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.

Thank you, Jeff, and thanks again to everyone for joining us today. As Jeff mentioned, I will cover our third quarter results and the impact from weather. I'll also provide additional details around our customer and sales growth, economic development, and financing activities. Lastly, I'll cover our expectations for the remainder of 2020. While we typically provide earnings guidance for the upcoming year on the third quarter call, we historically have not provided forward-looking guidance during a pending rate case. Consistent with that approach, we will hold off on providing 2021 earnings guidance until after the pending rate case concludes. Turning now to the third quarter, the significant tailwind from hotter-than-normal weather supported earnings of $3.07 per share compared to $2.77 per share in the third quarter of 2019. July set a new record for the hottest month recorded in Phoenix until August. August then surpassed July, setting another new record for the hottest month. The above average temperatures this quarter added 26 cents to earnings year over year. For the nine months ended September 30th, 2020, weather added 91 million of pre-tax gross margin or 61 cents per share year over year. We also experienced 2.3% customer growth and 1.3% weather normalized sales growth in the third quarter 2020 compared to the same period in 2019 from may 13th when businesses started reopening after the covet closure period through september 30th weather normalized sales increased one percent compared to the same period last year we continue to see a reduction in weather normalized commercial and industrial sales of five percent offset by an increase in weather normalized residential sales of six percent during this period the strength and speed of our return for positive growth numbers reflects the continued expansion of our local economy following the full COVID closure period earlier this year. Further evidence of our recovery can be seen in the increased number of single family building permits and commercial construction activity. In 2020, we expect a total of 32,000 housing permits, an increase of about 1,200 compared to last year, and the highest number since 2006. The labor market in Arizona has also started to gradually recover from the pandemic impacts as well. For 2020 through the end of August, employment in Metro Phoenix decreased 1.7% compared to 5.6% across the entire U.S. And while manufacturing employment in Metro Phoenix decreased 1.2%, construction employment increased by 0.9%. The ongoing growth of new businesses and residential properties and the 18 construction cranes that are currently visible here in downtown Phoenix are evidence of our continued growth. To serve our growing customer base and support investments in clean energy, in September, we issued $400 million of 30-year 2.65% green bonds at APS. The 2.65% coupon represents the lowest 30-year rate in the APS bond portfolio. Turning to our full-year 2020 guidance, as a result of the above-average weather, we are increasing our 2020 consolidated earnings range from $4.75 to $4.95 per share to $4.95 to $5.15 per share. The weather benefit has more than offset the additional costs and reduction in sales due to COVID-19. We are also increasing our 2020 weather normalized year-over-year sales growth expectations to be between zero and 1%. In light of the weather benefit, we have accelerated the timing of near-term O&M initiatives. For example, we're pulling forward some spend in 2020 that was previously anticipated for future years particularly around project work and customer experience initiatives, as well as one-time opportunities like our $10 million contribution to the APS Foundation, which supports our community nonprofits. Our revised 2020 O&M guidance range of $870 million to $890 million reflects these items. While we believe this increase in O&M demonstrates prudent planning and flexibility through this challenging year, we do remain focused on our lean initiatives and continue to see our core O&M trend down. We are executing our plan to reduce 2020 O&M expense by 20 million, including 10 million through improved procurement and contract management activities, and another 10 million in several small operating efficiencies across the enterprise. We also continue to partner with Arizona State University to train our workforce on lean skills and are excited about the long-term potential in continuing to streamline our business. While we don't enter a year counting on weather to be a driver, we do enter the year prepared to take advantage of above normal weather when it makes sense to do so. This can help us mitigate the impacts of mild weather in future years while also enabling our investment in certain key initiatives that improve customer experience, a focus area for our company. Our resource planning and capital expenditure forecasts have also been revised. The delay in our clean energy procurement impacted by the McMicken investigation slightly reduced our 2020 capital expenditure forecast by 68 million. However, we do remain committed to our clean energy commitments and have made progress with our resource acquisition activities. In September, we executed a 200 megawatt wind PPA with a 20-year term. This is a repower of an existing wind facility and is expected to be fully upgraded with additional capacity in 2021. We also plan to issue two new RFPs, one all-source RFP and an additional utility-owned energy storage RFP at our existing solar facilities. While it was an exceptionally hot summer, we are grateful the weather tailwind allowed us to further increase financial assistance to customers struggling to pay their bills as a result of COVID-19 and to accelerate investments that will enhance the quality of our service and maintain our record for providing top-tier reliability. As Jeff mentioned, we will continue to focus on our regulatory outcomes in the near term while executing our long-term plan to deliver value for our customers, shareholders, and community stakeholders. This concludes our prepared remarks. I'll now turn the call back over to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star keys. One moment, please, while we poll for questions. Thank you. Our first question comes from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.

