Pinnacle West Capital Q1 2025 Earnings Report

Pinnacle West Capital EPS Results

• Actual EPS: -$0.04
• Consensus EPS: $0.05
• Beat/Miss: Missed by -$0.09
• One Year Ago EPS: $0.15

Pinnacle West Capital Revenue Results

• Actual Revenue: $1.03 billion
• Expected Revenue: $988.95 million
• Beat/Miss: Beat by +$43.33 million
• YoY Revenue Growth: +8.50%

Pinnacle West Capital Announcement Details

• Quarter: Q1 2025
• Date: 5/1/2025
• Time: Before Market Opens
• Conference Call Date: Thursday, May 1, 2025
• Conference Call Time: 12:00PM ET

Pinnacle West Capital (NYSE:PNW), through its subsidiary, provides retail and wholesale electric services primarily in the state of Arizona. The company engages in the generation, transmission, and distribution of electricity using coal, nuclear, gas, oil, and solar generating facilities. Its transmission facilities include overhead lines and underground lines; and distribution facilities consist of overhead lines and underground primary cables. The company also owns and maintains transmission and distribution substations; and owns energy storage facilities. Pinnacle West Capital Corporation was incorporated in 1985 and is headquartered in Phoenix, Arizona.

Pinnacle West Capital Q1 2025 Earnings Call Transcript

Presentation

[Operator]

Good day, everyone, and welcome to the Pinnacle West Capital Corporation two thousand twenty five first 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.

[Amanda Ho, Director of 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 first quarter earnings, recent developments, and operating performance. Our speakers today will be our Chairman, President and CEO, Ted Geisler and our CFO, Andrew Cooper Jacob Tetlow, COO and Jose Esparza, SVP of Public Policy 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 Investor Relations website along with our earnings release and related information.

[Amanda Ho, Director of Investor Relations at Pinnacle West Capital]

Today's comments on our slides contain forward looking statements based on current expectations and actual results may differ materially from expectations. Our first quarter twenty twenty five Form 10 Q was filed this morning. 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 thirty days. It will also be available by telephone through 05/08/2025.

[Amanda Ho, Director of Investor Relations at Pinnacle West Capital]

I will now turn the call over to Ted.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Thanks, Amanda, and thank you all for joining us today. 2025 has started off in line with financial guidance we provided on the fourth quarter call in February. Before Andrew discusses the details of our first quarter results, I'll provide a few updates on recent operational and regulatory developments. Our diverse Arizona economy continues to thrive and grow at solid pace. Arizona has become a national leader in semiconductor and advanced manufacturing, which has attracted investments spanning the entire supply chain, including robotic manufacturing, advanced packaging, research and development, material suppliers and workforce development.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

This quarter had several notable expansion announcements, including the additional $100,000,000,000 investment by Taiwan Semiconductor Manufacturing Company beyond their original $65,000,000,000 investment. TSMC now intends to build three additional fabrication centers for a total of six, as well as two advanced packaging facilities and a research and development park. In fact, TSMC held the groundbreaking for Fab 3 this week as construction progress continues to advance. Also, NVIDIA announced they're manufacturing black weld chips at TSMC's facilities, and we'll be partnering with advanced packaging and testing operations right here in Arizona. In addition to TSMC, Arizona's total international exports rose almost 12% in 2024, the highest year over year growth rate in the country, led by mining, semiconductors, computer equipment, and aerospace products.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Health care is another rapidly expanding sector, highlighted by Mayo Clinic's announcement of a nearly $2,000,000,000 investment in their Phoenix Healthcare Hospital campus, the clinic's largest investment to date. These announcements highlight the diversity of investments and robust growth that will fuel the Arizona economy for years to come. Turning to operations, we're focused on continuing to provide top tier reliability for our customers, making year round investments to secure a resilient grid, and delivering excellence in customer experience. As we build out the grid to serve growth, we continue to increase our transmission investments to construct multiple high voltage lines and substations. Through our comprehensive summer preparedness program, we've procured all necessary generation capacity and reserves, completed our grid inspections, procured critical materials needed for restoration efforts, and executed robust fire mitigation investments.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

