Pinnacle West Capital Corp (PNW) 2004 Q2 法說會逐字稿

Good afternoon. My name is Jody, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Pinnacle West earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce Ms. Rebecca Hickman. Please go ahead, ma'am.

Thank you. I would like to take everyone for participating in this conference call to review our earnings for the second quarter and recent developments. A replay of this call will be available through August 5th by calling 1-800-642-1687 and entering access code 837-6241. A replay will also be available on our Web site, www.PinnacleWest.com, for the next 30 days.

This morning I have with me Bill Post, our Chairman and CEO; Jack Davis, who is President and Chief Operating Officer and also President and CEO of Arizona Public Service, and Don Brandt, CFO of both Pinnacle West and APS.

Here is an outline of our call's topics. Bill is going to provide an overview of our earnings for the quarter and discuss earnings guidance. Then Don will discuss the primary earnings variances, other financial topics and the Western wholesale energy market. After that Jack will update you on the status of regulatory developments and our operations, and finally Bill will wrap up prepared remarks.

Before I turn the call over to our speakers, I need to cover a few details with you. First, the Quarterly Statistics section of our Web site contains extensive supplemental information on our earnings variances and quarterly operating statistics. Second, please note that all of our references today to per-share amounts will be after income taxes and based on diluted shares outstanding.

It is also my responsibility to advise you that this call will contain forward-looking statements based on current expectations, and the Company assumes no obligation to update these statements. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. Please refer to be MD&A and our March 2004 10-Q which identifies some important factors that could cause actual results to differ materially from those contained in our forward-looking statements.

Also, during the course of this call, we will be discussing our ongoing earnings, which is a non-GAAP financial measure as defined by the SEC. Our earnings release, which is available on our Web site, reconciles our ongoing earnings to our net income.

Finally, this call and Web cast are the property of Pinnacle West Capital Corporation, and any copying, transcription, redistribution, retransmission or rebroadcast of this call in whole or in part without Pinnacle West's written consent is prohibited.

At this point, I will turn the call over to Bill.

Good afternoon. I would like to thank all of you for taking your time to join us today. Our reported earnings for the quarter were up from a year ago. We reported net income of $71 million or 78 cents a share compared with $56 million or 61 cents a share in the second quarter of 2003.

In our last conference call, I talked about the sale of the Phoenix Suns limited partnership that had just recently been announced. The transaction closed June the 30th as planned and added 23 cents a share to our earnings for the second quarter. Excluding that gain, our ongoing earnings were $50 million or 55 cents a share, which represents a decrease of 6 cents a share from last year's second quarter.

Don will give you the details of our financial results for the second quarter. Jack will be providing human update on our operations and the status of our rate case settlement discussions. I would like to add that I am encouraged by the settlement discussions and that progress continues to be made.

As to earnings guidance, we are not changing the guidance we issued last October for 2004 and the years beyond. The operating events we have dealt with this summer likely will have a modest negative impact on 2004; however, it would be premature to change our guidance today given we are still managing the situation. Both Jack and Don will address specifics related to these events.

Now I would like to turn it over to Don.

Thank you, Bill. In my commands, whenever I refer to amounts in millions of dollars, I will be referring to amounts after income taxes unless I indicate otherwise. Our ongoing earnings were negatively affected by costs related to new powerplants placed in-service in the last 12 months. The replacement power costs related to unplanned powerplant outages and a rate decrease for our retail customers. These factors were partially offset by retail sales increases related to customer growth and usage and lower regulatory asset amortization. I will explain each of these factors in more detail.

Increased cost to the new powerplants, such as depreciation, interest and other operating costs, were evident in this year's second quarter. Two new plants were placed in service in the last 12 months thus affecting the quarter-to-quarter comparison, Unit 5 at our West Phoenix plant last July and the Silverhawk plant May 17 of this year. Increased costs related to the new plants totaled approximately (inaudible) 10 cents a share.

Higher replacement power costs due to unplanned and planned outages reduced our earnings about 5 cents a share. The largest driver was the unplanned outages at the Palo Verde units for approximately one week in early June. Jack will provide detail on these outages.

