Pinnacle West Capital Corporation (PNW) Q3 2020 Earnings Call Transcript

Pinnacle West Capital Corporation (NYSE: PNW) Q3 2020 earnings call dated Oct. 30, 2020.

Corporate Participants:

Stefanie Layton — Director, Investor Relations

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

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Barbara Lockwood — Senior Vice President, Public Policy, Arizona Public Service Company

Analysts:

Michael Weinstein — Credit Suisse — Analyst

Julien Dumoulin-Smith — Bank of America — Analyst

Stephen Byrd — Morgan Stanley — Analyst

Insoo Kim — Goldman Sachs — Analyst

Paul Patterson — Glenrock Associates — Analyst

Sophie Karp — KeyBanc Capital Markets — Analyst

Charles Fishman — Morningstar — Analyst

James Schaefer — Guggenheim — Analyst

Presentation:

 

Operator

Greetings and welcome to the Pinnacle West Capital Corporation 2020 Third Quarter 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 — Director, Investor Relations

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our third 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’ 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 third quarter 2020 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. They will also be available by telephone through November 6, 2020.

I will now turn the call over to Jeff.

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

Great, thanks, Stefanie. And thank you all for joining us today. We continue to navigate through the extraordinary events of 2020 and so, as part of my operations update, I’ll share with you our success in managing the hottest July and August on record in the Valley. I’ll also provide an update on our regulatory dockets and our focus as we prepare for 2021. Ted will explain our earnings expectations for the year are higher due to the significantly above average temperatures.

And so, first, I want to recognize our field team for doing an exceptional job in maintaining reliable service for our customers this summer. The extreme heat this year contributed to a challenging energy market across the entire desert, Southwest. The lack of available capacity and the resulting declarations of energy emergencies by other utilities across the west, served as a reminder of the importance of long-term resource portfolio planning, vigilance over day-to-day energy supply and responsible energy policy.

Our ability to avoid an energy emergency this summer was the result of careful long-term planning, resource adequacy, flexibility and innovative customer programs. We relied heavily on our base load and fast ramping assets including Four Corners, Ocotillo and Palo Verde, and those assets were ready when we needed them. Our fossil fleets equivalent availability factor which is the percentage of time that a fossil generation unit is available and ready to perform when called upon was 95.3% from June through September. And Palo Verde Generating Station capacity factor for the same timeframe was 100.2%. Not only were our generation plants there when we needed them, our customers were as well. Out of an abundance of caution and to better prepare for potential unforeseen events, on August 18th and the 19th, we asked our customers to voluntarily conserve energy during peak hours. It came as no surprise to me that our customers were an amazing partner. Their response reduced peak demand on August 18th by approximately 240MW, creating a meaningful reduction on a day when the entire western grid was challenged.

In addition to successfully navigating the capacity shortfalls that were created by the heat, we also used our careful planning in close coordination with the Forest Service and first responders to mitigate the potential impact from wildfires this season. To reduce fire risk, our teams performed vegetation management activities, we held wildfire prevention training and we continue to expand our clearance around poles program, and it was an incredibly active wildfire season with over 900,000 acres burned to-date compared to an average over the last five years of 250,000 acres. Despite the above average wildfire activity, we actually experienced minimal impact to our assets, and I think that was due in part to our effective planning and risk management program.

Despite a worldwide pandemic, a record hot summer, regional capacity shortage and wildfires, our team continues to focus on how to make lasting impacts that benefit our customers, our shareholders and the company. Palo Verde consistently provides examples of this type of continuous improvement and forward thinking, as a recent example, Steve is a Palo Verde procurement engineer challenged our traditional procurement process and conducted a cost analysis in engineering evaluation for a micro switch replacement. The technical evaluation allowed Palo Verde to purchase commercial grade switches at approximately 7 times lower than the alternative. Over the next three years alone, this change is expected to save the company $2.5 million. His leadership and innovation earned him a nomination for an EPRI Technology Transfer Award, and I can’t emphasize enough that it’s our team who drives the success for this company, and I’m proud to recognize Steve for his innovation.

