Pinnacle West Capital Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The combined filing covers Pinnacle West and its principal regulated utility subsidiary, Arizona Public Service Company (APS). Pinnacle West derives essentially all its revenue and earnings from APS.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenue | $661.9 million | $740.5 million; down 10.6% |
| Operating income | $40.4 million | $60.1 million; down 32.7% |
| Net income attributable to Pinnacle West common shareholders | $30.0 million; diluted EPS $0.27 | $17.9 million; diluted EPS $0.16 |
| Net cash from operating activities | $183.6 million | $173.4 million |
| Capital expenditures | $340.0 million | $259.8 million |
| Cash and cash equivalents at March 31 | $63.1 million | $10.3 million at December 31, 2019 |
| Total debt, carrying value | $5.48 billion | $5.63 billion at December 31, 2019 |
Margins: Calculated operating margin was approximately 6.1%, versus 8.1% a year earlier. Net income attributable to common shareholders was approximately 4.5% of revenue, versus 2.4%. These are calculated from reported figures, not separately reported measures.
Pinnacle West reported $341.2 million of net investing cash outflow and $210.4 million of net financing cash inflow. Its current liabilities were $2.30 billion against current assets of $1.08 billion at quarter-end. Short-term borrowings were $563 million for Pinnacle West and $430 million for APS. APS reported $5.03 billion of total debt carrying value and $53.4 million of cash. Debt-to-capitalization covenant ratios were 53% for Pinnacle West and 48% for APS, below the 65% maximum.
Changes versus the prior period
- Revenue declined by $78.6 million, reflecting lower customer revenue and wholesale energy sales, among other factors. Revenue less fuel and purchased-power expense fell by $37 million.
- Lower operations and maintenance expense contributed $24 million to year-over-year earnings improvement; higher pension and postretirement non-service credits contributed another $9 million.
- Income taxes were $22 million lower, primarily reflecting amortization of excess deferred taxes. This benefit more than offset weaker operating income and helped lift reported common earnings.
- APS retail customers increased 2.2%, and weather-adjusted retail electricity sales increased 0.8%. Milder weather and customer tax-related bill credits weighed on revenue.
- Operating cash flow increased $11 million, while capital spending rose about $80 million. Cash flow from operations did not cover capital expenditures in the quarter.
Outlook, management commentary and risks
- COVID-19: APS estimated a $20–$30 million pre-tax adverse 2020 operating-results impact from summer and pandemic-related disconnection suspensions and associated bad debt expense. The estimate depends on customer behavior, economic conditions and the pandemic not extending into 2021. APS suspended nonpayment disconnections beginning March 13 and waived late fees. Management said COVID-19 had not materially affected Q1 results.
- Management stated that if the effects experienced from March 13 through April 30 continued through the end of Q2, weather-normalized retail electricity sales would be about 7% lower than Q2 2019. APS expected 2020 customer growth of 1.5%–2.5% and weather-normalized annual sales growth of 1%–2%, while noting heightened economic and demand uncertainty.
- APS drew on revolving credit facilities when commercial-paper markets were disrupted in March. Commercial-paper access resumed in mid-April, and proceeds had reduced facility borrowings by approximately $220 million through May 1. Management said this was not expected to materially affect financial position, results or cash flows.
- APS forecast capital expenditures of $1.33 billion in 2020, $1.65 billion in 2021 and $1.73 billion in 2022. It expects to fund capital needs with operating cash and external financing.
- APS’s pending retail rate case seeks a total revenue increase of $184 million, including a $69 million base-rate increase and reflecting a proposed $115 million net credit primarily related to tax refunds. The requested average annual customer bill increase is 5.6%; the hearing was scheduled to begin September 30, 2020. The outcome is uncertain.
- APS’s clean-energy commitments include 100% clean, carbon-free electricity by 2050, a 65% clean-energy mix with 45% renewables by 2030, and ending coal-fired generation by 2031. These plans depend on regulatory support, technology, customer growth and access to capital.
- Key uncertainties include regulatory recovery of utility investments and retired-plant costs; environmental compliance and coal-plant economics; nuclear operations and spent-fuel disposal; weather, fuel and power prices; customer collections; market access and credit ratings; and potential regulatory changes, including retail competition and renewable-energy standards.
Contingencies and unusual items
- APS was seeking recovery of remaining Navajo Generating Station investment ($79 million at March 31) and retirement costs; disallowance could require a write-off. Recovery of Four Corners SCR costs also remained pending, with an unfavorable decision potentially requiring a charge.
- Environmental rules and proceedings concerning coal-combustion residuals, emissions and water could increase compliance costs. APS stated that some ultimate costs cannot yet be estimated clearly.
- APS was refunding approximately 13,000 customers potentially affected by an error in its online rate-comparison tool. The refunds and inconvenience payments were not expected to be material; regulatory and Attorney General inquiries remained ongoing.
- The filing reported a $30.1 million derivative-contract loss in fuel and purchased-power expense before Power Supply Adjustor deferrals. Regulatory accounting defers qualifying unrealized derivative gains and losses, limiting immediate earnings effects.
- A $36 million customer bill credit from previously collected, unallocated demand-side-management funds was approved by the Arizona Corporation Commission in May 2020. APS also committed $5.3 million of non-ratepayer funds for pandemic assistance.
Important facts for investors to verify
- Whether the projected $20–$30 million pandemic and disconnection-related cost remains within range, and how customer collections and sales develop.
- The final outcome and timing of APS’s rate case, Four Corners SCR recovery, and recovery of Navajo and other retired-plant costs.
- Actual 2020–2022 capital spending, financing needs and the effect of investment plans on debt and liquidity.
- Progress toward clean-energy and coal-retirement goals, including the timing and economics of planned storage and renewable projects.
- Developments in environmental compliance costs, customer disconnection rules, and investigations related to the rate-comparison tool.