Pinnacle West Capital's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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Pinnacle West Capital Corporation (NYSE:PNW)

Q1 2014 Earnings Conference Call

May 2, 2014 12:00 pm ET

Executives

Paul Mountain - Director, IR

Don Brandt - Chairman & CEO

Jim Hatfield - CFO

Jeff Guldner- SVP, Public Policy, APS

Analysts

Greg Gordon - ISI Group

Julien Dumoulin-Smith - UBS

Ali Agha - SunTrust

Kit Konolige - BGC

Dan Eggers - Credit Suisse

Neil Mehta - Goldman Sachs

Brian Chin - Bank of America-Merrill Lynch

Paul Ridzon - KeyBanc Capital Markets

Steve Fleishman - Wolfe Research

Rajeev Lalwani - Morgan Stanley

Paul Patterson - Glenrock Associates

Charles Fishman - Morningstar

Andy Levi - Avon Capital Advisors

Operator

Greetings and welcome to the Pinnacle West Capital Corporation First Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Paul Mountain, Director of Investor Relations. Thank you, sir. You may begin.

Paul Mountain

Thank you, Christine. I'd like to thank everyone for participating in this conference call and webcast to review our first quarter 2014 earnings, recent developments, and operating performance.

Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Jeff Guldner, who is APS Senior Vice President of Public Policy, is also here with us.

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

Today's comments in our slides contain forward-looking statements based on current expectations. And the company assumes no obligation to update these statements. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements.

Our first quarter Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language, as well as the risk factors in MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures.

A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through May 9.

I will now turn the call over to Don.

Don Brandt

Thanks, Paul, and thank you all for joining us today. My comments today will focus on our generation portfolio and the regulatory landscape in Arizona. Jim will discuss the first quarter results and update you on our economic and financial outlook.

I'll begin with our Integrated Resource Plan filed on April 1, which outlines how we plan to meet Arizona's growing energy needs over the next 15 years. Our portfolio will continue to evolve into a cleaner, more flexible generation mix driven by renewable energy, energy efficiency and natural gas, with advanced technologies making the grid smarter and adding operational flexibility.

In our resource plan, we predict that the amount of renewable energy in our portfolio will double by 2029 driven by our continued leadership in solar energy.

The Solar Electric Power Association released its annual ranking of top solar utilities earlier this week, and APS moved up one spot to number three for growth in solar megawatts during 2013. We rank among the top five utilities for solar power in four categories.

Looked at another way, our solar investments combined with the investment in Solana Generating Station, enabled by our purchase power agreement, totaled $3 billion.

The AZ Sun Program is an important piece of that story. Construction and interconnection work remains on track at the Gila Bend site. The project with an expected in-service date of mid 2014 will bring 32 megawatts of utility-scale solar online. The next two projects totaling 20 megawatts that were approved by the ACC in December, 2013 are in the early stages of development. The 10 megawatt project in the City of Phoenix was approved by the City Council recently, an important step allowing us to move forward, and we are working with Luke Air Force Base on the land and the site plan for the 10 megawatt project at Luke.

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

The Palo Verde Nuclear Generating Station had an excellent quarter. All three units were at full power, slightly improved from the site capacity factor of 99% in last year's first quarter. The first of this year's two planned refueling outages began in Unit 2 on April 5, with all key work streams on track.

We discussed our summer preparedness plan with the commission last month. APS is well-positioned to meet customer demand this summer, despite drought conditions from a very dry winter that is expected to result in higher fire potential beginning in May.

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

Now turning to the regulatory landscape, I'll preface my comments with a brief recap. We were the first major utility to open a dialog about how to enable the continued growth of rooftop solar and still protect customers who do not want or cannot install solar on their homes. As we wrote in December, 2012, when we proposed a stakeholder conference, to explore the subject, and I quote, "It is APS's intent that the conference results in a collaborative solution resting on three primary pillars: one, an equitable and balanced distribution of cost and benefits; two, subsidies, if any, that are transparent; and three, a sustainable means for solar to continue in Arizona." By raising the net metering problem early, long before there is a financial issue for our company, APS and Arizona are in a stronger position today.

