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Pinnacle West Capital Corporation (NYSE:PNW)
Q3 2021 Earnings Call
Nov 5, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2021 Third Quarter Earnings Conference Call. [Operator Instructions]

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

Amanda Ho -- Director, Investor Relations

Thank you, Kate. I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2021 earnings, recent developments and financial outlook. Our speakers today will be our Chairman, President and CEO, Jeff Guldner; and our Senior Vice President, CFO, Ted Geissler; Barbara Lockwood, Senior Vice President, Public Policy is also here with us.

First, I need to cover a few details with you. We will be advancing the slides as the speakers present today. The slides that we will be using are also 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 third 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 November 12, 2021.

Now I will turn the call over to Ted.

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

Thank you, Amanda, and thanks again everyone for joining us today. These are indeed challenging times for us. But right upfront, I want to make it clear that while we may be navigating some short-term challenges, as you'll see, the mid-term prospects post 2022 are positive, and we remain confident in our ability to create renewed growth and deliver strong shareholder returns.

I know the conclusion of the 2019 rate case is the most significant development and everyone is interested in hearing more about that. But before we cover the rate case, you can see from the four main topics we will discuss today. I'll cover our third quarter results and our expectations for the remainder of 2021. I will then turn it over to Jeff to discuss our rate case outcome, next steps and strategy coming out of this case. Finally, I will wrap up with 2022 guidance and our long-term financial outlook.

Focusing on the third quarter, our performance remains strong, earning $3 per share compared to $3.07 per share in third quarter of 2020. Mild weather was a significant factor, largely offset by strong sales. We experienced a mild July and August driven by one of the wettest monsoon seasons in recent history. Residential cooling degree days in the third quarter decreased 27.5% compared to the same time a year ago, and were 10.6% lower than historical 10-year averages. As a reminder, third quarter last year was the hottest on record. Robust sales and usage growth in addition increased transmission sales this quarter mitigated most of the weather impacts.

Looking at full year, I'll provide an update to the 2021 Key Drivers and earnings guidance. Customer growth and weather normalized sales growth remain important drivers for the remainder of the year. We are updating weather normalized sales guidance to 3% to 4%, up from 1% to 2%, based on continued robust customer growth and strong residential usage. Lastly, with the conclusion of the 2019 rate case, we're now able to provide full year guidance. We expect earnings per share to be within the range of $5.25 to $5.35 per share.

Before I continue with our long-term financial outlook, I'll turn it over to Jeff to provide an update on our rate case.

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

Thanks, Ted, and thank you all for joining us today. As all of you know, after a series of open meetings and public discussions, the Commission issued a final decision in our 2019 rate case. This rate case was complex and the issues were numerous. I'll highlight a few of the main issues that were decided, the revenue requirement SCRs and the ROE. I'll also discuss our next step and strategy coming out of this case, and then lastly as Ted mentioned, he'll provide the 2022 guidance and our long-term financial outlook.

This outcome was not what we wanted and the process that transpired was not constructive. Everything we have said on the record with our regulators about what's so damaging and concerning about this decision holds true. It is a decision that makes everything we're committed to doing more challenging and more costly for a time. What this decision has not done is change our mission as a company, nor our commitment to delivering value to our customers and you our investors. It has not changed the commitment of our employees to operational excellence in all that we do. In fact, we're using the expertise and the track record that we've built in the areas of long-term planning, cost management, innovation and serving as an active voice and advocate for the Arizona business community to emerge from this case with a robust strategy. We're not apologetic about standing up for what's right for our customers and our communities and for our investors, the owners of this company. It's your confidence in us and your investment in us that makes it possible to deliver the product and services that power Arizona's economy and way of life. We don't take that for granted and we'll lay out for you today how we plan to continue to create values at competitive levels, amid the headwinds and the challenges that this case has created.

As a reminder, this case was unique for many reasons. We are compelled by the Commission to file this case under a question of whether we are over earning. We are also required to fully litigate this case instead of pursuing settlement opportunities. This is our first fully litigated rate case in over 15 years. We still believe that rate case settlements are the standard and this case was definitely an exception. And finally this case was centered around cost recovery of coal asset. In contrast, our future investment recovery will be premised on infrastructure supporting Clean Energy and our customer growth.

