Pinnacle West Capital Corporation

Greetings and welcome to the Pinnacle West Capital Corporation 2021 Second Quarter Earnings 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 second quarter 2021 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, Barbara Lockwood, Senior Vice President, Public Policy, and Jacob Tetlow, Executive Vice President, Operations, 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. Today's comments and our slides contain forward-looking statements based on current expectations and actual results may differ materially from expectations. Our second quarter 2021 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 August 12th, 2021. I will now turn the call over to Jeff.

Thank you, Stephanie, and thank you all for joining us today. I know that the release of the recommended opinion and order in our pending case is the most significant development for all of you, and both Ted and I will discuss that shortly. But I do want to cover some operational and customer matters before we go there. So as we progress through the summer season, I'm proud to say our team continues to excel in delivering reliable service to our customers. Arizona experienced several dozen sizable wildfires in June, with only mild damage to our infrastructure and minimal customer outages. We have strong vegetation management and fire mitigation programs, as well as mandatory line inspection prior to re-energizing in high risk areas. And all of these contributed to the protection of our infrastructure and reliable service for our customers. We also successfully navigated through an early summer heat wave that resulted in six consecutive days of at least 115 degrees and three days approaching our all-time peak demand. Our resource procurement efforts and reserve margin standards ensured that we were able to meet the needs of our customers through the hot summer last year, through the early heat wave this year, and we expect these efforts will continue through the balance of the summer. Following the heat wave in June, July brought a relentless series of monsoon storms. So it's good to see the monsoon back, but that does present challenges for us. In a five-day period during mid-July, our teams restored power to more than 120,000 customers affected by storm-related outages, and we effectively communicated with our customers regarding outage status and expected service restoration times. Our field crews worked in wet, humid, and muddy conditions with no safety events. I'm extremely proud of their exemplary work and the level of service that they've provided. With the weather we've already experienced this summer, it remains as important as ever to continue assisting our communities through our heat relief support programs. APS has partnered with St. Vincent de Paul, the Salvation Army, and Lyft to ensure that Arizonans have access to an emergency shelter and eviction protection programs, to cooling and hydration stations, and have transportation to the nearest cooling shelter as part of heat relief initiatives offered throughout the summer. This is another example of our effort to collaborate for the benefit of our customers, our communities, and our company. That focus on customer experience remains a top priority as we look to improve our JD Power customer satisfaction scores. We're pleased to see a measurable increase in our year-to-date residential customer satisfaction, but we recognize there's more work to do. We understand the importance of a high-quality customer experience, and I'm grateful and proud of our teams for employing a continuous improvement mindset to drive change for the benefit of our customers. So now on to the regulatory front. As you all know, the administrative law judge issued the recommended opinion and order for our rate case on August 2nd. I will say that we are disappointed and concerned by the recommendation, which would not appropriately allow for the recovery of important investments needed to serve customers reliably. Ted will speak to our estimates of the potential financial impacts that the RUE were to be adopted by the Commission. However, I do want to note that this is a recommendation from the Administrative Law Judge. It's not yet a final order of the Commission. A summary of the key points from the RU can be found in our investor deck on slide 23. From that, you can see that the administrative law judge recommended a $3.6 million revenue increase or a non-fuel $29 million revenue decrease, a 9.16% return on equity, an implied 0.05% return on fair value, the disallowance of the deferral and investment in the Four Corners SCR project, and recovery of the deferral and investment in the Ocotillo Modernization Project. There is no question that Four Corners has been a critical asset in serving our customers through the record heat the past several years. Without the EPA-mandated installation of SCRs, that plant would not have been allowed to operate and there just is not enough capacity in the West to reliably run the system without Four Corners. We continue to believe that the Commission and other stakeholders recognize the importance of investing in assets such as Four Corners to maintain reliability given the challenges that we've all seen in the West. And we've seen that as we work through the California Wheel-Through Order and the concern that the Commission has expressed on limitations that reliability challenges in a neighboring state is imposing on Arizona. So Four Corners is critical for us to continue to serve our customers, and our goal is to continue to work with the Commission to recover prudent investments and ensure that quality service can be maintained for our customers. The route, if approved as is, would put this objective in jeopardy. So where are we procedurally? We'll file exceptions to the RU. They're currently asking for exceptions on August 23rd, and then the Commission will schedule the case to be voted on at a future open meeting. We would expect the decision on this rate case to be issued during the third quarter of 2021. If the outcome of the case does not provide for necessary investments to support customer growth and to maintain the financial health of the company, we have the option to petition the Commission for reconsideration of that decision to challenge the legality of the decision through the court system or to file another rate case. And we will evaluate all of these options after the conclusion of the case to determine the best path forward to serve our customers and to provide value and predictability to our shareholders. In the meantime, we'll follow the rate case procedural schedule and we'll articulate and advocate the areas in which we disagree with the recommended order. On the ESG front, in May the Commission voted to preliminarily approve new clean energy rules that would provide for a final standard of 100% clean energy by 2070 with interim standards, the first of which requires a 50% reduction in carbon emissions by December of 2032. A final Commission vote on the clean energy rules package is required for the rules to become effective. We think we're well aligned with the Commission on the interim goals and expect to continue our current path to achieve 100% clean energy by 2050. We've executed a contract for an additional 60 megawatts of utility-owned energy storage to be located at our APS solar sites. This contract with a 2023 in-service date will complete the addition of storage on all of our current APS-owned solar facilities. In addition, we're working through our current all-source RFP for 600 to 800 megawatts of additional resources, with decisions from that RFP expected in the third quarter of this year. Our MSCI ESG rating improved from a single A to a double A this year, with MSCI noting our strong water management performance and decarbonization efforts as key score attributes. So we make good progress through the first half of this year, improving our customer experience, enhancing our stakeholder relationships, and working towards achieving our ESG and clean energy goals. We need to work through the recommended opinion and order and ensure that our perspective is understood by the Commission. So there's certainly more work to do, but I do want to acknowledge the team's dedication and commitment. And with that, I'll turn the call over to Ted. Thank you, Jeff.