Pinnacle West Capital Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 4, 2021

Key Takeaways

  • Q3 performance: Earned $3.00 EPS vs. $3.07 a year ago, raised 2021 weather-normalized sales growth guidance to 3–4% (from 1–2%) and full-year EPS guidance to $5.25–$5.35.
  • 2019 rate case outcome: Commission ordered a $119 million base rate decrease, disallowed $216 million of SCR investment and cut allowed ROE to 8.7%, prompting the company to pursue judicial review.
  • 2022 and long-term guidance: Projected 2022 EPS of $3.80–$4.00 (reflecting a $0.90 rate case drag) and a 5–7% EPS CAGR over the next five years.
  • Capital management strategy: Planning $4.7 billion of capital investments through 2024 while deferring equity issuance until after the next rate case and targeting O&M savings to limit dilution.
  • Clean energy transition: Committed to seasonal Four Corners operations in 2023 to reduce emissions by 20–25%, exit coal by 2031 and add nearly 1,400 MW of clean energy and storage.
AI Generated. May Contain Errors.
Earnings Conference Call
Pinnacle West Capital Q3 2021
00:00 / 00:00

There are 9 speakers on the call.

Operator

Thanks again everyone for joining us today. These are indeed challenging times for us. But right upfront, I want to make it clear that while we may be navigating some short term challenges, as you'll see, the midterm prospects post 2022 are positive. And we remain confident in our ability to create renewed growth and deliver strong shareholder returns. I know the conclusion of the 2019 rate case is the most significant development and everyone is interested in hearing more about that.

Operator

But before we cover the rate case, you can see from the 4 main topics we will discuss today. I'll cover our Q3 results and our expectations for the remainder of 2021. I will then turn it over to Jeff to discuss our rate case outcome, next steps and strategy coming out of this case. Finally, I will wrap up with 2022 guidance and our long term financial outlook. Focusing on the Q3, our performance remains strong, earning $3 per share compared to $3.07 per share in Q3 of 2020.

Operator

Mild weather was a significant factor, largely offset by strong sales. We experienced a mild July August, driven by one of the wettest monsoon seasons in recent history. Residential cooling degree days in the Q3 decreased 27.5% compared to the same time a year ago and were 10.6% lower than historical 10 year averages. As a reminder, Q3 last year was the hottest on record. Robot sales and usage growth in addition to increased transmission sales this quarter mitigated most of the weather impacts.

Operator

Looking at full year, I'll provide an update the 2021 key drivers and earnings guidance. Customer growth and weather normalized sales growth remain important drivers for the remainder of the year. We are updating weather normalized sales guidance to 3% to 4%, up from 1% to 2% based on continued robust customer growth and strong residential usage. Lastly, with the conclusion of the 2019 rate case, we're now able to provide full year guidance. We expect earnings per share to be within the range of $5.25 to $5.35 per share.

Operator

Before I continue with our long term financial outlook, I'll turn it over to Jeff to provide an update on our rate case.

Speaker 1

Thanks, Ted. And thank you all for joining us today, as all of you know, after a series of open meetings and public discussions, the commission issued a final decision in our 2019 rate case. This rate case was complex and the issues were numerous. I'll highlight a few of the main issues that were decided, the revenue requirement, the R is in the ROE. I'll also discuss our next step and strategy coming out of this case.

Speaker 1

And then lastly, as Ted mentioned, he'll provide the 2022 guidance and our long term financial outlook. This outcome was not what we wanted, and the process that transpired was not constructive. Everything we have said on the record with our regulators about what's so damaging and concerning about this decision holds true. It is a decision that makes everything we're committed to doing more challenging and more costly for a time. What this decision has not done it has changed our mission as a company nor our commitment to delivering value to our customers and you, our investors.

Speaker 1

It has not changed the commitment of our employees to operational excellence in all that we do. In fact, we're using the expertise and the track record that we've built in the areas of long term planning, cost management, innovation and serving as an active voice and advocate for the Arizona business community to emerge from this case with the robust strategy. We're not apologetic about standing up for what's right for our customers and our communities and for our investors, the owners of this company. It's your confidence in us and your investment in us that makes it possible to deliver the product and services that power Arizona's economy and way of life. We don't take that for granted, and we'll lay out for you today how we plan to continue to create values at competitive levels amidst the headwinds and the challenges that this case created.

Speaker 1

As a reminder, this case was unique for many reasons. We are compelled by the commission to file this case under a question of whether we are over earning. We're also required to fully litigate this case instead of pursuing settlement opportunities. This is our first fully litigated rate case in over 15 years. We still believe that rate case settlements are the standard, and this case was definitely an exception.

