Pinnacle West Capital Corp (PNW) 2012 Q2 法說會逐字稿

Greetings and welcome to the Pinnacle West Capital Corporation 2012 second-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. Thank you, Ms. Hickman, you may begin.

Thank you, LaTonya. I'd like to thank everyone for participating in this conference call and webcast to review our second-quarter 2012 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Jeff Guldner, who is APS Senior Vice President of Customers and Regulation, is also here with us.

Before I turn the call over to the our speakers, I need to cover a few details with you. First, the slides to which we refer are available on our Investor Relations website, along with our earnings release and related information. 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 second-quarter 2012 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 is also available by telephone through August 9.

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

Thank you, Becky, and thank you all for joining us today.

Since our last conference call, we've made progress in a number of key areas as we focus on our core Electric Utility business. This progress includes demonstrating improvement in the regulatory environment in Arizona, maintaining operational excellence, strengthening our financial profile and positioning ourselves to benefit from economic recovery. Jim and I will provide more information on each of these areas through our remarks today.

The regulatory environment in Arizona took another step forward when APS' retail rate settlement was approved on May 15 by the Arizona Corporation Commission. The decision came 11.5 months after the case was filed, the quickest resolution of a major Arizona utility rate case in recent memory. Supported by 22 of the 24 active parties to the case, the settlement shows significant collaboration and cooperation among APS, the Arizona Corporation Commission and other parties, as well as a comprehensive commitment to an expedited process.

The settlement contains a number of benefits for our customers, the communities we serve and our shareholders. Details of the agreement, as well as key underlying assumptions, are outlined in the appendix to our slides today. The settlement prevents base rates from increasing for four years, but it is not a rate freeze. Under the agreement, APS may file its next general rate case on or after May 31, 2015, for new base rates to become effective on or after July 1, 2016.

That said, we believe a number of factors will allow us to achieve competitive financial performance during the stay-out period. Aspects related to that settlement include, first, APS' rate adjustment mechanisms, all of APS' rate adjustors will continue to function throughout the stay-out period. These mechanisms include, among others, first, the FERC formula rates and the related retail transmission cost adjustor, which beginning in 2013, can pass annual changes in the FERC formula rate to APS retail customers without explicit ACC approval because of the settlement.

Next, the renewable energy surcharge, which allows for recovery of AZ Sun plant additions, and then the new lost fixed cost recovery mechanism, which was adopted in the settlement to mitigate the loss of certain fixed costs related to energy efficiency programs and distributed generation. And finally, an enhanced environmental improvement surcharge, which will allow APS to collect up to $5 million annually for certain carrying costs on government-mandated environmental capital projects.

Second, a carve out for the proposed Four Corners acquisition. This provision will allow APS to seek rate adjustments as early as mid-2013, if the acquisition is consummated as we currently plan. I will review our progress on the Four Corners plan momentarily. Third, provisions to mitigate certain cost increases. These features include deferrals of portions of higher property taxes attributable to tax-rate increases and 100% pass through of fuel cost through the power supply adjustor.

And finally, without a time sensitive base-rate case litigation process in the next few years, we can focus fully on operational excellence, efficiency and disciplined cost management. This settlement builds upon the constructive framework established in the 2009 settlement and provides financial support for APS that will help us achieve Arizona's energy goals over the next four years.

In a related matter, on July 18 the Arizona Commission approved the 2012 retail transmission cost adjustor increase. The rate change, which became effective August 1, will increase annual revenues $18 million. As I mentioned earlier, beginning next year, any future changes can automatically go into effect June 1 of each year without separate Arizona Commission action.

We appreciate the opportunity to continue to work with the Arizona Corporation Commission and various stakeholders to further influence the state's regulatory framework and to find solutions that balance the interests of customers, shareholders and other stakeholders. Our selective capital investments position us well to reliably serve the needs of APS' electricity customers while meeting goals for Arizona's sustainable energy future and environmental compliance.

I'll update you on two major components of our capital expenditure program, the AZ Sun program and the planned Four Corners acquisition. Our renewable energy initiatives, particularly the AZ Sun program, are important measured steps toward advancing Arizona's sustainable energy future. Through AZ Sun, APS plans to develop and own up to 200 megawatts of utility scale photovoltaic solar plants in Arizona, with in-service dates from 2011 through 2015. A summary of the program is included in the appendix to today's slides.

