Q3 2024 Pinnacle West Capital Corp Earnings Call
Speaker Change: Good day everyone, and welcome to the Pinnacle West Capital Corporation 2024 3rd Quarter Earnings Conference Call.
Speaker Change: At this time, all participants have been placed on a listen-only mode. If you have any questions or comments during the presentation, you may press star 1 on your phone to enter the question queue at any time, and we will open the floor for your questions and comments after the presentation.
Speaker Change: It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours. Thank you, Matt. I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2024 earnings, recent developments, and operating performance.
Speaker Change: Our speakers today will be our Chairman and CEO, Jeff Guldner, and our CFO, Andrew Cooper. Ted Geisler, APS President, Jacob Tetlow, COO, and Jose Esparza, Senior Vice President of Public Policy, are also here with us.
First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website along with our earnings release and related information.
Speaker Change: Today's comments and our slides contain forward-looking statements based on current expectations and actual results may differ materially from expectations.
Our third quarter 2024 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language, as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures.
Speaker Change: 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 13, 2024. I will now turn the call over to Jeff. Great. Thanks, Amanda. Thank you all for joining us today.
Jeff: We continue to execute well in our operational performance and financial management. So as part of my operations update, I'll share with you our success in managing through another record-breaking summer in the Valley and reliably serving our customers when they needed us most.
Speaker Change: I'll also provide an update on the regulatory lag docket, and then Andrew will explain how the hot weather and strong sales growth has led us to update our 2024 earnings guidance, and he'll also discuss our forward-looking financial expectations.
Speaker Change: So, to start, I wanted to recognize our operations and field teams for doing an exceptional job maintaining reliable service for our customers through the hottest summer on record.
Speaker Change: In addition to our team's keeping our system reliable here in Arizona, I also wanted to share my appreciation for the 30 crew members who recently volunteered to leave their homes.
Speaker Change: to answer the call for assistance in Florida and help rebuild the grid and restore power to communities devastated by Hurricane Milton. Our industry's mutual assistance network made this possible and it's a great example of living our APS promise by doing what's right for others and delivering for our communities.
Speaker Change: The summer season here was especially long, continuing into mid-October, when we finally said goodbye to triple-digit temperatures in the valley.
Speaker Change: We had a record streak of 113 consecutive days of 100-plus degrees, and we set an all-time new peak energy demand of 8,210 megawatts on August 4th.
Speaker Change: The hot days, the high nighttime temperatures, and the valley's heat island effect meant that air conditioners were often running around the clock to keep homes and businesses cool.
Speaker Change: 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 through the summer.
Speaker Change: Our baseload and our fast ramping assets all performed well. In addition, we used our virtual power plant that includes our cool rewards smart thermostat program.
Speaker Change: In that program, we've got over 95,000 enrolled thermostats that work together and help conserve nearly 160 megawatts when called.
Speaker Change: This summer, during a major storm outage, we partnered with customers enrolled in our program in a unique and historic way. Our customer technology experts worked with a specific targeted portion of that network of thermostats.
Speaker Change: located and participating customers homes to help voluntarily conserve power and that effort along with operational backups that included rerouting electricity or sectionalizing the system helped to relieve the strain successfully on the grid that was caused by that storm damage.
Speaker Change: This is the first time in APS history that a smart thermostat program was used in such a targeted manner using this innovative approach.
Speaker Change: Long-term planning has been key to providing reliable service. In fact, I'm happy to announce we've successfully contracted for our Red Hawk Power Plant expansion, which is expected to be in service by 2028.
Speaker Change: This project, along with the projects we announced last quarter, will add more than 800 megawatts of APS-owned generation and battery storage, ensuring that we have the resources necessary to provide reliable, affordable, and clean energy to our customers.
Speaker Change: With the 2023 All-Source RFP nearly complete, we're turning our attention to the next tranche of resource needs, and we plan to issue our 2024 All-Source RFP in the next few weeks.
Speaker Change: With the extreme weather that we experience each summer, it remains as important as ever to continue assisting our communities through our heat relief support programs. APS increased its energy support and crisis bill assistance.
Speaker Change: Maintained the summer moratorium on disconnects for past due bills and assisted customers with payment arrangements, and we partnered with more than 100 local nonprofit and community agencies to connect the state's most vulnerable population with helpful resources.
Speaker Change: Finally
Speaker Change: We continue to focus on providing the best experience to our customers, and I'm pleased to say that year-to-date Our customer care phone center is ranked first nationally among our peers as rated by our customers in the residential J.D. Power electric customer satisfaction study
Speaker Change: Overall, our customer satisfaction, as rated by customers through J.D. Power, places us in the top ten utilities amongst our peers. I'm extremely proud of our employees, our progress so far, and I look forward to closing out this year strong.
