Becky Hickman - Director, IR
Don Brandt - Chairman, President & CEO
Jim Hatfield - SVP & CFO
Mark Schiavoni - EVP, Operations, Arizona Public Service Company
Randy Edington - EVP & Chief Nuclear Officer, Arizona Public Service Company
Jeff Guldner - SVP, Customers & Regulation, Arizona Public Service Company
Pinnacle West Capital Corporation (PNW) Financial Analyst Presentation Conference Call November 9, 2012 3:00 PM ET
Welcome, I am Becky Hickman, Director of Investor Relations for Pinnacle West Capital Corporation and I am delighted that you are here. We believe we’ve got better weather than much of the rest of the country, although there is a storm coming through this weekend and we apologize for that. Possibly somebody brought it with them, but nobody has accepted the responsibility.
So what are we doing here? As an intro, we believe we have a solid value proposition. We have a strong execution story and leadership team and some of our leaders are here with us today. We of course have our speakers, Don Brandt, who is in the back of the room; Jim Hatfield, our CFO; Mark Schiavoni, EVP of Operations for APS; Randy Edington, EVP and Chief Nuclear Officer for APS and Jeff Guldner, Senior Vice President, Customers & Regulation for APS.
We have a number of others available to be with us today, and I am excited that they are here. Lee Nickloy, who is our Vice President and Treasurer; Pat Dinkel, who is responsible for Resource Management and Acquisition; John Hatfield, who is no relation to Jim Hatfield, but he is Vice President of Corporate Communications; Maria Lacal, Palo Verde; Lori Sundberg, who is Senior Vice President of Human Resources & Ethics; Meghan Grabel, from our Regulatory Group and Shirley Baum from our Legal Group who is here to give me the hook, if I do something wrong. If I have messed up on any of those titles, I apologize, but it’s important that you know that they are all here from different areas. They are concerned about hearing what you are concerned about. They are also available to help you with things about their areas. I have a special group that I want to recognize today. They are the team that put this event together for you; Dene Higuchi, Chalese Dalton, they have been so instrumental in pulling this off, thank you.
Now before I turn this over to the speakers, I get to do the detail stuff. I just turned off the ringer on my cell phone and I actually put it on my notes, because I was afraid I would forget. We are webcasting the presentations and Q&A. Most of you are more used to this than some of us are, but a reminder, please use microphones. We will distribute mics for the Q&A session. We are also going to do a joint Q&A session, so please hold your questions until that session starts at the end.
With respect to forward-looking statements, our presentations do certain forward-looking statements; now as you know, you can only place limited reliance on those statements when we make them. Also, the presentations contain some non-GAAP financial measures which we think are important measures for you to understand our business.
At the end of the day, there's a gift for you that will be available at the registration table. Please pickup your gift and thank you very much for being here. At this point, I want to turn it over to Don Brandt. Don Brandt is going to provide the strategic summary that’s going to kick off the whole thing and provide an overview. Thank you Don.
Thanks Becky and welcome all to Arizona. This might be the thick afternoon of your stay as Becky mentioned, there is a cold front coming in, supposed to be about 60 for a high to more a low in the 40s and a little bit of a rain along the way, but it's still a great place to be. This is as about as bad as the weather will get if it comes to fruit. And some great golf courses out here and restaurants, so we hope you enjoy yourself and hope it's a safe stay. We put in all of our operations safety first. At least that’s what I say and I was just admonished coming down, walking in here, walking in and using my Blackberry at the same time by our Vice President of Nuclear Operations Support, Maria Lacal, whose looks are deceiving. She looks like a nice lady. She commands the largest armed force in the State of Arizona. So don’t cross her.
For those of you who live on the Eastern Seaboard, if you’ve got family and friends out there, our hearts go out to those who have suffered damage. It's a long way from here to there, but last Friday morning, we loaded 35 linemen and 17 vehicles on C5/A Galaxy’s and C-130s and they are on Long Island and someone is interested, Becky can get you the link to some of their pictures, if you want an APS truck to add to your photo collection of the different utility vehicles on the East Coast. Just a couple of days ago, there were pictures of them in sporting goods store picking up some warmer gloves and warmer hats they weren’t quite expecting the Nor'easter when they left. And I was told yesterday that the guys decided they weren’t going to shave till they got back, so it will be motley crew, but we will celebrate their return.
Last week we discussed our financial results for the third quarter; it was a solid quarter from an earnings standpoint and our operations goal today is to go little deeper into our strategies and what we see in the years ahead and you will hear from my senior leadership team (inaudible) business and our non-nuclear generation. Randy Edington, our Chief Nuclear Officer and Executive Vice President will tell you about Palo Verde’s operations and just earlier this morning, we closed the breaker on unit two for it completed its refueling outage; it was one of the safest outages that’s ever occurred at Palo Verde.
We had no reportable incidents, OSHA reportable incidents during the outage. Immediately, before the outage, unit two had finished a 518 day continuous run, break for the breaker and set a new record for Palo Verde operational units. And also with the close of this outage, we had prior backup nine months ago, we have been first in the industry from the lowest dose rate on an average and one of the farley units’ took that away from us last June. We now have first place in that regard and that’s important.
I will dwell a little bit on Palo Verde and it’s very easy to assume with the nuclear units that are running well to put it in the back of your mind, that’s the last thing I do as CEO, and is frankly ought to be the last thing is investors, for analysts that you should do too. Randy I will do a lot more detail, but I have the occasion you all know, the journey where we were with Palo Verde and what it took to get us now and had to privilege to earlier this week to be done at Atlanta at the annual impose CEO's conference, where we gather every CEO and CNO and there four or five closest friends to renew the focus of the industry on safety and was asked to speak sustaining excellence in nuclear operations and is talked about Palo Verde first from a safety standpoint and the plant held standpoint, so training directors and the core focus on Palo Verde return to excellence has been based on knowledge. And I talked to the group about training programs we haven't place and every nuclear plant has extensive training, but we have two unique ones that we think is going to pay long-term benefits.
First, and I won’t dwell you with quite the details, I went into with it info, but one is every site employee down to administrative assistants is required to go through four week plant systems and operations training program that’s tested along way and condition of employment is passing that. And then every manager and above within the organization is required to initiate and successfully complete a seven month full time management certification program, so it will take a while to get everyone through the process, but in the few years, few short years every manager and above will wither have this management certification, an license or prior SRO experience; SRO is, Senior Reactor Operator; Randy will maybe throw in a few more acronyms but it’s an important part of our business its 30% of our generation and mostly importantly it’s the nation’s largest commercial nuclear facility and we plan to run it exceptionally well.
Jeff Guldner, one of the newest members of our senior management team will talk about the regulatory environment and customer service operations, call center and that his group touches the customer in more ways than one on the phone, in-person and through our billing process and Jeff also led the team that put the last two rate settlements together and he will talk to you about that front.
And Jim Hatfield will kind of wrap it up hopefully and answer some of your questions relative to the financial matters and forecast as we go ahead.
Slide one, most of you know all this, I won't dwell on the details but its there for some of the folks not so acquainted with our story, the largest electric utility in the State of Arizona. We've been around 126 years. There's been a lot of rapid growth over the last 20 years like most of the nation we slowed down but we never went negative through the recession over the last three years to four years. We will talk more about that in later presentations about prospects for growth, but we think we've got a very conservative forecast, not much growth at all.
We in our service territory sit on 26,000-27,000 empty homes and all it takes is a new residential customer to close on that house and give us a call and we can remotely turn the power on and there will be a customer consuming kilowatt hours.
Pinnacle West Capital Corp. is a lot different company than it was 3.5 years ago. We are out of the real estate business, we have that behind us, we exited the energy services business, the two sides of that and we focus now entirely on our regulated businesses operations in Arizona.
Our basically strategy that I hope you see today is take the inherent growth that will return at some point in the not too distant future to south western principally Arizona and translate that into shareholders value. The Arizona Corporation Commission with the elections on Tuesday, we had a Republican majority now, we have exclusively five Republicans running on their terms but the slots that were up for elections, Bob Stump was running for reelection and he was reelected and two new individuals to the Commission Suzan Bitter Smith and Bob Burns will be on the Commission and all three of those are experienced in the political world in Arizona, held offices and both have held leadership positions within our state legislature.
It’s a different commission, a different complexion but its also people we know and people we can work with and constructively as we have in the past to develop a relationship that's good for our customers, good for the communities we serve and good for the state of Arizona and for our investors.
Financially, we are well positioned at this point. It's been a long road over the last five years from where we were coming off of the periods of rapid growth, the fastest growing electric system in the nation, with a regulatory regime that lagged and used a lot of historical numbers with not many vehicles to stay current with the capital expenditure program.
We have much of that in place now. We've repaired the balance sheet. We look to focus on continuous operations, improvement and excellence around all aspects of our operations and cost management. Jim will be talking about that. Last month, the board authorized the almost 4% increase in the common dividend from annualized rate of $2.10 or $2.18 and we believe that reflects both my, my management teams’ and my board’s confidence in the future of the company and Jim will talk about [desperations] in Arizona in to shareholder value as one earning competitive returns over the next four years through the stay-out phase of our current rate case.
We expect to earn a minimum of a 9.5% rate of return. I think it's somewhat unlikely that we will go through the allowed return of 10%. That’s not our aspiration but our aspiration is to grow that earnings level meaningfully. Again, our forecast is conservative on the growth side. Jim will talk about that. We're not future sayers as to when the economy is going to turn around, particularly relative to the housing market and the movement from other parts of the country, the migration to the southwest but I think we will be the primary beneficiary of the nation when it comes to play. It’s a risk of stealing some of Jim’s thunder I know in one of our conference call and lot of our other discussions there was a talk about the 2015 rate case and potentially an equity issuance around that and I will underscore neither one of those uncertainties, it’s not our goal to file a rate case then. We would file the rate case if it’s necessary.