This includes the deployment of fire sensing cameras that use artificial intelligence to proactively search for early signs of wildfires, enabling critical operation decisions to help keep communities safe. We're in the final stages of planned maintenance activities for our generation units. We have successfully completed our major outages for the 4 Corners Power plant. In addition, we've invested in chiller upgrades at Red Hawk and Sundance units, reducing ambient derates during hot summer evenings when customers use the most energy. Finally, Palo Verde unit one is currently in planned refueling outage and expected to return to service in early May.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Upon the successful completion of the latest refueling outage, all three Palo Verde units are poised to provide reliable around the clock power to help meet the summer energy demand. We stand ready to safely, reliably, and affordably serve our customers as we head into summer, the season our customers depend on us the most. Turning to long term resource procurement, we continue to make progress on our annual all source request for proposals. As a reminder, we're seeking at least 2,000 megawatts of new resources to be in service between 2028 and 2030. We're in the process of evaluating project proposals and plan to have final project select selected later this year, which is expected to include a blend of ownership and PPA projects.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

We continue to build and enhance our customer centric culture, and our employees are focused on delivering excellent customer experience. Investing in advanced digital platforms is an important part of our strategy to deliver customer experience excellence while lowering costs over time. These efforts are paying off since APS now ranks in the top 10 nationally in the J. D. Power utility digital experience survey.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

I'm also proud to share that APS was recently recognized by Newsweek as one of the most trustworthy companies in America for 2024. On the regulatory front, we've been preparing for upcoming rate case filing and remain on track to file midyear. Primary objectives of this next rate case will be to recover costs and investments to secure a reliable and resilient grid, develop a modernized rate structure to support the unprecedented growth of high load factor customers in our service territory, and reduce regulatory lag while maintaining the lowest cost possible for customers. Our current rates are based on test year expenses that go back to 2021, and we look forward to working with the commission and stakeholders to update these costs while keeping rates affordable. The filing will include a formula rate proposal consistent with the commission's recently approved policy statement.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

In conclusion, we're excite we're executing our strategy while remaining focused on creating customer value and shareholder value throughout the year. Before I hand it over to Andrew, I want to give a special birthday shout out to both Andrew and Jacob who are celebrating today. It's truly a pleasure working alongside you both, wishing you both a very happy birthday. With that, I'll turn the call over to Andrew.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Thank you, Ted. And thanks again to everyone for joining us today. This morning, we reported our first quarter twenty twenty five financial results. I will review those results and provide additional details on sales and financial guidance. For the first quarter of twenty twenty five, we lost zero four dollars per share compared to earnings of $0.15 per share for the first quarter of twenty twenty four.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

The primary driver for this decrease was the sale of Wright Canyon Energy in 2024, which was a one time benefit of $0.15 in the first quarter last year. Other negative drivers were higher O and M, interest expense and depreciation and amortization, along with the positive amortization of an OPEB service credit rolling off in January. Partially offsetting these items were new rates that went into effect on March eighth of last year, providing a $0.29 year over year benefit this quarter. Other positive drivers were a gain from our Eldorado equity investment and higher transmission sales. Briefly touching upon weather, we averaged to normal weather for the quarter with little impact on margin.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

We continue to see a consistent ongoing influx of customers into our region as customer growth for the quarter was again strong at 2.3%, near the high end of our annual customer growth guidance. In fact, according to the latest report by the U. S. Census Bureau, last year Maricopa County was the third fastest growing county in The US by numeric number and adjacent Pinal County was the fifth fastest growing county by percentage growth. This trend of customer growth continues our need for investments in our system to ensure reliable service for all customers.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Our current capital plan is designed to meet these needs and our guidance remains unchanged. Our weather normalized sales growth was 2.1% for the quarter, driven by strong C and I growth of 5.3% caused by the continued ramp up of both manufacturing and data center customers. As extra high load factor customers have continued to grow as a proportion of our business, we have updated our procedures with respect to estimates of unbilled revenues for our customer classes. As a result, we had an adjustment in January to recalibrate accrued unbilled revenues offsetting year to date sales growth by 1.9. Even with the change, we expect our overall weather normalized sales growth to meet our guidance expectations of 4% to 6% for the year.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Arizona remains a diverse growth and investment hub. As Ted mentioned, TSMC announced that they will nearly triple their original expected investments in Arizona for a total of $165,000,000,000 TSMC's first fabrication facility is already in full production. They recently stated that they've completed construction on their second facility and are working on accelerating their production start date, and Fab three has broken ground. TSMC's expanded investment is expected to support 40,000 construction jobs over the next four years and create tens of thousands of high paying high-tech jobs. As a reminder, these announcements are beyond our current long term sales growth guidance of 4% to 6%, which is through 2027, but highlights the ongoing investments and opportunities in our service area.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

