Back to GetFilings.com
============================================================================
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
1993 FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ----- TO -----
COMMISSION FILE NUMBER 1-8962
--------------
PINNACLE WEST CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
ARIZONA 86-0512431
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
400 East Van Buren Street, Suite 700
Phoenix, Arizona 85004 (602) 379-2500
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
- ------------------------------------------------------------------------------
Common Stock, New York Stock Exchange
No Par Value..................................... Pacific Stock Exchange
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
AGGREGATE MARKET VALUE
OF SHARES HELD BY
TITLE OF EACH CLASS SHARES OUTSTANDING NON-AFFILIATES AS OF
OF VOTING STOCK AS OF MARCH 23, 1994 MARCH 23, 1994
- ------------------------------------------------------------------------------
Common Stock, No Par Value... 87,416,576 $ 1,818,209,400 (a)
- ------------------------------------------------------------------------------
(A) COMPUTED BY REFERENCE TO THE CLOSING PRICE ON THE COMPOSITE TAPE ON MARCH
23, 1994, AS REPORTED BY THE WALL STREET JOURNAL.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to its annual
meeting of shareholders to be held on May 19, 1994 are incorporated by
reference into Part III hereof.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
THE COMPANY
Pinnacle West Capital Corporation (the "Company") was incorporated in 1985
under the laws of the State of Arizona and is engaged in the acquisition and
holding of securities of corporations for investment purposes. The principal
executive offices of the Company are located at 400 East Van Buren Street,
Phoenix, Arizona 85004 (telephone 602-379-2500).
The Company and its subsidiaries employ approximately 7,915 persons. Of
these employees, approximately 7,050 are employees of the Company's principal
subsidiary, Arizona Public Service Company ("APS"), and employees assigned to
joint projects of APS where APS serves as a project manager, and approximately
865 are employees of the Company and its other subsidiaries.
Other subsidiaries of the Company, in addition to APS, include SunCor
Development Company ("SunCor") and El Dorado Investment Company ("El Dorado").
SunCor is engaged primarily in the owning, holding and development of real
property. El Dorado is involved in the business of making equity investments
in other companies. See "Business of Non-Utility Subsidiaries" in this Item
for further information regarding SunCor and El Dorado.
Effective December 16, 1986, the Company acquired MeraBank, A Federal
Savings Bank ("MeraBank"). On January 31, 1990, MeraBank was placed in
receivership, and is therefore considered a discontinued operation of the
Company for financial reporting purposes. See Note 2 of the Notes to the
Consolidated Financial Statements in Item 8 for information regarding the
Company's $450 million cash infusion into MeraBank in settlement of claims
made by certain federal agencies with respect to MeraBank.
CAPITAL REQUIREMENTS. During the past three years, the Company's primary
cash needs were for the repayment of principal and interest on its outstanding
debt. Additional cash needs in 1993 were related to the fourth quarter
restoration of common stock dividends.
As a result of a restructuring of substantially all of its outstanding
debt in 1990, and the prepayment of approximately $112 million, $96 million
and $152 million of its long-term debt in 1991, 1992 and 1993, respectively,
the Company has reduced required principal debt payments for the next three
years. The Company's principal and interest payment obligations during 1994,
1995 and 1996 are expected to total approximately $129 million, $129 million
and $83 million, respectively (based upon certain anticipated prepayments).
See Note 6 of the Notes to the Company's Consolidated Financial Statements in
Item 8 for additional information regarding the Company's and APS' outstanding
long-term debt.
The Company's ability to satisfy its debt service obligations is
substantially dependent upon the receipt of common stock dividends from APS.
The Company has in place a $40 million liquidity facility to assist the
Company in meeting its debt service requirements in the event that cash flow
is less than anticipated. The facility is available for principal and interest
payments on the Company's outstanding debt, with a maximum of $20 million for
principal payments.
The terms and provisions of certain of the Company's financing agreements
place severe restrictions on the Company's ability to incur additional debt,
to make capital infusions into its subsidiaries (excluding APS), to make other
new investments and to pay cash dividends to its shareholders unless certain
conditions are met. While the debt under these financing agreements remains
outstanding, the Company has agreed not to incur new debt, except generally
(and with certain restrictions) for (1) borrowings to reduce, refinance or
prepay existing debt and (2) borrowings under the liquidity facility discussed
in the immediately preceding paragraph. The Company's ability to pay cash
dividends or to make other corporate distributions is dependent upon the
satisfaction of certain financial covenants. The Company restored a dividend
on its common stock in the fourth quarter of 1993.
In the event of a sale of all or substantially all of the assets or shares
of common stock of El Dorado or SunCor, the net cash proceeds must be applied
by the Company to reduce its outstanding debt. Until the Company's lenders are
fully repaid, (1) any new investments by the Company in its subsidiaries
(excluding APS) are generally restricted to $15 million in the aggregate and
(2) any other new investments by the Company are generally restricted to $20
million in the aggregate. As of December 31, 1993, the Company had not made
any such investments.
As part of the Company's 1990 debt restructuring, the Company granted
substantially all of its lenders a security interest in the outstanding common
stock of APS pursuant to a Pledge Agreement, dated as of January 31, 1990 (the
"Pledge Agreement"). At December 31, 1993, the APS common stock secured
approximately $564 million of the Company's outstanding debt. Any borrowings
under the Company's liquidity facility (see above) would also be secured by
the APS common stock owned by the Company. Until the Company and the
collateral agent under the Pledge Agreement (the "Collateral Agent") receive
notice of the occurrence and continuation of an Event of Default (as defined
in the Pledge Agreement), the Company is entitled to exercise or refrain from
exercising any and all voting and other consensual rights pertaining to
the APS common stock. As to matters other than the election of directors, the
Company agreed not to exercise or refrain from exercising any such rights if,
in the Collateral Agent's judgment, such action would have a material adverse
effect on the value of the APS common stock. After notice of an Event of
Default, the Collateral Agent would have the right to vote the APS common
stock.
REGULATION
PUBLIC UTILITY HOLDING COMPANY
The Company currently conducts no significant business activities other
than investing in its subsidiaries and owns no significant assets other than
the common stock of its subsidiaries. The Company and its subsidiaries are
currently exempt from registration under the Public Utility Holding Company
Act of 1935 (the "Holding Company Act"); however, there are limits on the
extent to which the Company can diversify beyond energy-related fields without
affecting its exempt status. In February 1989, the Securities and Exchange
Commission (the "SEC") released for public comment a proposed rule under the
Holding Company Act relating to holding companies, like the Company, that are
exempt under Section 3(a)(1) of the Holding Company Act. The proposed rule, if
finally adopted by the SEC in its present form, could require the divestiture
of a portion of the Company's interests in non-utility businesses within a
three-year period after the rule's adoption in order for the Company to
maintain its Section 3(a)(1) exemption. If the Company failed to maintain this
exemption, the proposed rule would require the Company to divest itself of all
of its interests in non-utility businesses within the same three-year period.
At this time, the Company is unable to predict whether the proposed rule will
be adopted by the SEC and, if so, in what form it will be adopted.
On May 1, 1990, the ACC approved the filing of a petition with the SEC
requesting the SEC to revoke or modify the Company's exemption under the
Holding Company Act. The SEC has the power to terminate the Company's
exemption upon thirty days notice to the Company if it determines that a
question exists as to whether the exemption may be detrimental to the public
interest or the interests of investors or consumers. In the event of the
exercise of such power by the SEC, if the Company were to file an application
with the SEC during such thirty-day period requesting an exemption order, the
Company's exemption would remain in place until the SEC ruled on such
application. If the Company ultimately were to have its exemption modified,
conditioned or revoked, APS could be subject to SEC regulation in many aspects
of its business, including those relating to securities issuances,
diversification and transactions among affiliates. In a series of responses to
the ACC's petition and subsequent ACC letters to the SEC, the Company has
asked the SEC to refuse to take the action requested by the ACC. The Company
cannot predict what action, if any, the SEC may take with respect to the ACC
petition.
ARIZONA CORPORATION COMMISSION REPORTING REQUIREMENTS
On April 29, 1985, the ACC issued an order subjecting the Company and APS
to certain reporting requirements in connection with certain of their
activities. The order requires the Company to report to the ACC on a monthly
basis concerning the Company's diversification activities and plans, financing
arrangements and changes in management. The order also requires monthly
reports describing transactions between APS and the Company or its affiliates.
ARIZONA CORPORATION COMMISSION AFFILIATED INTEREST RULES
On March 14, 1990 the ACC issued an order adopting certain rules
purportedly applicable only to a certain class of public utilities regulated
by the ACC, including APS. The rules define the terms "public utility holding
company" and "affiliate" with respect to public service corporations regulated
by the ACC in such a manner as to include the Company and all of the Company's
non-public service corporation subsidiaries. By their terms, the rules, among
other things, require public utilities, such as APS, to receive ACC approval
prior to (1) obtaining an interest in, or guaranteeing or assuming the
liabilities of, any affiliate not regulated by the ACC; (2) lending to any
such affiliate (except for short-term loans in an amount less than $100,000);
or (3) using utility funds to form a subsidiary or divest itself of any
established subsidiary. The rules also would prevent a utility from
transacting business with an affiliate unless the affiliate agrees to provide
the ACC "access to the books and records of the affiliate to the degree
required to fully audit, examine or otherwise investigate transactions between
the public utility and the affiliate." In addition, the rules provide that an
"affiliate or holding company may not divest itself of, or otherwise
relinquish control of, a public utility without thirty (30) days prior written
notification to the [ACC]" and would require all public utilities subject to
them and all public utility holding companies to annually "provide the [ACC]
with a description of diversification plans for the current calendar year that
have been approved by the Boards of Directors." The order became effective as
to APS on December 1, 1992. The rules have not had, nor does the Company
expect the rules to have, a material adverse impact on the business or
operations of the Company.
BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
Following is a discussion of the business of APS, the Company's principal
subsidiary.
GENERAL
APS was incorporated in 1920 under the laws of Arizona and is engaged
principally in serving electricity in the State of Arizona. The principal
executive offices of APS are located at 400 North Fifth Street, Phoenix,
Arizona 85004 (telephone 602-250-1000). APS currently employs approximately
7,050 persons, which includes employees assigned to joint projects where APS
is project manager.
APS serves approximately 654,000 customers in an area that includes all or
part of 11 of Arizona's 15 counties. During 1993, no single purchaser or user
of energy accounted for more than 3% of total electric revenues.
