Pinnacle West Capital Corp (PNW) 2013 Q1 法說會逐字稿

Greetings, and welcome to the Pinnacle West Capital Corporation First Quarter 2013 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 begin.

Thank you, Christine. I'd like to thank everyone for participating in this conference call and webcast to review our first-quarter 2013 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 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 first quarter 10-Q was filed this morning. Please refer to that document for forward-looking statements cautionary language, as well as the Risk Factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available on our website for the next 30 days. It will also be available by telephone through May 10. At this point, I'll turn the call over to Don.

Thanks Becky, and thank you all for joining us on the call today. This year so far, we have made progress in a number of key areas in our core electric utility business. This progress includes -- first, strategically adding generation resources; second, continuing collaboration on Arizona's regulatory environment and energy future; third, maintaining operational excellence; fourth, strengthening our financial outlook; and finally, positioning ourselves to benefit from economic recovery in Arizona. Jim and I will provide more information on these areas through our remarks today.

Looking first at our generation resources, today I'll update you on two components of our Generation Resource program. Utility scale, solar resource additions and the planned Four Corners acquisition. As you know, through AZ Sun, APS develops and owns utility-scale photovoltaic solar plants in Arizona. In early April, we announced the 32-megawatt Gila Bend solar power plant, which will be located about 70 miles southwest of Phoenix.

We now have projects in service or committed for a total of 150 megawatts, with projected capital investments of $614 million. To date, we've placed a total of 86 megawatts in the commercial operation at five plant sites. The most recent addition was the 17-megawatt first phase at the Yuma Foothills plant in southwestern Arizona, which went into service on March 19. Construction and other development activities are currently under way for another 64 megawatts at three sites in Arizona -- Yuma Foothills Phase II, Hider II, and the newly announced Gila Bend site. We expect those facilities will go into operation in 2013 and 2014.

Also of note on the solar generation front, we expect the 250-megawatt Solana Power Plant near Gila Bend to go into commercial operation this summer. As a reminder, APS has a 30-year purchase power agreement for all the output from the Solana plant, which is being built and will be owned and operated by Abengoa Solar. Solana is a concentrating solar trough plant with thermal storage capability for six hours after the sun goes down. We're continuing with our plan to acquire Southern California Edison's interest in the Four Corners coal-fired plant in northwestern New Mexico. I'll outline the major steps of our plan.

Since late 2012, the Navajo Nation and BHP Billiton have been working on the sale of the coal mining operation serving the plant to the Navajo Nation from BHP. On Monday, the Navajo Nation Tribal Council approved formation of a special-purpose corporation to enable the mining operation transfer. The tribal council vote's a significant positive milestone along the way here in our acquisition of the additional resources at Four Corners. Negotiation between the Navajo Nation and BHP are still under way.

Key terms of the new coal supply contract for Four Corners are being finalized by APS, the other Four Corners co-owners, and the Navajo Nation. We are targeting mid-2013 to close APS's Four Corners acquisition from SoCal Edison, following satisfactory completion of the coal supply contract and finalization of other typical closing conditions. Shortly after the acquisition is complete, APS will file an application with the Arizona Corporation Commission to put the Four Corners additions into retail rates, as permitted by the 2012 retail regulatory settlement. We expect a decision and the related rate adjustments in early 2014.

Turning to Arizona regulation, APS's 2012 retail regulatory settlement has positioned us well for the next several years; however, there are still regulatory developments under way in our state. Several topics are currently in various stages of consideration, and including among others the ACC's interest in one -- and understanding the impacts of the existing net metering policy for distributed renewables -- that is roof top solar. This topic is being discussed in a series of APS-lead technical conferences, and we expect it to be the subject of a filing later this year. Second, examining the existing energy efficiency and renewable energy standards. These reviews are expected to be undertaken through individual utility dockets and broad policy processes.

On these and other issues, we're continuing to work with the Commission and various stake holders on a collaborative approach to the state's energy future. We realize these policy issues require careful study and consideration to ensure that strong service reliability and fair prices are available to all customers, that subsidies are both transparent and fair for all customers, and that shareholder returns will support continuing needed investments in infrastructure.

