Q4 2025 Earnings Call Transcript

Good day, everyone, and welcome to the Pinnacle West Capital Corporation 2025 Fourth Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to hand the floor over to your host, Amanda Ho. Ma'am, the floor is yours.

Thank you, Matthew. I would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 2025 Earnings, Recent Developments and Operating Performance. Our speakers today will be our Chairman, President and CEO, Ted Geisler; and our CFO, Andrew Cooper. Jacob Tetlow, COO; and Jose Esparza SVP of Public Policy, are also here with us.

First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information. Today's comments and our slides contain forward-looking statements based on current expectations, and actual results may differ materially from expectations. Our annual 2025 Form 10-K was filed this morning.

Please refer to that document for forward-looking statements cautionary language as well as the risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through March 4, 2026. I will now turn the call over to Ted.

Thank you, Amanda, and thank you all for joining us today. In 2025, our team demonstrated strong results and made significant progress on our strategic objectives. We serve record levels of demand with top quartile reliability, provided customers with top quartile customer experience and managed our grid expansion plans with discipline. Although we made solid progress in 2025, our efforts are ongoing, and we remain committed to executing our strategy.

Looking ahead to 2026, we will continue this approach with a particular focus on processing our rate case, executing our grid expansion plans, keeping rates affordable for customers and finalizing commercial opportunities with new large customers. Turning to operations. I want to recognize the outstanding safety execution by our team. Safety remains our most important priority, and I'm proud of our team's relentless focus on providing safe, reliable service particularly through the third hottest summer on record.

In 2025, APS set a new system peak of 8,648 megawatts on August 7, more than 400 megawatts higher than the prior year. Our generating fleet performed exceptionally well, and Palo Verde operated at 100% summertime capacity factor. Palo Verde remains the largest producing nuclear plant in the United States and recently received a 2025 INPO excellence award for achieving the highest levels of safety, reliability and operational performance. This level of consistency underscores the strength of our team's operational excellence.

Customer experience remains a key focus. In 2025, we made meaningful progress toward achieving industry-leading satisfaction. For example, we developed and deployed an AI-powered high bill analyzer to help customers better understand their billing and energy usage and efficiently address ways they can save on their energy bill. These improvements are resonating.

We ended the year in top quartile nationally among our peers for residential overall customer satisfaction and then the second quartile for business customers as measured by Escalent. We also ranked in the first quartile nationally in J.D power's Utility Digital Experience study. Our customer base is also becoming increasingly diverse, reflecting Arizona's evolving economy. Growth among commercial and industrial customers, including chip manufacturing and data centers continues to drive strong economic activity across the state.

These large load customers continue to accelerate their ramp schedules as evidenced by our long-term sales growth of 5% to 7% through 2030. The U.S. Department of Commerce and Taiwan recently announced agreements expected to spur at least $250 billion of additional semiconductor investment in the United States. In Arizona, TSMC continues to expand their footprint with its second fab moving to full production in 2027, a third fab under construction already, a fourth fab and advanced packaging facility in early development and 900 additional acres recently acquired for future expansion and growth.

We look forward to working with TSMC and the broader chip manufacturing sector as we expand grid infrastructure to support their rapid growth. At the same time, residential growth remained strong across our service territory. For the second consecutive year, we installed more than 34,000 new meters, the highest level in 20 years. We're ready to meet demand growth and our strong execution is showing results.

We finished over 400 megawatts of APS-owned resources ahead of schedule, including new gas units at Sundance, the Agave battery storage facility and Ironwood Solar. The Red Hawk gas expansion remains on track for completion in 2028 with ongoing preparations to support additional gas capacity of up to 2 gigawatts commencing in 2030. In parallel, we're closely monitoring progress of Transwestern's Southwest Desert Pipeline expansion, which has recently been upsized from 42 to 48 inches due to strong regional demand. These investments are critical to supporting Arizona's economic and population growth while maintaining strong reliability for our customers.

