Pinnacle West Capital Corp (PNW) Q1 2021 Earnings Call Transcript

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Pinnacle West Capital Corp (PNW -0.27%)
Q1 2021 Earnings Call
May 5, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Pinnacle West Capital Corporation 2021 First Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Stefanie Layton, Director of Investor Relations. Thank you. You may begin.

Stefanie Layton -- Director of Investor Relations

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our first quarter 2021 earnings, recent developments and operating performance.

Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Ted Geissler. Jim Hatfield, Chief Administrative Officer; Daniel Froetscher, APS' President and COO; Barbara Lockwood, Senior Vice President, Public Policy; and Jacob Tetlow, Senior 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. Today's comments and our slides contain forward-looking statements based on current expectations and actual results may differ materially from expectations. Our first quarter 2021 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 May 12, 2021.

I will now turn the call over to Jeff.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Thanks, Stefanie. And thank all of you for joining us today. 2021 has started off in line with our financial expectations. And so, before Ted discusses the details of our first quarter results, I'll provide a few updates on our recent operational and regulatory developments. And I'll also touch on our progress toward achieving our 2021 goals.

Spring is an important time of year for our summer preparedness work. And while we've always had a robust summer preparedness program, resource adequacy has recently become a more visible topic, given the events in neighboring states over the past year. To serve our customers with top-tier reliability, each year we perform preventative maintenance, emergency operation center drills, acquire critical spare equipment, conduct fire mitigation line patrols and execute a comprehensive plan to support public safety and first responders.

We're also procuring an additional 450 megawatts of seasonal peaking capacity, including hydro power, and we expanded our contract up to 60 megawatts for demand response from our commercial and industrial customers to help ensure that we've got adequate resources through the 2021 summer season. Additional information detailing our summer preparedness work can be found on the Pinnacle West website under the Events and Presentations tab.

Our procurement process is another important way that we help ensure long-term resource adequacy. Last year, we announced the addition of 141 megawatts of battery storage to be located on six of our APS-owned solar sites. Development has begun and this project is on track to meet the expected 2022 in-service date. We also announced two RFPs last year, including an all-source RFP and a battery RFP. The response to these solicitations was robust and we're in the process of reviewing the proposals. We expect to narrow the potential projects under review to a smaller pool soon.

On the regulatory front, the Commission continues to evaluate the clean energy rules preliminarily approved last year. In fact, the Commission is scheduled to discuss the clean energy rules at their open meeting today. The Commission may hold their final vote today or they may choose to continue the discussion.

For our rate case, the hearing concluded in March and initial briefs were filed on April 6 and reply briefs were filed on April 30. The ACC is scheduled to discuss at their open meeting today whether to reopen the evidentiary record in our pending case to include additional evidence, including evidence regarding adjusted cost recovery mechanisms. We believe the rate case record is sufficient and that adjustors provide substantial benefit to customers by supporting both critical programs and reflecting changes in utility cost that can be properly passed on to customers.

Pending this decision, the next steps in this rate case are that the administrative law judge will issue a recommended opinion and order and the Commission will schedule the case for an open meeting to vote. We currently expect a decision on the rate case will be issued during the third quarter of 2021.

Turning to our 2021 goals. On the fourth quarter 2020 earnings call, we highlighted improving our customer communication and engagement, enhancing our regulatory relationship and continuing to execute our clean energy commitment as three key priorities. We've made progress toward these objectives during the first quarter, but we recognized there is more work to do. Customer enrollment in our Cool Rewards program surpassed 36,000 connected smart thermostats. We're also working on a customer bill redesign project to simplify customer bills.

And a lot of the work that we're doing in the customer communication and education space is the result of collaboration with an input from our customer advisory and our stakeholder advisory boards. I can say, we truly appreciate the individuals and organizations that participate in these forums and they provide us with tremendous feedback.

In the regulatory space, we appreciate the Commission's balanced decision to implement our annual power supply adjusted rate change, 50% in April and 50% in November, instead of our typical February 1 implementation date. This decision recognizes and balances the ongoing COVID impacts on customers providing rate gradualism and helping to ensure that the company remains financially secure.

