Operator:

Good morning, everyone, and welcome to the Pinnacle West Capital Corporation 2024 Second Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Jeffrey Guldner:

Great. Thanks, Amanda, and thank you all for joining us today. Second quarter financials were positively impacted by a number of things

Operator:

Certainly. [Operator Instructions]. Your first question is coming from Shar Pourreza from Guggenheim Partners. Your line is live.

Jeffrey Guldner:

Hey Shar.

Andrew Cooper:

Hey Shar, it's Andrew. Yes. So as you mentioned, 5.5% sales growth for the quarter, largely driven by those large C&I customers continuing to ramp up. And so you saw that coming from both the manufacturing customers, TSMC's ecosystem as well as from the data centers. And so we're still guiding to a lower range this year as that ramp starts up in a longer-term range of 4% to 6%. And that -- we have not provided guidance out past 2026, and don't intend to do so today either. But if you think about the long-term, there is a backlog of these customers that's substantial and extends beyond 2026. You have the second and third phases of TSMC committed. We have over 4,000 megawatts of data center customers that are committed as well. And that doesn't even include the backlog of more than 10,000 data center requests that we've gotten beyond that. And so the stickiness of the large C&I sales growth is a pretty critical trend, and we expect it to continue based on what we're seeing in the service territory. The only other thing I would just add about the sales growth from this quarter is we saw a nice contribution to that C&I sales growth from small business. So two-thirds to 75% of the large C&I, that 10% growth in the C&I segment was from the larger customers. But we did see small businesses continue to flourish as well. And I think that speaks to what Jeff and I spend a lot of time talking about, which is the amplification effect of having a strong economy here and a rebuild manufacturing base, and we're starting to see some of the effects of that.

Andrew Cooper:

We do typically -- when we're not in a rate case year, provide updates at the third quarter around EEI as we suggest. That's certainly from the perspective of rolling forward our guidance, providing the long-term outlook on the sales growth as well as the capital that goes with it. I know in your first question, you asked about capital as well. So that would be -- the intent would be to look at the third quarter there, as well as ensuring that we're continuing to see these ramp trends. As we've seen over the last few years with these large high load factor customers, the ramps can be a little bit variable. And so we want to ensure that the 10% growth that we saw in the first half of the year continues before we make any changes to sales guidance.

Jeffrey Guldner:

Yes, Shar. I'll start and then anybody else can chime in. I think -- so you are seeing the -- bringing in the experts having a real dialogue around what are the systemic things that are being done in other places or in other jurisdictions, how does that work, I mean to me, the thing that's encouraging is, I think it really does show that there is a desire to understand what this means and particularly important in the context that we're moving into that the amount of capital that's going to have to go into serving the growth in Arizona and to really leverage. Like one of the key strengths of Arizona has been the broad regulatory environment, which has attracted so many of these customers like Red Bull and TSMC and others into the state. That's got to pair with our ability to serve them and to meet the growth that's coming. And so it's really, I think, understanding that broader context that's been helpful for these workshops. So it's good that we're seeing another one coming up in October. I think there'll be some continued exploration or dialogue around what the different areas are. We said in the script here that a lot of the focus is right now on both the forward test years, but also the formulaic approach to rates, which is similar to FERC. And so it's still early in the process. I think they are working to try to move this through and at least get some alignment or direction articulated here throughout the rest of the year. So I think good progress and something that we're definitely engaged in, trying to make sure that we can provide the support they're looking for as they sort through some of these policy options.

Jeffrey Guldner:

Yes, thank you, Shar.

Nicholas Campanella:

Hey, thanks for the time. I wanted to just put a finer point -- I'm sorry if I missed it, but just is October really the date that you're looking towards for this to be taken up. I just know that there should be some open meetings between now and then, but is it October?

Nicholas Campanella:

Okay. And then I guess just with the strong start to '24, what are some of the negatives that we might not be contemplating here that would keep you within the guidance range? I know you kind of said that you're at the higher end? And then just knowing that the long-term CAGR is not linear, obviously, it's going to be predicated on rate outcomes, is there any kind of pull-forward opportunity from O&M or otherwise to kind of help derisk your '25 outlook within the range?

Nicholas Campanella:

That's great. I appreciate that color. And one more, if I could, just with the reg lag docket kind of gaining traction, you also kind of have this ACC election in the background as well, and that all kind of culminates around this Fall time line. But how do you kind of see that changing the direction of the lag docket, if at all?

Nicholas Campanella:

All right. Thanks a lot.

Michael Lonegan:

Hi, thanks for taking my questions. On the financing plan, just wondering if you have any updated thoughts on the timing and type of equity or alternatives. I know you previously said you were leaning towards an ATM program that could match up well with capital deployment.

Michael Lonegan:

Great. Thank you. And then going back to the regulatory lag docket, depending on when it's complete and what comes out of it, do you think you'll start preparing a rate case filing right away and file that when that's complete, that it's done in, say, four to five months later? Or could we even see a rate case before that docket is finalized and in maybe various forms of what the regulatory lag docket could look like?

Michael Lonegan:

Great. Thanks for taking my questions.

Operator:

Thank you. Your next question is coming from Travis Miller from Morningstar. Your line is live.

Jeffrey Guldner:

Hey, Travis.

Andrew Cooper:

Yes. Certainly, we've been working over the last number of years where there's a moratorium on disconnects and things during the summer. So our pace of customer receipts throughout the year tends to be fairly predictable. And so we plan our financing both the long-term and the availability of short-term capital to accommodate the normal pace of customer payments over the course of the year. And certainly, the programs that we participate in and direct funds directly from our bottom line too as well as the ones that we work with our partners all provide an opportunity to kind of reduce some of the pressures on customers from a build perspective over the course of the year, particularly as we come out of our summer season and those bills begin to be more front of mind for customers.

Jeffrey Guldner:

Yes, I'll start. I mean that's part of the process, and we've obviously been through -- if you go back and look historically, the hottest temperature we've had in Phoenix was actually -- was it 2018 or so, it was a while ago. And so you always have to manage through with this. And there's a lot of focus around personnel. So how do you make sure that your crews who are working out in the heat have access to air-conditioned trucks and that we manage the workflow there. And then a fair amount of work just on the equipment every year, making sure that we look for resiliency that we monitor the equipment, that it does have some heat sensitivity. Ted and Jake, anything?

Jeffrey Guldner:

Yes. Just a correction, the highest temp in Phoenix recorded was in 1990, 122 degrees. And so this is just something in a desert environment you plan for hot summers.

Jeffrey Guldner:

Yes, thanks Travis.

Julien Dumoulin-Smith:

Hey guys, can you hear me?

Julien Dumoulin-Smith:

Hey guys. It's pleasure. Thanks for the time. Appreciate the opportunity. So maybe just coming back to the rate case timing and just the expectations of how this would filter in on the reg lag front. Obviously, making good progress here on that front. It sounds like it wouldn't be too long, a short period of time, subsequent to its resolution, say, in October, so early '25. Is your expectation here that ultimately, the impacts would be, call it, mid '26-ish, if you wanted to put a till date to it in terms of addressing that lag and having a partial year? And then maybe you could be a little bit more specific on how you think the extent of that is going right now on resolving some of that lag? Just if I can press you a little bit further.

Julien Dumoulin-Smith:

Awesome. And then related to that, if I can push you the SRB you just alluded to. I mean, in theory, there's no -- it's an evergreen program, right? As in to the extent we get subsequent revisions on your generation needs, to the extent to which that you're still in negotiation on some of the assets here as long as it goes through your typical procurement processes, all of that would still be eligible to participate in the SRB, right?

Julien Dumoulin-Smith:

Okay, excellent. Thank you very much.

Operator:

Thank you. [Operator Instructions] Your next question is coming from Paul Patterson from Glenrock Associates. Your line is live.

Jeffrey Guldner:

Hey, Paul. Good morning.

Jeffrey Guldner:

On the latter, we don't know where the proceeding is ultimately going to go. I wouldn't say that. I think, again, we're in August, there's a workshop scheduled for October. I would expect that, that workshop that the Commission would have some dialog on kind of where they feel they are in the process and what they think the timing is going forward. I think to your point, I think they are being pretty deliberate in how they're moving the workshop process forward. But it's kind of hard to sit here and give you expected dates and everything. I think we'll see how the dialog goes in October, see how comfortable they get with the information that they're hearing and get a check in at that point on what we expect to see from a process standpoint moving forward.

Jeffrey Guldner:

Yes, thanks Paul.

Operator:

Good morning, everyone, and welcome to the Pinnacle West Capital Corporation 2024 First Quarter Earnings Conference Call. [Operator Instructions].

Amanda Ho:

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our first quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Andrew Cooper. Ted Geisler, APS President; and Jacob Tetlow, EVP of Operations are also here with us.

In the first quarter of 2024, we achieved earnings of $0.15 per share compared to a loss of $0.03 per share in the first quarter of 2023. This improvement was driven by several key factors:

the sale of Bright Canyon Energy, the implementation of new rates on March 8, along with increases in adjusted revenue. And finally, robust customer and sales growth. These positive impacts were partially offset by milder year-over-year weather and increases in interest expense, depreciation and amortization and O&M.

Operator:

Certainly. Everyone at this time will be conducting a question-and-answer session. [Operator Instructions]. Your first question is coming from Nick Campanella from Barclays.

Andrew Cooper:

Sure. Thanks for the question. Yes. So we continue to work through our competitive RFP process, and that's really the basis for us putting projects through the SRB. We had a 1,000-megawatt RFP in 2023, and we're negotiating projects that are coming out of that right now. And so there's a healthy pipeline of projects, really across a diverse set of fuels, renewable in gas as well that we're looking at that would qualify.

Andrew Cooper:

Sure. As I mentioned earlier, we are really pleased to be able to execute on the foundational discrete block equity that we needed to ensure that we're maintaining a balanced healthy capital structure down to utility. And so as we go through and you've got kind of the 3-year capital financing plan in front of you, as we go through the out years of that plan, given the capital needs that we have today and ensuring a balanced capital structure down at the utility, there is, as you pointed out, an unidentified external financing need of an incremental $400 million from the parent.

Operator:

Your next question is coming from Shar Pourreza from Guggenheim Partners.

Andrew Cooper:

Sure, Jamieson, this is Andrew. I'll start. So in the near term, that 5.9% sales growth that we saw for the quarter, we felt really pleased with, and it did represent fundamentally a lot of the large high load factor C&I customers. And it was a mix of the ramp-up of the common semiconductor ecosystem of them and their suppliers and downstream vendors as well as the ramp-up of some of the existing data center customers that we've had come online over the last couple of years.

Jamieson Ward:

That's perfect. Very clear. And I appreciate it. And then, second, on the regulatory lag docket, which, of course, you guys already touched on. So following the March workshop, which I'm sure a lot of us tuned into and noting the yet-to-be-scheduled additional workshops, which you already mentioned. Could you give us your high-level sense of where the proceeding currently stands in terms of the time line overall until we could see an alternative ratemaking approach being adopted by the commission and actually available for you to use in rate cases? And also, are there any expected key milestones we should be watching for? And that's it.

Michael Lonegan:

Going back to the financing plan, you sized the $400 million of additional equity at 40% of incremental CapEx. Just wondering, any incremental spending beyond that going forward. How would you expect to finance that in terms of portion of equity?

Andrew Cooper:

Yes. And I think one of the things that we're trying to solve for through the regulatory initiatives is that lumpiness and trying to find a way to create a smoother, more predictable stream. We believe we've got substantial customer rate headroom to be able to make the investments we need to make over time. But when we're dependent on step function kind of rate relief to recover on them, that's really the challenge we are trying to address. We've talked pretty openly about the regulatory lag that we're seeing given the historical test year construct that we're living under. And the test here in the rate case that we just concluded and put rates into effect in March, those costs go back to the middle of 2021 before inflation was really starting to pick up, and we're starting to see an increase in interest rates as well.

Jeffrey Guldner:

Not really an earnings sensitivity. I mean you're watching, obviously, as we continue to work on the structure that Arizona has adopted with the resource comparison proxy process. As that steps down, you tend to see a little bit of cyclicality as applications go up before the credit steps down because of how the grandfathering works. And then you see -- you get a better sense of kind of where they level off. So I think we've got the information in the deck. If you want to say anything, Andrew.

Alexander Mortimer:

So industry-wide, we're seeing load growth. It seems skew more C&I, obviously, as well in your service territory. Do you expect cost of service to become a larger point of contention in future regulatory proceedings? And has Arizona taken any steps to address this?

Jeffrey Guldner:

Yes. There's extensive conversations that go on in a number of different fronts. And it's not just in the Western U.S. We've seen fire situations come really all over the country. And so these conversations, you see, for example, in the some of the wildfire task force groups, you see a lot more Eastern utilities that are participating in what used to just be a conversation among the Western utilities. There's a significant amount of technical work that's being done at EPRI to work through some of the technical solutions on wildfire. There's a significant amount of sharing, I'll call out PG&E, they are remarkably constructive in terms of helping to share work that they're doing and that's really true for all the utilities in the West. And so the California folks have obviously been in the front tip of the spear for this. They're very open about sharing those lessons and what's working for them and what technology solutions are available there.

Operator:

Good day, everyone. And welcome to the Pinnacle West Capital Corporation 2023 Fourth Quarter Earnings Conference Call. At this time all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Andrew Cooper:

Thank you, Amanda, and thank everyone for joining us today. I will first cover our fourth quarter and full year 2023 results before handing it to Jeff who will discuss our recent rate case outcome growth outlook and strategy. Afterwards I will finish up with our 2024 guidance and long-term financial outlook. In the fourth quarter of 2023 we achieved a $0.21 increase in earnings per share compared to the same quarter in 2022. This year-over-year improvement was largely driven by a $0.41 uplift in gross margin attributable to increased sales and usage as well as higher transmission revenue and contributions from the LFCR and 2019 rate case appeal. The lack of certain prior period items from Q4 2022 contributed to a $0.21 benefit to other income and expense on a year-over-year basis. These increases versus the prior year were partially offset by higher O&M expense, depreciation amortization, interest expense and benefit costs. For the full year 2023, we earned $4.41 per share, a $0.15 increase over 2022 surpassing our guidance range of $4.10 to $4.30 per share. A significant factor in this result was a $0.22 year-over-year weather benefit driven by an unprecedented summer heat wave during the third quarter. Overall weather contributed $0.48 in 2023 compared to normal weather. Revenues from adjuster mechanisms, transmission and increased sales and usage were also positive drivers for the year. In addition other income and expense was $0.33 higher year-over-year driven by the lack of certain prior expense items from 2022 and the sale of Bright Canyon assets in the third quarter of 2023. These increases versus 2022 were partially offset by higher O&M expense, depreciation amortization, interest expense and benefit costs. Overall we ended 2023 with 2% customer growth maintaining the years-long upper trajectory of consistent growth in our service territory. Weather normalized sales growth was within the expected guidance range at 1.5% in 2023 driven by 3.3%growth in our C&I customer segments. I'll now pass the discussion to Jeff to talk about our rate case outcome growth outlook and strategy before I continue with our 2024 guidance and long-term financial outlook.

Andrew Cooper:

Thanks Jeff. I'll now discuss our 2024 guidance and future financial outlook. For our 2024 outlook we are establishing an EPS guidance range of $4.60 to $4.80 per share reflecting the additional revenues from our recent rate case outcome with new rates effective March 8th. This revenue is partially offset by continued drag from increased expenses not captured in our historical test year. As Jeff mentioned this rate case was balanced and constructive and this decision will create a solid foundation from which we will grow. However it is important to highlight that we continue to face significant regulatory lag due to the timing of our historical test year which ended June 30th of 2022. This lag is mainly due to higher interest rates on borrowed capital, higher depreciation due to increased rate-based growth, lower contributions from pension on service credits, and increased O&M expense due to planned generation outages. We are encouraged by the commission's focus on holistically addressing regulatory lag through the newly created regulatory lag docket. We are committed to addressing these current costs in our next rate case and working with the commission to find solutions to reduce these impacts on our current construct. Our commitment to mitigating regulatory lag is a priority aiming to preserve our financial stability and build shareholder value between rate cases. Diving a bit deeper into 2024 the largest positive driver of our guidance will be new revenues from the implementation of the rate case decision. Other positive drivers are expected to include increased revenues from sales growth, the LFCR, and the full-year impact of the 2019 rate case appeal outcome. The most significant year-over-year negative driver is expected to be weather due to the record-breaking heat wave we saw in 2023 as we plan for normal weather. Other negative drivers are expected to be higher depreciation and harmonization expense, increased financing costs, and higher O&M primarily due to planned outages. Turning to customer growth, as Jeff mentioned, we once again expect our customer growth to be within the range of 1.5% to 2.5%, which continues to highlight the attractiveness of our state and service territory for customer in migration. For 2024 sales growth, we expect 2% to 4% growth of which 2.5% to 3.5%is driven by extra high load factor C&I customers. These sales create operating leverage and ultimately rate headroom for all customers. We've seen a steady ramping of these customers and anticipate they will continue to ramp through 2024. Longer term, we expect our weather normalized sales growth to be within the range of 4% to 6%through 2026 with 3%to 5%of this growth driven by our large C&I customers. Turning now to what we strive to provide investors going forward I will discuss our financial outlook and goals. We are rebasing our long-term EPS growth guidance of 5% to 7%off the midpoint of our 2024 guidance range of $4.60 to $4.80 per share. While our financial plan supports this growth rate for the long term, our goal is to work toward a more consistent and timely cost recovery profile. We have already made solid progress toward reducing regulatory lag with the commission approving the system reliability benefit surcharge. While this mechanism will enable more timely cost recovery for utility-owned generation, we must first develop these projects before the mechanism begins recovering costs. Therefore, this mechanism has the potential to create strong value in the future, but we must first work through the natural development cycle and get projects in service. In addition, the commission has reiterated its policy on settlements which may streamline future rate case filings while creating even more collaboration between parties. Finally, we will engage with regulators to holistically address regulatory lag through the newly created docket and commit our cadence of future rate cases to ensure we are recovering our material costs. We are allocating $6 billion for investment through 2026, contributing to a 14% increase in our capital investment profile compared to this time last year. This plan incorporates additional capital investment in generation that will qualify for the new SRB mechanism. In addition, an increasing portion of our capital plan is directed towards bolster in our FERC jurisdictional transmission infrastructure. Average annual spend is now more than double what it was as recently as five years ago. We have designed a well balanced capital allocation strategy that optimizes our ability to receive timely recovery for investments while providing reliable service across our rapidly growing service territory. Importantly, the SRB will expand our capacities of self-build generation to meet customer needs while reducing lag. Projects that meet the requirements of the all-source RFP and compete from a cost and reliability perspective would qualify for recovery through the SRB. We expect approved projects to be included in rates within approximately 180 days of in-service, significantly shortening the time between investment and recovery on those assets compared to a traditional rate case. Recovery will be at the prevailing weighted average cost of capital less 100 basis points until a future rate case. This discount will provide customers an immediate benefit while achieving rate gradualism and reducing lag. We have highlighted five potential near-term opportunities to secure project cost recovery through the SRB with final outcomes dependent on ongoing procurement processes. Additional opportunities are also expected to arise based on future RFP outcomes and projects aligning with this mechanism. The expansion of our capital investment plan is poised to drive substantial rate based growth. Consequently, we are revising our rate based growth guidance to an annual CAGR of 6% to 8%. In addition, with the adoption of the SRB, we now expect an increase in tracked capital, which will reduce regulatory lag in the future. By increasing our transmission spend and generation investment that qualifies for the SRB, we expect a double the amount of tracked capital which will improve our ability to receive timely cost recovery and reduce the amount to be recovered in future rate cases. To fortify our capital structure and support our robust capital expenditure plan, we are planning to issue a mix of debt and equity securities over the 2024 through 2026 period. Our principal goal is to have a healthy capital structure at the utility with no less than 50% equity. We have noted since 2021 the need for up to 500 million of equity to support a balanced utility capital structure. You'll recall this was deferred over the past two plus years as we sought to inflate shareholders as we work to improve the regulatory environment in Arizona. The capital structure need has grown by an additional 100 million to 200 million over that time and will be required to true up our equity ratio. At the same time, our CapEx profile has grown by almost 15%, nearly $1 billion over a four-year window. While we will pursue a blend of financing solutions across APS and Pinnacle West to address our investment objectives, sources of incremental capital may include up to $400 million of additional equity or equity-length securities over the period, size to approximately 40% of this incremental CapEx. The financing options for this incremental CapEx may potentially include at the market issuances, but we will continue to evaluate alternatives to common equity. As we advance into 2024, our dedication to cost management continues to guide our operations. Core O&M is declining year-over-year despite continued inflation, which supports our long-term goal of reduced O&M per megawatt hour. Notably, planned major outages are scheduled for four corners in a five, Redhawk and West Phoenix, with refilling outages at Palo Verde, marking a critical phase in our maintenance strategy. The four corners outage at Unit 5 specifically is the last major planned outage at the unit before its retirement, with the last major planned outage at Unit 4 scheduled for spring of 2025. Despite these necessary planned outages, our commitment to operational efficiency and lean practices remains intact for the long term. Our goal of declining O&M per megawatt hour is strongly established and underscores our effective cost management with rapid growth in our service territory. The second chart on this slide highlights our success in maintaining O&M cost increases below the rate of inflation since 2017, outperforming both national CPI trends and more specifically, local inflation rates in Phoenix. This achievement is a testament to our unwavering focus on optimizing operations and fostering a culture of efficiency across our organization. We continue to provide an attractive dividend yield as part of our total shareholder return and maintain a goal of managing our payout ratio into a sustained range of 65% to 75% in the future. With a solid track record of annual dividend growth, we understand the importance of returning value to our investors. We are committed to working diligently to ensure our dividend remains competitive. Turning to our credit ratings, following our recent rate case resolution and other developments in the Arizona regulatory climate, we are working with the rating agencies as they evaluate our credit. Healthy investment grade credit ratings are pivotal to our financial profile as they contribute to reducing borrowing costs, thereby directly benefiting our customers through more favorable financial conditions. We are adjusting our FFO/debt target range to 14% to 16% to properly balance the financing needs of the company and solid credit metrics. Our balance sheet remains strong, reinforcing our financial foundation. This balance sheet strength provides us flexibility to navigate the current interest rate environment and strategically address our near-term maturities as well as ongoing and future investment needs. Looking back at the last few years and the strides we've made, we are enthusiastic about our future and the potential of the company. Overcoming the setbacks of the prior rate case, we achieved the goal set forth during the preceding two years and we've aligned closely with the commission and stakeholders to secure a constructive outcome in this rate case. While challenges such as regulatory lag persist, our commitment to seek collaborative solutions with stakeholders, ACC staff, and the commission remains firm. Our dedication to keeping customer costs affordable is evident through our efficient O&M practices seeking to ensure that rates and costs stay below inflation during this period of unprecedented growth in our service territory. With a more constructive regulatory environment and a continued focus on affordability, we look forward to approaching the future with a clear vision and optimism for our customers and investors. This concludes our prepared remarks. I'll now turn the call back over to the operator for questions.

