Q3 2021 Pinnacle West Capital Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2021 third quarter earnings Conference call. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host.
<unk> director of Investor Relations Ma'am the floor is yours.
Thank you Kate.
We'd like to thank everyone for participating in this conference call and webcast to review our third quarter 2021 earnings recent developments and financial outlook. Our speakers today will be our chairman President and CEO, Jeff <unk>, and our senior Vice President CFO, Ted Geisler, Barbara Lockwood Senior Vice President Public policy is also here with us.
First I need to cover a few details with you we will be advancing the slides as the speakers present today. The slides that we will be using are also 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 third 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 M. D N 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 November 12, 2021, now I will turn the call over to Ted.
Thank you Amanda and thanks again to everyone for joining us today.
These are indeed challenging times for us, but right upfront I want to make it clear that while we may be navigating some short term challenges as youll see the mid term prospects post 2022 are positive and we remain confident in our ability to create new growth and deliver strong shareholder returns.
I know the conclusion of the 2019 rate cases, the most significant development and everyone is interested in hearing more about that but before we cover the rate case, you can see from the four main topics we will discuss today.
I'll cover our third quarter results and our expectations for remainder of 2021 I will then turn it over to Jeff to discuss our rate case outcome next steps and strategy coming out of this case.
Finally, I will wrap up with 2022 guidance and our long term financial outlook.
Focusing on the third quarter, our performance remained strong, earning $3 per share compared to $3 <unk> per share in third quarter of 2020.
Mild weather was a significant factor largely offset by strong sales, we experienced a mild July and August driven by one of the wettest monsoon seasons in recent history Reza.
Residential cooling degree days in the third quarter decreased 27, 5% compared to the same time a year ago.
Or 10, 6% lower than historical 10 year averages as a reminder, third quarter last year was the hottest on record.
Robot sales and usage growth. In addition increased transmission sales this quarter mitigated most of the weather impacts.
Looking at full year I'll provide an update to the 2021 key drivers and earnings guidance customer growth and weather normalized sales growth remain important drivers for the remainder of the year. We are updating weather normalized sales guidance to 3% to 4% up from 1% to 2% based on continued robust customer growth and strong residential.
Usage.
Lastly, with the conclusion of the 2019 rate case, we're now able to provide full year guidance, we expect earnings per share to be within the range of $5 25.
To $5 35 per share.
Before I continue with our long term financial outlook I'll turn it over to Jeff to provide an update on our rate case.
Thanks, Ted and thank you all for joining us today.
All of you know after a series of open meetings and public discussions the commission issued a final decision in our 2019 rate case.
This rate case was complex and the issues were numerous I'll highlight a few of the main issues that were decided the revenue requirement SCR and the ROE.
I'll also discuss our next step in strategy coming out of this case and then lastly, as Ted mentioned he'll provide the 2022 guidance and our long term financial outlook.
This outcome was not what we wanted and the process that transpired was not constructive everything we have said on the record with our regulators about what so damaging in concerning about this decision holds true.
It is a decision that makes everything we're committed to doing more challenging and more costly for a time.
With this decision has not done is change our mission as a company nor our commitment to delivering value to our customers and you our investors.
It does not change the commitment of our employees to operational excellence in all that we do in fact, we are using the expertise and the track record that we've built in the areas of long term planning cost management innovation and serving as an active voice and advocate for the Arizona business community to emerge from this case with a robust strategy.
We're not apologetic about standing up for what's right for our customers and our communities and for our investors the owners of this company.
What's your confidence in us and your investment in us that makes it possible to deliver the products and services that power Arizona's economy and way of life.
We don't take that for granted and we'll lay out for you today, how we plan to continue to create values at competitive levels amidst the headwinds and the challenges that this cases created.
As a reminder.
This case was unique for many reasons.
We are compelled by the commission to file this case under a question of whether we are over earning.
We're also required to fully litigate. This case instead of pursuing settlement opportunities. This is our first fully litigated rate case in over 15 years.
We still believe that rate case settlements are the standard in this case was definitely an exception.
And finally this case was centered around cost recovery of coal asset in contrast, our future investment recovery will be premised on infrastructure supporting clean energy and our customer growth.
Let me walk through some of the major decisions of the case first the commission adopted a total base rate decrease of $119 million inclusive of fuel.
