e10vq
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
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o |
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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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Exact Name of Each Registrant as specified in |
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Commission |
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its charter; State of Incorporation; Address; |
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IRS Employer |
File Number |
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and Telephone Number |
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Identification No. |
1-8962
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PINNACLE WEST CAPITAL CORPORATION
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86-0512431 |
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(an Arizona corporation) |
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400 North Fifth Street, P.O. Box 53999 |
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Phoenix, Arizona 85072-3999 |
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(602) 250-1000 |
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1-4473
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ARIZONA PUBLIC SERVICE COMPANY
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86-0011170 |
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(an Arizona corporation) |
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400 North Fifth Street, P.O. Box 53999 |
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Phoenix, Arizona 85072-3999 |
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(602) 250-1000 |
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Indicate by check mark whether each 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.
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PINNACLE WEST CAPITAL CORPORATION
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Yes þ No o |
ARIZONA PUBLIC SERVICE COMPANY
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Yes þ No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
PINNACLE WEST CAPITAL CORPORATION
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
ARIZONA PUBLIC SERVICE COMPANY
Large accelerated filer o Accelerated filer o Non-accelerated filer þ
Indicate by check mark whether each registrant is a shell company (as defined in Exchange Act
Rule 12b-2).
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PINNACLE WEST CAPITAL CORPORATION
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Yes o No þ |
ARIZONA PUBLIC SERVICE COMPANY
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Yes o No þ |
Indicate the number of shares outstanding of each of the issuers classes of common stock as
of the latest practicable date.
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PINNACLE WEST CAPITAL CORPORATION
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Number of shares of common stock, no par
value, outstanding as of August 3,
2007: 100,309,188 |
ARIZONA PUBLIC SERVICE COMPANY
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Number of shares of common stock, $2.50
par value, outstanding as of August 3,
2007: 71,264,947 |
Arizona Public Service Company meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format allowed
under that General Instruction.
This combined Form 10-Q is separately filed by Pinnacle West Capital Corporation and Arizona
Public Service Company. Each registrant is filing on its own behalf all of the information
contained in this Form 10-Q that relates to such registrant and, where required, its subsidiaries.
Except as stated in the preceding sentence, neither registrant is filing any information that does
not relate to such registrant, and therefore makes no representation as to any such information.
GLOSSARY
ACC Arizona Corporation Commission
ADEQ Arizona Department of Environmental Quality
ALJ Administrative Law Judge
APS Arizona Public Service Company, a subsidiary of the Company
APS Energy Services APS Energy Services Company, Inc., a subsidiary of the Company
Base Fuel Rate the $0.0325 per kWh base rate for fuel and purchased power established by the ACC
in its June 28, 2007 rate case order
Clean Air Act Clean Air Act, as amended
Company Pinnacle West Capital Corporation
DOE United States Department of Energy
El Dorado El Dorado Investment Company, a subsidiary of the Company
EPA United States Environmental Protection Agency
ERMC Energy Risk Management Committee
FASB Financial Accounting Standards Board
FERC United States Federal Energy Regulatory Commission
FIP Federal Implementation Plan
FIN FASB Interpretation Number
Fitch Fitch, Inc.
Four Corners Four Corners Power Plant
GAAP accounting principles generally accepted in the United States of America
IRS United States Internal Revenue Service
kWh kilowatt-hour, one thousand watts per hour
Moodys Moodys Investors Service
MWh megawatt-hour, one million watts per hour
Native Load retail and wholesale sales supplied under traditional cost-based rate regulation
Note a Note to Pinnacle Wests Condensed Consolidated Financial Statements in Item 1 of this
report
NRC United States Nuclear Regulatory Commission
OCI other comprehensive income
Off-System Sales sales of electricity from generation owned or contracted by the Company that is
over and above the amount required to serve APS retail customers and traditional wholesale
contracts
Palo Verde Palo Verde Nuclear Generating Station
2
Pinnacle West Pinnacle West Capital Corporation, the Company
Pinnacle West Energy Pinnacle West Energy Corporation, a subsidiary of the Company, dissolved as
of August 31, 2006
Pinnacle West Marketing & Trading Pinnacle West Marketing & Trading Co., LLC, a subsidiary of the
Company
PRP potentially responsible parties under Superfund
PSA power supply adjustor
Salt River Project Salt River Project Agricultural Improvement and Power District
SEC United States Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
Silverhawk Silverhawk Power Station
Standard & Poors Standard & Poors Corporation
SunCor SunCor Development Company, a subsidiary of the Company
Superfund Comprehensive Environmental Response, Compensation and Liability Act
2005 Deferrals PSA deferrals related to 2005 replacement power costs associated with unplanned
Palo Verde outages
2006 Deferrals PSA deferrals related to 2006 replacement power costs associated with unplanned
outages or reduced power operations at Palo Verde
2006 Form 10-K Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December
31, 2006
VIE variable interest entity
3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)
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Three Months Ended |
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June 30, |
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2007 |
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2006 |
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OPERATING REVENUES |
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Regulated electricity segment |
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$ |
711,293 |
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$ |
712,718 |
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Real estate segment |
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48,352 |
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112,603 |
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Marketing and trading |
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92,637 |
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89,925 |
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Other revenues |
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11,153 |
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9,782 |
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Total |
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863,435 |
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925,028 |
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OPERATING EXPENSES |
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Regulated electricity segment fuel and purchased power |
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270,337 |
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263,944 |
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Real estate segment operations |
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46,174 |
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98,412 |
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Marketing and trading fuel and purchased power |
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74,533 |
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72,716 |
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Operations and maintenance |
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177,310 |
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168,332 |
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Depreciation and amortization |
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92,835 |
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89,297 |
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Taxes other than income taxes |
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34,757 |
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32,700 |
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Other expenses |
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8,803 |
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8,430 |
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Total |
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704,749 |
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733,831 |
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OPERATING INCOME |
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158,686 |
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191,197 |
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OTHER |
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Allowance for equity funds used during construction |
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5,195 |
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3,633 |
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Other income (Note 14) |
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5,869 |
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12,022 |
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Other expense (Note 14) |
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(3,269 |
) |
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(5,815 |
) |
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Total |
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7,795 |
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9,840 |
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INTEREST EXPENSE |
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Interest charges |
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52,967 |
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45,882 |
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Capitalized interest |
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(5,213 |
) |
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(4,959 |
) |
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Total |
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47,754 |
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40,923 |
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INCOME FROM CONTINUING OPERATIONS BEFORE |
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INCOME TAXES |
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118,727 |
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160,114 |
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INCOME TAXES |
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40,231 |
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49,271 |
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INCOME FROM CONTINUING OPERATIONS |
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78,496 |
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110,843 |
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INCOME FROM DISCONTINUED OPERATIONS |
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Net of income tax expense of $310 and $855 (Note 17) |
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498 |
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1,311 |
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NET INCOME |
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$ |
78,994 |
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$ |
112,154 |
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WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING BASIC |
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100,229 |
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99,221 |
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WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING DILUTED |
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100,779 |
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99,640 |
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EARNINGS PER WEIGHTED-AVERAGE |
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COMMON SHARE OUTSTANDING |
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Income from continuing operations basic |
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$ |
0.78 |
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$ |
1.12 |
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Net income basic |
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0.79 |
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1.13 |
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Income from continuing operations diluted |
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0.78 |
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1.11 |
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Net income diluted |
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0.78 |
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1.13 |
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DIVIDENDS DECLARED PER SHARE |
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$ |
0.525 |
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$ |
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See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
4
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)
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Six Months Ended |
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June 30, |
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2007 |
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2006 |
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OPERATING REVENUES |
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Regulated electricity segment |
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$ |
1,247,344 |
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$ |
1,178,844 |
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Real estate segment |
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125,602 |
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220,457 |
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Marketing and trading |
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165,108 |
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174,927 |
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Other revenues |
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20,516 |
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21,006 |
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Total |
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1,558,570 |
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1,595,234 |
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OPERATING EXPENSES |
|
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|
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Regulated electricity segment fuel and purchased power |
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|
473,690 |
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|
421,339 |
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Real estate segment operations |
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107,617 |
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169,742 |
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Marketing and trading fuel and purchased power |
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|
132,477 |
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|
146,891 |
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Operations and maintenance |
|
|
348,888 |
|
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|
346,759 |
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Depreciation and amortization |
|
|
182,456 |
|
|
|
176,918 |
|
Taxes other than income taxes |
|
|
69,476 |
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|
68,273 |
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Other expenses |
|
|
17,291 |
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16,952 |
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|
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Total |
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|
1,331,895 |
|
|
|
1,346,874 |
|
|
|
|
|
|
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OPERATING INCOME |
|
|
226,675 |
|
|
|
248,360 |
|
|
|
|
|
|
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OTHER |
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|
|
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|
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Allowance for equity funds used during construction |
|
|
9,639 |
|
|
|
7,434 |
|
Other income (Note 14) |
|
|
8,642 |
|
|
|
17,489 |
|
Other expense (Note 14) |
|
|
(7,883 |
) |
|
|
(10,356 |
) |
|
|
|
|
|
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Total |
|
|
10,398 |
|
|
|
14,567 |
|
|
|
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
Interest charges |
|
|
103,959 |
|
|
|
93,408 |
|
Capitalized interest |
|
|
(10,020 |
) |
|
|
(8,983 |
) |
|
|
|
|
|
|
|
Total |
|
|
93,939 |
|
|
|
84,425 |
|
|
|
|
|
|
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INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES |
|
|
143,134 |
|
|
|
178,502 |
|
INCOME TAXES |
|
|
48,840 |
|
|
|
56,064 |
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
94,294 |
|
|
|
122,438 |
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
Net of income tax expense of $789 and $1,412 (Note 17) |
|
|
1,230 |
|
|
|
2,171 |
|
|
|
|
|
|
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NET INCOME |
|
$ |
95,524 |
|
|
$ |
124,609 |
|
|
|
|
|
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WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING BASIC |
|
|
100,138 |
|
|
|
99,168 |
|
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING DILUTED |
|
|
100,718 |
|
|
|
99,562 |
|
|
|
|
|
|
|
|
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|
EARNINGS PER WEIGHTED-AVERAGE |
|
|
|
|
|
|
|
|
COMMON SHARE OUTSTANDING |
|
|
|
|
|
|
|
|
Income from continuing operations basic |
|
$ |
0.94 |
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|
$ |
1.23 |
|
Net income basic |
|
|
0.95 |
|
|
|
1.26 |
|
Income from continuing operations diluted |
|
|
0.94 |
|
|
|
1.23 |
|
Net income diluted |
|
|
0.95 |
|
|
|
1.25 |
|
DIVIDENDS DECLARED PER SHARE |
|
$ |
1.05 |
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|
$ |
1.00 |
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
5
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
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2006 |
|
ASSETS |
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|
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|
|
|
|
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CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
23,472 |
|
|
$ |
87,210 |
|
Investment in debt securities |
|
|
|
|
|
|
32,700 |
|
Customer and other receivables |
|
|
504,318 |
|
|
|
501,628 |
|
Allowance for doubtful accounts |
|
|
(5,375 |
) |
|
|
(5,597 |
) |
Materials and supplies (at average cost) |
|
|
139,743 |
|
|
|
125,802 |
|
Fossil fuel (at average cost) |
|
|
31,527 |
|
|
|
21,973 |
|
Deferred income taxes |
|
|
20,600 |
|
|
|
982 |
|
Assets from risk management and trading
activities (Note 10) |
|
|
197,275 |
|
|
|
641,040 |
|
Assets held for sale (Note 17) |
|
|
21,485 |
|
|
|
|
|
Other current assets |
|
|
60,477 |
|
|
|
68,924 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
993,522 |
|
|
|
1,474,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS AND OTHER ASSETS |
|
|
|
|
|
|
|
|
Real estate investments net |
|
|
585,967 |
|
|
|
526,008 |
|
Assets from long-term risk management and
trading activities (Note 10) |
|
|
113,619 |
|
|
|
167,211 |
|
Decommissioning trust accounts (Note 18) |
|
|
362,484 |
|
|
|
343,771 |
|
Other assets |
|
|
112,794 |
|
|
|
111,388 |
|
|
|
|
|
|
|
|
Total investments and other assets |
|
|
1,174,864 |
|
|
|
1,148,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
Plant in service and held for future use |
|
|
11,392,309 |
|
|
|
11,154,919 |
|
Less accumulated depreciation and amortization |
|
|
3,882,224 |
|
|
|
3,797,475 |
|
|
|
|
|
|
|
|
Net |
|
|
7,510,085 |
|
|
|
7,357,444 |
|
Construction work in progress |
|
|
447,221 |
|
|
|
368,284 |
|
Intangible assets, net of accumulated amortization |
|
|
89,228 |
|
|
|
96,100 |
|
Nuclear fuel, net of accumulated amortization |
|
|
71,420 |
|
|
|
60,100 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
8,117,954 |
|
|
|
7,881,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED DEBITS |
|
|
|
|
|
|
|
|
Deferred fuel and purchased power regulatory asset
(Note 5) |
|
|
136,989 |
|
|
|
160,268 |
|
Other regulatory assets |
|
|
592,564 |
|
|
|
686,016 |
|
Other deferred debits (Note 8) |
|
|
165,821 |
|
|
|
104,691 |
|
|
|
|
|
|
|
|
Total deferred debits |
|
|
895,374 |
|
|
|
950,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
11,181,714 |
|
|
$ |
11,455,943 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
6
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
LIABILITIES AND COMMON STOCK EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
338,725 |
|
|
$ |
346,047 |
|
Accrued taxes (Note 8) |
|
|
326,253 |
|
|
|
263,935 |
|
Accrued interest |
|
|
50,317 |
|
|
|
48,746 |
|
Short-term borrowings |
|
|
140,344 |
|
|
|
35,750 |
|
Current
maturities of long-term debt (Note 4) |
|
|
66,315 |
|
|
|
1,596 |
|
Customer deposits |
|
|
74,763 |
|
|
|
70,168 |
|
Liabilities from risk management and trading
activities (Note 10) |
|
|
156,570 |
|
|
|
558,195 |
|
Other current liabilities |
|
|
116,475 |
|
|
|
134,123 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,269,762 |
|
|
|
1,458,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT LESS CURRENT MATURITIES (NOTE 4) |
|
|
3,232,661 |
|
|
|
3,232,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED CREDITS AND OTHER |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
1,236,002 |
|
|
|
1,225,798 |
|
Regulatory liabilities |
|
|
658,102 |
|
|
|
635,431 |
|
Liability for asset retirements |
|
|
272,977 |
|
|
|
268,389 |
|
Liabilities for pension and other postretirement benefits
(Note 6) |
|
|
605,111 |
|
|
|
588,852 |
|
Liabilities from long-term risk management
and trading activities (Note 10) |
|
|
59,596 |
|
|
|
171,170 |
|
Unamortized gain sale of utility plant |
|
|
38,894 |
|
|
|
41,182 |
|
Other |
|
|
385,396 |
|
|
|
387,812 |
|
|
|
|
|
|
|
|
Total deferred credits and other |
|
|
3,256,078 |
|
|
|
3,318,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTES 5, 8, 12,
13 and 15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK EQUITY |
|
|
|
|
|
|
|
|
Common stock, no par value |
|
|
2,126,244 |
|
|
|
2,114,550 |
|
Treasury stock |
|
|
(2,463 |
) |
|
|
(449 |
) |
|
|
|
|
|
|
|
Total common stock |
|
|
2,123,781 |
|
|
|
2,114,101 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) (Note 11): |
|
|
|
|
|
|
|
|
Pension and other postretirement benefits |
|
|
(46,056 |
) |
|
|
(19,263 |
) |
Derivative instruments |
|
|
38,003 |
|
|
|
31,531 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
|
(8,053 |
) |
|
|
12,268 |
|
|
|
|
|
|
|
|
Retained earnings |
|
|
1,307,485 |
|
|
|
1,319,747 |
|
|
|
|
|
|
|
|
Total common stock equity |
|
|
3,423,213 |
|
|
|
3,446,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND COMMON STOCK EQUITY |
|
$ |
11,181,714 |
|
|
$ |
11,455,943 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
7
PINNACLE WEST CAPITAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
95,524 |
|
|
$ |
124,609 |
|
Adjustments to reconcile net income to net cash provided
by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization including nuclear fuel |
|
|
198,893 |
|
|
|
188,863 |
|
Deferred fuel and purchased power |
|
|
(132,016 |
) |
|
|
(94,565 |
) |
Deferred fuel and purchased power amortization |
|
|
140,925 |
|
|
|
92,656 |
|
Deferred fuel and purchased power regulatory
disallowance |
|
|
14,370 |
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
(9,639 |
) |
|
|
(7,434 |
) |
Deferred income taxes |
|
|
(3,333 |
) |
|
|
16,481 |
|
Change in mark-to-market valuations |
|
|
2,324 |
|
|
|
11,730 |
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Customer and other receivables |
|
|
21,925 |
|
|
|
(764 |
) |
Materials, supplies and fossil fuel |
|
|
(23,495 |
) |
|
|
580 |
|
Other current assets |
|
|
3,810 |
|
|
|
3,806 |
|
Accounts payable |
|
|
(13,644 |
) |
|
|
(91,543 |
) |
Collateral |
|
|
(46,703 |
) |
|
|
(155,354 |
) |
Other current liabilities |
|
|
64,091 |
|
|
|
55,828 |
|
Proceeds from the sale of real estate assets |
|
|
19,808 |
|
|
|
15,482 |
|
Real estate investments |
|
|
(73,697 |
) |
|
|
(61,758 |
) |
Change in risk management and trading assets |
|
|
11,029 |
|
|
|
64,893 |
|
Change in risk management and trading liabilities |
|
|
15,883 |
|
|
|
(132,448 |
) |
Change in other long-term assets |
|
|
(20,138 |
) |
|
|
4,532 |
|
Change in other long-term liabilities |
|
|
24,403 |
|
|
|
20,631 |
|
|
|
|
|
|
|
|
Net cash flow provided by operating activities |
|
|
290,320 |
|
|
|
56,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(437,784 |
) |
|
|
(363,795 |
) |
Capitalized interest |
|
|
(10,020 |
) |
|
|
(8,983 |
) |
Proceeds from the sale of Silverhawk |
|
|
|
|
|
|
207,620 |
|
Purchases of investment securities |
|
|
(36,525 |
) |
|
|
(280,527 |
) |
Proceeds from sale of investment securities |
|
|
69,225 |
|
|
|
280,527 |
|
Proceeds from nuclear decommissioning trust sales |
|
|
133,463 |
|
|
|
114,875 |
|
Investment in nuclear decommissioning trust |
|
|
(143,834 |
) |
|
|
(125,246 |
) |
Other |
|
|
(2,981 |
) |
|
|
1,618 |
|
|
|
|
|
|
|
|
Net cash flow used for investing activities |
|
|
(428,456 |
) |
|
|
(173,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Issuance of long-term debt |
|
|
133,060 |
|
|
|
255,984 |
|
Repayment of long-term debt |
|
|
(68,801 |
) |
|
|
(353,549 |
) |
Short-term borrowings and payments net |
|
|
104,594 |
|
|
|
158,336 |
|
Dividends paid on common stock |
|
|
(105,110 |
) |
|
|
(99,227 |
) |
Common stock equity issuance |
|
|
17,930 |
|
|
|
8,910 |
|
Other |
|
|
(7,275 |
) |
|
|
8,837 |
|
|
|
|
|
|
|
|
Net cash flow provided by (used for) financing
activities |
|
|
74,398 |
|
|
|
(20,709 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(63,738 |
) |
|
|
(138,395 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
87,210 |
|
|
|
154,003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
23,472 |
|
|
$ |
15,608 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds |
|
$ |
40,714 |
|
|
$ |
251 |
|
Interest paid, net of amounts capitalized |
|
$ |
89,916 |
|
|
$ |
87,290 |
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements.