Unidentified Analyst:

Good morning, guys. It's James Howard [ph] on here for Shar.

Andrew Cooper:

Hi, James.

Jeff Guldner:

Sure, James. Thanks for the question. Fundamentally, if you think about the financing plan, you have the equity need that we've identified, which we've talked about for a long time. It's up to $500 million. And we've now true that up to an additional 100 to 200 that we need, to make sure that the equity ratio at the utility is strong. And at 51.9% equity ratio that was approved in the most recent rate case is a good example of a solid consistent with the market type equity ratio. And so that's kind of that need, and I think what you're focused on is what is the cadence for some of the -- that up to $400 million that I mentioned earlier to support future CapEx. And really, the way we think about it is what is the structure or type of issuance that would allow us to meet the needs of that CapEx as it's incurred. And certainly, an ATM program is one option that would allow us to draw equity periodically and have proceeds that match up with our capital. The capital need is relatively consistent across the period. And I just want to be clear that up to $400 million that is future capital spending as you work through the next three years of our plan. And so, we're very flexible in terms of thinking about what the options available are to us, whether an ATM or some sort of equity like security. We'll look at all those options. We don't have a strong preference. I think we want to make clear that as we think about our capital structure, we think about our CapEx plan, something that has a -- there will be external financing needs for the company to support that CapEx. And they could include equity type products. I think we'll continue to evaluate over the next few years what product matches up best and what market is most available to us. But I do cite the ATM as an example because of the way it allows that periodicity to match up against CapEx, which is ultimately what we're solving for over the longer term, both from the increases in transmission spend on the FERC side and then generation spend that we expect would be eligible for SRB.

Andrew Cooper:

Yes. So the projects that we've listed out are examples of the opportunities when you think about we're currently in our 2023 RFP where we ask for all-source resources. And so the five projects listed there cover that span of time. And we're still negotiating with third-party developers around PPAs. These projects are still in that very early stage of development. They are examples of the potential that we have within the existing window that we're in for this RFP. There will be future RFPs and future time spans that match up. But one of the things that we wanted to emphasize here is that for a long time we've been talking about feeling hamstrung for bringing competitive projects forward because of capital limitations and uncertainty around recovery. With the SRB, you have here a list of opportunities that demonstrate that that 10% to 15% of megawatts that we've been developing historically has that upside into a range much closer to kind of that 35% to 50%that we thought was potential based on looking at our own pipeline. So within the window of the existing RFP and the time period we're talking about, you take the megawatts that we expect need to be built from a utility-scale perspective over that window and what megawatts are available to us as potential opportunities. That's the 42%you see there. Will all these projects be built? We're still in that development timeline. We'll make that determination as we go along. The CapEx in our three-year plan that we believe is probable includes generation capital related to potential SRB projects, but we're not breaking that capital out granularly. But the 42% is representative of that upside opportunity relative to our prior view of our investment profile on the generation side.

Unidentified Analyst:

Perfect. Thank you. That's exactly what we were looking for in terms of an answer. It looked like an opportunity set to us, but we had a few inbounds and people were asking us to clarify. And so we did. Thank you so much. That's all we have.

Unidentified Analyst:

Appreciate it.

Nick Campanella:

Hey, good morning, everyone. Thanks for taking my question.

Nick Campanella:

Hey. So I guess it's good to see the ACC is kind of heading in the right direction here, especially acknowledging the capital investments you're putting in and working on the earned ROI lag. I guess just how would you kind of characterize under-earning this year, just as a on maybe that ACC rate base from a percentage basis and how much do you think you can kind of get back in the upcoming rate case filing versus what could be addressed in the ROI lag docket? Thank you.

Andrew Cooper:

Yes, Nick, we haven't quantified the lag because it varies year-to-year, but the drivers that you should think about, and Jeff mentioned one in the context of interest expense, that's certainly one we have a 3.85% embedded cost to debt in this case, but the two debt issuances we've done since the case are in the mid 5% range to the low 6% range. So substantially above it, we knew going into the case, we really wanted to focus on getting the ROE back up to the right level. We had a good equity capital structure, and so in terms of the elements of WACC, the cost of debt was one that we de-emphasized in this case. It created a lower revenue requirement, but we do need to recoup that to be more representative of forward financing costs. O&M is the other one where if you think about the test year, we were in a period of mid 2021 to mid 2022 as our test year. I like to say it was during the time where the Fed was still talking about inflation as transitory, but if you look at it relative to our 2024 O&M guidance, you're talking about somewhere in the neighborhood of $100 million of incremental O&M, and that's what's a really good from our perspective O&M story, where year-over-year, we are bringing O&M down despite having a full year of higher wages at some of our business units and on a -- that's on a core basis. And even with the higher amount of planned outages given the four corners outage, you're still talking about a less than 2% O&M increase to the midpoint of our guidance range. So a good story, but a lot of historical O&M to catch up on. Pension, which we've talked about in the past, fortunately is not a story. If you look at the guidance walk to 2024, no further impacts from pension. In fact, it's a penny positive on the non-service credit side, but we are carrying with us the 2022 market impacts of the impacts to our pension asset, as well as the substantial changing discount rates year-over-year. And so we'll need to recoup that as well. And then the final one and you'll see that again in our walk this year, increases in depreciation related to plan going to service. A great story from this rate case, that's the one area where we got 12 months to post-year plan plus one major project that fell outside that 12-month window. But our 2024 projects include some IT investments, which have a shorter depreciation life and will contribute further to that lag. So, we're excited to get into the opportunity to have a dialogue with the commission and stakeholders about these issues. And of course, we'll continue to look at the cadence of future rate cases to address them as well.

Andrew Cooper:

Yes, it's a really great question, Nick, because we have the investment profile. We have fortunately the customer rate headroom. The IRA is a TBD. We'll see where that goes. But we really have the profile to grow that 5% to 7% over the long term. And much of the conversation we've been having here has been about the regulatory lag kind of embedded in a historical test year. And so, if we could address that and go into a more stable price environment, we certainly have the opportunity to create more smooth cost recovery. Over the medium term, the SRB is a significant contributor to that, because you basically double the amount of tract capital that you have that are going through some form of adjuster mechanisms. So, between the transmission spend and the SRB eligible generation spend, you're having a much smoother pace of recovery, where your customer, your sales growth is supporting any O&M increases and supporting the needs of a growing distribution system, and then your transmission and generation spend is tracked. So, we view our ability, once we've caught up on these historical lagging costs, to be in a place where that cost recovery profile can smooth. We see the past to 5% to 7% either way, but it is really addressing some of these near-term pinch points that come out in the last few years of inflation that we need to address to get to the other side of that. Between the SRB and sales growth, because as you look at the long-term sales growth, not only is it providing some top line, but it's also, as I mentioned earlier, blunting some of the O&M and ensuring that we create operating leverage out of those increased sales.

Jeff Guldner:

Thanks, Nick.

Michael Lonegan:

Hi, good morning. Thanks for taking my question. So, you've talked about your equity issuance plan, balancing your capital and intended to balance your capital structure to greater than 50% equity at the APS level. Obviously, you lowered your FFO to debt target to 14% and 16%. Just wondering if ideally, you know, more specifically, if you're looking to target as high as 52%equity at APS, the structure to match the rate case outcome, and then where you anticipate lending, you know, on FFO to debt metric this year and over your plan?

Michael Lonegan:

Great, thank you. And then secondly, for me, regarding your sales growth forecast through 2026, you're guiding a 4% to 6% through that 26 period versus 2% to 4%this year. Obviously, you're expecting large C&I customers to come online. Just wondering how we should think about sales growth in '25 and specifically and also in '26 when we see the spike or is it consistent in those two years?

Michael Lonegan:

Great. Thanks, Andrew.

Paul Patterson:

Hey, good morning.

Paul Patterson:

Just really quick sort of from bookkeeping questions. I apologize if I miss this. What's the timing of your next rate case? Do you guys expect to file it?

Paul Patterson:

Okay. You anticipated my next question, which to follow-up on that, when do you think you said you expected to be engaged with it this year? Always hard to sort of predict when a docket like that would be resolved. But do you have any sense? I know it's really early, but I'm just curious. Do you have any idea when that -- when you think that might be -- we might get a conclusion or at least a better idea about where they're headed on that?

Paul Patterson:

Okay. Then I guess the answer to the first question is probably not until 2025 would we see an actual filing for a new rate case. Does that make sense? Am I thinking about it correctly?

Paul Patterson:

Awesome. Thanks so much.

Operator:

Thank you. Your next question is coming from Bill Appicelli from UBS. Your line is live.

Jeff Guldner:

Yes. Hi, Bill.

Jeff Guldner:

A short answer, yes. If you think about the RFP, assuming that our projects clear through the RFP, the earliest in services you have in advance of summer 2026. There is a filing process around the time the assets go into service, which I mentioned earlier in the remarks could be in the six-month range, but that's something that we'll work through at the time. The first slug of projects is ensuring that we have reliability over summer '26. And you'll see the types of projects that are in that list of potential opportunities are pretty diverse group of technology types. And so that was really the other thing I think that I would highlight from that opportunity set is it addresses reliability needs for the summer peak, as well as some of the shifts that we're making in our clean energy commitment. So 2026 is the period. I talked about earlier, this is a medium-term part of the solution on regulatory lag, is increasing the share of capital, and that'll pair nicely with the work that we're doing right now on some of those income statement costs that we want to make sure that we're recovering in a timely way.

Jeff Guldner:

Yes. So as the weather continued to be a positive benefit through the year, we did look at opportunities to take some of the O&M out of 2024. As we were triaging during the summer, we were really just making sure that we were allocating O&M to the right spots within '23 to make sure that we're meeting the needs of our generation fleet and keeping reliability through that summer. So there was some modest pull forward. And that's something that we look at every year and look at the opportunity to take costs out. What's really driving the long-term trend is our overall focus on customer affordability and on that lean culture that we've ingrained in the organization. That's a fundamental driver. You also have Challo. This is the last year of operations, and so some of the O&M from Challo rolls off as we move away from some of the heavier fuel, heavier O&M assets into some of the lighter O&M assets. So it's really a combination. All of that is offset by a full-year impact of our contracted IBW and some of the other wage pressure that we've seen. But there's a lot of pride internally on the ability to manage O&M and operate a reliable system with a lean mentality underlying it.

Andrew Cooper:

Yes. Just going back to your first question, yes, our guidance range includes the expected gain on the sale of Bright Canyon this year. And we're very confident that 5% to 100% earnings growth is available to us on that rebased level, including that year-over-year $0.10. Going to the equity, I wouldn't want to comment on the timing specifically of that $600 million to $700 million, but fundamentally, you're thinking about it the right way, which is that we have a need to true up our capital structure. And that capital structure need goes with the question that was asked earlier around the timing of our rate case, which we're also going to continue to monitor. So we're fortunate to have flexibility from the perspective of our capital plan and our financing plan as to when we do that larger equity ratio true up need. Common equity is the default kind of base case option for that need. We are flexible in terms of the timing. We'll continue to monitor the markets and you execute the optimal time for us. The $400 million that comes later is really a longer term periodic need over the period to make sure that we're supporting our CapEx from the right mix of external financing sources.

Andrew Cooper:

Thank you, Bill.

Anthony Crowdell:

Hey, good morning, team. Just two quick ones. Where did you end 2023 on an FFO to debt bases at Pinnacle West? And second, to Mike's question earlier on the balance sheet, you talked about a lot of discussions with the rating agencies. I'm just curious if you think the recent balanced outcome in the APS case is enough to remove the negative outlook at the agencies?

Anthony Crowdell:

Great. Thanks for taking my questions.

Operator:

Thank you. That concludes our Q&A session. Ladies and gentlemen, this completes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Operator:

Good day, everyone. And welcome to the Pinnacle West Capital Corporation 2023 Third Quarter Earnings Conference Call [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Jeff Guldner:

Great. Thanks, Amanda, and thank you all for joining us today. We continue to execute well on our operations performance and financial management. As part of my operations update, I'll share with you our success in managing through a record breaking summer in the valley and reliably serving our customers when they needed us the most. I'll also provide an update on our pending rate case and other regulatory filings. As Andrew will explain our earnings expectations for the year on track to meet our guidance range that we recently updated in the second quarter. First, I want to recognize our operations and field teams for doing an exceptional job maintaining reliable service for our customers this summer. July was just one day short of an entire month of 110-plus degrees and August did not provide much repreve. We ended the summer with 55 days of 110-plus degrees and 36 days of overnight lows above 90 degrees. During this period, our generation fleet performed extremely well and was available when our customers critically needed the power. Our careful long term planning for resource adequacy, combined with equipment maintenance programs and innovative customer demand side programs proved beneficial throughout the summer. APS set five new peak demand records during the month of July, ultimately reaching 8,162 megawatts on July 15. That figure’s over 500 megawatts higher than our last peak demand that was set in August of 2020. Our baseload and fast-ramping assets, including Four Corners, [Indiscernible] and Palo Verde all performed well. Our nonnuclear generation fleet's equivalent availability factor, which is the percentage of time that a generation units available and ready to perform when called upon was 93.4% from June through September. In addition, we were extremely pleased to have our Agave solar facilities and our AZ Sun batteries online and available to serve customers. Finally, Palo Verde generating station's capacity factor for the same time frame was 99%. With the successful completion of the summer run, Palo Verde Unit 1 has entered its planned refueling outage on October 7th. Not only were our generation plants there when we needed them our customers were as well. Customers participating in APS' Cool Rewards program helped create grid capacity while earning bill credits for voluntarily reducing their energy use. A community of more than 58,000 customers and about 80,000 of smart thermostats created a virtual power plant to save energy during the peak hours of the summer. This year, participating customers conserved a record 135 megawatts of power, the equivalent of a peaking unit. APS' Cool Rewards is the cornerstone of our virtual power plant, which is rapidly approaching 200 megawatts in participation and will be an important part of our long term resource planning strategy. We'll continue to expand this resource and these important partnerships with our customers as we continue our journey to 100% clean and carbon-free electricity by 2050. Long term planning has been key to providing reliable service. In fact, we just filed our Integrated Resource Plan or IRP with the Arizona Corporation Commission yesterday, outlining our resource needs for the next 15 years. We're expecting strong customer and demand growth during this period and have outlined the resources necessary to maintain affordable and reliable service for our customers. We anticipate that a variety of resource types will be important in serving this period of robust customer growth and look forward to partnering with customers, developers and stakeholders on bringing these technologies online. While the IRP does not specify ownership, we are committed to continuing our competitive all-source RFP process, which will yield a blend of PPA and ownership projects. The IRP includes a variety of scenarios but our preferred scenario identifies a diverse blend of technologies to secure a reliable grid while maintaining a strong focus on customer affordability. And this scenario also achieves our clean energy goals of 65% carbon free by 2030. With the extreme weather that we experienced each summer remains as important as ever to continue assisting our communities through our heat release support programs, APS partners with local community organizations to aid the state's most vulnerable populations. This support includes a collaboration with the foundation for senior living, offering emergency repair/replacement of AC systems during the hot summer months; the Salvation Army's network of 18 cooling and hydration stations across Arizona; an emergency shelter and homeless prevention program in partnership with St. Vincent de Paul; and a new partnership with Salary 211 and Lyft to provide eligible Arizonans with free rides to cooling shelters. These are just a few examples of our efforts to collaborate for the benefit of our customers and communities, and I'm pleased to share that APS was recently recognized with the innovative Corporate Philanthropy Award by the Phoenix Business Journal for these partnerships and programs aimed at providing heat relief to vulnerable individuals and customers. I'm also happy to share that we've completed our labor negotiations with our local IBEW and have a newly ratified agreement in effect. We worked hard to build a collaborative relationship with our labor union employees. And I'm grateful that we've been able to reach an agreement that allows us to continue to serve our customers and retain top talent. Finally, our customer care center was ranked as the top care center amongst our peers so far through the third quarter of this year as rated by our customers in the J.D. Power electric customer satisfaction study. And overall, our customer satisfaction is rated by customers through J.D. Power remains strong. I'm extremely proud of our employees, our progress so far and look forward to closing out the year strong. Turning to our rate case. After 24 days of hearings, we wrapped up on October 3rd, and the parties are now in the briefing period, initial briefs are due November 6th with replied reach due November 21st. We expect the administrative law judge to issue her recommended opinion in order later this year, possibly early next year, with it being placed on an open meeting agenda shortly thereafter. We look forward to completing our rate case in a constructive manner while securing the cost recovery that's necessary to enable continued growth of our electric grid and to support Arizona's growing economy. As we look to wrap up 2023, our focus and priorities remain on executing our mission of providing clean, reliable and affordable service to our customers. I want to thank you all for your time today, and I'll turn it over to Andrew.

