Business Context and Reporting Period
This Form 8-K is a joint current report filed by Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS), on March 6, 2006. The filing addresses operational issues at the Palo Verde Nuclear Generating Station, specifically Unit 1, which has been operating at reduced power levels since December 25, 2005, due to a non-safety related acoustic impact in a shutdown cooling line.
Key Financial Metrics and Operational Status
- Operational Status: Unit 1 is currently operating at approximately 25% power.
- Incurred Costs (Through Feb 28, 2006): Approximately $20 million in incremental replacement power costs after income taxes, with $18 million incurred since January 1, 2006.
- Projected Future Costs:
- Operating at reduced power until the June outage: Estimated $25 million after income taxes.
- June outage costs: Estimated $15 million after income taxes.
- Regulatory Deferrals: APS expects to defer approximately $50 million after income taxes under the Power Supply Adjustor (PSA) mechanism during 2006.
- Operations and Maintenance: No material increase in O&M costs is anticipated.
Material Changes and Planned Actions
Management has concluded that the preferred solution requires a five-week outage for Unit 1 to effect necessary modifications, originally planned for spring 2007 but now anticipated to begin in the June timeframe. Additionally, a one-week outage for preparatory work is scheduled to begin on March 18, 2006. This represents a significant acceleration of the repair timeline compared to the initial plan.
Outlook, Risks, and Contingencies
APS relies on the Power Supply Adjustor (PSA) approved by the Arizona Corporation Commission (ACC) to defer 90% of the difference between actual fuel/purchased power costs and base rates for future recovery. However, recovery is subject to annual PSA adjustments and ACC approval of periodic surcharge applications.
Key Risks Identified:
- Increased prices for purchased power.
- Unanticipated technical or operational issues with Unit 1.
- Unanticipated increased costs associated with the current situation or planned outage.
- Regulatory risk: The possibility that the ACC may not permit full recovery of the PSA deferrals.
Investor Verification Checklist
- Verify the exact start date and duration of the preparatory outage beginning March 18, 2006.
- Confirm the final timeline for the five-week modification outage scheduled for June 2006.
- Monitor Arizona Corporation Commission (ACC) proceedings regarding the approval of surcharge applications for the $50 million in deferred costs.
- Track forward market energy prices, as these directly impact the estimated $40 million in future incremental replacement power costs.