Good day everyone and welcome to the Pinnacle West Capital Corporation 2024 Third Quarter Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Thank you, Matt. I would like to thank everyone for participating in this conference call and webcast to review our third 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, COO; 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' website, along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our third quarter 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 November 13th, 2024. I will now turn the call over to Jeff.

Great. Thanks Amanda. Thank you all for joining us today. We continue to execute well on our operational performance and financial management. So, as part of my operations update, I'll share with you our success in managing through another record-breaking summer in the valley and reliably serving our customers when they needed us most. I'll also provide an update on the regulatory lag docket, and then Andrew will explain how the hot weather and strong sales growth has led us to update our 2024 earnings guidance, and he'll also discuss our forward-looking financial expectations. So, to start, I wanted to recognize our operations and field teams for doing an exceptional job maintaining reliable service for our customers through the hottest summer on record. In addition to our teams keeping our system reliable here in Arizona, I also wanted to share my appreciation for the 30 crew members who recently volunteered to leave their homes to answer the call for assistance in Florida and help rebuild the grid and restore power to communities devastated by Hurricane Milton. Our industry's mutual assistance network made this possible and it's a great example of living our APS promise by doing what's right for others and delivering for our communities. The summer season here was especially long continuing into mid-October when we finally said goodbye to triple-digit temperatures in the valley. We ended the summer with a total of 70 days of 110 degrees or more and that eclipse last year's record of 55 days; we had a record streak of 113 consecutive days of 100-plus degrees. And we set an all-time new peak energy demand of 8,210 megawatts on August 4th. The hot days, the high nighttime temperatures, and the valley's heat island effect meant that air conditioners were often running around the clock to keep homes and businesses cool. 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 through the summer. Our baseload and our fast-ramping assets all performed well. In addition, we used our virtual power plant that includes our Cool Rewards smart thermostat program. In that program, we've got over 95,000 enrolled thermostats that work together and helped conserve nearly 160 megawatts when called. This summer, during a major storm outage, we partnered with customers enrolled in our program in a unique and historic way. Our customer technology experts worked with a specific targeted portion of that network of thermostats, located in participating customers' homes to help voluntarily conserve power, and that effort, along with operational backups that included rerouting electricity or sectionalizing the system, helped to relieve the strain successfully on the grid that was caused by that storm damage. This is the first time in APS history that a smart thermostat program was used in such a targeted manner using this innovative approach. Long-term planning has been key to providing reliable service. In fact, I'm happy to announce that we successfully contracted for our Redhawk power plant expansion, which is expected to be in service by 2028. This project, along with the projects we announced last quarter, will add more than 800 megawatts of APS-owned generation and battery storage, ensuring that we have the resources necessary to provide reliable, affordable and clean energy to our customers. With the 2023 all-source RFP nearly complete, we're turning our attention to the next tranche of resource needs, and we plan to issue our 2024 all-source RFP in the next few weeks. With the extreme weather that we experienced each summer, it remains as important as ever to continue assisting our communities through our heat relief support programs. APS increased its energy support and crisis bill assistance; maintained the summer moratorium on disconnects for past due bills, and assisted customers with payment arrangements, and we partnered with more than 100 local non-profit and community agencies to connect the state's most vulnerable population with helpful resources. Finally, we continue to focus on providing the best experience to our customers, and I'm pleased to say that year-to-date, our customer care phone center is ranked first nationally among our peers, as rated by our customers in the residential J.D. Power Electric Customer Satisfaction Study. Overall, our customer satisfaction, as rated by customers through J.D. Power, places us in the top 10 utilities among our peers. I'm extremely proud of our employees, our progress so far, and I look forward to closing out this year strong. Turning to regulatory. The commission held a workshop dedicated to formal rates on October 3rd, in that workshop they heard from the Federal Energy Regulatory Commission, consumer advocates, and Arizona utilities. Staff provided recommendations on consumer safeguards and implementation options. We remain focused on making progress towards reducing regulatory lag while enabling the continued growth of a reliable electric grid. Obviously, elections were held yesterday. Those elections included three corporation commission seats in Arizona. With this morning about 91% of precincts reporting, if the current results stand, the Corporation Commission seats would be held by Commissioner Lea Márquez Peterson, Rachel Walden, and Rene Lopez. You can access both to the Secretary of State's website if you want to follow along, and that's at results.arizona.vote. As we look to wrap up 2024, our focus and priorities remain on executing our mission and providing reliable, affordable, and clean service to our customers. And I thank you for your time today, and I'll turn it over to Andrew.

