Pinnacle West Capital Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2022

Key Takeaways

  • Storm response: APS replaced over 800 poles during one of the most challenging summer storm seasons on record, restoring service rapidly while achieving a 95% availability factor for non-nuclear generation and 100.2% capacity factor at Palo Verde.
  • Customer satisfaction: Through Q3, APS climbed to the 2nd quartile in J.D. Power residential rankings and 1st quartile for business customers, led by improvements in customer care, reliability, billing, and corporate citizenship.
  • Inflation Reduction Act: The company sees major benefits from new clean energy incentives—an eight-year nuclear production tax credit, EV and storage credits, and extended clean energy tax credits—to advance a reliable, affordable clean energy transition.
  • Rate case filing: APS requested a 10.25% return on equity, a 51.93% equity ratio, and a $460 million annual revenue increase effective December 1, 2023, to fund grid resiliency, clean energy investments, enhanced low-income discounts, and simplify adjustment mechanisms.
  • Financial update: Q3 EPS of $2.88 topped expectations with a $0.23 weather tailwind, prompting a full-year 2022 guidance raise to $4.20–$4.35 per share; O&M outlook was increased to $880–$895 million, liquidity remains strong, and the dividend was hiked 1.8%.
AI Generated. May Contain Errors.
Earnings Conference Call
Pinnacle West Capital Q3 2022
00:00 / 00:00

There are 11 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2022 Third Quarter Earnings Conference Call. At this time, all participants have been placed on a listen only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Speaker 1

Thank you, Matt. I would like to thank everyone for participating in this conference call and webcast to review our Q3 2022 earnings recent developments and operating Our speakers today will be Chairman and CEO, Jeff Goldner and our CFO, Andrew Cooper Ted Geisser, APS President and Jacob Tetlow, Executive Vice President, Operations are also here with 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 slides contain forward looking statements based on current expectations and actual results may differ materially from expectations. Our Q3 2022 Form 10 Q was filed this morning.

Speaker 1

Please refer to that document for forward looking statements, cautionary language, as well as the Risk Factors and MD and A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. 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 10, 2022. I will now turn the call over to Jeff.

Speaker 2

Thank you, Amanda, and thank you all for joining us today. We continue to execute well on our operating performance and financial management. So as part of my operations update, I'll share with you our success in managing through one of the most challenging summer storm seasons that we've had in recent history. I'll also provide an overview of our rate case filing and then Andrew will review our financial performance including an update to our earnings expectations for the year due to higher sales growth Firstly and very importantly, I want to recognize our field teams for doing an exceptional job safely and quickly bringing Customers back online after heavy storms swept through different parts of the state this summer. The extreme weather brought on damaging winds, Heavy rains and flash flooding, which created a challenging environment where we saw a record number of poles damaged.

Speaker 2

And that's how we usually measure the intensity of a summer Typically, a storm season will see an average of about 300 poles damaged. This year, we replaced over 800. Many teams across the company worked together to restore service from our supply chain teams getting the necessary supplies, our field crews working day and night And our employees communicating with customers and making sure that they were kept apprised of the restoration efforts. Our careful long term planning, resource adequacy, flexibility and innovative customer programs also proved beneficial through the summer. APS reached the 3rd highest peak demand of 7,587 Megawatts on July 11 and the temperature on that day was only and I put that in quotes Only 115 degrees compared to our typical peak temperatures of 117 degrees or higher.

Speaker 2

Generally, every degree is worth about 140 megawatts of peak demand. So had we seen 117 degrees, we would have easily set a new record For APS Energy Demand this year. In addition, in early September, a heat wave hit the Southwest and the region once again saw the lack of available capacity, resulting in 15 declarations of energy emergencies by other utilities across the West. During this period, we served our customers reliably and also helped our neighboring utilities by making off system sales to the Western wholesale market. Those off system sales directly benefit ATS Fast ramping assets including Four Corners, Ocotillo and Palo Verde were ready when we needed them.

Speaker 2

Our non nuclear generation fleets Equivalent availability factor, EAF, and that's the percentage of time that a generating unit is available and ready to perform when called upon, Was 95% from June through September. Palo Verde generating stations capacity factor for the same timeframe was 100 0.2%. Finally, with this completion of the summer run, Palo Verde III safely entered its planned refueling outage on October 8, and we're getting ready to complete that outage in the next few days. I'm also happy to share that ACS when compared to the company's large investor owned peers. Continuing the progress that the company has been making over the last 2 years, APS's J.

