Q4 2023 Pinnacle West Capital Corporation Earnings Call

Operator: Subs by www.zeoranger.co.uk Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2023 fourth quarter earnings conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Good day, everyone and welcome to the Pinnacle West Capital Corporation, 2023 fourth quarter earnings Conference call.

At this time, all participants have been placed on a listen only mode and we will open the floor for your questions and comments after the presentation.

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

Amanda Ho: Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 2023 earnings, recent developments, and offering performance. Our speakers today will be our Chairman and CEO, Jeff Goldner, and our CFO, Andrew Cooper. Ted Geiser, APS President, and Jacob Tetlow, Executive Vice President of Operations, are also here. First, I need to cover a few details with you.

Amanda Ho: Thank you Matthew I would like to thank everyone for participating in this conference call and webcast to review, our fourth quarter and full year 2023 earnings recent developments and operating performance. Our speakers today will be our chairman and CEO, Jeff Goldberg and our CFO, Andrew Cooper, Ted Geisler, Aps, President and Jacobs Hello, Executive Vice President of operations are also here with us.

Amanda Ho: First I need to cover a few details with you the slides that we will be using are available on our investor Relations website, along with our earnings release and related information today's comments and our slides contain forward looking statements based on current expectations and actual results may differ materially from expectations. Our annual 2023 Form 10-K was filed this morning.

Amanda Ho: The slides that we will be using are available on our investor relations website, along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our annual 2023 Form 10-K was filed. Please refer to that document for forward-looking statements, cautionary language, as well as the risk factors and mDNA sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our document. 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 March 5, 2021. I will now turn the call over to Andy.

Amanda Ho: These refer to that document for forward looking statements cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures a replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through March 5th 2024.

Amanda Ho: I will now turn the call over to Andrew.

Andrew Cooper: Thank you, Amanda, and thanks to everyone for joining us today. I will first cover our fourth quarter and full year 2023 results before handing it to Jeff, who will discuss our recent rate case outcome, growth outlook, and strategy. Afterward, I will finish up with our 2024 guidance and long-term financial outlook. In the fourth quarter of 2023, we achieved a 21 percent increase in earnings per share compared to the same quarter in 2022. This year-over-year improvement was largely driven by a $0.41 uplift in gross margin attributable to increased sales and usage, as well as higher transmission revenue and contributions from the LFCR and 2019 rate case appeal. Additionally, the lack of certain prior period items from Q4 2022 contributed to a 21 cent benefit to other income and expense on a year-over-year basis. These increases versus the prior year were partially offset by higher O&M expense, depreciation amortization, interest expense, and benefit costs. For the full year 2023, we earned $4.41 per share.

Andrew Cooper: Thank you Amanda and thanks to everyone for joining us today.

Andrew Cooper: I will first cover our fourth quarter and full year 2023 results before handing it to Jeff who will discuss our recent rate case outcome growth outlook and strategy. Afterwards, I will finish up with our 2020 for guidance and long term financial outlook.

Andrew Cooper: In the fourth quarter of 2023, we achieved a 20 <unk> increase in earnings per share compared to the same quarter in 2022.

Jeffrey B. Guldner: This year over year improvement was largely driven by a 41 uplift in gross margin attributable to increased sales and usage as well as higher transmission revenue.

Jeffrey B. Guldner: Contributions from the LCR and 2019 rate case appeal.

Jeffrey B. Guldner: The lack of certain prior period items from Q4 2022 contributed to a 21 cent benefit to other income and expense on a year over year basis.

Jeffrey B. Guldner: These increases versus the prior year were partially offset by higher O&M expense depreciation amortization interest expense and benefit costs.

Jeffrey B. Guldner: For the full year 2023, we earned $4 41 per share.

Andrew Cooper: 15 cent increase over 2022, surpassing our guidance range of $4.10 to $4.30 per share. A significant factor in this result was a 22-cent year-over-year weather benefit driven by an unprecedented summer heat wave during the third quarter. Overall, weather contributed $0.48 in 2023 compared to normal weather. However, revenues from adjuster mechanisms, transmission, and increased sales and usage were also positive drivers for the year. In addition, other income and expense was $0.33 higher year over year, driven by the lack of certain prior expense items from 2022 and the sale of Bright Canyon assets in the third quarter of 2023.

Jeffrey B. Guldner: 15% increase over 2022, surpassing our guidance range of $4 10 to $4 30 per share.

Jeffrey B. Guldner: A significant factor in this result was a 22% year over year weather benefit driven by an unprecedented summer heat wave during the third quarter.

Jeffrey B. Guldner: Overall weather contributed <unk> 48 in 2023 compared to normal weather revenues.

Jeffrey B. Guldner: Revenues from adjuster mechanisms transmission and increased sales and usage were also positive drivers for the year. In addition, other income and expense was <unk> 33 higher year over year, driven by the lack of certain prior expense items from 2022, and the sale of bright canyon assets in the third quarter of 2020.

Jeffrey B. Guldner: Three.

Andrew Cooper: These increases versus 2022 were partially offset by higher O&M expense, depreciation and amortization, interest expense, and benefit costs. Overall, we ended 2023 with 2% customers, maintaining the years-long upward trajectory of consistent growth in our service territory. Weather normalized sales growth was within the expected guidance range at 1.5% in 2023, driven by 3.3% growth in our C&I customer segment. I'll now pass the discussion to Jeff to talk about our rate case outcome, growth outlook, and strategy before I continue with our 2024 guidance and long-term financial outlook. Great. Thank you, Andrew.

Jeffrey B. Guldner: These increases versus 2022 were partially offset by higher O&M expense depreciation and amortization interest expense and benefit costs.

Jeffrey B. Guldner: Overall, we ended 2023 with 2% customer growth maintaining the year's long upward trajectory of consistent growth in our service territory.

Jeffrey B. Guldner: Weather normalized sales growth growth was within the expected guidance range at one 5% in 2023, driven by three 3% growth in our C&I customer segments.

Jeffrey B. Guldner: I'll now pass the discussion to Jeff to talk about our rate case outcome growth outlook and strategy before I continue with our 2020 for guidance and long term financial outlook, great. Thank you Andrew and thank you all for joining us today.

Jeffrey B. Guldner: And thank you all for joining us today. As you all know, just a few days ago, the commission voted to approve our 2022 rate case. I'm pleased to say that this rate case decision was ultimately reasonable and constructive. I'll highlight a few of the main outcomes, including an improved authorized return on equity, the approval of a new generation rider, and a balanced revenue requirement increase, among other items. I'll also discuss our growth outlook and future strategy coming out of this case. Lastly, as Andrew mentioned, he'll provide our 2024 guidance and our long-term financial outlook.

Jeffrey B. Guldner: As you all know just a few days ago. The commission voted to approve our 2022 rate case I'm pleased to say that this rate case decision was ultimately reasonable and constructive.

Jeffrey B. Guldner: I'll highlight a few of the main outcomes, including an improved authorized return on equity the approval of a new generation rider and a balanced revenue requirement increase among other items I'll also discuss our growth outlook and future strategy coming out of this case.

Jeffrey B. Guldner: Lastly, as Andrew mentioned, he will provide our 2020 for guidance and our long term financial outlook.

Jeffrey B. Guldner: After the unconstructive outcome of our 2019 rate case, we designed a comprehensive strategy and plan, and I'm pleased to share that we have accomplished the goals that we set out two years ago. We executed on a strategy centered on creating shareholder value by creating customer value, and we've seen significant improvements in our J.D. Power survey results.

Jeffrey B. Guldner: After the unconstructed outcome of our 2019 rate case, we designed a comprehensive strategy and plan and I'm pleased to share that we have accomplished the goals that we set out two years ago.

Jeffrey B. Guldner: We executed on our strategy centered on creating shareholder value by creating customer value and we've seen significant improvements in our J D. Power survey results not only have we been successful in moving from fourth quartile in 2021% of second quartile at the end of 2023 for both our residential and our business customers.

