Business context and reporting period
Pinnacle West Capital Corporation (PNW) is an Arizona electric-utility holding company whose results are generated primarily by regulated subsidiary Arizona Public Service Company (APS), serving approximately 1.3 million retail customers. This combined Form 10-Q reports the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in millions of dollars unless stated otherwise.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $1,308.3 | $1,254.5 | $3,005.0 | $2,846.0 |
| Operating income | $429.4 | $455.0 | $755.3 | $757.3 |
| Net income attributable to PNW common shareholders | $339.8 | $346.4 | $591.1 | $570.0 |
| Diluted EPS | $3.00 | $3.07 | $5.22 | $5.05 |
| Operating margin, calculated | 32.8% | 36.3% | 25.1% | 26.6% |
Q3 revenue increased 4.3%, while operating income fell 5.6% and diluted EPS declined. For the first nine months, revenue rose 5.6%, operating income was nearly flat, and net income attributable to common shareholders increased 3.7%.
- Operating drivers: Fuel and purchased-power expense rose to $427.5 million in Q3 from $353.2 million, and to $895.5 million year to date from $780.1 million. Management attributed Q3 results primarily to weather-related revenue weakness and higher depreciation, partly offset by customer usage and growth, transmission revenue, and higher pension and postretirement credits. Year-to-date earnings benefited from customer growth and usage, transmission revenue, pension credits, and lower tax-related customer refunds; higher O&M, depreciation, and income taxes offset some of the gains.
- Cash flow and investment: Nine-month operating cash flow was $660.5 million versus $772.0 million. Capital expenditures were $1,006.4 million versus $971.1 million; net cash used in investing was $962.3 million. PNW cash declined to $25.7 million from $60.0 million at year-end 2020. Common dividends paid were $275.3 million.
- Debt and liquidity: At September 30, PNW had $6.913 billion of long-term debt, including current maturities, plus $125 million of short-term borrowings; APS had $6.266 billion of long-term debt and $125 million of commercial paper. APS issued $450 million of 2.2% senior notes due 2031. PNW reported a $200 million revolving facility and APS $1 billion of revolving facilities, with no facility borrowings outstanding; APS had $125 million of commercial paper. Debt-to-capitalization ratios were 54% for PNW and 49% for APS, within the 65% covenant limit.
- Balance sheet and regulatory balances: PNW total assets were $21.536 billion. Deferred fuel and purchased-power regulatory assets rose to $375.2 million from $175.8 million at year-end, reflecting costs deferred for future rate treatment. The filing reports APS common equity at 51% of capitalization under the ACC definition.
Material changes, outlook, and risks
- Rate case and SCR recovery: After quarter-end, on November 2, 2021, the ACC approved APS’s amended 2019 rate-case order. It sets an annual revenue decrease of $4.8 million, excluding temporary coal-community payments, and an 8.70% return on equity. The order allows recovery of most Four Corners SCR costs but disallows $215.5 million. APS intends to challenge the disallowance; if upheld, a charge of up to $215.5 million may be required. No impairment was recorded as of September 30.
- Sales and capital plans: Management projected weather-normalized retail sales growth of 3.0%–4.0% for 2021 and average annual growth of 3.5%–4.5% through 2024, and customer growth of 1.5%–2.5% annually through 2024. Estimated APS capital expenditures were $1.5 billion in 2021, $1.525 billion in each of 2022 and 2023, and $1.65 billion in 2024. These projections depend on customer growth, economic activity, data-center and manufacturing demand, conservation, and distributed generation.
- Clean-energy strategy: APS targets 65% clean energy by 2030, including 45% renewables, 100% clean, carbon-free electricity by 2050, and ending coal-fired generation by 2031. These targets depend on technology, regulatory support, affordability, and access to capital. APS plans at least 850 MW of energy storage by 2025. The filing also reports approximately $695 million of increased purchased-power and energy-storage commitments, mostly for 2026 and later.
- Customer and operating risks: APS estimated COVID-related disconnection moratorium and bad-debt effects could reduce 2021 operating results by $15–$25 million pretax beyond normal impacts. Supply-chain delays, extreme heat and weather, generation and transmission performance, fuel costs, and customer collections remain risks. A fuel and purchased-power procurement audit ordered by the ACC was underway; its outcome is uncertain.
- Credit and contingencies: Fitch downgraded PNW and APS issuer ratings on October 12, 2021; PNW’s issuer rating became BBB+ and APS’s BBB+, both with negative outlooks. Management said liquidity was adequate. Other material exposures include environmental compliance and coal-plant retirement costs, nuclear-related obligations, and regulatory recovery uncertainty. APS settled an Arizona Attorney General matter for $24.75 million, approximately $24 million of which was returned to customers.
Important facts for investors to verify
- Track the effect and implementation of the ACC rate-case order, including APS’s rehearing or appeal and the potential $215.5 million SCR disallowance.
- Assess whether projected sales growth, customer growth, and large-customer demand support the capital plan and clean-energy commitments.
- Monitor deferred fuel balances, PSA recovery timing, fuel costs, customer bad debt, and the results of the ACC procurement audit.
- Review debt maturities, credit-rating outlooks, access to revolving facilities, and the effect of planned capital spending on cash flow and dividends.
- Evaluate environmental, coal-retirement, nuclear, cybersecurity, and supply-chain risks, including the extent of recoverability through customer rates.