Pinnacle West Capital Aktie

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2026 First Quarter Earnings Conference Call. [Operator Instructions]

It is now my pleasure to hand the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our first quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman, President and CEO, Ted Geisler; and our CFO, Andrew Cooper; Jose Esparza, SVP of Public Policy is also here with us.

First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information. Today's comments in our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our first quarter 2026 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through May 11, 2026.

I will now turn the call over to Ted.

Thank you, Amanda, and thank you all for joining us today. We're off to a solid start in 2026, delivering first quarter earnings that support the financial guidance we provided in February. Before Andrew reviews the quarter in more detail, I'll highlight several operational, customer and regulatory developments that underscore the momentum across our business. Arizona's diverse economy continues to expand at a strong and sustained pace reinforcing the state's position as a national leader in semiconductor and advanced manufacturing. We are proud to support TSMC's accelerated expansion in Arizona and are working closely with the company and the infrastructure needed to power their growth.

With the second fab complete, TSMC expects to begin volume production 3-nanometer chips in the second half of next year. Construction is underway on the company's third fabrication facility and TSMC has also begun construction on its fourth fab and first advanced packaging facility with those facilities expected to come online by 2029.

Importantly, the momentum extends well beyond TSMC. Activity across the semiconductor supply chain continues to intensify throughout the region, with key suppliers rapidly establishing and expanding their local footprint to support accelerated production time lines. United Integrated Services Corp. [ Sun ] Chemicals and [ Morne Star ] have all purchased land in North Phoenix. At the same time, engineering firms, clean room specialists, electric mechanical integrators and equipment suppliers are increasing staffing levels and scaling operations across the Valley. These investments demonstrate strong confidence in Arizona's economy and reinforce the sustained growth we are seeing across our service territory.

Turning to operations. Our focus remains on delivering top-tier reliability, strengthening grid resilience and investing in the infrastructure and technology needed to serve our customers safely and efficiently. Across the company, we're using automation and advanced analytics to improve decision-making and execution. For example, we're applying machine learning tools to better anticipate equipment performance, prioritize asset maintenance, identify outage restoration more accurately and strengthen situation awareness during periods of elevated wildfire or weather risk. These capabilities are helping our teams act faster, target investments more effectively and continue improving reliability for our customers.

We continue making solid progress on our generation and transmission investment plans. Construction is now underway at our Red Hawk expansion project, which will add 8 combustion turbines and approximately 400 megawatts of reliable natural gas capacity to the system. We're also advancing the Desert Sun project, where we have secured major equipment reservations and continued to progress through early development activities, including siting and permitting.

On research procurement, we recently received proposals in response to the all-source RFP issued later last year, which targeted new resources beginning service between 2029 and 2031. We're evaluating those bids now and working with counterparties to determine the best fit projects for our system end customers. We expect to make final awards later this year.

As we plan for long-term growth, we're also focused on near-term summer preparedness. Palo Verde Unit 2 is in the final days of its planned refueling outage and expected to return to service soon. With all 3 units operating, Palo Verde will continue providing round-the-clock reliable and affordable energy to help meet our summer demand. We're prepared to serve our customers safely, reliably and affordably during the months ahead when they depend on us the most.

We continue to strengthen our customer-centric culture with employees focused on delivering reliable service, minimizing outages and providing a seamless experience across phone, field and digital channels. In the first quarter, APS delivered strong results in the [ Escalon ] customer relationship model, ranking in the first or second quartile across all core KPIs. APS also ranked in the first quartile through J.D. Power and was highlighted nationally as a top performer in customer awareness and participation in products and services, earning the highest awareness score in the country for available customer programs.

Lastly, our rate case remains on track. We have completed multiple rounds of written testimony and the hearing is scheduled to begin on May 18. We look forward to working with the commission and intervenors in a timely and constructive manner.

In summary, we're executing our plan. delivering operational excellence to our customers, investing in grid expansion to serve Arizona's rapid growth and improving investment recovery to reduce regulatory lag while ensuring affordability for our customers.

With that, I'll turn the call over to Andrew.

Thank you, Ted, and thanks again to everyone for joining us today. This morning, we reported our first quarter 2026 financial results. I will review those results and provide additional details on sales and financial guidance.

For the first quarter of 2026, we reported earnings of $0.27 per share compared to a loss of $0.04 per share for the first quarter of 2025, higher transmission revenue, favorable weather higher sales and usage and lower O&M were the primary benefits this quarter. These positives were slightly offset by increased financing costs, a smaller contribution from our El Dorado investment than last year and higher depreciation and amortization. Transmission revenues contributed $0.16 of benefit this quarter. This reflects our continued focus on heightened transmission investments to support our growing customer base. We expect a strong benefit in this area throughout the year in line with our annual guidance.

Weather also provided a meaningful benefit this quarter, primarily driven by the warm weather we experienced later in the quarter. Although we saw less heating load in January and February due to a mild winter. According to the National Weather Service, March was the hottest on record with 9 days at or above 100 degrees. The resulting impact was a benefit of $0.13 attributable to weather in the first quarter due to an increase in residential and commercial cooling degree days. We continue to see a consistent ongoing influx of customers into our region as customer growth for the quarter was again strong at 2.2% near the high end of our annual customer growth guidance. Our weather-normalized sales growth was 9.4% for the quarter, driven by strong C&I growth of 14.6% and residential growth of 1.8%.

We had a onetime adjustment to sales growth during last year's first quarter. And if we take that into consideration, we would still have experienced strong weather-normalized sales growth at 7.4% during Q1 of this year. We are not changing our annual sales growth guidance of 4% to 6% at this point, but it is a strong start to the year. This trend of customer and sales growth reinforces our need for investments in our system to ensure reliable service for our customers.

On the expense side, O&M saw a significant decrease in the first quarter compared to last year. This was mostly driven by lower plant outage expenses and a reduction to commission required energy efficiency programs. We continue to have a strong focus on cost management, and we are maintaining our goal of declining O&M per megawatt hour. Interest expense was higher this quarter compared to the first quarter of last year, driven by higher debt balances from issuances. Our year-over-year benefit from our El Dorado investment was smaller, driving a slight drag. Finally, our depreciation and amortization expense for the quarter increased slightly as the placement of additional plant in service was partially offset by the retirement of Cholla.

Turning to the balance sheet. We recently had positive conversations with all 3 credit rating agencies, resulting in the maintenance of our current ratings and stable outlooks. We are focused on sustaining solid ratings and metrics to the benefit of our customers as we continue to work with the commission and stakeholders on reducing regulatory lag through our pending rate case. Our guidance for financing remains unchanged and but we're pleased to announce that all of our equity funding needs for 2026 have been completed, and we are opportunistically working towards future year needs.

We now have nearly $850 million of priced equity available to us for future issuance under equity forwards, including more than $350 million price during the first quarter. We continue to utilize the mix of debt and equity sources to maintain our balanced capital structure. We are reaffirming all other aspects of our financial guidance and look forward to reliably serving our customers as we continue executing our strategy throughout the year. This concludes our prepared remarks.

I will now turn the call back over to the operator for questions.

[Operator Instructions] Your first question is coming from Shar Pourreza from Wells Fargo.

It's actually Alex on for Shar. So just on the long-term sales growth to that 5% to 7% you have out there through 2030, you're obviously seeing a lot of growth in your service territory and in the pipeline as well. You saw 7% growth just this past quarter. So can you just talk a little bit about just how sticky this outlook is? And can you sort of see -- can we sort of see this trend continue going forward? Is there sort of anything that you see that could potentially allow you to revisit this outlook as opportunities continue to materialize?

Yes, Alex. It's Andrew speaking. So as you noted, we did have sales growth this quarter that even adjusting for the adjustment from the first quarter of last year was almost 7.5%. And that was driven by just the continued ramp-up of our extra high load factor customers. And we've got a number of them that are all in different stages of their ramp. Last year, we were able to increase our long-term sales growth guidance through 2030, up to that 5% to 7%. And so what you saw in the first quarter here, was a number that looks more like the top end of our range for the long term relative to what we expect for this year, which is that 4% to 6%. So you're really seeing those long-term trends begin to manifest around the diversity of customers we have we're, at this point, about to get rolling on [ Fab 2 ] at TSMC, as Ted mentioned, and just to sustain customer additions to our service territory, which for the quarter were in the top half of our customer growth range.

So fundamentally, that long term, runway around the diverse sales growth that we're seeing in the service territory something that we see continuing. We'll continue to revisit because -- keep in mind that, that sales growth rate is driven by the customers that are committed to today that 400 to 500 megawatts or so of customers that we've committed to. There is a large backlog of customers in our queue. And as we continue to work the capital plan and the ability to serve those customers, we'll continue to look for opportunities to invest and see sales growth beyond our base plan. But for now, we still have to go with the 5% to 7% long term in the 4% to 6% for this year.

Got it. That's very helpful. And just pivoting here, just on the EPS and the rate base CAGR. So as you sort of look out, sort of, say, '28, '29 beyond, just any updated views on sort of how we should be thinking about the delta between the two? Is that 200 basis points sort of the right figure? Or could you see those two converge over time, just sort of just given all the opportunities and growth that you're seeing?

Yes, I mean, we'll have to revisit all of this at the conclusion of the rate case. Our capital investment opportunity will be informed by both the ability to narrow regulatory lag, which in of itself will help narrow that gap between what we spend and how it drop downs to the bottom line. But as well some of the potential for bilateral contracting opportunities with some of our large load customers, our expectation is to continue to push the customers to support some of the upfront funding which will allow us over the course of the contract to front-end load some of the funding which helps support the need for less external funding of those needs. And so we'll look at all of it.

For sure, as we continue to have a better and more predictable cash flow conversion, it does give us an opportunity to fund more from retained earnings. And so we'll just continue to look at that. But of course, we'll also be looking at the capital opportunity and continue to reinvest in the system as well.

Your next question is coming from Julien Dumoulin-Smith from Jefferies.

Team, nicely done. What a way to start the year.

Yes. Thanks, Julien.

Look, maybe just to kick you off here, from a timing perspective, how do you think what we could see on the August 3 IRP filing here? And how do you think about that refresh cycle here. Just what kind of clues could we get here in -- to kick off the summer here and ahead of any broader post rate case update? And then maybe related to that, while we're talking about timing, how would you think about the gating items here for this subscription model contract effort you guys are trying to get off the ground. When could contracts be signed? Is that something else that we could see the summer? Or how do you think about that materializing, if you will?

Yes, I appreciate the question, Julian. The IRP certainly will be a meaningful update. The team is working on finalizing the analysis and ultimately, the report now. And of course, we'll make sure that we are working with stakeholders on engaging in the different review components before the official filing here later this summer. But the IRP analysis will really include our latest long-term thinking in terms of sales growth within the service territory on all three sectors: residential, small- to medium-sized business, as well as the industrial growth.

Importantly, it will include all of the extra load factor growth that we have committed to, but it will not include anything that we have not contracted for yet. So that will continue to remain as upside, but we've done a lot of work over the past 6 to 12 months to really try to analyze over the next 10, 15 years, where do we think residential growth is going to be given recent trends with distributed generation, energy efficiency how do we think the long-term ramp rates will play out within this forecast period for the committed 4.5 gigawatts of extra load factor growth. And then the resources needed to be able to support that.

Within the near-term action plan window of the IRP, it will show some specific projects that have already been announced. But then beyond that, it will show a bucket of generation and transmission needed. And as we carry forward the capital plan here getting into the beginning of next year or at the conclusion of this rate case, that capital plan should support then the resource and transmission needs that are outlined in the IRP based on the committed growth that, that will be included in that analysis.

So it will be a material update in terms of our latest thinking on the growth and the various resource buckets needed to support it. With respect to subscription model, we continue to be in active negotiations with counterparties on various projects. Too early to tell how those may conclude. But as soon as they do, we'd expect to be filing agreements with the commission, and we still are on track to get those filed this year.

Got it. All right. This year, indeed. Excellent. And if you permit me to go back and needle a little bit here because as best I can tell, right, APS is rebuttal here moves real mechanics here closer to what you -- guys have on their gas complaint. How should you think about the cadence of that 200 basis points? I know that the game just ask you that a second ago here, but how do you think about the timing to close that gap, given some of those mechanics that you guys just tweaked here in the rebuttal? Is a 50 basis point ROE gap by 29% still hold? Or is there any potential to move that forward?

Yes. We still believe that our rebuttal position and where we believe our ability to continue to manage regulatory lag going forward is consistent with our position at this point. Management's goal is to be able to consistently earn within that 50 bps given there's some element of structural lag that will continue to exist. And I think the latest thinking on design elements for formula rate as well as assuming a constructive outcome ultimately in the rate case revenue requirement would allow us to do so by 2029 or going forward.

Your next question is coming from Richard Sunderland from Truist Securities.

Picking up some of the subscription model commentary. Just curious if you can frame -- I know you said, I think, early stage around the conversations. But has the interest shifted at all relative to your expectations 3, 6 months ago? I'm curious, just any flavor you can give around those conversations given limited insight from the outside.

Yes, I'd say that the interest is still robust within the service territory. Our overall Q size remains at an elevated level commensurate with what was we continue to hover just under 20 gigawatts of uncommitted demand. How much of that potentially is duplicative projects or interest versus projects ready to execute to be determined. But the interest in viable projects for us to be able to contract is meeting our original expectations. But these contracts are complex. They involve details around investments and execution of both transmission and generation infrastructure, ensuring that the rates are carefully calculated to make sure growth pays for growth that the financing needs are met, and that both the utility is protecting its customers for reliability and affordability and that the counterparty gets what they need in terms of timing and resource adequacy.