Let me walk through some of the major decisions of the case. First, the Commission adopted a total base rate decrease of $119 million inclusive of fuel. The Commission did reverse its initial vote to move the SCR issue to a separate proceeding and instead provided partial recovery of the SCRs with the disallowance of $216 million. We disagree with the Commission's decision that the SCR investment was imprudent and don't believe that the record in this case supports that conclusion. As I've stated before the Four Corners Power Plant is a critically important reliability asset for the entire Southwest region. It's used in useful currently serving customers and the investment in the SCRs was required to keep the plant running under federal law.

In addition, the Commission voted to lower the ROE from the recommended opinion orders already low ROE of 9.16% to 8.7%. With this part of the decision, the Commission has adopted an ROE that's meaningfully below the national average of 9.4% for electric utilities and the company disagrees with the Commission's rationale. We have embraced a culture focused on customer service and don't believe that a penalty was warranted, and the ROE granted ignores the fact that we were one of the fastest growing states in the country and we need to attract capital in order to fund the growth and economic development that we're experiencing in Arizona.

In addition, the Commission moved away from the long-standing practice of providing a risk premium for serving as the operator of the largest clean nuclear generating station in the country. We'll continue to navigate through these challenges by leveraging our strong growth and seeking judicial review of the decision through the courts. Although we are disappointed by the Commission's decision, importantly, we now have clarity of the path forward.

And so, let me share our next steps and strategy as we look to the future. We continue to remain optimistic about our future for many reasons and I'll discuss each of these reasons in more detail. First, we have a solid track record for performance and have grown earnings and our dividends steadily throughout this time, although we're looking at a reset with this rate case outcome and despite the challenges of our regulatory environment, both for Arizona and our company, we believe that we have the ability to create long-term value and steady growth from here. And Ted will later share our financial outlook and the actions that we're taking as a management team to get us there.

In addition to our earnings track record, we've delivered on our promise to provide affordable energy to our customers and I'll share I think a great example. We've seen a 6% weather normalized increase in demand for residential electricity from 2018 to 2020. During that same period we've lowered the average residential customer bill by more than 7%. We remain focused on customer affordability and keeping it central to our plans to provide long-term sustainable growth. That focus, coupled with continued cost management creates headroom for the future.

The second reason that I'm optimistic about our future is our best-in-class service territory. Arizona remains among the fastest growing states in the country, where other states were experiencing little or negative customer growth, we're projecting 1.5% to 2.5% retail customer growth in 2021 and 3% to 4% weather normalized sales growth. We expect 43,000 housing permits this year in Maricopa County alone, levels that have not been reached since before the great recession. We believe the constructive business environment and the ample job growth that it creates a competitive cost of living and a desirable climate will continue to grow the Metro Phoenix housing market and benefit the local economy.

Focusing on our service territory specifically, we continue to see development from a variety of sectors, which is helping to diversify our local economy more than ever. In particular, Phoenix is becoming a leader in attracting high tech and data center customers. As you may remember, Taiwan Semiconductor broke ground on their $12 billion investment earlier this year, cementing Phoenix is one of the top semiconductor hubs in the country. More recently, KORE Power announced their intention to build a 1 million square foot lithium-ion battery manufacturing facility. We'll continue to focus our economic development approach on helping to attract and expand businesses and job creators.

The third reason that we're confident is the clear path for our transition to Clean Energy. We came out with our Clean Energy commitment in early 2020, and I'm proud that we've made significant progress toward that commitment. As you know, earlier this year, we announced that our Four Corners power plant would begin seasonal operations in 2023. This will reduce annual carbon emissions from the plant by an estimated 20% to 25% compared to current conditions. In addition, we remain committed to end the use of coal at our remaining Cholla units by 2025 and to completely exit coal by 2031. Since our Clean Energy commitments announcement we've procured nearly 1,400 megawatts of additional Clean Energy and storage. Obviously, Arizona enjoys some of the best solar conditions in the world and we are well positioned to capitalize on this resource as we continue that Clean Energy transition.

Turning to our regulatory environment. Although, this last case was not constructive, I believe we'll be able to reasonably navigate through the regulatory environment in the future. I'll underscore that this last case was unique in nearly every aspect. We plan on filing a new rate case as soon as practicable and be looking to improve the ROE commensurate with rising interest rates and returns. Historically, outcomes achieved through settlement have delivered new and innovative customer programs and other results that benefit a broad and a diverse range of vested interest in our state's energy future. We would aim to achieve a settled outcome in our next case, because we believe that the nature of that process itself yields more informed constructive and mutually beneficial results. We'll work to find alignment with stakeholders and the regulators, so that we can improve things for all interested parties.

