Pinnacle West Capital Corporation (PNW) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 4, 2022. Pinnacle West is an Arizona electric-utility holding company whose results are driven primarily by regulated subsidiary Arizona Public Service Company (APS), serving approximately 1.3 million retail customers. Unless otherwise noted, financial amounts below are in U.S. dollars and rounded to millions.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenue | $783.5 million | $696.5 million | +12.5% |
| Operating income | $54.5 million | $47.5 million | +14.6% |
| Net income attributable to PNW common shareholders | $17.0 million | $35.6 million | −52.4% |
| Diluted earnings per share | $0.15 | $0.32 | −$0.17 |
| Net cash provided by operating activities | $340.6 million | $202.0 million | +$138.6 million |
| Capital expenditures | $391.6 million | $363.8 million | +$27.8 million |
Revenue growth reflected increased retail sales and usage, customer growth, higher transmission revenue, and lower customer refunds related to the Tax Act. Fuel and purchased-power expense rose to $265.3 million from $198.2 million; depreciation and amortization increased to $186.6 million from $157.8 million. Operations and maintenance expense fell to $218.3 million from $230.1 million. Operating margin, calculated as operating income divided by revenue, was approximately 7.0%, versus 6.8%.
Despite higher revenue and operating income, common-shareholder earnings declined. Management attributed the regulated-segment decrease primarily to higher depreciation and amortization—including the end of regulatory deferrals for the Ocotillo modernization and Four Corners SCR projects—higher income taxes, and lower other income. These were partly offset by stronger customer-driven revenue, transmission revenue, and lower operations and maintenance expense. PNW’s income tax expense was $4.2 million, versus a $4.4 million tax benefit in Q1 2021.
APS reported net income of $28.5 million, compared with $40.2 million; income attributable to its common shareholder was $24.2 million, compared with $35.3 million.
Balance sheet, debt and liquidity
- At March 31, 2022, PNW had total assets of $22.2 billion, cash of $14.0 million, current assets of $1.59 billion and current liabilities of $1.60 billion.
- Long-term debt, including current maturities, was $7.23 billion; short-term borrowings were $263.0 million. PNW repaid a $150 million term loan early in January and received the remaining $300 million under its $450 million term loan facility.
- PNW had no borrowings under its $200 million revolving credit facility and $13 million of commercial paper outstanding. APS had no revolving-credit borrowings and $250 million of commercial paper outstanding against $1 billion of revolving facilities. Management reported ample borrowing capacity.
- Debt-to-capitalization ratios were approximately 56% for PNW and 49% for APS; APS’s ACC-defined common-equity ratio was 51%. Both companies reported compliance with debt covenants.
- Operating cash flow increased to $340.6 million, primarily on higher cash receipts from electric revenues and working-capital changes, partly offset by higher operating and maintenance payments. Investing activities used $374.3 million, chiefly for capital expenditures. Financing activities provided $37.7 million; PNW paid $94.3 million in common dividends.
Material developments, outlook and risks
- Regulatory rates: APS implemented rates under its 2019 rate case effective December 1, 2021. The approved decision resulted in an annual revenue decrease of $4.8 million, excluding temporary Coal Community Transition payments and expenditures. APS expects to file its next general rate case around mid-2022 but was still evaluating timing.
- Four Corners SCR recovery: The ACC allowed approximately $194 million of SCR investment and deferrals in rate base but disallowed $215.5 million. APS is appealing. If the disallowance is upheld, APS estimates an approximately $154.4 million after-tax charge; no impairment was recorded at quarter-end.
- Fuel-cost recovery: APS’s 2022 Power Supply Adjustor rate rose to $0.007544 per kWh, the maximum annual increase under the plan. Approximately $365 million of fuel and purchased-power costs remained above the annual cap for recovery in future resets. An ACC audit found APS’s fuel-processing, dispatching and hedging procedures reasonable, but included recommendations; the final outcome remains uncertain.
- Growth and capital plans: Weather-adjusted retail electricity sales increased 4.4% year over year in Q1, and APS customer count increased 2.2%. Management projected 2022 customer growth of 1.5%–2.5% and sales growth of 1.5%–2.5%; average annual sales growth through 2024 was projected at 3.5%–4.5%, including expected large manufacturing and data-center contributions. APS estimated capital expenditures of $1.525 billion in 2022, $1.525 billion in 2023 and $1.650 billion in 2024.
- Clean-energy commitments: APS’s goals include 65% clean energy by 2030, 45% renewable generation as a share of retail sales by 2030, ending coal-fired generation by 2031, and 100% clean, carbon-free electricity by 2050. Achievement depends on regulatory support, technology, customer growth and capital access. The ACC withdrew its prior clean-energy rule package and opened a new docket on all-source procurement and integrated resource planning.
- Supply chain and inflation: Management reported inflation, tight labor markets and material delays, which had not yet significantly impaired service but could delay projects and increase summer purchased-power costs. The filing warns that failure to recover inflation-driven costs through rates could adversely affect results.
- Commitments and contingencies: Fuel and purchased-power commitments increased by approximately $1.2 billion, primarily from new energy and storage commitments. Executed but not-yet-commenced lease arrangements are expected to require approximately $1.8 billion of fixed payments over their terms. Environmental rules, coal-ash remediation, nuclear operations, potential weather extremes, cybersecurity, counterparty performance and regulatory proceedings remain risks; some costs or outcomes cannot yet be estimated.
Management also cited COVID-19 effects, weather-sensitive demand, volatile fuel and purchased-power costs, power-plant and transmission performance, and timely rate recovery as factors that could affect future results. The filing provides no earnings-per-share guidance.
Important facts for investors to verify
- Progress and outcome of APS’s appeal of the $215.5 million Four Corners SCR disallowance, including potential earnings impact.
- ACC decisions on APS’s next rate case, the 2022 Lost Fixed Cost Recovery filing, the fuel-cost audit recommendations and other cost-recovery mechanisms.
- Whether projected sales and customer growth—especially data-center and manufacturing demand—materialize, and whether inflation or supply-chain delays affect costs and reliability.
- Funding, timing and regulatory approval for planned generation, renewable and storage projects, and the associated $1.525 billion 2022 APS capital-expenditure estimate.
- Debt and liquidity needs as capital spending and new purchase, storage and lease commitments proceed; review the assumptions underlying the reported $1.8 billion future lease payments.