Pinnacle West Capital Corp (PNW) 2013 Q4 法說會逐字稿

Greetings and welcome to the Pinnacle West Capital Corporation 2013 fourth-quarter and full-year earnings conference call. (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. Thank you, sir. You may begin.

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our fourth-quarter and full-year 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's Senior Vice President of Public Policy, is also here with us.

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 2013 Form 10-K was filed this morning. Please refer to that document for forward-looking statements cautionary language as well as 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 shortly on our website for the next 30 days. It will also be available by telephone through February 28.

I will now turn the call over to Don.

Thanks, Paul, and thank you all for joining us on the call today. My comments today will discuss our operations and the strategic investments we're making to reliably serve our customers. I will conclude with a few areas to watch in 2014, and then Jim will discuss 2013 results and update you on our economic and financial outlooks.

Turning to our operations in 2013, we delivered on our commitments and remained focused on operational excellence across the business, as demonstrated by our top-tier performance in safety and reliability. I am proud to say that for the sixth consecutive year we recorded the lowest number of recordable injuries in our Company's history, moving closer to our goal of zero recordable injuries. The fossil and energy delivery teams in particular were instrumental in achieving this record performance.

Similarly, providing reliable electric service to our customers, despite the hottest summer on record, is our focus every single day and was demonstrated by top-quartile performance again this year.

The Palo Verde Nuclear Generating Station had another outstanding year with a capacity factor of 91%. This represents the fourth consecutive year in which production exceeded 31 million megawatt hours, and the ninth year in which Palo Verde was the only US generating facility to produce more than 30 million megawatt hours.

Unit 3 completed its planned outage in late November, after finalizing repairs we found early in the outage, related to a very small water leak from an instrumentation tube that connects to the bottom of the reactor vessel.

Turning to capital investments, we expanded our generation portfolio by completing the Four Corners transaction, which I will discuss in a moment, and also added over 400 megawatts of solar energy. Key additions to the solar portfolio include the 250-megawatt Solana plant which went into service in October of last year, as well as another 32-megawatts of AZ Sun that went into service in December at Hyder II and Foothills Phase 2.

Over the next several years we expect the solar generation portfolio to continue to grow, with 32 megawatts of AZ Sun going into service and mid-2014 and 20 megawatts of AZ Sun expected in 2015. These additions, including the 20 megawatts recently approved by our Commission, bring our owned utility scale solar commitment to 170 megawatts, or about $695 million.

Let me discuss the Four Corners in a bit more detail, as that transaction represents an important milestone. First, I would like to thank Dave Hansen, our Vice President of fossil generation, and the team that Dave worked with that was involved, for the commitment and patience in seeing this transaction through to its completion despite a challenging set of circumstances.

The transaction provides ongoing long-term benefits to the region ranging from reduced emissions, additional low-cost generation for our customers, and continued support of the Navajo Nation.

On December 30, APS notified the EPA that the Four Corners participants selected the BART alternative, which required APS to permanently retire the Four Corners Units 1, 2, and 3 by January 1, 2014, and install and operate selective catalytic reduction control technology on Units 4 and 5 by July 31, 2018. The environmental spend will be mostly in the period 2016 and 2017.

Units 1, 2, and 3 were retired on December 30. Decommissioning work begin immediately and is expected to last about three years, with the help of employees already dedicated to those Units.

Also, on December 30, APS filed an application with the Arizona Corporation Commission to recover costs associated with purchase of Southern California Edison's interest in Four Corners. We expect a procedural order from the Administrative Law Judge soon that will lay out the timeline, with the decision from the Commission expected later this year. As part of the application process, we have been conducting technical conferences in February to discuss the specifics of the filing with many of the interested stakeholders.

Another plant that plays an important role in our fleet and in maintaining the Valley's reliability is Ocotillo, a 330-megawatt four-unit gas plant in Tempe, Arizona. We announced the Ocotillo modernization project earlier this month, which will involve retiring two 110-megawatt steam units constructed in 1960; adding five 102-megawatt combustion turbines to the site; and maintaining the two existing 55-megawatt combustion turbines.

In total, this will increase the capacity of the Ocotillo site to 620 megawatts, adding 290 megawatts to what is there today. The project, targeted for completion by the summer of 2018, will represent an investment of between $600 million and $700 million to ensure the continued reliability of service in our Phoenix service area and allow our generation fleet to respond to increasing intermittent generation in the desert Southwest. Construction will likely start in 2016.

