10-Q: Pinnacle West and Arizona Public Service Report Strong Second Quarter Earnings Amidst Regulatory Changes

Pinnacle West and Arizona Public Service (APS) reported increased earnings for the second quarter of 2024, driven by new rates and customer growth, while navigating regulatory changes and ongoing investments in clean energy.

Summary

• Pinnacle West Capital Corporation and its subsidiary, Arizona Public Service Company (APS), have released their second quarter 2024 financial results, showing a significant increase in net income compared to the same period last year.
• Pinnacle West's net income attributable to common shareholders rose to $204 million, up from $107 million in Q2 2023, while APS's net income attributable to common shareholders increased to $212 million from $119 million.
• The improved financial performance was primarily driven by the implementation of new customer rates, increased customer usage, and growth, as well as higher revenue from the Court Resolution Surcharge (CRS).
• These gains were partially offset by increased depreciation and amortization expenses, higher interest charges, and higher income taxes.
• The report also details ongoing regulatory matters, including a limited rehearing on the grid access charge (GAC) for solar customers, scheduled for November 2024.
• APS is also seeking approval for an increase in its long-term debt limit from $8.0 billion to $9.5 billion and an increase in Pinnacle West's permitted yearly equity infusions.
• The company is actively investing in clean energy, with a goal to provide 100% clean, carbon-free electricity by 2050 and a 65% clean energy mix by 2030.
• APS is also committed to exiting coal-fired generation by 2031 and is actively pursuing renewable energy and energy storage projects.
• The company is also managing through significant growth in the Phoenix metropolitan area while experiencing supply chain issues similar to those experienced in other industries.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong financial results and progress towards clean energy goals. However, there are some concerns about regulatory risks, inflationary pressures, and supply chain issues, which temper the overall sentiment.

Positives

• The company experienced a significant increase in net income for both Pinnacle West and APS.
• New customer rates and increased customer usage contributed to higher revenues.
• The company is making progress towards its clean energy goals, with significant investments in renewable energy and energy storage.
• APS is actively managing its customer experience and has implemented various financial assistance programs.
• The company has ample borrowing capacity under its credit facilities and can readily access these facilities.
• APS is participating in the Western Energy Imbalance Market (WEIM) which is expected to lower fuel and purchased-power costs.
• APS has implemented a public safety power shutoff (PSPS) program for this upcoming fire season.

Negatives

• Increased depreciation and amortization expenses negatively impacted earnings.
• Higher interest charges, net of AFUDC, also reduced earnings.
• The company is facing higher income taxes.
• The company is experiencing supply chain issues similar to those experienced in other industries.
• The company is facing inflationary impacts in select equipment, particularly those that contain semiconductor components or that are labor intensive.
• The company is facing inflationary impacts in service rates and spend categories through pass-through costs, such as suppliers increased material costs, cost of insurance, and wage rates.

Risks

• The company is subject to regulatory risks, including the outcome of the limited rehearing on the grid access charge (GAC) for solar customers.
• The company is subject to environmental risks, including the potential for increased costs related to coal combustion residuals (CCR) and new EPA regulations.
• The company is subject to market risks, including fluctuations in interest rates and commodity prices.
• The company is subject to credit risks, including the potential for non-performance or non-payment by counterparties.
• The company is facing supply chain issues and inflationary pressures.
• The company is facing unprecedented incremental requests for service from extra-large commercial energy users (over 25 MW) with very high energy demands that persist virtually around-the-clock.

Future Outlook

The company 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. The company 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.

Management Comments

• APS's focus remains on its customers and the communities it serves.
• APS is managing through significant growth in the Phoenix metropolitan area while experiencing supply chain issues similar to those experienced in other industries.
• Maintaining reliability and affordability for our customers during the clean energy transition is fundamental to our strategy.
• We are committed to doing our part to build a clean and carbon-free future.
• Our vision is to create a sustainable energy future for Arizona by providing reliable, affordable, and clean energy to our customers.

Industry Context

The report reflects the ongoing trend in the utility industry towards clean energy transition, with a focus on renewable resources and energy storage. The company is also navigating the challenges of increasing demand, supply chain issues, and regulatory changes, which are common across the industry.

Comparison to Industry Standards

• The company's focus on customer satisfaction aligns with industry trends emphasizing customer-centric approaches.
• The company's commitment to clean energy and carbon reduction is consistent with the broader industry shift towards sustainability.
• The company's investment in grid modernization and reliability is in line with industry efforts to enhance infrastructure.
• The company's participation in regional energy markets is a common strategy for utilities to manage costs and improve efficiency.
• The company's financial performance, with increased earnings and revenue, is a positive sign compared to some utilities facing challenges in the current economic environment.
• The company's focus on managing costs and mitigating inflationary pressures is a common concern across the utility sector.

Legal Proceedings

• Six intervenors and the Attorney General of Arizona requested rehearing on various issues included in the ACCs decision, such as the grid access charge (GAC) for solar customers, the SRB, and CCT funding.
• A limited rehearing is scheduled to begin on November 5, 2024 for the purpose of reviewing the GAC.
• APS is participating in litigation as part of an ad hoc coalition of electric utility companies, independent power producers, and trade groups, called Electric Generators for a Sensible Transition, challenging the EPA's latest carbon emission standards for power plants.

Stakeholder Impact

• Shareholders will benefit from increased earnings and potential future growth.
• Customers will benefit from improved reliability, affordability, and clean energy options.
• Employees will be impacted by the company's focus on sustainability and customer experience.
• Communities will benefit from the company's commitment to clean energy and economic development.
• Suppliers will be impacted by the company's procurement strategies and supply chain management.
• Creditors will be impacted by the company's debt management and financial performance.

Next Steps

• APS will continue to work with lessors to determine revised commencement dates for delayed energy storage leases.
• APS will continue to monitor and respond to regulatory proceedings, including the limited rehearing on the grid access charge (GAC).
• APS will continue to evaluate and pursue options to reliably serve growing energy demand, including the potential addition of more natural gas generating units.
• APS will continue to monitor and respond to the EPA's proposed Greenhouse Gas (GHG) rule.
• APS will continue to implement its wildfire mitigation efforts.
• APS will continue to monitor and respond to the EPA's Good Neighbor Plan for Arizona.

Key Dates

Keywords

Pinnacle West, Arizona Public Service, APS, earnings, renewable energy, energy storage, regulatory, rate case, clean energy, financial results, net income, customer growth, power generation, transmission, distribution, coal, natural gas, solar, wind, electric vehicles, carbon capture, sustainability, wildfire, credit rating, debt, equity, capital expenditure, operating expenses, inflation, supply chain