Finally, I'm optimistic about the future because we have a well thought out long-term strategy that my entire management team and I are committed to executing. We've refocused on the customer and have built a customer-centric strategy that will allow us to deliver exceptional customer service results. We are the most improved large utility in J.D. Power's 2020 residential electric service study and we're focused on making continued improvements. Near term, our focus and priorities remain on improving our customer experience, customer communications, providing safe and reliable service and continuing to engage with stakeholders to advance our shared priorities of clean, reliable and affordable energy for Arizona residents and businesses.

I'll now turn it over to Ted to provide guidance and to share our long-term financial outlook.

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

Thank you, Jeff. Now, I'll walk through our 2022 guidance and long-term financial outlook. As Jeff discussed, this last case was not the outcome we were looking for and we recognize this rate case is a regulatory reset. We're providing a 2022 earnings guidance range of $3.80 to $4 per share given the full effects of the rate case. We recognize this is a significant reduction compared to 2021, so we've illustrated key factors contributing to the change in earnings.

As you can see on Slide 19, we're starting with the midpoint of our 2021 guidance and walking through the drivers to get us to the midpoint of our 2022 guidance. No surprise, the most significant driver is the recent rate case decision, with a negative $0.90 impact. This reflects an additional $13 million downward adjustment beyond the $90 million net income impact estimated for the recommended opinion on order last quarter. In addition, growth in depreciable plant, higher interest expense related to new financing needs and lower pension OPEB non service credits make up the remaining negative drivers. We are focused on cost management and expect O&M savings to provide some positive impact to get us to our 2022 guidance range of $3.80 to $4 per share.

Turning to the future, we are prepared to use all levers we have available to help us mitigate the impact of this case, and we remain optimistic of our ability to provide long-term value. As you can see, investors can expect seven objectives from us and I'll touch upon each one. Our plan is expected to provide strong long-term earnings growth after 2022 for the next five years. I want to be transparent and reemphasize that this as projected 5% to 7% earnings growth, builds on our 2022 guidance. We realize the 2021 base year is a lower growth rate at about 1% to 2%. However, we believe 2022 is the appropriate place to anchor our long-term outlook given the valuation reset that has already occurred and we're focused on creating shareholder value from this point going forward.

There are a number of factors that could provide upside potential to our growth guidance. For example, we have the ability to meet -- we have the ability to invest in more Clean Energy if we achieve more constructive cost recovery. In addition, robust economic development opportunities may drive increased sales and customer growth. Those along with other factors could provide upside to our guidance.

The second objective shareholders can expect from us, is an optimized capital management plan. As Jeff discussed, we continued to experience solid growth in our service territory, which is the primary driver behind our capital plan. Steady population growth is expected to drive average annual customer growth in the range of 1.5% to 2.5% through 2024. In addition, we expect average annual sales growth to be in the range of 3.5% to 4.5% through 2024 on a weather-normalized basis. We have updated our capital plan to $4.7 billion from 2022 to 2024. While this represents a modest increase from prior levels, we believe this is prudent until we're in a better place to secure timely and constructive cost recovery. We are committed to taking a balanced approach in managing our capital plan to support customer growth, reliability and our clean transition, while limiting our equity needs to minimize dilution as we recover from the outcome of this case.

Third, as you can see from 2019 to 2024, we project that our rate base growth will remain steady at an average annual growth rate of 5% to 6%. I want to highlight that our FERC jurisdictional transmission investments continue to represent a meaningful portion of that growth, that almost a quarter of the total rate base. These investments benefit from superior authorized returns in a more favorable cost recovery construct than our ACC jurisdictional investments. We believe the steady growth will allow us the opportunity to provide solid earnings growth from transmission in the future.

Next, I'd like to provide clarity on our financing plans going forward. We've previously stated that we would issue equity prior to the next rate case. We understand this case was not constructive and we're committed to doing everything we can to protect shareholders from further dilution. Therefore, we're deferring our equity issuance and have no plans to issue equity until the conclusion of the next rate case. In the meantime, we'll leverage our sales growth and the strength of our balance sheet to support our investment needs. While we show equity or equity alternatives in the plan, we have no plans for this to be sourced earlier than 2024, protecting investors from dilution during this period.

Moving to O&M. We have a solid track record of disciplined cost management and previously announced that we have initiated additional cost savings programs. We understand the importance of efficiency and instituting lean initiatives. With that in mind, we're updating our O&M guidance to show one, a reduction of O&M expense from 2021 to 2022. Two, a goal of keeping total O&M flat during this period. And three, a goal of declining O&M per kilowatt hour. Cost management and lean processes will continue to be a strong focus of our management team to mitigate both inflationary pressures and regulatory lag.