Thank you, Jeff, and thanks again to everyone for joining us today. Earlier this morning, we released our third quarter 2024 financial results. I'll review those results and highlight key drivers and provide an update to full year 2024 financial guidance. Finally, I will provide insight into our 2025 and long-term financial outlook. We earned $3.37 per share this quarter, a decrease of $0.13 compared to the third quarter last year. This decline was driven by several factors, higher O&M and depreciation expenses as well as financing costs and income tax timing. Offsetting these items were positive impacts from the new rates implemented earlier this year. And as Jeff mentioned, another summer of record-breaking heat, which contributed positively compared to last year. We continue to see strong sales growth across customer classes. For the third quarter, weather-normalized sales growth was 5.9%, with contributions from residential and both small and large C&I customer groups. With the continued expansion of our C&I customers, we saw a 10.3% C&I growth this quarter. This marks the third consecutive quarter with over 10% growth in the sector. Foundational to our sales growth has also been our continued strong retail customer growth, which came in at 2.3% for the quarter. Given these positive growth trends and this year's strong contribution from weather, we have updated our 2024 financial guidance. We now expect 2024 earnings in the range of $5 to $5.20 per share and have adjusted our sales growth expectations to 4% to 6% for the year, consistent with our long-term sales growth forecast. Additionally, with the sustained growth and recognizing the ability to utilize some of the weather benefit to derisk both future operating expense and capital investment, we've increased our forecasted O&M for the year to a range of $1.01 billion to $1.03 billion, and increased our capital expenditure plan for the year from $1.95 billion to $2.05 billion. As we look towards 2025, we expect an earnings-per-share range of $4.40 to $4.60. The anticipated decrease in 2025 compared to initial weather-normalized 2024 earnings guidance is due to additional costs associated with regulatory lag, including debt and equity financing costs, and higher D&A, as well as the end of a positive OPEB amortization and one-time gain from the sale of Bright Canyon in the prior period. These are partially offset by continued customer and sales growth and O&M management, highlighting the strong core fundamentals of our business. The growth outlook for 2025 remains robust for our service territory. We expect customer growth within a range of 1.5% to 2.5% and for both 2025 and the long term, as Arizona continues to be a highly attractive destination for both residents and businesses. We are seeing a record number of new customer leader sets on track to set more than 35,000 in 2024, the highest number since the Great Recession, and expect this trend to continue. Additionally, we anticipate weather-normalized sales growth for both 2025 and longer term through 2027 in the range of 4% to 6%, with 3% to 5% contributed by growth in the extra-high load factor C&I sector where demand remains strong and existing customers continue to ramp up. In fact, Taiwan Semiconductor recently reiterated its commitment to build out three fabs in Arizona by the end of the decade. The first fab entered engineered wafer production earlier this year with volume production expected to start in early 2025. Looking further ahead, we remain confident in our long-term trajectory. We are reaffirming our 5% to 7% EPS growth guidance based on the midpoint of our original 2024 guidance range of $4.60 to $4.80. Our financial strategy is designed to support this growth with a continued focus on balancing investment, cost recovery, and customer affordability. Our capital plan through 2027 includes $9.65 billion of investments, a 24% increase from the plan we shared earlier this year. This plan is focused on strengthening infrastructure, improving reliability, and meeting the demands of a rapidly growing service territory, including investments into new generation resources and our strategic transmission plan. These investments are expected to drive rate base growth of 6% to 8%. Notably, over 40% of our future capital investments in this plan are expected to qualify for the system reliability benefit surcharge just approved in our last rate case or through our FERC formula rates, both allowing for improved timeliness of cost recovery. To support the capital plan, we have also updated our financing strategy through 2027. Our plan includes a mix of debt and equity in support of a balanced utility capital structure and matched to our spending profile. Our updated equity needs during this planning period are lower than the target of 40% of new capital we established on our Q4, 2023 call in February and represent a very modest increase in the expected annual equity run rate. From $200 million annually to a range of approximately $250 million to $300 million annually. As we have stated previously, we continue to believe that an at-the-market equity issuance program would match well with our planned accretive capital investment profile. We are always exploring alternative financing options as well and believe that all of the above approach provides us the flexibility to utilize least-cost best-fit financing methods while maintaining a solid balance sheet, targeting metrics consistent with our current credit ratings. As we execute our capital and financing activities to reliably serve our rapidly growing customer base, we remain committed to maintaining a cost-efficient operation. Our long-term goal remains to reduce O&M per megawatt hour. And while we have the final scheduled major outage at our Four Corners Unit 5 facility in spring of 2025, our broader focus only in operations and efficiency will drive continued cost management into the future. As we look ahead to 2025 and beyond, we remain confident in our long-term financial strategy while recognizing and continuing to address the challenges of continued financial lag. Our strong customer growth across classes and robust sales growth, particularly in the semiconductor and broader manufacturing sector continues to highlight the unique benefits of our service territory. This, coupled with our improving regulatory environment that is focused on timely recovery, provides a compelling future. The investments we are making today lay the foundation for sustained growth and value creation for years to come and we remain focused on delivering reliable, affordable service while maintaining a strong financial position. This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

