Pinnacle West Capital Corp (PNW) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Pinnacle West Capital Corporation 2011 third-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, Rebecca Hickman, Director of Investor Relations for Pinnacle West Capital Corporation. Thank you, Ms. Hickman. You may begin.

Thank you, Christine. I'd like to thank everyone for participating in this conference call and webcast to review our third-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 our Investor Relations website, along with our earnings release, supplemental information on our earnings variances and operating statistics, the webcast, and the Form 8-K filed this morning. Please note that the slides contain reconciliations of certain non-GAAP financial information. Also, all of our references 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 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. Our third-quarter 2011 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements' cautionary language, 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 for the next 30 days. It will also be available by telephone through November 8.

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

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

Slide 5 summarizes our reported and ongoing earnings for the quarter. On a GAAP basis, for this year's third quarter, we reported consolidated net income attributable to common shareholders of $255 million, or $2.32 per share, compared with net income of $234 million, or $2.14 per share for the prior year's third quarter. Our ongoing earnings increased $0.18 per share. For the 2011 third quarter, we had consolidated ongoing earnings of $246 million, or $2.24 a share, versus ongoing earnings of $224 million, or $2.06 per share for the comparable quarter a year ago.

Slide 6 contains a reconciliation of our third-quarter GAAP earnings per share to our ongoing earnings. The amount for both quarters exclude results related to our discontinued operations. The discontinued operation amounts relate primarily to APS Energy Services and real estate activities. My remaining comments on the quarter will focus on ongoing results.

Moving to slide 7, you see the variances that drove the change in quarterly ongoing earnings per share. First, an increase in our regulated electricity segment gross margin added $0.10 per share compared with the prior year's third quarter. Several pluses and minuses comprise this positive net variance, and I will cover those items in more detail on the next slide. Second, lower operations and maintenance expenses improved earnings by $0.10 per share. The decrease largely reflects lower benefit costs, as well as lower generation costs related to the timing and scope of planned maintenance in our generation plants. Our expectation for 2011 total annual fossil generation plant outage O&M costs is to be generally flat to 2010's annual comparable O&M costs. This change in O&M excludes expenses related to the renewable energy standard, or RES, energy efficiency, and similar regulatory programs, which are offset by comparable revenue amounts.

Third, lower property taxes increased earnings by $0.02 per share. As we discussed last quarter, we were seeing higher property taxes in 2011, as counties raised business tax rates to adjust for lower residential assessed valuations. However, when we received the new property tax bills in September, they were lower than we had estimated, so we reduced the amounts we recorded. Finally, the net impact of all other items decreased earnings by $0.04 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 $0.10 per share compared with the 2010 quarter. The main components of that increase were as follows. Unusually hot weather was a positive contributor to our quarterly results, and increased earnings by $0.10 per share when compared with the same period a year ago. We had some record-breaking temperatures, particularly in August. We recorded 1,383 residential cooling degree days for the 2011 third quarter, which was 13% above normal, and about 6% above last year's third quarter, which was also favorable. Overall, the quarter was the hottest on record. For your reference, we have included a slide in the appendix that contains quarterly pre-tax gross margin effects of weather variances versus normal for the past couple of years.

The net effect of higher retail transmission revenues increased our results by $0.04 per share. The retail transmission cost adjustor rate increase that became effective July 1 of this year raised our quarterly revenue by $0.08 per share. However, in the third quarter we booked in an adjustment to our formula rates. This catch-up adjustment reduced the quarterly results by $0.04 per share. Our fuel costs, net of the PSA deferral, decreased our results by $0.02 per share, and the net effect of other miscellaneous items decreased our gross margin by $0.02 per share.

Turning to slide 9, and looking at our fundamental growth outlook in the Arizona economy. Economic growth in Arizona continued to improve in the third quarter, although modestly. As shown on slide 9, month-over-month [non-farm] job growth reached its fastest growth since the beginning of the economic recovery, although growth remains uneven. An improving trend, and one which could provide some near-term support to the Arizona economy over the next year, is a recent rebound in construction employment, which is embedded in this growth. Over the last quarter, construction employment has increased at an annualized rate of 7%, reflecting new investment in non-traditional sectors, like solar generation facilities, at a time when residential and commercial construction activity has remained flat. While not sufficient in and of itself to sustain a more broad-based economic recovery, this modest increment should help partially bridge the gap until the significant excess capacity in residential and commercial markets is largely absorbed. At the same time, consumer spending remains solidly in the 5% to 10% growth range, reflecting continued recovery from the extraordinarily large pullback we observed during 2008 and 2009.

