Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — 2013 RBC Capital Markets' Global Energy and Power Conference
57 slides from Pinnacle West Capital's conference presentation, Jun 4, 2013
Slide 1: Delivering Superior Shareholder Value
DELIVERING SUPERIOR SHAREHOLDER VALUE 2013 RBC Capital Markets' Global Energy and Power Conference June 4, 2013
Slide 2: Forward-Looking Statements
FORWARD-LOOKING STATEMENTS 2 This presentation contains forward-looking statements based on current expectations, including statements regarding our earnings guidance and financial outlook and goals. These forward-looking statements are often identified by words such as “estimate,” “predict,” “may,”
Slide 3: Non-GAAP Financial Measures
NON-GAAP FINANCIAL MEASURES 3 In this presentation, we refer to “on-going earnings per share,” which is a “non-GAAP financial measure,” as defined in accordance with SEC rules. We believe on-going earnings per share provides investors with a useful indicator of our results that is comparable among p
Slide 4: Pinnacle West: Who We Are
4 NYSE Ticker PNW Market Cap $7 Billion Enterprise Value $10 Billion Yield 4% Principal Subsidiary Arizona’s largest electric utility $13 billion assets Service Territory 1.1 million customer accounts 34,646 square miles Customer Growth 2% average annual growth expected 2013-2015 3-4% historical ave
Slide 5: Pinnacle West: Our Value Proposition
5 Our commitment to investors: Deliver superior shareholder returns through... PINNACLE WEST: OUR VALUE PROPOSITION
Slide 6: Pinnacle West: Our Value Proposition
PINNACLE WEST: OUR VALUE PROPOSITION 6
Slide 7: Positive Long-Term Demographics
POSITIVE LONG-TERM DEMOGRAPHICS 7 CAPITALIZING ON INTRINSIC GROWTH Superior Growth APS’s customer growth generally outpaces U.S. and Arizona population growth. Annual Growth 1990 1995 2000 2005 2010 2016 Projected APS Customer Growth Arizona Population Growth US Population Growth 2.7%* Millions APS
Slide 8: Long-Term Growth Drives Cap Ex
8 Investment is required throughout the business to meet expected demand growth LONG-TERM GROWTH DRIVES CAP EX CAPITALIZING ON INTRINSIC GROWTH APS Capital Expenditures by Function Other Distribution Transmission Renewables Environmental Traditional Generation Projected $ Millions Based on December
Slide 9: Solid Capital Recovery and Strong Rate Base Growth
SOLID CAPITAL RECOVERY AND STRONG RATE BASE GROWTH 9 We expect our rate base will grow 6% per year on average, and we have constructive recovery of capital expenditures. CAPITALIZING ON INTRINSIC GROWTH $ Billions Year-End Projected APS Rate Base Growth 6% Compound Annual Growth Rate ACC FERC Other
Slide 10: Pinnacle West: Our Value Proposition
PINNACLE WEST: OUR VALUE PROPOSITION 10
Slide 11: Operational Highlights
OPERATIONAL HIGHLIGHTS 11 Customer Satisfaction Ranked 3rd highest nationally among 55 large investor-owned electric utilities in 2012 J.D. Power residential customer survey Strong Nuclear and Coal Baseload Resources 2012 capacity factors above industry averages Palo Verde 20-year license extension
Slide 12: Pinnacle West: Our Value Proposition
PINNACLE WEST: OUR VALUE PROPOSITION 12
Slide 13: Renewable Energy Rises with the Sun
RENEWABLE ENERGY RISES WITH THE SUN 13 We are helping Arizona become the “Solar Capital of the World.” Germany and Japan are among countries with highest installed solar capacity, yet have solar conditions far inferior to Arizona MAKING COMPELLING CAPITAL INVESTMENTS Arizona Arizona
Slide 14: Four Corners Power Plant Proposed Plan
