Pinnacle West Capital Corporation Q1 2023 Earnings 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 is now my pleasure to turn the floor over to your host Amanda Ho Ma'am the floor is yours.
Thank you, Matt and I would like to thank everyone for participating in this conference call and webcast to review our first quarter 2023 earnings recent developments and operating performance. Our speakers today will be our chairman and CEO , Jeff Goldner, and our CFO , Andrew Cooper, Ted Geisler, Aps, President Jacob Tetlow, Executive Vice President of operations and Jose as far as the senior.
President of public policy 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 are first.
Quarter 2023 Form 10-Q was filed this morning, please refer to that document for forward looking statements cautionary language as well as the risk factors an 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.
It will also be available by telephone through May 11, 2023, I will now turn the call over to Jeff great. Thanks Amanda.
And thank you all for joining US today 2023 has started off in line with the financial guidance that we provided on our fourth quarter call in February and before Andrew discusses the details of our first quarter results I'll provide a few updates on recent operational and regulatory developments.
First off as you know safety is our number one priority and I do want to take this opportunity to commend and congratulate our employees for keeping safety and sharp focus in the first quarter, especially through an unseasonably long and challenging winter period.
We discuss summer preparedness quite extensively and that is our longest and highest peak demand season in Arizona, but winter preparedness is also an important part of how we reliably serve our customers throughout the year, we have an extremely diverse and broad service territory, serving 11 out of 15 counties in Arizona and so on <unk>.
And to the desert regions that most people associate with the state Aps also serves communities at much higher altitudes.
This year, Northern Arizona saw one of the wettest winter seasons in recent history in fact, Flagstaff set a record for the second highest snowfall total through March 1st in over 100 years.
Despite slippery roads hazardous conditions and freezing temperatures our crews were able to restore power safely and quickly to our customers when they needed it the most.
With winter now officially behind US we've quickly moved to preparing for the summer.
Well, we always have had a robust summer preparedness program resource adequacy continues to be extremely important as energy suppliers in the southwest Titan.
To serve our customers with top tier reliability each year, we perform preventive maintenance emergency operation Center girls acquire critical spare equipment.
Duct fire mitigation line patrols and execute a comprehensive plan to support public safety and first responders.
Also during the first quarter, our Palo Verde nuclear facility operated at a 100% capacity factor unit. Two is currently in a planned refueling outage that began on April eight and is on schedule to return to service in early may.
Successful completion of the latest refueling outage all three units are poised to provide around the clock clean energy to help meet the demands of the summer for the entire desert southwest.
In addition, our resource planning process helps ensure long term resource adequacy and progress towards our clean energy commitment.
We do plan to file our 2023 integrated resource plan. Later this year that will include a 15 year forecast of electricity demand.
And the resources needed to reliable reliably serve our customers.
We're currently engaging with a wide variety of stakeholders together input and feedback as we prepare to that plan.
I'm also extremely pleased to announce the completion of 141 megawatts of Aps owned batteries at our Arizona Sun sites with.
With an additional 60 megawatts that we expect to be completed by mid year.
We also expect our 150 megawatt <unk> solar plant to be in service in the next few months, we look forward to having these critical resources serve customers during the peak summer season.
And we're also finalizing project selections from our 2022, all source RFP and we've recently signed for Ppas to be in service by 2024 and 2025.
Finally, Aps is actively working on another all source RFP that is expected to be released midyear that will be for new resources to be in service by 2026 through 2028.
Additionally, we reached an exciting milestone in our clean energy journey on March 26, when our highest hour served by clean percent metric peaked at 99%.
And during that hour, we also reached 58% renewable energy.
Our participation in the energy imbalance market and our continued effort and exploring an expanded western energy market will be critical to maintaining customer reliability and affordability into the future.
We're also starting the year with solid J D power residential customer satisfaction survey scores that firmly place Aps within the second quartile for overall satisfaction when compared to its large investor owned peers.
We made gains in both power quality and reliability and corporate citizenship and the first quarter and this was especially positive given the challenging winter season that I spoke about earlier we.
We look forward to continuing to make improvements for our customers and providing a more frictionless customer experience.
And then turning to regulatory we continue to work through the rate case process are expected staffing intervenor direct testimony will be filed right now scheduled for may 22nd for revenue requirement in June 5th for rate design.