While these trends indicate that the Arizona economy is heading 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. Despite lagging residential valuations for tax purposes, we have seen fairly stable home prices in Metro Phoenix since early 2009, and view it as an indication that new housing supply is in balance with demand, although at very low levels for both. Weak demand for housing is mirrored in the commercial segment as well, where gains in occupancy for retail and office space are marginal at best. We believe that this situation will continue to restrain new construction and higher levels of growth for at least 2 to 3 years.

Over the long term, though, we remain confident in Arizona's fundamentals. We expect customer growth and usage to return to stronger levels, as the national and state economic environments improve. Looking at the next several years, we currently expect annual customer growth to average about 1% from 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.

Now, turning to our earnings outlook, I point you to slide 10. We continue to expect our consolidated ongoing earnings for 2011 will be in the range of $2.75 to $2.90 per share. However, primarily due to weather's contribution this quarter, we expect our 2011 performance will be near the top of the range. Our 2011 updated outlook assumes actual weather for the first 9 months, and normal weather patterns for the remainder of the year. It also assumes moderating electricity gross margins, with retail customer growth of about 1%, and weather-normalized growth in retail electric sales of about 1%. For your reference, an updated list of key assumptions and factors underlying our revised 2011 outlook is included in the appendix to today's slides.

Lastly, I want to comment on our liquidity and financing. APS ended the third quarter with no short-term debt outstanding, and had ample liquidity. A higher credit rating since June have provided APS and the parent Company improved access to short-term funding, as well as the debt capital markets, as evidenced by APS's recent financing. In August, APS issued $300 million of 30-year senior unsecured notes at 5.05%. Net proceeds from the sale of these notes were used, along with cash on hand, to repay $400 million of APS's outstanding unsecured senior notes at 6.375% that matured on October 15. To close my remarks today, we continue to be comfortable with our ability to fund APS's capital expenditure program, with no new equity needed until 2012 at the earliest.

And with that, I'll turn the call over to Don. Don?

Thanks, Jim, and thank you all for joining us today. I know it's a busy day for you, and we all look forward to seeing most of you next week at EEI.

Since our last earnings call, we've made distinct progress in key areas, and continued our track record of operational excellence. Today, I'll update you on the 4 following topics. 1, APS's pending general retail rate case, and other Arizona regulatory developments. 2, our investments in renewable resources and other generation. 3, our recent operating performance. And 4, the sale of our unregulated Energy Services subsidiary.

We know Arizona regulation and APS's recently filed retail rate case are top of mind for most of you. As I've discussed on our last call, APS filed a general retail rate case on June 1 of this year. Through the rate application, APS requested a $95 million net base rate increase, effective July 1of 2012. Details of the request, as well as key underlying assumptions, are outlined in the appendix to today's slides. The rate case proposals contain a number of benefits for our customers, the communities we serve, and our shareholders. The requested regulatory treatment would build upon the constructive regulatory framework established in the 2009 settlement, and would provide the financial support APS needs to achieve Arizona's ambitious energy goals.

Since the case was filed, we have continued to communicate with the Arizona Corporation Commission staff and interveners regarding the details of the case and its intent. Upcoming key dates in this proceeding are as follows. First, the ACC staff and interveners will file their direct testimony on all matters except rate design on November 18, and their remaining direct testimony on December 2. Second, the parties plan to enter into formal settlement discussions on November 30, with the goal of filing a settlement agreement with the Commission by December 23. Third, if a settlement is not reached, and the parties proceed to litigation, APS will file its rebuttal testimony on December 23. And fourth, whether or not the case settles, the hearing on the rate application is scheduled to begin on January 19. The procedural schedule is noteworthy in that it is designed to allow for final ACC decision by July 1 of 2012, a date consistent with APS's rate application and 2009 regulatory settlement.

Several ACC decisions over the last few years signal progress in Arizona's regulatory environment. We appreciate the opportunity to continue working with the Commission and various stakeholders to further enhance the state's regulatory framework, address several regulatory and operational issues, and find solutions that balance the interests of customers, shareholders, and other stakeholders alike. We look forward to working toward that goal in our ongoing state regulatory proceedings.

