Q3 2024 Pinnacle West Capital Corp Earnings Call

Thomson Reuters StreetEvents11-07

Participants Amanda Ho; IR Contact Officer; Pinnacle West Capital Corp Jeffrey Guldner; Chairman of the Board, President, Chief Executive Officer; Pinnacle West Capital Corp Andrew Cooper; Senior Vice...

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Jeffrey Guldner; Chairman of the Board, President, Chief Executive Officer; Pinnacle West Capital Corp. Andrew Cooper; Senior Vice President, Chief Financial Officer of the Company and APS; Pinnacle West Capital Corp. Theodore Geisler; President - Arizona Public Service Co.; Pinnacle West Capital Corp. Nicholas Campanella; Analyst; Barclays Corporate & Investment Bank. Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2024 third-quarter earnings conference call. It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.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 ","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"PNW":"品尼高西方资本品西资本"},"translate_title":"2024年第三季度Pinnacle West Capital Corp收益看涨期权","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"PNW":1},"content_text":"Participants\nAmanda Ho; IR Contact Officer; Pinnacle West Capital Corp\nJeffrey Guldner; Chairman of the Board, President, Chief Executive Officer; Pinnacle West Capital Corp\nAndrew Cooper; Senior Vice President, Chief Financial Officer of the Company and APS; Pinnacle West Capital Corp\nTheodore Geisler; President - Arizona Public Service Co.; Pinnacle West Capital Corp\nShahriar Pourreza; Analyst; Guggenheim Securities LLC\nNicholas Campanella; Analyst; Barclays Corporate & Investment Bank\nDavid Arcaro; Analyst; Morgan Stanley\nAnthony Crowdell; Analyst; Mizuho Securities USA\nPaul Patterson; Analyst; Glenrock Associates LLC\nJulien Dumoulin-Smith; Analyst; Jefferies\nSophie Karp; Analyst; KeyBanc Capital Markets Inc.\nSteven Fleishman; Analyst; Wolfe Research\nDylan Lipner; Analyst; Ladenburg Thalmann & Co. Inc.\nPresentation\nOperator\n Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2024 third-quarter earnings conference call. (Operator Instructions)It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.\nAmanda Ho\n 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 13, 2024.I will now turn the call over to Jeff.\nJeffrey Guldner\n 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 to divide triple-digit temperatures in the valley. We ended the summer with a total of 70 days of 110 degrees or more, and that eclipsed 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 4. The hot days, the high night time 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 worked 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 in 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 amongst our peers. I'm extremely proud of our employees and 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 3. 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 precinct's 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 at 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.\nAndrew Cooper\n 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 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 per share. 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% 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 into 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.\nQuestion and Answer Session\nOperator\n (Operator Instructions) Shar Pourreza, Guggenheim Partners.\nShahriar Pourreza\n Obviously, Jeff, it's topical this morning, to start with the elections. It's prelim, but it looks like we could end up with three more Republicans with the [five] commission. What could this, I guess, 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 curious how you're thinking about it.\nJeffrey Guldner\n Yeah. I think, Shar, generally -- and there's still some early -- late earlies, I think, out and a few precincts to report. But most of the vote is in, and you're correct that right now, you've got the three Republican candidates that are currently ahead. So obviously, that's still got to get finalized.I think if you look at what the comments that were made on the campaigns -- generally, what you'd see is the Republicans, I think, had a fair amount of alignment with the current commissioner, Myers and Thomson, in terms of focusing on issues like the regulatory lag docket.So I think it's -- I think that if that's the result that continues, you're likely to see continued alignment with the current bench. So obviously, I think that suggests that there would be constructive work continuing to move forward on the reg lag docket.Apart from that, this is something we engage commissioners on both sides throughout the campaign. And I'm sure that whoever ends up ultimately winning is going to have different issues and questions and want to understand things a little bit more. And we look forward to engaging with all the commissioners and having that dialogue and making sure they understand the drivers and the needs of the business.\nShahriar Pourreza\n Perfect. Fantastic. And then just lastly on load growth. On the near term, you guys assume that 4% to 6% for '24 and '25. 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 to being a hyperscaler? Thanks.