Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — EEI Financial Conference 2014
56 slides from Pinnacle West Capital's conference presentation, Nov 14, 2014
Slide 1: Delivering Superior Shareholder Value
DELIVERING SUPERIOR SHAREHOLDER VALUE EEI Financial Conference – Dallas | November 11-13, 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: Pinnacle West: Who We Are
PINNACLE WEST: We are a vertically integrated, regulated electric utility in the WHO WE ARE growing southwest U.S. Principal subsidiary: - Arizona Public Service Company, Arizona’s largest and longest-serving electric utility - Regulated utility provides stable, regulated earnings and cash flow base
Slide 4: Pinnacle West: Key Metrics
PINNACLE WEST: KEY METRICS NYSE Ticker: PNW Operating Revenues (2013): $3.2 Billion Market Capitalization*: $6.8 billion Residential 52% Commercial Enterprise Value*: $10.6 billion Industrial Consolidated Assets*: $14 billion 1% Other 42% Indicated Annual Dividend*: $2.38 6% Dividend Yield*: $4.0% A
Slide 5: Value Proposition
VALUE PROPOSITION Operational • Top ratings in Customer Satisfaction, Reliability and Safety • Palo Verde continues record levels of electricity production Excellence • Disciplined cost management Leverage to Economic • Arizona’s long-term growth fundamentals remain largely intact; supportive of mor
Slide 6: 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 2014 J.D. Power residential customer survey. production 9 times – the only U.S. plant to ever do so. APS
Slide 7: 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 Aug '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Q3 S
Slide 8: 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 2-3% annually 2015-2017 1% 0% Projected Arizona Population
Slide 9: Retail Sales Growth (Weather-Normalized)
RETAIL SALES GROWTH (WEATHER-NORMALIZED) • Weather-normalized retail sales growth on average about 0.5-1.5% for 2015-2017 after impacts of energy efficiency, customer conservation and distributed renewable generation initiatives (excluding Lost Fixed Cost Recovery) Distributed Generation (DG) Impact
Slide 10: 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 retai
Slide 11: Key Dates for Rate Design
KEY DATES FOR RATE DESIGN • Residential demand rates started • Time of Use rates initiated - due to central air conditioning load Early Nearly half of our residential (currently about 10% of customers 1980’s customers are on TOU rates have a rate with a demand charge) • APS proposed stakeholder • Sp
Slide 12: Key Rate Design Principles
KEY RATE DESIGN Smarter rates for smarter grid PRINCIPLES Arizona Public Service, Tucson Electric Power, Residential Utility Consumer Office and Arizona solar developers filed a joint letter with the ACC agreeing on the following rate design principles: Customer-focused Rate design changes needed to
Slide 13: Arizona Corporation Commission
ARIZONA CORPORATION Election held November 4, 2014 COMMISSION Terms to January 2017 Terms to January 2015 Susan Bob Bob Stump (R)* Brenda Gary Bitter Smith (R) Burns (R) Chairman Burns (R) Pierce (R)* Elected Terms Begin January 2015 Tom Forese (R) Doug Little (R) * Term limited - elected to four-ye
Slide 14: Resource Planning
RESOURCE PLANNING* MW Composition of Energy Mix by Resource* 14,000 Load Requirement Including Reserves 2014 12,000 27.7% 9.5% 17.0% 10,000 35.3% Gas Resource Planning 7.5% Requirement 20.1% Coal 8,000 Existing Contracts Nuclear 6,000 RE + DE 2029 15.3% 35.0% 4,000 EE 14.7% Existing Owned Resources
Slide 15: Rate Base
APS’s revenues come from a RATE BASE regulated retail rate base and meaningful transmission business APS Rate Base Growth $7.0 Billion Total Approved Rate Base Year-End ACC FERC Generation & Distribution Transmission 17% $2.0 83% $2.0 $1.8 $1.7 $1.3 $1.4 Most Recent Rate Decisions ACC FERC Rate Effe
Slide 16: Capital Expenditures
80% of capital expenditures are CAPITAL recovered through rate adjustors EXPENDITURES (40%) and depreciation cash flow (40%) ($ Millions) $1,248 $83 Other $1,091 $986 $85 $335 Distribution $44 $864 $234 $81 $328 Transmission $144 $223 $1 $132 $159 Renewable $216 Generation $166 $170 $60 $20 $37 $73
Slide 17: Environmental
Regional Haze compliance is the ENVIRONMENTAL biggest driver of environmental spend over the next 3-4 years Mercury and Other Cooling Regional Haze / BART Hazardous Air Coal Combustion Water (SCR) Pollutants Residuals Intake – (ACI + Baghouse) 316(b) MATS compliance by April Decision from EPA on Ann
Slide 18: Bright Canyon Energy – Transmission Growth
BRIGHT CANYON ENERGY – TRANSMISSION GROWTH BRIGHT CANYON ENERGY Pinnacle West subsidiary formed to pursue new growth opportunities TRANSCANYON A 50/50 Joint Venture formed with MidAmerican Transmission, subsidiary of Berkshire Hathaway Energy, to pursue transmission WECC opportunities in the western
Slide 19: Delaney Colorado River Transmission Line – Key Dates
DELANEY COLORADO RIVER TRANSMISSION LINE – KEY DATES CAISO Transmission Planning Process Bid Window Close November 19, 2014 Post List of Sufficient Applications January 13, 2015 (i.e. list of bidders) Shifts out 50 days Post List of Qualified Sponsors March 5, 2015 if sponsors elect to collaborate (
