Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Becky Hickman – Director, IR

Jim Hatfield – SVP and CFO

Don Brandt – Chairman, President and CEO

Don Robinson – President and COO

Analysts

Daniel Eggers – Credit Suisse

Ali Agha – SunTrust Robinson Humphrey

Paul Ridzon – KeyBanc

Chris Ellinghaus – Wellington Shields

Daniele Seitz – Dudack Research

Paul Patterson – Glenrock Associates

Yiktat Fung – Zimmer Lucas Partners

Pinnacle West Capital Corporation (PNW) Q1 2010 Earnings Call Transcript May 6, 2010 12:00 PM ET

Operator

Good morning. My name is Mason and I'll be your conference operator today. At this time I'd like to welcome everyone to the Pinnacle West Capital first quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions).

Thank you. I'll now turn the call over to Ms. Becky Hickman. You may now begin.

Becky Hickman

Thank you, Mason. Good morning. I would like to take this opportunity to thank everyone for participating in this conference call and webcast to review our first quarter earnings, recent developments and operating performance. Our speakers today will be our chairman and CEO, Don Brandt and our CFO Jim Hatfield. Don Robinson who is President and Chief Operating Officer of APS is also here with us.

Before I turn the call over to our speakers, I need to cover a few details with you. First, the slides we refer to today are available on our right investor relations website along with the webcast, the Form 8-K filed this morning, supplemental information on our earnings variances and quarterly operating statistics and our earnings release.

The slides and press release contain reconciliations of certain non-GAAP financial information. Please note that all of our references to per-share amounts today will be after income taxes and based on diluted shares outstanding. Also, it is my responsibility to advise you that this call and our slides contain forward-looking statements based on current expectations and the Company assumes no obligation to update these statements. Because the actual results may differ materially from expectations, we caution you not to place undue reliance on these statements.

Please refer to the forward-looking statements contained in our first quarter 2010 Form 10-Q which was filed with the SEC this morning, as well as the MD&A section, which identifies risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our website, www.pinnaclewest.com. It will also be available by telephone through May 13th.

At this point I'll turn the call over to Jim.

Jim Hatfield

Thank you, Becky. The topics I will discuss today are shown on Slide 4. First I'll review the consolidated quarterly results and discuss the main variances from last year's corresponding quarter. Second, I'll provide a brief update on the economic outlook for Arizona. Then I will discuss our earnings guidance for 2010 and '11 and I'll close with brief comments on our financing activity and liquidity.

Slide 5 summarizes our reported and our ongoing earnings for the quarter. On a GAAP basis, for this year's first quarter we reported a consolidated net loss attributable to common shareholders of $6 million or $0.06 per share, compared with a loss of $157 million or $1.55 per share for the prior year's first quarter.

From an ongoing earnings perspective, first quarter earnings improved significantly over last year. For the 2010 first quarter, we had consolidated ongoing earnings of $7 million or $0.07 per share, versus an ongoing loss of $25 million or $0.25 per share for the comparable quarter a year ago.

A reconciliation of our first quarter GAAP EPS to our ongoing EPS is shown on Slide 6. Both periods exclude results from the real estate segment because of SunCor's major restructuring launched in early 2009. I will provide update on SunCor in a few moments. I will focus my remaining comments on first quarter results on an ongoing basis.

Moving to Slide 7, the variance that makes up the change in quarterly ongoing earnings per share; first, an increase in our regulated electricity gross margin added $0.20 per share over the prior year's first quarter. There are several components to this net variance and I will cover those variances in more detail on the next slide.

Second, our effective income tax rate for the year decreased from 38% to 35%, which improved earnings in the quarter by $0.08 per share. We've now cleared all federal tax shares through 2007 and this positive change is the result of adjusting our accruals to reflect such actions.

