Pinnacle West Capital Q1 2022 Earnings Report

Pinnacle West Capital EPS Results

• Actual EPS: $0.15
• Consensus EPS: $0.05
• Beat/Miss: Beat by +$0.10
• One Year Ago EPS: $0.32

Pinnacle West Capital Revenue Results

• Actual Revenue: $783.53 million
• Expected Revenue: $692.73 million
• Beat/Miss: Beat by +$90.80 million
• YoY Revenue Growth: +12.50%

Pinnacle West Capital Announcement Details

• Quarter: Q1 2022
• Date: 5/4/2022
• Time: Before Market Opens
• Conference Call Date: Wednesday, May 4, 2022
• Conference Call Time: 5:28AM ET

Pinnacle West Capital (NYSE:PNW) is a publicly traded utility holding company headquartered in Phoenix, Arizona. Through its principal subsidiary, Arizona Public Service Company (APS), Pinnacle West generates, transmits and distributes electricity to more than one million residential, commercial and industrial customers across central and southern Arizona. The company’s regulated operations focus on delivering safe, reliable power while meeting evolving environmental standards.

The company’s diversified generation portfolio includes natural gas–fired plants, the nuclear-powered Palo Verde Generating Station—the largest nuclear facility in the United States by net output—plus growing investments in solar and battery storage projects. Pinnacle West also pursues grid modernization initiatives, energy‐efficiency programs and demand‐response solutions designed to enhance system resiliency and support Arizona’s long‐term clean energy goals.

Established in 1985 as the holding company for APS, Pinnacle West traces its origins to the founding of Phoenix Light and Fuel Company in 1886. Over more than a century of operations, the company has expanded its footprint through infrastructure upgrades and strategic renewables investments to meet rising energy demand in one of the fastest‐growing regions in the U.S. Its board and executive leadership draw on decades of utility and energy‐industry experience to guide ongoing efforts in sustainability, customer service and reliable electricity delivery.

Pinnacle West Capital Q1 2022 Earnings Call Transcript

Key Takeaways

• Q1 EPS was $0.15 per share compared to $0.32 last year, primarily driven by the unfavorable rate case decision and discontinuation of the Four Corners and Ocotillo accounting deferrals impacting the income statement without new revenue offsets.
• Customer count grew by 2.2% and weather-normalized sales rose 4.4% (3.5% residential and 5.2% C&I), providing upside to revenues and partially offsetting inflationary pressures.
• APS achieved zero serious injuries in Q1 and advanced its wildfire mitigation efforts through the Defensible Space Around Poles (DSAP) program, enhancing system reliability ahead of the summer peak season.
• The company remains on schedule to bring 141 MW of battery storage online in 2022 at APS-owned solar sites and to add a further 60 MW of batteries and 150 MW of solar capacity in 2023, while preparing an all-source RFP for 2024–25 clean energy resources.
• APS plans a mid-year 2022 rate case filing to recover costs from infrastructure investments, and recent collaboration with stakeholders delivered an approved Customer Education and Outreach Plan alongside gains in J.D. Power customer satisfaction scores.

Presentation

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2022 Q1 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.

[Amanda Ho, Investor Relations at Pinnacle West Capital]

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our Q1 2022 earnings, recent developments and operating performance. Our speakers today will be our chairman and CEO, Jeff Guldner, and our CFO, Ted Geisler. Barbara Lockwood, Senior Vice President, Public Policy, and Jacob Tetlow, Executive Vice President, Operations, are also here with us. 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. Our annual 2022 Form 10-Q was filed this morning.

[Amanda Ho, Investor Relations at Pinnacle West Capital]

Please refer to that document for forward-looking statements, cautionary language, as well as the risk factors and MD&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 May 11, 2022. I will now turn the call over to Jeff.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Great. Thank you, Amanda. Thank you all for joining us today. 2022 started off in line with the financial guidance that we provided coming out of the rate case decision last year. Before Ted discusses the details of our Q1 results, let me provide a few updates on recent operational and regulatory developments, and then I'll touch on our progress towards achieving our 2022 goals. First off, as you know, safety is our number one priority, and I do want to take this opportunity to commend and congratulate our employees for keeping safety in sharp focus in the Q1. Significant injuries or fatalities or SIFs are the most important safety metric, and we completed the quarter with no serious injuries.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

