Earnings Call Transcript - PNW Q2 2022

Operator, Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Pinnacle West Capital Corporation 2022 Second Quarter Earnings Conference Call. At this time, all participants are on a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to the host, Amanda Ho, Director of Investor Relations. Please go ahead.

Amanda Ho, Director of Investor Relations

Thank you, Kelly. I would like to thank everyone for participating in this conference call and webcast to review our second quarter 2022 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, Executive Vice President 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 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 2022 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 10, 2022. I will now turn the call over to Jeff.

Jeff Guldner, CEO

Thank you, Amanda, and thank you all for joining us today. We were troubleshooting a little bit of static on the line, so hopefully we're able to address that as we get the call started here this morning. Financial results year-to-date in 2022 continue to be in line with our expectations. And so, before Andrew discusses the details of our second quarter results, I'll provide a few updates on recent operational and regulatory developments, and I'll also touch on our ESG progress and accomplishments. As we move through the summer season, our team continues to excel in delivering reliable service to our customers. Each year, we prepare for summer, ensuring that we've got adequate generation resources to meet our peak demand and preparing for the summer wildfire season, which started early this year. Our robust vegetation management, fire mitigation programs, and mandatory line inspection requirements prior to re-energizing high-risk area lines, all contribute to the protection of our infrastructure and public safety, as well as to reliable service for our customers. Additionally, our resource procurement efforts and reserve margin standards have allowed us to provide exceptional service to our customers through multiple days, consecutive days of over 110 degrees, and we're well prepared to meet the expected peak demand through the balance of the summer. 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 has expanded its heat relief initiatives, including partnering 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 or replacement of air conditioning systems during the hot summer months, the Salvation Army's network of 18 cooling and hydration stations across Arizona, and an emergency shelter and eviction protection program that we do in partnership with St. Vincent de Paul. These are just a few examples of our effort to collaborate for the benefit of our customers and our community. We continue to remain focused on improving our customers' experiences. As previously shared, APS' J.D. Power Residential rankings for overall customer satisfaction have improved over the past two years, and thanks to the hard work of our employees, that improvement trend continued with the latest JDP Residential 2022 second quarter results, which reflects our midyear progress. Compared to 2021, APS made quartile gains in every driver of customer satisfaction, and overall satisfaction now exceeds industry benchmarks when compared to our large investor-owned peers nationally. APS is the strongest performing drivers in the latest J.D. Power survey were customer care, and that's both phone and digital, power quality and reliability, and corporate citizenship. And our improvement is also being recognized by our business customers, as we saw in J.D. Power's Business 2022 midyear results. APS is now in the first quartile for business customer satisfaction, and we're also the second most improved utility in the nation. Although we made good progress in our customer experience journey, we're not done yet. I'm proud of the team's progress to date, and I look forward to sharing further advancements in our customer experience journey with you in the future. Turning to our regulatory updates. In June, we filed our notice of intent to file a new rate case with the Arizona Corporation Commission. In that notice, we outlined the various items that we expect to request, including 12 months of post-test year plant to be included in the rate base. This application will really focus on a return to balanced ratemaking, which will enable the company to make the necessary investments to support Arizona's growing economy, resilient infrastructure, service reliability, improved customer experience, and a clean and secure energy future for our customers. We made the decision to delay the filing a few months from mid-year to the end of October to allow for additional time to work with stakeholders and address topics that were raised by Chairwoman Lea Márquez Peterson through various filings in the docket. The rate case will now have a test year ending June 30, 2022, and that test year actually allows us to include changes in revenue, expenses, and investments that we've experienced in the first six months of 2022, and to provide the commission a more accurate view of our current financial needs. In addition, we continue to work with the Arizona Corporation Commission and many stakeholders in an effort to gain a common understanding on a variety of issues and to pursue balanced solutions, and we look forward to continuing that work in our rate case. As an update on our ESG progress, earlier in May, we issued our 2022 all-source RFP in which we're seeking 1,000 to 1,500 megawatts of new resources. That will include up to 600 to 800 megawatts of renewables, and we've seen a very robust response to that proposal. We're currently in the process of reviewing bids, and we expect to develop a short list by the end of August. And I'm also proud to share that for the second consecutive year, the Environmental Protection Agency recognized APS with the ENERGY STAR Partner of the Year Award for excellence in customer energy efficiency programs. These offerings include the APS marketplace, which is a one-stop online shop that offers customers smart energy products and the company's Cool Rewards smart thermostat program. In our fourth year of operation, our Cool Rewards demand response program essentially operates like a virtual power plant where our customers provide over 100 megawatts of flexible clean capacity. The program connects nearly 66,000 APS customers with smart thermostat technology that helps them save money, while also playing an integral role in conserving energy when the demand on the electric grid is its highest. This partnership helps us ensure reliable, uninterrupted service to our customers on the hottest Arizona days, while also assisting us on our journey to 100% clean and carbon-free electricity by 2050. We've made solid progress through the first half of the year improving our customer experience and enhancing our stakeholder relationships and working towards achieving our ESG and clean energy goals. There's certainly more work to do, but this is a good opportunity for me to acknowledge the team's dedication and those early accomplishments. Finally, I'd like to congratulate Ted Geisler on his recent promotion to President of APS. Returning to a separate CEO and President roles within APS allows us to consolidate our core utility functions, including operations, public policy, technology, customer experience, and strategy, and Ted's well-rounded utility experience will be extremely valuable in this role. Additionally, I'd also like to congratulate and welcome Andrew Cooper as our Chief Financial Officer. Some of you met Andrew in his prior role as the company's Treasurer, and I look forward to each of you getting to know him better in his new role. And so with that, Andrew, I'll turn the call over to you.