We anticipate another important expectation that investors can look forward to as our attractive dividend yield. Yesterday, our Board of Directors announced an increase in our quarterly shareholder dividend from $0.83 to $0.85 per share. We have consistently grown our dividend for 10 years straight and we are committed to dividend growth going forward. Our longer term objective is to grow the dividend, commensurate with earnings growth and target a long-term dividend payout ratio of 65% to 75%. We understand that we're not there now, but we are confident in our plan and that we will eventually grow back into this payout range.

Turning to the final item, our balance sheet. We continue to maintain a strong balance sheet, providing us flexibility in our sources of capital over the next few years. We have an attractive long-term debt maturity profile and no debt maturing at APS until 2024. Additionally, we maintain robust and durable sources of liquidity with our $1.2 billion of credit facilities recently extended to 2026 and a well-funded and largely derisked pension.

Taking a closer look at our ratings. We continue to have solid investment grade credit ratings. Even with the recent downgrade by Fitch and the credit reviews announced by Moody's and S&P, our balance sheet targets include three key components, maintaining credit rating strength, maintaining an APS equity layer greater than 50% and an FFO to debt range of 16% to 18%.

In summary, we're taking action during this reset and have a plan for attractive growth going forward. Importantly, we plan to defer all equity until 2024, further reduce O&M and optimize the balance sheet and capital program during this reset period. In return, we have the highest dividend yield among peers, which stands today above 5%. While certainly a factor of the current valuation, even at a stock price 20% higher than current levels, we offer a dividend yield more competitive than peers. In addition, we announced long-term EPS growth guidance of 5% to 7% from 2022 for the next five years. With the attractive dividend yield and solid EPS CAGR, we anticipate a competitive 10% to 12% total shareholder return going forward. In the short-term, we are laser focused on doing everything we can to protect investors during this reset period and then transitioning to a renewed era of growth, so that we can provide a competitive return going forward. We remain optimistic about the future. Although the final outcome of this rate case was worse than we had expected, we have a path forward that is centered around our long-term track record of constructive rate case outcomes, our robust service territory growth, continued balance sheet strength and a focused management team that is taking action.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And our first question today is coming from Insoo Kim at Goldman Sachs. Your line is live. You may begin.

Insoo Kim -- Goldman Sachs -- Analyst

Yes, thank you and thanks for all the disclosures today on this. My first, maybe for Ted. Just trying to reconcile the walk to the 2022 guidance midpoint of the $3.90. Couple of things that stood out. It seems like the depreciable plant that maybe the D&A component of it is -- seem a little bit higher than what I was expecting. And then the pension item also something I don't know if it was just me or if that was already known, but could you walk through a couple of those items and as much detail as possible? And finally, you talked about that sales growth that's very robust, but it didn't seem like that was explicitly laid out in this walk, so what's being assumed here?

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

Yes, Insoo, happy to and thanks for the question. First, depreciation is certainly a drag, particularly given that the test year for this case has been over two years ago. So we've continued robust investment since then and that certainly has an impact going forward. So we haven't detailed out anything beyond the fact that ongoing depreciation until we file our next case certainly has an impact and given the outcome of this case that definitely shows next year. With respect to the pension, we've benefited from favorable market returns this year. We still expect there to be a benefit next year, but because our pension is in such strong status, we continue to rebalance and derisk the pension, that certainly gives us a view that we will have likely less market returns next year in terms of favorable non service credits. So that's really just a factor of continuing with our liability driven investment strategy and de-risking the pension going forward.

And then finally on sales growth. We can't say enough about the economic development that we see in our service territory. We try to look beyond the COVID impact. So for example, if you look at growth in 2021 compared to 2019, really just a void the comparison that 2020 given the COVID anomalies. We're at over 6% weather normalized sales growth right now and that is all true customer growth and usage increases, absent any COVID impacts, and that's before some of our large industrial customers that are under construction now come online, TSMC being one of them. So we look at the record housing permits levels, the amount of development that's going on right now and really believe strongly that the growth going forward is solid and based on economic development and that's why we're comfortable with the range from '22 to '24 being in the 3.5% to 4.5% standpoint. This year we're at the range of 3% to 4% and last quarter we already exceeded that range. So we believe those are good numbers going forward.

Insoo Kim -- Goldman Sachs -- Analyst

Okay. So, the $3.90 that assumes at least a 3% year-over-year weather normal low growth?

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

That's correct.

