Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for Pinnacle West Capital Corporation (Pinnacle West) and its primary subsidiary, Arizona Public Service Company (APS). Pinnacle West is a holding company whose principal subsidiary, APS, is a vertically integrated electric utility serving most of Arizona. The filing also includes results for the real estate segment, SunCor Development Company (SunCor), which has faced significant distress due to market conditions.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Operating Revenues | $840.1 million | $1,469.4 million |
| Net Income (Loss) Attributable to Common Shareholders | $68.3 million | $(88.2) million |
| Earnings Per Share (Diluted) | $0.68 | $(0.87) |
| Operating Cash Flow | Filing text does not provide a clear value for the three-month period. | $192.4 million |
| Total Assets | $11.86 billion (as of June 30, 2009) | N/A |
| Total Debt (Long-term + Current Maturities) | $3.86 billion (as of June 30, 2009) | N/A |
| Cash and Cash Equivalents | $17.6 million (as of June 30, 2009) | N/A |
Material Changes Versus Prior Period
- Net Income Decline: Consolidated net income attributable to common shareholders dropped from $133.9 million in the prior year quarter to $68.3 million in Q2 2009. For the six-month period, the company reported a net loss of $88.2 million compared to net income of $129.4 million in the prior year.
- Real Estate Impairment: The primary driver of the six-month loss was a $208 million pre-tax impairment charge recorded by the SunCor real estate segment due to distressed market conditions. This included charges for homebuilding operations, master-planned communities, and golf courses.
- Revenue Trends: Regulated electricity revenues decreased slightly year-over-year due to lower customer usage and weather effects, partially offset by an interim rate increase effective January 1, 2009. Real estate revenues declined significantly due to the distressed market.
- Discontinued Operations: Income from discontinued operations (primarily SunCor property sales) decreased significantly compared to the prior year, contributing to the overall decline in net income.
Guidance, Outlook, and Risks
- Rate Case Settlement: APS entered into a proposed settlement agreement on June 12, 2009, regarding its general retail rate case. The agreement includes a net retail rate increase of $207.5 million, subject to Arizona Corporation Commission (ACC) approval, with rates expected to become effective around January 1, 2010.
- SunCor Liquidity and Covenant Defaults: SunCor has violated covenants in its credit facilities due to impairment charges and loan maturities. It has obtained a forbearance agreement from lenders until August 15, 2009. Pinnacle West states that a SunCor default would not trigger a cross-default for the parent company or APS, but SunCor faces potential debt acceleration if waivers are not obtained.
- Capital Expenditures: Estimated capital expenditures for 2009 are $895 million, driven by environmental compliance, system reliability, and generation upgrades.
- Market Risks: The company faces risks related to volatile fuel prices, credit rating downgrades (which could trigger collateral requirements on derivatives), and regulatory changes regarding climate change and emissions.
- Dividends: Pinnacle West declared a quarterly dividend of $0.525 per share, payable September 1, 2009.
Investor Verification Checklist
- SunCor Covenant Status: Verify if SunCor successfully obtained extensions or waivers from lenders beyond the August 15, 2009 forbearance deadline to avoid debt acceleration.
- Rate Case Approval: Confirm the ACC's final approval of the proposed $207.5 million rate increase settlement and the effective date of new rates.
- Real Estate Asset Sales: Monitor the progress of SunCor's strategic asset sales, as proceeds are critical for repaying its outstanding debt and resolving covenant violations.
- Derivative Collateral: Review credit rating agency actions; a downgrade below investment grade could require posting an additional ~$140 million in collateral for derivative contracts.
- Environmental Compliance Costs: Track the final EPA determinations on "Best Available Retrofit Technology" (BART) for the Four Corners and Navajo plants, which could impact future capital expenditures.