We have a lot of initiatives in place and both Mark and Jim will touch on those and Mark Schiavoni and Jim Hatfield Head of the Corporate Initiatives form a relative to cost containment and some opportunities that we have for cost savings over the next few years and even if there is a rate case and equity issuance, I don’t see being if there is one and I underscore if very late in that period of time and our aspirations would also be to avoid that if at all possible. Jim will give you more color on that.
So I will wrap up my remarks at this point and invite Mark Schiavoni upfront. Thanks.
Good afternoon. My name is Mark Schiavoni and I am going to talk a little bit about operations before I could start that I was told that whoever is on the phone if you can go to mute on your phone will be appreciated thank you. I am going to talk about operations and the operations of the business and what’s going on today. I am going to talk in the areas of safety, our resource planning, energy delivery, the generation side of the business in our nuclear generation, energy innovation, our technology arm and what's going on as far as environmental space.
And as I go through each of this for the organization, one of things over the last three years to four years that we have driving organizationally as continuous improvement, how do we continue to look at our operation side of the business drive cost out, improve our efficiencies and really look at the core of the business and make sure we are doing the fundamentals correctly.
So with that, it starts with safety. Don alluded to safety in his open remarks, but I am a firm believer having been in this business for 38 years that you can walk into any industrial type business whether its our business as utilities, my and Randy’s background through the military, the navy specifically. And if you look at their safety performance that tells you a lot about the organization, it tells you about the fundamentals they believe in, it tells you about the rigor they put behind the things they do everyday and it will tell you how they operate.
And so as we focused on safety and really started driving safety performance as you can see starting back in 2008 when we come out of that year, that is one of our big initiatives, let’s get our fundamentals right, let’s focus on safety and let’s drive safety to zero. Hard road? Yes. Did you have a lot of? We won't stop until; we do achieve zero industrial safety accidents in our facilities.
Moving on, as we look towards the business itself, one of the key components of our business is in the resource planning and quite frankly the generation mix and what happens in our future. And as you can see what we have taking place about 2016 timeframe, we started rolling out some of our PPAs that we have been existing, these existing contracts.
With that we are also looking on the completion of our Four Corners transaction, and we start looking at what a resource planning requirement is. With the slowdown in growth, this continues to push out and that for us has been a time as Don alluded to with the wild growth we had give us an opportunity to catch our breath, put in place some process, as we look at our transmission distribution business and see where we have to make changes as we go forward.
We did look at what our additional resource requirements are going to be as we look out into the future, and as you can well imagine a lot of it will be dependent upon federal regulation, what happens in federal regulation. But you can see the current profile and what we are looking at 2027. So, there will be a transition with more gas coming into play, obviously much more in the way of renewable and we've done a lot in the way renewable so far as you are well aware.
So the three main components are transaction with Southern Cal Edison to complete the 4 and 5 acquisition, future renewable resources and then natural gas product resources are the key components that are going to make up that generation mix of the future in support of our existing portfolio.
So when you look at it, you can break it not by timeframes near-term the next three years. Really we are able to do it through renewable energy and energy efficiency programs we have. As you move out in 4 to 15 years of future, we start bringing in more gas and move in through that direction and then finally more in the way of technology.
That's a misnomer. We are starting to use technology now in a lot of ways to help improve our grid operation and our distribution system operation. We are the key things that are helping us today with technology besides metering and using for customers. We are starting to use metering in different ways to help determine the health of our great response times. So it helps with our staffing, as far as our ability to predict failure, get out in front of it, our line cable, our buried cable replacement program for H Cables.
We are able to detect much earlier cable failures or potential faults and drive through technology getting out and replacing those more in a predicted manner than responsive manner because of failure. So technology is a key part of us in our organization going forward. As we look at the Smart Grid and the Smart Grid composition; even though it shows technology and this maybe batteries, maybe charging stations, maybe the technology that helps energize the grid in the future. But technologies are playing in each of these components not only today, but going forward as we deploy technology in our business.
Renewable, not a surprise again you got the opportunity to be here today and you will be here for the next few days. One thing that Arizona has is plenty of sunshine, and as we all know it makes perfect sense for us to be a leader in being an organization pushing forward in solar. You can see how we stack up with other parts of the world and at lunch we had a discussion about what the potential was for PSEGs solar facilities right now, the things they have [ pole mounted] and how those things withstood storms. And for us we have a very different characteristic with the desert and our ability to place solar in much more tactical as well as strategic locations and being able to use that in support of our overall strategy going forward.
We are working collaboratively with the solar industry, with our regulators and what the legislators on renewable and how we go forward in our renewable space. Arizona Sun is a program that we've done much with and something we're very happy with results. We have been very aggressive over the last two years with development and placement of large scale solar, utilities owned solar.
As you can see, this year, we will have Chino Valley, which we’ve just about completed a testing on and will go in to full scale operation here we expect next week. So you can see that’s a first 6970 megawatts of generation will be in operation here by the end of November. We're working on Foothills and hydro facilities and you can see the timing on those.
Arizona Sun project has been significant project for us, and it's been our first real step in our first real adventure in to getting in to not adventure, sometime you may feel like that but real venture in to larger scale solar and how we own and operate solar going forward.
And there's been a lot of lessons that we’ve learned through this and when we consider that the entire projects roughly a $1 billion investment that we anticipate to complete by 2014, 200 megawatts of solar that we own and operate. One other things that’s given us, it's given us flexibility to place our facilities, strategically in varying areas of the state to maximize or minimize disruption; and when you do have cover or other storms or for Arizona haboobs that occasionally come through.
So our diversity of where we place solar is critical of what we've done in Arizona Sun, and to this point in time, with the facilities we've had in operation, we've very little diminishment of our solar resources with cloud cover or dust storms or other acts of nature that we tend to have here in Arizona. We have other projects, as I said, underway and they are on track and we do believe by the end of next year start up to ‘14 we’ll be in good position to wrap up this program.
Solana, this has been talked about in the past. Solana is the salt storage project. It’s a steam plant and using solar energy to be able to store the energy. So during the - although it’s gone very well, they are starting the testing early next year. We have been very happy with their progress in this particular area. This is going to be an interesting project, because it’s a first US major project of this size and with this type of storage capability.
We hope to learn a lot by this project and help Solana operates; because I think there are going to be some real lessons to be learned in operating these type of facilities. But again they are the type of facilities that you [float] them with battery storage to be the type of facilities in the future in the renewable space. So we expect to gain a lot of information through this operation.
It does create jobs for Arizona; so it’s another good thing that comes out of it, good by product for the State and Abengoa so far has been a very good partner in our dealings with them as far as project management and actual constructions of this facility. We are looking forward to it becoming operational.
So next is our energy renewable resource, energy efficiency programs. You see where we are at today, from a requirement standpoint, we are meeting a lot of commitments with renewable with energy efficiency and distributive. We met 244 megawatts with our own solar is where we expect to be by 2015, we expect their party ownership to be about 660 megawatts, and lastly distributed energy we expect to be about 540 megawatts all by the year 2015.
So we have made quite of bit of progress in this area, and it’s been a program that has been well received by our customers and they have been very active in all of these varying areas. Jeff, will talk a little bit, later one he talks in the regulatory comments more specifically about some of the ins and outs of the program and where we are today with some of the funding going forward in this particular programs.
Technology being driven by our Smart Grid and being able to look much more distributor generation, how does that operate, what’s the impact of invertors on the system, what do we change from the distribution network or how we operate distribution network to large scale solar, how do we change, how (inaudible) his organization looks at, real time forecast and what do they do as far as having rolling spinning reserves and other resources available.
So as we continue to evolve in these areas which are variable resources, it’s very important for us that technology keep up, so we have more productive tools on the impacts, because we have well over 1000 megawatts on the system by 2015. So it’s going to important we understand the impacts of the operations of those particular facilities, and I go back to one of my earlier point’s diversity and where and how these things are put in places critical to our performance going forward.
Energy generation which is our technology area, it’s a very busy slide, as you can see, but nonetheless this is what this industry is facing today in many areas, and its one I think that we are very progressive and have been very aggressive in. I think we have done a very good job of giving out in front of technologies. We were one of the early adopters of AMI, in figuring out what to do with AMI beyond the customer interface portion of AMI; how do we use it in our operational side of our business.
Smart Grid, again I think we were a first mover or one of the early movers in putting Smart Grid technology in place whether it be false identification, self healing technology, the ability to use it for predictive maintenance and predictive tooling, its been a core part of our business to the point where we've elevated that business internal to us and pull it out as a direct report to me where part of that resided in our resource management area.
So the visibility of this particular area of our business is extremely important to our future and we understand, we cannot necessarily be the experience and been able to doing some pilots early adoption of some technologies that we think have long term benefits to our operations. So when you look at whether it be generation in our schools and government programs, community power pilot that we are going to be doing, DOE, penetration solar study and right on the line through transmission, substation distribution and customers. So each leg of this, this is something that we feel very strongly about is part of our future and is something that we are working to continue to drive organizationally.
Part of that is the education process of our employees as well as our management team and our staff because as technology evolves the skill sets of yesterday may not be the same skill sets of tomorrow. So we are looking at it from the perspective also of the talent that we have internal to our organization from a perspective of redeployment, retraining and the things we will need to do for the future.
This is the area and I can say that other than, well I guess, it is number one; this is the area that every engineer and every person in the company wants to get into. It’s the fun stop, it’s the stop that’s cutting edge and they can really see that it'll help drive our future and what happens in the future of utility integration and usage of generation in combination with not only the traditional, but the new technologies coming in today. I apologize for that upfront Randy, because I know you believe everybody goes there, but there are other places that they would like to do.
Transmission, obviously with the renewable strength that we have and what we are trying to do on renewables; we have to be very strategic in thought and where we want to place it and what transmission requirements we have; its hard to see here, but you can see this stretch here, this is new transmission that we will have in place by 2017. Two-fold really, at the end of the day, it comes around to two things, one is to be able to place it in locations that support out and bring renewables to market, wherever they may end up being, diversifies our risk and we need to be able to make sure that we can diversify our risk.
