Pinnacle West Capital Corp (PNW) 2007 Q2 法說會逐字稿

Good afternoon. My name is Tim and I will be your conference operator today. At this time, I would like to everyone to be Pinnacle West quarterly earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you. Ms. Hickman, you may begin your conference.

I'd like to thank everyone for participating in this conference call to review our second-quarter earnings, recent regulatory developments, and 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 CEO of Arizona Public Service; and Don Brant, who is Executive Vice President and CFO of Pinnacle West and is also President and CFO of APS.

Before I turn the call over to our speakers, I need to cover a few details with you. First, I encourage you to check the quarterly statistics section of our website. It 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 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 the caption entitled "forward-looking statements" contained in the MD&A in our first-quarter 2007 Form 10-Q and the risk factors in our 2006 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 statements.

Also, during the course of this call, we will refer to our gross margin, which is a non-GAAP financial measure as defined by the SEC. The 8-K we filed this morning included a reconciliation of our gross margin to our operating 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 August 2. Finally, this call and webcast are the property of Pinnacle West Capital Corporation and any copying, transcription, redistribution, 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.

I would also like to thank you for taking your time to join us today. The second quarter was an eventful one for our Company. I'll highlight several issues and then turn the call over to Don and Jack to discuss the details of our financial results, the retail rate case decision, and other regulatory developments as well as our operations.

Growth in our service territory continued at a remarkable pace, some 3 times the national average and likely still the fastest rate in the United States. Bringing with it challenges to serve our customers' growing needs and to build the necessary electric infrastructure. We have successfully met these challenges in the past and we expect to meet them in the future. Our capital expenditures will be substantial to meet Arizona's energy requirements. We expect to invest some $950 million this year and to average approximately that level of investment going forward. These investments are essential to expand and maintain the reliability of our system and to serve Arizona's growing population. Maintaining our financial strength, flexibility, and access to capital markets are requisite to our ability to support these investments. [Paying] for growth will require some innovation in our rate setting policies. During deliberations on the recently completed rate case, the Arizona commissioners expressed concerns about how to support the vitality of our state and its remarkable growth. They also expressed concerns about who should pay for growth, all customers or new customers and how. I will discuss growth and our plan to deal with it more a little later.

Our fossil plants continue their superb operating performance, and operations at Palo Verde are improving. We are continuing to implement our nuclear performance improvement plan; our new Palo Verde management team is aggressively pursuing this plan and working closely with the Nuclear Regulatory Commission.

A significant milestone this quarter was the conclusion of APS's retail rate case. With this rate case, our 2005 rate settlement and various power supply adjustor proceedings, the Arizona Corporation Commission dealt with the tough realities of APS's increasing costs, granted APS substantial rate increases, established a new resource approval process and took steps to improve our regulatory framework. With the ACC's approval, we have implemented base fuel rates and a power supply adjustor that address the need for timely recovery of our fuel and purchase power costs. We also have taken some steps toward recovering our other cost increases. However, we were disappointed that the ACC did not address APS's earnings attrition attributable to the new plant investment necessary to serve our growing customer demand. Our costs, capital, fuel, and nonfuel will continue to increase as the energy needs of our service territory grow. Although growth presents opportunities, it also drives up costs and requires very significant capital investment.

Unless prices reflect these higher costs and increase investment, growth depresses current earnings.

Since the end of the 2005 test year used in our recent rate case, we have added over $500 million to net plant and service net of depreciation. As a result of the rate decision, we expect APS's earned return on equity to be about 7.5% for 2007, far less than the 10.75% rate of return authorized in the ACC order. Such a return is inadequate for our Company and our investors. We have put in place a multistep program to address the pressures growth places on our Company.

First, we are evaluating and reprioritizing all of our work processes, capital budgets, and cost expenditure levels and expect to have this effort completed by early in the fourth quarter. Our benchmarking study show that our cost performance is very good and we will not reduce our levels of safety, reliability, or service. However, we are committed to being as efficient as we can possibly be.

