Pinnacle West Capital Corp (PNW) 2010 Q1 法說會逐字稿

Good morning, my name is Mason and I'll be your conference operator today. At this time I'd like to welcome everyone to the Pinnacle West Capital first-quarter 2010 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. I'll now turn the call over to Ms. Becky Hickman. You may now begin.

Thank you, Mason. Good morning, I would like to take this opportunity to thank everyone for participating in this conference call and webcast to review our first quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt, and our CFO, Jim Hatfield. Don Robinson, who is President and Chief Operating Officer of APS is also here with us. Before I turn the call over to our speakers I need to cover a few details with you. First, the slides we refer to today are available on on our industrial relations website, along with the webcast, the Form 8-K filed this morning, supplemental information on our earning variances and quarterly operating statistics and our earnings release. The slides and press release contain reconciliations of certain non-GAAP financial information. Please note that all of our references to per-share amounts today will be after income taxes and based on diluted shares outstanding.

Also, it is my responsibility to advise you that this call and our slides 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 forward-looking statement contained in our first-quarter 2010 Form 10-Q, which was filed with the SEC this morning, as well as the MD&A section, which identifies risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our website, www.pinnaclewestcapital.com for the (inaudible). It will also be available by telephone through May 13th.

At this point I'll turn the call over to Jim.

Thank you, Becky. The topics I will discuss today are shown on slide four. First I'll review the consolidated quarterly results and discuss the main variances from last-year's corresponding quarter. Second, I'll provide a brief update on the economic outlook for Arizona. Then I will discuss our earnings guidance for 2010 and 2011 and I'll close with brief comments on our financing activity and liquidity.

Slide five summarizes our reported and ongoing earnings for the quarter. On a GAAP basis for this-year's first quarter we reported a consolidated net loss attributable to common shareholders of $6 million, or $0.06 per share, compared with a loss of $157 million, or $1.55 per share for the prior-year's first quarter. From an ongoing earnings perspective first-quarter earnings improved significantly over last year. For the 2010 first quarter we had consolidated ongoing earnings of $7 million, or $0.07 per share, versus an ongoing loss at $25 million, or $0.25 per share, for the comparable quarter a year ago. A reconciliation of our first quarter GAAP EPS to our ongoing EPS is shown on Slide six. Both periods exclude results from the real estate segment because of SunCor's major restructuring launch in early 2009. I will provide update on SunCor in a few moments. I will focus my remaining comments on first-quarter results on an ongoing basis.

Moving to Slide seven, the variance that makes up the change in quarterly ongoing earnings per share; first, an increase in our regulated electricity gross margin, added $0.20 per share over the prior-year's first quarter. There are several components to this net variance and I will cover those variances in more detail on the next slide. Second, our effective income tax rate for the year decreased from 38% to 35%, which improved earnings in the quarter by $0.08 per share. We've now cleared all federal tax years through 2007 and this positive change is the result of adjusting our accruals to reflect actions. Third, other income, net of other expense, improved $0.05 per share, primarily because of an investment loss in El Dorado in last year's first quarter. And, fourth, a net increase in O&M costs decreased earnings by $0.04 per share in the quarterly comparison. The O&M variance reflects labor expenses, which partially offset by lower generation costs in this year's first quarter, including effects of timing of plant fossil plant maintenance.

On that note I'd like to emphasis that our O&M are in line with expectations and we continue to work toward fairly-flat 2010 O&M numbers when compared to 2009. This change in O&M excludes expenses from the renewable energy surcharge, or RES, and our demand side management and energy efficiency efforts because these costs are offset by respective rate surcharges. To help with your analysis we have provided the amount of pretax RES and DSM revenues recorded by quarter over the last couple of years in the appendix to today's slides. Other miscellaneous items net improved our rules by $0.03 per share.

