Pinnacle West Capital Corp (PNW) 2019 Q4 法說會逐字稿

Greetings, and welcome to the Pinnacle West Capital Corporation 2019 Fourth Quarter and Full Year Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 2019 earnings, recent developments and operating performance.

Our speakers today will be our Chairman and CEO, Jeff Guldner; and our Chief Administrative Officer, Jim Hatfield; Ted Geisler, CFO; Daniel Froetscher, APS' President and COO, and Barbara Lockwood, Senior Vice President, Public Policy are also here with us.

First, I need to cover a few details with you. 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 2019 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 February 28. I will now turn the call over to Jeff.

Thanks, Stefanie, and thank you all for joining us today. Before I review our 2019 achievements and provide operating and regulatory updates, I want to look forward to the future and share more information about our focus areas and priorities.

Our strategy is anchored by 4 concepts that align with industry trends and shape the way we do business. Those concepts can most simply be stated as clean, affordable, reliable and customer-focused. Let me talk briefly about each one. Clean is about decarbonizing our generation mix with our new goal to deliver 100% clean carbon-free energy by 2050. Affordable is planning and operating our business to maintain reasonable electricity prices for the people, businesses and communities we serve. Reliable means serving our customers with dependable power safely and efficiently, and customer focus is about developing new solutions, products and services to meet the changing needs and expectations of our customers.

With these in mind, we created a long-term plan and targets to track our progress along the way. First, we recently announced our goal to deliver 100% clean carbon-free electricity to customers by 2050. This goal includes a near-term target of 65% clean energy with 45% coming from renewables by 2030 and a commitment to exit coal by 2031.

Importantly, our plan includes flexibility to ensure that we're able to execute in a way that maintains affordability for customers. As Jim will discuss, we expect this plan will require considerable capital investment. We believe that carbon-free future is possible while keeping customer rates over time at or below the rate of inflation with timely recovery of clean energy investments.

To support the affordability of our transition to a carbon-free resource mix, we will have a sharp focus on economic development in Arizona. Growing our customer base allocates costs across more customers, which helps keep rates affordable and increases shareholder value by growing our company. Supporting an internal culture focused on reducing costs and maintaining a financially strong company to access low-cost capital are also key in delivering 100% clean energy future affordably.

In the area of reliability, we believe putting the responsibility on the utility to maintain high-performing, well-run resources is important. In pursuit of our clean energy plan, we will acquire resources that appropriately balance reliability, cost and flexibility for our customers. This includes both owning new resources and considering supplemental generation from purchase power as appropriate.

Our fourth concept reinforces that customers are at the core of what we do every day. We're committed to providing options that make it easier to do business with us. We plan to continue developing innovative programs that connect customers with advanced technologies to help manage their bill. In addition, we'll be convening an advisory panel of customers to gain a deeper understanding of the customer experience through individual perspectives, so a little design basis thinking. As we work to execute in all these strategic areas, we'll focus on strengthening our relationships with stakeholders.

Going forward, we plan to continue working collaboratively with those who have a vested interest in Arizona's future and our company's role as the state's largest electricity provider. For our regulators, we are committed to maintaining an open dialogue, listening and ensuring transparency. We have a lot of important work ahead of us, and we'll be sharing information about our progress as we advance through the year. And while I'm excited about our future opportunities, I also want to recognize our team and the hard work completed last year. We finished 2019 with our best ever reliability performance, if you exclude outages from voluntary proactive fire mitigation efforts, and Palo Verde once again achieved a capacity factor above 90%.

Our goal to reach 100% clean carbon-free energy by 2050 is new, but our efforts to move towards a cleaner energy mix are not. In 2019, we maintained our environmental, social and governance A rating from MSCI, and we were ranked in the electric utility sector's top quartile by Sustainalytics.

Notably, APS was 1 of 10 American companies and the only U.S. utility to make CDP's A list for both climate change and water security in 2019. And we accomplished all this while reducing the average residential bill by 7.8% or $11.68 on average since January of 2018 due primarily to savings from federal tax reform and operating cost savings that have been passed on to customers.

