Good day, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2021 Fourth Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Amanda Ho, Director of IR. Ma'am, the floor is yours.

Thank you, Kate. I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 2021 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Ted Geisler. Barbara Lockwood, Senior Vice President, Public Policy; and Jacob Tetlow, Executive Vice President, Operations are also here with us. First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our annual 2021 Form 10-K 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 March 4, 2022. I will now turn the call over to Jeff.

Great. Thank you, Amanda. And thank you all for joining us today. And looking back on 2021, there are certainly a number of challenges and setbacks but also positive accomplishments and successes. Without question, the biggest setback of 2021 was the rate case outcome. Coming out of the rate case, we laid out a comprehensive plan on the third quarter earnings call, and we've already begun making progress towards that plan, and I'll briefly discuss that. I'll also provide an operations update and share some notable successes from our employees in 2021, and then Ted will discuss our 2021 earnings and our forward-looking financial expectations. I know we're all tired of talking about the last rate case and how disappointing that outcome was. As you know, the rate case decision makes everything that we're committed to doing more challenging and more costly for a time. Importantly, it's also cast our state at a negative light when it comes to our regulatory environment, and our efforts are focused on ways in which the company can support improving that regulatory environment. During our third quarter earnings call, we spoke of management actions that we planned on taking, which included the possibility of filing an appeal of the decision. That's not something that we took lightly, and I emphasize, I don't – we don't take pleasure in litigating with the commission. Our number one goal is doing what's right for the people and prosperity of Arizona, which includes working collaboratively with the commission and building a more constructive relationship. However, in this case, we really had no other choice. And in December, we filed a notice of appeal with the Arizona Court of Appeals in parallel with a special action with the Arizona Supreme Court. Although there were seven other amicus briefs. These…

Thank you, Jeff. And thanks again, everyone, for joining us today. This morning, we reported our fourth quarter and full year financial results for 2021 and updated our outlook for 2022. As you can see, 2021 was better than anticipated, primarily due to stronger sales growth in the fourth quarter. While 2021 resulted in a solid year, this does not mitigate our outlook for 2022 and the reality that we remain in a financial reset as a result of the recent rate case outcome. Before I review the details of our full year 2021 results, I'll briefly discuss some key factors from the fourth quarter, which are shown on Slide 4. Our performance was strong in the fourth quarter as we earned $0.24 per share compared to a loss of $0.17 per share in the fourth quarter of 2020. Keep in mind; we had two unique items in 2020 that did not repeat last year. Our settlement with the Arizona Attorney General's office and the company-funded portion of the Coal Community Transition payment, both were booked in the fourth quarter of 2020, resulting in a year-over-year benefit. Mild weather was a factor again this quarter but was largely offset by higher sales and usage, which came in well above prior expectations, largely due to strong residential growth and the continued expansion of our commercial customer segment. Turning now to our full year results for 2021, we earned $5.47 per share compared to $4.87 per share in 2020. Looking at Slide 5, I'll review some key factors of these results. In gross margin, weather was unfavorable by $0.76 compared to the prior period. As you may recall, 2020 had the hottest summer on record, whereas weather in 2021 was slightly below normal. Continued strong sales and usage was a $0.51 benefit.…

Thank you. Ladies and gentlemen that floor is now open questions. [Operator Instructions] Our first question today is coming from Shar Pourreza at Guggenheim Partners. Your line is live, you may begin.

Hey good morning, guys.

Hey, Shar.

Good morning, Shar.

So just a couple of quick ones here. Jeff, clearly, you've got healthy customer growth and load growth that's kind of even stronger than that, which is great. I guess the concerns here with us is with some of the disallowances related to generation expenses in the last case. It seems like a possibility exists for all this pace of growth to actually be a bad thing if you're underfunded as we think about integrating and servicing all this incremental demand safely. Can we just maybe get your thoughts here as we think about the upcoming rate case in light of the stronger-than-expected backdrop you're presenting today?

Yes, Shar. It's a great question because it really highlights, I think, the disconnect that we've got to work on between now and filing the next rate case and then prosecuting that case of the challenges you just identified, which is we're in one of the highest growths, if not the highest growth service territory in the country, which means that we're spending more capital. We're investing more than we've ever done in the history of the company. And yet in the last rate case, we received the lowest return on equity basically any utility in the country. And those two just don't – they don't gel together. I mean, that doesn't – that's the disconnect that we have to work with our regulators to help make sure that they understand that the challenges we have, the need to access capital markets, the need to maintain positive credit ratings is critical for us to be able to meet this growth. And with the tightening capacity markets in the West as we invest in new technologies, again, you can look at that risk profile as you just suggested and say that suggests the need for a higher return on equity than if it was just pipes and poles and wires. And so the environment that we're in, which is driving significant capital investment by us and need to access those financial markets requires that regulatory support and at least a healthy return on equity and cost recovery structure because we've got to be able to recover the cost of those investments and not turn that growth into a negative. So I think that's a good observation.

