Pinnacle West Capital Stock

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2026 Third 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 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 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 third 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 November 10, 2026.

I will now turn the call over to Ted.

Thank you, Amanda, and thank you all for joining us today. We delivered strong third quarter financial results and reliably serve customers through another challenging Arizona summer. Today, I'll discuss that performance, how we're serving growth while protecting customers, our resource plans and regulatory outlook. Andrew will then review our financial results and updated 2026 outlook.

Before turning to our performance, our hearts are with the families and communities across Arizona facing recovery from this past week's floods. APS is contributing $250,000 to Navajo Nation and the Hopi Tribe for emergency assistance in the Four Corners area and assessing additional needs in Northern Arizona following the weekends flash floods. We're also making $5 million in company-funded assistance available to customers facing financial hardship whatever the cause. We're here to help our customers and communities through these difficult times.

As I mentioned at the outset, our long-term planning and preparation was tested this summer, and it made a difference. We serve customers through 12 record-setting peak demand days, even as extreme heat and storms challenged our system. That performance reflects the work our employees do long before the hottest days arrived as well as their response when conditions are toughest. I'm incredibly proud of the way our team delivered strong operational excellence for customers through another record-breaking summer season. Palo Verde was a critical part of that performance. The plant achieved 100% capacity factor over the summer, delivering reliable carbon-free electricity for our customers and supporting the broader Desert Southwest grid.

Turning to growth. Third quarter weather normalized sales increased 9.5%, with commercial and industrial sales up 14.5% and residential sales up 4.5%. The Arizona's economic strength and our service territories appeal continue to attract investment. Amkor Technology is one example. In September, it announced the second phase of its advanced packaging and test campus in Peru, increasing its planned investment from $7 billion to approximately $12 billion and supporting more than 3,500 Arizona jobs. Our recent TSMC agreement shows how we're serving this growth while protecting customers. Executed in October, our first direct pricing contract is a 25-year agreement that's subject to regulatory approval, will serve approximately 1.8 gigawatts of demand a full build-out across TSMC's chip manufacturing campus.

Upfront capital contributions and credit support mechanisms align infrastructure and resource investments with TSMC's demand. Simply put, TSMC pay its own way. Residential customers will not subsidize this growth. The agreement provides a repeatable framework for other large customers, and we expect to file it with the commission for approval in the coming days. Our recently filed Integrated Resource plan puts the scale of this growth into perspective. By 2041, we project our customers' annual energy requirements will more than double to approximately 80,600 gigawatt hours with peak demand reaching 14.5 gigawatts, more than 5 gigawatts above today's level. Our preferred plan in the IRP identifies nearly 15 gigawatts of new resources and approximately 2.6 gigawatts of additional transmission capacity over the 15-year planning horizon.

The IRP is a planning road map, not a decision about who will own each resource. We remain committed to our competitive all-source procurement process, and we will compete by leveraging our proven track record of delivering reliable generation projects on time and on budget. Our objective is a balanced mix of dependable generation and new transmission built to serve growth reliably and affordably. On the regulatory front, parties in our pending rate case have submitted closing briefs, and we await the administrative law judges recommended opinion in order.

Based on the current schedule, we expect a final commission decision before year-end. We seek an outcome that supports reliability investments keeps affordability at the center and provides a timely durable framework for future cost recovery. As we approach year-end, our priorities remain clear: deliver reliable, affordable service today. advance the dependable generation and transmission that Arizona will need tomorrow and achieve a constructive regulatory outcome that protects customer affordability while reducing regulatory lag. With the rate case decision and the TSMC agreement in hand, we look forward to updating our long-term financial outlook on our next earnings call. We see significant opportunity ahead, and we're determined to meet it with discipline, and the long-term perspective for customers and shareholders alike.

Thank you for your time today, and I'll now turn the call over to Andrew.

Thank you, Ted, and thanks again to everyone for joining us today. This morning, we reported strong third quarter 2026 results, reflecting continued momentum across our business. I'll highlight the key drivers of our performance and discuss our updated outlook for the year. We delivered earnings of $3.49 per share in Q3, an increase of $0.10 year-over-year, driven by exceptional sales growth across all customer segments, continued customer expansion and favorable weather. These factors more than offset the impacts of ongoing investments in our system, including higher depreciation and amortization and both debt and equity financing costs associated with supporting long-term growth.

Given our strong year-to-date performance, robust sales trends across our retail customer base and continued economic momentum in our service territory, we are raising our 2026 earnings guidance to $5.05 to $5.25 per share, up from a prior range of $4.55 to $4.75 per share. Sales and customer growth contributed approximately $0.35 per share of earnings growth during the quarter. Customer growth remained healthy at 1.8%, while demand trends continued to exceed expectations across all customer classes. Weather-normalized retail sales increased 9.5% and including 14.5% growth in commercial and industrial sales and 4.5% growth in residential sales.

Importantly, this marks our second consecutive quarter of more than 9% weather-normalized retail sales growth demonstrating the strength and sustainability of demand across our service territory. As a result, we are increasing our full year 2026 retail sales growth outlook to 8% to 10% and with 5% to 7% growth expected from large commercial and industrial customers. Weather also provided an additional benefit during the quarter with each month experiencing more cooling degree days than the comparable period a year ago. As expected, depreciation and amortization expense increased as we continue placing significant capital investments into service. These investments are expanding system capacity, enhancing reliability and positioning us to meet growing customer demand.

Interest expense also increased, reflecting financing activities that support our long-term infrastructure program. We continue to execute a disciplined financing strategy, that balances capital investment needs, balance sheet strength and financial flexibility. In a significantly rising rate environment, we executed our financing plan efficiently in the third quarter. We raised $700 million of senior unsecured notes, including a $100 million reopening of our 2025 notes, which allowed us to maximize the execution of the financing transaction. We also priced approximately $235 million during the quarter under our ATM program, bringing year-to-date to nearly $920 million. We have priced the majority of our expected '26 and 2027 equity need while maintaining a balanced constructive capital structure. We will continue to look for opportunities to utilize the ATM program to stay proactive about our future needs.

Looking ahead, the demand outlook for our business continues to grow. Based on the increased load forecast included in our recently filed Integrated Resource Plan, we are raising our long-term sales growth outlook through 2030 from 5% to 7% to 8% to 10%. We with large C&I customers contributing 7% to 9%. This reflects the substantial economic development occurring across our service territory. In addition, we continue to expect steady population growth during the same period supporting annual customer growth of 1.5% to 2.5%. We are reaffirming all other aspects of our guidance and look forward to completing our pending rate case by year-end, with strong customer growth, increasing demand and significant investment opportunities ahead, we remain well positioned to deliver safe, reliable service while creating long-term value for our customers and shareholders.