This program is progressing on target. To date, we have placed in commercial operation three plants with a total of 50 megawatts of solar capacity. Construction and other development activities are currently under way at two sites for another 54 megawatts. We plan to place 19 megawatts into service late this year and the remainder into operation in 2013. Additional planning and procurement activities are in various stages for the balance of the AZ Sun program.

We are continuing to make progress on our plan to acquire Southern California Edison's interest in the Four Corners coal-fired plant in Northwestern New Mexico. A summary of that plan is included in the appendix to today's slides. The plan has substantial merits economically, environmentally and socially. The acquisition requires approvals from Arizona, California and Federal regulators and other government agencies, most of which have been obtained.

Noteworthy conditions that remain to be met prior to closing the transaction include negotiation of a new coal supply contract reasonably acceptable to APS and approval by the Federal Energy Regulatory Commission. We continue to target closing of the acquisition late this year. In addition to strategic capital investments, excellence in day-to-day execution remains a top priority. In the second quarter, our operating results reflected that priority.

Palo Verde operated at a 93% capacity factor, reflecting a portion of the planned refueling outage at Unit 3, which was completed on April 17 in 32 days. The facility's second-shortest refueling outage to date.

On the Customer Service side of our business, J.D. Power and Associates released the results of this year's Residential Customer Survey last month. I am pleased that APS was ranked third best among 55 large investor-owned electric utilities, continuing the recognition of our excellence and overall customer satisfaction. More specific to our region, we were ranked second among the 10 investor-owned utilities in the West.

Looking to the future, in late June I announced APS' organizational changes and promotions to strengthen our leadership team and further enhance our operations. First, APS President Don Robinson will continue as a Senior Advisor and join me in the newly created Office of the Chairman, while handing off his day-to-day operational responsibilities.

Second, Mark Schiavoni has been named Executive Vice President of Operations. In his new role, Mark has responsibility for operations, except for nuclear generation and customer service. Mark joined APS in 2009, bringing strong experience running Exelon's fossil fleet and also in nuclear operations at two other utilities.

Third, Jeff Guldner was named Senior Vice President of Customers and Regulation. This move combines our Customer Service organization and APS' interactions with Arizona and Federal utility regulators under Jeff's guidance. To date, Jeff has successfully headed our rate regulation efforts, including leading the team that negotiated the 2009 and 2012 retail rate settlements.

Fourth, the Information Technology organization now reports to Jim Hatfield who will focus that important group on increased efficiency and effectiveness that will benefit our entire Company. In addition, we have hired a new senior executive in IT who brings impressive experience in this regard from a major financial services company.

Finally, there were several senior manager promotions that will realign some of our operational areas under proven leaders. I believe these changes to the senior management team support our Company-wide focus on best practices and continuous improvement.

Over the past several years, we have often spoke about cost management. Following the theme of continuous improvement, we will continue to look for ways to improve our costs while maintaining safety and operational excellence. We have cross-functional cost management initiatives under way, co-head by Jim Hatfield and Mark Schiavoni, and Jim will discuss those initiatives momentarily.

To close my remarks, I'm very pleased where our Company is today and very optimistic about our future. With the retail rate settlement behind us, we will continue achieving top tier performance through focus on excellence and execution and continuous improvement. Something our talented leadership team and workforce do exceptionally well. Now, Jim will review our second-quarter results, credit rating upgrades and financing plans, the outlook for the Arizona economy, our cost management initiatives and our guidance for 2012 earnings and our financial outlook through the stay-out period.

Jim?

Thank you, Don.

As Don said, we continue making progress, strengthening our financial profile. Today, I will discuss the following topics. First, I will discuss our second-quarter results, including earnings and the primary variances from last year's corresponding quarter. Second, I will review recent upgrades of our credit ratings and our financing plans. Third, I'll provide an update on the status and outlook for the Arizona economy. Fourth, I will describe our cost-management initiatives to which Don referred. And finally, I will discuss our guidance for 2012 earnings and our financial outlook during the stay-out.

Slide 6 summarizes our reported and ongoing earnings for the quarter. On a GAAP basis, for this year's second quarter, we reported a consolidated net income attributable to common shareholders of $122 million or $1.11 per share, compared with net income of $87 million, or $0.79 per share for last year's second quarter. Our ongoing earnings increased $0.34 per share. For this year's second quarter, we had consolidated ongoing earnings of $123 million, or $1.12 per share, versus ongoing earnings of $86 million or $0.78 per share for the comparable quarter a year ago.

