Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — EEI Financial Conference 2016
52 slides from Pinnacle West Capital's conference presentation, Nov 6, 2016
Slide 1: Powering Growth, Delivering Value
POWERING GROWTH DELIVERING VALUE EEI Financial Conference l November 6-9, 2016 Powering Growth, Delivering Value
Slide 2: Forward Looking Statements
FORWARD LOOKING STATEMENTS 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: 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*: $8.5 billion - Enterprise Value*: $12.8 billion - Consolidated Assets: $15.5 billion - Indicated Annual Dividend*: $2.62 - D
Slide 4: Value Proposition
VALUE PROPOSITION We are executing on our financial and operational objectives … Financial Strength • Consolidated earned ROE more than 9.5% (weather-normalized) through 2016 • Annual dividend growth target of 5%, subject to declaration at Board of Director’s discretion • Strong credit ratings and b
Slide 5: 2016 Highlights & Accomplishments
2016 HIGHLIGHTS & ACCOMPLISHMENTS Increased indicated annual dividend for fifth straight year, by 5% Began construction on the $500M Ocotillo Modernization Project, including air permit approval Completed major outages on Four Corners Units 4 and 5 and on-track with $400M SCR installation De
Slide 6: Rate Base
APS’s revenues come from a RATE BASE regulated retail rate base and meaningful transmission business APS Rate Base Growth Total Rate Base Year-End ACC FERC Generation & Distribution Transmission 17% $1.8 83% $1.4 Most Recent Rate Decisions ACC - Proposed FERC Rate Effective Date 7/1/2017 6/1/2016 $8
Slide 7: Capital Expenditures
CAPITAL Capital expenditures are funded primarily through internally EXPENDITURES generated cash flow ($ Millions) Other $1,337 $1,233 $75 Distribution $89 $1,124 $1,057 $399 $77 $85 Transmission $380 $411 Renewable $340 $211 Generation $136 $1 $104 $197 $136 $201 $1 Environmental(1) $103 $58 $224 $
Slide 8: Resource Planning
Future resources need projected RESOURCE PLANNING in excess of 3,500 MW by 2022 and over 5,400 MW by 2027 MW 2017-2032 Supply / Demand Gap Composition of Energy Mix by Resource* 14,000 2017 13% 12,000 Total Load Requirements 23% 11% 10,000 Gas 26% 27% Coal 8,000 Future Grid-Scale Generation Existing
Slide 9: Economic Indicators
ECONOMIC Arizona and Metro Phoenix remain attractive places to live and do INDICATORS business Nonresidential Building Vacancy – Metro Phoenix Vacancy Rate Above-average job growth in 25% construction, financial services and Office wholesale trade sectors 20% 15% Industrial Vacancy rates in office a
Slide 10: The Grid Is Evolving – Increasingly Dynamic and Complex
THE GRID IS EVOLVING – INCREASINGLY DYNAMIC AND COMPLEX • 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 electric grid • Rates need to be modernized to enable advanced technologies
Slide 11: Renewable Resources
RENEWABLE APS is a leader in solar RESOURCES APS currently has over 1,350 MW APS Solar Portfolio* of renewable resources: AZ Sun • Solar* 1,050 MW 174 MW PPA 310 MW • Wind 289 MW DG • Biomass 14 MW 566 MW • Geothermal 10 MW • Biogas 6 MW AZ Sun includes 4 MW of other APS owned utility scale solar; D
Slide 12: Rooftop Solar Customers Use the Grid 24 Hours per Day
ROOFTOP SOLAR CUSTOMERS USE THE GRID 24 HOURS PER DAY TYPICAL GRID INTERACTION FOR ROOFTOP SOLAR • Customers with rooftop solar systems do not pay for all of the electric services they use • These unpaid costs are then paid by other customers (through higher rates) that can’t have or don’t want sola
Slide 13: Residential vs. Utility-Scale Solar