Jeffrey B. Guldner: Not only have we been successful in moving from fourth quartile in 2021 to second quartile at the end of 2023 for both our residential and our business customers, but we finished the year second amongst all large investor-owned utilities in phone customer care and in perfect power. Reliability has continued to be a top priority, and we're once again in the top quartile, meeting this milestone 10 years out of the last 11. This reliability was put on full display during the summer of 2023 when Arizona broke numerous heat records, yet our team delivered outstanding performance for our customers. Another important goal that we set was to build more collaborative relationships with stakeholders in the regulatory process, and we've succeeded in achieving supportive regulatory decisions. That includes both the efficient implementation of our successful 2019 rate case appeal, as well as the most recent rate case. And finally, we focused on shareholder value by deferring any equity issuances and continuing to grow our dividend during this challenging period. Now, I'll walk through some of the major highlights of the rate case. The Commission adopted a net revenue increase of $253.4 million.

Jeffrey B. Guldner: We finished the year second amongst all large investor owned utilities and phone customer care and in perfect power.

Jeffrey B. Guldner: Reliability has continued to be a top priority and we're once again top quartile meeting this milestone 10 years out of the last 11.

Jeffrey B. Guldner: This reliability was put on full display during the summer of 2023, when the Arizona broke numerous heat records yet our team delivered outstanding performance for our customers.

Jeffrey B. Guldner: Another important goal that we set was to build more collaborative relationships with stakeholders and the regulatory process and we succeeded in achieving supportive regulatory decisions.

Jeffrey B. Guldner: And that include both the efficient implementation of our successful 2019 rate case appeal as well as the most recent rate case.

Jeffrey B. Guldner: And finally, we are focused on shareholder value by deferring any equity issuances and continuing to grow our dividend during this challenging period.

Jeffrey B. Guldner: Now I'll walk through some of the major highlights of the rate case. The commission adopted a net revenue increase of $253 4 million.

Jeffrey B. Guldner: From the very beginning, we focused this rate case on improving the authorized ROE to recognize the risk and the investment needed to serve our rapidly growing service territory, and the Commission did that. The commission voted to adopt an authorized return on equity of 9.55% with a 0.25% fair value increment; a combination of those two is equivalent to a 9.85% return on equity. With this decision, the Commission has adopted an authorized return that's more in line with national averages, and it recognizes that we're one of the fastest growing states in the nation, and we need to attract capital in order to fund the investments necessary to reliably serve our customers. In addition, the Commission voted to approve our request for a System Reliability Benefit surcharge.

Jeffrey B. Guldner: From the very beginning we focused this rate case on improving the authorized ROE to recognize the risk in the investment needed to serve our rapidly growing service territory and the commission did that.

Jeffrey B. Guldner: The commission voted to adopt an authorized return on equity of 955% with a 0.25% fair value increment and combination of those two is equivalent to a 985 return on equity.

Jeffrey B. Guldner: With this decision the commission has adopted an authorized return that's more in line with national averages and it recognizes that we're one of the fastest growing states in the nation and we need to attract capital in order to fund the investments necessary to reliably serve our customers and.

Jeffrey B. Guldner: In addition, the commission voted to approve our request for a system reliability benefits surcharge. This is an important surcharge that will allow us to invest and much needed generation resources to continue to serve our customers reliably.

Jeffrey B. Guldner: This is an important surcharge that will allow us to invest in much needed generation resources to continue to serve our customers reliably and affordably while reducing regulatory lag. Importantly, the SRB will allow for the most cost-effective generation resources to be built for the benefit of our customers and to promote a healthier balance of PPAs and utility-owned assets. Later on, Andrew will discuss how the SRB provides future opportunities for CapEx growth. It's also noteworthy that the commissioners made positive amendments to the revised Recommended Opinion and Order at the open meeting that increased the net revenue requirement and addressed some items that would have created additional regulatory lag. This highlights the improved regulatory environment and our ability to achieve constructive outcomes. However, even at the final net revenue requirement, the outcome underscores the continued challenge from lagging historical costs.

Jeffrey B. Guldner: And affordably, while reducing regulatory lag.

Jeffrey B. Guldner: Importantly, the SRV will allow for the most cost effective generation resources to be built for the benefit of our customers and promote a healthier balance of ppas and utility owned assets.

Jeffrey B. Guldner: Later on Andrew will discuss how the SRV provides future opportunities for Capex growth.

Jeffrey B. Guldner: It's also noteworthy that the commissioners made positive amendments to the revised recommended opinion and order at the open meeting that increase the net revenue requirement address some items that would've created additional regulatory lag.

Jeffrey B. Guldner: This highlights the improved regulatory environment, and our ability to achieve constructive outcomes. However, even at the final net revenue requirement. The outcome underscores the continued challenge from lagging historical costs.

Jeffrey B. Guldner: We look forward to working with the Commission on addressing these lagging costs in the near future through both the regulatory lag docket, which will have a workshop on March 19th, as well as through future rate case filings. Now, I'll share our next step and strategies as we look to the future. We're focused on solid execution and continue to remain optimistic about our future for many reasons, and I'll discuss each of these reasons in more detail. First, I'm optimistic about our attractive service territory and consistent customer growth. Arizona remains among the fastest-growing states in the nation.

Jeffrey B. Guldner: We look forward to working with the commission on addressing these lagging costs in the near future through both the regulatory lag docket, which will have a workshop on March the 19th as well as through future rate case filings.

Jeffrey B. Guldner: Now I'll share our next step and strategies as we look to the future.

Jeffrey B. Guldner: We're focused on solid execution and continue to remain optimistic about our future for many reasons and I'll discuss each of these reasons in more detail.

Jeffrey B. Guldner: First I'm optimistic about our attractive service territory and consistent customer growth, Arizona remains among the fastest growing states in the nation.

Jeffrey B. Guldner: Where other states have been experiencing little or negative customer growth, we've been benefiting from steady and consistent retail customer growth of 2% for the last few years and project that growth to continue in the range of 1.5% to 2.5% in 2024. We believe that the constructive business environment with ample job growth, a competitive cost of living, and a desirable climate will continue to grow the Metro Phoenix market and benefit the local economy. Focusing on our service territory specifically, we continue to see development from a variety of sectors, which is helping to diversify our local economy more than ever. The availability of a skilled workforce in our state's business-friendly policies and regulations, coupled with our low propensity for natural disasters and our clean energy development potential, make us uniquely situated for growth.

Jeffrey B. Guldner: Other states have been experiencing little or negative customer growth, we've been benefiting from steady and consistent retail customer growth of 2% for the last few years and project that growth to continue.

Jeffrey B. Guldner: And the range of one 5% to two 5% in 2024.

Jeffrey B. Guldner: We believe that the constructive business environment with ample job growth a competitive cost of living and desirable climate will continue to grow the metro Phoenix market and benefit the local economy.

Jeffrey B. Guldner: Focusing on our service territory, specifically, we continue to see development from a variety of sectors, which is helping to diversify our local economy more than ever.

Jeffrey B. Guldner: The availability of a skilled workforce and our state's business friendly policies and regulations, coupled with our low propensity for natural disasters, and our clean energy development potential make us uniquely situated for growth.

Jeffrey B. Guldner: The tremendous demand that we see from large commercial and industrial customers will help spread fixed costs over increasing sales and have a positive multiplier impact on jobs and surrounding communities. We'll continue to focus our economic development approach on helping to attract and expand businesses and job creators. As you can see from this graphic from the Arizona Commerce Authority, the diversity of commercial and industrial growth in Arizona presents exciting opportunities.

Jeffrey B. Guldner: The tremendous demand that we see from large commercial and industrial customers will help spread fixed costs over increasing sales and has a positive multiplier impact for jobs and surrounding communities.

Jeffrey B. Guldner: We will continue to focus our economic development approach on helping to attract and expand businesses and job creators.

Jeffrey B. Guldner: As you can see from this graphic from the Arizona Commerce authority, the diversity of the commercial and industrial growth in Arizona presents exciting opportunities. Our state is seeing growth in a wide range of sectors driven by manufacturing reassuring, the clean economy, and digital infrastructure needs, which will help reduce the risk of any potential.

