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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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1995 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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8962
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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)
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
- - --------------------------------------------------------------------------------
Common Stock, ............................New York Stock Exchange
No Par Value Pacific Stock Exchange
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Aggregate Market Value
of Shares Held by
Title of Each Class Shares Outstanding Non-affiliates as of
of Voting Stock as of March 25, 1996 March 25, 1996
- - ---------------------------------------------------------------------------------------------------------------
Common Stock, No Par Value 87,430,265 $2,483,359,384 (a)
- - ----------------------------------------------------------------------------------------------------------------
(a) Computed by reference to the closing price on the composite tape on March
25, 1996, as reported by The Wall Street Journal.
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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. [ ]
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Documents Incorporated By Reference
Portions of the registrant's definitive Proxy Statement relating to its
annual meeting of shareholders to be held on May 22, 1996 are incorporated by
reference into Part III hereof.
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TABLE OF CONTENTS
Page
------
GLOSSARY ........................................................................ 1
PART I
Item 1. Business ................................................................ 2
Item 2. Properties ..............................................................11
Item 3. Legal Proceedings .......................................................14
Item 4. Submission of Matters to a Vote of Security Holders .....................17
Supplemental Item.
Executive Officers of the Registrant ......................................17
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters 18
Item 6. Selected Financial Data .................................................19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...............................................20
Item 8. Financial Statements and Supplementary Data .............................24
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure ................................................48
PART III
Item 10. Directors and Executive Officers of the Registrant .....................49
Item 11. Executive Compensation .................................................49
Item 12. Security Ownership of Certain Beneficial Owners and Management ........49
Item 13. Certain Relationships and Related Transactions .........................49
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules,
and Reports on Form 8-K ................................................50
SIGNATURES ......................................................................69
i
GLOSSARY
ACC -- Arizona Corporation Commission
ACC Staff -- Staff of the Arizona Corporation Commission
AFUDC -- Allowance for Funds Used During Construction
Amendments -- Clean Air Act Amendments of 1990
ANPP -- Arizona Nuclear Power Project, also known as Palo Verde
APS -- Arizona Public Service Company
Cholla -- Cholla Power Plant
Cholla 4 -- Unit 4 of the Cholla Power Plant
Company -- Pinnacle West Capital Corporation
DOE -- United States Department of Energy
El Dorado -- El Dorado Investment Company
EPA -- United States Environmental Protection Agency
Energy Act -- National Energy Policy Act of 1992
FERC -- Federal Energy Regulatory Commission
Four Corners -- Four Corners Power Plant
ITC -- Investment Tax Credit
kW -- Kilowatt, one thousand watts
kWh -- Kilowatt-hour, one thousand watts per hour
Mortgage -- APS' Mortgage and Deed of Trust, dated as of July 1, 1946, as
supplemented and amended
MWh -- Megawatt hours, one million watts per hour
1935 ACT -- Public Utility Holding Company Act of 1935
NGS -- Navajo Generating Station
NRC -- Nuclear Regulatory Commission
PacifiCorp -- An Oregon-based utility company
Palo Verde -- Palo Verde Nuclear Generating Station
SEC -- Securities and Exchange Commission
SRP -- Salt River Project Agricultural Improvement and Power District
SunCor -- SunCor Development Company
USEC -- United States Enrichment Corporation
1
PART I
ITEM 1. BUSINESS
THE COMPANY
GENERAL
Pinnacle West Capital Corporation was incorporated in 1985 under the laws of
the State of Arizona and is engaged, through its subsidiaries, in the generation
and distribution of electricity; in real estate development; and in venture
capital investment. 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 7,335 persons. Of these
employees, approximately 6,484 are employees of the Company's major subsidiary,
APS, and employees assigned to joint projects of APS where APS serves as a
project manager, and approximately 851 are employees of the Company and its
other subsidiaries.
Other subsidiaries of the Company, in addition to APS, include SunCor and El
Dorado. See "Business of SunCor Development Company" and "Business of El Dorado
Investment Company" in this Item for further information regarding SunCor and El
Dorado.
REGULATION
1935 ACT. The Company currently owns no significant assets other than the
common stock of its subsidiaries. The Company and its subsidiaries are currently
exempt from registration under the 1935 Act; however, the SEC has the authority
to revoke or condition an exemption if it appears that any question exists as to
whether the exemption may be detrimental to the public interest or the interest
of investors or consumers. On June 20, 1995, the SEC issued a Report on the
Regulation of Public Utility Holding Companies in which, as its preferred
option, the SEC recommended to the Congress conditional repeal of the 1935 Act,
with an adequate transition period. The SEC further recommended that legislation
repealing the 1935 Act should include provision for state access to books and
records of all companies in the holding company system, and for federal audit
authority and oversight of affiliate transactions. The Company cannot predict
what action, if any, the Congress may take with respect to the SEC's
recommendation.
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.
2
BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
Following is a discussion of the business of APS, the Company's major
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). At December 31, 1995, APS employed 6,484 people,
which includes employees assigned to joint projects where APS is project
manager.
APS serves approximately 705,000 customers in an area that includes all or
part of 11 of Arizona's 15 counties. During 1995, 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 (see "Competition" below); (ii)
difficulties in meeting government imposed environmental requirements; (iii) the
necessity to make substantial capital outlays for transmission and distribution
facilities; (iv) uncertainty regarding projected electrical demand growth; (v)
controversies over electromagnetic fields; (vi) controversies over the safety
and use of nuclear power; (vii) issues related to spent fuel and low-level waste
(see "Generating Fuel" below); and (viii) increasing costs of wages and
materials.
COMPETITION
Although APS currently serves electricity in particular areas pursuant to
certain retail service territorial rights, APS is subject to varying degrees of
competition in certain territories adjacent to or within areas that it serves
which are also currently served by other utilities in its region (such as Tucson
Electric Power Company, Southwest Gas Corporation, and Citizens Utility Company)
as well as cooperatives, municipalities, electrical districts and similar types
of governmental organizations (principally SRP). In addition, APS is competing
for large commercial and industrial projects which move into Arizona, and faces
challenges from low-cost hydroelectric power and natural gas fuel and the access
of some utilities to preferential low-priced federal power and other subsidies.
Partly as a result of the Energy Act, the electric utility industry is moving
toward a more competitive environment. The Energy Act is designed, among other
things, to promote competition among utility and non-utility generators. The
Energy Act also amends the Federal Power Act to allow the FERC to order electric
utilities to transmit, or "wheel," wholesale power for others. Presently, the
Company's primary competitors are the major utilities in its region as
competition for wholesale transactions in electricity is already intense in the
West. As competition in the electric utility industry continues to evolve, APS
will continue to pursue strategies to enhance its competitive position.
The FERC has been encouraging increased competition in the wholesale market,
and a proposed FERC rule would require each utility that markets wholesale power
to provide access over its transmission system to other energy providers at
prices and terms comparable to those which the utility applies to itself. The
FERC has also encouraged the formation of regional transmission groups to
enhance coordinated transmission planning and comparable access, as APS, other
utilities in the Southwest and several power marketers are doing with the
Southwestern Regional Transmission Association. All of the members of this
association will file comparability and market base tariffs with the FERC this
summer.
In 1995, APS and the ACC Staff proposed a regulatory settlement agreement
which APS believes lays the groundwork for a responsible transition to a
competitive future. See "1995 Regulatory Agreement" in Note 3 of Notes to
Consolidated Financial Statements in Item 8.
3
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, 1995 is
tabulated below.
