Business Context and Reporting Period
This Form 8-K is a combined current report filed by Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS), on February 20, 2009. The filing reports on financial results for the fiscal quarter ended December 31, 2008, and provides updated earnings guidance for 2009 and 2010. The company operates primarily as a regulated electric utility in Arizona and maintains a real estate subsidiary, SunCor Development Company.
Key Financial Metrics and Outlook
The filing focuses on forward-looking earnings per share (EPS) estimates rather than detailed historical financial statements for the quarter, which are referenced in attached exhibits.
- 2009 Consolidated EPS Outlook: Estimated at approximately $2.30 per share. This excludes the impact of SunCor (including potential future impairments) and assumes no net base rate increase beyond the interim surcharge.
- 2009 APS Contribution: Estimated at approximately $2.35 per share, representing a return on average common equity of about 7%.
- 2009 Holding Company Expenses: Estimated net loss of approximately $0.05 per share.
- 2010 Consolidated EPS Outlook: Estimated at approximately $3.00 per share, assuming the full general retail rate request is granted and effective for the entire year, excluding SunCor impacts.
- 2010 APS Contribution: Estimated at approximately $3.00 per share, representing a return on average common equity of about 9%.
- Historical Impairment: SunCor recorded a $53 million pretax impairment charge in 2008.
Material Changes and Regulatory Developments
Significant regulatory actions and market conditions are driving the company's financial outlook:
- Interim Rate Surcharge: On December 18, 2008, the Arizona Corporation Commission (ACC) approved an emergency interim base rate surcharge effective for bills issued after December 31, 2008. This is expected to increase annual pretax retail revenues by approximately $65.2 million. The surcharge is subject to refund with interest pending the final rate case outcome.
- Pending General Rate Case: APS has a general retail rate case pending, requesting a net overall increase of $278.2 million in annual pretax retail electricity revenues (effective no later than October 1, 2009). This includes $264.3 million in non-fuel base rates and $13.9 million for fuel costs. Settlement discussions began on January 30, 2009.
- Cost Reduction Mandate: The Interim Rate Decision requires APS to target additional cost cuts of at least $20 million and reinvest savings into infrastructure to reduce external debt financing needs.
- Real Estate Market: The outlook for SunCor reflects a weak U.S. real estate market and limited financing availability, contributing to the 2008 impairment charge.
- Rate Case Uncertainty: The ultimate outcome, timing, and effective date of the general retail rate case are unpredictable. Earnings estimates will increase if the final rate increase exceeds the interim surcharge.
- Real Estate Impairments: If economic conditions or the real estate market worsen, or if SunCor's strategy changes, the company may record additional impairment charges beyond the $53 million already recognized.
- Operational and Market Risks: Risks include volatile fuel costs (natural gas, coal, uranium), water supply availability, nuclear facility risks, credit market conditions, and the ability to recover capital expenditures through rates.
- Forward-Looking Statements: The company explicitly states it assumes no obligation to update these estimates except as required by law.
- Verify the final outcome and effective date of the APS general retail rate case before the October 1, 2009 deadline.
- Monitor SunCor Development Company for potential additional impairment charges given the weak real estate market.
- Review the attached exhibits (99.2, 99.6, 99.8) for specific historical revenue, profit, and cash flow figures for the quarter ended December 31, 2008, as they are not detailed in the main text of this 8-K.
- Assess the impact of the $65.2 million interim surcharge on cash flow, noting it is subject to potential refund with interest.
- Track the progress of the mandated $20 million cost reduction study required by the ACC.
Guidance, Risks, and Contingencies
Management's guidance is subject to numerous risks and contingencies: