The operator introduces the Pinnacle West Capital Corporation 2023 Fourth Quarter Earnings Conference Call and its speakers, Amanda Ho, Jeff Guldner, Andrew Cooper, Ted Geisler, and Jacob Tetlow. Amanda provides details about the conference call, including the availability of slides and forward-looking statements. Andrew discusses the company's fourth quarter and full year 2023 results, and Jeff talks about the recent rate case outcome, growth outlook, and strategy. Andrew concludes with the company's 2024 guidance and long-term financial outlook.

In the fourth quarter of 2023, the company experienced a $0.21 increase in earnings per share compared to the same quarter in 2022. This was largely due to increased sales and usage, higher transmission revenue, and contributions from previous rate cases. The lack of certain expenses from the previous year also contributed to this increase. For the full year, the company earned $4.41 per share, surpassing their guidance range. This was due to a $0.22 year-over-year weather benefit and positive drivers such as adjuster mechanisms, transmission, and increased sales. The company also saw 2% customer growth and 1.5% weather-normalized sales growth in 2023. The discussion then shifted to the company's rate case outcome, growth outlook, and strategy.

The speaker discusses the recent decision of the commission to approve the 2022 rate case, highlighting the positive outcomes such as improved return on equity and a balanced revenue increase. They also mention their growth outlook and future strategy, as well as their success in creating customer value and improving their J.D. Power survey results. The speaker also mentions their focus on reliability and building collaborative relationships with stakeholders, resulting in supportive regulatory decisions. They also mention their commitment to shareholder value by deferring equity issuances and continuing to grow their dividend.

The rate case resulted in a net revenue increase of $253.4 million and an authorized return on equity of 9.55%, which recognizes the need for investment in a rapidly growing service territory. The commission also approved a system reliability benefit surcharge to invest in generation resources and reduce regulatory lag. Positive amendments were made at the open meeting to increase the net revenue requirement and address lagging historical costs. This demonstrates an improved regulatory environment and the company's ability to achieve constructive outcomes.

The speaker is optimistic about the future of the company due to their attractive service territory and consistent customer growth. They believe that the constructive business environment and diverse sectors in their service territory will continue to drive growth. They also plan to focus on economic development to attract and expand businesses and job creators.

The state of Arizona is experiencing growth in various sectors, including manufacturing, clean energy, and digital infrastructure, which will help mitigate the risk of economic downturns. The regulatory environment has also improved, with the Arizona Corporation Commission making balanced and constructive decisions and addressing regulatory lag. The commission has also reaffirmed its policy on settlements, which have historically yielded beneficial results for stakeholders. The company has made significant progress in its transition to clean energy, with plans to retire coal units and procure more clean energy and storage. The approval of the SRB mechanism in the rate case will further benefit customers by allowing ownership in new clean energy assets.

The fourth reason for optimism about the future is the growth and opportunities in the FERC jurisdictional transmission business. APS has increased its core transmission spend and has filed a 10-year transmission system plan with the corporation commission. This plan includes critical projects that will strengthen resiliency and support the growing energy needs of customers. The total investment for APS's portion of these projects is estimated to be over $5 billion in the next 10 years. The management team is committed to executing a customer-centric strategy and has made progress in improving customer service and affordability. The focus on cost management creates rate headroom for the future. Andrew will now provide guidance and share the company's long-term financial outlook.

The company is projecting an EPS guidance range of $4.60 to $4.80 for 2024, with additional revenues from the recent rate case and offsetting expenses. They are facing regulatory lag due to timing of their historical test year, but are committed to mitigating this in their next rate case. The main positive drivers for their guidance are new revenues from the rate case, increased sales, and the impact of previous rate case outcomes. The main negative drivers are expected to be weather, higher expenses, and increased financing costs.

In this paragraph, the speaker discusses the company's expected customer growth and sales growth for 2024 and beyond. They also mention their goal to provide consistent and timely cost recovery for investors, with plans to reduce regulatory lag and engage with regulators to address this issue. The company's long-term EPS growth guidance is also mentioned, with a goal of 5% to 7% growth off the midpoint of their 2024 guidance range.

The company is allocating $6 billion for investment through 2026, with a focus on increasing capital investment in generation and FERC jurisdictional transmission infrastructure. They have designed a strategy to optimize timely recovery for investments while providing reliable service. The new SRB mechanism will allow for quicker recovery of self-build generation projects that meet the requirements of the all-source RFP. The company expects this expansion of their capital investment plan to drive substantial rate based growth and has revised their rate based growth guidance to an annual CAGR of 6% to 8%.

The adoption of the SRB is expected to increase tracked capital and reduce regulatory lag. The company plans to issue a mix of debt and equity securities over the next few years to fortify their capital structure and support their capital expenditure plan. They aim to have a healthy capital structure with at least 50% equity and may need up to $500 million of equity to achieve this. The company will also continue to focus on cost management and has seen a decline in core O&M costs despite inflation.

The company has scheduled major outages at four corners, Redhawk, West Phoenix, and Palo Verde as part of their maintenance strategy. Despite these outages, they remain committed to operational efficiency and have successfully kept O&M cost increases below the rate of inflation since 2017. They also aim to maintain a consistent dividend yield and are working with credit agencies to maintain a healthy credit rating. They have adjusted their FFO/debt target range to balance their financing needs and maintain solid credit metrics.

