Pinnacle West Capital Corp Q3 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to the Pinnacle West Capital Corporation 2021, Third Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Amanda Ho, Director of Investor Relations. Ma'am, the floor is yours.

Thank you, Kate. I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2021 earnings, recent developments and financial outlook. Our speakers today will be our Chairman, President and CEO Jeff Guldner, and our Senior Vice President, CFO Ted Geisler. Barbara Lockwood, Senior Vice President public policy is also here with us. First, I need to cover a few details with you. We will be advancing the slides as the speakers present today. The slides that we will be using are also 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 Third Quarter 2021 Form 10-Q 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 12th, 2020. Now, I will turn the call over to Ted.

Thank you, Amanda. And thanks again, everyone for joining us today. These are indeed challenging times for us, but right up front, I want to make it clear that while we may be navigating some short-term challenges, as you'll see, the midterm prospects post 2022 are positive. And we remain confident in our ability to create renewed growth and deliver strong shareholder returns. I know the conclusion of the 2019 rate case is the most significant development and everyone is interested in hearing more about that. But before we cover the rate case, you can see from the four main topics we will discuss today. I will cover our Third Quarter results and our expectations for the remainder of 2021. I will then turn it over to Jeff to discuss our rate case outcome, next steps and strategy coming out of this case. Finally, I will wrap up with 2022 guidance and our long-term financial outlook. Focusing on the third quarter, our performance remains strong, earning $3 per share compared to $3.07 per share in the third quarter of 2020. Mild weather was a significant factor, largely offset by strong sales. We experienced a mild July and August driven by one of the wettest monsoon seasons in recent history. Residential cooling degree days in the third quarter decreased 27.5% compared to the same time a year ago. And were 10.6% lower than historical 10-year averages. As a reminder, third quarter last year was the hottest on record. Robot sales and usage growth in addition, increased transmission sales this quarter mitigated most of the weather impacts. Looking at full year, I'll provide an update to the 2021 key drivers and earnings guidance, customer growth, and weather-normalized sales growth remain important drivers for the remainder of the year. We are updating weather-normalized sales guidance to 3 to 4% up from 1 to 2% based on continued robust customer growth and strong residential usage. Lastly, with the conclusion of the 2019 rate case, we're now able to provide full-year guidance. We expect earnings per share to be within the range of $5.25 to $5.35 per share. Before I continue with our long-term financial outlook, I will turn it over to Jeff to provide an update on our rate case.