Hi, guys. Hey, good morning, Michael. On the amendments to the proposed energy rules package, can you give us a sense of how those amendments and how the energy rule package in general would affect the 6% to 7% rate-based growth profile that you currently are predicting and At what point do we get an update on all of this in order to incorporate all of that into it?

Yeah, and let me start, Michael, on just the rulemaking that either Ted or Barbara may want to weigh in. So one thing I think is the alignment that we see from the energy rules package is really important, and there is fairly nice alignment with our efforts to decarbonize by 2050. And I think the interim targets, while the dates are a little bit different, the alignment is still there. And so I think it's consistent with what we were seeing as our plan. It's still got to go through the rulemaking process. So this just starts the rulemaking. It's a formal rulemaking, and that'll likely happen next year.

Yeah, Michael, this is Ted. I'll just say that given that the amendments and the plan where it looks like it's headed is largely consistent with our clean energy commitment, Our rate-based growth that we've outlined was already contemplating carbon-free and clean energy goals consistent with these energy rules. So that's how I think about it.

Gotcha. Great. And also on the rate case, as you're going forward with the staff recommendation out now, I just want to confirm, what would you consider the odds of a settlement process at this point, maybe after the election's over? Is it even possible at this point to get it done, or is there just not enough time?

Michael, this is right now proceeding down a litigated path, and so that's the process that we're following right now. As we've said before, we'd always be open for For those conversations, and it could be a narrower one with some of the individual participants, find alignment, take some issues off the table. So we'd continue to be open to it, but we're focused on the litigated path right now.

Okay, great. That's it for me for now. Thank you. Great. Thanks, Michael.

Our next question comes from the line of Julian Jamolin-Smith with Bank of America. Please proceed with your question.

Hey, good morning, team. Thanks for the time. Appreciate it. Hey, good morning. So perhaps if I can just pick it up where your prepared remarks kind of left off, can you talk a little bit more about the procurements that you just alluded to, for instance, the storage effort here and specifically utility-owned efforts and how that lines up against the cadence of the capex that you all have delineated? When should we see specific projects to line up against the coming years here. Does that make sense?

Yeah, Julian, this is Ted. Appreciate the question, and it does make sense. You know, given the McMicken investigation has now concluded, we have resumed procurement activity for investing in those APS-owned battery storage with the intent that it's in service in 2022. We've also got ongoing procurement activity for additional utility-owned renewable resources from a prior RFP, so look for results of that soon, too. And then additionally, we plan on issuing new RFPs for clean energy resources to be in service in future years. And that'll result, as we've said before, in a blend of PPA and ownership projects. We estimate those through our CapEx guidance now, but we continue to refine as we get nearer to each procurement outcome. And we have specific projects that result from those RFPs.

Got it. Excellent. All right. If I can pivot here to the 2021 outlook, and I know it's difficult to talk about without more specifics from you all, but obviously there seems to be something of a shift in O&M, but I don't want to put words too much in your mouth on this one. How are you thinking about the prospects for earning your ROE and or perhaps describe it as a tailwind in terms of accelerating costs from 21 into 20 at this point? I know without guidance is difficult, but I'm curious if you can help to start to quantify some of that benefit.

Yeah, it's difficult to quantify without guidance, Julian, but what I would say is that we continue to be aggressive about our lean initiatives and cost management. And the acceleration of O&M opportunities this year as a result of hot weather really focused largely in the customer space, community space, and was a pull forward from future years. It'll help us manage opportunities to the extent there's mild weather. But we remain focused despite the unique opportunity this year on cost management and keeping O&M flat with kilowatt hour sales.

All right. Fair enough. That sounds good. I'll leave it there. Thank you all very much. Thanks, Julian. Thanks, Julian.

Our next question comes from the line of Steven Bird with Morgan Stanley. Please proceed with your question.

Hi, good morning. How are you? Hey, Stephen. Good, Stephen. How are you? Doing great. Thank you. I wanted to step back and talk about your generation plans here. It's great to see a pretty aggressive move towards renewable energy. And I was just curious if we did see pretty aggressive federal legislation, including things like tax credits for solar and storage and maybe EV infrastructure and just other elements of things. how much that might change your longer-term planning or maybe near to mid-term as well, but just if there were fairly generous federal incentives, how that might shift your thinking?