Turning to slide eight and the drivers of a net increase in regulated electricity gross margin, total regulated gross margin was up $0.20 per share compared to 2009's first quarter. The components of that increase are as follows. Retail rate increases favorably impacted our quarterly results by $0.20 per share. Of this amount $0.14 per share related to net base rate increase and $0.03 per share related to line extension fees recorded as revenue. Both of these items became effective January 1st of this year under APS's retail regulatory settlement. The remaining $0.03 per share related to the 2009 transmission rate increase that went into effect last summer to our (inaudible) rates and our retail transmission cost adjuster. The non-cash mark-to-market valuation of APS's fuel and purchased power hedges, net of PSA deferrals was better by $0.02 per share compared with a year ago. This variance reflects smaller decline in mark-to-market than we saw in last-year's first quarter, as forward natural gas prices fell by 15% during this year's first quarter compared with a slightly larger decline a year ago. For your reference our mark-to-market amounts by quarter for the past couple of years are shown in the appendix.

Turning to the volumetric effects related to weather and kilowatt hour sales, weather variations improved our earnings by $0.02 per share, as the 2010 first quarter was about normal but last year's first quarter was mild. Our quarterly results were negatively impacted $0.02 per share related to lower weather normalized kilowatt hour sales compared to 2009, reflecting the impacts of customer growth and customer usage. In this year's first quarter APS's customer growth grew 6% compared with -- 0.6% compared with 0.8% in the prior year's first quarter. Weather normalized retail sales were down 1.7% in this year's quarter. All this decline came in the C&I segment and of that decline approximately two-thirds can be attributed to effects of our ACC-approved energy efficiency and demand side management programs, while the other one-third reflects the continuing weak economy in Arizona and the nation and its impact on C&I sales category. I'll provide more color on our economy momentarily. Lastly, the net effect of other miscellaneous factors reduced our gross margin by $0.02 per share.

Turning to slide nine and looking at our fundamental growth outlook in the Arizona economy, we currently expect the annual customer growth to average about 1% for 2010, through 2012. Additionally, we expect our annual weather normalized retail sales and kilowatt hours to be relatively flat from 2010 to 2012 because of the impacts of the national economy, the housing situation in Arizona and APS's energy efficiency programs. However, for the full-year 2010, we expect weather normalized retail kilowatt hour sales to be down slightly compared with the year 2009, primarily because of the first quarter effects I have already discussed. In the first quarter of this year we began to see some signs of stability in the Arizona economy. As shown on slide nine, housing prices appear to have stabilized as shown on the graph on the left-hand side of the slide. Additionally, as shown on the graph on the right-hand side of the slide, trends in occupied office space are positive again after several quarters of decline. However, occupied retail space is continuing to fall after reaching its peak in early 2008 and is not showing any similar signs of recovery.

Turning to slide 10, job growth appears to have stabilized, as well, when looking sequentially quarter over quarter, although unemployment is still high NS the number of jobs is some 4% less than a year ago. Furthermore, the Arizona Department of Commerce is predicting net job losses increasing in 2010, although they predict the rate of decline will slow to approximately 25% of the 2009 level. Other indicators of local economic activity have improved somewhat, including growth in household earnings, as reflected in personal income tax withholdings, which showed a modest positive gain in February for the first time since 2007. Taken as a whole, we are cautiously optimistic that the Arizona economy may have found a bottom and that we can begin the long process of recovery. We continue to expect the economy, both nationally and locally, to improve as we move through 2010.

Importantly, we need to see more robust customer confidence along with the rising economy in order to support a modest recovery in residential usage patterns, ignoring weather effects and the impacts of our energy efficiency programs. Usage by our commercial industrial customers, on the other hand, is likely to remain down, as office and retail properties struggle with their high vacancy rates. Over the longer term we remain confident of Arizona's fundamentals. We expect customer growth and usage to return to more normal levels as the national and state economic environments improve, albeit offset somewhat by APS's efficiency efforts.

