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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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1996 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, 1996
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
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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 27, 1997 March 27, 1997
- - ---------------------------------------------------------------------------------------------------------------
Common Stock, No Par Value 87,421,397 $2,653,893,267(a)
- - ----------------------------------------------------------------------------------------------------------------
(a) Computed by reference to the closing price on the composite tape on March 27, 1997, 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 21, 1997 are incorporated by
reference into Part III hereof.
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GLOSSARY .....................................................................
PART I .....................................................................
ITEM 1. BUSINESS....................................................
ITEM 2. PROPERTIES.................................................
ITEM 3. LEGAL PROCEEDINGS..........................................
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS...................................
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY...............
PART II ....................................................................
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.....................
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.......................
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
..........................................................
ITEM 9. CHANGES AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........
PART III ....................................................................
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT.................................
ITEM 11. EXECUTIVE COMPENSATION.....................................
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............
PART IV ....................................................................
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K.........................
SIGNATURES...................................................................
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
APB Opinion No. 25 -- Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees"
APS -- Arizona Public Service Company
CC&N -- Certificate of convenience and necessity
Cholla -- Cholla Power Plant
Cholla 4 -- Unit 4 of the Cholla Power Plant
Company -- Pinnacle West Capital Corporation
CUC -- Citizens Utilities Company
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
FASB -- Financial Accounting Standards Board
FERC -- Federal Energy Regulatory Commission
Four Corners -- Four Corners Power Plant
GAAP -- Generally accepted accounting principles
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
SFAS No. 34 -- Statement of Financial Accounting Standards No. 34,
"Capitalization of Interest Cost"
SFAS No. 71 -- Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation"
SFAS No. 123 -- Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation"
SRP -- Salt River Project Agricultural Improvement and Power District
SunCor -- SunCor Development Company
USEC -- United States Enrichment Corporation
Waste Act -- Nuclear Waste Policy Act of 1982, as amended
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, Suite 700, Phoenix, Arizona 85004
(telephone 602-379-2500).
At December 31, 1996, the Company and its subsidiaries employed
approximately 7,588 persons. Of these employees, approximately 6,365 were
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
1,223 were 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.
This document may contain "forward-looking statements" that involve
risks and uncertainties which could cause actual results or outcomes to differ
materially from those expressed in such forward-looking statements. The
following factors are among the factors that could cause actual results to
differ materially from the forward-looking statements: regulatory developments;
competitive developments; regional economic conditions; the cost of debt and
equity capital; regulatory, tax and environmental legislation; weather
variations affecting customer usage; and technological developments in the
electricity industry. See "Business of Arizona Public Service Company --
Competition" in this Item for a discussion of some of these factors as
applicable to APS. Any forward-looking statements should be considered in light
of these factors.
Arizona Corporation Commission Affiliated Interest Rules. On March 14,
1990, the ACC issued an order adopting certain rules purportedly applicable only
to a certain class of public utilities regulated by the ACC, including APS. The
rules define the terms "public utility holding company" and "affiliate" with
respect to public service corporations regulated by the ACC in such a manner as
to include the Company and all of the Company's non-public service corporation
subsidiaries. By their terms, the rules, among other things, require public
utilities, such as APS, to receive ACC approval prior to (1) obtaining an
interest in, or guaranteeing or assuming the liabilities of, any affiliate not
regulated by the ACC; (2) lending to any such affiliate (except for short-term
loans in an amount less than $100,000); or (3) using utility funds to form a
subsidiary or divest itself of any established subsidiary. The rules also would
prevent a utility from transacting business with an affiliate unless the
affiliate agrees to provide the ACC "access to the books and records of the
affiliate to the degree required to fully audit, examine or otherwise
investigate transactions between the public utility and the affiliate." In
addition, the rules provide that an "affiliate or holding company may not divest
itself of, or otherwise relinquish control of, a public utility without thirty
(30) days prior written notification to the [ACC]" and would require all public
utilities subject to them and all public utility holding companies to annually
"provide the [ACC] with a description of diversification plans for the current
calendar year that have been approved by the Boards of Directors." The order
became effective as to APS on December 1, 1992. The rules have not had, nor does
the Company expect the rules to have, a material adverse impact on the business
or operations of the Company.
BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
Following is a discussion of the business of APS, the Company's 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). The Company owns all of the outstanding shares
of APS' common stock.
APS is Arizona's largest electric utility, with 738,000 customers, and
provides wholesale or retail electric service to the entire state of Arizona
with the exception of Tucson and about one-half of the Phoenix area. During
1996, no single purchaser or user of energy accounted for more than 3% of total
electric revenues. At December 31, 1996, APS employed 6,365 people, which
includes employees assigned to joint projects where APS is project manager.
Competition
Retail
General. Under current law, APS is not in direct competition with any other
regulated electric utility for electric service in APS' retail service
territory. Nevertheless, APS is subject to varying degrees of competition in
certain territories adjacent to or within areas that it serves that 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).
APS faces competitive challenges from low-cost hydroelectric power and
natural gas fuel, as well as the access of some utilities to preferential
low-priced federal power and other subsidies. In addition, some customers,
particularly industrial and large commercial, may own and operate facilities to
generate their own electric energy requirements. Such facilities may be operated
by the customers themselves or by other entities engaged for such purpose. The
legislatures and/or the regulatory commissions in most states have considered or
are considering "retail wheeling." This requirement to transmit directly to
retail customers could have the result of allowing retail customers to choose to
purchase electric capacity and energy from the electric utility in whose service
area they are located or from other electric utilities or independent power
producers or power marketers.
ACC Rules Regarding Arizona Electric Industry Restructuring. The ACC Staff
has been conducting an ongoing investigation into the restructuring of the
Arizona electric industry in an open competition docket involving many parties.
In December 1996, the ACC adopted Rules for introduction of retail electric
competition in Arizona in phases from 1999 through 2003. The Rules establish a
framework for introducing competition; however, with respect to certain matters,
they also contain requirements for further workshops and ACC consideration prior
to implementation. Recommendations to the ACC from the workshops are expected in
late 1997. The Rules indicate that the ACC will allow recovery of unmitigated
stranded costs, but do not set forth the mechanisms for determining or
recovering such costs. APS believes that state legislation will ultimately be
required before significant implementation of retail electric competition can
lawfully occur in Arizona and intends to continue vigorously pursuing its
interest. See Note 2 of Notes to Consolidated Financial Statements in Item 8 for
further discussion of these Rules and of the lawsuits filed by APS challenging
certain provisions of the Rules.
Wholesale
General. APS competes with other utilities, power marketers, and
independent power producers in the sale of electric capacity and energy in the
wholesale market. APS expects that competition to sell capacity will remain
vigorous, and that wholesale prices will remain depressed for at least the next
several years due to increased competition and surplus capacity in the western
United States. APS' rates for wholesale power sales and transmission services
are
subject to regulation by the FERC. During 1996, approximately 6% of APS'
electric operating revenues resulted from such sales and charges.
The National Energy Policy Act of 1992 (the "Energy Act") has promoted
increased competition in the wholesale electric power markets. The Energy Act
reformed provisions of the Public Utility Holding Company Act of 1935 (the "1935
Act") and the Federal Power Act to remove certain barriers to competition for
the supply of electricity. For example, the Energy Act permits the FERC to order
transmission access for third parties to transmission facilities owned by
another entity so that independent suppliers and other third parties can sell at
wholesale to customers wherever located. The Energy Act does not, however,
permit the FERC to issue an order requiring transmission access to retail
customers.
Effective July 9, 1996, a FERC decision requires all electric utilities
subject to the FERC's jurisdiction to file transmission tariffs which provide
competitors with access to transmission facilities comparable to the
transmission owners' facilities for wholesale transactions, establishes
information requirements and provides recovery for certain wholesale stranded
costs. Retail stranded costs resulting from a state-authorized retail
direct-access program are the responsibility of the states, unless a state lacks
authority to impose rates to recover such costs in which case FERC will consider
doing so. APS has filed its revised open access tariff in accordance with this
decision. APS does not believe that this decision will have a material adverse
impact on its results of operations or financial position.
Federal Regulation
Several electric utility reform bills have been introduced during the
current legislative session, which as currently written, would allow consumers
to choose their electric supplier by 2000 or 2003. These bills, other bills that
are expected to be introduced and ongoing discussions at the federal level
suggest a wide range of opinion that will need to be narrowed before any
substantial restructuring of the electric utility industry can occur.
Regulatory Assets
APS' major regulatory assets are rate synchronization cost deferrals and
deferred taxes. These items, combined with miscellaneous regulatory assets and
liabilities, amounted to approximately $1.1 billion at December 31, 1996. In
accordance with a 1996 regulatory agreement between APS and the ACC Staff, the
ACC accelerated the amortization of substantially all of APS' regulatory assets
to an eight-year period beginning July 1, 1996. APS' existing regulatory orders
and current regulatory environment support its accounting practices related to
regulatory assets. If rate recovery of these assets is no longer probable,
whether due to competition or regulatory action, APS would no longer be able to
apply the provisions of SFAS No. 71 to all or some part of its operations which
could have a material impact on APS' financial statements. See Notes 1, 2, and 9
of Notes to Financial Statements in Item 8 for additional information.
Competitive Strategies
APS is pursuing strategies to maintain and enhance its competitive
position. These strategies include (i) cost management, with an emphasis on the
reduction of variable costs (fuel, operations, and maintenance expenses) and on
increased productivity through technological efficiencies; (ii) a focus on APS'
core business through customer service, distribution system reliability,
business segmentation and the anticipation of market opportunities; (iii) an
emphasis on good regulatory relationships; (iv) asset maximization (e.g., higher
capacity factors and lower forced outage rates); (v) strengthening APS' capital
structure and financial condition; (vi) leveraging core competencies into
related areas, such as energy management products and services; and (vii)
building a trading floor and implementing a risk management program to provide
for more stability of prices and the ability to retain or grow incremental
margin through more competitive pricing and risk management. Underpinning APS'
competitive strategies are the strong growth characteristics of APS' service
territory. As competition in the electric utility industry continues to evolve,
APS will continue to pursue strategies to enhance its competitive position.
Generating Fuel and Purchased Power
Generating Fuel and Purchased Power Costs
Fuel and purchased power costs were approximately $326 million during 1996,
a 20.7% increase over 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations" in Item
7 for a discussion of the factors contributing to this increase.
1996 Energy Mix
APS' sources of energy during 1996 were: purchased power - 17.1; coal -
43.9; nuclear - 35.4; and other - 3.6%.
Generating Fuel Mix
Coal, nuclear, gas and other contributions to total net generation of
electricity by APS in 1996, 1995 and 1994, 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
---------- ---- ---------- ---- ---------- ---- ---------- ---- ----
1996 52.5% $14.83 42.7% $5.20 4.3% $38.43 0.5% $11.46 $11.72
(estimate)
1995 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
Other includes oil and hydro generation.
Coal Supply
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
0.73%, 0.60% and 0.44%, respectively. In 1996, average prices paid for coal
supplied from reserves dedicated under the existing contracts increased as a
result of power market conditions that changed the mix of coal. 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 -- Plant Sites Leased from Navajo Nation" 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 11 of Notes to
Consolidated Financial Statements in Item 8 for information regarding APS'
obligation for coal mine reclamation.
Natural Gas Supply
APS is a party to contracts with forty natural gas operators and marketers
which allow APS to purchase natural gas in the method it determines to be most
economic. During 1996, the principal sources of APS' natural gas generating fuel
were twenty of these companies. APS is currently purchasing the majority of its
natural gas requirements from fifteen companies pursuant to contracts. During
1996 the price of natural gas increased primarily due to a significant increase
in the transportation costs as well as increased natural gas prices. 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.
Nuclear Fuel Supply
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.
Spent Nuclear Fuel and Waste Disposal. 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,
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. In July 1996, the United States Court of Appeals for the
District of Columbia Circuit ruled that the DOE has an obligation to start
disposing of spent nuclear fuel no later than January 31, 1998. By way of letter
dated December 17, 1996, DOE informed contract holders, including APS, that DOE
anticipates that it will be unable to begin acceptance of spent nuclear fuel for
disposal in a repository or interim storage facility by January 31, 1998.
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 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 2002, 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 2002, subject to obtaining any required governmental approvals.
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 2002.
A new low-level waste facility was built in 1995 on-site which could store
an amount of waste equivalent to ten years of normal operation at Palo Verde.
Although some low-level waste has been stored on-site, APS is currently shipping
low-level waste to off-site facilities. 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.
Purchased Power Agreements
In addition to that available from its own generating capacity (see
"Properties" in Item 2), 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. The generating capacity
available to APS pursuant to the contract was 305 MW through May 1996, at which
time the capacity decreased to 297 MW. In 1996, APS received approximately
557,998 MWh of energy under the contract and paid approximately $35 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 APS sold Cholla 4 to PacifiCorp. 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 (380 megawatts). APS also had the option
to convert these firm system sales to one-for-one seasonal capacity exchanges
with PacifiCorp. APS' agreements with PacifiCorp currently provide for the
following Company purchases and one-for-one seasonal capacity exchanges during
the indicated years: 1997 (175 megawatt firm capacity purchase; and 100 megawatt
capacity exchange effective May 15, 1997); 1998 (175 megawatt firm capacity
purchase, converting to capacity exchange in the summer of 1998; and 100
megawatt capacity exchange); 1999 and beyond (275 megawatt capacity exchange;
and 205 megawatt capacity exchange beginning in the summer of 1999). In 1996,
the generating capacity available to APS from PacifiCorp was 175 MW. APS
received approximately 404,000 MWh of energy and paid approximately $18.5
million for capacity availability and the energy received.
During 1996, APS entered into an agreement with Citizens Utilities Company
to build, own, operate and maintain a combustion turbine in northwest Arizona.
Pursuant to a twenty-year purchase power agreement, APS will recover the cost of
the turbine and CUC will pay for the output requested by CUC. APS has the right
to secondary use of the output for cost of fuel and variable operations and
maintenance. APS expects that the combustion turbine will be in service during
the first quarter of 1999.
Construction Program
During the years 1994 through 1996, APS incurred approximately $824 million
in capitalized expenditures. Utility capitalized expenditures for the years 1997
through 1999 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 1997 through
1999 have been estimated as follows:
(Millions of Dollars)
By Year By Major Facilities
- - --------------------------------------- --------------------------------------
1997 $296 Electric generation $267
1998 283 Electric transmission 64
1999 262 Electric distribution 412
$841 General facilities 98
==== ----
$841
====
The amounts for 1997 through 1999 exclude capitalized interest costs and
include capitalized property taxes and about $30 million each year for nuclear
fuel. APS conducts a continuing review of its construction program.
Mortgage Replacement Fund Requirements
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 1996, the replacement fund requirement amounted to
approximately $129 million. All of the bonds issued by APS under the Mortgage
which are callable prior to maturity 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.
Environmental Matters
EPA Environmental Regulation
Clean Air Act. 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 $470 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 is 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 December 1996, the EPA issued
rules for nitrogen oxides emissions limitations, which may require APS to
install additional pollution control equipment at Four Corners by January 1,
2000. Based on its initial evaluation, APS currently estimates its capital cost
of complying with the rules may be approximately $4 million. On February 14,
1997, APS filed a Petition for Review in the United States Court of Appeals for
the District of Columbia challenging the classification of Four Corners Unit 4
in these rules. Arizona Public Service Company v. United States Environmental
Protection Agency, No. 97-1091.
With respect to protection of visibility in certain specified areas, the
Amendments require the EPA to conduct a study 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 on visibility
impairment in the "Golden Circle of National Parks" in the Colorado Plateau.
NGS, Cholla and Four Corners are located near the "Golden Circle of National
Parks." The Commission completed its study and on June 10, 1996 submitted its
final recommendations to the EPA. The Commission recommended that, beginning in
2000 and every 5 years thereafter, if actual sulfur dioxide emissions from all
stationary sources in an eight-state region (including Arizona, New Mexico,
Utah, Nevada and California) exceed the projected emissions, which are projected
to decline under the current regulatory scheme, the projected total emissions
will be changed to a "regional emissions cap" and an emissions trading program
would be implemented to limit total sulfur dioxide emissions in the region. The
EPA will consider these recommendations before promulgating final requirements
on a regional haze regulatory program which is under EPA review (see "Air
Quality Standards" below), which is expected by December 1997. If such a program
were implemented, industry, including APS' coal plants, could be subject to
further emissions limits. 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 by 1999
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 or results of operations.
