Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — Morgan Stanley Utilities Conference 2011
57 slides from Pinnacle West Capital's conference presentation, Mar 10, 2011
Slide 1: Delivering Superior Shareholder Value
DELIVERING SUPERIOR SHAREHOLDER VALUE Morgan Stanley Utilities Conference March 10, 2011
Slide 2: Forward-Looking Statements
2 FORWARD-LOOKING STATEMENTS This presentation contains forward-looking statements based on current expectations, including statements regarding our 2011 earnings outlook. These forward-looking statements are often identified by words such as “estimate,” “predict,” “may,” “believe,” “plan,” “expect,
Slide 3: Pinnacle West: Who We Are
3 PINNACLE WEST: WHO WE ARE We are a vertically integrated, regulated electric utility. NYSE Ticker PNW Market Cap $5 Billion Enterprise Value $8 Billion Vertically Integrated Regulated Electric Utility $12 Billion Assets Non-Utility Subsidiaries $78 Million Assets
Slide 4: Focusing on Core Regulated Electric Utility Business
FOCUSING ON CORE REGULATED 4 ELECTRIC UTILITY BUSINESS APS is Arizona’s largest and longest-serving electric utility. Service Territory • 1.1 million customer accounts • 34,646 square miles Customer Growth STATE OF ARIZONA • 1.7% average annual growth expected 2011-2013 • 3-4% historical average — w
Slide 5: Pinnacle West: Our Value Proposition
5 PINNACLE WEST: OUR VALUE PROPOSITION Our commitment to investors: Deliver superior shareholder returns through…
Slide 6: Pinnacle West: Our Value Proposition
6 PINNACLE WEST: OUR VALUE PROPOSITION
Slide 7: Positive Long-Term Demographics
7 POSITIVE LONG-TERM DEMOGRAPHICS APS’ customer growth generally outpaces U.S. and Arizona population growth. Superior Growth APS Customer Growth Annual Growth Millions 5% 2 4% 1.9 73% 3% 1 1.1 2% 1% 0% 1990 1992 1994 1990 1995 2000 2002 2004 1996 1998 2000 2005 2015 2006 2008 2010 2012 2014 2010 20
Slide 8: APS Cap Ex Drives Strong Rate Base Growth
APS CAP EX DRIVES STRONG 8 RATE BASE GROWTH We reduced capital expenditures based on current economic conditions, yet still expect strong rate base growth. APS Capital Expenditures APS Rate Base $ Millions $ Billions 1,200 8 1,000 Other 6 800 Distribution 600 4 FERC Transmission ACC 400 Renewable Ge
Slide 9: Pinnacle West: Our Value Proposition
9 PINNACLE WEST: OUR VALUE PROPOSITION
Slide 10: Customer Satisfaction … A Key Priority
10 CUSTOMER SATISFACTION … A KEY PRIORITY Our employees provide top-tier customer service. Lowering Outage Time Outstanding Residential Per Customer Customer Satisfaction Rating Average Outage Rating Minutes/Year 700 120 675 APS 100 650 Industry Average 80 625 600 60 575 40 550 20 525 0 500 2005 200
Slide 11: Superior Power Plant Performance
11 SUPERIOR POWER PLANT PERFORMANCE Our nuclear and coal plants are strong baseload resources. Nuclear Capacity Factors Coal Performance Metrics 100% 100% APS 91% 92% 95% 95% 90% 90% 85% 85% 81% 80% Industry 90% 80% 75% 75% 65% 70% 70% 65% 65% 60% 60% 2003 2004 2005 2006 2007 2008 2009 2010 2003 200
Slide 12: Environmental, Sustainability and Technology Leadership
ENVIRONMENTAL, SUSTAINABILITY 12 AND TECHNOLOGY LEADERSHIP We are recognized worldwide for our achievements. Dow Jones Sustainability Index Ranked 294 of 1,000 Companies Worldwide Top 10 Utility Solar Ranking Global 100 Most Sustainable Social Responsibility Index Corporations in World “Best in Clas
Slide 13: Pinnacle West: Our Value Proposition
13 PINNACLE WEST: OUR VALUE PROPOSITION
Slide 14: Resource Planning for Reliability and Sustainability
RESOURCE PLANNING FOR 14 RELIABILITY AND SUSTAINABILITY Through a balanced resource mix including renewable resources and energy efficiency programs, we will meet future load growth. MW 14,000 14,000 Load Requirement 3% Four Corners Transactions, Net 12,000 Including 15% Reserves 4% Other Future Pur
