May 5, 2009
Executives
Rebecca Hickman – Director, IR Don Brandt – Chairman and CEO Jim Hatfield – SVP and CFO Don Robinson – President and COO of APS
Analysts
Greg Gordon – Citigroup Paul Patterson – Glenrock Associates Paul Ridzon – KeyBanc Daniel Sites [ph] – Dudek Research Group [ph] Kevin Fallon – Blenheim Capital Management Andrew Levy – Incremental Capital Reza Hatefi – Decade Chris Shelton – Millenium
Operator
Good morning, my name is Jamal, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2009 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. Now, I would like to turn the call over to Miss Rebecca Hickman, Director of Investor Relations.
You may begin, ma’am.
Rebecca Hickman
Thank you, Jamal. I’d like to thank everyone for participating in this conference call 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. John 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, I encourage you to check the quarterly earnings and statistics section of our Web site.
It contains extensive supplemental information on our earnings variances and quarterly operating statistics. Second, please note that all our references to per share amounts will be after income taxes and based on diluted shares outstanding.
Third, we will be referring to slides today during this conference call and webcast. The slides are available on our Investor Relations Web site with the webcast, and with the Form 8-K filed this morning.
During our prepared remarks we will give you verbal cues as we move through the slides. Looking at slide two, it is my responsibility to advice you that this call and our slides will 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 and the MD&A sections contained in our first quarter 2009 Form 10-Q, which was filed with the SEC this morning, as well as the risk factors section of our 2008 Form 10-K. All of which identifies some important factors that could cause actual results to differ materially from those contained in our forward-looking statements.
Next, during this call we will discuss certain non-GAAP financial measures. Our press release, the slides accompanying this webcast, and our filings with the SEC, all of which are posted on our Investor Relations Web site contained additional disclosures regarding these non-GAAP measures including reconciliations of these measures to the most comparable GAAP measures.
A replay of this call will be available on our Web site, www.pinnaclewest.com, for the next 30 days. It will also be available by telephone through May 12.
Finally, this call and webcast are the property of Pinnacle West Capital Corporation, and any copying, transcription, redistribution, retransmission, or rebroadcast of this call, in whole or in part, without Pinnacle West’s written consent is prohibited. At this point, I’ll turn the call over to Don.
Don Brandt
Thanks, Becky. I’d like to thank everyone for joining us on the call today.
We have been focused on excellence on operations throughout the organization and optimizing the positioning and value of Pinnacle West and our subsidiaries for the future. Today, I will discuss several major milestones we have achieved since our last earnings call with you.
Two weeks ago, we announced we have reached an agreement in principle to settle APS' pending retail rate case, and yesterday, a term sheet outlining the proposed settlement was filed with the Arizona Corporation Commission. In late March, we completed the review of SunCor’s strategies, markets, and properties, as a result we announced to plan to restructure SunCor by disposing a majority of its real estate assets.
Also in March, The Nuclear Regulatory Commission recognized that Palo Verde operations have improved significantly and returned to plant to routine inspection and oversight. I will discuss these and other operational and regulatory matters in some detail.
Then I’ll return the call over to Jim to discuss our first quarter results and other financial updates. I’ll begin with the proposed rate settlement.
Yesterday, APS, the ACC staff, and other parties to the pending retail rate case filed with the ACC a term sheet outlining the proposed settlement of the case along with the recommended schedule for filing a definitive settlement agreement and for the commission’s consideration of the settlement. Throughout the negotiation process, the discussions were open to all parties to the rate case.
In fact, the vast majority of the parties did indeed participate. Through the settlement process APS and the parties agreed to a rate and financial stability plan that provides benefits for APS, our customers, our investors, and other stakeholders.
Additionally, many provisions of the settlement are focused on advancing Arizona’s sustainable energy future. Of course to achieve all of these benefits it is essential the commission approves the settlement as proposed.
Slide four outlines the primary benefits of the settlement as we see them from an investor’s perspective. Among other things, the plan strengthens APS' financial position, supports the common dividend, and improves APS' ability to attract capital for needed infrastructure additions.
It provides a greater level of cost recovery and return on investment for APS all providing rate stability for our customers. Completing the settlement also allows the opportunity for us to help shape Arizona’s energy future outside continual rate cases.
Further, it continues APS' strong commitment to cost control and efficiency. And finally, it provides for a significant increase in energy efficiency programs and expands upon the current scope and magnitude of renewable energy programs.
Now, I will describe the major financial provisions of the settlement, which are outlined on slides five through eight. APS' annual base rate revenues will increase $207 million under the settlement effective January 1st of 2010.
This result compares with $278 million in APS' request. As you recall you’re currently collecting $65 million a year through our interim base rate sure charge that will continue until rate goes into an effect through a general rate case decision.
