Pinnacle West Capital Corp (PNW) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Pinnacle West Capital Corporation 2011 first-quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Becky Hickman, Director of Investor Relations. Thank you. Ms. Hickman, you may now begin.

Thank you, Melissa. Good morning. I would like 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 that we refer to today are available on our Investor Relations website, along with our earnings release, supplemental information on our earnings variances and quarterly operating statistics, the webcast, and the Form 8-K filed this morning. The slides 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 statements contained in our 2010 Form 10-Q, which was filed this morning, as well as that 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.PinnacleWest.com, for the next 30 days. It will also be available by telephone through May 6. At this point, I will turn the call over to Jim.

Thank you, Becky. The topics I will discuss today are outlined on slide 4. First, I will review the consolidated first-quarter results, and discuss the main variances from last year's corresponding quarter. Second, I will provide a brief update on the status and the outlook for the Arizona economy. Third, I will discuss our 2011 earnings guidance. And lastly, I will close with brief comments on our financing activities and needs.

Slide 5 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 $15 million, or $0.14 per share, compared with a net loss of $6 million, or $0.06 per share, for the prior-year's first quarter. Our ongoing earnings decreased $0.21 per share. For the 2011 first quarter, we had consolidated ongoing loss of $15 million, or $0.14 per share, versus ongoing earnings of $7 million, or $0.07 per share, for the comparable quarter a year ago.

Slide 6 contains a reconciliation of our first-quarter GAAP EPS to our ongoing earnings. The amounts for both quarters exclude results related to our discontinued operations, substantially comprised of the operations of our real estate business, SunCor. My remaining comments on the quarter will focus on ongoing results.

Moving to slide 7, you will see the variances that drove the change in quarterly ongoing EPS. First, an increase in our Regulated electricity segment gross margin added $0.04 per share, compared with the prior-year first quarter. Several pluses and minuses comprise this net variance, and I will cover those items in more detail on the next slide. Second, higher operations and maintenance expenses decreased earnings by $0.10 per share. The increase largely reflects higher generation costs, primarily due to the planned timing and scope of maintenance at two of our gas-fired combined-cycle power plants.

I will give additional detail of the timing of O&M for our planned outages in a few moments. This change in O&M excludes expenses related to the renewable energy standard, or RES, and similar regulatory programs, which are offset by comparable revenue amounts. Also, we have excluded $0.16 per share of expenses, related to the settlement in this year's first quarter of certain prior-period transmission rights-of-way, associated with the Four Corners power plant. These costs were offset by revenue to be received from Southern Cal Edison, which leases a related transmission line from APS, so there is no financial impact from the settlement.

Third, favorable resolution of tax matters in the prior period, which did not recur in the first quarter of 2011, decreased earnings by $0.08 per share. Fourth, higher infrastructure costs decreased earnings by $0.06 per share, reflecting increases in property taxes and appreciation. Finally, the net impact of all other items decreased earnings by $0.01 per share.

Turning to slide 8, and the composition of the net increase in our Regulated electricity gross margin. Total Regulated segment gross margin was up $0.04 per share, compared with the 2010 quarter. The components of that increase were as follows. Higher usage by APS customers, compared with the first quarter a year ago, increased our quarterly results by $0.03 per share. Weather normalized retail kilowatt hour sales were up 1.2% in the quarterly comparison, after reflecting the effects of our ACC-approved energy efficiency and demand side management programs.

This was the first time, since the third quarter of 2008, we have had higher overall retail kilowatt hour sales, and the first time since the fourth quarter of 2007, that our residential customers' average usage has increased. Also, we had 0.4% customer growth in the quarter, in addition to higher usage per customer. I will provide more on the state of the Arizona economy momentarily.

Weather effects improved earnings by $0.03 per share. This year's first quarter was cooler than normal, with residential heating degree days higher than normal by 17%. Higher line extension fees, recorded as revenues, increased gross margin by $0.01 per share. The net effect of lower transmission rates and other items decreased our results by $0.03 per share.

Moving to slide nine, I want to discuss the timing, on an annual basis, for planned O&M for fossil generation outages for this year and last year. O&M, as we indicated earlier, was impacted primarily by planned outages at two of our gas-fired combined-cycle power plants. On the slide, you see the spread of our O&M spends for overhaul of the fossil fleet in 2010, as compared to the expected spend for 2011.

