Q4 2022 Pinnacle West Capital Corp Earnings Call
Yeah.
Good day, everyone and welcome to the Pinnacle West Capital Corporation 2022 fourth quarter earnings.
Yeah.
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'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 fourth quarter and full year 2022 earnings recent developments and operating performance. Our speakers today will be our chairman and CEO , Jeff go in there and our CFO , Andrew Cooper, Ted Geisler, Aps, President Jacob Tetlow, Executive Vice President of operation and Jose as far as that.
Senior Vice President public policy are also here with that first I need to cover a few details with you. The fact that we are 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 expectation and actual results may differ materially from expectations are.
2022 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 MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures a replay of this call will be available shortly on our website for the next 30.
It will also be available by telephone through March six 2023, now I will turn the call over to John .
Thanks Amanda.
Thank you all for joining us today and good morning.
Looking back on 2022, it was no doubt one of our most challenging years in recent memory as we face major financial headwinds in our financial reset, resulting from the outcome of our last rate case.
I'm going to provide several updates today and share the successes, we were able to achieve despite the challenges we face.
Coming out of the last rate case, we laid out a comprehensive plan and strategy and we met or exceeded nearly every target we set for ourselves, including delivering strong service reliability to our customers.
Made significant progress in the last year, but we're not done and we look forward to continuing to execute our plan.
Turning now to regulatory we came out of the last rate case fully committed to improving our regulatory relationships and we've seen progress as a result of our focus in that area.
We received constructive decisions for all key items hurt by the previous fence during 2022, including our financing application last December .
We started 2023 with two new commissioners.
And a new Chair Commissioner Thompson and Commissioner Meyers joined the bench in January and Commissioner O'connor was elected chairman.
We've already seen constructive actions and decisions by the new bench, including the creation of a docket to examine ways to reduce regulatory lag. We believe that these conversations are important and we look forward to working with the commission on thoughtful solutions.
For our pending rate case, the administrative law judge issued a procedural order in December outlining the schedule. The first round of staff and intervenor testimony is due in may with the hearings set to commence in early August .
We look forward to working with the parties and the commission through the rate case process and gaining additional regulatory clarity.
Our number one goal continues to be to be doing what's right for the people and prosperity of Arizona, which includes working collaboratively with the commission and building a more constructive relationship.
Turning to the operations side I want to start by recognizing our field team's exceptional execution in 2022, I'm, especially proud of our employees for prioritizing safety and ending the year with significantly lower employee injuries.
Three low energy sips, and our lowest number of Osha recordable injuries on record.
We had one of the most hazardous and damaging summer storm seasons in recent history, where we saw a record number of pulls damaged and for.
For context, we replaced over 800 Poles, which is about 500 more than an average summer.
In addition, while parts of the southwest region experienced capacity shortages again in 2022 are careful long term planning and resource adequacy allowed us to serve our customers reliably.
Additionally, we remain engaged in the western wholesale market, which allowed us to make off system sales and to create savings for Aps customers.
Importantly, those off system sales directly benefit Aps customers by lowering lowering our overall costs, while helping maintain regional grid stability.
And finally, our generation units performed extremely well with our non nuclear fleet recording a summertime equivalent availability factor eas of 95%.
And we achieved a capacity factor of 102% at the Palo Verde generating station.
We recognize the importance of creating customer value and remain focused on improving our customer experience. Our employees are committed to putting customers first and working towards our goal of achieving an industry, leading best in class customer experience.
As a result of this commitment we made extraordinary progress on that front in 2022 with Aps, earning ratings from its customers, making it among the most improved utilities in the nation for both residential and business customer satisfaction measured by J D power.
Compared to 2021, Acs achieved quartile gains in every single driver of residential and business customer satisfaction firmly lifting the company into the second quartile nationally for residential customers in the first quartile nationally for business customers.
Consequently, overall satisfaction is now well above industry benchmarks when compared to the company's large investor owned peers.