In addition to these generation investments, we are making significant investments in the grid, much of which is to support renewable generation and key transmission infrastructure. On January 31, APS filed the annual 10-year plan for major transmission facilities.

Two projects of note include the Hassayampa to North Gila 2 project that is well underway and is still expected to be online in the second quarter of 2015, as well as a series of projects linking the Palo Verde power hub to a substation in Northeast Phoenix. These projects have been in our capital forecast.

The projects I highlighted are the key driver of our rate base growth. We have updated our estimates, as we now expect rate base growth of 6% to 7% through the year 2018.

Looking ahead to 2014, we have included a slide to outline some of the key regulatory and political milestones for the year. On the regulatory calendar, in addition to our annual filings related to the adjusters and compliance, we will be filing quarterly reports on distributed generation or rooftop solar installations. We will also participate in a series of Commission-led workshops on distributed generation and other technological developments as they occur throughout the year.

Let me conclude with a comment on the November net metering decision. The Commission made a significant first step in recognizing the cost shift embedded in the net metering construct.

The industry generally acknowledges this decision as the first significant advancement in the nation of the cost-shift issues associated with distributed generation installations. The $0.70 per kilowatt charge took effect on January 1.

Also included in the order, in an effort to protect our customers, was a requirement that each residential customer owning or leasing a rooftop solar system sign a disclaimer as part of the interconnection process, to heighten consumer awareness of the risk embedded in the agreement as it relates to potential future rate changes.

The net metering order also stated that APS shall file its next rate case in June 2015 per the provisions of the 2012 settlement, to more fully analyze the cost-shift issue. We will work with the stakeholders and the Commission through the workshops and other discussions before we determine how best to proceed. As always, we will continue to advocate for the best interest of our customers and for a sustainable solar policy for Arizona.

As you can see, we can anticipate another full year ahead, but our priorities are clear and the management team and I remain committed to that strategy. I will now turn the call over to Jim.

Thank you, Don. The topics I will discuss today are outlined on slide 4. I will begin with a review of our 2013 full-year results, followed by a discussion of our fourth-quarter results, including earnings and the primary variances from last year's quarter.

I will then provide an update on the status and outlook for the Arizona economy. Next, I will review our balance sheet strength, including recent upgrades of our credit ratings and our financing activities. And I will conclude with a review of 2014 earnings guidance.

Slide 5 summarizes our ongoing GAAP earnings for the quarter and full year. On a GAAP basis, for the fourth quarter of 2013 we reported consolidated net income attributable to common shareholders of $24 million or $0.22 per share, compared with net income of $23 million or $0.20 per share for the prior year's fourth quarter. On an ongoing basis, we reported consolidated ongoing earnings of $24 million or $0.22 per share for the 2013 fourth quarter, versus ongoing earnings of $27 million or $0.24 per share for the same quarter a year ago.

For the full-year 2013, on a GAAP basis we reported consolidated net income attributable to common shareholders of $406 million or $3.60 per share, compared to net income of $382 million or $3.45 per share for 2012. Our ongoing earnings for 2013 were also $3.66 per share, compared to $3.50 per share for 2012 and in the top half of our guidance range of $3.55 to $3.70.

Pinnacle West earned a consolidated ROE of 9.9% in 2013, above our 9.5% goal. Our remaining comments will focus on the fourth-quarter ongoing results.

Slide 6 outlines the variances that drove the change in quarterly ongoing earnings per share. Lower operations and maintenance expenses added $0.05 per share, largely driven by lower employee benefit costs. Lower interest expense improved earnings by $0.01 per share, due to lower debt balances and lower interest rates. The net impact of other items increased earnings by $0.06 per share, primarily tax-related items of $0.04 per share.

Higher net operating expenses decreased earnings by $0.03 per share, mainly reflecting an increase in depreciation and amortization due to additional plant in service. A decrease in our gross margin reduced earnings by $0.11 per share compared with the prior-year fourth-quarter period; I will cover the drivers of our gross margin variance on the next slide.

