Pinnacle West Capital Earnings Call Insights: Medium-Term Earnings Outlook and Net Metering
Medium-Term Earnings Outlook
Greg Gordon – ISI Group: So, I’m just looking at Slide 17 of your presentation where you lay out the drivers for the medium-term earnings outlook. To me there seems to be a modest but notable change there in that year. Your prior guidance presumes relatively flat retail electricity sales volume growth through ’13 to ’15 and now you are assuming that you will actually see some modest growth. So, I just wanted to make sure I’m seeing that correctly that you have revised up your sort of net kilowatt hour sales growth assumptions?
James R. Hatfield – CFO: Yeah. Greg, that’s exactly right and you know we’ve seen now for two quarters positive sales growth. And what we were assuming flat, you know in the shoulder quarters for us which was the fourth quarter and first quarter, it’s hard to read a long-term pattern, but at this point, we do see very modest growth where we saw flat previously.
Greg Gordon – ISI Group: Would you still – would your base case still assuming that you earn under your authorized ROE wouldn’t that give you the operating leverage to potentially close the gap towards the 10% growth aspiration?
James R. Hatfield – CFO: Absolutely.
Greg Gordon – ISI Group: 10% ROE aspiration.
James R. Hatfield – CFO: Yes. Absolutely…
Greg Gordon – ISI Group: The other thing that I’m wondering is whether you have any more refinancing opportunities that could further reduce your interest cost. You commented on the potential for lower interest rates later in the year, causing you to further revise your outlook, are you looking at opportunities for big maturities coming due that you could refinance lower.
James R. Hatfield – CFO: We don’t have anything for the rest of the year other than what I talked about in my remarks, Greg. And I don’t think we have another opportunity until ’14.
Greg Gordon – ISI Group: And then where do you stand on sort of ongoing cost management opportunities. This is the first time in a decade that you haven’t had to turn around to just file another rate case after resolving a regulatory uncertainty. And last time we spoke you talked about whole number of sort of operating efficiency and cost cutting measures that you were looking at. Is there any update on that?
James R. Hatfield – CFO: Yes, I’d say we are executing against our plan. I’m very pleased on where we are. If you look at the first quarter, you really have a couple of drivers that caused the $0.07 comparison, and one is the stock compensation that’s just based on stock price all time high. And the second is related deferral. Amortization of the deferral from our 2009 rate case on pension which theoretically we got recovery for in the non-fuel based rate increase. So, I’m very pleased. The IT cost that I mentioned being higher quarter-to-quarter, we decided to make some strategic investments in IT that should drive down cost beginning 2014 and beyond. So, that’s a very conscious thing on our part to take this opportunity to invest in the future. Other than that, cost would – came in flat year-over-year.
Donald E. Brandt – Chairman, President and CEO: Hey Greg, Don here. Let me add to that too. As I know you and others that were out for our Analyst Day last fall, saw the extensive presentations that both Jim Hatfield here and Mark Schiavoni covered in their spearheading this effort with the entire office or team. And I don’t characterize is at you know as cost cutting, but we’re putting in processes and that’s to better coordinate across operating units with the Company, streamlining some of the efforts and were seeing the results of that very optimistic about continuing results through the balance this year and frankly for years well into the future…
Greg Gordon – ISI Group: So, Don, would it be fair to say if the economy in Arizona and Phoenix does continue to accelerate, and you have some success in these cost control initiatives that Arizona Public Service are actually earning its authorized return is possible over the forecast period for the first time in a long time?
Donald E. Brandt – Chairman, President and CEO: Yes, very much so.
Kevin Cole – Credit Suisse: Don, if I guess on the back of Greg’s question, does the stronger realized performance now I guess – now expectations change your dividend recommendations to the board from the 4% annual increase?
Donald E. Brandt – Chairman, President and CEO: Kevin, you know we visit that with the Board in the fall at the October meeting, and I think our aspirations that we’ve laid out at least right now remain the same going forward.
Kevin Cole – Credit Suisse: Okay. And then I guess with the ACC’s review of net metering in the states I think 22% energy efficiency standard. Is this, like a result in change in tone or realization that the programs are becoming increasingly regressive as they scale up? And I guess, is it also safe to say that the study has not become more accommodative towards net metering?
Donald E. Brandt – Chairman, President and CEO: I wouldn’t characterize it as not more accommodating or less accommodating. I think, both we – right now, we are in a series of information gathering meetings and open to the public and interested parties, voice concerns in that and our primary interest is to make certain that one, all the parties and the commission understands what in fact the subsidies are that they are transparent and that there are some clear policy decisions being made going forward. And our primary interest is creating a sustainable energy future for Arizona and clearly we’ve been supportive as the record indicates of solar across the board, utility scale owned by us, utility scale owned by others like Abengoa’s project that will be the largest of its kind in the world when it’s done in a couple of months, and residential rooftop solar has been a big component and I expect it to continue to be so in Arizona.
Kevin Cole – Credit Suisse: Have you run any initial numbers to see how like what the impact of net metering or of energy efficiency if it gets like let’s say beyond a low hanging fruit to something like the 10% or greater magnitude, like what sort of impact that has on de-skewing rates from towards lower income folks, I guess skewing rates downwards?
Donald E. Brandt – Chairman, President and CEO: We’ve got a variety of different scenarios we’ve run and we’ve got the cost and that’s what we’re basically talking to all the parties about. Here are the facts and how does going forward – what might our recommendations to the Commission, what might be their recommendations to the Commission on how to design rates to basically create an environment that’s fair to all customers.
A Closer Look: Pinnacle West Capital Earnings Cheat Sheet>>