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Form 8-K PINNACLE WEST CAPITAL For: Oct 30 Filed by: ARIZONA PUBLIC SERVICE CO

October 30, 2015 8:31 AM EDT


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report (Date of earliest event reported):    October 30, 2015

Commission File Number
Exact Name of Registrant as Specified in Charter; State of Incorporation;
Address and Telephone Number
IRS Employer
Identification Number
 
 
 
1-8962
Pinnacle West Capital Corporation
(an Arizona corporation)
400 North Fifth Street, P.O. Box 53999
Phoenix, AZ 85072-3999
(602) 250-1000
86-0512431
 
 
 
1-4473
Arizona Public Service Company
(an Arizona corporation)
400 North Fifth Street, P.O. Box 53999
Phoenix, AZ 85072-3999
(602) 250-1000
86-0011170

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

This combined Form 8-K is separately filed or furnished by Pinnacle West Capital Corporation and Arizona Public Service Company. Each registrant is filing or furnishing on its own behalf all of the information contained in this Form 8-K that relates to such registrant and, where required, its subsidiaries. Except as stated in the preceding sentence, neither registrant is filing or furnishing any information that does not relate to such registrant, and therefore makes no representation as to any such information.






Item 2.02. Results of Operations and Financial Condition.
Item 7.01. Regulation FD Disclosure.

The following information is furnished pursuant to both Item 2.02 and 7.01.

On October 30, 2015, Pinnacle West Capital Corporation (the “Company” or “Pinnacle West”) issued a press release regarding its financial results for the fiscal quarter ended September 30, 2015 and its earnings outlook for 2015 and 2016. A copy of the press release is attached hereto as Exhibit 99.1.

The Company is providing a quarterly consolidated statistical summary and a copy of the slide presentation made in connection with the quarterly earnings conference call on October 30, 2015. This information contains Company operating results for the fiscal quarter ended October 30, 2015 and is attached hereto as Exhibits 99.2 and 99.3. The statistical summary and slide presentation are concurrently being posted to the Company’s website at www.pinnaclewest.com, which also contains a glossary of relevant terms.
Item 9.01.    Financial Statements and Exhibits.
(d)    Exhibits

Exhibit No.
Registrant(s)
Description
 
 
 
99.1
Pinnacle West
APS
Earnings News Release issued on October 30, 2015.
 
 
 
99.2
Pinnacle West
APS
Pinnacle West Capital Corporation quarterly consolidated statistical summary for the three-month and nine-month periods ended September 30, 2015 and 2014.
 
 
 
99.3
Pinnacle West
APS
Pinnacle West Capital Corporation 3rd Quarter 2015 Results slide presentation accompanying October 30, 2015 conference call.







SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


 
 
PINNACLE WEST CAPITAL CORPORATION
 
 
(Registrant)
 
 
 
Dated: October 30, 2015
 
By: /s/ James R. Hatfield            
 
 
James R. Hatfield
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
 
 
 
ARIZONA PUBLIC SERVICE COMPANY
 
 
(Registrant)
 
 
 
Dated: October 30, 2015
 
By: /s/ James R. Hatfield            
 
 
James R. Hatfield
 
 
Executive Vice President and
 
 
Chief Financial Officer













Exhibit Index


Exhibit No.
Registrant(s)
Description
 
 
 
99.1
Pinnacle West
APS
Earnings News Release issued on October 30, 2015.

 
 
 
99.2
Pinnacle West
APS
Pinnacle West Capital Corporation quarterly consolidated statistical summary for the three-month and nine-month periods ended September 30, 2015 and 2014.
 
 
 
99.3
Pinnacle West
APS
Pinnacle West Capital Corporation 3rd Quarter 2015 Results slide presentation accompanying October 30, 2015 conference call.







FOR IMMEDIATE RELEASE
October 30, 2015
Media Contact:
Analyst Contact:
Alan Bunnell, (602) 250-3376
Paul Mountain, (602) 250-4952
 
Website:
pinnaclewest.com

PINNACLE WEST REPORTS HIGHER THIRD-QUARTER EARNINGS

Quarterly financial results benefit from higher retail sales and warmer weather
Disciplined cost management and strong operational performance also contribute to bottom line
Company affirms 2015 guidance, introduces 2016 guidance


PHOENIX -Pinnacle West Capital Corp. (NYSE: PNW) today reported consolidated net income attributable to common shareholders for the 2015 third quarter of $257.1 million, or $2.30 per diluted share. This result compares with net income of $244.0 million, or $2.20 per share, for the same period a year ago.

“It was a solid quarter for us. An increase in retail sales, ongoing cost management and superior operational performance all contributed to sound financial results,” said Pinnacle West Chairman, President and Chief Executive Officer Don Brandt, adding that quarter-over-quarter weather-normalized sales growth has been positive four out of the past seven quarters.