Amount Percentage
------------ ------------
(Thousands
of Dollars)
Long-Term Debt Less Current Maturities:
First mortgage bonds .............................$1,604,317
Other ............................................ 527,704
------------
Total long-term debt less current maturities ... 2,132,021 50.7%
------------
Non-Redeemable Preferred Stock .................... 193,561 4.6
------------
Redeemable Preferred Stock ........................ 75,000 1.8
------------
Common Stock Equity:
Common stock, $2.50 par value, 100,000,000 shares
authorized; 71,264,947 shares outstanding ...... 178,162
Premiums and expenses ............................ 1,039,550
Retained earnings ................................ 403,843
------------
Total common stock equity ....................... 1,621,555 38.6
-----------
Total capitalization ........................... 4,022,137
Current Maturities of Long-Term Debt .............. 3,512 .1
Short-Term Borrowings ............................. 177,800 4.2
------------ ------------
Total ..........................................$4,203,449 100.0%
============ ============
See Notes 6, 7, and 8 of Notes to Consolidated Financial Statements in Item 8.
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 1995, the replacement fund requirement amounted to
approximately $128 million. Many, though not all, of the bonds issued by APS
under the 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.
RATES
STATE. The ACC has regulatory authority over APS in matters relating to
retail electric rates and the issuance of securities. See Note 3 of Notes to
Consolidated Financial Statements in Item 8 for a discussion of the 1995
regulatory agreement between APS and the ACC Staff.
FEDERAL. APS' rates for wholesale power sales and transmission services are
subject to regulation by the FERC. During 1995, approximately 6% 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.
4
CONSTRUCTION PROGRAM
During the years 1993 through 1995, APS incurred approximately $807 million
in capitalized expenditures. Utility capitalized expenditures for the years 1996
through 1998 are expected to be primarily for expanding transmission and
distribution capabilities to meet customer growth, upgrading existing facilities
and for environmental purposes. Capitalized expenditures, including expenditures
for environmental control facilities, for the years 1996 through 1998 have been
estimated as follows:
(Millions of Dollars)
By Year By Major Facilities
- - --------------------------------------------------------------------------------
1996 $246 Electric generation $244
1997 242 Electric transmission 29
1998 244 Electric distribution 352
----- General facilities 107
$732 ----
==== $732
====
The amounts for 1996 through 1998 exclude capitalized interest costs and
include capitalized property taxes and about $30 million each year for nuclear
fuel expenditures. APS conducts a continuing review of its construction program.
ENVIRONMENTAL MATTERS
EPA ENVIRONMENTAL REGULATION. Pursuant to the Clean Air Act, the EPA has
adopted regulations that address visibility impairment in certain
federally-protected areas which can be reasonably attributed to specific
sources. In September 1991, the EPA issued a final rule that would limit sulfur
dioxide emissions at NGS. Compliance with the emission limitation becomes
applicable to NGS Units 3, 2, and 1 in 1997, 1998, and 1999, respectively. SRP,
the NGS operating agent, has estimated a capital cost of $500 million, most of
which will be incurred through 1998, and annual operations and maintenance costs
of approximately $14 million for all three units, 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") 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 APS-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. In March 1995, the EPA issued
revised rules for nitrogen oxides emissions limitations, which may require APS
to install additional pollution control equipment at Four Corners. In the year
2000, Four Corners must comply with either these or recently proposed
requirements which the EPA published in January 1996. The EPA has until 1997 to
finalize these proposed requirements. Based on its initial evaluation, APS
currently estimates its capital cost of complying with the March 1995 rules may
be approximately $20 million, the incurrence of which began in 1995 and will
continue through 1999, with the highest expenditures expected during 1998.
With respect to protection of visibility in certain specified areas, the
Amendments require the EPA to conduct a study which the EPA estimates will be
completed in late 1996 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.
The EPA has established a "Grand Canyon Visibility Transport Commission" to
complete a study by May 1996 on visibility impairment in the "Golden Circle of
National Parks" in the Colorado Plateau. NGS, Cholla, and
5
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. The results of the first
study indicated an impact from mercury emissions from such units in certain
unspecified areas; however, the EPA has not yet stated whether or not emissions
limitations will be imposed. Next, the EPA will complete a general study in late
1996 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.
PURPORTED NAVAJO ENVIRONMENTAL REGULATION. Four Corners and NGS are located
on the Navajo Reservation and are held under easements granted by the federal
government as well as leases from the Navajo Nation. APS is the Four Corners
operating agent and owns a 100% interest in Four Corners Units 1, 2 and 3, and a
15% interest in Four Corners Units 4 and 5. APS owns a 14% interest in NGS Units
1, 2 and 3. In July 1995 the Navajo Nation enacted the Navajo Nation Air
Pollution Prevention and Control Act, the Navajo Nation Safe Drinking Water Act,
and the Navajo Nation Pesticide Act (collectively, the "Acts").
Pursuant to the Acts, the Navajo Nation Environmental Protection Agency is
authorized to promulgate regulations covering air quality, drinking water and
pesticide activities, including those that occur at Four Corners and NGS. By
separate letters dated October 12 and October 13, 1995, the Four Corners
participants and the NGS participants requested the United States Secretary of
the Interior to resolve their dispute with the Navajo Nation regarding whether
or not the Acts apply to operations of Four Corners and NGS. On October 17,
1995, the Four Corners participants and the NGS participants each filed a
lawsuit in the District Court of the Navajo Nation, Window Rock District,
seeking, among other things, a declaratory judgment that (i) their respective
leases and federal easements preclude the application of the Acts to the
operations of Four Corners and NGS, and (ii) the Navajo Nation and its agencies
and courts lack adjudicatory jurisdiction to determine the enforceability of the
Acts as applied to Four Corners and NGS. On October 18, 1995, the Navajo Nation
and the Four Corners and NGS participants agreed to indefinitely stay the
proceedings referenced in the preceding two sentences so that the parties may
attempt to resolve the dispute without litigation, and the Secretary and the
Court have stayed these proceedings pursuant to a request by the parties. APS
cannot currently predict the outcome of this matter.
GENERATING FUEL
Coal, nuclear, gas, and other contributions to total net generation of
electricity by APS in 1995, 1994, and 1993, 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
------------ --------- ------------ --------- ------------ --------- ------------ --------- -----------
1995 (estimate) 54.7% $13.83 40.1% $5.21 5.0% $19.52 0.2% $11.84 $10.66
1994 ............59.7 13.84 33.8 6.09 6.3 24.64 0.2 16.26 11.90
1993 ............62.3 12.95 32.4 6.17 5.1 31.53 0.2 18.32 11.70
Other includes oil and hydro generation.
6
APS believes that Cholla has sufficient reserves of low sulfur coal committed
to that plant for the next four years, the term of the existing coal contract.
Sufficient reserves of low sulfur coal are available to continue operating
Cholla 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 their useful lives. The current sulfur content of
coal being used at Four Corners, NGS, and Cholla is approximately 0.8%, 0.6%,
and 0.4%, respectively. In 1995, 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
Nation. 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 Nation and for NGS from a coal supplier with a long-term lease
with the Navajo Nation and the Hopi Tribe. APS purchases all of the coal which
fuels Cholla from a coal supplier who mines all of the coal under a long-term
lease of coal reserves owned by the Navajo Nation, the federal government, and
private landholders. See Note 12 of Notes to Consolidated Financial Statements
in Item 8 for information regarding APS' obligation for coal mine reclamation.
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 1995, the principal sources of APS' natural gas
generating fuel were 19 of these companies. APS is currently purchasing the
majority of its natural gas requirements from twelve 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 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 2000.
