Pinnacle West Capital Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Pinnacle West is the parent of Arizona Public Service Company (APS), a regulated electric utility operating primarily in Arizona; APS accounts for substantially all consolidated revenue and earnings. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $1.139 billion | $1.089 billion | $2.580 billion | $2.515 billion |
| Operating income | $404 million | $367 million | $665 million | $563 million |
| Net income attributable to common shareholders | $234 million | $187 million | $343 million | $98 million |
| Diluted EPS | $2.14 | $1.84 | $3.22 | $0.97 |
| Operating margin | 35.4% | 33.7% | 25.8% | 22.4% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $570 million | $771 million |
Revenue and operating income increased year over year. Q3 regulated-electricity net income rose about $25 million, principally from retail rate increases, partly offset by higher operating and maintenance costs. For the first nine months, regulated-electricity net income increased about $63 million. The company reported nine-month net income growth of $245 million, but the comparison was heavily affected by substantially lower SunCor real-estate impairment charges than in 2009 and a $25 million after-tax gain from the sale of APSES’s district-cooling business.
At September 30, cash and cash equivalents were $196 million, current assets $1.243 billion, and current liabilities $968 million. Long-term debt, including current maturities and Palo Verde leaseback notes, was approximately $3.70 billion; reported short-term borrowings were zero. Pinnacle West had a $200 million revolving facility with no borrowings, and APS had $989 million of facilities with no borrowings and no commercial paper outstanding. Consolidated operating cash flow declined about $201 million year over year, mainly due to margin and collateral movements and a voluntary $100 million pension contribution. Capital expenditures were $553 million for the nine months; estimated total capital expenditures were $728 million for 2010, $1.073 billion for 2011, and $1.172 billion for 2012.
Material changes and financing
- Pinnacle West issued 6.9 million shares in April at $38 per share, receiving approximately $253 million net and contributing the proceeds to APS for debt repayment, capital spending, and general purposes.
- APS’s nine-month net income attributable to its shareholder was $328 million, versus $260 million in 2009. APS’s operating cash flow was $506 million, down from $713 million.
- In 2010, APS began consolidating Palo Verde lessor trusts under revised variable-interest-entity accounting. The change added approximately $143 million of debt and $140 million of net property and equipment at September 30; it did not change net cash flows or income attributable to Pinnacle West shareholders.
- Pinnacle West declared a $0.525-per-share quarterly dividend on October 20, payable December 1, 2010. Nine-month dividends paid were $162 million; the 2010 nine-month dividend declared per share was $1.575, unchanged from 2009.
Outlook, risks, and contingencies
- Management estimated average customer growth of about 1% annually and weather-adjusted retail electricity sales to remain flat on average over 2010–2012. Nine-month customer growth was 0.6%, while weather-adjusted retail sales declined 1.0%.
- APS’s rate-case settlement provides an authorized 11% return on common equity and requires at least $700 million of equity infusions through 2014; $253 million had been contributed by September 30. APS expected to file its next general rate case in June 2011, subject to settlement restrictions.
- APS’s 2011 renewable-energy funding request was reduced to $92.5 million; ACC action was expected in Q4 2010. The AZ Sun program envisaged up to $500 million of investment for 100 MW of APS-owned solar resources through 2014.
- The EPA’s proposed Four Corners regional-haze controls could cost APS up to approximately $422 million for nitrogen-oxide controls and about $220 million for particulate-removal equipment. Requirements were not final; the company was evaluating and commenting on the proposal. Potential coal-combustion-waste regulation also remained unresolved.
- Fuel and purchased-power commitments and purchase obligations totaled approximately $10.3 billion, including $7.6 billion thereafter. The filing notes these amounts can vary under contract provisions.
- SunCor had $6 million of debt outstanding, part of it in default, and $22 million of assets held for sale. Pinnacle West said it did not believe SunCor’s inability to repay would materially harm parent liquidity; SunCor could not transfer cash dividends to Pinnacle West.
- Other risks include rate-recovery and regulatory outcomes, weather and weak Arizona economic conditions, power-plant performance, fuel and power prices, environmental and renewable-energy requirements, nuclear operations and spent-fuel disposal, capital-market access, and derivative counterparty or collateral exposure. Management reported effective disclosure controls as of September 30.
Most important facts for investors to verify
- How much of the reported earnings improvement reflects ongoing utility operations versus discontinued operations, asset-sale gains, tax items, and the prior-year impairment comparison.
- Whether APS sustains retail-rate benefits while managing operating costs, flat sales expectations, and the required equity infusions.
- The final EPA requirements and APS’s resulting Four Corners and other environmental capital costs.
- Cash-flow and collateral needs, refinancing and debt maturities, and the effect of planned capital spending on financing requirements.
- SunCor asset-sale progress and resolution of its debt default, and the timing and realization of the disclosed tax benefits.