“Operationally, our employees stepped up during what proved to be one of the most challenging storm seasons in years,” he said. “Our crews performed well under tough conditions, and employees across all departments responded with the high-quality service our customers have come to expect from APS.”

The 2015 third-quarter results comparison was positively impacted by the following major factors:

Adjustment mechanisms improved earnings by $0.17 per share compared to the 2014 third quarter. These adjustors included a Jan. 1, 2015, rate change reflecting acquisition of Southern California Edison’s interest in Units 4 and 5 of the Four Corners Power Plant; increased transmission revenues; revenue from the Company’s AZ Sun Program; and higher lost fixed cost recovery (LFCR) revenue.

Higher retail electricity sales - excluding the effects of weather variations, but including the effects of customer conservation, energy efficiency programs and distributed renewable generation - improved earnings $0.08 per share. Compared to the same quarter a year ago, weather-normalized retail sales improved 2.1 percent, while total customer growth increased 1.3 percent quarter-over-quarter.

The effects of weather variations improved results by $0.04 per share compared to the year-ago period. Highlighted by the second hottest August in 20 years, this year’s third quarter was warmer than the same period last year (104.3 degrees average high




temperatures versus 102.9 degrees) and slightly more favorable (0.5 percent) than normal based on a rolling 10-year average. As a result, residential cooling degree-days (a measure of the effects of weather) were 10.5 percent greater than last year’s third quarter and 3.3 percent better than normal 10-year averages.

These positive factors were partially offset by the following items:

Higher depreciation and amortization expenses, largely associated with the Four Corners transaction and additional plant in service, reduced earnings by $0.12 per share.

Expiration of a long-term wholesale contract at the end of 2014 decreased earnings by $0.02 per share.

The net effect of miscellaneous items decreased earnings $0.05 per share.

Financial Outlook
For 2015, the Company continues to expect its on-going consolidated earnings will be within a range of $3.75 to $3.95 per diluted share, on a weather-normalized basis.

Looking ahead to 2016, the Company estimates its on-going consolidated earnings will be within a range of $3.90 to $4.10 per diluted share. Longer-term, the Company’s goal is to achieve a consolidated earned return on average common equity of more than 9.5 percent annually through 2016.

Key factors and assumptions underlying both the 2015 and 2016 outlook can be found in the third-quarter 2015 earnings presentation slides on the Company’s website at pinnaclewest.com/investors.

Conference Call and Webcast
Pinnacle West invites interested parties to listen to the live webcast of management’s conference call to discuss the Company’s 2015 third-quarter results, as well as recent developments, at 12 noon ET (9 a.m. AZ time) today, October 30. The webcast can be accessed at pinnaclewest.com/presentations and will be available for replay on the website for 30 days. To access the live conference call by telephone, dial (877) 407-8035 or (201) 689-8035 for international callers. A replay of the call also will be available until 11:59 p.m. (ET), Friday, November 6, 2015, by calling (877) 660-6853 in the U.S. and Canada or (201) 612-7415 internationally and entering conference ID number 13621086.

Pinnacle West Capital Corp., an energy holding company based in Phoenix, has consolidated assets of about $15 billion, about 6,200 megawatts of generating capacity and about 6,400 employees in Arizona and New Mexico. Through its principal subsidiary, Arizona Public Service, the Company provides retail electricity service to nearly 1.2 million Arizona homes and businesses. For more information about Pinnacle West, visit the Company’s website at pinnaclewest.com.

Dollar amounts in this news release are after income taxes. Earnings per share amounts are based on average diluted common shares outstanding. For more information on Pinnacle West’s operating statistics and earnings, please visit pinnaclewest.com/investors.



FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements based on our current expectations, including statements regarding our earnings guidance and financial outlook and goals. These




forward-looking statements are often identified by words such as “estimate,” “predict,” “may,” “believe,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from outcomes currently expected or sought by Pinnacle West or APS. These factors include, but are not limited to:

our ability to manage capital expenditures and operations and maintenance costs while maintaining high reliability and customer service levels;
variations in demand for electricity, including those due to weather, the general economy, customer and sales growth (or decline), and the effects of energy conservation measures and distributed generation;
power plant and transmission system performance and outages;
competition in retail and wholesale power markets;
regulatory and judicial decisions, developments and proceedings;
new legislation or regulation including those relating to environmental requirements, nuclear plant operations and potential deregulation of retail electric markets;
fuel and water supply availability;
our ability to achieve timely and adequate rate recovery of our costs, including returns on debt and equity capital;
our ability to meet renewable energy and energy efficiency mandates and recover related costs;
risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty;
current and future economic conditions in Arizona, particularly in real estate markets;
the development of new technologies which may affect electric sales or delivery;
the cost of debt and equity capital and the ability to access capital markets when required;
environmental and other concerns surrounding coal-fired generation;
volatile fuel and purchased power costs;
the investment performance of the assets of our nuclear decommissioning trust, pension, and other postretirement benefit plans and the resulting impact on future funding requirements;
the liquidity of wholesale power markets and the use of derivative contracts in our business;
potential shortfalls in insurance coverage;
new accounting requirements or new interpretations of existing requirements;
generation, transmission and distribution facility and system conditions and operating costs;
the ability to meet the anticipated future need for additional generation and associated transmission facilities in our region;
the willingness or ability of our counterparties, power plant participants and power plant land owners to meet contractual or other obligations or extend the rights for continued power plant operations; and
restrictions on dividends or other provisions in our credit agreements and Arizona Corporation Commission orders.

These and other factors are discussed in Risk Factors described in Part 1, Item 1A of the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and in Part II, Item 1A of the Pinnacle West/APS Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, which readers should review carefully before placing any reliance on our financial statements or disclosures. Neither Pinnacle West nor APS assumes any obligation to update these statements, even if our internal estimates change, except as required by law.


# # #










PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(dollars and shares in thousands, except per share amounts)

 
 
 THREE MONTHS ENDED
 
 NINE MONTHS ENDED
 
 
 SEPTEMBER 30,
 
 SEPTEMBER 30,
 
 
 2015
 
 2014
 
 2015
 
 2014
 
 
 
 
 
 
 
 
 
Operating Revenues
 $ 1,199,146
 
 $ 1,172,667
 
 $ 2,761,013
 
 $ 2,765,182
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
Fuel and purchased power
         363,847
 
         382,361
 
         868,561
 
         923,001
 
Operations and maintenance
         220,449
 
         223,418
 
         646,358
 
         647,522
 
Depreciation and amortization
         125,625
 
         103,660
 
         369,313
 
         310,582
 
Taxes other than income taxes
           43,241
 
           40,850
 
         129,489
 
         130,699
 
Other expenses
                873
 
                603
 
             2,524
 
             2,320
 
    Total
         754,035
 
         750,892
 
      2,016,245
 
      2,014,124
 
 
 
 
 
 
 
 
 
Operating Income
         445,111
 
         421,775
 
         744,768
 
         751,058
 
 
 
 
 
 
 
 
 
Other Income (Deductions)
 
 
 
 
 
 
 
 
Allowance for equity funds used during construction
             7,645
 
             7,038
 
           26,214
 
           21,979
 
Other income
                139
 
             2,366
 
                549
 
             7,514
 
Other expense
           (5,538)
 
           (4,193)
 
         (12,433)
 
           (9,385)
 
   Total
             2,246
 
             5,211
 
           14,330
 
           20,108
 
 
 
 
 
 
 
 
 
Interest Expense
 
 
 
 
 
 
 
 
Interest charges
           49,342
 
           47,626
 
         146,069
 
         152,346
 
Allowance for borrowed funds used during construction
           (3,518)
 
           (3,479)
 
         (12,056)
 
         (11,039)
 
   Total
           45,824
 
           44,147
 
         134,013
 
         141,307
 
 
 
 
 
 
 
 
 
Income Before Income Taxes
         401,533
 
         382,839
 
         625,085
 
         629,859
 
 
 
 
 
 
 
 
 
Income Taxes
         139,555
 
         134,753
 
         214,873
 
         215,698
 
 
 
 
 
 
 
 
 
Net Income
         261,978
 
         248,086
 
         410,212
 
         414,161
 
 
 
 
 
 
 
 
 
Less: Net income attributable to noncontrolling interests
             4,862
 
             4,125
 
           14,072
 
           21,976
 
 
 
 
 
 
 
 
 
Net Income Attributable To Common Shareholders
 $ 257,116
 
 $ 243,961
 
 $ 396,140
 
 $ 392,185
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-Average Common Shares Outstanding - Basic
         111,036
 
         110,686
 
         110,984
 
         110,579
 
 
 
 
 
 
 
 
 
Weighted-Average Common Shares Outstanding - Diluted
         111,616
 
         111,103
 
         111,490
 
         110,962
 
 
 
 
 
 
 
 
 
Earnings Per Weighted-Average Common Share Outstanding
 
 
 
 
 
 
 