Andrew Cooper, CFO

Thank you, Jeff, and thanks again to everyone for joining us today. As Jeff mentioned, our second quarter 2022 financial results continue to be in line with our expectations. I will review those results and provide some additional details around sales, growth, O&M, and benefit costs. We earned $1.45 per share in the second quarter this year, down $0.46 compared to the second quarter last year. As was the case in the first quarter, the unfavorable rate case decision continues to be the primary driver for the lower year-over-year results. Again, the largest contributing factor is that the company is no longer deferring the costs related to the Four Corners SCR and Ocotillo modernization project to a regulatory asset, and these costs are now reflected in our income statement, resulting in a reduction of net income. Other negative impacts include lower margin because of lower transmission and LFCR revenues, higher O&M, higher depreciation and amortization, and lower pension and OPEB non-service credits. Weather impacts of the quarter yielded only a modest headwind, despite June of 2021 having been the hottest June on record. Partial offsets to these negative drivers were lower property tax expense, as well as continued sales and usage growth. Turning to sales and usage. Second quarter customer growth was in line with guidance at 2%. Sales growth has seen a strong trend of previous quarters continue as we experienced weather-normalized sales growth in the second quarter of 3.2%, primarily driven by our C&I customer segment. We are continuing to monitor sales and usage trends and are not changing our guidance ranges at this time. The Arizona labor market, which began to recover in 2021, has remained strong in 2022 to date. In May, the Arizona employment rate stood at 3.2%, the lowest state unemployment rate in over 40 years compared to the national rate of 3.6%. In addition, Arizona's population continues to grow and benefit from high net migration into the state. Recent census data shows that Arizona has the highest number of cities included among the top 15 fastest-growing US cities in 2021. Those top 15 nationally included four cities served by APS: Buckeye, Casa Grande, Maricopa, and Goodyear. The cost of living in Arizona and Metro Phoenix compares favorably to many locations from which we receive net migration, including many areas of California. We continue to project steady population growth and solid APS customer growth. In addition, commercial and industrial growth remained strong. In fact, CommercialSearch, a commercial listing platform, found that Phoenix ranks second nationally for industrial development growth in 2022. While the growth we're experiencing is positive, the negative impacts of the rate case continue to outweigh the benefit of that growth. This again underscores the need for substantial capital investment to maintain grid reliability and resource adequacy to keep up with growth as customers continue to move into the service territory and the corresponding need for reasonable and timely recovery of those investments. Like everyone else, we're facing significant inflationary pressures across every area we operate. We continue to rely on our Lean Sigma culture and customer affordability initiatives to mitigate these pressures. We will continue to monitor the inflationary impacts throughout the year and remain committed to our goal of keeping O&M flat and having declining O&M per megawatt hour. Turning to the issue of benefit costs. Given the volatility in the markets, we understand this has been a topic of interest. While we do not calculate 2023 pension expense until year-end 2022, making it too early to estimate, if the markets remain where they are today, we do expect to have some headwind for pension in 2023. However, there are three key points I want to highlight that serve to mitigate volatility in benefit costs and support a robust pension funded status. First, the company practices a liability-driven investment strategy and is currently in a well-funded position. Consistent with liability-driven investing, as the funded status of the plan has increased to current levels, allocation to more volatile asset classes has been reduced in the portfolio. The allocation to lower volatility assets, particularly fixed income, is expected to support funded status and benefit costs over the longer term. Additionally, and very importantly, in the near-term, benefit costs are also impacted by this asset allocation to fixed income, and higher prevailing fixed income yields would be reflected in next year's expected return on plan assets. Second, we employ the corridor test to account for benefit costs, which is a GAAP prescribed accounting method commonly used in the utility industry. Any differences between actual results and actuarial assumptions are booked to an account for possible future amortization. Only the portion that exceeds the corridor test is amortized over the remaining service life. Third, as we look to future recovery and benefit costs, given our mid-2022 test year, we expect to reflect at least a portion of this year's benefit cost impacts in our upcoming rate case. Turning to our current guidance. We are maintaining the 2022 earnings guidance range of $3.90 to $4.10 per share as we continue to see benefits of sales growth but recognize the inflation headwinds. All other areas of our financial guidance remain unchanged. We are confident we can continue to execute on our strategy, and we'll finish the year strong to deliver on that outlook. This concludes our prepared remarks. I will now turn the call back over to the operator for any questions.