Our final rate decrease under the 1999 settlement was implemented on July 1, 2003. This 1.5 percent decrease reduced earnings in the quarterly comparison by about a nickel.

Our fundamental growth continues to be strong and underpins our long run performance. Retail sales growth contributed about 7 cents a share for the quarterly comparison. Excluding the effects of weather, retail sales grew 5.8 percent. Our customer base grew 3.8 percent, which continues to be about three times the national average. Significantly the rate of growth continues to accelerate with the overall improvement in the Arizona economy. On a weather normalized basis, we experienced strong growth in both our residential and business customer classes. Residential sales increased 8.8 percent, and business sales increased 3.6 percent.

The decrease in regulatory asset amortization added about 8 cents a share. As a reminder, we accelerated the amortization of substantially all of APS's regulatory assets as part of the '99 settlement agreement. We completed the accelerated amortization at the end of the second quarter of this year. We recorded pretax amortization of $9 million or 6 cents a share in the second quarter of this year, whereas last year we recorded pretax amortization of $21.5 million or 14 cents a share in that second quarter.

Notably, as a result of our commodity price hedging program, rising natural gas market prices did not result in a significant variation in earnings for the quarter. While the average delivered spot market price of gas for the second quarter of 2004 increased 25 percent as compared with the second quarter of 2003, our actual delivered hedged price of gas declined 3 percent.

Our marketing and trading segment was basically flat for the quarterly comparison. The net increase in gross margin was only $1 million or a penny a share. However, I would like to briefly review the primary changes in that segment. The mark-to-market on transactions that will be delivered in future periods increased 3 cents a share. We also had improvement in our realized margins which contributed a few cents a share. Sales of excess generation were essentially flat compared to last year's second quarter, reflecting more compressed margins on higher sales volumes. These favorable factors were significantly offset by lower unit margins on APS Energy Services competitive retail contracts in California, which decreased our earnings about 5 cents a share. Suncor's earnings were essentially flat for the quarterly comparison, and Suncor's accelerated assets sales program is on track.

Now I would like to provide perspective on our marketing and trading business in the Western energy markets. As we have mentioned before, the primary focus of our M&T business is risk management. We emphasize hedging our natural gas and purchase power price risk. To that end, we are currently about 90 percent hedged for the second half of 2004 and are currently hedged approximately 50 percent for 2005. These hedge positions are at prices meaningfully below current forward market prices for the respective periods.

In the second quarter of this year, the results from our M&T business continued to reflect difficult market conditions in the West. SPARC spreads have been squeezed further.

As we show in the quarterly statistics on our Web site, compared with the year ago, spot prices at Palo Verde were up less than 5 percent for on-peak power and up approximately 30 percent for off-peak. For these same periods, natural gas prices increased about 25 percent. SPARC spreads in our region in the second quarter ranged from 0 to as high as $17 a megawatt hour with an average of just over $7.00 per megawatt hour. The average SPARC spread was down almost 50 percent from the second quarter a year ago.

From a trading perspective, the volume of new deals we have originated in the second quarter increased about 20 percent compared with the second quarter of last year. However, these deals have very narrow spread and will be delivered predominantly in 2004 and 2005.

In just a few minutes, Jack will brief you on the operational aspects of the two substation fires we experienced in July of this year, but let me address the financial implications of the fires first. Most of the costs of the replacement transformers will be covered by insurance. Uncovered replacement transformer costs will have a negligible impact on 2004 earnings. We are incurring additional costs as a result of the less than optimal dispatch of our system generation, and our sales and revenues are reduced as a result of our customer's outstanding response to our request for them to conserve energy. However, these negatives are somewhat mitigated by other avoided costs, principally lower generation and purchased power costs related to customer conservation. The net impact on 2004 earnings of these costs and revenue variations will likely be somewhat negative, but at this time we believe the amount will be manageable.

Now I will turn to our recent financing and cash flow activity and our dialogue with the rating agencies. In late June, APS issued $300 million of 10-year unsecured notes at a coupon of 5.8 percent. The purpose of the financing was to prefinance the debt maturities that will occur in January and August of 2005. APS has invested the bond proceeds and should remain in an invested position until August of next year.

