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 June 2, 2008. The filing addresses an update to the 2008 General Rate Case originally submitted to the Arizona Corporation Commission (ACC) on March 24, 2008. The update was requested by the ACC staff to reflect a test year ended December 31, 2007, rather than the September 30, 2007 test year used in the initial filing.
Key Financial Metrics and Rate Request
APS is requesting a net rate increase of $278.2 million for retail customers, effective no later than October 1, 2009. This represents an average rate increase of 8.5% for existing customers, plus a new growth-related impact fee for new connections. Key financial provisions of the updated request include:
- Rate Base: $5.4 billion (approximating the ACC-jurisdictional portion of book value of utility assets as of December 31, 2007).
- Non-Fuel Base Rates: Requested increase of $264.3 million.
- Fuel and Purchased Power Costs: Net increase of $13.9 million reflected in base rates, with recovery of up to $53 million through the impact fee.
- Base Fuel Rate: Proposed at $0.0388 per kilowatt-hour (kWh) based on estimated 2010 prices, up from the current $0.0325 per kWh.
- Attrition Adjustment: $79.3 million to address earnings erosion through 2010.
Proposed Capital Structure and Costs of Capital:
| Capital Structure | Cost of Capital |
|---|---|
| Long-term debt (46.2%) | 5.77% |
| Common stock equity (53.8%) | 11.50% |
| Weighted-average cost of capital | 8.86% |
Material Changes Versus Prior Period
The primary material change is the increase in the requested net rate increase from $265.5 million in the original March 24, 2008 filing to $278.2 million in this updated filing. This adjustment results from the change in the test year to December 31, 2007, and includes the reclassification of $170.0 million of fuel and purchased power revenues from the power supply adjustor to base rates. The filing also introduces a new growth-related impact fee charged to new connections, which was not part of the original request structure.
Guidance, Outlook, and Risks
Management Goals: The update requests that the ACC adopt goals to improve APS's financial strength, specifically allowing internal cash flow generation to cover operating and capital costs, stabilizing and improving credit ratings, and providing a reasonable return on the fair value of property.
Risks and Contingencies: The filing contains extensive forward-looking statements cautioning that actual results may differ materially from expectations. Key risks include:
- Regulatory and legislative decisions regarding the rate case and industry restructuring.
- Fluctuations in market prices for electricity, natural gas, coal, and uranium.
- Volatile market liquidity and counterparty credit risks related to derivative contracts.
- Power plant performance, outages, and transmission constraints.
- Weather variations and regional economic conditions affecting customer growth.
- Changes in accounting principles and the performance of the stock market affecting pension and decommissioning trust assets.
Important Facts for Investor Verification
- Verify the final outcome of the ACC's review of the updated $278.2 million rate increase request.
- Monitor the implementation timeline for the new growth-related impact fee and the 8.5% average rate increase.
- Track the company's ability to achieve the proposed 11.50% return on equity and 8.86% weighted-average cost of capital.
- Assess the impact of the $170.0 million reclassification of fuel revenues on future cash flow volatility.
- Review subsequent filings for updates on credit rating stability and internal cash flow coverage of capital costs.