Greetings and welcome to the Pinnacle West Capital Corporation 2020 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. [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.

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our first quarter 2020 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Ted Geisler; Jim Hatfield, Chief Administrative Officer; Daniel Froetscher, APS’ President and COO; and Barbara Lockwood, Senior Vice President, Public Policy 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. Note that the slides contain reconciliations of certain non-GAAP financial 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 2020 form 10-Q 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 website for the next 30 days. It will also be available by telephone through May 15th.I will now turn the call over to Jeff.

Thank you, Stefanie and thank you all for joining us today. Before I get started, let me say I hope everyone is doing well. This is certainly an unexpected way to start our year. But the last several weeks have only reaffirmed to me that our company and our people are resilient, agile and prepared to handle whatever comes our way.We recognized the realities of COVID-19 and the challenges that people are facing, and we remain committed first and foremost to safely delivering reliable power to Arizona, building shareholder value by ensuring customer value.In March, we made the decision to deploy as much of our workforce as possible to work from home and to change our work practices for those essential workers needed to keep the lights on for our customers and to prepare for the Arizona summer.The transition from normal course of business to social distancing and revised safety procedures were seamless from our reliability standpoint and for our customers. While our processes have changed, our priorities have not.From the financial perspective, our strengths lie in a strong balance sheet, good credit rating and sufficient liquidity. We can and will weather the storm. We recognize that in order to serve both our customers and our shareholders, it is important to maintain our financial health. Financial stability is a key driver in our decision making and it’s essential to support our long-term goals.Operationally, the rigor of our preparation and the strength of our team position us well to navigate the challenges presented by COVID-19. Our pandemic plan was established, tested, refined and rehearsed before any of the COVID-19 impacts began to hit us.As I mentioned earlier, we’ve transitioned as many employees as possible to working from home, and that includes over 140 call center associates who we moved very quickly…

Thank you, Jeff. And thank you again, everyone for joining us today. I want to add to Jeff’s appreciation and recognition of our team’s accomplishments under these unusual circumstances. I have always been proud of the APS workforce. But seeing our team’s lead through this pandemic with such tenacity and strength has truly been inspiring. I would also like to share our appreciation for those in the medical profession and other essential service providers making very real sacrifices that help our communities navigate the COVID-19 index.Before I discuss some of the unique aspects of our service territory and strengths that will serve us well through this current challenge, I want to briefly touch on our first quarter results. 2020 started out strong, earning $0.27 per share compared to $0.16 per share in the first quarter of ‘19.Lower adjusted O&M and higher pension and OPEB non-service costs contributed to the increase in earnings. We also experienced 2.2% customer growth and 0.8% weather-normalized sales growth in the first quarter compared to the same period in 2019. Excluding the last two weeks of March, weather-normalized sales for the quarter were within our original 2020 annual guidance range of 1% to 2%.While we started the year strong, we have also begun to experience impacts, including a reduction in load from the COVID-19, social distancing and stay at home guidelines. From March 13th, the date when many Arizona schools and businesses closed through April 30th, we have seen an approximate 14% reduction in weather-normalized commercial and industrial load compared to the same period last year, partially offset by an approximate 7% increase in weather-normalized residential load.A reduction and C&I load equates to an earnings decrease of around $0.14 per share, while the increase in residential usage contributes about $0.04 per share for a net reduction…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from line of Michael Weinstein with Credit Suisse. Please proceed with your question.

Hi, good afternoon, guys.

Hey, Michael.

Hey, Michael.

So if I understood it correctly, it looks if the trends persist in April, it’s about, that the April trends in COVID load reduction are about $0.05 a month, something along those lines going forward that’s where your extra $0.10 of impact comes [technical difficulty] in the second quarter?

Michael, this is Ted. It’s not linear wish it was that easy. You got to remember, we got seasonality, we’ve got seasonal rates that start here in May. So we try to do is, is just say that if you look at the entire effects of COVID since mid-March through the end of April, which is what we think the worst of it, because that’s during the forced stay at home measure.And if you just say that that forced stay at home measure effect were to continue all the way through the end of Q2, then you’d likely have a full $0.20 EPS impact. And that’s the way we’ve been thinking about it.Now keep in mind, we’re starting to reopen as I mentioned, retail start earlier this week. Salons started today, in fact, can’t wait to go get a haircut myself after this call. And Monday we’ve got restaurants opening.So certainly there’s some resumption and we’d expect to see some positivity from a sales standpoint as a result of this. But what we’re saying just from a scenario standpoint, if you just saw what we’ve seen over the last four weeks continue hard through the end of Q2, then that’s the impact.

Did you completely offset some higher residential, though would [technical difficulty] air conditioning load? You think that actually that you know the [technical difficulty] tend to offset from residential increases?

