Q2 2021 Pinnacle West Capital Corp Earnings Call
Yeah.
Greetings and welcome to the Pinnacle West Capital Corp, 2021, second quarter earnings Conference 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 are here of second quarter 2021 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, Barbara Lockwood Senior Vice President public policy and Jacob Tetlow Executive Vice President of operations are also here with the first I need to cover a few details with you on the slides that we will be using are available on our <unk>.
Investor Relations website, along with our earnings release and related information.
These comments on our slides contain forward looking statements based on current expectations and actual results may differ materially from expectations are.
Our second quarter, 2020.1 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 the MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures of repo.
Lay of this call will be available shortly on our website for the next 30 days will also be available by telephone through August 12, 2021, I will now turn the call over to Jack.
Thank you Stephanie and thank you all for joining us today.
I know that the release of the recommended opinion and order on our pending case is the most significant development for all of you on both Ted and I will discuss that shortly but I do want to cover some of operational and customer matters before we go there.
So as we progress through the summer season, I'm proud to say our team continues to excel in delivering reliable service to our customers.
Arizona experienced several dozen sizable wildfires in June with only mild damage to our infrastructure and minimal customer outages.
We have strong vegetation management and fire mitigation programs as well as mandatory line of inspection prior to re energizing in high risk areas and all of these contributed to the protection of our infrastructure and reliable service for our customers.
We also successfully navigated through an early summer heat waves. The resulted in 6 consecutive days of at least 115 degrees and 3 days of approaching our all time peak demand our resource procurement efforts on reserve margin standards ensured that we were able to meet the needs of our customers through the hot summer last year through the early heatwave this year.
And we expect these efforts will continue through the balance of the summer.
Following the Heatwave in June July brought a relentless series of monsoon storms. So it's good to see the monsoon back but that does present challenges for us.
In a 5 day period during mid July our teams restored power to more than 120000 customers affected by storm related outages, and we effectively communicated with our customers regarding out of status and expected service restoration times.
Our field crews worked in west humid and muddy conditions with no safety events I am extremely proud of their exemplary work and the level of service that they provided.
With the weather, we have already experienced this summer it remains as important as ever to continue assisting our communities through our heat relief support programs.
<unk> has partnered with St. Vincent Depaul, the Salvation Army and lifts to ensure that Arizona have access to an emergency shelter and eviction protection programs to cooling and hydration stations and have transportation to the nearest cooling shelter as part of heat relief initiatives offered throughout the summer.
This is another example of our effort to community to collaborate for the benefit of our customers our communities on our company.
That focus on customer experience remains a top priority as we look to improve our JD power customer satisfaction scores.
We are pleased to see a measurable increase in our year to date residential customer satisfaction, but we recognize there's more work to do.
We understand the importance of of high quality customer experience and I am grateful and proud of our teams for employing of continuous improvement mindset to drive change for the benefit of our customers.
So now on to the regulatory front.
As you all know the administrative law judge issued the recommended opinion on order for our rate case on August 2nd.
I will say that we are disappointed and concerned by the recommendation, which would not appropriate to allow for the recovery of important investments needed to serve customers reliably.
Ted will speak to our estimates of the potential financial impacts of the rumor to be adopted by the commission. However, I do want to note that this is a recommendation from the administrative law judge has not yet of final order of the commission.
A summary of the key points from the route can be found in our investor deck on slide 23 from that you can see that the administrative law judge recommended a $3.6 million revenue increase or a non fuel $29 million revenue decrease of $9, 1.6% return on equity.
And the implied 0.0 of 5% return on fair value the disallowance of the deferral and investment in the 4 corners, SCR projects and recovery of the deferral of an investment in the occupancy of modernization project.
There is no question. The 4 corners has been a critical assets and serving our customers through the record heat the past several years.
Without the EPA mandated installation of Scr's that plant would not have been allowed to operate and there just is not enough capacity in the west to reliably running the system without 4 corners.
We continue to believe that the commission and other stakeholders recognize the importance of investing in assets such as 4 corners to maintain reliability given the challenges that we've all seen in the west.
