Pinnacle West Capital Corporation — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; filed February 27, 2024. Although the request metadata says 2023 Q4, this is an annual filing, not a standalone quarterly report. Pinnacle West is a holding company deriving essentially all revenue and earnings from Arizona Public Service Company (APS), its regulated electric utility serving approximately 1.4 million customers.
Financial performance and position
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Operating revenue | $4.696 billion | $4.324 billion | +8.6% |
| Operating income | $824.6 million | $731.9 million | +12.7% |
| Net income attributable to common shareholders | $501.6 million | $483.6 million | +3.7% |
| Diluted EPS | $4.41 | $4.26 | +3.5% |
| Cash from operating activities | $1.208 billion | $1.241 billion | −2.7% |
| Capital expenditures | $1.846 billion | $1.707 billion | +8.1% |
Operating margin was approximately 17.6%, up from 16.9%; net income attributable to common shareholders as a share of revenue was approximately 10.7%, versus 11.2%. Operating cash flow less capital expenditures was negative approximately $639 million. Pinnacle West paid $386 million in common dividends; the 2023 dividend was $3.48 per share.
At year-end, Pinnacle West reported $8.416 billion of long-term debt, including current maturities, and $609.5 million of short-term borrowings. Cash was approximately $5 million. Committed revolving facilities totaled $1.45 billion, with $840.5 million available. Debt-to-capitalization ratios were approximately 60% for Pinnacle West and 52% for APS, below the 65% covenant limit. Pinnacle West and APS had negative outlooks from Moody’s, S&P, and Fitch.
APS reported 2023 net income attributable to its common shareholder of $547.3 million, compared with $524.9 million in 2022. APS’s common equity ratio, as defined by its ACC financing order, was 49%; shareholder equity was approximately $7.2 billion.
Changes versus 2022
- Higher revenue less fuel and purchased-power expense contributed $208 million: drivers included LFCR revenue (+$55 million), weather (+$34 million net), CRS revenue (+$34 million), transmission revenue (+$26 million), and retail customer growth and usage (+$25 million).
- Higher operations and maintenance expense (+$72 million consolidated), depreciation and amortization (+$41 million), and interest expense net of construction allowances (+$75 million) partly offset operating improvement.
- Other income and expenses improved by $61 million, reflecting higher interest income, increased construction-related allowance for equity funds, the BCE sale gain, and the absence of the prior-year Clear Creek wind investment impairment.
- APS retail customers grew 2.0%; weather-adjusted retail electricity sales increased 1.5%. The 2023 peak demand reached 8,162 MW, up from 7,587 MW in 2022.
Outlook, commentary, risks, and unusual items
- Rate case: After year-end, on February 22, 2024, the ACC approved an expected net annual revenue increase of approximately $253.4 million for APS, with an estimated roughly 8% increase to the typical residential customer bill. Rates were expected to take effect March 8, 2024, subject to the final order. The decision allowed a 9.55% return on equity and approved a modified System Reliability Benefit mechanism.
- Growth and supply: Management projects APS customer growth of 1.5%–2.5% annually through 2026, weather-adjusted retail sales growth of 2.0%–4.0% in 2024 and 4.0%–6.0% on average through 2026. Large data centers and manufacturing facilities are important assumptions; APS says extra-large service requests exceed foreseeable regional generation and transmission capacity and has deferred commitments to some prospective projects.
- Investment and transition: APS estimates capital expenditures of $1.95 billion in 2024, $2.00 billion in 2025, and $2.05 billion in 2026. Its targets include 65% clean energy by 2030, 45% renewable generation by 2030, exiting coal by 2031, and 100% clean, carbon-free electricity by 2050. APS planned more than 2,700 MW of utility-scale storage by 2026; project development, permitting, interconnection, supply-chain availability, and financing remain execution risks.
- Regulatory and environmental exposure: Future recovery of utility costs through regulated rates is a central risk and a critical audit matter. Pending or proposed EPA rules on greenhouse gases, coal ash, wastewater, and other environmental requirements could raise costs; APS cannot quantify some potential remediation obligations. Cholla coal use is to end by April 2025, while Four Corners remains in the portfolio under the coal-exit-by-2031 commitment.
- Other risks: The filing highlights extreme heat, drought and water availability, wildfire liability, generation outages, fuel and purchased-power volatility, cybersecurity, interest rates, and access to capital. Arizona’s Tier 1 Colorado River shortage was not expected to materially affect APS water supply at the filing date.
- Unusual items and contingencies: The BCE sale was completed January 12, 2024; 2023 included a $6.2 million pretax gain from the first stage. Pinnacle West retained certain project guarantees after the sale. The 2023 asset-retirement-obligation estimate increased by $135 million, including a $71 million increase for Cholla and $63 million for Palo Verde. APS’s total coal take-or-pay commitments were approximately $1.7 billion; estimated fuel and purchased-power commitments were approximately $1.0 billion in 2024 and $14.7 billion thereafter.
Investor verification priorities
- Confirm the final ACC rate-case order, implementation timing, actual revenue recovery, and customer bill effects against the stated estimates.
- Track cash generation, capital spending, debt issuance, borrowing costs, and availability under credit facilities as the three-year investment program advances.
- Test whether forecast customer and sales growth—particularly from data centers and manufacturing—materializes and can be served reliably without disproportionate costs.
- Monitor regulatory recovery of fuel, purchased-power, pension, and plant costs, and any material changes to regulatory assets and liabilities.
- Review EPA and other environmental decisions, coal-ash corrective-action estimates, water constraints, wildfire exposure, and the adequacy of related insurance and rate recovery.
- Assess progress on renewable and storage projects, coal retirement milestones, and the assumptions supporting the clean-energy targets.