Pinnacle West Capital Corporation — FY2022 Form 10-K
Business context and reporting period. This combined filing covers Pinnacle West and its principal subsidiary, Arizona Public Service Company (APS), for the fiscal year ended December 31, 2022; it is an annual report, not a standalone fourth-quarter report. Pinnacle West is a holding company whose earnings are derived essentially entirely from APS, a regulated electric utility serving approximately 1.3 million Arizona customers.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Operating revenue | $4.324 billion | $3.804 billion |
| Operating income | $732 million | $805 million |
| Net income attributable to common shareholders | $484 million | $619 million |
| Diluted EPS | $4.26 | $5.47 |
| Cash from operations | $1.242 billion | $860 million |
| Capital expenditures | $1.707 billion | $1.473 billion |
- Revenue rose 13.7%, while common-shareholder net income fell 21.8%. Fuel and purchased-power expense increased $477 million to $1.629 billion; depreciation and amortization rose $102 million to $753 million, and interest expense increased.
- Operating margin was approximately 16.9% of revenue, versus 21.2% in 2021; net margin was approximately 11.2%, versus 16.3%. These percentages are calculated from reported figures.
- Operating cash flow increased primarily on higher customer cash receipts, lower O&M payments and pension contributions, partly offset by higher fuel and purchased-power costs. Capital expenditures exceeded operating cash flow by approximately $466 million.
- At year-end, Pinnacle West reported $7.741 billion of long-term debt excluding current maturities and $341 million of short-term borrowings. APS reported $6.794 billion and $325 million, respectively. Pinnacle West’s debt-to-capitalization ratio was approximately 58%; APS’s was approximately 51%. Credit-rating outlooks were negative across Moody’s, S&P and Fitch.
- Pinnacle West had $1.2 billion of committed revolving credit facilities, with approximately $859 million available. Year-end cash was $4.8 million. APS’s common-equity ratio under the ACC definition was 50%, above its 40% minimum.
- Regulatory assets were $1.822 billion and regulatory liabilities $2.333 billion at year-end. Pinnacle West paid $3.42 per share in dividends during 2022 and increased its indicated annual dividend to $3.46 per share.
Material changes, outlook and commentary
- APS’s weather-adjusted retail electricity sales increased 2.4% in 2022 and its customer count grew 2.1%. Management projected weather-adjusted sales growth of 3.5%–5.5% in 2023 and average annual growth of 4.5%–6.5% through 2025, driven in part by data centers and manufacturing. Projected customer growth was 1.5%–2.5% annually through 2025.
- APS filed a 2022 rate case seeking a net $460 million increase in annual retail base rates, with a stated average customer bill impact of 13.6%. It requested rates effective December 1, 2023; hearings were scheduled for August 2023. The outcome was uncertain.
- Fuel costs remained a significant customer-recovery and cash-flow issue. The PSA balancing account was approximately $456 million under-collected as of October 31, 2022. In February 2023, the ACC approved a $0.019074/kWh PSA rate effective with the first March billing cycle, intended to bring the balance close to zero over 24 months.
- A continuing appeal concerns the ACC’s $215.5 million disallowance of Four Corners selective catalytic reduction investments and deferrals. If upheld, APS estimated an after-tax charge of approximately $154.4 million; no impairment had been recorded at year-end.
- Pinnacle West recorded a $12.8 million after-tax impairment in 2022, writing its Clear Creek wind investment from $17.1 million to zero amid persistent transmission curtailment and unresolved disputes.
- Management cited Phoenix inflation of 9.5% in 2022, supply-chain and labor pressures, and equipment price increases. APS said these had caused delays but had not materially impaired service; continued delays could raise purchased-power costs.
- APS’s clean-energy commitments are 65% clean energy, including 45% renewables, by 2030; an end to coal-fired generation by 2031; and a 100% clean, carbon-free electricity goal by 2050. It planned more than 1,200 MW of energy storage by 2025. These targets depend on regulatory support, technology, supply chains, load growth and capital access.
- Key risks include cost recovery and rate-case outcomes, extreme heat and drought, water availability, generation reliability, environmental compliance and coal retirement costs, wildfire exposure, cybersecurity, rising financing costs and execution of substantial capital programs. APS reported adequate current operating water supplies despite a Tier 2a Colorado River shortage declaration.
- Management projected APS capital expenditures of $1.67 billion in 2023, $1.80 billion in 2024 and $1.85 billion in 2025. The filing does not provide a clear formal earnings or EPS guidance range.
Important facts for investors to verify
- Track the ACC’s decisions in APS’s rate case and the timing and amount of any approved rate relief.
- Confirm PSA collections, the pace of recovery of the accumulated fuel balance, and any resulting customer affordability or bad-debt effects.
- Monitor the Four Corners SCR appeal and potential after-tax charge of approximately $154 million if the disallowance stands.
- Assess whether load-growth projections materialize and whether APS can deliver planned generation, storage and grid investments on schedule and within budget.
- Review debt maturities, borrowing costs, negative rating outlooks, liquidity availability and regulatory restrictions on APS distributions to Pinnacle West.
- Follow coal-plant retirement, coal-ash compliance, PFAS investigation and other environmental matters; some eventual costs remain unestimable in the filing.
Audit and controls: Deloitte & Touche issued unqualified opinions on both companies’ financial statements and internal control over financial reporting. Regulatory accounting was identified as a critical audit matter because recovery of costs and potential customer refunds depend on future regulatory decisions.