Speaker 2

D. Power residential ranking through the 3rd quarter firmly places the company into 2nd quartile For residential customer satisfaction, our strongest performing drivers through the 1st 3 quarters of 2022 were customer care, both phone and digital, Power Quality and Reliability, Corporate Citizenship and Billing and Payment. Additionally, APS' J. D. Power business customer mid year results Puts the company in the 1st quartile nationally.

Speaker 2

APS continues to be one of the most improved utilities in the nation for both residential and business customer satisfaction, And we've committed to our customers, shareholders and our regulators that a top focus of improvement for our team will be improving the customer experience. This has been a cornerstone of my strategy as CEO and I'm incredibly proud of our employees and proud of our progress so far and looking forward to closing out this year strong. Turning to a topic that's certainly top of mind to many of us, the Inflation Reduction Act. While we continue to evaluate the The tax benefits provide an opportunity to make Arizona a leader in clean investments. A few of the provisions that will benefit APS customers the most include the creation of an 8 year production tax credit for existing nuclear facilities, The inclusion of the EV and EV Infrastructure Tax Credits, new credits for storage and hydrogen, 10 plus year extension of the clean energy tax credits and a 3 year extension of the existing PTC and ITC.

Speaker 2

Each of these represents a big win for customers and for our industries. These incentives will help us to meet our clean energy commitment and they will help us to enable the clean energy Transition without compromising reliability and affordability. For a regulatory update, we filed a rate case on October 28, 2022. The key components of that filing include a requested 10.25% return on equity, a 1% return on a fair value increment, 51.93 percent equity layer and 12 months post test year plan. We've requested an increase In annual revenue of approximately $460,000,000 and we propose that new rates go into effect on December 1, 2023.

Speaker 2

This is an important rate case. It supports investments in our clean our energy infrastructure to ensure that all customers continue to receive the reliability that they count on and to increase resiliency under all weather conditions. We've made essential investments to maintain the health of the energy grid and to avoid Outages. This rate case also helps to ensure that Arizonans have access to the energy they need when they need it as we make a reasonable and affordable transition to a We're securing the energy needs of Arizona without compromising on affordability or reliability. We're balancing investments that optimize existing resources with investments in cost competitive clean energy generation that will power our state's future.

Speaker 2

Our filing contains proposals to further support our customers. After a lot of work with stakeholders, we're Proposing to enhance our limited income bill discount program to provide an additional discount for customers with the greatest need. And we're also proposing to eliminate in network credit card and in person kiosk payment fees for all customers. Programs and proposals like this demonstrate our commitment to improve customer satisfaction and make transacting with us more seamless and convenient. And lastly, we heard the commission's request for simplifying our adjusters.

Speaker 2

And in response, we proposed a number of modifications to our suite of adjustment mechanisms. Specifically, we propose reducing the number of adjustment mechanisms from 7 to 4 active adjusters With the elimination of the loss fixed cost recovery mechanism and the environmental improvement surcharge, we also propose To modify our renewable energy surcharge mechanism to allow APS to invest in clean energy projects to support Arizona's growth, While reducing the frequency of rate cases and smoothing out the financial impacts of the new projects. With this adjustment mechanism, tax credits from legislation like the IRA can reduce the overall cost of these investments And we would be able to pass those savings to customers more quickly through an adjuster. Finally, we're not

Speaker 3

So I

Speaker 2

want to thank you all again for your time today, and I'll turn the call over to Andrew.

Speaker 4

Thank you, Jeff, and thanks again to everyone for joining us today. I will cover our Q3 results, including the impact from weather. I'll also provide additional details around our customer and sales growth, O and M, as well as our expectations for the remainder of 2022. We earned $2.88 per share in the Q3 this year, down $0.12 compared to the Q3 last year, but above our original expectation. As has been the case all year, The unfavorable rate case decision is the driver for lower year over year results, specifically the reduction to net income from no longer deferring the costs related to the Four Corners SCR and the Ocotillo modernization project.