8
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Consolidation and Nature of Operations
The unaudited condensed consolidated financial statements include the accounts of Pinnacle
West and our subsidiaries: APS, Pinnacle West Energy (dissolved as of August 31, 2006), APS Energy
Services, SunCor, El Dorado and Pinnacle West Marketing & Trading. All significant intercompany
accounts and transactions between the consolidated companies have been eliminated. Our accounting
records are maintained in accordance with GAAP. The preparation of financial statements in
accordance with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Condensed Consolidated Financial Statements
Our unaudited condensed consolidated financial statements reflect all adjustments that we
believe are necessary for the fair presentation of our financial position, results of operations
and cash flows for the periods presented. We suggest that these condensed consolidated financial
statements and notes to condensed consolidated financial statements be read along with the
consolidated financial statements and notes to consolidated financial statements included in our
2006 Form 10-K. We have condensed certain prior year amounts on our condensed consolidated
statements of cash flows to conform to current year presentations.
3. Quarterly Fluctuations
Weather conditions cause significant seasonal fluctuations in our revenues. In addition, real
estate and trading and wholesale marketing activities can have significant impacts on our results
for interim periods. For these reasons, results for interim periods do not necessarily represent
results to be expected for the year.
4. Changes in Liquidity
On January 4, 2007, the FERC issued an order permitting Pinnacle West to transfer its
market-based rate tariff and wholesale power sales agreements to a newly-created Pinnacle West
subsidiary, Pinnacle West Marketing & Trading. Pinnacle West completed the transfer on February 1,
2007, which resulted in Pinnacle West no longer being a public utility under the Federal Power Act.
As a result, Pinnacle West is no longer subject to FERC jurisdiction in connection with its
issuance of securities or its incurrence of long-term debt.
SunCor entered into a secured construction loan on April 13, 2007, in the amount of $60
million, of which $26 million was outstanding at June 30, 2007. The loan matures on April 19,
2009, and may be extended one year if certain conditions are met.
In May 2007, Pinnacle West infused approximately $40 million of equity into APS, consisting of
the proceeds of stock issuances in 2006 under Pinnacle Wests Investors Advantage Plan (direct
stock purchase and dividend reinvestment plan) and employee stock plans.
9
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table shows principal payments due on Pinnacle Wests and APS total long-term
debt and capitalized lease requirements (dollars in millions) as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
|
Year |
|
Pinnacle West |
|
|
APS |
|
2007 |
|
$ |
1 |
|
|
$ |
|
|
2008 |
|
|
218 |
|
|
|
1 |
|
2009 |
|
|
27 |
|
|
|
1 |
|
2010 |
|
|
224 |
|
|
|
224 |
|
2011 |
|
|
578 |
|
|
|
401 |
|
Thereafter |
|
|
2,260 |
|
|
|
2,260 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,308 |
|
|
$ |
2,887 |
|
|
|
|
|
|
|
|
5. Regulatory Matters
APS General Rate Case and Power Supply Adjustor
Retail Rate Increase
On June 19, 2007, the ACC rendered its decision in APS general retail rate case pursuant to
which APS had requested a 20.4%, or $435 million, increase in its annual retail electricity
revenues. APS request was designed to recover approximately $315 million in fuel-related expenses
and approximately $120 million in non-fuel related expenses. The ACC order, which was formally
issued on June 28, 2007, increased APS annual retail base revenues by approximately $322 million,
effective July 1, 2007, which includes a fuel-related increase of approximately $315 million
(excluding the PSA surcharge for 2005 Deferrals discussed below), or 15.1%, and non-fuel related
increases of approximately $7 million. The interim PSA adjustor approved by the ACC on May 1,
2006, which was designed to recover a portion of APS fuel and purchased power costs deferred under
the PSA, terminated effective with the rate increase, resulting in a net retail rate increase of
approximately 6.8%. The base rate increase is premised on a return on equity of 10.75%; a 45%/55%
long-term debt/common equity capital structure; a weighted-average cost of capital of 8.32%; an
original cost rate base of $4.4 billion as of September 30, 2005; and a base rate for fuel and
purchased power costs of $0.0325 per kWh (the Base Fuel Rate).
PSA Modifications
The ACC order modified the PSA in various respects, effective July 1, 2007. The PSA, which
the ACC initially approved in 2005 as a part of APS 2003 rate case, provides for the adjustment of
retail rates to reflect variations in retail fuel and purchased power costs. As modified by the
ACCs recent order, the PSA is subject to specified parameters and procedures, including the
following:
|
|
|
APS records deferrals for recovery or refund to the extent actual retail fuel and
purchased power costs vary from the Base Fuel Rate; |
|
|
|
|
the deferrals continue to be subject to a 90/10 sharing arrangement in which APS
must absorb 10% of the retail fuel and purchased power costs above the Base Fuel |
10
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Rate and may retain 10% of the benefit from the retail fuel and purchased power
costs that are below the Base Fuel Rate, excluding certain costs, such as renewable
energy resources and the capacity components of long-term purchase power agreements
acquired through competitive procurement; |
|
|
|
|
the adjustment is made annually each February 1st and goes into effect
automatically unless suspended by the ACC; |
|
|
|
|
the PSA now uses a forward-looking estimate of fuel and purchased power costs
(instead of historical deferred costs, as under the prior PSA) to set the annual PSA
rate, which will be reconciled to actual costs experienced for each PSA Year (see the
following bullet point); |
|
|
|
|
the PSA rate includes (a) a Forward Component, under which APS recovers or refunds
differences between expected PSA Year fuel and purchased power costs and those embedded
in the Base Fuel Rate; (b) an Historical Component, under which the differences
between the PSA Years actual fuel and purchased power costs and those recovered
through the combination of the Base Fuel Rate and the Forward Component are recovered
during the next PSA Year; and (c) a Transition Component under which APS may seek
mid-year PSA changes due to large variances between actual fuel and purchased power
costs and the combination of the Base Fuel Rate and the Forward Component; |
|
|
|
|
amounts to be recovered or refunded through the sum of the PSA components discussed
in the preceding bullet point are limited to a maximum plus or minus $0.004 per kWh
change in the PSA rate in any PSA Year (February 1 through January 31); |
|
|
|
|
the Base Fuel Rate established in the ACC order reflects projected 2007 fuel and
purchased power costs; as a result, the Forward Component for the PSA Year ending
January 31, 2008 will be zero; and |
|
|
|
|
the PSA adjustor that took effect on February 1, 2007 ($0.004 per kWh), and that was
scheduled to expire on January 31, 2008, will remain in effect as long as necessary
after January 31, 2008 to collect the $46 million of 2007 fuel and purchased power
costs deferred as a result of the mid-year implementation of the new Base Fuel Rate. |
|
|
PSA Deferrals Related to Palo Verde Outages |
APS recorded $45 million of 2005 Deferrals and $79 million of 2006 Deferrals. The ACC order
(a) disallowed approximately $14 million, including accrued interest ($8 million after income
taxes), of the 2005 Deferrals because the ACC found that the outage costs giving rise to those
amounts resulted from APS imprudence, and (b) approved APS recovery of the balance of the 2005
Deferrals (approximately $34 million, including accrued interest) through a temporary PSA surcharge
over a twelve-month period effective July 1, 2007. In connection with the interim PSA adjustor
approved on May 1, 2006, the ACC directed the ACC staff to conduct a prudence audit of
11
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2006 Palo Verde outage costs. The prudence audit has not yet been completed. APS believes
these costs were prudently incurred and that the 2006 Deferrals are therefore recoverable.
PSA Balance
The following table shows the changes in the deferred fuel and purchase power regulatory asset
for the six months ended June 30, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
Beginning balance |
|
$ |
160 |
|
|
$ |
173 |
|
Deferred fuel and purchased power costs-current period |
|
|
129 |
|
|
|
91 |
|
Regulatory disallowance |
|
|
(14 |
) |
|
|
|
|
Interest on deferred fuel and purchased power |
|
|
3 |
|
|
|
4 |
|
Amounts recovered through revenues |
|
|
(141 |
) |
|
|
(93 |
) |
|
|
|
|
|
|
|
Ending balance |
|
$ |
137 |
|
|
$ |
175 |
|
|
|
|
|
|
|
|
Other Matters
The ACC order approved an environmental improvement surcharge (EIS) to recover capital costs
incurred for environmental improvements made by APS in compliance with federal and state laws or
regulatory requirements. The EIS will be set initially at $0.00016 per kWh, designed to produce
approximately $4.5 million of cash per year until further order of the ACC.
The ACC order requires APS and the ACC staff to work to prepare a nuclear performance
standard that the ACC can consider in a separate proceeding.
Pursuant to the ACC order, APS was not allowed to recover the pension costs associated with
the supplemental excess benefit retirement plan through the rate-making process. See Note 6.
The ACC did not adopt APS recommendations related to accelerated depreciation, inclusion of
construction work in progress in rate base, and an attrition adjustment.
APS Financing Authorization
On December 15, 2006, APS filed a financing application with the ACC requesting an (a)
increase in APS current short-term debt authorization (7% of APScapitalization) to 7% of
APScapitalization plus $500 million in order to meet its growing cash requirements, including cash
requirements for natural gas and power purchases, and (b) increase in APS current long-term debt
authorization (approximately $3.2 billion) to approximately $4.2 billion in light of the projected
growth of APS and its customer base and the resulting projected future financing needed to fund
APS capital expenditure and maintenance program and other cash requirements. An ACC ALJ conducted
a hearing on this matter on July 23, 2007, at which the ACC staff recommended approval of APS
requests, subject to specified parameters and procedures that APS generally supports. The ACC will
consider this matter at an open meeting on a date that has not yet been set.
12
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Federal
Price Mitigation Plan
In July 2002, the FERC adopted a price mitigation plan that constrains the price of
electricity in the wholesale spot electricity market in the western United States. The FERC
adopted a price cap of $250 per MWh for the period subsequent to October 31, 2002. On February 13,
2006, the FERC increased this price cap to $400 per MWh for prospective sales. Sales at prices
above the cap must be justified and are subject to potential refund. We do not expect this price
cap to have a material impact on our financial statements.
FERC Order
On August 11, 2004, Pinnacle West, APS, Pinnacle West Energy, and APS Energy Services
(collectively, the Pinnacle West Companies) submitted to the FERC an update to their three-year
market-based rate review pursuant to the FERCs order implementing a new generation market power
analysis. On December 20, 2004, the FERC issued an order approving the Pinnacle West Companies
market-based rates for control areas other than those of APS, Public Service Company of New Mexico
(PNM) and Tucson Electric Power Company (TEP). The FERC staff required the Pinnacle West
Companies to submit additional data with respect to these control areas, and the Pinnacle West
Companies did so.
On April 17, 2006, the FERC issued an order revoking the Pinnacle West Companies market-based
rate authority in the APS control area (the April 17 Order). The FERC found that the Pinnacle
West Companies failed to provide the necessary information about the calculation of transmission
imports into the APS control area to allow the FERC to make a determination regarding FERCs
generation market power screens in the APS control area. The FERC found that the Pinnacle West
Companies may charge market-based rates in the PNM and TEP control areas.
As a result of the April 17 Order, the Pinnacle West Companies must charge cost-based rates,
rather than market-based rates, in the APS control area for sales occurring after the date of the
order, April 17, 2006. The Pinnacle West Companies are required to refund any amounts collected
that exceed the default cost-based rates for all market rate sales within the APS control area from
February 27, 2005 to April 17, 2006.
The Pinnacle West Companies filed a Request for Rehearing and Clarification of the April 17
Order on May 17, 2006 and submitted a supplemental compliance filing on July 28, 2006. On December
21, 2006, the FERC issued an order granting clarification and provided additional details on what
steps the Pinnacle West Companies could take to correct the transmission import study previously
submitted. The Pinnacle West Companies complied with this order and filed additional transmission
import studies and generation market power analyses on February 20, 2007.
Based upon an analysis of the April 17 Order and preliminary calculations of the refund
obligations, at this time, neither Pinnacle West nor APS believes that the April 17 Order will have
a material adverse effect on its financial position, results of operations or cash flows.
13
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FERC Rate Case
On July 10, 2007, APS submitted a revised Open Access Transmission Tariff (OATT) filing with
the FERC to move from a fixed rate to a formula rate in order to more accurately reflect the costs
that APS incurs in providing transmission and ancillary services. The requested formula rate would
result in an estimated $37 million increase in annual transmission revenues to become effective October 1,
2007. The proposed formula rate would be updated each year on June 1 on the basis of APS actual
cost of service, as disclosed in APS FERC Form 1 reports, and projected capital expenditures. The
FERC is expected to issue its initial order on this matter within 60 days of APS filing.
Approximately $30 million of the requested increase represents charges for transmission services to
serve APS retail customers (Retail Transmission Charges) and, as a result, would not affect APS earnings until such time as APS
retail rates are adjusted to include these charges. As part of a
retail rate case settlement order in 2005, the ACC approved a
mechanism by which changes in Retail Transmission Charges can be
reflected in APS retail rates. APS is currently addressing the appropriate
procedure to implement the retail rate change if the requested Retail
Transmission Charges are permitted to become effective by FERC.
6. Retirement Plans and Other Benefits
Pinnacle West sponsors a qualified defined benefit and account balance pension plan, a
nonqualified supplemental excess benefit retirement plan (SEBRP), and other postretirement
benefit plans for the employees of Pinnacle West and our subsidiaries. Pinnacle West uses a
December 31 measurement date for its pension and other postretirement benefit plans. The
market-related value of our plan assets is their fair value at the measurement date.
Pursuant to the ACCs June 28, 2007 order in APS general rate case, APS was not allowed to
recover the pension costs associated with the SEBRP through the ratemaking process. Therefore, the
amounts that were previously recorded as a regulatory asset, approximately $45 million ($27
million, net of income taxes), were charged to other comprehensive income at June 30, 2007 (see
Notes 11 and S-2). This treatment is consistent with the accounting for this type of plan by our
unregulated entities.
The following table provides details of the plans benefit costs for the three and six months
ended June 30, 2007 and 2006. Also included is the portion of these costs charged to expense,
including administrative costs and excluding amounts billed to electric plant participants or
capitalized as overhead construction (dollars in millions):
14
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
Three Months |
|
|
Six Months |
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service cost-benefits earned
during the period |
|
$ |
12 |
|
|
$ |
9 |
|
|
$ |
25 |
|
|
$ |
24 |
|
|
$ |
3 |
|
|
$ |
2 |
|
|
$ |
9 |
|
|
$ |
10 |
|
Interest cost on benefit
obligation |
|
|
23 |
|
|
|
17 |
|
|
|
50 |
|
|
|
46 |
|
|
|
5 |
|
|
|
4 |
|
|
|
18 |
|
|
|
17 |
|
Expected return on plan assets |
|
|
(25 |
) |
|
|
(18 |
) |
|
|
(53 |
) |
|
|
(48 |
) |
|
|
(6 |
) |
|
|
(4 |
) |
|
|
(21 |
) |
|
|
(18 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition (asset)
obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Prior service cost |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
4 |
|
|
|
4 |
|
|
|
8 |
|
|
|
12 |
|
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
15 |
|
|
$ |
13 |
|
|
$ |
32 |
|
|
$ |
34 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
$ |
10 |
|
|
$ |
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of cost charged to
expense |
|
$ |
7 |
|
|
$ |
5 |
|
|
$ |
14 |
|
|
$ |
14 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
5 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APS share of costs charged
to expense |
|
$ |
6 |
|
|
$ |
5 |
|
|
$ |
13 |
|
|
$ |
13 |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
4 |
|
|
$ |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
The contribution to our pension plan in 2007 is estimated to be approximately $52 million, of
which approximately $0.3 million was contributed through August 2007. The contribution to our
other postretirement benefit plans in 2007 is estimated to be approximately $21 million. APS
share is approximately 96% of both plans.
7. Business Segments
Pinnacle Wests two principal business segments are:
|
|
|
our regulated electricity segment, which consists of traditional regulated retail
and wholesale electricity businesses (primarily electricity service to Native Load
customers) and related activities and includes electricity generation, transmission and
distribution; and |
|
|
|
|
our real estate segment, which consists of SunCors real estate development and
investment activities. |
Financial data for the three and six months ended June 30, 2007 and 2006 and at June 30, 2007
and December 31, 2006 by business segment is provided as follows (dollars in millions):
15
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated electricity |
|
$ |
712 |
|
|
$ |
713 |
|
|
$ |
1,248 |
|
|
$ |
1,179 |
|
Real estate |
|
|
48 |
|
|
|
113 |
|
|
|
126 |
|
|
|
220 |
|
Other |
|
|
103 |
|
|
|
99 |
|
|
|
185 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
863 |
|
|
$ |
925 |
|
|
$ |
1,559 |
|
|
$ |
1,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated electricity |
|
$ |
71 |
|
|
$ |
95 |
|
|
$ |
74 |
|
|
$ |
82 |
|
Real estate |
|
|
|
|
|
|
9 |
|
|
|
10 |
|
|
|
32 |
|
Other |
|
|
8 |
|
|
|
8 |
|
|
|
12 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79 |
|
|
$ |
112 |
|
|
$ |
96 |
|
|
$ |
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
Assets: |
|
|
|
|
|
|
|
|
Regulated electricity |
|
$ |
10,239 |
|
|
$ |
10,566 |
|
Real estate |
|
|
665 |
|
|
|
591 |
|
Other |
|
|
278 |
|
|
|
299 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,182 |
|
|
$ |
11,456 |
|
|
|
|
|
|
|
|
8. Income Taxes
As a result of a change in IRS guidance, we claimed a tax deduction related to an APS tax
accounting method change on the 2001 federal consolidated income tax return. The accelerated
deduction resulted in a $200 million reduction in the current income tax liability and a
corresponding increase in the plant-related deferred tax liability. The 2001 federal consolidated
income tax return is currently under examination by the IRS. As part of this ongoing examination,
the IRS is reviewing this accounting method change and the resultant deduction. During 2007, it is
expected that the IRS will finalize its examination and will issue a settlement on the tax
accounting method change. At this time, an estimate of the range of reasonably possible change in
the uncertain tax position cannot be made. However, we do not expect the ultimate outcome of this
examination to have a material adverse impact on our financial position or results of operations.
We expect that it will have a negative impact on cash flows.
We adopted FIN 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB
Statement No. 109 on January 1, 2007. The effect of applying the new guidance was not
significantly different in terms of tax impacts from the application of our previous policy.
Accordingly, the impact to retained earnings upon adoption was immaterial. In addition, the
guidance required us to reclassify certain tax benefits, which had the effect of increasing accrued
taxes and deferred debits by approximately $50 million to better reflect the expected timing of the
payment of taxes and interest.
16
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The total amount of unrecognized tax benefits recorded in accrued taxes as of January 1, 2007
was $186 million, of which $179 million related to APS. The majority of the unrecognized tax
benefits relate to the 2001 tax return position described above. Included in the balance of
unrecognized tax benefits at January 1, 2007 are approximately $5 million of tax positions for
consolidated Pinnacle West that, if recognized, would decrease our effective tax rate. For APS,
approximately $3 million would have the same effect.