So it takes a while for us to work through these negotiations, but they are making progress. We're pleased with how the subscription model was received by the market and is coming together. We're not at the point yet of filing them with the commission, but it's trending in that direction.

Great. I appreciate the commentary there. And then switching gears, I think it was about a month ago that the Governor's Energy Task Force delivered report. I know there was a lot in there. new nuclear and other things. I'm just curious what you have in it out of that report. Anything you'd highlight on either the nuclear front or more broadly, anything that's advanced the conversation out of that report.

Yes, sure. We appreciate the opportunity to work with the Governor, several agencies within the state other stakeholders to really, first, create awareness on what are the energy needs to be able to power Arizona's growth? And how should we think about those from a macro level. And I think it was a robust set of discussions that culminated in a directional report that identified several key factors.

One is, for example, the state has to invest in and support in new gas infrastructure to be able to power growth reliably. And so it showed widespread support for the gas pipeline infrastructure that is needed to the state will continue to benefit from a diverse set of resources, anchored by around-the-clock dispatchable generation, but also continuing to benefit from the robust solar [ ratings ] that we have.

And then when you look long term, the state has always been a leader in a reliable and affordable nuclear generation and the utilities and the state believe that, that's technology worth paying attention to and be open to support in the future when it makes sense from an affordability standpoint, from a licensing and permitting standpoint. And so we'll continue to work with stakeholders on any projects going forward to would make sense for us to be able to explore on behalf of our customers. We've said before, specific on new nuclear that we're not in a position to put the utility balance sheet at risk. But to the extent we've got large customers that are interested in seeing new nuclear and are willing to help support the financing for that as the operator of the largest producing nuclear plant in the country, we'd be very open to those discussions at that time.

Your next question is coming from Paul Patterson from Glenrock Associates.

So just a couple of questions have already been answered. But just on the prepared remarks, you mentioned how much you've taken care of in terms of equity, but you also mentioned looking for additional opportunities. I believe, if you could just -- I apologize if I missed it, if you could just elaborate a little bit on what your thinking is on that?

Sure. Paul, it's Andrew. Yes, on the equity side, we've continued to try to derisk the equity plan. We've got a 3-year equity plan out there through 2028. Now admittedly, that is base case plan without any of the expectations that could come from either the formula rate or the bilateral subscription-type agreement. It's sort of the base of what we need with the CapEx plan that we have in place today. And so at this point, through various equity forward transactions, we've accumulated almost $850 million of equity to put to work. Our stated need for this year is $650 million in terms of equity. So we've got nearly another $200 million that we've achieved through just our ATM program to help meet future year needs as well.

We're going to continue to look at the equity needs to the end of the rate case and what our kind of cash flow situation is at that point. And we'll revisit the financing plan along with our capital plan. But in terms of what those base needs are that $1 billion to $1.2 billion that we put out there for new money being raised from '26 to '28, we've already started to eat into that number by several hundred million. So we're just trying to derisk and do so opportunistically as we go along.

Your next question is coming from Ryan Levine from Citi.

In light of some of the Commissioner Myers testimony in D.C. recently, what is the thought process around converting retired gold to gas generation and potential for federal permitting reform to impact the company?

Yes, appreciate the question, Ryan. We continuously look at when it makes sense to revisit using some of our retired generation sites. At this point, really, the Cholla site is the only one that would probably fall under that category. And the analysis was done all the way back in 2015 on the need to retire that site as a coal facility. But ever since then, we've continuously done analysis to determine when it makes sense for our customers to be able to potentially convert it to gas, potentially use the site for new gas generation or even other technology in the future. And that analysis is ongoing.

As we see demand continue to rise in our service territory, natural gas continues to be an affordable resource for us. And as the cost of new gas generation has increased recently as a result of the supply chain demand, it makes gas conversion continue to look even more affordable. So at some point, if it makes sense for us to be able to convert that on behalf of our customers, then we'll make sure that, that has made clear, and we'll begin those investments and put it in our plans for the future.

And then regarding the potential for federal permitting reform to impact the company, any color there?

Yes. At this point, there's nothing really specific, Ryan, that I'd say we could directly tie to where reform could benefit. I think we agree with Commissioner Myers -- sorry, Chair Myers that the broader need for support in terms of streamlining federal permitting has never been more present than now given the significant infrastructure needs to be able to power some of the growing markets within our country. And Arizona is probably among one of the top, whether it be for transmission, siding, gas pipeline infrastructure. Any help in terms of driving efficiencies in the process and expediting federal permitting will only allow us to be able to implement infrastructure quicker and therefore, serve our customer demand quicker. So we support any opportunity to be able to look at those reforms. But at this point, probably too early to tell in terms of any specific opportunities that will benefit some of our infrastructure plans.

That said, I can see we're not counting on any changes to reform to be able to execute our plan, and we continue to remain on track with those infrastructure investment opportunities.

And then in light of the comments you just made around the ongoing investigation study around converting to a gas plant. Is there any time line that you're looking at when you -- when that study will conclude? And would that be concurrent with the subscription negotiations that you have underway that are targeting the end of this year?

I'd say probably the best opportunity to continue to look at that as we conclude our analysis leading up to this IRP filing, that will include a wholesale look at our generation mix as it relates to serving growth. And as a part of that is continued renewed analysis on any potential for gas conversion or new gas generation at the Cholla side.

Your next question is coming from Anthony Crowdell from Mizuho.

Just quickly, Slide 18 has given a nice slide of, I guess, committed load and then the uncommitted load. 20 gigawatts, it's uncommitted. Curious on the factors or timing of when we can maybe move that 20 gigawatts into the 4.5. And do you see conversion through 2028 or timing of conversion? And I have a follow-up.

Yes. Thanks, Anthony. So the subscription model offering that came out with last year and the negotiations that are currently underway with counterparties would reflect some elements of that 20 gigawatts potentially moving over to the committed customer bucket. So I'd say that, that process is underway now. And as we approach opportunity to file special rate agreements with our commission, that's really the opportunity for us to be able to create more visibility into how much of that 20 gigawatts may be able to shift over based on this initial subscription offering.

And then as we continue to work forward in our plan in terms of new transmission and generation infrastructure to be added, that will give us visibility into what the next vintages of subscription auto could look like to be able to offer back to that use. So it's currently in process. Our goal is to be able to submit those contracts to the commission for review this year. And I think that will be the point at which we'll have greater visibility into it.

In addition, our IRP, again, will do the sort of latest analysis on our best thinking in terms of organic load growth. So non-extra high load factor growth inclusive of residential, small- to medium-sized business and that will also likely provide some level of visibility into what we're thinking beyond just the 20 gigawatt Q in terms of the next 10 to 15 years of demand.

Great. And then if I think for APS, and I apologize for having correct, I believe you guys have a large load tariff that maybe reevaluate the cost of serve cost to serve these large load customers. I don't know if it's an annual basis or a longer tenure. I'm curious when you talk to some of your potential large load customers that may come on to your system. Did they have any comments or feeling or are they agnostic to the different type of large low tariff that exists either that APS is offering versus maybe other utilities that are offering?

We have an existing extra high load factor tariff. And as part of this rate case is proposed updating that tariff to ensure that it's reflecting the current supply-demand environment as well as making sure that, that tariff is priced so that growth pays for growth. And I think, generally speaking, these large customers accept the responsibility of paying for the costs associated with serving their growth. And then as we look to the future, our customers will have two options to be able to take service with us. The standard offering, which is continuing to take service from that [ X HLF ] tariff recognizing that it will be priced accordingly on a go-forward basis based on the actual cost of service.

But then to the extent that they want an accelerated offering through the subscription model, where they contribute to financing infrastructure or potentially helping accelerate providing key equipment, then we can enter into a special contract that gets submitted to the commission for review and approval. Either way, we've been clear all along that the pricing, whether it -- through tariff or subscription model needs to pay for the entire cost of service and the customers that want to do business with ABS need to accept that because that's a commitment we've made to our commission and our other customers.

And have they had a bias for it against it the diagnostics, any color you could provide on that.

Yes, I think there's general support. Obviously, we need to defend the pricing and ensure that our customers have visibility into that. But as we engage with counterparties on the incremental infrastructure needed to be able to serve them, this is incremental transmission, incremental generation they're truly new build to be able to serve them. There's no more capacity on the existing system to take advantage of. So it's all new construction. And as a result, the price of that looks different than it did when you were taking benefit from legacy structure that was already installed. And so it's important we're transparent with these customers and walking them through the specifics of what it takes to be able to serve them.

But I think there's general acceptance that that's the reality of the operating environment we're in today. And that's what it's going to take to be able to reliably kick in the Phoenix market. But the market demand remains robust. And so I think while the price is meaningfully different than may have been years ago and there's excess good capacity available. It hasn't changed the demand interest from our visibility at all.

Your next question is coming from Steve D'Ambrisi from RBC.

Congratulations on the strong start to the year.

Thanks, Steve.

Just quickly following up on Julian and Anthony's question. I believe the Phase 2 subscription offering was originally sized or initially sized at 1.2 gigawatts. And can you just talk or up to 1.2 gigawatts, can you just talk to what drove that sizing? Is that more reflective of, call it, the near-term opportunity within the 20 gigawatts? Or is it a function of sizing of Desert -- available capacity at Desert Sun? Or is it gas capacity or just what -- because clearly, I think everyone sees that there's a pretty large load opportunity here, and we're just trying to kind of understand what the pace of potential incremental additions to that sizing is.

Yes, sure. I appreciate the question. You're correct in that the initial sizing was more driven on the infrastructure that we had identified as being available for subscription offering. And so that was more of a reflection of the available generation and transmission that we had visibility to in the time frame that we knew the subscription counterparties were interested in. And so in large part from Desert Sun as well as the transmission to coincide with it. And that will be a continuous evaluation. So I would look at it as less specific amount of capacity fixed in time and more as we continuously evaluate how much of our organic load growth is going to require such as existing customers, residential, small- to medium-sized business. And then how much infrastructure we can build to be able to then offer above and beyond that organic loan growth to the subscription queue. We'll then contract for that availability.

When we went to the subscription queue, we started out with that 1 to 1.2 gigawatt offering. And then through that, we continue to progress with conversations with counterparties on what their interest is of that. If it's one counterparty or multiple. And that also opens the door for other counterparties that may have access to key equipment to be able to add in addition to. So it's a continuous process to continued evaluation. But the premise of the subscription model is we first get access to the opportunity to add incremental infrastructure above and beyond what our organic service territory load requirement is. We offer that to the queue, engage in negotiations finalize the capacity that's awarded and then go back and recreate that process all over again with new infrastructure opportunities that we create for future availability.

Your next question is coming from Travis Miller from Morningstar.

Question on transmission. So the revenue and earnings contribution for this quarter and thinking about for the year and even future years, was there anything in the quarter that made this uniquely large? Or is this type of trajectory that we should see again this year and then following along the upward sloping line of transmission investment.

Yes, Travis. As I mentioned in the prepared remarks, our transmission investment has just continued to increase to serve growing load. If you go back 5 years ago, we've doubled and doubled again the amount we're spending annually in terms of transmission CapEx. And for our system, that starts down at [ 69 kV ]. So it's a pretty substantial amount of the infrastructure. We're drilling even in the local area. And so I think what you're beginning to see, and you saw this in our results last year as well is this continued step function upwards in the results of the transmission investment that we've been making. And so take time for that investment to start to show through to the bottom line, and that's really what you're beginning to see year-over-year as we engage in more and larger projects, and that will continue upward.

It also shows all around the benefit of a formula rate from having gradual increases, it's also a rate that allows us to pass back wholesale revenue to our retail customers. And as actually kept some of those transmission rate increases pretty stable over the years, but it's allowed us to get contemporaneous recovery and reduce lag. And so it's a good indication of what we hope to be able to replicate for our -- the rest of our business, which is producing the right results for customers as we continue to grow.

Okay. Yes, that's great. And then on those just real quick -- on those transmission earnings, how other sensitive are those? Are those completely decoupled through the formula rate? Just have to remind me about the rate making structure.

Yes, it's trued up, and we are intended to earn our return on these investments. Yes.

And keep in mind that it's got a balancing account and there's a meaningful amount of that transmission revenue that's also paid back by wholesale customers, which offsets the cost to retail customers. So it's got an annual true-up as a part of this. The transmission driver is really more a reflection of our growing capital investments within the transmission system to be able to support reliability and growth than it is weather or any other factor.

What you're seeing right now is the impact of the rates we put into effect in the middle of last year and of course, there will be new rates to go into effect in the middle of 2026. For this quarter, they were consistent with the full year guidance that we gave for the year for the transmission segment.

Okay. Perfect. I appreciate all those details. And then just one high level the renewable energy standard repeal and thoughts on that? Had you anticipated that, expect any impact? Wondering your thoughts on that process. What was it a couple of weeks ago, maybe? A month ago now here.

Yes, Travis, no impact expected. I think the commission really had a very logical and thoughtful approach, which is the utility is already exceeding the original goal set forth in that renewable energy standard is being driven by just the general market interest and demand as well as the amount of growth that we have, which is spurred a significant amount of investment in utility scale, solar battery storage projects across the service territory to date. And so having an outdated policy standard that was put in place many years ago, that we're already exceeding probably didn't make much sense. So we anticipated that and don't expect any impact to the business along those lines.