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

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

Excellent. Nicely done, especially on that sales outlook. We never second guess you guys. With that said, though, I mean, as you think about all these customer-backed projects coming into the plan, I wanted to get ahead a little bit on the cash flow metrics here and think about a little bit what is the defining or limiting factor here? Is it about the debt? Or is it the equity capital structure at the utility itself that will be the driving factor for incremental new equity issuance. Just we clear this is a trend, and you all clearly seem to be articulating more on this front. But -- just as we get ready for some of these projects to be coming into the plan, I know none of it is necessarily awarded here, but how would you think about this?

Good morning, Julien, and thanks for the question. Yes, certainly, the most important thing is that we'll be able to provide updates on financing after we complete the rate case, along with the update to our capital plan. So that will all kind of appending I think we do look at both metrics, both are important and both kind of move in unison. And if you think about what are going to be the drivers of our external financing needs, there are two key ones that will change between kind of our regular way and going forward. One is that with the formula rate, we're going to have improved cash flow, improved FFO, which helps with our credit metrics.

It helps push down our dividend payout ratio. It really puts us in a better position, both through the catch-up of the under-earning and then the ongoing improved cash recovery. So that's going to be an important part of supporting both the equity cap structure, the utilities, supporting our credit metrics. And then certainly, as Ted talked about, this, the direct pricing contract model is going to be providing upfront cash, which will help to defray those external financing needs. Both metrics are important. We tend to want to keep our equity cap structure above 50%. We like the 52-plus range that we're in this rate case. We don't want to fall too far behind that. Ultimately, the way we've designed things like our PPC structure and the way we think about the formula rate, both also do support our credit metrics as well.

And then if I can ask maybe the follow-up related question. As you think about transposing rate base, given the comments you just made about equity in the earnings growth, how do you think about dilution, right? Obviously, there could be some [indiscernible] dynamics here, but how do you think about the translation factor that? Because clearly, especially given in light of the elevated sales growth and the subscription programs here. It seems like it's a double-digit rate base growth program potentially.

Yes. So certainly, over time and through those mechanisms I talked about, there should be a better convergence between rate base growth and earnings growth. Certainly, as we look to earn closer to our authorized return. And we're engaging in accretive projects. We're doing things, especially with both FRAM, will put us in a position to have more contemporary return and close that gap. And then the direct price and contract structure also improves the rate making at the same time. So all of it kind of drives in the direction of better convergence between rate base growth and earnings growth.

Right. Absolutely. And certainly, it seems like your outlook is going to be based off of '27, which is inclusive of some of the step-up in frame to begin with, if I recall right.

You are correct.

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

Just let me -- just a quick follow-up, and maybe I can fine-tune Julien's question in a second. So just historically, there's been around 200 basis points of lag. If you look at the 5% to 7% EPS 7% to 9% rate base, there's a couple of hundred basis points there. Just given the 8% to 10% sales growth, do you envision that would narrow? And what would be sort of a structural lag we should be thinking about as you're thinking about the 200 basis points?

Shar, it's Andrew. Has it gone? Yes. No. So for sure, I mean, the management goal continues to be to earn within 50 basis points of our authorized return by the time we've kind of caught up on lag, and that remains the goal. That will happen through the mechanism of the formula rate, and that will -- it will be something that happens over the time. Direct pricing contracts will also contribute to the narrowing of that gap. Sales growth is the exact type of trend that we've talked about in the past that creates tailwinds there to get us closer to the 50 basis points gets us within the base 50 basis points and ultimately potentially creates the opportunity over time to return funds to customers once you figure in nuclear production tax credits and things like that. So it's definitely one of the drivers. A big part of that mix over the long term is the large C&I customers. There's certainly a smaller ultimate impact for every percentage of growth there. But it's definitely a contributor and a tailwind to be able to achieve our management goal.

Got it. And then just lastly, I mean, obviously, you guys highlighted you'll get the GRC order by year-end. I just want to confirm this, I think I know the answer anyway. But just depending on when the GRC order comes and let's say, it's earlier part of December, is the special call kind of out of the question right now because it obviously post the GRC. This will be a massive update. So is there an opportunity to do a special call and update the plan in December? Or is it still the focus is a February update when you report year-end?

Yes, Shar, at this time, our focus is to utilize the Q4 call in February. We'll evaluate that based on timing of the final rate case decision. But at this point, I think it's safe to count on the Q4 call and anticipate a decision at some point mid-December for the rate case.

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

I want to start with this IRP update. Can you speak a little bit more to the high-level plans for the in-service dates on at 15 gigs of generation and 2.6 gig of transmission you spoke to in the scripts.

Yes, happy to, Richard. I appreciate the question. As you said, the plan outlines 15 gigawatts of resources needed. Importantly, that 15 gigawatts is measured on what is going to be necessary to serve purely what demand has been committed to. And so we did increase that committed demand from prior values. It's now 5.8 gigawatts, which is about 1.3 gigawatts higher than 4. But that does not include any prospective view on incremental or new data centers or incremental and new extra large manufacturing beyond what we've already committed.

So keep that in mind, the 15 gigawatts is purely for whatever has been committed or contracted that equals that now 5.8 gigawatt committed bucket. Out of that, about half is in development. We've got about 4.5 gigawatts of resources to be in service by 2028. And about 2.8 gigawatts additional of thermal generation, all of those projects we've spoken about before, the Red Hawk expansion, Cholla conversion, [ Soaro ] and Desert Sun each, respectively, having their first phases in development. And of those values about 40% is APS-owned Keep in mind then that the other half remains to be procured. Soaro and Desert on each have expansion capabilities. We're also procuring turbine reservations now for future projects as well as identifying future development sites.

And then we'll continue to run our RFP process to look for incremental opportunities beyond that. That's all on the generation side. On the transmission side, we outlined that the IRP alone is driving 2.6 gigawatts of new incremental transmission above and beyond what's in the 10-year plan. This transmission is needed just to be able to support the connection of new generation resources That, coupled with what's in the 10-year plan goes through 2035, it's a pretty meaningful amount of transmission just to be able to keep up with reliability, resiliency and connect the new generation resources and we'll continue to evaluate those needs as we finalize transmission studies.

And then lastly, just to reiterate, as we evaluate additional large manufacturing or data center customers that we may contract with in the future, we would then add those on top of this resource plan, both the demand as well as the resources commensurate to serve that demand in incremental form but we're taking a conservative view and only adding those once they're contracted.

Got it. Understood. That was very comprehensive. And maybe to follow up a little bit more on the thermal side. It sounds like efforts underway on additional turbines. Could you pair that with kind of your anchor shipper status on the new gas pipeline basically, what's committed now on your end on that type in terms of these laid out resources? Is that all tied to committed customers as well? And how does the sort of gas supply side square with all these puts and takes today?

Yes, sure. The Southwest pipeline is certainly a critical infrastructure project to be able to fuel some of the incremental thermal generation that will be in service in the 2030s. The generation that we've already announced will take service from that pipe. But there's certainly additional capacity that we've contracted from the pipe to be able to support generation beyond the projects that we've announced.