2019 was also a busy year for our state regulatory team, some of the work that we began in 2019 will continue this year. Key dockets for 2020 include our rate case, retail choice, disconnection rules and modifications to the commission's energy rules. A number of workshops have already been scheduled to discuss these topics, and you can find a list of key dates in the appendix to our slides.

The next milestone in our rate case proceeding is May 20, the date the commission staff and other interveners filed testimony. However, I would note that commission staff has indicated that they may need an extension to watch that proceeding. Outside of our regulated operations, our Bright Canyon subsidiary acquired minority equity stakes in 2 wind farms being developed by Tenaska, the 242-megawatt Clear Creek wind farm in Missouri and the 250-megawatt Nobles 2 wind farm in Minnesota. We expect these wind farms to be operational in Q1 and Q4 of this year, respectively. Our objective with these investments is to gain experience in the construction, ownership and operation of wind assets and to partner with a proven developer in Tenaska.

Our overall strategy with Bright Canyon is to develop, own, operate and acquire infrastructure within the electric energy industry. Investments in renewables, electric transmission and microgrids represent some of the opportunities that Bright Canyon has been evaluating. And I want to emphasize that these are close adjacencies. We will continue to pursue attractive growth opportunities consistent with our core strengths. We have ambitious goals and a talented team to achieve them. At the officer level, I recently made changes to our organizational structure that better aligns our experience and talent to our strategic focus areas and to strengthen our succession pipeline.

I'm excited about our future, all the possibilities and the team I have the privilege of working with. Before I turn it over to Jim for a financial discussion, I want to do 3 quick shout outs: First, to the team at Palo Verde for their work on a short notice outage at Unit 3 and getting the necessary work done safely and the unit back online ahead of schedule; and second, to our T&D engineering and construction team for their outstanding work on the new substations associated with the Microsoft data center build-out; and third, to the Arizona State Sun Devils for their win last night over #14 Oregon. So Jim, go ahead and take away.

Thank you, Jeff, and thank you again, everyone, for joining us today. This morning, we reported our financial results for the fourth quarter and full year 2019. Before I review the details of our 2019 results, let me briefly touch on some of the key factors from the quarter, which can be found on Slide 3.

For the fourth quarter of 2019, we earned $0.57 per share compared to $0.23 per share in the fourth quarter of 2018. Our results were largely impacted by a onetime tax refund to customers related to the TEAM 3 refund and lower adjusted O&M expenses. We also experienced another quarter of mild weather.

For the full year 2019, we earned $4.77 per share compared to $4.54 per share in 2018. 2019 earnings reflect our growing infrastructure to support the strong Phoenix economy and 2% customer growth. Other key items for 2019 was negative weather, which decreased gross margin by $37 million or $0.25 per share. The negative impact was more than offset by lower O&M. Year-over-year, lower adjusted O&M expense increased earnings $0.52 per share primarily driven by lower planned outage expenses and lower public outreach costs at the parent level.

As I mentioned last quarter, we are committed to enhancing our customer and shareholder value through cost management. The implementation of Lean Sigma will be the mechanism that allows us to improve the customer and employee experience while eliminating waste. As a result of our cost management efforts, we made great strides in reducing O&M in 2019, allowing us to reach the low end of our original guidance range despite the mildest Metro Phoenix cooling season in 10 years. We expect to continue our cost savings efforts by reducing O&M approximately $20 million in 2020. As Jeff mentioned in his comments, we are on a path to deliver 100% clean, carbon-free electricity. Part of that plan includes ending our use of the coal-fired generation, 7 years earlier than previously projected. As a result, the reduction in fuel costs as we use less fossil fuels and more renewables will be a source of cost savings to our customers in the future.

Our journey to a carbon-free future will require intelligent investments in renewable resources and developing technologies. As you can see on Slide 14, we rolled forward our CapEx forecast for 1 year. Our 2022 CapEx forecast reflects nearly $800 million of investment related to new clean generation resources and reflects our conservative mix of owned resources. While we don't know the exact mix of ownership versus purchase power at this point, we will need an appropriate mix to ensure long-term value and reliability for customers.

