Q3 2019 Earnings Call

Greetings and welcome to the Pinnacle West Capital Corporation first quarter 2019 earnings Conference call.

At this time, all participants are in listen only mode.

A brief question answer session will follow the formal presentation.

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It is now my pleasure to introduce your host definitely Leighton director of Investor Relations. Thank you you may begin.

Jim Hatfield, Jeff Goellner, H.P.S., as President and <unk> A.P.S. as executive Vice President of operations are also here with us.

I need to cover a few details with you.

But we will be using are available on our investor Relations website, along with our earnings releasing related information note that the slides contain reconciliations a certain non get financial information.

Today's comments and our slice contain forward looking statements based on our current expectations and accompanies hands no obligation to update these statements.

Because the actual results me different materially from expectations. The caution you not to place to undo reliance on these statements or third quarter 2019 Form 10-Q . was filed this morning. Please refer to that document for forward looking statements cautionary language as little as the rest factors, an M.D.N.A. sections, which identify risks and.

Uncertainties that could cause actual results to defer materially from those contained in our disclosures.

Replay of this call will be available shortly on our website for the next 30 days.

Also be available by telephone through November 14th and well now trying to call over to dawn.

Thank you Stephanie. Thank you all for joining us today are up routing performance in financial management remain in line with our expectations for the year.

Know whether provided significantly below average revenue in the second quarter and was mild and the third quarter before Jim discusses the impacts of whether on our expectations for 2019.

And details of our third quarter results I'll provide a few updates on current regulatory.

An operational developments.

The 2019 summer season was successfully completed by focusing on our core priorities.

Delivering save clean reliable and affordable energy.

June began with relatively mild temperatures, which for resource planning mud heavy imports from California, renewables and watching for over generation during the mid day hours.

July and August 23 days over 110 degrees.

It was a dry a summer it in the last 20 years with less than one inch of rain between June in the end of September .

The lack of humidity can impact peak demand, which was 7270 Mega lives in 2019, falling 200 megawatt short of the 2018 peak.

Evaluation of the Mic, making substation battery storage facility equipment failure is ongoing.

<unk> occurred on one rack containing 14 battery modules.

Iraq did experience of fire has been disassembled and was shipped to a forensic way up in Michigan, where it's undergoing a series of test.

Well, we remain committed to our investments in energy storage.

Imperative that we move forward safely we expected more specifics on what a safer path forward looks like should be available by the end of this year or early 2020.

Turning to our regulatory updates we filed a ratecase on October 31st 2019.

Keep components of the filing include 810.15% return on equity.

But 1% return on the fair value increment.

54.7% equity layer and 12 months of post test your plan.

We've requested an increase in annual revenue of $184 million.

Includes 73 million for the four corners selective catalytic reduction project.

It is the subject of a separate A.C.C. proceeding.

We've proposed new rates go into effect on December 1st 2020.

<unk> filing highlights technology, driven programs were already pursuing on behalf of our customers, including our participation in the western energy imbalance market or participation in this market not only provides greater ability to manage our grid.

And the intermittent resources in our service territory. It also provides access to the increasing availability.

Negative priced energy.

Our customers have realized gross savings oval over 120 million during that three years.

P. S has been a member of E. I am.

In further support of our customers are filing contains three proposals to benefit the most vulnerable.

We propose increasing funding for our crisis Bill assistance program from $1.25 million to 2.5 million annually.

Expanding the ways in which customers may enroll in our limited income Bill discount program and differing cost for Bill discount program, allowing for expanded program growth.

We're also responding to customers by proposing a flat bill pilot program.

This subscription rate will offer customers an option to be build the same amount each month.

Similar to an unlimited use cell phone plan.

Rooms, like this demonstrate our commitment to increase customer choice and provide options it fit our customers lifestyles.

In addition, we have heard the commission's request for transparency.

In our financial status on a more frequent basis in response, we've proposed and alternative formula rate concept for the Commission's consideration.

