Good morning, everyone, and welcome to the Pinnacle West Capital Corporation 2024 First 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 first quarter 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; 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 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 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 May 9, 2024. I will now turn the call over to Jeff.

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. Before Andrew discusses the details of our first quarter results, I'll provide a few updates on our recent operational and regulatory developments. With the temperatures in Arizona quickly heating up, we're focused on executing our robust summer preparedness program with 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 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 aimed at managing wildfire risk, which includes weather stations, cameras, remote control sectionalizing devices, and advanced risk modeling software. 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 Power Safety and Public Safety Power Shutoffs or PSPS. 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 have invested a lot in customer communications to ensure this is a transparent process. We're committed to taking active steps to prevent wildfires and safeguard the communities 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 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 is 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 demand for 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 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 8 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 the cost to service. The commission intends to further examine whether the grid access charge is just unreasonable and we'll be participating in those proceedings. Additionally, the commission has turned its focus to the regulatory lag docket. The first workshop was held on March 19 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. The commission has voiced their intent to have further workshops that will be noticed in the future. We look forward to continuing to work with the commission and 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 $0.15 per share compared to a loss of $0.03 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 8, along with increases in adjusted revenue, and 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 $0.15 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 $0.07 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 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 C&I growth. Because the first quarter is historically a smaller quarter for the company, we're 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 prominent example of this vibrant economic activity is Taiwan Semiconductor, which recently announced a $25 billion increase to the 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 3-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 the first to the 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 expense was 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 ensure 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 by 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.

Certainly. Everyone at this time will be conducting a question-and-answer session. Your first question is coming from Nick Campanella from Barclays.

This is Fei for Nick today. So first, I guess on rate case timing, as we have more time to digest the latest rate case outcome back in February, since the last quarterly update, can you maybe discuss some of your latest thoughts on SRB capital deployment? And how should it possibly accelerate in the coming years, deeper in the plan?

Sure. Thanks for the question. Yes. So we continue to work through our competitive RFP process, and that's really the basis for us putting projects through the SRB. We had a 1,000-megawatt RFP in 2023, and we're negotiating projects that are coming out of that right now. And so there's a healthy pipeline of projects across a diverse set of fuels, including renewables and gas, that we're looking at that would qualify. Our Q4 deck included some illustrative projects that we expect could meet the criteria for the SRB. We feel good about those projects being part of the plan, certainly, at least some of them. Our CapEx for the next three years that you see does include some probability-weighted capital on the generation side related to those projects. Ultimately, the RFPs will determine the results. But the projects that we laid out in Q4 represent potentially up to 40-plus percent of the megawatts that we need to procure based on our IRP over the next few years. So there's a substantial opportunity there. Of course, our #1 goal is for reliability and cost for customers. But ultimately, between this RFP and future RFPs, there will be future RFPs given the substantial need to meet customer growth demands over the next few years. We're confident that there'll be opportunities for us to participate. And then, of course, with the SRB, the opportunity to substantially reduce the lag on beginning to recover those investments becomes much shorter. So opportunities ahead as we have projects that come forward, we will certainly update you on their status.

Great. That's really helpful. And maybe I can just turn to financing a little bit as you've done the equity deal and remove this financing overhang post the constructive rate outcome. Can you just discuss as we evolve from the last quarter, your latest thinking on the remaining clinical capital of $400 million with ATM and hybrid at your disposal? Has any thinking on this changed since the equity deal, also given all the S&P positive revision on the credit outlook? How does that affect your thinking and confidence in the debt and hybrid market?

Sure. As I mentioned earlier, we are really pleased to be able to execute on the foundational discrete block equity that we needed to ensure that we're maintaining a balanced, healthy capital structure down to the utility. As we go through and you've got the three-year capital financing plan in front of you, as we go through the out years of that plan, given the capital needs that we have today and ensuring a balanced capital structure down at the utility, there is, as you pointed out, an unidentified external financing need of an incremental $400 million from the parent. Over the next couple of years, we'll continue to explore the different markets available to us to meet that need. The base case tends to be something like an ATM because that aligns well with deploying capital and then investing the proceeds into the utility. That would likely be where we would start. But what's motivating us most is maintaining a balanced capital structure down the utility as we look at the capital plan over the next few years, being judicious about the amount of parent company debt. To your point, there are securities that sit between debt and common which we will continue to look at as potential opportunities as well. We were pleased to see all the ratings return to stable across all three agencies. The agencies felt comfortable with the amount of holding company debt that we do have, but we want to continue to be judicious about it and ensure that we're managing appropriately to the right cash flow metrics so that we stay in that targeted range of 14% to 16% FFO to debt.

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

It's Jamieson Ward on for Shar. I just got a couple for you here. First, on sales growth, you're fortunate to have a fairly diverse mix of industries driving your long-term retail sales growth forecast. Could you remind us how much of the large C&I load that you're currently seeing is from data centers like in '24? And whether you're expecting the level of contribution to your annual load growth from data centers to increase between now and 2026 and then as well through the rest of the decade?

