Pinnacle West Capital Corporation (PNW) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Pinnacle West is an Arizona electric utility holding company; substantially all revenue and earnings come from regulated subsidiary Arizona Public Service Company (APS), serving approximately 1.3 million customers. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The filing was signed August 5, 2021.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $1,000.2 | $929.6 | $1,696.7 | $1,591.5 |
| Operating income | $278.4 | $261.9 | $325.9 | $302.3 |
| Net income attributable to PNW common shareholders | $215.7 | $193.6 | $251.3 | $223.6 |
| Diluted EPS | $1.91 | $1.71 | $2.22 | $1.98 |
| Operating cash flow | Not separately provided | Not separately provided | $312.4 | $369.0 |
| Capital expenditures | Not separately provided | Not separately provided | $681.1 | $677.0 |
- Q2 revenue rose about 7.6% and six-month revenue about 6.6%; common-shareholder net income increased about 11.4% and 12.4%, respectively. Management attributed earnings growth principally to customer growth and usage, weather, higher pension and postretirement non-service credits, and, for the half year, lower Tax Act-related refunds. Higher operating costs, depreciation and income taxes partly offset gains.
- Six-month operating cash flow fell $56.7 million year over year, primarily reflecting higher fuel and purchased-power costs and operations and maintenance payments, partly offset by higher revenue receipts and working-capital changes. Investing cash use was $649.6 million. Cash declined $45.8 million to $14.1 million at June 30.
- At June 30, PNW reported $6.466 billion of long-term debt including current maturities, $504.7 million of short-term borrowings, and $5.835 billion of total equity. APS separately reported $5.819 billion of long-term debt and $495 million of short-term commercial paper. PNW’s current assets were $1.523 billion against current liabilities of $2.023 billion.
- PNW and APS had $200 million and $1 billion of revolving credit facilities, respectively, maturing in 2026; neither had drawn on these facilities at quarter-end. Commercial paper outstanding was $9.7 million at PNW and $495 million at APS. Debt-to-capitalization covenant ratios were approximately 55% and 50%, respectively, versus a 65% maximum.
- Operating margin, calculated as operating income divided by revenue, was 27.8% in Q2 2021 versus 28.2% in Q2 2020; for the first half it was 19.2% versus 19.0%.
Material changes and business developments
- Retail customer counts grew 2.2% year over year in the first half; weather-adjusted retail kWh sales increased 3.3%. Commercial and industrial sales returned to pre-pandemic levels beginning in May, while residential demand remained elevated.
- The deferred fuel and purchased-power regulatory asset increased to $300.9 million from $175.8 million at year-end 2020. APS implemented half of a PSA rate increase in April 2021 and planned the remaining increase for November; $215.9 million of fuel and purchased-power costs remained above the annual rate cap for future resets.
- APS replaced its revolving credit facilities with $1 billion of facilities maturing in 2026. PNW replaced its $200 million facility with a new facility on similar terms. Both new agreements include sustainability-linked pricing provisions.
- PNW’s quarterly dividend was $0.83 per share, declared for payment September 1, 2021. APS capital expenditures were estimated at $1.5 billion annually for 2021–2023.
Outlook, regulatory matters, and risks
- Management projected annual customer growth of 1.5%–2.5% and weather-adjusted retail sales growth of 1.0%–2.0% for 2021 and, as described in the filing, for 2021–2023. These estimates exclude potential sales from several large manufacturing facilities. A 1% variation in annual sales projections could change annual net income by approximately $20 million; typical weather variation could affect annual net income by up to $15 million, with extreme variations historically exceeding $25 million.
- APS estimated that COVID-19 effects, the summer disconnection moratorium and associated bad debt would reduce 2021 operating results by approximately $20 million–$30 million pretax, compared with years without those impacts. Late fees were to remain waived through October 15, 2021. Management also cited ongoing uncertainty from pandemic effects, weather, fuel and purchased-power prices, operations, and customer collections.
- Major rate-case uncertainty: On August 2, 2021, after quarter-end, an administrative law judge recommended a $111 million annual base-revenue decrease in APS’s pending rate case, a 9.16% return on original-cost rate base, and non-recovery of Four Corners SCR project costs. This was a recommendation, not a final ACC order. APS said it expected to challenge the SCR recommendation. The filing states that adoption could result in a material loss; as of June 30, the SCR deferral balance was approximately $75 million net of deferred taxes and SCR plant investment approximately $320 million net of deferred taxes. No write-off was recorded, and the ultimate outcome and loss amount were not predictable.
- Other rate-case recommendations included recovery of Ocotillo modernization costs and a 15% disallowance of annual amortization of the Navajo Plant regulatory asset. The ACC had not issued a final decision. The rate case also addressed a proposed coal-community transition plan.
- APS settled an Arizona Attorney General matter concerning its rate-plan comparison tool for $24.75 million, including $24 million for customer restitution. The company reported the settlement and customer refunds did not materially affect its financial statements; possible further ACC action remained uncertain.
- Clean-energy goals include 65% clean energy by 2030, with 45% of the generation portfolio from renewables, ending APS coal-fired generation by 2031, and a 2050 aspiration for 100% clean, carbon-free electricity. Achievement depends on regulatory support, technology, growth and access to capital. Seasonal operation of Four Corners was planned to begin in fall 2023, subject to approvals.
- Key risks include regulatory and rate recovery outcomes, environmental compliance and potential coal-plant impairments, extreme weather and wildfire, power-plant outages, nuclear operations and spent-fuel disposal, commodity prices, counterparty credit, capital-market access, and COVID-19-related demand, costs and collections. The filing also discloses potential nuclear-insurance retrospective assessments and contingent collateral requirements.
Important facts for investors to verify
- Track the ACC’s final decision on the 2019 rate case, especially the proposed revenue decrease, allowed returns, Four Corners SCR cost recovery, and Navajo Plant treatment.
- Assess APS’s ability to recover fuel and purchased-power deferrals and the effects of the PSA rate changes and procurement audit.
- Monitor bad-debt expense, customer collections, and the stated $20 million–$30 million pretax 2021 COVID-19 and disconnection-moratorium impact.
- Compare operating cash flow with the $1.5 billion annual capital program, debt needs, dividends and available liquidity.
- Confirm progress, approvals, costs and reliability implications for clean-energy, storage, coal-transition and seasonal Four Corners plans.