RESIDENTIAL VS. Performance at system peak UTILITY-SCALE SOLAR On June 19th, APS customers hit “peak demand” for 2016 using more than 7,400 MW of electricity Residential Rooftop Solar AZ Sun Utility-Scale Solar 500 Residential Rooftop 7,445 8,000 500 AZ Sun 7445 8,000 System Load 6,908 System Load 6
Slide 14: Residential PV Applications
Residential DG (MWdc) Annual Additions RESIDENTIAL PV 74 99 APPLICATIONS* 51 57 44 18 22 10 2009 2011 2013 2015 2016 YTD 2500 2315 2250 2000 1888 1750 1547 1520 1500 1357 1290 1170 1250 1031 1353 1005 1000 777 1159 1162 1146 1196 1178 1087 750 939 833 871 836 783 500 681 717 710 610 641 487 523 250
Slide 15: Solar Partner Program
SOLAR PARTNER Learning how to efficiently enable the integration of rooftop solar PROGRAM and battery storage with our grid • Overview – Installing 10 MW of APS-owned residential PV systems; approximately 1,600 systems with average system size of 6kW – Advanced controllable inverters that can vary p
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, energy efficiency, demand controls and smart thermostats connected t
Slide 17: Palo Verde Nuclear Generating Station
PALO VERDE NUCLEAR Largest nuclear generating plant GENERATING STATION in the United States • Total Capacity: 4,000 MW (3 units) Low risk of natural events at Palo Verde – APS operated – APS share: 1,146 MW – Output: 32.5 million MWh in 2015 – Approximately 2,700 employees In Service License* Unit 1
Slide 18: 2016 APS Rate Case
2016 APS RATE CASE Powering Growth, Delivering Value
Slide 19: 2016 Rate Case Framework
2016 RATE CASE “A Bridge to the Future” FRAMEWORK Rate Case Objectives Focus on Focus on Focus on Focus on Clean Energy Customers Innovation Sustainability • Generate power from • Optimize customer • Prudently invest in new • Achieve an earned diverse portfolio and service and reliability technologi
Slide 20: 2016 APS Rate Case Application
2016 APS RATE CASE APPLICATION • Filed June 1, 2016 • Propose new rates go into effect on July 1, 2017 • Docket Number: E-01345A-16-0036 • Additional details, including filing, can be found at http://www.azenergyfuture.com/rate-review/ Procedural Schedule Staff and Intervenor Direct Testimony (ex ra
Slide 21: 2016 Rate Case Key Financials
2016 RATE CASE APS has requested a rate increase KEY FINANCIALS to become effective July 1, 2017 Test year ended December 31, 2015 Total Rate Base - Adjusted $8.01 Billion ACC Rate Base - Adjusted $6.77 Billion Allowed Return on Equity 10.5% Capital Structure Long-term debt 44.2% Common equity 55.8%
Slide 22: 2016 Rate Case Key Financials
2016 RATE CASE APS has requested a rate increase KEY FINANCIALS to become effective July 1, 2017 Overview of Rate Increase ($ in Millions) – Key Components Post-Test Year Plant Additions $ 98.1 Fair Value Increment 51.9 ROE Increase from 10.0% to 10.5% 29.3 Increase due to Changes in Depreciation Sc
Slide 23: 2016 Rate Case Summary
2016 RATE CASE SUMMARY Focus on Focus Focus Focus on Clean Energy on Customers on Innovation Sustainability Ocotillo Modernization Residential Rate Design Solar Partners Programs Power Supply Adjustment Project Modernization • Installing 10 MW of • Include environmental • Requesting cost deferral •
Slide 24: APS Cost of Service
Appropriate to place residential APS COST OF SERVICE solar customers into a unique sub-category of customers • Cost of service shows disparities in ratio Percent of Cost to Serve* of allocated costs to provide electric service, and what customer classes pay for the services received 108% • Solar cus
Slide 25: Rate Design Modernization