Yeah, fair question. I think at this point, without knowing details of what those incentives look like, I would say that it would likely just simply make the assets that we already intend on procuring in order to meet our clean energy commitment and potentially the Commission's energy rules more affordable for customers. But we'll just have to see what the details look like in any potential legislation and then evaluate from there.

Fair point. And then thinking about the just grid impacts of more renewables, there's always been this hope that perhaps the western states could coordinate more closely in terms of grid operations. I know there's been an initiative underway for many years. Do you see any particular changes there that might lead to better grid coordination among the western states?

Go ahead, Daniel. Stephen, this is Daniel. You know, when you look at August and the capacity shortfalls and the corresponding emergencies that were declared in a number of states, I think it exacerbates the need for the utilities in the states and the Western Interconnect to continue their work as it relates to better coordination, better facilitation of interdependencies. with the intended results of ensuring that we have reliability and that generation assets are fully leveraged and utilized across multiple jurisdictions. There's a number, as you mentioned, of working groups in play assessing those issues, and I think over the next six months to a year, you'll see some recommendations that will come forth out of some of those working group activities.

And, Stephen, we see that. We're in the energy imbalance market, and so there is some coordination, and that effort continues to develop.

Understood. Maybe just the last question for me, just thinking through fire risk, I think your prepared remarks touched on a lot of important points. Bigger picture, as you think about just the impacts of climate change and the risk from climate change, How might that continue to kind of factor into your thinking on both CAPEX? And also, how do we think about just the sort of performance standards that you're required to meet? I know your state's very, very different from California in this regard. I just want to make sure we kind of highlight some of those differences. So, for example, in California, we think about certain vegetation management standards, the sort of standard for liability is different. not great from a utility perspective. Just curious if you wouldn't mind just adding a little bit more as you think about climate change risk.

Yeah, so a lot of it is really focused around resilience and making sure that we, for example, protect transmission lines that are bringing remote generation into the valley. And you heard in my direct comments, a lot of that we do with vegetation management, working at defensible space around poles, And so we've got targeted programs out there. We continue to evaluate that. We look closely at what other utilities in the West are doing to make sure that we are adapting any of the best practices that we can. But when you look really broadly around climate impacts, the importance is around resilience. So whether it's looking at, like, microgrids, which we've got at Yuma, for the Marine Corps Air Station, you know, focusing on those kind of investments, we'll see how that ultimately translates as you look longer term. But that's Our focus is making sure we've got a good, resilient, redundant system so that if we have a line go out because of a wildfire, that we've got alternative paths or alternative ways to surf the load.

That's really helpful. That's all I had. Thank you. Thank you.

Our next question comes from the line of Insoo Kim with Goldman Sachs. Please proceed with your question.

Thank you. My first question is on just the renewable investments that you have lined out for 2021 and 2022. Given this current rate case will likely conclude sometime in 2021, and in the absence of a rider mechanism or a certain type of tracking mechanism for this type of investment, what is the general sense of timing for having to file the next rate case to get recovery of those?

And Sue, thanks for the question. That will largely depend on the outcome of this current case, so difficult to predict at this time. But to your point, we have been clear all along that we would intend on being able to seek concurrent recovery for clean energy investments. We think that's the best outcome for customers and our ability to be able to procure at the rate and volume needed to meet our clean energy goals.

Got it. And then in terms of the O&M, I think before the pull forward that you did this quarter, there was some low O&M that you were expecting after COVID happened. So is that incremental amount that seems like a pull forward more largely items that you are going to spend in 2021 that now, because you're doing it in 2020, just gives you that flexibility to manage the 2021 year?

Yeah, I think the way to think about this is these are initiatives that we've had in the pipe as discretionary items that we would like to be able to execute on in future years that hot weather gave us the opportunity to do now. And that gives us then further headroom in future years to the extent we have mild weather, then we can manage that accordingly. Understood. Thank you. Thanks, Instructor. Thanks, Instructor.

Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Hey, good morning. Hey, Paul. Morning, Paul. So my first question has got to do with there are a variety of proceedings and questions and what have you associated with rate design and the tool comparison stuff. When do you think those might be resolved? Will they be may be resolved in the context of the rate case or before or after? Or do you have any sense as to how those things might be eventually resolved?

Hi, Paul. This is Barbara Lockwood. Certainly, there are some items in play in the current rate case that we do expect to be resolved. some moderate changes potentially to rate design, and some conversations that we've been having around customer education, as well as potentially things like what the rates are named. So that is in process, and that will happen through that process. Outside of that, we have made a commitment that we're going to be continuously communicating with the Commission and our stakeholders as all of these issues continue to evolve. So we'll be talking to the Commission on a very regular basis, be it an open meeting or individual updates with our stakeholders, and that will continue as we seek to make progress on all of these issues with all of our stakeholders, including the Commission.