SIF is a metric that's focused on preventing serious injuries by improving hazard recognition, risk-based decision-making, procedures, equipment selection, employee training, and much more because we don't leave anything to chance when it comes to the safety of our people on the job. I'm grateful to our employees for taking accountability to operate by one of our principles within the APS Promise, that's anchoring in safety, and to help their coworkers to do the same. As you all know, spring is an important time of year for our summer preparedness work. We have always had a robust summer preparedness program, but resource adequacy has become increasingly important as energy supplies in the Southwest tighten.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

To serve our customers with top-tier reliability, each year we perform preventative maintenance, emergency operations center drills, acquire critical spare equipment, conduct fire mitigation line patrols, and execute a comprehensive plan to support public safety and first responders. In fact, we've already started seeing the benefits of our preparation as we've had an early start to the Arizona wildfire season. Our system has fared well and our defensible space around poles, what we call our DSAP program, is demonstrating great success while we continue to coordinate effectively with local first responder agencies to ensure that affected customers and communities have the support that they need. Also during the Q1, our Palo Verde Nuclear Facility operated at a 95% capacity factor.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

We've got unit one currently in a planned refueling outage that began on April eighth, and it's on schedule to return to service within the next few days.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

We expect our two refueling outages in 2022 to last approximately 30 days each. That's a time frame that reflects sound planning and execution. Upon the successful completion of the latest refueling outages, all three units will be poised to provide around-the-clock energy to help meet the demands of the summer for the entire Desert Southwest. Our procurement process is another important way that we help to ensure long-term resource adequacy and progress towards our clean energy commitment. We're on track to bring into service 141 megawatts of battery storage located on six APS-owned solar sites this year. Last year, we received robust RFP responses to meet the growing needs of our customers.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

The RFPs resulted in an additional 60 megawatts of APS-owned batteries to be placed at APS solar sites and 150 megawatts of new APS-owned solar, all expected to be online in 2023, as well as additional clean energy resources through PPAs. We're currently in the final stages of contracting for another APS-owned solar plus storage project that we look forward to announcing in the near future. Lastly, APS is working on another all-source RFP, excuse me, that's expected to be released in mid-May for new resources to be in service by 2024 and 2025. On the regulatory front, we've been preparing for the upcoming rate case filing and continue to expect the filing mid-year.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

The primary objectives of this next rate case will be to recover costs and investments that we've made to reliably serve our existing customers and to support the tremendous growth that we're seeing in our service territory. In addition, we continue to work with the Arizona Corporation Commission and many stakeholders in an effort to gain a common understanding on a variety of issues and to move forward with balanced solutions. One example of the stakeholder work has been our most recent customer education and outreach plan, which was recently approved by the Corporation Commission after months of collaboration. I think this was a great example of the progress that we're making to align with stakeholders and the commission on issues that have been challenging in years past.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

We truly appreciate the individuals and organizations that have been involved in these discussions, and I want to personally thank them for their time and thoughtful participation. We look forward to continuing the dialogue and making further progress with respect to our state's regulatory environment. I've also already touched on the progress of some of our 2022 priorities, including enhancing our stakeholder relationships and continuing to execute on our clean energy commitment. In addition, I'd like to highlight improvements we're making in the customer experience and communication space. I'm proud to say that we're making solid progress in improving our J.D. Power Residential Customer Satisfaction survey scores.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

APS made quartile gains in every single driver of customer satisfaction during Q1, moving the company to the top half of the third quartile for overall satisfaction when compared to its large investor-owned peers.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

APS's strongest performing drivers in the latest J.D. Power survey were power quality and reliability and customer care, and phone and digital, both of which performed well above the large investor-owned peer set averages. Enhancements to our website, interactive outage map, and alerts by text and email have improved customer satisfaction with our digital experience and grown engagement with transactions completed through these tools. Although we're making solid progress, we know we still have much work to do, and we look forward to continuing to execute on our priorities throughout the year. With that, Ted, I'll turn the call over to you.

[Ted Geisler, CFO at Pinnacle West Capital]

Thank you, Jeff, and thanks again to everyone for joining us today. This morning, we reported our Q1 2022 financial results. I'll review the results and provide some additional details around the customer and sales growth. 2022 started off in line with expectations, despite being significantly lower than last year. In the Q1 this year, we earned $0.15 per share, compared to $0.32 per share in the Q1 last year. This is the first full quarter of financial impacts resulting from the last rate case. Although consistent with our guidance, the unfavorable rate case decision is the primary driver for the lower quarter-over-quarter results. The largest contributing factor is the discontinuation of the Four Corners and Ocotillo accounting deferrals, as those costs are now impacting the income statement without any new revenue to offset the costs.