We also continue to make progress on our resource procurement and clean energy commitment since announcing our goal to reach 100% clean carbon free energy by 2053 years ago, we've procured over 'twenty 100 megawatts of clean and affordable energy resources.
Additionally, as previously discussed we issued an all source RFP last year for another 1000 to.
<unk> thousand 500 megawatts of new resources to be in service from 2025 to 2027.
And we continue to work through finalizing procurement decisions from that RFP.
These substantial investments that are essential resources designed to help us keep pace with Arizona has tremendous growth at the same time electricity capacity markets are tightening across the entire west.
Looking forward our goals for 2023 include continuously improving our customer communication and engagement achieving a constructive outcome in our pending rate case and reliably serving customers through the tremendous growth in our service territory and I want to once again recognize the near term headwinds that are created by the unfavorable outcome.
<unk> of our previous rate case, and how it will continue to make 2023 challenging power.
However, we believe in our ability to provide long term value to both customers and shareholders and we look forward to executing our plan and continuing our proven cost management efforts all against the backdrop of Arizona is extraordinary economic expansion.
So I want to thank you for your time today, and I'm going to turn the call over to Andrew who will talk about our fourth quarter and full year 2022 earnings in our forward looking financial expectations.
Thank you, Jeff and thanks, again to everyone for joining us today.
This morning, we reported our fourth quarter and full year financial results for 2022 and introduce guidance for 2023, I will cover our results and provide additional details around the financial outlook for 2023 and beyond.
As Jeff discussed we remain in a period of financial reset during the near term, but right up front that I want to make clear that while we are navigating through challenges brought on by the negative outcome over the last rate case, we have been executing well on our plan and we remain confident in our ability to create renewed growth and deliver strong shareholder returns.
For the fourth quarter of 2022, we lost 21 per share down <unk> 45 times compared to fourth quarter 2021.
The unfavorable rate case decision and reduction in net income from no longer deferring the cost related to the four corners, SCR and I'll get to your modernization project has been the primary driver of lower results all year and that remain the case for the fourth quarter.
The quarter also included a $17 $1 million impairment charge relating to our bright tax AMG equity investment. This was a legacy investment by bright Canyon.
For a minority stake in a wind farm in the fourth quarter, we determined that impairment of the investment was appropriate due to ongoing disputes on transmission cost allocation and a lack of a probable favorable outcome. Other negative impacts included lower LCR revenues higher O&M and higher interest expense.
Favorable weather and customer and sales growth were partial offsets the negative drivers in the fourth quarter.
For our full year results for 2022, we earned $4 26 per share down from $5 47 per share in 2021.
We ended the year in line with our updated full year guidance as noted earlier the negative rate case outcome drove a financial reset and is the primary driver for the lower year over year results. The bright canyon impairment charge higher O&M and higher interest expense for other negative drivers for lower year over year results for the year, we saw <unk>.
Initial weather as well as customer and sales growth, partially offset the negative drivers.
Turning to customer growth the fourth quarter remained in line with our guidance of two 1%, which was also the customer growth rate for the full year Eric.
Arizona continues to be a popular destination for relocation and had the fifth highest population growth in 2022. According to recent data from the U S Census Bureau.
Arizona has continued to show strong employment growth, including in emerging areas of economic diversification with manufacturing employment for example, growing at six 2% to 2022 as compared to U S rate of three 8%.
We also continued to experience strong weather normalized sales growth.
<unk> increased one 2% in the fourth quarter relative to the prior year and for the full year 2022, our weather normalized sales growth was two 4% in line with our upwardly revised guidance range. This was anchored by strong C&I growth of four 6% over 2021 as the benefits of Arizona is increase.
Singly diversified economy are realized in fact Phoenix Metro was recently named a top three industrial market to watch in 2023. According to a <unk> tenant demand study that evaluated 60 U S markets move.
