Pinnacle West Capital Corp (NYSE: PNW) Q1 2020 Earnings Call Transcript

Pinnacle West Capital Corp (PNW) Q1 2020 earnings call dated May 08, 2020

Corporate Participants:

Stefanie Layton — Investor Relations

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Barbara D. Lockwood — Senior Vice President, Public Policy

Analysts:

Michael Weinstein — Credit Suisse — Analyst

Shar Pourreza — Guggenheim — Analyst

Julien Dumoulin-Smith — Bank of America — Analyst

Paul Patterson — Glenrock Associates — Analyst

Charles Fishman — Morningstar — Analyst

Presentation:

Operator

Greetings, and welcome to the Pinnacle West Capital Corporation 2020 First Quarter Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Stefanie Layton, Director of Investor Relations. Thank you. You may begin.

Stefanie Layton — Investor Relations

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our first quarter 2020 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Jeff Guldner; and our CFO, Ted Geisler. Jim Hatfield, Chief Administrative Officer; Daniel Froetscher, APS’s President and COO; and Barbara Lockwood, Senior Vice President, Public Policy, are also here with us. First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information. Note that the slides contain reconciliations of certain non-GAAP financial information. Today’s comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations.

Our first quarter 2020 Form 10-Q was filed this morning. Please refer to that document for forward-looking statement cautionary language as well as risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through May 15.

I will now turn the call over to Jeff.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Thank you, Stefanie, and thank you all for joining us today. Before I get started, let me say, I hope everyone is doing well. This is certainly an unexpected way to start our year, but the last several weeks have only reaffirmed to me that our company and our people are resilient, agile and prepared to handle whatever comes our way. We recognize the realities of COVID-19 and the challenges that people are facing, and we remain committed, first and foremost, to safely delivering reliable power to Arizona, building shareholder value by ensuring customer value. In March, we made the decision to deploy as much of our workforce as possible to work from home and to change our work practices for those essential workers needed to keep the lights on for our customers and to prepare for the Arizona summer. The transition from normal course of business to social distancing and revised safety procedures was seamless from our reliability standpoint and for our customers. While our processes have changed, our priorities have not. From a financial perspective, our strengths lie on a strong balance sheet, good credit rating and sufficient liquidity. We can and will weather the storm. We recognize that in order to serve both our customers and our shareholders, it is important to maintain our financial health. Financial stability is a key driver in our decision-making, and it’s essential to support our long-term goals.

Operationally, the rigor of our preparation and the strength of our team position us well to navigate the challenges presented by COVID-19. Our pandemic plan was established, tested, refined and rehearsed before any of the COVID-19 impact began to hit us. As I mentioned earlier, we’ve transitioned as many employees as possible to working from home. I’ll note, that includes over 140 call center associates who we moved very quickly to seamlessly continue to provide customer service from their homes, and that includes the oversight folks as well, an incredible job by the IT group there, as well as our field employees who continue to prepare for our peak summer season. All necessary summer preparedness work, including vegetation management and planned outages at our power plants, have continued. In an effort to minimize the duration of those outages and the number of people required to be physically present, we prioritized essential work and deferred some discretionary maintenance until later in the year. I’m pleased to share that we completed the Palo Verde Unit two refueling outage earlier this week, ensuring that this key resource will be available to serve customers this summer. The refueling outage had a reduced scope to allow the completion of the essential work, with 40% less contractors than normal. In addition, we’ve deferred nonessential transmission and distribution work that would require more than a two hour planned outage to our residential customers during this time.

We are grateful for the support we’ve received from so many who’ve helped our employees stay safe, including Armored Outdoor Gear, one of our commercial customers in Flagstaff. I’d like to thank the owner, Tom Monroe, who made the decision to quickly pivot manufacturing operations to produce masks. We were able to quickly secure 3,000 masks for APS, including an expedited quantity of 300 for Palo Verde employees at a time when masks were harder to come by. It was really a win-win situation. We were able to keep our employees safe and, at the same time, support our local economy. Based on what we’ve seen so far in energy usage and customer load growth, and Ted will talk more about this, but we know that circumstances will continue to evolve. Our resource plans for additional generation remain in place. We expect to announce the results of outstanding wind and solar request for proposal in the near future. Just as in our pre COVID-19 world, as we learn more about our customer needs and how we are all recovering from the impact of our current situation, we will evaluate our assumptions for future generation resource needs and make any necessary adjustments.

