Q2 2023 Pinnacle West Capital Corporation Earnings Call
Yes.
Good day, everyone and welcome to the Pinnacle West Capital Corporation, 2023 second quarter earnings Conference call.
At this time all participants have been placed on a listen only mode. If you have any questions or comments. During the presentation. You May press star one on your phone to enter the question queue at any time.
It is now my pleasure to turn the floor over to your host Amanda Ho Ma'am the floor is yours.
Thank you Matthew I would like to thank everyone for participating in this conference call and webcast to review our second quarter 2023 earnings recent developments and operating performance. Our speakers today will be our chairman and CEO , Jeff Gardner and our CFO , Andrew Cooper, Ted Geisler, Aps President Jacob Tullow Executive Vice President of operations and he was as far as the senior Vice President public.
<unk> 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 expectation and actual results may differ materially from expectations, our second quarter 2023 four.
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 through August 10th 2023, I will now turn the call over to Jeff Great. Thanks, Amanda. Thank you all for joining us today.
Although our second quarter financials were negatively impacted by significantly mild weather in June as well as higher operating expenses, we have updated our full year 2023 guidance to take into account. The settlement that was reached between Acs and the commission on the SCR matter.
Before Andrew goes through the details of our second quarter results and updates to our 2023 full year guidance I'll just provide a few updates on our recent operational and regulatory developments.
Starting with operations as we progress through the summer season, I'm very proud to say that our team continues to excel in delivering reliable service to our customers.
The poverty generating station successfully completed its planned refueling and maintenance outage for unit one on may 13th.
Additionally, we commissioned the remaining 60 megawatts of energy storage at our AZ Sun sites. So that's totals now 201 megawatts of Aps owned storage installed this year.
And 150 megawatts of Aps owned solar at the Agave solar facility. These are all valuable resources to help serve our customers through the summer season.
In fact, while the second quarter was marked by extremely mild weather.
Thank all of you probably know July certainly heat it up.
Our robust planning resource procurement efforts and our dedicated team have allowed us to provide exceptional service to our customers throughout this unprecedented heatwave.
Phoenix experienced a record number of consecutive days of over a 110 degrees shattering prior records for daytime highs for evening lows for days over 110 degrees.
And the Aps team served its customers with top tier reliability throughout it all.
In fact, we broke our previous peak demand record multiple times. This July reaching a new all time record on July 20th at nearly 8200 megawatts.
That's a 500 megawatt increase compared to our prior record that was set in 2020.
I want to recognize our operators and our field teams for doing such an exceptional job in making sure that customers continue to have reliable service through this unrelenting teeth.
Aps plans years in advance to continue serving customers with reliable and affordable energy our resource planners secure a diverse energy mix to meet demand like solar and wind power battery energy storage and our Aps operated Palo Verde generating station.
Which is still the largest nuclear plant in the U S and the country's largest producer of clean energy.
When temperatures caused demand to increase aps's strength and resilience comes from using flexible resources like natural gas to keep homes and businesses cool over long stretches of extreme heat.
Another important tool, but I want to highlight that we utilize our core rewards demand response program. It's in its fifth year of operation that program essentially operates as a virtual power plant.
Our customers provide over 110 megawatts of flexible clean capacity. The program connects nearly 80000 Aps customers with smart thermostat technology.
It helps them save money, while also playing an integral role in conserving energy when the demand on the electric grid is at its highest.
This partnership helps us ensure reliable uninterrupted service to our customers on the hottest Arizona days, while also assisting us on our journey to a 100% clean and carbon free electricity by 2050.
So you can see we've taken all of the above approach to provide the most affordable and reliable service when our customers need us the most and.
And as part of our vigorous planning, we recently issued an all source RFP for another 1000 megawatts to be online between 2026 and 2028.
We're seeking the best combination of resources to serve our customers reliable reliably while not sacrificing affordability and continuing to build towards our clean energy future.
Additionally, we continue to remain focused on providing exceptional customer service, our J D power GDP residential rankings for overall customer satisfaction have steadily improved over the past two years.
And I am proud to share that the latest J D. Residential 2023 second quarter results have placed us back in the first quartile compared to our peers.
Aps's strongest performing drivers in the latest survey, where customer care, both phone and digital power quality and reliability and corporate citizenship we.
We have made remarkable progress over the past few years moving from fourth quartile to first and that progress would not have happened without the dedication and commitment of our hard working employees across the company.
