Good morning, everyone, and welcome to the Pinnacle West Capital Corporation 2024 Second Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. And we will open the floor for your questions and comments after the presentation. 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 second quarter 2024 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, 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 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 second 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 August 8, 2024. I will now turn the call over to Jeff.

Great. Thanks, Amanda, and thank you all for joining us today. Second quarter financials were positively impacted by a number of factors: the implementation of new customers, weather, and increased sales growth. Before Andrew discusses the details of our second quarter results, I'll provide a few updates on recent operational and regulatory developments. Starting with our operations. As we progress through the summer season, I am really proud to say our team continues to excel in delivering reliable service to our customers. In fact, we just experienced the hottest June on record in Phoenix with an average high temperature of over 109 degrees and an average overnight temperature of 85 degrees. According to the National Weather Service, the average high temperature in Phoenix during the second quarter was 98 degrees Fahrenheit, which is an increase of 2% over the same period last year and 1.4% above the 10-year historical average. The number of residential cooling degree days, that's a utility measure of the effects of weather, in this year's second quarter increased 53% compared to the same period a year ago and was 24% higher than historical 10-year averages. Our robust planning, resource procurement efforts, and our dedicated team have allowed us to provide exceptional service to our customers during this unrelenting summer season. I truly want to recognize our operators and our field teams for doing an exceptional job making sure our customers continue to have reliable service through this persistent heat. With the extreme weather we experience each summer, it remains crucial that we continue to assist our communities through heat relief support programs. We've partnered with local community organizations to aid the state's most vulnerable populations. This support includes a collaboration with the Foundation for Senior Living, where we offer emergency repair and replacement of AC systems during the hot summer months; the Salvation Army's network of cooling and hydration stations across Arizona, and an emergency shelter and addiction protection program in partnership with St. Vincent de Paul. We also offer a variety of assistance programs for those struggling with their bills. These resources include the Energy Support programs that provide limited-income customers with up to a 60% discount on their monthly bill; Crisis Bill Assistance that provides up to $1,000 annually to qualified limited-income customers who experience unexpected financial hardships; and Project SHARE, which is a Salvation Army-administered service providing up to $500 annually in emergency bill assistance. We plan years in advance to serve customers with reliable and affordable energy. Our resource planners secure a diverse energy mix to meet demand, including solar and wind, and rely on the energy provided by our share of the Palo Verde Nuclear Generating Station. When temperatures cause demand to increase, APS's strength and resilience come from using flexible resources like natural gas and energy storage to keep homes and businesses cool over long stretches of extreme heat. We’ve taken this comprehensive approach to provide the most affordable and reliable service when our customers need us the most. Recently, we've executed agreements on multiple projects resulting from our 2023 All-Source RFP to be online between 2026 and 2028, which includes over 400 megawatts of APS-owned resources already reflected in our capital plan. We're still in negotiations on additional projects and we look forward to announcing those in the future. We are always seeking the best combination of resources to serve our customers reliably, without sacrificing affordability, while continuing to build towards our clean energy future. Additionally, we remain focused on providing exceptional customer service. I'm proud to share that through the first two quarters of the year, the 2024 J.D. Power Residential and Business Survey results have placed us in the first quartile compared to peers. We've made remarkable progress over the past few years, moving from fourth quartile to first. I can absolutely say that progress would not have happened without the dedication and commitment of our hardworking employees across the company. Turning to our regulatory update. The Commission has continued to progress in the regulatory lag docket. At the July open meeting, the Commission unanimously voted to hold additional workshops and the next workshop is scheduled for October 3rd. Commission staff stated that the workshops will be focused on formula rates and future test years with experts sharing their experience with each of these regulatory structures. We'll continue to work with the commission and stakeholders on this important issue of reducing regulatory lag in Arizona. We've made solid progress through the first half of this year, improving our customer experience, enhancing our stakeholder relationships, and executing on regulatory priorities. We look forward to continuing to provide exceptional service for our customers throughout the remainder of the year. With that, I will turn the call over to Andrew.