Turning to our operational performance for a few minutes. Excellence in day-to-day operations remains a top priority. Our base-load nuclear and coal fleet continues to turn in solid performance. During the first quarter, our Palo Verde nuclear generating station operated at a 99% capacity factor. This year's planned spring refueling outage began in Unit 1 on March 30, and was completed last Sunday afternoon, April 28. The outage, which was completed in under 30 days, was the shortest in Palo Verde's history. More importantly, the outage was accomplished with zero OSHA recordable injuries, and also the outage set an industry-leading record for low-dose exposure. My personal thanks for a job well done is going out to every member of the Palo Verde employee team.

Our fossil plants have also operated well. Our coal plants have increased generations to take advantage of the higher near-term natural gas prices. We continue to garner external recognition for our customer service and corporate initiatives. Today, I'll highlight a few recent items. In February, JD Power & Associates released the results of its most recent business customer survey. APS continues its record of top decile ratings for overall customer satisfaction. In the most recent results, and repeating its ranking from last year, APS ranked fourth nationally among 44 large investor-owned electric utilities. More specific to our region, we were once again rated second among the 10 investor-owned utilities in the West.

We're pleased at APS's accomplishments installing and promoting solar power and promoting energy efficiency have been recognized by a number of independent third parties. For example, in April APS was again named one of the 10, ranking fourth, solar electric utilities in the United States by the Solar Electric Power Association. This year makes the sixth consecutive year APS has been on the list.

In addition, for the fourth consecutive year APS was awarded the EPA's highest honor for continued leadership in protecting the environment through energy efficiency programs. The EnergyStar Sustained Excellence Award recognized APS for its role as a regional leader in energy efficiency, and its ongoing involvement in two energy-efficient home programs. Finally, for the third year in a row Corporate Responsibility Magazine named Pinnacle West among its 100-Best Corporate Citizens based on the magazine's evaluation of US companies across a complete spectrum of environmental, social, and governance criteria.

To close my remarks, I am proud of where our Company is today and very optimistic about our future. We expect to continue achieving top-tier performance through planning and execution in key strategic and operational areas in our core utility business, areas in which our talented leadership team and work force perform very well. Now I'll turn the call over to Jim for a financial and economical review. Jim?

Thank you, Don. Today I'll discuss the following topics. First, I will review our first-quarter results, including earnings and the primary 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 review our 2013 earnings guidance and financial outlook. Finally, I will discuss a few other current financial topics.

Slide 6 summarizes our reported and ongoing earnings for the quarter. On a GAAP basis for this year's first quarter, we reported consolidated net income attributable to common shareholders of $24 million or $0.22 per share, compared to a net loss of $8 million, or $0.08 per share for the prior year's first quarter. Our ongoing earnings increased $0.29 per share. For the 2013 first quarter, we had consolidated ongoing earnings of $24 million, or $0.22 per share, versus an ongoing loss of $7 million, or $0.07 per share for the same quarter a year ago. Slide 7 reconciles our first-quarter GAAP earnings per share to our ongoing earnings per share. The amount for first quarter 2012 excludes results related to our discontinued operations. My remaining comments on the quarter will focus on ongoing results.

Moving to Slide 8, you see the variances that drove the change in quarterly ongoing earnings per share. First, an increase in our gross margin added $0.28 per share compared with the prior-year's first quarter. Several items comprises positive net variance, and I will cover those items in more detail on the next slide.

Second, lower infrastructure-related costs improved earnings by $0.06 per share, primarily because of the lower interest rates in the current year. Third, the net effect of miscellaneous items improved earnings by $0.02 per share. Fourth, higher operations and maintenance expense reduced earnings by $0.07 per share. The expense increase consisted largely of higher performance-based compensation costs resulting from improvements in the Company's stock price and estimated full-year performance; higher employee benefit costs, related primarily to the effects of the amortization in this year's first quarter of certain pension and other post-retirement benefit costs, compared with the regulatory deferral of such costs in 2012; and higher information technology costs.

These O&M increases were partially offset by lower generation costs, as a result of less planned maintenance being completed early in this year compared with 2012. 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 adjustment mechanisms.