As a reminder, both the gross margin and O&M variances exclude expenses related to the renewable energy standard, energy efficiency, and similar regulatory programs, all of which are essentially offset by comparable revenue amounts under adjustment mechanisms. Also, the deferrals associated with the Four Corners transaction are treated in a similar manner, as the O&M and D&A drivers I discussed exclude the deferrals as they had no impact on 2013 results.

Turning to slide 7 and the components of the net decrease of $0.11 in our gross margin, the main component of this were as follows. The Lost Fixed Cost Recovery Mechanism improved earnings by $0.02 per share, which, as designed, largely offset lower customer usage. Lower usage by APS's customers compared with the fourth quarter a year ago decreased our quarterly results by $0.03 per share.

Weather-normalized retail kilowatt-hour sales were down 1.9% in the fourth quarter of 2013 versus 2012. While our customer programs and conservation are the largest source of the reduction in sales, this variance also reflects a convergence back to more normal usage trend compared to last year's fourth quarter. This was in line with our expectations.

On a year-to-date basis, weather-normalized retail kilowatt-hour sales were down 0.5%.

Lower transmission revenues decreased earnings by $0.04 per share, due to the timing of the FERC formula rate true-up.

The effect of weather decreased earnings by $0.05 per share. During the fourth quarter, we record cooling degree days in October and heating degree days in November and December. The negative quarter-over-quarter variance was driven almost entirely by unfavorable weather versus normal in October of 2013.

In fact, in terms of the number of cooling degree days, last October recorded the fewest cooling degree days in the last 15 years. The net effect of other miscellaneous items decreased gross margin by $0.01 per share.

Slides 8, 9, and 10 look at the Arizona economy and our fundamental growth outlook. Economic growth in Arizona continued its overall improvement in the fourth quarter of 2013, consistent with the prior three quarters, although growth remains modest as has been the case for a year or so.

Vacant housing in Metro Phoenix has fallen by more than half since its peak in early 2010 and is at the lowest level in six years. Housing prices have responded.

On the upper left-hand side of slide 8 you can see that prices on existing home sales are 17% higher than they were a year ago, and up 45% from the bottom of the market in mid 2011. Rising prices are providing more support to new home construction. Additionally, vacant rates have fallen in all nonresidential categories, as you can see in the upper right of slide 8.

On the lower left-hand side of slide 8 shows that permits for new housing increased 12% in 2013 over 2012, and more than 150% from the low point in early 2011. This activity, plus business investment in the region, has led to an 8% gain in construction jobs in just the last year alone, which is supporting total nonfarm job growth, as seen in the lower right-hand side of slide 8.

Consumers are also driving the recovery. For 2013, Arizona consumer spending reached record highs. On balance, we see signs of sustained improvement in all economic indicators, which paint a picture of continuing, steady recovery.

Reflecting this steady improvement in economic conditions, APS's customer base grew 1.3% compared with a year ago. Looking at the next several years, we expect annual customer growth to average about 2.5% for 2014 through 2016, with higher growth rates at the end of the period than in the near term, for the reasons I have just discussed. This outlook is depicted on slide 9.

Additionally, we expect our annual weather-normalized retail sales in kilowatt-hours to increase by about 1% on average, from 2014 through 2016, primarily due to improving customer growth being partially offset by our customer programs and conservation. The headwinds from the overbuilt housing market and associated construction job losses are largely behind us, and the state is poised to embark on its next phase of sustained growth.

Between 1970 and 2001, Arizona's economy joined the US economy in economic recession five times; and each time Arizona's recovery rebounded from recession at a rate 2 to 3 times greater than the national average. We expect that this pattern will repeat itself in this business cycle once the national economy returns to more stable and healthy growth rates.

One of the key reasons for this expectation is the attractiveness of Phoenix as a place to live and do business in. Phoenix is the largest city in the Western United States, outside of California, and is almost 20% less expensive than living in California, which is the world's ninth largest economy.

As an example, the medium single-family home in Phoenix is priced 54% lower than the median single-family home in San Diego and almost 60% lower than in Los Angeles. These cost advantages are key to Phoenix area businesses retaining a competitive edge in the California market as well as globally.

This resurgence in growth is expected over the next few years. True to form, Arizona's population rate is growing at double the national average. The exact timing of this growth trajectory depends on many factors, but the roots of our future growth are well anchored in fundamentals.