We continue to recognize potential accrued interest related to unrecognized tax benefits in
the financial statements as income tax expense. As of January 1, 2007, the total amount of accrued
interest expense related to uncertain tax positions was $54 million for consolidated Pinnacle West,
which is included as a component of the $186 million unrecognized tax benefit noted above. APS
share included in the total was approximately $53 million. Additionally, Pinnacle West has accrued
$9 million of interest income to be received on the overpayment of income taxes for certain
adjustments that we have filed, or will file, with the IRS. The application of FIN 48 did not have
a material impact for the six months ended June 30, 2007.
As of January 1, 2007, the tax year ended December 31, 1999 and all subsequent tax years
remain subject to examination by federal and state taxing authorities. In addition, tax years
ended prior to December 31, 1999 may remain subject to examination by state taxing authorities.
9. Variable-Interest Entities
In 1986, APS entered into agreements with three separate VIE lessors in order to sell and
lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in
accordance with GAAP. We are not the primary beneficiary of the Palo Verde VIEs and, accordingly,
do not consolidate them.
APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of
certain events that APS does not consider to be reasonably likely to occur. Under certain
circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde
or the occurrence of specified nuclear events), APS would be required to assume the debt associated
with the transactions, make specified payments to the equity participants, and take title to the
leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If
such an event had occurred as of June 30, 2007, APS would have been required to assume
approximately $208 million of debt and pay the equity participants approximately $174 million.
10. Derivative and Energy Trading Accounting
We use derivative instruments (primarily forward purchases and sales, swaps, options and
futures) to manage our exposure to the commodity price risk inherent in the purchase and sale of
fuel, electricity and emission allowances and credits. As of June 30, 2007, we hedged exposures to
the price variability of the power and gas commodities for a maximum of 3.25 years. The changes in
market value of such contracts have a high correlation to price changes in the hedged transactions.
In addition, subject to specified risk parameters monitored by the ERMC, we engage in marketing
and trading activities intended to profit from market price movements.
17
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Hedges
The changes in the fair value of our hedged positions included in the Condensed Consolidated
Statements of Income, after consideration of amounts deferred under the PSA, for the three and six
months ended June 30, 2007 and 2006 are comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Gains (losses) on
the ineffective
portion of
derivatives
qualifying for
hedge accounting |
|
$ |
422 |
|
|
$ |
(2,975 |
) |
|
$ |
1,333 |
|
|
$ |
(3,154 |
) |
Gains (losses) from
the change in
options time value
excluded from
measurement of
effectiveness |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
(14 |
) |
Gains from the
discontinuance of
cash flow hedges |
|
|
|
|
|
|
|
|
|
|
314 |
|
|
|
434 |
|
During the next twelve months ending June 30, 2008, we estimate that a net gain of $37 million
before income taxes will be reclassified from accumulated other comprehensive income as an offset
to the effect of market price changes for the related hedged transactions. To the extent the
amounts are eligible for inclusion in the PSA, the amounts will be recorded as either a regulatory
asset or liability and have no effect on earnings (see Note 5).
Our assets and liabilities from risk management and trading activities are presented in two
categories, regulated electricity and marketing and trading.
The following tables summarize our assets and liabilities from risk management and trading
activities at June 30, 2007 and December 31, 2006 (dollars in thousands):
18
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
Current |
|
|
and Other |
|
|
Current |
|
|
Credits and |
|
|
Net Asset |
|
June 30, 2007 |
|
Assets |
|
|
Assets |
|
|
Liabilities |
|
|
Other |
|
|
(Liability) |
|
Regulated electricity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market |
|
$ |
47,698 |
|
|
$ |
61,239 |
|
|
$ |
(70,823 |
) |
|
$ |
(44,571 |
) |
|
$ |
(6,457 |
) |
Margin account
and options |
|
|
52,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,453 |
|
Marketing
and trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market |
|
|
94,653 |
|
|
|
39,790 |
|
|
|
(54,883 |
) |
|
|
(15,025 |
) |
|
|
64,535 |
|
Options, emission
allowances and
other contracts at cost |
|
|
2,471 |
|
|
|
12,590 |
|
|
|
(30,864 |
) |
|
|
|
|
|
|
(15,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
197,275 |
|
|
$ |
113,619 |
|
|
$ |
(156,570 |
) |
|
$ |
(59,596 |
) |
|
$ |
94,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
Current |
|
|
and Other |
|
|
Current |
|
|
Credits and |
|
|
Net Asset |
|
December 31, 2006 |
|
Assets |
|
|
Assets |
|
|
Liabilities |
|
|
Other |
|
|
(Liability) |
|
Regulated electricity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market |
|
$ |
458,034 |
|
|
$ |
96,892 |
|
|
$ |
(481,661 |
) |
|
$ |
(135,056 |
) |
|
$ |
(61,791 |
) |
Margin account
and options |
|
|
77,705 |
|
|
|
|
|
|
|
(2,228 |
) |
|
|
|
|
|
|
75,477 |
|
Marketing
and trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market |
|
|
105,301 |
|
|
|
69,480 |
|
|
|
(61,553 |
) |
|
|
(36,114 |
) |
|
|
77,114 |
|
Options and
emission
allowances
at cost |
|
|
|
|
|
|
839 |
|
|
|
(12,753 |
) |
|
|
|
|
|
|
(11,914 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
641,040 |
|
|
$ |
167,211 |
|
|
$ |
(558,195 |
) |
|
$ |
(171,170 |
) |
|
$ |
78,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2007, we changed the presentation of mark-to-market positions
related to natural gas basis swaps in the regulated electricity segment. We historically presented
the buy side and the sell side of such swaps at fair value gross on our consolidated balance
sheets, which resulted in mark-to-market assets and separate mark-to-market liabilities. We now
offset these matching assets and liabilities, thus presenting the net mark-to-market position by
contract, which correctly reflects the true nature of these contracts. The net asset/liability
position as historically disclosed in the table above is unchanged. Further, this change has no
impact on results of operations, common stock equity or cash flows. Had we previously presented
such amounts net, the effect on the December 31, 2006 balance sheet would have been to decrease
Current Assets and Current Liabilities by $376 million and decrease Investments and Other Assets
and Deferred Credits and Other by $59 million. We believe that the effect of presenting these
contracts gross in prior periods is immaterial to previously issued financial statements.
We maintain a margin account with a broker to support our risk management and trading
activities. The margin account was an asset of $52 million at June 30, 2007 and $73 million at
December 31, 2006 and is included in the margin account in the table above. Cash is deposited with
19
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the broker in this account at the time futures or options contracts are initiated. The change in
market value of these contracts (reflected in mark-to-market) requires adjustment of the margin
account balance.
Cash or other assets may be required to serve as collateral against our open positions on
certain energy-related contracts. Collateral provided to counterparties was $5 million at June 30,
2007 and $10 million at December 31, 2006, and is included in other current assets on the Condensed
Consolidated Balance Sheets. Collateral provided to us by counterparties was $3 million at June
30, 2007 and $54 million at December 31, 2006, and is included in other current liabilities on the
Condensed Consolidated Balance Sheets.
Credit Risk
We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We
have risk management and trading contracts with many counterparties, including one counterparty for
which a worst case exposure represents approximately 14% of Pinnacle Wests $311 million of risk
management and trading assets as of June 30, 2007. Our risk management process assesses and
monitors the financial exposure of this and all other counterparties. Despite the fact that the
great majority of trading counterparties securities are rated as investment grade by the credit
rating agencies, including the counterparty discussed above, there is still a possibility that one
or more of these companies could default, resulting in a material impact on consolidated earnings
for a given period. Counterparties in the portfolio consist principally of financial institutions,
major energy companies, municipalities and local distribution companies. We maintain credit
policies that we believe minimize overall credit risk to within acceptable limits. Determination
of the credit quality of our counterparties is based upon a number of factors, including credit
ratings and our evaluation of their financial condition. To manage credit risk, we employ
collateral requirements, standardized agreements that allow for the netting of positive and
negative exposures associated with a single counterparty and credit default swaps. Valuation
adjustments are established representing our estimated credit losses on our overall exposure to
counterparties.
11. Comprehensive Income (Loss)
Components of comprehensive income (loss) for the three and six months ended June 30, 2007 and
2006 are as follows (dollars in thousands):
20
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
78,994 |
|
|
$ |
112,154 |
|
|
$ |
95,524 |
|
|
$ |
124,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
on derivative instruments (a) |
|
|
(32,880 |
) |
|
|
(69,124 |
) |
|
|
29,680 |
|
|
|
(274,107 |
) |
Net reclassification of
realized gains to income (b) |
|
|
(14,049 |
) |
|
|
(676 |
) |
|
|
(19,061 |
) |
|
|
(18,206 |
) |
Net unrealized losses related to pension and other
postretirement benefits (c) |
|
|
(44,573 |
) |
|
|
|
|
|
|
(44,573 |
) |
|
|
|
|
Reclassification of pension and
other postretirement benefits
to income |
|
|
228 |
|
|
|
|
|
|
|
479 |
|
|
|
|
|
Income tax benefit related to
items of other comprehensive
income |
|
|
35,724 |
|
|
|
27,257 |
|
|
|
13,154 |
|
|
|
114,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
|
|
(55,550 |
) |
|
|
(42,543 |
) |
|
|
(20,321 |
) |
|
|
(178,164 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
23,444 |
|
|
$ |
69,611 |
|
|
$ |
75,203 |
|
|
$ |
(53,555 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These amounts primarily include unrealized gains and losses on contracts used to
hedge our forecasted electricity and natural gas requirements to serve Native Load.
These changes are primarily due to changes in forward natural gas prices and wholesale
electricity prices. |
|
(b) |
|
These amounts primarily include the reclassification of unrealized gains and
losses to realized for contracted commodities delivered during the period. |
|
(c) |
|
In accordance with the ACCs June 28, 2007 order in APS general rate case, these
amounts primarily include costs that were previously recorded as a regulatory asset and
have now been charged to other comprehensive income. |
21
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and Contingencies
Palo Verde Nuclear Generating Station
Spent Nuclear Fuel and Waste Disposal
Nuclear power plant operators are required to enter into spent fuel disposal contracts with
the DOE, and the DOE is required to accept and dispose of all spent nuclear fuel and other
high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste
Policy Act required the DOE to develop a permanent repository for the storage and disposal of spent
nuclear fuel by 1998, the DOE has announced that the repository cannot be completed before at least
2017. In November 1997, the United States Court of Appeals for the District of Columbia Circuit
(D.C. Circuit) issued a decision preventing the DOE from excusing its own delay, but refused to
order the DOE to begin accepting spent nuclear fuel. Based on this decision and the DOEs delay, a
number of utilities, including APS (on behalf of itself and the other Palo Verde owners), filed
damages actions against the DOE in the Court of Federal Claims. APS is currently pursuing that
damages claim.
APS currently estimates it will incur $147 million (in 2006 dollars) over the life of Palo
Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel. At
June 30, 2007, APS had a regulatory liability of approximately $5 million that represents amounts
recovered in retail rates in excess of amounts spent for on-site interim spent fuel storage.
NRC Matters
In October 2006, the NRC conducted an inspection of the Palo Verde emergency diesel generators
after a Palo Verde Unit 3 generator started but did not provide electrical output during routine
inspections on July 25 and September 22, 2006. On February 22, 2007, the NRC issued a white
finding (low to moderate safety significance) for this matter. Under the NRCs Action Matrix, this
finding, coupled with a previous NRC yellow finding relating to a 2004 matter involving Palo
Verdes safety injection systems, resulted in Palo Verde Unit 3 being placed in the
multiple/repetitive degraded cornerstone column of the NRCs Action Matrix, which has resulted in
an enhanced NRC inspection regimen. On June 21, 2007, the NRC issued a confirmatory action letter
confirming APS commitments regarding specific actions APS will take to improve Palo Verdes
performance. APS continues to implement its plan to improve Palo Verdes performance. APS does
not currently believe that this matter will have a material adverse impact on APS financial
position, results of operations, or cash flows.
On November 9, 2006, APS notified the NRC that a senior reactor operator at Palo Verde had
attempted to cover up a mistaken entry the operator had made in a Palo Verde operations
verification log. The senior reactor operator resigned shortly thereafter. By letter dated July
12, 2007, the NRC notified APS that, based upon the results of its investigation of the matter, the
NRC is considering an escalated enforcement action against Palo Verde due to the willfulness of the
senior reactor operators actions. The NRC noted in its letter that the safety significance of the
matter was very low. In accordance with NRC procedures, APS has requested alternative dispute
resolution with the NRC in an attempt to resolve this issue. APS cannot predict the outcome of
this matter.
22
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
California Energy Market Issues and Refunds in the Pacific Northwest
FERC
In July 2001, the FERC ordered an expedited fact-finding hearing to calculate refunds for spot
market transactions in California during a specified time frame. APS was a seller and a purchaser
in the California markets at issue and, to the extent that refunds are ordered, APS should be a
recipient as well as a payor of such amounts. The FERC is still considering the evidence and
refund amounts have not yet been finalized. However, on September 6, 2005, the Ninth Circuit
issued a decision, concluding that the FERC may not order refunds from entities that are not within
the FERCs jurisdiction. Because a number of the entities owing refunds under the FERCs
calculations are not within the FERCs jurisdiction, this order may affect the level of recovery of
refunds due in this proceeding. In addition, on August 8, 2005, the FERC issued an order allowing
sellers in the California markets to demonstrate that its refund methodology results in an overall
revenue shortfall for their transactions in the relevant markets over a specified time frame. More
than twenty sellers made such cost recovery filings on September 14, 2005. On January 26, 2006,
the FERC conditionally accepted thirteen of these filings, reducing the refund liability for these
sellers. Correspondingly, this will reduce the recovery of total refunds in the California
markets. On August 2, 2006, the Ninth Circuit issued a decision on the appropriate temporal scope
and the type of transactions that are properly subject to the refund orders. In the decision, the
Court preserved the scope of the FERCs existing refund proceedings, but also expanded it
potentially to include additional transactions, remanding the orders to the FERC for further
proceedings. Various parties filed petitions for rehearing on this order. In addition, on
December 19, 2006, the Ninth Circuit issued a decision on the appropriate standard of review at the
FERC on wholesale power contracts in the refund proceedings, specifically addressing the
application of the so-called just and reasonable standard as opposed to the public interest
standard. In so doing, the Ninth Circuit remanded the matter back to the FERC with the requirement
that the FERC review the refund matter using the appropriate standard of review. Like the August 2,
2006 Ninth Circuit decision, the December 19, 2006 decision has the potential to expand the
existing FERC refund proceedings. We currently believe the refund claims at FERC will have no
material adverse impact on our financial position, results of operations, or cash flows.
On March 19, 2002, the State of California filed a complaint with the FERC alleging that
wholesale sellers of power and energy, including the Company, failed to properly file rate
information at the FERC in connection with sales to California from 2000 to the present under
market-based rates. The complaint requests the FERC to require the wholesale sellers to refund any
rates that are found to exceed just and reasonable levels. This complaint was dismissed by the
FERC and the State of California appealed the matter to the Ninth Circuit Court of Appeals. In an
order issued September 9, 2004, the Ninth Circuit upheld the FERCs authority to permit
market-based rates, but rejected the FERCs claim that it was without authority to consider
retroactive refunds when a utility has not strictly adhered to the quarterly reporting requirements
of the market-based rate system. On September 9, 2004, the Ninth Circuit remanded the case to the
FERC for further proceedings. Several of the intervenors in this appeal filed a petition for
rehearing of this decision on October 25, 2004. The petition for rehearing was denied on July 31,
2006. On December 28, 2006, certain parties petitioned the Supreme Court for a writ of certiorari.
This petition was denied on June 18, 2007. On October 10, 2006, the State of California filed a
motion to stay the issuance of the mandate (scheduled to be issued on November 2, 2006) until June
13, 2007.
23
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 12, 2007, the Ninth Circuit extended the stay until August 13, 2007. The outcome of the
further proceedings cannot be predicted at this time.
On July 25, 2001, the FERC also ordered an evidentiary proceeding to discuss and evaluate
possible refunds for wholesale sales in the Pacific Northwest. The FERC affirmed the ALJs
conclusion that the prices in the Pacific Northwest were not unreasonable or unjust and refunds
should not be ordered in this proceeding. This decision has now been appealed to the Ninth Circuit
Court of Appeals and oral argument was held on January 8, 2007. Although the FERC ruling in this
matter is being appealed and the FERC has not yet calculated the specific refund amounts due in
California, we do not expect that the resolution of these issues, as to the amounts alleged in the
proceedings, will have a material adverse impact on our financial position, results of operations
or cash flows.
On March 26, 2003, the FERC made public a Final Report on Price Manipulation in Western
Markets, prepared by its staff and covering spot markets in the West in 2000 and 2001. The report
stated that a significant number of entities who participated in the California markets during the
2000-2001 time period, including APS, may potentially have been involved in arbitrage transactions
that allegedly violated certain provisions of the Independent System Operator tariff. After
reviewing the matter, along with the data supplied by APS, the FERC staff moved to dismiss the
claims against APS and to dismiss the proceeding. The motion to dismiss was granted by the FERC on
January 22, 2004. Certain parties have sought rehearing of this order, and that request is
pending.
FERC Order
See FERC Order in Note 5 for a discussion of an order issued by the FERC on April 17, 2006.
Natural Gas Supply
Pursuant to the terms of a comprehensive settlement entered into in 1996 with El Paso Natural
Gas Company, the rates charged for natural gas transportation were subject to a rate moratorium
through December 31, 2005.
On July 9, 2003, the FERC issued an order that altered the capacity rights of parties to the
1996 settlement but maintained the cost responsibility provisions agreed to by parties to that
settlement. On December 28, 2004, the D.C. Court of Appeals upheld the FERCs authority to alter
the capacity rights of parties to the settlement. With respect to the FERCs authority to maintain
the cost responsibility provisions of the settlement, a party has sought appellate review and is
seeking to reallocate the cost responsibility associated with the changed contractual obligations
in a way that would be less favorable to APS than under the FERCs July 9, 2003 order. Should this
party prevail on this point, APS annual capacity cost could be increased by approximately $3
million per year after income taxes for the period September 2003 through December 2005. This
appeal had been stayed pending further consideration by the FERC. On May 26, 2006, the FERC issued
an Order on Remand affirming its earlier decision that there is no basis for modifying the
settlement rates during the remaining term of the settlement. The party seeking appellate review
is continuing to pursue an appeal of this issue and has therefore sought rehearing of the May 26,
2006 order. A final FERC order is pending.
24
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Navajo Nation Litigation
In June 1999, the Navajo Nation served Salt River Project with a lawsuit filed in the United
States District Court for the District of Columbia (the D.C. Lawsuit) naming Salt River Project,
several Peabody Coal Company entities (collectively, Peabody), Southern California Edison Company
and other defendants, and citing various claims in connection with the renegotiations of the coal
royalty and lease agreements under which Peabody mines coal for the Navajo Generating Station and
the Mohave Generating Station. APS is a 14% owner of the Navajo Generating Station, which Salt
River Project operates. The D.C. Lawsuit alleges, among other things, that the defendants obtained
a favorable coal royalty rate by improperly influencing the outcome of a federal administrative
process under which the royalty rate was to be adjusted. The suit seeks $600 million in damages,
treble damages, punitive damages of not less than $1 billion, and the ejection of defendants from
all possessory interests and Navajo Tribal lands arising out of the [primary coal lease]. In July
2001, the court dismissed all claims against Salt River Project.
In January 2005, Peabody served APS with a lawsuit filed in the Circuit Court for the City of
St. Louis naming APS and the other Navajo Generating Station participants and seeking, among other
things, a declaration that the participants are obligated to reimburse Peabody for any royalty,
tax, or other obligation arising out of the D.C. Lawsuit. Based on APS ownership interest in the
Navajo Generating Station, APS could be liable for up to 14% of any such obligation. APS cannot
currently predict the outcome of this matter.
