Pinnacle West Capital Corp (PNW) 2008 Q4 法說會逐字稿

Good morning. I will be your conference operator today. At this time I would like to welcome everyone to the Pinnacle West year end 2008 conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

Ms. Becky Hickman, you may place begin your conference call, ma'am.

Thank you. I would like to thank everyone for participating in this conference call to review our fourth quarter earnings, recent development, earnings outlook, and operating performance. Today I have with me Bill Post our Chairman and CEO; Don Brandt, who is our President and Chief Operating Officer and CEO of Arizona Public Service; and Jim Hatfield, our CFO. These three will be the speakers. Also I have with me Don Robinson who is now President and Chief Operating Officer 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 to 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 our 2008 Form 10-K filed with the SEC this morning as well as the MD&A and risk factor section, each of which identifies some important factors that can 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 ongoing earnings, which is a non-GAAP financial measure as defined by the SEC. Our website contains a reconciliation of our ongoing earnings to 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 February 27. Finally, this call and webcast are the property of Pinnacle West Capital Corp. and any copying, transcription, redistribution, retransmission, or rebroadcast of this call in whole or in part without Pinnacle West written consent is prohibited. At this point I will turn the call over to Bill.

Good morning, everybody. Thank you for taking your time to join us today. Jim Hatfield is going to update you on the quarter, our earnings outlook for 2009, and 2010 and our liquidity position. Then Don Brandt is going to discuss our regulatory and operational areas. And then I will come back and close out the comments. Jim.

Thank you, Bill. For the fourth quarter, we reported on a GAAP basis a consolidated net loss of $39 million or $0.39 per share as compared with net income of $3 million or $0.03 per share in 2007s fourth quarter. Net income was down most notably because of impairment charge recorded at SunCor in this years fourth quarter and lower results at APS.

Looking at earnings from ongoing operations we incurred a net loss of $10 million or $0.10 per share for the fourth quarter of 2008 versus earnings of $9 million or $0.09 per share for the same quarter last year. For the year 2008, our ongoing earnings were $2.42 per share compared with 2007 ongoing earnings of $3.06 per share. Reconciliations of our ongoing earnings to our net income on a GAAP basis are included on our website. Our 2008 ongoing earnings were within our expectation of a reasonable range around $2.50.

Now I'll provide more detail on the reconciling items for the fourth quarter between GAAP and ongoing results. First, SunCor recorded an after tax impairment charge of $0.32 per share in 2008's fourth quarter as compared to no impairment charge in 2007. As we discussed in November at EI we review potential impairments quarterly to determine whether impairments should be taken. Before now, impairments were not needed. However three events came together in the fourth quarter to cause us to realize such a charge in the fourth quarter.

First, the continued deterioration in the real estate markets which accelerated in the fourth quarter. A furtherance of the credit crisis which continues to limit financing availability for potential purchasers. And finally, the renewal of a SunCor revolving credit facility in which SunCor must sell assets to reduce available capacity. The facility was renewed yesterday for an approximate one year term. Second, we recorded severance costs related to downsizing our work force of $0.05 per share in the fourth quarter of 2008 as compared to $0.03 per share in 2007 same period. Third, we favorably resolved certain tax issues associated with the 2005 sale of Silver Hawk which added $0.08 per share in 2008 with no comparable benefit in 2007. And lastly, we recorded a loss in the 2007 fourth quarter of $0.03 per share from discontinued operations related to an APS Energy Services project.

The following factors affected the comparison of our quarterly ongoing earnings. From an electricity gross margin perspective, earnings decreased $0.01 per share. Noncash mark to market valuations of APS fuel and purchase power hedges net of related PSA deferrals reduced earnings $0.07 per share as natural gas prices continued to decline in the fourth quarter. Additionally, warmer weather reduced gross margins about $0.01 as residential usage was down 2%, and lower retail sales reduced gross margins approximately $0.01.

Despite the downturn in customer consumption APS customer base increased a modest 1% as compared to 2.6% in 2007's fourth quarter. However, low usage per customer offset the modest customer growth. Looking forward, we continue to experience modest growth in our service territory, albeit at a slower rate than historically. We expect slow growth to continue other the next couple of years until the national economy begins to recover. Not unexpectedly the customer growth rate and usage decline are related primarily to Arizona's economic conditions which continue to reflect the deepening national recession. Over the longer term, we remain confident of Arizona's fundamentals and expect to see customer growth return to stronger levels as the national and state economic environments improve.

Partially offsetting these declines were higher transmission rates of approximately $0.05 per share as compared to 2007 resulting from our formula rates approved by the Federal Energy Regulatory Commission, and the operation of our transmission cost adjustor at the retail level. Miscellaneous gross margin items improved earnings by a net $0.03 per share.

