U.S. Markets open in 8 hrs 32 mins

Edited Transcript of PNW earnings conference call or presentation 1-May-19 4:00pm GMT

Q1 2019 Pinnacle West Capital Corp Earnings Call

Phoenix May 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Pinnacle West Capital Corp earnings conference call or presentation Wednesday, May 1, 2019 at 4:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daniel T. Froetscher

Arizona Public Service Company - EVP of Operations

* Donald E. Brandt

Pinnacle West Capital Corporation - Chairman, President & CEO

* James R. Hatfield

Pinnacle West Capital Corporation - Executive VP & CFO

* Jeffrey B. Guldner

Pinnacle West Capital Corporation - EVP of Public Policy

* Stefanie Layton

Pinnacle West Capital Corporation - Director of IR

================================================================================

Conference Call Participants

================================================================================

* Ali Agha

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Charles J. Fishman

Morningstar Inc., Research Division - Equity Analyst

* Gregory Harmon Gordon

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research

* Insoo Kim

Goldman Sachs Group Inc., Research Division - Equity Research Analyst

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research

* Michael Weinstein

Crédit Suisse AG, Research Division - United States Utilities Analyst

* Paul Patterson

Glenrock Associates LLC - Analyst

* Steven Isaac Fleishman

Wolfe Research, LLC - MD & Senior Utilities Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the Pinnacle West Capital Corporation 2019 First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stefanie Layton, Director of Investor Relations. Thank you, you may begin.

--------------------------------------------------------------------------------

Stefanie Layton, Pinnacle West Capital Corporation - Director of IR [2]

--------------------------------------------------------------------------------

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our first quarter earnings, recent developments, and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield.

Jeff Guldner, APS' President; and Daniel Froetscher, APS' 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.

Note that the slides contain reconciliations of certain non-GAAP financial information. Today's comments and our slides contain forward-looking statements based on current expectations, and the company assumes no obligation to update these statements. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements.

Our first quarter 2019 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements cautionary language as well as Risk Factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures.

A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through May 8. I will now turn the call over to Don.

--------------------------------------------------------------------------------

Donald E. Brandt, Pinnacle West Capital Corporation - Chairman, President & CEO [3]

--------------------------------------------------------------------------------

Thank you, Stefanie, and thank you all for joining us today. 2019 has started off in line with our expectations, and we remain well positioned for a solid year.

Before Jim discusses the details of our first quarter results, I'll provide a few updates on our recent regulatory and operational developments.

On April 9, Chief Administrative Law Judge Jane Rodda issued a Recommended Opinion and Order, or ROO as we call it, in the customer complaint docket. The ROO states that the customer complaint should be dismissed. The ROO also recommends that in the next rate review, APS, commission staff and other stakeholders collaborate on better ways to communicate the bill impacts to residential customers.

The ROO suggests that any further issues concerning the reasonableness of APS' rates or the adequacy of its customer education and outreach program be considered in the current rate review docket.

The current rate review docket was opened by the commission in January to review APS' 2018 books and records and to, excuse me, determine whether APS has earned more than it's allowed return.

As we have mentioned on our fourth quarter 2018 earnings call, our 2018 ACC jurisdictional return on equity was 9.5%, which is less than the authorized 10% ROE.

Commission staff is in the process of reviewing our 2018 financial information, and I'll provide the commissioners with the report at the conclusion of their review. While the commission staff had originally been targeting a May 3 deadline for their report, the staff indicated during the open meeting on April 23 and 24 that they may need some additional time.

Lastly, the commission approved our second refund to customers from federal tax reform. Starting April 1, we began passing an additional $86 million back to customers.

Together with the first $119 million in savings approved in 2018, customers will receive more than a $200 million rate decrease. The third and final tax refund request was filed with the commission on April 10 and is currently awaiting approval.

If approved, TEAM Phase 3 will return an additional $34 million to customers annually for the first 3 years. The tax reform reductions combined with additional savings from lower fuel costs are expected to lower bills $14 per month or $168 a year for the average residential customer compared to 1 year ago.