Besides history, slide 10 provides some anecdotal evidence of the economic outlook for Arizona. Forbes projects Arizona as the number 1 state for job growth and ranked Phoenix third on their 2014 list of America's Fastest-Growing Cities. Forbes is not alone; Moodys.com has an outlook for Arizona growth over the next five years that is more robust than our own internal forecasts.

Slide 11 outlines our investment-grade credit ratings and financing activities, as we continue to strengthen the balance sheet. In December, Standard & Poor's announced its upgrade to APS's senior unsecured rating, to A- from BBB+, a ratings level the Company hasn't enjoyed since the mid 1980s, as well as similar upgrades to Pinnacle West's and APS's corporate credit ratings. Additionally, in January Moody's upgraded APS's senior unsecured and corporate credit ratings to A3 and Pinnacle West corporate credit rating to Baa1.

These upgrades will allow our Company to borrow at lower interest rates, reducing the financing costs for new infrastructure investment and system improvement projects, while lowering costs to customers. In connection with these ratings actions, the rating agencies cited the Company's improving financial condition and focus on core utility operations, as well as an improvement in the Arizona regulatory environment.

In terms of our financing, on January 10, APS issued $250 million of 30-year 4.7% senior unsecured notes. The proceeds from the sale were used to fund the purchase price and certain costs associated with the acquisition of SoCal Edison's 48% ownership interest in each of Units 4 and 5 for Four Corners and to replenish cash used to reacquire two series of tax-exempt bonds in July and October 2013. We also plan to refinance a $300 million maturity this year and raise up to an additional $250 million of new money debt, as we assumed in our guidance.

Overall, liquidity is very strong. At the end of the fourth quarter, the parent Company had no short-term debt outstanding. APS had $153 million of commercial paper outstanding, temporarily used to fund the Four Corners transaction.

We estimate we will not need to raise additional common equity until 2016. The timing of our next general rate case will not necessarily drive the timing of our equity issuance.

On slide 12 are some of the details of our pension and other postretirement benefits. This will be a favorable driver in 2014 results as compared to 2013.

The two fundamental factors leading to lower expenses are our higher discount rate and improved funding status. Our pension fund status is now 90% funded, up from 77% at year-end 2012, driven by higher interest rates, substantial equity returns, and larger-than-assumed recent contributions.

As you know, the impact of higher interest rates benefits the funded status and is supported by our liability-driven investment strategy. The higher funded status translates to lower our long-term funding requirements. Please note that much of this expense reduction was captured in our original 2014 earnings guidance we issued on October 31.

Finally, I will discuss our earnings guidance. We continue to expect Pinnacle West's consolidated ongoing earnings for 2014 will be in the range of $3.60 to $3.75 per share. A complete list of factors and assumptions underlying our 2014 guidance is included in the appendix to our slides, which are mostly unchanged.

One update I would like to mention is the status of the Delaney-to-Colorado River transmission project that you have heard us talk about. The project reached a milestone on February 3 when the project was recommended for approval by the California Independent System Operator to the California Independent System Operator Board of Governors. The Board of Governors is expected to deliberate on this project at their March 20 meeting.

Keep in mind, even if approved there will be a competitive solicitation process, so we will not know if we are successful until the fourth quarter of the year. The capital expenditures for this project are not included in our projected CapEx at this time. We will continue to keep you updated in this regard.

That concludes our prepared remarks. Operator, we will now take questions.

(Operator Instructions) Michael Weinstein, UBS.

Hi, good morning. It's Julien here. So, just quickly, could you just chat about the timing issue of equity issuance in the context of a rate case and putting that in? I'm sorry if it wasn't exactly clear on the call.

Well, I apologize if it wasn't clear on the call. The point we are making -- I guess the only difference -- we talk about 2016, not until that year for equity. We are not necessarily looking at needing equity associated directly with the rate case.

So even if it is pulled forward, for example, 2016 is still our year.

Got you. And that would just subsequently be pulled into any further rate case? There would be no way to put that under the 2015 case, right? There is no true-up or anything?

Well, they have historically done known and measurable change when we issue equity for the capital structure. But our equity layer at APS for regulatory purpose right now is very strong, so.

Great, thank you. Then could you just quickly, going back to the last transmission project you were talking about, how much is that in terms of CapEx, and how would that change? Perhaps if you could talk broadly speaking about FERC 1000 in the context of your participation with CISO projects.

