FORM 10-Q Securities and Exchange Commission Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 ----------------------------- 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) <TABLE> <S> <C> Registrant's telephone number, including area code: (602) 379-2500 - - ---------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) </TABLE> 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 November 12, 1996: 87,418,327
- i - Glossary -------- ACC -- Arizona Corporation Commission ACC Order -- ACC Order commencing a formal rulemaking process for the adoption of proposed rules regarding the introduction of retail electric competition in Arizona ACC Staff -- Staff of the Arizona Corporation Commission AFUDC -- Allowance for funds used during construction Affected Utilities -- Utilities affected by the ACC's Proposed Rules on retail electric competition in Arizona APS -- Arizona Public Service Company CC&N -- Certificate of convenience and necessity Company -- Pinnacle West Capital Corporation El Dorado -- El Dorado Investment Company EPA -- Environmental Protection Agency ITCs -- Investment tax credits June 10-Q -- Pinnacle West Capital Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1996 1995 10-K -- Pinnacle West Capital Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1995 Palo Verde -- Palo Verde Nuclear Generating Station Proposed Rules -- Proposed rules issued by the ACC regarding the introduction of retail electric competition in Arizona Pinnacle West -- Pinnacle West Capital Corporation SEC -- Securities and Exchange Commission 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) <TABLE> <CAPTION> Three Months Ended September 30, 1996 1995 ------------ ------------ <S> <C> <C> Operating Revenues Electric $ 566,899 $ 549,082 Real estate 31,892 9,709 ------------ ------------ Total 598,791 558,791 ------------ ------------ Fuel Expenses Fuel for electric generation 68,243 68,715 Purchased power 39,793 23,539 ------------ ------------ Total 108,036 92,254 ------------ ------------ Operating Expenses Utility operations and maintenance 100,386 97,565 Real estate operations 28,396 10,801 Depreciation and amortization 91,144 61,625 Taxes other than income taxes 25,029 35,498 ------------ ------------ Total 244,955 205,489 ------------ ------------ Operating Income 245,800 261,048 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction 1,942 1,111 Interest on long-term debt (41,366) (51,355) Other interest (6,824) (5,400) Allowance for borrowed funds used during construction 2,021 2,130 Preferred stock dividend requirements of APS (4,153) (4,775) Other-net (272) (13,128) ------------ ------------ Total (48,652) (71,417) ------------ ------------ Income Before Income Taxes and Extraordinary Charge 197,148 189,631 Income Tax Expense 75,742 75,136 ------------ ------------ Income Before Extraordinary Charge 121,406 114,495 Extraordinary Charge for Early Retirement of Debt, Net of Income Tax of $9,667 (14,272) -- ------------ ------------ Net Income $ 107,134 $ 114,495 ============ ============ Average Common Shares Outstanding 87,439,830 87,414,951 Earnings Per Average Common Share Outstanding: Income Before Extraordinary Charge $ 1.39 $ 1.31 Extraordinary Charge (0.16) -- ------------ ------------ Total $ 1.23 $ 1.31 ============ ============ Dividends Declared Per Share $ 0.275 $ 0.225 ============ ============ </TABLE> 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) <TABLE> <CAPTION> Nine Months Ended September 30, 1996 1995 ------------ ------------ <S> <C> <C> Operating Revenues Electric $ 1,338,818 $ 1,266,228 Real estate 74,036 31,873 ------------ ------------ Total 1,412,854 1,298,101 ------------ ------------ Fuel Expenses Fuel for electric generation 167,866 160,248 Purchased power 76,197 49,563 ------------ ------------ Total 244,063 209,811 ------------ ------------ Operating Expenses Utility operations and maintenance 288,425 283,248 Real estate operations 71,749 31,152 Depreciation and amortization 209,421 183,315 Taxes other than income taxes 94,740 106,654 ------------ ------------ Total 664,335 604,369 ------------ ------------ Operating Income 504,456 483,921 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction 5,620 3,645 Interest on long-term debt (131,950) (158,952) Other interest (17,871) (13,153) Allowance for borrowed funds used during construction 7,422 6,481 Preferred stock dividend requirements of APS (12,956) (14,358) Other-net 415 (7,215) ------------ ------------ Total (149,320) (183,552) ------------ ------------ Income Before Income Taxes and Extraordinary Charge 355,136 300,369 Income Tax Expense 137,417 119,002 ------------ ------------ Income Before Extraordinary Charge 217,719 181,367 Extraordinary Charge for Early Retirement of Debt, Net of Income Tax of $13,777 (20,340) -- ------------ ------------ Net Income $ 197,379 $ 181,367 ============ ============ Average Common Shares Outstanding 87,436,827 87,404,258 Earnings Per Average Common Share Outstanding: Income Before Extraordinary Charge $ 2.49 $ 2.08 