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Pinnacle West Capital Q4 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Amanda Ho
    Director, Investor Relations
  • Jeffrey B. Guldner
    Chairman of the Board, President and Chief Executive Officer
  • Andrew D. Cooper
    Senior Vice President and Chief Financial Officer

Presentation

Operator

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2022 Fourth Quarter Earnings Conference Call. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Amanda Ho
Director, Investor Relations at Pinnacle West Capital

Thank you, Matt. I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 2022 earnings, recent developments and operating performance.

Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Andrew Cooper; Ted Geisler, APS President; Jacob Tetlow, Executive Vice President of Operations; and Jose Esparza, Senior Vice President of Public Policy are also here with us.

First, I need to cover a few details with you. The slides that we're using are available on our Investor Relations website, along with our earnings release and related information. Today's comments and slides contain forward-looking statements based on current expectations and actual results may differ materially from expectations. Our annual 2022 Form 10-K was filed this morning. Please refer to that document for forward-looking statements, cautionary language, as well as the Risk Factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosure. 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 March 6, 2023.

Now I will turn the call over to Jeff.

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Thanks, Amanda, and thank you all for joining us today. Good morning. In looking back on 2022, it was no doubt one of our most challenging years in recent memories. We faced major financial headwinds and a financial reset resulting from the outcome of our last rate case. I'm going to provide several updates today and share the successes we were able to achieve despite the challenges we faced.

Coming out of the last rate case, we laid out a comprehensive plan and strategy and we met we're exceeded nearly every target we set for ourselves, including delivering strong service reliability to our customers. We made significant progress in the last year, but we're not done and we look forward to continuing to execute our plan.

Turning now to regulatory, we came out of the last rate case fully committed to improving our regulatory relationships and we've seen progress as a result of our focus in that area. We received constructive decisions for all key items heard by the previous bench during 2022, including our financing application last December.

We started 2023 with two new commissioners and a new chair. Commissioner Thompson and Commissioner Meyers joined the bench in January and Commissioner O'Connor was elected Chairman. We've already seen constructive actions and decisions by the new bench, including the creation of a docket to examine ways to reduce regulatory lag. We believe that these conversations are important and we look forward to working with the commission on thoughtful solutions.

For our pending rate case, the Administrative Law Judge issued a procedural order in December outlining the schedule. The first round of staff and intervener testimony is due in May with the hearing set to commence in early August. We look forward to working with the parties and the commission through the rate case process and in gaining additional regulatory clarity. Our number one goal continues to be to be doing what's right for the people and prosperity of Arizona, which includes working collaboratively with the commission and building a more constructive relationship.

Turning to the operations side, I want to start by recognizing our field team's exceptional execution in 2022, I'm especially proud of our employees for prioritizing safety and ending the year with significantly lower employee injuries. Three low energy SIPs and our lowest number of OSHA recordable injuries on record. We had one of the most hazardous and damaging summer storm seasons in recent history, where we saw a record number of poles damaged, and for context, we replaced over 800 poles, which is about 500 more than an average summer.

In addition, while parts of the Southwest region experienced capacity shortages again in 2022, our careful long-term planning and resource adequacy allowed us to serve our customers reliably. Additionally, we remain engaged in the western wholesale market, which allowed us to make offsystem sales and to create savings for APS customers. Importantly, those offsystem sales directly benefit APS customers by lowering our overall costs, while helping maintain regional grid stability. And finally, our generation units performed extremely well with our non-nuclear fleet, recording its summertime equivalent availability factor, EAF, of 95%, and we achieved a capacity factor of 100.2% at the Palo Verde Generating Station.

We recognize the importance of creating customer value and remain focused on improving our customer experience. Our employees are committed to putting customers first and working towards our goal of achieving an industry leading best-in-class customer experience. As a result of this commitment, we made extraordinary progress on that front in 2022 with APS earning ratings from its customers, making it among the most improved utilities in the nation for both residential and business customer satisfaction measured by J.D. Power.