Moving on to our financial outlook, our 2023 earnings guidance range is $3 95 to $4 15 per share. Although this is a decline from 2022 actual results. The range is comparable to our weather normalized 2022 guidance range of $3 90 to $4 10 per share.
We forecast steady customer growth and robust sales growth ahead in 2023.
Headwinds for 2023 include higher benefit expense interest expense and plant DNA, we continue to target declining O&M per megawatt hour and believe our proven track record of cost management and lean initiatives will help us successfully navigate through this inflationary period. We continue to have a strong focus on O&M and look for.
Unity is to create efficiencies reduce risk and keep our costs low to maintain affordable rates for our customers.
Looking at our forecasted customer growth, we expect it to remain strong and are maintaining a one five to three 5% guidance range for 2023 on.
On sales growth, we expect continued strength, particularly in the C&I segment as economic diversification takes hold in areas such as semiconductor hubs other large manufacturing and distribution and.
In fact, TSMC recently announced plans to build a second fab in the north the Phoenix location, increasing its original 12 billion investment to $40 billion.
TSMC estimates the site looks like 4500 permanent jobs and increase from the earlier projection of 2000.
In addition, Procter and Gamble also announced plans for a $500 million investments into manufacturing facility, creating 500 new jobs.
Anchored by examples like these we are expecting our weather normalized sales growth range to be three five to five 5% for 2023.
Turning to pension as a reminder, our pension is 106% funded with no expectation for contributions needed in the near term we remain committed to the long term benefits of our liability driven investment strategy and to reduce volatility of our fixed income weighted portfolio.
Nevertheless, we are expecting a headwind in 2023, primarily resulting from the net effect of higher discount rates higher benefit expense. In 2023 is also impacted by negative 2020 to investment returns as partially offset by the impact of higher expected returns on assets in 2023.
All in we expect benefit expense to be 33 heads.
Headwinds for 2023 as compared to 2022.
However, we continue to evaluate options for regulatory recovery of higher benefit expense.
Turning to interest expense as the federal reserve continues to raise interest rates to try to combat inflation. We are closely monitoring our financing needs I would <unk>.
<unk> that we do not have any maturities until mid 2024 that we do expect higher interest expense year over year.
We've also updated our capital plan to $5 3 billion from.
From 2023 to 2025 with rate base growth at an average annual growth rates of 5% to 7%.
Importantly, the increase in Capex is independent of any rate case outcome and is directly related to loan growth and the needed investments, we're making and more resilient infrastructure. This updated needed simply to keep up with that growth and reliably serve customers customers.
We have also updated our financing plan to meet the demands of our updated capital plan. We are continuing to differ any equity issuance until the resolution of the current rate case and remain focused on achieving a constructive regulatory outcome.
The rest of our financial outlook remains consistent our outlook includes long term earnings growth of 5% to 7% off the midpoint of our weather normalized 2022 guidance range, we have a track record of dividend growth and our board recently raised our quarterly dividend to <unk> 86 per share while our current payout ratio is higher than our target we believe our plan.
We will allow us to achieve our long term dividend payout ratio of 65% to 75% in the future recognizing that all future dividends are subject to approval by our board.
We have a path forward that is centered around our long term track record of constructive rate case outcomes and robust service territory growth continued balance sheet strength and cost discipline and a focused management team that is taking action.
We look forward to building on the great work, we were able to accomplish in 2022 and executing on this plan in 2023.
This concludes our prepared remarks, I'll now turn the call back over to the operator for questions.
Certainly at this time, we'll be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
We do ask that we're posing your 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.
Your first question is coming from Julien Dumoulin Smith from Bank of America. Your line is live.
Hi, Good morning. This is Darius on for Julian just starting off I wanted to touch on the financing plan a little bit.
Recognizing that you won't need equity or won't be issuing equity until after the current rate case can you just maybe help us think about.
How are you looking at future equity needs beyond the.
The pendency of the rate case in 'twenty four 'twenty five in.
In particular in the context of the the higher capital plan.
