Q1 2022 Pinnacle West Capital Corp Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2022 first quarter earnings Conference call.
At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.
It's now my pleasure to turn the floor over to your host Amanda Ho Ma'am the floor is yours.
Matt I would like to thank everyone for participating in this conference call and webcast to review our first quarter 2022 earnings recent developments and operating performance. Our speakers today will be our chairman and CEO, Jeff go in there and our CFO, Ted Geisler, Barbara Lockwood Senior Vice President of public policy, and Jacob Tetlow Executive Vice President.
<unk> operations are also here with US first 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 20.
'twenty two.
<unk> Form 10-Q was filed this morning, please refer to that document for forward looking statements cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures.
This call will be available shortly on our website for the next 30 days. It will also be available by telephone for May 11, 2022, I will now turn the call over to Jeff Great. Thank you Amanda.
Thank you all for joining US today 2022 has started off in line with the financial guidance that we provided coming out of the rate case decision last year.
And before Ted discusses the details of our first quarter results. Let me provide a few updates on recent operational and regulatory developments and then I'll touch on our progress towards achieving our 2022 goals.
First off as you know safety is our number one priority and I do want to take this opportunity to command and congratulate our employees for keeping safety and sharp focus in the first quarter.
Significant injuries or fatalities or steps are the most important safety metric and we completed the quarter with no serious injuries.
As a metric thats focused on preventing serious injuries by improving hazard recognition risk based decision, making procedures equipment selection employee training and much more.
Because we don't leave anything to chance when it comes to the safety of our people on the job and I am grateful to our employees for taking accountability to operate by one of our principles within the Aps promised that's anchoring and safety.
And to help their co workers to do the same.
As you all know spring is an important time of year for our summer preparedness work.
We have always had a robust summer preparedness program, but.
But resource adequacy has become increasingly important as energy suppliers in the southwest Titan.
To serve our customers with top tier reliability each year, we perform preventative maintenance emergency operation Center drills acquire critical spare equipment.
Fire mitigation line patrols and execute a comprehensive plan to support public safety and first responders.
In fact, we've already started seeing the benefits of our preparation is we've had an early start to the Arizona wildfire season.
Our system has fared well and our defensible space around pulse, what we call. Our <unk> program is demonstrating great success, while we continue to coordinate effectively with local first responder agencies to ensure the affected customers and communities have the support that they need.
Also during the first quarter, our Palo Verde nuclear facility operated at a 95% capacity factor. We've got unit. One currently in a planned refueling outage that began on April eight and it is on scheduled to return to service within the next few days.
We expect our two refueling outages in 2022 to last approximately 30 days, each and thats the timeframe frame that reflect sound planning and execution and upon the successful completion of the latest refueling outages. All three units will be poised to provide around the clock energy to help meet the demands of the summer for the entire desert southwest.
Yes.
Our procurement process is another important way that we help to ensure long term resource adequacy and progress towards our clean energy commitment. We're on track to bring into service a 141 megawatts of battery storage located on six Aps owned solar sites this year.
Last year, we received robust RFP responses to meet the growing needs of our customers. The rfps resulted in an additional 60 megawatts of Aps owned batteries to be place that Aps solar sites and 150 megawatts of new Aps owned solar all expected to be online in 2023 as well as additional clean energy.
Resources through Ppas.
We're currently in the final stages of contracting for another Aps owned solar plus storage project that we look forward to announcing in the near future and lastly, Aps is working on another all source RFP.
Excuse me that is expected to be released in mid may for new resources to be in service by 2024 and 2025.
On the regulatory front, we've been preparing for the upcoming rate case filing and continue to expect a filing mid year.
Mary objectives of this next rate case will be to recover costs and investments that we've made to reliably serve our existing customers.
And to support the tremendous growth that we're seeing in our service territory.
In addition, we continue to work with the Arizona Corporation Commission and many stakeholders in an effort to gain a common understanding on a variety of issues and to move forward with balanced solutions.
One example of the stakeholder work has been our most recent customer education and outreach plan, which was recently approved by the Corporation Commission after months of collaboration.
I think this was a great examples of progress that we're making to align with stakeholders and the commission on issues that have been challenging in years past.
We truly appreciate the individuals and organizations that have been involved in these discussions and I want to personally thank them for their time and thoughtful participation.
We look forward to continuing the dialogue and making further progress with respect to our state's regulatory environment.