Okay. So I guess I'll sort of stay tuned and we'll see how it progresses. I'm just wondering whether or not there might be we might get some closure, I guess, with respect to this, if there's any sort of timing on that, or is it just sort of a stay tuned kind of thing?

So certainly, we think we've worked through the majority of the issues that have been in play with respect to the right comparison tool. And while there may be some additional discussion, from our perspective, we've taken all the steps that we've needed to take to resolve that issue. And anything remaining will just be updates in that respect. So we can't guarantee where things may evolve from there, but we do believe that we've taken every action that we needed to take to resolve that issue, and we've had numerous discussions about it, and it should be nearing the end of that conversation.

Okay, awesome. They have been numerous. So good. Good to hear. And then just on, could you give us an update on with this weather and everything else or where things stand in terms of rearage customers, you know, COVID and everything, how they're managing in terms of paying their bills?

Yeah, Paul, I appreciate the question. At this point, you know, we monitor that closely but still expect that the allowance we set forth for $20 to $30 million is consistent with where we think things are coming in, but we'll continue to monitor closely, obviously, as things evolve. We did feel it was appropriate to extend the disconnect moratorium through the end of the year. We think that's the right thing to do for our customers. But even given that extension, we believe that the allowance we have identified is appropriate. Okay.

And then with respect to the storage investigation and just in general, I mean, I know you guys are looking into this. You know, this is obviously sort of something that you guys have been focusing on and stuff. Any takeaways or any thoughts, you know, sort of about how you approach storage? I mean, is it sort of just a one-off thing and it doesn't really mean much? Or is maybe, you know, selection of vendors? Or I don't know, do you have any sense or any takeaways that we might think about with storage? And, you know, just going forward, any thoughts or insights that you've gained from this process?

Yeah, Paul, it's Daniel. And there's no doubt that off of our McMakin experience, we've learned a number of things, quite a few things that we will put into play on a going forward basis. Energy storage, in order for us to meet our clean energy commitment, and frankly, as it relates to the energy rules that were discussed and tentatively agreed to yesterday at the commission, Battery storage, energy storage is a critical component of our ability to meet those obligations. We've expanded our internal knowledge off the McMicken event incredibly as it relates to design, engineering, safety protocols, and mitigation steps. Having our employee, a number of consultants who we're using on a going forward basis to help us assess vendor and product design. technologies, and again, underlying systems, both mitigation and preventative. And I have a high level of confidence that we are in a much better position today than we've ever been as it relates to understanding the technology, its associated risks, and are in a much better place as it relates to design, engineering, and safety protocols. We've learned quite a bit, and I think we're in a pretty good place.

Okay. I'm just wondering if there's any sort of easy takeaway for us analysts who are not doing anywhere near the kind of work you guys are in terms of any sort of general sort of technological thing that you came up with, or maybe not. Maybe it's just too detailed. I'm just wondering if there's something that you could share with us or –

Yeah, a couple of general themes, Paul. As we move forward, we will consider containerized but not occupiable as a design alternative as compared to the occupiable containerized system that McMicken was. I believe there'll be changes. I trust there'll be changes in both fire suppression and the arresting, if you will, of what's called thermal runaway when battery cells fail. And we are moving forward under the absolute belief that cells will fail in the future and that we've got to design, engineer, and establish safety protocols to deal with that. You may very well see some wet or dry standpipe installations as it relates to a water cooling mechanism as mitigation infrastructure to deal with thermal runaway. Those are some of the things that we've extracted from the McMicken experience.

Okay, great. And then finally, I was wondering if you wanted to opine on what the election might bring us. And I, of course, understand if you help. But are there any polling trends or anything that you think we should be looking out for there, or should we just wait a few days? I don't know. I'd just wait. Paul, I don't think you can see a lot right now. Okay. Thanks so much. Hang in there. Thanks, Paul. Thanks, Paul.

Our next question comes from the line of Sophie Carp with KeyBank. Please proceed with your question. Hi. Good morning.

Thank you for taking my question. Sure. I was just wondering, yeah, I was just wondering about the rate case and if you can prepare your rebuttal, what are some of the key items that you identified where you disagree with the staff or where you think there's room for them to move more towards the middle ground versus their recommendation?

