Andrew Cooper
Senior Vice President & Chief Financial Officer at Pinnacle West Capital
Thanks, Jeff.
I'll now discuss our 2024 guidance and future financial outlook. For our 2024 outlook, we're establishing an EPS guidance range of $4.60 to $4.80 per share, reflecting the additional revenues from our recent rate case outcome with new rates effective March 8. This revenue is partially offset by continued drag from increased expenses not captured in our historical test year. As Jeff mentioned, this rate case was balanced and constructive, and this decision will create a solid foundation from which we will grow. However, it is important to highlight that we continue to face significant regulatory lag due to the timing of our historical test year, which ended June 30 of 2022. This lag is mainly due to higher interest rates on borrowed capital, higher depreciation due to increased rate base growth, lower contributions from pension, non-service credits, and increased O&M expense due to plan generation outages.
We are encouraged by the commission's focus on holistically addressing regulatory lag through the newly created regulatory lag docket. We are committed to addressing these current costs in our next rate case and working with the commission to find solutions to reduce these impacts on our current construct. Our commitment to mitigating regulatory lag is a priority, aiming to preserve our financial stability and build shareholder value between rate cases. Diving a bit deeper into 2024, the largest positive driver of our guidance will be new revenues from the implementation of the rate case decision.
Other positive drivers are expected to include increased revenues from sales growth. The LFCR and the full-year impact of the 2019 rate case appeal outcome. The most significant year-over-year negative driver is expected to be weather, due to the record-breaking heat wave we saw in 2023 as we plan for normal weather. Other negative drivers are expected to be higher depreciation and amortization expense, increased financing costs, and higher O&M primarily due to planned outages.
Turning to customer growth, as Jeff mentioned, we once again expect our customer growth to be within the range of 1.5% to 2.5%, which continues to highlight the attractiveness of our state and service territory for customer in migration. For 2024 sales growth, we expect 2% to 4% growth, of which 2.5% to 3.5% is driven by extra high load factor, C&I customers. These sales create operating leverage and ultimately rate headroom for all customers. We have seen a steady ramping of these customers and I anticipate it will continue to ramp through 2024. Longer-term, we expect our weather-normalized sales growth to be within the range of 4% to 6% through 2026, with 3% to 5% of this growth driven by our large C&I customers.
Turning now to what we strive to provide investors going forward, I will discuss our financial outlook and goals. We are rebasing our long-term EPS growth guidance of 5% to 7% of the midpoint of our 2024 guidance range of $4.60 to $4.80 per share. While our financial plan supports this growth rate for the long term, our goal is to work toward a more consistent and timely cost recovery profile. We have already made solid progress toward reducing regulatory lag with the commission, approving the system reliability benefits surcharge. While this mechanism will enable more timely cost recovery for utility-owned generation, we must first develop these projects before the mechanism begins recovering costs. Therefore, this mechanism has potential to create strong value in the future, but we must first work through the natural development cycle and get projects in service.
In addition, the Commission has reiterated its policy on settlements, which made streamlined future rate case filings, while creating even more collaboration between parties. Finally, we will engage with regulators to holistically address regulatory lag through the newly created docket and commit our cadence of future rate cases to ensure we are recovering our material costs. We are allocating $6 billion for investment through 2026, contributing to a 14% increase in our capital investment profile compared to this time last year. This plan incorporates additional capital investment generation that will qualify for the new SRB mechanism. In addition, an increasing portion of our capital plan is directed towards bolstering our FERC jurisdictional transmission infrastructure. Average annual spend is now more than double what it was as recently as five years ago.
We have designed a well-balanced capital allocation strategy that optimizes our ability to receive timely recovery for investments while providing reliable service across our rapidly growing service territory. Importantly, the SRB will expand our capacity to self-build generation to meet customer needs while reducing lag. Projects that meet the requirements of the all-source RFP and compete from a cost and reliability perspective would qualify for recovery through the SRB. We expect approved projects to be included in rates within approximately 180 days of in service, significantly shortening the time between investments from recovery on those assets compared to a traditional rate case. Recovery will be at the prevailing weighted average cost of capital less 100 basis points until a future rate case. This discount will provide customers an immediate benefit while achieving rate gradualism and reducing lag. We have highlighted five potential near-term opportunities to secure project cost recovery through the SRB with final outcomes dependent on ongoing procurement processes.
