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Text: Ted Geisler, CFO; Daniel Froetscher, APS' President and COO; and Barbara Lockwood, Senior Vice President, Public Policy are also here with us.
First, I need to cover a few details with you.
Note that the slides contain reconciliations of certain non-GAAP financial information.
It will also be available by telephone through February 28.
Before I review our 2019 achievements and provide operating and regulatory updates, I want to look forward to the future and share more information about our focus areas and priorities.
Our strategy is anchored by four concepts that align with industry trends and shape the way we do business.
Those concepts can most simply be stated as clean, affordable, reliable and customer-focused.
Let me talk briefly about each one.
Clean is about decarbonizing our generation mix with our new goal to deliver 100% clean carbon-free energy by 2050.
Affordable is planning and operating our business to maintain reasonable electricity prices for the people, businesses and communities we serve.
Reliable means serving our customers with dependable power safely and efficiently.
And customer-focused is about developing new solutions, products and services to meet the changing needs and expectations of our customers.
With these in mind, we created a long-term plan and targets to track our progress along the way.
First, we recently announced our goal to deliver 100% clean carbon-free electricity to customers by 2050.
This goal includes a near-term target of 65% clean energy with 45% coming from renewables by 2030 and a commitment to exit coal by 2031.
Importantly, our plan includes flexibility to ensure that we're able to execute in a way that maintains affordability for customers.
As Jim will discuss, we expect this plan will require considerable capital investment.
We believe a carbon-free future as possible while keeping customer rates over time at or below the rate of inflation with timely recovery of clean energy investments.
To support the affordability of our transition to a carbon-free resource mix, we will have a sharp focus on economic development in Arizona.
Growing our customer base, allocates these costs across more customers, which helps keep rates affordable and increase the shareholder value by growing our Company.
Supporting an internal culture focused on reducing costs and maintaining a financially strong company to access low cost capital are also key in delivering a 100% clean energy future affordably.
In the area of reliability, we believe putting the responsibility on the utility to maintain high-performing well-run resources is important.
In pursuit of our clean energy plan, we will acquire resources that appropriately balance reliability, cost and flexibility for our customers.
This includes both owning new resources and considering supplemental generation from purchase power as appropriate.
Our fourth concept reinforces that customers are at the core of what we do every day.
We're committed to providing options that make it easier to do business with us.
We plan to continue developing innovative programs that connect customers with advanced technologies to help manage their bill.
In addition, we'll be convening an advisory panel of customers to gain a deeper understanding of the customer experience through individual perspective, so a little design basis thinking.
As we work to execute in all these strategic areas, we'll focus on strengthening our relationships with stakeholders.
Going forward, we plan to continue working collaboratively with those who have vested interest in Arizona's future and our Company's role as the state's largest electricity provider.
For our regulators, we are committed to maintaining an open dialog, listening and ensuring transparency.
We have a lot of important work ahead of us, and we'll be sharing information about our progress as we advance through the year.
And while I'm excited about our future opportunities, I also want to recognize our team and the hard work completed last year.
We finished 2019 with our best-ever reliability performance, if you exclude outages from voluntary proactive fire mitigation efforts, and Palo Verde once again achieved a capacity factor above 90%.
Our goal to reach 100% clean carbon-free energy by 2050 is new, but our efforts to move toward a cleaner energy mix are not.
In 2019, we maintained our environmental, social and governance A rating from MSCI, and we were ranked in the electric utility sectors top quartile by Sustainalytics.
Notably, APS was one of 10 American companies and the only U.S. utility to make CDP's A List for both climate change and water security in 2019.
And we accomplished all this while reducing the average residential bill by 7.8% or $11.68 on average since January of 2018 due primarily to savings from federal tax reform and operating cost savings that have been passed on to customers.
2019 was also a busy year for our state regulatory team.
Some of the work that we began in 2019 will continue this year.
Key dockets for 2020 include our rate case, retail choice, disconnection rules and modifications to the commission's energy rules.
A number of workshops have already been scheduled to discuss these topics, and you can find a list of key dates in the appendix to our slides.
The next milestone in our rate case proceeding is May 20, the date the commission staff and other interveners file testimony.
However, I would note that commission staff has indicated that they may need an extension to watch that proceeding.
Outside of our regulated operations, our Bright Canyon subsidiary acquired minority equity stakes in two wind farms being developed by Tenaska.
The 242 megawatt Clear Creek wind farm in Missouri and the 250 megawatt Nobles 2 wind farm in Minnesota.
We expect these wind farms to be operational in Q1 and Q4 of this year, respectively.
Our objective with these investments is to gain experience in the construction, ownership and operation of wind assets, and to partner with a proven developer in Tenaska.
Our overall strategy with Bright Canyon is to develop, own, operate and acquire infrastructure within the electric energy industry.
Investments in renewables, electric transmission and microgrids represent some of the opportunities that Bright Canyon has been evaluating, and I want to emphasize that these are close adjacencies.
We will continue to pursue attractive growth opportunities consistent with our core strength.
We have ambitious goals and a talented team to achieve them.
At the officer level, I recently made changes to our organizational structure that better aligns our experience and talent to our strategic focus areas and to strengthen our succession pipeline.
I'm excited about our future, all the possibilities and the team I have the privilege of working with.
First, to the team at Palo Verde for their work on a short notice outage at Unit 3 in getting the necessary work done safely and the unit back online ahead of schedule.
And second, to our T&D Engineering and Construction team for their outstanding work on the new substations associated with the Microsoft datacenter build out.
And third, to the Arizona State Sun Devils for their win last night over 14 Oregon.
So Jim, go ahead and take it away.
Before I review the details of our 2019 results, let me briefly touch on some of the key factors from the quarter, which can be found on Slide 3.
