Pinnacle West Capital Corporation — Q1 2013 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2013 and includes Pinnacle West and its principal subsidiary, Arizona Public Service Company (APS). APS is a vertically integrated Arizona electric utility and accounts for essentially all of Pinnacle West’s revenue and earnings. Results are seasonal and interim performance may not indicate full-year results.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Operating revenue | $686.7 million | $620.6 million |
| Operating income | $86.9 million | $48.0 million |
| Net income attributable to common shareholders | $24.4 million | Loss of $8.3 million |
| Basic and diluted EPS | $0.22 | Loss of $0.08 |
| Operating cash flow | $212.2 million | $115.3 million |
| Capital expenditures | $182.9 million | $241.0 million |
Operating margin was approximately 12.7%, up from 7.7%. Revenue less fuel and purchased-power expense increased $51 million. Management attributed improved earnings primarily to the July 2012 retail rate settlement, weather, higher retail transmission revenue, customer growth and usage, and lower net interest charges; higher operations and maintenance costs and income taxes partly offset these gains.
At March 31, cash was $25.1 million. Debt carrying value, including current maturities and Palo Verde sale-leaseback notes, was approximately $3.43 billion. Pinnacle West had no commercial paper or credit-facility borrowings and had an unused $200 million revolving facility. APS had no facility borrowings or commercial paper and had $1 billion of revolving facilities. APS’s common-equity ratio under the ACC definition was 56%, above its 40% minimum. Pinnacle West’s consolidated debt-to-capitalization ratio was approximately 46%.
Capital spending used less cash than in the prior-year quarter; operating cash flow rose partly because of lower posted cash collateral, lower interest paid and working-capital changes. Pinnacle West paid $58.1 million in common dividends during the quarter; no dividend was declared in Q1, versus $0.525 per share in Q1 2012. The board declared a $0.545 quarterly dividend in April, payable in June.
Changes, outlook and management commentary
- APS’s 2013 retail renewable-energy plan received ACC approval with a $103 million budget. APS expects average annual customer growth of about 2% and weather-adjusted retail electricity sales growth of less than 1% over 2013–2015.
- Estimated APS capital expenditures are $1.116 billion in 2013, $1.030 billion in 2014 and $1.190 billion in 2015. These estimates assume APS completes its proposed Four Corners acquisition of SCE’s interests in Units 4 and 5 and closes Units 1–3.
- APS issued an additional $100 million of 4.50% senior notes due 2042. After quarter-end, APS refinanced a $500 million credit facility, extending its termination to April 2018.
- Management expects APS’s bonus-depreciation-related cash tax benefits to total up to $400–$500 million, with benefits expected to be fully realized by year-end 2013 and most already realized by December 31, 2012.
- SunCor’s bankruptcy plan became effective March 25, 2013 and provides for the release of Pinnacle West and affiliates from claims related to SunCor and its estates.
Risks, contingencies and unusual items
- Environmental requirements could drive substantial investment and operating costs, with rate recovery uncertain. Disclosed potential APS costs include approximately $300 million for Four Corners regional-haze controls under the assumed acquisition scenario, up to $158 million for Navajo Generating Station upgrades under EPA’s proposal, and approximately $187 million for Cholla controls if APS’s challenge is unsuccessful.
- The Four Corners acquisition remains conditional, including on completion of a new coal-supply contract and other requirements. APS cannot predict whether it will close. APS also sought FERC approval to defer and recover a $40 million payment related to termination of a transmission agreement; disallowance could result in a charge.
- Regulatory and litigation exposure includes Superfund matters, a Clean Air Act case concerning Four Corners, and potential claims or enforcement action relating to the 2011 Southwest power outage. Potential losses for certain matters cannot be reasonably estimated from the filing.
- APS faces nuclear operating, spent-fuel storage, insurance and decommissioning risks. Its estimated share of on-site interim spent-fuel storage costs over Palo Verde’s remaining life is $122 million.
- Commodity and counterparty exposure remains: two counterparties represented about 83% of Pinnacle West’s $54 million of risk-management assets. A downgrade below investment grade could trigger additional collateral requirements, including $106 million under derivative features and approximately $174 million under certain energy-related non-derivative contracts.
- Other uncertainties include weather, electricity demand, fuel and purchased-power prices, rate recovery, capital-market access, pension funding, and evolving regulation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the sustainability of improved earnings, particularly the impacts of weather, the retail rate settlement, usage and cost trends.
- Track actual capital spending and financing needs against the $1.0–$1.2 billion annual estimates and assess debt, liquidity and dividend capacity.
- Verify progress and final costs for the Four Corners transaction, coal-supply agreement, plant closures and related rate recovery.
- Monitor regulatory decisions and potential costs for environmental compliance, transmission, renewable energy and demand-side programs.
- Review developments in the disclosed litigation, nuclear obligations, counterparty concentrations and collateral requirements.