Turning to slide 9 and the components of our net increase in our gross margin, total gross margin increased $0.28 per share compared with last year's first quarter. The main components of that increase were as follows -- APS's regulatory settlement, which became effective July 1, 2012, improved gross margin by $0.13 per share, almost all of which was comprised of a non-fuel base-rate increase. When the 2012 settlement became effective in July, the Company also began recording revenues from the new Lost Fixed Cost Recovery mechanism, or LFCR, and stopped recording the line extension fees as revenues.

Higher weather-normalized kilowatt hour sales, after the effects of customer conservation, energy efficiency programs, and distributed renewable generation, increased our earnings by $0.06 per share. This variance was primarily driven by customer growth of 1.4% in the quarter compared to the same period a year ago. In addition, this variance reflects the effects of customers' usage patterns and related pricing. The effects of weather variations improved earnings by $0.06 per share. This year's first quarter was cooler, or more favorable than normal, while the 2012 first quarter was milder, or warmer than normal.

In the first quarter, residential heating degree days were 24% above normal, and 47% higher than the comparable quarter last year. The retail transmission revenue changes that became effective last summer improved earnings by $0.06 per share. The net effect of other miscellaneous items increased our gross margin by $0.01 per share, and increased fuel and purchase power costs net of the higher off-system sales and lower marked-to-market valuations, reduced earnings by $0.04 per share.

Turning to slides 10 and 11, and looking at our fundamental growth outlook in the Arizona economy. Economic growth in Arizona continued to improve in the first quarter 2013, although the growth remains modest, as has been the case for the last several quarters. As shown on slide 10, the rate of overall job growth has been positive for the last two years, and appears to be currently stabilizing around the 2% level. Nearly all of 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 generally in parallel with national trends. While these trends are positive, we believe that we still have at a minimum a few more quarters to a year to go before we see local markets returning to more normal conditions.

On slide 10, you can see our estimate of the amount of vacant homes and apartments that presently exist in our metro Phoenix service territory. In the first quarter 2013, the number of vacancies has continued to fall, such that we are currently at levels not seen since 2007. These absorptions have sparked renewed interest in the single-family housing market. We believe we are on pace to further reduce these vacancies throughout the remainder of 2013 to a level where existing home resale pricing will be more supportive of new home construction. However, home builders will need to acquire and develop land, attract skilled labor, and control building material costs.

On slide 11, you can see the recent trends in metro Phoenix home prices, as reflected in the Case-Shiller repeat sales index. Throughout 2012, we saw an up-tick in existing home prices which has continued into 2013. Even with the rebound in pricing, affordability of single-family housing remains high by historical standards, and combined with an improving economy, is the key support for current housing demands. The decline in vacancies, coupled with the increase in prices, is evidence of the continuing progression of the housing market back to more normal conditions.

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

On balance, we see signs of improvement in all economic indicators, which paint a picture of continuing steady recovery; but it will still be about a year before the Arizona economy has returned to normal levels of economic activity and growth. Reflecting a steady improvement in economic conditions, APS's customer base grew 1.4% in this year's first quarter, compared with the same quarter a year ago. Over the long term, we believe the fundamentals that have been important to Arizona's growth are still here, and that our growth rate in customers will return to more typical levels.

Looking at the next several years, we currently expect annual customer growth to average about 2% for 2013 through 2015, with growth rates higher at the end of the period than in the near term, for the reasons I just discussed. Additionally, we expect our annual weather-normalized retail sales in kilowatt hours to increase by less than 1% on average from 2013 through 2015, primarily due to customer conservation and energy efficiency and distributed renewable generation initiatives, offsetting the modest recovery in the economy and customer growth.

Next I will discuss our earnings guidance and financial outlook. As shown on slide 12, we expect Pinnacle West consolidated ongoing earnings for 2013 will be near the top end of our guidance range of $3.45 to $3.60 per share. The key factors and assumptions that under-pin our guidance are listed in the appendix to our slides. Our first-quarter 2013 earnings benefited by $0.05 per share for more-favorable-than-normal weather, and from changes in customer usage patterns and related pricing. As we do every quarter, we'll review our earnings guidance when we report second quarter results. Further effects in weather, customer usage factor, continued execution on our cost initiatives, and lower interest rates could cause us to adjust our guidance later this year.

