Pinnacle West Capital Corporation's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Pinnacle West Capital Corporation (PNW)

Q2 2012 Earnings Call

August 2, 2012, 12:00 p.m. ET


Becky Hickman - Director, IR

Don Brandt Chairman & CEO

Jim Hatfield – CFO

Jeff Guldner – SVP, Customers & Regulations


Greg Gordon - ISI Group

Neil Mehta – Goldman Sachs

Shar Pourreza – Citigroup

Ali Agha – SunTrust

Brian Russo - Ladenburg Thalmann

Kevin Cole - Credit Suisse

Jim [inaudible] – UBS

Charles Fishman - Morningstar

Paul Patterson - Glenrock Associates



Greetings, and welcome to the Pinnacle West Capital Corporation’s 2012 second quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

It is now my please to introduce your host, Ms. Rebecca Hickman, Director of Investor Relations. Thank you, Ms. Hickman, you may begin.

Becky Hickman

Thank you, LaTonya. I’d like to thank everyone for participating in this conference call and webcast to review our second quarter 2012 earnings, recent developments operating performance.

Our speakers today will be our Chairman and CEO, Don Brandt and our CFO Jim Hatfield. Jeff Guldner, who is our APS Senior Vice President of Customers and Regulations is also here with us.

Before I turn the call over to our speakers, I need to cover a few details with you. First, the slides to which we refer are available on our Investor Relations website along with our earnings release and related information. Please note that the slides contain reconciliations of certain non-GAAP financial information. Also, all of our references to per-share amounts will be after income taxes and based on diluted shares outstanding.

It is my responsibility to advice you that this call and our slides contains 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 second quarter 2012 Form 10-Q was filed this morning. Please refer to that document’s forward-looking statements cautionary language as well as the MDNA section, which identifies risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our website for the next 30 days. It is also available by telephone through August 9 th.

At this point, I’ll turn the call over to Don.

Don Brandt

Thank you, Becky, and thank you all for joining us today. Since our last conference call we’ve made progress in a number of key areas as we focus on our core electric utility business. This progress includes demonstrating improvement in the regulatory environment in Arizona, maintaining operational excellence, strengthening our financial profile and positioning ourselves to benefit from economic recovery. Jim and I will provide more information on each of these areas through our remarks today.

The regulatory environment in Arizona took another step forward when APS’s retail rate settlement was approved on May 15 th by the Arizona Corporation Commission. The decision came 11 ½ months after the case was filed, the quickest resolution of a major Arizona utility rate case in recent memory. Supported by 22 of the 24 active parties to the case, the settlement shows significant collaboration and cooperation among APS, the Arizona Corporation Commission and other parties as well as a comprehensive commitment to an expedited process.

The settlement contains a number of benefits for our customers, the communities we serve and our shareholders. Details of the agreement, as well as key underlying assumptions are outlined in the appendix to our slides today.

The settlement prevents base rates from increasing for four years, but it is not a rate freeze. Under the agreement, APS may file it’s next general rate case on or after May 31 st of 2015 for new base rates to become effective on or after July 1 st of 2016. That said, we believe a number of factors will allow us to achieve competitive financial performance during the stay-out period.

Aspects related to that settlement include first APS’s rate adjustment mechanisms. All of APS’s rate adjustment mechanisms will continue to function throughout the stay-out period. These mechanism include, among others, first the preferred formula rates and the related retail transmission costs adjusted, which beginning in 2013 can pass annual changes in the preferred formula rate to APS retail customers without explicit ACC approval because of the settlement.

Next, the renewable energy surcharge, which allows for recovery of AZ Sun plant additions and then the loss fixed cost recovery mechanisms, which was adopted in the settlement to mitigate the loss of certain fixed costs related to energy efficiency programs and distributed generation.

And finally, an enhanced environmental improvement surcharge, which will allow APS to collect up to $5 million annually for certain carrying costs on government-mandated environmental capital projects. Second, a carve out for the proposed Four Corners acquisition. This provision will allow APS to seek rate adjustments as early as mid-2013 if the acquisition is consummated as we currently plan. I will review our progress in the Four Corners plan momentarily.

Third, provisions to mitigate certain cost increases. These features include deferrals of portions of higher property taxes attributable to tax rate increases and 100% pass through of fuel costs through the power supply adjuster.

And finally, without a time-sensitive base rate case litigation process in the next few years, we can focus fully on operational excellence, efficiency and discipline cost management.

This settlement builds upon a constructive framework established in the 2009 settlement and provides financial support for APS that will help us achieve Arizona’s energy goals over the next four years.

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