Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — EEI Financial Conference 2017
48 slides from Pinnacle West Capital's conference presentation, Nov 5, 2017
Slide 1: Powering Growth, Delivering Value
POWERING GROWTH DELIVERING VALUE EEI Financial Conference l November 5-7, 2017 Powering Growth, Delivering Value
Slide 2: Forward Looking Statements and Non-GAAP Financial Measures
FORWARD LOOKING STATEMENTS AND NON-GAAP FINANCIAL MEASURES 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
Slide 3: Pinnacle West: Who We Are
We are a vertically integrated, PINNACLE WEST: regulated electric utility in the WHO WE ARE growing southwest United States Pinnacle West (NYSE: PNW) - Market Capitalization*: $9.8 billion - Enterprise Value*: $14.8 billion - Consolidated Assets: $17.0 billion - Indicated Annual Dividend*: $2.78 - D
Slide 4: Value Proposition
VALUE PROPOSITION We are executing on our financial and operational objectives … Leverage Operational Excellence Financial Strength Economic Growth Top decile safety performance Annual dividend growth target of Arizona’s long-term growth among peers 6%, subject to declaration at fundamentals r
Slide 5: Performance Results
PERFORMANCE Consistent performance with a RESULTS robust outlook for the future Net Income1 Strong earnings performance Track-record of earnings growth $442.0 $381.5 Favorable rate case decision in August 2017 supports revenue generation and infrastructure investment Strong long-term fundament
Slide 6: The Grid Is Evolving – Driving New Investments in Technology
THE GRID IS EVOLVING – DRIVING NEW INVESTMENTS IN TECHNOLOGY Grid stability, power quality and reliability remain the core of a sustainable electrical system. APS is at the forefront of utilities designing and planning for the next generation electric grid. New technology advances and changing custo
Slide 7: Grid Investments
Modernizing the distribution grid with advanced technology GRID INVESTMENTS investments – resulting in improved reliability for customers and more efficient operations Grid Operations & Investment $1.3 Billion from 2017-2019 Integrated Volt/VAR Control (IVVC) Advanced Distribution Management System
Slide 8: APS Microgrid Projects Completed
APS MICROGRID PROJECTS COMPLETED Data Center – North Phoenix • Phase 1=11MW Tier 4 diesel generation • In service December 2016 • 17 Autonomous Frequency Response events since April 2017; 1 ECC call for power event (7/19/2017) • 50% cost share • Customer has requested to begin Phase 2 planning • Add
Slide 9: Renewable Resources
RENEWABLE APS is a leader in solar RESOURCES APS Solar Portfolio* APS currently has 1,549 MW of renewable resources: Owned PPA 214 MW 310 MW • Solar* 1,230 MW DG • Wind 289 MW 706 MW • Biomass 14 MW • Geothermal 10 MW • Biogas 6 MW Owned solar includes 170 MW AZ Sun Program, 4 MW of other APS owned
Slide 10: Battery Storage
Energy storage is important but will only be cost effective in niche BATTERY STORAGE circumstances for the next several years APS Projects – Punkin Center, Arizona: 2 X 4MWh Li-ion battery storage systems to be installed in fall 2017 in place of rebuilding 20 miles of distribution lines – Solar Inno
Slide 11: Residential Solar vs. APS Customer Load
RESIDENTIAL SOLAR VS. APS CUSTOMER Performance at system peak LOAD On June 20th, APS customers hit “peak demand” for 2017 using more than 7,300 MW of electricity 500 7,367 8,000 6,918 6,136 400 6,000 304 300 Residential Rooftop MW 4,000 APS Customer Load 200 100 2,000 100 5 0 0 1 2 3 4 5 6 7 8 9 10
Slide 12: Residential PV Applications
Residential DG (MWdc) Annual Additions RESIDENTIAL PV 133 110 74 APPLICATIONS* 51 57 44 18 22 10 2009 2011 2013 2015 2017 YTD -Sep 4,500 3,876 3,962 4,000 3,500 3,000 2,525 2,267 2,500 1,991 2,041 1,864 2,000 1,620 1,591 1,469 1,413 1,367 1,462 1,450 1,500 1,267 1,291 1,311 1,154 1,141 1,003 1,002 1
Slide 13: The “Duck Curve”