Jeffrey B. Guldner: Our state is seeing growth in a wide range of sectors driven by manufacturing reshoring, the clean economy, and digital infrastructure needs, which will help reduce the risk of any potential downturns in a particular industry to keep our economy and growth stable. Turning to our regulatory environment, we've seen meaningful improvement in the last couple of years. The Arizona Corporation Commission has established a record of balanced and constructive decisions, including our most recent rate case.

Jeffrey B. Guldner: <unk> turns in a particular industry and to keep our economy and growth stable.

Jeffrey B. Guldner: Turning to our regulatory environment, we have seen meaningful improvement through the last couple of years. The Arizona Corporation Commission has established a record a balanced and constructive decisions, including our most recent rate case and.

Jeffrey B. Guldner: And importantly, beyond those decisions, the Commission has also recognized the need to address regulatory lag in a holistic manner and has opened a docket to review and discuss various solutions going forward, and that, as I mentioned, will kick off next month. We look forward to working with the Commission on addressing this important issue. In addition, the Commission reaffirmed its policy on settlement.

Jeffrey B. Guldner: And importantly beyond those decisions. The commission is also recognize the need to address regulatory lag and a holistic matter and has opened a docket to review and discuss various solutions going forward and as I mentioned, we will kick off next month.

Jeffrey B. Guldner: We look forward to working with the commission on addressing this important issue.

Jeffrey B. Guldner: In addition, the commission reaffirmed its policy on settlements.

Jeffrey B. Guldner: Historically, outcomes achieved through settlement have delivered new and innovative customer programs and other results that benefit a broad and diverse range of stakeholder interests in our state's energy future. We believe the nature of the settlement process itself yields more informed, constructive, and mutually beneficial outcomes. The third reason that we're confident is the clear path that we're on in our transition to clean energy. We came out with our clean energy commitment in early 2020, and I'm proud that we've made significant progress. We plan on retiring our remaining TROIA units by next year and to completely exit coal by 2031.

Jeffrey B. Guldner: Historically outcomes achieved through settlement have delivered new and innovative customer programs.

And other results that benefit a broad and diverse range of stakeholder interest in our state's energy future.

Jeffrey B. Guldner: We believe the nature of the settlement process itself yields more informed constructive and mutually beneficial results.

The third reason that we're confident is the clear path that we're on and our transition to clean energy, we came out with our clean energy commitment in early 2020.

Jeffrey B. Guldner: And I'm proud that we've made significant progress we plan on retiring our remaining troia units by next year and to completely exit coal by 2031.

Jeffrey B. Guldner: Since our clean energy commitment, we've procured nearly 5,000 megawatts of additional clean energy and storage and issued another all-source RFP for an additional 1,000 megawatts of reliable capacity, including at least 700 megawatts of renewable energy. With the approval of the SRB mechanism in this rate case, we're even better positioned to establish ownership in these new clean energy assets for our customers' benefit. The fourth reason I'm optimistic about the future is because of the tremendous amount of growth and opportunities we have in our FERC jurisdictional transmission business. We've increased our core transmission spend for the next three years and expect to have a much greater need for transmission capital expenditure over the next decade. We recently filed our 10-year transmission system plan with the Corporation Commission, showing five critical transmission projects that are needed to strengthen resiliency, support the growing energy needs of our customers, and allow for greater access to a diversity of resources in markets across the region. The total investment for APS's portion of these projects is estimated to total over $5 billion over the next 10 years.

Jeffrey B. Guldner: Since our clean energy commitment, we've procured nearly 5000 megawatts of additional clean energy and storage and issued another all source RFP for an additional 1000 megawatts of reliable capacity, including at least 700 megawatts of renewable energy.

Jeffrey B. Guldner: With the approval of the <unk> mechanism in this rate case, we're even better positioned to establish ownership in these new clean clean energy assets for our customers' benefit.

Jeffrey B. Guldner: The fourth reason I'm optimistic about the futures because of the tremendous amount of growth and opportunities we have in our FERC jurisdictional transmission business.

Jeffrey B. Guldner: We've increased our core transmission spend for the next three years and expect to have a much greater need for transmission capital spend over the next decade.

Jeffrey B. Guldner: We recently filed our 10 year transmission system plan with the Corporation Commission showing five critical transmission projects that are needed to strengthen resiliency support the growing energy needs of our customers and allow for greater access to a diversity of resources in markets across the region.

Jeffrey B. Guldner: The total investment for Acs's portion of these projects is estimated to total over $5 billion over the next 10 years.

Jeffrey B. Guldner: We look forward to developing this critical infrastructure that's necessary to continue to provide safe and reliable service to our customers. And finally, I'm optimistic about the future because my entire management team and I have been committed to executing a customer-centric strategy that will allow us to deliver exceptional customer service. As I mentioned earlier, we've made significant progress in our J.D. Power survey results and have moved from fourth quartile in 2021 to second quartile at the end of 2023. Additionally, we're focused on delivering on our goal to provide reliable energy to our customers in the most affordable manner. Increases in our rates remain well below the rate of inflation, even with the latest break case decision.

Jeffrey B. Guldner: We look forward to developing this critical infrastructure, that's necessary to continue to provide safe and reliable service to our customers.

Jeffrey B. Guldner: And finally, I'm optimistic about the future because my entire management team and I have been committed to executing our customer centric strategy that will allow us to deliver exceptional customer service.

Jeffrey B. Guldner: As I mentioned earlier, we've made significant progress in our J D. Power survey results and have moved from fourth quartile in 2021% to second quartile at the end of 2023.

Jeffrey B. Guldner: Additionally, we are focused on delivering on our goal to provide reliable energy to our customers in the most affordable manner.

Jeffrey B. Guldner: Increases in our rates remained well below the rate of inflation, even with the latest rate case decision, we remain focused on customer affordability and keeping it central to our plans to provide long term sustainable growth.

Jeffrey B. Guldner: We remain focused on customer affordability and keeping it central to our plans to provide long-term sustainable growth. That focus, coupled with continued cost management, creates the right headroom for the future. I'll now turn the call back over to Andrew to provide guidance and share our long-term financial outlook. Thanks, Jeff.

Jeffrey B. Guldner: That focus coupled with continued cost management creates rate headroom for the future.

Jeffrey B. Guldner: I'll now turn the call back over to Andrew to provide guidance and share our long term financial outlook.

Andrew Cooper: Thanks, Jeff.

Andrew Cooper: I'll now discuss our 2024 guidance and future financial outlook. For our 2024 outlook, we are establishing an EPS guidance range of $4.60 to $4.80 per share, reflecting the additional revenues from our recent rate case outcome, with new rates effective March 8. This revenue is partially offset by continued drag from increased expenses not captured in our historical past.

Andrew Cooper: I'll now discuss our 2020 for guidance and future financial outlook.

Andrew Cooper: For our 2024 outlook, we are establishing an EPS guidance range of $4 60.

Andrew Cooper: To $4 80 per share, reflecting the additional revenues from our recent rate case outcome with new rates effective March 8th.

Andrew Cooper: This revenue is partially offset by continued drag from increased expenses not captured in our historical test year.

Andrew Cooper: As Jeff mentioned, this rate case was balanced and constructive, and this decision will create a solid foundation from which we will grow. However, it is important to highlight that we continue to face significant regulatory lag due to the timing of our historical test year, which ended June 30th, 2022. This lag is mainly due to higher interest rates on borrowed capital, higher depreciation due to increased rate-based growth, lower contributions from pension funds on service credits, and increased O&M expense due to planned generation outages. We are encouraged by the Commission's focus on holistically addressing regulatory lag through the newly created Regulatory Lag Docket. We are committed to addressing these current costs in our next rate case and working with the Commission to find solutions to reduce these impacts on our current structure.

