Q3 2023 Pinnacle West Capital Corporation Earnings Call

Speaker 1: Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2023 third quarter earnings conference call.

Good day, everyone and welcome to the Pinnacle West Capital Corporation, 2023 third quarter earnings conference call at.

Speaker 1: 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.

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.

Speaker 1: It is now my pleasure to turn the floor over to your host, Amanda Ho. Man the floor's yours.

It is now my pleasure to turn the floor over to your host Amanda Ho Ma'am the floor is yours.

Speaker 2: Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast review our third quarter 2023 earnings, recent developments on operating performance. Our speakers today will be our chairman and CEO , Jeff Golnar and our CFO Andrew.

Thank you Matthew I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2023 earnings recent developments and operating performance. Our speakers today will be our chairman and CEO, Jeff Gold here and our CFO, Andrew Cooper, Ted Geisler, a P. S President Jacob Tetlow Executive Vice President of operations and who they are.

Speaker 2: Ted Geyser, APS president, Jacob Tedlow, executive vice president of operations, and Jose as bar the senior vice president of public policy are also here.

As a senior Vice President 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 third.

Speaker 2: 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 four of those statements based on current expectations and actual results made differ materially from expectations.

Speaker 2: Our third quarter 2023 Form 10-Q was filed this morning. Please refer to that document for forward looking statements cautionary language, as well as risk factors and mDNA sections which identify risk and uncertainties that could cause actual results to differ materially from those contained in our.

Quarter 2023 Form 10-Q was filed this morning, please refer to that document for forward looking statements cautionary language as well as 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 days.

Speaker 2: A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through November 9th, 2000.

It will also be available by telephone through November nine 2023, I will now turn the call over to Jeff Great. Thanks, Amanda and thank you all for joining US today, we continue to execute well on our operations performance and financial management as part of my operations update I'll share with you our success in managing through a record breaking summer in the valley.

Speaker 3: I will not turn the call over to guests. Great, thanks Amanda. And thank you all for joining us today. We continue to execute well on our operations performance and financial management as part of my operations update. I'll share with you our success in managing through a record breaking summer in the valley and reliably serving our customers when they needed us the most.

And reliably serving our customers when they needed us the most.

Speaker 3: I also provide an update on our pending rate case and other regulatory filings. As Andrew will explain, our earnings expectations for the year on track to meet our guidance range that we recently updated in the second quarter.

Also provide an update on our pending rate cases, and other regulatory filings as Andrew will explain our earnings expectations for the year on track to meet our guidance range that we recently updated in the second quarter.

Speaker 3: First, I want to recognize our operations and field teams for doing an exceptional job maintaining reliable service for our customers this summer.

First I want to recognize our operations and field teams for doing an exceptional job maintaining reliable service for our customers. This summer.

Speaker 3: July was just one day short of an entire month of 110 plus degrees, and August did not provide much to reprieve. We ended the summer with 55 days of 110 plus degrees, and 36 days of overnight lows above 90 degrees.

July was just one day short of an entire month of 110 plus degrees and August not provide much repreve. We entered the summer with 55 days of 110, plus degrees and 36 days of overnight lows above 90 degrees.

Speaker 3: During this period, our generation fleet performed extremely well and was available when our customers critically needed the power. Our careful long-term planning for resource adequacy combined with equipment maintenance programs and innovative customer demand side programs proved beneficial throughout the summer.

During this period, our generation fleet performed extremely well and was available when our customers critically needed to power. Our careful long term planning for resource adequacy combined with equipment maintenance programs and innovative customer demand side programs proved beneficial throughout the summer.

Speaker 3: APS set five new peak demand records during the month of July , ultimately reaching 8,162 megawatts on July 15.

<unk> Aps that five new peak demand records during the month of July ultimately, reaching 8162 megawatts on July 15th.

Speaker 3: That figure's over 500 megawatts higher than our last peak demand that was set in August of 2020.

That figure is over 500 megawatts higher than our last peak demand that was set in August of 2020.

Speaker 3: Our baseload and fast ramping assets, including Four Corners, Ocotillo, and Palo Verde all performed well. Our non-nuclear generation fleet's equivalent availability factor, which is the percentage of time that a generation unit is available and ready to perform when called upon, was 93.4% from June through September .

Our baseload and fast ramping assets, including four corners Okta, you owe in Palo Verde, all performed well our non nuclear generation fleets equivalent availability factor, which is the percentage of time that a generation units available and ready to perform when called upon was 93, 4% from June through September.

Speaker 3: In addition, we were extremely pleased to have our Gavi Solar Facilities and our AZ Sun batteries online and available to serve customers.

In addition, we were extremely pleased to have our agave solar facilities in our AZ Sun batteries online and available to serve customers.

Speaker 3: Finally, Palo Verde Generating Station's capacity factor for the same time frame was 99%.

Finally, Palo Verde generating stations capacity factor for the same timeframe was 99%.

Speaker 3: With the successful completion of the summer run, Palo Verde Unit 1 has entered its planned refueling outage on October the 7th.

With the successful completion of the summer run Palo Verde unit. One has entered its planned refueling outage on October the seventh.

Speaker 3: Not only were our generation plants there when we needed them, our customers were as well. Customers participating in APS's Cool Rewards Program helped create grid capacity while earning bill credits for voluntarily reducing their energy.

Not only were our generation plants, there when we needed them our customers were as well customers participating in Aps's cool rewards program help create grid capacity, while earning bill credits for voluntarily reducing their energy use.

Speaker 3: A community of more than 58,000 customers and about 80,000 smart thermostats created a virtual power plant to save energy during the peak hours of the summer.

Immunity of more than 58000 customers and about 80000, smart thermostats created a virtual power plant to save energy during the peak hours of the summer.

Speaker 3: This year, participating customers can serve the record 135 megawatts of power, the equivalent of a peak-

This year participating customers conserved a record 135 megawatts of power or the equivalent of a peaking unit.

Speaker 3: APS's cool rewards is the cornerstone of our virtual power plant, which is rapidly approaching 200 megawatts in participation and will be an important part of our long-term resource planning strategy.

Aps's cool rewards is the cornerstone of our virtual power plant, which is rapidly approaching 200 megawatts in participation and will be an important part of our long term resource planning strategy. We will continue to expand this resource in these important partnerships with our customers as we continue our journey to 100% clean carbon free electricity by 2050.

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Long term planning has been key to providing reliable service in fact, we just filed our integrated resource plan or IOP with the Arizona Corporation Commission yesterday outlining our resource needs for the next 15 years, we're expecting strong customer demand growth. During this period and have outlined the resources necessary to maintain a <unk>.

Portable and reliable service for our customers.

Speaker 3: We anticipate that a variety of resource types will be important in serving this period of robust customer growth and look forward to partnering with customers, developers, and stakeholders on bringing these technologies online.

We anticipate that a variety of resource types will be important in serving this period of robust customer growth and look forward to partnering with customers developers and stakeholders on bringing these technologies online.

Speaker 3: While the IRP does not specify ownership type, we are committed to continuing our competitive all-source RFP process, which will yield a blend of PPA and ownership projects.

While the IOP does not specify ownership type we are committed to continuing our competitive all source RFP process, which will yield a blend of PPA and ownership projects.

Speaker 3: The IRP includes a variety of scenarios, but our preferred scenario identifies a diverse blend of technologies.

The IOP includes a variety of scenarios, but our preferred scenario identifies a diverse blend of technologies to secure a reliable grid, while maintaining a strong focus on customer affordability and this scenario also achieves our clean energy goals of 65% carbon free by 2030.

Speaker 3: reliable grid while maintaining a strong focus on customer affordability. And this scenario also achieves our clean energy goals of 65% carbon free by 2030.

Speaker 3: With the extreme weather that we experience each summer, remains as important as ever to continue assisting our communities through our heat release support programs. APS partners with local community organizations to aid the state's most vulnerable population.

With the extreme weather that we experienced each summer remains as important as ever to continue assisting our communities through our heat released support programs.

<unk> partners with local community organizations to aid the state's most vulnerable populations. This support includes a collaboration with foundation for senior living offering emergency repair replacement of AC systems during the hot summer months.

Speaker 3: This support includes a collaboration with the Foundation for Senior Living, offering emergency repair or replacement of AC systems during the hot summer months.

Speaker 3: The Salvation Army's network of 18 cooling and hydration stations across Arizona an emergency shelter and homeless prevention program and partnership with St. Vincent de Paul and a new partnership with Solari 211 and LFT to provide eligible air zones with free rides to cooling shelter.

The Salvation Army his network of 18 cooling and hydration stations across Arizona.

An emergency shelter and homeless prevention program in partnership with St. Vincent Depaul and a new partnership with Solari 211, and lift to provide eligible Arizona with free rides to cooling shelters.

Speaker 3: These are just a few examples of our efforts to collaborate for the benefit of our customers and communities, and I'm pleased to share that APS was recently recognized with the Innovative Corporate Philanthropy Award by the Phoenix Business Journal for these partnerships and programs aimed at providing heat relief to vulnerable individuals and customers.