Slide 7 contains a reconciliation of our second-quarter GAAP earnings per share to our ongoing earnings per share. The amounts for both quarters exclude results related to our discontinued Real Estate and Energy Services businesses. My remaining comments on the quarter will focus on ongoing results.

Slide 8 displays the variances that drove the change in quarterly ongoing earnings per share. First, an increase in our gross margin added $0.35 per share compared with the prior year's second-quarter earnings. Several pluses and minuses comprise this positive net variance. And, I will cover those items in more detail on the next slide.

Second, lower infrastructure-related cost improved earnings by $0.06 per share, reflecting both lower interest charges and lower depreciation and amortization associated with the 20-year license extension granted last year by the US Nuclear Regulatory Commission for the Palo Verde Nuclear Generating Station. These cost reductions were partially offset by higher property taxes related to tax rate increases.

Third, higher operations and maintenance expense reduced earnings by $0.05 per share. The expense increase was largely due to stock compensation costs resulting from improvements in the Company's stock price. This O&M variance excludes expenses related to the Renewable Energy Standard, or RES, energy efficiency, and similar regulatory programs all of which were essentially offset by comparable revenue amounts under the adjustment mechanisms.

Fourth, the net impact of miscellaneous other items decreased earnings by $0.02 per share. Our second-quarter 2012 earnings benefited $0.03 per share because of the Arizona Sun program and plants that were placed in service late last year and early this year. This net variance is reflected in various line items on the income statement.

Turning to slide 9 and the components of the net increase in our gross margin, total gross margin increased $0.35 per share compared with last year's second quarter. The main components of that increase were as follows. The effects of weather variations improved earnings by $0.23 per share. This year's second quarter was hotter than normal, while the 2011 second quarter was abnormally mild. This year, residential cooling degree days were 14% higher than normal and 51% over the comparable quarter a year ago.

The retail transmission cost adjust, or rate increase that became effective July 1, 2011 improved earnings by $0.05 per share. Lower fuel and purchase power costs and higher mark-to-market valuations of APS' fuel hedges, net of related PCA deferrals, improved earnings by $0.04. The net effect of miscellaneous items improved our gross margin by $0.04 per share. Lower weather normalized retail kilowatt hour sales decreased our earnings by $0.01 per share. This variance reflects the effects of customer conservation and energy efficiency and distributed renewable generation initiatives, which were essentially offset by customer growth of 0.9% over a year-ago levels.

Slide 10 displays our investment grade credit ratings. In May, after approval of the retail rate settlement, both Moodys and Fitch raised Pinnacle West's and APS' long-term credit ratings one notch including an upgrade of APS' senior unsecured debt to BAA1 and BBB-plus, respectively. We are pleased the rating agencies recognize this constructive regulatory outcome and our improving financial performance.

Regarding our planned financing activity, we expect to issue debt to fund the acquisition of Southern California Edison interest in Four Corners later this year, if the transaction is consummated. With respect to potential equity issuance, following successful completion of the retail rate settlement, we currently project that we will not need to raise additional common equity capital until 2014, at the earliest. The timing and amount of any issuance would facilitate balancing of APS' capital structure and provide support for the Company's credit metrics.

Turning to slide 11, and looking at our fundamental growth outlook and the Arizona economy. Economic growth in Arizona continued to improve in the second quarter, although the growth remains modest, as has been the case for the last several quarters. As shown on slide 11, growth in non-farm jobs continued to show modest gains. In particular, the rate of overall job growth has held up well for over a year, and virtually all the major industrial sectors are experiencing some growth.

The sustained growth in jobs has been helpful in supporting gradual growth in incomes and consumer spending and has pushed the unemployment rate down in parallel with national trends. However, as I have discussed on previous calls, significant headwinds remain to be overcome before we can expect the Arizona economy to begin growing robustly. While consumer spending is above last year's levels, the rate of growth has declined in recent months, unemployment remains persistently high and the amount of unoccupied housing continues to restrain the new home construction market.

On slide 11, you can see our estimate of the amount of excess housing that presently exists in our service territory in Metro Phoenix. The good news is that the Phoenix economy has absorbed about 10,000 vacant homes and apartments since the peak of the vacancies was reached in 2009. We believe we are on a pace to further reduce those vacancies by the end of next year to a level where existing home resale pricing will be more supportive of new home construction.

