Q1 2021 Pinnacle West Capital Corp Earnings Call

Greetings and welcome to the Pinnacle West Capital Corp, 2021, first quarter earnings call.

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

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

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 first quarter 2021 earnings recent developments and operating performance.

Yesterday will be our chairman and CEO, Jeff Gardner and our CFO, Ted Geisler, Jim Hatfield, Chief administrative officer, Daniel furniture, Aps's, President and CLO, Barbara Lockwood Senior Vice President public policy and Jacob Tetlow Senior Vice President operations are also here with US first I need to cover a few details with you the slides that we.

We will be using are available on our Investor Relations website, along with our earnings release and related information today's comments and our slides contain forward looking statements based on current expectations and actual results may differ materially from expectations. Our first quarter 2021 form 10-Q was filed this morning. Please refer to 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. It will also be available by telephone through May 12, 2021, I will now turn the call over to Jack.

Thanks, Stephanie and thank all of you for joining us today.

2021 has started off in line with our financial expectations and so before Ted discusses the details of our first quarter results I'll provide a few updates on our recent operational and regulatory developments.

And I'll also touch on our progress towards achieving our 2021 goals.

Spring is an important time of year for our summer preparedness work and while we've always had a robust summer preparedness program resource adequacy has recently become a more visible topic give.

Given the events in neighboring states over the past year.

To serve our customers with top tier reliability each year, we perform preventative maintenance emergency operations center drills acquire critical spare equipment conduct fire mitigation line patrols and execute a comprehensive plan to support public safety and first responders.

We're also procuring an additional 450 megawatts of seasonal peaking capacity, including hydro power and we expanded our contract up to 60 megawatts for demand response from our commercial and industrial customers to help ensure that we've got adequate resources through the 2021 summer season.

Additional information detailing our summer preparedness work can be found on the pinnacle west website under the events and presentations tab.

Our procurement process is another important way that we help ensure long term resource adequacy last year, We announced the addition of 141 megawatts of battery storage to be located on six of our Aps owned solar sites development has begun and this project is on track to meet the expected 2022 in service day.

Eight.

We also announced two rfps last year, including an all source RFP and a battery RFP the.

The response to these solicitations was robust and we are in the process of reviewing the proposals we expect to narrow the potential projects under review to a smaller pool soon.

On the regulatory front. The commission continues to evaluate the clean energy rules preliminarily approved last year. In fact, the commission is scheduled to discuss the clean energy rules that they are open meeting today.

The commission may hold their final vote today or they may choose to continue the discussion.

For a rate case.

The hearings concluded in March initial briefs were filed on April six and reply briefs were filed on April 30th.

The ACC is scheduled to discuss with their open meeting today, whether to reopen the evidentiary record in our pending case to include additional evidence, including evidence regarding adjusted cost recovery mechanisms. We believe the rate case record is sufficient and that adjusters provides substantial benefits to customers by supporting both critical programs and.

Sting changes in utility costs that can be properly passed onto customers.

Pending this decision the next steps in this rate case or the administrative law judge will issue a recommended opinion and order.

And the commission will schedule the case for an open meeting to vote. We currently expect a decision on the rate case will be issued during the third quarter of 2021.

Turning to our 2021 goals on the fourth quarter 2020 earnings call, we highlighted improving our customer communication and engagement enhanced.

Enhancing our regulatory relationship and continuing to execute our clean energy commitment is three key priorities.

We've made progress towards these objectives during the first quarter, but we recognize there's more work to do customer enrollment and are cool rewards program surpassed 36000 connected smart thermostats.

We're also working on a customer bill redesign project to simplify customer bills and a lot of the work that we're doing in the customer communication and education space is the result of collaboration with input from our customer advisory and our stakeholder advisory boards I can say, we truly appreciate the individuals and organizations that party.

<unk> in these forums and they provide us with tremendous feedback.

In the regulatory space. We appreciate the commission's balanced decision to implement our annual power supply adjusted rate change, 50% in April and 50% in November instead of our typical February 1st implementation date.

This decision recognizes imbalances the ongoing COVID-19 impacts on customers, providing rate gradualism and helping to ensure that the company remains financially secure.

I already covered some of the progress we've made on procuring additional clean energy I'm also proud to share that the U S. Environmental Protection Agency selected Aps as a 2021 energy star partner of the year in recognition of our demand side management programs.

These programs contributed to our overall 2020 energy efficiency savings of nearly 586000 megawatt hours.

And they will contribute to reducing lifetime carbon emissions by an estimated $2 1 billion pounds.

In addition, we continue to explore partnerships with our customers to expand our micro grid offerings.