Operator, Operator

Certainly. The floor is now open for questions. Your first question is coming from Insoo Kim with Goldman Sachs. Please pose your question. Your line is live.

Insoo Kim, Analyst

Yes. Thank you. My first question just maybe on that pension item and the growth that you're expecting in 2023. I know it's still in flux and there are many moving pieces that could change it by year-end. But it seems like you're relatively confident that you could mitigate or offset most of that. And as we think about, one is that true? And I guess if we think about the ’23 growth off of '22, at least on the midpoint of the current guidance, that 5% to 7%, it's not an annual guidance, but any indication on whether you could still be in that range for '23 or is it too early to say?

Andrew Cooper, CFO

Yes, Insoo, thanks for the question. It is definitely too early to say right now. As I mentioned, we are monitoring from an O&M perspective, as well as this pension headwind. There are absolutely mitigants to the headwind that we see from the market returns on our assets where we stand today. There will undoubtedly be some headwind if the market continues to be at the level that it is today. But what we really wanted to highlight was that because we are so heavily allocated to fixed income, that all asset classes have performed similarly badly this year. But over the long term, fixed income is going to be the right place for us from a low volatility perspective. But in 2023, there will be an offset that I think may be missing from some of the calculations out there because we were starting from an expected return on assets this year that's lower than most of the industry at around 5% because we're so heavily invested in fixed income. And then when you project forward to next year and think about where we'll mark-to-market at year-end, fixed income yields are 200 basis points higher than they were when we set that return last year. And that will weigh into the expected return on asset calculation next year, which is an offset against the amortization of those potential losses that we have on the asset side.

Insoo Kim, Analyst

Understood. Thank you for that information. Jeff, as you engage with stakeholders and prepare for the late fall rate case filing, and considering the potential impacts of the IRA Bill, which might be advantageous for investments in solar and other clean energy resources, I wanted to ask about the clean energy writer mechanism that we didn't obtain in last year's rate case. Is this a significant topic of discussion in your current conversations, and what has been the early feedback?

Jeff Guldner, CEO

Yes. That's obviously an area that we're focused on right now. I think it's important that we continue to have good discussions. I'd say right now we're more in the technical aspects of what's building up the rate case application, as you get further into the case and again, particularly as you start to see which track whether it moves in a settlement track or whether it moves in a fully litigated track, what some of those options are. But Insoo, you're exactly right. You want to make sure you build in conceptually what the benefits of that kind of a tracker are. And in particular in this case, it's focused on just clean energy resources. And it really does help avoid just having serial rate cases come in as we have to catch up with investments that we're making. And so, I think it still presents a pretty compelling case. It's a little out of the ordinary for Arizona regulation. I expect that's something that Tucson Electric is also going to be spending some time on. And so, hopefully there's momentum that continues to build as people begin to see the benefits of having this more smoothly come in and not just force every utility here to come in on serial rate cases, but absolutely a topic of discussion.

Insoo Kim, Analyst

Got it. Thank you so much.

Jeff Guldner, CEO

Thanks, Insoo.

Operator, Operator

Your next question is coming from Julien Dumoulin-Smith from Bank of America. Please post your question, your line is live.

