Pinnacle West Capital Corp (PNW) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Pinnacle West earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Ms. Becky Hickman, Director of Investor Relations.

I would like to thank everyone for participating in the conference call to review our earnings for the third quarter of 2006, recent regulatory developments, and our operating performance. Today I have with me Bill Post, our Chairman and CEO; Jack Davis who is our President and Chief Operating Officer and also President and CEO of Arizona Public Service; and Don Brandt, our CFO. 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 website contains extensive supplemental information on our earnings variances and quarterly operating statistics. I encourage you to check the current quarter's section. 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 my responsibility to advise you that this call will contain forward-looking statements based on current expectations and the Company assumes no obligations 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 the caption entitled forward-looking statements contained in the SG&A in our second quarter 2006 Form 10-Q and the risk factors in our 2005 Form 10-K, each of which identifies some important factors that could cause actual results to differ materially from those contained in our forward-looking statement.

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 website is accompanied by a reconciliation of our ongoing earnings to our net income. A replay of this call will be available on our website, www.pinnaclewest.com for the next 30 days. It will also be available by telephone through November 3. Finally, this call and webcast 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'll turn the call over to Don.

Thank you, Becky. I too want to thank all of you for taking the time out of your busy schedule to listen to our call. For the third quarter of this year, our consolidated ongoing earnings were $184 million or $1.80 per share, down from 186 million or $1.89 per share for the same quarter last year. While there were no unusual items in this year's third quarter, ongoing earnings for the last year's third quarter exclude several non recurring items.

First, a regulatory disallowance of $87 million or $0.88 per share, related to our retail rate settlement and two, income from discontinued operations of $4 million or $0.04 per share, related to the sales of Silverhawk and NAC. We reported consolidated net income of 184 million or $1.84 per share for the third quarter this year, compared with a reported 104 million or $1.05 per share in the prior year quarter. On a year-to-date basis, consolidated ongoing earnings for the nine month period are $299 million or $3 per share, down slightly from an ongoing 302 million or $3.16 per share for the same nine-month period in 2005. As I am sure most of you understand, this year's customer price increases granted by the Arizona Corporation Commission under our power supply adjuster or PSA as we refer to it, commonly, have not had any impact on 2006 earnings. But they have resulted in a significant recovery of deferred fuel cost and have stabilized our declining cash flow and our important credit metrics.

Turning back to the third quarter, the ongoing earnings reduction was driven by higher fuel and purchased power cost, lower results from our marketing and trading and real estate operations, and milder weather. These negative factors were substantially offset by the effects of net revenue increases, attributable to customer growth and fuel cost deferrals.

Now I'll provide more details for each of these items. Non-cash PSA deferrals offset 90% of the effects of fuel and purchased power cost above the level of such cost in our base rates. Higher fuel and purchased power costs reduced earnings by $0.19 per share, but were substantially offset by increased deferrals of $0.18 per share. Fuel costs were higher predominantly because incremental customer growth is supplied by natural gas generation and purchased power. Lower marketing and trading gross margins reduced earnings $0.10 per share, primarily due to significant mark to market gains that occurred in the third quarter of last year, which were not repeated in this quarter.

While SunCor results were down $0.04 per share, earnings of of $0.17 per share this quarter for SunCor reflect a strong quarter as SunCor completed the balance of the large commercial property transactions it had planned for this year. Milder weather reduced earnings $0.04 per share, the third quarter for this year was milder than normal, while last year's quarter was slightly hotter than normal. Although the quarterly comparison reflects milder weather, for the year-to-date, hotter weather has added $0.04 per share to earnings. Increased revenue, net of fuel costs, related to retail sales growth increased earnings $0.17 per share. APS's customer base grew 4.4% in the third quarter, compared with the year ago. APS's quarterly customer growth rate has average 4.2% since December 2003.

O&M costs decreased earnings $0.03 per share. The changes in O&M were primarily related to planned generation maintenance and outage costs. Most of the increases in our O&M costs this year were in the first half of the year as we prepared for our summer peak season. Jack will discuss our pending retail rate case in a few minutes, but I'll take this opportunity to update you on the status of APS's PSA deferrals and hedge positions. As of September 30, APS had $209 million of accumulated PSA deferrals. The quarterly statistics on our website detail the changes in the deferral balance.

