Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — Q3 2019 Earnings Presentation
38 slides from Pinnacle West Capital's earnings presentation, Nov 7, 2019
Slide 1: Powering Growth, Delivering Value: Third Quarter 2019 Results
POWERING GROWTH DELIVERING VALUE Third Quarter 2019 Results November 7, 2019 Third Quarter 2019 | 0
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: Consolidated EPS Comparison
CONSOLIDATED EPS COMPARISON 2019 vs. 2018 3rd Quarter Earnings Year-to-Date Earnings $4.21 $4.31 $2.77 $2.80 2019 2018 2019 2018 Third Quarter 2019 | 2
Slide 4: EPS Variances
EPS VARIANCES 3rd Quarter 2019 vs. 3rd Quarter 2018 Adjusted Adjusted Pension & Adjusted Gross Adjusted Interest, OPEB Income Margin1 Adjusted Adjusted Other net of Non-service Adjusted Taxes $2.80 $(0.20) O&M1 D&A2 Taxes2 AFUDC2 Credits, net Other, net2 $0.20 $2.77 $0.04 $(0.01) $(0.01) $0.01 $(0.0
Slide 5: EPS Guidance
EPS GUIDANCE AS OF NOVEMBER 7, 2019 $4.75 – $4.95 Key Drivers 2020 + Lower O&M, primarily due to Navajo retirement, lower planned outage expense and cost management; offset by an increase in expenses associated with revised disconnect policies + Sales growth + Higher transmission revenue + Ocotillo
Slide 6: 2019 EPS Guidance
2019 EPS GUIDANCE Key Factors & Assumptions as of November 7, 2019 2019 Adjusted gross margin1,2 (operating revenues, net of fuel and $2.32 – $2.39 billion purchased power expenses) • Retail customer growth about 1.5-2.5% • Weather-normalized retail electricity sales volume about 0-1.0% higher compa
Slide 7: 2020 EPS Guidance
2020 EPS GUIDANCE Key Factors & Assumptions as of November 7, 2019 2020 Adjusted gross margin1,2 (operating revenues, net of fuel and $2.48 – $2.54 billion purchased power expenses) • Retail customer growth about 1.5-2.5% • Weather-normalized retail electricity sales volume about 1-2% higher compare
Slide 8: Financial Outlook
FINANCIAL OUTLOOK Key Factors & Assumptions as of November 7, 2019 Gross Margin – Customer and Sales Growth (2019-2021) Assumption Impact Retail customer growth • Expected to average about 1.5-2.5% annually • Strength in Arizona and U.S. economic conditions Weather-normalized retail electricity sale
Slide 9: Year-over-Year EPS Growth
2011 – 2018 Reported EPS Four Corners Step Increase Approved 15% 2017 Rate Increase • Due to our single-state 12-23-14 Effective 8-19-17 jurisdiction with a historical test Year-over-Year EPS Growth 10% year, our earnings growth is non- linear 5% • Earnings growth has historically been stronger imme
Slide 10: Balance Sheet Strength
BALANCE SHEET STRENGTH Near-Term Long-Term Debt Maturities 2019 Major Financing Activities $ in millions • $200 million 18-month APS unsecured $1,000 term loan entered into in February 2019 • $300 million 30-year 4.25% APS senior $800 unsecured notes issued February 2019 $450 • $300 million 10-year
Slide 11: Economic Development
ECONOMIC DEVELOPMENT Arizona’s focus on economic development continues to support growth in the state 2019 – New companies moving into APS’s service territory include: • Microsoft – constructing three world-class data centers • Nike – multimillion-dollar manufacturing facility employing at least 500
Slide 12: Economic Indicators
ECONOMIC INDICATORS Year over Year Employment Growth U.S. Phoenix Maricopa County ranked #1 in U.S. for 5% population growth for third straight year 1 4% 3% 2% Arizona is ranked No. 1 in construction 1% growth and No. 2 in manufacturing.2 0% Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Ph
Slide 13: Rate Base
RATE BASE APS’s revenues come from a regulated retail rate base and meaningful transmission business APS Rate Base Growth Total Approved Rate Base Year-End Generation & Distribution Transmission ACC FERC Long-term Rate Base Guidance: 19% 6-7% Average Annual Growth $2.1 81% $1.6 ACC FERC $1.5 Rate Ef
Slide 14: Operations & Maintenance