Extraordinary Charge (0.23) -- ------------ ------------ Total $ 2.26 $ 2.08 ============ ============ Dividends Declared Per Share $ 1.025 $ 0.675 ============ ============ </TABLE> 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) <TABLE> <CAPTION> Twelve Months Ended September 30, 1996 1995 ------------ ------------ <S> <C> <C> Operating Revenues Electric $ 1,687,542 $ 1,608,308 Real estate 97,009 52,793 ------------ ------------ Total 1,784,551 1,661,101 ------------ ------------ Fuel Expenses Fuel for electric generation 216,546 209,258 Purchased power 87,504 61,250 ------------ ------------ Total 304,050 270,508 ------------ ------------ Operating Expenses Utility operations and maintenance 405,991 386,160 Real estate operations 90,941 51,406 Depreciation and amortization 270,095 245,361 Taxes other than income taxes 130,515 141,210 ------------ ------------ Total 897,542 824,137 ------------ ------------ Operating Income 582,959 566,456 ------------ ------------ Other Income (Deductions) Allowance for equity funds used during construction 6,957 4,749 Interest on long-term debt (182,291) (212,175) Other interest (21,693) (16,456) Allowance for borrowed funds used during construction 10,006 8,005 Preferred stock dividend requirements of APS (17,732) (19,242) Other-net 4,134 (7,630) ------------ ------------ Total (200,619) (242,749) ------------ ------------ Income Before Income Taxes and Extraordinary Charge 382,340 323,707 ------------ ------------ Income Taxes Income tax expense 146,380 132,803 Non-recurring income tax benefit -- (26,770) ------------ ------------ Total 146,380 106,033 ------------ ------------ Income Before Extraordinary Charge 235,960 217,674 Extraordinary Charge for Early Retirement of Debt, Net of Income Tax of $21,611 (31,911) -- ------------ ------------ Net Income $ 204,049 $ 217,674 ============ ============ Average Common Shares Outstanding 87,443,641 87,402,674 Earnings Per Average Common Share Outstanding: Income Before Extraordinary Charge $ 2.69 $ 2.49 Extraordinary Charge (0.36) -- ------------ ------------ Total $ 2.33 $ 2.49 ============ ============ Dividends Declared Per Share $ 1.275 $ 0.900 ============ ============ </TABLE> See Notes to Condensed Consolidated Financial Statements. 3
PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Unaudited) ASSETS ------ (Thousands of Dollars) <TABLE> <CAPTION> September 30, December 31, 1996 1995 ------------ ----------- <S> <C> <C> Current Assets Cash and cash equivalents $ 64,408 $ 79,539 Customer and other receivables--net 171,411 131,393 Accrued utility revenues 74,008 53,519 Material and supplies 75,871 78,271 Fossil fuel 15,188 21,722 Deferred income taxes 46,316 46,355 Other current assets 31,006 19,671 ---------- ---------- Total current assets 478,208 430,470 ---------- ---------- Investments and Other Assets Real estate investments--net 400,038 411,693 Other assets 173,636 151,127 ---------- ---------- Total investments and other assets 573,674 562,820 ---------- ---------- Utility Plant Electric plant in service and held for future use 6,683,761 6,544,860 Less accumulated depreciation and amortization 2,389,447 2,231,614 ---------- ---------- Total 4,294,314 4,313,246 Construction work in progress 307,251 281,757 Nuclear fuel, net of amortization 49,829 52,084 ---------- ---------- Net utility plant 4,651,394 4,647,087 ---------- ---------- Deferred Debits Regulatory asset for income taxes 520,910 548,464 Palo Verde Unit 3 cost deferral 270,131 283,426 Palo Verde Unit 2 cost deferral 157,754 165,873 Other deferred debits 360,614 358,912 ---------- ---------- Total deferred debits 1,309,409 1,356,675 ---------- ---------- Total Assets $7,012,685 $6,997,052 ========== ========== </TABLE> See Notes to Condensed Consolidated Financial Statements. 4
PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- (Unaudited) LIABILITIES AND EQUITY ---------------------- (Thousands of Dollars) September 30, December 31, 1996 1995 ------------ ----------- Current Liabilities Accounts payable $ 124,847 $ 114,963 Accrued taxes 191,823 95,962 Accrued interest 29,509 48,958 Dividends payable 24,067 -- Short-term borrowings 310,689 177,800 Current maturities of long-term debt 169,409 8,780 Customer deposits 34,209 32,746 Other current liabilities 40,363 25,284 ---------- ---------- Total current liabilities 924,916 504,493 ---------- ---------- Long-Term Debt Less Current Maturities 2,078,869 2,510,709 ---------- ---------- Deferred Credits and Other Deferred income taxes 1,316,707 1,327,881 Deferred investment tax credit 75,653 97,897 Unamortized gain - sale of utility plant 88,083 91,514 Other 315,218 314,910 ---------- ---------- Total deferred credits and other 1,795,661 1,832,202 ---------- ---------- Commitments and Contingencies (Notes 5, 6 and 7) Minority Interests Non-redeemable preferred stock of APS 170,391 193,561 ---------- ---------- Redeemable preferred stock of APS 53,000 75,000 ---------- ---------- Common Stock Equity Common stock, no par value 1,639,709 1,638,684 Retained earnings 350,139 242,403 ---------- ---------- Total common stock equity 1,989,848 1,881,087 ---------- ---------- Total Liabilities and Equity $7,012,685 $6,997,052 ========== ========== See Notes to Condensed Consolidated Financial Statements. 5
