Pinnacle West Capital Corp (PNW) 2014 Q1 法說會逐字稿

Greetings and welcome to the Pinnacle West Capital Corporation first-quarter 2014 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.

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 first-quarter 2014 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 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 first 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 section, 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 May 9.

I will now turn the call over to Don.

Thanks, Paul, and thank you all for joining us today.

My comments today will focus on our generation portfolio and the regulatory landscape in Arizona. Jim will discuss the first-quarter results and update you on our economic and financial outlook.

I will begin with our integrated resource plan filed on April 1, which outlines how we plan to meet Arizona's growing energy needs over the next 15 years. Our portfolio will continue to evolve into a cleaner, more flexible generation mix, driven by renewable energy, energy efficiency, and natural gas, with advanced technologies making the grid smarter and adding operational flexibility. In our resource plan, we predict that the amount of renewable energy in our portfolio will double by 2029, driven by our continued leadership in solar energy.

The Solar Electric Power Association released its annual ranking of top solar utilities earlier this week, and APS moved up one spot to number three for growth in solar megawatts during 2013. We rank among on the top five utilities for solar power in four categories. Looked at another way, our solar investments, combined with the investment in Solana generating station, enabled by our purchase power agreement, totaled $3 billion.

The AZ Sun program is an important piece of that story. Construction and interconnection work remains on track at the Gila Bend site. The project, with an expected in-service date of mid-2014 will bring 32 megawatts of utility scale solar online.

The next two projects totaling 20 megawatts, that were approved by the ACC in December, 2013, are in the early stages of development. The 10-megawatt project in the city of Phoenix was approved by the city Council recently, an important step allowing us to move forward, and we are working with Luke Air Force Base on the land and the site plan for the 10-megawatt project at Luke.

In a recent filing with the ACC, we requested approval to develop another 20 megawatts of utility-owned solar at Redhawk power station to meet our renewable obligation under the 2009 settlement. If approved by the ACC, the 20 megawatts would bring the total approved in the AZ Sun program to 190 megawatts.

The Palo Verde nuclear generating station had an excellent quarter. All three units were at full power, slightly improved from the site capacity factor of 99% in last year's first quarter.

The first of this year's two planned refueling outages began in unit two on April 5, with all key work streams on track. We discussed our summer preparedness plan with the commission last month. APS is well-positioned to meet customer demand this summer, despite drought conditions from a very dry winter that is expected to result in higher fire potential beginning in May.

As we do each year, we monitor the health of our substations and the wires, which includes several methods of visual observation, and we have added a new level of contingency planning where we automatically and frequently run training scenarios of how to respond to potential issues within the Western interconnect.

Now, turning to the regulatory landscape, I'll preface my comments with a brief recap. We were the first major utility to open a dialogue about how to enable the continued growth of rooftop solar and still protect customers who do not want or cannot install solar on their homes.

As we wrote in December, 2012, when we proposed a stakeholder conference to explore the subject, and I quote, it is APS' intent that the conference result in a collaborative solution resting on three primary pillars: One, an equitable and balanced distribution of cost and benefits. Two, subsidies, if any, that are transparent. And three, a sustainable means for solar to continue in Arizona.

By raising the net metering problem early, long before it is a financial issue for our Company, APS and Arizona are in a stronger position today.

The ACC and other stakeholders, including the state's residential utility consumer office, RUCO, have recognized that net metering creates an unfair cost shift causing non-solar customers to pay higher rates to maintain the electricity grid. Commissioners and staff now understand the issue as well as any Public Utilities Commission in the nation. Our relationships with the commission, the staff, and other stakeholders remain very constructive.

On April 15, we filed the first quarterly report on the level of rooftop applications and installations. More than 2,200 residential, grid-tied solar photovoltaic systems were installed in the first quarter, bringing the total number on our system to more than 25,000.

There were 1,100 applications in the first quarter, compared to 1,800 in the first quarter of last year and 2,600 in the fourth quarter. The new rules related to rooftop solar have only been in effect for a few months and have shown significant month-to-month volatility.