So we'll continue to work with the developer on ensuring that pipeline maintains course, and we'll continue to look at the best fit projects to be able to develop to serve our customers beyond those that we've already announced to take advantage of that pipe. Given the solar radiants we have in Arizona, we still believe that a balanced portfolio is the right mix for our customers, that blend of incremental natural gas, utility scale solar, coupled with battery storage, that's what we continue to find in our model as being the best reliability solution at the lowest cost. And so it really will continue to be an all of the above approach. But because we've had so much utility scale solar and battery storage developed in recent years. We now are balancing that out with incremental gas. And then as we look to the future, it will likely be a blend of both.

Our next question is coming from David Arcaro from Morgan Stanley.

I was wondering just on the topic of the IRP, could you maybe lay out kind of how you would stage the RFPs as you go about just continuing along the process to nail down the megawatts and projects and the split of utility-owned versus none.

Yes. We're generally an annual RFP mode. It doesn't perfectly follow a calendar year. But right now, we're continuing to evaluate project proposals for the 2030-2031 time period we went out for solicitation of projects that would supply greater than a gigawatt of supply. We'll evaluate those results. And as soon as that result analysis concludes, then we'll reissue a new RFP. So it will generally be an RFP about every year going forward, just to continue to test the market, identify resource opportunities.

And then any development projects that we identify to our own pipeline will compete in that process to ensure its competitiveness as we go forward and commit to those projects in order to be able to serve growth. So that's generally how we see it playing out.

Okay. Got it. And would you not include the projects in your CapEx plan until you were to potentially win them through those RFP conclusions?

Well, the way we think about it is when we are confident that those projects are competitive, whether it be because we've had enough visibility into the market prices or because the RFP is concluded at that point, then we'll embedded in the capital forecast. And so for example, we've said that Cholla conversion, Desert Sun and Soaro, we have confidence in their competitiveness. And so any of the capital associated with those projects that happens to fall within the current guidance window would be included. If we think that there's any question on the project competitiveness, we would not include it in the capital forecast until we're confident in its ability to compete and be developed. Of course, any resources associated with DPC contract are being contracted with that customer. And once that commitment is made, then they would be included in the capital forecast as well.

Okay. Got it. Yes, that makes sense. And I guess curious on the transmission side of things as well, are there milestones that would be needed from your end to ensure that they're needed and kind of approved from the regulatory side before considering the transmission CapEx additions in your own forecast?

Well, we do file the year transmission plan with the Corporation Commission for visibility and awareness and there's transmission workshops to walk through each of those projects. But those projects are FERC regulated clearly demonstrate significant reliability and resiliency in need in order to maintain resource adequacy within our service territory. And then because there is no excess available capacity on the transmission system in our service territory today, any new generation that we connect requires incremental transmission to be able to incorporate that new capacity into the grid in a reliable manner.

So we're very confident that any project we identify has already been through the study process to demonstrate its prudency and need and therefore, comfortable that when we put it in our plan, it's necessary from a reliability standpoint. And therefore, we're counting on its need and ability to be developed.

Our next question is coming from Nicholas Campanella from Barclays.

Thank you for all the great answer so far. Just congrats on the DPC framework, definitely a milestone Obviously, this seems to be for the manufacturing customer base with TSMC. Can you talk about it just being more replicated for data centers or other manufacturing customers? And then just like what is your line of sight to convert more of this 20 gigawatts of uncommitted into the committed bucket now that you have this DPC out there, can you kind of start replicating this? Is this something that is more of like a long term or something we could see in the context of what's coming in the fourth quarter.

Yes. Thanks, Nick. The DPC was designed to be replicated. It's a standard agreement that we believe balances the right approach of protecting our existing customers from any cost shifts of reliability impacts while also securing the agreement necessary to ensure that we can build out the necessary infrastructure to reliably serve these extra large customers. So we do believe it's the right approach, and we do believe that it can be replicated.

As a reminder, the DPCs generally include credit support, both cash CWIP and deferred revenue prepayments, collateral provisions both liquid and nonliquid termination provisions, direct assignment cost provisions to protect existing customers from cost shifts as well as, of course, minimum energy and demand thresholds. All of that, we believe, is necessary to ensure that we are responsibly serving this new growth, and we believe that it can be replicated. With respect to being able to serve more from the 20 gigawatt queue. We do have other negotiations ongoing with customers that are in the queue. It's way too early to tell, whether those will transpire into a DPC or not, but we are having those discussions.

But importantly, outside of the extra large customers in the queue, we continue to see incredibly robust, what I call, organic non-data center growth in the service territory. And a meaningful part of that increase of our committed Q that now increased to the 5.8 gigawatts is from non-data center customers that are just driving and fueling the economy here in Arizona. So we're trying to take great care in ensuring that we continue to build out the grid and preserve capacity necessary to serve that amount of growth. The residential growth, the small- to medium-sized business growth, the continued manufacturing growth within the service territory.

We've made a commitment to Arizona that we will support in a timely manner, building out the grid to serve that sort of business as usual, societal needs from the nondata center customers, and we want to make sure that we preserve capacity to do that. As we continue to get greater visibility into the incremental generation and transmission projects that we can build, then we will evaluate what the ongoing nondata center demand is, what the capacity timing is of those new incremental projects and have dialogue with the Q customers to identify best fit projects for that new capacity.

Then I was just curious on the long-term sales forecast increased to 8% to 10%. Obviously, that lines up with the resources that you've announced you're building to today. to large C&I. Could you talk to the composition of that? And I know for TSMC specifically, does this include kind of their total expansion? Could there be more beyond that just based on what's been announced? Is there any way to understand that?

Yes. Nick, one of the aspects of our load growth that we're so excited about is the diversity. In fact, if you look at the division of that load growth, it's actually more manufacturing than it is data centers and a wide variety of manufacturing, certainly advanced manufacturing, such as chip manufacturing, but others as well. For example, we recently had Kimberly-Clark announced a large manufacturing center down in Yuma, Arizona, and we've got others throughout the service territory.

We also have incredibly robust growth still coming from residential, which is our largest category of growth. And then, of course, you've got data centers and the advanced manufacturing, including TSMC. The 1.88 gigawatts of committed service represented in our DPC contract with TSMC is included in the IRP and is reflected in the 5.8 gigawatts of committed demand. So that is -- and there -- we'll continue to work with TSMC on any future plans they have and any service they may need beyond that.

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

A lot of my questions have been answered. I just wanted to sort of on the long-term sales growth, which is a significant increase. It sounds like that's a little bit of a tailwind on rate lag. But I'm wondering, does -- do you see it having any significant impact on affordability in terms of the rate impact having that much more volume? Or will that be offset by something?

Yes, Paul, we certainly believe that these new extra large customers that are contributing to a meaningful part of that new load growth will have an affordability benefit to existing customers. When I think about the cost drivers of continuing to deliver reliable service to our customers, there continues to be an increase in fixed costs to be able to provide that service. You think about just the incremental increases in cybersecurity investments, wildfire protection investments, IT systems.

