Pinnacle West Capital Corporation (PNW) — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 3, 2022. This combined filing covers Pinnacle West and its principal regulated utility subsidiary, Arizona Public Service Company (APS). Unless noted, financial amounts below are Pinnacle West consolidated and in millions of dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,061.7 | $1,000.2 | $1,845.2 | $1,696.7 |
| Operating income | $223.1 | $278.4 | $277.6 | $325.9 |
| Net income attributable to common shareholders | $164.3 | $215.7 | $181.3 | $251.3 |
| Diluted EPS | $1.45 | $1.91 | $1.60 | $2.22 |
| Operating margin | 21.0% | 27.8% | 15.0% | 19.2% |
Revenue increased 6.1% in Q2 and 8.8% for the first half, but earnings declined. Management attributed the first-half common-income decrease of about $70 million mainly to higher depreciation and amortization, lower revenue from the changed lost-fixed-cost-recovery (LFCR) treatment and higher operating costs. Higher customer usage and growth and lower income taxes partly offset those pressures. Fuel and purchased-power expense rose to $617.5 million for the half from $468.1 million; much of the related cost is subject to regulatory recovery mechanisms.
First-half operating cash flow was $588.3 million, versus $312.4 million a year earlier. Capital expenditures were $843.2 million, leaving operating cash flow less capital expenditures at approximately negative $254.9 million. Financing cash flow was $225.2 million; cash ended the period at $29.2 million.
At June 30, 2022, Pinnacle West had $541 million of short-term borrowings and $7.241 billion of long-term debt, with no current long-term maturities reported. Debt therefore totaled about $7.782 billion, compared with approximately $7.356 billion at year-end 2021. Current assets were $1.798 billion and current liabilities $2.022 billion. The company reported a 57% debt-to-capitalization ratio; APS reported 50%. Pinnacle West and APS had committed revolving facilities of $200 million and $1 billion, respectively, with no facility borrowings; commercial paper outstanding was $26 million at Pinnacle West and $515 million at APS. Management said both companies had ample borrowing capacity.
Material changes and drivers
- Q2 common earnings fell about $51 million year over year; first-half common earnings fell about $70 million.
- First-half operating income declined despite higher revenue. Depreciation and amortization increased $56 million, primarily reflecting higher plant in service, updated depreciation rates, and the end of prior regulatory deferrals for the Ocotillo modernization and Four Corners SCR projects.
- New retail base rates under the 2019 APS rate case took effect December 1, 2021. The ACC decision produced an annual revenue decrease of $4.8 million, excluding temporary Coal Community Transition payments and expenditures.
- Customer growth was 2.1% for the first half. Weather-adjusted retail electricity sales rose 3.7%, with management citing stronger residential usage, commercial and industrial recovery, and new data-center load.
- Investment continued to expand: first-half capital expenditures were $843 million versus $681 million in 2021. APS’s estimated capital expenditures are $1.525 billion in 2022, $1.525 billion in 2023, and $1.650 billion in 2024.
Outlook, risks, and contingencies
- Management projected 2022 annual customer growth of 1.5%–2.5% and weather-adjusted retail sales growth of 1.5%–2.5%. Average annual sales growth through 2024 was projected at 3.5%–4.5%, including expected large manufacturing and data-center contributions; actual results depend on customer ramp-up, economic conditions, conservation, and distributed generation. No earnings guidance was stated in the supplied filing text.
- APS expects to file its next general retail rate case by the end of October 2022. The ACC’s review of APS’s application to raise its authorized long-term debt limit from $7.5 billion to $8.0 billion remained pending.
- APS is appealing the ACC’s disallowance of $215.5 million of Four Corners SCR investments and deferrals. No impairment was recorded at June 30; if the disallowance stands, APS estimates an after-tax charge of approximately $154.4 million.
- Fuel and purchased-power costs above the PSA annual cap are deferred for future recovery. The filing reports approximately $365 million above the cap at the time of the 2022 PSA compliance filing; the deferred fuel and purchased-power regulatory asset was $390.0 million at June 30.
- Fuel, purchased-power, construction, and energy-storage commitments increased, primarily due to about $1.2 billion of new commitments. Executed but not yet commenced lease arrangements, mainly for storage assets, are expected to involve about $1.8 billion of fixed payments over their terms; some commencement timing was delayed.
- Management cited inflation, supply-chain constraints, tight labor markets, extreme heat and weather, fuel-price volatility, plant and transmission performance, regulatory decisions, and access to capital as risks. Delays in materials could increase summer purchased-power needs.
- APS’s clean-energy goals are 65% clean energy by 2030, including 45% renewable generation, 100% clean, carbon-free electricity by 2050, and ending coal generation by 2031; the company notes execution depends on technology, regulation, resource availability, and financing. APS plans to end coal use at Cholla by 2025.
- Other matters include the pending information-technology investigation by the ACC, the appeal of the 2019 rate case, potential environmental and coal-ash compliance costs, and uncertainty concerning PFAS-related inquiries. Outcomes or costs for certain matters cannot yet be estimated. Pinnacle West’s credit-rating outlooks were negative at all three agencies listed in the filing.
Most important facts for investors to verify
- Whether earnings pressure persists, particularly from depreciation, base-rate changes, LFCR treatment, and operating costs.
- Progress and cash funding for the elevated capital program, planned generation and storage projects, and new contractual commitments.
- The outcome and timing of the Four Corners SCR appeal and potential $154.4 million after-tax charge.
- How quickly deferred fuel costs are recovered through the PSA, and the effect on customer bills and cash flow.
- Results of the next APS rate case and pending regulatory reviews, including the requested debt-limit increase.
- Liquidity, debt costs, and credit ratings amid higher borrowings and negative rating outlooks.