The Pinnacle West Capital Corporation is holding a conference call to discuss their third quarter 2023 earnings, recent developments, and operating performance. The speakers include the CEO, CFO, and other executives. The call will include forward-looking statements and a replay will be available on their website. The CEO will provide updates on operations, financial management, and regulatory filings.

The company's earnings expectations for the year are on track to meet their guidance range. The operations and field teams are praised for maintaining reliable service during a summer of extreme heat. The generation fleet performed well and set five new peak demand records in July. The company's careful planning and customer demand-side programs were beneficial. The Agave solar facilities and AZ Sun batteries were also available to serve customers. The Palo Verde generating station had a 99% capacity factor and Unit 1 has entered its planned refueling outage. Customers participating in the Cool Rewards program helped create grid capacity and earned bill credits for reducing their energy use.

APS has successfully implemented a virtual power plant with the help of over 58,000 customers and 80,000 smart thermostats, resulting in a record 135 megawatts of energy saved during peak hours. This is a key part of their long term resource planning strategy as they work towards 100% clean and carbon-free electricity by 2050. They have filed an Integrated Resource Plan outlining their resource needs for the next 15 years, with a focus on customer affordability and achieving their clean energy goals. Additionally, APS partners with local community organizations to provide heat relief support for vulnerable populations during extreme weather.

APS has collaborated with several organizations to provide support and relief to vulnerable individuals and customers, and has been recognized for their efforts. They have also reached a new agreement with their labor union employees and have been ranked as the top care center by J.D. Power. The rate case hearings have concluded and the administrative law judge is expected to issue a recommended opinion later this year.

The company is pleased with their third quarter 2023 financial results, which were positively impacted by record-breaking summer heat. They earned $3.50 per share, an increase of $0.62 from the same period last year. The increase was largely driven by favorable weather conditions, with residential cooling degree days increasing by 28% and reaching the highest levels in history. Other positive drivers included surcharge income, income tax items, and other net factors. However, these were partially offset by higher interest, depreciation, and amortization, as well as lower pension and OPEB nonservice credits. The company thanks everyone for joining the call and remains focused on providing clean, reliable, and affordable service to their customers.

In the third quarter, Q3 income taxes benefited from investment tax credit amortization and production tax credits. Customer growth was at 2%, in line with guidance, and weather normalized sales were flat. Residential sales were down, but C&I sales continued to grow. O&M expenses were slightly lower but are expected to increase due to inflation and costs associated with serving a growing service territory. Interest expense remains a challenge due to higher rates set by the Federal Reserve.

The speaker notes that the company only has one fixed rate maturity in 2024 and will closely monitor financing needs. The Board approved a 1.7% increase in quarterly dividend and expects to grow back into their target dividend payout ratio. CapEx guidance for 2023 has been raised due to distribution and generation investments, as well as transmission spend. The speaker also mentions the impact of weather on their financial outlook and the conclusion of rate case hearings. The speaker then turns the call over for questions and the first question is about the recent TransCanyon win under the DOE program and the opportunities it presents for the company.

The speaker discusses a recent announcement made by the Department of Energy regarding a joint project with Berkshire Hathaway. This project is seen as a derisking opportunity and is different from their core transmission business. The speaker also mentions a potential increase in CapEx for the year, but cannot provide updates for future years until after a rate case is completed.

The speaker discusses the critical trend of investing in regulated transmission assets within their company's footprint. They plan to continue this trend regardless of rate case outcomes and have identified a need for investments in 2023. The speaker also mentions their commitment to a liability-driven strategy for their pension, with a focus on maintaining strong funded status. Fixed income returns have been a challenge this year.

The speaker explains that they are not able to give an update on the company's assets and liabilities for 2024 yet, as they only revalue them at the end of the year. They also mention the impact of higher interest rates on their expenses and potential ownership changes in the future.

The speaker responds to a question about the company's projected spending in the next few years, stating that their current CapEx forecast covers the next three years and will be updated after the rate case is completed. They also mention that their investment decisions will depend on reliability, diverse developers, and timely returns. The next question asks about the firmness of the company's growth in industrial and data center sectors, to which the speaker responds by mentioning significant growth in those areas driven by land availability.

The speaker believes that there will be continued industrial load growth in the region, particularly from companies like TSMC and their supply chain. Data centers are also expected to contribute to this growth, although it is difficult to predict exactly where the megawatts will go. The company's current C&I sales growth is at 2.8%, but they are expecting a 4.5% to 6.5% growth rate through 2025, driven by TSMC and other data centers. The company is also confident in the attractiveness of their service territory for potential customers.