And from this point going forward, we really view it to be market driven. With respect to updates to the demand side management and efficiency standard. This is really an opportunity for the Commission to do a wholesale review on which programs had the greatest value and impact to our customers and which had less of an impact. And we think they appropriately rightsized those programs to focus on those that are having the greatest value and impact to our customers. And the accumulation of that resulted in continued meaningful support for our customers being able to conserve with energy where it makes the most sense, yet also pass on a roughly 1% rate decrease to all customers in the process. And so again, just, I think, a logical approach that still preserves the value of these programs, but also creates an affordability opportunity for all customers.

Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to hand the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 2025 Earnings, Recent Developments and Operating Performance.

Our speakers today will be our Chairman, President and CEO, Ted Geisler; and our CFO, Andrew Cooper. Jacob Tetlow, COO; and Jose Esparza SVP of Public Policy, are also here with us.

First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information.

Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our annual 2025 Form 10-K was filed this morning. Please refer to that document for forward-looking statements cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through March 4, 2026. I will now turn the call over to Ted.

Thank you, Amanda, and thank you all for joining us today. In 2025, our team demonstrated strong results and made significant progress on our strategic objectives. We serve record levels of demand with top quartile reliability, provided customers with top quartile customer experience and managed our grid expansion plans with discipline.

Although we made solid progress in 2025, our efforts are ongoing, and we remain committed to executing our strategy. Looking ahead to 2026, we will continue this approach with a particular focus on processing our rate case, executing our grid expansion plans, keeping rates affordable for customers and finalizing commercial opportunities with new large customers.

Turning to operations. I want to recognize the outstanding safety execution by our team. Safety remains our most important priority, and I'm proud of our team's relentless focus on providing safe, reliable service particularly through the third hottest summer on record.

In 2025, APS set a new system peak of 8,648 megawatts on August 7, more than 400 megawatts higher than the prior year. Our generating fleet performed exceptionally well, and Palo Verde operated at 100% summertime capacity factor. Palo Verde remains the largest producing nuclear plant in the United States and recently received a 2025 INPO excellence award for achieving the highest levels of safety, reliability and operational performance. This level of consistency underscores the strength of our team's operational excellence.

Customer experience remains a key focus. In 2025, we made meaningful progress toward achieving industry-leading satisfaction. For example, we developed and deployed an AI-powered high bill analyzer to help customers better understand their billing and energy usage and efficiently address ways they can save on their energy bill. These improvements are resonating. We ended the year in top quartile nationally among our peers for residential overall customer satisfaction and then the second quartile for business customers as measured by Escalent.

We also ranked in the first quartile nationally in J.D power's Utility Digital Experience study. Our customer base is also becoming increasingly diverse, reflecting Arizona's evolving economy. Growth among commercial and industrial customers, including chip manufacturing and data centers continues to drive strong economic activity across the state. These large load customers continue to accelerate their ramp schedules as evidenced by our long-term sales growth of 5% to 7% through 2030.

The U.S. Department of Commerce and Taiwan recently announced agreements expected to spur at least $250 billion of additional semiconductor investment in the United States. In Arizona, TSMC continues to expand their footprint with its second fab moving to full production in 2027, a third fab under construction already, a fourth fab and advanced packaging facility in early development and 900 additional acres recently acquired for future expansion and growth. We look forward to working with TSMC and the broader chip manufacturing sector as we expand grid infrastructure to support their rapid growth.

At the same time, residential growth remained strong across our service territory. For the second consecutive year, we installed more than 34,000 new meters, the highest level in 20 years. We're ready to meet demand growth and our strong execution is showing results. We finished over 400 megawatts of APS-owned resources ahead of schedule, including new gas units at Sundance, the Agave battery storage facility and Ironwood Solar. The Red Hawk gas expansion remains on track for completion in 2028 with ongoing preparations to support additional gas capacity of up to 2 gigawatts commencing in 2030.

In parallel, we're closely monitoring progress of Transwestern's Southwest Desert Pipeline expansion, which has recently been upsized from 42 to 48 inches due to strong regional demand. These investments are critical to supporting Arizona's economic and population growth while maintaining strong reliability for our customers.

Turning to regulatory matters. Our rate case remains on track, staff and intervener testimony is expected next month with hearings scheduled to begin in May. We value our ongoing collaboration with commission and stakeholders and continue to work together to support Arizona's growth, reduce regulatory lag, and ensure appropriate cost allocation so that growth pays for growth.

In closing, 2025 was a strong year of execution by our team. We're meeting rising demand, investing for our customers and positioning the company for long-term value creation. Our priorities for the year ahead remain clear: executing our mission to deliver safe, reliable and affordable service to our customers, invest in baseload generation and transmission to serve growth and achieve a constructive regulatory outcome that protects customer affordability while reducing regulatory lag. With that, I'll turn it over to Andrew to discuss our financial results and outlook going forward.

Thanks, Ted, and thanks again to everyone for joining us today. Earlier this morning, we released our fourth quarter and full year 2025 financial results. I'll walk through our performance for the period highlight the key drivers and then review our 2026 financial guidance, which we initially provided on our third quarter call.

Starting with the fourth quarter, we earned $0.13 per share compared with a $0.06 loss in the fourth quarter of 2024. The fourth quarter result reflects the continued vitality of our service territory, our strong operational execution and sustained cost management. Key drivers included favorable O&M versus last year as well as continued robust sales growth. These positives were partially offset by milder than normal weather, higher financing costs and pension and OPEB expenses.

For the full year, we delivered earnings of $5.05 per share, landing in the upper half of our updated guidance range. While this compares to $5.24 per share in 2024, a the year-over-year decline was primarily weather-driven, a $0.71 year-over-year drag. The prior year benefited from an extremely hot summer that extended into the fall, whereas 2025 experienced, on average, closer to normal weather.

Additional headwinds included financing costs, higher pension OPEB expense, depreciation and amortization and O&M. Importantly, these headwinds were largely offset by strong underlying growth in our business.

In the fourth quarter, we experienced 6.8% weather-normalized sales growth, driving full year weather-normalized sales growth of 5%. This included 2% residential growth and 7.5% commercial and industrial growth for the year, reflecting continued economic expansion across our service territory.

In addition, customer growth remains a durable multiyear trend. In 2025, total customer growth was 2.4% at the high end of our guidance range as new businesses and new residents continue to decide to call Arizona home. This consistent, diversified customer and load growth provides a strong foundation for our long-term outlook.

Looking ahead, we are reiterating all aspects of 2026 guidance provided on our third quarter 2025 call. including our annual earnings range of $4.55 to $4.75 per share. Our weather-normalized sales growth guidance for 2026 remains unchanged at 4% to 6% and with extra high load factor, C&I customers expected to contribute 3% to 5% of that growth. Our longer-term sales growth guidance also remains unchanged at 5% to 7% through 2030 and recognizing the robust growth in our service territory.

We continue to be laser-focused on cost efficiencies and our goal of declining O&M per megawatt hour. In 2025, we successfully achieved a 3.3% year-over-year decrease and expect to further reduce our O&M per megawatt hour in 2026. Cost management is a priority and we will continue to strive for operational excellence and efficiency through our lean culture and initiatives.

We are also reaffirming our capital and financing plans. Our capital program remains firmly focused on reliability grid resiliency and meeting the growing needs of our customers. Consistent with that strategy, our rate base growth guidance remains unchanged at 7% to 9% through 2028.

From a financing standpoint, we continue to execute a disciplined and balanced approach aligned with our balance sheet targets. Our capital spending is supported by a thoughtful mix of debt and equity.

Importantly, our 2026 equity needs are largely derisked with nearly $500 million already priced. We have also diligently focused on expanding our liquidity and to ensure we can most effectively take advantage of financing opportunities throughout the year as our capital investment program continues to grow. To that end, we recently closed on the extension of our core credit facilities to 2031 and expansion of revolving borrowing capacity by $550 million.

In closing, we delivered solid results in 2025, underpinned by strong execution and durable growth. We are excited about the opportunities ahead in 2026 and confident in our ability to execute our financial and operational plan with discipline. We look forward to progressing through our rate case with continued engagement with all stakeholders to support safe, reliable and affordable service for our customers. This concludes our prepared remarks. I will now turn the call over to the operator for questions.

[Operator Instructions] Your first question is coming from Nick Campanella from Barclays.

This is Fei for Nick today. Thanks. Just really wanted to touch on the capacity growth, if I can here. Can you just update us on the latest thinking on the IRP planning, including timing this year? And generally, how should we think about the incremental transmission and gas generation opportunities I guess, compared to what you disclosed here on Slide 21.

Yes. Thanks for joining us. Midyear, we'll expect to file an updated 15-year integrated resource plan. So that will be a snapshot of our most recent thinking in terms of load and demand forecast and the resource plan to be able to meet that. Of course, the near term in the action plan window, it will be a bit more specific with respect to technology resources and locations. And then when you get beyond that, sort of near-term 5-year window, then it's more directional in nature.

But the key is, it will continue to show the robust and strong growth over the long term and the amount of generation and transmission needed to be able to serve this growth. Of course, our capital plan right now only goes out through 2028. And so a lot of the growth to support TSMC's build-out as well as data center ramping goes beyond that period, and the resource plan should be able to indicate the amount of generation still needed to be able to serve even what we've already committed to.

But then above and beyond that, we are still negotiating to be able to serve incremental data center demand from our subscription queue, which we talked about last quarter. That's not in the capital plan. And to the extent that we're able to secure an agreement for incremental load to be able to serve a portion of that queue, that would be resources that would need to be built above and beyond what we've talked about.

And then in addition to that, any further expansion for TSMC would also need to be considered and would drive further generation or transmission expansion beyond what we've shown in the 3-year window within the current capital forecast.

Great. That's super clear. Maybe just a quick one on the credit metric update and the HoldCo debt percentage of total debt. Can you discuss the cadence to reach that mid-teens level target and where you 2025 year end metric landed?

Sure, Fei, it's Andrew. We're committed to keeping our HoldCo debt at a judicious level and that mid-teens level. I believe if you calculated at year-end, it was at 17%. So kind of within the range that we're targeting. And as you look at the financing plan for 2026, the HoldCo debt levels are intended to be quite modest and stay within that bandwidth.

Your next question is coming from Shar Pourreza from Wells Fargo.

It's actually Alex on for Shar. So just on the future sales growth of the 5% to 7% annually over the next 5 years, can you just remind us how sticky that number is over the long term? And also, what are you assuming in your forecast? Is that just sort of the minimum take agreements you have in your large low contracts. So if you were sort of think it this way, if customers sort of ramp faster more power on over time, would that be accretive opportunity to that 5% to 7% forecast?

Yes, Alex. I think the way to think about that is that load forecast is based on existing demand that we have certainty in being developed are already in service within the service territory that we expect to grow as well as projects that are already in development or under construction.

Therefore, there's upside to the extent that there's anything incremental added to that from either our uncommitted queue, further TSMC expansion or other projects that haven't been announced yet. But the growth forecast that we've outlined is really based on projects that we have a high degree of confidence and certainty in developing, and we track that very closely.

And just to add to that, it's Andrew. The cadence of that committed queue that we've got in our sales force goes sales forecast goes through into the 2030s. So while we've given you the 5%, 7% through 2030 the full build out of that existing capacity does have a runway beyond that. And you should also keep in mind that, that ramp and the cadence between now and is borne out of kind of our experience with these customers over the last several years and represents a pretty educated view of what that ramp looks like over the next several years.

Got it. That's helpful. And just on the -- just the EPS and the rate base CAGR you have out there. So as you sort of just look out to '27 and beyond, how should we be thinking about the delta between the two is sort of the 200 basis points the right figure? Or could you see those two converge over time just given the amount of opportunities you're seeing?

Yes, Alex, for sure, as we get out through the rate case, I think we'll be looking at both the capital plan itself. And we met the financing plan and therefore, what our EPS trajectory looks like. And so if you think about the rate base CAGR is going through 2028 right now, and we rolled that forward in the third quarter call.

You're really just beginning to see the impact of some of the projects that are in our long lead kind of execution window. You heard Ted talk about Red Hawk on the call. It's a good example. A lot of the transmission projects in our strategic transmission plan also represent that.

And so as we continue to consider how to provide more transparency for longer around the capital plan, what that means for the rate base CAGR. That will then trickle through the rate case and our expectations around the formula rate that allows us more prompt recovery. to give you more detail on what that means for financing and ultimately, for the trajectory of our EPS. But ultimately, our goal remains to create a more linear trajectory there borne out of the formula rate.

Your next question is coming from Julien Dumoulin-Smith from Jefferies.

Nicely done. I appreciate it. A couple of things to just wanted to talk quickly implications from the UNS case of late, especially the formula rate decision, being set. Any thoughts, reactions on your front in terms of readthrough, a two or three critical points that you'd flag here as it reads the APS, I know it's delicate. It's a comment here, but I want to make sure we're all line on the same reads here. If you can comment both on the concept of formula as well as the fair value piece.

Yes, of course, Julien, No, fair question. Look, I think the headline from our read as it was generally constructive. But there are material differences between the situation for the UNS gas case and then APS. But I'll just step through a few points on how we think about it.

