42,604 38,625 ------------ ------------ Income Before Extraordinary Charge 67,182 61,454 Extraordinary Charge for Early Retirement of Debt, Net of Income Tax of $1,674 -- (2,471) ------------ ------------ Net Income $ 67,182 $ 58,983 ============ ============ Average Common Shares Outstanding 85,155,688 87,420,263 Earnings Per Average Common Share Outstanding: Income before extraordinary charge $ 0.79 $ 0.70 Extraordinary charge -- (0.03) ------------ ------------ Total $ 0.79 $ 0.67 ============ ============ Dividends Declared Per Share $ 0.550 $ 0.500 ============ ============
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)
Six Months Ended June 30, 1997 1996 ------------ ------------ Operating Revenues Electric $ 837,772 $ 771,919 Real estate 49,709 42,144 ------------ ------------ Total 887,481 814,063 ------------ ------------ Fuel Expenses Fuel for electric generation 106,749 99,623 Purchased power 78,030 36,404 ------------ ------------ Total 184,779 136,027 ------------ ------------ Operating Expenses Utility operations and maintenance 177,178 188,039 Real estate operations 48,063 43,353 Depreciation and amortization 184,411 118,277 Taxes other than income taxes 60,555 69,711 ------------ ------------ Total 470,207 419,380 ------------ ------------ Operating Income 232,495 258,656 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction -- 3,678 Interest on long-term debt (79,904) (90,584) Other interest (10,474) (11,047) Capitalized interest 8,394 5,401 Preferred stock dividend requirements of APS (6,821) (8,803) Other-net 9,046 687 ------------ ------------ Total (79,759) (100,668) ------------ ------------ Income Before Income Tax and Extraordinary Charge 152,736 157,988 Income Tax Expense 60,172 61,675 ------------ ------------ Income Before Extraordinary Charge 92,564 96,313 Extraordinary Charge for Early Retirement of Debt, Net of Income Tax of $4,110 -- (6,068) ------------ ------------ Net Income $ 92,564 $ 90,245 ============ ============ Average Common Shares Outstanding 86,280,924 87,435,309 Earnings Per Average Common Share Outstanding: Income before extraordinary charge $ 1.07 $ 1.10 Extraordinary charge -- (0.07) ------------ ------------ Total $ 1.07 $ 1.03 ============ ============ Dividends Declared Per Share $ 0.825 $ 0.750 ============ ============
See Notes to Condensed Consolidated Financial Statements. 2 PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (Unaudited) (Dollars in thousands, except per share amounts)
Twelve Months Ended June 30, 1997 1996 ------------ ------------ Operating Revenues Electric $ 1,784,125 $ 1,669,725 Real estate 107,053 74,826 ------------ ------------ Total 1,891,178 1,744,551 ------------ ------------ Fuel Expenses Fuel for electric generation 237,519 217,018 Purchased power 136,756 71,250 ------------ ------------ Total 374,275 288,268 ------------ ------------ Operating Expenses Utility operations and maintenance 419,853 403,170 Real estate operations 100,790 73,346 Depreciation and amortization 365,641 240,576 Taxes other than income taxes 112,921 140,984 ------------ ------------ Total 999,205 858,076 ------------ ------------ Operating Income 517,698 598,207 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction 1,531 6,126 Interest on long-term debt (160,778) (192,280) Other interest (23,191) (20,269) Capitalized interest 12,502 10,115 Preferred stock dividend requirements of APS (15,110) (18,354) Other-net 1,611 (8,722) ------------ ------------ Total (183,435) (223,384) ------------ ------------ Income From Continuing Operation Before Income Tax 334,263 374,823 Income Tax Expense 126,953 145,774 ------------ ------------ Income From Continuing Operations 207,310 229,049 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 $9,667 and $11,944 (14,272) (17,639) ------------ ------------ Net Income $ 183,499 $ 211,410 ============ ============ Average Common Shares Outstanding 86,869,084 87,437,388 Earnings Per Average Common Share Outstanding: Continuing operations $ 2.38 $ 2.62 Discontinued operations (0.11) -- Extraordinary charge (0.16) (0.20) ------------ ------------ Total $ 2.11 $ 2.42 ============ ============ Dividends Declared Per Share $ 1.100 $ 1.225 ============ ============