Andrew Cooper: As Jeff mentioned this rate case was balanced and constructive and his decision will create a solid foundation from which we will grow. However, it is important to highlight that we continued to face significant regulatory lag due to the timing of our historical test year, which ended June 32022.

Andrew Cooper: This lag is mainly due to higher interest rates and borrowed capital.

Andrew Cooper: Higher depreciation due to increased rate base growth lower contributions from pension on service credits and increased O&M expense due to planned generation outages we.

Andrew Cooper: We are encouraged by the Commission's focus on Holistically addressing regulatory lag through the newly created regulatory lag to market. We are committed to addressing these current cost in our next rate case and working with the commission to find solutions to reduce these impacts on our current construct are.

Andrew Cooper: Our commitment to mitigating regulatory lag is a priority, aiming to preserve our financial stability and build shareholder value between rate cases. Diving a bit deeper into 2024, the largest positive driver of our guidance will be new revenues from the implementation of the Ray Case decision. Other positive drivers are expected to include increased revenues from sales growth, the LFCR, and the full year impact of the 2019 rate case appeal act. The most significant year-over-year negative driver is expected to be weather due to the record-breaking heat wave we saw in 2023, as we plan for normal weather.

Andrew Cooper: Our commitment to mitigate regulatory lag is a priority aiming to preserve our financial stability and.

Andrew Cooper: And build shareholder value between rate cases.

Diving a bit deeper into 2024, the largest positive driver of our guidance will be new revenues from the implementation of the rate case decision.

Andrew Cooper: Other positive drivers are expected to include increased revenues from sales growth the <unk> CR and the full year impact of the 2019 rate case appeal outcome.

Andrew Cooper: The most significant year over year negative driver is expected to be whether due to the record breaking heat wave. We saw in 2023 as we plan for normal weather.

Andrew Cooper: Other negative drivers are expected to be higher depreciation and amortization expense, increased financing costs, and higher O&M, primarily due to planned outages. Turning to customer growth, as Jeff mentioned, we once again expect our customer growth to be within the range of one and a half to two and a half percent, which continues to highlight the attractiveness of our state and service territory for customers in migration. For 2024 sales growth, we expect 2% to 4% growth, of which 2.5% to 3.5% is driven by extra high load factor CNI customers. These sales create operating leverage and ultimately rate headroom for all.

Andrew Cooper: Other negative drivers are expected to be higher depreciation and amortization expense increased financing costs and higher O&M, primarily due to planned outages.

Andrew Cooper: Turning to customer growth as Jeff mentioned, we once again expect our customer growth to be within the range of one five to two 5%, which continues to highlight the attractiveness of our state and service territory for customer and migration for.

Andrew Cooper: For 2020 for sales growth, we expect 2% to 4% growth of which $2 five to three 5% is driven by extra high load factor C&I customers.

Andrew Cooper: These sales create operating leverage and ultimately rate headroom for all customers. We have seen a steady ramping of these customers and we anticipate they will continue to ramp through 2020 for longer term, we expect our weather normalized sales growth to be within the range of 4% to 6% through 2020.

Andrew Cooper: We have seen a steady rise in these customers and anticipate it will continue to rise through 2024. Longer term, we expect our weather-normalized sales growth to be within the range of 4% to 6% through 2026, with 3% to 5% of this growth driven by our large C&I cuts. Turning now to what we strive to provide investors going forward, I will discuss our financial outlook and goals. We are rebasing our long-term UPS growth guidance of 5% to 7% off the midpoint of our 2024 guidance range of $4.60 to $4.80 per share. While our financial plan supports this growth rate for the long term, our goal is to work toward a more consistent and timely cost recovery profile. We have already made solid progress toward reducing regulatory lag with the Commission approving the System Reliability Benefit Surcharge.

Andrew Cooper: Six with 3% to 5% of this growth driven by our large C&I customers.

Andrew Cooper: Turning now to what we strive to provide investors going forward.

Speaker Change: Forward I will discuss our financial outlook and goals.

Speaker Change: We are re basing our long term EPS growth guidance of 5% to 7% off the midpoint of our 2024 guidance range of $4 60 to $4 80 per share.

Speaker Change: Our financial plan supports this growth rate for the long term our goal is to work toward a more consistent and timely cost recovery profile. We have already made solid progress toward reducing regulatory lag with the commission approving the system reliability benefit surcharge, while this mechanism will enable more timely cost recovery for utility.

Andrew Cooper: While this mechanism will enable more timely cost recovery for utility-owned generation, we must first develop these projects before the mechanism begins recovering costs. Therefore, this mechanism has the potential to create strong value in the future, but we must first work through the natural development cycle and get projects in service. In addition, the Commission has reiterated its policy on settlements, which may streamline future rate case filings while creating even more collaboration between parties.

Speaker Change: On generation, we must first develop these projects before the mechanism begins recovering costs. Therefore, this mechanism has the potential to create strong value in the future, but we must first worked through the natural development cycle and get projects in service.

Speaker Change: In addition, the commission has reiterated its policy on settlements, which made streamline future rate case filings, while creating even more collaboration between parties.

Andrew Cooper: Finally, we will engage with regulators to holistically address regulatory lag through the newly created docket and commit to our cadence of future rate cases to ensure we are recovering our material costs. We are allocating $6 billion for investment through 2026, contributing to a 14% increase in our capital investment profile compared to this time last year. This plan incorporates additional capital investment and generation that will qualify for the new SRB amendment. In addition, an increasing portion of our capital plan is directed towards bolstering our FERC jurisdictional transmission infrastructure. The average annual spend is now more than double what it was as recently as five years ago.

Speaker Change: Finally, we will engage with regulators to holistically address regulatory lag through the newly created docket.

Speaker Change: And commit our cadence of future rate cases to ensure we are recovering our material costs.

Speaker Change: We are allocating 6 billion for investment through 2026 contributing to a 14% increase in our capital investment profile compared to this time last year.

Speaker Change: This plan incorporates additional capital investment in generation that will qualify for the new <unk> mechanism.

Speaker Change: In addition, an increasing portion of our capital plan is directed towards bolstering our FERC jurisdictional transmission infrastructure average annual spend is now more than double what it was as recently as five years ago. We have designed a well balanced capital allocation strategy that optimizes, our ability to receive timely recovery for invest.

Andrew Cooper: We have designed a well-balanced capital allocation strategy that optimizes our ability to receive timely recovery for investment while providing reliable service across our rapidly growing service territory. Importantly, the SRB will expand our capacity to self-build generation to meet customer needs while reducing lag. Projects that meet the requirements of the all-source RFP and compete from a cost and reliability perspective would qualify for recovery through the SRB. We expect approved projects to be included in rates within approximately 180 days of being in-service, significantly shortening the time between investment and recovery on those assets compared to traditional ratekeeping. Recovery will be at the prevailing weighted average cost of capital, less 100 basis points, until a future rate. This discount will provide customers an immediate benefit while achieving rate gradualism and reducing lag.

Speaker Change: <unk>, while providing reliable service across our rapidly growing service territory.

Speaker Change: Importantly, the <unk> will expand our capacity to self build generation to meet customer needs, while reducing lag projects that meet the requirements of the all source RFP and compete from a cost and reliability perspective would qualify for recovery through the SRP.

Speaker Change: We expect approved projects to be included in rates within approximately 100 days 80 days of in service significantly shortening the time between investment and recovery on those assets compare to a traditional rate case recovery will be at the prevailing weighted average cost of capital that's 100 basis points until a future rate case.

Speaker Change: This discount will provide customers an immediate benefit while achieving rate gradualism and reducing lag.

Andrew Cooper: We have highlighted five potential near-term opportunities to secure project cost recovery through the SRB, with final outcomes dependent on ongoing procurement processes. Additional opportunities are also expected to arise based on future RFP outcomes and projects aligning with this measure. The expansion of our capital investment plan is poised to drive substantial rate-based growth. Consequently, we are revising our rate-based growth guidance to an annual CAGR of 6% to 8%. In addition, with the adoption of the SRB, we now expect an increase in tract capital, which will reduce regulatory lag in the future. By increasing our transmission spend and generation investment that qualifies for the SRB, we expect to double the amount of track capital, which will improve our ability to receive timely cost recovery and reduce the amount to be recovered in future rate cases, to fortify our capital structure and support our robust capital expenditure plan.