15 MAKING COMPELLING CAPITAL INVESTMENTS FOUR CORNERS POWER PLANT PROPOSED PLAN Our proposal represents a balanced solution to new environmental regulations. Acquire Southern California Edison’s 739 MW interest in Units 4 & 5 and shut down 560 MW Units 1 – 3 Purchase price: $294 million (subject to
Slide 15: Transmission Investment Essential
100 MW 970 MW 1032 MW 350 MW 4300 MW 1005 MW Legend NORTH SAGUARO N . GILA PALO VERDE - HASSAYAMPA YUCCA GILA BEND REDHAWK KYRENE WESTWING BAGDAD 2018 PINNACLE PEAK CHOLLA NAVAJO . 2016 CORONADO YOUNGS CANYON 2013 SUNDANCE FOUR CORNERS DESERT BASIN Line Relocation 2014 Planned lines Existing lines S
Slide 16: Pinnacle West: Our Value Proposition
PINNACLE WEST: OUR VALUE PROPOSITION 17
Slide 17: 2012 Retail Rate Case Settlement Key Provisions
2012 RETAIL RATE CASE SETTLEMENT KEY PROVISIONS – OTHER THAN BASE RATES 18 Constructive new or modified adjustment mechanisms Lost Fixed Cost Recovery (LFCR) rate mechanism to address ratemaking effects of energy efficiency and distributed renewable energy Power Supply Adjustor (PSA) – 100% pass-thr
Slide 18: Pinnacle West: Our Value Proposition
PINNACLE WEST: OUR VALUE PROPOSITION 19
Slide 19: ROE Improvement: A Multi-Pronged Approach
20 Improving our earned return on equity is one of our top priorities. Earned ROEs Key Initiatives Supportive electric utility rates Regulatory framework improvements Cost management initiatives Efficiency and effectiveness throughout organization STRENGTHENING OUR FINANCIAL PROFILE ROE IMPROVEMENT:
Slide 20: Strong Cost Management Focus
21 Our goal is to keep O&M growth in line with retail sales growth. STRENGTHENING OUR FINANCIAL PROFILE STRONG COST MANAGEMENT FOCUS Solid achievements to date Initiatives Company-wide benchmarking and evaluations Workforce attrition opportunities Knowledge transfer Process documentation Excludes RE
Slide 21: Effective Cost Management Initiatives
22 A variety of initiatives have been helping control operating and capital costs. STRENGTHENING OUR FINANCIAL PROFILE EFFECTIVE COST MANAGEMENT INITIATIVES Enterprise-wide Supply Chain Management Corporate Efficiency Study Fossil Generation Realignment Palo Verde Unit Production Cost Reductions Sus
Slide 22: Sustainable Cost Management Initiative
23 Continued success requires a more rigorous, standardized approach to running the business. STRENGTHENING OUR FINANCIAL PROFILE SUSTAINABLE COST MANAGEMENT INITIATIVE (“SCMI”) Recognize combined challenges Costs Capital Sales growth Regulatory stay-out Aging workforce Improve organizational effici
Slide 23: Consolidated On-Going EPS Outlook
CONSOLIDATED ON-GOING EPS OUTLOOK 24 STRENGTHENING OUR FINANCIAL PROFILE Our strategies and financial performance are producing earnings growth. On-Going EPS *Near top of range Guidance as of May 3, 2013 See key factors and assumptions in appendix $2.99 $3.50 $3.45 – $3.60 Outlook Through 2015 6% ra
Slide 24: Common Dividend Outlook
25 STRENGTHENING OUR FINANCIAL PROFILE COMMON DIVIDEND OUTLOOK Our financial results facilitate growing cash returns to our shareholders Dividend Growth Goal Indicated Annual Dividend Rate at Year-End * Increase effective 4th quarter 2012 Annual Dividend Growth Approx. 4%** *As of May 3, 2013 Future
Slide 25: Superior Shareholder Returns
SUPERIOR SHAREHOLDER RETURNS 26 Our total return to shareholders has outperformed our industry and the broad market over the past five years. STRENGTHENING OUR FINANCIAL PROFILE Pinnacle West S&P 500 S&P 1500 Electric Utilities 1 Year 2 Years 3 Years 5 Years Periods Ended December 31, 2012