Additional opportunities are also expected to arise based on future RFP outcomes and projects aligning with this mechanism. The expansion of our capital investment plan is poised to drive substantial rate base growth. Consequently, we are revising our rate base growth guidance to an annual CAGR of 6% to 8%. In addition, with the adoption of the SRB, we now expect an increase in tracked capital, which will reduce regulatory lag in the future. By increasing our transmission spend and generation investment that qualifies for the SRB, we expect to double the amount of tracked capital, which will improve our ability to receive timely cost recovery and reduce the amount to be recovered in future rate cases.
To fortify our capital structure and support our robust capital expenditure plan, we are planning to issue a mix of debt and equity securities over the 2024 through 2026 period. Our principal goal is to have a healthy capital structure, the utility, with no less than 50% equity. We have noted since 2021, the need for up to $500 million of equity to support a balanced utility capital structure. You'll recall, this was deferred over the past two-plus years as we sought to insulate shareholders as we work to improve the regulatory environment in Arizona. The capital structure need has grown by an additional $100 million to $200 million over that time and will be required to true-up our equity ratio.
At the same time, our capex profile has grown by almost 15%, nearly $1 billion over a four-year window. While we will pursue a blend of financing solutions across APS and Pinnacle West to address our investment objectives, sources of incremental capital may include up to $400 million of additional equity or equity-linked securities over the period, sized to approximately 40% of this incremental capex. The financing options for this incremental capex may potentially include at-the-market issuances, though, we will continue to evaluate alternatives to common equity. As we advance into 2024, our dedication to cost management continues to guide our operations. Core O&M is declining year-over-year despite continued inflation, which supports our long-term goal of reduced O&M per megawatt hour.
Notably, planned major outages are scheduled for Four Corners Unit 5, Red Hawk, and West Phoenix, with refueling outage at Palo Verde, marking a critical phase in our maintenance strategy. The Four Corners outage at Unit 5 specifically is the last major planned outage at the unit before its retirement, with the last major planned outage at Unit 4 scheduled for spring of 2025. Despite these necessarily planned outages, our commitment to operational efficiency and lean practices remains intact for the long term. Our goal of declining O&M per megawatt hour is strongly established and underscores our effective cost management with rapid growth in our service territory.
The second chart on this slide highlights our success in maintaining O&M cost increases below the rate of inflation since 2017, outperforming both national CPI trends and more specifically local inflation rates in Phoenix. This achievement is a testament to our unwavering focus on optimizing operations and fostering a culture of efficiency across our organization. We continue to provide an attractive dividend yield as part of our total shareholder return and maintain a goal of managing our payout ratio into a sustained range of 65% to 75% in the future. With a solid track record of annual dividend growth, we understand the importance of returning value to our investors. We are committed to working diligently to ensure our dividend remains competitive.
Turning to our credit ratings. Following our recent rate case resolution and other developments in the Arizona regulatory climate, we are working with the rating agencies as they evaluate our credit. Healthy investment-grade credit ratings are pivotal to our financial profile, as they contribute to reducing borrowing costs, thereby directly benefiting our customers through more favorable financial conditions. We are adjusting our FFO-to-debt target range to 14% to 16% to properly balance the financing needs of the company and solid credit metrics. Our balance sheet remains strong, reinforcing our financial foundation. This balance sheet strength provides us flexibility to navigate the current interest rate environment, and strategically address our near-term maturities, as well as ongoing and future investment needs.
Looking back at the last few years and the strides we've made, we are enthusiastic about our future and the potential of the company. Overcoming the setbacks of the prior rate case, we achieved the goals set forth during the preceding two years and we've aligned closely with the commission and stakeholders to secure constructive outcome in this rate case. While challenges such as regulatory lag persist, our commitment to see collaborative solutions with stakeholders, ACC staff, and the commission remained strong. Our dedication to keeping customer cost affordable is evident through our efficient O&M practices, seeking to ensure that rates and costs stay below inflation during this period of unprecedented growth in our service territory. With a more constructive regulatory environment and a continued focus on affordability, we look forward to approaching the future with a clear vision and optimism for our customers and investors.
This concludes our prepared remarks. I'll now turn the call back over to the operator for questions.