Thanks, Ted. Thank you for joining us today. As you know, after a series of meetings and discussions, the commission made a final decision in our 2019 rate case. This case was complex, with many issues. I'll highlight a few key decisions regarding the revenue requirement, SCR, and ROE, as well as our strategy moving forward. As Ted mentioned, he will provide guidance for 2022 and our long-term financial outlook. This outcome was not what we were hoping for, and the process was not constructive. Our concerns about this decision remain valid. It complicates and increases the cost of our commitments, but it does not change our mission or commitment to delivering value to our customers and investors. Our employees remain dedicated to operational excellence. We are leveraging our expertise in long-term planning, cost management, innovation, and advocacy for the Arizona business community to develop a strong strategy moving forward. We stand firm in advocating for the best interests of our customers and communities as well as our investors, whose confidence allows us to provide essential products and services that support Arizona's economy and lifestyle. We appreciate that support and will outline our plans to create value despite the challenges posed by this case. This case was unique for several reasons. We were required by the commission to file based on whether we were overearning and were compelled to fully litigate instead of pursuing settlements. It's been over 15 years since our last fully litigated rate case. We still view rate case settlements as standard, making this situation an exception. Moreover, this case focused on the cost recovery of coal assets, whereas our future investments will be based on infrastructure that supports clean energy and enhances customer growth. Now, let me summarize the major decisions made in the case. The commission approved a total base rate decrease of $119 million, including fuel. They reversed their initial decision to move the SCR issue to a separate proceeding, offering partial recovery of the SCRs but disallowing $216 million, a decision we disagree with. We believe the investment in the SCRs was necessary to keep the Four Corners Power Plant operational under federal regulations. Additionally, the commission lowered the ROE from a recommended already low 9.16% to 8.7%, significantly below the national average of 9.4% for electric utilities, with which we disagree. Our commitment to customer service warrants a penalty-free ROE, especially since we are one of the fastest-growing states and need to attract capital for growth and economic development in Arizona. The commission also deviated from the norm of providing a risk premium for operating the largest clean nuclear generating station in the country. We will navigate these challenges by utilizing our growth potential and seeking judicial review of the decisions made. While we are disappointed with the commission's ruling, we now have clarity for moving forward, so let me outline our next steps and strategy. We remain optimistic about our future for various reasons, which I will elaborate on. We have a solid performance track record, consistently growing earnings and dividends, even as we adapt to this rate case outcome. Despite the regulatory challenges, we believe we can generate long-term value and steady growth moving forward. Ted will later outline our financial outlook and the management actions being taken. Alongside our earnings track record, we have fulfilled our promise of providing affordable energy, exemplified by a 6% weather-normalized increase in residential electricity demand from 2018 to 2020, while lowering average residential bills by over 7% in that same period. We prioritize customer affordability, which is central to our sustainable growth plans. This commitment, combined with ongoing cost management, provides us with future potential. Another reason for our optimism is our superior service territory. Arizona remains one of the fastest-growing states, and while some areas face stagnant or declining customer bases, we're expecting 1.5% to 2.5% growth in retail customers and 3% to 4% growth in weather-normalized sales in 2021. Maricopa County alone is projected to see 43,000 housing permits this year, the highest since before the Great Recession. The favorable business climate, job growth, low cost of living, and appealing climate are expected to keep the Phoenix housing market growing, positively impacting the local economy. Specifically in our service territory, we're witnessing development across multiple sectors diversifying our local economy. Notably, Phoenix is becoming a significant hub for high-tech and data center businesses. Earlier this year, Taiwan Semiconductor started construction on a $12 billion project, establishing Phoenix as a leading semiconductor location. Recently, Core Power announced plans for a million square foot lithium-ion battery manufacturing facility. We will continue focusing on fostering economic development to attract and grow businesses and job creators. Our third point of confidence is a clear path to clean energy. After announcing our clean energy commitment in early 2020, we have made significant advancements. Earlier this year, we revealed that our Four Corners Power Plant would start seasonal operations in 2023, leading to a 20% to 25% reduction in annual carbon emissions. We also plan to end coal usage in our remaining Cholla units by 2025 and completely exit coal by 2031. Since our commitment was made, we've added nearly 1400 megawatts of clean energy and storage. Arizona's excellent solar conditions further position us to take advantage of this resource for our clean energy transformation. Regarding our regulatory environment, despite the challenges presented by this last case, I believe we can navigate it effectively moving forward. It's essential to note that this case was unique in many ways. We aim to file a new rate case as soon as possible and seek to improve the ROE in line with rising interest rates and competitor returns. Historically, settled outcomes have produced new, innovative customer programs and positive results for a broad array of interested parties in our state's energy landscape. We will strive for a negotiated outcome in our next case because we believe that process fosters informed, constructive, and mutually beneficial results. We will engage with stakeholders and regulators to enhance prospects for all parties involved. Finally, I'm optimistic about the future due to our thoughtful long-term strategy, which my management team and I are committed to executing. We have refocused on the customer and established a customer-centric strategy, enabling us to deliver exceptional service. We have ranked as the most improved large utility in J.D. Power's 2020 Residential Electric Service Study and are dedicated to ongoing improvements. In the near term, our focus remains on enhancing customer experiences, communication, ensuring safe and reliable service, and engaging with stakeholders to promote our shared goals of providing clean, reliable, and affordable energy to Arizona residents and businesses. I'll now hand it over to Ted for guidance and to share our long-term financial outlook.