On slide 12 you can see the recent trends in Metro Phoenix home prices as reflected in the Case Shiller repeat sales index. In recent months, we have seen a slight rebound in pricing as the number of foreclosure sales has declined. While we view this as a positive trend, we also recognize that single family resale pricing has just recently returned to levels that we saw in early 2010, just past the peak of the recession. More importantly, these price levels are consistent with the market for homes at the end of 2001, or 11 years ago.

This slide also shows that similar conditions are present in the commercial real estate market. As you can see on the slide, vacant rates for office and retail space have begun to fall from their peak levels but remain quite high. Again, we view this as a positive trend but believe that to the extent a vacant space in these markets means that the recovery for new office and retail construction will likely lag that for new homes.

Reflecting this modest steady improvement in economic conditions, APS' customer base grew 0.9% in this year's second quarter compared with the same quarter a year ago, and represents the strongest growth we've seen in three years.

Over the long term, we believe the fundamentals that have been important to Arizona's growth are still here and that our growth rate and customers will return to more typical levels. Looking at the next several years we currently expect annual customer growth to average about 2% for 2012 through 2015, with growth rates higher at the end of the period than in the near term for the reasons I've just discussed. Additionally, we expect our average annual weather normalized retail sales in kilowatt hours to be relatively flat from 2012 to 2015, primarily due to customer conservation and energy efficiency and distributed renewable generation initiatives offsetting the modest recovery in the economy.

Turning to slide 13 and our cost-management initiatives. We are building on a cost-management foundation with solid achievements in recent years. As this slide shows, we have been able to hold O&M essentially flat since 2008. In preparation for the recently settled rate case, we reduced capital and operational spending by more than $30 million per year through several efforts, such as our enterprise-wide supply chain initiative. However, we are cognizant that we cannot let cost escalate unchecked as customer growth and sales improve.

Our goal is to keep O&M growth in line with retail sales growth. However, we will not sacrifice safety or operational excellence in order to do so. To achieve continuous improvement, we are challenging employees throughout the Company to find ways to be more efficient and effective in their jobs. Additionally, we have a number of corporate initiatives. A Company-wide, cross-functional initiative is under way to benchmark and evaluate various activities.

Recently we have identified and eliminated some duplication of efforts. For example, we have combined financial business analysis groups into my organization. By consolidating previously decentralized functions, we were able to create significant synergies. Further, progress is being made on cross-functional processes, which will also create significant synergies.

Workforce attrition will provide opportunities to capitalize on efficiencies without the need for large layoffs. We estimate that more than 220 people will leave the Company in each of the next 10 years, due in large part to retirements as the baby boomers transition to the next phase of their lives. Through process improvements, we believe that we will be able to avoid replacing a significant number of those employees. To minimize the loss of key knowledge as our workforce changes, we are implementing programs to enhance knowledge transfer and ensure consistency and documentation of processes.

Finally, I will discuss our earnings guidance and financial outlook. As shown on slide 14, we currently expect Pinnacle West's consolidate ongoing earnings for 2012 will be in the range of $3.35 to $3.50 per share. Using the middle of the range, this reflects an improvement of approximately 15% over 2011 ongoing earnings per share. The key factors and assumptions that underpin our guidance are listed on slide 16 in the appendix to today's slides.

Looking ahead through the base rate stay-out period, the Company's goal is to achieve an annual consolidated earn return on average common equity of at least 9.5% on average through 2015, as shown on slide 14.

This represents another step change in earned returns, demonstrating the benefit to shareholders from our rate settlement. This expectation reflects the financial support provided by the retail rate settlement and other factors and assumptions outlined in slide 17 and 18. In terms of capital expenditures, we anticipate spend to average around $1.1 billion through 2015. However, approximately 45% will be addressed by the rate mechanisms Don alluded to, and approximately 35% will be covered by depreciation cash flow. This leaves minimal annual spend exposed to regulatory lag.

In closing, we are confident in achieving our financial objectives through the stay-out period. The gross margin mechanisms contained in the retail rate settlement coupled with our demonstrated cost management ability give us this confidence. Additionally, but not assumed in our outlook, an accelerated return to economic growth will provide upside to our outlook.

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

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

Greg Gordon, ISI Group.

Hi. Good morning. It's actually Bill Appicelli.

