Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — EEI Financial Conference 2014
56 slides from Pinnacle West Capital's conference presentation, Nov 10, 2014
Slide 1: Delivering Superior Shareholder Value
Delivering Superior Shareholder Value DELIVERING SUPERIOR SHAREHOLDER VALUE EEI Financial Conference – Dallas | November 11-13, 2014
Slide 2: Forward Looking Statements
Delivering Superior Shareholder Value2 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
Slide 3: Pinnacle West: Who We Are
Delivering Superior Shareholder Value3 PINNACLE WEST: WHO WE ARE We are a vertically integrated, regulated electric utility in the growing southwest U.S. Principal subsidiary: - Arizona Public Service Company, Arizona’s largest and longest-serving electric utility - Regulated utility provides stable
Slide 4: Pinnacle West: Key Metrics
Delivering Superior Shareholder Value4 PINNACLE WEST: KEY METRICS NYSE Ticker: PNW Market Capitalization*: $6.8 billion Enterprise Value*: $10.6 billion Consolidated Assets*: $14 billion Indicated Annual Dividend*: $2.38 Dividend Yield*: $4.0% APS Credit Ratings (Moody’s/S&P): A3/A- APS Credit Ratin
Slide 5: Value Proposition
Delivering Superior Shareholder Value5 VALUE PROPOSITION • Top ratings in Customer Satisfaction, Reliability and Safety • Palo Verde continues record levels of electricity production • Disciplined cost management Operational Excellence • Arizona’s long-term growth fundamentals remain largely intact;
Slide 6: Operational Excellence
Delivering Superior Shareholder Value6 30.230.430.4 30.8 30.6 31.231.3 31.931.4 20 22 24 26 28 30 32 1996 2002 2008 OPERATIONAL EXCELLENCE 177 108 97 65 58 47 35 0 40 80 120 160 200 2007 2008 2009 2010 2011 2012 2013 Palo Verde Palo Verde has exceeded 30 million megawatt-hours annual production 9 ti
Slide 7: Arizona Economic Indicators
Delivering Superior Shareholder Value7 0% 5% 10% 15% 20% 25% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Industrial ARIZONA ECONOMIC INDICATORS Nonresidential Building Vacancy – Metro Phoenix Single Family & Multifamily Housing Permits Maricopa County Home Prices – Metro Phoenix Value Relative to Jan ‘0
Slide 8: Customer Growth
Delivering Superior Shareholder Value8 CUSTOMER GROWTH 0% 1% 2% 3% 4% 5% Arizona Population Growth APS Customer Growth US Population Growth Annual Growth • Customer growth drives 85% of retail sales (excluding impacts of customer conservation, energy efficiency and distributed renewable generation i
Slide 9: Retail Sales Growth (Weather-Normalized)
Delivering Superior Shareholder Value9 2015 2016 2017 RETAIL SALES GROWTH (WEATHER-NORMALIZED) YoY Retail Sales Before Customer Programs Energy Efficiency & Customer Conservation Distributed Generation • Weather-normalized retail sales growth on average about 0.5-1.5% for 2015-2017 after impacts of
Slide 10: Arizona's Renewable Resource and Energy Efficiency Standards
Delivering Superior Shareholder Value10 • Cumulative savings from energy efficiency programs must be equivalent to 22% of annual retail sales by 2020 • Annual milestones in place to measure progress toward cumulative 2020 goal – 9.5% by 2015 – 22% by 2020 ARIZONA’S RENEWABLE RESOURCE AND ENERGY EFFI
Slide 11: Key Dates for Rate Design
Delivering Superior Shareholder Value11 KEY DATES FOR RATE DESIGN 2012 2013 2014 2015 - 2017 • APS proposed stakeholder conference to explore net metering • Spring: Conducted series of Technical Workshops on Net Metering • July: 2014 RES filing • November: ACC decision on net metering; recognized co
Slide 12: Key Rate Design Principles
Delivering Superior Shareholder Value12 KEY RATE DESIGN PRINCIPLES Smarter rates for smarter grid 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: Custom
Slide 13: Arizona Corporation Commission
Delivering Superior Shareholder Value13 ARIZONA CORPORATION COMMISSION Election held November 4, 2014 Bob Stump (R)* Chairman Brenda Burns (R) Gary Pierce (R)* Terms to January 2015Terms to January 2017 Susan Bitter Smith (R) Bob Burns (R) * Term limited - elected to four-year terms (limited to two