Speaker 1

And finally, this case was centered around cost recovery of coal assets. In contrast, our future investment recovery will be premised on infrastructure supporting clean energy and our customer growth. Let me walk through some of the major decisions of the case. First, the Commission adopted a total base rate decrease of $119,000,000 inclusive of fuel. The Commission did reverse the initial vote to move the SCR issue to a separate proceeding and instead provided partial recovery of the SCRs with a disallowance of $216,000,000 We disagree with the Commission's decision that the SCR investment was imprudent and don't believe that the record in this case supports that conclusion.

Speaker 1

As I stated before, the Four Corners power plant is a critically important reliability asset for the entire Southwest region. It's used and useful currently serving customers the investment in the SCRs was required to keep the plant running under federal law. In addition, the commission voted to lower the ROE from the recommended opinion and orders already low ROE of 9.16% to 8.7%. With this part of the decision the Commission's adopted an ROE that's meaningfully below the national average of 9.4% for electric utilities, and agrees with the commission's rationale. We have embraced a culture focused on customer service and don't believe that a penalty was warranted.

Speaker 1

And the ROE granted ignores the fact that we're one of the fastest growing states in the country and we need to attract capital in order to to fund the growth and economic development that we're experiencing in Arizona. In addition, the Commission moved away from the long standing practice of providing a risk premium for serving as the operator of the largest clean nuclear generating station in the country. We'll continue to navigate through these challenges by leveraging our strong growth and seeking judicial review of the decision through the courts. Although we're disappointed by the Commission's decision, importantly, we now have clarity of the path forward. And so let me share our next steps the strategy as we look to the future.

Speaker 1

We continue to remain optimistic about our future for many reasons, and I'll discuss each of these reasons in more detail. First, we have a solid track record for performance and have grown earnings and our dividends steadily throughout this that time, although we're looking at a reset with this rate case outcome and despite the challenges of our regulatory environment both for Arizona and company, we believe that we have the ability to create long term value and steady growth from here. And Ted will later share our financial outlook and that we're taking as a management team to get us there. In addition to our earnings track record, we've delivered on our promise to provide affordable energy to our customers, and I'll share I think a great example, we've seen a 6% weather normalized increase in demand for residential from 2018 to 2020, but during that same period we've lowered the average residential customer bill by more than 7%. We remain focused on customer affordability and keeping it central to our plans to provide long term sustainable growth.

Speaker 1

That focus, coupled with continued cost management, creates headroom for the future. The second reason that I'm optimistic about our future is our best in class service territory. Arizona remains among the fastest growing states in the country. Where other states are experiencing little or negative customer growth, we're projecting 1.5% to 2.5% retail customer growth in 2021 in 3% to 4% weather normalized sales growth, we expect 43,000 housing permits this year in Maricopa County alone levels that have not been reached since before the Great Recession. We believe the constructive business environment and the the job growth that it creates, the competitive cost of living and a desirable climate will continue to grow the Metro Phoenix housing market and benefit the local economy.

Speaker 1

Focusing on our service territory specifically, we continue to see development from a variety of sectors, which is helping to diversify our local economy more than ever. In particular, Phoenix is becoming a leader in attracting high-tech and data center customers. As you may remember, Taiwan Semiconductor broke ground on a $12,000,000,000 investment earlier this year cementing Phoenix as one of the top semiconductor hubs in the country. More recently, Core Power economic development approach on helping to attract and expand businesses and job creators. The third reason that we're confident is the clear path for our transition to clean energy.

Speaker 1

We came out with our clean energy commitment in early 2020, and I'm proud that we've made significant progress towards that commitment. As you know, earlier this year, we announced that our Four Corners power plant would begin seasonal operations in 2023. This will to reduce annual carbon emissions from the plant by an estimated 20% to 25% compared to current conditions. In addition, we remain committed to end the use coal in our remaining Cholla units by 2025 and to completely exit coal by 2,031. Since our clean energy commitments announcement, we've procured nearly 1400 megawatts of additional clean energy and storage.

Speaker 1

Obviously, Arizona enjoys some of the best solar conditions in the world, and we are well positioned to capitalize on this resource as we continue that clean energy transition. Turning to our regulatory environment. Although this last case was not constructive, I believe we'll be able to reasonably navigate through the regulatory environment in the future. I'll underscore that this last case was unique in nearly every aspect. We plan on filing a new rate case as soon as practicable and will be looking to improve the ROE commensurate with rising interest rates and peer returns.

