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Text: First, I need to cover a few details with you.
Note that the slides contain reconciliations of certain non-GAAP financial information.
They will also be available by telephone through November 6, 2020.
We continue to navigate through the extraordinary events of 2020 and so, as part of my operations update, I'll share with you our success in managing the hottest July and August on record in the Valley.
I'll also provide an update on our regulatory dockets and our focus as we prepare for 2021.
Ted will explain our earnings expectations for the year are higher due to the significantly above average temperatures.
And so, first, I want to recognize our field team for doing an exceptional job in maintaining reliable service for our customers this summer.
The extreme heat this year contributed to a challenging energy market across the entire desert, Southwest.
The lack of available capacity and the resulting declarations of energy emergencies by other utilities across the west, served as a reminder of the importance of long-term resource portfolio planning, vigilance over day-to-day energy supply and responsible energy policy.
Our ability to avoid an energy emergency this summer was the result of careful long-term planning, resource adequacy, flexibility and innovative customer programs.
We relied heavily on our base load and fast ramping assets including Four Corners, Ocotillo and Palo Verde, and those assets were ready when we needed them.
Our fossil fleets equivalent availability factor which is the percentage of time that a fossil generation unit is available and ready to perform when called upon was 95.3% from June through September.
And Palo Verde Generating Station capacity factor for the same timeframe was 100.2%.
Not only were our generation plants there when we needed them, our customers were as well.
Out of an abundance of caution and to better prepare for potential unforeseen events, on August 18th and the 19th, we asked our customers to voluntarily conserve energy during peak hours.
It came as no surprise to me that our customers were an amazing partner.
Their response reduced peak demand on August 18th by approximately 240MW, creating a meaningful reduction on a day when the entire western grid was challenged.
In addition to successfully navigating the capacity shortfalls that were created by the heat, we also used our careful planning in close coordination with the Forest Service and first responders to mitigate the potential impact from wildfires this season.
To reduce fire risk, our teams performed vegetation management activities, we held wildfire prevention training and we continue to expand our clearance around poles program, and it was an incredibly active wildfire season with over 900,000 acres burned to-date compared to an average over the last five years of 250,000 acres.
Despite the above average wildfire activity, we actually experienced minimal impact to our assets, and I think that was due in part to our effective planning and risk management program.
Despite a worldwide pandemic, a record hot summer, regional capacity shortage and wildfires, our team continues to focus on how to make lasting impacts that benefit our customers, our shareholders and the company.
Palo Verde consistently provides examples of this type of continuous improvement and forward thinking, as a recent example, Steve is a Palo Verde procurement engineer challenged our traditional procurement process and conducted a cost analysis in engineering evaluation for a micro switch replacement.
The technical evaluation allowed Palo Verde to purchase commercial grade switches at approximately 7 times lower than the alternative.
Over the next three years alone, this change is expected to save the company $2.5 million.
His leadership and innovation earned him a nomination for an EPRI Technology Transfer Award, and I can't emphasize enough that it's our team who drives the success for this company, and I'm proud to recognize Steve for his innovation.
Shifting gears to regulatory.
Staff and Intervenors filed testimony in our current rate case on October 2.
Staff's initial testimony recommended a 9.4% return on equity, and that compares to our current authorized 10% return on equity.
Staff also recommended approval of our actual capital structure at the end of the test year, that's consistent with our request and that would result in a 54.7% equity layer.
The total revenue increased recommended by staff is $89.7 million compared to our request for a $184 million increase.
We'll file our Rebuttal testimony on November 6 and Staff and Intervenors will file Surrebuttal testimony on November 20.
The hearing is scheduled to begin on December 14 and I expect it to continue into 2021.
While testimony is certainly an important part of the process and it does provide visibility in each party's priorities, we're still very early in the case and we expect that many of the issues will certainly be discussed further as the case progresses.
I do want to note that yesterday the commission voted on several amendments to a proposed energy rules package.
The amendments include new carbon reduction standard of 100% by 2050 with interim targets of 50% by 2032 and 75% by 2040.
The reductions are based on a 2016 to 2018 carbon emissions level benchmark.
The amendments also require electric utilities to install energy storage systems with the capacity equal to 5% of each utilities 2020 peak demand by 2035.
And 40% of the required energy storage must be customer owned or customer leased distributed storage.
Another approved amendment modifies the resource planning process including requirements for the ACC to approve utilities load forecast and resource plan and for utility to perform an all sorts requests for information to guide its resource planning.
Earlier this month, the commission also voted on another amendment to establish a new energy efficiency standard.
The standard requires electric utilities to implement demand side management resources equivalent to 35% of their 2020 peak load by 2030.
Eligible demand side management resources include energy efficiency, demand response and load shifting, and just importantly the commission must vote and I expect they will vote soon to approve a final energy rules package before any of these amendments can take effect.
As we look to wrap up 2020, we will continue to work with the commission on implementing a clean energy transition for the benefit of their constituents and for our customers.
Recall that we've spent an aspirational goal of 100% carbon free by 2050 and 65% clean by 2030.
To do so we'll require a strong regulatory partnership support for an organized transition away from coal and fossil fuels and regulatory and financial support for the expansion of renewables, batteries and energy efficiency within our portfolio.