To date, we have not experienced any material supply chain disruptions. Our team is actively monitoring for potential disruptions and has conducted a contract review to confirm the adequacy of our summer resource needs. In addition, they’ve solicited supplier input to identify market risks associated with 800-plus high-volume suppliers, including all of our critical suppliers. As with many other aspects of our operations, mitigation plans are in place to minimize any potential supply chain disruptions. On the regulatory front, the Arizona Corporation Commission has been busy addressing COVID-19 concerns and adjusting their work to accommodate social distancing guidelines. Not surprisingly, as a result, a number of their work streams have been delayed. As you may recall, the original rate case schedule that staff had was going to file testimony on May 20. At the request of the commission staff, that date has been extended to August 3, and the hearing is now scheduled to begin on September 30. On May five and 6, the commission held open meetings discussing our rate comparison tool, how to refund or collect the demand-side management funds and treatment for cost associated with COVID-19. As a result of the discussion, the commission voted to return $36 million of overcollected demand-side management funds to customers through a onetime bill credit in June. No votes were taken regarding the other matters. However, I’ll note that Chairman Burns did indicate that he plans to bring the topic of an accounting order for COVID-related cost before the commission again at a later date.

Our clean energy commitment received some positive validation in March after the commission held a workshop to discuss clean energy rules. Following that workshop, Chairman Burns, Commissioner Kennedy and Commissioner Marquez Peterson all publicly expressed support for a 100% clean by 2050 standard. And obviously, that’s aligned with our clean energy commitment, and I think that’s a good sign for the future of clean energy in Arizona. A good future for clean energy in Arizona means robust economic development in our state and an opportunity for financial growth for Pinnacle West. We’ve never experienced anything like COVID-19, but we’ve been through many challenging times in our 136 years of service to Arizona. We don’t know today what the ultimate disruptions or impacts of this pandemic will be, but I have no doubt we’ll navigate both through the near term and continue to deliver on our long-term goals.

And with that, I’ll turn it over to Ted.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Thank you, Jeff, and thank you again, everyone, for joining us today. I want to add to Jeff’s appreciation and recognition of our team’s accomplishments under these unusual circumstances. I have always been proud of the APS workforce, but seeing our teams lead through this pandemic with such tenacity and strength has truly been inspiring. I would also like to share our appreciation for those in the medical profession and other essential service providers, making very real sacrifices to help our communities navigate the COVID-19 impacts. Before I discuss some of the unique aspects of our service territory and strengths that will serve us well through this current challenge, I want to briefly touch on our first quarter results. 2020 started out strong, earning $0.27 per share compared to $0.16 per share in the first quarter of 2019. Lower adjusted O&M and higher pension in OPEB nonservice costs contributed to the increase in earnings. We also experienced 2.2% customer growth and 0.8% weather-normalized sales growth in the first quarter compared to the same period in 2019. Excluding the last two weeks of March, weather-normalized sales for the quarter were within our original 2020 annual guidance range of 1% to 2%.

While we started the year strong, we have also begun to experience impacts, including a reduction in load from the COVID-19 social distancing and stay-at-home guidelines. From March 13, the date when many Arizona schools and businesses closed, through April 30, we have seen an approximate 14% reduction in weather-normalized commercial and industrial load compared to the same period last year, partially offset by an approximate 7% increase in weather-normalized residential load. The reduction in C&I load equates to an earnings decrease of around $0.14 per share, while the increase in residential usage contributes about $0.04 per share for a net reduction of approximately $0.10 compared to our original expectations for this period. We cannot predict the ultimate duration or impacts from the social distancing and stay-at-home guidelines resulting from COVID-19 pandemic. However, we are committed to sharing with you today the information we have, scenario sensitivities and mitigating factors. On April 30, Governor Ducey extended the stay home, stay healthy, stay connected order through May 15, with some reopenings prior to that date. On May 4, retail establishments were committed to reopen, while following certain restrictions. Effective today, hair salons may open.