Turning to regulatory matters. Our rate case remains on track, staff and intervener testimony is expected next month with hearings scheduled to begin in May. We value our ongoing collaboration with commission and stakeholders and continue to work together to support Arizona's growth, reduce regulatory lag, and ensure appropriate cost allocation so that growth pays for growth. In closing, 2025 was a strong year of execution by our team.

We're meeting rising demand, investing for our customers and positioning the company for long-term value creation. Our priorities for the year ahead remain clear: executing our mission to deliver safe, reliable and affordable service to our customers, invest in baseload generation and transmission to serve growth and achieve a constructive regulatory outcome that protects customer affordability while reducing regulatory lag. With that, I'll turn it over to Andrew to discuss our financial results and outlook going forward.

Thanks, Ted, and thanks again to everyone for joining us today. Earlier this morning, we released our fourth quarter and full year 2025 financial results. I'll walk through our performance for the period highlight the key drivers and then review our 2026 financial guidance, which we initially provided on our third quarter call. Starting with the fourth quarter, we earned $0.13 per share compared with a $0.06 loss in the fourth quarter of 2024. The fourth quarter result reflects the continued vitality of our service territory, our strong operational execution and sustained cost management.

Key drivers included favorable O&M versus last year as well as continued robust sales growth. These positives were partially offset by milder than normal weather, higher financing costs and pension and OPEB expenses. For the full year, we delivered earnings of $5.05 per share, landing in the upper half of our updated guidance range. While this compares to $5.24 per share in 2024, a the year-over-year decline was primarily weather-driven, a $0.71 year-over-year drag.

The prior year benefited from an extremely hot summer that extended into the fall, whereas 2025 experienced, on average, closer to normal weather. Additional headwinds included financing costs, higher pension OPEB expense, depreciation and amortization and O&M. Importantly, these headwinds were largely offset by strong underlying growth in our business. In the fourth quarter, we experienced 6.8% weather-normalized sales growth, driving full year weather-normalized sales growth of 5%.

This included 2% residential growth and 7.5% commercial and industrial growth for the year, reflecting continued economic expansion across our service territory. In addition, customer growth remains a durable multiyear trend. In 2025, total customer growth was 2.4% at the high end of our guidance range as new businesses and new residents continue to decide to call Arizona home. This consistent, diversified customer and load growth provides a strong foundation for our long-term outlook.

Looking ahead, we are reiterating all aspects of 2026 guidance provided on our third quarter 2025 call. including our annual earnings range of $4.55 to $4.75 per share. Our weather-normalized sales growth guidance for 2026 remains unchanged at 4% to 6% and with extra high load factor, C&I customers expected to contribute 3% to 5% of that growth. Our longer-term sales growth guidance also remains unchanged at 5% to 7% through 2030 and recognizing the robust growth in our service territory. We continue to be laser-focused on cost efficiencies and our goal of declining O&M per megawatt hour.

In 2025, we successfully achieved a 3.3% year-over-year decrease and expect to further reduce our O&M per megawatt hour in 2026. Cost management is a priority and we will continue to strive for operational excellence and efficiency through our lean culture and initiatives. We are also reaffirming our capital and financing plans. Our capital program remains firmly focused on reliability grid resiliency and meeting the growing needs of our customers. Consistent with that strategy, our rate base growth guidance remains unchanged at 7% to 9% through 2028. From a financing standpoint, we continue to execute a disciplined and balanced approach aligned with our balance sheet targets.

Our capital spending is supported by a thoughtful mix of debt and equity. Importantly, our 2026 equity needs are largely derisked with nearly $500 million already priced. We have also diligently focused on expanding our liquidity and to ensure we can most effectively take advantage of financing opportunities throughout the year as our capital investment program continues to grow. To that end, we recently closed on the extension of our core credit facilities to 2031 and expansion of revolving borrowing capacity by $550 million.