 
Net income attributable to common shareholders - basic
 $ 2.32
 
 $ 2.20
 
 $ 3.57
 
 $ 3.55
 
Net income attributable to common shareholders - diluted
 $ 2.30
 
 $ 2.20
 
 $ 3.55
 
 $ 3.53


Last Updated 10/30/2015 Line 2015 2014 Incr (Decr) 2015 2014 Incr (Decr) EARNINGS CONTRIBUTION BY SUBSIDIARY (Dollars in Millions) 1 Arizona Public Service 266$ 255$ 11$ 420$ 427$ (7)$ 2 El Dorado - - - - (1) 1 3 Parent Company (4) (7) 3 (10) (12) 2 4 Net income 262 248 14 410 414 (4) 5 Less: Net Income Attributable to Noncontrolling Interests 5 4 1 14 22 (8) 6 Net Income Attributable to Common Shareholders 257$ 244$ 13$ 396$ 392$ 4$ EARNINGS PER SHARE BY SUBSIDIARY - DILUTED 7 Arizona Public Service 2.38$ 2.30$ 0.08$ 3.77$ 3.85$ (0.08)$ 8 El Dorado - - - - (0.01) 0.01 9 Parent Company (0.04) (0.06) 0.02 (0.09) (0.11) 0.02 10 Net income 2.34 2.24 0.10 3.68 3.73 (0.05) 11 Less: Net Income Attributable to Noncontrolling Interests 0.04 0.04 - 0.13 0.20 (0.07) 12 Net Income Attributable to Common Shareholders 2.30$ 2.20$ 0.10$ 3.55$ 3.53$ 0.02$ 13 BOOK VALUE PER SHARE 41.99$ 40.67$ 1.32$ 41.99$ 40.67$ 1.32$ COMMON SHARES OUTSTANDING (Thousands) 14 Average - Diluted 111,616 111,103 513 111,490 110,962 528 15 End of Period 110,847 110,447 400 110,847 110,447 400 Pinnacle West Capital Corporation Quarterly Consolidated Statistical Summary Periods Ended September 30, 2015 and 2014 3 Months Ended September 30, 9 Months Ended September 30, Page 1 of 4


 
Last Updated 10/30/2015 Line 2015 2014 Incr (Decr) 2015 2014 Incr (Decr) ELECTRIC OPERATING REVENUES (Dollars in Millions) Retail 16 Residential 657$ 619$ 38$ 1,375$ 1,329$ 46$ 17 Business 486 460 26 1,235 1,205 30 18 Total retail 1,143 1,079 64 2,610 2,534 76 Wholesale revenue on delivered electricity 19 Traditional contracts 3 16 (13) 9 40 (31) 20 Off-system sales 43 61 (18) 100 140 (40) 21 Native load hedge liquidation - - - - - - 22 Total wholesale 46 77 (31) 109 180 (71) 23 Transmission for others 12 7 5 27 23 4 24 Other miscellaneous services (3) 9 (12) 13 26 (13) 25 Total electric operating revenues 1,198$ 1,172$ 26$ 2,759$ 2,763$ (4)$ ELECTRIC SALES (GWH) Retail sales 26 Residential 4,834 4,665 169 10,393 10,252 141 27 Business 4,365 4,234 131 11,346 11,260 86 28 Total retail 9,199 8,899 300 21,739 21,512 227 Wholesale electricity delivered 29 Traditional contracts 38 186 (148) 150 560 (410) 30 Off-system sales 1,462 1,552 (90) 3,833 3,444 389 31 Retail load hedge management - - - - - - 32 Total wholesale 1,500 1,738 (238) 3,983 4,004 (21) 33 Total electric sales 10,699 10,637 62 25,722 25,516 206 Pinnacle West Capital Corporation Quarterly Consolidated Statistical Summary Periods Ended September 30, 2015 and 2014 3 Months Ended September 30, 9 Months Ended September 30, Page 2 of 4