I'll close my comments by sharing that Daniel Fresher, President and Chief operating Officer will retire. This August after serving nearly 41 years with the company.

Daniel has been instrumental in the success of this company over the past for decades in particular, he served as a respected and admired leader both within the companies and in the communities that we serve and as a mentor to many.

I can't express in words, my gratitude and appreciation for Daniel's contribution I join my colleagues in congratulating Daniel on his retirement, thanks, Matt. Thank you.

As Stephanie mentioned, Jacob Tetlow, Senior Vice President of operations is here today and he'll be joining our earnings calls going forward.

Jacob has a wealth of experience in both transmission and distribution operations and fossil generation here at Aps and Jacobs has extensive experience as well as the company's robust succession planning position us well to continue operating with top tier reliability.

And with that I'll turn the call over to Ted.

Thank you, Jeff and thanks, again to everyone for joining us today with Jeff having covered our operational and regulatory updates I'll cover our first quarter 2021 financial results I will also provide additional details around our customer and sales growth.

As I mentioned on the fourth quarter of 2020 call. We will provide 2021 and forward looking guidance at an investor briefing to be scheduled after the rate case concludes two.

2021 started strong, earning <unk> 32 per share compared to 27 per share in the first quarter for 2020.

Higher pension and other post retirement non service credits higher transmission revenue and weather all contributed to the increase in earnings partially offset by higher operations and maintenance expense due to higher planned outage expense compared to the prior year period.

We also experienced two 1% customer growth and positive weather normalized sales growth both within our expected guidance for the first quarter compared to the same period in 2020.

Economic development continues to support our customer and sales growth as headlines regarding new companies moving to our state are becoming even more frequent Chris Camacho, the greater Phoenix Economic Council, President and CEO said the organization is working with 291 companies that are considering relocating or expanding in the Phoenix area to support.

For the expansion of businesses Phoenix is projected to add $18 4 million square feet of new industrial space in 2021, placing the valleys second nationwide after Dallas. According to a study by commercial search this represents a 76% increase over last year for industrial construction.

The influx from business for relocation also adds to the residential population growth we have experienced.

Turning to our financial health, we are following the status of President Bidens infrastructure and tax plan, including the potential for new tax incentives and will integrate any necessary changes to our resource procurement plans and capital forecast if the proposal passes.

With regard to the potential for a corporate tax rate increase we are well positioned to address future changes through our existing team adjuster mechanism.

As an update on our customer delinquent accounts balances the cumulative total dollar amount of all residential accounts and arrears has decreased 30%. Since December 31, 2020, we see this trend continuing as customers are paying down past due balances.

We expect the commission's preliminary vote at the April open meeting to implement a permanent summer disconnect moratorium will result in this continuing trend of increasing delinquent balances through the summer and decreasing balances after the exploration of the annual moratorium.

For 2021, we expect the increased bad debt expense associated with the summer disconnect moratorium and COVID-19 disconnect moratorium will result in a negative impact for 2021 operating results of approximately $20 million to $30 million pre tax compared to prior years that did not have a disconnect moratorium. This is consistent with the res.

We experienced in 2020.

Including the impacts from COVID-19 in the summer disconnect moratorium, we continue to maintain a strong balance sheet solid investment grade credit ratings, a well funded pension and sufficient liquidity.

In addition, our focus and progress on cost saving initiatives continues to result in improvements as a recent example, our supply chain team installed a new inventory optimization software.

Software user scenario based service level, driven methodologies to establish optimal inventory policies since implementation in August of last year. This software has reduced our inventory by nearly $9 million, which mitigates potential inventory write off risk in the future.

Our lean efforts continue for managing costs combined with the key initiatives, Jeff highlighted for 2021.

They all support our commitment to provide long term value to both shareholders and customers.

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 you would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Yeah.

Thank you. Our first question comes from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.

Hi, good morning, guys.

Good morning, Mike.

Congratulations Dan.

Just wanted to say Oh, I wanted to ask about the rate case.

<unk> for our third quarter outcome is that.

Is that actually in the procedural schedule and I may have missed that in the beginning.

Or is that just like an estimate of when they think they might be able to come up with that.

Now can Michael.

Michael that's more of an estimate just given where we're at right now with filing we filed the last closing brief.

On April 30th so the judge right now has all the information that she needs to.

To work on a recommended opinion and order so it's a little bit of a question now of how long that will take her to to prepare it as I mentioned in my opening comments, they're likely to discuss today, whether they want to reopen the evidentiary hearing and have a little bit more testimony taken around.

Around adjustors, if that happens that could add a little bit of time to it. So we just don't have a lot of visibility on to where that's going right now, but our best estimates on what we know right now.