These are all necessary investments just to reliably serve our customers regardless of volume. And so when we add these extra large customers, they are helping reduce what otherwise would have been a higher cost that would be borne by residential customers and they're benefiting those customers. Now it's difficult to quantify because you'd have to take a more detailed perspective view on the usage and volume of each, but we know that a significant amount of that 5.8 gigawatts of committed demand is from these extra large customers and their volume will provide an affordability benefit.

On top of that, though, I just want to demonstrate that we're not counting on that to help ensure we protect affordability for customers. We're taking our own action as well. We're going on about 3 years of relatively flat O&M during an inflationary environment. The commission recently passed on a 1% decrease due to the rightsizing of the DSM plan. And they also passed on about a $14 month decrease in November due to passing on savings from Green Power Partner program back to customers. And then if you think about our rate CAGR just simply over the last 7 years, it's been well below inflation while we've been serving record growth. So I think our customers will see affordability benefit from the higher volume, but we also are doing everything we can to take management action to protect affordability as well.

Our next question is coming from Travis Miller from Morningstar.

Hi, everyone. Thank you. I appreciate all the details to answer most of my questions also, but a couple of quick follow-ups here. On the transmission side, how do you anticipate the cost allocated between the large load customers or that subscription program and then traditional retail FERC rates.

Yes, Travis. So first of all, all of it is rate based within the FERC rate base, but the cost allocation will depend on the driver. It's difficult to detail out because it just simply depends on what the need of that incremental transmission is. Some of this is simply needed to be able to replace aging infrastructure and improve resiliency. Some of it is to increase capacity on the transmission system, just given the broader service territory growth and then some of it is due to adding new generation. The transmission that is specific to a customer premise that's governed by the tariff rate formula and will require customer payments and contribution as well as, of course, any benefit from that transmission to the broader system ends up contributing to the broader rate base.

So it really is a mix of all of those drivers. But bottom line is similar to assigning generation investments to the growth driving it. We're ensuring that these large customers pay their appropriate share of the transmission costs that they're causing as well.

Okay. Got it. Another one, the 50 basis points on the pathway to that 50 basis points, what are you thinking in terms of timing or what's your goal in terms of timing on that lag?

Sure. Travis, it's Andrew. We know that it's going to take some time to catch up effectively from lag, just given we're still working under a historical test that goes back to the middle. We expect rates to be in effect from the rate case through '27. Based on the time line that we've proposed for the formula, we would make our first formula filing in May of 2027. And with those rates going to effect towards the end of 2027. That is the -- effectively the first opportunity for us to begin to meaningfully catch up at that point. We're bringing it forward from a '24 test year to a '26 test year. And then by that second formula filing in May of 2028, that will be the first opportunity to be in a full cadence of formula rate finance on an annual basis. So we would expect that once that '28 filing is processed, that you'd now be in a position to earn significantly closer to your authorized return. And that -- those rates would go into effect the out of '28. You're not going to get a lot of impact of them in '28 given December is when we contemplate rates going into effect under the formula rate. So really 2029 becomes the run rate as we move forward and have the ongoing benefit from the formula rate we expect coming out of this rate case.

Okay. Perfect. Got it. And then one other real quick one, election results, any chance that, that would delay the Jersey decision timing or has it in the past?

Yes. No, we don't anticipate any connection there. At this point, for the rate case, we're first waiting on the [indiscernible] to complete his recommended opinion and order, which we expect here in the coming weeks. And then the commission has been pretty focused on wanting to ensure that this case wraps up this year. So we'd expect that to still occur in December, regardless of election timing of results.

Your next question is coming from Sophie Karp from KeyBanc.

I heard you talk about this aspect of DPC that is prepaid revenue in a way. Could you talk a little bit more about that and maybe, is it possible to begin to quantify how much of the capital need can be covered by that feature?

Yes. Sophie, we can speak generally to it. It's all part of the broader credit support that we seek to ensure that these new large projects and the infrastructure associated with it can be supported by incremental credit support in order to preserve the company's financial health as we serve these large infrastructure investments. And so that credit supports a blend of cash CWIP as well as deferred revenue prepayments. We work that out with each counterparty depending on the profile of the investment spend, the timing of that and the magnitude. So it's a general framework, but it's going to be unique in terms of the sort of timing and cadence of that cash based on the infrastructure requirements, the volume of that infrastructure and what's needed to ensure that the credit profile of the company remains whole, during that infrastructure build.

Got it. Got it. And then on the IRP, I guess, have you guys given any thought to nuclear uprates, some of your peers out east unregulated are doing quite a bit of those. Is that an option for you?

Yes. Sophie, we've looked at any opportunities at Palo Verde, but all of the meaningful upgrades have already been done at Palo Verde. We've already replaced all the same turbine generation, for example. So I think really any opportunity remaining would not be very measurable. Instead, we're really more focused on investing in the plant for the long term, ensuring that we can reliably support its subsequent license renewal and then also investing in digital modifications. But incremental upgrade opportunities, we don't believe exist in any meaningful form at this point.

Our next question is coming from Anthony Crowdell from Mizuho.

Nicely done. Just I had just one question just quickly on -- I think you raised your '26 guidance midpoint by $0.50. The Q3 year-over-year was just up about $0.10. I mean, how much of the raise was like weather-driven versus sales growth? And how much of that carries into '27?

Anthony, the increase in our guidance was fundamentally driven by the higher than forecasted sales growth across customer classes. I mean it's just been substantial, seeing residential sales growth, including new customers coming to service territory plus increased usage and then the faster than forecasted ramp of some of our large C&I. That's been the primary driver. There's some modest weather benefit in there as well. And that has been pretty consistent throughout the year. It hasn't been like one big peak weather event. We've had Q1, Q2, Q3, we've had weather uplift. Now the guidance update does take into effect what we know for October, which was more mild.

But this has been fundamentally a story of of sales growth. And we viewed some of that to offset some O&M risk out in the future. When you talk about the sustainability of it, I think you see that we've continued that 8% to 10% sales growth past 2026 as well. And there, there's a slight change in mix. You noticed that for '26, large C&I is driving a significant percentage of it. I mean, we've got double-digit teens or C&I growth, but residential growth was above average this year. And we think part of that was customer behavior driven. We had a March in Phoenix where we had 9 days above 100 degrees. And that drove earlier than typical cooling by our customers, and it would appear that they just never shut it off. And so assuming that we refer to more normal residential usage trends next year, when we pair that with the ramp that we see for both our manufacturing and large C&I customers, it's that sustained continuous 8% to 10%, but just a slightly different mix than we see this year.

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

Sorry about that. Not sure what happened. I think my headset cut out. Apparently, it's my first conference call. Just two quick ones. Wondering how we can think about scaling this IRP opportunity beyond the existing plan? And then just any incremental committed load coming into a future IRP. Just for the first part, does the 2 to 3 to 1 kind of multiplier that you're seeing of new resources to committed load, does that hold as you continue to add new committed load. And then I think you had mentioned 40% of projects within the window are APS owned. Does that mix shift over time as you have an increased penetration of DPC agreements? Or is it more stable?