OPERATIONS & MAINTENANCE Goal is to keep O&M per kwh flat, adjusted for planned outages $ in millions $933 $858 74 $855 - 875 $830 - $850 63 50 - 60 40 - 50 859 795 805 - 815 790 - 800 2017 2018 2019E 2020E PNW Consolidated ex RES/DSM 1 Planned Fleet Outages 1 Excludes RES/DSM of $91 million in 2017
Slide 15: 2019 Planned Outage Schedule
2019 PLANNED OUTAGE SCHEDULE Coal, Nuclear, and Large Gas Planned Outages Q1 Q2 Q4 Estimated Estimated Estimated Plant Unit Duration Plant Unit Duration in Plant Unit Duration in Days Days in Days Four Corners 4 21 Palo Verde 1 33 Palo Verde 3 44 Four 5 21 Cholla* 1 50 Corners Cholla* 1 37 Redhawk*
Slide 16: 2020 Planned Outage Schedule
2020 PLANNED OUTAGE SCHEDULE Coal, Nuclear, and Large Gas Planned Outages Q1 Q2 Q4 Estimated Estimated Estimated Plant Unit Duration Plant Unit Duration in Plant Unit Duration in Days Days in Days Four Four Corners* 5 46 Corners* 5 30 Palo Verde 1 44 Palo Verde 2 30 *Outage duration spans Q1-Q2. Num
Slide 17: APS Capital Expenditures
APS CAPITAL EXPENDITURES Capital expenditures will support our growing customer base and utilization of advanced technology $ in millions $1,600 PROJECTED $1,472 $1,400 $1,331 $118 $1,237 $53 $1,202 $137 $1,200 $47 $156 $187 $16 $29 Traditional Generation $267 $521 1 $1,000 New Gas Generation $112 $
Slide 18: Distribution Grid Investments
DISTRIBUTION GRID INVESTMENTS Grid Operations and Investment Projected to be approximately $1.5 billion from 2019-2021 Customer Growth Grid Modernization Run and Maintain Approximately 50% of distribution capex Approximately 9% of distribution capex Approximately 41% of distribution capex Line Exten
Slide 19: Delivering on Our Commitment to Customer Affordability
DELIVERING ON OUR COMMITMENT TO CUSTOMER AFFORDABILITY 2018 - July 2019 Adjustments to Residential Bills 6.48% $144.42 4/1/19 - TEAM I Since 2018, changes to adjustors Credit from federal tax reform have lowered the average $148.89 $141.33 $154.02 4/1/18 - EIS customer’s bill $9.71 4/1/19 - EIS 2/1/
Slide 20: What's Next
WHAT’S NEXT Take Charge AZ Pilot Program • EV charging equipment, installation and maintenance for business customers, government agencies and multifamily housing communities • Participants pay for energy costs to charge • We encourage charging during daytime off- peak hours when solar energy is abu
Slide 21: Appendix
APPENDIX Third Quarter 2019 | 20
Slide 22: Credit Ratings and Metrics
CREDIT RATINGS AND METRICS APS Pinnacle West 2016 2017 2018 Corporate Credit Ratings1 APS FFO / Debt 27.4% 29.4% 24.5% Moody’s A2 A3 FFO / Interest 6.9x 7.5x 6.5x S&P A- A- Debt / 47.3% 46.8% 47.0% Fitch A- A- Capitalization Pinnacle West Senior Unsecured1 FFO / Debt 26.3% 26.4% 22.1% Moody’s A2 A3
Slide 23: Tax Reform
TAX REFORM ACC – TAX EXPENSE ADJUSTOR MECHANISM: • PHASE I: The ACC approved $119 million annual rate reduction reflecting the lower federal tax rate. Effective for the March 2018 billing cycle. • PHASE II: The ACC approved an additional $86.5 million rate reduction to return the unprotected “excess
Slide 24: Ocotillo Modernization Project & Four Corners SCRs
OCOTILLO MODERNIZATION PROJECT & FOUR CORNERS SCRs • Included in the 2017 Rate Review Order1, 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 with
Slide 25: Four Corners SCR Step Increase
FOUR CORNERS SCR STEP INCREASE The Administrative Law Judge issued a Recommended Opinion and Order on November 27, 20181 Key Components of APS’s Filed Request Financial Cost of Capital Bill Impact 2019 Full-Year EPS Impact3 • Consistent with prior • 7.85% Return on Rate Base2 • Rate rider applied as
Slide 26: Residential PV Applications
RESIDENTIAL PV APPLICATIONS1 Residential DG (MWdc) Annual Additions 151 133 133 4,000 87 57 74 3,500 2014 2015 2016 2017 2018 2019 YTD 3,000 2,500 2,000 1,500 1,000 500 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2016 Applications 2017 Applications 2018 Applications 2019 Applications 1 Monthly
Slide 27: Gross Margin Effects of Weather