Insoo Kim -- Goldman Sachs -- Analyst

Okay, got it. And my second question for Jeff. Just more broadly, definitely a challenging case. And as we think about moving forward from here and getting to file that next rate case and having further dialog with the interveners and the Commission. What are just some things that's in your mind you could do to at this time around have a more constructive dialog overall on various issues? Just curious on your overall thoughts given what's all transpired?

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

Yes, thanks for the question, Insoo. I mean, I think that's one of the more important things. We were -- ended up having some of the discussion about the long-term negative impacts that happened credit rating downgrade issues, things like that, that was happening at the open meeting instead of ahead of time. And so I think one of the important things just as we are working very hard to be as transparent as we can be with you is to then be as transparent as we can be with all the different parties that would likely participate in that next case.

I think that we do have areas of significant alignment when you look at the move toward more Clean Energy deployment and how we do that and just connecting the dots to say that, if you're going to actually meet the growth that we're seeing in the state and at the same time begin this transition and what are the benefits, I think one of the key things. And if you go back to Chairwoman Marquez Peterson's letter asking on how we could move to a $0.09 rate? Well, I don't think that's realistic given the fuel mix that we have here in Arizona. It's a great topic of conversation around how we do things like fuel for steel. So if we can reduce our fuel burn and the $1 billion that we spend on fuel and replace that with batteries and storage, she can really manage rate pressure but that's going to have to be an investment that we need to have the ability to invest in.

And so, to me it's really connecting all those dots and working with the stakeholders ahead of time and making sure that as much as that conversation as possible takes place before we file, and I think Ted mentioned, it takes about four months to get ready for a filing, we intend to file pretty quickly. But the idea is, we've got to have that conversation, so that people can put in context what a decision like this actually means in meeting Arizona's growth and managing a transition to Clean Energy. So it's going to be a lot of dialog. It's not just with the Commission, it's with the stakeholders that will be involved, but I make the start on that.

Insoo Kim -- Goldman Sachs -- Analyst

Thanks for the color. See you soon.

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

Thanks Insoo.

Operator

Thank you. Our next question today is coming from Julien Dumoulin-Smith at Bank of America. Your line is live. You may begin.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Hey, good morning, good afternoon. Really appreciate the time, questions. Wish you guys the best here. I know it's a difficult situation. Maybe if I can just pick it up from where Insoo left it off. How are you thinking about next steps forward about the SCR here? I noted your commentary, it didn't specifically, if I didn't catch it right mention follow-up in litigation? How are you thinking about that side whether it's securitization, litigation, ultimate operations of Four Corners as well as just coming back to this question on settlement, I know there's been some open debate as to whether or not the Commission or staff specifically can settle. I know the Chair made some comments in recent weeks as well. Is there an ability to settle right now as best you perceive it? I mean, certainly, you seem to suggest so in the commentary, but also separately the wider conversation on next steps which I imagine is somewhat glued on the SCR as well?

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

Yes, Julien, let me be really direct with that. I did have it in my initial comments, but our first step in the near term approach with the SCRs is to pursue judicial review. And so what we have to do is we have to go to the Commission first, you have to ask for rehearing that's a -- we have 20 days to ask for rehearing. The Commission has 20 days to act on that. If they don't act on it within 20 days, then it's deemed denied and that opens up then your access to the courts. And so I won't go into the more detailed strategy, but we were very clear in the hearing that the prudent standard that was used just does not match the record in the case. And so we were very clear that I think we gave them one option to say if we could do a debt return that we would be able to move forward with that. But the partial recovery that they gave, which means there was a disallowance of the $216 million, doesn't leave us a choice but to go to court on that issue. So that's the near-term process. What happens, down the road with securitization, I mean those are all things later.

With respect to getting in settling, I think one of the things that this case did show is the challenge of not having a settlement, where you do have a more limited scope of issues to look at. This was pretty wide open in terms of everything that was involved for both the hearing division, the parties and then ultimately the commissioners, and so I think we would continue to advocate for settlement as being a better outcome, because you are able to do a lot of those trade-offs with the parties who are most affected, rather than having it go to a commissioner or a judge where it often can be a binary outcome. Somebody is going to lose at all or they're going to win it all and in a lot of cases that compromise is much better. So I still think that that's the best path moving forward. That's what we would be working toward. And again we're going to have this period of time when we finally get out of ex-party to hopefully be able to have some conversation with the policymakers on how to make this more constructive.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. Yes, I hear you on that. And then more broadly on this 5% to 7%, I mean how are you thinking about sort of regulatory recovery rate case support for that, and the cadence of that 5% to 7% through the future forecast period. I'll let you define that. I just want to understand what this means for '23 and '24 and maybe understand a little bit on -- especially on the robust sales growth? I mean can you drive earnings growth independent of a rate case in the medium term, just given the pace of investment that you're articulating in rate base?

