Pinnacle West Capital Corporation (PNW) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The combined filing reports both Pinnacle West and its regulated utility subsidiary, Arizona Public Service Company (APS). Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context and results
Pinnacle West is an Arizona electric utility holding company whose results are generated primarily by APS, which serves approximately 1.3 million retail customers. First-quarter results are seasonal and are not necessarily indicative of full-year performance.
| PNW consolidated metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $945 million | $784 million | +21% |
| Operating income | $51 million | $54 million | Down $4 million |
| Net income (loss) attributable to common shareholders | $(3) million | $17 million | Down $20 million |
| Diluted earnings (loss) per share | $(0.03) | $0.15 | Down $0.18 |
| Cash from operating activities | $212 million | $341 million | Down $129 million |
| Capital expenditures | $445 million | $392 million | Up $54 million |
Revenue growth reflected higher retail revenue and wholesale energy sales. Fuel and purchased power expense rose to $395 million from $265 million, while operations and maintenance expense increased to $250 million from $218 million. Operating margin was approximately 5.4% of revenue, compared with 7.0% a year earlier. Pinnacle West’s net loss attributable to common shareholders includes the effect of $4.3 million of income attributable to noncontrolling interests; APS reported net income attributable to its common shareholder of $10.7 million, down from $24.2 million.
Cash, debt and liquidity
At March 31, Pinnacle West had $7 million of cash, $498 million of short-term borrowings and $7.98 billion of long-term debt, including current maturities. Current assets were $1.75 billion and current liabilities were $1.72 billion. APS had $7 million of cash, $463 million of short-term borrowings and $6.79 billion of long-term debt. Pinnacle West generated $212 million of operating cash, below its $445 million of capital expenditures. Its operating, investing and financing cash flows resulted in a $2 million increase in cash for the quarter.
Management said both companies had ample borrowing capacity under their credit facilities. On April 10, 2023, after quarter-end, each company replaced its revolving facilities with new facilities: $200 million for Pinnacle West and $1.25 billion for APS. At March 31, APS had $463 million of commercial paper outstanding; Pinnacle West had $35 million. Debt-to-capitalization covenant ratios were 59% for Pinnacle West and 51% for APS, below the 65% maximum. All three rating agencies listed negative outlooks for both companies.
Material changes and outlook
- Fuel-cost recovery: The deferred fuel and purchased power regulatory asset increased to $470 million from $461 million during the quarter. The ACC approved an APS Power Supply Adjustor rate of $0.019074 per kWh, effective in March 2023, designed to bring the balancing account close to zero over 24 months.
- Rate case: APS’s pending 2022 rate-case application seeks a net $460 million annual base-rate increase, with an estimated 13.6% average annual customer bill impact on the proposed effective date. APS requested rates effective December 1, 2023; hearings were scheduled to begin in August 2023. The outcome is uncertain.
- Load growth: APS reported weather-adjusted retail electricity sales up 3.6% year over year and customer growth of 2.0% for the quarter. Management projected customer growth of 1.5%–2.5% in 2023 and through 2025, and weather-adjusted retail sales growth of 3.5%–5.5% in 2023 and average annual growth of 4.5%–6.5% through 2025. These projections include anticipated data-center and manufacturing demand. APS also said prospective extra-large customers without existing commitments exceeded available regional generation and transmission capacity, and it could not commit to their projects at that time.
- Investment: APS forecast capital expenditures of $1.67 billion in 2023, $1.80 billion in 2024 and $1.85 billion in 2025, funded by operating cash and external financing. The filing also reports about $1.9 billion of increased fuel and purchased-power and purchase commitments, primarily for 2025 and later, including approximately $1.6 billion related to purchased-power lease contracts. Certain executed but not yet commenced energy-storage leases are expected to involve approximately $3.5 billion of fixed consideration over their terms.
- Clean-energy plans: APS’s stated goals include 65% clean energy by 2030, ending coal-fired generation by 2031, and aspiring to 100% clean, carbon-free electricity by 2050. Achievement depends on regulatory support, technology, resource development, reliability and access to capital. APS discontinued pursuing its Palo Verde hydrogen demonstration project after concluding it could not overcome economic hurdles.
Risks, contingencies and unusual items
- Four Corners SCR recovery: An Arizona appeals court vacated the ACC’s $215.5 million disallowance of certain investments and deferrals and remanded the matter. If the disallowance is ultimately upheld, APS estimated a charge of approximately $154.4 million after tax. The company had not recorded an impairment at March 31, 2023.
- Environmental exposure: Potential changes to coal-combustion residual, wastewater and air-emissions rules could increase compliance costs. APS said the ultimate costs and outcomes of certain proceedings cannot currently be estimated; rate recovery is not assured.
- Operating and market risks: Management cited inflation, supply-chain and labor constraints, weather variability, plant and transmission performance, volatile fuel and power prices, rising interest rates, regulatory decisions, cybersecurity and extreme-weather risks. APS said inflation continued to affect fuel, materials, insurance and wages, though some cost increases had begun to level off.
- Labor: APS’s collective bargaining agreement with the IBEW expired April 1, 2023. Negotiations were continuing with a federal mediator, while the existing contract remained in effect.
- Other commitments: APS’s Palo Verde sale-leaseback obligations include approximately $21 million in annual payments through 2033. Under specified events considered unlikely by APS, payments to noncontrolling participants could be approximately $324 million beginning in 2023, up to $501 million over the lease terms.
- Dividend and controls: After quarter-end, the board declared a $0.865-per-share dividend payable June 1, 2023. Management concluded disclosure controls were effective as of March 31 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track the ACC’s decision and timing in APS’s 2022 rate case, including any effect on the requested customer bill increase.
- Monitor the Four Corners SCR remand and any further appeal, given the potential $154.4 million after-tax charge.
- Assess fuel-cost recovery, the PSA balancing account and customer affordability as the approved rate takes effect.
- Compare actual cash generation and financing needs with the substantial capital program, debt maturities and long-term purchased-power and storage commitments.
- Check whether projected customer and sales growth—particularly from large data centers and manufacturers—can be served reliably and within available generation and transmission capacity.
- Follow environmental rulemaking, coal-plant transition costs, labor negotiations and the companies’ negative credit-rating outlooks.