Pinnacle West Capital Corp (PNW) 2013 Q3 法說會逐字稿

Greetings and welcome to the Pinnacle West Capital Corporation 2013 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, Paul Mountain, Director of Investor Relations for Pinnacle West Capital. Thank you, sir, 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 2013 earnings, recent developments, and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt, and our CFO, Jim Hatfield.

First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website along with our earnings release and related information. Note that the slides contain reconciliations of certain non-GAAP financial information.

Today's comments 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 Form 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 disclosure.

A replay of this call will be available shortly on our website for the next 30 days, and will also be available by telephone through November 7. I would now turn the call over to Don.

Thank you, Paul, and thank you all for joining us today. My comments today will provide an update on our operations, including the Four Corners transaction, as well as discuss the regulatory proposals that are in front of the Arizona Corporation Commission. Then Jim will discuss the results of the quarter and our earnings guidance.

First, let me highlight that last week our Board of Directors increased the common dividend by 4%,effective with this year's December payment. The increase builds on the 4% increase last fall, and is in line with the value return goals we outlined a year ago at our Analyst Day.

Turning now to Four Corners. With the Arizona Corporation Commission voting to close the retail electric competition docket on September 11, APS is now moving forward to address the remaining conditions to closing our acquisition of Southern California Edison's interest in Four Corners units 4 and 5.

The transfer of the mine from BHP to the Navajo Nation is progressing with the Navajo President and the Navajo Speaker of the Tribal Council signing legislation last week necessary to complete the acquisition of the mine. The other co-owners of the plant must also finalize their internal approvals of the coal contract.

Assuming all closing conditions are met, we anticipate the Four Corners transaction will close in December. Around the time of closing, APS plans to issue debt to provide permanent funding for the acquisition. Once the transaction is closed, we have two actions that need to occur by December 31, 2013.

First, a provision in APS's 2012 settlement agreement allows APS to file for the recovery of the Four Corners transaction related revenue requirement with the Arizona Corporation Commission, and to implement new rates prior to the Company's next rate case. The Commission will review the revenue requirement request and make a decision, which is expected in 2014.

Second, APS and the other Four Corners participants will notify the EPA of their chosen best available retrofit technologies, as you know it, BART compliance strategy. Which would include shutting down units 1, 2, and 3 by January 1, 2014, and installing selective catalytic reduction technology on units 4 and 5 by July 31, 2018. Again, assuming the Four Corners transaction is completed.

Turning to the rest of our operations, the Palo Verde Nuclear Generating Station had another solid operational quarter with a capacity factor of 100%. Unit 3 began a refueling outage on October 5, with a continuous run of 160 days by all three units. This was the second longest run for the three units simultaneously in plant history. Spanning from the completion of the planned unit 1 outage in April, to unit 3's current planned refueling and maintenance outage.

Early in the unit 3 outage during routine visual examinations, we discovered a very small water leak where an instrumentation tube connects to the bottom of the reactor vessel. The tiny leak was located inside the containment structure and was isolated from the environment. Multiple independent monitoring devices inside containment confirmed that this leak is exceptionally small and no other leaks have been detected.

The Palo Verde team is currently making all necessary repairs before the unit returns to service, which we expect later in November. Our share of the costs which are mainly capital are not expected to be material. Units 1 and 2 remain at full power.

Our solar portfolio achieved an important milestone with the 250-megawatt Solana plant reaching commercial operation earlier this month. As you know, APS will purchase 100% of Solana's generation, which will make a significant contribution towards our renewable energy standard target. Solana represents an important technological step forward, with the ability of Solana to store the sun's heat and thereby generate electricity long after the sun has set.

Work continues on Yuma Foothills Phase II and Hyder II as part of our AZ Sun utility scale solar platform, with these plants expected to come online later this year. In addition, work has begun on the 32-megawatt Gila Bend Plant, which is expected to come online in mid-2014, which will bring the total to 150 megawatts in commercial operation through AZ Sun.

As we discussed on our second-quarter call, APS also filed its annual Renewable Energy Standard implementation plan covering the 2014 to 2018 timeframe on July 12. The plan does not propose any new programs, but it does seek approval to conduct RFPs, signed contracts, and begin construction on the final 50 megawatts of the 200-megawatt AZ Sun program.