Thank you, Jeff, and thanks again to everyone for joining us today. This morning, we released our second quarter 2024 financial results. I will review those results and provide some additional details on key drivers for the quarter. We earned $1.76 per share this quarter, an increase of $0.82 per share compared to the second quarter last year. New customer rates, the weather, and continued robust sales growth were the main drivers for the quarter-over-quarter increase. The 2019 rate case appeal outcome, income tax timing, and O&M savings were also positive drivers for the quarter. Higher interest expense and depreciation and amortization expense were the primary negative drivers compared to last year. As Jeff mentioned, we experienced the hottest June on record, which contributed to a $0.29 benefit from weather versus this time last year. As a reminder, last year, we saw the mildest June since 2009. Our sales growth continued to be strong during the second quarter, providing a $0.24 benefit with total weather-normalized sales increasing 5.5% compared to the second quarter last year. C&I continued its robust growth at 10% for the quarter. This is primarily due to the ramping of large manufacturing and data center customers in our service territory. Although we are not changing our 2024 sales growth guidance at this time, our weather-normalized sales growth year-to-date has aligned more closely with our long-term sales growth guidance of 4% to 6%, of which 3% to 5% is expected to be attributable to our extra high load factor customers. Turning to economic conditions in Arizona, we experienced 2.1% customer growth in the second quarter and the fundamental economic factors supporting this growth remain strong. National inflation is declining, with the Phoenix Metro area, in particular, experiencing a year-over-year inflation rate of 2.7%, as of June data, which is below the national average of 3%. Additionally, Arizona's unemployment rate hit an all-time record low of 3.3% in June, which is below the national unemployment rate of 4.1%. These positive economic indicators underscore strong support for continued growth in our service territory. Our O&M initiatives have delivered benefits this quarter. We've been successful in our efforts to lower core O&M expense across various areas of our operations, including both nuclear and non-nuclear generation costs. We are making progress in our planned outages to keep our generation fleet resilient and reliable, with our goal remaining a decline in O&M per megawatt-hour while ensuring we meet the critical reliability demands of the summer season. While interest expenses rose in this quarter compared to last year due to higher debt balances and increased interest rates, we are managing our financing costs proactively. Additionally, our depreciation and amortization expense has increased, reflecting our investment in planned IT projects and other grid investments. These strategic projects are expected to yield long-term benefits even as they impose additional drag throughout the year. We have successfully executed our capital investment program and related financing strategies this quarter, managing our debt maturities. This quarter, APS issued $450 million in bonds in early May. In early June, we closed on both $525 million in convertible notes and $350 million in floating-rate notes at Pinnacle Labs. We are committed to seeking the most advantageous opportunities to strategically finance our capital plan. Finally, all other aspects of guidance remain unchanged, including 2024 EPS. However, if the sales growth and weather trends we experienced during the second quarter continue, we expect to be towards the higher end of our EPS range. We are closely monitoring sales growth and weather for the remainder of the year. We have had a strong first half of the year and are excited to continue executing our strategy throughout the rest of 2024. We are focused on ensuring our customers have safe and reliable power to navigate the summer heat. This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

Certainly. Your first question is coming from Shar Pourreza from Guggenheim Partners. Your line is live.

Hey guys.

Hey Shar.

Hey Jeff. The weather-normalized sales growth of 5.5% is in line with your longer-term target of 4% to 6%. Can you elaborate on how sustainable this is for the commercial and industrial environment? If it is sustainable, that would position you well for 2024, but how should we approach 2025 as we transition from 2024? Additionally, what implications does this have for your long-term capital program and earnings guidance? Thank you.