It’s difficult to predict. A good question and certainly on our minds as well, I’d say it’s possible. The other aspect that we’re thinking about is I know, you know, our workforce is contemplating the success we’ve had at a remote work environment. We would expect that we’ll have many employees embrace more flexible work from up work on a go forward basis, because we’re seeing the benefits of that.And so we think other companies may do the same. Therefore, you may have a long-term persistent change in usage for residential customers as a result of more flexible work environments. So a lot of uncertainties but I think your points well taken and certainly something that we’re paying attention to as well.

Sorry if you’ve covered this before, but our regulators considering [technical difficulty] rate case process for COVID?

Hey, Michael you’re breaking up on that question. I’m sorry. Could you say it again?

Sorry [technical difficulty] are regulators – sorry if you’ve covered this [technical difficulty]

I think we just lost you, Michael.

Sorry about that.

There you go, there you go. You’re back. Not sure –

Okay. Are regulators considering interim relief for COVID?

Yeah. So the discussion, there was a decision made to refund the over collected DSM balance. So that’s going to provide relief for customers with a bill credit in June. The discussion of whether an accounting order would be adopted was raised and there’s been some letters written by commissioners and some discussion in open meeting context around deferral mechanisms, which are obviously being discussed in many states, many jurisdictions.There was conversation on that earlier this week at the commission, but no action taken. And as I indicated – the Chairman indicated that he’s going to likely bring it back for further discussion. So there hasn’t been anything done yet, but they’re discussing it.

Okay, got it. Thank you.

Thanks, Michael.

Thanks, Michael.

Our next question comes from the line of Shar Pourezza with Guggenheim. Please proceed with your question.

Hey guys.

Hey, Shar.

Hey, Shar.

Just a couple of regulatory items. Just on the rate case in the event sort of the response to this pandemic proves a little bit longer than anticipated. I mean, we’ve already seen some delays here. Is there any scenario in which the rate case runs into ‘21? And if so, you know, how does sort of the statutory turnover at the commission affect the case? How should we sort of think about sort of settlement opportunities, especially as we head into the September hearings that you know, I have to imagine that you guys are a little bit more incentivized to settle here. So maybe just if you could just chat top level as we’re thinking about the rate case and how you’re going to strategize?

Yeah. Sure, Shar. You know I think right now under the current schedule, if you think about a September hearing date start and then you start layering on what happens. So you have a month to, maybe longer than a month hearing, followed by written briefs, followed by the administrative law judge putting together a recommended opinion and order, followed by exceptions, followed by an open meeting. I think the schedule that we have now does have the case moving into 2021.And so the question then is, where in 2021? And what happens over the rest of the summer? How does the pandemic play out? What impact does that have on the commission’s ability to process cases? And again, Tucson Electric is ahead of us, so is a one indicator that you could watch for there.With respect to settlement, you know, this was a case that the commissioner had indicated they wanted to do through a fully litigated rate case. Obviously, there’s a lot of uncertainty that’s come up now with the pandemic.And is an opportunity to do that, you know, that’s something that we are open to, I think there’s been a little bit of signaling that that might be more palatable than it was 6, 9 months ago. It’s still too early to say, because as you probably know, and what generally happens is, those discussions really start after you see staff and intervener testimony. So you kind of got the boundaries staked out.And so we wouldn’t expect to see much developments on that front until after testimony gets filed. And a little early to say whether that’s going to be something that the commission’s going to want to do. But it’s something that we would certainly entertain.

Got it. So just basically watch the August floor with the staff intervener coming out and the hearings that are now in September. So sometime between August and September should be a signal on whether you guys can form a stipulation or not?

Yeah, I think that’s probably fair.

Okay, perfect. And then just one last question on IRP. Is there sort of any updates? Do you expect any delays there around the COVID situation are we still on the – are we still shooting for June?

We’re still shooting for June. Again, things are a little fluid right now in terms of what’s affecting the workload. But we’re still anticipating a filing in June.

Terrific. Thanks, guys. Congrats on these results.

Yeah. Thanks, Shar.

Yeah. Thanks, Shar.

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

Hey, good morning team. Thanks for the time. Hope you all are doing well.

Yeah. Hey, Julien.

Good. Thanks very much. Appreciate it. So I suppose if I could break things down a little bit here. When you look at the impact thus far, it seems like it’s pretty weighted towards commercial versus the consolidated numbers that you guys talked about here on $0.10 versus industrial. And if I can take that a step further, and you think about commercial and you think about reconciling sort of against the full year and your expectations on guidance et cetera. What kind of trajectory thinking about here on the commercial recovery obviously [technical difficulty] trying to reconcile holding guidance? Obviously, it’s a very constructive by the times and critical I mean commercial do you have any thoughts about that. What it sort of embedded in your mind?