Slide 20: Earned Return on Equity
EARNED RETURN ON Delivering consistent earned return on equity is one of our top EQUITY priorities PNW Earned ROE 11% PNW 2013 Earned ROE PNW Consolidated 10% More Than 9.5% (a) Net Income $439,996 Annually (b) Less: Net Income Attributable to 33,892 Noncontrolling Interests 9% (c) Net Income Attrib
Slide 21: Cost Management
A variety of initiatives have been COST MANAGEMENT helping control operating and capital costs Results Ongoing effort to Sustainable Cost instill culture of cost Management Initiative management and efficiency Fleet operating Fossil Generation model to streamline Realignment workforce and reduce cos
Slide 22: 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 23: Dividend Growth
Pinnacle West’s annual dividend is DIVIDEND GROWTH $2.38 per share; targeting ~5% annual dividend growth Dividend Growth Goal Indicated Annual Dividend Rate at Year-End Dividend Yield 5% PNW 5% 4% 4% $2.38 3% $2.27 3% Industry Averages 2% $2.18 2% $2.10 1% 1% 0% 30% 50% 70% 90% Dividend Payout 2011
Slide 24: 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 11-0224 May 15 Renewable Energy Surcharge 14-0250 Jul 1 10-Year Transmission Plan (Annual) 13-0002 Jan 31 2014 Integrated Resource Plan (Biennial) 13-0070 Apr 1 Net Metering
Slide 25: Appendix
APPENDIX Delivering Superior Shareholder Value
Slide 26: 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 Randy Jeff Hatfield Schiavoni Edington Guldner EVP & Chief EVP & Chief EVP & SVP Financial Operating Chief Nuclear Customer
Slide 27: Palo Verde Nuclear Generating Station
PALO VERDE NUCLEAR Largest generating nuclear plant GENERATING STATION in the United States • Total Capacity: 4,000 MW (3 units) Low risk of natural events at Palo Verde o APS share: 1,146 MW; APS operated o Output: 31.4 million MWh in 2013 o Approximately 2,800 employees In Service License* Unit 1
Slide 28: Palo Verde Nuclear Generating Station
PALO VERDE NUCLEAR Located 50 miles west of GENERATING STATION downtown Phoenix 28 Delivering Superior Shareholder Value
Slide 29: Palo Verde Operating Costs Are Below Industry Averages and Improving
PALO VERDE OPERATING COSTS ARE BELOW INDUSTRY AVERAGES AND IMPROVING Dollars per Megawatt-Hour $23.24 $20.87 Industry Average $19.99 Industry Median 2007 2008 2009 2010 2011 2012 2013 Source: Electric Utility Cost Group (EUCG) 29 Delivering Superior Shareholder Value
Slide 30: 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 31: Four Corners Power Plant
FOUR CORNERS POWER PLANT • On December 30, 2013, APS and Southern California Edison (“SCE”) completed previously announced transaction whereby APS agreed to purchase SCE’s 48% interest in Units 4 and 5 of Four Corners – Final purchase price: $182 million – Estimated environmental compliance: At leas
Slide 32: APS Transmission
Strategic transmission investment is essential to maintain reliability APS TRANSMISSION and deliver diversified resources to customers • 10-Year Transmission Plan filed January 2014 (115 kV and above) – $496 million of transmission investment Flagstaff – 275 miles of new lines – Includes Hassayampa-
Slide 33: 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 PPA 174 MW • 3rd of all U.S. utilities for solar energy 310 MW installed in 2013 (410 MW) DG • 4th for new solar installed in 2013 380 MW (368 watts/customer) • 4th
Slide 34: AZ Sun Program
Owning solar resources makes sense for our customers and the AZ SUN PROGRAM environment and provides earnings growth potential • Community-scale photovoltaic solar plants to be owned by APS • Constructive rate recovery through RES until included in base rates • 150 MW in commercial operation to date
Slide 35: APS-Owned Rooftop Solar Proposal
• TBD APS-OWNED ROOFTOP SOLAR PROPOSAL • APS proposed an option to the ACC to convert 20 MW of AZ Sun into APS- owned residential rooftop solar, equates to approximately 3,000 customers • Estimated cost of $57-70 million • Benefits: − Provides an alternative for those who cannot afford solar or do n
Slide 36: Renewable Energy Rises with the Sun
RENEWABLE ENERGY We are helping Arizona become RISES WITH THE SUN the “Solar Capital of America” Arizona Germany and Japan are among countries with highest installed solar capacity, yet have solar conditions far inferior to Arizona Arizona ranks 1st in the U.S. for solar electricity capacity per cap
Slide 37: Residential PV Applications
RESIDENTIAL PV APPLICATIONS 2013 Applications* 2013 Canceled Apps 2014 Applications* 2014 Canceled Apps 1,000 37 77 114 124 66 108 800 45 136 112 46 116 44 38 116 600 70 151 37 900 885 400 821 800 793 787 33 83 745 731 747 734 644 653 672 93 570 26 513 433 454 200 364 346 252 251 0 13-Jan 14-Jan 13-
Slide 38: 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 Positive Positive S&P Stable Stable Fitch Positive Positive We are disclosing credit ratings to enhance under
Slide 39: S&P Credit Metrics
Our key credit metrics have been S&P CREDIT METRICS improving 2009 2010 2011 2012 2013 APS FFO / Debt 21.7% 23.7% 23.6% 27.7% 31.5% FFO / Interest 3.8x 4.0x 4.2x 4.9x 5.8X Debt / Capitalization 56.3% 52.6% 52.9% 50.7% 47.7% Pinnacle West FFO / Debt 19.1% 22.3% 23.0% 26.7% 29.8 FFO / Interest 3.3x 3.
