Pinnacle West Capital Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; this annual filing also reports quarterly results. Pinnacle West is a holding company whose revenues and earnings are derived essentially entirely from Arizona Public Service Company (APS), a regulated, vertically integrated Arizona electric utility serving approximately 1.2 million customers. Results are seasonal, with electricity demand typically peaking in summer.
Financial performance and condition
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Pinnacle West operating revenues | $3.455 billion | $3.302 billion | +4.6% |
| Operating income | $846 million | $852 million | −0.6% |
| Net income attributable to common shareholders | $406 million | $382 million | +6.4% |
| Diluted EPS | $3.66 | $3.45 | +6.1% |
| Operating cash flow | $1.153 billion | $1.171 billion | −$18 million |
| Cash used for investing | $1.009 billion | $873 million | −$136 million |
Operating margin was approximately 24.5% and net income attributable to common shareholders was approximately 11.8% of revenues. These are calculated from reported figures. APS reported $3.451 billion of electric revenues, $622 million of operating income, and $425 million of net income attributable to its common shareholder.
- Cash flow and investment: Pinnacle West’s capital expenditures were approximately $1.016 billion. Investing cash use increased primarily because APS acquired SCE’s Four Corners interest; the acquisition’s stated purchase price was approximately $182 million.
- Debt and liquidity: Pinnacle West reported $3.337 billion of long-term debt including current maturities, plus $153 million of short-term borrowings. It had $9.5 million of cash. Committed revolving facilities totaled $1.2 billion, with $1.047 billion unused; APS had $153 million of commercial paper outstanding. Debt-to-capitalization ratios were approximately 47% for Pinnacle West and 45% for APS.
- Capital and dividends: Total assets were $13.509 billion and total equity was $4.340 billion. Pinnacle West paid $2.20 per share in dividends during 2013 and increased its indicated annual dividend to $2.27 per share.
Material changes and operating developments
- Revenue increased, but operating income declined slightly as fuel and purchased-power costs, operating and maintenance expense, and depreciation rose. Earnings gains were supported by the 2012 retail rate settlement, higher transmission revenues, and lower interest expense.
- Weather-adjusted retail electricity sales fell 0.5% in 2013, while customer growth was 1.3%. Management attributed sales pressure partly to conservation, energy efficiency, and distributed generation.
- APS closed Four Corners Units 1–3 in December 2013 and acquired SCE’s 48% interest in Units 4 and 5, bringing APS’s ownership of those units to 63%. APS recognized a $37 million regulatory deferral related to the acquisition and closures.
- APS’s 2012 settlement provides a 10.0% authorized return on common equity and a stay-out from filing another general rate case before May 31, 2015, with a requested increase not to become effective before July 1, 2016. APS separately requested rate adjustments related to Four Corners; approval could raise average residential bills by approximately 2%.
Outlook, risks, and unusual items
- Management outlook: For 2014–2016, management expected average annual customer growth of approximately 2.5% and weather-adjusted retail sales growth of approximately 1%. APS expected reserve margins to decline over the following three years and anticipated needing additional conventional resources around 2017. No specific earnings guidance is stated in the provided filing text.
- Planned investment: Estimated APS capital expenditures are $965 million in 2014, $1.026 billion in 2015, and $1.263 billion in 2016. Management expects funding from operating cash flow and external financing.
- Environmental costs: APS estimated its Four Corners share of required pollution controls at approximately $350 million, with installation at Units 4 and 5 targeted by July 2018. Potential costs include approximately $200 million for Cholla controls, subject to litigation, up to approximately $200 million for Navajo Plant controls under EPA proposals, and approximately $120 million of remaining Cholla hazardous-air-pollutant equipment. Outcomes, timing, and rate recovery are uncertain.
- Regulatory and legal contingencies: FERC staff alleged APS violated seven reliability-standard requirements in connection with the 2011 Southwest outage; these were preliminary allegations, not FERC findings. Potential penalties are stated as up to $1 million per violation per day, and the filing does not establish a likely loss amount. Other matters include environmental litigation, a New Mexico coal severance tax assessment, and Superfund-related claims; several loss ranges cannot be reasonably estimated.
- Other exposures: Risks include coal-plant economics and regulation, fuel and water availability, spent-nuclear-fuel disposal, nuclear operating risks, rate-recovery decisions, weather-driven demand, competition from distributed generation, and access to capital. APS’s pension and postretirement obligations and significant planned contributions are also relevant to cash needs.
- Unusual cash/tax item: APS received an approximately $133 million IRS tax refund in the first quarter of 2014 after the expected refund was adjusted following tax examinations; the 2013 balance sheet included the receivable.
The independent auditor issued an unqualified opinion on the consolidated financial statements and internal controls; management and the auditor reported effective internal control over financial reporting as of December 31, 2013.
Most important facts for investors to verify
- ACC disposition and timing of the requested Four Corners rate adjustment, including prudence review and recovery of acquisition costs.
- Final scope, schedule, and recoverability of environmental compliance spending, particularly at Four Corners, Cholla, and the Navajo Plant.
- Resolution and financial consequences of the FERC reliability allegations and other litigation or assessments with unestimable losses.
- Actual retail sales, customer growth, and demand trends versus management’s 2014–2016 projections, including effects of conservation and rooftop solar.
- Funding of the capital program, pension contributions, and debt maturities, and continued access to credit facilities and capital markets.