Q4 2019 Earnings Call
Greetings and welcome to the Pinnacle West Capital Corporation, 2019, fourth quarter and full year earnings Conference call.
At this time, all participants are listen only mode.
A brief question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Stephanie Leighton director of Investor Relations. Thank you you may begin.
Thank you Christine I would like to thank everyone for participating in this conference call in webcast to review, our fourth quarter and full year 2019 earnings recent developments and the operating performance. Our speakers today will be our chairman and CEO, Jeff colder and our chief administrative officer, Jim Hatfield.
Geissler CFO, Daniel Fresher, Apss, President and COO and Barber Lockwood Senior Vice President public policy are also here with us.
First I need to cover a few details with you the slides that we will be using our available at our Investor Relations website, along with our earnings release and related information.
But the size contain reconciliations of certain non-GAAP financial information today's comments and our slides contain forward looking statements based on current expectations and actual results may differ materially from expectations are 2019 form 10-K was filed this morning.
Please refer to that document for forward looking statements cautionary language as was the risk factors and mdna sections, which identify risks and uncertainties that could cause actual results to differ materially from those contains our disclosures a replay of this call will be available shortly on our website for the next 30 days.
Also be available by telephone through February 28.
Well now turn the call over to John.
Thanks, Stephanie and thank you all for joining us today.
Before I review, our 2019 achievements and provide operating and regulatory updates and when I look forward to the future and sure more information about our focus areas and priorities.
Our strategy is anchored by four concepts that align with industry trends in shape. The way, we do business those concepts can most notably we stated as clean affordable reliable and customer focused.
Let me talk briefly about each one.
Clean it's about Decarbonizing, our generation mix with our new goal to deliver 100% clean carbon free energy by 2050.
Affordable is planning an operating our business to maintain reasonable electricity prices for the people business isn't communities we serve.
Reliable mean, serving our customers with dependable power safely and efficiently.
Customer focus this about developing new solutions products and services to meet the changing needs and expectations of our customers.
With these in mind, we created a long term plan and targets to track our progress along the way.
First we recently announced our goal to deliver 100% clean carbon free electricity to customers by 2050.
This call includes a near term target, 65% clean energy with 45% coming from renewables by 2030, and a commitment to exit coal by 2031.
Importantly, our plan includes flexibility to ensure that we're able to execute in a way that maintains affordability for customers.
As Jim will discuss we expect this plan will require considerable capital investment.
We believe a carbon free future as possible, while keeping customer rates overtime at or below the rate of inflation with timely recovery of clean energy investments.
To support the affordability of our transition to a carbon free resource mix, we will have a sharp focus on economic development in Arizona.
Growing our customer base allocates cost across more customers, which helps keep rates affordable and increase the shareholder value by growing our company.
Supporting an internal culture focused on reducing costs and maintaining a financially strong company to access low cost capital are also key and delivering 100% clean energy future affordably.
In the area of reliability, we believe putting the responsibility on the utility to maintain high performing well run resources is important.
In pursuit of our clean energy plan, we will acquire resources that appropriately balance reliability cost and flexibility for our customers.
This includes both owning new resources and considering supplemental generation from purchase power as appropriate.
Our fourth concept reinforces that customers are the core of what we do every day.
We're committed to providing options that make it easier to do business with US we plan to continue developing innovative programs that connect customers with advanced technologies to help manage their bill.
In addition, we'll be convening an advisory panel of customers to gain a deeper understanding of the customer experience through individual perspective, so little design basis thinking.
As we work to execute in all these strategic areas, we'll focus on strengthening our relationships with stakeholders going forward and we plan to continue working collaboratively with those who have a vested interest in Arizona future intercompany his role as the state's largest electricity provider.
For our regulators, we're committed to maintaining an open dialogue listening and ensuring transparency.
We have a lot of important work ahead of us and we'll be sharing information about our progress as we advance through the year.
And while I'm excited about our future opportunities I also want to recognize our team and the hard work completed last year.
We finished 2019 with our best ever reliability performance, if you exclude outages for voluntary proactive far mitigation efforts and Palo Verde once again achieved the capacity factor above 90%.
Our goal to reach 100% clean carbon free energy by 2050, as new but our efforts to move towards a cleaner energy mix or not.
In 2019, we maintained our environmental social and governance a rating from M.S.C. I.
And we were ranked in the electric utility sectors top cortile by sustained Olympics.