O and M was an anticipated drag on the first quarter. The major outage at the 4 Corners Power Plant drove larger planned outage costs when compared to Q1 of last year. Additionally, expenses associated with IT projects increased O and M for this quarter versus the prior year. Guidance for 2025 O and M remains unchanged as these items were already considered in our guidance and are anticipated to be offset over the balance of the year. Turning to the balance sheet.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

We recently had positive conversations with all three credit rating agencies, resulting in no changes to our current ratings and stable outlooks. We are focused on maintaining solid ratings and metrics to the benefit of our customers as we continue to work with the commission and stakeholders on reducing regulatory lag through our upcoming rate case. Our guidance for financing remains unchanged, featuring a mix of debt and equity sources intended to maintain a balanced capital structure. And as a reminder, we do not currently utilize or rely on the transferability of tax credits for any of the financing needs in our plan. Finally, we are reaffirming all other guidance provided on our fourth quarter call and look forward to continuing to execute our strategy and reliably serving our customers as we head into the upcoming summer season.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

[Operator]

Certainly. Everyone at this time will be conducting a question and answer session. Any or Once again, if you have questions or comments, please press 1 on your phone.

[Operator]

Your first question is coming from Nicholas Campanella from Barclays. Your line is live.

[Nicholas Campanella, Director at Barclays]

Hey. Good morning.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Good morning, Nick.

[Nicholas Campanella, Director at Barclays]

Hey.

[Nicholas Campanella, Director at Barclays]

So I just wanted to ask, you know, obviously, the the TSMC customer additions are are very notable, and you have this 3% to 5% large load C and I forecast in your long term outlook.

[Nicholas Campanella, Director at Barclays]

Can you just kind of

[Nicholas Campanella, Director at Barclays]

remind us like how many fabs are in that outlook? Or if you were to kind of decomp that adding another plant, what would that do to that long term forecast?

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Sure, Nick. It's Andrew. Thanks for the question. So clearly, Fab one, is in our forecast because this is actually the first quarter that it's at full volume production. And so certainly part of that ramp up, that we saw in C and I sales this quarter is a combination of TSMC and some of the data centers ramping up.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Recent announcements at TSMC on fabs two and three suggest an acceleration. And so we'll continue to work, with our customer on what that looks like from an infrastructure build out and sales forecast perspective. But certainly their initial expectation was 2028 for Fab two and by the end of the decade, so 2030ish for Fab three. Expect some acceleration of both of those. Whether the acceleration of Fab two would come into 2027 is something that we'll just have to continue to evaluate.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

But really the underlying fact is that the commitment to the six fabs and all of the other facilities that Ted mentioned really points to, at a minimum, the ability to have a pipeline that allows us to continue a pretty robust level of large C and I sales growth when you pair that ecosystem of semiconductor supply chain upstream and downstream, with some of the other diverse manufacturing and, data center growth that we're seeing.

[Nicholas Campanella, Director at Barclays]

Yep. Okay. That's helpful. I appreciate it. And you know, you have a new disclosure on your your your quit balance, which definitely seems material at 3 to 3 and a half billion.

[Nicholas Campanella, Director at Barclays]

Can you just kinda confirm you get retail rate return on that and and and how exactly that would flow into the the financials. And, you know, when you kinda layer that in on on top of your current rate based growth outlook, the fact that you're gonna have new formula rates, what would the offset be that would kind of put you back within that five to 7% range?