The benefits of a formula raid in addition to the Angel transparency and Accountability include annual earnings calibration annual A.C.C. approval. It reduction in the need for adjuster mechanisms and rate gradualism for customers.

The Commission has a number of other open dockets, including file disconnection rules and retail choice.

We anticipate another retail competition workshop, maybe scheduled in December or in early 2020 to continue evaluating the complexities of retail choice.

Into disconnection rules Docket Commission staff has proposed.

[noise] draft rules for the commissioners to consider we do not know the timing or next steps in this docket.

On October 29th the Commission approved our third tax expense adjuster mechanism.

Filing refunding, another $103 million to customers.

Including this third filing refunds to our retail customers from federal tax reform will told $547 million by the end of 2020.

Allowing us to continue investing in the system, while keeping bills affordable.

Earlier this year I announced my retirement date of November 15th.

I look forward to what's ahead I can't say enough about the immense pride I have in the performance of this company over my tenure the strength of our team and the dedication of our people drive our success I have no doubt that successful continue under jeffs leadership.

You all the best and I'll now turn to call over to Jim.

Thank you Don and thank you again, everyone for joining us.

This morning or pointed are for the answer is off a quarter.

2019.

$2 in 77 cents per share in a third quarter 2019, compared to $2, an 80 cents per share in the third quarter 2018.

<unk> Ernie drivers can be found on try three that material.

Given the impact here today from below normal weather not effective oriented.

For 25 to 495 2090 nines range.

Illustrate on Friday 26 to the into the third quarter 2019, whether decrease your smart in a total of 24 man or 16 here.

October <unk> are also below expectations.

Part to another month mild weather.

For the full year 2019, with the second negative whether impacts will be partially offset by lower.

And yet prove a team three refund.

I had to 2020, we will continue to enhance our customers shareholder value for our cost management discipline.

Along track record imagine, they're coughing continuous improvement the customer affordability effort challenges are employed to find ways to work better and more efficiently challenge rocker c. and eliminate unnecessary working our daily operations all of which are based on lean principles.

Working harder will not get it here, we must find different better way.

And it cost savings will result, although we are in the early stages of the customer affordability initiative, we haven't identified 20 million and potential Oh, and then saving how will serve as a positive driver 2020.

We're introducing 2020 guys at $4 concerning fights tested $4 in 95 per share.

Given that Ratecase outcome is unlikely to materially impact 2020 irony. There are no assumptions regarding neighboring case happen incorporated into the guy injury.

Positive drivers for 2020 include lower O. and am sales growth higher transmission revenue and <unk> respect our own and will decrease approximately 25 and then from 20 920 20. The main drivers for lower O. and EM include the closure to Nashville generating station.

Reduction from our customer affordability initiative and lower planned adage advance.

We expect the driver will be partially offset by an increase in advance associated with.

Disconnect policy.

Higher depreciation and amortization.

Higher property taxes, higher entered Japan, and lower a P.D.C.

We currently estimate that the disconnecting moratorium and revise policy.

Result in a decrease of pocketing 20 million.

30 million of pretax income in 2020, depending upon turn assumption, including customer behavior.

Estimated effective tax rate at 14% for 2020 reflects benefits associated.

With the amortization of 45 million, an excess different taxes associated with the team to teen three filings.

These effective tax rate benefits are substantially offset by the refunds provided to customers as part of the team filings.

Going forward and we will need a modest amount of equity to support the groping clean energy investments are customer of what was important are strong equity layer.

We will continue to evaluate our equity neat and clean the form and timing innovate any issuances as our capital expenditure plans progress.

We expect issue during a vein of long term Vanity P.S. during the remainder 2019.

May include a portion of our funding need for that refinancing a V.P.S. $250 million 2.2 seater knows which mature in January 2020.

We also affect the issue after what a billion of termed at eight P.S. and 450 million at Pinnacle Western 2020.