Notably a P.S. was one of 10 American companies and the only U.S. utility to make CDP is a list for both climate change and water security in 2019.
And we accomplished all this while reducing the average residential bill by 7.8% or $11.68 on average since January of 2018, due primarily to savings from federal tax reform and operating cost savings that have been passed along to customers.
29 seen was also a busy year first state regulatory team.
Some of the work that began in 2019 will continue this year key dockets for 2020 include our rate case retail choice disconnection rules and modifications to the Commission's energy rules.
A number of workshops have already been scheduled to discuss these topics and you can find a list of key dates in the appendix to our slides.
The next milestone in our rate case proceeding as May Twentyth. The day, the commission staff and the other Interveners filed testimony.
However, I would note. The commission staff has indicated that they may need an extension so watch that proceeding.
Outside of our regulated operations are bright Canyon subsidiary acquired minority equity Stakes into wind farms being developed by to NASCAR.
242 megawatt clear Creek wind farm in Missouri, and a 250 megawatt noble's to wind farm in Minnesota.
We expect these wind farms to be operational in Q1 in Q4. This year, respectively. Our objective with these investments if the gain experience and the construction ownership and operation of wind assets and to partner with a proven developer into NASCAR. Our overall strategy with bright canyon is to develop own operate and acquire info.
Structure within the electric energy industry.
Investments in renewables electric transmission and Microgrids represents some of the opportunities that bright canyon, it's been evaluating and I want to emphasize that these are close adjacencies.
We will continue to pursue attractive growth opportunities consistent with our core strikes.
We have ambitious goals and a talented team to achieve them.
At the officer level I recently made changes to our organizational structure that better aligns our experience and talent to our strategic focus areas and to strengthen our succession pipeline.
I'm excited about our future all the possibilities and a team I have the privilege of working with before I turn it over to Jim for financial discussion I want to do three quickshot outs.
First of the team at Palo Verde for their work on a short notice outage. It unit three in getting the necessary work done safely and unit back online ahead of schedule.
And second to our TNT engineering construction team for their outstanding work on the new substation is associated with the Microsoft Data Center, Buildout and third to the Arizona State Sun Devils for their when last night over number 14 organs. So Jim go ahead to take away [noise].
Thank you, Jeff and thank you again, everyone for joining us today.
This morning, we reported our financial results for the fourth quarter and full year 2019 before I review the details of our 2019 results. Let me briefly touch on some of the key factors from the quarter, what's can be found on slide three.
For the fourth quarter of 2019 were 57 cents per share compared to 23 cents per share in the fourth quarter of 2018.
Although results were largely impacted by onetime tax refund to customers related to the team three.
Refined and lower adjusted on M. expenses, we also experienced another quarter a mild weather.
For the full year 2019, we arent $4.77 per share compared to $4.54 per share and 2018.
2019 earnings reflect our growing infrastructure to support the strong Phoenix economy, and 2% customer growth.
Other key items for 2019 was negative weather, which decreased gross margin by 37 million or 25 cents per share the negative impact was more than offset by lower all went up year over year lower adjusted R&D expense increased earnings 52 cents per share primarily driven by lower plan.
Outage expenses and lower public outage costs at the parent level as I mentioned last quarter, we are committed to enhancing our customer and shareholder value to cost managed but yep well imitation of lane cigarette will be the mechanism that allows us to improve the customer and employee experience, while eliminating waste as varies all of our costs.
Cost management efforts, we made great strides and reducing our them in 2019, allowing us to reach a low end of our original guidance range. Despite the mileage metro clinics cooling season on 10 years.
Back to continue our cost savings effort by reducing Atlanta, approximately 20 million in 2020.
As Jeff mentioned in his comments, we're on a path to deliver 100% clean carbon free electricity bar that plan includes ending are used to coal fired generation seven years earlier than previously projected as a result, the reduction in fuel costs as we use less fossil fuels and more renewables will be source or call.
Savings to our customers in the future.
Our journey to a carbon free future already car intelligent investment and renewable resources and developing technologies as you can see on slide 14, we roll forward, our capex forecast for one year R. 22022, Capex forecast reflects nearly 800 million of investment related to new Queen.
Generation resources and reflects our conservative mix of old resources.
Well, we don't know the exact mix of ownership versus purchase power at this point, we will need to appropriate mix to ensure long term value and reliability for cost parse that said, we believe there's potential upside to our capital investments, especially as we get past 2022, as Jeff alluded to customer affordability will be top of mind, we booked.