PINNACLE WEST CAPITAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- (Unaudited) (THOUSANDS OF DOLLARS) <TABLE> <CAPTION> Nine Months Ended September 30, 1996 1995 --------- --------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Income before extraordinary charge $ 217,719 $ 181,367 Items not requiring cash Depreciation and amortization 235,600 208,171 Deferred income taxes--net 3,195 27,608 Allowance for equity funds used during construction (5,620) (3,645) Deferred investment tax credit (22,244) (21,385) Other--net (459) 4,123 Changes in current assets and liabilities Customer and other receivable--net (39,756) (32,175) Accrued utility revenues (20,489) (23,419) Materials, supplies and fossil fuel 8,934 9,154 Other current assets (591) (2,173) Accounts payable 9,004 (8,171) Accrued taxes 95,861 118,048 Accrued interest (19,449) (20,659) Other current liabilities 20,421 17,934 Decrease (increase) in land held 16,043 (12,322) Other--net 7,401 2,876 --------- --------- Net Cash Flow Provided By Operating Activities 505,570 445,332 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (196,641) (209,471) Allowance for borrowed funds used during construction (7,422) (6,481) Other--net (21,649) (5,664) --------- --------- Net Cash Flow Used For Investing Activities (225,712) (221,616) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt 112,765 102,740 Short-term borrowings--net 132,889 (69,300) Dividends paid on common stock (65,576) (58,998) Repayment of long-term debt (410,582) (179,865) Redemption of preferred stock (46,083) (4) Extraordinary charge for early retirement of debt (20,340) -- Other--net 1,938 (117) --------- --------- Net Cash Flow Used For Financing Activities (294,989) (205,544) --------- --------- Net Cash Flow (15,131) 18,172 Cash and Cash Equivalents at Beginning of Period 79,539 34,719 --------- --------- Cash and Cash Equivalents at End of Period $ 64,408 $ 52,891 ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest, net of amounts capitalized $ 155,943 $ 180,366 Income taxes $ 72,224 $ 35,757 </TABLE> 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 September 30, 1996, the results of operations for the three months, nine months and twelve months ended September 30, 1996 and 1995, and the cash flows for the nine months ended September 30, 1996 and 1995. 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 1995 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 nine months ended September 30, 1996. 5. Regulatory Matters Regulatory Agreement In April 1996 the ACC approved a regulatory agreement between APS and the ACC Staff. This agreement is substantially the same as the agreement proposed by APS and the ACC Staff in December 1995. The major provisions of the 1996 regulatory agreement are: - - - An annual rate reduction of approximately $48.5 million ($29 million after income taxes), or an average 3.4% for all customers except certain contract customers, effective July 1, 1996. - - - 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). 7
- - - A formula for sharing future cost savings between customers and shareholders, referencing a return on equity (as defined) of 11.25%. - - - A moratorium on filing for permanent rate changes, except under the sharing formula and under certain other limited circumstances, prior to July 2, 1999. - - - Infusion of $200 million of common equity into APS by the parent company, in annual increments of $50 million starting in 1996. Competition and Electric Industry Restructuring In recognition of evolving competition in the electric utility industry, there has been an ongoing investigation by the ACC Staff into industry restructuring in an open competition docket involving many parties. See Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8 of the 1995 10-K for further discussion of industry restructuring. On October 9, 1996 the ACC issued an order (the "ACC Order"), attached hereto and incorporated herein by reference, initiating a formal rulemaking process for the adoption of rules ("Proposed Rules") regarding the introduction of retail electric competition in Arizona. The ACC will hold public comment meetings on the Proposed Rules on December 2, 3 and 4, 1996. The ACC has indicated that, even if it then adopts the Proposed Rules, issues such as 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. Commissioner Carl Kunasek, the sole Republican on the three-member ACC, provided a concurring statement to the ACC Order in which he expressed concerns about the Proposed Rules and his intent to make substantive changes in them. As a result of the recent election, Mr. Kunasek will be joined on the ACC in January 1997 by Republican Jim Irvin, which will impact the leadership of the ACC and the composition of the ACC Staff. The positions on the rulemaking