And on Monday, restaurants are permitted to reopen. While the process and timing for a full reopening is still uncertain, this is a positive step to restarting the Arizona economy. Despite the fact that Arizona has already started to reopen, if we assume the trend we experienced from March 13 through April 30 continues through the end of the second quarter, we would anticipate a net weather-normalized sales decrease of approximately 7% compared to the second quarter 2019 and an earnings per share decrease of approximately $0.20 compared to our original second quarter 2020 expectations. The impacts from COVID-19 are not unique to us, but there are a few differentiating factors I’d like to highlight, most notably weather, cost management and sales growth. As most of you know, in the hot Southwest desert, our demand is significantly influenced by weather and air conditioning load. For this reason, our earnings are heavily weighted towards the third quarter. Historically, approximately 56% of our annual earnings comes from Q3, 28% from Q2 and only 6% from the first quarter. While we have already experienced a reduction in load from COVID-19, this reduction has occurred in our milder, shoulder season months.

As we saw last year, with the weather impact of negative $0.25 per share, weather alone can play a significant factor in our annual earnings. This year, Phoenix reached triple-digit temperatures already in April, setting record highs, and we’ve maintained above 100 degrees every day this week with excessive heat warnings already in effect. Cost management is another key lever for us to mitigate the potential decrease in sales. We will continue our focus on cost management using Lean Sigma that we introduced throughout the organization in 2019. Our commitment to becoming a lean operating company through continuously eliminating unnecessary costs out of the business contributed to our success in meeting earnings expectations in 2019. The current COVID environment is giving our team another reason to rally in 2020, as we work hard to realize additional efficiencies this year. We’ve already experienced a number of successes in this space, in addition to natural O&M reductions from adjustments in our processes and scope of work related to COVID. For example, by the end of this year, we’ll have deployed 28 bots across the enterprise as part of our digital transformation program. In our fossil fleet, as an example, we’re now using robotic process automation to complete all work packages. The use of technology to automate this process will save employees about 1,800 hours per year. Just five of the automations planned for the first part of this year are expected to produce an NPV benefit of $1.8 million over the next five years.

These examples and our focus on reducing costs will serve us well, not just through the interim challenges, but also in achieving our long-term goals of providing customers with affordable and reliable service. While total sales will likely continue to lag during the duration of the stay-at-home period, we remain confident in the long-term growth of our service territory. According to the Arizona Technology Council’s quarterly impact report, Arizona tech sector is growing at a rate 40% faster than the U.S. overall. Metro Phoenix area showed strong job growth through February of 2020, which has consistently been above the national average. Through February, employment in Metro Phoenix increased 3.2% compared to 1.5% for the entire U.S. Construction employment in Metro Phoenix increased by 5.4%, and manufacturing employment increased by 2.1%. This data reflects pre COVID-19 conditions, and we expect to see the 2.2% customer growth rate we experienced in the first quarter to slow in the near term. However, the qualities and fundamentals that I mentioned that have consistently attracted residents to Arizona, including a low cost of living, attractive weather and robust employment opportunities, remain intact and likely to continue supporting long-term growth after the economy normalizes.

In regard to our future capital investments, we remain committed to the $4.7 billion capex forecast for the 2020 through 2022 time frame, largely driven by clean energy investments. Information regarding COVID-19 and the potential impact is fluid and changing rapidly. We will continue to assess our capex plans, load forecast, sales expectations, O&M and other financial data points as more information becomes available. We recognize there are potential scenarios where COVID-19 impacts could necessitate changes in the timing or scope of our investment plans. However, as of today, we do not believe the limited load reductions experienced thus far require any alterations to our long-term plans. Similarly, we continue to believe 2020 Pinnacle West consolidated earnings of $4.75 to $4.95 per share remain achievable, assuming the impacts for COVID-19 dissipate by the end of the second quarter, and customer and sales growth resumes once the economy normalizes. Additional O&M savings are also being assessed by our management team to mitigate the impact from lost revenue. A complete list of key factors and assumptions underlying our 2020 guidance can be found on slides three and four.

Another advantage for Pinnacle West is our financial health. We have a strong balance sheet, A- credit rating, well-funded pensions, sufficient liquidity and no equity needs in 2020. We currently have $1.2 billion in revolver capacity with an option to increase by another $500 million. As of May 1, we have drawn down $310 million on our revolvers. In addition, all remaining Pinnacle West long-term debt maturing in 2020 will occur in November and December, and APS’s $200 million term loan matures in August. With all the long-term maturities falling late in the year, we have ample flexibility to assess the market conditions and evaluate our options. Further, at year-end 2019, our pension was 97% funded. With our liability driven investment strategy, our pension was 96.4% funded as of March 31, 2020, highlighting our resilience to the market volatility. Last week, we proudly celebrated 136 years of service to Arizona customers and communities, and we’ve been through plenty of challenges before. As Jeff mentioned, we were well prepared for this current challenge. We started from a position of financial strength. The seasonality of our jurisdiction and the exceptional skills and sophistication of our team give us confidence that we will effectively navigate the near term and continue to work towards our long-term commitments.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.

