FORM 10-Q
Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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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Arizona 86-0011170
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (602) 250-1000
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.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Number of shares of common stock, $2.50 par value, outstanding as of August 8, 1996: 71,264,947
ACC - Arizona Corporation Commission
ACC Staff - Staff of the Arizona Corporation Commission
AFUDC - Allowance for funds used during construction
Company - Arizona Public Service Company
EPA - Environmental Protection Agency
ITC - Investment tax credit
March 10-Q - Arizona Public Service Company Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996
1995 10-K - Arizona Public Service Company Annual Report on Form 10-K for the fiscal year ended December 31, 1995
Palo Verde - Palo Verde Nuclear Generating Station
Pinnacle West - Pinnacle West Capital Corporation
INDEPENDENT ACCOUNTANTS' REPORT
Arizona Public Service Company:
We have reviewed the accompanying condensed balance sheet of Arizona Public Service Company as of June 30, 1996 and the related condensed statements of income for the three-month, six-month and twelve-month periods ended June 30, 1996 and 1995 and cash flows for the six-month periods ended June 30, 1996 and 1995. These condensed financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to such condensed financial statements for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Arizona Public Service Company as of December 31, 1995 and the related statements of income, retained earnings, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 1996, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
August 1, 1996
Three Months
Ended June 30,
------------------------------------------------
1996 1995
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(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 426,658 $ 380,178
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FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 57,289 44,823
Purchased power . . . . . . . . . . . . . . . . . . . . 22,466 17,814
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Total . . . . . . . . . . . . . . . . . . . . . . . . 79,755 62,637
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OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 346,903 317,541
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OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . . . . . . . . . . 74,571 65,794
Maintenance . . . . . . . . . . . . . . . . . . . . . . 25,725 28,457
Depreciation and amortization . . . . . . . . . . . . . 58,795 60,413
Income taxes . . . . . . . . . . . . . . . . . . . . . . 49,664 38,913
Other taxes . . . . . . . . . . . . . . . . . . . . . . 35,170 35,245
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Total . . . . . . . . . . . . . . . . . . . . . . . . 243,925 228,822
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OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 102,978 88,719
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OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . 2,003 1,348
Other - net . . . . . . . . . . . . . . . . . . . . . . (2,751) (1,253)
Income taxes . . . . . . . . . . . . . . . . . . . . . . 9,539 6,803
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Total . . . . . . . . . . . . . . . . . . . . . . . . 8,791 6,898
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INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 111,769 95,617
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INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 37,360 40,051
Interest on short-term borrowings . . . . . . . . . . . 4,129 2,433
Debt discount, premium and expense . . . . . . . . . . . 2,004 2,036
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . (2,164) (2,355)
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Total . . . . . . . . . . . . . . . . . . . . . . . . 41,329 42,165
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NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 70,440 53,452
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 4,326 4,776
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EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 66,114 $ 48,676
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See Notes to Condensed Financial Statements.
Six Months
Ended June 30,
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1996 1995
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(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 771,919 $ 717,146
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FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 99,623 91,533
Purchased power . . . . . . . . . . . . . . . . . . . . 36,404 26,024
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Total . . . . . . . . . . . . . . . . . . . . . . . . 136,027 117,557
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OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 635,892 599,589
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OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . . . . . . . . . . 138,340 131,360
Maintenance . . . . . . . . . . . . . . . . . . . . . . 49,699 54,323
Depreciation and amortization . . . . . . . . . . . . . 117,181 120,839
Income taxes . . . . . . . . . . . . . . . . . . . . . . 81,023 60,535
Other taxes . . . . . . . . . . . . . . . . . . . . . . 69,149 70,599
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Total . . . . . . . . . . . . . . . . . . . . . . . . 455,392 437,656
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OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 180,500 161,933
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OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . 3,678 2,534
Other - net . . . . . . . . . . . . . . . . . . . . . . (3,042) 3,531
Income taxes . . . . . . . . . . . . . . . . . . . . . . 15,189 8,525
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Total . . . . . . . . . . . . . . . . . . . . . . . . 15,825 14,590
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INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 196,325 176,523
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INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 74,760 81,923
Interest on short-term borrowings . . . . . . . . . . . 6,799 3,657
Debt discount, premium and expense . . . . . . . . . . . 4,121 4,010
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . (5,401) (4,351)
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Total . . . . . . . . . . . . . . . . . . . . . . . . 80,279 85,239
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NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 116,046 91,284
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 8,803 9,583
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EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 107,243 $ 81,701
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See Notes to Condensed Financial Statements.