Julien Dumoulin-Smith, Analyst

Good morning. Thanks team. I appreciate the time and welcome Andrew again. Maybe just to come back to the question on IRA here. I just want to talk to a little bit more on that front. First off, AMT impacts elaborate a little bit on the latest there as well as just with respect to you mentioned all-source RFP here etcetera the opportunity to compete more effectively on a level playing field to win ownership opportunities. Again, notwithstanding, obviously the renewable rider considerations that might be limiting vector as well?

Jeff Guldner, CEO

Yes, Julien, we don't see an AMT effect on our end. You're correct about our ability to compete. One significant factor is that if we move towards a solar production tax credit, it would be very beneficial. We generally see the IRA process as advantageous for customer affordability, as it would lower our costs for advancing the deployment of clean technology and help us benefit from various tax credits. This applies to us and others involved in PPA work. There are also several provisions in that bill that help maintain a balance—a balance between utility ownership and PPAs as we progress with the deployment of clean technologies.

Julien Dumoulin-Smith, Analyst

Got it. All right. Excellent. And then related can we talk about the longer term? Obviously, kudos here on the near-term load growth trends, just a little bit curious on what you're seeing on your side as to load growth in the longer term and some of the evolving economic picture here. Specifically, if you can touch on the TSMC contribution that long-term guide, obviously I think it is probably nontrivial to some of the numbers you've thrown out there here, if you can talk about that.

Andrew Cooper, CFO

Sure, Julien. Let me start with the sales and usage side. As we saw this quarter, it's been a continuation of a lot of the trends. I think the most important thing we're seeing is the consistent continuation of that customer growth at that 2% level. From a customer usage perspective, this was really the quarter where we would have seen the maturation of some of those trends from the COVID recovery that work-from-home trend on the residential side. And then, this is really the quarter where the last of the C&I customers started to come online, and we saw a lot of strengths there. So from the perspective of economic activity in the service territory, residential side, that continuation of customer growth is something that has been spot on to where our guidance has been something that we feel pretty good about. On the C&I side, putting aside a longer-term question, which I'll let Jeff take around TSMC, we're seeing the maturation of some of those trends that we've seen play out over the course of the pandemic recovery.

Jeff Guldner, CEO

Yes, Julien. Regarding TSMC, there are several key technology sectors advancing within our region, particularly in semiconductors. We've had Intel here for some time, and now TSMC is expanding in our area. Intel is also opening another fabrication facility in the Salt River area. As you're likely aware, this clustering effect encourages other chip manufacturers to consider joining that ecosystem due to the abundant infrastructure support. Arizona State University and our state university systems are producing engineers at an impressive rate, which will further enhance the semiconductor ecosystem. TSMC's ongoing expansion will require us to keep pace with their growth and collaborate closely with them. While it is still too early to determine the exact timing for supply chain developments, we will provide updates as necessary since they are expected to become our largest load and customer. Additionally, we should also monitor the electric vehicle sector, with companies like Nikola Motors and Lucid establishing themselves in the Metro Phoenix area. We've noticed significant scaling down at the Lucid Motors site, where the factory size they are developing is remarkable. As these niche markets grow, we are already seeing strong advancements in bioscience and are optimistic about the growth in advanced manufacturing within our service territory. This will positively impact the efficient utilization of our resources. I hope this information is helpful.

Julien Dumoulin-Smith, Analyst

Yes, absolutely. And the bottom line you weren't seeing any shifting yet, as you said too early to tell on timing for TSMC either way.

Jeff Guldner, CEO

Yeah.

Julien Dumoulin-Smith, Analyst

All right, excellent, guys. Thank you very much, best of luck. See you soon.

Jeff Guldner, CEO

Thanks, Julien.

Operator, Operator

Your next question is coming from Nick Campanella with Credit Suisse. Please post your question, your line is live.

Nick Campanella, Analyst

Hey. Good morning. Congrats to Ted and Andrew. So I just wanted to ask on O&M. I think you had like roughly $0.10 headwind this quarter. If we look at the O&M, it's up like 6% to 7% versus time last year. And I know annual guidance is out there pointing to just a 4% kind of decrease. Can you just help kind of reconcile that? Is there kind of specific to the back half of the year that you have line of sight on to still hit that? And then, how do we kind of think about going into 2023, just being able to kind of manage the O&M line without new rates and the current inflationary backdrop that we have? Thanks.

