Pinnacle West Capital Q1 2022 Earnings Call Transcript

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Provided by Quartr
May 4, 2022

Key Takeaways

  • Q1 EPS was $0.15 per share compared to $0.32 last year, primarily driven by the unfavorable rate case decision and discontinuation of the Four Corners and Ocotillo accounting deferrals impacting the income statement without new revenue offsets.
  • Customer count grew by 2.2% and weather-normalized sales rose 4.4% (3.5% residential and 5.2% C&I), providing upside to revenues and partially offsetting inflationary pressures.
  • APS achieved zero serious injuries in Q1 and advanced its wildfire mitigation efforts through the Defensible Space Around Poles (DSAP) program, enhancing system reliability ahead of the summer peak season.
  • The company remains on schedule to bring 141 MW of battery storage online in 2022 at APS-owned solar sites and to add a further 60 MW of batteries and 150 MW of solar capacity in 2023, while preparing an all-source RFP for 2024–25 clean energy resources.
  • APS plans a mid-year 2022 rate case filing to recover costs from infrastructure investments, and recent collaboration with stakeholders delivered an approved Customer Education and Outreach Plan alongside gains in J.D. Power customer satisfaction scores.
AI Generated. May Contain Errors.
Earnings Conference Call
Pinnacle West Capital Q1 2022
00:00 / 00:00

There are 12 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2022 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.

Speaker 1

Thank you, Matt. I would like to thank everyone for participating in this conference call and webcast to review our Q1 2022 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Jeff Gollner And our CFO, Ted Geissler Barbara Lockwood, Senior Vice President, Public Policy and Jacob Tetlow, Executive Vice President, Operations are also here with us. First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website along with our earnings release and related information.

Speaker 1

Today's comments and our slides contain forward looking statements based on current expectations and actual results may differ materially from expectations. Our annual twenty 22 Form 10Q was filed this morning. Please refer to that document for forward looking A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through May 11, 2022. I will now turn the call over to Jeff.

Speaker 2

Great. Thank you, Amanda. Thank you all for joining us today. 2022 started off in line with the financial guidance We provided coming out of the rate case decision last year. And before Ted discusses the details of our Q1 results, let me provide a few updates on operational and regulatory developments, and then I'll touch on our progress towards achieving our 2022 goals.

Speaker 2

First off, as you know, safety is our number one priority, And I do want to take this opportunity to commend and congratulate our employees for keeping safety and sharp focus in the Q1. Significant injuries or fatalities or SIFs are the most important safety metric and we completed the quarter with no serious injuries. SITH is a metric that's focused on preventing serious injuries by improving hazard recognition, risk based decision making, procedures, equipment selection, Employee training and much more because we don't leave anything to chance when it comes to the safety of our people on the job. I'm grateful to our employees for taking accountability to operate by one of our principals within the APS promise, that's anchoring and safety, and to help their coworkers to do the same. As you all know, spring is an important time of year for our summer preparedness work.

Speaker 2

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

Speaker 2

We've got Unit 1 in a planned refueling outage that began on April 8 and it's on schedule to return to service within the next few days. We expect our 2 refueling outages in 2022 to last approximately 30 days each. That's a time frame that reflects our planning and execution. And upon the successful completion of the latest refueling outages, all three units will be poised to provide around the clock energy help meet the demands of the summer for the entire Desert Southwest. Our procurement process is another important way that we help To ensure long term resource adequacy and progress towards our clean energy commitment, we're on track to bring into service 141 megawatts of battery storage Located on 6 APS owned solar sites this year.

Speaker 2

Last year, we received robust RFP responses to meet the growing needs of our customers. The RFPs resulted in an additional 60 megawatts of APS owned batteries to be placed at APS solar sites and 150 megawatts of new APS owned solar, All expected to be online in 2023 as well as additional clean energy resources through PPAs. We're currently in the final stages of contracting for another APS owned solar plus storage project that we look forward to announcing in the near future. And lastly, APS is working on another all source RFP that's expected to be released in mid May for new resources to be in service 2020 4 2025. On the regulatory front, we've been preparing for the upcoming rate case filing and continue to expect the filing mid year.