I believe it's too early to draw conclusions about what the pace of installations in the first quarter of this year means. The important point is that Arizona remains ahead of schedule to meet its goals for renewable energy.

While we and the commission monitor rooftop activity, a series of three workshops are being conducted this year. One on energy efficiency, and that concluded in April. The second on innovative technologies, which is in process, and the third on the value and cost of distributed generation, which will get underway next week. The workshops provide a forum to collaborate with the commission, RUCO, and other stakeholders, while also learning from industry experts whose opinions we value in these venues.

One point remains clear. A robust grid is needed by all customers, and rate design needs to evolve to accommodate changing technologies and preserve the integrity of the system. We have confidence that Arizona regulators understand the issue and will protect the balance of customers who do not use or have access to distributed generation technologies.

APS is an early adopter of solar energy and smart grid technology. We are an industry leader in proactively addressing regulatory and revenue challenges associated with each. I expect a productive dialogue with key stakeholders over the next several months, especially on the complex topic of distributed energy and net metering.

Turning to two highlights related to our people. Earlier this year, we announced several internal organizational changes to expand the experience of key executives and transfer knowledge between critical roles. These changes continue to build our bench strength and drive efficiencies throughout the organization.

I'm also proud to share that APS was selected as a finalist for the 2014 Secretary of Defense Employer Support Freedom Award, generally known as the Freedom Award. This award is the United States Department of Defense's highest honor for employers, and recognizes companies that provide extraordinary support to their National Guard and reserve employees. APS is among 30 finalists for the award and made the cut from a pool of more than 2,800 nominated organizations.

Let me conclude with a personal observation about Arizona's economy. Jim will walk you through several economic indicators, which continue to move in a positive direction.

More broadly, though, there is a new sense of momentum among the business community here in Arizona. Forbes magazine has ranked Arizona as the number one state for expected job growth over the next five years, beating out Texas for the top spot. Forbes also ranked Phoenix the third fastest-growing city in America.

I spent the last few weeks talking about the economy with business leaders across the state, and I am struck by the optimism and enthusiasm I've encountered. That's an economic indicator that's not easily quantified, but important nonetheless. The fact remains that Arizona is an outstanding place to live and conduct business.

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 first-quarter results, including earnings and the primary variances from last year's first quarter. Followed by an update on the Arizona economy, and I will conclude with a review of our financial outlook.

Slide 5 summarizes our GAAP net income and ongoing earnings, which are the same this quarter. As usual, my comments will refer to ongoing earnings.

For the first quarter of 2014, we reported consolidated ongoing earnings of $16 million, or $0.14 per share, compared with ongoing earnings of $24 million, or $0.22 per share for the first quarter of 2013. Excluding the effects of weather, year-over-year earnings were actually up $0.05 per share in the first quarter of this year versus the first quarter of 2013.

Slide 6 outlines the variances that drove the change in quarterly ongoing earnings per share. Lower operations and maintenance expenses added $0.09 per share, largely driven by lower employee benefit costs, including the favorable impact from pension which is expected to benefit each quarter this year.

Higher depreciation and amortization expenses decreased earnings by $0.03 per share, primarily due to additional plant in service. Higher taxes, other than income taxes, reduced earnings by $0.02 per share due to higher property tax rates.

The net impact of other items, including higher interest expense, decreased earnings by $0.03 per share.

A decrease in our gross margin reduced earnings by $0.09 per share, compared with the prior year's first-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 renewal of energy standard, energy efficiency, and similar regulatory programs, all of which are essentially offset by comparable revenue amounts under our adjustment mechanisms. Also, the deferrals associated with the Four Corners transaction are treated in a similar manner. The drivers I discussed exclude these deferrals, as there was no net impact on first-quarter 2014 results.

Turning to slide 7, and the components of the net decrease of $0.09 in our gross margin, the main components of this were as follows.

The lost fixed cost recovery mechanism improved earnings by $0.02 per share, which, as designed, offset some of the impact from energy efficiency programs and distributed energy.

Higher usage by APS' customers compared to the first quarter a year ago increased quarterly results by $0.01 per share. Weather-normalized retail kilowatt hour sales, after the effects of energy efficiency programs, customer conservation, and distributed generation, were up 0.6% in the first quarter of 2014 versus 2013.