The commission did reverse its initial vote to move the SCR issue to a separate proceeding and instead provided partial recovery of the SCR.
With a disallowance of $216 million.
We disagree with the Commission's decision that the SCR investment was prudent and don't believe that the record in this case supports that conclusion as I've stated before the four corners power plant is a critically important reliability asset for the entire southwest region.
It's used and useful currently serving customers and the investment in the <unk> was required to keep the plant running under federal law.
In addition, the commission voted to lowered the ROE from the recommended opinion and orders already low ROE of nine 6% to eight 7%.
With this part of the decision the commission adopted an ROE that's meaningfully below the national average of nine 4% for electric utilities.
And our company disagrees with the Commission's rationale.
We have embraced a culture focused on customer service and don't believe that a penalty was warranted.
And the ROE granted ignores the fact that we're one of the fastest growing states in the country and we need to attract capital in order to fund the growth and economic development that we're experiencing in Arizona.
In addition, the commission moved away from the long standing practice of providing a risk premium for serving as the operator of the largest claim nuclear generating station in the country.
We will continue to navigate through these challenges by leveraging our strong growth and seeking judicial review of the decision through the courts.
Though we are disappointed by the Commission's decision importantly, we now have clarity of the path forward in.
And so let me share our next steps in our strategy as we look to the future.
We continue to remain optimistic about our future for many reasons and I'll discuss each of these reasons in more detail.
First we have a solid track record for performance and have grown earnings and our dividends steadily throughout this time, although we're looking at a reset with this rate case outcome and.
And despite the challenges of our regulatory environment, both for Arizona, and our company. We believe that we have the ability to create long term value and steady growth from here.
And Ted will later share our financial outlook and the actions that we're taking as a management team to get us there.
In addition to our earnings track record, we've delivered on our promise to provide affordable energy to our customers and I'm sure I think a great example.
We've seen a 6% weather normalized increase in demand for residential electricity from 2018 to 2020.
But during that same period, we have lowered the average residential customer bill by more than 7%.
We remain focused on customer affordability and keeping it central to our plans to provide long term sustainable growth.
That focus coupled with continued cost management creates headroom for the future.
The second reason that I'm optimistic about our future as our best in class service territory.
Arizona remains among the fastest growing states in the country, where other states are experiencing little or negative customer growth, we're projecting one 5% to two 5% retail customer growth in 2021, and 3% to 4% weather normalized sales growth.
We expect 43000 housing permits this year in Maricopa County alone levels that have not been reached since before the great recession.
We believe that constructive business environment, and the ample job growth that it creates a competitive cost of living and a desirable climate will continue to grow the metro Phoenix housing market and benefit the local economy.
Focusing on our service territory, specifically, we continue to see development from a variety of sectors, which is helping to diversify our local economy more than ever.
In particular, Phoenix is becoming a leader in attracting high Tech and data center customers.
As you May remember, Taiwan semiconductor broke ground on their $12 billion investment earlier this year cementing Phoenix is one of the top semiconductor hubs in the country.
More recently core power announced their intention to build a 1 million square foot lithium ion battery manufacturing facility.
We will continue to focus our economic development approach on helping to attract and expand businesses and job creators.
The third reason that we're confident is the clear path for our transition to clean energy, we came out with our clean energy commitment in early 2020, and I'm proud that we've made significant progress towards that commitment.
As you know earlier this year, we announced that our four corners power plant would begin seasonal operations in 2023. This will reduce annual carbon emissions from the plant by an estimated 20% to 25% compared to current conditions.
In addition, we remain committed to and the use of coal at our remaining Choi units by 2025 and to completely exit coal by 2031.
Since our clean energy commitments announcement, we've procured nearly 1400 megawatts of additional clean energy and storage.
Obviously, Arizona enjoys some of the best solar conditions in the world and we are well positioned to capitalize on this resource as we continue that clean energy transition.
Turning to our regulatory environment. Although this last case was not constructive I believe we will be able to reasonably navigate through the regulatory environment in the future.
Ill underscore that this last case was unique in nearly every aspect.
We plan on filing a new rate case as soon as practicable and be looking to improve the ROE commensurate with rising interest rates and peer returns.
Historically outcomes achieved through settlement have delivered new and innovative customer programs and other results that benefit a broad and diverse range of vested interest in our state's energy future.
We would aim to achieve a settled outcome in our next case, because we believe that the nature of that process itself yields more informed constructive and mutually beneficial results.