Turning to our operations. Palo Verde Generating Station had another successful quarter, operating above a 100% capacity factor. A planned refueling and maintenance outage for Palo Verde Unit 1 began on April 6.

Additionally, the Ocotillo Modernization Project is on budget and scheduled to have all 5 units in service by this summer.

On August 1, we plan to file our preliminary Integrated Resource Plan, which includes a 15-year forecast of electricity demand and the resources needed to serve our customers reliably in the future.

We're currently engaging with a wide variety of stakeholders to gather input and ideas prior to our preliminary filing. The final IRP will be filed with the commission in April of 2020.

An important part of our forecast will be increasing the integration of clean energy resources and technology in an economically responsible manner.

Clean energy resources not only reduce our carbon intensity, they also reduce O&M and fuel cost for customers.

Similar to the bill savings from tax reform, these reductions will allow us to continue investing in technology and grid enhancements necessary to support additional clean energy while maintaining customer bills at an affordable level.

As you know, in February, we announced the addition of nearly a gigawatt of new clean energy projects. Consistent with this plan, in April, we issued a request for proposal for 59 megawatts of storage that will be added to our existing Chino Valley and Red Rock Solar Plants. Both projects are expected to be in service in 2021.

We also issued a request for proposal for a new 100-megawatt solar facility, paired with 100 megawatts of battery storage, to be in service in 2021.

Lastly, I'd like to provide an update on the equipment failures that occurred on April 19 at our McMicken substation battery storage facility.

During the response to this incident, firefighters from Surprise and Peoria, Arizona, were injured. Our hearts go out to the injured firefighters.

We greatly appreciate their hard work and bravery in responding to this event. An investigation with APS first responder representatives and third-party engineering and safety experts is underway. A thorough investigation will help us determine the cause of the failure.

We have no reason to believe there are any safety issues with similar energy storage facilities. However, we will use the findings from the investigation to ensure all our facilities are safe moving forward.

In addition, we will continue with our plans to add clean energy projects to our system, including pairing storage with solar resources. Energy storage is a breakthrough technology, helping to solve challenges and create new opportunities for additional clean energy resources.

In closing, we are delivering on our commitments and continue to be well positioned for long-term growth. We're focused on operational excellence while solidifying Pinnacle West as a sustainable leader through strategic clean energy investments. I'll now turn the call over to Jim.

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Don and thank you again, everyone, for joining us today. This morning, we reported our financial results for the first quarter of 2019.

As shown on Slide 3 of the materials, for the first quarter of 2019, we earned $0.16 per share compared to $0.03 per share in the first quarter of 2018.

Higher adjusted gross margin and lower adjusted operating and maintenance expenses were the key positive drivers during the quarter.

Adjusted gross margin was up $0.14 per share compared to the prior year first quarter period. Favorable weather was a positive $0.14 gross margin impact during the quarter, driven by the second coldest February in the last 40 years.

Higher adjusted gross margin was also supported by a shift in the seasonality of revenue. The positive drivers were partially offset by lower transmission revenue and lower other gross margin. As Don mentioned, TEAM Phase 2 was approved by the commission and was implemented beginning on April 1.

The impact of TEAM Phase 2 is expected to be earnings neutral as both the timing of the refund and the offsetting income tax benefit will be recognized based on our seasonal sales pattern.

Sales net of energy efficiency and distributed generation were up 1% in the quarter compared to the prior year first quarter period. As we mentioned last year, we expect to see the headwinds from energy efficiency and distributed generation decline, which will likely narrow the difference between customer growth and retail sales growth going forward.

Continuing with the drivers, lower adjusted operations and maintenance expenses increased earnings $0.09 per share, primarily due to lower planned outage costs. Partially offsetting the positive earnings drivers were higher depreciation and amortization expenses due to plant additions and lower pension and other post-retirement non-service credits due to lower market returns.

As we look ahead to the remainder of 2019, we remain focused on achieving long-term benefits for customers and investors. We have a track record of cost management discipline, and we are taking the next steps in becoming a lean-principled organization.