INDUSTRY AND COMPANY ISSUES
The utility industry continues to experience a number of challenges.
Depending on the circumstances of a particular utility, these may include
(i) competition in general from numerous sources; (ii) effects of the National
Energy Policy Act of 1992 (the "Energy Act"); (iii) difficulties in meeting
government imposed environmental requirements; (iv) the necessity to make
substantial capital outlays for transmission and distribution facilities;
(v) uncertainty regarding projected electrical demand growth;
(vi) controversies over electromagnetic fields; (vii) controversies over the
safety and use of nuclear power; (viii) issues related to spent fuel and low
level waste (see "Generating Fuel" below); and (ix) increasing costs of wages
and materials.
The impact on APS of other utility industry problems is discussed in this
Item under "Environmental Matters." Also see "Water Supply" in this Item with
respect to certain problems specific to APS and other utilities.
COMPETITION
Certain territory adjacent to or within areas served by APS is served by
other investor-owned utilities (notably Tucson Electric Power Company serving
electricity in the Tucson area, Southwest Gas Corporation serving gas
throughout the state, and Citizens Utilities Company serving electricity and
gas in various locations throughout the state) and a number of cooperatives,
municipalities, electrical districts, and similar types of governmental
organizations (principally the Salt River Project Agricultural Improvement and
Power District ("SRP") serving electricity in various areas in and around
Phoenix).
APS expects increased competition in the future, mostly with respect to
large customers, from entities offering alternative sources of energy. In
recent years, changing laws and governmental regulations, interest in self-
generation, competition from nonregulated energy suppliers, and aggressive
marketing from the gas industry, are providing some utility customers with
alternative sources to satisfy their energy needs. This may be increased as a
result of the Energy Act which, among other things, removes certain previously
existing barriers to entry into electric generation. The Energy Act also
permits certain other parties to compete for resale customers currently served
by a particular utility and to use that utility's transmission facilities in
order to do so. The requirements with respect to implementation of the Energy
Act have not yet been completely determined, so APS cannot currently predict
its impact on APS' business and operations.
In order to remain competitive in this changing environment, APS has
determined that it must be a cost-effective supplier, provide excellent
service and be knowledgeable about its customers' businesses. APS is
concentrating on several areas which are key to the success of this strategy,
including effectively managing its operating and maintenance expenses;
reinforcing the importance of customer needs among APS employees; and working
with customers to evaluate, recommend and provide services which will optimize
their efficiency.
CAPITAL STRUCTURE
The capital structure of APS (which, for this purpose, includes short-term
borrowings and current maturities of long-term debt) as of December 31, 1993
is tabulated below.
Amount Percentage
---------- ----------
(Thousands
of
Dollars)
Long-Term Debt Less Current Maturities:
First mortgage bonds................................ $1,729,070
Other............................................... 395,584
----------
Total long-term debt less current maturities...... 2,124,654 50.7%
----------
Non-Redeemable Preferred Stock........................ 193,561 4.6
----------
Redeemable Preferred Stock............................ 197,610 4.7
----------
Common Stock Equity:
Common stock, $2.50 par value, 100,000,000 shares
authorized; 71,264,947 shares outstanding......... 178,162
Premiums and expenses............................... 1,037,681
Retained earnings................................... 307,098
----------
Total common stock equity......................... 1,522,941 36.4
----------
Total capitalization............................ 4,038,766
Current Maturities of Long-Term Debt.................. 3,179 .1
Short-Term Borrowings................................. 148,000 3.5
---------- --------
Total........................................... $4,189,945 100.0%
========== ========
See Notes 6, 7, and 8 of Notes to the Consolidated Financial Statements in
Item 8.
On March 1, 1994 APS redeemed all of the outstanding shares of its $8.80
Cumulative Preferred Stock, Series K ($100 par value), in the amount of $14.21
million. On March 2, 1994, APS issued $100 million of its First Mortgage
Bonds, 6 5/8% Series due 2004 and applied the net proceeds to the repayment of
short-term debt that had been incurred for the redemption of preferred stock
and for general corporate purposes.
So long as any of APS' first mortgage bonds are outstanding, APS is
required for each calendar year to deposit with the trustee under its mortgage
cash in a formularized amount related to net additions to APS' mortgaged
utility plant; however, APS may satisfy all or any part of this "replacement
fund" requirement by utilizing redeemed or retired bonds, net property
additions, or property retirements. For 1993, the replacement fund requirement
amounted to approximately $122 million. Many, though not all, of the bonds
issued by APS under its mortgage are redeemable at their par value plus
accrued interest with cash deposited by APS in the replacement fund, subject
in many cases to a period of time after the original issuance of the bonds
during which they may not be so redeemed and/or to other restrictions on any
such redemption. The cash deposited with the trustee by APS in partial
satisfaction of its 1993 replacement fund requirements will be used to redeem
$60.264 million in aggregate principal amount of APS' First Mortgage Bonds,
10 3/4% Series due 2019, at their principal amount plus accrued interest, on
April 4, 1994.
RATES
STATE. The ACC has regulatory authority over APS in matters relating to
retail electric rates and the issuance of securities. See "Rate Case
Settlement" in Note 3 of the Notes to the Consolidated Financial Statements
in Item 8 for a discussion of the December 1991 settlement of APS' most recent
retail rate case before the ACC.
FEDERAL. APS' rates for wholesale power sales and transmission services
are subject to regulation by the Federal Energy Regulatory Commission
("FERC"). During 1993, approximately 8% of APS' electric operating revenues
resulted from such sales and charges. For most wholesale transactions
regulated by the FERC, a fuel adjustment clause results in monthly adjustments
for changes in the actual cost of fuel for generation and in the fuel
component of purchased power expense.
CONSTRUCTION PROGRAM
Although its plans are subject to change, APS does not presently intend to
construct any new major baseload generating units for at least the next ten
years. Utility construction expenditures for the years 1994 through 1996 are
therefore expected to be primarily for expanding transmission and distribution
capabilities to meet customer growth, upgrading existing facilities, and for
environmental purposes. Construction expenditures, including expenditures for
environmental control facilities, for the years 1994 through 1996 have been
estimated as follows:
(MILLIONS OF DOLLARS)
BY YEAR BY MAJOR FACILITIES
- ------------------------------ ------------------------------------------
1994 $279 Electric generation $271
1995 302 Electric transmission 92
1996 293 Electric distribution 390
---- General facilities 121
$874 ----
==== $874
====
The amounts for 1994 through 1996 include expenditures for nuclear fuel
but exclude capitalized interest costs and capitalized property taxes. APS
conducts a continuing review of its construction program. This program and the
above estimates are subject to periodic revisions based upon changes in
assumptions as to system reliability, system load growth, rates of inflation,
the availability and timing of environmental and other regulatory approvals,
the availability and costs of outside sources of capital, and changes in
project construction schedules. During the years 1991 through 1993, APS
incurred approximately $641 million in construction expenditures and
approximately $31 million in additional capitalized items.
ENVIRONMENTAL MATTERS
Pursuant to the Clean Air Act, the United States Environmental Protection
Agency ("EPA") has adopted regulations, applicable to certain federally-
protected areas, that address visibility impairment that can be reasonably
attributed to specific sources. In September 1991, the EPA issued a final rule
that would limit sulfur dioxide emissions at the Navajo Generating Station
("NGS"). Compliance with the emission limitation becomes applicable to NGS
Units 1, 2, and 3 in 1997, 1998, and 1999, respectively. SRP, the NGS
operating agent, has estimated a capital cost of $530 million, most of which
will be incurred from 1995-1998, and annual operations and maintenance costs
of approximately $10 million per unit, for NGS to meet these requirements. APS
will be required to fund 14% of these expenditures.
The Clean Air Act Amendments of 1990 (the "Amendments") became effective
on November 15, 1990. The Amendments address, among other things, "acid rain,"
visibility in certain specified areas, toxic air pollutants, and the
nonattainment of national ambient air quality standards. With respect to "acid
rain," the Amendments establish a system of sulfur dioxide emissions
"allowances." Each existing utility unit is granted a certain number of
"allowances." On March 5, 1993, the EPA promulgated rules listing allowance
allocations applicable to Company-owned plants, which allocations will begin
in the year 2000. Based on those allocations, APS will have sufficient
allowances to permit continued operation of its plants at current levels
without installing additional equipment. In addition, the Amendments require
the EPA to set nitrogen oxides emissions limitations which would require
certain plants to install additional pollution control equipment. On March 22,
1994, the EPA issued rules for nitrogen oxide emissions limitations which will
require the Company to install additional pollution control equipment at the
Four Corners Power Plant ("Four Corners"). In the year 2000 Four Corners must
comply with either these or more stringent requirements which might be
promulgated by the EPA. The EPA has until 1997 to set more stringent
requirements. However, if Four Corners accelerates to 1997 compliance with
these March 22, 1994 requirements, it can delay until 2008 compliance with any
more stringent requirements which the EPA may set. APS has not yet determined
how it will proceed; however, APS currently estimates the capital cost of
complying by 1997 with the specified requirements will be approximately $16
million.
With respect to protection of visibility in certain specified areas, the
Amendments require the EPA to complete a study by November 1995 concerning
visibility impairment in those areas and identification of sources
contributing to such impairment. Interim findings of this study have indicated
that any beneficial effect on visibility as a result of the Amendments would
be offset by expected population and industry growth. EPA has established a
"Grand Canyon Visibility Transport Commission" to complete a study by November
1995 on visibility impairment in the "Golden Circle of National Parks" in the
Colorado Plateau. NGS, the Cholla Power Plant ("Cholla"), and Four Corners are
located near the "Golden Circle of National Parks." Based on the
recommendations of the Commission, the EPA may require additional emissions
controls at various sources causing visibility impairment in the "Golden
Circle of National Parks" and may limit economic development in several
western states. APS cannot currently estimate the capital expenditures, if
any, which may be required as a result of the EPA studies and the Commission's
recommendations.
With respect to hazardous air pollutants emitted by electric utility steam
generating units, the Amendments require two studies. First, there will be a
study to be completed by November 1994 of potential impacts of mercury
emissions from such units and various other sources on public health and on
the environment, including available control technologies. Second, the EPA
will complete a general study by November 1995 concerning the necessity of
regulating such units under the Amendments. Due to the lack of historical
data, and because APS cannot speculate as to the ultimate requirements by the
EPA, APS cannot currently estimate the capital expenditures, if any, which may
be required as a result of these studies.