Operator:

[Operator Instructions]. Your first question is coming from Shar Pourreza from Guggenheim Partners.

Jeff Guldner:

I think that was one of three announcements that was made by the DOE, and there's another one that's in the region here that we're not out with. But that one -- this line, as you know, is a joint project that we've been working on for a while with Berkshire Hathaway. This DOE announcement is essentially a derisking opportunity. So it's certainly positive for the project, but that project is still quite a ways out. It is core to our business and that it's transmission. But given that this is at an unregulated affiliate at TransCanyon, it would be more project financed. And so it is a little different than the core transmission at the utility that we're talking about, which is, again, where we tend to look mostly at the investment opportunities, but certainly something that we want to continue to look at. But it is a ways out.

Andrew Cooper:

Yes, so we did raise CapEx for the year by $130 million. And this was really looking at the needs for the year, independent of any potential rate case outcome and how generation could be addressed under a tracker. There were needs around the existing fleet, and we identified those. On the distribution side, we continue to see customer growth and frankly, some of the equipment that we need to acquire to serve that growth costing more in the current environment. I'd say the area that really -- we're not going to be able to provide an update on CapEx out past this year until after we get through the rate case. But I'd say the one trend that I think is critical to highlight, when you think about where the real transmission opportunities begin for us, it's within our regulated footprint. And so that additional $55 million that we're spending on our FERC transmission assets this year, I think is reflective of a trend that we've seen over the last few years of continuing to lean in there. There's a massive need in the transmission system, we have a formula rate and a competitive ROE. And so that's an area where we're going to expect to continue to lean in, regardless of rate case outcome and need around CapEx going forward. But the need here was discrete to identify needs in 2023, and we'll be able to provide an update for '24 and beyond when we come out of the rate case.

Nicholas Campanella:

So I just wanted to ask on pension. Could you just give us a sense on how that's performing versus targeted returns year-to-date? And just appreciating that recapture of pension is only partial because of the way that the test year in the rate case is structured. Should we be thinking about a continued benefit or headwind into '24 here, anything that you could quantify would be helpful as we think the '24?

Nicholas Campanella:

And I guess just the IRP, obviously, some big opportunities here, and you're not making any assumptions on ownership at this point. But can you just give us a flavor of is this spending that could potentially be incorporated in the next five year roll forward, or is it more further looking than that?

Operator:

Your next question is coming from Julian Dumoulin-Smith from Bank of America.

Jeff Guldner:

We've got pretty significant growth, obviously happening here in, I'd say, a few different sectors. One is the industrial load from TSMC and there's some other kind of high load factor factory load that is coming up. And a lot of that is really being driven by land availability. So you look at some of the big parcels of land that can hold these facilities. And as some of these companies compete, if it's not company A, company B is going to come in and take that land. And so some of that industrial load growth, I think, is going to continue and we continue to see pretty significant upside from the TSMCs and the supply chain that, that brings because that brings Linde and sort of gas manufacturers and other things. Data centers, I think, are absolutely happening, they're a little bit harder to figure out exactly where the megawatts are going. So I think that you can look in the region and say there's a certain amount of megawatts that are here, how that gets allocated between individual customers gets challenging for some of our planning folks, but it's more of a question of where it's going to go and how do we build the transmission distribution system out to that, match it on the generation side. But this is an attractive market for data centers. So we see that as a pretty significant growth opportunity. Coop, you want to comment on just how it's spoke through on the IRP?

Julian Dumoulin-Smith:

And then I know we've spoken to times about earned returns here, and that's difficult in some respects to get ahead of in the context of the case. But any further points that you would make in terms of items that would stand out in terms of puts and takes against your ability to earn your authorized levels here? I mean, obviously, we’ve sort of seen a number of points, but obviously, Nick mentioned pension a second ago. But what other points would you flag here as you think about the puts and takes and the ability to see improvement here, especially those in your control?

Operator:

Your next question is coming from Paul Patterson from Glenrock Associates.

Andrew Cooper:

So if you think about the course of the year and the trajectory that our sales growth has been. We've known really even going back 12 to 18 months that we've been moving into an environment where our sales growth is going to be driven by extra high load factor, large C&I customers. And we had very robust residential growth during the years around COVID as we had the work from home trend. And what we've seen quarter upon quarter is that trend tends to reverse out. We still have 2% customer growth coming into the service territory but the contribution from residential sales between energy efficiency, continued rooftop solar penetration and then some of the normalization of trends around residential usage, we've seen a decline, that decline has caused more of a deceleration than we expected. And that's frankly also relative to trying to gauge and continuously forecast EV penetration, which helps to offset some of that. So from a residential perspective, it may have been more pronounced over the last few quarters. But ultimately, it's moving from a trend perspective in the direction that we've anticipated. But again, this quarter, I think continue to emphasize a trend and it's probably been a little bit more pronounced. Early in the year, we did reforecast our high load factor customers, and that was really primarily based on the delay that Taiwan Semiconductor announced in the ability to start up the facility. They've committed to and they've reiterated recently a 2025 startup, and that is the basis of the long term plan. The continued ramp of the data centers we're seeing from one data center to another could be slower or faster than we expected. That's driving year-to-date, as I mentioned, 2.8% sales growth in the C&I segment. And so for the year, we're looking at 1% to 3% overall, down from the 2% to 4% that we talked about last quarter. That is fundamentally driven by some of the deceleration on the residential side. But over the long term, much of that sales growth is driven by the large C&I segment. And we continue to see the inflows of these larger customers, both the data centers and some of the advanced manufacturing and we feel confident that it can change from quarter-to-quarter a little bit who's ramping, who's not. As Jeff said, from a land use perspective, there's attractive parcels and we know who all is talking about taking them. So we feel good about it and the continued attractiveness of Arizona for those businesses coming in.

Jeff Guldner:

Paul, the core rewards program, which is that virtual power plant program, I don't think that's having an effect on the residential growth. Those are really an opportunity for us to call on those customers a number of times a year. On a lot of them, you actually precool the home before you call the event and then the customer can opt out without any penalty. And so we do see a little -- if you call it, multiple days in a row, there's a little erosion that happens as you get further into the events, but I don't think that's having an effect on the sales.

Andrew Cooper:

I think I would differentiate that program from the trend that you're suggesting may be happening. And we're definitely looking at usage patterns overall. If you think about the trajectory of our quarter, we had a month and half of extremely intense weather. And as we started to move into cooler weather, there was inevitably going to be customers looking at their bills, thinking about the opportunity to conserve in September. And I think as we saw the quarter go on, we saw residential usage per customer trail off. And I do think part of it reflects some bounce back effect from what was a very intense summer. So we're understanding those patterns and customer reactions both from a bill sensitivity perspective and just overall conservation. But I think those are probably anomalous to this particular quarter. There tends to be a psychology around when do I turn off my AC for the year. And people this year might have done it earlier, just in response to knowing that they were running it so intensely during the summer. But on the flip side, we actually saw price per megawatt hour go up for the quarter, which suggests that when we're in that intense period of heat, customers became more insensitive to our time use rates. And so normally, when you have higher megawatt hour sales you're seeing it at a lower price because it's more of the off-peak hours. And so I think from month to month, you're seeing different customer behaviors and we try to understand those as best we can. But overall, for the quarter, I think, we're just continuing to see the same trend of residential customers slowing down, continued energy efficiency and distributed generation and this reversal out. If you go back year-over-year, quarter-over-quarter for the last 24 months, you've been seeing those COVID work from home numbers continue to reverse out as people return to normal usage patterns.

Michael Lonegan:

So following up on an earlier question on Julian's rate case question. Obviously, there's some dependence on the outcome here. But coming out of it, given some delayed recovery on growing nominal O&M, higher interest expense, pension expense like you alluded to and assuming the SRB recovery mechanism is not granted, obviously, like given what happened in Tucson Electric case, you obviously may have some meaningful regulatory lag. You talked about some mitigation measures. But just wondering what your expectations are on when you may have to file your next rate case and just the frequency of that in general, especially without a recovery mechanism like SRB.

Operator:

Your next question is coming from Anthony Crowdell from Mizuho.

Andrew Cooper:

So you saw for this quarter that O&M was relatively flat. And I think that, that was very specific to some offsets from employee benefit expense that you could see detailed in the 10-Q. But foundationally, we've seen the same trends around O&M throughout the year, which is some of the lagging impacts of inflation, particularly around areas like wages and then increased O&M needs around our generation fleet, both nuclear and non-nuclear. We saw those from early in the year as we prepared to get into the summer and then we saw those after the summer where we needed to continue to spend time around the fleet. So the O&M numbers that we gave last quarter, that $915 million to $935 million that upped O&M level we continue to remain on track to. While we always look for opportunities to pull forward O&M from a future year, in this case, we took the anticipated weather benefit, we took the new surcharge revenue that was coming in and we look to the opportunities we have within the year to derisk our system, ensure plant reliability and address some of the wage issues that ensure we could maintain a competitive workforce. So what you're seeing from that 15 to 35 range that's remaining on track, the ability to derisk future years is probably a little bit more constrained given the needs of this year in particular. But certainly, as we see those opportunities, whether -- even the smallest things, we're encouraging people to look to do that work this year, if they can.

Jeff Guldner:

Anthony, it's certainly consistent with the dock and on regulatory lag. Obviously, that hasn't really started or is going to take a while to work through that docket. So we're, again, making the advocacy here in the case. It came in later in the process with Tucson than it did with us. So we were able to have more conversation at the hearings on it. And so if you listen to some of the hearings, I think there was, again, more dialog about folks trying to understand what does this do. We have now the briefing process and so this is being briefed out and so you'll be able to see it in the briefs. And then you've got -- so you've got really two more steps. So the judge is going to have to take the briefs and the advocacy that she heard at the hearing and conclude what is her recommendation based on that. And then the next opportunity is with the commission. And so the judge's recommended opinion is a recommended opinion. And so regardless of where that comes out, you will likely see continued advocacy through the open meeting as we present these cases, because just like you said, if they are -- and I think they are looking at how can I reduce regulatory lag, because it helps to reduce the number of rate cases that you have to come in with. And so as we tie those together, whether it's in the briefing stage right now or ultimately at the open meeting, those are exactly the arguments that we're trying to make. And again, the importance to us is that in PPA -- if you PPA, all the projects we need for reliability, you have less control from a project execution standpoint, and so a little bit more risk in getting those projects in. And so you want to make sure that there's that appropriate balance of self build versus PPAs. And it's really hard to self build this stuff if you're then picking up regulatory lag and it will drive quicker rate case filings. And so I think all those items are going to come out in the continued conversation, but we're still a ways from getting that through but it's probably early next year or later this year before we'll see that.

Jeff Guldner:

I wouldn't say -- we don't do like rate case expense. Some utilities file like rate case expense and put it in there. This is all embedded within the existing team, so the costs are essentially already embedded in the teams that we have. And when we come out of a rate case that just moves into other regulatory matters. So it's not something that we've ever really focused on. Certainly, there's paper and other things involved, but it's not material.

Travis Miller:

Trying to unpack this weather and then also related to earlier questions on O&M. I'm guessing and correct me if I'm wrong, that you've incurred some extra O&M just for the fact that you've had to operate the system at a higher level given the weather. What's the resulting potential benefit in, say, 2024 or 2025, if you get back to normal weather, you move the earnings on the top line? But are there other impacts that would be a benefit from not having hot weather?

Travis Miller:

And then just real quick on the 5% to 7%. I think you've said base year was normalized 2022. If you -- and correct me if that's wrong. But if you get through when you get through this rate case, do you foresee then adjusting that 5% to 7% to think about post rate case earnings number as the jump-off point?

Operator:

Your next question is coming from Sophie Karp from KeyBanc.

Andrew Cooper:

And so one of the things we've talked a lot about is that with our extra high load factor customers, given the hours that they're running and you're going to see a lower overall margin. We tend to give it in a percentage growth rule of thumb that if you have 1% of residential growth, it's equivalent to $20 million to $25 million of margin. If you have 1% of high load factor growth, it's more of the equivalent to $5 million to $10 million of margin. And so you do see a lower margin contribution, but an awful lot more megawatt hours. And so from that perspective, that's why we're so focused on our O&M continuing to be disciplined from a volumetric basis. We're going to have higher O&M as we serve more customers. But given these high load factor customers allow us to spread that O&M and frankly, they're a single site versus residentially going out to more and more subdivisions that that growth becomes efficient growth for us despite the margin being lower overall. From a customer cost of service perspective, we ensure that customers and our rate design is meant to ensure a fair distribution of costs across our various customer classes, and that's something that we look at each time we go in for a rate case and in short. But fundamentally, just from an overall perspective, blunting O&M with lots of megawatt hours in a single site is positive despite the lower margin.

Operator:

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2023 Second Quarter Earnings Conference Call. At this time all participants have been placed on a listen-only mode. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Jeff Guldner:

Great. Thanks, Amanda. Thank you all for joining us today. Although our second quarter financials were negatively impacted by significantly mild weather in June, as well as higher operating expenses, we have updated our full year 2023 guidance to take into account the settlement that was reached between APS and the commission on the SCR matter. Before Andrew goes through the details of our second quarter results and updates to our 2023 full year guidance, I'll just provide a few updates on recent operational and regulatory developments. Starting with operations. As we progress through the summer season, I'm very proud to say that our team continues to excel in delivering reliable service to our customers. The Palo Verde Generating Station successfully completed its planned refueling and maintenance outage for Unit 1 on May 13. Additionally, we commissioned the remaining 60 megawatts of energy storage at our AZ Sun sites. So that totals now 201 megawatts of APS-owned storage installed this year and 150 megawatts of APS-owned solar at the Agave Solar facility. These are all valuable resources to help serve our customers through the summer season. In fact, while the second quarter was marked by extremely mild weather, as I think all of you probably know, July certainly heated up. Our robust planning, resource procurement efforts and our dedicated team have allowed us to provide exceptional service to our customers throughout this unprecedented heat wave. Phoenix experienced a record number of consecutive days of over 110 degrees, shattering prior records for daytime highs for evening lows for days over 110 degrees, and the APS team served its customers with top-tier reliability throughout it all. In fact, we broke our previous peak demand record multiple times this July, reaching a new all-time record on July 20 at nearly 8,200 megawatts. That's a 500-megawatt increase compared to our prior record that was set in 2020. I want to recognize our operators and our field teams for doing such an exceptional job in making sure that customers continue to have reliable service through this unrelenting heat. As you know, APS plans years in advance to continue serving customers with reliable and affordable energy, our resource planners secure a diverse energy mix to meet demand like solar and wind power, battery energy storage and our APS operated Palo Verde Generating Station, which is still the largest nuclear plant in the U.S. and the country's largest producer of clean energy. When temperatures caused demand to increase, APS' strength and resilience comes from using flexible resources like natural gas to keep homes and businesses cool over long stretches of extreme heat. Another important tool that I want to highlight and that we utilize is our Cool Rewards demand response program. It's in its fifth year of operation. That program essentially operates as a virtual power plant where our customers provide over 110 megawatts of flexible clean capacity. The program connects nearly 80,000 APS customers with smart thermostat technology that helps them save money while also playing an integral role in conserving energy when the demand on the electric grid is its highest. This partnership helps us to ensure reliable, uninterrupted service to our customers on the hottest Arizona days, while also assisting us on our journey to 100% clean in carbon-free electricity by 2050. So you can see we've taken all of the above approach to provide the most affordable and reliable service when our customers need us the most. And as part of our vigorous planning, we recently issued an all-source RFP for another 1,000 megawatts to be online between 2026 and 2028. We're seeking the best combination of resources to serve our customers reliable – reliably while not sacrificing affordability and continuing to build towards our clean energy future. Additionally, we continue to remain focused on providing exceptional customer service. Our J.D. Power, JDP residential rankings for overall customer satisfaction have steadily improved over the past two years. And I'm proud to share that the latest JDP residential 2023 second quarter results have placed us back in the first quartile compared to our peers. APS is the strongest performing drivers in the latest survey where customer care, both phone and digital power quality and reliability and corporate citizenship. We've made remarkable progress over the past few years moving from fourth quartile to first and that progress would not have happened without the dedication and commitment of our hard-working employees across the company. I look forward to continuing to provide exemplary service to our customers in the future. Turning to our regulatory updates. Last quarter, I spoke about the appeal of our last rate case and the favorable Court of Appeals decision. The commission directed its legal staff to enter into negotiations with the company. And in June, we reached an agreement with the commission legal staff on how to implement that decision. The joint resolution was then approved at the June open meeting, and it created a court resolution surcharge that started on July 1. We're pleased that we were able to reach an agreement with the commission in a reasonable and expeditious manner to resolve this issue. And as I've mentioned previously, the Four Corners Power Plant is a critically important reliability asset for the entire Southwest. And the investment in SCRs was required to keep that plant running under federal law. Andrew will address the financial impacts from this decision here in a few minutes. On our rate case, we are almost done with all rounds of written testimony. Our rejoinder testimony is due tomorrow. The hearing is scheduled to begin on August 10. And we look forward to working through that process and resolving this rate case in a timely and constructive manner. We made solid progress through the first half of this year, improving our customer experience, enhancing our stakeholder relationships and executing on our regulatory matters. There is certainly more work to do, but I think this is a good opportunity to acknowledge the team's dedication and early accomplishments here in 2023. And with that, I'll turn the call over to Andrew.

Operator:

Certainly. [Operator Instructions] Your first question is coming from Julien Dumoulin-Smith from Bank of America. Your line is live.