Hey, Bill.

Just a question on the outlook going out to '15. I know you guys have given guidance here of rate base growth of about 6% off of an '11 base, you're targeting the average ROE of 9.5%. Thinking about earnings, how they relate to those metrics, and I know you're talking about issuing equity in '14 so there will be some impact from that. Just I was just wondering if we can get any additional thoughts on how the key pieces of earnings as it relates to the rate base growth, and then the other pieces that you mentioned there at the end about the acceleration in the economy, other things that could drive the 9.5% higher off of the targeted base?

Well, again, in that 6% rate-base growth, you do have equity in '14. You do have a little bit of regulatory lag, although a lot of that's been mitigated, and we're assuming cost control. If all those things come true, and the economy recovers, about a 1%-customer increase equals $10 million in after tax earnings, on average. Since we're assuming no sales growth over the 2015, we don't think there's a lot of down side in the growth number. And so, that gives you a delta on what may happen if we do see some acceleration.

Okay. Great. And then on the sales growth outlook, could you maybe disaggregate the 2.5% in terms of how it's getting offset through distributed generation energy efficiencies, do you have any sense of that?

No specific breakdown. We assume compliance on energy efficiency, which goes up every year, and then we have the Renewable Energy Standard by '15, and we do know that from a deployment perspective, we're slightly ahead of target. We can track those pretty good. And so, we feel we have those two. And then, we do have just some customer conservation in there due to continued lack of direction of the long-term economy.

Okay. And then just lastly, so if we think about growth, if it were to say to hit 3% or 3.5% at some point over the life of the deal, is that -- so that's netting out the 2.5% you're targeting, so that's how you get your sort of 1% of additional growth? Is that how we think about it?

No, my 1% additional growth is just saying if additional 1% customers came onto the system, normal usage would give you about $10 million of after tax earnings.

Oh, okay. Yes. Thank you.

Yes.

Neil Mehta, Goldman Sachs.

Hi. Thank you. Now that we're through the rate case here, as you said, Jim, cost control is so key. So do you believe you can keep O&M flat throughout the stay-out period, assuming retail sales that are flat, or is that more an aspirational target.

It's both aspirational, but I have a high degree of confidence in our ability to do that. The good news for me, from a cost perspective, is what we're trying to accomplish on the cost side is not just coming from the CFO. I have a good partner in Mark Schiavoni from the Op side, and together we're pretty aligned and pretty much see the same path going forward. So, I'm pretty confident, Neil.

Got it, Jim. Also, with the rate case behind us, dividend growth comes into focus. You've had that dividend around $2.10 for a long time. How are you thinking about the potential for dividend growth now?

You know, Neil, now that I think we have a runway out through '15, I would expect the Board would look at dividend policy later this year.

Got it. And guidance --

Neil, this is Don, let me add to that. Traditionally, our Board's looked at the dividend level, the annualized dividend level at their October meeting, and I think this year would be consistent with that. The Board will take a look at it, and we've accomplished a lot in the last few years in rebuilding our balance sheet and getting our earnings up to a competitive level, and I think those are all positive aspects going into the fall and the dividend decision.

Okay. And then when do you intend to issue 2013 guidance?

Right now we're tentatively planning to do it on our Analyst Day, November 9.

Perfect. Thank you. Thank you very much.

You're welcome. Thanks.

Shahriar Pourreza, Citigroup.

Good morning, everyone. Can you just remind us with the current regional Hayes rules that coming about if your CapEx outlook includes a state plan or federal implemented plan?

Currently, in terms of us, the regional Hayes rule applies to all the units at Four Corners, Navajo and Cholla 2, 3 and 4. The state-proposed bar at Cholla would be to install low NOX burners in over fired air. Although, the EPA recently rejected that, and calling for more stringent, expensive SCRs, and with final determine scheduled for November this year. The EPA-proposed bar at Four Corners, that was for Cholla, would the insulation on SCRs on Units 4 and 5, assuming the transaction closes, and we don't have a bar ruling from the EPA on Navajo at this time.

Is there status on how much your CapEx can increase, assuming that the federally implemented plan gets enacted?

Excuse me?

Is there a status on how much your CapEx could increase assuming a federally implemented plan gets enacted?

Really it affects Cholla at this point, and we don't have -- we have the state plan in there. I think it's about $182 million, if we had to implement the rest of the EPA's.