Just turning to our earnings outlook on slide 11 we continue to expect that our consolidated ongoing earnings for 2009 will be between $2.95 and $3.10 per share. The key factors and assumptions underlying our 2010 estimate have not changed, except for the following two items. For the year overall we currently expect weather normalized retail kilowatt sales volume to be slightly below 2009 levels and in part due to our energy efficiency initiatives and in part reflecting the weakness in the C&I segment in first quarter results. As I have already mentioned, our ongoing effective income tax rate is expected to be about 35%. For your reference, I would point you to the Form 8-K filed with the SEC on February 19, 2010, for the other assumptions and key factors underlying our 2010 outlook. In addition, we continue to estimate our 2011 ongoing consolidated earnings to be within the guidance range for 2010 ongoing consolidated earnings with some opportunity for modestly exceeding the range.

Turning to slide 12, and I'll just give you a quick update on our liquidity and recent financing. We continue to have ample liquidity, a stable credit profile and access to the capital and bank markets. Amounts shown on this slide include pro forma adjustments to reflect $253 million of proceeds from our issuance of 6.9 million common shares in mid-April, including the exercise of the over allotment option by the underwriters. We have almost $1.2 billion of available liquidity, including the net proceeds from the common stock offering. With this equity issuance completed we do not currently intend to issue common stock again until at least 2012 based on our current plan. On that point I want to emphasize what Don said kicking off the equity road show that our offering, although smaller than anticipated by most, is sufficient. Additional equity infusions will come from approximate $80 million in tax benefit generated from the SunCor asset liquidation the remainder of this year, or other sources of proceeds.

We have infused the net equity issuance proceeds as well as other funds into APS to fund its capital expenditures to expand and maintain the electric infrastructure. The sale of the SunCor properties continues to progress, albeit at a slower pace in light of the economic and real estate conditions. SunCor has a forbearance agreement with its banks that ends June 30th. We are continuing to actively pursue an early wind down that business.

That concludes my prepared remarks. I'll turn the call over to Don.

Thanks, Jim, and, again, thank you all for taking the time to join us on the call this morning. We appreciate your time and your interest. Jim's already touched on one of the issues that's important to our investors, our growth in the Arizona economy. Although the recession has slowed our growth, Arizona's intrinsic economic strength remains an attractive fundamental characteristic for our Company. During the first quarter we made progress in key strategic areas and continued our record of excellence in operations. I'll update you on the following topics today; one, the Arizona regulatory developments; two, our strong commitment to renewable resources, particularly solar; and three, our recent operating performance, which demonstrates solid execution.

Looking first at Arizona regulation, given our history over the past several years, it's unusual for me not to be discussing a pending retail rate matter. APS's recent regulatory settlement, which sets rate -- with set rate that became effective on January 1st was progressive and contained broad-ranging benefits for all parties. With that settlement in place we are continuing to work with the Arizona Corporation Commission and various stakeholders to further enhance the state's regulatory framework to benefit APS's customers and other stakeholders. The commission has been conducting workshops on several generic topics that address topics such as decoupling to enable and encourage utilities to meet energy efficiency goals; feed-in tariffs for renewables; externalities; and line extensions. The workshops are inquiries to gather information from various stakeholders about broad policy issues. Although these workshops are in early stages, we view the Commission's consideration of these issues to be positive steps that can further enhance the regulatory environment in Arizona.

The elections this fall will result in change at the Commission, as two of the five seats will be on the ballot. Chairman Mayes is term limited so her seat will be filled by a new commissioner. Commissioner Pierce is running for reelection for a second term. In total there are currently seven candidates for the two seats; three republicans, three democrats and one independent. The field will be narrowed to two candidates from each party following the primary election in late August with final elections in November.

Turning to renewable resources and operations, our commitment to renewables remains strong. Arizona's solar potential is among the best in the world and we are on track with our plans to significantly increase the amount of renewable energy we provide to our customers. APS's AZ Sun program, which, is outlined on slide 14, is a recent development of significant interest to the investment community and our customers. Although we already have entered into sizeable purchase agreements for solar and wind power, and we own several solar plants AZ Sun will be our first significant step toward owning large utility-scale solar facilities. Under the plan, APS will develop and own 100 megawatts of photovoltaic solar plants with an estimated cost of up to $500 million. We anticipate this solar capacity will be placed into service in 2011 through 2014. The AZ Sun program was approved by the Corporation Commission on March 3rd, along with constructive rate recovery consistent with the regulatory settlement including a return on both equity and debt capital. As such, when these facilities go into service we will begin to fully recover our costs and earn our full allowed rate of return on equity capital invested in these facilities.

