Business Context and Reporting Period
This Form 8-K, dated June 12, 2009, is filed jointly by Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS). The filing reports the entry into a Material Definitive Agreement regarding a pending general retail rate case. The agreement is subject to approval by the Arizona Corporation Commission (ACC), with an evidentiary hearing scheduled for August 19, 2009.
Key Financial Metrics and Agreement Terms
- Net Retail Rate Increase: $207.5 million (comprising a $344.7 million base rate increase less a $137.2 million reclassification of fuel and purchased power revenues).
- Non-Fuel Base Rate Increase: $196.3 million in annual pretax revenues, replacing a $65.2 million interim surcharge.
- Fuel and Purchased Power: Net increase of $11.2 million in annual pretax revenues; base fuel rate set at $0.0376 per kWh (up from $0.0325).
- Line Extension Revenues: Estimated increases of $23 million (2010), $25 million (2011), and $49 million (2012).
- Capital Structure: Authorized return on common equity of 11.0%; capital structure of 46.2% debt and 53.8% common equity.
- Equity Infusions: Commitment to infuse at least $700 million into APS between June 1, 2009, and December 31, 2014.
- Operational Expenses: Commitment to reduce average annual operational expenses by at least $30 million from 2010 through 2014.
Material Changes and Future Constraints
The agreement imposes significant constraints on future rate filings. APS is prohibited from filing its next two general rate cases until on or after June 1, 2011, and June 1, 2013, respectively, barring extraordinary events. Consequently, APS may not request its next general retail rate increase to be effective prior to July 1, 2012. The parties agreed to use good faith efforts to process subsequent rate cases within twelve months of sufficiency findings.
Outlook, Risks, and Contingencies
Effective Date: If approved by the ACC, the new rates and provisions are expected to become effective on or about January 1, 2010.
Regulatory Risk: The Settlement Agreement is explicitly conditioned upon ACC approval. The filing does not guarantee approval, noting only that an evidentiary hearing is scheduled.
Program Modifications: The agreement includes modifications to energy efficiency, demand-side management, and renewable energy programs, requiring expanded conservation efforts and concurrent recovery of related expenses.
Investor Verification Checklist
- Confirm the outcome of the ACC evidentiary hearing scheduled for August 19, 2009.
- Verify the final effective date of the rate increase, currently projected for January 1, 2010.
- Monitor the execution of the $700 million equity infusion commitment through 2014.
- Track the achievement of the $30 million annual operational expense reduction target from 2010 to 2014.
- Review the impact of the reclassification of $137.2 million from the Power Supply Adjustor to base rates on future cash flow volatility.