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 January 25, 2006. The filing addresses regulatory decisions by the Arizona Corporation Commission (ACC) regarding rate adjustments and operational updates concerning the Palo Verde Nuclear Generating Station.
Key Financial Metrics and Operational Data
- Rate Adjustment: The ACC approved a Power Supply Adjustor (PSA) rate of $0.004 per kilowatt-hour, effective February 1, 2006.
- Revenue Impact: The rate change represents an approximate 5% retail rate increase designed to recover $112 million in deferred retail fuel and purchased power costs over the subsequent 12 months.
- Accumulated Deferrals: As of December 31, 2005, APS reported pretax accumulated PSA deferrals totaling $173 million, including interest.
- Operational Costs: Reduced output at Palo Verde Unit 1 has resulted in incremental replacement power costs of less than $10 million after income taxes to date.
- Deferred Cost Cap: The annual limit for deferring retail fuel and purchased power costs is set at $776.2 million.
Material Changes and Regulatory Actions
- PSA Effective Date: The effective date for the annual adjustor was changed from April 1 to February 1.
- Surcharge Denial: The ACC denied APS's pending $80 million surcharge application filed in July 2005 on procedural grounds, deeming it premature. APS is now prohibited from requesting PSA surcharges until after the annual adjustor rate is set.
- Deferral Cap Modification: The ACC clarified that the $776.2 million cap does not create automatic disallowances of costs if APS demonstrates efforts to contain fuel and purchased power costs.
- Nuclear Unit Status: Palo Verde Unit 1 has been operating at approximately 25% power since December 25, 2005, due to a non-safety related acoustic impact in a shutdown cooling line.
Outlook, Risks, and Management Commentary
- Future Rate Cases: The ACC is expected to further examine the deferral cap in APS's pending application for an emergency interim rate increase.
- Operational Remedies: APS is currently formulating potential remedies to restore Palo Verde Unit 1 to full power.
- Recovery Mechanism: Future PSA surcharges will be limited to accumulated deferrals from the prior year-end not expected to be recovered through the annual adjustor or previously approved surcharges.
Investor Verification Checklist
- Verify the impact of the 5% rate increase on projected cash flows for the fiscal year beginning February 1, 2006.
- Monitor the status of the pending emergency interim rate increase application regarding the deferral cap.
- Track the timeline and cost implications for the restoration of Palo Verde Unit 1 to full capacity.
- Review Note 5 of the Form 10-Q for the quarter ended September 30, 2005, for detailed historical PSA deferral data.