Good day, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2021, Third Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. 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.

Thank you, Kate (ph). 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 Geisler. 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 12th, 2020. Now, I will turn the call over to Ted.

Thank you, Amanda. And thanks again, everyone for joining us today. These are indeed challenging times for us, but right up front, I want to make it clear that while we may be navigating some short-term challenges, as you'll see, the midterm 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 will 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. Robot 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 will turn it over to Jeff to provide an update on our rate case.

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 break case was complex, and the issues were numerous. I'll highlight a few of the main issues that were decided, the revenue requirement SCR and the ROE. I'll also discuss our next step and strategy coming out of this case. And 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…

Thank you, Jeff. Now, we'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 adjustments beyond, the $90 million net income impact estimated for the recommended, opinion and order last quarter. In addition, growth and depreciable plans, 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 cents to $4 per share. Turning to the future, we're 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 prod long-term value. As you can see, Investors can expect 7 objectives from us, and I will touch upon each one. Our plan is expected to provide strong long-term earnings growth off of 2022 for the next 5 years. I want to be transparent and reemphasize that this is projected 5% to 7% earnings growth built on our 2022 guidance. We realized…

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, . We ask that while posting your question, you please pick up your handset, if listening on speakerphone to provide optimum sound quality. And our first question today is coming from Insoo Kim at Goldman Sachs. Your line is live. You may begin.

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 390, couple of things that stood out, it seemed like the depreciable plant, maybe the DNA component of it is seemed 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 in 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?

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 2 years ago, so we've continued robust investments since then, and that certainly has an impact going forward. We haven't detailed out anything beyond the fact that ongoing depreciation until we file our next case, certainly as 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 re-balance the risk pension, that certainly gives us a view that we'll have likely less market returns next year, in terms of favorable mom service credits. That's really just a factor of continuing with our liability driven investment strategy, and diversity in the pension going forward. Finally on sales growth, we can't say enough about the economic developments that we see in our service territory. We try to look beyond the COVID impact. For example, if you look at growth in 2021 compared to 2019, and really just avoid the comparison to 2020, given the COVID anomalies, we're at over 6% with the normalized sales growth right now. And that is all through 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. 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.

Okay. So the 3-90 that assumes at least at a 3% year-over-year weather normal low growth?

That's correct.

Okay. Got it. And my second question is 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 dialogue with the interveners and the commission. What are just some things that, in your mind, you could do to this time around have a more constructive dialog overall and various issues? Just curious on your overall thoughts given, with all

Thanks for the question too. I think that's one of the more important things we were ended up having some of the discussion about long-term negative impacts that happen, 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 an area of significant alignment when you look at the move towards, 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, one of the key things. If you go back to general Marcus Peterson’s letter asking, on how we could move to a $0.09 rate, 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 billion dollars that we spend on fuel, and replace that with batteries and storage, it 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. So to me, it's really connecting all those dots, and working with the stakeholders ahead of time, and making sure that, as much of that conversation as possible takes place before we file. I think Ted mentioned, it takes about 4 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, and meeting Arizona's growth, and managing and transition to clean energy. So it's going to be a lot of dialogue. It's not just with the commission, is with the stakeholders that will be involved, but that makes the start on that.

Thanks for the caller, I'll see you soon.

Thanks, Insoo.

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

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 towards about the SCR here? I noted your commentary, it didn't specifically, if I didn't catch it right, mention follow-up and 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? Certainly you seem to suggest so in the commentary, but also separately, the wider conversation on next steps, which I imagine is somewhat fluid on the SCR as well.

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 SCR 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 -- 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 and it's deemed denied and that opens up than 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 this is -- 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 as a 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 an unsettling, 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. 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 effected. Rather than having it go to a commissioner, a judge for an opt-in can be a binary outcome, somebody's going to lose it all or they're going to win it all. 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 towards. And again, we're going to have this period of time when we finally get out of ex part to hopefully be able to have some conversation with policymakers on how to make this more constructed.

Got it. Yes. I hear you on that. And then more broadly on this 5 to 7, I mean, how are you thinking about regulatory recovery and 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. Can you drive earnings growth independent of a rate case in the medium-term? Just given the pace of investment that you're articulating and rate case.

Well, 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 one. We assume a conclusion of that before 2024, and we're being conservative on our assumption of just with reasonable regulation. And the 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 to many stakeholders, that could lead to a constructive outcome for everyone, but it will depend on those details in determining how long we go then after that, before a renewed and file another rate case. But the 5% to 7% is supported by reasonable regulation and a balanced outcome in the next filing.

Better than just have it. As you think about the prospects for regulatory recovery, by the time we get to 24-25.

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 as a prudent range.

Thank you. I'll pass it over. I know there's a lot to ask.

Thanks, Julien.

Thank you. Our next question today is coming from Shahr Puourreza, at Guggenheim Partners. Your line is live, you may begin.