Yeah, Julien it’s a fair question. But really, it’s too difficult to get specific on how we’re thinking about those two levers. You know, if this were more similar to the Great Recession, where you just had a net decrease in all customer classes, it’d be a bit easier to tie up the GDP and try to assume some level of resumption. But in this case, we’re seeing inverse trends where residential is up, C&I is down. It’s unclear what the business resumption will do to C&I slowly improving and then what residential does.So you know, for us, what we thought was most fair is just simply play out the current environment all the way through Q2 and be able to share that while businesses are reopening, let’s just assume that you saw no improvement. Here’s what the EPS impact would be. And then more importantly, focus on our levers. And this management team is very focused on our levers to fight hard and do everything we can to make sure that we mitigate the impacts.

Let’s talk about mitigating impact, if you don’t mind. And you all have talked a little bit here about it. If that you got $30 million here at the midpoint that one got it right here. But how do you think about the opportunity to pull more levers here, especially against your guidance with the 1% to 3% one you normalized sales growth?

Yeah, so certainly, you know, cost managements at the top of that list, as I mentioned and specific to cost management, you gave me some examples of our lean initiatives. But, you know, we also think about it through the lens of restricting, hiring or consulting costs, reduce employee expenses, deferring certain non-essential work activities course, we also anticipate some fundamental growth drivers.So, as we stated before, we don’t have data center baked into our forecast, because that remained relatively uncertain at the beginning of the year in terms of timing and volume. But we’re seeing data centers continue with their progression. In fact, two large data centers that have been under construction for a while, are transitioning in the next two weeks from construction power to full service usage. And that’s certainly a driver for us.While we don’t count on weather, and in full year guidance, weather is certainly helping us so far. And then finally, as you saw from Q1, we’ve got some non-operational drivers relative to in Q1 pension OPEB that it’ll analyze throughout the remaining three quarters.So as an example, those are some levers and from a cost management standpoint. We’ve identified what we need to do based on the assumptions that we shared with you today. And of course, we’ll continue to evaluate additional opportunities as more information becomes apparent throughout the remainder of the quarter.

Got it, excellent. And then you started with if I can just post it on this further. In your ‘20 guidance, you have both retail customer growth 2% at the midpoint and other more retail sales by employing a 1% to 2%. Can you talk about how you achieve that today? And again, are you going to take like too much on the sales side, because I know you’re talking about the cost of it and then you stated back and you just clarify this further? How you think about a line of sight getting there or you’re picking out today and I know it’s early about sort of taking first say that $30 million that’s the midpoint of on that savings and kind of thinking and ratcheting down that initial set of sales numbers and think about the net of that $30 million that’s the new proceed we’ll talk about in a year? Or is that vice-versa?

Julien, so you’re right in terms of the guidance range for customer growth, sales growth, you know, keep in mind for Q1, as we stated, we saw weather-normalized sales growth of 0.8% I’ll tell you, you know, prior to effective COVID, we saw 1% to 2%, weather normalized sales growth and in fact, the first couple of weeks in March, it actually jumped up to 2% to 3% with a normalized but the way I would look at it is we believe the fundamentals in our service territory still remain strong for growth.I wouldn’t be able to predict whether they returned to the original guidance levels, but we certainly expect that there’s going to be help from growth in the balance of the year when the economy normalizes to be able to offset some element of the COVID impacts.

And Julien, just qualitatively when you look at also beyond 2020 I mean the states very focused on looking at how to pivot the economic development strategy and that’s been something that we’ve been very involved with this helping to recruit commercial customers and helping to recruit additional high load factor consumers into the service territory.And I think as you begin to look at some of the potential changes on supply chain wanting to bring supply chain closer to, you know, closer to home, potential patterns of people who are looking to move from higher population density areas, there’s a lot of good, I think long-term focus that the economic development folks here both at the state level and within some of the larger companies are really working to try to capitalize on.So obviously, that can affect 2020. But when you look at some of the long-term patterns, I think it’s going to still be consistent with what we’ve seen, which is that we’ll see both the customer growth and if we can get the higher load factor, manufacturing, industrial customers, then we’ll sales growth as well.

Got it, yeah. Understood. Thank you all very much for your time. Best of luck with everything.

Yeah. Thanks, Julien.

Thanks, Julien.

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

Hey, good morning, guys.

Hey, Paul.

Good morning.

So just a follow-up on the regulatory stuff, which is numerous, I guess, and not that easy for me to follow. There is this, I think some sort of proposal associated with a rate freeze. And I was wondering, I assume that the deferral, is that correct? That I mean, if there was some sort of rate freeze that was enacted, that wasn’t clear to me whether or not there is sort of like it’s a deferral.In other words, before future collection after COVID or something like that. Am I understanding that correct?