Michael Weinstein — Credit Suisse — Analyst

Hi, good afternoon guys.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Hey, Mike.

Michael Weinstein — Credit Suisse — Analyst

So if I understood it correctly, it looks like if the trends persist in April, it’s about that the April trends in COVID load reduction are about $0.05 a month, something along those lines going forward. That’s where your extra $0.10 of impact comes in and it extends out into the second quarter.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Well, Michael, this is Ted. It’s not that linear. Wish it was that easy. You got to remember, we got seasonality. We’ve got seasonal rates that start here in May. So what we try to do is just say that if you look at the entire effects of COVID since mid-March through the end of April, which is what we think the worst of it, because that’s during the forced stay-at-home measure. And if you just say that, that forced stay-at-home measure effect were to continue all the way through the end of Q2, then you’d likely have a full $0.20 EPS impact, and that’s the way we’ve been thinking about it. Now keep in mind, we’re starting to reopen, as I mentioned. Retail started earlier this week. Salons started today. In fact, I can’t wait to go get a haircut myself after this call. And on Monday, we’ve got restaurants opening. So certainly, there’s some resumption, and we’d expect to see some positivity from a sales standpoint as a result of this. But what we’re saying, just from a scenario standpoint, is if you just saw what we’ve seen over the last four weeks continue hard through the end of Q2, then that’s the impact.

Michael Weinstein — Credit Suisse — Analyst

Okay. Do you think the offset from higher residential though would increase in the summer months as with hotter weather and more air conditioning load? Do you think that actually the number of — offset from residential increases?

Thed N. Geisler — Senior Vice President and Chief Financial Officer

It’s difficult to predict. Good question. And certainly, on our minds as well, I’d say it’s possible. The other aspect that we’re thinking about is I know our workforce is contemplating the success we’ve had at a remote work environment. We would expect that we’ll have many employees embrace more flexible work remote work a go-forward basis because we’re seeing the benefits of that. And so we think other companies may do the same. Therefore, you may have a long-term persistent change in usage for residential customers as a result of more flexible work environment. So a lot of uncertainties, but I think your point is well taken and certainly something that we’re paying attention to as well.

Michael Weinstein — Credit Suisse — Analyst

Sorry if you covered this before, but are regulators considering some kind of — some of kind interim relief during the rate case process for COVID?

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Michael, you’re breaking up on that question. I’m sorry. Could you say it again?

Michael Weinstein — Credit Suisse — Analyst

Sorry, I apologize. Are regulators sorry, if you covered this a little bit.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

I think we just lost you, Michael.

Michael Weinstein — Credit Suisse — Analyst

Sorry about that.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

There you go, there you go. You’re back. Not sure.

Michael Weinstein — Credit Suisse — Analyst

Okay. Are regulators considering interim relief for COVID?

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Yes. The so the discussion there was a decision made to refund the overcollected DSM balance, so that’s going to provide relief for customers with a bill credit in June. The discussion of whether an accounting order would be adopted was raised, and there’s been some letters written by commissioners and some discussion in open meeting context around deferral mechanisms, which are obviously being discussed in many states, many jurisdictions. There was conversation on that earlier this week at the commission, but no action taken. And as I indicated, the Chairman indicated that he’s going to likely bring it back for further discussions. So there hasn’t been anything done yet, but they are discussing it.

Michael Weinstein — Credit Suisse — Analyst

Okay, got it. Thank you.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Thanks, Michael.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Thanks, Michael.

Operator

Our next question comes from the line of Shar Pourreza with Guggenheim. Please proceed with your question.

Shar Pourreza — Guggenheim — Analyst

Hey, guys.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Hey. Shar.