Well, as you know, we submitted this project as an economic project back in 2011. 2012 was recommended by the Cal ISO. It was pulled between that time and the Board of Governors approving a plan for 2012.

It has again been recommended by the -- to the Board of Governors. It is about -- it is a 115-mile transmission line really from the Palo Verde hub into the Colorado River substation across Colorado River; and it is about $325 million. We would do this in a partnership, so our share would be half of that.

And if approved in the fourth -- if we win this competitive solicitation in the fourth quarter, this project wouldn't go into service till 2020, so we are still down the road. But as we talked about before, these here things could be interested away from APS. And, Jeff, can you talk about Order 1000?

Sure. Julien, Jeff Guldner. This project in Arizona, so it is within the California planning process, and that process is evolving with Order 1000. But it's one of the things that we looked at, is the strengths that we have within the region and understanding the transmission in the region. So it is folding that in with some of the Order 1000 developments.

Certainly we would be looking within the footprint, but at projects that make sense for our skills.

Got you. Excellent. Then just lastly could you just talk quickly -- obviously, you have the $0.70 kilowatt fixed charge now in place. What is the timing, at least as you see the world, in terms of getting step-ups in that rate?

Julien, Jeff again. So we do the quarterly reporting now in terms of what we are seeing with installations, and that is something that all of the parties have indicated that they want to watch. They want to see how the $0.70 charge affects the installation pace.

So as those numbers start to come in, you will have a number of parties who are looking at them; and then they may take action based on where we see that trajectory going. But nothing is specific yet.

We are very early in that process. We don't know exactly now what that trend is going to look like.

Julien, this is Jim here. I would just remind you that even if they decide to step it up, it is no revenue impact to us. It just goes offset to the LFCR.

Absolutely. Thank you again.

Kevin Cole, Credit Suisse.

Good morning, guys. I guess, Jeff, while you're on the phone, can you talk a little bit more about the options available to you to avoid commingling of net metering with the potential 2015 rate case? Just a path and timing for visibility into resolution.

Sure, Kevin. So we've got a couple things going right now. There is, first, the distributed generation workshop; and so they are going to be looking at the costs and benefits of distributed generation. Obviously that is occurring outside the rate case context.

We will also be looking at making a rate plan filing later in the year. So in the rate plan filing we will have some discussions.

Obviously something that we want to look at is how we make sure we have as constructive a discussion as we can, in a generic sense. Because it is not just an APS issue; this is a statewide issue.

And so have that discussion. And then as we move into the rate case, that is when you would implement some of the more rate-specific solutions.

I'm sorry. So are you saying that the net metering will be a part of the rate -- are you guys doing the 2015 rate case? Sorry if I misunderstood what you said.

I just think it's too early, Kevin, to know what our filing is going to look like right now. I think the visibility into this will be later in the year when we file our rate plan, which was a requirement of the last settlement.

Right. But you've got proceedings that are going to be going on this year prior to any rate case.

When will those proceedings end?

There isn't a docket -- there is a docket established but there is not yet a timeline that is established for having those proceedings. So they are going to just continue under the schedule that is developed.

What we have proposed so far is a list of potential parties and experts and witnesses that can talk through those proceedings.

Okay. So I guess the earliest we will find out about if net metering can be separate from the rate case is the end of this year; and the latest is, if you file a rate case, middle of next year. That is the timing?

Yes. That's probably fair.

Okay. Great. Thank you, guys.

Ali Agha, SunTrust.

Thank you. Jim, can you elaborate a little more about the visibility that you have on the sales growth and also the customer growth trends that you are assuming for 2014 through 2016? If you look at the second half of last year, retail sales were down in both third and fourth quarter. Customer growth has been running at about 1.3%.

So the pickup in customer growth, but more importantly retail sales: can you just remind us again on how that math works and how you are confident, given the second half of last year?

Well, first of all, the fourth quarter was off 1.9% on sales. I would point out that the comment on return to more normal, we were up 1% on usage per customer in the fourth quarter of 2012. So again, you have the one year up, one year down effect.

Like I said in my comments, fundamentally Arizona has demonstrated ability to grow 2 to 3 times faster than the US. And also as I said in my comments, it is not clear when that will be -- 2014, 2015 -- but we are confident in the long-term growth in the state of Arizona because the fundamentals have not changed.