RATE DESIGN Rate design that better aligns pricing with cost to serve and MODERNIZATION leverages existing platform Focus Area Current State Rate Case Objective Time-of-Use • > 50% of residential customers are on a • Most residential customers on a TOU rate Rates (TOU) TOU rate • On-peak hours from
Slide 26: Rate Design Modernization
RATE DESIGN Key residential rate proposals designed to reduce cost shift MODERNIZATION among customers • Streamlined rate choices for residential Current Proposed customers including combinations of the Customer Bill Customer Bill following: – Reduced kWh charges for variable portion (energy rate) –
Slide 27: Rate Design: A Solid Foundation to Build On
RATE DESIGN: Over 50% of APS residential customers are already on A SOLID FOUNDATION time-of-use rates, including TO BUILD ON 11% on demand rates 100% 75% 50% 25% 0% Standard TOU - Energy TOU - Demand 27 Powering Growth, Delivering Value
Slide 28: Ocotillo Modernization Project and Four Corners SCRs
OCOTILLO MODERNIZATION PROJECT AND FOUR CORNERS SCRs • Included in the 2016 rate case application, APS is requesting 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 29: Appendix
APPENDIX Powering Growth, Delivering Value
Slide 30: Leadership Team
Our top executives have more than 100 combined years of LEADERSHIP TEAM creating shareholder value in the energy industry Don Brandt Chairman & Chief Executive Officer Jim Mark Bob Jeff Hatfield Schiavoni Bement Guldner EVP & Chief EVP & Chief EVP & Chief SVP Financial Operating Nuclear Public Polic
Slide 31: Arizona Corporation Commission
ARIZONA CORPORATION COMMISSION Terms to January 2017 Terms to January 2019 Bob Bob Andy Tom Doug Burns (R) Stump (R)* Tobin (R) Forese (R) Little (R) Chairman Other State Officials ACC Utility Division Director - Tom Broderick** RUCO Director - David Tenney * Term limited - elected to four-year term
Slide 32: 2016 Key Dates
2016 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 Renewable Energy Adjustor Jul 1 E-01345A-16-0238 Nov 18: Workshop 2017 DSM Implementation Plan Dec 1: File energy E
Slide 33: Arizona Electric Utilities General Rate Cases
ARIZONA ELECTRIC UTILITIES GENERAL RATE CASES UNS Electric (93,000 customers) Tucson Electric Power Company (415,000 customers) Docket # E-04204A-15-0142 Docket # E-01933A-15-0322 Application Filed May 5, 2015 Application Filed Nov 5, 2015 Hearing (Mar 1 – 24, 2016) Intervenor and Staff Direct Testi
Slide 34: Financial Outlook
Key Factors & Assumptions as of FINANCIAL OUTLOOK November 3, 2016 Gross Margin – Customer Growth and Weather (2016-2018) 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 35: Dividend Growth
Pinnacle West’s indicated annual dividend is $2.62 per share; DIVIDEND GROWTH targeting ~5% annual dividend growth Dividend Growth Goal Indicated Annual Dividend Rate at Year-End $2.62 $2.50 $2.38 $2.27 $2.18 $2.10 2011 2012 2013 2014 2015 2016 2017 2018 Projected Future dividends subject to declara
Slide 36: Balance Sheet Strength
BALANCE SHEET STRENGTH Debt Maturity Schedule Credit Ratings ($Millions) • A- rating or better at S&P, Moody’s and Fitch $600 2016 Major Financing Activities $500 • $250 million 10-year 2.55% APS senior unsecured notes issued September 2016 $400 • $350 million 30-year 3.75% APS senior unsecured note
Slide 37: Credit Ratings and Metrics
CREDIT RATINGS AND Key credit metrics remain strong METRICS APS Parent 2010 2011 2012 2013 2014 2015 Corporate Credit Ratings APS Moody’s A2 A3 FFO / Debt 23.7% 23.6% 27.7% 31.5% 27.5% 29.7% S&P A- A- FFO / Interest 3.3x 4.2x 4.8x 5.6X 5.5x 5.8x Fitch A- A- Debt / 52.6% 52.9% 50.7% 47.7% 45.3% 45.8%