Thank you, Jeff. Now, we'll review our guidance for 2022 and our long-term financial outlook. As Jeff mentioned, we didn't achieve the outcome we were hoping for with the recent rate case, which acts as a regulatory reset. We are providing an earnings guidance range for 2022 of $3.80 to $4 per share, considering the full impact of the rate case. This represents a notable decrease compared to 2021, and we've outlined the key factors driving this change in earnings. Starting from the midpoint of our 2021 guidance and detailing the factors leading us to 2022, the most significant impact comes from the recent rate case decision with a negative effect of $0.90. This includes an additional $13 million downward adjustment on top of the $90 million net income impact we estimated last quarter. Furthermore, the growth in depreciable plants, increased interest expenses from new financing needs, and lower pension OPEB non-service credits are contributing negatively as well. We are committed to cost management and expect that our operational and maintenance savings will positively influence our ability to meet our 2022 guidance range of $3.80 to $4 per share. Looking ahead, we are ready to utilize all available strategies to alleviate the effects of this case and remain optimistic about creating long-term value. Investors can anticipate seven objectives from us, which I will outline. We expect to achieve strong long-term earnings growth starting from 2022 for the next five years. I want to be clear that we project a 5% to 7% earnings growth based on our 2022 guidance, while acknowledging that the base year of 2021 has a lower growth rate of about 1% to 2%. However, we believe 2022 is the proper reference point for our long-term outlook, given the valuation reset that has occurred. We are focused on enhancing shareholder value moving forward. Several factors could boost our growth guidance, including the potential for increased investment in clean energy if we achieve favorable cost recovery. Economic development opportunities may also drive higher sales and customer growth, which could further enhance our guidance. The second objective for shareholders is an optimized capital management plan. As Jeff noted, we are seeing steady growth in our service areas, which primarily drives our capital plan. We expect average annual customer growth to remain between 1.5% and 2.5% through 2024 due to steady population growth. Additionally, we project average annual sales growth of 3.5% to 4.5% through 2024 on a weather-adjusted basis. Our updated capital plans now total $4.7 billion from 2022 to 2024. While this is a slight increase from previous levels, we believe it is a prudent decision until we can secure timely and favorable cost recovery. We are dedicated to managing our capital plan in a balanced way that supports customer growth and reliability, while also facilitating our clean energy transition, all while limiting our equity needs to minimize dilution as we recover from this case's outcome. From 2019 to 2024, we anticipate steady rate base growth at an average annual rate of 5% to 6%. Notably, our FERC jurisdictional transmission investments contribute significantly to this growth, representing nearly a quarter of the total rate base. These investments benefit from strong authorized returns and more favorable cost recovery mechanisms in our ACC jurisdictional projects. This steady growth positions us to achieve solid earnings growth from transmission in the future. Regarding our financing plans, we previously stated that we would issue equity before the next rate case. However, we acknowledge this case's non-constructive outcome, and we are dedicated to protecting shareholders from further dilution. Thus, we are postponing our equity issuance with no plans to proceed until after the next rate case concludes. In the meantime, we will capitalize on our sales growth and our solid balance sheet to meet investment needs. While our plans include equity or equity alternatives, we do not intend to source them before 2024, thereby protecting investors from dilution during this timeframe. Concerning operational and maintenance expenses, we have a strong history of disciplined cost management and resilience. We have launched additional cost-saving initiatives, recognizing the significance of efficiency and lean practices. Accordingly, we are updating our guidance to indicate: 1. A reduction in O&M expenses from 2021 to 2022, 2. A goal of keeping total O&M expenses flat during this period, and 3. A goal of reducing O&M expenses per kilowatt-hour. Our management team will continue to prioritize cost management and lean processes to counter inflationary pressures and regulatory delays. Another key aspect for investors is our appealing dividend yield. Yesterday, our Board of Directors approved an increase in our quarterly dividend from $0.83 to $0.85 per share. We have steadily raised our dividend for ten consecutive years and remain committed to this growth. Our long-term goal is to increase the dividend in line with earnings growth, targeting a payout ratio of 65% to 75%. While we are not currently at this level, we are confident in our strategy and believe we will eventually align with this goal. Finally, regarding our balance sheet, we continue to uphold a robust financial position that offers us flexibility with our capital sources in the coming years. We boast an attractive long-term debt maturity profile, with no debts maturing at APS until 2024. Additionally, we have strong and sustainable liquidity sources, including $1.2 billion of credit facilities recently extended to 2026 and a well-funded, largely derisked pension. Despite a recent downgrade by Fitch and the credit assessments by Moody's and S&P, we maintain solid investment-grade ratings. Our balance sheet targets focus on three areas: maintaining our credit rating strength, ensuring that our EPS equity layer remains above 50%, and achieving an FFO-to-debt ratio of 16% to 18%. In conclusion, we are taking decisive actions during this reset and have a plan for attractive growth moving forward. Importantly, we will delay all equity issuance until 2024 and continue to lower O&M expenses while optimizing our balance sheet and capital strategy during this reset phase. In return, we offer a competitive dividend yield among our peers, currently around 5%. Even with the current valuation, our yield remains more attractive than competitors’. Furthermore, we project long-term growth rates of 5% to 7% from 2022 over the next five years. With our appealing dividend yield and solid earnings CAGR, we anticipate a total shareholder return of 10% to 12% going forward. In the short term, we are fully focused on safeguarding investor interests during this reset period and transitioning toward a renewed growth phase to deliver competitive returns. We remain optimistic about what lies ahead. Although the final outcome of this rate case was disappointing, we have a clear path forward based on our long-standing positive track record in rate cases, solid growth in our service territories, ongoing balance sheet stability, and a management team dedicated to taking proactive measures. This concludes our prepared remarks. I will now hand the call back to the Operator for questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, we ask that while posting your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. And our first question today is coming from Insoo Kim at Goldman Sachs. Your line is live. You may begin.