On September 30, 2013, the ACC staff issued a report recommending approval of APS's plan and the proposed budget. We filed APS's proposed solution with the Commission on a policy revision for net metering in July of this year. With the goal of ensuring that APS residential customers who install rooftop solar pay a fair price for their use of the electricity grid. And also receive incentives and appropriate compensation for their solar production. We believe the cost shifting should be resolved now.

The recommendation by the ACC staff last month proposes a range of solutions from addressing the cost shift now to waiting until APS's next rate case. Every serious stakeholder in the net metering debate, including ACC staff and RUCO, has acknowledged the cost shift problem.

Media coverage on the net metering issue has evolved from a debate about whether there is an issue to the coverage we're seeing lately in the Arizona media, which is more about finding a fair solution with RUCO's acknowledgment of the cost shift as the final confirmation. We expect the Arizona Corporation Commission to discuss both net metering and the Renewable Energy Standard implementation plan at its open meeting in a couple weeks.

To conclude, our value proposition remains clear. Our management team remains focused on executing our strategy, and delivering long-term rate based earnings and dividends growth. I'll now turn the call over to Jim.

Thank you, Don. The topics I will discuss today are outlined on slide 4. I'll begin with a review of our third-quarter results, including earnings and the primary variances from last year's relative quarter, followed by an update on the status and outlook for the Arizona economy, and we'll conclude with a review of our 2013 and 2014 earnings guidance and financial outlook.

Slide 5 summarizes our ongoing and GAAP earnings for the quarter and year-to-date. On an ongoing and GAAP basis for this year's third quarter, we reported consolidated net income attributable to common shareholders of $226 million or $2.04 per share, compared with net income of $245 million or $2.21 per share for the prior year's third quarter. As usual, my remaining comments will focus on ongoing results.

Slide 6 outlines the variances that drove the change in quarterly ongoing earnings per share. A decrease in our gross margin reduced earnings by $0.06 per share compared with the prior year's third quarter.

I will cover the drivers of our gross margin variance on the next slide. Higher operations and maintenance expenses reduced earnings by $0.04 per share, including communication cost associated with net metering and deregulation, partially offset by lower generation costs resulting from less planned maintenance being completed in the third quarter of this year than in the same quarter a year ago.

Both the gross margin and O&M variances exclude 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. Higher infrastructure related costs reduce earnings by $0.07 per share, reflecting increases in depreciation and amortization and property taxes which is driven by both additional property and higher rates.

Turning to slide 7, in the components of the net decrease of $0.06 in our gross margin, the main components of this was as follows starting with the positive drivers. The effects of weather improved earnings by $0.02 a share, although weather in the third quarters of both this year and last year were less favorable than normal, this year's quarter was relatively warmer. During the period, residential cooling degree days were 4% higher than last year's third quarter, but 3% below normal. The middle of September was particularly mild compared to normal.

The net effect of other miscellaneous items improved gross margin by $0.02 per share. Offsetting these items, lower usage by APS's customers compared with the third quarter a year ago decreased our quarterly results by $0.09 per share. Weather normalized retail kilowatt hour sales were down 1.3%, compared to last year for the quarter. While our customer programs and conservation are their largest source of the reduction in sales, this variance also reflects a convergence back to a more normal usage trend after stronger-than-expected usage for the year ago quarter, and is very much in line with our expectations.

On a year-to-date basis, weather normalized retail kilowatt hour sales are relatively flat in line with our guidance. Lower transmission revenue decreased earnings by $0.01 per share, including an unfavorable variance of $0.03 related to the transmission accrual that recorded in the third quarter of 2012, following the modification to transmission cost adjuster under our 2012 settlement.

Turning to slides 8 and 9 and looking at a fundamental growth outlook and the Arizona economy. Economic growth in Arizona continued its overall improvement in the third quarter 2013, although the growth remains modest as has been the case for the last year or so.

As shown on slide 8, the prices of existing single-family homes in Metro Phoenix reflect the benefit of these improving economic conditions. The steady job growth over the last two years has helped with the absorption of vacant homes and apartments in the Phoenix area, and housing prices have responded. Prices have now recovered to mid-2004 levels, a healthy improvement from levels seen in recent years.

