Pinnacle West Capital Corporation · NYSE:PNW
Pinnacle West Capital — EEI Financial Conference 2013
47 slides from Pinnacle West Capital's conference presentation, Nov 10, 2013
Slide 1: Delivering Superior Shareholder Value
DELIVERING SUPERIOR SHAREHOLDER VALUE EEI Financial Conference | November 10-13, 2013
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: Value Proposition
VALUE PROPOSITION • Maintaining focus on core electric utility business Experienced Management • Delivering long-term shareholder value Team Driving Focused • Creating a sustainable energy future for Arizona and the communities we serve Strategy • Driving cost management discipline through increased
Slide 4: 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* $6.2 Billion Enterprise Value** ~$9.4 Billion Dividend Yield* 4.1% Consolidated Assets $14 Billion Principal Subsidiary • Arizona’s largest and longest-servi
Slide 5: 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 YTD '05 '06 '07 '08 '09 '10 '11 '12 '13 YTD Job Grow
Slide 6: Long-Term Economic Outlook
LONG-TERM ECONOMIC OUTLOOK Annual Growth Retail customer growth to average 5% 2% annually 2013-2015, and expected to accelerate thereafter 4% 3% 2% 1% 0% 1990 1994 1998 2002 2006 2010 2014 Projected Arizona Population Growth APS Customer Growth US Population Growth 6 Delivering Superior Shareholder
Slide 7: Retail Sales Growth (Weather-Normalized)
RETAIL SALES GROWTH (WEATHER-NORMALIZED) • Weather-normalized retail sales growth less than 1% for 2013-2015 after impacts of energy efficiency, customer conservation and distributed renewable generation initiatives • 85% of retail sales growth driven by customer growth, excluding customer programs
Slide 8: 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 2013 J.D. Power residential customer survey. production 8 times – the only U.S. plant to ever do so. APS
Slide 9: 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% • Adjustment mechanisms (Lost Fixed Cost Recovery, 10% 9.9% PNW Consolidated Transmission Cost Adjustor, etc.) At least 9.5% annually providing increasing contri
Slide 10: Rate Base
APS’s revenues come from a RATE BASE regulated retail rate base and meaningful transmission business APS Rate Base Growth $6.9 Billion Total Approved Rate Base Year-End ACC FERC Generation & Distribution Transmission 17% $1.9 83% $1.7 $1.3 $1.5 $1.2 Most Recent Rate Decisions ACC FERC Rate Effective
Slide 11: 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 7% 6% PNW 5% $2.27 4% $2.18 3% $2.10 Industry Averages 2% 1% 0% 30% 50% 70% 90% Dividend Payout Yield as of October
Slide 12: Cost Management
A variety of initiatives have been COST MANAGEMENT helping control operating and capital costs Results Ongoing effort to Sustainable Cost instill culture of cost Management Initiative management and efficiency Fleet operating Fossil Generation model to streamline Realignment workforce and reduce cos
Slide 13: Sustainable Cost Management Initiative (SCMI)
SUSTAINABLE COST MANAGEMENT INITIATIVE (“SCMI”) Motivation for Change Sustainable Changes Tiered Metrics • Capitalize on changes driven by aging workforce Linked to incentives to drive accountability across all levels Business Planning Enterprise • Improve organizational efficiencies To increase tra
Slide 14: Operations & Maintenance
OPERATIONS & Our goal is to keep O&M growth at MAINTENANCE or below retail sales growth levels ($ Millions) $129 $119 $150 $124 $121 $95 $785 - $790 - $795* $810 $727 $749 $754 $761 2009 2010 2011 2012 2013E 2014E Consolidated RES/DSM** Note: Pinnacle West O&M for 2009-2012: $10M, $9M, $8M and $11M,
Slide 15: Capital Expenditures
80% of capital expenditures are CAPITAL recovered through rate adjustors EXPENDITURES (40%) and depreciation cash flow (40%) ($ Millions) $1,278 $48 Other $1,110 $1,055 $41 $363 $48 Distribution $909 $249 $49 $374 Transmission $196 $252 $138 $213 Renewable $213 Generation $182 $201 $21 $142 $41 $63
Slide 16: Resource Planning