Third, other income, net of other expense improved $0.05 per share, primarily because of an investment loss in El Dorado in last year's first quarter and, fourth, a net increase in O&M costs decreased earnings by $0.04 in the quarterly comparison. The O&M variance reflects labor expenses which were partially offset by lower generation costs in this year's first quarter, including effects of timing of fossil plant maintenance.

On that note I would like to emphasize that our O&M numbers are in line with expectations and we continue to work towards fairly flat 2010 O&M numbers when compared to 2009. This change in O&M excludes expenses from the renewable energy surcharge or RES, on our demand side, management and energy efficiency efforts because these costs are offset by respective rate surcharges. To help with your analysis, we have provided the amount of pretax RES and DSM revenues recorded by quarter for the last couple of years in the appendix to today's slides. Other miscellaneous items net, improved our results by $0.03 per share.

Turning to Slide 8 and the drivers of the net increase in regulated electricity gross margin, total regulated gross margin was up $0.20 per share compared to 2009's first quarter. The components of that increase are as follows. Retail rate increases favorably impacted our quarterly results by $0.20 per share. Of this amount $0.14 per share related to net base rate increase and $0.03 per share related to line extension fees recorded as revenue.

Both of these items became effective January 1st of this year under APS's retail regulatory settlement. The remaining $0.03 per share related to the 2009 transmission rate increase that went to effect last summer to our FERC formula rates and our retail transmission cost adjuster.

The non-cash mark to market valuation of APS's fuel and purchase power hedges net of PSA deferrals was better by $0.02 per share compared with a year ago. This variance reflects a smaller decline in mark to market than we saw in last year's quarter as forward natural gas prices fell by 15% during this year's first quarter compared with a slightly larger decline a year ago. For your reference, our mark to market amounts by quarter for the past couple of years are shown in the appendix.

Turning to the volumetric effects related to weather and kilowatt-hour sales, weather variations improved our earnings by $0.02 per share as the 2010 first quarter was about normal but last year's first quarter was mild. Our quarterly results were negatively impacted $0.02 per share related to lower weather normalized kilowatt-hour sales compared to 2009, reflecting the impacts of customer growth and customer usage.

In this year's first quarter APS's customer base grew 0.6% compared with 0.8% in the prior year's first quarter. Weather normalized retail sales were down 1.7% in this year's quarter. All this decline came in the C&I segment and of that decline approximately two-thirds can be attributed to the effects of our ACC approved energy efficiency and demand-side management programs while the other one-third reflects the continuing weakening economy in Arizona and in the nation and its impact on the C&I sales category. I'll provide more color on our economy momentarily. Lastly, the net effect of other miscellaneous factors reduced our gross margin by $0.02 per share.

Turning to Slide 9 and looking at our fundamental growth outlook in the Arizona economy, we currently expect the annual customer growth to average about 1% for 2010 through 2012. Additionally we expect our annual weather normalized retail sales and kilowatt-hours to be relatively flat from 2010 through 2012 because of the impacts of the national economy, the housing situation in Arizona and APS's energy efficiency programs.

However, for the full-year 2010, we expect weather normalized retail kilowatt-hour sales to be down slightly, compared with year 2009 primarily because of the first quarter effects I've already discussed. In the first quarter of this year we began to see some signs of stability in the Arizona economy. As shown on Slide 9, housing prices appear to have stabilized as shown on the graph on the left-hand side of the slide.

Additionally as shown on the graph on the right-hand side of the slide, trends in occupied office space are positive again after several quarters of decline. However, occupied retail space is continuing to fall after reaching its peak in early 2008 and it is not showing any similar signs of recovery.

Turning to Slide 10, job growth appears to have stabilized as well, when looking sequentially quarter-over-quarter, although unemployment is still high and the number of jobs is some 4% less than a year ago. Furthermore, the Arizona Department of Commerce is predicting net job losses increasing in 2010, although they predict the rate of decline will slow at approximately 25% of the 2009 level.