That said, we believe there is potential upside to our capital investments, especially as we get past 2022. As Jeff alluded to, customer affordability will be top of mind. We would expect customer rates to increase no more than the rate of inflation over time. In terms of financing our clean energy future, we would expect that we will issue equity sometime after 2020. While the exact amount has not yet been determined, we would expect the amount to be in the $300 million to $400 million range. The timing of the offering around the next rate case minimizes dilution and is ultimately accretive for our shareholders. Our financial health, including a solid equity layer, will continue to provide our customers the benefits of low-cost access to capital and competitive returns to our shareholders.

In 2020, we expect to issue up to $1 billion of term debt at APS and $450 million at Pinnacle West. Overall liquidity remains strong. In the fourth quarter APS issued $300 million of new 30-year unsecured debt at 3.5%. We use the proceeds to repay commercial paper and to fund $100 million of our $250 million par value 2.2 notes, which matured in mid-January.

At the end of the fourth quarter, Pinnacle West had $115 million of short-term debt outstanding and APS had no short-term debt outstanding. Due to the tax benefits associated with both the TEAM Phase 2 and Phase 3 and optimized use of income tax incentives, our effective tax rate for 2019 was a negative $2.9 million. We anticipate an effective tax rate in 2020 of 14%. Continued use of income tax incentives, including tax credits associated with clean generation investments will reduce cash taxes in the year projects -- our projects are placed in service. A quick note on pension. The funded status of our pension remains healthy at 97% as of year-end 2019. This is due to strong portfolio returns during 2019, continued contributions and the continued success of our liability-driven investment strategy, which has helped mitigate risk to our benefit plan funded status.

2019 was a great year for economic development in our service territory. We saw high-profile data centers and manufacturing plants break ground in the West Valley. We successfully connected 2 new data centers to our power grid, including the Microsoft data center and began prep work to add an additional 6 data center feeds in 2020.

In addition to growth in the commercial sector, Arizona is benefiting from residential population growth. According to a December 2019 report for the U.S. Census Bureau, Arizona ranked third in population growth behind Texas and Florida. Arizona population grew by approximately 120,000 people between July 2018 and July 2019. Reflecting the steady improvement in economic conditions, APS' retail customer base grew 2.2% in the fourth quarter of 2019. We expect that this growth rate will continue in response to the economic trends in our service territory.

The Metro Phoenix area continues to show strong job growth and has consistently been above the national average. In 2019, employment in Metro Phoenix increased 2.9% compared to 1.6% for the entire U.S. Construction employment in Metro Phoenix increased by 9.6% and manufacturing employment increased by 5.2%.

According to the U.S. Bureau of Labor Statistics, Arizona's job growth ranked second in the nation in 2019. The Metro Phoenix residential real estate market has also continued its upward trend. In 2020, we expect a total of 31,100 housing permits driven by both single-family and multifamily permits. We continue to expect Pinnacle West's consolidated earnings for 2020 to be in the range of $4.75 to $4.95 per share. A complete list of key factors and assumptions underlying our 2020 guidance can be found on Slide 6 and 7.

In closing, our long-term rate base growth outlook remains intact at 6% to 7%, and we expect to achieve a weather-normalized annual consolidated earned return on average common equity of more than 9.5% in 2020. The new year is off to a great start with the announcement of our bold clean energy plan, coupled with organic growth in our service territory.

We are excited to embark on a path that will help create a healthy and prosperous Arizona that benefits our customers, communities and shareholders. This concludes our prepared remarks. I'll now turn the call back over to the operator for questions.

(Operator Instructions) Our first question comes from the line of Michael Weinstein with Crédit Suisse.

Could you talk about the -- you mentioned that there would be potentially some upside after 2022 in the capital plan as a result of your carbon reduction and greenhouse gas goals, trying to achieve that going forward. Is there any way maybe we could kind of frame that up and talk about some more of the specific opportunities you see ahead, particularly maybe in battery storage or in generation?

Well, on average, between now and to hit the interim target at 2030, we're going to need at least 300 megawatts of battery storage and 300 to 500 megawatts of other resources to meet that goal. And so ultimately, you have some competing plans out there, all toward green and clean, but at different dates, and we'll have to see exactly how it plays out. But we're being very conservative in how we think about our CapEx budgets at this point.