Jeff Guldner:

Yes, hi Dariusz. This is Jeff. Let me start with kind of the context of the rider. It came up in the Tucson Electric rate case ultimately didn’t make it into the administrative law judges’ recommendation. That case is going to open meeting here pretty quickly. We have filed it and we’re going to continue to advocate for it because we think it’s an appropriate way of addressing regulatory lag. And you can see with just the growth that we’re seeing, the need for that additional generation and need to have that balance between not just PPAs, but some that we can more directly control and really control the deployment of that capital. That as well as the ability to find a mechanism that we can flow through the production tax credits is going to be important. So we think there is good reasons to continue to advocate for it. I think what you’re seeing that is still modestly encouraging is that there is an interest from staff in understanding the value and the concept. And so that’s really what the hearing process, I think, is going to give us an opportunity to do is to advocate and explain why this makes sense in the context of where we are. And I’d be more concerned if it was pretty just a flat no, we’re not interested. And I think you can see from the testimony from the dialogue in the Tucson case that there is an interest in understanding it. We’re not quite there yet, and I hope that we’ll have an opportunity at hearing to really explain why we see significant value moving forward with this and not just coming back in which is your other alternative is you come right back in another rate case pretty quickly if there’s not a way to address this kind of – the regulatory lag that comes from getting those plants into service, but not into rates efficiently. Andrew, you want to talk maybe on the capital?

Dariusz Lozny:

Great. Thank you for that detail. I appreciate that. One more, if I could. I just wanted to come back to the generation related O&M spending that Andrew highlighted in the opening remarks. Specifically, how do you see that shaping up for the back half of the year, just given the amount that you have to run the generation resources, obviously, during this extremely hot weather. Do you anticipate that there’s sort of some additional catch-up O&M, if you will, in the latter part of the year? And then related, assuming the weather normalizes in 2024 or thereafter, do you see that as an opportunity to flex down that O&M in future periods.

Dariusz Lozny:

Okay, great. Thank you very much for that detail. I’ll pass it along here.

Operator:

Thank you. Your next question is coming from Alex Mortimer from Mizuho. Your line is live.

Jeff Guldner:

Hi, Alex.

Andrew Cooper:

Yes, Alex, we are definitely focused on the tools that we have at our disposal to create more linear, predictable earnings stream within that 5% to 7% growth rate. And so we're comfortable with the 5% to 7% rate. Certainly we'll be updating all of the key drivers of our financial performance after the rate case concludes. Inevitably, given the outcome of the 2019 rate case and the financial reset there, rate relief will be a meaningful driver of our growth over the medium term. It's hard to avoid that fact. However, the work we're doing around how do we manage O&M within the context of weather from year-to-year? How do we push for more capital to be tracked so we can create more rate gradualism for customers, but also more linearity for shareholders? Those are the levers within our control that we're trying to deliver within that long-term EPS growth rate range a little bit more of a predictable track within it. Ultimately, doing the things that are within our control and managing costs as best we can.

Andrew Cooper:

Yes. Alex, that's all, I think a conversation that we could have after the rate case. Ultimately, over the long-term we want to be able to through a linear earnings stream, create a long-term earnings growth rate that isn't based on a base here. That is a continuous product of more predictable, less regulatory lag; and so those are the things that we're focused on to create that. So it becomes less about a specific base here. But as far as updating from our current 5% to 7% of 2022 weather normalized guidance, that's a conversation we can have after the rate case.

Jeff Guldner:

Thanks Alex.

Paul Patterson:

Hey. Good morning.

Andrew Cooper:

Hey Paul.

Jeff Guldner:

Yes. As we mentioned we're just here a day away from filing, rejoin our testimony. So you got five rounds of testimony and the hearing scheduled to start in a week or so. So the likelihood that a settlement would sort of come up from there is low. We continue and we always look for opportunities to narrow issues or for opportunities to engage in a conversation around that. But I think right now, it certainly seems like we're moving towards hearing. I will say if you can follow on the testimony and the intervenors and the physicians on this case, that this is much more what I call a traditional rate case. It's a lot more fewer issues the more traditional things that are coming. So I think that that is positive in terms of where the case has evolved to.

Jeff Guldner:

Yes. I mean it's clearly a concern when you get into prolonged stretches of this. We've had, we had a hotter day number years ago I think the still record high day was actually quite a while ago. But it's the persistence of this heat wave that I think has really sort of challenged the policy makers. But the important thing to remember is that the heat in the desert in the summer is not new to us. And so there have been certainly cases where you've had multiple days in the north of 115, where you get the same kind of issues about being safe outside, making sure that you don't – you don't make contact with the pavement. The most important thing, I think, that the policymakers here are doing a nice job of is trying to address the unsheltered population. We've got, for example, [Paul an] (0:25:20) air conditioner program where we can help support through the foundation for senior living. People getting air conditioner repairs because those are where it gets really dangerous. If you're just in a home with an air conditioner, people are kind of used to this, I think, but it's certainly something that you need to look at from a resilience standpoint in ensuring that as you continue to see longer periods of hot weather that we've got the resilience to be able to navigate that. But people are still moving here. It's still a very I think it's still the fastest-growing county in the U.S. So I don't think the heat deters them, and it's kind of similar to what you deal with in the Northeast and the Upper Midwest where you've got the really cold winters, you just got to know how to adapt to it.

Jeff Guldner:

Yes.

James Ward:

Hi guys. It's James Ward on for Shar. How are you?

Andrew Cooper:

Hi James.

Andrew Cooper:

Yes, James, so just to step back, we do have that drag now from the end of 2022 when we took into account the rapid increase in interest rates in 2022, which affects both our fixed income portfolio as well as the interest costs associated with our pension. So we have that drag which year-over-year is in the 30-some-odd range, and you see it this quarter as you've seen in prior quarters. And so one of the things we did say to the investment community is we wanted to reduce the lag associated with the pension expense and more properly reflect the test year expense because we didn't know those numbers when we filed our direct case. And so on rebuttal, as you alluded to we did file to take better account of what the testers should be based on averaging the mark-to-market end of 2021, mark-to-market end of 2022. And as you said, that's about a $20 million benefit. When it comes to the impact there, that isn't going to be something that flows through pension accounting. That's something that's going to flow through the revenue requirements and through customer charges. So that will be – if it is approved, and we're going to continue to advocate for it through the case, staff did not express support from it and there's a remodel testimony, but it's something we're going to continue to push for. That would just be reflected in the revenue requirement like everything else. However, at the same time as we do every year, at the end of the year, we're going to have to reevaluate our pension expenses based on expected market returns where discount rates are at that point. And what may, as you said, pass through the corridor and be considered material from the perspective beginning to amortize. But the drag from 2022 will remain, and the key is to reduce regulatory lag on the recovery of that through the adjustments and normalization requests that we made on rebuttal.

Andrew Cooper:

Sure. Thanks James.

Dariusz Lozny:

Hey guys, its Dariusz back on. Just one quick follow-up, if I could. I just wanted to ask about the change in your guidance relative to the effective tax rate. It looks like it ticked up a little bit. And now there's a band versus previously it was a point estimate. Just wondering what drove that?

Dariusz Lozny:

Okay. Great. Thanks so much for clarifying.

Operator:

Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Operator:

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2023 First Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma’am, the floor is yours.

Jeffrey Guldner:

Great. Thanks Amanda and thank you all for joining us today. 2023 has started off in line with the financial guidance that we provided on the fourth quarter call in February. And before Andrew discusses the details of our first quarter results, I will provide a few updates on recent operational and regulatory developments. First off, as you know, safety is our number one priority, and I do want to take this opportunity to congratulate our employees for keeping safety in sharp focus in the first quarter, especially through an unseasonably long and challenging winter period. We discussed summer preparedness quite extensively, and that is our longest and highest peak demand season in Arizona. But winter preparedness is also an important part of how we reliably serve our customers throughout the year. We have an extremely diverse and broad service territory, serving 11 out of 15 counties in Arizona and so in addition to the desert regions that most people associate with the state, APS also serves communities at much higher altitudes. This year, northern Arizona saw one of the wettest winter seasons in recent history. In fact, Flagstaff set a record for the second highest snowfall total through March 1st in over 100-years. Despite slippery roads, hazardous conditions and freezing temperatures, our crews were able to restore power safely and quickly to our customers when they needed it the most. With winter now officially behind us, we have quickly moved to preparing for the summer. While we always have had a robust summer preparedness program, resource adequacy continues to be extremely important as energy supplies in the southwest tighten. To serve our customers with top-tier reliability each year, we perform preventative maintenance, emergency operations center drills, acquire critical spare equipment, conduct fire mitigation line controls and execute a comprehensive plan to support public safety and first responders. Also during the first quarter, our Palo Verde nuclear facility operated a 100% capacity factor. Unit two is currently in a planned refueling outage that began on April 8th and is on schedule to return to service in early May. Upon successful completion of the latest refueling outage, all three units are poised to provide around-the-clock clean energy to help meet the demands of the summer for the entire Desert Southwest. In addition, our resource planning process helps ensure long-term resource adequacy and progress towards our clean energy commitment. We do plan to file our 2023 integrated resource plan later this year. That will include a 15-year forecast of electricity demand and the resources needed to reliably serve our customers. We are currently engaging with a wide variety of stakeholders to gather input and feedback as we prepare that plan. I’m also extremely pleased to announce the completion of 141 megawatts of APS-owned batteries at our Arizona sun sites with an additional 60 megawatts that we expect to be completed by midyear. We also expect our 150-megawatt Agave solar plant to be in service in the next few months. We look forward to having these critical resources serve customers during the peak summer season. And we are also finalizing project selections from our 2022 all-source RFP, and we have recently signed 4 PPAs to be in service by 2024 and 2025. Finally, APS is actively working on another all-source RFP that is expected to be released midyear, and that will be for new resources to be in service by 2026 through 2028. Additionally, we reached an exciting milestone in our clean energy journey on March 26th when our highest hours served by clean percent metric peaked at 99%. And during that hour, we also reached 58% renewable energy. Our participation in the energy imbalance market and our continued effort in exploring an expanded Western energy market will be critical to maintaining customer reliability and affordability into the future. We are also starting the year with solid J.D. Power Residential Customer Satisfaction Survey scores that firmly place APS within the second quartile for overall satisfaction when compared to its large investor-owned peers. We made gains in both power quality and reliability and corporate citizenship in the first quarter, and this was especially positive, given the challenging winter season that I spoke about earlier. We look forward to continuing to make improvements for our customers and providing a more frictionless customer experience. And then turning to regulatory, we continue to work through the rate case process. Expect that staff and intervenor direct testimony will be filed right now scheduled for May 22nd for revenue requirement and June 5th for rate design. In addition, in March, we received a favorable decision from the Arizona Court of Appeals on our appeal of the last rate case decision. We are pleased that the Court of Appeals clarified the prudency standard that must be applied by the commission in their evaluation for recovery of investments that we make. The Four Corners Power Plant is a critically important reliability asset for the entire Southwest region, and the investment in SCRs was required to keep that plant running under Federal Law. Right now, parties have until May 8th to file a petition for review to the Supreme Court. No one has filed that petition yet. And we look forward to working with the commission and other parties to resolve this in a matter -- in the most efficient way that we can. So although 2023 is off to a solid start, we know we still have much work to do, and we look forward to continuing to execute on our priorities throughout the year. And with that, I will turn the call over to Andrew. Andrew.

Operator:

Certainly. [Operator Instructions] Your first question is coming from Julien Dumoulin-Smith from Bank of America Merrill Lynch.

Jeffrey Guldner:

Yes. Dariusz, I mean, obviously, we follow those cases pretty closely, and we are always open to looking at different alternatives. I think in our case, still focused on the kind of mechanisms that we currently have and that we have used before is probably the better path for us. But we are early. We will wait and see how the staff testimony comes in, the intervenor testimony comes in, and then we will begin working from there.

Andrew Cooper:

Sure, Dariusz. It is Andrew. The most important thing I would say about the O&M profile for the year is that we remain on plan. And so if you look at the year-over-year comparison, a lot of what you are seeing there in the first quarter is timing-related, where when you compare the first quarter of 2022, you are seeing an uncharacteristically low O&M first quarter if you look at the last three or four-years. And there is a confluence of things that drove last year to be lower than average. You had the A&G credits from Palo Verde and outage schedules and things like that, that drive that. But you also really didn’t see in the first quarter of last year, inflation in the way that we saw it later in the year and that we continue to see it this year. And so that run rate of O&M that we ended up with for last year really didn’t start until later in the year when we were still thinking in the first quarter of last year that inflation was transitory, it became a lot stickier. And so the trend that we typically see seasonally throughout the year, I think, holds here around O&M. This quarter looked fairly characteristic for a first quarter from an O&M perspective. We certainly continue to focus on our lean initiatives, customer affordability opportunities on the O&M side and that declining O&M per megawatt-hour. But from a shaping perspective, this year so far has looked like a relatively typical year. Last year happened to have and is driving that comparison in our chart, and in our deck to look like a drag, which certainly in the scheme of the quarter, it is year-over-year, but against an unusual comparison from last year.

Jeffrey Guldner:

Thanks Dariusz.

Jamieson Ward:

Hi guys. It is actually James Ward on for Shar. How are you?

Jamieson Ward:

Doing well. Looking forward to seeing you guys in a few weeks - or actually, you are not doing EGA. Sorry, it is a habit over the last -- I just covered a bunch of all these calls.

Jamieson Ward:

We wish we were seeing you. Shar is seeing you for AVR in a couple of months. That is what I was thinking of. Alright, getting to the question, and Jeff, very glad that you are able to make it. That is terrific. So our first question is just earlier this year, and it is relating back to O&M but sort of from a slightly different angle, the question that was just asked. Earlier this year, we saw the stock come out with a recommendation - sorry, ROE for some or mixed up here. Recommendation for 9.6% ROE for Tucson Electric and on May 22nd we will be seeing the first round of staff and entrepreneur testimony get filed in your case. Based on what you have been seeing recently, and I get that there are a few data points, how are you thinking about ballpark expectations of what a reasonable ROE recommendation might be?

Jamieson Ward:

Totally fair. Understood. Sorry, I just had to ask that one as well. The original I wanted to ask on O&M. So following up on the prior question as previously mentioned, you continue to target declining O&M per megawatt-hour despite inflationary pressures. What level of inflation are you assuming relative to that guidance target when you said it? And then as a follow-up, how does actual inflation been coming in by comparison and those are my questions. Thank you.

Jamieson Ward:

Got it. Thank you very much.

Alexander Mortimer :

Hi good morning. So many large customers coming online in the next couple of years, how do you think about the linearity of the long-term EPS CAGR as we look through 2023, 2024 and 2025?

Alexander Mortimer :

Okay, understood. And then just on the -- kind of circling back on the large customer side. How do you think about your exposure to a potential economic slowdown, potentially second half of this year or further out, given that so much of that investment is coming in and then is there a good way to think about sort of quantifying your exposure to load growth where, for example, 50 basis points of load growth is worth $0.10 of EPS or kind of something along those lines?

Andrew Cooper:

Sure, yes. And Alex, also, if you look at this year in particular, we continue to monitor for signs of economic slowdown. The first quarter certainly showed that ramp-up of those larger customers. C&I growth contributed 4.3%, which was pretty solid and in line with the range that we have overall for the year. But on the residential side and the small C&I side, but really on the residential side, we continue to see despite that work-from-home trend being mature, in fact, some people going back to the office, we saw a sizable uptick in usage per customer this quarter. It was kind of a full robust winter tourism season, part-time residents, visitors to the valley here. So we continue to see strength in the economy. Those are the types of things that we monitor within a given year to assess the health of the economy. And certainly, as the inflation rate has started to come down here, that is been a meaningful contributor. Customer growth is a big piece of that as well, that 2% customer growth, continuing to look at that, where the cost of living in Arizona remains affordable relative to areas where the net migration is happening from, which is particularly cities in California, that is another measure of economic vitality that we measure. There is a rule of thumb that we tend to use around 1% of sales growth. Remember, the large C&I customers come in at a lower margin. So if you think about 1% of C&I sales, it is less than $10 million. It is in the $5 million to $10 million range of revenue from 1% of large C&I. Residential, it is in the $25 million-plus, 1% growth annually in residential would be $25 million-plus of incremental revenue.

Andrew Cooper:

Sure. Thanks Alex.

Travis Miller:

Thanks you and good morning everyone. You have just touched on a lot of what my question was going to be, but in terms of that difference between the electricity sales growth and the customer growth. Longer term, and again, you kind of mentioned this, but thinking about the residential side more, would you expect that customer growth rate and the electricity sales growth rate to somewhat match each other or are there trends you are seeing in terms of those growth rates changing, right, either people becoming more efficient or more use per household, something like that?

Andrew Cooper:

Yes. Jeff is right, the 2% customer growth in that range is something that we see continuing, given the factors that I talked about. A lot of it is offset by energy efficiency, as Jeff described. We certainly look to the small C&I growing up around the new subdivisions and things as well. The area that we are starting to monitor this year, we don’t have numbers around it, but it is EV, electric vehicle penetration. That is one area where usage per customer on the residential side is forecasted to pick up over time. So that EV penetration is an important part of the calculus around the residential because as we have -- kind of we are starting to see last year, the work-from-home trend reached a point of saturation. In fact, as I mentioned, we have had people start going back to the office. So when you take that plus energy efficiency, it eats into quite a bit of the customer growth. So it will be the impacts of things like EVs, if you go out into the future.

Jeffrey Guldner:

No. Travis, if you dig into our stuff, you will see we are - and it is kind of partly because of where we are located in the country. But if you look at us and project who serves the other half of Phoenix, we have the highest penetration of time of use rates. We have residential demand rates. We are very far ahead of the curve nationally on rate design. And so a lot of that is really what is incenting customers to do things. We have an incredibly robust smart thermostat program that we use to help us get through the summer from a demand response perspective. And so a lot of the stuff that you might be thinking in other states is going to start hitting the commission, has hit the commission, and we are well ahead of a lot of our peers in those areas.