The net effect of other miscellaneous items increased gross margin by $0.04 per share, including the benefit of the two Arizona Sun projects that went into service at the end of 2013.

Lower transmission revenue decreased earnings by $0.03 per share due to a prior-period true-up recorded in the first quarter of 2013. We have included a couple of slides in the appendix that outline how theTCA works in a bit more detail.

As I referenced earlier, the effects of weather variation decreased earnings by $0.13 per share. This year's first quarter was milder, or less favorable than normal, while the first quarter of 2013 was cooler, or more favorable than normal. In the first quarter of this year, heating degree days were 51% below normal and 61% lower than the comparable quarter a year ago.

Beginning on slide 8 is a look at the Arizona economy and our fundamental growth outlook. Economic growth in Arizona continued its overall improvement in the first quarter of 2014, consistent with the four prior quarters although, the growth remains modest, as has been the case for the last 18 months or so.

Vacant housing in Phoenix Metro has fallen by more than half since its peak in early 2010, and is at its 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 14% higher than they were a year ago, and up 44% from the bottom of the market in mid-2011.

Improved home values are providing more support to new home construction. Additionally, vacancy rates have fallen in all nonresidential categories, as you can see in the upper right of slide 8.

The lower left-hand side of slide 8 shows that permits for new, single-family homes increased 8% in 2013 over 2012, and more than 75% from the low point in 2011. Despite the mild start this year in housing permit activity, we expect to see continued permit growth as the Arizona economy continues to improve.

Overall, stable activity, plus business investment in the region, has led to a 6% gain in construction jobs since last year alone, which is supporting total non-farm job growth, as seen on the lower right-hand side of slide 8.

On balance, we see signs of sustained improvement in all economic indicators, which paint a picture of continued state of recovery. As in past recoveries, it is likely that each successive year in the near-term will be stronger as we go forward.

Reflecting the steady improvement in economic conditions, APS' customer base grew 1.3%, compared with the first quarter last year. 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 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 over-built 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. 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 and final path of the growth trajectory depends on many factors, but the roots of our future growth are well anchored in fundamentals.

On slide 10, I have some statistics to support the comments Don made on the growth prospects in the Phoenix metropolitan area. Recently, there have been over 8,000 new jobs announced, due to near-term anticipated expansions of current facilities or consolidation of existing operations to Phoenix. These are from the likes of USAA, Luke Air Force Base, Mayo Clinic, and State Farm insurance.

With our recent filing and focus on distributed energy, we have included some additional data on slide 11 to help better illustrate the impact of DE. As Don mentioned, the current impact of distributed energy on our gross margin is small. As you can see in gray on the slide, distributed generation is impacting gross margins by approximately 0.5%.

Finally, I will review our financial outlook and earnings guidance.

In terms of our recent financings, on May 1, APS purchased the Maricopa County 2009 Series A, D, and E pollution control bonds totaling $100 million. We expect to re-market these bonds within the next 12 months.

Overall, liquidity remains strong. At the end of the first quarter, the parent company had $10 million of commercial paper outstanding, and APS had no short-term debt outstanding.

In March, we received a procedural order related to the application and approval of the Four Corners rate rider. Hearings are scheduled to begin in August with the final decision expected by year-end. The complete ALJ procedural schedule is included in the appendix of our slides.

Even though the Four Corners rate rider is now expected later than we originally assumed, we continue to expect that Pinnacle West 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 on slide 13, which are mostly unchanged.

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

(Operator Instructions)

Greg Gordon, ISI Group.

Two questions. As it relates to growth. The customer growth was 1.3% in the quarter. That was good. You were at 0.6% sales growth. I see that that was really led by residential.

Yes.

The delta between customer growth and sales growth is quite small on an overall basis. It's 70 bps. You have told us was to sort of model over time more like 150-basis-point spread between customer growth and sales growth due to energy efficiency, demand response, and DG. Why was it so tight in the quarter? Or, should we not look at it on a quarterly basis but on an annual basis because you get more energy efficiency -- you get more energy conservation in the summer.