Hey Shar, it's Andrew. Yes. So as you mentioned, 5.5% sales growth for the quarter, largely driven by those large C&I customers continuing to ramp up. And so you saw that coming from both the manufacturing customers, TSMC's ecosystem, as well as data centers. We're still guiding to a lower range this year as that ramp starts up in a longer-term range of 4% to 6%. We have not provided guidance out past 2026 and don't intend to do so today either. But if you think about the long term, there is a substantial backlog of these customers that extends beyond 2026. You have the second and third phases of TSMC committed. We have over 4,000 megawatts of data center customers that are committed as well. That doesn't even include the backlog of more than 10,000 data center requests that we've gotten beyond that. The stickiness of the large C&I sales growth is a critical trend, and we expect it to continue based on what we're seeing in the service territory. The only other thing I would just add about the sales growth from this quarter is we saw a nice contribution to that C&I sales growth from small businesses. Two-thirds to 75% of the large C&I; that 10% growth in the C&I segment was from the larger customers. But we did see small businesses continue to flourish as well. This speaks to what Jeff and I spend a lot of time talking about, which is the amplification effect of a strong economy here and a rebuilt manufacturing base, and we're starting to see some of those effects.

Yes. I mean the tailwinds are obviously pretty evident. I guess, Andrew, what's the podium for you to revisit this and update investors? Is it sort of with the year-end update? Or could we see something closer as we get to EEI?

We do typically, when we're not in a rate case year, provide updates at the third quarter around EEI as we suggest. That’s certainly from the perspective of rolling forward our guidance and providing the long-term outlook on the sales growth, as well as the capital that goes with it. I know in your first question, you asked about capital as well. So that would be the intent, to look at the third quarter there, as well as ensuring that we're continuing to see these ramp trends. As we've seen over the last few years with these large high-load factor customers, the ramps can be a little variable. We want to ensure that the 10% growth we saw in the first half of the year continues before making any changes to sales guidance.

Okay. Perfect. And then just lastly, the reg lag docket that's kind of out there, I mean, obviously, another workshop. Maybe just provide just a little bit higher-level thoughts on kind of where the timeline stands today? Any incremental details you can provide coming out of the recent meeting and just additional milestones? Because it seems like it's gaining fairly good traction, but I just wanted to see if there's anything incremental to add there? Thanks.

Yes, I'll start, and then others can join in. You are seeing the experts brought in to have a meaningful conversation about the systemic actions happening in other places and how those work. The encouraging aspect is the willingness to understand the implications, especially concerning the investment needed to support growth in Arizona. Arizona's broad regulatory environment has attracted numerous customers, including Red Bull and TSMC, which must align with our capacity to meet the anticipated growth. Understanding this larger context has been beneficial for the workshops. It's positive that another workshop is scheduled for October, and there will likely be ongoing discussions about various aspects. Currently, a significant focus is on the forward test years and the formulaic approach to rates, similar to FERC. While it's still early in this process, efforts are underway to articulate alignment and direction for the remainder of the year. I see this as good progress, and we are actively engaged to provide the necessary support as these policy options are evaluated.

Perfect. Appreciate it, guys. Congrats on the execution. It's pretty notable.

Yes, thank you, Shar.

Thank you. Your next question is coming from Nick Campanella from Barclays. Your line is live.

Thank you for your time. I wanted to clarify if October is really the date you are aiming for regarding this issue. I know there will be some open meetings before then, but is October the target?

Yes. It's October.

Okay. And then I guess just with the strong start to '24, what are some of the negatives that we might not be contemplating here that would keep you within the guidance range? I know you kind of said that you're at the higher end? And then just knowing that the long-term CAGR is not linear, obviously, that's going to be predicated on rate outcomes. Is there any kind of pull-forward opportunity from O&M or otherwise to kind of help derisk your '25 outlook within the range?