Twelve Months
Ended June 30,
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1996 1995
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(Thousands of Dollars)
ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . $ 1,669,725 $ 1,600,109
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FUEL EXPENSES:
Fuel for electric generation . . . . . . . . . . . . . . 217,018 210,578
Purchased power . . . . . . . . . . . . . . . . . . . . 71,250 63,243
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Total . . . . . . . . . . . . . . . . . . . . . . . . 288,268 273,821
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OPERATING REVENUES LESS FUEL EXPENSES . . . . . . . . . . 1,381,457 1,326,288
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OTHER OPERATING EXPENSES:
Operations excluding fuel expenses . . . . . . . . . . . 291,822 281,209
Maintenance . . . . . . . . . . . . . . . . . . . . . . 111,348 110,330
Depreciation and amortization . . . . . . . . . . . . . 238,440 241,373
Income taxes . . . . . . . . . . . . . . . . . . . . . . 199,353 173,159
Other taxes . . . . . . . . . . . . . . . . . . . . . . 140,173 140,605
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Total . . . . . . . . . . . . . . . . . . . . . . . . 981,136 946,676
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OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 400,321 379,612
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OTHER INCOME (DEDUCTIONS):
AFUDC - equity . . . . . . . . . . . . . . . . . . . . 6,126 4,652
Other - net . . . . . . . . . . . . . . . . . . . . . . (23,605) 370
Income taxes . . . . . . . . . . . . . . . . . . . . . . 44,262 14,983
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Total . . . . . . . . . . . . . . . . . . . . . . . . 26,783 20,005
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INCOME BEFORE INTEREST DEDUCTIONS . . . . . . . . . . . . 427,104 399,617
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INTEREST DEDUCTIONS:
Interest on long-term debt . . . . . . . . . . . . . . . 152,869 161,723
Interest on short-term borrowings . . . . . . . . . . . 11,285 6,728
Debt discount, premium and expense . . . . . . . . . . . 8,733 7,991
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . (10,115) (7,276)
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Total . . . . . . . . . . . . . . . . . . . . . . . . 162,772 169,166
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NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 264,332 230,451
PREFERRED STOCK DIVIDEND REQUIREMENTS . . . . . . . . . . 18,354 20,375
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EARNINGS FOR COMMON STOCK . . . . . . . . . . . . . . . . $ 245,978 $ 210,076
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See Notes to Condensed Financial Statements.
ASSETS
(Unaudited)
June 30, December 31,
1996 1995
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(Thousands of Dollars)
UTILITY PLANT:
Electric plant in service and held for future use . . . $ 6,643,725 $ 6,544,860
Less accumulated depreciation and amortization . . . . . 2,334,170 2,231,614
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Total . . . . . . . . . . . . . . . . . . . . . . . . 4,309,555 4,313,246
Construction work in progress . . . . . . . . . . . . . 271,889 281,757
Nuclear fuel, net of amortization . . . . . . . . . . . 52,404 52,084
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Utility plant - net . . . . . . . . . . . . . . . . . 4,633,848 4,647,087
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INVESTMENTS AND OTHER ASSETS :. . . . . . . . . . . . . . . 109,493 97,742
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CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . 335 18,389
Accounts receivable:
Service customers . . . . . . . . . . . . . . . . . . 108,773 100,433
Other . . . . . . . . . . . . . . . . . . . . . . . . 11,049 28,107
Allowance for doubtful accounts . . . . . . . . . . . (1,390) (1,656)
Accrued utility revenues . . . . . . . . . . . . . . . . 63,932 53,519
Materials and supplies, at average cost . . . . . . . . 77,242 78,271
Fossil fuel, at average cost . . . . . . . . . . . . . 17,422 21,722
Deferred income taxes . . . . . . . . . . . . . . . . . 5,614 5,653
Other . . . . . . . . . . . . . . . . . . . . . . . . . 17,474 17,839
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Total current assets . . . . . . . . . . . . . . . . 300,451 322,277
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DEFERRED DEBITS:
Regulatory asset for income taxes . . . . . . . . . . . 544,615 548,464
Palo Verde Unit 3 cost deferral . . . . . . . . . . . . 278,845 283,426
Palo Verde Unit 2 cost deferral . . . . . . . . . . . . 162,842 165,873
Unamortized costs of reacquired debt . . . . . . . . . . 71,129 63,518
Unamortized debt issue costs . . . . . . . . . . . . . . 16,901 17,772
Other . . . . . . . . . . . . . . . . . . . . . . . . . 272,469 272,103
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Total deferred debits . . . . . . . . . . . . . . . . 1,346,801 1,351,156
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TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 6,390,593 $ 6,418,262
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See Notes to Condensed Financial Statements.
