Pinnacle West Capital Corporation (PNW) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Pinnacle West is an Arizona utility holding company whose earnings are primarily generated by regulated subsidiary Arizona Public Service Company (APS), serving approximately 1.4 million retail customers. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless otherwise noted.
Financial performance
| Metric | PNW consolidated | APS consolidated |
|---|---|---|
| Operating revenue | $951.7 million, up 0.7% from $945.0 million | $951.7 million, up 0.7% |
| Operating income | $66.8 million, versus $50.7 million | $70.9 million, versus $54.7 million |
| Net income attributable to common shareholders | $16.9 million ($0.15 diluted EPS), versus a $3.3 million loss (−$0.03 EPS) | $15.1 million, versus $10.7 million |
| Operating cash flow | $347.4 million, versus $211.6 million | $366.0 million, versus $239.6 million |
| Capital expenditures | $517.8 million | $517.8 million |
For PNW, operating margin was approximately 7.0%, compared with 5.4% a year earlier. Revenue less fuel and purchased-power costs rose $44 million to approximately $594 million. Fuel and purchased-power expense declined $36.6 million, while operations and maintenance rose $7.5 million and depreciation and amortization rose $18.4 million. Interest expense, net of construction allowances, increased $11.2 million.
PNW’s improved common-shareholder result included a $23.0 million pretax gain on the final stage of the Bright Canyon Energy (BCE) sale. Management also cited new retail base rates, customer growth and usage, and higher CRS and LFCR revenues as positive factors; higher depreciation, interest, weather effects, and operating costs partly offset them. APS’s results exclude PNW’s BCE gain.
Balance sheet, debt and liquidity
At March 31, 2024, PNW reported total assets of $24.85 billion, long-term debt including current maturities of $8.42 billion, short-term borrowings of $793.5 million, and cash of $9.6 million. APS reported total assets of $24.72 billion, long-term debt including current maturities of $7.29 billion, short-term borrowings of $733.5 million, and cash of $9.5 million. PNW’s and APS’s debt-to-capitalization covenant ratios were approximately 60% and 53%, respectively, below the 65% maximum.
PNW had $60 million of commercial paper outstanding; APS had $384 million, with respective weighted-average rates of 5.47% and 5.42%. Neither had borrowings under its revolving credit facility. APS also drew the full $350 million of a term loan in February 2024, maturing in December 2024. Management stated that both companies had ample borrowing capacity. Their revolving facilities mature in 2028; APS’s facility is $1.25 billion and PNW’s is $200 million.
Operating cash flow exceeded investing cash outflow, but capital expenditures remained substantial. PNW used $424.1 million in investing activities and generated $81.4 million from financing activities; the quarter-end cash increase was $4.7 million. Common dividends paid were $98.1 million. PNW had entered into equity forward sale agreements covering 11.24 million shares, potentially providing $728 million if settled with shares; they were unsettled at quarter-end and could dilute shareholders.
Material changes and regulatory developments
- Retail rates: The ACC’s 2022 rate-case order became effective March 8, 2024. It provides an expected net annual APS revenue increase of approximately $253.4 million and an estimated 8% increase for a typical residential customer. The order also approved changes to cost-recovery mechanisms, including a higher annual PSA adjustment cap.
- Rehearing: In April 2024, the ACC granted limited rehearing on whether the grid access charge for solar customers is just and reasonable. APS cannot predict the outcome.
- Customer and sales growth: APS reported customer growth of 1.8% and weather-adjusted retail electricity sales growth of 5.9% year over year in the quarter. Commercial and industrial demand, including new data centers, supported sales.
- BCE sale: The final sale stage closed January 12, 2024. PNW recognized a $23 million Q1 gain and held $46 million of interest-bearing promissory notes receivable, expected to be paid by August 4, 2024.
Outlook, risks and unusual items
Management projected APS customer growth of 1.5%–2.5% in 2024 and annually through 2026. Weather-adjusted retail sales growth was projected at 2.0%–4.0% for 2024 and 4.0%–6.0% annually through 2026, including anticipated large data-center and manufacturing demand. APS stated that requests from extra-large energy users exceed foreseeable regional generation and transmission capacity and that it was not committing to new projects above 25 MW without existing commitments. The filing text does not provide a specific full-year EPS guidance figure.
APS estimated capital expenditures of $1.95 billion in 2024, $2.00 billion in 2025, and $2.05 billion in 2026. It plans to install more than 2,700 MW of utility-scale energy storage by 2026. Separately, executed but not-yet-commenced energy-storage leases are expected to involve approximately $7.1 billion of fixed payments over their terms; commencement dates have been delayed and are being reassessed.
- Environmental rules finalized by the EPA on April 25, 2024, including requirements concerning coal ash, carbon emissions, wastewater, and air toxics, may raise compliance costs. APS was still assessing their effects; recovery through customer rates is not assured.
- Wildfire, extreme weather, drought, plant and transmission outages, fuel and purchased-power prices, supply-chain constraints, inflation, interest rates, and regulatory outcomes could affect reliability, costs, or earnings. APS has implemented a public safety power shutoff program for the 2024 fire season.
- APS’s clean-energy objectives include 65% clean energy by 2030, exit from coal-fired generation by 2031, and a 2050 goal of 100% clean, carbon-free electricity. Achievement depends on technology, regulatory support, load growth, and access to capital.
- PNW continues to guarantee certain obligations for the Kūpono solar project after selling BCE; the company described the likelihood of payment under construction-related guarantees as remote, but stated maximum obligations could not be reasonably estimated.
- APS faces nuclear-related exposures, including potential retrospective insurance premiums and spent-fuel disposal uncertainty. A specified event under Palo Verde sale-leaseback arrangements could require payments of approximately $334 million beginning in 2024, potentially up to $501 million over lease extensions.
Investor verification priorities
- Separate recurring utility earnings from the $23 million BCE-sale gain and assess how rate-case revenues and higher costs affect subsequent quarters.
- Track implementation and any appeal or rehearing outcomes for the ACC rate order, particularly the solar grid access charge and PSA balance recovery.
- Verify the timing, cost, financing, and regulatory recovery of APS’s capital program and delayed energy-storage commitments.
- Monitor APS’s large-load pipeline against available generation and transmission capacity, and test sales-growth assumptions against actual customer additions and usage.
- Review debt maturities, short-term borrowing levels, credit ratings, and whether PNW settles its equity forwards with shares or cash.
- Follow EPA rule implementation, APS’s estimated compliance costs, and the extent to which those costs can be recovered in rates.