Q4 2024 Pinnacle West Capital Corp Earnings Call
Speaker Change: Good day everyone, and welcome to the Pinnacle West Capital Corporation 2024 4th 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, Matthew.
Speaker Change: I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 2024 earnings, recent developments, and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner, APS President, Ted Geisler, and our CFO, Andrew Cooper. Jacob Tetlow, COO, is also here with us.
Speaker Change: 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 that actual results may differ materially from expectations.
Speaker Change: Our annual 2024 Form 10-K was filed this morning. 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 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 March 4, 2021.
Bye.
Speaker Change: I will now turn the call over to Jeff. Great, thanks Amanda. Thank you all for joining us today. I want to look back on 2024 and just say I'm extremely proud of our company and all of our accomplishments.
Jeff Guldner: I'm going to provide several updates today and share the successes we were able to achieve despite the challenges that we faced. And we met or exceeded nearly every target we set for ourselves, including delivering strong service reliability to our customers.
Jeff Guldner: We made significant progress in the last year, but we're not done, and we look forward to continuing to execute on our plan.
Jeff Guldner: On the regulatory front, we were able to achieve a constructive outcome in our last rate case, and even more importantly, the Commission has been committed to finding ways to reduce regulatory lag.
Jeff Guldner: In December, the Commission approved a policy statement on formula rates, recognizing the need for better regulatory recovery to support our customers and the tremendous growth that we're seeing in Arizona.
Jeff Guldner: We started the year with two new commissioners, Commissioner Walden and Commissioner Lopez who joined the bench in January with Commissioner Marquez-Peterson.
Jeff Guldner: In addition, Commissioner Thompson and Commissioner Myers were elected to Chairman and Vice-Chairman, respectively. And we look forward to continuing to work collaboratively with the new bench of commissioners.
Jeff Guldner: Turning to the operations side, I want to start by recognizing our field team's exceptional execution in 2024. I'm especially proud of our employees for prioritizing safety and ending the year with zero serious injuries or fatalities or SIFs.
Jeff Guldner: We were able to accomplish this through 113 consecutive days of 100 degrees and above in Phoenix. That's the longest stretch in Arizona history.
Jeff Guldner: and APS customers set a peak energy demand record of 8,210 megawatts on Sunday, August 4th, breaking a prior record of 8,162 megawatts from 2023.
Jeff Guldner: Our generating fleet operated extremely well and was available when our customers critically needed the power.
Jeff Guldner: For the 16th consecutive year, and the 20th overall, Palo Verde Generating Station's three nuclear units exceeded 30 million megawatt hours of net generation and achieved a capacity factor of 93.7 percent.
Jeff Guldner: Finally, in December, I announced my retirement date of March 31st.
Jeff Guldner: When I became CEO over five years ago, we began executing on a vision to improve our customer experience.
Jeff Guldner: to position the company for long-term financial health and to enable the workforce as a future. And that future provides both reliable and carbon-free electricity.
Jeff Guldner: Ted and I have had a close and trusted partnership throughout our tenures, enabling a seamless succession and continued focus on advancing our company's strategy.
Jeff Guldner: The strength of our team and the dedication of our people is truly what makes this company special and I can't fully express how proud I am to have been a part of this journey. And with that I'm going to turn it over to Ted to talk about our future and what we can look forward to.
Thank you Jeff
Ted Geisler: First, I'd like to take this opportunity to recognize everything you have done to create a strong foundation for our company's success with your collaborative leadership approach over the past five years.
Ted Geisler: Under your leadership, our team has achieved performance improvement across all aspects of our business, including improving our customers' experience and the company's long-term financial health. We're truly grateful for your years of service to Pinnacle West and APS, and I'm personally grateful for the trust and confidence you've placed in me during these years. Thanks, Ben.
Speaker Change: Looking ahead, I'm honored and humbled to continue serving our customers and shareholders through an era of unprecedented growth.
Ted Geisler: Our team is focused on robust grid expansion, improving the timely recovery of our investments,
Ted Geisler: delivering an exceptional customer experience and a relentless focus on talent development. I firmly believe we have the right strategy, the right team, and the right culture to deliver consistently for our customers while creating sustained competitive value for our shareholders.