LIABILITIES
(Unaudited)
June 30, December 31,
1996 1995
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(Thousands of Dollars)
CAPITALIZATION:
Common stock . . . . . . . . . . . . . . . . . . . . . . $ 178,162 $ 178,162
Premiums and expenses - net . . . . . . . . . . . . . . 1,040,194 1,039,550
Retained earnings . . . . . . . . . . . . . . . . . . . 383,470 403,843
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Common stock equity . . . . . . . . . . . . . . . . . 1,601,826 1,621,555
Non-redeemable preferred stock . . . . . . . . . . . . . 173,526 193,561
Redeemable preferred stock . . . . . . . . . . . . . . . 66,000 75,000
Long-term debt less current maturities . . . . . . . . . 1,955,285 2,132,021
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Total capitalization . . . . . . . . . . . . . . . . 3,796,637 4,022,137
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CURRENT LIABILITIES:
Commercial paper . . . . . . . . . . . . . . . . . . . . 194,265 177,800
Current maturities of long-term debt . . . . . . . . . . 153,643 3,512
Accounts payable . . . . . . . . . . . . . . . . . . . . 91,366 106,583
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 95,731 82,827
Accrued interest . . . . . . . . . . . . . . . . . . . . 38,582 41,549
Common dividends payable . . . . . . . . . . . . . . . . 42,500 --
Customer deposits . . . . . . . . . . . . . . . . . . . 32,492 32,746
Other . . . . . . . . . . . . . . . . . . . . . . . . . 31,565 21,134
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Total current liabilities . . . . . . . . . . . . . . 680,144 466,151
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DEFERRED CREDITS AND OTHER:
Deferred income taxes . . . . . . . . . . . . . . . . . 1,428,993 1,429,482
Deferred investment tax credit . . . . . . . . . . . . . 102,091 115,353
Unamortized gain - sale of utility plant . . . . . . . . 89,227 91,514
Customer advances for construction . . . . . . . . . . . 21,890 19,846
Other . . . . . . . . . . . . . . . . . . . . . . . . . 271,611 273,779
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Total deferred credits and other . . . . . . . . . . 1,913,812 1,929,974
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COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . $ 6,390,593 $ 6,418,262
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See Notes to Condensed Financial Statements.
Six Months
Ended June 30,
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1996 1995
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(Thousands of Dollars)
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 116,046 $ 91,284
Items not requiring cash:
Depreciation and amortization . . . . . . . . . . . . 117,181 120,839
Nuclear fuel amortization . . . . . . . . . . . . . . 15,788 15,193
AFUDC - equity . . . . . . . . . . . . . . . . . . . . (3,678) (2,534)
Deferred income taxes - net . . . . . . . . . . . . . 3,399 12,821
Deferred investment tax credit - net . . . . . . . . . (13,262) (10,223)
Changes in certain current assets and liabilities:
Accounts receivable - net . . . . . . . . . . . . . . 8,452 22,334
Accrued utility revenues . . . . . . . . . . . . . . . (10,413) (9,902)
Materials, supplies and fossil fuel . . . . . . . . . 5,329 7,372
Other current assets . . . . . . . . . . . . . . . . . 365 (4,395)
Accounts payable . . . . . . . . . . . . . . . . . . . (6,014) (21,508)
Accrued taxes . . . . . . . . . . . . . . . . . . . . 12,904 11,036
Accrued interest . . . . . . . . . . . . . . . . . . . (2,967) (3,725)
Other current liabilities . . . . . . . . . . . . . . 7,590 7,713
Other - net . . . . . . . . . . . . . . . . . . . . . . 12,889 (12,308)
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Net cash flow provided by operating activities . . . 263,609 223,997
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Cash Flows from Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . (120,810) (144,227)
AFUDC - debt . . . . . . . . . . . . . . . . . . . . . . (5,401) (4,351)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (10,147) (7,852)
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Net cash flow used for investing activities. . . . . (136,358) (156,430)
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Cash Flows from Financing Activities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . 100,000 79,348
Short-term borrowings - net . . . . . . . . . . . . . . 16,465 47,755
Dividends paid on common stock . . . . . . . . . . . . . (85,000) (70,000)
Dividends paid on preferred stock . . . . . . . . . . . (8,994) (9,584)
Repayment of preferred stock . . . . . . . . . . . . . . (30,603) (4)
Repayment and reacquisition of long-term debt . . . . . (137,173) (108,044)
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Net cash flow used for financing activities . . . . (145,305) (60,529)
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Net increase (decrease) in cash and cash equivalents . . . (18,054) 7,038
Cash and cash equivalents at beginning of period . . . . . 18,389 6,532
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Cash and cash equivalents at end of period . . . . . . . . $ 335 $ 13,570
===================== ======================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (excluding capitalized interest) . . . . . . $ 78,178 $ 85,583
Income taxes . . . . . . . . . . . . . . . . . . . . . $ 60,499 $ 41,515
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See Notes to Condensed Financial Statements.