Additionally, the rate of overall job growth has been positive for the last two years, and appears to be stable at around at the 2% level. Nearly all of the major industrial sectors are experiencing some growth. The sustained growth in jobs has been helpful in supporting a gradual increase in incomes, business, and consumer confidence, and thus consumer spending. Arizona's unemployment rate reflects those improving economic conditions and has seen steady year-on-year declines.

The resurgence of existing home prices has sparked more demand for new housing. Permits for new single-family homes are up substantially this year and 2013 will likely end up as the best year for new construction since 2007.

However, homebuilders continue to face hurdles in acquiring and developing land at reasonable prices, attracting skilled labor, and controlling building material cost, particularly at the entry level of the market. The building of homebuilders to successfully navigate through these challenges will have an influence on the pace of the Phoenix and Arizona construction recovery over the next several quarters.

The top right chart indicates that the commercial real estate market has been gradually improving as well, but may have a longer recovery period than housing. 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 were dramatically.

On balance, we see signs of some faint improvement in all economic indicators which paint a picture of a continued, steady recovery. Reflecting a steady improvement in economic conditions, APS's customer base grew 1.3% year-to-date compared with a year ago.

On slide 9, looking over the long-term, we believe the fundamentals that have been important to Arizona's growth are still here and that our customer growth rate will return to more typical levels. Looking at the next several years, we continue to expect annual customer growth to average about 2% for 2013 through 2015, with higher growth rates at the end of the period than in the near-term for the reasons I just discussed.

Additionally, we also continue to 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 our customer programs and conservation offsetting the continuing recovery in the economy and customer growth.

Finally, I'll discuss our earnings guidance and financial outlook. As shown on slide 10, we continue to expect that Pinnacle West consolidated ongoing earnings for 2013 will be in the range of $3.55 to $3.70 per share. However, we know much of the favorable weather we saw through this second quarter has been reversed in September and October, but it is included in our guidance. In fact, in terms of the number of cooling degree days this October has recorded the fewest cooling degree days in the last 15 years.

We are also introducing 2014 ongoing guidance of $3.60 to $3.75 per share. Key assumptions in 2014 include customer growth at 2%, with retail kilowatt hour sales increasing about 0.5%.

The impact of the Four Corners acquisition affected mid-year and no equity issuance plan. A complete list of factors and assumptions underlying our 2013 and 2014 guidance is included in the appendix to our slides.

As Don discussed, the Board of Directors increased the indicated annual dividend by $0.09 per share, or about 4%, to $2.27 per share effective with the December payment. The Company goal continues to be an annualized consolidated earned return on average common equity of at least 9.5% through 2015. This underpins our ability to expect to grow our dividend by approximately 4% per year. In addition, we remain on track for 2013 consistent with our earnings guidance range.

Lastly, I just want to make a brief point on our liquidity. As Don remarked, around the time of the closing of the Four Corners transaction, APS plans to issue debt to provide permanent funding for the acquisition. At the end of the third quarter, both the parent Company and APS had no short-term debt outstanding and we have ample liquidity. This concludes our prepared remarks, operator, we'll now take questions.

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

(Operator Instructions)

Thank you. Shar Pourreza, Citigroup

Good morning, everyone.

Hello, Shar.

The midpoint of your guidance range, $3.60 to $3.75, seems to imply a little bit closer to an earned ROE of 9.5%. I think, historically, you've guided and even in the prior call, you mentioned that you should see probably lag close to about ten basis points. So, maybe and earned ROE close to 9.8%, 9.9%.

And there's no real change in your customer growth assumptions or whether normalized growth assumptions from of volume basis. So, I guess I'm kind of curious what the delta is and is it energy efficiency or what are you seeing down there?

Well, Shar, I would say our guidance bookends the 9.5% to 10% earned ROE. And I think no real change in our outlook. As we look to 2014 and beyond, the pieces of the rate-based growth, earnings growth, and dividend growth are still in tact

Good. Got it and then just let me ask you one question on Four Corners. The transaction is going to close pretty, timing wise, pretty close to when the EPA can announce potential carbon legislation on existing assets.

Can you give us an update on where the ACC or APS or the Governor is with the EPA on potential impacts? Because, obviously, there's going to be litigation as a result of it, but ultimately can lead to pretty high capital requirements of these assets? Can we get a status on that?