I already covered some of the progress we've made on procuring additional clean energy. I'm also proud to share that the US Environmental Protection Agency selected APS as a 2021 Energy Star Partner of the Year in recognition of our demand-side management programs. These programs contributed to our overall 2020 energy efficiency savings of nearly 586,000 megawatt hours and they will contribute to reducing lifetime carbon emissions by an estimated 2.1 billion pounds. In addition, we continue to explore partnerships with our customers to expand our microgrid offerings.

I'll close my comments by sharing that Daniel Froetscher, President and Chief Operating Officer, will retire this August after serving nearly 41 years with the company. Daniel has been instrumental in the success of this company over the past four decades. In particular, he served as a respected and admired leader both within the companies and in the communities that we serve and as a mentor to many. I can't express in words my gratitude and appreciation for Daniel's contribution. I join my colleagues in congratulating Daniel on his retirement. Thanks, man.

Daniel T. Froetscher -- President and Chief Operating Officer, Arizona Public Service Company

Thank you.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

As Stephanie mentioned, Jacob Tetlow, Senior Vice President of Operations, is here today and he'll be joining our earnings calls going forward. Jacob has a wealth of experience in both transmission and distribution operations and fossil generation here at APS. And Jacob's extensive experience as well as the company's robust succession planning position us well to continue operating with top-tier reliability.

And with that, I'll turn the call over to Ted.

Ted N. Geisler -- Senior Vice President and Chief Financial Officer

Thank you, Jeff. And thanks again to everyone for joining us today. With Jeff having covered our operational and regulatory updates, I'll cover our first quarter 2021 financial results. I'll also provide additional details around our customer and sales growth.

As I mentioned on the fourth quarter 2020 call, we will provide 2021 and forward-looking guidance at an investor briefing to be scheduled after the rate case concludes.

2021 started strong, earning $0.32 per share compared to $0.27 per share in the first quarter of 2020. Higher pension and other post-retirement non-service credits, higher transmission revenue and weather, all contributed to the increase in earnings, partially offset by a higher operations and maintenance expense due to higher planned outage expense compared to the prior year period. We also experienced 2.1% customer growth and positive weather-normalized sales growth, both within our expected guidance for the first quarter compared to the same period in 2020.

Economic development continues to support our customer and sales growth as headlines regarding new companies moving to our state are becoming even more frequent. Chris Camacho, the Greater Phoenix Economic Council President and CEO, said the organization is working with 291 companies that are considering relocating or expanding in the Phoenix area.

To support the expansion of businesses, Phoenix is projected to add 18.4 million square feet of new industrial space in 2021, placing the valley second nationwide after Dallas according to a study by CommercialSearch. This represents a 76% increase over last year for industrial construction. The influx from business for relocation also adds to the residential population growth we have experienced.

Turning to our financial health. We are following the status of President Biden's infrastructure and tax plan, including the potential for new tax incentives and we'll integrate any necessary changes to our resource procurement plans and capital if the proposal passes. With regard to the potential for a corporate tax rate increase, we are well positioned to address future changes through our existing TEAM adjustor mechanism.

As an update on our customer delinquent account balances, the cumulative total dollar amount of all residential accounts in arrears has decreased 30% since December 31, 2020. We see this trend continuing as customers are paying down past due balances. We expect the Commission's preliminary vote at the April open meeting to implement a permanent summer disconnect moratorium will result in this continuing trend of increasing delinquent balances through the summer and decreasing balances after the expiration of the annual moratorium.

For 2021, we expect the increased bad debt expense associated with the summer disconnect moratorium and COVID-19 disconnect moratorium will result in a negative impact to our 2021 operating results of approximately $20 million to $30 million pre-tax compared to prior years that did not have a disconnect moratorium. This is consistent with the results we experienced in 2020.

Including the impacts from COVID and the summer disconnect moratorium, we continue to maintain a strong balance sheet, solid investment grade credit ratings, a well-funded pension and sufficient liquidity. In addition, our focus and progress on cost saving initiatives continues to result in improvements. As a recent example, our supply chain team installed a new inventory optimization software. The software uses scenario-based service level-driven methodologies to establish optimal inventory policies. Since implementation in August of last year, this software has reduced our inventory by nearly $9 million, which mitigates potential inventory write-off risk in the future.