We are committed to identifying new ways of working and strengthening our lean and digital capabilities in order to create cost reduction opportunities to keep customer rates affordable over the long term.

Turning now to the Arizona economy. Metro Phoenix continues to show strong job growth and has consistently been among the national average. Through February of 2019, employment in Metro Phoenix increased 3.1% over 2018 compared to 1.8% for the entire U.S. Job growth remains strong in the construction and manufacturing sectors, a sign of strength in the regional economy.

Construction employment increased by 10.3% and manufacturing employment increased by 4.3%. We expect a continuation of business expansion and the related job growth to continue to support commercial and economic development.

In particular, we have had several recent announcements of companies moving to the West side of the Metro Phoenix area. Red Bull announced they will build a 700,000 square-feet facility in Glendale, and milk distributor Fairlife plans to build a 300,000 square-foot distribution facility in Goodyear. After announcements from Stream Data Centers and Vantage Data Centers regarding plans to build in the West Valley, Microsoft recently confirmed their plans to build world-class data center facilities on 2 new sites in Goodyear. Phoenix was also ranked the second-most active market in data center leasing in 2018 according to CBRE's latest U.S. data center trends report.

The Metro Phoenix residential real estate market has also continued its upward post-recession trend.

In 2019, we expect a total of 30,000 housing permits, an increase of about 2,800 compared to 2018, driven by single-family permits.

We believe that solid job and income growth and relatively low mortgage rates should allow the Phoenix Metro housing market, and the economy more generally, to continue to expand faster than the national average.

Reflecting the steady improvement in economic conditions, APS' retail customer base grew 1.9% in the first quarter of 2019. We expect that this growth rate will continue to accelerate in response to the economic growth trends I just discussed.

Importantly, long-term fundamentals supporting future population, job growth and economic development in Arizona appear to be in place.

According to the U.S. Census data, Maricopa County ranked #1 in the U.S. for population growth for the third straight year, and we believe Phoenix will remain one of the country's fastest-growing large metropolitan areas.

Switching to our financing activities. On February 26, APS entered into a $200 million unsecured term loan facility that matures on August 26, 2020.

On February 28, APS issued $300 million of 30-year 4.25% senior unsecured notes. The proceeds were used to repay the $500 million of 8.75% senior notes at maturity. We continue to expect to issue up to $450 million of long-term debt at APS during the remainder of 200 -- 2019.

Overall, liquidity remains strong. Turning to guidance. We continue to expect Pinnacle West consolidated earnings for 2019 will be in the range of $4.75 to $4.95 per share.

A complete list of the key factors and assumptions underlying our guidance is included on Slide 6 and 7 of the materials. This concludes our prepared remarks. I'll now turn the call back over to the operator for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Greg Gordon with Evercore.

--------------------------------------------------------------------------------

Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [2]

--------------------------------------------------------------------------------

So I see all of the underlying short-, medium- and long-term guidance drivers are the same as Q4. But I did notice that you've extended the planned outage schedule for Cholla on Page 10 of the presentation. Can you explain what's going on there? And why that's not having an impact on your O&M or moving you around on the guidance range in any material way, I would hope?

--------------------------------------------------------------------------------

Daniel T. Froetscher, Arizona Public Service Company - EVP of Operations [3]

--------------------------------------------------------------------------------

Yes, Greg, it's Daniel Froetscher. Thanks for the question. When we opened up the generator in Cholla at the outset of our planned outage, we discovered some rubbing and erosion elements that affected rotor vibrations, and in essence had to remove that rotor, ship it offsite, get it recalibrated and balanced, and it's due to be back on site later this week. The outage was originally scheduled for 46 days, it will go to approximately 79 days. And the reality is at this time of year, based on its anticipated running profile anyway, there will not be an increase to overall fossil O&M.

--------------------------------------------------------------------------------

Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [4]

--------------------------------------------------------------------------------

Great. Second question, I know that we fought the war to end all wars on rooftop solar several years ago in terms of getting a balanced decision on net metering. But I saw news yesterday that Tesla, the artist formerly known as SolarCity, significantly cut -- is significantly cutting the cost of its rooftop solar installations. I know it's only been a day, but do you have any sense of whether or not that might allow them to increase or slow the deceleration of their penetration under the current rate structure in Arizona?

