Pinnacle West Capital Corporation

Greetings and welcome to the Pinnacle West Capital Corporation 2020 third quarter conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephanie Layton, Director of Investor Relations. Thank you. You may begin.

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2020 earnings, recent developments, and operating performance. Our speakers today will be our Chairman and CEO, Jeff Goldner, and our CFO, Ted Geisler. Jim Hatfield, Chief Administrative Officer, Daniel Fretcher, APS Vice President and COO, and Barbara Lockwood, Senior Vice President, Public Policy, are also here with us. First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information. Note that the slides contain reconciliations of certain non-GAAP financial information. Today's comments and our slides contain forward-looking statements based on current expectations and actual results may differ materially from expectations. Our third quarter 2020 form 10Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language, as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through November 6, 2020. I will now turn the call over to Jeff.

Great. Thanks, Stephanie. And thank you all for joining us today. We continue to navigate through the extraordinary events of 2020. And so as part of my operations update, I'll share with you our success in managing the hottest July and August on record in the Valley. I'll also provide an update on our regulatory dockets and our focus as we prepare for 2021. As Ted will explain, our earnings expectations for the year are higher due to the significantly above average temperatures. And so first, I want to recognize our field team for doing an exceptional job in maintaining reliable service for our customers this summer. The extreme heat this year contributed to a challenging energy market across the entire desert southwest. The lack of available capacity and the resulting declarations of energy emergencies by other utilities across the West served as a reminder of the importance of long-term resource portfolio planning, vigilance over day-to-day energy supply, and responsible energy policy. Our ability to avoid an energy emergency this summer was the result of careful long-term planning, resource adequacy, flexibility, and innovative customer programs. We relied heavily on our baseload and fast ramping assets, including Four Corners, Ocotillo, and Palo Verde, and those assets were ready when we needed them. Our fossil fleet's equivalent availability factor, which is the percentage of time that a fossil generation unit is available and ready to perform when called upon, was 95.3% from June through September. And Palo Verde Generating Station's capacity factor for the same timeframe was 100.2%. Not only were our generation plants there when we needed them, our customers were as well. Out of an abundance of caution and to better prepare for potential unforeseen events, on August the 18th and the 19th, we asked our customers to voluntarily conserve energy during peak hours. It came as no surprise to me that our customers were an amazing partner. Their response reduced peak demand on August 18th by approximately 240 megawatts, creating a meaningful reduction on a day when the entire western grid was challenged. In addition to successfully navigating the capacity shortfalls that were created by the heat, we also used our careful planning and close coordination with the Forest Service and first responders to mitigate the potential impact from wildfires this season. To reduce fire risk, our teams performed vegetation management activities, we held wildfire prevention training, and we continued to expand our clearance around poles program. And it was an incredibly active wildfire season with over 900,000 acres burned to date compared to an average over the last five years of 250,000 acres. Despite the above average wildfire activity, we actually experienced minimal impact to our assets. And I think that was due in part to our effective planning and risk management program. Despite a worldwide pandemic, a record hot summer, regional capacity shortage, and wildfires, our team continues to focus on how to make lasting impacts that benefit our customers, our shareholders, and the company. Palo Verde consistently provides examples of this type of continuous improvement and forward thinking. As a recent example, T. Lee, who's a Palo Verde procurement engineer, challenged our traditional procurement process, and conducted a cost analysis and engineering evaluation for a microswitch replacement. The technical evaluation allowed Palo Verde to purchase commercial-grade switches at approximately seven times lower than the alternative. Over the next three years alone, this change is expected to save the company $2.5 million. His leadership and innovation earned him a nomination for an F3 Technology Transfer Award, And I can't emphasize enough that it's our team who drives the success of this company, and I'm proud to recognize T for his innovation. Shifting gears to regulatory, staff and intervenors filed testimony in our current rate case on October 2nd. Staff's initial testimony recommended a 9.4% return on equity, and that compares to our current authorized 10% return on equity. Staff also recommended approval of our actual capital structure at the end of the test year. That's consistent with our request, and that would result in a 54.7% equity layer. The total revenue increase recommended by staff is $89.7 million compared to our request for a $184 million increase. We'll file our rebuttal testimony on November 6th, and staff and interveners will file their rebuttal testimony on November 20th. The hearing is scheduled to begin on December 14th. and I expect it to continue into 2021. While testimony is certainly an important part of the process and it does provide visibility into each party's priorities, we're still very early in the case and we expect that many of the issues will certainly be discussed further as the case progresses. I do want to note that yesterday the Commission voted on several amendments to a proposed energy rules package The amendments include new carbon reduction standard of 100% by 2050 with interim targets of 50% by 2032 and 75% by 2040. The reductions are based off of a 2016 to 2018 carbon emissions level benchmark. The amendments also require electric utilities to install energy storage systems with a capacity equal to 5% of each utility's 2020 peak demand by 2035. and 40% of the required energy storage must be customer-owned or customer-leased distributed storage. Another approved amendment modifies the resource planning process, including requirements for the ACC to approve a utility's load forecast and resource plan and for a utility to perform an all-source request for information to guide its resource planning. Earlier this month, the Commission also voted on another amendment to establish a new energy efficiency standard The standard requires electric utilities to implement demand-side management resources equivalent to 35% of their 2020 peak load by 2030. Eligible demand-side management resources include energy efficiency, demand response, and load shifting. And just importantly, the commission must vote, and I expect they will vote soon, to approve a final energy rules package before any of these amendments can take effect. As we look to wrap up 2020, we'll continue to work with the Commission on implementing a clean energy transition for the benefit of their constituents and for our customers. Recall that we've set an aspirational goal of 100% carbon-free by 2050 and 65% clean by 2030. To do so will require a strong regulatory partnership, support for an organized transition away from coal and fossil fuels, and regulatory and financial support for the expansion of renewables, batteries, and energy efficiency within our portfolio. I think yesterday was a strong indication of alignment with both the Commission and other stakeholders to achieve a cleaner energy vision and energy future for Arizona. Near term, our focus and priorities remain on improving our customer communications, rebuilding our regulatory relationships by reestablishing trust, moving towards a reasonable resolution of our rate case, and continuing to engage with stakeholders to build alignment on priorities that support our goal of providing clean, reliable, and affordable service to our customers. So again, thank you all for your time today, and I'll turn the call over to Ted.