Yeah. I think all that’s been out really on that right now I’ll ask Barbara to clarify it, if she wants to spin a conversation about what are different things that could be done. So there isn’t rate freeze in place, right now. As you notice, typically when that’s done, you would put a deferral mechanism in place in lieu of doing that, but that’s only been at the conceptual level right now, it hasn’t really gotten into that much detail. Anything to add Barbara?

Yeah. Paul this is Barbara Lockwood. There was some discussion around that generally didn’t really get any traction at the recent open meeting. And it was discussed, basically in conjunction with any sort of accounting orders. Jeff mentioned earlier, there’s been some conversation around different mechanisms of decision that was made this week was to refund the $36 million that was a part of our DSM fund that was unallocated dollars, and that was a release that they chose to provide to customers this week.

Okay, great. And then on the sort of the general rate case, answer this a guess the sort of continuing review of the most economical plan and customer adoption and what have you. Is it safe to say that probably there's not going to be a lot of action before the rate case at this point in time, in other words, that it would seem to me that due to – the fact that you got a rate case going on, that would be sort of the where, if anything would probably be done in terms of resolving that is. Is that an appropriate way to thinking about it?

I think what’s happening right now on the most economical plan is, we’ve put into place the bill comparison tool that appears now on every customer’s bill that identifies whether they’re on the most economical plan and if not, what they would say both on a month and then on an annual basis from that plan. So the intent is to provide his customers as much information as we can about whether they’re on the most economical plan or not.We have some experience in this area, having had demand and kind of use rates for like 40 years and in many cases, we know customers for whatever reason, don’t choose to be on the most economical plan. They choose to be on a plan that they want to be on.And so there’s been discussion about how do we make sure we’re educating and trying to encourage customers to move to that most economical plan, and we've been briefing the commission monthly on progress there, that’s likely to be discussed in the rate case. But that’s really the connection between the most economical rate discussion and the ongoing rate case. Does that help?

Yeah, it does mean I followed your compliance filing recently and so the discussion around I guess, all I was wondering is it, it seemed I mean, I guess it wasn’t that much adoption, I guess, or that much change in people on the most economical plan. So I was wondering if it was to be addressed, though, it would make sense to me that, and I’m just wondering if I’m being logical here that the Commission is probably not going to take action in terms of trying to change that regulatorily if they do make an effort, it would probably done a rate case if that were to happen. Does that make sense?

Yeah, I think that you would change in terms of a rate design change or anything that would have to happen in a rate case. I mean, the conversation of whether you would default people to their most economical plan, which is something Sacramento did for example, that’s not something we had proposed. We wanted to give customers a choice here, but those are likely to be discussed in the rate case.

I just add to that, you know, when we’re defining most economic plan, that could mean that if one plan’s $1 more savings than another, it’s more economical. And so oftentimes with the information that we’re sharing our customers on the bottom of the bill, they may look at it and see the difference between the current plan and the most economic is so de minimis not worth going through a change and yet they still classify this potentially not being on their most economic plan. So it’s difficult to read too much into the proportion of customers that are or not.

Okay, fair enough. Thanks so much. I appreciate and hang in there.

Yeah. Thanks, Paul.

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

Hi, on tax rate notice the you know, I had a power failure. But if my memory serves me 14%, 13% for this – is your guidance for this year and that didn’t change yet. There was some benefit in the CARES Act, correct. Does that not impact the effective tax rate? Or is it just something you’ve elected not to change at this point after only the first quarter?

Now, there’s no recent change that impacts our guidance for what you said correct, 14% effective tax rate.

Okay. And then it sounds like on your discussion of CapEx for 2020, you did delay some projects, but you anticipate catching up on that, because you didn’t change your CapEx guidance for 2020.

No plans to change CapEx and there’s been no material projects that have been changed, we may have shifted some non-essential work activities. Certainly we’re working with home builders, et cetera, to the extent that their timing or volume changes, but we’ve got other opportunities on the list that the organization would love to be able to get a head start on that could fill in that gap. So we’re sticking with our current CapEx plan for the year.

Okay, last question. The COVID-19 expense due to that. You said the commission elected not to vote on it at the last meeting. When do you anticipate it the being voted on?

It’s just up for further discussion right now. So there isn’t a timeline. It’s just something that was raised. They didn’t vote it out on the last discussion. I can’t tell you whether they’re going to vote it out on the next discussion, but it’s still in – if they’re still talking about it.

Okay, that’s all I had. Thanks. Stay safe guys.

Thank you.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

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

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.