Turning to renewable resources and our AZ Sun development activities, we are on track with plans to significantly increase the amount of renewable energy that APS provides for our retail customers. In doing so, we place strong emphasis on solar power, because Arizona has some of the best solar conditions in the world. The AZ Sun program is APS's plan to develop and own utility-scale photovoltaic plants in Arizona.

The first phase of the program, which includes 100 megawatts of solar resources, is nearing completion. As part of that first phase, in the past 2 months we have placed two 17-megawatt power plants into commercial operations, the Paloma plant and the Cotton Center plant, each located in Gila Bend, Arizona, a town about 35 miles southwest of Phoenix. Together, these plants add 34 megawatts of solar capacity to the APS generation mix. We expect another 11-megawatts solar plant to come online later this year at the Hyder facility in southwestern Arizona. Thus, we plan to have a total of 45 megawatts of AZ Sun projects in operation by year end.

Construction and other development activities are underway at 3 sites for an additional 38 megawatts. These facilities are expected to be in service in 2012 and 2013. Procurement activities are in process for the balance of capacity needed to complete the first phase of the AZ Sun program.

APS has also proposed a second phase of the AZ Sun program as part of its 2012 RES implementation plan filed with the Arizona Commission on July 1of this year. In Phase II, APS would place another 100 megawatts of utility-scale plants in service in the 2013 to 2015 timeframe, with a potential capital investment of up to $475 million. We've requested constructive regulatory treatment for the facilities through the renewable energy surcharge until the plants are recovered through base rates, consistent with the treatment afforded our 2009 regulatory settlement. Last week, the Arizona Corporation Commission staff issued its recommendation on the 2012 RES implementation plan, which included approval of Phase II of the AZ Sun program and our requested regulatory treatment. Assuming the Commissioner's consideration follows the timing related to previous year's RES implementation plans, we expect a decision from the Commission on the 2012 plan around the end of this year.

For your reference, the appendix to our slide today contains summaries of both phases of the AZ Sun program. We're excited about the AZ Sun program, and our other renewable energy initiatives. They're important steps toward advancing Arizona's sustainable energy future.

Turning to the status of our Four Corners plan. Last November, we announced 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. We believe our plan has substantial merits, economically, environmentally, and socially. A summary of the plan is included in the appendix to our slides.

In short, the plan includes -- APS buying Southern California Edison's 739-megawatt interest in Units 4 and 5, which is targeted for closing in the second half of 2012; shutting down Units 1, 2, and 3, which are wholly owned by APS, and total 560 megawatts in size; and capital expenditures for environmental compliance on APS's expanded share of Units 4 and 5, which would be far less than the amount APS would need to spend if it were instead to bring our existing interest in all 5 plant units into compliance with proposed EPA rules. The acquisition requires approval by Arizona, California, and federal regulators, and other government agencies. In Arizona, the Corporation Commission completed a hearing on the matter on September 1, and the parties have completed post-hearing briefs. We are awaiting a recommendation from the administrative law judge before the matter is brought before the Commission for a vote.

We remain optimistic that APS and Southern California Edison will obtain rulings from their respective Commissions in a timely manner. Our acquisition is also conditioned upon the execution of a new coal supply agreement, which is currently in negotiation, as well as expiration of the Hart-Scott-Rodino waiting period and other typical closing conditions.

Looking at our power plant performance, our base load coal and nuclear fleet continues to perform very well. Our coal-fired plants continue their top tier performance. In the third quarter, our coal fleet posted a capacity factor of 87%, which is well above the most recently available industry average of 68%. During the third quarter, our Palo Verde nuclear facility operated at a 96% capacity factor. Currently, Unit 1 is in a planned refueling outage, which we expect to be completed early this month, reflecting a schedule of approximately 33 days.

Turning to the overall quality of our operation, we are pleased that 2 prominent organizations recognized our Company's sustainability and corporate responsibility efforts during the third quarter of this year. First, Pinnacle West was named to the Dow Jones North American sustainability index for the 7th straight year. And furthermore, our Company was 1 of only 12 electric utilities included in the index. Second, Pinnacle West was the top-ranked utility in Corporate Responsibility magazine's list of the 100 best corporate citizens, and ranked 15th best overall.