Certain aspects of the Amendments may require related expenditures by APS,
such as permit fees, none of which APS expects to have a material impact on
its financial position.
GENERATING FUEL
Coal, nuclear, gas, and other contributions to total net generation of
electricity by APS in 1993, 1992, and 1991, and the average cost to APS of
those fuels (in dollars per MWh), were as follows:
COAL NUCLEAR GAS OTHER ALL FUELS
------------------------- ------------------------- ------------------------- ------------------------- ------------
PERCENT OF AVERAGE PERCENT OF AVERAGE PERCENT OF AVERAGE PERCENT OF AVERAGE AVERAGE
GENERATION COST GENERATION COST GENERATION COST GENERATION COST COST
------------- ---------- ------------- ---------- ------------- ---------- ------------- ---------- ------------
1993
(estimate) 62.3% $12.95 32.4% $6.17 5.1% $31.53 0.2% $18.32 $11.70
1992..... 58.8 13.06 36.4 5.84 4.5 31.27 0.3 20.75 11.26
1991..... 59.0 13.62 37.3 7.03 3.4 21.11 0.3 28.69 11.45
Other includes oil and hydro generation.
APS believes that Cholla has sufficient reserves of low sulfur coal
committed to that plant for the next six years, the term of the existing coal
contract, and sufficient reserves of low sulfur coal available for use to
continue operating it for its useful life. APS also believes that Four Corners
and NGS have sufficient reserves of low sulfur coal available for use by those
plants to continue operating them for at least thirty years. The current
sulfur content of coal being used at Four Corners, NGS, and Cholla is 0.8%,
0.6%, and 0.4%, respectively. In 1993, average prices paid for coal supplied
from reserves dedicated under the existing contracts were relatively stable,
although applicable contract clauses permit escalations under certain
conditions. In addition, major price adjustments can occur from time to time
as a result of contract renegotiation.
NGS and Four Corners are located on the Navajo Reservation and held under
easements granted by the federal government as well as leases from the Navajo
Tribe. See "Properties" in Item 2. APS purchases all of the coal which fuels
Four Corners from a coal supplier with a long-term lease of coal reserves
owned by the Navajo Tribe and for NGS from a coal supplier with a long-term
lease with the Navajo and Hopi Tribes. APS purchases all of the coal which
fuels Cholla from a coal supplier who obtains substantially all of the coal
under a long-term lease of coal reserves owned by the Navajo Tribe and under a
lease with the Bureau of Land Management.
APS is a party to contracts with twenty-seven natural gas operators and
marketers which allow APS to purchase natural gas in the method it determines
to be most economic. During 1993, the principal sources of APS' natural gas
generating fuel were twelve of these companies. APS is currently purchasing
the majority of its natural gas requirements from six companies pursuant to
contracts. APS' natural gas supply is transported pursuant to a firm
transportation service contract between APS and El Paso Natural Gas Company.
APS continues to analyze the market to determine the source and method of
meeting its natural gas requirements.
The fuel cycle for the Palo Verde Nuclear Generating Station ("Palo
Verde") is comprised of the following stages: (1) the mining and milling of
uranium ore to produce uranium concentrates, (2) the conversion of uranium
concentrates to uranium hexafluoride, (3) the enrichment of uranium
hexafluoride, (4) the fabrication of fuel assemblies, (5) the utilization of
fuel assemblies in reactors, and (6) the storage of spent fuel and the
disposal thereof. The Palo Verde participants have made arrangements through
contract flexibilities to obtain quantities of uranium concentrates
anticipated to be sufficient to meet operational requirements through 1996.
Existing contracts and options could be utilized to meet approximately 75% of
requirements in 1997 and 50% of requirements from 1998 through 2000. Spot
purchases in the uranium market will be made, as appropriate, in lieu of any
uranium that might be obtained through contract flexibilities and options. The
Palo Verde participants have contracted for all conversion services required
through 1994 and for up to 65% of conversion services required through 1998,
with options to continue through the year 2000. The Palo Verde participants,
including APS, have an enrichment services contract with United States
Enrichment Corporation ("USEC") which obligates USEC to furnish enrichment
services required for the operation of the three Palo Verde units over a term
expiring in November 2014, with annual options to terminate each year of the
contract with ten years prior notice. The participants have exercised this
option, terminating 30% of requirements for 1996 through 1998 and 100% of
requirements during the years 1999 through 2002. In addition, existing
contracts will provide fuel assembly fabrication services for at least ten
years from the date of operation of each Palo Verde unit, and through contract
options, approximately fifteen additional years are available. The Energy Act
includes an assessment for decontamination and decommissioning of the
enrichment facilities of the United States Department of Energy ("DOE"). The
total amount of this assessment has not yet been finalized; however, based on
preliminary indications, APS expects that the annual assessment for Palo Verde
will be approximately $3 million, plus escalation for inflation, for fifteen
years. APS will be required to fund 29.1% of this assessment.
Existing spent fuel storage facilities at Palo Verde have sufficient
capacity with certain modifications to store all fuel expected to be
discharged from normal operation of all Palo Verde units through at least the
year 2005. Pursuant to the Nuclear Waste Policy Act of 1982, as amended in
1987 (the "Waste Act"), DOE is obligated to accept and dispose of all spent
nuclear fuel and other high-level radioactive wastes generated by all domestic
power reactors. The Nuclear Regulatory Commission (the "NRC"), pursuant to the
Waste Act, also requires operators of nuclear power reactors to enter into
spent fuel disposal contracts with DOE. APS, on its own behalf and on behalf
of the other Palo Verde participants, has executed a spent fuel disposal
contract with DOE. The Act also obligates DOE to develop the facilities
necessary for the permanent disposal of all spent fuel generated, and to be
generated, by domestic power reactors and to have the first such facility in
operation by 1998 under prescribed procedures. In November 1989, DOE reported
that such permanent disposal facility will not be in operation until 2010. As
a result, under DOE's current criteria for shipping allocation rights, Palo
Verde's spent fuel shipments to the DOE permanent disposal facility would
begin in approximately 2025. In addition, APS believes that on-site storage of
spent fuel may be required beyond the life of Palo Verde's generating units.
APS currently believes that alternative interim spent fuel storage methods are
or will be available on-site or off-site for use by Palo Verde to allow its
continued operation beyond 2005 and to safely store spent fuel until DOE's
scheduled shipments from Palo Verde begin.
The off-site facilities for low level waste now being utilized for Palo
Verde may soon be closed to it. APS is currently exploring means to either
ship the waste to an alternative site or to store it on-site until an off-site
location becomes available. APS currently believes that interim low level
waste storage methods are or will be available for use by Palo Verde to allow
its continued operation and to safely store low level waste until a permanent
disposal facility is available.
While believing that scientific and financial aspects of the issues with
respect to fuel and low level waste can be resolved satisfactorily, APS
acknowledges that their ultimate resolution will require political resolve and
action on national and regional scales which it is less able to predict.
PALO VERDE LIABILITY AND INSURANCE MATTERS
See "Nuclear Insurance" in Note 13 of the Notes to the Consolidated
Financial Statements in Item 8 for a discussion of the insurance maintained by
the Palo Verde participants, including APS, for Palo Verde.
PALO VERDE NUCLEAR GENERATING STATION
By letter dated July 7, 1993, the NRC advised APS that, as a result of a
Recommended Decision and Order by a Department of Labor Administrative Law
Judge (the "ALJ") finding that APS discriminated against a former contract
employee at Palo Verde because he engaged in "protected activities" (as
defined under federal regulations), the NRC intended to schedule an
enforcement conference with APS. Following the ALJ's finding, APS investigated
various elements of both the substantive allegations and the manner in which
the United States Department of Labor (the "DOL") proceedings were conducted.
As a result of that investigation, APS determined that one of its employees
had falsely testified during the proceedings, that there were inconsistencies
in the testimony of another employee, and that certain documents were
requested in, but not provided during, discovery. The two employees in
question are no longer with APS. APS provided the results of its investigation
to the ALJ, who referred matters relating to the conduct of two former
employees of APS to the United States Attorney's office in Phoenix, Arizona.
On December 15, 1993 APS and the former contract employee who had raised the
DOL claim entered into a settlement agreement, a part of which was subject
to approval by the Secretary of Labor. On March 21, 1994 the Secretary of
Labor issued a final order approving the settlement. By letter dated August
10, 1993, APS also provided the results of its investigation to the NRC, and
advised the NRC that, as a result of APS' investigation, APS had changed its
position opposing the finding of discrimination. The NRC is investigating this
matter and APS is fully cooperating with the NRC in this regard.
See "Palo Verde Tube Cracks" in Note 13 of the Notes to the Consolidated
Financial Statements in Item 8 for a discussion of issues relating to
the Palo Verde steam generators.
WATER SUPPLY
Assured supplies of water are important both to APS (for its generating
plants) and to its customers. However, conflicting claims to limited amounts
of water in the southwestern United States have resulted in numerous court
actions in recent years.
Both groundwater and surface water in areas important to APS' operations
have been the subject of inquiries, claims, and legal proceedings which will
require a number of years to resolve. APS is one of a number of parties in a
proceeding before a state court in New Mexico to adjudicate rights to a stream
system from which water for Four Corners is derived. (State of New Mexico, in
the relation of S.E. Reynolds, State Engineer vs. United States of America,
City of Farmington, Utah International, Inc., et al., San Juan County, New
Mexico, District Court No. 75-184). An agreement reached with the Navajo Tribe
in 1985, however, provides that if Four Corners loses a portion of its rights
in the adjudication, the Tribe will provide, for a then-agreed upon cost,
sufficient water from its allocation to offset the loss.
A summons served on APS in early 1986 required all water claimants in the
Lower Gila River Watershed in Arizona to assert any claims to water on or
before January 20, 1987, in an action pending in Maricopa County Superior
Court. (In re The General Adjudication of All Rights to Use Water in the Gila
River System and Source, Supreme Court Nos. WC-79-0001 through WC 79-0004
(Consolidated) [WC-1, WC-2, WC-3 and WC-4 (Consolidated)], Maricopa County
Nos. W-1, W-2, W-3 and W-4 (Consolidated)). Palo Verde is located within the
geographic area subject to the summons, and the rights of the Palo Verde
participants, including APS, to the use of groundwater and effluent at Palo
Verde is potentially at issue in this action. APS, as project manager of Palo
Verde, filed claims that dispute the court's jurisdiction over the Palo Verde
participants' groundwater rights and their contractual rights to effluent
relating to Palo Verde and, alternatively, seek confirmation of such rights.