See Notes to Condensed Consolidated Financial Statements. 3 PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Unaudited) ASSETS ------ (Thousands of Dollars) June 30, December 31, 1997 1996 ---------- ---------- Current Assets Cash and cash equivalents $ 25,041 $ 26,686 Customer and other receivables--net 171,533 169,237 Accrued utility revenues 69,517 55,470 Material and supplies 74,499 74,120 Fossil fuel 12,396 13,928 Deferred income taxes 69,724 69,688 Other current assets 45,362 41,140 ---------- ---------- Total current assets 468,072 450,269 ---------- ---------- Investments and Other Assets Real estate investments--net 390,487 398,527 Other assets 201,278 173,109 ---------- ---------- Total investments and other assets 591,765 571,636 ---------- ---------- Utility Plant Electric plant in service and held for future use 6,855,873 6,803,211 Less accumulated depreciation and amortization 2,547,552 2,426,143 ---------- ---------- Total 4,308,321 4,377,068 Construction work in progress 309,659 226,935 Nuclear fuel, net of amortization 51,953 51,137 ---------- ---------- Net utility plant 4,669,933 4,655,140 ---------- ---------- Deferred Debits Regulatory asset for income taxes 488,058 516,722 Rate synchronization cost deferrals 386,476 414,082 Other deferred debits 349,055 381,440 ---------- ---------- Total deferred debits 1,223,589 1,312,244 ---------- ---------- Total Assets $6,953,359 $6,989,289 ========== ========== See Notes to Condensed Consolidated Financial Statements. 4 PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Unaudited) LIABILITIES AND EQUITY ---------------------- (Thousands of Dollars) June 30, December 31, 1997 1996 ---------- ---------- Current Liabilities Accounts payable $ 140,863 $ 184,095 Accrued taxes 115,800 82,413 Accrued interest 34,471 39,652 Dividends payable 23,327 -- Short-term borrowings 228,000 16,900 Current maturities of long-term debt 107,002 156,277 Customer deposits 33,028 34,222 Other current liabilities 27,343 37,056 ---------- ---------- Total current liabilities 709,834 550,615 ---------- ---------- Long-Term Debt Less Current Maturities 2,296,883 2,372,113 ---------- ---------- Deferred Credits and Other Deferred income taxes 1,331,154 1,359,312 Deferred investment tax credit 66,509 74,379 Unamortized gain - sale of utility plant 84,651 86,939 Other 379,619 356,935 ---------- ---------- Total deferred credits and other 1,861,933 1,877,565 ---------- ---------- Commitments and Contingencies (Notes 5, 6 and 7) Minority Interests Non-redeemable preferred stock of APS 143,493 165,673 ---------- ---------- Redeemable preferred stock of APS 29,110 53,000 ---------- ---------- Common Stock Equity Common stock, no par value 1,556,341 1,636,354 Retained earnings 355,765 333,969 ---------- ---------- Total common stock equity 1,912,106 1,970,323 ---------- ---------- Total Liabilities and Equity $6,953,359 $6,989,289 ========== ========== See Notes to Condensed Consolidated Financial Statements. 5 PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) (THOUSANDS OF DOLLARS)
Six Months Ended June 30, 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Income before extraordinary charge $ 92,564 $ 96,313 Items not requiring cash Depreciation and amortization 200,991 134,567 Deferred income taxes--net (24,844) 3,684 Allowance for equity funds used during construction -- (3,678) Deferred investment tax credit (7,870) (11,206) Other--net (10,123) (1,711) Changes in current assets and liabilities Customer and other receivables--net (2,296) (5,896) Accrued utility revenues (14,047) (10,413) Materials, supplies and fossil fuel 1,153 5,329 Other current assets (4,222) 12,617 Accounts payable (39,477) (11,094) Accrued taxes 33,387 22,725 Accrued interest (5,181) (4,307) Other current liabilities (10,838) 14,225 Decrease (increase) in land held 6,189 7,156 Other--net 45,872 557 --------- --------- Net Cash Flow Provided By Operating Activities 261,258 248,868 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (145,203) (120,810) Capitalized interest (8,394) (5,401) Other--net (18,441) (12,392) --------- --------- Net Cash Flow Used For Investing Activities (172,038) (138,603) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt 102,382 108,993 Short-term borrowings--net 211,100 16,465 Dividends paid on common stock (47,441) (43,715) Repayment of long-term debt (230,823) (218,387) Redemption of preferred stock (46,044) (30,603) Repurchase and Retirement of Common Stock (79,863) -- Extraordinary charge for early retirement of debt -- (6,068) Other--net (176) 2,376 --------- --------- Net Cash Flow Used For Financing Activities (90,865) (170,939) --------- --------- Net Cash Flow (1,645) (60,674) Cash and Cash Equivalents at Beginning of Period 26,686 79,539 --------- --------- Cash and Cash Equivalents at End of Period $ 25,041 $ 18,865 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest, net of amounts capitalized $ 83,351 $ 95,810 Income taxes $ 56,090 $ 40,000
