Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — Non-Deal Roadshow (June 2014)
39 slides from Pinnacle West Capital's roadshow presentation, Jun 3, 2014
Slide 1: Delivering Superior Shareholder Value
DELIVERING SUPERIOR SHAREHOLDER VALUE Investor Meetings | June 3-4, 2014 Delivering Superior Shareholder 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: Value Proposition
VALUE PROPOSITION • Maintaining focus on core electric utility business Experienced Management • Delivering long-term value Team Driving Focused • Creating a sustainable energy future for Arizona and the communities we serve Strategy • Driving cost management discipline through increased transparenc
Slide 4: Pinnacle West: Who We Are
PINNACLE WEST: We are a vertically integrated, regulated electric utility in the WHO WE ARE growing southwest U.S. NYSE Ticker PNW Market Cap* $6 Billion Enterprise Value* $9.5 Billion Dividend Yield* 4% Consolidated Assets Over $13 Billion Principal Subsidiary • Arizona’s largest and longest-servin
Slide 5: Arizona Economic Indicators
ARIZONA ECONOMIC INDICATORS Home Prices – Metro Phoenix Nonresidential Building Vacancy – Metro Phoenix Value Relative to Jan ‘05 Vacancy Rate 175 25% Office 150 20% Industrial 125 15% 100 10% Retail 75 5% 50 0% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Feb '05 '06 '07 '08 '09 '10 '11 '12 '13 '14Q1 Ne
Slide 6: Customer Growth
CUSTOMER GROWTH Annual Growth 5% • Customer growth drives 85% of retail sales 4% (excluding impacts of customer conservation, energy efficiency and distributed renewable 3% generation initiatives) • Retail customer growth to 2% average about 2.5% annually 2014-2016 1% 0% 1990 1994 1998 2002 2006 201
Slide 7: Retail Sales Growth (Weather-Normalized)
RETAIL SALES GROWTH (WEATHER-NORMALIZED) • Weather-normalized retail sales growth about 1% for 2014-2016 after impacts of energy efficiency, customer conservation and distributed renewable generation initiatives (excluding Lost Fixed Cost Recovery) Distributed Energy (DE) Impact • DE makes up 0.5% (
Slide 8: 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 – 5% by 2015 to 22% of annual retail
Slide 9: Operational Excellence
OPERATIONAL EXCELLENCE Customer Satisfaction Palo Verde Ranked 5th highest nationally among 54 large investor-owned Palo Verde has exceeded 30 million megawatt-hours annual electric utilities in 2013 J.D. Power residential customer survey. production 9 times – the only U.S. plant to ever do so. APS
Slide 10: Earned ROE
Delivering consistent earned EARNED ROE return on equity is one of our top priorities Earned ROE Key Drivers During Rate Case Stay-Out 11% PNW • Adjustment mechanisms Consolidated (Lost Fixed Cost Recovery, 10% 9.9% At least 9.5% Annually Transmission Cost Adjustor, etc.) providing increasing contri
Slide 11: Dividend Growth
Pinnacle West’s annual dividend is DIVIDEND GROWTH $2.27 per share; targeting ~4% annual dividend growth Dividend Growth Goal Indicated Annual Dividend Rate at Year-End Dividend Yield 6% 5% PNW 4% $2.27 $2.18 3% $2.10 Industry Averages 2% 1% 0% 30% 50% 70% 90% Dividend Payout Yield as of April 30, 2
Slide 12: Capital Expenditures
80% of capital expenditures are CAPITAL recovered through rate adjustors EXPENDITURES (40%) and depreciation cash flow (40%) ($ Millions) $1,263 $48 Other $1,026 $986 $973 $363 $41 Distribution $44 $71 $234 $240 $374 Transmission $196 $132 Renewable $206 $213 $213 Generation $166 $20 $130 $7 $57 $25
Slide 13: Resource Planning
RESOURCE PLANNING* MW Composition of Energy Mix by Resource 14,000 Load Requirement Including Reserves 2014 12,000 27.7% 9.5% 10,000 17.0% Gas 35.3% Resource Planning 7.5% Requirement 20.1% Coal 8,000 Existing Contracts Nuclear 6,000 2029 RE + DE 15.3% 4,000 EE 28.5% 13.6% Existing Owned Resources 2
Slide 14: Ocotillo Power Plant (Tempe, AZ)