Slide 38: Operations & Maintenance Outlook
OPERATIONS & Goal is to keep O&M per kWh flat, MAINTENANCE adjusted for planned outages OUTLOOK ($ Millions) $83 $137 $103 $150 $124 $96 $825 - $805 $845 $761 $788 $772 $754 2011 2012 2013 2014 2015 2016E PNW Consolidated RES/DSM* *Renewable energy and demand side management expenses are offset by a
Slide 39: Operational Excellence
OPERATIONAL EXCELLENCE Power Quality and Reliability Palo Verde Ranked 9th highest nationally among 53 large investor-owned electric Palo Verde has exceeded its own record for generation - 32.5 million utilities in 2016 J.D. Power residential customer survey. megawatt-hours annual production in 2015
Slide 40: Arizona's Renewable Resource and Energy Efficiency Standards
ARIZONA’S RENEWABLE RESOURCE AND ENERGY EFFICIENCY STANDARDS Renewable Energy (RES) Requirements Energy Efficiency Requirements • Portion of retail sales to be supplied by • Cumulative savings from energy renewable resources efficiency programs must be equivalent – 6% by 2016 to 22% of annual retail
Slide 41: APS Transmission
Strategic transmission investment is essential to maintain reliability APS TRANSMISSION and deliver diversified resources to customers • 10-Year Transmission Plan filed January 2016 (115 kV and above) – 110 miles of new lines • Also includes: – Delaney-Palo Verde 500kV (2016) Flagstaff – Delaney-Sun
Slide 42: Bright Canyon Energy
BRIGHT CANYON ENERGY BRIGHT CANYON ENERGY Pinnacle West subsidiary formed to pursue long-term growth opportunities in the electric energy industry TRANSCANYON A 50/50 Joint Venture formed with BHE U.S. Transmission, a subsidiary of Berkshire Hathaway Energy, to develop, build and own transmission in
Slide 43: 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”) February 2016 base fuel rat
Slide 44: 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 45: Regulatory Mechanisms (TCA)
REGULATORY We have achieved constructive transmission rate treatment with MECHANISMS (TCA) annual adjustments 2015 2016 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 2015 Rates 2016 Rates (Including True-Up) (Including True-Up) 2015 Revenue 2016 Reve
Slide 46: Regulatory Mechanisms (LFCR)
REGULATORY Lost Fixed Cost Recovery MECHANISMS (LFCR) • Lost Fixed Cost Recovery (LFCR) was implemented as part of the July 2012 settlement 2016 Revenue – Estimated to offset 30-40% of revenues lost 2015 Revenue due to ACC-mandated energy efficiency (EE) and distributed renewable generation (DG) 201
Slide 47: Environmental Plan
ENVIRONMENTAL Regional Haze compliance is the biggest driver of environmental PLAN spend over the next few years Cooling Water Mercury and Other Regional Haze / BART Coal Combustion Intake Hazardous Air Pollutants (SCR) Residuals Structures – (ACI + Baghouse) CWA 316(b) MATS compliance by April Anno
Slide 48: 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 14% Percent of Portfolio MWh 23% Gas 36% Coal 27% 14% Nuclear 26% 18% 18% RE + DE 11% 13% 14% EE Emissions 2017 2032 • 820 MW of coal has been retired including 560 MW
Slide 49: 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 50: 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 51: 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 52: Investor Relations Contacts
INVESTOR RELATIONS CONTACTS Paul J. Mountain, CFA General Manager, Investor Relations & Audit Services (602) 250-4952 paul.mountain@pinnaclewest.com Ted Geisler Director, Investor Relations (602) 250-3200 ted.geisler@pinnaclewest.com Chalese Haraldsen (602) 250-5643 chalese.haraldsen@pinnaclewest.co
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