Slide 15: Four Corners Power Plant Transactions
FOUR CORNERS POWER PLANT 15 TRANSACTIONS 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 • Acquisition target date: late 2012 • Estimated
Slide 16: Benefits of Proposed Four Corners Plan
BENEFITS OF PROPOSED 16 FOUR CORNERS PLAN Our proposal provides multiple, long-term stakeholder benefits. • Best, most viable resource option (lowest cost and risk) • Reduces carbon-related environmental exposure • Low-cost generating resource • Incremental rate base investment • Well-known asset an
Slide 17: Renewable Energy Rises with the Sun
17 RENEWABLE ENERGY RISES WITH THE SUN We are helping Arizona become the “Solar Capital of the World.” Arizona Germany and Japan are among countries with highest installed solar capacity, yet have solar conditions far inferior to Arizona MAKING COMPELLING CAPITAL INVESTMENTS
Slide 18: AZ Sun Program Provides Earnings Growth Potential
AZ SUN PROGRAM PROVIDES 18 EARNINGS GROWTH POTENTIAL APS has contracted to date for 83% of the program. • 100 MW photovoltaic solar plants to be owned by APS • Up to $500 million capital investment ($377 million committed to date) • In service 2011-2014 • Constructive rate recovery Announced Project
Slide 19: Transmission Investment Essential
19 TRANSMISSION INVESTMENT ESSENTIAL Strategic transmission is necessary to maintain reliability and deliver diversified resources to our customers. NAVAJO • 10-Year Transmission Plan (115-kV and above) FOUR NORTH CORNERS 100 MW • $450 million of new 970 MW transmission investment • 258 miles of new
Slide 20: Pinnacle West: Our Value Proposition
20 PINNACLE WEST: OUR VALUE PROPOSITION
Slide 21: Arizona Corporation Commissioners
21 ARIZONA CORPORATION COMMISSIONERS The new composition provides opportunities for additional relationships and process efficiencies. Terms Through January 2013 Terms Through January 2015 Sandra Kennedy Paul Newman Bob Stump Brenda Burns Gary Pierce (Rep) (Dem) (Dem) (Rep) (Rep) Chairman IMPROVING
Slide 22: Improving Regulatory Framework
22 IMPROVING REGULATORY FRAMEWORK Opportunities exist to continue regulatory dialogue, cooperatively addressing shareholder and stakeholder interests. On-going APS meetings with stakeholders Progress on generic issues • Approvals by ACC in 2010 • Decoupling policy statement • Resource planning rules
Slide 23: 2011 Retail Rate Case Prefiling Notice
23 2011 RETAIL RATE CASE PREFILING NOTICE To facilitate timely processing and collaboration, we notified the ACC we intend to file a retail rate case on June 1, 2011. Notice filed February 1, 2011 Key rate case proposals outlined in notice • Revenue-per-customer decoupling mechanism • Post test-year
Slide 24: Pinnacle West: Our Value Proposition
24 PINNACLE WEST: OUR VALUE PROPOSITION
Slide 25: Consolidated On-Going EPS Outlook
25 CONSOLIDATED ON-GOING EPS OUTLOOK Our on-going earnings have improved. Per Share $3.50 $3.08 $3.00 - $3.15 $3.00 $2.50 $2.30 $2.00 $1.50 $1.00 $0.50 $0.00 2009 2010 2011 Guidance See key factors and assumptions in Appendix. As of 2/18/11 STRENGTHENING OUR FINANCIAL PROFILE
Slide 26: ROE Improvement: A Multi-Pronged Approach
ROE IMPROVEMENT: 26 A MULTI-PRONGED APPROACH Improving our earned return on equity is one of our top priorities. Earned ROEs Key Initiatives 10% • Supportive electric utility rates • Regulatory framework 9% improvements 8% • Cost management initiatives • Efficiency and effectiveness 7% throughout or
Slide 27: Cost Efficiency Supports Future Results
COST EFFICIENCY SUPPORTS 27 FUTURE RESULTS Our cost management and efficiency efforts will improve financial results beyond those achievable solely through regulatory decisions. Enterprise-wide emphasis Engaged, motivated Better leverage workforce Cost technology Efficiency Effective, efficient Opti
Slide 28: APS Operations & Maintenance Expense Trends