Yes, I appreciate the question, Steve. I sort of think about the incremental opportunities in two buckets. One is -- we continue to just see robust nondata center growth within the service territory. That's part of what led to the increase in guidance. Of course, it's at a pretty high level of sales growth that we updated yet that's sustained and defended by all the new projects and growth we see coming in. So certainly, there always is upside potential there from the current level, but it really is quite elevated and we think it's durable for the medium to long term.

But the more obvious opportunity is that we have not included any prospective view on any incremental data centers or new large manufacturers that may be contracted in the future. We would not include those in that load growth forecast until we have certainty that we are committed to serve them, and we have a contract. And so when you think about the 20-plus gigawatt Q, anything coming from that queue over the 15-year horizon that the IRP covers, would be above and beyond the current IRP and you would need incremental generation and transmission to serve each one of those projects.

Getting to your next question regarding the ownership. We've always said that we think moving from our historical 10% to 15% incremental generation ownership to something closer to 50-50 was a more balanced approach, and we believe in our ability to easily compete at that ownership level. So the 40% is getting closer, but we still see there being upside potential for ownership, given our track record of being able to develop these projects on time on budget and ensuring that they've got the reliability characteristics to meet that load.

The last piece, Steve, I'll say is that there is no excess generation in our service territory any new meaningful customer growth that we take on requires new generation to be procured just has to be. And in addition to that, you're going to have to expand the transmission system to connect that new generation to our current network. So any new customer commitment we have or any organic sales growth above and beyond our current guidance level is going to require new generation and transmission to be able to serve it. That's part of why we're already working on development plans beyond the phases of Desert Sun and Soaro that we've announced because we know we're going to need that capacity, not just to be able to serve the out-years in the but also to have a chance at serving incremental growth beyond what we've already committed.

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 2026 Second 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 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; 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 second 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 August 11, 2026.

I will now turn the call over to Ted.

Thank you, Amanda, and thank you all for joining us today. We had a solid second quarter, supported by disciplined execution across the business. Before Andrew walks through the results and our updated outlook, I'd like to share a few updates on recent operational and regulatory developments.

Arizona's economy remains on a strong and sustainable growth trajectory, further cementing the state's standing as a national leader in semiconductor manufacturing and advanced technology. A major highlight this quarter was Taiwan Semiconductor Manufacturing Company's announcement of an additional $100 billion investment in Arizona, bringing its total commitment to $265 billion.

TSMC now plans to develop up to 12 leading-edge fabrication and advanced packaging facilities in North Phoenix, along with the dedicated research and development campus, and the ripple effect goes well beyond TSMC's own facilities. Nearly 20,000 acres of surrounding land are now in various stages of planning and development, giving rise to an entirely new economic corridor in the region.

Halo Vista is a great example. Development is already underway with the first tenant expected to arrive in the first half of next year. Over the next decade, the project is expected to grow to approximately 30 million square feet of mixed-use development and about 9,000 residential units. It's just one illustration of the sustained growth we're seeing across our service territory. To meet that growth, our all of the above resource strategy is built to keep pace while continuing to deliver reliable and affordable service every day to our customers.

Recently, we announced our intent to convert 2 retired coal-fired units at the Cholla power plant to natural gas. Once complete, the project is expected to provide approximately 380 megawatts of reliable, dispatchable generation by 2029. By repurposing existing infrastructure and transmission assets, we're able to reliably serve growing demand while maximizing the affordable value of assets already in place.

Generation investment alone won't be enough to support Arizona's long-term growth. That's why we're also making significant investments in transmission with multiple projects underway and additional opportunities under development. These investments enhance system reliability and resiliency, improve integration of new resources and expand access to regional markets and out-of-state generation. Importantly, they also benefit from constructive and timely recovery through our FERC formula rate while creating opportunities for additional wheeling revenue that helps support affordability for our retail customers.

Turning to our rate case. We concluded 31 days of hearings on July 7 and have now moved into the briefing phase. Initial briefs are due August 27, with reply briefs due September 11. We expect the administrative law judge to issue a recommended opinion and order later this year, which would then advance to the commission for consideration. Based on this procedural schedule, we continue to expect a final commission decision before year-end. Throughout this process, we remain focused on achieving a constructive outcome and consistent framework for recovering ongoing investments in order to support Arizona's growth and our customers' future energy needs.

As we move through the summer season, I'm proud of how our team continues to deliver top-tier reliable service amid extreme heat. Reliability is at the core of our mission, made possible by disciplined planning, thoughtful resource procurement and exceptional execution across the organization. I want to recognize our planners, engineers, operators, field personnel and all our team members for their commitment and dedication to serving our customers safely and reliably through the summer months so far.

On August 2, we reached a new all-time peak demand record of 9,164 megawatts, exceeding last year's record by more than 500 megawatts. This record is a clear signal of the growth underway in our service territory and our performance this summer demonstrates we're ready for it.

We're also continuing to strengthen our customer-centric culture and enhance the experience we provide to our customers. A key focus is delivering a strong billing and payment experience by offering customers flexible options and support tailored to their needs, including budget billing, flexible payment arrangements and programs designed to help customers better manage their overall energy costs. Investments in digital platforms, customer communications and self-serve capabilities remain an important part of our strategy to improve service, increase engagement and ultimately lower costs over time.

And those efforts are producing meaningful results. In the second quarter, APS achieved strong performance in Escalent's Customer Relationship Index, ranking in the first quartile for business customer satisfaction and the second quartile for residential customers, reflecting continued progress in building trust, delivering value and creating a seamless customer experience.

In closing, we remain focused on building the infrastructure needed to support Arizona's growth, maintaining reliable and affordable service for our customers and advancing our key regulatory initiatives. The momentum and exceptional growth we're seeing across our state underscore just how important this work is, and we look forward to continuing to deliver for our customers, communities and shareholders through the remainder of the year.

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 second quarter 2026 financial results. I will walk through the key drivers behind our performance and provide some additional details for the quarter.

We earned $1.43 per share during Q2, a decrease of $0.15 compared to the second quarter of 2025. Higher interest net of AFUDC, higher depreciation and amortization due to higher plant balances and lower transmission revenue were the primary negative drivers for the quarter-over-quarter comparison. These drivers were partially offset by beneficial weather and higher sales growth and usage.

Weather was a benefit during the quarter. The early start to triple-digit temperatures in the valley and higher average temperatures each month of the quarter compared to the same period last year contributed to increased cooling demand.

Customer and sales growth continues to be strong, contributing approximately $0.11 of quarter-over-quarter earnings benefit. We achieved 2.1% customer growth and weather-normalized sales growth of 9.6% compared with the second quarter of last year. While we are not updating our 2026 sales growth guidance at this time, year-to-date weather-normalized sales growth has tracked more closely with our longer-term outlook.

Residential sales growth came in strong at 5.6%, and commercial and industrial sales also continued to perform exceptionally well, increasing 12.7% during the quarter, driven by the ongoing expansion of a diverse mix of data center and advanced manufacturing customers.