ARIZONA PUBLIC SERVICE COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company as of June 30, 1996, the results of operations for the three months, six months and twelve months ended June 30, 1996 and 1995, and the cash flows for the six months ended June 30, 1996 and 1995. It is suggested that these condensed financial statements and notes to condensed financial statements be read in conjunction with the financial statements and notes to financial statements included in the 1995 10-K. Certain prior year balances have been restated to conform to the current year presentation.
2. The Company's operations are subject to seasonal fluctuations, with variations occurring in energy usage by customers from season to season and from month to month within a season, primarily as a result of changing weather conditions. For this and other reasons, the results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
3. All the outstanding shares of common stock of the Company are owned by Pinnacle West.
4. See "Liquidity and Capital Resources" in Part I, Item 2 of this report for changes in capitalization for the six months ended June 30, 1996.
5. Regulatory Matters
Regulatory Agreement
In April 1996, the ACC approved a regulatory agreement between the Company and the ACC Staff. This agreement is substantially the same as the agreement proposed by the Company and the ACC Staff in December 1995. The major provisions of the 1996 regulatory agreement are:
* An annual rate reduction of approximately $48.5 million ($29 million after
income taxes), or an average 3.4% for all customers except certain contract
customers, effective July 1, 1996.
* Recovery of substantially all of the Company's 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).
* A formula for sharing future cost savings between customers and
shareholders, referencing a return on equity (as defined) of 11.25%.
* A moratorium on filing for permanent rate changes, except under the
sharing formula and under certain other limited circumstances, prior to
July 2, 1999.
* Infusion of $200 million of common equity into the Company by Pinnacle West, in annual increments of $50 million starting in 1996.
Competition and Electric Industry Restructuring
In recognition of evolving competition in the electric utility industry and an ongoing investigation by the ACC Staff into industry restructuring in an open competition docket involving many parties, the 1996 regulatory agreement also includes an element setting out a number of issues which the Company and the ACC Staff agree the ACC should be requested to consider in developing restructuring policies. See Note 3 of Notes to Financial Statements in Part II, Item 8 of the 1995 10-K for further discussion of the industry restructuring element of the agreement. As part of the competition docket and in response to the ACC Staff's request, on June 28, 1996, the Company filed its recommended phased retail access plan under which the Company proposed generation market access to larger customers beginning in the year 2000 and expanding such access to smaller commercial and industrial customers, and eventually all customers, in successive steps thereafter. The Company expects that the implementation of its plan would support effective competition, including resolving issues of exclusive service territory rights, obligation to serve, reciprocity and the recovery of potentially stranded costs. Other parties have also submitted their plans as part of this docket. The ACC Staff has advised that they presently intend to prepare a draft rule on competition and will solicit comments from all parties on the draft rule. The Company cannot currently predict the outcome of this matter.