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Nick. So we added that disclosure because we wanted to make clear that our pipeline of opportunities continues beyond the three year plan that we provide. And in particular, you think about the strategic transmission plan that we filed last year, those are projects that are multi year. If you look in our disclosures, they go out through the end of the decade. And those are the projects that are already inciting.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

There's a broader strategic transmission planning process that includes incremental projects as well as some of the generation we're building. For example, the Red Hawk gas plant isn't in service until 'twenty eight, so it's outside that plant. So we wanted to kind of give a sense for the scale relative to, in disclosure you also see what that level of QIP would have been in 2023, the scale of projects that are under construction that may not be captured in the plan. There is AFUDC associated with it, but from a cash return perspective that's not something that's in the plan. So ultimately it's really more a matter of giving clarity around that track record that can extend beyond 2027, which is the period of current rate based disclosure.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

And so really between the strategic transmission projects and then the overall investments in our self build generation, whether that's the projects coming through our All Source RFP, investing in Palo Verde for the long term, these are all things that we want to highlight which may not be captured in the narrow window that we give. And so as we go through not only the rate case and understand how some of our other CapEx may be put on an even footing by having a formula rate in place, and then as we continue to bring from our development pipeline, both on the generation and transmission side, into the actual rate based disclosure, we'll be able to come back to you on what that rate based growth rate looks like. But at a minimum, we wanted to be able to highlight that we are moving into these larger projects that meet the needs of the growth that we see in the service territory for the long term.

[Nicholas Campanella, Director at Barclays]

All right. Understood. Thanks a lot.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Thanks, Nick.

[Operator]

Thank you. Your next question is coming from Michael Lonigan from Evercore. Your line is live.

[Michael Lonegan, Director - Equity Research at Evercore ISI]

Hi. Thanks for taking my questions. So, obviously, you know, you'll be filing the rate case midyear, you know, probably get new rates late twenty six. Just wondering what we could expect in terms of regulatory lag on percentage terms in '26 while the rate case is pending versus the nine fifty five allowed ROE in the jurisdiction.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Yeah, Michael. This is Ted. Thanks for the question. You know, obviously, we're focused on addressing regulatory lag through this case. I think the commission's focused on that as well, given that they recognize it adds cost to customers over time.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

And so that's a big focus for the formula rate plan. Our intent is to be able to put in a structure going forward after this case to where we can minimize regulatory lag in a respectable manner. And so that's what the formula is designed to do is to have a dead band around solving to be able to earn your, allowed ROE. Clearly, at this time, it's difficult to be able to do that. So I think the policy statement illustrated that where there is a dead band of being able to earn as close to that allowed ROE as possible.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

And outside of that dead band, you would then file for adjustment. We're looking to work with the commission stakeholders to try to design the mechanics of the formula rate plan to be able to, meet the intent of the policy statement. It's too early to tell how that'll, work specifically, so I think the details through this general rate case will matter. But I think the commission, a lot of stakeholders involved in the process, and certainly utilities are aligned that that's the intent. And then you can work towards ensuring that the allowed ROE is measured to be competitive to peers and what's necessary to attract capital.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

And your rent making construct is designed to allow you to earn as close to that allowed ROE as possible.

[Michael Lonegan, Director - Equity Research at Evercore ISI]

Great. Thanks. And then, you know, secondly, was wondering if you could talk about your current pipeline of high load factor customers. I think in your last disclosure, you said you were committed to four gigawatts and had interest from another 10 plus gigawatts that you were working through a planning process with. Just wondering what's the latest on these numbers?

[Michael Lonegan, Director - Equity Research at Evercore ISI]

And is the four gigawatts still what's baked into your plan?

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Yeah, Michael. The four gigawatts is still what we've committed to. We're actively building out infrastructure to serve. Obviously, a a large portion of that will be coming online this year and into the coming years that's within our guidance range, but the full build out of that four gigawatts extends beyond the guidance range. And then we do have a substantial and growing, queue of customers that we're actively working to assess the timing and capacity needs of their projects, it's, at least 10 gigawatts.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

And, that's a continuous focus of our team is identifying their needs, identifying the infrastructure required to be able to build it out, and what the timing of that infrastructure installation would be. Most of that infrastructure would likely be in the capital plan beyond the current guidance period. But as we get closer to those projects, moving into the committed queue, we'll certainly update what that committed queue number is.