Compared to 2021, APS achieved quartile gains in every single driver of residential and business customer satisfaction, firmly lifting the company into the second quartile nationally for residential customers and the first quartile nationally for business customers. Consequently, overall satisfaction is now well above industry benchmarks when compared to the company's large investor owned peers. We also continue to make progress on our resource procurement and clean energy commitment. Since announcing our goal to reach 100% clean carbon-free energy by 2050 three years ago, we've procured over 2,100 megawatts of clean and affordable energy resources.

Additionally, as previously discussed, we issued an all source RFP last year for another 1,000 to 1500 megawatts of new resources to be in service from 2025 to 2027, and we continue to work through finalizing procurement decisions from that RFP. These substantial investments are essential resources designed to help us keep pace with Arizona's tremendous growth. At the same time, electricity capacity markets are tightening across the entire west.

Looking forward, our goals for 2023 include continuously improving our customer communication and engagement, achieving a constructive outcome in our pending rate case and reliably serving customers through the tremendous growth in our service territory. And I want to once again recognize the near-term headwinds that are created by the unfavorable outcome of our previous rate case and how it will continue to make 2023 challenging. However, we believe in our ability to provide long-term value to both customers and shareholders, and we look forward to executing our plan and continuing our proven cost management efforts all against the backdrop of Arizona's extraordinary economic expansion.

So I want to thank you for your time today and I'm going to turn a call over to Andrew, who'll talk about our fourth quarter and full year 2022 earnings and our forward-looking financial expectations. Andrew?

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Thank you, Jeff, and thanks again to everyone for joining us today. This morning, we reported our fourth quarter and full year financial results for 2022 and introduce guidance for 2023. I will cover our results and provide additional details around the financial outlook for 2023 and beyond. As Jeff discussed, we remain in our period of financial reset during the near-term. But right up front, I want to make clear that while we are navigating through challenges brought on by the negative outcome of the last rate case, we have been executing well on our plan and we remain confident in our ability to create renewed growth and deliver strong shareholder returns.

For the fourth quarter of 2022, we lost $0.21 per share down $0.45 compared to fourth quarter 2021. The unfavorable rate case decision and reduction in net income from no longer deferring the cost related to the four quarters' SCR and Ocotillo modernization project have been the primary driver of lower results all year, and that remained the case for the fourth quarter.

The quarter also included a $17.1 million impairment charge relating to a Bright Canyon Energy equity investment. This was a legacy investment by Bright Canyon for a minority stake in a wind farm in the fourth quarter. We determined that impairment of the investment was appropriate due to ongoing disputes on transmission cost allocation and a lack of a probable favorable outcome. Other negative impacts included lower LFCR revenues, higher O&M and higher interest expense.

Favorable weather and customer and sales growth were partial offsets to the negative drivers in the fourth quarter. For our full year results for 2022, we earned $4.26 per share down from $5.47 per share in 2021. We ended the year in line with our updated full year guidance. As noted earlier, the negative rate case outcome drove a financial reset and is the primary driver for the lower year-over-year results. The Bright Canyon impairment charge, higher O&M and higher interest expense for other negative drivers for lower year-over-year results. For the year, we saw beneficial weather as well as customer and sales growth that partially offset the negative drivers.

Turning to customer growth, the fourth quarter remained in line with our guidance at 2.1%, which was also the customer growth rate for the full year. Arizona continues to be a popular destination for relocation and has the fifth highest population growth in 2022 according to recent data from the U.S. Census Bureau. Arizona has continued to show strong employment growth, including in emerging areas of economic diversification with manufacturing employment, for example, growing at 6.2% in 2022 as compared to a U.S. rate of 3.8%.

We also continue to experience strong weather normalized sales growth. Sales increased 1.2% in the fourth quarter relative to the prior year, and for the full year 2022, our weather normalized sales growth was 2.4%, in line with our upwardly revised guidance range. This was anchored by strong C&I growth of 4.6% over 2021, as the benefits of Arizona's increasingly diversified economy are realized. In fact, Phoenix Metro was recently named a top three industrial market to watch in 2023, according to a JLL Tenant Demand Study that evaluate 60 U.S. markets.

Moving on to our financial outlook, our 2023 earnings guidance range is $3.95 to $4.15 per share. Although this is a decline from 2022 actual results, the range is comparable to our weather normalized 2022 guidance range of $3.90 to $4.10 per share. We forecast steady customer growth and robust sales growth ahead in 2023. Headwinds for 2023 include higher benefit expense, interest expense and plant D&A.