Ted Geisler: Arizona is well positioned for long-term growth and our company is committed to enabling this growth through strong execution of our generation, transmission, and distribution investments.
Ted Geisler: We recognize the importance of creating customer value and remain focused on delivering an excellent customer experience. Our employees are putting customers first and working towards our goal of achieving an industry-leading customer experience.
Ted Geisler: Because of this commitment, we made solid progress on that front in 2024, finishing the year as a top performer among utilities for power quality and reliability, the top performer in helping customers choose rate options, a top performer in helping customers lower their bills, and a top performer for overall digital experience.
Ted Geisler: Our customer base, which for decades leaned heavily residential, is now more diverse than ever, mirroring the diversification in our growing Arizona economy.
Ted Geisler: A robust increase in commercial and industrial customers in our service territory, including new chip manufacturing and expanded data center operations.
Ted Geisler: is leading to strong economic growth across our entire state. As an example, construction continues in Northwest Phoenix on the Taiwan Semiconductor Manufacturing Company facility. By the end of the decade, TSMC is expected to have invested $65 billion in three dedicated semiconductor fabs.
Ted Geisler: The first fab began high-volume chip production in the fourth quarter of 2024. Amcor Technology also announced plans to invest $2 billion in a semiconductor advanced packaging and testing facility to be built nearby Peoria, Arizona, creating more than 2,000 jobs.
Ted Geisler: Both companies, along with an already strong Arizona presence by Intel, is expected to stimulate many suppliers and related manufacturing and service entities to establish operations here, further increasing growth for our state and APS.
Ted Geisler: TSMC and the nearby Science and Manufacturing Park alone is anticipated to create approximately 62,000 jobs.
Ted Geisler: Meanwhile, our residential customer base also continues to grow. In 2024, we installed more than 32,000 new residential meters, the most since before the Great Recession. Importantly, we see residential growth across our entire service territory.
Ted Geisler: For example, the Yuma area saw a 34% year-over-year growth in meter sets, and Casa Grande saw a 36% year-over-year growth. Finally, Metro Phoenix experienced 49% year-over-year growth in new meter sets.
Ted Geisler: We are well positioned to capitalize on this demand and have embarked on the largest transmission and generation expansion in our company's history.
Ted Geisler: In fact, we recently procured nearly 7,300 megawatts of new resources to be in service between 2026 and 2028.
Ted Geisler: We're committed to serving Arizona's economic and population growth responsibly while maintaining a top-tier reliability for our customers as we connect new large customer facilities like chip manufacturers and data centers.
Ted Geisler: We continue to make progress on responsibly decarbonizing the electric grid while focusing on reliability and affordability for our customers.
Ted Geisler: Last year, we delivered top quartile reliability for our customers through another record year of summer heat and peak demand, while at the same time generating 54% of our total energy mix from carbon-free resources.
Ted Geisler: We're also working to improve timely investment recovery through innovative rate design and regulatory outcomes that benefit our customers and our company.
Ted Geisler: This began last year when we secured the new System Reliability Benefit Mechanism for improving cost recovery on new generation investments.
Ted Geisler: and we look forward to continuing to collaborate with the Commission and stakeholders on implementing a formula rate plan in the future. We're focused on executing our plan and expect to file a new rate case mid-year 2025 to support Arizona's economic expansion.
Ted Geisler: Thank you for your time today. I'll now turn it over to Andrew who will discuss our fourth quarter and full year 2024 earnings and our forward-looking financial expectations.
Andrew Cooper: Thanks, Ted and Jeff, and thanks again to everyone for joining us today.
Ted Geisler: Earlier this morning, we released our fourth quarter and full year 2024 financial results. I'll share those results and highlight key drivers, and we'll review our full year 2025 financial guidance, which was provided in Q3 2024.
Ted Geisler: We lost six cents per share during the fourth quarter of 2024 compared to a flat result in Q4 of 2023.