Costs of the first 50 megawatts of AZ Sun will be recovered through the renewable energy surcharge until such costs are included in base rates or another recovery mechanism. Costs for the remaining 50 megawatts will be recovered through the energy renewable surcharge or another rate adjustment mechanism to be determined in APS's next retail rate case, which is expected to be filed in June of 2011. In January APS issued two requests for proposal for renewable resources. These RFPs are part of the process for procuring the additional renewable resources required under the regulatory settlement. Respondents were requested to provide proposals for long-term purchase power agreements and our turnkey agreements under which the projects would be built by the developers and purchased by APS upon completion. The first RFP was for utility-scale solar PV projects ranging in size between 15 and 50 megawatts. In total, APS anticipates procuring 220,000 megawatt hours annually from this implementing the AZ Sun program.

The second RFP is for Arizona wind projects ranging in size between 15 and 100 megawatts. APS received proposals under both of the RFPs in April. The response to the solar RFP was exceptionally strong while there were also a number of wind proposals. We are currently evaluating the proposals with a plan to short-list viable bidders by the end of this month with a goal of finalizing arrangements with selected bidders by late summer. Any further discussion of the proposals at this time would be premature while we are in the evaluation phase.

In the regulatory settlement, we agreed to acquire an additional 1.7 million megawatt hours of renewable energy resources to be in service by the end of 2015. With the new additions we estimate renewable resources will supply about 10% of APS's retail sales by the end of 2015, which is double the amount required under the Corporation Commission's renewable energy standard for that year. The combination of these efforts, with renewable initiatives we already have under way, will be important steps in advancing Arizona's sustainable energy future.

Looking at our operating performance, our baseload nuclear and coal fleet continues to perform very well. In the first quarter our Palo Verde nuclear plant operated at a 96% capacity factor. Unit one is currently in a refueling outage which began April 3rd. During this outage we will replace the reactor vessel head and install a rapid refueling package. We completed a similar refueling outage at Unit two last fall and plan to perform similar work at Unit three this fall. Looking ahead the Palo Verde team remains focused on achieving safe, sustainable top quartile performance in all aspects of the plants operations. Our Coal-fired plants continue to operate at top-tier capacity factors, well above the most recently available industry average of 73%. In the first quarter our coal fleet posted a capacity factor of 80%, which was slightly ahead of our expectations and last year's first quarter results. We are focused on continuing operational excellence and we constantly seek to improve performance in every facet of the Company. Through focused strategies and sound execution I am confident we will continue to move this Company forward.

That concludes our remarks this morning and, operator, at this time we would be pleased to take any questions.

(Operator Instructions). Your first question comes from the line of Daniel Eggers from Credit Suisse. Your line is now open.

Good afternoon/morning, first question. Jim, can you talk more about the tax rate in the quarter and for the full year and what was the impact of settling up all of the outstanding tax returns?

Sure. And simply what happened is, we're now cleared through IRS audit through 2007 and just adjusted our accruals. I want to also point out an quarter like the first quarter where you're typically zero net income, your tax rates are going to be screwy. But if we look at the -- overall over the -- over year the impacts it'll have for 2010 in the first quarter was about $0.08. I think for the year that's going to run at a 35% rate, somewhere in the vicinity of about $0.13, $0.14 over the course of the year just from my lowering of the tax rate, assuming we hit the midpoint of the guidance.

Now, is that -- should we be thinking that's the right tax rate of the future or is this because of the true-ups of the past returns the rates are lower?

I would not assume a 35% tax rate beyond 2010. It's just reflective of adjusting our accruals to clear the prior years.