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

Julien, the way I think about that is, as Jeff said, we plan on filing the next case as soon as practical, given the outcome of this recent, and we assume a conclusion of that before 2024 and we're being conservative in our assumption of just with reasonable regulation and a conservative outcome in that case we can support 5% to 7% earnings growth. And it will just depend on the details of that next case. I think given the sales growth, our commitment to cost management, we've got the ability to offer a favorable construct many stakeholders that could lead to a constructive outcome forever, but it will just depend on those details in determining how long we go then after that before really file another rate case. But the 5% to 7% is supported by just reasonable regulation and a balanced outcome in the next filing.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

But not better than the 5% to 7% as you think about the prospects for regulatory recovery, by the time you get to '24 or '25?

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

Well, that's a long-term target. So in the near term, you could be better. It just depends on the outcome. But over the long-term, we believe 5% to 7% is a prudent range.

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Got it. All right, thank you. I'll pass it over. I know there's a lot to ask.

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

Thanks Julien.

Operator

Thank you. Our next question today is coming from Shar Pourreza at Guggenheim Partners. Your line is live. You may begin.

Shar Pourreza -- Guggenheim Partners -- Analyst

Hey, guys.

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

Hey, Shar.

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

Hey, Shar.

Shar Pourreza -- Guggenheim Partners -- Analyst

Just a couple of questions here. First, I just wanted to follow-up on Julien's question. Just curious how you expect the litigation, I guess to affect the next rate case? And any sense on timing of the judicial review? And Jeff, more importantly, if you're trying to align with the different stakeholders, I guess why appeal, given that your plan obviously seems to support this outcome. Why not set out work with the stakeholders. I guess could the litigation, more of the future filing from a settlement and dialog perspective?

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

Yes, Shar. To me, one of the most important things is just how the prudent standard was applied in this case and I tried to make it very clear during the open meetings that this is more than just $216 million write-off. I mean that is not good, and I don't think that was supported by the evidence of the case. But when you start thinking about the amount of investments that we need to put in and if every time we do that, there is a look backwards to say -- well, maybe there is a different technology that would have been better or cheaper. It makes it really hard to think about how you're going to navigate this Clean Energy transition. And so I think we were trying to be as transparent and as clear as we could be with the Commission when we were in the open meeting about what we would have to do given this outcome. And so that's unfortunate. I mean I would much rather not be in that position. But as we move through that, I don't think anybody is going to be surprised by it and the point is to say, let's figure out how we can align on what we can align on. I mean that's part of the regulatory structure is sometimes companies appeal, you've got a right to appeal that setup and the framework. We're not doing anything more than we have the rights to do, but we still need to work together and we still need to work collaboratively through that. So we'll have to do what we can do to try to navigate that.

Shar Pourreza -- Guggenheim Partners -- Analyst

Got it. And then just on the equity front, it seems like the Commission has left the equity layers alone as long as they stay consistent with past levels. I guess it's good to see there is some rationale you highlighted that may justify the GRC outcome and how it could be somewhat anomalistic. But you do have another GRC coming up, which had equity needs in of itself and now you layer in that with this order as it stands today, you seem somewhat under-equitized. I know you're deferring the equity, but it's not going away. I guess how should we think about your prior equity guide coupled with sort of the recent order, which can be somewhat offset by maybe use of parent leverage and lower growth? I mean, is there a scenario Ted that where you wouldn't need any equity in '24, how does -- so how do we think about the book ends?

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

Yes, I appreciate that, Shar. The way we think about it first, is any Pinnacle debt that's injected in APS will be treated as equity at APS, of course. And then the second really more fundamental, we just don't believe that this prudent issue common at the current valuation. With respect to whether we could defer beyond 2024 to Pinnacle's outcome that will just depend on the next outcome. And as we stated, we'll also evaluate alternatives when the time comes such as hybrids or forwards or convertibles to mitigate for the dilution at that time. But heading into the next rate case, our primary focus will be improving the ROE that we believe is unjust and not appropriate given -- as Jeff mentioned, the growth that we need to finance as well as some responsibilities we have, as operating the nation's largest Clean Energy asset and I believe that our balance sheet profile heading into the next case will allow us to then focus on improving that ROE.