Ted Geisler: Our largest positive drivers year over year were new rates, as well as benefits from weather and continued sales growth. These were offset by negative drivers in O&M, DNA, financing costs, and other net.
Ted Geisler: For the full year 2024, we ended at $5.24 per share, an increase of $0.83 per share from 2023, slightly above our updated annual guidance range.
Ted Geisler: The constructive rate case outcome, as well as strong sales and usage growth throughout the year, were the largest positive drivers of this increase.
Ted Geisler: We also had benefits from our approved surcharges and positive contributions from weather. Offsetting these benefits were increases in O&M, DNA, and debt financing costs, as well as shared dilution from our equity issuance.
Ted Geisler: We saw strong and consistent customer and sales growth continue throughout 2024.
Ted Geisler: with customer growth coming in at 2.1% for the full year.
This was slightly above the midpoint of our guidance range.
Ted Geisler: of 1.5% to 2.5% and continues the trend of steady customer growth each year.
Ted Geisler: Last quarter, we had raised our full year 2024 sales growth guidance from 2% to 4% up to 4% to 6% to match our long-term growth guidance after seeing multiple quarters of strong growth, particularly in the C&I segment.
Ted Geisler: This strong growth continued in the fourth quarter, with weather-normalized cells growth coming in at 5.5 percent.
Ted Geisler: We ended the full year near the high end of our sales growth guidance range at 5.7%. This growth was driven by both consistent residential sales growth of 1.1% for the full year and strong growth in our C&I segment of 9.7% for the year.
Ted Geisler: As Ted mentioned, this growth trend reflects the diversity of our Arizona economy, as we saw growth across a breadth of C&I sectors, from small business to manufacturing.
Ted Geisler: The robust weather benefit in 2024 allowed us the opportunity to de-risk future spend.
Ted Geisler: We are focused on cost efficiencies, and we continue to work towards our goal of declining O&M per megawatt hour. Cost management is a priority, and we will continue to strive for operational excellence and efficiency through our lean culture and initiatives.
Ted Geisler: Looking ahead, we are reiterating all aspects of 2025 guidance provided on our third quarter 2024 call.
Ted Geisler: Our Weather Normalized Sales Growth Guidance for 2025 remains unchanged at 4% to 6%, matching our long-term expectations, with extra high load factor C&I customers contributing 3% to 5%.
Ted Geisler: As Ted talked about earlier, we continue to see both residents and businesses viewing Arizona as a highly attractive destination to call home.
Ted Geisler: We are also reaffirming our capital and financing plans and are already making progress on both. Our capital plan continues to focus on strengthening infrastructure, improving reliability, and meeting the accelerating demands of our growing service territory.
Ted Geisler: These investments include strategic transmission and new generation resources, with over 40% of our future capital investments being tracked via our System Reliability Benefits Surcharge or through our FERC formula rates, allowing for more timely recovery.
Ted Geisler: Our financing plan supports a balanced utility capital structure matched to our spending profile and includes a mix of both debt and equity. We are focused on maintaining a solid balance sheet and stable credit ratings.
Ted Geisler: We completed our block equity in early 2024 and closed out the year by opening an at-the-market program, consistent with the cadence of our investment.
Ted Geisler: Our laser focus on cost management, balanced capital investment and financing plans,
along with the strong growth trajectory of our service territory.
Ted Geisler: allows us to reaffirm our long-term 5% to 7% EPS growth guidance based on the midpoint of our original 2024 guide of $4.60 to $4.80 per share.
Ted Geisler: We end 2024 strong in our confidence in our plan for 2025 and the long term, while continuing to recognize and address the challenges of regulatory lag with our regulators.
Ted Geisler: We are focused on executing our plan to deliver reliable, affordable service to our increasingly diversified and growing service territory, while maintaining financial health and creating value into the future. This concludes our prepared remarks. I will now turn the call over to the operator for questions.
Ted Geisler: 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.
Ted Geisler: Once again, if you have any questions or comments, please press star 1 on your phone.
