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 July 30, 2008. The filing reports on financial results and operational updates for the fiscal quarter ended June 30, 2008. The company operates primarily in the electric utility sector in Arizona.
Key Financial Metrics and Guidance
The filing references a press release (Exhibit 99.9) containing detailed financial results, including non-GAAP measures termed "on-going earnings." Specific GAAP revenue, profit, cash flow, or debt figures for the quarter are not explicitly stated in the text of this Form 8-K but are referenced as being contained in the attached exhibits.
- 2008 Earnings Outlook: Management estimates consolidated on-going earnings for 2008 will be approximately $2.50 per share.
- Earnings Composition: APS is expected to contribute substantially all of the 2008 on-going earnings, while SunCor Development Company's contribution is expected to be minimal.
- Exclusions: The 2008 earnings estimate excludes $0.30 per share of tax credits related to prior years that were recorded in the quarter ended June 30, 2008.
- Capital Expenditures: The company plans to reduce capital expenditures by an additional $500 million over the next three years, building on a previously announced $200 million reduction for 2008-2012.
Material Changes and Strategic Actions
The company is implementing a four-component program to improve financial strength and reduce the need for external financing:
- Completion of a cost reduction effort, including the elimination of $200 million in capital expenditures and reductions in operations and maintenance expenses.
- Pursuit of interim rate relief under a general retail rate case pending before the Arizona Corporation Commission (ACC).
- Reduction of at least an additional $500 million in capital expenditures over the next three years, driven by reduced customer growth outlooks and deferrals of large transmission projects.
- Seeking a constructive decision in the pending general retail rate case with the ACC.
Management believes these actions will eliminate the need for a Pinnacle West equity issuance in 2008.
Outlook, Risks, and Contingencies
The earnings guidance provided in this filing supersedes all previous guidance. The outlook is subject to numerous risks, including:
- Regulatory Risks: Outcomes and timing of pending rate cases with the ACC and other regulatory or legislative actions.
- Market Conditions: Fluctuations in fuel prices (natural gas, coal, uranium), volatile market liquidity, and deteriorating counterparty credit.
- Operational Risks: Power plant performance, transmission outages, and weather variations affecting energy usage.
- Economic Factors: Strength of housing and credit markets, which impact customer growth and energy usage.
- Financial Risks: Changes in accounting principles, stock market performance, and interest rate environments affecting pension and decommissioning trust assets.
Management cautions that actual results may differ materially from expectations and assumes no obligation to update forward-looking statements.
Investor Verification Checklist
- Verify the specific GAAP net income and revenue figures for the quarter ended June 30, 2008, in the attached Exhibit 99.9 (Earnings News Release) and Exhibit 99.7 (Earnings Variance Explanations).
- Confirm the status and potential impact of the pending general retail rate case before the Arizona Corporation Commission.
- Review the reconciliation of "on-going earnings" to GAAP net income in Exhibit 99.9 to understand the $0.30 per share tax credit exclusion.
- Monitor the progress of the $500 million capital expenditure reduction plan and its impact on future rate cases.
- Assess the company's liquidity position and credit ratings in light of the stated goal to avoid an equity issuance in 2008.