Speaker Change: We have highlighted <unk> potential near term opportunities to secure project cost recovery through the SRV with final outcomes dependent on an ongoing procurement processes.

Additional opportunities are also expected to arise based on future RFP outcomes and project aligning with this mechanism.

Speaker Change: The expansion of our capital investment plan is poised to drive substantial rate base growth.

Speaker Change: Consequently, we are revising our rate base growth guidance to an annual CAGR of 6% to 8%. In addition, with the adoption of the <unk>. We now expect an increase in track capital, which will reduce regulatory lag in the future.

Speaker Change: By increasing our transmission spend and generation investment in a qualified for the SMB, we expect to double the amount of trapped capital, which will improve our ability to receive timely cost recovery and reduce the amount to be recovered in future rate cases.

Speaker Change: To fortify our capital structure and support our robust capital expenditure plan, we are planning to issue a mix of debt and equity securities over the 2024 through 2026 period.

Andrew Cooper: We are planning to issue a mix of debt and equity securities over the 2024 through 2026 period. Our principal goal is to have a healthy capital structure at the utility with no less than 50% equity. We have noted since 2021 the need for up to $500 million of equity to support a balanced utility capital structure. You'll recall this was deferred over the past two plus years as we sought to revalue shareholders as we worked to improve the regulatory environment in Arizona. The capital structure need has grown by an additional 100 to 200.

Speaker Change: Our principal goal is to have a healthy capital structure of the utility with no less than 50% equity. We have noted since 2021, the need for up to $500 million of equity to support our balanced utility capital structure.

Speaker Change: Youll recall this was deferred over the past two plus years as we sought to insulate shareholders as we work to improve the regulatory environments in Arizona.

Speaker Change: The capital structure need has grown by an additional 100 to 200 million over that time, and we will be required to true up our equity ratio.

Speaker Change: At the same time, our Capex profile has grown by almost 15% nearly $1 billion over a four year window.

Speaker Change: While we will pursue a blended financing solutions across Aps and pinnacle west to address our investment objectives sources of incremental capital may include up to $400 million of additional equity or equity linked securities over the period size to approximately 40% of this incremental capex to.

Speaker Change: The financing options for this incremental Capex may potentially include at the market issuances, though we will continue to evaluate alternatives to common equity.

Speaker Change: As we advance into 2024, our dedication to cost management continues to guide our operations core O&M is declining year over year. Despite continued inflation, which supports our long term goal of reduced O&M per megawatt hour, notably planned major outages are scheduled.

Speaker Change: For four corners unit, five Red Hawk, and West Phoenix with refueling outages at Palo Verde marketing critical phase in our maintenance strategy. The four corners outage at unit five specifically is the last major planned outage at unit before his retirement with the last major planned outage at unit four is scheduled.

Speaker Change: For spring of 2025.

Speaker Change: Despite these necessary planned outages, our commitment to operational efficiency and lean practices remains intact for the long term.

Speaker Change: Our goal is declining O&M per megawatt hour is strongly established and underscores our effective cost management with rapid growth in our service territory. The second chart on this slide highlights our success in maintaining O&M cost increases below the rate of inflation since 2017 outperforming both national.

Speaker Change: CPI trends and more specifically local inflation rates in Phoenix. This achievement is a testament to our unwavering focus on optimizing operations and fostering a culture of efficiency across our organization.

Speaker Change: We continue to provide an attractive dividend yield as part of our total shareholder return and maintain our goal of managing our payout ratio into a sustained range of 65% to 75% in the future with.

Speaker Change: With a solid track record of annual dividend growth, we understand the importance of returning value to our investors. We are committed to working diligently to ensure our dividend remains competitive.

Speaker Change: Turning to our credit ratings following our recent rate case resolution and other developments in the Arizona regulatory climate.

Speaker Change: We are working with the rating agencies as they evaluate our credit healthy investment grade credit ratings are pivotal to our financial profile as they contribute to reducing borrowing costs, thereby directly benefiting our customers through more favorable financial conditions, we are adjusting our <unk> to debt target range to 14%.

Speaker Change: That's a 16% to properly balance the financing needs of the company and solid credit metrics.

Speaker Change: Our balance sheet remains strong reinforcing our financial foundation. This balance sheet strength provides us flexibility to navigate the current interest rate environment and strategically address our near term maturities as well as the ongoing and future investment needs.

Speaker Change: Looking back at the last few years and the strides we've made we are enthusiastic about our future and the potential of the company.

Speaker Change: Overcoming the setbacks of the prior rate case, we achieved the goals set forth during the preceding two years and we've aligned closely with the commission and stakeholders to secure a constructive outcome in this rate case.

Speaker Change: While challenges such as regulatory lag persist our commitment to see collaborative solutions with stakeholders ACC staff and the commission remains firm.

Speaker Change: Our dedication to keeping customer cost affordable is evident through our efficient O&M practices seeking to ensure that rates and costs stay below inflation. During this period of unprecedented growth in our service territory.

Speaker Change: With a more constructive regulatory environment and a continued focus on affordability, we look forward to approaching the future with a clear vision and optimism for our customers and investors.

Speaker Change: This concludes our prepared remarks, I'll now turn the call back over to the operator for questions.

Speaker Change: 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 Change: We do ask that what posing a question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.

Once again, if you have any questions or comments. Please press star one on your phone please hold while the call for questions.

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

Speaker Change: Good morning, guys, it's Jamie Starwood on here for Shar.

Speaker Change: Hey, how are you hi, Jason Hey, Jamie.

Speaker Change: Hey.

Jamie Starwood: Just a couple of quick questions here after your upcoming.

Jamie Starwood: Presumably 24 equity issuance what would you expect your typical funding cadence to look like.

Jamie Starwood: Over the next couple of years, but kind of going forward beyond that it's been a special situation waiting for the ROE to come back up in this last rate case. So we just wanted to get a sense, especially now that you have the SRV and as rate base growth is picking up you'd mentioned, both ATM and hybrids how would you characterize your preference between implementing a regular.

Jamie Starwood: Other ATM annual ATM, and then continuing to space out equity issuances.

Speaker Change: Sure Jason Thanks for the question fundamentally as you think about the financing plan.

Have the equity need that we've identified which we've talked about for a long time is up to $500 million and we have now true that up to an additional 1% to 200 that we need to make sure that the equity ratio at the utility.

Speaker Change: Is strong and at 51, 9% equity ratio that was approved in the most recent rate cases are a good example of the solid consistent with the market type equity ratio and so that's that's kind of that need and I think what youre focused on is what is the cadence for some of the that up to 400 million.

Speaker Change: As I mentioned earlier to support future Capex and really the way we think about it is what is the structure or type of issuance that would allow us to meet the needs of that capex as it's incurred and certainly <unk>.

Speaker Change: ATM program is one option that would allow us to drive equity.

Periodically.

Speaker Change: <unk> have proceeds that match up with our capital the capital need is relatively consistent across the period and I just wanted to be clear that up to $400 million that is future capital spending.

Speaker Change: As you work through the next three years of our plan and so we're very flexible in terms of thinking about what the options available to us whether an ATM or some sort of equity linked security.

Speaker Change: We will look at all of those options. We don't have a strong preference I think we wanted to make clear that as we think about our capital structure, we think about our Capex plan.

Speaker Change: Something that has a there will be external financing needs.

Speaker Change: For the company to support that Capex and they could include equity type products will continue to evaluate over the next few years, what product matches, our best and what market is most available to us, but I do cite the ATM as an example, because of the way it allows that periodicity to match up against Capex, which is ultimately what.

Speaker Change: We're solving for over the longer term both from the increases in transmission spend on the FERC side, and then generation spend that we expect would be eligible for SMB.

Got it. Thank you for that that makes a lot of sense.