Speaker Change: Your first 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 for the time. I appreciate it. And first off, Jeff, Ted, congrats. It's been a pleasure and welcome indeed. So I want to just leave it at that here.
Speaker Change: Thanks, Jody. And pass our regards on to Jameson as well.
Absolutely, indeed.
Speaker Change: So maybe just to kick things off here, I mean, obviously making good progress on the core business.
Speaker Change: With respect to, you know, the ACC, it's clarified that it supports settlements in general. And frankly, now we're looking at a formula rate potentially.
Speaker Change: How do you think about, you know, a test case here being able to be settled, right? Do you need to fully litigate in order to see and implement formula rates at this point?
Yeah, Julie, I appreciate the question.
Speaker Change: We always believe that settlements can lead to good outcomes, both for our customers, the regulators, stakeholders, and corporate company. We've got a long track record of.
constructed settlements in the past.
Speaker Change: That said, we're not assuming that this case will be settled nor does it need to be settled in order to achieve a constructive outcome. So I think our go-in default position is to prepare for a litigated case, particularly considering that the filing will likely include details around the formula rate plan and that'll be a new rate-making concept that we want to make sure we get right and get implemented.
Speaker Change: correctly, but we're always open to settlements and to the extent that stakeholders choose to align around a constructive outcome that could be concluded through a settlement, then I believe we'll be open to do so as well. And it could be that you get some partial areas that you're able to resolve ahead of time. So, but yeah, first time in the formula for sure.
Speaker Change: Excellent and maybe a little bit more of a longer-term question as you think about it. Obviously you guys give a CapEx forecast through 27 only and versus some of your peers and obviously given the longer dated nature some of the demand growth some of the CapEx is a little bit longer dated than we've seen historically. Clearly I'm cognizant of the low growth coming at the high end of the range, obviously RFP here being exceptionally large. I mean how do you think about CapEx trends beyond the 27 period? I just want to
Speaker Change: start to needle a little bit on that just given the trends we're seeing from some of your peers and given the robust growth dynamics you're seeing
25 through 27 period.
Speaker Change: Other than through, you know, being AFUDC, Construction Work in Progress, you're talking about, you know, if you look at our strategic transmission plan, you have projects within service dates at the end of this decade into the beginning of the next decade. And frankly, as the generation resources that we, you know, begin to look at to meet the needs in the 2030s start to, you know, develop through the plan, those are going to be longer lead time and larger projects where we look at, you know, the variety of ways to finance them.
Speaker Change: So there's a lot that, as we get through the other side of this formula, rate opportunity we'll be looking at from a capital allocation and overall size of the capital envelope.
Speaker Change: Wonderful. Excellent guys. Thank you very much. All the best. Congrats. Thanks, Julian.
Speaker Change: Thank you. Your next question is coming from Michael Lonegan from Evercore. Your line is live.
Michael Lonegan: Hi, good morning. Thanks for taking my questions and congrats Jeff and Ted. Yep. Thanks Michael. Thank you.
Speaker Change: Yeah, of course. In the past, you've talked about a goal for an evergreen 5-7% EPS growth rate.
Speaker Change: You know, obviously formula of rates will help improve cost recovery. You know, sales growth continues to be robust near the top end of expectations.
Speaker Change: CapEx opportunities, significant backload of high load customers, large. Just wondering if you see an opportunity to increase your growth rate to the high end of 5-7% or above that range at some point, or does your focus remain on a continuation of 5-7% with a smoother profile?
Speaker Change: Michael, I think that the first and foremost is the continuation of the five to seven percent with a smoother profile. That is our number one goal right now.
Speaker Change: is to work through this next rate case proceeding to try to find ways to reduce regulatory lag.
Speaker Change: We've also leaned into CapEx that has more contemporary news recovery, like
Speaker Change: the generation projects including the 800 megawatts we won in the last RFP that are should be eligible for the SRB as well as the substantial increases
Speaker Change: in Transmission, but certainly as we look at the long term.
Speaker Change: We're pretty conservative in how we forecast that top-line growth. We've got a long...