In closing, we delivered solid results in 2025, underpinned by strong execution and durable growth. We are excited about the opportunities ahead in 2026 and confident in our ability to execute our financial and operational plan with discipline. We look forward to progressing through our rate case with continued engagement with all stakeholders to support safe, reliable and affordable service for our customers. This concludes our prepared remarks.

I will now turn the call over to the operator for questions.

[Operator Instructions] Your first question is coming from Nick Campanella from Barclays.

This is Fei for Nick today. Thanks. Just really wanted to touch on the capacity growth, if I can here. Can you just update us on the latest thinking on the IRP planning, including timing this year? And generally, how should we think about the incremental transmission and gas generation opportunities I guess, compared to what you disclosed here on Slide 21.

Yes. Thanks for joining us. Midyear, we'll expect to file an updated 15-year integrated resource plan. So that will be a snapshot of our most recent thinking in terms of load and demand forecast and the resource plan to be able to meet that.

Of course, the near term in the action plan window, it will be a bit more specific with respect to technology resources and locations. And then when you get beyond that, sort of near-term 5-year window, then it's more directional in nature. But the key is, it will continue to show the robust and strong growth over the long term and the amount of generation and transmission needed to be able to serve this growth. Of course, our capital plan right now only goes out through 2028. And so a lot of the growth to support TSMC's build-out as well as data center ramping goes beyond that period, and the resource plan should be able to indicate the amount of generation still needed to be able to serve even what we've already committed to.

But then above and beyond that, we are still negotiating to be able to serve incremental data center demand from our subscription queue, which we talked about last quarter. That's not in the capital plan. And to the extent that we're able to secure an agreement for incremental load to be able to serve a portion of that queue, that would be resources that would need to be built above and beyond what we've talked about. And then in addition to that, any further expansion for TSMC would also need to be considered and would drive further generation or transmission expansion beyond what we've shown in the 3-year window within the current capital forecast.

Great. That's super clear. Maybe just a quick one on the credit metric update and the HoldCo debt percentage of total debt. Can you discuss the cadence to reach that mid-teens level target and where you 2025 year end metric landed?

Sure, Fei, it's Andrew. We're committed to keeping our HoldCo debt at a judicious level and that mid-teens level. I believe if you calculated at year-end, it was at 17%. So kind of within the range that we're targeting. And as you look at the financing plan for 2026, the HoldCo debt levels are intended to be quite modest and stay within that bandwidth.

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

It's actually Alex on for Shar. So just on the future sales growth of the 5% to 7% annually over the next 5 years, can you just remind us how sticky that number is over the long term? And also, what are you assuming in your forecast? Is that just sort of the minimum take agreements you have in your large low contracts.

So if you were sort of think it this way, if customers sort of ramp faster more power on over time, would that be accretive opportunity to that 5% to 7% forecast?

Yes, Alex. I think the way to think about that is that load forecast is based on existing demand that we have certainty in being developed are already in service within the service territory that we expect to grow as well as projects that are already in development or under construction. Therefore, there's upside to the extent that there's anything incremental added to that from either our uncommitted queue, further TSMC expansion or other projects that haven't been announced yet. But the growth forecast that we've outlined is really based on projects that we have a high degree of confidence and certainty in developing, and we track that very closely.

And just to add to that, it's Andrew. The cadence of that committed queue that we've got in our sales force goes sales forecast goes through into the 2030s. So while we've given you the 5%, 7% through 2030 the full build out of that existing capacity does have a runway beyond that. And you should also keep in mind that, that ramp and the cadence between now and is borne out of kind of our experience with these customers over the last several years and represents a pretty educated view of what that ramp looks like over the next several years.

Got it. That's helpful. And just on the -- just the EPS and the rate base CAGR you have out there. So as you sort of just look out to '27 and beyond, how should we be thinking about the delta between the two is sort of the 200 basis points the right figure? Or could you see those two converge over time just given the amount of opportunities you're seeing?