Overall, the point any remain strong <unk>.

A complete less and factors and assumptions underlying or 2019, and 20 and 20 guys can be found on flights five to seven.

In addition to our cost management, we stand to benefit from organic growth in our favorite territory. As a result of economic development. According to the Arizona Technology Councils <unk> report, Arizona Tech sector is growing out right, 40% faster than the U.S. overall, the Metro Phoenix area continues to show.

Oh, Strom job growth and it's consistently been above the national average.

Through August 2019, employment, and that's something increased 3%.

Compared to 1.6 for the entire U.S. construction employment and Metro Phoenix increase like 10.8% and manufacturing employment increased by 5%.

The Metro Phoenix residential real estate market has also continues up with.

<unk>.

The 19, we expect a total of 3000 housing permits and increase of about 2900 compared to 2018.

Single family permits, reflecting the steady improvement and economic conditions, Apss retail customer base, 2.1% and the third quarter 2019.

<unk> growth weight will continue to accelerate in response to the economic trends and justice pets.

Imposing our long term racing for outlook remained at 60.

And we expect to a cheating whether my life annual validated.

Average common equity and one of the 9.5%.

<unk>.

Tells graded on slide eight are earning to not linear and will fluctuate from year to year.

<unk> reached the end of <unk>, well on 2020 regulatory lack <unk>. However over the long term the opportunity to partner with stakeholders across Arizona, <unk> cleaner energy future positions as well to continue our track record of success.

And this concludes our prepared remarks, I'll turn call back over to the operator for questions.

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Please volleyball for question.

Thank you are first question comes from online as Michael Weinstein, We credit Suisse pleased to see what your question.

I can morning.

Why am I going.

And I looked at the slides and I'll continue and the four corners a C.R.'s.

You know that she was about seven cents.

Yes reduction.

Impact them for foreigners.

It looks like perhaps the two of those things combined in 2020 would be probably about 15 cent hits event.

I'd be fair to say that.

Seen since.

Restored once in my case is finished and 2021.

That that would be even map of the combined too you know <unk>, obviously, but those are the two big components of our rate ask.

Gotcha and.

Do you have kind of any thoughts right now on what kinds of equity issuances you might do for the monastery.

So you might.

And with time.

Yeah. It was 2020 issue or 2021 issue.

I don't have any thoughts currently Michael.

Alright.

Well, thank you very much.

Hi next question comes to mind it into came with Goldman Sachs pretty tricky, we give question.

Thank you maybe starting with the economic data that you guys were pointing out it seems like there's stuff continues to be a lot of gross you know in various industries in commercial industrial site. Despite that you know you now <unk> forecasting the weather normalized invoke growth or 21 to be 50 basis points lower than your prior for cats could you just.

Talk a little bit about you know.

They used to change that you're <unk>, you're seeing the various customer classes.

Yeah. So we you know look at the.

Residential continued to be strong economy is doing very well overall virtually all sectors.

Stronger growth in his hand, I customer base is being dominated by warehousing and they'll just think.

Apparently retail Sergeant mall still appear to be week, which is in mind with Nashville trend.

So from an energy use perspective, the rapid growth and warehouse you download just exact or appears to be reducing average use per customer and is he an eye area still showing grow up a little weaker than we expected.

[noise] understood and then maybe it's <unk> to the rate case I think in the past couple of month. There's you mean in conversations about you know the treatment of the fair value increment of those.

The rate base and I, just I I'm not familiar with that in terms of is that a P.C.'s statute is that a legislative item, whereas that just a something that the A.C.C.S. you know discretion on whether to to prove an increment or not.

Jeff that's actually part of the Arizona Constitution and so the.

State is adopted in the Constitution 1912, a fair value requirements. So it's somewhat unique to Arizona and it over the years it's been.

Addressed in a variety of different like cases, not all of them ours and it really started to have more of a role.

Probably five or six years ago, you know water.