Thank you for the disclosures today. My first question is for Ted. I'm trying to understand how we reached the 2022 guidance midpoint of $3.90. A couple of things stood out to me; it seems like the depreciable plant and perhaps the O&M component were higher than I anticipated. Additionally, I noticed something with the pension item. I'm not sure if this was already known or if it's just my perception, but could you elaborate on those items in detail? Finally, you mentioned strong sales growth, but it wasn't clearly outlined in this discussion. What assumptions are we making here?

Happy to and thanks for the question. First, depreciation is certainly a drag, particularly given that the test year for this case has been over 2 years ago, so we've continued robust investments since then, and that certainly has an impact going forward. We haven't detailed out anything beyond the fact that ongoing depreciation until we file our next case certainly has an impact, and given the outcome of this case, that definitely shows next year. With respect to the pension, we've benefited from favorable market returns this year. We still expect there to be a benefit next year, but because our pension is in such strong status, we continue to rebalance the risk pension, that certainly gives us a view that we'll have likely less market returns next year, in terms of favorable non-service credits. That's really just a factor of continuing with our liability-driven investment strategy and diversity in the pension going forward. Finally on sales growth, we can't say enough about the economic developments that we see in our service territory. We try to look beyond the COVID impact. For example, if you look at growth in 2021 compared to 2019, and really just avoid the comparison to 2020, given the COVID anomalies, we're at over 6% with the normalized sales growth right now. And that is all through customer growth and usage increases, absent any COVID impacts. And that's before some of our large industrial customers that are under construction now come online, TSMC being one of them. We look at the record housing permit levels, the amount of development that's going on right now and really believe strongly that the growth going forward is solid and based on economic development. And that's why we're comfortable with the range from 2022 to 2024 being in the 3.5% to 4.5% standpoint. This year we're at the range of 3% to 4%, and last quarter we already exceeded that range, so we believe those are good numbers going forward.

Okay. So the $3.90 that assumes at least at a 3% year-over-year weather-normalized growth?

That's correct.

Okay. Got it. And my second question is for Jeff. Just more broadly, definitely a challenging case. And as we think about moving forward from here, and getting to file that next rate case and having further dialogue with the interveners and the commission. What are just some things that, in your mind, you could do to this time around to have a more constructive dialogue overall and various issues? Just curious on your overall thoughts given all of this.

Thank you for the question. I believe this is a crucial topic, especially concerning the long-term negative impacts, such as credit rating downgrades, that we discussed during the open meeting. It's important for us to maintain transparency not only with you but also with all parties that may be involved in the upcoming case. We have a shared goal in moving towards greater clean energy deployment, which is vital for meeting the state's growth. Regarding General Marcus Peterson’s inquiry about reaching a $0.09 rate, I feel that target is unrealistic considering Arizona's current fuel mix. It opens an interesting conversation around initiatives like fuel-for-steel. If we can decrease our fuel consumption and the substantial costs associated with it by utilizing batteries and storage, we could alleviate some pressure on rates. However, that requires investment capability. Therefore, connecting all these elements and engaging with stakeholders early on is essential, ensuring as much dialogue as possible occurs before we file. As Ted mentioned, preparing for a filing takes about four months, and we plan to initiate this process soon. It's crucial to have meaningful discussions so that stakeholders understand the implications of our decisions for Arizona's growth and the transition to clean energy. This will involve ongoing discussions not only with the commission but also with the relevant stakeholders, which is where we need to start.

Thanks for the caller, I'll see you soon.

Thanks, Insoo.

Thank you. Our next question today is coming from Julien Dumoulin-Smith at Bank of America. Your line is live, you may begin.