And we've seen that as we work through the California will through order on the concern that the commission has expressed on limitations.
Reliability challenges in the neighboring state is imposing on Arizona.
4 corners is critical for us to continue to serve our customers and our goal is to continue to work with the commission to recover prudent investments.
And ensure the quality service can be maintained for our customers.
The Roo if approved as is would put this objective in jeopardy.
So where are we procedurally.
We will file exceptions to the Ru the curve.
Currently asking for exceptions on August 20, <unk> and then the commission will schedule of the case to be voted on at a future open meeting.
We would expect the decision on this rate case to be issued during the third quarter of 2021.
If the outcome of the case does not provide for necessary investments to support customer growth and to maintain the financial health of the company.
We have the option to petitioned the commission for reconsideration of that decision to challenge the legality of the decision through the court system.
Or the file another rate case, and we will evaluate all of these options. After the conclusion of the case to determine the best path forward to.
The serve our customers and to provide value and predictability to our shareholders.
In the meantime, we will file the rate case procedural schedule, and we will articulate and advocate the areas on which we disagree with the recommended order.
On the ESG front in May of the commission voted to preliminarily approved new clean energy rules that would provide for a final standard of 100% clean energy by 2070 with interim standards. The first of which requires a 50% reduction in carbon emissions by December of 2032.
A final commission vote on the clean energy rules packages required for the rules to become effective.
We think we're well aligned with the commission on the interim goals and expect to continue our current path to achieve of 100 per cent clean energy by 2050.
We've executed a contract for an additional 60 megawatts of utility owned energy storage to be located at our Aps solar sites. This contract with the 2023 in service date, we will complete. The addition of storage on all of our current Aps owned solar facilities.
In addition, we are working through our current all source RFP for 6 to 800 megawatts of additional resources with decisions from that RFP expected in the third quarter of this year.
Our MSCI ESG rating improved from a single a 2 of double a this year with MSCI, noting our strong water management performance and de carbonization efforts as key score attributes.
So we've made good progress through the first half of this year, improving our customer experience enhancing our stakeholder relationships and working towards achieving our ESG and clean energy goals.
We need to work through the recommended opinion and order and ensure that our perspective is understood by the commission.
So there's certainly more work to do but I do on acknowledged the team's dedication and commitment 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 second quarter 2021 financial results.
I will also provide additional details around our customer and sales growth and potential impacts from the administrative law judges recommended opinion and order.
Our performance in the second quarter remained strong.
<unk> of $1.91 per share compared to $1.71 per share in the second quarter of 2020.
Higher pension and other post retirement non service credits higher sales on usage and weather all contributed to the increase in earnings partially offset by higher operations and maintenance expenses compared to the prior year period.
We experienced 2.3% customer growth and 5.7% weather normalized sales growth during the second quarter compared to the same period in 2020 residential.
The residential sales increased 1.3% and commercial and industrial sales increased 10, 3% compared to the second quarter of 2020.
The increase in C&I reflects the reopening and returned in person work, we're seeing this year compared to the second quarter last year and Covid business closures that occurred last year and primarily from out work environment.
Given the strong rebound in C&I sales and continued residential strength, we're increasing our 2021 sales estimate to 1% to 2% growth from our previous estimate of 5% to 1.5% growth.
The labor market in Arizona is also recovering from the Covid pandemic impacts for 2021 through the end of May employment in Metro Phoenix increased 1% compared to 2.2%.
The increase in the entire U S to.
The clear Thats, 1% Metro Phoenix compared to 2% increase in the entire U S.
In 2020, Arizona was the third fastest growing state of the U S. As the result of this continued strong population growth, Arizona reached the highest level of residential housing permits since 2006 last year.
This year through May Maricopa County has already reached 21000 housing permits which puts housing permits on pace to exceed last year.
We believe the relatively low mortgage rates low cost of living desirable place with more space on affordable housing will continue to be of driver and grow Metro Phoenix housing market and benefit. The overall local economy. This continues to be 1 of our core strength of our long term growth thesis.
Turning to our financial health.
While the recommended opinion and order from the administrative law judge is not a final order from the commission, we want to be transparent about.