Yes, Alex, for sure, as we get out through the rate case, I think we'll be looking at both the capital plan itself. And we met the financing plan and therefore, what our EPS trajectory looks like. And so if you think about the rate base CAGR is going through 2028 right now, and we rolled that forward in the third quarter call. You're really just beginning to see the impact of some of the projects that are in our long lead kind of execution window.

You heard Ted talk about Red Hawk on the call. It's a good example. A lot of the transmission projects in our strategic transmission plan also represent that. And so as we continue to consider how to provide more transparency for longer around the capital plan, what that means for the rate base CAGR.

That will then trickle through the rate case and our expectations around the formula rate that allows us more prompt recovery. to give you more detail on what that means for financing and ultimately, for the trajectory of our EPS. But ultimately, our goal remains to create a more linear trajectory there borne out of the formula rate.

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

Julien Dumoulin-Smith: Nicely done. I appreciate it. A couple of things to just wanted to talk quickly implications from the UNS case of late, especially the formula rate decision, being set. Any thoughts, reactions on your front in terms of readthrough, a two or three critical points that you'd flag here as it reads the APS, I know it's delicate. It's a comment here, but I want to make sure we're all line on the same reads here. If you can comment both on the concept of formula as well as the fair value piece.

Yes, of course, Julien, No, fair question. Look, I think the headline from our read as it was generally constructive. But there are material differences between the situation for the UNS gas case and then APS. But I'll just step through a few points on how we think about it.

I mean, first, look, they got about 86% of their original revenue requirement ask which results in over a 14% rate increase. That's pretty healthy. They got a formula rate with a post-test year plan the commission rightfully recognize that through all the good work at the workshops last year, there is no need for a pilot. So it's a secure formula rate for perpetuity.

And they have an ROE similar to their current. That said, we do disagree with the notion that you should have an ROE reduced at all as a result of the formula rate, and we'll continue to make that argument. But they still got a fairly healthy ROE consistent with what they've had before plus the formula rate. But Jeff, to recognize some of the differences, it's a gas utility in an area that doesn't experience near as much growth as what we're seeing.

It's been 16 years since the last rate case filing, so a little bit difficult to make the argument that regulatory lag is impacting our ability to fund growth like we see. They certainly have a different risk profile. And the formula rate schedule was a little different than what we are proposing or would expect to work with the commission on securing. But what was proposed work for UNS, they agreed to it, and maybe that works for their service territory.

So again, I think the headline is generally constructive. It secures the first formula rate within the state and shows the direction that the state is heading, which is great. But there are some differences between our service territories that we'll continue to advocate for.

Julien Dumoulin-Smith: Yes, absolutely. Appreciate it. And then just if I can keep going here in as much as you guys have this interesting 20 gigawatts of uncommitted load, the 4.5 have committed relative to the '25 system peak. So just an incredible backdrop. With that said, can you comment and reconcile a little bit against the IRP? I know -- look, I know it's coming midyear. I get that we're trying to jump ahead of it a little bit. But just trying to like decompose, especially the 4.5 committed against what's already in the forecast or even beyond the core forecast, but what would be incremental in that again, it's all kind of coming back to an eventual roll forward of your plan as well as like what's truly incremental to the plan relative to the current years that you have disclosed. Just trying to zero in, it seems like a material update here.

Yes. I appreciate the question, Julien. The way I would characterize it is the IRP will consider known and committed customer demand. So it will reflect with a longer-range forecast, what we expect the 4.5 gigawatts of committed load to materialize into over the 15-year period as well as our, I'll call it, organic load growth that's above and beyond that 4.5 gigawatts of committed high load factor demand.