6. The Palo Verde participants have insurance for public liability payments resulting from nuclear energy hazards to the full limit of liability under federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $200 million and the balance by an industry-wide retrospective assessment program. If losses at any nuclear power plant covered by this program exceed the accumulated funds for this program, the Company could be assessed retrospective premium adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $79 million, subject to an annual limit of $10 million per incident. Based upon the Company's 29.1% interest in the three Palo Verde units, the Company's maximum potential assessment per incident is approximately $69 million, with an annual payment limitation of approximately $9 million.
The Palo Verde participants maintain "all risk" (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. The Company has also secured insurance against portions of any increased cost of generation or purchased power and business interruption resulting from a sudden and unforeseen outage of any of the three units. The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions and exclusions.
7. The Company has encountered tube cracking in the Palo Verde steam generators and has taken, and will continue to take, remedial actions that
it believes have slowed the rate of tube degradation. The projected service life of the steam generators is reassessed periodically in conjunction with inspections made during scheduled outages of the Palo Verde units. The Company's ongoing analyses indicate that it will be economically desirable for the Company to replace the Unit 2 steam generators, which have been most affected by tube cracking, in five to ten years. The Company expects that the steam generator replacement can be accomplished within financial parameters established before replacement was a consideration, and the Company estimates that its share of the replacement costs (in 1996 dollars and including installation and replacement power costs) will be between $30 million and $50 million, most of which will be incurred after the year 2000. The Company expects that the replacement would be performed in conjunction with a normal refueling outage in order to limit incremental outage time to approximately 50 days. Based on the latest available data, the Company estimates that the Unit 1 and Unit 3 steam generators should operate for the license periods (until 2025 and 2027, respectively), although the Company will continue its normal periodic assessment of these steam generators.
ARIZONA PUBLIC SERVICE COMPANY
The following table summarizes the Company's revenues and earnings for
the three-month, six-month and twelve-month periods ended June 30, 1996 and
1995:
Periods ended June 30
(Thousands of Dollars)
Three Months Six Months Twelve Months
----------------------------- ----------------------------- -----------------------------------
1996 1995 1996 1995 1996 1995
----------------------------- ----------------------------- -----------------------------------
Operating $426,658 $380,178 $771,919 $717,146 $1,669,725 $1,600,109
revenues
Earnings for
common stock $ 66,114 $ 48,676 $107,243 $ 81,701 $ 245,978 $ 210,076
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Earnings increased in the three-month period ended June 30, 1996 primarily due to increased operating revenues resulting from warmer weather and customer growth. Partially offsetting the increased operating revenues were increases in fuel expenses and operations and maintenance expenses. Fuel expenses were higher due to increased retail sales, higher coal prices, and higher natural gas costs. Operations and maintenance expenses increased primarily due to the timing of charges for employee incentive plans.
Earnings increased in the six-month period ended June 30, 1996 primarily due to increased operating revenues and lower interest expense. Operating revenues were higher due to customer growth and warmer weather. Interest expense decreased due to lower interest rates and lower debt balances. Partially offsetting these positive factors were an increase in fuel expenses and a gain on the sale of a small subsidiary in the first quarter of 1995. Fuel expenses were higher due to increased retail sales, higher coal prices, and higher natural gas costs.
Earnings increased in the twelve-month period ended June 30, 1996 primarily due to increased operating revenues and accelerated investment tax credit amortization. Operating revenues increased due to customer growth, higher residential usage, and warmer weather. The accelerated investment tax credit amortization was a result of the 1994 rate
settlement (see "Other Income" below) and is reflected as a decrease in income tax expense.
Partially offsetting these positive factors were increased fuel expenses, write-downs of an office building and certain inventory, and a gain on the sale of a small subsidiary in the first quarter of 1995. Fuel expenses were higher primarily due to increased retail sales.
Other income reflects accounting practices required for regulated public utilities and represents a composite of cash and non-cash items, including AFUDC. See Note 1 of Notes to Financial Statements in Part II, Item 8 of the 1995 10-K.
As part of a 1994 rate settlement agreement with the ACC, the Company accelerated amortization of substantially all deferred ITCs over a five-year period beginning in 1995, resulting in a decrease in annual income tax expense of approximately $21 million.
See Note 5 of Notes to Condensed Financial Statements in Part I, Item 1 of this report and Note 3 of Notes to Financial Statements in Part II, Item 8 of the 1995 10-K for a discussion of the Company's regulatory agreement and industry restructuring.
