Pinnacle West(US:PNW)2022-02-25 13:33Part I Business Pinnacle West, through its subsidiary APS, is a regulated electric utility serving 1.3 million customers, focused on a clean energy transition to 100% carbon-free electricity by 2050 Business of Arizona Public Service Company APS is a regulated electric utility serving 1.3 million customers, committed to 100% carbon-free electricity by 2050, managing diverse generation assets and environmental challenges - APS is a vertically-integrated electric utility serving approximately 1.3 million customers and owns or leases 6,323 MW of regulated generation capacity1922 APS 2021 Energy Sources for Native Load Customers | Energy Source | Percentage of Supply | | :--- | :--- | | Nuclear | 29% | | Gas/Oil | 26% | | Coal | 21% | | Renewables* | 13% | | Purchased Power | 11% | *Renewables include wind, solar, geothermal, biomass, and distributed generation - APS has established a 'Clean Energy Commitment' with three primary goals: - Achieve 100% clean, carbon-free electricity by 2050 - Reach a 65% clean energy mix by 2030, with 45% from renewables - End all use of coal-fired generation by 20312833 - APS operates the Palo Verde Generating Station, the largest nuclear power plant in the U.S., and holds renewed operating licenses for its three units extending to 2045, 2046, and 2047, respectively3336 - The company plans to cease using coal at its remaining Cholla units by 2025 and at the Four Corners plant by 2031. The Navajo Plant ceased operations in November 2019535861 - APS is significantly expanding its energy storage capacity, with plans to install over 900 MW by 2025 through a combination of utility-owned battery projects and Power Purchase Agreements (PPAs)74 - The Arizona Renewable Energy Standard (RES) mandates that APS supply 12% of its retail electric sales from renewable resources in 2022, increasing to 15% by 202586 - APS faces significant environmental regulatory oversight from the EPA concerning regional haze, coal combustion residuals (coal ash), and ozone standards, which could lead to material compliance costs113116124 Human Capital The company prioritizes employee safety, development, and diversity, implementing COVID-19 protocols and fostering engagement through talent programs and surveys - In response to the COVID-19 pandemic, the company transitioned non-essential workers to remote work in March 2020 and implemented safety protocols like bifurcated control rooms to maintain essential services142 Workforce Diversity Statistics (as of Dec 31, 2021) | Metric | Percentage | | :--- | :--- | | Ethnically or Racially Diverse Employees | 33% | | Female Employees | 25% | | Veteran Employees | 16% | | Female Officers | 40% | - The company focuses on talent development through programs such as leadership academies, from which 84 employees graduated in 2021, and a summer internship program that hosted 67 interns151152 - Employee engagement is tracked via annual and quarterly surveys, focusing on an Employee Experience Index. Feedback has led to enterprise-wide initiatives to improve communication and remove job obstacles154 Business of Other Subsidiaries Pinnacle West's non-utility subsidiaries, Bright Canyon Energy and El Dorado, invest in energy infrastructure and Arizona-based technology ventures - Bright Canyon Energy (BCE) develops energy infrastructure and has acquired minority ownership in two wind farms: the 242 MW Clear Creek project (9.9% ownership) and the 250 MW Nobles 2 project (5.1% ownership), both of which are operational159160 - El Dorado, an investment subsidiary, has committed $25 million to the Energy Impact Partners fund to foster utility industry innovation and another $25 million to the invisionAZ Fund to support early-stage technology companies in Arizona161 Risk Factors The company faces substantial regulatory, operational, and financial risks, including cost recovery challenges, environmental compliance, climate impacts, cybersecurity, and credit rating downgrades - Regulatory Risk: Financial condition depends on APS's ability to recover costs in a timely manner through regulated rates approved by the ACC and FERC. Regulatory decisions can materially impact results, and prior decisions can be reopened169 - Environmental Risk: APS is subject to numerous environmental laws regarding air emissions, water quality, and coal combustion residuals (CCR). New or revised regulations could increase costs, jeopardize the economic viability of coal plants, and lead to asset impairments175178180 - Climate Change Risk: The company faces financial risks from potential GHG regulations and litigation, as well as physical and operational risks from weather extremes like drought, high temperatures, and increased wildfire threat, which are common in the Southwest181183192 - Cybersecurity Risk: The company is subject to increasing threats from sophisticated actors targeting IT and operational systems. A significant breach could disrupt critical business