Pinnacle West Capital Corporation

review our fourth quarter and full year 2023 earnings, recent developments, and offering performance. Our speakers today will be our Chairman and CEO, Jeff Goldner, and our CFO, Andrew Cooper. Ted Geisler, APS President, and Jacob Tedlow, Executive Vice President of 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 annual 2023 Form 10-K 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 March 5th, 2024. I will now turn the call over to Andrew.

Thank you, Amanda. And thanks to everyone for joining us today. I will first cover our fourth quarter and full year 2023 results before handing it to Jeff, who will discuss our recent rate case outcome, growth outlook and strategy. Afterwards, I will finish up with our 2024 guidance and long-term financial outlook. In the fourth quarter of 2023, we achieved a 21 cent increase in earnings per share compared to the same quarter in 2022. This year over year improvement was largely driven by a 41 cent uplift in gross margin, attributable to increased sales and usage, as well as higher transmission revenue and contributions from the LFCR and 2019 rate case appeal. The lack of certain prior period items from Q4 2022 contributed to a 21 cent benefit to other income and expense on a year-over-year basis. These increases versus the prior year were partially offset by higher O&M expense, depreciation and amortization, interest expense, and benefit costs. For the full year 2023, we earned $4.41 per share, a 15-cent increase over 2022, surpassing our guidance range of $4.10 to $4.30 per share. A significant factor in this result was a 22-cent year-over-year weather benefit driven by an unprecedented summer heat wave during the third quarter. Overall, weather contributed 48 cents in 2023 compared to normal weather. Revenues from adjuster mechanisms, transmission, and increased sales and usage were also positive drivers for the year. In addition, other income and expense was 33 cents higher year-over-year. driven by the lack of certain prior expense items from 2022 and the sale of Bright Canyon assets in the third quarter of 2023. These increases versus 2022 were partially offset by higher O&M expense, depreciation and amortization, interest expense, and benefit costs. Overall, we ended 2023 with 2% customer growth, maintaining the years-long upward trajectory of consistent growth in our service territory. Whether normalized sales growth was within the expected guidance range at 1.5% in 2023, driven by 3.3% growth in our CNI customer segment. I'll now pass the discussion to Jeff to talk about our rate case outcome, growth outlook, and strategy before I continue with our 2024 guidance and long-term financial outlook.