Superfund. The Comprehensive Environmental Response, Compensation, and
Liability Act ("Superfund") establishes liability for the cleanup of hazardous
substances found contaminating the soil, water or air. Those who generated,
transported or disposed of hazardous substances at a contaminated site are among
those who are potentially responsible parties ("PRP's") and may be each
strictly, and often jointly and severally, liable for the cost of any necessary
remediation of the substances. The EPA had previously advised APS that the EPA
considers APS to be a PRP in the Indian Bend Wash Superfund Site, South Area,
where APS' Ocotillo Power Plant is located. APS is in the process of conducting
a voluntary investigation to determine the extent and scope of contamination at
the plant site. Based on the information to date, APS does not expect this
matter to have a material impact on its financial position or results of
operations.
Air Quality Standards. In December 1996, the EPA proposed revised National
Ambient Air Quality Standards ("NAAQS") for ozone and particulate matter, and
related implementing regulations. The comment period for the proposed NAAQS
rules ended on March 12, 1997, and the final rules are expected by July 1997.
The EPA is also expected to propose rules to deal with regional haze by June
1997, and final rules are expected by December 1997. Due to these standards APS
could be required to install additional pollution control equipment at certain
of its plants. APS cannot currently estimate the capital expenditures, if any,
which may be required as a result of the final rules.
MGP Sites. APS currently is investigating properties, either presently or
previously owned by APS, which were at one time sites of, or sites associated
with, manufactured gas plants. The purpose of this investigation is to determine
if waste materials are present, if such materials constitute an environmental or
health risk, and if APS has any responsibility for remedial action. Where
appropriate, APS has begun remediation of certain of these sites. APS does not
expect these matters to have a material adverse effect on its financial position
or results of operations.
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.
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 material adverse impact on
its financial position or results of operations.
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, development, and sale 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 150 persons. Resort Management,
which manages the Wigwam Resort and Country Club (the "Wigwam") golf and other
operations, employs between 525 and 760 persons at the Wigwam, depending on the
Wigwam's operating season. Resort Management also operates golf and other
operations which employ approximately 315 persons.
Effective January 1, 1996, SunCor's homebuilding subsidiary, SunCor Homes,
Inc., purchased the assets of Golden Heritage Homes. Subsequent to December 31,
1996, SunCor Homes, Inc. changed its name to Golden Heritage Homes, Inc.
Beginning in 1996, the financial statements of SunCor reflect the acquisition of
Golden Heritage Homes.
SunCor's projects consist primarily of land and improvements and other real
estate investments. SunCor acquired 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,
350 acres as a planned area development, known as Litchfield Greens, and a 130-
unit apartment complex known as the Palm Valley Apartments.
SunCor's projects under development also include acquisition of 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. In
1996, SunCor acquired an option to develop a 21,000 acre master-planned
community as a joint venture in Santa Fe, New Mexico called Rancho Viejo. The
initial 2,500 acres are under development.
For the years ended December 31, 1996, 1995, and 1994, SunCor's operating
revenues were approximately $99.5 million, $54.8 million, and $59.3 million,
respectively, and its income was approximately $4.2 million, $4.1 million, and
$0.5 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 $61 million, $43 million, and $55
million for 1997, 1998, and 1999, respectively.
At December 31, 1996, SunCor had total assets of approximately $441
million. See Note 5 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 homebuilding and the development of
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 totaling
approximately $7.5 million at December 31, 1996. El Dorado has remaining funding
commitments in the aggregate amount of approximately $2.5 million in 1997. In
addition to the foregoing investments, at December 31, 1996, El Dorado had
direct investments of approximately $19.8 million in other private and public
companies and partnerships.
For the years ended December 31, 1996, 1995, and 1994, El Dorado's income
(losses) were approximately $0.4 million, $8.5 million, and ($4.0 million),
respectively. At December 31, 1996, El Dorado had total assets of approximately
$38.8 million.
ITEM 2. PROPERTIES
Accredited Capacity
APS' present generating facilities have an accredited capacity aggregating
4,026,700 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.................. 1,091,600
=========
Other.................................................................................... 5,600
=========
- - ---------------
(1) West Phoenix steam units (108,300 kW) are currently mothballed.
- - -----------------------------------------------------
Reserve Margin
APS' peak one-hour demand on its electric system was recorded on July 31,
1996 at 4,574,700 kW, compared to the 1995 peak of 4,420,400 kW recorded on July
28. 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 31, 1996, computed in accordance with accepted
industry practices, amounted to 4,680,300 kW, for an installed reserve margin of
2.7%. The power actually available to APS from its resources fluctuates from
time to time due in part to
planned outages, technical problems and short-term purchases. The available
capacity from sources actually operable at the time of the 1996 peak amounted to
4,909,300 kW, for a margin of 8.5%. Firm purchases from neighboring utilities
totaling 650,000 kW were in place at the time of the peak ensuring the ability
to meet the load requirement.
Plant Sites Leased from Navajo Nation
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. 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 that would settle certain issues
regarding this waiver and other matters, including the computation of royalties
due on the sales of coal and possessory interest taxes paid by the fuel supplier
to Four Corners. If this settlement is consummated, the fuel supplier, the
Navajo Nation and the Four Corners participants would agree as a part of their
settlement to restructure their relationships in an effort to permit the power
and energy generated at Four Corners to be priced competitively. APS cannot
currently predict the outcome of these settlement negotiations. Certain of APS'
transmission lines and almost all of its contracted coal sources are also
located on Indian reservations. See "Business of Arizona Public Service Company
- - -- Generating Fuel and Purchased Power -- Coal Supply" in Item 1.
Palo Verde Nuclear Generating Station
Palo Verde Leases
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 9 of
Notes to Consolidated Financial Statements in Item 8).
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.
Nuclear Decommissioning Costs
See Note 12 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 11 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 11 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.
Other Information Regarding APS' Properties
See "Business of Arizona Public Service Company -- Environmental Matters"
and " -- Water Supply" in Item 1 with respect to matters having possible impact
on the operation of certain of APS' power plants.
See "Business of Arizona Public Service Company -- Construction Program" in
Item 1 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Needs and Resources" in Item 7 for a discussion
of APS' construction plans.
See Notes 5, 9 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.
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.
[MAP PAGE]
In accordance with Item 304 of Regulation S-T of the Securities Exchange
Act of 1934, APS' Service Territory map contained in this Form 10-K is a map of
the State of Arizona showing APS' service area, the location of its major power
plants and principal transmission lines, and the location of transmission lines
operated by APS' for others. The major power plants shown on such map are the
Navajo Generating Station located in Coconino County, Arizona; the Four Corners
Power Plant located near Farmington, New Mexico; the Cholla Power Plant, located
in Navajo County, Arizona; the Yucca Power Plant, located near Yuma, Arizona;
and the Palo Verde Nuclear Generating Station, located about 55 miles west of
Phoenix, Arizona (each of which plants is reflected on such map as being jointly
owned with other utilities), as well as the Ocotillo Power Plant and West
Phoenix Power Plant, each located near Phoenix, Arizona, and the Saguaro Power
Plant, located near Tucson, Arizona. APS' major transmission lines shown on such
map are reflected as running between the power plants named above and certain
major cities in the State of Arizona. The transmission lines operated for others
shown on such map are reflected as running from the Four Corners Plant through a
portion of northern Arizona to the California border.
ITEM 3. LEGAL PROCEEDINGS
APS
Property Taxes
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). On April 23,
1996, the parties reached an agreement to settle the litigation and on July 18,
1996, the Governor signed a new Arizona property tax law that reduced the
aggregate property tax of APS by approximately $18 million (before income taxes)
in 1996, with slightly lower amounts expected in future years. Under the formula
for potential future rate reduction pursuant to the 1996 regulatory agreement
(see "1996 Regulatory Agreement" in Note 2 of Notes to Financial Statements in
Item 8 of this report), the property tax reduction is expected to reduce future
retail rates. The parties to the litigation have reached a settlement pursuant
to which APS 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.
See "Business of Arizona Public Service Company -- Environmental Matters"
and "-- Water Supply" in Item 1 in regard to pending or threatened litigation
and other disputes. See "Regulatory Matters" in Note 2 of Notes to Financial
Statements in Item 8 for information regarding lawsuits filed by APS challenging
certain provisions of rules adopted by the ACC for the phased-in introduction of
retail electric competition in Arizona (Arizona Public Service Company v. The
Arizona Corporation Commission, in the Superior Court of the State of Arizona in
and for the County of Maricopa, No. CV97-03753, and Arizona Public Service
Company v. The Arizona Corporation Commission, in the Court of Appeals, State of
Arizona, Division One, No. 1 CA-CC-97-0002, ACC Docket No. R-0000-94-165).
Pinnacle West
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. 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 that, among other matters, partially
dismissed the RTC litigation described above. Two non-settling individuals who
pursued independent claims against the RTC were not dismissed from the RTC
litigation.
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 13, 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. On
February 3, 1997, the
Arizona district court granted summary judgment in favor of the Company and
ordered the dismissal of this third-party complaint with prejudice. On February
18, 1997, the Company filed a motion with the court requesting entry of a
judgment and order of dismissal with prejudice and requesting certification of
the judgment as final. It is not presently known whether the plaintiffs will
seek to appeal the court's ruling. The Company believes that it has no
obligation with respect to any costs or damages with respect to this matter.
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. On October 4, 1996, the plaintiff filed a motion to amend its
complaint to broaden the factual basis for its claims under theories of
securities fraud, racketeering and consumer fraud. That motion is under
consideration. On January 15, 1997, the Company filed a motion for summary
judgment on the consumer fraud claim. That motion is also under consideration.
The Company intends to vigorously defend itself in this action.
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 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 filed a motion for reconsideration which
was denied. The plaintiff has appealed the dismissal to the Ninth Circuit Court
of Appeals. That appeal remains under consideration. The Company intends to
vigorously defend itself in this action.
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 plaintiff's state securities law claims.
The plaintiff sought unspecified compensatory and punitive damages and requested
that the compensatory damages be trebled under the Arizona Racketeering Act. On
December 10, 1996, the parties executed a settlement agreement and mutual
release in full and final settlement of this litigation. Settlement funds in an
amount not material to the Company have been paid to plaintiff. The parties have
filed a joint stipulation for dismissal with prejudice of the lawsuit. A formal
order dismissing the lawsuit has not yet been issued by the court.
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. On April 12, 1996, the court granted the
Company's motion for summary judgment and dismissed plaintiffs' claims with
prejudice. On May 13, 1996, plaintiffs filed a notice of appeal to the Ninth
Circuit Court of Appeals. The appeal has been fully briefed and the court has
scheduled oral argument for May 5, 1997. The Company intends to vigorously
defend itself in this action.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report, through the solicitation of
proxies or otherwise.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY
The Company's executive officers are as follows:
Age at March 1,
---------------
Name 1997 Position(s) at March 1, 1997
- - ---- ---- ----------------------------
Michael S. Ash 43 Corporate Counsel
Arlyn J. Larson 62 Vice President of Corporate Planning and
Development
Nancy E. Felker 45 Vice President and Treasurer
William J. Post 46 President
George A. Schreiber, Jr. 48 Executive Vice President and Chief Financial Officer
Richard Snell 66 Chairman of the Board of Directors and Chief
Executive Officer
Faye Widenmann 48 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. Felker was elected Treasurer in June 1990 and as a Vice President
in February 1994. Ms. Felker also serves as Treasurer of APS, a position she was
elected to in June 1993 after serving as Assistant Treasurer of APS since
December 1992.
Mr. Post was elected President of the Company effective February 5,
1997 after having served as its Executive Vice President since June 1995. He has
also been the President and Chief Executive Officer of APS since February 1997.
He had been APS' Chief Operating Officer since September 1994, as well as a
Senior Vice President since June 1993. Prior to the time, he had served as a
Vice President of APS since 1982. Mr. Post is also a director of APS.
Mr. Schreiber was elected to the positions of Executive Vice President
and Chief Financial Officer of both the Company and APS effective February 3,
1997. From 1990 to January 1997, he was Managing Director at PaineWebber, Inc.
He is also a director of APS.
Mr. Snell has been Chairman of the Board and Chief Executive Officer of
the Company and Chairman of the Board of APS since February 1990. Until February
1997, he was also President of the Company. Mr. Snell is also a director of
Aztar Corporation, Banc One Arizona Corporation and Central Newspapers, Inc.
Ms. Widenmann was elected Secretary of the Company in 1985 and Vice
President of Corporate Relations and Administration in November 1986.
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 12, 1997,
the Company's common stock was held of record by approximately 50,000
shareholders.
The chart below sets forth the common stock price ranges on the
composite tape, as reported in the Wall Street Journal for 1996 and 1995. The
chart also sets forth the dividends declared and paid per share during each of
the four quarters for 1996 and 1995.
Common Stock Price Ranges and Dividends
- - --------------------------------------------------------------------------------
Dividend
1996 High Low Per Share(a)
- - --------------------------------------------------------------------------------
1st Quarter 30 1/4 26 1/4 .25
2nd Quarter 30 3/8 26 1/4 .50
3rd Quarter 30 28 .275
4th Quarter 32 1/4 29 1/2 0
- - --------------------------------------------------------------------------------
1995
- - --------------------------------------------------------------------------------
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
- - --------------------------------------------------------------------------------
(a) Dividends for the third quarter were declared in June and
dividends for the fourth quarter were declared in
September.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands, Except Per Share Amounts) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Operating Results
Operating revenues
Electric $ 1,718,272 $ 1,614,952 $ 1,626,168 $ 1,602,413 $ 1,587,582
Real estate 99,488 54,846 59,253 32,248 19,959
Income from continuing operations (a) $ 211,059(b) $ 199,608 $ 200,619(c) $ 169,978 $ 150,440
Income (loss) from discontinued
operations - net of income tax (9,539)(d) -- -- -- 6,000(d)
Extraordinary charge for early
retirement of debt - net of income tax (e) (20,340) (11,571) -- -- --
Cumulative effect of change in
accounting for income taxes (f) -- -- -- 19,252 --
------------ ------------ ------------ ------------ ------------
Net income $ 181,180 $ 188,037 $ 200,619 $ 189,230 $ 156,440
============ ============ ============ ============ ============
Common Stock Data
Book value per share - year-end $ 22.51 $ 21.49 $ 20.32 $ 18.87 $ 17.00
Earnings (loss) per average common
share outstanding
Continuing operations $ 2.41(b) $ 2.28 $ 2.30(c) $ 1.95 $ 1.73
Discontinued operations (0.11) -- -- -- 0.07
Extraordinary charge (0.23) (0.13) -- -- --
Accounting change -- -- -- 0.22 --
------------ ------------ ------------ ------------ ------------
Total $ 2.07 $ 2.15 $ 2.30(c) $ 2.17 $ 1.80
============ ============ ============ ============ ============
Dividends declared per share (g) $ 1.025 $ 0.925 $ 0.825 $ 0.200 $ --
Average common shares outstanding 87,441,515 87,419,300 87,410,967 87,241,899 87,044,180
Total Assets $ 6,989,289 $ 6,997,052 $ 6,909,752 $ 6,956,799 $ 6,270,476
============ ============ ============ ============ ============
Liabilities and Equity
Long-term debt less current maturities $ 2,372,113 $ 2,510,709 $ 2,588,525 $ 2,633,620 $ 2,774,305
Other liabilities 2,428,180 2,336,695 2,276,249 2,282,508 1,620,250
------------ ------------ ------------ ------------ ------------
4,800,293 4,847,404 4,864,774 4,916,128 4,394,555
Minority interests
Non-redeemable preferred stock of APS 165,673 193,561 193,561 193,561 168,561
Redeemable preferred stock of APS 53,000 75,000 75,000 197,610 225,635
Common stock equity 1,970,323 1,881,087 1,776,417 1,649,500 1,481,725
------------ ------------ ------------ ------------ ------------
Total $ 6,989,289 $ 6,997,052 $ 6,909,752 $ 6,956,799 $ 6,270,476
============ ============ ============ ============ ============
(a) Includes after-tax Palo Verde Unit 3 accretion income in 1994, 1993 and
1992 of approximately $20.3 million, $45.3 million and $40.7 million,
respectively.
