Pinnacle West Capital Corporation (NYSE:PNW) Q3 2023 Earnings Call Transcript

Paul Patterson: Just on the residential. You also mentioned during the prepared remarks about the virtual — the success in your virtual power — I forget the name, but the virtual power plant participation and what have you. Are you seeing — I mean do you think there might be a price elasticity issue that’s developing? I mean, is the success there in that, what do you think — is there any tie-in with that, I guess, is what I’m wondering in terms of what’s happened on the weakness in the residential area and perhaps the interest in being part of this savings program that you discussed earlier?

Jeff Guldner: Paul, the core rewards program, which is that virtual power plant program, I don’t think that’s having an effect on the residential growth. Those are really an opportunity for us to call on those customers a number of times a year. On a lot of them, you actually precool the home before you call the event and then the customer can opt out without any penalty. And so we do see a little — if you call it, multiple days in a row, there’s a little erosion that happens as you get further into the events, but I don’t think that’s having an effect on the sales.

Paul Patterson: I didn’t mean that, that program itself was the problem. What I was suggesting was that the interest in that program or the participation in that program, which seems to be pretty strong. So does that might be a signal of — they’re trying to save money, right, that’s part of the — I understood. So I was just wondering if that was — if there were somewhat related in that way, if you follow me as opposed to it being the driver of lower residential consumption. Am I making any sense?

Andrew Cooper: I think I would differentiate that program from the trend that you’re suggesting may be happening. And we’re definitely looking at usage patterns overall. If you think about the trajectory of our quarter, we had a month and half of extremely intense weather. And as we started to move into cooler weather, there was inevitably going to be customers looking at their bills, thinking about the opportunity to conserve in September. And I think as we saw the quarter go on, we saw residential usage per customer trail off. And I do think part of it reflects some bounce back effect from what was a very intense summer. So we’re understanding those patterns and customer reactions both from a bill sensitivity perspective and just overall conservation.

But I think those are probably anomalous to this particular quarter. There tends to be a psychology around when do I turn off my AC for the year. And people this year might have done it earlier, just in response to knowing that they were running it so intensely during the summer. But on the flip side, we actually saw price per megawatt hour go up for the quarter, which suggests that when we’re in that intense period of heat, customers became more insensitive to our time use rates. And so normally, when you have higher megawatt hour sales you’re seeing it at a lower price because it’s more of the off-peak hours. And so I think from month to month, you’re seeing different customer behaviors and we try to understand those as best we can. But overall, for the quarter, I think, we’re just continuing to see the same trend of residential customers slowing down, continued energy efficiency and distributed generation and this reversal out.

If you go back year-over-year, quarter-over-quarter for the last 24 months, you’ve been seeing those COVID work from home numbers continue to reverse out as people return to normal usage patterns.

Operator: Your next question is coming from Michael Lonegan from Evercore.

Michael Lonegan: So following up on an earlier question on Julian’s rate case question. Obviously, there’s some dependence on the outcome here. But coming out of it, given some delayed recovery on growing nominal O&M, higher interest expense, pension expense like you alluded to and assuming the SRB recovery mechanism is not granted, obviously, like given what happened in Tucson Electric case, you obviously may have some meaningful regulatory lag. You talked about some mitigation measures. But just wondering what your expectations are on when you may have to file your next rate case and just the frequency of that in general, especially without a recovery mechanism like SRB.

Jeff Guldner: Michael, that’s really the key issue around the SRB is that given that and frankly, given the growth that we’ve been talking about through most of this call, if there’s not a mechanism that’s in there to help us contemporary to recover that, the post test year plant that we have in process right now only gets you so far. And so the kind of the point around having an SRB is that if you don’t do that, you’re going to drive more frequent rate case filings. The specifics around that, we won’t know until we see the outcome of this rate case. So it’s too early to tiny down with kind of exactly what that timing would look like. But it completely comes back to the point that if you have an SRB mechanism in place that helps us track some of the capital and derisk some of the projects that are needed to reliably serve load then we’re able to do that without having to come back in as frequently on the rate case.

And so Tucson didn’t get it, that’s a little bit more of a unique story, I think, in the circumstances there. So we’re continuing to advocate for it in this case. There’s a lot of positive dialog towards the end of the hearing around that, but we won’t know that until we get through the rate case process.

Operator: Your next question is coming from Anthony Crowdell from Mizuho.

Anthony Crowdell: Just I guess quickly, if I could hit on like cadence of the year, very strong third quarter, type of drivers you could give us going into fourth quarter? And maybe is there an ability where you would maybe flex O&M within the year?

Andrew Cooper: So you saw for this quarter that O&M was relatively flat. And I think that, that was very specific to some offsets from employee benefit expense that you could see detailed in the 10-Q. But foundationally, we’ve seen the same trends around O&M throughout the year, which is some of the lagging impacts of inflation, particularly around areas like wages and then increased O&M needs around our generation fleet, both nuclear and non-nuclear. We saw those from early in the year as we prepared to get into the summer and then we saw those after the summer where we needed to continue to spend time around the fleet. So the O&M numbers that we gave last quarter, that $915 million to $935 million that upped O&M level we continue to remain on track to.