[Ted Geisler, CFO at Pinnacle West Capital]

Other negative impacts include higher depreciation and amortization due to increased plant additions, higher income taxes, and lower pension and OPEB non-service credits. These negative impacts were partially offset by lower O&M expense, higher transmission revenues, and the continued strong customer and sales growth. Our lower O&M this quarter is driven by continued cost management, as well as timing of planned outage schedules. We experienced 2.2% customer growth in the Q1, which is in the upper end of our guidance range of 1.5%-2.5%. Additionally, our weather-normalized sales growth remains strong at 4.4%, which is above our guidance range. The Q1 weather-normalized sales growth is comprised of 3.5% residential growth and 5.2% C&I growth.

[Ted Geisler, CFO at Pinnacle West Capital]

Although the sales growth is stronger than expected, we are not changing guidance at this time, but we'll continue monitoring the usage trends and adjust as necessary. The strong recovery of the Arizona labor market in 2021 is continuing into 2022. As a reminder, by July of last year, the Phoenix metro area had recovered all jobs lost during the pandemic. By the end of 2021, Arizona was one of only three states that had recovered all jobs lost during the pandemic. In March of this year, the Arizona unemployment rate fell to a historic low of 3.3% compared to the national average of 3.6%, which is the lowest state unemployment rate in nearly 50 years. Arizona continues to benefit from high net migration into the state.

[Ted Geisler, CFO at Pinnacle West Capital]

Compared to the rest of the U.S. in 2021, Arizona was the third fastest-growing state, Phoenix was the second fastest-growing metro area, and Maricopa County was the fastest-growing county. As a result of this continued strong population growth, Maricopa County residential housing permits are off to another record start in 2022 and expected to have another robust year. While this growth is positive, it does not outweigh the negative impacts of the last rate case outcome. This growth underscores the need for substantial capital investment to keep up with the influx of customers in order to maintain grid reliability and resource adequacy and the need for reasonable and timely recovery of those investments. Lastly, our focus and progress on cost management continues to produce results.

[Ted Geisler, CFO at Pinnacle West Capital]

As a recent example, our transmission and distribution teams began implementing mobile digital security stations at construction sites where multiple security guards have traditionally been used. Deployment of these stations is safer, more secure, more reliable than traditional security, plus the new practice has the additional benefit of recurring cost savings. This dedication to cost management is more important than ever as we are facing inflationary pressures across all areas of our business. While we expect our 2022 earnings results to remain in our guidance range of $3.90-$4.10 per share, we are capturing the benefits of higher sales in the Q1, along with our continued Lean Six Sigma initiatives to mitigate the inflation headwinds so we can finish the year strong. All other aspects of our financial outlook remain consistent with prior guidance.

[Ted Geisler, CFO at Pinnacle West Capital]

We are confident that our laser focus on cost management, combined with the key initiatives Jeff highlighted for 2022, support our commitment to provide long-term value. We look forward to continuing to execute on our strategy and updating you on progress throughout the year. This concludes our prepared remarks. I'll now turn the call back over to the operator for questions.

[Operator]

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone. Please hold while we poll for questions. Your first question is coming from Julien Dumoulin-Smith from Bank of America. Your line is live.

[Julien Dumoulin-Smith, Managing Director, Senior Equity Research Analyst at Bank of America]

Hey, good morning team. Thanks for the time. Hope you guys are well. Congrats on the results.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Hey, Julien.

[Julien Dumoulin-Smith, Managing Director, Senior Equity Research Analyst at Bank of America]

Thank you. First question here. How are you thinking about, if at all, adjusting your strategy in petitioning for recovery under the LFSR, the Lost Fixed Cost Rider here? After last year's request for an increase was rejected. Is there some way to address the Commission's thoughts and perspectives here in a more holistic way? Any thoughts or reactions after the May meeting or at the upcoming May meeting?