(b) Includes an after-tax charge of $18.9 million ($0.22 per share) for a
voluntary severance program and approximately $12 million ($0.13 per share)
of income tax benefits related to capital loss carryforwards.
(c) Includes a non-recurring income tax benefit of $26.8 million ($0.31 per
share) related to a change in tax law.
(d) In 1996 settlement of a legal matter; and in 1992, tax benefits associated
with MeraBank, a Federal Savings Bank.
(e) Charges associated with the repayment or refinancing of the parent
company's high-coupon debt.
(f) Results of the adoption of the liability method of accounting for income
taxes.
(g) In October 1993, the Board of Directors declared a quarterly dividend on
common stock, which was previously suspended in October 1989.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion relates to Pinnacle West and its subsidiaries: APS,
SunCor and El Dorado. The discussion also relates to the discontinued operations
of MeraBank, A Federal Savings Bank.
Capital Needs and Resources
Parent Company
The parent company reduced its debt by approximately $60 million, $120 million
and $134 million in 1996, 1995 and 1994, respectively. An existing line of
credit and the remaining 11.61% debentures were replaced in 1996 with $50
million of senior notes and a $225 million line of credit under which borrowings
of $200 million were outstanding at December 31, 1996. Extraordinary charges of
$20.3 million after income taxes were incurred in the repayment and refinancing
of parent company debt in 1996. The parent company does not have any debt
repayment obligations until 2001.
During the past three years, the parent company's primary cash needs
were for common stock dividends, interest payments and optional and mandatory
repayment of principal on its long-term debt (see Note 5 of Notes to
Consolidated Financial Statements). As provided in the 1996 regulatory agreement
(see Note 2 of Notes to Consolidated Financial Statements), the parent company
invested $50 million in APS in 1996 and will invest similar amounts annually in
1997 through 1999. In March 1997, the Board of Directors approved a program for
the repurchase of up to $80 million of the Company's common stock in 1997.
Dividends from APS have been Pinnacle West's primary source of cash.
SunCor provided cash in 1996, as did SunCor and El Dorado in 1995, and both are
expected to contribute to Pinnacle West's cash flow in 1997. Tax allocations
within the consolidated group have been additional sources of cash.
APS
During 1996, APS redeemed approximately $223 million of long-term debt and
preferred stock. Required and optional redemptions of preferred stock and
repayments of long-term debt, including premiums thereon, and payments for a
capitalized lease obligation are expected to total approximately $222 million,
$114 million and $114 million for the years 1997, 1998 and 1999, respectively.
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, external financings and the annual equity infusions from the parent
company of $50 million from 1997 through 1999.
Present construction plans through the year 2006 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, for upgrading existing facilities and for environmental purposes.
Capital expenditures are anticipated to be approximately $296 million, $283
million and $262 million for 1997, 1998 and 1999, respectively. These amounts
include about $30 million each year for nuclear fuel.
During the period 1994 through 1996, APS funded all capital
expenditures with funds from operations. APS expects to have adequate resources
to meet its capital requirements for the period 1997 through 1999.
Although provisions in APS' bond indenture, articles of incorporation
and Arizona Corporation Commission (ACC) financing orders establish maximum
amounts of additional first mortgage bonds and preferred stock that APS may
issue, management does not expect any of these provisions to limit APS' ability
to meet its capital requirements.
As of December 31, 1996, APS had credit commitments from various banks
totaling approximately $400 million, which were available either to support the
issuance of commercial paper or to be used as bank borrowings. At the end of
1996, there were $16.9 million of commercial paper and $100 million of bank
borrowings outstanding.
Non-Utility Subsidiaries
During the past three years, SunCor and El Dorado together funded all of their
operations through cash flow from operations and their own 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 $61 million, $43 million and $55 million for 1997, 1998
and 1999, respectively. Capital resources available to meet these requirements
include funds provided by operations and SunCor's own external financings.
During 1996, SunCor refinanced existing lines of credit and mortgage
bonds with a new $100 million bank financing, consisting of a $55 million line
of credit under which $42 million was outstanding at December 31, 1996, and a
$45 million term loan. SunCor has debt obligations of $3 million, $5 million and
$29 million due in 1997, 1998 and 1999, respectively.
Results of Operations
1996 Compared with 1995
Pinnacle West reported net income of $181.2 million in 1996 compared with $188.0
million in 1995. The following table summarizes the comparisons:
(Thousands of Dollars) 1996 1995
---- ----
Income from continuing
operations $ 211,059 $ 199,608
Loss from discontinued
operations -
net of income tax (9,539) --
Extraordinary charge for early
retirement of debt - net of
income tax (20,340) (11,571)
------------ ------------
Net income $ 181,180 $ 188,037
============ ============
The 1996 loss on discontinued operations related to the remnants of
MeraBank legal matters. Earnings improvement from continuing operations is
primarily due to increased earnings at APS and lower interest expense at the
parent company resulting from debt reduction and lower interest rates.
APS earnings in 1996 were $226.4 million compared with $220.4 million
in 1995. Earnings increased primarily due to increased operating revenues, lower
property taxes, the recognition of $12 million of income tax benefits associated
with capital loss carryforwards and lower interest expense. The comparison of
1996 to 1995 was also positively impacted by asset write-downs of $21 million
before income taxes in 1995. Operating revenues were higher due to increased
sales resulting from customer growth, warmer weather in 1996 and higher usage,
particularly by residential customers. Property taxes decreased primarily due to
a change in tax law. Interest expense was lower due to lower average interest
rates and lower amounts of debt outstanding.
Partially offsetting these positive factors at APS were $60 million of
accelerated regulatory asset amortization, higher fuel expenses, a pretax charge
of $31.7 million for a voluntary severance program and a retail rate reduction.
Also negatively affecting the comparison of 1996 with 1995 was a gain on the
sale of a small subsidiary in 1995. The accelerated regulatory asset
amortization and the rate reduction were part of a regulatory agreement which
became effective July 1, 1996 (see Note 2 of Notes to Consolidated Financial
Statements). Fuel expenses were up primarily due to higher natural gas costs,
increased retail sales and higher coal prices. 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.
SunCor reported net income of $4.2 million in 1996 compared with $4.1
million in 1995. Increased real estate revenues and operating expenses were the
result of the acquisition of Golden Heritage Homes in 1996.
El Dorado reported net income of $0.4 million in 1996 compared to $8.5
million in 1995. The decrease reflects investment sales in 1995.
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
reflected 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, 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. The
accelerated amortization of investment tax credits (ITC's) was a result of a
1994 rate settlement (see Note 2 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 these positive factors 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 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 and
the termination of a sale-leaseback arrangement related to the Wigwam Resort
which was replaced with a management agreement.
El Dorado reported net income of $8.5 million in 1995 compared with a
$4.0 million loss in 1994. The improvement reflects sales in 1995 of investments
and an investment write-down in 1994.
Electric Operating Revenues
Operating revenues reflect changes in both the volume of units sold and price
per kilowatt-hour of electric sales. An analysis of the increases (decreases) in
1996 and 1995 electric operating revenues compared with the prior year follows:
(Millions of Dollars) 1996 1995
Volume variance:
Customer growth
and usage $ 75.1 $ 57.9
Weather 40.1 (42.0)
Other -- (1.7)
Rate reductions (29.7) (11.4)
Interchange sales 8.5 (7.2)
Other 9.3 (6.8)
-------- -------
Total change $ 103.3 $ (11.2)
======== =======
Income Tax Issues
See Note 3 of Notes to Consolidated Financial Statements regarding
accelerated amortization of investment tax credits and the recognition of $26.8
million of income tax benefits in 1994.
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) and accretion income on
Palo Verde Unit 3 (see Consolidated Statements of Cash Flows and Note 1 of Notes
to Consolidated Financial Statements). The after-tax accretion income recorded
in 1994 was $20.3 million. 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 2 of Notes to Consolidated Financial
Statements).
ACCOUNTING MATTERS
See Note 12 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.
CURRENT ISSUES
The Company's ability to maintain and improve its current level of earnings will
depend on several factors. As the electric industry becomes more competitive,
APS' ability to reduce costs and increase productivity and asset utilization
will be an important factor in maintaining a price structure that is both
attractive to customers and profitable to the Company. Other important factors
that could affect the Company's future earnings levels and any forward-looking
statements contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" include regulatory developments;
competitive developments; regional economic conditions; the cost of debt and
equity capital; regulatory, tax and environmental legislation; weather
variations affecting customer usage; and technological developments in the
electricity industry.
Competition
Competition continues to evolve in the electric utility industry. In December
1996, the ACC adopted rules for the introduction of retail electric competition
in Arizona in phases from 1999 through 2003. The Rules establish a framework for
introducing competition; however, with respect to certain matters, they also
contain requirements for further workshops and ACC consideration prior to
implementation. Recommendations to the ACC from the workshops are expected in
late 1997. The Rules indicate that the ACC will allow recovery of unmitigated
stranded costs, but do not set forth the mechanisms for determining or
recovering such costs. Separately, the Arizona legislature established a joint
legislative committee to study retail electric competition and to report to the
legislature by the end of 1997. The Company believes that state legislation will
ultimately be required before significant implementation of retail electric
competition can lawfully occur in Arizona. Additionally, legislation related to
electric competition has been proposed in the U.S. Congress. See Note 2 of Notes
to Consolidated Financial Statements for further discussion of competitive
developments. Until it has been determined how competition will be implemented
in Arizona, the Company cannot accurately predict the impact of full retail
electric competition on its financial position or results of operations.
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' existing regulatory orders and current regulatory
environment support its accounting practices related to regulatory assets, which
amounted to approximately $1.1 billion at December 31, 1996. If rate recovery of
these assets is no longer probable, whether due to competition or regulatory
action, APS would no longer be able to apply the provisions of SFAS No. 71 to
all or some part of its operations which could have a material impact on the
Company's financial statements. See Note 1 of Notes to Consolidated Financial
Statements for additional information on regulatory accounting.
Rate Matters
Pursuant to the price reduction formula in the 1996 regulatory agreement (see
Note 2 of Notes to Consolidated Financial Statements), in March 1997, APS filed
with the ACC its calculation of an annual retail rate reduction of approximately
$18 million ($11 million after income taxes), or 1.2%, to become effective July
1, 1997. The amount and timing of the rate decrease is subject to ACC approval
and, if the ACC orders hearings on the matter, the effective date could be
delayed.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Management........................................................................................
Independent Auditors' Report ...............................................................................
Consolidated Statements of Income for each of the three years in the period ended December 31, 1996.........
Consolidated Balance Sheets -- December 31, 1996 and 1995...................................................
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996.....
Consolidated Statements of Retained Earnings for each of the three years in the period ended December 31,
1996...............................................................................................
Notes to Consolidated Financial Statements..................................................................
Financial Statement Schedule for each of the three years in the period ended December 31, 1996
Schedule II--Valuation and Qualifying Accounts for the years ended December 31,
1996, 1995 and 1994.......................................................................
See Note 13 of Notes to Consolidated Financial Statements for the
selected quarterly financial data required to be presented in this Item.
REPORT OF MANAGEMENT
The primary responsibility for the integrity of the Company's financial
information rests with management, which has prepared the accompanying financial
statements and related information. Such information was prepared in accordance
with generally accepted accounting principles appropriate in the circumstances,
based on 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 control 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 George A. Schreiber, Jr.
Chairman and Chief Executive Officer Executive Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of
Pinnacle West Capital Corporation and its subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of income, retained earnings
and cash flows for each of the three years in the period ended December 31,
1996. Our audits also included the financial statement schedule listed in the
Index at Item 8. These financial statements and the financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule 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, 1996 and 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Phoenix, Arizona
March 5, 1997
PINNACLE WEST CAPITAL CORPORATION
Consolidated Statements of Income
Year ended December 31,
(Dollars in Thousands, Except Per Share Amounts)
1996 1995 1994
---- ---- ----
Operating Revenues
Electric $ 1,718,272 $ 1,614,952 $ 1,626,168
Real estate 99,488 54,846 59,253
------------ ------------ ------------
Total 1,817,760 1,669,798 1,685,421
------------ ------------ ------------
Fuel Expenses
Fuel for electric generation 230,393 208,928 237,103
Purchased power 95,130 60,870 63,586
------------ ------------ ------------
Total 325,523 269,798 300,689
------------ ------------ ------------
Operating Expenses
Utility operations and maintenance 430,714 400,814 411,921
Real estate operations 96,080 50,344 59,789
Depreciation and amortization (Note 1) 299,507 243,989 237,326
Taxes other than income taxes 122,077 142,429 141,926
------------ ------------ ------------
Total 948,378 837,576 850,962
------------ ------------ ------------
OPERATING INCOME 543,859 562,424 533,770
------------ ------------ ------------
Other Income (Deductions)
Allowance for equity funds used during
construction 5,209 4,982 3,941
Palo Verde accretion income (Note 1) -- -- 33,596
Interest on long-term debt (171,458) (209,293) (229,810)
Other interest (23,764) (16,975) (15,185)
Allowance for borrowed funds used
during construction 9,509 9,065 5,442
Preferred stock dividend requirements of APS (17,092) (19,134) (25,274)
Other - net (6,748) (3,496) 17,109
------------ ------------ ------------
Total (204,344) (234,851) (210,181)
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 339,515 327,573 323,589
Income Taxes (Note 3)
Income tax expense 128,456 127,965 149,740
Non-recurring income tax benefit -- -- (26,770)
Total 128,456 127,965 122,970
INCOME FROM CONTINUING OPERATIONS 211,059 199,608 200,619
Loss from Discontinued Operations -
Net of Income Tax of $6,461 (9,539) -- --
Extraordinary Charge for Early Retirement
of Debt - Net of Income Tax of
$13,777 and $7,834 (20,340) (11,571) --
------------ ------------ ------------
NET INCOME $ 181,180 $ 188,037 $ 200,619
============ ============ ============
Average Common Shares Outstanding 87,441,515 87,419,300 87,410,967
Earnings (Loss) Per
Average Common Share Outstanding
Continuing operations $ 2.41 $ 2.28 $ 2.30
Discontinued operations (0.11) -- --
Extraordinary charge (0.23) (0.13) --
------------ ------------ ------------
Total $ 2.07 $ 2.15 $ 2.30
============ ============ ============
Dividends Declared Per Share $ 1.025 $ 0.925 $ 0.825
============ ============ ============
See Notes to Consolidated Financial Statements
PINNACLE WEST CAPITAL CORPORATION
Consolidated Balance Sheets
(Dollars in Thousands)
December 31,
1996 1995
---------- -----------
ASSETS
Current Assets
Cash and cash equivalents $ 26,686 $ 79,539
Customer and other receivables - net 169,237 131,393
Accrued utility revenues (Note 1) 55,470 53,519
Material and supplies (at average cost) 74,120 78,271
Fossil fuel (at average cost) 13,928 21,722
Deferred income taxes (Note 3) 69,688 46,355
Other current assets 41,140 19,671
---------- ----------
Total current assets 450,269 430,470
---------- ----------
Investments and Other Assets
Real estate investments - net 398,527 411,693
Other assets (Note 12) 173,109 151,127
---------- ----------
Total investments and other assets 571,636 562,820
---------- ----------
Utility Plant (Note 5, 9 and 10)
Electric plant in service and held for future use 6,803,211 6,544,860
Less accumulated depreciation and
amortization 2,426,143 2,231,614
---------- ----------
Total 4,377,068 4,313,246
Construction work in progress 226,935 281,757
Nuclear fuel, net of amortization of $63,892 and $68,275 51,137 52,084
---------- ----------
Net utility plant 4,655,140 4,647,087
---------- ----------
Deferred Debits
Regulatory asset for income taxes (Note 3) 516,722 548,464
Rate synchronization cost deferrals (Note 1) 414,082 449,299
Other deferred debits 381,440 358,912
---------- ----------
Total deferred debits 1,312,244 1,356,675
---------- ----------
TOTAL ASSETS $6,989,289 $6,997,052
========== ==========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
Consolidated Balance Sheets
(Dollars in Thousands)
December 31,
1996 1995
---------- ----------
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 184,095 $ 114,963
Accrued taxes 82,413 95,962
Accrued interest 39,652 48,958
Short-term borrowings (Note 4) 16,900 177,800
Current maturities of long-term debt (Note 5) 156,277 8,780
Customer deposits 34,222 32,746
Other current liabilities 37,056 25,284
---------- ----------
Total current liabilities 550,615 504,493
---------- ----------
Long-Term Debt Less Current Maturities (Note 5) 2,372,113 2,510,709
---------- ----------
Deferred Credits and Other
Deferred income taxes (Note 3) 1,359,312 1,327,881
Deferred investment tax credit (Note 3) 74,379 97,897
Unamortized gain - sale of utility plant 86,939 91,514
Other 356,935 314,910
---------- ----------
Total deferred credits and other 1,877,565 1,832,202
---------- ----------
Commitments and Contingencies (Note 11)
Minority Interests (Note 6)
Non-Redeemable preferred stock of APS 165,673 193,561
---------- ----------
Redeemable preferred stock of APS 53,000 75,000
---------- ----------
Common Stock Equity (Note 7)
Common stock, no par value; authorized
150,000,000 shares; issued and
outstanding 87,515,847 in 1996 and 1995 1,636,354 1,638,684
Retained earnings 333,969 242,403
---------- ----------
Total common stock equity 1,970,323 1,881,087
---------- ----------
TOTAL LIABILITIES AND EQUITY $6,989,289 $6,997,052
========== ==========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
Consolidated Statements of Cash Flows
Year Ended December 31,
(Thousands of Dollars)
1996 1995 1994
---- ---- ----
Cash Flows From Operating Activities
(NOTE 1)
Income from continuing operations $ 211,059 $ 199,608 $ 200,619
Items not requiring cash
Depreciation and amortization 334,808 276,288 271,654
Deferred income taxes - net 13,392 61,076 78,841
Rate refund reversal -- -- (9,308)
Palo Verde accretion income -- -- (33,596)
Allowance for equity funds used
during construction (5,209) (4,982) (3,941)
Deferred investment tax credit (23,518) (23,529) (5,905)
Other - net (365) 16,099 4,753
Changes in current assets and liabilities
Customer and other receivables - net (38,106) 4,653 (7,693)
Accrued utility revenues (1,951) 1,913 4,924
Materials, supplies and fossil fuel 11,945 25,606 4,795
Other current assets (8,949) (4,249) (1,640)
Accounts payable 65,586 (2,093) 25,068
Accrued taxes (7,088) 6,818 (7,159)
Accrued interest (9,306) (7,100) (1,616)
Other current liabilities 1,515 3,714 (1,730)
Decrease (increase) in land held 16,547 (4,660) (10,163)
Other - net 12,176 6,700 (10,730)
--------- --------- ---------
Net Cash Flow Provided By Operating Activities 572,536 555,862 497,173
--------- --------- ---------
Cash Flows From Investing Activities
Capital expenditures (258,598) (295,772) (245,925)
Allowance for borrowed funds used
during construction (9,509) (9,065) (5,442)
Other - net (15,945) 422 (1,773)
--------- --------- ---------
Net Cash Flow Used For Investing Activities (284,052) (304,415) (253,140)
--------- --------- ---------
Cash Flows From Financing Activities
Issuance of long-term debt 557,067 225,128 595,362
Short-term borrowings - net (160,900) 46,300 (16,500)
Dividends paid on common stock (89,614) (80,855) (72,115)
Repayment of long-term debt (575,332) (383,117) (643,991)
Redemption of preferred stock (50,360) -- (124,096)
Extraordinary charge for early retirement of debt (20,340) (11,571) --
Other - net (1,858) (2,512) (101)
--------- --------- ---------
Net Cash Flow Used For Financing Activities (341,337) (206,627) (261,441)
--------- --------- ---------
Net Cash Flow (52,853) 44,820 (17,408)
Cash and Cash Equivalents at Beginning of Year 79,539 34,719 52,127
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 26,686 $ 79,539 $ 34,719
========= ========= =========
See Notes to Consolidated Financial Statements.