On the potential estimated financial implications if the commission were to approve the recommended opinion and order is written for.
Perspective, the general rule of thumb is that every 50 basis point reduction in ROE equates to approximately $32 million in revenue requirement.
Regarding the potential impact from the recommendation to deny 4 corners of the to deny recovery of 4 corners, SCR investment and deferral as of June 32021, the SCR deferral balance was approximately $75 million and the net book value of the asset was approximately $320 million net of accumulated.
The deferred income taxes.
Because of this is only a recommendation from the ALJ and not a decision from the commission, we will not be making any changes to the deferral at this time.
If the commission denies recovery of the deferral. It would likely result in a write off of approximately $75 million, which is net of accumulated deferred income tax.
If the commission also denies recovery of the investment itself, we will consider all regulatory and legal avenues to mitigate any potential write offs.
In summary, we estimate through if approved could decrease annual net income up to about $90 million, which includes the non fuel decrease as well as the effects of incremental costs, we incur once rates become effective.
We're already of top quartile performer for O&M and are employing additional robust cost management improvements throughout the enterprise. This magnitude of the revenue decrease would be significant and detrimental to all of our stakeholders, including customers.
Regarding our financing plans, we expect to issue up to $500 million of long term debt at EPS. During the remainder of 2020 to fund capital investments, we will hold an investor briefing at the rate case concludes at which time, we will provide financial guidance, including any forecast of pinnacle west level funding needs.
As we continue to navigate through the evolving pandemic and the resolution of our current rate case, we will continue to focus on our commitment to our shareholders customers communities and our team.
The fundamentals within our service territory of strong and diverse economic growth and increasing population and the general attractiveness of Arizona, our strong operational performance, our disciplined cost management, all bode well for the future. We will continue to work hard to resolve these current challenges.
This concludes our prepared remarks, I'll now turn the call over to the operator for questions.
Thank you we will now be conducting a question and answer session.
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Thank you. Our first question comes from the line of Julien Dumoulin Smith with Bank of America. Please proceed with your question.
Hey, good morning team, thanks for the opportunity to connect I hope, you're all doing well.
Julien I wanted to hey, good morning.
At the outset here, if we can try to clarify things I mean, obviously, it's disappointing.
How do we think about the balance sheet needs an impact here from an equity funding perspective, and specifically U S.
Site in your comments, the regulatory and legal avenues. It sounds like there could be of multi stage balance sheet impact. So that's that's pending that resolution you wouldnt necessarily take the full write off of the the.
The principal net balance on.
Until the subsequent decisions made right.
Yes, Julien this is Ted thanks for the question I think the thinking about it right. So, let's let's break it out into 2 components of the recommendation with respect to SCR disallowance. The first is the deferral of itself.
Because of this is just the recommendation and not an actual decision.
On the deferral of remains intact currently, but if the recommendation or at the hold at a final decision then that would trigger likely write off of the deferral, which at this time.
As of June 30th that balance is about $75 million. However.
However, if the.
Recommendation for disallowance of the actual plant of <unk>.
Was decided upon at the commission, we do have other options both within the regulatory space and legal space and as a result, we would evaluate our options at that time and that would not necessarily trigger of write off then given the fact that you do have other paths to pursue even if the decision was made consistent with the roof.
The price, where they're a little bit when you think about the avenues here you all have talked about on the equity funding needs.
Conceptually you are ready.
To the extent to which the 1 would pursue an immediate subsequent rate case here would that effectively necessitate again, necessitating soft terms the need to true up the capital structure of inclusive of that initial 75.
Well, we will continue to evaluate the equity needs. We've said for a while now that we would be focused on looking at equity needs to preserve the equity ratio that said fully recognize that if there is any write off impact of the income statement that will have an impact on equity ratio going forward.
So we'll evaluate that but keep in mind also we do continue to have a strong balance sheet, both at pinnacle, and Aps and will evaluate being able to utilize that balance sheet to the extent possible to mitigate any further equity dilution impact.
Yes understood you absolutely have the strong balance sheet there.