For the six months ended June 30, 1996, the Company incurred approximately $114 million in capital expenditures, accounting for approximately 44% of the most recently estimated 1996 capital expenditures. The Company has estimated total capital expenditures for the years 1996, 1997, and 1998 to be approximately $260 million, $284 million, and $284 million, respectively. These amounts include about $30 million each year for nuclear fuel expenditures.
Required and optional redemptions of preferred stock and long-term debt, including premiums thereon, and a capitalized lease obligation are expected to total approximately $214 million, $164 million, and $114 million for the years 1996, 1997, and 1998, respectively. During the six months ended June 30, 1996, the Company redeemed approximately $140 million of its long-term debt and approximately $30 million of its preferred stock, and incurred $100 million of long-term debt under a revolving credit agreement. It is the Company's intention over the next several years to use excess cash flow to retire debt and preferred stock.
Although provisions in the Company's bond indenture, articles of incorporation, and financing orders from the ACC restrict the issuance of additional first mortgage bonds and preferred stock, management does not expect any of these restrictions to limit the Company's ability to meet its capital requirements.
As previously reported, on April 23, 1996, the parties reached an agreement to settle the litigation in which the Arizona Court of Appeals held that an Arizona state property tax law, effective December 31, 1989, is unconstitutional and a lawsuit filed by the Palo Verde participants, including the Company, was returned to the Arizona Tax Court for determination of the appropriate remedy consistent with that decision. See "Property Taxes" in Part II, Item 1 of the March 10-Q. On July 18, 1996, the Governor signed a new Arizona property tax law which amends the statute declared unconstitutional and is expected to reduce the aggregate property tax of the Company by approximately $18 million (before income taxes) per year. Under the formula for potential future rate reduction pursuant to the 1996 regulatory agreement (see "Regulatory Matters - Regulatory Agreement" in Note 5 of Notes to Condensed Financial Statements in Part I, Item 1 of this report), the property tax reduction may reduce future retail rates. The parties to the litigation anticipate that a settlement will be reached pursuant to which the Company will relinquish its claims for retrospective relief provided that the prospective relief provided by the new law is not changed (other than by changes in law affecting taxpayers generally) for a period of three years.
At the Annual Meeting of Shareholders held on May 21, 1996, the shareholders elected all of the directors of the Company, each of whom will serve for the ensuing year or until his or her successor is elected or qualified, as follows:
Votes
Against Broker
Votes and Non-
Director For Withheld Abstentions Votes
-------- --- -------- ----------- -----
O. Mark De Michele 75,109,537 24,635 N/A N/A
Martha O. Hesse 75,109,200 24,717 N/A N/A
Marianne M. Jennings 75,107,402 30,226 N/A N/A
Robert G. Matlock 75,108,532 24,571 N/A N/A
Jaron B. Norberg 75,111,152 22,805 N/A N/A
John R. Norton III 75,109,054 26,222 N/A N/A
William J. Post 75,111,152 22,975 N/A N/A
Donald M. Riley 75,108,861 25,082 N/A N/A
Henry B. Sargent 75,109,620 23,646 N/A N/A
Wilma W. Schwada 75,107,969 30,425 N/A N/A
Richard Snell 75,111,152 23,342 N/A N/A
Dianne C. Walker 75,107,644 30,505 N/A N/A
Ben F. Williams, Jr. 75,106,759 26,463 N/A N/A
Thomas G. Woods, Jr. 75,109,951 27,794 N/A N/A
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As previously reported, pursuant to the Clean Air Act Amendments of 1990, the EPA established a "Grand Canyon Visibility Transport Commission" to complete a study on visibility impairment in the "Golden Circle of National Parks." See "Environmental Matters - EPA Environmental Regulation" in Part I, Item 1 of the 1995 10-K. The Commission completed its study and on June 10, 1996 submitted its final recommendations to EPA. Pursuant to the recommendations, beginning in 2000 and every 5 years thereafter, sulfur dioxide emissions would be measured and if the emissions exceed the projected emissions, which under the current regulatory scheme are expected to decline, EPA would implement a program to limit total sulfur dioxide emissions in the western United States. If such a program were implemented, industry, including the Company's coal plants, could be subject to further emissions limits. The EPA will consider these recommendations before promulgating final requirements. The Company cannot currently predict the outcome of this matter.
See Note 7 of Notes to Condensed Financial Statements in Part I, Item 1 of this report for a discussion of issues regarding the Palo Verde steam generators.