Three of APS' less-utilized power plants are also located within the
geographic area subject to the summons. APS' claims dispute the court's
jurisdiction over APS' groundwater rights with respect to these plants and,
alternatively, seek confirmation of such rights. On December 10, 1992, the
Arizona Supreme Court heard oral argument on certain issues in this matter
which are pending on interlocutory appeal, and as a result, issues important
to APS' claims have been remanded to the trial court for further action. No
trial date concerning the water rights claims of APS has been set in this
matter.
APS has also filed claims to water in the Little Colorado River Watershed
in Arizona in an action pending in the Apache County Superior Court. (In re
The General Adjudication of All Rights to Use Water in the Little Colorado
River System and Source, Supreme Court No. WC-79-0006 WC-6, Apache County No.
6417). APS' groundwater resource utilized at Cholla is within the geographic
area subject to the adjudication and is therefore potentially at issue in the
case. APS' claims dispute the court's jurisdiction over APS' groundwater
rights and, alternatively, seek confirmation of such rights. The parties are
in the process of settlement negotiations with respect to this matter. No
trial date concerning the water rights claims of APS has been set in this
matter.
Although the foregoing matters remain subject to further evaluation, APS
expects that the described litigation will not have a materially adverse
impact on its operations or financial position.
BUSINESS OF NON-UTILITY SUBSIDIARIES
SUNCOR DEVELOPMENT COMPANY
SunCor was incorporated in 1965 under the laws of the State of Arizona and
is engaged primarily in the owning, holding and development of real property.
The principal executive offices of SunCor are located at 2828 North Central,
Suite 900, Phoenix, Arizona 85004 (telephone 602-285-6800). SunCor and its
subsidiaries, excluding SunCor Resort and Golf Management, Inc. ("Resort
Management"), employ approximately 60 persons. Resort Management, which
manages the Wigwam Resort and Country Club (the "Wigwam"), employs between 400
and 715 persons, depending on the Wigwam's operating season. Resort Management
also operates other golf operations.
On April 4, 1990, SunCor sold the Wigwam and certain other associated
property for $70 million in cash. As noted in the preceding paragraph, Resort
Management, a subsidiary of SunCor, manages the Wigwam. SunCor has also
entered into a joint venture with the purchaser of the Wigwam to develop
certain property located near the Wigwam.
SunCor's assets consist primarily of land and improvements and other real
estate investments. SunCor's holdings include approximately 11,000 acres west
of Phoenix in the area of Goodyear/Litchfield Park, Arizona ("Palm Valley"),
including a private water and sewer company to provide those utility services
to the property. A substantial portion of the undeveloped property is
currently being used for agricultural purposes. SunCor has completed the
master-plan for developing Palm Valley and has begun commercial and
residential development of approximately 640 acres. The initial phase included
the development of an 18-hole championship golf course which was completed in
1993. In addition, within the Palm Valley project, SunCor has entered into
joint ventures to develop 2,200 acres as a retirement community, known as
PebbleCreek, and 350 acres as a planned area development, known as Litchfield
Greens.
SunCor's holdings also include a 1,400 acre master-planned community north
of Phoenix called Tatum Ranch, a 1,400 acre master-planned community northeast
of Phoenix called Scottsdale Mountain, a 140 acre master-planned project for
business use northwest of Phoenix called Talavi and a 420 acre master-planned
project for business use east of Phoenix called MarketPlace.
For the years ended December 31, 1993, 1992 and 1991, SunCor's operating
revenues were approximately $32.2 million, $20.0 million, and $12.7 million,
respectively, and its pre-tax losses were approximately $4.0 million, $6.2
million, and $9.6 million, respectively. During 1994, SunCor estimates that
its capital expenditures will total approximately $33 million. See "The
Company -- Capital Requirements" in this Item for a discussion of restrictions
on the Company's ability to make new investments in SunCor.
At December 31, 1993, SunCor had total assets of approximately $429
million. SunCor intends to continue its focus on real estate development in
residential, commercial and industrial projects.
EL DORADO INVESTMENT COMPANY
El Dorado was incorporated in 1983 under the laws of the State of Arizona
and is engaged in the business of making equity investments in other
companies. El Dorado's offices are located at 400 East Van Buren Street, Suite
650, Phoenix, Arizona 85004 (telephone 602-252-3441).
El Dorado has investments in three major venture capital partnerships
totalling approximately $28.5 million. El Dorado has remaining funding
commitments to these partnerships in the aggregate amount of approximately $6
million through 1995. In addition to the foregoing investments, through 1993
El Dorado had directly invested approximately $22.2 million in other private
and public companies and partnerships with perceived high growth potential.
For the years ended December 31, 1993, 1992 and 1991 El Dorado's pre-tax
losses were approximately $3.9 million, $2.6 million and $6.7 million,
respectively. At December 31, 1993, El Dorado had total assets of
approximately $57.6 million. See "The Company -- Capital Requirements" in this
Item for a discussion of restrictions on the Company's ability to make new
investments in El Dorado.
ITEM 2. PROPERTIES
APS' present generating facilities have an accredited capacity aggregating
4,022,410 kw, comprised as follows:
Capacity(kw)
------------
Coal:
Units 1, 2, and 3 at Four Corners, aggregating........... 560,000
15% owned Units 4 and 5 at Four Corners, representing.... 222,000
Units 1, 2, and 3 at Cholla Plant, aggregating........... 590,000
14% owned Units 1, 2, and 3 at the Navajo Plant,
representing........................................... 315,000
-----------
1,687,000
===========
Gas or Oil:
Two steam units at Ocotillo, two steam units at Saguaro,
and one steam unit at Yucca, aggregating............... 468,400(1)
Eleven combustion turbine units, aggregating............. 500,600
Three combined cycle units, aggregating.................. 253,500
-----------
1,222,500
===========
Nuclear:
29.1% owned or leased Units 1, 2, and 3 at Palo Verde,
representing........................................... 1,108,710
===========
Other........................................................ 4,200
===========
- ----------
(1) West Phoenix steam units (96,300 kw) are currently mothballed.
--------------
APS' peak one-hour demand on its electric system was recorded on August 2,
1993 at 3,802,300 kw, compared to the 1992 peak of 3,796,400 kw recorded on
August 17. Taking into account additional capacity then available to it under
purchase power contracts as well as its own generating capacity, APS'
capability of meeting system demand on August 2, 1993, computed in accordance
with accepted industry practices, amounted to 4,505,000 kw, for an installed
reserve margin of 16.7%. The power actually available to APS from its
resources fluctuates from time to time due in part to planned outages and
technical problems. The available capacity from sources actually operable at
the time of the 1993 peak amounted to 4,099,500 kw, for a margin of 13.4%.
NGS and Four Corners are located on land held under easements from the
federal government and also under leases from the Navajo Tribe. The risk with
respect to enforcement of these easements and leases is not deemed by APS to
be material. APS is dependent, however, in some measure upon the willingness
and ability of the Navajo Tribe to honor its commitments. Certain of APS'
transmission lines and almost all of its contracted coal sources are also
located on Indian reservations. See "Generating Fuel" in Item 1.
Operation of each of the three Palo Verde units requires an operating
license from the NRC. Full power operating licenses for Units 1, 2, and 3 were
issued by the NRC in June 1985, April 1986, and November 1987, respectively.
The full power operating licenses, each valid for a period of approximately 40
years, authorize APS, as operating agent for Palo Verde, to operate the three
Palo Verde units at full power.
On August 18, 1986 and December 19, 1986, APS entered into a total of
three sale and leaseback transactions under which it sold and leased back
approximately 42% of its 29.1% ownership interest in Palo Verde Unit 2. The
leases under each of the sale and leaseback transactions have initial lease
terms expiring on December 31, 2015. Each of the leases also allows APS to
extend the term of the lease and/or to repurchase the leased Unit 2 interest
under certain circumstances at fair market value. The leases in the aggregate
require annual payments of approximately $40 million through 1999,
approximately $46 million in 2000, and approximately $49 million through 2015
(see Note 11 of the Notes to the Consolidated Financial Statements in Item 8).
See "Water Supply" in Item 1 with respect to matters having possible
impact on the operation of certain of APS' power plants, including Palo Verde.
APS' construction plans are susceptible to changes in forecasts of future
demand on its electric system and in its ability to finance its construction
program. Although its plans are subject to change, APS does not presently
intend to construct any new major baseload generating units for at least the
next ten years. Important factors affecting APS' ability to delay the
construction of new major generating units are continuing efforts to upgrade
and improve the reliability of existing generating stations, system load
diversity with other utilities, and continuing efforts in customer demand-side
conservation and load management programs.
In addition to that available from its own generating capacity, APS
purchases electricity from other utilities under various arrangements. One of
the most important of these is a long-term contract with SRP which may be
canceled by SRP on three years' notice and which requires SRP to make
available, and APS to pay for, certain amounts of electricity that are based
in large part on customer demand within certain areas now served by APS
pursuant to a related territorial agreement. APS believes that the prices
payable by it under the contract are fair to both parties. The generating
capacity available to APS pursuant to the contract was 302,000 kw until May
1993, at which time the capacity increased to 304,000 kw. In 1993, APS
received approximately 840,000 MWh of energy under the contract and paid
approximately $40 million for capacity availability and energy received.
In September 1990, APS and PacifiCorp, an Oregon-based utility company,
entered into certain agreements relating principally to sales and purchases of
electric power and electric utility assets, and in July 1991, after regulatory
approvals, APS sold Cholla Unit 4 to PacifiCorp for approximately $230
million. As part of the transaction, PacifiCorp agreed to make a firm system
sale to APS for thirty years during APS' summer peak season in the amount of
175 megawatts for the first five years, increasing thereafter, at APS' option,
up to a maximum amount equal to the rated capacity of Cholla Unit 4. After the
first five years, all or part of the sale may be converted to a one-for-one
seasonal capacity exchange. PacifiCorp has the right to purchase from APS up
to 125 average megawatts of energy per year for thirty years. PacifiCorp and
APS also entered into a 100 megawatt one-for-one seasonal capacity exchange to
be effective upon the latter of January 1, 1996 or the completion of certain
new transmission projects. In addition, PacifiCorp agreed to pay APS (i) $20
million upon commercial operation of 150 megawatts of peaking capacity
constructed by APS and (ii) $19 million in connection with the construction of
transmission lines and upgrades that will afford PacifiCorp 150 megawatts of
northbound transmission rights. In addition, PacifiCorp secured additional
firm transmission capacity of 30 megawatts over APS' system. In 1993, APS
received 401,475 MWh of energy from PacifiCorp under these transactions and
paid approximately $19 million for capacity availability and the energy
received, and PacifiCorp paid approximately $2.7 million for 144,171 MWh.
