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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the Pinnacle West Capital Corporation 2021 Second Quarter 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 second quarter 2021 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; Barbara Lockwood, Senior Vice President, Public Policy; and Jacob Tetlow, Executive Vice President, Operations, are also here with us.
First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our second quarter 2021 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through August 12, 2021.
I will now turn the call over to Jeff.
Thank you, Stefanie, and thank you all for joining us today. I know that the release has a recommended opinion in order and our pending case is the most significant development for all of you, and both Ted and I will discuss that shortly. But I do want to cover some operational and customer matters before we go there.
So as we progress through the summer season, I'm proud to say our team continues to excel in delivering reliable service to our customers. Arizona experienced several dozen sizable wildfires in June with only mild damage to our infrastructure and minimal customer outages. We have strong vegetation management and fire mitigation programs as well as mandatory line inspection prior to reenergizing in high-risk areas. And all of these contributed to the protection of our infrastructure and reliable service for our customers. We also successfully navigated through an early summer heat wave that resulted in 6 consecutive days of at least 115 degrees and 3 days approaching our all-time peak demand. Our resource procurement efforts and reserve margin standards ensure that we were able to meet the needs of our customers through the hot summer last year, through the early heat wave this year, and we expect these efforts will continue through the balance of the summer.
Following the heat wave in June, July brought a relentless series of monsoon storms. So it's good to see the monsoon back, but that does present challenges for us. In a 5-day period during mid-July, our teams restored power to more than 120,000 customers affected by storm-related outages and we effectively communicated with our customers regarding outage status and expected service restoration times. Our field crews worked in wet, humid and muddy conditions with no safety events. I'm extremely proud of their exemplary work and the level of service that they've provided.
With the weather we've already experienced this summer, it remains as important as ever to continue assisting our communities through our heat relief support programs. APS has partnered with St. Vincent De Paul, the Salvation Army and Lyft to ensure that Arizonans have access to an emergency shelter and eviction protection programs, to cooling and hydration stations, and have transportation to the nearest cooling shelter as part of heat relief initiatives offered throughout the summer. This is another example of our effort to collaborate for the benefit of our customers, our communities and our company.
That focus on customer experience remains a top priority as we look to improve our J.D. Power customer satisfaction scores. We are pleased to see a measurable increase in our year-to-date residential customer satisfaction, but we recognize there's more work to do. We understand the importance of a high-quality customer experience, and I'm grateful and proud of our teams for employing a continuous improvement mindset to drive change for the benefit of our customers.
So now on to the regulatory front. As you all know, the administrative law judge issued the recommended opinion in order for our rate case on August 2. I will say that we are disappointed and concerned by the recommendation, which would not appropriately allow for the recovery of important investments needed to serve customers reliably. Ted will speak to our estimates of the potential financial impacts if the rule were to be adopted by the commission. However, I do want to note that this is a recommendation from the administrative law judge, it's not yet a final order of the commission.
A summary of the key points from the rule can be found in our investor deck on Slide 23. From that, you can see that the administrative law judge recommended a $3.6 million revenue increase or a nonfuel $29 million revenue decrease; a 9.16% return on equity; an implied 0.05% return on fair value; the disallowance of the deferral and investment in the Four Corners SCR project; and recovery of the deferral and investment in the Ocotillo Modernization Project. There is no question that Four Corners has been a critical asset in serving our customers through the record heat the past several years. Without the EPA-mandated installation of SCRs, that plant would not have been allowed to operate and there just is not enough capacity in the West to reliably run the system without Four Corners.
We continue to believe that the commission and other stakeholders recognize the importance of investing in assets such as Four Corners to maintain reliability, given the challenges that we've all seen in the West. And we've seen that as we work through the California wheel through order and the concern that the commission has expressed on limitations that reliability challenges in a neighboring state is imposing on Arizona. So Four Corners is critical for us to continue to serve our customers, and our goal is to continue to work with the commission to recover prudent investments and ensure that quality service can be maintained for our customers. The ROO, if approved as is, would put this objective in jeopardy.