These are just a few examples of our efforts to collaborate for the benefit of our customers and communities and I'm pleased to share that Aps was recently recognized with the innovative corporate Philanthropy award by the Phoenix business Journal for these partnerships and programs aimed at providing heat relief to vulnerable individuals' and customers.

Speaker 3: I'm also happy to share that we've completed our labor negotiations with our local IBW and have a newly ratified agreement in effect. We work hard to build a collaborative relationship with our labor union employees, and I'm grateful that we've been able to reach an agreement that allows us to continue to serve our customers and retain top talent.

I'm also happy to share that we've completed our labor negotiations with our local IBEW and havent newly ratified agreement in effect, we've worked hard to build a collaborative relationship with our labor Union employees.

I'm grateful that we've been able to reach an agreement that allows us to continue to serve our customers and retain top talent.

Speaker 3: Finally, our customer care center was ranked as the top care center amongst our peers so far through the third quarter of this year as rated by our customers in the JD Power Electric Customer Satisfaction Study.

Finally, our customer care center was ranked as the top care center amongst our peers. So far through the third quarter of this year as rated by our customers in the J D power electric customer satisfaction study.

Speaker 3: And overall, our customer satisfaction is rated by customers through JD Power Remain Strong. I'm extremely proud of our employees, our progress so far, and look forward to closing out the year strong.

And overall, our customer satisfaction as rated by customers through J D power remains strong.

Extremely proud of our employees our progress so far and look forward to closing out the year strong.

Speaker 3: Turning to our rate case, after 24 days of hearings, we wrapped up on October 3rd, and the parties are now in the briefing period. Initial briefs are due November 6th, with reply briefs due November 21st. We expect the administrative law judge to issue her recommended opinion and order later this year, possibly early next year, with it being placed on an open meeting agenda shortly thereafter.

Turning to our rate case after 24 days of hearings, we wrapped up on October 3rd and the parties are now in the briefing period initial briefs are due November six with reply briefs due November 'twenty one.

We expect the administrative law judge to issue here, a recommended opinion and order later this year, possibly early next year with it being placed on an open meeting agenda. Shortly thereafter.

Speaker 3: We look forward to completing our race case in a constructive manner while securing the cost recovery that's necessary to enable continued growth of our electric grid and to support Arizona's growing economy.

We look forward to completing our rate case in a constructive manner, while securing the cost recovery that's necessary to enable continued growth of our electric grid and to support Arizona's growing economy.

Speaker 3: As we look to wrap up 2023, our focus and priorities remain on executing our mission of providing clean, reliable, and affordable service to our customers. I want to thank you all for your time today and I'll turn over to you. Thank you, Jeff.

As we look to wrap up 2023, our focus and priorities remain on executing our mission of providing clean reliable and affordable service to our customers I want to thank you all for your time today and I'll turn it over.

Thank you, Jeff and thanks, again to everyone for joining us.

Speaker 4: Earlier today, we released our third quarter 2023 financial results. I will review those results which were positively impacted by weather and provide additional detail on the various drivers to the quarter.

Earlier today, we released our third quarter 2023 of the financial results I will review those results, which were positively impacted by weather and provide additional detail on the various drivers for the quarter.

Speaker 4: We earned $3.50 per share this quarter, an increase of $0.62 compared to the third quarter last year. As Jeff mentioned,

We earned $3 50 per share this quarter, an increase of 62 compared to the third quarter last year.

As Jeff mentioned, we experienced record breaking summer heat so weather was by far the largest driver for the higher year over year results. In fact, the number of residential cooling degree days, which is the utilities measure of the effects of weather increased more than 28% over the same period, a year ago and were 32% higher than historical 10 year.

Speaker 4: So weather was by far the largest driver for the higher year-over-year results.

Speaker 4: In fact, the number of residential cooling degree days, which is a utility's measure of the effects of weather, increased more than 28% over the same period a year ago, and we're 32% higher than historical 10-year average.

Speaker 4: Residential coin-degree days to the month of July were the highest of any year since data tracking began in 1974. And August recorded the second highest coin-degree days for the month behind only August of 2020.

Averages.

Residential cooling degree days for the month of July were the highest of any year since data tracking began in 1974 and August recorded the second highest client degree days for the month behind only August of 2020.

Speaker 4: This resulted in a 38 cent benefit from weather versus third quarter last year, which itself was slightly warmer.

This resulted in a 38% benefit from weather versus third quarter last year, which itself was slightly warmer than normal.

Speaker 4: Savorable surcharge income through both our LFCR and the new surcharge related to the 2019 rate case appeal out.

Favorable surcharge income through both our LCR and the new surcharge related to the 2019 rate case appeal outcome income.

Speaker 4: Income tax items and other net were also positive drivers, partially offset by higher interest, higher depreciation and amortization, and lower pension and OPEB non-service credit.

Income tax items and other net were also positive drivers, partially offset by higher interest and higher depreciation and amortization and lower pension and non service credits.

Speaker 4: Our income tax benefit is largely due to the timing of certain tax items being recognized through the effect of tax rates.

Our income tax benefit is largely due to the timing of certain tax items being recognized through the effective tax rate Q.

Speaker 4: Q3 income taxes were also favorably impacted by the investment tax credit amortization from our Arizona Sun Battery Facilities and production tax credits from our Gobi Solar Facilities.

Q3 income taxes were also favorably impacted by the investment tax credit amortization from our Arizona and battery facilities and production tax credits from our <unk> solar facility.

Speaker 4: Turning to customer growth in the third quarter, it came in at 2%, which is right at the midpoint of our 1.5 to 2.5% guidance range.

Turning to customer growth in the third quarter. It came in at 2%, which is right at the midpoint of our one five to two 5% guidance range, Arizona remains an attractive destination for population in migration and for economic development.

Speaker 4: Arizona remains an attractive destination for population migration and for economic development.

Speaker 4: APS was honored in the September issue of site selection mag.

Yes was honored in the September issue of site selection magazine as one of the top utilities in economic development based on corporate end user project investment and affiliated job creation.

Speaker 4: as one of the top utilities in economic development based on corporate end user projects investments and affiliated job creation.

Speaker 4: Our weather normalized sales growth was flat in the third quarter compared to last year. For the quarter, residential sales were down 1.9% on lower weather normalized customer usage, but our strong CNI sales growth continued, coming in at 2.2% to the quarter, and is now at 2.8% 500 subs and 10 1ting schemes ?paha. First year today.

Our weather normalized sales growth was flat in the third quarter compared to last year for the quarter residential sales were down one 9% on lower weather normalized customer usage, but our strong C&I sales growth continued coming in at two 2% for the quarter and is now at two 8%.

Through three quarters year to date.

Speaker 4: Due to the weaker weather and normalized residential sales, we are adjusting our sales growth guidance for the year to 1 to 3%. While keeping our long-term sales growth guidance at 4.5 to 6.5.

Due to the weaker weather normalized residential sales we are adjusting our sales growth guidance for the year 212, 3%, while keeping our long term sales growth guidance at four five to six 5%.

Speaker 4: Turning to O&M, this quarter came in slightly lower than last.

Turning to O&M this quarter came in slightly lower than last year. However.

Speaker 4: However, we continue to see pressures in ONM, both from inflation, as well as increases in cost incurred to serve the significant growth in our service terms.

However, we continue to see pressures in O&M, both from inflation as well as increases in costs incurred to serve the significant growth in our service territory. We continue to look for opportunities to reduce risk and find efficiencies that keep our costs low and maintaining customer rate affordability, we raised our O&M guidance last quarter.

Speaker 4: We continue to look for opportunities to reduce risk and find efficiencies that keep our costs slow and maintain customer rate affordability. We raised our O&M guidance last quarter and are reaffirming it now while continuing to target O&M permit what hour declines over the long term.

And are reaffirming it now while continuing to target O&M per megawatt hour declines over the long term <unk>.

Speaker 4: Interest expense remains a drag on earnings as the Federal Reserve continues to combat inflation through higher rates, and they have signaled that higher rates will likely persist.

Interest expense remains a drag on earnings as the Federal reserve continues to combat inflation through higher rates and they have signaled that higher rates will likely persist.

Speaker 4: This is expected to impact future debt finance and refine.

This is expected to impact future debt financings and refinancings with that said I will note. We only have a single fixed rate maturity of $250 million in 2024, and we will continue to closely monitor our financing needs.

Speaker 4: With that said, I will note we only have a single fixed-straight maturity of $250 million in 2024. And we will continue to closely monitor our finance.

Speaker 4: Recently, our board approved a 1.7% increase in our quarterly dividend. We are proud to continue our track record of steady dividend growth and are confident in our intention to grow back into our 65 to 75% dividend payout ratio target over the long term.

Recently, our board approved a one 7% increase in our quarterly dividend. We are proud to continue our track record of steady dividend growth and are confident in our intention to grow back into our 65% to 75% dividend payout ratio target over the long term.

Speaker 4: Training to CAPEX, we have raised our guidance for 2023 from $1.67 billion to $1.8 billion. This increases due to distribution investments needed to serve our growing service territory and generation investments to support the reliability of our fleet.