Certainly. Everyone, at this time, we'll be conducting a question-and-answer session. Your first question is coming from Shar Pourreza from Guggenheim Partners. Your line is live.

Hey Jeff, hey Andrew, good morning.

Hey Shar.

Morning. Obviously, Jeff, it's topical this morning to start with the elections. It's preliminary, but it looks like we could end up with three more Republicans with the 5-0 Commission. What could this mean from a regulatory construct standpoint, you guys are making really good progress on items like the regulatory lag proceeding? So, curious if this progress can change in any direction for better or worse. I have to imagine we could see some policy shifts here, but I'm just kind of curious how you're thinking about it?

Yes, I think Shar, generally, there's still some early results pending and a few precincts left to report. But most of the vote is in, and you're right that currently, the three Republican candidates are ahead. This still needs to be finalized. Looking at the comments made during the campaigns, it seems the Republicans had a fair amount of alignment with the current Commissioner Myers and Thomson, particularly regarding issues like the regulatory lag docket. If these results hold, we can expect continued alignment with the current group, which suggests constructive efforts will persist regarding the regulatory lag docket. Additionally, we have engaged with Commissioners from both sides throughout the campaign. I am sure that whoever ultimately wins will have different issues and questions and will seek to understand things better. We look forward to interacting with all Commissioners, ensuring they grasp the drivers and needs of the business.

Perfect. Fantastic. And then just lastly on load growth. On the near term, you guys kind of assume that 4% to 6% for 2024 and 2025. And that, I guess, aligns well with your longer range guide as well. Can you maybe just Jeff, talk about the stickiness there, but also just more wondering just given the conversations you've been having with customers, are there opportunities there where we could see another step change increase in load from a large customer being a hyperscaler? Thanks.

Let me ask Coop to join in on this. I believe it's quite stable. One of our main focuses in Arizona over the past several years, especially since the last recession, has been to shift the economy from a heavy reliance on homebuilding and retirement to more advanced manufacturing. The state has made significant progress in this area. There is a growing manufacturing sector, and I recently spoke with the Commerce Authority, which highlighted various projects underway. These include large data centers that are increasingly interested in Arizona, as well as smaller 5 to 10-megawatt factories and manufacturing sites looking to capitalize on available land. This makes the state appealing for those needs. Our location between Texas and California is advantageous, and we have strong transportation infrastructure. While we may experience extreme summer heat, it’s typically dry. I expect to see continued growth in this sector. However, as we scale up to larger operations, we will need to address the infrastructure to support that growth. We’re collaborating closely with TSMC and are open to new developments. There's significant pent-up demand from both manufacturing and data centers. Did I miss anything, Coop?