Hi guys.

Hi,Shahr.

Hi, Shahr

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 sit out, work with the stakeholders? I guess could the litigation mar the future filing from a settlement and dialogue perspective?

Sure. It's maybe one of the most important things. That's 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. That is not good, and I don't think that qualified as -- by the evidence of the case, but when you start thinking about the number of investments that we need to put in, and if every time we do that, there's a look backwards to say, "Well, maybe there's a different technology that would've 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 can 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. That's part of the part of the regulatory structure as sometimes companies appeal. You got a right to appeal, that's set up in 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. We'll have to do what we can do to try to navigate that.

Got it. And then just on the equity fund, it seems like the commission has left the equity lenders alone as long as they stay consistent with past levels. I guess it's good to see there's some rationale, you highlight 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. Now, you're erring that 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 the apparent leverage and low growth. I mean, is there a scenario Ted, that where you wouldn't need any equity in '24? So how do we think about the bookends?

Yeah, I appreciate that Shahr. The way we think about it first is, any Pinnacle debt that's injecting APS will be treated as equity at APS of course. The second early more fundamental, we just don't believe that it's prudent issue comment at the current valuation. With respect to whether we could differ beyond 2024 depending on this outcome, that will just depend on the next outcome. 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, not appropriate. Given as Jeff mentioned, the growth that we need to finance as well as the responsibilities we have, as operating in the nation's largest clean energy asset and I believe that our Balance Sheet profile having in next case will allow us to then focused on improving that ROE

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

Thanks sir.

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

Hi, good morning. Thank you for taking my question.

Hi, Sophie.

Hi, Sophie.

I guess a couple of questions here. First, on your operating expense, this OpEx guide for 2022, I'm just curious what levers you have to keep that service alive and maybe modestly down versus what we've seen in 2021. How are you thinking about that?

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 has really been a Company-wide concerted effort to embrace Lean, eliminate waste, harvest savings. and be able to use this as one of our levers through this reset period. In this last rate case, in fact, we were able to take some of the customer portability savings and have that as part of our filing and pass that on to customers. of course, it doesn't just stop with that last rate as 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, 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 are more value-add work. There is just a tremendous amount of opportunity and ideas, that this organization has come forward with and is executing. We're really inspired by how much the team has stepped up, and is taking this as a challenge and an opportunity to deliver efficiencies in this period.

Thank you. Solar rise has been brief connection with access charges being eliminated, and they think this is really remember going into reasons why it was put in the first place. Now that it's gone and 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?

Well, Sophie, first of all, just want to make sure we're clear that the grid access charge going away is revenue neutral. So that really is just a cost shift between customer classes. But our estimates for whether 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 where we're 6%, so we're confident in that weather-normalized range going forward, even with the impacts of energy efficiency and rooftop solar.

Alright. Thank you. That's all from me.

Thank you.

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

Hi. Thanks. 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 some maybe lag upfront, and then when you get the rate relief it goes higher? Could you talk a little bit about the year-by-year of that?

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 certainly is an unreasonable 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 than that'll really propel growth in that long-term earnings range target. So certainly, I will be looking for the filing that'll 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 5 years.

Okay. I'm just going to ask maybe a little more clearly 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?

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

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

Yeah. And actually, I think if we file in '22 it's possible to get 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.

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

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

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

We don't believe there's 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 little risk.

Okay. That's it for now. Thanks.

Thanks, Steve.

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

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

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 are they 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.

It's more of maybe the double leverage hasn't been presented that a commission historically versus that they either approved or disapproved that, fair.

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

Then if I think of high-end of rate case guidance at 6%, our high end of EPS guidance is 7%. Are you assuming either improved our ROEs or minimizing some regulatory lag to get to that? If you hit the high end of rate-based guidance, how do I hit the high end of the EPS guidance?

I think the key there is, 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.

Great. And then just lastly, you made a really good distinction about maybe the disallowance on the SCRS was related to legacy coal plant, and a lot of the capex going forward, is more monetizing the clean energy. But 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 projects so that your risk of this allowance is much smaller, maybe what we saw in the SCR order or decision?

Every 2 -- I guess 2 parts that will -- 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 de -risk new technology projects. So you don't run out Look at, for example, our battery storage work. We've put a pause after we had the McMicken event, so that we could deeply, deeply understand safety around lithium-ion utility scale batteries. We're now moving forward in a pretty aggressive way with those systems, but they are established technology, they're known. There's more of them being installed. We're not first movers on it and so I think that you'll see a lot of work on. I'm 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, now that you don't use hindsight to go back and look at what was an appropriate decision when circumstances have changed.

Great. Thanks so much for taking my questions, I'm looking forward to seeing you guys at

Next to Anthony. Thank you.

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

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 our path forward, and are focused on our customers, and look forward to seeing some you at and thank you again, that concludes our call.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.