Customer rates to increase no more than the rail inflation over time.
In terms of financing our clean energy future, we would expect that we will issue equity sometime after 2020.
Well the exact amount has not yet been determined that we would expect him out to be in a 300 to 400 million dollar range. The timing of the offering around the next rate case, minimizing dilution and is ultimately accretive for our shareholders, our financial help including a solid equity layer.
Continue to provide our customers the benefits of low cost access to capital and competitive returns to our shareholders.
In 2020, we expect to issue you have to 1 billion of term debt at Ats and for 15 million that pedicle West overall liquidity remains strong in the fourth quarter EPS issued 300 man of news 30 year unsecured debt at 3.5%, we used the proceeds to repay commercial paper and to find.
On a man of our children 50 million par value 2.2 notes, which matured in mid January.
Yeah, the fourth quarter Bekele west at a $15 million the short term debt outstanding and Ats had no short term debt outstanding.
The tax benefits associated with both the team phase two and phase three.
And optimize use of income tax incentives our effective tax rate for 2019 was a negative 2.9.
We anticipate the effective tax rate in 2020, a 14%.
Continued use of the income tax incentives, including tax credits associated with clean generation investments will reduce cash taxes in Europe.
Projects are projects are placed in service.
A quick note on pension the funded status of our pension remains healthy at 97% as of yearend 2019.
This is due to strong portfolio returns during 2019 continued contributions and the continued success of our liability driven investment strategy, which has helped mitigate risk to our benefit plan funded status.
2019 was a great year for economic development and our service territory.
We saw high profile Datacenters, a manufacturing plants break ground in the West Valley, we successfully connected do data centers to our power grid, including the Microsoft Data Center and began prep work to add an additional six data center feeds in 2020.
Just want to growth in the commercial sector, Arizona is benefiting from residential population growth. According to a December 2019 report for the U.S. Census Bureau, Arizona rate third and population growth behind Texas and Florida.
Arizona population grew by approximately 120000 people.
Between July 2018 on July 2019, reflecting the steady improvement in economic conditions.
Yes, as retail customer base grew 2.2% into fourth quarter 2019.
We expect that this growth rate will continue in response to the economic trends in our service territory.
Metro Phoenix area continues to show strong job growth and has consistently been above the national average in 2019 employment in Metro Phoenix increased 2.9% compared to 1.6% for the entire U.S. construction employment and Metro Phenix increased by 9.6 and manufacturing employment increased by five point.
Two.
According to the U.S. Bureau of Labor statistics.
No job growth right second in the nation in 2019.
Metro Phoenix residential real estate market has also continued its upward trend.
And 2020, we expect a total of 31100 housing permits driven by both single family a multifamily permits.
We continue to expect pedicle west consolidated arrange for 2020 to be in the range of for 75 to 495 per share.
A complete less a key factors and assumptions underlying our 2020 guidance can be found on slide six and seven.
In closing our long term rate base growth outlook remains intact at 6% to 7% and we expect to achieve a weather normalized annual consolidated earned return on average common equity a more than 9.5%.
2020, the new years off to a great start with the announcement of our bulk clean energy plan, coupled with organic growth in our service territory.
We are excited to embark on a path that will help create a healthy and prosperous Arizona that benefits our customers committees and shareholders.
This concludes our prepared remarks, I'll now turn the call back over to the operator for questions.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
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I just didn't do you think speaker equipment, it may be necessary to pick up your handset before Christmas dark He's one moment, please what we pull for questions.
Thank you. Our first question comes relied of Michael Weinstein with Credit Suisse. Please proceed with your question.
Hi, good morning, guys.
Hey, Michael.
Could you talk about the a and you mentioned that there would be potentially some upside after 2022 and the capital plan.
You know as a result of.
Your carbon reduction and greenhouse gas goals are trying to achieve that going forward.
Is there any way, we maybe we could have kind of frame that up and.
Talk about some more of the specific opportunities you see ahead, particularly maybe in battery storage or in generation.
Well on average between now and they hit the interim target 2030 were going to need at least 300 megawatts battery storage in three to 500 megawatts of other resources to meet that goal and so.
Ultimately you have some competing plans out there all toward green and claim but a different dates and want to see exactly how it plays out, but we're being very conservative and how we think about our capex budgets at this point.
Got you and I think maybe I missed this but did you talk about equity needs going forward I know, it's now a little bit early considering the rate case, you still pending and everything but.