We continue to target declining O&M per megawatt hour and believe our proven track record of cost management and lean initiatives will help us successfully navigate through this inflationary period. We continue to have the strong focus on O&M and look for opportunities to create efficiencies, reduce risk, and keep our costs low to maintain affordable rates for our customers.

Looking at our forecast of customer growth, we expect it to remain strong and are maintaining the 1.5% to 2.5% guidance range for 2023. On sales growth, we expect continued strength, particularly in the C&I segment as economic diversification takes hold in areas such as semiconductor hubs, other large manufacturing and distribution. In fact, TSMC recently announced plans to build a second fab at the North Phoenix location, increasing its original $12 billion investment to $40 billion.

TSMC estimates the site will employ 4,500 permanent jobs and increase from the earlier projection of 2,000. In addition, Procter & Gamble also announced plans for a $500 million investment in a manufacturing facility creating 500 new jobs. Anchored by examples like these, we are expecting our weather normalized sales growth range to be 3.5% to 5.5% for 2023.

Turning to pension, as a reminder, our pension is 106% funded with no expectation for contributions needed in the near-term. We remain committed to the long-term benefits of our liability-driven investment strategy and the reduced volatility of a fixed income weighted portfolio. Nevertheless, we are expecting a headwind in 2023, primarily resulting from the net effect of higher discount rates.

Higher benefit expense in 2023 is also impacted by negative 2022 investment returns and is partially offset by the impact of higher expense returns on assets in 2023. All-in, we expect benefit expense to be $0.33 headwind for 2023 as compared to 2022. However, we continue to evaluate options for regulatory recovery of higher benefit expense.

Turning to interest expense as a federal reserve continues to raise interest rates to try to combat inflation, we are closely monitoring our financing needs. I would highlight that we do not have any maturities until mid-2024 that we do expect higher interest expense year-over-year. We've also updated our capital plan to $5.3 billion from 2023 to 2025 with rate-based growth at an average annual growth rate of 5% to 7%.

Importantly, the increase in capex is independent of any rate case outcome and is directly related to more growth and the needed investments we are making in more resilient infrastructure. This update is needed simply to keep up with that growth and reliably to serve customers. We have also updated our financing plan to meet the demands of our updated capital plan. We are continuing to defer any equity issuance until resolution of the current rate case and remain focused on achieving a constructive regulatory outcome.

The rest of our financial outlook remains consistent. Our outlook includes long-term earnings growth of 5% to 7% off the midpoint of our weather normalized 2022 guidance range. We have a track record of dividend growth and the board recently raised our quarterly dividend to $0.865 per share. While our current payout ratio is higher than our target, we believe our plan will allow us to achieve our long-term dividend payout ratio of 65% to 75% in the future.

Recognizing that all future dividends are subject to approval by our board, we have a path forward that is centered around our long-term track record of constructive rate case outcomes and robust service territory growth, continued balance sheet strength and cost discipline, and a focus management team that is taking action. We look forward to building on the great work we were able to accomplish in 2022 and executing on this plan in 2023.

This concludes our prepared remarks. I'll now turn the call back over to the Operator for questions.

Questions and Answers

Operator

[Operator Instructions] Your first question is coming from Julien Dumoulin-Smith from Bank of America. Your line is live.

Dariusz Lozny
Analyst at Bank of America

Hi, good morning, this is Dariusz for Julian. Just starting off, I wanted to touch on the financing plan a little bit, recognizing that you won't need equity or won't be issuing equity until after the current rate case. Can you just maybe help us think about how you're looking at future equity needs beyond dependency of the rate case in '24 and '25 in particular in the context of this higher capital plan?