Other indicators of local economic activity have improved somewhat, including growth in household earnings as reflected in personal income tax with holdings which showed a modest positive gain in February for the first time since 2007. Taken as a whole, we are cautiously optimistic that the Arizona economy may have found a bottom and that we can begin the long process of recovery. We continue to expect the economy both nationally and locally to improve as we move through 2010.

Importantly, we need to see more robust customer confidence along with the rising economy in order to support a modest recovery in residential usage patterns, ignoring weather effects and the impacts of our energy efficiency programs. Usage by commercial and industrial customers, on the other hand is likely to remain down as office and retail properties struggle with their high vacancy rates. Over the longer term, we remain confident of Arizona's fundamentals. We expect customer growth and usage to return to more normal levels as the national and state economic environments improve, albeit offset somewhat by APS's efficiency efforts.

Just turning to our earnings outlook on Slide 11, we continue to expect that our consolidated ongoing earnings for 2009 will be between $2.95 and $3.10 per share. The key factors and assumptions underlying our 2010 estimate have not changed except for the following two items.

For the year overall, we currently expect weather normalized retail-kilowatt sales volumes to be slightly below 2009 levels, in part due to our energy efficiency initiatives and in part reflecting the weakness in the C&I segment in quarter results and as I have already mentioned, our ongoing effective income tax rate is expected to be about 35%.

For your reference, I would point you to the Form 8-K filed with the SEC on February 19th, 2010 for the other assumptions and key factors underlying our 2010 outlook. In addition, we continue to estimate our 2011 ongoing consolidated earnings to be within the guidance range for 2010 ongoing consolidated earnings with some opportunity for modestly exceeding the range.

Turning to Slide 12, now I'll just give you a quick update on our liquidity and recent financing. We continue to have ample liquidity, a stable credit profile and access to the capital and bank markets. Amounts shown on this slide include pro forma adjustments to reflect $253 million of proceeds from our issuance of 6.9 million common shares in mid-April including exercise of the over allotment option by the underwriters. We have almost $1.2 billion of available liquidity including the net proceeds from the common stock offering.

With this equity issuance completed, we do not currently intend to issue common stock again until at least 2012, based on our current plan. On that point I want to emphasize what Don said kicking off the equity road show that our offering, although smaller than anticipated by most is sufficient. Additional equity infusions will come from the approximately $80 million in tax benefits generated through the SunCor asset liquidation in the remainder of this year or other sources of proceeds.

We have infused the net equity issuance proceeds as well as other funds into APS to fund its capital expenditures to expand and maintain the electric infrastructure. The sale of the SunCor properties continues to progress albeit at a slower pace in light of the economic and real estate market conditions. SunCor has a forbearance agreement with its banks that ends June 30. We are continuing to actively pursue an orderly wind down that business.

And that concludes my prepared remarks. I'll turn the call over to Don.

Don Brandt

Thanks, Jim and again, thank you all for taking the time to join us on the call this morning. We appreciate your time and your interest. Jim's already touched on one of the issues that's important to our investors, our growth in the Arizona economy. Although the recession has slowed our growth, Arizona's intrinsic economic strength remains an attractive fundamental characteristic for our company.

During the first quarter we made progress in key strategic areas and continued our record of excellence in operations. I'll update you on the following topics today. One, the Arizona regulatory developments; two, our strong commitment to renewable resources, particularly solar and three, our recent operating performance which demonstrates solid execution.

Looking first at Arizona regulation, given our history over the past several years, it's unusual for me not to be discussing a pending retail rate matter. APS's recent regulatory settlement with a set rate that became effective January 1st, was progressive and contained broad ranging benefits for all parties. With that settlement in place, we are continuing to work with the Arizona Corporation Commission and various stakeholders to further enhance the state's regulatory framework to benefit APS's customers and other stake holders.

The commission has been conducting workshops on several generic policy topics that address topics such, decoupling to enable and encourage utilities to meet energy efficiency goals, feed-in tariffs for renewables, externalities and line extensions; the workshops or inquiries to gather information from various stakeholders about broad policy issues. Although, these workshops are in early stages, we view the Commission's consideration of these issues to be positive steps that can further enhance the regulatory environment in Arizona.