Superfund
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 PRPs. PRPs may be strictly, and often jointly and
severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA considers
APS to be a PRP in the Motorola 52nd Street Superfund Site, Operable Unit 3 (OU3) in
Phoenix, Arizona. APS has facilities that are within this Superfund site. APS and Pinnacle West
have agreed with the EPA to perform certain investigative activities of the APS facilities within
OU3. Because the investigation has not yet been completed and ultimate remediation requirements
are not yet finalized, neither APS nor Pinnacle West can currently estimate the expenditures that
may be required.
Salt River Project
Salt River Project has notified APS that Salt River Project allegedly failed to bill APS for
(a) energy losses under certain service schedules of a power contract between the parties, and (b)
certain other charges under the contract. Salt River Project asserts that certain of these
failures to bill APS for such losses and charges may extend back to 1996 and, as a result, claims
that APS owes it approximately $29 million. APS disputes that it is required to pay these amounts.
No lawsuit or litigation has been initiated in the matter at this time. We do not expect that
resolution of this matter will have a material adverse impact on our financial position, results of
operations, or cash flows.
25
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Litigation
We are party to various other claims, legal actions and complaints arising in the ordinary
course of business, including but not limited to environmental matters related to the Clean Air
Act, Navajo Nation issues and EPA and ADEQ issues. In our opinion, the ultimate resolution of
these matters will not have a material adverse effect on our results of operations, cash flows or
liquidity.
13. Nuclear Insurance
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 $300 million
and the balance by an industry-wide retrospective assessment program. If losses at any nuclear
power plant covered by the program 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 $101 million, subject to an annual limit of $15 million per
incident, to be periodically adjusted for inflation. Based on APS interest in the three Palo
Verde units, APS maximum potential assessment per incident for all three units is approximately
$88 million, with an annual payment limitation of approximately $13 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 accidental outage of any of
the three units. The property damage, decontamination, and replacement power coverages are
provided by Nuclear Electric Insurance Limited (NEIL). APS is subject to retrospective assessments
under all NEIL policies if NEILs losses in any policy year exceed accumulated funds. The maximum
amount of retrospective assessments APS could incur under the current NEIL policies totals $18.1
million. The insurance coverage discussed in this and the previous paragraph is subject to certain
policy conditions and exclusions.
26
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. Other Income and Other Expense
The following table provides detail of other income and other expense for the three and six
months ended June 30, 2007 and 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SO2 emission allowance sales and
other (a) |
|
$ |
|
|
|
$ |
8,810 |
|
|
$ |
|
|
|
$ |
9,171 |
|
Interest income |
|
|
1,950 |
|
|
|
2,285 |
|
|
|
5,362 |
|
|
|
7,190 |
|
Investment
gains net |
|
|
2,681 |
|
|
|
|
|
|
|
942 |
|
|
|
|
|
SunCor other income (b) |
|
|
778 |
|
|
|
717 |
|
|
|
1,358 |
|
|
|
883 |
|
Miscellaneous |
|
|
460 |
|
|
|
210 |
|
|
|
980 |
|
|
|
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
5,869 |
|
|
$ |
12,022 |
|
|
$ |
8,642 |
|
|
$ |
17,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating costs (a) |
|
$ |
(2,344 |
) |
|
$ |
(3,828 |
) |
|
$ |
(5,655 |
) |
|
$ |
(7,547 |
) |
Investment losses net |
|
|
|
|
|
|
(1,066 |
) |
|
|
|
|
|
|
(1,097 |
) |
Miscellaneous |
|
|
(925 |
) |
|
|
(921 |
) |
|
|
(2,228 |
) |
|
|
(1,712 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
$ |
(3,269 |
) |
|
$ |
(5,815 |
) |
|
$ |
(7,883 |
) |
|
$ |
(10,356 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As defined by the FERC, includes below-the-line non-operating utility income
and expense (items excluded from utility rate recovery). |
|
(b) |
|
Includes equity earnings from a real estate joint venture that is a
pass-through entity for tax purposes. |
15. Guarantees
We have issued parental guarantees and letters of credit and obtained surety bonds on behalf
of our subsidiaries. Our parental guarantees for Pinnacle West Marketing & Trading relate to
commodity energy products. Our credit support instruments enable APS Energy Services to offer
commodity energy and energy-related products. Non-performance or non-payment under the original
contract by our subsidiaries would require us to perform under the guarantee or surety bond. No
liability is currently recorded on the Condensed Consolidated Balance Sheets related to Pinnacle
Wests current outstanding guarantees on behalf of our subsidiaries. Our guarantees have no
recourse or collateral provisions to allow us to recover amounts paid under the guarantees. The
amounts and approximate terms of our guarantees and surety bonds for each subsidiary at June 30,
2007 are as follows (dollars in millions):
27
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantees |
|
|
Surety Bonds |
|
|
|
|
|
|
|
Term |
|
|
|
|
|
|
Term |
|
|
|
Amount |
|
|
(in years) |
|
|
Amount |
|
|
(in years) |
|
Parental: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle West Marketing & Trading |
|
$ |
51 |
|
|
|
1 |
|
|
$ |
|
|
|
|
|
|
APS Energy Services |
|
|
18 |
|
|
|
1 |
|
|
|
24 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
69 |
|
|
|
|
|
|
$ |
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2007, Pinnacle West had approximately $5 million of letters of credit related to
workers compensation expiring in late 2007. We intend to provide from either existing or new
facilities for the extension, renewal or substitution of the letters of credit to the extent
required.
APS has entered into various agreements that require letters of credit for financial assurance
purposes. At June 30, 2007, approximately $200 million of letters of credit were outstanding to
support existing pollution control bonds of approximately $200 million. The letters of credit are
available to fund the payment of principal and interest of such debt obligations and expire in
2010. APS has also entered into approximately $86 million of letters of credit to support certain
equity lessors in the Palo Verde sale leaseback transactions (see Note 9 for further details on the
Palo Verde sale leaseback transactions). These letters of credit expire in 2010. Additionally, at
June 30, 2007, APS had approximately $4 million of letters of credit related to counterparty
collateral requirements expiring in 2007. APS intends to provide from either existing or new
facilities for the extension, renewal or substitution of the letters of credit to the extent
required.
We enter into agreements that include indemnification provisions relating to liabilities
arising from or related to certain of our agreements; most significantly, APS has agreed to
indemnify the equity participants and other parties in the Palo Verde sale leaseback transactions
with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in
the indemnification provisions and, therefore, the overall maximum amount of the obligation under
such indemnification provisions cannot be reasonably estimated. Based on historical experience and
evaluation of the specific indemnities, we do not believe that any material loss related to such
indemnification provisions is likely.
16. Earnings Per Share
The following table presents earnings per weighted average common share outstanding for the
three and six months ended June 30, 2007 and 2006:
28
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.78 |
|
|
$ |
1.12 |
|
|
$ |
0.94 |
|
|
$ |
1.23 |
|
Income from discontinued operations |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
0.79 |
|
|
$ |
1.13 |
|
|
$ |
0.95 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.78 |
|
|
$ |
1.11 |
|
|
$ |
0.94 |
|
|
$ |
1.23 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.02 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
0.78 |
|
|
$ |
1.13 |
|
|
$ |
0.95 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options and performance shares increased average common shares outstanding by
approximately 550,000 shares and 419,000 shares for the three months ended June 30, 2007 and June
30, 2006, respectively, and by approximately 580,000 shares and 394,000 shares for the six months
ended June 30, 2007 and 2006, respectively.
Options to purchase 113,250 shares of common stock for the three-month period ended June 30,
2007 were outstanding but were excluded from the computation of diluted earnings per share because
the options exercise prices were greater than the average market price of the common shares.
There were no such options outstanding for the six-month period ended June 30, 2007. Options to
purchase shares of common stock that were excluded from the computation of diluted earnings per
share for that same reason were 881,628 shares for the three-month period ended June 30, 2006 and
808,876 shares for the six-month period ended June 30, 2006.
17. Discontinued Operations
SunCor (real estate segment) In 2006 and 2007, SunCor sold commercial properties that were
required to be reported as discontinued operations on Pinnacle Wests Condensed Consolidated
Statements of Income in accordance with SFAS No. 144. As a result of those sales, we recorded in
2007 a gain from discontinued operations of approximately $1 million ($1 million pretax). The
assets held for sale at June 30, 2007 relate to property in the amount of $21 million. The
following table contains SunCors revenue, income before income taxes and income after income taxes
classified as discontinued operations on Pinnacle Wests Condensed Consolidated Statements of
Income for the three and six months ended June 30, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Revenue |
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
3 |
|
|
$ |
3 |
|
Income before income taxes |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
3 |
|
Income after income taxes |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
29
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
18. Nuclear Decommissioning Trust
To fund the costs APS expects to incur to decommission Palo Verde, APS established external
decommissioning trusts in accordance with NRC regulations. APS invests the trust funds in fixed
income and equity securities. APS applies the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, in accounting for investments in decommissioning trust
funds, and classifies these investments as available for sale. As a result, we record the
decommissioning trust funds at their fair value on our Condensed Consolidated Balance Sheets.
Because of the ability of APS to recover decommissioning costs in rates and in accordance with the
regulatory treatment for decommissioning trust funds, APS has recorded the offsetting amount of
unrealized gains (losses) on investment securities in other regulatory liabilities/assets.
The following table summarizes the fair value of APS nuclear decommissioning trust fund
assets at June 30, 2007 and December 31, 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrealized |
|
|
|
Fair Value |
|
|
Gains |
|
June 30, 2007 |
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
178 |
|
|
$ |
72 |
|
Fixed income securities |
|
|
184 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Total |
|
$ |
362 |
|
|
$ |
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
164 |
|
|
$ |
63 |
|
Fixed income securities |
|
|
180 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total |
|
$ |
344 |
|
|
$ |
66 |
|
|
|
|
|
|
|
|
The costs of securities sold are determined on the basis of specific identification. The
following table sets forth approximate gains and losses and proceeds from the sale of securities by
the nuclear decommissioning trust funds (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Realized gains |
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
|
$ |
1 |
|
Realized losses |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(2 |
) |
Proceeds from the
sale of securities |
|
|
70 |
|
|
|
49 |
|
|
|
133 |
|
|
|
115 |
|
30
PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The fair value of fixed income securities, summarized by contractual maturities, at June 30,
2007 is as follows (dollars in millions):
|
|
|
|
|
Fair Value |
|
June 30, 2007 |
|
Less than one year |
|
$ |
17 |
|
1 year 5 years |
|
|
37 |
|
5 years 10 years |
|
|
38 |
|
Greater than 10 years |
|
|
92 |
|
|
|
|
|
Total |
|
$ |
184 |
|
|
|
|
|
19. New Accounting Standards
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This guidance
establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The Statement is effective for us on January 1, 2008. We are currently evaluating
this new guidance.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 provides companies with an option to report selected
financial assets and liabilities at fair value. SFAS No. 159 is effective for us on January 1,
2008. We are currently evaluating this new guidance.
See Note 8 for a discussion of FIN 48 on accounting for uncertainty in income taxes, which we
adopted January 1, 2007. The effect of applying the new guidance was not significantly different
in terms of tax impacts from the application of our previous policy. Accordingly, the impact to
retained earnings upon adoption was immaterial.
31
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
ELECTRIC OPERATING REVENUES |
|
|
|
|
|
|
|
|
Regulated electricity |
|
$ |
712,443 |
|
|
$ |
714,727 |
|
Marketing and trading |
|
|
9,316 |
|
|
|
4,123 |
|
|
|
|
|
|
|
|
Total |
|
|
721,759 |
|
|
|
718,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Regulated electricity fuel and purchased power |
|
|
271,301 |
|
|
|
265,735 |
|
Marketing and trading fuel and purchased power |
|
|
2,105 |
|
|
|
1,490 |
|
Operations and maintenance |
|
|
170,631 |
|
|
|
164,373 |
|
Depreciation and amortization |
|
|
90,809 |
|
|
|
87,969 |
|
Income taxes |
|
|
42,682 |
|
|
|
46,650 |
|
Other taxes |
|
|
34,588 |
|
|
|
32,666 |
|
|
|
|
|
|
|
|
Total |
|
|
612,116 |
|
|
|
598,883 |
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
109,643 |
|
|
|
119,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (DEDUCTIONS) |
|
|
|
|
|
|
|
|
Income taxes |
|
|
(399 |
) |
|
|
953 |
|
Allowance for equity funds used during construction |
|
|
5,195 |
|
|
|
3,633 |
|
Other income (Note S-3) |
|
|
4,356 |
|
|
|
10,989 |
|
Other expense (Note S-3) |
|
|
(2,769 |
) |
|
|
(4,558 |
) |
|
|
|
|
|
|
|
Total |
|
|
6,383 |
|
|
|
11,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST DEDUCTIONS |
|
|
|
|
|
|
|
|
Interest on long-term debt |
|
|
40,400 |
|
|
|
34,890 |
|
Interest on short-term borrowings |
|
|
2,052 |
|
|
|
2,985 |
|
Debt discount, premium and expense |
|
|
1,159 |
|
|
|
1,025 |
|
Allowance for borrowed funds used during construction |
|
|
(2,675 |
) |
|
|
(1,673 |
) |
|
|
|
|
|
|
|
Total |
|
|
40,936 |
|
|
|
37,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
75,090 |
|
|
$ |
93,757 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental Notes to
Arizona Public Service Companys Condensed Financial Statements.
32
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
ELECTRIC OPERATING REVENUES |
|
|
|
|
|
|
|
|
Regulated electricity |
|
$ |
1,249,819 |
|
|
$ |
1,181,949 |
|
Marketing and trading |
|
|
10,200 |
|
|
|
13,770 |
|
|
|
|
|
|
|
|
Total |
|
|
1,260,019 |
|
|
|
1,195,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
Regulated electricity fuel and purchased power |
|
|
475,795 |
|
|
|
424,009 |
|
Marketing and trading fuel and purchased power |
|
|
3,807 |
|
|
|
2,858 |
|
Operations and maintenance |
|
|
336,565 |
|
|
|
337,726 |
|
Depreciation and amortization |
|
|
178,685 |
|
|
|
174,280 |
|
Income taxes |
|
|
45,825 |
|
|
|
43,621 |
|
Other taxes |
|
|
69,110 |
|
|
|
68,214 |
|
|
|
|
|
|
|
|
Total |
|
|
1,109,787 |
|
|
|
1,050,708 |
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
150,232 |
|
|
|
145,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (DEDUCTIONS) |
|
|
|
|
|
|
|
|
Income taxes |
|
|
355 |
|
|
|
1,189 |
|
Allowance for equity funds used during construction |
|
|
9,639 |
|
|
|
7,434 |
|
Other income (Note S-3) |
|
|
8,789 |
|
|
|
15,085 |
|
Other expense (Note S-3) |
|
|
(7,673 |
) |
|
|
(7,528 |
) |
|
|
|
|
|
|
|
Total |
|
|
11,110 |
|
|
|
16,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST DEDUCTIONS |
|
|
|
|
|
|
|
|
Interest on long-term debt |
|
|
80,475 |
|
|
|
69,140 |
|
Interest on short-term borrowings |
|
|
4,033 |
|
|
|
5,011 |
|
Debt discount, premium and expense |
|
|
2,315 |
|
|
|
2,198 |
|
Allowance for borrowed funds used during construction |
|
|
(4,888 |
) |
|
|
(3,394 |
) |
|
|
|
|
|
|
|
Total |
|
|
81,935 |
|
|
|
72,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
79,407 |
|
|
$ |
88,236 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental Notes to
Arizona Public Service Companys Condensed Financial Statements.
33
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UTILITY PLANT |
|
|
|
|
|
|
|
|
Electric plant in service and held for future use |
|
$ |
11,329,496 |
|
|
$ |
11,094,868 |
|
Less accumulated depreciation and amortization |
|
|
3,873,132 |
|
|
|
3,789,534 |
|
|
|
|
|
|
|
|
Net |
|
|
7,456,364 |
|
|
|
7,305,334 |
|
|
|
|
|
|
|
|
|
|
Construction work in progress |
|
|
445,780 |
|
|
|
365,704 |
|
Intangible assets, net of accumulated amortization |
|
|
88,488 |
|
|
|
95,601 |
|
Nuclear fuel, net of accumulated amortization |
|
|
71,420 |
|
|
|
60,100 |
|
|
|
|
|
|
|
|
Total utility plant |
|
|
8,062,052 |
|
|
|
7,826,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTMENTS AND OTHER ASSETS |
|
|
|
|
|
|
|
|
Decommissioning trust accounts (Note 18) |
|
|
362,484 |
|
|
|
343,771 |
|
Assets from long-term risk management and trading
activities (Note S-1) |
|
|
61,239 |
|
|
|
96,892 |
|
Other assets |
|
|
70,744 |
|
|
|
67,763 |
|
|
|
|
|
|
|
|
Total investments and other assets |
|
|
494,467 |
|
|
|
508,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,799 |
|
|
|
81,870 |
|
Investment in debt securities |
|
|
|
|
|
|
32,700 |
|
Customer and other receivables |
|
|
430,672 |
|
|
|
410,436 |
|
Allowance for doubtful accounts |
|
|
(3,989 |
) |
|
|
(4,223 |
) |
Materials and supplies (at average cost) |
|
|
139,743 |
|
|
|
125,802 |
|
Fossil fuel (at average cost) |
|
|
31,527 |
|
|
|
21,973 |
|
Assets from risk management and trading activities (Note
S-1) |
|
|
105,258 |
|
|
|
539,308 |
|
Deferred income taxes |
|
|
37,764 |
|
|
|
19,220 |
|
Other current assets |
|
|
16,908 |
|
|
|
13,367 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
759,682 |
|
|
|
1,240,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED DEBITS |
|
|
|
|
|
|
|
|
Deferred fuel and purchased power regulatory asset (Note 5) |
|
|
136,989 |
|
|
|
160,268 |
|
Other regulatory assets |
|
|
592,564 |
|
|
|
686,016 |
|
Unamortized debt issue costs |
|
|
25,352 |
|
|
|
26,393 |
|
Other (Note 8) |
|
|
133,121 |
|
|
|
65,397 |
|
|
|
|
|
|
|
|
Total deferred debits |
|
|
888,026 |
|
|
|
938,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
10,204,227 |
|
|
$ |
10,513,692 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental Notes to
Arizona Public Service Companys Condensed Financial Statements.