On the expense side, excluding the effects of renewable energy standard our RES and severance costs, O&M decreased by approximately $0.01 per share as lower fossil generation expense was partially offset by higher expenses throughout the rest of the business. As a reminder, expenditures related to the RES are earnings neutral since they're recorded mostly in O&M expense but are offset by revenues collected through a surcharge. The pretax RES related O&M was $7 million for the fourth quarter 2008 and $25 million for the full year. Higher expenses related primarily to infrastructure additions and improvements reduced earnings $0.14 per share. Specifically, higher interest expense net of capitalized financing costs reduced earnings $0.08 per share. Increased property taxes reduced earnings $0.04 per share. And higher depreciation and amortization decreased earnings $0.02 per share.

In terms of SunCor, the depressed economy and real estate markets reduced our contribution by $0.10 a share because of fewer sales of homes and land parcels. All other items increased earning $0.05 per share in the 2008-quarter as compared to 2007. The following summarizes the components of the reduction in ongoing earnings of $0.19 per share. Lower electric gross margin minus $0.01, lower O&M expense plus $0.01, higher expenses related to capital expenditures minus $0.14, SunCor operations minus $0.10 and other items net plus $0.05.

Turning now from historical variance to earning outlook. For 2009, we estimate our consolidated earnings will be within a reasonable range of around $2.30 per share excluding the impact of SunCor, including any potential future real estate impairment or other charges. This guidance does not include any potential earnings benefit during the year from a base rate increase at the conclusion of APS' pending general retail general rate case. It does, however, assume that the interbase rate surcharge will remain in effect throughout 2009. Our earnings estimate would increase to the extent that general rate case ultimately includes a 2009 base rate increase in 2009, that exceeds the amount of the interim base rate surcharge. Projections for our subsidiaries that are included in 2009 consolidated earnings guidance are as follows.

We estimated APS' 2009 earnings within a reasonable range of around $2.35 per share, which is equivalent to a return on APS average common equity of about 7%. This highlights our continuing need for substantial rate relief. We currently estimate, again excluding the impact of potential impairment or other charges SunCor will have no meaningful impact on 2009 consolidated financial results, consistent with our outlook for continuing recession real estate markets and continued limited credit availability. We currently estimate holding Company expenses and other items net will be within a reasonable range of a $0.05 per share loss.

Looking beyond the general rate case resolution of 2010, we estimate our consolidated earnings will be within a reasonable range of around $3 per share. This projection assumes that APS' general retail rate request has been granted in full and will be effective for the entire year. We estimate APS's 2010 earnings will be within a reasonable range of around $3 per share. We currently estimate that SunCor, holding Company expenses and other items net will have no material effect on our 2010 consolidated financial results.

As you recall, in the interim rate order, the Arizona Corporation Commission ordered us to examine our operations and expenses to target additional reductions of $20 million. That study is due March 18, and thus is still underway. As a result, we do not know with certainty the classifications of cost reductions we ultimately will identify. Those reductions could include O&M, cash working capital or capital projects. As a result, our guidance for 2009 and '10 has not been adjusted for the impact of additional cost reductions. You can find in the 8-K we filed this morning and on our website further detail reconciling our 2008 results to our 2009 estimates and our 2009 estimates to 2010 consolidated earnings guidance.

Now I would like to give you an update on our liquidity and pensions. Despite continued disruptions in the credit and liquidity markets, Pinnacle West and APS have been able to access existing credit facilities ensuring adequate liquidity. To remind you, Pinnacle West has a $283 million revolving credit facility that terminates in December 2002 and APS has two revolving credit facilities totaling $866 million that terminate December 2010 and September 2011. For a total combined capacity of approximately $1.15 billion at the end of 2008.

On December 31, Pinnacle West and APS collectively had about $560 million in available credit capacity, after accounting for short term debt outstanding and cash on hand. Additionally, we have no long term debt at either Company until 2011. We will attempt to issue long term debt at some point in 2009. In addition to having adequate liquidity, we have a very positive story as it relates to our pension plan in 2008. Despite a disastrous year in the financial markets our pension plans earned an approximately 12% positive return in 2008. We accomplished this by implementing a hedging strategy in July, when we began utilizing long duration bonds and interest rate swaps to better match the interest rate sensitivity of the plans assets with the planned liabilities. The result of this strategy was a gain on our swap position when absolute treasury yields fail in the fourth quarter. As a result, our funded status at the end of 2008 remained comparable to 2007.

From an accounting perspective, our PBO, or projected benefit obligation was 82% funded at the end of 2008, and on a cash funded basis, which is based on the internal revenue code regulations our pension plan was 98.6% funded at plan year 2008. We estimate the minimum required contribution to our pension plan will be approximately $36 million in 2009. Execution of the hedging strategy saved Pinnacle West from having to make an additional $100 million contribution to the pension plan in 2009, and additional contributions thereafter.

