Pinnacle West Capital Corporation - Company Profile, Information, Business Description, History, Background Information on Pinnacle West Capital Corporation

400 N. 5th Street
Phoenix, Arizona 85072-3999

Company Perspectives:

At Pinnacle West we are focused on one constant common goal--create value: Value for our customers, our shareholders, our employees and the communities we serve.

History of Pinnacle West Capital Corporation

Pinnacle West Capital Corporation is a Phoenix-based holding company with consolidated assets of $8 billion and revenues of $4.55 billion. The main component of Pinnacle West is the Arizona Public Service Company (APS), the state's largest electric utility. The company that became Arizona Public Service started as a small municipal utility in 1884. In the more than 100 years since then the utility has grown in size, scope, and type of service, branching out into new areas. Although Pinnacle West's reckless business acquisitions almost brought about its ruin in the 1980s, the firm is recovering and planning for growth in the future.

Late 1880s-1940s: Formation of a Utility Company

In 1884, the Phoenix Light & Fuel Co. was organized to provide electricity and heating to the people of Phoenix. In 1906, the Pacific Gas & Electric Co. was formed, and it acquired all the assets of Phoenix Light & Gas. In 1909 the firm had net earnings of $57,000 on revenues of $170,000. By 1917, Pacific Gas provided commercial gas, electric light, and power to 5,800 customers in and around Phoenix and its net earnings had grown to $154,000 on revenues of $460,000. In 1920 Central Arizona Light & Power Co. was incorporated and it took over all the plants, property, and business of the Pacific Gas & Electric Co. In 1920, revenues first topped $1 million and the firm had net income of $308,000.

In 1925 Central Arizona became a subsidiary of American Power & Light, a holding company that had been organized in Maine in 1909. That year, H.L. Aller replaced C.H. Walbridge as president. By 1928 Central Arizona supplied all the electric power and light service to the Arizona towns of Phoenix, Chandler, Gilbert, and Buckeye, and the entire gas service in Phoenix. Although the firm owned a steam electric generating station with a capacity of 700 kilowatts, it bought most of its energy from two other utilities, the Arizona Power Co. and the Salt River Valley Water Users' Association. In 1928, the utility had 19,000 electric customers and 11,000 gas customers, nearly double the 1924 totals.

The utility continued to grow slowly during the 1930s despite the financial hardships of the Depression. In 1930, the firm completed construction on its main steam electric generating plant, and by 1935, when E.H. Coe took over as president, the firm had 24,000 electric customers and 12,576 gas customers. That represented a small gain from 1930's figures of 21,000 electric customers and 12,568 gas customers. But while service expanded rapidly, revenues declined slowly and profits dropped sharply. Revenues fell from $3.24 million in 1930 to $2.96 million in 1935, and net income was halved, from $1 million in 1930 to $528,000 in 1935.

In the latter half of the 1930s, as the country climbed out of the Depression, Central Arizona expanded. In 1939 Central Arizona bought the electric distribution system of the Scottsdale Light & Power Co. and the adjacent distribution system of the Salt River Water Users' Association. Throughout the years Central Arizona had continued to build steam generating stations and by 1941 it had steam electric generating stations with a capacity of 42,000 kilowatts. That year, when the utility had 33,000 electric customers and 20,900 gas customers, the firm had revenues of $4.8 million and net income of $664,000. That figure was well below 1930's net of over $1 million.

1940s-50s: Independence and Expansion

With the end of World War II in 1945, Central Arizona gained its independence. The holding company released it and the firm issued common stock in 1945. Central Arizona expanded during the postwar years, purchasing the electric distribution systems in Salome and Parker, Arizona, in 1947. The following year M.O. Best replaced E.H. Coe as chairman, and in 1949 the company purchased the electric facilities at Gila Bend, Arizona, from Arizona Edison Co.

Like many other companies, Central Arizona embarked on ambitious construction programs in the late 1940s and 1950s. In 1949 and 1950 the firm budgeted over $19 million for new construction, mostly for new units at the steam plant, and for two new generators. The firm experienced great growth in the late 1940s. Revenues soared to $10.1 million in 1948, and the firm's net income finally topped $1 million, checking in at $1.5 million. In 1949 Central Arizona acquired the entire capital stock of Northern Arizona Light & Power Co., and that firm became Central's subsidiary.