Yes and just in terms of Four Corners and the EPA, I think the EPA came out earlier this year which was for new sources and their coming out with existing sources won't be for another additional amount of time. So our plans right now are to just close the transaction and install SCRs in 2017 and 2018 and we think that will fit within the EPA guidelines.

Okay, thanks very much.

Greg Gordon, ISI Group

Thanks, good morning, guys.

Hello, Greg.

Just to be clear on the third-quarter and year-to-date numbers, because I think the decline in sales was a little bit disconcerting to some people. The year-to-date numbers, you are seeing about, you've seen about 1.3% customer growth and more or less flat sales growth so, despite the fact that the third quarter was a bad comp versus last year, you are actually on plan relative to your expectations?

Absolutely, Greg. Like I said in my remarks, we were off in the third quarter. It's consistent with last year where we were off in the third quarter as well and, it's certainly met our expectations from a sales growth.

Great. And then you've given guidance for 2% customer growth, 0.5% sales growth in 2014, but if I triangulate around what you said about an expectation of accelerating customer growth and sales growth, and you expect, and the averages that you said you expect through 2015, just mathematically speaking, you think that customer and sales growth should accelerate in 2015 versus 2014? That correct?

Absolutely, Greg

And you've said before, you see the ability to keep your O&M relatively flat over that period, is that still a fair assumption?

That's still our assumption

Okay. The final question on this subject and then one other. Don, I know Jim just said that the $3.60 to $3.75 guidance for 2014 more or less bookends a earned ROE of 9.5% to 10%.

And I know weather variations can do a lot to your earnings throughout the course of year and there's other factors that are hard to manage, but is it still your aspiration and assumption that you could default, if your plan is executed, earned towards your authorized return on equity?

That is correct, Greg, that would be our direction.

Great.

To earn towards our allowed rate of return. Let me add before we get too far away from your last question about customer growth, and I know you and others would be interested in this. I just had a discussion the day before yesterday with some representatives of the homebuilders industry.

And to use their words, the builders are not able to meet the current demand for housing in the area. And the key issues are three they identified, labor, labor shortage, which they've actually built some trade schools to get construction labor back up to speed.

The permitting process and that's going through the various city and county government entities, and a lack of improved lots right now which they're going at gangbusters. So, my words, not theirs.

I think there's this initial hurdle to get over to get those pieces in place and we'll see things start to accelerate relative to solar, excuse me sales growth, which is in line with essentially what Jim was telling you a few minutes ago.

Great and then my final question with regard to solar stuff, I guess the next open meeting is in mid-November. Do you think that it's possible you'll get a decision both on the net metering issue and the 50 megawatts of Arizona Sun that you've recommended, that the staff is recommended be approved? And if they do approve that is that in your current CapEx forecast or would that be accretive to CapEx and rate base?

We do not have the last 50 megawatts of Arizona Sun in our forecast at the moment. It would likely be a 2015 event.

And that would get recovered through a rate rider as the rest of the Arizona Sun program has?

Yes. Exactly

Great, thank you, guys

Thanks, Greg.

Julien Dumoulin-Smith, UBS.

Hello, good morning.

Hello, Julien.

So, just wanted to touch on the 2014 guidance again just real quickly here. You're talking about some pretty robust growth, obviously. And I'd be curious, in looking at the gross margin component of this, right?

It seems more flattish, year-on-year. Obviously, the top end is a little higher. Can you talk about maybe the composition of growth and reconcile those two comments a little bit?

Sure, I think you have a couple components here. One, obviously, is 0.5% sales growth. And the other would be, as we've talked about, the mechanisms we have in place that continue to add to gross margin on an annual basis.

You have the TSA, you have the RES, you have the LFCR, and of course, we've assumed that a half year of Four Corners. So you would get one half of that, roughly a half, in 2014 and a half in 2015 assuming it goes in on July 1

Got you. How much of the growth in gross margin here is attributable to growth in sales, if you will, versus say rate increases? And perhaps just to be clear, how much year-on-year in aggregate are we talking about a reversal of one-time weather-related benefits this year to just kind of make it more apples-to-apples?

Well I think so far, and we don't know what October is yet because it's the last day of the month. We know it was terribly mild, like I said, we haven't had an October like this since 1998. So, I think at the end of September, we still had about $0.06 or $0.07 of weather, positive weather, so you'd have to weather normalize from that.