Speaker Change: Turning to regulatory, the Commission held a workshop dedicated to formula rates on October 3rd. In that workshop, they heard from the Federal Energy Regulatory Commission, consumer advocates, and Arizona utilities.
Speaker Change: Staff provided recommendations on consumer safeguards and implementation options. We remain focused on making progress towards reducing regulatory lag while enabling the continued growth of a reliable electric grid.
Speaker Change: Obviously, elections were held yesterday. Those elections included three Corporation Commission seats in Arizona.
Speaker Change: with this morning about 91% of precincts reporting if the current results stand, the Corporation Commission seats would be held by Commissioner Lia Marquez-Peterson, Rachel Walden, and Renee Lopez.
Speaker Change: You can access votes at the Secretary of State's website if you want to follow along, and that's at results.arizona.vote.
Speaker Change: As we look to wrap up 2024, our focus and priorities remain on executing our mission of providing reliable, affordable, and clean service to our customers.
Speaker Change: And I thank you for your time today, and I'll turn it over to Andrew. Thank you, Jeff, and thanks again to everyone for joining us today.
Andrew Cooper: Earlier this morning we released our third quarter 2024 financial results. I'll review those results and highlight key drivers and provide an update to full year 2024 financial guidance. Finally, I will provide insight into our 2025 and long-term financial outlook.
Speaker Change: We earned $3.37 per share this quarter, a decrease of 13 cents compared to the third quarter last year.
Speaker Change: This decline was driven by several factors.
Speaker Change: higher O&M and depreciation expenses, as well as financing costs and income tax timing. Offsetting these items were positive impacts from the new rates implemented earlier this year, and as Jeff mentioned, another summer of record-breaking heat, which contributed positively compared to last year.
Speaker Change: We continue to see strong sales growth across customer classes.
Speaker Change: For the third quarter, weather normalized sales growth was 5.9%, with contributions from residential and both small and large C&I customer groups.
Speaker Change: With the continued expansion of our C&I customers, we saw 10.3% C&I growth this quarter. This marks the third consecutive quarter with over 10% growth in the sector.
Speaker Change: Foundational to our sales growth has also been our continued strong retail customer growth, which came in at 2.3 percent for the quarter.
Speaker Change: Given these positive growth trends and this year's strong contribution from weather, we have updated our 2024 financial guidance.
Speaker Change: We now expect 2024 earnings in the range of $5 to $5.20 per share and have adjusted our sales growth expectations to four to six percent for the year, consistent with our long-term sales growth forecast.
Speaker Change: Additionally...
Speaker Change: With the sustained growth and recognizing the ability to utilize some of the weather benefit to de-risk both future operating expense and capital investment.
Speaker Change: We've increased our forecasted O&M for the year to a range of $1.01 billion to $1.03 billion and increased our capital expenditure plan for the year from $1.95 billion to $2.05 billion.
Speaker Change: As we look toward 2025,
Speaker Change: We expect an earnings per share range of $4.40 to $4.60 per share.
Speaker Change: The Anticipated Decrease in 2025 Compared to Initial Weather-Normalized 2024 Earnings Guidance
Speaker Change: is due to additional costs associated with regulatory lag, including debt and equity financing costs and higher DNA, as well as the end of a positive OPEB amortization and one-time gain from the sale of Bright Canyon in the prior period.
Speaker Change: These are partially offset by continued customer and sales growth and O&M management, highlighting the strong core fundamentals of our business.
Speaker Change: The growth outlook for 2025 remains robust for our service territory. We expect customer growth within a range of 1.5% to 2.5% for both 2025 and the long term, as Arizona continues to be a highly attractive destination for both residents and businesses.
Speaker Change: We are seeing a record number of new customer meter sets, on track to set more than 35,000 in 2024, the highest number since the Great Recession, and expect this trend to continue.
Speaker Change: Additionally, we anticipate weather normalized sales growth for both 2025 and longer term through 2027 in the range of 4 to 6 percent, with 3 to 5 percent contributed by growth in the extra high load factor C&I sector.
Speaker Change: where demand remains strong and existing customers continue to ramp up.
Speaker Change: In fact, Taiwan Semiconductor recently reiterated its commitment to build out three fabs in Arizona by the end of the decade. The first fab entered engineered wafer production earlier this year, with volume production expected to start in early 2025.
Speaker Change: Looking further ahead, we remain confident in our long-term trajectory. We are reaffirming our 5 to 7% EPS growth guidance based on the midpoint of our original 2024 guidance range of $4.60 to $4.80.