And just to clarify here, if you don't mind breaking it down you said that the $90 million figure here can you break that down just a little bit more between the SCR and some of the other items here just high level. If you don't mind just in terms of the impact there is as we sensitize the desktop outcome.
Sure, Yes, happy too high levels. So you've got the $4 million net sort of revenue increase as proposed in the room.
That includes fuel so we've got to get that down the non fuel. So you back out about $33 million of fuel related increases that takes you 2 of total non fuel revenue decrease of.
$29 million, yes.
You add to that the incremental cost that we've stated for a while now will hit the income statement once rates go into effect of about $110 million and then you tax effect that gets you to the $90 million estimated.
Annual impact ongoing earnings and again, we expect that to be up to $90 million and that's an estimate at this time.
Got it and if they approve the SCR just what would that 90 go to do you have anything like that.
If the SCR plant would be put back into the rates.
Approved then about half of $90 million impact would be mitigated.
Got it excellent okay, and sorry, just to squeeze in 1 more here if I can.
What are you willing to go too on the consolidator of debt metric here, just just to clarify the earlier comment you made here. Obviously, you do have a strong balance sheet and recognizing that.
Yes, Julian appreciate the question that's not something we can really discuss today, but when we do have our investor brief at the conclusion of the rate case happy to walk through more details of our financing plans at that time, given that we'll have certainty on the case all of the details will be known and look forward to sharing how we think about credit metrics and financing going forward at that point.
I appreciate that it's certainly a fluid situation all of the best Alright take care of good luck. Thank you.
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Our next question comes from the line of <unk> Kim with Goldman Sachs. Please proceed with your question.
Okay. Thank you.
Thanks for all of the color on the Julians question on all of the the different breakdowns I guess from a procedural basis. You commented that some of the avenues you have is whether it's the consideration some legal avenues falling into the rate case.
Are those all exclusive of each other or is it possible that you could potentially just go ahead and filing of the rate case, given the units. Yes. There is more regulatory lag with other items that need recovery, while pursuing specific were.
The consideration of ore and legal items on the site.
Yes.
The I'd say, what what is the.
The requirement to exhaust the administrative remedies so the rehearing.
Our reconsideration request is necessary before you pursue.
<unk> court of appeal, but if you do pursue of court of appeal, then that doesn't change your ability to file another rate case and have the appeal pending and in a separate rate case, moving but again, we would look at.
At what options, we would need to employ based on what the conclusion of the cases.
Got it got it on.
I'll leave that there and then just debt.
Different topic on the on the load growth it seems like.
Continuation of the solid whether it's customer growth or just demand growth.
That youre seeing I guess, Paul on normalized basis beyond 2021 are those trends that youre seeing giving you the confidence that you could raise debt.
Normalized weather normal load.
We will grow by 5% on average through 2023.
More color there.
Yeah, and so I think that's right. We're looking at the local economy of the trends that we see last year was difficult to be able to separate what was normal growth versus the fluctuation between C&I and residential due to COVID-19, but we're starting to see that trend normalize with some repeated pattern and.
So for example, the residential growth we see we believe thats true of sustained growth on C&I, we believe out of the 10.3.
Just under 2% of that is really organic growth and then when we see what's coming down the pipe with respect of new industrial and commercial growth, which then in turn Spurs more housing growth. We're confident that we'll continue to have robust customer growth on that will translate into the the increased usage, which is what gave us confidence to increase that range.
Got it got it alright, that's it for me. Thank you. Thanks.
Thanks Vincent.
Our next question comes from the line of Paul Patterson with <unk> Associates. Please proceed with your question.
Hey, good morning.
Hey, Paul Good morning.
<unk>.
So a couple of things.
Just a housekeeping item of the LCR.
Which they didn't vote to increase.
But you guys are still deferring is that gonna be it wasn't clear to me in the room, how that's going to be impacted.
If the rule were to be adopted.
Hi, Paul This is Barbara Lockwood, we didn't oppose to do anything with the of CR in this case.
The proposed to let it continue to operate as it currently operates and so we expect that it will just continue the function with the balancing account that already exists for the LCR on it will be addressed in the next application Q2 change that of gesture.