PINNACLE WEST CAPITAL CORPORATION
Consolidated Statements of Retained Earnings
Year Ended December 31,
(Thousands of Dollars)
1996 1995 1994
---- ---- ----
Retained Earnings at Beginning of Year $ 242,403 $ 135,221 $ 6,717
Net Income 181,180 188,037 200,619
Common Stock Dividends (89,614) (80,855) (72,115)
--------- --------- ---------
Retained Earnings at End of Year $ 333,969 $ 242,403 $ 135,221
========= ========= =========
See Notes to Consolidated Financial Statements.
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 and Arizona's largest electric
utility, with 738,000 customers, provides wholesale or retail electric service
to the entire state with the exception of Tucson and about one-half of the
Phoenix area. 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 rate synchronization cost deferrals
(see "Rate Synchronization Cost Deferrals" in this note) and deferred taxes (see
Note 3). These items, combined with miscellaneous regulatory assets and
liabilities, amounted to approximately $1.1 billion and $1.2 billion at December
31, 1996 and 1995, respectively, most of which are included in "Deferred Debits"
on the Consolidated Balance Sheets. In accordance with the 1996 regulatory
agreement (see Note 2), the ACC accelerated the amortization of substantially
all of APS' regulatory assets to an eight-year period beginning July 1, 1996.
The accelerated portion of the regulatory asset amortization, approximately $60
million pretax in 1996, is included in depreciation and amortization expense on
the Consolidated Statements of Income.
APS' existing regulatory orders and current regulatory environment
support its accounting practices related to regulatory assets. If rate recovery
of these assets is no longer probable, whether due to competition or regulatory
action, APS would no longer be able to apply the provisions of SFAS No. 71 to
all or some part of its operations which could have a material impact on the
Company's financial statements.
Utility Plant and Depreciation
Utility plant represents the buildings, equipment and other facilities
used to provide electric service. The cost of utility plant includes labor,
materials, contract services, other related items and an allowance for funds
used during construction. The cost of retired depreciable utility plant, plus
removal costs less salvage realized, is charged to accumulated depreciation. See
Note 12 for information on a proposed accounting standard which impacts
accounting for removal costs.
Depreciation on utility property is recorded on a straight-line basis.
The applicable rates for 1994 through 1996 ranged from 1.51% to 20%, which
resulted in an annual composite rate of 3.32% for 1996. Depreciation and
amortization of non-utility property and equipment are provided over the
estimated useful lives of the related assets, ranging from 3 to 50 years.
Allowance for Funds Used During Construction
AFUDC represents the cost of debt and equity funds used to finance construction
of utility plant. Plant construction costs, including AFUDC, are recovered in
authorized rates through depreciation when completed projects are placed into
commercial operation. AFUDC does not represent current cash earnings.
AFUDC has been calculated using composite rates of 7.75% for 1996;
8.52% for 1995; and 7.70% for 1994. APS compounds AFUDC semiannually and ceases
to accrue AFUDC when construction is completed and the property is placed in
service. Effective in 1997, APS will no longer accrue AFUDC. In place of AFUDC,
APS will capitalize interest in accordance with SFAS No. 34, "Capitalization of
Interest Cost."
Revenues
Electric operating revenues are recognized on the accrual basis and include
estimated amounts for service rendered but unbilled at the end of each
accounting period.
Palo Verde Accretion Income
In 1991, the carrying value of Palo Verde Unit 3 was discounted to reflect the
present value of lost cash flows resulting from a 1991 rate settlement agreement
deeming a portion of the unit to temporarily be excess capacity. In accordance
with generally accepted accounting principles, accretion income was recorded
over a thirty-month period ended May 1994 in the aggregate amount of the
original discount. The after-tax accretion income recorded in 1994 was $20.3
million.
Rate Synchronization Cost Deferrals
As authorized by the ACC, operating costs (excluding fuel) and financing costs
of Palo Verde Units 2 and 3 were deferred from the commercial operation date
(September 1986 and January 1988, respectively) until the date the units were
included in a rate order (April 1988 and December 1991, respectively). Beginning
July 1, 1996, the deferrals are being amortized over an eight-year period in
accordance with the 1996 regulatory agreement (see Note 2). Prior to July 1, the
deferrals were amortized over thirty-five year periods. Amortization of the
deferrals is included in depreciation and amortization expense on the
Consolidated Statements of Income.
Nuclear Fuel
Nuclear fuel is charged to fuel expense using the unit-of-production method
under which the number of units of thermal energy produced in the current period
is related to the total thermal units expected to be produced over the remaining
life of the fuel.
Under federal law, the United States Department of Energy (DOE) is
responsible for the permanent disposal of spent nuclear fuel, and assesses
$0.001 per kWh of nuclear generation. This amount is charged to nuclear fuel
expense. See Note 11 for information on spent fuel disposal and Note 12 for
information on nuclear decommissioning costs.
Income Taxes
The Company files a consolidated U.S. income tax return. In accordance with an
intercompany tax allocation agreement, provisions for income taxes are made by
each subsidiary as if separate income tax returns were filed. The difference, if
any, between these provisions and consolidated income tax expense is allocated
to the parent company.
Reacquired Debt Costs
APS amortizes gains and losses on reacquired debt over the remaining life of the
original debt, consistent with ratemaking. In accordance with the 1996
regulatory agreement (see Note 2), the ACC accelerated APS' amortization of the
regulatory asset for reacquired debt costs to an eight-year period beginning
July 1, 1996. The accelerated portion of the regulatory asset amortization is
included in depreciation and amortization expense on the Consolidated Statements
of Income.
Statements of Cash Flows
Temporary cash investments and marketable securities are considered to be cash
equivalents for purposes of the Consolidated Statements of Cash Flows. During
1996, 1995 and 1994, the Company paid interest, net of amounts capitalized, of
$185.9 million, $216.8 million and $231.6 million, respectively. Income taxes
paid were $121.0 million, $77.4 million and $56.5 million, respectively; and
dividends paid on preferred stock of APS were $17.4 million, $19.1 million and
$26.2 million, respectively.
Reclassifications
Certain prior year balances have been restated to conform to the 1996
presentation.
2. REGULATORY MATTERS
Electric Industry Restructuring
State
The ACC has been conducting an ongoing investigation into the restructuring of
the Arizona electric industry in an open competition docket involving many
parties. In December 1996, the ACC adopted rules that provide a framework for
the introduction of retail electric competition. The ACC has ordered that
reliability, stranded cost recovery, the phase-in process, and bundled,
unbundled and metering services, as well as legal issues, will require
additional consideration and will be addressed through workshops and working
groups which will issue recommendations to the ACC during 1997. The Rules
include the following major provisions:
o The Rules are intended to apply to virtually all of the Arizona electric
utilities regulated by the ACC, including APS.
o Each affected utility would be required to make available at least 20
percent of its 1995 system retail peak demand for competitive generation supply
to all customer classes not later than January 1, 1999; at least 50 percent not
later than January 1, 2001; and all of its retail demand not later than January
1, 2003.
o Electric service providers that obtain a Certificate of Convenience and
Necessity (CC&N) from the ACC would be allowed to supply, market and/or broker
specified electric services at retail. These services would include electric
generation, but exclude electric transmission and distribution.
o On or before December 31, 1997, each affected utility is required to file
with the ACC proposed tariffs for bundled service and unbundled service. Bundled
service means electric service elements (i.e., generation, transmission,
distribution and ancillary services) provided as a package to customers within
an affected utility's current service area. Unbundled service means electric
service elements provided and priced separately. Affected utilities would be
required to provide bundled service, as well as unbundled transmission,
distribution and miscellaneous other services, at regulated cost-based rates.
o The Rules indicate that the ACC will allow recovery of unmitigated
stranded costs. Each affected utility would be required to file with the ACC
estimates of unmitigated stranded costs. The ACC would then, after hearing and
consideration of various factors, determine the magnitude of stranded cost and
appropriate stranded cost recovery mechanisms and charges.
APS continues to focus on working with the ACC to bring competitive
benefits to Arizona but believes that certain provisions of the Rules are
deficient. In February 1997, APS filed lawsuits to protect its legal rights
regarding the Rules.
A joint legislative committee has been appointed to study electric
utility industry restructuring issues and report back to the legislature by the
end of 1997. APS believes that legislation will ultimately be required before
significant implementation of the Rules can lawfully occur.
Until it has been further determined how competition will be
implemented in Arizona, APS cannot accurately predict the impact of full retail
competition on its financial position or results of operations.
Federal
The Energy Policy Act of 1992 and recent rulemakings by FERC have promoted
increased competition in the wholesale electric power markets. The Company does
not expect these rules to have a material impact on its financial statements.
Several electric utility reform bills have been introduced during the
current legislative session, which as currently written, would allow consumers
to choose their electric supplier by 2000 or 2003. These bills, other bills that
are expected to be introduced, and ongoing discussions at the federal level
suggest a wide range of opinion that will need to be narrowed before any
substantial restructuring of the electric utility industry can occur.
1996 Regulatory Agreement
In April 1996, the ACC approved a regulatory agreement between APS and the ACC
Staff. The major provisions of this agreement are:
o An annual rate reduction of approximately $48.5 million ($29 million
after income taxes), or 3.4% on average for all customers except certain
contract customers, effective July 1, 1996.
o Recovery of substantially all of APS' present regulatory assets through
accelerated amortization over an eight-year period beginning July 1, 1996,
increasing annual amortization by approximately $120 million ($72 million after
income taxes). See Note 1.
o A formula for sharing future cost savings between customers and
shareholders (price reduction formula) referencing a return on equity (as
defined) of 11.25%.
o A moratorium on filing for permanent rate changes prior to July 2, 1999,
except under the price reduction formula and under certain other limited
circumstances.
o Infusion of $200 million of common equity into APS by the parent company,
in annual payments of $50 million starting in 1996.
Pursuant to the price reduction formula, in March 1997, APS filed with
the ACC its calculation of an annual retail rate reduction of approximately $18
million ($11 million after income taxes), or 1.2%, to become effective July 1,
1997. The amount and timing of the rate decrease is subject to ACC approval.
1994 Settlement Agreement
In May 1994, the ACC approved a retail rate settlement agreement which provided
for a net annual retail rate reduction of 2.2% on average, or approximately $32
million ($19 million after income taxes), effective June 1, 1994. As part of the
settlement, in 1994 APS reversed approximately $20 million of depreciation ($15
million after income taxes) related to a 1991 Palo Verde write-off. It also
provided for the accelerated amortization of substantially all deferred
investment tax credits over a five-year period beginning in 1995.
3. INCOME TAXES
Investment Tax Credit
Beginning in 1995, substantially all ITCs are being amortized over a five-year
period in accordance with the 1994 rate settlement agreement. Prior to 1995,
ITCs were deferred and amortized to other income over the estimated lives of the
related assets as directed by the ACC.
Non-recurring Income Tax Benefit
The recognition of $26.8 million of non-recurring income tax benefits in 1994
relates to a change in tax law.
Income Taxes
The Company follows the liability method of accounting for income taxes which
requires that deferred income taxes be recorded for all temporary differences
between the tax bases of assets and liabilities and the amounts recognized for
financial reporting. Deferred taxes are recorded using currently enacted tax
rates. In accordance with SFAS No. 71, APS established a regulatory asset for
certain temporary differences, primarily AFUDC equity, to reflect the ratemaking
treatment. This regulatory asset is being amortized as the related differences
reverse. In accordance with the 1996 regulatory agreement (see Note 2), the ACC
accelerated APS' amortization of the regulatory asset for income taxes to an
eight-year period beginning July 1, 1996. The accelerated portion of the
regulatory asset amortization is included in depreciation and amortization
expense on the Consolidated Statements of Income.
