Q4 2021 Pinnacle West Capital Corp Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2021 fourth quarter earnings Conference call. At this time, all participants have been placed on a listen only mode.
Laura will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Amanda how director of IR Ma'am the floor is yours.
Thank you Kate I would like to thank everyone for participating in this conference call and webcast to review, our fourth quarter and full year 2021 earnings recent developments and operating performance. Our speakers today will be our chairman and CEO , Jeff Goellner and our CFO , Ted Geisler, Barbara Lockwood Senior Vice President public calls.
And Jacob Tetlow Executive Vice President operations are also here with us.
I need to cover a few details with you the slides that 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 annual 2021.
Form 10-K 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 E 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 March four 2022.
I will now turn the call over to Jeff.
Great. Thank you Amanda and thank you all for joining us today.
Back on 2021, there are certainly a number of challenges and setbacks, but also positive accomplishments and successes.
Without question the biggest setback of 2021 was the rate case outcome coming out of the rate case, we laid out a comprehensive plan on the third quarter earnings call and we've already begun making progress towards that plan and ill briefly discuss that.
I'll also provide an operations update and share. Some notable successes from our employees in 2021, and then Ted will discuss our 2021 earnings and our forward looking financial expectations.
I know, we're all tired of talking about the last rate case, and how disappointing that outcome was as you know the rate case decision makes everything that we're committed to doing more challenging and more costly for a time.
Importantly, it's also cast our state in a negative light when it comes to our regulatory environment and our efforts are focused on ways in which the company can support improving that regulatory environment.
During our third quarter earnings call. We spoke of management actions that we planned on taking which included the possibility of filing an appeal to the decision.
That's not something that we took lightly and I would emphasize I don't we don't take pleasure in litigating with the commission. Our number one goal is doing what's right for the people and prosperity of Arizona.
Which includes working collaboratively with the commission and building a more constructive relationship.
However in this case, we really had no other choice and in December we filed a notice of appeal with the Arizona Court of Appeals in parallel with a special action with the Arizona Supreme Court.
Although there were seven other amicus briefs. These are friends of the court briefs filed in support of our special action filing on February 8th the.
The Supreme Court declined to take jurisdiction of the case.
This was not particularly surprising since the Supreme Court only here is a small number of special action requests each year and importantly, the Supreme Court's decision to decline jurisdiction does not impact our pending appeal with the court of Appeals.
We don't know what the final resolution of that case will be however, we look forward to the opportunity to share with the court our arguments and the reasons why we believe the commission erred in its rate case decision.
Turning to the operations side, although 2021 was extremely challenging it was not without successes and I want to start by recognizing our field team's exceptional execution in 2021.
We reliably served are over one 3 million customers through the hottest June on record followed by the third wettest monsoon season.
Our non nuclear fleet recorded unimpressive reliability performance with a summer time equivalent availability factor of.
Of 94, 4% and I just want to call out another data point on that non nuclear fleets performance out of 50 226 starts.
Last year, there were only nine messes and that startup reliability is impressive and it's important in our participation in the energy imbalance market and our actions in the broader market in the west.
And also benefits our customers.
Recognizing that creating customer values inextricably linked to increasing shareholder value, we remain focused on improving the customer experience.
Although there is still much work to be done, we're not where we want to be yet, we're making positive progress.
Thanks to the hard work of our employees, our fourth quarter J D power overall residential customer satisfaction score.
Dumped one quartile compared to the prior among large investor owned utilities in the U S.
We had year over year improvements in several key areas that are important to our customers, including power quality and reliability billing and payment and customer call Center performance.
In fact, our customer ratings put us in the top decile nationally for perfect power and the second quartile nationally for our telephone customer care.
ACS was also named a 2021 business customer champion by escalate, which recognize the company is one of the top performing electric utilities in the nation for business customer scores and brand trust product experience service satisfaction and customer effort.
In addition, we continue to make progress on the ESG front on January 22nd we celebrated two years since announcing our goal to reach 100% clean carbon free energy by 2050.
Over the past two years, we've procured nearly 4500 megawatts of clean energy resources.
These substantial investments are not only vital to our transition away from coal and into a clean energy future.