So in closing, we have sufficient liquidity and coupled with our reduced CapEx and cost cutting efforts we have the wherewithal to execute on our plan to serve the long term growth of Arizona. Adequate rate relief is the next benchmark to restoring our long term financial health. And I would also like to comment on the dividend. Our Board of Directors and management understand that near term the dividend is a value driver for Pinnacle West common stock. And therefore we consider the dividend sacred. Long term we view the dividend as a piece of the total return puzzle. It is also essential to accessing the equity markets when needed over time. And that concludes my prepared remarks. I will turn the call over to Don Brandt.

Thanks, Jim. I will begin with regulatory matters. In January three new Commissioners took off at the Arizona Corporation Commission. There are now three Republicans and two Democrats on the Commission. The new Commissioners are Sandra Kennedy and Paul Newman who are both Democrats and Bob Stump a Republican. Commissioners Kris Mayes and Gary Pierce continue on the ACC. And in January Commissioner Mayes was elected Chairman of the Commission.

We believe that changes at the ACC provide opportunities for constructive dialogue and action to ensure that we meet Arizona's future energy needs with reliable electricity and excellent customer service at reasonable prices. With appropriate consideration of renewable and other resources, and the financial health of APS.

We have made progress on the regulatory front in a number of areas. APS's interim base rate surcharge request, the pending retail rate case, setting the 2009 PSA annual adjustor rate, and filing APS's resource plan. Allow me to elaborate on each of these.

On December 18, the ACC approved an interim base rate surcharge for APS. This surcharge is expected to increase annual pre tax retail revenues by approximately $65 million. It became effective for customer bills issued after December 31, and will remain in effect until the decision in APS's pending general rate case becomes effective. By authorizing the Company to implement the interim surcharge, the ACC provided a degree of financial stability for APS to help ensure that we retain our investment grade credit ratings and to avoid the certain future cost increases that would otherwise result if APS's credit ratings were downgraded.

As part of the interim rate decision, the ACC asked APS to target additional cost reductions of at least $20 million. We have assured the Commissioners of the Company will meet their target. We are completing that review and as Jim mentioned we plan to file the required report with the ACC by March 18. Clearly the most significant regulatory related item is APS's general rate case pending the at the ACC. As a reminder, we have requested a net increase in annual retail revenues of $278 million to become effective October 1, this year. The net increase represents a base rate increase of $448 million, less $170 million of fuel-related revenues, that would be reclassified from the existing PSA. The request is based on a rate base of $5.4 billion as of December 31, 2007, a return on equity of 11.5%, and a 46 to 54% debt to equity capital structure. The filing also includes several proposed methods for reducing regulatory lag and the resulting earnings attrition.

On December 19, the ACC staff and interveners in the rate case filed their initial written testimony. The ACC staff recommends a net increase of $166 million based on an 11% return on equity, and APS's proposed capital structure as well as a number of cost disallowances and test year adjustments. The Residential Utility Consumer Office or RUCO recommends no net rate change after reclassification of $170 million of PSA revenues to base rates. And a coalition of commercial and industrial customers recommends a net rate increase of $215 million.

In late January, we began settlement discussions with the ACC staff and other parties to the general rate case. On February 4, the Administrative Law Judge suspended for at least 30 days or the traditional procedural schedule that had been established for the case. APS or the staff is to make a filing prior to the end of the 30 day suspension period, updating the Commission on the status of the settlement discussions and recommending appropriate procedures going forward. Because we are in the early stages of the discussions, we cannot predict whether settlement of the case will be possible.

The third regulatory topic outlined is setting of the 2009 PSA annual adjustor rate. The adjustor rate will be 5.3 mills per kilowatt hour for the 12 months that began February 1, 2009. This rate was slightly higher than the 4 mills per kilowatt hour that was in effect for the preceding 12 months. With the enhancements to our PSA that were approved by the Commission in mid 2007, we are in a much better position with respect to fuel costs recovery than in previous years. At the end of 2008, APS had accumulated PSA deferrals of only $8 million.

Turning to growth in our service territory and our resource plans, growth in Arizona continues, albeit much slower during the current economic environment than the robust levels we are accustomed to. Historically Arizona's growth slows during national economic downturns and accelerates after recessions. In 2008, APS customer base grew 1.4%, down from the 3.3% growth we had in 2007. We are currently projecting annual customer growth of around 1% for the next couple of years with an increase in the rate of growth thereafter.

Looking at the longer term, we currently project that customer demand in 2025 will be more than 50% higher than today. As such, we must continue planning to serve Arizona's growing energy needs. Throughout 2008, we talk about our resource planning initiative, an extensive series of workshops and meeting with stakeholders throughout the state to obtain input and to build public understanding of the options and challenge we face in Arizona as we plan for and acquire energy resources.

Late last month we filed APS's resource plan with the Commission and working with the Commission, the steps we now will take will provide for Arizona's energy future. They will also provide energy security for customers, reduce climate effects, and position Arizona as a renewable energy leader for decades to come.