So where are we procedurally? We'll file exceptions to the ROO. They're currently asking for exceptions on August 23, and then the commission will schedule the case to be voted on at a future open meeting. We would expect a decision on this rate case to be issued during the third quarter of 2021. If the outcome of the case does not provide for necessary investments to support customer growth and to maintain the financial health of the company, we have the option to petition the commission for reconsideration of that decision to challenge the legality of the decision through the court system or to file another rate case. And we will evaluate all of these options after the conclusion of the case to determine the best path forward to serve our customers and to provide value and predictability to our shareholders. In the meantime, we'll follow the rate case procedural schedule, and we'll articulate and advocate the areas in which we disagree with the recommended order.
On the ESG front, in May, the commission voted to preliminarily approve new clean energy rules that would provide for a final standard of 100% clean energy by 2070 with interim standards, the first of which requires a 50% reduction in carbon emissions by December of 2032. A final commission vote on the clean energy rules package is required for the rules to become effective. We think we're well aligned with the commission on the interim goals and expect to continue our current path to achieve 100% clean energy by 2050.
We've executed a contract for an additional 60 megawatts of utility-owned energy storage to be located at our APS solar sites. This contract with a 2023 in-service date will complete the addition of storage on all of our current APS-owned solar facilities. In addition, we're working through our current all-source RFP for 600 to 800 megawatts of additional resources, with decisions from that RFP expected in the third quarter of this year.
Our MSCI ESG rating improved from a single A to AA this year, with MSCI noting our strong water management performance and decarbonization efforts as key score attributes. So we made good progress through the first half of this year, improving our customer experience, enhancing our stakeholder relationships and working towards achieving our ESG and clean energy goals. We need to work through the recommended opinion and order and ensure that our perspective is understood by the commission. So there's certainly more work to do, but I do want to acknowledge the team's dedication and commitment.
And with that, I'll turn the call over to Ted.
Thank you, Jeff, and thanks again to everyone for joining us today. With Jeff having covered our operational and regulatory updates, I will cover our second quarter 2021 financial results. I'll also provide additional details around our customer and sales growth and potential impacts from the administrative law judge's recommended opinion and order.
Our performance in the second quarter remained strong, earning $1.91 per share compared to $1.71 per share in the second quarter of 2020. Higher pension and other post-retirement nonservice credits, higher sales and usage and weather, all contributed to the increase in earnings, partially offset by higher operations and maintenance expenses compared to the prior year period. We experienced 2.3% customer growth and 5.7% weather-normalized sales growth during the second quarter compared to the same period in 2020. Residential sales increased 1.3% and commercial and industrial sales increased 10.3% compared to the second quarter of 2020. The increase in C&I reflects the reopening and return to in-person work we are seeing this year compared to the second quarter last year and COVID business closures that occurred last year and primarily remote work environment. Given the strong rebound in C&I sales and continued residential strength, we're increasing our 2021 sales estimate to 1% to 2% growth from our previous estimate of 0.5% to 1.5% growth.
The labor market in Arizona is also recovering from the COVID pandemic impacts. For 2021 through the end of May, employment in Metro Phoenix increased 1% compared to 0.2% increase in the entire U.S. To be clear, that's 1% in Metro Phoenix compared to a 0.2% increase in the entire U.S. In 2020, Arizona was the third fastest-growing state in the U.S. As a result of this continued strong population growth, Arizona reached the highest level of residential housing permits since 2006 last year. This year, through May, Maricopa County has already reached 21,000 housing permits, which puts housing permits on pace to exceed last year. We believe the relatively low mortgage rates, low cost of living, desirable place with more space and affordable housing will continue to be a driver and grow Metro Phoenix housing market and benefit the overall local economy. This continues to be one of our core strengths of our long-term growth thesis.