I've also already touched on the progress of some of our 2022 priorities, including enhancing our stakeholder relationships and continuing to execute on our clean energy commitment.
In addition, I'd like to highlight improvements, we're making in the customer experience and communication space.
I am proud to say that we're making solid progress in improving our J D power residential customer satisfaction survey scores.
We estimate quartile gains in every single driver of customer satisfaction. During Q1, moving the company to the top half of the third quartile for overall satisfaction.
When compared to its large investor owned peers.
The strongest performing drivers in the latest GDP survey, where power quality and reliability in customer care and phone in digital both of which performed well above the large investor owned peer set averages.
Enhancements to our website interactive outage map and alerts by text and email have improved customer satisfaction with our digital experience and growing engagement with transactions completed through these tools.
Although we're making solid progress we know we still have much work to do and we look forward to continuing to execute on our priorities throughout the year.
With that said I'll turn the call over to you.
Thank you, Jeff and thanks again, everyone for joining US today. This morning, we reported our first quarter 2022 financial results I'll review the results and provide some additional details around the customer and sales growth.
22 started off in line with expectations, despite being significantly lower than last year.
In the first quarter. This year, we earned <unk> 15 per share compared to 32 per share in the first quarter last year. This is the first full quarter of financial impacts, resulting from the last rate case, although consistent with our guidance. The unfavorable rate case decision is the primary driver for the lower quarter over quarter results the largest contributing factor is.
The discontinuation of the four corners, and OCA Tito accounting deferrals as those costs are now impacting the income statement without any new revenue to offset the costs.
Other negative impacts include higher depreciation and amortization due to increased plant additions higher income taxes, and lower pension and OPEC. Non service credits. These negative impacts were partially offset by lower O&M expense higher transmission revenues and the continued strong customer and sales growth.
Our lower O&M. This quarter is driven by continued cost management as well as timing of planned outage schedules.
We experienced two 2% customer growth in the first quarter, which is in the upper end of our guidance range of one 5% to two 5%.
Additionally, our weather normalized sales growth remained strong at four 4%, which is above our guidance range. The first quarter weather normalized sales growth is comprised of three 5% residential growth and five 2% C&I growth.
Although the sales growth is stronger than expected we are not changing guidance at this time, but we'll continue monitoring the usage trends and adjust as necessary.
The strong recovery of the Arizona Labor market in 2021 is continuing into 2022.
As a reminder by July of last year, the Phoenix Metro area had recovered all jobs lost during the pandemic and by the end of 2021, Arizona was one of only three states that it recovered all jobs lost during the pandemic in March of this year, the Arizona unemployment rate fell to a historic low of three 3% compared to the national average of three 6% which is.
The lowest state unemployment rate in nearly 50 years.
Arizona continues to benefit from high net migration into the state compared to the rest of the U S. In 2021, Arizona was the third fastest growing state Phoenix was the second fastest growing metro area in Maricopa County was the fastest growing county.
As a result of this continued strong population growth Maricopa County residential housing permits are off to another record start in 2022 and expected to have another robust year.
While this growth is positive it does not outweigh the negative impacts of the last rate case outcome. This growth underscores the need for substantial capital investment to keep up with the influx of customers in order to maintain grid reliability and resource adequacy and the need for reasonable and timely recovery of those investments.
Lastly, our focus and progress on cost management continues to produce results.
As a recent example, our transmission and distribution teams began implementing mobile digital security stations at construction sites, where multiple security guards have traditionally been used deployment of these stations are safer more secure more reliable than traditional security plus the new practice has the additional benefit of reoccurring cost savings this dedication to cost management.
<unk> is more important than ever as we are facing inflationary pressures across all areas of our business.
We expect our 2022 earnings results to remain in our guidance range of $3 90 to $4 10 per share we are capturing the benefits of higher sales in the first quarter, along with our continued lean sigma initiatives to mitigate the inflation headwinds. So we can finish the year strong.
All other aspects of our financial outlook remained consistent with prior guidance we.
We are confident that our laser focus on cost management combined with the key initiatives, Jeff highlighted for 2020 to support our commitment to provide long term value. We look forward to continuing to execute on our strategy and updating you on progress throughout the year. This concludes.
<unk>, our prepared remarks, I'll now turn the call back over to the operator for questions.
Okay.
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, we do ask that will posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Your first question is coming from Julien Dumoulin Smith from Bank of America. Your line is live.
Hey, good morning team. Thanks for the time I Hope you guys are well congrats on the results.
Hey, Julien.