Andrew Cooper, CFO

Sure, Nick. So we are definitely beginning in this quarter to see some of the headwinds from inflation play out, and that's what you're seeing reflected there. I don't think there's anything particular about the second half of the year. We certainly continue to monitor in the third quarter and going into the rest of the year. That balance between sales and O&M and so really aren't in a position to make any changes at this point just monitoring that. Keep in mind, a lot of the inflation we're seeing is on the capital side. Jeff mentioned the RFP that we put out. We'll see in that RFP how some of those project costs play out, and those are the longer lead-time piece of this. So from the perspective of O&M, it's really for us to continue to be vigilant on our customer affordability and land segment initiatives and just continue to monitor for this year and going into next. That's kind of the key for us. Fuel cost, obviously was a big inflationary item this summer. We were very well hedged 85% plus, and that really helped to from a customer affordability perspective on the PSM mechanism to make sure that some of that was blunted, given how high gas prices have gotten for our business. So really just a continued vigilance and monitoring for the rest of the year.

Nick Campanella, Analyst

Okay. Okay. So just continuing to monitor. Got it. And then if I could just go back to the pension, you had this disclosure on the slide about 100% of interest rate volatility using a combination of fixed income portfolio assets and US treasury future contracts. How does that kind of affect the downside to the assets? And just our understanding is just as rates go up, the contributions required would maybe be lower, but just can you help us understand how that plays in here?

Andrew Cooper, CFO

Yes. No, it's a great question, Nick. And so that hedging process, which is our liability-driven strategy is really about funded status. And that is kind of our north star is to be in a position to not make future contributions to the pension. We don't project any contributions over the next few years. The funded status remains relatively intact. That 100% is – makes us agnostic to changes in interest rates. We do have a 20% allocation to equities and other risk assets still today. Those assets from an asset perspective may move and that can create actuarial gains and losses relative to what our expected return is. So the allocation to those treasury securities and other fixed income securities is the LDI strategy, matching up our liability with our asset and becoming agnostic to moves in interest rates, so that our funded status doesn't change materially. Being heavily allocated to those fixed income securities is helpful to reduce the volatility of benefit costs, but it is not hedging the asset per se. It's hedging the relationship between the asset and the liability.

Nick Campanella, Analyst

Got it. Okay. And then if I could just follow up on the pension thing just one more question. I know that you have other income guidance in 2022, it's like $60 million to $65 million or so. And what type of pension return inform that number for year-end 2021? And I guess if we were trying to kind of extrapolate how that number could change as you get into 2023 here? Could you give us any color?

Andrew Cooper, CFO

Yes. So that number is the accumulation of actuarial gains and losses over time. Given where asset classes were in 2021 and 2020 and prior years, you're seeing a significant contribution from actuarial gains in those years. It really – it's reflective of the returns on the assets in our portfolio in the prior year, which have been historically still fairly fixed income heavy. We're at 80% fixed income this year, 20% equities. And I think that will help – hopefully help you extrapolate. The information we provided this quarter in the deck is meant to kind of give you each driver and how it responds to changes in market forces as well as interest rates and discount rates generally. So if you kind of take the combination of those factors, that's how we arrive at that non-service contribution or cost at the end of the year.

David Peters, Analyst

Yes. Hey, hope you guys are all doing well.

Jeff Guldner, CEO

Hey, David.

David Peters, Analyst

Hard to keep harping on this but I just had another question on the pension and OPEB. Understanding that a lot can happen between now and year-end when you guys actually mark the assets. But is there any like sense or sensitivity you can think on how to think about the potential impact in 2023? Again, understanding that a lot of the assets are fixed income, which are faring better than equities, but still down 10% or so nonetheless? Thank you.

Andrew Cooper, CFO

It's challenging to establish a straightforward guideline because numerous factors influence both our service and non-service costs in relation to changes in interest rates. As interest rates approach zero, certain line items react differently, and rising interest rates can heighten sensitivity. The impacts aren’t linear. Starting with the main factors, our service costs are affected, while interest costs, which are not linked to market returns, are influenced by discount rates that move inversely with interest rates. Our anticipated return for the upcoming year may be based on a smaller asset base if there was a negative return the previous year. However, there's a positive effect from re-evaluating fixed income yields. Additionally, any amortization of actuarial gains and losses is always netted. Therefore, if there’s a loss in asset return from the previous year, before applying the corridor test—which is the accounting method we employ—we net any actuarial gains resulting from our discount rate being higher than expected in 2022. This results in a smaller net actuarial loss that we will then apply the corridor test to and amortize. These are the primary drivers, and we strive to keep all of them in mind. None operate linearly or in perfect sync with one another, but they are the factors guiding our expectations for any anticipated headwind based on market return.