They're essential resources designed to help us keep pace with Arizona has tremendous growth at the same time that capacity markets are tightening across the entire west.
And finally I want to highlight three awards that we received in 2021 that recognize our commitment in the ESG space.
First Aps was honored with by the EPA with the energy Star partner of the year Award for excellence in customer programs.
Second Pinnacle West was recognized by the global environmental nonprofit CDP for leadership and corporate sustainability with a minus scores for both climate change and water security.
That's significant because pinnacle west is one of only two north American electric utility companies to achieve leadership scores in these areas.
Finally, the 2021 inclusive workplace award recognition from the diversity leadership Alliance and the Arizona Society Human resources management, acknowledging our efforts to create a diverse and inclusive environment for our employees I'm extremely proud of the progress that our company continues to make and congratulate our employees on these important.
Recognitions.
As we look forward our goals for 2022 include continuously improving our customer communication and engagement enhancing our regulatory relationships and continued execution of our clean energy commitment.
I want to once again recognize the near term headwinds that were created by the unfavorable rate case outcome and how challenging it will make 2022, but.
But we believe in our ability to provide long term value to both customers and shareholders.
We look forward to executing our plan and continuing our proven cost management efforts all against the backdrop of Arizona is incredible economic expansion. So again. Thank you all for joining us today and I'll turn the call over to Ted.
Thank you, Jeff and thanks again, everyone for joining us today.
This morning, we reported our fourth quarter and full year financial results for 2021 and updated our outlook for 2022.
As you can see 2021 was better than anticipated primarily due to stronger sales growth in the fourth quarter.
2021 resulted in a solid year. This does not mitigate our outlook for 2022 and the reality that we remain in a financial reset as a result of the recent rate case outcome.
Before I review the details of our full year 2021 results I'll briefly discuss some key factors from the fourth quarter, which are shown on slide four.
Our performance was strong in the fourth quarter as we earned <unk> 24 per share compared to a loss of <unk> 17 per share in the fourth quarter of 2020 keep.
Keep in mind, we had two unique items in 2020 that did not repeat last year, our settlement with the Arizona Attorney General's office and the company funded portion of the KOL community transition payment.
For booked in the fourth quarter of 2020, resulting in a year over year benefit.
Weather was a factor again this quarter, but was largely offset by higher sales and usage, which came in well above prior expectations largely due to strong residential growth and the continued expansion of our commercial customer segment.
Turning now to our full year results for 2021, we earned $5 47 per share compared to $4 87 per share in 2020 looking at slide five I will review some key factors of these results in gross margin whether it was unfavorable by <unk> 76 compared to the prior period as you may recall 2020.
The hottest summer on record.
Whether in 2021 was slightly below normal.
Continued strong sales and usage was a 51 benefit the 2021 guidance established on our third quarter call assumed weather normalized sales growth of three 5%. However, we experienced a much stronger fourth quarter than anticipated with weather normalized sales growth of six 7%.
<unk> full year weather normalized sales growth of four 2%.
Our year over year retail customer growth ended strong at two 2% for.
For 2021 employment in Metro Phoenix increased 4% compared to a national average of two 8% in November Arizona also achieved an important milestone employment recovered to pre pandemic levels a milestone reached by only three other states. In addition, Arizona was once again the third fastest growing state in the U S last.
Year.
As a result of this robust population growth Maricopa County residential housing permits had their strongest year since 2005, finishing with just over 43000 permits we are investing heavily to support this level of growth, which is beneficial to our customers and the entire state. However, we must be able to receive constructive regulatory recovery in a timely manner to.
Continue to support this level of growth.
Now turning to our 2022 outlook as we shared last quarter, we reset our financial targets as an outcome from the recent rate case decision.
The majority of what we shared last quarter has not materially changed but I will discuss a few updates which result in a slight increase to our 2022 guidance range now projected to be $3 90 to $4 10 per share.
We have updated slide six to illustrate 2021 full year results of $5 47 per share compared to the midpoint of our new 2022 guidance range. In addition to increased sales. We plan to continue our track record of disciplined cost management to reduce O&M in 2022. However.
However, we are not immune to inflationary pressures and recognize this will be more challenging than in years past as you can see we are still targeting a meaningful reduction in costs compared to 2021 as we remain laser focused on cost management through our lean Sigma initiatives.