34
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITALIZATION |
|
|
|
|
|
|
|
|
Common stock |
|
$ |
178,162 |
|
|
$ |
178,162 |
|
Additional paid-in capital |
|
|
2,105,466 |
|
|
|
2,065,918 |
|
Retained earnings |
|
|
957,025 |
|
|
|
960,405 |
|
Accumulated other comprehensive income (loss) (Note S-2): |
|
|
|
|
|
|
|
|
Pension benefits |
|
|
(27,107 |
) |
|
|
|
|
Derivative instruments |
|
|
14,675 |
|
|
|
2,988 |
|
|
|
|
|
|
|
|
Common stock equity |
|
|
3,228,221 |
|
|
|
3,207,473 |
|
Long-term
debt less current maturities (Note 4) |
|
|
2,877,346 |
|
|
|
2,877,502 |
|
|
|
|
|
|
|
|
Total capitalization |
|
|
6,105,567 |
|
|
|
6,084,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Commercial paper |
|
|
28,000 |
|
|
|
|
|
Current
maturities of long-term debt (Note 4) |
|
|
1,045 |
|
|
|
968 |
|
Accounts payable |
|
|
240,231 |
|
|
|
223,417 |
|
Accrued taxes (Note 8) |
|
|
434,205 |
|
|
|
381,444 |
|
Accrued interest |
|
|
46,455 |
|
|
|
45,254 |
|
Customer deposits |
|
|
66,644 |
|
|
|
61,900 |
|
Liabilities from risk management and trading activities (Note S-1) |
|
|
75,493 |
|
|
|
490,855 |
|
Other current liabilities |
|
|
92,466 |
|
|
|
74,728 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
984,539 |
|
|
|
1,278,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED CREDITS AND OTHER |
|
|
|
|
|
|
|
|
Deferred income taxes |
|
|
1,232,781 |
|
|
|
1,215,862 |
|
Regulatory liabilities |
|
|
658,102 |
|
|
|
635,431 |
|
Liability for asset retirements |
|
|
272,977 |
|
|
|
268,389 |
|
Pension and other postretirement liabilities (Note 6) |
|
|
567,208 |
|
|
|
551,531 |
|
Customer advances for construction |
|
|
77,861 |
|
|
|
71,211 |
|
Unamortized gain sale of utility plant |
|
|
38,894 |
|
|
|
41,182 |
|
Liabilities from long-term risk management and trading
activities (Note S-1) |
|
|
44,571 |
|
|
|
135,056 |
|
Other |
|
|
221,727 |
|
|
|
231,489 |
|
|
|
|
|
|
|
|
Total deferred credits and other |
|
|
3,114,121 |
|
|
|
3,150,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES ( NOTES 5, 8, 12, 13 and 15) |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
10,204,227 |
|
|
$ |
10,513,692 |
|
|
|
|
|
|
|
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental
Notes to Arizona Public Service Companys Condensed Financial Statements.
35
ARIZONA PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
79,407 |
|
|
$ |
88,236 |
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization including nuclear fuel |
|
|
195,122 |
|
|
|
186,225 |
|
Deferred fuel and purchased power |
|
|
(132,016 |
) |
|
|
(94,565 |
) |
Deferred fuel and purchased power amortization |
|
|
140,925 |
|
|
|
92,655 |
|
Deferred fuel and purchased power regulatory disallowance |
|
|
14,370 |
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
(9,639 |
) |
|
|
(7,434 |
) |
Deferred income taxes |
|
|
(2,862 |
) |
|
|
16,481 |
|
Changes in mark-to-market valuations |
|
|
(3,000 |
) |
|
|
2,464 |
|
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Customer and other receivables |
|
|
5,583 |
|
|
|
(13,257 |
) |
Materials, supplies and fossil fuel |
|
|
(23,495 |
) |
|
|
(4,707 |
) |
Other current assets |
|
|
(5,060 |
) |
|
|
1,677 |
|
Accounts payable |
|
|
10,492 |
|
|
|
(26,765 |
) |
Collateral |
|
|
1,259 |
|
|
|
(162,310 |
) |
Other current liabilities |
|
|
40,944 |
|
|
|
63,366 |
|
Change in risk management and trading liabilities |
|
|
(2,306 |
) |
|
|
(120,505 |
) |
Change in other long-term assets |
|
|
(1,750 |
) |
|
|
(5,045 |
) |
Change in other long-term liabilities |
|
|
26,316 |
|
|
|
21,553 |
|
|
|
|
|
|
|
|
Net cash flow provided by operating activities |
|
|
334,290 |
|
|
|
38,069 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(410,463 |
) |
|
|
(313,479 |
) |
Allowance for borrowed funds used during construction |
|
|
(4,888 |
) |
|
|
(3,394 |
) |
Purchases of investment securities |
|
|
(36,525 |
) |
|
|
(133,026 |
) |
Proceeds from sale of investment securities |
|
|
69,225 |
|
|
|
133,026 |
|
Proceeds from nuclear decommissioning trust sales |
|
|
133,463 |
|
|
|
114,875 |
|
Investment in nuclear decommissioning trust |
|
|
(143,834 |
) |
|
|
(125,246 |
) |
Other |
|
|
(3,321 |
) |
|
|
(1,626 |
) |
|
|
|
|
|
|
|
Net cash flow used for investing activities |
|
|
(396,343 |
) |
|
|
(328,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Equity infusion |
|
|
39,548 |
|
|
|
210,000 |
|
Short-term borrowings, net |
|
|
28,000 |
|
|
|
117,558 |
|
Dividends paid on common stock |
|
|
(85,000 |
) |
|
|
(85,000 |
) |
Repayment and reacquisition of long-term debt |
|
|
(566 |
) |
|
|
(1,690 |
) |
|
|
|
|
|
|
|
Net cash flow provided by (used for) financing activities |
|
|
(18,018 |
) |
|
|
240,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(80,071 |
) |
|
|
(49,933 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
81,870 |
|
|
|
49,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
1,799 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
Income taxes, net of refunds |
|
$ |
44,424 |
|
|
$ |
|
|
Interest, net of amounts capitalized |
|
$ |
78,418 |
|
|
$ |
70,103 |
|
See Notes to Pinnacle Wests Condensed Consolidated Financial Statements and Supplemental Notes
to Arizona Public Service Companys Condensed Financial Statements.
36
Certain notes to APS Condensed Financial Statements are combined with the Notes to
Pinnacle Wests Condensed Consolidated Financial Statements. Listed below are the Condensed
Consolidated Notes to Pinnacle Wests Condensed Consolidated Financial Statements, the majority of
which also relate to APS Condensed Financial Statements. In addition, listed below are the
Supplemental Notes which are required disclosures for APS and should be read in conjunction with
Pinnacle Wests Condensed Consolidated Notes.
|
|
|
|
|
|
|
Condensed |
|
APS |
|
|
Consolidated |
|
Supplemental |
|
|
Footnote |
|
Footnote |
|
|
Reference |
|
Reference |
Consolidation and Nature of Operations |
|
Note 1 |
|
|
Condensed Consolidated Financial Statements |
|
Note 2 |
|
|
Quarterly Fluctuations |
|
Note 3 |
|
|
Changes in Liquidity |
|
Note 4 |
|
|
Regulatory Matters |
|
Note 5 |
|
|
Retirement Plans and Other Benefits |
|
Note 6 |
|
|
Business Segments |
|
Note 7 |
|
|
Income Taxes |
|
Note 8 |
|
|
Variable-Interest Entities |
|
Note 9 |
|
|
Derivative and Energy Trading Accounting |
|
Note 10 |
|
Note S-1 |
Comprehensive Income (Loss) |
|
Note 11 |
|
Note S-2 |
Commitments and Contingencies |
|
Note 12 |
|
|
Nuclear Insurance |
|
Note 13 |
|
|
Other Income and Other Expense |
|
Note 14 |
|
Note S-3 |
Guarantees |
|
Note 15 |
|
|
Earnings Per Share |
|
Note 16 |
|
|
Discontinued Operations |
|
Note 17 |
|
|
Nuclear Decommissioning Trust |
|
Note 18 |
|
|
New Accounting Standards |
|
Note 19 |
|
|
37
S-1. Derivative and Energy Trading Accounting
APS is exposed to the impact of market fluctuations in the commodity price of electricity,
natural gas and emissions allowances. As part of its overall risk management program, APS uses
various commodity instruments that qualify as derivatives to hedge purchases and sales of
electricity, fuels, and emission allowances and credits. As of June 30, 2007, APS hedged exposures
to these risks for a maximum of 3.25 years.
Cash Flow Hedges
The changes in the fair value of APS hedged positions included in the APS Condensed
Statements of Income, after consideration of amounts deferred under the PSA, for the three and six
months ended June 30, 2007 and 2006 were comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Gains (losses) on the ineffective
portion of derivatives qualifying
for hedge accounting |
|
$ |
422 |
|
|
$ |
(2,824 |
) |
|
$ |
1,333 |
|
|
$ |
(3,260 |
) |
Gains (losses) from the change in
options time value excluded from
measurement of effectiveness |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
(14 |
) |
Gains from the discontinuance of
cash flow hedges |
|
|
|
|
|
|
|
|
|
|
150 |
|
|
|
159 |
|
During the next twelve months ending June 30, 2008, APS estimates that a net gain of $8
million before income taxes will be reclassified from accumulated other comprehensive income as an
offset to the effect of market price changes for the related hedged transactions. To the extent
the amounts are eligible for inclusion in the PSA, the amounts will be recorded as either a
regulatory asset or liability and have no effect on earnings (see Note 5).
APS assets and liabilities from risk management and trading activities are presented in two
categories.
The following tables summarize APS assets and liabilities from risk management and trading
activities at June 30, 2007 and December 31, 2006 (dollars in thousands):
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
Current |
|
|
and Other |
|
|
Current |
|
|
Credits and |
|
|
Net Asset |
|
June 30, 2007 |
|
Assets |
|
|
Assets |
|
|
Liabilities |
|
|
Other |
|
|
(Liability) |
|
Regulated Electricity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market |
|
$ |
47,698 |
|
|
$ |
61,239 |
|
|
$ |
(70,823 |
) |
|
$ |
(44,571 |
) |
|
$ |
(6,457 |
) |
Margin account
and options |
|
|
52,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,453 |
|
Marketing and Trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market |
|
|
2,712 |
|
|
|
|
|
|
|
(4,436 |
) |
|
|
|
|
|
|
(1,724 |
) |
Options and
other contracts at cost |
|
|
2,395 |
|
|
|
|
|
|
|
(234 |
) |
|
|
|
|
|
|
2,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
105,258 |
|
|
$ |
61,239 |
|
|
$ |
(75,493 |
) |
|
$ |
(44,571 |
) |
|
$ |
46,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
Deferred |
|
|
|
|
|
|
Current |
|
|
and Other |
|
|
Current |
|
|
Credits and |
|
|
Net Asset |
|
December 31, 2006 |
|
Assets |
|
|
Assets |
|
|
Liabilities |
|
|
Other |
|
|
(Liability) |
|
Regulated Electricity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market |
|
$ |
458,034 |
|
|
$ |
96,892 |
|
|
$ |
(481,661 |
) |
|
$ |
(135,056 |
) |
|
$ |
(61,791 |
) |
Margin account
and options |
|
|
77,705 |
|
|
|
|
|
|
|
(2,228 |
) |
|
|
|
|
|
|
75,477 |
|
Marketing and Trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market |
|
|
3,569 |
|
|
|
|
|
|
|
(6,654 |
) |
|
|
|
|
|
|
(3,085 |
) |
Options at cost |
|
|
|
|
|
|
|
|
|
|
(312 |
) |
|
|
|
|
|
|
(312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
539,308 |
|
|
$ |
96,892 |
|
|
$ |
(490,855 |
) |
|
$ |
(135,056 |
) |
|
$ |
10,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of 2007, we changed the presentation of mark-to-market positions
related to natural gas basis swaps in the regulated electricity segment. We historically presented
the buy side and the sell side of such swaps at fair value gross on our consolidated balance
sheets, which resulted in mark-to-market assets and separate mark-to-market liabilities. We now
offset these matching assets and liabilities, thus presenting the net mark-to-market position by
contract, which correctly reflects the true nature of these contracts. The net asset/liability
position as historically disclosed in the table above is unchanged. Further, this change has no
impact on income, common stock equity or cash flows. Had we previously presented such amounts net,
the effect on the December 31, 2006 balance sheet would have been to decrease Current Assets and
Current Liabilities by $376 million and decrease Investments and Other Assets and Deferred Credits
and Other by $59 million. We believe that the effect of presenting these contracts gross in prior
periods is immaterial to previously issued financial statements.
We maintain a margin account with a broker to support our risk management and trading
activities. The margin account was an asset of $52 million at June 30, 2007 and $73 million at
December 31, 2006 and is included in the margin account in the table above. Cash is deposited with
the broker in this account at the time futures or options contracts are initiated. The change in
market value of these contracts (reflected in mark-to-market) requires adjustment of the margin
account balance.
Cash or other assets may be required to serve as collateral against APS open positions on
certain energy-related contracts. No collateral was provided to counterparties at June 30, 2007
and $2 million was provided at December 31, 2006 and is included in other current assets on the
Condensed Balance Sheets. No collateral was provided to us by counterparties at June 30, 2007 and
39
$1 million was provided to us at December 31, 2006, and is included in other current liabilities on
the Condensed Balance Sheets.
S-2. Comprehensive Income (Loss)
Components of APS comprehensive income (loss) for the three and six months ended June 30,
2007 and 2006 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
75,090 |
|
|
$ |
93,757 |
|
|
$ |
79,407 |
|
|
$ |
88,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses)
on derivative instruments (a) |
|
|
(25,781 |
) |
|
|
(62,304 |
) |
|
|
24,764 |
|
|
|
(225,196 |
) |
Net reclassification of
realized losses (gains) to
income (b) |
|
|
(6,270 |
) |
|
|
2,958 |
|
|
|
(5,529 |
) |
|
|
(7,157 |
) |
Net unrealized losses related
to pension benefits (c) |
|
|
(44,613 |
) |
|
|
|
|
|
|
(44,613 |
) |
|
|
|
|
Net income tax benefit related
to items of other comprehensive
income |
|
|
30,082 |
|
|
|
23,175 |
|
|
|
9,958 |
|
|
|
90,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
|
|
(46,582 |
) |
|
|
(36,171 |
) |
|
|
(15,420 |
) |
|
|
(141,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
28,508 |
|
|
$ |
57,586 |
|
|
$ |
63,987 |
|
|
$ |
(53,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
These amounts primarily include unrealized gains and losses on contracts used to
hedge our forecasted electricity and natural gas requirements to serve Native Load.
These changes are primarily due to changes in forward natural gas prices and wholesale
electricity prices. |
|
(b) |
|
These amounts primarily include the reclassification of unrealized gains and
losses to realized gains and losses for contracted commodities delivered during the
period. |
|
(c) |
|
In accordance with the ACCs June 28, 2007 order in APS general rate case, these
amounts include costs that were previously recorded as a regulatory asset and have now
been charged to other comprehensive income. |
S-3. Other Income and Other Expense
The following table provides detail of APS other income and other expense for the three and
six months ended June 30, 2007 and 2006 (dollars in thousands):
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SO2 emission allowance
sales and other (a) |
|
$ |
245 |
|
|
$ |
8,810 |
|
|
$ |
434 |
|
|
$ |
9,171 |
|
Interest income |
|
|
1,512 |
|
|
|
1,970 |
|
|
|
4,859 |
|
|
|
5,504 |
|
Investment gains net |
|
|
2,141 |
|
|
|
|
|
|
|
2,518 |
|
|
|
165 |
|
Miscellaneous |
|
|
458 |
|
|
|
209 |
|
|
|
978 |
|
|
|
245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
$ |
4,356 |
|
|
$ |
10,989 |
|
|
$ |
8,789 |
|
|
$ |
15,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating costs (a) |
|
$ |
(2001 |
) |
|
$ |
(3,311 |
) |
|
$ |
(5,234 |
) |
|
$ |
(6,527 |
) |
Miscellaneous |
|
|
(768 |
) |
|
|
(1,247 |
) |
|
|
(2,439 |
) |
|
|
(1,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense |
|
$ |
(2,769 |
) |
|
$ |
(4,558 |
) |
|
$ |
(7,673 |
) |
|
$ |
(7,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As defined by the FERC, includes below-the-line non-operating utility income and
expense (items excluded from utility rate recovery). |
41
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with Pinnacle Wests Condensed
Consolidated Financial Statements and Arizona Public Service Companys Condensed Financial
Statements and the related Notes that appear in Item 1 of this report.
OVERVIEW
Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated
electric utility that provides retail and wholesale electric service to most of the state of
Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson
metropolitan area and Mohave County in northwestern Arizona. APS has historically accounted for a
substantial part of our revenues and earnings, and is expected to continue to do so. Customer
growth in APS service territory is about three times the national average and remains a
fundamental driver of our revenues and earnings.
The ACC regulates APS retail electric rates. Our profitability is affected by the rates APS
may charge and the timely recovery of costs through those rates. APS capital expenditure
requirements, which are discussed below under Liquidity and Capital Resources, are substantial
because of the significant customer growth in APS service territory, highlighting APS need for
the timely recovery of these and other expenditures through rates. As discussed in greater detail
in Note 5, on June 28, 2007, the ACC issued an order in a general rate case that APS filed in late
2005. Additionally, the ACC has directed the ACC staff to conduct a prudence audit of 2006 Palo
Verde outage costs. This prudence audit has not yet been completed. APS believes these costs were
prudently incurred and that the 2006 Deferrals, totaling
approximately $79 million, are, therefore,
recoverable.
SunCor, our real estate development subsidiary, has been and is expected to continue to be an
important source of earnings. See discussion below in Pinnacle West Consolidated Factors
Affecting our Financial Outlook Subsidiaries. Our subsidiary, APS Energy Services, provides
competitive commodity-related energy services and energy-related products and services to
commercial and industrial retail customers in the western United States. El Dorado, our investment
subsidiary, owns minority interests in several energy-related investments and Arizona
community-based ventures. Pinnacle West Marketing & Trading is the Companys newly-formed
marketing and trading subsidiary. Activity in this subsidiary began in February 2007. See Note 4.
We continue to focus on solid operational performance in our electricity generation and
delivery activities. In the delivery area, we focus on superior reliability and customer
satisfaction. We plan to expand long-term resources and our transmission and distribution systems
to meet the electricity needs of our growing retail customers and sustain reliability.
See Pinnacle West Consolidated Factors Affecting Our Financial Outlook below for a
discussion of several factors that could affect our future financial results.
42
EARNINGS CONTRIBUTION BY BUSINESS SEGMENT
Pinnacle Wests two principal business segments are:
|
|
|
our regulated electricity segment, which consists of traditional regulated retail
and wholesale electricity businesses (primarily electric service to Native Load
customers) and related activities and includes electricity generation, transmission
and distribution; and |
|
|
|
|
our real estate segment, which consists of SunCors real estate development and
investment activities. |
The following table summarizes income from continuing operations by segment for the three
months and six months ended June 30, 2007 and 2006 and reconciles net income in total (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Regulated electricity |
|
$ |
71 |
|
|
$ |
95 |
|
|
$ |
74 |
|
|
$ |
82 |
|
Real estate |
|
|
|
|
|
|
8 |
|
|
|
8 |
|
|
|
30 |
|
Other (a) |
|
|
8 |
|
|
|
8 |
|
|
|
12 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
79 |
|
|
|
111 |
|
|
|
94 |
|
|
|
122 |
|
Discontinued operations net of tax (b) |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
79 |
|
|
$ |
112 |
|
|
$ |
96 |
|
|
$ |
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily marketing and trading activity. |
|
(b) |
|
Primarily relates to sales of commercial properties. |
PINNACLE WEST CONSOLIDATED RESULTS OF OPERATIONS
General
Throughout the following explanations of our results of operations, we refer to gross
margin. With respect to our regulated electricity segment, gross margin refers to operating
revenues less fuel and purchased power costs. Gross margin is a non-GAAP financial measure, as
defined in accordance with SEC rules. Exhibit 99.1 reconciles this non-GAAP financial measure to
operating income, which is the most directly comparable financial measure calculated and presented
in accordance with accounting principles generally accepted in the United States (GAAP). We view
gross margin as an important performance measure of the core profitability of our operations. This
measure is a key component of our internal financial reporting and is used by our management in
analyzing our business. We believe that investors benefit from having access to the same financial
measures that our management uses.