Turning to Capex, we have raised our guidance for 2023 from $1 67 billion to $1 $8 billion. This increase is due to the distribution investments needed to serve our growing service territory and generation investments support the reliability of our fleet. This higher capex level also includes <unk>.

Speaker 4: The tire cat-backed level also includes increases in transmission spend as we continue to make key investments in our FERC jurisdiction high voltage.

Increases in transmission spend as we continue to make key investments in our FERC jurisdictional high voltage system. We now expect 2023 transmission capital within our regulated footprint and a spend level nearly 50% higher than last year.

Speaker 4: We now expect 2023 transmission capital within our regulated footprint at a spend level nearly 50% higher than last year.

Speaker 4: Finally, I'd like to reiterate the impact weather has had on our financial outlook for the year. Taking both the mild spring weather of the second quarter and extremely hot summer weather of the third quarter into consideration, we continue to guide to our $4.10 to $4.30 per share earnings guidance range for the year.

Finally, I'd like to reiterate the impact weather has had on our financial outlook for the year, taking both the mild spring weather of the second quarter, an extremely hot summer weather of the third quarter into consideration, we continue to guide to a $4 10 to.

To $4 30 per share earnings guidance range for the year.

With a rate case hearings concluded we look forward to continuing to execute on our strategy as we await the issuance of the recommended opinion order and the final decision.

Speaker 4: This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

This concludes our prepared remarks, I will now turn the call back over to the operator for questions.

Speaker 1: Certainly, everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star one on your phone at this time.

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.

Speaker 1: We do ask the while posing your question, please pick up your hand-fed if you're listening on speakerphone to provide optimum sound quality.

We do have to while posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.

Speaker 1: Once again, if you have any questions or comments, please press star 1 on your phone.

Once again, if you have any questions or comments. Please press star one on your phone.

Speaker 1: Your first question is coming from Shar Perusa from Guggenheim Partners. Your line is live.

Your first question is coming from Shar <unk> from Guggenheim Partners. Your line is live.

Hey, guys good morning.

Good morning.

Speaker 5: Yes. So the, um, chapter trans canyon, when under the DOE program, and obviously it's a large line, so 14 miles, you taught up to Nevada. Can you just talk about any timing scale next step?

Yes so.

Chuck the Trans Canyon when under the Doe program I mean, obviously, it's a large line in 2014 miles, Utah and Nevada can you just talk about any timing scale next steps and sort of how to think about opportunities like that relative to the current capex guidance.

And there's obviously other needs in the region. So curious to hear if you're seeing more announcements like this thanks.

Speaker 3: Yeah, I think that was one of three announcements that was made by the DOE. And there's another one that's in the region here that we're not off with.

Sure I think that was one of the three announcements that was made by the Doj and there is another one that's in the region here.

We're not we're not involved with but.

Speaker 3: That one this line, as you know, is a is a joint project that we've been working on for a while with Berkshire Hathaway This DOE announcement is is essentially a de-risking Opportunity, so it's certainly positive for the project, but that project still quite a ways out It is core to our business and that it's transmission But given that this is at a an unregulated affiliate at Trans Canyon It would be more project finance

That one this line is.

As of Joy.

Projects that we've been working on for a while with Berkshire Hathaway.

This deal announcement is essentially a de risking opportunity. So it's certainly positive for the project, but that project is still quite a ways out it is core to our business and that its transmission, but given that this is at our unregulated affiliates at Trans Canyon.

It would be more project financed.

Speaker 3: And so it is a little different than the core transmission at the utility that we're talking about, which is again where we tend to look mostly at the investment opportunities, but certainly something that we want to continue to to look at. But it is a ways out.

And so it is a little different than the core transmission at the utility that we're talking about which is again, where we tend to look mostly at the investment opportunities, but certainly something that we want to continue to.

To look at but it is a ways out.

Speaker 5: Got it. All right, perfect. And then obviously just quickly to jump in the catbacks is no little bull and you raised it some of, you know, obviously at the tail end of the year. Could we see similar increases to 24 and 25 catbacks in future updates or was this year's increase the one off? You're still kind of projecting similar rate base right now in the 25 time frames. I guess how do we think about this?

Got it alright, perfect and then obviously just quickly jumping to Capex is notable and you raised it somewhat obviously at the tail end of the year.

Could we see similar increases to 2025 capex in future updates or was this year's increase a one off.

Kind of projecting similar rate base right now in the 25 timeframe. So I guess, how do we think about the cadence.

Speaker 4: Yeah, sure. Hi, it's Andrew. Yeah, so we did raise CapEx for the year by $130 million.

Yeah sure Hi, it's Andrew.

Yes, so hey, it did raise capex for the year by $130 million.

Speaker 4: This was really looking at the needs for the year, independent of any potential rate case outcome and how generation could be addressed under a tracker. There were needs around the existing fleet and we identified those on the distribution side. We continued to see customer growth and frankly some of the equipment that we need to acquire to serve that growth, cost me more in the current environment.

This was really looking at the needs for the year independent of any potential rate case outcome and how are you generation could be <unk>.

Dressed under our tracker.

The needs around the existing fleet and we identified those on the distribution side, we continue to see customer growth and frankly, some of the equipment that we need to acquire to serve that growth costing more in the current environment I would say the area that really were not going to be able to provide an update on capex.

Speaker 4: I'd say the area that really, you know, we're not going to be able to provide an update on CapEx out past this year until after we get through the rate case, but I'd say the one trend that I think is critical to highlight, when you think about where the real transmission opportunities begin for us, it's within our regulated framework.

Next I'll pass this year until after we get through the rate case, but I'd say the one trend that I think is critical to highlight when you think about where the real transmission opportunities begin for us it's within our regulated footprint and so that additional $55 million that we're spending on our FERC transmission.

Speaker 4: And so that additional 55 million that we're spending on our fur transmission.

Speaker 4: assets this year, I think is reflective of a trend that we've seen over the last few years of continuing to lean in there.

Assets. This year I think is reflective of a trend that we've seen over the last few years of continuing to lean in there.

Speaker 4: There's a massive need in the transmission system. We have a formula rate and a competitive ROE. And so that's an area where we're gonna expect to continue to lean in regardless of rate case outcome and need around catbacks going forward. But the need here was discrete to identify needs in 2023 and we'll be able to provide enough.

There is a massive need in the transmission system, we have a formula rate and a competitive Roe and.

And so that's an area, where we're going to expect to continue to lean in regardless of rate case outcome in and you'd around capex going forward, but the need here was discrete to identify needs in 2023, and we will be able to provide an update.

Speaker 4: for, you know, 24 and beyond when we come out of the race.

For 24 and beyond when we come out of the rate case.

Speaker 3: Great. Looking forward to that. Thank you guys. That's all I had. Appreciate it. Yep. Thanks, sir.

Great looking forward to that thank you guys. That's all I had appreciate it the FHA.

Speaker 1: Thank you. Your next question is coming from Nicholas Campanella from Barclays. Your line is live.

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Thank you. Your next question is coming from Nicholas Campanella from Barclays. Your line is live.

Speaker 6: Hey, good morning everyone. Can you hear me? Okay. Yep. Hey, good morning. Good morning. So, I just wanted to ask on on pension. Could you just give us a sense on on how that's performing versus.

Hey, good morning, everyone can you hear me okay.

Hey, good morning, good morning, So I just wanted to ask on on pension could you just give us a sense on how that's performing versus.

Speaker 6: you know, targeted returns year to date and just appreciating appreciating that, you know, recapture of a pension is only partial because the way that the test year in the rate case is structured. Should we be thinking about a continued benefit or headwind into 24 here. Anything that you could quantify would be helpful as we think 24. Thanks.

Targeted returns year to date, and just appreciating appreciating that recapture of pension is only partially because of the way that the test year in the rate case is structured.

Should we be thinking about.

Continued benefit or headwind into 2000 and for here.

Anything that you can quantify would be helpful. As we think the 24. Thanks.

Speaker 4: Sure, Nick. So I guess just from the outset, I would I would say that, you know, we're really committed to a liability driven strategy. And I've said it many times before. We're primarily fixed income invested, about 80 percent of our portfolio. And it's meant to match up the asset liabilities so that our funded status remains strong. Because from a investor value proposition perspective, I think over the long term.

Sure Nick.

So I guess just from the outset.

I would say that we're really committed to a liability driven strategy and I've said it many times before.

Primarily fixed income invested about 80% of our portfolio and it's meant to match up the asset and liabilities. So that our funded status remains strong because from a investor value proposition perspective, I think over the long term.

Speaker 4: having to mitigate through the strategy, the need to go out to the market and raise external capels to fund the pension, that is what we do not want to do. And so we're focused on funded spatters.

Having to mitigate through the strategy the need to go out to the market and raise external capital to fund the pension that is what we do not want to do and so we're focused on funded status.

Speaker 4: for that reason. Fixed income returns have continued to be challenged this year. When it comes to 2024, we're not really in a position today to give an update because we do only revalue the assets and liabilities at the end of the year. And so as you'll recall from prior years, we look at actuarial gains and losses in a relative to the expected return at your end.

For that reason fixed income returns have continued to be challenged this year. When it comes to 2024, you were not related position today.

