Pinnacle West Capital Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

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

Analysts

• Dariusz Lozny, Bank of America Co.
• Alex Mortimer, Mizuho
• Paul Patterson, Glenrock Associates
• Jamieson Ward, Guggenheim Partners

Presentation

[Operator]

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2023 Second 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 of Investor Relations at Pinnacle West Capital]

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our second quarter 2023 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; and 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 will be using are available on our Investor Relations website along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations and actual results may differ materially from expectations. Our second quarter 2023 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language, as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through August 10, 2023.

I will now turn the call over to Jeff.

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

Great. Thanks, Amanda. Thank you all for joining us today. Although our second quarter financials were negatively impacted by significantly mild weather in June as well as higher operating expenses, we have updated our full year 2023 guidance to take into account the settlement that was reached between APS and the Commission on the SCR matter. Before Andrew goes through the details of our second quarter results and updates to our 2023 full year guidance, I'll just provide a few updates on a recent operational and regulatory developments.

Starting with operations. As we progressed through the summer season, I'm very proud to say that our team continues to excel in delivering reliable service to our customers. The Palo Verde Generating Station successfully completed its planned refueling and maintenance outage for unit one on May 13th. Additionally, we commissioned the remaining 60 megawatts of energy storage at our AZ Sun sites. So that totals now 201 megawatts of APS-owned storage installed this year, and 150 megawatts of APS-owned solar at the Agave solar facility. These are all valuable resources to help serve our customers through the summer season.

In fact, while the second quarter was marked by extremely mild weather, as I think all of you probably know, July certainly heated up. Our robust planning, resource procurement efforts and our dedicated team have allowed us to provide exceptional service to our customers throughout this unprecedented heatwave. Phoenix experienced a record number of consecutive days of over 110 degrees, shattering prior records for daytime highs, or evening lows, for days over 110 degrees. And the APS team served its customers with top-tier reliability throughout it all.

In fact, we broke our previous peak demand record multiple times this July, reaching a new all-time record on July 20th at nearly 8,200 megawatts. That's a 500 megawatt increase compared to our prior record that was set in 2020. I want to recognize our operators and our field teams for doing such an exceptional job in making sure that customers continue to have reliable service through this unrelenting heat.

As you know, APS planned years in advance to continue serving customers with reliable and affordable energy, our resource planners to secure a diverse energy mix to meet demand, like solar and wind power, battery energy storage, and our APS-operated Palo Verde Generating Station, which is still the largest nuclear plant in the U.S. and the country's largest producers of clean energy. When temperatures caused demand to increase, APS's strength and resilience comes from using flexible resources like natural gas to keep homes and businesses cool over long stretches of extreme heat.

Another important tool that I want to highlight and that we utilize is our Cool Rewards demand response program, it's in its fifth year of operation. That program essentially operates as a virtual power plant where our customers provide over 110 megawatts of flexible clean capacity. The program connects nearly 80,000 APS customers with smart thermostat technology that helps them save money, while also playing an integral role in conserving energy when the demand on the electric grid is at it's highest. This partnership helps us ensure reliable, uninterrupted service to our customers on the hottest Arizona days, while also assisting us in our journey to 100% clean and carbon-free electricity by 2050.

So, you see, we've taken all of the above approach to provide the most affordable and reliable service when our customers need us the most. And as part of our vigorous planning, we recently issued an all-source RFP for another 1,000 megawatts to be online between 2026 and 2028. We are seeking the best combination of resources to serve our customers reliable -- reliably, while not sacrificing affordability and continuing to build towards our clean energy future.

Additionally, we continue to remain focused on providing exceptional customer service. Our J.D. Power -- JDP residential rankings for overall customer satisfaction have steadily improved over the past two years. And I'm proud to share that the latest JDP residential 2023 second quarter results have placed us back in the first quartile compared to our peers. APS's strongest performing drivers in the latest survey were customer care, both phone and digital, power quality and reliability and corporate citizenship. We've made remarkable progress over the past few years, moving from fourth quartile to first. And that progress would not have happened without the dedication and commitment of our hard-working employees across the company. I look forward to continuing to provide exemplary service to our customers in the future.