Can you talk let me get normalized equity needs going forward and what that might change depending on the outcome because.
Well so.
We don't expect to issue equity in 2020, Michael We expect the next offering we have will be into three to four three out of the 400 million dollar range.
It'll be teed up or closer to the next rate filing, but a lot of that will be what shakes out ultimately and the capital expenditures as we move forward.
EPA versus old.
Does that complete your question.
Oh is that block block equity or ATM type equity.
Yeah, No we haven't decided.
The the how yet at this point.
So well have to.
Yeah.
He tells a follow on that as we get closer.
Okay got it thank you very much.
Thanks, Michael.
Our next question comes from line of Greg Gordon with Evercore. Please proceed with your question.
Thanks, Good morning.
Morning, Greg.
A couple of questions.
So other than the the rider that you have or EPS solar communities, which I believe is for rooftops we.
We should be assuming that the to move this capital through into rates that I think you've already said this pretty explicitly you will need to file another rate case post.
The one that's gonna be closing this year or two or you'll be in sort of cereal filing mode to get these.
Investments into its revenues is that fair.
Got it may depend a little bit Greg on kind of how the how this case moves forward I'm you know we've got in our yes adjustment mechanism. There's some potential for for that to to come into play a I think what you'd see us if you move with a more traditional rate basing process. Then yeah, you wouldn't be looking at break.
Races that would be filed periodically to reflect the changing capital, but but one of the things I think we'd like to have a conversation with the commission about as our there either mechanisms we have today or other ways that we could look at doing that so that we're not in cereal rate making mode.
Understood and then when I look at the 2022.
Right base target or aspiration [noise].
It's it just looks a little bit low to me relative to the increase in Capex.
Maybe I'm wrong, but you should I presume that the CW IP balances would be perhaps a bit larger in.
The if you D.C. portion of your of your income statement would be a little bit.
Bigger in 22.
Great just Jim.
I know this slide is a.
2020, 2022, six to seven we think is a long term outlook and whatnot sorry, just reflect the dept appeared that show.
You know the math look into that what's shown is more like 8%, but we're lucky that or you know it doesn't future.
No no I understand that I'm, making I'm asking a more basic question when I think about.
<unk> be the earnings guidance for.
This year with ER with.
Hey, if you do see are expected to be.
35 million plus or minus that's on slide six.
Yep I'm, just I'm, just sort of saying like maybe I'm, stating the obvious but as your capital expenditures accelerate that CW IP and therefore.
The contribution to earnings from a if you do see should grow.
That would be that would be correct Greg.
Okay.
Final question guys. I think there was some work do you see a work started easy see outside of the the Tucson case, an outside of the your pending case has been work shopping several different different issues, including you know, making a policy decision on how to deal with fair value.
No adjustment how to deal with post test year adjustments and rate cases.
And I think there was one other item, which frankly I'm embarrassed I can't remember, but I think you up to the <unk> hopefully you [noise].
<unk>.
Knowledgeable about the do it but what I'm referencing and could you give us an update on that where those stand on those two or three items.
Yes, Greg This is barber Laughlin there has been some conversation about taking a look at those outside of at rate cases.
So there hasn't been much activity on that recently they've been focused on some other top.
Okay. So there is no sort of formal process for coming up with policy statements on those with like a date certain.
No that's not not at this time.
Okay. Thank you very much take care.
Thanks, Greg.
Our next question comes for line of Insoo, Kim with Goldman Sachs. Please proceed with your question.
Thank you first question could you.
Maybe give a little bit of an update on your thoughts on the tell competition docket and yeah. A couple of the proposal that were made just your thoughts on the feasibility of that and what potentially picked back half on on the system and on ethanol.
Yeah, I insist up the <unk> you know the.
The process, there's been some draft rule proposals that were put out and if we want to go when anymore detail at Barbara talk about it but one of the major challenges we have here in Arizona is that we're not in an organized market.
And to make their retail competition.
The effective you think you've really got to be and then in an R. T O and have that underlying framework and you've also got to have a fair amount of infrastructure around resource adequacy Oh, we're in a time if you go back to the original a competition discussion back in early two thousands.
There was a lot more capacity there was an overbuild of capacity and so capacity was not as tight.
We're in a much tighter capacity markets. So it would be really risky to move forward without strong resource adequacy frameworks.