Canes context, and so the conditions being applying it in discussing how to apply the fair value.

Standard since that time, there's this was a workshop on it a few weeks ago.

So there's some moving parts on I don't know exactly how that's going to play out.

Okay, but the constitution with state that and that that the P.C. would apply some sort of thing farewell increment two rates yes.

Okay. Thank you very much thanks.

Next question come through line of Julian <unk>, We think of America Merrill Lynch pretty interesting to hear question.

Good morning team.

Mind Julia feeling.

So obviously continue to cut costs and the 20 versus 19 can you talk a little bit about how you think about burned returns a narrowing the gap versus authorizing <unk> I'm really trying to get at how you think about sort of a post ray case outcome.

And and continuing to focus on during that gap, especially in in the eventuality of of any change in a threads returns here and then maybe if I could follow up on ensues question. Just in brief how do you think about the delta in in ask here unfair.

Oh, you peace just given some of the commentary another cases.

Between stuff.

So July I think in terms of narrow and.

Regulatory lag yeah, we have some mechanisms now they'll work well from a right gradualism perspective, obviously as an alternative in the case we.

You know propose formula rates would just be an annual filing much like if we do at park, but you wouldn't need adjusters.

And those will be the sort of two things we'd look at it in terms of getting faster recovery in terms of the.

Value.

I'll, just say on the fair value Julianne.

Each each cases, a little bit difference or if you watch right now and that's just one electric case.

Requested a a one on a quarter percent fair value increment and.

Testimony that have found was a little less than half a percent.

Increment there have been other cases before where the company.

Well our company didn't get a fair value increment, but again, that's going to be in the context and that specific case.

And so it is an area. That's the policy is evolving or at least being discussed.

But it's just a part of the Arizona regulatory framework.

A fair enough, but with respect to earn returns I mean, obviously, oh and I'm coming down means the the broad framework I think you guys have historically talked about is about a 9.5% earned return or better.

I suppose <unk> still broadly even go into the future thing sticking to that.

Mantra is that is it.

Mm.

Independent era that me.

Well I mean based on where we are now obviously the on the right case outcome, but we can't really.

Focus on a really you know say what that is because they don't don't we can't predict fiasco.

But we do try to get the the the delta between you're always going to have some structural disallowances right and so you do try to narrow the delta between the earned in the authorized for time and so that obviously will continue to be a focus something for us.

Got it excellent and then cap X.Y. and there's a small bump in in 20, but how do how do you think about any potential to ship that around obviously, but I suppose it was earlier here you you made a more meaningful shift given dependency the case, we shouldn't be expecting anything more meaningful until the determination that case right.

A resolution rather yeah I think it has more now almost on 2020. That's you know we have a good plan for 20, and 21 and I wouldn't expect any big changes currently.

A fair enough guys I leave it there thank you.

[laughter] next question comes from line of Greg Gordon, We'd have a core I as I. Please proceed with your question.

<unk> congratulations on the retirement.

You've served.

Customers of your utility in Arizona, very very well over your tenure and also put up good returns for shareholders, So well deserved.

Thanks, Greg appreciated come, especially coming from you.

The <unk> I I've been multitasking years, I appreciated an apologize if I missed <unk>. This but we're looking at the adjusted gross margin targets for 19 and 20, you know obviously they came down a lot for 19 and you know the 20 adjusted gross margin target is actually below where you thought you were.

Only going to come in in 19.

You know your your your expectations for whether normalize retail electric sales volume or lower for this year, but the same for next year.

<unk> can you just go through what you've Recalibrated, there and whether you know it's just a 19 issue or there's also some uncertainty around where you think you'll end in 20, given what's happened versus the initial expectations in 19.

Well and number 500 question, we talked about how.

In the T.I.N.I. sector due to the customer mix that what were we have now versus historically Racine less used for Kassberg, that's really route warehousing logistics and.