I look forward to continuing to fried exemplary service to our customers in the future turning to our regulatory update last quarter I spoke about the appeal of our last rate case, and the favorable court of appeals decision that.
The commission directed its legal staff to enter into negotiations with the company and in June We reached an agreement with the commission legal staff on how to implement that decision there.
The joint resolution was been approved it at the June open meeting and it created a court resolution surcharge that started on July the first.
We're pleased that we were able to reach an agreement with the commission in a reasonable and expeditious manner to resolve this issue and as I've mentioned previously the four corners power plant is a critically important reliability asset for the entire southwest.
And the investment in S. C ours was required to keep that plant running under federal law, Andrew will address the financial impacts from this decision here in a few minutes.
On a rate case, we are almost done with all rounds of written testimony are rejoinder testimony is due tomorrow.
Hearing is scheduled to begin on August 10, and.
And we look forward to working through that process in resolving this rate case in a timely and constructive manner. We made solid progress through the first half of this year, improving our customer experience enhancing our stakeholder relationships and executing on our regulatory matters there.
There's certainly more work to do but I think this is a good opportunity to acknowledge the teams dedication and early accomplishments here in 2023 and with that I'll turn the call over to Andrew.
Thank you, Jeff and thanks, again to everyone for joining us today.
This morning, we released our second quarter 2023 financial results I will first review those results, which were negatively impacted by extremely mild weather and provide some additional details on the various drivers for the quarter. I will also provide an update to full year 2023 guidance. We earned <unk> 94 per share this quarter.
Down 51 cents compared to the second quarter last year.
Weather specifically during the month of June was the primary driver for the lower year over year results June 2023 was the mildest since 2009 with an average daily temperatures slightly below 90 degrees. This resulted in a 25% year over year drag from weather compared to Q2 last year, which was which noted.
<unk> included an above average contribution from June 2020, twos, how weather higher O&M interest expense and depreciation and amortization and lower pension and OPEC non service credits, where other negative drivers, partially offset by higher transmission revenues and <unk> revenues.
O&M was 21, <unk> higher year over year or 14, excluding resin DSM, we have experienced year over year increases to most of our O&M categories due to inflation and high customer growth, we have seen inflationary impacts in areas, including chemicals materials insurance and wage rates.
The 14th Q2 headwind O&M associated with our generation fleet constitutes 10 cents and for the first half of the year generation fleet O&M has been a 21 sidetrack prior.
Prioritizing the needs of our generation fleet to ensure reliability for customers has been essential to our summer preparedness strategy. The importance of this prioritization was as clear as ever as our team successfully ran our fleet during the month of July .
In addition, as Jeff mentioned July weather was record breaking at similar to past years, the weather benefits have allowed us to flex up to derisk future spending.
Just on the O&M trends, we are seeing we are increasing our O&M guidance range for 2000 $23 million to $915 million to $935 million importantly, even with this update we anticipate our O&M per megawatt hour to be flat to last year, and we maintain our goal of declining O&M per megawatt hour into the future.
We continue to look for opportunities to create efficiencies reduce risk and keep our costs low to maintain affordable rates for our customers.
Turning now to customer growth, we continue to be in line with expectations customer growth remains at 2% for the second quarter. The fundamentals for customer growth remains strong in our service territory and Arizona continues to be a popular migration destination redfin.
Redfin Dot Com noted in May that Phoenix led the nation in housing markets. Its users were most interested in moving into the.
The cost of living in Arizona in the Phoenix Metro area still compare favorably to many western markets. So we continue to project steady population growth and corresponding Aps customer growth largely driven by net migrations.
However, weather normalized sales growth for the quarter was <unk>, 1% compared to last year, Although we continue to see steady C&I sales growth, which came in at two 2% for the second quarter. This year versus last year overall sales growth has been slower than originally anticipated we continue to monitor our extra high load factor.
Customers as they ramp up and in fact, Taiwan semiconductor recently announced a delay in the opening of their first chip factory with.
With a flat year over year sales growth in the quarter and slower ramp up of these larger customers. We are revising our sales growth guidance range to 2% to 4% for 2023.
Because sales from these larger customers contribute a lower margin the change to our sales growth guidance has a disproportionately smaller impact to earnings expectations over the longer term, we continue to forecast a strong contribution to sales growth from advanced manufacturing and other large customers, though the variable remains the speed of their ramp up.