Speaker Change: Our financial strategy is designed to support this growth with a continued focus on balancing investment, cost recovery, and customer affordability.
Speaker Change: Our capital plan through 2027 includes $9.65 billion of investments, a 24% increase from the plan we shared earlier this year.
Speaker Change: This plan is focused on strengthening infrastructure, improving reliability, and meeting the demands of a rapidly growing service territory, including investments into new generation resources and into our strategic transmission plan.
Speaker Change: These investments are expected to drive rate-based growth of 6 to 8 percent.
Speaker Change: Notably, over 40% of our future capital investments in this plan are expected to qualify for the System Reliability Benefit Surcharge just approved in our last rate case, or through our FERC formula rates, both allowing for improved timeliness of cost recovery.
Speaker Change: To support the capital plan, we have also updated our financing strategy through 2027.
Speaker Change: Our plan includes a mix of debt and equity in support of a balanced utility capital structure and matched to our spending profile.
Speaker Change: are updated equity needs during this planning period.
Speaker Change: are lower than the target of 40% of new capital we established on our Q4 2023 call in February and represent a very modest increase in the expected annual equity run rate from $200 million annually to a range of approximately $250 to $300 million annually.
Speaker Change: As we've stated previously, we continue to believe that an at-the-market equity issuance program would match well with our planned accretive capital investment profile.
Speaker Change: We are always exploring alternative financing options as well, and believe this all-of-the-above approach provides us the flexibility to utilize least-cost, best-fit financing methods while maintaining a solid balance sheet, targeting metrics consistent with our current credit ratings.
Speaker Change: As we execute our capital and financing activities to reliably serve our rapidly growing customer base, we remain committed to maintaining a cost-efficient operation.
Speaker Change: Our long-term goal remains to reduce O&M per megawatt hour, and while we have the final scheduled major outage at our Four Corners Unit 5 facility in spring of 2025, our broader focus on lean operations and efficiency will drive continued cost management into the future.
Speaker Change: As we look ahead to 2025 and beyond, we remain confident in our long-term financial strategy while recognizing and continuing to address the challenges of continued financial lags.
Speaker Change: Our strong customer growth across classes and robust sales growth, particularly in the semiconductor and broader manufacturing sector, continues to highlight the unique benefits of our service territory.
Speaker Change: This, coupled with our improving regulatory environment that is focused on timely recovery, provides a compelling future.
Speaker Change: The investments we are making today lay the foundation for sustained growth and value creation for years to come, and we remain focused on delivering reliable, affordable service while maintaining a strong financial position.
Speaker Change: This concludes our prepared remarks. I will now turn the call back over to the operator for questions.
Speaker Change: Certainly. Everyone at this time will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time.
Speaker Change: We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality.
Speaker Change: Once again, if you have any questions or comments, please press star 1 on your phone.
Speaker Change: Your first question is coming from Shar Parusa from Guggenheim Partners. Your line is live.
Shar Parusa: Hey, Jeff. Hey, Andrew. Good morning. Hey, sir.
Shar Parusa: Morning, morning. Obviously, Jeff, it's topical this morning, you know, just start with the elections. It's prelim, but looks like we could end up with three more Republicans with a 5-0 commission. What could this, I guess, mean from a regulatory construct standpoint? You guys are making, you know, really good progress on items like, you know, the regulatory lag proceeding. So, curious if...
Shar Parusa: this progress can change in any direction, for better or worse. I have to imagine we could see some policy shifts here, but I'm just kind of curious how you're thinking about it.
Speaker Change: Yeah, I think SHARD generally, you know, and there's still some early, late early's I think out and a few precincts to report.
Speaker Change: But most of the vote is in, and you're correct that right now you've got the three Republican candidates that are...
Speaker Change: currently head so obviously that's still got to get finalized. I think if you look at what the comments that were made on the campaigns
Speaker Change: that generally what you'd see is that the Republicans, I think, had a fair amount of alignment with the current Commissioner Myers and Thompson.
Speaker Change: in terms of focusing on issues like the regulatory lag docket. So I think it's I think that if that's the result that continues, you're you're likely to see continued alignment with the current bench. So.
Speaker Change: Obviously, I think that suggests that there would be constructive work continuing to move forward on the REG-LAG docket. Apart from that, this is something we engage commissioners on both sides.
Speaker Change: throughout the campaign. And I'm sure that whoever ends up ultimately winning is going to have different issues and questions and want to understand things a little bit more. And we look forward to engaging with all the commissioners and having that dialogue and making sure they understand the drivers and the needs of the business.