Our rule of thumb on 1% sales growth is roughly $10 million of net income, which equates to about $0.09, so you would have $0.04 or so just based on sales growth

Got you. And I just wanted to clarify this, there's a lot of talk other about distributed gen and solar and all that, but just be very clear and perhaps quantify to me, what kind of variability could DG put into your numbers? It seems relatively small but just put a finer number on that?

Well, right now we're seeing the DG piece probably take away about one 0.5% of sales growth or so, and the rest is, as we talked about, EE and conservation. And we don't see a lot of variability in that number, obviously. We expect DG will grow but so will the number of our customers, and so you'll see fairly consistent sort of 0.5%

Got you. And taking the same analogy of growth in 2014 and looking further beyond, we've seen some of your peers out there talk about long-term EPS growth, the trajectory coming down a little bit. Obviously you guys have some EPA related spend and some demand growth that I suppose spurs longer-term outlook.

What are you guys thinking I mean if you can put any kind of ballpark sense there? Are we talking about at a minimum maintaining your current growth trajectory or is there actually an acceleration here you're talking about in 2015 onwards?

Are you talking about, what kind of growth? EPS growth?

Yes, I think bottom line EPS growth.

I think, Julien, you have really in 2014 somewhat of a lull in growth, but our growth rate hasn't changed. And we talk about our forecast in 2015, but beyond that we have, as we sit here today, planning peakers in the Valley, those are 2017, 2018 events. You have SCRs, which are 2017, 2018 events as well, so we don't really see a slowdown in our growth rate as we sit here today.

Is arguably an increase or?

We haven't talked about increase or decrease. We think it's going to be consistent, steady growth which supports our dividend growth outlook

Got you. And perhaps just lastly here, I mean obviously a lot of focus again on DG. Is that an opportunity in the long term here for you guys to get involved somehow beyond AZ Sun?

We have not, it's something we've looked at but right now we have no plans to get into DG.

Great, all right, thank you.

Our plans in the solar space would be more utility scale with the PPAs to creditworthy customers

Got you. Thank you very much.

You're welcome.

Ali Agha, SunTrust Robinson Humphrey.

Thank you. Jim, wanted to clarify a couple of things. One is, just to be clear from your commentary, the third-quarter financial results that you just reported, were those inline with expectations or below because of the sales growth? Or can you just give us a sense of that?

No I would say it's inline. I don't think we're -- as I said the sales reduction was not outside our expectation. We did have a little higher property tax which is something that we probably didn't expect, we see property tax rates going up about 10%. Remember we have the deferral mechanisms were able to differ a little bit part of that. Other than that, I'd say it's inline with expectations

Okay. And then second, as you point out in your 2014 guidance, you're not assuming any new equity issuance so, at this stage, when is the earliest you believe equity would be required for you guys?

Well, right now we're assuming no equity in our forecast period which goes through 2015.

Oh, through 2015 as well? Okay.

Correct.

And does that also influence your thinking on the next rate case filing?

Oh, they're somewhat connected but obviously our goal would be to stay out as long as we can. It's likely to be pushed off but we do have the peakers and the SCRs, which at some point we'll want to make sure we recover

Okay. And then you talked about the dividend, the 4% growth rate that you've assumed will continue going forward. Does that assume a pretty steady current payout ratio? Does the payout ratio go up, does it go down? How should we think about that for the dividend?

It's pretty much steady with the 4% dividend increase

Okay, so we should assume a 4% EPS growth to go with that dividend growth?

Well, as we said last year, we have 4% dividend growth and sort of 6% rate base growth long-term. And so earnings are going -- that would be your bookends from an earnings perspective.

Right. Got it. And last question, to be clear, I'm just confirming I think you mentioned, so in your 2014 guidance, you've got Four Corners contributing earnings for half a year?

Correct.

Understood. Thank you.

Kevin Cole, Credit Suisse.

Good morning, guys

Hello, Kevin.

Just a follow-up on Agha's question, so if there's no equity through 2015, should we think about the next test year being 2016 and then your filing mid-2017 and rates effective 2018? Is that how we should think about it?