Through September, we have deferred $225 million, and have recovered $195 million through the various PSA adjusters and surcharges. Of the recoveries, the regulatory support granted by the Arizona Corporation Commission through last spring's 7 mill interim adjuster provided about $100 million in cash from May 1, through September 30, of this year. As I mentioned earlier, the deferral recovery positively impacts cash flow but does not affect earnings because the amount recovered through revenue is also amortized as fuel and purchased power expense.

As of today, we have hedged 85% of our remaining 2006 exposure to purchased power and natural gas price risk for native load requirements. Similarly, we have hedged about 85% of our 2007 price risk and 55% of our 2008 price risk. These hedge positions are generally at prices below forward market prices.

Turning to our financing and liquidity situation, in early August, APS -- excuse me APS issued 400 million of debt, consisting of $250 million of 6.25% ten-year notes and $150 million of 6.875% 30 year notes. The proceeds of the debt issuance will be used to pay $84 million of 6.75% notes, maturing in November, and for general corporate purposes, primarily to fund APS's construction program. During the third quarter, APS successfully syndicated an additional $500 million revolving credit facility for a five-year term. The terms and conditions of the new facility are similar to APS's existing $400 million credit facility that matures in 2010. The two facilities provide ample liquidity for working capital needs.

Pinnacle West the Parent had approximately $50 million of short term debt outstanding at the end of the quarter. Pinnacle West has a $300 million revolving credit facility maturing in 2010 and relatively minimal working capital needs. Furthermore, the Parent does not have any long-term debt repayments until 2011 when its only series of long-term debt matures. I'll now turn the call over to Jack.

Thanks, Don. The topics I will cover today are regulatory developments and operational performance. First, I will discuss the regulatory issues. This year the commissioners, ACC staff, and certain intervenors have recognized a need to accelerate fuel cost recovery and to improve APS's financial strength. I believe the actions taken earlier this year by the Commission to address fuel cost recovery was very positive and a recognition that they are understanding that the financial strength of APS is important. The PSA adjuster and surcharge increases implemented during the first half of this year are all temporary price changes to facilitate timely recovery of powered fuel and purchased power cost incurred to serve APS's customers. Due to these adjusters and surcharges we expect to recover our 2005 and 2006 PSA deferrals, except for $45 million related to the 2005 Palo Verde uplanned outages, and about $97 million of our 2006 deferrals.

Ongoing rate levels including a new base fuel rate are being addressed through APS's general rate case. Additionally, some consideration is being given during the rate case proceedings to continuing a 7 mill interim adjuster until a new base rate becomes effective. Clearly the most significant regulatory item pending is the retail rate case. The constructive outcome from that proceeding is essential for Arizona Public Service to maintain the investment grade credit ratings. Such an outcome will allow APS to recover its fuel and other operating costs as well as provide APS the opportunity to earn its allowed rate of return when these new rates are in effect. In addition it will position the Company to continue to lively serving the energy needs of our rapidly growing customer base. APS's current request for an increase of -- is for an increase of $434 million or 20.4%. If the 7 mill adjuster is contingent until the new base rates are established the increase over then current rates would be about 12%.

We updated the request through our prefile testimony to reflect changes in forward price for fuel and purchased power and other non fuel items. Increased fuel and purchased power costs still remain the lions share of the request comprising about 14.8 percentage points of the increase. We are proposing to increase the base fuel rate to $0.0325 per kilowatt hour from our present $0.020743 per kilowatt hour. In August, the ACC staff and intervenors filed direct testimony in the case. Through subsequent testimony they have modified their positions. Here is an update of the staff and certain intervenor's recommendations.

First, the staff recommends a total increase of 9.2% or $196 million including a 9.1% for fuel related increases. A 10% -- a 10.25% return on equity, the acceptance of APS's requested capital structure and miscellaneous other items. The staff also suggests potential changes to our PSA that would accelerate fuel cost recovery. Second, the residential utility consumer office normally known as RUCO recommends an increase of 10.89% or $232 million with a 9.25% ROE and a 50/50 capital structure. Among the other intervenors, a business coalition recommends that the ACC decrease our request by at least $131 million. This reduction would result in a net increase of not more than $303 million or 14%.