The primary recommendations of the resource plan include first increasing the role of renewable energy resources, such as solar. We will accelerate the development of renewable energy and propose to exceed the current renewable energy standard requirements. Second, providing opportunities for all customers to improve energy efficiency through Commission approved programs. And finally, leveling off fossil fuel consumption and continue evaluating the potential for future nuclear power to serve base load growth needs beyond the year 2020.

Turning to our recent operating performance, as Jim indicated SunCor's operations have been affected by the distressed state of the real estate markets nationally and the limited financing available for developers and potential purchasers. Our overall objective at SunCor is to maximize the value of SunCor's assets. Credit and real estate market conditions necessitate that we undertake a re-evaluation of SunCor's strategy including the markets in which it operates. This is a process which is under progress. While our re-evaluation is not complete a reshaped SunCor is likely to be more focused and more agile. If conditions in the broader economy or the real estate markets worsen or as a result of a change in SunCor's strategy, we may be required to record additional impairments.

Looking at our nuclear plant performance, the combined capacity factor for the Palo Verde units for the full year 2008 was 84%, up from 79% in 2007. For the fourth quarter of 2008, the site average capacity factor was 74% compared with 57% in the comparable quarter a year ago. The fourth quarter capacity factors were affected primarily by planned refueling outages, unit 1 in 2008 and unit 3 in 2007. Of note, the 2007 unit 3 refueling outage was an extended outage because it included the planned replacement of the steam generators, low pressure turbines and core protection calculators. The outage represented the completion of our program to replace this equipment in all three units.

Palo Verde has two refueling outages each year, during 2009, unit three is scheduled for a 40 to 50 day outage in the spring, and in the fall unit two is scheduled for an outage of about 60 days which will be the first outage during which we replace that units reactor vessel head, and install a new rapid refueling package. We plan to make similar improvements in the other units in 2010.

We are making substantial progress on site improvement plan and we continue working very closely with the Nuclear Regulatory Commission at all levels to ensure that issues at Palo Verde are being addressed. We are committed to returning Palo Verde to sustainable first quartile performance in all aspects of safety and operations.

Currently we expect the NRC confirmatory action letter to be cleared and unit three to be moved out of column four of the NRCs oversight matrix later this year. Our coal-fired plants continue to operate superbly, performing at the upper end of the industry's top quartile. During 2008 the coal plants posted an 86% capacity factor which was comparable with their 2007 performance and well ahead of the industry average of 75%. This achievement was led by our Four Corners and Choya plants. Four Corners posted a site capacity factor of 86%, while APS's Choya units recorded a capacity factor of 87%. Four Corners unit number three set a new record with a 94% capacity factor, as did Choya's unit three with a 91% capacity factor for the year.

Our delivery business had one of the best years ever from a reliability perspective continuing its tradition of industry top quartile performance. Our retail customers experienced a record low average number of service interruptions per customers. Employees throughout our organization are focused on operational excellence. We work hard to maintain top notch customer service, we continually strive to raise the bar even higher, constantly improving efficiency, and effectiveness in every aspect of our business.

As most of you know, Bill plans to retire from our Company at the end of April, marking the end of a very successful 38 year career. During his career, Bill has provided strong leadership, and tireless energy in our Company and throughout the communities we serve. Has he guided the Company through many milestones since becoming President and CEO in February 1997, including managing the period of the fastest growth in the Company's 123 year history, while performing at record efficiency and elevating our customer service to top tier levels. And navigating significant regulatory transitions including a move to the edge of competition and then a return to traditional regulation after the failed California deregulation experiment. On a more human note, the Pinnacle West families of Companies has a truly unique culture that embraces integrity, innovation, trust and respect. Everyone who works here knows that Bill Post championed that culture and that culture will be one of his enduring legacies. Bill, thank you for your contributions. You will be missed.

Finally, as the incoming Chairman and CEO of Pinnacle West I want to assure our investors of our Boards and my and my management team's commitment to driving shareholder value. As Jim mentioned, integral to that commitment we fully understand the significance of the current dividend level, and the prospect for dividend growth over the longer term as part of the Pinnacle West shareholder value equation. And we are committed to preserving that value. Going forward, I believe both our earnings levels and our focus on strong liquidity will allow us to stand firmly behind that commitment. Now I will turn the call back to Bill to wrap it up.

Thank, Don. And this is my last earnings call I would like to thank all of you for your interest in Pinnacle West and many of you for your investment in our Company. I appreciate the opportunity I've had to work with all of you and with some of you it has been a relationship that goes back several decades. My decision to retire was not an easy one because it has been my privilege to work with many wonderful people in our industry and obviously with the dedicated people of Arizona Public Service Company and Pinnacle West. It is also been an honor to serve the customers of our Company and the residents of my home state. We take our obligations to you, our customers, and our employees very seriously. And I am very confident that under Don Brandt's strong leadership we will continue to do so. He along with Don Robinson and the entire management team are very focused on providing high performance and I have absolutely no doubt that Pinnacle West will continue to do so. Thank you for your time. Thank you for your attention. And we would now be happy to answer all of your questions.