Distributed generation is changing THE “DUCK CURVE” the load shape of the grid Current Spring Day Spring Day 2022 Excess renewables creates over-generation … and potentially for nuclear generation in challenges … 5,000 the future 5,000 4,500 4,500 4,000 4,000 3,500 3,500 3,000 3,000 2,500 2,500 2,00
Slide 14: Demand Side Management (DSM)
DEMAND SIDE 2018 DSM Plan shifts the focus to align with APS’s changing MANAGEMENT (DSM) resource needs School Bus Electrification – Pilot program to electrify school busses that can charge in the middle of the day Managed EV Charging Program – Fleet, workplace and multifamily charging infrastructur
Slide 15: APS Solar
Providing more renewable energy APS SOLAR and technology to all customers APS Solar Partner Program (Installations Complete) – Installed 10 MW of APS-owned residential PV systems with advanced controllable inverters that can vary power output – 4 MWh of grid-tied battery storage on 2 of the particip
Slide 16: Solar Innovation Study
Examining the integration of SOLAR INNOVATION behind the meter advanced STUDY technologies with demand-based rates Overview – Installing APS-owned residential PV systems on 75 homes with various configurations of battery storage, load shifting, demand controls and smart thermostats connected to a cl
Slide 17: Resource Planning
RESOURCE PLANNING1 Peak* 8,405 MW 9,835 MW 11,410 MW Resource Reductions 2017-2022 2017-2027 2017-2032 (Retirements, Expirations) -487 MW -872 MW -872 MW Ocotillo steam unit retirements and Ocotillo steam unit retirements, Ocotillo steam unit retirements, Navajo contract expiration Navajo contract e
Slide 18: APS Capital Expenditures
APS CAPITAL Capital expenditures are funded primarily through internally EXPENDITURES generated cash flow ($ Millions) Other $1,337 $1,224 $77 $1,181 Distribution $87 $82 $420 $1,009 Transmission $388 $124 $421 Renewable $182 Generation $127 $3 $437 $102 $178 $199 Environmental(1) $16 $220 $90 $245
Slide 19: Operations & Maintenance
OPERATIONS & Goal is to keep O&M per kWh flat, MAINTENANCE adjusted for planned outages ($ Millions) $860 - $880 $828 $830 - $850 $788 $805 75 - 85 $772 55 - 65 52 72 37 38 756 775 - 785 785 - 795 751 753 734 2013 2014 2015 2016 2017E 2018E* PNW Consolidated ex RES/DSM** Planned Fleet Outages * 2018
Slide 20: Planned Outage Cycles
PLANNED OUTAGE The length of time between CYCLES outages varies from plant to plant Palo Verde Generating Station − Palo Verde will continue to have two refueling outages each year (18 months cycles for each of the three units) − APS’s share of the annual planned outage expense at Palo Verde has bee
Slide 21: Sustainability
APS’s vision is to create a SUSTAINABILITY sustainable energy future for Arizona Pinnacle West and APS have adopted a strategic framework that Five critical areas of our sustainability efforts supports our operating foundation Carbon Management • 50% of our diverse energy mix is carbon-free • 4.9M m
Slide 22: APS Transmission
Strategic transmission investment is essential to maintain reliability APS TRANSMISSION and deliver diversified resources to customers • 10-Year Transmission Plan filed January 2017 (115 kV and above) – 52 miles of new lines – 5 bulk transformer additions Flagstaff • Also includes: – Sun Valley-Morg
Slide 23: Palo Verde Nuclear Generating Station
PALO VERDE NUCLEAR Largest nuclear generating plant GENERATING STATION in the United States APS shares ownership of Palo Verde with other Western utilities, but maintains sole management responsibility for the nation’s largest nuclear plant 25 >$1B 100% Years as the nation’s largest Annual budget Ca
Slide 24: Appendix
APPENDIX Powering Growth, Delivering Value
Slide 25: Senior Management Team
SENIOR Our management team has more than 100 combined years of MANAGEMENT creating shareholder value in the TEAM energy industry Don Brandt Jim Hatfield We maintain a robust Chairman of the Board, President and Executive Vice President and Chief Executive Officer, Pinnacle West & APS Chief Financial