Consequently, net base rate revenues would increase $142 million annually or about 5.4% when the settlement is implemented. The proposed increase includes the following components, a non fuel related increase of $196.3 million and a net fuel related increase of $11.2 million.
The proposed rates are based on allowed return equity of 11%, compared with the 11.5% originally requested by APS. Besides the base rate provisions, there are a number of other financial provisions.
In 2010 to 2012 or the earlier conclusion of APS ‘s next general rate case payment collected for line extensions and upgrades will be recorded as revenues instead of contributions in aid of construction as they are now. At this time, we estimate this change will add pretax revenue of $23 million in 2010, $25 million in 2011, and $49 million in 2012.
These estimates are of course highly dependent upon the number and type of new customers added by APS during those years and are provided only to give you some ideas of relative significance of this change in accounting for such proceeds. In 2011 and 2012, APS will be allowed to defer for future rate recovery, increases in cost for pensions and other post retirement benefits above the 2007 test year amounts subject to certain Caps.
The provision of the proposed settlement underscores APS' ongoing cost management and efficiency efforts. In December 2008, interim rate decision, the commission asked us to review APS' expenses targeting reductions of at least $20 million.
As a result of the proposed settlement, APS will identify an additional $10M of pretax expense reductions to be implemented in 2010. The average annual expense reduction of $30 million the previous $20 million plus the new $10 million are to continue through 2014.
On March 18, we filed with the ACC a report stating we had identified annualized cost reductions of $25.9 million. Jim will discuss the cost reduction filing in a bit more detail.
Finally, APS is to obtain a total of at least $700 million of equity infusions in the five-year period from the date of this definitive settlement agreement as filed through 2014. The parties have agreed to the parameters for APS' filing of its next two general rate cases as summarized on slide eight.
APS may file general based rate requests on or after June 1st of 2011 and June 1st of 2013. A based rate increase resulting from APS' next rate case may not become effective before July 1st of 2012.
And the settling parties intend to process future cases within 12 months of sufficiency findings by the ACC staff. Those are the major provisions of the proposed settlement as outlined in the term sheet we filed yesterday.
As shown on slide nine, the parties have indicated the definitive settlement agreement will be filed on June 12. We have asked the ACC administrative law judge to establish a procedural schedule requiring filing of initial testimony by the supporting parties by July 1st with additional testimony by supporting an opposing party in late July and early August, culminating with a hearing beginning August 17th.
We expect the procedural order from the ALJ in the very near future. Under this schedule, it is likely that the ALJ could issue a recommendation and turn the case over to the ACC commissioners for their consideration sometime in the early fourth quarter of this year, thus allowing for a commission decision which would permit new rates to become effective on January 1st of 2010 as proposed.
Next, I’ll discuss our restructuring plan for SunCor. We reviewed SunCor’s strategies, market, and the assets because of current distress conditions in the real state and the credit markets.
Our expectation of such conditions will continue for some time and conditions imposed by SunCor’s banks while reviewing, excuse me – renewing an existing SunCor credit facility in early 2009. Based on the results of the reviews, the SunCor board of directors decided in the late march to restructure SunCor by completing a series of strategic transactions, to dispose of a majority of SunCor’s assets and as a result to reduce it’s outstanding debts.
Through the restructuring, SunCor will sell its home building operations, master plan communities, and golf courses. We currently plan to complete the asset sales in 2009.
The sale proceeds will be used to pay down SunCor’s debt substantially eliminating it by the end of the program. SunCor currently plans to retain commercial assets at its Hayden Ferry Lakeside project in Tempe, Arizona.
And about 2000 acres of commercial land at its Palm Valley project in the Western Phoenix metropolitan area. Execution of this strategic restructuring plan will provide a number of benefits, which include maximizing the value of SunCor’s remaining assets, allowing SunCor to focus on key real state segments in the Phoenix area; substantially eliminating SunCor’s outstanding debts producing at least $80million of cash tax benefits; and last but not least, eliminating real estate earnings (inaudible) for Pinnacle West.
Jim will discuss the financial impacts of the SunCor’s restructuring plan. Turning to operating performance, Palo Verde continues to pose very solid performance.
The nuclear units ran at full power throughout the first quarter of this year, compared with a 92% site capacity factor in last year’s first quarter. Regarding Palo Verde refueling outages, there are two each year.
Unit three is currently in a refueling outage, which is scheduled for completion in mid May with a duration of 40 to 50 days. This fall, unit two is scheduled for an outage of about 60 days, which will be the first outage during which we will replace a unit’s reactor, excuse me – reactor vessel head and install a new rapid refueling package.