Speaker 4

Other negative year over year impacts include lower LFCR revenues, higher O and M, higher depreciation and amortization and higher interest expense. Partial offsets this quarter to the negative drivers were lower tax expense, continued customer and sales growth and weather. Weather was a significant benefit this quarter compared to last year. Q3 2021 was extremely mild, resulting in a large negative impact on margin. 3rd quarter this year was slightly warmer overall than normal and coupled with higher humidity resulted in a $0.23 benefit to margin.

Speaker 4

On customer growth, 3rd quarter remained in line with our guidance at 2%. In addition, we have experienced strong weather normalized sales growth all year. 3rd quarter saw an increase of 1.3% driven by C and I sales growth of 4.9%, partially offset by a decline in residential usage. We are no longer experiencing increased usage impacts from COVID work from home trends. C and I sales growth in 2022 has largely been driven by strong sales among a diverse set of small C and I customers and from ongoing expansion of several large C and I customers.

Speaker 4

Due to the beneficial weather and strong sales and customer growth, we are updating our full year 2022 earnings guidance to $4.20 to $4.35 per share. I will note that without the weather benefit, We would have expected to be in line with our original guidance as our sales growth would have offset our increase in O and M, which I will talk about later. Turning to the economy here in Arizona, Maricopa County Residential Housing Permits started the year off at a fast pace and are trending to finish largely driven by net migration along with solid APS customer growth. Importantly, our growth is not solely reliant on residential housing or construction As the increase in business segments such as semiconductors, electric vehicle manufacturing and data centers provide increased diversity in our customer base. In fact, in October, Align Data Centers announced an expansion of an additional 2,000,000 square feet over 2 sites.

Speaker 4

Turning to O and M, we continue to experience cost inflation, which is affecting all areas of the business. Our O and M levels are further impacted by the need to serve Significant growth in our service territory. As a result, we have experienced cost increases in categories including chemicals, contract services, equipment and materials. We've been able to mitigate much of these cost increases through our customer affordability and lean efforts. In addition, similar to past years, the increased sales volumes And pension benefits have allowed us to flex up on spending to relieve some of those cost pressures and de risk future O and M spend.

Speaker 4

As such, we are adjusting our O and M guidance for the year and expect our O and M to fall within the range of $880,000,000 to $895,000,000 While our total O and M is increasing in the near term, we still expect our O and M per megawatt hour to decline over the long term. We remain focused on O and M and we continue to look for opportunities to create efficiencies, reduce risk and keep our costs low to maintain affordable rates for our customers. Finally, I will briefly touch upon our liquidity and financial health. As the Federal Reserve continues to raise interest rates To try to combat inflation, we are closely monitoring our financing needs. We continue to maintain a strong balance sheet and a well funded pension And I would highlight that APS does not have any long term debt maturities until mid-twenty 24 and limited floating rate debt.

Speaker 4

Couple of weeks ago, our Board approved a 1.8% increase in our quarterly dividend per share.

Speaker 2

We have grown our dividend

Speaker 4

for 10 consecutive years and continue that trend this year. We continue to be confident in our plan and intend to grow back into our long term dividend payout ratio target of 65% to 75% in the future. We are grateful to be able to serve a state that continues to grow and thrive and the weather tailwind this year will allow us As Jeff mentioned, we will continue to focus on our regulatory outcomes while executing our long term plan to deliver value for our customers and for our shareholders. This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

Operator

Certainly. Ladies and gentlemen, the floor is now open for questions. Your first question is coming from Nick Campanella from Credit Suisse. Your line is live. Next question is coming from Insoo Kim from Goldman Sachs.

Operator

Your line is live.

Speaker 5

Thank you. First question on the IRA and just clean energy transition. Thank you for the commentary on that. Know it's a little bit early and we have the regulatory proceeding going. But as you think about the IR impact on the various generation resources And what you had laid out so far in terms of the AllSource RFPs through 'twenty seven and beyond, how does this Change whether in terms of magnitude or just timing of what you have laid out so far?

Speaker 5

Thanks.