 
Last Updated 10/30/2015 Line 2015 2014 Incr (Decr) 2015 2014 Incr (Decr) AVERAGE ELECTRIC CUSTOMERS Retail customers 34 Residential 1,043,551 1,030,055 13,496 1,044,927 1,031,996 12,931 35 Business 130,628 129,558 1,070 130,391 129,196 1,195 36 Total retail 1,174,179 1,159,613 14,566 1,175,318 1,161,192 14,126 37 Wholesale customers 46 56 (10) 47 56 (9) 38 Total customers 1,174,225 1,159,669 14,556 1,175,365 1,161,248 14,117 39 Total customer growth (% over prior year) 1.3% 1.4% (0.1)% 1.2% 1.4% (0.2)% RETAIL SALES (GWH) - WEATHER NORMALIZED 40 Residential 4,842 4,729 113 10,664 10,561 103 41 Business 4,297 4,221 76 11,280 11,224 56 42 Total 9,139 8,950 189 21,944 21,785 159 43 Retail sales (GWH) (% over prior year) 2.1% 0.7% RETAIL USAGE (KWh/Average Customer) 44 Residential 4,631 4,529 102 9,946 9,934 12 45 Business 33,415 32,680 735 87,013 87,157 (144) RETAIL USAGE - WEATHER NORMALIZED (KWh/Average Customer) 46 Residential 4,640 4,591 49 10,206 10,233 (27) 47 Business 32,892 32,577 315 86,512 86,878 (366) ELECTRICITY DEMAND (MW) 48 Native load peak demand 7,031 7,007 24 7,031 7,007 24 WEATHER INDICATORS - RESIDENTIAL Actual 49 Cooling degree-days 1,265 1,145 120 1,749 1,675 74 50 Heating degree-days - - - 254 245 9 51 Average humidity 33% 34% (1)% 29% 26% 3% 10-Year Averages 52 Cooling degree-days 1,224 1,224 - 1,709 1,709 - 53 Heating degree-days - - - 524 524 - 54 Average humidity 29% 29% - 24% 24% - Periods Ended September 30, 2015 and 2014 3 Months Ended September 30, 9 Months Ended September 30, Quarterly Consolidated Statistical Summary Pinnacle West Capital Corporation Page 3 of 4


 
Last Updated 10/30/2015 Line 2015 2014 Incr (Decr) 2015 2014 Incr (Decr) ENERGY SOURCES (GWH) Generation production 55 Nuclear 2,535 2,523 12 7,262 7,232 30 56 Coal 3,163 3,450 (287) 8,300 8,985 (685) 57 Gas, oil and other 2,550 1,615 935 4,974 4,713 261 58 Total generation production 8,248 7,588 660 20,536 20,930 (394) Purchased power 59 Firm load 2,940 2,717 223 6,197 5,601 596 60 Marketing and trading 109 140 (31) 297 351 (54) 61 Total purchased power 3,049 2,857 192 6,494 5,952 542 62 Total energy sources 11,296 10,445 851 27,030 26,882 148 POWER PLANT PERFORMANCE Capacity Factors 63 Nuclear 100% 100% - 97% 96% 1% 64 Coal 74% 81% (7)% 66% 71% (5)% 65 Gas, oil and other 33% 30% 3% 17% 21% (4)% 66 System average 58% 58% - 46% 49% (3)% ECONOMIC INDICATORS Building Permits (a) 67 Metro Phoenix 6,106 3,962 2,144 16,686 14,387 2,299 Arizona Job Growth (b) 68 Payroll job growth (% over prior year) 2.1% 1.8% 0.3% 2.3% 1.9% 0.4% 69 Unemployment rate (%, seasonally adjusted) 6.2% 6.7% (0.5)% 6.2% 6.9% (0.7)% Sources: (a) U.S. Census Bureau (b) Arizona Department of Economic Security 3 Months Ended September 30, 9 Months Ended September 30, Pinnacle West Capital Corporation Quarterly Consolidated Statistical Summary Periods Ended September 30, 2015 and 2014 Page 4 of 4