We plan to make similar improvements in the other two units in 2010. The NRC has formally recognized Palo Verde’s significant operational improvements.
On March 24th, the agency cleared the confirmatory action letter and moved unit three to column one from column four of the NRC’s reactor oversight matrix. Thus returning Palo Verde to routine inspection levels and ending the heightened scrutiny under which the plant has been operating.
Randy Edington and his team have done a tremendous job of improving Palo Verde’s performance. Our focus is safe, long term, sustainable first quarter performance in all aspects of Palo Verde’s operations.
We have established five-year targets to consistently achieved 88% site average capacity factors, 30-day refueling outages, and production cost under $0.02 per kilo watt hour. Certainly, clearing the confirmatory action letter and returning the column one in the shortest time ever for any nuclear facility were very important steps in achieving our long term goal.
Our coal fire plants continue to operate superbly. In the first quarter, the coal plants posted a 78% capacity factor, which was comparable with their performance in the first quarter a year ago.
And ahead of the latest available industry average of 75%. In the first quarter of both years, the capacity factors largely reflect normal seasonal overhauls and maintenance.
Now, I’ll turn the call over to Jim, who’ll cover our earnings and other financial updates. Jim?
Jim Hatfield
Thank you, Don. Today, the five topics I would like to touch upon as showed on slide 11 are, first quarter results; the financial impacts of the SunCor restructuring plan to which Don referred; earnings outlook for both 2009 and more importantly, 2010; our current liquidity situation; and, the common dividend level.
First, beginning with the first quarter results on slide 12. We reported, on a GAAP basis, a consolidated net loss attributable to common share holders of $156.5 million or $1.55 per share in the first quarter of 2009 as compared to net loss of $4 million or $0.04 per share in 2008’s first quarter.
Earnings were down primarily due to the real state impairment and related charges recorded in this year’s first quarter as well as lower results in APS. I’ll cover SunCor’s restructuring from a financial perspective later.
Excluding the real state impairment related charges, we recorded, on an on going basis, a net loss of $29 million or $0.29 per share in this year’s first quarter as compared to a net loss of $4 million or $0.04 per share for the same period in 2009. On slide 13, as a reconciliation of our GAAP earnings to our ongoing earnings per share.
The reconciliation is also available in the body of the earnings release and on our web site. A couple of comments on the reconciliation before we move on.
First, the difference with turning report and ongoing earnings, as you can see on the slide relates totally to SunCor. Second, we expect a majority of SunCor’s operations to move in to discontinued operations beginning in the second quarter.
This will move most of the SunCor s out of ongoing results and therefore reduced the drag on ongoing earnings. Moving on to slide 14, we’ll begin the discussion of earnings with a look at year-to-year variations to our ongoing earnings per share.
You can see the major drivers were gross margin at APS was off $0.09 per share. I’ll provide some detail on gross margin on the next few slides.
Marketing and trading contributions were off $0.04 per share due to the expiration of our large wholesale contract in 2008. This was a contract entered into earlier in the decade.
To clarify, we have not been actively pursuing marketing and trading for some time. O&M expense is lower in this year’s quarter to the tune of $0.01 per share.
This is primarily due to lower levels of expenses across the board, partially off set by higher expenses in fossil generation related to planned outages at units. This is net of RES related expenses, which are collected at surcharge.
Expenses related to our capital program, which includes infrastructure additions and improvements are up approximately $0.07 per share in this year’s quarter. The expenses are primarily depreciation, property tax, and interest.
Other expenses net of other income increased $0.04 per share in this year’s quarter. And lastly, you can see the $0.02 miscellaneous items net at the bottom of the chart.
If you add all of that up, you can see all you can see the components of the $0.25 per share ongoing earnings variance. On slide 15, you see the drivers of gross margin variances in the first quarter 2009 as compared to the first quarter of 2008.
This also excludes the impact of RES as previously mentioned. On slide 14, APS' gross margins were down by $0.09 on a comparative basis from the first quarter of 2008.
On the positive side, we have the benefits of the pretax $65.2 million interim decision, which was effective with the first billion-cycle in 2009. The impact of that in the first quarter was $0.80 per share.
Additionally, we have the transmission rate increase by perk of our formula rates in the subsequent operation of our retail transmission cost adjuster, which improved gross margins by $0.04 per share. Conversely, with the precipitous drop in natural gas prices, we had a non-cash mark-to-market valuation of APS' fuel and purchase powering hedges, net of the PSA deferrals at $0.12 per share on a comparative basis from last year.
We had a small negative mark-to-market in this year’s final quarter of $0.03 per share, compared with a large positive mark-to-market gate of $0.09 per share in 2008 first quarter consistent with the large run up of natural gas in the first half of 2008. Milder weather and lower cost per usage combined for a $0.10 detriment to the first quarter of 2009.