The elections this fall will result in change of the Commission as two of the five seats will be on the ballot. Chairman Mayes is term limited, so her seat will be filled by a new Commissioner. Commissioner Pearce is running for reelection for a second term. In total, there are currently seven candidates for the two seats, three republicans, three democrats and one independent.

The field will be narrowed to two candidates from each party following the primary election in late August with final elections in November. Turning to renewable resources and operations, our commitment to renewables remains strong. Arizona's solar potential is among the best in the world, and we are on track with our plans to significantly increase the amount of renewable energy we provide to our customers.

APS's AZ Sun Program which is outlined on Slide 14 is a recent development of significant interest to the investment community in our customers. Although, we already have entered into sizeable purchase agreements for solar and wind power, and we own several solar plants, AZ Sun will be our first significant step toward owning large utility scale solar facilities. Under the plan, APS will develop and own 100 megawatts of photovoltaic solar plants with an estimated cost of up to $500 million.

We anticipate this solar capacity will be placed into service in 2011 through 2014. The AZ Sun Program was approved by the Corporation Commission on March 3rd, along with constructive rate recovery consistent with the regulatory settlement including a return on both equity and debt capital. As such, when these facilities go into service we will begin to fully recover our costs and earn our full allowed rate of return on equity capital invested in these facilities.

Costs of the first 50 megawatts of AZ Sun will be recovered through the renewable energy surcharge until such costs are included in base rates and or another recovery mechanism. Costs for the remaining 50 megawatts will be recovered through the renewable energy surcharge or another rate adjustment mechanism to be determined in APS's next retail rate case, which is expected to be filed in June of 2011.

In January, APS issued two requests for proposal for renewable resources. These RFPs are part of the process for procuring the additional renewable resources required under the regulatory settlement. Respondents were requested to provide proposals for long-term purchase power agreements and our turnkey agreements under which the projects would be built by the developers and purchased by APS upon completion.

The first RFP was for utility scale solar PV projects ranging in size between 15 and 50 megawatts. In total, APS anticipates procuring 220,000 megawatt hours annually from this solicitation. This RFP serves as the initial procurement process for implementing the AZ Sun Program. The second RFP was for Arizona wind projects ranging in size between 15 and 100 megawatts.

APS received proposals under both of the RFPs in April. The response to those solar RFP was exceptionally strong while there were also a number of win proposals. We are currently evaluating the proposals with a plan to short list viable bidders by the end of this month with a goal of finalizing arrangements with selected bidders by late summer. Any further discussion of the proposals at this time would be premature while we are in the evaluation phase.

In the regulatory settlement, we agreed to acquire an additional 1.7 million megawatt hours of renewable energy resources to be in service by the end of 2015. With the new additions, we estimate renewable resources will supply about 10% of APS's retail sales by the end of 2015, which is double the amount required under the Corporation Commission's renewable energy standard for that year.

The combination of these efforts with renewable initiatives we already have underway will be important steps in advancing Arizona's sustainable energy future. Looking at our operating performance, our baseload nuclear and coal fleet continues to perform very well. In the first quarter, our Palo Verde nuclear plant operated at a 96% capacity factor. Unit 1 is currently in a refueling outage, which began on April 3rd. During this outage, we will replace reactor vessel head and install a rapid refueling package. We completed a similar refueling outage at Unit 2 last fall and plan to perform similar work at Unit 3 this fall.

Looking ahead, the Palo Verde team remains focused on achieving safe sustainable top quartile performance in all aspects of the plant's operations. Our coal-fired plants continue to operate at top tier capacity factors, well above the recently available industry average of 73%.

In the first quarter our coal fleet posted a capacity factor of 80%, which was slightly ahead of our expectations and last year's first quarter results. We are focused on continuing operational excellence and we constantly seek to improve performance in every facet of the company. Through focus strategies and sound execution, I am confident we'll continue to move this company forward.