Speaker 2

Hey, Ansu. We've got a current IRP moving forward right now that I think will probably just continue. We may be able to see Some benefits ultimately in that, but that's largely going to be focused given where we are on probably PPAs. So I think the real benefit to this and this is kind of the key that I was trying to emphasize in the commentary is that if we can I used the React, that renewable energy adjuster to pass through the tax benefits concurrently with the investment? It really unlocks value for customers, because then RFPs when we're pursuing those.

Speaker 2

We can pursue the most advantageous long term investments for our customers and be able to better mix The owned versus PPA assets. Again, I think the benefit of being able to flow those tax credits and the other incentives through an adjustment mechanism means The rate impact, so it's really the combination of the smoother capital recovery, but also gradualism on the rate impact, The ability to reflect the tax credit benefits immediately and then to increase some of the ownership benefits, which is going to Provide long term benefits to customers. So the details of things like the nuclear PTC and other things are still Getting worked out in the regulations, but I think we do see some significant benefits. And obviously, it can be in other things like EV charging infrastructure and things like that.

Speaker 5

Got it. Okay. And the other question, just in terms of thinking about 2023 earnings power guidance is should we Still assume that until the rate case is largely finalized, we you guys won't be providing 2023 guidance?

Speaker 4

Yes. It's Andrew. Consistent with our practice and other rate cases, our plan right now is to not provide guidance while we're Pending in the rate case, though, we certainly evaluate both our current year and future year guidance as we go through the year. I think one of the big things that will

Speaker 3

You know, as opposed

Speaker 4

to that decision, we'll be taking a look at the procedural schedule in the case and making a determination at that point about whether we're able to provide guidance in 2023.

Speaker 2

And so it's really tough to get that first and foremost, see what we can do and we'll be able to update everybody on Q4 As well as with drivers.

Speaker 4

Got it. Thank you very much.

Speaker 2

Yes. Thanks.

Operator

Thank you. Your next question is coming from Julien Dumoulin Smith from Bank of America. Your line is live.

Speaker 6

Hey, guys. This is Darius on for Julian. Thank you for taking my question. The first one has to do with the proposed Clean Energy, not a new rider, but a modification to the existing one in the latest rate case filing. Can you maybe talk about, given the fact that the one you proposed in the prior rate case received some opposition and ultimately didn't get through, can you talk about How you approach this go around differently, maybe what was modified, and your level of confidence in getting support from the key stakeholders this time around?

Speaker 7

Hey, Darius, it's Ted Geisberg here. Happy to address that. We think there's several reasons why this really has an opportunity to create Value for our customers. So it's more of an affordability opportunity for customers now than ever before. And that is a big difference between this proposal and last rate case.

Speaker 7

A couple of reasons, and Jeff alluded to these. 1, with IRA and now being able to pass through production tax credits to customers, This mechanism and using the existing renewable energy mechanism really provides an avenue for us to be able to pass on that savings Without being able to include those carrying costs for capital investments, there's no way to then pass on those clean credits. And given that we operate in Arizona with some of the best solar radiance on the globe, we expect more production tax credits to be passed on to customers and just about any other Area that you could install solar. So a big benefit there and certainly those production tax credits didn't exist when we proposed last mechanism. And then the other item that's noteworthy is we continue to operate competitive all source RFPs.

Speaker 7

And through those RFPs, we see the proposed projects And are able to identify that ownership opportunities provide tremendous value for customers, in addition to balancing that with And so providing a mechanism allows us to continuously operate a competitive procurement process And ensure that we're always taking the best value projects for customers and passing those on in a timely manner along with

Speaker 2

the tax credits. And Darius, one other I mean, so remember that the proposal for the infrastructure tracker in the last case was broader. So this is really targeting clean energy investments, which is why it's tied to the renewable energy adjustment mechanism. So Again, these are different. We've seen carrying costs come through the React before.

Speaker 2

So it's not a new concept.

Operator

Thank you. Your next question is coming from Shahriar Pourreza from Guggenheim Partners. Your line is live.

Speaker 8

Hi, guys. It's Jameson Ward on

Speaker 2

for Shar.

Speaker 8

How are you?

Speaker 6

Hey, good. How are you?