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [5]

--------------------------------------------------------------------------------

Sunrun has probably been the leader in our service territory over the last 18 months or so. And so it's hard to say what that will do at this point in time.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Our next question comes from the line of Insoo Kim with Goldman Sachs.

--------------------------------------------------------------------------------

Insoo Kim, Goldman Sachs Group Inc., Research Division - Equity Research Analyst [7]

--------------------------------------------------------------------------------

Apologies, I was on mute. Just going back to the Cholla plant. I know you guys are potentially looking into the conversion of one of the units to biomass. Could -- any detail you could provide on timing or scale of such a conversion? And my second related question is, why are you only considering the conversion of one of the units as opposed to the remaining couple?

--------------------------------------------------------------------------------

Daniel T. Froetscher, Arizona Public Service Company - EVP of Operations [8]

--------------------------------------------------------------------------------

Yes. Thanks for the question. Again, it's Daniel Froetscher. We have just taken an exploratory look at converting potentially Cholla 1 to biomass. We've engaged the services of a third-party engineering and design firm, invested in that exploratory look over the last 60 to 75 days. And in relatively short order, it should be coming forth with summary of that analysis, and a discussion at the Arizona Corporation Commission then about whether that appears to be the right approach to take for our customers and our companies, so asking you to be patient a little bit longer.

In terms of only the 1 unit versus Unit 1 and 3, frankly, there is an existing biomass plant within which APS is the off-taker in northern Arizona. There is some level of uncertainty about long-term contracts for harvesting the biomass and slash from the Northern Arizona forest to support multiple, multiple biomass plants, and so we're taking a conservative approach. Additionally, there are some gas pipeline issues that would prevent Cholla from being converted to anything larger than a Unit 1 conversion of about 60 to 70 megawatts.

--------------------------------------------------------------------------------

Insoo Kim, Goldman Sachs Group Inc., Research Division - Equity Research Analyst [9]

--------------------------------------------------------------------------------

Got it. And then maybe switching to guidance a little bit. In your 2019 guidance, do you incorporate the Four Corners SCR investment recovery and return to go into effect sometime in this year, potentially mid-2019?

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [10]

--------------------------------------------------------------------------------

Yes. So our guidance considered an earlier 2019 implementation date. We'll continue to look at guidance throughout the year. But I don't believe that guidance will change. As we continue the deferral, that offsets most of the costs of the SCR, so we should be good within our original guidance.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Our next question comes from the line of Michael Weinstein with Crédit Suisse.

--------------------------------------------------------------------------------

Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [12]

--------------------------------------------------------------------------------

I see that in the CapEx forecast, there's a little bit more clean generation of CapEx planned for 2020. It looks like some of the buckets have changed a little bit. Maybe you can just talk about what that's from. And what's happening since the last -- since the fourth quarter report?

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [13]

--------------------------------------------------------------------------------

Nothing has really changed. We've just trued up the cash flows over those years as we got a better understanding of how all the cash flows will work.

--------------------------------------------------------------------------------

Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [14]

--------------------------------------------------------------------------------

Okay. And after -- I guess, once we get the staff report, the ROO, eventually it's -- assuming it's -- I guess it might be delayed. But I guess officially right now it's still May 3, is that correct?

--------------------------------------------------------------------------------

Jeffrey B. Guldner, Pinnacle West Capital Corporation - EVP of Public Policy [15]

--------------------------------------------------------------------------------

No. Michael, this is Jeff. So there was discussion at the last open meeting, I think Don mentioned it. There was discussion at the last open meeting where staff indicated that they were not likely to make that May 3 date. And so we expect -- I don't have great visibility on when it's coming out. But it's -- I would expect this will probably come out later in May.

--------------------------------------------------------------------------------

Michael Weinstein, Crédit Suisse AG, Research Division - United States Utilities Analyst [16]

--------------------------------------------------------------------------------

And could you kind of explain what actions -- what are the possible choices that the commission have -- has after that? Like what happens at the ACC level once that report comes out?