Existing contracts and options could be utilized to meet approximately 80% of
requirements in 2001 and 2002 and 50% of requirements from 2003 through 2007.
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 2000 and with options for up to 70% through 2002. The Palo Verde
participants, including APS, have an enrichment services contract with USEC
which obligates USEC to furnish enrichment services required for the operation
of the three Palo Verde units over a term expiring in September 2002, with
options to continue through September 2007. In addition, existing contracts will
provide fuel assembly fabrication services until at least 2003 for each Palo
Verde unit, and through contract options, approximately fifteen additional years
are available.
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 NRC, pursuant to the Waste Act, also requires operators of nuclear
power reactors to enter into spent fuel disposal contracts with DOE and APS, on
its own behalf and on behalf of the other Palo Verde participants, has done so.
Under the Waste Act, DOE was to develop the facilities necessary for the storage
and disposal of spent nuclear fuel and to have the first such facility in
operation by 1998. That facility was to be a permanent repository, but DOE has
announced that such a repository now cannot be completed before 2010. Several
bills have been introduced in Congress contemplating the construction of a
central interim storage facility which could be available in the latter part of
the current decade; however, there is resistance to certain features of these
bills both in Congress and in the Administration.
Facility funding is a further complication. While all nuclear utilities pay
into a so-called nuclear waste fund an amount calculated on the basis of the
output of their respective plants, the annual Congressional appropriations for
the permanent repository have been for amounts less than the amounts paid into
the waste fund (the balance of which is being used for other purposes) and,
according to DOE spokespersons, may now be at a level less than needed to
achieve a 2010 operational date for a permanent repository. No funding will be
available for a central interim facility until one is authorized by Congress.
APS has storage capacity in existing fuel storage pools at Palo Verde which,
with certain modifications, could accommodate all fuel expected to be discharged
from normal operation of Palo Verde through about 2005, and believes it could
augment that wet storage with new facilities for on-site dry storage of spent
fuel for an indeterminate period of operation beyond 2005, subject to obtaining
any required governmental approvals.
7
One way or another, APS currently believes that spent fuel storage or
disposal methods will be available for use by Palo Verde to allow its continued
operation beyond 2005.
Currently, low-level waste is being stored on-site. A new low-level waste
facility was built in 1995 on-site which could store an amount of waste
equivalent to up to ten years of normal operation at Palo Verde. APS is
currently evaluating whether to ship low-level waste to off-site facilities or
to continue to store the waste on-site. 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 of spent
fuel and low-level waste storage and disposal can be resolved satisfactorily,
APS acknowledges that their ultimate resolution in a timely fashion will require
political resolve and action on national and regional scales which it is less
able to predict.
PALO VERDE NUCLEAR GENERATING STATION
REGULATORY. 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. See Note 13 of Notes to
Consolidated Financial Statements in Item 8 for a discussion of APS' nuclear
decommissioning costs.
STEAM GENERATORS. See "Palo Verde Nuclear Generating Station" in Note 12
of Notes to Consolidated Financial Statements in Item 8 for a discussion of
issues relating to the Palo Verde steam generators.
PALO VERDE LIABILITY AND INSURANCE MATTERS. See "Palo Verde Nuclear
Generating Station" in Note 12 of Notes to Consolidated Financial Statements in
Item 8 for a discussion of the insurance maintained by the Palo Verde
participants, including APS, for Palo Verde.
DEPARTMENT OF LABOR MATTER. On May 10, 1993, a Department of Labor ("DOL")
Administrative Law Judge issued a Recommended Decision and Order finding that
APS discriminated against a former contract employee who worked at Palo Verde
because he engaged in protected activities (as defined under federal
regulations). APS and the former contract employee who had raised the DOL claim
entered into a settlement agreement which was approved by the Secretary of Labor
in June 1995. By letter dated March 7, 1996, the NRC sent a Notice of Violation
and Proposed Imposition of Civil Penalty notifying APS that the NRC proposes to
impose a $100,000 civil penalty for a "Severity Level III" violation of NRC
requirements relating to the circumstances surrounding this matter. The NRC also
concluded in its March 7, 1996 letter that APS' actions taken and planned to
correct the violation have already been addressed and therefore APS is not
required to respond to the Notice of Violation. APS plans to pay the associated
penalty within thirty days.
8
WATER SUPPLY
Assured supplies of water are important both to APS (for its generating
plants) and to its customers and, at the present time, APS has adequate water to
meet its needs. 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 Nation in 1985,
however, provides that if Four Corners loses a portion of its rights in the
adjudication, the Navajo Nation 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. Issues important to APS'
claims were remanded to the trial court for further action and the trial court
certified its decision for interlocutory appeal to the Arizona Supreme Court. On
September 28, 1994, the Arizona Supreme Court granted review of the trial court
decision. 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 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,
including homebuilding. The principal executive offices of SunCor are located at
3838 North Central, Suite 1500, Phoenix, Arizona 85012 (telephone 602-
285-6800). SunCor and its subsidiaries, excluding SunCor Resort & Golf
Management, Inc. ("Resort Management"), employ approximately 97 persons. Resort
Management, which manages the Wigwam Resort and Country Club (the "Wigwam"),
employs between 205 and 720 persons, depending on the Wigwam's operating season.
Resort Management also operates other golf operations.
9
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 the commercial and residential development of
approximately 640 acres is well underway. The initial phase included the
development of an 18-hole championship golf course that 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. Two recent projects
- - -- SunRidge Canyon, a 950 acre golf and residential master-planned community
northeast of Phoenix, and Sedona Golf Resort, a 300 acre golf and residential
master-planned community near Sedona, Arizona -- are also being developed
jointly with other venture partners.
For the years ended December 31, 1995, 1994, and 1993, SunCor's operating
revenues were approximately $54.8 million, $59.3 million, and $32.2 million,
respectively, and its income (losses) were approximately $4.1 million, $0.5
million, and ($4.0 million), respectively. SunCor's capital needs consist
primarily of capital expenditures and home construction, which, on the basis of
projects now under development, are expected to approximate $85 million, $68
million, and $60 million for 1996, 1997, and 1998, respectively.
At December 31, 1995, SunCor had total assets of approximately $436 million,
approximately $221 million of which has been pledged to secure certain long-term
debt of SunCor. See Note 6 of Notes to the Consolidated Financial Statements in
Item 8 for information regarding SunCor's long-term debt. SunCor intends to
continue its focus on real estate development in residential, commercial, and
industrial projects.
BUSINESS OF EL DORADO INVESTMENT COMPANY
El Dorado was incorporated in 1983 under the laws of the State of Arizona and
is engaged principally in the business of making equity investments in other
companies. El Dorado's offices are located at 400 East Van Buren Street, Suite
750, Phoenix, Arizona 85004 (telephone 602-252-3441).
El Dorado had investments in venture capital partnerships totalling
approximately $7.3 million at December 31, 1995. El Dorado has remaining funding
commitments in the aggregate amount of approximately $3.1 million through 1996.
In addition to the foregoing investments, at December 31, 1995, El Dorado had
direct investments of approximately $17.9 million in other private and public
companies and partnerships.
For the years ended December 31, 1995, 1994, and 1993 El Dorado's income
(losses) were approximately $8.5 million, ($4.0 million), and ($3.9 million),
respectively. At December 31, 1995, El Dorado had total assets of approximately
$38.4 million.