that will actually be taken by the members of the ACC, as evidenced by recently reported comments, are by no means clear at this time. The Proposed Rules include the following major provisions: - - - The Proposed Rules are intended to apply to virtually all of the Arizona electric utilities regulated by the ACC (the "Affected Utilities"), including APS. - - - Each Affected Utility would be required to make available at least 20 percent of its 1995 system retail peak demand for competitive generation supply to all customer classes not later than January 1, 1999, at least 50 percent not later than January 1, 2001, and all of its retail demand not later than January 1, 2003. - - - "Electric Service Providers" that obtain 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 not include most electric distribution services. Affected Utilities would not be required to apply for CC&N's for any services provided in their existing service territories. - - - On or before December 31, 1997 each Affected Utility would file with the ACC proposed tariffs for "Standard Offer Bundled Service" and "Unbundled Service." 8
"Standard Offer Bundled Service" means electric service elements (i.e., generation, transmission, distribution and ancillary services) provided and priced as a package to consumers within a designated area. "Unbundled Service" means electric service elements provided and priced separately. The Proposed Rules indicate that the ACC shall allow recovery by Affected Utilities of unmitigated Stranded Cost, defined as "the verifiable net difference between (a) the value of all prudent jurisdictional assets and obligations necessary to furnish electricity (such as generating plants, purchased power contracts, fuel contracts, and regulatory assets), acquired or entered into prior to the adoption of the [Proposed Rules], and (b) the market value of those assets and obligations directly attributable to the introduction of competition under the [Proposed Rules]." Each Affected Utility would be required to take "every feasible, cost-effective measure" to mitigate or offset Stranded Cost and to file with the ACC estimates of unmitigated Stranded Cost. 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 on a case-by-case basis. In comments submitted to the ACC, APS has stated that certain provisions of the Proposed Rules are deficient, legally and otherwise, because, among other things, (i) the ACC has no authority to require or authorize retail competition between electric utilities or to regulate non-public service corporations; (ii) the rules fail to address the vested property rights of Affected Utilities, including APS, to receive adequate compensation for the amendment or rescission of CC&N's or for stranded costs; (iii) the rules are discriminatory because they favor newly-certificated competitors over Affected Utilities; (iv) the rules do not provide for the fundamental statutory and due process rights of APS and other Affected Utilities; (v) specific measures of the Proposed Rules, including the proposed phase-in, could affect APS' ability to maintain system reliability in a cost-effective manner; and (vi) the status of certain of APS' potential competitors, including public power entities and out-of-state utilities, is unclear. In April 1996 an Arizona law established legislative and advisory committees to study electric utility industry restructuring issues and report back to the legislature by the end of 1997. The committees include representatives of the ACC and APS. The Company believes that legislation will ultimately be required before significant implementation of the Proposed Rules (or whatever they may evolve into) can lawfully occur. 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, 9
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 in conjunction with inspections made during scheduled outages of the Palo Verde units. APS' ongoing analyses indicate that it will be economically desirable for APS to replace the Unit 2 steam generators, which have been most affected by tube cracking, in five to ten years. APS expects that the steam generator replacement can be accomplished within financial parameters established before replacement was a consideration, and APS estimates that its share of the replacement costs (in 1996 dollars and including installation and replacement power costs) will be approximately $50 million, most of which will be incurred after the year 2000. APS expects that the replacement would be performed in conjunction with a normal refueling outage in order to limit incremental outage time to approximately 50 days. 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. 10