Speaker 2

The primary objectives of this next rate case will be to recover costs and investments that we've made to reliably serve our existing customers and to support the tremendous growth that we're seeing in our service territory. In addition, we continue to work with the Arizona Corporation Commission and many stakeholders in an effort to gain a common understanding on a variety of issues and to move forward with balanced solutions. One example of the stakeholder work has been our most Customer Education and Outreach Plan, which was recently approved by the Corporation Commission after months of collaboration. I think this was a great example of the progress that we're making to align with stakeholders and the commission on issues that have been challenging in years past. We truly appreciate the individuals and organizations that have been involved in these discussions, and I want to personally thank them for their time and thoughtful participation.

Speaker 2

We look forward to continuing the dialogue and making further progress with respect to our state's regulatory environment. I've also Already touched on the progress of some of our 2022 priorities, including enhancing our stakeholder relationships and continuing to execute on our clean energy commitment. In addition, I'd like to highlight improvements we're making in the customer experience and communications space. I'm proud to say that we're making solid progress in improving our J. D.

Speaker 2

Power Residential Customer satisfaction survey scores. APS made quartile gains in every single driver of customer satisfaction during Q1 moving the company to the top half of the third quartile for overall satisfaction when compared to its large investor owned peers. APS' strongest performing drivers in the latest JDP survey were power quality and reliability and customer care and phone and digital, both of which performed well above the large Investor Own Peer Set Averages. Enhancements to our website, interactive outage map and alerts by text and e mail have improved customer satisfaction We're making solid progress. We know we still have much work to do, and we look forward to continuing to execute on our priorities throughout the year.

Speaker 2

With that, Ted, I'll turn the call over

Speaker 3

to you. Thank you, Jeff, and thanks again everyone for joining us today. This morning, we reported our Q1 2022 financial results. I'll review the results and provide some additional details around the customer and sales growth. 2022 started off in line with expectations Despite being significantly lower than last year, in the Q1 this year, we earned $0.15 per share compared to $0.32 per share in the Q1 last year.

Speaker 3

This is the 1st full quarter of financial impacts resulting from the last rate case. Although consistent with our guidance, The unfavorable rate case decision is the primary driver for the lower quarter over quarter results. The largest contributing factor is the discontinuation of the Four Corners and Ocotillo Accounting deferrals as those costs are now impacting the income statement without any new revenue to offset the costs. Other negative impacts include higher depreciation and amortization due to increased plant additions, higher income taxes and lower pension and OPEB non service credits. These negative impacts We're partially offset by lower O and M expense, higher transmission revenues and the continued strong customer and sales growth.

Speaker 3

Our lower O and M this quarter is driven by continued cost management as well as timing of planned outage schedules. We experienced 2.2% growth in the Q1, which is in the upper end of our guidance range of 1.5% to 2.5%. Additionally, Our weather normalized sales growth remains strong at 4.4%, which is above our guidance range. The 1st quarter weather normalized sales growth It's comprised of 3.5 percent residential growth and 5.2 percent C and I growth. Although the sales growth is stronger than expected, We are not changing guidance at this time, but we'll continue monitoring the usage trends and adjust as necessary.

Speaker 3

The strong recovery of the Arizona labor market 2021 is continuing into 2022. As a reminder, by July of last year, the Phoenix metro area had recovered all jobs lost during the pandemic. And by the end of 2021, Arizona was one of only 3 states that have recovered all jobs lost during the pandemic. In March of this year, Arizona unemployment rate fell to a historic low of 3.3% compared to the national average of 3.6%, which is the lowest state unemployment rate in nearly 50 years. Arizona continues to benefit from high net migration into the state.

Speaker 3

Compared to the rest of the U. S. In 2021, Arizona was the 3rd fastest growing state, Phoenix was the 2nd fastest growing metro area and Maricopa County was the fastest growing county. As a result of this continued strong population growth, Maricopa County Residential Housing Permits are off to another record start in 2022 and expected to have another robust year. While this growth is positive, It does not outweigh the negative impacts of the last rate case outcome.

Speaker 3

This growth underscores the need for substantial capital investment to keep up With the influx of customers in order to maintain grid reliability and resource adequacy and the need for reasonable and timely recovery of those investments. Lastly, our focus and progress on cost management continues to produce results. As a recent example, our transmission distribution teams began implementing mobile digital security stations at construction sites where multiple security guards have traditionally been used. Deployment of these stations is safer, more secure, more reliable than traditional security, plus the new practice has the additional benefit of reoccurring cost savings. This dedication to cost management is more important than ever as we are facing inflationary pressures across all areas of our business.