To give an update because we do only revalued the assets and liabilities at the end of the year and so as you'll recall from prior years, we look at actuarial gains and losses relative to the expected return at year end as they are material and we measure that through what is known as a quarter test which is the most common.

Speaker 4: and through material and we measure that through what is known as the corridor cast which is the most common accounting approach among utilities to addressing actual games and losses and at that point of its material we would allemaal tab

Accounting approach among utilities to addressing actuarial gains and losses and at that point, if it's material, we would amortize any gain or loss over the life of the plant, which is in the 10 to 12 year range. So too early to look out to 2024, you alluded to.

Speaker 4: any gain or loss over the life of the plans, which is in the 10 to 12-year range. So too early to look out at 2024. You alluded to...

Speaker 4: the pension expense that was crystallized at the end of 22.

The pension expense that was crystallized at the end of 'twenty two.

Speaker 4: based on market returns last year. And there we have advocated through the stages of this rate case, including the hearing, and we will continue to do this.

Based on market returns last year and there we have advocated through the stages of this rate case, including the hearing and we will continue to.

Speaker 4: do so through to the open meeting to ensure that we get appropriate recovery there, consistent with our prior rate case, which in a split test year, as you noted, it doesn't necessarily get us recovery on the whole amount, but would average out to give us half of the recovery on.

Do so through the open meeting to ensure that we get appropriate recovery there consistent with our prior rate case, which in a split test year as.

You noted doesn't necessarily get us recovery on the whole amount, but would average out to give us half of that recovery on on that 22 year end impact. So we will continue to advocate for that and certainly be able to give you an update when we.

Speaker 4: on that 22 year end impact. So we'll continue to advocate for that and certainly be able to give you an update when we re-value everything at your end on any impact.

Revalue everything at year end on any impacts.

Speaker 4: from 23 returns. The one thing I would remind you of is that higher interest rates while they may impact the value of a bond portfolio have a meaningfully positive impact on service cost, which helps us from an O&M perspective. And you see that in the year over your O&M numbers this year.

From 'twenty three returns the one thing I would remind you of is that higher interest rates, while they may impact the value of our bond portfolio have a meaningfully positive impact on service cost, which helps us from an O&M perspective, and you see that in the year over year O&M numbers this year.

Speaker 4: And, of course, potentially lead to a higher expected return next year, given where yields are. So we'll look at all the puts and takes around higher interest rates and discount rates at year end and can give you an update on that.

And of course.

Actually lead to a higher expected return next year, given where yields are so we'll look at all the puts and takes around higher interest rates and discount rates at year end and can give you an update at that point.

Speaker 6: All right, thank you very much. And I guess just the IRP, obviously some big opportunities here and you're not making any assumptions on ownership at this point, but can you just give us a flavor of?

Alright, Thank you very much.

I guess, just the ERP, obviously, some some big opportunities here and you are not making any assumptions on ownership at this point, but can you just give us a flavor of.

Speaker 6: is this is this spending that could potentially be incorporated in the next five-year roll forward or is it is it more further looking than that?

And this is this spending that could potentially be incorporated in the next five year roll forward or is it more further looking at on that.

Speaker 4: Yeah Nick, Sandra again. What I'd say is that you've got our current Cadvex forecast for the next three years. We'll refresh 24 and 25 after the case.

Yes, Nick it's Andrew again, what I'd say is that you've got our current capex forecast for the next three years, we'll refresh 'twenty four 'twenty five after the case.

Speaker 4: After the rate case is done, we have better clarity on the SRB mechanism, which we continue to advocate for in this case. The IRP is agnostic, as you said. We've got projects in various stages of development in our pipeline and bringing those projects forward will be dependent upon

After the rate case is done and we have better clarity on the <unk> mechanism, which we continue to advocate for in this case.

The <unk> is agnostic as he said.

We've got projects in various stages of development in our pipeline and bringing those projects forward will be dependent upon.

Speaker 4: Ensuring reliability and diverse group of developers, including ourselves, but also whether or not there's contemporaneous returns because of the lumpiness of that CapEx, we want to make sure that if we're going to lean into it, that there's an ability to recover that investment in a timely way.

Ensuring reliability and diverse group of.

Of developers, including ourselves.

But also whether or not theres contemporaneous returns because of the lumpiness of that Capex, we want to make sure that if we're going to lean into it that there is an ability to recover that investment in a timely way.

Hey, I appreciate it and we'll see you soon here thanks a lot.

Thanks, Nick.

Speaker 1: Thank you. Your next question is coming from Julian DeMoulin-Smith from Bank of America. Your line is live.

Thank you. Your next question is coming from Julien Dumoulin Smith from Bank of America. Your line is live.

Speaker 7: Hey, good morning team. Actually, let me just pick up where Nick left off there on on on on IRP here real quickly.

Hey, Good morning came actually let me just pick up where we're Nick left off there on.

On the ERP here real quickly.

Speaker 7: you know obviously the new data centers growth is pretty impressive here i just wanted to get a sense of of health firm or some of these industrial manufacturing data center data points that you guys are showing here and obviously you think are large subject to some uh... some movements and delays but uh... how how firm in time and uh... use that uh... are these numbers here in front of us uh... and well i'll leave it open and you guys

Obviously, the new Datacenters growth is pretty impressive I just wanted to get a sense of just how firm are some of these industrial manufacturing and data center data points that you guys are showing here I mean, obviously, you're seeing our large subject to some some movements and delays but.

How firm in timeline is that are these numbers here in front of us.

Well I'll leave it open ended for you guys.

Speaker 3: Yeah, I'm, uh, uh, Joanne, it's good to, it's good to hear you. You know, we've got pretty significant growth, obviously happening here. And I'd say a few different sectors. One is the industrial load from TSMC and there's some other kind of high load factor, factory load that is coming up. And a lot of that is really being driven by land availability. So you look at some of the big parcels of land that can hold these facilities.

Yeah.

Julian it's good to hear you.

We've got pretty significant growth, obviously happening here in <unk>.

Say a few different sectors. One is the industrial load from TSMC and Theres. Some other kind of high load factor factory load that is coming up in a lot of that is really being driven by land availability. So you look at some of the big parcels of land that can hold these facilities.

Speaker 8: And as some of these companies compete, if it's not company A, company B is going to come in and take that land. And so some of that industrial load growth, I think, is going to continue. And we continue to see pretty significant upside from the TSMCs and the supply chain that that brings. Because that brings Linde and sort of gas manufacturers and other things.

And as some of these companies compete if its not company a company B is going to come in and take that land and so some of that industrial load growth I think is going to continue.

And we see continue to see pretty significant upside from the Tsmc's and the supply chain that that brings because that brings you know.

Lindy.

Gas manufacturers and other things to.

Speaker 8: Data centers, I think, are absolutely happening. They're a little bit harder to figure out exactly where the megawatts are going. So I think that you can look in the region and say there's a certain amount of megawatts that are here.

Data centers, I think are absolutely happening, there or a little bit harder to figure out exactly where the megawatts are going so so I think that you can look in the region and say there is a certain amount of megawatts that are here how that gets allocated between individual customers gets challenging for some of our planning folks, but it's more of a question of <unk>.

Speaker 8: How that gets allocated between individual customers, gets challenging for some of our planning folks, but it's more of a question of where it's gonna go, and how do we build the transmission distribution system out to that, match it on the generation side.

Where it's going to go and how do we build the transmission distribution system out to that match it on the generation side.

Speaker 8: But this is an attractive market for data centers. So so we see that as a pretty significant pretty significant growth opportunity Coop you want to comment on just how it's full

But this is an attractive market for data centers. So so we see that as a pretty significant pretty significant growth opportunity.

You want to comment on just how that's flowed through on the ERP.

Speaker 4: Yeah, so your date we're seeing our CNI cause sales growth in the 2.8% range your date through September , which

Yes.

So year to date, we're seeing.

Our C&I sales growth in the two 8% range year to date through September.

Which.

Speaker 4: As we've gone through the year, we've had to monitor the ramp rate. And it goes back early to what Jeff is saying in that when you're thinking about these customers, they may have an anchor can into and then they're building out their box from there. And so watching those ramp rates and understanding them with some of these earlier customers that are coming through will help inform our long-term view. But that four and a half to six and a half percent growth rate that we're expecting through 25.

Is <unk>.

<unk> gone through the year, we've had to monitor the ramp rate and it goes back to what Jeff is saying in that when Youre thinking about these customers. They may have an anchor tenant and then they are building out their box from there and so watching those ramp rates and understanding them with some of these earlier customers that are coming through will help inform our long term view, but that $4 five.

Six 5% growth rate that we're expecting through 25 is based on the data centers. We know we're ramping up it's based on TSMC and its supply chain.

Speaker 4: is based on the data centers we know are ramping up. It's based on TSMC and its supply chain.

Speaker 4: PSMC's made recent announcements that reaffirmed their 2025 commitment to being up and running. So that's the planning forecast that we're working on during the near term. The continued attractiveness of the service territory over the longer term from an IRP perspective.

TSMC has made recent announcements that reaffirmed their 2025 commitment to being up and running and so that's that's the planning forecast that we're working under in the near term and then the continued attractiveness of the service territory over the longer term from an <unk> perspective.