Slide 26: 2017 On-Going EPS Guidance
2017 ON-GOING Key Factors & Assumptions as of EPS GUIDANCE November 3, 2017 2017 Electricity gross margin* (operating revenues, net of fuel and $2.45 – $2.50 billion purchased power expenses) • Retail customer growth about 1.5-2.5% • Weather-normalized retail electricity sales volume about 0-1.0% hi
Slide 27: 2018 On-Going EPS Guidance
2018 ON-GOING Key Factors & Assumptions as of EPS GUIDANCE November 3, 2017 2018 Electricity gross margin* (operating revenues, net of fuel and $2.61 – $2.66 billion purchased power expenses) • Retail customer growth about 1.5-2.5% • Weather-normalized retail electricity sales volume about 0.5-1.5%
Slide 28: Financial Outlook
Key Factors & Assumptions as of FINANCIAL OUTLOOK November 3, 2017 Gross Margin – Customer Growth and Weather (2017-2019) Assumption Impact Retail customer growth • Expected to average about 2-3% annually • Modestly improving Arizona and U.S. economic conditions Weather-normalized retail electricity
Slide 29: Economic Indicators
ECONOMIC Arizona and Metro Phoenix remain attractive places to live and do INDICATORS business Nonresidential Building Vacancy – Metro Phoenix Vacancy Rate Maricopa County ranked #1 in U.S. for 25% population growth in 2016 Office - U.S. Census Bureau March 2017 20% 15% Industrial Above-average job
Slide 30: Rate Base
APS’s revenues come from a RATE BASE regulated retail rate base and meaningful transmission business APS Rate Base Growth Total Approved Rate Base Year-End ACC FERC Generation & Distribution Transmission 17% $1.8 83% $1.4 $1.4 ACC FERC Rate Effective Date 8/19/2017 6/1/2017 $8.2 $6.5 $6.8 Test Year
Slide 31: Balance Sheet Strength
BALANCE SHEET STRENGTH Credit Ratings Debt Maturity Schedule • A- or equivalent ratings or better at S&P, Moody’s ($Millions) and Fitch $600 2017 Major Financing Activities $500 • $300 million 10-year 2.95% APS senior unsecured notes issued September 2017 $400 • $250 million re-opening in March of A
Slide 32: 2017 Rate Review Order
2017 RATE REVIEW ORDER* EFFECTIVE AUGUST 19, 2017 Key Financial Proposals – Base Rate Changes Annualized Base Rate Revenue Changes ($ millions) Non-fuel, Non-depreciation Base Rate Increase $ 87.2 Decrease fuel and Purchased Power over Base Rates (53.6) Increase due to Changes in Depreciation Schedu
Slide 33: 2017 Rate Review Order
2017 RATE REVIEW ORDER* EFFECTIVE AUGUST 19, 2017 Key Proposals – Revenue Requirement • Cost deferral order from in-service dates to incorporation of SCRs in rates using a step-increase no Four Corners later than January 1, 2019 Ocotillo Modernization • Cost deferral order from in-service dates to e
Slide 34: Ocotillo Modernization Project and Four Corners SCRs
OCOTILLO MODERNIZATION PROJECT AND FOUR CORNERS SCRs • Included in the 2017 Rate Review Order*, APS has been granted Accounting Deferral Orders for two large generation-related capital investments – Ocotillo Modernization Project: Retiring two aging, steam-based, natural gas units, and replacing wit
Slide 35: Arizona Corporation Commission
ARIZONA CORPORATION COMMISSION Term to January 2019 Terms to January 2020 Tom Justin Bob Boyd Andy Forese (R) Olson (R)** Burns (R)* Dunn (R) Tobin (R) Chairman Other State Officials ACC Executive Director – Ted Vogt RUCO Director – David Tenney * Term limited - elected to four-year terms (limited t
Slide 36: 2017 Key Dates
2017 KEY DATES ACC Key Dates / Docket # Q1 Q2 Q3 Q4 Key Recurring Regulatory Filings Lost Fixed Cost Recovery Jan 15 E-01345A-11-0224 Transmission Cost Adjustor May 15 E-01345A-11-0224 2018 DSM/EE Implementation Plan Decision expected by Sep 1 E-01345A-17-0134 end of 2017 2018 RES Implementation Pla
Slide 37: Regulatory Mechanisms