Turning to our financial health. While the recommended opinion and order from the administrative law judge is not a final order from the commission, we want to be transparent about the potential estimated financial implications if the commission were to approve the recommended opinion and order as written. For perspective, the general rule of thumb is that every 50 basis point reduction in ROE equates to approximately $32 million in revenue requirement. Regarding the potential impact from the recommendation to deny Four Corners of the -- to deny recovery of Four Corners SCR investment and deferral, as of June 30, 2021, the SCR deferral balance was approximately $75 million, and the net book value of the asset was approximately $320 million net of accumulated deferred income taxes. Because this is only a recommendation from the ALJ and not a decision from the commission, we will not be making any changes to the deferral at this time. If the commission denies recovery of the deferral, it would likely result in a write-off of approximately $75 million, which is net of accumulated deferred income tax. If the commission also denies recovery of the investment itself, we will consider all regulatory and legal avenues to mitigate any potential write-offs.
In summary, we estimate the ROO, if approved, could decrease annual net income up to about $90 million, which includes the nonfuel decrease as well as the effects of incremental costs we incur once rates become effective.
We're already a top quartile performer for O&M and are employing additional robust cost management improvements throughout the enterprise. This magnitude of a revenue decrease would be significant and detrimental to all of our stakeholders, including customers.
Regarding our financing plans, we expect to issue up to $500 million of long-term debt at APS during the remainder of 2020 to fund capital investments. We will hold an investor briefing at the rate case concludes, at which time we will provide financial guidance, including any forecasted Pinnacle West level funding needs.
As we continue to navigate through the evolving pandemic and the resolution of our current rate case, we will continue to focus on our commitment to our shareholders customers, communities and our team. The fundamentals within our service territory of strong and diverse economic growth and increasing population and the general attractiveness of Arizona, our strong operational performance, our disciplined cost management all bode well for the future. We will continue to work hard to resolve these current challenges.
This concludes our prepared remarks. I'll now turn the call over to the operator for questions.
[Operator Instructions]. Our first question comes from the line of Julien Dumoulin-Smith with Bank of America.
I want to -- perhaps at the outset here, if we can try to clarify things. I mean, obviously, this is disappointing. How do we think about the balance sheet needs and impact here from an equity funding perspective? And specifically, you cite in your comments, your regulatory and legal avenues. It sounds like there could be a multistage balance sheet impact, such that pending that resolution, you wouldn't necessarily take the full write-off of the principal net balance until a subsequent decision is made, right?
Yes, Julien, this is Ted. Thanks for the question. I think you're thinking about it right. So let's break it out into 2 components of the recommendation with respect to SCR disallowance. The first is the deferral itself. And because this is just a recommendation and not an actual decision, the deferral remains intact currently. But if the recommendation were to hold at a final decision, then that would trigger a likely write-off of the deferral, which at this time -- or as of June 30, that balance is about $75 million.
However, if the recommendation for disallowance of the actual plant of SCR was decided upon at the commission, we do have other options, both within the regulatory space and legal space. And as a result, we'd evaluate our options at that time and that would not necessarily trigger a write-off then, given the fact that you do have other paths to pursue even if a decision was made consistent with the ROO.
Let me prod further a little bit. When you think about the avenues here, you all have talked about an equity funding need conceptually already. To the extent that which one would pursue an immediate subsequent rate case here, would that effectively necessitate, again, necessitate in soft terms, the need to true up the capital structure inclusive of that initial $75 million?
Well, we'll continue to evaluate the equity needs. We've said for a while now that we would be focused on looking at equity needs to preserve the equity ratio. That said, fully recognize that if there is any write-off impact to the income statement, that will have an impact on equity ratio going forward. So we'll evaluate that. But keep in mind also, we do continue to have a strong balance sheet, both at Pinnacle and APS, and we'll evaluate being able to utilize that balance sheet to the extent possible to mitigate any further equity dilution impact.