Okay. Okay, I get it. Then at the back, in the appendix, you lay out a five-year rate base growth trajectory, 6.6% average, I think 6% to 7% as you talked about on the call as well. What is the visibility or confidence level in that five-year growth for rate base?

And what would that equate to from an earnings per share growth for the Company?

The visibility we have through 2018 is, I would say I am pretty confident. Ocotillo still needs approval; we have to get permitting and all of those things. But we have announced that project. It is critical for reliability in the Valley for both us and SRP.

Then the other big driver as we get into 2017, 2018 is going to be the SCRs at Four Corners 4 and 5, which the owners are committed to do. So things move around every year as circumstances change, but I think we are pretty confident that that is the trajectory of rate base growth.

In terms of earnings, I think it really depends on a couple of factors: what happens with sales; timing of rate case will be important. So as we have said, when we had 6% rate base growth, you're going to see earnings per share grow somewhere between rate base growth and the 4% dividend growth.

Okay, okay, got it. Lastly, more near-term, if I recall correctly, we have assumed that new rates for Four Corners will go into effect July 1 onwards. Is the current schedule keeping you on track? And is that what is embedded in the 2014 guidance?

2014 guidance has Four Corners July 1. I think -- we don't have a procedural schedule yet, so don't know when we will get that; but I think once we get the ALJ schedule we will have when those go into effect.

In the interim, we are deferring the cost with 1, 2, and 3, and 4 and 5 acquisition until the time they go into effect. So cash impact, but no book impact.

Okay, thank you.

Neil Mehta, Goldman Sachs.

Good morning. LFCR, what is the sensitivity to every 1% change in weather normal demand in 2014?

Whatever 1% in weather demand?

The weather normal demand.

Oh, weather normal demand. Well, generally speaking, every 1% customer growth is about $30 million of gross margin, about $10 million of net income.

Okay. So as demand tracks below expectations, more like the second half of 2013 type of run rate, do you think you have the O&M flexibility to still make the midpoint of guidance?

We are confident in our guidance.

Got it. Then last question on transmission adjustment clauses in 2014. Approximately what is the rate increase related to transmission?

We haven't filed that yet, Neil. Part of our adjustment in the fourth quarter of 2013 was a true-up to what we expect to file; but we have not worked through the Form 1 yet. We expect to file that -- probably around April 1 would be a good timeline.

All right, great. Thanks, guys.

Brian Chin, Merrill Lynch.

Hi, good morning. Just a question on slide 12, your pension expenses. It looked as though there were some adjustments to the discount rate and the plan assets. So it looks as though your pension expense would be a little bit lower in 2014 and 2015 than what it was in 2013.

Given that the guidance for 2014 didn't really change, can you just give a little bit more color as to what some of the offsets to that might be? Or has the retention of the guidance been just a little bit more conservatism on your part, or a little bit of mix of both? Just a little extra color there.

Well, I think a little bit of both. When we came out on guidance on October 31, we had a fairly good view of interest rates, so we knew we would have some reduction -- or some increase in the discount rate. We factored that in.

We have a liability funded pension strategy, which -- the more we are funded the more we move toward fixed income. So we do -- the long-term return on plan assets would drop as we get more funded.

So we made a educated guess at the end of October. And where we are, now that we have the assumptions nailed down, is not materially different than what we had in October.

Of course it would be, I think, for us kind of silly to change our guidance based on truing up the pension from -- through really one month of the year. So it is some conservatism in that regard.

Very helpful. Thank you.

Charles Fishman, Morningstar.

Ocotillo would not be covered by a tracker; that would have to wait for the rate case following 2016?

Well, it could or couldn't. We haven't made any decisions on our rate strategy there. We won't really begin spending any material money until 2016, so -- and I think what we try to do from a rate strategy also depends on the timing of a rate case.

Okay, but that plant, that is not considered an environmental thing? It wouldn't be covered by any trackers, correct?

No.

Okay. That's what I thought. Then just on the FERC true-up that caused the $0.04 in the recently ended quarter, I always thought those FERC true-ups were like clockwork. What happened?

Well, so we -- basically, when we are going to file next year, we begin to actually charge to revenue a portion of what we think we are going to do next year, because it is for this year period. That came out of our settlement when we had the actual date of June 1 in Arizona as well as FERC.