[Michael Lonegan, Director - Equity Research at Evercore ISI]

Great. Thanks for taking my questions.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Thank you.

[Operator]

Thank you. Your next question is coming from Julien Dumoulin Smith from Jefferies. Your line is live.

[Julien Dumoulin-Smith, Research Analyst at Jefferies Financial Group]

Hey. Good afternoon. Good morning, team. Thank you very much for the time. Nicely done.

[Julien Dumoulin-Smith, Research Analyst at Jefferies Financial Group]

Maybe just to follow-up a little bit on where I think you left the question off with Nick and and maybe to take it a step further. How are you thinking about providing a longer term view beyond the three year period? I mean, notable the way that you responded on Quip, etcetera. I mean, is there a longer dated view coming here in a more comprehensive set as you think about rolling forward eventually here?

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Yeah. Hey, Julian. It's Andrew. No. Thanks for that question.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

And, you know, it's certainly something that, you know, we continue to evaluate, in particular because we're doing larger projects that take you know, that have longer lead time, and we have clarity on a pipeline of customers coming in that extends out further. So it's certainly something we'll look at. At the same time, though, getting through the formula rate design and proceeding then gives us clarity on the broader capital allocation decisions overall. So you could look at how much are we doing in distribution and IT and kind of core space where you're getting projects in service on much shorter time frames, where it's sort of the day in, day out block in tackling stuff, and then giving clarity of disclosure about the large strategic transmission projects, the investment plan at Palo Verde, the projects that come out of the all source RFPs, all those types of things that taken us into the 2030s. The other piece you'll see is we're on a three year cycle for our integrated resource planning.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

And so as we work through that process, the goal will be to link up some that tends to be an action window that's five years of the fifteen that we're talking about. So trying to link those two think will be important as we do more of these long lead time projects. So it's a great question. It's something that we continuously look at.

[Julien Dumoulin-Smith, Research Analyst at Jefferies Financial Group]

Got it. Sounds like a little bit of a longer fuse, but teeing up the entire organization therein. And then if I can follow-up as well on a related question here. You talk about fab two and three potentially, I think you even said accelerating themselves, and and I I don't think it was entirely clear as to whether that's contemplated within the three to five. When would you go out for procurement around potential resources there?

[Julien Dumoulin-Smith, Research Analyst at Jefferies Financial Group]

I mean, you know, you say it's longer dated, but, you know, let's put it this way, 2030 and earlier is is front and center and would need, you know, actions on on procurement in in the near term. How do you think about that as well as, you know, some of these other items like Mayo Clinic also playing into the outlook here are just coming back to the table for another round of procurement and RFP or something like that.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Yeah, Julian. You're absolutely right. We're out to procurement right now for 2028 to 02/1930. We've got an RFP that recently concluded accepting proposals for a minimum of 2,000 megawatts to be in service in the years 2028 to 2030. And so we're evaluating those proposals right now.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

And as we look at how much volume we actually take from the RFP, we're taking into consideration as we work with TSMC, Amcor, and frankly, a myriad of other recent economic development opportunities even outside the chip and data center sector to identify what are the total resource needs at the back end of this decade and therefore how much do we need to take from this RFP. So that's that's actively in progress. We've been on an annual routine of these RFPs, and so we'll evaluate the proposals from this year and then likely be back out in the market again for another round of RFPs.

[Julien Dumoulin-Smith, Research Analyst at Jefferies Financial Group]

Right. So bottom line, upsizing the present RFP, you said a minimum of two gigs, but there's potentially a a real likelihood for a meaningful expansion of that.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

That's definitely the potential similar to the last RFP where we ended up procuring a meaningful amount more than what we originally requested. It just depends on the quality of the proposals and the timing of their ability to execute. We're always clear to state the minimum that we need, but we've got the ability to be able to take more as necessary to ensure resource adequacy as long as they're competitive projects, and we're going through those proposals now.

[Julien Dumoulin-Smith, Research Analyst at Jefferies Financial Group]

Thanks again, guys.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Thank you.

[Operator]

Thank you. Your next question is coming from Travis Miller from Morningstar. Your line is live.

[Travis Miller, Analyst at Morningstar]

Thank you. Hello, everyone.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Hey, Travis.