Turning to our regulatory updates. Last quarter, I spoke about the appeal of our last rate case and the favorable Court of Appeals decision. The Commission directed its legal staff to enter into negotiations with the company. And in June, we reached an agreement with the Commission's legal staff on how to implement that decision. The joint resolution was then approved at the June open meeting and it created a court resolution surcharge that started on July the 1st. We're pleased that we were able to reach an agreement with the commission in a reasonable and expeditious manner to resolve this issue. And as I've mentioned previously, the Four Corners power plant is a critically important reliability asset for the entire Southwest. And the investment in SCRs was required to keep that plant running under federal law. Andrew will address the financial impacts from this decision here in a few minutes.

On our rate case, we are almost done with all rounds of written testimony. Our rejoinder testimony is due tomorrow. The hearing is scheduled to begin on August 10th, and we look forward to working through that process and resolving this rate case in a timely and constructive manner.

We've made solid progress through the first half of this year, improving our customer experience, enhancing our stakeholder relationships and executing on our regulatory matters. There's certainly more work to do. But I think this is a good opportunity to acknowledge the team's dedication and early accomplishments here in 2023.

And with that, I'll turn the call over to 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 released our second quarter 2023 financial results. I will first review those results, which were negatively impacted by extremely mild weather and provide some additional details on the various drivers for the quarter. I will also provide an update to full year 2023 guidance.

We earned $0.94 per share this quarter, down $0.51 compared to the second quarter last year. Weather, specifically during the month of June was the primary driver for the lower year-over-year results. June 2023 was the mildest since 2009, with an average daily temperature slightly below 90 degrees. This resulted in a $0.25 year-over-year drag from weather compared to Q2 last year, which was -- which notably included an above-average contribution from June 2022's hot weather.

Higher O&M, interest expense and depreciation and amortization, and lower pension and OPEB non-service credits were other negative drivers, partially offset by higher transmission revenues and LFCR revenues. O&M was $0.21 higher year-over-year, or $0.14 excluding RES and DSM. We have experienced year-over-year increases to most of our O&M categories due to inflation and high customer growth. We've seen inflationary impacts in areas including chemicals, materials, insurance, and wage rates.

Of the $0.14 Q2 headwind, O&M associated with our generation fleet constitutes $0.10. And for the first half of the year, generation fleet O&M has been a $0.21 drag. Prioritizing the needs of our generation fleet to ensure reliability for customers has been essential to our summer preparedness strategy. The importance of this prioritization was as clear as ever as our team successfully ran our fleet during the month of July.

In addition, as Jeff mentioned, July weather was record-breaking. And similar to past years, the weather benefits have allowed us to flex up to derisk future spending. Based on the O&M trends we are seeing, we are increasing our O&M guidance range for 2023 to $915 million to $935 million. Importantly, even with this update, we anticipate our O&M per megawatt hour to be flat to last year, and we maintain our goal of declining O&M per megawatt hour into the future. We continue to look for opportunities to create efficiencies, reduce risk, and keep our costs low to maintain affordable rates for our customers.

Turning now to customer growth. We continue to be in line with expectations. Customer growth remains at 2% for the second quarter. The fundamentals for customer growth remained strong in our service territory, and Arizona continues to be a popular migration destination. Redfin.com noted in May, that Phoenix led the nation in housing markets, its users were most interested in moving into. The cost of living in Arizona and the Phoenix Metro area still compare favorably to many Western markets. So we continue to project steady population growth and corresponding APS customer growth, largely driven by net migration.

However, weather-normalized sales growth for the quarter was 0.1% compared to last year. Although we continue to see steady C&I sales growth, which came in at 2.2% for the second quarter this year versus last year, overall sales growth has been slower than originally anticipated. We continue to monitor our extra high load factor customers as they ramp up. And in fact, Taiwan Semiconductor recently announced a delay in the opening of their first chip factory.

With the flat year-over-year sales growth in the quarter and slower ramp up of these larger customers, we are revising our sales guidance range to 2% to 4% for 2023. Because sales from these larger customers contribute a lower margin, the change to our sales growth guidance has a disproportionately smaller impact during this expectations. Over the longer term, we continue to forecast a strong contribution to sales growth from advanced manufacturing and other large customers, though the variable remains to speed of their ramp-up.

Turning to our 2023 guidance for EPS. With the approval by the Commission of the joint resolution of the 2019 rate case appeal, on July 1st, we began collecting a corresponding surcharge with an annualized impact of approximately $52.5 million. This surcharge includes both a prospective and historical portion and it's collected through a per kilowatt hour charge. Taking all financial drivers into account, including this additional revenue, July temperatures with normalized weather thereafter, anticipated lower sales growth and the higher O&M trends mentioned earlier, we now expect our new EPS guidance range to be $4.10 to $4.30 per share for the year. We look forward to continuing to execute on our strategy and on the next phases of our pending rate case process.