Operator:

Thank you. That completes our Q&A session. Everyone, this concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Operator:

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2022 Fourth Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Jeffrey Guldner:

Thanks, Amanda, and thank you all for joining us today. Good morning. In looking back on 2022, it was no doubt one of our most challenging years in recent memory is we faced major financial headwinds and a financial reset resulting from the outcome of our last rate case. I'm going to provide several updates today and share the successes we were able to achieve, despite the challenges we faced. Coming out of last rate case, we laid out a comprehensive plan and strategy and we met or exceeded nearly every target we set for ourselves, including delivering strong service reliability to our customers. We made significant progress in the last year but we're not done and we look forward to continuing to execute our plan. Turning now to regulatory, we came out of the last rate case fully committed to improving our regulatory relationships, and we've seen progress as a result of our focus in that area. We received constructive decisions for all key items served by the previous bench during 2022, including our financing application last December. We started 2023 with two new commissioners and a new Chair, Commissioner Thompson and Commissioner Meyers joined the bench in January and Commissioner O'Connor was elected Chairman. We've already seen constructive actions and decisions by the new bench, including the creation of a docket to examine ways to reduce regulatory lag. We believe that these conversations are important and we look forward to working with the commission on thoughtful solutions. For our pending rate case, the administrative law judge issued a procedural order in December, outlining the schedule. The first round of staff and intervenor testimony is due in May with the hearing set to commence in early August. We look forward to working with the parties and the commission through the rate case process and in gaining additional regulatory clarity. Our number one goal continues be to be doing what's right for the people and prosperity of Arizona, which includes working collaboratively with the commission and building a more constructive relationship. Turning to the operation side, I want to start by recognizing our field team's exceptional execution in 2022, I'm especially proud of our employees for prioritizing safety and ending the year with significantly lower employee injuries. Three low-energy SIPs and our lowest number of OSHA recordable injuries on record. We had one of the most hazardous and damaging summer storm seasons in recent history, where we saw a record number of poles damaged. And for context we replaced over 800 poles, which is about 500 more than an average summer. In addition, while parts of the southwest region experienced capacity shortages, again in 2022, our careful long-term planning and resource adequacy allowed us to serve our customers reliably. Additionally, we remain engaged in the western wholesale market which allowed us to make off-system sales and to create savings for APS customers. Importantly, those off-system sales directly benefit APS customers by lowering our overall costs, while helping maintain regional grid stability. And finally, our generation units performed extremely well with our nonnuclear fleet, recording a summertime equivalent availability factor, EAF of 95%, and we achieved a capacity factor of 100.2% at the Palo Verde Generating Station. We recognize the importance of creating customer value and remain focused on improving our customer experience. Our employees are committed to putting customers first and working towards our goal of achieving an industry-leading best-in-class customer experience. As a result of this commitment, we made extraordinary progress on that front in 2022 with APS earning ratings from its customers making it among the most improved utilities in the nation for both residential and business customer satisfaction, measured by J.D. Power. Compared to 2021, APS achieved quartile gains in every single driver of residential and business customer satisfaction, firmly lifting the company into the second quartile nationally for residential customers, in the first quartile nationally for business customers. Consequently, overall satisfaction is now well above industry benchmarks when compared to the Company's large investor-owned peers. We also continue to make progress on our resource procurement and clean energy commitment since announcing our goal to reach 100% clean carbon-free energy by 2050, three years ago. We procured over 2,100 megawatts of clean and affordable energy resources. Additionally, as previously discussed, we issued an all-source RFP last year for another 1,000 to 1,500 megawatts of new resources to be in service from 2025 to 2027, and we continue to work through finalizing procurement decisions from that RFP. These substantial investments are essential resources designed to help us keep pace with Arizona's tremendous growth. At the same time, electricity capacity markets are tightening across the entire West. Looking forward, our goals for 2023 include, continuously improving our customer communication and engagement; achieving a constructive outcome in our pending rate case; and reliably serving customers through the tremendous growth in our service territory. And I want to once again recognize the near-term headwinds that are created by the unfavorable outcome of our previous rate case and how it will continue to make 2023 challenging. However, we believe in our ability to provide long-term value to both customers and shareholders and we look forward to executing our plan and continuing our proven cost management efforts all against the backdrop of Arizona's extraordinary economic expansion. So I want to thank you for your time today and I'm going to turn the call over to Andrew, who will talk about our fourth quarter and full-year 2022 earnings and our forward-looking financial expectations. Andrew?

Operator:

Certainly. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Julien Dumoulin-Smith from Bank of America. Your line is live.

Andrew Cooper:

Sure, Dariusz. It's Andrew. As you noted, we do have an equity need in the plan there, that $400 million to $500 million of equity in 2024. And that's really set up to make sure that the APS equity layer is appropriately capitalized coming out of the rate case given some of the debt that weren't for APS in the near term. Any future equity needs will really be dependent on the capital plan that we developed after the rate case concludes. As I mentioned earlier, the capital that we've added into the plan here is really dependent on load growth and serving the service territories it expands. Once we get through the rate case and think about, for example, our clean capital spend, that will be an area where as we with a constructive outcome consider a different ratio of self-build versus PPA assets. We will look at the financing plan at that point to make a determination. We'll also be looking for feedback from the rating agencies on our credit metrics at the conclusion of the rate case to figure out the right capital plan for the years beyond 2024. But as of now, the need for 2024, that $400 million to $500 million post the rate case is intact.

Andrew Cooper:

Sure, Dariusz. So the forecast is driven by a diversified group of manufacturing, data center customers and some of the overall C&I growth that we're seeing in the service territory. It's a pretty different economic story than it's been in the past as far as the factors contributing to growth here. We're not really depending on the broader macroeconomic story as much as specifically identified customers, which include TSMC, and it's a considerable part of that. The 2% to 4% of the 3.5% to 5.5%, that is from the large customers, TSMC is a considerable part of that, but there is data center customers and other manufacturing there as well. So it's pretty diversified on that front. The 5% to 7% earnings growth rate is through 2026, and that's pretty much coterminous. The sales growth rate -- the long-term sale growth rate that we have here is through 2025, but roughly similar trends through that forecast period. As you've seen even in 2022, that sales growth is certainly helping us to mitigate the inflation and some of the O&M pressure that we're seeing. And we'll continue to work both those cost levers and keep a close eye on the macroeconomic environment and the specific customers as well as we go through the forecast period.

Jeffrey Guldner:

Thanks, Dariusz.

Shar Pourreza:

Hey, guys.

Shar Pourreza:

Good morning, Jeff. Let me ask you, so Jeff, you historically have said that, you're under-investing in APS by maybe roughly a $200 million to $300 million per year. Is that still the case? I mean, obviously, from your prepared remarks, it sounds like the $600 million, you guys just bumped up in CapEx is sort of agnostic to APS and base level spending. But I'm just kind of curious, if you take this increase layered in with what you've said, you have under-invested in the system, how do we sort of think about the two together?

Shar Pourreza:

Got it. Yeah, I was just more curious on that $200 million to $300 million, you've quoted before in the past and how that correlates with the CapEx increase today. And then just on the CapEx increase, what does that sort of puts you around that 5% to 7% rate base growth range? They have out there now? The $600 million?

Shar Pourreza:

Got it. Okay. And then just lastly, if the Court of Appeals where to rule in favor regarding the Four Corners SCR and Ocotillo projects. What would that look like, I guess from an EPS standpoint in 2023, would it be retroactive? And what would the incremental EPS be going forward since you only obviously report GAAP results? Thanks.

Andrew Cooper:

Yeah, I'm sure you remember too, that there may be a further appeal, so the Court of Appeals if they issue a ruling, it's -- it goes in our favor. I can see the Sierra Club, taken that up and seeking Supreme Court review. So that could add some additional time on. But ultimately, as Andrew said, it's going to-end up back at the commission.

Jeffrey Guldner:

Yeah. Thanks, Shar.

Operator:

Thank you. Your next question is coming from Anthony Crowdell from Mizuho. Your line is live.

Andrew Cooper:

Sure, Anthony, it's Andrew. As I mentioned, we're going to look at all of the options, including around regulatory recovery. Our priority in the rate case is a constructive outcome. And we'll look at pension when we go into remodel strategy and one of the various levers that we need to think about in what a constructive outcome looks like, but it's not the only lever and it's not the only cost that we've got to deal with. So there is certainly precedent where there is a split test year to look at on pension expense from what is now a historical period. And that's something that we'll consider as one of our options. In the last rate case, we average the two years surrounding split test year but regulatory recovery remains one path that we continue to look at. But then of course, any other levers we have around our other costs, O&M, interest expense, all those things that we can do there to make sure that we meet our forecast. That's really the focus. As I said earlier, we're committed to the pension strategy. You know 2022, all asset classes for the most part, face losses and discount rates went precipitously. So we're just --we're living with the reality of that, mitigating it as best we can.

Jeffrey Guldner:

No. Anthony, it's more -- I think it's a little more than that. I mean, it really is looking certainly at clean tracker, particularly as a potential vehicle to give the tax credit. The customers in a more contemporary manner. I mean, that makes a lot of sense to us as a way to optimize the -- getting a little bit more utility owned generation in the mix. But it's going to be the overall framework that really drives what we do, right, like we'll look at the results of the case and figure out how we optimize the mix of both the PPA and then the utility-owned generation and storage resources. And so can't really flag what that looks like here, but we have opportunity, I think to get a more optimized mix for customers. Then we're seeing now and just because of the last rate case, we are not able to do utility-owned assets at the level that we think is probably optimal.

Andrew Cooper:

Yeah, Anderw, we do get recovery on the cost and the results year-over-year impacted by those costs kind of coming into our income statement without offsetting revenues. So what you really see, if there were a positive outcome would be the recovery on the investment in there alongside the cost.

Jeffrey Guldner:

Yup. Thanks, Anthony.

Nicholas Campanella:

Hey. Good morning, everyone.

Nicholas Campanella:

Hey. So, I guess, just starting on 2023 drivers, what was the driver of the lower tax-rate? I think it's 10% versus last year it was closer to 14%, can you just update us on that?

Nicholas Campanella:

Okay. So possibly just tax credit driven. And then on your just credit outlook, I think you kind of mentioned in the deck, 16% to 18% range. Where did you end the year? And then what's the feedback from the agency has been in terms of whether they are looking for -- before moving on the negative outlook and is it GRC related, is the numbers related? And what's your willingness to defend the Ba1 rating here if you have to.

Nicholas Campanella:

Okay. And then just one last one for me, in your prepared remarks upfront, you kind of mentioned this regulatory lag docket. What's the outcome that stakeholders are trying to solve for here and what are some of the mechanisms you're exploring, if you could maybe update us on that?

Nicholas Campanella:

Alright. Well, thanks so much for answering my questions.

Operator:

Thank you. That concludes our Q&A session. Everyone that concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Operator:

Good afternoon, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2022 Third Quarter Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Jeffrey Guldner:

Thank you, Amanda, and thank you all for joining us today. We continue to execute well on our operating performance and financial management. So as part of my operations update, I'll share with you our success in managing through one of the most challenging summer storm seasons that we've had in recent history. I'll also provide an overview of our rate case filing. And then Andrew will review our financial performance, including an update to our earnings expectations for the year due to higher sales growth and weather. Firstly, and very importantly, I want to recognize our field teams for doing an exceptional job, safely and quickly bringing customers back online after heavy storms swept through different parts of the state this summer. The extreme weather brought on damaging winds, heavy rains and flash flooding, which created a challenging environment where we saw a record number of poles damaged, and that's how we usually measure the intensity of a summer storm season. Typically, a storm season, we'll see an average of about 300 poles damaged. This year, we replaced over 800. Many teams across the company worked together to restore service from our supply chain teams, getting the necessary supplies, our field crews working day and night and our employees communicating with customers and making sure that they were kept apprised of the restoration efforts. Our careful long-term planning, resource adequacy, flexibility and innovative customer programs also proved beneficial through the summer. APS reached the third highest peak demand of 7,587 megawatts on July 11, and the temperature on that day was "only", and I put that in quotes "only" 115 degrees compared to our typical peak temperatures of 117 degrees or higher. Generally, every degree is worth about 140 megawatts of peak demand. So had we seen 117 degrees, we would have easily set a new record for APS energy demand this year. In addition, in early September, a heat wave hit the Southwest and the region once again saw the lack of available capacity, resulting in 15 declarations of energy emergencies by other utilities across the West. During this period, we served our customers reliably and also helped our neighboring utilities by making off-system sales to the western wholesale market. Those off-system sales directly benefit APS customers by lowering our overall costs while helping to maintain regional grid stability. For our own reliability, our baseload and fast-ramping assets, including Four Corners, Ocotillo and Palo Verde were ready when we needed them. Our nonnuclear generation fleet's equivalent availability factor, EAF, and that's the percentage of time that a generating unit is available and ready to perform when called upon, was 95% from June through September. Palo Verde generating stations capacity factor for the same time frame was 100.2%. Finally, with this completion of the summer run, Palo Verde 3 safely entered its planned refueling outage on October 8, and we're getting ready to complete that outage in the next few days. I'm also happy to share that APS continues to make quartile gains in every single driver of residential customer satisfaction, and that overall satisfaction is above industry benchmarks when compared to the company's large investor-owned peers. Continuing the progress that the company has been making over the last 2 years, APS' J.D. Power residential ranking through the third quarter firmly places the company into second quartile for residential customer satisfaction. Our strongest performing drivers through the first 3 quarters of 2022 were customer care, both phone and digital; power quality and reliability; corporate citizenship; and billing and payment. Additionally, APS's J.D. Power business customer midyear results puts the company in the first quartile nationally. APS continues to be one of the most improved utilities in the nation for both residential and business customer satisfaction. And we've committed to our customers, shareholders and our regulators that a top focus of improvement for our team will be improving the customer experience. That's been a cornerstone of my strategy as CEO, and I'm incredibly proud of our employees and proud of our progress so far and looking forward to closing out this year strong. Turning to a topic that's certainly top of mind to many of us, the Inflation Reduction Act. While we continue to evaluate the potential of the legislation as the regulations are being written, the tax benefits provide an opportunity to make Arizona a leader in clean investments. A few of the provisions that will benefit APS customers the most include the creation of an 8-year production tax credit for existing nuclear facilities, the inclusion of the EV and EV infrastructure tax credits, new credits for storage and hydrogen, a 10-plus year extension of the clean energy tax credits and a 3-year extension of the existing PTC and ITC. Each of these represents a big win for customers and for our industries. These incentives will help us to meet our clean energy commitment, and they will help us to enable the clean energy transition without compromising reliability and affordability. For a regulatory update, we filed a rate case on October 28, 2022. The key components of that filing include a requested 10.25% return on equity, a 1% return on a fair value increment, 51.93% equity layer and 12 months post test year plant. We've requested an increase in annual revenue of approximately $460 million, and we proposed that new rates go into effect on December 1, 2023. This is an important rate case. It supports investments in our clean -- our energy infrastructure to ensure that all customers continue to receive the reliability that they count on and to increase resiliency under all weather conditions. We've made essential investments to maintain the health of the energy grid and to avoid outages. This rate case also helps to ensure that Arizonans have access to the energy they need when they need it as we make a reasonable and affordable transition to a clean energy future. We're securing the energy needs of Arizona without compromising on affordability or reliability. We're balancing investments that optimize existing resources with investments in cost competitive clean energy generation that will power our state's future. Our filing contains proposals to further support our customers after a lot of work with stakeholders, we're proposing to enhance our limited income bill discount program to provide an additional discount for customers with the greatest need. And we're also proposing to eliminate in-network credit card and in-person kiosk payment fees for all customers. Programs and proposals like this demonstrate our commitment to improve customer satisfaction and make transacting with us more seamless and convenient. And lastly, we heard the commission's request for simplifying our adjustors. And in response, we proposed a number of modifications to our suite of adjustment mechanisms. Specifically, we propose reducing the number of adjustment mechanisms from 7 to 4 active adjustors with the elimination of the lost fixed cost recovery mechanism and the environmental improvement surcharge. We also propose to modify our renewable energy surcharge mechanism to allow APS to invest in clean energy projects to support Arizona's growth while reducing the frequency of rate cases and smoothing out the financial impacts of the new projects. With this adjustment mechanism, tax credits from legislation like the IRA can reduce the overall cost of these investments, and we would be able to pass those savings to customers more quickly through an adjustor. Finally, we are not proposing any changes to our current power supply adjustor or transmission cost adjustor. As we look to wrap up 2022, our focus and priorities remain on improving our customer experience, continuing to engage with stakeholders to build alignment and executing on our mission of providing clean, reliable and affordable service to our customers. So I want to thank you all again for your time today, and I'll turn the call over to Andrew.

Operator:

[Operator Instructions]. Your first question is coming from Nick Campanella from Credit Suisse. Next question is coming from Insoo Kim from Goldman Sachs.

Jeffrey Guldner:

Insoo, we've got a current IRP moving forward right now that I think we'll probably just continue. And we may be able to see some benefits ultimately in that, but that's largely going to be focused, given where we are on probably PPAs. So I think the real benefit to this, and this is kind of the key that I was trying to emphasize in the commentary, is that if we can use the react, that renewable energy adjustor to pass through the tax benefit concurrently with the investment, it really unlocks value for customers, which has been RFPs when we're pursuing those. We can pursue the most advantageous long-term investments for our customers and be able to better mix the owned versus PPA assets. Again, I think the benefit of being able to flow those tax credits and the other incentives through an adjustment mechanism means you're not waiting multiple years to rate cases before you can get that benefit to customers. At the same time, you're smoothing out the rate impact. So it's really the combination of the smoother capital recovery, but also gradualism on the rate impact, the ability to reflect the tax credit benefits immediately and then to increase some of the ownership benefits, which is going to provide long-term benefits to customers. So the details of things like the nuclear PTC and other things are still getting worked out in the regulations. But I think we do see some significant benefits. And obviously, it can be in other things like EV charging infrastructure and things like that.

Andrew Cooper:

Yes. Insoo, it's Andrew. Consistent with our practice in other rate cases, our plan right now is to not provide guidance while we're pending the rate case, though, we certainly evaluate both our current year and future year guidance as we go through the year. I think one of the big things that will influence that decision will be taking a look at the procedural schedule in the case and making a determination at that point about whether we're able to provide guidance to '23.

Operator:

Your next question is coming from Julien Dumoulin-Smith from Bank of America.

Theodore Geisler:

Dariusz, it's Ted Geisler here. Happy to address that. We think there are several reasons why this really has an opportunity to create value for our customers. So it's more of an affordability opportunity for customers now than ever before. And that is a big difference between this proposal and the last rate case. A couple of reasons, and Jeff alluded to these, one with IRA and now being able to pass through production tax credits to customers, this mechanism, and using the existing renewable energy mechanism, really provides an avenue for us to be able to pass on that savings to customers without being able to include those carrying costs for capital investments. There's no way to then pass on those clean credits. And given that we operate in Arizona with some of the best solar radiants on the globe, we expect more production tax credits to be passed on to customers and just about any other area that you can install solar. So a big benefit there and certainly, those production tax credits didn't exist when we proposed the last mechanism. And then the other item that's noteworthy is we continue to operate competitive all-source RFPs. And through those RFPs, we see the proposed projects and are able to identify that ownership opportunities provide tremendous value for customers in addition to balancing that with continued long-term PPAs. And so providing a mechanism allows us to continuously operate a competitive procurement process and ensure that we're always taking the best value projects for customers and passing those on in a timely manner along with the tax credits.

Operator:

Your next question is coming from Shar Pourreza from Guggenheim Partners.

Andrew Cooper:

Yes. Jamieson, it's Andrew. We look at the -- both the 5% to 7% long-term EPS growth rate range as well as the rate case application. Both of those look at -- we look at holistically. The 5% to 7% has reasonable regulatory recovery through kind of the whole package of the rate case built into it. It also has our sales growth forecast and our O&M management built into it as well. So there's a lot of components in there, and it's really hard to parse those out, either from regulatory recovery perspective or the components of that 5% to 7%, which we are, as you said, reiterating on this quarter.

Jamieson Ward:

Got you. Yes. No, I get that with the upper end there. I guess what I was wondering was sort of further to the point that you make in your testimony about attracting investment into the state and to the utility, the current level of the ROE that the commission has set is that something that is sufficient to get you there. And if it's not something that you're able to parse out and break out separately, that's fine. I have a second question I can move on to. But just wondered if there was a straightforward answer to it or if it's not that simple.