The components of income tax expense from continuing operations are as follows:
Year Ended December 31, 1996 1995 1994
(Thousands of Dollars) ---- ---- ----
Current
Federal $ 105,312 $ 77,869 $ 49,112
State 35,052 1,081 922
--------- --------- ---------
Total current 140,364 78,950 50,034
Deferred 23,752 21,339 (10,012)
NOL and ITC
carryforward utilized -- 58,019 115,623
Change in
valuation allowance (12,142) (6,814) --
Change in tax law -- -- (26,770)
ITC amortization (23,518) (23,529) (5,905)
--------- --------- ---------
Total expense $ 128,456 $ 127,965 $ 122,970
========= ========= =========
Income tax expense differed from the amount computed by multiplying income from
continuing operations before income taxes by the statutory federal income tax
rate due to the following:
Year Ended December 31, 1996 1995 1994
(Thousands of Dollars) ---- ---- ----
Federal income tax
expense at statutory
rate, 35% $ 118,830 $ 114,651 $ 113,256
Increases (reductions)
in tax expense
resulting from:
Tax under book
depreciation 19,229 18,186 17,236
Preferred stock
dividends of APS 5,982 6,697 8,846
ITC amortization (23,518) (23,529) (5,905)
State income tax
net of federal
income tax
benefit 19,565 19,245 (5,983)
Change in
valuation
allowance (10,525) (5,908) --
Other (1,107) (1,377) (4,480)
---------- --------- ---------
Income tax expense $ 128,456 $ 127,965 $ 122,970
========== ========= =========
The components of the net deferred income tax liability at December 31 were as
follows:
(Thousands of Dollars) 1996 1995
---- ----
Deferred tax assets
Alternative minimum tax (can be
carried forward indefinitely) $ 125,735 $ 140,708
Deferred gain on Palo Verde
Unit 2 sale/leaseback 35,105 36,945
Other 97,060 109,612
Valuation allowance (7,964) (25,552)
----------- -----------
Total deferred tax assets 249,936 261,713
----------- -----------
Deferred tax liabilities
Plant-related 1,104,902 1,081,290
Regulatory asset for
income taxes 208,647 221,418
Rate synchronization deferrals 167,202 181,384
Other 58,809 59,147
----------- -----------
Total deferred tax liabilities 1,539,560 1,543,239
----------- -----------
Accumulated deferred
income taxes - net $ 1,289,624 $ 1,281,526
=========== ===========
4. Lines of Credit
APS had committed lines of credit with various banks of $400 million at December
31, 1996 and $300 million at December 31, 1995, which were available either to
support the issuance of commercial paper or to be used for bank borrowings. The
commitment fees at December 31, 1996 and 1995 for these lines of credit ranged
from 0.10% to 0.15% per annum. APS had long-term bank borrowings of $100 million
outstanding at December 31, 1996 and commercial paper borrowings outstanding of
$16.9 million and $177.8 million at December 31, 1996 and 1995, respectively,
under these lines of credit. The weighted average interest rate on commercial
paper borrowings was 6.40% and 6.06% on December 31, 1996 and 1995,
respectively. By Arizona statute, APS' short-term borrowings cannot exceed 7% of
its total capitalization without the consent of the ACC.
The parent company had a revolving line of credit of $225 million at
December 31, 1996 and $100 million at December 31, 1995. The commitment fees on
these lines were 0.125% in 1996, and ranged from 0.13% to 0.18% in 1995.
Outstanding amounts under these lines at December 31, 1996 and 1995, were $200
million and $100 million, respectively.
SunCor had revolving lines of credit totalling $55 million at December
31, 1996 and $40 million at December 31, 1995. The commitment fees on these
lines were 0.125% in 1996, and ranged from 0.125% to 0.2% in 1995. SunCor had
$42.4 million and $40.0 million outstanding under these lines at December 31,
1996 and 1995, respectively.
5. Long-Term Debt
Borrowings under the APS mortgage bond indenture are secured by substantially
all utility plant; SunCor's debt is collaterized by interests in certain real
property; and Pinnacle West's debt is unsecured. The following table presents
consolidated long-term debt outstanding:
December 31,
(Thousands of Dollars) Maturity Dates Interest Rates 1996 1995
-------------- -------------- ---- ----
APS
First mortgage bonds 1997-2028 5.5%-10.25%(a) $1,448,848 $1,604,317
Pollution control indebtedness 2024-2031 Adjustable(b) 439,990 433,280
Senior notes 2006 6.75% 100,000 --
Debentures 2025 10% 75,000 75,000
Bank loans 2001 Adjustable(c) 100,000 --
Capitalized lease obligation (d) 1996-2001 7.48% 19,424 22,936
---------- ----------
2,183,262 2,135,533
SunCor
Revolving credit 1998-2001 (e) 42,432 40,000
Bank loan 1998-2000 (f) 45,000 --
Notes payable 1997-2006 (g) 7,696 3,545
Mortgage bonds 1996-2002 8.175% -- 30,000
---------- ----------
95,128 73,545
---------- ----------
Pinnacle West
Revolving credit 2000-2001 (h) 200,000 100,000
Senior notes 2001-2003 (i) 50,000 --
Debentures 2000 11.61% -- 210,411
---------- ----------
250,000 310,411
---------- ----------
Total long-term debt 2,528,390 2,519,489
Less current maturities 156,277 8,780
---------- ----------
Total long-term debt less
current maturities $2,372,113 $2,510,709
========== ==========
(a) The weighted-average rate at December 31, 1996 and 1995 was 7.66% and
7.79%, respectively. The weighted-average years to maturity at December 31,
1996 and 1995 was 18 years and 19 years, respectively.
(b) The weighted-average rates for the years ended December 31, 1996 and 1995
were 3.40% and 4.31%, respectively. Changes in short-term interest rates
would affect the costs associated with this debt.
(c) The weighted-average rate for the year ended December 31, 1996 was 5.76%.
Changes in short-term interest rates would affect the costs associated with
this debt.
(d) Represents the present value of future lease payments (discounted at an
interest rate of 7.48%) on a combined cycle plant sold and leased back from
the independent owner-trustee formed to own the facility (see Note 9).
(e) The weighted-average interest rate at December 31, 1996 and 1995 was 8.52%
and 8.43%, respectively. Interest for 1996 was based on LIBOR plus 2% or
prime plus 0.5%, and for 1995 was based on LIBOR plus 2.5% or 2.75% or
prime plus 0.5%.
(f) The weighted-average interest rate at December 31, 1996 was 7.62%. Interest
is based on LIBOR plus 2% or prime plus 0.5%.
(g) Multiple notes primarily with variable interest rates based mostly on the
lenders' prime.
(h) The weighted-average interest rate at December 31, 1996 and 1995 was 5.85%
and 6.21%, respectively. Interest for 1996 was based on LIBOR plus 0.4% and
for 1995 was LIBOR plus 0.3%.
(i) Includes two series of notes: $25 million at 6.62% due 2001, and $25
million at 6.87% due 2003.
During 1996, Pinnacle West prepaid at a premium the remaining 11.61%
debentures due December 2000, using a short-term borrowing, which was replaced
with a new line of credit (see Note 4) and senior notes. The early retirement of
debt resulted in a charge of $20.3 million after income taxes, which has been
reflected as an extraordinary charge in the Consolidated Statements of Income.
Aggregate annual principal payments due on total long-term debt and for
sinking fund requirements through 2001 are as follows: 1997, $156.3 million;
1998, $108.9 million; 1999, $133.7 million; 2000, $160.1 million; and 2001,
$327.6 million. See Note 6 for redemption and sinking fund requirements of
redeemable preferred stock of APS.
6. Preferred Stock of APS
Non-redeemable preferred stock is not redeemable except at the option of APS.
Redeemable preferred stock is redeemable through sinking fund obligations. In
addition, Series V redeemable preferred stock is callable by APS. Preferred
stock balances of APS are shown below:
Number of Shares Outstanding Par Value Outstanding
at December 31, at December 31,
Call
Par Value Price Per
Authorized 1996 1995 Per Share 1996 1995 Share (a)
---------- ---- ---- --------- ---- ---- ---------
(Thousands of Dollars)
Non-Redeemable:
$1.10 preferred 160,000 152,740 155,945 $ 25.00 $ 3,818 $ 3,898 $ 27.50
$2.50 preferred 105,000 102,532 103,254 50.00 5,127 5,163 51.00
$2.36 preferred 120,000 40,000 40,000 50.00 2,000 2,000 51.00
$4.35 preferred 150,000 75,000 75,000 100.00 7,500 7,500 102.00
Serial preferred: 1,000,000
$2.400 Series A 239,900 240,000 50.00 11,995 12,000 50.50
$2.625 Series C 240,000 240,000 50.00 12,000 12,000 51.00
$2.275 Series D 199,655 200,000 50.00 9,983 10,000 50.50
$3.250 Series E 320,000 320,000 50.00 16,000 16,000 51.00
Serial preferred: 4,000,000(b)
Adjustable rate
Series Q 372,851 500,000 100.00 37,285 50,000 (c)
Serial preferred: 10,000,000
$1.8125 Series W 2,398,615 3,000,000 25.00 59,965 75,000 (d)
--------- --------- ----------- -----------
Total 4,141,293 4,874,199 $ 165,673 $ 193,561
========= ========= =========== ===========
Redeemable:
Serial preferred:
$10.00 Series U 410,000 500,000 $ 100.00 $ 41,000 $ 50,000 --
$7.875 Series V 120,000 250,000 100.00 12,000 25,000 (e)
--------- --------- ----------- -----------
Total 530,000 750,000 $ 53,000 $ 75,000
========= ========= =========== ===========
(a) In each case plus accrued dividends.
(b) This authorization also covers all outstanding redeemable preferred stock.
(c) Dividend rate adjusted quarterly to 2% below that of certain United States
Treasury securities, but in no event less than 6% or greater than 12% per
annum. Reedemable at par.
(d) Redeemable at par after December 1, 1998.
(e) Redeemable at $104.73 through May 31, 1997, and thereafter declining by a
predetermined amount each year to par after May 31, 2002.
If there were to be any arrearage in dividends on any of its preferred stock or
in the sinking fund requirements applicable to any of its redeemable preferred
stock, APS could not pay dividends on its common stock or acquire any shares
thereof for consideration. The redemption requirements for the above issues for
the next five years are: $10.0 million in each of the years 1997 through 2000,
and $1.0 million in 2001.
Redeemable preferred stock transactions of APS during each of the three
years in the period ended December 31, 1996 are as follows:
Number of Par Value
(Dollars in Thousands) Shares Amount
------ ------
Balance, December 31, 1993 1,976,100 $ 197,610
Retirements
$8.80 Series K (142,100) (14,210)
$11.50 Series R (284,000) (28,400)
$8.48 Series S (300,000) (30,000)
$8.50 Series T (500,000) (50,000)
--------- ----------
Balance, December 31, 1994 750,000 75,000
Retirements -- --
--------- ----------
Balance, December 31, 1995 750,000 75,000
Retirements
$10.00 Series U (90,000) (9,000)
$7.875 Series V (130,000) (13,000)
--------- ----------
Balance, December 31, 1996 530,000 $ 53,000
========= ==========
7. Common Stock
The Company's common stock issued during each of the three years in the period
ended December 31, 1996 is as follows:
Number of
(Dollars in Thousands) Shares Amount (a)
---------- ----------
Balance, December 31, 1993 87,423,817 $ 1,642,783
Common stock issued 5,825 (1,587)
---------- -----------
Balance, December 31, 1994 87,429,642 1,641,196
Common stock issued 86,205 (2,512)
---------- -----------
Balance, December 31, 1995 87,515,847 1,638,684
Common stock issued -- (2,330)
---------- -----------
Balance, December 31, 1996 87,515,847 $ 1,636,354
========== ===========
(a) Including premiums and expenses of preferred stock issues of APS.
The Company has incentive plans under which it may grant non-qualified
stock options (NQSOs), incentive stock options (ISOs) and restricted stock
awards to officers and key employees. The FASB issued a new statement on
"Accounting for Stock-Based Compensation" which was effective for 1996. The
statement encourages, but does not require, companies to recognize compensation
expense based on the fair value method. The Company continues to recognize
expense based on Accounting Principles Board Opinion No. 25. The effects on net
income of applying the fair value method would not be material.
The plans provide for the granting of new options or awards of up to
3.5 million shares at a price per option not less than fair market value on the
date the option is granted. The plans also provide for the granting of any
combination of stock appreciation rights or dividend equivalents. The awards
outstanding under the various incentive plans at December 31, 1996, approximate
1,809,576 NQSOs, 259,825 restricted shares, 18,749 dividend equivalent shares
and no ISOs or stock appreciation rights.
8. Retirement Plans and Other Benefits
Voluntary Severance Plan
APS sponsored a voluntary severance plan in 1996 which resulted in a before
income tax charge of $31.7 million (including pension and postretirement benefit
expense) recorded primarily as operations and maintenance expense. Employees
participating in the plan were credited with an additional year of age and
service for purposes of calculating pension and postretirement benefits. The
total additional pension and postretirement benefit expense recorded for this
program was $2.3 million and $5.4 million, respectively.
Pension Plans
The Company sponsors defined benefit pension plans covering substantially all
employees. Benefits are based on years of service and compensation utilizing a
final average pay benefit formula. Company policy is to fund not less than the
minimum required contribution nor greater than the maximum tax-deductible
contribution. Plan assets consist primarily of domestic and international common
stocks and bonds and real estate. Pension expense, including administrative and
severance costs, for 1996, 1995 and 1994 was approximately $15.5 million, $10.0
million and $12.3 million, respectively.
The components of net periodic pension costs before consideration of
amounts capitalized or billed to others and excluding severance costs of $2.9
million in 1996 and $1.4 million in 1994 are as follows:
(Thousands of Dollars) 1996 1995 1994
---- ---- ----
Service cost - benefits
earned during
the period $ 23,397 $ 16,390 $ 20,728
Interest cost on
projected benefit
obligation 45,124 39,762 39,748
Return on plan assets (63,136) (83,031) 6,053
Net amortization
and deferral 19,969 46,469 (44,283)
-------- -------- --------
Net consolidated
periodic pension cost $ 25,354 $ 19,590 $ 22,246
======== ======== ========
A reconciliation of the funded status of the plan to the amounts
recognized in the balance sheets is presented below:
(Thousands of Dollars) 1996 1995
---- ----
Plan assets at fair value $ 539,179 $ 474,583
--------- ---------
Less:
Accumulated benefit
obligation, including vested
benefits of $418,052 and
$399,962 in 1996 and
1995, respectively 472,864 432,772
Effect of projected future
compensation increases 135,811 151,897
--------- ---------
Total projected benefit obligation 608,675 584,669
--------- ---------
Plan assets less than projected
benefit obligation (69,496) (110,086)
Plus:
Unrecognized net loss
from past experience
different from that assumed 3,314 45,227
Unrecognized prior service cost 20,563 23,892
Unrecognized net transition
asset (29,690) (32,917)
--------- ---------
Accrued pension liability $ (75,309) $ (73,884)
========= =========
Principal actuarial assumptions used were:
1996 1995
---- ----
Discount rate 7.75% 7.25%
Rate of increase in
compensation levels 4.50% 4.50%
Expected long-term rate
of return on assets 9.00% 9.00%
In addition to the defined benefit pension plans, the Company also sponsors
qualified defined contribution plans. Collectively, these plans cover
substantially all employees. The plans provide for employee contributions and
partial employer matching contributions after certain eligibility requirements
are met. Expenses related to these plans for 1996, 1995 and 1994 were $3.6
million, $3.2 million and $3.3 million, respectively.
Postretirement Plans
The Company provides medical and life insurance benefits to its retired
employees. Employees must retire to become eligible for these retirement
benefits which are based on years of service and age. The retiree medical
insurance plans are contributory; the retiree life insurance plans are
non-contributory. In accordance with the governing plan documents, the Company
retains the right to change or eliminate these benefits.
Funding is based upon actuarially determined contributions that take
tax consequences into account. Plan assets consist primarily of domestic stocks
and bonds. The postretirement benefit expense for 1996, 1995 and 1994 was
approximately $16 million, $14 million and $14 million, respectively.