\nJeffrey Guldner\n Let me -- and I'll ask Coop to join in on this. I mean, I think it's sticky. So one of the things that we've really focused on in Arizona over the last decades -- not quite decade, but since the last recession was trying to pivot the economy here from largely homebuilding retirement focus into more advanced manufacturing. And I think that the state has done a really nice job of doing that.And so you do see a lot of manufacturing. I was just on a call with the Commerce Authority, and they were showing some of the projects that are out there. And they do range from -- you got the big ones. The data centers, obviously, are looking closely to Arizona. But then you also see a lot of these 5, 10-megawatt factories and manufacturing sites that are just looking to niche into whatever land is available.And so I do think that the state continues to be attractive for that load. We're in good location between Texas and California. We've got good transportation. We don't really have the hurricane-type disruptive weather. But you see, you get a hot summer, but that's a dry heat, I guess.And so I think we're going to continue to see that growth. It gets a little harder as you get into much bigger because now, you've got to deal with -- just the reality is we have to figure out power plants to serve that growth.And so we're working closely with TSMC, and we would welcome the additions. We'll figure out how to do it, but it's -- we've got a lot of pent-up demand coming from both manufacturing and data centers. Did I miss anything, Coop?\nAndrew Cooper\n No, I would just add, Shar, that you see it in the contribution this year that 4% to 6% is pretty diversified as you move into '25. You have the TSMC beginning to ramp up, and it's 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.\nShahriar Pourreza\n Got it. Perfect. See you guys in a couple of days. Congrats on this another positive step change.\nJeffrey Guldner\n Thanks, Shar.\nOperator\n Nick Campanella, Barclays.\nNicholas Campanella\n 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 '25 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 '26 and then full run rate '27? Just thinking through that timing would be helpful.\nAndrew Cooper\n Hey, Nick. It's Andrew. As you mentioned, we have moved the amount of CapEx that's being tracked up, and that's been intentional on our part. Now that with the SRB, we have increased confidence in putting some of these customer-centric generation projects through that are affordable and go through our outsourced RFP. And we've significantly ramped up our transmission CapEx and have the formula rate in a transmission adjuster there.So that will certainly help over time. Admittedly, some of those transmission projects and, obviously, the generation projects are multiyear. And so there's -- until those go into service and get put through the trackers, there's always some lag there.On the fundamental lag question, though, the CapEx and the operating costs that aren't captured in those trackers. The reason we're so focused on the regulatory lag docket and on being prompt about filing a future rate case is because the further we get away from the last rate case, the more that lag takes place.You see that in the 2025 guidance. We have some of the same issues around interest expense and D&A as we invest in infrastructure. And then added to that is a couple of structural issues, this OPEB item.And so while we haven't quantified the exact amount, the reason that we're so focused on, number one, increasing the CapEx going to track items and then looking at solutions around the non-tracked items is in order to earn as close to the authorized ROE as we can. Jeff, if you want to add on how the rate case timing will play --\nJeffrey Guldner\n Yeah. And then, Nick, if you think about it -- so obviously, the commission is working on what the structure could look like if they move forward with the formula rate docket. That could change what the case looks like or how you would file it.But when you think about the timing of that, the earliest you could go is really a mid-25 filing. Because if you did a '24 test year, you'd be looking at a mid-25 filing. We haven't announced anything on that, but that's just the earliest that you could realistically go. And then it would probably take a year to prosecute that case.So you'd be looking at rates coming in in the middle of '26 or so -- back half of '26. And no matter what happens in terms of the structure of that, whether it's a formula or it's just the normal traditional rate case, that's really the first time that you could then get the relief on some of the lagging items that Andrew was talking about.That's the first time you would have now put into the new rate structure. Things like that pension OPEB cliff issue would get put into that structure. So the next time you're likely to see that is probably in the mid-26, back half '26 time frame. Hopefully, that helps.\nNicholas Campanella\n That does. I really appreciate that. And then just one clarification on the financing plan because I know you are highlighting you have these forward draws available from the block you did in February of '24. But just none of that nets against the $700 million to $900 million figure, is that correct?\nAndrew Cooper\n That's correct, Nick. The $725 million that we did in the block last February, we haven't drawn that yet. And that was really a lot of the cashback. It was to make sure that we continue to have the balanced capital structure down the utility.The -- if you remember in the last plan, we have about $400 million slated for -- of unidentified parent capital for '25 and '26. So effectively, the $700 million to $900 million both rolls forward and then modestly increases that $400 million by an additional $500 million. And we would expect that equity would match up with our capital needs over the '25 through '27 period.We have not made any draws under the original block $725 million, and that would be the first place we go for that equity. But certainly, with things like ATMs and then -- we've used the forward overlay on the original equity and could certainly consider that for future equity as well, both of those tools taken together will allow us to match up the CapEx with the external financing as we go.