 
Third Quarter 2015 THIRD QUARTER 2015 RESULTS October 30, 2015


 
Third Quarter 20152 FORWARD LOOKING STATEMENTS AND NON-GAAP FINANCIAL MEASURES This presentation contains forward-looking statements based on current expectations, including statements regarding our earnings guidance and financial outlook and goals. These forward-looking statements are often identified by words such as “estimate,” “predict,” “may,” “believe,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from outcomes currently expected or sought by Pinnacle West or APS. These factors include, but are not limited to: our ability to manage capital expenditures and operations and maintenance costs while maintaining high reliability and customer service levels; variations in demand for electricity, including those due to weather, the general economy, customer and sales growth (or decline), and the effects of energy conservation measures and distributed generation; power plant and transmission system performance and outages; competition in retail and wholesale power markets; regulatory and judicial decisions, developments and proceedings; new legislation or regulation, including those relating to environmental requirements, nuclear plant operations and potential deregulation of retail electric markets; fuel and water supply availability; our ability to achieve timely and adequate rate recovery of our costs, including returns on debt and equity capital; our ability to meet renewable energy and energy efficiency mandates and recover related costs; risks inherent in the operation of nuclear facilities, including spent fuel disposal uncertainty; current and future economic conditions in Arizona, particularly in real estate markets; the development of new technologies which may affect electric sales or delivery; the cost of debt and equity capital and the ability to access capital markets when required; environmental and other concerns surrounding coal-fired generation; volatile fuel and purchased power costs; the investment performance of the assets of our nuclear decommissioning trust, pension, and other postretirement benefit plans and the resulting impact on future funding requirements; the liquidity of wholesale power markets and the use of derivative contracts in our business; potential shortfalls in insurance coverage; new accounting requirements or new interpretations of existing requirements; generation, transmission and distribution facility and system conditions and operating costs; the ability to meet the anticipated future need for additional generation and associated transmission facilities in our region; the willingness or ability of our counterparties, power plant participants and power plant land owners to meet contractual or other obligations or extend the rights for continued power plant operations; and restrictions on dividends or other provisions in our credit agreements and ACC orders. These and other factors are discussed in Risk Factors described in Part I, Item 1A of the Pinnacle West/APS Annual Report on Form 10-K for the fiscal year ended December 31, 2014, and in Part II of the Pinnacle West/APS Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, which you should review carefully before placing any reliance on our financial statements, disclosures or earnings outlook. Neither Pinnacle West nor APS assumes any obligation to update these statements, even if our internal estimates change, except as required by law. In this presentation, references to net income and earnings per share (EPS) refer to amounts attributable to common shareholders. We present “gross margin” per diluted share of common stock. Gross margin refers to operating revenues less fuel and purchased power expenses. Gross margin is a “non-GAAP financial measure,” as defined in accordance with SEC rules. The appendix contains a reconciliation of this non-GAAP financial measure to the referenced revenue and expense line items on our Consolidated Statements of Income, which are the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles in the United States of America (GAAP). We view gross margin as an important performance measure of the core profitability of our operations. We refer to “on-going earnings” in this presentation, which is also a non-GAAP financial measure. We believe on-going earnings and the information provided in the reconciliation provide investors with useful indicators of our results that are comparable among periods because they exclude the effects of unusual items that may occur on an irregular basis. Investors should note that these non-GAAP financial measures may involve judgments by management, including whether an item is classified as an unusual item. These measures are key components of our internal financial reporting and are used by our management in analyzing the operations of our business. We believe that investors benefit from having access to the same financial measures that management uses.


 
Third Quarter 20153 CONSOLIDATED EPS COMPARISON 2015 VS. 2014 $2.30 $2.20 2015 2014 3rd Quarter GAAP Net Income $2.30 $2.20 3rd Quarter On-Going Earnings $3.55 $3.53 2015 2014 Year-to-Date GAAP Net Income $3.55 $3.53 Year-to-Date On-Going Earnings


 
Third Quarter 20154 Gross Margin(1) $0.28 ON-GOING EPS VARIANCES 3RD QUARTER 2015 VS. 3RD QUARTER 2014 Other, net $(0.05) Other Taxes $(0.01) (1) Excludes costs, and offsetting operating revenues, associated with renewable energy (excluding AZ Sun), demand side management and similar regulatory programs. D&A $(0.12) Net Increase $0.10 =


 
Third Quarter 20155 GROSS MARGIN EPS DRIVERS 3RD QUARTER 2015 VS. 3RD QUARTER 2014 Lost Fixed Cost Recovery Mechanism $0.02 = Net Increase $0.28 Transmission Revenue $0.02 See non-GAAP reconciliation for gross margin in appendix. Weather $0.04 Four Corners Rate Change $0.11 Higher kWh Sales $0.08 Wholesale Contract $(0.02)Other, net (incl. AZ Sun) $0.03


 
Third Quarter 20156 ECONOMIC INDICATORS Arizona and Metro Phoenix remain attractive places to live and do business Single Family & Multifamily Housing Permits Maricopa County Job Growth (Total Nonfarm) – Metro Phoenix (10.0)% (5.0)% 0.0% 5.0% 10.0% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Metro Phoenix U.S. YoY Change E 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 '07 '08 '09 '10 '11 '12 '13 '14 '15 Single Family Multifamily Construction, healthcare, tourism, financial activities, business services, and consumer services adding jobs at a rate above 3% Phoenix ranked 1st in tech industry job growth over last 2 years (tied with San Francisco) - CBRE September 2015 Phoenix ranked 6th for commercial real estate investment (3rd excluding Texas cities) - Situs RERC, August 2015 Phoenix tops West and Mountain regions for economic development projects, beats San Francisco and Seattle - Site Selection magazine, March 2015 Q3


 
Third Quarter 20157 ON-GOING EPS GUIDANCE AS OF OCTOBER 30, 2015 2015 Guidance 2016 Guidance * Assumes normal weather See key factor and assumptions in appendix. $3.75 - $3.95* $3.90 - $4.10* + Adjustment mechanisms, primarily Transmission Cost Adjustor (TCA) and Lost Fixed Cost Recovery (LFCR) + Modest sales growth – Higher O&M, primarily planned fossil outages Key Drivers 2015 - 2016