Yes. Understood. You absolutely have a strong balance sheet there. And just to clarify here, if you don't mind breaking it down. You said a $90 million figure here. Can you break that down just a little bit more between the SCR and some of the other items here? Just high level, if you don't mind, just in terms of the impact there as we sensitize a potential outcome.
Sure. Yes, happy to. High level, so you've got the $4 million net sort of revenue increase as proposed in the ROO. That includes fuel. So we've got to get that down to nonfuel. So you back out about $33 million of fuel-related increases, that takes you to a total nonfuel revenue decrease of $29 million. You add to that the incremental cost that we've stated for a while now, will hit the income statement once rates go into effect of about $110 million. And then you tax effect that, that gets you to the $90 million estimated annual impacts to ongoing earnings. And again, we expect that to be up to $90 million, and that's an estimate at this time.
Got it. And if they approve the SCR, just what would that $90 million go to? Do you have anything like that?
If the SCR plant would be put back into rates as approved, then about half that $90 million impact would be mitigated.
Got it. Excellent. Okay. And sorry, just to squeeze in one more here, if I can. What are you willing to go to on a consolidated FFO-to-debt metric here? Just to clarify the earlier comment you made here. Obviously, you do have a strong balance sheet and recognizing that.
Yes, Julien, appreciate the question. That's not something we can really discuss today. But when we do have our investor brief at the conclusion of the rate case, happy to walk through more details of our financing plans at that time, given that we'll have certainty on the case. All the details will be known and look forward to sharing how we think about credit metrics and financing going forward at that point.
Indeed, I appreciate that it's a certainly a fluid situation. All the best.
Thank you.
Our next question comes from the line of Insoo Kim with Goldman Sachs.
Thanks for all the color from Julien's question on all of the different breakdowns. I guess from a procedural basis, you commented that some of the avenues you have is, whether it's a consideration, some legal avenues probably into the rate case. Are those all exclusive of each other? Or is it possible that you could potentially just go ahead and file another rate case, given it's -- if there's more regulatory lag with other items that need recovery while pursuing specific consideration or legal items on the side?
Yes. Insoo, I'd say what is the requirement to exhaust administrative remedies, so the rehearing reconsideration request is necessary before you pursue a court appeal. But if you do pursue a court appeal, then that doesn't change your ability to file another rate case and have the appeal pending and a separate rate case moving. But again, we would look at what options we would need to employ based on what the conclusion of the case is.
Got it. Got it. I'll leave that there. And then just a different topic. On the load growth, it seems like a continuation of solid, whether it's customer growth or just demand growth that you're seeing, I guess, more on a normalized basis beyond 2021, are those trends that you're seeing giving you the confidence that you could raise that? The normalized weather normal will go to by 0.5% on average through 2023? Just some more color there.
Yes. Insoo, I think that's right. We're looking at the local economy, the trends that we see. Last year was difficult to be able to separate what was normal growth versus fluctuation between C&I and residential due to COVID, but we're starting to see that trend normalize with some repeated pattern. And so for example, the residential growth we see, we believe that's true sustained growth.
On C&I, we believe out of the 10.3, just under 2% of that is really organic growth. And then when we see what's coming down the pipe with respect to new industrial and commercial growth, which then in turn spurs more housing growth, we're confident that we'll continue to have robust customer growth, and that will translate into the increased usage, which is what gave us confidence to increase that range.
Our next question comes from the line of Paul Patterson with Glenrock Associates.
So a couple of things. Just a housekeeping item. The LFCR, which they didn't vote to increase but you guys are still deferring, is that going to be -- it wasn't clear to me in the ROO how that's going to be impacted if the rule were to be adopted.
Paul, this is Barbara Lockwood. We didn't propose to do anything with the LFCR in this case. We just propose to let it continue to operate as it currently operates. And so we expect that it will just continue to function with the balancing account that already exists with the LFCR and it will be addressed in the next application to change that adjustment.