In addition in March we received a favorable decision from the Arizona Court of Appeals on our appeal of the last rate case decision.
We are pleased that the court of appeals clarified the prudency standard that must be applied by the commission in their evaluation for recovery of investments that we make the.
The four corners power plant is a critically important reliability asset for the entire southwest region and the investment in SCR was required to keep that plant running under federal law.
Right out parties have until may 8th to file a petition for review to the Supreme Court No. One has filed a petition yet.
We look forward to working with the commission and other parties to resolve this in a matter in a most efficient way that we can.
Although 2023 is off to a solid start we know we still have much work to do and we look forward to continuing to execute on our priorities throughout the year and with that I'll turn the call over to Andrew Andrew.
Thank you, Jeff and thanks, again to everyone for joining us today.
This morning, we reported our first quarter 2023 financial results I will review those results and provide additional details on weather impacts sales and guidance.
While lower than last year 2023 has started off in line with our expectations. We lost <unk> <unk> per share this quarter 18 cents lower than first quarter 2022.
Weather, along with sales and customer growth were the primary benefits this quarter offset by higher O&M interest depreciation as well as a smaller benefit from pension and OPEC.
Weather provided an earnings benefit this quarter, primarily driven by the lengthy winter season, Jeff mentioned earlier.
According to the National weather service. The first three months of the year with a cooler start to a year in the Phoenix Metropolitan area. Since 1979 with March of 2023 being the coldest March in more than 30 years.
The resulting impact was an increase in energy sales in the first quarter as residential heating degree days increased about 51% compared to the same timeframe a year ago and were 57% higher than the historical 10 year average.
Turning to customer and sales growth, we experienced 2% total retail customer growth in the first quarter.
Which is in line with our guidance range of one five to two 5%. Additionally.
Additionally, weather normalized sales growth remained strong at three 6% for the quarter and is also within our guidance range. The first quarter weather normalized sales growth is comprised of two 8% residential growth and four 3% C&I growth as previously discussed our 2023 sales growth is driven.
By several large customers expanding and ramping up their usage, while our sales growth guidance remains unchanged for the year. We will continue to monitor the timing and usage of these large C&I customers coming online and adjust as necessary.
Metro Phoenix continues to show strong growth in manufacturing employment, a four 8% compared to two 6% for the entire U S. In fact, the White House recently announced that Arizona has attracted over $58 billion.
A private investment for manufacturing since 2021.
Additionally, we continued to project steady population growth along with solid Aps customer growth. According to recent data from U S Census Bureau, Maricopa County has the largest population increase in the U S. In 2022 and led the nation in net domestic migration.
On the expense side O&M as a significant driver relative to the first quarter last year. This was primarily due to timing with the prior year, reflecting lower than normal first quarter O&M levels importantly, our O&M guidance range for the year remains unchanged, while we continue to strengthen the impacts of inflation we have this.
Strong company wide focus on cost management and maintain our goal of declining O&M per megawatt hour.
Interest expense was higher versus first quarter last year due to higher interest rates on higher total debt balances, though we maintain a limited portfolio of floating rate debt and have no debt maturities until mid 2024. Additionally from a liquidity perspective, we were very pleased to successfully complete the upsizing and extension of our credits.
Facilities out to 2028 in early April .
As a quick reminder, on pension it is well 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 the reduced volatility in the fixed income weighted portfolio. As we've previously stated we are expecting a headwind in 2023 and we saw this in the first.
Water with lower year over year, and non service credits, partially offset by lower service cost, which is reflected in O&M expense. We will continue to evaluate options for regulatory recovery of higher benefit expenses.
Our overall expectations for 2023 remain unchanged.
And our guidance of 5% to 7% long term earnings growth off the midpoint of weather normalized 2022 guidance remains intact. Our capital plan includes the investments necessary to reliably serve our rapidly growing service territory independent of any rate case outcome, and we continued to defer any potential equity issuance.
Until the resolution of the current rate case, we.
We look forward to continuing to execute our plan through 2023 and two the resolution of the rate case.
This concludes our prepared remarks, I will 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.
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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 Merrill Lynch. Your line is live.
Hi, Good morning. This is Darius on for Julian and thank you for taking the question.
Maybe just first one I ask.
Acknowledged that we have.
Haven't gotten beat staff testimony in the rate case, yet, but maybe.