functions, lead to data theft, and result in significant financial and reputational damage210212 - Nuclear Operations Risk: Ownership and operation of the Palo Verde nuclear plant expose the company to significant liabilities, stringent regulatory oversight by the NRC, and risks related to spent fuel disposal and potential terrorist attacks174219 - Financial Risk: A downgrade of credit ratings could increase borrowing costs and limit access to capital. The value of pension and nuclear decommissioning trust funds is subject to market performance, and shortfalls could require significant additional funding230231 - COVID-19 Risk: The pandemic could continue to negatively affect the business by decreasing energy demand, disrupting the supply chain, increasing uncollectable accounts, and delaying capital projects226227 Properties As of December 31, 2021, APS owned 6,323 MW of diverse generation capacity and operated extensive transmission and distribution networks, with some facilities on leased Indian lands APS Owned Generation Capacity by Type (as of Dec 31, 2021) | Facility Type | Owned Capacity (MW) | | :--- | :--- | | Nuclear | 1,146 | | Steam (Coal) | 1,357 | | Combined Cycle (Gas) | 1,975 | | Combustion Turbine (Gas/Oil) | 1,598 | | Solar | 247 | | Total Capacity | 6,323 | - APS's transmission facilities include approximately 5,814 pole miles of overhead lines and 74 miles of underground lines. Its distribution network comprises 11,258 miles of overhead lines and 22,821 miles of underground primary cable262 - Key power plants, such as Four Corners, and portions of the transmission system are located on Indian lands under leases and rights-of-way. The Four Corners leasehold interest has been extended to 2041266267268 Legal Proceedings The company is involved in various legal proceedings, including environmental, Superfund, and regulatory matters before the ACC and FERC - The company references other sections for details on legal proceedings, specifically Note 4 for ACC and FERC matters, and Note 11 for environmental, Superfund-related, and other disputes270 Information about our Executive Officers This section lists Pinnacle West's executive officers as of February 25, 2022, detailing their ages, positions, and professional backgrounds - Provides a list of executive officers, their ages, and their roles and employment history over the past five years275 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Pinnacle West's common stock (PNW) trades on the NYSE, underperforming industry and broader market indices over the past five years, while APS stock is not publicly traded - Pinnacle West's common stock is traded on the NYSE under the symbol PNW. As of February 17, 2022, there were approximately 15,730 shareholders of record277 Cumulative Total Shareholder Return (2016-2021) | Company/Index | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Pinnacle West Common Stock | $100 | $113 | $117 | $127 | $117 | $108 | | Edison Electric Institute Index | $100 | $112 | $116 | $146 | $144 | $169 | | S&P 500 Index | $100 | $122 | $116 | $153 | $181 | $233 | Management's Discussion and Analysis of Financial Condition and Results of Operations Pinnacle West's 2021 net income increased due to customer growth and regulatory factors, as the company pursues a clean energy transition with significant capital investments, despite recent credit rating downgrades Overview The company's strategy focuses on clean energy transition, grid reliability, and customer affordability, with significant investments and projected growth, while navigating impacts from the COVID-19 pandemic and the 2019 Rate Case - The COVID-19 pandemic resulted in higher residential electricity sales and increased bad debt expense. The combined impact of the pandemic and the Summer Disconnection Moratorium negatively impacted 2021 operating results by approximately $25 million pre-tax294298 - The company's 'Clean Energy Commitment' aims for 100% clean, carbon-free electricity by 2050, with a 2030 target of 65% clean energy (45% renewable) and a full exit from coal generation by 2031303304 - The 2019 Rate Case concluded in November 2021, resulting in an annual revenue decrease of $4.8 million, an authorized ROE of 8.70%, and a disallowance of $215.5 million in costs for the Four Corners SCR project, which APS is appealing363365 Projected Annual Growth (2022-2024) | Metric | Projected Average Annual Growth | | :--- | :--- | | Customer Growth | 1.5% to 2.5% | | Retail Sales (weather-normalized) | 3.5% to 4.5% | Results of Operations Consolidated net income attributable to common shareholders increased to $619 million in 2021, driven by higher retail revenue and pension credits, partially offset by weather impacts and increased expenses Consolidated Net Income Attributable to Common Shareholders | Year | Net Income (in millions) | | :--- | :--- | | 2021 | $619 | | 2020 | $551 | - The $56 million increase in operating revenues less fuel and purchased power was