Pinnacle West Capital Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with FY2020. The filing is a combined annual report for Pinnacle West and its regulated utility subsidiary, Arizona Public Service Company (APS). Pinnacle West derives essentially all of its revenue and earnings from APS, which serves approximately 1.3 million customers in Arizona.
Financial performance
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Operating revenue | $3.804 billion | $3.587 billion | +6.0% |
| Operating income | $805 million | $788 million | +2.2% |
| Net income attributable to Pinnacle West common shareholders | $619 million | $551 million | +12.4% |
| Diluted earnings per share | $5.47 | $4.87 | +$0.60 |
| Net cash from operating activities | $860 million | $966 million | -$107 million |
| Capital expenditures | $1.473 billion | $1.327 billion | +$147 million |
Calculated operating margin was approximately 21.2%, compared with 22.0% in 2020; net margin attributable to common shareholders was approximately 16.3%, compared with 15.4%. The earnings increase reflected stronger customer usage and growth, higher transmission revenue, lower tax-related customer refunds, higher pension and postretirement credits, and the prior-year Arizona Attorney General-related charge. Offsetting factors included weather impacts, higher depreciation and income taxes, and higher fuel and purchased-power costs.
- Retail electricity sales, weather-normalized, rose 4.2%; customer count increased 2.2%. The reported sales comparison includes a correction to 2020 commercial and industrial volumes of 111 GWh.
- Fuel and purchased-power expense increased to $1.153 billion from $993 million. A portion of variable fuel and purchased-power costs is recovered through the PSA, subject to its rules and annual adjustment limits.
- Operating cash flow fell despite higher earnings, principally reflecting increased fuel and purchased-power and operating payments. Cash and cash equivalents ended the year at $10 million.
- Pinnacle West paid $3.34 per share in dividends during 2021 and increased its indicated annual dividend to $3.40 per share.
Debt and liquidity
- At year-end, Pinnacle West reported $6.914 billion of long-term debt, including current maturities, and $292 million of short-term borrowings. Debt to capitalization was approximately 56%, versus a 65% covenant ceiling.
- APS had $6.267 billion of long-term debt and $279 million of short-term borrowings. Its ACC-defined common equity ratio was 51%, above the required 40% minimum.
- Combined committed credit facilities totaled $1.2 billion, with $908 million available at December 31, 2021. Management stated that borrowing capacity and market access were adequate.
- Fitch, S&P and Moody’s downgraded Pinnacle West and APS ratings in 2021; all outlooks were negative. The filing warns that further downgrades could raise borrowing costs, limit market access, or increase collateral requirements.
Material changes, outlook and commentary
- Rate case: The ACC approved APS’s 2019 rate case in November 2021, with new rates effective December 1. The decision produces an annual revenue decrease of approximately $4.8 million, excluding temporary coal-community payments, and sets APS’s return on equity at 8.70%. APS appealed portions of the order.
- Four Corners SCR recovery: The ACC allowed approximately $194 million of plant investment and deferrals into rate base but disallowed $215.5 million. APS has not recorded an impairment while the appeal is pending; if the disallowance is upheld, the filing estimates an approximately $154.4 million after-tax charge.
- Fuel-cost recovery: The PSA rate increased by the permitted $0.004/kWh for the year beginning February 2022. Approximately $365 million of fuel and purchased-power costs remained above the annual adjustment cap and is expected to be reflected in future resets. The related regulatory asset was $388 million at year-end 2021, versus $176 million a year earlier.
- 2022–2024 planning: APS projects weather-normalized retail sales growth of 1.5%–2.5% in 2022 and average annual growth of 3.5%–4.5% through 2024, including expected contributions from large manufacturing facilities and data centers. Customer growth is projected at 1.5%–2.5% annually. These are projections, not earnings guidance.
- Estimated APS capital expenditures are $1.525 billion in each of 2022 and 2023 and $1.650 billion in 2024. Management identified approximately $30 million of annual incremental cost-saving opportunities for 2022.
- APS plans to install more than 900 MW of energy storage by 2025. Its stated goals are 65% clean energy by 2030, including 45% renewables, ending coal-fired generation by 2031, and 100% clean, carbon-free electricity by 2050. These plans depend on regulatory approval, project execution, technology, supply chains and financing.
Risks, contingencies and unusual items
- Regulatory recovery is central to results. Pinnacle West reported $1.712 billion of regulatory assets and $2.795 billion of regulatory liabilities; changes in ACC or FERC decisions could affect recovery, refunds and earnings.
- APS reported an approximately $25 million pre-tax adverse 2021 operating impact from customer delinquencies, COVID-19 effects and disconnection moratoria; management expected similar impacts to continue for the foreseeable future.
- Environmental and coal-related exposures include CCR compliance and corrective-action costs, plant retirement and reclamation obligations, and potential future emissions requirements. The Cholla alternative-closure application remained pending; the cost estimate for Cholla corrective action was not yet clear.
- Other material operating risks include drought and water access, extreme heat, wildfires, power-plant or transmission outages, nuclear operations and spent-fuel disposal, cybersecurity, supply-chain delays, and potential changes to Arizona retail-electric competition.
- The 2019 rate case included a time-of-use rate implementation dispute, with possible penalties or customer rebates still under consideration. The ACC also opened an investigation into APS’s Information Technology department in December 2021; APS stated it could not predict the outcome.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Regulatory accounting was identified as a critical audit matter because of judgment involved in assessing future cost recovery and potential disallowances.
Important facts for investors to verify
- Outcome and timing of APS’s appeal of the $215.5 million Four Corners SCR disallowance and the potential $154.4 million after-tax charge.
- Progress in recovering deferred fuel costs, the PSA balance above its annual cap, and the ACC’s fuel-procurement audit.
- Implementation and financial effects of the 2019 rate-case decision, including the time-of-use rate review and any customer remedies.
- Actual sales growth and large-customer ramp-up versus forecasts, alongside expected capital spending and financing needs.
- Rating outlooks, available liquidity and borrowing costs, and the regulatory and environmental approvals needed for coal transition and storage projects.