PNW
#Thank you, Don and thank you again everyone for joining us on the call
This morning, we reported our financial results for the second quarter of 2017. As shown on Slide 3 of the materials, for the second quarter of 2017, we earned $1.49 per share compared to $1.08 per share in the second quarter of 2016. Slide 4 outlines the variances that drove the change in our quarterly ongoing earnings per share
I’ll highlight a few of the key drivers
Total gross margin was up $0.27 per share compared with the second quarter of 2016, supported by stronger customer usage, favorable weather and higher transmission and loss fixed cost recovery revenues
Higher net sales in the second quarter of 2017 compared with the second quarter of 2016 increased earnings by $0.10 per share, which we believe reflects the improving economic conditions we are seeing locally and I’ll talk about more on that in a moment, which was supported by 1.8% customer growth as well as higher average usage by our residential customers
Weather-normalized retail, kilowatt-hour sales were up 2.9% in the quarterly comparison, net of the impact of customer conservation energy efficiency programs and distributed renewable generation
Although we are pleased with the favorable sales growth we saw in the second quarter, year-to-date, through the end of June, sales were up 0.1% and we still expect that weather-normalized sales growth will fall within the range of about 0% to 1% for the year
Lower operations and maintenance expense contributed $0.14 per share in the second quarter of 2017, primarily driven by less fossil generation plant outage activity during the current period
As you recall, we had a large plant outage at the Four Corners Power Plant in both the first and second quarters of 2016 as part of the plant’s routine maintenance schedule
And keep in mind that we expect extended outages at Four Corners in the second half of this year as we prepare for the installation of pollution control equipment
Also want to note that the quarterly O&M variance includes a charge related to the cancellation of capital projects at the Navajo Generating Station, which has an offsetting adjustment depreciation
On the topic of depreciation, higher D&A decreased earnings by $0.01 per share in the second quarter, primarily due to increased plant in service, partly offset by the Navajo plant item I just mentioned
Turning now to the Arizona’s economy, which continues to be an integral part of our investment story, I will highlight the trends we are seeing in our local economy and in particular, the Metro Phoenix area
As seen on the upper panel on Slide 5, the Phoenix Metropolitan area continued to show job growth above the national average
Through May, employment in the Metro Phoenix area increased 2.4%, compared to 1.6% for the entire U.S
This above-average job growth is driven largely by the financial services sector
The solid job growth continues to have a positive effect on the Metro Phoenix area’s commercial and residential real estate markets
Vacancy rates in commercial markets continue to fall and at are levels last seen in 2008 or earlier
Additionally, about 2 million-square-foot of new office and retail space was under construction at the end of the quarter
We expect a 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 its residential real estate market
As you can see in the lower panel on Slide 5, housing construction is expected to continue the upward post-recession trend
In 2017, housing permits are expected to increase by about 5,000 compared to 2016, driven by single-family permits
In fact, permits for new single-family homes in March through May were at their highest level seen since August of 2007. 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, low mortgage rates and the opening up of credit to the wave of households who suffered from foreclosures during the recession 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
As I previously mentioned, reflecting the steady improvement in economic conditions, APS’s retail customer base grew 1.8% in the second 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 support future population, job growth, and economic development in Arizona prepared to be in place
Finally, a quick update on our financing and guidance plans
We expect to issue about $650 million of additional long-term debt this year, one transaction at Pinnacle, including the refinancing of the $125 million term loan and one at APS
Overall, our balance sheet and liquidity remain very strong
We plan to issue earnings guidance for 2017 after the final approval of APS’s pending rate review through a separate communication
However, to assist you with estimates, a list of key drivers that may affect 2017 ongoing earnings is included in the Appendix to today’s slides
We also plan to release 2018 ongoing guidance on our third quarter call consistent with our standard practice
This concludes our prepared remarks
I will now turn the call back over to the operator for questions
Question-and-Answer Session
I would just say, Greg, it’s a great question as one quarter we come up pretty flat to negative
We do know that consumer confidence at the residential level increased in the second quarter
And I think that’s consistent with the surge in housing permits in the second quarter
That said we will see some consumer elasticity as they get their bills in July from the warm June
So right now, we are continuing to be led here today by the commercial sector with the things we mentioned before, State Farm completing its build-out last year, but still continuing to increase forecast as we move forward
So, I think I would answer that by saying I think the third quarter is going to tell us a lot as well
So we knew our O&M was going to be back end loaded this year
I think I would look to the first quarter of ‘16 when we did similar type outages at Four Corners
That’s the guide in terms of the magnitude of that spend, Greg
No, we will provide ‘18 guidance
And then as our normal practice at the end of the third quarter – I am sorry, ‘17 guidance and at the end of the third quarter, we will do ‘18 guidance
But at this time, we have no plans to go out any further than what we normally do
No
I would expect actually our equity ratio to sort of fall as we issue fixed income securities over the next couple of years
Yes
The equity ratio and the ROE were just placed in there as parameters for us, the rate case for the black box, so the extra equity in this case, it doesn’t lead to earnings power
Earnings always goes in peaks and troughs
And keep in mind, when we do the step increase, we still have $0.5 billion of Ocotillo that’s being deferred, but not being earned on
So that would create a drag until it ultimately gets some rates hopefully in 2020.
Yes
I think we are pleased with where we are compared to our plan this year
And beyond that, we haven’t really given any guidance and we will talk about that when we get guidance out here soon
Yes
So I would say that we get probably as much impact of energy efficiency as we do rooftop, but we probably will have by the time rate goes into effect and installations that are valid we have received before that, we will probably end with 70,000 or so rooftop solar and that will be about 6% of our residential customer base will be with rooftop solar
After that, remains to be seen in terms of continued growth
We get about a 1.5% or so offset typically from the EE and DE