Speaker Change: Perfect, fantastic. And then just lastly on load growth.
Speaker Change: On a near term, you guys kind of assume that 4 to 6 for 24 and 25.
Speaker Change: Are there opportunities there where we could see another step change increase in load from a large customer to being a hyperscaler? Thanks.
Speaker Change: Let me, and I'll ask Coop too, to join in on this. I mean, I think it's sticky. So one of the things that we've really focused on in Arizona over the last
Speaker Change: decade, not quite decade, but since the last recession, was trying to pivot the economy here from largely home building kind of retirement focus into more advanced manufacturing, and I think that the state has done a really nice job of
Speaker Change: And so you do see a lot of manufacturing. I was just on a call with the Commerce Authority and they were showing some of the projects that are
Speaker Change: factories and manufacturing sites that are just looking to niche into whatever land is available.
Speaker Change: hurricane-type disruptive weather that you see. You get a hot summer, but you know, it's a dry heat, I guess, and so I think we're going to continue to see
Speaker Change: That kind of growth that it gets a little harder as you get into much bigger because now you've got to deal with just the reality is we have to figure out the power plants to serve
Speaker Change: pretty diversified as you move into 25, you have the TSMC beginning to ramp up and reflective of that diversification in the service territory that Jeff talked about. But it's also been the contribution from small business and residential, we're forecasting one and a half to two and a half percent customer growth continuing. And we've been, you know, outperforming the midpoint of that range this year.
Speaker Change: and you're seeing those contributions across customer classes. And that's a result of the diversification on the large CNI leading to some of that downstream growth as well.
Speaker Change: Got it. Perfect. I'll see you guys in a couple days. Congrats on this another positive step change. Yep. Thanks, sir.
Speaker Change: Thank you.
Speaker Change: Thank you. Your next question is coming from Nick Campanella from Barclays. Your line is live.
Nick Campanella: Hey, good morning. Thanks for taking the questions.
Nick Campanella: and thinking through that 955 ACC ROE, could you quantify maybe just how much you're lagging there in 25 on a percentage basis and then just on the current.
Speaker Change: Great case outlook
Speaker Change: when would you have improvement in that ROE? Would it be partial year 26 and then full run rate 27? Just thinking through that timing would be helpful. Thank you.
Speaker Change: So that will certainly help over time. Admittedly, some of those transmission projects, and obviously the generation projects, are multi-year.
Speaker Change: is because the further we get away from the last rape case, the more that lag takes place. And you see that in the 2025 guidance.
Speaker Change: Some of the same issues around interest expense and DNA as we invest
Speaker Change: in Infrastructure and then added to that is a couple structural issues with the OPEB.
Speaker Change: I don't
Speaker Change: And so while we haven't quantified the exact amount, the reason that we're so focused on, number one, increasing the CapEx going to attract items and then looking at.
Speaker Change: non-tracked items is in order to earn as close to the authorized ROE as we can. Jeffrey, do you want to add on how the rate case timing will play into that? Yeah, and then, Nick, if you think about it, so obviously the Commission is kind of working on what the structure could look like if they move forward with the formula rate.
Speaker Change: 25 filing because you're if you did a 24 test year you'd be looking at a mid 25 filing we haven't
Speaker Change: or so back half of 26, and that, no matter what happens in terms of the structure of that, whether it's a formula or it's just a normal traditional rate case.
Speaker Change: That pension OPEB cliff issue would get put into that into that structure So the the next time you're likely to see that is probably in the mid 26 back half 26 time frame Hopefully that helps
Speaker Change: That does. I really appreciate that. And then just one clarification on the financing plan, because I know you kind of are highlighting you have these forward draws available from the block you did in February of 24, but just none of that nets against this $700 million to $900 million figure. Is that correct?
Speaker Change: That's correct, Nick. The $725 million that we did in the block in last February, we haven't drawn that yet.
Speaker Change: Um...
Speaker Change: That equity would match up with our capital needs over the 25 through 27 period We've not made any draws under the original block 725 and that would be sort of the first place We go for for that equity But certainly with things like ATMs and then we've you know Use the forward overlay and the original equity and could certainly consider that for future equity as well Both of those tools taken together will allow us to match up the capex with the external financing as we go
Speaker Change: All right, thanks a lot. See you in Florida.
Speaker Change: Yep, hey there.
Speaker Change: Thank you. Your next question is coming from David Arcaro from Morgan Stanley. Your line is live.
David Arcaro: Hey, good morning. Thanks so much.
David Arcaro: Would you be able to give kind of what you're seeing in terms of a pipeline, the megawatts in your pipeline of data center demand in terms of the large load requests?