In 1952 Central Arizona merged with Arizona Edison Co., and changed its name to the Arizona Public Service Company (APS). The utility had three steam electric generating stations at Phoenix, McNary, and Flagstaff. The Phoenix station had a capacity of 145,000 kilowatts and was fired by natural gas. The other two plants were much smaller, with capacity of about 7,000 and 3,000 kilowatts, respectively. The utility also had eight internal combustion generating plants. In addition, it leased a steam plant and two hydroelectric plants. But nearly all the firm's power came from the Phoenix Steam Plant.

The company continued to grow and expand in the 1950s. In 1955, in an effort to concentrate more on electricity, the company sold its water and sewage properties to the Arizona Water Co. In 1954 the firm finished construction on its largest steam plant, the Saguaro Steam Plant, which came on line in 1955 with a capacity of 200,000 kilowatts. In its first year the Saguaro plant accounted for most of the energy generated by the firm. That year J.M. Jacobs took over as chairman, and launched a new construction program. In 1955, Arizona Public Service announced it would spend nearly $100 million on construction between 1956 and 1960.

1960s: Statewide Expansion

Many new plants were constructed, including a new coal-fired steam electric generating plant at Joseph City, with one unit of 115,000 kilowatts. In 1960 the natural-gas fueled Ocotillo station at Tempe came on line with two units of 110,000 kilowatts each. In addition to building more plants, APS expanded its relations with other utilities. In 1956, APS and California Electric Power Co. entered an agreement to construct a generating station at Yuma, Arizona. The first 75,000-kilowatt unit was completed in 1966. In 1961 APS started construction on the coal-burning Four Corners plant. The firm continued to grow quickly, with the number of electric customers rising from 147,000 in 1956 to 192,000 in 1962, while the number of gas customers rose from 147,000 to 217,000. Over the same period, revenues rose from $46 million to $86 million, while net income doubled from $6.7 million to $13.6 million in 1962.

In the 1960s, the firm expanded in part by acquiring other companies. In 1962 it bought the gas and electric distribution facilities in the city of Tombstone, Arizona. In 1968 the firm bought the electric distribution facilities of the Yuma Irrigation District. In 1965 W.T. Lucking took over as chairman. By 1970 the firm had 238,000 electric and 271,000 gas customers. That year APS supplied service in 11 of Arizona's 14 counties, and had 2,758 employees. As the Arizona economy boomed during the 1960s, construction went unabated. The Four Corners plants had three units installed by 1964 with a total capacity of 575,000 kilowatts, the firm's largest. In 1969 the firm started construction of a 500,000-volt transmission line across northern Arizona. Revenues and income grew almost every year in the 1960s, standing at $131 million and $11 million, respectively, in 1969. In 1971, F.L. Snell took over as chairman, and he oversaw continued construction. A new plant was built at Yuma, and its first unit was installed in 1972. The utility also installed combustion turbines at a new Phoenix plant in 1972. The construction program burgeoned in the mid- and late 1970s, with spending totaling $216 million in 1976 and $353 million in 1978.

1970s: New Energy Source and Diversification

The 1970s finally saw APS enter the nuclear power business, becoming the project manager for the Arizona Nuclear Power Project. In May 1976 APS received a construction permit from the Nuclear Regulatory Commission to build the Palo Verde Nuclear Generating Station, whose three units would have a capacity of 33,810 megawatts. APS owned 29 percent of the facility, which was originally scheduled to be completed in 1982. By 1976 the firm had 342,000 electricity and 339,000 gas customers. Operating revenues rose from $149 million in 1971 to $394 million in 1976, while income more than tripled, from $19 million in 1971 to $60 million in 1976.

K.L. Turley became chairman in 1980 and led the firm through a turbulent decade in which a series of ill-fated corporate moves nearly caused the firm's demise. But at the beginning of the 1980s, APS was quite healthy. In 1981, the utility had 438,000 electricity and 341,000 gas customers. Total operating revenues in 1981 stood at $882 million, with $730 million coming from the electricity business. But in 1987, total revenues were over $1.31 billion, all of which came from electricity. Net earnings had risen to $313 million.

In 1984 the firm restructured, getting out of the gas business altogether by selling its distribution facilities to Southwest Gas Corp. In 1985 the utility completed the formation of AZP Group Inc., a holding company that took over the company's entire common stock. Two years later, AZP Group, Inc., formally changed its name to Pinnacle West Capital Corporation.