Kevin, I think you're probably far ahead of our thought. Our objective is to run the business exceptionally well, control our costs, deliver outstanding value and service to our customers, and as Jim said, we have no plans for equity in 2014 and it's not our objective or, I doubt, many other electric utilities in the country to file rate cases as a first course of action. So we'll deal with that as our plans evolve.

But is it still right to think of you had filed, that you had to true-up balance sheet during the test year versus prospectively, like how you could for CapEx?

Yes, during the test year, likely. Yes.

Okay. And then I guess you guys have long pointed towards your 4% dividend growth and keeping the payout ratio flat, which is perfectly in line with your 2014 guidance. Should we think about your growth rate remaining inline with the dividend growth?

Or, I guess, can you help me kind of bridge the gap between the 4% growth rate and your 6% rate base growth for 2015 and 2016?

Well, Kevin, we haven't come out with a long-term EPS growth rate but like we said at the analyst meeting last year, you have 6% rate base growth, 4% dividend growth, that's going to be your bookends for earnings growth on sort of a CAGR, knowing that any year it could be plus or minus depending upon various factors.

And the reason that 2014 is maybe not towards the 6% because of the delay in Four Corners? If Four Corners wasn't delayed then you'd probably be closer to the 6%? Is that how we should think about it?

No, I think some of the factors for next year are things like a smaller, were envisioning a smaller TCA this year that will pick up in 2015, just based on transmission spend and the way our formula works, so and we already only have Four Corners for half a year here, you're exactly right.

Okay. And just when I think about energy efficiency, so for this quarter I saw we had 1.3% population growth but weather normalized negative 1.3%, and so that's roughly 2.5% energy efficiency netting. What was unique about the third quarter which drove so much energy efficiency versus the future periods?

I don't think there was anything unique about this year's quarter. Sales were off 1.2% last year. Which was actually a little better than we thought it would be last year, so nothing really unique about the third quarter. Keep in mind, you have a lot of weather variability in our largest quarter that always has an impact on numbers as well.

Okay. So, the big net energy efficiency loss could be a little bit of weather baked in there just from --

Weather is an art not a science. I know my guys disagree with that assessment, but you look at average temperature and you get peak highs and lower lows and it always has an impact, but that's our calculation that we came up with.

Okay. So let me ask just one last question. I know Jim you spent a lot of time just on O&M generally. When you're thinking about flat O&M, is flat to, is it on an absolute basis?

And are you thinking flat off of year-end 2013? So whatever the number is this year it should hover at that level until you file another rate case? Or are you seeing or are you pegging that with volume growth or can you actually see maybe expect a year-on-year cut in O&M?

I would think if we see short of net can it bake sales growth grow, our aspiration is to be at or lower than the rate of sales growth. So as we look to next year with 0.5% can it be at sales expectation I would think you could assume that we're going to be fairly flat in 2014 over 2013.

Okay, so still it's flat to volume growth not flat on an absolute basis?

Correct

Okay. Great, thank you, guys.

Brian Chin, Merrill Lynch.

Hello, good morning.

Hello, Brian.

Jim, could you just remind us again what is the CapEx guidance for 2013? And then I know you didn't give it explicitly in the 2014 number, but is there a CapEx number that you're thinking of for 2014 as well just so that way we can triangulate properly?

So the 2014 number is roughly a little over $900 million, our 2013 number is about $1.1 billion. Keep in mind, we've assumed the Four Corner is in there for 2013 which pushes that number up a bit.

Great. Great. And then for 2014, is there a depreciation and amortization number?

Yes, it's about $400 million year.

Great, thank you very much, that's it.

You're welcome, Brian.

Kit Carlidge, BGC.

Good morning, guys.

Hello, Kit.

Most of my questions have been addressed. Just on the inclusion of Four Corners, the settlement in 2012 envisioned, that going into rates. What does the Commission need to decide or consider in order to grant approval for that to go into rates?

Well the docket was held open for Four Corners. We will file the cost of service and ask before the end of the year. And it's, like we said earlier, that pace has been adjudicated once and we will just update our expectation for cost of service with our filing, and we expect it to go into effect July 1.

So, you expected to be, I mean do you expect this to be a contested issue? Are people going to look at your cost of service and come back and say this is way too high or something to that effect?