See "Liquidity and Capital Resources" in Part I, Item 2 of this report for a discussion of the Company's construction and financing programs.
See Note 5 of the Notes to Condensed Financial Statements in Part I, Item 1 of this report for a discussion of competition and restructuring issues.
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.1 Amendment No. 3 to Amended and Restated Decommissioning Trust
Agreement (PVNGS Unit 2) dated as of November 1, 1994
15.1 Letter in Lieu of Consent Regarding Unaudited Interim Financial
Information
27.1 Financial Data Schedule
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(b) Reports on Form 8-K
During the quarter ended June 30, 1996, and the period ended August 8, 1996, the Company did not file any reports on Form 8-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
Dated: August 8, 1996 By:Jaron B. Norberg
------------------------ ----------------------------
Jaron B. Norberg
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer
and Officer Duly Authorized
to sign this Report)
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EXHIBIT 10.1
This Amendment No. 3, dated as of June 20, 1996, to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of January 31, 1992, as amended by Amendment No. 1 thereto dated as of November 1, 1992 and Amendment No. 2 thereto dated as of November 1, 1994 (the "Decommissioning Trust Agreement"; terms used herein as therein defined), is entered into between Arizona Public Service Company ("APS"), State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee and as Lessor, and Mellon Bank, N.A., as Decommissioning Trustee ("Decommissioning Trustee").
WHEREAS, the parties hereto wish to amend the investment parameters for the Decommissioning Trust Fund and the Second Fund contained in Exhibit B to the Decommissioning Trust Agreement;
NOW, THEREFORE, in consideration of the premises and of other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Amendment.
Paragraph (l) of Exhibit B to the Decommissioning Trust Agreement is hereby deleted and is replaced in its entirety by the following:
(l) (x) corporate equity securities, including, but not limited to, investment in units of common or collective trust funds investing in corporate equity securities; including, but not limited to, the Decommissioning Trustee's Nuclear Decommissioning Trust Equity Index Fund (the "NDT Equity Index Fund") and (y) obligations not included in clauses (a) through (k) issued or guaranteed by a person controlled or supervised by and acting as an instrumentality of the United States of America pursuant to authority granted by the Congress of the United States of America, including Federal Intermediate Credit Bank, Banks for Cooperatives, Federal Land Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation; provided, that no more than fifty percent (50%) of the aggregate assets of the Funds may be invested in securities described in (x) and (y) of this subparagraph (l) during the period from June 27, 1996 through December 31, 2000, no more than forty percent (40%) during the period from January 1, 2001 through December 31, 2003, no more than thirty percent (30%) during the period from January 1, 2004 through December 31, 2006, and no more than fifteen percent (15%) during the period from January 1, 2007 through January 31, 2010; and provided further that after January 31, 2010, no investments shall be made in such securities.
SECTION 2. Effectiveness.
This Amendment No. 3 shall become effective as of the date hereof upon the execution and delivery of a counterpart of this Amendment No. 3 by each of the parties hereto.
SECTION 3. Miscellaneous
(a) Full Force and Effect.
Except as expressly provided herein, the Decommissioning Trust Agreement shall remain unchanged and in full force and effect. Each reference in the Decommissioning Trust Agreement and in any exhibit or schedule thereto to "this Agreement," "hereto," "hereof" and terms of similar import shall be deemed to refer to the Decommissioning Trust Agreement as amended hereby.
(b) Counterparts.
This Amendment No. 3 may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment No. 3 by signing any such counterpart.
(c) Arizona Law.
This Amendment No. 3 shall be construed in accordance with and governed by the law of the State of Arizona.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3 to the Decommissioning Trust Agreement to be duly executed as of the day and year first above written.
ARIZONA PUBLIC SERVICE COMPANY
MELLON BANK N.A., as
Decommissioning Trustee
STATE STREET BANK AND TRUST COMPANY,
as Owner Trustee under a Trust Agreement with Security
Pacific Capital Leasing Corporation and as Lessor under a
Facility Lease with Arizona Public Service Company
STATE STREET BANK AND TRUST COMPANY,
as Owner Trustee under a Trust Agreement with Emerson
Finance Co. and as Lessor under a Facility Lease with
Arizona Public Service Company
Title Vice President
-----------------------------------------------------
STATE OF ARIZONA )
) ss.