See Notes to Condensed Consolidated Financial Statements. 6 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. Certain prior year balances have been restated to conform to the current year presentation. 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 June 30, 1997, the results of operations for the three months, six months and twelve months ended June 30, 1997 and 1996, and the cash flows for the six months ended June 30, 1997 and 1996. It is suggested that these condensed 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 six months ended June 30, 1997. 5. Regulatory Matters Electric Industry Restructuring State The ACC has been conducting an ongoing investigation into the restructuring of the Arizona electric industry. In December 1996, the ACC adopted rules that provide a framework for the introduction of retail electric competition. The ACC has ordered that reliability, stranded cost recovery, the phase-in process, and bundled, unbundled and metering services, as well as legal issues, will require additional consideration and will be addressed through workshops and working groups which will issue recommendations to the ACC during 1997. The Rules include the following major provisions: o The Rules are intended to apply to virtually all of the Arizona electric utilities regulated by the ACC, including APS. 7 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. Stranded costs are the costs of generating plants, other assets and contract commitments that were prudently incurred to serve power customers that could go unrecovered if these customers are allowed to use open access to move to another supplier. Each affected utility would be required to file with the ACC estimates of unmitigated stranded costs. The ACC would then, after hearing and consideration of various factors, determine the magnitude of stranded cost and appropriate stranded cost recovery mechanisms and charges. The Company continues to focus on working with the ACC to bring competitive benefits to Arizona but believes that certain provisions of the Rules are deficient. In February 1997, APS filed lawsuits to protect its legal rights regarding the Rules. The Arizona legislature has appointed a joint legislative committee to study electric utility industry restructuring issues and report back to them by the end of 1997. The Company believes that legislation will ultimately be required before significant implementation of retail electric competition can lawfully occur. Until it has been further determined how competition will be implemented in Arizona, the Company cannot accurately predict the impact of full retail competition on its financial position or results of operations. Federal The Energy Policy Act of 1992 and recent rulemakings by FERC have promoted increased competition in the wholesale electric power markets. The Company does not expect these rulemakings to have a material impact on its financial statements. 8 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 opinion that will need to be narrowed before any substantial restructuring of the electric utility industry can occur. Regulatory Accounting The Company prepares its financial statements in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS No. 71 requires a cost-based, rate-regulated enterprise to reflect the impact of regulatory decisions in its financial statements. The Company's existing regulatory orders and current regulatory environment support its accounting practices related to regulatory assets, which amounted to approximately $1.0 billion at June 30, 1997. In accordance with the 1996 regulatory agreement (see below), the ACC accelerated the amortization of substantially all of the Company's regulatory assets over an eight-year period. If rate recovery of these assets is no longer probable, whether due to competition or regulatory action, the Company would no longer be able to apply the provisions of SFAS No. 71 to all or some part of its operations, which could have a material impact on the Company's financial statements. 1996 Regulatory Agreement In April 1996, the ACC approved a regulatory agreement between 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. 9 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 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. Accounting Matters Financial Accounting Standards Board recently issued three new standards; SFAS 128 on "Earnings per Share"; SFAS 130 on "Reporting Comprehensive Income"; and SFAS 131 on "Disclosures about Segments of an Enterprise and Related Information". 10 The "Earnings per Share" standard is effective for both interim and annual periods ending after December 15, 1997. The standard will not have a material effect on the Company's earnings per share. The "Reporting Comprehensive Income" standard is effective for fiscal years beginning after December 15, 1997. The standard changes the reporting of certain items currently reported in the common stock equity section of the balance sheet. The Company is currently evaluating the impact this standard will have on its financial statements. The "Disclosures about Segments of an Enterprise and Related Information" standard is effective for fiscal years beginning after December 15, 1997. The 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. 