During the past several months, APS successfully completed two bank facilities, both of which were oversubscribed. We renewed our revolving credit facility while increasing its size to $325 million and extending its term to three years. The revolver provides liquidity support for the APS $250 million commercial paper program, as well as providing an additional $75 million for additional liquidity needs and letters of credit.

We also renewed a $150 million letter of credit facility supporting tax-exempt bonds for a three-year term. We continue to have ongoing dialogue with the rating agencies. They are closely monitoring our regulatory developments. I believe the negative outlook they have on our securities will continue until we have reached resolution of the rate case.

In terms of pension fund contributions, we will be making a $35 million contribution this year which reflects the minimum required. The required contribution would have been significantly higher if federal pension interest rate relief legislation had not been passed. And finally, Pinnacle West received approximately $100 million in May from the Southern Nevada Water Authority for its 25 percent ownership interest in Silverhawk. Pinnacle entered the quarter with about $30 million of commercial paper outstanding.

I will now turn the call over to Jack.

Thank you, Don. Today I am going to give you a brief update on regulatory developments for the Arizona Corporation Commission and a summary of our recent operations.

I will start on the regulatory front. APS's pending rate case is by far our most prominent regulatory activity. On our last conference call, I reported to you that we entered into settlement discussions with the ACC staff and the intervenors. We have been discussing all of the issues set out in our rate case filing, as well as related issues raised by ACC commissioners' letters. The content of the discussions is confidential, so I can not give you specific details on the discussion topics. I can, however, update you on the process aspects of the discussions.

The Ministry of Law judge for the rate case granted a stay in the traditional procedural schedule beginning May 1st to allow the parties to focus on settlement discussions. Currently this stay has been extended until at least October 18. I'm sorry, August 18. There are more than 30 parties in the rate case, and most of them have been participating in the settlement process. The ALJ has been holding procedural conferences about once a month as checkpoints to determine whether the parties consider the settlement discussions to be productive and whether to continue the stay or return to the traditional litigated schedule. On July 19, we and another parties indicated that we believe the settlement discussions are productive and that progress continues to be made.

The next procedural conference is scheduled for August 18. I hope by that time we will have a much better sense of whether or not a settlement can be reached. We continue to believe that we have a very strong case, one that supports APS's ongoing ability to provide reliables service to our customers in Arizona. We have worked vigorously to defend our position, first through a traditional rate case filing and testimony process and more recently through our participation in the settlement discussions.

Now I would like to discuss our pending acquisition of the Sundance powerplant. In June, we announced that we had entered into an agreement to acquire the Sundance generating station from PPL. The acquisition is a culmination of the RFP process we began last November for long-term power supply resources to meet our existing and growing shortfall of peaking capacity. APS does not intend to enter into any transactions as a result of the 2003 RFP.

I will give you a brief recap of the pertinent details of the Sundance transaction. APS plans to buy Sundance for approximately $190 million in cash. The plan is a 450 megawatt simple cycle gas powered facility about 55 miles southeast of downtown Phoenix. This is a 10 quick start General Electric LM6000 combustion turbines, which meet our needs for flexible reliable peaking capacity.

Along with the generating plant, we will obtain the necessary transmission capacity to deliver the power to our customers. As an additional plus, the location of the plant and transmission compliment our system. The transaction is subject to various regulatory approvals, including the ACC, the Federal Energy Regulatory Commission, the Department of Justice and the Federal Trade Commission.

APS and PPL have filed a joint application with the ACC seeking approval of the transaction by the end of the year. We are not requesting that Sundance be reflected in our pending rate case. Rather through the ACC application, APS requested rate recognition of Sundance and the company's next rate case and that certain operating and capital costs be deferred until that time. We expect to close the transaction by the end of the first quarter of 2005.

I should remind you we have been buying 150 megawatts of power from PPL during the summer months as a result of the 2003 Trek B (ph) contracts. The contract extends through September 2005, and we and PPL intend to terminate that contract upon the closing of the asset purchase.

Now I will briefly review some of our operating activities during the second quarter and the past month. As Don said, growth in our retail service territory has been remarkable. As one of the fastest-growing service territories in the country, we face significant challenges every day in meeting that growth. We maintain a steadfast focus on customer satisfaction and operational performance throughout our organization to serve our growing customer base.