(Operator Instructions) We will pause just a moment to compile the Q&A roster. Your first question comes from Paul Ridzon from KeyBanc. Your line is open.

I just had a couple of questions. How much equity is now left at SunCor?

SunCor's equity now is $263 million.

And just clarification your '09 and '10 guidance assumes that SunCor kind of G&A losses are offset with some level of property sales?

That's not what we are saying specifically. Right now as Don mentioned reviewing SunCor's operation going forward, the impact to the P&L will be dependent upon the route that's ultimately taken. With that still underway we are making no assumption about SunCor. Once that is done we will come back and update SunCor's impact for '09 and '10.

What was the G&A run rate at SunCor at that 12/31/08?

The G&A run rate at 12/31 was about $44 million pretax.

$44 million?

Yes, for the year, pretax.

So about $0.25?

Roughly, yes.

And then the guidance does not include the forced $20 million of O&M savings. That's still under review?

That's correct. One thing I want to point out. It may not be totally O&M, may be part capital, may be part working capital. Instead of just assuming the impact of $20 million, we will update that once we are through with our review and we report a commission which will be March 18.

What, on a percentage basis, what percent of that $20 million do you think is going to flow through the P&L?

I would say since we've already cut $720 million net of capital the large majority of it will flow through the P&L either as O&M or working capital would be my guess at this point.

Thank you very mump.

This is Don, you used the term forced and they did order us to that but we've had a long history of trimming expenses and you saw that last year in 2008 and 2007 and years before that. In my remarks to the commission at the open hearing I told them we would substantially exceed that $20 million. That is part of the way we do business here, they wanted to see it. We were going to deliver it anyway.

Is it substantially exceeding incorporating guidance?

No.

So it is 230 plus something substantially more than 20 is that the right way to look at it?

Depending on your definition of substantial but yes it will be more than 20.

Thank you very much for the clarification.

Okay.

Your next question comes from the line of Andrew Levy from Incremental Capital. Your line is open.

Hello.

Good morning.

Hi, how are you doing? Sorry about that. I just, just going back on the dividend I understand your commitment to it, and I understand obviously your 2.10 guidance incorporates the full amount of the rate increase if I read correctly your statements as well.

The 2.30 incorporates only the interim--.

I'm talking about the 2010, the $3 number.

That would include the full asked by it, yes.

All right. Which is like $200 million and whatever.

Right.

What happens if you get half of it? Which is actually fairly generous in the regulatory world in this aspect of what's going on? Are your statements on the dividends still valid or if your dividend is dependent on revenue relief from the commission?

In this particular circumstance I wouldn't agree with your assertion that half is generous. But with that said, yes, we believe going forward we are still comfortable with the dividend.

Based on full rate relief or based on partial rate relief?

Even based with partial rate relief.

Okay. Thank you very much.

Your next question comes from the line of Ted Heyn from Catapult.

Morning.

I'm sorry.

Had a few quick questions, first just to clarify, sorry to beat a dead horse on this but on the SunCor are you excluding just the impairment charges from your guidance or do you assume that SunCor or are you excluding SunCor all together because there may be an operating loss for the next couple of years?

Well, that certainly is not the case in '10. I think in 2009 we are excluding SunCor in totality at this point because the P&L impact will be dependent upon the ultimate course it has chosen as Don said we restructure the business. We continue to believe that 2010 will be a challenging year in the real estate and in 2010 we are assuming 0 operating results from SunCor.

Okay. So in 2010 you are assuming it is a break even business ex any charges. But in '09 -- and then does that relate to you mention that you finally got this refinancing and that there may be some actual forced divestitures, is that basically you're going to be forced to sell a portion of your assets this year, at prices you would rather not just to meet the covenants of that renewal?

Well, the refinancing steps down the available capacity over time. And so in this environment, the way to be able to achieve that is to divest itself of assets as they move throughout the year. That is not to say that SunCor doesn't have assets at the value today is greater than book. But obviously, if you look at what has happened in home building and raw land we have seen a deterioration in market value. So, we are taking the impact of that as well.

Got you. And then, actually just a quick question on just some details on those earning drivers that you gave out, the, on the 2008 to 2009 you are talking about a $0.35 to $0.45 step up from gross margin. Could you give us a little color on what the break out is there, because if I do the market on just the $62 million that gets you to the full $0.45 and I think if you just look at the stub piece of the TCA charge or the transmission charges you have that is another, $0.15 or so. I just, can you give us a break out of--?

Sure.