Greg, I wouldn't look at the first quarter and try to draw any conclusions based on the year. Remember, first quarter, we had low sales in total. Normally, like the weather, which we had in the fourth quarter, sometimes skews results. I would look at it over the course of the year.

Okay. My second question is, in talking to my housing analyst here at ISI that there has been a slowdown in new housing purchases in the Southwest over the winter. It could cause you to have some concern about the longer term growth trends. Can you give us some feedback on what you're hearing from developers in your service territory?

Greg, we are getting pretty positive signals from the developers. They've had labor shortages, and as I've mentioned on previous calls, they've actually built some trade schools to train crafts, labor for the construction. If you fly in and out of Phoenix, you will see there is a fair amount of dirt moving, subdivision development. That's echoed by what the homebuilders are telling us.

Great. Thank you.

Julien Dumoulin-Smith, UBS.

I suppose first question out of the gate, on the waiver -- or potential waiver to delay the rate case. Where do you stand on that? Do you anticipate filing that in the next couple months here?

Julien, this is Jeff Guldner. We haven't made a determination on how we move forward with that at this point. We are focused right now on moving into the workshops and having some of the dialogue and the value of DG and the technology innovation workshops.

What would be the puts and takes, if you will, in terms of making a decision to do so or not?

Really, just need to look at how some of the discussion will evolve. Obviously, we expect that in the value of DG workshop there's going to be some discussion around rate design issues.

Excellent. I suppose, just following up on that, in terms of the DG issue here, ultimately, how do you think about that playing out relative to the rate case on being a separate track? Is that something that could be moving forward, say, late this year, early next on a separate timeline? Or, how are you thinking about that for the time being? Just to get an update.

We certainly see value in having the discussion around the rate design issues, which are broader than just APS. That's going to involve other utilities. You would have to implement anything like that in a rate case. So, there is probably several paths forward.

To the extent to which the DG issues were broader than just you and obviously just your rate design issues, would that ultimately be a separate docket, just to be clear?

Don't know whether it would be separate or not.

Excellent. Lastly, in terms of the Four Corners development, can you quantify a little bit what the delay means in terms of your numbers?

Well, Four Corners is slightly less than $0.01 a month delay. So, somewhere around $0.04 or $0.05 for us. But, we have that incorporated in our guidance.

Excellent. Thank you.

Ali Agha, SunTrust.

Jim, to be clear if I heard you right, as you mentioned, the delay in Four Corners on the map is about $0.05. Are you specifically seeing whether it was the pension cost that you referred to in your opening remarks? Are there specific benefits or offsets that you are seeing? That's kind of neutralizing it out there? Or, should we think you are still in the range, but there may be some headwind of not having it done on time -- coming in on time.

Well, we factored into the range of possible outcomes both the delay in Four Corners, and we had a pretty good view that pension and OPEB would be down this year over last year. So, we're still -- the range is good, and we try to incorporate and probability risk, sort of each of these factors. It hasn't changed my outlook on the guidance.

Okay. To be clear, there has been no specific offsets that you could point to us to say this came in better than what you may have budgeted originally?

No. It has been steady cost control as you see in the first quarter.

Also, on the AZ Sun program, where is the commission right now on its thinking on the remaining -- final 30 megawatts? I know there was some talk that maybe that's not required anymore. Just give us an update on that, and when that is supposed to be resolved?

If you remember, last year the commission approved another 20 megawatts -- 10 for city of Phoenix and 10 for Luke. And said, when you come back for your 2014-2015 filing, we will see how your penetration of rooftop and load and the need. We filed for 20 of that 30, and we are waiting the commission approval on it.

This process will clarify their thinking whether that's needed are not basically?

Correct.

Okay. My last question, in terms of the longer term growth outlook there. I know you added this chart in there showing the small DG component. Is it still fair to say rate-base growth should still be the key driver in terms of benchmarking EPS growth? Are you still seeing that relationship as is?

Yes.

Thank you.

Kit Konolige, BGC.

