Pinnacle West Capital Corporation and Arizona Public Service Company — Q1 2015
Business context and reporting period. This combined Form 10-Q covers the three months ended March 31, 2015. Pinnacle West’s results are primarily those of APS, its regulated Arizona electric utility subsidiary. Interim results are seasonal and are not necessarily indicative of full-year performance.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Pinnacle West operating revenue | $671.2 million | $686.3 million |
| Operating income | $67.7 million | $75.2 million |
| Net income | $20.7 million | $24.7 million |
| Net income attributable to common shareholders | $16.1 million | $15.8 million |
| EPS, basic / diluted | $0.15 / $0.14 | $0.14 / $0.14 |
| Cash from operating activities | $144.1 million | $249.2 million |
| Capital expenditures | $251.0 million | $207.5 million |
Operating margin was approximately 10.1%, compared with 11.0% a year earlier. At March 31, Pinnacle West reported cash of $11.7 million, total debt of approximately $3.665 billion, and total equity of $4.553 billion. Short-term borrowings were $44.5 million, down from $147.4 million at December 31, 2014; current maturities of long-term debt were $383.6 million.
APS generated $153.0 million of operating cash flow and spent $250.9 million on capital expenditures. APS reported $3.540 billion of debt, approximately $4.5 billion of shareholder equity, and a 55% common equity ratio under the ACC’s definition, above its 40% minimum requirement. The filing states both companies had ample borrowing capacity. Pinnacle West had no commercial paper borrowings; APS had $45 million outstanding under its $250 million commercial paper program and access to $1 billion of revolving facilities.
Changes versus the prior comparable period
- Revenue fell about 2.2% and operating income declined about 10.0%. Fuel and purchased-power expense fell $26.5 million, but depreciation and amortization rose $19.2 million.
- Net income attributable to Pinnacle West common shareholders increased slightly, despite lower consolidated net income, in part because income attributable to noncontrolling interests declined.
- Operating cash flow decreased $105 million, principally because Q1 2014 included a $135 million income tax refund. Capital spending increased approximately $44 million.
- Management attributed a $12 million increase in revenue less fuel and purchased-power expense to Four Corners-related rate changes, weather, and other factors. Interest expense also declined.
Outlook, management commentary, and risks
- Operating outlook: Management expects average annual customer growth of 2.0%–3.0% and weather-adjusted retail electricity sales growth of 0.5%–1.5% in 2015–2017. Q1 customer growth was 1.2%, while weather-adjusted sales decreased 0.8%. The filing provides no earnings-per-share guidance.
- Investment and dividends: APS estimates capital expenditures of $1.056 billion in 2015, $1.064 billion in 2016, and $1.332 billion in 2017. Pinnacle West declared a $0.595-per-share dividend payable June 1, 2015.
- Generation and environmental exposure: APS plans to retire Cholla Unit 2 by April 2016, subject to the regulatory and environmental process, and expects to stop burning coal at its other APS-owned Cholla units by the mid-2020s if its proposed compromise is approved. Recovery of Cholla Unit 2’s $127 million remaining book value depends on future rate treatment. Environmental compliance at Four Corners, Navajo, and Cholla could require substantial investment.
- Regulatory and contractual matters: The ACC’s approval of Four Corners rate adjustments, providing $57.1 million in annual revenue, is under appeal. APS and SCE’s dispute over a transmission termination agreement could result in arbitration and a charge if APS is unsuccessful. APS also requested an increase in a grid access charge for certain new rooftop-solar customers; the ACC’s decision was uncertain.
- Commodity and counterparty risks: A $44.8 million derivative loss was recognized in fuel and purchased-power expense before PSA deferrals. Regulatory treatment defers relevant gains and losses, so this amount should not be read as the direct net earnings impact. One counterparty accounted for approximately 94% of Pinnacle West’s $32 million of risk-management assets. Potential collateral calls and credit downgrades remain risks.
- Other items: A revised Four Corners decommissioning study increased the asset retirement obligation by $18 million. APS’s approved $12.2 million share of a DOE spent-fuel settlement payment was expected in Q2 2015 and was to be recorded as a regulatory liability, without income impact. The filing reports no material change in contractual obligations outside the normal course of business.
Important facts for investors to verify
- Whether operating cash generation and liquidity remain adequate as planned capital expenditures rise, and how much external financing is required.
- Whether regulators and courts uphold cost recovery and rate adjustments, including Four Corners, Cholla retirement costs, and the proposed solar grid charge.
- Final environmental compliance obligations, coal-plant operating plans, and related capital costs and asset-recovery treatment.
- How customer growth, conservation, distributed generation, and weather affect electricity sales and earnings relative to management’s estimates.
- Whether the transmission agreement dispute, environmental matters, and other contingencies result in material charges, cash needs, or operational disruption.