Speaker Change: Yeah, I'll ask maybe Ted can...
Speaker Change: Describe what we're seeing
Speaker Change: Yes, sure. David, this is Ted. You know, we continue to see significant demand, both in projects that we've been working with for several months or even up to a couple years, as well as new demand coming into the service territory.
Speaker Change: But in addition to that we've got over 10,000 megawatts
Speaker Change: of Extra High Load Factor Demand, again, largely represented by data centers that we are currently working with in a planning process to identify when we can commit to serving their demand based on their location, their capacity and needs.
Speaker Change: and how do we ensure that we meet their reliability requirement while still serving all of our non data center growth. So that's what we're looking at right now but that is fluid, changes frequently and typically changes to the upside as demand continues.
Speaker Change: Excellent. Yeah, thanks for that color. Is it fair to say that 4000 megawatts are kind of embedded in the in the current plan? That's correct.
Speaker Change: gigawatt scale data centers that I would imagine would have, you know, just on their own pretty big impacts in terms of CapEx investment needs.
Speaker Change: You know the amount that is committed that is already in some form of development phase is relatively distributed We do have a couple larger Single requests that's in the 10,000 megawatt queue that is still in the early planning stages
Speaker Change: But the amount that is currently in development that's already baked into our expectations is relatively distributed. And I'll just echo what Andrew said earlier, too. In addition to that 4,000 megawatts of extra high load factor customers,
Speaker Change: You know, we're really pleased to see the distributed demand coming from manufacturing as well as residential Which is not insignificant this quarter alone 1.7 percent growth and we're at the highest new meter set level that we've seen in well over a decade
Speaker Change: which is impressive. So that demand and the demand guidance that we are offering is spread not only across a number of commercial industrial customers but even across the broader segments of small business, large business, data center, and residential.
Speaker Change: Yeah, gotcha. Okay, great. Thanks so much. That's helpful. Yep. Thanks, Dave. Thanks.
Speaker Change: Thank you. Your next question is coming from Anthony Crowdell from Missouho. Your line is live.
Anthony Crowdell: Hey good morning guys, congrats on a great quarter. Just I guess quickly on the five to seven percent EPS CAGR, I mean if I think of the higher end of that, the seven percent, what is the assumption there on regulatory lag that it's
Speaker Change: declined or that that five to seven doesn't assume the
Speaker Change: current regulatory lag docket keeps it enacted.
Speaker Change: single rate case oriented outcomes be the determinant of these sort of step function increases.
Speaker Change: We're confident in the rate-based growth.
Speaker Change: more dependent on these single events. That's really the focus for us.
Speaker Change: Great. And then just lastly, a lot of conversation around large loads going on the system. We've seen other states working on changing the rate design to maybe something kind of like a take-or-pay contract or a 10-year take-or-pay contract. Is that something that APS is looking into?
Speaker Change: Yeah, you know, Anthony, one of the things we're very focused on in talking to those customers is protecting the potential impacts to the existing customer base.
Speaker Change: And so in a lot of cases, what you're seeing is protections so that, you know, if you if you make a large investment and put a bunch of distribution transmission infrastructure in for a customer and then they don't show up.
Speaker Change: You've got to have protection so that that doesn't then get pushed through to the rest of the customer base. And so there's a fair amount of work that's going on. And we do it collaboratively. We're talking to the
Speaker Change: work for us, but I'd say the focus on that is really in in trying to protect the existing customer base and while being fair to those new customers
Speaker Change: Being able to learn their ramp up and learn how to ensure that we are, one, being accurate and conservative in our forecast of their actual usage versus
David Arcaro: Andrew Ho, Andrew Cooper, Jeffrey Guldner
Speaker Change: Great, thanks for taking my questions. Yep, thanks for having us.
Speaker Change: Thank you. Your next question is coming from Paul Patterson from Glenrock Associates. Your line is live.
Paul Patterson: Hey, good morning.
Speaker Change: Hey Paul So I just have one question left and it goes back to the the election and I've been following this thing on the
Speaker Change: on the website that you were talking about. And I apologize, but how many votes did you say were still left to be counted?
Speaker Change: And that's what percentage of the...
Speaker Change: of the total vote.
Speaker Change: I think we had, what do we have, 2 million?
Speaker Change: Okay. Yeah, I mean, it looks like it looks like the Republicans are like, definitely like, all you're leading. It just is it is a little tight. So I just want to make sure on that. Okay, when do you think the votes will be finished?