10
ITEM 2. PROPERTIES
APS' present generating facilities have an accredited capacity aggregating
4,025,241 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 ....................... 615,000
14% owned Units 1, 2, and 3 at the Navajo Plant, representing ....... 315,000
----------
1,712,000
==========
Gas or Oil:
Two steam units at Ocotillo, two steam units at Saguaro, and one
steam unit at Yucca, aggregating ..................................... 463,400(1)
Eleven combustion turbine units, aggregating ......................... 500,600
Three combined cycle units, aggregating .............................. 253,500
----------
1,217,500
==========
Nuclear:
29.1% owned or leased Units 1, 2, and 3 at Palo Verde, representing 1,091,541
==========
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 July 28,
1995 at 4,420,400 kW, compared to the 1994 peak of 4,214,000 kW recorded on June
29. 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 July 28, 1995, computed in accordance with accepted
industry practices, amounted to 4,608,941 kW, for an installed reserve margin of
6.4%. 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 1995 peak
amounted to 4,469,841 kW, for a margin of 1.3%.
NGS and Four Corners are located on land held under easements from the
federal government and also under leases from the Navajo Nation. 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 Nation to honor its commitments. The lease for Four
Corners contains a waiver until 2001 of the requirement that APS pay certain
taxes to the Navajo Nation. APS and the Navajo Nation are currently negotiating
an agreement regarding taxes to be assessed against APS after the expiration of
the waiver. APS cannot currently predict the outcome of this matter. 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.
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 10 of
Notes to 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.
11
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 313,000 kW through May 1995, at which time the capacity decreased
to 305,000 kW. In 1995, APS received approximately 657,765 MWh of energy under
the contract and paid approximately $30 million for capacity availability and
energy received.
In September 1990, APS and PacifiCorp 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 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 4. In April 1995 APS gave PacifiCorp the required three-year
notice to change the existing 175 megawatt purchase to one-for-one seasonal
capacity exchange beginning in the summer of 1998. APS has one option remaining
to increase the firm purchase to the rated capacity of Cholla 4 (less the
current exchange capacity) and also to convert this increase to one-for-one
seasonal exchange by a three-year written notice prior to May 1, 1996.
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 May 15, 1997 or the completion of certain new transmission projects. In
addition, PacifiCorp agreed to pay APS (i) $20 million prior to January 15, 1997
and (ii) $19 million ($9.5 million of which has been paid) 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, for which approximately
$0.5 million was paid during 1995. In 1995, APS received 386,350 MWh of energy
from PacifiCorp under these transactions and paid approximately $18 million for
capacity availability and the energy received.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Capital Needs and Resources -- APS" in Item 7 for a discussion
of APS' construction plans.
See Notes 6 and 10 of Notes to Consolidated Financial Statements in Item 8
with respect to property of APS not held in fee or held subject to any major
encumbrance.
As part of the Company's restructuring of its debt in 1990, the Company
granted substantially all of its lenders at that time 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, 1995, the APS common
stock secured approximately $210 million of the Company's outstanding debt.
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.
See "Business of SunCor Development Company" and "Business of El Dorado
Investment Company" in Item 1 for a description of properties held by SunCor and
El Dorado, respectively.
12
[MAP PAGE]
13
ITEM 3. LEGAL PROCEEDINGS
APS
On June 29, 1990, a new Arizona state property tax law was enacted, effective
as of December 31, 1989, which adversely impacted APS' earnings before income
taxes in tax years 1990 through 1995 by an aggregate amount of approximately $21
million per year. 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 appealed
this decision to the Arizona Court of Appeals. In November 1995, the Arizona
Court of Appeals reversed that decision, holding that the law is
unconstitutional. The matter has been returned to the Arizona Tax Court for
determination of the appropriate remedy consistent with the Arizona Court of
Appeals decision. Pursuant to the provisions of APS' 1995 proposed regulatory
settlement agreement (see Note 3 of Notes to Consolidated Financial Statements
in Item 8), if any overcollected property taxes are refunded to APS by the State
of Arizona as a result of the disposition of this lawsuit, APS would refund all
of the net jurisdictional amount of such refund to its retail customers. APS
cannot currently predict the ultimate outcome of this matter.
See "Environmental Matters," "Palo Verde Nuclear Generating Station," and
"Water Supply" in Item 1 in regard to pending or threatened litigation and other
disputes involving APS.
PINNACLE WEST
On November 7, 1988 and December 20, 1988, two separate lawsuits were filed
in the United States District Court for the District of Arizona against the
Company and certain of its directors and officers. The lawsuits, which were
consolidated on October 2, 1989, alleged 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 consolidated complaint
sought unspecified compensatory and punitive damages as well as fees and costs.
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 alleged 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.
14
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 two paragraphs under this heading and (2) partially
dismissing the litigation initiated by the RTC and described in the immediately
preceding paragraph. The settlement provides 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. Two non-settling individuals who pursued independent claims
against the RTC were not dismissed from the RTC litigation and have appealed the
settlement. On March 23, 1995, the appeals court affirmed the judgment entered
by the District Court which approved the settlement and dismissed the litigation
described above. On August 28, 1995, the same individuals filed a petition with
the U.S. Supreme Court seeking that court's review of the settlement. On January
16, 1996, the Supreme Court denied the petition and the settlement became final.
The non-settling individuals have filed a third-party complaint against the
Company in the United States District Court for the District of Arizona alleging
claims for contractual and statutory indemnification in the event that these
individuals are found liable on the RTC's claims against them. The third-party
complaint, which was served on the Company on or about November 15, 1995,
further alleges that the Company acted in bad faith and wrongfully denied
indemnification to these individuals and seeks compensatory and punitive damages
in an unspecified amount as well as costs and attorneys' fees. In addition, one
of these individuals seeks a judicial determination that the Company is
obligated to pay him pension benefits in an unspecified amount in the event that
the RTC does not fully pay these benefits. The December 30, 1993 settlement
order barred the non-settling individuals from asserting claims for contribution
and certain claims for noncontractual indemnification against the Company. This
order is dispositive of some but not all of the claims alleged in the
third-party complaint. The Company believes that it has no obligation with
respect to any such costs or damages.
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 a 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. The amended complaint alleges
claims under the federal securities laws, the federal racketeering statutes, and
state consumer fraud statutes and seeks damages in the approximate amount of
$4.8 million, plus interest. On June 8, 1993, the Ohio court ordered this case
to be transferred to the District of Arizona. The individual director defendants
were subsequently dismissed without prejudice pursuant to the stipulation of the
parties. On November 10, 1994, the Company filed a motion for summary judgment
on all counts, which on September 20, 1995 was granted in part and denied in
part. The order rejected the plaintiff's claims as to one of the two purchases
of MeraBank debentures at issue, and accordingly, reduced the amount in
controversy to one-half of the original claimed amount. The Company and the
individual directors and officers believe that the lawsuit is without merit and
will vigorously defend themselves.
On August 17, 1993, the Company was served with a separate complaint filed by
the same plaintiff in the United States District Court for the District of
Arizona alleging claims under the Arizona Racketeering Act and the Arizona
Consumer Fraud Act seeking compensatory damages in
15
the amount of $1.2 million plus interest, punitive damages, treble damages,
interest, attorneys' fees and costs. On September 24, 1993, the plaintiff
voluntarily dismissed the Arizona Consumer Fraud Act claims. On March 6, 1995,
the court dismissed the Arizona Racketeering Act claims. The plaintiff has filed
a motion for reconsideration which remains under advisement. The plaintiff has
also appealed the dismissal to the Ninth Circuit Court of Appeals. That appeal
has been stayed pending the trial court's ruling on the motion for
reconsideration.
