Pinnacle West Capital Corporation — 2024 Q1

This is Fei for Nick today. So first, I guess on rate case timing, as we have more time to digest the latest rate case outcome back in February, since the last quarterly update. Can you maybe discuss some of your latest thoughts on SRB capital deployment? And how should it possibly accelerate in the coming years, deeper in the plan?

Sure. Thanks for the question. Yes. So we continue to work through our competitive RFP process, and that's really the basis for us putting projects through the SRB. We had a 1,000-megawatt RFP in 2023, and we're negotiating projects that are coming out of that right now. And so there's a healthy pipeline of projects, really across a diverse set of fuels, renewable in gas as well that we're looking at that would qualify.

Great. That's really helpful. And maybe I can just turn to financing a little bit as you've done the equity deal and remove this financing overhang post the constructive rate outcome. Can you just maybe discuss as we evolve from the last quarter, your latest thinking on the remaining clinical capital of $400 million with ATM and hybrid at your disposal. Has any thinking on this changed since the equity deal, also given all the S&P positive revision on the credit outlook. How does that affect your thinking and confidence in the debt and hybrid market?

Sure. As I mentioned earlier, we are really pleased to be able to execute on the foundational discrete block equity that we needed to ensure that we're maintaining a balanced healthy capital structure down to utility. And so as we go through and you've got kind of the 3-year capital financing plan in front of you, as we go through the out years of that plan, given the capital needs that we have today and ensuring a balanced capital structure down at the utility, there is, as you pointed out, an unidentified external financing need of an incremental $400 million from the parent.

It's Jamieson Ward on for Shar. I just got a couple for you here. First, on sales growth, you're obviously fortunate to have a fairly diverse mix of industries driving your long-term retail sales growth forecast. Could you remind us how much of the large C&I load that you're currently seeing is from data centers like in '24. And then whether you're expecting the level of contribution to your annual load growth from data centers to increase between now and 2026 and then as well through the rest of the decade?

Sure, Jamieson, this is Andrew. I'll start. So in the near term, that 5.9% sales growth that we saw for the quarter, we felt really pleased with, and it did represent fundamentally a lot of the large high load factor C&I customers. And it was a mix of the ramp-up of the common semiconductor ecosystem of them and their suppliers and downstream vendors as well as the ramp-up of some of the existing data center customers that we've had come online over the last couple of years.

That's perfect. Very clear. And I appreciate it. And then, second, on the regulatory lag docket, which, of course, you guys already touched on. So following the March workshop, which I'm sure a lot of us tuned into and noting the yet-to-be-scheduled additional workshops, which you already mentioned. Could you give us your high-level sense of where the proceeding currently stands in terms of the time line overall until we could see an alternative ratemaking approach being adopted by the commission and actually available for you to use in rate cases? And also, are there any expected key milestones we should be watching for? And that's it.

Yes. Jamieson, this is Jeff. I think the next one to watch for is the June open meeting is likely where they're going to have further discussion. I think there was some thought it might go on the May open meeting. I think it's more likely now on the June meeting. That will be important because I think that's where you'll see the commissioners discuss the process going forward and potentially give some more color on the time line.

Sure. And going back, Michael, it's Andrew. Certainly, there will be opportunities to look at our capital plan over the next few years. And as we see, for example, what projects come out of our RFP is on the generation side and the pace of execution of our strategic transmission plan will continue to revisit that CapEx forecast. And fundamentally, I think some of the drivers I talked about earlier will determine how we fund that, right? We want to make sure that we're staying in the right spot from our cash flow metrics perspective. And there's a numerator question there as well, on the [indiscernible] debt where we want to make sure that we're reducing regulatory lag through the mechanisms Jeff just talked about to help support those credit metrics. But again, making sure we're being judicious about parent company debt.

Yes. And I think one of the things that we're trying to solve for through the regulatory initiatives is that lumpiness and trying to find a way to create a smoother, more predictable stream. We believe we've got substantial customer rate headroom to be able to make the investments we need to make over time. But when we're dependent on step function kind of rate relief to recover on them, that's really the challenge we are trying to address. We've talked pretty openly about the regulatory lag that we're seeing given the historical test year construct that we're living under. And the test here in the rate case that we just concluded and put rates into effect in March, those costs go back to the middle of 2021 before inflation was really starting to pick up, and we're starting to see an increase in interest rates as well.

Not really an earnings sensitivity. I mean you're watching, obviously, as we continue to work on the structure that Arizona has adopted with the resource comparison proxy process. As that steps down, you tend to see a little bit of cyclicality as applications go up before the credit steps down because of how the grandfathering works. And then you see -- you get a better sense of kind of where they level off. So I think we've got the information in the deck. If you want to say anything, Andrew.

Yes. Yes. No. I would just say that if you look at our sales growth even for the quarter, we continue to see that 1.5% customer growth. A lot of it is offset by just the continued secular trend around energy efficiency and some attributed generation adoption. And we baked into the plan. We expect fairly modest -- out of that customer growth, expect fairly modest residential sales growth. And certainly, as we continue to monitor the trends around DG, continue to monitor trends around electric vehicles, et cetera, it would be able to refinance that.

That's certainly been a topic conversation with the regulators, and it is -- I think it is something that there's a lot more attention being paid to. One of the things to recognize, if you have the cost of service done right, when you get a higher load factor customer, which is typically a C&I customer, the margin on those customers tends to be lower because you get closer to actual cost of service, but the fixed cost, the spread of fixed costs and the recovery of fixed cost can actually help the system. And so you just got to be careful that you reflect that in the cost of service in a way that it is appropriately recognizing that.

Yes. There's extensive conversations that go on in a number of different fronts. And it's not just in the Western U.S. We've seen fire situations come really all over the country. And so these conversations, you see, for example, in the some of the wildfire task force groups, you see a lot more Eastern utilities that are participating in what used to just be a conversation among the Western utilities. There's a significant amount of technical work that's being done at EPRI to work through some of the technical solutions on wildfire. There's a significant amount of sharing, I'll call out PG&E, they are remarkably constructive in terms of helping to share work that they're doing and that's really true for all the utilities in the West. And so the California folks have obviously been in the front tip of the spear for this. They're very open about sharing those lessons and what's working for them and what technology solutions are available there.