Pinnacle West Capital Corp Q3 FY2023 Earnings Call

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2023 Third Quarter Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2023 earnings, recent developments, and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Andrew Cooper. Ted Geisler, APS' President; Jacob Tetlow, Executive Vice President of Operations; and Jose Esparza, Senior Vice President of 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, 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 from expectations. Our third quarter 2023 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language as well as 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 9, 2023, and I will now turn the call over to Jeff.

Great. Thanks, Amanda, and thank you all for joining us today. We continue to execute well on our operations performance and financial management. As part of my operations update, I will share with you our success in managing through a record-breaking summer in the valley and reliably serving our customers when they needed us the most. I'll also provide an update on our pending rate case and other regulatory filings. As Andrew will explain, our earnings expectations for the year are on track to meet our guidance range that we recently updated in the second quarter. First, I want to recognize our operations and field teams for doing an exceptional job maintaining reliable service for our customers this summer. July was just one day short of an entire month of 110-plus degrees, and August did not provide much reprieve. We ended the summer with 55 days of 110-plus degrees and 36 days of overnight lows above 90 degrees. During this period, our generation fleet performed extremely well and was available when our customers critically needed the power. Our careful long-term planning for resource adequacy, combined with equipment maintenance programs and innovative customer demand-side programs proved beneficial throughout the summer. APS set five new peak demand records during the month of July, ultimately reaching 8,162 megawatts on July 15. That figure is over 500 megawatts higher than our last peak demand that was set in August of 2020. Our baseload and fast-ramping assets, including Four Corners, Palo Verde, and others all performed well. Our nonnuclear generation fleet's equivalent availability factor, which is the percentage of time that generation units are available and ready to perform when called upon, was 93.4% from June through September. In addition, we were extremely pleased to have our Agave solar facilities and our AZ Sun batteries online and available to serve customers. Finally, Palo Verde generating station's capacity factor for the same time frame was 99%. With the successful completion of the summer run, Palo Verde Unit 1 has entered its planned refueling outage on October 7th. Not only were our generation plants there when we needed them, our customers were as well. Customers participating in APS' Cool Rewards program helped create grid capacity while earning bill credits for voluntarily reducing their energy use. A community of more than 58,000 customers and about 80,000 smart thermostats created a virtual power plant to save energy during the peak hours of the summer. This year, participating customers conserved a record 135 megawatts of power, the equivalent of a peaking unit. APS' Cool Rewards is the cornerstone of our virtual power plant, which is rapidly approaching 200 megawatts in participation and will be an important part of our long-term resource planning strategy. We'll continue to expand this resource and these important partnerships with our customers as we continue our journey to 100% clean and carbon-free electricity by 2050. Long-term planning has been key to providing reliable service. In fact, we just filed our Integrated Resource Plan or IRP with the Arizona Corporation Commission yesterday, outlining our resource needs for the next 15 years. We're expecting strong customer and demand growth during this period and have outlined the resources necessary to maintain affordable and reliable service for our customers. We anticipate that a variety of resource types will be important in serving this period of robust customer growth and look forward to partnering with customers, developers and stakeholders on bringing these technologies online. While the IRP does not specify ownership, we are committed to continuing our competitive all-source RFP process, which will yield a blend of PPA and ownership projects. The IRP includes a variety of scenarios, but our preferred scenario identifies a diverse blend of technologies to secure a reliable grid while maintaining a strong focus on customer affordability. And this scenario also achieves our clean energy goals of 65% carbon free by 2030. With the extreme weather that we experienced each summer remains as important as ever to continue assisting our communities through our heat relief support programs, APS partners with local community organizations to aid the state's most vulnerable populations. This support includes a collaboration with the foundation for senior living, offering emergency repair/replacement of AC systems during the hot summer months; the Salvation Army's network of 18 cooling and hydration stations across Arizona; an emergency shelter and homeless prevention program in partnership with St. Vincent de Paul; and a new partnership with Salary 211 and Lyft to provide eligible Arizonans with free rides to cooling shelters. These are just a few examples of our efforts to collaborate for the benefit of our customers and communities, and I'm pleased to share that APS was recently recognized with the innovative Corporate Philanthropy Award by the Phoenix Business Journal for these partnerships and programs aimed at providing heat relief to vulnerable individuals and customers. I'm also happy to share that we've completed our labor negotiations with our local IBEW and have a newly ratified agreement in effect. We worked hard to build a collaborative relationship with our labor union employees. And I'm grateful that we've been able to reach an agreement that allows us to continue to serve our customers and retain top talent. Finally, our customer care center was ranked as the top care center among our peers so far through the third quarter of this year as rated by our customers in the J.D. Power electric customer satisfaction study. And overall, our customer satisfaction as rated by customers through J.D. Power remains strong. I'm extremely proud of our employees, our progress so far and look forward to closing out the year strong. Turning to our rate case. After 24 days of hearings, we wrapped up on October 3rd, and the parties are now in the briefing period. Initial briefs are due November 6th with reply briefs due November 21st. We expect the administrative law judge to issue her recommended opinion and order later this year, possibly early next year, with it being placed on an open meeting agenda shortly thereafter. We look forward to completing our rate case in a constructive manner while securing the cost recovery that's necessary to enable continued growth of our electric grid and to support Arizona's growing economy. As we look to wrap up 2023, our focus and priorities remain on executing our mission of providing clean, reliable, and affordable service to our customers. I want to thank you all for your time today, and I'll turn it over to Andrew.