SCRs on Units 2 and 3 at Cholla would cost us about $182 million in additional CapEx.

Okay. Perfect. Thank you.

Ali Agha, SunTrust.

Thank you. Good morning.

Hey, Ali.

Jim, to be clear, the guidance that you have for 2012, the range, the 9.5% ROE, should we assume that's associated with the midpoint of that guidance, if we think about ROE for 2012?

I think the 9.5% really relates to '13 through '15. If you think about, we have the rate increase in the second half of the year, and we have the mechanisms from the '09 settlement in the first half of the year, so I would expect to slightly exceed the 9.5% in 2012, with sort of a hybrid year.

I see. Okay. And secondly, also to be clear, if I recall the CapEx plan that you have right now, if I use '12 as a base, does that translate into a 5% annual rate base growth, is it 5% or 6%?

The 6% is from 2011.

Right. So, if we move it --

I haven't calculated from '12.

Okay. I thought in one of your slides I may have seen 5%. I may be wrong there.

It would decelerate because you have Four Corners in 2012, which is a large piece of the component in '12.

Right. Okay. And thirdly, on the equity issuance, that you said you don't see it before 2014. Should we think of it really a timing issue, you need it for your next rate case, or should we think end of '14 or maybe not there, and from a size perspective for the last couple of transactions be a good proxy of the size we should be thinking about?

No proxy for a size at this point. It wouldn't be until '14 at the earliest, and we'd have to get to '14 and make a decision as to what we're going to do at that point.

Understood. Thank you.

Brian Russo, Ladenburg Thalmann. Please proceed with your question.

Yes. Hello. You mentioned the ongoing coal contract at Four Corners, and the acquisition would be contingent on that. Could you just update us on the timeline there and what are the major items of discussion?

Well, we expect to get the transaction closed by the end of the year, say around the first of December, and we're in active negotiations on the coal supply contracting. Like with most contracts, it involves price.

Okay. And then, just to clarify on the 9.5% target ROE, is that utility earned ROE or is that the consolidated ROE, which would include the $0.05 of parent drag?

Consolidated.

Okay. Thank you.

Kevin Cole, Credit Suisse.

Hi. Good morning, guys. Congratulations on the very constructive rate outcome and change in regulatory tone.

Thank you.

A little bit more on the earnings drivers. So, the base approach that I should use is that given that you expect 6% annual rate base growth and a flat 9.5% earned ROE, that your base EPS growth should be 6%, and then that will likely be a little bit bigger in 2012, '13 and '14 due to the rate increase in the Four Corners and that it could start to taper off towards the back end a little bit due to the equity dilution in 2014 sometime?

Kevin, with 6% rate base growth it would be hard for me to see a path to 6% earnings growth, weather normalized. You do have the dilution at some point assumed throughout the stay-out, and you do and will continue to have some regulatory lag. So I would say it's going to be south of that.

Okay. Should it follow the path of the EPS growth being a little stronger in '12, '13 and '14 and then tapering off toward the back end due to that equity dilution?

If you assume equity dilution in the back end, yes, that would be the case, due to the dilution.

Okay. And then Jim, does your 2014 equity comment preclude you from doing forward sale or something like that on the back of the project getting approved later this year?

We would not be precluding from doing anything at this point.

Okay. Lastly, can you put some color around your dividend policy going forward during the four-year rate stay-out?

Well, Kevin, I think where we're at now is pretty close to the conclusion of rebuilding, one, the Company's balance sheet, significantly adding some consistency to the Arizona regulatory environment, both consistency and credibility with the expeditious resolution of the last settlement and the settlement before that that laid really the groundwork going forward. You've talk to Jim about earnings growth and earning at a minimum 9.5% ROE going forward. That kind of lays the groundwork, the next step is we have had the dividend frozen for a number of years at the current level. That's something, again, that the Board's going to address at our October Board Meeting in all likelihood, and I think you'll see a dividend path forward coming out this fall.

Great. Thank you. That's very helpful. Again, congrats.

Thank you.

Jim von Riesemann, UBS.

Good morning, Arizona.

Hey, Jim, how are you?

Good, yourself?

Great.