See "El Paso Electric Company Bankruptcy" in Note 13 of the Notes to the
Consolidated Financial Statements in Item 8 for a discussion of the filing by
El Paso Electric Company ("EPEC") of a voluntary petition to reorganize under
Chapter 11 of the Bankruptcy Code. EPEC has a joint ownership interest with
APS and others in Palo Verde and Four Corners Units 4 and 5.
See Notes 6 and 12 of the Notes to the Consolidated Financial Statements
in Item 8 with respect to property of APS not held in fee or held subject to
any major encumbrance.
See "SunCor Development Company" and "El Dorado Investment Company" under
the heading "Business of Non-Utility Subsidiaries" in Item 1 for a description
of properties held by the non-utility subsidiaries of the Company.
GRAPHIC
- -------
MAP OF THE STATE OF ARIZONA SHOWING APS' SERVICE AREA, THE LOCATION OF ITS
MAJOR POWER PLANTS AND PRINCIPAL TRANSMISSION LINES, AND THE LOCATION OF
TRANSMISSION LINES OPERATED BY APS FOR OTHERS. SEE APPENDIX FOR DETAILED
DESCRIPTION.
ITEM 3. LEGAL PROCEEDINGS
APS
On June 29, 1990, a new Arizona state tax law was enacted, effective as of
December 31, 1989, which adversely impacted APS' earnings in tax years 1990
through 1993 by an aggregate amount of approximately $82 million, before
income taxes. On December 20, 1990, the Palo Verde participants, including
APS, filed a lawsuit in the Arizona Tax Court, a division of the Maricopa
County Superior Court, against the Arizona Department of Revenue, the
Treasurer of the State of Arizona, and various Arizona counties, claiming,
among other things, that portions of the new tax law are unconstitutional.
(Arizona Public Service Company, et al. v. Apache County, et al., No. TX
90-01686 (Consol.), Maricopa County Superior Court). In December 1992, the
court granted summary judgment to the taxing authorities, holding that the law
is constitutional. APS has appealed this decision to the Arizona Court of
Appeals. APS cannot currently predict the ultimate outcome of this matter.
See "Water Supply" and "Palo Verde Nuclear Generating Station" in Item 1
and "El Paso Electric Company Bankruptcy" in Note 13 of the Notes to the
Company's Consolidated Financial Statements in Item 8 in regard to other
pending or threatened litigation involving APS.
PINNACLE WEST
A lawsuit was filed in the United States District Court for the District
of Arizona against the Company, its inside directors and certain of its
officers on November 7, 1988 and was amended on December 15, 1988 to add the
remaining directors and additional substantive claims. As amended, the
complaint alleges violations of federal securities laws and Arizona
securities, consumer fraud and other state laws in connection with certain
actions of the Company and statements made on its behalf relating to the
Company's diversification activities, future business prospects and dividends.
The Court certified a class consisting of all purchasers of the Company's
common stock between April 1, 1987 and October 7, 1988 (the alleged "Class
Period"). The complaint sought unspecified compensatory and punitive damages
as well as fees and costs.
On December 20, 1988 a lawsuit was filed in the United States District
Court for the District of Arizona against the Company and certain officers and
directors, alleging violations of federal securities laws and Arizona
securities, consumer fraud and other state laws in connection with certain
actions of the Company and statements made on its behalf relating to the
Company's diversification activities, future business prospects and dividends.
The lawsuit is substantially similar to the lawsuit referenced in the
preceding paragraph. The plaintiffs, two individuals who claim to have
purchased the Company's common stock between April 1, 1987 and October 7, 1988
(the alleged "Class Period"), requested unspecified compensatory and punitive
damages as well as fees and costs. On October 2, 1989, the cases described in
this and the preceding paragraph were consolidated.
On December 15, 1989 a shareholder derivative lawsuit was filed in the
United States District Court for the District of Arizona naming the Company's
directors as defendants and the Company as nominal defendant. The lawsuit
alleges breach of fiduciary duties by the directors in connection with the
Company's diversification activities, and further alleges violation of federal
securities laws by one director in connection with the sale of MeraBank to the
Company in 1986. The plaintiffs requested, on the Company's behalf,
unspecified compensatory and punitive damages.
On April 22, 1991 a lawsuit was filed in the United States District Court
for the District of Arizona by the Resolution Trust Corporation (the "RTC")
against certain former officers and directors of MeraBank. The suit sought,
among other things, damages in excess of $270 million, and alleged negligence,
gross negligence, breach of fiduciary duty, breach of duty of loyalty and
breach of contract with respect to the management and operation of MeraBank by
the defendants beginning in the early 1980s. Although the Company was not a
defendant, the Company agreed to advance reasonable attorneys' fees and
expenses, in various amounts, to those defendants who served on the MeraBank
Board of Directors at the request of the Company. The Company reserved
the right to alter the amount of such advances or to terminate them as the
case developed, and received undertakings from the persons receiving such
advances to repay such amounts in the event that they are ultimately
determined not to be entitled to indemnification. The Company has terminated
future such advances as to certain of those defendants. In addition, in
June and November of 1989 the Company's Board of Directors adopted resolutions
whereby the Company agreed to indemnify the non-officer members of the
MeraBank Board of Directors against claims brought against such individuals in
their capacity as directors of MeraBank, for acts occurring on or after June
and November 1989, the effective dates of the indemnification resolutions.
On December 30, 1993, and as the result of a negotiated settlement, the
United States District Court for the District of Arizona entered orders and
final judgments (1) dismissing the consolidated shareholder class litigation
and shareholder derivative litigation initiated in 1988 and 1989,
respectively, and described in the first three paragraphs under this heading
and (2) partially dismissing the litigation initiated by the RTC and described
in the immediately preceding paragraph. Two non-settling individuals who are
pursuing independent claims against the RTC were not dismissed from the RTC
litigation and have appealed the settlement. These individuals may attempt to
look to the Company, its insurance carriers and others for indemnification of
certain costs and damages. The Company believes that it has no obligation
with respect to any such costs or damages. The settlement provides for
for payments totaling $61.625 million, of which the Company's share is $5.75
million. A litigation reserve previously established by the Company is
sufficient to cover the Company's share of the settlement. The balance of the
settlement payment will be funded by the Company's insurers.
On January 18, 1991 a lawsuit was filed in the United States District
Court, Southern District of Ohio, Western Division, against, among other
parties, the Company and certain of its officers and directors, the Office of
Thrift Supervision ("OTS"), the RTC and the Federal Deposit Insurance
Corporation ("FDIC"). The amended complaint in this lawsuit alleges that the
plaintiff purchased MeraBank subordinated debentures with a face amount of $1
million in 1987 in reliance upon the capital maintenance stipulation executed
by the Company as a condition to the Company's acquisition of MeraBank. The
plaintiff further alleges that the value of such debentures was impaired
because of the Company's release from its purported obligations under the
stipulation and the actions of the OTS in placing MeraBank in receivership.
See Note 2 of the Notes to the Consolidated Financial Statements in Item 8
for additional information regarding the stipulation. The plaintiff is seeking
damages in the approximate amount of $4.8 million. On August 2, 1991 the Ohio
court issued an order dismissing the case with prejudice as to the Company
and the officer/director defendants for lack of personal jurisdiction. The
court also ordered the case dismissed with prejudice as to the OTS, the RTC
and the FDIC. On October 1, 1991 the plaintiff appealed the court's order.
On February 17, 1993, the United States Court of Appeals for the Sixth Circuit
affirmed the entry of summary judgment in favor of the RTC, OTS, and FDIC, but
reversed the district court's dismissal in favor of the Company and certain of
its officers and directors. The Court of Appeals remanded the case to the
district court for a determination of whether plaintiff had adequately pled
its claims so that the district court could exercise personal jurisdiction.
The district court was further instructed to consider whether the Southern
District of Ohio was the proper venue for the suit. On June 8, 1993, the Ohio
court ordered this case to be transferred to the District of Arizona. On
August 17, 1993, the Company was served with a separate complaint filed by the
same plaintiff in the District Court for the District of Arizona alleging
claims under the Arizona Racketeering Act and the Arizona Consumer Fraud Act
seeking compensatory damages in the amount of $1.2 million plus interest,
punitive damages, treble damages, interest, attorneys' fees and costs. The
plaintiff has voluntarily dismissed the Arizona Consumer Fraud Act claims;
however, the Arizona Racketeering Act claims remain pending. The Company and
the individual directors and officers believe that the lawsuit is without
merit and will vigorously defend themselves.
On May 1, 1991, a lawsuit was filed in the United States District Court
for the District of Arizona against the Company by another purchaser of the
same issue of MeraBank subordinated debentures referred to in the immediately
preceding paragraph. This plaintiff also claims to have purchased the
debentures, with a face amount of approximately $12.4 million, in reliance
upon the stipulation. The suit further alleges that the Company induced the
plaintiff to retain its investment in the debentures by representing to the
plaintiff that the Company would keep MeraBank capitalized in accordance with
federal regulatory requirements. The suit alleges violations of federal and
state securities laws, fraud, negligent representation, racketeering and
intentional interference with contractual relations. The plaintiff seeks
unspecified compensatory and punitive damages and has requested that the
compensatory damages be trebled under Arizona's civil racketeering statute.
The Company intends to vigorously defend itself in this action.
On December 22, 1993, Pinnacle West was served with a complaint filed by
another purchaser of MeraBank subordinated debentures alleging claims
substantially similar to the claims described in the preceding paragraph. The
complaint, which was filed in the United States District Court for the
District of Arizona, seeks compensation and punitive damages in an unspecified
amount plus attorneys' fees and costs. The Company intends to vigorously
defend itself in this action.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report, through the solicitation of
proxies or otherwise.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers are as follows:
AGE AT
NAME MARCH 1, 1994 POSITION(S) AT MARCH 1, 1994
- ---- ------------- ----------------------------
Michael S. Ash 40 Corporate Counsel
Arlyn J. Larson 59 Vice President of Corporate
Planning and Development
Nancy E. Newquist 42 Vice President and Treasurer
Henry B. Sargent 59 Executive Vice President and
Chief Financial Officer(1)
Richard Snell 63 Chairman of the Board of Directors,
President and Chief Executive Officer(1)
Faye Widenmann 45 Vice President of Corporate Relations
and Administration and Secretary
- ----------
(1) Member of the Board of Directors.