Well, any sort of regulatory filing has people on all sides. I will say this came out in the last case that was adjudicated what we believe our cost of service would be. I think you could expect people to question any sort of changes in that, but the cost of service has been put out there and explained in our last, in the original filing, so I don't think it will be a surprise to anybody

All right, okay. One other area on net metering. If you got what you would like to see, the changes you would like to see made, how would that affect rates?

Well, our proposals to APS's proposal, and I haven't read RUCO's yet so I really can't comment although I'm sure it's probably similar, is some sort of monthly charge. But keep in mind, there is no new money to APS. Any fee collected in the near-term would go to offset the LFCR, so there would be no net revenue to APS and a reduction in LFCR going forward until the next rate case where we just have rate design.

All right, understood. Okay, thank you

Just let me, this is Don, as I know you know, net metering is a cost shifting issue. It's fundamentally a customer issue. It's no secret that the current net metering structure creates a cost shift that unfairly burdens non-solar customers.

Other important stakeholders like the ACC staff and RUCO have acknowledged this fact, and without a doubt, the time to fix this problem is now before it gets worse. And that's the key, is fix it now while it's easily fixable.

Right.

And the best way to encourage the continued growth of rooftop solar is not through hidden subsidies as currently exists within net metering structure. And those subsidies are funded by non-solar customers, but rather through transparent, up-front incentives funded by all customers. And fixing the current net metering policy will help continue Arizona's national leadership in solar energy.

Understood. So I was trying to get at the idea of how much would rates change for non-solar customers? Is this is a big impact? Or is spread out over so many customers that it's relatively small and they're relatively indifferent to how this proceeding turns out?

Near-term there'd be no change to non-solar customers. As proposed by us and staff it would be a monthly charge other than whatever they decide to do with upfront incentives, which would be collected through the RES.

Right. Okay. Thank you.

Neil Mehta, Goldman Sachs.

Good morning.

Hello, Neil.

Could you provide some clarity on the major transmission projects that you're currently working on right now? And what are the incremental opportunities that sit in front of you that could present some upside to your transmission budget?

Well, our biggest project, we have several projects as we've talked about. Our biggest project is our Hassayampa to North Gila substation 2, which is about a $230 million spend that does not go into service until May of 2015, so that's our big one.

Everything else is pretty fairly routine. We're always adding substations and adding capacity to make sure the systems robust, so between now and 2015 I don't really see any incremental opportunities. Longer-term, as growth picks up we'll have to do more and more transmission just to support the system load.

Fair enough. Thanks, Jim

You're welcome, Neil

Craig Lucas, Nexus Asset Management

Thanks a lot. I have a question about net metering. I know that this is -didn't head over in the last couple of questions. But my question is that your guidance for next year as well as your comments around the 9.5% ROE, are they assuming that the net metering issue is fixed within that guidance? Or, does your guidance assume the status quo regarding DG?

Well as I said earlier, Craig, let's assume the Commission rules on the staff proposal, for example.

Yes?

That offset is a reduction in LFCR, so again there would be no net gross margin to APS until such time we have our next rate case.

Well, that may be true but it's obviously also true that about 0.5%, half of 1%, of sales growth then would obviously benefit the Company even though the money would go essentially to properly incent the real economics of solar and that cross subsidy. But obviously, there would be 0.5% better sales coming through?

No.

So does your --?

The 0.5% is not going away, it's here and it's on the system, and our --

Right, but I apologize. That existing solar customers would not change but the continued growth in that class would obviously change, right?

The growth, it would be so incremental and small as to not be noticeable in our 2014 guidance.

I see. So basically, what you have would stay and then the stick of it would be properly attuned, let's say, going forward?

Yes, again, right now it's a 0.5%. We have about 20,000 residential installations, it's a small piece of the system. And any up or down of installations is not going to really impact our --

I see.

DE number.

I see. And one more little question, also so if you are able to fix this through the cross subsidy issue, that really, there's really no reason to go in for a rate case until the 2016 timeframe? Is that the way we should think about it? And beyond?

This issue has nothing to do with our thinking of the next rate case.

Okay, thank you very much I appreciate it.

Charles Fishman, Morningstar

Thank you. Just in preparing slide 16 and 17 on 2014 guidance, the gross margin stays about the same, expenses stay roughly the same, interest expense actually goes up, tax-free shares are about the same. Is it because of that footnote that you got a little bit of a bump up in your guidance versus 2013?