Moving now to our powerplant performance, the capacity factor for Palo Verde was 77 percent in the second quarter. The major factor that affect our (inaudible) performance statistics were the normal spring refueling and maintenance outage and an unplanned outage in June. The spring refueling outages were in the second quarters of both 2004 and 2003. The 2004 outage lasted about 38 days, while the 2003 outage lasted 33 days. Both outages were within reason of our 35 to 36 day target with the length of refueling outages.

On June 14th, all three units at Palo Verde tripped off line due to a transmission system disturbance that was initiated on another utility system. The plant responded as designed and was not damaged as a result of the trip. We returned all three units to service within an average of five days.

The June transmission disturbance also caused both units at our Redhawk plant to trip. Again, neither of those plants were damaged by the trip. Both units will return to service the same day.

Two substation fires in the metropolitan Phoenix area in July have been in the news. The first fire was on July 4 at the West Wing transmission substation, which we joint-own with other utilities. We were able to restore a section of the West Wing disturbance within four days. We have procured on behalf of the West Wing participants an existing 500 kilovolt transformer from the Bonneville power authority. We expect the transformer to arrive in Phoenix around the end of the week and have it installed in the next several weeks. Installing that transformer will allow us to restore a second section of West Wing disturbance. By next summer, we expect to restore the third and final section at West Wing to service prior to be peak.

The second part fire occurred on July 20th at our Deer Valley distribution substation. That substation was fully restored to service within six days using a spare transformer we had on hand. As a result of the West Wing substation fire, transmission import capability into the Phoenix load pocket was reduced as much as 20 percent. After a new transformer has been installed at West Wing in August, we will have the substation restored to about two-thirds of its capability.

We have been able to avoid customer interruptions by maximizing the use of APSs and (inaudible) projects powerplants inside the load pocket, including our (inaudible) powerplants, routing power through other transmission lines, and asking our customers to conserve power during the peak hours. We have hired independent experts to help determine the cause of the substation fires and to review our maintenance practices, and we expect to receive their reports by the end of the year.

Last week we installed (inaudible) corporation commission at a public meeting on the June transmission disturbance, the powerplant outages, the substation fires, and the outlook for the rest of the summer. In addition to describing the events, we explained the extent and intensity of our activities of addressing the events -- keeping our customers power on and implementing access to the extent practical to prevent similar situations in the future. In my remarks to the ACC, I stated that we are guardedly optimistic about our ability to avoid customer interruptions this summer.

The powerplant outages and substation fires have been significant operational challenges for us recently. They have highlighted the commitment of our employees to providing the highest level of customer service and their capabilities to solve and address complex problems thoroughly and with a sense of urgency. I am very pleased with our employees' actions in addressing these challenges. I am also pleased with our customers' corporative response to our request that they help by conserving power.

Our coal plants have also run very well. For the second quarter of this year, they posted a capacity factor of 81 percent, representing the best quarter since the third quarter of 2002. The Silverhawk powerplant near Las Vegas was completed and declared operational on May 17 on time and under budget. Silverhawk's initial sales confirmed that it is strategically positioned to supply power in the Southwestern markets, including California and Nevada.

Last week JD Powers and Associates released their results for the 2004 electric utility residential customer satisfaction survey. The study was conducted from late March to early June. The results show that APS ranks sixth nationally among IOUs and continues to rank second among electric utilities in the West on customer satisfaction.

In summary, we continue our emphasis throughout the company on providing exceptional service to our customers, and we are focused on constructively addressing the regulatory issues at the state and federal level. That concludes my prepared remarks, and I will now turn the call back over to Bill.

In summary, I would like to emphasize just a few points. As John said, growth in our electric service territory is remarkable, 3.8 percent, making ours one of the fastest-growing electric markets in the United States. That growth provides a sound foundation for our business, but it also presents challenges in serving the energy needs of our customers and providing the infrastructure necessary to reliably do so.

I would like to echo Jack's comments about our employers. We focus intently each day on every facet of our business, providing exceptional customer service, improving our operations, managing the risks of our business, controlling costs, and planning for the future. In recent weeks, they have been challenged by an abnormal sequence of operational events, and they have risen to the challenge. I'm proud of our employees and their accomplishments.