I use the two categories together for a reason because it’s sometimes hard to distinguish what is weather and what is usage patterns in shoulder periods. Slide 16 shows that this year’s first quarter was a second mildest on record beaten only by 2003.
Pitting the grid A’s recorded, a proxy for weather temperature in the first quarter was 383 as compared to a ten-year average of 571 or 33% pure heating degree days in normal. As importantly, variations in the weather day-to-day were volatile so pure weather statistics based on averages may not completely capture the weather impact.
Back to the gross margin drivers on slide 17, I want to address lower costumer usage column. APS' costumer based increased a modest 0.8% in this year’s first quarter, compared with a 0.2% increase in 2008’s first quarter.
However, whether normalized usage was down lowering gross margin by $0.02 per share. We believe this downturn in costumer consumption likely will be short lived and has more to do with extremely mild weather conditions than people’s pocketbooks.
As stated earlier, during the first quarter, Phoenix had a particularly mild weather with an average temperature of 62 degrees. We have seen nothing that would indicate a change in costumer consumption habits at this point.
Looking forward, we continue to expect moderate growth over the next couple of years, albeit on a slower rate than historical averages. We still expect 1% costumer growth in 2009 through 2011.
And as we’ve said on past calls, over the longer term, we remain confident of the fundamental – fundamentals of Arizona’s feature. And expect to see costumer growth return to stronger levels as the national and state economic environments improve.
On slide 18, I want to discuss briefly the financial impacts of the second quarter restructuring process that Don discussed earlier. As a result of the Board agreeing to a plan to the invest assets to pay off bank debt, we recorded a non-cash impairment charge of approximately $202 million pretax or $1.22 per share in this year’s first quarter.
Additionally, SunCor recorded other impairment charges of approximately $8 million pretax or $0.04 per share. The execution of the plan is to be kicked-off later this week for a majority of the assets.
We intend to apply the proceeds from the asset sales in the associated tax benefits, which we expect to be approximately $80 million to accelerate repayment of SunCor’s debt. As we mentioned in the last call, SunCor’s security revolver requires SunCor to reduce outstanding borrowings at date certain through August 2010.
As of March 31st, SunCor had approximately $175 million of total long term debt of which approaching $108 million was outstanding under the revolver. SunCor is discussing with the banks – with the banks in the revolver our waiver so they can execute the sales process.
Please keep in mind that there is no cross to faults or any other ties to Pinnacle West or APS with the SunCor debt. When we are down with the process at the end of 2009, the ongoing pretax G&A burn at SunCor will be substantially reduced from the $44 million recorded in 2008 and future real estate volatility will be eliminated for Pinnacle West shareholders.
As to earnings guidance, which is addressed on slide 19, we are reaffirming 2009 and 2010 guidance at reasonable ranges around $2.30 and $3 per share, respectively. The key assumptions for 2009 include the following, SunCor is not a material component for this year because the majority of the real estate operations will be recorded as discontinued operations beginning in the second quarter.
The current interim base rate surcharge will remain in effect throughout 2009. In the effects of milder weather are all set throughout the year with cost savings identified in our filing with the ATC in March.
The key assumptions for 2010 include the following, rate settlements implemented 1/1/2010 and the identified cost savings are included. Further details reconciled in our 2008 results for 2009 and 2010 estimates are available on our Web site and in the 10-K we filed this morning.
I want to provide a quick update of our liquidity as of March 31, 2009 as shown on slide 20. We did complete a $500 million unsecured note offering in late February, which has greatly benefited our overall liquidity position.
Simply stated, we have ample liquidity to execute on our capital programs. At quarter end, we had about $760 million of available credit capacity after considering short term debt levels and cash on hand.
Additionally, we have no maturities of long term debt outside the SunCor until 2011. In terms of equity, we see no need to issue until 2010.
In closing, on slide 21, you see the yield of Pinnacle West common stock compared to the electric utility average. We remain committed to the common dividend, which is currently $2.10 per share annually.
We are keenly aware that it is very important to our investors, provides an attractive yield, and is an important part of the value proposition. That concludes my prepared remarks.
I’ll turn the call back over to Don Brandt for a wrap-up. Don?
Don Brandt
Thanks, Jim. In summary, our organization is intensely focused on operational excellence as well as improving earnings and financial metrics.
We work hard to maintain topnotch costumer service. We continually strive to raise the bar even higher.
Constantly improving efficiency and effectiveness in every facet of the company. APS' proposed rate settlement demonstrates positive improvement in Arizona’s regulatory environment.
However, it is critical for the settlement to be approved as proposed for APS, our customers, investors, and other stakeholders to realize the benefits of the settlement. The SunCor restructuring plant optimizes the assets and related financial results while minimizing risk going forward.