\nOperator\n David Arcaro, Morgan Stanley.\nDavid Arcaro\n Let me see. Would you be able to give you're seeing in terms of a pipeline, the megawatts in your pipeline, of data center demand in terms of the large load requests?\nJeffrey Guldner\n Yeah, I'll ask -- maybe Ted can describe what we're seeing.\nTheodore Geisler\n Yeah, 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.\nDavid Arcaro\n Excellent, yeah. Is it fair to say that 4,000 megawatts are embedded in the current plan that you put out?\nTheodore Geisler\n That's correct, yes.\nDavid Arcaro\n 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 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?\nTheodore Geisler\n The amount that is committed that is already in some form of development phase is relatively distributed. We do have a couple larger single request that's 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.\nOperator\n Anthony Crowdell, Mizuho.\nAnthony Crowdell\n 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, the 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 docket gets enacted?\nAndrew Cooper\n Yeah, Anthony. It's Andrew. The way we think about the 5% to 7% and how it interacts with improving regulatory lag is more fundamentally creating a smoother and more predictable version of that 5% to 7% as opposed to having single rate case oriented outcomes be the determinant of the step function increases.We're confident in the rate base growth. We're confident in the -- effectively, the great headroom to be able to make these investments cost affordable for customers. But what the reduction of lag would do would allow for that smoother trend.Now of course, that then means received from a cash flow perspective of better credit metrics and better confidence in the overall plan. And so that then flows into where you end up in the range and how we feel about it.But ultimately, what we're talking about is smoothing out that range. So it's predictable and transparent year in and year out as opposed to being more dependent on these single events. That's really the focus for us.\nAnthony Crowdell\n 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 like a take-or-pay contract or a 10-year take-or-pay contract. Is that something that APS is looking into?\nJeffrey Guldner\n Yeah. 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 mutually work for us. But I'd say the focus on that is really in trying to protect the existing customer base while being fair to those new customers. Anything you want to add, Ted?\nTheodore Geisler\n Yeah. 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.\nOperator\n Paul Patterson, Glenrock Associates.\nPaul Patterson\n 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?\nJeffrey Guldner\n I think it's in the 120,000 range.\nPaul Patterson\n And that's what percentage of the total vote?\nJeffrey Guldner\n I think we have 2 million.\nPaul Patterson\n Okay. It looks like the Republicans are definitely like all leading. It just is -- it is a little tight. So I just want to make sure on that. Okay. When do you think the votes will be finished?\nJeffrey Guldner\n I think they're -- I mean, they have these late earlies that they need to count, and then you got to go through the certification process. But again, I think you can watch pretty -- probably by the end of today, you're going to get closer to a smaller number.\nOperator\n Julien Dumoulin-Smith, Jefferies.\nJulien Dumoulin-Smith\n Look, I wanted to come back to one thing that Nick was putting his 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 '25, but really as you think about beyond that in the '26 and '27, given the updated forecast grade?Can you provide any initial expectations? I know there's a number of moving pieces there. But just given the CapEx composition, excluding changes in the construct from here, would you expect lag to accelerate? Or how do you think about the offsets with load growth potentially?\nAndrew Cooper\n Hey, Julien. It's Andrew. Yeah, so the load growth definitely is supportive, and that's the other reason why we look at O&M on a megawatt-hour basis so that -- not only on the capital side, but as our footprint expands and we're spending more from an O&M perspective, it's being covered by that growth as well.Then when you get to the capital, it is, first and foremost, a question of capital allocation at this point and making sure that we're allocating to asset classes that are going to give us an appropriate investment recovery. And that's been into transmission and now, increasingly, into generation.We are increasing our distribution investments and some of our other core infrastructure investments. But those are being done judiciously as we continue to look towards potential mechanisms that remediate our ability to get that lag under control. We do need to file a rate case.A lot of the lag that's in there is not as much the capital as on the income statement side. If you think about our last rate case, it had a test year that preceded