Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2023 First Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and we will open the floor for your 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 first quarter 2023 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 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 first quarter 2023 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 May 11, 2023. I will now turn the call over to Jeff.

Great. Thanks Amanda and thank you all for joining us today. 2023 has started off in line with the financial guidance that we provided on the fourth quarter call in February. And before Andrew discusses the details of our first quarter results, I will provide a few updates on recent operational and regulatory developments. First off, as you know, safety is our number one priority, and I do want to take this opportunity to congratulate our employees for keeping safety in sharp focus in the first quarter, especially through an unseasonably long and challenging winter period. We discussed summer preparedness quite extensively, and that is our longest and highest peak demand season in Arizona. But winter preparedness is also an important part of how we reliably serve our customers throughout the year. We have an extremely diverse and broad service territory, serving 11 out of 15 counties in Arizona and so in addition to the desert regions that most people associate with the state, APS also serves communities at much higher altitudes. This year, northern Arizona saw one of the wettest winter seasons in recent history. In fact, Flagstaff set a record for the second highest snowfall total through March 1st in over 100-years. Despite slippery roads, hazardous conditions and freezing temperatures, our crews were able to restore power safely and quickly to our customers when they needed it the most. With winter now officially behind us, we have quickly moved to preparing for the summer. While we always have had a robust summer preparedness program, resource adequacy continues to be extremely important as energy supplies in the southwest tighten. To serve our customers with top-tier reliability each year, we perform preventative maintenance, emergency operations center drills, acquire critical spare equipment, conduct fire mitigation line controls and execute a comprehensive…

Thank you, Jeff, and thanks again to everyone for joining us today. This morning, we reported our first quarter 2023 financial results. I will review those results and provide additional details on weather impacts, sales and guidance. While lower than last year, 2023 has started off in line with our expectations. We lost $0.03 per share this quarter, $0.18 lower than first quarter 2022. Weather, along with sales and customer growth, were the primary benefits this quarter, offset by higher O&M, interest, depreciation as well as a smaller benefit from pension and OPEB. Weather provided an earnings benefit this quarter, primarily driven by the lengthy winter season Jeff mentioned earlier. According to the National Weather Service, the first three-months of the year were the coolest start to a year in the Phoenix Metropolitan area since 1979, with March of 2023 being the coldest March in more than 30-years. The resulting impact was an increase in energy sales in the first quarter as residential heating degree days increased about 51% compared to the same time frame a year-ago and were 57% higher than the historical 10-year average. Turning to customer and sales growth. We experienced 2% total retail customer growth in the first quarter, which is in line with our guidance range of 1.5% to 2.5%. Additionally, weather-normalized sales growth remained strong at 3.6% for the quarter and is also within our guidance range. The first quarter weather-normalized sales growth is comprised of 2.8% residential growth and 4.3% C&I growth. As previously discussed, our 2023 sales growth is driven by several large customers expanding and ramping up their usage. While our sales growth guidance remains unchanged for the year, we will continue to monitor the timing and usage of these large C&I customers coming online and adjust as necessary. Metro Phoenix…

Certainly. [Operator Instructions] Your first question is coming from Julien Dumoulin-Smith from Bank of America Merrill Lynch.

Hi good morning. This is Dariusz on for Julien. Maybe just first one, I acknowledge that we haven’t gotten the staff testimony in the rate case yet, but maybe just looking at one of your peers that is a couple of months ahead of you. I think there was a proposal by the staff in that case to consider use of a mechanism that had previously been used by water utilities in lieu of a brand-new renewable rider. I was wondering if that is something you guys have evaluated at all in your planning. I know you have a proposed modification in there. But are you perhaps looking at what the staff proposed in that rate case and starting to think about contingencies ahead of the staff testimony that is coming in a few weeks here?

Yes. Dariusz, I mean, obviously, we follow those cases pretty closely, and we are always open to looking at different alternatives. I think in our case, still focused on the kind of mechanisms that we currently have and that we have used before is probably the better path for us. But we are early. We will wait and see how the staff testimony comes in, the intervenor testimony comes in, and then we will begin working from there.

