Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2022 Fourth Quarter Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Thank you, Matt. I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full-year 2022 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Andrew Cooper; Ted Geisler, APS President; Jacob Tetlow, Executive Vice President of Operations; and Jose Esparza, Senior Vice President of Public Policy, are also here with us. First, I need to cover a few details with you. The slides that we are 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 2022 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 6, 2023. Now, I will turn the call over to Jeff.

Thanks, Amanda, and thank you all for joining us today. Good morning. In looking back on 2022, it was no doubt one of our most challenging years in recent memory is we faced major financial headwinds and a financial reset resulting from the outcome of our last rate case. I'm going to provide several updates today and share the successes we were able to achieve, despite the challenges we faced. Coming out of last rate case, we laid out a comprehensive plan and strategy and we met or exceeded nearly every target we set for ourselves, including delivering strong service reliability to our customers. We made significant progress in the last year but we're not done and we look forward to continuing to execute our plan. Turning now to regulatory, we came out of the last rate case fully committed to improving our regulatory relationships, and we've seen progress as a result of our focus in that area. We received constructive decisions for all key items served by the previous bench during 2022, including our financing application last December. We started 2023 with two new commissioners and a new Chair, Commissioner Thompson and Commissioner Meyers joined the bench in January and Commissioner O'Connor was elected Chairman. We've already seen constructive actions and decisions by the new bench, including the creation of a docket to examine ways to reduce regulatory lag. We believe that these conversations are important and we look forward to working with the commission on thoughtful solutions. For our pending rate case, the administrative law judge issued a procedural order in December, outlining the schedule. The first round of staff and intervenor testimony is due in May with the hearing set to commence in early August. We look forward to working with the parties and the commission through…

Thank you, Jeff, and thanks again to everyone for joining us today. This morning we reported our fourth quarter and full-year financial results for 2022 and introduced guidance for 2023. I will cover our results and provide additional details around the financial outlook for 2023 and beyond. As Jeff discussed, we remain in our period of financial reset during the near-term. But right upfront I want to make clear that while we are navigating through challenges brought on by the negative outcome over the last rate case, we have been executing well on our plan and we remain confident in our ability to create renewed growth and deliver strong shareholder returns. For the fourth quarter of 2022, we lost $0.21 per share, down $0.45 compared to fourth quarter 2021. The unfavorable rate case decision and reduction in net income from no longer deferring the costs related to the Four Corners SCR and Ocotillo modernization project have been the primary driver of lower results all year and that remain the case for the fourth quarter. The quarter also included a $17.1 million impairment charge relating to a Bright Canyon energy equity investment. This was a legacy investment by Bright Canyon for a minority stake in a wind farm. In the fourth quarter, we determined that impairment of the investment was appropriate due to ongoing disputes on transmission cost allocation and a lack of a probable favorable outcome. Other negative impacts included lower LFCR revenues, higher O&M and higher interest expense. Favorable weather and customer and sales growth were partial offsets to the negative drivers in the fourth quarter. For our full year results for 2022, we earned $4.26 per share, down from $5.47 per share in 2021. We ended the year in line with our updated full year guidance. As noted…

Certainly. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Your first question is coming from Julien Dumoulin-Smith from Bank of America. Your line is live.

Hi, good morning. This is Dariusz on for Julian. Just starting off, I wanted to touch on the financing plan a little bit, recognizing that you won't need equity or won't be issuing equity until after the current rate case. Can you just maybe help us think about, how you're looking at future equity need beyond the pendency of the rate case in 2024 and 2025? In particular, in the context of the higher capital plan?

Sure, Dariusz. It's Andrew. As you noted, we do have an equity need in the plan there, that $400 million to $500 million of equity in 2024. And that's really set up to make sure that the APS equity layer is appropriately capitalized coming out of the rate case given some of the debt that weren't for APS in the near term. Any future equity needs will really be dependent on the capital plan that we developed after the rate case concludes. As I mentioned earlier, the capital that we've added into the plan here is really dependent on load growth and serving the service territories it expands. Once we get through the rate case and think about, for example, our clean capital spend, that will be an area where as we with a constructive outcome consider a different ratio of self-build versus PPA assets. We will look at the financing plan at that point to make a determination. We'll also be looking for feedback from the rating agencies on our credit metrics at the conclusion of the rate case to figure out the right capital plan for the years beyond 2024. But as of now, the need for 2024, that $400 million to $500 million post the rate case is intact.

Excellent. Thank you. And maybe if I can touch on the robust loan growth forecast and you guys said out there and then you update this morning. Can you maybe just discuss a little bit about what your level of visibility is on the contribution to that lower growth? Other than TSMC I know you mentioned a couple of other large customers coming online over this period. And also within the context of your 5% to 7% EPS CAGR, can you maybe discuss how much if any delays could be absorbed to the largest TSMC project that would still allow you to maintain that 5% to 7% within this forecast period?