Slide 14: Resource Planning
Delivering Superior Shareholder Value14 RESOURCE PLANNING* 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 2014 2017 2020 2023 2026 2029 Existing Owned Resources Existing Contracts Resource Planning Requirement Load Requirement Including Reserves MW 20.1% 35.3% 27.7% 9.5% 7.5% 17.0% 2014 Gas Coal Nuc
Slide 15: Rate Base
Delivering Superior Shareholder Value15 RATE BASE APS’s revenues come from a regulated retail rate base and meaningful transmission business $5.9 $6.2 $6.5 $6.8 $7.4 $8.0 $1.3 $1.4 $1.7 $1.8 $2.0 $2.0 2013 2014 2015 2016 2017 2018 APS Rate Base Growth Year-End ACC FERC $7.0 Billion Total Approved Ra
Slide 16: Capital Expenditures
Delivering Superior Shareholder Value16 $390 $292 $365 $526 $20 $25 $37 $159 $166 $73 $60 $1 $132 $170 $216 $144 $234 $223 $328 $335 $44 $81 $85 $83 2013 2014 2015 2016 CAPITAL EXPENDITURES 80% of capital expenditures are recovered through rate adjustors (40%) and depreciation cash flow (40%) ($ Mil
Slide 17: Environmental Regulation and Compliance
Delivering Superior Shareholder Value17 Regional Haze / BART (SCR) Mercury and Other Hazardous Air Pollutants (ACI + Baghouse) Coal Combustion Residuals Cooling Water Intake – 316(b) EPA Ruling Announced in 1999, with site-specific requirements announced more recently MATS compliance by April 2015,
Slide 18: Bright Canyon Energy – Transmission Growth
Delivering Superior Shareholder Value18 BRIGHT CANYON ENERGY – TRANSMISSION GROWTH DELANEY COLORADO RIVER TRANSMISSION LINE New 500kV line between the planned Delaney substation near Palo Verde Generating Station in Arizona and the Colorado River substation, located just west of Blythe, California I
Slide 19: Delaney Colorado River Transmission Line – Key Dates
Delivering Superior Shareholder Value19 DELANEY COLORADO RIVER TRANSMISSION LINE – KEY DATES CAISO Transmission Planning Process Bid Window Close November 19, 2014 Post List of Sufficient Applications (i.e. list of bidders) January 13, 2015 Post List of Qualified Sponsors March 5, 2015 Post Approved
Slide 20: Earned Return on Equity
Delivering Superior Shareholder Value20 6% 7% 8% 9% 10% 11% 2009 2010 2011 2012 2013 2014 2015 2016 EARNED RETURN ON EQUITY PNW Earned ROE Goal Delivering consistent earned return on equity is one of our top priorities PNW Consolidated More Than 9.5% Annually PNW 2013 Earned ROE (a) Net Income $439,
Slide 21: Cost Management
Delivering Superior Shareholder Value21 2007 2008 2009 2010 2011 2012 2013 2014 2015 COST MANAGEMENT A variety of initiatives have been helping control operating and capital costs Sustainable Cost Management Initiative Ongoing effort to instill culture of cost management and efficiency Fossil Genera
Slide 22: Sustainable Cost Management Initiative
Delivering Superior Shareholder Value22 Motivation for Change SUSTAINABLE COST MANAGEMENT INITIATIVE (“SCMI”) • Capitalize on changes driven by aging workforce • Improve organizational efficiencies • Strengthen governance and clarify accountability • Refine understanding of cost structure to better
Slide 23: Dividend Growth
Delivering Superior Shareholder Value23 0% 1% 1% 2% 2% 3% 3% 4% 4% 5% 5% 30% 50% 70% 90% $2.10 $2.18 $2.27 $2.38 2011 2012 2013 2014 2015 2016 Dividend Growth Goal Indicated Annual Dividend Rate at Year-End DIVIDEND GROWTH Pinnacle West’s annual dividend is $2.38 per share; targeting ~5% annual divi
Slide 24: 2014 Key Dates
Delivering Superior Shareholder Value24 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 Pla
Slide 25: Appendix
Delivering Superior Shareholder Value APPENDIX
Slide 26: Leadership Team
Delivering Superior Shareholder Value26 LEADERSHIP TEAM Our top executives have more than 100 combined years of creating shareholder value in the energy industry Don Brandt Chairman & Chief Executive Officer Mark Schiavoni EVP & Chief Operating Officer Jeff Guldner SVP Customers & Regulation Randy E
Slide 27: Palo Verde Nuclear Generating Station