And so we should assume it goes back to the old 37%, 38% level?

Yes.

Okay. I guess the next question, Don, maybe is you talk a little bit about the decoupling conversation in Arizona, where is that going, what are the swing factors the Commission's looking for, as the discussion moves forward with principals for our program and given the challenging volume environment, how does that affect your thought process?

Dan, good question. Let me have Don Robinson speak to that.

Hi, Dan . What we really -- the workshops have really just got started and the thing I can tell you at this point is the one thing that people have agreement on, is the Company needs to have some sort of decoupling mechanism to continue to provide us an incentive to go forth with energy efficiency so we are not financially harmed on that. The process hasn't even gone along far enough yet to tell -- for us to give you a good sense of where it's headed in terms of what principals they are other than people recognize the need for it and I believe we can work through that

I guess either of the Dons your thought process of what kind of drivers should go into it. Obviously you've had a good history of good population growth, is that something that seems amenable where you'd set decoupling to a customer growth rate rather than a volumetric growth rate?

That is one of the things we're looking at very closely.

Is there any other major principles we should be watching in this conversation?

Not at this point.

And any feel for timing on when we will have some sort of master plan from all parties and maybe thoughts on when the Commission could act on a final decision?

Dan, the one thing I've learned after all of these years is it is impossible to predict the Commission's timing on a workshop process, because there are so many parties involved and there's so many different issues and different areas they want to have workshops in, I even don't want to even hazard a guess what it would take.

Is it a priority of the outgoing and perspective outgoing commissioners if this gets done in 2010?

It is a priority for them. I'm not sure whether there is enough time to get it done, even if they desire to get it done, so it may or may not happen this year.

And, Dan, almost anything is possible but it is very likely that the details as they would apply to any specific company, would get discussed and resolved in an actual rate proceeding.

So does that mean, Don, that it would be likely that this wouldn't show up until the -- go effective with the next rate case or could it go in before the next rate case as a resolved?

I would doubt, I can't imagine a scenario where it go would go in before the next rate case.

Okay, got it. Thank you, guys.

Thank you ,

Your next question comes from the line of Ali Agha from SunTrust Robinson Humphrey, Your line is now open.

Thank you, good morning.

Good morning.

Jim, or Don, when you talked about your 2010 guidance and you talked about the variances from your original assumptions and, Jim, you mentioned the tax rate alone probably gives you an extra $0.13 to $0.14 for the year, was there any other offsets to that? I know talked sales coming down a bit, but any reason why you would not raise your 2010 guidance? That's a pretty big incremental earnings pickup for the year.

Well, keep in mind we see softer sales after really four months of 2010 in the C&I segment especially and if you look at really across the board, they're all off on a usage basis. And, again, that's reflecting a lot of energy efficiency and distributed solar and likewise, especially as it relates to schools. And so we think sales will -- could potentially be weaker than we thought going into the year, and that trend continues. And, looking historical regression analysis, sales growth, is highly correlated to job growth in Arizona, and, again, we don't see a big pickup in job growth. In fact, the Department of Commerce sees a loss of jobs in 2010. So I think while we're getting the positive benefit of the lower tax rate, we are seeing the effect on gross margin from that. I would not necessarily say it's a one-to-one correlation, but it all -- it fits inside the current guidance.

Okay. But just to be clear, other than the projection for software sales, there's nothing else, either higher cost or some other offsets that we should think about?

Not at this point. We're on track , in my opinion, on our cost savings targets, and everything else appears to be going well other than the continued softness in sales

Okay. And, Jim, could you remind us, what is the implied utility ROE that's embedded in that guidance?

It would be in the sort of 9.5% range.

9.5% range. Okay, okay. And with regards to the renewable program, should we also assume that as you laid out the earnings contribution incremental earnings should be directly correlated with when those facilities actually come on line? Is that when you start booking the earnings?