And finally, our current common dividend is supported by our strategies, operations, and the retail rate settlement. Overall, our employees possess a drive for excellence to improve value for our shareholders, our costumers, and the communities we serve.
That concludes our prepared remarks. Jamal, at this time we would be pleased to take any questions.
Operator
Yes, sir. (Operator instructions) Your first question comes from the line of Greg Gordon from Citigroup.
Your line is open.
Greg Gordon – Citigroup
Good afternoon.
Jim Hatfield
Hey, Greg.
Don Brandt
Hi, Greg.
Greg Gordon – Citigroup
Congratulations on the settlement. I hope the commission approves it.
They should. But anyways, on the point of the settlement, a couple of questions or clarification, are there any time limits or sort of a milestones in terms of when you have to meet certain minimum equity infusion requirements between now and 2014?
Jim Hatfield
There are not, Greg. And I think, again, with all the parties together and discussing all the issues they understand that the timing needs to be left to the company to sort of address the marketplace at the appropriate time.
Greg Gordon – Citigroup
So is it still your expectation, assuming the settlements approved that you would not need to issue equity in 2009?
Jim Hatfield
That’s correct.
Greg Gordon – Citigroup
Thank you. Next question is related to Palo Verde.
You’re currently looking for a license extension there? Where are you in the process and at what point might we hear the decision from the NRC?
Don Brandt
Greg, I believe it was in December we filed the license extension and we’re looking prior ground to two-year process.
Greg Gordon – Citigroup
So it was December of ’09.
Don Brandt
Eight, eight.
Greg Gordon – Citigroup
I’m sorry, December of ’08. Sorry.
So you wouldn’t get a decision until December 2010 most likely?
Jim Hatfield
Eighteen months to two years.
Greg Gordon – Citigroup
Okay. Okay.
So under the terms of the settlement, if there were a change in the depreciation expense to the – due to license extension, that wouldn’t be reconciled into rates until the next base rate case?
Jim Hatfield
Correct.
Don Brandt
That’s right.
Greg Gordon – Citigroup
Don Brandt
Thank you.
Operator
Your next question or comment comes from the line of Paul Patterson from Glenrock Associates. Your line is open
Paul Patterson – Glenrock Associates
Good morning, guys.
Don Brandt
Good morning, Paul.
Paul Patterson – Glenrock Associates
Just to go over in the settlement here. You’ve got the additional $23 million from SEAC going to revenues, correct, on top of the $196 million?
Don Brandt
Correct.
Paul Patterson – Glenrock Associates
Okay. And there’s another $30 million in terms of savings that you guys are going to be able to have – when I’ve read the settlement, it seems that it was not included in the $196 million calculation.
Jim Hatfield
That would be correct.
Rebecca Hickman
Paul,–
Don Brandt
$10 million in incremental from what we’ve already reported to the commission.
Paul Patterson – Glenrock Associates
Okay. So we should think about it as more of the $10 million incremental as opposed the $30 million?
Don Brandt
Correct.
Paul Patterson – Glenrock Associates
Okay. And then going back to the $700 million of – one final thing on the settlement, the 54% equity ratio, is that what we should be thinking about here?
Don Brandt
Yes.
Paul Patterson – Glenrock Associates
Okay. And then the $700 million equity issuance or equity infusion, what timing do we have associated with this – I know you guys have flexibility on this, but when we look at the 2010 guidance what shall we be thinking about with respect to that?
Jim Hatfield
Well, I think we addressed this on the last call. Again, based on the schedule of getting the order, we don’t anticipate the need to issue equity until any earlier than sometime in 2010.
I think in our $3 guidance, we have about $0.07 to $0.075 to $0.08 of dilution based on a new equity issuance. And we’d just for simplicity made the assumption as the middle of the year, just to make our math easy.
And going forward from there, based on return-to-normal growth, I support that we’ll have to issue equity on a periodic basis just to support the capital structure anyways. So I didn’t look at that provision as anything that we wouldn’t have to do to maintain the credit ratings anyway.
Paul Patterson – Glenrock Associates
Okay.
Jim Hatfield
Whether its 700 or not, who knows based on what happens in the future. But some level of equity will be needed past ten just to support your billion dollar a year CapEx program.
Paul Patterson – Glenrock Associates
Sure. Sure.
And then in terms of 2010, when we look at the SunCor impact, I wasn’t completely clear on the restructuring tax benefits. Does that go to the – basically to the pay down of debt, or how should we think about that benefit that shows up from the tax benefits from restructuring?
Jim Hatfield
I think our – first and foremost our goal is to get the banks paid off to allow SunCor to operate without restrictions of the bank. Beyond that, that can be used for various things.