Slide 26: Our Commitment to Investors: Delivering Superior Shareholder Returns
PINNACLE WEST: OUR VALUE PROPOSITION 27 Our commitment to investors... Delivering Superior Shareholder Returns
Slide 27: Appendix
APPENDIX we PINNACLE WEST
Slide 28: A Respected, Veteran Leadership Team
A RESPECTED, VETERAN LEADERSHIP TEAM Jim Hatfield SVP & CFO 29 Our top executives have more than 100 combined years of creating shareholder value in the energy industry. Don Brandt Chairman & CEO Mark Schiavoni EVP Operations Jeff Guldner SVP Customers & Regulation Randy Edington EVP & Chief Nuclear
Slide 29: Positive Near-Term Trends
30 Arizona’s economy is reflecting more sustained growth and activity. STRENGTHENING OUR FINANCIAL PROFILE POSITIVE NEAR-TERM TRENDS Non-Farm Job Growth Year-Over- Year Change Metro Phoenix Vacant Housing APS Service Territory YTD YTD
Slide 30: Positive Near-Term Trends: Housing and Non-Residential
31 Housing and non-residential sectors are showing steady improvement. STRENGTHENING OUR FINANCIAL PROFILE POSITIVE NEAR-TERM TRENDS Value Relative to Jan ‘05 Home Prices Nonresidential Building Vacancy YTD YTD Vacancy Rate Office Retail
Slide 31: 2013 On-Going EPS Guidance: Key Factors & Assumptions
32 Key Factors & Assumptions as of May 3, 2013 STRENGTHENING OUR FINANCIAL PROFILE 2013 ON-GOING EPS GUIDANCE Electricity gross margin* (operating revenues, net of fuel and purchased power expenses) about $2.17 billion to $2.22 billion Retail customer growth about 1.5% Weather-normalized retail elec
Slide 32: 2013–2015 Financial Outlook
2013 – 2015 FINANCIAL OUTLOOK 33 2012 retail rate settlement effective July 1, 2012 Revenue provisions Retail base rate changes effective July 1, 2012 Adjustment mechanisms Four Corners acquisition AZ Sun additions to flow through RES until next base rate case Lost Fixed Cost Recovery (LFCR) mechani
Slide 33: 2013–2015 Financial Outlook: Key Drivers and Assumptions
2013 – 2015 FINANCIAL OUTLOOK 34 Key Drivers and Assumptions as of May 3, 2013 (continued) Modestly improving Arizona and U.S. economic conditions Retail customer growth to average 2% annually Weather-normalized retail electricity sales volume growth: Less than 1% after customer conservation and ene
Slide 34: Non-GAAP EPS Reconciliation
NON-GAAP EPS RECONCILIATION 35 Consolidated On-Going EPS Guidance STRENGTHENING OUR FINANCIAL PROFILE Year 2011 Actual Year 2012 Actual Year 2013 Guidance* Net income attributable to common shareholders $ 3.09 $ 3.45 Adjustments: Loss (income) from: discontinued operations (0.10) (0.05) On-going EPS
Slide 35: Ready Access to Capital
READY ACCESS TO CAPITAL 36 Strong access to capital resources is supported by solid credit ratings, manageable debt maturities and ample liquidity. STRENGTHENING OUR FINANCIAL PROFILE 52.9% 55.4% 2013 Major Financing Activities $100 million APS senior notes* Remarketing tax-exempt debt Farmington 19
Slide 36: Solid Credit Ratings
SOLID CREDIT RATINGS 37 STRENGTHENING OUR FINANCIAL PROFILE Available liquidity remains substantial and our credit ratings have improved. We are disclosing these ratings to enhance understanding of our sources of liquidity and the effects of our ratings on our costs of funds. APS Parent Corporate Cr
Slide 37: S&P Credit Metrics
S&P CREDIT METRICS 38 APS FFO / Debt FFO / Interest Debt / Capitalization Pinnacle West FFO / Debt FFO / Interest Debt / Capitalization Our key credit metrics have been improving. STRENGTHENING OUR FINANCIAL PROFILE 2008 2009 2010 2011 2012 22.1% 22.8% 22.3% 20.8% 29.7% 5.1x 4.8x 4.6x 4.6X 6.6x 57.4