It will also include our latest thinking in terms of TSMC and the related chip manufacturing schedule for both timing and potential expansion. What it will not include is any portion of the uncommitted queue that is in negotiation or yet to be contracted. So that will all still remain as incremental demand above and beyond what we show in the IRP. So I guess just summing it up, the IRP will give us the best line of sight for how the 4.5 gigawatts of high load factor demand will materialize over the 15-year period, plus our view on the organic load growth such as residential, et cetera.

And then anything that we contract from the uncommitted queue, which we're actively working on will be incremental to that even above and beyond what we show in IRP.

Julien Dumoulin-Smith: Right. Absolutely. And then just to close the loop on that, I mean, where are you in terms of what's in the committed or uncommitted? I imagine the bulk of the committed is TSMC, but can you break that down a little bit? And maybe you can comment a little bit on where you stand on kind of translating further uncommitted into the committed bucket? Any potential that, that moves from one bucket to the other prior to that IRP even?

Yes. I'd say the majority of that committed is still a healthy amount of high load factor customers that are data centers or related that we have committed to over the past a couple of years and are actively and build out a ramping. TSMC is certainly a material portion of that, but the 4.5 gigawatts does not include any potential expansion of TSMC and we'll continue to work with them on their plans for any acceleration or expansion. So that would be above and beyond the 4.5 gigawatts.

But as we said in the last quarter, we did bring forward an opportunity to uncommitted to evaluate through our subscription model. Those negotiations are ongoing. To the extent that, that is finalized ahead of the IRP, it may be included, but there's also a likelihood that it would be incremental to the we would aim to be able to file an agreement with our commission for any successful negotiations of that subscription model this year.

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

So just I know we've got staff and intervener testimony coming up here. But I'm wondering, given all the discussions sort of happening there in Arizona and what have you, is there -- are there any thoughts about maybe -- and given the fact that we've got now the ARM from the formula stuff from UNS, what -- are you any thoughts about maybe potentially a settlement on the case. I mean, I know, like I said, we have staff coming up and intervenors. But just any thoughts about that?

Has there been any thought about that or discussion with that?

Yes, Paul, I appreciate the question. I'd say at this point, we're focused on processing the case in the traditional manner. We always remain open to settlements, and the company actually has a long track record of successful settlements in this jurisdiction. But this case has some unique aspects to it.

One is making sure that we align on the mechanics of implementing the formula rate. And two, is the importance of getting the rate design changes agreed to for the new high load factor tariff. And those would be well served in the traditional hearing process. We've demonstrated successfully to be able to achieve a constructive outcome in the last rate case through the hearing process.

And so we think that's a viable path for us to once again achieve a constructive outcome. So at this point, we're focused on the traditional format. We always remain open to settlement, but that's not something I would count on for this case.

Okay. Fair enough. And then just finally on -- there was a Nuclear Conference yesterday or hearing what have you at the commission. And I wasn't able to listen to a lot of that, frankly, but it sounds like there's a lot of kind of excitement for -- in the context of utilities.

In terms of this resource and I was just wondering if you guys, any thoughts about what the -- if there's anything in the near term that we might see on that? Or just any thoughts on that?

Yes, Paul, I mean, we're fortunate that the broader community policymakers and community leaders remain very supportive for nuclear. Obviously, that's important to us given the fact that we operate the largest producing nuclear plant in the country today. But there's also a lot of interest in whether there's an opportunity for new nuclear in Arizona going forward. We've been very clear with stakeholders and our customers that while we remain constructively supportive of the nuclear for our country and potentially Arizona in the future that, that's not something that you would expect in the near term, but it's something that we want to pay close attention to and work collaboratively with stakeholders to identify what those opportunities could look like over the medium and long term for our state.

And so that's a big part of what the workshop was about yesterday. And we really appreciate the commission taking time to learn and explore what these opportunities could be. It's a great dialogue. But we've been very clear that there's a lot of capital required.

You need constructive policy and importantly, you need the supply chain and the trades to be able to have the capacity to be able to build out these projects. So we're actively involved in the industry. We're actively involved in the state and supporting what new nuclear could look like in the future, but we view that as more of a medium and long-term opportunity.