But if they don't allow an increase, I guess, it just simply keeps getting deferred. Is that sort of how we should think about it?
Yes. It actually -- there's a balancing account with that adjuster and the dollars to accumulate in that until there's action taken on that adjuster, one way or another.
Okay. And then -- go ahead, sorry.
I will say -- I'm sorry, Paul. I will say in the ROO, there is a provision to reopen the rate case for 12 months so that we can work with stakeholders on alternatives for our adjuster suite. And we're looking at that as an opportunity to find alignment and common ground and prepare proposal that will address any issues or concerns and resolve, hopefully, any questions, lingering questions, about our adjusters.
Got it. And then the Chair put out a letter earlier this week, and in fact, there's been some back and forth on this whole proceeding regarding the renewable implementation in Solana and the contract associated with it. And you guys have been very articulated. I don't know if it was you, Barbara, or someone else who wrote that prudency is not done through a lens of hindsight and what have you. But nonetheless, we got this letter on Monday that seems to be saying we should be doing a prudency review on a somewhat dated PPA that is way above market current rates. How should we think about this in the context of just -- I guess, what do you say to that, I guess? I mean, how should we think about that, seeing...
Yes, Paul. So the -- I think right now, it's a single commissioner who has expressed her point of view with respect to that Solana contract. And I agree, again strongly. If you go back to the time that, that contract was entered into, there was a big debate about solar thermal versus solar photovoltaic, where is the future of it, the importance of the capacity value and the molten salt storage for us, and he had a very different natural gas price profile.
And so it is, to look today and go back that far and say that this was imprudent, and it's a PPA, so it's a purchase power agreement. It's not an item that's in our rate base and it was done consistent with the commission direction at the time. So the commissioners at the time were very, very excited, very much pushing to have that project move forward. And so understand that Chairwoman Marquez-Peterson's viewpoint on that. We'll continue to share our perspective on it, but it's clear to me that, that was prudent when it was entered into at the time. It was consistent with the standards that we had at the time. And I don't know, from a legal basis, how you could go back now and say that there's an issue that we should be accountable for on it.
If it was to be rejected by the commission, would that be a force majeure? Or would there be any -- I mean -- or would you just basically just have to sort of legally proceed what you're going to have to -- I mean, you do that anyway, obviously. But I mean, how do we think about that, I guess, I mean?
We take that one step at a time. We'd see what -- I mean, obviously, right now, the most important thing to do is to make sure it's clear what the legal standard is and where this plant fits into it and then you don't have to go to the force majeure issues. I mean that would not be good for development in Arizona, if you start having contracts that are being defaulted on. So I think we feel pretty strongly that this is a proceeding we'll put our perspective on, but it was a prudent decision at the time, and it should continue to be part of our asset portfolio. And let's just take that one step at a time.
Okay. I guess just finally, when this kind of situation -- I've been doing this, I guess, too long, but when this kind of consumer advocacy or when this -- when the -- when there seems to be an effort on the part of the commission to control rates or to what have you, I mean, you guys might win on many of these cases legally. But I guess what the concern for us to come up with is there's more than one way to cause problems in terms of recovery and what have you. How do you think about strategically going ahead with your plans and your investments and what have you in this environment if you follow what I'm saying? I mean, in other words, I guess, strategically, is there -- I'm sure you guys must be thinking about maybe different strategic alternatives if this environment sort of continues. Do you follow what I'm saying?
Yes. I follow what you're saying. I mean, that's been an important piece of us of how we've looked at this broadly. I mean our customer affordability initiative was driven in large part to say we've got to be as effective as we can at managing our controllable O&M expenses so that we can create headroom to make the investments in clean energy that we know we're going to need to make in the future and keep the rate of rate growth at or below the rate of inflation. And so that continues. And our rates are lower today than you compare it, Ted, from what 2018 were.