Slide 38: Attractive Dividend Yield
ATTRACTIVE DIVIDEND YIELD 39 Dividend Yield Dividend Payout Industry Averages PNW Yield as of April 30, 2013 Payout 12 Months Ended March 31, 2013 Pinnacle West’s annual dividend is $2.18 per share — providing a solid yield. STRENGTHENING OUR FINANCIAL PROFILE
Slide 39: U.S. Nuclear Operating Costs
40 Palo Verde operating costs are below industry averages and improving. STRENGTHENING OUR FINANCIAL PROFILE Dollars per Megawatt-Hour U.S. NUCLEAR OPERATING COSTS
Slide 40: Environmental, Sustainability and Governance Leadership
ENVIRONMENTAL, SUSTAINABILITY AND GOVERNANCE LEADERSHIP 41 MAINTAINING OPERATIONAL EXCELLENCE We are recognized internationally for our achievements. Top 10 Utility Solar Ranking Ranked in Corporate Responsibility Magazine’s 100 Best Corporate Citizens Best practices in utility arboriculture since 1
Slide 41: Customer Satisfaction: A Key Priority
CUSTOMER SATISFACTION: A KEY PRIORITY 42 Our employees provide top-tier customer service. MAINTAINING OPERATIONAL EXCELLENCE Lowering Outage Time Per Customer Average Outage Minutes/Year Outstanding Residential Customer Satisfaction Rating Rating 2012 J.D. Power Residential Customer Survey APS Indus
Slide 42: Superior Power Plant Performance
Coal Performance Metrics Nuclear Capacity Factors SUPERIOR POWER PLANT PERFORMANCE 43 Our nuclear and coal plants are strong baseload resources. MAINTAINING OPERATIONAL EXCELLENCE APS Commercial Availability APS Capacity Factor Industry Capacity Factor Industry 91% APS 92% 63% 71% 93% 3,937 MW total
Slide 43: 2012 Retail Customer, Sales and Revenue Mixes
2012 RETAIL CUSTOMER, SALES AND REVENUE MIXES 44 Residential Commercial Industrial Other Customers Year-End 1.1 Million Retail Sales 28,154 GWh Operating Revenues $3.1 Billion 8% 45% 47% 50% 43% 11% 89% Our business mix is attractive due to favorable climate and other conditions in our market area.
Slide 44: 2012 APS Generation and Energy Fuel Mixes
45 2012 APS GENERATION AND ENERGY FUEL MIXES Energy Fuel Mix 34,229 GWh Generation Fuel Mix 27,635 GWh Generation Capacity Mix 6,250 MW Nuclear Coal Gas & Oil Purchased Power Our balanced resource mix provides our customers reliability and manages price volatility. MAINTAINING OPERATIONAL EXCELLENCE
Slide 45: Arizona Corporation Commissioners
ARIZONA CORPORATION COMMISSIONERS 46 IMPROVING OUR REGULATORY ENVIRONMENT Three seats for four-year terms through January 2017 were addressed in the November 2012 election. * Term limited Bob Stump (R)* Chairman Brenda Burns (R) Gary Pierce (R)* Terms To January 2015 Terms To January 2017 Susan Bitt
Slide 46: 2012 Retail Rate Case Settlement Key Benefits
2012 RETAIL RATE CASE SETTLEMENT KEY BENEFITS 47 Shareholder Benefits Regulatory certainty Base rate stay-out until at least mid-2016 Rate gradualism through adjustment mechanisms Financial support APS needs to achieve Arizona’s energy goals 10% allowed return on equity Customer Benefits Rate certai
Slide 47: 2012 Retail Rate Case Settlement Key Financial Assumptions
2012 RETAIL RATE CASE SETTLEMENT KEY FINANCIAL ASSUMPTIONS 49 IMPROVING OUR REGULATORY ENVIRONMENT Rate base $5.7 billion Allowed return on equity 10% Capital structure Long-term debt 46.1% Common equity 53.9% Base fuel rate (¢/kWh) 3.21¢ Projected fuel-price year for base fuel rate 2012 Test year e
Slide 48: Our Regulatory Mix