Speaker 3

While we expect our 2022 earnings results to remain in our guidance range of $3.90 to $4.10 per share, We are capturing the benefits of higher sales in the Q1 along with our continued lean sigma initiatives to mitigate the inflation headwinds so we can finish the year strong. All other aspects of our financial outlook remain consistent with prior guidance. We are confident that our laser focus on cost management combined with the key initiatives Jeff highlighted for 2022 support our commitment to provide long term value. We look forward to continuing to execute on our strategy and updating you on progress throughout the year. This concludes our prepared remarks.

Speaker 3

I'll now turn the call back over to the operator for questions.

Operator

Certainly. Ladies and gentlemen, the floor is now open for questions. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Your first question is coming from Julien Dumoulin Smith from Bank of America. Your line is live.

Speaker 4

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

Speaker 2

Hey, Julien.

Speaker 4

Hey, thank you. So first question here, how are you thinking about it, if at all, adjusting Your strategy in petitioning for recovery under the LSCR, the loss fixed cost rider here. After last year's request for an increase was rejected, I mean, is there some way to address the commission's thoughts and perspectives here in a more holistic way? Any thoughts or reactions after the May meeting or into the upcoming May meeting?

Speaker 2

Yes. I mean, we've got Julien, we've got the existing LSCR that's moving forward in the May open meeting. And then as you know, we've got a rate case filing that's coming up. We've been working with stakeholders on potential ways to address or other ways to deal with that, but that would be still be Prospective. So that would be something that would be coming in the next rate case.

Speaker 2

It would not really reflect the current LFCR mechanism.

Speaker 3

Yes. Julian, this is Ted. And just to be clear, the LFCR structural changes and therefore the accounting changes that were made, that was all factored into our guidance for the year.

Speaker 4

Right. Thanks for the clarity there. Yes, I'm curious. But you're working with stakeholders here to address that and that would be part of the rate case filing To the extent of which that you could come to us? Okay, excellent.

Speaker 4

And then just if I can pivot here slightly, I noticed you're still looking at moving ahead on Similar timeframe for the rate case despite admittedly these robust sales etcetera. Just can you talk a little bit about how both the DTI and inflationary elements as well as sales and or if you want to include LSCR in this Could influence rate case timing, if that at all is a consider or any of those 3 are considerations?

Speaker 2

Not going to be a consideration for rate case Timing, Tucson Electric has filed their notice of intent. So they're moving forward with the filing. Obviously, inflationary pressures Run Counter, it's a historic test year, so we'll see where probably not all that's going to get baked in, But that doesn't really affect our timing on moving forward with the mid year filing.

Speaker 4

Got it. It seems not it does The Tucson case in terms of their fairly parallel timeline it would seem.

Speaker 2

Yes. Excellent.

Speaker 4

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

Speaker 3

Okay. Thanks, Julien. Thanks, Julien.

Operator

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

Speaker 5

Hey, good morning everyone. Hope everyone is doing well.

Speaker 2

Hey, Nick.

Speaker 5

Hey, hey. So just the comments on resource adequacy, I just think are interesting. And you just remind us when is your next IRP filing and how the recent kind of tighter markets change your thinking on needing any new baseload generation in the 5 year window? And then just how are you feeling overall about summer from a capacity perspective? Are you sufficiently covered?

Speaker 5

Thanks.

Speaker 2

Yes. Let me start, Nick, and then I'll probably ask Jake to weigh in with some thoughts. So the RFPs are on a cycle where we are we do have An RFP that's moving forward, and we've got RFPs that we're closing. So we've generally got projects that are underway that are moving forward, multiple projects, And we have RFPs cycled, so the new projects come in before those projects are completed. So the RFP process, I think, It's working pretty well.

Speaker 2

The challenge in the West is there's really tight regional markets. So in a lot of cases where you'd go out and buy Cover yourself with purchases from others, that pool is shrinking. And so we have made procurements for this summer that are to help us Generally, keep our reserve margins intact, and we're looking pretty creatively at where we go procure those resources from. But ultimately, One of the things in the next 10 years that we really need to do is figure out how we align the West better with market structures. And you've got California Proposing to expand the energy imbalance market into a broader day ahead market.

Speaker 2

You've got other companies in the West that are looking at how you Do more market based structures with other states that are not there in California. So there's a lot of work that's being done right now in terms of looking at market options for the West. But As we move forward with that, that will enhance access to resources on a broader footprint I think we'll ultimately improve reliability, but we have to continue to procure because there's uncertainty in how that process is going to move forward and what the timing Yes. In terms of the summer, Jake, you want to just highlight where we are?