The components of net periodic postretirement benefit costs before
consideration of amounts capitalized or billed to others and excluding severance
costs of $9.6 million in 1996 are as follows:
(Thousands of Dollars) 1996 1995 1994
---- ---- ----
Service cost - benefits
earned during
the period $ 8,168 $ 6,925 $ 9,030
Interest cost on
accumulated benefit
obligation 13,525 13,879 14,152
Return on plan assets (12,550) (15,133) (6,459)
Net amortization
and deferral 12,778 17,179 11,680
-------- -------- --------
Net consolidated
periodic postretire-
ment benefit cost $ 21,921 $ 22,850 $ 28,403
======== ======== ========
A reconciliation of the funded status of the plan to the amounts recognized in
the balance sheets is presented below:
(Thousands of Dollars) 1996 1995
---- ----
Plan assets at fair value $ 109,763 $ 81,309
Less accumulated postretirement benefit obligation:
Retirees 87,146 90,616
Fully eligible plan participants 3,720 15,659
Other active plan participants 90,539 108,235
--------- ---------
Total accumulated postretirement
benefit obligation 181,405 214,510
--------- ---------
Plan assets less than accumulated
benefit obligation (71,642) (133,201)
Plus:
Unrecognized transition
obligation 123,239 156,599
Unrecognized net gain from past
experience different from
that assumed (62,759) (24,621)
--------- ---------
Accrued postretirement liability $ (11,162) $ (1,223)
========= =========
Principal actuarial assumptions used were:
1996 1995
---- ----
Discount rate 7.75% 7.25%
Annual salary increases for life
insurance obligation 4.50% 4.50%
Expected long-term rate of return
on assets - after tax 7.75% 7.64%
Initial health care cost trend
rate - under age 65 9.00% 9.50%
Initial health care cost trend
rate - age 65 and over 8.00% 8.50%
Ultimate health care cost trend
rate (reached in the year 2002) 5.50% 5.50%
Assuming a one percent increase in the health care cost trend rate, the
1996 cost of postretirement benefits other than pensions would increase by
approximately $5 million and the accumulated benefit obligation as of December
31, 1996 would increase by approximately $31 million.
9. Leases
In 1986, APS entered into sale and leaseback transactions under which it sold
approximately 42% of its share of Palo Verde Unit 2 and certain common
facilities. The gain of approximately $140.2 million has been deferred and is
being amortized to operations expense over the original lease term. The leases
are being accounted for as operating leases. The amounts to be paid each year
approximate $40.1 million through 1999, $46.3 million in 2000, and $49.0 million
through 2015. Options to renew for two additional years and to purchase the
property at fair market value at the end of the lease terms are also included.
Consistent with the ratemaking treatment, an amount equal to the annual lease
payments is included in rent expense. A regulatory asset is recognized for the
difference between lease payments and rent expense calculated on a straight-line
basis. In accordance with the 1996 regulatory agreement (see Note 2), the ACC
accelerated APS' amortization of the regulatory asset for leases to an
eight-year period beginning July 1, 1996. The accelerated amortization is
included in depreciation and amortization expense on the Consolidated Statements
of Income. The balance of this regulatory asset at December 31, 1996 was $57.3
million. Lease expense for 1996, 1995 and 1994 was $41.8 million, $41.7 million
and $42.2 million, respectively.
APS has a capital lease on a combined cycle plant which it sold and
leased back. The lease requires semiannual payments of $2.6 million through June
2001, and includes renewal and purchase options based on fair market value. This
plant is included in plant in service at its original cost of $54.4 million;
accumulated amortization at December 31, 1996 was $44.6 million.
In addition, the Company leases certain land, buildings, equipment and
miscellaneous other items through operating rental agreements with varying
terms, provisions and expiration dates. Rent expense for 1996, 1995 and 1994 was
approximately $12.8 million, $15.4 million and $21.3 million, respectively.
Annual future minimum rental commitments, excluding the Palo Verde and combined
cycle leases, through 2001 are as follows: 1997, $14.9 million; 1998, $14.9
million; 1999, $14.8 million; 2000, $14.8 million and 2001, $15.5 million. Total
rental commitments after the year 2001 are estimated at $171.2 million.
10. Jointly-Owned Facilities
At December 31, 1996, APS owned interests in the following jointly-owned
electric generating and transmission facilities. APS' share of related operating
and maintenance expenses is included in utility operations and maintenance.
Percent Plant Construction
Owned by in Accumulated Work in
(Dollars in Thousands) APS Service Depreciation Progress
-------- -------- ------------ ------------
Generating Facilities
Palo Verde Nuclear Generating Station
Units 1 and 3 29.1% $ 1,825,459 $ 547,750 $ 15,130
Palo Verde Nuclear Generating Station
Unit 2 (see Note 9) 17.0% 568,647 175,926 7,109
Four Corners Steam Generating Station
Units 4 and 5 15.0% 144,080 58,447 674
Navajo Steam Generating Station
Units 1, 2 and 3 14.0% 141,178 82,430 61,289(a)
Cholla Steam Generating Station
Common Facilities(b) 62.8%(c) 71,154 37,962 549
Transmission Facilities
ANPP 500 KV System 35.8%(c) 62,593 17,848 1,469
Navajo Southern System 31.4%(c) 27,113 16,135 46
Palo Verde - Yuma 500 KV System 23.9%(c) 11,376 3,727 --
Four Corners Switchyards 27.5%(c) 3,068 1,634 3
Phoenix - Mead System 17.1%(c) 36,089 (876) 325
(a) The construction costs at Navajo are primarily related to the installation
of scrubbers required by recent environmental legislation.
(b) APS is the operating agent for Cholla Unit 4, which is owned by PacifiCorp.
The common facilities at the Cholla Plant are jointly-owned.
(c) Weighted average of interests.
- - --------------------------------------------------------------------------------
11. Commitments and Contingencies
Litigation
The Company is party to various claims, legal actions and complaints arising in
the ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a material adverse effect on the
Company's financial statements.
Palo Verde Nuclear Generating Station
APS has encountered tube cracking in steam generators and has taken, and will
continue to take, remedial actions that it believes have slowed the rate of tube
degradation. The projected service life of the steam generators is reassessed
periodically and these analyses indicate that it will be economically desirable
for APS to replace the Unit 2 steam generators between 2003 and 2008. APS
estimates that its share of the replacement costs (in 1996 dollars and including
installation and replacement power costs) will be approximately $50 million,
most of which will be incurred after the year 2000. Based on the latest
available data, APS estimates that the Unit 1 and Unit 3 steam generators should
operate for the license periods (until 2025 and 2027, respectively), although
APS will continue its normal periodic assessment of these steam generators.
Under the Nuclear Waste Policy Act, DOE was to develop the facilities
necessary for the storage and disposal of spent 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. The Company has 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 2002, 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 2002, subject to
obtaining any required governmental approvals. The Company currently believes
that spent fuel storage or disposal methods will be available for use by Palo
Verde to allow its continued operation beyond 2002.
The Palo Verde participants have insurance for public liability
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 the programs exceed the accumulated funds, APS
could be assessed retrospective premium adjustments. The maximum assessment per
reactor under the program for each nuclear incident is approximately $79
million, subject to an annual limit of $10 million per incident. Based upon APS'
29.1% interest in the three Palo Verde units, APS' maximum potential assessment
per incident for all three units is approximately $69 million, with an annual
payment limitation of approximately $9 million.
The Palo Verde participants maintain "all risk" (including nuclear
hazards) insurance for property damage to, and decontamination of, property at
Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of
which must first be applied to stabilization and decontamination. APS has also
secured insurance against portions of any increased cost of generation or
purchased power and business interruption resulting from a sudden and unforeseen
outage of any of the three units. The insurance coverage discussed in this and
the previous paragraph is subject to certain policy conditions and exclusions.
Fuel and Purchased Power Commitments
APS is a party to various fuel and purchased power contracts with terms
expiring from 1997 through 2020 that include required purchase provisions. APS
estimates its 1997 contract requirements to be approximately $120 million.
However, this amount may vary significantly pursuant to certain provisions in
such contracts which permit APS to decrease its required purchases under certain
circumstances.
APS is contractually obligated to reimburse certain coal providers for
amounts incurred for coal mine reclamation. APS' share of the total obligation
is estimated at $114 million. The portion of the coal mine reclamation
obligation related to coal already burned is approximately $68 million at
December 31, 1996 and is included in "Deferred Credits-Other" in the
Consolidated Balance Sheet. A regulatory asset has been established for amounts
not yet recovered from ratepayers. In accordance with the 1996 regulatory
agreement (see Note 2), the ACC began accelerated amortization of APS'
regulatory asset for coal mine reclamation costs over an eight-year period
beginning July 1, 1996. Amortization is included in depreciation and
amortization expense on the Consolidated Statements of Income. The balance of
the regulatory asset at December 31, 1996 was approximately $69 million.
Construction Program
Total capital expenditures in 1997 are estimated at $357 million.
12. Nuclear Decommissioning Costs
In 1996, APS recorded $11.4 million for decommissioning expense. APS estimates
it will cost approximately $2.0 billion ($440 million in 1996 dollars), over a
fourteen year period beginning in 2024, to decommission its 29.1% interest in
the three Palo Verde units. Decommissioning costs are charged to expense over
the respective unit's operating license term and are included in the accumulated
depreciation balance until each unit is retired. Nuclear decommissioning costs
are currently recovered in rates.
APS is utilizing a 1995 site-specific study for Palo Verde, prepared
for APS by an independent consultant, that assumes the prompt
removal/dismantlement method of decommissioning. APS is required to update the
study every three years.
As required by regulation, APS has established external trust accounts
into which quarterly deposits are made for decommissioning. As of December 31,
1996, APS had deposited a total of $68.1 million. The trust accounts are
included in "Investments and Other Assets" on the Consolidated Balance Sheets at
a market value of $95.5 million on December 31, 1996. The trust funds are
invested primarily in fixed-income securities and domestic stock and are
classified as available for sale. Realized and unrealized gains and losses are
reflected in accumulated depreciation.
In February 1996, the FASB issued an exposure draft "Accounting for
Certain Liabilities Related to Closure or Removal of Long-Lived Assets" which
would require the estimated present value of the cost of decommissioning and
certain other removal costs to be recorded as a liability, along with an
offsetting plant asset when a decommissioning or other removal obligation is
incurred. The FASB has indicated that a revised exposure draft or a final
statement will be issued in the second quarter of 1997.
13. Selected Quarterly Financial Data (Unaudited)
Consolidated quarterly financial information for 1996 and 1995 is as follows:
(Dollars in Thousands, Except per Share Amounts) 1996
----
Quarter Ended March 31 June 30 September 30 December 31
Operating Revenues
Electric $ 345,261 $ 426,658 $ 566,899 $ 379,454
Real estate 15,994 26,150 31,892 25,452
Operating Income (a) $ 106,562 $ 152,094 $ 245,800 $ 39,403
Income (loss) from continuing operations (b) $ 34,859 $ 61,454 $ 121,406 $ (6,660)
Loss on discontinued operations - net of income tax -- -- -- (9,539)
Extraordinary charge for early retirement of debt -
net of income tax (3,597) (2,471) (14,272) --
--------- --------- --------- ---------
Net Income (Loss) $ 31,262 $ 58,983 $ 107,134 $ (16,199)
========= ========= ========= =========
Earnings (loss) per average
common share outstanding
Continuing operations $ 0.40 $ 0.70 $ 1.39 $ (0.08)
Discontinued operations -- -- -- (0.11)
Extraordinary charge (0.04) (0.03) (0.16) --
--------- --------- --------- ---------
Total $ 0.36 $ 0.67 $ 1.23 $ (0.19)
========= ========= ========= =========
Dividends declared per share (c) $ 0.250 $ 0.500 $ 0.275 $ --
========= ========= ========= =========
(Dollars in Thousands, Except per Share Amounts) 1995
----
Quarter Ended March 31 June 30 September 30 December 31
Operating Revenues
Electric $ 336,968 $ 380,178 $ 549,082 $ 348,724
Real estate 9,146 13,018 9,709 22,973
Operating Income (a) $ 95,699 $ 127,174 $ 261,048 $ 78,503
Income before extraordinary charge $ 24,623 $ 42,249 $ 114,495 $ 18,241
Extraordinary charge for early retirement of debt -
net of income tax -- -- -- (11,571)
--------- --------- --------- ---------
Net Income $ 24,623 $ 42,249 $ 114,495 $ 6,670
========= ========= ========= =========
Earnings (loss) per average
common share outstanding
Income before extraordinary charge $ 0.28 $ 0.48 $ 1.31 $ 0.21
Extraordinary charge -- -- -- (0.13)
--------- --------- --------- ---------
Total $ 0.28 $ 0.48 $ 1.31 $ 0.08
========= ========= ========= =========
Dividends declared per share $ 0.225 $ 0.225 $ 0.225 $ 0.250
========= ========= ========= =========
(a) APS' operations are subject to seasonal fluctuations primarily as a result
of weather conditions. The results of operations for interim periods are
not necessarily indicative of the results to be expected for the full year.
(b) Net income for the quarter ended December 31, 1996 includes a charge of
$18.9 million for a voluntary severance program.
(c) Dividends for the quarters ended September 30 and December 31, 1996 were
declared in June and September, respectively.
14. Fair Value of Financial Instruments
The Company estimates that the carrying amounts of its cash equivalents and
commercial paper are reasonable estimates of their fair values at December 31,
1996 and 1995 due to their short maturities.
Investments in debt and equity securities are held for purposes other
than trading. The December 31, 1996 and 1995 fair values of such investments,
determined by using quoted market values or by discounting cash flows at rates
equal to the Company's cost of capital, approximate their carrying amounts. It
was not practical to estimate the fair value of several investments in joint
ventures and untraded equity securities because costs to do so would be
excessive. The carrying value of these investments totaled $20.0 million and
$22.8 million at year-end 1996 and 1995, respectively.
The carrying value of long-term debt (excluding a capitalized lease
obligation) on December 31, 1996 and 1995 was $2.51 billion and $2.50 billion,
respectively, and the estimated fair value was $2.47 billion and $2.52 billion,
respectively. The fair value estimates are based on quoted market prices of the
same or similar issues.
PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E
Additions
-----------------------
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions period
- - ------------------------------ ------------ ------------ ---------- ------------ -----------
(Thousands of Dollars)
YEAR ENDED DECEMBER 31, 1996
Real Estate Valuation Reserves $47,000 $ -- $ -- $ 6,000 $41,000
YEAR ENDED DECEMBER 31, 1995
Real Estate Valuation Reserves $84,000 $ -- $ -- $ 37,000(a) $47,000
YEAR ENDED DECEMBER 31, 1994
Real Estate Valuation Reserves $84,000 $ -- $ -- $ -- $84,000
(a) Represents pro-rata allocations for sale of land.
ITEM 9. CHANGES AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT
Reference is hereby made to "Election of Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance"in the Company's Proxy Statement
relating to the annual meeting of shareholders to be held on May 21, 1997 (the
"1997 Proxy Statement") and to the Supplemental Item -- "Executive Officers of
the Company" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Reference is hereby made to the fourth and fifth paragraphs under the
heading "The Board and its Committees," and to "Human Resources Committee
Report," "Compensation Committee Interlocks and Insider Participation," "Stock
Performance Comparisons," "Executive Compensation" and "Executive Benefit Plans"
in the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to "Certain Securities Ownership" in the 1997
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to "Compensation Committee Interlocks and
Insider Participation" in the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements and Financial Statement Schedules
See the Index to Consolidated Financial Statements and Financial
Statement Schedule in Part II, Item 8.