Turning to our 2023 guidance for EPS with the approval by the commission of the joint resolution of the 2019 rate case appeal on July one we began collecting a corresponding surcharge with an annualized impact of approximately $52 $5 million. This surcharge includes both a prospective and hyster.
Oracle portion and is collected through a per kilowatt hour charge taken in all financial drivers into account, including this additional revenue July temperatures, but normalized weather thereafter anticipated lower sales growth in the higher O&M trends mentioned earlier, we now expect our new EPS guidance range to be $4 10.
To $4 30 per share for the year.
We look forward to continuing to execute on our strategy and on the next phases of our pending rate case process. This concludes our prepared remarks, I will now turn the call back over to the operator for questions.
Certainly everyone. 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 while posting 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.
Please hold while we poll for questions.
Your first question is coming from Julien Dumoulin Smith from Bank of America. Your line is live.
Okay.
Hey, guys. Good morning. This is Eric on for Julien. Thank you for taking the question just wanted to start off.
The rate case, if I could staff, obviously came out with a recent round of testimony and specifically the generation rider that you've proposed then revised during the course of the rate case I was wondering if you could comment on staff.
Views there and in the event that that rider is then ultimately supported by the commission in this rate case outcome, how that might affect your procurement slashed capital strategy going forward, yes.
Hey, Dara.
Jeff Let me let me start.
With kind of the context of the rider.
Came up in the Tucson electric.
Our rate case, ultimately didn't make it into the administrative law judge's recommendation that cases go into open meeting here pretty quickly.
We have filed that and we're going to continue to advocate for it because we think it's an appropriate way of addressing regulatory lag and you can see with just the growth that we're seeing the need for that.
Additional generation and need to have that balance between not just ppas, but some that we can that we can more directly control and really control the deployment of that capital.
That as well as the ability to find a mechanism that we can flow through the production tax credits is going to be it's going to be important. So we think there's good reasons to continue to advocate for it I think what youre seeing that is still modestly encouraging is that there is an interest from staff and understanding the value.
<unk>.
And the concept and so that's really what the hearing process I think is going to give us an opportunity to do is to advocate and explain why this makes sense in the context of where we are.
And I'd be more concerned if there was just a flat no. We're not interested and I think you can see from the testimony from the dialogue in the Tucson case that there is an interest in understanding it we're not quite there yet and I hope that we'll have an opportunity adhering to really explain why we see significant value in moving forward with this and not just coming back in.
<unk>, which is your other alternative is you come right back in on another rate case pretty quickly. If there is not a way to address this.
This kind of.
The regulatory lag that comes from getting those plants into service, but not into into rates sufficiently talk.
Maybe on the capital sure Darius it's Andrew.
To date going back the last rate case, we have been reluctant to bring forward our projects that had been cost competitive with the market and because of the the question around recovery and the SRV as Jeff talked about really would be an important tool to help us think about taking what's been less than maybe 20% of the megawatts that we have been procuring over the last call.
Her years and increase that number ultimately we're going to make the investments that we need to make for reliability and the two projects that are in our post test year plant that relate to our generation fleet, Jeff talked about those were commissioned this summer our agave solar project as well as the batteries at our AZ Sun sites. Those are projects that were commissioned for this summer and.
Those were really critical and at some of the developers we work with have supply chain delays in some of those challenges our ability to deliver to deliver I think has been highlighted through those post test. Your plants. So we will continue to look at ways to reduce lag.
And ultimately make the decisions that we need to make around capital from our perspective to make sure that we're delivering.
Each summer as we've seen these increasing peak demand numbers.
Great. Thank you for that detail I appreciate that one more if I could I just wanted to come back to the generation related O&M spending that Andrew highlighted in the opening remarks.
Specifically, how do you see that shaping up for the back half of the year just given the amount that you have to run the generation resources. Obviously during this extremely hot weather you had stated that there's sort of some additional catch up O&M. If you will in the latter part of the year and then related assuming the weather normalizes in 'twenty four.
Our or thereafter, do you see that as an opportunity to flex down that O&M in future periods.
Yes. They are so taking the first part of that so the guidance range that we updated today incorporates anticipated O&M kind of across the year and so we have seen in the first half of your absolute needs of the generation fleet and from this July .
Certainly be continued needs and so we have anticipated those and frankly have been part use the benefit of July whether to look at the rest of the year and think about what are the needs, we have and where the pressure points and.