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 1995 10-K. During August, Pinnacle West prepaid the remaining $150 million of 11.61% bond debentures due March 2000, incurring an extraordinary charge of $14.3 million after income taxes. Proceeds for the debt prepayment and penalty came from a short-term borrowing that will be refinanced with long-term debt at a later date. 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. The Board declared a quarterly dividend of 27.5 cents per share of common stock, payable December 2, 1996 to shareholders of record on November 1, 1996, totaling approximately $24.1 million. APS - - --- For the nine months ended September 30, 1996, APS incurred approximately $197 million in capital expenditures, accounting for approximately 76% of the most recently estimated 1996 capital expenditures. APS has estimated total capital expenditures for the years 1996, 1997 and 1998 to be approximately $260 million, $284 million and $284 million, respectively. These amounts include about $30 million each year for nuclear fuel expenditures. Required and optional redemptions of preferred stock and long-term debt, including premiums thereon, and a capitalized lease obligation are expected to total approximately $217 million, $164 million and $114 million for the years 1996, 1997 and 1998, respectively. During the nine months ended September 30, 1996, APS redeemed approximately $171 million of its long-term debt and approximately $46 million of its preferred stock, and incurred $100 million of long-term debt under a 11
revolving credit agreement. It is APS' intention over the next several years to use excess cash flow primarily to retire debt and preferred stock. Although provisions in APS' bond indenture, articles of incorporation and financing orders from the ACC restrict the issuance 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, nine-month and twelve-month periods ended September 30, 1996 and 1995: 12
Income (Loss) (Unaudited) (Thousands of Dollars) <TABLE> <CAPTION> Three Months Ended Nine Months Ended Twelve Months Ended September 30, September 30, September 30, 1996 1995 1996 1995 1996 1995 --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> APS $ 124,331 $ 123,570 $ 231,574 $ 205,271 $ 246,739 $ 223,287 SunCor 2,278 (1,555) 1,186 (201) 5,465 467 El Dorado (231) (99) (270) 304 7,933 480 Pinnacle West (1) (19,244) (7,421) (35,111) (24,007) (56,088) (6,560) ========= ========= ========= ========= ========= ========= NET INCOME $ 107,134 $ 114,495 $ 197,379 $ 181,367 $ 204,049 $ 217,674 ========= ========= ========= ========= ========= ========= </TABLE> (1) Includes Pinnacle West's interest expense, extraordinary charge for early retirement of debt and operating expenses net of income tax benefits. Income tax benefits are as follows (in thousands): $9,997 and $3,841 for the three months ended September 30, 1996 and 1995, respectively; and $18,271 and $11,969 for the nine months ended September 30, 1996 and 1995, respectively; and $27,409 and $43,569 for the twelve months ended September 30, 1996 and 1995, respectively. 13
APS - - --- Operating Results - Three-month period ended September 30, 1996 compared to three-month period ended September 30, 1995 Earnings were flat in the three-month period ended September 30, 1996. Results were favorably impacted by increased operating revenues, the write-down of an office building in 1995, lower property taxes, and lower interest expense. Operating revenues were higher due to customer growth, warmer weather and higher residential usage. Property tax estimates for 1996 were reduced in the third quarter to reflect a change in tax law. See "Property Taxes" in Part II, Item 1 of the June 10-Q. Interest expense decreased due to lower average interest rates and lower debt balances. Substantially offsetting these positive factors were the accelerated amortization of regulatory assets, a retail rate reduction, and an increase in fuel expenses. The accelerated regulatory asset amortization and the rate 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 higher natural gas costs, a less favorable mix of fuel and purchased power, and increased retail sales. Operating Results - Nine-month period ended September 30, 1996 compared to nine-month period ended September 30, 1995 Earnings increased in the nine-month period ended September 30, 1996 primarily due to increased operating revenues, the write-down of an office building in 1995, a reduction in property taxes (see "Property Taxes" in Part II, Item 1 of the June 10-Q), and lower interest expense. Operating revenues were higher due to customer growth, warmer weather, and higher residential usage. Interest expense decreased due to lower average interest rates and lower debt balances. Partially offsetting these positive factors were an increase in fuel expenses, the accelerated amortization of regulatory assets, a retail rate reduction, and a gain on the sale of a small subsidiary in the first quarter of 1995. Fuel expenses were higher primarily due to higher natural gas costs, increased retail sales, higher coal prices, and a less favorable mix of fuel and purchased power. The accelerated regulatory asset amortization and the rate reduction were part of a regulatory agreement which became effective July 1, 1996. See Note 5 of Notes to Condensed Consolidated Financial Statements. 14