Yes. Shar, this is Ted. I'll just add to that, that we fully recognize that the sales growth, customer growth is tremendous in our service territory. We've said that for a long time, and the fundamentals are coming through as predicted. But we also recognize that that growth is only as good as our ability to recover the cost and investments needed to support that growth. And so that's certainly a key focus for us as we look forward to continue to work with stakeholders and our regulator. Good news is we haven't raised base rates since 2017. And in fact, through our cost management effort, rates are lower today. The average bill is lower today than it was in the 2017 outcome of that last rate case. We think we've got the ability to be able to recover these costs and still focus on affordability for our customers.

Got it. And then lastly is, I mean, obviously we've noticed a few pieces of legislation in the state, which seem to be focused on improving the construct in various ways, like maybe enhanced oversight and dealing sort of with the ACC which is obviously a welcome surprise for some of us, right? How are you thinking about the legislatures increased interest and maybe activity around establishing more effective rate making? And any specific bills we should be monitoring at this point?

Yes, Shar. I think you know that there's been some tension between the commission, the legislature for a while and it's important to remember in Arizona, the commission's authority over ratemaking is constitutional authority. So there's not a lot that the legislature could do, if anything around rate making. And so we don't really have a position on any of the bills that are out with the legislature now. As I said, our focus is really on ensuring that we have the dialogue with the stakeholders and with the commission to ensure that the connection between the growth that we're seeing and the need to access the financial markets to support the investment to drive that growth and continue to grow Arizona. That we can make that connection and that we can improve the regulatory structure. We've had good examples. Post test year plant, there has been other mechanisms, the commission has adopted that have supported recovery of investments outside of a purely historical test year rate case. And so our focus is really on engaging with the stakeholders of the commission and the commission and the staff to make sure that we're explaining the need that we have, and frankly, the challenges that we have going forward.

Terrific. Thank you guys so much. Appreciate it.

Thanks Shar.

Thanks Shar.

Thank you. Our next question today is coming from Insoo Kim at Goldman Sachs. Your line is live. You may being.

Yes. Thank you. First question, when we think about the unchanged CapEx over the next few years in your plan, obviously, I think there's some level of conservatism there. As we think about this welcome low growth especially on the residential side, any color on just on the base level of capital that's needed to service this increasing customer growth around what level that could potentially layer on going forward?

Yes. Insoo, good question. And you're right, that's relatively conservative because we put a lot of effort into prioritizing the projects and investments needed to both maintain reliability in the grid and keep up with customer expansion. And as our customer growth continues to exceed our expectations that puts even more pressure on the capital budget. We've got it set at those levels because we are very focused on trying to maintain affordability for customers and target a reasonable level of future rate increases, certainly levels that as we said before, are at or below inflation. But as customer growth continues to be robust, that's more and more challenging. So we're still focused on trying to balance the capital budget with affordability, but we'll just continue to monitor that as the service territory expands and as we continue to procure the resources needed to serve that growth in the future.

Okay. I'll leave it there. I guess the second question, Jeff, I guess, a few months have passed now and you've made it a point to try to engage with various stakeholders as you prepare for this next rate case. Just some color on how those discussions if they have happened so far, how they've been? And what are some of the key items and focus items that people are working on?

Yes. Insoo, I think it's been constructive. And so we have been able to engage and frankly, it's been good since we've been ex-parte essentially the entire time I've been CEO. And coming out of ex-parte is important. And again, the conversations are around the discussion we had here on the phone, the importance of the regulatory construct that we have in Arizona, given the growth and the transition is happening around the west in decarbonization. There's also been, I think, good discussions about the current western market, and as you know, we're very tight right now in the West. There's not a lot of excess capacity, and we're going to have challenges moving forward across this entire region of dealing with both the growth, but then also the transition, putting significant amounts of battery storage in. And so a lot of this has been just making sure that our point of view on the changes that are happening in the system, the opportunities to expand Western markets, and again, the need to be able to invest to meet the growth is all well understood by all of the stakeholders that we work with and by the commission.

Got it. So we'll see how that translates going forward. Thank you very much. Have a good weekend.

Yes. Thanks Insoo.

Thank you. Our next question today is coming from Paul Patterson at Glenrock Associates. Your line is live. You may begin.

Hey, good morning guys.

Hey Paul.