Finally, regarding our non-utility operations, we continue to focus on our core utility business, and streamlining the Company. Toward that end, in August we sold our competitive energy services subsidiary, APS Energy Services, for an after-tax gain of $10 million.

In summary, our Company aims 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, and proactively managing the challenges facing our industry.

This concludes our prepared remarks this morning. Operator, at this time, we would be pleased to take any questions.

Thank you. (Operator Instructions) Thank you.

Our first question is from Greg Gordon with ISI Group. Please proceed with your question.

Thanks. Good morning, guys. I have 2 questions. First, when you look at your regulatory filing, including the decoupling/rate design aspects that you requested, has there been any sort of heretofore public commentary from different intervener groups that you could talk about, that point to the points of the most contention as we approach the settlement talk dates?

No, Greg, like we said, we've had stakeholder meetings on a monthly basis, and dialogue has generally been good. I think it's been a good, lively give-and-take, but I don't think anything pops to the surface that would indicate a ranking, so to speak, of where people's heads are now.

Okay. My second question is kind of away from this. You own, obviously, the largest operating nuclear facility in the country. And Don, I know that you're also on the Board of Nuclear Energy Insurance Limited. Can you comment on what you're seeing in terms of the issues at Crystal River 3, what looks like a near miss of an issue at Davis-Besse, and how that informs how you're thinking about the maintenance of your nuclear plant, and whether you're embarking on any construction projects there that we need to be wary of?

No, I can't comment on Crystal River or Davis-Besse, Greg, but we don't have any kind of projects anywhere close to anything like that. We're doing some construction in like an outage administration building. But literally that's an office -- small office building within the protected area.

Okay. So there's no plans for steam generator or of vessel head replacements?

No, we've just completed, over the last 10, 12, 13 years, all the steam generators changed out through the early part of the last decade, and just completed a year or so ago, the last reactor head. And unique, we have a hatch that was built into containment during construction, so there was no cutting concrete. It was just unbolting and opening the hatch. It was a big project, but there was no cutting into the concrete.

Thanks, Don.

Our next question comes from the line of Kevin Cole with Credit Suisse. Please proceed with your question.

Hello. Good morning, guys.

Hello, Kevin.

I have a question on energy efficiency. So, I recognize that energy efficiency is typically viewed as the cheapest form of power, but those capital costs are often borne by the customers as they upgrade equipment, make their home improvements, and so on. But if we're in a sustained low economy, it seems like these resources are less available today than they were a couple years ago when these policies were struck, especially now with being a bigger bifurcation between economic classes. Don, do you know if the Commission is showing any interest at all in reducing the efficiency targets to lessen the burden on your customers, particularly as those -- the lower end of the economic spectrum are being affected by base rates resets?

Kevin, we haven't seen anything out of the Commission in that regard to this point. And I'll add, particularly during the first few years of pursuing energy efficiency, we're really in the point in time of a lot of low-hanging fruit. And most of the programs we have in place have, besides our subsidies, some pretty quick payback periods for customers. And it's been a very favorable response from our customers, and the results demonstrate that the programs and processes work.

Okay. And what sort of programs do you have in place right now in order to achieve I guess the nearest hurdle, right, is 9.5% by 2015?

A variety -- well, time of use rates, weatherization programs, pool pump programs, air conditioning rebates for higher SEERs, I could go on. We've got -- you can find most of them on our website, pretty extensive, we think probably one of the most extensive programs in the industry.

Thank you.

I guess on a separate question -- Jim, did you say that you're assuming 1% customer growth from 2011 to 2014? Because I thought you filed for 1.7% in the rate case.

On average, 1% customer growth, yes.

What sort of -- under a full decoupling mechanism, what sort of -- I guess have you provided any sort of EPS sensitivity to changes in realized customer growth rates?

No.

Okay. All right. Thanks, guys.

Our next question comes from the line of Ali Agha with SunTrust Robinson Humphrey. Please proceed with your question.

Thank you. Good morning.

Good morning.

Jim, could you remind us, assuming you do end up at the higher end of the range as you expect to for the year, what would that correspond to in terms of ROE for the utility?

It would be just north of 8.5%.