Thank you. So first question here, how are you thinking about it.
If it all adjusting your strategy in petitioning for recovery under the LCR the lost fixed cost rider here.
After last year's request for an increase was rejected I mean is there some way to address the commission's thoughts and perspective here.
A more holistic way.
Any thoughts or reactions after the may meeting.
Alright.
Into the upcoming meeting.
Yes, I mean, we've got Julian we've got the existing LCR, that's moving forward and in the May Open meeting and then as you know we've got a rate case filing that's coming up we've been working with stakeholders on.
Potential ways to address or are otherwise deal with that but that would be still be prospective so that would be something that would be coming in the next rate case. It would not really reflect the current alexey our mechanism.
Yes, Julien this pad and just to be clear the LFC or structural changes and therefore, the accounting changes that were made that was all factored into our guidance for the year.
Right. Thanks for the clarity there, yes, I am curious, but youre working with stakeholders here to address that and that would be part of the rate case filing and.
To the extent to which that you could come to them.
Okay excellent and then just if I can pivot here slightly.
I noticed youre still looking at moving ahead on a similar timeframe for the rate case. Despite admittedly. These robust sales et cetera, just can you talk a little bit about how both the CPI and inflationary elements as well as sales.
And or if you want to include the LCR and then.
Could influence.
Our rate case timing if that at all is it considered or any of those three are considerations.
Im not going to be a consideration for our rate case timing.
Tucson Electric just filed file their notice of intent so they're moving forward with the filing obviously inflationary pressures.
I've run run run counter to the historic test year. So we will see we're probably not all of that is going to get baked in but.
But but that doesn't really affect our timing on moving forward with a mid year filing.
Got it it seems neither does there.
The Tucson case in terms of their fairly parallel timeline it would seem.
Excellent.
Alright fair enough I'll leave it there for others. Thank you guys. Okay. Thanks, John Thanks Julien.
Thank you. Your next question is coming from Nicholas Campanella from Credit Suisse. Your line is live.
Hey, good morning, everyone hope everyone's doing well.
Hey, Hey, so just the comments on resource adequacy I think are interesting and can you just remind us you know.
When's your next <unk> filing and have the recent kind of tighter markets change your thinking on needing any new baseload generation and the five year window and then just how are you feeling overall about summer from a capacity perspective are you sufficiently covered.
Yeah, Let me, let me start Nick and then I'll probably ask Jake.
To weigh in with some thoughts so.
<unk> are on a cycle, where we are we do have an RFP that's moving forward.
And we've got Rfps that we're closing so we've generally got projects that are underway that are moving forward multiple projects and and we have RFP cycle. So.
New projects come in before those projects are completed so the RFP process I think is working.
Is working pretty well the challenge in the West is theres really tight regional markets.
So in a lot of cases, where you would go out and buy.
Cover yourself with purchases from others that pool as is.
Is shrinking and so we have made procurements for this summer that or to help us generally.
Keep our reserve margins intact.
And we're looking pretty creatively at where we go procure those resources from but ultimately one of the things in the next 10 years that we really need to do is figure out how we align the west better with market structures and you've got California.
Proposing to expand the.
The energy imbalance market into broader day ahead market you've got other companies in the west that are looking at how you could do more market based structures.
Other states that are not there in California. So there is a lot of work that's being done right now in terms of looking at market options for the west, but as we move forward with that that will enhance access to resources on a broader footprint.
I think we will ultimately improve reliability, but we have to continue to procure because there is uncertainty and how that process is going to move forward and what the timing.
As in terms of the summer Jake you want to just highlight where we are we're in good shape on it sure happy to make a couple of additional comments Jacob Taylor here.
Summer of 'twenty two we're in good shape, we've already.
We have had some of the supply chain challenges that others have seen those those impacts have all been mitigated and so we're in good shape for 'twenty two and we're good shape for 23, youre going to see the RFP come out later this year and that'll be really focused on 25% and 26 resources. So.
As you think about the near term I would say we're in good shape, we know what those supply chain constraints are.
And then past that we will be.
We'll be adding in the 'twenty 'twenty four 'twenty five I'm sorry.
I know that and Saturday $20 25 resources will come out of the next RFP cycle. So I would say we're in good shape and we've mitigated the known supply chain constraints and we're reaching out to all of those different suppliers right now to ensure that we have timelines that we can we can work into our plans.
Thanks, That's all Super helpful. I guess, just piggybacking off of that.
As it relates to just coal piles.