As you noted we do have an equity need and the plan there that $4 billion to $500 billion of equity in 2024, and that's that's really set up to make sure that the Aps equity layer is appropriately capitalized coming out of the rate case, given some of the data that we're incurring aps in the near term any future equity needs will really be depended.
On the capital plan that we developed after the rate case concludes as I mentioned earlier the capital that we've added into the plan here is really dependent on.
Load growth in serving the service territory as it expands.
Once we get through the rate case and think about for example on our clean <unk>.
Capital spend that will be an area where as we.
With a constructive outcome consider.
A different ratio of self build versus PPA assets, we would look at the financing plan at that point to make a determination. We will also be looking for feedback from the rating agencies on our credit metrics at the conclusion of the rate case to figure out the right capital plan for the years beyond 2024, but as of now.
Need for 2024 that $4 million to $500 million post the rate case is intact.
Excellent. Thank you and maybe if I could touch on the robust load growth forecast that you guys have out there and then you update this morning can.
Can you, maybe just discuss a little bit about what your level of visibility is on the contrary.
Contributions of AD load growth other than TSMC I know you mentioned a couple of other large customers coming online.
Over this period.
So within the context of your five to seven EPS CAGR.
Can you maybe discuss how much if any delays could be absorbed to.
To the large TSMC project that would still allow you to maintain that 5% to seven within this forecast period.
Sure Darius so the forecast is driven by a diversified group of manufacturing data center customers.
And some of the overall C&I growth that we're seeing in the service territory, so pretty different economic story than its been in the past as far as the factors contributing to growth here, we're not really depending on the broader macroeconomic story as much as to specifically identify customers, which include TSMC and its a considerable part.
Of that two to four in the 2% to 4% of the.
<unk>, 5% that is from the large customers TSMC has a considerable part of that but there is data center customers and other manufacturing there as well so it's pretty pretty diversified on that front on the 5% to 7% earnings growth rate through 2026 and Thats.
Pretty much coterminous.
The sales growth rate for longer term growth rate that we have here is through 2025, but roughly similar trends through that through that forecast period as you've as you've seen even in 2020 to that sales growth is certainly helping us to mitigate.
The inflation in some of the O&M pressure that we're seeing in and that will continue to.
Work, both those cost levers and keep a close eye on the macroeconomic environment any specific customers as well as we go through the forecast period.
Okay, great well, thank you for that detail looking forward to catching up later in the week.
Thanks Dara.
Thank you. Your next question is coming from Shar <unk> from Guggenheim. Your line is live.
Hey, guys.
Sure.
Good morning, Jeff.
Let me ask you so Jeff do you historically have said that.
You're under investing in Aps, but maybe roughly a two and a $2 million to $300 million per year.
Is that still the case I mean, obviously from your prepared remarks, it sounds like the $600 million you guys. Just bumped up in Capex is sort of agnostic to Aps and base level spending, but I'm just kind of curious if you take this increase layered in with what you said that you have under invested in the system, how do we sort of.
Think about the two together.
Yes, I wouldn't say, we've underinvested in the system I mean, as you know we've been keeping up with what we need to invest in for for load growth, where the where the opportunity is around the generation side and where there are opportunities, particularly now with the tax credit framework that the IRA has setup.
There are opportunities for us to do more.
The optimized mix of self build obviously it wouldn't be a 100%.
Utility owned but we're doing probably what manner in the 25% range of utility owned were a more rational I think if we could do it would be in the 50% range. So that we're actually being able to maximize the benefit of those tax credits for customers. So.
A lot of this opportunity is really going to depend on how the rate case outcome goes we've got the clean tracker proposal.
Take our renewable energy adjustment charge and allow us to again flow through.
Some of those clean investments and if we can do that then we get to a more optimized mix of utility owned versus PPA solar and storage primarily is what I think you would expect to see.
But a lot of what Youre seeing is just the investment that we have to make for load growth.