And this is a pretty lean condition. So how you would put in place the infrastructure that would ensure resource adequacy, how would you deal with a market structure that moves beyond a scheduling independent scheduling miniature straighter, which is what we had in the last go around into an actual RTL type of independent system, operator, and then.
How would you actually address the arbitrage the gaming that could happen around.
The trading and prices and customer facing situation. So it's just really difficult for me to see how you put all those in place to make this effective but obviously this is early in the discussion on where those rules are.
So we'll engage ensure that perspective with the commission.
Got it thanks for that insight and the second question just going back to the storage and you know there clean energy investments I think the 300 of storage and a 300 to 500 megawatts of other resources, what time frame was that for and.
I heard a 2030 timeframe and I didn't know what the overall opportunity set.
You may have spoken about in this next 10 year period.
Yeah into I was referencing the sort of a interim 45% a renewable target in 2030.
And over that timeframe from now the 2030, our knee is about 300 megawatts a year, a battery storage and three to 500 megawatts of.
Renewable generation a year in that timeframe.
Got it when I was just looking at the clean energy investments in 2020 123, two it seems like the dollar amounts if you do some rough math would imply pretty high one hundreds of megawatts I don't know if it is what you're talking about already been captured in this next couple of years or am I doing the math.
No. It's been captured remember, it's a it's an average over the timeframe.
But yeah, we see significant opportunity and storage and renewables.
Got it okay I'll follow up thank you.
Thanks.
Our next question comes from a line of Julien Dumoulin Smith with Bank of America Merrill Lynch. Please proceed with your question.
Hey, Good morning takes design can you hear me Hey, John.
Hey, Howdy.
Just a follow up and clarify the early equity commentary when you talk about a three to 400 billion. It seems as if that you're basically saying 2021. Upon the rate case resolution. Just also wanted to clarify it does that include 2022.
Where these contemplate no equity in 22 as you true up your capital structure in 21, given that you've now provide a capex and 22, so sorry surgical each other but just wanted to clarify that yeah no.
Yeah go for it I was just say July if I implied it was going to be in 2021.
That wasn't what I was trying to apply was just trying to apply as we we look out we see our capex well need to issue equity or to support the cap structure to the next rate case.
I I've done it go assumption on one that rate case will be filed.
Okay, and just to clarify that that is reflective of the capex at least 42.
As it says they are not necessarily indicative of like perhaps equity subsequently.
Closed 22 right.
Yeah. That's it just doesn't that the next time, we gotta market I expect it to be in a three to 400 range and that was <unk> three or five based on what we ultimately do on the Capex line saw.
Got it excellent. Thank you and then the second question.
Actually the rate case dynamics, obviously, it's a little bit more protracted here.
How do you think about settlement and the timing of having those settlement conversation just given how longer across incident.
And then just so what is well you know Ali I'll leave it easy.
Yeah. The the originally if you remember Julien the there's a lot of discussion. This was the case that we were directed to file by the commission and I think that the assumption was that this would be a fully litigated oh fully litigated rate case.
Obviously, we would I think like to talk about settlement I think theres a lot of benefits of settling cases are particularly in the sense that you've come up with solutions that.
Both sides you can have a win win kind of an outcome and often in litigation cases, you're much more in a binary outcome word it's kind of one or the other.
And so I think there's there's value in settlement, it's probably too early we haven't even got and it is staffer intervenor testimony, yet that's going to come in May.
Likely and so it's early yet to see if theres a dynamic that could come into play there, but just to be realistic. The commission had said that this is a case that they want to see fully litigated. So if that changes or if the opportunity presents itself I think we'd certainly be interested in doing that but that's not the path that were on right now.
Got it and just to clarify that has not changed.
Monster.
What is your understanding on this case, yeah, and its and again Julien. It's also kind of early in the process, where it to have really done if everything is normally that's going to come after you see staffing intervenor testimony come in.
Already excellent. Thank you all very much okay. Thanks drilling.
Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.
Hey, good morning Paypal.
So first question sort of on the renewable energy.
Outlook.
Central cost impact you guys are pretty more effort in renewable energy costs have come way down.
Just wondering how you when you look at your you read Baysinger your Capex projections and everything you.
Obviously, they're going to be lots of variables, but what do you guys thinking about what the potential rate impact.
Might be with.
This outlook.
Yeah, Paul what what what we've really been focused on is is trying to manage through this plan with a essentially real prices remaining flat. So keep the the rate pressure at or below the rate of inflation.
