PNW
#Thank you, Don
And thank you again everyone for joining us on a call
Today I'll discuss the details of our third quarter financial results provide an update on Arizona economy and review our financial outlook, including introducing 2018 guidance
This morning, we've reported our financial results for the third quarter of 2017, which will in line with expectation
As summarized on Slide 3 of the materials, for the third quarter of 2017, we earned $2.46 per share, compared to $2.35 per share in the third quarter of 2016. Slide 4, outlines the vacancies that drove - the variances that drove the changes in our quarterly ongoing earnings per share
I'll highlight a few of the key drivers
Gross margin was up $0.22 per share in the third quarter of this year, compared to last year reported by several factors
The rate increase approved by the commission in ADS' rate case proceeding, which became effective August 19, improved gross margin in $0.13 per share
Higher sales in the third quarter of 2017, compared to the third quarter of 2016 increased earnings by $0.02 per share, driven by customer growth, partly offset by the effects of energy efficiency and the disputed generation, the net effect of weather variations $0.02 per share
Cooling degree-days were higher in the third quarter of this year, compared to last year, although whether in both 2016 and 2017 third quarters with less favorable the material averages
Higher operations and maintenance expenses decreased earnings by $0.02 per share in the third quarter of 2017, primarily due to an increase in employee benefit costs
We also have had higher plant outage cost related to the beginning stages of the SCR installation at Four Corners unit 5. Depreciation and amortization expenses were higher in the third quarter of 2017, compared to the third quarter of 2016, impacting earnings by $0.07 per share
The increase was primarily driven related to time additions and the $61 million annual increase in D&A rates approved in the rate case
Looking next to Arizona's economy, which continues to be an integral part of our investment thesis, I'll cover some of the trends we are seeing on the local economy and in particular, the Metro Phoenix area
Metro Phoenix areas continue to show job growth of about the national average
Through August, employment in Metro Phoenix increased 2% compared 1.5% for the entire U.S
The above average job growth is broad based and driven largely by tourism, health care, manufacturing, finance and construction
The Metro Phoenix unemployment rate of 4.3% also reflects a strength of the job market
Job growth continued to have a positive effect on the Metro Phoenix area commercial and residential real estate markets
As seen on the upper of Slide 5, vacancy rates in commercial markets continue to fall or at the levels last seen in 2008 or earlier
Additionally, about 3 million square feet of new office and retail space was under construction at the end of the quarter
We expect the continuation of business expansion and related job growth in the Phoenix market, which will, in turn, support continued commercial development
Metro Phoenix has also had growth in the residential real estate market
As you can see in the lower panel of Slide 5, housing construction is expected to continue the upward post-recession, trend
In 2017, housing permits are expected to increase by about 2,000 compared to 2016, driven by single-family permits
In fact, permits for new single-family homes in the third quarter with a highest level seen since 2006. One factor driving this increase is that Maricopa County was the fastest-growing county in the U.S
in 2016. That activity in the market is providing meaningful support for home prices, which have returned to levels last seen in 2008. We believe that solid job growth and low mortgage rates should allow the Metro Phoenix housing market and the economy more generally to continue to expand at this pace over the next couple of years
Reflecting the steady improvement in economic conditions, APS's retail customer base grew 1.9% in the third quarter
We expect that this growth rate will continue to gradually accelerate in response to the economic growth trends I just discussed
Importantly, the long-term fundamentals supporting future population, job growth and economic development in Arizona appear to be in place
Finally, I will review our financing activity, earnings guidance and financial outlook
On September 11, APS issued $300 million of 10-year 2.95% senior unsecured notes
The proceeds will be used to refinance commercial paper borrowings and replenish cash temporarily used to fund capital expenditures
Overall, our balance sheet and liquidity remain very strong
At the end of the quarter, Pinnacle West and APS had approximately $100 million and $32 million of short-term debt outstanding, respectively
As Don discussed, in October, the Board of Directors increased indicative annual dividend by $0.16 per share, or approximately 6% to $2.78 per share effective with the December payments
Turning to guidance
We continue to expect Pinnacle West's consolidated ongoing earnings for 2017 will be in the range of $4.15 to $4.30 per share
Key drivers to the remainder of the year include the impact from our rate case, and higher O&Ms as we complete the plant outage at Four Corners