Good morning. Good afternoon. Really appreciate the time questions. Wish you guys the best here. I know it's a difficult situation. Maybe if I can just pick it up from where Insoo left it off, how are you thinking about next steps towards about the SCR here? I noted your commentary, it didn't specifically, if I didn't catch it right, mention follow-up and litigation. How are you thinking about that side, whether it's securitization, litigation, ultimate operations of Four Corners, as well as just coming back to this question on settlement? I know there's been some open debate as to whether or not the commission or staff specifically can settle. I know the chair made some comments in recent weeks as well. Is there an ability to settle right now as best you perceive it? Certainly, you seem to suggest so in the commentary, but also separately, the wider conversation on next steps, which I imagine is somewhat fluid on the SCR as well.

Yes, Julien. Let me be direct. Our immediate focus regarding the SCR is to pursue judicial review. First, we must go to the commission and request a rehearing. We have 20 days to do this, and the commission has 20 days to respond. If they do not act within that time frame, it will be considered denied, allowing us access to the courts. I won’t delve into the detailed strategy, but we were clear in the hearing that the prudent standard applies incorrectly to the record in this case. We provided one option that involved a debt return to help us move forward. However, with the partial recovery, including the disallowance of $216 million, we have no choice but to seek court intervention. This outlines our near-term process. As for what happens with securitization later, those discussions will come afterward. This case highlighted the difficulties of not having a settlement, which would have limited the scope of issues considered. It was quite broad, involving various parties and the commissioners. We believe in advocating for a settlement as it tends to provide better outcomes, allowing for trade-offs among the affected parties. Relying on a commissioner or judge for a decision can lead to a binary result where someone ends up losing everything. Compromise is often a far better option. Thus, we will continue to work towards that goal. Once we exit the ex parte period, we hope to engage with policymakers to foster a more constructive dialogue.

I understand your point. Regarding the 5 to 7, how are you approaching regulatory recovery and rate case support for that, and what is the expected timeline for the 5 to 7 in the future forecast period? I would like you to clarify that. Specifically, I'm interested in what this indicates for 2023 and 2024, and I'd also like to hear more about the strong sales growth. Is it possible to achieve earnings growth without a rate case in the medium term, considering the investment pace you are describing and the rate case situation?

Well, Julien, the way I think about that is, as Jeff said, we plan on filing the next case as soon as practical, given the outcome of this recent one. We assume a conclusion of that before 2024, and we're being conservative on our assumption of just reasonable regulation. And the conservative outcome in that case, we can support 5% to 7% earnings growth. And it will just depend on the details of that next case. I think, given the sales growth, our commitment to cost management, we've got the ability to offer a favorable construct to many stakeholders, that could lead to a constructive outcome for everyone, but it will depend on those details in determining how long we go then after that before a renewed and filed another rate case. But the 5% to 7% is supported by reasonable regulation and a balanced outcome in the next filing.

Better than just have it. As you think about the prospects for regulatory recovery, by the time we get to '24-25.

Well, that's a long-term target. So in the near-term, you could be better, it just depends on the outcome. But over the long term, we believe 5 to 7 as a prudent range.

Thank you. I'll pass it over. I know there's a lot to ask.

Thanks, Julien.

Thank you. Our next question today is coming from Shahr Puourreza at Guggenheim Partners. Your line is live, you may begin.

Hi guys.

Hi, Shahr.

Hi, Shahr.

Just a couple of questions here. First, I just wanted to follow up on Julien's question. Just curious how you expect the litigation, I guess, to affect the next rate case, and any sense on timing of the judicial review. And Jeff, more importantly, if you're trying to align with the different stakeholders. I guess why appeal, given that your plan obviously seems to support this outcome? Why not sit out, work with the stakeholders? I guess could the litigation mar the future filing from a settlement and dialogue perspective?

Sure. This is perhaps one of the most critical aspects. It highlights how the prudent standard was implemented in this situation. I aimed to clearly communicate during the open meetings that this goes beyond just a $216 million write-off, which is not favorable and doesn't reflect the evidence of the case. However, when considering the number of investments we need to make, if each time we do so we look back and question whether different technology could have been better or cheaper, it complicates the process of navigating the clean energy transition. We were trying to be as transparent as possible with the commission during the open meeting about what we would need to do in light of this outcome. It's unfortunate because I would prefer not to be in this situation. As we move forward, I don't believe anyone will be caught off guard by it. The focus should be on finding common ground. It's part of the regulatory framework that companies have the right to appeal, and we are operating within that framework. However, collaboration is essential, and we must work together through these challenges. We'll do our best to navigate this.

