The paragraph is an introduction to the Pinnacle West Capital Corporation's Third Quarter 2024 Earnings Conference Call. The operator, Matt, welcomes participants, and Amanda Ho, the host, thanks everyone for joining. She outlines that the call will review the company's third-quarter earnings, developments, and performance, with presentations from the Chairman and CEO, Jeff Guldner, and CFO, Andrew Cooper. Other key executives are also present. She mentions the availability of the presentation slides and cautions about forward-looking statements. The third-quarter Form 10-Q has been filed and holds detailed information. A replay of the call will be available on the website and by phone until November 13, 2024. The call is then turned over to Jeff Guldner, who will discuss the company's operational success and financial management, highlighting their reliability during a record-breaking summer.

The paragraph provides an update on the company's operations over a record hot summer, praising the operations and field teams for maintaining reliable service amid challenging conditions in Arizona. It highlights the company's contribution to Hurricane Milton recovery efforts in Florida through a mutual assistance network. The summer saw unprecedented high temperatures, resulting in a new peak energy demand. Despite these challenges, the company's generation fleet, resource planning, and customer demand-side programs effectively met the increased demand. The success is attributed to long-term planning, maintenance, and the use of smart technology like the Cool Rewards program.

The paragraph discusses APS's successful smart thermostat program, which enrolled over 95,000 devices to conserve energy during a major storm outage. This innovative approach was the first of its kind for APS and effectively relieved grid strain. Additionally, APS is expanding its energy resources with a planned Redhawk power plant expansion, adding more than 800 megawatts of generation and storage by 2028. As they finalize their 2023 energy resource planning, APS is preparing for a 2024 all-source RFP. The company continues to support communities with heat relief programs, bill assistance, and partnerships with over 100 local agencies to aid vulnerable populations.

The paragraph discusses the company's achievements and future focus. It highlights that their customer care phone center ranks first nationally in the J.D. Power Electric Customer Satisfaction Study, and overall, they are in the top 10 utilities. The company is working on reducing regulatory lag and improving the electric grid. Recent elections in Arizona affected corporation commission seats. Looking ahead, the company aims to continue providing reliable and affordable service. The paragraph ends with Andrew Cooper announcing the release of third-quarter 2024 financial results and a forthcoming update on 2025 financial guidance and long-term outlook.

The company reported earnings of $3.37 per share for the current quarter, a decrease of $0.13 from the previous year, mainly due to increased operational, depreciation, and financing expenses, as well as income tax timing. However, positive impacts from new rates and a hotter summer partially offset these declines. The company experienced strong sales growth, with weather-normalized sales up 5.9% and consistent 10.3% growth in the C&I sector. Retail customer growth was also strong at 2.3%. As a result, the company updated its 2024 financial guidance, projecting earnings of $5 to $5.20 per share and sales growth of 4% to 6%. They also increased their O&M and capital expenditure plans for the year. Looking ahead to 2025, the company anticipates earnings per share of $4.40 to $4.60 due to higher costs related to regulatory lag, debt, equity financing, and depreciation and amortization.

The paragraph discusses the company's strong financial and growth outlook, highlighting the impact of the end of a positive OPEB amortization and a previous one-time gain from the sale of Bright Canyon, partially offset by ongoing customer and sales growth. The company's service territory growth is expected to remain robust, with projected customer growth of 1.5% to 2.5% and weather-normalized sales growth of 4% to 6% through 2027. The extra high load factor C&I sector is a significant contributor to this growth. Taiwan Semiconductor's projects in Arizona also add to the positive outlook. The company reaffirms its 5% to 7% EPS growth guidance, supported by a capital plan involving $9.65 billion in investments through 2027 to enhance infrastructure and meet rising demand.