Delivering Superior Shareholder Value27 PALO VERDE NUCLEAR GENERATING STATION Largest generating nuclear plant in the United States • Total Capacity: 4,000 MW (3 units) o APS share: 1,146 MW; APS operated o Output: 31.4 million MWh in 2013 o Approximately 2,800 employees • Fukushima-related impacts
Slide 28: Palo Verde Nuclear Generating Station Location
Delivering Superior Shareholder Value28 PALO VERDE NUCLEAR GENERATING STATION Located 50 miles west of downtown Phoenix
Slide 29: Palo Verde Operating Costs Below Industry Averages
Delivering Superior Shareholder Value29 $19.99 $23.24 $20.87 2007 2008 2009 2010 2011 2012 2013 D o l l a r s p e r M e g a w a t t - H o u r PALO VERDE OPERATING COSTS ARE BELOW INDUSTRY AVERAGES AND IMPROVING Industry Average Industry Median Source: Electric Utility Cost Group (EUCG)
Slide 30: Ocotillo Power Plant
Delivering Superior Shareholder Value30 OCOTILLO POWER PLANT (TEMPE, AZ) Ocotillo modernization project will maintain valley grid reliability and increase APS’s generating capacity by 290 MW • Maintains system reliability through retirement of aging steam units • Replacement units meet need for incr
Slide 31: Four Corners Power Plant
Delivering Superior Shareholder Value31 • 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 comp
Slide 32: APS Transmission
Delivering Superior Shareholder Value32 • 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 (HANG2) • ~110 miles; 500 kV • Construction started March 2013 • Estimated in-service mid 2015
Slide 33: APS Is a Leader in Solar
Delivering Superior Shareholder Value33 APS IS A LEADER IN SOLAR We are committed to making Arizona the solar capital of America • 3rd of all U.S. utilities for solar energy installed in 2013 (410 MW) • 4th for new solar installed in 2013 (368 watts/customer) • 4th for overall solar capacity (740 MW
Slide 34: AZ Sun Program
Delivering Superior Shareholder Value34 • 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 • Commitments to date: – 170 MW; $690 million capital investment (average of $4,060/kw
Slide 35: APS-Owned Rooftop Solar Proposal
Delivering Superior Shareholder Value35 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 tho
Slide 36: Renewable Energy Rises with the Sun
Delivering Superior Shareholder Value36 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 capita installed in 2013* RENEWABLE ENERGY RISES WITH THE SUN We are
Slide 37: Residential PV Applications
Delivering Superior Shareholder Value37 As of September 30, 2014, over 28,000 residential grid-tied solar photovoltaic (PV) systems have been installed in APS’s service territory *Note: www.arizonagoessolar.org logs total applications, but currently excludes canceled applications. Data also contains
Slide 38: Credit Ratings
Delivering Superior Shareholder Value38 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 enhan
Slide 39: S&P Credit Metrics
Delivering Superior Shareholder Value39 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 3.6x 3.9x 4.5x 5.1X Debt
Slide 40: Financing
Delivering Superior Shareholder Value40 FINANCING $300 $300 $250 $500 $125 $- $100 $200 $300 $400 $500 $600 2014 2015 2016 2017 2018 2019 APS PNW ($Millions) Debt Maturity Schedule 2014 Major Financing Activities • $250 million 30-year 4.70% APS senior unsecured notes issued in January 2014 with pro
Slide 41: On-Going EPS Guidance
Delivering Superior Shareholder Value41 ON-GOING EPS GUIDANCE AS OF OCTOBER 31, 2014 2014 Guidance 2015 Guidance Note: Earned Return on Equity goal based on average Total Shareholders’ Equity for PNW Consolidated. Affirming 2014 Guidance range…introducing 2015 Guidance $3.60 - $3.75 $3.75 - $3.95 Ou
Slide 42: 2014 On-Going EPS Guidance
Delivering Superior Shareholder Value42 2014 ON-GOING EPS GUIDANCE Key Factors & Assumptions as of October 31, 2014 2014 Electricity gross margin* (operating revenues, net of fuel and purchased power expenses) $2.20 – $2.22 billion • Retail customer growth about 1.5% • Weather-normalized retail elec
Slide 43: 2015 On-Going EPS Guidance