Just looking at one of your peers. That's a couple of months ahead of you I think there was a proposal by the staffing that case to consider use of a mechanism that had previously been used by water utilities in lieu of a brand new renewable rider.
I was wondering if that's something that you guys have evaluated at all in your planning I know you have a proposed modification in there but are.
Are you, perhaps looking at what the staff proposed in that rate case.
It's starting to think about contingencies ahead of the staff testimony that's coming in a few weeks here.
Yeah, Darrin, we I mean, obviously, we follow those cases, it's pretty pretty closely.
Always open to looking at different alternatives I think.
In our case still focused on the kind of mechanisms that we currently have and that we've used before is probably the better path.
For us, but you know we're early we'll wait and see how the staff testimony. It comes in the Intervenor testimony comes in and then then we'll begin working from there.
Okay, certainly appreciate that and.
And just on your annual the drivers in the annual guidance for the year Youre still youre still guiding roughly flattish on adjusted O&M, obviously that was a bit of a.
Headwind in the quarter as we think about shaping for the remaining three quarters should we think of the.
The Delta there is more or less ratable in Q2.
Q2 through Q4 or.
Any particular ups and downs to it for the remainder of the year.
Sure Gary it's Andrew.
The most important thing I would say about the O&M profile for the year is that we remain on plan and so if you look at the year over year comparison, a lot of what Youre seeing there in the first quarter is is timing related where when you compare to first quarter of 2022, Youre seeing an uncharacteristically low.
O&M first quarter, if you look at the last three or four years and there is a confluence of things that drove last year to be lower than average you had.
The AMG credits from Palo Verde outage schedules and things like that that drive that but you're also really didn't see in the first quarter of last year.
Inflation in the way that we saw later in the area that we continue to see it this year and so that run rate of O&M that we ended up with for last year really didn't start until later in the year. When we were still thinking in the first quarter of last year that inflation was transitory it became a lot stickier and so the trend that we've that we've that we typically see seasonally throughout the year.
I think holds here around to O&M.
This quarter looked fairly characteristic for first quarter from an O&M perspective, we.
We certainly continue to focus on our lean initiatives.
Customer affordability opportunities on the O&M side in that declining on a per megawatt hour, but from a shaping perspective. This year. So far has looked like.
A relatively typical year last.
Last year happened to have and is driving that comparison in our in our chart in our deck to look like.
A drag which certainly in the scheme of the quarter it is year over year, but.
Against a unusual comparison from last year.
Okay, great. Thank you both very much I appreciate the color I'll turn it over here.
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Thank you. Your next question is coming from Shar <unk> from Guggenheim Partners. Your line is live.
Hi, guys its actually James Ward on for Shar, how are you hey.
Good how are you.
Doing well.
Looking forward to seeing you guys.
In a few weeks.
Oh actually youre not doing NGA I'm, sorry, that's happened over the last I'd just covered a bunch of OCC costs.
Youre, saying you.
Sure seeing you for a couple.
A couple of months, that's what I was thinking that alright.
Question, and Jackie has very glad that youre able to make it.
That's terrific.
So our first question is.
Earlier, this year and it's relating back to O&M, but Jordan.
Slightly different angle. The question that was just asked.
Earlier this year, we saw the stock come out with a recommendation.
Oh, I'm, sorry, ROA for us I'm, sorry, I'm getting mixed up here.
Recommendation of nine 6% ROE for Tucson electric and on May 22nd will be seen in the first round of staff and intervenor testimony filed in your case.
Based on what you have been seeing recently and I get that there are a few data points.
Are you thinking about ballpark expectations of what a reasonable ROE recommendation might be.
Yeah, I don't want to go into.
Kind of a ballpark, obviously I think a couple of things that are are are moving one as you know the court of appeals.
Did come in in our last case, I will say I think that $8 seven in the last case was very much an outlier.
And I believe that the commission and the parties have kind of seen the negative impacts that can happen. When you get a cost of capital that is that far outside of kind of industry norms. We did see in the court of appeals the 20 basis point.
Disallowance that had had been addressed by the commission that was reversed by the court.
So we're still waiting to see whether the appeals go up but I think that moves up to an $8 nine from the last case and then I do think it is fair to look at.
What youre seeing recommended for the other utilities.
The most important differentiator for us that will continue to emphasize as we worked through this case.
As the cost of capital from a risk profile for a utility like Tucson electric.