Shar Pourreza — Guggenheim — Analyst

Sure. Just a couple of regulatory items. Just on the rate case, in the event, sort of the response as pandemic proves a little bit longer than anticipated, I mean, we’ve already seen some delays here, is there any scenario in which the rate case runs into 2021? And if so, how does sort of the statutory turnover at the commission affect the case? How should we sort of think about sort of settlement opportunities, especially as we head into the September hearings? I have to imagine that you guys are a little bit more incentivized to settle here. So maybe just if you could just talk, chat, top level as we’re thinking about the rate case and how you’re going to strategize.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Yes. Sure, Shar. I think right now, under the current schedule, if you think about a September hearing date start and then you start layering on what happens, so you have a month to maybe longer than a month hearing, followed by written briefs, followed by the administrative law judge putting together a recommended opinion and order, followed by exceptions, followed by an open meeting, I think the schedule that we have now does have the case moving into 2021. And so the question then is, where in 2021 and what happens over the rest of the summer, how does the pandemic play out, what impacts does that have on the commission’s ability to process cases. And again, Tucson Electric is ahead of us, so there’s one indicator that you could watch for there.

With respect to a settlement, this was a case that the commission had indicated they wanted to do through a fully litigated rate case. Obviously, there’s a lot of uncertainty that’s come up now with the pandemic. And is there an opportunity to do that? That’s something that we are open to. I think there’s been a little bit of signaling that, that might be more palatable than it was six, nine months ago. It’s still too early to say because, as you probably know and what generally happens, is those discussions really start after you see staff and intervenor testimony. So you’ve kind of got the boundaries staked out. And so we wouldn’t expect to see much developments on that front until after testimony gets filed. And a little early to say whether that’s going to be something that commission is going to want to do, but it’s something that we would certainly entertain.

Shar Pourreza — Guggenheim — Analyst

Got it. So just basically watch the August floor with the staff and intervenor coming out and the hearings that are now in September. So sometime between August and September should be a signal on whether you guys can form a stipulation or not.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Yes. I think that’s quite fair.

Shar Pourreza — Guggenheim — Analyst

Okay. Perfect. And then just one last question on the IRP. Is there sort of any updates that’s do you expect any delays there around the COVID situation? Are we still shooting for June?

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

We’re still shooting for June. Again, things are a little fluid right now in terms of what what’s affecting the workload, but we’re still anticipating a filing in June.

Shar Pourreza — Guggenheim — Analyst

Congrats on these results.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Yeah.

Operator

Our next question comes from the line of Julien Dumoulin-Smith with Bank of America. Please proceed with your question.

Julien Dumoulin-Smith — Bank of America — Analyst

Hey, good morning. I think the you all doing well.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Yeah, so know perhaps thank very much, I appreciate it.

Julien Dumoulin-Smith — Bank of America — Analyst

So I suppose if I could break things down a little bit here. When you look at the impact, thus far, it seems like it’s principally weighted towards commercial versus the consolidated number that you guys talked about here on 10 times Brisbane, industrial. And if I can take that a step further, as you think about commercial and you think about reconciling sort of against the full year and your expectations on guidance, what kind of trajectory are you thinking about here on the commercial recovery here? Obviously, you’ve talked about in Europe. Just trying to reconcile holding guidance, obviously, some very constructive residential trends to critically have in commercial here. You’ve talked about some of that, but what is sort of embedded in your mind?

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Yes. Julien, it’s a fair question. But really, it’s too difficult to get specific on how we’re thinking about those two levers. If these were more similar to the Great Recession, where you just had a net decrease in all customer classes, it’d be a bit easier to tie it to GDP and try to assume some level of resumption. But in this case, where you’re seeing inverse trends, where residential is up, C&I is down, it’s unclear what the resumption will the business resumption will do to C&I slowly improving and then residential does. So for us, what we thought was most fair is to simply play out the current environment all the way through Q2 and be able to share that, while businesses are reopening, let’s just assume that you saw no improvement. Here’s what the EPS impact would be and then, more importantly, focus on our levers. And this management team is very focused on our levers to fight hard and do everything we can to make sure that we mitigate the impacts.

Julien Dumoulin-Smith — Bank of America — Analyst

Let’s talk about mitigating impacts, if you don’t mind. You all have talked a little here about it. I think you got $13 million here at the midpoint, if I got it right here. But how do you think about the opportunity to pull more levers here, pushing against your guidance with the 1% to 2% normalized sales growth?

