Pinnacle West Capital Corporation — Q3 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2022. Pinnacle West is an Arizona utility holding company whose principal subsidiary, Arizona Public Service Company (APS), serves approximately 1.3 million retail electric customers. Figures below are for Pinnacle West consolidated unless otherwise noted; dollar amounts are in millions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,469.9 | $1,308.3 | $3,315.1 | $3,005.0 |
| Operating income | $417.6 | $429.4 | $695.2 | $755.3 |
| Net income attributable to common shareholders | $326.3 | $339.8 | $507.6 | $591.1 |
| Diluted EPS | $2.88 | $3.00 | $4.48 | $5.22 |
| Operating margin | 28.4% | 32.8% | 21.0% | 25.1% |
Revenue increased 12.4% in the quarter and 10.3% year to date, while common-shareholder net income declined 4.0% and 14.1%, respectively. Higher fuel and purchased-power costs, depreciation, operations and maintenance, and interest expense weighed on results. Revenue growth reflected, among other items, customer usage and growth, weather, lower Tax Act-related customer refunds, and transmission revenue. Fuel and purchased-power costs generally flow through APS’s regulatory recovery mechanisms, though timing of recovery affects cash flows.
- Cash flow: Nine-month operating cash flow was $1,031.9, up from $660.5. Investing cash outflow was $1,221.9, including $1,276.9 of capital expenditures; financing cash inflow was $187.0. Cash ended at $7.0.
- Debt and liquidity: Pinnacle West reported approximately $7,838.7 of short-term borrowings, current maturities and long-term debt at September 30, versus about $7,355.7 at year-end 2021. APS reported $443.0 of commercial paper and $6,396.7 of long-term debt. The companies reported ample borrowing capacity; revolving facilities were undrawn, with $24 million of Pinnacle West and $443 million of APS commercial paper outstanding. Debt-to-capitalization covenant ratios were 56% for Pinnacle West and 49% for APS, below the 65% maximum.
- Capital and dividends: APS capital expenditures were $1,254.7 for the nine months. Management estimates APS capital expenditures of $1,525 in each of 2022 and 2023 and $1,650 in 2024, before BCE projects. Pinnacle West declared a quarterly dividend of $0.865 per share, raising the indicated annual rate from $3.40 to $3.46.
Material changes and management commentary
Year-to-date earnings fell by $83 million. Management attributed the decline chiefly to $83 million higher depreciation and amortization, including the ending of prior regulatory deferrals for the Ocotillo modernization and Four Corners SCR projects, and higher operating and maintenance and interest costs. These were partly offset by higher revenue and lower income taxes. Weather-adjusted retail sales increased 2.7% year over year through September; APS raised its 2022 sales-growth outlook to 2.0%–3.0% and forecast average annual growth of 3.5%–4.5% through 2024. Customer growth was 2.0% year to date, with a 1.5%–2.5% annual outlook through 2024.
Management cited Phoenix-area inflation of 13% over the prior twelve months and equipment cost increases of 15%–60% in the first three quarters. Cost-control measures and long-term procurement contracts have helped mitigate pressures. Supply-chain and labor constraints are delaying some projects, but APS reported no material effect to date on its ability to serve customers.
Outlook, regulatory matters and risks
- Rate case: Filed October 28, 2022, after quarter-end, APS requested a net $460 million annual base-rate increase, representing a proposed 13.6% average customer-bill increase, with requested rates effective December 1, 2023. The request is pending and its outcome is uncertain.
- Fuel recovery: APS’s deferred fuel and purchased-power regulatory asset was $445.0 at September 30, up from $388.1 at year-end. Approximately $365 million of fuel and purchased-power costs remained above the annual PSA recovery cap, to be reflected in future rate resets.
- Four Corners SCR appeal: APS is contesting a $215.5 million disallowance of plant investment and cost deferrals. No impairment was recorded; if the disallowance is upheld, APS estimates an after-tax charge of approximately $154.4 million.
- Community-transition funding: ACC staff recommended in October 2022 that Coal Community Transition funding not be collected from ratepayers. The outcome remains uncertain.
- Clean energy and investment: APS’s goals include 65% clean energy by 2030, ending coal-fired generation by 2031, and 100% clean, carbon-free electricity by 2050. Execution depends on regulatory support, technology, project development, supply chains and access to capital. Planned energy-storage and renewable projects face possible delays.
- Other exposures: Risks include volatile fuel and power prices, extreme weather and wildfire, environmental compliance and coal-plant economics, nuclear operations and spent-fuel disposal, customer collections, counterparty credit, and regulatory decisions. APS estimates that an upheld SCR disallowance could materially affect earnings; environmental and other contingencies may have costs that are not yet reasonably estimable.
The filing does not provide a clear numeric full-year earnings or EPS guidance figure. Pinnacle West and APS stated that disclosure controls were effective as of September 30, 2022, and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Progress and timing of APS’s rate case, including the final allowed increase and customer impact.
- Outcome of the Four Corners SCR appeal and any resulting earnings charge.
- Timing and regulatory recovery of deferred fuel and purchased-power costs, including the PSA balance and recovery cap.
- Whether capital spending and renewable or storage projects remain on schedule amid inflation and supply-chain constraints.
- Debt, commercial-paper usage, credit ratings and access to liquidity as investment needs continue.
- Whether sales growth, customer growth and clean-energy commitments track management’s stated outlook.