Got it. And then just on the equity fund, it seems like the commission has left the equity lenders alone as long as they stay consistent with past levels. I guess it's good to see there's some rationale, you highlight that may justify the GRC outcome, and how it could be somewhat anomalistic, but you do have another GRC coming up which had equity needs in of itself. Now, you're erring that this order as it stands today, you seem somewhat under equitized. I know you're deferring the equity, but it's not going away, I guess how should we think about your prior equity guide coupled with sort of the recent order, which can be somewhat offset by maybe use the apparent leverage and low growth. I mean, is there a scenario Ted, that where you wouldn't need any equity in '24? So how do we think about the bookends?

Yeah, I appreciate that Shahr. The way we think about it first is, any Pinnacle debt that's injecting APS will be treated as equity at APS, of course. The second early more fundamental, we just don't believe that it's prudent to issue comments at the current valuation. With respect to whether we could differ beyond 2024 depending on this outcome, that will just depend on the next outcome. As we stated, we'll also evaluate alternatives when the time comes, such as hybrids or forwards, or convertibles, to mitigate for the dilution at that time. But heading into the next rate case, our primary focus will be improving the ROE that we believe is unjust, not appropriate. Given as Jeff mentioned, the growth that we need to finance as well as the responsibilities we have as operating in the nation's largest clean energy asset, and I believe that our balance sheet profile heading into the next case will allow us to focus on improving that ROE.

Got it. Thank you, guys, for this and I appreciate the color. See you next week.

Thanks sir.

Thank you. Our next question today is coming from Sophie Karp at KeyBanc. Your line is live, you may begin.

Hi, good morning. Thank you for taking my question.

Hi, Sophie.

Hi, Sophie.

I guess a couple of questions here. First, on your operating expense, this OpEx guide for 2022, I'm just curious what levers you have to keep that service alive and maybe modestly down versus what we've seen in 2021. How are you thinking about that?

I appreciate that, Sophie. We're real proud of our customer affordability program and our growing culture of being focused on Lean Sigma. So this has really been a company-wide concerted effort to embrace Lean, eliminate waste, harvest savings, and be able to use this as one of our levers through this reset period. In this last rate case, in fact, we were able to take some of the customer portability savings and have that as part of our filing and pass that on to customers. Of course, it doesn't just stop with that last rate as filings, we're continuing to focus on cost management and operating a lean organization and that's part of one of the lever that is going to help us during this period, it's not any one item, it's a variety of initiatives across the entire enterprise. Whether it be being able to consolidate supply and services and leverage our supply chain strategies more efficiently, or be able to automate, some of our systems and processes, and then be able to focus our human hours on more value-add work. There is just a tremendous amount of opportunity and ideas that this organization has come forward with and is executing. We're really inspired by how much the team has stepped up and is taking this as a challenge and an opportunity to deliver efficiencies in this period.

Thank you. Solar rise has been brief connection with access charges being eliminated, and they think this is really remember going into reasons why it was put in the first place. Now that it's gone and the solar applications are going up, how do you think about that? When you forecast your load growth, would that be an issue for you guys at some point?

Well, Sophie, first of all, just want to make sure we're clear that the grid access charge going away is revenue neutral. So that really is just a cost shift between customer classes. But our estimates for weather-normalized sales growth is net of energy efficiency or rooftop. So if you were to look at the gross numbers, they are even higher than what we're projecting. And again, as we sit here today, over 4% weather-normalized sales growth currently, that's higher than our current range. And if you compare it to 2019 where we're at 6%, so we're confident in that weather-normalized range going forward, even with the impacts of energy efficiency and rooftop solar.

Alright. Thank you. That's all from me.

Thank you.

Thank you. Our next question today is coming from Steven Fleishman at Wolfe Research. Your line is live, you may begin.

Hi. Thanks. Somebody asked this question before, but I'm not sure I heard the answer. The 5% to 7% growth rate that you've laid out, Is that something you see consistent over this period, or is there some maybe lag upfront, and then when you get the rate relief it goes higher? Could you talk a little bit about the year-by-year of that?