I continue to believe that our underlying customer growth and the related potential for earnings and dividend growth are distinguishing characteristics for our company. Our goal is to continue capitalizing on these advantages. The rate case outcome remains the most significant single factor affecting our outlook. We are fully committed to achieving an outcome that will cover the cost of providing reliable service for our fast-growing customer base, while providing a fair return to our investors for their investment in our company and our state.

That concludes our prepared remarks, and we would be happy to answer any questions you have.

(OPERATOR INSTRUCTIONS). Greg Gordon, Smith Barney.

Can you do me a favor so I don't have to go back through my files? Can you remind us what your last articulated both short-term and long-term earnings guidance was since you are reaffirming at this point that outlook?

The 8-K last October was for 2004 a base level of earnings of $2.50 a share, and for years beyond 2004, it was a minimum level of $3.40. That assumed within that 3.40 number that the rate request was granted in full and was in effect for the full year of 2005 and beyond.

So in the short run, you have had some operational issues, but you're maintaining the short run guidance given the things you discussed on the call, correct?

Yes.

And in the long run despite the fact that we don't have a deal yet/haven't tilted to a litigated solution, you still feel confident given the framework of how things have projected so far with your long-term outlook?

Yes.

Dan Eggers, CSFB.

The first question I guess maybe Jack can help with this from a procedural perspective. How long can you guys continue to extend settlement talks with the ALJ, or at some point in time, do they draw a line saying, okay, you guys have to come with something to us?

There is no procedural policy on how long you can extend the procedural schedule. Obviously the fact that all the parties have asked for the extensions tells you that we are making some progress.

If talks fall apart in the next month or so, where do you guys stand from a timeline on the traditional rate filing? Has this pushed everything back by three to four months at this point from what the original schedule was?

I think you just go back to the original schedule and start from that point, from the point of if the talks fail.

Okay. Got it. And then looking out with some of the issues you guys have had with the Palo Verde and then with the substation fires, what has been Arizona's sentiment regarding reliability needs? Has it been that general sentiment would be more supportive than it has been, or has it been a bit more indifferent?

Well, reliability has been an issue that has been in the local press literally every day for the last month. As we have talked with you before, this is an area that depends on an infrastructure to meet the kind of growth that I talked about just a few moments ago. So reliability continues to be a significant issue here, and from our standpoint, the steps that we have taken in the last few years to add the Redhawk plants, the West Phoenix plants, Saguaro, have all been positive in terms of being able to meet the challenge here in the last month.

Got it. With the amount of generation you guys now have in Arizona in the region, with Sundance included I guess in that, how much or how far out do guys feel you now have spare capacity or available capacity to meet this underlying 3 or 4 percent demand growth type numbers?

This is Jack. We are sitting here today in 2004 and by 2007, including all the (inaudible) assets and including Sundance, we are still 1000 megawatt short in that timeframe of meeting our predicted peak requirements.

Got it. Thank you, guys.

David Dickens, Deephaven.

Can you talk a little bit about your estimates of the amount of load that you have lost or the customer usage that has been avoided by customers because of your conservation requests surrounding the substation issues?

Yes, let me just preface that these are estimates. As Don said, as you look going to the future, we are in an area here where we are trying to make estimates on things that people are not doing. So it is difficult to make these estimates, and I want to put them into a category that is different than reporting financial results. So these are really estimates.

But our sense is, is that we have seen, as you look at the hourly loads and you compare them to last year and you compare them to earlier periods in the summer, that we have seen fairly significant reduction. Now let me also say that the area that we're concentrating on is not the entire state of Arizona. The transmission fires that Jack talked about basically deal with the City of Phoenix. Then the City of Phoenix is approximately half of our total load, but we're managing an area that is the combined load of both APS and the Salt River project, which is in the range of 9 to 10,000 megawatts.

Our sense is that depending upon the temperatures, depending upon the days, we are seeing reductions in the range of 2 to 3 percent. Which does not sound like a lot when you talk about 2 to 3 percent, but you have got to remember on peak that is a significant factor. When you're looking at two to three to four hours in the afternoon that you need to manage, that percentage can be very significant in terms of being able to continue to meet the load.