Our Lean efforts continue for managing costs, combined with the key initiatives Jeff highlighted for 2021. They all support our commitment to provide long-term value to both shareholders and customers.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.

Michael Weinstein -- Credit Suisse -- Analyst

Hi. Good morning, guys.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Good morning, Michael.

Ted N. Geisler -- Senior Vice President and Chief Financial Officer

Good morning, Michael.

Michael Weinstein -- Credit Suisse -- Analyst

Congratulations, Dan. I just wanted to say -- I wanted to ask about the rate case expectation for third quarter outcome. Is that actually in a procedural schedule? I may have missed that in the beginning. Or is that just like an estimate of when you think they might be able to come up with an outcome?

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Michael, that's more of an estimate. Just given where we're at right now with the filing, we filed the last closing brief on April 30. So, the judge right now has all the information that she needs to work on the recommended opinion and order. So it's a little bit of a question now of how long that will take her to prepare it. As I mentioned in my opening comments, they are likely to discuss today whether they want to reopen the evidentiary hearing and have a little bit more testimony taken around adjustors. If that happens, that could add a little bit of time to it. So we just don't have a lot of visibility on to where that's going right now. But our best estimates on what we know right now is that given how long it usually takes a judge to prepare a recommended order and opinion that were in the third quarter.

Michael Weinstein -- Credit Suisse -- Analyst

Got it. And in terms of financing needs and equity needs going forward, you're planning on issuing equity after this case is finished, right. But it's not clear how much it will be until you get a final decision. Is that accurate?

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Yeah, Michael, that's accurate. We previously estimated about $300 million to $400 million sometime before the next rate case, but that will become more clear on the conclusion of this case. And we'll look forward to updating that further at our investor brief at the conclusion of this rate case.

Michael Weinstein -- Credit Suisse -- Analyst

Would you lean toward doing that this year though, if assuming a third quarter outcome or would that be more spread over time?

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

It would all depend on the timing and outcome of this case, Michael.

Michael Weinstein -- Credit Suisse -- Analyst

Got you. All right. Thank you very much.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please proceed with your question.

Dariusz Korybko -- Bank of America -- Analyst

Hey. Good morning. It's Dariusz on for Julien here. Just wanted to ask in a little bit more detail on your 2021 key drivers. I know you guys referred to some weather-normalized retail sales growth. I was wondering if you could speak to the breakdown of that among residential, commercial and industrial, if you can at all.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Yeah, Dariusz, happy to. Residential for the quarter was up 2.2%. Commercial and industrial was down 0.8%. Obviously each uses different load patterns. So, the net from weather-normalized basis was 0.5%, which is within our guidance range. And then, of course, customer growth, new meter sets installed was at the upper end of our range of 2.1%. And this is consistent with what we see from economic growth and economic drivers in terms of large pattern of residential relocations. In fact, just read an article the other day where Phoenix is the number one metropolitan area in the country for millennials to move to. And that's consistent with where we see a lot of the jobs going as well.

Dariusz Korybko -- Bank of America -- Analyst

Great. Thank you. And if I can add one more kind of more high level question. Assuming you don't get your renewable recovery rider in this existing rate case, what would be the strategy then for pursuing some kind of concurrent recovery mechanism in the future? Would you potentially try to file for that or pursue that outside of a rate case process or roll it into subsequent rate case filing?

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Yeah. There is the -- there was testimony in the case about existing mechanisms and the power of the renewable energy surcharge mechanism has been used in the past to recover capital investment. And so, there was some testimony about -- you've got existing mechanisms that may be able to accommodate some of that. So obviously we looked for that possibility. Absent that, to try to implement a new mechanism, you really would go back to the next rate case. There may be options that you could look at with deferrals or other regulatory strategies to try to mitigate the regulatory lag, but we kind of have to take that all into consideration.

Dariusz Korybko -- Bank of America -- Analyst

Okay. Thank you very much. Appreciate it.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Yep, thank you.