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Yes. So certainly, cost management is at the top of that list, as I mentioned. And specific to cost management, I gave you some examples of our lean initiatives. But we also think about it through the lens of restricting hiring or consulting costs, reduced employee expenses, deferring certain nonessential work activities. Of course, we also anticipate some fundamental growth drivers. So as we stated before, we don’t have data center build-out baked into our forecast because that remained relatively uncertain at the beginning of the year in terms of timing and volume. But we’re seeing data centers continue with their progression. In fact, two large data centers that have been under construction for a while are transitioning in the next two weeks from construction power to full-service usage, and that’s certainly a driver for us. While we don’t count on weather in full year guidance, weather is certainly helping us so far. And then, finally, as you saw from Q1, we’ve got some nonoperational drivers relative to in Q1, pension OPEB that will annualize throughout the remaining three quarters. So as an example, those are some levers. And from a cost management standpoint, we’ve identified what we need to do based on the assumptions that we shared with you today. And of course, we’ll continue to evaluate additional opportunities as more information becomes apparent throughout the remainder of the quarter.

Julien Dumoulin-Smith — Bank of America — Analyst

Got it. Excellent. And then sorry, if I could just push on this further. In your 2020 guidance, you have both retail customer growth of 2% at the midpoint and other normal retail sales volumes growing at 1% to 2%. Can you talk about how you achieved that today? And I don’t want to fixate too much on that sales side because I know you’re talking about the cost the this year, that you exhibited back there that just clarifies this further. How do you think about a line of sight to getting there? Or are you thinking about today, and I know it’s early, about sort of taking, let’s say, that $13 million at the midpoint from own net savings and kind of taking it, ratcheting down that initial set of sales numbers and think about the net of that $13 million, that’s the new pro deal you were talking about for the year? Or is that too simplistic?

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Yes. So you’re right in terms of the guidance range for customer growth sales growth. Keep in mind, for Q1, as we stated, we saw weather-normalized sales growth of 20%. I’ll tell you, prior to effects of COVID, we saw 1% to 2% weather-normalized sales growth. And in fact, the first couple of weeks in March, it actually jumped up to 2% to 3% with the normalized. But the way I would look at it is we believe fundamentals in our service territories still remain strong for growth. Wouldn’t be able to predict whether they return to the original guidance levels, but we certainly expect that there’s going to be help from growth in the balance of the year when the economy normalizes to be able to offset some element of the COVID impacts.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

And Julien, just qualitatively, when you look at also beyond 2020, I mean, the state is very focused on looking at how to pivot the economic development strategy, and that’s been something that we’ve been very involved with, just helping to recruit commercial customers and helping to recruit additional high load factor consumers into the service territory. And I think, as you begin to look at some of the potential changes on supply chain, wanting to bring supply chain closer to home, potential patterns of people who are looking to move from higher population density areas, there is a lot of good, I think, long-term focus that the economic development folks here, both at the state level and within some of the larger companies, are really working to try to capitalize on. So obviously, it’s not going to affect 2020. But when you look at some of the long-term patterns, I think it’s going to still be consistent with what we’ve seen, which is that we’ll see both the customer growth. And if we can get the higher load factor manufacturing industrial customers, then we’ll see sales growth as well.

Julien Dumoulin-Smith — Bank of America — Analyst

Yeah. Yeah, understood. Thank you all very much. With our investors like every day.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Yeah, thanks.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Thanks.

Operator

Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Paul Patterson — Glenrock Associates — Analyst

Hey, good morning guys.

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Hey, Paul.

Paul Patterson — Glenrock Associates — Analyst

So just to follow up on a regulatory stuff, which is numerous, I guess, and not that easy for me to follow. There is this, I think, some sort of proposal associated with the rate freeze. And I was wondering, I was I assume that’s a deferral. Is that correct? I mean, if there was some sort of rate freeze that was enacted that it wasn’t clear to me whether or not there is sort of like it’s a deferral. In other words, it’d be for future collection after COVID or something like that. Am I understanding that correct?

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Yes. I think all that’s been out really on that right now, and I’ll ask Barbara clarify, if she wants. There’s been a conversation about what are different things that could be done. So there isn’t a rate freeze in place right now. As you know, typically, when that’s done, you would put a deferral mechanism in place in doing that. But that’s only been at the conceptual level right now, and it hasn’t really gotten into that much detail. Anything to add, Barbara?

Barbara D. Lockwood — Senior Vice President, Public Policy

Yes. Paul, this is Barbara Lockwood. There was some discussion around that generally. Didn’t really get any traction at the recent open meeting. And it was discussed basically in conjunction with any sort of accounting orders. Jeff mentioned earlier, there’s been some conversation around different mechanisms. But the decision that was made this week was to refund the $36 million that was a part of our DSM fund that was unallocated dollars, and that was the relief that they chose to provide to customers this week.