So our transmission plan which you see there by those dotted lines, its $0.5 billion roughly and it’s about 270 miles in new lines that would be going in place. And we believe strongly in the needs and what we are doing in here and we had looked at this very hard and how we will use this not only today, but as we look forward into the future.
A little bit on performance, because at the end of the day, as I started, it comes down to the organization and being able to perform, whether its starts with safety, but it moves its way through the organization and reflects itself in other areas. As you can see and [SAAFFI] one of the key indicators that are used in energy delivery business in the industry, we’re in top quartile, we sit very near at the top decile performance; its been a strength of our organization and it coincides with my earlier comment, you look at 2008, you can remember back that safety graph, you can see that changes that are taking place with APS along that same timeline.
So again those behaviors, the fundamentals, the things that you get people to engage with, to become safer, reflect back in the operations in other areas such as this; ahead of our delivery business Daniel Froetscher has done a great job of engaging his folks, the responsiveness, as Don alluded to though, the like of where we are at in New York, one little just story about that, after the first few days, being in New York, one of the things we got call back from our folks was that they were just amazed at our safety and the safety of what they see in other businesses if you will. They were very proud of their performance in safety and their peers asked a lot of questions, why do you guys do this, how do you it; is this part of your normal business and it was a big, it helped us because as management’s sometimes very hard to show for them that they can bring back to our business and say, other’s noted our performance and this is what they say and we become kind of their benchmark, which is what we all aspire to be and it reflects itself when you see here.
The fossil fleet, our performance in fossil fleet has been good. Majority of our assets are coal facilities, are 60 years old, performance for 60-year old units, capacity factor wise has been extremely good. It's been at or near top-quartile in capacity factor. We shifted and we started looking at our commercial availability or the equivalent availability factor. Are the units available and basically that’s something the measurements that we're using. And as you can see, from the commercial side as well as the AF, we're maintaining good 90% performance overall across our fleet of availability. We started to make some significant investments as we look at Four Corners four and five and they like continuing to operate for the next 25 to 30 plus years.
As we look at those investments, we are investing for the long-term through programs we put in place as well as capital investment. This past summer, we had one of our highest peak demand days and the last six years at APS and the fleet performed flawlessly and at the end of the day it’s really what we want. Days like today, it’s nice to be available, but it’s not that important when your load is at 3,000 megawatts and days when its 7,000 plus that’s when you need to be there and the fossil fleet was there this summer during those days that we needed them the most.
So the performance has continued to improve this area; we are doing a lot with our equipment, because of the age of the equipment to get out in front of some of some of the challenges and issue in the future, but I think we have made significant headway and we continue to see this progress of again continue to improve the performance of these plants.
This emissions rule, there are rules in place; we have until 2015 to comply at our coal facilities, actually we just got an extension at Cholla to take one year longer because of a coinciding BART rule, Best Available Retrofit Technology which is for NOx, which is going through the EPA now there is a draft flip out that’s in contention with the SIP, State Implementation Plan that was add. So till that was finalized there was a conflict on the technology that we’ve had to put on Cholla, so we were able to get another year for implementation from the State which is good.
Four Corners will go forward with implementation of maths; on units four and five we already have the baghouses, so we don't see much that we have to do and we have to put an absorbing injection system some sort of chemical control, but no major technology upgrades for mercury, the site is for regional haze we’ll be putting SCRs on as we have said what we would do is part of our fit for Four Corners four and five.
So Navajo generating station which will is also part on our end is also situated well for the mercury rule. So only place where we do not have the right technology in place for mercury is Cholla Unit 2; we invested in Cholla 1 and 3, excuse me Cholla 3 two years ago and completed the upgraded of a baghouse, we were in line to put the baghouse on Unit 2 and then we had original haze rule come out, we said wait, we’ll stop and see what happens with those regional haze rule before we go forward and put the technology on. We are situated and ready to go, when we decide, but until we get a final rule on BART, we’ll hold off and put going forward with upgrading Cholla 2.
Regional Haze, as I briefly touched on, we have our BART federal implementation plan for the Units 4 and 5 at Four Corners. We have one or two choices to make and our choice has been made by July of next acquisition with Southern Cal Edison and we have until 2018 to upgrade units four and five. We owe the EPA response by July of our, which alternative we are going to go down.
316(b), short of it is, corn water intake structures and its infringement rule for a product life; it has been worked through the EPA. This had been a multi-year issue industry wide and what would have to be done based on what the final rule. So this is something that hasn’t come out yet, we don’t know where this is going to go, the industry is coalesced on a position and working aggressively with the EPA to see if we can come up with some sort of solution with 316B. Long and short of it, it comes down to cooling towers versus no cooling towers or some other sort of mechanism on your circulating systems for being able to stop.
And then lastly is ash rule, the CCR rule as a result of the [TBA] a few years back. Again it has not been decided on what the final ruling is, very simply put it gets ruled as hazardous, its going to be one set of parameters we are to follow with our ash plans and our ash management, the dry versus wet handling systems. If it’s treated as non-hazardous, much cheaper, much more easy to deal with, our perspective is that's the path it will take but again until the rules are finalized we are not sure what the ultimate outcome will be of the CCR rules.
So long and short, I'm extremely happy with the direction operation is going. I think we continue to improve and I think one of the best things about the operation side of the business is I think we are well situated both from a generation portfolio, from our transmission and distribution system, our technology and our ability to manage resources we are situated from not only today but well into the future. This is the good chart; this is the awards section, sustainability. It is part of our vision and mission statements. We are recognized as one of the most sustainable businesses, utility or otherwise in the country. Again, something we are very proud of because we do spend much of our time thinking about sustainability and how do we provide a sustainable energy future for Arizona.
Okay with that, I'll turn it over to Randy Edington, Executive Vice President of Nuclear Operations. Thank you.
Hey good afternoon. I had a chance to talk, I came here in 2007, January 2007 at Arizona and talked to about four of you I think in 2008. Mark said I'm going to build on this when I talked about at that time frame and we are continuing on that path and we will go forward. Actually, what I really want to do Mark actually set it up, is I am hopefully very boring, nuclear power brand boring is a good thing right.
He gets to talk about all the exciting stuff and I going to talk about the plants that's running well, high performance, sustainable, predictable level and do it for a long-term which is what our real objective is. Ms. Maria Lacal in the back, I want to introduce her again and she is an engineer and licensed operator came out of Florida, she also joined us in 2007 and I know its kind of important as we were able to recruit some very talented people and we still have those people today because they like what we are doing and what we are building here and a key part in keeping those sustain organization (inaudible) from New Orleans to New York to Nebraska and now I'm focusing on long-term sustainable. I still do a lot of work with the industry in many areas.
I'm the Chairman of the Executive Advisor Group visited all 25 (inaudible) officers. I have been for three years. I'm the Chairman of Pressurized Water Operating Group which is 69 US reactors, a 150 international. I'm the Executive sponsor for the work force development for the industry and I'm on the Fukushima Steering Committee. So I do a lot of work in the industry very much aware of it and do a lot of work with any plants that are not running well.
So we are focusing on Palo Verde. I am going to hit real quick business plans, performance trends, the capital improvements we’ve done, a little bit on Fukushima and then where we are at from going forward. So here is the site itself, a unique site, 4,000 megawatts. It's the largest generating sites within the US, largest nuclear station in the US of course, a generation station of any kind and what you are seeing in here is the evaporation ponds and we finished our construction there.
There has been a major upgrade. We will, when those ponds are completed which will be in the next two years, we can operate for 60 plus years with a few adjustments go after  years of operation at this site because of that, and say 3 units and then water rec, and then freshwater over here. So coming out of different angle, this is our water rec. So we have three nuclear sites. We have freshwater, we meet these extra lives in order to give us that extra capacity for maintenance. Also it's 15 days of 100% power all three units operation in December and in a situation, it would be much more than a year with a freshwater, not (inaudible) throughout the site and in many other cases besides here.
So that’s one area that we looked at. The water rec facility, we own our own pipeline. We get waste water from the five cities in Phoenix, bring them in and they clean it, we clean it more and we put it in here. It is actually (inaudible). If you look out here, this is our dry-cask area. We’re in dry-cask business. We have those capacity there for over 60 years of full operation, all three units can be put there and we have room for expansion if you wanted to go more and you see the three units and ultimate heat sinks, cooling tires, which we will talk a little bit about that.
This is our business plan and this looks very similar to what you saw in 2008 and that the very core part of our business the red blocks has a change, we are still (inaudible) the green and yellow blocks gives us stability to like adjustments or fine tune areas and it’s a very strong plan, we have been executing it for five years now and we feel like we are well on our way with all kinds of variance very high performance now.
The yellow does represent transition you would think 2008 we cleared confirmatory action letter or years later and we are completing our transition (inaudible) a good running plant again I get to work with lots of them, is your higher numbers of return well before you had to keep focusing very hard on your fundamentals and your core business and your culture and solidify that completely and we are very, very close to finishing that out and make a formal transition now or even though our high numbers returned years ago, a couple of years ago, we are continuing to focus on that improvement.
Because of the goals that we have established and again this should look familiar to most of you who are here and in 2007 we established long-term goals of where we wouldn’t be in 2013. As of today, we are meeting most of these goals and as of 2013 we expect to have movement and we are well on path for. The only ones that have changed even though we evaluate them each year it’s a capacity, we started at 88%, we went to 90%, we are now at 92% and we feel like we can consistently deliver 92% and above capacity. So this site as a site generation throughout. One of them that we have not made yet is we are added getting that performance at those levels, with these past goals and we should approach that number this year that $20 per megawatt is pure O&M, it’s all O&M, it’s ING, it’s all kinds of O&M, it’s not fuel, it’s not capital, that’s a separate, we do track all those, that’s what we set as our target.