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

Questions and Answers

[Operator]

Certainly. Everyone at this time, we'll be conducting a question-and-answer session. [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]

Hey guys, good morning. This is Dariusz on for Julien. Thank you for taking the question. Just wanted to start off on the rate case, if I could. Staff obviously came out with a recent round of testimony and specifically the generation rider that you've proposed and revised during the course of the rate case. Just wondering if you could comment on staff's [Phonetic] latest views there. And in the event that that rider isn't ultimately supported by the Commission in this rate case outcome, how that might affect your procurement/capital strategy going forward?

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

Yeah. Hey, Dariusz. This is Jeff. Let me -- let me start with kind of the context of the rider. It came up in the Tucson Electric rate case. Ultimately didn't make it into the administrative law judge's recommendation. That case is going to open meeting here pretty quickly. We have filed it, and we're going to continue to advocate for it because we think it's an appropriate way of addressing regulatory lag and you can see with just the growth that we're seeing the need for that additional generation and need to have that balance between not just PPAs, but some that we can -- that we can more directly control and really control the deployment of that capital. That, as well as the ability to find a mechanism that we can flow through the production tax credits, is going to be -- is going to be important.

So we think there's good reasons to continue to advocate for it. I think what you're seeing that it is still modestly encouraging is that there is an interest from staff in understanding the value and the concept. And so that's really what the hearing process I think is going to give us an opportunity to do is to advocate and explain why this makes sense in the context of where we are. And I'd be more concerned if it was pretty -- just a flat, no, we're not interested. And I think you can see from the testimony and from the dialog in the Tucson case, that there is an interest in understanding it. We're not quite there yet. And I hope that we'll have an opportunity at hearing to really explain why we see significant value in moving forward with this. And not just coming back in, which is, your other alternative is you come right back in on another rate case pretty quickly if there's not a way to address this -- this kind of the regulatory lag that comes from getting those plants into service, but not into rate sufficiently.

You want to talk maybe on the capital?

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

Sure, Dariusz. It's Andrew. To date, going back to last rate case, we've been reluctant to bring forward our projects that have been cost-competitive with the market because of the question around recovery. And the SOB [Phonetic] as Jeff talked about, really would be an important tool to help us think about taking what's been less than maybe 20% of the megawatts that we've been procuring over the last couple of years and increase that number.

Ultimately, we're going to make the investments that we need to make for reliability, and the two projects that are in our post-test year plant that relate to our generation fleet, Jeff talked about, those were commissioned the summer are Agave solar project as well as the batteries that our AZ Sun sites. Those were projects that were commissioned for this summer and those were really critical. And as some of the developers who we work with have supply chain delays and some of those challenges. Our ability to deliver -- to deliver I think has been highlighted through those post-test year plants. So we'll continue to look at ways to reduce lag, and ultimately make the decision that we need to make around capital from our perspective to make sure that we're delivering each summer as we've seen these increasing peak demand numbers.

[Dariusz Lozny, Analyst at Bank of America]

Great. Thank you for that detail. Appreciate that. One more if I could. I just wanted to come back to the generation-related O&M spending that Andrew highlighted in the opening remarks. Specifically, how do you see that shaping up for the back half of the year just given the amount that you have to run the generation resources obviously, during this extremely hot weather? Do you anticipate that there is sort of some additional catch-up O&M, if you will, in the latter part of the year? And then related, assuming the weather normalizes in '24 or thereafter, do you see that as an opportunity to flex down that O&M in future periods?

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

Yeah, Dariusz, so taking the first part of that. So the guidance range that we updated today incorporates anticipated O&M kind of across the year. And so we've seen in the first half of the year absolute need to the generation fleet. And from this July, there'll certainly be continued needs. And so we've anticipated those. And frankly, have been part used the benefit of dry weather to look at the rest of the year and think about what are the needs we have and where are the pressure points. And if weather were to continue to be a factor for the rest of the year, absolutely making sure that we can generate -- support the generation fleet both at Palo Verde, as well as our traditional fleet. It's definitely part of the calculus.

And so then when you think about weather for the rest of the year, post-July, which we've incorporated at this point and has been part of strategically thinking about O&M. Every year at the end of the summer, we look at our O&M opportunities set and risks set for the remainder of the year and into the next calendar year, and think about where we could flex our muscle around pull forwards, derisking. And so we'll do that to the upside and downside as the year goes on.