We anticipate our spend on overhauls in 2011 will be about the same as in 2010. With that said, we planned, and successfully executed on, about half of our overall dollars in the first quarter of 2011, compared to 20% during the same period in 2010. So, while the year-over-year comparison for the quarter gives you one impression, we are actually on track with operating expenses for 2011, and we plan no change to guidance.

Turning to slide 10, and looking at our fundamental growth outlook in the Arizona economy. In the first quarter of this year, we continued to see signs of stability in the Arizona economy. As shown on the slide, month-over-month, non-farm job growth has continued a slow but positive pace. On a more encouraging note, we have seen stronger consumer spending, as reflected in an increased rate of growth for Arizona retail sales.

While these trends indicate that the Arizona economy is headed in the right direction, we must remain cognizant of the significant headwinds that continue. Unemployment remains high, and vacancy rates in housing and commercial real estate have only just begun to retreat from their peaks of last year. We believe the situation will continue to restrain new construction and higher levels of growth for at least two to three years. Over the long term, though, we remain confident in Arizona's fundamentals. We expect customer growth and usage to remain to return to stronger levels, as the national and state economic environments improve.

Although we experienced growth in both customers and usage per customer in the first quarter, I would not jump to any conclusions that we have started a significant upward growth trend. In 2011, we expect growth in customers and kilowatt hour sales of about 1%. Looking at the next several years, we expect annual customer growth to average about 1.7% for 2011 through 2013. Additionally, we expect our average annual weather-normalized retail sales, in kilowatt hours, to be relatively flat from 2011 through 2013, primarily due to APS's energy efficiency programs offsetting a modest recovery in the economy.

So, turning to our earnings outlook, I would point you to slide 11. In terms of results year-to-date, we are on track to meet, and we are affirming, our consolidated ongoing earnings guidance for 2011, of $3.00 to $3.15 per share. For your reference, a list of key assumptions and factors underlying our 2011 outlook is included in the appendix to today's slides. Additionally, as we stated in our prior call, the 2011 outlook includes an expected contribution from our AZ Sun program of about $0.03 to $0.04 per share.

In terms of 2011, we intend to share with you the major drivers for 2012 sometime after our general rate case is filed with the Commission on June 1 of this year. However, we will not provide 2012 earnings guidance while the rate case is pending. Before I turn the call over to Don, I want to comment on liquidity. APS ended the first quarter with no short-term debt outstanding, and has ample liquidity. As a result, we are comfortable with our ability to fund APS's capital expenditure program with no new equity until 2012 at the earliest.

With that, I will turn the call over to Don Brandt. Don?

Thanks, Jim. And since our last earnings call, we made distinct progress in key areas and continued our track record of operational excellence. Today, I will address four areas. One, our renewable and other generation investments; two, environmental compliance; three, rate regulation matters; and finally, four, our recent operating performance.

Beginning with renewable resources and our AZ Sun development activities. We are on track with plans to significantly increase the amount of renewable energy we provide our customers. Investing in these resources makes sense for our customer, their communities, the environment, and our shareholders. We have a strong emphasis on solar power, because Arizona has some of the best solar conditions in the world.

Since the beginning of the year, our most noteworthy progress related to renewable energy, has been on APS's AZ Sun program. The Company's plan to develop and own 100 megawatts of photovoltaic utility-scale solar plants in Arizona. The appendix to our slides today contains a summary of the AZ Sun program, and the projects committed to date. We have announced projects with a total deliverable capacity of 83 megawatts, and an estimated capital investment of $384 million.

Additional procurement initiatives are underway to fill out the remaining 17 megawatts of the program. Construction and another development activities are now underway, and we expect to place the first 45 megawatts of the AZ Sun program in service for customers later this year.

Turning to the status of our Four Corners plan, and other environmental compliance matters. Last quarter I discussed our multi part plan to address several challenges facing our Four Corners coal-fired plant in northwestern New Mexico. The plan presents a creative solution to address new environmental regulations, and maintains our well-balanced resource portfolio. A summary of the plan is included in the appendix to our slides. To recap the plan, APS has agreed to buy Southern California Edison's 739 megawatt interest in units 4 and 5 at Four Corners.

This opportunity exists because So Cal Edison has indicated it must exit its interest in the plant by 2016 to comply with California law. The purchase price is $294 million. The parties target closing on the transaction in late 2012. If the purchase transaction moves forward as planned, we intend to shut down Four Corners units 1, 2, and 3, which total 560 megawatts in size, and are wholly owned by APS.