Speaker Change: I think they're, I mean, they have these late early these late early is that they that they need to count and then you got to go through the certification process. But again, I think you can
Speaker Change: I think you can watch pretty probably by the end of today that you're going to get closer to a smaller number Okay, great. Thanks so much. That's it for me. Have a great one. Okay
Speaker Change: Thank you. Your next question is coming from Julian DeMoulin-Smith from Jeffreys. Your line is live.
Julian DeMoulin-Smith: Hey, good morning team. Thank you guys very much. Nicely done.
Speaker Change: Hey, Julian. So...
Julian DeMoulin-Smith: Hey, top of the morning. Look, I wanted to come back to one thing that Nick was putting his finger on, and that was about earned returns here. You know, just given the uptake in CapEx, and obviously you've got some of these pieces that aren't as tracked.
Julian DeMoulin-Smith: I mean, how are you thinking about that lag dynamic into not just 25, but really as you think about beyond that in the 26 and 27, given the updated forecast period?
Speaker Change: Can you provide any kind of initial expectations? I know there's a number of moving pieces there, but...
Speaker Change: just given the the catback composition, you know, excluding kind of changes in the the construct from here, would you expect lag to accelerate or how do you think about, you know, the offsets of load growth potentially?
Speaker Change: Hey, Julian, it's Andrew. Yeah, so the low growth definitely is supportive and, you know, that's the other reason why we look at O&M on a megawatt-hour basis, so that not only on the capital side, but as our footprint expands and we're spending more from an O&M perspective, that it's being covered.
Speaker Change: by that growth as well.
Speaker Change: You know, then when you get to the capital, you know, it is first and foremost the question of capital allocation at this point and making sure that we're allocating.
Speaker Change: to asset classes that are gonna give us an appropriate investment recovery. And that's been into transmission and now increasingly into generation. You know, we are increasing our distribution investments and some of our other core infrastructure investments.
Speaker Change: But those are being done judiciously as we continue to look.
Speaker Change: We do need to file a rate case.
Speaker Change: A lot of the lag that's in there is not as much the capital as on the income statement side.
Speaker Change: Our interest to expense and our pension expense, those are all stale relative to what we're actually realizing on our income statement. And so, certainly the ability to true up those costs through the next rate case.
Speaker Change: Given that, you know, the last rare case we had 12 months of...
Speaker Change: post-test your plant and service accounted for.
Speaker Change: And now we're going more into some of these tract areas of capital. We're in a relatively good place from a capital perspective. We're mindful that the capital plan is increased.
Speaker Change: And so then if you did have a construct overlaid on top of that, that, for example, gave you a formula rate.
Speaker Change: and be more confident that we'd earn closer to our earned returns. So, the number one thing we have to do is catch up on some of those income statement costs here through another rate case and then be in a position to continue to be smart and agile around how we allocate the capital.
Speaker Change: Got it. So when you think about the 5 to 7 here, that's with or without the rag docket resolution? Is that a fair way to characterize it from here? It's just kind of smoothing out over the course of the plan?
Speaker Change: The docket would help us to smooth that out. I think, as I mentioned earlier, it's the difference between having, you know, single dependence on rate cases, and frankly, with the SRB and the transmission adjuster, we don't, but having large dependence on rate cases versus having annual true-ups that, you know, when we do have increased costs, we can recover, and when we have
Speaker Change: Andrew Cooper, Jeffrey Guldner
Speaker Change: You're in and you're out as opposed to, you know, after a rape case.
Speaker Change: Yeah, absolutely. And as you say, if I can nitpick a little bit, the Q mentioned inflation actually decelerating here. Your O&M in 24 is slightly higher. I noticed from last night, can you comment a little bit about the inflationary trends you're seeing? I mean, is that another dynamic that we should be putting our finger on as it pertains to lag? And maybe actually while we're at it on nitpicking, the tax rate's down in 25. Is that a good structural right here, or do you expect that to uptick here through the plan too?
Speaker Change: Yeah, so starting...
Speaker Change: with the O&M. You know, we increased O&M in 2024, and this is something we do year in and year out. We look at the weather benefit that we may be seeing during the summer and pull forward projects, look at the multi-year horizon for O&M, and figure out what we could bring forward.
Speaker Change: A chunk of the O&M increase that we saw this year was related to deliberately bringing projects forward into this year. And then as Jeff mentioned in his prepared remarks, funding some of our customer assistance programs.
Speaker Change: Again, in recognition of how hot the summer was. So some of the O&M you see in 24 is a result of that.
Speaker Change: you know, pursue aggressively an operating culture.
Speaker Change: You know, we've been working closely with all of our operating businesses on the O&M profile for next year And that's kind of the result of what you see the uptick this year and then, you know, pretty meaningful decline next
Speaker Change: On the tax rate, the higher tax rate this year relative to next year is simply a result of higher taxable income and sort of pushing us up on an effective basis.