That concludes our prepared remarks this morning and operator, at this time we would be pleased to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Daniel Eggers from Credit Suisse. Your line is now open.

Daniel Eggers – Credit Suisse

Hey, good afternoon\morning. First question Jim; can you talk a little bit more about the tax rate in the quarter and kind of for the full year and what was the impact of settling up all the outstanding tax returns?

Jim Hatfield

Sure. And simply what happened is, we're now cleared through IRS audit through '07 and we just adjusted our accruals. I want to also point out any quarter like the first quarter where you're typically zero net income, your tax rates are going to be screwy. But if we look at overall, over the year the impacts it will have for 2010, in the first quarter it was about $0.08. I think for the year that's going to run at a 35% rate, somewhere in the vicinity of about $0.13 – $0.14 over the course of the year just from my lowering of the tax rate, assuming we hit the midpoint of the guidance.

Daniel Eggers – Credit Suisse

Is that – should we be thinking that's the right tax rate in the future or is this because of the true-ups of the past returns, the rates were a bit lower?

Jim Hatfield

I would not assume a 35% tax rate beyond 2010. It's just reflective of the sort of adjusting our accruals to clear the prior years.

Daniel Eggers – Credit Suisse

And so we should assume it kind of goes back to the old 37%, 38% level?

Jim Hatfield

Yes.

Daniel Eggers – Credit Suisse

Okay. I guess kind of the next question, Don, maybe, you could talk a little bit about the decoupling conversation in Arizona, where is that going, kind of what are the swing factors, the commissions looking forward as the discussion moves forward with principals for our program and given the challenging volume environment, how does that affect your thought process?

Don Brandt

Dan, good question. Let me have Don Robinson speak to that.

Don Robinson

Hi, Dan. What we really – the workshops have really just got started and the thing I can tell you at this point is the one thing that people have agreement on, is the company needs to have some sort of decoupling mechanism to continue to provide us an incentive to go forward with energy efficiency so we are not financial harmed on that. The process hasn’t even gone along far enough yet to tell, for us to give you a good sense of where it's headed in terms of what principals they are other than people recognize the need for it and I believe we can work through that successfully.

Daniel Eggers – Credit Suisse

I guess either of the Dons, your thought process on what kind of drivers should go into it; obviously you've had a good history of good population growth. Is that something that seems amenable or you'd say your decoupling to customer growth rate rather than a volumetric growth rate?

Don Brandt

That is clearly one of the things we're looking at very closely.

Daniel Eggers – Credit Suisse

Okay, is there any other major principles that we should be watching in this conversation?

Don Brandt

Not at this point.

Daniel Eggers – Credit Suisse

Okay and any feel for a time when we will have some sort of master plan from all parties and maybe thoughts on when the Commission could act on a final decision?

Don Brandt

Dan, the one thing I've learned after all of these years is, it is impossible to predict the Commission's timing on a workshop process. Because there are so many parties involved and there are so many different issues and different areas they want to have workshops in, I don't even want to hazard a guess of what it would take.

Daniel Eggers – Credit Suisse

Is it a priority for the outgoing or prospectively outgoing commissioners if this gets done in 2010?

Don Robinson

It is a priority for them. I'm not sure whether there is enough time to get it done, even if they desire to get it done. So it may or may not happen this year.

Don Brandt

And Dan, almost anything is possible but it is very likely that the details, as they would apply to any specific company, would get discussed and resolved in an actual rate proceeding.

Daniel Eggers – Credit Suisse

So does that mean Don that it would be likely that this wouldn't show up until the go effective with the next rate case or could it go in before the next rate case is resolved.

Don Brandt

I would doubt. I can't imagine a scenario where it would go in before the next rate case.

Daniel Eggers – Credit Suisse

Okay. Got it. Thank you, guys.

Don Robinson

Thank you, Dan.

Operator

Your next question comes from the line of Ali Agha from SunTrust Robinson Humphrey. Your line is now open.