Speaker 7: got it excellent and then you know i know we've spoken to times about earned returns here and you know that's difficult in some respect to get ahead of it in the context of the case but any further points that you would make in terms of items that would stand out uh... in terms of puts and takes against your ability to earn a year your authorized uh... level fear of the obviously sort of uh... the number of points but you know obviously nick mentioned pension the second ago but what other points would you flag here as you think about the puts and takes in

Got it excellent and then.

I know we've spoken at times about earned returns here and that's difficult in some respects to get ahead of it in the context of the case, but any further points that you would make in terms of items that would stand out.

In terms of puts and takes against your ability to earn your authorized.

Level here I mean, obviously, you've sort of seen a number of points, but you know obviously, Nick mentioned pension a second ago, but what other points would you flag here as you think about the puts and takes and the ability to see improvement here.

Especially those in your control.

Speaker 9: Yeah, no, join, we-

Yeah Julian we.

Speaker 4: We do have a historical test year, and so we're working with a number of costs that go back to the 21-22 period. And so if you think about O&M, there we need to continue to manage costs, exercise our lean muscle, because those costs do go back to a time when I think people still use the word transitory to talk about inflation. So O&M is one of those. Pension, we've done what we said we were going to do throughout the cases. We go back in and advocate in favor of addressing those.

We do have an historical test year, and so we're working with a number of costs that go back to the 'twenty one 'twenty two period and so if you think about O&M. There we need to continue to manage cost exercise our lean muscle because those costs do go back to a.

A timeline I think people still use the word transitory it's talked about inflation. So O&M is one of those pension we've done what we said we were going to do throughout the cases once we knew the numbers we'd go back in and advocate.

In favor of addressing those and then interest expense is really the third one and thats, partially within our control and partially not strategically within this case, we were okay with areas of whack other than ROE.

Speaker 4: And then interest expense is really the third one, and that's partially within our control and partially not. Strategically within this case, we were okay with areas of whack, other than ROE being lower to keep the overall revenue requirement down. So having a low interest expense.

Being lower to keep the overall revenue requirement down so having low interest expense and a slightly lower equity capital structure was really all in the name of ensuring that we could focus on ROE and the importance of a market competitive Roe.

Speaker 4: and a slightly lower equity capital structure was really all in the name of ensuring that we could focus on ROE and the importance of a market competitive ROE to our ability to attract capital to the state.

Two two our ability to attract capital to the states. So on the interest expense side, we're really doing all the things that are within our control to finance Opportunistically. If you think about it we went and earlier this year to with the banks to expand our revolving revolver capacity. So that we could be in the CP market.

Speaker 4: On the interest expense side, you know, we're really doing all the things that are within our control.

Speaker 4: finance opportunistically. If you think about it, we went in earlier this year to.

Speaker 4: with the banks to expand our revolver capacity so that we could be in the CP market more often to give us flexibility and not lock in long-term rates because we have to, but be able to, you know, choose market environments that are conducive to doing it. You know, on interest expense, I would also say that we're

More more often to give us flexibility and not lock in long term rates, because we have to be able to choose market environments that are conducive to doing it.

On interest expense I would also say that we are.

Speaker 4: The advocacy in the rate case is important because ultimately ensuring that our credit rating stabilizes at an appropriate level means that on a relative basis to our peers, achieving competitive credit spreads will help to mitigate rates as well. And there, we've taken whatever measures we can to clear out 20, 24 maturities. We actually refinance.

The advocacy in the rate case is important because ultimately ensuring that our credit ratings stabilizes at an appropriate level means that on a relative basis to our peers.

Achieving competitive credit spreads will help to mitigate rates as well.

And there we've taken whatever measures we can to clear out 2024 maturities, we actually refinanced one of our pieces of 2020 for maturity debt back a couple years ago at very competitive yields and we only have one fixed rate maturing next year.

Speaker 4: one of our pieces of 2024 maturity debt back a couple years ago at very competitive yields.

Speaker 4: And we only have one fixed rate maturity next year.

Speaker 4: you know, that needs to be reset at current rates. So I think those are really the three areas. The key advocacy we're doing is around ways to reduce regulatory lag coming out of this case. The SRB is one, certainly one mechanism we could do it. We're leaning into our FERC return assets that have a formula rate. And after this case, we will continue to identify and push for ways to reduce regulatory lag in the state overall.

That needs to be reset at current rates. So I think those are really the three areas.

The key advocacy, we're doing is around ways to reduce regulatory lag coming out of this case. The <unk>. One certainly one mechanism we could do it we're leaning into our FERC return on assets that have a formula rate and after this case, we will continue to identify and push for ways to reduce regulatory lag and the state overall.

Speaker 7: Got it. All right guys, well, we'll see you soon, all right, and thank you so much. See you on your from the

Got it alright, guys well, we'll see you soon alright. Thank you so much.

Thanks, Julien yesterday in Phoenix.

Thank you. Your next question is coming from Paul Patterson from <unk> Associates. Your line is live.

Good morning.

Hey, Paul.

Speaker 10: Just, I wanted to go over just the sales growth and the changes we've seen since the beginning of the year in 2023. Could you just elaborate a little bit more of like why it's not met your expectations for...

Just wanted to go over the sales growth.

And the changes we've seen since the beginning of the year.

In 2023.

Could you just elaborate a little bit more about why.

Not met your expectations.

For 2023.

Speaker 10: I know that you guys are reiterating the long term whether normalized field growth, but maybe just review why you don't think.

I know that you guys are.

Reiterating the.

Long term weather normalized sales growth, but maybe.

Maybe just review why you don't think.

Speaker 10: What's happening this year is going to impact longer term.

What's happening this year is going to impact longer term.

Speaker 4: to our policy, Andrew. So if you think about the course of the year and the trajectory that our sales growth has taken, we've known really even going back 12 to 18 months that we've been moving into an environment where our sales growth is gonna be driven by extra high load factor, large CNI costs.

Sure Paul It's Andrew.

So if you think about the course of the year and the trajectory that ourselves growth has taken we've known really even going back 12 to 18 months that we've been moving into an environment, where our sales growth is going to be driven by extra high load factor large C&I customers and we have very robust residential growth during the years around COVID-19.

Speaker 4: And we have very robust residential growth during the years around COVID as we had the work from home trend. And what we've seen quarter upon quarter is that trend tend to reverse out. We still have 2% customer growth coming into the service territory, but the contribution from residential sales.

As we had to work from home trend than what we've seen quarter. Upon quarter is that trend tend to reverse out we saw a 2% customer growth coming into the service territory, but the contribution from residential sales between energy efficiency continued rooftop solar penetration and then some of the norm.

Speaker 4: between energy efficiency, continued rooftop solar penetration, and then some of the normalization of trends around residential usage, we've seen as a client. That the client has caused more of a deceleration than we expected, and that's frankly also relative to trying to gauge and continuously forecast EV penetration, which helps to offset some of that. So from a residential perspective, it may have been more pronounced than this i'm having due to the footsteps of a pupil. I'm having due to the footsteps of a pupil.

Amortization of trends around residential usage, we've seen a decline that the client has has caused more of a deceleration than we expected and that's frankly also relative to trying to gauge and continuously forecast EV penetration, which helps to offset some of that so from a residential perspective it may.

I have been more and.

Speaker 4: over the last few quarters, but ultimately it's moving from a trend perspective in the direction that we've anticipated. But again, this quarter I think, you know, continued to emphasize that trend and it's probably been a little bit more pronounced.

More pronounced over the last few quarters, but ultimately it's moving from a trend perspective in the direction that we've anticipated.

But again this quarter I think you will continue to emphasize a trend and it's probably been a little bit more pronounced.

Speaker 4: Early in the year, we did re-forecast our high-low factor customers, and that was really primarily based on the delay that Taiwan Semiconductor announced in the ability to start up the facility.

Early in the year, we did re forecast our high load factor customers and that was really primarily based on the delay that Taiwan semiconductor announced and the ability to start up the facility.

Speaker 4: They've committed to and they've reiterated recently a 2025 start up and that is the basis of the long-term plan. The continued ramp of the data centers we're seeing.

They've committed to and they've reiterated recently, a 2025 startup and that is the basis of the long term plan. The continued ramp of the data centers, we're seeing from one data center to another it can be slower faster than we expected that's driving year to date as I mentioned to 8% sales growth in the large and the <unk>.

Speaker 4: From one data center to another, it could be slower or faster than we expected. That's driving year-to-date, as I mentioned, 2.8% sales growth in the large, in the CNI segment.

<unk> segment.

Speaker 4: And so, you know, for the year, we're looking at one to three percent overall, down from the two to four percent that we talked about last quarter. That is fundamentally driven by some of the deceleration on the residential side. But over the long term,

And so for the year, we're looking at 1% to 3% overall down from the 2% to 4% that we talked about last quarter that is fundamentally driven by some of the deceleration on the residential side, but over the long term much of that sales growth is driven by the large C&I segment and we continue to see the inflows of these larger.