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Sure, Dariusz. This is Andrew. As you noted, we do have an equity need in the plan there, that $400 million to $500 million of equity in 2024 and that that's really setup to make sure that the APS equity layer is appropriately capitalized, coming out of the rate case given some of the debt that we're creating APS in the near-term. Any future equity needs will really be dependent on the capital plan that we develop after the rate case concludes. As I mentioned earlier, the capital that we've added into the plan here is really dependent on load growth and serving the service territory as it expands. Once we get through the rate case and think about, for example, our clean capital spend, that'll be an area, where as we -- with a constructive outcome consider a different ratio of self-bill versus PPA assets. We will look at the financing plan at that point to make a determination. We'll also be looking for feedback from the rating agencies on our credit metrics at the conclusion of the rate case to figure out the right capital plan for the years beyond 2024. But as of now, the need for 2024, that $400 million to $500 million post the rate case says is intact.

Dariusz Lozny
Analyst at Bank of America

Excellent, thank you. And maybe if I can touch on the robust load growth forecast that you guys have out there and then you updated this morning. Can you maybe just discuss a little bit about what your level of visibility is, on the contribution to that load growth other than TSMC? I know you mentioned a couple of other large customers coming online over this period. And also within the context of your 5% to 7% EPS CAGR, can you maybe discuss how much if any delays could be absorbed to the large TSMC project that would still allow you to maintain that 5% to 7% within this forecast period?

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Sure, Dariusz. So the forecast is driven by a diversified group of manufacturing, data center customers, and some of the overall C&I growth that we're seeing in the service territory. It's a pretty different economic story than it's been in the past. As far as the factors contributing to growth here, we're not really depending on the broader macroeconomic story as much as specifically identified customers, which include TSMC. And it's a considerable part of that 2% to 4% of the 3.5% to 5.5% that is from the large customers. TSMC is a considerable part of that, but there's data center customers and other manufacturing there as well. So it's pretty diversified on that front. The 5% to 7% earnings growth rate is through 2026, and that's pretty much coterminous.

The sales growth rate -- the long-term sales growth rate that we have here is through 2025, but roughly, similar trends through that -- through that forecast period. And as you've seen even in 2022, that sales growth is certainly helping us to mitigate the inflation and some of the O&M pressure that we're seeing. And we'll continue to work both those cost levers and keep a close eye on the macroeconomic environment and the specific customers as well as we go through the forecast period.

Dariusz Lozny
Analyst at Bank of America

Okay, great. Well, thank you for that in detail. I'm looking forward to catching up later on the week.

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Thanks, Dariusz.

Operator

Thank you. Your next question is coming from Shar Pourezza from Guggenheim. Your line is live.

Shar Pourezza
Analyst at Guggenheim

Hey, guys.

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Hey, Shar.

Shar Pourezza
Analyst at Guggenheim

Good morning, Jeff. Let me ask you -- so Jeff, you've historically have said that, you're under investing in APS by maybe roughly a tune of $200 million to $300 million per year. Is that still the case? I mean, obviously from your prepared remarks, it sounds like the $600 million you guys just bumped up in capex is sort of agnostic to APS and base level spending. But I'm just kind of curious if you take this increase layered in with what you said you've underinvested in the system, how do we sort of think about the two together?

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Yeah, and sure, I wouldn't say, we've underinvested in the system. I mean, as you know, we've been keeping up with what we need to invest in for load growth. We're the -- where the opportunity is, is around the generation side and where there are opportunities, particularly now with the tax credit framework that the IRA has setup, that there are opportunities for us to do more optimized mix of self-build. Obviously, it wouldn't be a 100% utility owned, but we are doing probably what entering the 25% range of utility owned. We're a more rationalize, I think if we could do it would be in the 50% range. So that we're actually being able to maximize the benefit of those tax credits for customers. So a lot of this opportunity is really going to depend on how the rate case outcome goes.

We've got the clean tracker proposal that would take our renewable energy adjustment charge and allow us to again, flow through some of those clean investments. And if we can do that, then we get to a more optimized mix of utility owned versus PPA, solar and storage primarily is, is what I think you would expect to see. But a lot of what you're seeing is just the investment that we have to make for load growth. And so I think what you were getting at is that there's an ability to further optimize that after the rate case and looking at that mix of generation, but we're going to invest what we need to invest in the poles and wires and the infrastructure to serve customers.

