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 December 30, 2013. The filing details significant operational and regulatory events concerning the Four Corners Power Plant, including the closing of an asset purchase, a new coal supply agreement, and compliance decisions regarding EPA emissions standards.
Key Financial Metrics and Transactions
- Asset Acquisition: APS purchased Southern California Edison Company's 48% interest in Units 4 and 5 of the Four Corners Power Plant for approximately $182 million, subject to minor post-closing adjustments.
- Rate Impact: APS filed for rate adjustments related to the acquisition. If approved, the average bill impact to residential customers is estimated at approximately 2%.
- Compliance Costs: APS's share of costs for installing selective catalytic reduction (SCR) controls on Units 4 and 5 is estimated at approximately $350 million.
- Coal Supply: A long-term coal supply agreement was executed for the period from July 2016 through 2031.
Material Changes and Operational Updates
- Ownership Transfer: Ownership of BHP Navajo Coal Company, the supplier for Four Corners, was transferred to Navajo Transitional Energy Company, LLC (NTEC).
- Shortfall Obligation: El Paso Electric Company (7% owner) did not sign the new coal supply agreement. APS agreed to assume the 7% shortfall obligation and granted NTEC an option to purchase this 7% interest.
- Plant Closure and Upgrades: Under the EPA's regional haze rule, co-owners elected to permanently close Units 1, 2, and 3 by January 1, 2014, and install SCR controls on Units 4 and 5 by July 31, 2018.
Outlook, Risks, and Contingencies
- Regulatory Uncertainty: The Arizona Corporation Commission (ACC) reserved the right to review the prudence of the Four Corners transaction for cost recovery. APS cannot predict the outcome of its request for rate adjustments.
- Contractual Contingencies: The 2016 Coal Supply Agreement includes alternate pricing terms for the 7% shortfall obligation if NTEC does not exercise its option to purchase the interest.
- Capital Expenditure Risk: The $350 million SCR cost is based on EPA final standards and represents a significant future capital outlay.
Investor Verification Checklist
- Verify the final purchase price of the Four Corners interest after post-closing adjustments.
- Monitor the Arizona Corporation Commission's decision on the prudence review and the approval of the requested rate adjustments.
- Track the progress of the permanent closure of Units 1, 2, and 3 and the installation timeline for SCR controls on Units 4 and 5.
- Confirm whether NTEC exercises its option to purchase the 7% interest held by El Paso Electric Company.