Okay. Certainly appreciate that. And just on your annual - the drivers in the annual guidance for the year, you are still - I see you are still guiding roughly flattish on adjusted O&M. Obviously, that was a bit of a headwind in the quarter. As we think about shaping for the remaining three quarters, should we think of the delta there as more or less ratable from Q2 to Q4? Or any particular ups and downs to it for the remainder of the year?

Sure, Dariusz. It is Andrew. The most important thing I would say about the O&M profile for the year is that we remain on plan. And so if you look at the year-over-year comparison, a lot of what you are seeing there in the first quarter is timing-related, where when you compare the first quarter of 2022, you are seeing an uncharacteristically low O&M first quarter if you look at the last three or four-years. And there is a confluence of things that drove last year to be lower than average. You had the A&G credits from Palo Verde and outage schedules and things like that, that drive that. But you also really didn’t see in the first quarter of last year, inflation in the way that we saw it later in the year and that we continue to see it this year. And so that run rate of O&M that we ended up with for last year really didn’t start until later in the year when we were still thinking in the first quarter of last year that inflation was transitory, it became a lot stickier. And so the trend that we typically see seasonally throughout the year, I think, holds here around O&M. This quarter looked fairly characteristic for a first quarter from an O&M perspective. We certainly continue to focus on our lean initiatives, customer affordability opportunities on the O&M side and that declining O&M per megawatt-hour. But from a shaping perspective, this year so far has looked like a relatively typical year. Last year happened to have and is driving that comparison in our chart, and in our deck to look like a drag, which certainly in the scheme of the quarter, it is year-over-year, but against an unusual comparison from last year.

Okay, great. Thank you both very much. I appreciate the color. I will turn it over here.

Thanks Dariusz.

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

Hi guys. It is actually James Ward on for Shar. How are you?

Good. How are you?

Doing well. Looking forward to seeing you guys in a few weeks - or actually, you are not doing EGA. Sorry, it is a habit over the last -- I just covered a bunch of all these calls.

No worries.

We wish we were seeing you. Shar is seeing you for AVR in a couple of months. That is what I was thinking of. Alright, getting to the question, and Jeff, very glad that you are able to make it. That is terrific. So our first question is just earlier this year, and it is relating back to O&M but sort of from a slightly different angle, the question that was just asked. Earlier this year, we saw the stock come out with a recommendation - sorry, ROE for some or mixed up here. Recommendation for 9.6% ROE for Tucson Electric and on May 22nd we will be seeing the first round of staff and entrepreneur testimony get filed in your case. Based on what you have been seeing recently, and I get that there are a few data points, how are you thinking about ballpark expectations of what a reasonable ROE recommendation might be?

Yes. I don’t want to go into kind of a ballpark. Obviously, I think a couple of things that are moving. One, as you know, the Court of Appeals did come in our last case, I will say, I think that 8.7 in the last case was very much an outlier. And I believe that the commission of the parties kind of have seen the negative impacts that can happen when you get a cost of capital that has stepped far outside of kind of industry norms. We did see in the Court of Appeals, the 20 basis point disallowance that had been addressed by the commission. That was reversed by the Court. So we are still waiting to see whether the appeals go up, but I think that moves you up to an 8.9 from the last case. And then I do think it is fair to look at what you are seeing recommended for the other utilities. Probably the most important differentiator for us that we will continue to emphasize as we work through this case is the cost of capital from a risk profile for a utility like Tucson Electric has historically been 25 to 50 basis points lower than ours because we operate Palo Verde. And so Palo Verde is an immense benefit to customers but it creates a higher risk profile, therefore, a higher cost of equity. And that historically has been recognized by the commission. It wasn’t in the last case, and that was a point that we had tried to emphasize. And so again, we will continue to emphasize that as we move forward here. But until we see the staff and intervenor testimony come in here next month or in the next little while, I don’t want to speculate on what we think is reasonable for that. We will work with what we get.