We filed extensive testimony rebutting the staff, RUCOs, and other intervenors positions. Either the staff's or RUCO's recommendations would result in an woefully inadequate outcome of this rate case. Both APS's Don Brandt, and Steve Federer, a prominent former credit rating agency executive and former Chairman of the Mission Public Service Commission testified that the ACC adoption of either staff's or RUCOs position would result in a downgrade of APS's credit ratings to non investment grade. The hearing began October 10 and we expect to it conclude in December. About 50 witnesses are expected to testify during the process on the issues related to the various facts of the request, rate design, and the 2005 Palo Verde unplanned outages. We expect a final decision of the case sometime next spring.

In addition to the previous regulatory items we also have a $45 million PSA surcharge pending. APS request for this surcharge which was filed in February requests a final step in recovering our 2005 PSA deferrals. The surcharge is related to replacement power costs associated with the unplanned outages at Palo Verde in 2005. It is designed to be a temporary increase averaging about 1.9% over a 12-month period. We have proposed that the surcharge be implemented upon completion of the ACC's review of the outages.

In mid August, the ACC staff issued its report on the review of the 2005 Palo Verde outages. The staff recommends that the ACC disallow approximately $7.4 million, $10 million after income taxes of the $45 million surcharge request. The report alleges that four of the unplanned outages were avoidable and therefore the replacement part cost should not be collected from customers. Among other things, the report also recommends that the ACC establish minimum nuclear performance standards for Palo Verde with examination of the associated costs by the ACC if the standards are not met. We disagree with the staff's findings regarding the obvious. In addition we responded to the staff's nuclear performance proposal was incomplete and deficient in a number of key respects. The Palo Verde 2005 outage review has been consolidated with the pending rate case so that testimony and decisions on the related issues are being addressed as part of the rate case proceeding.

Now I will turn to growth in our market and meeting the resources needs for that growth. Solid growth in our service territory continues. Arizona's population continues to grow at three times the national average. That growth is the foundation of our customer growth which was 4.4% in the third quarter versus the prior year. Customer growth translated into sales growth. Our retail sales increased 4.6% in the third quarter, compared with the same quarter last year. On a weather normalized basis the third quarter retail sales grow by 5.5%.

Customer growth also translated into peak load growth. On July 21, we set our system peak for this year of 7,652 megawatts. This peak was 9.3% above last year's peak. On a weather normalized basis our peak grew by 2.9% compared with last year, which was consistent with our expectation. Successfully serving our growth requires us to continue adding new long-term resources. In January, we announced a base load RFP. Through this RFP we are seeking a proposal for long-term unit specific link capacity of 100 to 500 megawatts per unit. We're requesting delivery as early 2009 but no later than 2014.

We received proposals in response to the RFP in July and earlier this month we started short listing several bidders for further consideration. As in the past I cannot share with you much about the proposals we received because of confidentiality agreements with the bidders. However, I can tell you that the response to the RFP was strong. Over the next several months we plan to have discussion with the short term bidders -- with the short list of bidders to optimize one or more of the proposal.

Now I will discuss our recent operating performance. Looking at our nuclear plant performance, the combined capacity factor for power units was 88% during the third quarter of this year, the same as comparable quarter a year ago. This year's third quarter capacity factor was primarily affected by the unplanned outage for time at unit 1 related to -- including modifications in early July to resolve the shutdown cooling line and vibration issue and to replacing fresh rodded heaters in late September. The outage to replace the unit 1 fresh rodded heaters extended through October 16.

Also in July there were minor unplanned outages at units 2 and 3 that lasted a combined total of four days. As I said in last quarter's conference call, the vibration issue on the shutdown cooling line at unit 1 has been -- that was being addressed during the first half of the year has been remedied and is behind us. Power order units 2 have run very well. Both units have run at full power so far this year except for unit 3s refueling outage in the spring. Unit 2 refueling outage that began September 30, and some minor outages totaling 10 days combined since the beginning of the year. Priorities to working to improve performance with emphasis on safety, operations, maintenance and engineering standards, accountability, leadership, team performance, corrective actions and equipment reliability. I am confident that the plant's performance will improve going forward. Our coal fired plants continue to operate superbly. During the third quarter the coal plants posted a 94% capacity factor, virtually the came same as a year ago. That concludes my prepared remarks and I'll turn the call over to Bill.