Our work to find alignment with stakeholders and the regulators. So that we can improve things for all interested parties.
Finally, I'm optimistic about the future because we have a well thought out long term strategy that my entire management team and I are committed to executing well.
We've refocused on the customer and have built a customer centric strategy that will allow us to deliver exceptional customer service results were the most improved large utility in J D. Power's 2020 residential electric service steady and we're focused on making continued improvements.
Near term, our focus and priorities remain on improving our customer experience customer communications, providing safe and reliable service and continuing to engage with stakeholders to advance our shared priorities of clean reliable and affordable energy for Arizona residents and businesses.
I'll now turn it over to Ted to provide guidance and to share our long term financial outlook.
Thank you, Jeff now I'll walk through our 2022 guidance and long term financial outlook.
As Jeff discussed this last case was not the outcome we were looking for and we recognize this rate case is a regulatory reset.
Providing a 2022 earnings guidance range of $3 80 to $4 per share given the full effects of the rate case. We recognize this is a significant reduction compared to 2021. So we've illustrated key factors contributing to the change in earnings as you can see on slide 19, we're starting with the midpoint of our 2021 guidance.
And walking through the drivers to get us to the midpoint of our 2022 guidance no surprise. The most significant driver is the recent rate case decision with a negative <unk> impact.
This reflects an additional 13 million downward adjustment beyond the $90 million net income impact estimated for the recommended opinion and order last quarter in.
In addition growth in depreciable plant higher interest expense related to new financing needs and lower pension OPEC non service credits make up the remaining negative drivers.
We are focused on cost management and expect O&M savings to provide some positive impact to get us to our 2022 guidance range of $3 80 to $4 per share.
Turning to the future we are prepared to use all levers we have available to help us mitigate the impact of this case and we remain optimistic of our ability to provide long term value as you can see investors can expect seven objectives from us and I will touch upon each one.
Our plan is expected to provide strong long term earnings growth off of 2022 for the next five years I want to be transparent and reemphasize that this is projected 5% to 7% earnings growth builds on our 2022 guidance. We realize that 2021 base year is a lower growth rate at about one.
Went to 2%. However, we believe 2022 is the appropriate place to anchor our long term outlook given the valuation reset that has already occurred and we're focused on creating shareholder value from this point going forward.
There are a number of factors that could provide upside potential to our growth guidance for example.
We have the ability to meet.
We have the ability to invest in more clean energy, if we achieve more constructive cost recovery. In addition, robust economic development opportunities may drive increased sales and customer growth.
<unk> along with other factors could provide upside to our guidance.
The second objective shareholders can expect from US is an optimized capital management plan as.
As Jeff discussed we continued to experience solid growth in our service territory, which is the primary driver behind our capital plan steady population growth is expected to drive average annual customer growth is in the range of one five to two 5% through 2024. In addition, we expect average annual sales growth.
<unk> to be in the range of three five to four 5% through 2024 on a weather normalized basis, we have updated our capital plan to $4 7 billion from 2022% in 2024.
While this represents a modest increase from prior levels. We believe this is prudent until we're in a better place to secure timely and constructive cost recovery we.
We are committed to taking a balanced approach to managing our capital plan to support customer growth reliability, and our clean transition, while limiting our equity needs to minimize dilution as we recover from the outcome of this case.
Third as you can see from 2019 to 2024, we projected our rate base growth will remain steady at an average annual growth rate of 5% to 6%.
I want to highlight that our PRC jurisdictional transmission investments continue to represent a meaningful portion of that growth at almost a quarter of the total rate base. These investments benefit from superior authorized returns in a more favorable cost recovery construct and our ACC jurisdictional investments. We believe the steady growth will allow us the opportunity to provide solid earnings growth from transmission.
In the future.
Next I'd like to provide clarity on our financing plans going forward with.
We have previously stated that we would issue equity prior to the next rate case, we understand this case was not constructive and we're committed to doing everything we can to protect shareholders from further dilution. Therefore, we're deferring our equity issuance and have no plans to issue equity until the conclusion of the next rate case.
In the meantime, we will leverage our sales growth and the strength of our balance sheet to support our investment needs.
While we show equity or equity alternatives in the plan, we have no plans for this to be sourced earlier than 2020 for protecting investors from dilution during this period.
Moving to O&M we.