Shifting gears to regulatory. Staff and Intervenors filed testimony in our current rate case on October 2. Staff’s initial testimony recommended a 9.4% return on equity, and that compares to our current authorized 10% return on equity. Staff also recommended approval of our actual capital structure at the end of the test year, that’s consistent with our request and that would result in a 54.7% equity layer. The total revenue increased recommended by staff is $89.7 million compared to our request for a $184 million increase. We’ll file our Rebuttal testimony on November 6 and Staff and Intervenors will file Surrebuttal testimony on November 20. The hearing is scheduled to begin on December 14 and I expect it to continue into 2021. While testimony is certainly an important part of the process and it does provide visibility in each party’s priorities, we’re still very early in the case and we expect that many of the issues will certainly be discussed further as the case progresses.

I do want to note that yesterday the commission voted on several amendments to a proposed energy rules package. The amendments include new carbon reduction standard of 100% by 2050 with interim targets of 50% by 2032 and 75% by 2040. The reductions are based off of a 2016 to 2018 carbon emissions level benchmark. The amendments also require electric utilities to install energy storage systems with the capacity equal to 5% of each utilities 2020 peak demand by 2035. And 40% of the required energy storage must be customer owned or customer leased distributed storage. Another approved amendment modifies the resource planning process including requirements for the ACC to approve utilities load forecast and resource plan and for utility to perform an all sorts requests for information to guide its resource planning. Earlier this month, the commission also voted on another amendment to establish a new energy efficiency standard. The standard requires electric utilities to implement demand side management resources equivalent to 35% of their 2020 peak load by 2030. Eligible demand side management resources include energy efficiency, demand response and load shifting, and just importantly the commission must vote and I expect they will vote soon to approve a final energy rules package before any of these amendments can take effect.

As we look to wrap up 2020, we will continue to work with the commission on implementing a clean energy transition for the benefit of their constituents and for our customers. Recall that we’ve spent an aspirational goal of 100% carbon free by 2050 and 65% clean by 2030. To do so we’ll require a strong regulatory partnership support for an organized transition away from coal and fossil fuels and regulatory and financial support for the expansion of renewables, batteries and energy efficiency within our portfolio. I think yesterday was a strong indication of alignment with both the commission and other stakeholders to achieve a cleaner energy vision and energy future for Arizona. Near term, our focus and priorities remain on improving our customer communications, rebuilding our regulatory relationships by reestablishing trust, moving towards a reasonable resolution of our rate case and continuing to engage with stakeholders to build alignment on priorities to support our goal of providing clean reliable and affordable service to our customers.

So again thank you all for your time today and I’ll turn the call over to Ted.

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Thank you, Jeff. And thanks again to everyone for joining us today. As Jeff mentioned, I will cover our third quarter results and the impact from weather. I’ll also provide additional details around our customer and sales growth, economic development and financing activities. Lastly, I’ll cover our expectations for the remainder of 2020. While we typically provide earnings guidance for the upcoming year on the third quarter call, we historically have not provided forward-looking guidance during a pending rate case, consistent with that approach we will hold off on providing 2021 earnings guidance until after the pending rate case concludes.

Turning now to the third quarter. The significant tailwind from hotter than normal weather supported earnings of $3.07 per share compared to $2.77 per share in the third quarter of ’19. July set a new record for the hottest month recorded in Phoenix until August. August then surpassed July setting another new record for the hottest month. The above average temperatures this quarter added $0.26 to earnings year-over-year. For the nine months ended September 30, 2020, weather added $91 million of pretax gross margin or $0.61 per share year-over-year. We also experienced 2.3% customer growth and 1.3% weather normalized sales growth in the third quarter 2020 compared to the same period in 2019. From May 13, when business started reopening after the COVID closure period through September 30, weather normalized sales increased 1% compared to the same period last year. We continue to see a reduction in weather normalized commercial and industrial sales of 5%, offset by an increase in weather normalized residential sales of 6% during this period. The strength and speed of our return for positive growth numbers reflects the continued expansion of our local economy, following the full COVID closure period earlier this year.