GROSS MARGIN EFFECTS OF WEATHER $ in millions pretax Variances vs. Normal $25 $20 $15 $10 14 $5 8 9 0 $0 $(5) (12) $(10) (23) $(15) (33) $(20) $(25) $(30) $(35) Q1 Q2 Q3 Q4 Q1 Q2 Q3 2018 2019 $(13) Million $(24) Million All periods recalculated to current 10-year rolling average (2007 – 2016) Third
Slide 28: Renewable Energy and Demand Side Management Expenses
RENEWABLE ENERGY AND DEMAND SIDE MANAGEMENT EXPENSES1 Renewable Energy Demand Side Management $40 $ in millions pretax $30 $10 $12 $20 $14 $11 $14 $9 $11 $10 $21 $17 $12 $13 $9 $10 $7 $0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2018 2019 $104 Million $66 Million 1 Renewable energy and demand side management expenses ar
Slide 29: 2019 Key Dates
2019 KEY DATES ACC Key Dates / Docket # Q1 Q2 Q3 Q4 Power Supply Adjustor (PSA): E-01345A-16-0036 Implemented: Feb 1 2018 LFCR approved 2019 Lost Fixed Cost Recovery: E-01345A-16-0036 2019 LFCR approved LFCR Filed: Feb 15 Filed: May 15 Transmission Cost Adjustor: E-01345A-16-0036 Implementation: Jun
Slide 30: 2019 APS Rate Case Application
2019 APS RATE CASE APPLICATION Filed October 31, 2019 Docket Number: E-01345A-19-0236 Additional details, including filing, can be found at http://www.pinnaclewest.com/investors Adjustor Changes and New Mechanisms Overview Formula Rate - Proposed as an alternative to existing adjustor mechanisms Def
Slide 31: 2019 Rate Case Key Financials
2019 RATE CASE KEY FINANCIALS APS has requested a rate increase to become effective December 1, 2020 Test year ended June 30, 2019 Total Rate Base - Adjusted $11.12 Billion ACC Rate Base - Adjusted $8.87 Billion Allowed Return on Equity 10.15% Capital Structure Long-term debt 45.3% Common equity 54.
Slide 32: 2019 Rate Case Key Financials
2019 RATE CASE KEY FINANCIALS APS has requested a rate increase to become effective December 1, 2020 Overview of Rate Increase ($ in Millions) - Key Components Four Corners SCRs $ 73 Ocotillo Modernization Project 100 Post-Test Year Plant Additions 66 Net Change in Other Items 64 Tax Expense Adjusto
Slide 33: Arizona Utilities General Rate Cases
ARIZONA UTILITIES GENERAL RATE CASES Tucson Electric Power Company (417,000 customers) Southwest Gas (1.1M customers in AZ) Docket # E-01933A-19-0028 Docket # G-01551A-19-0055 Application Filed April 1, 2019 Application Filed May 1, 2019 Staff/Intervenor Direct Testimony (Revenue) (Oct 11, 2019) Sta
Slide 34: Non-GAAP Measure Reconciliation
NON-GAAP MEASURE RECONCILIATION Three Months Ended September 30, Four Corners Income tax Income tax and expense at Four expense at RES/ Ocotillo statutory 2019 RES/ Corners statutory 2018 EPS $ in millions pretax, except per share amounts 20191 DSM Deferrals2 rate Other Adjusted 20181 DSM Deferral 2
Slide 35: Non-GAAP Measure Reconciliation
NON-GAAP MEASURE RECONCILIATION 2019 Guidance $ in millions pretax Operating revenues1 $ 3,455 - $ 3,535 Fuel and purchased power expenses1 (1,055) - (1,065) Gross margin 2,400 - 2,470 Adjustments: Renewable energy and demand side management programs (85) - (85) Adjusted gross margin $ 2,315 - $ 2,3
Slide 36: Non-GAAP Measure Reconciliation
NON-GAAP MEASURE RECONCILIATION 2020 Guidance $ in millions pretax Operating revenues1 $ 3,570 - $ 3,640 Fuel and purchased power expenses1 (1,030) - (1,040) Gross margin 2,540 - 2,600 Adjustments: Renewable energy and demand side management programs (65) - (65) Adjusted gross margin $ 2,475 - $ 2,5
Slide 37: Consolidated Statistics
CONSOLIDATED STATISTICS 3 Months Ended September 30, 9 Months Ended September 30, 2019 2018 Incr (Decr) 2019 2018 Incr (Decr) ELECTRIC OPERATING REVENUES (Dollars in Millions) Retail Residential $ 668 $ 695 (27) $ 1,453 $ 1,512 $ (60) Business 466 497 (31) 1,194 1,275 (81) Total Retail 1,134 1,192 (
Slide 38: Consolidated Statistics
CONSOLIDATED STATISTICS 3 Months Ended September 30, 9 Months Ended September 30, 2019 2018 Incr (Decr) 2019 2018 Incr (Decr) ENERGY SOURCES (GWH) Generation Production Nuclear 2,490 2,462 28 7,202 7,078 124 Coal 2,621 2,612 9 6,360 5,443 916 Gas, Oil and Other 2,971 2,833 138 6,445 6,044 401 Renewa
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