Speaker Change: The second question last one I had is turning to your SRV, how should we think about the 42% figure you call out on slide 25.

Speaker Change: This is just a high level question is that just projects, which could potentially be eligible for the SRV. If you were to win them and an all source RFP or are you expressing any sort of.

Speaker Change: Probability of these projects ending up on plan.

Speaker Change: Yes, so the projects that we've listed out are examples of the opportunities. When you think about we're currently in our 2023 RFP our re ask for all source resources and so there are five projects listed there cover that span of time, and we're still negotiating with third party developers around people.

Speaker Change: These projects are still in that very early stage of development. They are examples of the potential that we have within the existing window that we're in for this RFP there will be future rfps in future time spans that match up but one of the things that we wanted to emphasize here is that for a long time, we've been talking about fillingham strong.

Speaker Change: Bringing competitive projects forward because of.

Speaker Change: Capital limitations and uncertainty around recovery with ESRB you have here a list of opportunities that demonstrate that that 10% to 15% of megawatts that we have been developing historically has upside into a range much closer to kind of that 35% to 50% that we thought was potential based on looking at our <unk>.

Speaker Change: On pipeline so within the window of the existing RFP in the time period, we're talking about you take the megawatts that we expect need to be built from a utility scale perspective.

Speaker Change: That window, and what megawatts are available to us as potential opportunities and thats the 42% you see there.

Speaker Change: While all of these projects be built and we're still in that development timeline will will make that determination as we go along the capex in our three year plan that we believe is probable.

Speaker Change: Includes generation capital related to potential <unk> projects, but we're not breaking those that cath lab ground Euro granularly, but 42% is representative of that upside opportunity relative to our prior view of our investment profile in the generation side and Jameson as Jeff as you know, it's still very specific.

Speaker Change: Negotiations of the individual projects and Theres really two things, we would be trying to capture with these SRV.

Speaker Change: Projects, one is the benefits long term benefit to customers that would be better than if you just did a PPA and then the second as was mentioned at the hearing.

Speaker Change: From a reliability standpoint, when we build the projects they come in on time. So when we have a critical need for a summer and we're developing the project we've been good at getting those in timely and you have more risk when you have a PPA and somebody can slide the in service date.

Speaker Change: Sometimes that makes it a suboptimal, but it's pretty it's a pretty project specific analysis, you'll have to go. So I think just showing representative projects was what we were trying to get across here, but the details will matter and those will come up in the in the negotiations with these with these projects.

Speaker Change: Perfect. Thank you no that's exactly what we were looking for in terms of an answer it looks like an opportunity set to us, but we had a few inbounds and people were asking us to clarify.

And so we did.

Speaker Change: Thank you so much that's all we have James and I appreciate it.

Speaker Change: Thank you. Your next question is coming from Nick Campanella from Barclays. Your line is live.

Nick Campanella: Hey, good morning, everyone. Thanks for taking my question.

Nick Campanella: Hey, so I guess.

Nick Campanella: It's good to see the ACC is kind of heading in the right direction here, especially.

Nick Campanella: Acknowledging the capital investments, you're putting in and.

Nick Campanella: Working on the earned ROE lag I guess, just how would you kind of characterize under earning this year on.

Nick Campanella: Maybe that ACC rate base from a from a percentage basis and how much do you think you can kind of get back.

Nick Campanella: The upcoming rate case filing versus what can be addressed and and the ROE lag docket. Thank you.

Speaker Change: Let me, let me I'll start Nick.

Nick Campanella: The challenge with this case in particular.

Speaker Change: Was that we came into it with a very inflationary environment.

Speaker Change: But we haven't seen before so we had a lot of the kind of lagged that in a flat interest rate environment, you don't necessarily see us as pronounced I think probably the biggest one that the coupe mentioned in the.

Speaker Change: And the.

Speaker Change: And the narrative was that the interest cost because we're actually lowering the embedded.

Speaker Change: Interest cost in this case that just was decided but our interest costs are significantly higher.

Speaker Change: And so those those are hopefully the things that we will get picked up in the regulatory lag docket and so structurally I think thats kind of open right now as to seeing what they want to focus on its good again that theyre actually focused on this as a real issue.

Speaker Change: That if youre in a historical test year jurisdiction like Arizona, and you don't have trackers or other things to pick up some of that regulatory lag any particularly when you get into an environment like we're in now with the higher inflationary pressures you can really come out of the case with with some significant baked in language that actually then means when you come in for your next case <unk>.

Speaker Change: Got a higher ASP.

Speaker Change: Because youre not getting the rate gradualism as you pick it up and so do you want to maybe talk we do what we can to mitigate it there is some structural stuff that you just can't do and you have to you have to come in with a subsequent case and then hopefully this regulatory lag dock. It gives us some visibility on mechanisms or structures that you can use that mitigated.

Speaker Change: Yes, Nick.

Speaker Change: Having.

Speaker Change: Wanted five the lag as you know it varies year to year, but the drivers that you should think about.

Speaker Change: And Jeff mentioned and one in the context of interest expense.

Speaker Change: Yes that certainly when we have a three 5% embedded cost of debt in this case, but the two debt issuances, we've done since the case here.

Speaker Change: In the mid 5% range to the low 6% range, so substantially above it we knew going into the case, we really wanted to focus on getting the ROE back up to the right level, we had a good equity capital structure and so in terms of the elements of lag.

Speaker Change: The cost of that was one that we de emphasized in this case.

Speaker Change: Create a lower revenue environment, but we do need to recoup that to be more representative of forward financing costs O&M as the other one where if you think about the test year. We were in a period of mid 2021 to mid 2022 is our test year I'd like to say it was during the time, where the fed was still talking about inflation is as transit.

Speaker Change: Tori, but if you look at it relative to our 2020 for O&M.

Speaker Change: O&M guidance Youre talking about somewhere in the neighborhood of $100 million of incremental O&M and Thats with a really good from our perspective, O&M story, where year over year, we are bringing O&M down despite having a full year of higher wages at some of our.

Speaker Change: Business unit and.

Speaker Change: That's on a core basis, and even with the higher amount of planned outages given the four corners outage youre still talking about less than 2%.

Speaker Change: O&M increased to the mid point of our guidance range. So a good story, but a lot of historical announced to catch up on <unk>.

Speaker Change: Pension, which we've talked about in the past.

Fortunately is not a story if you look at the guidance walk to 2024.

Speaker Change: No further impacts from pension in fact, it's a penny positive on the non service credit side, but we are carrying with us on the 2022 market impacts.

You had impact to our pension asset as well as the substantial change in discount rates year over year, and so we'll need to recoup that as well and then the final one and Youll see that again in our work this year increases in depreciation related to plant going to service a great story from this rate case, that's the one area, where we got 12 months.

Speaker Change: Post test year plant plus one major project that fell outside of that 12 month window, but our 2024 projects include some it investments, which have a shorter depreciation life and will contribute further to that lag. So.

Speaker Change: We've we're excited to get in to the opportunity to have a.

Speaker Change: Dialogue with the commission and stakeholders about these issues and of course, we will continue to look at the cadence of future rate cases to address them as well.

Speaker Change: Thanks for laying all that out there really really appreciate it.

Speaker Change: I guess, Andrew just on this 5% to seven growth rate.

Speaker Change: I think in the past, it's been tough to kind of extrapolate that linearly off of the base here just because of the the rate filing cadence.

Andrew Cooper: Can you just kind of give us a flavor of how youre thinking about it.

Speaker Change: I guess, you would have new rates in mid 'twenty five, but then as you get past that you start to ramp this FRB capital potentially you have some FERC transmission opportunities you highlighted so do you kind of start to grow linearly in 'twenty, six and beyond or how do you kind of think about that thanks.

Yes. It is.

Speaker Change: Really great question, Nick because we have the investment profile, we have fortunately the customer rate headroom. The iras are TBD, we'll see where that goes.

Speaker Change: But we really have the profile to grow that 5% to 7% over the long term and much of the conversation we've been having here has been about the regulatory lag kind of embedded in a historical test year and so if we could address that and go into a more stable price environment, we certainly have the opportunity.