The executive officers of the Company are elected no less often than
annually and may be removed by the Board of Directors at any time. The terms
served by the named officers in their current positions and the principal
occupations (in addition to those stated in the table) of such officers for
the past five years have been as follows:
Mr. Ash was elected Corporate Counsel of the Company in February 1991. He
previously held the positions of Legal Counsel to the Company (December 1986
to February 1991) and Attorney in the APS Law Department (July 1983 to
September 1985).
Mr. Larson was elected Vice President, Corporate Planning and Development
in July 1986.
Ms. Newquist was elected Treasurer in June 1990 and as a Vice President in
February 1994. Ms. Newquist also serves as Treasurer of APS, a position she
was elected to in June 1993 after serving as Assistant Treasurer of APS since
October 1992. From May 1987 to June 1990, Ms. Newquist served as the Company's
Director of Finance.
Mr. Sargent was elected Executive Vice President and Chief Financial
Officer of the Company in April 1985. Mr. Sargent was Executive Vice President
and Chief Financial Officer of APS from September 1981 until July 1986. He is
also a director of Magma Copper Company, Tucson, Arizona.
Mr. Snell was elected Chairman of the Board, President and Chief Executive
Officer of the Company effective February 5, 1990. He was also elected
Chairman of the Board of APS effective the same date. Previously, he was
Chairman of the Board (1989-1992) and Chief Executive Officer (1989-1990) of
Aztar Corporation, and Chairman of the Board, President and Chief Executive
Officer of Ramada Inc., Phoenix, Arizona (1981-1989). Mr. Snell remains a
director of Aztar Corporation and is also a director of Bank One Arizona
Corporation, Phoenix, Arizona.
Ms. Widenmann was elected Secretary of the Company in 1985 and Vice
President of Corporate Relations and Administration in November 1986. She was
Secretary of APS from June 1983 until April 1987.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is publicly held and is traded on the New York
and Pacific Stock Exchanges. At the close of business on March 14, 1994, the
Company's common stock was held of record by approximately 59,795
shareholders.
The chart below sets forth the common stock price ranges on the composite
tape, as reported in the Wall Street Journal for 1993 and 1992. There were no
dividends declared or paid on or in respect of the Company's common stock
during 1992 and the first three quarters of 1993. A dividend of $.20 per share
was declared and paid on the Company's common stock during the fourth quarter
of 1993.
COMMON STOCK PRICE RANGES
- ------------------------------------------------------------------------------
1992 HIGH LOW
- -------------------------------------------
1st Quarter 18 1/4 16 3/4
2nd Quarter 18 3/8 16 7/8
3rd Quarter 20 17 7/8
4th Quarter 20 1/2 19 1/8
- -------------------------------------------
1993
- -------------------------------------------
1st Quarter 21 3/4 19 5/8
2nd Quarter 23 1/2 20 7/8
3rd Quarter 25 1/4 23 1/8
4th Quarter 24 3/8 20 3/8
- -------------------------------------------
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1993 1992 1991 1990 1989
-------------- -------------- ---------------------- -------------- ---------------
OPERATING RESULTS
Operating revenues
Electric $ 1,686,290 $ 1,669,679 $ 1,515,289 $ 1,508,325 $ 1,447,154
Provision for rate refund -- -- (53,436) -- --
Real estate 32,248 19,959 12,697 81,264 44,492
Income (loss) from continuing
operations $ 169,978 $ 150,440 $ (340,317) (a) $ 70,208 $ 124,553
Income (loss) from discontinued
operations -- net of tax (b) -- 6,000 153,455 27,125 (675,968)
Cumulative effect of change in
accounting for income taxes (c) 19,252 -- -- -- --
-------------- -------------- ---------------------- -------------- ---------------
Net income (loss) $ 189,230 $ 156,440 $ (186,862) $ 97,333 $ (551,415)
============== ============== ====================== ============== ===============
COMMON STOCK DATA
Book value per share -- year-
end $ 18.87 $ 17.00 $ 15.23 $ 17.40 $ 16.31
Earnings (loss) per average
common share outstanding
Continuing operations $ 1.95 $ 1.73 $ (3.91) $ 0.81 $ 1.44
Discontinued operations -- 0.07 1.76 0.31 (7.80)
Accounting change 0.22 -- -- -- --
-------------- -------------- ---------------------- -------------- ---------------
Total $ 2.17 $ 1.80 $ (2.15) $ 1.12 $ (6.36)
============== ============== ====================== ============== ===============
Dividends declared per share $ $ $
(d) $ 0.20 -- -- -- $ 0.80
Common shares outstanding
Year-end 87,423,817 87,161,872 87,009,974 86,873,174 86,723,774
Average 87,241,899 87,044,180 86,937,052 86,769,924 86,720,747
TOTAL ASSETS $ 6,956,799 $ 6,270,476 $ 6,147,639 $ 6,793,755 $ 6,791,748
============== ============== ====================== ============== ===============
LIABILITIES AND EQUITY
Long-term debt less current
maturities $ 2,633,620 $2,774,305 $ 2,996,910 $ 3,218,168 $ 3,423,686
Other liabilities 2,282,508 1,620,250 1,429,488 1,702,628 1,581,148
-------------- -------------- ---------------------- -------------- ---------------
Total liabilities 4,916,128 4,394,555 4,426,398 4,920,796 5,004,834
Minority interests
Non-redeemable preferred
stock of APS 193,561 168,561 168,561 168,561 168,561
Redeemable preferred stock of
APS 197,610 225,635 227,278 192,453 204,021
Common stock equity 1,649,500 1,481,725 1,325,402 1,511,945 1,414,332
-------------- -------------- ---------------------- -------------- ---------------
Total liabilities and
equity $ 6,956,799 $ 6,270,476 $ 6,147,639 $ 6,793,755 $ 6,791,748
============== ============== ====================== ============== ===============
- ----------
(a) Includes approximately $407 million of write-offs and adjustments, net of income tax,
related to Palo Verde, See Note 3 of Notes to the Consolidated Financial Statements in Item 8.
(b) Results of MeraBank, a Federal Savings Bank, and Malapai Resources Company, a uranium mining
company, are classified as discontinued operations in the consolidated financial statements.
See Note 2 of Notes to the Consolidated Financial Statements in Item 8.
(c) Results of the adoption of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." See Note 4 of Notes to the Consolidated Financial Statements in Item 8.
(d) On October 20, 1993, the Pinnacle West Board of Directors restored a quarterly dividend,
which was previously suspended in October, 1989.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to Pinnacle West Capital Corporation (the
"Company" or "Pinnacle West") and its subsidiaries: Arizona Public Service
Company ("APS"), SunCor Development Company ("SunCor") and El Dorado
Investment Company ("El Dorado"). The discussion also relates to the
discontinued operations of MeraBank, A Federal Savings Bank ("MeraBank").
CAPITAL NEEDS AND RESOURCES
Parent Company
During the past three years, Pinnacle West's primary cash needs were for
the payment of interest and prepayment of principal on its long-term debt (see
Note 6 of Notes to Consolidated Financial Statements). Additional cash needs
in 1993 were related to the fourth quarter restoration of common stock
dividends.
Dividends from APS have been Pinnacle West's primary source of cash. Tax
allocations within the consolidated group and net operating loss carryforwards
associated with MeraBank have also been sources of cash.
The non-utility subsidiaries (SunCor and El Dorado) are also expected to
contribute to Pinnacle West's cash flow.
Pinnacle West prepaid substantial amounts of its parent-level debt in each
of the last three years. Management expects Pinnacle West to have sufficient
cash flow available for mandatory and optional debt repayments to allow parent
company debt to be reduced from $564 million at the end of 1993 to
approximately $300 million by year-end 1995.
At the end of 1993, Pinnacle West had a $40 million liquidity facility as
summarized in Note 5 of Notes to Consolidated Financial Statements; no
borrowings were outstanding thereunder.
APS
APS' capital needs consist primarily of construction expenditures and
required repayments or redemptions of long-term debt and preferred stock. The
capital resources available to meet these requirements include funds provided
by operations and external financings.
Present construction plans exclude any major baseload generating plants
for at least the next ten years. In general, most of the construction
expenditures are for expanding transmission and distribution capabilities to
meet customer growth, upgrading existing facilities, and environmental
purposes. Construction expenditures are anticipated to be $279 million, $302
million and $293 million for 1994, 1995 and 1996, respectively. These amounts
include nuclear fuel expenditures, but exclude capitalized property taxes and
capitalized interest costs.
In the 1991 through 1993 period, APS funded all of its capital
expenditures (construction expenditures and capitalized property taxes) with
internally generated funds, after the payment of dividends. For the period
1994 through 1996, APS estimates that it will fund substantially all of its
capital expenditures with internally generated funds, after the payment of
dividends.
During 1993, APS redeemed or repurchased approximately $637 million of
long-term debt and preferred stock, of which approximately $527 million was
optional. Refunding obligations for preferred stock, long-term debt, a
capitalized lease obligation, and certain anticipated early redemptions are
expected to total approximately $187 million, $135 million and $4 million for
the years 1994, 1995 and 1996, respectively.
APS currently expects to issue in 1994 a total of approximately $125
million of long-term debt (primarily first mortgage bonds) and approximately
$125 million of preferred stock. Of this, APS issued on March 2, 1994, $100
million of its First Mortgage Bonds, 6 5/8% series due 2004, and applied the
net proceeds to the repayment of short-term debt that had been incurred for
the redemption of preferred stock and for general corporate purposes. APS
expects that substantially all of the net proceeds of the balance of the
securities to be issued during 1994 will be used for the retirement of
outstanding debt and preferred stock. On March 1, 1994, APS redeemed all of
the outstanding shares of its $8.80 Cumulative Preferred Stock, Series K ($100
Par Value) in the amount of $14.21 million. As of April 4, 1994, APS will be
redeeming all $60.264 million of its outstanding First Mortgage Bonds, 10 3/4%
Series due 2019.