Sophie, so we're in the middle of working on the rebuttal testimony right now, so probably not able to really go into a significant amount of detail about that, but obviously what we do is we look pretty carefully at The testimony that comes in, we see if there are issues, and there inevitably are. There are some issues where we're like, you know what, that's a good point, and let's make an adjustment to that. And then there are some issues where we're going to try to clarify or explain what we meant in the initial filing. And so we're not too far away from getting that rebuttal testimony filed. I think you'll be able to see the highlights of where that is on November 6th. when we make that. So sorry it can't be a lot more helpful right now on it, but it's not too far down the road.

Thank you. Yeah, I was kind of hoping to get some sneak peek of that. But I also wanted to just make sure I understand the stance on the O&M, right? So clearly you guys had a very good quarter with the weather help, and you pulled forward some of the O&M. What is the reason that you didn't pull forward more? Is that strictly driven by kind of the customer rate consideration, trying to balance the O&M per megawatt hour, or was there just not enough projects in the pipeline that were easily pullable forward, if you will?

Yeah, Sophie, appreciate the question. I think there's many factors that go into that evaluation, but we want to make sure that we balance projects that immediately add value that we can execute. and that are prioritized amongst a myriad of criteria as we rank and order every project that we plan for and decide to fund. So it really just went through our normal prioritization and ranking exercise, and we pulled forward initiatives that we felt were prudent and could have an immediate impact, particularly in the customer experience and customer focus space.

Thank you.

Thank you, Sophie. Thanks, Sophie.

Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.

Hi. I just want to follow up on the battery storage. Make sure I'm up to date on this. That facility that had the incident has still not been energized. Am I correct about that? I mean, you never completed all the repair and felt that it was in a condition you could start using it again, correct?

Charles, this is Daniel. That is correct. It has not been recommissioned, and it will not be recommissioned. We're working with the vendor on make-whole remedies as it relates to our contractual arrangements. Okay.

And then, specific to, you know, again, following up on battery storage, I would think, or tell me if my assumption is correct or not, that the extremely hot weather creates some challenges for APS with respect to battery storage that maybe a typical utility doesn't face. Is that is that true?

Again, Charles, this is Daniel. No, that's not quite true. The containerized systems are air conditioned and cooled to certain optimal operating temperatures. And so Arizona's high summertime heat does not introduce any additional risk as it relates to the underlying technology.

Okay, so it sounds like you're going to have battery storage. It's just a question of some maybe different technology and some advancements that occur, correct?

Yes, we'll employ the learnings off of McMicken, other learnings from the general industry and technology development that have occurred since McMicken, and be prepared to move forward with what we believe to be a superior engineering design and set of safety systems to ensure battery success moving forward. Okay, that's very helpful. Thanks, Daniel.

That's all I have. Thanks, Charles.

Our next question comes from the line of Shara Pariza with Guggenheim. Please receive your question.

Hey, guys. Good morning. It's actually James from Shara.

Hey, James.

Just one quick question about the energy rules. I could just follow on the earlier ones. There was some discussion from one commissioner, I think, about including a spending cap I was just wondering if you could give us a little bit of background on that, and then do you see something like that actually getting into the final package at this point?

Hi, James. This is Barbara Lockwood. Yes, that was Commissioner Olson, and Commissioner Olson is not a supporter of any sort of clean energy requirement, and so he was attempting to insert a requirement that consistent with his philosophy that it should only be low-cost resource. That's the only guiding force for energy resource investment across the board. So it was not supported. It was supported by one other commissioner, and it was not approved on a 3-2-2 vote. So I would be very surprised if there is any support on a going-forward basis for that sort of cap. Having said that, we do have an election next week, and depending on the outcome of that, there could be a different perspective. But as it sits today, we believe there's broad support for these clean energy rules and that that sort of requirement is not going to be successfully passed or incorporated into these rules.

Okay. And then just the schedule for finalization of the package, I guess, have they set a date yet?

So, James, good question. They have not set a date yet. If you were listening yesterday, they voted on all of the amendments that were there. They actually moved the amended item, but then they recessed before they voted the final package, and that was because they needed to put together the final package and all the conforming changes to make sure it was exactly what they wanted to vote on at the end of the day. And the chairman indicated when they had that package, they would reconvene and then take the final vote. So we don't have any indication as to when that's going to be, but we do think it'll be relatively soon that they would like to get this done. Now, having said that, keep in mind, this is a vote to go to the final rulemaking process. So there will be another vote before these rules become final and effective, and that will happen likely next year. Okay.

Thank you very much. That's it for me. Thanks, guys. Have a good weekend. Good. Thanks, James.

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you for joining us today. This concludes our call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.