I just wanted to ask about the decline in O&M year-over-year. Could you go into a little bit what that is, pension, OPEB, etcetera?

A lot of it is pension, OPEB, and other employee benefit costs. Certainly, if I look at the business' cost controls, some time in the quarter, that expense is incurred. It's just a continuation of our ongoing program including the enterprise process improvement initiative, which is looking to streamline processes and document everything that we do.

How should we think about, say year-over-year changes in O&M going forward? Or, is that something that we'd have to look at in the context of the next rate case?

Well, I would say two things on that, Kit. One is our stated goal is to keep O&M basically flat year-over-year. Certainly, as we move out in the outer years, less than or equal to the growth in kilowatt hour sales. We are not going to change how we spend and run the business just because we have a rate case. We will continue to be focused on costs. Being as efficient as possible, which ultimately lowers cost to customers, which is a good thing.

Thank you.

Dan Eggers, Credit Suisse.

I want to go back to Greg's questions a little earlier about the housing growth outlook and that sort of stuff. With inventories down at the lowest point in six years and permits starting to come back. How should we be thinking about the rate of permitting and the conversion of permitting to new home construction to help support that 2.5% customer growth rate? What is the lag between permits moving, the houses getting built? And then, what is the quantum of homes that we need to start getting added to the system?

Typically, you see anywhere from a 12- to 24-month delay in permitting to home construction. Of course, there's abnormalities in that, it could be longer. We see -- and Moody's projects around 25,000 permits this year which is going to relate the customer growth of about 2% to 2.5% over the next three years. We'll see permits begin to accelerate once, as Don alluded to, there is the getting skilled crafts trained. You will see permits pick up, and growth will follow.

Is there enough in queue when you look at or talk to the builders -- or things that are going to be built to support the 2.5% number this year? Or, is it more like this year is going to be at this 1%, 1.5% level, and then we'll think about 2015 and 2016 being 2.5%, 3.5% numbers?

2.5% will be the three-year average, and it will be accelerated coming out of the -- in 2016. You will see growth somewhere around 2% or so this year, and it will be accelerating through that to average 2.5%.

One of the things we had heard from our homebuilding analyst, is there was talk of more of these homes being built with the option of solar being included with construction. When you talk to the developers, what rate of absorption are they seeing or hearing as far as people opting for solar to be built on the house at construction?

There's a few developments, Dan, that kind of specialize in that -- I guess is the word I'd use. The majority do not.

So, it has -- .

What the percentage of those they're putting it in or building a home or electing to go solar or not.

Don, is there talk, or are there conversations about prospectively expanding the renewable mandate in Arizona where you could then eventually expand Arizona Sun and that sort of stuff?

At this time, I don't believe we've got any substantive discussions going on in that regard.

Okay. One last question from me, system performance level. As the solar stake is increasing, are you seeing any more volatility on the daily dispatch profile? Or, the requirements on peaking ramps as far as when solar is on and off? How is that changing, besides Ocotillo, the need for new physical generation?

We are clearly seeing that. That's -- looking forward, expect more of it. That's one of the driving factors behind Ocotillo. In the next few years, Ocotillo is going to be the majority of that expenditure in addition to the generating sources. It would be adaptations on the distribution system.

And, the Ocotillo timing, when you model how it works with the timing as the solar share takes greater impact?

Ocotillo should be finished in 2018. The majority of the spend will be in 2017 and 2018.

You are okay from a system performance level?

Yes.

A lot of the solar is spread out across the system. That has an impact as well.

Great. Thank you.

Neil Mehta, Goldman Sachs.

Can you talk through dividend growth? You've got this 4% target over the long-term. What do you need to see to get more aggressive when it comes to dividend growth than 4%?

Obviously, we are targeting average of around 4%. We'd have to see a clear path to rate-based growth greater than the 6% to 7% we are seeing now. To give us confidence to move beyond what we are seeing right now. Our payout ratio continues to be in the low 60s, so we have a lot of flexibility moving forward.

On equity, Jim, what have you said about when the earliest you would need to issue equity is?

Not until 2016. At the earliest.