Ali Agha – SunTrust Robinson Humphrey

Thank you, good morning.

Don Brandt

Good morning.

Ali Agha – SunTrust Robinson Humphrey

Jim or Don, would there ever – when you talk about your 2010 guidance and you talked about the variances from your own little assumptions and Jim, you mentioned the tax rate alone probably gives you an extra $0.13 to $0.14 for the year. Was there any other offsets to that? I know you talked sales coming down a bit but any reason why you would not raise your 2010 guidance? I mean, that's a pretty big incremental earnings pickup for the year?

Jim Hatfield

Well, keep in mind we see softer sales after really four months of 2010 in the C&I segment especially and if you look at, really across the board, they're all off on a usage basis. And again, that's reflecting a lot of energy efficiency and distributed solar and likewise, especially as it relates to schools.

And so we think sales could potentially be weaker than we thought going into the year. That trend continues. And looking at historical regression analysis, sales growth is highly correlated to job growth in Arizona and again, we don't see a big pickup in job growth. In fact, the Department of Commerce sees a loss of jobs in 2010. So I think while we're getting the positive benefit of the lower tax rate, we are seeing the effect on gross margin from that. I would not necessarily say it's a one-to-one correlation, but it all fits inside the current guidance.

Ali Agha – SunTrust Robinson Humphrey

Okay. But just to be clear, other than the projection for software sales, there's nothing else either higher cost or some other offsets that we should think about?

Jim Hatfield

Not at this point. We're on track in my opinion on our cost savings targets and everything else appears to be going well other than the continued softness in sales growth.

Ali Agha – SunTrust Robinson Humphrey

Okay. And also Jim, could you remind us what is the implied utility ROE that's embedded in that guidance?

Jim Hatfield

It would be in the sort of 9.5% range.

Ali Agha – SunTrust Robinson Humphrey

9.5% range. Okay. And with regards to the renewable program, should we also assume that as you laid out the earnings contribution, incremental earnings should be sort of directly correlated with when those facilities actually come on line? Is that when you start booking the earnings?

Jim Hatfield

That's correct, that's correct. And as Don talked about, we're going through the RFP evaluation process. In my opinion, unlikely we'll see a contribution in '10. But, it really depends how quickly we can get contracted and get these projects going. The quicker the better from an earnings perspective.

Ali Agha – SunTrust Robinson Humphrey

Certainly. Thank you.

Operator

Your next question comes from the line of Paul Ridzon from KeyBanc. Your line is now open.

Paul Ridzon – KeyBanc

Jim, did you say it was unlikely to see a contribution in '10?

Jim Hatfield

Correct.

Paul Ridzon – KeyBanc

Okay, and then just an update on Solana and where that is with the DOE. And if that doesn't happen, what you're thinking about your capital opportunities?

Don Robinson

This Don Robinson. Solana, Abengoa continues to work with DOE. We expect that they'll get some answer in the next few months. That continues to be a moving target. On the second part of the question, of what happens if it doesn't go, as Don mentioned in his comments, we had an extraordinarily high response to our request for proposals for solar so that if something were to happen there, we would just move on to other options and do some other projects instead of that. Still hopeful that Abengoa will go on but we just wait like everybody to get through that federal process.

Paul Ridzon – KeyBanc

Are you thinking PPAs or like what's the self build opportunity?

Don Brandt

Clearly, we're looking at both PPAs and self-build as we move forward. We are not enamored with signing a bunch of new PPAs exclusively.

Paul Ridzon – KeyBanc

I imagine the Commission is cognizant of the imputed debt issues there as well.

Don Brandt

They are and they also are seeing that if it's dependent on everybody else doing it, we run into as many more problems or more than if we were doing it ourself.

Paul Ridzon – KeyBanc

Okay. Thank you very much.

Operator

Your next question comes from the line of Chris Ellinghaus from Wellington Shields. Your line is now open.