Operator

Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Paul Patterson -- Glenrock Associates -- Analyst

Hey. Good morning.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Good morning, Paul.

Paul Patterson -- Glenrock Associates -- Analyst

So, back to the rate case. Just a little bit of clarification here. So, if I understood it correctly, and I was unable to listen to the meeting yesterday, they haven't talked about the adjustor issue yet. They didn't get to that. Is that it and they're going to be following it up today? Is that right?

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

That's right, Paul. There are two-day open meetings and so that they -- we were further down on the agenda. So they didn't get to us yesterday and they are probably doing the energy rules right now.

Paul Patterson -- Glenrock Associates -- Analyst

Okay. And then, with respect to the -- with this adjustor issue, other than Sandra Kennedy's letter, is there any other -- anything else that we should be thinking about as to why there they are looking at additional testimony or reopening the record with respect to these adjustors potentially?

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

There has been commentary. I mean, this is a question that has come up not just with us but with other utilities. We can get you a copy of the letter that we filed prior to the open meeting today that again tried to lay out the real value that these adjustors create and the fact that they're very common throughout the country. So a lot of this right now is, let's continue to provide the support for the structure that we have.

And as you may know, if you go back to many of the Commission's different policy decisions, we have, for example, our LFCR adjustor mechanism, because originally the state had set up policy for full revenue decoupling. And when there was concern about actually going to full revenue decoupling, that was adopted as a mitigation measure. So it's a core piece of the overall energy efficiency structure that was adopted in the state. And so, this is the kind of information that is continuing to go to the commissioners. We feel like there is a good record to support that and they're going to have to decide today whether they want to take additional testimony.

Paul Patterson -- Glenrock Associates -- Analyst

I did read her letter and I think also the staff was pretty supportive as well or at least I gathered as much. So -- OK, so we'll just see what happens there. And we'll take it from -- any idea of -- well, we'll just have to see what they do, I guess. Okay. Thanks so much.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Yep. Thanks, Paul.

Operator

Our next question comes from the line of David Peters with Wolfe Research. Please proceed with your question.

David Peters -- Wolfe Research -- Analyst

Yeah, hey. Good morning, guys.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Good morning, David.

David Peters -- Wolfe Research -- Analyst

Just a follow-up on that. Do you have any sense and how long that could elongate the timeline if they were to reopen it? I know you said you expect it to have sometime.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Yeah. It's hard to say, because it will depend on how they want to do it and really input from the parties. And I would expect the judge may weigh in on that today as well. I know some cases where they've gone back and it's been just like a quick one-day of additional testimony. And so, we've seen that before. In this case, if they say, well, we'd like to have some briefs and other things, that would obviously make it longer, but it's just hard to tell until we get through the open meeting today.

David Peters -- Wolfe Research -- Analyst

Okay. And then, the next question, just on the all-source RFP you have out there. Can you remind me, is any of those megawatts currently in the capex plan or would anything that comes out of that, at least what you show for '23 be upside?

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Yeah. I appreciate that question. So, our estimates for outcomes of that all-source RFP is already baked into the current capital program that we've got, including the recent addendum of the 100 to 150 megawatt solar. So that RFP is consistent with the plans and the capital guidance that we've already put forward.

David Peters -- Wolfe Research -- Analyst

Okay. That's it for me. Thank you.

Operator

Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.

Charles Fishman -- Morningstar -- Analyst

Thank you. Good morning. Another utility earlier this week that has a pretty good presence of data centers reported that they're still seeing strong growth. And I know that's been important load contributor in your C&I segment as well. Do you -- are you seeing the same thing? Is it still pretty strong on the data center growth?

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Yeah, Charles. Appreciate the question. We are -- we've got about 24 megawatts under construction right now. I know a firm JLL Research recently published that they estimate there's about 250 megawatts planned either in early development or expected to be under construction in the planning horizon. And they estimate our service territory to be ultimately the second largest data center hub in the country. So, we continue to think that for a variety of reasons this is a good location for data centers. We're seeing those in early stages of development.