We will be within a few sense about this year and we expect to break that next year set for our long-term goals in 2013. So most of these goals are either met or closed and well executed and well on track for finish on 2013 again we are established even in 2007 than we want to be at this time.
This represents and this is our business plan, we just talked about. We have a ten year capital improvement plan laid out, so all three units are water rec, its all laid out for ten years, we know exactly what we want to work and we go to strategic plan which is based on this area, end of license which for this side we have been operating 25 years and 15 more years on the original license, we do have license renewal, we got it actually about a few weeks, after Fukushima happened. End of license, so we will go for another 20 years, we’ll have the license renewals, we are good for 60 and we preserve the option for beyond 60, so we actually or might consider that we keep the capability to go beyond 60 and we are looking at those.
And then we go down and look at our risk areas and we have risk plans all laid down on everyone of those and have mitigated with our ideas and we out write this plan every year in (inaudible). One thing that’s a little difference when we talk last time as we have now, that you prior heard of the USA alliance or STARS Alliance. The STARS Alliance is split out, it is now its all LOC, it just happened this August. The headquarter is in Phoenix that many vendors are now establishing places here in Phoenix and to better support with the junior ecologist and four year ecologist were out and various lenders were establishing locations here at Phoenix in order to support the STARS Alliance and the other western plant but this is the STARS Alliance, and so these are the plants. So that LLC was formed this year and we are continuing to harden that. As our metrics, I could show you, let me show you just the one that probably makes the biggest difference, how many megawatts are we putting at. This site is currently putting out more megawatts and has been for these last two years and expected to do it again this year, than its ever produced in its life. And there is room for more upgrades, not a lot more room but there's more room for performance and there's more room for upgrades.
So at this time it is [producing] record capacity. We expect a record this year. In fact there's $32 million. We think we are going to have to raise that bar because we think we can right around the $32 million regularly, and with a little bit room for outside. This kind of represents this green band of what I'm talking about predictable, sustainable. So we are trying to stay in certain bands of performance and that's what we focus on is how do I ensure that I get that high performance year in and year out. So that's where we are at and that kind of represents most of the indicators that we have. This is industrial safety, several marks that I just fully agree with it.
If you get your safety culture right, it carries over and everything else you are doing. When we talk safety in nuclear, we talk nuclear safety, industrial safety, radiological safety and safety culture. This is an industrial safety slide, I'm going to use it because its ones that we are still working with pretty aggressively. We actually have the record for all, for those on all three units now, and historically we are in the top deciles for three units, three separate units.
We have the lowest, we've worked on our risk management area and we have some of the best in the industry, and it’s an area that we are continuing to focus on. So we use those behaviors, but here's an industrial safety one and these numbers, of course you know the nuclear industry is a very high performing industry and these are very, very tight industry. If you compare this to any other industry, you would already be well past the top [decile], and you can see how we've been improving, but the industry was getting better and then we are finally getting over and we are penetrating into the top half of the industry. So we are getting into the top half of the industry and all our indicators and fundamentally where we are right now we are either in the third indicator going to second, or in the second, going to first. So most of our indicators have moved into those ranges and we still have some upsides and more room to go and more opportunity there.
This is cost and again this is the industry average. This is industry median. This is what I talked to you in 2008, and said I think we are thinking out this year, we should be able to come down from here on. We did. This is where we project to be this year, which will be approaching the top quartile in here and that's for this year, and then we feel that we can reduce or flatten cost for another few years, even though the industry prices will probably go up in this area. So we think we have a few more years of reduction or flat costs, while the industry moves up.
Now regarding major capital spend. Again we talked about a lot of these before where we were either doing them or planning them, and we have done every one of these projects, and basically any major replacement component has been replaced. New steam generators, new heads, new rapid refueling, new routers, with spare parts. The only one we didn't do is a cooling tower replacement which we are looking at the time because when we got into it and worked it aggressively, put some modifications in and we don't have to replace them. So we have no intention of replacing those cooling towers. We are going to maintain them for at least 15 or 20 more years
I think for the next 35 years. But we have the option to replacing them all 15-20 years from now. So we thought we were going to replacement them right away, we're not because we've been able to get in there and maintain them, and though it’s not new, it would be a $400 million, $500 million project, not some of the numbers you hear as some of the other plants because they are putting different ones in. We're putting in replacements. But right now we don’t need them.
Same generators all got replaced. The heads all got replaced. The rapid refueling and all of this material got replaced. So we now, instead of 26 lifts to get all that out, to refuel we do for, they are shielded, they have the safety mechanisms in them built in. So they are done very, some say it’s off two days of critical past on the outages and they are much safer to do.
These are transformers, which are in the process of being replaced. We have two spare ones. You probably heard stories of people losing transformers. So we keep one in overhaul, one on spare and we systematically replacing all rotors, and the turbine generators have been replaced. Out here is a cooling tower, and what we did is we put upgraded the valves and we can now take a set of cooling towers off on line, at reduced power, or we can extend finishing outage (inaudible) it up, and do work on that and if we had to, we will shut the valves and replace the cooling tower with out coming offline. So we will build a more line tower (inaudible).
Energy Education Center. Why would I have that up there? Frankly, this is as a key, it is the public involvement and engagement. This center was actually finishing and not quite turned over when Fukushima happened. We went ahead and landed and the public involvement and engagement, this center was actually finishing and not quite turned over when Fukushima happened. We went ahead and landed and dealt with the public in detail there, brought lots of people in. This center is set up to educate the public; it is shared with the local communities so there is auditoriums and all. So various schools and businesses can use it and have. There are exhibits that are being established in there to help continue to teach the public and we have a very close knit group that is very supportive of Palo Verde across in all of Arizona with especially in the Phoenix area because they get extra exposure to this and discussions of this all the time.
Talk a minute about Fukushima. As I said I am on the Fukushima Steering Committee. From the moment that Fukushima happened all 26 at that time now 25 chief nuclear officer were on the phone, we talked daily. We still talk weekly. There is a Fukushima Steering Committee that meets about every three weeks now that we continue to look at make sure we understand it and that we continue to insist that this industry and the US moves ahead and takes account on this and imply any lessons learnt. This is our event room, it was established and still is established and we keep a core team because we are focusing on caving a leadership role in this area. There is lot of reason for that, it sounds pure business, but make sure we really understand and get involve in that area.
If you look at Fukushima for a minute, it was a natural event, it was a seismic that I don't want to damage the plant, it was the Tsunami. So as an industry we are looking at all the natural events and know that how we are focusing on it. I won't take for a minute and talk about Palo Verde. If I look at Palo Verde here is a plant at Fukushima and here Palo Verde. We are as far apart as you can be and every other plants that are in between. We don't rest on that we know that, but we are still using the license in the plant.
If you look at natural events, here is Palo Verde and here is rest of the world. I am not sure what natural event and I have looked hard can be a challenge to these three units. We don't have hurricanes, we don't have tsunamis, we don't have flooding. We do get rain every once a while, but it’s usually over there, it’s not right where I am at. It’s we have even looked at dust storms and we have been gone over Saudi Arabia to study them, because they have worked dust storms away yet and see how the (inaudible) equipment now. We do have seismically the closest thing and this is Palo Verde and this is every earth quake is ever happened in Arizona that we know about. You know it’s not very many around here which is why the site was picked in the first place.
So from a natural event area Palo Verde is in a pretty good shape, but we are still very actively involved in prior lessons learned throughout the industry. The other thing that we have at Palo Verde is we have a fire team. In fact almost any big plant, Southern California has benchmarked this local, well and planned some benchmarked as are coming and looking at it because this clearly becomes your margin workers. We actually designed trucks for all the equipment. So I can move that truck to any area, have three of them that can go to any area and these areas have been trained dramatically. We have regional centers that which one of them will go in Phoenix that just got approved.
So there will be one in Memphis, there will be one in Phoenix and we have 65 stations, all 65 stations’ equipment is going to be coordinated for their station and then the [EMPO] emergency response center or now I'll call industry response center has been upgraded and is being upgraded so that you make one call to EMPO, you get whatever you need from 65 stations, so the coordination of the industry has always been very strong. We maybe competitive utilities but we are united to nuclear force so the coordination of the industry is just continues the tighten down and strengthen on that and now we have that ability to share even better than we ever have done.
So those are kind of where we are at Fukushima, I know you all have heard a lot about it for purpose of today in particular, just wanted to point out where Palo Verde’s at; we are in about as good a shape as we can get and we do imply every lessons learned and we are not ignoring it, but its not where we are at.
Then there's the economic aspects. We had an economic study done here. Palo Verde is worth $1.8 billion annually, every year for the economy of Arizona. That’s not counting electricity. That’s just normal economic study, cyclical [air force] base is $2.1 billion. The difference is there is a community now knows that. We've talked to them, we've shared it, we've worked with a lot of the industry leaders and they are very much interested in us being around, they are very supportive, they actually would like for us to do the extra 20 years. So we have a very pro business and pro nuclear.
The last thing I will end up with is that this is our current licenses. We have been renewed to these days roughly another 35 years and we are focusing on that, so we've got 25 years operation. We are generating more than we've ever generated and we've got 35 more years to continue to focus on that and then our objective is to be boring for the next 35 years, you’ll read about us in the newspapers and that we are in a predictable goal and we are doing that very deliberately and very rigorously looking at how to make sure we are in that area.
And we want to preserve the option for additional 20 years working with the public and awareness and educating it and we are actually having a lot of efforts. We do have everything we need from water contracts to major components change. We still will continuously upgrade equipment as we go to that timeframe, but that's the story on Palo Verde at this time. It has improved dramatically. It’s operated within a certain band and it still has upside.
With that, I believe we are going to take a break and we are going to do it for 15 minutes, right. So 15 minutes from now, break’s over. You all have a good day.
Thank you all for getting back timely. At this point, I will turn the program over to Jeff Guldner. Thanks.