I mean, first, look, they got about 86% of their original revenue requirement ask which results in over a 14% rate increase. That's pretty healthy. They got a formula rate with a post-test year plan the commission rightfully recognize that through all the good work at the workshops last year, there is no need for a pilot. So it's a secure formula rate for perpetuity. And they have an ROE similar to their current.

That said, we do disagree with the notion that you should have an ROE reduced at all as a result of the formula rate, and we'll continue to make that argument. But they still got a fairly healthy ROE consistent with what they've had before plus the formula rate. But Jeff, to recognize some of the differences, it's a gas utility in an area that doesn't experience near as much growth as what we're seeing. It's been 16 years since the last rate case filing, so a little bit difficult to make the argument that regulatory lag is impacting our ability to fund growth like we see.

They certainly have a different risk profile. And the formula rate schedule was a little different than what we are proposing or would expect to work with the commission on securing. But what was proposed work for UNS, they agreed to it, and maybe that works for their service territory.

So again, I think the headline is generally constructive. It secures the first formula rate within the state and shows the direction that the state is heading, which is great. But there are some differences between our service territories that we'll continue to advocate for.

Yes, absolutely. Appreciate it. And then just if I can keep going here in as much as you guys have this interesting 20 gigawatts of uncommitted load, the 4.5 have committed relative to the '25 system peak. So just an incredible backdrop. With that said, can you comment and reconcile a little bit against the IRP? I know -- look, I know it's coming midyear. I get that we're trying to jump ahead of it a little bit. But just trying to like decompose, especially the 4.5 committed against what's already in the forecast or even beyond the core forecast, but what would be incremental in that again, it's all kind of coming back to an eventual roll forward of your plan as well as like what's truly incremental to the plan relative to the current years that you have disclosed. Just trying to zero in, it seems like a material update here.

Yes. I appreciate the question, Julien. The way I would characterize it is the IRP will consider known and committed customer demand. So it will reflect with a longer-range forecast, what we expect the 4.5 gigawatts of committed load to materialize into over the 15-year period as well as our, I'll call it, organic load growth that's above and beyond that 4.5 gigawatts of committed high load factor demand.

It will also include our latest thinking in terms of TSMC and the related chip manufacturing schedule for both timing and potential expansion. What it will not include is any portion of the uncommitted queue that is in negotiation or yet to be contracted. So that will all still remain as incremental demand above and beyond what we show in the IRP.

So I guess just summing it up, the IRP will give us the best line of sight for how the 4.5 gigawatts of high load factor demand will materialize over the 15-year period, plus our view on the organic load growth such as residential, et cetera. And then anything that we contract from the uncommitted queue, which we're actively working on will be incremental to that even above and beyond what we show in IRP.

Right. Absolutely. And then just to close the loop on that, I mean, where are you in terms of what's in the committed or uncommitted? I imagine the bulk of the committed is TSMC, but can you break that down a little bit? And maybe you can comment a little bit on where you stand on kind of translating further uncommitted into the committed bucket? Any potential that, that moves from one bucket to the other prior to that IRP even?

Yes. I'd say the majority of that committed is still a healthy amount of high load factor customers that are data centers or related that we have committed to over the past a couple of years and are actively and build out a ramping.

TSMC is certainly a material portion of that, but the 4.5 gigawatts does not include any potential expansion of TSMC and we'll continue to work with them on their plans for any acceleration or expansion. So that would be above and beyond the 4.5 gigawatts.

But as we said in the last quarter, we did bring forward an opportunity to uncommitted to evaluate through our subscription model. Those negotiations are ongoing. To the extent that, that is finalized ahead of the IRP, it may be included, but there's also a likelihood that it would be incremental to the we would aim to be able to file an agreement with our commission for any successful negotiations of that subscription model this year.

Your next question is coming from Paul Patterson from Glenrock Associates.

So just I know we've got staff and intervener testimony coming up here. But I'm wondering, given all the discussions sort of happening there in Arizona and what have you, is there -- are there any thoughts about maybe -- and given the fact that we've got now the ARM from the formula stuff from UNS, what -- are you any thoughts about maybe potentially a settlement on the case. I mean, I know, like I said, we have staff coming up and intervenors. But just any thoughts about that? Has there been any thought about that or discussion with that?

Yes, Paul, I appreciate the question. I'd say at this point, we're focused on processing the case in the traditional manner. We always remain open to settlements, and the company actually has a long track record of successful settlements in this jurisdiction.

But this case has some unique aspects to it. One is making sure that we align on the mechanics of implementing the formula rate. And two, is the importance of getting the rate design changes agreed to for the new high load factor tariff. And those would be well served in the traditional hearing process. We've demonstrated successfully to be able to achieve a constructive outcome in the last rate case through the hearing process. And so we think that's a viable path for us to once again achieve a constructive outcome.

So at this point, we're focused on the traditional format. We always remain open to settlement, but that's not something I would count on for this case.

Okay. Fair enough. And then just finally on -- there was a Nuclear Conference yesterday or hearing what have you at the commission. And I wasn't able to listen to a lot of that, frankly, but it sounds like there's a lot of kind of excitement for -- in the context of utilities. In terms of this resource and I was just wondering if you guys, any thoughts about what the -- if there's anything in the near term that we might see on that? Or just any thoughts on that?

Yes, Paul, I mean, we're fortunate that the broader community policymakers and community leaders remain very supportive for nuclear. Obviously, that's important to us given the fact that we operate the largest producing nuclear plant in the country today. But there's also a lot of interest in whether there's an opportunity for new nuclear in Arizona going forward.

We've been very clear with stakeholders and our customers that while we remain constructively supportive of the nuclear for our country and potentially Arizona in the future that, that's not something that you would expect in the near term, but it's something that we want to pay close attention to and work collaboratively with stakeholders to identify what those opportunities could look like over the medium and long term for our state.

And so that's a big part of what the workshop was about yesterday. And we really appreciate the commission taking time to learn and explore what these opportunities could be. It's a great dialogue. But we've been very clear that there's a lot of capital required. You need constructive policy and importantly, you need the supply chain and the trades to be able to have the capacity to be able to build out these projects. So we're actively involved in the industry. We're actively involved in the state and supporting what new nuclear could look like in the future, but we view that as more of a medium and long-term opportunity.

Your next question is coming from Steve D'Ambrisi from RBC Capital Markets.

Just a quick one. Slide 20 on the sales growth. I mean I think the first bullet says at all 9 consecutive quarters of growth exceeding the guidance range. And just obviously, 4Q looks like it's accelerating. Maybe there's some art versus science of weather normalization in a weak weather quarter. But can you just talk a little bit about what the sales growth trend looks like versus kind of the 4% to 6%, '26 sales growth that you've given in the long-term guidance as well?

Sure, Steve, it's Andrew. We've continued to see very diversified and very consistent sales growth. For the year, residential came in at really at the top end of where we've ever forecasted because that 4% to 6% that we've forecasted for last year that we forecast for this year represents largely the ramp-up of our extra high load factor customers. So to see that level of residential growth driven by nearly 2.5% customer growth remains strong.

What we expect in 2026 is kind of reversion to the normal dynamics where the ramp-up of the extra high load factor customers is the dominant part of the sales mix. But one of the, I think, tailwinds that we've seen that we'll just have to continue to monitor in 2026. ,[indiscernible] generation produced pretty small offsets to residential sales. And I think that's what drove it to the upside and kind of continue to drive that tailwind into Q4 of last year. And so we'll just have to continue to monitor as those reductions in applications we're seeing for new rooftop installations translate potentially into support for our residential sales growth numbers.

But in the near term, 2026 is driven by the known customers in that queue that we see ramping and see coming online, including as the fabs of TSMC continue to move ahead. And then over the longer term, through 2030, that step up is really related to, again, those known customers and where we expect them to be in their ramps.

And having worked with the data centers for a long time, I think our forecasting has gained a good balance of understanding where these customers are what the intent of their facilities are and how that drives those ramp rates year-to-year. But fundamentally, the runway that we have with these customers and combined with the semiconductor space and then the residential growth gives us pretty strong confidence in those numbers through the end of the decade.

Okay. That's helpful. And just -- I don't know if -- do you have a sensitivity or a rule of thumb on like -- to the extent, I know you're guiding back down to the normal average for resi customer growth. But to the extent it's back at the top end and outperformance by 50 basis points or 100 basis points, like what that means for like an EPS sensitivity.

Yes. On a gross margin basis, we typically say that 1% of residential growth is somewhere north of $25 million, whereas 1% related to extra high load factor could be more in the $5 million to $10 million range. So that's kind of the distinction. Of course, all of it gives us operating leverage as we continue to focus on reducing our costs. across the system. But that's the rule of thumb that we think about in terms of residential hours just being more clustered around the peak and the [ HLS ], of course, delivering 90-plus percent load factors across peak, off-peak hours.

Your next question is coming from Ryan Levine from Citi.

Any color you could share around the pace of the large load commitments in the uncommitted bucket that you're considering to be ready for? I mean do you think this should all come together for a lot of these large customers around the same time? Or kind of how do you manage the kind of cadence of potential movement from the uncommitted to the committed bucket?

Yes, Ryan, the way we are treating that is as we identify infrastructure and projects to be able to offer to that uncommitted queue at a volume that is worthy of gaining their interest, so call it a gigawatt or more roughly. Then we'll offer that to the uncommitted generate or gauge interest based on the location and the timing of that infrastructure and ultimately work with counterparties on the best fit for that infrastructure opportunity and negotiate an agreement. We made our first offer through the subscription model in the latter part of last year. And as a result, we're actively in discussions right now with those counterparties that are interested with the intent to try to finalize an agreement and file it with the commission this year.

And then in parallel to that, we're working on a pipeline of generation and transmission infrastructure projects that would create incremental capacity that could then go back and be offered to that in committed queue.

So we'd expect that to be on somewhat of a repeatable basis going forward. And again, as mentioned before, I think when Julien was asking the question, that all of that for uncommitted demand would be incremental to the current plan. We wait until we have a secured contract with a definitive project before we add it to the plan, both from a capital and rate base standpoint. And then the load growth associated with those uncommitted projects would also be incremental to the plan.

So we're actively working on that now. But importantly, we want to make sure that we identify the infrastructure capacity first. and do this prudently. And then secondly, it will be important in parallel to work with our commission on modernizing the rates to ensure the growth base for growth.

Great. And then is the company looking to finance some of the transmission build out with some of the DOE energy dominance financing as we've seen with some of your peers around the country. And how are you thinking about the transmission funding start?

Yes, Ryan, it's Andrew. We'll look at all financing sources for the CapEx plan. in particular, we are interested in looking at sources of capital that are outside the traditional. I think it starts with our customers and ensuring that as part of this growth base for growth conception, that they're putting capital to work given the size of some of the balance sheets and the urgency with which they want to come online.

So looking at customer financing, certainly looking at any financing alternatives out there. And so we'll continue to evaluate grants and other opportunities that come out of the federal government, as well as we go along. But fundamentally right now, the financing plan you see is our base plan today, which really allows us to rely on traditional funding sources.

But certainly, as we look at some of these large projects and more on a temporal basis, look at doing a bunch of large stuff at once, we'll look at all kinds of alternatives to take it off balance sheet during construction. I think really, it starts with ensuring that we're aligned with our customers and through the subscription model to the extent that we can get capital upfront from our customers to buy down their price over time, that helps us as well from a balance sheet perspective.

Your next question is coming from Anthony Crowdell from Mizuho.

Just two quick questions. One is where did you end the year on an FFO to debt basis? And will you be at 14% to 16% throughout the entire forecast period? And then I have one follow-up.

Yes. So Moody's is really the limiting constraint given their downward the threshold is 14%. So we really focus there. And we were north of 14%. We won't get their official calculations until Q1. But if you do it on the basis as we understand it, we're high 14s from a Moody's perspective. So feel good about that.

Our aspirational goal is to ensure that we're always maintaining 100 basis points of cushion. If you look at the regulatory lag that we're going to continue to go through in 2026, I think it really points to why the dialogue we're having and its rate case is so important. That the debt, the further you get away from any rate relief, it starts to come under some pressure. And so while we know that the rating agencies don't take a short-term perspective, and we've maintained pretty consistent dialogue with them about the improvements that we're seeing and the potential for cost recovery, particularly through the formula if you look at our earnings trajectory in '26 versus '25. That is all regulatory lag related and that should translate into the top line on an FFO to debt numerator perspective as well.

Ultimately, I think our goal is to grow that numerator. And that, I think, will go a long way to shore up the credit metrics and allow us to deliver that 14% to 16% for the long term with sufficient cushion within that range.

Great. And then I think, Ted, it was to earlier -- one of the earlier questions on transparency. You hope to get earnings, I believe once the formula rate plan is in effect. You started talking about maybe more linear or more linearity with the earnings.

Is it -- you hope with the formula rate plan if it -- once it gets passed and enacted that we get a more linear trajectory of earnings longer trajectory of earnings or both?

Yes, Anthony, I think we fully recognize that a more standard disclosure would be able to match earnings rate base and capital plan out to that 5-year mark. And so we would like to be able to give longer visibility and also include within that a more consistent linear trajectory. But given the current construct within our jurisdiction, of the lumpy nature of these rate cases, that's just been challenging to do while maintaining precision with that forecast. And so we'll take the opportunity once this case is processed to be able to step back and reflect on the best disclosures we can develop and release and our aim would be to be more consistent with our peers in that regard.

So once we conclude the case, we'll prepare a new set of disclosures and forecasts and our goal would be to be able to provide that in the longer term and be able to achieve more linearity as a result of the more regular nature in which the formula will work.