We have a solid track record of disciplined cost management and previously announced that we have initiated additional cost savings programs.
We understand the importance of efficiency and instituting lean initiatives with that in mind, we're updating our O&M guidance to show one a reduction of O&M expense from 2021 to 2022.
To our goal of keeping total O&M flat during this period and three our goal of declining O&M per kilowatt hour.
Cost management and lean processes will continue to be a strong focus of our management team to mitigate both inflationary pressures and regulatory lag.
We anticipate another important expectation that investors can look forward to is our attractive dividend yield yesterday, our board of directors announced an increase in our quarterly shareholder dividend from <unk> 80, <unk> 85 per share we have consistently grown our dividend for 10 years straight and we're committed to dividend growth going forward.
Our longer term objective is to grow the dividend commensurate with earnings growth and target a long term dividend payout ratio of 65% to 75%.
We understand that we're not there now, but we are confident in our plan and that we will eventually grow back into this payout range.
Turning to the final item our balance sheet, we continue to maintain maintain a strong balance sheet, providing us flexibility in our sources of capital over the next few years, we have an attractive long term debt maturity profile and no debt maturing at Aps until 2024.
Additionally, we maintained robust and durable sources of liquidity with our $1 2 billion of credit facilities recently extended to 2026, and a well funded and largely derisked pension.
Taking a closer look at our ratings, we continue to have solid investment grade credit ratings, even with the recent downgrade by Fitch in the credit reviews announced by Moody's and S&P our balance sheet targets include three key components.
Maintaining credit rating strength, maintaining an epic Aps equity layer greater than 50% and an <unk> to debt range of 16% to 18%.
In summary, we.
We're taking action during this reset and have a plan for attractive growth going forward.
Importantly, we plan to defer all equity until 2024 further reduce O&M and optimize the balance sheet and capital program. During this reset period.
In return, we have the highest dividend yield among peers, which stands today at about 5%.
While certainly a factor in the current valuation, even though the stock price, 20% higher than current levels, we offer a dividend yield more competitive than peers.
In addition, we announced long term EPS growth guidance of 5% to 7% from 2022 for the next five years.
With the attractive dividend yield and solid EPS CAGR, we anticipate a competitive 10% to 12% total shareholder return going forward.
In the short term we are laser focused on doing everything we can to protect investors during this reset period and.
And then transitioning to a renewed era of growth. So that we can provide a competitive return going forward.
We remain optimistic about the future. Although the final outcome of this rate case was worse than we had expected we have a path forward that is centered around our long term track record of constructive rate case outcomes, a robust service territory growth continued balance sheet strength and a focused management team that is taking action.
This concludes our prepared remarks, I'll now turn the call back over to the operator for questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
If you wish to withdraw from the queue. Please press star two.
Ask that will posing your question. Please pickup your handset is listening on speaker phone to provide optimum sound quality. Once again, if you have any questions or comments. Please press star one now please hold a moment, while we poll for questions.
And our first question today is coming from <unk> Kim with Goldman Sachs. Your line is live you may begin.
Yes, Thank you and thanks for all the disclosures today on this my first maybe for Ted just trying to reconcile the walk to the 2022 guidance mid point of the 390 <unk> couple of things that stood out it seemed like the depreciable plant maybe the DNA component of it is.
A little bit higher than what I was expecting and then.
The pension item also something I don't know if it was just me or if that was already.
Now, but could you walk through a couple of those items in as much detail as possible and finally, you talked about that sales growth, that's very robust, but it didn't seem like that was six months certainly laid out in this walk so what's being assumed here.
Yes, so happy to and thanks for the question first depreciation is certainly a drag, particularly given that the test year for this case has been over two years ago. So we've continued robust investment since then and Thats certainly has an impact going forward. So we haven't detailed out anything beyond the fact that.
Ongoing depreciation until we file our next case, certainly has an impact and given the outcome of this case that definitely shows next year with.
With respect to the pension we benefited from favorable market returns this year.
Still expect there to be a benefit next year, but because our pension is in such strong status. We continue to rebalance and de risk. The pension that certainly gives us a view that we will have likely less market returns next year in terms of favorable non service credits. So that's really just a factor of continuing with our liability driven investment strategy.
Jean de risking the pension going forward.
And then finally on sales growth.
We can't say enough about the economic development that we see in our service territory.
<unk>.