Delivering Superior Shareholder Value43 2015 ON-GOING EPS GUIDANCE Key Factors & Assumptions as of October 31, 2014 2015 Electricity gross margin* (operating revenues, net of fuel and purchased power expenses) $2.30 – $2.35 billion • Retail customer growth about 1.5-2.5% • Weather-normalized retail
Slide 44: 2015–2017 Financial Outlook
Delivering Superior Shareholder Value44 2015 – 2017 FINANCIAL OUTLOOK Key Factors & Assumptions as of October 31, 2014 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 el
Slide 45: Operations & Maintenance Trends
Delivering Superior Shareholder Value45 OPERATIONS & MAINTENANCE TRENDS Our goal is to keep consolidated O&M growth at or below retail sales growth levels $749 $754 $761 $788 $121 $150 $124 $137 $103 $106 2010 2011 2012 2013 2014E 2015E Consolidated RES/DSM* *Renewable energy and demand side managem
Slide 46: List of Other Selected ACC Dockets
Delivering Superior Shareholder Value46 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 Energ
Slide 47: Net Metering
Delivering Superior Shareholder Value47 • 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 are then paid, through higher rates, by non-rooftop solar customers • The
Slide 48: Operational Considerations with Increased Variable Generation
Delivering Superior Shareholder Value48 OPERATIONAL CONSIDERATIONS WITH INCREASED VARIABLE GENERATION The grid provides real-time voltage and power needed to start air conditioners and other motors loads (for typical AC unit) • Steep ramp rate of backup generation • Instant variability • Voltage con
Slide 49: Emerging Technologies Rely on the Grid
Delivering Superior Shareholder Value49 EMERGING TECHNOLOGIES RELY ON THE GRID All of these technologies are part of an integrated grid Electric Vehicles Battery Storage Fuel Cells Home Energy Management Microgrids Rooftop Solar Electrical System
Slide 50: Reliability Services Require Technology Advancements
Delivering Superior Shareholder Value50 RELIABILITY SERVICES REQUIRE TECHNOLOGY ADVANCEMENTS ON THE UTILITY SIDE Substation Health Monitoring Integrated Volt/VAR Control (IVVC) Communicating Fault Indicators (CFI) Synchrophasors (WISP) Supervisory Controlled Switches Advanced Distribution Management
Slide 51: Regulatory Adjustment Mechanisms
Delivering Superior Shareholder Value51 Mechanism Adopted / Last Adjusted Description Power Supply Adjustor (“PSA”) April 2005 / February 2014 • Recovers variance between actual fuel and purchased power costs and base fuel rate • Includes forward-looking, historical and transition components Renewab
Slide 52: Regulatory Mechanisms (TCA)
Delivering Superior Shareholder Value52 • 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 projected revenue requirement to actual, with variance incorporated into nex
Slide 53: Regulatory Mechanisms (TCA) Timeline
Delivering Superior Shareholder Value53 6/1 Rate Goes Into Effect REGULATORY MECHANISMS (TCA) We have achieved constructive transmission rate treatment with 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 6/1 Rate Goes Into
Slide 54: Regulatory Mechanisms (LFCR)
Delivering Superior Shareholder Value54 • Lost Fixed Cost Recovery (LFCR) was implemented as part of the July 2012 settlement – Estimated to offset 30-40% of revenues lost due to ACC- mandated energy efficiency (EE) and distributed renewable generation (DG) initiatives • Annual filing by January 15t
Slide 55: Generation Portfolio
Delivering Superior Shareholder Value55 GENERATION PORTFOLIO* Fuel/Plant Location Units Dispatch COD Ownership Interest1 Net Capacity (MW) NUCLEAR 1,146 MW Palo Verde Wintersburg, AZ 1-3 Base 1986-1989 29.1% 1,146 COAL 1,932 MW Cholla Joseph City, AZ 1-3 Base 1962-1980 100 647 Four Corners Farmingto
Slide 56: Purchased Power Contracts
Delivering Superior Shareholder Value56 PURCHASED POWER CONTRACTS* Fuel/Contract Location Owner/Developer Status1 PPA Signed COD Term (Years) Net Capacity (MW) SOLAR 310 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 Presc
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