But if they don't allow an increase I guess it just simply keeps getting deferred is that sort of how we should think about it.
Yes, it actually there's a balancing account without adjuster and the dollars of taking the right on that until there is action taken on that of gesture 1 way or another.
Okay.
Okay sure.
I'm sorry, Paul.
I will say and the there is a provision to open the rate case for 12 months. So that we can work with stakeholders on.
On alternatives for our gesture suite and we're looking at that as an opportunity.
Opportunity too fine of alignment and common ground.
And.
Prepare a proposal that will address.
The address any issues and concerns and have resolved hopefully any questions lingering questions battery gestures.
Got it.
And then the.
The the chair.
Put out of the letter earlier this week and in fact, there's been some back and forth on this whole proceeding regarding the renewable.
A limitation and so on the.
And the contract associated with it and you guys are on very articulate of I don't know if it was the you Barbara or someone else, who who wrote the prudency is not.
<unk> done through the lens of hindsight what have you.
But nonetheless, we got this letter.
On Monday that seems to be saying, we should be doing of Prudence review.
On a somewhat dated PPA.
It is way above market current rates.
How should we think about this in the context of.
Of just.
Yes.
I guess, what do you say the that I guess I mean, how should we think about that.
Yeah, Paul so the.
I think right now its a single commissioner who has expressed her point of view.
With respect to that Salon of contract and I agree again strongly if you go back to the time that that contract was entered into.
There was a big debate about solar thermal versus solar photovoltaic where's the future of it the importance of the capacity value and the molten salt storage.
For us and he had a very different.
Natural gas price profile.
And so it has to look today and go back that far and say that this was imprudent and it's the PPA. So it's the purchase power agreement it's not of.
It's not an item thats in our rate base and it was done consistent with the commission direction at the time. So the commissioners at the time were very.
Very excited very much pushing to have that project move forward.
So yes.
I understand the chairwoman Marquez Peterson's viewpoint on that we will continue to share our perspective on it but it's clear to me that that was prudent when it was entered into at the time it was consistent with the.
With the standards that we had at the time and I don't know from a legal basis, how you could go back now and say that the.
There is an issue that we should be accountable for on it.
If it was to be rejected by the commission would that be of force majeure or would there be any.
I mean or would you just basically just have to sort of legally proceed what you're going to have to I mean, you would do that anyway, obviously, but I mean.
How do we think about that I guess I mean, we.
We'd take that 1 step at a time, we'd see what I mean, obviously right now of the most important thing to do is make sure. It's clear what the legal standard is and where this plant fits into it and then you don't have to go to the.
To the force majeure issues, I mean that would not be good for development in Arizona. If you start having contracts that are being defaulted on.
So I think we feel pretty strongly that this is the proceeding will put our perspective on but it was a prudent decision at the time and it should continue to be part of our of our asset portfolio on let's just take that 1 step at a time.
Okay. I guess, just finally, when this kind of situation I've been doing this so I guess too long but.
When this kind of.
Consumer advocacy or.
When this.
When the when there seems to be an effort on the part of the commission to Controle rates or what have you. I mean, you guys might win on many of these cases legally but I guess, what the concerns of it has to come up with us.
There's more than 1 way.
Cause problems.
In terms of recovery and what have you.
How do you think about strategically.
Going ahead with with your plans and your investments and what have you.
In this environment, if you follow what I'm, saying in other words I guess.
Strategically use there.
I'm sure you guys must be thinking about maybe different strategic alternatives.
This.
The environment sort of continues do you follow what I'm, saying, yes, Paul of what Youre, saying Thats been an important piece of us of how we've looked at this broadly I mean, our customer affordability initiative was driven.
In large part to say, we've got to be as effective as we can at managing our controllable O&M expenses. So that we can create headroom to make the investments in clean energy that.
But we know we're going to need to make in the future and and keep the.
The rate of <unk>.
Rate growth at or below the rate of inflation.
And so that continues and our rates are lower today than compared Ted from what 2018 were 6.7% average bill lower than 2018, yeah. So so we've continued to focus on on keeping rates low I think what's important is we have the dialogue with the stakeholders.