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 above. 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,
promissory estoppel, racketeering and intentional interference with contractual
relations. On October 7, 1994, the court dismissed the plaintiff's federal
securities law claims. On May 4, 1995, the Court granted the Company's motion
for reconsideration and also dismissed plantiff's state securities law claims.
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, the Company was served with a complaint filed by other
purchasers of MeraBank subordinated debentures with a face amount of
approximately $1.5 million 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 compensatory and
punitive damages in an unspecified amount plus attorneys' fees and costs. On
October 6, 1995, the Company filed a motion for summary judgment seeking
dismissal of the suit based on, among other things, a claim that the applicable
statute of limitations had expired. On November 13, 1995, the plaintiffs filed a
cross-motion for partial summary judgment with respect to certain of the
Company's alleged misrepresentations and omissions and on a fraudulent
concealment defense to the expiration of the applicable statutes of limitations.
Both motions remain under consideration by the court. The Company intends to
vigorously defend itself in this action.
16
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, 1996 Position(s) at March 1, 1996
- - ----------------- --------------- -------------------------------------
Michael S. Ash 42 Corporate Counsel
Arlyn J. Larson 61 Vice President of Corporate
Planning and Development
Nancy E. Newquist 44 Vice President and Treasurer
William J. Post 45 Executive Vice President
Richard Snell 65 Chairman of the Board of Directors,
President and Chief Executive Officer
Faye Widenmann 47 Vice President of Corporate Relations
and Administration and Secretary
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 position of Legal Counsel to the Company from December 1986
to February 1991.
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.
Mr. Post was elected Executive Vice President of the Company effective June
30, 1995. Since September 1994 he has also been Senior Vice President and Chief
Operating Officer of APS. From June 1993 to September 1994 he was Senior Vice
President, Planning, Information & Financial Services of APS. Prior to June 1993
he was Vice President, Finance and Rates of APS.
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. Mr. Snell is a director of Aztar
Corporation and is also a director of Banc One Arizona Corporation and Bank One,
Arizona N.A., Phoenix, Arizona.
Ms. Widenmann was elected Secretary of the Company in 1985 and Vice President
of Corporate Relations and Administration in November 1986.
17
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 13, 1996, the
Company's common stock was held of record by approximately 55,000 shareholders.
The chart below sets forth the common stock price ranges on the composite
tape, as reported in the Wall Street Journal for 1995 and 1994. The chart also
sets forth the dividends declared and paid per share during each of the four
quarters for 1995 and 1994.
Common Stock Price Ranges and Dividends
- - ------------------------------------------------------
DIVIDEND
1995 HIGH LOW PER SHARE
- - ------------------------------------------------------
1st Quarter 21-1/2 19-5/8 .225
2nd Quarter 24-3/4 20-7/8 .225
3rd Quarter 26-1/2 23-3/8 .225
4th Quarter 28-7/8 26-1/8 .25
- - ------------------------------------------------------
1994
- - ------------------------------------------------------
1st Quarter 22-7/8 19-1/2 .20
2nd Quarter 21 16 .20
3rd Quarter 18-3/4 16-1/8 .20
4th Quarter 20-1/8 17-1/8 .225
- - ------------------------------------------------------
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars In Thousands, Except Per Share Amounts)
1995 1994 1993 1992 1991
------------ --------------- ------------- ------------- -------------
OPERATING RESULTS
Operating revenues
Electric $ 1,614,952 $ 1,626,168 $ 1,602,413 $ 1,587,582 $ 1,385,815
Real estate 54,846 59,253 32,248 19,959 12,697
Income (loss) from continuing
operations (a) 199,608 $ 200,619(b) $ 169,978 $ 150,440 $ (340,317)
Income from discontinued
operations -- net of income tax
(c) -- -- -- 6,000 153,455
Extraordinary charge for early
retirement of debt -- net of
income tax (d) (11,571) -- -- -- --
Cumulative effect of change
in accounting for
income taxes (e) -- -- 19,252 -- --
------------ --------------- ------------- ------------- ------------
Net income (loss) $ 188,037 $ 200,619 $ 189,230 $ 156,440 $ (186,862)
============ =============== ============= ============= ============
COMMON STOCK DATA
Book value per share -- year-end $ 21.49 $ 20.32 $ 18.87 $ 17.00 $ 15.23
Earnings (loss) per average common
share outstanding
Continuing operations $ 2.28 $ 2.30 $ 1.95 $ 1.73 $ (3.91)
Discontinued operations -- -- -- 0.07 1.76
Extraordinary charge (0.13) -- -- -- --
Accounting change -- -- 0.22 -- --
------------ --------------- ------------- ------------- ------------
Total $ 2.15 $ 2.30 $ 2.17 $ 1.80 $ (2.15)
============ =============== ============= ============= ============
Dividends declared per share (f) $ 0.925 $ 0.825 $ 0.20 $ -- $ --
Common shares outstanding
Year-end 87,515,847 87,429,642 87,423,817 87,161,872 87,009,974
Average 87,419,300 87,410,967 87,241,899 87,044,180 86,937,052
TOTAL ASSETS $ 6,997,052 $ 6,909,752 $ 6,956,799 $ 6,270,476 $ 6,147,639
============ =============== ============= ============= =============
LIABILITIES AND EQUITY
Long-term debt less current
maturities $ 2,510,709 $ 2,588,525 $ 2,633,620 $ 2,774,305 $ 2,996,910
Other liabilities 2,336,695 2,276,249 2,282,508 1,620,250 1,429,488
------------ --------------- ------------- ------------- ------------
Total liabilities 4,847,404 4,864,774 4,916,128 4,394,555 4,426,398
Minority interests
Non-redeemable preferred stock of
APS 193,561 193,561 193,561 168,561 168,561
Redeemable preferred stock of APS 75,000 75,000 197,610 225,635 227,278
Common stock equity 1,881,087 1,776,417 1,649,500 1,481,725 1,325,402
------------ --------------- ------------- ------------- ------------
Total liabilities and equity $ 6,997,052 $ 6,909,752 $ 6,956,799 $ 6,270,476 $ 6,147,639
============ =============== ============= ============= =============
- - ----------
(a) Includes after-tax Palo Verde Unit 3 accretion income in 1994, 1993, 1992
and 1991 of approximately $20.3 million, $45.3 million, $40.7 million and
$3.2 million, respectively. Also includes approximately $407 million of
write-offs and adjustments in 1991, net of income tax, related to the Palo
Verde Nuclear Generating Station
(b) Includes a non-recurring income tax benefit of $26.8 million related to a
change in tax law.
(c) Tax benefits associated with MeraBank, A Federal Savings Bank.
(d) Prepayment penalty associated with the refinancing of $100 million of
parent company debt.
(e) Results of the adoption of the liability method of accounting for income
taxes. See Note 4 of Notes to Consolidated Financial Statements.
(f) In October 1993, the Board of Directors declared a quarterly dividend on
common stock, which was previously suspended in October 1989.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to Pinnacle West and its subsidiaries: APS,
SunCor and El Dorado.
CAPITAL NEEDS AND RESOURCES
Parent Company
During the past three years, the parent company's primary cash needs were
for the payment of common stock dividends, interest and optional and mandatory
repayment of principal on its long-term debt (see Note 6 of Notes to
Consolidated Financial Statements).
Dividends from APS have been the parent company's primary source of cash.
SunCor and El Dorado provided cash in 1995. Tax allocations within the
consolidated group have been additional sources of cash.
The parent company prepaid or repaid approximately $120 million, $134
million and $152 million of its debt in 1995, 1994 and 1993, respectively. In
1995, the parent company refinanced $100 million of 11.61% debentures due in
2000 to achieve a lower ongoing interest rate, thereby incurring a prepayment
penalty of $11.6 million after income taxes.