[Travis Miller, Analyst at Morningstar]

More of a technical question here on the filing coming up. Is the filing gonna be purely a formula rate plan such that they just get one filing, or is there somewhat of a split here where you have to file a formulary rate plan option and a general rate case traditional option?

[Travis Miller, Analyst at Morningstar]

Technically thinking about that filing.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Yeah. Travis, the way we look at it is we're filing a traditional rate case based on a 2024 test year, but then included in that will be a filing proposal for how you implement a formula rate plan to ensure you're minimizing regulatory lag for future years. And so it'll all be a part of one filing, but you first have to recover the revenue deficiency based on the 2024 test year. And then the formula rate design included in our filing will be how to keep rates current and trued up on a go forward basis once this case is processed and concluded. So that's that's how we're thinking about it.

[Travis Miller, Analyst at Morningstar]

Okay. That makes sense. So there won't be two rate adjustments. It would be the traditional rate adjustment and then future years, if approved, the formula rate plan rate adjustment.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

That's correct. And that's the intent of the commission is how do we go longer between rate cases, minimize regulatory lag, and ensure rate gradualism for our customers. And so that's gonna be all part of this initial filing.

[Travis Miller, Analyst at Morningstar]

Perfect. Okay. That's great. And then on the o and m, if you strip out the outages, strip out the RESDSM, how is that trending, that core O M? Is that trending towards your expectations in the first quarter or anything unusual in the first quarter on that side?

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Yes, Travis, it's Andrew. We're trending consistent with our plan for O and M for the year. The planned outage you referenced is lumpy and is a timing issue of doing a large outage at a plant like, 4 Corners. That was a first quarter event. There there's also an O and M project I mentioned earlier in the prepared remarks that is is a big backbone IT project.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

And so right now, it's in sort of that O and M phase, and over the course of the year, it'll transition to capital. And so that shows up and and basically takes what could could be straight line O and M over the year into a little bit of first quarter lumpiness. But we expect over the course of the year to be able to meet our O and guidance range. We were able to take a lot of proactive action last year coming out of the summer to plan in a multiyear fashion around O and M. And so we're seeing some of the benefits of, being able to do that, as we work through the year.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

So, you know, we expect to be on plan for O and M.

[Travis Miller, Analyst at Morningstar]

Okay. Perfect. Thanks so much.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Thanks, Travis.

[Operator]

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

[Sophie Karp, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

Hi. Good morning. Thank you for taking my question.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Good morning, Sophie.

[Sophie Karp, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

So a little bit more on this O and M question. Do you need, like, I guess, offsetting items in the rest of the year to kind of counter the lumpiness in the first quarter? Or was this already contemplated when you issued guidance, just to clarify?

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Yeah. The the latter, Sophie. We contemplated the planned outages as well as the design of the the IT project, knowing that, we'd get back to regular way O and M And so we expect that we'll, you know, we're we're we're sort of done with it. Other than the normal outages at at Palo Verde, you know, we're we're out of the planned outages at this point and, ready to move forward.

[Sophie Karp, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

Got it. Got it. Okay. And then a couple more questions I have on the so first on the transmission lines. Right?

[Sophie Karp, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

I'm wondering if you ever contemplate the six forty five kV line maybe in your territory. Does that make sense ever? Because I noticed you don't go, like, that high voltage and, you know, rarely are they built, but more it's a little a little bit more conversations about these types of lines now. So wondering where you stand on that.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Yes, Sophie. The the transmission engineering team evaluates all aspects of potential voltage, including even advanced conductors and new technology. Right now, we don't see a need for that level of voltage. We go currently up to 500 kV as the highest, but it is a part of the evaluation as we continue to look forward on service territory growth. You know, one of the limiting factors oftentimes is what size right of way do you need, and that oftentimes informs then what level of voltage you need to procure.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

But at this point, the majority of our transmission projects that are, between now and the end of the decade are two thirty KV. We've also got a substantial amount of substation build out as it ranges in voltage. And then longer term, we certainly see more 500 KV expansion or new build. But at this point, that's the highest level of voltage that we think is necessary for the service territory.