43
Deferred Fuel and Purchased Power Costs
Our subsidiary, APS, settled its 2003 general retail rate case effective April 1, 2005. As
part of the settlement, the ACC approved the PSA, which permits APS to defer for recovery or refund
fluctuations in retail fuel and purchased power costs, subject to specified parameters. In its
June 28, 2007 general rate case order, the ACC modified the PSA in various respects, effective July
1, 2007. In accordance with the modified PSA, APS continues to defer for future rate recovery 90%
of the difference between actual retail fuel and purchased power costs and the amount of such costs
currently included in base rates, excluding certain costs. APS recovers PSA deferrals from its
customers through the PSA, which is adjusted annually. See PSA Modifications in Note 5. The
recovery of PSA deferrals recorded as revenue is offset dollar-for-dollar by the amortization of
those deferred expenses recorded as fuel and purchased power.
The balance of APS PSA accumulated unrecovered deferrals at June 30, 2007 was approximately
$137 million. APS expects to recover these deferrals through a combination of the PSA adjustor
that took effect on February 1, 2007 and the temporary PSA surcharge relating to the 2005
Deferrals. See PSA Modifications in Note 5. Although the prudence audit of 2006 Palo Verde
outage costs has not yet been completed, APS believes these costs were prudently incurred and that
the 2006 Deferrals (totaling approximately $79 million) are therefore recoverable.
Operating Results Three-month period ended June 30, 2007 compared with three-month period ended
June 30, 2006
Our consolidated net income for the three months ended June 30, 2007 was $79 million compared
with $112 million for the comparable prior-year period. Net income decreased $33 million in the
period-to-period comparison, reflecting the following changes in earnings by segment:
|
|
|
Regulated Electricity Segment Net income decreased approximately $24 million
primarily due to income tax credits related to prior years resolved in 2006; a
regulatory disallowance (see Deferred Fuel and Purchased Power Costs above); higher
operations and maintenance expense related to fossil generation costs; the effects of
weather on retail sales; and higher interest expense, net of capitalized financing
costs, due to higher debt balances and rates. These negative factors were partially
offset by higher retail sales primarily due to customer growth. In addition, higher
fuel and purchased power costs were partially offset by the deferral of such costs in
accordance with the PSA. See Deferred Fuel and Purchased Power Costs above. |
|
|
|
|
Real Estate Segment Net income decreased approximately $9 million primarily due to lower
sales of residential property due to a slowdown in the western United States residential real
estate markets. |
44
Additional details on the major factors that increased (decreased) net income are contained in the
following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Pretax |
|
|
After Tax |
|
Regulated electricity segment gross margin: |
|
|
|
|
|
|
|
|
Higher fuel and purchased power costs due to increased prices |
|
$ |
(27 |
) |
|
$ |
(16 |
) |
Increased deferred fuel and purchased power costs |
|
|
26 |
|
|
|
16 |
|
Regulatory disallowance (see Deferred Fuel and Purchased
Power Costs above) |
|
|
(14 |
) |
|
|
(8 |
) |
Effects of weather on retail sales |
|
|
(7 |
) |
|
|
(4 |
) |
Higher retail sales primarily due to customer growth and usage
patterns, excluding weather effects |
|
|
10 |
|
|
|
6 |
|
Miscellaneous items, net |
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Net decrease in regulated electricity segment gross margin |
|
|
(8 |
) |
|
|
(5 |
) |
Lower real estate segment contribution primarily due to decreased
sales of residential property |
|
|
(15 |
) |
|
|
(9 |
) |
Operations and maintenance increases primarily due to: |
|
|
|
|
|
|
|
|
Generation costs, including greater fossil power plant
maintenance outages |
|
|
(8 |
) |
|
|
(5 |
) |
Miscellaneous items, net |
|
|
(1 |
) |
|
|
(1 |
) |
Higher depreciation and amortization primarily due to increased
plant balances |
|
|
(4 |
) |
|
|
(2 |
) |
Lower other income, net of expense, primarily due to miscellaneous
asset sales in the prior-year period |
|
|
(4 |
) |
|
|
(2 |
) |
Higher interest expense, net of capitalized financing costs,
primarily
due to higher debt balances and rates |
|
|
(5 |
) |
|
|
(3 |
) |
Income tax credits related to prior years resolved in 2006 |
|
|
|
|
|
|
(10 |
) |
Other miscellaneous items, net |
|
|
2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Net decrease in net income |
|
$ |
(43 |
) |
|
$ |
(33 |
) |
|
|
|
|
|
|
|
Regulated Electricity Segment Revenues
Regulated electricity segment revenues were $1 million lower for the three months ended June
30, 2007 compared with the prior-year period primarily as a result of:
|
|
|
a $12 million decrease in Off-System Sales due to lower prices; |
|
|
|
|
a $9 million decrease in retail revenues due to weather; |
|
|
|
|
a $13 million increase in retail revenues primarily related to customer
growth and usage patterns, excluding weather effects; and |
|
|
|
|
a $7 million increase due to miscellaneous factors. |
Real Estate Segment Revenues
Real estate segment revenues were $64 million lower for the three months ended June 30, 2007
compared with the prior-year period primarily as a result of:
45
|
|
|
a $56 million decrease in residential property sales due to a slowdown
in the western United States residential real estate markets; |
|
|
|
|
a $4 million decrease in revenue primarily due to the timing of land
parcel sales; and |
|
|
|
|
a $4 million decrease due to miscellaneous factors. |
Operating Results Six-month period ended June 30, 2007 compared with six-month period ended June
30, 2006
Our consolidated net income for the six months ended June 30, 2007 was $96 million compared
with $125 million for the comparable prior-year period. Net income decreased $29 million in the
period-to-period comparison, primarily reflecting the following changes in earnings by segment:
|
|
|
Regulated Electricity Segment Net income decreased approximately $8 million
primarily due to income tax credits related to prior years resolved in 2006; a
regulatory disallowance (see Deferred Fuel and Purchased Power Costs above); higher
interest expense, net of capitalized financing costs, due to higher debt balances;
lower other income, net of expense, primarily due to miscellaneous asset sales in the
prior-year period and decreased interest income; and higher depreciation and
amortization expense primarily due to increased plant asset balances. The negative
factors were partially offset by higher retail sales primarily due to customer growth
and the effects of weather on retail sales. In addition, higher fuel and purchased
power costs were partially offset by the deferral of such costs in accordance with the
PSA. See Deferred Fuel and Purchased Power Costs above. |
|
|
|
|
Real Estate Segment Net income decreased approximately $22 million primarily due
to lower sales of residential property due to a slowdown in the western United States
residential real estate markets and the timing of land parcel sales. |
46
Additional details on the major factors that increased (decreased) net income are contained in the
following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Pretax |
|
|
After Tax |
|
Regulated electricity segment gross margin: |
|
|
|
|
|
|
|
|
Higher fuel and purchased power costs due to increased prices |
|
$ |
(42 |
) |
|
$ |
(26 |
) |
Increased deferred fuel and purchased power costs |
|
|
38 |
|
|
|
23 |
|
Regulatory disallowance (see Deferred Fuel and Purchased
Power Costs above) |
|
|
(14 |
) |
|
|
(8 |
) |
Effects of weather on retail sales |
|
|
6 |
|
|
|
4 |
|
Higher retail sales primarily due to customer growth and usage
patterns, excluding weather effects |
|
|
20 |
|
|
|
12 |
|
Miscellaneous items, net |
|
|
8 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Net increase in regulated electricity segment gross margin |
|
|
16 |
|
|
|
10 |
|
Lower real estate segment contribution primarily due to decreased
sales of residential property and land parcels |
|
|
(36 |
) |
|
|
(22 |
) |
Higher depreciation and amortization primarily due to increased
plant asset balances |
|
|
(6 |
) |
|
|
(4 |
) |
Lower other income, net of expense, primarily due to miscellaneous
asset sales in the prior-year period and decreased interest income |
|
|
(6 |
) |
|
|
(4 |
) |
Higher interest expense, net of capitalized financing costs,
primarily due to higher debt balances and rates |
|
|
(7 |
) |
|
|
(4 |
) |
Income tax credits related to prior years resolved in 2006 |
|
|
|
|
|
|
(10 |
) |
Other miscellaneous items, net |
|
|
2 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Net decrease in net income |
|
$ |
(37 |
) |
|
$ |
(29 |
) |
|
|
|
|
|
|
|
Regulated Electricity Segment Revenues
Regulated electricity segment revenues were $68 million higher for the six months ended June
30, 2007 compared with the prior-year period primarily as a result of:
|
|
|
a $48 million increase in retail revenues related to recovery of PSA
deferrals, which had no earnings effect because of amortization of the same amount
recorded as fuel and purchased power expense (see Deferred Fuel and Purchased Power
Costs above); |
|
|
|
|
a $26 million increase in retail revenues primarily related to customer
growth and usage patterns, excluding weather effects; |
|
|
|
|
a $9 million increase in retail revenues due to weather; |
|
|
|
|
a $17 million decrease in Off-System Sales due to lower prices; and |
|
|
|
|
a $2 million increase due to miscellaneous factors. |
47
Real Estate Segment Revenues
Real estate segment revenues were $95 million lower for the six months ended June 30, 2007
compared with the prior-year period primarily as a result of:
|
|
|
a $76 million decrease in residential property sales due to a slowdown
in the western United States residential real estate markets; and |
|
|
|
|
a $19 million decrease in revenue primarily due to the timing of land
parcel sales. |
Other Revenues
Marketing and trading revenues were $10 million lower for the six months ended June 30, 2007
compared with the prior-year period primarily as a result of:
|
|
|
a $12 million decrease from lower competitive retail sales volumes in
California; and |
|
|
|
|
a $2 million increase due to miscellaneous factors. |
LIQUIDITY AND CAPITAL RESOURCES
Capital Needs and Resources Pinnacle West Consolidated
Capital Expenditure Requirements
The following table summarizes the actual capital expenditures for the six months ended June
30, 2007 and estimated capital expenditures for the next three years (dollars in millions):
CAPITAL EXPENDITURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
Estimated for the Year Ended |
|
|
|
|
|
June 30, |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2007 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
APS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
$ |
198 |
|
|
$ |
362 |
|
|
$ |
411 |
|
|
$ |
459 |
|
Transmission |
|
|
85 |
|
|
|
173 |
|
|
|
200 |
|
|
|
288 |
|
Generation |
|
|
120 |
|
|
|
388 |
|
|
|
298 |
|
|
|
335 |
|
Other (a) |
|
|
6 |
|
|
|
26 |
|
|
|
39 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
409 |
|
|
|
949 |
|
|
|
948 |
|
|
|
1,122 |
|
SunCor (b) |
|
|
99 |
|
|
|
131 |
|
|
|
101 |
|
|
|
100 |
|
Other |
|
|
1 |
|
|
|
13 |
|
|
|
19 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
509 |
|
|
$ |
1,093 |
|
|
$ |
1,068 |
|
|
$ |
1,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Primarily information systems and facilities projects. |
48
|
|
|
(b) |
|
Consists primarily of capital expenditures for residential land development and
retail and office building construction reflected in Real estate investments on the
Condensed Consolidated Statements of Cash Flows. |
Distribution and transmission capital expenditures are comprised of infrastructure additions
and upgrades, capital replacements, new customer construction and related information systems and
facility costs. Examples of the types of projects included in the forecast include lines,
substations, line extensions to new residential and commercial developments and upgrades to
customer information systems. Major transmission projects are driven by strong regional customer
growth.
Generation capital expenditures are comprised of various improvements to APS existing fossil
and nuclear plants and the replacement of Palo Verde steam generators (see below). Examples of the
types of projects included in this category are additions, upgrades and capital replacements of
various power plant equipment, such as turbines, boilers and environmental equipment.
Environmental expenditures are estimated at approximately $80 million to $100 million per year for
2007, 2008 and 2009. Generation also includes nuclear fuel expenditures of approximately $110
million for 2007, $40 million for 2008 and $100 million for 2009.
The Palo Verde owners have approved the manufacture of one additional replacement set of steam
generators. These generators will be installed in Unit 3 and are scheduled for completion in the
Fall of 2007 at an approximate cost of $70 million (APS share). Approximately $35 million of the
Unit 3 steam generator costs have been incurred through June 30, 2007, with the remaining $35
million included in the capital expenditures table above. Capital expenditures will be funded with
internally generated cash and/or external financings.
Contractual Obligations
Our future contractual obligations have not changed materially from the amounts disclosed in
Part II, Item 7 of the 2006 Form 10-K, with the exception of our aggregate fuel and purchased power
commitments, which increased from approximately $2.6 billion at
December 31, 2006 to $2.9 billion
at June 30, 2007 as follows (dollars in billions):
|
|
|
|
|
|
|
|
|
2007 |
|
2008-2009 |
|
2010-2011 |
|
Thereafter |
|
Total |
$0.6
|
|
$0.6
|
|
$0.4
|
|
$1.3
|
|
$2.9 |
See Note 4 for a list of payments due on total long-term debt and capitalized lease
requirements.
Upon adoption of FIN 48, we are now required to include uncertain tax positions in our
contractual obligation disclosure. We have uncertain tax positions of approximately $192 million
and we expect to settle substantially all of these in 2007. See Note 8 for additional information.
Off-Balance Sheet Arrangements
In 1986, APS entered into agreements with three separate VIE lessors in order to sell and
lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in
accordance with GAAP. We are not the primary beneficiary of the Palo Verde VIEs and, accordingly,
do not consolidate them.
49
APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of
certain events that APS does not consider to be reasonably likely to occur. Under certain
circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde
or the occurrence of specified nuclear events), APS would be required to assume the debt associated
with the transactions, make specified payments to the equity participants, and take title to the
leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If
such an event had occurred as of June 30, 2007, APS would have been required to assume
approximately $208 million of debt and pay the equity participants approximately $174 million.
Guarantees and Letters of Credit
We have issued parental guarantees and letters of credit and obtained surety bonds on behalf
of our subsidiaries. Our parental guarantees for Pinnacle West Marketing & Trading relate to
commodity energy products. Our credit support instruments enable APS Energy Services to offer
commodity energy and energy-related products. Non-performance or non-payment under the original
contract by our subsidiaries would require us to perform under the guarantee or surety bond. No
liability is currently recorded on the Condensed Consolidated Balance Sheets related to Pinnacle
Wests current outstanding guarantees on behalf of our subsidiaries. Our guarantees have no
recourse or collateral provisions to allow us to recover amounts paid under the guarantees. We
generally agree to indemnification provisions related to liabilities arising from or related to
certain of our agreements, with limited exceptions depending on the particular agreement. See Note
15 for additional information regarding guarantees and letters of credit.
Credit Ratings
The
ratings of securities of Pinnacle West and APS as of August 6, 2007 are shown below. The
ratings reflect the respective views of the rating agencies, from which an explanation of the
significance of their ratings may be obtained. There is no assurance that these ratings will
continue for any given period of time. The ratings may be revised or withdrawn entirely by the
rating agencies, if, in their respective judgments, circumstances so warrant. Any downward
revision or withdrawal may adversely affect the market price of Pinnacle Wests or APS securities
and serve to increase the cost of and access to capital. It may also require additional collateral
related to certain derivative instruments (see Note 10).
|
|
|
|
|
|
|
|
|
Moodys |
|
Standard & Poors |
|
Fitch |
Pinnacle West |
|
|
|
|
|
|
Senior unsecured (a) |
|
Baa3 (P) |
|
BB+ (prelim) |
|
N/A |
Commercial paper |
|
P-3 |
|
A-3 |
|
F-3 |
Outlook |
|
Negative |
|
Stable |
|
Stable |
|
APS |
|
|
|
|
|
|
Senior unsecured |
|
Baa2 |
|
BBB- |
|
BBB |
Secured lease
obligation bonds |
|
Baa2 |
|
BBB- |
|
BBB- |
Commercial paper |
|
P-2 |
|
A-3 |
|
F-2 |
Outlook |
|
Negative |
|
Stable |
|
Stable |
|
|
|
(a) |
|
Pinnacle West has a shelf registration under SEC Rule 415. Pinnacle West
currently has no outstanding, rated senior unsecured securities. However, Moodys
assigns a |
50
|
|
|
|
|
provisional (P) rating and Standard & Poors assigns a preliminary (prelim) rating to
the senior unsecured securities that can be issued under such shelf registrations. |
Debt Provisions
Pinnacle Wests and APS debt covenants related to their respective bank financing
arrangements include debt to capitalization ratios. Certain of APS bank financing arrangements
also include an interest coverage test. Pinnacle West and APS comply with these covenants and each
anticipates it will continue to meet these and other significant covenant requirements. For both
Pinnacle West and APS, these covenants require that the ratio of consolidated debt to total
consolidated capitalization not exceed 65%. At June 30, 2007, the ratio was approximately 50% for
Pinnacle West and 46% for APS. The provisions regarding interest coverage require a minimum cash
coverage of two times the interest requirements for APS. The interest coverage was approximately
4.5 times under APS bank financing agreements as of June 30, 2007. Failure to comply with such
covenant levels would result in an event of default which, generally speaking, would require the
immediate repayment of the debt subject to the covenants and could cross-default other debt. See
further discussion of cross-default provisions below.
Neither Pinnacle Wests nor APS financing agreements contain rating triggers that would
result in an acceleration of the required interest and principal payments in the event of a rating
downgrade. However, in the event of a rating downgrade, Pinnacle West and/or APS may be subject to
increased interest costs under certain financing agreements.
All of Pinnacle Wests loan agreements contain cross-default provisions that would result in
defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or
APS were to default under certain other material agreements. All of APS bank agreements contain
cross-default provisions that would result in defaults and the potential acceleration of payment
under these bank agreements if APS were to default under certain other material agreements.
Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings.
See Note 4 for further discussions.
Capital Needs and Resources By Company
Pinnacle West (Parent Company)
Our primary cash needs are for dividends to our shareholders and principal and interest
payments on our long-term debt. The level of our common stock dividends and future dividend growth
will be dependent on a number of factors including, but not limited to, payout ratio trends, free
cash flow and financial market conditions.
Our primary sources of cash are dividends from APS, external financings and cash distributions
from our other subsidiaries, primarily SunCor. An existing ACC order requires APS to maintain a
common equity ratio of at least 40% and prohibits APS from paying common stock dividends if the
payment would reduce its common equity below that threshold. As defined in the ACC order, the
common equity ratio is common equity divided by the sum of common equity and long-term debt,
including current maturities of long-term debt. At June 30, 2007, APS common equity ratio, as
defined, was approximately 53%.
51
In May 2007, Pinnacle West infused approximately $40 million of equity into APS, consisting of
the proceeds of stock issuances in 2006 under Pinnacle Wests Investors Advantage Plan (direct
stock purchase and dividend reinvestment plan) and employee stock plans.
On July 18, 2007, the Pinnacle West Board of Directors declared a quarterly dividend of $0.525
per share of common stock, payable on September 4, 2007, to shareholders of record on August
1, 2007.
Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a
non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and
our subsidiaries. IRS regulations require us to contribute a minimum amount to the qualified plan.
We contribute at least the minimum amount required under IRS regulations, but no more than the
maximum tax-deductible amount. The minimum required funding takes into consideration the value of
plan assets and our pension obligation. The assets in the plan are comprised of fixed-income,
equity and short-term investments. Future year contribution amounts are dependent on fund
performance and fund valuation assumptions. We contributed $47 million in 2006. The contribution
to our pension plan in 2007 is estimated to be approximately $52 million, of which approximately
$0.3 million was contributed through August 2007. The contribution to our other postretirement
benefit plans in 2007 is estimated to be approximately $21 million. APS and other subsidiaries
fund their share of the contributions. APS share is approximately 96% of both plans.
