Q4 2020 Pinnacle West Capital Corp Earnings Call
Greetings and welcome to the Pinnacle West Capital Corp, 2024th quarter earnings Conference call.
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Brief question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Stefanie Layton director of Investor Relations. Thank you you may begin.
Thank you Christine I would like to thank everyone for participating in this conference call and webcast to review, our fourth quarter and full year 'twenty and 'twenty earnings recent developments and operating performance.
Speakers today will be our chairman and CEO, Jeff Gardner and our CFO, Ted Geisler, Jim Hatfield, Chief administrative officer, Daniel French or EPS, as President and CFO and Barbara Lockwood Senior Vice President Public policy are also here with us first and need to cover a few details with you. The slides we will be using are available on our investor relation.
And the website, along with our earnings release and related information and note that the slides contain reconciliations of certain non-GAAP financial information today's comments and our slides contain forward looking statements based on our current expectations and actual results may differ materially from expectations, our 'twenty and 'twenty form 10-K was filed this morning. Please.
And that document for forward looking statements cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures.
A replay of this call will be available shortly on our website for the next 30 days and will also be available by telephone through March 3rd 2021, I will now turn the call over to Jeff Great. Thank you Stephanie and thank you all for joining us today I want to spend a few minutes looking back on 2020, because there were certainly challenges, but there are also many.
Impressive accomplishment.
So as part of our operations update I'll share with you some of the most notable successes from 2020 I'll also provide a regulatory update and highlight our goals for 2021, and then Ted will discuss our 2020 earnings and our approach to communicating forward looking financial expectations.
I'd like to start by recognizing our field team's exceptional execution in 2020.
Our non nuclear fleet recorded its best reliability performance since 2007 with a summer time equivalent availability factor of 95, 3%.
We also celebrated our best year ever for service reliability, when you exclude voluntary and proactive fire mitigation impacts.
With that performance the average Aps customer experienced less than one power outage and face fewer total minutes of interrupted service and industry averages.
And Palo Verde surpassed the 1 billion gross megawatt hours Mark for production over the life of the plant and it achieved a summer reliability capacity factor of 100%.
In addition, the U S Department of Energy's office of nuclear Energy announced Palo Verde was the nation's top producer of carbon free energy for the 25th year in a row highlighting its important contribution to our clean energy commitment.
Our team's performance was even more meaningful given the record setting summer and.
2020, we set a new record for peak demand on our system, beating the former 2017 record by 4% and then surpassing that record six more times.
Our partnership and support both to and from our customers was another defining aspect to me of 2020.
On the most challenging summer day as our customers responded to our time and use rate structure and a request to voluntarily conserve by reducing peak demand up to 240 megawatts.
Our customers were there for us last year, and we were there for our customers and 2020, we provided more than $15 million and pandemic aid to our customers and our communities.
And our commitment to our customers communities and to each other is captured in our new Aps promise, which we adopted last year.
The Aps promise incorporates the principals and behaviors that will empower us to achieve our strategic goals. It represents the opportunity to build on our cultural strength and developed new behaviors that will enable our future success and I want to share with you and example of this behavior and involves Glen Chamberlain Who's a storekeeper at our Yucca power plant and <unk>.
Uma.
And he assisted a customer who wrote his bike to the plant and an effort to pay as bill Glenn not only located the nearest bill payment location, but he also provided the customer water and help them get to the grocery store to pay as bill Glenn went above and beyond his duties to ensure that this customer had a positive experience with Aps and it's a great example.
All of the Aps promise and action.
By doing the right thing and being empowered to go the extra mile literally in this case for our customers.
Turning now to regulatory we started 2021 with two new commissioners and a new Chair Commission.
Commissioner Tovar, a Democrat and Commissioner O'connor, a Republican joined the bench and.
In addition commissioner Marquez Peterson was elected chairwoman.
After her election chairwoman Marquez Peterson outlined several priorities, including moving forward with the Commission's energy rolls, improving Arizona's regulatory climate and establishing permanent disconnect rules.
With regard to the Commission's energy rules, the Arizona Legislature has introduced two identical measures one and the Senate.
And one in the house of Representatives that seek to limit the commission's ability to set energy policy. Each version was heard by the respective natural resources energy and water Committee and they passed along party lines.