No, I would just add, Shar, that you kind of see in the contribution this year, that 4% to 6% is pretty diversified as you move into 2025, you have the TSMC beginning to ramp up and reflective of that diversification in the service territory that Jeff talked about. But it's also been the contribution from small business and residential. We're forecasting 1.5% to 2.5% customer growth continuing. And we've been outperforming the midpoint of that range this year. and you're seeing those contributions across customer classes, and that's a result of the diversification on the large C&I leading to some of that downstream growth as well.

Got it, perfect. See you guys in a couple of days, congrats on this another positive step change.

Thanks Shar.

Thanks Shar.

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

Hey, good morning. Thanks for taking the question.

Hey Nick.

Hey. So, just acknowledging that a lot of this CapEx raise was fit into trapped capital. And thinking through that 95.5% ACC ROE, could you quantify maybe just how much you're lagging there in 2025 on a percentage basis? And then just on the current rate case outlook, when would you have improvement in that ROE? Would it be partial year 2026 and then full run rate 2027? Just thinking through that timing would be helpful. Thank you.

Hey Nick, it's Andrew. As you noted, we have intentionally increased the amount of CapEx that we are tracking, especially with the SRB, which has boosted our confidence in advancing customer-centric generation projects that are affordable and go through our outsourced RFP process. We've also significantly increased our transmission CapEx and have implemented a formula rate in a transmission adjuster, which will benefit us in the long run. However, some of these transmission and generation projects are multiyear initiatives, and there is always some delay in getting them into service and reflected in the trackers. Regarding the fundamental lag, we are focused on the regulatory lag docket and are prioritizing the timely filing of a future rate case because the longer we wait since the last rate case, the more lag we experience. This is reflected in our 2025 guidance. We are encountering similar issues with interest expense and depreciation and amortization as we invest in infrastructure, along with a few structural challenges related to the OPEB item. While we have not determined the exact amount, our primary focus is on increasing CapEx for tracked items and seeking solutions for the non-tracked items to achieve an authorized return on equity as closely as possible. Jeff, do you want to elaborate on how the rate case timing will affect this?

Yes. Nick, if you consider it, the commission is exploring what the structure might look like if they proceed with the formula rate docket, which could alter the nature of the case or how it is filed. In terms of timing, the earliest possible filing would be in mid-2025. If a 2024 test year is used, a mid-2025 filing is anticipated. We haven't made any announcements regarding this, but that is the most realistic timeline, and it would likely take about a year to advance that case. Therefore, we would expect rate adjustments to occur around mid-2026 or the latter part of 2026, regardless of whether the structure follows a formula or a traditional rate case. This timeframe is when relief on some delayed items, like the pension OPEB cliff issue mentioned by Andrew, would be included in the new rate structure. So, the next opportunity to see that would likely be in the latter half of 2026. I hope that clarifies things.

That does. I really appreciate that. And then just one clarification on the financing plan because I know you kind of were highlighting you have these forward draws available from the block you did in February of 2024. But just none of that nets against the $700 million to $900 million figure, is that correct?

That's correct, Nick. The $725 million we secured in the block last February has not been drawn yet. The primary purpose of that was to maintain a balanced capital structure within the utility. In the last plan, we set aside about $400 million for unidentified parent capital for 2025 and 2026. So the range of $700 million to $900 million effectively rolls forward and slightly increases that $400 million by an additional $500 million. We expect that equity will align with our capital needs from 2025 to 2027. We have not made any withdrawals from the original $725 million block, and that will be our first source for that equity. Additionally, we have tools like ATMs and the ability to utilize the forward overlay on the original equity, which we could also consider for future equity needs. Combining both tools will enable us to align our capital expenditures with external financing as we proceed.

All right, thanks a lot. See you in Florida.

Yes.

Thank you. Your next question is coming from David Arcaro from Morgan Stanley.

Hey, good morning. Thanks so much.

Yes, hey David.

Let me see, would you be able to give kind of what you're seeing in terms of a pipeline, the megawatts in your pipeline of data center demand in terms of the large load requests?

Yes, I'll ask, maybe Ted can describe what we're seeing.