Further evidence of our recovery can be seen in the increased number of single-family building permits and commercial construction activity. In 2020, we expect a total of 32,000 housing permits, an increase of about 1,200 compared to last year and the highest number since 2006. The labor market in Arizona has also started to gradually recover from the pandemic impacts as well. For 2020 through the end of August the employment in Metro Phoenix decreased 1.7% compared to 5.6% across the entire US. And while manufacturing employment Metro Phoenix decreased 1.2%, construction employment increased by 0.9%. The ongoing growth of new businesses and residential properties and the 18 construction cranes that are currently visible here in Downtown Phoenix are evidence of our continued growth. To serve our growing customer base and support investments in clean energy, in September, we issued $400 million of 30 year 2.65% green bonds at APS. The 2.65% coupon represents the lowest 30-year rate in the APS bond portfolio.

Turning to our full-year 2020 guidance, as a result of the above average weather, we are increasing our 2020 consolidated earnings range from $4.75 to $4.95 per share to $4.95 to $5.15 per share. The weather benefit has more than offset the additional costs and the reduction in sales due to COVID-19. We are also increasing our 2020 weather normalized year-over-year sales growth expectations to be between zero and 1%. In light of the weather benefit, we have accelerated the timing of near term O&M initiatives. For example, we’re pulling forward some spend in 2020 that was previously anticipated for future years, particularly around project work and customer experience initiatives as well as one time opportunities, like our $10 million contribution to the APS Foundation, which supports our community non-profits.

Our revised 2020 O&M guidance range of $870 million to $890 million reflects these items. While we believe this increase in O&M demonstrates prudent, planning and flexibility through this challenging year, we do remain focused on our lean initiatives and continue to see our core O&M trend down. We are executing our plan to reduce 2020 O&M expense by $20 million, including $10 million through improved procurement and contract management activities, and another $10 million in several small operating efficiencies across the enterprise. We also continue to partner with Arizona State University to train our workforce on lean skills and are excited about the long-term potential in continuing to streamline our business. While we don’t enter a year counting on whether it would be a driver, we do enter the year prepared to take advantage of above normal weather when it makes sense to do so. This can help us mitigate the impacts of mild weather in future years, while also enabling our investment in certain key initiatives that improve customer experience, a focus area for our company.

Our resource planning and capital expenditure forecast have also been revised. The delay in our clean energy procurement impacted by the McMicken investigation, slightly reduced our 2020 capital expenditure forecast by $68 million. However, we do remain committed to our clean energy commitments that have made progress with our resource acquisition activities. In September, we executed a 200 megawatt wind PPA with a 20-year term. This is a re-power of an existing wind facility and is expected to be fully upgraded with additional capacity in 2021. We also plan to issue two new RFPs. One outsourced RFP and an additional utility owned energy storage RFP at our existing solar facilities.

While it was an exceptionally hot summer, we are grateful the weather tailwind allowed us to further increase financial assistance to customers struggling to pay their bills as a result of COVID-19, and to accelerate investments that will enhance the quality of our service and maintain our record for providing top tier reliability. As Jeff mentioned, we will continue to focus on our regulatory outcomes in the near term, while executing our long-term plan to deliver value for our customers, shareholders and community stakeholders.

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

Questions and Answers:

 

Operator

Thank you. We will now be conducting a question-and-answer session. [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 guys.

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

Good morning, Michael.

Michael Weinstein — Credit Suisse — Analyst

On the amendments to the proposed energy rules package, can you give us a sense of how those amendments — and how the energy rule package in general would affect the 67% rate base growth profile that you currently are predicting? And at what point do we get an update on all of this when you — in order when you incorporate all of that into it?