Although we can't predict if these bills will ultimately pass and be signed by the Governor. We do know that this will not change our investment plans and clean energy or our commitment to become a 100% carbon free by 2050.
From a rate case, the hearing began on January 14th and is expected to conclude by mid March after the hearing the parties will file briefs and the administrative law judge will issue, what's called a recommended opinion and order.
And finally, the commission will schedule the case for an open meeting to vote and our current expectation is that the case will likely conclude around mid year.
On February 22nd Aps entered into a settlement agreement with the Arizona Attorney General's office related to the implementation of New service plans from our 2016 rate case.
Including the execution of our customer education and outreach plan.
The settlement resulted in EPS paying $24 $75 million $24 million of which will be returned to as many as 228000 eligible Aps customers.
So moving all customers to new plans and the 2017 2018 timeframe was a major undertaking and an industry first there are areas, we could have done better to guide customers through the process.
Recognizing that we've embraced lessons learned and applied a lot of improvement and it's my hope that the settlement agreement will enable us to concentrate on building a best in class customer experience, which in turn will and will provide improved shareholder value for the long term and I've said this before and.
I think it's important we will create shareholder value by creating customer value.
Looking forward our goals for 2021 include continuously improving our customer communication and engagement.
Enhancing our regulatory relationship and continued execution of our clean energy commitment.
On January 22nd we celebrated one year since announcing our goal to reach 100% clean carbon free energy by 2050 over.
Over the past year, we secured more than 400 megawatts of clean energy resources and we've also issued Rfps late last year to acquire battery storage and renewables.
Those rfps are expected to add more and the gigawatt of clean energy resources to the system and.
In addition to reducing carbon through our generation resources, we also committed to transition and 30% of our light duty vehicles and equipment to electric and ultimately to operate a 100% clean carbon free transportation fleet by 2050.
Our performance in 2020 demonstrates that we have what it takes to forge a path forward and to keep our company strong and 2021, we look forward to supporting our growing customer base, while maintaining our financial health.
So I want to thank you for your time today, and I'll turn the call over to Ted.
Thank you, Jeff and thanks again, everyone for joining us today with Jeff having covered our 2020 performance highlights I will cover our full year 2020 financial results I'll also provide additional details around our customer and sales growth forecast capital program and rate base growth as I mentioned and our third quarter call. We historically have.
Not provided forward looking guidance during our pending rate case consistent with that approach, we will hold off on providing 2020 earnings guidance until after our current rate case concludes for full year 2020, we earned $4 87 per share compared to $4 70 per share and 2019.
Excluding the 17 net impact from the settlement with the Attorney General and our 2020 earnings would have been $5 <unk> per share and near the midpoint of our $4 95 to $5 15 guidance range. The decrease in earnings per share resulted from resulting from the settlement was offset by $125 million increase and pre tax.
Gross margin or <unk> 83 per share year over year from weather and response to the unusually large weather benefit we did accelerate the timing of future O&M initiatives, while the pull forward increased our 2020 total O&M. Our originally budgeted O&M was trending down in 2020, we met our goal to reduce O&M.
$20 million largely through lean initiatives and automation and in addition, every leader and the company completed White belt Lean Sigma training. This is an important milestone and our effort to embed a mindset of cost management and customer affordability across the enterprise and.
And to equip our people with the skills and tools to identify and implement ways. We can be more efficient and cost effective. This mindset will continue to be a top priority in 2021.
Turning now to our customer and sales growth in 2020, we experienced two 3% customer growth and one 4% weather normalized sales growth compared to 2019, even with the impacts from Covid, we energized more than 27000, new customers and five new substation supporting data centers.
For 2021, we expect retail customer growth to be between one five and two 5% with that trend continuing through 2023, we expect weather normalized retail electric sales growth between <unk> five to one 5% and 2021 and between 1% to 2% on average from 2021 through 2023.
Our guidance now includes estimated contributions of several large data centers that have been interconnected we will continue to estimate contributions and evaluate our sales growth guidance as these and other new datacenters develop more usage history.
Although the total impact from COVID-19 on future sales is still unknown. The 2020 impact for the period from March 13 through December 31 was a 1% increase.