The ACC and other stakeholders, including the state's Residential Utility Consumer Office or RUCO, have recognized that net metering creates an unfair cost shift causing non-solar customers to pay higher rates to maintain the electricity grid. Commissioners and staff now understand the issue as well as any public utilities commission in the nation. Our relationships with the commission and the staff and other stakeholders remain very constructive.

On April 15, we filed the first quarterly reports on the level of rooftop applications and installations. More than 2,200 residential grid type solar photovoltaic systems were installed in the first quarter bringing the total number on our system to more than 25,000. There were 1,100 applications in the first quarter compared to 1,800 in the first quarter of last year and 2,600 in the fourth quarter.

The new rules related to rooftop solar have only been in effect for a few months and have shown significant month-to-month volatility. So I believe it's too early to draw conclusions about what the pace of installations in the first quarter of this year means. The important point is that Arizona remains ahead of schedule to meet its goals for renewable energy.

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

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

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

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

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

Let me conclude with a personal observation about Arizona's economy. Jim will walk you through several economic indicators which continue to move in a positive direction. More broadly though, there is a new sense of momentum among the business community here in Arizona. Forbes Magazine has ranked Arizona as the number one state for expected job growth over the next five years, beating out Texas for the top spot. Forbes also ranked Phoenix the third fastest growing city in America.

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

I'll now turn the call over to Jim.

Jim Hatfield

Thank you, Don. The topics I will discuss today are outlined on Slide 4. I'll begin with a review of our first quarter results including earnings and the primary variances from last year's first quarter, followed by an update on the Arizona economy, and I'll conclude with a review of our financial outlook.

Slide 5 summarizes our GAAP net income and ongoing earnings, which are the same this quarter. As usual, my comments will refer to ongoing earnings. For the first quarter of 2014, we reported consolidated ongoing earnings of $16 million, or $0.14 per share, compared with ongoing earnings of $24 million, or $0.22 per share, for the first quarter of 2013. Excluding the effects of weather, year-over-year earnings were actually up $0.05 per share in the first quarter of this year versus the first quarter of 2013.

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

Higher depreciation and amortization expenses decreased earnings by $0.03 per share primarily due to additional plant and service. Higher taxes other than income taxes reduced earnings by $0.02 per share due to higher property tax rates. The net impact of other items, including higher interest expense, decreased earnings by $0.03 per share.

A decrease in our gross margin reduced earnings by $0.09 per share, compared with the prior year's first quarter period. I'll cover the drivers of our gross margin variance on the next slide.

As a reminder, both the gross margin and O&M variances exclude expenses related to the renewable energy standard, energy efficiency and similar regulatory programs, all of which are essentially offset by comparable revenue amounts under adjustment mechanisms. Also, the deferrals associated with the Four Corners transaction are treated in a similar manner. The drivers I discussed exclude these deferrals as there was no net impact on the first quarter of 2014 results.

Turing to Slide 7 and the components of the net decrease of $0.09 in our gross margin, the main components of this were as follows. The lost fixed cost recovery mechanism improved earnings by $0.02 per share, which, as designed, offset some of the impact from energy efficiency programs and distributed energy. Higher usage by APS's customers compared to the first quarter a year ago increased quarterly results by $0.01 per share. Weather normalized retail kilowatt-hour sales, after the effects of energy efficiency programs, customer conservation, and distributed generation, were up 0.6% in the first quarter of 2014 versus 2013.

The net effect of other miscellaneous items increased gross margin by $0.04 per share including the benefit of the two Arizona Sun projects that went to service at the end of 2013. Lower transmission revenue decreased earnings by $0.03 per share due to a prior period true up recorded in the first quarter of 2013.

We have included a couple of slides in the appendix that outline how the TCA works in a bit more detail.