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yeah. I mean, we've got, Julien, we've got the existing LFSR that's moving forward in the May open meeting. Then as you know, we've got a rate case filing that's coming up. We've been working with stakeholders on potential ways to address or other ways to deal with that, but that would still be prospective. That would be something that would be coming in the next rate case. It would not really reflect the current LFSR mechanism.

[Ted Geisler, CFO at Pinnacle West Capital]

Yeah. Julien, this is Ted. Just to be clear, the LFSR structural changes and therefore the accounting changes that were made, that was all factored into our guidance for the year.

[Julien Dumoulin-Smith, Managing Director, Senior Equity Research Analyst at Bank of America]

Right. Thanks for the clarity there. Yeah, I'm curious. But you're working with stakeholders here to address that, and that would be part of the rate case filing, to the extent to which that you could come to some. Okay, excellent. Then just if I can pivot here slightly, I notice you're still looking at moving ahead on the similar timeframe for the rate case despite admittedly these robust sales, et cetera. Just can you talk a little bit about how both the CPI and inflationary elements as well as sales, and/or if you want to include LFSR in this, could influence rate case timing if that at all is a consideration or any of those three are considerations?

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

They're not gonna be a consideration for rate case timing. You know, Tucson Electric just filed their notice of intent, so they're moving forward with the filing. Obviously, inflationary pressures run counter to historic test year. We'll see. Probably not all that's gonna get baked in, but that doesn't really affect our timing on moving forward with the mid-year filing.

[Julien Dumoulin-Smith, Managing Director, Senior Equity Research Analyst at Bank of America]

Got it. It seems noted as the Tucson case in terms of their fairly parallel timeline, it would seem.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yeah.

[Julien Dumoulin-Smith, Managing Director, Senior Equity Research Analyst at Bank of America]

Excellent. All right. Fair enough. Well, I'll leave it there for others. Thank you, guys.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Okay. Thanks, Julien.

[Ted Geisler, CFO at Pinnacle West Capital]

Thanks, Julien.

[Operator]

Thank you. Your next question is coming from Nicholas Campanella from Credit Suisse. Your line is live.

[Nicholas Campanella, Vice President, Equity Research at Credit Suisse]

Hey. Good morning, everyone. Hope everyone's doing well.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Hey, Nick.

[Nicholas Campanella, Vice President, Equity Research at Credit Suisse]

Just the comments on resource adequacy I just think are interesting. Can you just remind us when's your next IRP filing and have the recent kind of tighter markets changed your thinking on needing any new base load generation in the five-year window? Just how are you feeling overall about summer from a capacity perspective? Are you sufficiently covered? Thanks.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yeah. Let me start, Nick, and then I'll probably ask Jacob to weigh in with some thoughts. You know, the RFPs are on a cycle. We're we are we do have an RFP that's moving forward, and we've got RFPs that we're closing. We've generally got projects that are underway that are moving forward, multiple projects, and we have RFP cycles so that new projects come in before those projects are completed. The RFP process, I think is working pretty well. The challenge in the West is there's really tight regional markets. In a lot of cases where you go out and buy cover yourself with purchases from others, that pool is shrinking.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

We have made procurements for this summer that are to help us generally keep our reserve margins intact. We're looking pretty creatively at where we go procure those resources from. But ultimately, one of the things in the next 10 years that we really need to do is figure out how we align the West better with market structures. You've got California proposing to expand the energy imbalance market into a broader day-ahead market. You've got other companies in the West that are looking at how you could do more market-based structures with other states that are not there in California. There's a lot of work that's being done right now in terms of looking at market options for the West.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

If as we move forward with that will enhance access to resources on a broader footprint, that I think will ultimately improve reliability. We have to continue to procure because there's uncertainty in how that process is gonna move forward and what the timing is. In terms of the summer, Jake, you want to just highlight where we are? We're in good shape though, Nick.

[Jacob Tetlow, Executive Vice President, Operations at Pinnacle West Capital]

Sure. Happy to make a couple additional comments. Jacob Tetlow here. For summer of 2022, we're in good shape. We've already had some of the supply chain challenges that others have seen. Those impacts have all been mitigated, and so we're in good shape for 2022, and we're in good shape for 2023. You're gonna see the RFP come out later this year, and that'll be really focused on 2025 and 2026 resources. As you think about the near term, I would say we're in good shape. We know what those supply chain constraints are. And then past that, we'll be adding in the 2024, 2025. I'm sorry. I just I know that didn't sound right. 2024 and 2025 resources will come out of the next RFP cycle.