While residential weather normalized sales increased 5% the increase was partially offset by a 4% decrease and commercial and industrial sales. These trends have the potential to normalize somewhat through 2021.
Our customer and sales growth expectations are supported by the strength, we continue to see and our economy and 2020, Arizona was the third fastest growing state and the U S. In addition, construction employment increased by 7% and 2020, which places Metro Phoenix, among the strongest construction industries and the U S.
The uptick and companies relocating and Arizona has supported the strength and our construction employment.
And other recent example of a new company, moving and Arizona, Taiwan semiconductor selected a site and our service territory to build its new 12 billion facility. We recognize that growth is a key differentiator from pinnacle west and we actively engage and economic development to attract new employers and to help existing companies expand their arizona operations or <unk>.
Access in this area was recently recognized by site selection magazine, which named EPS of 2020 top utility and economic development.
Moving now to Capex and rate base as shown on slides 11, and 12, we have refreshed and rolled forward by one year, our capital program and rate base forecast. Our current forecast includes $1 5 billion of capital investments per year for 2021 through 2023.
$150 million reduction in 'twenty, and 'twenty, one and $225 million reduction and 2022.
<unk>, our ongoing refinement to balance customer bill impacts, while still executing our clean energy plan.
Specifically, we've updated our pricing assumptions based on pricing, we are seeing from actual bids refreshed our capital requirements to support customer growth and updated the timing of when new resources will be added because the outcome of the current rate case is still pending we are not assuming our future clean energy investments will be recovered through and adjuster.
And if a recovery mechanism supporting the facilitation of clean energy transition is approved we will refresh our assumptions and future forecast to reflect this and other rate case outcomes importantly, our resource needs still exist, but we are striving to ensure rate gradualism as we procure clean energy resources.
In closing our strategy, our team and our fundamental growth our consistent strengths that provide the backbone we need to succeed and the long run and we look forward to providing more detailed guidance at an investor briefing to be scheduled after the rate cases completed.
This concludes our prepared remarks, I will now turn the call back over to the operator for questions.
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Yeah.
Thank you. Our first question comes from the line of Julien Dumoulin Smith with Bank of America. Please proceed with your question.
Hi, Good morning, it's serious laws me on for Julien here.
Wanted to quickly ask about <unk>.
Previous update you guys.
That's why I expect annual renewable additions of 305 hundred megawatts and the 22 to 2030 timeframe and just wondering if given the updated capex forecast that you put out and if theres been any update to that expectation.
Yeah. Derrick this is Ted I. Appreciate the question I'd say Directionally that is still correct. That's on average between now and 2030 to achieve our goal of 65% clean with 45% renewables the timing from year to year between now and 2030 is not necessarily just even year over year and as we've mentioned before.
And our first our next coal retirement occurs by 2025 at that point Youll see a meaningful amount of.
<unk> savings, which means that your procurement needs and the back half of the decade.
And I can continue to ramp up to meet that 2030 goal, while having a minimal bill impact.
Yeah.
Okay, great and if I could ask one more this is just about O&M cadence and 'twenty one relative to 2020, you alluded to pulling forward some O&M spend from 2021.
Can you talk about sort of how that then affects the shape of 2021 O&M.
Yeah, we're not providing forward looking guidance.
You're correct. The pull forward was unique to 2020, given extreme weather and we wanted to take advantage of that and de risk future years.
Similarly, once we get past pandemic.
And would expect COVID-19 related costs would likely be reduced or eliminated.
But keep in mind, there as we've historically guided to flat O&M for kilowatt hour sales growth and we will continue to focus on our lean efforts and Darius just.
Again for context, you mentioned pull forward from 2021, O&M, it's not necessarily just 2021, it's pull forward of future O&M.
And so it's picking up things that would've gone and subsequent years as well.
Okay excellent I appreciate that clarification, that's it from me. Thank you very much.
Okay.
Our next question comes from the line of Paul Patterson with Glenn <unk> Associates. Please proceed with your question.
Hey, good morning, how are you.
And with good Paul.
And I apologize for missing this but I noticed that your capex was down.
For.
Versus the third quarter for 'twenty.
One and 2022, but the rate base.
I think it's the same that you guys have projected for 2023.