Yes, sure. David, this is Ted. We continue to see significant demand, both in projects that we've been working with for several months or even up to a couple of years as well as new demand coming into the service territory. Right now, we've got over 4,000 megawatts of extra high-load factor customers, largely including data centers that we've committed to that are either in construction or development coming online or in the early stages of planning. But in addition to that, we've got over 10,000 megawatts of extra high-load factor demand, again, largely represented by data centers that we are currently working with in a planning process to identify when we can commit to serving their demand based on their location, their capacity needs, and how do we ensure that we meet their reliability requirement while still serving all of our non-data center growth. So, that's what we're looking at right now, but that is fluid, changes frequently and typically changes the upside as demand continues.

Excellent. Yes, thanks for that color. Is it fair to say that 4,000 megawatts are kind of embedded in the current plan?

That's correct. Yes.

Yes. And obviously, a huge pipeline relative to your current system. Just I'm wondering like are there very large data centers in there that would be kind of transformational for your system? Like are you seeing gigawatt scale data centers that I would imagine would have just on their own, pretty big impacts in terms of CapEx investment needs?

The amount that is committed that is already in some form of development phase is relatively distributed. We do have a couple larger single requests that are in the 10,000-megawatt queue that is still in the early planning stages. But the amount that is currently in development that's already baked into our expectations is relatively distributed. And I'll just echo what Andrew said earlier, too, in addition to that 4,000 megawatts of extra high-load factor customers, we're really pleased to see the distributed demand coming from manufacturing as well as residential, which is not insignificant. This quarter alone, 1.7% growth, and we're at the highest new meter set level that we've seen in well over a decade, which is impressive. And so that demand and the demand guidance that we are offering is spread not only across a number of commercial industrial customers but even across the broader segments of small business, large business, data center, and residential.

Yes, got you. okay, great. Thanks so much. That’s helpful.

Thanks.

Thank you. Your next question is coming from Anthony Crowdell from Mizuho. Your line is live.

Hey, good morning guys. Congrats on a great quarter. Just, I guess, quickly on the 5% to 7% EPS CAGR. I mean if I think of the higher end of that to 7%, what is the assumption there on regulatory lag that it's declined or that 5% to 7% doesn't assume the current regulatory lag dock gets enacted?

Yes, Anthony, it's Andrew. Good morning. We view the 5% to 7% growth in relation to reducing regulatory lag as a way to create a more consistent and predictable outcome, rather than relying on infrequent rate cases for sudden increases. We have confidence in our rate base growth and believe we have ample capacity to make these investments affordable for our customers. The reduction of lag would contribute to a more steady growth trend. This would also enhance our cash flow, resulting in better credit metrics and greater confidence in our overall strategy. Ultimately, we aim to smooth out this growth range to provide predictability and transparency each year, rather than being heavily influenced by one-off events. That is our primary focus.

Great. And then just lastly, a lot of conversation around large loads going on in the system. We've seen other states working on changing the rate design to maybe something kind of like a take-or-pay contract or a 10-year take-or-pay contract. Is that something that APS is looking into?

Yes, Anthony, one of the things we're very focused on in talking to those customers is protecting the potential impacts to the existing customer base. And so in a lot of cases, what you're seeing is protection so that if you make a large investment and put a bunch of distribution, transmission infrastructure in for a customer, then they don't show up. You've got to have protection so that, that doesn't then get pushed through to the rest of the customer base. And so there is a fair amount of work that's going on. And we do it collaboratively. We're talking to the large loads in the data centers and trying to understand what things we can do that kind of mutually work for us. But I'd say the focus on that is really in trying to protect the existing customer base and while being fair to those new customers. So, you want to add Ted?

Yes, Jeff is absolutely right. One of the benefits we have in our service territory is we were putting in service some of the large data centers going back to even 2019. So, we've actually been fortunate to develop quite a bit of history and experience in being able to learn their ramp-up and learn how to ensure that we are, one, being accurate and conservative in our forecast of their actual usage versus potentially planned usage as well as ensuring that we have growth pay for growth and that the infrastructure need to serve these data centers is paid by the data centers and preventing any cost shift to our other customer classes.

Great. Thanks for taking my questions.

Yes, thanks Anthony.

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

Hey, good morning.

Hey Paul.

So, I just have one question left. And it goes back to the election. And I've been following this thing on the website that you were talking about. And I apologize, but how many votes did you say were still left to be counted?