Okay. And then going back to the commentary that you made earlier, in terms of the discussion that you're having with all the parties throughout this process on the rate case, should one extrapolate that to assume that we should assume that a settlement is the most likely outcome on this process, given what you've been hearing from all the parties you've been in discussion with?

I wouldn't extrapolate the technical conference into a settlement in the case. The proposing of mechanisms that we did, decoupling the infrastructure tracker, these were really avenues to more fully explain and get points of view and clear up questions going into the filing from the interveners.

Okay. And then lastly, can you remind us -- what were the final outcome of the study or the report that was done on the outage that had happened a few months back? Has that issue been pretty much resolved? Or just remind us where we stand on that.

This is Don Robinson. The September 8 outage is still being reviewed by FERC and NERC and WECC and the California ISO, and we wouldn't expect any results out for many months.

Sometimes beyond your rate case outcome, et cetera?

Well, I can't tell you when the rate case is going to be done, but I think this will be a few months down the road.

Okay. Thank you.

Our next question comes from the line of Brian Russo with Ladenburg Thalmann. Please proceed with your question.

Yes, hello.

Hello, Brian.

Just the property tax trends that you're seeing, it seemed that they've come in a little bit under what you were expecting a quarter ago. Is this kind of an ongoing review, or is the base that's reflected in your O&M expense guidance, should that be the base that we can now work off of going forward?

Well, I would answer it this way, Brian -- we knew in 2010 we would have higher rates than 2009, because valuations were falling. We knew 2011 would be higher than 2010. We tried to extrapolate that into booking a number in the second quarter, and they came in slightly lighter than we thought. And with the stability of the home pricing we've been seeing the last year, we could see an increase in property taxes. But we think the big run-up's behind us over the last couple of years.

Okay. And the $475 million of capital investment for the Phase II of AZ Sun -- should we assume you build or buy 50% of that, and the rest are PPAs?

No, that -- the $475 million and 100 megawatts would be our rate basing, similar to what we did in AZ 1.

Okay. Great. Thanks a lot.

Yes.

Our next question comes from the line of Shar Pourreza with Citigroup. Please proceed with your question.

Good afternoon. Can you comment on your pre-established equity needs in 2012, if we assume a constructive outcome in the rate case?

Well, like we've said before, our need for equity will be driven by whether or not we have a settlement, because that will dictate whether or not 2012 is a test year. And if 2012 is not a test year, I don't believe we would issue equity in 2012. I think we would be issuing it in 2013, at the earliest, in that regard.

Size-wise, we haven't really talked about size. I would just point out that Don alluded to the sale of APS Energy Services, and we continue to sell non-regulated. And that would continue to reduce the need for equity at the Pinnacle level.

Any potential upside to your credit ratings, assuming a constructive outcome?

Well, that's obviously up to the agencies, but S&P kept us on positive outlook, and I think there's potential implication there. But we've had no dialogue with the agencies directly related to the subject.

Okay. Thank you.

Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Hello, guys.

Hello, Neil.

So, as we think about that $44 million transmission rate increase that you received earlier this year, how much of it did you take in Q3, and what was the adjustment factor that offset part of that in the quarter?

The increase in Q3 was the $8 million, before the adjustment factor. And the adjustment factor was just an adjustment to a formula that affected prior years.

Got it. So, that was limited to Q3, the adjustment, but on a go-forward basis it won't be a factor?

Won't be much of a factor, that's correct.

All right. And then, on AZ Sun 2, as you think about those 100 megawatts from 2013 to 2015, in your filing did you talk about the distribution of those megawatts, when you expect them to come online?

Well, Neil, we did, but I would point out that, just like we did it ratably in the last one, we'll be opportunistic. And you have to do RFPs and you have to find projects that work, that have land. And permitting is always an issue, as we've seen. So, it will be based on really what the market and availability of projects give us over that timeframe.

Got it. And then on Four Corners, can you just refresh us in terms of how you're thinking about timing? We've still got some regulatory approvals that are contingent. Are you still targeting late 2012?

Yes.

Yes.

And -- got it. I guess those are my questions. Thank you very much, guys.

Thank you, Neil.

Thanks, Neil.

(Operator Instructions)

Our next question is from Paul Patterson with Glenrock Associates. Please proceed with your question.

Good morning.

Hello, Paul.