APS got caught up in the problems that plagued the Southwest in the 1980s. Turley believed that diversification was the only way to continue to have earnings grow. From mid-1985 onward, when the company became a holding company, it embarked on a reckless series of acquisitions, including the purchase of Arizona's biggest thrift, MeraBank, for $426 million, twice the book value. Soon after, it spent $400 million for a vacation resort and 15,000 acres of undeveloped real estate, and formed a new subsidiary, SunCor Development Company, to develop the land. It also committed more than $115 million to form another subsidiary, venture capital firm El Dorado Investment Company. Finally, in 1986, the firm also bought Malapai Resources, a uranium venture.

But these moves proved disastrous. The late 1980s was the wrong time to buy real estate and thrifts in Arizona. As the real estate market and the savings and loan industry went bust, Pinnacle suffered the consequences. MeraBank quickly became a noose around Pinnacle's neck. With Turley's blessing, the bank went on a property lending binge just as Arizona's real estate market went into freefall. By 1989 MeraBank was hemorrhaging money, losing more than $200 million in 1988 and more than $190 million for the first nine months of 1989. That year, with MeraBank holding $700 million in problem loans, Pinnacle agreed to provide MeraBank with $450 million in capital. The following year, federal regulators seized control of MeraBank and the company reached an agreement with federal agencies that finally released Pinnacle from further financial obligations to the failed bank.

Then the price of uranium fell sharply in the late 1980s, and the Malapai subsidiary began to lose money. In 1990, after the unit caused Pinnacle millions of dollars in losses, Pinnacle sold Malapai Resources to the U.S. mineral affiliate of a French energy company for $38 million. Throughout the bad times, income from utility operations was somewhat steady, standing at $264 million in 1987 and $237 million in 1988. But losses drove earnings down from $280 million in 1987 to $4 million in 1988. Pinnacle's stock suffered horribly, falling from $30 to $13 per share in 1989. In March 1989 the Palo Verde plant, the nation's largest nuclear plant, was shut down. Unexpected problems had caused lengthy power outages, and the utility had to buy replacement energy from higher-cost oil and gas plants. It was also hit with $250,000 in civil fines. A 1990 report by the Nuclear Regulatory Commission found that organizational instability and uncertainty were evident at Palo Verde.

Pinnacle's problems made it a target of takeover speculation. In 1989 and 1990 PacifiCorp, the Portland-based Oregon power company, made four unsuccessful hostile takeover bids against the company. In the end, though, the two firms reached an agreement that provided for swaps of power and transmission-related items. In 1990, Turley retired, and was replaced by Richard Snell.

1990s: Repairing the Damage

In 1989, the utility, which was still responsible for nearly 75 percent of Pinnacle's revenues, cut about 1,000 of its 8,900 jobs. In 1990, APS cut 675 more jobs, about 9 percent of its remaining workforce. Pinnacle West suspended its common stock dividend in October 1989, and in 1990 said it would not resume a payout for another three years. Pinnacle West was saved only by a massive debt restructuring. It proposed cuts of $578 million over the next five years in construction and other budgets.

In 1991, Pinnacle took a $265 million permanent write-down and a $142 million temporary write-down as a result of the 1989 Palo Verde nuclear plant shutdown. That year, Arizona Public Service was hit with a $1.3 million fine in connection with air pollution violations at a coal-fired generating plant.

The firm's balance sheets continued to shake out in the late 1980s and early 1990s. In 1989 Pinnacle's loss widened to $551 million. But in 1990 the company had earnings of $97 million on operating income of $459 million. Pinnacle continued to look for ways to cut costs and slashed its construction budget for 1990 to 1995 by $770 million.

In 1991 Pinnacle West had assets of $6.5 billion. By that time, Pinnacle had only two other subsidiaries: SunCor, the real estate firm, and El Dorado, the venture capital firm. In 1991 the firm had another loss of $186 million, largely due to write-offs from the 1989 Palo Verde problems. Yet Palo Verde was back in operation, and it was the top-producing nuclear generating station in the nation, producing almost 26.7 million megawatt hours. By 1991 APS had 620,000 customers, up from 566,000 in 1987. Committed to cutting costs and reducing debts, the firm finally began to recover from the excesses of the 1980s, reporting significant profits for the first quarter of 1992.