Speaker Change: Our tax credit portfolio is pretty robust and we're managing to as low of a tax rate as we can, but that's just more so a result of what our pre-tax income looks like.
Speaker Change: Right, so it should be pretty stable in that rate. That's what I'm hearing from you. Yeah, we're pretty stable given the tax credits. Yeah.
Speaker Change: Yeah, exactly. Alright, excellent. Thank you guys on all the details. Really appreciate it. Nicely done. Yep. You bet, Julian.
Speaker Change: Thank you. Your next question is coming from Sophie Karp from KeyBank. GearLine is live.
Sophie Karp: Hey, good morning guys. Hey Sophie.
Sophie Karp: I wanted to ask you about the all-sorts RFP. Can you remind me, remind us maybe how much?
Speaker Change: system reliability surcharge mechanism, and how do you expect your sort of win rate, if you will, to shape up in the next rounds of this RFP?
Speaker Change: We've been able to more than double the successful ownership projects since SRB, in fact from the last RFP We've got about 800 megawatts of projects that are currently contracted and under development
Sophie Karp: We'll be getting ready to issue the next RFP likely later this year, so we'll see a new batch of projects go through that process.
Sophie Karp: throughout 2025. We're not at the, I'll call it 40 to 50% mix between ownership and PPA yet, but we've more than doubled the ownership projects. And as we continue to process RFPs, we'll look to continue to increase that ownership share.
Speaker Change: Thank you, and maybe just more of a high-level question on inflation, kind of follow-up on this discussion we just had, how the inflation impacted your regulatory lab, when you look into your next rate case.
Speaker Change: What are your inflationary expectations now?
Speaker Change: I guess going forward, if you have any. Maybe it's too early to call it.
Speaker Change: Thank you.
Speaker Change: How are you thinking about the inflationary scenarios going forward, because it's important for you to mitigate them.
Speaker Change: One of the key things in this next rate case is the fact that the O&M costs that we crystallized in our last rate case based on the historical test year go back as far as July of 2021.
Speaker Change: And so you didn't really see in the rates we were charging customers today any of the inflation that we've recognized over the last couple of years.
Speaker Change: And so, our ability to, you know, recognize
Speaker Change: Thank you.
Speaker Change: that we would need in this rate case just simply relates to the fact that if you look at our, you know, O&M taking out Res and DSM and things like that from, you know, the early 2020s, I can't believe we're in the mid 2020s now.
Speaker Change: But in the early 2020s, $850 million, and next year, we're guiding to O&M range that's in the high 900s. So there's substantial lag. Some of that is growing service territory, but a lot of that is recognizing the reality of the cost environment that we're in today.
Speaker Change: Yep, okay, thank you, appreciate the comments.
Speaker Change: Thank you. Your next question is coming from Steve Fleshman from Wolf Research. Your line is live.
Steve Fleshman: Good morning, everyone.
Steve Fleshman: You might have answered this, I apologize, but you mentioned less than 40% equity to fund the additional CapEx.
Steve Fleshman: I assume, is that just the fact that you're getting more cash flow through, you know, more timely recovery or just any other explanation for that?
Speaker Change: It was having incremental retained earnings that supports our credit metrics and therefore puts us in a position to feel more confident in our capital plan.
Steve Fleshman: And as you see that sales growth top line, that also, you know, from a, while we still continue to have some significant lag, you know, from a credit metrics perspective, as we pay down our deferred fuel balance, as we continue to see top line sales growth.
Steve Fleshman: It supports the credit metrics in a way that allows us to be a little bit more judicious around both the, you know, what that incremental equity need is and the fact that we took $725 million off the table up front.
Steve Fleshman: gives us some flexibility to be opportunistic on when we do that equity. But if you look at the increase in the CapEx plan and our ability to do it, stay within our credit metrics.
Steve Fleshman: Maintain a balanced equity cap structure at the utility and be judicious about how much parent company debt we're taking on.
Steve Fleshman: That $700 million of incremental equity over 2025-2027 is a number that matches up with the capital plan and allows us to kind of stay where we are from a metrics perspective. And that is less than 40% of that incremental need.
Steve Fleshman: Thank you.
Speaker Change: You also, I think, mentioned alternative financings. Could you just...
Speaker Change: Maybe give more color what you're thinking there.
Speaker Change: Yeah, so we're open to the full spectrum of things, you know, on the debt side, for example.
Speaker Change: You know, we're always looking at things like, you know, the DOE program that is in place today through the IRA.