The paragraph outlines the company's financial strategy for growth, focusing on capital investments expected to drive a 6% to 8% rate base growth, with over 40% qualifying for system reliability benefits. The financing strategy includes a mix of debt and equity, with reduced equity needs compared to previous targets. The annual equity run rate is adjusted to $250 million to $300 million, with an at-the-market equity issuance program seen as complementary to their investment profile. The company is also exploring alternative financing options to maintain a solid balance sheet and support its growing customer base. Additionally, the company aims to reduce operational and maintenance costs and improve efficiency, with a significant facility outage scheduled for 2025. They are confident in their long-term financial strategy, despite ongoing challenges.

The paragraph discusses the strong customer and sales growth in the semiconductor and manufacturing sectors, emphasizing the advantages of the company's service territory. It highlights the benefit of an improving regulatory environment focused on timely recovery, which promises a compelling future. The company is making current investments to ensure sustained growth and value creation while aiming to provide reliable and affordable service, and maintaining a strong financial position. The discussion then shifts to a Q&A session, where Shar Pourreza from Guggenheim Partners inquires about the implications of potential election outcomes on the regulatory environment, noting the prospect of having three more Republicans on a commission. Jeffrey Guldner acknowledges that the election results are still being finalized but confirms that the Republican candidates currently lead.

The paragraph discusses the potential alignment of Republicans with Commissioners Myers and Thomson on regulatory issues, specifically the regulatory lag docket. This suggests ongoing constructive work in that area. The speaker, Shar Pourreza, also touches on load growth projections, assuming a 4% to 6% increase for 2024 and 2025, which aligns with the company's longer-range guidance. Jeffrey Guldner adds that Arizona's economy has been shifting from being heavily focused on homebuilding and retirement to more advanced manufacturing, which has contributed to sustained load growth.

The paragraph discusses a conversation about Arizona's attractiveness for data centers and manufacturing sites due to its strategic location between Texas and California, good transportation, and favorable weather conditions. The state is experiencing growth in both the large-scale industrial sector and smaller businesses, with ongoing diversification across customer classes. The conversation highlights the need for new power plants to support this growth and mentions collaboration with TSMC, anticipating growth in customer numbers and contributions from various sectors. The speakers acknowledge the positive momentum and express optimism about future developments.

In the paragraph, Nick Campanella from Barclays asks about the capital expenditure (CapEx) increase and its impact on the return on equity (ROE) lag for 2025, as well as the outlook for improvement in ROE through rate cases. Andrew Cooper responds by explaining that the increase in CapEx, particularly in customer-centric generation projects and transmission, is intentional and supported by confidence from the SRB and outsourced RFP processes. Cooper acknowledges that there is a timing lag in realizing benefits from multiyear projects until they go into service and are tracked financially. He highlights the importance of addressing regulatory lag and filing future rate cases promptly to mitigate these effects, noting that lag becomes more pronounced the further they are from the last rate case, as reflected in the 2025 guidance. Additionally, structural issues like interest expenses and D&A investments contribute to the challenge.

The paragraph discusses a utility company's focus on increasing capital expenditures (CapEx) for tracked and non-tracked items to achieve a closer return on equity (ROE) to the authorized rate. Jeffrey Guldner explains the timing and potential structure of a rate case filing, indicating that the earliest realistic filing is mid-2025 if using a 2024 test year, with rates likely coming into effect by mid to late 2026. This timing would address lagging issues, such as pension and OPEB cliffs, within the new rate structure. Nick Campanella seeks clarification on the financing plan, confirming that the forward draws available in February 2024 do not offset the $700 million to $900 million figure mentioned. Andrew Cooper confirms this understanding.

The paragraph discusses financial strategies and future plans of a company related to a $725 million block of funds from February, which has not yet been utilized. The funds are aimed at maintaining a balanced capital structure. There's an additional $400 million planned for parent capital in 2025-2026, which will be augmented by $500 million. The company expects to match equity with capital needs from 2025 to 2027, with the $725 million block being the first source for this equity. Financial tools like ATMs and forward overlays could be used for future equity requirements, helping align capital expenditures with external financing. Additionally, there is a conversation about a significant pipeline of over 4,000 megawatts of data center demand, indicating ongoing and future projects.

