Pinnacle West Capital Corporation — 2011 Form 10-K
Business context and reporting period. This combined filing covers Pinnacle West and its wholly owned utility subsidiary, Arizona Public Service Company (APS), for the fiscal year ended December 31, 2011. Pinnacle West is a holding company whose results are driven primarily by APS, a regulated electric utility serving about 1.1 million customers in Arizona. The filing is annual; fourth-quarter figures are noted separately below.
Financial performance and position
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Pinnacle West operating revenue | $3.241 billion | $3.189 billion | Up 1.6% |
| Income from continuing operations | $355.6 million | $344.9 million | Up $10.8 million |
| Net income attributable to common shareholders | $339.5 million | $350.1 million | Down $10.6 million |
| Basic / diluted EPS | $3.11 / $3.09 | $3.28 / $3.27 | Continuing-operations basic EPS was $3.01, versus $3.05 |
| Operating cash flow | $1.126 billion | $750 million | Up $375 million |
| Capital expenditures | $885 million | $748 million | Increased investment, especially renewables and utility infrastructure |
| Cash and cash equivalents | $33.6 million | $110.2 million | Year-end cash declined $76.6 million |
| Total assets | $13.111 billion | $12.393 billion | Up $718 million |
| Long-term debt, including current maturities | About $3.496 billion | About $3.678 billion | Debt-to-capitalization ratio was 47% at year-end |
| Common dividends declared per share | $2.10 | $2.10 | Unchanged |
APS reported electric operating revenue of $3.237 billion, operating income of $554.4 million and net income attributable to its common shareholder of $336.2 million, compared with $3.181 billion, $549.0 million and $335.7 million, respectively, in 2010. APS fuel and purchased-power costs fell to $1.009 billion from $1.047 billion, while operations and maintenance expense rose to $895.9 million from $860.7 million.
Fourth quarter: Pinnacle West reported revenue of $667.9 million and net income attributable to common shareholders of $12.6 million; basic EPS was $0.12. Results were highly seasonal, with the third quarter contributing $255.4 million of common-shareholder net income.
Liquidity and debt: At December 31, Pinnacle West and APS had no borrowings outstanding under their revolving credit facilities and had $1.2 billion of total committed facilities available. Pinnacle West reported current assets of $956.5 million and current liabilities of $1.343 billion. APS’s common equity ratio under the ACC financing order was 55%, above its 40% minimum. APS issued $300 million of 5.05% senior notes in 2011; in January 2012 it issued $325 million of 4.50% notes to help refinance $375 million due in March 2012.
Material changes versus the prior year
- Pinnacle West’s common-shareholder net income declined 3%, despite higher continuing-operations income. Discontinued-operations income fell by $14 million: 2011 included an after-tax $10 million gain from selling APSES, while 2010 included a $25 million after-tax gain from APSES’s district-cooling sale.
- Regulated electricity segment net income increased from $325 million to $329 million. Higher weather-related revenue and transmission charges and lower operating and maintenance costs excluding pass-through items were partly offset by higher depreciation, property taxes and income taxes.
- Operating cash flow rose substantially, primarily reflecting a $200 million voluntary pension contribution in 2010, changes in collateral and margin accounts, and differences in tax payments between periods. Cash flow from operations exceeded reported capital expenditures in 2011.
- APS’s customer growth was 0.4% in 2011; weather-adjusted retail electricity sales increased 0.6% year over year, following average annual declines of 0.9% during 2009–2011.
Outlook, management commentary, risks and contingencies
- Operating outlook: Management estimated average annual customer growth of about 1.6% for 2012–2014 and weather-adjusted retail sales approximately flat on average over that period. These are estimates, not earnings guidance; management said a weaker-than-expected Arizona recovery could affect them. It also noted typical weather or economic variation could change annual net income by up to about $10 million, with extreme weather historically producing larger effects.
- Rates: APS’s proposed 2011 rate-case settlement provided for no net change in base rates, a 10% authorized return on common equity, changes to fuel-cost recovery and mechanisms addressing energy efficiency and distributed generation. ACC approval was still pending when the filing was issued; the proposed effective date was about July 1, 2012. The agreement would generally bar APS from filing its next general rate case before May 31, 2015.
- Capital program: Estimated capital expenditures were $1.177 billion in 2012, $1.025 billion in 2013 and $1.169 billion in 2014. These estimates assume APS completes the proposed $294 million purchase of SCE’s Four Corners Units 4 and 5 interests and subsequently closes Units 1–3. The purchase remained subject to regulatory and other conditions. APS also projected about $550 million of transmission investment over ten years.
- Generation and environmental exposure: Potential regional-haze, mercury and other air-pollution controls could require substantial investment and could affect coal-plant economics. Four Corners control-cost estimates included up to about $400 million for APS’s share under the EPA’s original proposal, or about $300 million assuming the proposed acquisition and closure of Units 1–3; additional particulate-control costs were estimated at about $220 million. MATS-related estimates included about $89 million for Cholla. Final requirements and costs remained uncertain, and management expected eligible environmental costs generally to be recoverable through rates.
- Other significant risks: The filing highlights timely rate recovery, fuel and purchased-power prices, plant or transmission outages, drought and water rights, nuclear safety and spent-fuel disposal, renewable and efficiency mandates, access to capital and pension funding. The September 2011 regional outage affected approximately 69,700 APS customers; FERC, NERC and WECC inquiries were ongoing, and potential findings or penalties were uncertain. Environmental claims against Four Corners and the Kivalina climate-change litigation were also unresolved; the company said it would defend the claims.
- Other developments: Palo Verde’s NRC operating licenses were extended by 20 years, and the plant recorded a 90.7% capacity factor in 2011. Pinnacle West sold APSES in August 2011. SunCor, with about $9 million of remaining assets and no bank debt at year-end, filed for bankruptcy protection in February 2012; management did not expect a material impact on Pinnacle West.
Important facts for investors to verify
- Whether the ACC approved the APS rate-case settlement, its final terms and implementation timing.
- Whether the Four Corners acquisition and planned unit closures closed as assumed in capital and environmental estimates, including required Navajo Nation lease and federal approvals.
- Final environmental-control requirements, costs, rate recovery and effects on the viability of APS’s coal facilities.
- Results and financial consequences, if any, of investigations into the September 2011 outage and pending environmental litigation.
- Liquidity and refinancing execution, planned capital spending, pension contributions and the timing of expected tax benefits.
- That reported earnings comparisons reflect discontinued operations and sale gains; continuing-operations basic EPS declined from $3.05 to $3.01.