the increase in inflation, the increase in interest rates. So if you think about our O&M, our interest expense, and our pension expense, those are all scaled relative to what we're actually realizing on our income statement.And so certainly, the ability to true up those costs through the next rate case, given that the last rate case we had 12 months of post-test year plan [and serve as] accounted for, we're -- and now we're going more into some of these tracked areas of capital. We're in a relatively good place from a capital perspective.We're mindful that the capital plan has increased. And so then, if you did have a construct overlaid on top of that that, for example, gave you a formula rate, some of these other areas of capital would become more available to us to invest in and be more confident that we burn closer to our earned returns.So the number one thing we have to do is catch up on some of those income statement costs here through another rate case and then be in a position to continue to be smart and agile around how we allocate the capital.\nJulien Dumoulin-Smith\n 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 is it smoothing out over the course of the plan?\nAndrew Cooper\n The docket would help us to smooth that out. I think, as I mentioned earlier, it's the difference between having single dependence on rate cases. And frankly, with the SRB and the transmission adjuster, we don't. But having large dependence on rate cases versus having annual true-ups that -- when we do have increased costs, we can recover.And when we have opportunity for customer cost savings, we give those back through the mechanism as well and, fundamentally, earn as close then to our authorized return as we can year in and year out as opposed to after rate case.\nJulien Dumoulin-Smith\n Yeah, absolutely. And so you say -- just if I can [tack] a little bit. The queue mentioned some inflation actually decelerating here. Your O&M in '24 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 our finger on as it pertains to lag? And maybe actually, while we're nitpicking, the tax rate's down in '25. Is that a good structural rate here? Or you expect that uptick here to the plan to?\nAndrew Cooper\n Yeah. 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 '24 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 '25 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 pursued 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 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 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 pretax income looks like.\nJulien Dumoulin-Smith\n Right. So it should be pretty stable in that rate. Is what I'm hearing from?\nAndrew Cooper\n Yeah, we're pretty stable given the tax credit set.\nOperator\n Sophie Karp, KeyBanc.\nSophie Karp\n I wanted to ask you about the [old source] RFP. Can you remind me -- remind us maybe how much of that 8,500 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, if you will, to shape up in the next rounds of this RFP?\nTheodore Geisler\n Yeah. 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.\nSophie Karp\n Okay. All right. Helpful. And maybe just more of a high-level question on inflation (inaudible) to follow up on this discussion you just had, how the inflation impacted your regulatory lab. When you look into your next rate case, what are your inflationary expectations now, I guess, going forward, if you have any?Maybe it's too early to call it. But like given potential change in policy in Washington, what is that -- how are you thinking about the inflationary scenarios going forward? Because it's important for you to mitigate in your rates, obviously.\nAndrew Cooper\n Yeah, absolutely, Sophie. It's Andrew. One of the key things in this next rate case is the fact that the O&M costs that we crystallized in our last rate case based on the historical test year go back as far as July 2021. And so you didn't really see in the rates we were charging customers today any of the inflation that we've recognized over the last couple of years.And so our ability to recognize the current cost environment, which is stable -- maybe costs aren't declining at this point, but they're stable. And if we continue on the current cost level that we're at today, and we're being very disciplined from a O&M management perspective to achieve that, we'll be able to true up to what our current cost environment looks like in the next rate case.But there's a pretty substantial increase that we would need in this rate case. It just simply relates to the fact that if you look at our O&M, taking out [resin DSM], and things like that from early 2020 -- I can't believe we're in the mid-2020s now. But in the early 2020s, $850 million -- and next year, we're guiding to O&M range that's in the high $900 million.So there's substantial lag. Some of that is a growing service territory, but a lot of that is recognizing the reality of the cost environment that we're in today.\nOperator\n Steve Fleishman, Wolfe Research.\nSteven Fleishman\n The -- 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?