6.7% average bill lower than 2018.
Yes. So we've continued to focus on keeping rates low. I think what's important is we have the dialogue with the stakeholders and the commission is the understanding that it's a balance. And if we do this in a way that causes credit ratings to degrade and your cost of debt increases, ultimately, customers end up paying for that. And if our requirement, if the cost to issue equity is higher because we're not able to maintain the competitive field to attract equity investment in, and that's ultimately going to be a higher cost to customers. And so that's the important thing.
And this is we're doing everything that we can to manage costs. We're looking at ways that we can, again, move out of variable fuel resources and start saving on the fuel bill. But we've got to do that in balance. And I think that's the message we have to continue to send to the commission is that you -- if all you focus on is the short-term rate impacts don't reflect on where we are with respect to the work that's already happened in lowering our rates over the last few years, ultimately, it's going to end up costing customers more. And so it is just an alignment. It's an alignment effort that we just have to continue to focus on.
Yes. And Paul, this is Ted. I'll just add, too, from a strategic standpoint. When we look at the value creation opportunities we've got, we are disappointed in this ROO, no 2 ways about it, and we've got a lot of facts to be able to continue to demonstrate as to why the investments are prudent and critical to keep the lights on. But we also recognize this is one of the last legacy issues that we are working to resolve with the commission. We were called into this case, it didn't start out in the normal form. Notwithstanding, we've made a lot of great progress with the commission. This is one of the last legacy items that we need to put to bed and get behind us.
But once we do, we can't forget about the fact that we have robust growth in our service territory, just increased the ranges again today, continue to have that strong balance sheet, disciplined cost management, a tremendous path forward for investing in clean. We will continue to make progress with the commission and get this case behind us and then be able to unlock more value with those other strengths that we've got.
Our next question comes from the line of Steve Fleishman with Wolfe Research.
I guess, first question is just in terms of in the event that you do need to pursue a legal review of this case, any sense on how long that might take? How long has that taken maybe in other cases in the courts?
Yes, Steve. The law in Arizona does provide for a direct appeal and a rate case matter to the Court of Appeals. So you go into the court of appeals rather than starting at superior court and then working your way up. And so typically, those are in the year time frame or so, which is often why you might see a case also filed. If you got a legal appeal, you might still see a company file a rate case at the same time.
Okay. And just in terms of -- I know the balance sheet is strong and your payout ratio is relatively low. Just how should we think about risk to credit and if at all, the dividend, if this were implemented?
Yes, Steve. Well, certainly, we're engaged with the agencies as we continue to work through this. They recognize that this was just a recommendation, not a decision. But they also recognize we've got continued growth in rate base and capital investment. And as soon as we solidify our financing plans similar with our equity investors, we'll be working with the agencies to make sure that we incorporate the conclusion of the case and update any assumptions there. So we'll evaluate, certainly, with them what credit metrics look like and ratings, et cetera.
With respect to the dividend, our intent is to continue defending the dividend. The Board reviews this annually. We'll certainly take into consideration where the case concludes. But we'll share more dividend policy at the investor brief here at the end. But we intend to continue defending the dividend.
Okay. And then just -- maybe the last question is just we'll get the outcome of this case. But when you're looking kind of -- obviously it's important for, I guess, future cases and just you have a pretty big capital plan and you all -- you do -- at least for now, they haven't approved this renewable provider. So -- and then the other issue is that these rate cases take a long time in the state. So how are you thinking about just managing the capital plan, given what's happened here, the length of rate cases? And just how do you keep focus of having such a big capital plan if this is where we end up?
Steve, I think that's a fair point. And aside from the current case that we're in from a regulatory construct standpoint, our top priority is to continue to work with stakeholders and the commission to minimize regulatory lag. And that includes getting back to the time frame of the cases that we had before.