The paragraph discusses the efforts to meet the high load demand, primarily from data centers, which account for over 10,000 megawatts of extra demand. Currently, 4,000 megawatts are integrated into the existing plan. Although some large data centers may require significant capital investment, most of the committed development is spread across multiple projects rather than concentrated in a single large project. Additionally, there is notable growth in distributed demand from manufacturing and residential sectors, with a 1.7% increase and a high number of new meter installations this quarter.

The paragraph involves a discussion about financial projections and regulatory influences on earnings per share (EPS) growth. Anthony Crowdell from Mizuho congratulates the company on a strong quarter and inquires about the assumptions behind their projected 5% to 7% EPS compound annual growth rate (CAGR), specifically regarding regulatory lag. Andrew Cooper explains that rather than depending on individual rate case outcomes, the company aims for a smoother and more predictable growth trajectory by reducing regulatory lag. This approach would enhance cash flow, credit metrics, and overall confidence in their investment plan, leading to more stable and transparent financial outcomes. The conversation ends with Anthony mentioning discussions around large loads on the system.

The paragraph discusses Arizona Public Service's (APS) approach to rate design, particularly with regards to large investments in infrastructure for new customers like data centers. Jeffrey Guldner emphasizes the need to protect the existing customer base from bearing the costs if these new customers don't use the infrastructure as anticipated. APS is exploring contract options like take-or-pay to mitigate this risk. Ted Geisler adds that APS has experience with large data centers since 2019, allowing them to make accurate usage forecasts and ensure infrastructure costs for new growth are covered by those benefiting from it, thereby avoiding cost shifts to other customers.

In the paragraph, Paul Patterson is asking Jeffrey Guldner about the status of vote counting in an election, mentioning that 120,000 votes are still left to be counted out of a total of 2 million. They discuss the situation, noting that the Republicans are leading but the race remains tight. Guldner indicates that the votes should be mostly counted by the end of the day, but the certification process still needs to be completed. After this exchange, the operator introduces the next speaker, Julien Dumoulin-Smith from Jefferies, who shifts the conversation to financial matters. Julien asks about earned returns, especially in light of increased capital expenditures (CapEx) and upcoming forecasts for 2025 through 2027, and how these factors might affect financial dynamics. Andrew Cooper responds to Julien's inquiry.

The paragraph discusses a company's strategy for managing operational and maintenance (O&M) expenses and capital investments in response to load growth and economic conditions. The company focuses on allocating capital to transmission and generation assets to ensure appropriate investment recovery while cautiously increasing investments in distribution and core infrastructure. They recognize the need to address regulatory lag by filing a rate case to align income statements with inflation and interest rate increases. The company is in a decent capital position but acknowledges that a formula rate structure could enhance access to certain capital areas, improving investment confidence and return on investments.

The paragraph discusses strategies for managing costs and earnings in the context of utility rate cases. Andrew Cooper explains the importance of reducing reliance on rate cases by implementing annual true-ups to recover increased costs and pass savings onto customers. This approach aims to achieve a more consistent return. Julien Dumoulin-Smith asks about inflation trends, noting an increase in O&M costs for 2024. Cooper clarifies that the company adjusts its O&M budget annually, considering factors like weather benefits and long-term project planning. They also briefly touch on potential changes in tax rates by 2025.

The paragraph discusses the reasons behind the increase in O&M (Operations and Maintenance) costs for the year. A portion of the increase resulted from intentionally moving projects forward and funding customer assistance programs due to the hot summer. Although inflation continues to affect some items, the increase is mainly on the capital side. The O&M costs for 2024 reflect these factors, but a decrease is expected in 2025 due to derisking efforts and aggressive cost management. The higher tax rate this year is attributed to increased taxable income, though it is expected to stabilize due to the robust tax credit portfolio. Julien Dumoulin-Smith confirms this understanding, and Andrew Cooper agrees. The conversation ends with the operator introducing Sophie Karp from KeyBanc, who acknowledges a successful quarter and inquires about the All-Source RFP.