--------------------------------------------------------------------------------

Jeffrey B. Guldner, Pinnacle West Capital Corporation - EVP of Public Policy [17]

--------------------------------------------------------------------------------

Well, they will issue the report. So one of the questions is what open meeting will it be synced to. There is an open meeting May 21 and 22. Given the time for exceptions and such, it will be challenging to see it making that open meeting, And there's an opening moving June 11 and 12. When they issue their Recommended Opinion and Order, all parties have an opportunity to file exceptions to that. Part of the discussion that had been in that process was what are the remedies, and I think that would be my opinion, more future focus, so things to address on the next rate case. But you got to see what the staff report says.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [19]

--------------------------------------------------------------------------------

Perhaps just to come back to where Michael just left it off, if you can. Can you talk a little bit more about the time line here as you see it, more for the Four Corners step up. And then also if I can go back to Insoo's question. How do you think about offsetting factors here for guidance depending on the time line for Four Corners to get done, especially if it's pushed out from June into July or whatever? And I'm thinking here about O&M cost cuts or anything else that, again, as you think about like affirming the 2019 outlook specifically here. I know a number of different questions there, so I'll let you take it at each point.

--------------------------------------------------------------------------------

Jeffrey B. Guldner, Pinnacle West Capital Corporation - EVP of Public Policy [20]

--------------------------------------------------------------------------------

Yes, Julien, it's Jeff. Let me start with the sequencing. So you've got the customer complaint case, Recommended Opinion and Order came out on that, recommended dismissing the complaint. There -- that was discussed, but not voted on at the last open meeting. And so then you have got the rate review, and so we would expect the ROO to come out next month or so. The timing of that -- so I don't know whether the customer complaint is going to go on the May open meeting, or whether that would get pushed to potentially coincide with the rate review at a subsequent open meeting. And again, all that will then drive what happens with the SCR decision? And will they all be on an open meeting? Or will there be some sequencing between there? Just don't have visibility to that, but from a timing standpoint, that's what I look at.

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [21]

--------------------------------------------------------------------------------

And then on your last question, Julien, I mean when I look through the guidance through the course of the year, we will manage within the bandwidths of all the factors of guidance. So again, I don't expect a delay will cause us to rethink guidance, at least at this point.

--------------------------------------------------------------------------------

Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [22]

--------------------------------------------------------------------------------

And sorry, just to clarify that. When you say at least at this point, that's contemplating a delay potentially into this July time frame. Or actually, how do you even think about the time frame? And is there a relationship between this ROO and just getting this Four Corners step-up done at this point?

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [23]

--------------------------------------------------------------------------------

I think we look at a range of timing of the SCR ROO. I'm still very comfortable with our guidance.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Our next question comes from the line of Ali Agha with SunTrust.

--------------------------------------------------------------------------------

Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [25]

--------------------------------------------------------------------------------

Clarifying a few of the points made already. First, on the staff audit on the -- on the returns calculation, are there certain adjustments that they make that may be different of -- to the way you calculate that? Because if I heard you right, you guys have already run the math and you didn't see yourself overearning. But is there a different math that staff likely goes through than the way you've done it?

--------------------------------------------------------------------------------

Jeffrey B. Guldner, Pinnacle West Capital Corporation - EVP of Public Policy [26]

--------------------------------------------------------------------------------

Ali, it's Jeff. I don't know. They'll come out with a staff report, and we do -- when we do rate cases, you do pro forma adjustments and things, but we'll have to see in the staff report.

--------------------------------------------------------------------------------

Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [27]

--------------------------------------------------------------------------------

I see. And then Jim, coming back just again to get a perspective on this Four Corners step-up, and you said there is deferred cost obviously, currently, that are out there as well. So on a net basis, can you just give us a sense of what the impact is of this Four Corners step-up net of deferred cost?

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [28]

--------------------------------------------------------------------------------

Well, all the costs are deferred. So your deferral balance gets bigger as you go through the year.