So we are seeing really significant contributions from our customers. Those customers have really risen to the challenge that we and Salt River project have put forward to them. And frankly if it had not been for their efforts, I am not sure we would be able to get through this summer without customer interruptions.

And in a related question, if weather was 2 to 3 percent off of normal, what would the typical earnings impact from a weather-related demand change of a similar magnitude be? I understand that the weather questions typically apply to your whole customer base, but here we are just talking about half of it.

Well, the challenge with weather, if you look at 2 to 3 percent, it really kind of depends. Our load is actually just as significantly, in fact, in parts of the summer, more significantly affected by low temperatures compared to high temperatures. So it is difficult to answer a question that is just 2 to 3 percent. It really depends on what happens to the humidity and what happens to the temperatures both high and low.

The other phenomenon that is important for us is we manage this for the next two to three weeks in terms of getting that transformer in and in place, and West Wing we see load growth throughout the week. So normally our highest days are on Thursdays. It grows from Monday through Thursday and then falls on Friday and falls through the weekend. But, of course, that is effected by weather as well.

So I don't think that answered your question very well. But just in terms of 1 to 2 percent, it is difficult to quantify that.

One of the things that we did in our last call, and I'm looking for it but I do not have a copy of it right here, was Don Brandt put some sensitivities together, and that was provided in our last call and in the October of last year 8-K. The weather extremes, and this is obviously for the entire system, tends to be the high and low plus or minus 10 cents a share. I believe that was based on the extremes of the last 10 or so years of history.

I will pull the transcript and check that. And the last question I have related to the issue is, can you just talk about how these outages have changed your supply mix or your fuel mix? You said that the import capacity into Phoenix has been reduced to about 20 percent. I assume that that means you have been running some of the in city generation harder than you otherwise would have?

That is correct. It has basically been a shift from gas plants outside to gas plants inside. So as Don described to you, we have seen some increased costs as a result of heat rates. But overall the percentages have not changed that dramatically.

David, one thing I would remind you is that 20 percent reduction was only for the first four days.

Okay.

And then we moved back up from that, so.

Ashar Khan, SAC Capital.

Most of my questions have been answered, but just going back to the schedule on the rate case, do you still think that you can get a decision this year based on the current schedule?

Yes, I think that the current schedule we can get a decision this year or very early in 2005.

To address an issue, another question that was asked to earlier, I have no reason to believe these discussions will not result in a fruitful settlement.

Thank you.

Michael Goldenberg, Luminous Management.

Good morning, guys. I just had a couple of quick questions. First of all, this regulatory asset amortization, the way I understand it there is a gap between the revenue you collect for that and the depreciation that has come about this year and that is going to close next year. Is my understanding correct on that?

Now, it is not correct. We have a schedule that really started back in September of 1999 that brought our total regulatory assets down at least from this level at 1999's level down to zero. It is a schedule that laid out the amortization year by year. It was specifically outlined at that point, and in fact, it has been in all of our 10-Qs and 10-Ks since then. So it shows specifically the amount of the regulatory asset amortization and its declining path as Don said up through the second quarter.

But there is a revenue portion that is embedded in your rates?

The revenue portion was also specifically decided in 1999, and it, in terms of its path, has had rate decreases since 1999. The last one was last summer, and that was a 1.5 percent decrease. So both the overall rate levels and the schedule for the amortization and regulatory assets were prescribed five years ago.

But I guess just to completely understand it, next year is there going to be 0 variance year-over-year due to to this amortization, or is there going to be a swing back because there will be no more amortization?

Well, it will be -- the regulatory asset amortization has stopped, so the variance that you would see next year would be against the amortization that we took this year.

And that is going to be --?

And that is it.

But is that going to be negative, or is that going to be 0?

No, as you decrease the amortization, it improves the earnings. So the comparison to next year would be positive.

Because revenues are going to stay flat year-over-year for that portion?

No, revenues will be a function, as Jack said, in terms of the regulatory process that we have. But if you look at current rates, there is no future rate decrease in terms of the agreement from 1999. So if you look at current rates, the overall rate level would be flat as we went forward until it is changed through the great proceeding that Jack described.