[Sophie Karp, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

Got it. And lastly for me, the it seems like you have, the rooftop solar applications in your territory seem to be trending significantly lower versus the historical, I guess, level. Does that impact you at all? In in what way? Just one.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Yeah. Certainly, we we track that in terms of what level of offset rooftop solar or energy efficiency may have on, organic sales. And so, you know, clearly, less rooftop solar applications may show less offset. We think this is just part of the natural market conditions given that there's some level of saturation of rooftop solar already within the service territory. We've got one of the highest levels of penetration to rooftop solar already.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

In addition to, obviously, the financing costs that a lot of our customers would have to absorb for installing rooftop solar, and then the amount of credit where the customers that remain that could take on a long term contract. So we think these numbers are probably a leveling off or normalization of the amount that's being installed, and we'll just continue to track it as potential offset. Right now, you know, our our growth trends for residential and c and I are, in line with what we expect for the year, and that includes any offsets for energy efficiency or rooftop solar.

[Sophie Karp, Managing Director & Equity Research Analyst at KeyBanc Capital Markets]

Okay. Thank you so much.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Thank you.

[Operator]

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

[Paul Patterson, Analyst at Glenrock Associates LLC]

Hey. Good morning.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Morning, Paul.

[Paul Patterson, Analyst at Glenrock Associates LLC]

Most of my questions have been answered. Just one quick on the the Eldorado item that you highlighted on page on slide three. Just could you tell me what triggered that?

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Sure. Paul, it's Andrew. So just by way of background, Eldorado is the entity that Pinnacle West, has to hold, our nonutility, non APS energy related investments. It's a long standing entity with a number of long standing investments, including the one that created the gain this quarter. And, you know, frankly, you know, this was an investment that has shown a higher degree of profitability recently.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

It's a electric switchgear company. And recognizing that higher profitability, we recognized a gain on the investment this quarter. It's a minority stake and certainly not core to the APS investment profile. But among some of the longstanding energy investments we have, it has shown favorable economic trends recently, and so we did recognize that gain this quarter. But, you know, quarter to quarter, year to year, it this is a very small the Eldorado business is a very small, you know, mainly legacy type investments that we've made over time.

[Paul Patterson, Analyst at Glenrock Associates LLC]

K. Great. Thanks a lot.

[Operator]

Thank you. Your next question is coming from Ryan Levine from Citi. Your line is live.

[Ryan Levine, Analyst at Citigroup]

Hi, everybody. The coal plant hi. On the coal plant closure, can you give us an update post the executive order and commissioner comments if there's any reassessment of the potential restart for for that plant?

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Yeah. Ryan, specifically, some of the comments mentioned on the executive order were referring to one of our legacy coal plants called Cholla, which actually began its retirement process, last decade with retiring a couple units, and then the last remaining units were retired earlier this year in accordance actually to federal law and requirement along with our state implementation plan. In addition, it's not an economic plant to continue to run. So for those two reasons, the plant was on a track to retire, and we expect it to remain retired. We also already procured replacement generation in anticipation of that retirement both for this year and future years.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

What we are doing, is exploring how that site can be repurposed one day in the future for new generation, potentially new nuclear, potentially new gas generation. So we think it's got a great potential for investment, jobs, economic stimulus within that area, but as a new technology that'll last for decades to come. And that's really the right purpose for that site as well as the most economic use of generation for our customers.

[Ryan Levine, Analyst at Citigroup]

Okay. So the some of the legislative proposals and you don't anticipate changing the course of action for that plan. Is that correct?

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

That's correct.

[Ryan Levine, Analyst at Citigroup]

K. Appreciate the time.

[Operator]

Thank you. Your next question is coming from Steven DiAmbroshi from Ladenburg Thalmann. Your line is live.

[Stephen D'Ambrisi, Managing Director at Ladenburg Thalmann]

Hi, guys. Thanks for taking my questions. Just quickly, first, on sales growth. It sounded like you in the quarter, you sound sounded like you mentioned it in the script briefly, but I just wanted a little bit of clarity. On the residential side, it looks like usage implied is down a lot, and I just was wondering if that's noise or or if you could talk a little bit about that.