Speaker Change: Unity to create more smooth cost recovery.

Speaker Change: Over the medium term the SRV as a significant contributor to that because you basically double the amount of trapped capital that you have that are going through some form of adjuster mechanisms. So between the transmission spend and the SRV eligible generation spend youre, having a much smoother or pace of recovery, where you're <unk>.

Speaker Change: Customer your sales growth is supporting any O&M increases and supporting the needs of our growing distribution system and then your transmission and generation spend is tracked so we view our ability once we've caught up on these historical lagging cost to be in a place where that cost recovery profile.

Speaker Change: Can smooth, we see the path to 5% to 7% either way, but it is really addressing some of these near term pinch points that come out of the last few years of inflation.

Speaker Change: That we need to address and to get to the other side of that between the SMB and sales growth.

Speaker Change: As you look at the long term sales growth not only is it providing some top line, but it's also as I mentioned earlier blunting some of the O&M and ensuring that we create operating leverage out of those increased sales.

Speaker Change: Thanks for that I appreciate the time.

Speaker Change: Thanks, Nick.

Speaker Change: Thank you. Your next question is coming from Michael <unk> from Evercore ISI. Your line is live.

Michael: Hi, good morning, Thanks for taking my question.

Michael: So you've talked about your equity issuance plan balancing your capital intended to balance our capital structure to greater than 50% equity at the Aps level. Obviously, you lowered your <unk> to debt targets of 14, and 16% just wondering if ideally more specifically if youre looking at target as high as.

Michael: 52% equity at Aps.

Michael: Structure to match the rate case outcome, and then where you anticipate landing on <unk> to debt metric this year and over your plan.

Michael: Yes.

Michael: I think there's two pieces to the equity capital structure story, one is we never want to fall too far behind.

Michael: Yeah.

Michael: The equity ratio has been an issue that through the last two rate case cycles for example, with <unk>.

Michael: Nearly a 55% in 2019 and then nearly 52% in this most recent rate case, it's been an issue that's largely not been one that.

Michael: Has been subject to a lot of debate as to the actual capital structure at the end of the historic had the historical test year, and we think that a balanced capital structure, a little bit more than 50%.

Michael: Equity at the utility is an appropriate one it's consistent with national averages as I mentioned earlier in my remarks with 51, 9% that we got in the last rate case is a solid capital structure.

Michael: It is consistent with where averages are around the country.

Michael: And while in in any given year, we want to make sure that we're we're trying to stay above 50, so we're not in a catch up situation.

Michael: We are going to look at any time period, what is the overall WAC look like what's the rate.

Michael: No.

Michael: Right.

Michael: Question from going into a rate case and want to make sure that the WAC overall, it's one that's affordable to customers. So it's really a balance.

Michael: That equity that we talked about earlier, the up to 500, which now needs to be true it up a little bit higher.

Michael: If you look at our 10-K and you calculate the Aps equity ratio, it's below 50% and so this is the capital that we believe we need to get to the right spot going forward. This is all balanced with with credit metrics. The 14% to 16% you mentioned is an opportunity for us to balance the needs of our capital.

Michael: Investment plan and having solid investment grade credit ratings, we're still in conversations with the rating agencies.

Michael: It is.

Michael: <unk> been watching the regulatory environment over the last two years and.

Michael: <unk> continued to work with them to you.

Michael: Verify where theyre coming out now that the rate cases completed.

Great. Thank you and then secondly for me.

Michael: Regarding your sales growth forecast through 2026 regarding a 46% through that 2006 period.

Michael: Versus 2% to 4% this year.

Michael: Obviously, you're expecting large C&I customers to come online.

Wondering how we should think about sales growth in <unk> and 'twenty, five and specifically and also in 2006.

Michael: When we see that despite weak or is it a consistent in those two years.

Yeah, and we haven't been granular between the two because as we've seen over the last few years.

Michael: And we can see we've conservatively forecast our sales growth and I think we learned a lot last year in terms of the ramp rate of some of these larger high load factor customers. Both on the advanced manufacturing side and the data centers and so we forecast conservatively and there can be some variability intra year as <unk>.

Michael: Far as you've kind of datacenter box.

Michael: <unk> got an anchor in there and you can keep building it out that happens over time and through for these large customers.

Michael: We're not sharing a gradual.

Michael: Granular view between 25 and 26.

Michael: Would say that talent semiconductor, which is one of the larger.

Michael: New customers that we have coming in and they're committed to full ramp up of their first fab in the first half of 2025 and the ecosystem of other companies that surrounds them is part of that sales growth rate.

Michael: And so their timing, reaching their full production and then having a full year impact of that in 2026 kind of gets you to the terminal year their growth rate range. It doesn't give you an answer to your question on 25 versus 26, exactly but the trends that we watch are fundamentally the ramp rates.

Michael: So each of these customers and our our team is having regular conversations with each of them and has a pretty close pulse on what the ramp looks like.

Speaker Change: Great. Thanks, Andrew.

Speaker Change: Thank you. Your next question is coming from Paul Patterson from Glen Rock Your line is live.

Speaker Change: Yes.

Paul Patterson: Hey, good morning.

Paul Patterson: Hey, Paul.

Paul Patterson: Just really quick sort of bookkeeping questions.

Paul Patterson: I apologize if I missed this what's the timing of your next weakness do you expect to put the pilot.

Speaker Change: Yes, Paul we haven't.

Speaker Change: Have not.

Speaker Change: The timing for that.

Speaker Change: Regulatory lag docket is starting on March 19th.

Speaker Change: And so that's going to be the first workshop I expect theyre going to can I expect the commission is going to engage probably most of this year and conversations around around that docket.

Speaker Change: Consistent with what we had.

Speaker Change: Sheridan.

Speaker Change: We'd want to see how that dockets involving.

Speaker Change: And make sure that if there's opportunities to have a better structure in terms of different process that picks up regulatory lag you would want to wait until you see how that docket plays out so we have to balance that and continuing to watch with the progress on that with them.

Speaker Change: The regulatory lag that Andrew was talking about earlier.

Speaker Change: Okay, you anticipated my next question, which.

Speaker Change: <unk>.

Speaker Change: A follow up on that when do you think you said you expect them to be engaged with it this year.

Speaker Change: Always hard to sort of predict when when the docket like that would be resolved, but do.

Speaker Change: Do you have any sense I know, it's really early but.

Speaker Change: So I'm just curious.

Speaker Change: Do you have any idea when that when you think that might be they might we might get to a conclusion or at least a better idea about where they're headed on that yeah. I think if you watched probably the initial dockets I'm guessing, they're probably going to have some conversation around the timing that they look they look for that I would not be surprised.

Speaker Change: Particularly because I think the start of this docket waited until all the utilities were through their rate cases, So we had a tough case U S case.

Speaker Change: And so I think they are just waiting for our case to get cleared before opening this generic docket up and looking at the utilities and given the focus that I think the commission has indicated around dealing with regulatory lag I would not be surprised if you've got a pretty.

Speaker Change: Pretty good progress throughout this year.

Speaker Change: And the idea would be that in 2025 and beyond.

Speaker Change: Clarity in terms of a processor or an approach to take that that's when you'd start seeing seen utilities.

Speaker Change: Again to adapt the recommendations or whatever comes out of this docket, but you've got to watch early on and just see how it begins to develop.

Speaker Change: Okay.

Speaker Change: So the answer to the first question sort of is probably not until 2025, what do we see an actual filing for a for a new rate case does that makes sense am I thinking about it correctly.

Speaker Change: Yes, I think <unk> got you want to put rates in effect. If we put rates in effect in March is typically will want to have at least half of the year rates in effect. That's been a process that has been used in Arizona and then if you start lining up calendar versus split years, but obviously like you said, we want to watch how the docket evolves.

Speaker Change: <unk>.