Ocotillo modernization project OCOTILLO POWER will maintain valley grid PLANT (TEMPE, AZ) reliability and increase APS’s generating capacity by 290 MW • Maintains system reliability through retirement of aging steam units • Replacement units meet need for increased portfolio responsiveness • Aids in
Slide 15: Four Corners Power Plant
FOUR CORNERS POWER PLANT • On December 30, 2013, APS and Southern California ALJ Procedural Schedule Edison (“SCE”) completed previously announced transaction whereby APS agreed to purchase SCE’s Staff/Intervenor Direct June 19, 2014 48% interest in Units 4 and 5 of Four Corners Testimony – Final pu
Slide 16: Transmission
Strategic transmission investment is essential to maintain reliability TRANSMISSION and deliver diversified resources to customers • 10-Year Transmission Plan filed January 2014 (115 kV and above) – $496 million of transmission investment – 275 miles of new lines – Includes Hassayampa-North Gila (HA
Slide 17: AZ Sun Program
Owning solar resources makes sense for our customers and the AZ SUN PROGRAM environment and provides earnings growth potential • Utility-scale photovoltaic solar plants to be owned by APS • Constructive rate recovery through RES until included in base rates • 118 MW in commercial operation to date;
Slide 18: Net Metering
Rooftop solar customers still use NET METERING the grid 24 hours a day TYPICAL GRID INTERACTION FOR ROOFTOP SOLAR • Customers with rooftop solar systems do not pay for all of the electric services they use (i.e. rooftop customers still need support from the grid 24 hours a day) • These unpaid costs
Slide 19: Rate Design Changes Needed to Align Fixed Costs and Revenue
RATE DESIGN CHANGES NEEDED TO ALIGN FIXED COSTS AND REVENUE Costs – APS Residential Classes Revenue – APS Residential Classes (2010) (2010) Fixed Charge Revenue 10% Variable Costs 31% Fixed Costs Variable 69% Charge Revenue 90% 19 Delivering Superior Shareholder Value
Slide 20: APS Taking Steps to Lead Evolution of Grid and Rate Design
APS TAKING STEPS TO LEAD EVOLUTION OF GRID AND RATE DESIGN Traditional Utility Future Utility Diversified fuel mix Centralized generation Resource Flexibility Planning Renewables (Utility scale and Rooftop) Based on KWh One size fits all Rate Design Match fixed costs and revenues Some decoupling Emp
Slide 21: Arizona Rate Design: What's Next?
ARIZONA RATE DESIGN: WHAT’S NEXT? • APS’ perspective o Today’s rate designs are not compatible with the evolving energy landscape o Rate redesign should be discussed in an open process including all stakeholders o Because each utility is unique, final decisions on rate design must be determined in u
Slide 22: 2014 Key Dates
2014 KEY DATES Docket # Q1 Q2 Q3 Q4 Key Regulatory Filings Lost Fixed Cost Recovery 11-0224 Jan 15 Transmission Cost Adjustor May 15 Renewable Energy Surcharge Jul 1 10-Year Transmission Plan (Annual) 13-0002 Jan 31 2014 Integrated Resource Plan (Biennial) 13-0070 Apr 1 Net Metering (Decision No. 74
Slide 23: Appendix
APPENDIX Delivering Superior Shareholder Value
Slide 24: Financial Outlook
2014 – 2016 Key Factors & Assumptions as of FINANCIAL OUTLOOK May 2, 2014 Gross Margin – Customer Growth and Weather Assumption Impact Retail customer growth • Expected to average about 2.5% annually (2014-2016) • Modestly improving Arizona and U.S. economic conditions Weather-normalized retail elec
Slide 25: Operations & Maintenance
OPERATIONS & Our goal is to keep consolidated O&M growth at or below retail MAINTENANCE sales growth levels ($ Millions) $137 $94 $150 $124 $121 $95 $790 - $810 $788* $727 $749 $754 $761 2009 2010 2011 2012 2013 2014E Consolidated RES/DSM** Note: Pinnacle West O&M for 2009-2014E: $10M, $9M, $8M, $11
Slide 26: Sustainable Cost Management Initiative (SCMI)