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

Yes. Let me start Michael on just the rulemaking and either Ted and Barbara may want to weigh in. So one thing I think is the alignment that we see from the energy rules package is really important and if there is a fairly nice alignment with our efforts to decarbonize by 2050, and I think the interim targets, while the dates are a little bit different. They’re not — the alignment is still there. And so I think it’s consistent with what we were saying as our plan. It’s still got to go through the rulemaking process. So this just starts the rulemaking, it’s a formal rulemaking and that will likely happen next year.

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Yes, Michael, this is Ted. I’ll just say that given that the amendments and the plan where it looks like I said it is largely consistent with a clean energy commitment, our rate base growth that we have outlined was already contemplating carbon free and energy — clean energy goals consistent with these energy rules. So that’s how I think about it.

Michael Weinstein — Credit Suisse — Analyst

Got you. Great. And also on the rate case, as you’re going forward, with the Staff recommendation out now, I just wanted to confirm if there is no — where would you consider the odds of the settlement process at this point. I mean, maybe after the elections over. Is it even possible at this point to get it done or is it just not enough time?

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

We’re — Michael, we’re still — this is right now proceeding down a litigated path and so that’s the process that we’re following right now. As we said before, we always be open for those conversations and it could be a narrow one with some of the individual participants, fine alignment, take some issues off the table. So we’d continue to be open to it, but we’re focused on the litigated path right now.

Michael Weinstein — Credit Suisse — Analyst

Okay, great. That’s it from me for now. Thank you.

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

Great. Thanks, Michael.

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 team. Thanks for the time. I appreciate it.

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Hey Julien.

Julien Dumoulin-Smith — Bank of America — Analyst

Hey, good morning. So perhaps if I can just pick up where your prepared remarks kind of left off. Can you talk a little bit more about the procurements that you just alluded to, for instance, the storage effort here and specifically utility owned efforts and how that lines up against the cadence to the capex that you all have delineated? So when should we see the specific projects to line up against the coming years here, if that makes sense?

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Yes, Julien this is Ted. Appreciate the question and it does make sense. Given the McMicken investigation is now concluded, we have resumed procurement activity for investing in those APS owned battery storage with the intent that it’s in service in 2022. We’ve also got ongoing procurement activity for additional utility owned renewable resources from the prior RFPs. So look for results of that soon too. And then additionally we plan on issuing new RFPs for clean energy resources to be in service in future years and that’ll result as we said before in a blend of PPA and ownership projects. We estimate those through our capex guidance now, but we continue to refine as we get nearer to each procurements outcome and we have specific projects that result from those RFPs.

Julien Dumoulin-Smith — Bank of America — Analyst

Got it. Excellent. All right. If I can pivot here to the 2021 outlook, and I know it’s difficult to talk about without more specifics from you all, but obviously there seems to be something of a shift in O&M, but I don’t want to put words too much in your mouth on this. How are you thinking about the prospects for earning your ROE and/or perhaps describing the tailwind in terms of accelerating costs from ’21 into ’20 at this point. I know that guidance is dif, but I’m curious to be in help to start to quantify some of that benefit?

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Yes, it’s difficult to quantify, without guidance Julien, but what I would say is that we continue to be aggressive about our lean initiatives and cost management. And the acceleration of O&M opportunities this year as a result of weather really focused largely in the customer space, community space and was a pull-forward from future years, it will help us manage opportunities to the extent there is mild weather. But we remain focused despite the unique opportunity this year on cost management and keeping O&M throughout our sales.

Julien Dumoulin-Smith — Bank of America — Analyst

All right, fair enough. That’s sounds good. I’ll leave it there. Thank you all very much.

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

Thanks, Julien.

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Thanks, Julien.

Operator

Our next question comes from the line of Stephen Byrd with Morgan Stanley. Please proceed with your question.

Stephen Byrd — Morgan Stanley — Analyst

Hi, good morning. How are you?

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

Hey Stephen.

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Good, Stephen, how are you?