Speaker Change: Decide how we move forward. The other thing just to you've got flagged that I think is an important driver and you saw it with the complexity of this case is that continuing to work with stakeholders on the value settlements, we had a long history. Prior to the last couple of cases, where we were able to reach pretty constructive settlements that had.

Speaker Change: Benefits and the real benefit of moving into a settlement is you don't see.

Speaker Change: Typically you don't see binary outcomes, there's things, where there's benefits to both sides and so some of the customer related programs. In particular, you can actually get pretty good results in a settlement.

Speaker Change: When you are crafting things like that and so I would hope that at the same time as the commission is working through the regulatory lag docket that we continue to work with stakeholders to set up an environment, where we could see.

The next case moving in and again, maybe taking advantage of whatever comes out of that docket, but moving into more of a settlement structure that a fully litigated case. So it's still too early to tell on on both counts, but those are two areas we'd be focused on.

Speaker Change: Awesome. Thanks, so much.

Speaker Change: Yes.

Speaker Change: Thank you. Your next question is coming from Bill <unk>, Chile from UBS. Your line is live.

Bill: Hi, good morning, Thank you.

Yes, I don't want to do.

Bill: Just a question so on the SMB.

Bill: Practically speaking would that be deployed in 2026, when some of these assets are coming into service or why don't we first see that deployed.

Short answer yes.

Bill: You think about the RFP, assuming that our projects clear through the RFP.

Bill: The earliest in services you have or.

Bill: In advance of summer 2026, there is a filing process.

Bill: Around the time, the assets going into service, which I mentioned earlier in our remarks could be.

Bill: In the six month range, but.

Bill: That's not something that we'll work through at the time.

Bill: The first kind of slug of projects is ensuring that we have reliability over summer 'twenty six and you'll see the types of projects that are in that list of potential opportunities are pretty diverse group of technology types and so that was really the other thing I think that I would highlight from that average.

Bill: Unity said as it addresses.

Bill: Reliability needs for the summer peak.

As well as some of the shifts that we're making towards.

Bill: Our clean energy commitment. So 2026 is the is the period when you had talked about earlier.

This is a medium term part of the solution around regulatory lag is increasing the share of trapped capital and now pair nicely with.

Bill: The work that we're doing right now on some of those income statement costs that we want to make sure that we're recovering in a timely way.

Okay, and then I guess.

Bill: Around that on the cost side did you guys take advantage of some of the weather and pull forward some of the O&M.

Bill: 2023, or I guess, maybe how are you combating some of these inflationary pressures to keep the core O&M declining year over year.

Speaker Change: Yes so.

Speaker Change: As the weather continued to be a positive benefit through the year. We did look at opportunities to take some of the O&M out of 2024 as we were triaging. During the summer we were really just making sure that we are allocating O&M to the right spots within 23 to make sure that we're meeting the needs of our generation fleet and keeping reliability through that summer. So there.

Speaker Change: Was some modest pull forward.

Speaker Change: And Thats something that we look at every year and look at the opportunity.

Speaker Change: To take costs out whats really driving the long term trend is our overall focus on customer affordability and on that lean culture.

Speaker Change: We've ingrained in the organization Thats a fundamental driver you also have choice.

This is the last year.

Speaker Change: Year of operations and so some of the O&M from Chile.

Speaker Change: Rolls off.

Speaker Change: As we.

Speaker Change: Move away from some of the heavier fuel heavier O&M assets into some of the lighter.

Speaker Change: <unk> assets. So it's really a combination of that is offset by a full year impact of our contracted IBEW and some of the other wage pressure that we've seen but we're.

Speaker Change: There's a lot of pride internally on the ability to manage O&M and operated reliable system with lean mentality underlying it.

Speaker Change: Okay, Alright, and then lastly, just two quick ones on the 24.

Speaker Change: Theres 10 cents in the guidance for the BCE sale, but I just wanted to clarify that you are still good growing off of the midpoint right even though.

Speaker Change: Obviously as a sale thats not going to repeat and then secondly, just on the okay.

Speaker Change: Okay, and then secondly on the on the equity.

Speaker Change: The $6 million to $700 million that should be sort of block equity that we should expect upfront. This year right and then the the four hundreds more ratable through.

Speaker Change: All of the adoptions that you discussed earlier is that the way to think about it.

Yes, just going back to your first question yes.

Speaker Change: Our guidance range includes the expected gain on the sale of bright Canyon this year.

Speaker Change: And we're very confident that 5% to 10% earnings growth is.

Speaker Change: He is available to us on that rebased level, including that.

Speaker Change: Year over year 10.

Speaker Change: Yeah.

Speaker Change: Going to the equity, yes, I wouldn't want to comment on the timing specifically of that $6 million to $700 million.

Speaker Change: But fundamentally you're thinking about it the right way, which is that we.

Speaker Change: We have a need to true up our capital structure in that capital structure need goes with the question that was asked earlier around the timing of our rate case, which were also.

Speaker Change: Im not going to continue to monitor so we're fortunate to have flexibility from the perspective of our capital plan and our financing plan as to when we do that that larger.

Speaker Change: Equity ratio true up need common equity is the default kind of base case option for that need we are flexible in terms of the timing will continue to monitor the markets.

Speaker Change: You executed the optimal time for us the $400 million that comes later is really a longer term periodic need over the period to make sure that we're supporting our.

Speaker Change: Capex from the right mix of external financing sources.

Speaker Change: Alright, great. Thank you and congrats on getting through a successful rate case.

Speaker Change: Thank you Bill.

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

Anthony: Good morning team just two quick ones, where did you end 2023 on an episodic basis at Pinnacle West and second.

Anthony: To Mike's question earlier on the balance sheet, you talked about a lot of discussions with the rating agencies I am just curious if you think the recent balanced outcome and the Aps case is enough to remove the negative outlook at the agency.

Speaker Change: Yes, Thanks Anthony.

The agencies Havent <unk>.

Speaker Change: Provided theyre kind of official calculations on ethylene it at year end.

Speaker Change: Yet we had if you think about the old range that we had set at 16% to 18%.

Speaker Change: If you look at any of the kind of trailing periods before that we had we had fallen below that.

Speaker Change: We're in the fifteens.

So I don't have a Q4 number but from the agency is it's in the <unk>.

Speaker Change: Trailing basis before that and so one of the things we wanted to do is be realistic about.

Setting a range that made sense to meet our capital needs that we believe allows us to preserve solid investment grade credit ratings and Thats, why we reset that target in 2014% to 16%.

Speaker Change: S&P was pretty clear in the middle of the year that Theyre downgrade threshold with a constructive rate case outcome is in the 13% range in there of course, the one that's one notch lower and so we feel confident.

Speaker Change: Our range allows us to continue to manage around that.

Speaker Change: Other agencies, which have a one notch higher rating, we're still at a point to your second question, where we're waiting to see how they evaluate a credit but we felt comfortable moving to this fortunate to 16% target range over the longer term to.

Speaker Change: To match up our capital needs and where we thought we'd be okay from a ratings perspective.

Speaker Change: So to your second question, we've had quite a bit of conversation with the agencies over the last couple of years.

Speaker Change: We've spent a lot of time, highlighting with them and they are certainly mindful of the constructive regulatory outcomes that we've seen.

Speaker Change: And so we can't really predict when.

Speaker Change: When theyre going to act, but we are actively going to engage with them now that the rate cases complete to continue to highlight these factors as we said all along the agencies are focused as much qualitatively.

Speaker Change: Qualitatively here on the improvements and de risking of the regulatory construct which we believe we've seen over the course of the proceedings over the last.

Speaker Change: Two years, but certainly we will be sharing with them numbers and forecast and that dialogue so that they can.

They don't typically have outlooks.

Speaker Change: Not resolved for this period of time, they were clearly waiting for this rate case outcome to complete in order to resolve their outlooks and so again why can't.

Speaker Change: We anticipate how and when they'll act our expectation would be that now that they have all the information in front of them. They can make an evaluation of the ratings.

Speaker Change: Great. Thanks for taking my questions.

Speaker Change: Thanks Anthony.

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