We try to look beyond the Covid impacts. So for example, if you look at growth in 2021 compared to 2019 really just avoid the comparison of 2020, given the COVID-19 anomalies.
We're at over 6% weather normalized sales growth right now and that is all true customer growth and usage increases absent any COVID-19 impacts and thats before some of our large industrial customers that are under construction now come online TSMC being one of them. So.
We look at the record housing permits levels the amount of development Thats going on right now and really believe strongly that the.
<unk> growth going forward is solid and based on economic development and Thats why were comfortable with the range from 22 to 24 being in the three five to four 5%.
Standpoint.
This year, we're at the range of 3% to 4% in last quarter, we already exceeded that range. So.
We believe those are good numbers going forward.
So the $3 90 that assumes at least a 3% year over year.
Other normal low growth.
That's correct.
Okay.
Got it.
And then my second question for Jeff just more broadly.
Clearly a challenging case and as we think about moving forward from here and getting too.
To file that next rate case, and having further dialogue with the.
Interveners and the commission.
What are just some things that.
And you could do to it this time around have a more constructive dialogue overall on various tissues just.
Just curious on your overall thoughts given with all the transparency.
Capex for the question into I mean, I think thats one of the more important things we were ended up having.
Some of the discussion about the long term negative impacts that happen.
Credit rating downgrade issues things like that that was happening at the open meeting instead of ahead of time.
So I think one of the important things just as we are working very hard to be as transparent as we can be with you as to them be as transparent as we can be with all the different parties that would likely participate in that next case.
Think that we do have areas of significant alignment when you look at the move towards.
<unk> clean energy deployment, and how we do that and just connecting the dots to say that.
If youre going to actually meet the growth that we're seeing in the state and at the same time begin this transition and what are the benefits I think one of the key things.
And if you go back to shareholder Marquez Peterson's letter asking on how we could move to a <unk> rate.
Well I don't think thats realistic given the.
Fuel mix that we have here in Arizona, It's a great topic of conversation around how we do things like fuel for steel. So if we can can reduce our fuel burn and the $1 billion that we spend on fuel and replace that with batteries and storage you can really manage rate pressure, but that's going to have to.
It would be an investment that we need to have the ability to invest in.
And so to me, it's really connecting all of those dots and working with the stakeholders ahead of time and making sure that as much of that conversation as possible. It takes place before we file and I think Ted mentioned it take.
About four months to get ready for a filing we intend to file pretty quickly.
But the idea is we've got to have that conversation. So that people can put in context, what a decision like this actually means in meeting Arizona's growth.
Managing a transition to clean energy so.
It's going to be a lot of dialogue is not just with the commission with the stakeholders that will be involved.
But I'm anxious to start on that.
Thanks for the color.
Thanks Vince.
Thank you. Our next question today is coming from Julien Dumoulin Smith with Bank of America. Your line is live you may begin.
Hey, good morning, good afternoon really.
I appreciate the time questions wish you guys. The best here I know.
The difficult situation.
Maybe if I can just pick it up into lifted off.
How are you thinking about next step towards about the SCR here I E.
Noted your commentary it didn't specifically if I didn't catch it right mentioned follow up in litigation how are you thinking about.
That side, whether its securitization litigation ultimate operations of four corners as well I was just coming back to this question on settlement I know theres been some open debate as to whether or not the commission or SaaS, specifically can settle.
I know the chair made some comments in recent weeks as well is there an ability to several right now as best you perceive it I mean, certainly you seem to suggest so in the commentary, but also separately the wider conversation on next steps, which I imagine is somewhat fluid on the SCR as well.
Yes, Julian let me, let me be really direct with that I did have it in my initial initial comments, but our first step in the near term approach with the SCR is to is to pursue judicial review.
And so what we have to do is we have to go to the commission first you have to ask for a rehearing.
We have 20 days fast for rehearing. The commission has 20 days too.
Act on that if they don't act on it within 20 days then it's deemed denied and that opens up then your access to the courts.
And so I won't go into the more detailed strategy, but we were very clear in the hearing that.
Prudent standard it was used just does not match the record in the case.
And so we were very clear that I think we gave them one option to say if we could do a debt return that we would be able to move forward with that but the <unk>.
Partial recovery that they gave which means there was a disallowance of the $260 million.
Doesn't leave us a choice, but to go to court on that on that issue.