We have achieved a supportive REGULATORY regulatory structure and MECHANISMS improvements in cost recovery timing Adopted / Mechanism Description Last Adjusted Power Supply Adjustor April 2005 / • Recovers variance between actual fuel and purchased power costs and (“PSA”) August 2017 base fuel rate
Slide 38: Regulatory Mechanisms (TCA)
REGULATORY We have achieved constructive transmission rate treatment with MECHANISMS (TCA) annual adjustments • FERC Formula Rates adopted in 2008 • Adjusted annually with 10.75% allowed ROE • Based on FERC Form 1 and projected closings – Update filed each May – Annual rate true-up compares projecte
Slide 39: Regulatory Mechanisms (TCA)
REGULATORY We have achieved constructive transmission rate treatment with MECHANISMS (TCA) annual adjustments 2016 2017 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 2016 Rates 2017 Rates (Including True-Up) (Including True-Up) 2016 Revenue 2017 Reve
Slide 40: Regulatory Mechanisms (LFCR)
REGULATORY Lost Fixed Cost Recovery MECHANISMS (LFCR) • Lost Fixed Cost Recovery (LFCR) was implemented as part of the July 2012 settlement 2017 Revenue – Estimated to offset 30-40% of revenues lost due to 2016 Revenue ACC-mandated energy efficiency (EE) and 2015 Revenue distributed renewable genera
Slide 41: Environmental Plan
Regional Haze compliance is the ENVIRONMENTAL biggest driver of environmental PLAN spend over the next few years Regional Haze / BART Coal Combustion Residuals (SCR) Announced in 1999, with site-specific requirements Announced on December 19, 2014 EPA Ruling announced more recently (Subtitle D) Four
Slide 42: Coal Fleet Strategy
APS’s proactive approach to reducing emissions leads to coal’s COAL FLEET STRATEGY expected share of the energy mix being reduced to 11% (970 MW) Nuclear Percent of Portfolio MWh 17% 25% Coal 11% 21% Gas 33% 26% RE + DE 18% 12% EE 13% 13% 3% 8% Short-Term Market 2017 2032 Purchase Emissions • 820 MW
Slide 43: Water Strategy
APS, and Palo Verde in particular, has provided national and WATER STRATEGY international leadership on the use of reclaimed water for power generation Vision: APS continues to strive for sustainable and cost-effective water supplies for energy production for APS customers. Mission: To execute a str
Slide 44: Generation Portfolio
GENERATION PORTFOLIO* Plant Location No. of Units Dispatch COD Ownership Interest1 Net Capacity (MW) NUCLEAR Palo Verde Wintersburg, AZ 3 Base 1986-1989 29.1% 1,146 1,146 MW Cholla Joseph City, AZ 2 Base 1962-1980 100 387 COAL Four Corners Farmington, NM 2 Base 1969-1970 63 970 1,672 MW Navajo Page,
Slide 45: Purchased Power Contracts
PURCHASED POWER CONTRACTS* Contract Location Owner/Developer Status1 PPA Signed COD Term (Years) Net Capacity (MW) Solana Gila Bend, AZ Abengoa IO Feb-2008 2013 30 250 RE Ajo Ajo, AZ Duke Energy Gen Svcs IO Jan-2010 2011 25 5 Sun E AZ 1 Prescott, AZ SunEdison IO Feb-2010 2011 30 10 SOLAR 310 MW Sadd
Slide 46: Non-GAAP Measure Reconciliation
NON-GAAP MEASURE RECONCILIATION 2017 Guidance $ millions pretax Operating revenues* $ 3,540 - $ 3,600 Fuel and purchased power expenses* (1,010) - (1,020) Gross margin 2,530 - 2,580 Adjustments: Renewable energy and demand side management programs (80) - (80) Adjusted gross margin $ 2,450 - $ 2,500
Slide 47: Non-GAAP Measure Reconciliation
NON-GAAP MEASURE RECONCILIATION 2018 Guidance $ millions pretax Operating revenues* $ 3,790 - $ 3,850 Fuel and purchased power expenses* (1,090) - (1,100) Gross margin 2,700 - 2,750 Adjustments: Renewable energy and demand side management programs (90) - (90) Adjusted gross margin $ 2,610 - $ 2,660
Slide 48: Investor Relations Contacts
INVESTOR RELATIONS CONTACTS Stefanie Layton Director, Investor Relations (602) 250-4541 stefanie.layton@pinnaclewest.com Chalese Haraldsen (602) 250-5643 chalese.haraldsen@pinnaclewest.com Michelle Clemente (602) 250-3752 michelle.clemente@pinnaclewest.com Pinnacle West Capital Corporation P.O. Box
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