Just as we shared in the third quarter, we continue to anticipate strong customer and sales growth in the range of one five to two 5% for 2022, while the total range has not changed given the stronger growth in the fourth corner, we have revised our residential growth projections higher which is partially offset by slower growth in our commercial.
And industrial segments due to expansion delays.
Sales growth through 2024 remains the same as we guided last quarter three five to four 5% and we remain confident in the long term developments in our service territory.
Finally, we've also updated our interest expense net of AFDC to reflect higher interest rates and updated timing of debt issuances.
The remaining aspects of our financial outlook remained consistent with our guidance provided last quarter and we are committed to executing our plan through this reset period, we continue to benefit from a solid balance sheet. Despite recent downgrades by all three rating agencies. After the rate case decision that said, we do remain on negative outlooks as they closely monitor the Arizona regular.
Tori environment.
We look forward to showing progress in each area of our strategy and we will continue to provide updates as we move through the year.
Meanwhile, we're focused on building an exceptional experience for our existing customers rapidly expanding the grid for our incoming customers and delivering long term value for our shareholders. This concludes our prepared remarks I'll now turn the call back over 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 now to join the queue. If you wish to lead the queue at any point you May press star two.
We do ask that if you are listening via speaker phone. Please pickup your handset for optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone now.
Our first question today is coming from Shar <unk> Guggenheim partners your.
Your line is live you may begin.
Hey, good morning, guys.
Hey, Shar good morning Shar.
So just a couple of quick ones here, Jeff clearly, you've got healthy customer growth and load growth thats kind of even stronger than that which is great.
The concern here with US is with some of the disallowances related to generation expenses in the last case it seems like a possibility exists for all this pace of growth to actually be a bad thing if youre under funded as we think about integrating and servicing all of this incremental demand safely could we just maybe get your thoughts here.
As we think about the upcoming rate case in light of the stronger than expected backdrop, you're presenting today.
Yeah Charles.
It's a great question because it really highlights I think that the disconnect that we've got to work on between now and filing the next rate case, and then prosecuting that.
That case.
Of the.
Challenges you just identified which is we're in one of the highest growth if not the highest growth service territory in the country.
Which means that we're spending more capital we are investing more than we've ever done in the history of the company.
And yet in the last rate case, we received the lowest return on equity basically any utility in the country and those two just don't.
They don't gel together I mean that doesn't that's the disconnect that we have to work with our regulators to help.
To help make sure that they understand the challenges we have the need to access capital markets the need to maintain positive credit ratings.
Is critical for us to be able to meet this growth.
And with the tightening capacity markets in the west as we invest in new technologies again, you can look at that risk profile as you just suggested and say that suggests.
The need for a higher return on equity that if it was just pipes and poles and wires and so the environment that we're in which is driving significant capital investment by us and need to access those financial markets requires.
It requires that regulatory support.
And at least a healthy return on equity and cost recovery structure, because we've got to be able to recover the cost of those investments.
And not turn that growth into a negative so I think thats it.
Good observation yes.
Yes, sorry. This is Ted I'll, just add to that that we fully recognize that the sales growth customer growth is tremendous in our service territory. We've said that for a long time and the fundamentals are coming through as predicted but we also recognize that that growth is only as good as our ability to recover the costs and investments needed to support that growth and so that's certainly a key.
Focus for us as we look forward to continue to work with stakeholders and our regulator. Good news is we haven't raised base rates since 2017.
And in fact through our cost management effort rates are lower today than average bill is lower today than it was in the 2017 outcome of that last rate case. So we think we've got the ability to be able to recover these costs and still focus on affordability for our customers.
Got it and then lastly is I mean, obviously, we've noticed a few pieces of legislation in the state which seem to be focused on improving the construct in various ways like maybe enhanced oversight.
And dealing sort of with the ACC, which.
Which is obviously a welcome surprise for some of us right.
How are you thinking about the legislature's increased interest in maybe activity around establishing more effective ratemaking and any specific bills, we should be monitoring at this point.
Yes, Shar I think I think you know that there's been some tension between the commission the legislature for a while and it's important to remember in Arizona. The Commission's authority over ratemaking is a constitutional authority. So theres not a lot that the legislature could do if anything.