Thank you, Jeff, and thanks again to everyone for joining us. Earlier today, we released our third quarter 2023 financial results. I will review those results, which were positively impacted by weather, and provide additional detail on the various drivers for the quarter. We earned $3.50 per share this quarter, an increase of $0.62 compared to the third quarter last year. As Jeff mentioned, we experienced record-breaking summer heat, so weather was by far the largest driver for the higher year-over-year results. In fact, the number of residential cooling degree days, which is a utility's measure of the effects of weather, increased more than 28% over the same period a year ago and were 32% higher than historical 10-year averages. Residential cooling degree days for the month of July were the highest of any year since data tracking began in 1974, and August recorded the second highest cooling degree days for the month behind only August of 2020. This resulted in a $0.38 benefit from weather versus third quarter last year, which itself was slightly warmer than normal. Favorable surcharge income through both our LFCR and the new surcharge related to the 2019 rate case appeal outcome, income tax items and other net were also positive drivers, partially offset by higher interest, higher depreciation and amortization and lower pension and OPEB non-service credits. Our income tax benefit is largely due to the timing of certain tax items being recognized through the effective tax rate. Q3 income taxes were also favorably impacted by the investment tax credit amortization from our Arizona Sun battery facilities and production tax credits from our Agave solar facilities. Turning to customer growth in the third quarter, it came in at 2%, which is right at the midpoint of our 1.5% to 2.5% guidance range. Arizona remains an attractive destination for population migration and for economic development. APS was honored in the September issue of Site Selection Magazine as one of the top utilities in economic development based on corporate end-user project investments and affiliated job creation. Our weather-normalized sales growth was flat in the third quarter compared to last year. For the quarter, residential sales were down 1.9% on lower weather-normalized customer usage, but our strong commercial and industrial sales growth continued coming in at 2.2% for the quarter and is now at 2.8% through three quarters year-to-date. Due to the weaker weather-normalized residential sales, we are adjusting our sales growth guidance for the year to 1% to 3%, while keeping our long-term sales growth guidance at 4.5% to 6.5%. Turning to O&M, this quarter came in slightly lower than last year. However, we continue to see pressures in O&M, both from inflation as well as increases in costs incurred to serve the significant growth in our service territory. We continue to look for opportunities to reduce risk and find efficiencies that keep our costs low and maintain customer rate affordability. We raised our O&M guidance last quarter and are reaffirming it now while continuing to target O&M permit hour declines over the long term. Interest expense remains a drag on earnings as the Federal Reserve continues to combat inflation through higher rates, and they have signaled that higher rates will likely persist. With that said, I will note we only have a single fixed-rate maturity of $250 million in 2024 and we will continue to closely monitor our financing needs. Recently, our Board approved a 1.7% increase in our quarterly dividend. We are proud to continue our track record of steady dividend growth and are confident in our intention to grow back into our 65% to 75% dividend payout ratio target over the long term. Turning to CapEx, we have raised our guidance for 2023 from $1.67 billion to $1.8 billion. This increase is due to distribution investments needed to serve our growing service territory and generation investments to support the reliability of our fleet. This higher CapEx level also includes increases in transmission spend as we continue to make key investments in our FERC jurisdictional high voltage system. We now expect 2023 transmission capital within our regulated footprint at a spend level nearly 50% higher than last year. Finally, I'd like to reiterate the impact weather has had on our financial outlook for the year. Taking both the mild spring weather of the second quarter and extremely hot summer weather of the third quarter into consideration, we continue to guide to our $4.10 to $4.30 per share earnings guidance range for the year. With our rate case hearings concluded, we look forward to continuing to execute on our strategy as we await the issuance of the recommended opinion order and the final decision. This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