Shar Pourreza -- Guggenheim Partners -- Analyst

Got it, got it. Thank you guys for this and I appreciate the color. See you next week.

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

Thanks Shar.

Operator

Thank you. Our next question today is coming from Sophie Karp at KeyBanc. Your line is live. You may begin.

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Hi, good morning and thank you for taking my questions.

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

Hi, Sophie.

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

Hi, Sophie.

Sophie Karp -- KeyBanc Capital Markets -- Analyst

I had a couple of questions here. First on your operating expense, this opex guide for 2022. I'm just kind of curious what levers you have to keep that fairly flat or maybe modestly down versus what we've seen in 2021? How should you -- How are you thinking about that?

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

Yes, I appreciate that Sophie. We're real proud of our customer affordability program and our growing culture of being focused on Lean Sigma. So this is really been a companywide concerted effort to embrace lean, eliminate waste, harvest savings and be able to use this is one of our levers through this recent period. In this last rate case, in fact, we were able to take some of the customer affordability savings and have that as part of our filing and pass that on the customers. Of course, it doesn't just stop with that last rate case filings, we're continuing to focus on cost management and operating a lean organization and that's part of one of the lever that is going to help us during this period. So it's not any one item, it's a variety of initiatives across the entire enterprise, whether it be, being able to consolidate supply and services and leverage our supply chain strategies more efficiently or be able to automate some of our systems and processes and then be able to focus our human hours or more value add work, there is just a tremendous amount of opportunity and ideas that this organization has come forward with and is executing, and we're really inspired by how much the team has stepped up and is taking this is a challenge and an opportunity to deliver efficiencies in this period.

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Got it. Thank you. And then on solar, right, so the grid connection -- grid access charge has been eliminated, and I think this is -- we all remember kind of the reasons why it was put in, in the first place. I guess now that it has gone on in the solar applications are going up. How do you think about that when you forecast your load growth? Would that be an issue for you guys at some point?

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

Well, Sophie, first of all, just want to make sure we're clear that the grid access charge going ways revenue neutral. So that really is just a cost shift between customer classes. But our estimates for weather normalized sales growth is net of energy efficiency or rooftop. So if you were to look at the gross numbers they are even higher than what we're projecting. And again, as we sit here today over 4% weather normalized sales growth currently, that's higher than our current range, and if you compare it to 2019 we were over 6%. So we are confident in that weather normalized range going forward even with the impacts of energy efficiency and rooftop solar.

Sophie Karp -- KeyBanc Capital Markets -- Analyst

All right. Thank you. That's all from me.

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

Thank you.

Operator

Thank you. Our next question today is coming from Steve Fleishman at Wolfe Research. Your line is live. You may begin.

Steve Fleishman -- Wolfe Research -- Analyst

Yes, hi, thanks. Just somebody asked this question before, but I'm not sure I heard the answer. The 5% to 7% growth rate that you've laid out, is that something you see consistent over this period? Or is there -- is it -- is there some may be lag upfront and then when you get the rate relief it goes higher. Could you just talk a little bit about kind of the year-by-year of that?

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

Yes, Steve, happy to, it's difficult to break down year-by-year, but I think the main point that you're getting at is, it's certainly is dependent upon reasonable regulation in the next rate case. We will continue to have growth based on our organic growth in the service territory, but we believe with reasonable regulation and what we're estimating as a conservative outcome in the next rate case, then that will really propel growth in that long-term earnings range target. So, certainly we'll be looking for the filing that will be coming forward sooner rather than later and the outcome of that next case to project over the long-term, and that's why that range is over the next five years.

Steve Fleishman -- Wolfe Research -- Analyst

Okay. I'm just going to ask, maybe a little more clearly if on the question, just so, because I think for the next rate case, you're really not going to have in place till late '24, did you say or?

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

Well, it depends on the schedule, but if you file in '22, I think it's reasonable to expect an outcome in '23.

Steve Fleishman -- Wolfe Research -- Analyst

Okay. So there is only really one year '23 without the outcome of the rate case. By '24, you expect you will have it in place.

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

Yes, and actually, I think if we file in '22, it's possibly an outcome in '23 consistent with schedules we've had in the past. And therefore you have some resolution in '23 and then your first full year is '24.

Steve Fleishman -- Wolfe Research -- Analyst

Okay, great. And then maybe just on the -- in terms of understanding the kind of equity. So you plan to -- I assume keep the APS equity at the 54 and change that's authorized in this last case?