If weather were to continue to be a factor for the rest of the year, absolutely, making sure that we can generate.
Support the generation fleet, both Palo Verde as well as.
Our traditional fleet.
It is definitely part of the calculus and so then when you think about weather for the rest of the year Post July which we've incorporated at this point and has been part of it part of strategically thinking about O&M every year at the end of the summer we look at our O&M opportunities set and risk set for the remainder of the year and into the next calendar year and think about.
Where we can flex our muscle around pull forwards de risking and so we will do that to the upside and downside as the year goes on we are comfortable with the new O&M range that we've set out based on where we are the decisions we've made effectively.
Conversations that we normally have in October once you've looked at the full full summer we're making those earlier so we're comfortable with the range that we're in and certainly as we have weather as we have continued wear and tear on our generation fleet we have.
Accommodated that within that within the current range.
Okay.
Okay, great. Thank you very much for that detail I'll pass it along here.
Yes.
Thank you. Your next question is coming from Alex <unk> from Mizuho. Your line is live.
Hi, good morning.
Yes.
So with the dual tailwind of new rates next year and the load increase that was expected. This year materializing more than 24, how should we think about the linearity of earnings in 'twenty, four 'twenty five and beyond.
Within the long term growth rate should we expect it to be at the higher end of the five to seven or should we think that there could potentially be more of a onetime step up in 'twenty four given coming out of the rate case.
Yes, Alex we are definitely focused on the tools that we have at our at our disposal to create more linear predictable earnings stream within that 5% to 7% growth rate and so we are.
We're comfortable with the 5% to 7% rate certainly will be updating all of the key drivers of our financial performance. After the rate case concludes.
Inevitably given the outcome of the 2019 rate case, and the financial reset their rate relief will be a meaningful.
A meaningful driver of our growth over the medium term.
Hard to avoid that fact, however, the work we're doing around how do we manage O&M within the context of whether from year to year, how do we push for more capital to be tracked. So we can create more rate gradualism for customers, but also more linearity for shareholders. Those are the levers within our control that we are trying to deliver within that long.
Term EPS growth rate range.
A little bit more of a predictable track within it ultimately doing the things that are within our control and managing costs as best we can.
Understood has there been any discussion internally about how to potentially think of a new base here for the long term growth rate given the increased clarity and potential step up we'll see following the resolution of the case later this year.
Yes, Alex that's all I think a conversation that we can have that after the rate case.
Ultimately over the long term, we want to be able to through linear earning stream create a long term earnings growth rate that isn't based on a base here that is a continue.
Continuous.
Product of more predictable less regulatory lag and so those are the things that we're focused on to create that sort of it becomes less about a specific base here, but as far as updating from our current 5% to 7% off 2022 weather normalized guidance. That's a conversation we can have after the rate case.
Alright. Thank you so much I'll leave it there.
Thanks Al.
Thank you. Your next question is coming from Paul Patterson from <unk> Associates. Your line is live.
Hey, good morning.
Profitable.
So.
I apologize if I just wanted to sort of just to follow up again on the rate case in the past you guys were thinking that was a potential that there'd be a settlement.
And I'm, just sort of wondering where things maybe stand with respect to that potential.
Given that we've had so many filings now and what happened yes.
Yes.
As we mentioned.
Just a.
A day away from filing rejoinder testimony, so you've got five rounds of testimony and the hearing scheduled.
To start.
In a week or so.
So the likelihood that a settlement would sort of come up from from there as it was low we continue and we always look for opportunities to narrow issues.
Or for opportunities to engage in a conversation around that but I think right now it's.
It certainly seems like we're moving towards CRE I will say if.
If you've been following the testimony and the intervenors in the positions on this case that this is.
Much more what I call it traditional rate case, its a lot more.
Fewer issues.
The more traditional things that are coming so I think that that is a positive in terms of where the cases has evolved.
Yes.
Notable change from from the last one I agree with that.
Wanted to also just through basketball.
I haven't I've ever been to Arizona in the summer and.
Theres a lot of national media coverage of the recent heat wave.
And I don't know, whether or not it's being over dramatized or not but it sounds like.
Extreme and I'm just wondering.
Sort of your take on it because you guys are.
You guys are are needed so to speak or close to it.
<unk>.
And through B I know you mentioned you know it doesn't seem to have impacted your outlook for growth.
Growth, but just I mean, you don't need to go and sort of check all of those.