Could you tell me, what's sort of going on there or what I'm missing.
Yes, you are not missing anything there are updates and both directions. So of course, you have the capital reduction and changes and accumulated depreciation.
Accumulated deferred taxes, but you also have changes and the asset mix depreciation timing working capital and other rig assets. So you've got movement in both directions and this is a refresh that contemplates all of those factors.
Okay, and the decrease in Capex was that and.
Basically sort of just managing.
Rates and what have you or what led to the lower Capex and.
In general in terms of what your plans are and I don't think.
Yes, we're managing customer bill impact.
And promoting rate gradualism as we build out clean we're still committed to our clean.
Clean energy investments and achieving our 2030 goal and ultimately the 2050 goal.
Keep in mind stated on the last question and the largest of our fuel savings really isn't expected until after this capital forecast that you see and this release and that's driven both by the coal retirement next coming in 2025 as well as the accumulated.
Renewable additions that we are currently adding and the fuel savings that that will create.
That will ultimately create enough bill headroom to allow us to continue to invest and our clean energy plan, while minimizing any bill impact.
Awesome. Thanks, so much guys.
Yes, Thanks Paul.
Our next question comes from the line of <unk> Kim with Goldman Sachs. Please proceed with your question.
Thank you Mike.
Question is on the post clean energy writer.
And this rate case.
And you don't get an approval of debt.
And is the logical next step two.
We file a proposal and a separate bucket or what are some on the other options there.
And so typically.
Adjustment mechanisms are adopted and rate cases.
If you are following the hearing some of the dialogue that is happening right now we continue to advocate for the advanced energy mechanism. There is some dialogue from other parties that are recognizing the fact that we have and the past recovered capital investments.
I'm thinking here, Arizona, Sun, which was recovered through a renewable energy surcharge.
And so theres some dialogue and the case that says well does the advanced energy mechanism has to be at or are there opportunities to use other mechanisms and so that's still a live issue and.
On the case.
If we ultimately get through the case on the commission.
Doesn't approve and.
And on adjustment mechanism.
Then you would likely be and the next case, making that proposal and again continuing to demonstrate the benefits that that brings and one of the primary ones as Ted mentioned rate gradualism.
That's really what we're trying to do here is you don't want to build up a bunch of capital investments and then come in with a larger rate increase that you can manage that over a more gradual pace you are able to keep rate increases and kind of closer to the.
Closer to a zero real so under the rate of inflation and so we'll continue to make the point as we move forward, but there is several different paths. This could ultimately go.
Got it so I guess, if it doesn't work out this time around and.
And looking at the revised Capex plans and whatnot.
And.
How do you think about the.
And the changes and any timing on the next rate case from how you were thinking about it a few months ago and related to that just thoughts on.
Yeah, the equity issuance forecast that you guys have laid out before.
I'll, let Ted on the equity side, but the timing of the next rate case isn't necessarily driven by the presence or absence of and advanced energy mechanism. It's.
It could be a factor, but its more likely going to be driven by just the overall outcome of the case.
And so it will depend on what the ultimate outcome and the cases, and then that would ultimately affect how do you want to.
Yes.
That ultimately affect the timing of our equity issuance as we said.
And would expect that to be before the next case.
So we'll know more upon the conclusion of this case and be able to include that and our expected financing plans going forward.
Got it thanks, so much.
Thank you.
Our next question comes from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.
Hi, guys.
Hey, Michael.
Hey.
Have you picked up any further support from Interveners on the advanced energy mechanism I think the Navajo nation was balance as.
One of the supporters early on but.
Has there been any other for the moving on that yes.
Yes, let me, let me ask Barbara Lockwood, and just give her color on it.
Yes, Hi, Michael.
The advanced energy mechanism and is actually supported by a number of the intervenors and Navajo nation as one.
Sierra club and generally supportive and.
Southwestern energy efficiency project, and there's a number of others that are understanding and seeing the value of the advanced energy mechanism and supporting that.
We go so.
Still a number of parties that are not supportive of it but we do have.
Good contingent debt understands the value and and supporting the concept to be transparent and mechanism.
Got you and then just a follow up on Paul Patterson's question.