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

That was the equity from the last test year. We will measure the equity at the end of this next test year and that will just be whatever it is, that will be exactly what we file. But again, our view is while you'll have equity injection based on Pinnacle debt, we are more focused on trying to prevent further dilution during this period and then really focus the filing on improving the ROE.

Steve Fleishman -- Wolfe Research -- Analyst

Right. And is there any risk of them imputing that or is there not any history of that?

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

We don't believe there is risk and we believe that the commission will understand that we have to lever the company in order to keep funding the growth in this state. And that's the position they put us in as a result of the outcome of this recent case. So I view that as a little risk.

Steve Fleishman -- Wolfe Research -- Analyst

Okay. That's it for now. Thanks.

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

Thanks, Steve.

Operator

Thank you. Our next question today is coming from Anthony Crowdell at Mizuho. Your line is live. You may begin.

Anthony Crowdell -- Mizuho Securities -- Analyst

Hey, good afternoon. Thanks so much for the detail in the slide. If I could just follow-up on Steve's question. So you're saying the Commission doesn't really care about how it's historically not cared about double leverage, is that accurate?

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

Well, it's really not been anything that's been a focus and I can't speculate on what that may look like in the next rate case filing. I think the key is that with our record growth we have to finance that somehow, and given the outcome and the impact that's had on our valuation, the prudent way to finance it is to use the strength of our balance sheet and I believe the Commission will understand that.

Anthony Crowdell -- Mizuho Securities -- Analyst

Okay. So it's more of maybe double leverage hasn't been presented to the Commission historically versus that they've either approved or disapproved. Is that fair?

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

Anthony, I don't expect it to be an issue.

Anthony Crowdell -- Mizuho Securities -- Analyst

Okay. And then if I think of the high-end of rate base guidance is 6%, the high end of EPS guidance is 7%. Are you assuming either improved ROEs or minimizing some regulatory lag to get to that. If you hit the high end of rate base guidance, how do I hit the high end of the EPS guide?

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

I think the key there over time is really going to be improving regulatory lag, which has been a focus of our team all along. And I believe that we've been clear as well that improving regulatory lag also allows us to stay out of rate cases. So, that will definitely be a key focus in this next filing, certainly improving ROE to be commensurate with peers is also a driver as well.

Anthony Crowdell -- Mizuho Securities -- Analyst

Great. And then just lastly, you made a really good distinction about, maybe the disallowance on the SCRs was related to like legacy coal plant and a lot of the capex going forward is more modernized in Clean Energy. But just given any type of risk of new technology or something coming up supplementing it and now the Commission playing Monday morning quarterback with that capex, does that give you any hesitancy on going with any big projects or limiting the value of any type of project, so that your risk of disallowance is much smaller and maybe what we saw in the SCR order or decision?

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

Yes, I guess two parts to that. So one is the -- that's again one of the important reasons for why we had to seek review of the case is because getting clarity around not -- we make the decisions based on the information that we have at the time we make the decisions to move forward in a prudent way. And there is a lot of new technology that's coming in. So I do think probably everybody in the industry is trying to figure out how do you derisk new technology projects. So you don't run out look at, for example, our battery storage work. We put a pause after we had the McMicken event. So that we can deeply, deeply understand safety around lithium-ion utility scale batteries. We're now moving forward in a pretty aggressive way with those systems, but their established technology. They're known, there is more of being installed. We're not first movers on it. And so I think that you'll see a lot of work on trying to make sure that we're managing that risk, because I think it's a good point. But one of the important things for us was to get clarity on that you don't use hindsight to go back and look at what was an appropriate decision when circumstances have changed.

Anthony Crowdell -- Mizuho Securities -- Analyst

Great, thanks so much for taking my questions. Looking forward to seeing you guys at EEI.

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

Us too Anthony. Thank you.

Operator

Thank you. That was our last question for today. I will now turn the call over to management for any closing remarks.

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

Great, thank you. And just -- I just want to thank all of you for your investment and your confidence in us. This rate case outcome was not what we had hoped for, but we are focused now on a path forward and are focused on our customers and look forward to seeing some of you at EEI and thank you again. That concludes our call.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Amanda Ho -- Director, Investor Relations

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

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

Insoo Kim -- Goldman Sachs -- Analyst

Julien Dumoulin-Smith -- Bank of America Merrill Lynch -- Analyst

Shar Pourreza -- Guggenheim Partners -- Analyst

Sophie Karp -- KeyBanc Capital Markets -- Analyst

Steve Fleishman -- Wolfe Research -- Analyst

Anthony Crowdell -- Mizuho Securities -- Analyst

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