[Operator Instructions] Your next question is coming from Chris Ellinghaus from Siebert Williams Shank.

Just a follow-up. I was thinking the same thing about the disclosure and how formula rates will change that. But just to be clear, is it just the formula rates being effective or do you also need to have some greater clarity on, say, what's in the committed queue as well as having some better sense of where TSMC is going with their next expansions to give you adequate data to do that sort of extension?

Yes, Chris, the way we think about it is it really is almost entirely about the timing consistency of cost recovery. We've got a pretty good view of our committed demand, and it's robust. But due to the substantial regulatory lag in the jurisdiction, the ability to consistently on a linear basis, translate that top line growth and the bottom line growth is challenged by the lumpy nature of our rate case process.

When you evolve to a formula rate, you've got more steady gradual rate changes for our customers, and it also allows us to have a bit more of a predictable and consistent recovery method to be able to recover those costs. And that's really the biggest change.

Okay, sure. Andrew, in terms of looking at particularly the RES DSM component of O&M. How should we think about that going forward relative to where you are for 2026?

Yes. So I think the most important thing to keep in mind, Chris, is that those are regulatory programs that we recover through rates, and so they basically show up in both our gross margin number and then they show up offsetting nearly dollar for dollar on the O&M side.

At the end of last year, the commission determined to discontinue some of those regulatory programs. And so the size of the overall DSM program condensed. And so you've seen that condensing both on the gross margin side and on the O&M side. And so while there is a great overall story around our O&M cost management as a company, when you look at our waterfall from '25 to '26, a considerable portion of that O&M related benefit is tied directly to an offsetting decrease in revenue received on the gross margins, that RES DSM PSA chemicals line items.

So while the programs that we have in place today, we feel really good about the commission made that determination. And so those programs have been condensed in the meantime. And...

I understand that there's an offset, but what I'm trying to figure out is sort of given the cost pressures for -- particularly for residential sort of across the board. Do you think that there -- I guess, the right way to put it, is there appetite for those programs is permanently reduced? Or do you think there could be some return to those programs given just sort of cost of living pressures for consumers?

Yes. Chris, this is Ted. I guess the way I would look at it is I think the commission and staff really took a thoughtful approach to reviewing all the programs and saying, which of those programs have the greatest positive impact for the customers that need them the most and let's focus the funding on those programs.

While retiring the programs that are a bit legacy in nature that have less effectiveness and may not be worth the investment any longer. A lot of those programs have been in place for many years, they did a lot of good work, but they also started to reach a saturation point. And so really, the programs that are remaining are the ones that benefit the customers that need it the most and have the greatest impact and I think this commission is focused on just continuously reviewing those programs to ensuring that they're using the dollars wisely and they're maximizing impact for the investment made.

The commission is also very focused on affordability. They recognize the need to allow utilities to recover costs as a result of inflation as a result of the investments needed to secure a reliable grid due to growth. But in parallel, look for any opportunity possible to be able to reduce cost for customers and the rightsizing of the DSM plan resulted in a meaningful savings to all our customers.

But just to echo what Andrew said, we need to do our part as well, which is why we're going on 3 years now of flat to declining O&M, declining O&M per kilowatt hour. We continue to be focused on modernizing the rates in this rate case to ensure that the extra high load factor customers are paying their fair share of growth, which has a net benefit to residential customers. And we remain competitive from a rate standpoint where residential rates are below the national average, and we'll do everything we can to be able to keep them affordable.

That helps. Lastly, the additional TSMC expansions, how much vision do you have into them at this point? And when do you have -- expect to have more perfect clarity on what that's going to look like for you?

TSMC is a very important customer, obviously, with a substantial build-out ongoing. And so we're in active discussions with them. Both the timing of the fabs that they've announced and committed to as well as any potential expansion that they may have. So when they're ready to solidify their plans, then we'll be ready to articulate what that means from a utility infrastructure standpoint.

Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Good day, everyone, and welcome to the Pinnacle West Capital Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our third quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman, President and CEO, Ted Geisler; and our CFO, Andrew Cooper. Jacob Tetlow, COO; and Jose Esparza, SVP of Public Policy, are also here with us.

First, I need to cover a few details on the slides. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our third quarter 2025 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language as well as the risk factors and MD&A sections which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through November 10, 2025.

I will now turn the call over to Ted.

Thank you, Amanda, and thank you all for joining us today. In the third quarter, we delivered strong operational and financial performance, underscoring the discipline and focus to define our strategy. Today, I'll share how we plan to continue to meet rising customer demand and how we successfully navigated a dynamic summer season. I'll also highlight our long-term planning efforts and strategic investments that position us for sustainable growth. Then Andrew will walk through how increased sales and transmission revenue have led us to revise our 2025 earnings guidance, along with our forward-looking financial expectations.

Importantly, our long-term planning and resource procurement paid off as we reliably serve customers over multiple record peak days this quarter. I'm proud of our entire team for stepping up during the summer season to support our customers and communities with industry-leading reliability, a hallmark of our company. Our crews battled storms, flooding and extreme heat, yet we're prepared to ensure customers were taking care of with rapid response and operational excellence. Additionally, [ Palo Verde ] generating station operated at 100% capacity factor the entire summer, delivering a solid performance for our customers and the entire Desert Southwest region.

Our peak demand record reflects the strong underlying economic growth in our service territory with weather-normalized sales growth of 5.4% and residential sales growth of 4.3% in the third quarter alone. Arizona's population growth remains robust, fueled by major employers, expanding their operations and driving demand for skilled labor. The state's ability to attract and retain high-quality talent is truly a key differentiator and a powerful signal of the long-term economic fatality we're helping support. [ SEMICON West ] recognized as North America's largest microelectronic Exhibition and Conference was held outside California for the first time in more than 50 years with Phoenix being selected as the host city. Our region's economic momentum continues to accelerate.

Site Selection Magazine recently named [ Maricopa ] County, the top county in the nation for economic development in 2025, citing its success in attracting high-growth industries like semiconductors, data centers and logistics. Taiwan Semiconductor reaffirmed its commitment to Arizona, accelerating production of 2-nanometer wafers and advanced technologies. They also announced plans to acquire a second location in Phoenix to support their vision for a stand-alone giga-fab cluster.

Meanwhile, [ Amkor ] Technology broke ground on a $7 billion advanced semiconductor packaging and testing facility, which is an increased investment of $5 billion over their original plans. The first phase is expected to be completed by mid-2027 with production beginning in early 2028. To support this growth, we're executing our plan for long-term investments in both transmission and baseload generation, which are essential to secure a reliable grid for the long term.

In Q2, we announced our role as the anchor shipper on the Desert Southwest expansion project. And just days ago, we announced our plans to develop a new generation site near [ Hila Bend ] just southwest of Phoenix, which could add up to 2,000 megawatts of reliable and affordable natural gas generation to our customers. The [ Desert Sun Power Plant ] is a 2-phase project designed to serve both existing customers and the rising demand from extra large energy users like data centers and manufacturers. Phase 1 is expected to begin serving committed customers by late 2030. Phase 2 is expected to support new demand from our queue of high load factor customers.

Importantly, we're working with customers now to contract for the Phase 2 capacity using our subscription model, a commercial construct designed to ensure growth pays for growth while protecting affordability for all customers. Investment in generation alone will not be enough to support the growth in customer demand. We're making significant investments in transmission as well with multiple projects underway and more in development. These projects are expected to enhance reliability, resiliency and integration of new resources. They also expand our access to out-of-state generation and regional markets. Transmission investment benefit from constructive and timely recovery through our [indiscernible] formula rate and creates opportunities for additional wheeling revenues that support affordability for our retail customers.

Turning to our pending rate case. We remain actively engaged with intervenors in responding to data requests, and remain on track for a hearing in Q2 of next year. As we approach the end of 2025, our priorities remain clear: executing our mission to deliver reliable and affordable service to our customers investing in baseload generation and transmission to serve growth and achieving a constructive regulatory outcome that protects customer affordability while reducing regulatory lag.

Thank you for your time today. I'll now turn it over to Andrew.

Thank you, Ted, and thanks again to everyone for joining us today. This morning, we released our third quarter 2025 financial results. I'll walk through the key drivers behind our performance, provide context on our updated 2025 guidance and share our outlook for 2026 and beyond.

We reported earnings of $3.39 per share for the quarter, a modest increase of $0.02 year-over-year. This result was primarily attributable to higher transmission revenues and higher sales driven by robust sales growth across customer classes. These gains were partially offset by lower weather-driven sales compared to last year's Q3, higher interest expense, reduced pension and [ OPEB ] benefits and an increase in our outstanding share count. Based on strong sales growth along with above normal weather, an increase in transmission revenues and contributions from El Dorado, we are raising our 2025 EPS guidance from a range of $4.40 to $4.60 per share, up to $4.90 to $5.10 per share. With the ability to derisk future operating expenses, our updated guidance reflects an increase to our forecasted O&M for the year to a range of $1.025 billion to $1.045 billion.

Sales growth across all customer classes continues to be strong. We experienced 5.4% weather-normalized sales growth for the quarter, including 6.6% C&I growth, supported by the continued ramp-up of our large load customers and 4.3% residential growth. Year-to-date residential sales growth stands at 2%, exceeding our expectations and fueled by continued customer growth to the top end of our range. We are, therefore, narrowing our customer growth guidance range to the high end of 2% to 2.5% for the year.

As we look ahead to 2026, we anticipate earnings per share of $4.55 to $4.75 per share. The expected year-over-year decrease compared to our revised 2025 earnings guidance is due to the projection of normal weather and higher financing and D&A costs as we work through the rate case process. We continue to expect robust customer and sales growth increased transmission revenues, focused O&M management and some positive contributions from our El Dorado subsidiary. Customer growth next year is expected at 1.5% to 2.5%, supported by Arizona's ongoing population and business expansion. Last year, we set a post-recession record with nearly 35,000 new meter sets. We're on track to match that figure again in 2025 and our forecast for 2026 customer additions remained strong.

For overall sales growth, we expect weather normalized sales to continue to grow at 4% to 6% in 2026. And with the strong residential sales growth trends and continued ramping and acceleration plans by our extra high load factor customers, including in the advanced manufacturing space, we are increasingly confident in our forecasted long-term sales growth range and are raising it up from 4% to 6% to 5% to 7% and extending it through 2030.

Our capital and financing strategy remain focused on enabling growth while maintaining affordability and financial discipline. We've updated our capital plan through 2028 to include critical strategic investments in transmission and generation that support reliability and the demands of our rapidly growing service territory. As highlighted by Ted, we look forward to developing these new resources for the benefit of our customers. These investments are expected to drive rate base growth of 7% to 9% through 2028, an increase from our prior guidance of 6% to 8% through 2027. To support this plan, we've updated our financing strategy for '26 through '28, maintaining a balanced mix of debt and equity aligned with our balance sheet targets. For 2026, approximately 85% of our equity need has already been priced with an additional $1 billion to $1.2 billion of Pinnacle West equity forecasted through 2028.

On the O&M front, our 2026 outlook reflects our commitment to cost efficiency. We expect a slight year-over-year decrease despite continued customer growth, and we remain focused on reducing O&M per mega hour over the long term.

Finally, we are affirming our long-term EPS growth guidance range of 5% to 7% based on the midpoint of our original 2024 guidance range. We recognize that regulatory lag will continue to be a factor in 2026. However, we remain confident in our long-term financial strategy. Our service territory offers unique advantages, including strong growth across all customer classes and a diversified economic base that includes advanced manufacturing, data centers and continued population growth. Working closely with the Arizona Corporation Commission and stakeholders, we're committed to addressing regulatory lag, improving recovery timing and ensuring affordability as we continue serving new and existing customers.

This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

[Operator Instructions] Your first question is coming from Julien Dumoulin-Smith from Jefferies.

Appreciate it and nicely done. I got to say again. Look, let me -- if I can kick it off here. Obviously, the gas build is front and center here for you guys, good progress. How are you thinking about just eventually giving visibility on '29 and '30, especially as what you see that here. Can you speak a little bit to the extent possible of what that trajectory as you rolled it forward here? What potentially look like in that context? And maybe speak a little bit more to the sequencing of getting this pipeline built in time and in service to align with what seems like a fairly tight time frame altogether to build out this generation.

Yes, Julien, thanks very much. And I'll start and then Andrew can talk about the capital plan. The pipeline is expected to be in service in 2029. We're staying very close to that project and remain confident in the milestones between here and there. And so as you know, that was the first key step. Second step then is starting to announce some of the generation capacity projects that we've been working on, [ Desert Sun ] being the first major announcement and project that we would expect.

And so as we've said, we think about this in really 2 phases. The first phase is going to be necessary to support committed customers. That's a part of the 4.5 gigawatts that we've already committed to and are building out to serve. And we'd expect to be able to have that phase in service in 2030. So still a healthy margin passed when the pipeline is in service, but a schedule that we're comfortable with meeting Importantly, we've got all the key equipment secured, land interconnection is in place. So I think we're in a good spot to be able to deliver on that time line.

And then the second phase of that project, we've identified the opportunity to be able to serve our subscription customers with. We've rolled out an opportunity to subscription customers for 1.2 gigawatts and we're actively working with those counterparties on their desired timing and ramp rate to be able to take advantage of that second phase. And that's one of the benefits of the subscription model is we can ensure that the delivery time line of that second phase corresponds with the counterparties ramp rate, and we make sure that reliability is protected by keeping those 2 in sync.