Your first question is coming from Shar Pourreza from Guggenheim Partners.

So Jeff, the TransCanyon win under the DOE program, and obviously, it's a large line, it's 114 miles, Utah to Nevada. Can you just talk about any timing, scale, next steps and sort of how to think about opportunities like that relative to the current CapEx guidance? And there's obviously other needs in the region. So curious, are you seeing more announcements like this?

I think that was one of three announcements made by the DOE, and there's another one in the region that we haven't disclosed yet. This particular line is a joint project we've been collaborating on with Berkshire Hathaway for some time. The DOE announcement essentially represents a derisking opportunity, which is positive for the project, although it is still quite a ways out. It is core to our business as it involves transmission. However, since this is associated with an unregulated affiliate at TransCanyon, it would be financed more as a project rather than through our core utility transmission investments, where we typically focus on the investment opportunities. Nevertheless, it is something we want to keep monitoring, but it is still a ways off.

And then obviously, just quickly the jump in the CapEx is notable, and you raised it somewhat obviously at the tail end of the year. Could we see similar increases to 2024 and 2025 CapEx and future updates, or was this year's increase a one-off? You're still kind of projecting similar rate base right now in the '25 time frame. So I guess how do we think about the cadence?

We raised capital expenditures for the year by $130 million, assessing the needs independently of any potential rate case outcome and how generation might be addressed through a tracker. There were identified needs within the existing fleet. On the distribution side, we are experiencing customer growth, and the necessary equipment to support that growth is becoming more expensive in the current climate. We won't be able to provide an update on capital expenditures for beyond this year until after the rate case concludes. However, it’s important to note that significant transmission opportunities exist within our regulated footprint. The additional $55 million allocated for our FERC transmission assets this year reflects a trend we've observed over the past few years of increasing investment in that area. There is a considerable demand in the transmission system, and we have a formula rate along with a competitive return on equity. Therefore, we plan to continue to invest regardless of the rate case outcome and capital expenditure needs looking ahead. The requirements we identified were specific to 2023, and we will update on 2024 and future years after the rate case.

Your next question is coming from Nicholas Campanella from Barclays.

So I just wanted to ask on pension. Could you just give us a sense on how that's performing versus targeted returns year-to-date? And just appreciating that recapture of pension is only partial because of the way that the test year in the rate case is structured. Should we be thinking about a continued benefit or headwind into '24 here, anything that you could quantify would be helpful as we think the '24?