And so I think I think what youre getting at is that there is an ability to further optimize that after the rate case and looking at that mix of generation, but we're going to invest what we need to invest in the poles and wires and the infrastructure to serve customers.
Got it yes. It was just more curious on that $2 million to $300 million of code it before in the past and how that correlates with the.
The Capex increase today.
And then just.
On the Capex increase where does that sort of puts you around that 5% to 7% rate base growth range.
Out there now.
Yes.
Okay. The.
The $600 million.
Yes.
The.
You saw the upper end of that rate base growth has come up with the update and that's that's really the result.
There is a much narrower range of rate base growth with the prior forecast Shar and yes.
You could think about it is more extended range I don't think there is a broader range of uncertainty just with the Capex. We have in there more of an opportunity you have seen some of the timing move around in our capital Jeff was just talking about our clean spend you're seeing some of those buckets move from 24 to $25 with the addition of the $25 forecast so there.
Or some timing.
Some of our capital investments in some of the decisions, we need to make but thats really been.
The main thing is the increase in the range driven by the higher Capex forecast.
Okay and then just lastly, if the court of appeals were to rule in.
In favor regarding the four corners SCR is in our control of projects.
What would that look like I guess from an EPS standpoint in 'twenty three would it be retroactive.
Would the incremental EPS P going forward since you only obviously report GAAP results.
Sure.
Any decision at the court of Appeals.
If it were positive the decision would be remanded the commission for further action. So there wouldn't be really anything done.
Retroactively.
All I can really give you sort of the rule of thumb you are talking about roughly 200.
Million disallowance and.
Capital structure Thats in the 50 50 range apply an ROE to that and that kind of gives you.
The rock EPS impact of beginning to recover on that the timing of that would be dependent on <unk>.
The traction of the ACC, if there were a positive outcome and shire and remember to that.
They may there may be a further appeal. So the court of appeals if they issue a ruling.
If it goes in our favor I can see the Sierra club taken that up in seeking Supreme Court review, so that could add some additional time on but ultimately as Andrew said, it's going to end up back at the commission.
Okay perfect. That's fantastic I'll see you guys soon I appreciate it.
Thanks, John Fischer.
Thank you. Your next question is coming from Anthony <unk> from Mizuho. Your line is live.
Hey, good morning, Thanks, so much for taking my questions.
Hey.
Just a couple of them first off.
Anything management could do to help mitigate the volatility in the pension expense.
Sure Anthony it's Andrew.
As I mentioned, we're going to look at all the options including around.
Regulatory recovery our priority in the rate case is a constructive outcome and we'll look at pension when we go into the remodel strategy is one of the various levers that we need to think about.
What a constructive outcome looks like but not the only lever and it's not the only costs that we've got to deal with so there's certainly precedent where there's a split test year to look at pension expense from us.
What is now a historical period.
Something that we'll consider as one of our options within the last week as we averaged the two years surrounding splits for test year, but regulatory recovery remains one.
We continue to look at but then of course any of the levers we have around our other costs O&M and interest expense all of the things that we can do there to make sure that we.
Meet our meet our forecast.
That's really the focus we're as I said earlier, we're committed to the passion strategy.
2022.
All asset classes for the most part.
First losses in discount rates went up precipitously and so.
We're living with the reality of that and mitigating as best we can.
Great and if I could jump on charge I believe it was.
Question chart.
About I think you are looking for more clarity from the rate case, where you potentially may see more.
Clean generation spending is it just comes down to.
Clean track a proposal needs approval is that what investors should be focused on to see if we do get more clean generation spend.
Anthony it's more I think.
A little more.
Then that I mean, it really is looking certainly a clean tracker.
Particularly as a potential vehicle to give.
<unk> credit.
The tax credit attributes back to customers in a more contemporary manner I mean.
That makes a lot of sense to us as a way to optimize the <unk>.
Getting a little bit more utility Utah.
Utility owned generation in the mix.