Chris Ellinghaus – Wellington Shields

Hey everybody. How are you?

Don Brandt

Hi, Chris, how are you?

Chris Ellinghaus – Wellington Shields

Good. Can you just discuss your CapEx potential in regards to – you have an RFP for wind in addition to solar – just generally comment about, what if you were a little more aggressive on renewables. That seems to sort of mesh with the Commission's sort of attitude. And secondly, in terms of the legislative and regulatory action likely on greenhouse gases and generically the environment, what are your thoughts in terms of what might have to CapEx related to that debate.

Jim Hatfield

Well, as I've said on the first one Chris, on the CapEx potential, we've said the Arizona signed up to $500 million for those 100 megawatts. We have RFPs on wind. Wind is generally running $2,000 a KW. So depending on the amount of the projects, that's an opportunity. I do think we have to be cognizant going down this path of right basing renewable. While it's clear we have Commission's support to do some in rate base, we can't rely totally on a PPA model and I think the Chairman Mayes made that clear in the open meeting with me.

And so I think we're going to continue to try to pick and choose our opportunities to rate base. Wind gets done at least much easier than solar. So, that will be a factor. And so at this point while there may be some CapEx potential upside on renewables, other than Arizona Sun, there is not a clear path right now. On the environmental I'll just speak to the dollars. I think it really depends on what we get. The range is broad. We put out there $400 million to $700 million or $800 million depending upon what standard we ultimately get. I think that is the wild card but Don, I don’t know if you have any additional comments.

Don Brandt

Yes, Chris, this is Don Brandt. I don't think we have got certainly any clarity on carbon legislation and I doubt we'll have much clarity for another year or so in that regard. And that is – one of the various business factors why we're driving on renewables and particularly solar is we can actually deploy solar and it's a good hedge against potential costs and consequences of future carbon legislation.

Chris Ellinghaus – Wellington Shields

Can you just elaborate a little bit about what major issues may come up as a result in terms of what kind of projects you might envision?

Jim Hatfield

For renewables or…?

Chris Ellinghaus – Wellington Shields

No, for the environmental aspects of the debate.

Don Robinson

This is Don Robinson. Clearly at the coal plants we have got the FCRs and those issues, just like every other coal plant would be looking at and facing during that. We have nothing unusual in that respect.

Chris Ellinghaus – Wellington Shields

Yes, I'm just thinking in broad terms if there is some potential CapEx uplift from a lot of different points of view, and just thinking about what other things might come down the pike. Thanks for the clarity.

Don Brandt

Okay. Thanks, Chris.

Operator

Your next question comes from the line of Daniele Seitz from Dudack Research. Your line is now open.

Daniele Seitz – Dudack Research

Thanks. Actually along the lines with Chris's questions, do you have a feel for what type of rate-based growth you are looking at, given the addition of those new projects at this time?

Don Brandt

Well, I think, including Arizona Sun, we're looking at about 6% annual growth in rate-base according to our latest CapEx plan. Obviously rules around carbon could change that both positively and negatively but we'll just have to wait and see. If this becomes an issue we need clarity to be able to definitively answer those questions.

Daniele Seitz – Dudack Research

Okay. And this includes the Arizona Sun, right?

Don Brandt

Correct.

Daniele Seitz – Dudack Research

Okay. And then, do you have a feel for what the Commission is looking at in term of the mix of purchase power versus build? Did they give you a hint as to which way they would like you to go? I guess 50-50, something like that?

Jim Hatfield

There has been no clear target on that. The dialog was much along we can't sustain a PPA model without facing non-investment grade status at some point and they're understanding that not adverse to rate-basing some of this stuff going forward but it can't be a sole model of rate-basing. I don't know that anybody has really thought through an ideal mix. From our perspective, obviously, the more rate-base, the greater earnings opportunity. But we do have robust wholesale market in Arizona and I don't think anybody is going to try to ignore that.