Thanks, Jack. In summary, we had the second fastest growing service territory in the country. Over the years we have consistently planned for and met our customers' growing demand. We are aggressively focused on the future and the financial position we need to meet that growth. So is our commission. Last year they resolved the multi-year uncertainty of Arizona's electric generating market by consolidating our generation, establishing a generation resource procurement process and implementing a fuel and purchased power adjustment cost. This year that recognized and quickly responded to the tough realities of rising fuel costs. They understand that in the last five years we've invested over $4 billion in electric plant and they know that APS needs to invest to approximately 5 billion in the next five years to construct the electric infrastructure necessary to meet Arizona's economic growth.

I believe their recent decisions show their commitment to a financially sound utility and its importance in meeting the energy future of our state. Again, we thank you for your time and interest in our company. It concludes our prepared remarks and we would be happy to answer all your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Greg Gordon of Citigroup.

Good afternoon, gentlemen.

Good afternoon, Greg and this is Bill Post. I just want to congratulate you on your well deserved recognition, you and Dan Ford and we wish Steve the best. But I just wanted to say congratulations for the second year in a row.

I appreciate that. Of the three of us, I think Steve is probably the smartest.

Well, wish him well.

I'm going to ask you some questions around real estate. Can you refresh our memories as to what the current book value is of your real estate portfolio, talk about where you are in terms of realized earnings versus your guidance for the year and then give us a sense of how we should triangulate around what to expect even though you are not giving earnings guidance as we move forward given what's happened in the overall housing market in terms of the direction and magnitude of the earnings of that business.

Greg, I don't have the book value here as I speak. Maybe Becky's got an exact number. But it's in the ballpark of a little more than $400 million. But relative to -- let me just speak SunCor. They've had a very solid year to-date and in the past there's been I think earnings have been skewed towards the fourth quarter. That's purely the nature of the business, not fourth quarter driven. It's just closing some of the larger transactions. They just tended to -- the last four years fall into the fourth quarter. That's not going to -- that's not a trend to expect in the future. They tend to be relatively lumpy.

We closed two large transactions just in the last quarter, as a matter of fact last two months, and housing prices when we had the second quarter call, we saw -- the only weaknesses we saw at that point in time, mid summer, were in the Phoenix market, which is a different kind of a development project than in -- and a different demographics than the other locations we have throughout the west. We had not seen any kind of weakness there at that point. We started to see some weakness in those other markets in September on the home building front and going forward, we've never contended that we're -- we are a home builder, partially at SunCor. We're not immune from the vagaries of that market. We'd expect home sales to be off next year, somewhere in the 20 to 35% range from where we're at this year. We're looking at total home sales of around 700, but the key thing with SunCor is it's a very diversified real estate business and we have not seen any weakness whatsoever on the commercial side, the cap rates are staying right where they've been, actually a tad up here.

We've got several large transactions planned for next -- for calendar '07. One of the large projects in the West Valley, Alameda Crossings in Palm Valley is I'll call it a large neighborhood shopping center with a Kohl's department store and a Sprout's specialty grocer are the anchor tenants. That will transact in '07, very likely. And we have several large commercial properties that are already in escrow, a combination of commercial properties and multi-family pads. And sometimes these land transactions or project transactions just a closing process is longer than the development process. At times it seems that way. By the time they get through environmentals and all the other aspects of closing a large real estate deal. So I think it's not much more than you know a guess on the home front, home building front. I think we'll see some weakness next year but I don't think you'll see the decline in SunCor comparable to some of the very large declines that you're seeing or at least I'm hearing about from some of the other pure home building entities. And again, it goes back to the diversification aspect.

There's a portion of your earnings that are fee based and you're saying there's a portion that come from the commercial segment and then there's a portion that come from the home building segment. And so we need to sort of weight your exposure accordingly. Is that a fair regurgitation of your--?

Yes, exactly.

Okay, thanks, guys.

Thanks, Greg.

Your next question comes from the line of David Grumhaus of Copia Capital.

Good morning, guys.

Good morning.