So I guess just from the outset, I would say that we're really committed to a liability-driven strategy and I've said it many times before. We're primarily fixed income invested about 80% of our portfolio. And it's meant to match up the asset and liabilities so that our funded status remains strong, because from an investor value proposition perspective, I think over the long term, having to mitigate through the strategy they need to go out to the market and raise external capital to fund the pension, that is what we do not want to do. And so we're focused on funded status for that reason. Fixed income returns have continued to be challenged this year. When it comes to 2024, we're not really in a position today to give an update because we do only revalue the assets and liabilities at the end of the year. And so as you'll recall from prior years, we look at actuarial gains and losses relative to the expected return at year-end as they're material, and we measure that through what is known as a corridor test, which is the most common accounting approach among utilities to addressing actuarial gains and losses. And at that point, if it's material, we would amortize any gain or loss over the life of the plants, which is in the 10 to 12-year range. So too early to look out at 2024. You alluded to the pension expense that was crystallized at the end of 2022 based on market returns last year. And there, we have advocated through the stages of this rate case, including the hearing and we will continue to do so through to the open meeting to ensure that we get appropriate recovery there, consistent with our prior rate case, which in a split test year, as you noted, it doesn't necessarily get us recovery on the whole amount, but would average out to give us half of the recovery on that 2022 year-end impact. So we'll continue to advocate for that and certainly be able to give you an update when we revalue everything at year end on any impacts from 2023 returns. The one thing I would remind you of is that higher interest rates, while they may impact the value of our bond portfolio, have a meaningfully positive impact on service costs, which helps us from an O&M perspective. And you see that in the year-over-year O&M numbers this year. And of course, potentially lead to a higher expected return next year given where yields are. So we look at all the puts and takes around higher interest rates and discount rates at year end and can give you an update at that point.

And I guess just the IRP, obviously, some big opportunities here, and you're not making any assumptions on ownership at this point. But can you just give us a flavor of is this spending that could potentially be incorporated in the next five-year roll forward, or is it more further looking than that?

What I'd say is that you've got our current CapEx forecast for the next three years. We'll refresh 2024 and 2025 after the case. As the rate case is done, we have better clarity on the SRB mechanism, which we continue to advocate for in this case. The IRP is agnostic. As you said, we've got projects in various stages of development in our pipeline and bringing those projects forward will be dependent upon ensuring reliability and diverse group of developers, including ourselves, but also whether or not there's contemporaneous returns. Because of the lumpiness of that CapEx, we want to make sure that we're going to lean into it that there's an ability to recover that investment in a timely way.

Your next question is coming from Julian Dumoulin-Smith from Bank of America.

Actually, let me just pick up where Nick left off here on IRP here real quickly. Just obviously, the new data centers growth is pretty impressive here. I just wanted to get a sense of just how firm are some of these industrial manufacturing and data center, data points that you guys are showing here. I mean, obviously, your things are large, or subject to some movements and delays. But how firm in timeline is that, are these numbers here in front of us? I'll leave it open then to you guys.

We've got pretty significant growth, obviously happening here in, I'd say, a few different sectors. One is the industrial load from TSMC and there's some other kind of high load-factor factory load that is coming up. And a lot of that is really being driven by land availability. So you look at some of the big parcels of land that can hold these facilities. And as some of these companies compete, if it's not company A, company B is going to come in and take that land. And so some of that industrial load growth, I think, is going to continue and we continue to see pretty significant upside from the TSMCs and the supply chain that that brings because that brings Linde and sort of gas manufacturers and other things. Data centers, I think, are absolutely happening; they're a little bit harder to figure out exactly where the megawatts are going. So I think that you can look in the region and say there's a certain amount of megawatts that are here, how that gets allocated between individual customers gets challenging for some of our planning folks, but it's more of a question of where it's going to go and how do we build the transmission distribution system out to match it on the generation side. But this is an attractive market for data centers, so we see that as a pretty significant growth opportunity. Coop, you want to comment on just how it's spoken through on the IRP?