These units are older and less efficient than units 4 and 5, and compliance with new regulations issued by the US Environmental Protection Agency would be very expensive for them. The net result of the anticipated acquisition and closure is a 179 megawatt increase in APS's share of Four Corners. We estimate that APS's capital expenditures for environmental compliance for our revised plant share will be about $300 million, Costs primarily incurred to install selective catalytic reduction equipment, or SCRs as they are called, on units 4 and 5, as the EPA's proposed rules would require.

These expenditures are far less than what APS would make if it were instead to bring our existing interest in all five of the plant's units into compliance with proposed EPA rules, an approach that would require capital investment totaling an estimated $620 million. The acquisition requires approval by Arizona, California, and federal regulators and other government agencies. It is also contingent upon the extensions of the land lease with the Navajo Nation and of the coal supply contract.

During the first quarter, we've made progress towards such approvals on several fronts. The land-lease extension through 2041 was approved by the Navajo Nation, and now awaits final approval by the US Department of the Interior. The deadline by which other participants must have exercised their right of first refusal to purchase a portion of Southern California Edison's share has passed, and APS remains the only -- excuse me, the only purchaser.

The Arizona Corporation Commission has scheduled a hearing on the matter to begin on July 14, and coal contract negotiations also continue. We believe our plan has substantial merits, economically, environmentally, and socially. Our proposal clearly provides significant savings, given that the purchase price, plus environmental compliance costs combined for APS's revised share, are less than the cost of environmental compliance for APS's existing ownership in the plant. Our plan has substantial benefits in other important areas, as well. We remain hopeful that APS and Southern California Edison will obtain the requisite approvals in a timely manner.

Now, let me touch for a few minutes on other EPA compliance developments. In March, the EPA proposed rules to regulate mercury and certain other air emissions at coal-fired power plants. Their proposed rules were in line with our expectations, and we anticipate that they will be finalized in late 2011. All APS-owned plants, except Four Corners units 1, 2, and 3, and one unit at Cholla power plant, are equipped with scrubbers and bag houses, and thus, able to comply with the proposed rule. We currently estimate that installation of scrubbers at Cholla will cost about $89 million and will be completed by 2015.

Also, in March, the EPA proposed a rule on cooling water intake structures at existing power plants, which is sometimes referred to as the Section 316(b) rule. The proposed rule is subject to a 90-day public comment period, and we expect that a final rule will be issued in mid-2012. Of APS's existing power plants, only Four Corners and Navajo would be impacted by this rule, if finalized. And we are now analyzing the nature of the impacts and potential costs of compliance.

Turning to rate regulation matters now. We continue to work with the Arizona Corporation Commission and stakeholders, in an effort to gain a common understanding on various regulatory and operational issues and to find solutions that balance the interest of customers, shareholders, and other stakeholders alike. We look forward to continuing this dialogue, and making further progress with respect to our state's regulatory environment.

We have also been preparing for APS's 2011 retail rate case filing. As I noted on our last call, APS filed a notice on February 1, with the Arizona Corporation Commission, indicating that we intend to file a rate case on June 1. The primary objectives of our rate case filing will be to recover costs and investments we have made to serve our customers and to build upon the support of regulatory mechanisms, established in APS's 2009 regulatory settlement.

Required by the settlement, the 120-day notice filing was designed to inform stakeholders of the key proposals that APS likely will include in its upcoming rate case, and to facilitate timely resolution of that proceeding. Some of the proposals in the notice include a decoupling mechanism, post-test year plant additions to rate base, and an infrastructure-tracking adjustment mechanism to recover future generation and environmental capital costs. For your convenience, a summary of the proposals is provided in the appendix to our slides.

Earlier this month, we made our 2011 filings for rate changes related to transmission services. The total adjustments to our transmission rate will be $44 million, calculated pursuant to the formula rate approved by the Federal Energy Regulatory Commission. Of this amount, $6 million relates to wholesale transactions with other utilities, and will become effective on June 1. We have filed an application with the ACC requesting that the $38 million related to transmission services for APS's retail customers become effective on July 1.