Paul Patterson — Glenrock Associates — Analyst

Okay. Great. And then on the sort of the general rate case and sort of the I guess, the sort of continuing review of the most economical plan and customer adoption and what have you, is it safe to say that, probably, there’s not going to be a lot of action before the rate case at this point in time? In other words, the it would seem to me that due to the fact that you got a rate case going on, that would be sort of the where, if anything, would probably be done in terms of resolving that? Is that an appropriate way of thinking about it?

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

I think what so what’s happening right now on the most economical plan is we put into place a bill comparison tool that appears now on every customer’s bill that identifies whether they’re on the most economical plan and, if not, what they would save, both on a month and then on an annual basis from that plan. So the intent is to provide its customers as much information as we can about whether they’re on the most economical plan or not. We have some experience in this area having had demand and time of use rates for like 40 years. And in many cases, we know customers, for whatever reason, don’t choose to be on the most economical plan. They choose to be on a plan that they want to be on. And so there’s been discussion about how do we make sure we’re educating and trying to encourage customers to move to that most economical plan, and we’ve been briefing the commission monthly on progress there that’s likely to be discussed in the rate case. But that’s really the connection between the most economical rate discussion and the ongoing rate case. Does that help?

Paul Patterson — Glenrock Associates — Analyst

Yes, it does. I mean I followed your compliance filing recently and some of the discussion around it. I guess all I was wondering is it seemed I mean, I guess there wasn’t that much adoption, I guess, or that much change in people on the most economical plan. So I was just wondering if it was to be addressed, though, it would make sense to me that and I’m just wondering if I’m being logical here, that the commission is probably not going to take action in terms of trying to change that regulatorily. If they do make an effort, it would probably done a rate case if that were to happen. Does that make sense?

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

Yes. I think that you would change in terms of a rate design change or anything, that would have to happen in a rate case. I mean the conversation of whether you would default people to their most economical plan, which is something Sacramento did, for example, that’s not something we had proposed. We wanted to give customers a choice here, but those are likely to be discussed in the rate case.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Yes. I’d just add, too, that when we’re defining the most economic plan, that could mean that if one plan’s $1 more savings than another, it’s more economical. And so oftentimes, with the information that we’re sharing our customers on the bottom of the bill, they may look at it and see the difference between the current plan and the most economic is so de minimis, not worth going through a change. And yet they’re still classified as potentially not being on their most economic plan. So it’s difficult to read too much into the proportion of customers that are or are not.

Paul Patterson — Glenrock Associates — Analyst

Okay, fair enough. Takes so much, I appreciate it and and hanging in there yeah.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Thanks, Paul.

Operator

Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.

Charles Fishman — Morningstar — Analyst

Hi. On tax rate, notice the I had a power failure, but if my memory serves me, 14%, 13% for this is your guidance for this year, and that didn’t change, yet there was some benefit in the CARES Act, correct? Does that not impact the effective tax rate? Or is it just something you’ve elected not to change at this point after only the first quarter?

Thed N. Geisler — Senior Vice President and Chief Financial Officer

No. There’s no recent change that impacts our guidance for what you said, correct, 14% effective tax rate.

Charles Fishman — Morningstar — Analyst

Okay. And then it sounds like on your discussion of capex for 2020, you did delay some projects, but you anticipate catching up on that because you didn’t change your capex guidance for 2020.

Thed N. Geisler — Senior Vice President and Chief Financial Officer

Yes. No plans to change capex, and there’s been no material projects that have been changed. We may have shifted some nonessential work activities. Certainly, we’re working with homebuilders, etc, to the extent that their timing or volume changes. But we’ve got other opportunities on the list that the organization would love to be able to get a head start on that could fill in that gap. So we’re sticking with our current capex plan for the year.

Charles Fishman — Morningstar — Analyst

Okay. Last question. The COVID-19 experts expense due to that, you said the commission elected not to vote on at the last meeting. When do you anticipate it being voted on?

Jeffrey B. Guldner — Chairman of the Board, President and Chief Executive Officer

It’s just for further discussion right now. So there isn’t a time line. It’s just something that was raised. They didn’t vote it out on the last discussion. I can’t tell you whether they’re going to vote it out on the next discussion, but it’s still and if they’re still talking about it.

Charles Fishman — Morningstar — Analyst

Okay, that’s all I had. Thanks, they say that thank you.

Operator

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

Stefanie Layton — Investor Relations

Thank you for joining us today. This concludes our call.

Operator

[Operator Closing Remarks].