And the rate base or are they not the rate based on the capex projection for renewable or clean generation clean generation portion of it. That's the part that seems to really have been trend is that.
Is that more of a delay into further years beyond 2023 or is it.
Is that 6% rate base growth profile that you talk about now is.
Is that is there could be a permanent feature going forward or is this simply a.
Kind of a delay and so maybe you see how the rate case turns out or.
How are you.
Are there less projects or is it the same number of renewable projects being planned for the next decade.
Yeah, Michael I. Appreciate the question I'd say that we are committed to achieving those goals in 2030.
But we continue to evaluate the timing of those assets and service over the next decade.
Can't project any forward guidance of course beyond the years that we've listed here, but in order to achieve those ultimate goals in 2030, the amount needing to be procured hasnt changed we'll take a look at how to best time that procurement to promote rate gradualism and take advantage of the fuel savings.
We expect to occur beyond the capital.
The forecast that we've provided you today.
And it was what was the main driver of lower cash flows that.
Led you to reduce the forecast for Capex as debt.
Because it sounded like depreciation.
One of the main drivers.
Michael you are referring to rate base.
Correlation of capital again.
Yes, well that'd be on I think you mentioned a couple of different different factors that were.
Pushing you to I guess reduce the capital spending range through 2023.
Versus the prior plan.
Hearing something about depreciation.
Well I'd focus on yeah, I'd focus on the reduction of capital more about that concept of rate gradualism and trying to minimize near term bill impact.
I'd say the other drivers are really more about.
And the refresh to rate base to lineup with this capital forecast that includes other factors such as depreciation and.
Asset timing timing.
Timing of working capital Reg assets et cetera.
Right.
I think it's a little bit striking only because it looks like you might be losing an entire year rate base growth versus the prior.
Forecast so.
This is something.
And I want to address maybe maybe that would be addressed and that analyst day that you're planning after them right. After the rate case concludes.
Certainly when the rate case concludes we'll be able to provide.
Our financing plans and expectations going forward as well as more detail on how we're going to continue to execute our clean energy plan.
Okay alright, thank you.
Thanks, Mike Thanks, Michael.
Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.
Thank you.
Make sure I understand so.
Not necessarily this year, but 'twenty two 'twenty three.
And there is enough headroom or at least maybe there is something you can't answer until the rate case.
Would there be enough head room that if you've got debt and generation mechanism.
The two generation Capex would increase significantly as.
Is that.
And I, concluding and correctly on that.
Charles I think the way to think about that is.
The mechanism is one element of this pending rate case when the rate case concludes we'll take that opportunity to.
Look at our guidance going forward, including the capital plan.
The benefit of the mechanism as Jeff pointed out is it promotes rate gradualism and helps ensure a minimal and more gradual bill impact on customers over time.
So that's one of the important elements of the mechanism, but will really take a point to look at the entire rate case outcome, including whether the proposed mechanism is approved.
And then look at guidance going forward, including Capex.
But it sounds like there is certainly the E.
Our opportunity from.
And just.
Just a question balancing and.
Uh huh.
Headroom et cetera, correct.
Our resource need Hasnt changed and that's part of why you see some of the reduction in these near term years was largely and that clean energy spend because our customer growth still remains robust, that's larger which fueling the transmission and distribution spend so the resource need still exists the goal to get to 2030 is still.
Exist, we're only showing out through 2023 here the timing between now and 2030 is still leaves a lot of opportunity for us to continue to execute and invest and clean generation.
And as stated earlier the fuel savings that will create that bill headroom is largely beyond this 2023 period and therefore creates an opportunity for continued clean energy investments, while minimizing bill impact.
Okay. That's helpful. Thank you that's all on.
Our next question comes from the line of Anthony <unk> with Mizuho. Please proceed with your question.
Hey, good morning, just I guess, if I could follow up on Mike Weinstein's question and I think also earlier you guys referred to and maybe there is like.
And the amount of the bill impact mitigating Bill impact I guess and lower Capex. So all of that is.
First question is where do you think the sweet spot is on like acceptable bill increases to get through and.
And then the.
Second it's very specific euro cash capex.
Capex at one 500.
How do you get to that just curious if you could give us some insight into either of those.