A feeling and then why are purchase power costs going up if gas is going down?

Sure. You are right on the interim increase. The transmission revenue increase we have is about half of what you have. Keep in mind we have significantly slowed transmission build because of the slow down in customer growth. The other offset to that would be as we look at where we have hedged and gas prices continuing to fall we expect there will be some mark to market decline in 2009 reflecting the 10% of our 90/10 sharing.

So you will have -- you're going to take a negative mark to market hit because you have hedged at higher prices in the PSA and gas continues to fall?

That's correct. That's based on today.

Okay.

Obviously we have seen that turn around throughout the year. So.

But that $0.35 to $0.45 includes that mark to market hedge?

Correct.

Okay. Then I am sorry, just on the TCA not to get in too much detail, I think you got a $30 million increase in March of last year, and then another $13 million halfway through July. So shouldn't you just even if you just pro rata that there shouldn't there be just another 17 from the full year effect of those?

No. You've got -- Ted, this is Becky. You have got most of it before the heavy use period and the transmission rate increases actually seasonalize.

Okay.

So most of it was in effect for the summer last year.

Okay. I got you. Thank you very much. Appreciate it. Congratulations, Bill.

Thank you.

Your next requests comes from the line of Yiktat Fung with Zimmer Lucas Partners.

Good morning.

Morning.

Hi. I'm just wondering if you can comment on your needs for my external equity within the next few years?

Well, as we said in prior calls the amount of equity we need will be dependent upon really two key factors and one is the general rate case outcome as well as our ability to reduce capital and O&M expenses here. We are not going to know what equity we need if any until we get through this regulatory cycle. So, to the extend we need any, I would think it is a 2010 event and not a 2009 event.

Okay. And does your guidance numbers for 2010 assume any sort of equity issuance?

Yes, they do.

Okay. And how much is the impact of that?

The impact in 2010 is embedded in the $0.10 to $0.15 miscellaneous other items net on your reconciliation.

So that $0.10 to $0.15 is the valuation?

It is not just that. There's other items in there as well. But it is embedded in there.

Okay. Can you break out which part is the valuation? Is it half of it or?

It is about half of it, yes.

Half of it. What are your thoughts in terms of I think you talked about before that you're fairly comfortable with your dividend, what are your thoughts on your payout ratio given that you are guiding the 2.30 in 2009.

Well, obviously we look at 2009 as an aberration really. When we say we are strongly committed to the dividend we are really looking at the growth potential of APS, over time. There's one factor that goes into that obviously is getting substantial rate relief to compensate us for the capital that's being put in the business. Long term as you think about the growth that an APS has, we would be comfortable with ultimately a pay out of 60, 65% of dividend to retain as much capital for growth but still compensate investors for, in the yield and then obviously that implies that we have a ways to go to get to the next opportunity to increase dividends.

With regards to the renewed SunCor revolver I think you mentioned that the capacity decreases over time. Can you give me a bit more specifics on that?

Well, the, capacity was 150. It is 125, they are underneath that in terms of current borrowings and it steps down over time to about 85 million at the end of 2010. Okay. And that's periodic step downs.

How much borrowing do you have under that revolver right now?

We have about $100 million at December 31.

Okay. So basically you just need to trim it by about $15 million to hit the lower capacity number of $85 million.

That's correct.

Okay. And as for mark to market impact that you were talking about in the 2009 guidance, that's embedded in gross margin? How much is embedded in that figure?

Well, we have potentially within that range up to about $0.07 of higher, of mark to market. But obviously that's going to be dependent upon ultimately gas prices which continue to fall today.

Okay. And just one final question, you said you still expect about 1% customer growth in '09 and '10; is that correct?

That's correct.

Do you estimate any, is there any expectation for usage declines to offset that growth?

We have not seen that heretofore. If you look at residential we are not seeing usage increases at this point, but certainly not decreases. We are seeing usage patterns pretty flat in the C&I, especially the smaller customers in that category. At this point we are just assuming no growth is in usage per customer but with continued smaller customer growth for the next couple of years anyway.

Okay. So the usage decline that you saw in 2008 that is mainly due to weather; is that correct?

Well, it is weather and there is some in the fourth quarter. But keep in mind in the third quarter with you saw customers up seven-tenths of 1% on a per customer basis. That's going to vary with a lot of factors. And the weather is not a perfect number.

Thank you so much.

Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is open.

Hi guys, how are you? Congratulations, Bill.

Thanks, Paul.

On the expectation for trading and marketing in 2010, what are those? Are those just basically flat with your expectations in 2009 or?

Yes. Marking and trading here is not a, not significant line item.

Okay. And the, the $200 million of -- $200 million plus of common equity, excuse me, of equity in the SunCor business.

Right.

I believe the total assets in the 10-K were around $460 million; is that correct?

Yes, that's $493 million.

$493 million?

Yes.