Alright, good afternoon everyone. I am going to spend a few minutes talking about our regulatory journey from early 2008 through the last rate case settlement and then I’ll look at where we're going in the future. And so that will touch on just for grounding a little bit of our regulatory landscape for background, talk a little bit about what we think of as a strategic framework around regulatory, what we have put together, what we're focused on, highlight some goals and initiatives both at Arizona Corporation Commission and also at the Federal Energy from regulated rate base.
We’ve got a pretty meaningful transmission business. So the ACC sets the generation and distribution rates. The Federal Energy Regulatory Commission sets the transmission rates, that’s in orange, but what's important to note is that even though we're unbundled, we don’t have an RTO in Arizona and so residential customers still pay the majority of our transmission rates and they do that through a transmission cost adjustor that’s at the retail level and one of the things, and we will talk about a little bit more, but one other things we really focused on in our last case is to try to synchronize that so that we can get the wholesale rate making and a retail rate making in line we're able to do that I think in the last case.
Our ACC rates were set on the settlement agreement on July 1st. Should you all know that, on a test year ending in 2010, we will talk about why you’ve got to really look at that, historical test here in a little bit different perspective in Arizona’s current environment and then we're on formula rates and so we update those formula rates on June 1st of every year, we updated in last June 1, 2012, and you can see again the details of those rates.
So when you think about a regulatory framework, one of the things we have worked very hard on since 2008 is really focusing on creating a constructive regulatory environment. What we've seen is that we can come up with creative solutions to issues that if you litigate will end up putting in front of a judge sort of binary choice and typically binary choices don’t work well for anybody. And when we have been working on our last two settlement cases, I think we all concluded is a group of stakeholders that we are better to try to find creative solutions to some of those challenges and as we have done that, it’s started with making sure we have that environment sets so that we can have those collaborative discussions.
Interveners in our rate case that are representing customer groups, interveners that are representing issue oriented groups, but getting that engagement early, I will show you a little bit on how that worked in our last case and some improvements we made. And then developing from that some constructive relationships that we can start kind of do some problem solving together and come up with things that work for both of our benefits and we ground that and we have put a lot of emphasis on regulatory compliance in making sure we have got a strong compliance culture.
We think that that’s an important price of admission into the regulatory arena as shown and we do care about the regulations, we spend a lot of time complying on the regulations, if you follow our comments made with for example the Federal Energy Regulatory Commission, we tend to focus on compliance related issues to make sure the rules are clear, so that we can follow them. We are not necessarily going to try to engage in policy issues that might be more significant for AEP or Duke, but we are going to engage in areas where we have a particular expertise and a lot of times that comes around to compliance and we think that creates the margin that we really to have this constructive regulatory relationship.
And so just to give you some idea of how that worked out, so you heard the 2010 test year in our rate case we knew coming out of that 2008, 2009 case that one of the things we needed to improve on was working our rate cases through the regulatory cycle in less than 20 months and typically if you go back and you look at almost any major utility in Arizona, you see these rate cases take between 18 and 24 months, by the time you get to the end of the case, you are ready to file another case.
And so we worked on some process changes and you can see when we came out of the 2008, 2009 case, we had a period of time before we can start our next rate case. We started probably a month or so after that case concluded in the technical conferences that we led prior to filing that case, got feedback from those parties and adjusted our case to address some of that feedback and by the time we were actually moving into the rate case most of the folks, I don't think anyone was surprised with what we filed, and we hit the ground, I think with a very constructive start with that team.
We also looked at process improvements that we could make and identified some of the gaps that we are seeing before; what typically happened in Arizona case is we answered typically between 2,000 and 3,000 data requests on just a variety of different issues over the course of rate case. And what would typically happen as you file a case, three months would go by and nothing would happened, consultants would get engaged and then you would get a 700 question data request and you can't answer all that in time.
We worked with the stakeholders and so the questions are pretty similar, let's put them all together ahead of time. We will file the discovery answers with our initial filing. You can engage, you’ll know what our filing is, you know when it’s coming. You can go out and engage consultants before that so that when our filing comes in, you’ll have consultants on staff and ready to start reviewing the case.
And we think that that process improvement helped meaningfully reduce the amount of rate case lag but it really required that collaborative environment for parties to say I'm willing to take up on it and I'm willing to listen to you and I'm willing to hear what you have to say and how we can make this process better.
And so when you look at the framework in Arizona, these are some things that I think is helpful to consider because again it’s some times easy just there your historical test period or future looking test period and its not quite as black and white as that.
One of the themes that we knew we were dealing with is regulatory lag and most of that regulatory lag being introduced by a historical test year. In the last rate case settlement, we were able to recover post test year plan through still look at it and say I know what that is, I can go on, I can touch it and I can go and see it and so it looks a lot like historical plan and so it worked for them and we felt like it was a good risk mitigation because if you do forward test years often times you are projecting data and you get into an argument about whether your projections are accurate and what's economy going to do and so there are certainly risks in how you litigate it for a test year rate case and this seems like a very good solution that brought us fairly current with plan investment, and our rate cases for years have also had pro forma adjustment to expense items.
And so when we can show a known and measurable change to expenses, we are able to pro forma that so that when rates take effect they are reflecting their current costs both up and down and so that's really helped address what you might think of as a historical test year into much more current period rate case.
We have had a history of critical regulatory relationships; we've worked again very hard to enhance our commission and our stakeholder engagement and turned those into constructive relationships. We had a lot of stakeholders that intervene in our rate cases, that's probably not uncommon in most parts of the country but we get them. There's very limited, there's a limited bar to intervention so its very easy to intervene in a rate case in Arizona and so we do get a wide spectrum of parties and just being able to create that environment where they can participate in discussions and in discovery and in creative problem solving has been helpful in letting us navigate this path.
And then our four year stay-out which I will talk about towards the end of the presentation, really the theme around that was to say that if we are going to have upward rate pressure and we know that's happening around the country, one of the things that we felt customers benefit from more than a historical period where you are raising rates in lumpy amounts is more rate gradualism, so that between that the company is not earning its return and customers aren't able to adapt to some of those changes.
And so what you will see in our stay-out period is yes we do have a base rate stay-out period but we are very clearly the stakeholders of our objective to improve our earned returns, narrow the gap between authorized and the earned return and to do that we had to have mechanisms that could address earnings erosion, that would occur, our earned return erosion that would occur between rate cases and so those mechanisms were a critical part of the settlement agreement itself.
And so again, we started with our historical test year but you can see in the first of those adjustments was really picking up post test year plant for 15 months, kept generally that historical test year framework but it got us more current with planned investments, adjusters that recover revenue requirements, Arizona Sun is probably the best example of one where we are picking up utility plant, utility scale solar that's meeting the Arizona Renewable Energy Standards and we are picking the revenue requirement up through the RES adjustor, historically that had been an expense adjustor that that picked up just expense. This was a significant shift to say, lets start picking up some revenue requirement and we did the same thing with the environmental EIS, Environmental Improvement Surcharge.
In the past, it's not a lot of money but in the past, what we would do is we would charge about $5 million through rates, take the $5 million in and book it to Kayak, a contribution made in construction, making just a change to say lets call that a revenue requirement adjustor. You can now support $25 million ourselves. So you can support more capital investment because you are not putting it all in as a contribution and we're able to get a little bit earnings growth from that as well as being able to pick up more plant in that adjustor. So we thought without changing rates, customers pay the same amount today. We're able to support more plant investments. So that was one of the creative resolutions we are able to do in this case.
We did a little bit with deferrals because we recognize that in trying to balance that four stay-out they were really costs that were out of our control, property tax rates for example. We can’t really do much about what happen. We look further risk mitigation that we could do and then put those safety nets in place and the same with Four Corners. We knew that coming online. We've had some significant capital cost, got a deferral order for that and then in the next column, worked on a potential adjustment to that once it closes. So the case has been held open to address the Four Corners acquisition.
The last mechanism in fix cost recovery, that’s clearly a focus that we have is working on improved fix. We still get a significant amount of our variable fixed cost, recovered through variable rates and so we've been working with as per decoupling mechanism. We got significant pushback from the consumer advocate and from AARP and so we started again working in settlement negotiations to see what was the solution that the parties could agree to and actually came up with I think a very creative solution where we moved to a mechanism that’s just tied to the loss fixed cost. So it doesn’t pick up weather, it doesn’t pick up economic changes, but it does pick up significant amount of the lost fixed cost associated with investments in renewable energy, distributed energy and in energy efficiency.
And then for customers who just said I don’t want to do that. I do not want to pay that we worked on an (inaudible) option so that a customer says I don’t want the adjustor, but I understand the issue, I will go ahead and have a higher basic service charge. So we will pick the fixed cost erosion up to a little bit higher basic service charge and that was a resolution that works and it gives customer choice and so AARP was able to sign up for that. And we thought it was a significant advantage to have AARP and our consumer advocate supporting our settlement agreement as we went before the commission.
So those are some examples of things that we can do to address what you might think of again as a historical formula rate increases with our retail rates. We have a retail cost adjustor but what happened prior to this settlement agreement is that it would go through essentially a separate proceeding at the commission, so we would raise rates at through FERC formula rate on June 1. We would have an application and that the commission to change our adjustor and we might see two months or so of lag through the summer before the state commission would raise the adjustor and there is not a balancing account associated with that.
And so what we did is the parties agreed to change that to look more like our retail fuel adjustor which is that we file all the information ahead of time and then the parties and staff are free to suspend the application if there is something they don’t like, but as you have seen with the history of our fuel adjustor what happens is we file it, we file accurate information and then it becomes effective on the date that the wholesale rates adjust.
So there is the ability to suspend, but without any problem in the rate, it just would go into effect and so that will synchronize our retail and our wholesale cost recovery much better than we were seeing in the past. We are focused on some positive development areas at FERC. I think on transmission, we don't see the contentious you see in some places around the ROEs and we don't have a lot of incentive rates and any incentive rates in our FERC formula.