And the commission is the understanding that.
That it's a balance and if we do this in a way that causes credit ratings to degrade and your cost of debt increases ultimately customers end up paying for that and if our requirement if the cost to issue equity is higher.
Because we're not able to maintain.
Maintain the competitive field to attract equity investment and that's ultimately going to be of higher cost to customers.
And so that's the important thing and this is we're doing everything we can to manage costs. We're looking at ways that we can again move out of variable of <unk>.
Fuel resources.
And start saving on the fuel bill.
But we've got to do that in balance and I think that's the message we have to continue the ascend to the commission is that if you.
If all of you focus on is the short term rate impacts don't reflect on where we are with respect to.
The works, it's already happened in lowering our our rates over the last few years ultimately, it's going to end up costing customers more.
And so it is just the alignment it's an alignment efforts. So we just have to continue to focus on.
Yes, Paul of this Ted I'll, just add to from a strategic standpoint, when we look at the value creation opportunities we've got.
We are disappointed in this room no 2 ways about it and we've got a lot of the facts to be able to continue to demonstrate as to why of the investments are prudent and critical to keep the lights on but we also recognize this as 1 of the last legacy issues that we are working to resolve with the commission. We were called end of this case of it didn't start out in the normal form.
Notwithstanding we kind of lot of great progress with the commission. This is 1 of the last legacy items that we need to we need to put to bad debt behind us.
But once we do we can't forget about the fact that we have robust growth in our service territory. Just increase the range is again today continue to have that strong balance sheet disciplined cost management of tremendous path forward for investing in clean.
We will continue to make progress with the commission and get this case behind us and then be able to unlock more value with those other strength that we've got.
Okay. Thanks, a lot of hanging there.
Our next question comes from the line of Steve Fleishman with Wolfe Research. Please proceed with your question.
Yes. Thanks.
I guess first question is just in terms of in the event that you do need to pursue our legal review of this case and any sense on how long that might take or how long has that taken.
In other cases.
Yes on the court.
Yes, Steve the.
Lon Arizona does provide for a direct appeal on our rate case better to the court of Appeals. So you go in you.
You go into the court of appeals, rather than starting at Superior Court and then working your way up and so typically those are in the year timeframe or so.
Which is often why you might see of case also filed if you've got a legal appeal you might still see of company file a rate case at the same time.
Okay.
And just in terms of I know the balance sheet strong and your payout ratio is relatively low.
Yes.
How should we think about risk to credit.
And if at all of the dividend if this were implemented.
Yes, Steve will certainly we're engaged with the agencies as we continue to work through this they recognize that this was just a recommendation out of decision.
But they also recognize we've got.
Growth in rate base of capital investment.
And as soon as we solidify our financing plans similar with.
Our equity investors will be working with the agencies to make sure that we incorporate the conclusion of the case an update any assumptions there. So we'll evaluate.
Certainly with them what the credit metrics look like in ratings et cetera, with respect to the dividend. Our intent is to continue defending the dividend board of reviews of US annually, we will certainly take into consideration where the case concludes.
But we will share more of a dividend policy at the Investor brief here at the end.
We intend to continue defending the dividend.
Okay and then just.
Maybe the the last question is just the.
Yeah.
We will get the outcome of this case.
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But when Youre looking kind of obviously, it's important for I guess future.
Future cases, and just you have a pretty big capital plan.
And you all you're doing.
At least for now they have an approved this renewables rider.
And then the other issue is that these rate cases take a long time in the state.
How are you thinking about just managing the capital plan given.
What's happened here.
The.
The length of rate cases.
And just how do you keep.
Focus on having such a big capital plan.
This is where we end up.
So Steve I think thats of Fairpoint and.
Side from the current case that we're in.
The regulatory construct standpoint, our top priority is to continue to work with stakeholders on the commission to minimize regulatory lag and that includes getting back to the timeframe of the cases that we had before we've actually got a pretty good track record of realm.
The relatively short duration rate cases. This 1 is a bit of an anomaly, particularly given it fell within the year of Covid that certainly had an impact.
But aside from that whether it be our clean investments or investments to continue to support the.