11 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 - -------------- For the six months ended June 30, 1997, the primary source of cash has been dividends from APS. SunCor and El Dorado both have provided cash to the parent during 1997. During the quarter ended June 30, 1997, the parent company borrowed on its existing line of credit an additional $50 million of which $20 million has been repaid. The parent company's total outstanding debt as of June 30, 1997, was $280 million. In March, the Board approved a program for the repurchase of up to $80 million of the Company's common stock. As of July 2, 1997 the Company completed the program, spending approximately $80 million for the repurchase of 2.7 million shares of stock. The Board declared a quarterly dividend of 27.5 cents per share of common stock, payable September 1, 1997, to shareholders of record on August 1, 1997, totaling approximately $23.3 million. 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 starting in 1996. APS - --- For the six months ended June 30, 1997, APS incurred approximately $146 million in capital expenditures, which is approximately 53% 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, $290 million, and $265 million, respectively. These amounts include about $30 million each year for nuclear fuel expenditures. 12 Required and optional redemptions of preferred stock and repayment of long-term debt, including premiums thereon, and payments for a capitalized lease obligation are expected to total approximately $268 million, $114 million, and $114 million for the years 1997, 1998, and 1999, respectively. During the six months ended June 30, 1997, APS redeemed approximately $219 million of its long-term debt and approximately $46 million of its preferred stock, which redemptions were funded with internal cash from operations and short-term debt. APS' cash flow from operations is cyclical, with the highest cash flows generated in the summer. As a result, APS expects to pay down a significant portion of its short-term debt balance in the third quarter of the year using cash flow from operations. As a result of the 1996 regulatory agreement (see Note 5 of Notes to Condensed Consolidated Financial Statements), Pinnacle West invested $50 million in APS in 1996 and will invest similar amounts annually in 1997 through 1999. 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, six-month and twelve-month periods ended June 30, 1997 and 1996: 13 Income (Loss) (Unaudited) (Thousands of Dollars)
Three Months Ended Six Months Ended Twelve Months Ended June 30, June 30, June 30, 1997 1996 1997 1996 1997 1996 --------- --------- --------- --------- --------- --------- APS $ 66,298 $ 66,114 $ 91,317 $ 107,243 $ 210,453 $ 245,978 SunCor 1,167 118 2,255 (1,092) 7,501 1,632 El Dorado 3,686 97 6,956 (39) 7,366 8,065 Pinnacle West (1) (3,969) (7,346) (7,964) (15,867) (41,821) (44,265) --------- --------- --------- --------- --------- --------- NET INCOME $ 67,182 $ 58,983 $ 92,564 $ 90,245 $ 183,499 $ 211,410 ========= ========= ========= ========= ========= =========
(1) Includes Pinnacle West's interest expense, extraordinary charge for early retirement of debt, discontinued operations and operating expenses net of income tax benefits. Income tax benefits are as follows (in thousands): $822 and $3,177 for the three months ended June 30, 1997 and 1996, respectively; and $1,208 and $8,274 for the six months ended June 30, 1997 and 1996, respectively; and $17,678 and $21,253 for the twelve months ended June 30, 1997 and 1996, respectively. 14 APS - --- Operating Results - Three-month period ended June 30, 1997 compared to three-month period ended June 30, 1996 Earnings were flat in the three-month comparison as strong customer growth, cost savings, and increased sales due to weather offset the effects of the 1996 regulatory agreement (see Note 5 of Notes to Condensed Consolidated Financial Statements). In the three-month comparison, the regulatory agreement, which became effective July 1, 1996, resulted in $29 million (before income taxes) of accelerated regulatory asset amortization and a retail price reduction which reduced pretax revenues by $13 million. Results were favorably impacted by increased operating revenues (net of related fuel expenses), lower operations and maintenance expenses and a decrease in other taxes. Operating revenues increased $32 million primarily due to a $24 million increase in sales for resale, $15 million from retail customer growth, and $6 million attributable to weather effects, partially offset by the 1996 retail price reduction impact of $13 million. Sales