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

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

Vacant housing in Phoenix Metro has fallen by more than half since its peak in early 2010 and is at its lowest level in six years. Housing prices have responded. On the upper left-hand side of Slide 8 you can see that prices on existing home sales are 14% higher than they were a year ago and up 44% from the bottom of the market in mid-2011. Improved home values are providing more support to new home construction. Additionally, vacancy rates have fallen in all non-residential categories, as you can see in the upper right of Slide 8.

The lower left hand side of slide eight shows that permits for new single family homes increased 8% in 2013 over 2012 and more than 75% from the low point in early 2011. Despite the mild start this year in housing permit activity, we expect to see continued permit growth as the Arizona economy continues to improve. Overall, stable activity plus business investment in the region has led to 6% gain in construction jobs in just last year alone, which is supporting total non-farm job growth, as seen on the lower right hand side of Slide 8.

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

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

Additionally, we expect our annual weather-normalized retail sales in kilowatt hours to increase by about 1% on average from 2014 through 2016, primarily due to improving customer growth being partially offset by our customer programs and conservation.

The headwinds from the overgrown housing market and associated construction job losses are largely behind us and the state is poised to embark on its next phase of sustained growth. This resurgence in growth is expected over the next few years. True to form, Arizona's population rate is growing at double the national average. The exact timing and final path of the growth trajectory depends on many factors, but the roots of our future growth are well-anchored in fundamentals.

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

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

Finally, I'll review our financial outlook and earnings guidance. In terms of our recent financings on May 1, APS purchased the Maricopa County 2009 Series A, D, and E Pollution Control Bonds totaling $100 million. We expect to remarket these bonds within the next 12 months. Overall, liquidity remains strong. At the end of the first quarter, the parent company had $10 million of commercial paper outstanding and APS had no short-term debt outstanding.

In March, we received a procedural order related to the application and approval of the Four Corners rate rider. Hearings are scheduled to begin in August with a final decision expected by year-end. The complete ALJ procedural schedule is included in the appendix to our slides. Even though the Four Corners rate rider is now expected later than we originally assumed, we continue to expect that Pinnacle West consolidated ongoing earnings for 2014 will be in the range of $3.60 to $3.75 per share. A complete list of factors and assumptions underlying our 2014 guidance is included on Slide 13, which are mostly unchanged.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Greg Jordan with ISI Group. Please proceed with your question.

Greg Gordon - ISI Group

Good. Two questions as it relates to growth. So the customer growth was 1.3% in the quarter and that was good. You're at 0.6% sales growth, and I see that that was really led by residential?

Don Brandt

Yes.

Greg Gordon - ISI Group

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

Jim Hatfield

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

Greg Gordon - ISI Group

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

Don Brandt

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

Operator

Our next question comes from the line of Julien Dumoulin-Smith with UBS. Please proceed with your question.

Julien Dumoulin-Smith - UBS

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

Jeff Guldner

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

Julien Dumoulin-Smith - UBS

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

Jeff Guldner

You only just need to look at how some of the discussion will evolve. So, obviously, we expect that in the value DG workshop there is going to be some discussion around rate design issues.

Julien Dumoulin-Smith - UBS

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

Jeff Guldner

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

Julien Dumoulin-Smith - UBS

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

Don Brandt

I don't know whether it would be separate or not.

Julien Dumoulin-Smith - UBS

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

Jim Hatfield

Well Four Corners is slightly less than $0.01 amounts delay, so somewhere around $0.04, $0.05 for us, but we have that incorporated in our guidance.

Operator

And our next question comes from the line of Ali Agha with SunTrust. Please proceed with your question.

Ali Agha - SunTrust

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

Jim Hatfield

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

Ali Agha - SunTrust

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

Jim Hatfield

No. I think it's just been steady cost control as you see in the first quarter.

Ali Agha - SunTrust

Also, on the AZ Sun program, where is the commission right now on its thinking on the final 30 megawatts? I know there were some talks that maybe that's not required any more. If you just give us an update on that and when that is supposed to be resolved.