Now, is debt or I assume at least some of that is debt that is offsetting the asset there, is that recourse back to Pinnacle?

No, there's no hook at all between SunCor and APS or Pinnacle West either through recourse or cross default or any other mechanism.

Okay. Then just finally, just if you could refresh and I apologize for this I got slightly distracted. On the O&M that you guys are planning on reducing but isn't in guidance, could you just refresh what that amount is and what year?

I am sorry. Would you say that again, Paul.

I believe there were some O&M reductions that you guys are not including in guidance; correct?

Oh, yes, that's -- we were referring to the and responding to the Commission requests that we continue to look at our operations and expenses with the goal to reduce that by $20 million.

Okay. And that would be in what year?

2009.

Okay. And what do -- what do you think it would be in 2010 or would it be--?

Well, what we intend to do is do sustainable cost reductions. So, for the most part, we would expect anything we get in '09 carries over.

Okay. But there wouldn't be anything more; is that right?

We are not planning any. I will say this Company has a culture of cost consciousness and we are always looking ways to improve productivity and become more efficient. So, that is something that is embedded in our core.

Sure. I guess what I am wondering here is we are now, we are in February. This is under review and apparently not in guidance, do I understand that correctly?

Correct?

And that would indicate to me that it hasn't been implemented yet. I guess I am wondering whether or not there would be -- if you are able to effectuate that in 2009, whatever those reductions would be, I am just trying to figure out how we should think about. A, the fact that it isn't in guidance indicates that there is some -- you are not putting it in there because it is under review. It is still, you are not certain about it but I am wondering is, is would there be any carry through from an annualized basis into 2010 or do you follow me?

No. I expect we will achieve the $20 million in calendar '09. Some of it has already been implemented.

Okay. So it has already been implemented?

And some of it is being identified for implementation. I know it is March, but I don't think you can think of at 912, so the number gets implemented at [9 and the carryover to 10] we are expecting the $20 million in '09.

And I guess just I am sorry to be so slow. Why is it not being included in guidance?

Well, it is -- the $20 million has not been totally identified nor have we reported it to the Commission yet.

Okay. Okay. I appreciate guys. Thanks a lot.

Your next question comes from the line of Jonathan Arnold from Merrill Lynch. Your line is open.

Good morning, guys.

Morning.

Just housekeeping type question, just ask you to refresh us on what level of CapEx we should be thinking about after this year? And then whether, how much additional flexibility you feel you might have in that given the kind of sales assumptions you are making?

Well, our CapEx at, in total is going to be about $900 million which is consistent with what it was in 2008. I think $906 million total in '08 and the same in '09. APS is going to be the majority of that. About $883 million, and in terms of flexibility, we are always looking at our CapEx and obviously to the extent you see continued slow down that will drive that CapEx number down. We think we have done a pretty thorough job last year when we did the review of CapEx that led to the $200 million, $500 million, 720 net, 520, 720 gross, 520 net after the customer charge. But we will continue to spend money prudently especially when we are in a period of earning a 8% return on equity.

Thank you.

Your next question comes from the line of [Julian Demone-Smith] from UBS.

Good morning.

Morning.

Would you mind running through the various scenarios that could play out with regard to SunCor and the review? I mean what are the possibilities and what are the time frames we are talking about there?

Well, we are in the process of the review, we are not completed. And there's nothing that is not on the table.

Okay. I mean I was just looking at the, I mean, are there any potential scenarios that you can disclose? What avenues? And maybe a second question unrelated would be in light of the continuing economic deterioration, has that affected your IRP that you filed recently? Particularly with regards to your future needs for base load nuclear or anything like that I mean?

No. I think in developing our resource plan we have taken into account the slow down that is in customer growth that's occurred started last year in a significant way and is expected to continue for the next few years. So that was factored in to the resource plan as we filed it at the end of the year.

Just one last detail with regards to the base load nuclear you alluded to in the IRP. Would it be possible to add another unit at Palo Verde or any preliminary thoughts in that regard?

Well, ours is a very high level look at nuclear as an option and again beyond the year 2020, Palo Verde was originally designed, the site for five units and there are three there now. But that, we are not limiting our reviews at just the Palo Verde site.

All right. Great. Well, thanks again for the time this morning.

Thank you.

Your next question comes from the line of Danielle Seitz from Seitz Research.

Thank you. I was wondering if the fuel reduction that you have mentioned in your rate case could be actually larger and therefore would help settlement discussions when you approach October?

Well, Danielle, the fuel cost reductions that effectively flow through to customers in the PSA. So naturally any and all reductions to customer -- the costs that are borne by customers helps customers and it's good for APS also.

I was just wondering if the settlement, if the new commission would actually favor a settlement of the case given the fact that they are new to the system?

Well, they are very new and we are pursuing this settlement and we think it's a worthwhile endeavor at this point.

You are relatively optimistic to be successful there?