Slide 13 illustrates our long-term financial outlook. We continue to expect to grow our dividends by approximately 4% annually. Of course, future dividends are subject to declaration at the Board of Director's discretion. The Company's goal continues to be an annual estimated -- annual consolidated earnings return on average common equity of at least 9.5% through 2015.

Finally, I'd just like to discuss a few other financial topics. Our recent financing activities include three transactions. In March, APS issued $100 million of 4.5% unsecured senior notes that mature on April 1, 2042. Net proceeds from sales of these notes were used to repay short-term commercial paper borrowings. In April, APS refinanced its $500-million revolving credit facility that would have matured in February 2015 with a new $500-million facility that extends through April 2018. On May 1, APS purchased all $32 million of the Maricopa County 2009 Series C pollution control bonds which are expected to be re-marketed within the next 12 months.

Looking ahead, we still expect to issue debt to fund the acquisition of Southern California Edison's interest in the Four Corners plant later this year if the transaction is consummated. We also continue to project we will not need to raise additional common equity until 2014 at the earliest. The timing and amount of any equity issuance would facilitate rebalancing APS's capital structure and provide support for the Company's credit metrics.

Since bonus depreciation was extended for 2013 by the new tax act, many of you have asked about the impact of the extension. We estimate that as a result of the combination of the provisions of the 2012 and 2010 Tax Acts, total cash benefits from bonus depreciation could be up to $400 million to $500 million. We anticipate these tax benefits will be fully realized by APS by the end of 2013, with a majority of the benefits have been realized by the end of 2012.

In closing, we're confident in our expectations to achieve our financial objectives through 2015, that is, during the base-rate stay-out period. Our confidence is supported by the gross margin mechanisms contained in the retail rate settlement, coupled with our demonstrated operational execution and cost-management abilities. Additionally, our outlook conservatively assumes a modest economic recovery. An accelerated return to economic growth should provide up-side to our outlook. This concludes our prepared remarks. Operator, we would be pleased to take questions at this time.

(Operator Instructions)

Our first question comes from the line of Greg Gordon with ISI Group.

Thanks, good morning guys. Congratulations on a great start to the year. I'm just looking at Slide 17 of your presentation, where you lay out the drivers for the medium-term earnings outlook. To me, there seems to be a modest but notable change there, in that your prior guidance presumed relatively flat retail electricity sales volume growth through '13 to '15, and now you're assuming that you will actually see some modest growth. I just wanted to make sure I'm seeing that correctly that you have revised up your sort of net kilowatt hour sales growth assumptions?

Greg that's exactly right, and we've seen now for two quarters positive sales growth. While we were assuming flat, in the shoulder quarters for us, which were the fourth quarter and first quarter, it's hard to read a long-term pattern, but at this point, we do see very modest growth where we saw flat previously.

Well, would you still, with your base case still assuming that you earned under your authorized ROE, wouldn't that give you the operating leverage to potentially close the gap towards the 10% growth aspiration?

Oh, absolutely.

The 10% ROE aspiration, sorry.

Yes, absolutely.

The other thing that I'm wondering is whether you have any more refinancing opportunities that could further reduce your interest cost? You commented on the potential for lower interest rates later in the year causing you to further revise your outlook. Are you looking at opportunities for big maturities coming due that you could refinance lower?

We don't have anything for the rest of the year, other than what I talked about in my remarks, Greg, and I don't think we have another opportunity until '14.

Then where do you stand on sort of ongoing cost-management opportunities? This is the first time in a decade that you haven't had to turn around and just file another rate case after resolving a regulatory uncertainty. Last time we spoke, you talked about a whole number of sort of operating efficiency and cost-cutting measures that you were looking at. Is there any update on that?

Yes, I would say we're executing against our plan. I'm very pleased on where we are. If you look at the first quarter, you really have a couple of drivers that caused the $0.07 comparison, and one is the stock compensation. That's just based on stock price, all-time high. The second is really the deferral, amortization of the deferral from our 2009 rate case on pension, which theoretically we got recovery for in the non-fuel base-rate increase, so I'm very pleased. The IT costs that I mentioned being higher quarter to quarter, we've decided to make some strategic investments into IT that should drive down cost beginning 2014 and beyond, so it's a very conscious thing on our part to take this opportunity to invest in the future. Other than that, costs would have came in flat year over year.