Sure, Jamieson, this is Andrew. I'll start. So in the near term, that 5.9% sales growth that we saw for the quarter, we felt really pleased with, and it did represent fundamentally a lot of the large high load factor C&I customers. It was a mix of the ramp-up of the semiconductor ecosystem and their suppliers, and downstream vendors, as well as the ramp-up of some existing data center customers that we've had come online over the last couple of years. In the near term, because Taiwan Semiconductor is such a large component of our sales growth and, as you said, the diverse set of industrial and manufacturing customers are coming in, their ramp really continues throughout this year until they reach full production next year. Their downstream folks and their upstream supply chain are working in parallel. So in the later part of our forecast, there is a lot more from the manufacturing side. In the near term, it's a little more weighted to the data centers. And you need to remember that for us, data centers have been customers we've been dealing with for a very long time. The Phoenix market has been a significant data center market for a while. So we're comfortable with the ramps of these customers, the capacity that they're asking for in the near term. It’s really that longer-term '25 when TSMC's first phase goes fully into production and then in the out years of the plan when Fab 2 and Fab 3 go at full production, where some of that manufacturing growth really takes over the plan. If you look at our IRP over the decade, it's roughly half and half from advanced manufacturing and data centers. It's probably a good way to think about it. There's certainly more demand on both sides than is represented in that IRP, but ultimately, in terms of the customers we can serve on the pace of infrastructure build-out, that's roughly the balance.

That's perfect. Very clear. And I appreciate it. And then, second, on the regulatory lag docket, which you already touched on. So following the March workshop, which I'm sure a lot of us tuned into and noting the yet-to-be-scheduled additional workshops, could you give us your high-level sense of where the proceeding currently stands in terms of the timeline overall until we could see an alternative ratemaking approach being adopted by the commission and actually available for you to use in rate cases? And also, are there any expected key milestones we should be watching for?

Yes. Jamieson, this is Jeff. I think the next one to watch for is the June open meeting, which is likely where they're going to have further discussion. I think there was some thought it might go on the May open meeting. I think it's more likely now on the June meeting. That will be important because I think that's where you'll see the commissioners discuss the process going forward and potentially give some more color on the timeline. I do think there is an interest; the conversation was constructive regarding the exploration of a forward test year and other concepts like formula rates, which we use at FERC. Additional conversations from experts have focused on these programs as well. The content seems to be moving in the right direction. The schedule is being developed, and I think there’s a desire to keep moving this forward promptly. One of the things we'll be watching for is how the process unfolds. I know at some point, they'll have a conversation on whether there's role-making or a policy statement. If you think back to our decoupling workshops years ago, that ended up in a policy statement as opposed to a rule. The policy statement just goes out, and then the utilities can implement that in their rate cases. So we’ll be watching for all that. I expect you’ll see a bit more probably in the next quarter, but the next key milestone is likely that June open meeting where they will discuss the process.

Your next question is coming from Michael Lonegan from Evercore ISI.

Going back to the financing plan, you sized the $400 million of additional equity at 40% of incremental CapEx. Just wondering, any incremental spending beyond that going forward. How would you expect to finance that in terms of portion of equity?

Sure. And going back, Michael, it's Andrew. Certainly, there will be opportunities to look at our capital plan over the next few years. As we see, for example, what projects come out of our RFPs on the generation side and the pace of execution of our strategic transmission plan, we will continue to revisit that CapEx forecast. Some of the drivers I talked about earlier will determine how we fund that. We want to make sure that we're staying in the right spot from our cash flow metrics perspective. We also want to ensure that we're reducing regulatory lag through the mechanisms Jeff just talked about to help support those credit metrics. But again, we want to be judicious about parent company debt. That 40% of incremental CapEx, paired with retained earnings, is how we would ensure that we maintain that debt, plus whatever incremental modest Pinnacle West debt we could take on. One good rule of thumb to think about. We haven't updated the CapEx plan or the financing plan. Until we do so and look at all the markets available to us, that's everything from all of the debt markets available to the parent, to some of the low-cost financing options we've talked about in the past in our slides about continuing to look at things like the DOE lending program and accessing low-cost financing for our customers. Foundationally, I think some modest amount of equity to maintain a balanced capital structure over time is going to be one of the ways to do it, and we will continue to look at all those markets for the $400 million needed and any incremental need.

Great. And then secondly for me, going back to the regulatory lag. Your EPS guidance forecast through '26 presumably isn't accounting for any changes in the regulatory docket in terms of test years or formula rates. Just wondering if there's anything you could share about the earned ROE on the ACC rate base that you are assuming in guidance this year and then over the course of '25 and '26, presumably, it will be somewhat lumpy.