Sure, Dariusz. So the forecast is driven by a diversified group of manufacturing, data center customers and some of the overall C&I growth that we're seeing in the service territory. It's a pretty different economic story than it's been in the past as far as the factors contributing to growth here. We're not really depending on the broader macroeconomic story as much as specifically identified customers, which include TSMC, and it's a considerable part of that. The 2% to 4% of the 3.5% to 5.5%, that is from the large customers, TSMC is a considerable part of that, but there is data center customers and other manufacturing there as well. So it's pretty diversified on that front. The 5% to 7% earnings growth rate is through 2026, and that's pretty much coterminous. The sales growth rate -- the long-term sale growth rate that we have here is through 2025, but roughly similar trends through that forecast period. As you've seen even in 2022, that sales growth is certainly helping us to mitigate the inflation and some of the O&M pressure that we're seeing. And we'll continue to work both those cost levers and keep a close eye on the macroeconomic environment and the specific customers as well as we go through the forecast period.

Okay. Great. Well, thank you for that detail. Looking-forward to catching-up later in the week.

Thanks, Dariusz.

Thank you. Your next question is coming from Shar Pourreza from Guggenheim. Your line is live.

Hey, guys.

Hey, Shar.

Good morning, Jeff. Let me ask you, so Jeff, you historically have said that, you're under-investing in APS by maybe roughly a $200 million to $300 million per year. Is that still the case? I mean, obviously, from your prepared remarks, it sounds like the $600 million, you guys just bumped up in CapEx is sort of agnostic to APS and base level spending. But I'm just kind of curious, if you take this increase layered in with what you've said, you have under-invested in the system, how do we sort of think about the two together?

Yeah. And Shar, I wouldn't say we've under-invested in the system, I mean, as you know, we've been keeping up with what we need to invest in for load growth where the opportunity is around the generation side and where there are opportunities particularly now with the tax credit framework that the IRA has set-up. There are opportunities for us to do more optimized mix the self-build. Obviously, it wouldn't be 100% utility owned, but we're doing probably what in the 25% range of utility on where a more rational, I think if we could do it, would be in the 50% range so that we're actually being able to maximize the benefit of those tax credits for customers. So a lot of this opportunity is really going to depend on how the rate case outcome goes. We've got the clean tracker proposal that would take our renewable energy adjustment charge and allow us to again flow through some of those clean investments. And if we can do that, then we get to a more optimized mix of utility-owned versus PPA, solar and storage, primarily is what I think you would expect to see. But a lot of what you're seeing is just the investments that we have to make for load growth. And so I think you're getting at is that there is an ability to further optimize that after the rate case and looking at that mix of generation. But we're going to invest what we need to invest in the poles and wires and the infrastructure to serve customers.

Got it. Yeah, I was just more curious on that $200 million to $300 million, you've quoted before in the past and how that correlates with the CapEx increase today. And then just on the CapEx increase, what does that sort of puts you around that 5% to 7% rate base growth range? They have out there now? The $600 million?

Yeah. So that -- you saw the upper-end of that rate base growth number come up with our update. And that's really the result. There is a much narrow range of rate base growth with the prior forecast, Shar. And you can think about it is more extended range, I don't think there is a broader range of uncertainty just with the CapEx we have in there, more of an opportunity. You've seen some of the timing move around in our capital, Jeff, was just talking about our clean spend. You've seen some of those buckets move from 2024 into 2025 with the addition of the 2025 forecast. So there's some timing around some of our capital investments and some of the decisions we need to make. But that's really been, the main thing is the increase in the range, driven by the higher CapEx forecast.

Got it. Okay. And then just lastly, if the Court of Appeals where to rule in favor regarding the Four Corners SCR and Ocotillo projects. What would that look like, I guess from an EPS standpoint in 2023, would it be retroactive? And what would the incremental EPS be going forward since you only obviously report GAAP results? Thanks.

Sure. So any decision at the Court of Appeals, if it were positive decision would be remanded to the commission for further actions. There wouldn't be really anything done retroactively. All I can really give you sort of the rule of thumb. You're talking about roughly $200 million disallowance and capital structure that's in the 50-50 range, applying ROE to that, and that kind of gives you the rough EPS impact of beginning to recover on that. The timing of that would be dependent on future action of the ACC if there were a positive outcome.

Yeah, I'm sure you remember too, that there may be a further appeal, so the Court of Appeals if they issue a ruling, it's -- it goes in our favor. I can see the Sierra Club, taken that up and seeking Supreme Court review. So that could add some additional time on. But ultimately, as Andrew said, it's going to-end up back at the commission.

Okay. Perfect. That's fantastic. See you guys soon. Appreciate it.

Yeah. Thanks, Shar.

Thanks, Shar.

Thank you. Your next question is coming from Anthony Crowdell from Mizuho. Your line is live.

Hey, good morning. Thanks so much for taking my questions. Just a couple of them. First-off, anything management could do to help mitigate the volatility in the pension expense?