Speaker 1

Historically, outcomes achieved through settlement have delivered new and innovative customer programs and other results that benefit a broad and a diverse range of vested interest in our state's energy future. We would aim to achieve a settled outcome in our next case because we believe that the nature of that process itself yields more informed, constructive and mutually beneficial results. We'll work to to find alignment with stakeholders and the regulators so that we can improve things for all interested parties. Finally, I'm optimistic about the future because we have a well thought out long term strategy that my entire management team and we're committed to executing. We've refocused on the customer and have built a customer centric strategy that will allow us to deliver exceptional customer service results.

Speaker 1

We are the most improved large utility in J. D. Power's 2020 residential electric service study, and we're focused on making continued improvements. Near term, our focus and priorities remain on improving our customer experience, customer communications, providing safe and reliable service and continuing to engage with stakeholders to advance our shared priorities of clean, reliable and affordable energy for Arizona residents and businesses. I'll now turn it over to Ted to provide guidance and to share our long term financial outlook.

Operator

Thank you, Jeff. Now I'll walk through our 2022 guidance and long term financial outlook. As Jeff discussed, this last case was not the outcome we were looking for and we recognize this rate case is a regulatory reset. We're providing a 2022 earnings guidance range of $3.80 to $4 per share given the full effects of the rate case. We recognize this is a significant reduction compared to 2021, so we've illustrated key factors contributing to the change in earnings.

Operator

As you can see on Slide 19, we're starting with the midpoint of 2021 guidance and walking through the drivers to get us to the midpoint of our 2022 guidance. No surprise, the most significant driver is to break this decision with a negative $0.90 impact. This reflects an additional $13,000,000 downward adjustment beyond the 90,000,000 net income impact estimated for the recommended opinion in order last quarter. In addition, growth in depreciable plan, higher interest expense related to new financing needs and lower pension OPEB non service credits make up the remaining negative drivers. We are focused on cost management and expect O and M savings to provide some positive impact to get us to our 2022 guidance range the $3.80 to $4 per share.

Operator

Turning to the future, we are prepared to use all levers we have available to help us mitigate the impact of this case. And we remain optimistic of our ability to provide long term value. As you can see, investors can expect 7 objectives from us, and I'll touch upon each one. Our plan is expected to provide strong long term earnings growth off of 2022 for the next 5 years. I want to be transparent and reemphasize that this is projected 5% to 7% earnings growth builds on our 2022 guidance.

Operator

We realize that 2021 base year is a lower growth rate at about 1% to 2%. However, we believe 2022 is the appropriate place to anchor our long term outlook given the valuation reset that has already occurred. And we're focused on creating shareholder value from this point going forward. There are a number of factors that can provide upside potential to our growth

Speaker 1

guidance. For example, we have the ability to meet we have the ability to

Operator

invest in more clean energy if we achieve more constructive cost recovery. In addition, robust economic development opportunities may drive increased sales and customer growth. Those, along with other factors, could provide upside to our guidance. The second objective shareholders can expect from us is an optimized capital management plan. As Jeff discussed, we continue to experience solid growth in our service territory, which is the primary driver behind our capital plan.

Operator

Steady population growth is expected to drive average annual customer growth in the range of 1.5% to 2.5% through 2024. In addition, we expect average annual sales growth to be in the range of 3.5% to 4.5% through 2024 on a weather normalized basis. We have updated our capital plan to $4,700,000,000 from 2022 to 2024. While this represents a modest increase from prior levels, we believe this is prudent until we're in a better place to secure timely and constructive cost recovery. We are committed to taking a balanced approach to managing capital plan to support customer growth, reliability and our clean transition, while limiting our equity needs to minimize dilution as we recover from the outcome of this case.

Operator

3rd, as you can see from 2019 to 2024, we project that our rate base growth will remain steady at an average annual growth rate of 5 the 6%. I want to highlight that our FERC jurisdictional transmission investments continue to represent a meaningful portion of that growth at almost a quarter of the total rate base. These investments benefit from superior authorized returns and a more favorable cost recovery construct than our ACC jurisdictional investments. We believe the steady growth will allow us the opportunity to provide solid earnings growth from transmission in the future. Next, I'd like to provide clarity on our financing plans going forward.

Operator

We've previously stated that we would issue equity prior to the next rate case. We understand this case was not constructive, and we're committed to doing everything we can to protect shareholders from further dilution. Therefore, we're deferring our equity issuance and have no plans to issue equity until the conclusion of the next rate case. In the meantime, we'll leverage our sales growth and the strength of our balance sheet to support our investment needs. While we show equity or equity alternatives in the plan, we have no plans for this to be sourced earlier than 2024, protecting investors from dilution during this period.