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

Stephen D’Ambrisi: Just a quick one. Slide 20 on the sales growth. I mean I think the first bullet says at all 9 consecutive quarters of growth exceeding the guidance range. And just obviously, 4Q looks like it's accelerating. Maybe there's some art versus science of weather normalization in a weak weather quarter. But can you just talk a little bit about what the sales growth trend looks like versus kind of the 4% to 6%, '26 sales growth that you've given in the long-term guidance as well?

Sure, Steve, it's Andrew. We've continued to see very diversified and very consistent sales growth. For the year, residential came in at really at the top end of where we've ever forecasted because that 4% to 6% that we've forecasted for last year that we forecast for this year represents largely the ramp-up of our extra high load factor customers. So to see that level of residential growth driven by nearly 2.5% customer growth remains strong.

What we expect in 2026 is kind of reversion to the normal dynamics where the ramp-up of the extra high load factor customers is the dominant part of the sales mix. But one of the, I think, tailwinds that we've seen that we'll just have to continue to monitor in 2026. ,[indiscernible] generation produced pretty small offsets to residential sales. And I think that's what drove it to the upside and kind of continue to drive that tailwind into Q4 of last year. And so we'll just have to continue to monitor as those reductions in applications we're seeing for new rooftop installations translate potentially into support for our residential sales growth numbers.

But in the near term, 2026 is driven by the known customers in that queue that we see ramping and see coming online, including as the fabs of TSMC continue to move ahead. And then over the longer term, through 2030, that step up is really related to, again, those known customers and where we expect them to be in their ramps. And having worked with the data centers for a long time, I think our forecasting has gained a good balance of understanding where these customers are what the intent of their facilities are and how that drives those ramp rates year-to-year. But fundamentally, the runway that we have with these customers and combined with the semiconductor space and then the residential growth gives us pretty strong confidence in those numbers through the end of the decade.

Stephen D’Ambrisi: Okay. That's helpful. And just -- I don't know if -- do you have a sensitivity or a rule of thumb on like -- to the extent, I know you're guiding back down to the normal average for resi customer growth. But to the extent it's back at the top end and outperformance by 50 basis points or 100 basis points, like what that means for like an EPS sensitivity.

Yes. On a gross margin basis, we typically say that 1% of residential growth is somewhere north of $25 million, whereas 1% related to extra high load factor could be more in the $5 million to $10 million range. So that's kind of the distinction. Of course, all of it gives us operating leverage as we continue to focus on reducing our costs. across the system.

But that's the rule of thumb that we think about in terms of residential hours just being more clustered around the peak and the [ HLS ], of course, delivering 90-plus percent load factors across peak, off-peak hours.

Your next question is coming from Ryan Levine from Citi.

Any color you could share around the pace of the large load commitments in the uncommitted bucket that you're considering to be ready for? I mean do you think this should all come together for a lot of these large customers around the same time? Or kind of how do you manage the kind of cadence of potential movement from the uncommitted to the committed bucket?

Yes, Ryan, the way we are treating that is as we identify infrastructure and projects to be able to offer to that uncommitted queue at a volume that is worthy of gaining their interest, so call it a gigawatt or more roughly. Then we'll offer that to the uncommitted generate or gauge interest based on the location and the timing of that infrastructure and ultimately work with counterparties on the best fit for that infrastructure opportunity and negotiate an agreement. We made our first offer through the subscription model in the latter part of last year. And as a result, we're actively in discussions right now with those counterparties that are interested with the intent to try to finalize an agreement and file it with the commission this year.

And then in parallel to that, we're working on a pipeline of generation and transmission infrastructure projects that would create incremental capacity that could then go back and be offered to that in committed queue. So we'd expect that to be on somewhat of a repeatable basis going forward. And again, as mentioned before, I think when Julien was asking the question, that all of that for uncommitted demand would be incremental to the current plan. We wait until we have a secured contract with a definitive project before we add it to the plan, both from a capital and rate base standpoint.