County of Maricopa )
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The foregoing instrument was acknowledged before me this 27th day of June, 1996, by Nancy E. Newquist, the Treasurer of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, on behalf of said corporation.
STATE OF PA )
) ss.
County of Allegheny )
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The foregoing instrument was acknowledged before me this 25th day of June, 1996, by Earl Kleckner, a Trust Officer of MELLON BANK, N.A., a corporation having trust powers, as Decommissioning Trustee, on behalf of said corporation.
STATE OF MASSACHUSETTS )
) ss.
County of Suffolk )
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The foregoing instrument was acknowledged before me this 26th day of June, 1996, by Mark Nelson, the Vice President of STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, in its capacity as Owner Trustee under a Trust Agreement with Security Pacific Capital Leasing Corporation, and as Lessor under a Facility Lease with Arizona Public Service Company, on behalf of said association in such capacities.
STATE OF MASSACHUSETTS )
) ss.
County of Suffolk )
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The foregoing instrument was acknowledged before me this 26th day of June 1996, by Mark Nelson the Vice President of STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, in its capacity as Owner Trustee under a Trust Agreement with Emerson Finance Co., and as Lessor under a Facility Lease with Arizona Public Service Company, on behalf of said association in such capacities.
Exhibit 15.1
August 7, 1996
Arizona Public Service Company
Post Office Box 53999
Phoenix, Arizona 85072-3999
We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim financial information of Arizona Public Service Company for the periods ended June 30, 1996 and 1995, as indicated in our report dated August 1, 1996; because we did not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, is incorporated by reference in Registration Statement Nos. 33-51085, 33-57822, 33-61228, 33-55473, and 33-64455 on Form S-3.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
| ARTICLE UT |
| MULTIPLIER: 1,000 |
| CURRENCY: U.S. DOLLARS |
| PERIOD TYPE | 6 MOS |
| FISCAL YEAR END | DEC 31 1996 |
| PERIOD START | JAN 01 1996 |
| PERIOD END | JUN 30 1996 |
| EXCHANGE RATE | 1 |
| BOOK VALUE | PER BOOK |
| TOTAL NET UTILITY PLANT | 4,633,848 |
| OTHER PROPERTY AND INVEST | 109,493 |
| TOTAL CURRENT ASSETS | 300,451 |
| TOTAL DEFERRED CHARGES | 1,346,801 |
| OTHER ASSETS | 0 |
| TOTAL ASSETS | 6,390,593 |
| COMMON | 178,162 |
| CAPITAL SURPLUS PAID IN | 1,040,194 |
| RETAINED EARNINGS | 383,470 |
| TOTAL COMMON STOCKHOLDERS EQ | 1,601,826 |
| PREFERRED MANDATORY | 66,000 |
| PREFERRED | 173,526 |
| LONG TERM DEBT NET | 1,955,285 |
| SHORT TERM NOTES | 0 |
| LONG TERM NOTES PAYABLE | 0 |
| COMMERCIAL PAPER OBLIGATIONS | 194,265 |
| LONG TERM DEBT CURRENT PORT | 153,643 |
| PREFERRED STOCK CURRENT | 0 |
| CAPITAL LEASE OBLIGATIONS | 0 |
| LEASES CURRENT | 0 |
| OTHER ITEMS CAPITAL AND LIAB | 2,246,048 |
| TOT CAPITALIZATION AND LIAB | 6,390,593 |
| GROSS OPERATING REVENUE | 771,919 |
| INCOME TAX EXPENSE | 81,023 |
| OTHER OPERATING EXPENSES | 510,396 |
| TOTAL OPERATING EXPENSES | 591,419 |
| OPERATING INCOME LOSS | 180,500 |
| OTHER INCOME NET | 15,825 |
| INCOME BEFORE INTEREST EXPEN | 196,325 |
| TOTAL INTEREST EXPENSE | 80,279 |
| NET INCOME | 116,046 |
| PREFERRED STOCK DIVIDENDS | 8,803 |
| EARNINGS AVAILABLE FOR COMM | 107,243 |
| COMMON STOCK DIVIDENDS | 127,500 |
| TOTAL INTEREST ON BONDS | 71,903 |
| CASH FLOW OPERATIONS | 263,609 |
| EPS PRIMARY | 0 |
| EPS DILUTED | 0 |