Speaker 1

Moving to O and M,

Operator

we have a solid track record of disciplined cost management and previously announced that we have initiated additional cost savings programs. We understand the importance of efficiency and instituting lean initiatives. With that in mind, we're updating our O and M guidance to show, 1, a reduction of O and M expense from 2021 to 2022 2, a goal of keeping total O and M flat during this period and 3, a goal of declining O and M per kilowatt hour. Cost management and lean processes will continue to be a strong focus our management team to mitigate both inflationary pressures and regulatory lag. We anticipate another important expectation that investors can look forward to is our attractive dividend yield.

Operator

Yesterday, our Board of Directors announced an increase in our quarterly shareholder dividend from $0.83 to 0.85 cents per share. We have consistently grown our dividend for 10 years straight and we are committed to dividend growth going forward. Our longer term objective to grow the dividend commensurate with earnings growth and target a long term dividend payout ratio of 65% to 75%. We understand that we're not there now, but we are confident in our plan and that we will eventually grow back into this payout range. Turning to the final item, our balance sheet.

Operator

We continue to maintain a strong balance sheet, providing us flexibility in our sources of capital over the next few years. We have an attractive long term debt maturity profile and no debt maturing at APS until 2024. Additionally, we maintain robust and durable sources of liquidity with our $1,200,000,000 of credit facilities recently extended to 2026 and a well funded and largely derisked pension. Taking a closer look at our ratings, we continue to have solid investment grade credit ratings even with the recent downgrade by Fitch in the credit reviews announced by Moody's and S and P. Our balance sheet targets include 3 key components: maintaining credit rating strength, maintaining an APS equity layer greater than 50% and an FFO to debt range of 16% to 18%.

Operator

In summary, we're taking action during this reset and have a plan for attractive growth going forward. Importantly, we plan to defer all equity until 2024, further reduce O and M and optimize the balance sheet and capital program during this reset period. In return, we have the highest dividend yield among peers, which stands today above 5%. While certainly a factor even at a stock price 20% higher than current levels, we offer a dividend yield more competitive than peers. In addition, we announced long term EPS growth guidance of 5% to 7% from 2022 for the next 5 years.

Operator

With the attractive dividend yield and solid EPS CAGR, we anticipate a competitive 10% to 12% total shareholder return going forward. In the short term, we are laser focused on doing everything we can to protect investors during this reset period and then transitioning to a renewed era of growth so that we can provide a competitive return going forward. We remain optimistic about the future. Although the final outcome of this rate case was worse than we had expected, we have

Speaker 1

a path forward. It is

Operator

centered around our long term track record of constructive rate case outcomes, our robust service territory growth, continued balance sheet strength and a focused management team that is taking action. This concludes our prepared remarks. I'll now turn the call back over to the operator for questions.

Speaker 2

Thank And our first question today is coming from Insoo Kim at Goldman Sachs. Your line is live. You may begin.

Speaker 3

Yes. Thank you, and thanks for all the disclosures today on this. My first, maybe for Ted. Just trying to Reconcile the walk to the 2022 guidance, midpoint of the $390,000,000 Couple of things that stood out. It seemed like the depreciable plant, Maybe the D and A component of it is seems a little bit higher than what I was expecting.

Speaker 3

And then The pension item also something I don't know if it was just me or if that was already known, but Could you walk through a couple of those items in as much detail as possible? And finally, you talked about that sales growth that's very robust, but it didn't seem like That was explicitly laid out in this walk. So what's being assumed here?

Speaker 4

Yes. And Sue, happy to,

Operator

and thanks for the question. First, depreciation is certainly a drag, particularly given that the test year for this case has been over 2 years ago. So we've continued robust investments since then and that certainly has an impact going forward. So we haven't detailed out anything beyond the fact that ongoing depreciation until we file our next case certainly has an impact. And given the outcome of this case, that definitely shows next year.

Operator

With respect to the pension, we've benefited from favorable market returns this year. We still expect there to be a benefit next year. But because our pension is in such strong status, we continue to rebalance and de risk the pension. That certainly gives us a view that we'll have likely less market returns next year in terms of favorable non service credits. So that's really just a factor of continuing with our liability driven investment strategy and derisking the pension going forward.

Operator

And then finally on sales growth, we can't say enough about the economic development that we see in our service territory. We try to look beyond the COVID impact. So example, if you look at growth in 2021 compared to 2019, really just avoid the comparison to 2020 given the COVID anomalies, we're at over 6% where the normalized sales growth right now. And that is all true customer growth and usage increases absent any COVID impacts, and that's before some of our large industrial customers that are under construction now come online, MC being one of them. So we look at the record housing permits levels, the amount of development that's going on right now and really believe strongly that the growth going forward is solid and based on economic development.