Management expects to have sufficient cash flow in 1996 to reduce parent
company debt by approximately $100 million, of which $30 million was prepaid on
March 1, 1996 at a prepayment penalty of $3.6 million after income taxes.
Additional prepayments, and perhaps refinancing, could result in substantial
prepayment penalties in 1996. Subject to approval of the 1995 regulatory
agreement (see Note 3 of Notes to Consolidated Financial Statements), $50
million annually for the years 1996 through 1999 will be invested in APS by the
parent company.
In the refinancing of $100 million of long-term debt in 1995, the parent
company established a revolving line of credit of $100 million; as of December
31, 1995, borrowings of $100 million were outstanding thereunder.
APS
APS' capital requirements consist primarily of capital expenditures and
optional and mandatory repayments of long-term debt and preferred stock. The
resources available to meet these requirements include funds provided by
operations and external financings.
Present construction plans through the year 2005 do not include any major
baseload generating plants. In general, most of the capital expenditures are for
expanding transmission and distribution capabilities to meet customer growth,
upgrading existing facilities and for environmental purposes. Capital
expenditures are anticipated to be approximately $246 million, $242 million and
$244 million for 1996, 1997 and 1998, respectively. These amounts include about
$30 million each year for nuclear fuel expenditures.
In the period 1993 through 1995, APS funded all capital expenditures with
funds provided by operations, after the payment of dividends. For the period
1996 through 1998, APS estimates that it will fund substantially all capital
expenditures in the same manner.
During 1995, APS redeemed $147 million of long-term debt, of which $144
million was optional. Refunding obligations for preferred stock, long-term debt,
a capitalized lease obligation and certain anticipated early redemptions are
expected to approximate $75 million, $164 million and $114 million for the years
1996, 1997 and 1998, respectively. As of March 1, 1996, APS had redeemed
approximately $46 million of its long-term debt and approximately $15 million of
its preferred stock.
Although provisions in APS' bond indenture, articles of incorporation, and
financing orders from the Arizona Corporation Commission (ACC) restrict the
issuance of additional first mortgage bonds and preferred stock, management does
not expect any of these restrictions to limit APS' ability to meet its capital
requirements.
As of December 31, 1995, APS had credit commitments from various banks
totaling approximately $300 million, which were available either to support the
issuance of commercial paper or to be used as bank borrowings. At the end of
1995, there were $177.8 million of commercial paper and no bank borrowings
outstanding.
20
Non-Utility Subsidiaries
During the past three years, SunCor and El Dorado together, funded all of
their operations through cash flow from operations and financings. SunCor's
capital needs consist primarily of capital expenditures and home construction
which, on the basis of projects now under development, are expected to
approximate $85 million, $68 million and $60 million for 1996, 1997 and 1998,
respectively. Capital resources available to meet these requirements include
funds provided by SunCor's operations and external financings.
During 1995, SunCor increased its existing revolving lines of credit to $40
million; at December 31, 1995, borrowings of $40 million were outstanding
thereunder.
RESULTS OF OPERATIONS
1995 Compared with 1994
The Company reported net income of $188.0 million in 1995 compared with
$200.6 million in 1994. However, both years included significant extraordinary
or non-recurring items. In 1995, an extraordinary charge of $11.6 million after
income taxes was recorded for a debt prepayment penalty. Net income for 1994
included a non-recurring income tax benefit of $26.8 million. Excluding the
effects of the extraordinary and non-recurring items, the Company earned $199.6
million in 1995 compared with $173.8 million in 1994. The earnings improvement
reflects earnings at the subsidiaries and lower interest expense at the parent
company due to continued debt reduction.
APS earnings in 1995 were $220.4 million compared with $218.2 million in
1994. Earnings increased primarily due to customer growth, lower fuel expenses,
accelerated amortization of investment tax credits (ITCs), lower operations and
maintenance expenses, lower preferred stock dividends, and a gain recognized on
the sale of a small subsidiary. Fuel expenses decreased due to lower fuel prices
and a more favorable mix resulting from increased nuclear generation. APS does
not have a fuel adjustment clause as part of its retail rate structure;
therefore, changes in fuel and purchased power expenses are reflected currently
in earnings. The accelerated amortization of ITCs was a result of a 1994 rate
settlement (see Note 3 of Notes to Consolidated Financial Statements) and is
reflected as an $18 million decrease in consolidated income tax expense.
Operations and maintenance expense decreased as a result of lower fossil plant
overhaul costs, improved nuclear operations and severance costs incurred in
1994. Preferred stock dividends decreased due to less preferred stock
outstanding.
Substantially offsetting the positive factors at APS were the absence of
non-cash income related to a 1991 rate settlement, milder weather, the reversal
in 1994 of certain previously recorded depreciation, a retail rate reduction
which became effective June 1, 1994, and in 1995 a $13 million pretax write-down
of an APS office building and an $8 million pretax write-down of certain
inventory.
SunCor reported net income of $4.1 million in 1995 compared with $0.5
million in 1994. The improvement reflects increased commercial land sales, the
expiration of a lease agreement related to the Wigwam Resort and an increase in
management fees.
El Dorado reported net income of $8.5 million in 1995 compared to a $4.0
million loss in 1994. The improvement reflects sales in 1995 of El Dorado
investments and an investment write-down in 1994.
1994 Compared with 1993
The Company reported net income of $200.6 million in 1994, which included a
non-recurring income tax benefit of $26.8 million. Excluding that benefit,
earnings in 1994 were $173.8 million compared with earnings before an accounting
change of $170.0 million in 1993.
Underlying the small increase were several significant factors. Electric
operating revenues increased primarily due to strong customer growth and
significantly warmer weather in 1994, partially offset by lower interchange
sales and the 1994 rate reduction. Substantially offsetting the earnings effect
of the 1994 rate reduction was a one-time depreciation reversal, also occasioned
by the 1994 rate settlement (see Note 3 of Notes to Consolidated Financial
Statements). Interest expense declined due primarily to parent company debt
repayment and APS' refinancing activity in 1994 and 1993.
21
Substantially offsetting these positive factors were the completion in May
1994 of the recording of non-cash income related to a 1991 rate settlement (see
Note 1 of Notes to Consolidated Financial Statements); increased utility
operations and maintenance expense due primarily to employee severance costs;
and increased nuclear decommissioning costs.
Higher fuel and purchased power expenses in 1994 over 1993 to meet increased
retail sales were about offset by lower fuel costs for reduced interchange
sales.
SunCor reported a small profit in 1994 compared with a $4.0 million loss in
1993. Real estate revenues and operating expenses in 1994 increased $27.0
million and $21.6 million, respectively, reflecting increased volumes of
residential and commercial property sales.
Electric Operating Revenues
Electric operating revenues reflect changes in both the volume of units sold
and price per kilowatt-hour (kWh) of electric sales. An analysis of the
increases (decreases) in 1995 and 1994 electric operating revenues compared with
the prior year follows (in millions of dollars):
1995 1994
---- ----
Volume variance:
Customer growth $ 48.4 $ 56.4
Weather (42.0) 42.0
Other 7.8 (11.7)
1994 rate reduction (11.4) (26.5)
Interchange sales (7.2) (19.5)
Reversal of refund obligation (9.3) (12.1)
Other operating revenues 2.5 (4.8)
------- -------
Total change $ (11.2) $ 23.8
======= =======
INCOME TAX ISSUES
See Note 4 of Notes to Consolidated Financial Statements regarding
accelerated amortization of ITCs, recognition of $26.8 million of non-recurring
income tax benefits in 1994 and an accounting standard for income taxes which
required the recognition in 1993 of $19.3 million of tax benefits related to net
operating loss carryforwards.