for resale are sales of electricity at wholesale to other electric utilities, power marketers, or public authorities for resale to their customers. The increase in sales for resale was a result of increased activity in competitive bulk power markets and was accompanied by significant increases in related purchased power. These bulk power activities did not result in a significant variance in earnings due to market pressures on prices. Operation and maintenance expenses were lower by $11 million primarily due to the timing of nuclear refueling, charges for employee incentive plans in 1996, and savings from a 1996 voluntary severance program. Other taxes decreased $5 million primarily due to a 1996 change in property tax law. The impact of this tax law change for the first half of 1996 was recorded in the third quarter of 1996. 15 Operating Results - Six-month period ended June 30, 1997 compared to six-month period ended June 30, 1996 Earnings decreased in the six-month comparison due to the effects of the 1996 regulatory agreement (see Note 5 of Notes to Condensed Consolidated Financial Statements). These effects were partially offset by customer growth, cost savings, and increased sales due to weather. In the six-month comparison, the regulatory agreement, which became effective July 1, 1996, resulted in $59 million (before income taxes) of accelerated regulatory asset amortization and a retail price reduction which reduced pretax revenues by $24 million. Partially offsetting these negative factors were increased operating revenues (net of related fuel expenses), lower operations and maintenance expenses, a decrease in other taxes, and lower interest expense. Operating revenues increased $66 million primarily due to a $46 million increase in sales for resale, $32 million of retail customer growth and higher usage, and $9 million attributable to weather effects, partially offset by the $24 million impact of the retail price reduction. Sales for resale are sales of electricity at wholesale to other electric utilities, power marketers, or public authorities for resale to their customers. The increase in sales for resale was a result of increased activity in competitive bulk power markets and was accompanied by significant increases in related purchased power. These bulk power activities did not result in a significant variance in earnings due to market pressures on prices. Operations and maintenance expenses were $11 million lower primarily due to improved nuclear operations, charges for employee incentive plans in 1996, and savings from a 1996 voluntary severance program. Other taxes decreased $10 million primarily due to a 1996 change in property tax law. The impact of this tax law change for the first half of 1996 was recorded in the third quarter of 1996. Interest expense decreased $6 million due to lower average interest rates and lower amounts of debt outstanding. 16 Operating Results - Twelve-month period ended June 30, 1997 compared to twelve-month period ended June 30, 1996 Earnings decreased in the twelve-month comparison ended June 30, 1997 due to the effects of the 1996 regulatory agreement (see Note 5 of Notes to Condensed Consolidated 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, cost savings, increased sales due to weather, and the recognition of $8 million of income tax benefits associated with capital loss carryforwards. The twelve-month comparison was also positively impacted by $21 million of pretax asset write-downs in the twelve months ended June 30, 1996. In the twelve-month comparison, the regulatory agreement, which became effective July 1, 1996, resulted in $119 million of accelerated regulatory asset amortization and a retail price reduction which reduced revenues by $54 million. Fuel expenses increased $86 million primarily due to increased retail and wholesale sales volumes and a less favorable mix of generation and purchased power, particularly during a regional power outage in August 1996. Operating revenues increased $114 million primarily due to $72 million of customer growth and higher usage, a $61 million increase in sales for resale, and $26 million attributable to weather effects, partially offset by the $54 million impact of the retail price reduction. Sales for resale are sales of electricity at wholesale to other electric utilities, power marketers, or public authorities for resale to their customers. The increase in sales for resale was accompanied by significant increases in related purchased power and was a result of increased activity in competitive bulk power markets. These bulk power activities did not result in a significant variance in earnings due to market pressures on prices. Other taxes decreased $29 million primarily due to a 1996 change in property