Exhibits Filed
Exhibit No. Description
- - ----------- -----------
10.1a -- Summary of the Pinnacle West Capital Corporation 1997 Bonus Plan
10.2a -- Second Amendment to Employment Agreement effective as of February 5, 1997 between
Richard Snell and the Company
21 -- Subsidiaries of the Company
23.1 -- Consent of Deloitte & Touche LLP
27 -- Financial Data Schedule
In addition to those Exhibits shown above, the Company hereby
incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and
Regulation ss. 229.l0(d) by reference to the filings set forth below:
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
3.2 Articles of Incorporation, 19.1 to the Company's 1-8962 11-14-88
restated as of July 29, 1988 September 1988 Form 10-Q
Report
3.3 Bylaws, amended as of 3.1 to the Company's 1995 1-8962 4-1-96
February 21, 1996 Form 10-K Report
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
4.1 Mortgage and Deed of Trust 4.1 to APS' September 1-4473 11-9-92
Relating to APS' First 1992 Form 10-Q Report
Mortgage Bonds, together with
forty-eight indentures
supplemental thereto
4.2 Forty-ninth Supplemental 4.1 to APS' 1992 Form 10- 1-4473 3-30-93
Indenture K Report
4.3 Fiftieth Supplemental Indenture 4.2 to APS' 1993 Form 10- 1-4473 3-30-94
K Report
4.4 Fifty-first Supplemental 4.1 to APS' August 1, 1993 1-4473 9-27-93
Indenture Form 8-K Report
4.5 Fifty-second Supplemental 4.1 to APS' September 30, 1-4473 11-15-93
Indenture 1993 Form 10-Q Report
4.6 Fifty-third Supplemental 4.5 to APS' Registration 1-4473 3-1-94
Indenture Statement No. 33-61228 by
means of February 23, 1994
Form 8-K Report
4.7 Fifty-fourth Supplemental 4.1 to APS' Registration 1-4473 11-22-96
Indenture Statements Nos. 33-61228,
33-55473, 33-64455 and
333-15379 by means of
November 19, 1996 Form
8-K Report
4.8 Agreement, dated March 21, 4.1 to APS' 1993 Form 10- 1-4473 3-30-94
1994, relating to the filing of K Report
instruments defining the rights
of holders of APS long-term
debt not in excess of 10% of
APS' total assets
4.9 Indenture dated as of January 4.6 to APS' Registration 1-4473 1-11-95
1, 1995 among APS and The Statement Nos. 33-61228
Bank of New York, as Trustee and 33-55473 by means of
January 1, 1995 Form 8-K
Report
4.10 First Supplemental Indenture 4.4 to APS' Registration l-4473 1-11-95
dated as of January 1, 1995 Statement Nos. 33-61228
and 33-55473 by means of
January 1, 1995 Form 8-K
Report
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
4.11 Indenture dated as of 4.5 to APS' Registration 1-4473 11-22 -96
November 15, 1996 among Statements Nos. 33-61228,
APS and The Bank of New 33-55473, 33-64455 and
York, as Trustee 333-15379 by means of
November 19, 1996 Form
8-K Report
4.12 First Supplemental Indenture 4.6 to APS' Registration 1-4473 11-22-96
Statements Nos. 33-61228,
33-55473, 33-64455 and
333-15379 by means of
November 19, 1996 Form
8-K Report
4.13 Agreement of Resignation, 4.1 to APS' September 25, 1-4473 10-24-95
Appointment, Acceptance and 1995 Form 8-K Report
Assignment dated as of August
18, 1995 by and among APS,
Bank of America National
Trust and Savings Association
and The Bank of New York
4.14 Rights Agreement, amended as 4.1 to the Company's 1990 1-8962 3-28-91
of November 14, 1990, Form 10-K Report
between the Company and The
Valley National Bank of
Arizona, as Rights Agent,
which includes the Certificate
of Designation of Series A
Participating Preferred Stock as
Exhibit A, the form of Rights
Certificate as Exhibit B and the
Summary of Rights as Exhibit
C
4.15 Specimen Certificate of 4.2 to the Company's 1988 1-8962 3-31-89
Pinnacle West Capital Form 10-K Report
Corporation Common Stock,
no par value
4.16 Agreement, dated March 29, 4.1 to the Company's 1987 1-8962 3-30-88
1988, relating to the filing of Form 10-K Report
instruments defining the rights
of holders of long-term debt
not in excess of 10% of the
Company's total assets
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.3 Agreement, dated December 6, 4.1 to the Company's 1-8962 12-7-89
1989, between the Company December 6, 1989 Form 8-
and the Office of Thrift K Report
Supervision, United States
Department of Treasury, and
related documents
10.4 Release from the Office of 10.1 to the Company's 1989 1-8962 3-31-89
Thrift Supervision, United Form 10-K Report
States Department of Report
the Treasury, to the Company,
dated March 22, 1990,
releasing the Company from its
purported obligations under the
Stipulation and under any other
source of alleged obligation of
the Company to infuse equity
capital into MeraBank
10.5 Release from the Federal 10.2 to the Company's 1989 1-8962 3-31-89
Deposit Insurance Corporation Form 10-K Report
to the Company, dated March
22, 1990, releasing the
Company from its purported
obligations under the
Stipulation and under any other
source of alleged obligation of
the Company to infuse equity
capital into MeraBank
10.6 Release from the Resolution 10.3 to the Company's 1989 1-8962 3-31-89
Trust Corporation (in its Form 10-K Report
corporate capacity) to the
Company, dated March 21,
1990, releasing the Company
from its purported obligations
under the Stipulation and under
any other source of alleged
obligation of the Company to
infuse equity capital into
MeraBank
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.7 Release from the Resolution 10.4 to the Company's 1989 1-8962 3-31-89
Trust Corporation (in its Form 10-K Report
capacity as Receiver of
MeraBank) to the Company,
dated March 21, 1990,
releasing the Company from its
purported obligations under the
Stipulation and under any other
source of alleged obligation to
the Company to infuse equity
capital into MeraBank
10.8ad Form of Key Executive 10.5 to the Company's 1989 1-8962 3-31-89
Employment and Severance Form 10-K Report
Agreement between the
Company and each of its
executive officers
10.9a Employment Agreement, 10.1 to the Company's 1990 2-96386 3-28-91
effective as of February 5, Form 10-K Report
1990, between Richard Snell
and the Company
10.10 Two separate 10.2 to APS' September 1-4473 11-14-91
Decommissioning Trust 1991 Form 10-Q Report
Agreements (relating to
PVNGS Units 1 and 3,
respectively), each dated July
1, 1991, between APS and
Mellon Bank, N.A., as
Decommissioning Trustee
10.11 Amendment No. 1 to 10.1 to APS' 1994 Form 1-4473 3-30-95
Decommissioning Trust 10-K Report
Agreement (PVNGS Unit 1),
dated as of December 1, 1994
10.12 Amendment No. 1 to 10.2 to APS' 1994 Form 1-4473 3-30-95
Decommissioning Trust 10-K Report
Agreement (PVNGS Unit 3),
dated as of December 1, 1994
10.13 Amendment No. 2 to APS 10.4 to APS' 1996 Form 1-4473 3-28-97
Decommissioning Trust Agreement 10-K Report
(PVNGS Unit 1) dated as of
July 1, 1991
10.14 Amendment No. 2 to APS 10.6 to APS' 1996 Form 1-4473 3-28-97
Decommissioning Trust Agreement 10-K Report
(PVNGS Unit 3) dated as of
July 1, 1991
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.15 Amended and Restated 10.1 to the Company's 1991 1-8962 3-26-92
Decommissioning Trust Form 10-K Report
Agreement (PVNGS Unit 2)
dated as of January 31, 1992,
among APS, Mellon Bank,
N.A., as Decommissioning
Trustee, and State Street Bank
and Trust Company, as
successor to The First National
Bank of Boston, as Owner
Trustee under two separate
Trust Agreements, each with a
separate Equity Participant, and
as Lessor under two separate
Facility Leases, each relating to
an undivided interest in
PVNGS Unit 2
10.16 First Amendment to Amended 10.2 to APS' 1992 Form 1-4473 3-30-93
and Restated Decommissioning 10-K Report
Trust Agreement (PVNGS Unit
2), dated as of November 1,
1992
10.17 Amendment No. 2 to Amended 10.2 to APS' 1994 Form 1-4473 3-30-95
and Restated Decommissioning 10-K Report
Trust Agreement (PVNGS Unit
2), dated as of November 1,
1994
10.18 Amendment No. 3 to Amended 10.1 to APS' June 1996 1-4473 8-9-96
and Restated Decommissioning Form 10-Q Report
Trust Agreement (PVNGS Unit
2), dated as of November 1,
1994
10.19 Amendment No. 4 to APS Amended 10.5 to APS' 1996 Form 1-4473 3-28-97
and Restated Decommissioning Trust 10-K Report
Agreement (PVNGS Unit 2) dated
as of January 31, 1992
10.20 Asset Purchase and Power 10.1 to APS' June 1991 1-4473 8-8-91
Exchange Agreement dated Form 10-Q Report
September 21, 1990 between
APS and PacifiCorp, as
amended as of October 11,
1990 and as of July 18, 1991
10.21 Long-Term Power Transactions 10.2 to APS' June 1991 1-4473 8-8-91
Agreement dated September Form 10-Q Report
21, 1990 between APS and
PacifiCorp, as amended as of
October 11, 1990, and as of
July 8, 1991
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.22 Amendment No. 1 dated April 10.3 to APS' 1995 Form 1-4473 3-29-96
5, 1995 to the Long-Term 10-K Report
Power Transaction Agreement
and Asset Purchase and Power
Exchange Agreement between
PacifiCorp and APS
10.23 Restated Transmission 10.4 to APS' 1995 Form 1-4473 3-29-96
Agreement between PacifiCorp 10-K Report
and APS dated April 5, 1995
10.24 Contract among PacifiCorp, 10.5 to APS' 1995 Form 1-4473 3-29-96
APS and United States 10-K Report
Department of Energy Western
Area Power Administration,
Salt Lake Area Integrated
Projects for Firm Transmission
Service dated May 5, 1995
10.25 Reciprocal Transmission 10.6 to APS' 1995 Form 1-4473 3-29-96
Service Agreement between 10-K Report
APS and PacifiCorp dated as of
March 2, 1994
10.26 Contract, dated July 21, 1984, 10.31 to the Company's 2-96386 3-13-85
with DOE providing for the Form S-14 Registration
disposal of nuclear fuel and/or Statement
high-level radioactive waste,
ANPP
10.27 Indenture of Lease with Navajo 5.01 to APS' Form S-7 2-59644 9-1-77
Tribe of Indians, Four Corners Registration Statement
Plant
10.28 Supplemental and Additional 5.02 to APS' Form S-7 2-59644 9-1-77
Indenture of Lease, including Registration Statement
amendments and supplements
to original lease with Navajo
Tribe of Indians, Four Corners
Plant
10.29 Amendment and Supplement 10.36 to the Company's 1-8962 7-25-85
No. 1 to Supplemental and Registration Statement on
Additional Indenture of Lease, Form 8-B Report
Four Corners, dated April 25,
1985
10.30 Application and Grant of multi- 5.04 to APS' Form S-7 2-59644 9-1-77
party rights-of-way and Registration Statement
easements, Four Corners Plant
Site
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.31 Application end Amendment 10.37 to the Company's 1-8962 7-25-85
No. 1 to Grant of multi-party Registration Statement on
rights-of-way and easements, Form 8-B
Four Corners Power Plant Site,
dated April 25, 1985
10.32 Application and Grant of 5.05 to APS' Form S-7 2-59644 9-1-77
Arizona Public Service Registration Statement
Company rights-of-way and
easements, Four Corners Plant
Site
10.33 Application end Amendment 10.38 to the Company's 1-8962 7-25-85
No. 1 to Grant of Arizona Registration Statement on
Public Service Company Form 8-B
rights-of-way and easements,
Four Corners Power Plant Site,
dated April 25, 1985
10.34 Indenture of Lease, Navajo 5(g) to APS' Form S-7 2-36505 3-23-70
Units 1, 2, and 3 Registration Statement
10.35 Application and Grant of 5(h) to APS' Form S-7 2-36505 3-23-70
rights-of-way and easements, Registration Statement
Navajo Plant
10.36 Water Service Contract 5(1) to APS' Form S-7 2-394442 3-16-71
Assignment with the United Registration Statement
States Department of Interior,
Bureau of Reclamation, Navajo
Plant
10.37 Arizona Nuclear Power Project 10.1 to APS' 1988 Form 1-4473 3-8-89
Participation Agreement, dated 10-K
August 23, 1973, among APS,
Salt River Project Agricultural
Improvement and Power
District, Southern California
Edison Company' Public
Service Company of New
Mexico, El Paso Electric
Company, Southern California
Public Power Authority, and
Department of Water and
Power of the City of Los
Angeles, and amendments 1-12
thereto
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.38 Amendment No. 13, dated as of 10.1 to APS' March 1991 1-4473 5-15-91
April 22, 1991, to Arizona Form 10-Q
Nuclear Power Project
Participation Agreement, dated
August 23, 1973, among APS,
Salt River Project Agricultural
Improvement and Power
District, Southern California
Edison Company, Public
Service Company of New
Mexico, El Paso Electric
Company, Southern California
Public Power Authority, and
Department of Water and
Power of the City of Los
Angeles
10.39c Facility Lease, dated as of 4.3 to APS' Form S-3 33-9480 10-24-86
August 1, 1986, between State Registration Statement
Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
in its capacity as Owner
Trustee, as Lessor, and APS, as
Lessee
10.40c Amendment No. 1, dated as of 10.5 to APS' September 1-4473 12-4-86
November 1, 1986, to Facility 1986 Form 10-Q Report by
Lease, dated as of August 1, means of Amendment No. 1
1986, between State Street on December 3, 1986 Form
Bank and Trust Company, as 8
successor to The First National
Bank of Boston, in its capacity
as Owner Trustee, as Lessor,
and APS, as Lessee
10.41c Amendment No. 2 dated as of 10.3 to APS' 1988 Form 1-4473 3-8-89
June 1, 1987 to Facility Lease 10-K Report
dated as of August 1, 1986
between State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Lessor, and APS, as
Lessee
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.42c Amendment No. 3, dated as of 10.3 to APS' 1992 Form 1-4473 3-30-93
March 17, 1993, to Facility 10-K Report
Lease, dated as of August 1,
1986, between State Street
Bank and Trust Company, as
successor to The First National
Bank of Boston, as Lessor, and
APS, as Lessee
10.43 Facility Lease, dated as of 10.1 to APS' November 18, 1-4473 1-20-87
December 15, 1986, between 1986 Form 8-K Report
State Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
in its capacity as Owner
Trustee, as Lessor, and APS, as
Lessee
10.44 Amendment No. 1, dated as of 4.13 to APS' Form S-3 1-4473 8-24-87
August 1, 1987, to Facility Registration Statement No.