And and obviously part of what you can look out with that is as you put more storage resources into the system, you're able to trade out some fuel expense and so I think we're probably a billion or so of fuel expense.
Right now and in what we've seen so if you can do a little fuel for steel you're able to translate that fuel expense into.
Yes rate base growth, but importantly, it takes the rate pressure off customers, so that you're able to make that.
Make that trade out and get the capital investment, but also mitigate rate impacts and really important other component to this plan is the work that we've been doing you see it reflected in and I think some of the.
Earnings that we're able to announce this quarter.
Is the work around the lean six Sigma transformation, where we're trying to really look at doing work differently, and and eliminate waste and and streamline processes.
And that's going to be important because we've got to keep the oh. It M. A flatter lower so that as you're making these capital investments you're not just putting the rate increases through to consumers.
So it's gonna have to be a combination of of that looking at how you can do some fuel for steel and save on fuel expense and then how you can or how you can find the on M. savings and then just the third component, which is different from the internal pieces, but is is just driving growth in the state and so when you see the large.
Hi load factor customers come in like the data centers.
They pick up a significant amount of the fixed costs and so you're able to more efficiently use the system and so it's really tying those three things together that we think can help mitigate rate pressures on us.
Great and then.
I guess sort of on the other element that that you mentioned at the beginning of the coldest redesign issue.
And as you know this it seems to me at least from from watching oldest redesign issue that was implemented in the last week cases caused.
Well really actually is probably caused a lot of the regulatory issues that we're we're now in countering.
And I know that you guys are trying to do customer education, what have you book coming from it sort of from.
More become a consumer perspective, you know fairly quick technology and stuff when you have to educate the consumer.
That sometimes as seen in of itself is being kind of a drawback.
I'm wondering whether or not there's there's an effort of maybe thinking about.
And I don't really see it I guess from the current rate case, and it's it's there I apologize, but the idea maybe just simplifying the whole thing because the amount I guess, what I'm wondering is customers may not want to be educated you know I'm, saying in other words they want simplicity.
Yeah, and so I'm just wondering I know you guys doing a stake will do thing in that and discussing it with stakeholders. What have you, but I'm wondering if there's any plan potentially up sort of a making it so that you don't have.
What we I guess sort of has come up with in which you have people sort of having really difficult time with.
We just sort of.
Do you.
Side of rates, just the complexity of what at least some of these customers seem to be dealing with.
So a couple couple of points to the that you know first as we we are absolutely looking ahead at those issues. We've got a proposal in the case for essentially a flat bill so similar to what you see cell phone companies offer which is.
Here's what your monthly plan would be its fixed we don't do a true up at the end others, a nuance to that that actually says if you tie it to allowing us to put a smart thermostat in the house you'd you'd get a lower.
Lower risk rate on that.
But what's really important on your ears, I think you're going to see this still continue to cross commissions around the country is as you move into this.
He asked energy economies as we're making this transition.
There is absolutely a role for customers not just commercial and industrial and we're working a lot with some of our commercial and industrial customers are asking for demand side options. So that they can manage around the prices that we see if the wholesale level. The duck curve issue that we've got which is.
Causing a causing wholesale prices to be very low or negative.
In the middle of the day, and then you know the need to shift load off into the into that evening hours when you've got no solar production coming onto the grid and so the commercial industrial customers are absolutely taking advantage of that a lot of the rate design pieces are simply to a line.
Rates that we've had for decades, we've had time to use and demand rates in our service territory for decades, so the rig concepts aren't new.
The issue was that if you have a 12 to seven peak period and you've got negative price is occurring at noon that has a crazy pricing on to send customers. There's no way you can long term operate a system with that kind of time use period.
So the first changes shifting the time use off to three to eight which aligns with what we actually see as the peak and get some of that ship.
And then with the demand rates, we've had the largest demand rate participation in the country for again decades, because in Arizona lot of cases, you've got to air conditioners. When you have a demand rate your.
Average a you know your consumption your energy costs the cents per kilowatt hours lower because it's picked up on a demand charge and even back 20 years ago. There were technologies like load controllers that could allow customers to manage their demand.
And so you know you out we're going through education process, but what we're seeing in the rate design is real customer response to those price signals. We're seeing customers are able to take advantage of didnt demand response programs with smart thermostats that we simply would not be able to offer without that rate design.
Really importantly, as you move forward is just doesn't <unk> to me you can't leave residential customers out of this advanced energy economy, and we have to be able to take advantage of the thermal storage. That's in the you know 1.1 million residential homes that we haven't our service territory through smart water heaters smart thermostats things like that.