Just on the rate case appeal. Are there any key dates we should be looking out for? And in terms of Insoo's questions, in terms of your discussions, what have you. Is there any sort of focus on how – I guess how does the timing associated with the new rate case interact on your expectations for the rate case appeal outcome if you follow me. I mean are people sort of saying, hey, we want to see how that goes? Or is that a gating issue in any way the rate case appeal and the outcome there?

Yes. No, Paul, I don't think it's a gating issue. In terms of the time line that happens. We do have more clarity now in the sense that there's not a special action. The special action would have had a quicker clock on it than the Court of Appeals action. The Court of Appeals appeal, if you look at kind of other cases, typically is a year or more. The next milestone in that Court of Appeals case is April 11. And that's when opening briefs are due and then I think it's 40 days after that, you see responding briefs to it, and they're talking about intervenors right now. And so that case is going to continue to progress, and so as we file midyear this year, those two will overlap certainly, but they're not – neither is gating to the other.

Okay. But we'll probably get a decision, it would sound if I'm understanding it correctly – on the appeal, we'll probably get a decision before we get to, I don't know, an ALJ or something maybe? Or is that the right way to maybe think of it or at least in terms of the final outcome on...

Yes. It's possible. I mean that – again, a lot of it depends on the timing. You've got two different timing variables there. So it's difficult to say how they're going to exactly interface. But if the – if the Court of Appeals came back with the ruling, most likely that's going to be a remand to the commission anyway, if the rate case is pending, then there's a potential that you could pick that up in the then pending rate case. And so a lot of it is just going to be fluid as both those cases progress.

Okay. And any sense of maybe when oral arguments with the – I assume there's an oral argument situation with the judges ask – were they interact with the litigants? Do we have any sense when that might possibly happen?

No. I don't – we really don't this early in the case. But again, we'll keep people posted as the case progresses.

Okay. Awesome. Thanks so much. I really appreciate it.

Okay. Yes.

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

Good morning, Jeff. Good morning, Ted. Congrats on the quarter.

Thanks, Anthony.

Hopefully two easy questions, just one more housekeeping; in the rate filing that you're planning, I guess, later this year, will you be able to recover the operating costs associated with the SCRs that were denied from the last rate case. I just say they limited the return on investment, but you pick up the – are you able to file for the recovery of the operating costs associated with it?

Well, Anthony, this is Ted. We don't get into details of the rate case strategy at this time, but we'll be sure to go through those details once we file the case.

Great. And then lastly, you talked about demand growth. In one of the slides, you talk about 3.5% to 4.5% growth through 2024. Just curious we're all looking for as much detail as possible. Just do you think the build-out of the C&I segment slows down post 2024? Or is it a case of just large numbers as the growth just keeps getting bigger and bigger, it's harder to stay up on that 3.5% to 4.5% number.

Yes, fair question, Anthony. It's difficult to predict any more granular than that range beyond 2024. But I will say if you look at the fundamentals of our service territory for a long period of time in history we've traditionally always had higher growth compared to really most other service territories. And the fundamentals that we're seeing right now in our service territories suggests that you're going to continue to have long-term robust growth, whether it be the jobs that are created, the diversification within the economy here. It wasn't that long ago we were heavily dependent on purely construction and tourism. As of right now, manufacturing jobs are actually outpacing construction jobs within the state. So we've got a lot of good trends that suggest to long-term growth that could support that level or maybe even higher. But at this point, we're focused on that 3.5% to 4.5% between 2022 and 2024. And we feel confident in that range because we can point to projects and customers that we know with certainty are locating here.

Great. Thanks so much for taking my questions.

Yes. Thank you, Anthony.

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

Yes. Hey, good afternoon.

Hey David.

Just related to the renewable procurement efforts, you have decent chunks of CapEx for clean gen each year in your plan. I'm just curious, have you seen any supply chain-related issues. Just an update on schedules there would be great. And I guess to the extent that you do have any delays, it sounds like you have enough on your plate to backfill. Anything that might slip, I just wanted to double check?

Yes. Good question, David. We are experiencing delays in certain areas, whether it be materials or some of the projects that we have procured. We don't believe any are causing any significant impact, but it's really an impact on timing adjusting from one-month to another within the same year. We don't anticipate any impact on the capital program.

Great. And then just specific back to the discussions you've had with stakeholders ahead of the next rate case. I'm just curious if you've had a chance to talk more about the merits of a concurrent recovery mechanism for renewables, just given the aspirations you have in the state. Just curious if you've had any traction on that specifically?

Yes, that's – David, that's certainly part of the conversations that we're having. Again, we're early in that, but that's one of the key areas of focus for us.

Okay. Thank you.

Yes. Thank you.

Thanks David.

Thank you. We have no further questions in the queue at this time. This concludes today's event. You may now disconnect, and have a wonderful day. We thank you for your participation.