[Ted Geisler, CFO at Pinnacle West Capital]

I would say we're in good shape, and we've mitigated the known supply chain constraints, and we're reaching out to all those different suppliers right now to ensure that we have timelines that we can work into our plans.

[Nicholas Campanella, Vice President, Equity Research at Credit Suisse]

Thanks. That's all super helpful. I guess just piggybacking off that, as it relates to just coal piles, you know.

[Nicholas Campanella, Vice President, Equity Research at Credit Suisse]

Are you having any kind of tightness there? You know, any issues with procuring? Are you kind of fully covered? Maybe you can give us some color there.

[Ted Geisler, CFO at Pinnacle West Capital]

Yeah. I mean, one of the benefits is our largest supply there would be our Four Corners Power Plant, which is actually essentially a mine-mouth plant, so it has its own rail right to the mine, so there's no issues there. That's our largest coal resource. On the Cholla Power Plant, they keep generally about a 3-4-month supply on the coal pile. We don't have any risk there on the coal side.

[Nicholas Campanella, Vice President, Equity Research at Credit Suisse]

Thanks a lot. Appreciate it.

[Ted Geisler, CFO at Pinnacle West Capital]

Thanks, Nick.

[Operator]

Thank you. Your next question is coming from Insoo Kim from Goldman Sachs. Your line is live.

[Insoo Kim, Managing Director, Senior Equity Research Analyst at Goldman Sachs]

Yeah. Thank you. First question the very strong resi weather normal load that we saw this quarter even assuming the customer growth I think the usage per customer was up pretty nicely. Just any color on what was driving that? Are we just seeing less of a move towards back to office in your jurisdictions, or is it something else? Is it too early on this front to extrapolate this data point to future quarters?

[Ted Geisler, CFO at Pinnacle West Capital]

Yeah. Thanks, Insoo. You know, it's really about two parts, organic customer growth and one part higher usage per customer. That raw growth, largely due to net migration into the service territory is really continuing to be the biggest driver. I was reading a Redfin report here recently that said Phoenix is one of top two cities people are looking to relocate to, in the Q1 2022, and the most common origin was Southern California. The article was referencing that even with higher mortgage rates, they actually think that'll propel more growth because it'll enable people to continue to expand housing footprint by affordable housing, with rising mortgage rates by leaving Southern California, migrating to affordable places to live, such as Arizona and Phoenix. That's a big part of what we're seeing, Insoo.

[Insoo Kim, Managing Director, Senior Equity Research Analyst at Goldman Sachs]

Okay. That's helpful. The second question, just going—I guess, after Q1, again, maybe a little bit too early, but how you're situated for the year. You've talked about the balance between the stronger load growth, but also the inflationary impacts. Just at this point versus the plan when you had laid out originally, are any one of those items stronger or better or worse than you had expected?

[Ted Geisler, CFO at Pinnacle West Capital]

Yeah. At this point, we definitely feel good about our plan and our guidance, so no changes there. You know, it is just the Q1, and that Q1 is relatively small compared to the others. We'll continue to monitor as we progress through the year. Our guidance for O&M in 2022, as you know, is meaningfully lower than our O&M last year, but we are still confident to be managing within that range. The higher sales growth is certainly helping to mitigate any unexpected inflationary pressures. At this point, we feel good about the plan, and we'll continue to monitor both the sales growth trends and cost management throughout the year.

[Insoo Kim, Managing Director, Senior Equity Research Analyst at Goldman Sachs]

Understood. Thank you.

[Ted Geisler, CFO at Pinnacle West Capital]

Thanks, Insoo.

[Operator]

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

[Paul Patterson, Founder and Equity Research Analyst at Glenrock Associates]

Hey, how you doing?

[Ted Geisler, CFO at Pinnacle West Capital]

Hey, Paul.

[Paul Patterson, Founder and Equity Research Analyst at Glenrock Associates]

Just what I wanted to touch base with you on is the legislature. There was a bill, I think it's 2536, that doesn't seem to have gone anywhere. I was just wondering how you guys think the potential for a change in how the ACC is constructed and if there might. You know, how that. If you have any outlook, I don't know if you do, in terms of what might be going on there.

[Ted Geisler, CFO at Pinnacle West Capital]

Paul, which one?