Speaker 8

Doing well. In last week's rate case filing, you lay out quite clearly the importance of a higher ROE and you make the case for 10.25 percent. Today, you reiterated your 5% to 7% EPS CAGR through 2026 Off of a $4 base in 2022, just staying high level and holding all else equal, If the commission maintained your current 8.7% ROE, is the bottom end of the range achievable? Or how should we think about how the ROE kind of plays in there?

Speaker 4

Yes. Jemison, it's Andrew. We look at the Both are 5% to 7% long term EPS growth rate range as well as the rate case application, both of those look at We look at holistically, the 5% to 7% has, reasonable regulatory recovery through kind of the whole package of the rate case built into it. It also has our sales growth forecast and our O and M management built into it as well. So there's a lot of components in there and it's really hard to parse those out either a regulatory recovery perspective, what are the components of that 5% to 7%, which we are, as you said, reiterating on this quarter?

Speaker 7

Yes. And Jameson, this is Ted. I just add to that the proposed ROE has nothing to do with what would be required to achieve some earnings range. It's all based on the expert testimony of Doctor. Moore and the factors that he concluded through the various models that are run and introduced testimony and so it's really based on his evidence that is defining and defending the 10.25 request.

Speaker 8

Got you. Yes. No, I guess that was the upper end there. I guess what I was wondering was sort of further to the point that you make in your testimony about attracting investment into the state and to the utility. The Current level of the ROE that the commission has set, is that something that is sufficient to get you there?

Speaker 8

And If it's not something that you're able to parse out and break out separately, that's fine. I have a second question I can move on to. But just wondered if there was a straightforward answer to it or It's not that simple.

Speaker 7

No, I think that's a great point. I mean, 2 things we try to make clear in the testimony is, 1, given the growth we're There is significant capital that we need to raise to keep up with the growth, and we are very concerned on our ability to do that given the unprecedented low current ROE. 2nd, we're on negative watch by credit agencies and this rate case and how the commission views a The return on equity is under careful consideration. And so to the extent that you end up getting further downgraded, that ultimately increases cost for customers. So there's an opportunity to actually preserve our access to capital and mitigate future interest expense as we raise capital to keep up with customer growth, Which is all part of why we believe the 10.25 is a more appropriate ROE than the current level.

Speaker 8

Got it. Thank you. That makes sense. I'll move on to my second question here. I appreciate the color.

Speaker 8

Several other utilities have mentioned There are pension headwinds for 2023 have dropped 1st again over the past few months due to market performance. Can you remind us Whether your rate case captures the entire year or if it'll just be up until the June 30 test year, and if it Is just half of twenty twenty two, does that mean that there's, I guess, half a year of drag that Would carry on until the next rate case or how should we think about what's incorporated into the rate case and would ultimately end up in rates and what isn't?

Speaker 4

Yes, James, thanks for the question. Our bench remains very well funded and we Like others continue to watch the market and have seen the market experience losses across most asset classes this year. Ultimately, from a rate recovery perspective, we are in a split test year at June 30, and what's known today is the pension expense from year end When we get to the end of the year and we mark our asset to market and we know whether there are losses that need to be amortized, Which just as a reminder, we use the quarter test and evaluate materiality of those losses and those are then amortized over the average service life of our plan, which tends to be in the 10 to 12 year range depending on the plan. At that point, we'll be able to have a full sense for what The pension expense is going into 2023. And if the last rate case is a baseline example, We were also in a split test year and proposed at that point, we had that information in averaging of the 2 years, which To your question, effectively blends in half year of the 2022 impact.

Speaker 4

When we get to the end of the year, we'll make a determination On regulatory strategy, but that last rate case is an example of how we handled it in an air split test year.

Speaker 8

Got it. Very clear. Thank you very much. Look forward to seeing you guys at EEI.

Speaker 7

Thanks, Jeff.

Operator

Thank you. Your next question is coming from Sophie Karp from KeyBanc. Your line is live.

Speaker 9

Thank you for taking my questions. My first question is about, I guess, all the puts and takes in the rate case application here. You guys are proposing a lot of modifications and eliminations of some recovery mechanisms. Could you just maybe give us some rundown on how these

Speaker 7

Yes. Sophie, it's Ted here. Really, the intent is to try to be responsive to feedback we've gotten from commission and stakeholders and simplify The adjusters, so when you think about the 7 we have now, eliminating the environmental adjuster and LCR, sweeping current balances Base rates, that's a way to simplify that, have less adjustments throughout the year. The DSM adjuster largely remains similar It has been, although has an update to recover some of the fixed costs currently in the LFCR, but that would be combined with other elements of the existing DSM mechanism. The Renewable Energy mechanism remains large as it is today other than expanding it to include, of course, the carrying costs of New clean investments going forward.