Great. Thank you, Andrew. And thank you all for joining us today. As you all know, just a few days ago, the Commission voted to approve our 2022 rate case. I'm pleased to say that this rate case decision was ultimately reasonable and constructive. I'll highlight a few of the main outcomes, including an improved authorized return on equity, the approval of a new generation rider, and a balanced revenue requirement increase, among other items. I'll also discuss our growth outlook and future strategy coming out of this case. Lastly, as Andrew mentioned, he'll provide our 2024 guidance and our long-term financial outlook. After the unconstructive outcome of our 2019 rate case, we designed a comprehensive strategy and plan, and I'm pleased to share that we have accomplished the goals that we set out two years ago. We executed on a strategy centered on creating shareholder value by creating customer value, and we've seen significant improvements in our JD Power survey results. Not only have we been successful in moving from fourth quartile in 2021 to second quartile at the end of 2023 for both our residential and our business customers, we finished the year second amongst all large investor-owned utilities in phone customer care and in perfect power. Reliability has continued to be a top priority, and we're once again top quartile meeting this milestone 10 years out of the last 11. This reliability was put on full display during the summer of 2023 when Arizona broke numerous heat records, yet our team delivered outstanding performance for our customers. Another important goal that we set was to build more collaborative relationships with stakeholders in the regulatory process, and we succeeded in achieving supportive regulatory decisions that include both the efficient implementation of our successful 2019 rate case appeal, as well as the most recent rate case. And finally, we focused on shareholder value by deferring any equity issuances and continuing to grow our dividend during this challenging period. Now I'll walk through some of the major highlights of the rate case. The Commission adopted a net revenue increase of $253.4 million. From the very beginning, we focused this rate case on improving the authorized ROE to recognize the risk and the investment needed to serve our rapidly growing service territory, and the Commission did that. The Commission voted to adopt an authorized return on equity of 9.55% with a 0.25% fair value increment. The combination of those two is equivalent to a 9.85 return on equity. With this decision, the Commission has adopted an authorized return that's more in line with national averages and that recognizes that we're one of the fastest growing states in the nation and we need to attract capital in order to fund the investments necessary to reliably serve our customers. In addition, the Commission voted to approve our request for a system reliability benefit surcharge. This is an important surcharge that will allow us to invest in much needed generation resources to continue to serve our customers reliably and affordably while reducing regulatory lag. Importantly, the SRB will allow for the most cost effective generation resources to be built for the benefit of our customers and to promote a healthier balance of PPAs and utility-owned assets. Later on, Andrew will discuss how the SRB provides future opportunities for CapEx growth. It's also noteworthy that the commissioners made positive amendments to the revised recommended opinion and order at the open meeting that increased the net revenue requirement and addressed some items that would have created additional regulatory lag. This highlights the improved regulatory environment and our ability to achieve constructive outcomes. However, even at the final net revenue requirement, the outcome underscores the continued challenge from lagging historical costs. We look forward to working with the Commission on addressing these lagging costs in the near future through both the regulatory lag docket, which will have a workshop on March the 19th, as well as through future rate case filings. Now I'll share our next step and strategies as we look to the future. We're focused on solid execution and continue to remain optimistic about our future for many reasons. And I'll discuss each of these reasons in more detail. First, I'm optimistic about our attractive service territory and consistent customer growth. Arizona remains among the fastest growing states in the nation. Where other states have been experiencing little or negative customer growth, we've been benefiting from steady and consistent retail customer growth of 2% for the last few years and project that growth to continue in the range of 1.5% to 2.5% in 2024. We believe that the constructive business environment with ample job growth, a competitive cost of living, and a desirable climate will continue to grow the Metro Phoenix market and benefit the local economy. Focusing on our service territory specifically, we continue to see development from a variety of sectors, which is helping to diversify our local economy more than ever. The availability of a skilled workforce in our state's business friendly policies and regulations, coupled with our low propensity for natural disasters and our clean energy development potential make us uniquely situated for growth. The tremendous demand that we see from large commercial and industrial customers will help spread fixed costs over increasing sales and has a positive multiplier impact for jobs and surrounding communities. We'll continue to focus our economic development approach on helping to attract and expand businesses and job creators. As you can see from this graphic from the Arizona Commerce Authority, the diversity of the commercial and industrial growth in Arizona presents exciting opportunities. Our state is seeing growth in a wide range of sectors driven by manufacturing reshoring, the clean economy, and digital infrastructure needs, which will help reduce the risk of any potential downturns in a particular industry to keep our economy and growth stable. Turning to our regulatory environment, we've seen meaningful improvement through the last couple of years. The Arizona Corporation Commission has established a record of balanced and constructive decisions, including our most recent rate case. And importantly, beyond those decisions, the Commission has also recognized the need to address regulatory lag in a holistic matter and has opened a docket to review and discuss various solutions going forward and that, as I mentioned, will kick off next month. We look forward to working with the Commission on addressing this important issue. In addition, the Commission reaffirmed its policy on settlements. Historically, outcomes achieved through settlement have delivered new and innovative customer programs and other results that benefit a broad and diverse range of stakeholder interests in our state's energy future. We believe the nature of the settlement process itself yields more informed, constructive, and mutually beneficial results. The third reason that we're confident is the clear path that we're on in our transition to clean energy. We came out with our clean energy commitment in early 2020, and I'm proud that we've made significant progress. We plan on retiring our remaining CHOIA units by next year and to completely exit coal by 2031. Since our clean energy commitment, we've procured nearly 5,000 megawatts of additional clean energy and storage and issued another all-source RFP for an additional 1,000 megawatts of reliable capacity, including at least 700 megawatts of renewable energy. With the approval of the SRB mechanism in this rate case, we're even better positioned to establish ownership in these new clean energy assets for our customers' benefit. The fourth reason I'm optimistic about the future is because of the tremendous amount of growth and opportunities we have in our FERC jurisdictional transmission business. We've increased our core transmission spend for the next three years and expect to have a much greater need for transmission capital spend over the next decade. We recently filed our 10-year transmission system plan with the Corporation Commission showing five critical transmission projects that are needed to strengthen resiliency, support the growing energy needs of our customers, and allow for greater access to a diversity of resources in markets across the region. The total investment for APS's portion of these projects is estimated to total over $5 billion over the next 10 years. We look forward to developing this critical infrastructure that's necessary to continue to provide safe and reliable service to our customers. And finally, I'm optimistic about the future because my entire management team and I have been committed to executing a customer-centric strategy that will allow us to deliver exceptional customer service. As I mentioned earlier, we've made significant progress in our J.D. Power survey results and have moved from fourth quartile in 2021 to second quartile at the end of 2023. Additionally, we're focused on delivering on our goal to provide reliable energy to our customers in the most affordable manner. Increases in our rates remain well below the rate of inflation, even with the latest break case decision. We remain focused on customer affordability and keeping it central to our plans to provide long-term sustainable growth. That focus, coupled with continued cost management, creates rate headroom for the future. I'll now turn the call back over to Andrew to provide guidance and share our long-term financial outlook.