Got you. And I think maybe I missed this, but did you talk about equity needs going forward? I know it's a little bit early considering the rate case is still pending and everything, but can you talk about maybe a normalized equity need going forward? And how that might change depending on the outcome of the case?

Well, so we don't expect to issue equity in 2020, Michael. We expect the next offering we have will be in the $300 million to $400 million range. It'll be teed up closer to the next rate filing. But a lot of that will be what it shakes out ultimately in the capital expenditures as we move forward, PPA versus owned.

Does that complete your question?

No. Is that block equity or ATM-type equity?

Yes. No, we haven't decided the how yet at this point. So we'll have to -- details to follow on that as we get closer.

Our next question comes from the line of Greg Gordon with Evercore.

Couple questions. So other than the rider that you have for APS solar communities, which I believe is for rooftop, which we should be assuming that to move this capital through into rates that I think you've already said this pretty exclusively, you will need to file a another rate case post the one that's going to be closing this year to -- or you'll be in sort of serial filing mode to get these investments into revenues? Is that fair?

It may depend a little bit, Greg, on kind of how this case moves forward. We've got an RES adjustment mechanism. There's some potential for that to come into play. I think what you'd see is if you move with a more traditional rate basing process, then yes, you would be looking at rate cases that would be filed periodically to reflect the changing capital. But one of the things I think we'd like to have a conversation with the commission about is are there either mechanisms we have today or other ways that we can look at doing that so that we're not in serial rate making mode.

Understood. And then when I look at the 2022 rate base target or aspiration, it just looks a little bit low to me relative to the increase in CapEx, maybe I'm wrong, but should I presume that the CWIP balances would be perhaps a bit larger and the AFUDC portion of your income statement would be a little bit bigger in '22?

Greg, this is Jim. I know the slide is 2020, 2022, the 6% to 7%, we think is a long-term outlook and wouldn't necessarily just reflect the debt -- the period that's shown. The math looking at what's shown is more like 8%, but we're looking at into the future.

No, no, I understand that. I'm asking a more basic question. When I think about the earnings guidance for this year with AFUDC expected to be $35 million, plus or minus, that's on Slide 6.

Yes.

I'm just sort of saying like, maybe I'm stating the obvious, but as your capital expenditures accelerate up that CWIP, and therefore the contribution to earnings from AFUDC should grow?

Yes, that would be correct, Greg.

Okay. Final question, guys. I think there was some more -- the PUC -- or sorry, the ACC outside of the Tucson case and outside of the -- your pending case has been workshopping several different issues, including making a policy decision on how to deal with fair value adjustment, how to deal with post-test year adjustments in rate cases, and I think there was one other item, which frankly, I'm embarrassed. I can't remember, but I think you -- hopefully, you are knowledgeable about what I'm referencing. And could you give us an update on that, where those stand on those 2 or 3 items?

Yes, Greg, this is Barbara Lockwood. There has been some conversation about taking a look at those outside of rate cases. Frankly, there hasn't been much activity on that recently. They've been focused on some other topics.

Okay. So there's no sort of formal process for coming up with policy statements on those with like a date certain?

No, there's not. Not at this time.

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

First question, could you maybe give a little bit of an update on your thoughts on the retail competition docket and a couple of the proposals that were made? And just your thoughts on the feasibility of that and what potential impact that could have on the system and on APS as well?

Yes. Insoo, it's Jeff. The process, there's been some draft rule proposals that were put out. And if we want to go into any more detail, I'll let Barbara talk about it. But one of the major challenges we have here in Arizona is that we're not in an organized market. And to make the retail competition effective. I think you've really got to be in an RTO and have that underlying framework. And you've also got to have a fair amount of infrastructure around resource adequacy. We're in a time, if you go back to the original competition discussion back in the early 2000s, there was a lot more capacity. There was an overbuild of capacity.