O&M expense declined modestly compared with the second quarter of last year. We remain committed to our long-term objective of reducing O&M expense on a per megawatt hour basis over time. Across the organization, we continue to identify opportunities to improve efficiency, reduce risk and manage costs responsibly while maintaining the high level of service and reliability our customers expect.

Interest expense increased year-over-year, reflecting higher debt balances and a higher interest rate environment. Depreciation and amortization expense also increased as investments such as Agave, Ironwood and Sundance were placed into service. These resources are providing critical capacity needed to support customer growth and maintain system reliability and are key components of our pending rate case. Transmission revenues were lower in the quarter due primarily to a final true-up adjustment related to 2025.

We continue to execute well on our capital investment program and financing strategy while actively managing upcoming debt maturities. Although we are not updating our capital expenditure guidance today, it is important to note that our current outlook does not include the recently announced Cholla conversion project. We expect that project could add up to approximately $440 million of incremental capital investment, mostly in 2027 and 2028.

Turning to financing. We continue to be opportunistic with the use of our ATM and have utilized all remaining capacity from our existing $900 million ATM equity program. Earlier this morning, we announced the filing of a new $500 million ATM program that will provide ongoing funding flexibility consistent with our current equity financing guidance.

Additionally, in the second quarter, we successfully issued $500 million of senior unsecured notes at Pinnacle West to refinance our maturing notes and support our broader funding strategy. We continue to be deliberate in our financing plan to support a balanced capital structure and strong balance sheet and seek advantageous financing opportunities.

Based on our strong execution through the first half of the year, we are reiterating all other aspects of our guidance and currently expect to finish the year at the top end of our earnings guidance range of $4.55 to $4.75 per share. As always, we remain mindful of the potential impacts of weather and sales variability during the remaining summer months and we'll continue to monitor both closely.

Overall, we remain focused on executing our strategy, investing to support Arizona's continued growth, maintaining financial discipline and delivering long-term value for our customers and shareholders.

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

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

It's actually Alex on for Shar. Just wanted to touch on the retail sales growth you're seeing, you've exceeded expectations again this quarter. So with the third quarter being your biggest quarter, do you see this level of growth continuing at this pace for the remainder of the year? And just how are you thinking about the sales guidance longer term? Is this something you could consider revisiting just given the magnitude of growth you are already seeing across your footprint?

Sure, Alex. It's Andrew. Thanks for the question. It was a robust quarter from a sales growth perspective. And I think the key hallmark of it was the diversity of that growth across residential and across our C&I. And even within C&I, that diversification across a number of data centers ramping up as well as the continued build-out of the semiconductor ecosystem.

And as I mentioned in the prepared remarks, this was a lot closer to our long-term sales growth guidance range, which we provided through 2030, which is 5% to 7% relative to the 4% to 6% that we're showing for this year. There certainly is upside potential to the sales growth range. I think as importantly, there is a sustained runway of that very robust level of sales growth.

If you think about the residential side, while some of what drove this quarter was customer behavior, some of it was a secular trend towards higher usage per customer. And I think that derives in part from a saturation of energy efficiency and distributed generation on our system. It's also supported by the continued customer growth that we're seeing. We were at 2.1% for the quarter, again, above the midpoint of our customer growth guidance range. So certainly continuing to see residential outperform relative to our expectations and that sustained inflow of people as opportunities for jobs in Arizona continue to grow is something that we would expect to continue to see.

And on the C&I side, 12.7% for the quarter. If you think about it, our long-term range is 4% to 6% for C&I, 5% to 7% total, 4% to 6% to the large C&I. Given C&I is half of our sales, that 12.7% corresponds to something above 6%, if you kind of divide it by 2, which suggests that we're at or above the top end of our long-term C&I growth rate. And the fact that, that 4,500 megawatts of large C&I that's ramping up, that ramp continues even beyond that guidance period, right? It takes beyond 2030 to get to the full ramp-up of that 4,500 megawatts would suggest that the run rate continues and that certainly is a pace -- as we look at the ramp, we'll continue to monitor the pace and see if there is upside to the guidance that we're providing.

Got it. Makes sense. And then just maybe just touching on the upcoming IRP filing. Maybe just a little -- if you could provide a little insight into sort of how you're thinking about the filing and how that is shaping up around the 4.5 gigawatts of committed load. With the TSMC recent announcement, is that already assumed in the 20 gigawatts of uncommitted load? Or is that incremental? And just are you -- do you remain on track to file by the end of October?

Yes. Thanks, Alex. We're on track to file the IRP by the end of October. And our approach to that remains the same, which is we will include in the load forecast all committed customer growth, that will include the full intended build-out of TSMC because we're continuing to commit to support their full investment plan.

So we continue to work with TSMC on what their announcement means in terms of timing of that capacity addition as well as what the ramp looks like. And as we continue to get more confirmation and clarity on that, that will make its way into the IRP and our intention is to have our latest thinking on that, combined with all our other committed customer growth included in the IRP. As we contract for specific projects from the uncommitted queue, then that would be above and beyond what we assume in the IRP, and you would then add corresponding resources with that to be commensurate with those load additions.

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

I just wanted to follow up on that last point and try to understand, again, sort of the TSMC update, where I know we'll see more details in the IRP, but what exactly it means for those additional conversations in the uncommitted queue in your Desert Sun plant opportunity overall? Could you speak a little bit more to kind of those knock-on effects out of the TSMC announcement and how you think that impacts the uncommitted side of the opportunity over the next 12 months?

Yes, sure, Richard. So just stepping back for a moment, TSMC is now committed to 12 facilities that includes both their fabs as well as advanced packaging. And then in addition to that, of course, is the R&D part. There's also a continued acceleration of schedule for them as we work to be able to support their build-out.

And I think we've mentioned before their prior commitment prior to this incremental $100 billion investment was over 1 gigawatt of demand. We're working with them now on what this incremental investment means in terms of additional capacity, timing of ramp for all facilities. We're committed to be able to meet their needs and be able to serve them, but we're refining with them now on timing expectations, facilities needed to be able to support it and what the full build-out means in terms of electric demand.

So details on total capacity ramp schedule, et cetera, are being finalized, and we'll provide that update as we finalize it with TSMC, but our intent is to have it included in the IRP by the end of October when we file it, given that it is part of our committed customer group.

With respect to the uncommitted queue, we continue to be in negotiations on potential projects that may come from that. It's too early to be able to offer any more details and our intent would be as we're able to finalize a contract or contracts from that uncommitted queue that when those are filed, we'd be prepared to detail what that means in terms of incremental capacity and demand coming from the uncommitted queue.

Understood. And then I guess, in consideration of the Cholla conversion announcement and some of this other activity, how are you thinking about gas supply overall? And what are you focused on right now in terms of the Desert Southwest projects, siting -- potentially any siting challenges and what have you as that opens up incremental gas capacity in the region?