APS OPERATIONS & 28 MAINTENANCE EXPENSE TRENDS Our goal is to keep O&M growth in line with retail sales growth. $ Millions 800 600 400 200 0 2006 2007 2008 2009 2010 Excludes RES and demand-side management costs STRENGTHENING OUR FINANCIAL PROFILE
Slide 29: Ample Financing Access
29 AMPLE FINANCING ACCESS Investment-grade credit ratings, capitalization and liquidity should provide adequate access to bank and capital markets. Capitalization & Liquidity 2011 - 2012 Major Financing Activities December 31, 2010 $ Billions 2011 $500M APS revolver refinancing* 8 2011 $175M PNW sen
Slide 30: Top-Tier Dividend Yield
30 TOP-TIER DIVIDEND YIELD Pinnacle West’s annual dividend is $2.10 per share — providing a top-quartile yield with a near-average payout. Dividend Yield 7% PNW 6% 5% 4% 3% Industry Averages 2% 1% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Dividend Yield as of December 31, 2010 Dividend Payout D
Slide 31: Superior Shareholder Returns
31 SUPERIOR SHAREHOLDER RETURNS Our total return to shareholders has outperformed our industry and the broad market over the past five years. Pinnacle West S&P 500 S&P 1500 Electric Utilities 50% 50.00% 45.5% 45.4% 40% 40.00% 32.6% 30% 30.00% 20.9% 20% 19.5% 20.00% 17.4% 15.0% 12.0% 10% 10.00% 9.0%
Slide 32: Pinnacle West: Our Value Proposition
32 PINNACLE WEST: OUR VALUE PROPOSITION Our commitment to investors… Deliver Superior Shareholder Returns
Slide 33: Appendix
APPENDIX o'O'9 PINNACLE WEST
Slide 34: A Respected, Veteran Leadership Team
34 A RESPECTED, VETERAN LEADERSHIP TEAM Our top executives have more than 130 combined years of creating shareholder value in the energy industry. Don Brandt Chairman & CEO Jim Don Mark Randy Dave Falck Robinson Schiavoni Edington EVP, Hatfield APS SVP EVP & General SVP & CFO President Fossil Chief
Slide 35: 2011 On-Going EPS Guidance
35 2011 ON-GOING EPS GUIDANCE Key Factors and Assumptions. • Electricity gross margin (operating revenues, net of fuel and purchased power expenses, excluding Renewable Energy Surcharge and similar rate adjustors) about $2.05 billion to $2.10 billion; • Retail customer growth about 1 percent; • Weat
Slide 36: Renewable Energy and Demand-Side Management Expenses
RENEWABLE ENERGY AND 36 DEMAND-SIDE MANAGEMENT EXPENSES* Pretax Millions $40 $35 $30 15 $25 8 12 7 8 11 $20 2 6 $15 $10 2 20 19 21 2 2 18 18 17 18 16 $5 9 2 7 7 $0 2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 2010 Renewable Energy Demand-Side Management * O&M expenses related to Renewable Energy
Slide 37: Quarterly Mark-to-Market on Hedge Contracts
QUARTERLY MARK-TO-MARKET 37 ON HEDGE CONTRACTS Pretax Millions $20 14 14 $10 8 5 0 1 $0 (2) (1) (1) $(10) (5) (9) $(20) $(30) (29) $(40) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 2010 * Related to APS 10% share under Power Supply Adjustor (PSA), net of related deferrals. MAKING COMPELLING CAPITA
Slide 38: Gross Margin Effects of Weather Variances Versus Normal
GROSS MARGIN EFFECTS OF WEATHER 38 VARIANCES VERSUS NORMAL* Pretax Millions $15 11 $10 7 $5 2 1 $0 (1) ($5) (4) (4) ($10) ($15) ($20) ($25) (24) ($30) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 * All periods recalculated to conform to current presentation. MAKING COMPELLING CAPITAL INVESTMENTS
Slide 39: Credit Ratings
39 CREDIT RATINGS APS has investment-grade credit ratings. APS Parent Senior Unsecured Moody’s Baa2 Baa3* S&P BBB- BB+* Fitch BBB - Outlook Moody’s Stable Stable S&P Positive Positive Fitch Stable Stable *Preliminary STRENGTHENING OUR FINANCIAL PROFILE
Slide 40: S&P Credit Metrics
40 S&P CREDIT METRICS Our key credit metrics have been improving. 2006 2007 2008 2009 2010 APS FFO / Debt 18.3% 18.6% 19.0% 21.3% 21.4% FFO / Interest 3.8x 4.3x 4.5x 4.5x 4.6x Debt / Capitalization 54.2% 54.8% 57.2% 56.6% 54.4% Pinnacle West FFO / Debt 15.5% 16.9% 18.0% 20.0% 20.0% FFO / Interest 3.