Stephen Byrd — Morgan Stanley — Analyst

Doing great. Thank you. I wanted to step back and talk about your generation plans here. It’s great to see a pretty aggressive move towards renewable energy and I was just curious if we did see pretty aggressive federal legislation. So, including things like tax credits for solar and storage and maybe EV infrastructure and just other elements of things, how much that might change your longer term planning or so maybe near to mid-term as well. But just if there were fairly generous federal incentives, how that might shift you’re thinking?

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

Yeah, fair question. I think at this point without knowing details what those incentives look like, I would say that it would likely just simply make the assets that we already intend on procuring in order to meet our clean energy commitment and potentially the commission’s energy rules more affordable for customers. But we’ll just have to see what the details look like in any potential legislation and then evaluate from there.

Stephen Byrd — Morgan Stanley — Analyst

Yeah, fair point. And then thinking about the — just grid impacts of more renewables. There is always been this hope that perhaps the western states could coordinate more closely in terms of great operations. I know there has been an initiative underway for many years. Do you see any particular changes there that might lead to better grade coordination among the western states?

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

Go ahead Dan.

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Hi, Stephen. This is Daniel. When you look at August and the capacity shortfalls in the corresponding emergencies that were declared in a number of states, I think it exacerbates the need for the utilities in the states in the western interconnect to continue their work as it relates to better coordination, better facilitation of interdependencies with the intend and results of ensuring that we have reliability and that generation assets are fully leveraged and utilized across multiple jurisdictions. There is a number that you mentioned of working groups in play, assessing those issues and I think over the next six months to a year, you’ll see some recommendations that will come forth that of some of those working group activities.

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

And Stephen, we see that in the energy imbalance market and so there is some coordination and that effort continues to develop.

Stephen Byrd — Morgan Stanley — Analyst

Understood. Maybe just last question from me, just on thinking through fire risk. I think your prepared remarks, touched on a lot of important points. Bigger picture as you think about just the impacts of climate change and the risk of — from climate change, how might that continue to kind of factor into your thinking on both capex and also how do we think about just the sort of performance standards that you’re required to meet. I know you’re states very, very different from California in this regard. I just want to make sure we kind of highlight some of those differences. For example in California, we think about certain vegetation management standards. The sort of standard for liability is not great from utility perspective. Just curious if you would mind just adding a little bit more as you think about climate change risk?

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

Yes, so a lot of it is really focused around resilience and making sure that we, for example, protect transmission lines that are bringing remote generation into the Valley and you heard in my direct comments a lot of that we do with vegetation management, working at defensible space around poles and so we’ve got targeted programs out there. We continue to evaluate that. We look closely at what other utilities in the west are doing to make sure that we are adapting any of the best practices that we can. But when you look really broadly around climate impacts, the importance is around resilience. So whether it’s looking at like micro grids which we’ve got at Yuma, for the Marine Corps Air Station focusing on those kind of investments. We’ll see how that ultimately translates as you look at longer term, but that’s been our focus, is making sure we’ve got a good resilient redundant system so that if we have a line go out because of a wildfire that we’ve got alternative path or alternative ways to serve the load.

Stephen Byrd — Morgan Stanley — Analyst

Certainly helpful. That’s all I had. Thank you.

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

Thank you.

Operator

Our next question comes from the line of Insoo Kim with Goldman Sachs. Please proceed with your question.

Insoo Kim — Goldman Sachs — Analyst

Thank you. My first question is on just the renewable investments that you outlined out for 2021 and 2022. Given this current rate case will likely conclude sometime in 2021 and unless the absence — in the absence of a rider mechanism or some type of tracking mechanism for those type of investments. What is the general sense of timing for having to file the next rate case to get recovery of those?

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Yes, Insoo, thanks for the question. That will largely depend on the outcome of this current case. So it is difficult to predict at this time. But to your point, we have been clear all along that we would intend on being able to seek concurrent recovery for clean energy investments. We think that’s the best outcome for customers and our ability to be able to procure at the rate and volume needed to meet our clean energy goals.