I think we are more focused on urging the commission to recognize the important value of transmission and looking for some improvements like putting construction work in progress and in our standard rate making practices putting (inaudible) and standard rate making practices and really not looking as much of incentive rates.
FERC order 1,000 compliance is going to be a significant regulatory issue for us to follow just because we are not in a RTO and see you got a budget folks that are outside regional transmission organizations that are putting together plans on how to do that but that's an ongoing process, and then just recently the FERC has started looking at performance metrics, they have done that for RTOs, they are also are going to be looking at it in non-RTO corners, the step increase mechanism where the best case is held open to address that and when we file an application for that, we will obviously work with staff and the parties to stream on that again as much as we can somewhat we did with the rate case.
We will be prepared to file if we need to a rate case in middle of 2015 and do the same processes to work to get that decision by the middle of 2016. We will continue to work with stakeholders IRP or Integrated Planning Process is working through the commission right now, we worked with focus on that and on the federal level still working actively on order 1,000 compliance.
One of the things that has been helpful to us and we don't loose sight off and spend a lot of time thinking about trying to put constructive plans together is how do we maintain strong customer satisfaction. We think that that's important and when we go into our regulators and talk about the need to raise prices and what's driving it, why we are doing it, why we need to have it, having a background that we've been able to have in the past is certainly helpful and we need to maintain that.
We are right now third of the large IOUs on residential customer satisfaction. We've spent a lot of time thinking about what we could do to improve that and I think utilities around the country are doing that but that's helpful to us and something that we spend a fair amount of time with. So when you look through that four years stay-out provision, its important to understand that the structure that's in there was not, it didn't just happen, it didn't come together in a litigated case with random things that pulled in the decision. This was really carefully thought out by all the parties to that case as a way that would help us support that length of the stay-out, address issues that were beyond our control, customers are going to benefit for that.
So that's an incentive that works both ways, it helps our shareholders during the stay-out period, and it benefits customers over the long term, those are the type of synergies that we like to look to. But we've really put together a good set of mechanisms that will help support that stay-out period whether it’s lost fixed cost recovery mechanism or property tax deferrals. We knew that the 90-10 sharing and fuel adjuster would make it impossible to stay-out through that period of time. So that was eliminated like others on utilities now we have a straight pass through of fuel costs, looking at forward-looking improvements to things like the environmental surcharge and then addressing the Four Corners transaction all support that stay-out provision.
So we think that that continues to show positive regulatory developments, and we will be remaining focused on constructive ongoing relationships, we've got a lot of change that we know is coming on the industry, we have changed that is not going to leave us alone and we want to make sure we've got a good platform to address those challenges and that change with our regulators. And with that I will turn it over to Jim.
Thank you Jeff and good afternoon everyone. I have seen most of you over the last year and so the presentation is essentially consistent with that. I think there's three new elements in here that we will highlight as we go through. First of all, we are going to talk a little bit more about the economy with a few additional slides. We have a little bit more on the cost initiative that's been alluded to and then we do have a dividend growth projection in here as well.
So you see the agenda. We want to start really with just a review of the third quarter quickly, margin at $0.21 versus $2.24 with a big impact being cooler weather in this year’s third quarter. The discontinued, the GAAP is impacted by a 10% gain on the sale of our energy services assets last year. All of my comments going forward again will be focused on ongoing earnings. So we start with the deconstruction of the changes quarter-to-quarter. You see higher gross margin $0.16, I will talk a little bit more about that on the next slide.
Lower infrastructure related costs, $0.04, that’s really lower interest, lower depreciation and amortization. Effective July 1, depreciation was lower due to the 20-year life extension for Palo Verde and we partially offset by higher property tax with net of the deferral all other items were $0.04 and the OM were down $0.10 higher, really three things and increase employee benefit cost. We had the pension deferral in the last rate cash which we began to defer July 1. That was an impact. And then we had higher fossil maintenance cost this year versus last year. That was planned maintenance, keep in mind our schedules vary year-to-year and we will see some variations from time to time.
O&M exclude the (inaudible) and energy efficiency out of O&M as are also in revenue and offset. Absence of certain items prior year effected our effective tax rate. Really, two items, we don’t have the federal research and experimentation credit this year, it expired at end of the year. although we do expect Congress to extend that by the end of the year and then tax benefits of a non-cash turbine contribution last year as well.
Fuel base rate increase also is the beginning of the LFCR amortization and then we had to the offset an absence of revenue under Schedule 3, you have to remember the last settlement, that was booked as revenue, went back to contribution at the beginning July 1 of this year. Retail transmission increase of $0.09. We had a TCA increase that went in to effect August 1. Last year we had a catch up adjustment that went against gross margin with the absence of that this year, and then with the rate settlement that Jeff referred to we now will put in the retail portion of transmission effected June 1 effective would be for foreclosure rates. And so we begin to amortize that variance of our 2011 filing.
Miscellaneous items were up by about $0.05. You saw weather there $0.17 last year we had a very warm third quarter, this year we had a very mild third quarter. Residential cooling degree days were 15% lower than last year and about 5% below normal, so we had negative impact due to weather. We also had lower weather normalized retail kilowatt hour sales. Actual weather normalized sales increased about 1.2%, but it’s really the mix between customer classes. We had one large customer that increased had kilowatt hour sales about 1.3%, but very little margin contributed by the customer and that’s the $0.02 impact. So $0.16 top line growth in this year’s quarter.
Just want to talk a bit about our long-term financial objectives, obviously the overriding goal is to continue provide superior total returns to shareholders. Number of areas we are going to focus on is continue to consistent performance, capitalize on our attractive service territory, continue emphasis and discipline on capital and O&M budget disciplines, obviously continue to focus on the credit rating and continue to further strengthening our financial profile, and contribute back to shareholders through dividends, earnings growth return.
So, just on the demographics, obviously it’s one of our most attractive fundamentals. On this slide, you see customer growth in yellow, population growth in blue, with the US population growth green across the slides. It tells us really a couple of things. One Arizona has consistently grown at population growth higher in the national average. It also tell us when we had down cycles once we come out of the cycle where accelerate pretty quickly.
Economic growth in Arizona continues to improve, although I would say it’s a very modest growth. And I am going to cover that in more detail in a moment. Over the long term we think the fundamentals that have been important to Arizona’s growth climate, low cost of living, great place to raise a family and then from a business perspective you are right next to the six largest GDP in the world will continue.
Over the next few 2015, we project about 2% customer growth. Obviously this year it’s about 1%, so we will see some acceleration going forward and I think the slides I have toward the end on economy will bear that out. I will point out though that as Mark, talked about energy efficiency and distributed energy programs, we don't expect any sales growth over this timeframe, and this could certainly very strong growth. So let's talk a little bit on the economy and we will start with job growth. Overall job growth has held up well over the last year. Growing at 2.4% year-over-year which is a better than a national average considerably. We are seeing really all major industrial sectors experience some growth. Construction and real estate are showing the greatest strength with over 6% year-over-year growth.
In terms of vacancies, a key statistic we measure is the available single-family homes and apartments that are complete, but vacant. We have seen this drop from about 37,000 at the peak, now to about 25,000 vacant homes as we sit here today. Metro Phoenix economy has absorbed more than 10,000 vacant homes and apartments since the peak of 2010. New construction is beginning to respond, housing permits were above last year’s levels in quarter three by 20% and we believe we are on pace to further reduce vacancies by the end of 2013 and our study show that we really need to get below or at 20,000 vacancies before we see the real uptick in the construction activity.
So here's a slide that shows existing single-family home sales with normal foreclosure and then the percent of foreclosures of the homes sold. Most recent four quarters resulted in 87,000 existing single-family homes which is the sixth highest of all time in Phoenix. 2009 to ‘11 home sales ranked first, eight and fourth in the Metro Phoenix’s history. Foreclosures helped to drive the market in recent years accounting for more than one-third of the total market until the last one were through investors that's now down to less than 15. That shows more fundamental buyers buying these homes. Lender on sales were down 70% quarter-over-quarter and 190,000 homes have been sold through foreclosures since 2007, almost 20% of the entire Metro Phoenix housing stock, that gives you an idea of sort of how far down it went.
However, the good news is the new home market is breathing again after three very weak years. We had highest that's been in over two years in the third quarter of 2012 and more typical long-term average would be in the range of about 30,000 per year. Single-family permits were up 40% over the prior year, as I said total housing permits about 20% and an increasing demand really reflects the declining value gap with existing homes. Existing home prices are accelerating faster than new home prices. I have a case show of statistics on the next slide, but price compression between existing and new homes maybe slow though as new home pricing start feeling the impact of land and the lack of skilled labor near term which is one of the things that is a concern for the home builders.
But we are seeing the oversupply symptoms starting to wane. We've seen an uptick in home prices in recent months, again because of due to the less in foreclosure area. Metro home prices have seen the largest increase of the 20 metro areas covered by the [case show] index and even with a rebound in prices we are seeing home affordability for single-family house remains at an all time low by historical standards here.
Same story on commercial side, vacancy rates for office and retail spaces have begun to fall from the office and retail construction. Across these three segments, there is about 4.6 million square foot currently under construction compared to long-term average of about 16 million square foot to give you an example of where it stands.
So in terms of the long-term growth, it's obviously going to drive long-term CapEx. Here on this slide, you see the investment in the business. We expected to be about $1.1 billion in a year. Really the graph displays the traditional categories and now I would have you turn to the appendix for the assumptions in the ‘13 through ‘15 timeframe.
Obviously, we talked about AZ Sun. That’s an important program with a good recovery mechanism. Four Corners which Mark talked about in ’12; strategic transmission necessary that Jeff covered in his slides and then obviously investing in transmission is a good business for us. It helps maintain reliability. It’s new to handle with the growth in Arizona and we need to bring renewable resources to market and with the formula rate we have a diversification on the regulatory side.