--------------------------------------------------------------------------------

Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [29]

--------------------------------------------------------------------------------

Right. So when you do get the step-up, in other words, what's was kind of embedded in guidance in terms of the net EPS impact? How should we think about that?

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [30]

--------------------------------------------------------------------------------

I would think about it as the deferral covers the -- your cost, and so until the step goes into effect, you're just deferring all the costs and not a significant financial impact.

--------------------------------------------------------------------------------

Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [31]

--------------------------------------------------------------------------------

I get that. But I'm saying, assuming this all plays out, I mean is this a net $0.10 pickup or $0.05 pickup? I mean just to get a sense of magnitude, the way you're thinking about it.

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [32]

--------------------------------------------------------------------------------

It's in guidance.

--------------------------------------------------------------------------------

Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [33]

--------------------------------------------------------------------------------

Okay. Okay. And then my final question, can you just remind us again on your current thinking on when to file the next rate case? And when, at the earliest, do you think you may need to issue external equity at this point?

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [34]

--------------------------------------------------------------------------------

So right now, our plans are June 1, 2020, and as we've said in the past, we're considering issuing equity sometime this year. But it won't be a -- it will be a modest amount, so...

--------------------------------------------------------------------------------

Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [35]

--------------------------------------------------------------------------------

So sometime this year, but a modest amount?

--------------------------------------------------------------------------------

James R. Hatfield, Pinnacle West Capital Corporation - Executive VP & CFO [36]

--------------------------------------------------------------------------------

Yes, we're considering sometime this year, but whatever we issue will be a modest amount. It's really to top off the capital structure.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Our next question comes from the line of Steve Fleishman with Wolfe Research.

--------------------------------------------------------------------------------

Steven Isaac Fleishman, Wolfe Research, LLC - MD & Senior Utilities Analyst [38]

--------------------------------------------------------------------------------

Don, just a question on the battery fire and just -- I think in some of the articles I read that there's been some of these maybe overseas. So I'm just kind of curious, what is -- of some of the ones that have occurred elsewhere, what have generally been the reason for it? And just do you have any sense of what can be done differently to make sure these don't happen in the future?

--------------------------------------------------------------------------------

Donald E. Brandt, Pinnacle West Capital Corporation - Chairman, President & CEO [39]

--------------------------------------------------------------------------------

Yes. Thanks, Steve. I don't think we have a lot of data on the fires overseas. I think they've been a variety of different causes. And it's just far too preliminary to even speculate on what happened. We're not quite sure if it was fire or explosion or both. Very early. I think it was just last Monday that the experts got into the field, so to speak, where it was secured and safe to begin the inspection, and we think it's going to be at least a couple of weeks to do the postmortem on it.

--------------------------------------------------------------------------------

Steven Isaac Fleishman, Wolfe Research, LLC - MD & Senior Utilities Analyst [40]

--------------------------------------------------------------------------------

Okay. And so I mean, I assume -- I mean, obviously, this is a big new sector, and having something like this happen kind of not -- it's kind of important. I mean are you seeing like a lot of people take a look at this from well beyond kind of your -- just the company involved?

--------------------------------------------------------------------------------

Donald E. Brandt, Pinnacle West Capital Corporation - Chairman, President & CEO [41]

--------------------------------------------------------------------------------

Yes, yes, I think the industry is taking a look at it, and obviously, we're getting a lot of questions what happened. But the technology is not extremely complex, identifying what the issues in this specific instance was and to make sure that doesn't recur. I don't think it's anything systemic relative to the design or the industry as a whole. We still have full confidence in going forward on our clean energy projects, including pairing batteries with solar resources, so we don't have doubts there. I mean some glitch happened, and we're going to run it to ground to make sure it's not anyplace else on our system. And I think the industry will be looking to make sure it's not anyplace else.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question comes from the line of Paul Patterson with Glenrock Associates.