We certainly recognize that as we look in the next decade and beyond, new gas transport supply is going to be needed to continue to reliably support the growth in the region, which is why we contracted with that Desert Southwest pipeline now in anticipation of it getting in service at the end of this decade to prepare for next decade. So we feel comfortable in our ability to reliably serve the current gas supply through the end of this decade. But as we look into next decade, that pipeline is going to be critical to be able to continue to expand at the rate that we desire.

The pipeline is in early stages of development, although it continues to move along as expected. We believe it's on schedule. They continue to work with stakeholders, community members, and work through the filing process. I know on July 9, FERC opened their scoping process for review. And I think the developer is doing a good job responding to feedback and ensuring that they continue to focus on planning the route where it meets the least impact as possible.

We have to keep in mind, it does help that it's largely following the path of the existing pipeline that's there. This is not, I'll call it, a greenfield route where there's no pipeline that exists. The existing pipe connecting Permian Basin to Southern Arizona follows largely the same route. This will be planned in. This is just simply going alongside it for most of the way. So we feel good about that. But at this point, things seem to be moving on track, and we'll look forward to taking service from that pipe when it gets in service, and that will be important for our expansion plans in the next decade.

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

I just wanted to follow up from the earlier sales growth question. I mean, how are you thinking about that transposing itself into the IRP? And then what drove the IRP move from August to the end of October? And did the scope change at all? I mean just given all the different moving parts on load and large loads here? Just can you elaborate a little bit? Should we expect the annual ramp in the resource portfolios in that filing specifically? Again, what should we be looking for in that in as much as this could be something of a clue into a more formalized update next year?

Yes, Julien, I can speak to the IRP aspect and then invite Andrew to speak to any other aspects regarding long-term load growth trends. But as we continue to finalize the analysis of the IRP and work with stakeholders, there's a lot of variables that we thought were important to try to capture accurately within this IRP. Obviously, the IRP is a snapshot in time and it seems like immediately when you file that, things continue to update.

And given the volume of activity that continues to progress, we thought it was more prudent to be able to capture some of the things that were being updated this year and finalize that in the IRP. One of those being the likelihood of being able to convert Cholla, and we felt it was prudent to be able to capture that in the IRP. Another is knowing that we've been working with TSMC on their expansion plans and the desire to be able to capture the latest capacity additions and ramp schedule for them in the IRP. And then again, continuing to monitor the robust growth trends that we're seeing in the service territory and making sure that the load forecast we include in the IRP really does reflect these latest growth trends.

And for all those reasons, plus ensuring we are able to take time and engage with stakeholders in a constructive manner before the filing, we felt it was better to wait until October so that we could file the most up-to-date analysis in the IRP as possible. And I think that's going to pay off because back to one of your questions, what you should expect from this IRP is really our latest thinking on the committed load growth and the ramp of that load growth.

An example of that is notwithstanding the robust year-over-year weather-normalized sales growth. We've seen the TSMC fab contribution is relatively flat year-over-year. Now we expect the majority of their ramp to be coming here soon and progressing in a strong manner each year from this point out. But we want to be able to detail out in the IRP, the details of what that growth timing is coming from chip manufacturing versus data centers versus the traditional residential and C&I growth. And I think the 4.5-plus gigawatts of our committed queue, this will be the first line of sight that we're able to offer in terms of the timing of that ramp and the resources needed to be able to serve it.

So that will probably be the best insight that will come from the IRP. Outside of that, it'll show the big buckets of resources needed to be able to serve it and we'll fill in those buckets as we get in the action window of each time period.

And just to clarify, this meaningfully ahead of plan sales growth thus far includes a flat TSMC thus far year-to-date, if I'm hearing you right? And then separately, in addition to that, just to clarify this. Also, how do you think about the 2025 all-source RFP? And when do you expect those decisions to land in as much as that seems to be coming in and around the time line for this IRP as well? I know you've almost got these things back to back. As we see across the industry, these kind of pancaked RFPs and IRPs, but does that dictate -- when does that come out here on the all-source here from '25?

Yes. On your first point, you're correct. The production from TSMC has been relatively flat year-over-year. The majority of their demand increases is coming very soon and will progress more rapidly as we get into next year and going forward.

But I think that's noteworthy that the weather normalized growth that you saw really reflects the diversity in our service territory with robust residential, other manufacturing and small- to medium-sized business. And then, of course, the ramp of some of the existing data centers that are just now starting to occupy. But the bulk, by far, of the TSMC contribution, which is significant is yet to benefit the sales growth actuals.

With respect to the RFP, we continue to finalize our evaluation of results, negotiate with counterparties on the resources and expect to be able to have some of those resources contracted by the end of the year. So as we finalize some of those contracts, we'll be in a better position to announce what comes from that RFP. But our aim is to get as far along in that process as possible at the end of this year. And then, of course, as normal, we'll roll right into another RFP when that's done.

Your next question is coming from Travis Miller from Morningstar.

Just going on the rate case. Wondering if you could characterize any thoughts, surprises, non-surprises in the conversations so far in the filings so far?

Yes. I'd say, generally speaking, we're very pleased with how the hearing wrapped up. It was a long hearing, 31 days. But that provided an incredibly robust opportunity for a very strong evidence on the record. And that's probably the best thing that came from the hearing. We have very strong evidence on the record for supporting our positions, supporting the need to be able to address regulatory lag and come up with a sustainable cost recovery framework going forward.

And I also think that it's noteworthy how constructive commission staff was on many positions as well as the time that the administrative law judge took to understand the issues, understand the positions and make sure that the facts and evidence was able to be put on the record. That will help us given how substantive this case is with respect to not just the traditional recovery of revenue requirement, but more importantly, creating a new process for sustainable cost recovery going forward.

That said, we're in the briefing stage. So briefs will be filed August 27 and again on September 11. And then we're in a bit of a holding pattern until the recommended order comes out here in Q4. We continue to be very confident in the ability for this case to be resolved this year. A final open meeting likely towards the end of the year, but we're on track with that schedule as we've been contemplating all year long.

Okay. Great. And then on transmission, what are the next steps? What are the signals you're looking for to start putting some of those identifying projects for the upside that you've been talking about on the transmission side?

Sure, Travis, it's Andrew. We've really begun to lean into the transmission opportunity, both to serve customer growth and advance the resiliency of our system as well as reach more out-of-footprint resources. And you could see it in the kind of shift in our CapEx plan from $300 million to $400 million or so of core transmission spending to the types of figures that you see in our 3-year guidance window towards the end of the period where those numbers are up pretty substantially. And if you look back to the beginning of this decade, we were at -- in the $200 million a year range on CapEx for transmission.

So we are beginning to execute beyond those core transmission projects on our strategic transmission opportunities. We file a biennial plan with the commission, which includes a number of the projects that we're doing that, again, extend to access resources further afield, build the resiliency of the system and keep up with growth.

There are some pretty large projects in there, and we're just beginning to unlock the capital associated with those. There's a substantial project that creates resiliency on the line that connects the Four Corners region into Cholla, and ultimately, down into the load pocket here. And that's a multi potential $1 billion project, several hundred mile line.

