Pinnacle West Capital Corporation (NYSE:PNW) Q1 2024 Earnings Call Transcript

Michael Lonegan: Great. Thank you. And then secondly for me, going back to the regulatory lag, your EPS guidance forecast through ’26, presumably isn’t accounting for any changes in the regulatory docket in terms of test years or formula rates. Just wondering, if there’s anything you could share about the earned ROE on the ACC rate base that you are assuming in guidance this year and then over the course of ’25 and ’26 presumably it will be somewhat lumpy.

Andrew Cooper: 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 great 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 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 raised 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.

And so we are in that period right now where there is that drift around our ability to earn close to our actual ROE, while we haven’t disclosed a specific number. As we go through time and look at costs that go back to 2021, ’22, that definitely increases. We feel very positive about the impact that the SRB can have on creating smoothness and reducing lag if you look back to what we said in Q4 about the types of projects, there’s RFPs nearly yearly at this point and opportunities for us to put forward cost competitive projects that we’re building ourselves. And so between generation and transmission, 30%, 40% of our capital will now have trackers and give us much smoother, more predictable recovery. So it really comes down to those operating costs, the income statement costs, O&M depreciation et cetera.

And then any of the distribution capital that’s not picked up by sales growth that we need to focus on. And that’s really the focus of these regulatory initiatives, be it the regulatory lag docket or the timing of our next rate case. And those are really the two levers we have besides our continued focus on cost management. Our customer affordable initiatives lean operating culture are really the other lever that we have within our control. And I think we’ve demonstrated a pretty strong track record there and we plan for 2024 to reduce our core O&M expense by a couple of percent over the last year even as we still face substantial inflation for goods and services.

Michael Lonegan: Great. Thanks. And then a quick final one for me. Regarding rooftop solar installations, are you expecting a continued decline in them to trickle down into residential sales growth and then the LFCR mechanism and just wondering, if you have an earnings sensitivity there.

Jeff Guldner: 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 cyclicalities 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 that. I don’t know, if you want anything, Andrew.

Andrew Cooper: 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, able to refinance that. But effectively we have that post-COVID work-from-home period, where we had a short window of an increase in residential sales growth, a substantial increases that were really just a break in what has been a secular trend in those residential declines.

And ultimately goes back to the diversification of our economy and the attraction of more residential customers to service center, where we’ll continue to see in our forecast some modest increases in residential sales and how much DG offsets that is something that we’ll just have to continue to monitor.

Michael Lonegan: Great. Thanks for taking my question.

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

Alex Mortimer: Hi. Good morning team.

Jeff Guldner: Good morning, Alex.

Alex Mortimer: So industry-wide we’re seeing load growth. It seems skew more C&I, obviously as well in your service territory. Do you expect cost of service to become a large point of retention and future regulatory proceedings? And has Arizona taken any steps to address this?

Jeff Guldner: 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 costs — the spread of fixed costs and the recovery of this 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 is appropriately recognizing that and so in a general concept the high load factor customers can make the system operate more efficiently.