Greg, Don here. Let me add to that, too, as I know you and others that were out for our Analyst Day last fall saw the extensive presentations that both Jim and Jim Hatfield here and Mark Schiavoni covered, and they are spearheading this effort with the entire officer team. I don't characterize it, as you know, as cost cutting; but we're putting in processes that better coordinate across operating units within the Company, and streamlining some of the efforts. We're seeing the results of that, and very optimistic about continuing results through the balance of this year, and frankly for years well into the future.

Don, would it be fair to say if the economy in Arizona and Phoenix does continue to accelerate and you have some success in these cost control initiatives that Arizona Public Service actually earning its authorized return is possible over the forecast period for the first time in a long time?

Yes, very much so.

Thank you.

Thank you, Greg.

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

Don and Jim, I guess on the back of Greg's question, does the stronger realized performance, and I guess now expectations, change your dividend recommendations to the Board from the 4% annual increase?

Kevin, we visit that with the Board in the fall at the October meeting, and I think our aspirations that we've laid out at least for right now remain the same going forward.

Okay. Then I guess with the ACC's review of net metering in the states, I think 22% energy efficiency standard? Is this a result in change of tone or realization that the programs are becoming increasingly regressive as they scale up? I guess is it also safe to say that this study is not to become more accommodated towards net metering?

I wouldn't characterize it as not more accommodating or less accommodating. I think both right now we're in a series of information-gathering meetings and open to the public and interested parties, voice concerns in that. Our primary interest is to make certain that one, all the parties and the Commission understands what in fact the subsidies are -- that they are transparent, and that there are some clear policy decisions being made going forward. Our primary interest is creating a sustainable energy future for Arizona, and clearly we've been supportive, as the record indicates, of solar across the board. Utility-scale owned by us, utility-scale owned by others like Abengoa's project that will be the largest of its kind in the world when it's done in a couple months; and roof-top solar has been a big -- residential roof-top solar has been a big component, and I expect it to continue to be so in Arizona.

Have you run any initial numbers to see how -- what the impact of net metering or of energy efficiency, if it gets let's say beyond the low-hanging fruit to something like 10% or greater magnitude -- what sort of impact that has on de-skewing rates from, towards the lower-income folks -- I guess de-skewing rates downward?

Yes, we've got a variety of different scenarios we've run. We've got the cost, and that's what we're basically talking to all of the parties about -- here are the facts and how does going forward, what might our recommendations to the Commission, what might be their recommendations to the Commission, on how to design rates to basically create an environment that's fair to all customers.

Great. Thank you guys, congrats on a good quarter.

Thanks, Kevin.

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

How are you thinking about the timing of your next rate case, especially given some operational execution we've seen over the last couple quarters? How does that timing impact the way you think about issuing equity?

Well, as we've said before, Neil, we have the option to file a case in May 31, 2015. We're not obligated to file a case, so we'll obviously look at interest rates, allowed ROEs, and how we're performing, and make a determination there. As we've said before, the commentary around 2014 assumes that's a test year, and believe we have the ability to not issue in '14, if '14 doesn't become a test year. We're really looking at equity. At the same time, we're really looking at what a test-year scenario would be.

Got it. Then related to transmission, which has obviously been a big part of the rate base growth story here, do you see upside to your transmission CapEx program over the next couple of years?

Not over the next couple years, though. No, Neil.

Okay. Finally, when's the earliest you would need new generation in Arizona?

Well, we don't see a need for base load until into the next decade at some point.

All right, thank you very much.

Our next question comes from the line of Paul Ridzon with KeyBanc Capital Markets.

What was the impact of the roll-off of pension deferral?

In terms of the quarter?

Yes.

The pension deferral in the quarter I think was about $0.06.

Is that going to be ratable through the year?

It will be ratable for the second quarter, and then we'll have an even comparison from starting the July 1, 2012, rate case.

Okay. Thank you very much, and congratulations on the quarter.

Thanks, Paul.