Got it. And just a follow-up on Ashar point, you remain very confident that, whenever it is, August 18th or April 20th, will yield constructive results?

We said what we said.

Zudula Murphy (ph), Zimmer Lucas Partners.

A couple of nitpicky questions on the earnings release. You mentioned about the 23 cent gain that is realized at Eldorado, but the contribution for the full quarter was actually 39 cents. I am wondering what else was actually there and whether any of that contribution going forward is something that we can see if it is recurring or not?

You bet. I think Becky is going to answer that one.

If you look at the Eldorado numbers on a stand-alone basis, the Eldorado numbers are pretax. The tax effect of the Sun sale is at the parent company.

So what you're saying is that this 39 and 12 is next to 27 and that would compare with the 23?

Right.

Okay. That answers my other question then in terms of the swing on the parent company. So what you are saying is that the parent company was probably consistent with the first quarter absent the tax expense being reflected at that level?

I think that is pretty true.

Zach Schreiber (ph), Ducane Capital (ph).

Just a question on the regulatory. I do not want to beat a dead dog here. Is there any way of elaborating what exactly a fruitful outcome settlement means? Does that mean definitely. Obviously I would imagine that any rational person's definition of fruitful would probably imply staff. Does it also (technical difficulty) kind of must have parties, or are we just sort of saying as we staff?

I would point you to what the Administrative Law Judge said, and we have communicated to you this morning our sense of those continuing discussions. Given the agreements that we have with all the parties, from our standpoint we have told you all we can tell you.

I got on the call late. I apologize. Could you reiterate what the ALJ said? You are referring to the comments from July 20th?

What we do is each time we check with the ALJ and all the parties make a statement to the ALJ, and all I am saying is at July 19th all the parties told the ALJ that they thought it was good to give continuance to the rate case because the Sullivan discussions were being productive.

Right. And the third question is sort of a question about growth and sort of growth could be really good, and also it looked kind of to the North to Nevada, growth can actually be bad insofar as regulatory lag and inflation and so forth. Given that we are in a high-growth service territory, given the sort of operating leverage embedded within your cost structure and your whole rate structure, how long-term a deal are you willing to think about? How do you think about the pluses and minuses of growth, and how do you think about how long-term an outcome you want here and protections around inflation, or is all of this whatever it is will keep it -- will keep the growth, and we can manage the cost structure and we will fight inflation and we will take care that in exchange for having the commission give you some sort of archived structure? Just some sort of a philosophical question.

As a company, we have managed growth for years. It is basically a hallmark of our company, and it is one of the things -- if you look back to 1994 and you look at the history that we have had, we have been able to manage some of the highest growth in the entire country and provide rate decreases, price decreases to our customers and, at the same time, produce solid returns. That has been and continues to be a major philosophical focus of our company. It is something that we look at, not just from the standpoint of how do we meet growth, but how do we use growth as something to increase value for our investors, our customers and for the state of Arizona.

So I think the Bill Post answer is growth is good and we can handle it.

That is a summary.

Okay. Great.

(OPERATOR INSTRUCTIONS). John Hanson, Imperium.

(technical difficulty) -- if you would on the major generating outages that are planned for the second half of the year here?

The second half of the year, the only one that is major would be the planned refueling outage of the Palo Verde Unit #3. (multiple speakers). We will also extend that outage by about 20 days to take care of some other issues related to the unit.

Okay. None of the big fossil units are out then?

I am sorry?

None of the big fossil units will be on plan maintenance for the fall?

Not that I can recall at the present time.

Dan Eggers, CSFB.

One more. Just on the Western markets and the fact that spreads remain crummy despite the fact that all of us on the East Coast keep seeing threats of shortages and hot weather and all of that sort of stuff, can you give a little more color of why that market is not proving particularly economic? And what from a philosophical standpoint, do you guys see needing to happen to get that fixed and likelihood of that happening?

Well, economic I guess it's depending upon whether you're buying or selling. For example, the --

Economic for you.