primarily driven by: - +$76 million from higher customer usage and growth - +$30 million from lower refunds related to the Tax Act - +$26 million from higher transmission revenues - -$114 million from the effects of weather397 - Pension and other postretirement non-service credits increased by $57 million year-over-year, primarily due to actual market returns exceeding estimated returns in 2020399 - Depreciation and amortization expense increased by $37 million due to increased plant in service398 Liquidity and Capital Resources The company maintains liquidity despite decreased operating cash flow, with substantial projected capital expenditures for clean energy, but faces credit rating downgrades due to regulatory uncertainty Summary of Cash Flows (Consolidated) | (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $860 | $967 | | Net cash used for investing activities | $(1,387) | $(1,278) | | Net cash from financing activities | $477 | $361 | Estimated Capital Expenditures (APS) | (in millions) | 2022 | 2023 | 2024 | | :--- | :--- | :--- | | Generation (Clean & Other) | $590 | $600 | $750 | | Distribution | $510 | $530 | $500 | | Transmission | $250 | $210 | $210 | | Other | $175 | $185 | $190 | | Total APS | $1,525 | $1,525 | $1,650 | - In late 2021, Fitch, S&P, and Moody's all downgraded the credit ratings of Pinnacle West and APS, citing negative outlooks primarily due to regulatory uncertainty following the 2019 Rate Case decision432 - At December 31, 2021, the debt-to-capitalization ratio was 56% for Pinnacle West and 50% for APS, both in compliance with the 65% maximum covenant427 Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for Pinnacle West and APS, including management's report on internal controls and the auditor's report highlighting regulatory accounting as a critical audit matter - Presents the audited consolidated financial statements for Pinnacle West and APS for the years ended December 31, 2021, 2020, and 2019467 - Includes Management's Report on Internal Control over Financial Reporting, concluding that internal controls were effective as of December 31, 2021469505 - The Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP) provides an unqualified opinion on the financial statements and the effectiveness of internal controls. It highlights 'Regulatory Accounting' as a Critical Audit Matter, noting the significant management judgments required to assess the likelihood of recovering regulatory assets and the impact of future regulatory orders472480483 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal control over financial reporting during Q4 2021 - Management of both Pinnacle West and APS concluded that their respective disclosure controls and procedures were effective as of December 31, 2021917918 - No material changes in internal control over financial reporting occurred during the fourth quarter of 2021918 Part III Directors, Executive Officers and Corporate Governance This section incorporates by reference information on directors, executive officers, and corporate governance from the 2022 Proxy Statement, including the Code of Ethics - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for its 2022 Annual Meeting of Shareholders924 Executive Compensation This section incorporates by reference executive and director compensation details from the company's 2022 Proxy Statement - Details on executive compensation are incorporated by reference from the 2022 Proxy Statement927 Security Ownership and Related Stockholder Matters This section incorporates by reference security ownership information from the 2022 Proxy Statement, detailing outstanding and available securities under equity compensation plans as of December 31, 2021 Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise (a) | Securities Remaining Available for Future Issuance (c) | | :--- | :--- | :--- | | Approved by security holders | 1,243,225 | 1,241,996 | | Not approved by security holders | — | — | | Total | 1,243,225 | 1,241,996 | Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference information on related party transactions and director independence from the company's 2022 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement937 Principal Accountant Fees and Services This section details fees paid to Deloitte & Touche LLP for audit and audit-related services in 2021 and 2020, all pre-approved by the Audit Committee APS Principal Accountant Fees (Deloitte & Touche LLP) | Type of Service | 2021 | 2020 | | :--- | :--- | :--- | | Audit Fees | $2,580,260 | $2,414,909 | | Audit-Related Fees | $333,905 | $323,067 | Part IV Exhibits and Financial Statement Schedules This section provides an index of financial statements and schedules, listing all exhibits filed with the Form 10-K, including corporate governance and material contracts - Lists all exhibits filed with the Form 10-K, including Articles of Incorporation, Bylaws, debt indentures, material contracts, and executive compensation plans945946