I think it's in the 120,000 range.

And that's what percentage of the total vote.

I think we have 2 million.

Okay. It looks like the Republicans are definitely leading, but it's a bit tight. I just want to confirm that. When do you think the votes will be finished?

I think they have some late ballots that need to be counted, and then they have to go through the certification process. However, I believe that by the end of today, we'll likely get closer to a smaller number.

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

Hey, good morning team. Thank you guys very much. Nicely done.

Hey Julien.

Hey Jeff, good morning. Look, I wanted to come back to one thing that Nick was putting the finger on and that was about earned returns here. Just given the uptick in CapEx, and obviously, you've got some of these pieces that aren't as tracked I mean, how are you thinking about that lag dynamic into not just 2025, but really as you think about beyond that in the 2026 and 2027? Given the updated forecast grade, can you provide any kind of initial expectations? I know there's a number of moving pieces there, but just given the CapEx composition, excluding kind of changes in the construct from here, would you expect lag to accelerate or how do you think about the offsets with load growth potentially?

Hey Julien, it's Andrew. The load growth is definitely beneficial, which is why we analyze O&M on a megawatt hour basis. As our footprint grows and our O&M expenses increase, that growth helps cover those costs. When it comes to capital, our focus is on capital allocation. We need to invest in asset classes that will provide a proper return on investment, which has been shifting towards transmission and increasingly towards generation. We're also boosting our distribution and core infrastructure investments, but we are being cautious as we explore potential solutions to manage the lag. We need to file a rate case, as much of the lag stems from the income statement side rather than capital expenditures. Our last rate case was based on a test year that didn't account for the inflation and interest rate increases that followed. Our O&M, interest expenses, and pension costs are all relative to what is reflected on our income statement. The ability to adjust those expenses in the next rate case is crucial, especially since our last case included 12 months of post-test year data. We're now focusing on these tracked capital areas and feel relatively stable from a capital standpoint. We're aware that our capital plan has expanded, and if a new formula rate were implemented, we could have more capital available for investment, allowing us to be more confident in achieving our expected returns. Our primary goal is to address those income statement costs through another rate case and remain strategic and flexible in our capital allocation moving forward.

Got it. So, when you think about the 5% to 7% here, that's with or without the reg docket resolution. Is that a fair way to characterize it from here? Or it's just kind of smoothing out over the course of the plan?

The docket would help us address this issue. As I mentioned earlier, it's about the difference between relying heavily on rate cases and, with the SRB and the transmission adjuster, not needing to rely on them as much. We are shifting from a large dependence on rate cases to having annual true-ups that allow us to recover increased costs when they arise. Additionally, when we have opportunities for customer cost savings, we can return those savings through the mechanism as well, which enables us to earn as close to our authorized return as possible each year, rather than waiting until after a rate case.

Yes, absolutely. And so you say, just if I can tack a little bit, the Q mentioned some inflation actually decelerating here. Your O&M in 2024 is slightly higher. I noticed from last deck. Can you comment a little bit about the inflationary trends you're seeing? I mean, is that another dynamic that we should be putting your finger on as it pertains to lag? And maybe actually, while we're at on net picking, the tax rates down in 2025, is that a good structural rate here? Or you expect that uptick here to the plan to?

Yes. So, starting with the O&M. We increased O&M in 2024. And this is something we do year in and year out. We look at the weather benefit that we may be seeing during the summer and pull forward projects, look at the multiyear horizon for O&M and figure out what we get going forward. And so a chunk of the O&M increase that we saw this year was related to deliberately bringing projects forward into this year. And then as Jeff mentioned in his prepared remarks, funding some of our customer assistance programs, again, a recognition of how hot the summer was. So, some of the O&M you see in 2024 is a result of that. We're certainly still seeing pockets of inflation in some of the items. A lot more of that is on the capital side. But overall, the O&M increase that you're seeing this year is a result of that. It's created a good opportunity next year, and you do see in the 2025 guidance O&M coming down. that's a combination both of the derisking that we did this year. And then, frankly, some of the organic cost management opportunities that we pursue aggressively lean operating culture. We've been working closely with all of our operating businesses on the O&M profile for next year. And that's kind of the result of what you see, the uptick this year and then a pretty meaningful decline next. On the tax rate, the higher tax rate this year relative to next year is simply a result of higher taxable income and sort of pushing us up on an effective basis. Our tax credit portfolio is pretty robust, and we're managing to a lot of the tax rate as we can, but that's just more so a result of what our pre-tax income looks like.