Speaker Change: and I'm going to talk a little bit about what we've seen in the past with data center type customers. And so, you know, as we see the ramp up of some of our large industrial customers, as we see the continued residential customer behavior, you know, this year we saw 1.1% residential customer growth, which was pretty substantial above the top end of what our expectation was there. So, you know, as we look at those customer classes and on the residential side, continuation of trends around...
Speaker Change: kind of the deceleration of new rooftop solar. We'll continue to look at what that top line looks like, but number one is getting through the formula rate opportunity and the chance to have a smoother path of earnings going forward.
Got it. Thank you.
Speaker Change: for House Bill 2201 proposed in Arizona that would address wildfire mitigation plans and
Speaker Change: proposed limitations on liabilities as it pertains to class action lawsuits, damage claims, and other items. I'm just wondering what your thoughts and confidence level, you know, is in favorable legislation being passed.
Speaker Change: Michael, I appreciate the question. It's still pretty early in the process. It's a House bill and it's still in the House.
So we'll continue to monitor. Of course, we support it.
as well as many other organizations throughout the state.
Firefighters Association, many of the unions, other utilities.
Speaker Change: be better around wildfire prevention and ensure that all entities are aligned on what good wildfire prevention measures look like is probably good legislation for any state. And so we support it. We think that there's forward momentum and progress and we'll continue to monitor it along the way, but probably too early to be able to anticipate any final conclusion at this point.
Great, thank you very much. Yep, thanks Michael.
Speaker Change: Thank you. Once again, everyone, if you have any questions or comments, please press star, then 1 on your phone. Your next question is coming from Travis Miller from Morningstar. Your line is live.
Speaker Change: Good morning. Thank you. I echo the congratulations to both of you. Thanks, Jeff, for the last five years.
Real quick clarification on the major 2025 rate case.
Speaker Change: As the formula rates go, how does that go together, right? Would it be then the next rate case that you would implement formula rates? Because obviously this would be the historical.
Speaker Change: How's that kind of timing going to work if the Commission does support formula rates as part of the filing?
Speaker Change: Yeah, Travis, appreciate the question. The way we would anticipate it working is this next case would really look like a traditional rape case based on a historic test year with post-test year plan.
So, if you assume a mid-2025 filing...
Speaker Change: Let's anticipate a conclusion of a case perhaps by the end of 2026. And then if that included
designed for a formula rate plan on a go-forward basis.
Speaker Change: consistent with the Commission's policy statement, which of course is orienting a formula rate plan based on a historic test year.
Speaker Change: Then, you could assume as soon as one year later, a Formula 8 plan would then take into account any adjustments that would be made based on whatever the Formula 8 plan is intended to adjust.
Speaker Change: The costs trued up on a go-forward basis once you conclude this next rate case, and we'll look to work through all the details of that in this next case as a part of the filing and align with the commission on details around how that formula would work.
Speaker Change: Okay, that makes sense. Yeah, thanks. And then one quick other one on that. ROE, what are your thoughts on that? I don't think it was in the policy statement, but...
You can correct me if I'm wrong there.
Well, we would envision a change every year.
Speaker Change: and then we'll look to work with the commission on how that would be maintained in a future forward formula rate construct. So it wasn't detailed out in the policy statement and we'll just look to work through all those details in this upcoming case.
Speaker Change: Okay, great. Now let's have on the one higher level again back to the formula rates any chance that if this is successful that you would shift around CapEx or is there some opportunity?
Speaker Change: to shift around CapEx between transmission, transmission already obviously has that network level, but between distribution and generation perhaps, shifting that CapEx if you end up getting that formula rate plan authorization.
Andrew Cooper: Yeah, Travis, it's Andrew. Yeah, that's a that's a great question. I think we will definitely be looking at capital allocation Should we be working through a formula rate if you think about
you know, some of the projects that we're spending.
Andrew Cooper: are we associated with it, but the opportunity in our distribution system and our IT backbone infrastructure and one of the areas that I always think about is maintenance of our generation fleet, not only just some of our older fossil units, but investing in Palo Verde for the long term.