Around ratemaking and so we don't really have a position on any of the bills.
That are out with the legislature now as I said, our focus is really on ensuring that we have the dialogue with the stakeholders and with the commission.
To ensure that the connection between the <unk>.
Growth that we're seeing and the need to access the financial markets to support the investment to drive that growth and continue to grow Arizona.
That we can make that connection and that we can improve the regulatory structure is we've had good examples post test year plant theres been other <unk>.
<unk>. So the commission has adopted that have supported recovery of investments outside of a purely historical rate by historical test year rate case.
And so our focus is really on engaging with the stakeholders at the commission and the commission and the staff to make sure that we're explaining the need that we have.
And frankly, the challenges that we have going forward.
Terrific. Thank you guys. So much appreciate it.
Thanks sure. Thanks Shar.
Thank you. Our next question today is coming from in Soo Kim at Goldman Sachs. Your line is live you may begin.
Yes. Thank you first question when we think about the unchanged capex over the next few years in your plan. Obviously I think there is some level of conservatism there as we think about.
This is.
This welcome low growth, especially on the residential side any color on just on the base level of capital that's needed to service this increasing customer growth.
Around what level that could potentially layer on going forward.
Yes.
Good question and yes, you're right.
<unk> relatively conservative because we put a lot of effort into prioritizing the projects and investments needed to both maintain reliability in the grid and keep up with customer expansion and as our customer growth continues to exceed our expectations that puts even more pressure on the capital budget. We've got it set at those levels because we are very far.
<unk> on trying to maintain affordability for customers and.
Target a reasonable level of future rate increases certainly levels that as we've said before are at or below inflation, but.
But as customer growth continues to be robust, that's more and more challenging. So we're still focused on trying to balance.
The capital budget with affordability.
But we'll just continue to monitor that as the service territory expands and as we continue to procure the resources needed to serve that growth in the future.
Okay.
Leave it there I guess the second question.
Jeff.
Just a few months have passed now and.
You've made it a point to try to engage with various stakeholders as you prepare for this next rate case, just some color on how those discussions if they have happened so far how they've been and what are some of the key items on focus.
But that people are all working on.
Yes.
I think it's been constructive and so we have been able to engage and frankly, it's been it's.
It's been good since we've been ex parte essentially the entire time I've been CEO .
And so coming out of X parties important and again the conversations are around the discussion we had here on the phone the importance of the <unk>.
Regulatory construct that we have in Arizona, given the growth in the transition that's happening around the west and de carbonization.
There's also been I think good discussions about the current western market and as you know, we're very tight right now in the west there's not a lot of excess capacity.
And we're going to have challenges moving forward across this entire region of.
Of dealing with both the growth, but then also the transition putting significant amounts of battery storage in.
And so a lot of this has been just making sure that our point of view on on the changes that are happening in the system.
Opportunities to expand western markets.
And again, the need to be able to invest to meet the growth is all well understood by all of the stakeholders that we work with them by the commission.
Got it so we'll see how that translates going forward. Thank you very much have a good weekend.
Thanks Nancy.
Thank you. Our next question today is coming from Paul Patterson <unk> Associates. Your line is live you may begin.
Hey, good morning, guys.
Hey, Paul.
Just on.
The rate case appeal.
Are there any key dates we should be looking out for it.
In terms of into questions.
In terms of your discussions what have you.
Is there any sort of focus on.
How I guess, how does the timing associated with the with the new rate case.
Interact on your expectations for the rate case appeal outcome. If you follow me I mean are people sort of saying Hey, we want to see how that goes.
Is that a gating issue in any way the rate case appeal and the outcome there.
Yeah, I don't I don't think it's a gating issue in terms of the timeline that happens and that we do have more clarity now in the sense that there is not a special action a special action.
Would've had a quicker clock on it then the court of Appeals action. The court of Appeals appeal. If you look at kind of other cases, typically has a year or more.
The next milestone in that quarter of Appeals cases April 11th and Thats. When opening briefs are due and then I think it's 40 days after that you see.
Responding briefs to it and Theyre talking about intervenors right now.
And so that that case is going to continue to progress and so as we file.
Mid year.