Insoo Kim — Goldman Sachs — Analyst

Got it. And then in terms of the O&M, I think before the portfolio that you did this quarter, there was some lower O&M there expecting after COVID happened. So is that incremental amount that seemed like a pull-forward more largely items that you are going to spend in 2021 but now, because you’re doing it in 2020 just gives you that flexibility to mention 2021?

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Yes, I think the way to think about this is, these are initiatives that we had in the pipe as discretionary items that we would like to be able to execute on in future years. That hot weather gave us the opportunity to do now and that gives us then further headroom in future years to the extent we have mild weather, then we can manage that accordingly.

Insoo Kim — Goldman Sachs — Analyst

Understood. Thank you.

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Thanks Insoo

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

Thanks Insoo.

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.

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

Hey, Paul.

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Good morning Paul.

Paul Patterson — Glenrock Associates — Analyst

So my first question is got to do with the variety of proceedings and questions and what have you associated with like rate design and the tool comparison stuff. When do you think those might be resolved? Will they be — maybe resolved in the context of the rate case or before or after or do you have any sense as to how those things might be eventually resolved?

Barbara Lockwood — Senior Vice President, Public Policy, Arizona Public Service Company

Hi, Paul. This is Barbara Lockwood. Certainly there are some items in play in the current rate case that we do expect to be resolved. Some moderate changes potentially to rate design and some conversations that we’ve been having around customer education as well as potentially things like what the rates are named. So that is in process, and that will happen through that process. Outside of that, we have made a commitment that we are going to be continuously communicating with the commission and our stakeholders, as all of these issues continue to evolve. So we’ll be talking to the commission on a very regular basis, be an open meeting or individual updates with our stakeholders, and that will continue as we seek to big progress on all of these issues with all of our stakeholders, including the commission.

Paul Patterson — Glenrock Associates — Analyst

Okay. So I guess it sort of stay tuned and we’ll see how it progresses. I’m just wondering whether or not there might be — we might get some closure I guess with respect to this. If there is any sort of timing on that or is it just sort of a stay tuned kind of thing?

Barbara Lockwood — Senior Vice President, Public Policy, Arizona Public Service Company

So certainly, we think we’ve worked through the majority of the issues that have been in play with respect to the right comparison tool. And while there may be some additional discussion from our perspective, we’ve taken all the steps that we’ve needed to take to resolve that issue. And anything remaining will just be updates in that respect. So we can’t guaranty where things may evolve from there, but we do believe that we’ve taken every action that we needed to take to resolve that issue and we’ve had numerous discussions about it and it should be nearing the end of that conversation.

Paul Patterson — Glenrock Associates — Analyst

Okay, awesome. There have been numerous, so good. Good to hear. So, and then just on — could you give us an update on with this weather and everything else, where things stand in terms of arrearage [Phonetic] customers, COVID and everything. What — how they’re managing in terms of paying their bills?

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

Yes, Paul, I appreciate the question. At this point we monitor that closely, but still expect that the allowance we set forth for $20 million to $30 million is consistent with where we think things are coming in, but we’ll continue to monitor closely, obviously, as things evolve. We did feel it was appropriate to extend the moratorium through the end of the year. We think that’s the right thing to do for our customers, but even given that extension, we believe that the allowance we have identified is appropriate.

Paul Patterson — Glenrock Associates — Analyst

Okay. And then with respect to the storage investigation. Just in general, I mean, I know you guys were looking into this. This is obviously sort of some thing that you guys have been focusing on stuff. Any takeaways or any thoughts, sort of about how you approach storage. I mean is it just a one-off thing and it doesn’t really mean much or maybe selection of vendors or I don’t know, do you have any sense or any takeaways that we might think about with storage. And just going forward, any thoughts or insights that you gain from this process?