Well, it is still very early in the process. We wouldn't be pursuing it if we didn't think it were a worthwhile endeavor.

Great. My other questions have been answered and I just wanted to wish Bill, it was a pleasure working with you.

Thank you, Danielle. I appreciate that. I have enjoyed working with you. Thank you.

Your next question comes from the line of [Rick Schaubin] from JEL Partners.

Hi, how are you. I just want to ask a clarification, not a clarification, a question with regard to the wholesale sales. I noticed that there was just a big drop off in wholesale sales year-over-year and I was wondering what that was attributed to and also how it impacts the utility in anyway or even if there is an impact?

Rick, we had talked about for the last several years about a relatively large contract actually, or two or three of them, but the vast majority of it was in one then that contract rolled off last year. And we don't expect to have something to duplicate it. And as Jim indicated, marketing, trading going forward would be relatively minor and flat.

How are -- and just a follow-up, how are the wholesale sales treated as part of like the, the rate setting mechanism, are they deducted from the fuel cost. How does it work with regard to the utility?

Well, it depends on the nature, but most of them are segregated. It is as wholesale jurisdictional sales.

And so those would go above and beyond the ROE of the utility. Is that how to look at it?

Yes. But.

I guess what I am saying is if you book more generation you had a tremendous excess of power, would that be included as part of the ROE of the utility, or would that be excess?

This is Don Robinson, the off system sales that we make are traditionally treated through the PSA. So there is the, we get to keep the 10%, but the--.

Okay.

Customers would get the other piece.

Okay. Great. Thank you very much.

Your next question comes from Reza Hatefi from Decade. Your line is open.

Thank you very much. What is the expected O&M growth in 2009 and 2010 as part of your guidance?

The guidance on O&M at this point for O&M is about a, about a 4% increase, 5% increase year-over-year. You have to take out the RES and the other things when you look at O&M because they tend to skew the number.

Okay. And what is the tax basis on SunCor?

Its relatively close to book value.

Okay. Great. And I know you have been asked this question a couple of times but is a complete sale of SunCor on the table? Is that one of the options?

Well, we are considering all alternatives.

And you mentioned mark to market hurting your 2009 earnings guidance. Is, is that mark to market only associated with the 10% in the 90/10 fuel clause or is it generally across the board mark to market head?

No, it is the 10% piece. 90% flows through as a mechanism under the PSA.

So to confirm, it's just your exposure on the 10% is worth, I think you said like $0.07 or something?

Yes. That's correct.

That goes away, there's no mark to market in your 2010 guidance?

There is a slight mark to market decrease in '10 but keep in mind that is based on a forward curve and if gas prices go the other direction, obviously those will evaporate. As we saw the first and the second half of the year the swing from a benefit to a loss.

Okay. Great. Thank you very much.

Your next question comes from the line of [Asese Veigleman] Millennium Partners, your line is open.

Thank you. Hey guys.

Good morning.

Good morning. I had just three quick questions. Can you break out the writedowns relative to the housing units for the commercial units that you guys have?

Yes. I will be glad to do that. There were really two components to the impairment charge. The, of the $53.3 million pretax, $23.8 million was the Bridgeview condos, part of the Hayden Ferry complex in Tempe. Because they are condos, and if you remember this is the second condo building they built, the first one sold out relatively quickly. These are held for sale and under the held for sale rules, accounting rules those are mark to market. And as you, it is impacted by everything that is going on in the real estate market. The rest of it, the pretax charge which is equivalent to $29.5 million relate to various residential and commercial either home building, golf courses or just raw land or office buildings throughout SunCor territory that are held for sale but failed the fair value test under 144. So they were written down as well.

Okay. What kind of cash burn do you think you guys are going to go through in SunCor to restructure the business?

Well, I think it depends on the ultimate path of restructuring. Obviously status quo, is it a sustainable business plan in this environment, and so first and foremost we would look to minimize cash burn because cash is king.

Okay. And just last question, on the pension, you guys are doing a Treasury swap.

Right.

What kind of collateral do you guys need to put up against that? Who is the counterparty on that swap? And considering the reversal that happened since the beginning of the year in the treasury markets, how does that affect your pension expenses going guard?

I guess I will say three things. One is we unwound the swaps in January to preserve the gain. Second of all, there was no collateral involved. Our investment manager just went out and executed swaps in the marketplace. So there was no, we bought the swap instrument. There was no collateral need on our part and the counterparties we don't know exactly who they are because they were done through the investment manager or just in the marketplace.

Okay.

But those swaps are now gone.

And we have a $497 million gain that was locked in.

Okay. Okay. Thank you very much.

Thank you for your questions. I would now like to turn the call back to our host for closing remarks.

This is Becky. I want to thank you for being with us today and if you have any follow-up questions, please call me or Lisa Malagon. Thank you very much.

Thank you.

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