Totally fair. Understood. Sorry, I just had to ask that one as well. The original I wanted to ask on O&M. So following up on the prior question as previously mentioned, you continue to target declining O&M per megawatt-hour despite inflationary pressures. What level of inflation are you assuming relative to that guidance target when you said it? And then as a follow-up, how does actual inflation been coming in by comparison and those are my questions. Thank you.

Sure. Thanks, James. And when you think about our O&M targets in absolute dollars for this year, we have guided to a range of 885 million to 905 million. And that is relative - if you take the midpoint of that range, it is relatively flat with the O&M number from last year, excluding res and DSM expense, which was at 892 million. So just on that -- simply on a midpoint basis, you are talking about most of the inflation that we recognized last year trying to hold as flat as we can to that number. And that is really the aim. We saw inflation start to come into our operating environment over the course of last year, and that was across O&M, capital, fuel, obviously, as well. And so on the O&M side, we have really been focused on all of the cost efficiency, customer affordability initiatives that we undertake. And we certainly always look at those at the end of the year after we have had the summer and make sure that we pull the levers that the team knows that they have to get to that range. So we are expecting that the - any further inflation, and we have seen inflation in Phoenix slow down on trend with the national slowdown in inflation as the Fed activity has picked up, still a higher level of inflation in our local operating environment and overall but still relatively low inflation compared to some of the areas where we are seeing people come into the service territory from. So we continue to monitor that inflation, and there is areas around wages and other things that we are monitoring, but we remain focused on our existing target, which is relatively flattish to last year at that midpoint.

Got it. Thank you very much.

Thank you. Your next question is coming from Alex Mortimer from Mizuho Securities. Your line is live.

Hi good morning. So many large customers coming online in the next couple of years, how do you think about the linearity of the long-term EPS CAGR as we look through 2023, 2024 and 2025?

So I understand a lot of focus on the linearity of earnings. We do have a rate case before us, and that is certainly a critical contributor, given we have been relatively flat on rates for the last five-years so that is an important contributor. The sales growth, though, certainly is a factor that helps us mitigate some of the zoning pressures. And that is why we are focused on O&M per megawatt-hour as an inflationary measure because we want to be - kind of keep ourselves to account as the footprint that we have of customers within our service territory grows, that we are not letting O&M drift upward with that growing service territory. But the sales growth itself is - does have some large customers ramping up. They are ramping up over the next several years. And so that long-term 4.5% to 6.5% sales growth range is dependent on the continued uptick of those large customers on the manufacturing and data center side over those years. Certainly, the first phases of TSMC are a big initial impact, but there are a number of customers in that mix, the TSMC supply chain, the data centers that are contributing over the time frame of our sales growth guidance range.

Okay, understood. And then just on the -- kind of circling back on the large customer side. How do you think about your exposure to a potential economic slowdown, potentially second half of this year or further out, given that so much of that investment is coming in and then is there a good way to think about sort of quantifying your exposure to load growth where, for example, 50 basis points of load growth is worth $0.10 of EPS or kind of something along those lines?

Yes, Alex, let me start and I will let Andrew chime in as well. I mean, one of the interesting differences that we have seen, if you look at the Arizona market back in the last recession, 2007 time frame, we are very exposed on housing construction and residential growth. And so we are one of the hardest hit areas when that recession came in. It was kind of us and I think Nevada were probably the two hardest hit regions. The change that is happened since then has been a really purposeful refocus on manufacturing and advanced manufacturing. And that maybe a little less exposed to the sort of near-term, if we see going into recession. A lot of these companies are making investments here very focused on the long term. And TSMC, again, that is a strategic investment in the United States. So I think that we have less exposure. Obviously, a downturn can affect some of the timing. But when you look at the long-term economic growth that is coming into the Phoenix region, a lot of them is just being driven by the attractiveness of this market for advanced manufacturing. And I think that, that is going to be - we are going to be more resilient, certainly in the near-term, than if you look back to a prior recession. Andrew, do you want to talk about maybe specific guidance?