Both will, of course, take service from the new pipeline, but we're comfortable with the timing and how that coincides with the pipelines in service. And we'll continue to monitor pipeline progress along the way. And be prepared to adjust if needed. But we're comfortable with the time line we've laid out.

Andrew, do you want to speak to the capital plan?

Sure. Yes. Julien, as specifically relates to the Desert Sun project. There is some of the capital related to that project, both on the generation side as well as small amounts on the transmission side in the current plan. You've got long lead equipment and land and things like that, that are in the plan. And certainly, given the service base that Ted is talking about for Phase 1, you would see that CapEx ramp up as we get closer to the end of the decade. Certainly around the broader capital plan as we work through the rate case and understand the dynamics of the formula grade and continue to develop our subscription model with our customers that will provide us the opportunity to give more visibility as we certainly want to make sure that, that growth pays for growth.

But the plan that we've put forward through '28 reflects the beginnings of some of those really big long -- longer lead time investments we're making on the generation and the transmission side. You could see it in the 2028 kind of new run rate for transmission investments and some of the additional information we provided about our ability to start to look at that additional $6 billion backlog of FERC regulated transmission assets and start to begin to develop those in parallel with a project like Desert Sun. So that's the plan.

We feel good about the plan for '28. And as we are able to certainly provide more information about the time line through the end of the decade, and we've tried to start to do that with some of the construction work in progress disclosure that we've been providing over the last few quarters.

Got it. And next just you kind of teed up the next piece. How is that progress going on the subscription? You talked about this 1.2-k-watt opportunity. Where are you in sort of filling that bucket or that opportunity?

Yes, we've got active dialogue. This was [ Tranche 1 ] of our subscription and recognize that the timing of Tranche 1 coincides with developing that Phase 2 of Desert Sun as well as we [indiscernible] service the new pipeline. So we're working with counterparties now to match that up with their desired in-service timing. But conversations are active, and we remain optimistic in being able to deploy subscription model to both continue to serve part of the 20-gigawatt queue that is ready to begin service in our service territory while also designing it in a way that helps with financing and protects customer reportability.

So I think the key elements of the model has been well received by the market. We're actively working with counterparties, it's going to be a good way to be able to serve that queue both now and going forward.

Yes. Fair enough. One little detail here, on '26 you've got this $0.55 bump here on transmission. That's a sustainable level, right? That's a pretty big bump.

Yes. Julien, we'll provide guidance as we go forward, obviously, on that. But I think it's reflective of the trend. We've been very committed to investing in our FERC regulated transmission business, and that's some of the capital that I was talking about, both because of that need to access resources from further field and to serve our growth. And given the FERC construct, the formula rate, and the amount of capital that we've stepped into there, this is just a natural reflection of the plan that we've put forward and converting it now into annual earnings opportunity.

Your next question is coming from Nicholas Campanella from Barclays.

This is [ Stefan ]. So quickly, just one clarification on equity dilution, if I could. So since 2026 equity need is 85% taken care of, which is the $550 million already priced as you put in the slide. What's the true incremental equity needs for '26 through '28 especially when we look at the $1 billion to $1.2 billion total equity used for the 3-year guidance period?

And also, I guess, how should we think about the cadence of issuing through '26 and '27? And how should we think about any equity mitigation given the strong sales growth backdrop that you just provided in the update.

Thanks [ Dave ]. So yes, on the equity, as you pointed out, we have substantially derisked the need in '26 through all the equity that we've priced both through the block issuance we did in 2024 and our use of our ATM over the last 2 years. So it would feel like we're in a good position.

If we look over the incremental need over the 3 years, that '26 to '28 period, that's what that $1 billion to $1.2 billion represents. And so certainly, these projects are lumpy. So the cadence of issuance need kind of goes with that. That's where an ATM has worked well for us to date to be able to time our drawdowns and our issuance with the CapEx as we go through some of these larger projects.

But your last question around mitigation is really the key one. When you think about that range and our ability to meet our long-term aspirations around the balanced capital structure and to minimize the amount of equity dilution within that balanced capital structure, it really comes back to all the work we're doing both around reducing regulatory lag through the rate case process to improve retained earnings and our ability to fund that capital from internally generated funds.

And then to look to our large loan customers in the subscription discussion to make sure that to the extent that we could secure cash upfront, to fund those investments that it reduces the need for us to go after the market for equity. So while that's the range today of forecasted need, we're going to continue to work through the rate case process and the engagement on the large load side to try to mitigate that as much as possible.

Got it. That's very helpful. And secondly, just on the transmission capital investment slide you laid out, if I could. I appreciate the clarity on the $2.6 billion cumulative transmission CapEx through '28. And also the [ $6 million ] plus through 2034. Could you just comment on your assumption on annual transmission CapEx post 2028? And how should we interpret the $6 billion plus, especially on what's contributing and driving the upside?

Yes. So we haven't laid out the specifics of the plan post 2028 because these are really the projects that reflect in the 10-year strategic transmission plan that we filed with the commission every other year. There are a host of projects in their, 500 or 600 miles of high-voltage lines that we're developing to meet different needs. And there's some fungibility in terms of to develop this line with that line. So we're doing a lot of that work today.

The way I would think about it overall is that we went from [ $200 million ] a year of run rate CapEx 5 years ago in transmission for just sort of the local area projects, the things that we do that are [ 60-plus ], that number is increasing to the $300 million to $400 million range of just the blocking tackling [indiscernible] do on the transmission side. And so the increments above that, that you see almost that the potential for that $850-plus million number to be a run rate, there is a baseline $300 million to $400 million in there. And then in print above that is reflective of the beginning of investing in these strategic transmission projects but it's a really long runway and the number will vary from year-to-year.

But I think if you look at 2028, that is a reflection of the opportunity on an ongoing basis through the combination of core transmission and that increment from strategic transmission.

Got it. That's super helpful. If I could, just another quick clarification on the robust sales growth guidance you refresh. I guess, seeing a really elevated level of 5% to 7% through 2030, while looking at a 7% to 9% rate base growth is through 2028. I guess can you comment on your confidence level to possibly extend the 7 to 9 [ Regus ] growth further into the horizon? And I guess, what could be the key drivers contributing to that?

Yes. So we've laid out through 2028 on the rate base side. And one of the reasons it stepped up is that you're beginning to see some of those long lead projects come into service in '28. The best example being [ Red Hawk ], the expansion of our natural gas facility there. As you get into 2029 and 2030 and beyond, more of these larger projects come in and service up to your point, the higher sales growth we're seeing, especially from the large load type customers. And so as we continue to kind of move forward and develop the CapEx plan around Desert Sun around those strategic $6 billion strategic transmission that we were just talking about, we'll continue to look at that rate base growth rate.

Our confidence is that, that runway is quite long. What the level is, is what we'll be able to kind of continue to work through. That [ SWIP ] disclosure that I mentioned earlier, it's also a good way to think about some of the projects that we know are already in the hopper that take us into '29 and '30. And a good way to extrapolate if you do some of that math.

Your next question is coming from Shar Pourreza from Wells Fargo.

This is actually Alex on for Shar. So just on the growth rate outlook, just you guys are still targeting that 5 to 7 of the '24 midpoint. Just in the context of today's new '26 guidance, can you just help frame what you might use as your new base? And will you roll forward the plan as soon as the rate case is concluded.

Sure. Yes. So really, the rigs becomes precipitant for us to look at all that. And if you think about [ bashers ], we really try to set a high bar for ourselves as we can to make sure that we're consistently meeting or exceeding expectations and doing so in the right way. And so we want to get to the point where the -- that 5%, 7% becomes evergreen. Right now, we're in a situation where earnings are lumpy. We go and we have a rate case and we get a rate increase, and then there's regulatory lag through a lengthy rate case process.

The formula rate is really an important element here to be able to convert that earnings growth rate from being kind of a long term, look at '24 and then look at '28 is something that can be more evergreen. And so I think, as we work through the rate case process and the structure of the formula rate, we'll be much better positioned to talk about what all that looks like. And ultimately, that's the goal is to be able to deliver year in, year out. produce more modest increases year-over-year for customers as well. That's a really important part of it. And ultimately, that creates the better stability for us around our earnings growth.

Got it. Okay. That's helpful. And then just switching gears here, just give you a sense -- more of a sense on the megawatt pipeline you have around the hyperscaler side and just sort of how you think about capacity first generation needs?

Yes, sure, Alex. So we continue to see just a robust pipeline of demand. As we've articulated in the slides, we've got 4.5 gigawatts of incremental demand that we've already committed to. That's in part what Desert Sun is going to be serving as well as future generation and transmission investments that are included in our guidance period and will have to be developed even beyond. But in addition to that, we want to start making progress on committing and serving part of the 20 gigawatts of uncommitted load that is in our current Q. And so that's also a part of what Desert Sun will begin to be able to allow us to serve. But of course, we anticipate wanting to be able to offer much more than just that initial tranche of 1.2 gigawatts.

So the intent is contract that first tranche and then we'll continue to identify generation and transmission capacity expansion opportunities as we get to a certain point in the predevelopment of those projects to where we are confident in the timing and level of capacity available for us to be able to offer, and we'll go to the market and offer another tranche service to that uncommitted queue. And that's the model that we anticipate being able to deploy going forward. Bottom line is we anticipate being able to continuously offer capacity to eat into that 20 gigawatts. And we think the 1.2-gigs that we've offered recently is just the first step into that trajectory.

Your next question is coming from Travis Miller from Morningstar.

Just want to confirm on the guidance for '26. There's no contribution from the rate case. Is that correct? And then if that's correct, any ideas or guidance you could give on what maybe a dollar increase or so to speak, would be in the back end of the year? Any thoughts there?

Yes, Travis, you're correct. We have not made any assumptions for rate case conclusion that's informed 2026 guidance. As we said, we do anticipate the case resolving in the last quarter of the year. And given that such a small quarter for us anyhow and the timing just didn't seem prudent for us to be able to make any assumptions at this point. But certainly, once the case concludes, that will allow us to step back and reevaluate the constructive nature of the outcome and what that means in terms of forward-looking guidance. So we'd look to do that at that time as well as the details around how the formula rate would work both timing and level on a go-forward basis. So look for further updates once the case concludes on all those aspects.

Okay. Makes sense. And then separately, that 4.5 gigawatts of committed customers, can you kind of elaborate on who those customers are? And maybe is any of that going to kind of your system wide base with residential or small commercial? And how do you -- how would you break up that 4.5 gigawatts?

Yes. The 4.5 gigawatts is a nice balance and blend between incremental industrial growth, such as chip manufacturing, [ TSMC ] and [ Amkor ] being examples of that as well as their supply basis. As well as, of course, data centers that are already in development or even in service, but we expect to ramp through this period. And then importantly, we continue to see just steady and robust residential and small business growth. So I'd say that's one of the hallmarks of our growth story is a very diversified story, not too dependent on one industry or customer base or another [ Maricopa ] County just recently ranked top County for economic development in 2025. And it's the third fastest in the U.S., phoenix just rank #1 of the top 15 growth markets for manufacturing. And all of that is separate from a data center story. It just shows the true underlying growth.

We're also pleased to see that affordability still is a hallmark of our service territory, favorable cost of living. Phoenix inflation is growing at about 1.4% versus national average at 2.9%. So I think there's a lot of drivers behind why we're seeing diversified growth in that 4.5 gigawatts represents all sectors, which gives us confidence in the growth rate, but also means that we've got a lot of infrastructure to deploy to continue to keep up with the various sectors that are demanding it.

Okay. Yes. No, that sounds good. And then -- most of that 4.5 gigawatts go into rate base? Or is some of that the subscription model that you were talking about that might be outside of rate base?

Well, let's be clear, all of our investment goes in the rate base. The subscription model still goes into rate base, we are just contracting with those customers. Think about it as more of a special rate agreement rather than out of rate base, and that special rate agreement just ensures that growth pays for growth and that the timing of their ramp coincides with the timing of the ramp of the infrastructure to be built to serve them as well as potentially getting their help to finance some of that infrastructure so that we maintain a healthy balance sheet as we grow these rate base investments, specifically for data centers.

So it's all going in the rate base. It's just a matter of how you recover the dollars is really the difference in the subscription model.

Your next question is coming from Steve D’Ambrisi from RBC Capital Markets.

I just was hoping for a little bit more color on the year-over-year change in sales growth as an EPS driver. I know for '25 guidance, you had embedded $0.58 and for '26 guidance, it looks like you're embedding $0.39. I guess I would just step back and say it doesn't seem like the magnitude or mix is really that different given both years were 4% to 6% total, of which 3% to 5% was from large C&I. So can you just give a little color there? Is it mix within the C&I classes? Or what's driving the difference in EPS magnitude uplift from sales growth?

Steve, it's Andrew. Sure. Yes, so you're right, '26 does have a bit of a smaller contribution there. And that's really the fact that we're talking about a pretty big group of customers that has puts and takes in their ramp rate from year to year. And some of those -- as we've been in early data center market, we've been able to develop more sophisticated forecasting on a customer-by-customer basis, who's testing equipment, who's actually ramping. And so you do see some variation within the customer class. So the residential small business number is relatively stable. And as we've seen this quarter and our guidance for this year, the expectation of continued pretty large new customer additions and an actual positive contribution from residential sales despite the fact that we've continued to have energy efficiency and distributed generation press up against that.