--------------------------------------------------------------------------------

Paul Patterson, Glenrock Associates LLC - Analyst [43]

--------------------------------------------------------------------------------

Just sort of back on the Champion complaint case. When I was listening to one of the -- I guess it was last week, the hearing, it seemed that there was some discussion that -- I think it was like 56% of customers were not on the economically optimal rate plan. And I think it was Commissioner Olson seemed to suggest the idea of placing customers sort of as a default on the economic -- on a plan that would be economically optimal for them, since the education seems to be sort of a challenge here. And I was just wondering, do we have a sense as to what the potential revenue impact of that might be? Or just your general thoughts about that approach.

--------------------------------------------------------------------------------

Jeffrey B. Guldner, Pinnacle West Capital Corporation - EVP of Public Policy [44]

--------------------------------------------------------------------------------

Yes. Paul this is Jeff. So the complexity with that, I think this was talked about at the hearing, was that the settling parties in that underlying rate case agreed on a framework where the customer would move on to the most like rate. And so there was a lot of customer outreach to try to encourage customers to move on to the best rate, but because of the -- this is -- we're ahead of the rest of the country, I think, in residential rate design. And so a lot of the things that we're working through here are going to be important in how you do this in other places, and so that was one of them. But the parties initially to the settlement said we think we should move customers to the most like, most similar rate structure, not necessarily the one that is best for them. And so what I think you'll see in this and the rate review case is a fair amount of attention on that: How do you focus on the customer education piece of this? And then how you factor that into revenue, you have to look at that in subsequent cases.

--------------------------------------------------------------------------------

Paul Patterson, Glenrock Associates LLC - Analyst [45]

--------------------------------------------------------------------------------

Okay. But I guess what I'm -- what it sounded to me like, when I listened to it, was that just in general, because of the complexity of this and because of the sort of the response that we've seen, the fact that we've got this complaint case, et cetera, it seemed to me that they were looking sort of perhaps beyond the idea of educating customers. They simply are going for a default rate that would be economically optimal. Do you follow what I'm saying? And I'm just wondering if that did happen, do we have a sense what that would mean from a revenue impact? Do you follow what I'm saying? If they were to take it...

--------------------------------------------------------------------------------

Jeffrey B. Guldner, Pinnacle West Capital Corporation - EVP of Public Policy [46]

--------------------------------------------------------------------------------

Yes. Yes. No, I don't. Again, my guess is that would be in a subsequent case.

--------------------------------------------------------------------------------

Paul Patterson, Glenrock Associates LLC - Analyst [47]

--------------------------------------------------------------------------------

You don't think it would be as part of this complaint case?

--------------------------------------------------------------------------------

Jeffrey B. Guldner, Pinnacle West Capital Corporation - EVP of Public Policy [48]

--------------------------------------------------------------------------------

I don't know, but I don't think so.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Our next question comes from the line of Charles Fishman with Morningstar.

--------------------------------------------------------------------------------

Charles J. Fishman, Morningstar Inc., Research Division - Equity Analyst [50]

--------------------------------------------------------------------------------

Don, in your opening remarks, I believe you said as part of the next round of IRP process, you would forecast demand to 2035. And then if memory serves me, the last time you went through this, you were talking a 30% increase by 2030 in customer demand. I would think with what's going on over the last 5 years with respect to the Phoenix economy, with respect to the rate design that is now more balanced between utility-scale renewables as well as rooftop, is it fair to assume that, that number is going to -- is not going to be lower, and it could even go a little higher as far as a 15-year growth rate?

--------------------------------------------------------------------------------

Donald E. Brandt, Pinnacle West Capital Corporation - Chairman, President & CEO [51]

--------------------------------------------------------------------------------

That's a good observation, Charles. I hate to front-run our work on the IRP, even the preliminary IRP, but the economy here in Arizona is really humming on all cylinders. You don't even have to do a study. You can just drive around, all the cranes and the excavation and building going on, both commercial, industrial, residential. So it wouldn't surprise me to see longer-term growth rates higher than they were last time around.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

We have reached the end of the question-and-answer session. I will now turn the floor back to management for closing comments.

--------------------------------------------------------------------------------

Stefanie Layton, Pinnacle West Capital Corporation - Director of IR [53]

--------------------------------------------------------------------------------

Thank you all for joining us today. This concludes our call.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.