Operating Results - Twelve-month period ended September 30, 1996 compared to twelve-month period ended September 30, 1995 Earnings increased in the twelve-month period ended September 30, 1996 primarily due to increased operating revenues, the write-down of an office building in 1995, a reduction in property taxes (see "Property Taxes" in Part II, Item 1 of the June 10-Q), and lower interest expense. Operating revenues were higher due to customer growth, warmer weather, and higher residential usage. Interest expense decreased due to lower average interest rates and lower debt balances. Partially offsetting these positive factors were an increase in fuel expenses, the accelerated amortization of regulatory assets, increased operation and maintenance expenses, a retail rate reduction, and a gain on the sale of a small subsidiary in the first quarter of 1995. Fuel expenses were higher primarily due to increased retail sales, higher natural gas costs, a less favorable mix of fuel and purchased power, and higher coal prices. The accelerated regulatory asset amortization and the rate reduction were part of a regulatory agreement which became effective July 1, 1996. See Note 5 of Notes to Condensed Consolidated Financial Statements. Operations and maintenance expenses were higher primarily due to the write-down of certain inventory in the fourth quarter of 1995. Non-utility Operations - - ---------------------- The parent company incurred extraordinary charges for the prepayment of debt in the three-month, nine-month and twelve-month periods. Interest expense decreased in all periods due primarily to debt reduction. Additionally, the parent company's income tax benefit decreased in the twelve-month period due to a 1994 non-recurring income tax benefit of approximately $26.8 million related to a change in tax law. SunCor's earnings increased in the three-month, nine-month and twelve-month periods due to an increase in net land sales. El Dorado's decrease in earnings in the nine-month period was the result of a 1995 gain on a sale of an investment. Earnings in the twelve-month period increased due to the sale of an investment in the fourth quarter of 1995. Other Income - - ------------ Other income reflects accounting practices required for regulated public utilities and represents a composite of cash and non-cash items, including AFUDC. See Note 1 of Notes to Consolidated Financial Statements in Part II, Item 8 of the 1995 10-K. 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. 15
Voluntary Severance Program - - --------------------------- APS will take a charge in the fourth quarter of 1996 for a voluntary severance program. Employees may submit their request to participate in the program from October 15 through November 15, 1996. APS cannot currently estimate the financial impact of this program. Regulatory Agreement - - -------------------- See Note 5 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report and Note 3 of Notes to Consolidated Financial Statements in Part II, Item 8 of the 1995 10-K for a discussion of APS' regulatory agreement and the Proposed Rules regarding the introduction of retail electric competition in Arizona. 16
PART II. OTHER INFORMATION -------------------------- The following information relates primarily to Pinnacle West and its principal subsidiary, APS. ITEM 5. Other Information - - -------------------------- Environmental Matters --------------------- As previously reported, the Clean Air Act Amendments of 1990 required two studies with respect to hazardous air pollutants emitted by electric utility steam generating units. See "Environmental Matters -- EPA Environmental Regulation" in Part I, Item 1 of the 1995 10-K. The EPA has postponed, for up to three years, the general study concerning the necessity of regulating such units and has deferred promulgating regulations relating to mercury emissions. 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. Competition and Electric Industry Restructuring ----------------------------------------------- See Note 5 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of competition and the Proposed 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 In addition to the Exhibit shown above, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 by reference to the filings set forth below: Previously Filed File Date Exhibit No. Description As Exhibit No. Effective - - ----------- ----------- ---------------- ---- --------- 10.1 ACC Order dated 10.1 to APS' 1-4473 11/14/96 October 9, 1996 September 1996 Form 10-Q Report 17
(b) Reports on Form 8-K During the quarter ended September 30, 1996, and the period ended November 13, 1996, the Company filed the following Report on Form 8-K: Report filed September 3, 1996 relating to a draft ACC rule for the introduction of retail electric competition in Arizona. 18
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: November 14, 1996 By: /s/ William J. Post ------------------ William J. Post Executive Vice President (Principal Financial Officer and Officer Duly Authorized to sign this Report) 19