The extended planned outage at Four Corners is why earnings in the fourth quarter of this year are expected to be lower than the fourth quarter of 2016. We are also introducing 2018 ongoing guidance of $4.25 to $4.45 per share, which includes an increase in our weather-normalized sales forecast to 0.5% to 1.5%
The rate increase, our adjustment mechanisms and sales growth will be important gross margin drivers, we expect will be partially offset higher fossil plant outage cost and higher other operating expenses relating to more plant service, including higher G&A and property tax
We've also increased our 2018 capital expenditures forecast by approximately $40 million, mainly from reliability-related projects
We have higher cost of planned outages cost in 2018 including the 95 day SCR installation of Four Corners Unit 4. We also have planned outages that our gas plant including Redhawk, maintenance that our gas plants is based on one hours and starts
Our participation in the energy and balance market increasing levels of solar generation and low gas prices combined with the result and more starts in many of our plants
We'll continue to plant to operate our business for long-term success, but we continuously strive to manage costs in sustainable manner
In 2018, there are larger than normal number of planned outages will provides necessary maintenance to continue operating or diversified fleet with a high level of reliability our customers expect
We also believe that thoughtful and well-executed preventive maintenance can limit more costly emerged work in the future
We will find a complete list of factors and assumptions underlining our 2017 and 2018 guidance in the appendix to today's slides
Our rate base growth outlook remains at 67% through 2019, and this growth expect annualized consolidated return on average common equity at more than 9.5% over the same time raising
With the combination of modest customer growth supported by robust economic development activities, extensive capital investment opportunities and renewable resources, technology and grid modernization together with a constructive and forward thinking regulatory commission
We believe we are well-positioned to continue our track record of success
This concludes our prepared remarks
I will now turn the call back over to the operator for questions
Question-and-Answer Session
Well, I would just state it this way since we don't give earnings growth is, our rate base growth is 6% to 7%, the board and the management team is very comfortable of what we'd see through the next rate cycle
So you can imply anything you want on that
I would say that, year-to-date, of 0.1%
We saw a somewhat of the slowdown usages that came probably in October
Probably some impact in there, higher than the rate case
We had a weak fourth quarter of 2016, so I think sales are right in line with what we've forecasted throughout the year
Hi, Greg
So the exact number will be in our EEI slide deck, which will be filed later today and we're just finalizing the number, but you did see a fall off on what we expected with the pull forward in 2018 to the grandfathering, but that number will be in slide that we'll follow later today
And Greg we will have a updated - we'll file all updated CapEx including 2020 in our 10-K in February, so that will give you all so outlook in the future
Yes, we don't really need anything at the moment
But we'll evaluate ongoing whether we need something that or not so
Well, I think we'll continue to play more battery storage as we move forward
I think we're taking a measured pace to make sure we're not in front of the cost curve
As Don said, we're putting in a couple of batteries in the rural area to in lieu of upgrading the circuit
And I think there will continue to be opportunities where we can sort of capital near-term few battery storage
But we're just getting started at battery storage at this point
Obviously, we don't think 3% is normal or the board would normal rate the dividend of 6%
2018, as it sits today as a test year
There's a lot of capital if that recovered in there you have the training of the - you have a deferral, but you are not earning on it
So now I think it's just on unusual year if you look back historically we've grown from 10% to 1.5% EPS and I wish desktop was leaner it makes it a lot easier but unfortunately it's not leaner
We're always have cycles through the rate cycle
So the way it sits today, remember we have the step increase in the Four Corners which will be 1/1/2019. We currently have 2018 as a test year which would be - Ocotillo will be done in May of 2019 and then it will be the rest of the capital and with 2018 test year as it sits today
It's not one issue for the rate case; it would be four rate case
So we cannot file the before moving on to 2019, so if you think about the last cycle we filed June 1, rate will to effect July 1, 2020 and that's as it's currently contemplated
Well, that moving one piece of it Greg
I haven't calculated it, but certainly your $0.11 in 2018 over 2017 is part of that up and down that happens on a year-to-year basis
I'll say overall O&M and obviously this goes up and down, cents per kWh, O&M expense as a - cent per kWh whether normalized retail sales have been flat since 2010 at $0.275 of kWh
So we'll work hard that to keep O&M certainly over the timeframe based on kWh growth