Finally, there has been some increased M&A activity in the Southwest and in the industry, in general. Can you just comment in terms of your thoughts of whether you think there is value that can be created from regional consolidation?

That's pure speculation, Neil.

Fair enough. Fair enough. I will wait until another time to ask. Thanks.

Brian Chin, Bank of America Merrill Lynch.

Just going back to the question about how you think about the next rate case. I understand, from one of your prior answers that much of it depends on how events unfold over the remainder of this year. For example, the DG workshop. Can you give a little bit more color on what are some of the factors in the upcoming workshop, for example? Or, discussions around DG that might help swing you in one direction or another with regards to do we pursue a more delimited rate-setting-style rate case, or more full-blown rate case? Some of the factors I'm thinking of could be whether the DG cost numbers end up coming out higher or lower out of the workshop. Whether there's a degree of unanimity among the different regulated utilities in the state? Whether the relationship and the tone among different stakeholders ends up being a little bit less acrimonious than it has been in the past? Can you walk us through some of the factors that you are thinking of that might help you, ultimately, come to the right decision on the next rate case?

Brian, this is Jeff. Some of the ones that you just outlined are good -- are right on target with that. What I think you're going to see, certainly, is some discussion in the value of DG workshop around what you think about solar valuation and the valuation of rooftop solar. I think there is also going to be some discussion around how that pairs up with the value of the grid. That's going to be a broader discussion, obviously, than just APS. We will have other utilities that are in there.

It's going to be difficult to have that kind of discussion without, ultimately, looking at some of the other aspects around rate design. As that unfolds, I think we will be able to see little bit more about what that dialogue looks like, what the other utilities are thinking. We also like the opportunity to hear in that from a number of different industry experts from around the country. That's one of the things that the commission has done, I think, a nice job in lining up folks who are going to provide commentary during those workshops. Those are just going to start next week. We will go in and see how those progress, and obviously, that will inform some of our decision-making.

If you could remind us of the timeline of the workshop? And then, roughly, sort of the general time frame under which we are more likely to see public commentary from you about how you wish to proceed in the next rate case?

The workshops -- the value of DG workshops start on May 7. There's another one that has been scheduled in June. There isn't really a schedule beyond that. So, there may be some additional workshops that follow from that. We also have, overlaying that, separate but probably interrelated in some ways, the innovation and technology workshops and another one of those is coming in late May. As we work through those, probably -- obviously, it will be later in the year before we see how that looks, then, from a longer term regulatory perspective.

Great. Thank you very much.

Paul Ridzon, KeyBanc Capital Markets.

Jim, just your equity comment? Is that no equity until 2016 or through 2016?

No equity until at least 2016.

Okay. Just as far as the O&M, we're $0.09 ahead here. Your full-year outlook is to be flat or up slightly. I guess the implication is that we are going to see some heavier O&M later in the year?

Yes, a lot of that is timing, especially as it relates to generation overhauls. Just some O&M delayed till later in the year. I wouldn't say it's going to be heavy. But, pension and OPEB is going to be down in every quarter, we know that.

That's baked into your flat assumption?

Yes.

Thank you very much.

Steve Fleishman, Wolfe Research.

A couple questions. First, these workshops, are they going to be webcast, so we can listen in?

Yes.

Do you know?

Yes.

Okay. Don, you mentioned in your prepared remarks the April 15 filing you made and highlighted the fact that the adds year-to-date are less than a year ago and was certainly less than Q4. Then, you also said, don't read too much into that yet. Can you give a little color on that commentary? And, why we shouldn't read too much into that yet?

If you look back two or three years, Steve, the volatility from one month, say of February of this year versus last year versus the year before that -- it's a pattern. If you just look at a few months at a time, doesn't seem to be a lot of rhyme or reason to it.

Okay.

You can draw your own conclusions. But, when I look back over several years of history, one could get out on a limb and prove themselves wrong in another few months.

Okay. Second question is related to the upcoming ACC elections. Has there been any people that have clarity on who's going to be running? And, I'm curious if the solar issue has started coming up at all from a common elections standpoint?