Operator

And that's why we're comfortable with the range from 22% to 24% being in the 3 point a 4.5% standpoint. This year, we're at the range of 3% to 4%, and last quarter, we already exceeded that range. So we believe those are good numbers going forward.

Speaker 3

Okay. So the 3.90, that assumes at least a 3% year over year Whether normal low growth?

Operator

That's correct.

Speaker 3

Okay. Got it. And then my second question for Jeff, just more broadly, definitely a challenging case. And as we think about moving forward from here and getting To file that next rate case and having further dialogue with the interveners and the commission, What are just some things that in your mind you could do to this time around have a more constructive dialogue overall on various issues? Just curious on your overall thoughts given what's all transpired.

Speaker 1

Yes. Thanks for the question, Sue. I mean, I think that's one of the more important things. We ended up having some of the discussion about the long term negative impacts that happen, credit rating downgrade issues, things like that, that was happening at the open meeting instead of ahead of time. And so I think one of the important things just as we are working very hard to be as parent as we can be with you is to then be as transparent as we can be with all the different parties that would likely participate in that next case.

Speaker 1

I think that we do have areas of significant alignment when you look at the move towards more clean energy employment and how we do that and just connecting the dots to say that if you're going to actually meet the growth that we're seeing in the state and at the same time begin this transition and what are the benefits. I think one of the key things, and if you go back to Chairman Marquez Peterson's letter asking on how we could move to a $0.09 rate. While I don't think that's realistic given the fuel mix that we have here in Arizona, it's a great topic of conversation around how we do things like fuel for steel. So if we can reduce our fuel burn and the $1,000,000,000 that we spend on fuel and replace that with batteries and storage, you can really damage rate pressure, but that's going to have to be an investment that we need to have the ability to invest in. And so to me, it's really connecting all those dots and working with the stakeholders ahead of I'm in making sure that as much of that conversation as possible takes place before we file.

Speaker 1

And I think Ted mentioned, It takes about 4 months to get ready for a filing. We intend to file pretty quickly. But the idea is we've got to have that conversation so people can put in context what a decision like this actually means in meeting Arizona's growth and managing a transition to clean energy. So it's going to be a lot of dialogue. It's not just with the commission, it's with the stakeholders that will be involved.

Speaker 1

But I'm anxious to start on that.

Speaker 3

Thanks for the color. I'll see you soon.

Operator

Thanks, Insoo.

Speaker 2

Thank you. Our next question today is coming from Julien Dumoulin Smith at Bank of America. Your line is live. You may begin.

Speaker 5

Hey, good morning, good afternoon. Really appreciate the time, questions. Wish you guys the best here. I know it's a Difficult situation. Maybe if I could just pick it up from where Insoo left it off.

Speaker 5

How are you thinking about Except for the SCR here. I noted your commentary. It didn't specifically, if I didn't catch it right, mention follow-up in litigation. How are you thinking about that side, whether it's securitization, litigation, ultimate operations at Four Corners, As well as just coming back to this question on settlement, I know there's been some open debate as to whether or not the commission or staff specifically can settle. I know the chair made some comments in recent weeks as well.

Speaker 5

Is there an ability to settle right now as best you perceive it? I mean, certainly, you seem to suggest So in the commentary, but also separately, the water conversation on next steps, which I imagine is somewhat fluid on the FCR as well.

Speaker 1

Yes, Julien. Let me be really direct with that. I did have it in my initial comments. But our first staff in a near term approach with the SCRs is to pursue judicial review. And so what we have to do is we have to go to the commission first.

Speaker 1

You have to ask for rehearing. We have 20 days to ask for rehearing. The commission has 20 days to act on that. If they don't act on it within 20 days, then it's deemed denied and that opens up then your access to the courts. And so I won't go into the more detailed strategy, but we were very clear in the hearing that the prudent standard that was used just does not match the record in the case.

Speaker 1

And so we were very clear that I think we gave them one option to say if we do a debt return that we would be able to move forward with that. But the partial recovery that they gave, which means there was a disallowance of the 2 16,000,000 doesn't leave us a choice but to go to court on that issue. So that's the near term process. What happens down the road with securitization, I mean, those are all things later. With respect to getting in and settling, I think one of the things that this case did show is the challenge of not having a settlement where you do have a more limited scope of issues to look at.