Second, earlier this month, we filed a FERC rate case. Jack will give you more details on that request.

Third, I mentioned earlier the issue of growth. It is an important subject to us and our state regulators. We expect, before the end of the year, to bring alternatives to the ACC to address growth and the impact it has on our state and our Company.

Fourth, before year-end, we will provide the ACC with resource alternatives to meet future load growth. In our recent rate decision, the Commission established the docket to review our self-billed generating resource option and we will provide alternative resource proposals to cover renewable, base-load and conservation options.

Finally, we are assessing our need for additional rate relief. We will not file a rate case with the ACC until we have assured ourselves that our expenditure, service, and efficiency levels are appropriate. Additionally, the elements of the multistep program I've just described can have a significant impact on revenue requirements and they will all be considered and incorporated into any future rate filings. I will update you on this topic in our next quarterly call.

Finally, this morning we updated our earnings outlook for 2007. Our guidance has historically provided new estimates with and without the full effects of APS's rate request since it was filed. We have refined our guidance to reflect the actual rate decision. Currently, we expect that our consolidated earnings for 2007 will be within a reasonable range of $2.55 per share. 2008 will be impacted by the items I mentioned earlier and we will update you on 2008 later this year. Don will give you more details on our guidance.

And at this point, I would like to turn the call over to Don and Jack.

Thanks, Bill and thank you all for joining us this morning. First, I will discuss our 2007 guidance. As Bill said, our consolidated earnings guidance is a reasonable range around $2.55 per share and reflects the retail rate case decision effective on July 1st of this year. We estimate that APS's 2007 earnings contribution will be within a reasonable range of $2.25 per share, which will produce an earned rate return of about 7.5% for the year. Our guidance includes a $30 million estimate for SunCor's 2007 earnings. Our previous guidance included an estimate of a reasonable range around $2.45 per share without any effects of a rate case decision.

The substantive differences between our current guidance and that previous guidance are as follows -- first, the ACC approved a $7 million annualized increase attributable to nonfuel-related costs. The partials year effect of this rate change increased our estimate $0.02 per share.

Second, the Commission approved an increase in the base fuel rate to $0.0325/kWh from the $0.0207/kWh prior to that. This change impacts the PSA sharing arrangement under which APS absorbs 10% of fuel cost variances. The partial year effect of this change increased our estimate $0.11 per share.

And third, the regulatory disallowance of certain 2005 PSA deferrals reduced our estimate $0.08 per share.

Turning to our second-quarter results, we reported consolidated net income of $79 million or $0.78 per share compared with $112 million or $1.13 per share in the prior-year quarter. The quarter-to-quarter comparison was affected by the regulatory disallowance of $0.08 per share and the absence of income tax credits recorded in 2006 of $0.10 per share.

Other factors contributing to the earnings decline were as follows -- weather effects decreased earnings $0.04 per share. The second quarter of this year was hotter than normal, but last year's second quarter was even hotter, including the hottest June on record and cooling degree days 12% above normal. By comparison, in the second quarter this year, the cooling degree days were 10% above normal. Higher O&M expenses decreased earnings $0.06 per share. These cost increases were largely attributable to more planned maintenance outages at our gas plants. Higher interest costs primarily due to higher debt balance at APS decreased earnings $0.04 per share. Similarly, increased depreciation and property taxes primarily related to higher APS plant balances reduced earnings $0.04 per share. SunCor's results were down $0.09 per share, chiefly related to lower sales of residential property consistent with the slowdown in the western U.S. homebuilding markets we discussed earlier this year.

Gross margin increases related to customer growth of 3.5% increased earnings $0.06 per share.

Now, let me address APS's PSA deferrals and fuel hedge positions. As of June 30th, APS had $137 million of accumulated PSA deferrals. We expect to recover these deferrals through a combination of the PSA adjustor that took effect on February 1 and the PSA surcharge authorized in the recent rate case decision. The quarterly statistic on our website show the changes in the deferral balance.