Are you, having any kind of tightness there.
Do you.
Any issues with procuring are you kind of fully covered maybe you can give us some color there.
Yes, I mean, one of the benefits is our largest supply there would be our four corners power plant, which is actually.
Essentially a mine mouth plant. So it has its own rail right to the mine. So there's no issues there.
That's our largest coal resource and on the Chilean power plant. They keep generally about a three to four months supply on the coal pile. So so we don't have any risk there on the coal side.
Thanks, a lot appreciate it.
Excellent thanks, Nick.
Thank you. Your next question is coming from <unk> Kim from Goldman Sachs. Your line is live.
Yes. Thank you.
First question.
Very strong rajeev weather normal load that we saw this quarter, even assuming the customer growth I think the usage per customer was up pretty nicely.
Just any color on what was driving that is are we just seeing less.
They move towards back to office in your jurisdictions or is it something else and is it too early to extrapolate this data point to future quarters.
Yes, thanks ensue.
About two parts organic customer growth of one part higher usage per customers. So that raw growth largely due to net migration in to the service territory is really continuing to be the biggest driver I was reading a redfin report here recently that said Phoenix is one of <unk>.
Two cities people are looking to relocate too.
In the Q1 2022, and the most common origin with southern California.
The article was referencing that even with higher mortgage rates. They actually think that will propel more growth because it will enable people to continue to expand housing footprint by affordable housing.
With rising mortgage rates by leaving Southern California migrating affordable places to live such as Arizona and Phoenix. So that's a big part of what we're seeing in soup.
Okay.
That's helpful. Second question, just going I guess after first quarter again, maybe a little bit too early but how you are situated for the year you talked about the.
The balance between the stronger loan growth, but also the inflationary impacts.
Just at this point.
Versus the plan when you had laid out originally.
Or any one of those items stronger or better or worse than you had expected.
Yeah at this point.
We feel good about our plan and our guidance. So no changes there. It is just the first quarter and that first quarter is relatively small compared to the others. So we'll continue to monitor as we progressed through the year.
Our guidance for O&M in 2022, as you know is meaningfully lower than higher O&M last year, but we're still confident to be managing within that range and the higher sales growth is certainly helping to mitigate any unexpected inflationary pressures. So at this point, we feel good about the plan and we will continue to monitor.
Both sales growth trends.
And cost management throughout the year.
Understood. Thank you.
Thanks Sue.
Thank you. Your next question is coming from Paul Patterson from <unk> Associates. Your line is live.
Hey, How're you doing.
Thanks, Paul.
So just.
What I wanted to touch base with you on is the.
The legislature.
There was a bill I think it's 25, 36%.
That doesn't seem to have gone anywhere.
I was just wondering if oh.
How you guys think.
The potential for a change.
In the.
And how the accs.
Constructed in and if there might help that.
If you have any outlook I don't know if you do in terms of what what might be going on there.
Which.
Which one.
Well actually on track it by numbers, but okay.
It's the one that basically.
That changes the ACC to more of an a.
Appointed.
Oh.
Situation I think one of them I.
Let's get the details on it I think one of them might be elected.
Yes, they're moving pretty Theyre getting pretty late in the session. So I don't I don't.
I think thats, probably going anywhere.
Okay.
And then in terms of economic development and everything.
It sounds great.
Is there anything that.
We should think about us.
I mean has this changed any of your.
I mean, you guys mentioned, the long term outlook and the need for reliability and stuff is there any anything here that you think might might change or move up the issue of reliability because of all this.
Paul all the economic development that we're seeing.
Has really been part of our forecast.
And when we think about reliability needs, we manage that to peak demand in the summer.
The economic development that we're seeing is largely factored into that forecast. We then added reserve margin on top of it the sales growth is really.
Just detailing out how much energy around the clock, you get which is a little bit different the peak demand. The measure that we use to plan for resource adequacy, I will say, though it underscores the importance of Palo Verde and.
Four corners as we get through these hot summers both units critical for not just Arizona, but the entire southwest in fact, Palo Verde supplies about 70% of the entire southwest regions carbon free energy through the summer so.
Just underscores the importance of those two assets for the region.
Absolutely.
Good point will take so much I really appreciate it yes. Thanks Paul.
Thank you. Your next question is coming from David Peters from Wolfe Research. Your line is live.
Yeah, Hey, good morning.
