Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — Non-Deal Roadshow (October 2014)
48 slides from Pinnacle West Capital's roadshow presentation, Oct 6, 2014
Slide 1: Delivering Superior Shareholder Value
DELIVERING SUPERIOR SHAREHOLDER VALUE Investor Meetings | October 6 - 10, 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. NYSE Ticker PNW Market Cap* $6.3 Billion Enterprise Value* $9.9 Billion Dividend Yield* 4% Consolidated Assets $13.7 Billion Principal Subsidiary • Arizona’s largest and longest-serving
Slide 4: 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 5: Leadership Team
Our top executives have more than 100 combined years of LEADERSHIP TEAM creating shareholder value in the energy industry Don Brandt Chairman & CEO Mark Randy Jeff Jim Schiavoni Edington Guldner Hatfield EVP & Chief EVP & SVP EVP Operating Chief Nuclear Customers & & CFO Officer Officer Regulation 5
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 Apr '05 '06 '07 '08 '09 '10 '11 '12 '13 '14Q2 Si
Slide 8: Arizona Economy – Homebuilders Agree Phoenix Has Solid Long-Term Outlook
ARIZONA ECONOMY – HOMEBUILDERS AGREE PHOENIX HAS SOLID LONG-TERM OUTLOOK “I am bullish on Phoenix over the long term…I believe that going into 2015 we're going to experience a more normal market in Arizona after things get more in balance.” “We remain confident in the long-term growth of the opportu
Slide 9: 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 10: 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 11: 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 374 MW (368 watts/customer) • 4th
Slide 12: 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 13: 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 14: 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 15: 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 – APS will continue to operate Four Corners a
Slide 16: 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 17: 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 – 275 miles of new lines – Includes Hassayampa-North Gila
Slide 18: PNW Transmission
PNW TRANSMISSION BRIGHT CANYON ENERGY Pinnacle West subsidiary formed to pursue new growth opportunities TRANSCANYON A 50/50 Joint Venture formed with MidAmerican Transmission, to pursue transmission opportunities in the western United States DELANEY COLORADO RIVER TRANSMISSION LINE New 500kV line b
Slide 19: Delaney Colorado River Transmission Line
DELANEY COLORADO RIVER TRANSMISSION LINE CAISO Transmission Planning Process Bid Window Close November 19, 2014 Post List of Sufficient Applications (i.e. January 13, 2015 list of bidders) Shifts out 50 days if Post List of Qualified Sponsors March 5, 2015 sponsors elect to collaborate (Collaboratio
Slide 20: 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 21: 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-14
Slide 22: 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 23: 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 24: 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 25: 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 25 Delivering Superior Shareholder Value
Slide 26: 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 (for typical AC unit) 26 Delivering Superior Shareholder Value
Slide 27: 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 Management System System (EMS) Upgrades Control (IVVC) Communicating Fault Smart Meters Strategic Indicators (CFI) Fiber Supervisory Controlled S
Slide 28: Arizona Corporation Commission
ARIZONA November 2014 elections will CORPORATION determine two seats; elected to serve four-year term 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)* Election Slate (Two seats) – November 4, 2014 Re
Slide 29: 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% PNW 5% 4% $2.27 $2.18 3% $2.10 Industry Averages 2% 1% 0% 30% 50% 70% 90% Dividend Payout Yield as of August 31,
Slide 30: Appendix
APPENDIX Delivering Superior Shareholder Value
Slide 31: Environmental, Sustainability and Governance Leadership
ENVIRONMENTAL, SUSTAINABILITY AND GOVERNANCE LEADERSHIP Rated 4th Highest Ranked on Dow Jones Intelligent Utility in 2011 North America Sustainability Environmental Certification Index 2005-2012 Gas/Oil Fleet – 2011 Coal Fleet – 2012 TD&C Fleet - 2013 Recognized as #1 utility in incremental EE savin
Slide 32: 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 33: Residential PV Applications
RESIDENTIAL PV APPLICATIONS 2013 Applications* 2013 Canceled Apps 2014 Applications* 2014 Canceled Apps 1000 75 114 124 52 107 800 36 136 109 46 116 43 36 116 600 70 151 37 883 400 831 800 33 793 83 758 787 732 749 733 647 654 673 93 569 26 513 432 458 200 369 353 257 251 0 13-Jan 14-Jan 13-Feb2 14-
Slide 34: 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 35: 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 36: 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 37: Operations & Maintenance
OPERATIONS & Our goal is to keep consolidated O&M growth at or below retail MAINTENANCE sales growth levels ($ Millions) $137 $99 $150 $124 $121 $95 $790 - $810 $788* $727 $749 $754 $761 2009 2010 2011 2012 2013 2014E Consolidated RES/DSM** As of June 30, 2014. Note: Pinnacle West O&M for 2009-2014E
Slide 38: Palo Verde
Palo Verde operating costs are PALO VERDE below industry averages and improving Dollars per Megawatt-Hour $23.24 $20.87 Industry Average $19.99 Industry Median 2007 2008 2009 2010 2011 2012 2013 Source: Electric Utility Cost Group (EUCG) 38 Delivering Superior Shareholder Value
Slide 39: Capital Expenditures
80% of capital expenditures are CAPITAL recovered through rate adjustors EXPENDITURES (40%) and depreciation cash flow (40%) ($ Millions) $1,263 $48 Other $1,026 $986 $363 $931 $41 Distribution $44 $74 $234 $373 Transmission $230 $196 $132 Renewable $177 $212 Generation $166 $213 $20 $131 $8 $58 $22
Slide 40: 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 Positive Positive We are disclosing credit ratings to enhance understan
Slide 41: 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 / 56.3% 52.6% 52.9% 50.7% 47.7% Capitalization Pinnacle West FFO / Debt 19.1% 22.3% 23.0% 26.7% 29.8 FFO / Interest 3.3x 3.
Slide 42: Financing
FINANCING 2014 Major Financing Activities Debt Maturity Schedule • $250 million 30-year 4.70% APS senior ($Millions) unsecured notes issued in January 2014 $600 with proceeds used primarily to fund acquisition of Four Corners $500 • $250 million 10-year 3.35% APS senior unsecured notes issued June 2
Slide 43: 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 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 April – Annual rate true-up compares projec
Slide 45: 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 46: 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 47: 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 48: 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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