So thats the near term process, what happens down the road with securitization I mean those are all those are all things later.
With respect to getting an unsettling I think one of the things that.
<unk> did show is the challenge of not having a settlement where you do have a more limited scope of issues to look at this was pretty wide open in terms of everything that was involved both the hearing division the parties.
And then ultimately the commissioners and so.
I think we would continue to advocate for settlement as being a better outcome. Because you are able to do a lot of those tradeoffs with the parties who are most affected.
Rather than having it go to a commissioner of judge where it often can be a binary outcome somebody's youre going to lose it all or theyre going to win at all and in a lot of cases that compromises is much better. So I still think that that's the best path.
Moving forward, that's what we would be be working towards and again, we're going to have this period of time when we finally get out of ex party to hopefully be able to have some conversation with policymakers on how to make this more constructive.
Got it yeah I hear you on that and then more broadly on this five to seven I mean, how are you thinking about.
You sort of regulatory recovery rate case support for that and the cadence of that five to seven through the future forecast period I'll, let you define that I just want to understand what this means for 'twenty three and 'twenty four.
And maybe understand a little bit, especially on the robust sales growth.
Can you drive earnings growth independent of a rate case in the medium term just given the pace of investment that you're articulating in rate base.
Well Julien the way I would think about that is as Jeff said, we plan on filing the next case as soon as practical given the outcome of this recent one and.
And we assume a conclusion of that before 2024, and we're being conservative in our assumption of just with reasonable regulation and a conservative outcome in that case, we can support 5% to 7% earnings growth.
And it'll just depend on the details of that next case I think given the sales growth our commitment to cost management, we've got the ability to.
Offer a favorable construct.
Many stakeholders that could lead to a constructive outcome for everyone, but it will just depend on those details in determining how long.
We go then after that before ever needing to file another rate case, but the 5% to 7% is supported by just reasonable regulation and a balanced outcome in the next filing.
But not better than just having as you think about the prospects for regulatory recovery.
Let me get to 'twenty four 'twenty five.
Well, that's a long term target so in the near term you could be better it just depends on the outcome, but over the long term. We believe five to seven is a prudent range.
Got it alright, thank you I'll pass it over I know Theres a lot to ask.
Thanks Julien.
Thank you. Our next question today is coming from Shar <unk> Guggenheim Partners. Your line is live.
You may begin.
Hey, guys.
Sure.
Just a couple of questions here first I just wanted to follow up on Julians question. Just curious how you expect the litigation I guess to effect. The next rate case, and any sense on timing of the judicial review and Jeff more importantly, if youre trying to.
<unk> with.
With the different stakeholders I guess why appeal given that your plan, obviously seems to support this outcome why not set out work with the stakeholders I guess could the litigation more of the future filing from a settlement in dialogue perspective.
Yes sure.
To me one of the most important things is just how the how that prudent standard was applied in this case and.
I tried to make it very clear during the open meetings that.
This is more than just $216 million write off I mean that is not good and don't think that was supported by the by the by the evidence in the case.
But when you start thinking about the amount of investments that we need to put in and if if if every time, we do that there's a look backwards to say well, maybe there's a different technology that would've been better or cheaper.
It makes it really hard to think about how youre going to navigate this clean energy transition and so I think we were trying to be as transparent and as clear as we could be.
With the commission when we were in the open meeting about what we would have to do given this outcome and so thats unfortunate I would much rather not be in.
That position.
But.
As we move through that I don't think anybody is going to be surprised by it and the point is to say lets.
Figure out how we can align on on what we can align on.
That's part of the part of the regulatory structure is sometimes companies appeal you have got the right to appeal that set up in a framework we're not.
Doing anything more than we have the rights to do but we still need to work together and we still need to work collaboratively through that so we will have to do what we can do to try to navigate that.
Got it and then just on the equity front. It seems like the commission has left the equity layers alone as long as they stay consistent with past levels I guess, it's good to see Theres. Some rationale you highlight that may justify the <unk> outcome and how it can be somewhat anomalistic, but you do have another <unk> coming up.
Had equity needs in of itself and now you layer in that with this order as it stands today you seem somewhat underact with ties to I know you're deferring the equity.
But it's not going away I guess, how should we think about your prior equity guide coupled with sort of the recent order, which can be somewhat offset by maybe use a parent leverage on load growth.
Is there a scenario Ted.