Sure. Hey Nick, it's Andrew. In terms of things we're monitoring for the rest of the year, as I mentioned earlier, certainly on the sales side, I want to make sure that ramp rate continues with our customers. Residential sales continue to have some customer behavioral elements that we watch as well, including the end of a very hot summer. We saw some of those at the end of summer last year. Overall, the sales growth trends have been a positive tailwind to date. The spot we certainly continue to watch that could lead into your second question is just around O&M. We've been judicious in the first half of the year to engage some of those O&M savings. Our guidance for the year for O&M contemplates a 2% reduction in core O&M to accommodate some large planned outages we have this year, leading to a 2% overall increase in O&M. The largest of the outages is still to come with Four Corners in the second half of this year. As we watch the O&M picture, we've seen a good story year-to-date. Those savings from exercising our lean muscle and all the operational efficiencies we've been pursuing have played out according to plan. However, as we engage in that outage, the planning and work we've done to keep us within our O&M range is crucial. There aren't many other items that rise to the top of the list concerning potential headwinds other than the normal economic and sales-related ones. We've derisked our financing plans for the year by completing all the financing we did. So we have a good handle on our rate picture for the year and the D&A is what it is based on the assets going into service. Just to reiterate on O&M since I think the outage picture is the one we focus on for the rest of the year. We are exploring our multi-year O&M plan and where we can derisk it. The reasoning for that is the Four Corners outage continues into '25, which gives us flexibility in how we initiate some of these O&M projects, whether on the T&D side or the technology side. There are many factors we review to find agility in our approach. So the short answer is yes, we will look at O&M as we continue to monitor weather patterns and see how the outage schedule pans out.

That's great. I appreciate that color. And one more, if I could, just with the reg lag docket gaining traction, you also have this ACC election in the background as well, and that all kind of culminates around this Fall timeline. How do you see that changing the direction of the lag docket, if at all?

Yes, I think the lag docket is moving forward on the schedule they have. The election is still pretty early; we're just out of the primaries here, and most of the attention currently is on top ticket races. Therefore, there hasn't been much dialogue about commission election issues. We continue to engage with the candidates on both sides, and it was an uncontested primary on both ends. We have been in contact with candidates on both sides as part of our desire to maintain conversation, especially because it ties back to the growth we're seeing in the state and the need to support that growth. Governor Hobbs has been very supportive of growth in the state, continuing actions that follow up on what our Republican predecessor has been driving.

All right. Thanks a lot.

Thank you. Your next question is coming from Michael Lonegan from Evercore ISI. Your line is live.

Hi, thanks for taking my questions. On the financing plan, just wondering if you have any updated thoughts on the timing and type of equity or alternatives. I know you previously said you were leaning towards an ATM program that could match up well with capital deployment.

Michael, it's Andrew. Yes, so no updates at this point. If you recall, we did the big block equity that we wanted to ensure that we have a robust balanced capital structure down at APS. That's underway and we'll draw that over time; we have 18 months to do so. We derisked our maturities for both APS and Pinnacle West during the second quarter with a number of debt instruments, which has consumed some of the debt parent amount in our three-year financing plan. This predominantly leaves the incremental external financing we need to do at the parent, the $400 million number that we have in our plan. Ultimately, at the base case, there still remains common equity. We will look at other instruments as alternatives, and an ATM program is an ability to match capital needs with external financing. That would be our base case. As we move through the year and think about rolling forward our financing plan, an ATM program tends to be a three-year initiative. We're kind of done with our '24 equity needs. Therefore, as we look to '25 through '27, we'll provide any updates; however, the $400 million is the number we are targeting at the moment and ATMs remain our base case.

Great. Thank you. And then going back to the regulatory lag docket, depending on when it's complete and what comes out of it, do you think you'll start preparing a rate case filing right away and file that when it's complete, say, four to five months later? Or could we even see a rate case before that docket is finalized in various forms of what the regulatory lag docket could look like?

Yes, I think we are still working through the docket and trying to understand the direction it’s heading to inform our path from that point onwards. We will see how the next workshop looks and how they continue to work through the process, and obviously, we will keep people posted.

Great. Thanks for taking my questions.

Yes, thanks, Michael.

Thank you. Your next question is coming from Travis Miller from Morningstar. Your line is live.

Good morning. Thank you.

Hey, Travis.

You talked a lot at the beginning about the customer bill assistance and the higher bills and stuff. Is there any chance, with the weather if it stays hot or gets hotter, that could impact working capital for you? Or the regulatory mechanisms that would offset some of that cash flow issue potentially?

