Earnings Labs

Pinnacle West Capital Corporation (PNW)

Q4 2018 Earnings Call· Fri, Feb 22, 2019

$102.86

+0.43%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+0.49%

1 Week

-0.47%

1 Month

+3.88%

vs S&P

+3.17%

Transcript

Operator

Operator

Good day ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2018 Fourth Quarter and Full Year Conference Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host to Ms. Stefanie Layton. Ma'am, the floor is yours.

Stefanie Layton

Analyst

Thank you, Jess. I would like to thank everyone for participating in the conference call and webcast to review our fourth quarter and full year 2018 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Jeff Guldner, APS' President and Daniel Froetscher, APS' Executive Vice President of Operations are also here with us. First, I need to cover a few details with you. The slides that we will be using our available on our Investor Relations Web site, along with our earnings release and related information. Note that the slides contain reconciliations of certain non-GAAP financial information. Today's comments and our slides contain forward-looking statements based on our current expectations and the company assumes no obligation to update these statements. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. Our 2018 Form 10-K was filed this morning. Please refer to that document for forward-looking statements, cautionary language as well as 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 Web site for the next 30 days. It will also be available by telephone through March 1. I will now turn the call over to Don.

Don Brandt

Analyst

Thanks Stephanie and thank you all for joining us today. Pinnacle West delivered a solid 2018 with earnings near the top of our guidance range. Constructive public policy outcomes and our balance sheet remains one of the strongest in the industry. Jim will discuss the financial results. My comments will focus on our 2018 highlights and the year ahead. Our fleet performed well in 2018. Palo Verde generating station completed another outstanding year of carbon free electricity production generating 31.1 million megawatt hours of energy. It is also notable that the team at Palo Verde completed the scheduled 2018 spring refueling and maintenance outage in 28 days and 13 hours, the shortest in Palo Verde history. Turning to our generation needs, in 2018, we issued a request for proposal for approximately 106 megawatts of battery storage to be located on up to 5 of our AZ Sun sites. Based upon our evaluation of the RFP responses, we expanded the initial phase of battery deployment to 141 megawatts by adding a 6th AZ Sun site which is expected to be in surplus by mid 2020. This investment will allow customers to use energy from our existing AZ Sun solar facilities during the peak period after the sun sets. Increases fuel savings for customers and further advances our clean energy portfolio goals. In addition, we have entered into purchase power agreements for over 600 megawatts of peaking capacity resources beginning in 2021. These contracts are the result of our 2018 peaking capacity RFP and include 150 megawatts of battery storage and a 463 megawatt summer seasonal natural gas power purchase agreement. Looking forward, we will continue our efforts to meet future customer needs with clean technologies. To accomplish this, we plan to install at least 660 megawatts of APS owned solar plus…

Jim Hatfield

Analyst

Thank you, Don. And thank you, again, everyone for joining us today. This morning we reported our financial results for the fourth quarter and full year 2018. As you can see on Slide 3 of the materials, we had a successful year. Before I review the details of our 2018 results, let me briefly touch on some of the key factors from the quarter which can be found on Slide 4. For the fourth quarter of 2018, we earned $0.23 per share compared to $0.19 per share in the fourth quarter of 2017. Adjusted gross margin was down $0.15 per share compared to the fourth quarter of 2017. Higher sales related revenue and the change in residential rate design and seasonal rates were more than offset by the unfavorable weather and the refund to customers resulting from Federal Tax Reform. As a reminder, the 2017 rate review order established new rate options for customers. The new rates shifted a portion of the revenue previously collected during the summer to non-summer month's better aligning revenue collection with the cost to serve. Offsetting the decrease in adjusted gross margin were lower, operating and maintenance expenses, higher pension and other post retirement benefits non-service credits, other income and lower adjusted income tax expense. For the full year 2018, we delivered solid results with earnings at the upper end of our guidance range, earning $4.54 per share compared to $4.35 per share in 2017. Reflected in these results is an ACC jurisdictional ROE of 9.5. When we calculated the ACC jurisdictional ROE, we excluded revenue related to FERC jurisdiction. FERC represents approximately 17% of rate base and has an authorized ROE of 10.75%. Turning your attention to Slide 5, I'll review some highlights of our full year results. Gross margin was a key driver…

Operator

Operator

Thank you. The floor is now open for questions. [Operator Instructions] We'll go first to Ali Agha with SunTrust. Your line is open. And Ali, your line is open. Please go ahead.