We will meet future load growth through a balanced mix including RESOURCE PLANNING natural gas, renewable resources and energy efficiency programs MW Composition of Energy Mix by Resource 14,000 Load Requirement Including Reserves 2012 12,000 28.8% 4.9% 10,000 Resource Planning 9.6% Gas 38.0% Requir
Slide 17: Four Corners Power Plant
• Our proposal represents a balanced solution to new FOUR CORNERS POWER PLANT environmental regulations. Acquire Southern California Edison’s 739 MW interest in Units 4 & 5 and shut down Units 1-3 (560 MW) • Purchase price: $294 million, subject to adjustments, including reduction of $7.5 million pe
Slide 18: Transmission
Strategic transmission investment is essential to maintain reliability TRANSMISSION and deliver diversified resources to customers • 10-Year Transmission Plan filed January 2013 (115 kV and above) – $612 million of new transmission investment – 275 miles of new lines – Includes Hassayampa-North Gila
Slide 19: 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 energy development* * Enviro
Slide 20: 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 retail
Slide 21: AZ Sun Program
Owning solar resources makes sense for our customers and the AZ SUN PROGRAM environment and provides earnings growth potential • Utility-scale photovoltaic solar plants to be owned by APS • Constructive rate recovery through RES until included in base rates • 86 MW in commercial operation to date; 1
Slide 22: Solana
Solana will provide more than SOLANA one-quarter of APS’s renewable energy target by 2015 • Largest solar plant of its kind, capable of powering 70,000 APS customers • 250 MW 30-year PPA for all output (~900 GWh/year) • Concentrating solar trough facility 70 miles southwest of Phoenix • Commercial o
Slide 23: 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 Fin
Slide 24: Net Metering
Rooftop solar customers still use NET METERING 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: APS Proposed Net Metering Options
Either option ensures rooftop APS PROPOSED NET solar customers get fair credit for METERING OPTIONS their solar energy and pay their fair share of the grid Net Metering Option or Bill Credit Option Net metering would be replaced by a bill Future solar customers would be credit, where future solar cu
Slide 26: 2013 Consolidated On-Going EPS Guidance: $3.55 - $3.70
2013 CONSOLIDATED ON-GOING EPS GUIDANCE: $3.55 - $3.70 Key Factors & Assumptions as of October 31, 2013 2013 Electricity gross margin* (operating revenues, net of fuel and $2.22 - $2.24 billion purchased power expenses) • Retail customer growth about 1.5% • Weather-normalized retail electricity sale
Slide 27: 2014 Consolidated On-Going EPS Guidance: $3.60 - $3.75
2014 CONSOLIDATED ON-GOING EPS GUIDANCE: $3.60 - $3.75 Key Factors & Assumptions as of October 31, 2013 2014 Electricity gross margin* (operating revenues, net of fuel and $2.22 – $2.27 billion purchased power expenses) • Retail customer growth about 2.0% • Weather-normalized retail electricity sale
Slide 28: Financial Outlook
2013 – 2015 Key Factors & Assumptions as of FINANCIAL OUTLOOK October 31, 2013 Gross Margin – Customer Growth and Weather Assumption Impact Retail customer growth • Expected to average 2% annually (2013-2015) • Modestly improving Arizona and U.S. economic conditions Weather-normalized retail electri
Slide 29: Superior Shareholder Returns
SUPERIOR SHAREHOLDER RETURNS Pinnacle West S&P 500 Index S&P 1500 Electric Utility Index 150% 127.6% 125% 102.5% 100% 75% 58.3% 54.8% 49.3% 50% 46.5% 33.2% 35.1% 27.2% 25% 17.1% 9.9% 5.7% 0% 1 Year 2 Years 3 Years 5 Years Total Shareholder Return - Periods Ended October 31, 2013 29 Delivering Superi
Slide 30: Appendix
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Slide 31: 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 EVP & SVP EVP Operations Chief Nuclear Customers & & CFO Officer Regulation 31 Delivering Su
Slide 32: Superior Power Plant Performance