 
Third Quarter 2015 APPENDIX


 
Third Quarter 20159 2015 ON-GOING EPS GUIDANCE Key Factors & Assumptions as of October 30, 2015 2015 Electricity gross margin* (operating revenues, net of fuel and purchased power expenses) $2.27 – $2.32 billion • Retail customer growth about 1.0-2.0% • Weather-normalized retail electricity sales volume about 0-1.0% to prior year taking into account effects of customer conservation, energy efficiency and distributed renewable generation initiatives • Assumes normal weather Operating and maintenance* $775 - $795 million Other operating expenses (depreciation and amortization, and taxes other than income taxes) $650 - $670 million Interest expense, net of allowance for borrowed and equity funds used during construction (Total AFUDC $45 million) $150 - $160 million Net income attributable to noncontrolling interests ~$20 million Effective tax rate 34.5% Average diluted common shares outstanding ~111.0 million On-Going EPS Guidance $3.75 - $3.95 * Excludes O&M of $104 million, and offsetting revenues, associated with renewable energy and demand side management programs.


 
Third Quarter 201510 2016 ON-GOING EPS GUIDANCE Key Factors & Assumptions as of October 30, 2015 2016 Electricity gross margin* (operating revenues, net of fuel and purchased power expenses) $2.34 – $2.39 billion • Retail customer growth about 1.5-2.5% • Weather-normalized retail electricity sales volume about 0-1.0% to prior year taking into account effects of customer conservation, energy efficiency and distributed renewable generation initiatives • Assumes normal weather Operating and maintenance* $825 - $845 million Other operating expenses (depreciation and amortization including impacts related to Palo Verde sale leaseback, and taxes other than income taxes) $645 - $665 million Interest expense, net of allowance for borrowed and equity funds used during construction (Total AFUDC $50 million) $155 - $165 million Net income attributable to noncontrolling interests ~$20 million Effective tax rate 34-35% Average diluted common shares outstanding ~112.0 million On-Going EPS Guidance $3.90 - $4.10 * Excludes O&M of $114 million, and offsetting revenues, associated with renewable energy and demand side management programs.


 
Third Quarter 201511 FINANCIAL OUTLOOK Key Factors & Assumptions as of October 30, 2015 Assumption Impact Retail customer growth • Expected to average about 2-3% annually • Modestly improving Arizona and U.S. economic conditions Weather-normalized retail electricity sales volume growth • About 0.5-1.5% after customer conservation and energy efficiency and distributed renewable generation initiatives Assumption Impact AZ Sun Program • Additions to flow through RES until next base rate case • First 50 MW of AZ Sun is recovered through base rates Lost Fixed Cost Recovery (LFCR) • Offsets 30-40% of revenues lost due to ACC-mandated energy efficiency and distributed renewable generation initiatives Environmental Improvement Surcharge (EIS) • Assumed to recover up to $5 million annually of carrying costs for government- mandated environmental capital expenditures Power Supply Adjustor (PSA) • 100% recovery as of July 1, 2012 Transmission Cost Adjustor (TCA) • TCA is filed each May and automatically goes into rates effective June 1 • Beginning July 1, 2012 following conclusion of the regulatory settlement, transmission revenue is accrued each month as it is earned. Four Corners Acquisition • Four Corners rate increase effective January 1, 2015 Potential Property Tax Deferrals (2012 retail rate settlement): Assume 60% of property tax increases relate to tax rates, therefore, will be eligible for deferrals (Deferral rates: 50% in 2013; 75% in 2014 and thereafter) Gross Margin – Customer Growth and Weather (2015-2017) Gross Margin – Related to 2012 Retail Rate Settlement Outlook Through 2016: Goal of earning more than 9.5% Return on Equity (earned Return on Equity based on average Total Shareholder’s Equity for PNW consolidated, weather-normalized)


 
Third Quarter 201512 OPERATIONS & MAINTENANCE OUTLOOK Goal is to keep O&M per kWh flat, adjusted for planned outages $754 $761 $788 $805 $150 $124 $137 $103 $104 $114 2011 2012 2013 2014 2015E 2016E PNW Consolidated RES/DSM* *Renewable energy and demand side management expenses are offset by adjustor mechanisms. $775 - $795 ($ Millions) $825 - $845


 
Third Quarter 201513 $289 $259 $230 $250 $66 $77 $258 $24 $47 $234 $198 $63 $66 $13 $1 $192 $193 $125 $180 $242 $336 $347 $317 $73 $89 $85 $81 2014 2015 2016 2017 CAPITAL EXPENDITURES 70% of capital expenditures are recovered through rate adjustors (30%) and depreciation cash flow (40%) ($ Millions) $883 $1,056 $1,111 Other Distribution Transmission Renewable Generation Environmental Traditional Generation Projected $1,285 • The table does not include capital expenditures related to El Paso's 7% interest in Four Corners Units 4 and 5 of $3 million in 2015, $27 million in 2016 and $20 million in 2017. • 2015 – 2017 as disclosed in Third Quarter 2015 Form 10-Q. New Gas Generation