OTHER 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 arising out of a 1991 rate
settlement (see Consolidated Statements of Cash Flows and Note 1 of Notes to
Consolidated Financial Statements). The accretion income and refund reversals,
net of income taxes, totaled $25.9 million and $58.2 million in 1994 and 1993,
respectively. Also in 1994 was a one-time depreciation reversal of $15 million,
after income taxes, which was included in "Other -- net" in the Consolidated
Statements of Income (see Note 3 of Notes to Consolidated Financial Statements).
1995 REGULATORY AGREEMENT
In December 1995, APS and the ACC Staff announced an agreement which
includes an economic proposal to be heard by the full ACC in April 1996.
Principal features include an annual rate reduction of approximately $48 million
($29 million after income taxes) and recovery of substantially all of APS'
present regulatory assets through accelerated amortization over an eight-year
period beginning July 1, 1996 increasing annual amortization by approximately
$120 million ($72 million after income taxes). The agreement also includes an
industry restructuring element. See Note 3 of Notes to Consolidated Financial
Statements for further discussion of this agreement.
22
ACCOUNTING MATTERS
Note 2 of Notes to Consolidated Financial Statements describes two new
accounting standards related to asset impairment and stock-based compensation,
which are effective in 1996. The standards do not have a material impact on the
Company's financial position or results of operations at the time of adoption.
See Note 13 of Notes to Consolidated Financial Statements for a description of a
proposed standard on accounting for certain liabilities related to closure or
removal of long-lived assets.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
------
Report of Management ................................................................. 25
Independent Auditors' Report ......................................................... 26
Consolidated Statements of Income for each of the three years in the period ended
December 31, 1995 ................................................................... 27
Consolidated Balance Sheets -- December 31, 1995 and 1994 ............................ 28
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1995 ................................................................... 30
Consolidated Statements of Retained Earnings for each of the three years in the
period ended December 31, 1995 ...................................................... 31
Notes to Consolidated Financial Statements ........................................... 32
Financial Statement Schedule for each of the three years in the period ended December
31, 1995
Schedule II -- Valuation and Qualifying Accounts for the years ended December 31,
1995, 1994 and 1993 .................................................................. 48
See Note 14 of Notes to Consolidated Financial Statements for the selected
quarterly financial data required to be presented in this Item.
24
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 management's 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.
A limiting factor in all systems of internal accounting control is that the cost
of the system should not exceed the benefits to be derived. Management believes
that the Company's system provides the appropriate balance between such costs
and benefits.
Periodically the internal accounting system is 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 William J. Post
Chairman of the Board of Directors, Executive Vice President
President and Chief Executive Officer
25
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Pinnacle West
Capital Corporation and its subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of income, retained earnings and cash flows
for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 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 therein.
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 LLP
Phoenix, Arizona
March 1, 1996
26
PINNACLE WEST CAPITAL CORPORATION
Consolidated Statements of Income
(Dollars in Thousands, Except Per Share Amounts)
Year Ended December 31,
------------------------------------
1995 1994 1993
---- ---- ----
Operating Revenues
Electric ............................................... $ 1,614,952 $ 1,626,168 $ 1,602,413
Real estate ............................................ 54,846 59,253 32,248
------------ ------------ ------------
Total ...................................... 1,669,798 1,685,421 1,634,661
------------ ------------ ------------
Fuel Expenses
Fuel for electric generation ........................... 208,928 237,103 231,434
Purchased power ........................................ 60,870 63,586 69,112
------------ ------------ ------------
Total ...................................... 269,798 300,689 300,546
------------ ------------ ------------
Operating Expenses
Utility operations and maintenance ..................... 400,814 411,921 401,216
Real estate operations ................................. 50,344 59,789 38,220
Depreciation and amortization .......................... 243,989 237,326 223,558
Taxes other than income taxes .......................... 142,429 141,926 138,468
------------ ------------ ------------
Total ...................................... 837,576 850,962 801,462
------------ ------------ ------------
Operating Income ......................................... 562,424 533,770 532,653
------------ ------------ ------------
Other Income (Deductions)
Allowance for equity funds used during construction .... 4,982 3,941 2,326
Palo Verde accretion income (Note 1) ................... -- 33,596 74,880
Interest on long-term debt ............................. (209,293) (229,810) (245,961)
Other interest ......................................... (16,975) (15,185) (16,505)
Allowance for borrowed funds used during construction .. 9,065 5,442 4,153
Preferred stock dividend requirements of APS ........... (19,134) (25,274) (30,840)
Other-- net ............................................ (3,496) 17,109 (2,282)
------------ ------------ ------------
Total ...................................... (234,851) (210,181) (214,229)
------------ ------------ ------------
Income Before Income Taxes, Extraordinary
Charge and Accounting Change ........................... 327,573 323,589 318,424
------------ ------------ ------------
Income Taxes (Note 4)
Income tax expense ..................................... 127,965 149,740 148,446
Non-recurring income tax benefit ....................... -- (26,770) --
------------ ------------ ------------
Total ...................................... 127,965 122,970 148,446
------------ ------------ ------------
Income Before Extraordinary Charge
and Accounting Change .................................. 199,608 200,619 169,978
Extraordinary Charge for Early Retirement of Debt -
Net of Income Tax of $7,834 ............................ (11,571) -- --
Cumulative Effect of Change in Accounting for
Income Taxes (Note 4) .................................. -- -- 19,252
------------ ------------ ------------
Net Income ............................................... $ 188,037 $ 200,619 $ 189,230
============ ============ ============
Average Common Shares Outstanding ........................ 87,419,300 87,410,967 87,241,899
Earnings Per Average Common Share Outstanding
Income before extraordinary charge and accounting change $ 2.28 $ 2.30 $ 1.95
Extraordinary charge ................................... (0.13) -- --
Accounting change ........................................ -- -- 0.22
------------ ------------ ------------
Total ...................................... $ 2.15 $ 2.30 $ 2.17
============ ============ ============
Dividends Declared Per Share ............................. $ 0.925 $ 0.825 $ 0.200
============ ============ ============
See Notes to Consolidated Financial Statements.
27
PINNACLE WEST CAPITAL CORPORATION
Consolidated Balance Sheets
(Thousands of Dollars)
December 31,
----------------
1995 1994
---- ----
Assets
Current Assets
Cash and cash equivalents ............................... $ 79,539 $ 34,719
Customer and other receivables -- net ................... 131,393 136,143
Accrued utility revenues (Note 1) ....................... 53,519 55,432
Materials and supplies (at average cost) ................ 78,271 89,864
Fossil fuel (at average cost) ........................... 21,722 35,735
Other current assets .................................... 19,671 15,422
Deferred income taxes (Note 4) .......................... 46,355 68,263
---------- ----------
Total current assets ..................... 430,470 435,578
---------- ----------
Investments and Other Assets
Real estate investments -- net .......................... 411,693 408,505
Other assets (Note 13) .................................. 151,127 150,589
---------- ----------
Total investments and other assets ...................... 562,820 559,094
---------- ----------
Utility Plant (Notes 6, 10 and 11)
Electric plant in service and held for future use ....... 6,544,860 6,475,249
Less accumulated depreciation and amortization .......... 2,231,614 2,122,439
---------- ----------
Total .................................... 4,313,246 4,352,810
Construction work in progress ........................... 281,757 224,312
Nuclear fuel, net of amortization of $68,275 and $80,599 52,084 46,951
---------- ----------
Net utility plant ........................ 4,647,087 4,624,073
---------- ----------
Deferred Debits
Regulatory asset for income taxes (Note 4) .............. 548,464 557,049
Palo Verde Unit 3 cost deferral (Note 1) ................ 283,426 292,586
Palo Verde Unit 2 cost deferral (Note 1) ................ 165,873 171,936
Other deferred debits ................................... 358,912 269,436
---------- ----------
Total deferred debits .................... 1,356,675 1,291,007
---------- ----------
Total Assets ................................................. $6,997,052 $6,909,752
========== ==========
See Notes to Consolidated Financial Statements.