So one of the things I want to talk about here is that $1.1 billion annual CapEx cycle, about 45% of it is under the rate mechanisms that Jeff alluded to. You see those in green. Cash flow depreciation is in blue. So about 80% of our, 35% of those are or about 80% total is recovered through some sort of mechanism, leaving only about 20% subject to the normal regulatory lag and like I said earlier, we don’t have sales growth in our forecast. So at this point, there is two regulatory lag. Gives us about 6% compound annual growth rate throughout this timeframe and you see the breakdown between the ACC and FERC.
Again Jeff covered the adjustors, I just wanted to lay it out in terms of 5% next year; Four Corners we’re assuming the July 1st close here 55% in ‘13, 45% in ‘14. We expect to have annual adjustors in the TCA our annual filing of FERC, so that would had each year; AZ Sun through 2015 will continue to be an annual adjustor probably and in this timeframe it will recover to the rest. LFCR’s already started through 2015 and then the environmental improvement surcharge which Jeff alluded to really not beginning to hit until 2014. So that’s how those mechanisms lay out from a gross margins perspective through the stay out period.
So obviously during this time, we had to have a strong cost management focus. We have done a really good job since 2008 of holding O&M fairly flat and our goal is to keep on them inline with [KBA] sales growth which would imply over the timeframe fairly flat as well.
On this side, I want to talk about some of the things that we are doing, and so as Don alluded to, Mark and I are co-sponsors of our sustainable cost management initiative and the value to me on that is this isn’t a finance driven program, this isn’t an operating driven program, but this is a corporate led program and so that puts a pretty good foundation into it. The motivation for this really came about in the first part of 2011 and we are facing several factors, excuse me, ’11, we were facing several factors at that time. We looked out and the industry is facing increasing cost, we have a large capital program, we have no sales growth and then obviously the rate challenge is continuing out there and we also had an ageing workforce. And we currently have at least 220 people sustainable, we would not be successful. So we implemented and then came along the settlement in this January of 2012, furthering need to do what we are doing now.
Doing several things to make this sustainable, we have created a set of pure metrics and with the stated goal of wanting to be bottom of top quartile at some point in the future. And we are doing that, we are looking at not only the number of people, but total cost with also being cost effective. And so we tie that into our integrated business planning now through our corporate resources operating model or we affectionately call CROM; lot more transparency from the support units to the business units on sinking up and planning for the things that need to be done as we support the business.
I would also say that phase one of this was getting the integrated planning and the pure metrics into placed. We also looked at we were had redundancies. This company had decentralized for example financial planning and analysis and that grew up over the last decade really into the 90s when we thought we are going to deregulation and each business unit had these function, so we consolidated it. And we consolidated it, eliminating about 10% of the FTEs, but more importantly, we now have standardized ways to approach these initiatives. We are getting ready to do IT same thing, decentralized, we are going to centralize them. All with the opportunity to keep them embedded in the business but yet have a centralized approach. The thing that we will not do during this timeframe, we will not sacrifice safety in our products.
The other thing we will be doing is business process reengineering to really focus now that we have our functional alignment where do we have overlapping processes and ways we can take the money out of the business and streamline the business.
So we have an aggressive cost management program but again we have the opportunity that's been handed to us and that is as people leave the workforce our goal would be to make sure we don't, we are not hiring back one-for-one and that we have left the place sustainable and documented business processes for the next generation to move forward.
So just in terms of consolidated outlook, we continue to expect Pinnacle West to earn between $335 million and $350 million this year, up about 15% from our 2011 ongoing earnings. For 2013, we expect Pinnacle to be somewhere between $345 million and $360 million. The assumptions are in your appendix. So the question was asked on the earnings call last Friday why can't we earn our 6% rate base growth. And the key is really to meet a couple of things.
One, we do not have any sales growth. We do have the LFCR but it’s not a one-for-one mechanism. So we are still behind on the sell side.
Second of all, and even though we have many mechanisms, we are still subject to regulatory lag and what that brings really the infrastructure related costs that aren't recovered, depreciation, property tax. We have a partial deferral and also capital costs.
So that's really why we would not expect to earn rate based growth. We would expect to be somewhat below that as we move forward. As Don alluded to, we did raise a dividend; the board raised a dividend in October for an annual rate of $2.18 a share.
Moving forward, based on our current projections, we would expect and I want to recommend to the board with the almost non-investment grade rating two grade settlements. We sold our unregulated assets. Now we are focused on the vertically integrated utility and the last piece of puzzle was really the dividend increase and we are happy to be here.
So on a competitive ROE; we've made substantial progress in our returns in the last few years. In the last decade, we earned somewhere between 7% and 8% on average. And Jeff talked about all the issues that were behind the 7% and 8% and historic past year, long lead times, high growth, unable to get adequate rate relief.
The last settlement we were able to earn about 9.5% in 2010 and 2011. This settlement with a 10% authorized ROE; we expect to earn at least 9.5% through the stay-out period. Its going to come with really the mechanisms that Jeff alluded to, our cost controls focusing on the fundamentals of the business and I agree with Mark and Randy on the safety and I talk about it every time on the road, its important because it does, you are paying attention to your business and you run it well and you can't have good financial results unless you underpin it with strong operating performance.
And so also point out that in here we have no sales growth. Obviously, we're seeing the economy improve modestly. We're not projecting anything at this point that would be an upside scenario to the forecast would be quicker recovery to be sales growth.
Don hit this slide. Our total returns have been very good in both the one, three and five year timeframes where again we're focused on total return for the shareholder being superior. Just briefly on access to capital, we maintained solid investment grade credit ratings. We are now a BBB minus at both Fitch and Moody’s, BBB flat at S&P and we continue to be on a positive outlook.
We have ample liquidity at this point to manage the business. You see some of the financing activities that we've undertaken. We will expect to issue new debts to support the Four Corners transactions.
As we move forward, as Jeff alluded to, we can now file again in next rate case until May 31, 2015. This is (inaudible) we would do that if we do not have to do that. I think that’s an important point. We don’t need equity proceeds until 2014, assuming a 2015 test year, 2015 filing. So what we have typically done in the past is we have issued equities, capital structure in the rate saving environment.
Here is the ratings and we have about $1.2 billion in current liquidity through committed credit facilities as well as existing cash on hand and just to close, I want to say, we think we have compelling value proposition. We are now an execution story and not a regulatory story, and we are focused on execution.
As we said earlier, we have come a long way since 2008. We are very confident of our ability to manage through this stay-out period. Don talked about his feeling for the management team, I think the place we are in now is we have a management team that’s pulling together and has really focused on executing to the stay-out period and that’s a good feeling.
So our goal really again superior total shareholder returns through dividend, price appreciation and ultimately opportunity to execute and get multiple [expansion].
So with, that I am going to turn back over to Don for the summary.
Thanks Jim and again thank you all for your time and attention today. I just want to very quickly summarize, you have heard a good overview of our business and some of our key executives today. Our overall goal is to create value again for our customers and the communities we serve but also operating basically first quartile performance across all aspects, in some cases first decile performance and improved regulatory environment with the settlement behind us and the various mechanisms that will continue to cover some costs during the four year stay-out period.
And the overall positive regulatory construct in the state of Arizona also but growth in earnings the expected 4% annual growth in the dividend going forward and I think an important relative value creator will be having the 10% return on equity, [locked] in be allowed 10% return on equity or locked in over the next four years and not subject to potential downsizing of a lot returned on equities which we are already starting to see in the industry, at least my expectation is that would be continuing and that's one key factor in negotiating and sitting out with Jeff and the parties was key from our standpoint is we saw that huge advantage with the four year stay-out period.
So with, that I will invite the team up here. We will be happy to answer any kind of questions you might have and Becky can tell us how we are going to handle with microphones, with the webcast.
We have got two microphones for the Q&A session for the audience and then one microphone for John and speaker team. And I’ll hand those back and forth. So if you let us know, if you have a question, we will make sure, we get you a mic, thanks.
Jim, could you talk a little bit, I am going to put a fixed income hat on here for a second, but could you talk a little bit about cash flows and how you see cash flows?
To improvement in earnings for the mechanisms that we have there, those will be gross margin contributors. We will probably see slight increases in depreciation will begin going the other way on the deferred tax in 2013 just because of the normal run-off for those deferred taxes. So we can handle the cash flow gap through long-term instruments through this time frame and we are also assuming to funding another pension plan as well in there.
Well, we had it between $400 million to $450 million over the timeframe. So a pretty significant number. And then did you have two questions. Did I answer it. Okay. Alright.
So just talking about sort of the math of what you guys aspire to deliver to shareholders, you said that you expect to run a minimum of 9.5% ROE over the life of the plan, and that's at apparent level, right. That's parent equity, not regulatory equity, correct?
Well, at the end of the third quarter you had a little over $4 billion of common equity on the parent balance sheet, and that retained earnings didn't grow at all, retained earnings didn't grow at all between now and the end of 2013 and you earned a 9.5% ROE on that you know to $3.50 a share. And that guidance range for next year is $3.45 to $3.60. So that implies the potential for you to fall short of your ROE aspiration. So I mean this is in fact your intention to earn that minimum 9.5% ROE and so.
And we risk our assumptions and our goal is to have a range that we have a 80% to 90% chance of earning it on the down side and an opportunity to earn 30% to 20% on the upside. So we have really moving parts we are really going to be O&M. We have a good handle on what pension is. We have a property tax deferral for 50% in 2013 and then over all it will just be capital spend and the associated infrastructure related costs. We don't have a lot of moving pieces. So we are confident of that range. We are confident of our ability to (inaudible) and then it will just be capital spend and the associated infrastructure related costs. We don't have a lot of moving pieces. So we are confident of that range. We are confident of our ability to earn at least 9.5% in ’13.
Right and then the other thing that is a little bit confusing to me is. I get that your regulatory model isn't perfect and I also think I understand that that's the reason why you assume a minimum of a 9.5% when the authorized is 10% and that was perfect to you have a shot at the 10%.