Yes. One of the things we're trying to solve for through the regulatory initiatives is that lumpiness and trying to find a way to create a smoother, more predictable stream. We believe we've got substantial customer rate headroom to be able to make the investments we need over time. When we're dependent on step function kind of rate relief to recover these investments, that's really the challenge we are addressing. We've talked pretty openly about the regulatory lag we're experiencing given the historical test year construct that we're living under. The test year in the rate case we just concluded and put rates into effect in March reflects costs going back to the middle of 2021, before inflation really started to pick up, and we're starting to see an increase in interest rates as well. We are in that period right now where there is that drift around our ability to earn close to our actual ROE while we haven't disclosed a specific number. As we go through time and look at costs that go back to '21 and '22, that definitely increases. We feel very positive about the impact that the SRB can have on creating smoothness and reducing lag. If you look back to what we said in Q4 about the types of projects, there are RFPs nearly yearly at this point and opportunities for us to propose cost-competitive projects we're building ourselves. Between generation and transmission, 30% to 40% of our capital will now have trackers, allowing us much smoother, more predictable recovery. It really comes down to those operating costs, the income statement costs, O&M, depreciation, etc. Any distribution capital not picked up by sales growth needs to be focused on. That's really the focus of these regulatory initiatives, whether it's the regulatory lag docket or the timing of our next rate case. Those are the two levers we have besides our continued focus on cost management. Our customer affordability initiatives, our lean operating culture, are the other lever within our control. We've demonstrated a strong track record there, and we plan for 2024 to reduce our core O&M expense by a couple of percent over the last year, even as we still face substantial inflation for goods and services.

Great. And then a quick final one for me. Regarding rooftop solar installations, are you expecting a continued decline in them to affect residential sales growth, and the LFCR mechanism? I just wonder if you have an earnings sensitivity there?

Not really an earnings sensitivity. I mean you're watching, as we continue to work on the structure that Arizona has adopted with the resource comparison proxy process. As that steps down, you tend to see a little bit of cyclicality as applications go up before the credit steps down because of how the grandfathering works. Then you get a better sense of where they level off. I think we've got the information in the deck. If you want to say anything, Andrew.

Yes. I would just say that if you look at our sales growth even for the quarter, we continue to see that 1.5% customer growth. A lot of that is offset by the continued secular trend around energy efficiency and some attributed generation adoption. We baked into the plan that we expect fairly modest out of that customer growth, and certainly, as we continue to monitor trends around DG and electric vehicles, we will refine that. But effectively, we had that post-COVID work-from-home period, where we had a short window of an increase in residential sales growth. A substantial increase that was really just a break in what has been a secular trend in those residential declines. Ultimately, it goes back to the diversification of our economy and the attraction of more residential customers to the service territory, where we'll continue to see in our forecast some modest increases in residential sales. How much DG offsets that is something we'll have to continue to monitor.

Your next question is coming from Alex Mortimer from Mizuho.

So industry-wide, we're seeing load growth. It seems skewed more towards C&I, obviously, in your service territory. Do you expect cost of service to become a larger point of contention in future regulatory proceedings? And has Arizona taken any steps to address this?

That's certainly been a topic of conversation with the regulators, and there is a lot more attention being paid to it. One of the things to recognize is that having the cost of service done right means that when you get a higher load factor customer, which is typically a C&I customer, the margin on those customers tends to be lower because you get closer to actual cost of service. However, the fixed costs and recovery of fixed costs can actually help the system. You have to be careful to reflect that in the cost of service in a way that accurately recognizes that. In a general concept, high load factor customers can make the system operate more efficiently. So yes, I think you're going to see more attention paid to cost of service to ensure that we get that balance right.

Understood. And then just quickly, can you touch on any conversations you've had with either regulators or other stakeholders, either at the national or state level surrounding the wildfire issue? Are there any specific goals with these conversations as we see the entire industry and certainly the western part of the country trying to work towards a solution?

Yes. There are extensive conversations happening on numerous fronts. It’s not just in the Western U.S. We've seen fire situations arise all over the country. So these conversations involve wildfire task force groups, and you see a lot more Eastern utilities participating, which were previously just conversations among Western utilities. A significant amount of technical work is being done at EPRI to work through some of the solutions on wildfire. There's also substantial sharing among utilities, particularly from PG&E, who are remarkably constructive in sharing their experiences and successes, which is likewise true for all the utilities in the West. The California folks have been at the forefront of this, and they’re very open about sharing the lessons learned and the technology solutions available. There is certainly a robust conversation happening at all levels. Regulators are becoming much more attuned to this, and we've had constructive workshops in Arizona with our regulators, and most importantly, with customers, particularly as you look at the PSPS-type programs. It’s important to be proactive with customers so that they understand the situation and can take measures to prepare. Conversations are also happening on the insurance side to explore better insurance options and whether there’s a role for the federal government to assist. So there’s a lot of work aligning to support wildfire efforts.

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