Various things impact that: what goes into service, what expense levels are, what our wheeling revenue is. So as we go through the year we just get a better view as to where we are going to end up the year.

We are talking $0.02 increase last, in 2012, and $0.02 down this year. So I would say it is pretty close, actually.

So nobody really challenged the true-up; it was just a procedural thing?

It is an internal thing.

Okay.

This is Jeff. It's the way the formula works. So everything that is happening in a true-up is normal formula adjustments. And they just become clear as you work through the formula year.

Okay, thank you.

Rajeev Lalwani, Morgan Stanley.

Hi, can you just walk through the timeline and approval process for the Ocotillo project? And then I have a follow-up.

I can only tell you that we have to get permitting -- we have to get approval from the city of Tempe.

This is Jeff. There is about a year-long certificate of environmental compliance or compatibility process that takes place. So that would go before the Arizona Commission. Ultimately they are the ones who approve the certificate of environmental compatibility.

And then once that is approved you've got your other normal air permitting and other things that would go forward. But that initial regulatory approval is about a 12-month process.

Then a clarification of a question earlier, or an answer earlier. The 1% sales growth that you noted from 2014 to 2016, does that include any benefit from the LFCR?

And if it doesn't, what would the benefit of the LFCR be on top of the 1%? If that makes sense.

Yes, obviously as customer growth increases from where we are today up to 2.5%, we are going to begin to see a sales growth increase as well. On top of that 1% would be some benefit of the LFCR, or whatever else happens out of net metering and the rate case. That would be consistent with what we are doing today from an LFCR perspective.

Like could you just quantify?

Like $0.01 to $0.02 a quarter, basically.

Okay. And on a percentage basis, what does that come out to? Like 0.5% or so?

I think this year's filing was like 0.7% or something like that.

Okay.

It started at 0.2%. It is capped at 1% rate increase. So that would be your top end.

We are about 0.75% rate on this year's.

Okay. So going forward from a modeling standpoint, weather-normalized sales growth should be something like 1.5%, 1.7% or so?

Well, you need to separate sales from revenue. Because we think sales growth is going to be about 1%; and then you have some of your adjusters that you would include on top of that. Like TCA, RES, LFCR, EIS when we get later into the period.

Understood. Thank you.

(Operator Instructions) Kit Konolige, BGC.

Good morning. On the $0.70 for net metering, obviously it has not been in place very long, but I am sure you guys are watching it closely. Do you have any early returns or even anecdotal feedback on whether it's having any impact one way or the other?

Kit, this is Don. No, we are just a month or so into it. To draw any conclusions from the statistics would be pure speculation.

If I understood you correctly, basically your strategy towards any further proposed alteration in, let's say, the level of that charge would -- you want to gather evidence and go through these workshops, and it may or may not be something that is part of the next rate case.

I think you're correct.

Okay. Very good. Thank you.

Jim von Riesemann, CRT Capital.

Good morning. Hey, Chairman Stump was in New York last month and made a couple comments about some of the regulatory policies that the ACC is going to be examining. Then he also brought up the topic of ballot initiatives. At that time he had mentioned the possibility of a retail competition ballot initiative going into Arizona.

I know judging currently it is not on the ballot. But can you just give an update with that and some of the dynamic pricing and some of the other things that they were talking about?

You want to try it?

Jim, this is Jeff. We don't know of any ballot initiative right now. There is legislation that is out there right now, and I think there was one bill that was introduced that had a kind of broadly defined competition language in it. But that hasn't -- I don't believe that has moved right now.

And so obviously we would be watching that, but (multiple speakers) there yet.

Okay. Then I have just one nit question, if you don't mind. Sorry to do this on a call. The CapEx from the slide deck doesn't match your cash flow CapEx in the 10-K. It is off by about $152 million. Am I missing something there?

We will have to look into that. We also have -- we also accrue CapEx in December; but we will have to look into that.

Maybe it is that. Okay, we will talk later. Thank you.

Ali Agha, SunTrust.

Hey, Jim, just a follow-up. I wanted to be clear I was understanding you right on your thoughts on equity needs and so on. What would be the trigger for the equity offering? I guess you are looking at that in 2016.