Jamieson Ward:

Got it. That makes sense. I'll move on to my second question here. I appreciate the color. Several other utilities have mentioned that their pension headwinds for 2023 has gotten worse again over the past few months due to market performance. Can you remind us whether your rate case captures the entire year? Or if it will just be up until the June 30 test year? And if it is just half of 2022, does that mean that there's, I guess, 0.5 years of a drag that would carry on until the next rate case? Or how should we think about what's incorporated into the rate case and would ultimately end up in rates and what isn't?

Operator:

Your next question is coming from Sophie Karp from KeyBanc.

Theodore Geisler:

Yes. Sophie, Ted here. Really, the intent is to try to be responsive to the feedback we've gotten from commission and stakeholders and simplify the adjustors. So when you think about the 7 we have now eliminating the environmental adjustor in LFCR, sweeping current balances and base rates, that's a way to simplify that, have less adjustments throughout the year. The DSM adjustor largely remains similar to what it has been, although has to recover some of the fixed cost currently in the LFCR, but that will be combined with other elements of the existing DSM mechanism. The renewable energy mechanism remains larger than it is today other than expanding it to include, of course, the carrying costs of new clean investments going forward. As Jeff said, PSA, TCA remain the same. And then TEAM is focused on income tax adjustments. So as a result, it can remain an asset for the time being. So it's a good opportunity for us to be able to simplify the bill, simplify adjustments throughout the year for our customers, [indiscernible] and then really just focus on the base rate changes going forward.

Sophie Karp:

Awesome. And my other question is on O&M. So with how rapidly the conditions are changing now in the market and that, I guess, pertains to borrowing cost due to O&M ongoing costs. How do you ensure that your request here is adequate for, I guess, the environment that you might find yourself 6, 12 months from now? How much confidence do you have that, I guess, the request you put in is going to be sufficient given that we may see a cost and [indiscernible] environment staying higher for longer?

Andrew Cooper:

Yes. And Sophie, it's really a similar concept on the borrowing cost side. We have a strong balance sheet. We're able to be flexible because of the liquidity we have to opportunistically issue debt at times that the market is relatively favorable. We're certainly in a increasing interest rate environment. Again, there, you have the historical test here. And when we look at the rate case, if we look at the WACC, and so that's a combination of a number of factors, not just interest expense, but the ROE and the cap structure. So that's an important piece of this as well. But as far as forward-looking interest expense, we're fortunate to have no maturities until the middle of 2024 and a lot of floating rate debt. So it's really just a question of opportunistically raising debt at appropriate times to support the CapEx investments that we have to make, and we've disclosed what our expectation is around those debt needs over the next 2 years.

David Peters:

Curious just on the election next week. I know it's inherently tough, if not impossible to predict. But I just -- I don't think there's any kind of pulling data at that level. But I'm just wondering if you could speak to kind of what you see currently up ballot. And is it your experience that what happens there typically informs the outcome down ballot?

David Peters:

Yes, that makes sense. Another one I had was just on the composition of the O&M increase. And obviously, I think, Andrew, you spoke to just inflationary pressures, but then there's also a piece just kind of required to keep up with the growth you guys are seeing. And I think you also said you pulled forward some from '23 to derisk future periods. So could you just kind of help parse that out a little bit?

David Peters:

Just one more quick one, if I could. Just on the capital plan, I'm just curious to get kind of your latest view on just your base needs to support what seems like an even stronger sales growth outlook now. Are those levels pretty conservative just as they kind of sit on your slides today? Or I guess, just when do you think you'll be in a position to maybe update that? And then also, I guess, anything RFP related from IRA benefits?

Operator:

[Operator Instructions]. Your next question is coming from Paul Patterson from Glenrock Associates.

Theodore Geisler:

Yes. Paul, this is Ted. I appreciate the question. TEAM was really established in early to focus on adjustments and income tax levels. So largely to pass on federal tax reform focused on income tax changes, whereas the production tax credit opportunity that we have in front of us for future solar investments as a result of IRA. That is intended to be constant, ongoing and tied to the production levels of solar that is procured and ultimately, we would propose recovered through that react adjustor. So as you recover costs for the new solar facilities, the intent would be you offset those costs in part by passing back the production tax credits from those same facilities through the same mechanism. And we believe that to be materially different than what TEAM was originally set up for, which is limited to income tax adjustments.

Theodore Geisler:

That's exactly right.

Theodore Geisler:

Yes. We certainly would expect it to improve inventory lag for our ability to continue to finance these investments. And ultimately, that benefits the company and customers, both in terms of rate gradualism, but also likely could extend out or delay what otherwise would need to be a rate case to recover those costs.

Operator:

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Pinnacle West Capital Corporation 2022 Second Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. After managements' prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to the host, Amanda Ho, Director of Investor Relations. Please go ahead.

Jeff Guldner:

Thank you, Amanda, and thank you all for joining us today. We were troubleshooting a little bit of static on the line. So hopefully we're able to address that as we get the call started here this morning. Financial results year-to-date in 2022 continue to be in line with our expectations. And so, before Andrew discusses the details of our second quarter results, I'll provide a few updates on recent operational and regulatory developments and I'll also touch on our ESG progress and accomplishments. As we move through the summer season, our team continues to excel in delivering reliable service to our customers. Each year, we prepare for summer, ensuring that we've got adequate generation resources to meet our peak demand and preparing for the summer wildfire season, which started early this year. Our robust vegetation management, fire mitigation programs and mandatory line inspection requirements prior to reenergizing high-risk area lines, all contribute to the protection of our infrastructure and the public safety, as well as to reliable service for our customers. Additionally, our resource procurement efforts and reserve margin standards have allowed us to provide exceptional service to our customers through multiple days, consecutive days of over 110 degrees and we're well prepared to meet the expected peak demand through the balance of the summer. With the extreme weather that we experienced each summer, it remains as important as ever to continue assisting our communities through our heat relief support programs. APS has expanded its heat relief initiatives, including partnering with local community organizations to aid the state's most vulnerable populations. This support includes a collaboration with the foundation for senior living, where we offer emergency repair or replacement of air conditioning systems during the hot summer months. The Salvation Army's network of 18 cooling and hydration stations across Arizona and an emergency shelter and eviction protection program that we do in partnership with St. Vincent de Paul, these are just a few examples of our effort to collaborate for the benefit of our customers and our community. We continue to remain focused on improving our customers' experiences. As previously shared, APS' J.D. Power Residential rankings for overall customer satisfaction have improved over the past two years. And thanks to the hard work of our employees that improvement trend continued with the latest JDP Residential 2022 second quarter results, which reflects our midyear progress. Compared to 2021, APS made quartile gains in every driver of customer satisfaction and overall satisfaction now exceeds industry benchmarks when compared to our large investor-owned peers nationally. APS is the strongest performing drivers in the latest J.D. Power survey were customer care and that's both, phone and digital, power quality and reliability and corporate citizenship. And our improvement is also being recognized by our business customers, as we saw in J.D. Power's Business 2022 midyear results. APS is now in the first quartile for business customer satisfaction and we're also the second most improved utility in the nation. Although we made good progress in our customer experience journey, we're not done yet. I'm proud of the team's progress to date and I look forward to sharing further advancements in our customer experience journey with you in the future. Turning to our regulatory updates. In June, we filed our notice of intent to file a new rate case with the Arizona Corporation Commission. In that notice, we outlined the various items that we expect to request including 12 months of posttest year plant to be included in rate base. This application will really focus on a return to balanced ratemaking, which will enable the company to make the necessary investments to support Arizona's growing economy, resilient infrastructure, service reliability, improved customer experience and a clean and secure energy future for our customers. We made the decision to delay the filing a few months from midyear to the end of October to allow for additional time to work with stakeholders and address topics that were raised by Chairwoman, Lea Márquez Peterson through various filings in the docket. The rate case will now have a test year ending June 30th, 2022 and that test year actually allows us to include changes in revenue expenses and investments that we've experienced in the first six months of 2022 and to provide the commission a more accurate view of our current financial needs. In addition, we continue to work with the Arizona Corporation Commission and many stakeholders in an effort to gain a common understanding on a variety of issues and to pursue balanced solutions and we look forward to continuing that work in our rate case. As an update on our ESG progress earlier in May, we issued our 2022 all-source RFP in which we're seeking 1,000 to 1,500 megawatts of new resources. And that will include up to 600 to 800 megawatts of renewables and we've seen a very robust response to that proposal. We're currently in the process of reviewing bids and we expect to develop a short list by the end of August. And I'm also proud to share that for the second consecutive year of the Environmental Protection Agency recognized APS with the ENERGY STAR Partner of the Year Award for excellence in customer energy efficiency programs. These offerings include the APS marketplace, which is a one-stop online shop that offers customers smart energy products and the company's Cool Rewards smart thermostat program. In our fourth year of operation, our Cool Rewards demand response program essentially operates like a virtual power plant where our customers provide over 100 megawatts of flexible clean capacity. The program connects nearly 66,000 APS customers with smart thermostat technology that helps them save money, while also playing an integral role in conserving energy when the demand on the electric grid is its highest. This partnership helps us ensure reliable uninterrupted service to our customers on the hottest Arizona days, while also assisting us on our journey to 100% clean and carbon-free electricity by 2050. We've made solid progress through the first half of the year improving our customer experience and enhancing our stakeholder relationships and working towards achieving our ESG and clean energy goals. There's certainly more work to do, but this is a good opportunity for me to acknowledge the team's dedication and those early accomplishments. Finally, I'd like to congratulate Ted Geisler on his recent promotion to President of APS, returning to a separate CEO and President roles within APS allows us to consolidate our core utility functions, including operations, public policy, technology, customer experience and strategy, and Ted's well-rounded utility experience will be extremely valuable in this role. And additionally, I'd also like to congratulate and welcome Andrew Cooper, as our Chief Financial Officer. Some of you met Andrew in his prior role as the company's Treasurer and I look forward to each of you getting to know him better in his new role. And so with that, Andrew I'll turn the call over to you.

Operator:

Certainly. The floor is now open for questions. Your first question is coming from Insoo Kim with Goldman Sachs. Please pose your question. Your line is live.

Andrew Cooper:

Yes Insoo, thanks for the question. It is definitely too early to say right now. As I mentioned, we are monitoring from an O&M perspective, as well as this pension headwind. There are absolutely mitigants to the headwind that we see from the market returns on our assets where we stand today. There will undoubtedly be some headwind if the market continues to be at the level that it is today. But what we really wanted to highlight was that because we are so heavily allocated to fixed income, that all asset classes have performed similarly badly this year. But over the long-term fixed income is going to be the right place for us from a low volatility perspective. But in 2023 will be an offset that, I think may be missing from some of the calculations out there because we were starting from an expected return on assets this year that's lower than most of the industry at around 5% because we're so heavily invested in fixed income. And then when you project forward to next year and think about where we'll mark-to-market at year-end, fixed income yields are 200 basis points higher than they were when we set that return last year. And that will weigh into the expected return on asset calculation next year which is an offset against the amortization of those potential losses that we have on the asset side.

Jeff Guldner:

Yes. That's obviously an area that we're focused in right now. I think it's important that we continue to have good discussions. I'd say, right now we're more in the technical aspects of what's building up the rate case application, as you get further into the case and again particularly as you start to see which track whether it moves in a settlement track or whether it moves in a fully litigated track what some of those options are but – Insoo, you're exactly right. You want to make sure you build in conceptually, what the benefits of that kind of a tracker are. And in particular in this case, it's focused on just clean energy resources. And it really does help avoid just having serial rate cases come in as we have to catch up with investments that we're making. And so, I think it still presents a pretty compelling case. It's a little out of the ordinary for Arizona regulation. I expect that's something that Tucson Electric is also going to be spending some time on. And so, hopefully there's momentum that continues to build, as people begin to see the benefits of having this more smoothly come in and not just force every utility here to come in on serial rate cases, but absolutely a topic of discussion.

Jeff Guldner:

Thanks, Insoo.

Julien Dumoulin-Smith:

Good morning. Thanks team. I appreciate the time and welcome Andrew again. Maybe just to come back to the question on IRA here. I just want to talk to a little bit more on that front. First off, AMT impacts elaborate a little bit on the latest there as well as, just with respect you mentioned all-source RFP here etcetera the opportunity to compete more effectively on a level playing field to win ownership opportunities. Again notwithstanding, obviously the renewable rider considerations that might be limiting vector as well?

Julien Dumoulin-Smith:

Got it. All right. Excellent. And then related can we talk about the longer term? Obviously, kudos here on the near-term load growth trends, just a little bit curious on, what you're seeing on your side as to load growth in the longer term and some of the evolving economic picture here. And specifically if you can touch on, the TSMC contribution that long-term guide, obviously I think it is probably nontrivial to some of the numbers you've thrown out there here, if you can talk about that.

Jeff Guldner:

Yeah. And Julien on the TSMC, I think if you look at the state there's a couple of key technology sectors that we're really I think moving ahead from a national standpoint. One of them is semiconductors. So we've had Intel here for quite a while. TSMC is now building out in our service territory. Intel is opening another fab, over in Salt River territory. And as you -- I'm sure you know, as you start to see that clustering effect that continues to make the case for other chip manufacturers. And I think the CHIPS Act will be a nice tailwind here but it makes the case for other chip manufacturers to say "Hey, I need to get into that ecosystem, because there's so much infrastructure support." ASU or Arizona State University and our state university systems continue to churn out engineers at a remarkable pace. And so that ecosystem I think will continue to help drive semiconductors in general. And then again TSMC will -- I think as they continue to build out we're going to be working to keep up with their growth and obviously work with them very closely. A little early to tell exactly what that timing looks like, with supply chain things like that but we'll continue to keep folks updated, because obviously that's likely to be our largest load, our largest customer. The other one to watch though also is the electric vehicle space. And you see clustering whether it's Nikola Motors or Lucid or other companies that are building out in the Metro Phoenix area. We see a pretty significant scaling us down at the Lucid Motors site, a couple of months ago and the size of the factory that they're working on down there is just truly impressive. And so I think as we see some of those niche areas begin to develop. We already have a pretty strong bioscience area, but we certainly like the advanced manufacturing growth that we're seeing in the service territory. And again, just because of how that's going to affect good utilization of our resources. Hopefully that was helpful.

Jeff Guldner:

Yeah.

Jeff Guldner:

Thanks, Julien.

Nick Campanella:

Hey. Good morning. Congrats to Ted and Andrew. So I just wanted to ask on O&M. I think you had like roughly $0.10 headwind this quarter. If we look at the O&M, it's up like 6% to 7% versus time last year. And I know annual guidance is out there pointing to just a 4% kind of decrease. Can you just help kind of reconcile that? Is there kind of specific to the back half of the year that you have line of sight on to still hit that? And then, how do we kind of think about going into 2023, just being able to kind of manage the O&M line without new rates and the current inflationary backdrop that we have? Thanks.

Nick Campanella:

Okay. Okay. So just continuing to monitor. Got it. And then if I could just go back to the pension you had this disclosure on the slide about 100% of interest rate volatility using a combination of fixed income portfolio assets and US treasury future contracts. How does that kind of affect the downside to the assets? And just our understanding is just as rates go up the contributions required would maybe be lower but just can you help us understand how that plays in here?

Nick Campanella:

Got it. Okay. And then if I could just follow up on the pension thing just one more question. I know that you have other income guidance in 2022, it's like $60 million to $65 million or so. And what type of pension return inform that number for year-end 2021? And I guess if we were trying to kind of extrapolate how that number could change as you get into 2023 here? Could you give us any color?

Nick Campanella:

All right. Thanks. I’ll get back in the queue.

David Peters:

Yes. Hey, hope you guys are all doing well.

David Peters:

Hard to keep harping on this but I just had another question on the pension and OPEB. Understanding that a lot can happen between now and year-end when you guys actually mark the assets. But is there any like sense or sensitivity you can think on how to think about the potential impact in 2023? Again, understanding that a lot of the assets are fixed income, which are faring better than equities, but still down 10% or so nonetheless? Thank you.

David Peters:

Okay. Appreciate that. And just to clarify that, 100% hedging on interest rate volatility, does that help protect asset downside on the 80% of the fixed income allocation?

David Peters:

Okay. Perfect. Thank you. Just one other question, separate. Just with respect to the sales growth, obviously, continued strong follow through in Q2 from Q1. Anything that you've seen changes as of late? And then, maybe you could just remind us within the EPS CAGR that you guys have until, maybe, I guess, you have new rates in effect from this next rate case. How much of that is being driven by sales specifically?

David Peters:

Okay. Thank you, guys.

Operator:

Your next question is coming from Shar Pourreza with Guggenheim Partners. Please pose your question. Your line is live.

Jeff Guldner:

Hey, Shar.

Jeff Guldner:

Yeah Shar. I mean, obviously, the challenge, which you all are seeing too is we don't know how it's going to mark-to-market at the end of the year. So you don't have a good estimate as to what that is. I think Andrew indicated there are mechanisms or strategies that we can use, but I can't say we're going to offset every headwind that that's going to create. I think that's likely to be a headwind for us in 2023. And then depending on the amortization that will be a headwind for a little while. And for us it's really back to anchoring around our Lean Sigma culture and just continuing to execute on the cost management that we can get and not to -- we're going to put it in the rate case and the averaging of the two test years. So again it's helpful that we've got this split test here. So you've got 2020-2021 and then 2021-2022 that would get averaged, which is based on how they did it in the last rate case. But we're not looking at proposing a deferral mechanism or some other regulatory mechanism for this, because there's frankly other things we want to be pursuing in the rate case. So can we offset? We're going to work to see what we can do to mitigate the impact of this headwind just like other headwinds that we see moving forward. Can I tell you we can get that all this time? I can't. I don't know exactly what that headwind is going to be but we're obviously focused on doing what we can to continue to deliver on the long-term guidance that we provided.

Andrew Cooper:

As of now Shar, we're maintaining the guidance range that we have. We're seeing those pressures. We're going to continue to watch it as we get through the summer, see where we are. As I mentioned a lot of the challenges around capital and some of the new projects that we're starting to engage in, it's not been easy but some of the same things Jeff said around our customer affordability and maintaining that vigilance is what we are focused on doing right now.

Andrew Cooper:

Yeah. Shar that would be consistent with our prior practice. So that's what's anticipated right now.

Andrew Cooper:

Yeah. Thanks Shar.

