Pinnacle West Capital Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Pinnacle West is a holding company whose results are generated primarily by regulated Arizona Public Service Company (APS), an electric utility serving most of Arizona. Amounts below are in U.S. dollars; financial-statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $1,190.8 | $1,268.0 | $2,800.8 | $2,934.9 |
| Operating income | $403.3 | $433.3 | $660.0 | $706.8 |
| Net income attributable to common shareholders | $312.3 | $315.0 | $474.3 | $485.0 |
| Diluted earnings per share | $2.77 | $2.80 | $4.21 | $4.31 |
| Operating cash flow | Not presented separately | Not presented separately | $834.8 | $959.8 |
| Capital expenditures | Not presented separately | Not presented separately | $857.9 | $898.5 |
Q3 revenue declined about 6% year over year and common-shareholder net income declined about 1%. For the first nine months, revenue fell about 5%, operating income about 7%, and common-shareholder net income about 2%. APS reported nine-month net income of $511.9 million, versus $540.4 million in 2018.
For the nine-month period, the company attributed the decline in operating revenue less fuel and purchased-power costs primarily to tax-related customer refunds, weather, lower renewable-energy surcharges and transmission revenue. Lower operations and maintenance expense partly offset these pressures. Income-tax expense also decreased, mainly due to amortization of excess deferred taxes and lower pretax income. Management noted weaker pension and postretirement non-service credits, primarily reflecting lower market returns.
Balance sheet, debt and liquidity
- At September 30, 2019, Pinnacle West reported cash of $29.9 million, total assets of $18.38 billion and equity of $5.68 billion. Cash was $5.8 million at December 31, 2018.
- Consolidated balance-sheet debt included $57.4 million of short-term borrowings, $450 million of current maturities and $4.985 billion of long-term debt. The reported debt-to-capitalization covenant ratio was approximately 50% for Pinnacle West and 46% for APS; the covenant limit is 65%.
- APS had $1 billion of revolving credit facilities, with no facility borrowings or letters of credit outstanding at quarter-end and $3 million of commercial paper outstanding. Pinnacle West had a $200 million revolving facility, no facility borrowings or letters of credit, and $13 million of commercial paper outstanding. The filing describes available borrowing capacity as ample.
- Nine-month operating cash flow fell $125 million to $834.8 million, primarily due to lower cash receipts from electric revenues and higher pension contributions. Capital expenditures remained substantial; management estimated APS capital expenditures of $1.24 billion in 2019, $1.33 billion in 2020 and $1.47 billion in 2021.
- APS issued $300 million of 4.25% senior notes due 2049 and $300 million of 2.6% senior notes due 2029; it also repaid $500 million of 8.75% notes at maturity. Pinnacle West reported $41 million outstanding under a term loan maturing May 2020.
Material developments, outlook and risks
- Rate case: After quarter-end, APS filed a retail rate case on October 31, 2019, requesting a $184 million total annual revenue increase and an average customer bill increase of 5.6% (5.4% for a typical residential customer), with requested rates effective December 1, 2020. The filing includes a $69 million base-rate increase and a net credit of about $115 million, primarily reflecting tax refunds shifted into base rates. The outcome is uncertain.
- Customer disconnection moratorium: APS estimated an approximately $10 million pretax negative impact on 2019 results from the Arizona residential disconnection moratorium; impacts beyond 2019 remained under assessment.
- Generation and environmental matters: The Navajo Generating Station was scheduled to cease operations by December 2019. APS intends to seek recovery of its remaining $80 million book investment and other closure costs, which may be material. Four Corners selective catalytic reduction cost recovery remained pending; an unfavorable decision could result in a charge. Coal-ash compliance, environmental regulation and potential coal-plant retirement also create cost and recovery uncertainty.
- Storage project: A battery module at APS’s McMicken facility failed in April 2019. APS was reassessing the timing and implementation of planned battery projects, including a previously contracted 141 MW deployment. The company continued to target at least 850 MW of energy storage by 2025, subject to the investigation and regulatory recovery.
- Sales and customer outlook: Weather-adjusted retail sales increased 0.5% and customers grew 1.9% in the first nine months. Management projected customer growth of 1.5%–2.5% annually in 2019 and on average through 2021, and weather-adjusted sales growth of 0%–1% in 2019 and 1%–2% on average through 2021. The sales outlook excludes potential effects of several large data centers, whose demand remained uncertain.
- Dividend and leadership: The board declared a quarterly dividend of $0.7825 per share, payable December 2, 2019, and raised the indicated annual dividend from $2.95 to $3.13 per share. Effective November 15, 2019, Jeffrey Guldner was to become CEO of Pinnacle West and APS; outgoing CEO Donald Brandt was to provide consulting services for up to $1.75 million over 12 months.
- Other risks: Results are sensitive to weather, customer usage and growth, fuel and purchased-power costs, plant performance, regulatory rate recovery, environmental requirements, interest rates, capital-market access and counterparty performance. The filing also describes regulatory proceedings, lawsuits and other contingencies; their outcomes are not generally predictable.
Investor verification priorities
- Track the ACC’s review and eventual decision on APS’s October 2019 rate case, including the requested revenue increase, customer bill impacts and timing.
- Confirm the actual financial effects of the disconnection moratorium, tax-refund mechanisms and excess-deferred-tax amortization.
- Monitor recovery of Four Corners SCR costs and Navajo Plant investment and closure costs, alongside coal-ash compliance estimates and related regulatory decisions.
- Assess whether operating cash flow, planned capital spending, pension contributions and debt issuance support liquidity and the increased dividend.
- Follow the McMicken investigation and any resulting changes to APS’s battery procurement, project schedule and 2025 storage target.
- Compare realized customer growth, weather-adjusted electricity sales and large-customer demand with management’s stated outlook.