We have a shot.
So if the aspiration is to earn a minimum of 9.5% and rate base growth to 6%.
And then it will just be capital spend and the associated infrastructure related costs. We don't have a lot of moving pieces. So we are confident of that range. We are confident of our ability to earn at least 9.5% in ’13.
Right and then the other thing that it’s a little bit confusing to me is I get that your regulatory model isn't perfect and I also think I understand that that's the reason why you assume a minimum of a 9.5% when the authorized is 10% and that was perfect to you have a shot at the 10%.
We have a shot.
So if the aspiration is to earn a minimum of 9.5% and rate base growth to 6% and you are not, potentially not diluting this with equity in ’15, then shouldn't earnings growth, if you earn 9.5% each year actually be somewhat close to rate based growth.
If we did have equity.
If you do have equity.
It would be closer if we did not have equity, yes. The assumption is equity is before a filing was made. You are not to earn on equity until some point later.
That’s okay. So the issue of whether or not your track rate base growth is really associated with potential need for equity?
We're not and some of these other things which infrastructure cost will be a small drag as we go forward but it's only 20%. So
Okay, and then you haven't baked in any potential upside and further acceleration of housing recovery.
One of the things that we've worked pretty hard on for the last couple of elections is working with all the candidates. So we've been out doing briefings, doing presentations, providing information to all the candidates, Democrat and Republican so that we can, when they hit the ground in January, they will have as much information as we can get them about what our challenges are, what our opportunities are and how we run our business, and so that’s part of this engagement process. So we're going to try to make that transition as seamless as we can, and it's just being through continuing work with them and continuing to have that dialog.
And then, Jim, this might be for you here on O&M, looking at the bar chart, there is a little bit of a tickup in 13 relative to 12? What's the dry growth I am thinking where it will be a little closer to flat?
Well most of that will be, some of that’s related to Four Corners 4 and 5, which we're taking on a little bit incremental, more O&M next year.
My question centers around the settlement agreement. Can you just refresh our memories? A, that has an evergreen position in it and then B, if it does not what mechanisms are not subject to or do have an evergreen provision in them. Meaning it like there’s LCFR continue to add in (inaudible) address again in the next proceeding.
I think there may be some there is not a mechanism just to give you a comparison in 2010 in the last settlement agreement we had a hard stop on booking line extension fees as revenues which was a critical gap closer to being able to stay out for that period. And so we were in a position where it didn’t matter whether the financials mattered or not, you were going to lose that treatment that accounting treatment there should not present that issue, there may be things like procedures or reviews or other things there is fuel and purchase power audit that’s scheduled for certain periods of time that we might have to talk about, but I don’t think you see the kind of mechanisms that you had in the last settlement agreement that drive you into that hard stop that you just have to have a change for it.
So my real question then comes to this which is a follow up to what Greg was asking that if you look at your renewable energy standards in the state of Arizona and you gave in the charts to 2.1% cumulative growth per year I guess through ‘15 that ratchets up to 2.5% from ‘15 to 2020. So how do you grow the business over the long-term if all of your sales growth is going to be cut out through the energy efficiency mechanism?
Well ultimately you need faster customer growth. I mean we are seeing it in the ‘12 to ‘15 where we are growing customers on average 2% we have no sales growth because they are being eaten up by these energy efficiency centers. We do think we will grow faster than that as we get further out based on projection, but you are really going to need customer growth to eat through those impacts or find some other way to get recovery of those loss sale such that will be the other alternative, like full decoupling with we will do that, so.
We change the disclosure maybe it was too subtle two quarters ago relative to the pressure on sales growth for customer. But in customer conservation energy efficiency distributed earning, we look at our energy efficiency program that does even come close to the sales etcetera. We thought Asian sale growth, been there is an overall pressure on sales just coming out of the economy, we go in restaurants around here, they are not like they were four years ago, not much else is and this is the brand series, so just like improvement in impact.
Two quick questions, first actually just following up on that. Do you have any data on the wage compensation growth and I see the unemployment not formed unemployment trending well, but what about wage and compensation growth in region?
And my second question is for Randy, just curious on looking at some of the numbers of the STARS Alliance and seeing how their regulatory cost have been creeping up and they are excited issues like Fukushima or NRC regulations. Clearly Palo Verde is doing superior job and just can you explain what the cost pressures are generally for the industry and how you have been able to with those?
Again if you look where we are coming, but you have to get back in the where we belong which is really in this area. We have a huge economy of sales for big units, so pressure of course is the regulatory costs, all of the costs, the [run-off] from fuels, materials parts. We just have more room for, not only performance gain; we are still fine-tuning our cost fees. We feel like we can bring our costs down a little bit more because we started to hire and we think we can hold it for quite a while partly because the economy of scale that we have, we have three standard units, there's an economy of scale, there's a risk management piece to that too. So we are really just, the rate is slowing, but the, little bit more room yet to get more performance and to get a little bit more cost out of the organization.
Can you quantify the regulatory cost pressure that you see ballpark?
Not sure if I can actually give you specific number, it varies and we have such a strong regulatory environment right now so one client would have a higher impact than others we are gaining from a very high regulatory cost because of what we went through. We have extreme completed a very big inspection with absolutely clear (inaudible) senior regulator people out. So we have a very strong regulatory group as far as I was talk about hiring the right people and holding them, I've got extremely experienced people, but again we were coming from fairly high regulatory numbers. So we are going to hit a point where we will start back up but it would be actually [weird].
Next question is probably for Jim or Mark but on the sustainable cost management initiative when you look out the next couple of years of where you see that program potentially going how much of that, the savings that are contemplated within your longer term forecast outlook?
Well, from a savings perspective, we've assumed flat O&M throughout the outlook. We have not gone through the various programs, added up what potential savings are going to be and communicated that. We are doing work on what is our opportunity set in front of us, so we have a better handle on what that means from a financial perspective.
Let me just add to that. Two things still have to take place before we can fully bake if there is upside that is obvious. Jim mentioned in this presentation the redundancies and overlaps, we've identified that. Now, we got to work our way through what do we do with that, how do we manage that because its people that we are talking about. So, yeah, one piece there. The second part is as Jim also alluded too our policies or processes or procedures, how do we streamline the business. And that is just starting as our next phase of [FCMI] to really start streamlining. We did the functionality, we know where everybody is at, we know what functions everybody is performing, now let's put the processes in place and work them out. We have a process we will use but we will do something to help gain efficiencies. So we will have some upside we are just not ready to quantify.
And I think we've talked about in public before and we are expecting 200 to 300 retirements each year for the next five years.
Don, Jim, do you think your current payout ratio is sort at the right level, do you think that it should rise, are you comfortable with it rising over time, do you want it to fall over time. And I'm asking this question because I know you raised the dividend $0.02 a quarter, you hadn't raised the dividend in a real long time and you wanted to start off at a level that you know you could repeat but if you, as over the next several years as you keep going back at the board every year and recommending dividend growth, should we expect the dividend to grow in line with earnings growth or should we expect it to grow greater than earnings growth, less than earnings growth, given how you feel about the payout? I guess that’s my question.
If I say anything other than approximately 4%. We got one of the lawyers in the back here surely he will have something to say to me. To answer your question over regulators, it's setting that number. We wanted something that was just at a minimum sustainable. We've talked about our forecast. We think it's fairly conservative. There is upsides on the cost containment side. There is upside on the filling in vacant homes, which include no infrastructure cost and just revenue use going forward. So what you aspired and improved on that but it's a solid base from where we start.
Could you talk about future potential increases in FERC investments, in terms of your transmission side, exporting to California, do you see that as a potential opportunity?
Yes, I do. It's probably in the three to five year range. That thing we've been doing some work with two years ago, we made a filing with the solar territory. I mean that if you are going to build solar and there was in Devers 2, to serve in the California, that be an ideal location. Now if you back up 4-5 years ago and the Arizona Commission basically said no to Devers 2.
I think the sentiment at the Commission is completely different now, but we’d be looking at doing that with a California based revenue source out of the Cal ISO and so probably Bill was a partner us to the border and then beyond that in the California, you are someone else but that’s a multi-billion project and again I don’t want to get far ahead with. One we have to get to California planning direction reversed because once Arizona’s Commission said no to Devers 2, California went more to a north, south path. Now they haven’t been tremendously successful in sighting solar and other renewable resources in the state, so couple of things have to happen, but we are on top of that. Now how quickly we can get it move that’s why I say two or three years from now to shed some light on an actual policy direction for California and then beyond that. Jeff you want to add to that.
And negotiations are already started with the Cal ISO or
In terms of when would capital actually be deployed if this were to happen.
The Cal ISO has a very structured planning process and they do multiple planning processes typically running at one time. We submitted proposal to look at Delaney which is substation Arizona to Colorado river to substation right inside the California border to look at that line in the context of their planning process. That planning process rejected the line, but it was close to showing a positive cost benefits. So we are now looking at getting back in the next planning process to present that line back form.
Don you just mentioned that you could get a little bit of a benefit, as you get a little bit of a revenue growth from houses vacant houses being filled but you don’t have any of the infrastructure costs associated with that. Does that mean then that when the vacant houses hit that 20,000 level that you refer to that your team refer to earlier in the presentation when you start to see construction activity starting to expand and that benefit starts to go away over the next few years?
The number is about 27,000. Yeah, and if you saw GM's curved though. The one chart the uptick was on housing permits for sellers of new homes. So its not going to be, its not like a five, four go back to accounting places. I mean there is a combination of the existing homes and the new homes stock that comes in the place. So there are actually two sides to that equation, now which sells and what percentage, that's out of my league.
Okay. Well, thank you all again. Becky what time do we reconvene for refreshments and dinner, I’ll let you explain all that.
Thanks, Don. On 6 o'clock at Bourbon [Steak] which is just on the other side of the lobby here at the hotel. And again thank you very, very much for your time and attention today. And we have a gift for you out of the registration table, thank you.
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