Provisions in APS' mortgage bond indenture and articles of incorporation
require certain coverage ratios to be met before APS can issue additional
first mortgage bonds or preferred stock. In addition, the mortgage bond
indenture limits the amount of additional bonds which may be issued to a
percentage of net property additions, to property previously pledged as
security for certain bonds that have been redeemed or retired, and/or to cash
deposited with the mortgage bond trustee. After giving effect to the
transactions described in the preceding paragraph, as of December 31, 1993,
APS estimates that the mortgage bond indenture and the articles of
incorporation would have allowed it to issue up to approximately $1.2 billion
and $986 million of additional first mortgage bonds and preferred stock,
respectively.
The Arizona Corporation Commission (the "ACC") has authority over APS with
respect to the issuance of long-term debt and equity securities. Existing ACC
orders allow APS to have up to approximately $2.6 billion in long-term debt
and approximately $501 million of preferred stock outstanding at any one time.
Management does not expect any of the foregoing restrictions to limit APS'
ability to meet its capital requirements.
As of December 31, 1993, APS had credit commitments from various banks
totalling approximately $302 million, which were available either to support
the issuance of commercial paper or to be used for bank borrowings. Commercial
paper borrowings totalling $148 million were outstanding at the end of 1993.
Non-Utility Subsidiaries
During the past three years, the non-utility subsidiaries generally
financed all of their operations through cash flow from operations and
financings that did not involve Pinnacle West.
SunCor's capital needs consist primarily of construction expenditures,
which are expected to approximate $33 million, $18 million and $14 million for
1994, 1995 and 1996, respectively. Capital resources available to meet these
requirements include funds provided by operations and external financings.
On March 2, 1994, SunCor issued $25 million of Collateralized Mortgage
Bonds, due in 2004. The bonds are secured by specified parcels of real
property and bear variable interest based on London Interbank Offered Rate
(LIBOR). Simultaneously, $6 million of 12% debt due in 1997 was prepaid.
Management expects El Dorado's internal cash flows to be sufficient to
fund its operations for the foreseeable future.
RESULTS OF OPERATIONS
1993 Compared to 1992
Pinnacle West reported income from continuing operations of $170.0 million
in 1993 compared to $150.4 million in 1992, for an increase of $19.6 million.
The primary factor contributing to this increase was lower interest expense.
Interest costs in 1993 were $22.5 million lower than 1992 due to refinancing
debt at lower rates, lower average debt balances and lower interest rates on
APS' variable-rate debt. Partially offsetting the lower interest expense were
increased taxes and higher utility operating expenses.
Electric operating revenues were up $16.6 million in 1993 on sales volumes
of 20.1 million megawatt-hours (MWh) compared to 20.6 million MWh in 1992.
Although revenues increased $45.3 million due to growth in the residential and
business customer classes, these increases were largely offset by milder than
normal weather and reduced interchange sales to other utilities.
Fuel and purchased power costs increased $15.5 million in 1993 due to Palo
Verde outages and reduced power operations (see Note 13 of Notes to
Consolidated Financial Statements). Partially offsetting the $15.5 million
were miscellaneous items resulting in a net increase of $13.3 million over
1992. These increases are reflected currently in earnings because APS does not
have a fuel adjustment clause as part of its retail rate structure. The net
result of electric operating revenues less fuel and purchased power expense
was an increase of $3.3 million comparing 1993 to 1992.
In 1993, utility operations expense increased $11.8 million over 1992
levels primarily due to the implementation of new accounting standards for
postemployment benefits and postretirement benefits other than pensions, which
added $17 million to expense in 1993 (see Note 9 of Notes to Consolidated
Financial Statements). Partially offsetting these factors were lower power
plant operating costs, lower rent expense and lower costs for an employee
gainsharing plan.
Real estate operating revenues and operating expenses were up $12.3
million and $10.9 million, respectively, in 1993 due to increased sales of
residential lots.
1992 Compared to 1991
Income from continuing operations in 1992 was $150.4 million compared to a
loss in 1991 of $340.3 million. This was primarily due to the after-tax write-
offs of $407 million in 1991 resulting from a rate case settlement with the
ACC (see "Rate Case Settlement" in Note 3 of Notes to Consolidated Financial
Statements). Excluding the effects of the write-offs, income from continuing
operations increased by $83.7 million in 1992 as a result of several factors,
including higher revenues, lower interest costs and lower utility operations
expenses. Partially offsetting these factors were higher fuel and purchased
power costs and higher utility maintenance expenses.
Electric operating revenues were up $154.4 million during 1992 on sales
volumes of 20.6 million MWh compared to 20.0 million MWh in 1991. The volume
increase of $48.6 million was largely due to growth in residential and
business customer classes and increased sales due to more normal weather as
compared to 1991. A price-related increase of $85.9 million was largely due to
an increase in retail base rates effective December 6, 1991 and a higher
average price for interchange sales to other utilities. Also contributing to
the increase in 1992 was a $19.9 million reversal of a non-cash refund
obligation recorded in December, 1991 (see Note 3 of Notes to Consolidated
Financial Statements).
Real estate revenues increased in 1992 primarily due to the sale of a golf
course.
Interest costs were $47.8 million lower in 1992 as compared to 1991 due to
lower average debt balances, lower interest rates on APS' variable-rate debt
and lower interest rates on refinanced debt.
Fuel expenses increased in 1992 over 1991 by $13.4 million as a result of
increased generation due to increased retail and interchange sales, and
increased gas prices. These increases were partially offset by lower prices
for coal and uranium. The increase in the purchased power component of fuel
expenses was due to favorable market prices.
Utility operations costs were $15.3 million lower in 1992 as compared to
1991 primarily due to lower operating costs at Palo Verde, lower fossil plant
overhaul costs and other miscellaneous cost reductions. Partially offsetting
these were an obligation recorded for an employee gainsharing plan and higher
nuclear refueling outage costs.
Non-Cash Income
Net income reflects accounting practices required for regulated public
utilities and represents a composite of cash and non-cash items, including
Allowance for Funds Used During Construction (AFUDC), accretion income on Palo
Verde Unit 3 and the reversal of a refund obligation related to the Palo Verde
write-off (see "Consolidated Statements of Cash Flows" and Note 3 of Notes to
Consolidated Financial Statements). APS recorded after-tax accretion income of
$45.3 million, $40.7 million and $3.2 million in 1993, 1992 and 1991,
respectively. APS also recorded refund obligation reversals in electric
operating revenues of $12.9 million after tax in each of the years 1993 and
1992 and $0.9 million in 1991. APS will record after-tax accretion income and
refund obligation reversals of $20.3 million and $5.6 million, respectively,
through June 5, 1994.
Palo Verde Nuclear Generating Station
As APS continues its investigation and analysis of the Palo Verde steam
generators, certain corrective actions are being taken. These include chemical
cleaning, operating the units at reduced temperatures, and for some periods,
operating the units at approximately 86% power. So long as three units are
involved in mid-cycle outages and are operated at the 86% level, APS will
incur an average of approximately $2 million per month (before income taxes)
for additional fuel and purchased power costs. See "Palo Verde Tube Cracks" in
Note 13 of Notes to Consolidated Financial Statements for a more detailed
discussion.
Accounting Issues
Note 4 of Notes to Consolidated Financial Statements describes a new
accounting standard for income taxes which required the recognition in 1993 of
$19.3 million of state tax benefits related to net operating loss
carryforwards.
Discontinued Operations
Income from discontinued operations of $6.0 million and $153.5 million in
1992 and 1991, respectively, resulted from tax benefits recorded in connection
with the MeraBank settlement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
----------
Report of Management.............................................. 25
Independent Auditors' Report...................................... 26
Statements of Income for each of the three years in the period
ended December 31, 1993......................................... 27
Balance Sheets -- December 31, 1993 and 1992...................... 28, 29
Statements of Cash Flows for each of the three years in the period
ended December 31, 1993......................................... 30
Statements of Retained Earnings for each of the three years in the
period ended December 31, 1993.................................. 31
Notes to Financial Statements..................................... 32
Financial Statement Schedules for each of the three years in the
period ended December 31, 1993
Schedule V -- Property, Plant and Equipment.................. 50
Schedule VI -- Accumulated Depreciation, Depletion and
Amortization of Property, Plant and Equipment.............. 53
Schedule VIII -- Valuation and Qualifying Accounts for the
years ended December 31, 1993, 1992 and 1991............... 56
Schedule IX -- Short-Term Borrowings......................... 57
See Note 14 of Notes to Consolidated Financial Statements for the
selected quarterly financial data required to be presented in this Item.
REPORT OF MANAGEMENT
The primary responsibility for the integrity of the Company's financial
information rests with management, which has prepared the accompanying
financial statements and related information. Such information was prepared in
accordance with generally accepted accounting principles appropriate in the
circumstances, based on managements best estimates and judgments and giving
due consideration to materiality. These financial statements have been audited
by independent auditors and their report is included.
Management maintains and relies upon systems of internal accounting
controls, which are periodically reviewed by both the Company's internal
auditors and its independent auditors to test for compliance. Reports issued
by the internal auditors are released to management, and such reports, or
summaries thereof, are transmitted to the Audit Committee of the Board of
Directors and the independent auditors on a timely basis.
The Audit Committee, composed solely of outside directors, meets
periodically with the internal auditors and independent auditors (as well as
management) to review the work of each. The internal auditors and independent
auditors have free access to the Audit Committee, without management present,
to discuss the results of their audit work.
Management believes that the Company's systems, policies and procedures
provide reasonable assurance that operations are conducted in conformity with
the law and with management's commitment to a high standard of business
conduct.
Richard Snell Henry B. Sargent
Chairman & President Executive Vice President
& Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Pinnacle
West Capital Corporation and its subsidiaries as of December 31, 1993 and 1992
and the related consolidated statements of income, retained earnings and cash
flows for each of the three years in the period ended December 31, 1993. Our
audits also included the financial statement schedules listed in the Index at
Item 8. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pinnacle West Capital
Corporation and its subsidiaries at December 31, 1993 and 1992 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
herein.
As discussed in Note 4 of Notes to Consolidated Financial Statements, the
Company changed its method of accounting for income taxes effective January 1,
1993 to conform with Statement of Financial Accounting Standards No. 109.