Slide 41: 2010 Retail Customer, Sales and Revenue Mixes
2010 RETAIL CUSTOMER, 41 SALES AND REVENUE MIXES Our business mix is attractive due to favorable climate and other conditions in our market area. 11% 11% 8% 6% 8% 47% 47% 50% 51% 45% 45% 42% 43% 89% 89% Customers Retail Sales Operating Revenues Year-End 27,709 GWh $2.9 Billion 1.1 Million Residentia
Slide 42: 2010 APS Generation and Energy Fuel Mixes
2010 APS GENERATION AND 42 ENERGY FUEL MIXES Our balanced resource mix provides our customers reliability and manages price volatility. 18% 21% 18% 21% 27% 220% 2% 26% 34% 32% 54% 16% 54% 17% 28% 28% 36% 46%4 6 % 36% Energy Generation Generation Fuel Mix Fuel Mix Capacity Mix 33,788 GWh 26,828 GWh 6
Slide 43: Superior Power Plant Performance
43 SUPERIOR POWER PLANT PERFORMANCE Our nuclear and coal plants are strong baseload resources. Nuclear Capacity Factors Coal Performance Metrics APS 91% 100% 100% APS Commercial Availability 92% APS Capacity Factor 90% 90% Industry Capacity Factor 81% 80% 80% 65% Industry 90% 70% 70% 60% 60% 2003 20
Slide 44: A Well-Balanced Generation Portfolio
44 A WELL-BALANCED GENERATION PORTFOLIO Commercial Ownership Net Capacity Fuel / Plant Location Units Dispatch Ops. Date Operator Interest1 (MW) Nuclear Palo Verde Wintersburg, AZ 1-3 Base 1986 - 1989 APS 29.1% 1,146 Total Nuclear 1,146 Coal Cholla Joseph City, AZ 1-3 Base 1962 - 1980 APS 100 647 Fo
Slide 45: Renewable Purchase Power Contracts
45 RENEWABLE PURCHASE POWER CONTRACTS Commercial PPA Operation Term Capacity Fuel / Contract Location Developer Status 1 Signed Date (years) Net (MW) Solar Solana Gila Bend, AZ Abengoa AD Feb-2008 2013 30 250 RE Ajo Ajo, AZ Recurrent AD Jan-2010 2011 25 5 Sun E AZ 1 Prescott, AZ SunEdison UC Feb-201
Slide 46: Four Corners Power Plant Facts & Figures
FOUR CORNERS POWER PLANT 46 FACTS & FIGURES Common Unit 1 Unit 2 Unit 3 Unit 4 Unit 5 Commercial Operation Date 1963 1963 1964 1969 1970 Original Cost ($M) $37 $369 $166 Net Book Value at 12/31/10 ($M) $20 $125 $63 Current Depreciation Ends 2031 Mid-2016 Mid-2016 Mid-2016 2031 2031 Current Expiratio
Slide 47: Arizona's Renewable Resource and Energy Efficiency Standards
ARIZONA’S RENEWABLE RESOURCE 47 AND ENERGY EFFICIENCY STANDARDS We are committed to aggressive renewable and energy efficiency standards. Renewable Energy (RES) Minimum Requirements Portion of retail sales to be supplied by renewable resources • 5% by 2015 • 15% by 2025 Distributed energy component
Slide 48: AZ Sun Program Summary
48 AZ SUN PROGRAM SUMMARY APS is investing up to $500 million to own 100 MW of solar generation by year-end 2014. Name Location Capacity Developer Target COD* Paloma Gila Bend, AZ 17 MW First Solar 2011 Cotton Center Gila Bend, AZ 17 MW Solon 2011 Hyder Phase 1 Hyder, AZ 11 MW SunEdison 2011 Hyder P
Slide 49: Solana: A "Sunny Place"
49 SOLANA: A “SUNNY PLACE” Solana will provide about one-third of APS’ renewable energy target of 10% by 2015. • 250-MW 30-year PPA for all output (~900 GWh/year) • Concentrating solar trough facility 70 miles southwest of Phoenix • Expected to be first major stored-heat plant in U.S. on targeted 20