Speaker 1

This was pretty wide open in terms of everything that was involved for both the hearing division, the parties, and then ultimately the commissioners. And so I think we would continue to advocate for settlement as being a better outcome because you are able to do a lot of those trade offs with the parties who are most affected rather than having it go to a commissioner or a judge where it often can be a binary outcome. Somebody is going to lose it all or they're going to win it all. And in a lot of cases, that compromise is much better. So I still think that that's the best path moving forward, that's what we would be working towards.

Speaker 1

And again, we're going to have this period of time when we finally get out of ex parte to hopefully be able to have some conversation with the policymakers on how to make this more constructive.

Speaker 5

Got it. Yes, I hear you on that. And then more broadly on this 5% to 7%, I mean, how are you thinking about Sort of regulatory recovery and rate case support for that and the cadence of that 5% to 7% through the future forecast period, I'll let you define that. I just want to understand what this means for 2023 2024 and maybe understand a little bit on especially on the robust sales growth. I mean, can you drive earnings growth independent of a rate case in the medium term, just given the pace of investment that you're articulating in rate case?

Speaker 4

Well, Julien, the way I

Operator

think about that is, as Jeff said, we plan on filing the next case as soon as practical given the outcome of this recent one. And we assume a conclusion of that before 2024 and we're being conservative in our assumption of just with reasonable regulation and a conservative outcome in that case, we can support 5% to 7% earnings growth. And it'll just depend on the details of that next case. I think given the sales growth, our commitment to cost management, we've got the ability to offer a favorable construct many stakeholders that could lead to a constructive outcome for everyone, but it'll just depend on those details in determining how long we go then after that before ever needing to file another rate case. But the 5% to 7% is supported by just reasonable regulation and a balanced outcome in the next filing.

Speaker 5

But not better than 5, 7, as you think about the prospects For regulatory recovery by the time you get to 24, 25?

Operator

Well, that's a long term target. So in the near term, you could be better. It just depends on the outcome. But over the long term, we believe 5% to 7% is a prudent range.

Speaker 5

Got it. All right. Thank you. I'll pass it over. I know there's a lot to ask.

Speaker 1

Thanks, Julien.

Speaker 2

Thank you. Our next question today is coming from Shahriar Pourreza at Guggenheim Partners. Your line is live. You may begin.

Speaker 6

Hey, guys.

Operator

Hey, Shar. Hey, Shar.

Speaker 7

Just a couple of questions here. First, I just wanted to follow-up on Julian's question. Just curious how you expect The litigation,

Operator

I guess, to affect the

Speaker 7

next rate case, and any sense on timing of the judicial review? And Jeff, more importantly, if you're trying to align with the different stakeholders. I guess, why appeal, given that your plan obviously seems to support this outcome? Why not sit out, work with the stakeholders? I guess could the litigation mar the future filing from a settlement and dialogue perspective?

Speaker 1

Yes, Shar, to me, one of the most important things is just how the prudent standard was applied in this case. And I tried to make it very clear during the open meetings that this is more than just 2 dollars 16,000,000 write off. I mean that is not good and don't think that was supported by the evidence in the case. But when you start thinking about the amount of investments that we need to put in and if every time we do that, there's a look backwards to say, well, maybe there's a different technology that would have been better or cheaper. It makes it really hard to think about how you're going to navigate this clean energy transition.

Speaker 1

And so I think we were trying to be as transparent and as clear as we could be with the commission when we were in the open meeting about what we would have to do given this outcome. And so that's unfortunate. I mean, I would much rather not be in that position. But as we move through that, I don't think anybody's going to be prized by it. And the point is to say let's figure out how we can align on what we can't align on.

Speaker 1

I mean, that's part of the regulatory structure is sometimes companies appeal. You've got a right to appeal. That's set up in the framework. We're not doing anything more than we have the rights to do. But we still need to work together and we still need to work collaboratively through that.

Speaker 1

So we'll have do what we can do to try to navigate that.

Speaker 7

Got it. And then just on the equity front, it seems like the commission has left the equity layers alone as long as they stay consistent with past levels. I guess it's good to see there's some rationale you Highlight that may justify the GRC outcome and how it could be somewhat anomalistic. But you do have another GRC coming up, which had equity needs in of Dalf, now you layer in that this order as it stands today, you seem somewhat under equitized. I know you're deferring the equity, But it's not going away.

Speaker 7

I guess, how should we think about your prior equity guide coupled with sort of the recent order, which can be somewhat offset by maybe use Parent leverage and load growth. I mean is there a scenario, Ted, that where you wouldn't need any equity in 'twenty four? How do we think about the bookends?