Speaker 4: Much of that sales growth is driven by the large CNI segment. And we continue to see the inflows of these larger customers, both the data centers and some of the advanced manufacturing. And we feel confident that it can change from quarter to quarter a little bit, who's ramping and who's not. As Jeff said, from a land use perspective, there's attractive parcels. And we know who all is talking about taking them. So we feel good about it and the continued attractiveness of Arizona for those businesses.

Customers, both the data centers and some of the advanced manufacturing and we feel confident that it.

It can change from quarter to quarter, a little bit whose ramping who's not as Jeff said from a land use perspective, theres attractive parcels and we know who I was talking about taking them. So we feel good about it and the continued attractiveness of <unk>.

Arizona for those businesses coming in.

Speaker 10: Okay, great. Thanks for the explanation just just on.

Okay, great. Thanks for the explanation just.

Just on.

Speaker 10: on the residential, you also mentioned doing the preparing marks about.

On the residential.

You also mentioned during the prepared remarks about.

Speaker 10: about the virtual success in your virtual power, you know, the, I forget the name, but the virtual power plant participation and what have you. Are you seeing, I mean,

What about the virtual the success in your virtual power.

I forget the name, but the the virtual power plant participation and what have you.

Are you seeing I mean do you think.

Speaker 10: Do you think there might be a pricey elasticity issue that's developing? I mean, is the success there in that? Is there any tie-in with that? I guess is what I'm wondering in terms of what's happened on the weakness in the residential area and perhaps the interest in.

Do you think there might be a price elasticity issue that's developing.

I mean is the success there in that.

What do you think is there any tie in with that I guess is what I'm wondering in terms of.

What's what's happened on the on the weakness in the in the residential area and perhaps the interest in <unk>.

Speaker 10: in being part of this savings program that you discussed earlier.

Being part of this savings program that you discussed earlier.

Speaker 8: You have a Paulie the core awards program which is that virtual power plant program.

Yes.

Paul the core rewards program, which is that virtual power plant program.

Speaker 8: I don't think that's having an effect on the residential growth. Those are really an opportunity for us to call on those customers a number of times a year. On a lot of them, you actually pre-cool the home before you call the event. And then the customer can opt out without any penalty. So we do see a little, you know, if you call it multiple days in a row, there's a little.

I don't think Thats, having an effect on the residential growth. Those are those are really an opportunity for us to call on those customers a number of times a year.

On a lot of them you actually pre cooled at home before you call. The event and then the customer can opt out without any kind of without any penalty and so we do see a little if you call. It multiple days in a row there is a little.

Speaker 10: there's a there's a little erosion that happens uh... as you get further into the event but i don't think that's having an effect on the sales yet you know but it would be a part of the unit that that program itself with the problem i haven't been suggesting that the the interest in that program of the participation that program which seems to be pretty strong yeah that

There's a little erosion that happens as you get further into the events, but I don't think thats, having an effect on the sales yes.

Okay.

Pardon me.

That program itself with the problem.

I would suggest that we've got the.

Interest in that program with the participation that program, which seems to be pretty strong.

Speaker 10: might be a signal of, you know, they're trying to save money, right? That's part of the, I understand. I was just wondering if that was, if they were somewhat related in that way, if you follow me as opposed to it being the driver of lower, lower residential consumption.

I'll do that.

Might be a signal of they're trying to save money, but that's part of the part.

So I was just wondering if that was if it was somewhat related in that way. If you follow me as opposed to it being the driver of lower lower residential consumption.

Okay.

Speaker 4: Yeah, no, and it's Andrew again. I think I would differentiate that program from the trend that you're suggesting may be happening. And we're definitely looking at usage patterns overall. If you think about the trajectory of our quarter, we had a month and a half of extremely intense weather. And as we started to move into cooler weather, there was inevitably going to be customers.

Yeah, No and it's Andrew again.

I think I would differentiate that program from the trend that you're suggesting maybe happening and we're definitely looking at usage patterns. Overall, if you think about the trajectory of our quarter, we had a month and a half of extremely intense weather and as we started to move into cooler weather.

There was inevitably going to be customers looking at their bills thinking about the opportunity to conserve.

Speaker 4: looking at their bills, thinking about, you know, the opportunity to conserve in September . And I think as we saw the quarter go on, we saw residential usage per customer trail off. And I do think part of it reflects

In September and I think as we saw the quarter to one we saw residential usage per customer.

Rail off and I do think part of it reflects some.

Speaker 4: you know, bounce back from what was a very intense summer. So

Bounce back from what was a very intense summer. So we're understanding those patterns and customer reactions period, both from a bill sensitivity perspective, and just overall conservation.

Speaker 4: We're, you know, understanding those patterns and customer reactions, made it both from a build-sensitive perspective and just overall conservation.

Speaker 4: But I think those are probably anomalous to this particular quarter.

But I think those are probably anomalous to this particular quarter.

Speaker 4: There tends to be a psychology around when do I turn off my AC for the year, and people this year might have done it earlier just in response to knowing that they were running it so intensely during the summer. But on the flip side, we actually saw price per megawatt hour go up for the quarter, which suggests that when we were in that intense period of heat, customers became more insensitive to our time use rates.

There tends to be a psychology around when do I turn off my AC for the year and people. This year might have done. It earlier just in response to knowing that they were running it so intensely during the summer, but on the flip side, we actually saw.

Price.

Per megawatt hour go up for the quarter, which suggest that when we were in that intense period of heat customers became more insensitive to our time of use rates and so normally when you have higher megawatt hour sales youre seeing it at a lower price because it's more of the off peak hours and so I think.

Speaker 4: And so normally when you hire me, what hour sales, you're seeing it at a lower price because it's more of the off-peak hours. And so I think, you know, for months to months, you're seeing different customer behaviors and we try to understand those as best we can. But overall, for the quarter.

For month to month, Youre seeing different customer behaviors, and we try to understand those as best we can.

Speaker 4: I think we're just continuing to see the same trend of residential customers slowing down continued energy efficiency and distributed generation. And this refers to that, if you go back, you're a quarter of a quarter for the last 24 months.

But overall for the quarter.

I think we're just continuing to see the same trend of residential customers.

Slowing down continued energy efficiency and distributed generation and this reversal out if you go back year over year quarter over quarter for the last 24 months you have been seeing that those COVID-19 work from home numbers continue to reverse out as people return to normal usage patterns.

Speaker 4: You've been seeing those COVID work-from-home numbers continue to reverse out as people return to normal usage pattern.

Speaker 10: Okay. I really appreciate the call. Thanks so much. Yep.

Okay.

We appreciate the color. Thanks, so much yes, thanks Paul.

Speaker 1: Thank you. Your next question is coming from Michael Lonegan from F. Corp. Your line is live. Hi, thanks for...

Thank you. Your next question is coming from Michael loan again from Evercore. Your line is live.

Hi, Thanks for taking my question.

Speaker 11: So following up on an earlier question on Julian's rate case question, obviously there's some dependence on the outcome here, but coming out of it, given some delayed recovery on growing nominal O&M, higher interest expense, pension expense, like you alluded to, and assuming the SRB recovery mechanism is not granted, obviously given what happened in Tucson Electrics case.

So following up on an earlier question on Julie's rate case question.

Obviously, there is some dependence on the outcome here, but coming out of it given.

Some delayed recovery on growing nominal O&M higher interest expense pension expense like you alluded to and assuming the SRV recovery mechanism is not granted.

Obviously, given what happened in Tucson Electric's case.

Speaker 8: You know, you know, you obviously may have some meaningful regulatory lag. You talk about some mitigation measures, but just wondering, you know, what your expectations are when you may have to, you know, file your next rate case and just the frequency of that general, especially without a recovery mechanism like SRB. Yeah, Michael, that's, you know, that's really the key.

We obviously may have some meaningful regulatory lag you're talking about some mitigation measures, but just wondering.

What your expectations are when you may have to file your next rate case.

This is the frequency of that general, especially without a recovery mechanism like SRV.

Yes, Michael.

That's really the key issue around the SRV is that is that given given that and frankly, given the growth that we've been talking about through most of this call if theres not a mechanism.

Speaker 8: Issue around the SRB is that given that and frankly given the growth that we've been talking about through most of this call, if there's not a mechanism.

Speaker 8: That's in there to help us contemporaries to recover that the post-test your plant that we have in process right now only gets you so far and so the Kind of the point around having an SRB is that if you don't do that, you're going to drive more more frequent rate case violence

Thats in there to help us contemporaries to recover that the post test year plant that we have in process right now only gets you so far and so the.

The point around having an SRP is that if you don't do that youre going to drive more more frequent rate case filings.

Speaker 3: This specifics around that, we won't know until we see the outcome of this rate case. So it's too early to pin you down with kind of exactly what that timing would look like. But it completely comes back to the point that if you have an SRB mechanism in place that helps us.

The specifics around that we won't know until we see the outcome of this rate case.

Too early to.

Timmy downloads kind of exactly what that timing would look like.

But it completely comes back to the point that if you have an SRP mechanism in place that helps us.

Speaker 8: helps us track some of the capital and be risks some of the projects that are needed to reliably serve load. Then we're able to do that without having to come back in as frequently on the rate case. And so Tucson didn't get it. That's a little bit more of a unique story, I think, in the circumstances there. So we're continuing to advocate for it in this case. There's a lot of positive dialogue towards the end of the hearing.