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Yes, Paul, it’s Daniel. And there is no doubt that offers our McMicken experience. We’ve learned a number of things, quite a few things that we will put into play on a going forward basis. Energy storage, in order for us to meet our clean energy commitments and frankly as it relates to the energy rules that were discussed and tentatively agreed to yesterday at the commission, battery storage, energy storage is a critical component of our ability to meet those obligations. We’ve expanded our internal knowledge of the McMicken event incredibly as it relates to design engineering safety protocols and mitigation steps having our employee, a number of consultants who were using on a going-forward basis to help us assess vendor and product design technologies and again underlying systems, both mitigation and preventative. And I have a high level of confidence that we are much better positioned today than we’ve ever been as it relates to understanding the technology, it’s associated risks, and are in a much better place as it relates to design, engineering and safety protocols. We’ve learned quite a bit and I think we’re in a pretty good place.

Paul Patterson — Glenrock Associates — Analyst

Okay. I was wondering if there is any sort of easy takeaway for us, analysts who are not, who are doing anywhere near the kind of work you guys are in terms of any sort of general sort of technological thing that you came up with or maybe not or maybe it’s just too detailed. So I’m just wondering is there something that you could share with us or?

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Yes, a couple of general themes, Paul. As we move forward, we will consider containerized but not occupyable as a design alternative as compared to the occupyable containerized system McMicken was. I believe there will be changes, I trust there will be changes in both fire suppression and the arresting if you will, of what’s called thermal runaway when battery cells fail. And we are moving forward under the absolute belief that sales will fail in the future and that we’ve got a design engineer and established safety protocols to deal with that. You may very well see some wet or dry stand pipe installations as it relates to a water cooling mechanism as mitigation infrastructure to deal with a thermal runaway. Those are some of the things that we’ve extracted from the McMicken experience.

Paul Patterson — Glenrock Associates — Analyst

Okay, great. And then finally, I was wondering if you wanted to opine on what the election might bring us. I of course understand if you — are there any pulling trends or anything, you think we should be looking out for there? Or should we just wait a few days?

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

I’d just wait. Paul, I don’t think you can see a lot right now.

Paul Patterson — Glenrock Associates — Analyst

Okay, thanks so much.

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Thanks, Paul.

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

Thanks, Paul.

Operator

Our next question comes from the line of Sophie Karp with KeyBanc. Please proceed with your question.

Sophie Karp — KeyBanc Capital Markets — Analyst

Hi, good morning. Thank you for taking my question.

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

Sure.

Sophie Karp — KeyBanc Capital Markets — Analyst

I was just wondering, yeah, I was just wondering about the rate case. And as you prepare your — what are some of the key items that you identified where you disagree with the Staff of where you think there’s room for them to move more towards the middle ground or just the recommendation?

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

Sophie, so we’re in the middle of working on the Rebuttal testimony right now. So probably not able to really go into significant amount of detail about that, but obviously what we do is we look pretty carefully at the testimony that comes in. We see if there are issues and are inevitably are, there are some issues where we’re like, that’s a good point. And let’s make an adjustment to that and then there are some issues where we are going to try to clarify or explain what we meant in the initial filing. And so we’re not too far away from getting our Rebuttal testimony filed. I think you’ll be able to see the highlights of where that is on November 6, when we make that. So sorry, can’t be a lot more helpful right now on it, but it’s not too far down the road.

Sophie Karp — KeyBanc Capital Markets — Analyst

Thank you. Yeah, I was kind of hoping to get some sneak peak of that. And also I wanted to just make sure I understand the stance on that O&M right. So clearly, you guys had a very good quarter with the weather help and you put forward some of your O&M. So what is the reason that you didn’t pull forward more? Is that strictly driven by kind of the customer rate consideration in trying to balance the O&M per megawatt hour? Or there are just not enough projects in the pipeline that will easily pull-forward, if you will?

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Yes, Sophie appreciate the question. I think there is many factors that go into that evaluation, but we want to make sure that we balance projects immediately add value that we can execute. And that are prioritized amongst myriad of criteria as we rank in order every project that we plan for and decide the funds. So it really just went through our normal prioritization and ranking exercise, and we pulled forward initiatives that we felt were prudent and could have an immediate impact, particularly in the customer experience and customer focus space.

Sophie Karp — KeyBanc Capital Markets — Analyst

All right. Thank you.

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

Thank you Sophie.

