Pinnacle West Capital Corporation (PNW) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Pinnacle West is an Arizona electric-utility holding company whose results are driven primarily by regulated subsidiary Arizona Public Service Company (APS), serving approximately 1.3 million retail customers. Figures below are Pinnacle West consolidated unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $1,254.5 million | $1,190.8 million | $2,846.0 million | $2,800.8 million |
| Operating income | $455.0 million | $403.3 million | $757.3 million | $660.0 million |
| Net income attributable to common shareholders | $346.4 million | $312.3 million | $570.0 million | $474.3 million |
| Diluted EPS | $3.07 | $2.77 | $5.05 | $4.21 |
Margins: Operating margin, calculated as operating income divided by revenue, was approximately 36.3% for Q3 and 26.6% year to date, versus 33.9% and 23.6%, respectively, in 2019.
Cash flow and investment: Nine-month operating cash flow was $772.0 million, down from $834.8 million. Capital expenditures were $971.1 million, compared with $857.9 million; cash used in investing was $955.5 million. Financing provided $355.1 million, versus $21.3 million, and cash ended the period at $181.9 million.
Debt and liquidity: Long-term debt was $6.316 billion, compared with $4.833 billion at year-end 2019; short-term borrowings were $57.9 million. Pinnacle West had $34 million of commercial paper and $24 million outstanding under its term loan. APS had no revolver or commercial-paper borrowings and access to $1 billion of revolving facilities. Debt-to-capitalization ratios were approximately 53% for Pinnacle West and 48% for APS; both were within the 65% covenant limit. APS reported a 51% common-equity ratio under its ACC financing order.
Other key metrics: Total assets were $19.75 billion. The allowance for doubtful accounts increased to $18.1 million from $8.2 million at year-end 2019. APS’s deferred fuel and purchased-power regulatory asset rose to $162.1 million from $70.1 million.
Changes versus the prior comparable period
- Q3 common-shareholder net income increased about 11%; nine-month net income rose about 20%. Revenue increased approximately 5% in Q3 and 2% year to date.
- Management attributed improved earnings chiefly to hotter-than-normal weather, customer growth and higher pension and postretirement non-service credits. Year-to-date results also benefited from lower operations and maintenance costs and fuel/purchased-power costs.
- Higher income taxes partly offset the improvement. Nine-month interest expense also increased, primarily due to higher debt balances.
- Operating cash flow declined despite higher earnings, principally because of lower cash receipts from electric revenues and higher fuel and purchased-power cash costs. Capital spending increased.
Outlook, management commentary and risks
- COVID-19 and customers: From March 13 through September 30, weather-normalized residential sales rose 6%, while commercial and industrial sales fell 7%; aggregate usage impact was negative 1%. APS projected that residential and business demand patterns would partly normalize into 2021. The company estimated a $20–$30 million pretax 2020 earnings impact from disconnection moratoria and related bad debt, and a similar incremental impact in 2021 from the summer moratorium and associated bad debt. Customer disconnections and late fees were suspended through December 31, 2020. COVID-related health and safety costs increased nine-month O&M by about $14 million.
- Rate case: APS requested a total $184 million revenue increase, with a typical residential customer bill impact of 5.4%, and sought rates effective December 1, 2020. ACC Staff recommended an $89.7 million increase; RUCO recommended a $20.8 million decrease. The hearing was scheduled to begin December 14, 2020. APS said unfavorable adopted recommendations could materially affect its financial statements; the outcome was uncertain.
- Regulatory and operating exposure: The ACC’s review of the prior rate case and allegations of over-earning remained unresolved. APS also faced uncertainty over cost recovery for the Four Corners SCR project and remaining Navajo Generating Station investment and retirement costs. Environmental rules and coal-ash corrective actions may increase costs; recovery through rates is not assured. Nuclear operations, spent-fuel disposal, weather, wildfire, water and fuel availability, and commodity markets are additional risks.
- Energy transition and planned investment: APS’s stated goals include 65% clean energy by 2030, ending coal-fired generation by 2031, and 100% clean, carbon-free electricity by 2050. Planned APS capital expenditures were $1.263 billion in 2020, $1.650 billion in 2021 and $1.725 billion in 2022, including substantial renewable and storage spending. APS was still evaluating the timing of battery deployments following the 2019 McMicken battery incident.
- Sales and growth assumptions: APS projected customer growth of 1.5%–2.5% annually for 2020–2022 and weather-adjusted retail sales growth averaging 0.5%–1.5% over that period. Management estimated a 1% variation in annual kWh sales could change annual net income by about $20 million under normal conditions. No full-year earnings-per-share guidance is clearly provided in the filing text.
- Dividend and financing: After quarter-end, the board declared a $0.83-per-share dividend payable December 1, 2020, raising the indicated annual dividend from $3.13 to $3.32. Pinnacle West issued $500 million of 1.3% notes; APS issued $600 million of 3.35% notes and $400 million of 2.65% notes, the latter designated to finance or reimburse eligible green expenditures.
Important facts for investors to verify
- Progress and final outcome of APS’s pending rate case, including allowed revenue, return on equity and recovery of major project costs.
- Whether COVID-related customer arrears and bad debt remain within APS’s $20–$30 million pretax impact estimates and how customer sales trends develop.
- Capital spending, long-term debt growth, financing costs and the ability to fund the planned renewable, storage and grid investments.
- Regulatory recovery and potential impairment exposure for Four Corners SCR, Navajo retirement costs and coal-ash remediation.
- Whether clean-energy rules, battery deployment and the stated resource-transition goals can be achieved while maintaining reliability and affordability.