The dynamic of the regulatory climate proved to be a crucial factor in the company's recovery. After reaching a 1991 low of $9.63, Pinnacle's stock gradually rebounded--due in part to the favorable resolution of a longstanding case before the Arizona Commerce Commission, entailing a $66.5 million base rate hike. Regarding the approved rate increase, Pinnacle West Chairman Richard Snell was quoted in the Insiders' Chronicle as saying, "What we have now is a focus by both the Arizona Commerce Commission and ourselves on the price of the product. Our first job is to contain our costs so that the price we are allowed to charge for the product is sufficient to provide a reasonable return to our shareholders." Anticipation ran high that the dividend on the company's common stock would be restored in the short term.

The succeeding few years were marked by a campaign, spearheaded by the Arizona State Legislature, to introduce unfettered retail electric competition in the state starting in January 1999. The way had been cleared in 1998 by an agreement between APS and major competitor SRP (Salt River Project), under which the two companies would free service territories held to be exclusive under a 1955 agreement, reduce the cost to APS for wholesale power purchased from SRP, and embrace joint opportunities, aiming at mutual cost savings. APS also worked with the Arizona Corporations Commission on the establishment of price guidelines, and by late 1998 had reduced consumer rates by 8.4 percent.

At the beginning of 1999, Richard Snell turned over the position of CEO to William Post, a transition that had long been planned; Snell continued as chairman. A number of ambitious projects were launched shortly after, even as the deregulation of Arizona's power utilities moved toward resolution. Pinnacle entered into a joint plan with Calpine Corporation to develop greatly increased power generation capability at APS's West Phoenix Power station through a combination of new construction and repowering of existing units. Late in 1999, Pinnacle created a new subsidiary, Pinnacle West Energy, and began working on plans to construct a large power generating facility west of Phoenix, in Maricopa County; the new plant would provide power to be sold in the competitive markets of several western states. Pinnacle also implemented a redistribution of management responsibilities, organizing the business into three principal divisions: generation, distribution, and energy services. The company was now listed on the S&P 500.

As 2000 began, expansion continued to be significant. Pinnacle joined forces with Reliant Energy Power Generation of Houston to develop 2,500 megawatts of new power generation at three sites: the Redhawk power plant in Arizona, and two facilities in Nevada. Each partner would have a half interest in each facility. Pinnacle also boosted its ownership share in the vital Palo Verde nuclear plant to 45 percent with the acquisition of a 16 percent share formerly held by Southern California Edison.

Construction began in July 2000 on the West Phoenix project, and in December on the Redhawk facility, projected as the largest single venture with a 2,120 megawatt capacity. Pinnacle also announced in December the purchase of the Harry Allen generating facility, in southern Nevada, from Nevada Power for $65.2 million, with the intention of adding a new 500 megawatt gas-fired unit to the site.

Also in 2000, Pinnacle was recognized for its "greenness"; Innovest Strategic Value Advisors of New York, an industry consulting group, awarded Pinnacle its highest rating for environmental management and performance.

California's energy shortage in 2001 helped Pinnacle achieve impressive numbers for early 2001; the first quarter showed revenue of $938.8 million as compared with $488.1 million for the same period in 2000. Much of the company's increased revenue was derived from selling power on the wholesale market to the West Coast. The new century also marked Pinnacle's first expansion into Nevada; in August of that year, the company announced plans for a $400 million gas-fired plant just north of Las Vegas.

Pinnacle continued its steady reduction of customer rates, reaching a cumulative drop, in the summer of 2002, of 14.5 percent over a ten-year period, and initiated a voluntary workforce reduction program that led to the departure of several upper managers. Pinnacle finished the year by issuing 5.7 million shares of common stock, with proceeds to be used to pay down construction debt, and canceled the construction of the 3rd and 4th units at the Redhawk Power Station.

Despite these setbacks, with its generation assets in Arizona, Nevada, and New Mexico and a strong emphasis on fiscally sensible policies, Pinnacle appeared well positioned to take advantage of expanding energy demand in the western states.

Principal Subsidiaries: Arizona Public Service Company; SunCor Development Company; El Dorado Investment Company; APS Energy Services.

Principal Competitors: PNM Resources, Inc.; SRP; UniSource Energy Corporation.


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