Higher transmission revenues add to Pinnacle West’s 2Q13 earnings

Higher transmission revenues, primarily attributable to transmission rate changes due to increased investment in transmission infrastructure and related costs, contributed to increased 2Q13 earnings for Pinnacle West Capital Corp. (NYSE:PNW), parent company of Arizona Public Service (APS), company officials said during Pinnacle’s earnings call Aug. 2.

The transmission rate changes added 6 cents per share to total consolidated earnings of $131.2m, or $1.18 per share of common stock during the quarter, compared to ongoing earnings of $123.1m or $1.12 per share during 2Q12.

“We made progress toward our financial targets by executing on our strategy,” Don Brandt, Pinnacle chairman and CEO, said during the call, while noting a regulatory policy issue in Arizona that required the company’s attention and affected its operations.

Specifically, he pointed to a May 9 vote by the Arizona Corporation Commission (ACC) to open a docket “to re-examine the facilitation of a deregulated electric market in Arizona.” The company filed formal comments in opposition to the move.

“In Arizona, the hottest state in America, reliable electric service is literally a life-or-death necessity,” Brandt said. “We encouraged the commission not to trade Arizona’s long record of affordable rates, reliable service and customer satisfaction for the risk and uncertainties associated with deregulation.”

He noted that, as of the comment deadline of July 15, opposition was overwhelming.

“We could count the number of customers that are proponents of so-called deregulation on one hand,” Brandt said. “I’m looking at a list of 153 organizations, elected officials, Chambers [of Commerce], numerous other business leaders, leaders of the Arizona Senate and the Arizona House of Representatives, numerous mayors, city managers, and other local elected officials across the state that have come out strongly against it.”

Regardless of what appears to be a groundswell of opposition, the company has put on hold its plans to acquire the portion of the Four Corners power plant owned by a subsidiary of Edison International (NYSE:EIX).

“It would not be prudent for APS to complete its acquisition of Southern California Edison’s interest in Four Corners until the commission’s intentions with regard to deregulation become clear,” Brandt said. “In the meantime, we intend to maintain all necessary regulatory and other approvals to ensure the necessary steps to complete the acquisition remain on track.”

Solid quarter operationally

“The Palo Verde Nuclear Generating Station had another solid operational quarter, with a capacity factor of 90%,” Brandt said, noting that the spring refueling outage at Unit 1 was completed in less than 30 days, the shortest in Palo Verde’s history.

In addition, he noted, the plant received accolades from an outside industry organization.

“A recent evaluation by the Institute of Nuclear Power Operations (INPO) has validated that it is one of the best-run nuclear facilities in the nation,” he added, noting that INPO characterized overall performance at Palo Verde as “excellent.”

INPO promotes safety and reliability in the operation of commercial nuclear power plants through plant evaluations, training and accreditation, events analysis and information exchange, and other assistance.

In addition to its baseload generation, APS continues to expand its portfolio of renewable energy resources, including utility-scale solar generation.

“The completion of Yuma Foothills Phase 2, and the Hyder II project later this year will grow our AZ Sun platform to 118 MW in commercial operation by the end of this year,” he added. “We also expect the 250 MW Solana project to reach commercial operation in 3Q13, with APS purchasing 100% of that power, which is a key step to meeting our renewable energy standard target.”

Located 70 miles southwest of Phoenix, Solana is a concentrating solar trough facility and is the largest of its kind, according to Brandt. The concentrating solar design, along with the plant’s thermal storage capabilities, will allow solar-powered energy to be produced for up to six hours after sundown, he said.

In addition, work will begin this fall on the 32 MW Gila Bend solar plant, which is expected to come online in mid-2014.

Second quarter operating results

The company’s net income attributable to common shareholders for 2Q13 was $131.2m compared with net income of $122.3m for the same quarter a year ago. Net income includes operations discontinued during 2Q13, while consolidated earnings do not.

In addition to higher transmission revenues, earnings were positively affected by a 2012 regulatory settlement that included a retail non-fuel base rate increase and retail customer growth. The positive factors were partially offset by higher fuel and purchased power costs, the effects of weather that was cooler in 2Q13 than in 2Q12, higher operating and maintenance expenses primarily related to amortization of certain retirement benefits in 2013, compared with the regulatory deferral of such costs in 2012.

“Another solid quarter operationally and financially gave us the confidence to raise our 2013 guidance,” Brandt said, adding that PNW now expects its 2013 consolidated on-going earnings will be in the range of $3.55 to $3.70 per diluted share.

Longer term, the company’s goal is to achieve a consolidated earned return on average common equity of at least 9.5% annually in 2013 through 2015, he said.