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

Jim, listening to your comments, fair to say that Q1 came in ahead of your internal budget, and was it weather? Can you just confirm that, and how much ahead was it indeed, if you look at the final numbers?

Well, I'm not going to comment on how it compared to budget, but I will say we were positively viewed the customer growth number and sales growth, which obviously we're ahead of expectations since we had talked about flat sales growth. I think we're very pleased, as well, with the execution on the cost management side, so we did have a good quarter, and we are executing against the plan.

Also to clarify your remark with regards to the range for the year, clearly the bias is to the upside and is it -- I mean, when you talked about lower interest later in the year perhaps causing you to go above that or reconsidering that, can you just clarify that to your other remark that there is no refinancing alternatively for you for the rest of the year? Is it lower growth or what would cause you to change that range for the year?

Well, I think we've had, like I said earlier, we've had positive sales growth the last two quarters. I've said out talking to investors that we're very loath to look at a fourth-quarter, first-quarter scenario and talk about that's a trend, because you get a lot of abnormalities on a shoulder quarter as it relates to revenue and pricing; so continuation to load growth, continuation of the execution of the cost management would be things to look at after the second quarter, and just ensure that we're executing on the year.

Also to clarify, the 6% rate-base growth annual number, '13, '15 [feeler], just remind me, is that using the '12 actual and then growing it over '12 to '15, or is that '13 actual and then '13 over '15?

It's '12.

'12 actual through '15 on a compound annual basis?

Yes.

Okay, thank you.

Yes, thank you, Ali.

Our next question comes from the line of Julien Dumoulin-Smith with UBS.

First question here, just to make sure I heard you crystal-clear. You talked about guidance here, you alluded to adjusting your guidance plan later this year. Is that a 2Q update in your mind, or do you really need to wait to the summer heating season? I just want to be very clear about that.

We review guidance every quarter, and we'll review it again at the end of the second quarter, so I guess I'd say it's ongoing from how we evaluate that.

Not to parse it apart too much, but given where you are relative to your targets thus far this year, if you were to continue on the same trend, could you make an assumption to say that you would be ahead of expectations by second quarter?

Well, we had $0.05 of weather to benefit. I guess if that continued on $0.05 every quarter, obviously we would be ahead of where we thought we would, since we assume normal weather Other than that, we're really not going to comment on comparison to internal budgets.

Then just a little detail here I wanted to follow-up on from a transmission-recovery perspective. I think you had some positive changes year on year in terms of the timing of new rates. Could you talk about that, and what kind of year-on-year up-lift that would provide in '13?

Yes, well we file, we'll file our formula rate on May 15. We're still going through the formula now, and those rates would go into effect on June 1, both at the FERC level and at the Arizona jurisdictional level. We don't have a number at this point, so I can't really talk magnitude.

Just to be clear, when would they have conventionally gone into service or into effect?

They would typically go into effect June 1.

Okay. That's it, thank you.

Thank you, Julian.

Our next question comes from the line of Sarah Akers with Wells Fargo. Please proceed with your question.

Just a quick follow-up on the regulatory discussion. I think you mentioned needing recovery of infrastructure investments, so I'm curious is there anything being discussed that could support new recovery mechanisms for CapEx that's not currently being covered by riders or initiatives improved in the last settlement?

Nothing at this point, Sarah.

Okay, thanks a lot, appreciate it.

(Operator Instructions)

Our next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Good morning, guys. Just to go back to Greg's question on the sales growth, as I recall you guys had expected 2.5% sales growth prior to the effects of conservation and energy efficiency and distributed generation. Is that still the case, and do you guys expect less of the offset from distributed generation and energy efficiency, or has that increased?

Well, it was around 2.5% as we got out to 2015. I don't think anything has changed on the DE-EE customer conservation side. What we're seeing now is a little higher levels of customer growth, I guess.

Okay, because it looks like it's the same number that you guys had expected before, which was 2% annually when I look at these slides; so I guess, let me ask it more simply. What is it that's driving the sales growth higher, in your opinion? Is it a better economy, or do you know? I don't know. You guys mentioned there were two quarters that came in good, but I was just wondering if you could just elaborate a little bit more about what's driving that?