Looking at our operating performance, our base load coal and nuclear plant continues to perform well. Our coal-fired plants continued their top-tier performance. In the first quarter, our coal fleet posted a capacity factor of 78%, which is well above the most recently available industry average of 65%. During the first quarter, our Palo Verde nuclear facility operated at a 99% capacity factor.

Unit 2 is currently in a planned refueling outage that began on April 2. We planned two refueling outages in 2011, to last 35 to 40 days each, a time frame that reflects sound planning and execution, as well as the benefits of our work over the past two years installing rapid refueling packages and replacing reactor vessel heads.

On April 21, the US Nuclear Regulatory Commission approved 20-year license extensions for each of Palo Verde's three units. This was a major achievement that will result in significant cost savings and other benefits for APS's customers, and the entire southwestern United States, over the extended lifetime of the plant. Obviously, the nuclear industry is at the top of many minds, following the recent tragic events in Japan. So, a few comments on this subject are merited today.

We strongly believe that Palo Verde is safe, and that there are key differences between our plant and the Japanese situation, including less susceptibility to external events like earthquakes and tsunamis. However, we and the rest of the US nuclear fleet have been carefully studying the developments in Japan. We are keenly aware that there will be lessons learned from that event that will strengthen the safety of our nation's nuclear feet. As the operator of the largest nuclear plant in the United States, our mission for Palo Verde is to operate safely and efficiently for the long-term.

Turning to the quality of our customer service. In February, J.D. Power and Associates released the results of its 2010 business customer survey. I am pleased that APS continues its record of performance excellence and overall customer satisfaction. In the most recent results, APS ranked fourth nationally among 45 large investor-owned electric utilities. More specific to our region, we were rated second among 10 investor-owned utilities in the West.

We also recently received recognition for achievements in other areas. Specifically, for the second consecutive year, APS was awarded the EPA's highest honor for continued leadership in protecting the environment through energy efficiency programs. The Energy Star Sustained Excellence Award recognized two APS home programs for promoting energy efficiency, and reducing greenhouse gas emissions.

In addition, Pinnacle West was ranked 15th in Corporate Responsibility Magazine's 2011 list of the 100 best corporate citizens. This award was especially meaningful to us, because it recognized our performance in many environmental, social, and governance areas. To wrap it up, our Company's goal is to achieve top-tier performance, and we constantly work toward that objective in every facet of our business. Going forward, we are committed to maintaining operational excellence and achieving superior financial results by concentrating on our core electric utility business.

That concludes our prepared remarks today. And Operator, at this time, we would be pleased to take any questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Dan Eggers with Credit Suisse Group. Please proceed with your question.

On the Four Corners, can -- upon approval, when will the $294 million go into rate base? And then, on the requisite compliance spending of, I think, $300 million, what is the timing of that and how will you seek recovery?

On the first question, what we have asked for in -- or will ask for in this rate case is an infrastructure adjuster of -- whatever the title ends up being. Assuming we're successful in getting that, and a late third-quarter close at Four Corners in 2012, it would be relatively short time frame, from a regulatory lag perspective -- half the year or less, depending upon the timing. So, that would be a fairly quick recovery of the cost. In terms of the $300 million in environmental, we would expect that we will begin spending that and the -- and planning for it in the 2012, 2013 timeframe. And the spend would be sort of 2014 to 2016 time frame.

Okay. Would that be the same for Cholla, as well?

Well, the Cholla, we'll be doing by, I think Don said, 2015. So, that would be in that -- if 2015 it's complete, you would expect a couple years of planning and few expenditures.

Okay. And how economic are these plants to Arizona? What is the net benefit to Pinnacle West? How important are these jobs to the Navajo tribe? And how competitive are these plants versus the new gas plants?

We think these plants are very competitive, and they are very critical from a job standpoint here in Arizona -- for the state as a whole, and particularly to the Navajo Nation. The Four Corners plant and the coal mine adjacent to the plant generate about 60% of the revenues for the Navajo Nation's general fund.

To give you a relative value, Kevin, I think Four Corners 4 and 5, from a cost per megawatt hour basis, are about 15% less, with a comparable capacity factor. So, that's the magnitude.

Okay, great. Thank you. And sorry -- and then, last question, with regards to timing of the rate case. Stop me if I am being too cute here, but if I look forward to 2012, and the Arizona Commission re-election is -- somehow garners a ton of attention, do you see [Kennedy, Newman, and some] all going up for re-election? And then, second of all, do you see any benefit to the Commission for having this rate case still going in early, mid-next year, when the election starts?