So year-to-date, we're seeing our C&I sales growth in the 2.8% range year-to-date through September, which is as we've gone through the year, we've had to monitor the ramp rate and it goes back to what Jeff was saying in that when you're thinking about these customers, you may have an anchor tenant, and then they're building out their box from there. And so watching those ramp rates and understanding them with some of these earlier customers that are coming through will help inform our long-term view. But that 4.5% to 6.5% growth rate that we're expecting through 2025 is based on the data centers we know we're ramping up, it's based on TSMC and its supply chain. TSMC has made recent announcements that reaffirm their 2020 commitment to being up and running. And so that's the planning forecast that we're working under in the near term and then the continued attractiveness of the service territory over the longer term from an IRP perspective.

And then I know we've spoken to times about earned returns here, and that's difficult in some respects to get ahead of in the context of the case. But any further points that you would make in terms of items that would stand out in terms of puts and takes against your ability to earn your authorized levels here? I mean, obviously, we’ve sort of seen a number of points, but obviously, Nick mentioned pension a second ago. But what other points would you flag here as you think about the puts and takes and the ability to see improvement here, especially those in your control?

We do have a historical test year and so we're working with a number of costs that go back to the 2021-2022 period. And so if you think about O&M, there, we need to continue to manage costs, exercise our lean muscle, because those costs do go back to a time when I think people still use the word transitory to talk about inflation. So O&M is one of those pensions. We’ve done what we said we were going to do throughout the case; once we knew the numbers, we'd go back in and advocate in favor of addressing those. And then interest expense is really the third one, and that's partially within our control and partially not. Strategically, within this case, we were okay with areas of WACC other than ROE being lower to keep the overall revenue requirement down. So having a low interest expense and a slightly lower equity capital structure was really all in the name of ensuring that we could focus on ROE and the importance of a market competitive ROE to our ability to attract capital to the state. So on the interest expense side, we're really doing all the things that are within our control to finance opportunistically. If you think about it, we went in earlier this year with the banks to expand our revolver capacity, so that we could be in the CP market more often to give us flexibility and not lock in long-term rates because we have to, but be able to choose market environments that are conducive to doing it. On interest expense, I would also say that our advocacy in the rate case is important because ultimately, ensuring that our credit rating stabilizes at an appropriate level, means that on a relative basis to our peers, achieving competitive credit spreads will help to mitigate rates as well. And there, we've taken whatever measures we can to clear out 2024 maturities. We actually refinanced one of our pieces of 2024 maturity debt back a couple of years ago at a very competitive yield. And we only have one fixed-rate maturity next year that needs to be reset at current rates. So I think those are really the three areas. The key advocacy we're doing is around ways to reduce regulatory lag coming out of this case. The SRB is certainly one mechanism we could do it. We're leaning into our FERC return assets that have a formula rate. And after this case, we will continue to identify and push for ways to reduce regulatory lag in the state overall.

Your next question is coming from Paul Patterson from Glenrock Associates.

I wanted to go over just the sales growth and the changes we've seen since the beginning of the year in 2023. Could you just elaborate a little bit more like why it's not met your expectations for 2023? And I know that you guys are reiterating the long-term weather normalized sales growth. But maybe just review why you don't think what's happening this year is going to impact longer term?