Is that given how long it usually takes a judge to prepare a recommended order an opinion that were in the third quarter.

Got it and in terms of financing needs and equity needs going forward.

You're planning on issuing equity. After this case is finished right, but it's not clear, but what how much it'll be until that so you get a final decision is that accurate.

Yeah, Michael that's accurate we've previously estimated about three to 400 million sometime before the next rate case, but that'll become more clear upon the conclusion of this case.

And we'll look forward to updating that further at our investor brief at the conclusion of this rate case.

Right, but do you lean towards doing that this year, though if assuming a third quarter outcome or would that be more spread over time.

It would all depend on the timing and outcome of this case Michael.

Gotcha Alright.

Alright, Thank you very much.

Thank you Paul.

Our next question comes from the line of Julien Dumoulin Smith with Bank of America. Please proceed with your question.

Hey, good morning, it's Darius Dawn for Julian here, just wanted to ask a little bit more detail on your.

2021 key drivers I know you guys referred to some.

Weather normalized retail sales growth I was wondering if you could speak to the breakdown of that among residential commercial and industrial if you can at all.

Yeah, there is happy to residential for the quarter was up two 2% commercial industrial was.

It was down 8%, obviously, each user's different load patterns. So the net from weather normalized basis was 5%, which was within our guidance range and then of course customer growth new meter sets installed was at the upper end of our range of two 1%.

And this is consistent with what we see from economic growth and economic drivers in terms of large pattern of residential relocations. In fact, just read an article the other day, where Phoenix has the number one metropolitan area in the country from millennials to move to.

And thats consistent with where we see a lot of the jobs going as well.

Great. Thank you and if I could add one more kind of more high level question Sue.

Assuming you don't get your renewable recovery rider in this.

Listing rate case, what would be the strategy then for pursuing some kind of concurrent recovery mechanism in the future would you potentially.

Try to file for that or pursue that outside of a rate case process for roll it into a subsequent rate case filings.

There is the there was testimony in the case about existing mechanisms in the power of the renewable energy surcharge mechanism has been used in the past to recover capital investments and so there was some testimony about you've got existing mechanisms that may be able to have.

Comedy accommodate some of that.

So obviously, we look we'd look for that possibility absent that to try to implement a new mechanism you really would go back to the next rate case, there may be options that you could look at with deferrals or other.

Other regulatory strategies to try to mitigate the regulatory lag, but we kind of have to take that all into consideration.

Okay. Thank you very much I appreciate it thank.

Thank you.

Our next question comes from the line of Paul Patterson with Glen Rock Associates. Please proceed with your question.

Hey, good morning.

Morning, Paul.

So.

Back to the rate case.

Just.

For a little bit for clarification here, so if I understood correctly, and I was unable to listen to the meeting yesterday. They haven't talked about the adjuster issue yeah. They didn't get to that is that it and they're gonna be following it up today is that right.

That's right Paul there are two day open meetings and so that they.

We were further down on the agenda. So they didn't get to us yesterday, and they're probably doing the energy rules right now.

Okay.

And then with respect to the.

Good.

This adjusted issue other than St. Jude Kennedy's letter is there any other anything else that we should be thinking about as as to why there they're looking at additional testimony or reopening the record with respect to these.

B with respect to these issues with respect to these adjusters potentially.

Hey, there.

There's been commentary I mean this is like this is a question that has come up not just with us, but with with other utilities. We can get you a copy of the letter that we filed prior to the open meeting today that again tried to lay out.

The real value that these adjusters create and the fact that they are very common throughout the country. So a lot of this right now as is.

Let's continue to provide the support for the structure that we have and as you may know if you go back to many of the Commission's different policy decisions. We have for example, our LFC our adjusted mechanism because originally the state had set a policy for full revenue decoupling.

And when there was concern about actually going to full revenue decoupling that was adopted as a mitigation measure. So it's a core piece of the overall energy efficiency structure that was adopted in the state.

So we're this is the kind of information that is continuing to go to the commissioners, we feel like Theres a good record.

To support that.

They are going after the size of the day, whether they want to take additional testimony.

Yes, I did read your letter and I think also the staff was was pretty supportive as well or at least yes.

I got it out as much so okay. So we'll just see what happens there and.

And we'll take it from there any idea of well, we'll just have to see what they do I guess, okay. Thanks, so much yes. Thanks Paul.

Our next question comes from the line of David Peters with Wolfe Research. Please proceed with your question.

Yeah, Hey, good morning, guys. Good morning, Brian Davis.

Just to follow up on that do you have any sense as to how long that could elongate.

Line, if they were to reopen it.

You said you expected Ted sometime.