During the second quarter, we deferred $90 million, recorded the $14 million pretax regulatory disallowance and recovered $72 million through various PSA adjustors and surcharges. As most of you are aware, the deferral recovery positively impacts cash flow, but does not affect earnings because the amount recovered through revenue also is amortized as fuel expense.

With respect to managing our fuel and purchased power costs, we have a hedge program that substantially mitigates natural gas and power price volatility for our customers and shareholders. As of today, we have hedged more than 85% of our 2007 exposure to purchase power and natural gas price risk for Native Load requirements. Similarly, we have hedged about 85% of our 2008 price risk and 50% of our 2009 price risk. These hedge positions are at prices in line with current forward market prices. I'll now turn the call over to Jack.

Thank you, Don. Today, I will update you on the highlights of recent regulatory developments and operational performance. Let me start with a regulatory summary.

On June 19, the Arizona Corporation Commission voted on APS's general retail rate case. Among other matters, through this decision, the Commission approved the following. A net average rate increase for retail customers of 6.8%. Modifications to improve the structure of the power supply adjustor or PSA. A regulatory disallowance of certain 2005 pretax PSA deferrals. And a surcharge to allow a recovery of the remainder of the 2005 PSA deferrals.

Now I'll provide some details on each of these items. The decision approved an annual base rate increase of approximately $322 million or 15.1% based on test year sales. The increase included a fuel-related increase of $315 million and nonfuel increases of $7 million. The base rate increase is premised on original cost rate base of $4.4 billion, a 45 to 55% debt equity capital structure and a return on equity of 10.75% and a weighted average cost of capital of 8.32%.

The new rates include base rate for fuel and purchased power costs of $0.0325/kWh. This new base fuel rate represents a significant increase from the former rate of $0.0207/kWh and these two new rates took effect July 1st.

At the same time the new base rates became effective, the 7 ml [interim] PSA adjustor terminated. The net effect of these two rate changes plus the approved PSA surcharge, which I will describe momentarily, was an average of 6.8% increase for our customers.

Through modifications to the PSA structure, the Commission facilitated more timely recovery of changes in APS's fuel and purchased power costs.

The major modifications are as follows -- modified PSA, which also became effective July 1st, will use a forward-looking estimate of fuel and purchased power costs as well as historical deferred costs to set an annual adjustor rate. The annual limit of plus or minus 4 ml/kWh on changes in adjustor rates was adopted and the cumulative lifetime cap of plus or minus 4 mls was eliminated. The 9010 Schering arrangement under which APS absorbs 10% of variances between actual fuel and purchased power costs and the base fuel rate was retained, but it was modified to exclude certain costs, including renewable energy resources, and the capacity components of competitively bid long-term purchase power agreements.

The 4 ml adjustor that took place on February 1st of this year will remain in effect as long as necessary after January 1st of 2008 to collect an additional $46 million of 2007 costs deferred under the PSA as a result of the mid year implementation of the new base fuel rate. Addressing APS's request for a surcharge to recover PSA cost deferrals related to unplanned 2005 Palo Verde outages, the ACC disallowed approximately $14 million of such pretax deferrals, including accrued interest. On an after-tax basis, the disallowance was $8 million or $0.08 per share.

The ACC also approved a PSA surcharge to recover the balance of such deferrals for about $34 million through a temporary rate increase over a 12-month period that began July 1st.

Now let me turn to federal rate issues. On July 10, as Bill mentioned, APS filed a rate increase case with the Federal Energy Regulatory Commission requesting an increase in its transmission rates. The filing asked for a $37 million increase in annual rates effective October 1st of this year. However, it is important to understand that only about $7 million of the annual increase amount would come from wholesale customers and approximately $30 million of the increase represents charges for transmission services to serve APS's retail customers.

We are currently addressing the appropriate procedure to implement the related retail rate changes after which, that portion would affect earnings. The filing also includes a proposal for FERC to improve a formula rate [segment] methodology to allow APS to adjust wholesale transmission rates on June 1st of each year.