David Peters, Analyst

Okay. Appreciate that. And just to clarify that, 100% hedging on interest rate volatility, does that help protect asset downside on the 80% of the fixed income allocation?

Andrew Cooper, CFO

Not directly. What it does is ensure that as interest rates change, if the asset decreases or increases, the liability decreases. When the liability decreases, the asset increases. This approach is designed to maintain our funded status by considering the average service life of our plan participants and making us less sensitive to fluctuations in interest rates, so that our funded status remains stable. While being heavily invested in fixed-income securities helps to reduce the volatility of benefit costs, it does not directly hedge the asset. Instead, it hedges the relationship between the asset and the liability.

David Peters, Analyst

Okay. Perfect. Thank you. Just one other question, separate. Just with respect to the sales growth, obviously, continued strong follow through in Q2 from Q1. Anything that you've seen changes as of late? And then, maybe you could just remind us within the EPS CAGR that you guys have until, maybe, I guess, you have new rates in effect from this next rate case. How much of that is being driven by sales specifically?

Andrew Cooper, CFO

So the big trends we're seeing right now on the sales growth side are, sort of, that consistent customer growth, as I mentioned. We had a strong showing from C&I growth this quarter, and that was really a result of the return to normalcy from the perspective of our C&I customers, in particular, schools and government institutions. On the residential side, continuing to see customer usage start to get back to normal levels, as anyone who was working from home is now working from home. So the residential side is really just going to be continued to be driven by customer growth. Over the long term and implicit in that 5% to 7% EPS CAGR is this near-term 1.5% to 2% growth that we're tracking towards monitoring. And then, in the longer term that 3.5% to 4.5% growth, which is driven on the back end by a lot of the factors Jeff talked about earlier from some of our large industrial customers, which contributed an incremental 100 basis points to growth over that time period. And that's really the key thing baked in from a sales perspective.

David Peters, Analyst

Okay. Thank you, guys.

Andrew Cooper, CFO

Yes. Thank you.

Operator, Operator

Your next question is coming from Shar Pourreza with Guggenheim Partners. Please pose your question, your line is live.

Shar Pourreza, Analyst

Hey, guys.

Jeff Guldner, CEO

Hey, Shar.

Shar Pourreza, Analyst

Jeff touched on the pension topic, and there are various estimates regarding the potential impact. Is the takeaway that you can offset the entire impact today, or just part of it, without going into further details about what that impact could be? What should we highlight?

Jeff Guldner, CEO

The challenge we face is that we don't know how it will be marked at the end of the year, making it difficult to provide a solid estimate. While there are strategies we can employ, I can't guarantee that we'll fully offset the challenges this will bring. We anticipate this will be a headwind for us in 2023 and, depending on the amortization, may continue affecting us for a while. Our focus remains on adhering to our Lean Sigma culture and effectively managing costs. We have a split test period for averaging, which is similar to how it was handled in the last rate case. We aren’t planning to propose a deferral mechanism or any other regulatory approach since we have other priorities for the rate case. We will work on mitigating this headwind as we do with other challenges, but I can't guarantee we'll fully manage it all. We remain committed to delivering on the long-term guidance we have provided.

Shar Pourreza, Analyst

Got it, got it. And then just where are you trending towards your O&M guide? Are you closer to the lower end just given the year-to-date performance?

Andrew Cooper, CFO

As of now, Shar, we're maintaining the guidance range that we have. We're seeing those pressures. We're going to continue to watch it as we get through the summer, see where we are. As I mentioned, a lot of the challenges around capital and some of the new projects that we're starting to engage in, it's not been easy but some of the same things Jeff said around our customer affordability and maintaining that vigilance is what we are focused on doing right now.

Shar Pourreza, Analyst

Got it. And then just lastly, and thank you for this. It's just around guidance for 2023 with the rate case being filed towards the back half of this year. Are you going to just wait on providing any visibility around 2023 until the rate case concludes?

Andrew Cooper, CFO

Yeah, Shar, that would be consistent with our prior practice. So that's what's anticipated right now.

Shar Pourreza, Analyst

Fantastic. That was it. Thanks, guys. Appreciate it.

Andrew Cooper, CFO

Yeah, thanks, Shar.

Jeff Guldner, CEO

Thanks very much.

Operator, Operator

There appear to be no further questions in queue at this time. I'd like to thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.