Yes, it's hard to it's hard to say because it will depend on how they want to do it and really input from the parties and I would expect the judge may weigh in.

On that today as well I know some cases, where they've gone back and it's been just like a quick one day of AR.

One day of additional testimony and and so we've seen that before in this case, if they say well we'd like to have some briefs and other things that would obviously make it longer but it's just hard to tell until we get through the open meeting today.

Okay.

And then the next question just on the you all source RFP you have out there can you remind me is any of that you know those megawatts currently in the Capex plan or what anything that comes out of that you know at least what your share for 23 be upside.

Yes, I appreciate that question. So our estimates for outcomes of that all source RFP is already baked into the current capital program that we've got including the recent addendum of the 100 150 megawatt solar so that rfps consistent with the plans and the capital guidance that we've already put forward.

Okay. So it for me thank you.

Okay.

Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.

Thank you good morning.

Another utility earlier this week that has a pretty good.

For the presence of data centers.

<unk> reported that they are still seeing strong growth I know that's been an important load contributor.

Our C&I.

Segment as well.

Are you seeing the same thing is it still pretty strong on the data center growth.

Yeah. Charles I. Appreciate the question. We are we got about 24 megawatts under construction right now.

I know a firm day, although research recently published that they estimate there's about 250 megawatts planned either in early development or are expected to be under construction in the planning horizon.

And they estimate our service territory to be ultimately the second largest datacenter hub in the country. So are.

We continue to think that for a variety of reasons. This is a good location for data centers, we're seeing those in early stages of development.

I think the key though is at what rate do the data centers actually fill up from our server capacity standpoint, and therefore, an energy demand standpoint.

Building the shell of the datacenter and therefore interconnecting. It is one thing, but it takes time for those data centers to then fill up from a capacity and demand standpoint. So that's that's what we'll continue to monitor over time, yes, Charles the bigger probably the bigger driver right now or at least an equally important driver right now in Arizona is the is the industrial.

<unk>, that's happening and so im sure Youre aware that Taiwan semiconductor is pursuing I think their largest north American fab.

In our service territory and there is additional.

Semiconductors, Intel's announced additional work down in the Salt River project area, and so Arizona is becoming a.

My conductor manufacturing center, we've got a fair amount of electric vehicle manufacturing.

The real pivot has been in 2007 after that recession, we were primarily a construction residential growth economy, and we are now much more on industrial growth economy in Datacenters are obviously a piece of that.

Okay. That's very helpful. Thank you that's all I had.

Thanks Ross.

Okay.

Our next question comes from the line of Sophie Karp with Keybanc. Please proceed with your question.

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

Just two from me on the ALJ timing right.

Would you given a normal progression right, let's say if they don't we opened the evidentiary record.

Would you expect this J&J to come up come out with that proposed decision in order to meet the timeline that you outlined for the right day.

Asked differently, if it doesn't come out by a certain date should we expect slippage credit how should we think about that yes.

So it's a great question.

We are one of the biggest cases that goes through the commission and so we are certainly different than a small water company case.

Case, and so the ALJ is typically it's just a longer process to work through the evidentiary record and to put the recommended opinion together so.

So I'd say, usually you see in a couple of months range.

To put that together, but a lot of it is stuff that we can't see so it depends on the commission's workload. It depends on the other cases that she's got and.

So we don't have much visibility into what the timing is but they they work on them. They work on them expeditiously, but the size of this case.

Look at a couple of months at least.

Got it guys very helpful. Thank you and then maybe if you could comment a little bit on the current economic recovery situations in Arizona line that post COVID-19 world.

I think you mentioned that the C&I volumes are still down a little bit on a weather normal basis.

Where do you see that going just based on what's happening on the ground there.

Yes. So for you I appreciate the question keep in mind, the 8% reduction is comparing year over year and of course really we didn't see the effects of COVID-19 until the very end of Q1 last year, so from that standpoint.

You'll see that to be a fairly mild impact compared to what it otherwise could have been.

When you look at the vacancy rates for example in commercial leasing.

If you look year over year pre COVID-19 post COVID-19. They are really only down about 1%. So it went from about 11, 5% vacancy to 12, 5%, but it's certainly something that we continue to monitor and when we look at the overall.

Usage trends, you still see a meaningful increase in residential and a meaningful reduction compared to historical patterns of commercial industrial and so the key will be is as businesses get more comfortable with reopening how do those to normalize all that said it doesn't take away from the fact that we've got a very high influx.

So new meter sets being installed residential and commercial and so when we net it together, we still expect to see net positive growth.

Got it. Thank you so much I appreciate the comments telephony. 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.

This does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.