So if you think about the course of the year and the trajectory that our sales growth has been. We've known really even going back 12 to 18 months that we've been moving into an environment where our sales growth is going to be driven by extra-high load factor, large commercial & industrial customers. And we had very robust residential growth during the years around COVID as we had the work-from-home trend. And what we've seen quarter upon quarter is that trend tends to reverse out. We still have 2% customer growth coming into the service territory, but the contribution from residential sales between energy efficiency, continued rooftop solar penetration and then some of the normalization of trends around residential usage, we've seen a decline, and that decline has caused more of a deceleration than we expected. And that's frankly also relative to trying to gauge and continuously forecast EV penetration, which helps to offset some of that. So from a residential perspective, it may have been more pronounced over the last few quarters. But ultimately, it's moving from a trend perspective in the direction that we've anticipated. But again, this quarter, I think continues to emphasize a trend and it's probably been a little bit more pronounced. Early in the year, we did reforecast our high load factor customers, and that was really primarily based on the delay that Taiwan Semiconductor announced in the ability to start up the facility. They've committed to and they've reiterated recently a 2025 startup, and that is the basis of the long-term plan. The continued ramp of the data centers we're seeing from one data center to another could be slower or faster than we expected. That's driving year-to-date, as I mentioned, 2.8% sales growth in the C&I segment. And so for the year, we're looking at 1% to 3% overall, down from the 2% to 4% that we talked about last quarter. That is fundamentally driven by some of the deceleration on the residential side. But over the long term, much of that sales growth is driven by the large C&I segment. And we continue to see the inflows of these larger customers, both the data centers and some of the advanced manufacturing, and we feel confident that it can change from quarter-to-quarter a little bit who's ramping, who's not. As Jeff said, from a land use perspective, there's attractive parcels and we know who all is talking about taking them. So we feel good about it and the continued attractiveness of Arizona for those businesses coming in.

Regarding the residential aspect, you mentioned earlier the success of your virtual power plant participation. Are you observing any potential price elasticity issues developing? Do you think there is a connection between this success and the recent weakness in the residential sector, as well as the interest in the savings program you mentioned?

Paul, I don't believe the Cool Rewards program, which is the virtual power plant initiative, is impacting our residential growth. These programs present opportunities for us to engage with customers multiple times throughout the year. In many cases, we cool the home prior to the event, allowing customers to opt-out without any penalties. While we do notice a slight decline in engagement if events occur consecutively over several days, I don't think this affects our sales.

I didn't mean that the program itself was the problem. What I was suggesting is that the interest in or participation in that program, which appears to be quite strong, might indicate that they are trying to save money. I was just curious if that could be somewhat related, rather than it being the cause of lower residential consumption. Does that make sense?

I think I would differentiate that program from the trend that you're suggesting may be happening. And we're definitely looking at usage patterns overall. If you think about the trajectory of our quarter, we had a month and a half of extremely intense weather. And as we started to move into cooler weather, there were inevitably going to be customers looking at their bills, thinking about the opportunity to conserve in September. And I think as we saw the quarter go on, we saw residential usage per customer trail off. And I do think part of it reflects some bounce-back effect from what was a very intense summer. So we're understanding those patterns and customer reactions both from a bill sensitivity perspective and just overall conservation. But I think those are probably anomalous to this particular quarter. There tends to be a psychology around when do I turn off my AC for the year. And people this year might have done it earlier, just in response to knowing that they were running it so intensely during the summer. But on the flip side, we actually saw price per megawatt hour go up for the quarter, which suggests that when we're in that intense period of heat, customers became more insensitive to our time use rates. And so normally, when you have higher megawatt hour sales, you're seeing it at a lower price because it's more of the off-peak hours. And so I think from month to month, you're seeing different customer behaviors and we try to understand those as best we can. But overall, for the quarter, I think we're just continuing to see the same trend of residential customers slowing down, continued energy efficiency and distributed generation, and this reversal out. If you go back year-over-year, quarter-over-quarter for the last 24 months, you've been seeing those COVID work-from-home numbers continue to reverse out as people return to normal usage patterns.

Your next question is coming from Michael Lonegan from Evercore.

So following up on an earlier question on Julian's rate case question. Obviously, there's some dependence on the outcome here. But coming out of it, given some delayed recovery on growing nominal O&M, higher interest expense, pension expense like you alluded to and assuming the SRB recovery mechanism is not granted, obviously, like given what happened in Tucson Electric case, you obviously may have some meaningful regulatory lag. You talked about some mitigation measures. But just wondering what your expectations are on when you may have to file your next rate case and just the frequency of that in general, especially without a recovery mechanism like SRB.