\nAndrew Cooper\n Yeah, Steve. Part of it is -- you look at one of the things we did with the summer benefit this year wasn't just some of the O&M derisking. It was having incremental retained earnings that supports our credit metrics and therefore, puts us in a position to feel more confident in our capital plan.And as you see that sales growth top line, that also from a -- while we still continue to have some significant lag from a credit metrics perspective as we pay down our deferred fuel balance, as we continue to see top line sales growth, it supports the credit metrics in a way that allows us to be a little bit more judicious around both the -- what that incremental equity need is.And the fact that we took $725 million off the table upfront gives us some flexibility to be opportunistic on when we do that equity. But if you look at the increase in the CapEx plan and our ability to do it, stay within our credit metrics, maintain a balanced equity cap structure at the utility, and be judicious about how much parent company debt we're taking on, that [$700 million] of incremental equity over '25 to '27 is a number that matches up with the capital plan and allows us to re we are from a metrics perspective. And that is less than 40% of that incremental need.\nSteven Fleishman\n You also, I think, mentioned alternative financings. Could you just maybe give more color what you're thinking there?\nAndrew Cooper\n Yeah. 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 levering 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 their ways to have those off?And the new loan program is a good example of that. We also recognized [$7 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.\nSteven Fleishman\n 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?\nJeffrey Guldner\n Yeah. I mean we're still waiting to see what the guidance looks like.\nAndrew Cooper\n Yeah. 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.\nOperator\n Dylan Lipner, Ladenburg Thalmann & Company.\nDylan Lipner\n 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.\nAndrew Cooper\n Yeah. So we really think about the multi-year plan and the portfolio of O&M projects that we've got. And so there's a -- if you look at the update to our O&M guidance, we haven't broken it out specifically at '25 to '24 because we're in the middle of '25 budget at the same time.So when we think about really derisking opportunities over the multiyear horizon, we look out more than one year. Because we've created this muscle internally where at the beginning of every summer, we look at what the summer is going to start to like from a weather perspective and what opportunities that provides.There's some great examples of projects that we did. We've got an IT infrastructure project that we know is eventually going to be a capital project. But in the planning stages, some of that gets booked to O&M. Well, as we saw the weather come up, we said, well, let's start planning that project this year versus moving into next year.And there's a lot of great examples like that from across the company. We don't really break that out from the broader long-term derisking. We have the granular projects that we move, but we also do it in the context of '25 budgeting. So there's a little bit of a gray area between what has truly been pulled forward versus something that, yeah, we'll slate for '24 and the '25 budget.But ultimately, we always look for those opportunities. We also look for capital as a way to leverage some of that weather benefit as well. And we knew that we needed to look at '25 O&M in and of itself. And so I think one of the key points for us was how could we bring down the '25 O&M number, knowing that we had that OPEB amortization and the Bright Canyon gain going away in '25.So for us, we've been thinking all year about how do we budget for '25 in light of some of those structural changes. And so we've been working very closely across the business to do that. And one of the great examples there is with the OPEB item.We knew that was within the context of our overall employee benefits and retirement benefits portfolio. And so we actively went after opportunities in that bucket. And so we put our primary health insurer out for bid. We created some substantial savings in '25 -- expected for '25 based on switching over our health insurer. For 6,000 employees in their beneficiaries, that's a pretty substantial opportunity as well.\nDylan Lipner\n Got you. 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.\nJeffrey Guldner\n I mean yes, you could. Again, I think what we're looking at is they're working through that process. I think I mentioned earlier in the call the earliest you could file something practically is middle of '25. And so we're -- they're moving on the regulatory lag docket.I would expect that probably going to -- it's hard to tell. I mean, you have new commissioners coming in, so there may be some delay if they don't finish it by the end of this year as it goes into next year. But we'll just watch all that.\nDylan Lipner\n 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?\nJeffrey Guldner\n I mean, it's possible. There are policy statements out here that have just status policy statements. And so I think we just watch just as the process develops.\nTheodore Geisler\n Dylan, I think -- this is Ted. Another way we're looking at it as well is if they issue the policy statement, that's really to align the commission and stakeholders that this is the preferred rate-making approach. And we'd include that preferred rate-making approach then in the filing of our next rate case.And that rate-making approach pretended formula rates would then be adjudicated as a part of our next rate case and qualified in the outcome of that next case. So that would still get us to the same outcome.\nOperator\n 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. 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