Congrats on a nice quarter. Just a question for you on Palo Verde. I know when unit 2 went into the refuel you identified some problems with the J wells. Is that going to extend the outage? I think you said you've reached a contingency plan with the NRC. Any repercussions or anything we should look for at the contingency plan?

Well, we do not have -- if I understand your question, and I'm not sure I know what you mean when you talk about J wells, but as we look at the outage, it's very close to the plan that we laid forward and we don't see any changes today.

This is Jack. We were today beginning the process of loading fuel back into the vessel. I think our original schedule for the outage was somewhere around 39 days. And we're within that 39 days, plus or minus 20 hours or so.

Okay. And some of the minor outages you've had at one and three, it sounded like in your remarks that they were just that, minor outages and you don't expect any ongoing issues with them.

No, they were just -- there's nothing routine about unplanned outage but--.

Right.

But I would put that -- those in that category.

Okay. That's helpful. And lastly on the coal plants they've obviously been running terrifically well. When you sort of think about long range capacity factors that those can run at, what sort of numbers should we be thinking about?

Well, I'm not going to give you a precise prediction on long-term capacity factors for our plants, but my view of generating plants is a pretty simplistic one. As long as they are economical, which ours were very economical we will spend the capital to keep the plants in a top shape running condition. And so while we have had a great year this year, I would view that the long-term capacity effect of those units would consistently be at or above industry norms.

Okay. Thank you.

Thanks.

Your next question comes from the line of Dan Eggers of Credit Suisse.

First question, since you brought up the notion that the housing market was slowing a little bit in the Phoenix area or I guess some of the more middle income type housing was slowing, should we translate that at all be concerned about APS's core customer growth if the reason is starting to slow.

Well, in terms of our customer growth, our long range kind of forecast of our customer growth and it could vary a little bit year by year is somewhere in the 3.5 to 4% customer growth range. There will be ups and downs but you won't see huge ups and downs if you're talking about our customer growth rate going down by 100% from the previous year or something like that.

Okay.

We've seen some declines there but nothing that would suggest you're sitting on the edge of a huge drop. We're still as Jack pointed out looking at customer growth in the range of 4% and as we look to the future, we're still going to see some pretty significant growth, but it's going to be at a slightly lower rate than what we've had historically.

Okay. On the rate case, any color on settlement conversations, whether you guys have attempted to do that or what the time frame would be where those could get more active?

Dan, there hasn't been any discussions regarding settlement. It was clear to us when we started this process that the commissioners wanted a fully litigated rate case and that's the path we're on. There may be some sort of discussions at some point in time for some issues in the rate case itself but I don't see an overall settlement in the cards right now. As I said in my prepared remarks, we're looking at a decision in the spring of next year.

Okay. When do you guys think you're going to give '07 updated guidance?

We're going to have to take a look at that as we go forward, Dan. It's one of these things as you well know as we deal with the issues from a regulatory standpoint and we move forward in terms of that decision, that's going to have an impact on how we take a look at our financial future. We'll do that as best we can as the events come forward in the next few months.

Okay. Fair enough. Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Paul Patterson of Glenrock Associates.

Hi, Paul.

Just want to touch base on trading and marketing, just sort of what the market conditions you guys are seeing out there and just any feel for in your sort of neck of the woods, what's driving things.

Well, pretty much natural gas is driving things and that's nothing new. We're seeing marketing and trading last year, as I mentioned in my prepared remarks was we had had some positive market to market and the downturn this year is basically marketing and trailing was flat, maybe 2 million compared to I believe it was 13, 14 million on a mark to market positive.

This is more of a normal run rate?

Pardon?

This is more of a normal run rate what you're seeing here in the third quarter as far as last year. Is that the way to think about it?

Well, I wouldn't say normal. It's what's become normal. And looking out, we're looking at spark spreads, still in the teens. When I look out to calendar '07, calendar '08, at Palo Verde you move up to Meade which has got a premium over Verde pricing but that peaks into the 20s. That's on peak pricing. Today's spot prices are in the pal low Verde in the low 13 spark spreads. It's a relatively quiet market. I mean, most of what we've -- for the system basis, APS, is we're essentially when we do have capacity, it's in the off-peak months and it's gas capacity because basically all our nuclear and coal's have been absorbed by our native load requirements so we're selling gas into a gas market and the spreads are pretty thin.