And anything after that would just be cash that can be used to run the business.
Paul Patterson – Glenrock Associates
And how much – I’m wondering if there would be – How much of that benefit – the tax benefit could we see show up like that? Outside the – or will just be part of the discontinued operation?
I’m just wondering how’d that work.
Jim Hatfield
Paul Patterson – Glenrock Associates
But will that be part of the discontinued operations or does that mean that as a corporation you benefit from? Do you follow me?
Don Brandt
Yes. It wouldn’t be part of the discontinued operations.
It’d be additional cash flow for the corporation as a whole. And during this, as Jim indicated, we expect to complete the sales processes during 2009 while the values are depressed from what they might have been.
Regardless, we still expect to generate substantial cash proceeds from these transactions.
Paul Patterson – Glenrock Associates
Okay. And then marketing and trading for 2010, is that in the 2010 guidance?
Is there any benefit from that?
Don Brandt
No. I mean, as we’ve stated earlier, we’re essentially out of that business.
We did have a longer term contract that rolled off at eight, so you will see in the first half of the year some sort of negative, but that’s incorporated in our Q-30. But no, nothing in 2010.
Paul Patterson – Glenrock Associates
Okay. Great.
Thanks a lot, guys.
Rebecca Hickman
Paul, one other thing that I want to clarify. You asked about a $196 million plus the $23 million with respect to the settlement.
There’s another $11 million that you need to consider. The $196 is the non-fuel based rate increases, the $11 million is the fuel-related base rate increases, and the $23 million is the estimated 2010 impact of the scheduled three or line extension collection.
So that’s a total of $230 million.
Paul Patterson – Glenrock Associates
I really appreciate that. Thank you.
Rebecca Hickman
Thanks.
Don Brandt
Thanks, Paul.
Operator
Your next question comes from the line of Paul Ridzon from KeyBanc. Your line is open.
Paul Ridzon – KeyBanc
Good noon or good morning. I guess wherever you are.
First of all, congratulations on the settlement, it looks pretty balanced. I just have a couple of questions.
There’s been some noise around changing the line extension methodology to funding some of it. Where do you see that going?
Jim Hatfield
Paul, I think a couple of things on that. Obviously, that has been somewhat controversial especially in the development community.
I do think the parties to the settlement know the importance of kayak and understanding – it would be very unfair to put that into the part of the settlement then take away the line extension. I think there are some things we can do around the line extension feed that would benefit people but would not hurt the impact to APS.
And so I think that’s where we’ll ultimately end up.
Paul Ridzon – KeyBanc
And Greg Gordon asked this question, but I saw some settlement language around maintaining a 52% debt-to-Cap ratio. How much variability is there around that?
Are they going to look at that every quarter and force equity or–
Don Brandt
No, no. It’s really.
I would look at it this way, Paul. I think it’s more of an ongoing reporting requirement.
And to monitor that, more obviously comfortable in the context of the settlement with meeting those provisions or we wouldn’t agree to it. But again, they understand right in the business that issue of equity and timing is a decision the company has to make.
And so, they’ll just be watching that from the sidelines in terms of where we are according to that metric.
Paul Ridzon – KeyBanc
How do you think about in the event that we see the return very quickly of robust growth, let’s hope it happens, but to what extent do you think you’ve kind of lock yourself out of filing to get relief on some of that. What provisions are there if any in the settlement that could kind of give you the opportunity for emergency relief?
Jim Hatfield
Well I think if you look at the timing, – our ability to file, we can’t – we are not able to file any sooner than 6/1/11. So frankly, based on the settlement, we’ll have the opportunity to file with 2010 past year.
And frankly that’s not a whole lot different than we would have anyway.
Paul Ridzon – KeyBanc
Thank you. That’s pretty much status quo.
I see your point.
Jim Hatfield
Yes. And I think the big thing with that tough, Paul, is certainly the staff is committed to try and process the case in 12 months.
And we’ve talked about some things we can do try to make that happen. And so I think, from being locked out it doesn’t seem to be anything significant.
I think once we file again to whenever that is, I think we’ll see an accelerated process on the other end.
Paul Ridzon – KeyBanc
That would be very welcomed. And then, just from a bookkeeping perspective, of the 2/30/09 guidance what have we done so far in the first quarter?
How are you doing that accounting?
Jim Hatfield
I’m not sure of the question, Paul.
Paul Ridzon – KeyBanc
How much of the 2/30 is now under your belt? I just don’t know what’s your accounting as far as the APS' versus other pieces?
Jim Hatfield
The APS of in quarter was about a $0.15 loss.
Paul Ridzon – KeyBanc
So basically, relative to 2/30 guidance were at a $0.15 loss?
