Pinnacle West Capital Corporation — FY 2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed February 24, 2021. This is an annual report, not a standalone fourth-quarter report. Pinnacle West is a holding company whose results are driven primarily by Arizona Public Service Company (APS), its regulated electric utility serving approximately 1.3 million customers in Arizona.
Financial performance and position
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Operating revenue | $3.587 billion | $3.471 billion | +3.3% |
| Operating income | $788 million | $672 million | +$116 million |
| Net income attributable to common shareholders | $551 million | $538 million | +2.3% |
| Diluted EPS | $4.87 | $4.77 | +$0.10 |
| Cash from operating activities | $966 million | $957 million | +$10 million |
| Capital expenditures | $1.327 billion | $1.191 billion | +$135 million |
Operating income margin was approximately 22.0% of revenue, versus 19.4% in 2019; net income attributable to common shareholders was approximately 15.4% of revenue, versus 15.5%. Cash from operations less capital expenditures was approximately negative $360 million. Pinnacle West ended the year with $60 million cash, $6.314 billion long-term debt and $169 million short-term borrowings. Debt to capitalization was approximately 54% for Pinnacle West and 49% for APS, below the 65% covenant limit. Available credit facilities were $1.062 billion in total, including $1.0 billion at APS.
APS reported net income attributable to its common shareholder of $568 million, compared with $565 million in 2019. APS’s operating cash flow was $929 million and capital expenditures were $1.327 billion. Its year-end long-term debt was $5.818 billion; common equity ratio under the ACC financing order was 51%, against a 40% minimum. Pinnacle West paid $3.18 per share in dividends during 2020 and raised its indicated annual dividend to $3.32 per share.
Changes versus 2019
- Higher revenue less fuel and purchased-power costs added $164 million, driven chiefly by hotter-than-normal weather (+$125 million net) and lower customer refunds related to the Tax Act (+$85 million). Lower fuel and purchased-power costs, customer growth and other items partly offset sales and transmission revenue pressures.
- Higher operating costs included increased COVID-related, employee-benefit, bad-debt and information-technology expenses. Depreciation and amortization rose $23 million; interest expense rose $12 million.
- Net income growth was partly offset by higher income taxes, including lower amortization of excess deferred taxes, and lower other income after contributions and other expenses.
- Retail customers grew 2.3%; weather-normalized retail electricity sales increased 1.4%. During the pandemic period from March 13 through year-end, residential weather-normalized sales rose 5%, commercial and industrial sales fell 4%, and total usage increased about 1%.
Outlook, regulatory matters and risks
- Management projects customer growth of 1.5%–2.5% annually and weather-normalized retail sales growth of 0.5%–1.5% in 2021, averaging 1.0%–2.0% annually over 2021–2023. Estimates include some, but not all, anticipated data-center contributions. A 1% sales variance may change annual net income by about $20 million; typical weather variation may affect income by up to $15 million, with extreme variations exceeding $25 million.
- APS forecasts $1.5 billion of capital expenditures annually in 2021–2023. Management expects to fund investment with operating cash and external debt or equity financing.
- APS’s retail rate case remained unresolved at filing. APS sought a $184 million annual revenue increase in its initial application and later proposed a $169 million increase; ACC Staff recommended an $89.7 million increase, while RUCO recommended a $20.8 million decrease. The hearing began in January 2021; the outcome could materially affect APS’s results and cost recovery.
- APS’s Clean Energy Commitment targets 65% clean energy by 2030, including 45% renewables, ending coal-fired generation by 2031, and 100% clean, carbon-free electricity by 2050. At year-end, 50% of APS’s energy supply was from clean resources. APS plans at least 850 MW of energy storage by 2025; execution, permitting, affordability, reliability and regulatory approval remain important dependencies.
- APS recorded a $25 million coal-community transition contribution in 2020. A proposed transition plan and customer funding components remained subject to ACC review. Cholla Unit 4 retired in December 2020; APS plans to cease coal use at its remaining Cholla units by April 2025 and at Four Corners by 2031. Recovery of retired-plant balances remains dependent on regulatory outcomes.
- COVID-19 increased bad-debt expense and operating costs. The suspension of customer disconnections and the summer disconnection moratorium reduced 2020 operating results by approximately $23 million pretax; management estimated a further $20–$30 million pretax impact in 2021. APS resumed disconnections in January 2021 with payment arrangements for certain customers.
- On February 22, 2021, APS agreed to pay $24.75 million to settle an Arizona Attorney General matter; $24 million is customer restitution. The filing also reports a $24 million reduction to 2020 residential revenue related to the matter.
- Key risks include timely recovery of costs through regulated rates, environmental and coal-ash compliance costs, climate and wildfire exposure, drought and water availability, nuclear operating and spent-fuel risks, generation reliability, cybersecurity, customer bad debt, and access to capital. The auditor identified regulatory accounting and future rate decisions as a critical audit matter.
Important facts for investors to verify
- Track the ACC decision in APS’s rate case, including allowed revenue, return on equity, plant-cost recovery and treatment of the proposed clean-energy recovery mechanism.
- Confirm the timing and accounting treatment of the $24.75 million Attorney General settlement and any additional ACC action.
- Monitor customer arrears, bad-debt expense and the actual 2021 effects of disconnection policies and COVID-19 recovery.
- Assess whether planned $1.5 billion annual capital spending and clean-energy/storage commitments can be financed while maintaining credit metrics and dividend capacity.
- Review coal retirement, CCR corrective-action estimates, regulatory-asset recovery and water, environmental and nuclear contingencies as new decisions or cost estimates emerge.