Michael, that's really the key issue around the SRB is that given that and frankly, given the growth that we've been talking about through most of this call, if there's not a mechanism that's in there to help us contemporaneously recover that, the post-test year plant that we have in process right now only gets you so far. And so the kind of the point around having an SRB is that if you don't do that, you're going to drive more frequent rate case filings. The specifics around that, we won't know until we see the outcome of this rate case. So it's too early to pin down with kind of exactly what that timing would look like. But it completely comes back to the point that if you have an SRB mechanism in place that helps us track some of the capital and derisk some of the projects that are needed to reliably serve load, then we're able to do that without having to come back in as frequently on the rate case. And so Tucson didn't get it; that's a little bit more of a unique story, I think, in the circumstances there. So we're continuing to advocate for it in this case. There's a lot of positive dialogue towards the end of the hearing around that, but we won't know that until we get through the rate case process.

Your next question is coming from Anthony Crowdell from Mizuho.

Just I guess quickly, if I could hit on the cadence of the year, very strong third quarter, type of drivers you could give us going into the fourth quarter? And maybe is there an ability where you would maybe flex O&M within the year?

So you saw for this quarter that O&M was relatively flat. And I think that that was very specific to some offsets from employee benefit expense that you could see detailed in the 10-Q. But foundationally, we've seen the same trends around O&M throughout the year, which is some of the lagging impacts of inflation, particularly around areas like wages and then increased O&M needs around our generation fleet, both nuclear and non-nuclear. We saw those from early in the year as we prepared to get into the summer, and then we saw those after the summer where we needed to continue to spend time around the fleet. So the O&M numbers that we gave last quarter, that $915 million to $935 million that upped O&M level we continue to remain on track to. While we always look for opportunities to pull forward O&M from a future year, in this case, we took the anticipated weather benefit, we took the new surcharge revenue that was coming in and we looked to the opportunities we have within the year to derisk our system, ensure plant reliability and address some of the wage issues that ensure we could maintain a competitive workforce. So what you're seeing from that 15 to 35 range that's remaining on track, the ability to derisk future years is probably a little bit more constrained given the needs of this year in particular. But certainly, as we see those opportunities, even the smallest things, we're encouraging people to look to do that work this year if they can.

I have a follow-up question. Jeff, you were responding to Mike, but my thoughts are a bit scattered right now. Regarding the SRB, you mentioned having discussions and the unique situation in Tucson. Can you provide any updates on the conversations you’re having? Also, how do you see the SRB relating to one of the commissioners initiating a docket to reduce regulatory lag? It seems like the SRB would be relevant in that context and could potentially answer the question about minimizing regulatory delays. I'll leave it open for you to respond.

Anthony, this aligns with the ongoing discussions about regulatory delays. Clearly, the process hasn't truly started and will take some time to navigate. We are actively advocating our position in this case. Tucson entered this phase later than we did, allowing us to engage more during the hearings. If you listen to the hearings, you'll notice there was more discussion aimed at clarifying the implications of this situation. We are now in the briefing phase, and you'll be able to review the details in the briefs. There are essentially two more steps to follow. The judge will consider the briefs and the arguments presented during the hearing to reach her recommendation. Following that, the commission will have its opportunity to weigh in. The judge's opinion is merely a recommendation. Regardless of the outcome, we anticipate ongoing advocacy during the open meetings as we present our cases. As you've mentioned, I believe there is a movement to explore ways to mitigate regulatory delays, as this would reduce the frequency of rate cases we need to file. We're linking these points together, whether during the briefing or at the open meeting, as these are the arguments we are focusing on. It's crucial for us that with Power Purchase Agreements (PPAs) in place, we can ensure all necessary projects for reliability are executed without excessive regulatory lag, which adds risk to project completion. It's challenging to build these projects independently when facing regulatory delays, which can lead to more frequent rate case filings. I expect these discussions will continue, but it's likely to be early next year or later this year before we see any progress.