Daniele Seitz – Dudack Research

Just on a general basis, what type of capacity factor in your region this sort of plant will provide? Do you have a feel for that?

Don Robinson

This is Don Robinson. The capacity factor for solar projects would generally be in the 30% to 40% range on a year-wide basis. But if you look at solar thermal like we proposed at Solana, it will be on – the capacity factor will be very high during the on-peak periods and with photovoltaic it will also be relatively high during the on-peak periods. So if you look at an annual capacity factor, it looks relatively low obviously because the evenings are not running.

Daniele Seitz – Dudack Research

But they're running when you need them. I understand. Thank you very much. I appreciate it.

Don Brandt

Thank you, Danielle.

Operator

(Operator Instructions). Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is open.

Paul Patterson – Glenrock Associates

All right, most of my questions have been answered but I want to follow up on the solar. Could you give us a flavor again of what the cost you're seeing per megawatt-hour, just what the range is roughly speaking for solar?

Don Brandt

Well, large-scale solar is under confidentiality agreement. So we really can't talk about that. With the Arizona Sun, the original projections were about $5,000 a KW. We're sorting through the RFPs now. It remains to be seen if that continues to be the cost going forward.

Paul Patterson – Glenrock Associates

Okay, but on a megawatt-hour basis and capacity factor that Daniele was just asking about, what does that come out to in terms of roughly speaking? I'm not asking for anything. Just sort of a rough idea?

Don Robinson

Paul, this is Don Robinson. Actually, under the terms of RFP and the confidentiality, we can't even give out rough numbers on what our megawatt-hour numbers are.

Paul Patterson – Glenrock Associates

Okay, can you give us an idea about what the potential impact to customers might be? I did notice that there was sort of a strange legislative thing a couple of months ago where they did pass something and then they took it away I guess because of jobs and location of factories, I believe was part of the issue.

Don Brandt

Let's go back though, and talk about the legislation. The legislation was something that was proposed and pulled. So it never actually was our action by the legislature on that. In terms of impact to customers, it's going to depend on two things over the long term. One is gas prices and the other, what happens to carbon. So we know from a capital cost, these things tend to be a little more expensive. But the benefit we have with solar is our conditions and our high capacity factors on-peak when we need them most.

Paul Patterson – Glenrock Associates

Okay. Thanks a lot.

Operator

Your next question comes from the line of Yiktat Fung from Zimmer Lucas Partners. Your line is open.

Yiktat Fung – Zimmer Lucas Partners

Congratulations on a solid quarter.

Don Brandt

Thanks, Yiktat.

Yiktat Fung – Zimmer Lucas Partners

I would just like to clarify sales forecast. Do you now expect '11-'12 sales to be flat to the new 2010 sales which is slightly lower than 2009?

Don Brandt

No, '10 through '12 we see flat sales sort of in the aggregate. So right now we're looking at maybe slightly negative sales that are not in '10. That would imply a slight pickup really in '12. But over the three-year period you're going to see sales pretty much flat lined.

Yiktat Fung – Zimmer Lucas Partners

So it's basically flat through 2009. 2011 and 2012 will be flat 2009. There might be a tiny dip in '10?

Don Brandt

That’s correct.

Yiktat Fung – Zimmer Lucas Partners

Okay. And just to check up on the legislature, has the legislation about kayak [ph] also been pulled?

Jim Hatfield

It's Jim. The recession is over in Arizona. So there was no action on that either. There is a workshop going on as well on line extension, and back to Don's original comment on decoupling, nobody really knows the timing of that moving forward.

Yiktat Fung – Zimmer Lucas Partners

Okay, thank you, very much.

Jim Hatfield

Yup.

Don Brandt

Okay. Thank you, Yiktat.

Operator

There are no further questions at this time. I'll turn the call back over to leadership for any further comments.

Don Brandt

Okay. Well, thank you for your time again this morning. We appreciate your interest. If you have any other questions don't hesitate to call any one of us. Have a great day.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pinnacle West Capital Corporation Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts