10-Q: Pinnacle West and Arizona Public Service Company Report First Quarter 2024 Results

Pinnacle West and Arizona Public Service Company (APS) report a net income increase for the first quarter of 2024, driven by new retail base rates and increased customer activity.

Summary

• Pinnacle West's consolidated net income attributable to common shareholders for the first quarter of 2024 was $17 million, compared to a net loss of $3 million in the same period last year.
• The increase in net income was primarily due to new retail base rates, increased customer growth and usage, higher Court Resolution Surcharge (CRS) and Lost Fixed Cost Recovery (LFCR) revenue, and a gain on the sale of Bright Canyon Energy (BCE).
• These positive factors were partially offset by higher depreciation and amortization expenses, higher interest charges, the effects of weather, and higher operations and maintenance expenses.
• APS's net income attributable to common shareholders was $15 million for the first quarter of 2024, compared to $11 million in the same period last year.
• Operating revenues less fuel and purchased power expenses were $44 million higher for both Pinnacle West and APS in the first quarter of 2024 compared to the same period in 2023.
• This increase was primarily due to new retail base rates, higher retail revenue due to changes in usage patterns and customer growth, higher CRS and LFCR revenue, partially offset by lower transmission revenues and the effects of weather.
• Operations and maintenance expenses increased by $8 million for both Pinnacle West and APS, primarily due to higher information technology, nuclear generation, and transmission, distribution, and customer service costs.
• Depreciation and amortization expenses were $18 million higher for both Pinnacle West and APS due to increased plant in service and intangible assets.
• Interest charges, net of allowance for borrowed funds used during construction, were $12 million higher for Pinnacle West and $10 million higher for APS due to higher debt balances and interest rates.
• Pinnacle West's consolidated net cash provided by operating activities was $347 million in 2024, compared to $211 million in 2023, an increase of $136 million.
• Pinnacle West's consolidated net cash used for investing activities was $424 million in 2024, compared to $453 million in 2023, a decrease of $29 million.
• Pinnacle West's consolidated net cash provided by financing activities was $82 million in 2024, compared to $244 million in 2023, a decrease of $162 million.
• APS's consolidated net cash provided by operating activities was $366 million in 2024, compared to $240 million in 2023, an increase of $126 million.
• APS's consolidated net cash used for investing activities was $462 million in 2024, compared to $427 million in 2023, an increase of $35 million.
• APS's consolidated net cash provided by financing activities was $101 million in 2024, compared to $190 million in 2023, a decrease of $89 million.

Sentiment

Score: 7

Explanation: The document presents a positive outlook with improved financial results and progress towards clean energy goals, but also acknowledges challenges and risks, resulting in a moderately positive sentiment.

Positives

• The new retail base rates implemented in March 2024 positively impacted revenue.
• Increased customer growth and usage contributed to higher revenues.
• The sale of BCE resulted in a gain of $23 million.
• Higher cash flow from operations provides financial flexibility.
• The company is making progress towards its clean energy goals.

Negatives

• Higher depreciation and amortization expenses negatively impacted net income.
• Increased interest charges, net of AFUDC, reduced net income.
• Higher operations and maintenance expenses reduced net income.
• The effects of weather negatively impacted revenues.
• Lower transmission revenues reduced net income.

Risks

• The company is exposed to market risks related to changes in interest rates, commodity prices, and investments.
• The company is exposed to credit risks related to non-performance or non-payment by counterparties.
• The company is subject to numerous environmental laws and regulations that could result in increased costs.
• The company is subject to regulatory risks, including the outcome of the 2022 Rate Case rehearing and other regulatory proceedings.
• The company is exposed to risks related to the operation of nuclear facilities, including spent fuel disposal uncertainty.
• The company is exposed to risks related to cybersecurity threats, data security breaches, and other catastrophic events.
• The company is exposed to risks related to the development of new technologies which may affect electric sales or delivery.
• The company is exposed to risks related to volatile fuel and purchased power costs.
• The company is exposed to risks related to the investment performance of the assets of our nuclear decommissioning trust, pension, and other postretirement benefit plans.
• The company is exposed to risks related to the liquidity of wholesale power markets and the use of derivative contracts in our business.
• The company is exposed to risks related to potential shortfalls in insurance coverage.
• The company is exposed to risks related to new accounting requirements or new interpretations of existing requirements.
• The company is exposed to risks related to generation, transmission, and distribution facilities and system conditions and operating costs.
• The company is exposed to risks related to the ability to meet the anticipated future need for additional generation and associated transmission facilities in our region.
• The company is exposed to risks related to the willingness or ability of our counterparties, power plant participants, and power plant landowners to meet contractual or other obligations or extend the rights for continued power plant operations.
• The company is exposed to risks related to restrictions on dividends or other provisions in our credit agreements and Arizona Corporation Commission (ACC) orders.

Future Outlook

APS projects annual customer growth to be 1.5% to 2.5% for 2024 and the average annual growth to be in the range of 1.5% to 2.5% through 2026. APS also projects that annual retail electricity sales in kWh will increase in the range of 2.0% to 4.0% for 2024 and that average annual growth will be in the range of 4.0% to 6.0% through 2026, excluding the effects of weather variations.

Management Comments

• APS is managing through significant growth in the Phoenix metropolitan area while experiencing supply chain issues similar to those experienced in other industries.
• APS is exploring available options for securing sufficient electric generation and transmission to meet projections of future customer needs.
• APS is committed to doing its part to build a clean and carbon-free future.
• APS is focused on mitigating the cost pressures related to the current inflationary environment.

Industry Context

The report reflects the ongoing challenges and opportunities in the utility sector, including the transition to clean energy, managing customer growth, and addressing regulatory changes. The company's focus on renewable energy and energy storage aligns with broader industry trends towards decarbonization and grid modernization.

Comparison to Industry Standards

• The company's customer growth rate of 1.8% for the quarter is within the range of other utilities in growing regions.
• The company's focus on renewable energy and energy storage is consistent with industry trends towards decarbonization.
• The company's efforts to improve customer satisfaction are in line with industry best practices.
• The company's capital expenditure plans are significant and reflect the need to upgrade infrastructure and integrate new technologies.
• The company's financial performance is comparable to other large investor-owned utilities, with a focus on managing costs and maintaining profitability.

Legal Proceedings

• Six intervenors and the Attorney General of Arizona requested rehearing on various issues included in the ACCs decision in the 2022 Rate Case, such as the grid access charge (GAC) for solar customers, the SRB, and CCT funding.
• On April 15, 2024, the ACC granted, in part, the rehearing applications of the Attorney General, Arizona Solar Energy Industries Association, Solar Energy Industries Association, and Vote Solar for the limited purpose of reviewing arguments concerning the GAC.
• APS filed a Notice of Direct Appeal to the Arizona Court of Appeals on December 17, 2021 requesting review of certain aspects of the 2019 Rate Case.
• On March 6, 2023, the Court issued its opinion in this matter, affirming in part and reversing in part the ACCs decision in the 2019 Rate Case.
• APS and at least two dozen other parties have been defendants in various CERCLA lawsuits stemming from allegations that contamination from OU3 and elsewhere has impacted groundwater wells operated by the Roosevelt Irrigation District (RID).
• At this time, only one active lawsuit remains pending, which is on appeal to the U.S. Court of Appeals for the Ninth Circuit based on a U.S. District Court order dismissing cost recovery claims of approximately $20.7 million by a service provider for RID.

Stakeholder Impact

• Customers will see an increase in their bills due to the new retail base rates.
• Customers will benefit from improved reliability and customer service.
• Customers will benefit from the company's commitment to clean energy.
• Shareholders will benefit from improved financial results and the company's long-term growth strategy.
• Employees will benefit from the company's commitment to safety and health.
• Communities will benefit from the company's commitment to sustainability and economic development.

Next Steps

• APS will continue to work with lessors to determine revised commencement dates for leased energy storage assets.
• APS will continue to evaluate its compliance options for Four Corners based on the ELG regulations finalized in April 2024.
• APS will continue to assess the recently finalized EPA carbon emission standards and cannot yet predict their potential impact on APSs operations.
• APS will continue to monitor the status of environmental matters, which, depending on their final outcome, could require modification to planned environmental expenditures.
• APS will continue to explore available options for securing sufficient electric generation and transmission to meet projections of future customer needs.
• APS will continue to pursue market resources that meet its system needs and offer the best value for customers through competitive RFPs.
• APS will continue to monitor the impacts of its disconnection policies, payment arrangements, among other considerations impacting its estimated write-off factor, and allowance for doubtful accounts.
• APS will continue to work on projects that were in the queue prior to the ACC decision to discontinue the Solar Communities program.
• APS will continue to work with the Navajo Nation and the Hopi Tribe to finalize disbursement of funds for electrification of homes and businesses on their reservations.
• APS will continue to evaluate policy and regulatory options, as well as insurance programs, to mitigate the impact of wildfire events.
• APS will continue to monitor the development of CCUS technologies.
• APS will continue to monitor the emergence of artificial intelligence technology risk and opportunities.
• APS will continue to await guidance from the U.S. Treasury Department related to the definition of gross receipts from nuclear sales for purposes of the credit phase-out applicable to the nuclear PTC.

Key Dates

Keywords

Pinnacle West, Arizona Public Service, APS, Net Income, Operating Revenue, Fuel Costs, Rate Case, Renewable Energy, Energy Storage, Regulatory, Financial Results, Earnings, Power Generation, Electric Utility, Clean Energy