It helps us attract some of the capital and de risked some of the projects that are needed to reliably serve load then we're able to do that without having to come back in as frequently on the rate case, and so Tucson didn't get it.

As a little bit more of a unique.

Laurie I think in the circumstances there.

So we're continuing to advocate for it.

In this case there is a lot of positive dialogue towards the end of the hearing.

Speaker 11: around that, but we won't know that until we get through the rate case process. Got it. Thank you. I'll see you.

Around that but.

We won't know that until we get through the rate case process.

Got it thank you.

Yep.

Soon.

Okay.

Speaker 1: Thank you. Your next question is coming from Anthony Croudell from Mizzouho. Your line is like...

Thank you. Your next question is coming from Anthony <unk> from Mizuho. Your line is live.

Speaker 3: Hey, good afternoon team. Hope all is well. Just, I guess, quickly, if I could hit on...

Hey, good afternoon team hope all is well.

I guess quickly if I could hit on.

Speaker 3: like cadence of the year, very strong for third quarter, you know, type of drivers you could give us going into fourth quarter and maybe is there ability where you would maybe flex O&M within the year?

The cadence of the year very strong.

Third quarter.

Type of drivers you could give us going into fourth quarter and maybe.

Is there ability to where you would maybe flex O&M within the year.

Yes, Anthony Hi, it's Andrew.

Speaker 4: You saw for this quarter that O&M was relatively flat and I think that that was very specific to some off-sets from employee benefit expense that you can see detailed in the 10Q. But foundationally, we've seen the same trends around O&M throughout the year, which is some of the lagging impacts of inflation, and particularly around areas like wages.

You saw for this quarter that O&M was relatively flat and I think that that was very specific to us.

Some offsets from employee benefit expense that you can see detailed in the in the 10-Q, but foundational Lee we've seen the same trends around O&M throughout the year, which is some of the lagging impacts of inflation and particularly around the areas like wages and then increased O&M needs around our generation fleet both.

Speaker 4: and then increased O&M needs around our generation fleet, both nuclear and non-nuclear. We saw those from early in the year as we prepared to get into the summer. And then we saw those after the summer where we needed to continue to spend time around the fleet. So the O&M numbers that we gave last quarter, that 915 to 935 million that upped O&M level, we continue to remain on track to.

Nuclear and non nuclear we saw those from early in the year as we prepared to get into the summer and then we saw those.

After the summer, where we needed to continue to spend time around the fleet. So the O&M numbers that we gave last quarter that $915 $9 million to $135 million.

Upped O&M level, we continue to remain on track to.

Speaker 4: While we always look for opportunities to pull forward ONM from a future year, in this case, we took the anticipated weather benefit, we took the new surcharge revenue that was coming in.

While we always look for opportunities to pull forward O&M from a future year. In this case, we took the anticipated weather benefit we took the.

The new surcharge revenue that was coming in and we.

Speaker 4: And we looked at the opportunities we had within the year to de-risk our system and shore plant reliability and address some of the wage issues that ensure we could maintain a competitive workforce.

Look to the opportunities we have within the year to Derisk, our system ensure plant reliability and address some of the wage issues that ensure we could maintain a competitive workforce. So what youre seeing from that 915 to 935 branches thats remaining on track.

Speaker 4: So what you're seeing from that 915 to 935 ranges, that's remaining on track. The ability to do risk future years is probably a little bit more constrained given the needs of this year in particular. But certainly as we see those opportunities, whether even the smallest things, we're encouraging people to look to do that work this year if they can.

The ability to de risk future years is probably a little bit more constrained given the needs of this year in particular.

But certainly as we see those opportunities whether they are even even the smallest things we're encouraging people to to look to do that work. This year if they can.

Speaker 3: Great, and just one follow up. I believe Jeff, you were answering, I think it was Mike's, but my brain's a little squishy right now from the day. Just on the SRB, talked about having conversations and the uniqueness to what happened to Tucson. But just, one is any update you give us on maybe the conversations you're having in two. How do you think the SRB would, how do you tie that into with one of the commissioners opening up a docket to minimize regulatory lag? You would think that the aim of requesting your organization to work on the mapHi all these data captured is activated.

Great and just one follow up I believe Jeff you were answering.

I think it was Mike, but my brains, a little squishy right now from the day just on the SRV.

<unk> talked about having conversations in the uniqueness to what happened to Tucson, but just.

One is any update you can give us on maybe the conversations you're having and two how do you think the SRV wood.

How do you tie that into with one of the commissioners.

Opening up a docket to minimize regulatory lag.

You would think that the SRV would fit.

Speaker 8: sit there and kind of already answer the question of minimize regulatory lag. I'll leave it open ended there. Yeah, I mean, it is it's certainly consistent with the docket on regulatory lag. Obviously, that hasn't really started or is going to take a while to work through that that docket. So we're, again, making the advocacy here in the case.

Fit there and kind of already answered the question to minimize regulatory like I'll leave it open ended there yes.

Yes Anthony.

It is.

It is certainly consistent with the docket on regulatory lag, obviously that hasnt really.

Started or is it going to take a while to work through that docket. So.

Again, making the advocacy here in the case.

Speaker 8: It came in later in the process with Tucson, then it did with us. So we were able to have more conversation at the hearings on it. And so if you listen to some of the hearings, I think there was, again, more dialogue about folks trying to understand, you know, what does this do? We have now the briefing process. And so this is being briefed out. And so you'll be able to see it in the in the brief.

It came in later in the process with Tucson.

It did with US so we were able to have more conversation at the at the hearings on it and so if you listen to some of the hearings I think there is again more dialogue about folks trying to understand.

What does this do we have now the briefing process and so this is being briefed out and so youll be able to see it in the in the briefs.

Speaker 8: And then you've got, so you've got really two more steps. So the judge is going to have to take the briefs and the advocacy that she heard at the hearing and conclude what is her recommendation based on that. And then the next opportunity is with the commission.

And then you've got so you've got really two more steps. So the judge is going to have to take the briefs and the advocacy that she heard at the hearing and conclude what is her recommendation based on that and then the next opportunity is with the commission.

Speaker 11: And so the judge's recommended opinion is a recommended opinion. And so regardless of where that comes out, you will likely see continued advocacy through the open meeting as we present these cases. Because just like you said, if they are, and I think they are looking at how can I reduce regulatory lag, because it helps to reduce the number of rate cases that you have to come in with.

And so the judges.

Judges recommended opinion as a recommended opinion and so Rick.

Regardless of where that comes out you will likely see continued advocacy through the open meeting.

As we present these cases, because just like you said if they are and I think they are looking at how can I reduce regulatory lag because it helps to reduce the number of rate cases that you have to come in with.

Speaker 8: And so as we tie those together, you know, whether it's in the briefing stage right now or ultimately at the open meeting, those are exactly the arguments that we're trying to make. And again, you know, the importance to us is that PPA, if you PPA, all the projects we need for reliability have less control from a project execution standpoint. And so a little bit more risk in...

And so as we tie those together whether it's in the in the briefing stage right now are ultimately at the open meeting those are exactly the arguments that were trying to make and again the.

Importance to us is that PPA ing, if the PPA all the projects we need for reliability you have less control from a project execution standpoint, and so a little bit more risk in.

Speaker 11: in getting those projects in. And so you want to make sure that there's that appropriate balance that self-built versus PPAs.

And getting those projects in and so you want to make sure that there's that appropriate balance of self build versus ppas.

Speaker 11: And it's really hard to self-build this stuff if you're then picking up regulatory lag, and it will drive quicker rate case filings. And so I think all those items are going to come out in the continued conversation, but we're still, you know, we're still a ways from getting that through, but it's probably early next year, later this year, before we'll

It's really hard to self build this stuff. This year, then pick it up regulatory lag and it will drive quicker rate case filings.

And so I think all of those items are going to come out and the continued conversation, but we're still we're still a ways from getting that through but it's probably early next year. Later this year before we'll see that.

Speaker 3: And just lastly, what is the cost to litigate a ray case? If you guys put an estimate or a range around litigating a ray case.

And just lastly, what is the cost to litigate a rate case have you guys put an estimate or a range around mitigating our rate case.

Speaker 11: I wouldn't say we don't do like rate case expense. Some utilities file like rate case expense and put it in there. This is all embedded within the existing team. So the costs are essentially already embedded in the teams that we have. And when we come out of a rate case, it just moves into other regulatory matters. So it's not something that we've ever really focused on. Certainly there's paper and other things involved, but it's not material. Great. Thanks.

It's.

I wouldn't say, we don't do like rate case expense some utilities file a rate case expense and put it in there. This is all embedded within the existing teams. So that costs are essentially already embedded in the teams that we have and when we come out of a rate case that just moves into other regulatory matters. So it's not something that we've ever.

Really focused on certainly there's paper and other things involved but it's not not material.

Great. Thanks for taking my questions here.

Speaker 1: Thank you. Your next question is coming from Travis Miller from Morningstar. Your line is lies.

Thank you. Your next question is coming from Travis Miller from Morningstar. Your line is live.

