Pinnacle West Capital Corporation

Andrew Cooper. Ted Geisler, APS President, and Jacob Tetlow, EVP 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 first quarter 2024 Form 10Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language, as well as the risk factors and MDNA 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 May 9, 2024. I will now turn the call over to Jess.

Thanks, Amanda, and thank you all for joining us today. 2024 started off in line with the financial guidance that we provided on the fourth quarter call in February. And before Andrew discusses the details of our first quarter results, I'll provide a few updates on our recent operational and on regulatory developments. With the temperatures in Arizona quickly heating up, we're focused on executing our robust summer preparedness program with the resource adequacy continuing to be extremely important as energy demands increase and energy supplies in the Southwest tighten. To serve our customers with top-tier reliability, we work year-round on operational preparedness, resource planning, procuring sufficient reserve margins, creating customer partnerships to manage peak demand, and maintaining a comprehensive fire mitigation program. In fact, as we head into the wildfire season, the company is taking further action to protect our customers and our communities from the risk of wildfires. Our comprehensive fire mitigation strategy includes three key categories to ensure defense in depth. First, we have a robust vegetation management program, including creating defensible space around poles and infrastructure and strong coordination with forest management officials around the state. Second, we deploy technology that's targeted at managing wildfire risk, and that includes weather stations, cameras, remote control, sexualizing devices, and advanced risk modeling software. And third, we apply several risk-informed operating protocols, such as specific requirements for how our crews work safely in fire-prone areas, in addition to new protocols such as public safety power shutoffs, or PSPSs. While PSPS is a new protocol for our program, we've been working on this implementation following last summer, and we've partnered with local communities, first responders, and state officials to ensure that our customers are informed and know what to expect. We've had community workshops and we've invested a lot in customer communications to ensure that this is a transparent process. We're committed to actively taking steps to prevent wildfires and to safeguard the communities that we serve while continuing to learn from operating experience developed throughout our industry. Turning to our operational preparedness, it's extremely important that our generation units are ready for the summer. We're in the final stages of our planned maintenance activities for our thermal units, ahead of the summer period to ensure our system is ready to serve. In addition, Palo Verde's Unit 3 is currently in a planned refueling outage that began on April 6, and it's on schedule to return to service in early May. Upon the successful completion of the latest refueling outage, all three units are poised to provide around-the-clock clean energy to help meet the demands of the summer for the entire desert southwest. I'm also proud to say that we're starting this year with J.D. Power residential customer satisfaction survey scores that place APS within the first quartile for overall satisfaction when compared to its large investor-owned peers. APS made gains in every category, including power quality and reliability, price, corporate citizenship, billing and payment, communications, and customer care, both digital and phone, in the first quarter. Results like this take the dedication and the commitment of all employees across the company, and we look forward to continuing to make improvements for our customers and providing a more frictionless experience. Turning to regulatory, we've successfully implemented the rate case outcome on March 8th for our customers. The Commission recently voted to hold a narrow rehearing on our rate case that's limited to the grid access charge. That charge is a rate design issue. where the Commission had increased the revenue allocation to distributed generation solar customers to better align their rates with cost of service. The Commission intends, I think, to further examine whether the grid access charge is just and reasonable and will be participating in those proceedings. Additionally, the Commission has turned its focus to the regulatory lag docket The first workshop was held on March 19th with multiple stakeholders presenting a variety of options on how to holistically address regulatory lag. And interested parties have been invited to file written comments into the docket, and the Commission has voiced their intent of having further workshops that will be noticed in the future. We look forward to continuing to work with the Commission and with other stakeholders on addressing regulatory lag in Arizona. Although 2024 is off to a solid start, we know we have much to do still, and we look forward to continuing to execute on our priorities throughout the year. And with that, I'll turn the call over to Andrew.