Right. So, it should be pretty stable in that rate, is what I'm hearing from?

Yes, we're pretty stable given the tax credit set.

Yes, exactly. Excellent. thank you guys on the all the details, really appreciate it. Nicely done.

You bet Julien.

Thank you. Your next question is coming from Sophie Karp from KeyBanc. Your line is live.

Hey, good morning guys. Congrats on a solid quarter.

Hey Sophie.

I wanted to ask you about the All-Source RFP. Can you remind us how much of the 8500 megawatts that you procured since 2020 you were able to actually build yourselves through the system reliability surcharge mechanism? And how do you expect your win rate to shape up in the next rounds of this RFP?

Yes. Sophie, this is Ted. I think we've been pretty clear that we believe an even balance between ownership and third-party owned or PPA projects is probably the right long-term mix. We've been able to more than double the successful ownership projects since SRB, in fact, from the last RFP, we've got about 800 megawatts of projects that are currently contracted and under development. We'll be getting ready to issue the next RFP likely later this year. So, we'll see a new batch of projects go through that process throughout 2025. We're not at the, I'll call it, 40% to 50% mix between ownership and PPA yet, but we've more than doubled the ownership projects. And as we continue to process RFPs, we'll look to continue to increase that ownership share.

Thank you for the helpful insights. I have a broader question about inflation in relation to your regulatory lag as you prepare for your next rate case. What are your current inflation expectations moving forward? It may be premature to make definitive calls, especially with potential policy changes in Washington, but how are you approaching future inflation scenarios? This is crucial for managing your rates effectively.

Yes, absolutely, Sophie. It's Andrew. One of the key aspects of our next rate case is that the operating and maintenance costs we established in our last rate case, based on the historical test year, date back to July 2021. Consequently, the rates currently charged to customers do not reflect any of the inflation we have experienced over the past couple of years. Our ability to adjust for the current cost environment is important; while costs may not be decreasing, they are stable. If we maintain our current cost level and remain disciplined in our O&M management, we will be able to align with the current cost environment in the upcoming rate case. However, there is a significant increase required in this rare case due to the lag in recognition. For context, our O&M costs, excluding resources and demand-side management from early 2020, were $850 million. Next year, we anticipate O&M costs in the high $900 million range. This indicates a substantial lag, which is partly due to our expanding service territory, but mainly reflects the reality of our current cost environment.

Yes, okay. Thank you. Appreciate the comments.

Thank you. Your next question is coming from Steve Fleishman from Wolfe Research. Your line is live.

Hi, good morning everyone.

Hey Steve.

You might have answered this, I apologize. But you mentioned less than 40% equity to fund the additional CapEx. I assume, is that just the fact that you're getting more cash flow through more timely recovery or just any other explanation for that?

Yes, Steve. Part of what we achieved with the summer benefit this year involved not only some operational and maintenance risk reduction but also increasing retained earnings that enhance our credit metrics. This strengthens our confidence in our capital plan. As we see sales growth, although we still experience a significant lag in our credit metrics, reducing our deferred fuel balance alongside this growth supports our credit metrics. It enables us to be more selective about our equity needs. The $725 million we proactively set aside provides us the flexibility to be opportunistic regarding equity timing. With the planned increase in capital expenditures and our capability to stay within our credit metrics while maintaining a balanced equity structure at the utility, we can judiciously manage how much parent company equity we take on. The additional $700 million to $900 million in equity from 2025 to 2027 aligns with the capital plan and allows us to maintain our metrics, which is less than 40% of that additional need.

You also, I think, mentioned alternative financings. Could you just maybe give more color what you're thinking there?