Andrew Cooper: And all of those are opportunities that, you know, we have to wait for periodic rate cases to recover on. And so we'll look at the, you know, both the
Andrew Cooper: Allocation among our business lines and then you know what the size of the overall capital spend would be as it's supported by our credit metrics and our financing plan with the more predictable and contemporaneous recovery that we'd see should formula rates be adopted.
Thank you.
Okay, great. That's very helpful. Thank you.
Speaker Change: Thank you. Your next question is coming from Chris Ellinghaus from Williams Capital. Your line is live.
Ted Geisler: Hey everybody, how are you? This is Ted and Jeff. I hope you have a great retirement.
Ted Geisler: Would that give you the opportunity to extend your CapEx forecast at that point?
You know, Chris, it could, but I'll just underscore what.
Andrew said, which is I think our CapEx forecast.
It is really meant to...
Ted Geisler: reflect what our capital plan is currently while we're entering a period of...
a new rate application along with
Ted Geisler: agreeing with the commission on how to keep rates trued up going forward to a formula rate plan. So, our first priority is...
Ted Geisler: really to work through that process, and then after that, I think, reflect on what the right capital outlook could be, capital allocation across our three business lines of generation, transmission, distribution. So we'll certainly continue to assess and reflect on what a
Ted Geisler: forward looking forecast could be. But priority number one is to file this case and then align with commission and stakeholders on how to keep rates trued up going forward through the formulary plan.
Sure.
When you talk about the
Speaker Change: end of 2026 sort of timeline for adjudicating the case. Are you including in that sort of thought process, the complication addition of the formula rate issue in the case?
Speaker Change: Chris, yes, that's a rough estimate of what a timeline could be based on historical timelines of practice, but given that the Commission really took
Speaker Change: Most of 2024 to host workshops and ultimately align on what a good mitigation tool would be to minimize regulatory lag.
Speaker Change: Aligning on formula rate plan. A lot of that work and alignment has already been done. It culminated in the issuance of a policy statement. And so this is really about
Speaker Change: including and ultimately implementing that policy statement in our rate case filing and then just simply detailing out the mechanics of how it would work. So yes, that timeline estimate we believe can still be accomplished with the formula rate plan mechanics being agreed to as well.
Okay, maybe it's a good question for Ted.
Speaker Change: You know, you put out your statement on new nuclear thoughts in December, I think it was.
Thank you.
You know.
Speaker Change: When you talk about the early 2040s, can you just sort of...
Speaker Change: discuss what you see as the decision points to get to that point in in terms of you know when new SMRs are ready you know how do you sort of get to that decision tree that you sort of have in your mind
Yeah, Chris, and this is Ted.
Speaker Change: You know, we really wanted to put out the announcement to just recognize that we think nuclear has the potential for helping us
Speaker Change: serve customers in the long term with reliable, affordable, carbon-free energy. But given the reality of the long lead time it takes to develop, and frankly the uncertainty around which nuclear technology may be best suited for any potential future investment,
Speaker Change: Step one was really for us to begin a formal collaboration with
Speaker Change: some of our utility partners in the state, Salt River Project and Tucson Electric, and begin assessing where locations may be suitable for new nuclear, what technologies may be in the best interest of our customers over the long term, and importantly, monitor the technology and supply side maturity over time.
Speaker Change: And so the announcement was really a recognition that we think nuclear is a promising technology, but it's too early.
Speaker Change: to be able to commit to a project. However, we are taking the developments that we see elsewhere seriously, and we want to dedicate a team to pay attention to those developments and begin thinking about what options may exist in Arizona.
As we start to zero in on potential suitable locations...
what technology is maturing nicely in the marketplace and importantly
Speaker Change: If the supply side starts to mature where you have a dependable
Speaker Change: scaled up a set of contractors that can develop the technology, then I think the decision criteria will become more clear and we'll be in a better position to more seriously consider whether there's a project that could come from this effort. But at this point, I just emphasize it's really an assessment period, and then we'll know more in the future.
Speaker Change: That's helpful. I appreciate it. Thanks so much. Appreciate the color. Thanks, Chris