But it's going to be the overall framework that really drives drives what we do right.
We'll look at the results of the case and figure out how we optimize the mix of.
Of both the PPA and then the utility owned generation and storage resources, and so can't really flagged what that looks like here, but we have opportunity I think to get a more optimized mix for customers.
We're seeing now and just because of the last rate case, we are not able to do utility owned.
Assets at the levels that we think is probably optimal.
Great and just lastly.
From the disallowances on the.
Coal Capex in <unk>.
Currently in the appeal does the company get recovery of the operating expenses associated with what the capital that was disallowed Im sure. There is additional capital with running these scr's do you recover the expenses associated with that whereas if you do prevail in the appeal court that that also could be a potential.
Tailwind in earnings.
Yes, Andy we do get recovery on the Cogs.
Perfect.
And our results year over year impacted by those costs kind of coming into our income statement without offsetting revenues. So what you'd really see if there were a positive outcome would be the recovery on the on the investment.
In there alongside the cost.
Great. Thanks for taking my questions I appreciate it yes. Thanks Anthony.
Thank you once again, everyone. If you have any remaining questions or comments. Please press star then one on your phone.
Your next question is coming from Nick Campanella from Credit Suisse. Your line is live.
Hey, good morning, everyone.
Hey, So I guess just starting on 'twenty three drivers what was the driver of the lower tax rate I think of 10% versus last year was closer to 2014 can you just update us on that.
I think the lower effective tax rate has.
It Hasnt.
As.
Kind of.
There is a combination of factors.
In the lower overall tax rate in any of that.
There is a variety of puts and takes in there around.
Tax credits and the like.
Okay, So, possibly just tax credit driven.
And then on your just credit outlook.
I think you've kind of mentioned in the deck, 16% to 18% range.
Where did you end the year.
And then what's the feedback from the agency has been in terms of whether they are looking for.
Before moving on the negative outlook.
Is it <unk> related is a numbers related and whats your willingness to defend the <unk> rating here if you have too.
Yes, Nick.
The agencies calculate and I don't think they have all put out.
How they view the output of that number at year end to 16% to 18% is sized around.
Where the agencies would like us to be today, you saw both Moody's and Fitch This month.
Reaffirm their current outlook.
Their current ratings as well as the negative outlook.
If you take a look at their positions, but ultimately.
Absent some exogenous factor they are really looking to see the rate case outcome to make determination about.
About the ratings and any future changes they've made to the downgrade thresholds, we're committed to that 6% to 18% that's what keeps us in or to the last part of your question. That's what keeps us in our current category.
You have got Moody's with 18% threshold right now.
S&P with a 70% 17% to keep us at our current rating and return sustainable 13% three downgrades that they are one notch lower right now and so we use that to connect to 18% target too.
To keep the current ratings, we will have to see as I said after the rate case with the rating agencies readjust at all our targets are for downgrade.
Okay, and then just one last one for me in your prepared remarks upfront you kind of mentioned this regulatory lag docket.
Whats the outcome that stakeholders are trying to solve for here.
Some of the mechanisms you're exploring if you can maybe update us on that.
Yes, Nick.
I think it was just more of an indication of.
Sure.
<unk>.
The new commissioners coming in I think both of which had indicated that they don't like being.
One of the lowest if not the lowest rated commission.
In the U S from from like our a and so this was an effort to begin to talk about the things like for test years and other things that.
You typically see discussed in other in other jurisdictions. So its a little early to see exactly what will come from it I think again the tone is good because it's an indication of.
There is benefit to customers from having.
<unk>.
Good performing utility and I think we saw that come out loud and clear after the last rate case outcome.
And I think that's a recognition of let's talk about public stakeholder driven way what some of those mechanisms are so I think thats a positive sign but.
Pretty early in the process right now.
Alright, well thanks, so much for answering my questions, Yes, you bet Nick.
Thank you that concludes our Q&A session. Everyone. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.