Julian Dumoulin-Smith asks Andrew Cooper about the factors that may affect the company's ability to earn its authorized levels. Cooper mentions O&M costs, pension costs, and interest expense as key areas of focus. He explains that they are managing costs and advocating for changes in pension costs, and that they strategically kept interest expense low in order to focus on achieving a market competitive ROE and attracting capital to the state. They are also taking steps to finance opportunistically.

The speaker discusses the company's decision to expand their revolver capacity with banks earlier in the year in order to have more flexibility in the commercial paper market. They also mention the importance of advocacy in the rate case to stabilize their credit rating and mitigate rates. The company has taken measures to refinance debt and reduce regulatory lag. The speaker then addresses the sales growth for 2023 and explains that it has not met expectations, but they are still reiterating their long-term weather normalized sales growth. They believe that the current sales growth trajectory will not impact their long-term outlook.

The company has known for the past 12-18 months that their sales growth will be driven by high load factor, large C&I customers. They have seen a decline in residential sales due to factors such as energy efficiency, rooftop solar, and changes in residential usage. This decline has caused a deceleration in sales growth, but it aligns with the company's long-term expectations. The delay in Taiwan Semiconductor's facility startup has also impacted sales growth, but the company is still expecting 1-3% growth overall, primarily driven by the C&I segment.

The company has been seeing an increase in larger customers, such as data centers and advanced manufacturing, coming to Arizona. They are confident in the attractiveness of the state for these businesses. In regards to the residential sector, the success of the virtual power plant program is not affecting sales. However, the interest and participation in the program may be a signal of customers trying to save money.

The speaker is discussing the potential relationship between a conservation program and lower residential energy consumption. They mention that there may be a trend of customers using less energy, possibly due to the intense summer weather and possible conservation efforts. However, they also note that there was a rebound effect in the quarter and that overall, residential energy usage is slowing down due to factors such as energy efficiency and distributed generation.

The COVID work from home numbers are starting to reverse as people return to normal usage patterns. In regards to the rate case, there is some dependence on the outcome and there may be a delay in recovery for O&M, interest, and pension expenses if the SRB recovery mechanism is not granted. This could result in more frequent rate case filings. The timing of these filings will depend on the outcome of the current rate case, but having an SRB mechanism in place would help mitigate the need for frequent filings. The situation in Tucson is unique.

The company is advocating for a rate case and there is positive dialogue around it, but the outcome is uncertain until the rate case process is completed. In terms of the company's performance, the third quarter was strong and O&M expenses remained relatively flat throughout the year. The company is on track to meet its projected O&M range, but it may be difficult to pull forward expenses from future years due to the needs of this year.

The speaker is encouraging people to take advantage of any opportunities available this year, no matter how small. The conversation then shifts to an update on the SRB and its potential role in minimizing regulatory lag. The speaker explains that they are making their case in the ongoing docket and that there have been discussions and advocacy during the hearings. The next steps include the judge's recommended opinion and the commission's decision.

The speaker discusses the ongoing advocacy and arguments being made in regards to reducing regulatory lag and balancing self build projects versus Power Purchase Agreements. They mention the difficulty of self building without incurring regulatory lag and the potential for increased rate case filings. When asked about the cost of mitigating a rate case, the speaker explains that it is not something they focus on and is already embedded in their existing team. They also mention the impact of weather on their operations and how it affects their O&M expenses.

The speaker explains that they have incurred extra operation and maintenance costs due to the hot weather this summer. They have been spending money to ensure their fleet is prepared for the summer and have also increased their CapEx and O&M due to wear and tear. They have a robust outage schedule planned for next year to address these issues. They also mention that they did not have a strong monsoon season this year, but had intense storms in the winter which affected their planning and deployment of resources.

The speaker, Andrew Cooper, responds to a question about the impact of the growth in data centers and other industrial users on the company's margins. He explains that the extra high load factor of these customers will result in a lower overall margin. He also mentions that the company will look at adjusting their 5% to 7% growth rate after their rate case is completed.

In this paragraph, the speaker discusses the impact of residential and high load factor growth on the company's margin and customer cost of service. They mention a rule of thumb for estimating the margin contribution of each type of growth and explain why high load factor growth is more efficient despite lower margins. They also mention the importance of fair distribution of costs across customer classes in rate design. The speaker concludes by stating that overall, high load factor growth is positive for the company despite the lower margin.

This summary was generated with AI and may contain some inaccuracies.