Pinnacle West Capital Corporation — Q1 2021 Form 10-Q
Business context and period. This combined filing covers Pinnacle West Capital Corporation (PNW) and its regulated utility subsidiary, Arizona Public Service Company (APS), for the three months ended March 31, 2021, compared with Q1 2020. APS supplies electricity to approximately 1.3 million Arizona retail customers; it generates essentially all of Pinnacle West’s revenue and earnings. The quarter is seasonally affected by weather and maintenance timing, so results are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change / note |
|---|---|---|---|
| Operating revenue | $696.5 million | $661.9 million | Up 5.2%; residential and non-residential retail revenue increased |
| Operating income | $47.5 million | $40.4 million | Operating margin approximately 6.8%, versus 6.1% |
| Net income attributable to PNW common shareholders | $35.6 million | $30.0 million | Up about 19%; diluted EPS was $0.32 versus $0.27 |
| APS net income attributable to its common shareholder | $35.3 million | $35.3 million | Essentially unchanged |
| Cash from operating activities | $202.0 million | $183.6 million | Up $18.4 million |
| Capital expenditures | $363.8 million | $340.0 million | Operating cash flow less capital expenditures was negative $161.8 million |
| Cash and cash equivalents, March 31 | $17.2 million | $63.1 million | Cash declined $42.8 million during Q1 2021 |
| Consolidated long-term debt | $6.465 billion | $6.314 billion at December 31, 2020 | Plus $214.8 million of short-term borrowings |
PNW’s income before tax was $36.2 million, versus $14.7 million in Q1 2020. Income taxes were a benefit of $4.4 million in Q1 2021, compared with a $20.2 million benefit a year earlier. The filing attributes the year-over-year earnings increase primarily to lower current-year Tax Act-related customer refunds, weather and transmission revenue, and higher pension and postretirement non-service credits; higher operating and maintenance expense and income taxes partly offset those items.
APS had $199.5 million of commercial paper outstanding and no borrowings under its $1 billion revolving credit facilities at March 31. PNW had $0.3 million of commercial paper outstanding and no revolving-facility borrowings. Management reported ample borrowing capacity. Debt-to-capitalization covenant ratios were approximately 54% for PNW and 49% for APS, below the 65% maximum. APS’s common equity ratio under the applicable ACC order was 51%.
Material changes and notable items
- Revenue rose 5.2%, while operating expenses increased 4.4%. The filing reports weather-related effects, higher transmission revenue and lower Tax Act-related refunds as key revenue drivers.
- Operations and maintenance expense increased $8 million year over year, principally from fossil-generation costs and employee benefits. Depreciation and amortization increased $4 million.
- Pension and other postretirement non-service credits increased $14 million. APS transferred approximately $106 million of other postretirement plan assets to an active union employee medical account in January 2021.
- APS’s deferred fuel and purchased-power regulatory asset increased to $228.6 million from $175.8 million at year-end. The ACC phased in the 2021 Power Supply Adjustor increase: half began in April 2021 and the remaining half was scheduled for November 2021, after the reporting date.
- In February 2021, APS agreed to a $24.75 million consent settlement with the Arizona Attorney General concerning its rate-comparison tool and related matters; $24 million is to be returned to customers. APS stated the matter was resolved with the Attorney General, while noting possible further ACC inquiries.
Outlook, management commentary and risks
- Sales and customer growth: Weather-adjusted retail sales increased 0.5% in Q1 and customers increased 2.1% year over year. Management projected customer growth of 1.5%–2.5% in 2021 and annually through 2023, and weather-adjusted retail sales growth of 0.5%–1.5% in 2021 and an average 1.0%–2.0% in 2021–2023. These projections exclude weather effects; sales guidance also excludes several prospective large manufacturing facilities.
- Capital program: APS estimated capital expenditures of $1.5 billion annually for 2021, 2022 and 2023. Management expected funding from operating cash and external financing.
- Clean-energy plans: APS’s goals are 65% clean energy by 2030, including 45% renewable generation, to end coal-fired generation by 2031, and to provide 100% clean, carbon-free electricity by 2050. APS planned at least 850 MW of energy storage by 2025. These plans depend on regulatory support, technology, customer growth and access to capital.
- Regulatory exposure: APS’s 2019 general rate case remained pending. APS sought a $184 million annual revenue increase; recommendations ranged from revenue decreases to increases, and some parties opposed recovery of certain costs or proposed changes to adjustor mechanisms. The ACC’s decision was anticipated in Q3 2021, but timing and outcome were uncertain. An unfavorable decision could materially affect APS’s financial statements.
- COVID-19 and customer collections: APS estimated a $20 million–$30 million pre-tax adverse 2021 operating impact from the disconnection moratorium, pandemic-related collection effects and bad debt, relative to years without those impacts. Late fees were to remain waived through October 15, 2021. Management also cited ongoing health-and-safety costs and uncertainty around sales normalization.
- Other principal risks: Weather extremes, fuel and purchased-power volatility, generation and transmission reliability, wildfire and other catastrophic events, environmental compliance and coal-plant economics, nuclear operations and spent-fuel disposal, counterparty credit, and changing regulatory or energy-policy requirements. APS reported that February 2021 Texas gas-supply interruptions did not affect its customer service or materially affect its financial results.
- Commitments and contingencies: Fuel and purchased-power commitments increased by approximately $550 million, primarily from new purchased-power and energy-storage commitments, with most increases in 2026 and later. Environmental corrective-action costs at coal facilities remain subject to assessment and regulatory uncertainty.
Most important facts for investors to verify
- Track the ACC’s final decision in APS’s pending rate case, particularly allowed revenue, return on equity, recovery of project costs and treatment of adjustor mechanisms.
- Compare realized customer collections, bad-debt expense and sales trends with APS’s estimated $20 million–$30 million 2021 pre-tax COVID-19 and disconnection-related impact.
- Monitor the phased-in PSA rate changes and the ACC-ordered fuel and purchased-power procurement audit, including effects on customer bills and regulatory balances.
- Assess whether the $1.5 billion annual capital plan and clean-energy commitments can be financed while maintaining liquidity, credit metrics and dividend capacity.
- Follow environmental and coal-related proceedings, including Four Corners and Cholla compliance costs, and evaluate the recoverability of regulatory assets tied to retired or retiring plants.
- Confirm the accounting and customer-refund treatment of the Attorney General settlement and whether any additional ACC action follows.