That's correct, that's correct. And as Don talked about, we're going through the RFP evaluation process. In my opinion, and likely we'll see a contribution in 2010, but it really depends how quickly we can get contracted and get these projects going. The quicker the better from an earnings perspective.

Certainly. Thank you.

Your next question comes from the line of Paul Ridzon from KeyBanc. Your line is now open.

Jim, did you say it's unlikely to see a contribution in 2010?

Correct.

And then just an update on Solana and where that is with the DOE and if that doesn't happen how you're -- what you're thinking about your capital opportunities?

This is Don Robinson. Solana, Abengoa continues to work with DOE, , we expect that they'll get some answer in the next few months. That continues to be a moving target. On the second part of the question, of what happens if it doesn't go, as Don mentioned in his comments, we had an extraordinarily high response to our request for proposals for solar so that if something were to happen there, we would just move on to other options and do some other projects instead of that. Still hopeful that Abengoa will go on but we just wait like everybody tolls get through that federal

Are you thinking PPAs or what's the self-build opportunity?

Clearly we're looking at both PPAs and self-build as we move forward. We're not enamored with signing a bunch of new PPAs exclusively.

I imagine the Commission is cognizant of imputed debt issues there, as well?

They are and they also are seeing that the -- if it's dependent on everybody else doing it we run into as many more problems or more as if we were doing it ourself.

Okay, thank you very much.

Your next question comes from the line of Chris Ellinghaus from Wellington Shields. Your line is now open.

Hey, everybody, how are you?

Hey, Chris, how are you?

Good. Can you just discuss your CapEx potential in regards to -- you have an RFP for wind in addition to solar, just generally comment about what if you were a little more aggressive on renewables, that seems to mesh sort of with the Commission's attitude? And secondly, in terms with the legislative and regulatory action likely on greenhouse gases and generically the environment, what are your thoughts in terms of what might have to CapEx related to that debate?

Well, I think on the -- as I said on the first one, Chris, on the CapEx potential, we've said the AZ Sun up to $500 million for those 100 megawatts. We have RFPs in on wind. Wind's generally running $2,000 a KW or so depending on the amount of the project. That is an opportunity. I think we have to be cognizant going down this path of rate-basing renewable. While it is clear we have Commission's support to do some in rate-base, we can't rely totally on a PPA model and I think Chairman Mayes made that clear in the open meeting with me. And so I think we're going to continue to try to pick and choose our opportunities to rate-base. Wind gets done much easier than solar, so that'll be a factor. And so at this point, while there may be some CapEx potential upside on renewables, other than the AZ Sun there is not a clear path right now. On the environmental I'll just speak to the dollars. I think it really depends on what we get. The range is broad. We put out there $400 million to $700 million or $800 million depending upon what standard we ultimately get and I think that's the wild card. But Don and Don, I don't know if you have additional comments?

Yes, Chris, this is Don Brandt I don't think we've got any -- certainly any clarity on carbon legislation and I doubt we'll have much clarity for another year or so in that regard. And that is one of the various business factors why we're driving on renewables. and particularly solar, is we can actually deploy solar and it's a good hedge against what potential costs and consequences of future carbon legislation.

Can you just elaborate a little bit about what major issues may come up as a result in terms of what kind of projects that you might envision?

For renewables or --?

No, for the environmental aspects of the debate.

This is Don Robinson, Clearly at the coal plants we have the FCRs and those issues like every other coal plant would be looking and facing during -- we have nothing unusual in that respect.

Okay. Yes, I'm just thinking in broad terms there's some potential CapEx uplift from a lot of different points of view, and just thinking about what other things might come down the pike. Thanks for the clarity.

Okay.

Yes, thanks, Chris.

Your next question comes from the line of Daniele Seitz from Dudack Research, your line is now open.

Thanks. Actually along the lines with Chris's questions, do you have a feel for what type of rate-base growth you are looking at given the addition of those new projects at this time?

Well, I think including AZ Sun, we're looking at about 6% annual growth in rate base according to our latest CapEx plan. Obviously rules around carbon could change that, both positively and negatively, but we'll just have to wait and see. If this becomes an issue we need clarity to be able to definitively answer those questions.