Operator:

There appear to be no further questions in queue at this time. I'd like to thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Operator:

Good afternoon, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2022 First Quarter Earnings Conference Call. At this time all participants have been on a listen-only mode and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Jeff Guldner:

Great. Thank you, Amanda. Thank you all for joining us today. 2022 started off in line with the financial guidance that we provided coming out of the rate case decision last year. And before Ted discusses the details of our first quarter results, let me provide a few updates on recent operational and regulatory developments, and then I'll touch on our progress towards achieving our 2022 goals. First off, as you know, safety is our number one priority and I do want to take this opportunity to commend and congratulate our employees for keeping safety and sharp focus in the first quarter. Significant injuries or fatalities or SIFs are the most important safety metric and we completed the quarter with no serious injuries. SIF is a metric that's focused on preventing serious injuries by improving hazard recognition, risk-based decision-making, procedures, equipment selection, employee training and much more because we don't leave anything to chance when it comes to the safety of our people on the job. And I'm grateful to our employees for taking accountability to operate by one of our principles within the APS promise, that's anchoring and safety, and to help their coworkers to do the same. As you all know, spring is an important time of year for our summer preparedness work. We have always had a robust summer preparedness program, but resource adequacy has become increasingly important as energy supplies in the southwest tighten. To serve our customers with top-tier reliability, each year we perform preventative maintenance, emergency operations center drills, acquire critical spare equipment, conduct fire mitigation line patrols and execute a comprehensive plan to support public safety and first responders. In fact, we've already started seeing the benefits of our preparation as we've had an early start to the Arizona wildfire season. Our system has fared well and our defensible space around poles, what we call our DSAP program, is demonstrating great success while we continue to coordinate effectively with local first responder agencies to ensure that affected customers and communities have the support that they need. Also during the first quarter, our Palo Verde nuclear facility operated at a 95% capacity factor. We've got Unit 1 currently in a planned refueling outage that began on April 8, and it's on schedule to return to service within the next few days. We expect our two refueling outages in 2022 to last approximately 30 days each, and that's a time frame that reflects sound planning and execution. And upon the successful completion of the latest refueling outages, all three units will be poised to provide around the clock energy to help meet the demands of the summer for the entire desert southwest. Our procurement process is another important way that we help to ensure long-term resource adequacy and progress towards our clean energy commitment. We're on track to bring into service 141 megawatts of battery storage located on six APS-owned solar sites this year. Last year, we received robust RFP responses to meet the growing needs of our customers. The RFPs resulted in an additional 60 megawatts of APS-owned batteries to be placed at APS solar sites and 150 megawatts of new APS-owned solar, all expected to be online in 2023 as well as additional clean energy resources through PPAs. We're currently in the final stages of contracting for another APS-owned solar plus storage project that we look forward to announcing in the near future. And lastly, APS is working on another all-source RFP that's expected to be released in mid-May for new resources to be in service by 2024 and 2025. On the regulatory front, we've been preparing for the upcoming rate case filing and continue to expect the filing mid-year. The primary objectives of this next rate case will be to recover costs and investments that we've made to reliably serve our existing customers and to support the tremendous growth that we're seeing in our service territory. In addition, we continue to work with the Arizona Corporation Commission and many stakeholders in an effort to gain a common understanding on a variety of issues and to move forward with balanced solutions. One example of the stakeholder work has been our most recent customer education and outreach plan, which was recently approved by the Corporation Commission after months of collaboration. I think this was a great example of the progress that we're making to align with stakeholders and the commission on issues that have been challenging in years past. We truly appreciate the individuals and organizations that have been involved in these discussions and I want to personally thank them for their time and thoughtful participation. We look forward to continuing the dialogue and making further progress with respect to our state's regulatory environment. I've also already touched on the progress of some of our 2022 priorities, including enhancing our stakeholder relationships and continuing to execute on our clean energy commitment. In addition, I'd like to highlight improvements we're making in the customer experience and communication space. I'm proud to say that we're making solid progress in improving our J.D. Power Residential Customer Satisfaction Survey scores. APS made quartile gains in every single driver of customer satisfaction during Q1, moving the company to the top half of the third quartile for overall satisfaction when compared to its large investor-owned peers. APS' strongest performing drivers in the latest JDP survey were power quality and reliability and customer care, and phone and digital, both of which performed well above the large investor-owned peer-set averages. Enhancements to our website, interactive outage map and alerts by text and email have improved customer satisfaction with our digital experience and grown engagement with transactions completed through these tools. Although we're making solid progress, we know we still have much work to do and we look forward to continuing to execute on our priorities throughout the year. With that, Ted, I'll turn the call over to you.

Operator:

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Julien Dumoulin-Smith from Bank of America. Your line is live.

Jeff Guldner:

Hey, Julien.

Jeff Guldner:

Yes, I mean, we've got – Julien, we've got the existing LFCR that's moving forward in the May open meeting. And then as you know, we've got a rate case filing that's coming up, we've been working with stakeholders on potential ways to address or other ways to deal with that, but that would be still be prospective. So that would be something that would be coming in the next rate case. It would not really reflect the current LFCR mechanism.

Julien Dumoulin-Smith:

Right. Thanks for the clarity there. Yes. I'm curious. But you're working with stakeholders here to address that, and that would be part of the rate case filing, to the extent of which that you could – okay, excellent. And then just if I can pivot here slightly I notice, you're still looking at moving ahead on the similar timeframe for the rate case, despite admittedly these robust sales, et cetera. Just can you talk a little bit about how both the CPI and inflationary elements as well, the sales and/or if you want to include LFCR, this could influence rate case timing, if that at all is consider or any of those three are considerations?

Julien Dumoulin-Smith:

Got it. It seems noted as the Tucson case in terms of their fairly parallel timeline, it would seem?

Julien Dumoulin-Smith:

Excellent. All right. Fair enough. Well, I'll leave it there for others. Thank you guys.

Ted Geisler:

Thanks Julien.

Nicholas Campanella:

Hey, good morning, everyone. Hope everyone's doing well.

Nicholas Campanella:

Hey, so just the comments on resource adequacy, I just think are interesting. And can you just remind us, when's your next IRP filing and have the recent kind of tighter markets change your thinking on needing any new base load generation in the five-year window, and then just how are you feeling overall about summer from a capacity perspective? Are you sufficiently covered? Thanks.

Jacob Tetlow:

Sure, happy to make couple additional comments, Jacob Tetlow here. For summer of 2022, we’re in good shape. We’ve already – we have had some of the supply chain challenges that others have seen. Those impacts have all been mitigated. And so we’re in good shape for 2022, and we’re in good shape for 2023. You’re going to see the RFP come out later this year, and that’ll be really focused on 2025 and 2026 resources. So as you think about the near-term, I would say we’re in good shape. We know what those supply chain constraints are. And then past that we will be – we’ll be adding in the 2024, 2025. I’m sorry. I knew that didn’t sound right. 2024 and 2025 resources will come out of the next RFP cycle. So I would say we’re in good shape and we’ve mitigated the known supply chain constraints. And we’re reaching out to all those different suppliers right now to ensure that we have timelines that we can work into our plan.

Jeff Guldner:

Yes. I mean, one of the benefits is, our largest supply there would be our Four Corners power plant, which is actually essentially a mine mouth plant. So it has its own rail right to the mine. So there’s no issues there. And that’s our largest coal resource and on the Cholla Power Plant, they keep generally about a three to four month supply on the coal pile. So we don’t have any risk there on the coal side.

Jeff Guldner:

Thanks.

Insoo Kim:

Yes. Thank you. First question, the very strong resi weather normal low that we saw this quarter, even assuming the customer growth I think the usage per customer was up pretty nicely. Just any color on what was driving that? Are we just seeing less of a move towards back to office on in your jurisdictions or is it something else? And is it too early the front to extrapolate this data point to future quarters?

Insoo Kim:

Okay. That’s helpful. The second question just going – I guess after first quarter, again, maybe a little bit too early, but how you’re situated for the year. You’ve talked about the balance between the stronger low growth, but also the inflationary impacts. Just at this point versus the plan when you had laid out originally, are any one of those items stronger or better or worse than you had expected?

Insoo Kim:

Understood. Thank you.

Operator:

Thank you. Your next question is coming from Paul Patterson from Glenrock Associates. Your line is live.

Jeff Guldner:

Hey, Paul.

Ted Geisler:

Paul, which one, I can’t track it by numbers.

Ted Geisler:

Yes. They’re moving pretty, they’re getting pretty late in session, so I don’t think that’s probably going anywhere.

Jeff Guldner:

Paul, all the economic development that we’re seeing has really been a part of our forecast. And when we think about reliability needs, we manage that to peak demand in the summer, which the economic development that we’re seeing is largely factored into that forecast. We then had a reserve margin on top of it. The sales growth is really just detailing out how much energy around the clock you get, which is a little bit different than peak demand the measure that we use to plan for resource adequacy. I will say though, it underscores the importance of Palo Verde and Four Corners as we get through these hot summers both units critical for not just Arizona, but the entire Southwest. In fact, Palo Verde supplies about 70% of the entire Southwest region’s carbon free energy through the summer. So really just underscores importance of those two assets for the region.

Jeff Guldner:

Yes. Thanks, Paul.

David Peters:

Yes. Hey, good morning.

David Peters:

Just a question on the upcoming rate case you mentioned that your in-state peers also moving forward to file. I’m just curious if you see the possibility of a longer timeline of getting a final order than you would’ve otherwise just given the workload on staff and others, just thinking about how the timing of that final order would play into to the EPS CAGR you all have?

David Peters:

Okay, great. And then just related to the case again, just how are you thinking about potential size of the ask mitigating impacts to customers, particularly as you’re dealing with the inflationary environment on things like fuel and the like, and I know it’s just been a big focus at the commission, so just any comments, that would be great.

David Peters:

Right. And then just one last one, if I can, I think you said you have one APS solar project expected to come online in 2023, but it sounds like that’s not going to be impacted by the DOCS investigation. Is that right?

David Peters:

Okay, great. Thank you, guys.

Operator:

Thank you. Your next question is coming from Anthony Crowdell from Mizuho. Your line is live.

Jeff Guldner:

Hey Anthony.

Anthony Crowdell:

Hopefully just one quick one, just I guess on the appeal. Obviously, the issues going on in the world right now, there’s more of an emphasis on whether it’s fuel security or you talk about Four Corners as a mine-mouth plant, maybe a more stable commodity prices. Is there a chance I don’t know how the appeal goes, but if the appeal doesn’t come your way and there’s a potential for a new commissioner and also a new emphasis on maybe the stability of the coal-fired generation, that the company is able to get those SCRs in rates in the next filing.

Anthony Crowdell:

Great. Thanks so much. Great quarter. Thanks for taking my question.

Operator:

Thank you. Your next question is coming from Greg Orrill from UBS. Your line is live.

Jeff Guldner:

Yes, I mean, there’s – I think, there were a couple amendments that were floated before that that was pulled from the last open meeting. There were a couple of proposed amendments that were floated. I think they probably have to refloat those as they go up, but I think most of the discussion is likely to be in how in the next rate case this mechanism gets addressed since it was established in a prior rate case you really would address structural changes like that in a rate case.

Jeff Guldner:

Yes. Thanks, Greg.

Operator:

Good day, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2021 Fourth Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Amanda Ho, Director of IR. Ma'am, the floor is yours.

Jeff Guldner:

Great. Thank you, Amanda. And thank you all for joining us today. And looking back on 2021, there are certainly a number of challenges and setbacks but also positive accomplishments and successes. Without question, the biggest setback of 2021 was the rate case outcome. Coming out of the rate case, we laid out a comprehensive plan on the third quarter earnings call, and we've already begun making progress towards that plan, and I'll briefly discuss that. I'll also provide an operations update and share some notable successes from our employees in 2021, and then Ted will discuss our 2021 earnings and our forward-looking financial expectations. I know we're all tired of talking about the last rate case and how disappointing that outcome was. As you know, the rate case decision makes everything that we're committed to doing more challenging and more costly for a time. Importantly, it's also cast our state at a negative light when it comes to our regulatory environment, and our efforts are focused on ways in which the company can support improving that regulatory environment. During our third quarter earnings call, we spoke of management actions that we planned on taking, which included the possibility of filing an appeal of the decision. That's not something that we took lightly, and I emphasize, I don't – we don't take pleasure in litigating with the commission. Our number one goal is doing what's right for the people and prosperity of Arizona, which includes working collaboratively with the commission and building a more constructive relationship. However, in this case, we really had no other choice. And in December, we filed a notice of appeal with the Arizona Court of Appeals in parallel with a special action with the Arizona Supreme Court. Although there were seven other amicus briefs. These are friend of the court’s briefs filed in support of our special action filings, on February 8, the Supreme Court declined to take jurisdiction of the case. This was not particularly surprising since the Supreme Court only hears a small number of special action requests each year. And importantly, the Supreme Court's decision to decline jurisdiction does not impact our pending appeal with the Court of Appeals. We don't know what the final resolution of that case will be. However, we look forward to the opportunity to share with the court, our arguments and the reasons why we believe the commission erred in its rate case decision. Turning to the operations side, although 2021 was extremely challenging, it was not without successes. And I want to start by recognizing our field team's exceptional execution in 2021. We reliably served our over 1.3 million customers through the hottest June on record, followed by the third wettest monsoon season. Our non-nuclear fleet recorded an impressive reliability performance with a summertime equivalent availability factor or EAF of 94.4%. I just want to call out another data point on that nonnuclear fleet's performance. Out of fifty-two hundred and twenty-six starts last year, there were only nine misses, and that start-up reliability is impressive, and it's important in our participation in the energy imbalance market and our actions in the broader market in the West and also benefits our customers. Recognizing that creating customer value is inextricably linked to increasing shareholder value, we remain focused on improving the customer experience. Although there's still much work to be done, we're not where we want to be yet, we're making positive progress. Thanks to the hard work of our employees, our fourth quarter J.D. Power overall residential customer satisfaction score jumped one quartile compared to the year prior among large investor-owned utilities in the U.S. We had year-over-year improvements in several key areas that are important to our customers, including power quality and reliability, billing and payment and customer call center performance. In fact, our customer ratings put us in the top decile nationally for perfect power and the second quartile nationally for our telephone customer care. APS was also named a 2021 Business Customer Champion by Escalent, which recognized the company as one of the top-performing electric utilities in the nation for business customer scores and brand trust, product experience, service satisfaction and customer effort. In addition, we continue to make progress on the ESG front. On January 22, we celebrated two years since announcing our goal to reach 100% clean carbon-free energy by 2050. Over the past two years, we've procured nearly 1,400 megawatts of clean energy resources. These substantial investments are not only vital to our transition away from coal and into a clean energy future, but they are essential resources designed to help us keep pace with Arizona's tremendous growth at the same time that capacity markets are tightening across the entire West. And finally, I want to highlight three awards that we received in 2021 that recognize our commitment in the ESG space. First, APS was honored by the EPA with the Energy Star Partner of the Year Award for excellence in customer programs. Second, Pinnacle West was recognized by the global environmental nonprofit, CDP, for leadership in corporate sustainability with A- scores for both climate change and water security. That's significant because Pinnacle West is one of only two North American electric utility companies to achieve leadership scores in these areas. Finally, the 2021 Inclusive Workplace Award, a joint recognition from the Diversity Leadership Alliance and the Arizona Society Human Resources Management, acknowledging our efforts to create a diverse and inclusive environment for our employees. I'm extremely proud of the progress that our company continues to make and congratulate our employees on these important recognitions. As we look forward, our goals for 2022 include continuously improving our customer communication and engagement, enhancing our regulatory relationships and continued execution of our clean energy commitment. I want to once again recognize the near-term headwinds that were created by the unfavorable rate case outcome and how challenging it will make 2022, but we believe in our ability to provide long-term value to both customers and shareholders. We look forward to executing our plan and continuing our proven cost management efforts, all against the backdrop of Arizona's incredible economic expansion. So again, thank you all for joining us today, and I'll turn the call over to Ted.

Operator:

Thank you. Ladies and gentlemen that floor is now open questions. [Operator Instructions] Our first question today is coming from Shar Pourreza at Guggenheim Partners. Your line is live, you may begin.

Jeff Guldner:

Hey, Shar.

Shar Pourreza:

So just a couple of quick ones here. Jeff, clearly, you've got healthy customer growth and load growth that's kind of even stronger than that, which is great. I guess the concerns here with us is with some of the disallowances related to generation expenses in the last case. It seems like a possibility exists for all this pace of growth to actually be a bad thing if you're underfunded as we think about integrating and servicing all this incremental demand safely. Can we just maybe get your thoughts here as we think about the upcoming rate case in light of the stronger-than-expected backdrop you're presenting today?

Ted Geisler:

Yes. Shar, this is Ted. I'll just add to that, that we fully recognize that the sales growth, customer growth is tremendous in our service territory. We've said that for a long time, and the fundamentals are coming through as predicted. But we also recognize that that growth is only as good as our ability to recover the cost and investments needed to support that growth. And so that's certainly a key focus for us as we look forward to continue to work with stakeholders and our regulator. Good news is we haven't raised base rates since 2017. And in fact, through our cost management effort, rates are lower today. The average bill is lower today than it was in the 2017 outcome of that last rate case. We think we've got the ability to be able to recover these costs and still focus on affordability for our customers.

Jeff Guldner:

Yes, Shar. I think you know that there's been some tension between the commission, the legislature for a while and it's important to remember in Arizona, the commission's authority over ratemaking is constitutional authority. So there's not a lot that the legislature could do, if anything around rate making. And so we don't really have a position on any of the bills that are out with the legislature now. As I said, our focus is really on ensuring that we have the dialogue with the stakeholders and with the commission to ensure that the connection between the growth that we're seeing and the need to access the financial markets to support the investment to drive that growth and continue to grow Arizona. That we can make that connection and that we can improve the regulatory structure. We've had good examples. Post test year plant, there has been other mechanisms, the commission has adopted that have supported recovery of investments outside of a purely historical test year rate case. And so our focus is really on engaging with the stakeholders of the commission and the commission and the staff to make sure that we're explaining the need that we have, and frankly, the challenges that we have going forward.

Ted Geisler:

Thanks Shar.

Operator:

Thank you. Our next question today is coming from Insoo Kim at Goldman Sachs. Your line is live. You may being.

Ted Geisler:

Yes. Insoo, good question. And you're right, that's relatively conservative because we put a lot of effort into prioritizing the projects and investments needed to both maintain reliability in the grid and keep up with customer expansion. And as our customer growth continues to exceed our expectations that puts even more pressure on the capital budget. We've got it set at those levels because we are very focused on trying to maintain affordability for customers and target a reasonable level of future rate increases, certainly levels that as we said before, are at or below inflation. But as customer growth continues to be robust, that's more and more challenging. So we're still focused on trying to balance the capital budget with affordability, but we'll just continue to monitor that as the service territory expands and as we continue to procure the resources needed to serve that growth in the future.

Ted Geisler:

Yes. Insoo, I think it's been constructive. And so we have been able to engage and frankly, it's been good since we've been ex-parte essentially the entire time I've been CEO. And coming out of ex-parte is important. And again, the conversations are around the discussion we had here on the phone, the importance of the regulatory construct that we have in Arizona, given the growth and the transition is happening around the west in decarbonization. There's also been, I think, good discussions about the current western market, and as you know, we're very tight right now in the West. There's not a lot of excess capacity, and we're going to have challenges moving forward across this entire region of dealing with both the growth, but then also the transition, putting significant amounts of battery storage in. And so a lot of this has been just making sure that our point of view on the changes that are happening in the system, the opportunities to expand Western markets, and again, the need to be able to invest to meet the growth is all well understood by all of the stakeholders that we work with and by the commission.

Ted Geisler:

Yes. Thanks Insoo.

Paul Patterson:

Hey, good morning guys.