tax law. The impact of this tax law change for the first half of 1996 was recorded in the third quarter of 1996. Interest expense decreased $12 million due to lower average interest rates and lower amounts of debt outstanding. Non-utility Operations - ---------------------- The parent company's losses decreased in all periods due to lower interest expense resulting from debt reduction and refinancing which yielded lower average interest rates. Additionally, all periods ended June 1996 included extraordinary charges related to the early retirement of debt. The twelve-month period ended June 1997 included an extraordinary charge related to the early retirement of debt and a loss from discontinued operations on a legal matter related to MeraBank, A Federal Savings Bank (a former subsidiary). SunCor's earnings increased in the three-month period due to an increase in net home sales and in the six-month and twelve-month period due to an increase in net home sales and the sale of a joint venture project. 17 El Dorado's increase in earnings in the three-month and six-month periods was the result of investment sales. Earnings in the twelve-month period decreased due to the sale of an investment in the fourth quarter of 1995 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. 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 price reduction, which became effective on July 1, 1997. 18 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 21, 1997, the following persons were elected Class III Directors with a term to expire at the 2000 annual meeting: Abstentions Votes Votes and Broker For Against Non Votes --- ------- --------- Pamela Grant 82,096,542 988,360 N/A Martha O. Hesse 82,148,229 936,673 N/A William S. Jaimeson 82,099,641 985,262 N/A Richard S. Snell 82,105,963 978,938 N/A ITEM 5. Other Information - -------------------------- Environmental Matters - --------------------- EPA Environmental Regulation ---------------------------- Air Quality Standards. In July 1997 the EPA proposed regulations on regional haze. See "Environmental Matters - EPA Environmental Regulation - Air Quality Standards" in Part I, Item 1 of the 1996 10-K. The proposal would require states to submit plans to meet "presumptive reasonable progress targets" for achieving perceptible improvements in visibility conditions in Federal Class I areas (e.g., national parks) every 10-15 years. The proposal also calls for states to conduct three year "best available retrofit technology" ("BART") review on point sources which became operational between 1962 and 1977 and which may normally be anticipated to contribute to regional haze visibility impairment. Because the actual level of emissions controls, if any, for any unit cannot be determined at this time, APS currently cannot estimate the capital expenditures, if any, which would result from the final rules. Also in July 1997 EPA promulgated final National Ambient Air Quality Standards for ozone and particulate matter. See "Environmental Matters - EPA Environmental Regulation - Air Quality Standards" in Part I, Item 1 of the 1996 10-K. Pursuant to the rules, the ozone standard is more stringent and a new ambient standard for very fine particles has been established. The Company does not currently expect these rules to have a material adverse effect on its financial position or results of operations. Palo Verde Nuclear Generating Station ------------------------------------- See Note 7 of Notes to Condensed 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 APS' construction and financing programs. Competition and Electric Industry Restructuring ----------------------------------------------- 19 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. On February 28, 1997, a lawsuit was filed by APS 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. 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 June 30, 1997, and the period from July 1, through August 14, 1997, the Company did not file any reports on Form 8-K. 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. PINNACLE WEST CAPITAL CORPORATION (Registrant) Dated: August 14, 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) 21 EX-27 2 FINANCIAL DATA SCHEDULE UT
UT Public Utility Companies and Public Utility Holding Companies (Thousands of Dollars) Fiscal year ended December 31, 1997 For Period January 1, 1997 through June 30, 1997 Six Months Ended 1000 U.S. Dollar 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 1 PER-BOOK $4,669,933 591,765 468,072 1,223,589 0 6,953,359 1,556,341 0 355,765 1,912,106 29,110 143,493 2,296,883 0 0 228,000 107,002 0 0 0 2,236,765 6,953,359 887,481 60,172 470,207 654,986 232,495 (79,759) 0 81,984 92,564 0 92,564 47,441 63,731 261,258 1.07 0
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