So it really is the year-to-year variability in some of our large loan customers. I think where we really want to focus is the fact that this is a long-term set of customers with the trajectory now that we feel confident about through [ 2018 ], including raising that sales guidance by 100 basis points over that period. And the fact that, that means that the [indiscernible] contribution that steps up by 100 basis points as well. So over the long term, feeling really good. There is some intra-year variability. But once you pair that with continued customer growth, residential growth and then the continued conversion of our transmission investments into revenue through our formula. We're feeling pretty confident about the ultimate outcome.

That's really helpful. And I guess like that would be like the put and take versus what kind of we were assuming is just the sales growth versus transmission. I know Julien asked about it, but can you talk a little bit more about that clearly throughout the rest of the plan, transmission growth steps up materially into '28? And so does that $0.55 benefit scale linearly with the increase in transmission spending? Or is there something that's causing super normal growth in recoveries in...

Yes. No. Over time, it should be proportionate to the investment. We earn pretty quickly, right, when we're putting assets into service. I think the thing that will happen is it will get a little bit lumpier because in the near term, that $300 million to $400 million of run rate projects, those are smaller projects that get done within a given year, maybe over 2 years at [ MAC ]. And we're moving forward into lines that may take longer to build.

Some of the things that we're looking at are can you energize them on sectialized basis so that we can reduce the regulatory lag if we're building a 100-mile line, can you do it in segments? That's the type of thing that we're thinking about to make sure that we continue to translate that opportunity into earnings.

The other thing that's been nice about the transmission opportunity is that it's part of the broader wholesale market. And so the opportunity to offset some of the impact to our retail customer base through willing rolling over our system has been a big part of our customer affordability story as well. So there's multiple benefits to doing it. We are doing some larger projects. So the scaling will ultimately get there over the long term. But intra year, there could be some lumpiness just given you're talking about that increment above the core $300 million to $400 million being longer lead time projects that can take a few years to get into service.

Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2025 Second Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our second quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman, President and CEO, Ted Geisler; and our CFO, Andrew Cooper. Jacob Tetlow, COO, is also here with us.

First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our second quarter 2025 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements cautionary language as well as risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through August 13, 2025.

I will now turn the call over to Ted.

Thank you, Amanda, and thank you all for joining us today. Our second quarter financial results are in line with our annual guidance. Before Andrew discusses the details of these results, I'll provide a few updates on recent operational and regulatory developments. As we progress through the summer season, I'm very proud to share our team continues to excel in delivering reliable service to our customers. For the third consecutive year, we set a new peak energy demand record. Our customers reached a new peak on July 9 at more than 8,500 megawatts when Phoenix reached 118 degrees, more than a 300-megawatt increase from last year's peak. And we may surpass this again tomorrow as temperatures are expected to reach at least 118 again. We take our responsibility to reliably and affordably to serve our customers seriously through robust planning, resource procurement efforts and a dedicated team.

I want to recognize our planners, engineers, operators, field teams, everyone that makes up the APS workforce for doing an exceptional job making sure our customers continue to experience reliable service through our summer season. Setting a new peak does not come as a surprise since our state continues experiencing growing customer demand, steady population growth and economic diversity. There on the Commerce Authority just reported a record-breaking year in fiscal 2025 with a projected 24,000 jobs created in the state and businesses committed to investing over $31 billion in Arizona communities. For the second year in a row, Arizona earned the top spot by Site Selection magazine for attracting business investment in the Mountain region.

Additionally, CNBC recently ranked Arizona in the top 3 states for infrastructure which takes into account how states are delivering on customer power and data demands. We're working diligently with our customers and community leaders to develop the new infrastructure needed to power our state's growth. In fact, TSMC announced earlier this month that it plans to accelerate production time lines for some planned facilities by several quarters, and we're developing accelerated construction schedules now to meet their needs.

Our all of the above approach to resource planning is ensuring that we deliver reliable service to our customers every day and in the moments when it matters most, like this week. The cornerstone of our balanced energy portfolio is the Palo Verde Generating Station which celebrated its 40th anniversary this year. We continue to invest in Palo Verde for the long term. Although we have already secured 20-year license extensions to continue operating into the 2040s we're taking steps now to prepare for subsequent license renewals into the 2060s. In addition, we recently contracted to exercise a buyout option of 94 megawatts previously contracted under sale leaseback. This will allow us to continue providing reliable and low-cost baseload energy to our customers for decades to come.

In addition to nuclear, natural gas continues to be an important part of our diverse resource portfolio. We are already developing 675 megawatts of additional natural gas generation to support reliability. Earlier today, we announced a project with Transwestern Pipeline Company to support the Desert Southwest pipeline expansion. The new pipeline will help maintain year-round regional energy reliability by expanding transport capacity of natural gas from the Permian Basin to Arizona, enabling new gas generation infrastructure to be built in support of our customers into the next decade and beyond. This new pipeline was a critical milestone for our team to secure before proceeding further with procuring new gas generation needed to support Arizona's reliability and growth. We expect the pipeline project to be in service by 2030, and we will be coordinating the development of new gas-fired generation to be in service coincident with this timing.

In addition to generation, we continue to make progress on our transmission investments and are on track to complete multiple transmission and substation projects for our growing customer base with the tremendous growth and critical need to build out the grid, we have increased our investment in transmission infrastructure and expect this to continue being a strong component of our capital plan well into the future. We are evaluating additional opportunities to build FERC jurisdictional transmission for the benefit of our customers and look forward to providing additional information on this in the future.

As Arizona continues to grow at unprecedented levels, reliable service for our customers is our top priority. Which has led us to update our clean energy goal from 0 carbon to carbon neutral by 2050. We're also transitioning away from interim targets to better reflect our near-term focus of reliability and affordability for our customers. And instead, we'll report interim progress in our resource plans going forward. We will rely on the integrated resource planning process to forecast the right energy mix and our all-source RFP process to support reliability through best-fit lease cost resources, including dispatchable resources such as natural gas, plus solar and storage.

Turning to our regulatory updates. We filed a rate case on June 13. Key components of the filing include a 10.7% return on equity, 1% return on the fair value increment 52.4% equity layer in 12 months of post-test-year plan. We requested an increase of annual revenue of $580 million, with rates to be in effect in the back half of 2026. Since our filing, a procedural schedule has been issued, which shows a hearing in May and a final open meeting vote in October of 2026. The rate case supports investments in our energy infrastructure to ensure that all customers continue to receive the reliability they count on and increased resiliency under all weather conditions. We're focused on investments to protect the grid from extreme weather and have invested in programs such as vegetation management, predictive maintenance and wildfire early detection and mitigation tools.

On a related note, HB 2201, the state's wildfire mitigation bill received bipartisan support from Arizona legislature and was recently signed into law by Governor Hubs. The bill requires Arizona utilities to submit comprehensive wildfire mitigation plans to the Arizona Department of Forestry and Fire Management for approval and mitigates wildfire liability risk by defining standards for the wildfire mitigation in Arizona, with reference to those plans.

Lastly, we're laser-focused on reducing regulatory lag, controlling costs and keeping rates as low as possible for our customers. We've proposed a formula rate adjustment mechanism to improve timely recovery of prudent and necessary costs while smoothing out customer bill impacts. In addition, we're proposing adjustments to our existing rate design to ensure new large customers will pay their full cost of service without shifting costs to other customers. We're focused on building out the grid to serve growth, ensuring reliability for our customers at the lowest cost possible and executing on our regulatory priorities. We look forward to delivering on our commitment to customers for safe, reliable and affordable service, especially through the summer season, while also delivering on our commitments to shareholders as well.

With that, I'll turn the call over to Andrew.

Thank you, Ted, and thanks again to everyone for joining us today. This morning, we released our second quarter 2025 financial results. I will review those results and provide some additional details on key drivers for the quarter.

We earned $1.58 per share in the second quarter, a decrease of $0.18 compared to the second quarter of 2024. Weather, O&M, share issuance and pension and OPEB nonservice credits were the primary negative drivers for the quarter-over-quarter comparison, along with income taxes and D&A. These were partially offset by sales growth and transmission revenue and a gain from an El Dorado equity investment. While weather was beneficial for the quarter as compared to normal weather, it was less than half the weather benefit we experienced in the second quarter last year. As a reminder, June 2024 was the hottest June on record contributing much of the quarter-over-quarter drag. Our sales growth was strong for the quarter, contributing $0.08 of benefit year-over-year as our weather-normalized sales increased 5.2% compared to the second quarter last year. Solidly within our guidance range of 4% to 6% and with significant contributions from both residential and C&I customer classes.

C&I once again has shown robust sales growth at 8% for the quarter. With the continued ramping of diverse data center and large manufacturing customers in our service territory. We experienced 2.4% customer growth in the second quarter, and Arizona's economic backdrop remains strong. We continue to see strong in-migration and population growth with [indiscernible] ranking in the top 3 among the 50 hottest new home markets for 2025 according to Zonda National Housing Market Data firm. In addition, according to recent U.S. Census population estimates, multiple cities within our service territory have seen tremendous growth over the past 5 years with Buckeye, Grader Surprise and [ Collage ] all exceeding 15% population growth. This customer growth included a surge in new home builds and new meter sets.

In fact, meter sets through the first half of the year are on a similar pace to last year, which was the highest number of new meters in over a decade. Also of note, in Phoenix, inflation unemployment both remained below national averages. This provides us confidence in our current long-term sales growth guidance of 4% to 6% through 2027. We continue to monitor overall economic trends, both locally and nationally, and we'll take them into consideration for future updates.

O&M was higher this quarter. And year-to-date, while our O&M costs were higher compared to last year. This is largely due to the timing of the planned major outage at our Fort Quantix plant. Our cost-saving measures and lean culture remains a central tenet of our operations and we continue to anticipate balanced spend aligned with our O&M guidance in the second half of the year. We are also maintaining our goal of declining O&M per megawatt hour while our customer footprint continues to grow. We are focused on executing our capital investment program and financing strategy. Our long-term plans remain intact with the passage of the One Big Beautiful Bill Act. We have already begun construction on our Gavan Harwood projects where we anticipate tax credit benefits and these key reliability resources are on track to be in service by 2026.

Turning to our financing plan. We issued $800 million in bonds in the second quarter to pay off our 2025 maturities and support our funding strategy. We continue to be deliberate in our financing plan to support a balanced capital structure and balance sheet strength and find advantageous financial opportunities. We are reiterating all other aspects of guidance. And given the strong execution of our plan through the first half of this year, we expect that we will end the year in the top half of our full year EPS range of $4.40 to $4.60 per share. As always, we are closely monitoring sales growth and weather as we move through this summer. We look forward to continuing to execute our strategy throughout the rest of 2025.

This concludes our prepared remarks. I will now turn the call back over to the operator for questions.

[Operator Instructions] Your first question is coming from Julian Damolin Smith from Jefferies.

Nicely done this quarter.

Thanks, Julian.

So just if you can elaborate a little bit about today's announcements with ET here in the pipe. I mean can you talk about the opportunity to scale beyond just this RFP here for '28 to '30. Obviously, you've got 2 gigawatts and change there, but the ability to potentially tap into some of the 16 gigawatts of uncommitted queue. I mean it's a big commitment with ET here. I mean, is that really aligning with your participation in just the 2 gigawatts? Or is it more than that in terms of your own generation opportunity that you see?

Yes, Julien, I appreciate the question. A couple of pieces there. This pipe was a critical strategic commitment for us to create a long-term, reliable supply of natural gas that was sort of foundational for us to be able to then build the generation and transmission needed to be able to power the state's growth well into the future. And so this is a really important milestone, and we've been working on it hard and waiting to secure it before being able to officially sort of roll forward and bring clarity on additional transmission and generation projects.

Look, it's a big pipeline project, 42-inch design capacity, 1.5 Bcf per day. And APS is the anchor shipper. So we've contracted a volume that we believe supports substantial reliability and growth for many years to come, and we've contracted for the ability to procure even more from the pipe as needed as we both serve committed to and begin to eat away at that uncommitted Q.

I think with respect to the RFP, what you've seen from us is we've got just about annual RFPs. And so the 1 that was put out here for 2,000 megawatts that was targeting a very narrow window of time and really wanting to accomplish 2 things. One, be able to secure a renewal of existing gas resources that are tolls or PPAs so that we can ensure that capacity for the long term and then marry it up with long-term commitments of new data center growth. But then two, to be able to start to solicit the market for new gas generation and the pipeline will be a key element of that. We believe APS is well positioned to have strong ownership opportunities with new gas generation and the total results from this RFP and procurement efforts alongside it could easily exceed 2 gigawatts, but we'll look to be able to provide more clarity on that as we get later into the year.

Got it. Understood. And then maybe can you speak a little bit to the transmission opportunity here? I mean, look, clearly, accelerating here from, call it, the $350 million level to double that to $700 million by '27. But to your point, you're kind of insinuating that '29 procurement here, you have procurement needs in 2030. What's the sale of the opportunity on transmission and then the -- what you just talked on the second on generation, and ultimately, what do you guys provide a reveal of longer-term CapEx because almost everything we're talking about here is beyond the scope of what you guys suppose technically or officially disclosed today in the [indiscernible].