Operator

Yes, I appreciate that, Shar.

Speaker 4

The way we think about it

Operator

first is any Pinnacle debt that's injected in APS will be treated as equity at APS, of course. And then the second really more fundamental, we just don't believe that it's prudent to issue comment at the current valuation. With respect to whether we could defer beyond 2024 depending on this outcome, that'll just depend on the next outcome. And as we stated, we'll also evaluate alternatives when the time comes such as hybrids or forwards or convertibles to mitigate further dilution at that time. But heading into the next rate case, our primary focus will be improving the ROE that we believe is unjust and not appropriate given, as Jeff mentioned, the growth that we need to finance as well as the responsibilities we have as operating the nation's largest clean energy asset.

Operator

And I believe that our balance sheet profile heading in this next case will allow us to then focus on improving that ROE.

Speaker 7

Got it. Got it. Thank you guys for this and appreciate the color. See you next week.

Operator

Thanks, sir.

Speaker 2

Thank you. Our next question Today is coming from Sophie Karp at KeyBanc. Your line is live. You may begin. Hi.

Speaker 4

Good morning. Thank you for taking my question.

Speaker 1

Hi, Sophie. Hi, Sophie.

Speaker 4

I guess a couple of questions here. First on your operating expense with OpEx guide for 2022. I'm just kind of curious what levers do you have to keep that service wet and maybe modestly down versus what we've seen in 2021, how should we how are you thinking about that?

Operator

Yes, I appreciate that, Sophie. We're real proud of our customer affordability program and our growing culture of being focused on Lean Sigma. So this has really been a company wide concerted effort to embrace lean, eliminate waste, harvest savings, and be able to use this as one of our levers through this reset period. In this last rate case, in fact, we're able to take some of the customer affordability savings and have that as part of our filing and pass that on to customers. Of course, it doesn't just stop with that last rate case filings.

Operator

We're continuing to focus on cost management and operating a lean organization and that's part of one of the lever that is going to help us during this period. So it's not any one item. It's a variety of initiatives across the entire enterprise, whether it be being able to consolidate supply and services and leverage our supply chain strategies more efficiently or be able to automate some of our systems and processes and then be able to focus our human hours on more value add work. There is just a tremendous amount of opportunity and ideas that this organization has come forward with and is executing. And we're really inspired by how much the team has stepped up and is taking this as a challenge and an opportunity to deliver efficiencies in this period.

Speaker 4

Got it. Thank you. And then on solar, right, so the grid connection grid This charge has been eliminated, and I think this is we'll remember kind of the reasons why it was put in, in the 1st place. I guess Now that it's gone and the solar applications are going up, how do you think about that when you kind of forecast your load growth? Would that be an issue for you guys At some point?

Operator

Well, Sophie, first of all, just want to make sure we're clear that the grid access charge going away is revenue neutral. So that really is just a cost shift between for classes, but our estimates for whether normalized sales growth is net of energy efficiency or rooftop. So if you were to look at the gross numbers, they're even higher than what we're projecting. And again, as we sit here today, over 4% weather normalized sales growth currently, that's higher than our current range. And if you compare it to 2019, we're over 6%.

Operator

So are confident in that weather normalized range going forward, even with the impacts of energy efficiency and rooftop solar.

Speaker 4

All right. Thank you. That's all for me.

Operator

Thank you.

Speaker 2

Thank you. Our next question today is coming from Steve Fleishman at Wolfe Research. Your line is live. You may begin.

Speaker 8

Yes. Hi, thanks. Just somebody asked this question before, but I'm not sure I heard the answer. The 5% to 7% growth rate that you laid out, Is that something you see consistent over this period? Or Is there some maybe lag upfront and then when you get the rate relief, it goes higher?

Speaker 8

Could you just talk a little bit about kind of the year by year of that?

Operator

Yes, Steve, happy to. It's difficult to break down year by year, but I think the main point that you're getting at is it's certainly dependent on reasonable regulation in the next rate case. We will continue to have growth based on our organic growth in the service territory. But we believe with reasonable regulation and what we're estimating as a conservative outcome in the next rate case, that that will really propel growth in that long term earnings range target. So certainly, we'll be looking for the filing that will be coming forward sooner rather than later and the outcome of that next case to project over the long term.

Operator

And that's why that ranges over the next 5 years.

Speaker 8

Okay. I'm just going to ask maybe a little more clearly on the question just so Because I think for the next rate case, you're really not going to have in place till late 'twenty four, did you say? Or

Operator

Well, it depends on the but if you file in 2022, I think it's reasonable to expect an outcome in 2023.