Ali Agha

Analyst

Yes, hello. Good morning. Can you hear me? Good morning. Good. First question on this -- the Four Corner step increase, I thought originally that was to have happened by the beginning of the year. Any reason for the delay in that and does that in any way impact your '19 guidance depending on when that does actually take place?

Jeff Guldner

Analyst

Yes. Ali, this is Jeff. So that recommended opinion in order is out on the SCR increase. It has not gone to the commission yet. It's possible that that could push out to when they're further into the rate audit. And so that is just under way right now and it doesn't have an impact the guidance.

Don Brandt

Analyst

We're very comfortable with the guidance.

Ali Agha

Analyst

So assuming this happens around May time period that should still be fine with the guidance?

Don Brandt

Analyst

Yes.

Ali Agha

Analyst

Okay. Secondly on the rate base CAGR. So, if I just took the 17 to 21 numbers that you're showing us that gave it as closer to 8%. So just wanted to reconcile that with the 6% to 7% that you have on the same chart. Fair to say that at least for the next three or four years we're running at a faster pace than that.

Don Brandt

Analyst

That I would only add that that your math is correct, but you're looking at 1 point in time and as you go past beyond 2021 more comfortable with the 6 or 7.

Ali Agha

Analyst

I see. And then, lastly, just on a funding note there's obviously a pretty big step up in CapEx in 21, 19 and 20 are pretty robust as well. So can you just remind us of where the equity needs show in and when external equity would be required to fund that and roughly how much -- how should we be thinking about that for modeling purposes.

Don Brandt

Analyst

So any equity we issue would not necessarily be for 21 CapEx, but it would be more related to the capital structure at APS. And we will need to top that off at some point this year. And if it isn't in the form of equity it would be a modest amount.

Ali Agha

Analyst

I see. So think about that sometime later this year?

Don Brandt

Analyst

If we did anything it would be later this year.

Ali Agha

Analyst

Got it. Thank you.

Operator

Operator

Moving next to Julien Dumoulin-Smith with Bank of America Merrill Lynch.

Julien Dumoulin-Smith

Analyst

Good morning. Can you hear me?

Don Brandt

Analyst

Yes, Julian.

Julien Dumoulin-Smith

Analyst

Hey. So perhaps on up a little bit on Ali's questions first, let me start where he left off on the CapEx front. Can you just elaborate a little bit, the 21 is obviously the first year of higher CapEx. You talk about this 2019 RFP of 260 megawatts. Is that the full amount reflected in 21? And I just want to understand a little bit I acknowledge we're early on how the cadence of that RFP could play out in the subsequent years. And again, under the assumption that you own this. In the other little piece if you could address it, as we haven't seen too many storage projects and utility ownership yet. How are you thinking about the dollar per kilowatt capital costs here, right, i.e. the number of hours et cetera the parameters if will?

Don Brandt

Analyst

So I think in terms of what we have announced to-date it's been a combination of PPA and ownership. As we move forward, we're more inclined to ownership but they are at [indiscernible] what we do as well as cost moving forward.

Julien Dumoulin-Smith

Analyst

Got you. Okay. Fair enough. But the 260 is that fully baked into 2021 itself I mean is there some that that bleeds into 22. And then, separately I presume that that's you're assuming that you've got you you've got the 260 in your outlook or is there some haircutting of that?

Don Brandt

Analyst

We have in the outlook what is expected to incur by 2021. Yes.

Julien Dumoulin-Smith

Analyst

Got it. Okay. Actually, then just to come back to the Four Corners side of the equation real quickly. Obviously, sales are oriented towards the summer. Is there anything further in terms of timeline here that would give the ACC some need or requirement to kind of vote on that thing?

Jim Hatfield

Analyst

Now, not a requirement Julian, but, yes, it's the rate audit right now is scheduled to go through May 3rd.

Julien Dumoulin-Smith

Analyst

Got it. Is there any reason to link one versus the other, obviously, I mean they're separate and distinct in efforts here.