Yes, Julien, that's correct in the sense commensurate with the continued growing generation portfolio. We also expect a continued growing transmission portfolio. And transmissions key for really 3 reasons. One, as we build new generation, we're going to need to invest in new transmission and connect that with customer demand. Two, we've got a substantial need within the service territory to continue to expand the capacity and resiliency of the existing system, which is part of what's driven the capital program for transmission to more than double here in the recent period. But then three, on top of that higher run rate going forward, we expect that there will be an opportunity for large regional transmission investments to give us access to the marketplace even outside of the Phoenix Metropolitan area both access to the market for low-cost energy but also access to additional generation that may continue to provide a balanced energy supply into Phoenix.

And those will be lumpy over time as most large new transmission projects are, but we view that as above and beyond the current run rate necessary just to support reliability and resiliency. And as we roll forward capital, the next iteration of that likely on our Q3 call, then we'll see opportunities to continue to lean in to transmission over time.

Just -- Julien, it's Andrew. To put a little bit around the numbers where we are today, the run rate of transmission, just the local area projects, the core blocking and tackling is in that $300 million to $400 million range. And that is a major step up from the $150 million to $200 million we were doing in that space less than 5 years ago. And then as you think forward, the numbers we've disclosed '25 -- 2025 to 2027, those are the beginnings of some of the strategic transmission projects that we outlined in our strategic transmission plan last year. Which was a pretty substantial plan over a decade. And if you think about even the run rate of that plant, it heads point, it is lumpy. But as we -- '25 to '27 is only the beginnings of those projects, to your point, that become operational in the latter part of the decade.

As we roll things forward, you'll see more detail on those projects, and then you'll start to see some of the projects that are in the strategic transmission plan that we're still evaluating and how those may play out. And those are the longer lead time lumpier projects that Ted was referring to.

Right. So it seems like you're in the transmission investment potential is accelerating into the end of the decade, as you kind of reach more of the COD on the long distance projects?

That's correct.

Your next question is coming from Nick Campanella from Barclays.

I think everyone understands that you're in the middle of a rate case -- now we have to go through '26. There's going to be additional lag while we wait for those new rates. Can you just kind of talk about how you expect that lag to evolve '26, '27 and then '28 as we get through the GRC as well as the formula rate plan.

Yes. Nick, I think the easiest way to think about that is, obviously, 2026 is key to being able to conclude this rate case. And with better visibility now with the procedural schedule, we expect that to be in the latter part of the year. And importantly, while we look forward to resolving that case, it's still based on the 2024 test year. So day 1 of new rates in effect still means meaningful regulatory lag, which is why we believe the commission is so focused on wanting to address that for all utilities through the formula rate mechanisms and formulary policy. And so once the case concludes, the end of '26, then based on the proposed plan of administration, the first ability to file a formula rate adjustment based on updated cost would be then in 2027 and we would expect for that filing to occur by July 31, 2027, based on the proposed plan administration with the new formula rate adjustment in effect by September 1, that will certainly give some relief and update on regulatory lag.

And then 2028 has the potential to be the first full year of those updated costs with then, of course, an annual adjustment going thereafter. So that's how we think about it. But obviously, we've got a agree on that with the commission and go through the stakeholder process through this upcoming case first.

Okay. That's helpful. And then I guess just to follow up on the last question. Just to be very clear, the Southwest pipeline, you have 2 gigs of committed in the queue right now. And just this pipeline unlocks how much capacity that you could actually serve into the early 2030s if you could just simplistically frame it.

Yes. So to be clear, we've got close to 4.5 gigawatts of committed extra high load factor customer demand. And that's a blend of largely data centers as well as large manufacturing like TSMC. That's the committed amount that we are actively working on committed projects under contract, putting steel in the ground to serve. In addition to that, we're now approaching just under 20 gigawatts of uncommitted Q that has expressed serious interest in new projects within our system, and we're working with that queue on being able to identify new resources to be able to serve them. The pipeline was a critical first step in us then gaining clarity on the ability to reliably commit and serve to the uncommitted queue.

Now that we've got that in place, we're going to continue working and finalize new generation projects that will be able to be allocated to that uncommitted Q and then the transmission associated with that. So I think this pipeline was the first key step. It will certainly be used to help ensure long-term reliability for our committed customers. But a big part of that pipeline, given the magnitude is going to really be used to allow us to start to commit to projects in the uncommitted Q. And I think we'll get more visibility on that later in the year and into next as we announce generation projects and transmission projects to support those uncommitted customers.

Okay. That's great. And just one last one, if I could. Just the Eldorado gain. Just was that expected in guidance when you set guidance? Or is that kind of incremental through this year? And otherwise, would you still be at the midpoint.

Sure, Nick, it's Andrew. Just by way of background, Eldorado is our nonutility -- nonregulated business. It is some legacy investments that were to invest in energy infrastructure and some community projects over the years. And I -- became profitable over the last year. It's a electric switch -- company actually serves the data center market, among others. And so we've had to recognize some gains related to the increased profitability in that investment. It's something that we monitor quarter-to-quarter because it's an earn investment under an equity investment method of accounting, it's not something that is part of the core business is not something that we plan for when we budget. And so while it's been nice to see some tailwinds from it this year, which have contributed to -- among many other factors that contribute to our ability to have confidence in the upper end of our range. It's not something that is really part of that core that we're focused on for the long term.

And you've seen us last year, we exited [indiscernible] business as a way to really emphasize the core. And while SAI has been profitable and a good story this year, it's not something that we're certainly focused on as the coinfrastructure investments.

Your next question is coming from Paul Patterson from Glenrock Associates. Paul?

So a lot of stuff has been covered, but I just have one really sort of technical question. On the solar on your slides, the solar power plant performance it looks like for the 6 months and 3 months, it's -- the performance is down, I guess, from 36% to 26%. Can you just tell me what that is?

Yes, Paul, I think that's really referring to peak value or peak demand. And really, that's just reflecting that the more solar you install the less capacity is there to be able to serve peak demand. So that's well within our resource planning assumptions and consistent with what we would expect.

So it's like a curtailment thing?

No, it's not curtailment. It's just a factor of total capacity installed and the amount of that's actually serving peak energy demand. But the solar facilities that we have in our utility scale facilities. They're performing well and performing as expected.

Okay. So it's -- okay, I got you. I think I get what you're saying. So I guess, it's the way it's sort of laid out here.

Your next question is coming from Travis Miller from Morningstar.

A lot of questions and follow-ups here on the generation and transmission side. So wondering on the distribution side, as you hit some of these peak demand and continue to see some of this growth, is there upside opportunity in terms of capital investment or other O&M savings, et cetera, at the distribution level?

Yes, Travis, I appreciate the question. Absolutely. Distribution is directly tied to growth and as we continue to experience strong growth, that puts pressure on continued investments in the distribution system. So I think what you see today is a growing level of distribution investments commensurate with the customer growth we have. And if you look at the quarterly values of customer growth, we've got the highest level of customer additions this past quarter that we've had in the last 2 years. And the growing distribution category is reflective of keeping up with that growth.

In addition, within distribution, we have resiliency investments because we continuously invest back into the existing distribution system to ensure we're achieving our target of top quartile reliability for all our customers. And that includes new technology to create greater visibility and automation on the distribution grid. In addition to replacing old circuits, adding redundancy and then building new circuits and transformers to keep up with growth. So that's an important part of our capital program, and we believe we'll continue to see growth into the future as we continue to support a growing customer region.

The last thing I'd say is from a peak demand standpoint or a customer count standpoint, while we may be a midsize utility, we actually have the fifth largest service territory from a Square Mile standpoint of our peers. And that means it's a big distribution system. And so there's a lot of investment opportunity just to ensure we're maintaining reliable service to our customers over the long term.

Okay. That's great. And then real quick on the rate case. Anything in your initial conversations or putting together the request that you think will be more contentious or less contentious with all the stuff that you've got in there?

I think the case was filed as expected. But importantly, this case includes 2 elements that are, I'll call it, unique and above and beyond what you would expect from a standard rate case filing. So the 3 key components for the case is the standard component, which is simply seeking recovery to make up for the revenue deficiency. The second component, though, is to provide a proposal consistent with the commission's policy statement for transitioning to a formula rate plan going forward. And -- we filed our case consistent with the outcome of the workshops that were held last year and with the design that incorporated a lot of feedback from stakeholders along the way. So it'd be unfair to say everyone agrees with the details of that plan, but it does incorporate a lot of the feedback that was considered last year, and we look forward to working with stakeholders and the commission on finalizing the details of that.

The third component importantly is on the minds of many, and that is a proposal for adjusting rate design to ensure that our new large customer additions are paying their fair share of the infrastructure required and preventing a cost shift to other customer classes. And that's an important element of this case that's particularly important now, given the sizable additions of customers and infrastructure to support that new growth. And I know that's top of mind for many utilities across the country, and we believe it's paramount to ensure affordability for our existing customer base going forward.

So those are the 3 elements. I wouldn't say there's any aspect of that stands out is overly contentious, but there are 2 key components that are above and beyond what you would normally expect in just a standard rate case filing.

Sure. Okay. And then could the commission break those out such that they would might approve parts of any of those 3?

Well, I suppose anything is possible. I don't know if that would be the most efficient way, though, to process this case, and we fully expect to have a standard hearing process, and it probably makes sense then while you have an administrative law judge and all the stakeholders weighing in through a formal hearing to ensure that everyone has the opportunity to produce evidence and testimony to debate and support all 3 of those elements. So we believe that's likely how the commission is thinking about it, and that's certainly the way we believe is the most efficient way to process this filing.

Your next question is coming from Sophie Karp from KeyBanc.

A lot of growth happening in your territory, some of which you're highlighting through volume growth as well as customer growth, et cetera. At what point do you think your kind of rate case CAGR begins to inflect to the upside? And how do you think about the timing of maybe quantify it for investors given the rate case and all the other moving parts that you have?

Sophie, it's Andrew. Yes, I think a lot of the key things that Ted highlighted earlier on are critical to think about the long run rate that we have from both a customer growth perspective and a CapEx perspective. And that is the sort of new area where we're looking at some of these larger generation investments that we can make, and that's -- we talked about the pipeline kind of unlocking the opportunity to begin to look at those.

And then as we think about accessing new resources from afar, some of these transmission projects that are above and beyond the run rate that we've been talking about. And because they are larger projects, we've started to give more information in our disclosure around the quip aspect of some of these longer lead time projects that may not show up in rate base in such a narrow window that we show, which right now is [ 25 million ] to [ 27 million ] I think you pointed to the rate case as an important milestone given the formula rate that Ted just talked about, gives us the opportunity to look at all capital on an even playing field because you'll have very consistent cost recovery across different asset types. And I think we'll have better visibility into that the cadence of the long-term CapEx spend really across the different parts of our business.

And so we haven't made any determinations around elongating that CapEx disclosure but certainly expect to roll it forward in the ordinary course the way we would typically in the third quarter. And as we've developed these strategic transmission projects continue to work, as Ted said, on the generation opportunities unlocked by the pipeline, we'll be able to provide more information as we go forward.

Got it. And then I don't know if I missed it maybe in the prepared remarks, Ted, but are you quantifying your kind of larger customers pipeline? In terms of maybe load study requests or however else you may quantify it?

Sophie, I think if I understood you right, have we quantified the potential customer commitments that are available through the uncommitted forgive me if I misunderstood your question, but we've got about 4.5 gigawatts of committed customers that fall into the category of -- we consider extra high load factor customers or significant large commercial customers and that's made up of largely data centers and large manufacturing. But in addition to that, we've got nearly 20 gigawatts of customer requests in an uncommitted queue. And the pipeline was a critical infrastructure commitment that we wanted to secure and get visibility to before we start to then get further on new generation or transmission build necessary to be able to then start to contract in that uncommitted queue.

Now that we've got the pipeline secure, I think we'll be able to begin in earnest working with some of those customers and associating their needs with new generation or transmission projects.

Your next question is coming from Ryan Levine from Citi.

One clarifying question. In relation to the anchor shipper relationship, what's the risk for shareholders and repayers if the uncommitted growth projects don't materialize? Or is there any color around how to phrase the risk profile, recognizing that there's a lot of growth potential. I'm just trying to understand the potential risk if some of that doesn't materialize?

Yes. Ryan, I think the easiest way to think about that is even if you had no uncommitted queue, this pipeline was still necessary to secure long-term reliability with the most affordable resources possible for our existing customers and the customers that we've already committed to serve. So while there's upside for us to be able to procure even additional capacity on this pipeline -- the pipeline was essential even just to serve our existing customer base and those that we're currently building out to serve in the committed queue. And as a result, we believe that this pipeline is easily demonstrated as prudent and necessary to support reliability now and for the long term.

And just a follow-up, are there contractual rights to be able to expand your capacity if needed and the growth materializes at prenegotiated tariff rates? Or is that subject to future negotiations?

We've commercially secured the ability to flex up capacity procurement.

Your next question is coming from Paul Fremont from Ladenburg.

Congratulations on the quarter. Given the fact that you guys are currently in a rate case, when should we expect that you would give 2026 guidance?

Paul, it's Andrew. Typically, as you alluded to in a rate case, just given -- I started to over the timing of its conclusion, we wouldn't normally provide earnings guidance. But as Ted mentioned in the prepared remarks, we now have the procedural schedule, and we expect rates -- we expect a hearing in the fourth quarter. And as a result, you're talking about next year being, for the most part, pretty much regular way. So we would expect to be in a position to provide earnings guidance for 2026 based on that procedural schedule. And we would typically provide earnings guidance on the third quarter call.

Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time.