Paul Patterson:

Just on the rate case appeal. Are there any key dates we should be looking out for? And in terms of Insoo's questions, in terms of your discussions, what have you. Is there any sort of focus on how – I guess how does the timing associated with the new rate case interact on your expectations for the rate case appeal outcome if you follow me. I mean are people sort of saying, hey, we want to see how that goes? Or is that a gating issue in any way the rate case appeal and the outcome there?

Paul Patterson:

Okay. But we'll probably get a decision, it would sound if I'm understanding it correctly – on the appeal, we'll probably get a decision before we get to, I don't know, an ALJ or something maybe? Or is that the right way to maybe think of it or at least in terms of the final outcome on...

Paul Patterson:

Okay. And any sense of maybe when oral arguments with the – I assume there's an oral argument situation with the judges ask – were they interact with the litigants? Do we have any sense when that might possibly happen?

Paul Patterson:

Okay. Awesome. Thanks so much. I really appreciate it.

Operator:

Thank you. Our next question today is coming from Anthony Crowdell at Mizuho Group. Your line is live. You may begin.

Jeff Guldner:

Thanks, Anthony.

Ted Geisler:

Well, Anthony, this is Ted. We don't get into details of the rate case strategy at this time, but we'll be sure to go through those details once we file the case.

Ted Geisler:

Yes, fair question, Anthony. It's difficult to predict any more granular than that range beyond 2024. But I will say if you look at the fundamentals of our service territory for a long period of time in history we've traditionally always had higher growth compared to really most other service territories. And the fundamentals that we're seeing right now in our service territories suggests that you're going to continue to have long-term robust growth, whether it be the jobs that are created, the diversification within the economy here. It wasn't that long ago we were heavily dependent on purely construction and tourism. As of right now, manufacturing jobs are actually outpacing construction jobs within the state. So we've got a lot of good trends that suggest to long-term growth that could support that level or maybe even higher. But at this point, we're focused on that 3.5% to 4.5% between 2022 and 2024. And we feel confident in that range because we can point to projects and customers that we know with certainty are locating here.

Ted Geisler:

Yes. Thank you, Anthony.

David Peters:

Yes. Hey, good afternoon.

David Peters:

Just related to the renewable procurement efforts, you have decent chunks of CapEx for clean gen each year in your plan. I'm just curious, have you seen any supply chain-related issues. Just an update on schedules there would be great. And I guess to the extent that you do have any delays, it sounds like you have enough on your plate to backfill. Anything that might slip, I just wanted to double check?

David Peters:

Great. And then just specific back to the discussions you've had with stakeholders ahead of the next rate case. I'm just curious if you've had a chance to talk more about the merits of a concurrent recovery mechanism for renewables, just given the aspirations you have in the state. Just curious if you've had any traction on that specifically?

David Peters:

Okay. Thank you.

Ted Geisler:

Thanks David.

Operator:

Good day, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2021, Third Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Amanda Ho, Director of Investor Relations. Ma'am, the floor is yours.

Theodore Geisler:

Thank you, Amanda. And thanks again, everyone for joining us today. These are indeed challenging times for us, but right up front, I want to make it clear that while we may be navigating some short-term challenges, as you'll see, the midterm prospects post 2022 are positive. And we remain confident in our ability to create renewed growth and deliver strong shareholder returns. I know the conclusion of the 2019 rate case is the most significant development and everyone is interested in hearing more about that. But before we cover the rate case, you can see from the four main topics we will discuss today. I will cover our Third Quarter results and our expectations for the remainder of 2021. I will then turn it over to Jeff to discuss our rate case outcome, next steps and strategy coming out of this case. Finally, I will wrap up with 2022 guidance and our long-term financial outlook. Focusing on the third quarter, our performance remains strong, earning $3 per share compared to $3.07 per share in third quarter of 2020. Mild weather was a significant factor, largely offset by strong sales. We experienced a mild July and August driven by one of the wettest monsoon seasons in recent history. Residential cooling degree days in the third quarter decreased 27.5% compared to the same time a year ago. And were 10.6% lower than historical 10-year averages. As a reminder, third quarter last year was the hottest on record. Robot sales and usage growth in addition, increased transmission sales this quarter mitigated most of the weather impacts. Looking at full year, I'll provide an update to the 2021 key drivers and earnings guidance, customer growth, and weather-normalized sales growth remain important drivers for the remainder of the year. We are updating weather-normalized sales guidance to 3 to 4% up from 1 to 2% based on continued robust customer growth and strong residential usage. Lastly, with the conclusion of the 2019 rate case, we're now able to provide full-year guidance. We expect earnings per share to be within the range of $5.25. to $5.35 per share. Before I continue with our long-term financial outlook, I will turn it over to Jeff to provide an update on our rate case.

Theodore Geisler:

Thank you, Jeff. Now, we'll walk through our 2022 guidance and long-term financial outlook. As Jeff discussed, this last case was not the outcome we were looking for and we recognize this rate case is a regulatory reset. We're providing a 2022 earnings guidance range of $3.80 to $4 per share, given the full effects of the rate case, we recognize this is a significant reduction compared to 2021, so we've illustrated key factors contributing to the change in earnings. As you can see on slide 19, we're starting with the midpoint of our 2021 guidance and walking through the drivers to get us to the midpoint of our 2022 guidance. No surprise, the most significant driver is the recent rate case decision with a negative $0.90 impact. This reflects an additional 13 million downward adjustments beyond, the $90 million net income impact estimated for the recommended, opinion and order last quarter. In addition, growth and depreciable plans, higher interest expense related to new financing needs, and lower pension OPEB non-service credits, make up the remaining negative drivers. We are focused on cost management and expect O&M savings to provide some positive impact to get us to our 2022 guidance range, of $3.80 cents to $4 per share. Turning to the future, we're prepared to use all levers we have available to help us mitigate the impact of this case, and we remain optimistic of our ability to prod long-term value. As you can see, Investors can expect 7 objectives from us, and I will touch upon each one. Our plan is expected to provide strong long-term earnings growth off of 2022 for the next 5 years. I want to be transparent and reemphasize that this is projected 5% to 7% earnings growth built on our 2022 guidance. We realized a 2021 base year is a lower growth rate, at about 1% to 2%. However, we believe 2022, is the appropriate place to anchor our long-term outlook, given the valuation reset that has already occurred. And we're focused on creating shareholder value from this point going forward. There are a number of factors that could provide upside potential to our growth guidance. For example, we have the ability to meet -- We have the ability to invest in more clean energy if we achieve more constructive cost recovery. In addition, broke-off economic development opportunities may drive increased sales and customer growth. Those, along with other factors, could provide upside to our guidance. The second objective shareholders can expect from us is an optimized capital management plan. As Jeff discussed, we continue to experience solid growth in our service territories, which is the primary driver behind our capital plan. Steady population growth is expected to drive average annual customer growth in the range of 1.5% to 2.5% through 2024. In addition, we expect average annual sales growth to be in the range of 3.5% to 4.5% through 2024 on a weather-normalized basis. We have updated our capital plans to $4.7 billion from 2022 to 2024. While this represents a modest increase from prior levels, we believe this is prudent, until we're in a better place to secure timely and constructive cost recovery. We're committed to taking a balanced approach to manage our capital plan that support customer growth, reliability, and our clean transition, while limiting our equity needs to minimize dilution, as we recover from the outcome of this case. Third, as you can see from 2019 to 2024, we project that our rate base growth will remain steady at an average annual growth rate of 5% to 6%. I want to highlight that our FERC jurisdictional transmission investments, continue to represent a meaningful portion of that growth, that's almost a quarter of the total rate base. These investments benefit from superior authorized returns, and a more favorable cost recovery construct in our ACC jurisdictional investments. We believe the steady growth will allow us the opportunity to provide solid earnings growth from transmission in the future. Next, I'd like to provide clarity on our financing plans going forward. We've previously stated that we would issue equity prior to the next rate case. We understand this case was not constructive and we're committed to doing everything we can to protect shareholders from further dilution. Therefore, we're deferring our equity issuance and have no plans to issue equity until the conclusion of the next rate case. In the meantime, we'll leverage our sales growth and the strength of our Balance Sheet to support our investment needs. While we show equity or equity alternatives in the plan, we have no plans for this to be sourced earlier than 2024, protecting Investors from dilution during this period. Moving to O&M, we have a solid track record of disciplined cost management, improved really see announced that we have initiated additional cost-savings programs. We understand the importance of efficiency, and instituting lean initiatives. With that in mind, we're updating our own guidance to show; 1. A reduction of O&M expense from 2021 to 2022. 2. A goal of keeping total O& M flat during this period, and 3. A goal of declining O&M per kilowatt hour. Cost management and lean processes will continue to be a strong focus of our management team to mitigate both inflationary pressures and regulatory lag. We anticipate another important expectation that investors can look forward to as our attractive dividend yield. Yesterday, our Board of Directors announced an increase in our quarterly shareholder dividend from $0.83 to $0.85 per share. We have consistently grown our dividend for 10 years straight, and we're committed to dividend growth going forward. Our longer-term objective is to grow the dividend commensurate with earnings growth and target a long-term dividend payout ratio of 65% to 75%. We understand that we're not there now, but we're confident in our plan and that we will eventually grow back into this payout range. Turning to the final item, our Balance Sheet. We continue to maintain a strong Balance Sheet, providing us flexibility in our sources of capital over the next few years. We have an attractive long-term debt maturity profile and no debt maturing at APS until 2024. Additionally, we maintained robust and durable sources of liquidity with our $1.2 billion of credit facilities recently extended to 2026 and a well-funded in largely derisked pension. Taking a closer look at our ratings, we continue to have solid investment-grade credit ratings. Even with the recent downgrade by Fitch, and the credit reviews announced by Moody's and S&P, our balance sheet targets include 3 key components; maintaining credit ratings strength, maintaining an EPS equity layer greater than 50%, and an FFO-to-debt range of 16% to 18%. In summary, we're taking action, during this reset and have a plan for attractive growth going forward. Importantly, we plan to defer all equity until 2024, further reduce O&M and optimize the Balance Sheet and Capital program during this reset period. In return, we have the highest dividend yield among peers, which stands today about 5%. While certainly a factor of the current valuation, even of the stock price 20% higher than current levels, we offer a dividend yield more competitive than peers. In addition, we announced long term growth guidance of 5% to 7% from 2022 for the next 5years. With the attractive dividend yield and solid EPS CAGR, we anticipate a competitive 10% to 12% total shareholder return going forward. In the short-term, we are laser-focused on doing everything we can to protect investors during this reset period, and then transitioning to a renewed era of growth, so that we can provide a competitive return going forward. We remain optimistic about the future. Although the final outcome of this rate case was worse than we had expected, we have a path forward. That is centered around our long-term track record of constructive rate case outcomes, our robust service territory growth, continued Balance Sheet strength, and a focused management team that is taking action. This concludes our prepared remarks. I'll now turn the call back over to the Operator for questions.

Insoo Kim:

Thank you and thanks for all the disclosures today on this. My first -- maybe for Ted, just trying to reconcile the walk to the 2022 guidance midpoint of the 390, couple of things that stood out, it seemed like the depreciable plant, maybe the DNA component of it is seemed a little bit higher than what I was expecting and then the pension item also something. I don't know if it was just me or if that was already known, but could you walk through a couple of those items in as much detail as possible? And finally, you talked about that sales growth that's very robust, but it didn't seem like that was explicitly laid out in this walk, so what's being assumed here?

Insoo Kim:

Okay. So the 3-90 that assumes at least at a 3% year-over-year weather normal low growth?

Insoo Kim:

Okay. Got it. And my second question is for Jeff. Just more broadly, definitely A challenging case. And as we think about moving forward from here, and getting to file that next rate case and having further dialogue with the interveners and the commission. What are just some things that, in your mind, you could do to this time around have a more constructive dialog overall and various issues? Just curious on your overall thoughts given, with all

Insoo Kim:

Thanks for the caller, I'll see you soon.

Operator:

Thank you. Our next question today is coming from Julien Dumoulin -Smith, at Bank of America. Your line is live, you may begin.

Jeffrey Guldner:

Yes Julien. Let me be really direct with that. I did have it in my initial comments, but our first step in the near-term approach with the SCR is to pursue judicial review. And so what we have to do is we have to go to the commission first. You have to ask for rehearing. That's -- we have 20 days to ask for rehearing. The commission has 20 days to act on that If they don't act on it within 20 days and it's deemed denied and that opens up than your access to the courts. And so I won't go into the more detailed strategy, but we were very clear in the hearing that this is -- the prudent standard that was used just does not match the record in the case. And so we were very clear that -- I think we gave them one option to say if we could do a debt return, that we would be able to move forward with that. But as a partial recovery that they gave, which means there was a disallowance of the $216 million doesn't leave us a choice but to go to court on that issue. So that's the near-term process. What happens down the road with securitization? I mean, those are all things later. With respect to getting an unsettling, I think one of the things that this case did show is, the challenge of not having a settlement where you do have a more limited, scope of issues to look at. This was pretty wide open in terms of everything that was involved, for both the hearing division, the parties, and then ultimately the commissioners. I think we would continue to advocate for settlement as being a better outcome, because you are able to do a lot of those trade-offs, with the parties who are most effected. Rather than having it go to a commissioner, a judge for an opt-in can be a binary outcome, somebody's going to lose it all or they're going to win it all. In a lot of cases that compromise is much better. So I still think that that's the best path moving forward. That's what we would be working towards. And again, we're going to have this period of time when we finally get out of ex part to hopefully be able to have some conversation with policymakers on how to make this more constructed.

Theodore Geisler:

Well, Julien, the way I think about that is, as Jeff said, we plan on filing the next case as soon as practical, given the outcome of this recent one. We assume a conclusion of that before 2024, and we're being conservative on our assumption of just with reasonable regulation. And the conservative outcome in that case, we can support 5% to 7% earnings growth. And it will just depend on the details of that next case. I think, given the sales growth, our commitment to cost management, we've got the ability to offer a favorable construct to many stakeholders, that could lead to a constructive outcome for everyone, but it will depend on those details in determining how long we go then after that, before a renewed and file another rate case. But the 5% to 7% is supported by reasonable regulation and a balanced outcome in the next filing.

Theodore Geisler:

Well, that's a long-term target. So in the near-term, you could be better, it just depends on the outcome. But over the long term, we believe 5 to 7 as a prudent range.

Jeffrey Guldner:

Thanks, Julien.

Shahriar Pourreza:

Hi guys.

Jeffrey Guldner:

Hi, Shahr

Jeffrey Guldner:

Sure. It's maybe one of the most important things. That's just how the prudent standard was applied in this case. And I tried to make it very clear during the open meetings, that this is more than just $216 million write-off. That is not good, and I don't think that qualified as -- by the evidence of the case, but when you start thinking about the number of investments that we need to put in, and if every time we do that, there's a look backwards to say, "Well, maybe there's a different technology that would've been better or cheaper." It makes it really hard to think about how you're going to navigate this clean energy transition. And so I think we were trying to be as transparent and as clear as we can be with the commission when we were in the open meeting about what we would have to do given this outcome. And so that's unfortunate, I mean, I would much rather not be in that position. But as we move through that, I don't think anybody is going to be surprised by it. And the point is to say, let's figure out how we can align on what we can align on. That's part of the part of the regulatory structure as sometimes companies appeal. You got a right to appeal, that's set up in the framework. We're not doing anything more than we have the rights to do, but we still need to work together and we still need to work collaboratively through that. We'll have to do what we can do to try to navigate that.

Theodore Geisler:

Yeah, I appreciate that Shahr. The way we think about it first is, any Pinnacle debt that's injecting APS will be treated as equity at APS of course. The second early more fundamental, we just don't believe that it's prudent issue comment at the current valuation. With respect to whether we could differ beyond 2024 depending on this outcome, that will just depend on the next outcome. As we stated, we'll also evaluate alternatives when the time comes, such as hybrids or forwards, or convertibles, to mitigate for the dilution at that time. But heading into the next rate case, our primary focus will be improving the ROE that we believe is unjust, not appropriate. Given as Jeff mentioned, the growth that we need to finance as well as the responsibilities we have, as operating in the nation's largest clean energy asset and I believe that our Balance Sheet profile having in next case will allow us to then focused on improving that ROE

Theodore Geisler:

Thanks sir.

Sophie Karp:

Hi, good morning. Thank you for taking my question.

Jeffrey Guldner:

Hi, Sophie.

Theodore Geisler:

I appreciate that, Sophie. We're real proud of our customer affordability program and our growing culture of being focused on Lean Sigma. So this has really been a Company-wide concerted effort to embrace Lean, eliminate waste, harvest savings. and be able to use this as one of our levers through this reset period. In this last rate case, in fact, we were able to take some of the customer portability savings and have that as part of our filing and pass that on to customers. of course, it doesn't just stop with that last rate as filings we're continuing to focus on cost management and operating a lean organization and that's part of one of the lever that is going to help us during this period, it's not any one item it's a variety of initiatives across the entire enterprise. Whether it be being able to consolidate supply and services and leverage our supply chain strategies more efficiently. Or be able to automate, some of our systems and processes, and then be able to focus our -- human hours are more value-add work. There is just a tremendous amount of opportunity and ideas, that this organization has come forward with and is executing. We're really inspired by how much the team has stepped up, and is taking this as a challenge and an opportunity to deliver efficiencies in this period.

Theodore Geisler:

Well, Sophie, first of all, just want to make sure we're clear that the grid access charge going away is revenue neutral. So that really is just a cost shift between customer classes. But our estimates for whether normalized sales growth is net of energy efficiency or rooftop. So if you were to look at the gross numbers, they are even higher than what we're projecting. And again, as we sit here today, over 4% weather-normalized sales growth currently, that's higher than our current range. And if you compare it to 2019 where we're 6%, so we're confident in that weather-normalized range going forward, even with the impacts of energy efficiency and rooftop solar.

Theodore Geisler:

Thank you.

Steven Fleishman:

Hi. Thanks. Somebody asked this question before, but I'm not sure I heard the answer. The 5% to 7% growth rate that you've laid out, Is that something you see consistent over this period, or is there some maybe lag upfront, and then when you get the rate relief it goes higher? Could you talk a little bit about the year-by-year of that?

Steven Fleishman:

Okay. I'm just going to ask maybe a little more clearly on the question. Just so -- because I think for the next rate case, you're really not going to have in place till late '24 did you say or?

Steven Fleishman:

Okay. So there's only really one year, '23, without the outcome of the rate case? By '24 you expect you will have it in place?

Steven Fleishman:

Okay. Great. And then maybe just on the -- in terms of understanding the kind of equity. So you plan to, I assume, keep the ATS equity at the 54, and change that's authorized in this last case.

Steven Fleishman:

Right. And is there any risk of them imputing that, or is there not any history of that?

Steven Fleishman:

Okay. That's it for now. Thanks.

Operator:

Thank you. Our next question today is coming from Anthony Crowdell at Mizuho. Your line is live. You may begin.

Jeffrey Guldner:

It's really not been anything that's been a focus and, I can't speculate on what that may look like in the next rate case filing are they the key is that with our record growth, we have to finance that somehow. And given the outcome and the impact that's had on our valuation, the prudent way to finance it, is to use the strength of our Balance Sheet. And I believe the Commission will understand that.