We're comfortable with the new O&M range that we've set out based on where we are, the decisions we've made effectively, conversations that we normally have in October once you've looked at the full summer, we're making those earlier. So we're comfortable with the range that we're in and certainly as we have weather, as we have continued wear and tear on our generation fleet, we've accommodated that within the current range.

[Dariusz Lozny, Analyst at Bank of America]

Okay, great. Thank you very much for that detail. I'll pass it along here.

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

Thanks, Dariusz.

[Operator]

Thank you. Your next question is coming from Alex Mortimer from Mizuho. Your line is live.

[Alex Mortimer, Analyst at Mizuho]

Hi, good morning.

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

Hey, Alex.

[Alex Mortimer, Analyst at Mizuho]

So, with the dual tailwind of new rates next year and the load increase that was expected this year materializing more in '24, how should we think about the linearity of earnings in '24 and '25 and beyond? Kind of within the long-term growth rate, should we expect to be at the higher end of the 5% to 7%? Or should we think that there could potentially be more of a one-time step-up in '24 given coming out of the rate case?

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

Yeah, Alex. We are definitely focused on the tools that we have at our disposal to create more linear, predictable earnings stream within that 5% to 7% growth rate. And so we're comfortable with the 5% to 7% rate. Certainly, we'll be updating all the key drivers of our financial performance after the rate case concludes.

Inevitably, given the outcome of the 2019 rate case and the financial reset there, rate relief will be a meaningful driver of our growth over the medium term. It's hard to avoid that fact. However, the work we're doing around how do we manage O&M within in the context of weather from year-to-year, how do we push for more capital to be tracked, so we can create more rate gradualism for customers, but also more linearity for shareholders. Those are the levers within our control that we're trying to deliver within that long-term EPS growth rate range. A little bit more of a predictable track within it. Ultimately, doing the things that are within our control and managing costs as best we can.

[Alex Mortimer, Analyst at Mizuho]

Understood. Has there been any discussion internally about how to potentially think of a new base here for the long term growth rate given the increased clarity and potential step up we'll see following the resolution of the case later this year?

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

Yeah, Alex, that's a I think a conversation that we can have after the rate case. Ultimately, over the long term, we want to be able to, through a linear earnings stream create a long term earnings growth rate that isn't based on the base here. That is a continuous product of more predictable, less regulatory lag. And so those are the things that we're focused on to create that, so it becomes less about a specific base here. But as far as updating from our current 5% to 7% of 2022 weather-normalized guidance, that's a conversation we can have that for the rate case.

[Alex Mortimer, Analyst at Mizuho]

All right. Thank you so much. I'll leave it there.

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

Thanks, Alex.

[Operator]

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

[Paul Patterson, Analyst at Glenrock Associates]

Hey, good morning.

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

Hey, Paul.

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

Hi, Paul.

[Paul Patterson, Analyst at Glenrock Associates]

So I apologize, I just wanted to sort of just follow up again on the rate case. In the past, you guys were thinking there was potential that there'll be a settlement. And I'm just sort of wondering where things maybe stand with respect to that potential given that we've had so many filings now and what have you.

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

Yeah, we're, as we mentioned, we're just a day away from filing rejoining testimony. So you got five rounds of testimony and the hearing's scheduled to start in a week or so. So the likelihood that a settlement would sort of come up from there is is low. We continue and we always look for opportunities to narrow issues or for opportunities to engage in a conversation around that. But I think right now it's -- it certainly seems like we're moving towards hearing.

I will say, If you've been following the testimony and the interveners and the positions on this case, that this is much more what I call a traditional rate case, it's a lot more fewer issues. That's the more traditional things that are coming. So I think that that is a positive in terms of where the case has evolved to.

[Paul Patterson, Analyst at Glenrock Associates]

Yeah. It's a notable change from the last one. I agree with that. I want to also just ask you, I haven't -- I've ever been to Arizona in the summer and there's a lot of national media coverage of the recent heat wave. And I don't know whether not it is being over-dramatized or not, but it sounds like kind of extreme. And I'm just wondering; A, sort of your take on it because you guys are -- you guys are native so to speak or al least close to it. And so B, I know you mentioned, it doesn't seem to have impacted your outlook for growth, but just -- I mean, I don't need to sort of check off the list of sort of horrors that they're describing in terms of people getting burned by just sitting on the sidewalk or, you know I'm talking about like the cactuses dying kind of thing. Could you sort of just give a little more perspective on that?