Thank you Hello, everyone.

Speaker 12: Hey Jeff. Yeah, trying to unpack this weather and then also related to earlier question alone. Oh, and now.

Trying to unpack this weather and then also related to earlier question on O&M.

Speaker 12: I'm guessing and correcting me if I'm wrong, that you've incurred some extra O&M just for the fact that you've had to operate the system at a higher level given the weather. What's the resulting potential benefit in say 2024, 2025, if you get back to normal weather, right? You'd lose the earnings on the top line, but are there other impacts that would be a benefit from...

And correct me if I'm wrong that you have incurred some extra O&M just for the fact that.

You've had to operate the system at a higher level given the weather, what's the resulting potential benefit in Cy 'twenty 'twenty four 'twenty five.

You get back to normal whether you'd lose the earnings on the topline but are there other impacts that would be a benefit from.

Not having hot weather.

Speaker 4: Yeah, no, it's a good question, Travis. And certainly there were some reliability related needs. A lot of the anticipated even before the summer, where we were spending money to continue to ensure our fleet. We do all of our summer preparedness the same way every year. We project for the summer forecast. In fact, the peak load we reached was consistent with the types of forecast.

Yes, no it's a.

Good question Travis is certainly there were some reliability related needs a lot of the anticipated even before this summer where we're spending money to continue to ensure our fleet. We do all of our summer preparedness. The same way every year, we project for the summer forecast in fact are the peak will be reached with.

With the types of forecast that we set in advance and we plan or our own resources and the PPA and market based resources. Accordingly, So we're spending spending money on O&M on the fleet, even before the summer and certainly coming out of the summer the wear and tear both the capex that I mentioned that we've increased.

Speaker 4: that we set in advance, and we plan our own resources and

Speaker 4: the PPA and market-based resources accordingly. So we're spending money on O&M on the fleet even before the summer. And certainly coming out of the summer, the wear and tear, both the CAP-XBIT, I mentioned that we've increased this year as well as the O&M are related to that. You do see, we released this quarter, the outer schedule for next year. So you do see across our gas fleet and hopefully as well as the normal Palo Verde refueling outage.

This year as well as the O&M.

Our related related to that you do see we released this quarter the outage schedule for next year. So you do see across our gas fleet and hopefully as well as the normal Palo Verde Refuelling outage.

Speaker 4: You know, pretty robust outage schedule next year, including what will be the beginning of the last.

Pretty robust outage schedule next year, including what's what will be the beginning of the last major outage at four corners. During the asset life. So yes. There is there is some outage related work to get us through the remainder of the decade next year.

Speaker 4: major outage at Four Corners during the asset's life. So, you know, there is some outage related work to get us through the remainder of the decade next year.

Speaker 4: You know, one of the things that we didn't have this year, but we planned for is we didn't have a very strong monsoon rain and wind season this year. So, you know, there was some, a little bit of a mitigate there we planned for that every year and didn't have intense storms.

One of the things that we didn't have this year, but we plan for it we didn't have a very strong monsoon rain and wind season. This year. So yeah. There is some little bit of a mitigate there we plan for that every year and it didn't have intense storms, but we did have very intense storms in the winter at the beginning of this year. So there's there's puts and takes every year on how we plan and then.

Speaker 4: But we did have very intense storms in the winter at the beginning of this year. So there's puts and takes every year on how we plan.

Speaker 4: and then how we deploy those O&M resources, but foundationally, given the outages, we have next year and the overall plan. I think if we had a normal, normal weather year next year, it wouldn't have a material, you know, impact on the overall O&M picture.

How we deploy those O&M resources, but foundation really given the outages. We have next year and the overall plan I think if we had a normal normal weather Youre next year wouldn't have a material.

Impact on the overall O&M picture.

Speaker 12: Okay, that makes sense. And then just real quick, on the five to seven percent, I think you've said base year was a normalized 2022.

Okay that makes sense and then just real quick on the 5% to 7% I think you've said base year was sort of a normalized 2022.

Speaker 12: If you, and correct me if that's wrong, but if you get through, when you get through this rate case, do you foresee then adjusting that five-submressant to think about post rate case earnings number as the jump off point?

If you and correct me, if that's wrong, but if you get through when you get through this rate case do you foresee then <unk>.

Adjusting that five 7% of think about post rate case earnings number as the jump off point.

Speaker 4: Yeah, again, another good question. That's something that will come out with after the rate case. I've mentioned it in this forum before that, we said that five to seven on a year that had been a financial reset. So our earnings were in decline in the year we set. So it certainly would be something that we'll look at. Because ultimately, what we want that five to seven to represent is in evergreen long-term growth rate. And so being able to achieve that over the long term.

Yes again another good question.

The thing that will come out with after the rate case as I've mentioned it in this forum before that.

We said that five to seven on a year that had been a financial reset. So our earnings were in decline in the year. We said so it certainly would be something that we'll look at because ultimately what we want that 5% to 70 represent is an evergreen long term growth rate and so being able to achieve that over the long term regardless of base here is the ultimate aspiration.

Speaker 4: You know, regardless of base year is the ultimate aspiration, so it will be something that we'll look at after the case, after the case when we refresh the guidance. Okay, perfect.

And so it will be something that we'll look at after the game. After the case when we refresh the guidance.

Okay perfect. Thanks, Thanks, so much appreciate it.

Speaker 1: Thank you. Your next question is coming from Sophie Carp from Keybank. Your line is live.

Thank you. Your next question is coming from Sophie Karp from Keybanc. Your line is live.

Speaker 13: Hi, and a good afternoon. Thank you for taking my questions.

Hi, Good afternoon. Thank you for taking my question Sophie.

Speaker 13: Hey, I'm just most of my questions have been answered, but I was curious if I could maybe get you to comment a little bit on the.

Okay.

Most of my questions have been answered, but I was curious if I can.

Maybe get you to comment a little bit on that.

Speaker 13: The impact that the growth in data centers and other similar industrial uses is going to have on the margins, you know, if that continues. So can you help us understand, I guess, you.

The impact that the growth in data centers and other similar industrial use it is going to have on the margins.

If that continues so can you help us understand I guess.

Speaker 13: the impact of adding, I don't know, one gigawatt of load of data centers is equivalent to how many residential customers. And over time, how do you think that the rates that different customer classes are paying are going to evolve in Arizona?

The impact of adding <unk>.

One gigawatt of load.

The other centrust's is equivalent to how many residential customers.

Over time, how do you think that the.

Alright, the different customer classes that pain that going to evolve in Arizona.

Speaker 4: Sure, Sophie, it's Andrew. And so one of the things we've talked a lot about is that with our extra high load factor customers, given the hours that they're running, and you're going to see a lower overall margin, we tend to give it in a percentage growth.

Sure Sophie.

Andrew and so one of the things we've talked a lot about is that with our extra high load factor customers given the hours that they're they're running and.

Youre going to see a lower overall margin we tend to give it at a percentage growth.

Speaker 4: a rule of thumb that you know if you have one percent residential growth it's equivalent to you know 20 to 30 20 to 25 million dollars a margin if you have one percent of high low-sactric growth it's more the equivalent to 5 to 10 million of margin and so you do see a lower margin contribution but an awful lot more metal at hours

Rule of thumb that if you had 1% residential growth that's equivalent to 20% $20 to $25 million of margin. If you have 1% of high load factor growth, it's more of the equivalent of $5 million to $10 million of margin and so you do see a lower margin contribution, but an awful lot more.

What hours.

Speaker 4: And so, you know, from that perspective, that's why we were so focused on our ONM continuing to be disciplined from a volumetric basis. We're going to have higher ONM as we serve more customers, but given these high-low factor customers allow us to...

And so from that perspective.

That's why we are so focused on our O&M.

<unk> to be disciplined from a volumetric basis, we're going to have higher O&M as we serve more customers, but given these high load factor customers allow us to spread that O&M and frankly, they are at a single site versus residential you're going out to more and more subdivisions that growth becomes efficient growth for us despite the margin.

Speaker 4: Spread that on M and frankly they were the single fight versus residentially going out to more and more sub-division.

Speaker 4: that that growth becomes efficient growth for us despite the margin being lower overall.

Being lower overall.

Speaker 4: From a customer cost of service perspective, we ensure that customers and our rate design is meant to ensure fair distribution of costs across our various customer classes. That's something that we look at each time we go in for a rate case and ensure that the fundamentals is from an overall perspective.

Customer cost of service perspective, we ensure that customers.

Our rate design has been to ensure fair distribution of costs across our various customer classes and that's something that we look at each time, we go in for a rate case and ensure but fundamentally just from an overall perspective.

Speaker 4: Blunting O&M with lots of megawatt hours at a single site is positive despite the lower margin.

Blunting O&M with lots of megawatt hours at a single site is positive despite the lower margin.

Got it. Thank you so much appreciate it.

Sure. Thanks Sophie.

Speaker 1: Thank you. That completes our Q&A session. Ladies and gentlemen, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Thank you that completes our Q&A session, ladies and gentlemen. This concludes today's event you may disconnect at this time and have a wonderful day. Thank you for your participation.

Okay.