Okay.

That's been the situation probably for at least the last year and I don't really see that changing for a few years down the road.

Great. Thank you.

Your next question comes from the line of Zack Schreiber of Duquesne Capital.

Congratulations on a good quarter.

Hi, Zack.

Just a question, just following-up on Greg Gordon's questions. On the real estate, can you tell us what is the breakdown in terms of SunCor's business between residential and commercial sort of in '05, in owe '06 and structurally on an ongoing basis and in terms of going forward, some of the softness you were seeing on the residential and home building side, are you comfortable that the commercial side can offset that or perhaps even more than offset that or not offset that? I'm just not left with a sense as to whether or not your sort of guidance is $0.45 is where we ought to be on that?

Well, I guess relative to the size of the home building compared to total SunCor, it's going to vary year to year, but somewhere between 30 to 45% or so, on average, but there's going do be variability from year to year and there has been in the past. The commercial sales as I said, they've been very strong. There's no indication of any weakening there. It's a totally different market. It's not going to make up for all of it. It's not going to more than make up for it. But it's part of our strategy to have a diversified business so when home building is down, all of SunCor is not down. I think we positioned SunCor to have respectable, repeatable levels of earnings going forward many that's kind of the story you've heard from bill and I for the last two years and while certainly the home building weakness will -- you'll be able to see it, I suspect next year, but it won't be as dramatic.

The big difference too in the planned unit development business, we know how we operate. We look at projects on a 20 to 40 year basis. Obviously we want to keep some volume going. But compared to some of the national home builders, we've seen them call it fall on their swords just to keep the volumes up and they've got a lot of business reasons to do that. But we don't. We don't have those same business reasons. So I think we can act as we call it a little more rational. It makes rational sense for SunCor to behave the way we are and I'll let other people run their business the way they deem appropriate.

Got it.

Just to add a couple things to that, one is that you need to keep in mind that the home building is fairly diversified geographically here in the west and that home building is not just in Phoenix. It's in New Mexico, Utah, and Idaho in addition to Arizona. Second as you know and you've heard in our calls for the last three years, we've been in the process of actually selling an awful lot of our residential property over the last three years and we have not been buying residential properties for development here in Phoenix and so we anticipate, actually frankly we thought -- I thought three years ago that the downturn was going to come sooner than it did. So we've been on that path for some time and we've had that factored into our forecast for literally three years.

Got it. Just on the year-to-date breakdown for '06, between residential and commercial at SunCor, is it within that -- is it around 45% or is it the upper end of the range or -- I just trying to get some sense of what's in the year-to-date numbers.

I don't have that specific statistic handy. If you want to give Becky a shout afterwards she can walk you through some of that.

Just moving along on the ACC side and on the whole political side, can you just sort of discuss a little bit, perhaps I missed this earlier, where we are with the different commissioners that are up for re-election with the seat that was vacated by Commissioner Spitzer, just sort of what the dynamics are on the commission and who is up and who the candidates are and what their profile is? Or can you folks -- are you folks -- I guess there's not much you want to say too much about them but just to give us a little objective information would be great.

Okay. Well, we have five commissioners, they have four year terms. Two of them are up in the election in the second week of November. Chris May's seat and as you mentioned Mark Spitzer's seat. Mark Spitzer left the commission to join the FERC. He is now a Federal Energy Regulatory commissioner and the Governor appointed Barry Wong to fill his seat through the end of its term which expires early in January. And those are the two seats that are up in the election. There are two Republicans, Chris Mays and Gary Pierce that are running for those seats. Two Democrats, Mark Monoyal and Rick Boyer and one Libertarian, a fellow by the name of Rick Fowlkes. Those are the five people that are on the ballot. And as I said, those will be elected to four-year terms.

Got it. Thank you so much.

You bet.

Your next question comes from the line of Daniele Seitz from Dahlman Rose.

I just have two questions. One assuming that the Palo Verde unique, solitary thing normally next year, how much of an impact do you anticipate on your overall results, independently?

Daniele, if I understood your question, are you saying in terms of planned outages next year?

Yes, I was assuming that they will be working normally next year.