It's challenging to break down year-by-year, but the key point is that we expect unreasonable regulation in the next rate case. We will continue to see growth driven by our organic expansion in the service territory. However, we believe that with reasonable regulation and what we're estimating as a conservative outcome in the upcoming rate case, that will significantly boost growth in our long-term earnings target. I'm definitely looking forward to the upcoming filing and the results of that next case to plan for the long term. That's why we're projecting that range over the next five years.

Okay. Can you clarify the question? I think for the next rate case, you mentioned it wouldn't be in place until late 2024, is that correct?

Well, it depends on the schedule, but if you file in '22, I think it's reasonable to expect an outcome in '23.

Okay. So there's only really one year, '23, without the outcome of the rate case? By '24 you expect you will have it in place?

Yeah. And actually, I think if we file in '22 it's possible to get an outcome in '23 consistent with schedules we've had in the past. And therefore, you have some resolution in '23 and then your first full year is '24.

Okay, great. Regarding the equity, I assume you plan to maintain the ATS equity at the 54 and change that was authorized in this last case.

Well, that was the equity from the last test year. We'll measure the equity at the end of this next test year, and that'll just be whatever it is, that will be exactly what we file. But again, our view is while you will have equity injection based on Pinnacle debt, we are more focused on trying to prevent further dilution during this period and really focused on filing on improving our ROE.

Right. And is there any risk of them imputing that, or is there not any history of that?

We don't believe there's risk, and we believe that the commission will understand that we have to lever the Company in order to keep funding the growth in this state. And that's the position they put us in as a result of the outcome of this recent case. So I view that as little risk.

Okay. That's it for now. Thanks.

Thanks, Steve.

Thank you. Our next question today is coming from Anthony Crowdell at Mizuho. Your line is live, you may begin.

Hey, good afternoon. Thanks so much for the detail on the slide. If I could just follow-up on Steve's question. So you're saying that the commission doesn't really care or has historically not cared about double leverage. Is that accurate?

It's really not been anything that's been a focus and I can't speculate on what that may look like in the next rate case filing. The key is that with our record growth, we have to finance that somehow. And given the outcome and the impact that's had on our valuation, the prudent way to finance it is to use the strength of our balance sheet. And I believe the Commission will understand that.

It's more of maybe the double leverage hasn't been presented to the commission historically versus that they either approved or disapproved that, fair.

I don't expect it to be an issue.

Then if I think of high-end of rate case guidance at 6%, our high-end of EPS guidance is 7%. Are you assuming either improved ROEs or minimizing some regulatory lag to get to that? If you hit the high end of rate-based guidance, how do I hit the high end of the EPS guidance?

I think the key there is, over time, is really going to be improving regulatory lag, which has been a focus of our team all along. And I believe that we've been clear as well that improving regulatory lag also allows us to stay out of rate cases. So that will definitely be a key focus in this next filing. Certainly improving ROE to be commensurate with peers is also a driver as well.

Great. And then just lastly, you made a really good distinction about maybe the disallowance on the SCRS was related to legacy coal plant, and a lot of the capex going forward is more monetizing the clean energy. But given any type of risk of new technology or something coming up, supplementing it and now the commission playing Monday morning quarterback with that capex, does that give you any hesitancy on going with any big projects or limiting the value of any type of projects so that your risk of this allowance is much smaller, maybe what we saw in the SCR order or decision?

One important reason for seeking a review of the case is to gain clarity on our decisions, which are made based on the information available at the time. There is a lot of new technology emerging, and the industry is figuring out how to reduce the risks associated with new technology projects. For instance, we paused our battery storage efforts after the McMicken event to thoroughly examine safety concerns related to lithium-ion utility-scale batteries. We are now advancing with these systems, which are established and widely used technology. We are not first movers in this area, and I believe we will be undertaking considerable work to manage the associated risks. It's crucial for us to gain clarity, so we avoid using hindsight to judge what was an appropriate decision when circumstances have changed.

Great. Thanks so much for taking my questions, I'm looking forward to seeing you guys at the conference.

Next to Anthony. Thank you.

Thank you. That was our last question for today. I will now turn the call over to management for any closing remarks.

Thank you all for your investment and confidence in us. The outcome of this rate case was not what we had anticipated, but we are now focused on our path forward and our customers. We look forward to seeing some of you at the conference. Thank you once again, and that concludes our call.

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