 
Third Quarter 201514 $2.10 $2.18 $2.27 $2.38 $2.50 2011 2012 2013 2014 2015 2016 2017 Dividend Growth Goal Indicated Annual Dividend Rate at Year-End DIVIDEND GROWTH Pinnacle West’s annual dividend is $2.50 per share; targeting ~5% annual dividend growth Projected Future dividends subject to declaration at Board of Directors’ discretion.


 
Third Quarter 201515 RATE BASE APS’s revenues come from a regulated retail rate base and meaningful transmission business $6.0 $6.2 $7.6 $1.3 $1.5 $1.8 2014 2015 2016 2017 2018 APS Rate Base Growth Year-End ACC FERC $7.0 Billion Total Rate Base Projected Most Recent Rate Decisions ACC FERC Rate Effective Date 7/1/2012 6/1/2015 Test Year Ended 12/31/2010* 12/31/2014 Rate Base $5.7B $1.3B Equity Layer 54% 58% Allowed ROE 10.00% 10.75% *Adjusted to include post test-year plant in service through 3/31/2012 83% 17% Generation & Distribution Transmission Rate base $ in billions, rounded


 
Third Quarter 201516 BALANCE SHEET STRENGTH $250 $50 $500 $250 $125 $- $100 $200 $300 $400 $500 2016 2017 2018 2019 2020 APS PNW ($Millions) Debt Maturity Schedule Credit Ratings • A- rating or better at S&P, Moody’s and Fitch 2015 Major Financing Activities • $250 million 5-year 2.20% APS senior unsecured notes issued in January 2015 • $300 million 10-year 3.15% APS senior unsecured notes issued in May 2015 - refinanced $300 million of 4.65% notes that matured May 15, 2015 • Expect up to an additional $300 million of new long-term debt in Q4 2015 2016 Major Financing Activities • Currently expect about $550 million of long-term debt, including issuance to refinance $250 million of debt maturing on August 1, 2016 • In addition, there will be several tax-exempt series remarketed or refinanced We are disclosing credit ratings to enhance understanding of our sources of liquidity and the effects of our ratings on our costs of funds.


 
Third Quarter 201517 249 361 343 444 629 720 648 795 872 950 532 851 517 719 859 754 1,203 1,235 1,479 1,272 1,161 0 29 36 86 47 53 70 70 92 69 113 47 81 112 108 65 100 106 94 79 96 38 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 RESIDENTIAL PV APPLICATIONS As of September 30, 2015, nearly 36,000 residential grid-tied solar photovoltaic (PV) systems have been installed in APS’s service territory, equivalent to 255 MW. *Note: www.arizonagoessolar.org logs total residential application volume, including cancellations. Solar water heaters can also be found on the site, but are not included in the chart above. 2014 Applications* 2014 Canceled Apps 2015 Applications* 2015 Canceled Apps Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 15 19 23 44 51 57 2009 2010 2011 2012 2013 2014 Residential DG (MW) Annual Additions


 
Third Quarter 201518 (17) 5 (5) (7) (10) (6) 2 $(20) $(15) $(10) $(5) $0 $5 Q1 Q2 Q3 Q4 Q1 Q2 Q3 GROSS MARGIN EFFECTS OF WEATHER VARIANCES VS. NORMAL Pretax Millions 2014 $(24) Million All periods recalculated to current 10-year rolling average (2004-2013). 2015 $(14) Million


 
Third Quarter 201519 10 8 15 11 12 7 11 16 14 17 12 11 14 18 $0 $10 $20 $30 $40 $50 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Renewable Energy Demand Side Management RENEWABLE ENERGY AND DEMAND SIDE MANAGEMENT EXPENSES* * O&M expenses related to renewable energy, demand side management and similar regulatory programs are offset by comparable revenue amounts. Pretax Millions 2014 $103 Million 2015 $73 Million


 
Third Quarter 201520 NON-GAAP MEASURE RECONCILIATION GROSS MARGIN $ millions pretax, except per share amounts 2015 2014 Operating revenues* 1,199$ 1,173$ Fuel and purchased power expenses* (364) (383) Gross margin 835 790 0.25$ Adjustments: Renewable energy (excluding AZ Sun), demand side management and similar regulatory programs (25) (30) 0.03 Gross margin - adjusted 810$ 760$ 0.28$ * Line items from Consolidated Statements of Income Three Months Ended September 30, EPS Impact


 


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