And then the load growth associated with those uncommitted projects would also be incremental to the plan. So we're actively working on that now. But importantly, we want to make sure that we identify the infrastructure capacity first. and do this prudently. And then secondly, it will be important in parallel to work with our commission on modernizing the rates to ensure the growth base for growth.

Great. And then is the company looking to finance some of the transmission build out with some of the DOE energy dominance financing as we've seen with some of your peers around the country. And how are you thinking about the transmission funding start?

Yes, Ryan, it's Andrew. We'll look at all financing sources for the CapEx plan. in particular, we are interested in looking at sources of capital that are outside the traditional. I think it starts with our customers and ensuring that as part of this growth base for growth conception, that they're putting capital to work given the size of some of the balance sheets and the urgency with which they want to come online. So looking at customer financing, certainly looking at any financing alternatives out there.

And so we'll continue to evaluate grants and other opportunities that come out of the federal government, as well as we go along. But fundamentally right now, the financing plan you see is our base plan today, which really allows us to rely on traditional funding sources. But certainly, as we look at some of these large projects and more on a temporal basis, look at doing a bunch of large stuff at once, we'll look at all kinds of alternatives to take it off balance sheet during construction. I think really, it starts with ensuring that we're aligned with our customers and through the subscription model to the extent that we can get capital upfront from our customers to buy down their price over time, that helps us as well from a balance sheet perspective.

Your next question is coming from Anthony Crowdell from Mizuho.

Just two quick questions. One is where did you end the year on an FFO to debt basis? And will you be at 14% to 16% throughout the entire forecast period? And then I have one follow-up.

Yes. So Moody's is really the limiting constraint given their downward the threshold is 14%. So we really focus there. And we were north of 14%.

We won't get their official calculations until Q1. But if you do it on the basis as we understand it, we're high 14s from a Moody's perspective. So feel good about that. Our aspirational goal is to ensure that we're always maintaining 100 basis points of cushion. If you look at the regulatory lag that we're going to continue to go through in 2026, I think it really points to why the dialogue we're having and its rate case is so important.

That the debt, the further you get away from any rate relief, it starts to come under some pressure. And so while we know that the rating agencies don't take a short-term perspective, and we've maintained pretty consistent dialogue with them about the improvements that we're seeing and the potential for cost recovery, particularly through the formula if you look at our earnings trajectory in '26 versus '25. That is all regulatory lag related and that should translate into the top line on an FFO to debt numerator perspective as well. Ultimately, I think our goal is to grow that numerator. And that, I think, will go a long way to shore up the credit metrics and allow us to deliver that 14% to 16% for the long term with sufficient cushion within that range.

Great. And then I think, Ted, it was to earlier -- one of the earlier questions on transparency. You hope to get earnings, I believe once the formula rate plan is in effect. You started talking about maybe more linear or more linearity with the earnings.

Is it -- you hope with the formula rate plan if it -- once it gets passed and enacted that we get a more linear trajectory of earnings longer trajectory of earnings or both?

Yes, Anthony, I think we fully recognize that a more standard disclosure would be able to match earnings rate base and capital plan out to that 5-year mark. And so we would like to be able to give longer visibility and also include within that a more consistent linear trajectory. But given the current construct within our jurisdiction, of the lumpy nature of these rate cases, that's just been challenging to do while maintaining precision with that forecast. And so we'll take the opportunity once this case is processed to be able to step back and reflect on the best disclosures we can develop and release and our aim would be to be more consistent with our peers in that regard.

So once we conclude the case, we'll prepare a new set of disclosures and forecasts and our goal would be to be able to provide that in the longer term and be able to achieve more linearity as a result of the more regular nature in which the formula will work.