And none of that really works without the rate design.
So to sorry for the long answer but to try to get to your question Yeah, Let's put together some options like the flat bill so that we can target or a give something to folks who really don't want to do that.
Recognize that there are a lot of folks who don't want to worry about it. So now there's technology like smart thermostats that can do it without them having to actively.
Do things I think increasingly you'll see the technology take the consumer behavior out of the equation and they'll just be doing things and the customer won't notice.
But to get to that point, you've got to have these price signals that are there. So again, sorry for the long answer, but that's how we're thinking about.
I appreciate it thanks a lot.
Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.
Hey, the only thing I had left is the a disconnect policy that you brought up last quarter I see it's still a book on the bullet points on your 2020.
Drivers did that get resolved between 20 and 30 million.
So we've got 20, and 30 million was our projection going into 2020 keep in mind.
You are just now having people come off the sort of form of payment plan and so a lot of this is well see later this year what that impact will be we did increase our bad debt reserve last year in June.
So we are picking some of that and just our reserve, but where that shakes out remains to be seen we will ultimately adjust that reserve. Once we have an annualized pattern that we feel good that that's right about it but Charles <unk> <unk> rulemaking still the rulemaking is still underway at the commission so they've not landed on final rules for that yet.
Okay got it that's all I had thank you very much.
Thanks Charles.
Our next question comes from the line of David Peters with Wolfe Research. Please proceed with your question.
Hey, Good morning, guys, Hey, David Mike.
Well be curious just to kind of get your guys view of the.
Just solution that's been proposed to potentially news that you see see tune appointed Commission.
Do you sense, there is a level support for this at the legislature and from voters.
Should we expect to kind of see a similar.
Result that we saw in the past.
Yeah, I think David the you know didnt good get out through a committee or there was a committee that.
Failed out of and that was exactly the comment that was made is that the committee members said that they believed it was important to allow that voters to have the right to elect the commission.
And so it's working its way through the process right now just began to be clear. This was not something that we proposed or that we were I'm trying to move forward with a and you know just to give you a flavor on that I think if if it were in so it still unclear as to whether it would.
Ultimately get out of the house, but are out of the legislature to the ballot. It would then have to go to the ballot. You know so then you'd have to actually have voters decide to do this and as you know I made the commitment that we weren't going to participate in commission elections, I think within the spirit of that commitment.
We would not be participating in something like an independent expenditure to try to promote this because I just think that would be too close to violating the spirit of what we're committed to do with the commission.
So you know legislature will do well, what they're doing but.
And I think we said we'd work with.
Commissioners, obviously weather appointed or elected but if this would be a long road.
Great and.
And then just just quickly on the break Canyon business, you know as you kind of think about it today.
Do you expect or is the intention to ever get this you know to the scale of where it's kind of a material earnings driver for you guys.
Yes, a little early in that but I think when when you look at the adjacent see opportunities. That's what I tried to emphasize in the prepared remarks is that we're not.
Trying to go out far beyond what we believe is really core expertise. So we've got expertise in working with a with wind and solar we're working on more expertise around battery storage. A we've got we had phenomenal performance that our micro grid, a we had an event in Yuma with a micro grid that we've installed for.
In Marine Corps station, where they actually lost the substation.
And in eight seconds that microgrid kicked in and picked up the entire load of the base from a black start held the load until the substation was repaired and then was able to seamlessly transition the base back into service. So you know for what the military is looking for and their base resiliency work.
Those kind of projects or are good we've got great expertise I think in doing those and so a little early to see how much is really there, but I don't want to leave that.
Expertise or you know untapped and so we are looking at how we can expand a break canyon into into more opportunities like that but.
What's the competitive environment, we're not going to do something that doesn't make sense, obviously for our investors, but we do think there's some opportunity there.
Great. Thank you.
Our next question is they follow question for Michael Weinstein with Credit Suisse. Please proceed with your question.
Hey, guys just a quick one.
How much equity is usually issue to to the employee plans or every year.
How much how much could then absorb of that future 300 400 land.
So we don't have employee plan, we have a drop and I think do revenue through the drip is 11 $12 million a year is not significant.
Got you Okay alright, thank you.
It's Michael.
Thank you we have no further questions at this time I would now like to turn the floor back over to management for closing comments.
Thank you for joining us today this concludes our call.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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