Robust growth within the service territory, we recognize that that lag has an impact and we believe there's options to be able to continue to mitigate it and that is a priority for us.
Both within this case and beyond.
We look at the capital plan and decide from investing in clean.
We have to fund the growth, we've got commercial industrial customers coming the demand.
Investment in infrastructure to be able to continue to drive this local economy and so we need to make sure that we're aligned with our stakeholders on the regulator on the need to continue to fund that capital to be able to fuel Arizona's growth because if you look at the $1.5 billion and our guidance by far the majority of that is just to keep up with Arizona.
Growth and it's our job to do it.
Steve I'll just add.
1 thing to note. This case has been particularly long is unusual in a number of ways and that we of Halloween, but it was also the fully litigated in the first fully litigated case, we've had in quite some time, we will always seek to settle and we can improve the timeframe.
To do so and we're hopeful that we'll be in that position and the next case that we have sales keep in mind debt.
The case is relatively unique in terms of the timeframe of the circumstances around it and as Ted said it.
Hopefully the final piece of some of the legacy issues that we've been dealing with.
Thank you Steve.
Our next question comes from the line of Sophie Karp with Keybanc capital markets. Please proceed with your question.
Hello, MS Corp. Your line of lives.
Perhaps you have your line on mute.
Our next operating region.
We can move on to the next caller.
Our next question comes from the line of Anthony crowd, well with Mizuho. Please proceed with your question.
Hey, good morning, Jeff Good morning, Ted just I guess.
Maybe a weird question if the.
The rule is adopted.
And maybe the investment in the SCR is not prudent.
Can you stop operation of it.
I guess theres, the O&M drag associated with operating yes yards of operating the plant would you stop utilizing the facility.
That's the that's kind of why I mean, that's the that's the question I think Anthony is.
As given the debt SCR is legally required for us to operate the plant and given that if we didn't have 4 corners on a day like today, we're going to of a hot day today. If we didn't have the capacity out of 4 corners. There is nothing else on the west there's nothing else that we could go get Theres no other resource that we could.
That we could use to keep the lights on.
So you have the continued operated and so thats why.
It's why I'm struggling in particular with this with this recommendation as this has been clearly demonstrated over the last 2 summers as not just Houston useful but necessary from a capacity basis in the face of a bunch of challenges around capacity and whether it's California or Texas.
It's just brought that to 2 of highlight and so you are now putting us in a position to say well you've got to run the plant, but we're not going to give you a recovery of either of the investment in the plant that's required to continue to operate at or the ongoing operating expenses of it.
Just don't think that's a reasonable outcome.
Yeah, and Anthony I will just add keep in mind, what's in this case on what we're talking about is the environmental technology. The Crs that plant itself is in rate base.
From prior decisions, obviously and that remains on rate base.
I guess my follow up is maybe a longer term strategy question.
We look at how the the utilities sector has evolved maybe over the last 10.20 years.
Net given some really challenging regulatory decisions a lot of single state utilities have looked to diversify the regulatory risk in pursuit of maybe.
Being acquired by a multistate utility to enable efficient capital to move to different jurisdictions.
I mean is that something that is this on.
If this rule was upheld something of the company would have to entertain.
Anthony we don't talk about the M&A.
Issues.
But I will say in terms of diversification, we do have some work going on at a break canyon.
Affiliate and so there is some opportunity there again, the <unk> majority of of.
<unk>.
Revenue net income comes from Aps, but we continue to look at.
At opportunities there on just.
1 perspective, we've got some ownership in a couple of wind farms, 1 in Missouri and the ones in Minnesota.
And I think it will be important for us to share with the regulators of the returns that we see from capital invested in those states is better than the returns we can get here in Arizona that puts you on a real.
In rural predicament. So the Roe's are important to maintain the attractiveness to get capital invested in states on the continued investment in and needed reliability, but we do have some assets that are outside.
Of the traditional regulated platform, it's not yet material from an earnings standpoint.
We do look for opportunities there.
Great. Thanks for taking my questions.
Thanks, Anthony Thanks Anthony.
We have reached the end of the question and answer session 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.