The list of sort of horrors that they're describing in terms of people getting burnt by just sitting on the sidewalk or you know what I'm talking about like the cactus is dying kind of thing could you sort of just give a little more perspective on that yes.
It's clearly a concern.
When you get into prolonged stretches of this we've had I mean, we had a hotter day.
A number of years ago, but I think theres still record high day was was actually quite a while ago, but but it's the persistence of this heatwave that I think is really sort of challenge the policymakers, but the important thing to remember is that the heat in the desert and the summer is not new.
To us and so there have been certainly cases, where <unk> had multiple days in the north of 115, where you get the same kind of issues about being safe outside and making sure that you don't.
You don't make contact with the pavement.
The most important thing I think that the policymakers here doing is doing a nice job of is trying to address the sheltered population. We've got for example, Paul and Air Conditioner program, where we can help support through the foundation for senior living people getting air conditioner repairs, because those are where it gets.
Really dangerous if you're just in a home with an air conditioner.
People are kind of used to this I think but it's certainly something that you need to look at from a resilience standpoint, and ensuring that as you continue to see longer periods of hot weather that we've got the resilience to be able to to.
To navigate that but you know.
People are still moving here, it's still a very.
He is still the fastest growing county in the U S. So I don't think the heat the tourism and it's kind of similar to what you deal within the in the northeast and the.
Upper Midwest, where you've got the really cold winters, you just got to know how to adapt to it.
Okay, well thanks, so much.
Yes.
Yeah.
Thank you. Your next question is coming from Shar <unk> from Guggenheim Partners. Your line is live.
Hi, guys its James <unk> on for Shar, how are you.
Hey, good Jameson.
Hey.
Just a quick one on the pension front.
Leaving 2023 aside for the moment.
If we were to assume that the final order reflects the pension related adjustments from your rebuttal testimony just thinking about the roughly $20 million or so improvement there what impact would you expect that to have going forward on pension related EPS drag just thinking about the amortization.
And outside of the corridor rule from last year's impact really.
Yes, James So just just to step back we do have that drag now from.
The end of 2022, when we took into account the <unk>.
<unk> increase in interest rates in 2002, which affect both our fixed income portfolio as well as the interest costs associated with our pension so we have that drag.
Which year over year is in the 30, some odd percent range and you see it this quarter as you've seen in prior quarters as well.
One of the things we did.
Say to the investment community as we wanted to reduce the lag associated with our pension expense and more properly reflect the test year expands.
Expense, because we didn't know those numbers when we filed our direct case and so on rebuttal as you alluded to we did.
File to take better account of where the tester should be based on averaging the mark to market into 'twenty, one mark to market into 'twenty, two and as you said that's about a 20 million dollar benefit when it comes to the impact there that is that isn't going to be something that flows through pension accounting that somebody is going to flow through the revenue requirement and through customer charges, so that will be.
If it is approved and we're going to continue to advocate for it through the case, our staff did not express support from it and Theyre Surrebuttal testimony, but it's something we're going to continue to push for that would just be reflected in the revenue requirement like everything else. However at the same time as we do every year at the end of the or we're going to have to reevaluate our pension expenses based on.
The unexpected market returns where discount rates are at that point and what May as you said pass through the corridor and be considered material from the perspective of beginning to amortize, but the drag from 'twenty two will remain and the key is to reduce regulatory lag on the recovery of that.
Through the adjustments and normalization request that we made on rebuttal.
Got it perfect. Thank you Andrew I appreciate the color.
Sure. Thanks Joseph.
Thank you once again, everyone. If you have any questions or comments. Please press Star then one on your phone. Your next question is coming from Julien Dumoulin Smith from Bank of America. Your line is live.
Okay.
Hey, guys. Its Darius back on just one quick follow up if I could just wanted to ask about the change in your guidance relative to the effective tax rate. It looked like it ticked up a little bit and now there's a band versus previously it was a point estimate just wondering what drove that.
Yeah. It did areas very perceptive. So what happened is in the first quarter when we set guidance at <unk>.
It was just slightly below 11% effective tax rate now or at least 12 to 12, five and if you recall when we set a lower effective tax rate was based on our anticipated in service date of projects that generate production tax credits, namely the agave project.
And so the higher tax rate now reflects our better estimate of the in service date of the project.
Okay, great. Thanks, so much for clarifying.
Thanks Darius.
Thank you that completes 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.
Okay.