Now let me discuss growth in our market. Growth in our service territory remains solid. Arizona's population continues to grow at 3 times the national average. That growth is the foundation of our customer growth, which was 3.5% in the second quarter versus the prior year. Customer growth translates into sales growth. On a weather-normalized basis, the second-quarter retail sales grew 1.9%. Customer growth also translates into peak load growth. On July 18, we set our preliminary system peak for the year so far of 7380 MW.

This preliminary peak was 2% below our forecasted peak for the year, and it reflected a 4% decrease from last year. However, on a weather-normalized basis, the preliminary peak represents some 2% higher than last year.

Last summer, we set our peak on a day that reached 118 degrees in Phoenix, which happens only once every few years. Our systems operated very well to meet this summer's peak. We have a significant amount of summer left, so I do not know whether we have achieved our final peak for this year.

Let me turn now to operating performance. We have been actively addressing the operating issues at Palo Verde. During the second quarter, the nuclear plant's generation production increased 54% compared with last year. This improvement is further shown through the combined capacity factor for the nuclear units, which was 75% for this year's second quarter compared with 49% in the same quarter a year ago. As a reminder, unit [1] went down last year during the second quarter while we resolved a migration issue in one of its shutdown cooling lines.

We have scheduled two refueling outages and maintenance outages at Palo Verde each year. This year's spring outage at unit 1 was completed on July 19. The fall outage will be at unit 3. During that outage, we will replace the unit steam generators and low pressure turbines and core protection calculators. Unit 3 will be the final unit to receive the replacements, thus, completing the largest replacement program in Palo Verde's history.

We're aggressively addressing operations at Palo Verde with a goal of returning the plant to top tier performance as soon as possible. We're completing it through a self-evaluation of the plant to identify and correct and correct any issues. In addition, we're working closely with the Nuclear Regulatory Commission to ensure that our plans and procedures for addressing issues are coordinated with them.

Our coal-fired plants continue to operate superbly. During the second quarter, the coal plants posted an 86% capacity factor, slightly better than their performance in the same quarter last year.

Lastly, turning to customer service, this morning, J.D. Power and Associates released the results of the 2007 survey of residential electric utility customers. APS continued its record strong performance in customer performance, again being rated the number two investor owned utility in the west.

That concludes my prepared remarks and I'll return the call back to Bill.

In summary, we understand what it takes to serve the fastest-growing state in the country. Over the years, we have consistently met our customers' growing energy needs and we will continue to do so.

That concludes our prepared remarks and we would be very happy to answer your questions.

(OPERATOR INSTRUCTIONS). Greg Gordon, Citigroup.

Bill, I've got sort of a big picture question for you. A lot of us were able to monitor the rate case over the Internet and listen to the hearings and listen to the -- not just read the outcome, but listen to the process. And it's pretty clear at least from a couple thousand miles away here in New York, that the process seems broken, that there just seems to be a tremendous amount of distrust and lack of ability to communicate effectively between the Company, the Company's management and the Commission. As the CEO of the Company, what can you do to correct that so that in the future, we can presume that you have the ability to actually earn your authorized return?

Well, Greg, as you know, we have had several proceedings before this commission over the last four to five years. Many of the issues that we're dealing with are very tough issues. We have a fuel adjustor that for the, literally the very first time, is completely comprehensive. And if you go back to the last time we had a fuel adjustor it was 1988. So we have had to deal with some very, very tough issues here, not like other companies across the country. We have had to deal with the change from competition and all of the issues associated with that, as well as the -- more or less the restructuring of the rate setting process in terms of putting us back into really a fully vertically integrated regulated utility. So these are tough issues and they are issues that we have been dealing with for a long time.

As we go forward, one of the things that, given all of these decisions, one of the things that we will now be able to do is really focus much more on the future than the past and be able to deal with issues that have a policy impact on our state as well as our Company as we go forward. I think those kinds of issues have an opportunity to have more dialogue and discussion compared to the historical rate making issues that really are looking backwards. So I think it will set a new tone and it will set a different perspective and the way that we deal in terms of the Commission and the issues before them.