This year those two will overlap certainly, but theyre not neither is gating to the other.
Okay split but.
We'll probably get a decision it would sound if I'm if I'm understanding correctly.
On the on the appeal would probably get a decision before we get too.
I don't know, an ALJ or something maybe more.
That's the right way to maybe think of it or at least in terms of the final outcome.
Yes.
Yeah, Paul it's possible I mean again, a lot of it depends on the timing you got two different timing variables. There so it's difficult to say.
They're going to exactly exactly interface, but if that if the if the court of appeals came back with the ruling most likely that's going to be a remand to the commission anyway. If the rate cases pending then there is a potential that you could pick that up in the in the then pending rate case, and so you know a lot of it is just going to be fluid as both of those cases progress.
Okay, and any sense of maybe when oral arguments.
I assume there.
There was an oral argument situations with the judges.
Ask.
Were they interact with the with the with the litigants.
Do you have any sense when that might possibly happen.
No I don't we really don't necessarily in the case.
But again, we'll keep people posted as the case progresses, okay awesome. Thanks, so much I really appreciate it yes, yes. Thanks Paul.
Thank you. Our next question today is coming from Anthony <unk> at Mizuho Group. Your line is live you may begin.
Good morning, Jeff Good morning, Ted Congrats on the quarter.
Thanks Anthony.
Two questions just one more housekeeping.
Rate filing that you are planning I guess.
Later this year.
Will you be able to recover the operating costs associated with the <unk> that were denied from the last rate case, I would just say that they eliminate the return on investment, but you pick up the are you able to file for the recovery of the operating costs associated with it.
Well Anthony this is Ted we don't get into the details of the rate case strategy at this time, but we'll be sure to go through those details once we file the case.
Great and then lastly.
You talked about demand growth in Asia, and one of the slides you talked about three five to four 5% growth.
Through 2024, just curious.
We're looking for as much detail as possible.
Do you think the build out of the C&I segment slowdown post 'twenty four or is it a case of just large numbers as the growth just keeps getting bigger and bigger it's hard to stay up on that.
On that three five to four 5% number.
Yes Fair question, Anthony as you know, it's difficult to predict any more granular than that range beyond 2024, but I will say if you look at the fundamentals of our service territory for a long period of time in our history.
Traditionally always had higher growth.
Compared to really most other service territories and the fundamentals that we're seeing right now in our service territory suggests that youre going to continue to have long term robust growth whether it be the jobs that are created the diversification within the economy here wasn't that long ago, we were heavily dependent on purely construction and tourism.
As of right now manufacturing jobs are actually outpacing construction jobs within the states. So we've got a lot of good trends that suggest to long term growth that could support that level or maybe even higher but at this point, we're focused on that three five to four 5% between 2022 and 2024.
We feel confident in that range, because we can point to projects and customers that we know with certainty are locating here.
Great. Thanks, so much for taking my questions.
Yes, Thank you Anthony.
Thank you. Our next question today is coming from David Peters at Wolfe Research. Your line is life you may begin.
Yeah, Hey, good afternoon.
Hey, David.
Just related to the renewable procurement efforts.
A decent chunk of Capex for clean Gen. Each year in your plan them I'm. Just curious have you seen any supply chain related issues, just an update on schedules there would be great and I guess.
To the extent that you do have any delays it sounds like you have enough on your plate to backfill.
Anything that might slip, but just wanted to double check.
Yes. Good question, David we are experiencing delays in certain areas, whether it be materials or some of the projects that we have procured we don't believe any are causing any significant impact, but it's really an impact on timing adjusting from one month to another within the same year.
We don't anticipate any impact on the capital program.
Great.
And then just specific back to the discussions you've had with stakeholders.
The next rate case, I'm, just curious if you've had a chance.
To talk more about the merits of a concurrent recovery mechanism for renewables just given.
The aspirations you have in the state.
Just curious if you've had any traction on that specifically.
Yes.
David that's a certain part of the conversations that we're having again we're early in that.
That's one of the key areas of focus for us.
Okay. Thank you.
Okay. Thank you thanks, David.
Thank you we have no further questions in the queue at this time.
This concludes today's event you.
You may now disconnect and have a wonderful day, we thank you for your participation.