You wouldn't need any equity and 24, how does how do we think about the bookends.
Yes, I appreciate that short the way we think about it first is any pinnacle debt. That's injected in Aps will be treated as equity at EPS of course.
And then the second really more fundamental we just don't believe that it's prudent to issue common at the current valuation.
With respect to.
Whether we can deferred beyond 2024, depending on this outcome that will just depend on the next outcome and as we stated we will also evaluate alternatives. When the time comes such as hybrids or pull forwards or convertibles to mitigate the dilution at that time.
But heading into the next rate case, our primary focus will be improving the ROE that we believe is unjust and not appropriate given as Jeff mentioned the growth that we need to finance as well as the responsibilities we have.
<unk> operated in the nation's largest clean energy asset.
And I believe that our.
Balance sheet profile heading in this next case will allow us to then focus on improving our Roe.
Got it got it. Thank you guys for this and I appreciate the color see you next week. Thank you Sir.
Thank you. Our next question today is coming from Sophie Karp at Keybanc. Your line is live you may begin.
Hi.
Good morning, Thank you for taking my question.
Hey, Savi.
Okay.
I guess a couple of questions here first on Europe.
Please and expense Opex guide for 2020, two I'm, just kind of curious what levers you have.
To keep that fairly flat to maybe modestly down versus what we've seen in 2020 one.
Should you Michele how are you thinking about that.
Yes, I appreciate that so we're real proud of our customer affordability program and our growing culture of being focused on lean Sigma. So this has really been a.
Companywide concerted effort to embrace lean eliminate waste harvest savings.
And be able to use this as one of our levers through this reset period.
In this last rate case in fact, we were able to take some of the customer affordability savings in.
That is part of our filing and pass that on the customers.
Of course, it doesn't just stop with that last rate case filings were continuing to focus on cost management and operating a lean organization and that's part of the lever that's going to help us.
During this period, so it's not any one item, it's a variety of initiatives across the entire enterprise.
Whether it be.
Being able to consolidate supply and services and.
Leverage our supply chain strategies more efficiently.
Or be able to automate some of our systems and processes and then be able to focus our human hours on more value added work. There is just a tremendous amount of opportunity and ideas that this organization has come forward with and is executing and we're really inspired by how much the team has stepped up.
<unk> is taking this as a challenge and an opportunity to deliver efficiencies in this period.
Got it. Thank you and then solar right so the grid connection.
EBITDAX. This charge has been eliminated and I think Paul this is Sam.
We all remember.
As always on slide was put in.
Put in in the first place I guess now that it's gone and missile applications are going up how do you think about that.
When you forecast your load growth would that be an issue for you guys at some point.
Well so first of all just want to make sure we're clear that the grid access charge going away is revenue neutral. So that really is just a cost shift between customer classes.
But our estimates for weather normalized sales growth is net of energy efficiency or rooftop. So if you were to look at the gross numbers they are even higher than what we're projecting.
And again as we sit here today.
Over 4% weather normalized sales growth currently that's.
That's higher than our current range and if you compare it to 2019 were over 6%. So we are confident that weather normalized range going forward.
Even with the impacts of energy efficiency and rooftop solar.
Okay. Thank you that's all for me.
Thank you.
Thank you. Our next question today is coming from Steve Fleishman at Wolfe Research. Your line is live you may begin.
Yes, hi, thanks.
Just somebody asked this question before but I'm not sure I heard the answer.
The 5% to 7% growth rate that you've laid out.
Is that.
You see consistent over this period or is there.
Is it is there some may be lag upfront and then when you get the rate relief that it goes higher could you just talk a little bit about.
Kind of the year by year of that.
Yes, Steve happy to it's difficult to breakdown year by year, but I think the main point that youre getting at is it certainly is dependent on reasonable regulation in the next rate case.
We will continue to have growth.
Based on our organic growth in the service territory.
But we believe with reasonable regulation and what we're estimating is a conservative outcome in the next rate case.
That will really propel growth.
In that long term earnings range target. So certainly we'll be looking for the filing that will be coming forward sooner rather than later and the outcome of that next case to.
Project over the long term and Thats why that range is over the next five years.
Okay.
Just going to ask maybe a little more clearly.
The question, just so because I think for the.
The next rate case, you're really not going to have in place till late 'twenty four did you say or.
Well it depends on the schedule, but if you file in 'twenty two I think it's reasonable to expect to now come in 'twenty three.