Is it because of the renewable energy and energy efficiency programs? Where does the little bit of increase come from?

Well it will become from our mechanisms, one half a year Four Corners, interest in D&A is going to go up. But that's sort of a difference in our guidance would be those two factors, a little higher gross margin, little higher interest in D&A in 2014.

Does the renewable energy programs and efficiency programs, they add a little bit, don't they - to make up the gross margin loss or?

Well we have the LFCR --

Yes.

-- which was part, and then we have the renewable energy standard which is our implementation plan, so any of the Arizona Sun projects we know we're going to get 32 megawatts in in 2014, that will help gross margin as well.

Okay I probably need to plug in your 2014 numbers and talk to Paul and get clear on that, but thank you.

That would be an excellent idea, Charles

(laughter) Okay, thanks

Paul Patterson, Glenrock Associates.

Good morning

Morning, Paul.

I just wanted to follow-up with on Craig's question in maybe a different way. What I'm wondering here is what is the impact of taking away the subsidy on this 0.5%? Let's just talk about going forward, perhaps.

I mean in other words, what is the sensitivity to -- in other words if you do away with the subsidy for solar, which seems to be precipitously defended by the solar advocates, what would be the impact on new installation? Could you give us a little bit of a flavor as to what would happen in terms of new solar, what you would estimate would happen as a result of new solar applications?

Well, Paul, Don Brandt, here. It's important to take our proposals in their entirety - and most importantly, up front we said, is the existing 18,000 to 20,000 customers that are already on rooftop, to grandfather them so they are not impacted...

Right.

...we do not want them to feel like there is a take-away. Two, fix and we had two different proposals basically to fix the non-transparent subsidy that is inherent in the current net metering structure. But then, equally importantly is to provide an upfront transparent subsidy.

We didn't recommend any specific number, but our idea is a number that would continue to allow the rooftop solar market to continue to flourish in Arizona as it has been. But to do it in a transparent manner that, in future years, every year the Commission could reconsider that amount of subsidy to reflect, one, changing an overall public policy goals, but also the expectation is that solar panel prices and installation cost will continue to decline dramatically as they have in the past few years.

Okay, sounds great. And I think it makes a lot of sense public policy-wise. I guess what I'm wondering is that from what I've seen from the solar industry, they seem almost apoplectic at the idea of changing this. And which would suggest to me that perhaps it would -- it has the potential for threatening their business.

And I'm not sure if that's because of just simply the profit margin that's associated with it or if it's because of the level of installations or what have you being less. But, I guess I'm just trying to get a sense as to when you put forward this, do you think this would lower the level of solar deployment, and --?

We think it would lower, but we thought it was a fair and equitable solution. It's a customer issue balancing the interest of customers without solar and those that are going to elect to install solar. There's no expectation that it would decline and just to set the record straight, I mean APS is one of the strongest proponents of solar energy in Arizona and we have the records to prove it.

Arizona has the largest percentage of per capita solar per customer in the nation, and this is a cost shifting and fairness issue of the current net metering structure. When it became apparent, we took action at the Corporation Commission that we believe is in the best interest of Arizona and all electricity customers.

And we look forward to a constructive discussion that we started earlier this year. And as you point out, and I think you use the perfect word to describe it, but instead we immediately became the target of intense political attacks from SolarCity and Sunrun and a few other organizations that, established organizations, that twisted the facts, misdirected the conversation from the actual issue, and proposed ideas that would further harm our customers.

It wasn't a fight we sought. We would have preferred to avoid it, but we had to set the record straight and we have an obligation to our customers, our employees, and shareholders. And, I think it's going to be very evident in what's been filed already with the Commission and their hearings, middle of next month

Okay, great thanks for the clarification. Just to further, much of it you've planned point out, but basically you don't see it having a material impact one way or the other in terms of your projected sales growth or the level of sales growth going forward or in terms of the foreseeable future at least two or three years? Is that the best way of thinking, am I correct in understanding that?

I think that's very correct. To add my point to that, I direct you if you want to take a look at the editorial in the Wall Street journal the Monday before last about how government is making solar billionaires, and that's how you get apoplectic behavior when they feel their profit margins are threatened.

I hear you. Thank you very much.

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

Thanks, Christine. That concludes our call. Thanks, everybody

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.