[Paul Patterson, Founder and Equity Research Analyst at Glenrock Associates]

That's the one that changes.

[Ted Geisler, CFO at Pinnacle West Capital]

Which one? I can't track them by numbers.

[Paul Patterson, Founder and Equity Research Analyst at Glenrock Associates]

Okay. Apologize. It's the one that basically changes the ACC to more of an appointed.

[Ted Geisler, CFO at Pinnacle West Capital]

Oh

[Paul Patterson, Founder and Equity Research Analyst at Glenrock Associates]

situation. I forget the details on it. I think one of them might be elected.

[Ted Geisler, CFO at Pinnacle West Capital]

Yeah. They're moving pretty. They're getting pretty late in session, so I don't think that's probably going anywhere.

[Paul Patterson, Founder and Equity Research Analyst at Glenrock Associates]

Okay. Then in terms of economic development and everything, it sounds great. Is there anything that we should think about? I mean, has this changed any of your, I mean, you guys mentioned the long-term outlook and the need for reliability and stuff. Is there anything here that you think might change or move up the issue of reliability because of all this?

[Ted Geisler, CFO at Pinnacle West Capital]

No, Paul. All the economic development that we're seeing has really been a part of our forecast. And when we think about reliability needs, we manage that to peak demand in the summer, which the economic development that we're seeing is largely factored into that forecast. We then add a reserve margin on top of it. The sales growth is really just detailing out how much energy around the clock you get, which is a little bit different than peak demand, the measure that we use to plan for resource adequacy. I will say, though, it underscores the importance of Palo Verde and Four Corners as we get through these hot summers, both units critical for not just Arizona, but the entire Southwest.

[Ted Geisler, CFO at Pinnacle West Capital]

In fact, Palo Verde supplies about 70% of the entire Southwest region's carbon-free energy through the summer. Really, just underscores the importance of those two assets for the region.

[Paul Patterson, Founder and Equity Research Analyst at Glenrock Associates]

Absolutely. Good point. Well, thanks so much. I really appreciate it.

[Ted Geisler, CFO at Pinnacle West Capital]

Yeah. Thanks, Paul.

[Operator]

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

[David Peters, Managing Director, Senior Equity Research Analyst at Wolfe Research]

Yeah. Hey, good morning.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Hey, David.

[David Peters, Managing Director, Senior Equity Research Analyst at Wolfe Research]

Just a question on the upcoming rate case. You mentioned that your in-state peer is also moving forward to file. I'm just curious if you see the possibility of a longer timeline of getting a final order than you would have otherwise, just given the workload on staff and others. Just thinking about how the timing of that final order would play into the EPS carryover you all have.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

David, excuse me. It's early in the process. I mean, one of the things that is important to recognize with the commission is they've got a steady pace of rate cases. There's a tremendous number of water companies here in the state, and so there's always a pretty steady drumbeat of cases that move through. Certainly, our case and Tucson Electric Power and some of the larger companies, Southwest Gas, are bigger, more intensive rate cases. You know, they've got a hearing division down in Tucson. There's a hearing division up here. I don't see anything right now where I'd call that the fact that they're two cases together would affect the timing.

[David Peters, Managing Director, Senior Equity Research Analyst at Wolfe Research]

Okay. Great. Then just related to the case again, just how are you thinking about potential size of the ask, mitigating impacts to customers, particularly as you're, dealing with the inflationary environment on things like fuel and the like? You know, I know.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yeah.

[David Peters, Managing Director, Senior Equity Research Analyst at Wolfe Research]

It's just been a big focus of the commission, so just any comments you have there would be great.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yeah. We're always very sensitive to how to balance those issues and look for those opportunities. Frankly, we've done that in the rate design in terms of providing customers choices to move on to different rate plans that provide different opportunities to save based on selections that they wanna make. Also we wanna look at things that we can bake into the case that give that kind of optionality. Something that we're aware of. Obviously, we're a cost of service industry, so you do the math, and a lot of this is about investments that we've made to support reliability and serve the customers that we have.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

The growth helps because then you have a bigger, kind of kilowatt-hour base to spread those costs on, but you still need to reflect the cost of the service that go into the calculated revenue requirement. But yeah, absolutely, we're looking at all that.

[David Peters, Managing Director, Senior Equity Research Analyst at Wolfe Research]

Great. Just one last one, if I can. I think you said you have one APS solar project expected to come online in 2023, but it sounds like that's not gonna be impacted by the DOC's investigation. Is that right?