A couple of questions. This transportation Highway Bill, or whatever you want to call it that Congress passed, does that have any cash flow impact for you guys? Well, it could. Our minimum funding requirements would drop under the Highway Bill as we understand the parameters right now. The result of dropping our funding, Jim, going forward is it drives our expense up, and so at this point with the liquidity we have and the plan in place, we're still planning on funding it at pre-Highway Bill levels, which is somewhere in the [$150 million, $160 million area], '13 through '15. Just kind of keeping along this whole cash flow theme for a second, can you talk a little about, or broadly speaking, '13 to '15, what your coverage metrics, what you want them to look like, or your capital structure targets, and then maybe what the impacts of the absence of bonus depreciation starting next year is going to have on cash flow?

Well, couple of things on that, Jim. Obviously, when we try to reset a test year we're very happy with our 53%, 54% equity ratio for rate making purposes. That obviously will fluctuate throughout the time frame, just based on the fact we're not in a test year. Our coverage metrics are fine. We will realize that a lot of the bonus depreciation for tax purposes next year as well because we have a tax loss that we have to carry forward. So we're very pleased with cash flow liquidity and our balance sheet at this point. And it's not going to deteriorate throughout the stay-out period.

Okay. No worries. Thanks much, guys.

(Operator Instructions)

Charles Fishman, Morningstar. Please proceed with your question.

Thank you. Assuming the Four Corners acquisition is consummated, would the SCR installation for those two units come under the EIS, or do you have to wait until the next rate case?

They would come under the EIS once we started putting them on the units, and then of course you would like to time those so you can maximize that. I will just point out that that EIS is capped at about roughly a $5 million revenue requirement on an annual basis. It won't be one-for-one recovery, but of course, every bit helps.

Okay. That was it. Thank you.

Paul Patterson, Glenrock Associates.

Good morning, and congratulations on the continuous improvements.

Thanks, Paul.

Good morning, Paul.

Just to revisit customer growth, and I apologize if I missed this, 1% customer growth in 2012 projected to double through the 2015 time frame. Just wondering what actually drives that? Is it the economy? And if it is, what's the economic forecast that you guys have in that?

Yes, you're right, it sort of accelerates through '15. What really drives that, Paul, is we don't see the absorption of available homes getting to a level until around the end of next year or early '14, where you'll see the construction cycle start again. Of course, as construction cycle starts, that leads to retail sales, which leads to other jobs, which has a snow-balling effect. So, it's just the natural digging out of the inventory that we have in Phoenix.

So, there's still a lot of migration into Arizona. It's just right now absorbing the -- the home build is being delayed as a result. Is that how we should think about it?

We had at the peak somewhere around 35,000 available homes and apartments, and we've absorbed about 10,000 roughly of those. And until you get the construction cycle moving, that will be the driver, and it's going to take some time.

Okay. And then just in terms of that growth rate, which seems to accelerate, looks like you guys still -- the APS energy efficiency advantage here, you guys are still -- are you projecting that you're going to be able to keep it flat throughout that period, or should we think that that's going to be accelerating as well, that growth rate? It's impressive how you guys have been able to keep sales growth flat with the energy efficiency efforts. Just wondering how we should think about that over time.

Yes, I think, Paul, we have increasing standards each year going forward, so you're going to see acceleration of those programs, and we believe it's going to offset the increase in customer growth through that time frame.

Very impressive. Thank you.

Eli Kraicer, Millennium Partners.

Good morning, guys. It's Chris Shelton. How are you.

Hey, Chris.

Quick clarification. I just want to see, so the 6% rate base growth is off of 2011. I know the rate base that you filed for has some puts and takes as far as -- the question would be what's the base for 2011 rate base?

2011 rate base was -- let's see. It was ACC total was 5.7% at the end of '11.

Okay. And that excludes any of the construction work in progress or any of the --

Yes, it would be your normal rate base for rate-making purposes.

Okay. Great. And then I know you used to have a slide or prior to this you had a slide that had rate base growth of 5% through '14. Is that slide still approximately right for the interim years or is the extra growth kind of coming from the '15 time frame?

The slide that we have had previously is still pretty much intact from a rate base perspective, and obviously, we moved to '15, we're starting to get into some environmental and some more growth type of projections.

Got it. Great. And final question, I know the equity layer at the utility will vary as we go through the years and truing up in time for the next case. What equity layer range do you see over the period?

You know, Chris, it stays above 50% throughout that time frame. It gets to maybe 51.5%, but we have healthy credit metrics throughout the stay-out period.

Okay. Great. Thanks a lot, guys.

Okay.

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