Okay. So so there's only really one year 23 without.
The outcome of the rate case by 2004 do you expect you'll have it in place.
And actually I think if we file in 'twenty, two it's possibly get an outcome in 'twenty three consistent with.
Schedules, we've had in the past and therefore, you have some resolution in 'twenty three and then your first full year is 24.
Okay, Great and then.
Maybe just on the.
In terms of understanding the.
Kind of equity. So you plan do I assume keep the Ats equity at the 54 and change.
That's authorized.
In this last case.
With that that was the equity from the last test year.
We will measure the equity at the end of this next test year and that will just be whatever it is that will be exactly what we file.
But again, our view is while youll have equity injection based on pinnacle.
<unk> debt.
We are more focused on trying to prevent further dilution. During this period and then really focus the filing on improving the Roe.
Right and is there any risk of them computing.
Or is there not.
Any history of that.
We don't believe Theres risk and we believe that the commission will understand that we have to lever the company in order to keep funding the growth in this state and Thats the position they put us in as a result of the outcome of this recent case, so I view that as little risk.
Okay.
That's it for now thanks.
Thanks, Steve.
Thank you.
Our next question today is coming from.
<unk> Codell at Mizuho. Your line is live you may begin.
Hey, good afternoon. Thanks, so much for the detail on the slide if I could just follow up on Steve's question. So youre, saying the commission doesn't really care.
Pandora has historically not cared about double leverage is that accurate.
Well it's.
Really not been anything thats been a focus and.
I can't speculate on.
What that May look like in the next rate case filing I think the key is that with a record growth we have to finance that somehow and given the outcome and the impact that's had on our valuation the prudent way to finance. It is to use the strength of our balance sheet and I believe the commission will understand that.
Okay. So it's more of a maybe.
Double leverage Hasnt been presented to the commission historically versus.
Dave either approved or disapproved that sir.
Anthony I don't expect it to be an issue.
Okay, and then if I think of the high and the rate base guidance of 6% the.
The high end of EPS guidance is 7%.
Are you assuming either improves our Roe.
Or minimizing some regulatory lag to get to that if you hit the high end of rate base guidance, how do I hit the high end of EPS guidance.
Yes, I think.
The key there is over time is really going to be improving regulatory lag, which has been a focus of our team.
All along and I believe that we've been clear as well that.
Improving regulatory lag also allows us to stay out of rate cases.
So that will definitely be a key focus in this next filing certainly improving ROE to be commensurate with peers is also a driver as well.
Great and then just lastly.
You made a really good distinction about.
Maybe the disallowance on the SCR, so as it relates to like legacy coal plant.
A lot of the Capex going forward is more modernizing the grid clean energy.
But just given any type of risk of new technology, there's something coming up supplementing the commission playing Monday morning quarterback without Capex.
Does that give you any hazard hesitancy on going with any big projects, we're limiting the value of any type of projects. So that your risk of disallowance is much smaller maybe what we saw in the SCR.
Whatever decision.
Yes, Anthony I guess two parts of that so one is the <unk>.
One of the important reasons for why we had to seek review of the case is because getting clarity around not.
We make the decisions based on the information that we have at the time, we make the decisions.
To move forward in a prudent way and there is a lot of new technology, that's coming in so I do think probably everybody in the industry is trying to figure out how do you de risk new technology projects. So you don't run out.
For example, our battery storage work, we put a pause after we had the mcmeekin event, so that we could deeply deeply understand.
Safety around lithium ion utility scale batteries.
We're now moving forward in a pretty aggressive way with with those.
Those systems, but they are established technology theyre known theres more of being installed we're not first movers on it and so I think that youll see a lot of work on him.
I'm trying to make sure that we're managing that risk because I think it's a good point, but one of the important things for US was to get clarity on that that you don't use hindsight to go back and look at what was an appropriate decision when circumstances have changed.
Great. Thanks, so much for taking my questions and looking forward to seeing you guys at Adi.
As to Anthony Thank you.
Thank you.
That was our last question for today I will now turn the call over to management for any closing remarks.
Great. Thank you and just I just want to thank all of you for your investment and your confidence in US. This rate case outcome was not what we had hoped for.
But we are focused now on a path forward and are focused on our customers and look forward to seeing some of you at EI and thank you again.
That concludes our call.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.