Jim Hatfield
Right but –
Paul Ridzon – KeyBanc
Okay. Understood.
Thank you.
Jim Hatfield
I don’t think that the loss unexpected based on where we headed into the year.
Paul Ridzon – KeyBanc
Okay. Thanks a lot.
Jim Hatfield
Yes.
Operator
Your next question or comment comes from the line of Daniel Sites [ph] from Dudek Research Group [ph]. Your line is open.
Daniel Sites – Dudek Research Group
Thanks. Just on what we're doing – following on just the previous question.
You are assuming normal weather for the rest of the year, is that – or you’ll recover the $0.15 loss. Is that it?
Jim Hatfield
That’s correct. We have –
Daniel Sites – Dudek Research Group
And refueling schedule, do you have the sense of when refueling are taking place? Roughly?
Jim Hatfield
I’m sorry. Could you repeat that question?
Daniel Sites – Dudek Research Group
The refueling for Palo Verde. Do you have sense of the timing for that?
Jim Hatfield
Yes. We’re on – we plan a 44 day outage.
That such – May 17th is the expected breaker closure. All the reports we’ve gotten is we’re on tract with that.
So it looks like from a capacity and fuel perspective, knock on wood, as we’ve said here today, were on tract to meet our target.
Daniel Sites – Dudek Research Group
And this is – do you have another one of this for the year?
Don Brandt
No we refuel a unit because there are three units in there on the 18-month cycle. So you end up with one every spring and fall and were expecting the next unit to take it down for refueling right around the first of October of 2009.
Daniel Sites – Dudek Research Group
Okay. Okay.
Because of future rate filings, since you are respected, have you changed anything in your CapEx schedule or is it the same one as the one you have presented in March?
Jim Hatfield
It’s the same one that we have highlighted March at this point.
Daniel Sites – Dudek Research Group
Okay.
Jim Hatfield
Obviously we look to adjust that going forward, it will be definitive upon growth and other thing that we see in the service territory.
Daniel Sites – Dudek Research Group
Okay. But you haven’t – For the time being no change.
Jim Hatfield
Correct.
Daniel Sites – Dudek Research Group
Great. And just to – Maybe I missed it, on which debt will be left on SunCor when you’re done with your program at this point?
Jim Hatfield
Our expectation is there’ll be no debt at SunCor when we’re through with the asset divestitures.
Daniel Sites – Dudek Research Group
Okay. Great.
Thanks a lot.
Jim Hatfield
Thanks.
Operator
Your next question comes from the line of Kevin Fallon from Blenheim Capital Management. Your line is open.
Kevin Fallon – Blenheim Capital Management
Good morning. Just a couple of questions on the settlement.
In particular, I’m trying to understand on the $700 million in equity infusions. Are you guys required to put from the parent down into the sub $700 million of cash or do you retain the earnings or anything like that get calculate into that or get calculated against that figure?
Jim Hatfield
Well I think the expectation of the party that’s not sort of retain the earnings you keep in the business, but I think most importantly, as we look out in a lot of the filing we’re doing and the monitoring has to do with where are we FFO to debt, and where are the credit metrics that sort of thing. Obviously, you get a three great weather years in a row.
And you don’t need to issue equity. I don’t think that's the intent of the same issue equity when it's not needed.
Kevin Fallon – Blenheim Capital Management
But it doesn’t require you to issue $700 million worth of new equity or debt at a parent level and put it down. Is that correct?
Jim Hatfield
That's correct.
Kevin Fallon – Blenheim Capital Management
Okay. And in terms of the dividend from Arizona public service to the parent, you guys have paid a $170 million a year for the last couple of years.
Does the settlement allow you to increase that payment up to the parent now?
Jim Hatfield
Yes. There's a restriction on dividend after 2009.
Kevin Fallon – Blenheim Capital Management
After 2009, you can set it to whatever you need?
Jim Hatfield
Yes.
Kevin Fallon – Blenheim Capital Management
And in terms of the SunCor to $80 million tax gain that's going to be realized in counting your 2010 to actual cash?
Jim Hatfield
That's correct.
Kevin Fallon – Blenheim Capital Management
And it's $80 million of cash? It's not a tax affected $80 million.
Jim Hatfield
That's correct.
Kevin Fallon – Blenheim Capital Management
And under the settlement, the transmission hikes that you get for your for formula rates, are those incremental to whatever you get in the settlement here?
Jim Hatfield
Correct.
Kevin Fallon – Blenheim Capital Management
And does this settlement allow for the automatic pass through on the retail section? Or do you have to go and seek recovery in the process you currently do?
Jim Hatfield
Well, I think we're going to have to go to the process that we've gone through the past, but if you remember sort of the 2007 and 2008, it was pretty perfunctory process at the commission.