Jim Hatfield

Analyst

There's no reason to think they're going to wait for that. They are separate right, but one of things they're looking at is whether there was over running in 2018. And we tell that once the commissioners have the information in their hand they'll make an informed decision.

Julien Dumoulin-Smith

Analyst

Got it. All right. Excellent. I'll leave it there. Thank you very much.

Operator

Operator

We'll move next to Insoo Kim with Goldman Sachs.

Insoo Kim

Analyst

Thank you. Regarding the upsized weather normalized low growth assumption from 19 to 21, I think my understanding is that that's the impact of you know the distributed generation impacts coming off and maybe some -- less of their energy efficiency investments that should more line customer growth with low growth especially on the EU side. Have you seen -- have you been seeing the effects of education to use more power at the off-peak hours. It seems like the upside growth depends on the changes in customer behavior on usage.

Don Brandt

Analyst

I would say the asset impact was really prices realized and not [indiscernible] just concerned. I think what we saw was a very strong fourth quarter with 0.3% growth and we're beginning to see the economic activity in the West Valley which is what we've been talking about for a couple years begin to come to fruition. I will say meter sets which are a leading indicator exceeded budget in January for the first time in a long time.

Jim Hatfield

Analyst

So we're seeing now the realization of this economic activity happening.

Insoo Kim

Analyst

So when you look at the changes in customer growth outlook that moderated down about 0.5% on average annually, but the low growth kind of upset, would assume that the usage per customer whether it's retail or residential or commercial is expected to pick up.

Don Brandt

Analyst

That's correct.

Insoo Kim

Analyst

Got it. And then in regards to the clean energy investments including storage, would that be need to go through a rate case for recovery or are there contemplations on a potential mechanisms to cover the costs in return during the construction?

Don Brandt

Analyst

So the PPA construct would go through a procedure to get it into the PSA. What we rate base will be recovered in normal course over time.

Insoo Kim

Analyst

Through a rate case, right?

Don Brandt

Analyst

Yes.

Insoo Kim

Analyst

Understood. Thank you very much.

Don Brandt

Analyst

Thank you, Insoo.

Operator

Operator

We'll go next to Charles Fishman with Morningstar Research.

Charles Fishman

Analyst

The questions I have are concerning, Slide 8, the capital expenditure and specifically the new bar 2021. Is the increase in clean generation, is that a little less than $200 million between 21 and 20. Is that the expansion of the battery program?

Don Brandt

Analyst

Yes. That would be batteries and as well as utility scale solar.

Charles Fishman

Analyst

Okay. And then that new distribution center in West Phoenix that you mentioned where does that enter in on the bars. What year we're at?

Don Brandt

Analyst

Activity for it is occurred some in 18 and will occur in '19 and '20 and '21, the infrastructure for the West Valley will be ongoing.

Charles Fishman

Analyst

Roughly how much. I mean I envision that as a facility for your distribution trucks and people involved, am I picturing that correctly?

Daniel Froetscher

Analyst

Yes, Charles. This is Daniel Froetscher. Yes, that is a facility to be used for predominantly our transmission and distribution teams. It's located in the West Valley, sits on about an 88 acre parcel, is a multi-year build that will total roughly $85 million to $90 million.

Charles Fishman

Analyst

Got it. Okay. That's all I have. Thank you.

Operator

Operator

Moving next to Michael Weinstein with Credit Suisse.

Michael Weinstein

Analyst

Hi, guys.

Don Brandt

Analyst

Hey, Michael.

Michael Weinstein

Analyst

The IRP that filing that's coming up in the spring, how much more of a -- how much more CapEx can we expect to see, how much of an early indication is the 2021 bump in CapEx as to how this IRP is going to be shaping up? And how many more years of view do you think will get out of that -- at that point?

Daniel Froetscher

Analyst

Michael, this is Daniel Froetscher. I wouldn't correlate necessarily our preliminary IRP which is due a little later this year to 2021 and beyond. We obviously haven't forecasted our CapEx beyond 2021. I think the IRP will foundationally serve as a forward look shaping mechanism relative to our resource requirements and our desired resource choices for additional capacity in energy.