Don Brandt

Well, if you remember, last year the commission approved another 20 megawatts, 10 megawatts for City of Phoenix, 10 megawatts for Luke, and said when you come back for your 2014-2015 filing, we'll see how your penetration of rooftop and load and the need. We filed for 20 of that 30, and we're waiting the commission approval on it.

Ali Agha - SunTrust

So this process will clarify the thinking whether that's needed or not basically?

Don Brandt

Correct.

Ali Agha - SunTrust

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

Don Brandt

Yes.

Operator

Our next question comes from the line of Kit Konolige with BGC. Please proceed with your question.

Kit Konolige - BGC

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

Jim Hatfield

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

Kit Konolige - BGC

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

Jim Hatfield

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

Operator

Our next question comes from the line of Dan Eggers with Credit Suisse. Please proceed with your question.

Dan Eggers - Credit Suisse

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

Jim Hatfield

Well, typically, you see anywhere from 12 to 24-month delay in permitting to home construction. And, of course, there is anomalies in that, and it could be longer, but we see, and Moody's projects around 25,000 permits this year, which is going to relate to the customer growth of about 2%, 2.5% over the next three years. So we'll see permits begin to accelerate once -- as Don alluded to, they are getting skilled craft trained and you'll see permits pick up and growth will follow.

Dan Eggers - Credit Suisse

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

Jim Hatfield

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

Dan Eggers - Credit Suisse

And then I guess one of the things we'd heard from our homebuilding analysts is there is talk of more of these homes being built with the option of solar being included with construction. When you guys talk to the developers, what rate of absorption are they seeing and hearing as far as people opting for solar to be built on the house at construction?

Don Brandt

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

Dan Eggers - Credit Suisse

That hasn't?

Don Brandt

What the percentages of those that are building a home are electing to go solar or not.

Dan Eggers - Credit Suisse

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

Don Brandt

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

Dan Eggers - Credit Suisse

And I guess one last question from me, system performance level. As the solar stake is increasing, are you seeing any more volatility kind of in the daily dispatch profile or the requirements on your peaking ramps as far as when solar is on and off? And how is that changing as Ocotillo, the need for new physical generation?

Don Brandt

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

Dan Eggers - Credit Suisse

And the Ocotillo timing, when you guys model out works with kind of the timing, does the solar share takes greater impact?

Jim Hatfield

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

Dan Eggers - Credit Suisse

But you guys are okay from a system performance level?

Jim Hatfield

Oh, yes.

Don Brandt

Oh, yes.

Dan Eggers - Credit Suisse

Okay.

Jim Hatfield

And lot of the solar is spread out across the system, so that has an impact as well.

Operator

Our next question comes from the line of Neil Mehta with Goldman Sachs. Please proceed with your question.

Neil Mehta - Goldman Sachs

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

Jim Hatfield

Well, obviously, we're targeting average of around 4%. And we'd have to see clear path to rate-based growth greater than 6% or 7% we're seeing now to give us confidence to sort of move beyond what we're seeing right now. Our payout ratio continues to be in the low 60, so we haven't a lot of flexibility moving forward.

Neil Mehta - Goldman Sachs

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

Jim Hatfield

Not until 2016.

Neil Mehta - Goldman Sachs

2016.

Jim Hatfield

At the earliest.

Neil Mehta - Goldman Sachs

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

Don Brandt

That's pure speculation, Neil.

Operator

Our next question comes from the line of Brian Chin with Bank of America-Merrill Lynch. Please proceed with your question.

Brian Chin - Bank of America-Merrill Lynch

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

Jeff Guldner

Yes, Brian, this is Jeff. I think some of the ones that you just outlined are good, are right on target with that. I mean, what I think you're going to see certainly is some discussion in the value of DG workshop around what you think about solar valuation, the valuation of rooftop solar, but I think there is also going to be some discussion around how that pairs up with the value of the grid. And that's going to be a broader discussion, obviously, than just APS. So we'll have other utilities that are in there. And I think it's going to be difficult to have that kind of discussion without ultimately looking at some of the other aspects around rate design. And so, as that unfolds, I think we'll be able to see a little bit more about what that dialog looks like, what the other utilities are thinking.