And so capacity was not as tight. We're in a much tighter capacity market. So it would be really risky to move forward without strong resource adequacy frameworks. And this is a pretty lean commission. And so how you would put in place the infrastructure that would ensure resource adequacy, how would you deal with the market structure that moves beyond the scheduling -- independent scheduling administrator, which is what we have in the last go around into an actual RTO type of independent system operator. And then how would you actually address the arbitrage, the gaming that could happen around the trading and prices and customer-facing situation. So it's just really difficult for me to see how you put all those in place to make this effective. But obviously, this is early in the discussion on where those rules are. And so we'll engage and share that perspective with the commission.

Got it. And the second question, just going back to the storage and other clean energy investments. I think the 300 of storage and the 300 to 500 megawatts of other resources, what time frame was that for? And I heard a 2030 time frame, and I didn't know what the overall opportunity set you may have spoken about in this next 10-year period?

Yes. Insoo, I was referencing the sort of interim 45% renewable target in 2030. And over that time frame from now to 2030, our need is about 300 megawatts a year of better storage and 300 to 500 megawatts of renewable generation a year in that time frame.

Got it. When I was just looking at the clean energy investments in 2021 and 2022, it seems like the dollar amounts, if you do some rough math would imply pretty high hundreds of megawatts. I don't know, is what you're talking about already been captured in this next couple years? Or am I doing the math wrong?

No, it's been captured. Remember, it's an average over the time frame. But yes, we see significant opportunity in storage and renewables.

Our next question comes from the line of Julien Dumoulin-Smith with Bank of America Merrill Lynch.

Can you hear me? So just to follow up and clarify the early equity commentary. When you talk about that $300 million to $400 million, it seems as if that you're basically saying 2021 upon rate case resolution. Just also want to clarify, does that include 2022 or at least contemplate no equity in '22, as you true-up your capital structure in '21 given that you've now provided CapEx in '22? So sorry, sorry if it's a little detailed there, but I just wanted to clarify that.

Yes. No, I would just say, Julien, if I implied it was going to be in 2021, that wasn't what I was trying to imply. I was just trying to imply as we look out, we see our CapEx, we'll need to issue equity to support the capital structure in the next rate case. I've made no assumption on when that rate case would be filed.

Okay. And just to clarify that, that is reflective of the CapEx at least through '22 as it sits today, not necessarily indicative of like perhaps equity subsequently, post '22, right?

Yes, this is just -- the next time we go to market, I expect it to be in the $300 million to $400 million range, and that would be refined based on what we ultimately do on the CapEx line and so on.

Got it. Excellent. And then the second question, coming back to the rate case dynamics. Obviously, it's a little more protracted here. How do you think about settlement and the timing of having those settlement conversations, just given how longer a process it is? And then just to what -- I'll leave it easy.

Yes. The -- originally, if you remember, Julien, that there's a lot of discussion. This was a case that we were directed to file by the commission. And I think that the assumption was that this would be a fully litigated rate case. Obviously, we would, I think, like to talk about settlement. I think there's a lot of benefits of settling cases, particularly in the sense that you've come up with solutions that both sides, you can have a win-win kind of an outcome and often in litigated cases, you're much more in a binary outcome where it's kind of one or the other. And so I think there's value in settlement. It's probably too early. We haven't even got staff or intervenor testimony yet, that's going to come in May likely and so it's early yet to see if there's a dynamic that could come into play there. But just to be realistic, the commission had said that this is a case that they want to see fully litigated, so if that changes or if the opportunity presents itself, I think we'd certainly be interested in doing that but that's not the path that we're on right now.

Got it. And just to clarify that, that has not changed in recent months here, at least your understanding on this case.

Yes. And again, Julien, it's also kind of early in the process for it to have really done anything because normally, that's going to come after you see staff and intervenor testimony come in.

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

So first question, sort of on the renewable energy sort of outlook and potential cost impact, you guys are putting more effort in renewable energy, costs have come way down. I'm just wondering how you -- when you look at your rate base and your CapEx projections and everything, obviously there are going to be lots of variables. But what are you guys thinking about what the potential rate impact might be with this outlook?