Ted N. Geisler — Senior Vice President and Chief Financial Officer, Pinnacle West Capital Corporation and Arizona Pub

Thanks Sophie.

Operator

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

Charles Fishman — Morningstar — Analyst

Hi. I just want to follow-up on the battery storage. Make sure I’m up to date on this facility that had the incident has still not been energized. Am I correct about that? I mean you’ve never completed all the repair and felt that it was in a condition you could start using it again, correct?

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Charles, this is Daniel. That is correct. It has not been re-commissioned and it will not be re-commissioned. We’re working with the vendor on make over remedies as it relates to our contractual arrangements.

Charles Fishman — Morningstar — Analyst

Okay. And then specific to again following up on battery storage. I would think or tell me if my assumption is correct or not, that the extremely hot weather create some challenges for APS with respect to battery storage. There maybe a typical utility doesn’t face. Is that true?

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Again, Charles, this is Daniel. No that’s not quite true. The containerized systems are air-conditioned and cool to certain optimal operating temperatures and so Arizona’s high summer time heat does not introduce any additional risk as it relates to the underlying technology.

Charles Fishman — Morningstar — Analyst

Okay. So it sounds like you’re going to have battery storage. It’s just a question of, so maybe different technology and some advancements to occur. Correct?

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Yes, we will employ the learnings off of McMicken. Other learnings from the general industry and technology development that have occurred since McMicken and be prepared to move forward with what we believe to be a superior engineering design instead of safety systems to ensure battery success moving forward.

Charles Fishman — Morningstar — Analyst

Okay, that’s very helpful. Thanks, Daniel. That’s all I have.

Daniel T. Froetscher — President and Chief Operating Officer, Arizona Public Service Company

Thanks, Charles.

Operator

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

James Schaefer — Guggenheim — Analyst

Hey guys. Good morning. It’s actually James for Shahriar.

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

Hey, James.

James Schaefer — Guggenheim — Analyst

Just one quick question about the energy goals. I could just follow on the earlier ones. There was some discussion from one commissioner I think about including a spending cap. I was just wondering if you could give us a little bit of background on that. And then, do you see something like that actually getting into the final package at this point?

Barbara Lockwood — Senior Vice President, Public Policy, Arizona Public Service Company

Hi, James. This is Barbara Lockwood. Yes, that was Commissioner Olson. And Commissioner Olson is not a supporter of any sort of clean energy requirement. And so he was attempting to insert a requirement that — consistent with his philosophy that it should only be low cost resource. That’s the only guiding force for energy resource investment across the board. So it was not supported. It was supported by one another Commissioner and it was not approved on a three to two vote. So I would be very surprised if there is any support on a going-forward basis for that sort of cap. Having said that, we do have an election next week and depending on the outcome of that there could be a different perspective. But as it sits today, we believe there is broad support for these clean energy rules and that sort of requirement is not going to be successfully test or incorporated into these rules.

James Schaefer — Guggenheim — Analyst

Okay and then just the schedule for finalization of the package. I guess have they sort of set a date to it?

Barbara Lockwood — Senior Vice President, Public Policy, Arizona Public Service Company

So, James. Good question. They have not set a date yet. If you were listening yesterday, they voted on all of the amendments that were there. They actually moved the amended item that’s in recessed before they voted the final package and that was because they needed to quickly get to the final package and all the conforming changes to make sure it was exactly what they wanted to vote on at the end of the day. And the Chairman indicated when they had that package they would reconvene and then take the final vote. So we don’t have any indication as to one that’s going to be, but we do think it will be relatively soon that they would like to get this done. Now having said that, keep in mind, this is a vote to go to the formal rulemaking process. So there will be another vote before these rules become final and effective and that will happen likely next year.

James Schaefer — Guggenheim — Analyst

Okay, thank you very much. That’s it from me. Thanks guys. Happy weekend.

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

Thanks James.

Operator

Thank you. We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Stefanie Layton — Director, Investor Relations

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

Operator

[Operator Closing Remarks]