No. The answer to your last one, first, so far, it has not. We are sort of in the -- not early stages, but many of the candidates are still gathering the signatures and the other information data that's required for them to be a candidate in the clean elections process and for the primaries.

Okay. It's just two spots that are up, if I recall?

That's correct.

Lastly, I think there was this ruling by the Department of Revenue to put a property tax on solar leases? Has that been finalized? Has that occurred? Maybe is that having any impact on some of the additions?

To clarify the issue, the statute that requires generating assets and entities not using the generation themselves, i.e., rooftop solar under lease arrangement versus a homeowner that outright owns his generation --it's the same law applies to our solar properties -- has been on the book for years. The solar lease companies were not paying that tax. Last year, about this time, the Arizona Department of Revenue issued a ruling that they were required to pay it. It's pretty clear when you look at the law. In the legislature this last session, they were -- they being the solar lease entities -- running or attempting to run legislation to exempt themselves from that tax. The tax would be on them, not on the homeowner.

They weren't very successful at it. And, I'll say earlier -- midstream in that process -- they turned on that APS was trying to raise property taxes on solar customers and just within the last legislature ended their session last week. And, just recently, as of yesterday, they were posting on some of their websites an attack on our governor, and that her administration -- I presume by that they mean the Department of Revenue was applying this tax. The facts are the tax has been on the books as a statute for years. They weren't paying it. Now, they are being required to comply. That's sort of where we're at right now, if that answers your question.

Thanks for clarifying that. Appreciate it. Thanks.

Rajeev Lalwani, Morgan Stanley.

The first one was on the quarterly DG filings. To the extent there is an acceleration or deceleration in applications, do you expect the commission to change some of those fixed charges that they've implemented?

Rajeev, this is Jeff. I don't know. I think that they're going to monitor them. Don't anticipate right now any action, certainly, in the near-term.

Another question on the rate case. What's the test year that you are going to use?

Under the current framework we have, we'd be looking at a 2014 test year. So, some of the discussion that had happened earlier, is whether that's the test year we would move forward with, or would we move forward, potentially, with a different test year. To do that, we would have to have some change in the existing regulatory framework we have.

Okay. Based on the guidance you provided for the year, what's the earned ROE from a regulatory standpoint that you are forecasting?

It's going to be in excess of 9.5% and short of 10%.

Okay. The rate ask -- or the revenue ask doesn't seem like it's going to be a very big number, is that the takeaway?

We have a $1 billion spend. So, it will be what it is when we ultimately get there.

Okay. That was it. Thank you.

Paul Patterson, Glenrock Associates.

Just to sort of -- most of my questions have been answered. Focusing back on slide 11 and the customer energy efficiency, I was just wondering -- how much of that do you estimate is because of utility programs? Things you are doing versus just general trends, I guess, in consumer behavior?

In that regard, Paul, it's sort of hard to nail a number. We could track what CFLs we hand out and things of that nature. We do think most of the energy efficiency is in lighting, for the most part. What we really don't know is what are customers are doing outside of any incentives we give. Then, how much is just conservation on the part of homeowners in sort of an uncertain world. We do know that EE is going to continue to be an impact as everything that is manufactured today is more efficient than what it replaces, including buildings, footprints, and so on. That's no data I can turn to do support how much is ours and how much is customers.

Just sort of following on Steve's question about the trends in installations. One of the things, I guess, one might think could happen is that due to a change in pricing, what have you, with the charge, and what have you. There might have been an acceleration of activity in the fourth quarter. As time goes on, that might get more normal. In other words, you might see a cannibalization of the first quarter stuff, or being brought in a little bit earlier into the fourth quarter. When we look at the trend throughout the quarter, or as much data as you have through April, or what have you -- do you see -- and I know it's volatile. I completely understand what you are talking about. Do you see a trend in installations -- solar installations that are trending upwards as the months go on? Is it really just to hard to tell?