Yes. So, we're open to the full spectrum of things. On the debt side, for example, we're always looking at things like the DOE program that is in place today through the IRA. We've always looked at hybrid securities as an option of the parent as a way to manage some of the credit metrics and some of the equity need. We've always to-date been biased towards as straightforward of a capital structure as we can and some of those key points around just balancing the equity cap structure at the utility, not using overly leveraging the parent. And we went out there and issued equity when we needed equities. So, I think the simplest explanation is probably key for us, but we're always open. Are there alternative forms of equity out there? Are there creative ways to finance some of these assets? Are there asset classes that are more attractive to do one way versus the other and there are ways to hide those off. And the DOE loan program is a good example of that. We also recognized $70 million of grants from the DOE this year that helps to defray the financing costs as well. So, we'll be opportunistic, look at the opportunities in the capital markets and in other markets as well.

Okay. And then lastly, nuclear PTC when we finally get that detail I assume that's not in your earnings. Like are you still going to treat it as something you might like defer? Or just how should we think about the nuclear PTC?

Yes, I mean, we're still waiting to see what the guidance looks like.

Yes. And look, at the end of the day, it's a customer asset. We want to make sure that in light of all of the capital needs that we have and the need to do it in a customer affordable way, the trajectory of that PTC is, it belongs to customers. There's this time period before our next rate case where we have to figure out structurally how it works. And I think waiting to see the guidance will be important to that. But you're correct, it's not in any of our guidance today. Ultimately, though, it is a way to defer the cost of the capital investment plan for customers.

Thanks so much.

Thank you. Your next question is coming from Dylan Lipner from Ladenburg Thalmann & Company. Your line is live.

Hey, how are you guys doing? Good afternoon. Good quarter.

Hey Dylan.

Thanks Dylan.

Just wondering, going back to the O&M. I want to know how much of O&M was pulled forward from 2025 into this year?

We are focused on our multiyear plan and the range of O&M projects we have. Regarding our O&M guidance update, we haven't specifically separated the figures for 2025 and 2024 because we are currently in the process of budgeting for 2025. We aim to identify opportunities for reducing risks over several years, and we consider more than just one year in our planning. Each summer, we analyze potential weather impacts and the opportunities that arise from them. For instance, we have an IT infrastructure project that will eventually transition into a capital project, but it has been initially categorized under O&M during planning. As weather forecasts came in, we decided to advance that project to this year rather than defer it to next year. This approach has yielded several similar examples across the company. We don't specifically differentiate between our detailed project adjustments and our overall long-term risk management strategy, although we are also mindful of the ongoing 2025 budget considerations. There is some ambiguity regarding what has been advanced and what will be slated for 2024 or included in the 2025 budget. We consistently seek out these opportunities while also considering capital investments to enhance our weather-related benefits. We recognize the necessity to examine the O&M for 2025 independently, especially with the anticipated changes, including the end of OPEB amortization and the Bright Canyon gain in 2025. Thus, we have spent the year strategizing how to budget for 2025 amid these structural adjustments. A pertinent example involves the OPEB item, which is a facet of our overall employee and retirement benefits. We actively pursued cost-saving opportunities in this area, notably by putting our primary health insurance out to competitive bidding, which is expected to generate significant savings for 2025 by changing insurers for our 6,000 employees and their beneficiaries.

Got you. Thank you for that. And then, going to the regulatory lag docket, the potential that you guys can file a rate case prior to when the ACC could issue a policy statement?

Yes, that is a possibility. They are currently working through the process. I mentioned earlier that the earliest practical filing could be in the middle of 2025. They are addressing the regulatory lag docket, but it's difficult to predict how it will unfold. With new commissioners coming in, there may be delays if they don’t complete it by the end of this year as it transitions into next year, so we will keep an eye on it.

Great. And say a policy statement is made by the commission. Do you expect that the ACC could follow it up with like a rule change?

I mean, it's possible. There are policy statements out here, good at just state as policy statements. And so I think we just kind of watch it as the process develops.

Dylan, this is Ted. Another perspective to consider is that if they issue the policy statement, it will serve to align the commission and stakeholders on the preferred rate-making approach. We would then include that preferred rate-making approach in our next rate case filing. The formula rates from that approach would be evaluated as part of our next rate case and integrated into the outcome of that case. Ultimately, this would lead us to the same result.

Got you. All right, great. Thank you very much guys.

Yes.

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.