SUPERIOR POWER PLANT PERFORMANCE Nuclear Capacity Factors Coal Performance Metrics APS 92% 100% APS Commercial Availability APS Capacity Factor Industry Capacity Factor 1 93% 90% 0.9 71% 0.8 80% Industry 89% 0.7 55% 70% 0.6 60% 0.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003 2004 2005 200
Slide 33: Palo Verde
Palo Verde operating costs are PALO VERDE below industry averages and improving Dollars per Megawatt-House $23.89 $20.46 Industry Average $20.01 Industry Median 2007 2008 2009 2010 2011 2012 Source: Electric Utility Cost Group (EUCG) 33 Delivering Superior Shareholder Value
Slide 34: Fukushima Follow-Up
FUKUSHIMA FOLLOW-UP • Low risk of natural events at Palo Verde • Seismic and flooding walk-downs conducted • Changes in NRC regulations and industry standards • NRC Regional Response Centers to be located in Phoenix and Memphis Palo Verde • Fukushima-related costs are approximately $100 million (APS
Slide 35: Energy Delivery
Top-quartile reliability is reducing ENERGY DELIVERY the frequency of customer outages System Average Interruption • Comprehensive maintenance Frequency Index (SAIFI) and inspection program Average number includes: of customer – EEI Edison Award winning interruptions/year TOAN, state-of-the art, on-
Slide 36: Financing
FINANCING Major Financing Activities Long-Term Debt Maturities ($ Millions) • Currently expect $500 million total long-term debt issuance in 2014, $300 million of which is related to $125 refinancing maturing debt • Potential need for new debt financing up to $250 million, subject to closing of Four
Slide 37: Credit Metrics and Ratings
CREDIT METRICS AND RATINGS Key Credit Metrics Improving Investment Grade Credit Rating 2008 2009 2010 2011 2012 APS Parent APS Corporate Credit Ratings FFO / Debt 22.1% 22.8% 22.3% 20.8% 29.7% Moody’s Baa1 Baa2 FFO / Interest 5.1x 4.8x 4.6x 4.6x 6.6x S&P BBB+ BBB+ Debt / Fitch BBB+ BBB+ 57.4% 56.8%
Slide 38: Arizona Corporation Commission
ARIZONA Three seats of four-year terms through January 2017 were CORPORATION addressed in the November 2012 COMMISSION election Terms To January 2017 Terms To January 2015 New Commissioners Incumbents Susan Bob Bob Stump (R)* Brenda Gary Bitter Smith (R) Burns (R) Chairman Burns (R) Pierce (R)* * Te
Slide 39: 2012 Retail Rate Case Settlement
2012 RETAIL RATE The settlement contains a number of key benefits for shareholders CASE SETTLEMENT and customers • Shareholder Benefits – Regulatory certainty • Base rate stay-out until at least mid-2016 • Rate gradualism through adjustment mechanisms – Financial support APS needs to achieve Arizona
Slide 40: 2012 Retail Rate Case Settlement: Key Provisions
2012 RETAIL RATE Key financial provisions & CASE SETTLEMENT assumptions Base Rates and Timing Annual Revenue Charges Annualized Base Rate Revenue Changes ($ millions) Non-fuel base rate increase $116.3 Fuel-related base rate decrease (153.1) Revenues related to AZ Sun and other solar projects to be
Slide 41: 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 2013 base fue
Slide 42: Regulatory Mechanisms: Lost Fixed Cost Recovery
REGULATORY Lost Fixed Cost Recovery MECHANISMS • 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-mandated 2012 Revenue energy efficiency (EE) and distributed Rate Recov
Slide 43: Transmission
We have achieved constructive TRANSMISSION 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 Adjustor Rate Rate Rate
Slide 44: Regulatory Calendar
REGULATORY CALENDAR LIST OF SELECTED DOCKETS Docket # 2012 Retail Rate Settlement E-01345A-11-0224 (including Four Corners rate recovery) Energy Efficiency and Integrated Resource Planning* E-00000XX-13-0214 2014 Renewable Energy Standard Implementation Plan E-01345A-13-0140 Net Metering E-01345A-13
Slide 45: 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 Four Corners Farmington, NM 1-3 Base 1963-1964 100 560 COAL 1,753 MW Four Cor
Slide 46: 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
Slide 47: 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 1st utility in world to endorse Top 10 Utility Ceres’ Code of Cond
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