Yes, right. Just as an example, the week back in early to mid June when the Palo Verde units were off on an average of five days, for about four days we were purchasing 3 to 350 megawatts on the hour through the super peak period from one plant combined-cycle plant in test-mode at an average price of about $8.00. Again, I think the key factor has been some of the excess capacity and the operating characteristics, particularly during test operations of the big combined-cycle plants that are coming on or recently coming on. We have a situation where every time we start to see a little daylight with SPARC spreads we have some operators with 1 to 2000 megawatts of capacity that jump on it and drive it back down to zero.

What it will take to turn that around? Frankly, not a lot. You eat up 1 to 3000 megawatts, and say that gets eaten up out of California or intrinsic growth in our region of the Southwest and we're back to a somewhat constrained market.

Will that happen this summer? You know California will probably peak late August or into September as opposed to the time we here in Arizona peak. A little bit of growth there. They have had some hot spills. The Cal ISO is reporting minimal reserve margin. They think they are adequate to get through, but it will be a tight summer. A heatwave in California in August and September could be productive. That is kind of wishful thinking I think on our behalf, but clearly we are seeing some signs of it. Give it another year to 18 months and it would not take much growth to remedy the situation.

Greg Gordon, Smith Barney.

A follow-up which you basically just answered. I look at some sort of proprietary numbers that I get from my power and gas traders here at (inaudible) that show obviously incredibly thinly traded market out in 2007 and 2008, but a significantly widening SPARC spread opportunity, especially in the desert Southwest. So it begs the question of if you don't get sort of a rational negotiated solution from the regulatory process, why would you even want the assets to be rate based if you are going to be coming into a significantly constrained market in the back half of the decade?

That is a valid question.

Do you have an answer?

Well, of course, it depends on the regulatory process. So you're absolutely right. As we have been going forward with this commission literally back since October of 2001, we built those plants, the reliability plants we call them, to meet the needs of APS's customers. As you look at this last month for example, it is a good thing we did. So our focus has been and continues to be on reliability first, and that is why we are before the commission and having the discussions that we are having.

On the other hand, as you point out as we find ourselves in this situation where that is rejected, there are other alternatives that we can consider.

I think the investors are sort of in a situation where in the long run you hopefully get a stable competitive return from a rational regulatory outcome, but you also probably get a pretty full return on your investment over time if you are forced to put the assets into the market, although we may have to weather another year to 18 months of relatively low returns before that supply/demand balance --?

I think that in part goes back to the question that was asked earlier about growth. As we deal with that growth issue going forward, there are different -- let me be clear -- our focus has been with the expansion of our generation fleet on meeting the needs of native load, and that has not changed.

Tom O'Neill, Lehman Brothers.

Good morning. I was just wondering if you could give us an update on the upcoming FERC filing process and the timeline around the PWC and Sundance, and I guess specifically around that how it might impact the accounting if you had PWC transferred in and you had Sundance approved? So if you had an approval at the ACC but not yet a FERC.

I can at least address the regulatory piece of it, and maybe you can repeat your question as it relates to the accounting fees. In terms of the Sundance piece, we will first go through the ACC process to make sure they agree that this purchase is a prudent purchase, and then from that, we would be filing with the FERC for potential assets into Arizona public service.

In terms of PWC assets, I think it's a little different process, whether it is a litigated or a settlement process that comes up with putting those units into APS. Obviously in that particular case, to the extent it was either a settlement or a litigated process that was approved by our commission, we would be filing with the FERC with the full force and approval of our own state commission supporting moving those assets into APS.

You had a second question, I think it had to do with accounting.

Let me try to respond to that and tell me if I am anywhere close. I am not sure the accounting per se is necessarily going to be very relevant. We would not reflect in the accounts the transfer of the units from PWC to APS until we actually got FERC approval. The only really key from a bottom-line prospective is at what point in time we can actually reflect the revenue requirement in our billings to customers.

Okay. And you would be able to reflect the revenue requirement around the PWC assets prior to FERC approval?

Under different scenarios, yes.

At this time, there are no further questions. Are there any closing remarks?

We will just say thanks to everybody. We appreciate your time. We know it is very valuable and you are very busy. So thank you for your attention today.

We all echo Bill's comments. If any of you have any follow-up questions, obviously please call me or Lisa Malagon and we will address them. Thanks.

Thank you. This concludes today's conference call. You may now disconnect.