Slide 40: Financing
FINANCING 2014 Major Financing Activities Debt Maturity Schedule • $250 million 30-year 4.70% APS senior ($Millions) unsecured notes issued in January 2014 with $600 proceeds used primarily to fund acquisition of Four Corners $500 • $250 million 10-year 3.35% APS senior unsecured notes issued June 2
Slide 41: On-Going EPS Guidance
ON-GOING EPS GUIDANCE AS OF OCTOBER 31, 2014 Affirming 2014 Guidance range…introducing 2015 Guidance $3.75 - $3.95 Outlook through 2016 • Goal of earning more than 9.5% $3.60 - $3.75 Return on Equity • Adjustment mechanisms (Lost Fixed Cost Recovery, Transmission Cost Adjustor, AZ Sun, etc.) providi
Slide 42: 2014 On-Going EPS Guidance
2014 ON-GOING Key Factors & Assumptions as of EPS GUIDANCE October 31, 2014 2014 Electricity gross margin* (operating revenues, net of fuel and $2.20 – $2.22 billion purchased power expenses) • Retail customer growth about 1.5% • Weather-normalized retail electricity sales volume about flat to prior
Slide 43: 2015 On-Going EPS Guidance
2015 ON-GOING Key Factors & Assumptions as of EPS GUIDANCE October 31, 2014 2015 Electricity gross margin* (operating revenues, net of fuel and $2.30 – $2.35 billion purchased power expenses) • Retail customer growth about 1.5-2.5% • Weather-normalized retail electricity sales volume about 0-1.0% to
Slide 44: Financial Outlook
2015 – 2017 Key Factors & Assumptions as of FINANCIAL OUTLOOK October 31, 2014 Gross Margin – Customer Growth and Weather Assumption Impact Retail customer growth • Expected to average about 2-3% annually (2015-2017) • Modestly improving Arizona and U.S. economic conditions Weather-normalized retail
Slide 45: Operations & Maintenance Trends
OPERATIONS & Our goal is to keep consolidated O&M growth at or below retail MAINTENANCE TRENDS sales growth levels ($ Millions) $137 $103 $106 $150 $124 $121 $790 - $795 - $800 $815 $754 $761 $788 $749 2010 2011 2012 2013 2014E 2015E Consolidated RES/DSM* *Renewable energy and demand side management
Slide 46: List of Other Selected ACC Dockets
LIST OF OTHER SELECTED ACC DOCKETS Description Docket # 2014 Renewable Energy Standard Implementation Plan E-01345A-13-0140* AZ Sun/AZ Sun Distributed Generation Proposal E-01345A-13-0140* Cholla Unit 2 Retirement Proposal E-00000V-13-0070 2015 Renewable Energy Standard Implementation Plan E-01345A-
Slide 47: Net Metering
Rooftop solar customers still NET METERING use 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 48: Operational Considerations with Increased Variable Generation
OPERATIONAL CONSIDERATIONS WITH INCREASED VARIABLE GENERATION The grid provides real-time voltage and • Steep ramp rate of backup generation power needed to start air conditioners and • Instant variability other motors loads (for typical AC unit) • Voltage control at distribution level 48 Delivering
Slide 49: Emerging Technologies Rely on the Grid
EMERGING All of these technologies are part TECHNOLOGIES of an integrated grid RELY ON THE GRID Rooftop Solar Home Energy Management Battery Storage Electrical System Fuel Cells Electric Vehicles Microgrids 49 Delivering Superior Shareholder Value
Slide 50: Reliability Services Require Technology Advancements on the Utility Side
RELIABILITY SERVICES REQUIRE TECHNOLOGY ADVANCEMENTS ON THE UTILITY SIDE Advanced Distribution Energy Management Synchrophasors (WISP) Integrated Volt/VAR System (EMS) Upgrades Control (IVVC) Management System Communicating Fault Smart Meters Indicators (CFI) Strategic Fiber Supervisory Controlled S
Slide 51: 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 52: 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 April – Annual rate true-up compares projec
Slide 53: 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 54: 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 55: 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 56: 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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