Speaker 6

We're in good shape, Dominic. Sure. Happy to make a couple of additional comments. Jacob Tetlow here. For summer of 2022, we are in good shape.

Speaker 6

We've already we have had some of the supply chain challenges that others have seen. Those impacts have all been mitigated. And so we're in good shape for 2022 and we're in good shape for 2023. You're going to see the RFP come out Later this year, and that will be really focused on 25 and 26 resources. So as you think about the near term, I would say we're in good shape.

Speaker 6

We know what those supply chain And then past that, we will be adding in the 2024, 2025, I'm sorry. I know that doesn't sound right. 24, 25 resources will come out of the next RFP cycle. So I would say we're in good shape and we've mitigated the known supply chain constraints And we're reaching out to all those different suppliers right now to ensure that we have time lines that we can work into our plans.

Speaker 5

Thanks. That's all super helpful. I guess just piggybacking off of that, as it relates to just coal piles, Are you having any kind of tightness there and any issues with procuring? Are you kind of fully covered? Maybe you can give us some color there.

Speaker 6

Yes. I mean, one of the benefits is our largest supply there would be our Four Corners power plant, which is actually essentially a mine mouth plant. So it has its own rail Right to the mine. So there's no issues there, and that's our largest coal resource. And on the Cholla Power Plant, they keep generally about a 3 to 4 month supply on the coal Kyle, so we don't have any risk there on the coal side.

Speaker 5

Thanks a lot. Appreciate it.

Speaker 3

Thanks, Nick. Thanks, Nick.

Operator

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

Speaker 7

Yes, thank you. First question, the very strong resi weather normal load that we saw this Even assuming the customer growth, I think the usage for customer was up pretty nicely. Just any color on what was driving that? Is Are we just seeing less of a move towards back to office in your jurisdictions? Or is it something else?

Speaker 7

And is it too early Just want to extrapolate this data point to future quarters.

Speaker 3

Yes. Thanks, Anshu. It's really about 2 parts Organic customer growth and 1 part higher usage per customer. So that raw growth largely due to net migration into the service It's really continuing to be the biggest driver. I was reading the Redfin report here recently that said Phoenix is 1 of top 2 cities people are looking to relocate to in the Q1 2022 and the most common origin was Southern California.

Speaker 3

And the article was referencing that even with higher mortgage rates, they actually think that will propel more growth because it will enable people to continue to Expand housing footprint by affordable housing with rising mortgage rates by leaving Southern California migrating to affordable Places to live such as Arizona and Phoenix. So that's a big part of what we're seeing in too.

Speaker 7

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

Speaker 3

Yes. At this point, we definitely feel good about our plan and our guidance. So no changes there. It is just the Q1 And that Q1 is relatively small compared to the others. So we'll continue to monitor as we progress through the year.

Speaker 3

Our guidance for O and M in 2022, as you know, is meaningfully lower than our O and M last year, but we are still confident to be managing within that range. And the higher sales growth is certainly helping to mitigate any unexpected inflationary pressures. So at this point, we feel good about the plan and we'll continue to I monitor both sales growth trends and cost management throughout the year.

Speaker 7

Understood. Thank you.

Speaker 3

Thanks, Insoo.

Operator

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

Speaker 8

Hey, how are you doing?

Speaker 2

Hey, Paul.

Speaker 8

So just What I wanted to touch base with you on is the legislature. There was a bill, I think it's 2,536, That doesn't seem to have gone anywhere. And I was just wondering if how you guys think the potential for a change In the in how the ACC is constructed and if there might how that If you have any outlook, I don't know if you do in terms of what might be going on there.

Speaker 3

Paul, which one? That's the one that

Speaker 8

basically that changes the ACC to More of an appointed situation. I think one of them let's get the details on it. I think one of them might be elected.

Speaker 2

Yes, they're moving pretty they're getting pretty late in session. So I don't think that's probably going anywhere.

Speaker 8

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

Speaker 3

Paul, all the economic development that we're seeing has really been part of our forecast. And when we think about reliability needs, We managed that to peak demand in the summer, which the economic development that we're seeing is largely factored into that forecast. We then add a reserve margin on The sales growth is really just detailing out how much energy around the clock you get, which is a little bit different than peak demand, The measure that we use to plan for resource adequacy. I will say though it underscores the importance of Palo Verde and Four Corners As we get through these hot summers, both units critical for not just Arizona, but the entire Southwest. In fact, Palo Verde Supplies about 70% of the entire Southwest region's carbon free energy through the summer.