No going forward, we have a slide with some of the other data centers and other things, which are highly uncertain in terms of timing and exact a mouse. So I think we're just recalibrating to what we're seeing actually in the marketplace.

Okay and then the back on my on Michael Weinstein's question. You you do you did thank you for putting a slide in the appendix on the impact this year of.

Not getting this step increase I think you annualized data that's seven cents.

Woot annualized it a larger number in 2020 before it all gets worked out in the re cases that is that right.

No. That's that's really the delta between you know your having it in his rates and earn an equity retire versus just endeavoring term and that project will continue to me to do that for.

You know the concurrent.

L.J. rule out there for that and that's not going to change the the impact will be it's <unk>.

And your cats return it.

Fairly met them over a one year timeframe.

Okay.

Oh, Thank you guys have a great food like <unk>.

Hi next question comes in a line of only I go it centrist rabbits and have replaced it with your question.

Thank you a good morning.

Running first question just to clarify I think you mentioned that you know you'll go to be below the low end up your guidance for this you're getting give us some calibration of how much lower we should be thinking about just you know as as we think about finishing just to get off.

Well, we below 475, that's about.

Fine it's point I can put on at the moment.

Oh, good <unk> I mean can you I know you man Oh, you manage your your dog it towards the nine and 100% or higher and written.

Any any any ranging numbers, we should think about what 19 when the dust settles.

No.

Okay.

Then my second question I think in your comments you mentioned in 2020.

These are goodbyes disconnect policies.

Will hood, you'll by about 20 to 30 million.

What I wanted them, so am I heard that right and to does that.

<unk> backed up to new in the future years as well.

Well you heard it correctly the impact based on various assumptions. The rally is we don't have a policy at this point.

Going forward, so anything beyond the assumption.

The number would be a pure <unk> guess at this point and at some point to future.

Those will ultimately be selected it it rates whatever we end up.

I see so so that is some truing up that will happen in this red gift that's gotta depending.

We did do a couple of pro forma us in the case to try to.

Increase our.

I'm collectible with faith.

The increase we're saying now.

Longer term it'll depend on what the what the final rules are so they're in the rule, making process now on on the disconnect policy and and we're participating in that and ultimately will be reflected in what those roles come out with.

I see but just from I guess, a big picture point of view.

Would we expect that there would be some headwinds from dish or I mean today basically the rules will be such that this would not be an issue going forward Toby head was until ultimately you get reflected in race.

Whether that's what we ask for in this case or down the road based on the final rural which we don't have yet.

I Gotcha, and then lastly, Ah U.M. I I just wanted to come from you mention the need for some equity a small equity going forward.

You don't need that for this race games right that 54.7.

It's based on your actual.

You know capital structure or does it does somebody needed to get a bit to that level as well no our capital structure 54.7 ads of Ah.

June 30th that's what we found on the K.

Right. Okay. Thank you.

[noise] Hi next question comes from line of trials Fishman with Morningstar. Please proceed with your question.

Q, Don I think I first much over 20 years ago, and a sort of followed you.

Around and sure who are the board at the Pinnacle, well certainly made a great decision when they took out of Saint Louis.

Thanks Charles.

Yeah. He's the only question I have is effective tax rate, 14% that you're using and your.

Key factors for next year.

Little more color on that Jim or <unk>, what will likely I mean, I assume that will rise as we go forward here in the next decade.

It is it's really a reflection of the.

The first pass slow pack.

Through a team three which royally will be reflected in effect the tax rate.

For the foreseeable future, but based on the fact that we're getting a back over.

27, and a half years properly.

Okay. So we can <unk>.

It will stay at around this level over the next few years all things equal Okay got it that's the only thing I had thank you.

Thank you we have reached the end of the question and answer session. I would now like you turn the floor back over to management for closing comments.

Thank you for doing S. out today this concluded dot com.

Ladies and gentlemen, this conclude today's teleconference. You may disconnecting lines at this time. Thank you for your participation and have a wonderful day.