Jeff, one of those -- the points you made about the change in the policy that occurred at the end of December, what we saw was a significantly higher application rate in December of folks trying to get in before that change occurred. So, we know that was driving the numbers to be very high in December. The challenge, to try to be with only four months, essentially of data, to say what's the long-term trend, is you've got, among other things, that change as well as things like we don't have an upfront cash incentive right now driving folks in early in the application process to get their installations in. We want to make sure we are looking at that trend of data to ensure we see enough of those different variables to get a handle on what the overall long-term trend is. I think it's too early right now to really tell.

Okay. I appreciate it. Thanks a lot.

Charles Fishman, Morningstar.

If I could ask a couple of more quick questions on slide 11. I might be reading more into this, or trying to get more out of this chart that I should. If I look at the distributed energy portion of those three bars, it looks like it's getting smaller. Yet, I realize you said it's a little early to make any conclusions from this monthly charge. Am I reading too much into that?

Well, I think you have the offsetting factor there is you get increasing sales before EE and DE continuing to rise. But it's a smaller percentage of the overall total.

Okay. That make sense. Got it. On the box on the right, you have -- last year, let's say a little over 28,000 gigawatt hours of total retail sales what you are saying, the 60 gigawatt hours are -- is that just for one year? Or, is that cumulative?

Just one year.

That's one year. That's what I thought. That was it. Thank you very much.

Andy Levi, Avon Capital Advisors.

This wasn't actually going to be my initial question. Back on what Paul Patterson was asking. I would think it's more the cash incentives that's having the difference versus the $5 a month fixed charge. Is that fair, would you agree?

In terms of the applications coming down?

Yes. I can't imagine $5 making a big difference.

That's probably -- I think that's our assessment. If there's a change in just the logistics of how you go through the process, it's likely making it difficult to look at year-over-year comparisons when the year before you had upfront cash incentives and folks were trying to get -- .

Right, it's $5. I can't see it affecting the consumers' decisions. Okay. Back to what Brian Chin was talking about. Just to understand the process for the rest of the year. We are going to have these workshops where the various stakeholders will discuss their views. Obviously, net metering being the issue and getting that $5 charge increased to a more reasonable level.

Then, once the workshops are done, you really get in -- tell me if I'm right or wrong on this. You really get into the point of not only whether you've filed for a rate increase or not a rate increase, which you probably won't do. But, really whether the commission is going to move ahead in trying to deal with the net metering issue and raising that amount before the end of the year. Is that correct?

I think the workshops are broader than that. When you look at -- just on the value of distributed generation workshop, the $5 charge was something that was adopted in our proceeding that ended last year. This is, I think, going to be a more broad discussion on how you look at distributed generation in general and bring in in other utilities. It's a little difficult to predict how that's going to unfold. Again, what we are looking forward to is having experts from around the country coming in and sharing their perspectives. Not just on the value -- we think, not just on the value of distributed generation, but also on how you look at the value of the grid and the services that we are providing. So, since those haven't even started yet, it is a little hard to tell how that's going to evolve. Obviously, that's what that's what we're looking forward to next.

Is the scenario possible that that net metering charge gets altered as a result of these workshops?

I don't think as a result of these workshops -- .

I don't mean a direct result where you go from workshop to a change in net metering charge. But, where the workshops lead to a commission docket that ultimately would lead to that.

Andy, I don't think we have any expectations, as we said earlier today, that that workshop is going to alter that charge. Remember, that charge is off-set by LFCR. Will not have an impact on APS.

I know. I understand that. But, I guess kind of the way I view your stock performance recently, it seems that most of the underperformance has to do with solar penetration/net metering, and that can continue on. You look at the state of California, and they are probably going to come up with a net metering charge in the $20 range, $25 range. I think if there was a more fair charge or more balanced charge between solar users and utility, that may make a difference in people's perception of your long-term prospects. So, that's kind of what I'm getting at.

I guess, from -- talking to some people down in Arizona who maybe are in the position to make decisions, it seems at least with some, a desire to get a more equitable balance between solar and the Company. Or, the utilities, I should say. So, that was kind of the line of questioning, where I could see if we could get something done this year. But, I understand you need to get through the workshops and all that, first.

Yes.

Thank you very much.

Ladies and gentlemen, we've reached the end of the question-and-answer session. I would now like to turn the floor back over to Mr. Mountain 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.