Well, Kevin, I can't speak for whether the commissioners are going to seek reelection. That's going to be up to them. I think the general consensus -- thought, is that they will. And we've -- kind of gave a lot of thought to the timing and extent of this case, and the accelerated nature of this compared to prior cases, which we addressed as part of the settlement of a few years ago. And I think that will be to our advantage, going into this case.

Okay. Thanks, guys. Have a good day.

Thank you. Our next question is from Ali Agha with SunTrust. Please proceed with your question.

Thank you. First question, I wanted to clarify, Jim or Don, the -- in some of your pie charts, you have given us your rate base growth numbers, 2011 through 2013, I believe. Does that 2013 number include the purchase -- the extra purchase of Four Corners in there?

Hi, Ali. This is Jim. Yes, it does.

It does. Okay. Second question -- I recall in 2010 your actual ROE was about 9.3% or thereabouts, if memory serves me right. Can you also remind us, what is the embedded ROE in that 2011 guidance?

Well, Ali, you are correct. It was 9.3% in 2010. And we are projecting at this point slightly under 9%, high 8%s, for 2011.

Okay. And the 2013, if I recall, the average rate based is about -- is it $7.6 billion?

I'm sorry, what year?

2013.

2013, it's looking to be 5% annualized growth. So, somewhere in the $7 billion, $7.75 billion range.

Okay. That's the year-end, or the average?

That would be year-end.

That would be year-end.

Yes.

And my last question, Jim, from an equity issuance perspective, you had said before -- the key for this equity issuance is to time it for the equity ratio for the next round of rate case increase, as I recall. Is there a (inaudible) that we -- with the fourth quarter investment and the other CapEx that -- which you are going to spend on environmental, would that require a separate meaningful external capital, i.e., equity, or is that factored in on -- how do you think about that versus getting (inaudible) for the next rate case?

Well, I think you are exactly right, Ali, in that we -- the purposes of our equity issuance are to calibrate the capital structure for rate-making purposes. When we look at the Four Corners transaction, vis-a-vis the other sort of requirements for capital, it's just an incremental capital requirement. So, we would not do two transactions to satisfy that. We would look at sort of incremental, on top what was planned.

I see. Okay. Thank you.

Thank you. Our next question comes from Stefka Gerova with JPMorgan. Please proceed with your question.

Thank you. I have two unrelated questions for you today. First, have you had any feedback from various stakeholders on your pre-filing notice in the APS rate case, and do you have a view on what may be the more challenging issues in the case?

Hi, Stefka, this is Jim. How are you?

Good. How are you?

Fine, thanks. We have had ongoing dialogue with the stakeholders since probably middle of last year, in terms of coming up to this case. Filing this case is no secret; it was really contemplated by all the parties, in my opinion, from the last settlement. The feedback we have gotten has been consistent throughout the process. We have been talking about decoupling, we have been talking about some sort of mechanism to recover costs in the years we are not in a rate case. So, I think we have had very good dialogue with the stakeholders at this point. As I go into the case, I think you're -- probably any time you go for a rate -- base rate increase, there's always some (audio disconnected)

Ms. Hickman?

Yes, ma'am.

Your line is back in and live.

Thank you. We apologize for the technical difficulties. Stefka?

I guess I missed a part of the answer. I'm not sure if everybody did. But I will move on to my second question, which relates to slide 9. I was wondering if you could quantify the planned fossil fleet's outage O&M that you expect for 2011?

Oh, on slide 9? So, dollar magnitude, they are both in the upper $40 million range.

And that's consistent with what you had seen in 2010?

Correct. It's really --

Okay.

Stefka, just a timing of the planned outages, and based on the plant lifecycle.

Sure, completely understood. Thank you very much.

Thank you. Our next question is from Jim von Riesemann with UBS. Please proceed with your question.

Could you guys just help me out with bridging your earnings expectations for the balance of the year? I looked at a 12-month earnings figure, and if I take the last three quarters of 2010, it's [$2.97]. And then, with this quarter, I'm at [$2.83]. But can you refresh our memories as to what the major drivers are to get to your $3 to $3.15? Because I'm sitting at a trailing 12 of [$2.83] right now.