Is it to true up the balance sheet for the rate case, even though you may have filed earlier? Or is it more to look at your CapEx forecast next three years and look at funding needs? What would be that triggering element for you in terms of when you end up raising equity?

What we look at is our credit metrics to protect our A- credit rating.

Okay. So that is looking at your funding needs, etc. But to be clear, given your equity layer at APS right now, you're fairly comfortable that you will be at your threshold through the rate case process?

Yes, I am very comfortable.

All right. Thank you.

Andy Levi, Avon Capital Advisors.

Hi, good morning, guys. Just wanted to shake out a little bit more, just to make sure I understood it. Just back on the sales, can you just explain a little bit in more detail, I guess, from what you were saying that the third quarter and particularly the fourth quarter of 2012 was unusually high; and that is what is making the fourth quarter of 2013 look uglier than it really is; and really is not something that we should focus on going forward.

So can you maybe just talk about that? Because the reason I say that is, I look how your stock is trading and I think that may be affecting it today.

Well, if you look at fourth quarter of 2012, usage per customer was up 1% from what we consider normal customer usage and custom growth. And it was lower in the fourth quarter of 2013 by 1.9%, with 1% of that being the offset of last year.

I will point out this -- and you know, you have a quarter where -- and the first quarter is like this as well -- any anomaly in weather can really skew usage just based on weather patterns. So we're not worried about it. We see it a lot in the first and fourth quarters just because of the very low usage.

We are still confident in our projections going forward.

So I guess, what the fourth quarter just in general is -- is that your lowest earnings quarter?

First quarter would be.

First quarter; and then second, then it comes fourth quarter; then you really make your money in the second and third quarters. So I guess what you are saying is, just to paraphrase, is: because of weather and because of low usage, it is very hard to use that number as some type of trend.

I would say that despite my team's best ascertations, weather is an art, not a science, when it comes to exactly what is weather-driven and what is not weather-driven.

The other thing I just wanted to give you an opportunity, for no better way to put it, is you look at how the stock has done particularly since the last five or six months. And you went from trading at a pretty nice premium to the group, and then after EEI and the things that happened with rooftop solar and the ruling there, which obviously they really affect your earnings.

Your trading -- I guess you're the third cheapest stock in the group on the regulated side. So how do you turn that around? And why -- if you had to just talk about a few things, why it shouldn't be justified, and maybe address the regulatory atmosphere in Arizona, which is probably not as bad as what is being portrayed in the stock.

Andy, first, I will say the regulatory atmosphere I think is very positive. There was a lot of relatively ugly media coverage generated by certain parties in particularly the second -- excuse me, third and fourth quarter last year. That has probably got some impact, a fair amount of notoriety.

I think a number of other states around the country are going to take up the cause, and we will see where it goes.

But coming back to, I think, the intrinsic value that Pinnacle West has to offer is, first, a lot of the charts and numbers Jim went over, is the intrinsic growth that is inherent in our service territory, the level of rate base growth we have got. We are very successful, I think one of the best operators in the nation, and that all adds up to creation of shareholder value over a longer period of time.

One little nit on -- to add to Jim's comments about the fourth quarter, we did have a month of October where cooling degree days were all but nonexistent. So I won't get into the statistics of it, but the weather-normalizing model is a statistical model. And when you get a few standard deviations off of a normal weather pattern in one of the traditionally weakest quarters of the year, I wouldn't use the fourth quarter of 2013 to predict any kind of a future trend.

All right. Thank you very much. Then the last question I have is just -- can you just remind us of dividend policy going forward?

Current intention of the Board is to grow the dividend approximately 4% a year, and they will look at that every October and make a determination. But certainly with rate base growth and adjusters and our ability to earn, we would expect that to continue, subject to Board annual action.

Thank you very much.

Paul Patterson, Glenrock Associates.

Good morning. Just very quickly on the 1% sales growth, does that anticipate any change in the impact from solar installations?

No. It is really at a projection of continued rooftop solar.

Okay. So in other words, the changes that we have seen so far, which you guys have indicated it's too early to really measure what the impact will be from the recent regulatory decision, as far as your -- the numbers that you have it, the 1%, you guys are not baking in any significant change as a result of that regulatory decision?

Correct.

Okay. That's -- everything else was answered. Thank you so much.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

That concludes the 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.