For the fourth quarter of 2019, we earned $0.57 per share compared to $0.23 per share in the fourth quarter of 2018.
Our results were largely impacted by a one-time tax refund to customers related to the TEAM III refund and lower adjusted O&M expenses.
We also experienced another quarter of mild weather.
For the full-year 2019, we earned $4.77 per share compared to $4.54 per share in 2018.
2019 earnings reflect our growing infrastructure to support the strong Phoenix economy and 2% customer growth.
Other key items for 2019 was negative weather, which decreased gross margin by $37 million or $0.25 per share.
The negative impact was more than offset by lower O&M.
Year-over-year lower adjusted O&M expense increased earnings $0.52 per share, primarily driven by lower planned outage expenses and lower public outreach costs at the parent level.
As I mentioned last quarter, we are committed to enhancing our customer and shareholder value through cost management.
The implementation of Lean Sigma will be the mechanism that allows us to improve the customer and employee experience while eliminating waste.
As a result of our cost management efforts, we made great strides in reducing O&M in 2019, allowing us to reach the low end of our original guidance range, despite the mildest Metro Phoenix cooling season on 10 years.
We expect to continue our cost savings efforts by reducing O&M approximately $20 million in 2020.
As Jeff mentioned in his comments, we are on a path to deliver 100% clean carbon-free electricity.
Part of that plan includes ending our use of coal-fired generation seven years earlier than previously projected.
As a result, the reduction in fuel costs as we use less fossil fuels and more renewables will be a source of cost savings to our customers in the future.
Our journey to a carbon-free future will require intelligent investments in renewable resources and developing technologies.
As you can see on Slide 14, we rolled forward our capex forecast for one year.
Our 2022 capex forecast reflects nearly $800 million of investment related to new clean generation resources and reflects our conservative mix of owned resources.
While we don't know the exact mix of ownership versus purchase power at this point, we will need an appropriate mix to ensure long-term value and reliability for customers.
That said, we believe there is potential upside to our capital investments, especially as we get past 2022.
As Jeff alluded to, customer affordability will be top of mind.
We would expect customer rates to increase no more than the rate of inflation over time.
In terms of financing our clean energy future, we would expect that we will issue equity sometime after 2020.
While the exact amount has not yet been determined, we would expect the amount to be in the $300 million to $400 million range.
The timing of the offering around the next rate case minimizes dilution and is ultimately accretive for our shareholders.
Our financial health, including a solid equity layer, will continue to provide our customers the benefits of low-cost access to capital and competitive returns to our shareholders.
In 2020, we expect to issue up to $1 billion of term debt at APS and $450 million that Pinnacle West.
Overall liquidity remain strong.
In the fourth quarter, APS issued $300 million of new 30-year unsecured debt at 3.5%.
We used the proceeds to repay commercial paper and to fund a $100 million of our $250 million par value 2.2% notes which matured in mid-January.
At the end of the fourth quarter, Pinnacle West had a $115 million of short-term debt outstanding and APS had no short-term debt outstanding.
Due to the tax benefits associated with both the TEAM Phase II and Phase III and optimized use of income tax incentives, our effective tax rate for 2019 was a negative 2.9%.
We anticipate an effective tax rate in 2020 of 14%.
Continued use of income tax incentives, including tax credits associated with clean generation investments, will reduce cash taxes in the year projects -- our projects are placed in service.
A quick note on pension.
The funded status of our pension remains healthy at 97% as of year-end 2019.
This is due to strong portfolio returns during 2019, continued contributions and the continued success of our liability-driven investment strategy, which has helped mitigate risk to our benefit plan funded status.
2019 was a great year for economic development in our service territory.
We saw high-profile data centers and manufacturing plants break ground in the West Valley.
We successfully connected two new data centers to our power grid included in the Microsoft data center and begin prep work to add an additional six data center feeds in 2020.
In addition to growth from the commercial sector, Arizona is benefiting from residential population growth.
According to a December 2019 report from the U.S. Census Bureau, Arizona ranked third in population growth behind Texas and Florida.
Arizona's population grew by approximately 120,000 people between July 2018 and July 2019.
Reflecting the steady improvement in economic conditions, APS' retail customer base grew 2.2% in the fourth quarter of 2019.
We expect that this growth rate will continue in response to the economic trends in our service territory.
The Metro Phoenix area continues to show strong job growth and has consistently been above the national average.
In 2019, employment in Metro Phoenix increased 2.9% compared to 1.6% for the entire U.S. Construction employment in Metro Phoenix increased by 9.6% and manufacturing employment increased by 5.2%.
According to the U.S. Bureau of Labor Statistics, Arizona's job growth ranked second in the nation in 2019.
The Metro Phoenix residential real estate market has also continued its upward trend.
In 2020, we expect a total of 31,100 housing permits, driven by both single-family and multifamily permits.
We continue to expect Pinnacle West's consolidated earnings for 2020 to be in the range of $4.75 to $4.95 per share.
A complete list of key factors and assumptions underlying our 2020 guidance can be found on Slide 6 and 7.
In closing, our long-term rate base growth outlook remains intact at 6% to 7% and we expect to achieve a weather-normalized annual consolidated earned return on average common equity of more than 9.5% in 2020.
The new year is off to a great start with the announcement of our bold clean energy plan, coupled with organic growth in our service territory.
We are excited to embark on a path that will help create a healthy and prosperous Arizona that benefits our customers, communities and shareholders.

user
compname reports qtrly earnings per share of $0.57.
pinnacle west capital corp - qtrly earnings per share $0.57.
pinnacle west capital corp - reaffirms 2020 estimated consolidated earnings will be within a range of $4.75 to $4.95 per diluted share.

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