Speaker 8

Okay. So there's only really one year 2023 without the outcome of the rent case. By 2024, you expect you'll have it in place.

Operator

Yes. And actually, I think if we file in 'twenty two, it's possibly an outcome in 'twenty three consistent with schedules we've had in the past. And therefore, you have some resolution in 'twenty three and then your first full year is 'twenty four.

Speaker 8

Okay, great. And then maybe just on the in terms of understanding the kind of equity. So you plan to, I assume, keep the ATS equity at the $54,000,000 and change that's authorized in this last case?

Operator

Well, that was the equity from the last test year. We'll measure the equity at the end of this next test year and that'll just be whatever it is. That'll be exactly what we file. But again, our view is while you all have equity injection based on Pinnacle debt, we are more focused on trying to prevent further dilution during this period and then really focus the filing on improving ROE.

Speaker 8

Right. And is there any risk of them imputing that? Or is there not any history of that?

Operator

We don't believe there's risk and we believe that the commission will understand that we have to lever the company in order to keep funding the growth in this state. And that's the position they put us in as a result of the outcome of this recent case. So I view that as a little risky.

Speaker 8

Okay. That's it for now. Thanks.

Operator

Thanks,

Speaker 2

Thank you. Our next question today is coming from Anthony Crudell at Mizuho. Your line is live. You may begin.

Speaker 6

Hey, good afternoon. Thanks so much for the detail on the slide. If I could just follow-up on Steve's question. So you're saying the commission doesn't really care or has historically not cared about double leverage. Is that accurate?

Operator

Well, it's really not been anything that's been a focus, and I can't speculate on what that may look like in the next rate case filing. I think the key is that with our record growth, we have to finance that somehow. Given the outcome and the impact that's had on our valuation, the prudent way to finance it is to use the strength of our balance sheet. And I believe the commission will understand that.

Speaker 6

Okay. So it's more of maybe double leverage hasn't been presented at the commission historically versus that they've either approved or disapproved of it. Is that fair?

Operator

Anthony, I don't expect it to be an issue.

Speaker 6

Okay. And then if I think of the high end of rate base guidance as 6%, the high end of EPS guidance is 7%. Are you assuming either improved ROEs or minimizing some regulatory lag to get to that? If you hit the high end of rate base guidance, how I hit the high end of the EPS guidance?

Operator

Yes. I think the key there over time is really going to be improving regulatory lag, which has been of our team all along. And I believe that we've been clear as well that improving regulatory lag also allows us to stay out of rate cases. So that'll definitely be a key focus in this next filing. Certainly improving ROE to be commensurate with peers is also a driver as well.

Speaker 6

Great. And then just lastly, You made a really good distinction about maybe the disallowance on the STRs is related to like legacy coal plant and a lot of the CapEx going forward is more Modernizing to create clean energy. But just given any type of risk of new technology or something coming up supplementing it and Now the commission playing Monday morning quarterback with that CapEx, does that give you any hesitancy on going with any big projects or limiting the value of any type of projects so that your risk of disallowance is much Smaller, maybe what we saw in the SCR order or decision?

Speaker 1

Yes. Anthony, I guess 2 parts to that. So one is that's, Again, one of the important reasons for why we had to seek review of the case is because getting clarity around not We make the decisions based on the information that we have at the time we make the decisions to move forward in a prudent way. And there is a lot of new technology that's coming in. So I do think probably everybody in the industry is trying to figure out how do you derisk new technology projects so you don't run out, look at, for example, our battery storage work, we put a pause after we had the McMicken event so that we could deeply, deeply to stand safety around lithium ion utility scale batteries.

Speaker 1

We're now moving forward in a pretty aggressive way with those systems that they're established technology. They're known. There's more of them being installed. We're not first movers on it. And so I think that you'll We'll see a lot of work on trying to make sure that we're managing that risk because I think it's a good point.

Speaker 1

But one of the important things for us was get clarity on that you don't use hindsight to go back and look at what was an appropriate decision when circumstances have changed.

Speaker 6

Great. Thanks so much for taking my question and looking forward to seeing you guys at EDI.

Operator

Thanks, too, Anthony. Thank you.

Speaker 2

Thank you. That was our last question for today. I'll now turn the call over to management for any closing remarks.

Speaker 1

Great. Thank you. And just I just want to thank all of you for your investment and your confidence in us. This rate case outcome was not what we had hoped for, but we are focused now on a path forward and are focused on our customers and look forward to seeing some of you at EEI. And thank you again.

Speaker 1

That concludes our call.

Speaker 2

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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