Okay. And this is includes the (inaudible), right?

Correct.

Okay. And do you have a feel for what the Commission is looking at in terms of the mix of purchase power versus build? Do they have -- did they give you a hint as to which way they would like you to go, 50/50, something like that?

There's been no clear target on that. The dialog was much along we can't sustain a PPA model without facing non-investment grade status at some point and they're understanding that, not adverse to rate-basing, some of this stuff going forward but it can't be a sole model of rate-basing. I don't know that anybody has really thought through an ideal mix. From our perspective, obviously, the more rate-base, the greater earnings opportunity. But we do have robust wholesale market in Arizona and I don't think anybody's going to try to ignore that.

Just as a general -- on a general basis, what type of capacity factor is the sun -- in your region is sort of plant would provide. Do you have a feel for that?

This is Don Robinson. The capacity factor for solar projects would generally be in the 30% to 40% range on a year-wide basis, but if you look at solar/thermal like we've proposed at Solana it will be -- the capacity factor will be very high during the on-peak periods and with photovoltaic it will also be relatively high during the on-peak periods. If you look at annual capacity factor it looks relatively low, obviously, because the evenings are not running.

But they are running when you need them. I understand. Thank you very much, I appreciate it.

Thank you, Daniele.

(Operator Instructions). Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is open.

Most of my questions have been answered but I want to follow up on the solar. Can you give us a flavor, again, about what the cost you're seeing per megawatt hour for -- just hat the range is, roughly speaking, for solar?

Well, large-scale solar is under confidentiality agreement so we really can't talk about that. With the AZ Sun original projections were about $5,000 a KW. We're sorting through the RFPs now. It remains to be seen if that continues to be the cost going forward.

Okay. But on a megawatt hour basis and capacity factor that you -- that Daniele was just asking about, what does that come out to in terms of -- roughly speaking, I'm not asking for anything just sort of a rough idea?

Paul, this is Don Robinson, under the terms of our RFP and and the confidentiality we can't even give out rough numbers on what our megawatt hour numbers are.

Okay. Now can you give us idea about what the potential impact to customers might be? I did notice that there was sort of a strange legislative thing a couple of months ago where they did pass something and then they took it away because -- I guess because of jobs and location of a -- factories, I believe, was part of the issue.

Lets go back, though, and talk about the legislation. The legislation was something that was proposed and pulled so it never actually was a action by the legislature on that. In terms of impact to customers it's going to depend on two things over the long term; one is gas prices, and the other, what happens to carbon. So we know from a capital cost these things tend to be a little more expensive, but the benefit we have of solar is our conditions and our high capacity factors on peak when we need them most.

Okay. Thanks a lot.

Your next question comes from the line of Yiktat Fung from Zimmer Lucas Partners. Your line is open.

Congratulations on a solid quarter.

Thanks, Yiktat.

I would like to clarify the sales forecast, do you expect 2011, 2012 sales to be flat to 2010 sal -- the new 2010 sales, which slightly lower than 2009?

No. 2010 through 2012 we see flat sales in the aggregate, so right now we're looking at maybe slightly negative sales in 2010, that would imply a slight pickup really in 2012. But over the three-year period you're going to to see sales pretty much flat line.

So it's basically flat through 2009 -- or 2011 and 2012 will be flat 2009. There might be a tiny dip in 2010?

Correct.

Okay. And just to check up on the legislature, has the legislation about [Kayak] also been pulled?

Yes, the session is over in Arizona, so there was no action on that, either. There is a workshop going on, as well, on line extension, and back to Don's original comment on decoupling, nobody really knows the timing of that moving forward.

Okay, thank you very much.

Yus.

Okay, thank you Yiktat.

There are no further questions at this time. I turn the call over to leadership for any further comments.

Thank you for your time again this morning. We appreciate your interest. If you have any other questions don't hesitate to call any one of us. Have a great day.

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