We also like the opportunity here in that from a number of different industry experts from around the country. That's one of the things that the commission has done I think a nice job in lining up. Folks are going to provide commentary during those workshops. So those are just going to start next week. We'll go in and see how those progress, and obviously that will inform some of our decision making.

Brian Chin - Bank of America-Merrill Lynch

And then if you could remind us of the timeline of the workshop, and then roughly sort of the general timeframe under which we're more likely to see public commentary from you about how you wish to proceed in the next rate case?

Don Brandt

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

Operator

Our next question comes from the line of Paul Ridzon with KeyBanc Capital Markets. Please proceed with your question.

Paul Ridzon - KeyBanc Capital Markets

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

Jim Hatfield

No equity until at least 2016.

Paul Ridzon - KeyBanc Capital Markets

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

Jim Hatfield

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

Paul Ridzon - KeyBanc Capital Markets

And that's baked into your flat assumption?

Jim Hatfield

Yes.

Operator

Our next question comes from the line of Steve Fleishman with Wolfe Research. Please proceed with your question.

Steve Fleishman - Wolfe Research

Couple of questions. Just first, these workshops, are they going to be webcast so that we can listen in? Do you know?

Jim Hatfield

Yes. Yes.

Steve Fleishman - Wolfe Research

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

Don Brandt

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

Steve Fleishman - Wolfe Research

Okay.

Don Brandt

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

Steve Fleishman - Wolfe Research

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

Don Brandt

To answer to your last one first, so far it has not and we're sort of in the not early stages, but many of the candidates are still gathering the signatures and the other information data that's required for them to be a candidate in the clean elections process and for the primaries.

Steve Fleishman - Wolfe Research

Okay. Just two spots that are up, if I recall?

Don Brandt

That's correct.

Steve Fleishman - Wolfe Research

And then, lastly, I think there's this ruling by the Department of Revenue to put a property tax on solar leases. Has that been finalized and has that occurred and maybe is that having any impact on some of these additions?

Don Brandt

Well, to clarify the issue, the statute that requires generating assets that you should not link an entity is not using the generation themselves, i.e., rooftop solar under lease arrangement versus a homeowner that outright owns his generation. And it's the same law applies to our solar properties, has been on the books for years. These solar lease companies were not paying that tax. Last year about this time, the Arizona Department of Revenue issued a ruling that they were required to pay it. It's pretty clear when you look at the law.

In the legislature this last session they were, they being these solar lease entities, running or attempting to run legislation to exempt themselves from that tax; and the tax would be on them, not on the homeowner. And they weren't very successful at it. And, say, early or midstream in that process they turned on that APS was trying to raise property taxes on solar customers, and just within the last -- the legislature ended their session last week, and just recently as of yesterday, they were posting on some of their websites an attack on our governor and that her administration, I presume by that they mean the department of revenue, was applying this tax.

The facts are the tax has been on the books as a statue for years, and they weren't paying it. Now they're being required to comply. That's sort of where we are at right now, if that answers your question.

Steve Fleishman - Wolfe Research

Yes. No, thanks for clarifying that. Appreciate it. Thanks, guys.

Don Brandt

Thanks.

Operator

Our next question comes from the line of Rajeev Lalwani with Morgan Stanley. Please proceed with your question.

Rajeev Lalwani - Morgan Stanley

Hi. Thanks for taking my questions. First one was just on the quarterly DG filings. To the extent there's an acceleration or a deceleration in applications, do you expect the commission to change some of those fixed charges that they've implemented?

Jeff Guldner

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

Rajeev Lalwani - Morgan Stanley

And then just another question on the rate case. What's the test year that you're going to use?

Jeff Guldner

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

Rajeev Lalwani - Morgan Stanley

Okay. And then just based on the guidance you provided for the year, what's the earned ROE from a regulatory standpoint that you're forecasting?