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yeah, I think that's right. Obviously, I think hopefully you saw. I know that's getting a lot of attention right now, and hopefully you saw. We appreciate Senator Sinema along with some other congressional legislators submitting comments to the Department of Commerce to urge that process move quickly because it is creating uncertainty in the industry. We're moving forward with the projects that we've got under contract.

[David Peters, Managing Director, Senior Equity Research Analyst at Wolfe Research]

Okay, great. Thank you, guys.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yep. Thanks, David.

[Operator]

Thank you. Your next question is coming from Anthony Crowdell from Mizuho. Your line is live.

[Anthony Crowdell, Managing Director, Senior Equity Research Analyst at Mizuho]

Hey, good morning, Jeff. Good morning, Ted.

[Ted Geisler, CFO at Pinnacle West Capital]

Hey, Anthony.

[Ted Geisler, CFO at Pinnacle West Capital]

Hey, Anthony.

[Anthony Crowdell, Managing Director, Senior Equity Research Analyst at Mizuho]

Hopefully just one quick one, just I guess on the appeal. You know, obviously the issues going on in the world right now, there's more of an emphasis on whether it's fuel security or you talk about Four Corners as a mine-mouth plant, maybe more stable commodity prices. Is there a chance, I don't know how the appeal goes, but if the appeal doesn't come your way and there's a potential for a new commissioner and also a new emphasis on maybe the stability of the coal-fired generation, that the company's able to get those SCRs in rates in the next filing?

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

I don't know if I'd walk through hypotheticals. I mean, we're pursuing the appeal. We think we've got a solid case. I think, Anthony, your fuel security is part of that. It's less about the foreign fuel security. In fact, we've got an incredibly tight capacity market here in the Desert Southwest. That power plant, which is a large power plant, could not operate if we didn't have those SCRs on it. It's critical now. Ironically, it is in the money right now because of the high natural gas prices. Regardless of the economics, we couldn't maintain reliability of the system without Four Corners, and we can't run Four Corners without the SCRs.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

For fuel security for us, we needed to have that power plant, which is why we went through the entire process from acquiring the Edison share, to investing in the SCRs, to making that plant reliable through the summer. So again, we think the appeal is the appeal will reflect that. What happens down the road, I just don't know how you can speculate on that.

[Anthony Crowdell, Managing Director, Senior Equity Research Analyst at Mizuho]

Great. Thanks so much. Great quarter. Thanks for taking my question.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yeah. Thanks, Anthony.

[Operator]

Thank you. Your next question is coming from Gregg Orrill from UBS. Your line is live.

[Gregg Orrill, Managing Director, Senior Equity Research Analyst at UBS]

Yeah. Thank you. Just regarding the LFR mechanism, are you expecting any changes to that, and do you expect anything on that topic to come up at the May meeting of the commission?

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yeah. I mean, there's—I think there were a couple amendments that were floated before that. That was pulled from the last open meeting. There were a couple of proposed amendments that were floated. I think they probably have to refloat those as they go up. I think most of the discussion is likely to be in how, in the next rate case this mechanism gets addressed. Since it was established in a prior rate case, you really would address structural changes like that in a rate case.

[Gregg Orrill, Managing Director, Senior Equity Research Analyst at UBS]

Okay, thanks.

[Jeff Guldner, Chairman and CEO at Pinnacle West Capital]

Yep. Thanks, Gregg.

[Operator]

Thank you. This concludes our Q&A session and conference call. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Amanda Ho, Investor Relations
• Jacob Tetlow, Executive Vice President, Operations
• Jeff Guldner, Chairman and CEO
• Ted Geisler, CFO

Analysts

• Anthony Crowdell, Managing Director, Senior Equity Research Analyst at Mizuho
• David Peters, Managing Director, Senior Equity Research Analyst at Wolfe Research
• Gregg Orrill, Managing Director, Senior Equity Research Analyst at UBS
• Insoo Kim, Managing Director, Senior Equity Research Analyst at Goldman Sachs
• Julien Dumoulin-Smith, Managing Director, Senior Equity Research Analyst at Bank of America
• Nicholas Campanella, Vice President, Equity Research at Credit Suisse
• Paul Patterson, Founder and Equity Research Analyst at Glenrock Associates