Sure. You have -- obviously, the first quarter of this year, significantly impacted by the fossil timing. So, you're really getting the last three months of last year in a significant -- you know, half of this year's spend in the first year. Obviously, the difference from last year to this year would be retail sales growth of about 1% net of the EE and DE impact. We see a little bit more, in terms of line extension revenue; and we saw that in the first quarter. And we also have a transmission rate increase later this year. Expenses are fairly flat. We will see some increase in, obviously, depreciation and property tax. Those are really the major drivers, on a quarter-to -- or a year-to-year basis, impacting 2011.

Do you care to give any guidance on a quarterly basis? I know that's not your practice, but --

We don't do that, Jim, and I will tell you why. And the first quarter was a great demonstration of that. In the first and fourth quarters of the year, with timing of outages and things like that, it materially skews these quarters. So, we just look at it on an annual basis.

I understand. And then, just one modeling-type question. What was the quarter-end rate base? Do have that handy?

You know, I haven't looked at that, but I -- my guess would be that it's about $6.5 billion, roughly.

Okay. Thanks. That's all I had.

And Jim, I might -- Don. I might add for the first quarter, we were dead on with our plan. And I don't know if it will help you, but Jim, when he referenced slide 9, you want to make sure you're -- for Q2 and Q3, particularly, that differential between the fossil O&M in 2010 compared to the projected levels in 2011.

No, that I figured out. But I appreciate the color.

Okay.

Okay, thanks.

Thank you. Our next question comes from Brian Chin with Citigroup. Please proceed with your question.

I think you -- Jim, you cut out right as you were beginning to respond to the earlier question about just sort of the interactions you have had with other intervenors in the rate case, and some of these proposed mechanisms. I hate to ask you to repeat what you said, but I think that's right when you started to cut out. So, if you could just go -- add a little more color, one more time?

Sure. Brian, we have had ongoing dialogue, as you know, since the middle of last year with the stakeholders. And in fact, filing on June 1, like we have planned to do, is not a surprise to anybody; and it was contemplated coming out of the settlement in 2009. Since the middle of last year, we have been talking to the parties about the need for decoupling. And in fact, we got a Commission policy in December, [5-O]. We've talked about a need to -- whether it's infrastructure tracking or whatever you want to call it, the ability to collect additional revenues in the -- when we are not in for a rate case, is ability to offset the significant infrastructure spend.

We talked about line extension and the things we have to do there, and change of policy. And we had 18 months post-test year plan, and I think everybody sort of assumes that that model works, for purposes of the settlement. So, I think all along, the dialogue has been very constructive, very healthy. Nothing's new to anybody in this case. So, all in all, I would say the dialogue has been very productive.

Very good. Thank you.

Thank you, ladies and gentlemen. (Operator Instructions) Our next question comes from Reza Hatefi from Decade Capital Management. Please proceed with your question.

Thank you very much. Could you -- I guess you mentioned it earlier, your customer growth guidance is 1.7% from 2011 to 2013, but load growth is kind of flattish. Could you talk about -- I guess, just thinking of it from an earnings driver, how that's going to work, along with the energy efficiency? I guess energy efficiency is rate-based, so you get a return on that. But then, you have customer growth but no load growth? So, does that mean that growth, in a sense, doesn't add to earnings, because there's no load? Or, somehow -- I just need some clarification on that.

Sure. I would be glad to answer that. This is Jim. You have our assumptions correct. And the driver is, of course, the energy efficiency standard and distributed energy standard in Arizona, as we see it, is offsetting kilowatt hour sales growth inherent in the customer growth rate. We do not rate-base energy efficiency costs; those are a total pass-through, from an O&M perspective. And so, yes, I think sales growth is really flat, going forward. And that's why -- and I think all of the parties agree, that the coupling policy is the right policy for Arizona.

And then, when you say it's in your O&M, so you sort of get one-to-one recovery on that? And so, excluding this extra O&M, so to speak, that gets recovered, what is -- what should we assume is underlying O&M growth over this time frame?

Well, we haven't talked about 2012 at this point; and so, I am going to hold off on that. I'll just point back to -- we have been fairly flat from an operating cost perspective over the last couple of years, and our goal is to continue to focus on cost efficiency.

Okay, okay. Thank you very much.

Thank you. We have no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Thank you, Melissa. And thank you, everyone, for joining us today. Meanwhile, if you have further details or questions that you need answered about the Company, please call me or Geoff Wendt. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.