Sure, Anthony, it's Andrew. As I mentioned, we're going to look at all of the options, including around regulatory recovery. Our priority in the rate case is a constructive outcome. And we'll look at pension when we go into remodel strategy and one of the various levers that we need to think about in what a constructive outcome looks like, but it's not the only lever and it's not the only cost that we've got to deal with. So there is certainly precedent where there is a split test year to look at on pension expense from what is now a historical period. And that's something that we'll consider as one of our options. In the last rate case, we average the two years surrounding split test year but regulatory recovery remains one path that we continue to look at. But then of course, any other levers we have around our other costs, O&M, interest expense, all those things that we can do there to make sure that we meet our forecast. That's really the focus. As I said earlier, we're committed to the pension strategy. You know 2022, all asset classes for the most part, face losses and discount rates went precipitously. So we're just --we're living with the reality of that, mitigating it as best we can.

Great. And if I could jump on Shar's, I believe it was a question Shar asked. About -- I think you're looking for more clarity from the rate case where you potentially may see more clean generation spending. Is it just comes down to the clean track of proposal needs approval? Is that what investors should be focused on to see if we do get more clean generation spend?

No. Anthony, it's more -- I think it's a little more than that. I mean, it really is looking certainly at clean tracker, particularly as a potential vehicle to give the tax credit. The customers in a more contemporary manner. I mean, that makes a lot of sense to us as a way to optimize the -- getting a little bit more utility owned generation in the mix. But it's going to be the overall framework that really drives what we do, right, like we'll look at the results of the case and figure out how we optimize the mix of both the PPA and then the utility-owned generation and storage resources. And so can't really flag what that looks like here, but we have opportunity, I think to get a more optimized mix for customers. Then we're seeing now and just because of the last rate case, we are not able to do utility-owned assets at the level that we think is probably optimal.

Great. And just lastly, from the disallowances on the coal CapEx and it's currently an appeal, does the company get recovery of the operating expenses associated with what the capital that was disallowed? I'm sure there's additional capitals running these SCRs. Do you recover the expenses associated with that, whereas if you do prevail in the Appeal Court, that, that also could be a potential tailwind in earnings?

Yeah, Anderw, we do get recovery on the cost and the results year-over-year impacted by those costs kind of coming into our income statement without offsetting revenues. So what you really see, if there were a positive outcome would be the recovery on the investment in there alongside the cost.

Great. Thanks for taking my question, I appreciate it.

Yup. Thanks, Anthony.

Thank you. [Operator Instructions] Your next question is coming from Nick Campanella from Credit Suisse. Your line is live.

Hey. Good morning, everyone.

Hey, Nick

Hey. So, I guess, just starting on 2023 drivers, what was the driver of the lower tax-rate? I think it's 10% versus last year it was closer to 14%, can you just update us on that?

I think the lower effective tax-rate has -- hasn't kind of -- there is a combination of factors in the lower overall tax rate. And you know, there is a variety of puts and takes in there around tax credits and the like.

Okay. So possibly just tax credit driven. And then on your just credit outlook, I think you kind of mentioned in the deck, 16% to 18% range. Where did you end the year? And then what's the feedback from the agency has been in terms of whether they are looking for -- before moving on the negative outlook and is it GRC related, is the numbers related? And what's your willingness to defend the Ba1 rating here if you have to.

Yeah, Nick. So the agencies will calculate, I don't think I'll put out how they view the FFO-to-debt number at year end. The 16% to 18% is sized around where the agencies would like us to be today. You saw both Moody's and Fitch this month reaffirm their current outlook, the current ratings as well as the negative outlook. And you could take a look at their positions, but ultimately absent some exogenous factor, they're really looking to see the rate case outcome to make determination about the ratings and any future changes they make to the downgrade thresholds. We're committed to that 16% to 18%, that's what keeps us in our -- the your last part of your question, that's what keeps us in our current category. You've got Moody's with 18% threshold right now and S&P with a 17% to keep us at our current rating and return to stable 13% for a downgrade, that they are one-notch lower right now. And then so, we use that 16% to 18% target to keep to the current ratings. We'll have to see, as I said, after the rate case of the rating agencies readjusted at all what the targets are for downgrade.

Okay. And then just one last one for me, in your prepared remarks upfront, you kind of mentioned this regulatory lag docket. What's the outcome that stakeholders are trying to solve for here and what are some of the mechanisms you're exploring, if you could maybe update us on that?

Nick, I think it was just more of an indication of the new commissioners coming in. I think, both of which had indicated that they don't like being one of the lowest if not the lowest-rated commission in the U.S. from like RA. And so this was an effort to begin to talk about the things like forward test years and other things that you typically see discussed in other jurisdictions. So it's a little early to see exactly what will come from it. I think again the tone is good because it's an indication. There is benefit to customers from having a good performing utility and I think we saw that come out loud and clear after the last rate case outcome. And I think that's a recognition of let's talk about in a public stakeholder driven way what some of those mechanisms are. So I think that's a positive sign, but it's pretty early in the process right now.

Alright. Well, thanks so much for answering my questions.

Yeah. You bet, Nick.

Thank you. That concludes our Q&A session. Everyone that concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.