Has historically been 25 to 50 basis points lower than ours, because we operate Palo Verde.
So palo Verde, and immense benefit to customers, but it creates a higher risk profile, therefore, a higher cost of equity.
And that has historically been recognized by the commission. It wasn't in the last case and that was a point that we have tried to emphasize and so again, we will continue to emphasize that.
As we move forward here, but you know until we see the staff and intervenor testimony come in.
Here next month or you know in the next in the next little while.
Don't want to speculate on what we think is reasonable for there will work with what we get.
Totally fair understood sorry, I, just asked that one as well.
Originally wanted to ask was on O&M, so kind of following up on the prior question. As previously mentioned you continue to target declining O&M per megawatt hour despite inflationary pressures.
What level of inflation.
Are you assuming relative to that guidance targets when you said it.
And then as a.
Follow up how does an actual inflation been coming in by comparison and those are my questions. Thank you.
Sure Thanks, James and.
When you think about our O&M targets in absolute dollars for this year.
Guided to a range of $885 million to $905 million and that is.
Relative if you take the midpoint of that range, it's relatively flat with the.
O&M number from last year, excluding resin DSM expense, which was at 892. So just.
Just on that simply on a midpoint basis youre talking about.
Most of the inflation that we recognized last year trying to hold as flat as we can to that number and thats really the aim we saw inflation start to come into our operating environment over the course of last year and that was across O&M capital fuel, obviously as well and so on the O&M side.
We've really been focused on all of the call.
Cost efficiency customer affordability initiatives that we undertake and we certainly always look at those at the end of the year. After we've had the summer and make sure that we pulled the levers that the team knows that they have to get to that range. So we're.
We're expecting that the any further inflation and we've seen inflation in Phoenix.
Slow down.
On trend with the national slowdown inflation as the fed activities picked up still a higher level of inflation in our local operating environment than overall, but still relatively low inflation compared to some of the areas, where we're seeing people coming into the service territory from so we continue to monitor that inflation and theres areas.
You know around wages and other things that we were monitoring but we are.
We remain focused on our existing target, which is relatively flattish to last year at that midpoint.
Got it thank you very much.
Thank you. Your next question is coming from Alex <unk> from Mizuho Securities. Your line is live.
Hi, good morning.
Yes.
So many large customers coming online in the next couple of years, how do you think about the linearity of the long term EPS CAGR as we look through.
'twenty three 'twenty four and 'twenty five.
So.
I understand a lot of focus on the linearity of earnings we do have a.
Our rate case before us and that is certainly.
Critical contributor given we've been relatively flat on rates for the last five years. So that's a important contributor the sales growth.
Certainly is a factor that helps us to mitigate some of those O&M pressures and Thats why we are focused on O&M per megawatt hour.
As the inflationary measure.
Because we want to be kind of keep ourselves to account as the footprint that we have of customers within our service territory grows that we're not letting O&M drift upward with with that growing service territory, but the sales growth itself.
Is.
<unk> does have some large customers ramping up they are ramping up over the next several years and so that long term four five to six 5% sales growth range is dependent on the continued.
Optic of those large customers on the manufacturing and data center side over those years its not certainly the first phases of TSMC are big.
Initial impact, but there are a number of customers in that mix. The TSMC supply chain. The data centers that are contributing over the timeframe of our sales growth guidance range.
Okay understood and then just kind of circling back on the large customer side.
Do you think about your exposure to a potential economic slowdown potentially second half of this year or farther out given that so much of that investment is coming in and then is there a good way to think about sort of quantifying your exposure load growth, where for example, 50 basis points of load growth is worth 10 cents of EPS or something along those lines Yeah, Alex Let me.
Let me start now.
Let Andrew chime in as well I mean, one of the interesting differences that we've seen if you look at the Arizona market back in.
The last recession in 2007 timeframe, we're very exposed on housing construction and residential growth and so we were one of the hardest hit areas when that recession came in it was kind of us and I think Nevada were probably the two hardest hit regions.
The change that's happened since then it's been a really purposeful refocus on manufacturing and advanced manufacturing.
And that.
Maybe a little less exposed to the sort of near term.
If we see going into recession, a lot of these companies are making investments here very focused on the long term and TSMC again, that's a strategic investment in the United States. So I think that we have less exposure, obviously, a downturn can affect some of the timing, but when you look at the at the long term economic growth that's coming into the Phoenix region, a lot of them is.