The discussion revolves around the procurement and development of 8,500 megawatts since 2020, specifically through the System Reliability Surcharge (SRB) mechanism. Ted Geisler explains that while the current ownership of projects hasn't yet reached a target mix of 40-50% between ownership and third-party or PPA projects, the ownership share has more than doubled, with 800 megawatts contracted and under development from the last RFP. The next RFP is expected to be issued later in the year, with projects continuing into 2025. Sophie Karp then asks about inflation's impact on their regulatory plans, to which Andrew Cooper responds that the upcoming rate case will address operational and maintenance costs set in the previous case, based on historical data as of July 2021.

The paragraph discusses the impact of inflation on customer rates and the company's costs over the past few years. It mentions that current costs are stable, though not declining, and the company aims to align customer rates with these costs in the next rate case. There has been a significant increase in operating and maintenance (O&M) expenses from $850 million in early 2020 to an expected high $900 million next year, partly due to a growing service territory and acknowledging current cost realities. The conversation then shifts to funding additional capital expenditures, with less than 40% equity needed, supported by increased cash flow and retained earnings, which enhances credit metrics and confidence in the capital plan.

The paragraph discusses the company's approach to managing its financial structure amid sales growth and credit metrics. It highlights their strategy to pay down deferred fuel balances and cautiously manage incremental equity needs, emphasizing the flexibility provided by an upfront $725 million. The company aims to align its capital expenditure (CapEx) plan with its credit metrics while maintaining a balanced equity structure. They plan to introduce $700 million to $900 million in incremental equity from 2025 to 2027, which constitutes less than 40% of the incremental need. Steve Fleishman inquires about alternative financing methods, to which Andrew Cooper responds that they are exploring various options, such as the Department of Energy program and hybrid securities, to manage credit metrics efficiently and keep the capital structure straightforward, staying open to innovative financing methods.

The paragraph discusses several financial topics related to asset classes, investments, and financing in the context of energy companies. It mentions a DOE loan program and a $70 million grant to help with financing costs. The conversation involves Jeffrey Guldner, Andrew Cooper, and Steve Fleishman discussing the nuclear Production Tax Credit (PTC), stating it is not included in current earnings and highlighting its importance as a customer asset that could defer capital investment costs. The guidance for the PTC's implementation and its effect on rate cases are still pending. Dylan Lipner then asks about the operational and maintenance (O&M) expenses, specifically how much has been advanced from 2025 to the current year, with Andrew Cooper emphasizing a multiyear plan for O&M projects.

The paragraph discusses the company's approach to managing its operations and maintenance (O&M) budget for 2025. The strategy involves leveraging weather-related opportunities and efficiently planning projects, such as an IT infrastructure initiative. The company does not detail specific changes between 2024 and 2025 but focuses on long-term risk management. It emphasizes the need to reduce the 2025 O&M budget due to structural changes like the expiration of the OPEB amortization and Bright Canyon gain. The company collaborates across departments to address these financial challenges and manage employee and retirement benefits.

The paragraph discusses efforts by a company to switch its primary health insurer, which is expected to result in substantial savings for 6,000 employees and their beneficiaries by 2025. Dylan Lipner queries about the potential to file a rate case before the Arizona Corporation Commission (ACC) issues a policy statement, with Jeffrey Guldner explaining that the earliest practical filing is mid-2025. Guldner notes that the process might be delayed due to new commissioners but will be monitored. Ted Geisler adds that a policy statement could indicate the preferred rate-making approach, which would be included in their next rate case filing and formalized through adjudication, achieving the same result. Dylan Lipner expresses appreciation for their insights.

The paragraph marks the end of a Q&A session and the conclusion of the event, thanking participants and inviting them to disconnect.

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