As far as the issue in terms of the allowed rate of return versus the actual earned return as we mentioned to you earlier, and as you know, Greg, the thing that really deals with that deficiency between our earned return and the allowed return is the impact of growth and the attrition that comes as a result of that. As I mentioned in my comments, we expect to deal with that explicitly as we go forward. But it is an issue that produces literally that difference.

I don't believe it is related to many of the topics that we've talked about in the past in terms of kind of that historical rate making orientation versus the reality of going through all of this work in a way where growth has a negative effect on that total return.

So in summary, the final part of your question in terms of not being able to earn the allowed return as a function of growth, the issues that we've been dealing with have been very tough issues that have very much a historical nature and I think many of the ones that we're going to be going forward with are going to be much, much more focused on future issues.

Dan Eggers, Credit Suisse.

Good morning. As kind of a follow-on to where Greg was, working with the Commission and trying to get to a forward-looking design given the length of time cases have taken in recent years in Arizona for you guys and given the fact that three commissioners will be up for -- or actually their terms end in 2008, how do you bridge that or do we find ourselves in a better of an air pocket until we get to 2009, when you have new commissioners in place who will be better positioned to set future policy?

Dan, as you know, that's an issue where, every two years, the impact is felt in terms of the changes of commissioners. And so as we deal with these issues, one of the things that we have seen with this Commission is that there is continuity there and even though there are changes, we end up with current commissioners, recently elected commissioners, dealing with those issues as they come on board. You saw that just in our last decision. But that is a reality that we have here in terms of the changes of the Commission because we also, as you know, have term limits of two to four-year terms, and as a result, there will be changes of the Commission as we go forward.

As I mentioned in those steps we're going to be taking, some of the things that we would be dealing with we would expect to deal with those before the next election. For example, the issue of growth and the issues of the resource plans. Some of those may or may not have an impact in terms of certainly our cash flows and other items. It's going to be our intent to deal particularly with the growth issue before the end of the year which, as you know, by following the testimony in the case as well as the comments of the commissioners is an issue that the Commission has said they want to deal with. So I don't think we're going to be on hold until we see a new commission from the next election.

I know you guys are looking at or reviewing kind of operating costs, savings opportunities, capital investment opportunities. But with a CapEx run rate at $950 million and the dividend payment that is pretty close to -- getting close to 100% of utility earnings payout, what do you see as flexibility as far as cutting back on some of the CapEx potentially and how are you guys going to approach financing the combination of CapEx and dividend until there is a more constructive forward-looking resolution with the Commission?

Dan, Don Brandt here. As part of the review, we're looking at not just the dollars, but the processes whereby the dollars are derived and the projects. And we're going into it without any preconceived conclusions. We want to be as efficient as possible. On the other hand, we don't want to negatively impact customer service or safety, reliability. We've got good benchmarks compared to other industry participants from our cost levels. And our unit costs per customer and per kilowatt-hour look very favorable. But with that, we're going to give it a fresh look and make sure we are doing the right thing.

On the financing side, financing the dividend and the growth, the CapEx, principally, as in the past, we have relied on the debt capital markets. On a longer-term basis, we will likely be turning to the equity markets. The rate we're growing is going to require both debt and equity financing.

Okay. And I guess just one more question just by way of SunCor with the $30 million net income target for this year and being at $8 million thereabouts year-to-date, where is the comfort to find the pickup for the rest of the year from an earnings perspective, and any comments if you guys have been looking at whether you need to write down the PP&E for that business for past investments as we're seeing with other homebuilders? And any leaning as to what we could expect for 2008 right now?

Good question, Dan. First, we've got a relatively high degree of comfort on that $30 million. The second quarter was a push, but it was real close in timing a large $10 million commercial transaction that tentatively was scheduled for the second quarter, booked into the third quarter. We, now, as it looks, the third and fourth quarters should be relatively even split to the balance. In other words, $10 million a quarter on an after-tax basis. But it is largely driven by commercial transactions. And given the nature basically most of them are in escrow at this point in time. The timing, being what it is, it doesn't take much to move one of those transactions back a week or a month.