SUSTAINABLE COST MANAGEMENT INITIATIVE (“SCMI”) Motivation for Change Sustainable Changes Tiered Metrics • Capitalize on changes driven by aging workforce Linked to incentives to drive accountability across all levels Business Planning Enterprise • Improve organizational efficiencies To increase tra
Slide 27: Pension & Other Post Retirement Benefits (OPEB)
PENSION & OTHER POST RETIREMENT BENEFITS (“OPEB”) Pension Funded Status(1)(2) ($ in millions) Expense(3) 2013A 2014E 2015E 90% Pension(1) $31 ~$10 ~$10 OPEB $18 ~$10 ~$10 77% Contributions 2013A 2014E 2015E 2016E YE 2012 YE 2013 Pension $141 $175 Up to $100 Up to $25 • Pension funded status for GAAP
Slide 28: APS Is a Leader in Solar
APS IS A LEADER We are committed to making Arizona the solar capital of IN SOLAR America APS Solar Portfolio* APS 2013 Rankings AZ Sun 154 MW PPA • 3rd of all U.S. utilities for solar energy 310 MW installed in 2013 (410 MW) DE • 4th for new solar installed in 2013 350 MW (368 watts/customer) • 4th
Slide 29: Emerging Technologies Rely on the Grid
EMERGING All of these technologies are TECHNOLOGIES dependent on the grid RELY ON THE GRID Rooftop Solar Home Energy Management Battery Storage GRID Fuel Cells Electric Vehicles Microgrids 29 Delivering Superior Shareholder Value
Slide 30: Operational Challenges
OPERATIONAL CHALLENGES The grid provides real-time voltage • Steep ramp rate of backup generation and power needed to start air • Instant variability conditioners and other motors loads • Voltage control at distribution level 30 Delivering Superior Shareholder Value
Slide 31: Arizona Corporation Commission
ARIZONA Three seats of four-year terms through January 2017 were CORPORATION addressed in the November 2012 COMMISSION election Terms To January 2017 Terms To January 2015 New Commissioners Incumbents Susan Bob Bob Stump (R)* Brenda Gary Bitter Smith (R) Burns (R) Chairman Burns (R) Pierce (R)* * Te
Slide 32: Regulatory Mechanisms
We have achieved a more REGULATORY supportive regulatory structure MECHANISMS and 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 2014 base fue
Slide 33: 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 34: Regulatory Mechanisms (TCA)
REGULATORY We have achieved constructive transmission rate treatment with MECHANISMS (TCA) annual adjustments 2013 2014 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 2013 Rates 2014 Rates (Including True-Up) (Including True-Up) 2013 Revenue 2014 Reve
Slide 35: Regulatory Mechanisms (LFCR)
REGULATORY Lost Fixed Cost Recovery MECHANISMS (LFCR) • Lost Fixed Cost Recovery (LFCR) was implemented as part of the July 2012 2015 Revenue settlement 2014 Revenue – Estimated to offset 30-40% of 2013 Revenue revenues lost due to ACC- 2012 Revenue mandated energy efficiency (EE) Rate Recovery and
Slide 36: Credit Ratings
CREDIT RATINGS Investment Grade Credit Ratings APS Parent Corporate Credit Ratings Moody’s A3 Baa1 S&P A- A- Fitch BBB+ BBB+ Senior Unsecured Moody’s A3 - S&P A- - Fitch A- - Outlook Moody’s Stable Stable S&P Stable Stable Fitch Stable Stable We are disclosing credit ratings to enhance understanding
Slide 37: Financing
FINANCING Debt Maturity Schedule 2014 Major Financing Activities ($Millions) • $250 million 30-year 4.70% APS senior $600 unsecured notes issued in January 2014 $500 • Currently expect about $550 million additional long-term debt issuance in 2014, including issuance to refinance $400 $125 $300 milli
Slide 38: Generation Portfolio
GENERATION PORTFOLIO* Fuel/Plant Location Units Dispatch COD Ownership Interest1 Net Capacity (MW) NUCLEAR Palo Verde Wintersburg, AZ 1-3 Base 1986-1989 29.1% 1,146 1,146 MW Cholla Joseph City, AZ 1-3 Base 1962-1980 100 647 COAL Four Corners Farmington, NM 4, 5 Base 1969-1970 63 970 1,932 MW Navajo
Slide 39: Purchased Power Contracts
PURCHASED POWER CONTRACTS* Fuel/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
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