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

Yeah. I mean, it's clearly a concern when you get into prolonged stretches of this. We've had -- I mean, we had a hotter day a number of years ago. I think the still record high day was actually quite a while ago. But it's the persistence of this heat wave that I think is really sort of challenged the policymakers. But the important thing to remember is that the heat in the desert in the summer is not new to us. And so there have been certainly cases where you had multiple days in the north of 115, where you get the same kind of issues about being safe outside, making sure that you don't -- you don't make contact with the pavement.

The most important thing I think that the policymakers here are doing a nice job of is trying to address the unsheltered population. We've got, for example, call an air-conditioner program where we can help support through the foundation for senior living, people getting air-conditioner repairs, because those are where it gets really dangerous if you're just in a home with an air-conditioner, people are kind of used to this I think. But it's certainly something that you need to look at from a resilient standpoint and ensuring that as we continue to see longer periods of hot weather that we've got the resilience to be able to navigate that. But people are still moving here. It's still a very -- I mean, it's still the fastest-growing county in the U.S. So, I don't think the heat deters them. And it's kind of similar what you deal within the -- in the Northeast in the upper Midwest where you've got the really cold winters. You just got to know how to adapt to it.

[Paul Patterson, Analyst at Glenrock Associates]

Okay. Well, thanks so much.

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

Yeah.

[Operator]

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

[Jamieson Ward, Analyst at Guggenheim Partners]

Hi guys. It's Jamieson Ward on for Shar. How are you?

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

Hey. Good Jamieson.

[Jamieson Ward, Analyst at Guggenheim Partners]

Hey. Just a quick one on the pension front. Just leaving 2023 aside for the moment, if we were to assume that the final order reflects the pension-related adjustments from your rebuttal testimony, just thinking about the roughly $20 million or so improvement there, what impact would you expect that to have going forward on pension-related EPS drag? Just thinking about the amortization outside of the corridor rule from last year's impact really.

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

Yeah, Jamieson. So just to step back, we do have that drag now from the end of 2022 when we took into account the rapid increase in interest rates in '22, which affect both our fixed-income portfolio as well as the interest cost associated with our pension. So we have that drag, which year-over-year is in the $0.30 some odd range and you see it this quarter as you've seen in prior quarters.

One of the things we did say to the investment community is we wanted to reduce the lag associated with the pension expense and more properly reflect the test year expense because we didn't know those numbers when we filed our direct case. And so, our rebuttal, as you alluded to, we did file to take better account of whether test year should be based on averaging the mark-to-market into '21, mark-to-market into '22. And as you said, that's about a $20 million benefit.

When it comes to the impact there, that is -- that isn't going to be something that flows through pension accounting, that's something that's going to flow through the revenue requirement and through customer charges. So that'll be -- if it is approved and we're gonna continue to advocate for it through the case. Our staff did not express support from it in their surrebuttal testimony. But it's something we're going to continue to push for. That would just be reflected in the revenue requirement like everything else.

However, at the same time, as we do every year, at the end of the year we're going to have to reevaluate our pension expenses based on the expected market returns, where discount rates are at that point, and what made, as you said, pass through the corridor and be considered material from the perspective of beginning to amortize. But the drag from '22 will remain and the key is to reduce regulatory lag on the recovery of that through the adjustments and normalization request that we made on rebuttal.

[Jamieson Ward, Analyst at Guggenheim Partners]

Got it. Perfect. Thank you, Andrew. I appreciate the color.

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

Sure. Thanks, Jamieson.

[Operator]

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

[Dariusz Lozny, Analyst at Bank of America]

Hey, guys. It's Dariusz back on. Just one quick follow-up if I could. I just wanted to ask about the change in your guidance relative to the effective tax rate. It looked like it ticked up a little bit. And now there's a band versus previously it was a point estimate. Just wondering what drove that?

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

Yeah, it did Dariusz. Very receptive. So what happened is, in the first quarter when we set guidance at just slightly below 11% effective tax rate, now we're at this 12.0% to 12.5%. And when -- if you recall, when we said that lower effective tax rate was based on our anticipated in-service date of projects that generate production tax credits, namely the Agave project. And so, the higher tax rate now reflects our better estimate of the in-service date of the project.

[Dariusz Lozny, Analyst at Bank of America]

Okay, great. Thanks so much for clarifying.

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

Yeah. Thanks, Dariusz.

[Operator]

Thank you. That completes our Q&A session.

[Operator Closing Remarks]