Paul, Don here. I think it's a variety of factors. One, it's clearly a better economy. I think some consumer confidence is coming back. We see that in usage patterns, also the housing inventory. We're down to right at about 20,000 units of housing, which is kind of equilibrium. I wouldn't say we've got a home building boom going on, but home builders have become active. They usually end up talking to us 12 to 18 months before projects go, there's some home building going on. We've seen home building -- excuse me, home prices come up since clearly last spring, when real residential buyers as opposed to investors came into the market and drove that. I think overall, it's generally trended positive in the last two quarters.

Okay so when we look at sort of policies or what you guys are baking in, in terms of policies for energy efficiency and distribution, you guys haven't -- because there has been some activity, as you guys are obviously well aware of, that might suggest it might get scaled back. None of that's getting involved in this. Is that sort of how we should think about it? It's just basically you're sort of fine-tuning the estimates, given what you're experiencing right now? Is that how we should think about it, as opposed to a significant change in policy outlook or something?

Right. I think that's correct. We haven't assumed any kind of change in those underlying policies on the energy efficiency side.

Okay, great. Then just on the stock price impacting compensation, what have you. Is there a -- just to get a sense of the magnitude or sensitivity, I guess, is a better way to think about it -- is there a sense you could give us in terms of if the stock continues to soar, what that might mean in terms of hit to earnings, whatever that might be?

It was about almost $8 million for the quarter. I'd have to go back and lack at what it was at the end of the year versus what it was at the end of the first quarter.

So basically, if we took the price at the end of last year and we looked at what it's done at the end of the quarter, that would give us a sense as to that price impact created $8 million of pre-tax, is that how we should think about it?

Yes, all things equal that would be correct.

And that's pre-tax, right?

Yes.

Okay, thanks so much.

Our next question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.

Not being familiar with the rules and procedures of the Navajo Nation, I just want to make sure I understand this -- that the committee that's been formed, they have the final say on the coal mine transfer, and then it's pretty much the path is pretty clear to the closing after that?

Well generally, yes. The Tribal Council is their governing body. It works very similar to the United States Congress. They approve it, and the president of the nation signs their legislation into law, and this to form the special-purpose entity to hold the coal company that would presumably transfer through acquisition from BHP over to the nation. They put that into place. Now there's some final contract negotiations to be completed, but essentially most of the legislation we and they need to complete the Four Corners steps is in place with the vote that was occurred earlier this week.

Okay, and then on the concentrating solar plant, your participation in that is strictly in the form of a power purchase agreement. You're not taking any operational risk on that, correct?

Correct.

Not at all. It's all -- they produce it, we take it, and we pay for it.

Okay, that was it, thank you.

Okay.

Our next question comes from the line of Andy Levi with Avon Capital.

I'll just kind of throw one out there out of left field for you to make you think a little bit, but the stock's done extremely well and congratulations on that, and --

Thank you.

Obviously your multiple also is dramatically increased relative to some of your peers who surround you, smaller utilities. What are your thoughts just on consolidation in general in your area?

I think with the desert Southwest, and specifically Arizona, the intrinsic growth that's here, that gives us plenty to manage for many years into the future.

That's a good answer, thank you.

Our next question comes from the line of Kevin Fallon with SIR Capital Management. Please proceed with your question.

Hi, congratulations on a great quarter. Just to clarify, do the economics of the LFCR all run through in the first quarter, or are they accrued over the periods that they occur -- as in, did you accrue second half last year's benefit last year, or did it all come in the first quarter?

Yes, we started accruing the LFCR in 2012 at the implementation of the rate settlement, so we started it in July 1 of '12.

Okay, great. Then the assumptions behind that, the percentage recovery, there's no change in that? I think that's what Paul was asking you? I just want to clarify that.

No, there's no change in the LFCR.

Okay. Then in terms of the top end of guidance for this year, the $3.60, does that equal APS earning that's authorized, or would that number be higher than the $3.60?

The $3.60 does not have APS earning their authorized return.

Can you tell us what that would be?

I'd have to calculate it. I don't have the number with me.

Okay, thank you very much.

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 need further details about our earnings or other information about our Company, please contact us. 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.