by Ryan Randazzo - Jul. 31, 2008 12:00 AM
The Arizona Republic
Pinnacle West Capital Corp. will slash $500 million from planned investments in Arizona Public Service Co.'s electrical infrastructure in the next three years to improve the company's "deteriorated" finances, officials said Wednesday.
They announced the cuts while discussing the company's $133.9 million profit earned from April to June.
Those profits were boosted by unusual circumstances, including a $30 million tax benefit and big sale in its real-estate division.
Officials downplayed the profits, emphasizing that APS is earning about an 8.5 percent return on its investments, less than the 10.75 percent it is legally allowed to earn.
They said that without a rate increase, they have little choice but to cut infrastructure spending.
In the past year, APS has raised its base rates, fuel rates and twice increased transmission rates, but officials say it is not enough.
They are asking the Arizona Corporation Commission for another base-rate increase, and said the company's ability to meet growing energy demands in Arizona is jeopardized by its rate structure.
"Ongoing earnings are flat for the year with inflation offsetting our efficiency savings and revenue growth," Chairman Bill Post said.
Getting higher rates approved is critical to maintaining the company's credit rating, officials said. If its credit slips, funding new power plants will be even more difficult.
"Sustaining superior, reliable customer service requires a financially strong company," Post said. "We cannot invest in the infrastructure needed to reliably meet customer needs without consistent financial help."
In addition to the 9.4 percent rate increase that would bring the monthly average household electric bill up about $11, APS has asked the Corporation Commission to grant the utility an interim increase that would raise bills about $4.66 in the meantime while the lengthy rate hearings take place.
The full rate hearing likely won't be finished until fall 2009, but the interim request could be enacted by November.
The utility has an obligation to provide power to new customers, but top executives will review every capital-expense project from power-plant upgrades to transmission lines and cut what they can, President Don Brandt said.
"They will look at each project and assess the overall business risk of deferring or eliminating that project," Brandt said.
Profits increased
A one-time tax benefit and selling its Hayden Ferry Lakeside development in Tempe helped Pinnacle West's profits by $30 million and $19 million, respectively.
Pinnacle West, which also owns SunCor Development Co., reported profit of $133.9 million, or $1.33 a share, compared with $79 million, or 78 cents a share, in the same quarter last year.
Excluding the tax benefit and the office-building sale, Pinnacle West still earned $84.9 million, $5.9 million more for the quarter than a year ago, a 7.4 percent increase.
Revenue rose 7.3 percent to $926 million for the quarter.
Analysts polled by Thomson Financial Network estimated earnings of 80 cents a share, which the company topped even excluding the one-time items.
Wall Street analysts for the most part characterize the relationship between the company and regulators as poor.
"Fundamentally, (Pinnacle West) has a great market, with customer growth about twice the national average, and reliably hot summers," analyst Philip Adams of Gimme Credit research said. "But (Pinnacle West) has historically had a problem getting timely regulatory relief to meet rising costs and a return on invested capital to support the growth."
Company shares rose Wednesday 94 cents, about 3 percent, to $32.52.
Executive pay raise
Earlier this month, APS gave the vice president in charge of Palo Verde Nuclear Generating Station a $252,000 raise - upping his annual base salary to $800,000 - and $1 million a year in deferred compensation for four years.
Brandt said the increase was justified even amid the company's financial problems because that official, Randall Edington, is well regarded in the industry and critical to helping the nuclear station get out of regulatory trouble.
"There are a small number of people in the world that can do what Randy can do," Brandt said.
He added that Edington won't get the $4 million in deferred compensation if he leaves before 2012, which gives him a strong incentive to stick around and see the plant through its current troubles.
"He and his team are doing a great job," Brandt said.
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