Yes, Paul, what we've really been focused on is trying to manage through this plan with essentially, real prices remaining flat. So keep the rate pressure at or below the rate of inflation. And obviously, part of what you can look at with that is, as you put more storage resources into the system, you're able to trade out some fuel expense. And so I think we're probably $1 billion or so of fuel expense right now in what we see. So if you can do a little fuel for steel, you're able to translate that fuel expense into, you had rate base growth, but importantly, it takes the rate pressure off customers so that you're able to make that trade out and get the capital investment, but also mitigate the rate impacts.

And really important other component to this plan is the work that we've been doing. You see it reflected in, I think, some of the earnings that we were able to announce this quarter, is the work around the Lean Six Sigma transformation, where we're trying to really look at doing work differently and eliminate waste and streamline processes and that's going to be important because we've got to keep the O&M flat or lower so that as you're making these capital investments, you're not just putting the rate increases through to consumers. And so it's going to have to be a combination of that, looking at how you can do some fuel for steel and save on fuel expense. And then how you can find the O&M savings. And then just the third component, which is different from the internal pieces, but is just driving growth in the state. And so when you see the large high load factor customers come in, like the data centers, they pick up a significant amount of the fixed costs. And so you're able to more efficiently use the system. And so it's really tying those 3 things together that we think can help mitigate rate pressures on this.

Okay. Great. And then I guess, sort of on the other element that you mentioned at the beginning of the call, this rate design issue. And as you know, this -- it seems to me, at least, from watching all of this, that the rate design issue that was implemented in the last rate case has caused, well, really actually probably caused a lot of the regulatory issues that we're now encountering. And I know that you guys are trying to do customer education and what have you. But coming from it sort of from more of a consumer perspective, things like technology and stuff. When you have to educate the consumer that sometimes is seen in of itself as being kind of a drawback. And I'm wondering whether or not there's an effort of maybe thinking about -- and I don't really see it, I guess, in the current rate case, and it's there, I apologize. But the idea of maybe just simplifying the whole thing because I'm not -- I guess what I'm wondering is, customers may not want to be educated.

You know what I'm saying? In other words, they might want simplicity. And so I'm just wondering, I know you guys are doing a stakeholder thing and discussing it with stakeholders and what have you. But I'm wondering if there's any plan potentially of sort of making it so that you don't have what we I guess sort of have come up with, in which you have people sort of having a really difficult time with just sort of dealing, outside of rates, just the complexity of what at least some of these customers seem to be dealing with.

Yes. Paul, couple of points to that. First is we are absolutely looking at those issues. We've got a proposal in the case for essentially a flat bill. So similar to what you see cell phone companies offer, which is here's what your monthly plan would be, it's fixed. We don't do a true-up at the end. There's a nuance to that, that actually says if you tie it to allowing us to put a smart thermostat in the house, you'd get a lower risk rate on that. But what's really important, I think you're going to see this still continue across commissions around the country. As you move into this advanced energy economy as we're making this transition, there is absolutely a role for customers, not just commercial and industrial, and we're working a lot with some of our commercial and industrial customers who are asking for demand-side options so that they can manage around the prices that we see at the wholesale level, the duck-curve issue that we've got, which is causing wholesale prices to be very low or negative in the middle of the day and then the need to shift load off into the evening hours when you've got no solar production coming out of the grid. And so the commercial and industrial customers are absolutely taking advantage of that. A lot of the rate design pieces are simply to align rates that we've had for decades. We've had time use in demand rates in our service territory for decades. So the rate concepts aren't new.

The issue was that if you have a 12:00 to 7:00 peak period, and you've got negative prices occurring at noon, that is a crazy price signal to send customers. There's no way you can long-term operate a system with that kind of time of use period, and so the first change is shifting the time of use off to 3:00 to 8:00, which aligns it with what we actually see as the peak and get some of that shift. And then with the demand rates, we've had the largest demand rate participation in the country for, again, decades because in Arizona, in a lot of cases, you've got 2 air conditioners. When you have a demand rate, your average, your consumption, your energy cost, the cents per kilowatt hour is lower because it's picked up on a demand charge. And even back 20 years ago, there were technologies like load controllers that could allow customers to manage their demand. And so yes, we're going through an education process, but what we're seeing in the rate design is real customer response to those price signals.