Thank you, Jeff, and thanks again to everyone for joining us today. This morning, we reported our first quarter 2024 financial results. I will review those results and provide additional details on weather, sales, and guidance. In the first quarter of 2024, we achieved earnings of 15 cents per share compared to a loss of 3 cents per share in the first quarter of 2023. This improvement was driven by several key factors, the sale of Bright Canyon Energy, the implementation of new rates on March 8th, along with increases in adjuster revenues, and finally, robust customer and sales growth. These positive impacts were partially offset by milder year-over-year weather and increases in interest expense depreciation and amortization, and O&M. The Bright Canyon Energy transaction provided a one-time benefit of 15 cents per share this quarter. This follows the initial phase of the sale completed in the third quarter of last year. In addition, as Jeff mentioned, we successfully implemented new rates for our customers in March and are seeing a benefit from these new revenues. Turning to weather, although conditions in the first three months of this year were normal, we experienced a drag of 7 cents per share year over year. This drag can be attributed to the exceptionally cold start in 2023, which was one of the coldest in the Phoenix metro area since 1979, and to March 2023 being the coldest March in over three decades. Customer growth for the quarter came in as expected at 1.8%, and consistent with our guidance range of 1.5% to 2.5%. Our weather normalized sales growth came in at 5.9% for the quarter, driven by robust CNI growth. Because first quarter is historically a smaller quarter for the company, we are still expecting our weather normalized sales growth to come in within our existing guidance range of 2% to 4% for the year. Arizona's economy remains a diverse growth and investment hub. A prime example of this vibrant economic activity is Taiwan Semiconductor. which recently announced a $25 billion increase to their previously announced $40 billion investment in Arizona for a total of $65 billion. TSMC announced plans to build a third facility by the end of the decade, and the facilities are now expected to employ more than 6,000 workers, of which TSMC has already hired over 2,000. In addition, there continues to be sustained interest for additional data center and manufacturing development within our service territory. Although these developments are outside of our current three-year sales growth guidance, they represent significant long-term opportunities for earnings growth and the potential for enhanced cost efficiency for all our customers. Residential growth in our region has been consistently strong. Maricopa County was recognized by the U.S. Census Bureau as the fourth largest growing county in the nation in 2023, welcoming over 30,000 new residents. This ongoing influx of residents underscores the need for continuous investment in our infrastructure to ensure reliable service for all our customers. Our current capital expenditure and financing plans are designed to meet these expanding demands effectively. O&M was a slight drag compared to Q1 2023. The effect was less than expected, primarily due to delays in procuring essential materials needed for planned maintenance work at our power plants. These delays are expected to shift the timing of certain costs from first to second quarter. Despite ongoing inflationary pressures and the costs associated with supporting our expanding customer base, we remain committed to our 2024 O&M guidance, which is a year-over-year reduction in core expense. Interest expenses higher this quarter compared to the first quarter of last year, driven by increased interest rates and higher debt balances. and we continue to monitor the actions of the Federal Reserve. In addition, our depreciation and amortization expense is higher as one of two large planned information technology projects went into service this quarter. These projects are extremely important to make sure we have updated systems and the tools necessary to reliably serve our customers. Due to the shorter depreciation schedule for IT projects, we expect these expenses to create meaningful drag throughout the year and have already accounted for them in our annual guidance. After the constructive rate case outcome, we successfully completed our planned equity offering of about $750 million of common stock in a forward sale. We will determine the most opportune time to settle the forward sale agreements and invest the funds into the utility to maintain a healthy and sustainable capital structure. In addition, the rating agencies have completed their reviews of our ratings and importantly, all three rating agencies have resolved our outlook from negative to stable. Moody's and Fitch downgraded Pinnacle West ratings by one notch, with Moody's downgrading APS ratings one notch as well, and we are now similarly rated by all three agencies. We continue to focus on reducing regulatory lag and sustaining our targeted cash flow metrics with adequate cushion to maintain solid investment grade credit ratings for the benefit of our customers. Finally, we are reaffirming all other guidance provided on the fourth quarter call and look forward to continuing to execute our strategy and reliably serving our customers as we head into the upcoming summer season. This concludes our prepared remarks. I will now turn the call back over to the operator for questions.