And so for projects like that, we've got a great construct with our FERC formula rate and our transmission adjuster. We collect wheeling revenue, which helps to create affordability for our existing customers. And there, it's a matter of working those projects in the development stage to ensure that we can kind of sectionalize and energize the segment so that we reduce the regulatory lag there. But we've really continued to focus on our FERC jurisdictional assets given the formula rate that we have in place here today and the massive investment needs that our transmission system has.

And you see it in the results even year-over-year, we continue to grow transmission revenue. Any distortion you see in Q2 is really just a result of timing of the true-up. But year-over-year, those increases continue as we file this formula every year in June, our transmission adjuster with the commission. And so we now have new transmission rates in effect as of June as well.

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

Just a few questions left. One is there was a primary election and some people sort of were surprised by the outcome there. And I was just wondering if you had any -- what you could share, if anything, on sort of your takeaways or insights on the election and what's coming up here?

Yes, sure. I think it's important to note that we have the ability to constructively work with any commissioner. I think it was consistent with prior election results that we saw Commissioner Thompson be the top vote-getter. So that wasn't a surprise. But when you got below him, the other 2 candidates in the Republican primary, they were pretty close to one another. So while it wasn't a wide margin, it certainly did result in Chairman Myers being slightly lower than Dr. Heap, who was the higher vote-getter between the two.

I think stepping back from that, though, the key that I would keep in mind and focus on is that we design our strategy around serving customers reliably at the lowest cost possible, and doing that while keeping up with unprecedented growth. And we strongly believe that's the right strategy regardless of who sits on the commission.

Importantly, we execute that strategy very well. And we found over the years with commissioners that when we deliver top-tier reliability, top-tier customer satisfaction, keep residential rates below the national average like they are right now while keeping up with growth that, that should resonate with any commissioner that's on the bench.

Also importantly, and I mentioned this before when we were talking about the rate case hearing that our commission staff is a very important party to constructive regulatory environment, and they aren't elected. They're a critical part of the process now and going forward and are relied upon heavily by any commissioner who sits in those seats with their expert independent analysis. And I'm very confident in our constructive working relationship we have with staff and their ability to listen to the key issues and do what's right for Arizonans.

So to sum it up, we know all the candidates in this race. We're confident in our ability to earn constructive outcomes on the merits of how we do business because the merits are strong. And at the end of the day, that's what's going to carry us forward beyond any individual election.

Absolutely. Awesome. So second question is the Colorado River and just sort of national reports, looks a little dire. So I know that -- I think that Palo Verde is insulated operationally from using the Colorado River and what have you.

But I guess my question is that given the drought conditions, is there any operational issue short term regarding the utility? Or any longer-term issues that this drought and this sharp reduction that the federal government is proposing, I think, with respect to Arizona's share and what have you. Is there any impact longer term, I guess, in terms of -- or near term in terms of what seems like kind of dramatic reductions in water?

Yes, Paul, we don't anticipate any operational impact at all as a result of the negotiations on Colorado River allocation. Importantly, as you said, Palo Verde operates on a 100% recycled wastewater, which we're very proud of. It's the only nuclear plant in the world not on a body of water, and we're able to maintain that sustainable operation through the wastewater treatment that we use.

Also, I think it's noteworthy that we've been able to keep up with record growth while cutting our overall water usage for operations in half over the last 10 years. So we've got a pretty good sustainable story in terms of contributing to water savings as a company while keeping up with growth.

With respect to the long term, certainly, there needs to be a reallocation framework designed among the lower basin states and the upper basin states to match actual water allocation with the current levels of the Colorado River. But we view that as a long-term framework that may result in changing economics for water, but there's a variety of long-term solutions that could fill in the gap in the shortfall of the Colorado River. It's just a matter of developing those long-term solutions and who pays for it.

So it's more of an economic issue than it is an impact of no water supply. And Arizona has a variety of water resource supply. Colorado River being just one of them. So we're certainly paying attention to that, want to make sure that the states are able to continue to collaborate and find a durable solution that meets everyone's expectations.

Arizona put forward a reasonable solution that helps reallocate water usage in 2027, 2028 that should meet the intent of the new operating guidelines. And then I know there's longer-term solutions being evaluated from there. So it's a situation to continue to monitor, but we believe it's more about long-term economics than it is water supply.

[Operator Instructions] Your next question is coming from Steve D'Ambrisi from RBC Capital.

Just a quick one. Most of my questions have been asked and answered, but just a quick follow-up on the TSMC announcement. Obviously, the ramp rate is a critical factor. But just given the commentary that TSMC's previously announced investment represented more than a gigawatt of demand. Can we use that prior $165 billion for greater than 1 gigawatt as like a rule of thumb for potential power demand from the incremental $100 billion? And just -- or if there's anything you could highlight that would potentially change the intensity per dollar of capital invested in this announcement versus prior announcements?

Yes, Steve, I think directionally, that's probably a fair general assumption, but we're still working through the details of what each fab will require as well as the ramp schedule of that. And certainly, the fabs do differ with respect to the type of chips they manufacture and the energy intensity. The more advanced the chips tends to be, the more energy intensive. And so I think there could be variation to that rule, and we'll be prepared to detail more about that when we finalize things with TSMC and hopefully able to put those details in the IRP as well. But for the purpose of just a general directional estimate, I think the way you outlined it may make sense.

Okay. And then just, again, like on the sales for the year, I mean running -- the C&I running like 13% or 14% year-to-date and that being half of your total sales. I mean, just simplistically, right, that seems like that's almost all of your -- above the top end of your long-term sales growth just at C&I. And so can you just -- is there timing or certain things ramping earlier? Or are you just really that far above because it seems like resi is going pretty well as well?

Yes. Steve, it's a combination of things, right? The ramp schedules from data center customers have always been as AI remains kind of a nascent field, our forecasting has to kind of keep up with what our customers are saying and our lived experience over the last 5 years of having data center customers. And we certainly see these levels as pretty robust.

There are some elements of it that we expect would be a faster ramp. But part of it is that our customers are trying to figure out the use case going on inside their box. And so we continue to refine our own forecast as we go along and find very favorable what we're seeing from these customers as they continue to move forward. We've got half a dozen different campuses going at various stages of ramp.

As Ted mentioned, not a lot of change year-over-year from TSMC, but that broader ecosystem of new manufacturers coming in and folks outside the data center industry beginning to lay down facilities in Phoenix has continued to contribute to the length of the runway. But the residential customer story was a big piece of it, and that increased usage per customer, the continued customer growth. Even though more of it now from residential is coming in the off-peak hours, which comes at a lower price, it's still contributing a positive margin overall to the story.

So it's been the diversity of the growth. It's been continuing to refine the data center ramp rates as we understand what one data center is doing within the facility versus another. And just the ongoing dialogue with our customers will help us to continue to refine whether there is upside to those numbers to that long-term rate over the long term. But certainly, the runway of it is pretty robust.

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 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.