We're seeing customers are able to take advantage of demand response programs with smart thermostats that we simply would not be able to offer without that rate design. And really importantly, as you move forward, it just doesn't -- to me, you can't leave residential customers out of this advanced energy economy, and we have to be able to take advantage of the thermal storage that's in the 1.1 million residential homes that we have in our service territory through smart water heaters, smart thermostats, things like that. And none of that really works without the rate design. So to -- sorry for the long answer, but to try to get to your question, yes, let's put together some options like the flat bill, so that we can target or give something to folks who really don't want to do that. Recognize that there are a lot of folks who don't want to worry about it. So now there's technology like smart thermostats that can do it without them having to actively do things. I think increasingly, you'll see the technology take the consumer behavior out of the equation, and they'll just be doing things and the customer won't notice. But to get to that point, you've got to have these price signals that are there. So again, sorry for the long answer, but that's how we're thinking about it.

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

The only thing I had left is the disconnect policy that you brought up last quarter. I see it's still on the bullet points on your 2020 drivers. Did that get resolved between the $20 million and $30 million?

So that $20 million and $30 million was our projection going into 2020. Keep in mind, you're just now having people come off the sort of 4-month payment plan. And so a lot of this is we'll see later this year what that impact will be. We did increase our bad debt reserve last year in June. So we are picking some of that in just our reserve. But where that shakes out remains to be seen. We will ultimately adjust that reserve once we have an annualized pattern that we feel good that, that's the right amount.

But Charles, the rule-making is still underway at the commission. So they've not landed on final rules for that yet.

Our next question comes from the line of David Peters with Wolfe Research.

I would be curious just to kind of get your guys' view of the legislation that's been proposed to potentially move the ACC to an appointed commission. Do you sense there is a level of support for this at the legislature and from voters? Or should we expect to kind of see a similar result that we saw in the past?

Yes. I think, David, the -- it didn't get out through a committee. There's a committee that it failed out of and that was exactly the comment that was made is that the committee members said that they believed it was important to allow the voters to have the right to elect the commission. And so it's working its way through the process right now, just again to be clear, this was not something that we proposed or that we were trying to move forward with. And just to give you a flavor on that. I think if it were and so it's still unclear as to whether it would ultimately get out of the house -- or out of the legislature to the ballot, it would then have to go to the ballot. So then you'd have to actually have voters decide to do this. And as you know, I made a commitment that we weren't going to participate in commission elections. I think within the spirit of that commitment, we would not be participating in something like an independent expenditure to try to promote this because I just think that would be too close to violating the spirit of what we had committed to do with the commission. So legislature will do what they're doing. But -- and I think we said we'd work with commissioners, obviously, whether appointed or elected, but this would be a long road.

Great. And then just quickly on the Bright Canyon business, as you kind of think about it today, do you expect or is the intention to ever get this to the scale of where it's kind of a material earnings driver for you guys?

Yes, it's a little early in that, but I think when you look at the adjacency opportunities, that's what I tried to emphasize in the prepared remarks is that we're not trying to go out far beyond what we believe is really core expertise. So we've got expertise in working with wind and solar. We're working on more expertise around battery storage. We've got -- we had phenomenal performance at our microgrid. We had an event in Yuma with the microgrid that we'd installed for the Marine Corps Air Station where they actually lost the substation and in 8 seconds, that microgrid kicked in and picked up the entire load of the base from a black start, held the load until the substation was repaired and then was able to seamlessly transition the base back into service. So for what the military is looking for and their base resiliency work, those kind of projects are good. We've got great expertise, I think, in doing those. And so a little early to see how much is really there, but -- and I don't want to leave that expertise untapped. And so we are looking at how we can expand Bright Canyon into more opportunities like that. But it's a competitive environment. We're not going to do something that doesn't make sense, obviously, for our investors, but we do think there's some opportunity there.

Our next question is a follow-up question from Michael Weinstein with Crédit Suisse.

Just a quick one. How much equity is usually issued to the employee plans every year? And how much can that absorb of the future $300 million to $400 million?

So we don't have an employee plan, we have a DRIP. And I think the revenue through the DRIP is $11 million, $12 million a year. It's not significant.

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.

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

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation,

and have a wonderful day.