Shar Pourezza
Analyst at Guggenheim

Got it. Yeah, I was just more curious on that $200 million to $300 million you've quoted before in the past and how that correlates with the capex increase today. And then just on the capex increase, where does that sort of put you around that 5% to 7% rate based growth range that you have out there now, the $600 million?

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Yeah. So that -- you saw the upper end of that rate base growth number come up with this year update and that's really the result. Like, we -- there's a much narrower range of rate-based growth with the prior forecast chart and you could think about it as -- more expanded range. I don't think there's a broader range of uncertainty just with the capex we have in there more of an opportunity. You've seen some of the timing move around in our capital. Jeff was just talking about our claim spend. You've seen some of those buckets move from '24 into '25 with the addition of the '25 forecast. So there's some timing around some of our capital investments and some of the decisions we need to make. But that's really been the main thing is the increase in the range driven by the higher capex forecast.

Shar Pourezza
Analyst at Guggenheim

Got it. Okay. And then just lastly, if the court of appeals were to rule in favor regarding the Four Corners SCRs and the Ocotillo projects, what would that look like, I guess from an EPS standpoint in '23? Would it be retroactive and what would the incremental EPS be going forward since you only obviously report GAAP results? Thanks.

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Sure. So any decision at the court of appeals if it were positive, just to say, sure, it would be remand to the commission for further action. So there wouldn't be really anything done retroactively. All I can really give you is sort of the rule of thumb. You're talking about a roughly $200 million disallowance and capital structure that's in the 50-50 range applying ROE to that. And that kind of gives you, the rough EPS impact of beginning to recover on that. The timing of that would be dependent on future action of the ACC if there were a positive outcome.

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Yeah. I'm sure, I remember too that, that they may -- there may be a further appeal so the court of appeals, if they issue a ruling, it's -- if it goes in our favor, I can see the Sierra Club taking that up and seeking Supreme Court review. So that could add some additional time on, but ultimately, as Andrew said, it's going to end up back at the commission.

Shar Pourezza
Analyst at Guggenheim

Okay. Perfect. That's fantastic. I'll see you guys soon. Appreciate it.

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Yeah. Thanks, Shar.

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Thanks, Shar.

Operator

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

Anthony Crowdell
Analyst at Mizuho Securities

Hey, good morning. Thanks so much for taking my questions. Just a couple of them. First off, anything management could do to help mitigate the volatility in the pension expense?

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Sure, Anthony, it's Andrew. As I mentioned, we're going to look at all the options including around regulatory or recovery. Our priority in the rate case is a constructive outcome, and we'll look at pension when we go into a rebuttal strategy. As you know, one of the various levers that we need to think about in what a constructive outcome looks like, but it's not the only lever and it's not the only cost that we've got to deal with. So there's certainly precedent where there's a split test here to look at pension expense from a -- what is now a historical period. And that's something that we'll consider as one of our options. In the last rate case, we averaged the two years surrounding the split test year, but regulatory recovery remains one path that we continue to look at.

But then of course, any of the levers we have around our other costs O&M and interest expense, all those things that we can do there to make sure that we meet our forecast. That's really the focus. We're -- as I said earlier, we're committed to the pension strategy. 2022 all asset classes for the most part face losses and discount rates went up precipitously. And so we're just -- we're living with the reality of that and mitigating it as best we can.

Anthony Crowdell
Analyst at Mizuho Securities

Great. And if I could jump on Shar's, I believe it was a question Shar asked about, I think you're looking for more clarity from the rate case where you potentially may see more clean generation spending. Is it just comes down to the clean track of proposal needs approval? Is that what investors should be focused on to see if we do get more clean generation spend?

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

No. Anthony, it's more -- I think it's, it's a, a little more than that. I mean, it really is looking certainly a clean tracker particularly as a potential vehicle to give the tax credit -- the tax credit attributes back to customers in a more contemporary manner. I mean, that makes a lot of sense to us as a way to optimize the getting a little bit more utility owned generation in the mix. But it's going to be the overall framework that really drives what we do, right? Like you -- we'll look at the results of the case and figure out how we optimize the mix of both the PPA and then the utility owned generation in storage resources. And so, can't really flag what that looks like here, but we have opportunity, I think, to get a more optimized mix for customers than we're seeing now and just because of the last rate case. We are not able to do utility owned assets at the level that we think is probably optimal.