Yes. A normal year for us is two fuel outages because of the three units. We have one this spring and one in the fall. The one in the fall is the final unit scheduled for steam generator replacement.

Yes.

And I think as you know, we've had two of those and it would be our final one in the fall of this year.

Okay. And in terms of the capacity factor, do you have a sense of where -- you have a goal as to where you would like to be?

Well, the -- if you look at it on the fuel outages, our target has been in about the 35 to 40 day range. So we have a fuel outage of about 40 days in the spring. And with the steam generator replacement it's about 75 days.

Okay. Great. And I have a small detail. What is causing the other income for almost doubling over the first nine months of the year? I forgot that?

It's combination of some tax credits and arbitrage interest income. We've done some prefinancing.

And I mean, this is a abnormal or this should be occurring next year as well.

Right it's just an anomaly, right.

Okay. Thank you.

Your next question comes from the line of [Tom Wechtenwal] of Deephaven Capital Management.

Good morning, actually it's David Thickens. I just want to follow-up a little bit on Zack's questions and some of the comments you made there. I mean, several years ago you did take guidance up on SunCor and order of magnitude at the time characterizing the boost as fairly short term in nature as you sold down the residential properties and definitely above what you considered a normalized level. Can you talk about to what extent you consider current results continuing to reflect excess earnings above that normalized trend line or to what extent we've seen because of the strength in the real estate markets a resetting of what would be considered normalized and maybe as kind of a follow-on, if we are still seeing kind of excess earnings, how long do you expect them to persist kind of above normalized?

Let me see if I hit that and then Don can fill in the spots I missed. About four years ago we put forward a plan to as I mentioned earlier, to increase the cash flows from SunCor into Pinnacle West and we've achieved that plan. That was in part the accelerated sale but it was also in part a repositioning of the portfolio of the various components of the real estate business that SunCor had been in. In particular, moving away from raw land investment to a more service driven type of business in SunCor. We've accomplished that goal. It is now much more in-line with the model that fits in our industry, where it has more of an ROI type orientation to it, compared to the long-term investment in land. And we believe that model as Don mentioned earlier has the potential to continue to make contributions.

We've said from the outset that there would be a point where there would be some decrease and really what we're saying is as we go into the next year, we're pretty much on the path that we have described to you. If anything, if you go back four years, it's occurred somewhat later and we've had higher performance over that period than we thought we were four years ago. But that overall strategy is in place and we believe going forward we'll continue to make contribution. It's also true, as Don said, that a portion of that contribution comes from residential home sales, not all of it comes from residential home sales, but a portion comes from residential home sales and those home sales are in a fairly broad geographical region, covering the four states that I mentioned. I don't know if that answered your question or not. If not, give us a little more precise understanding of what you would like to focus on.

I just wanted to kind of make a distinction between any slowdown in SunCor's results looking forward, because of a macro slowdown in the housing market versus a potential slowdown due to the kind of playing out of -- this acceleration slowing down in and of itself, looking just at SunCor, not looking at the macro environment. I guess what I'm hearing from you is looking forward, you see both factors impacting those results.

This is Don Brandt speaking. We called it for the period, the year's '03, '04, '05 our accelerated assets sales program and that's essentially over with. And that was a concerted effort to move some of the land investments that had been around for more than a decade. There are still parcels of land that have been around for a decade and they involve some of the transaction. But I essentially at the end of '05 that accelerated program I'd call it over with. And going forward, it's a going forward business.

If you haven't seen them and they're not still up on our website, if you would give Becky Hickman a call, our manager of IR, we were using about six months to a year ago, maybe they're still there but some pretty good slides to kind of show where the business -- where it was from a portfolio standpoint and where we've moved it and the different categories and type of project and the fact that the dollars are actually I'll call it in real estate inventory for an extremely short period of time. Currently as compared to the business three to five years ago when the property -- the average life of a dollar in inventory was quite a few years.

David, those slides are in presentation archives on the website.

Okay, I'm follow up on the website. If I have more questions talk to you at EEI.

You bet.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Are there any closing remarks at this time?

No, I would just reinforce what we said. We thank you for your time. We know this is very busy. We look forward to seeing you at EEI.

Again, if you have any questions, please let me know. Thanks.

This concludes today's Pinnacle West earnings conference call. You may now disconnect.