Speaker 7

As Jeff said, PSA, TCA remain the same. And then team is focused on income tax So as a result, can remain inactive for the time being. So it's a good opportunity for us to be able to simplify the bill, simplify adjustments throughout the year.

Speaker 3

So from selling down

Speaker 7

And then really just focus on base rate changes going forward.

Speaker 2

And Sophie, your point on Important change here really on addressing that would be the using the renewable energy adjustment mechanism To both flow back the tax credits to customers, but then also to get more concrete between investment. And that's what Could help keep us having to file rate cases more rapidly. That's really the most important thing. If you have regulatory lag, you need

Speaker 3

to get to

Speaker 2

So that will be an important adjuster to be looking at to If that can help us with more concurrent recovery and then hopefully again to push out rate case filings.

Speaker 9

Awesome. Thank you. And my other question is on O and M. So with how rapidly the conditions are I guess, the environment that you might find yourself 6, 12 months from now, how much confidence do you have that, I guess, the request you put in It's going to be sufficient given that we may see a cost and a board environment staying higher for longer.

Speaker 2

Well, so be put in a we're in a historical test year environment. And so the timing of this rate case was able to pick up First half of expenses in 2022, but ultimately that's something that we rely more on our lean Sigma and Internal cost discipline, to continue to manage through those challenges because that you can't go really in a forward test year and say, let's go propose pro formas and things Like that for adjustments. So I think that's the nature of the jurisdiction that we're in, but we manage that. It does help drive discipline on the cost management side. Yes.

Speaker 4

And so it's really a similar concept on the borrowing cost side. We have a strong balance sheet. We're able to be flexible because of liquidity we have To opportunistically issue debt at times that the market is relatively favorable, we're certainly in a increasing interest Rate environment, again, there you have a historical test here. And when we look at the rate case, we look at the WACC. And so that's a combination of a number of factors, not just Interest expense, but the ROE and the cap structure.

Speaker 4

So that's an important piece as well. But as far as forward looking interest expense, We were fortunate to have no maturities until the middle of 2024 and not a lot of floating rate debt. So it's really just a question of opportunistically raising Debt, at appropriate times to support the CapEx investments that we have to make and we've disclosed what our expectation is around Those that needs over the next 2 years.

Speaker 9

Thank you. Thanks so much.

Speaker 2

Yes. Thanks, Sophie.

Operator

Thank you. Your next question is coming from David Peters from Wolfe Research. Your line is live.

Speaker 3

Yes. Hey, good morning, everybody. Hey, Dick. Curious just on the election next week. I know it's inherently tough, If not, impossible to predict.

Speaker 3

But I just I don't think there's any kind of pulling data at that level. But I'm just wondering if you Speak to kind of what you see currently up ballot and is it your experience that what happens there typically informs the outcome down ballot?

Speaker 2

Yes, David, it's a tough one in Arizona, particularly when you've got an election like this where I think most a lot of the polling is showing Pretty close margins in different races. Arizona, you do see things in Arizona where people will tend to move around the ballot. And so we've had cases before where we've elected a Democratic governor, but had Republicans in kind of all the both the Senate seats. And I think your point is probably the most relevant for the Corporation Commission elections is that there's not a lot of polling It's done down at that level. And so our strategy is always to work with all of the potential candidates to make sure we've met with them, to make sure that we're Informing them on kind of our plans and how we see the world because at the end of the day, you've got to work with whoever gets elected.

Speaker 3

Yes, that makes sense. Another one I had was just on the composition of the O and M increase. Obviously, I think you Andrew, you spoke to just inflationary pressures, but then there's also a piece just kind of required to keep up with the growth you guys are seeing. And I think you also said Pull forward some from 'twenty three to derisk future periods. So could you just kind of help parse that out a little bit?