Jim Hatfield

Well, it's going to be in excess of 9.5% and short of 10%.

Rajeev Lalwani - Morgan Stanley

Okay. And so the rate ask or the revenue ask doesn't seem like it's going to be a very big number is kind of the takeaway?

Jim Hatfield

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

Operator

Your next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed with your question.

Paul Patterson - Glenrock Associates

Most of my questions have been answered, but just sort of focusing back on Slide 11 and the customer energy efficiency. I was just wondering how much of that do you guys estimate is because of utility programs, things you guys are doing versus just sort of general trends I guess in consumer behavior?

Jim Hatfield

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

Paul Patterson - Glenrock Associates

And then just sort of following on Steve's question about the trends in installations, one of the things, I guess, one might think could happen is that due to a change in pricing or what have you, with the charge and what have you, that there might have been an acceleration of activity in the fourth quarter. And as time goes on that might get more normal. In other words, you might see sort of a cannibalization of sort of the first quarter stuff or being brought in, I guess, a little bit earlier into the fourth quarter.

I'm just wondering when we look at the trend throughout the quarter or as much data as you have through April or what have you, do you see -- and I know it's volatile and I completely understand what you guys are talking about, but do you see a trend in solar installations that are trending upwards as the months go on or is it really just too hard to tell?

Jeff Guldner

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

Operator

Question comes from the line of Charles Fishman with Morningstar. Please proceed with your question.

Charles Fishman - Morningstar

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

Jim Hatfield

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

Charles Fishman - Morningstar

And so, on the box on the right, you have last year, let's say, little over 28,000 gigawatt hours of total retail sales, and what you're saying is the 60 gigawatt hours are -- is that just for one year or is that cumulative?

Jim Hatfield

Just one year.

Charles Fishman - Morningstar

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

Operator

Our next question comes from the line of Andy Levi with Avon Capital Advisors. Please proceed with your question.

Andy Levi - Avon Capital Advisors

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

Jeff Guldner

In terms of the applications coming down?

Andy Levi - Avon Capital Advisors

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

Jeff Guldner

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

Andy Levi - Avon Capital Advisors

Right. Yes, because $5 I can't see affecting consumers' decisions. Okay. So then kind of back to what Brian Chin was talking about. So just to understand the process for the rest of the year, we're going to have these workshops where the various stakeholders will discuss their views, obviously net metering being the issue in getting that $5 charge increased to a more reasonable level. And then once the workshops are done, you really get in, and just tell me if I'm right or wrong on this, you really get into the point of not only whether you file for a rate increase or not a rate increase, which you probably won't do, but really whether the commission is going to move ahead in trying to deal with the net metering issue and raising that amount before the end of the year. Is that correct?

Jeff Guldner

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

Andy Levi - Avon Capital Advisors

And is this scenario possible that net metering charge gets altered as a result of these workshops?

Jeff Guldner

I don't think it's as a result of these --

Andy Levi - Avon Capital Advisors

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

Jim Hatfield

Well, Andy, I don't think we have any expectations. We said here today that that workshop is going to alter that charge. And remember, that charge has offset the CLFTR. So it would not have an impact on EPS.

Andy Levi - Avon Capital Advisors

I know, I understand that. But I guess, the kind of the way I kind of viewed your stock performance recently, it seems that most of the underperformance has to do with solar penetration/net metering and that can continue on. And you look at the state of California, they're probably going to come up with a net metering charge in the $20 range, $25 range. And I think if there was a more fair charge or more balanced charge between solely users and utility that may make a difference in people's perception of your long-term prospects. So, that's kind of what I'm getting at. And I guess from, I don't know, talking to some people down in Arizona who maybe are in the position to make decisions, it seems that there's at least with some a desire to get a more equitable balance between solar, and the company, or the utilities I should say. So that was kind of the line of questioning where I would see if we could get something done this year, but I understand these need to get through the workshops and all that first.

Jim Hatfield

Yes.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the floor back over to Mr. Mountain for closing comments.

Paul Mountain

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

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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