APS
APS
capital requirements consist primarily of capital expenditures and optional
and mandatory redemptions of long-term debt. APS pays for its capital requirements with cash from
operations and, to the extent necessary, external financings. APS has historically paid its
dividends to Pinnacle West with cash from operations. See Pinnacle West (Parent Company) above
for a discussion of the common equity ratio that APS must maintain in order to pay dividends to
Pinnacle West. As noted above, in May 2007, Pinnacle West infused approximately $40 million of
equity into APS.
Although provisions in APS articles of incorporation and ACC financing orders establish
maximum amounts of preferred stock and debt that APS may issue, APS does not expect any of these
provisions to limit its ability to meet its capital requirements. APS has requested the ACC to
increase (a) APS current short-term debt authorization (7% of APS capitalization) to 7% of APS
capitalization plus $500 million and (b) APS current long-term debt authorization (approximately
$3.2 billion) to approximately $4.2 billion in light of the projected growth of APS and its
customer base and the resulting projected future financing needed to fund APS capital expenditure
and maintenance program and other cash requirements. See APS Financing Authorization in Note 5.
See Deferred Fuel and Purchased Power Costs above and PSA Modifications in Note 5 for
information regarding the PSA approved by the ACC. Although APS defers actual retail fuel and
purchased power costs on a current basis, APS recovery of the deferrals from its ratepayers is
subject to annual PSA adjustments and, if necessary, periodic surcharge applications.
See Cash Flow Hedges in Note 10 for information related to collateral provided to us by
counterparties.
52
Other Subsidiaries
During the past three years, SunCor funded its cash requirements with cash from operations and
its own external financings. SunCors capital needs consist primarily of capital expenditures for
land development and retail and office building construction. See the capital expenditures table
above for actual capital expenditures during the six months ended June 30, 2007 and projected
capital expenditures for the next three years. SunCor expects to fund its future capital
requirements with cash from operations and external financings.
SunCor entered into a secured construction loan on April 13, 2007, in the amount of $60
million, $26 million of which was outstanding at June 30, 2007. The loan matures on April 19,
2009, and may be extended one year if certain conditions are met.
El Dorado expects minimal capital requirements over the next three years and intends to focus
on prudently realizing the value of its existing investments.
APS Energy Services expects minimal capital expenditures over the next three years.
See Overview above and Note 4 for discussion of Pinnacle West Marketing & Trading, the
Companys newly-formed marketing and trading subsidiary.
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements in accordance with GAAP, management must often make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosures at the date of the financial statements and during the reporting
period. Some of those judgments can be subjective and complex, and actual results could differ
from those estimates. Our most critical accounting policies include the impacts of regulatory
accounting, the determination of the appropriate accounting for our pension and other
postretirement benefits and derivatives accounting. There have been no changes to our critical
accounting policies since our 2006 Form 10-K. See Critical Accounting Policies in Item 7 of the
2006 Form 10-K for further details about our critical accounting policies.
OTHER ACCOUNTING MATTERS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
guidance establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The Statement is effective for us on January 1, 2008. We are currently evaluating
this new guidance.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities. SFAS No. 159 provides companies with an option to report selected
financial assets and liabilities at fair value. SFAS No. 159 is effective for us on January 1,
2008. We are currently evaluating this new guidance.
53
See Note 8 for a discussion of FIN 48 on accounting for uncertainty in income taxes, which we
adopted January 1, 2007. The effect of applying the new guidance was not significantly different
in terms of tax impacts from the application of our previous policy. Accordingly, the impact to
retained earnings upon adoption was immaterial.
PINNACLE WEST CONSOLIDATED FACTORS AFFECTING
OUR FINANCIAL OUTLOOK
Factors Affecting Operating Revenues, Fuel and Purchased Power Costs
General Electric operating revenues are derived from sales of electricity in regulated retail
markets in Arizona and from competitive retail and wholesale power markets in the western United
States. For the years 2004 through 2006, retail electric revenues comprised approximately 82% of
our total electric operating revenues. Our electric operating revenues are affected by electricity
sales volumes related to customer mix, customer growth, average usage per customer, electricity
rates and tariffs, variations in weather from period to period, and amortization of PSA deferrals.
Competitive retail sales of energy and energy-related products and services are made by APS Energy
Services in certain western states that have opened to competition. Off-System Sales of excess
generation output, purchased power and natural gas are included in regulated electricity segment
revenues and related fuel and purchased power because the gross margin is credited to APS retail
customers through the PSA. These revenue transactions are affected by the availability of excess
generation or other energy resources and wholesale market conditions, including demand and prices.
Competitive wholesale transactions are made by the marketing and trading group through structured
trading opportunities involving matched sales and purchases of commodities.
Retail Rate Proceedings The ACC regulates APS retail electric rates. Our profitability is
affected by the rates APS may charge and the timely recovery of costs through those rates. APS
capital expenditure requirements, which are discussed above under Liquidity and Capital
Resources, are substantial because of the significant customer growth in APS service territory,
highlighting APS need for the timely recovery of these and other expenditures through rates. As
discussed in greater detail in Note 5, on June 28, 2007, the ACC issued an order in a general rate
case that APS filed in late 2005. Additionally, the ACC has directed the ACC staff to conduct a
prudence audit of 2006 Palo Verde outage costs. This prudence audit has not yet been completed.
APS believes these costs were prudently incurred and that the 2006 Deferrals, totaling
approximately $79 million, are, therefore, recoverable.
Fuel and Purchased Power Costs Fuel and purchased power costs included on our income
statements are impacted by our electricity sales volumes, existing contracts for purchased power
and generation fuel, our power plant performance, transmission availability or constraints,
prevailing market prices, new generating plants being placed in service in our market areas, our
hedging program for managing such costs and, since April 1, 2005, PSA deferrals and the
amortization thereof. See PSA Modifications and PSA Deferrals Related to Palo Verde Outages in
Note 5 for information regarding the PSA, including the 2006 Deferrals that are the subject of an
ACC prudence review. APS recovery of PSA deferrals from its ratepayers is subject to annual PSA
adjustments and, if necessary, periodic surcharge applications.
Customer and Sales Growth The customer and sales growth referred to in this paragraph applies
to Native Load customers and sales to them. Customer growth in APS service territory for the
six-month period ended June 30, 2007 was 3.7% compared with the prior-year period. Customer
54
growth averaged 4.1% a year for the three years from 2004 through 2006, and we currently expect
customer growth to average about 3.8% per year from 2007 to 2009. For the three years 2004 through
2006, APS actual retail electricity sales in kilowatt-hours grew at an average rate of 4.2%;
adjusted to exclude effects of weather variations, such retail sales growth averaged 4.6% a year.
We currently estimate that total retail electricity sales in kilowatt-hours will grow 3.5% on
average, from 2007 through 2009, before the effects of weather variations. We currently expect our
retail sales growth in 2007 to be below average because of potential effects on customer usage from
retail rate increases (see Note 5).
Actual sales growth, excluding weather-related variations, may differ from our projections as
a result of numerous factors, such as economic conditions, customer growth, usage patterns and
responses to retail price changes. Our experience indicates that a reasonable range of variation
in our kilowatt-hour sales projection attributable to such economic factors can result in increases
or decreases in annual net income of up to $10 million.
Weather In forecasting retail sales growth, we assume normal weather patterns based on
historical data. Historical extreme weather variations have resulted in annual variations in net
income in excess of $20 million. However, our experience indicates that the more typical
variations from normal weather can result in increases or decreases in annual net income of up to
$10 million.
Wholesale Market Our marketing and trading activities focus primarily on managing APS risks
relating to fuel and purchased power costs in connection with its costs of serving Native Load
customer demand. Our marketing and trading activities include, subject to specified parameters,
marketing, hedging and trading in electricity, fuels and emission allowances and credits. See
FERC Rate Case in Note 5 for information regarding APS recent filing with the FERC requesting an
increase in transmission rates.
Other Factors Affecting Financial Results
Operations and Maintenance Expenses Operations and maintenance expenses are impacted by
growth, power plant additions and operations, inflation, outages, higher-trending pension and other
postretirement benefit costs and other factors.
Depreciation and Amortization Expenses Depreciation and amortization expenses are impacted by
net additions to utility plant and other property, which include generation construction, changes
in depreciation and amortization rates, and changes in regulatory asset amortization.
Property Taxes Taxes other than income taxes consist primarily of property taxes, which are
affected by the value of property in-service and under construction, assessed valuation ratios, and
tax rates. The average property tax rate for APS, which currently owns the majority of our
property, was 8.9% of assessed value for 2006 and 9.2% for 2005. We expect property taxes to
increase as new power plants and additions to our transmission and distribution facilities are
included in the property tax base.
Interest Expense Interest expense is affected by the amount of debt outstanding and the
interest rates on that debt. The primary factors affecting borrowing levels are expected to be our
capital expenditures, long-term debt maturities, and internally generated cash flow. Capitalized
interest offsets a portion of interest expense while capital projects are under construction. We
stop accruing capitalized interest on a project when it is placed in commercial operation.
55
Retail Competition Although some very limited retail competition existed in Arizona in 1999
and 2000, there are currently no active retail electric service providers providing unbundled
energy or other utility services to APS customers. We cannot predict when, and the extent to
which, additional electric service providers will re-enter APS service territory.
Subsidiaries SunCors net income was $61 million in 2006, $56 million in 2005, and $45
million in 2004. See Note 17 for further discussion. We currently expect SunCors net income in
2007 will be approximately $30 million. This estimate reflects a slowdown in the western United
States residential real estate markets.
APS Energy Services and El Dorados historical results are not indicative of future
performance.
General Our financial results may be affected by a number of broad factors. See
Forward-Looking Statements below for further information on such factors, which may cause our
actual future results to differ from those we currently seek or anticipate.
Market Risks
Our operations include managing market risks related to changes in interest rates, commodity
prices and investments held by our nuclear decommissioning trust fund.
Interest Rate and Equity Risk
We have exposure to changing interest rates. Changing interest rates will affect interest
paid on variable-rate debt and the market value of fixed income securities held by our nuclear
decommissioning trust fund. The nuclear decommissioning trust fund also has risks associated with
the changing market value of its investments. Nuclear decommissioning costs are recovered in
regulated electricity prices.
Commodity Price Risk
We are exposed to the impact of market fluctuations in the commodity price and transportation
costs of electricity, natural gas and emissions allowances. Our ERMC, consisting of officers and
key management personnel, oversees company-wide energy risk management activities and monitors the
results of marketing and trading activities to ensure compliance with our stated energy risk
management and trading policies. We manage risks associated with these market fluctuations by
utilizing various commodity instruments that qualify as derivatives, including exchange-traded
futures and options and over-the-counter forwards, options and swaps. As part of our risk
management program, we use such instruments to hedge purchases and sales of electricity, fuels and
emissions allowances and credits. The changes in market value of such contracts have a high
correlation to price changes in the hedged commodities. In addition, subject to specified risk
parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit
from market price movements.
56
The mark-to-market value of derivative instruments related to our risk management and trading
activities are presented in two categories:
|
|
|
Regulated Electricity non-trading derivative instruments that hedge our purchases
and sales of electricity and fuel for APS Native Load requirements of our regulated
electricity business segment; and |
|
|
|
|
Marketing and Trading non-trading and trading derivative instruments of our
competitive business activities. |
The following tables show the pretax changes in mark-to-market value of our non-trading and
trading derivative positions for the six months ended June 30, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
Regulated |
|
|
Marketing |
|
|
Regulated |
|
|
Marketing |
|
|
|
Electricity |
|
|
and Trading |
|
|
Electricity |
|
|
and Trading |
|
Mark-to-market of net positions
at beginning of period |
|
$ |
(62 |
) |
|
$ |
77 |
|
|
$ |
335 |
|
|
$ |
181 |
|
Recognized in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in mark-to-market
gains (losses) for future
period
deliveries |
|
|
3 |
|
|
|
16 |
|
|
|
(6 |
) |
|
|
(3 |
) |
Mark-to-market
(gains) losses realized
including ineffectiveness
during the period |
|
|
(1 |
) |
|
|
(20 |
) |
|
|
(4 |
) |
|
|
1 |
|
Deferred as a regulatory liability
(asset) |
|
|
34 |
|
|
|
|
|
|
|
(61 |
) |
|
|
|
|
Recognized in OCI: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in mark-to-market
for future period
deliveries gains (losses) (a) |
|
|
25 |
|
|
|
5 |
|
|
|
(225 |
) |
|
|
(49 |
) |
Mark-to-market
gains realized during the
period |
|
|
(5 |
) |
|
|
(13 |
) |
|
|
(7 |
) |
|
|
(11 |
) |
Change in valuation techniques |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market of net positions
at end of period |
|
$ |
(6 |
) |
|
$ |
65 |
|
|
$ |
32 |
|
|
$ |
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The increases (decreases) in regulated mark-to-market recorded in OCI are due
primarily to increases (decreases) in forward natural gas prices. |
The tables below show the fair value of maturities of our non-trading and trading derivative
contracts (dollars in millions) at June 30, 2007 by maturities and by the type of valuation that is
performed to calculate the fair values. See Note 1, Derivative Accounting, in Item 8 of our 2006
Form 10-K for more discussion of our valuation methods.
57
Regulated Electricity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years |
|
|
Total fair |
|
Source of Fair Value |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
thereafter |
|
|
value |
|
Prices actively quoted |
|
$ |
(16 |
) |
|
$ |
9 |
|
|
$ |
9 |
|
|
$ |
6 |
|
|
$ |
|
|
|
$ |
8 |
|
Prices provided by
other external sources |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
Prices based on models
and other valuation
methods |
|
|
(4 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
2 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total by maturity |
|
$ |
(21 |
) |
|
$ |
1 |
|
|
$ |
8 |
|
|
$ |
4 |
|
|
$ |
2 |
|
|
$ |
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and Trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years |
|
|
Total fair |
|
Source of Fair Value |
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
thereafter |
|
|
value |
|
Prices actively quoted |
|
$ |
22 |
|
|
$ |
16 |
|
|
$ |
(1 |
) |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
36 |
|
Prices provided by
other external sources |
|
|
10 |
|
|
|
22 |
|
|
|
(1 |
) |
|
|
|
|
|
|
3 |
|
|
|
3 |
|
|
|
37 |
|
Prices based on models
and other valuation
methods |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total by maturity |
|
$ |
26 |
|
|
$ |
38 |
|
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
$ |
3 |
|
|
$ |
1 |
|
|
$ |
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below shows the impact that hypothetical price movements of 10% would have on the
market value of our risk management and trading assets and liabilities included on Pinnacle Wests
Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
December 31, 2006 |
|
|
|
Gain (Loss) |
|
|
Gain (Loss) |
|
|
|
Price Up |
|
|
Price |
|
|
Price Up |
|
|
Price |
|
Commodity |
|
|
10 % |
|
|
Down 10% |
|
|
10 % |
|
|
Down 10% |
Mark-to-market changes
reported in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity |
|
$ |
1 |
|
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
Natural gas |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
Mark-to-market changes
reported in OCI (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity |
|
|
41 |
|
|
|
(41 |
) |
|
|
38 |
|
|
|
(38 |
) |
Natural gas |
|
|
87 |
|
|
|
(87 |
) |
|
|
80 |
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
128 |
|
|
$ |
(128 |
) |
|
$ |
118 |
|
|
$ |
(118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
(a) |
|
These contracts are hedges of our forecasted purchases of natural gas and
electricity. The impact of these hypothetical price movements would substantially
offset the impact that these same price movements would have on the physical exposures
being hedged. |
Credit Risk
We are exposed to losses in the event of non-performance or non-payment by counterparties. We
have risk management and trading contracts with many counterparties, including one counterparty for
which a worst case exposure represents approximately 14% of Pinnacle Wests $311 million of risk
management and trading assets as of June 30, 2007. See Note 1, Derivative Accounting in Item 8
of our 2006 Form 10-K for a discussion of our credit valuation adjustment policy. See Note 10 for
further discussion of credit risk.
ARIZONA PUBLIC SERVICE COMPANY RESULTS OF OPERATIONS
General
Throughout the following explanations of our results of operations, we refer to gross
margin. Gross margin refers to electric operating revenues less fuel and purchased power costs.
Gross margin is a non-GAAP financial measure, as defined in accordance with SEC rules. Exhibit
99.2 reconciles this non-GAAP financial measure to operating income, which is the most directly
comparable financial measure calculated and presented in accordance with GAAP. We view gross
margin as an important performance measure of the core profitability of our operations. This
measure is a key component of our internal financial reporting and is used by our management in
analyzing our business. We believe that investors benefit from having access to the same financial
measures that our management uses.
Deferred Fuel and Purchased Power Costs
APS settled its 2003 general retail rate case effective April 1, 2005. As part of the
settlement, the ACC approved the PSA, which permits APS to defer for recovery or refund
fluctuations in retail fuel and purchased power costs, subject to specified parameters. In its
June 28, 2007 general rate case order, the ACC modified the PSA in various respects, effective July
1, 2007. In accordance with the modified PSA, APS continues to defer for future rate recovery 90%
of the difference between actual retail fuel and purchased power costs and the amount of such costs
currently included in base rates, excluding certain costs. APS recovers PSA deferrals from its
customers through the PSA, which is adjusted annually. See PSA Modifications in Note 5. The
recovery of PSA deferrals recorded as revenue is offset dollar-for-dollar by the amortization of
those deferred expenses recorded as fuel and purchased power.
The balance of APS PSA accumulated unrecovered deferrals at June 30, 2007 was approximately
$137 million. APS expects to recover these deferrals through a combination of the PSA adjustor
that took effect on February 1, 2007 and the temporary PSA surcharge relating to the 2005
Deferrals. See PSA Modifications in Note 5. Although the prudence audit of 2006 Palo Verde
outage costs has not yet been completed, APS believes these costs were prudently incurred and that
the 2006 Deferrals (totaling approximately $79 million) are, therefore, recoverable.
59
Operating Results Three-month period ended June 30, 2007 compared with three-month period ended
June 30, 2006
APS net income for the three months ended June 30, 2007 was $75 million compared with $94
million for the comparable prior-year period. The $19 million decrease was primarily due to income
tax credits related to prior years resolved in 2006; a regulatory disallowance (see Deferred Fuel
and Purchased Power Costs above); higher operations and maintenance expense related to fossil
generation costs; the effects of weather on retail sales; lower other income, net of expense,
primarily due to miscellaneous asset sales in the prior-year period; and higher interest expense,
net of capitalized financing costs, due to higher debt balances and rates. These negative factors
were partially offset by higher retail sales primarily due to customer growth. In addition, higher
fuel and purchased power costs were partially offset by the deferral of such costs in accordance
with the PSA. See Deferred Fuel and Purchased Power Costs above.