Wanted to just touch base with you on this staff recommendation on the solar incentives, and the fact that solar prices have fallen. Any comments on that? Any thoughts about how that could affect the proposals you have at the Commission, the fall in solar prices?

As we looked at the filing, the staff pretty much agreed with the request that we had made, and actually cut down the incentive piece a little on the residential to recognize the fact that you don't need as much there. But other than that, we don't see much else happening.

Okay. And then, with respect to the property tax question that I think Brian was asking about, I guess the $0.02, is that -- I wasn't completely clear on that. Is that sort of an annual impact that we're going to be seeing, in terms of the delta, as to what you had seen previously, or --?

That's an annual impact. We now have our assessments in, our bills in for the year. So, now we do know our bill. Third quarter, we were trying to extrapolate some things we saw from various counties.

Okay. And then, you guys very effectively went over your schedule, and I missed part of it. The November 30 and December 23 dates, what were those signifying? I apologize for being a little off the ball.

Paul, the November 30 date is the date, according to the procedural schedule, that we formally start settlement discussions. It's since been clarified, and said we could start earlier if all the parties choose to. And we have until December 23, when we'll either file a settlement agreement in the case, or we'll file rebuttal testimony. So, we'll be on dual track in that timeframe.

Okay. Great. Thanks a lot.

Thank you, Paul.

Our next question comes from the line of [Jim Kratzel] with Morningstar. Please proceed with your question.

Hello. Good morning.

Good morning.

I've noticed that your weather-normalized retail usage for businesses have slowed down quite a bit the last few quarters. The first quarter this year, you had 1.7% growth, second quarter 0.3% growth, and then the latest quarter down 1.9%. What were the drivers for that, and do you think that will continue for the next 6 to 12 months?

Well, as I looked at the customer usage before the call, I saw no particular industry group or driver for commercial sales. So, I think it's broad based and reflective of just the day-to-day economy in Arizona. As I mentioned earlier in the call, we've seen some economic statistics that have been pretty -- fairly favorable, noting that we came from pretty far back. And so, I don't expect any real worsening of those sales trends as we move forward.

Okay. So, yes, with your weather-normalized guidance of flat for 2011 through 2013, you're basically assuming that that will normalize and stabilize going forward?

Yes.

Okay. Thank you.

Our next question comes from the line of [Ted Hayden] with Point State Capital. Please proceed with your question.

Good afternoon.

Hello, Ted.

Had a quick question on pensions.

Okay.

One, just your thoughts in general about pension headwinds next year, given the move in the markets and the move in discount rates. And then secondly, I'm remembering, I think in 2008 you guys were -- had some unique plan where you actually booked a gain where the market was obviously down significantly on your assets. And I wanted to just know if that program was still in place, and how we should think about the performance of your assets this year?

There's no question we'll have headwinds on pension in 2012, with not only the discount rate, but certainly we look at the screen today and know what asset returns are doing. Keep in mind, we do get to defer a bigger piece of pension in OPEB in 2012. So, that will partially offset that. And then what you referred to in 2008 is, we had executed an LDI strategy on the pension plan. And at the end of the year when you had very low Treasuries, very high spreads, we ended up with a positive return in the pension plan. In fact, I think we had the top performing pension plan in America that year. That plan was removed at the beginning of 2009 to take the gain. So, that plan is only partially in place today, and will continue to benefit us. But no question, we have headwinds.

Okay. So, your returns will look probably more in line with the market than they did in 2008, because you had made a good call back then?

That's correct.

Okay. Great. Thanks a lot, guys.

Our next question is a follow-up question from Neil Mehta with Goldman Sachs. Please proceed with your question.

Thank you. Southwest Gas recently received a decoupling mechanism. I think there's another gas utility segment that's in for a decoupling mechanism. Do you view that as a relevant read-over to the Commission's appetite for decoupling for electric?

No, I think this Commission has clearly demonstrated the difference between electric and gas companies in the rate-setting process, and further delineated growth utilities from non-growth utilities on the electric side as well. I think the track record clearly points to that.

Got it. And on O&M expense growth, what have you guys guided to for next year?

We haven't.

Okay. Thanks, guys.

Ms. Hickman, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you, Christine, and thank you all again for joining us today. As always, if you have further details that you need about our earnings or information about our Company, please contact me or Geoff Wendt. This concludes our call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.