Business Context and Reporting Period
This Form 8-K is a current report filed by Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS), on June 1, 2016. The filing discloses regulatory actions and investor communications related to APS's annual retail base rate application.
Key Financial Metrics and Rate Case Details
The filing centers on a rate case application filed with the Arizona Corporation Commission (ACC) requesting an annual increase in retail base rates of $165.9 million. This figure excludes amounts collected through existing adjustor mechanisms. Key financial parameters of the application include:
- Rate Base: Original cost rate base of $6.8 billion (as of December 31, 2015).
- Customer Impact: Average annual customer bill increase of 5.74%.
- Adjustor Balances: Approximately $267.6 million in adjustor account balances (as of December 31, 2015) proposed for transfer to base rates without incremental bill impact.
- Cost of Capital: Proposed weighted-average cost of capital (WACC) of 8.13%, based on a capital structure of 44.20% long-term debt (5.13% cost) and 55.80% common stock equity (10.50% cost).
- Fuel Rate: Proposed base rate for fuel and purchased power of $0.029882 per kWh, a decrease from the current rate of $0.032071 per kWh.
Material Changes and Proposed Deferrals
The application requests authorization to defer specific construction costs for future recovery rather than immediate inclusion in base rates:
- Four Corners Power Plant: Approximately $400 million in direct costs for selective catalytic reduction equipment, with proposed step-rate increases beginning in 2019.
- Ocotillo Power Plant: Approximately $500 million in direct construction costs for modernization, expected to be fully in service by early 2019.
- Property Taxes: Deferral of increases or decreases in Arizona property taxes attributable to rate changes after the application adjudication date.
Additionally, the filing proposes updates to four adjustor mechanisms (Power Supply Adjustor, Lost Fixed Cost Recovery Mechanism, Transmission Cost Adjustor, and Environmental Improvement Surcharge) and significant rate design changes for residential and commercial customers.
Outlook, Risks, and Management Commentary
APS requests that the rate increase become effective July 1, 2017. The company expects the ACC to issue a procedural schedule within the next sixty days. Management explicitly states that APS cannot predict the outcome of the request. The filing also notes that Pinnacle West will participate in investor and analyst meetings from June 2, 2016, through June 14, 2016, utilizing slides attached as Exhibit 99.1.
Investor Verification Checklist
- Verify the final ACC decision on the $165.9 million base rate increase and the 5.74% bill impact.
- Confirm the approved cost of capital and capital structure versus the proposed 8.13% WACC.
- Monitor the timeline for the recovery of the $400 million Four Corners and $500 million Ocotillo deferred costs.
- Review the specific implementation details of the new residential rate plans and net metering tariff modifications.
- Check for any regulatory adjustments to the proposed fuel rate decrease from $0.032071 to $0.029882 per kWh.