Just just a question on the upcoming rate case, you mentioned that your your instate peers also moving forward to file I'm. Just curious if you see the possibility of a longer timeline of getting a final order than you would've otherwise just given the workload on staff and others just thinking about the timing of that that final.
Order would play into to the EPS CAGR you'll have.
David It's early.
It's early in the process I mean, one of the things that.
It is important to recognize with the commission is they've got a steady pace of rate cases, theres, a tremendous number of water companies here in the state and so there's always a.
Pretty steady drumbeat of cases that moves through certainly our case in Tucson electric and.
Some of the larger companies southwest gas or are bigger more intensive rate cases, but.
They've got a hearing division down in Tucson is hearing division up here.
So I don't I don't see anything right now our.
Call that the fact that there are two cases together would affect the timing.
Okay, Great and then just.
Related to the case again, just how are you thinking about potential size of the ask.
Hmm.
Mitigating impacts to customers, particularly as youre dealing with the inflationary environment on things like fuel and the like and.
I know, it's just been a big focus at the commission. So just any comments there would be great yes.
We're always very sensitive to how to balance those issues.
And look for those opportunities frankly, we've done that in the rate design in terms of providing customers choices to move on a different rate plans that provide different opportunities to two.
To say based on selections that they want to make but also we want to look at things that we can bake into the case to give that kind of optionality. So.
Something that we're aware of obviously your cost of service industry. So.
You do the math.
This is about investments that we've made to support reliability and service customers that we have the growth helps because we can have a bigger.
Kind of kilowatt hour base to spread those costs on but you still need to reflect the cost to service that that go into the into the calculating revenue requirement, but but yes, absolutely. We're looking at all of that.
Alright, and then just one last one if I can I think you said you have one.
Aps solar.
Project expected to come online in 'twenty, three but it sounds like that's.
That's not going to be impacted by the <unk> investigation is that right.
Yes, I think Thats I think thats right and obviously I think hopefully you sign on that's getting a lot of attention right now and hopefully we appreciate center cinema.
Along with some other.
Congressional legislators submitting comments to the department of Commerce to urge the debt process and move quickly because it is creating uncertainty.
In the industry, but we're moving forward with the projects that we've got under contract.
Okay, great. Thank you guys.
Yes, David.
Thank you. Your next question is coming from Anthony <unk> from Mizuho. Your line is live.
Hey, good morning, Jeff Good morning, Ted.
Anthony Anthony.
Hopefully just one quick one just I guess on the appeal.
Obviously the issues going on in the World right now there's more of an emphasis on.
Whether it's fuel security or you talked about four corners as the mine Mountain mine mouth plant, maybe more stable commodity prices.
<unk>.
Is there a chance I don't know how the appeal goes but at the appeal doesn't come your way and there is a potential for a new commissioner and also a new emphasis on maybe.
The stability of the of coal fired generation.
Being able to get those in rates in the <unk>.
Next filing.
I don't know if I walk through hypotheticals, I mean were pursuing the appeal.
We think we've got a solid case I think Anthony you're you're.
Fuel security as part of that it's less about.
The foreign fuel security, it's back we've got incredibly tight capacity market share in the desert southwest that power plant, which is a large power plant could not operate if we didn't have those SCR is on it.
It is critical now ironically it is in the money right now because of the high natural gas prices.
Regardless of the economics, we couldnt maintain reliability of the system without four corners, and we can't run four corners without the Crs.
And so youll security for us we needed to have that power plant, which is why we went through the entire process from acquiring the Edison share to investing in the SCR is too.
To making that plant reliable through the summer. So so again, we think the appeal is.
The appeal will reflect that.
What happens down the road.
I don't know how you can speculate on that.
Great. Thanks, so much great quarter, thanks for taking my questions, yes. Thanks Anthony.
Thank you. Your next question is coming from Greg <unk> from UBS. Your line is live.
Yes. Thank you.
Just regarding the OFC our mechanism are you expecting any any changes to that and.
Do you expect it.
On that topic to come up at the May meeting.
The Commission, yes, I mean theres there I think there are a couple of amendments that were floated before that that was pulled from the last open meeting there were a couple of proposed amendments that were floated I think they prior to refloat those.
As they go up but I think most of the discussion is likely to be and how in the next rate case. This mechanism gets addressed.
Since it was established in a prior rate case.
You really would address structural changes like that in a rate case.
Okay. Thanks.
Yes.
Thanks, Greg.
Thank you. This concludes our Q&A session and conference call. Thank you for attending today's presentation you may now disconnect.