Deloitte & Touche
Phoenix, Arizona
February 21, 1994
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1992 1991
------------- ------------ ------------
Operating Revenues
Electric......................... $ 1,686,290 $ 1,669,679 $ 1,515,289
Provision for rate refund
(Note 3)....................... -- -- (53,436)
Real estate...................... 32,248 19,959 12,697
------------- ------------ ------------
Total........................ 1,718,538 1,689,638 1,474,550
------------- ------------ ------------
Fuel Expenses
Fuel for electric generation..... 231,434 230,194 223,983
Purchased power.................. 69,112 57,007 49,788
------------- ------------ ------------
Total........................ 300,546 287,201 273,771
------------- ------------ ------------
Operating Expenses
Utility operations and
maintenance.................... 401,216 390,512 401,736
Real estate operations........... 38,220 27,309 25,482
Depreciation and amortization.... 223,558 220,076 219,010
Taxes other than income taxes
(Note 11)...................... 222,345 217,063 215,541
Palo Verde cost deferral
(Notes 1 and 3)................ -- -- (70,886)
Disallowed Palo Verde costs
(Note 3)....................... -- -- 577,145
------------- ------------ ------------
Total........................ 885,339 854,960 1,368,028
------------- ------------ ------------
Operating Income (Loss)............ 532,653 547,477 (167,249)
------------- ------------ ------------
Other Income (Deductions)
Allowance for equity funds used
during construction (Note 1)... 2,326 3,103 3,902
Palo Verde cost deferral
(Notes 1 and 3)................ -- -- 63,068
Palo Verde accretion income
(Note 3)....................... 74,880 67,421 5,306
Interest on long-term debt....... (245,961) (272,240) (316,282)
Other interest................... (16,505) (12,718) (16,447)
Allowance for borrowed funds used
during construction (Note 1)... 4,153 4,492 6,636
Preferred stock dividend
requirements of APS............ (30,840) (32,452) (33,404)
Other -- net..................... (2,282) (13,045) (31,463)
------------- ------------ ------------
Total........................ (214,229) (255,439) (318,684)
------------- ------------ ------------
Income (Loss) From Continuing
Operations
Before Income Taxes.............. 318,424 292,038 (485,933)
Income Tax Expense (Benefit)
(Note 4)......................... 148,446 141,598 (145,616)
------------- ------------ ------------
Income (Loss) From Continuing
Operations....................... 169,978 150,440 (340,317)
Income From Discontinued Operations
(Note 2)......................... -- 6,000 153,455
Cumulative Effect of Change in
Accounting for Income Taxes...... 19,252 -- --
------------- ------------ ------------
Net Income (Loss).................. $ 189,230 $ 156,440 $ (186,862)
============= ============ ============
Average Common Shares Outstanding.. 87,241,899 87,044,180 86,937,052
Earnings (Loss) Per Average Common
Share Outstanding
Continuing operations.......... $ 1.95 $ 1.73 $ (3.91)
Discontinued operations........ -- 0.07 1.76
Accounting change.............. 0.22 -- --
------------- ------------ ------------
Total........................ $ 2.17 $ 1.80 $ (2.15)
============= ============ ============
Dividends Declared Per Share....... $ 0.20 $ -- $ --
============= ============ ============
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
DECEMBER 31,
----------------------
1993 1992
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents........................... $ 52,127 $ 87,926
Customer and other receivables -- net............... 126,343 157,433
Accrued utility revenues (Note 1)................... 60,356 51,517
Materials and supplies (at average cost)............ 96,174 95,978
Fossil fuel (at average cost)....................... 34,220 36,668
Other current assets................................ 13,782 8,000
Deferred income taxes (Note 4)...................... 100,234 105,348
---------- ----------
Total current assets.............................. 483,236 542,870
---------- ----------
Investments and Other Assets
Real estate investments -- net...................... 402,873 394,527
Other assets........................................ 136,074 142,309
---------- ----------
Total investments and other assets................ 538,947 536,836
---------- ----------
Utility Plant (Notes 6, 11 and 12)
Electric plant in service, including nuclear fuel... 6,462,589 6,335,327
Construction work in progress....................... 197,556 162,168
---------- ----------
Total utility plant............................... 6,660,145 6,497,495
Less accumulated depreciation and amortization...... 2,058,895 1,973,698
---------- ----------
Net utility plant................................. 4,601,250 4,523,797
---------- ----------
Deferred Debits
Regulatory asset for income taxes (Note 4).......... 585,294 --
Palo Verde Unit 3 cost deferral (Notes 1 and 3)..... 301,748 310,908
Palo Verde Unit 2 cost deferral (Note 1)............ 177,998 184,061
Other deferred debits............................... 268,326 172,004
---------- ----------
Total deferred debits............................. 1,333,366 666,973
---------- ----------
Total Assets.......................................... $6,956,799 $6,270,476
========== ==========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
DECEMBER 31,
-----------------------
1993 1992
---------- -----------
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable................................... $ 97,489 $ 105,718
Accrued taxes...................................... 96,303 117,694
Accrued interest................................... 57,674 58,579
Short-term borrowings (Note 5)..................... 148,000 195,000
Current maturities of long-term debt (Note 6)...... 78,841 94,217
Other current liabilities.......................... 60,845 78,909
---------- -----------
Total current liabilities........................ 539,152 650,117
---------- -----------
Non-Current Liabilities
Long-term debt less current maturities (Note 6).... 2,633,620 2,774,305
Other liabilities.................................. 8,246 9,449
---------- -----------
Total non-current liabilities.................... 2,641,866 2,783,754
---------- -----------
Deferred Credits and Other
Deferred income taxes (Note 4)..................... 1,278,673 578,020
Deferred investment tax credit..................... 127,331 133,359
Unamortized gain -- sale of utility plant.......... 107,344 116,167
Other deferred credits............................. 221,762 133,138
---------- -----------
Total deferred credits and other................. 1,735,110 960,684
---------- -----------
Commitments and Contingencies (Note 13)
Minority Interests
Non-redeemable preferred stock of APS (Note 7)..... 193,561 168,561
---------- -----------
Redeemable preferred stock of APS (Note 7)......... 197,610 225,635
---------- -----------
Common Stock Equity (Note 8)
Common stock, no par value; authorized 150,000,000
shares; issued and outstanding 87,423,817 in 1993
and 87,161,872 in 1992........................... 1,642,783 1,646,772
Retained earnings (deficit)........................ 6,717 (165,047)
---------- -----------
Total common stock equity........................ 1,649,500 1,481,725
---------- -----------
Total Liabilities and Equity......................... $6,956,799 $6,270,476
========== ===========
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1992 1991
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES (Note 1)
Income (loss) from continuing
operations.......................... $ 169,978 $ 150,440 $ (340,317)
Items not requiring cash
Depreciation and amortization....... 258,562 259,637 268,153
Deferred income taxes -- net........ 139,725 84,146 (128,863)
Palo Verde cost deferral (Notes 1
and 3)............................ -- -- (133,954)
Provision for rate refund -- net
(Note 3).......................... (21,374) (21,374) 52,057
Disallowed Palo Verde costs (Note 3) -- -- 577,145
Palo Verde accretion income (Note 3) (74,880) (67,421) (5,306)
Other -- net........................ (168) (1,829) (4,235)
Changes in current assets and
liabilities
Accounts receivable -- net.......... 31,090 (31,715) 18,006
Accrued utility revenues............ (8,839) (7,055) 1,004
Materials, supplies and fossil fuel. 2,252 5,094 (8,490)
Other current assets................ (5,782) 2,042 (478)
Accounts payable.................... (27,196) 9,547 18,866
Accrued taxes....................... (21,391) 45,962 (18,902)
Accrued interest.................... (905) (16,593) (3,588)
Other current liabilities........... (18,408) (16,549) 3,364
Additions to real estate............ (29,290) (12,647) (18,593)
Sales of real estate................ 21,396 14,622 7,787
Other -- net........................ 34,292 5,973 4,407
------------ ----------- -----------
Net Cash Flow Provided By Operating
Activities.......................... 449,062 402,280 288,063
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.................. (234,944) (224,419) (182,687)
Allowance for equity funds used during
construction........................ 2,326 3,103 3,902
Sale of property (Note 3)............. 89 5,480 233,875
Other -- net.......................... 1,609 (6,555) (2,630)
------------ ----------- -----------
Net Cash Flow Provided By (Used For)
Investing Activities................ (230,920) (222,391) 52,460
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt............ 535,893 649,165 485,844
Issuance of preferred stock........... 72,644 24,781 49,375
Short-term borrowings -- net.......... (47,000) 195,000 (159,000)
Dividends paid on common stock........ (17,466) -- --
Repayment of long-term debt........... (711,241) (1,109,181) (593,252)
Repayment of preferred stock.......... (78,663) (27,850) (15,175)
Other -- net.......................... (8,108) 2,407 6,042
------------ ----------- -----------
Net Cash Flow Used For Financing
Activities.......................... (253,941) (265,678) (226,166)
------------ ----------- -----------
Net Cash Flow......................... (35,799) (85,789) 114,357
Cash and Cash Equivalents at Beginning
of Year............................. 87,926 173,715 59,358
------------ ----------- -----------
Cash and Cash Equivalents at End of
Year................................ $ 52,127 $ 87,926 $ 173,715
============ =========== ===========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1992 1991
----------- ---------- ----------
Retained Earnings (Deficit) at Beginning
of Year................................ $ (165,047) $ (321,487) $ (134,625)
Net Income (Loss)........................ 189,230 156,440 (186,862)
Common Stock Dividends................... (17,466) -- --
----------- ---------- ----------
Retained Earnings (Deficit) at End of
Year................................... $ 6,717 $ (165,047) $ (321,487)
=========== ========== ==========
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. CONSOLIDATION
The consolidated financial statements include the accounts of Pinnacle
West Capital Corporation and its subsidiaries: Arizona Public Service Company,
an electric utility; SunCor Development Company, a real estate development
company; and El Dorado Investment Company, a venture capital firm. Certain
prior year balances have been reclassified to conform to the 1993
presentation.
B. UTILITY PLANT AND DEPRECIATION
Utility plant represents the buildings, equipment and other facilities
used to provide electric service. The cost of utility plant includes labor,
material, contract services and other related items and an allowance for funds
used during construction. The cost of retired depreciable utility plant, plus
removal costs less salvage realized, is charged to accumulated depreciation.
Depreciation on utility property is provided on a straight-line basis. The
applicable rates for 1991 through 1993 ranged from 0.84% to 15.00%, which
resulted in annual composite rates of 3.37%. Depreciation and amortization of
non-utility property and equipment are provided over the estimated useful
lives of the related assets, ranging from 3 to 33.3 years.
C. REVENUES
Electric operating revenues are recognized on the accrual basis and
include estimated amounts for serv