Michael Weinstein

Analyst

Got you. And are you getting any kind of indication from Commissioner Kennedy as to her desire for renewables at this point, is she -- I'm curious about what kind of talks you've had with the new commissioners?

Jeff Guldner

Analyst

Michael, this is Jeff. So Commissioner Kennedy, when she came on the bench indicated that she was going to propose or was talking about a 50% renewable energy standard by 2028. And so that's what we've heard from her. Commissioner Tobin as you can recall has a proposal for an 80% clean standard. And so we expect there will be some dialogue at the commission around those various proposals. You think that'll be entering to the draft IRP.

Don Brandt

Analyst

Well, the IRP is going to certainly intersect that at some point. So it's a little hard to tell how exactly all that's going to ultimately unfold. But obviously if you file an IRP and you're having some discussion around those potential standards they're going to intersect

Michael Weinstein

Analyst

Got you. Okay. Thank you.

Operator

Operator

We'll go next to Paul Patterson with Glenrock Associates.

Paul Patterson

Analyst

Good morning.

Don Brandt

Analyst

Good morning.

Paul Patterson

Analyst

Was wondering with this increase in retail sales -- and I apology if I've missed this. When's the next time you guys expect to go into a four week.

Don Brandt

Analyst

Right now. Our expectation is to file June 1, 2020.

Paul Patterson

Analyst

And then, with respect to the discussion around competition, what is driving that. I mean I hear you guys arguments on how it doesn't really work for most ratepayers, but what do you think is driving this sort of -- I'm old enough to remember when this first came up. What do you think is causing this new -- this new inner season?

Jim Hatfield

Analyst

I think there's certainly you saw in Nevada there was a push there. There's still discussions that I think occur around the country periodically. It has been a topic in Arizona kind of hoping on for a while. We continue to see that the challenges as Don mentioned in his comments the legal framework here in Arizona's is constitutionally grounded. And so that makes it more challenging to implement something here. But again the conversations in terms of what are customers realizing in other states what are the challenges being confronted in other states. Those are all good conversations to have and we will share our viewpoints on that okay.

Paul Patterson

Analyst

Okay. With respect to the battery and solar combination, how should we think about sort of what that -- how that compares in terms of cost and flexibility to a gas plant. If such a comparison can be made or what kind of serve capacity value can we sort of -- should we think about with the combination of these things. Do you follow me if there's any quantitative sort of number that you have around that?

Daniel Froetscher

Analyst

Paul. This is Daniel. I would simply say that coming off of our 2018 request for proposals we were pleasantly surprised by the cost competitiveness of batteries in general. Obviously have made some decisions then that as an alternative to gas as a peaking capacity for the late afternoon early evening ramp that we experienced from a system standpoint at battery storage, charged by day time solar generation for 3to 4 hour ramp windows in that late afternoon early evening timeframe is a viable solution for our customers and our system.

Paul Patterson

Analyst

Okay. And by viable, I mean without the environmental benefits and what have you would you say it, it's would you say it's higher than what we'd see if you -- if you had a gas plant sort of thing working with solar or I mean is there any you follow what I'm saying. I'm just trying to get sort of picture as to how that what that kind of means if you follow me.

Don Brandt

Analyst

Yes. I would simply say we found it to be quite cost competitive.

Paul Patterson

Analyst

Okay. Okay. Impressive. And then, just finally back on the question about customer sales which really seemed to your forecast has really bumped out without customer growth really changing. Is that the size of the customer that we mentioned economic growth could just elaborate just a little bit further on that in terms of what exactly how that actually uses. Is that just because there are larger customers that are coming onboard or that the customers that you have are going to be using a lot more electricity just sort of how should we think about that.

Don Brandt

Analyst

I think what you're seeing in the West Valley is a lot of large commercial warehousing distribution data center. So you're getting a different mix of customer and that customer growth as well.

Paul Patterson

Analyst

Okay Awesome. Thanks so much guys. Have a good weekend.

Operator

Operator

There was no other questions. I'll turn the conference back to the speakers for closing remarks.

Stefanie Layton

Analyst

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

Operator

Operator

Ladies and gentlemen, we thank you for your participation. You may disconnect your phone lines at this time and have a great day.