Additional details on the major factors that increased (decreased) net income are contained in
the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Pretax |
|
|
After Tax |
|
Gross margin: |
|
|
|
|
|
|
|
|
Higher fuel and purchased power costs due to increased prices |
|
$ |
(27 |
) |
|
$ |
(16 |
) |
Increased deferred fuel and purchased power costs |
|
|
26 |
|
|
|
16 |
|
Regulatory disallowance (see Deferred Fuel and Purchased
Power
Costs above) |
|
|
(14 |
) |
|
|
(8 |
) |
Effects of weather on retail sales |
|
|
(7 |
) |
|
|
(4 |
) |
Higher retail sales primarily due to customer growth and usage
patterns, excluding weather effects |
|
|
10 |
|
|
|
6 |
|
Higher gains on marketing and trading |
|
|
5 |
|
|
|
3 |
|
Miscellaneous items, net |
|
|
4 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Net decrease in gross margin |
|
|
(3 |
) |
|
|
(1 |
) |
Operations and maintenance increases primarily due to: |
|
|
|
|
|
|
|
|
Generation costs, including greater fossil power plant maintenance
outages |
|
|
(8 |
) |
|
|
(5 |
) |
Miscellaneous items, net |
|
|
2 |
|
|
|
1 |
|
Higher depreciation and amortization primarily due to increased plant
balances |
|
|
(3 |
) |
|
|
(2 |
) |
Lower other income, net of expense, primarily due to miscellaneous asset
sales in the prior-year period |
|
|
(5 |
) |
|
|
(3 |
) |
Higher interest expense, net of capitalized financing costs, primarily
due to higher debt balances and rates |
|
|
(4 |
) |
|
|
(2 |
) |
Income tax credits related to prior years resolved in 2006 |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
Net decrease in net income |
|
$ |
(21 |
) |
|
$ |
(19 |
) |
|
|
|
|
|
|
|
Regulated Electricity Revenues
Regulated electricity revenues were $2 million lower for the three months ended June 30, 2007
compared with the prior-year period primarily as a result of:
|
|
|
a $12 million decrease in Off-System Sales due to lower prices; |
60
|
|
|
a $9 million decrease in retail revenues due to weather; |
|
|
|
|
a $13 million increase in retail revenues primarily related to customer
growth and usage patterns, excluding weather effects; and |
|
|
|
|
a $6 million increase due to miscellaneous factors. |
Operating Results Six-month period ended June 30, 2007 compared with six-month period ended June
30, 2006
APS net income for the six months ended June 30, 2007 was $79 million compared with $88
million for the comparable prior-year period. The $9 million decrease was primarily due to income
tax credits related to prior years resolved in 2006; a regulatory disallowance (see Deferred Fuel
and Purchased Power Costs above); higher interest expense, net of capitalized financing costs, due
to higher debt balances; lower other income, net of expense, primarily due to miscellaneous asset
sales in the prior-year period; and higher depreciation and amortization expense primarily due to
increased plant asset balances. These negative factors were partially offset by higher retail sales
primarily due to customer growth and the effects of weather on retail sales. In addition, higher
fuel and purchased power costs were partially offset by the deferral of such costs in accordance
with the PSA. See Deferred Fuel and Purchased Power Costs above.
Additional details on the major factors that increased (decreased) net income are contained in
the following table (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Pretax |
|
|
After
Tax |
|
Gross margin: |
|
|
|
|
|
|
|
|
Higher fuel and purchased power costs due to increased prices |
|
$ |
(42 |
) |
|
$ |
(26 |
) |
Increased deferred fuel and purchased power costs |
|
|
38 |
|
|
|
23 |
|
Regulatory disallowance (see Deferred Fuel and Purchased
Power
Costs above) |
|
|
(14 |
) |
|
|
(8 |
) |
Effects of weather on retail sales |
|
|
6 |
|
|
|
4 |
|
Higher retail sales primarily due to customer growth and usage
patterns, excluding weather effects |
|
|
20 |
|
|
|
12 |
|
Lower gains on marketing and trading |
|
|
(4 |
) |
|
|
(2 |
) |
Miscellaneous items, net |
|
|
8 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Net increase in gross margin |
|
|
12 |
|
|
|
8 |
|
Higher depreciation and amortization primarily due to increased plant
asset balances |
|
|
(4 |
) |
|
|
(2 |
) |
Lower other income, net of expense, primarily due to miscellaneous asset
sales and decreased interest income in the prior-year period |
|
|
(6 |
) |
|
|
(4 |
) |
Higher interest expense, net of capitalized financing costs, primarily
due to higher debt balances and rates |
|
|
(9 |
) |
|
|
(5 |
) |
Income tax credits related to prior years resolved in 2006 |
|
|
|
|
|
|
(7 |
) |
Other miscellaneous items, net |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Net decrease in net income |
|
$ |
(6 |
) |
|
$ |
(9 |
) |
|
|
|
|
|
|
|
61
Regulated Electricity Revenues
Regulated electricity revenues were $68 million higher for the six months ended June 30, 2007
compared with the prior-year period primarily as a result of:
|
|
|
a $48 million increase in retail revenues related to recovery of PSA
deferrals, which had no earnings effect because of amortization of the same amount
recorded as fuel and purchased power expense (see Deferred Fuel and Purchased Power
Costs above); |
|
|
|
|
a $26 million increase in retail revenues primarily related to customer
growth and usage patterns, excluding weather effects; |
|
|
|
|
a $9 million increase in retail revenues due to weather; |
|
|
|
|
a $17 million decrease in Off-System Sales due to lower prices; and |
|
|
|
|
a $2 million increase due to miscellaneous factors. |
ARIZONA PUBLIC SERVICE COMPANY LIQUIDITY AND CAPITAL RESOURCES
Contractual Obligations
APS future contractual obligations have not changed materially from the amounts disclosed in
Part II, Item 7 of the 2006 Form 10-K, with the exception of our aggregate fuel and purchased power
commitments, which increased from approximately $2.5 billion at
December 31, 2006 to $2.8 billion
at June 30, 2007 as follows (dollars in billions):
|
|
|
|
|
|
|
|
|
2007 |
|
2008-2009 |
|
2010-2011 |
|
Thereafter |
|
Total |
$0.6
|
|
$0.5
|
|
$0.4
|
|
$1.3
|
|
$2.8 |
See Note 4 for a list of APS payments due on total long-term debt and capitalized lease
requirements.
Upon adoption of FIN 48, APS is now required to include uncertain tax positions in the
contractual obligations disclosure. APS has uncertain tax positions of approximately $186 million
and expects to settle substantially all of these in 2007. See Note 8 for additional information.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements based on current expectations, and neither
Pinnacle West nor APS assumes any obligation to update these statements or make any further
statements on any of these issues, except as required by applicable law. These forward-looking
statements are often identified by words such as estimate, predict, hope, may, believe,
anticipate, plan, expect, require, intend, assume and similar words. Because actual
results may differ materially from expectations, we caution readers not to place undue reliance on
these statements. A number of factors could cause future results to differ materially from
historical results, or from results or outcomes currently expected or sought by Pinnacle West or
APS.
62
In addition to the Risk Factors described in Item 1A of the 2006 Form 10-K, these factors include,
but are not limited to:
|
|
|
state and federal regulatory and legislative decisions and actions, particularly
those affecting our rates and our recovery of fuel and purchased power costs; |
|
|
|
|
the ongoing restructuring of the electric industry, including the introduction of
retail electric competition in Arizona and decisions impacting wholesale competition; |
|
|
|
|
the outcome of regulatory, legislative and judicial proceedings, both current and
future, relating to such restructuring; |
|
|
|
|
market prices for electricity and natural gas; |
|
|
|
|
power plant performance and outages; |
|
|
|
|
transmission outages and constraints; |
|
|
|
|
weather variations affecting local and regional customer energy usage; |
|
|
|
|
customer growth and energy usage; |
|
|
|
|
regional economic and market conditions, including the results of litigation and
other proceedings resulting from the California energy situation, volatile fuel and
purchased power costs and the completion of generation and transmission construction in
the region, which could affect customer growth and the cost of power supplies; |
|
|
|
|
the cost of debt and equity capital and access to capital markets; |
|
|
|
|
current credit ratings remaining in effect for any given period of time; |
|
|
|
|
our ability to compete successfully outside traditional regulated markets (including
the wholesale market); |
|
|
|
|
the performance of our marketing and trading activities due to volatile market
liquidity and any deteriorating counterparty credit and the use of derivative contracts
in our business (including the interpretation of the subjective and complex accounting
rules related to these contracts); |
|
|
|
|
changes in accounting principles generally accepted in the United States of America
and the interpretation of those principles; |
|
|
|
|
the performance of the stock market and the changing interest rate environment,
which affect the value of our nuclear decommissioning trust, pension, and other
postretirement benefit plan assets, the amount of required contributions to Pinnacle
Wests pension plan and contributions to APS nuclear decommissioning trust funds, as
well as the reported costs of providing pension and other postretirement benefits; |
|
|
|
|
technological developments in the electric industry; |
|
|
|
|
the strength of the real estate market in SunCors market areas, which include
Arizona, Idaho, New Mexico and Utah; and |
|
|
|
|
other uncertainties, all of which are difficult to predict and many of which are
beyond the control of Pinnacle West and APS. |
63
|
|
|
Item 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
See Pinnacle West Consolidated Factors Affecting Our Financial Outlook in Item 2 above for
a discussion of quantitative and qualitative disclosures about market risks.
Item 4. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
The term disclosure controls and procedures means controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act)
(15 U.S.C. 78a et seq.), is recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to a companys management, including its principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
Pinnacle Wests management, with the participation of Pinnacle Wests Chief Executive Officer
and Chief Financial Officer, have evaluated the effectiveness of Pinnacle Wests disclosure
controls and procedures as of June 30, 2007. Based on that evaluation, Pinnacle Wests Chief
Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle Wests
disclosure controls and procedures were effective.
APS management, with the participation of APS Chief Executive Officer and Chief Financial
Officer, have evaluated the effectiveness of APS disclosure controls and procedures as of June 30,
2007. Based on that evaluation, APS Chief Executive Officer and Chief Financial Officer have
concluded that, as of that date, APS disclosure controls and procedures were effective.
(b) Changes in Internal Control Over Financial Reporting
The term internal control over financial reporting (defined in SEC Rule 13a-15(f)) refers to
the process of a company that is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP.
No change in Pinnacle Wests or APS internal control over financial reporting occurred during
the fiscal quarter ended June 30, 2007 that materially affected, or is reasonably likely to
materially affect, Pinnacle Wests or APS internal control over financial reporting.
64
Part II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 12 in regard to pending or threatened litigation or other disputes. See also
Federal Implementation Plan Four Corners FIP under Item 5 below.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in the 2006 Form 10-K, which could
materially affect the business, financial condition, cash flows or future results of APS and
Pinnacle West. The risks described in the 2006 Form 10-K are not the only risks facing APS and
Pinnacle West. Additional risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect the business, financial condition, cash
flows and/or operating results of APS and Pinnacle West.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Proposal 1 Amend the Articles of Incorporation to Provide for the Annual Election of all
Directors
At our Annual Meeting of Shareholders held on May 23, 2007, a proposal requesting that the
Articles of Incorporation of the Company be amended to allow for the annual election of all
directors was submitted to the shareholders, and the voting was as follows:
|
|
|
|
|
|
|
Proposal to amend Articles of |
|
|
|
|
|
|
Incorporation to allow for annual |
|
|
|
|
|
Abstentions and |
election of all directors |
|
Votes For |
|
Votes Against |
|
Broker Non-Votes |
|
|
86,534,331 |
|
928,582 |
|
789,622 |
Proposal 2 Election of Directors
At the same meeting, the following persons were elected as directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abstentions and |
Directors (Term to expire at |
|
|
|
|
|
|
|
|
|
Broker Non- |
2008 Annual Meeting) |
|
Votes For |
|
Votes Withheld |
|
Votes |
Edward N. Basha, Jr. |
|
|
86,993,320 |
|
|
|
1,259,215 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Jack E. Davis |
|
|
86,137,714 |
|
|
|
2,114,821 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Michael L. Gallagher |
|
|
79,188,134 |
|
|
|
9,064,401 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Pamela Grant |
|
|
85,896,473 |
|
|
|
2,356,062 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Roy A. Herberger, Jr. |
|
|
85,922,686 |
|
|
|
2,329,849 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Abstentions and |
Directors (Term to expire at |
|
|
|
|
|
|
|
|
|
Broker Non- |
2008 Annual Meeting) |
|
Votes For |
|
Votes Withheld |
|
Votes |
William S. Jamieson |
|
|
85,912,687 |
|
|
|
2,339,848 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Humber to S. Lopez |
|
|
85,916,331 |
|
|
|
2,336,204 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Kathryn L. Munro |
|
|
87,245,653 |
|
|
|
1,006,882 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
Bruce J. Nordstrom |
|
|
87,252,259 |
|
|
|
1,000,276 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
William J. Post |
|
|
86,028,145 |
|
|
|
2,224,390 |
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
William L. Stewart |
|
|
86,129,568 |
|
|
|
2,122,967 |
|
|
N/A |
Proposal 3 Approval of 2007 Long-Term Incentive Plan
At the same meeting, a proposal for the approval of the Pinnacle West Capital Corporation 2007
Long-Term Incentive Plan was submitted to the shareholders, and the voting was as follows:
|
|
|
|
|
|
|
Proposal for the approval of the |
|
|
|
|
|
Abstentions and |
2007 Long-Term Incentive Plan |
|
Votes For |
|
Votes Against |
|
Broker Non-Votes |
|
|
69,135,791 |
|
7,313,106 |
|
11,803,638 |
Proposal 4 Independent Registered Accounting Firm
At the same meeting, a proposal for the ratification of the selection of Deloitte & Touche LLP
as independent Registered Accounting Firm of the Company for the fiscal year ending 2007 was
submitted to the shareholders, and the voting was as follows:
|
|
|
|
|
|
|
Proposal for the ratification |
|
|
|
|
|
|
of the selection of Deloitte & |
|
|
|
|
|
|
Touche LLP for the fiscal year |
|
|
|
|
|
Abstentions and |
ending 2007 |
|
Votes For |
|
Votes Against |
|
Broker Non-Votes |
|
|
87,125,249 |
|
380,368 |
|
746,918 |
Item 5. OTHER INFORMATION
Construction and Financing Programs
See Liquidity and Capital Resources in Part I, Item 2 of this report for a discussion of
construction and financing programs of the Company and its subsidiaries.
Regulatory Matters
See Note 5 for a discussion of regulatory developments.
66
Environmental Matters
See Environmental Matters Superfund in Note 12 for a discussion of a Superfund site.
Federal Implementation Plan (FIP)
In September 1999, the EPA proposed a FIP to set air quality standards at certain power
plants, including the Four Corners Power Plant and the Navajo Generating Station. On September 12,
2006, the EPA proposed a revised FIP to establish air quality standards at both of these plants.
Four Corners FIP On April 30, 2007, the EPA adopted a source specific FIP to set air quality
standards at the Four Corners Power Plant. See Environmental Regulation Federal Implementation
Plan in Part 1, Item 1 of the 2006 Form 10-K for additional information regarding the procedural
and litigation issues leading to the EPAs adoption of the FIP. The FIP essentially federalizes
the requirements contained in the New Mexico State Implementation Plan, which Four Corners has
historically followed. The FIP also includes a requirement to maintain and enhance dust
suppression methods. We do not believe the FIP will have a material impact on our financial
position, results of operations or cash flows. On July 2, 2007, APS filed a petition for review in
the United States District Court of Appeals for the Tenth Circuit seeking revisions to the FIP to
clarify certain requirements and allow operational flexibility. On July 6, 2007, the Sierra Club
and other parties filed a petition for review with the same court challenging the FIPs compliance
with the Clean Air Act. We cannot predict the outcome of this matter.
Navajo Generating Station FIP The proposed FIP for the Navajo Generating Station is still
pending. APS cannot currently predict the effect of this proposed FIP on the Companys financial
position, results of operations or cash flows, or whether the proposed FIP will be adopted in its
current form.
Greenhouse Gas Accord
On February 26, 2007 five western states (Arizona, California, New Mexico, Oregon and
Washington) entered into an accord, called the Western Regional Climate Action Initiative (the
Initiative), to reduce greenhouse gas emissions from automobiles and certain industries,
including utilities. Since then, Utah, British Columbia and Manitoba have joined the Initiative.
The Initiative requires the states and provinces to set emission goals within six months and
determine a specific plan to meet such goals within eighteen months. While we continue to monitor
the impact of this Initiative, we cannot predict its impact on our operations at this time.
Salt River Project Power Contract
As previously disclosed, APS currently purchases approximately 200 MW of generating capacity
under a contract with Salt River Project. See Business of Arizona Public Service Company
Purchased Power in Part I, Item 1 of the 2006 Form 10-K. By letter dated June 14, 2007, Salt
River Project gave notice to APS that, pursuant to the terms of the contract, Salt River Project
has elected to cancel the contract, effective June 15, 2010. APS does not believe that the
contract cancellation will have a material adverse impact on its financial position, results of
operations or cash flows. See Salt River Project in Note 12 for information regarding a billing
dispute under this contract.
67
Item 6. EXHIBITS
(a) Exhibits
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Exhibit No. |
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Registrant(s) |
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Description |
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10.1 |
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Pinnacle West
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Form of Restricted Stock Unit
agreement under the Pinnacle West Capital Corporation 2007 Long-Term Incentive Plan |
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12.1 |
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Pinnacle West
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Ratio of Earnings to Fixed Charges |
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12.2 |
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APS
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Ratio of Earnings to Fixed Charges |
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12.3 |
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Pinnacle West
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Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividend Requirements |
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31.1 |
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Pinnacle West
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Certificate of William J. Post, Chief
Executive Officer, pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended |
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31.2 |
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Pinnacle West
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Certificate of Donald E. Brandt, Chief
Financial Officer, pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended |
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31.3 |
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APS
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Certificate of Jack E. Davis, Chief
Executive Officer, pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended |
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31.4 |
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APS
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Certificate of Donald E. Brandt, Chief
Financial Officer, pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended |
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32.1 |
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Pinnacle West
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Certification of Chief Executive Officer
and Chief Financial Officer, pursuant to 18
U.S.C. Section 1850, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 |
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32.2 |
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APS
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Certification of Chief Executive Officer
and Chief Financial Officer, pursuant to 18
U.S.C. Section 1850, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 |
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99.1 |
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Pinnacle West
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Reconciliation of Operating Income to Gross
Margin |
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Exhibit No. |
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Registrant(s) |
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Description |
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99.2 |
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APS
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Reconciliation of Operating Income to Gross
Margin |
In addition, the Company hereby incorporates the following Exhibits pursuant to Exchange Act
Rule 12b-32 and Regulation §229.10(d) by reference to the filings set forth below:
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Date |
Exhibit No. |
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Registrant(s) |
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Description |
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Previously Filed as Exhibit a |
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Filed |
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3.1
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Pinnacle West
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Articles of
Incorporation,
restated as of May
23, 2007
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4.1 to Pinnacle West/APS May 23, 2007
Form 8-K Report, File Nos. 1-8962 and
1-4473
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5-25-07 |
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3.2
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Pinnacle West
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Pinnacle West
Capital Corporation
Bylaws, amended as
of May 23, 2007
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4.2 to Pinnacle West/APS May 23, 2007
Form 8-K Report, File Nos. 1-8962 and
1-4473
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5-25-07 |
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3.3
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APS
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Articles of
Incorporation,
restated as of May
25, 1988
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4.2 to APS Form S-3 Registration Nos.
33-33910 and 33-55248 by means of
September 24, 1993 Form 8-K Report,
File No. 1-4473
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9-29-93 |
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3.4
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APS
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Arizona Public
Service Company
Bylaws, amended as
of June 23, 2004
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3.1 to APS June 30, 2004 Form 10-Q
Report, File No. 1-4473
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8-9-04 |
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a |
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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. |
69
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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PINNACLE WEST CAPITAL CORPORATION
(Registrant)
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Dated: August 7, 2007 |
By: |
/s/ Donald E. Brandt |
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Donald E. Brandt |
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Executive Vice President and Chief
Financial Officer
(Principal Financial Officer
and Officer Duly Authorized to sign this Report) |
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ARIZONA PUBLIC SERVICE COMPANY
(Registrant)
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Dated: August 7, 2007 |
By: |
/s/ Donald E. Brandt |
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Donald E. Brandt |
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President and Chief Financial Officer
(Principal Financial Officer and
Officer Duly Authorized to sign this Report) |
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70