With that said, homebuilding has progressively gotten weaker during the course of the year from even where we looked at it beginning of the year. But our $30 million number has about 15% of that is attributable to home sales for the year -- the total estimate. And that's about as a weak as we see them going.

We don't foresee the need for any form of write-off that you have seen come out of some of the larger national homebuilders. As you know, most of our home developments or I will call them participatory joint ventures. We own very little of the land in our planned unit developments. We do these in partnership with landowners who participate in the future profits with the landholders, so that minimizes our investment. So I don't foresee any kind of a write-off that you referred to.

Okay, thank you, guys.

[Ted Hane], [Catapool].

Good afternoon. Don, I just had a quick question on the guidance for this year. When I'm looking at kind of the trailing 12 months of contributions, it looks like you guys are tracking right around $300 million of net income with right around 30 for SunCor, which is your full-year guidance. And really the big delta, it seems like, is coming from APS. I just wanted to kind of walk through what are the key drivers of obviously you have growth growing gross margins. What are the key offsets that are going to bring that $300 million number down to the kind of 263, if you kind of back out the Palo Verde disallowance?

O&M expense is not -- I don't want to call it a key driver, but it will be higher in the second half of the year than it was in the first half, maybe about 10 to $15 million a quarter. And that's principally due to timing of unit overhauls. Depreciation and the growth-related or capital-related costs, depreciation property taxes interest are up in the second half, reflecting increased investment in plant.

Okay. And then just a quick -- so those are the key drivers?

Yes.

Okay. And then, just a quick question on the FERC filing. I guess, what do you -- first, what do you kind of see your trailing ROEs on your FERC-regulated rate base being? And then secondly, you guys kind of touched on that you may try to address getting some sort of transmission rider to move through that $30 million of rates into the retail tariff and kind of what is the timing on that?

This is Jack. I'll address the second part of your question first. We already have a transmission rider in our tariff that was the result of the 2005 rate settlement. And so when I referred to that in my comments, it's really a matter of how we go about implementing that in coordination with the effective date of the FERC rate filing.

Okay.

Okay, so we already had that.

Okay, so it's already in place?

The rate case was just completed. There was a small amount of discussion at least in the open meeting about when are we going to file a FERC rate case, which I said we did on the 9th.

Okay.

(multiple speakers) I forgot, we filed for ROE in the FERC rate case at 11.5%. And the way FERC operates is we make our filing. They will look at it and then put it into effect not later than October 1, subject to refund pending a hearing.

Okay. I'm sorry. So it will be in effect, subject to refund and then you'll hammer out some of the details after that?

That's right.

Okay. Great. Thank you very much.

David Thickens, Deephaven Capital Management.

Good afternoon. Most of my questions are about real estate and have been asked, but maybe one that can help us clarify as we look forward, I realize that there is a significant delay from the time deals are struck in this business to the time they close and they are reported as earnings. Can you tell us what has happened to the backlog, if you will, of deal signings, that would maybe give us a picture as we look beyond the end of this year?

I wouldn't put it in perspective of deal signings, but I think I know what you mean. Our commercial business, which is principally herein Arizona and in the Maricopa County area has been very strong. We have substantial holdings, particularly in the west valley. And that's where most of the commercial transactions have been that have generated the earnings. We have substantial land holdings and other asset holdings that should fuel the commercial real estate business for a good number of years, frankly.

Well, in terms of inking transactions, can you talk about comparative pricing for deals that were inked but not closed in second quarter the prior year and give us some kind of comparable metrics there?

The margin -- well, if I understand your question, let me try answering it, you tell me. The margins we are seeing now this year are at least as good, slightly better maybe in some cases than we saw a year ago.

Okay. What about sales volume?