Lease, dated as of December 33-9480 by means of
15, 1986, between State Street August 1, 1987 Form 8-K
Bank and Trust Company, as Report
successor to The First National
Bank of Boston, as Lessor, and
APS, as Lessee
10.45 Amendment No. 2, dated as of 10.4 to APS' 1992 Form 1-4473 3-30-93
March 17,1993, to Facility 10-K Report
Lease, dated as of December
15, 1986, between State Street
Bank and Trust Company, as
successor to The First National
Bank of Boston, as Lessor, and
APS, as Lessee
10.46a Directors' Deferred 10.1 to APS' June 1986 1-4473 8-13-86
Compensation Plan, as restated, Form 10-Q Report
effective January 1, 1986
10.47a Second Amendment to the 10.2 to APS' 1993 Form 1-4473 3-30-94
Arizona Public Service 10-K Report
Company Deferred
Compensation Plan, effective
as of January 1, 1993
10.48a Third Amendment to the 10.1 to APS' September 1-4473 11-10-94
Arizona Public Service 1994 Form 10-Q
Company Directors' Deferred
Compensation Plan, effective
as of May 1, 1993
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.49a Arizona Public Service 10.4 to APS' 1988 Form 1-4473 3-8-89
Company Deferred 10-K Report
Compensation Plan, as restated,
effective January 1, 1984, and
the second and third amendments
thereto, dated December 22, 1986,
and December 23, 1987
respectively
10.50 Third Amendment to the 10.3 to APS' 1993 Form 1-4473 3-30-94
Arizona Public Service 10-K Report
Company Deferred
Compensation Plan, effective
as of January 1, 1993
10.51a Fourth Amendment to the 10.2 to APS' September 1-4473 11-10-94
Arizona Public Service 1994 Form 10-Q Report
Company Deferred
Compensation Plan effective as
of May 1, 1993
10.52a Fifth Amendment to the Arizona 10.3 to APS' 1996 Form 1-4473 3-28-97
Public Service Company Deferred 10-K Report
Compensation Plan
10.53a 1997 APS Senior Management 10.1 to APS' 1996 Form 1-4473 3-28-97
Variable Pay Plan 10-K Report
10.54a 1997 APS Officers Variable Pay 10.2 to APS' 1996 Form 1-4473 3-28-97
Plan 10-K Report
10.55a Pinnacle West Capital 10.10 to APS' 1995 Form 1-4473 3-29-96
Corporation, Arizona Public 10-K Report
Service Company, SunCor
Development Company and El
Dorado Investment Company
Deferred Compensation Plan as
amended and restated effective
January 1, 1996
10.56a Arizona Public Service 10.11 to APS' 1995 Form 1-4473 3-29-96
Company Supplemental Excess 10-K Report
Benefit Retirement Plan as
amended and restated on
December 20, 1995
10.57a Pinnacle West Capital 10.7 to APS' 1994 Form 1-4473 3-30-95
Corporation and Arizona 10-K Report
Public Service Company
Directors' Retirement Plan,
effective as of January l, 1995
10.58a Letter Agreement dated 10.7 to APS' 1994 Form 1-4473 3-30-96
December 21, 1993, between 10-K Report
APS and William L. Stewart
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.59a Agreement for Utility 10.6 to APS' 1988 Form 1-4473 3-8-89
Consulting Services, dated 10-K Report
March 1, 1985, between APS
and Thomas G. Woods, Jr., and
Amendment No. 1 thereto,
dated January 6, 1986
10.60a Letter Agreement, dated April 10.7 to APS' 1988 Form 1-4473 3-8-89
3, 1978, between APS and O. 10-K Report
Mark DeMichele, regarding
certain retirement benefits
granted to Mr. DeMichele
10.61a Letter Agreement dated July 10.1 to APS' September 1-4473 11-14-95
28, 1995, between APS and 1995 10-Q Report
Jaron B. Norberg regarding
certain of Mr. Norberg's
retirement benefits.
10.62a Letter Agreement dated as of 10.8 to APS' 1995 Form 1-4473 3-29-96
January 1, 1996 between APS 10-K Report
and Robert G. Matlock &
Associates, Inc. for consulting
services
10.63 Letter Agreement dated October 10.7 to APS' 1996 Form 1-4473 3-28-97
9, 1996 between APS and Jaron 10-K Report
B. Norberg
10.64 Letter Agreement dated August 10.8 to APS' 1996 Form 1-4473 3-28-97
16, 1996 between APS and William 10-K Report
L. Stewart
10.65 Letter Agreement dated November 10.9 to APS' 1996 Form 1-4473 3-28-97
27, 1996 between APS and George 10-K Report
A. Schreiber, Jr.
10.66ad Key Executive Employment 10.3 to APS' 1989 Form 1-4473 3-8-90
and Severance Agreement 10-K Report
between APS and certain
executive of officers of APS
10.67ad Revised form of Key Executive 10.5 to APS' 1993 Form 1-4473 3-30-94
Employment and Severance 10-K Report
Agreement between APS and
certain executive officers of
APS
10.68ad Second revised form of Key 10.9 to APS' 1994 Form 1-4473 3-30-95
Executive Employment and 10-K Report
Severance Agreement between
APS and certain executive
officers of APS
10.69ad Key Executive Employment 10.4 to APS' 1989 Form 1-4473 3-8-90
and Severance Agreement 10-K Report
between APS and certain
managers of APS
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.70ad Revised form of Key Executive 10.4 to APS' 1993 Form 1-4473 3-30-94
Employment and Severance 10-K Report
Agreement between APS and
certain key employees of APS
10.71ad Second revised Form of Key 10.8 to APS' 1994 Form 1-4473 3-30-95
Executive Employment and 10-K Report
Severance Agreement between
APS and certain key employees
of APS
10.72a Pinnacle West Capital 10.1 to APS' 1992 Form 1-4473 3-30-93
Corporation Stock Option and 10-K Report
Incentive Plan
10.73a Pinnacle West Capital A to the Proxy Statement 1-8962 4-16-94
Corporation 1994 Long-Term for the Plan Report for the
Incentive Plan, effective as of Company's 1994 Annual
March 23, 1994 Meeting of Shareholders
10.74a Pinnacle West Capital B to the Proxy Statement 1-8962 4-16-94
Corporation Director Equity for the Plan Report for the
Participation Plan Company's 1994 Annual
Meeting of Shareholders
10.75 Agreement No. 13904 (Option 10.3 to APS' 1991 Form 1-4473 3-19-92
and Purchase of Effluent) with 10-K Report
Cities of Phoenix, Glendale,
Mesa, Scottsdale, Tempe,
Town of Youngtown, and Salt
River Project Agricultural
Improvement and Power
District, dated April 23, 1973
10.76 Agreement for the Sale and 10.4 to APS' 1991 Form 1-4473 3-19-92
purchase of Wastewater 10-K Report
Effluent with City of Tolleson
and Salt River Agricultural
Improvement and Power
District, dated June 12, 1981,
including Amendment No. 1
dated as of November 12, 1981
and Amendment No. 2 dated as
of June 4, 1986
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
10.77a First Amendment to 10.2 to the Company's 1995 1-8962 4-1-96
Employment Agreement, Form 10-K Report
effective March 31, 1995,
between Richard Snell and the
Company
99.1 Collateral Trust Indenture 4.2 to APS' 1992 Form 10- 1-4473 3-30-93
among PVNGS II Funding K Report
Corp., Inc., APS and Chemical
Bank, as Trustee
99.2 Supplemental Indenture to 4.3 to APS' 1992 Form 10- 1-4473 3-30-93
Collateral Trust Indenture K Report
among PVNGS II Funding
Corp., Inc., APS and Chemical
Bank, as Trustee
99.3c Participation Agreement, dated 28.1 to APS' September 1-4473 11-9-92
as of August 1, 1986, among 1992 Form 10-Q Report
PVNGS Funding Corp., Inc.,
Bank of America National
Trust and Savings Association,
State Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
in its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual capacity
and as Indenture Trustee, APS,
and the Equity Participant
named therein
99.4c Amendment No. 1 dated as of 10.8 to APS' September 1-4473 12-4-86
November 1, 1989, to 1986 Form 10-Q Report by
Participation Agreement, dated means of Amendment No.
as of August 1, 1986, among 1, on December 3, 1986
PVNGS Funding Corp., Inc., Form 8
Bank of America National
Trust and Savings Association,
State Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
in its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual capacity
and as Indenture Trustee, APS,
and the Equity Participant
named therein
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
99.5c Amendment No. 2, dated as of 28.4 to APS' 1992 Form 1-4473 3-30-93
March 17, 1993, to 10-K Report
Participation Agreement, dated
as of August 1, 1986, among
PVNGS Funding Corp., Inc.,
PVNGS II Funding Corp., Inc.,
State Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
in its individual capacity and as
Owner Trustee, Chemical
Bank, in its individual capacity
and as Indenture Trustee, APS,
and the Equity Participant
named therein
99.6c Trust Indenture, Mortgage, 4.5 to APS' Form S-3 33-9480 10-24-86
Security Agreement and Registration Statement
Assignment of Facility Lease,
dated as of August 1, 1986,
between State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Owner Trustee, and
Chemical Bank, as Indenture
Trustee
99.7c Supplemental Indenture No.1, 10.6 to APS' September 1-4473 12-4-86
dated as of November 1, 1986 1986 Form 10-Q Report by
to Trust Indenture, Mortgage, means of Amendment No. 1
Security Agreement and on December 3, 1986 Form
Assignment of Facility Lease, 8
dated as of August 1, 1986,
between State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Owner Trustee, and
Chemical Bank, as Indenture
Trustee
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
99.8c Supplemental Indenture No. 2 28.14 to APS' 1992 Form 1-4473 3-30-93
to Trust Indenture, Mortgage, 10-K Report
Security Agreement and
Assignment of Facility Lease,
dated as of August 1, 1986,
between State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Owner Trustee, and
Chemical Bank, as Lease
Indenture Trustee
99.9c Assignment, Assumption and 28.3 to APS' Form S-3 33-9480 10-24-86
Further Agreement, dated as of Registration Statement
August 1, 1986, between APS
and State Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
as Owner Trustee
99.10c Amendment No. 1, dated as of 10.10 to APS' September 1-4473 12-4-86
November 1, 1986, to 1986 Form 10-Q Report by
Assignment, Assumption and means of Amendment No. l
Further Agreement, dated as of on December 3, 1986 Form
August 1, 1986, between APS 8
and State Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
as Owner Trustee
99.11c Amendment No. 2, dated as of 28.6 to APS' 1992 Form 1-4473 3-30-93
March 17, 1993, to 10-K Report
Assignment, Assumption and
Further Agreement, dated as of
August 1, 1986, between APS
and State Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
as Owner Trustee
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
99.12 Participation Agreement, dated 28.2 to APS' September 1-4473 11-9-92
as of December 15, 1986, 1992 Form 10-Q Report
among PVNGS Funding
Report Corp., Inc., State Street
Bank and Trust Company, as
successor to The First National
Bank of Boston, in its
individual capacity and as
Owner Trustee, Chemical
Bank, in its individual capacity
and as Indenture Trustee under
a Trust Indenture, APS, and the
Owner Participant named
therein
99.13 Amendment No. 1, dated as of 28.20 to APS' Form S-3 1-4473 8-10-87
August 1, 1987, to Participation Registration Statement No.
Agreement, dated as of 33-9480 by means of a
December 15, 1986, among November 6, 1986 Form 8-
PVNGS Funding Corp., Inc. as K Report
Funding Corporation, State
Street Bank and Trust
Company, as successor to The
First National Bank of Boston,
as Owner Trustee, Chemical
Bank, as Indenture Trustee,
APS, and the Owner Participant
named therein
99.14 Amendment No. 2, dated as of 28.5 to APS' 1992 Form 1-4473 3-30-93
March 17, 1993, to 10-K Report
Participation Agreement, dated
as of December 15, 1986,
among PVNGS Funding Corp.,
Inc., PVNGS II Funding Corp.,
Inc., State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, in its individual
capacity and as Owner Trustee,
Chemical Bank, in its
individual capacity and as
Indenture Trustee, APS, and
the Owner Participant named
therein
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
99.15 Trust Indenture, Mortgage, 10.2 to APS' November 18, 1-4473 1-20-87
Security Agreement and 1986 Form 10-K Report
Assignment of Facility Lease,
dated as of December 15, 1986,
between State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Owner Trustee, and
Chemical Bank, as Indenture
Trustee
99.16 Supplemental Indenture No. 1, 4.13 to APS' Form S-3 1-4473 8-24-87
dated as of August 1, 1987, to Registration Statement No.
Trust Indenture, Mortgage, 33-9480 by means of
Security Agreement and August 1, 1987 Form 8-K
Assignment of Facility Lease, Report
dated as of December 15, 1986,
between State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Owner Trustee, and
Chemical Bank, as Indenture
Trustee
99.17 Supplemental Indenture No. 2 4.5 to APS' 1992 Form 10- 1-4473 3-30-93
to Trust Indenture Mortgage, K Report
Security Agreement and
Assignment of Facility Lease,
dated as of December 15, 1986,
between State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Owner Trustee, and
Chemical Bank, as Lease
Indenture Trustee
99.18 Assignment, Assumption and 10.5 to APS' November 18, 1-4473 1-20-87
Further Agreement, dated as of 1986 Form 8-K Report
December 15, 1986, between
APS and State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Owner Trustee
Exhibit No. Description Originally Filed as Exhibit: File No.b Date Effective
- - ----------- ----------- ---------------------------- --------- --------------
99.19 Amendment No. 1, dated as of 28.7 to APS' 1992 Form 1-4473 3-30-93
March 17, 1993, to 10-K Report
Assignment, Assumption and
Further Agreement, dated as of
December 15, 1986, between
APS and State Street Bank and
Trust Company, as successor to
The First National Bank of
Boston, as Owner Trustee
99.20c Indemnity Agreement dated as 28.3 to APS' 1992 Form 1-4473 3-30-93
of March 17, 1993 by APS 10-K Report
99.21 Extension Letter, dated as of 28.20 to APS' Form S-3 1-4473 8-10-87
August 13, 1987, from the Registration Statement No.
signatories of the Participation 33-9480 by means of a
Agreement to Chemical Bank November 6, 1986 Form 8-
K Report
99.22 Arizona Corporation 28.1 to APS' 1991 Form 1-4473 3-19-92
Commission Order dated 10-K Report
December 6, 1991
99.23 Arizona Corporation 10.1 to APS' June 1994 1-4473 8-12-94
Commission Order dated June form 10-Q Report
1, 1994
99.24 Rate Reduction Agreement 10.1 to APS' December 4, 1-4473 12-14-95
dated December 4, 1995 1995 8-K Report
between APS and the ACC
Staff
99.25 ACC Order dated April 24, 10.1 to APS' March 1996 1-4473 5-14-96
1996 Form 10-Q Report
99.26 Arizona Corporation Commission 99.1 to APS' 1996 Form 1-4473 3-28-97
Order, Decision No. 59943, dated 10-K Report
December 26, 1996, including the
Rules regarding the introduction
of retail competition in Arizona
(a) Management contract or compensatory plan or arrangement required
to be filed as an exhibit pursuant to Item 14(c) of Form 10-K
(b) Reports filed under File Nos. 1-4473 and 1-8962 were filed in the
office of the Securities and Exchange Commission located in Washington, D.C.
(c) An additional document, substantially identical in all material
respects to this Exhibit, has been entered into, relating to an additional
Equity Participant. Although such additional document may differ in other
respects (such as dollar amounts, percentages, tax indemnity matters, and dates
of execution), there are no material details in which such document differs from
this Exhibit.
(d) Additional agreements, substantially identical in all material
respects to this Exhibit have been entered into with additional persons.
Although such additional documents may differ in other respects (such as dollar
amounts and dates of execution), there are no material details in which such
agreements differ from this Exhibit.
Reports on Form 8-K
During the quarter ended December 31, 1996, and the period ended March
28, 1997, the Company did not file any Report on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PINNACLE WEST CAPITAL CORPORATION
(Registrant)
Date: March 28, 1997 Richard Snell
-----------------------------------------
(Richard Snell, Chairman of the Board of
Directors and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Richard Snell Principal Executive March 28, 1997
- - -------------------------------------------------- Officer and Director
(Richard Snell, Chairman of the Board of Directors
and Chief Executive Officer)
William J. Post President and March 28, 1997
- - -------------------------------------------------- Director
(William J. Post)
George A. Schreiber Principal Financial March 28, 1997
- - -------------------------------------------------- Officer, Principal
(George A. Schreiber, Jr.) Accounting Officer,
Executive Vice
President and Director
Pamela Grant Director March 28, 1997
- - --------------------------------------------------
(Pamela Grant)
Roy A. Herberger, Jr. Director March 28, 1997
- - --------------------------------------------------
(Roy A. Herberger, Jr.)
Martha O. Hesse Director March 28, 1997
- - --------------------------------------------------
(Martha O. Hesse)
William S. Jamieson, Jr. Director March 28, 1997
- - --------------------------------------------------
(William S. Jamieson, Jr.)
John R. Norton, III Director March 28, 1997
- - --------------------------------------------------
(John R. Norton, III)
Humberto S. Lopez Director March 28, 1997
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(Humberto S. Lopez)
Douglas J. Wall Director March 28, 1997
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(Douglas J. Wall)
COMMISSION FILE NUMBER 1-8962
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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EXHIBITS TO
1996 FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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PINNACLE WEST CAPITAL CORPORATION
(Exact name of registrant as specified in charter)
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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10.1a -- Summary of the Pinnacle West Capital Corporation 1997 Bonus Plan
10.2a -- Second Amendment to Employment Agreement effective as of February 5, 1997,
between Richard Snell and the Company
21 -- Subsidiaries of the Company
23.1 -- Consent of Deloitte & Touche LLP
27 -- Financial Data Schedule
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(a)Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.