Speaker 4

Sure, David. Yes, so as I mentioned, you captured the key factors. We also had, as Jeff talked So there's a lot of factors driving O and M this year. And the way we think about it and That move in our guidance range up to that $8.80 to $8.95 is when we think about the efforts we're taking to mitigate Some of that cost inflation. You compare actual 2021 O and M to the new 2022 guidance range in that midpoint, you're talking about Just over 2.5% increase year over year.

Speaker 4

So our cost mitigation efforts as of the same time as you alluded to, we Forward spending derisk some future year O and M kind of creates quite a few puts and takes in that number. So where we're really focused because of the growth in service territory and where we have to spend there is continuing to monitor O and M on a per kilowatt hour basis and making sure that we're remaining And I think that will be a good measure if O and M sustains at these levels or increases because we are serving a larger service territory that we're remaining efficient about that spend. It's really hard to parse out, the different pieces because we're responding to a lot of factors in the market, both a local service territory where inflation is high, But also in the national market where we compete to buy some of our products and services. So see a lot of factors at play. The increased range is sort of a combination of all those factors net of the mitigation efforts that we've taken this year, which we think have been Pretty successful in blunting the impact of that higher O and M.

Speaker 3

Thank you for that. Just one more quick one, if I could. Just On the capital plan, I'm just curious to get kind of your latest view on just your base needs to support what seems like An even stronger sales growth outlook now. Are those levels pretty conservative just as they kind of sit on your slides today? Or I guess just when do you think you'll be in a position to maybe update that?

Speaker 3

And then also I guess anything RFP related from IRA benefits?

Speaker 4

Yes, David, that CapEx level is really baseline of where we are today. And what it takes into account Is that we're signing quite a few PPAs to respond to the reliability need and the customer growth. And Our CapEx increment if you think about our CapEx plus the PPAs we're signing, it would become a pretty materially larger number. We're fortunate to have same mechanism as a way to recover some of those PPA costs as we work through this rate case and a path to more predictable regulatory recovery. But the numbers that are in there are kind of reflective of the current baseline and we'll continue to evaluate the capital plan.

Speaker 4

You'll see the results of RFPs And that will allow us even while we're in the rate case to adjust our CapEx forecast going forward. But the rate case outcome ultimately be the best indicator For us to take a look at that balance PPAs and self build assets and what that means for the generation CapEx going forward.

Speaker 3

Okay. Thank

Operator

you. Thank you. Your next question is coming from Paul Patterson from Glenrock Associates. Your line is live.

Speaker 10

Hey, good morning.

Speaker 8

Hey, Paul.

Speaker 10

The last questions have been answered. Just back to the rate case, I apologize if I missed this, but the team, the tax adjustment tax expense adjuster mechanism, to maintain it as Inactive, I'm just wondering how that interplays with the renewable energy adjustment charge. And I think you mentioned the tax benefits moving through that. And I'm just sort of wondering why maintain it as an active or how would the team have worked If it was active regarding the IRA and what have you?

Speaker 7

Yes. Paul, this is Ted. I appreciate the question. The team was really established narrowly to focus on adjustments in income tax levels, so largely to pass on federal tax reform focused on income tax changes. Whereas the production tax credit opportunity that we have in front of us for future solar investments as a result of IRA, Yes, that is intended to be constant, ongoing and tied to the production levels of solar that is procured.

Speaker 7

And ultimately, we would propose recovered through that REAC adjusters. So as you recover costs for the new solar facilities, the intent would be you offset those Costs in part by passing back the production tax credits from those same facilities through the same mechanism. And we believe that to be materially different than What team was originally set up for, which is limited income tax adjustments.

Speaker 10

Okay. I think I understand. But why maintain it as inactive, I guess? I mean, is it the case of future tax reform or?

Speaker 7

That's exactly right.

Speaker 10

Okay. And then in terms of the REACT and what have you, You mentioned the benefit in terms of regulatory lag for customers. Would there be any potential regulatory lag Reduction benefit for shareholders as well?

Speaker 7

Yes. We certainly would expect it to improve regulatory lag For our ability to continue to finance these investments and ultimately, that benefits The company and customers, both in terms of rate gradualism, but also likely could extend out or delay what

Operator

Thank you. That concludes our Q and A session. Ladies and gentlemen, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Powered by Quartr