We've actually got a pretty good track record of relatively short duration rate cases. This one is a bit of an anomaly, particularly given it fell within a year of COVID, that certainly had an impact. But aside from that, whether it be our clean investments or investments to continue to support the robust growth within the service territory, we recognize that, that lag has an impact, and we believe there's options to be able to continue to mitigate it. And that is a priority for us, both within this case and beyond.
We look at the capital plan and aside from investing in clean, we have to fund the growth. We've got commercial industrial customers coming, that demand investment in infrastructure to be able to continue to drive this local economy. And so we need to make sure that we're aligned with our stakeholders and the regulator on the need to continue to fund that capital to be able to fuel Arizona's growth because if you look at the $1.5 billion in our guidance by far, the majority of that is just to keep up with Arizona's growth, and it's our job to do it.
Steve, I'll just add. One thing to know, this case has been particularly long. It is unusual in a number of ways and that we were called in. But it was also fully litigated and it's the first fully litigated case we've had in quite some time. We will always seek to settle and we can improve the time frames to do so, and we're hopeful that we'll be in that position in the next case that we have. So keep in mind that this case is relatively unique in terms of the time frame and the circumstances around it. And as Ted said, it's hopefully the final piece of some of the legacy issues that we've been dealing with.
Our next question comes from the line of Sophie Karp with KeyBanc Capital Markets. [Technical Difficulty]
Our next question comes from...
Operator, we can move on to the next caller.
Our next question comes from the line of Anthony Crowdell with Mizuho.
Just, I guess, maybe a weird question. If the ROO was adopted and maybe the investment in the SCR was found not prudent, do you stop operation of it? I mean, I guess there's an O&M drag associated with operating the SCRs or operating the plant, would you stop utilizing that facility?
That's the -- that's kind of why -- I mean that's the question I think, Anthony, is given that, that SCR is legally required for us to operate the plan and given that if we didn't have Four Corners on a day like today, we're going to have a hot day today. If we didn't have the capacity out of Four Corners, there's nothing else in the West. There's nothing else that we could go get. There's no other resource that we could use to keep the lights on.
And so you have to continue to operate it. So that's why -- and that's why I'm struggling in particular with this recommendation, is this has been clearly demonstrated over the last 2 summers as not just used and useful, but necessary from a capacity basis in the face of a bunch of challenges around capacity, whether it's California or Texas, has just brought that to a highlight. And so you're now putting us in a position to say, well, you got to run the plant, but we're not going to give you a recovery of either the investment in the plant that's required to continue to operate it or the ongoing operating expenses of it. Just don't think that's a reasonable outcome.
Yes. And Anthony, I'll just add. Keep in mind, what's in this case and what we're talking about is the environmental technology, the SCRs. The plant itself is in rate base from prior decisions, obviously, and that remains in rate base.
And I guess my follow-up is maybe a longer-term strategy question. I mean if we look at how the utility sector has evolved maybe over the last 10, 20 years, it seems that given some really challenging regulatory decisions, a lot of single state utilities have looked to diversify their regulatory risk and pursued maybe either being acquired by a multistate utility to enable efficient capital to move through different jurisdictions. I mean, is that something that if this -- or if this ROO was upheld, something that the company would have to entertain?
Anthony, we don't talk about M&A issues. But I will say, in terms of diversification, we do have some work going on at our Bright Canyon affiliate. And so there is some opportunity there. Again, the vast majority of revenue net income comes from APS, but we continue to look at opportunities there.
And just one perspective, we've got some ownership in a couple of wind farms, one is in Missouri and one is in Minnesota. And I think it will be important for us to share with the regulators that the returns that we see from capital invested in those states is better than the returns we can get here in Arizona that puts you in a real predicament. So the ROEs are important to maintain the attractiveness to get capital invested in states and have continued to invested in needed reliability, but we do have some assets that are outside the traditional regulated platform. It's not yet material from an earnings standpoint, but we do look for opportunities there.
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.
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.