I think the key though is at what rate do the data centers actually fill up from a server capacity standpoint and therefore an energy demand standpoint. Building the shell of the data center and therefore interconnecting it is one thing, but it takes time for those data centers to then fill up from a capacity and demand standpoint. So that's what we'll continue to monitor over time.

Ted N. Geisler -- Senior Vice President and Chief Financial Officer

Yeah. Charles, the bigger -- probably the bigger driver right now, or at least an equally important driver right now, in Arizona is the industrial development that's happening. And so, I'm sure you're aware that Taiwan Semiconductor is pursuing, I think, their largest North American fab in our service territory. And there is additional semiconductors. Intel has announced additional work down in the Salt River project area. And so, Arizona is becoming a semiconductor manufacturing center. We've got a fair amount of electric vehicle manufacturing. So, the real pivot has been in 2007 after that recession, we were primarily a construction residential growth economy. And we're now much more an industrial growth economy and data centers are obviously a piece of that.

Charles Fishman -- Morningstar -- Analyst

Okay. That's very helpful. Thank you. That's all I have.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Thanks, Charles.

Operator

Our next question comes from the line of Sophie Karp with KeyBanc. Please proceed with your question.

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Hi. Good morning. Thank you for taking my question. Just -- if I may, on the ALJ timing, right, when would you -- given the normal progression, right, let's say if they don't reopen the evidential record, by when would you expect this ALJ to come up -- come out with a proposed decision in order to still meet the timeline that you outlined for the rate case? As differently, if it doesn't come out by a certain date, should we expect slippage kind of how should we think about that?

Ted N. Geisler -- Senior Vice President and Chief Financial Officer

Yeah, Sophie, it's a great question. We are one of the biggest cases that goes through the Commission. And so, we're certainly different than a small water company case. And so, the ALJ is typically -- it's just a longer process to work through the evidentiary record and to put the recommended opinion together. So, I'd say, usually you see in a couple of months range to put that together, but a lot of it is stuff we can't see. So it depends on the Commission's workload, it depends on the other cases that she has got. And so, we don't have much visibility into what the timing is, but they work on them expeditiously. But the size of this case, I look at a couple of months at least.

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Got it. Got it. Very helpful. Thank you. And then, maybe if you could comment a little bit on kind of economic recovery situation in Arizona in a post COVID world. I think you mentioned that the C&I volumes are still down a little bit on a weather normal basis. Where do you see that go in just based on what's happening on the ground there?

Ted N. Geisler -- Senior Vice President and Chief Financial Officer

Yeah. Sophie, appreciate the question. Keep in mind, the 0.8% reduction is comparing year-over-year and, of course, really we didn't see the effects of COVID till the very end of Q1 last year. So, from that standpoint, I still see that to be a fairly mild impact compared to what it otherwise could have been. When you look at the vacancy rates, for example, in commercial leasing, if you look year-over-year pre-COVID, post-COVID, they are really only down about 1%, so it went from about 11.5% vacancy to 12.5%. But it's certainly something that we continue to monitor.

And when we look at the overall usage trends, you still see a meaningful increase in residential and a meaningful reduction compared to historical patterns of commercial and industrial. And so, the key will be, as businesses get more comfortable with reopening, how do those two normalize. All that said, it doesn't take away from the fact that we've got very high influx of new meter sets being installed, residential and commercial. And so, when we net it together, we still expect to see net positive growth.

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Got it. Thank you so much. I appreciate the comments. That's all from me.

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Thank you.

Operator

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Stefanie Layton -- Director of Investor Relations

Thank you for joining us today. This concludes our call.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Stefanie Layton -- Director of Investor Relations

Jeffrey B. Guldner -- Chairman of the Board, President and Chief Executive Officer

Daniel T. Froetscher -- President and Chief Operating Officer, Arizona Public Service Company

Ted N. Geisler -- Senior Vice President and Chief Financial Officer

Michael Weinstein -- Credit Suisse -- Analyst

Dariusz Korybko -- Bank of America -- Analyst

Paul Patterson -- Glenrock Associates -- Analyst

David Peters -- Wolfe Research -- Analyst

Charles Fishman -- Morningstar -- Analyst

Sophie Karp -- KeyBanc Capital Markets -- Analyst

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