Well, these tend to be large, from $10 million, $15 million net proceeds down to $1 million or less. So, volume is probably not a real great measure on the commercial side of our business.

Okay. Can you give us any metrics on the residential side other than saying it slowed? Recognizing that it's a smaller piece of the overall business?

In normal times, back it up to say two years ago, we would expect homebuilding to be more like 40% of total margins and it's about 15% for this year.

Okay. Thank you.

Tom O'Neill, Highbridge.

Good morning. Just curious, based on your comments and kind of recognizing the slow pace at which the ACC works, what is -- what are you saying in terms of filing the next rate case, you are going to complete this review cycle by fourth quarter and make a determination at what point you file in '08?

Yes.

Okay. And then, based on your earlier comments, as you kind of look out into 2008, do you see the scope where you can improve upon the 7.5 ROE that you expect this year or that's probably the hurdle that you are going to keep defined?

Well let me see if I understand your question. Are you saying that as we go forward, we would accept a level of 7.5% return?

Well, I guess absent a rate increase, is that a number that you think you can beat or are you going to be challenged to get your way back to that number by the mere fact that the rate recovery isn't sufficient to pay for the growth?

Well, as you know, growth continues and so as we go forward, we continue to see the impact of that in a growing magnitude each year. So as we deal with growth, as we look at it today, as I mentioned, we've added $500 million a plant just here in the last six quarters net of depreciation. So that is a factor. It is the primary factor that puts us in a situation where we earn below the allowed level.

So as you go forward, that's going to continue to have an impact on that. That's why we were dealing with the issue of attrition through the various models that we have proposed in the last case and that's why we will continue to deal with that as we go forward. As I mentioned, it's going to be our intent to deal to deal with the issue of growth not so much from the standpoint of a base rate case filing, but the issue of growth in Arizona and bring that before the Commission with some alternatives of financing that growth before the end of the year. So I don't think you can say that it's going to be 7% and declining as we go forward. We're going to be dealing with that on an ongoing basis.

As far as whether or not that's an acceptable level, it is not an acceptable level. It's something that we, as I mentioned, are dealing with from several different points of view. One thing is critical is that we take a look at our efficiencies and ensure ourselves that we are as aggressive and as efficient as we can possibly be. We have seen significant improvements in that area over the last five years and we expect to continue to do so.

But, efficiency just by itself is not going to impact the earnings level to the same degree that the impacted growth is going to have as we go forward. So when we are adding somewhere close to almost $100 million net of plant per quarter, that's something that we have to deal with directly, and efficiency will not completely offset that.

Okay. And the second question, just wanted to understand what you were saying about new generation resources. You are not currently contemplating bringing forth new build opportunities I would presume under the current regulatory framework it was?

Well, the current regulatory framework, one of the things that is being addressed as a result of this last decision is a docket specifically to deal with the self build moratorium and that's something that we're going to participate in. But the short answer to your question is as we look at it right now, the answer to that is no. However, it is going to be important that we provide a broad perspective on what resource options we need to deal with from the standpoint of the state that go beyond just a single year one or two year's growth. So we will be looking at this from a long-term perspective, which will really be a dialogue, not so much a commitment to a particular plant, but a dialogue about how we deal with growth from the standpoint of base load, what types of a base load, how we deal with as we have been in terms of renewables and conservation, and the levels that have been approved so far would be incorporated, as well as looking at other methods and alternatives. So it is to take a look at the entire resource picture going forward, that would be in a process independent of the one where we look at how we finance growth.

Okay, great. Thanks.

That is the allotted time for our Q&A today. I will now turn the call back over to Ms. Hickman.

At this particular time, if any of you have any questions as a follow-up, please call me or Lisa Malagon and I will let Bill say one final thank you.

Well, I just want to say thanks. I know it's a busy time. I thank you for your time and your attention, and please give us a call on any and all issues that you want to deal with in terms of having discussions with Becky. So thank you very much.

This concludes today's conference call. You may now disconnect and have a great afternoon.