And just lastly, what is the cost to mitigate a rate case. Have you guys put an estimate or a range around mitigating a rate case?

I wouldn't say we include rate case expenses like some utilities do. These costs are already incorporated within our existing teams. After a rate case, those costs transition to other regulatory matters. It's not something we've focused on much. There are certainly documents and other elements involved, but they aren't significant.

Your next question is coming from Travis Miller from Morningstar.

Trying to unpack this weather and then also related to earlier questions on O&M. I'm guessing and correct me if I'm wrong, that you've incurred some extra O&M just for the fact that you've had to operate the system at a higher level given the weather. What's the resulting potential benefit in, say, 2024 or 2025, if you get back to normal weather, you move the earnings on the top line? But are there other impacts that would be a benefit from not having hot weather?

That's an excellent question, Travis. We definitely had some reliability needs, many of which we anticipated even before the summer. We budgeted to ensure our fleet was prepared properly. Every year, we handle summer readiness in a similar manner, making projections based on summer forecasts. The peak load we experienced aligned with the forecasts we created, allowing us to plan our resources, including both PPA and market-based resources, accordingly. We were investing in O&M for the fleet before summer, and after summer, the wear and tear, along with the increased CapEx I mentioned, relate to that. This quarter, we released the outage schedule for next year, which includes a robust schedule for our gas fleet and the usual refueling outage at Palo Verde. Notably, it also marks the beginning of the last major outage at Four Corners during the asset’s lifecycle. There is necessary work ahead to carry us through the rest of the decade. This year, we planned for a strong monsoon season, but we didn't experience significant rain or wind. We account for that each year, and while we faced intense winter storms earlier this year, the weather variability affects our planning and deployment of O&M resources. However, considering the outages scheduled for next year and our overall strategy, if we encounter a typical weather year next year, it should not significantly impact the overall O&M situation.

Regarding the 5% to 7%, I believe you mentioned that the base year was normalized for 2022. If I'm not mistaken, once you complete the rate case, do you anticipate adjusting that 5% to 7% to reflect the earnings number post-rate case as your starting point?

That's something that will come out after the rate case. I've mentioned it in this forum before that we said that 5% to 7% on a year that had been a financial reset. So our earnings were in decline in the year we said. So it certainly would be something that we'll look at. Because ultimately, what we want that 5% to 7% to represent is an evergreen long-term growth rate. And so being able to achieve that over the long term regardless of base year is the ultimate aspiration. So it will be something that we'll look at after the case when we refresh the guidance.

Your next question is coming from Sophie Karp from KeyBanc.

I have most of my questions answered, but I was wondering if you could comment on how the growth in data centers and similar industrial users might affect margins if that trend continues. Could you clarify how adding 1 gigawatt of data center load compares to the number of residential customers? Additionally, how do you see the rates for different customer classes changing over time?

And so one of the things we've talked a lot about is that with our extra high load factor customers, given the hours that they're running and you're going to see a lower overall margin. We tend to give it in a percentage growth rule of thumb that if you have 1% of residential growth, it's equivalent to $20 million to $25 million of margin. If you have 1% of high load factor growth, it's more of the equivalent to $5 million to $10 million of margin. And so you do see a lower margin contribution, but an awful lot more megawatt hours. And so from that perspective, that's why we're so focused on our O&M continuing to be disciplined from a volumetric basis. We're going to have higher O&M as we serve more customers. But given these high load factor customers allow us to spread that O&M and frankly, they're a single site versus residentially going out to more and more subdivisions that that growth becomes efficient growth for us despite the margin being lower overall. From a customer cost of service perspective, we ensure that customers and our rate design is meant to ensure a fair distribution of costs across our various customer classes, and that's something that we look at each time we go in for a rate case and in short. But fundamentally, just from an overall perspective, blunting O&M with lots of megawatt hours in a single site is positive despite the lower margin.

Thank you. That completes our Q&A session. Ladies and gentlemen, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.