[Stephen D'Ambrisi, Managing Director at Ladenburg Thalmann]

It sounds like maybe there's an accounting change that that could have impacted it.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

Yeah. That that's right, Steven. So, you know, the underlying sales growth trends for the quarter were very strong. On the C and I side in particular, seeing the ramp up of these customers. If you look at the underlying sales trends for residential, you had 2.3 customer growth, which contributed contributed increased sales.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

And that was offset, as it often is, by the continued trends around energy efficiency and just, you know, you know, customer usage. What I think, you know, particular to the first quarter, and keep in mind it's a very small quarter, so it kind of has an exacerbated effect, is that we did make a one time adjustment to how we, account for, you know, estimates of unbilled revenues for all of our customer classes. For a long time, we looked at, you know, all revenue, in a in a month that was being accrued, kinda holistically across customer classes. And we reached a point where our extra high load factor customers, have become a substantial enough part of our overall sales mix that we need to, do estimates for that accrual, separately, for each of those customers. And so this in January, we recognized that procedural change and that led to a, you know, as reported offset to our sales growth, for the quarter.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

We feel really comfortable about the 4% to 6% sales growth expectations for the year. And the residential trends, which I know is where you were really focused, are are really on trend to what we've seen over, you know, the last span of quarters kind of post COVID, which is continued strong sales growth with an offset from energy efficiency that takes you to somewhere either north or south of flattish growth. So, you know, this quarter, if you take out the impact of that accrual adjustment, you're really talking about, like, you know, negative point 2%. And in some quarters that's been positive half a percent, positive 1%. And so really in that range around zero is how our 4% to 6% sales growth is set.

[Andrew Cooper, Senior VP & CFO at Pinnacle West Capital]

And we're seeing underlying trends notwithstanding the offset from that you know, estimated revenue item that are really consistent with what we've been seeing for the last number of quarters.

[Stephen D'Ambrisi, Managing Director at Ladenburg Thalmann]

Okay. That's very helpful. Thank you.

[Stephen D'Ambrisi, Managing Director at Ladenburg Thalmann]

And then just a follow-up to some

[Stephen D'Ambrisi, Managing Director at Ladenburg Thalmann]

of the questions around the the rate case and the formula rate plan request. Know, I guess my question is if, you know, rate case, just from a timing perspective, if you have, like, a fourteen, sixteen twelve, fourteen, sixteen month time clock and you get rates effective, on the '24 test year, step up sometime at the end of twenty six, is it possible to turn around and and get a formula rate step in '27 for the following year? Because presumably, you'll be under earning at that point. Or just, like, procedurally, how does it work? Do you have to wait until '28 to get your first formula rate step?

[Stephen D'Ambrisi, Managing Director at Ladenburg Thalmann]

Thanks.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Yeah. It's a good question. The the intent would be that you should have an opportunity under the scenario that you outlined to be able to have your first formula rate adjustment in 2027. The formula rate plan is designed to be an annual adjustment. So in theory, if you conclude the case in twenty sixth, then '27 should be your first adjustment.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Obviously, the details and timing will be subject to the outcome of this case. But what you outlined is the intent of the Formula eight plan, and that's what we would pursue is to try to keep that adjustment as timely as possible following the conclusion of this case.

[Stephen D'Ambrisi, Managing Director at Ladenburg Thalmann]

Okay. Thank you very much. That's very helpful. Appreciate it.

[Ted Geisler, President, CEO & Chairman of the Board at Pinnacle West Capital]

Thank you.

[Operator]

Thank you. That completes our q and a session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Participants

Executives

• Amanda Ho, Director of Investor Relations
• Ted Geisler, President, CEO & Chairman of the Board
• Andrew Cooper, Senior VP & CFO

Analysts

• Nicholas Campanella, Director at Barclays
• Michael Lonegan, Director - Equity Research at Evercore ISI
• Julien Dumoulin-Smith, Research Analyst at Jefferies Financial Group
• Travis Miller, Analyst at Morningstar
• Sophie Karp, Managing Director & Equity Research Analyst at KeyBanc Capital Markets
• Paul Patterson, Analyst at Glenrock Associates LLC
• Ryan Levine, Analyst at Citigroup
• Stephen D'Ambrisi, Managing Director at Ladenburg Thalmann