28
PINNACLE WEST CAPITAL CORPORATION
Consolidated Balance Sheets
(Thousands of Dollars)
December 31,
------------------
1995 1994
---- ----
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable .............................. $ 114,963 $ 126,842
Accrued taxes ................................. 95,962 89,144
Accrued interest .............................. 48,958 56,058
Short-term borrowings (Note 5) ................ 177,800 131,500
Current maturities of long-term debt (Note 6) . 8,780 78,512
Other current liabilities ..................... 58,030 48,792
---------- ----------
Total current liabilities ................ 504,493 530,848
---------- ----------
Long-term debt less current maturities (Note 6) .... 2,510,709 2,588,525
---------- ----------
Deferred Credits and Other
Deferred income taxes (Note 4) ................ 1,327,881 1,297,298
Deferred investment tax credit (Note 4) ....... 97,897 121,426
Unamortized gain -- sale of utility plant ..... 91,514 98,551
Other ......................................... 314,910 228,126
---------- ----------
Total deferred credits and other ........ 1,832,202 1,745,401
---------- ----------
Commitments and Contingencies (Note 12)
Minority Interests (Note 7)
Non-redeemable preferred stock of APS ......... 193,561 193,561
---------- ----------
Redeemable preferred stock of APS ............. 75,000 75,000
---------- ----------
Common Stock Equity (Note 8)
Common stock, no par value; authorized
150,000,000 shares; issued and outstanding
87,515,847 in 1995 and 87,429,642 in 1994 .... 1,638,684 1,641,196
Retained earnings ............................. 242,403 135,221
---------- ----------
Total common stock equity ................ 1,881,087 1,776,417
---------- ----------
Total Liabilities and Equity ....................... $6,997,052 $6,909,752
========== ==========
29
PINNACLE WEST CAPITAL CORPORATION
Consolidated Statements of Cash Flows
(Thousands of Dollars)
Year Ended December 31,
------------------------------
1995 1994 1993
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES (Note 1)
Income before extraordinary charge
and accounting change ............................. $ 199,608 $ 200,619 $ 169,978
Items not requiring cash
Depreciation and amortization ..................... 276,288 271,654 258,562
Deferred income taxes-- net ....................... 61,076 78,841 139,725
Rate refund reversal .............................. -- (9,308) (21,374)
Palo Verde accretion income ....................... -- (33,596) (74,880)
Allowance for equity funds used during construction (4,982) (3,941) (2,326)
Deferred investment tax credit .................... (23,529) (5,905) (6,028)
Other-- net ....................................... 16,099 4,753 8,186
Changes in current assets and liabilities
Customer and other receivables-- net .............. 4,653 (7,693) 31,090
Accrued utility revenues .......................... 1,913 4,924 (8,839)
Materials, supplies and fossil fuel ............... 25,606 4,795 2,252
Other current assets .............................. (4,249) (1,640) (5,782)
Accounts payable .................................. (2,093) 25,068 (27,196)
Accrued taxes ..................................... 6,818 (7,159) (21,391)
Accrued interest .................................. (7,100) (1,616) (905)
Other current liabilities ......................... 3,714 (1,730) (18,408)
Increase in land held .................................. (4,660) (10,163) (7,894)
Other-- net ............................................ 6,700 (10,730) 34,292
--------- --------- ---------
Net Cash Flow Provided By Operating Activities ......... 555,862 497,173 449,062
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................... (295,772) (245,925) (228,465)
Allowance for borrowed funds used during construction .. (9,065) (5,442) (4,153)
Other-- net ............................................ 422 (1,773) 1,698
--------- --------- ---------
Net Cash Flow Used For Investing Activities ............ (304,415) (253,140) (230,920)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt ............................. 225,128 595,362 535,893
Issuance of preferred stock ............................ -- -- 72,644
Short-term borrowings-- net ............................ 46,300 (16,500) (47,000)
Dividends paid on common stock ......................... (80,855) (72,115) (17,466)
Repayment of long-term debt ............................ (383,117) (643,991) (711,241)
Redemption of preferred stock .......................... -- (124,096) (78,663)
Extraordinary charge for early retirement of debt ...... (11,571) -- --
Other-- net ............................................ (2,512) (101) (8,108)
--------- --------- ---------
Net Cash Flow Used For Financing Activities ............ (206,627) (261,441) (253,941)
--------- --------- ---------
Net Cash Flow .......................................... 44,820 (17,408) (35,799)
Cash and Cash Equivalents at Beginning of Year ......... 34,719 52,127 87,926
--------- --------- ---------
Cash and Cash Equivalents at End of Year ............... $ 79,539 $ 34,719 $ 52,127
========= ========= =========
See Notes to Consolidated Financial Statements.
30
PINNACLE WEST CAPITAL CORPORATION
Consolidated Statements of Retained Earnings
(Thousands of Dollars)
Year Ended December 31,
-------------------------------
1995 1994 1993
---- ---- ----
Retained Earnings (Deficit) at Beginning of Year $ 135,221 $ 6,717 $(165,047)
Net Income ..................................... 188,037 200,619 189,230
Common Stock Dividends ......................... (80,855) (72,115) (17,466)
--------- --------- ---------
Retained Earnings at End of Year ............... $ 242,403 $ 135,221 $ 6,717
========= ========= =========
See Notes to Consolidated Financial Statements.
31
PINNACLE WEST CAPITAL CORPORATION
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Consolidation and Nature of Operations
The consolidated financial statements include the accounts of Pinnacle West
and its subsidiaries: APS, SunCor, and El Dorado.
APS, the Company's major subsidiary, is the state's largest electric utility
serving approximately 705,000 customers in an area that includes all or part of
11 of Arizona's 15 counties. SunCor is a developer of residential, commercial
and industrial projects on some 14,000 acres predominantly in the metropolitan
Phoenix area, and El Dorado is a venture capital firm with a diversified
portfolio.
Accounting Records
The accounting records are maintained in accordance with generally accepted
accounting principles (GAAP). The preparation of financial statements in
accordance with GAAP requires the use of estimates by management. Actual results
could differ from those estimates.
Regulatory Accounting
APS prepares its financial statements in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation." SFAS No. 71 requires a cost-based
rate-regulated enterprise to reflect the impact of regulatory decisions in its
financial statements.
APS' major regulatory assets are Palo Verde cost deferrals (see "Palo Verde
Cost Deferrals" in this note) and deferred taxes (see Note 4). These items,
combined with miscellaneous regulatory assets and liabilities, amounted to
approximately $1.2 billion and $1.1 billion at December 31, 1995 and 1994,
respectively, most of which are included in "Deferred Debits" on the
Consolidated Balance Sheets.
APS' current regulatory orders and regulatory environment support the
recognition of regulatory assets. If rate recovery of these costs becomes
unlikely or uncertain, whether due to competition or regulatory action, APS may
no longer be able