Business Context and Reporting Period
This Form 8-K is a joint filing by Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS), dated March 24, 2008. The report details a significant regulatory event: APS filed a request with the Arizona Corporation Commission (ACC) for a general rate increase effective no later than July 1, 2009.
Key Financial Metrics and Rate Case Details
The filing focuses on the proposed 2008 General Rate Case rather than historical financial performance. Key proposed metrics include:
- Net Rate Increase Request: $265.5 million for retail customers.
- Average Rate Increase: 8.1% for existing customers.
- Rate Base: $5.3 billion (approximating ACC-jurisdictional book value of utility assets as of September 30, 2007).
- Base Rate Components: $252.6 million increase in non-fuel base rates and a $12.9 million net increase for fuel and purchased power costs.
- Impact Fee: Up to $53 million of increases to be recovered through a new growth-related impact fee for new connections.
- Base Fuel Rate: Proposed at $0.0366 per kWh (up from $0.0325 per kWh).
- Proposed Capital Structure: 45.9% Long-term debt and 54.1% Common stock equity.
- Cost of Capital: 5.77% for debt, 11.50% for equity, resulting in a weighted-average cost of capital of 8.87%.
Material Changes and Strategic Adjustments
The filing outlines several material changes to rate structures and regulatory mechanisms:
- Asset Inclusions: The rate base includes Units 5 and 6 of the Yucca Power Plant, steam generator replacements at Palo Verde Unit 3, and environmental upgrades to coal plants.
- Revenue Reclassification: $106.2 million of fuel and purchased power revenues are being reclassified from the Power Supply Adjustor (PSA) to base rates.
- Rate Design: Introduction of a new super-peak residential time-of-use rate and a commercial/industrial critical peak pricing proposal.
- Regulatory Modifications: Requests to modify the Environmental Improvement Surcharge (EIS) and Demand Side Management Adjustment Clause (DSMAC) to support conservation and environmental upgrades.
Outlook, Risks, and Management Commentary
APS expects the ACC to issue a procedural schedule within the next several months. The filing includes extensive forward-looking statements cautioning that actual results may differ materially from expectations. Key risks identified include:
- Regulatory and legislative decisions regarding the rate case outcome and timing.
- Restructuring of the electric industry and the introduction of retail competition in Arizona.
- Volatile market prices for electricity and natural gas.
- Counterparty credit deterioration and the use of derivative contracts.
- Power plant performance, transmission outages, and weather variations.
- Changes in accounting principles and the performance of the stock market affecting pension and decommissioning trust assets.
Investor Verification Checklist
- Verify the final outcome and effective date of the rate case with the Arizona Corporation Commission.
- Monitor the procedural schedule issued by the ACC for the rate case timeline.
- Assess the impact of the proposed 8.1% rate increase on customer growth and demand.
- Review the status of the Yucca Power Plant Units 5 and 6 and Palo Verde Unit 3 upgrades included in the rate base.
- Track changes in fuel and purchased power costs relative to the proposed Base Fuel Rate of $0.0366 per kWh.