Yeah, Anthony Let me, let me start with just the kind of bill impact and the challenge of course is there has not changed.
Change kind of year over year, theres, not necessarily a sweet spot its always good if you can keep the rate.
Pressure kind of at or below the rate of inflation certainly over the long term and that's what we've been successful and doing if you go back and look at the last probably 10 15 years.
But it gets a little lumpy and so growth helps so as you get additional growth and that can pick up some of the cost for the additional resources, but as Ted pointed out we've got retiring assets that need to be replaced.
And the biggest benefit that comes from retiring something like a coal asset is that you save the fuel cost and.
And you move into more zero marginal cost.
Resources.
And it's really that changing of putting a resource that consumes fuel cost and that gets pass through our fuel adjuster power supply adjuster with a zero marginal cost resource that creates that headroom because we're changing out expense from the carrying cost of the asset and so that's where some of this timing is being driven as well.
And you look at Choi of retiring its and 2024 timeframe.
So its outside of our planning window, but that's what we're trying to triangulate as to make sure that we're not putting unnecessary or unacceptable bill pressure on as we manage through the 2030 clean commitment.
And if I cut on the Capex, Yeah, and I'd, just say I wouldn't read too much into the even number of one five that's just part of the projections.
As we continue to support customer growth large customers moving into our service territory.
And that'll continue to drive transmission distribution investment as we continue to get the results of our Rfps that'll inform more specific numbers on our clean energy investments the numbers could get more refined as we get closer to each year, but.
Directionally this is a good projection.
And then just lastly, I did touch on the settlement that you and.
Maybe on Monday.
Is there any day.
And we could maybe infer from that that maybe or regulatory environment has improved from the changes. The company has made or just that you've reached a settlement I know the current and the pending rate case.
It's going to be fully litigated mitigated and continuing.
Continuing on that path and is there any region, where we can look and see that hey, we're able to reach a settlement.
Settlement with parties on a very contentious issue and that things may be fine.
For the rate case, and I'll leave it at that right yeah.
Yeah.
It's a little different so this this was the attorney general. So this is not a normal party to commission proceedings and if you go back and look that the inquiry into the migration and the customer education and outreach plan began at the commission.
And then.
They had referred and the attorney General has jurisdiction over other things that the commission may not but the attorney General then picked that up and Theyre Civil Division and we have been.
Cooperating with them and providing information for more than a year I believe on.
On that matter and we had the opportunity instead of litigating that case.
Important that we focus on improving the customer experience here and I didn't want to.
Spent three years and litigation with this the right thing to do is to settle the case, we're satisfied that the 24 million on the $24 seven and five goes back to customers.
It's the right thing to do and so the appropriate thing for US was to reach the settlement, but it's not the traditional parties and that this isn't that this wasn't a multiparty settlement. This was basically us and the attorney general.
Great. Thanks, so much for taking my questions.
Thank you.
Our next question comes from the line of David Peters with Wolfe Research. Please proceed with your question.
Hey, Hey, guys, good morning, Hey, David and David.
Does the Capex refresh and particularly with respect to the renewables reflect any changes at all on what your view is likely to be rate base first ppas and thank you Sir.
Started to work through some of these rfps.
Well, David we're still committed to that open transparent competitive procurement process. So while we still believe there'll be a blend of ppas and ownership going forward.
I think this is more about timing between now and our 2030 goal.
And wanting the respect that bill impact and take advantage of fuel savings that may occur beyond 2023 than it is any prediction of results of future Rfps.
And can you remind me and just what is kind of a baseline expectation within that.
And three to 500 megawatts per year and over the through I guess 2030 that you expect to be Aps and.
We don't have a specific percentage or sort of baseline split between the two.
We just run the RFP and we have results are evaluated from those solicitations.
We had a project last year for example that was a repower of and existing wind facility. That's under PPA. It made good economic sense for our customers to sign that PPA since its an existing facility, but then we also.
Look our contracts for ownership of utility scale utility owned storage coupled with our existing.
Solar assets and we are finalizing a result of and RFP right now for utility owned utility scale solar plus storage.
So it just depends on the bids we get and the economics of each bid and the viability of the projects that are proposed.
Great. Thanks, guys.
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 and thank you for your participation and have a wonderful day.