Speaker 3

So, really, just underscores reports for those two assets for the region.

Speaker 8

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

Speaker 3

Yes. Thanks, Paul.

Operator

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

Speaker 9

Yes. Hey, good morning. Hey, David. Just a question on the upcoming rate case. You mentioned that your in state peers also moving forward to file.

Speaker 9

I'm just Curious if you see the possibility of a longer timeline of getting a final order than you would have otherwise just given The workload on staff and others, just thinking about how the timing of that final order would play into the EPS CAGR you all have?

Speaker 2

David, it's early in the process. I mean, one of the things that is important to recognize with the They've got a steady pace of rate cases. There's a tremendous number of water companies here in the state. And so there's always a Pretty steady drumbeat of cases that move through. Certainly, our case and Tucson Electric and some of the larger companies, Southwest Gas are bigger, More intensive rate cases, but they've got a hearing division down in Tucson, there's hearing division up here.

Speaker 2

So I don't see anything right now where I'd call that the fact that there are 2 cases together would affect the timing.

Speaker 3

Okay,

Speaker 9

great. And then just related to the case again, just how are you thinking about potential size of the ask Mitigating impacts to customers, particularly as you're dealing with the inflationary environment on things like fuel and the like. And I know it's just been a big focus at the commission, so just any comments you

Speaker 6

have there would be great.

Speaker 2

Yes. We're always very sensitive to how to balance those issues And look for those opportunities. Frankly, we've done that in the rate design in terms of providing customers choices to move on to different rate plans that provide different to save based on selections that they want to make, but also we want to look at things that we can Bacon is the case to get that kind of optionality. So something that we're aware of, obviously, we're across the service industry. So You do the math and a lot of this is about investments that we've made to support reliability and serve the customers that we have.

Speaker 2

The growth helps because we have a bigger Kind of kilowatt hour base to spread those costs on, but you still need to reflect the cost of the service that go And to calculate on revenue requirement. But yes, absolutely, we're looking at all that.

Speaker 9

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

Speaker 2

Yes, I think that's right. And obviously, I think hopefully, you saw I know that's getting a lot of attention right now and hopefully, you saw and we appreciate Senator Cinema Along with some other congressional legislators submitting comments to the Department of Commerce to urge that that Process moved quickly because it is creating uncertainty in the industry, but we're moving forward with the projects that we've got under contract.

Speaker 6

Okay, great.

Speaker 9

Thank you, guys.

Speaker 3

Yes, David.

Operator

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

Speaker 10

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

Speaker 2

Hey, Anthony. Hey, Anthony.

Speaker 10

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

Speaker 2

I don't know if I'd walk through hypotheticals. I mean, we're pursuing the appeal. We think we've got A solid case. I think, Anthony, your fuel security is part of that. It's less about the foreign fuel security.

Speaker 2

In fact, we've got High capacity market here in the Desert Southwest, that power plant, which is a large power plant, could not operate if we didn't have those SCRs on it. It's critical now. Ironically, it is in the money right now because of the high natural gas prices. Regardless of the economics, we couldn't maintain reliability of the system without Four Corners and we can't run Four Corners without the SCRs. And so for fuel security for us, we needed to have that power plant, which is why we went through the entire process from acquiring the Addison share to investing in the SCRs to making that plant reliable through the summer.

Speaker 2

So again, we think the appeal is The appeal will reflect that. What happens down the road, I just I don't know how you can speculate on that.

Speaker 10

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

Speaker 3

Yes. Thanks, Anthony.

Operator

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

Speaker 9

Yes. Thank you.

Speaker 11

Just regarding the LFCR mechanism, Are you expecting any changes to that? And do you expect anything on that topic to come up at the May meeting The commission?

Speaker 2

Yes. I mean, there's I think there were a couple of amendments that were floated before that. That was pulled from the last open meeting. There were a couple of Proposed amendments that were floated, I think they probably have to refloat those as they go up. But I think most of the discussion is likely to be in how In the next rate case, this mechanism gets addressed.

Speaker 2

Since it was established in a prior rate case, You really would address structural changes like that in a rate case.

Speaker 11

Okay, thanks.

Speaker 3

Yes. Thanks, Greg.

Operator

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

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