Just being driven by the attractiveness of this market for advanced manufacturing.
And I think that that's going to be we're going to be more resilient certainly in the in the near term then if you look back to a prior recession.
Andrew you want to talk about maybe specific guidance sure, yes, and Alex also if you look at this this year in particular, we continue to monitor for signs of economic slowdown or the first quarter certainly showed.
That ramp up of those larger customers.
High growth contributed four 3%, which was pretty solid and in line with with.
The range that we have overall for the year, but.
But on the residential side and small C&I side, but really on the residential side, we continue to see despite.
That work from home trend being mature in fact, some people going back to the office, we saw a sizable uptick in usage per customer. This quarter. It was kind of the a full robust winter tourism season part time residents visitors to the valley here. So we continue to see strength in the economy. Those are the types of things that we that we.
Monitor within a given year or two.
Assess the health of the economy certainly is the inflation rate has started to come down here that's been a meaningful contributor.
From a customer growth is a big piece of that as well that 2% customer growth continuing to look at that.
Where the cost of living in Arizona remains affordable relative to areas, where the net migration is happening from which is particularly cities in California. That's another measure of economic vitality that we measure.
There is a rule of thumb that we tend to use around 1% of sales growth remember.
Remember the large C&I customers.
Come in at a lower margin. So if you think about 1% of C&I sales, it's less than $10 million thats in the $5 million to $10 million range of revenue from 1% of large C&I residential it's in the $25 million plus 1% growth annually and residential would be.
$25 million plus of incremental revenue.
Wonderful. Thanks, so much it's very helpful. Congrats on the quarter and good luck with the rest of the year, Jeff. Thanks. Thanks Charles.
Thank you. Your next question is coming from Travis Miller from Morningstar. Your line is live.
Thank you and good morning, everyone.
Hey, Travis you've just touched on a lot of what my question wasn't going to be but.
In terms of the difference between the electricity sales growth in the customer growth.
Longer term and again, you kind of mentioned this but thinking about the residential side more would you expect that customer growth rate and the electricity sales growth rate too.
Somewhat match each other or are there trends youre seeing in terms of those growth rates changing right either people, becoming more efficient or.
Maury you spur household something like that.
Yeah, Travis, we still see and Coupe can probably talk about the sort of specifics, but we still see very robust rooftop solar penetration I think we have the highest per capita rooftop solar.
In the in the U S outside of Hawaii.
And so that that tends to offset some of that on the residential.
Side the growth is still good. It also drives kind of multiplier effects as you get more C&I that comes into support those residential customers. So it's still certainly not a.
A net positive, but yes, it's hard to make it a linear equation.
That's typically what we see right yeah, just exactly right the 2% customer growth and that range is something that we see continuing given the factors that I talked about a lot of it is offset by energy efficiency as Jeff described.
Certainly look to the small C&I grown up around the new subdivisions and things as well the area that we're starting to monitor this year, we don't have the numbers rounded, but as EV electric vehicle penetration, that's one area where usage per customer on the residential side.
<unk> is forecasted to pick up over time.
So.
That EV penetration is an important part of the calculus around the residential because as we've kind of we're starting to see last year.
The work from home trend reached a point of saturation in fact as I mentioned, we've had people start going back to the office. So when you take that plus energy efficiency it eats into quite a bit of the customer growth. So it will be the impacts of things like <unk>. If you go out into the future.
Okay.
Does that difference between the sales growth and customer growth and how that evolves do you think that'll become more of an issue of discussion and the regulatory realm in terms of rate cases and rate design.
No Travis if you dig into our stuff Youll see were.
And it's kind of partly because of where we're located in the in the country, but if you look at us and Salt River project, who serves the other half of Phoenix.
We have the highest penetration of time of use rates, we have residential demand rates.
We're very far ahead of the curve nationally on rate design.
And so a lot of that is really what's incentive customers to do things, we have incredibly robust smart thermostat program.
We used to help us get through the summers from a demand response perspective, and so a lot of the stuff that you might be thinking in other states is going to start hitting the commission has hit the commission.
We're well ahead of a lot of our peers in those areas.
Okay perfect I appreciate the tough yep.
Okay.
Thank you that completes our Q&A session.
This concludes today's event you may disconnect at this time and have a wonderful day.
Thank you for your participation.
Yeah.
Okay.