OUR REGULATORY MIX 50 IMPROVING OUR REGULATORY ENVIRONMENT The bulk of APS’s revenues comes from a regulated retail rate base and a meaningful transmission business. $6.9 Billion Total Approved Rate Base Most Recent Rate Decisions ACC FERC Rate Effective Dates 7/1/2012 6/1/2013 Test Year Ended 12/31
Slide 49: Constructive Transmission Rate Regulation
Annual Revenue Rate Effective Dates Annual Revenue Rate Effective Dates Annual Revenue Rate Effective Dates Retail Portion (TCA) $ 21 M 6/1/2013 $ 18 M 8/1/2012 $ 38 M 7/1/2011 Wholesale Portion $ 5 M 6/1/2013 $ (2) M 6/1/2012 $ 6 M 6/1/2011 Total Increase (Decrease) $ 26 M $ 16 M $ 44 M Equity Rati
Slide 50: Significant Regulatory Progress
52 SIGNIFICANT REGULATORY PROGRESS IMPROVING OUR REGULATORY ENVIRONMENT We have achieved a more supportive regulatory structure and improvements in cost recovery timing. Mechanism Adopted/ Last Adjusted Description Power Supply Adjustor (“PSA”) April 2005 / February 2013 Recovers variance between ac
Slide 51: A Well-Balanced Generation Portfolio
A WELL-BALANCED GENERATION PORTFOLIO Fuel / Plant Location Units Dispatch Commercial Ops. Date Ownership Interest1 Net Capacity (MW) Nuclear Palo Verde Wintersburg, AZ 1-3 Base 1986 - 1989 29.1% 1,146 Total Nuclear 1,146 Coal Cholla Joseph City, AZ 1-3 Base 1962 - 1980 100 647 Four Corners Farmingto
Slide 52: Resource Planning for Reliability and Sustainability
RESOURCE PLANNING FOR RELIABILITY AND SUSTAINABILITY MAKING COMPELLING CAPITAL INVESTMENTS We will meet future load growth through a balanced resource mix including renewable resources and energy efficiency programs. Existing Owned Resources Includes retirement of Four Corners 1-3 Existing Contracts
Slide 53: Four Corners Power Plant Facts & Figures
55 FOUR CORNERS POWER PLANT FACTS & FIGURES MAKING COMPELLING CAPITAL INVESTMENTS Common Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Commercial Operation Date 1963 1963 1964 1969 1970 Original Cost ($M) * $59 $382 $165 Net Book Value at 12/31/12 ($M) * $41 $0 $129 Current Depreciation Ends 2038 Mid-2012 2038
Slide 54: Arizona's Renewable Resource and Energy Efficiency Standards
56 Renewable Energy (RES) Minimum Requirements Portion of retail sales to be supplied by renewable resources 5% by 2015 15% by 2025 Distributed energy component 30% of total requirement by 2012 APS on track to approximately double 2015 requirement Pursuant to 2009 regulatory settlement Energy Effici
Slide 55: AZ Sun Program Summary
AZ SUN PROGRAM SUMMARY 57 MAKING COMPELLING CAPITAL INVESTMENTS Name Location Capacity Developer Actual or Target COD* Paloma Gila Bend, AZ 17 MW First Solar Sept. 2011 Cotton Center Gila Bend, AZ 17 MW Solon Oct. 2011 Hyder I Phase 1 Hyder, AZ 11 MW SunEdison Oct. 2011 Hyder I Phase 2 Hyder, AZ 5 M
Slide 56: Renewable Purchase Power Contracts
RENEWABLE PURCHASE POWER CONTRACTS 58 MAKING COMPELLING CAPITAL INVESTMENTS Fuel / Contract Location Owner/ Developer Status 1 PPA Signed Commercial Operation Date Term (years) Capacity Net (MW) Solar Solana Gila Bend, AZ Abengoa UC Feb-2008 2013 30 250 RE Ajo Ajo, AZ Duke Energy Gen Svcs IO Jan-201
Slide 57: Solana: A Sunny Place
SOLANA: A “SUNNY PLACE” 59 250-MW 30-year PPA for all output (~900 GWh/year) Concentrating solar trough facility 70 miles southwest of Phoenix On target for 2013 commercial operation 90%+ on-peak capacity factor with use of thermal storage capability Expected to be first major U.S. solar trough plan
Pinnacle West Capital — 2013 RBC Capital Markets' Global Energy and Power Conference on 6ix