Yes. Certainly, we've been working over the last number of years where there's a moratorium on disconnects during the summer. Our pace of customer receipts tends to be predictable throughout the year. So we plan our financing, both long-term and short-term, to accommodate the normal pace of customer payments over the year. The programs we participate in, along with direct funds from our bottom line, as well as the ones we work with our partners provide an opportunity to relieve some pressures on customers from a billing perspective throughout the year, especially as we come out of our summer season when those bills become more front of mind for customers.

Okay. Got it. And then another heat question, if we do see these unusual temperatures. What kind of planning do you perform in terms of system resiliency or even equipment-type planning for the heat? I'm thinking extreme weather taking out some equipment as we've seen in other places with extreme cold weather. What contingencies do you have on your system?

Yes, I'll start. That's part of the process, and we've obviously been through the hottest temperatures in Phoenix in the past. You have to manage through this and there is a focus on personnel, making sure that your crews working in the heat have access to air-conditioned trucks while managing workflow. There is considerable work on monitoring equipment that shows heat sensitivity. Ted and Jake, do you want to add anything?

Yes, Jeff, you said it well. The only thing I'd add is that the temperatures we've seen so far fall within our design criteria and what we planned for. It's interesting that while we saw higher sales in Q2 due to weather, we still didn't break our peak demand compared to last year. That indicates we experienced higher low temperatures at night while having more consistent days at or exceeding 110 degrees. However, we did not encounter the extreme heat that occurred last year. From an equipment standpoint, we take this seriously. We have resiliency plans, and we study each summer, which informs our future design criteria. We're sitting well in terms of the impacts on equipment, and we'll continue to monitor and adapt moving forward.

Yes, just to clarify, the highest temperature recorded in Phoenix was 122 degrees in 1990. This is something you must plan for during hot desert summers.

Whenever you want to send that heat to Chicago, I'd appreciate it. I'll even trade you some 0 degrees over there, if you’d like. I appreciate the thoughts.

Yes, thanks, Travis.

Thank you. Your next question is coming from Julien Dumoulin-Smith from Jefferies. Your line is live.

Hey guys, can you hear me?

Yes, hey Julien. We can.

Hey guys. It's a pleasure. Thanks for the time and the opportunity. Coming back to the rate case timing and the expectations of how this would filter into the reg lag front. It sounds like there wouldn't be too long a period of time, after resolution, say in October, leading to early '25. Is your expectation that ultimately, the impacts would be around mid '26 for addressing that lag and evaluating the extent of it?

Yes. Julien, on the process, there's a workshop scheduled next in October, which serves as a key data point. Once visibility into that is increased, it's fairly standard; it takes about six months to prepare a filing, typically about a year to work through it. Factors like settlements could also play into the analysis. We're in August now, and with the upcoming workshop in October, it’s important to see how dialogue continues and how comfortable they become with the information being presented. You're starting to see movement helping address regulatory lag items. The SRB was approved in the last case and applies not just to us but another utility in the state. Those are the kinds of considerations we continuously work through to achieve a more contemporary recovery of capital incentivized to meet the growth we have.

Awesome. If I can push on the SRB, I mean, it’s an evergreen program, right? As long as we get subsequent revisions on your generation needs and you're still negotiating on some of the assets, everything will be eligible to participate in the SRB, right?

Yes.

Thank you. Your next question is coming from Paul Patterson from Glenrock Associates. Your line is live.

Hey, good morning, guys.

Hey, Paul. Good morning.

I apologize for being slightly unclear, but it sounds like you guys are expecting this regulatory lag proceeding to move somewhat rapidly. I want to ensure I understand this. There's a workshop scheduled in October, but do you think things might move rapidly after that? I wanted to get some sense on that. Would it be safe to assume you guys will not file a rate case until you get a determination in that proceeding?

On the latter, we do not know where the proceeding is ultimately going to lead. I wouldn't say that. Again, we are in August; the workshop is scheduled for October. I expect some dialogue at that workshop regarding the process's timing. It appears they're being deliberate in how they’re moving the workshop forward. It’s challenging for me to propose expected dates now; we need to see how that dialogue goes in October.

Okay, thanks for the clarification. I appreciate it. Have a great one. Stay cool.

Yes, thanks Paul.

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.