[Operator Instructions] Your next question is coming from Chris Ellinghaus from Siebert Williams Shank.

Just a follow-up. I was thinking the same thing about the disclosure and how formula rates will change that. But just to be clear, is it just the formula rates being effective or do you also need to have some greater clarity on, say, what's in the committed queue as well as having some better sense of where TSMC is going with their next expansions to give you adequate data to do that sort of extension?

Yes, Chris, the way we think about it is it really is almost entirely about the timing consistency of cost recovery. We've got a pretty good view of our committed demand, and it's robust. But due to the substantial regulatory lag in the jurisdiction, the ability to consistently on a linear basis, translate that top line growth and the bottom line growth is challenged by the lumpy nature of our rate case process. When you evolve to a formula rate, you've got more steady gradual rate changes for our customers, and it also allows us to have a bit more of a predictable and consistent recovery method to be able to recover those costs.

And that's really the biggest change.

Okay, sure. Andrew, in terms of looking at particularly the RES DSM component of O&M. How should we think about that going forward relative to where you are for 2026?

Yes. So I think the most important thing to keep in mind, Chris, is that those are regulatory programs that we recover through rates, and so they basically show up in both our gross margin number and then they show up offsetting nearly dollar for dollar on the O&M side. At the end of last year, the commission determined to discontinue some of those regulatory programs. And so the size of the overall DSM program condensed.

And so you've seen that condensing both on the gross margin side and on the O&M side. And so while there is a great overall story around our O&M cost management as a company, when you look at our waterfall from '25 to '26, a considerable portion of that O&M related benefit is tied directly to an offsetting decrease in revenue received on the gross margins, that RES DSM PSA chemicals line items. So while the programs that we have in place today, we feel really good about the commission made that determination. And so those programs have been condensed in the meantime.

And...

I understand that there's an offset, but what I'm trying to figure out is sort of given the cost pressures for -- particularly for residential sort of across the board. Do you think that there -- I guess, the right way to put it, is there appetite for those programs is permanently reduced? Or do you think there could be some return to those programs given just sort of cost of living pressures for consumers?

Yes. Chris, this is Ted. I guess the way I would look at it is I think the commission and staff really took a thoughtful approach to reviewing all the programs and saying, which of those programs have the greatest positive impact for the customers that need them the most and let's focus the funding on those programs. While retiring the programs that are a bit legacy in nature that have less effectiveness and may not be worth the investment any longer.

A lot of those programs have been in place for many years, they did a lot of good work, but they also started to reach a saturation point. And so really, the programs that are remaining are the ones that benefit the customers that need it the most and have the greatest impact and I think this commission is focused on just continuously reviewing those programs to ensuring that they're using the dollars wisely and they're maximizing impact for the investment made. The commission is also very focused on affordability. They recognize the need to allow utilities to recover costs as a result of inflation as a result of the investments needed to secure a reliable grid due to growth.

But in parallel, look for any opportunity possible to be able to reduce cost for customers and the rightsizing of the DSM plan resulted in a meaningful savings to all our customers. But just to echo what Andrew said, we need to do our part as well, which is why we're going on 3 years now of flat to declining O&M, declining O&M per kilowatt hour. We continue to be focused on modernizing the rates in this rate case to ensure that the extra high load factor customers are paying their fair share of growth, which has a net benefit to residential customers. And we remain competitive from a rate standpoint where residential rates are below the national average, and we'll do everything we can to be able to keep them affordable.

That helps. Lastly, the additional TSMC expansions, how much vision do you have into them at this point? And when do you have -- expect to have more perfect clarity on what that's going to look like for you?

TSMC is a very important customer, obviously, with a substantial build-out ongoing. And so we're in active discussions with them. Both the timing of the fabs that they've announced and committed to as well as any potential expansion that they may have. So when they're ready to solidify their plans, then we'll be ready to articulate what that means from a utility infrastructure standpoint.

Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.