Slide 50: APS Energy Efficiency Initiatives Increasing
APS ENERGY EFFICIENCY 50 INITIATIVES INCREASING APS plans to double customers’ energy efficiency savings from 2010 through 2012. Cumulative Annual Energy Savings Associated with EE/DSM Programs GWh • Program costs currently recovered 2,250 through retail DSM adjustor 2,000 • Decoupling or other fina
Slide 51: Progressive Regulatory Settlement Positions APS Well Through 2012
PROGRESSIVE REGULATORY SETTLEMENT 51 POSITIONS APS WELL THROUGH 2012 APS’ 2009 regulatory settlement contains a number of investor benefits. • Strengthens APS’ earned ROE and financial condition • Supports common dividend • Demonstrates increased cooperation among APS, ACC Staff, residential consume
Slide 52: 2009 Regulatory Settlement Summary
52 2009 REGULATORY SETTLEMENT SUMMARY The settlement provisions include earnings support until APS’ next rate case decision. Estimated Pretax Earnings Benefits $ Millions 2010 2011 2012 Settlement agreement terms Base rate increase $ 207 $ 207 $ 207 Line extensions treated as revenue 23 25 49 Pensio
Slide 53: Our Regulatory Mix
53 OUR REGULATORY MIX The bulk of APS’ revenues comes from a regulated retail rate base and a meaningful transmission business. Most Recent Rate Decisions ACC FERC Transmission 16% Effective Date 1/1/2010 6/1/2010 Test Year Ending 12/31/2007 12/31/2009 Rate Base $5.6 B $1.1 B Generation & Distributi
Slide 54: APS Revenues by Recovery Mechanism
54 APS REVENUES BY RECOVERY MECHANISM Supportive regulatory treatment through adjustment mechanisms supplements base rates. Regulated Electricity Revenue by Recovery Mechanism $ Millions Test Year Historical Forecast 3,500 3,000 Base Rates 2,500 RES 2,000 TCA 1,500 PSA 1,000 DSM 500 Other 0 2005 200
Slide 55: Constructive Transmission Rate Regulation
CONSTRUCTIVE TRANSMISSION 55 RATE REGULATION We have achieved transmission rate treatment with annual adjustments. • FERC Formula Rates adopted in 2008 • Adjusted annually with 10.75% allowed ROE • Based on FERC Form 1 and certain projections • Retail portion flows through ACC Transmission Cost Adju
Slide 56: Decoupling Model
56 DECOUPLING MODEL State regulators approved a policy statement supporting a revenue-per-customer approach. • Arizona Corporation Commission unanimously approved decoupling policy statement, December 2010 • Supports fixed-cost per customer methodology • Decoupling provides method to mitigate disinc
Slide 57: Significant Regulatory Progress Since 2005
SIGNIFICANT REGULATORY PROGRESS 57 SINCE 2005 We have achieved a more supportive regulatory structure and improvements in cost recovery timing. Adopted/ Mechanism Last Adjusted Description Power Supply April 2005 / • Recovers 90% of variance between actual fuel and purchased power costs and base fue
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