Speaker Change: as a way to manage some of the credit metrics and some of the equity need. We've always, to date, been biased towards as straightforward of a capital structure as we can, and some of those key points around just balancing the equity cap structure at the utility, not overly levering the parent.
Speaker Change: and we went out there and issued equity when we needed equity.
Speaker Change: Simplest explanation is probably, you know, key for us, but we're always open. Are there alternative forms of equity out there? Are there creative ways to finance some of these assets? Are there asset classes that are, you know, more attractive to do one way versus the other, and there are ways to hive those off? And the DOE Loan Program's a good example of that.
Speaker Change: We also recognize $70 million of grants from the DOE this year that helps to defray the financing costs as well. So we'll be opportunistic, look at the opportunities in the capital markets and in other markets as well.
Speaker Change: I assume that's not in your earnings, like are you still going to?
Speaker Change: you know treat it as something you might like defer or just how should we think about the nuclear PTC?
Speaker Change: Yeah, I mean we're still waiting to see what the guidance looks like.
Speaker Change: Yeah, and look, at the end of the day, it's a it's a customer asset. We want to make sure that in light of all the capital needs that we have and the need to do it in a customer affordable way, you know, the the trajectory of that PTC is
Speaker Change: Andrew Cooper, Jeffrey Guldner
Speaker Change: All right, thanks so much. Yep.
Speaker Change: Thank you. Thank you.
Speaker Change: Thank you. Your next question is coming from Dylan Lipner from Ladenburg Salmon & Company. Your line is live.
Dylan Lipner: Hey, how are you guys doing? Crafting a good quarter. Hey, Bill. Thanks, Tom. Just wondering, going back to the O&M, I wanted to know how much of an O&M was pulled forward from 2025 into this year?
Speaker Change: Yes, so we really think about the multi-year plan and the portfolio of O&M projects that we've created.
Speaker Change: that we've got. And so, you know, there's, there's a, if you look at the update to our O&M guidance, we haven't broken out specifically at 25 to 24 because we're in the middle of doing our 25 budget at the same time. So we think about really de-risking opportunities over the multi-year horizon. We look out more than one year because, you know, we've kind of created this muscle internally where at the beginning of every summer,
Speaker Change: look at what the summer is going to start to look like from a weather perspective and what opportunities that provides.
Speaker Change: We don't really break that out from...
Speaker Change: kind of broader long-term de-risking. We have the granular projects that we moved, but we also do it in the context of 25 budgeting. So there's a little bit of, you know, a little bit of a gray area between what has truly been pulled forward versus something that, yep, we'll slate it for 24 instead of the 25 budget.
Speaker Change: But ultimately, you know, we always look for those opportunities. We also look for capital as a way to leverage some of that weather benefit as well. And we knew that we needed to look at 25 O&M in and of itself. And so I think one of the key points for us
Speaker Change: going away in 25. So for us, we've been thinking all year about how do we budget for 25 in light of some of those structural changes. And so we've been working very closely across the business to do that. And
Speaker Change: One of the great examples there is with the OPEB item, we knew that was within the context of our overall employee benefits and retiree benefits portfolio, and so we actively went after opportunities in that bucket, and so we put our primary health insurer out for bid and created some substantial savings in 25, expected for 25, based on switching over our health insurer. For 6,000 employees and their beneficiaries, that's a pretty substantial opportunity as well.
Speaker Change: Gotcha, thank you for that. I'm going to go into the regulatory lag docket. The potential that you guys can file a rate case prior to when the ACC could issue a policy statement.
Speaker Change: I mean, yes, you could. Again, I think what we're looking at is they're working through that process. I think I mentioned earlier in the call, the earliest you could file something practically is the middle of 25.
Speaker Change: and so we're you know they're they're moving on the regulatory lag docket I would expect that's probably gonna it's hard to tell me you have new commissioners coming in so there may be some some delay if they don't finish it by the end of this year as it goes into next year but but we'll just watch all that
Speaker Change: Great, and say a policy statement is made by the Commission, do you expect that the ACC could follow it up with like a rule change?
Speaker Change: That I mean
Speaker Change: There are policy statements out here that have just stayed as policy statements, and so I think we just kind of watch this as the process develops.
Speaker Change: Dylan, I think this Ted, another way we're looking at it as well is if they issue the policy statement, that's really to align the commission and stakeholders that this is the preferred rate making approach.
Speaker Change: And we'd include that preferred ratemaking approach then in the filing of our next rate case. And that ratemaking approach, pretend it's formula rates, would then be adjudicated as a part of our next rate case and codified in the outcome of that next case. So that would still get us to the same outcome.
Speaker Change: All right, great. Thank you very much guys. Yep