I think yesterday was a strong indication of alignment with both the commission and other stakeholders to achieve a cleaner energy vision and energy future for Arizona.
Near term, our focus and priorities remain on improving our customer communications, rebuilding our regulatory relationships by reestablishing trust, moving toward a reasonable resolution of our rate case and continuing to engage with stakeholders to build alignment on priorities to support our goal of providing clean reliable and affordable service to our customers.
As Jeff mentioned, I will cover our third quarter results and the impact from weather.
I'll also provide additional details around our customer and sales growth, economic development and financing activities.
Lastly, I'll cover our expectations for the remainder of 2020.
Turning now to the third quarter.
The significant tailwind from hotter than normal weather supported earnings of $3.07 per share compared to $2.77 per share in the third quarter of '19.
July set a new record for the hottest month recorded in Phoenix until August.
August then surpassed July setting another new record for the hottest month.
The above average temperatures this quarter added $0.26 to earnings year-over-year.
For the nine months ended September 30, 2020, weather added $91 million of pre-tax gross margin or $0.61 per share year-over-year.
We also experienced 2.3% customer growth and 1.3% weather normalized sales growth in the third quarter 2020 compared to the same period in 2019.
From May 13, when business started reopening after the COVID closure period through September 30, weather normalized sales increased 1% compared to the same period last year.
We continue to see a reduction in weather normalized commercial and industrial sales of 5%, offset by an increase in weather normalized residential sales of 6% during this period.
The strength and speed of our return for positive growth numbers reflects the continued expansion of our local economy, following the full COVID closure period earlier this year.
Further evidence of our recovery can be seen in the increased number of single-family building permits and commercial construction activity.
In 2020, we expect a total of 32,000 housing permits, an increase of about 1,200 compared to last year and the highest number since 2006.
The labor market in Arizona has also started to gradually recover from the pandemic impacts as well.
For 2020 through the end of August the employment in Metro Phoenix decreased 1.7% compared to 5.6% across the entire US.
And while manufacturing employment Metro Phoenix decreased 1.2%, construction employment increased by 0.9%.
The ongoing growth of new businesses and residential properties and the 18 construction cranes that are currently visible here in Downtown Phoenix are evidence of our continued growth.
To serve our growing customer base and support investments in clean energy, in September, we issued $400 million of 30 year 2.65% green bonds at APS.
The 2.65% coupon represents the lowest 30-year rate in the APS bond portfolio.
Turning to our full-year 2020 guidance, as a result of the above average weather, we are increasing our 2020 consolidated earnings range from $4.75 to $4.95 per share to $4.95 to $5.15 per share.
The weather benefit has more than offset the additional costs and the reduction in sales due to COVID-19.
We are also increasing our 2020 weather normalized year-over-year sales growth expectations to be between zero and 1%.
In light of the weather benefit, we have accelerated the timing of near term O&M initiatives.
For example, we're pulling forward some spend in 2020 that was previously anticipated for future years, particularly around project work and customer experience initiatives as well as one time opportunities, like our $10 million contribution to the APS Foundation, which supports our community non-profits.
Our revised 2020 O&M guidance range of $870 million to $890 million reflects these items.
While we believe this increase in O&M demonstrates prudent, planning and flexibility through this challenging year, we do remain focused on our lean initiatives and continue to see our core O&M trend down.
We are executing our plan to reduce 2020 O&M expense by $20 million, including $10 million through improved procurement and contract management activities, and another $10 million in several small operating efficiencies across the enterprise.
We also continue to partner with Arizona State University to train our workforce on lean skills and are excited about the long-term potential in continuing to streamline our business.
While we don't enter a year counting on whether it would be a driver, we do enter the year prepared to take advantage of above normal weather when it makes sense to do so.
This can help us mitigate the impacts of mild weather in future years, while also enabling our investment in certain key initiatives that improve customer experience, a focus area for our company.
Our resource planning and capital expenditure forecast have also been revised.
The delay in our clean energy procurement impacted by the McMicken investigation, slightly reduced our 2020 capital expenditure forecast by $68 million.
However, we do remain committed to our clean energy commitments that have made progress with our resource acquisition activities.
In September, we executed a 200 megawatt wind PPA with a 20-year term.
This is a repower of an existing wind facility and is expected to be fully upgraded with additional capacity in 2021.
We also plan to issue two new RFPs.
One outsourced RFP and an additional utility owned energy storage RFP at our existing solar facilities.
While it was an exceptionally hot summer, we are grateful the weather tailwind allowed us to further increase financial assistance to customers struggling to pay their bills as a result of COVID-19, and to accelerate investments that will enhance the quality of our service and maintain our record for providing top tier reliability.
As Jeff mentioned, we will continue to focus on our regulatory outcomes in the near term, while executing our long-term plan to deliver value for our customers, shareholders and community stakeholders.

user
compname says co increased 2020 consolidated earnings guidance to $4.95 to $5.15 per diluted share.
q3 earnings per share $3.07.
sees fy 2020 earnings per share $4.95 to $5.15.
increased 2020 consolidated earnings guidance to $4.95 to $5.15 per diluted share.

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