Kevin Fallon – Blenheim Capital Management
That's right. But there's nothing – in other words, they stay out or what have you in no way should have perform precludes the deferred hikes?
Jim Hatfield
Correct.
Kevin Fallon – Blenheim Capital Management
Okay.
Don Brandt
And all the other surcharges will go on at sort of normal.
Kevin Fallon – Blenheim Capital Management
And the $11 million of the net fuel related increase that just basically increased in the fuel component in based rate. Is that a earnings impact or is that a cash flow impact?
Rebecca Hickman
Tax earnings–
Jim Hatfield
That's a pretax earnings impact.
Kevin Fallon – Blenheim Capital Management
So, earnings are actually increased by pretax so $11 million I think it was. Excellent, thank you very much.
Jim Hatfield
Thank you, Kevin.
Operator
Your next question comes from the line of Andrew Levy from Incremental Capital. Your line is open.
Andrew Levy – Incremental Capital
Hey, guys. I guess you saved $3 in 010, assuming you get the full ratings or not the full ratings but the full settlement which you probably will.
As you look in the 2011, I know you're not making a forecast for 2011, but everything else equal – are you able to grow earnings off to 2010 based? Or you're not sure or –?
Jim Hatfield
Andrew, we're not going to talk about guidance for 2011 today.
Andrew Levy – Incremental Capital
Yes. I understand the guidance, but can you grow earnings on the next couple of years with this settlement?
Of you $3 based or not?
Jim Hatfield
We're just not going to go in this to 2011 today. I mean, if I were to indicate one way or another, that's effectively guidance, and I can't do that today.
Andrew Levy – Incremental Capital
Okay. Thank you.
Operator
Your next question comes from the line Reza Hatefi from Decade. Your line is open.
Reza Hatefi – Decade
Thank you. I just wanted to confirm an earlier question.
The $700 million of equity, that's just infusion into the utility, but otherwise, you can still continue with your normal $170 million out flow from the utility to the parent level. Correct?
Jim Hatfield
That's correct.
Reza Hatefi – Decade
Okay, great. Thank you very much.
Don Brandt
Okay, Reza. Thanks.
Operator
Your next question comes from the line of Chris Shelton from Millennium. Your line is open.
Don Brandt
Chris, are you there?
Operator
Mister Shelton, your line is open.
Chris Shelton – Millennium
Hello.
Jim Hatfield
Hey, Chris.
Chris Shelton – Millennium
Can you hear me now?
Jim Hatfield
Yes.
Chris Shelton – Millennium
Sorry, I was on mute. I have a quick question on the expense savings that are ear marked in the settlement.
And I know, for the following deed for the commission this year, some of those incentives were capitalized and some were extent. Is that the plan for $150 million over the five-years or there's more kind of expense savings?
Jim Hatfield
Well its expense – let's go back. The $20 million was expense which could be reduction of capital, working capital, O&M, and the $30 million is no different in characterization from the 20.
Chris Shelton – Millennium
Okay, so kind of all income statements affecting?
Jim Hatfield
Sure. Yes.
Chris Shelton – Millennium
Okay. And then, I guess the second thing – in the past, you guys had kind of been running pretty mean at the utility, I think on the cost side.
And I'm sure it's where you guys are thinking you can really make an effort to control cost going forward.
Jim Hatfield
Let me give Don Robinson a chance to talk here.
Chris Shelton – Millennium
Okay. Perfect.
Don Robinson
They always give me the fun ones. We're actually looking at all of the cost here.
We have run very lean and we'll continue to do that. We're going to look at improving some of the efficiency that we do have in some of the operating areas of the plant, our plants as well as the operational areas.
And we're going to look at reducing some of our back office cost.
Don Brandt
Yes. We'll say this, Chris, back to your point.
We follow statistics. We follow fossil capacity factors, customer sat, reliability, O&M per customer and then customers per employee.
Those last few statistics show us very favorably. Our own imprecated DH [ph] is lower than the average in the Western state, customers per employee continues to rise.
That said, we're going to continue on our – for – it's really about efficiency and productivity, and we'll continue to try overturn stones, to try to find where there maybe some opportunity.
Chris Shelton – Millennium
Got you. So maybe some opportunities going forward that you may not have in the past, I guess – well I guess that's it.
Thanks, guys.
Don Brandt
Thank you.
Operator
(Operator instructions) At this time, there are no further questions on queue.
Don Brandt
Okay. Well let me just extend a very sincere thank you for all of your time today.
And obviously, if you have any questions, give any of us a call. We would be happy to talk to you, and have a great day.
Operator
This concludes today's conference call. You may now disconnect.