Sure, yes. And Alex, also, if you look at this year in particular, we continue to monitor for signs of economic slowdown. The first quarter certainly showed that ramp-up of those larger customers. C&I growth contributed 4.3%, which was pretty solid and in line with the range that we have overall for the year. But on the residential side and the small C&I side, but really on the residential side, we continue to see despite that work-from-home trend being mature, in fact, some people going back to the office, we saw a sizable uptick in usage per customer this quarter. It was kind of a full robust winter tourism season, part-time residents, visitors to the valley here. So we continue to see strength in the economy. Those are the types of things that we monitor within a given year to assess the health of the economy. And certainly, as the inflation rate has started to come down here, that is been a meaningful contributor. Customer growth is a big piece of that as well, that 2% customer growth, continuing to look at that, where the cost of living in Arizona remains affordable relative to areas where the net migration is happening from, which is particularly cities in California, that is another measure of economic vitality that we measure. There is a rule of thumb that we tend to use around 1% of sales growth. Remember, the large C&I customers come in at a lower margin. So if you think about 1% of C&I sales, it is less than $10 million. It is in the $5 million to $10 million range of revenue from 1% of large C&I. Residential, it is in the $25 million-plus, 1% growth annually in residential would be $25 million-plus of incremental revenue.

Wonderful. It is very helpful. Congrats on the quarter and good luck with the rest of the year.

Sure. Thanks Alex.

Thank you. Your next question is coming from Travis Miller from Morningstar. Your line is live.

Thanks you and good morning everyone. You have just touched on a lot of what my question was going to be, but in terms of that difference between the electricity sales growth and the customer growth. Longer term, and again, you kind of mentioned this, but thinking about the residential side more, would you expect that customer growth rate and the electricity sales growth rate to somewhat match each other or are there trends you are seeing in terms of those growth rates changing, right, either people becoming more efficient or more use per household, something like that?

Travis, we still see, and Coop can probably talk about the sort of specifics, but we still see very robust rooftop solar penetration. I think we have the highest per capita rooftop solar in the U.S. outside of Hawaii. And so that tends to offset some of that on the residential side. The growth is still good. It also drives kind of multiplier effects as you get more C&I that comes in to support those residential customers, so it is still certainly a net positive. But yes, it is hard to make it a linear equation. That is typically what we see right through.

Yes. Jeff is right, the 2% customer growth in that range is something that we see continuing, given the factors that I talked about. A lot of it is offset by energy efficiency, as Jeff described. We certainly look to the small C&I growing up around the new subdivisions and things as well. The area that we are starting to monitor this year, we don’t have numbers around it, but it is EV, electric vehicle penetration. That is one area where usage per customer on the residential side is forecasted to pick up over time. So that EV penetration is an important part of the calculus around the residential because as we have -- kind of we are starting to see last year, the work-from-home trend reached a point of saturation. In fact, as I mentioned, we have had people start going back to the office. So when you take that plus energy efficiency, it eats into quite a bit of the customer growth. So it will be the impacts of things like EVs, if you go out into the future.

And does that difference between the sales growth and customer growth and how that evolves, do you think that will become more of an issue of discussion in the regulatory realm in terms of rate case and rate design?

No. Travis, if you dig into our stuff, you will see we are - and it is kind of partly because of where we are located in the country. But if you look at us and project who serves the other half of Phoenix, we have the highest penetration of time of use rates. We have residential demand rates. We are very far ahead of the curve nationally on rate design. And so a lot of that is really what is incenting customers to do things. We have an incredibly robust smart thermostat program that we use to help us get through the summer from a demand response perspective. And so a lot of the stuff that you might be thinking in other states is going to start hitting the commission, has hit the commission, and we are well ahead of a lot of our peers in those areas.

Okay, perfect. I appreciate your thoughts.

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