The company's balance sheet is strong, providing flexibility to navigate interest rates and address investment needs. They are optimistic about the future and have overcome previous setbacks. They are committed to keeping costs affordable and have a constructive regulatory environment. They will have an equity issuance in 2024 and are unsure of future funding plans.

The speaker, Jeff Guldner, discusses the company's need for equity in their recent rate case and their plans for future capital spending. They are open to various options, such as an ATM program or equity securities, to meet their financing needs. The company will need external financing to support their capital expenditures.

The speaker discusses the potential for equity type products to be included in their product offerings and how they will continue to evaluate the best options for their market. They mention the ATM as an example of how it can help with periodicity and solving for long-term increases in transmission and generation spending. They also mention their SRB and how the 42% figure on slide 25 represents potential projects that could be eligible for the SRB if they win them in an all-source RFP. This figure does not express a probability of these projects ending up in their plan, but rather serves as examples of opportunities within the current RFP window. The speaker emphasizes that the SRB allows for a larger potential pipeline of competitive projects compared to their previous limitations.

The company is considering building utility-scale projects that would provide a significant amount of megawatts. The decision to build these projects will be made as negotiations progress. The company believes that these projects have the potential to provide long-term benefits to customers and improve reliability. The details of these projects will be determined through negotiations.

Nick Campanella from Barclays asked a question about the company's under-earning this year and how much they could get back in the upcoming rate case filing and ROI lag docket. Jeff Guldner responded by explaining that the inflationary environment has caused a lag in earnings, particularly in interest costs. He believes these factors will be addressed in the regulatory lag docket.

The speaker is discussing the issue of regulatory lag and its impact on utility cases. They mention how higher inflationary pressures can result in significant baked-in lag, leading to a higher ask in the next case. They also mention that they try to mitigate this issue, but some structural factors cannot be controlled. The speaker then talks about the drivers of regulatory lag, such as interest expense and O&M costs, and how they need to recoup these costs to be more representative of forward financing costs.

The speaker discusses the increase in O&M costs and how it is a good story despite having higher wages and planned outages. They also mention that there will be no further impacts from pension and that there will be increases in depreciation related to plan going to service. The speaker is excited to have a dialogue with the commission and stakeholders about these issues and will continue to address them in future rate cases.

The speaker is discussing the company's potential growth rate of 5% to 7% over the long term and how it may be affected by regulatory lag and historical test years. They mention the potential for a smoother cost recovery profile in the future due to factors such as the SRB and transmission spend. However, they also acknowledge the need to address near-term pinch points in order to reach this growth rate.

The company is aiming for a balanced capital structure of more than 50% equity at the APS level. This will help to create operating leverage and balance their capital structure with the rate case outcome. The current equity ratio of 51.9% is consistent with national averages and the company wants to stay above 50% in order to avoid playing catch-up.

The speaker discusses the importance of balancing the WACC (weighted average cost of capital) for customers and shareholders. They mention the need to increase equity and maintain credit metrics while also addressing the 14% to 16% sales growth forecast through 2026. They note that the spike in sales growth in 2025 and 2026 may be inconsistent due to the ramp rate of larger customers.

The company is not sharing a granular view between 2025 and 2026 for their large customers. One of their larger new customers, Taiwan Semiconductor, is committed to full ramp up of their first fab in the first half of 2025. The company is closely monitoring the ramp rates of each customer and will file their next rate case at an undetermined time, as they want to see how the regulatory lag docket evolves first.

The interviewer asks Jeff Guldner about the timing of the resolution of a docket related to regulatory lag. Guldner anticipates the question and explains that the docket will likely progress throughout the year and utilities may start adapting the recommendations in 2025. He also mentions the process of putting rates in effect and monitoring the development of the docket before deciding how to move forward.

The speaker discusses the potential deployment of the SRB in 2026 when some assets are expected to come into service. They mention that the RFP process and filing process will be completed before the assets go into service, and the first priority is ensuring reliability for summer 2026.

The speaker discusses the diverse range of technology projects included in the list of potential opportunities and how they address reliability needs and clean energy commitments. They also mention the potential to pull forward some O&M costs from 2024 into 2023 due to favorable weather, but the long-term trend is driven by a focus on customer affordability and a lean culture within the organization. The upcoming closure of the Challo facility will also contribute to a decrease in O&M costs.

The company has faced some wage pressure, but is proud of their ability to manage operating costs and maintain a reliable system. The guidance for the BCE sale is included in their earnings growth, and the company plans to true up their capital structure with a mix of equity and debt, but the timing is still being determined.

The company's FFO to debt ratio at the end of 2023 is not yet available, but it is expected to fall within the new range of 14% to 16%, which was set to meet capital needs and maintain good credit ratings. The company is waiting for the rating agencies to evaluate the credit, and S&P has already stated that their downgrade threshold is in the 13% range.

The company has decided to target a 14% to 16% range for their capital needs in the long term. They have been in discussions with ratings agencies and will continue to engage with them now that the rate case is complete. The agencies are focused on the improvements and de-risking of the regulatory construct and will make an evaluation of the company's ratings with all the information now available to them.

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