Anthony Crowdell
Analyst at Mizuho Securities

Great. And just lastly from the disallowances on the coal capex and it's currently an appeal, does the company get recovery of the operating expenses associated with what the capital that was disallowed? I'm sure there's additional capital with running these SCRs? Do you recover the expenses associated with that, whereas if you do prevail in the appeal court, that that also could be a potential tailwind in earnings?

Andrew D. Cooper
Senior Vice President and Chief Financial Officer at Pinnacle West Capital

Yeah, Anthony, we do get recovery on the cost. And in fact you saw the results year-over-year impacted by those costs kind of coming into our income statement without offsetting revenue. So what you'd really see, if there were a positive outcome would be the recovery on the investment in there alongside the cost.

Anthony Crowdell
Analyst at Mizuho Securities

Great. Thanks for taking my questions. I appreciate it.

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Yeah. Thanks, Anthony.

Operator

Thank you. [Operator Instructions] Your next question is coming from Nick Campanella from Credit Suisse. Your line is live.

Nicholas Campanella
Analyst at Credit Suisse Group

Hey, good morning, everyone.

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Hey, Nick.

Nicholas Campanella
Analyst at Credit Suisse Group

Hey. So I guess just starting on '23 drivers, what was just the driver of the lower tax rate? I think it's 10% versus last year was closer to 14%. Can you just update us on that?

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

I think the, the lower effective tax rate has an kind of -- there's a combination of factors in the lower overall tax rate. And there's a kind of -- there's a variety of puts and takes in there around tax credits and the like.

Nicholas Campanella
Analyst at Credit Suisse Group

Okay. So possibly just tax credit-driven. And then on your just credit outlook, I think you kind of mentioned in the deck 16% to 18% range. Where did you end the year? And then what's the feedback from the agencies been in terms of what are they looking for before moving on the negative outlook and is it GRC-related? Is it numbers related? And what's your willingness to defend the Ba1 Rating here if you have to?

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Yeah, Nick. So the agencies will calculate, and I don't think they've all put out how they view the -- debt number at year end. The 16% to 18% is sized around, where the agencies would like us to be today. You saw both Moody's and Fitch this month reaffirm their current outlook include -- their current ratings as well as the negative outlook. And you could -- you take a look at their positions, but ultimately absent some exogenous factor, they're really looking to see the rate case outcome to make a determination about the ratings and any future changes they'd make to the downgrade thresholds. We're committed to that 16% to 18%. That's what keeps us in our -- to the last part of your question, that's what keeps us in our current category. You've got Moody's with 18% threshold right now and S&P with a 70% -- 17% to keep us at our current rating in return to stable 13% for a downgrade, though they are one notch lower right now. And so we use that 16% to 18% target to keep to the current ratings. We'll have to see, as I said, after the rate case if the rating agencies readjust at all what their targets are for downgrade.

Nicholas Campanella
Analyst at Credit Suisse Group

Okay. And then just one last one for me, in your prepared remarks upfront, you kind of mentioned this regulatory lag docket, what's the outcome that stakeholders are trying to solve for here, and what are some of the mechanisms you're exploring? If you can maybe update us on that?

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Yeah, Nick. I think it was just more of an indication of the new commissioners coming in, I think both of which had indicated that they don't like being one of the lowest, if not the lowest rated commission in the U.S. from like RA. And so this was an effort to begin to talk about, the things like for testers and other things that you typically see discussed in other jurisdictions. So it's a little early to see exactly what will come from it. I think, again, the tone is good, because it's an indication of, there is benefit to customers from having a good performing utility. And I think we saw that come out loud and clear after the last break case outcome. And I think that's a recognition of let's talk about in a public stakeholder driven way, what some of those mechanisms are. So I think that's a positive sign, but it's pretty early in the process right now.

Nicholas Campanella
Analyst at Credit Suisse Group

All right. Well, thanks so much for answering my questions.

Jeffrey B. Guldner
Chairman of the Board, President and Chief Executive Officer at Pinnacle West Capital

Yeah, you bet, Nick.

Operator

[Operator Closing Remarks]

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