Oct 29, 2009
Executives
Rebecca Hickman – Director, IR James R. Hatfield – SVP and CFO Donald E.
Brandt – Chairman and CEO Donald G. Robinson – President and COO of APS
Analysts
Daniel Eggers - Credit Suisse Paul Patterson - Glenrock Associates Chris Ellinghaus - Shield & Company Danielle Seitz - Dudack Research Brian Chin – Citigroup Scott Senjac - Decade Capital Kevin Fallon – Blenheim Capital Management
Operator
Good afternoon. My name is Kim and I’ll be your conference operator today.
At this time I would like to welcome everyone to the Pinnacle West third quarter 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’s instruction) Thank you.
Ms. Hickman, you may begin your conference.
Rebecca Hickman
Thank you, Kim. Good morning.
I’d like to thank everyone for participating in this conference call to review our third quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt and our CFO, Jim Hatfield.
Don Robinson, who is President and Chief Operating Officer of APS is also here with us. Before I turn the call over to our speakers I need to cover a few details with you.
First, I encourage you to check the quarterly earnings and statistic section of our website. It contains extensive supplemental information on our earning variances and quarterly operating statistics.
Second, please note that all of 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 website with the webcast and with the AK filed this morning. During our prepared remarks we will give you verbal cues as we move through the slides.
Looking at Slide 2, it is my responsibility to advise you that this call and our slides contain forward-looking statements based on current expectations. And the company assumes no obligation to update these statements.
Because actual results may differ materially from expectations we caution you not to place undue reliance on these statements. Please refer to our forward-looking statements and MD&A section contained in our third quarter 2009 Form 10-Q which was filed with the SEC this morning, as well as the risks factor section of our 2008 Form 10-K, all of which identify important factors that could cause actual results to differ materially from those contained in our forward-looking statement.
Next, during this call we will discuss certain non-GAAP financial measures. Our press release and the slides accompanying this webcast, which are posted on our investor relations website, contain additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable GAAP measures.
A replay of this call will be available on our website, www.pinnaclewest.com for the next 30 days. It will also be available by telephone through November 6.
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 written consent is prohibited. At this point I’ll turn the call over to Jim.
James R. Hatfield
Thank you, Becky. As shown on Slide 4, I will cover the following topics today.
First I will review third quarter results for Pinnacle West Capital Corporation and discuss the main variances from last year’s period. I’ll briefly touch upon the economic outlook in Arizona.
I will review our earnings guidance for 2009 and 2010 and I’ll close with a brief comment on liquidity. A reconciliation of our GAAP EPS to our ongoing EPS is shown on Slide 5.
As you know, we’ve excluded the real estate segment from our ongoing earnings because of the major restructuring underway at SunCor and the implications for that business moving forward. Don will provide a brief update on the SunCor restructuring in a few moments.
In terms of results, we reported on a GAAP basis, consolidated net income, attributable to common shareholders of $186.7 million or $1.84 per share in this year’s third quarter, as compared with $151.6 million or $1.50 per share in 2009’s third quarter. I will continue to focus my remarks on our ongoing earnings which exclude results from the real estate segment for both quarters as well as severance costs and last year’s third quarter.
Consolidated ongoing earnings in the third quarter, a non-GAAP measure, were $199.1 million or $1.96 per share, compared with $161.1 million or $1.59 per share in the prior year period. Moving to Slide 6, sits that makeup that changed to ongoing earnings per share.
First gross margin at our regulated utility was $0.39 per share better than last year’s quarter. Embedded in this variance are several pluses and minus which I’ll cover in more detail on the next slide.
Also benefiting financial results in this year’s quarter by $0.08 per share was lower O&M. Essentially, O&M was lower all across the utilities segments.
This improvement was primarily related to the effects of our cost saving measures and timing. And we will continue to focus on discipline cost management.
These changes in gross margin and O&M excludes dollars related to the renewable energy standard or RES, and our demand side management and energy efficiency programs. These costs are collected and offset through respective rates surcharges.
You may find that useful to refer to the (inaudible) in today’s slides to find the amount of RES and DSM revenues recorded by quarter over the last couple of years. Other items net as a result of many various factors, none of which were significant.
And lastly, higher expenses related to infrastructure additions and improvement reduced our earnings approximately $0.14 per share in this year’s quarter. The major components of that change were, interest, net of capitalized financing costs, $0.09 per share, property tax $0.03, depreciation and amortization $0.02 per share.
So in summary, ongoing earnings increased by $0.37 per share driven in large part by higher gross margins. Turing to Slide 7 and the drivers of the net increase and regulated electricity gross margin.
As shown on the last slide, the regulated gross margin was up $0.39 per share compared with last year’s third quarter. The various factors contributing to the variance are retail rate increases favorably impacting our quarterly results by $0.17 per share.
Of this amount, $0.13 per share related to the interim rate increase that became effective at the beginning of this year. And the remaining $0.04 per share relates to the 2009 transmission rate increase that went into effect June 1 to our formula rates and August 1st through our retail transmission cost adjuster.
Volume (inaudible) effects related to weather improved our quarterly results $0.05 per share. July was the hottest on record.
In fact, it was the hottest month ever recorded in Arizona with an average temperature of 98.4 degrees. The benefits from July’s extreme weather were partially offset by lower than normal humidity throughout the quarter, particularly in September.
By comparison, last year’s third quarter was slightly milder than normal. However, our quarterly results were negatively impacted by $0.04 per share related to lower weather normalized kilowatt hour sales after netting the impact the customer growth and customer usage.
In this year’s third quarter, APS’s customer base grew 0.6% as compared to 1.2% in 2008’s third quarter. However, overall, weather normalized retail sales were down 1.3%.
Weather normalized residential sales were off 0.8% in the quarter with a majority of the reduction coming from the effects of the ACC improved energy efficiency and demand site management program. This represents some improvement from last quarter.
But it is reflective of the softness of the Arizona economy and customer conservation. I’ll provide more color on the state of our economy momentarily.
The non-cash mark-to-market valuation of APS’s fuel and purchase power hedges net of PSA deferrals was better by $0.22 per share compared with a year ago. The major factor driving this variance was a reversal of $0.17 per share of negative mark-to-market from last year’s third quarter driven by plummeting natural gas prices during that period.
In this year’s quarter with more stable but somewhat rising natural gas prices, we recorded a positive mark-to-market of $0.05 per share. For your reference, our mark-to-market amounts by quarter for the past couple years are shown on Slide 12 in the appendix.
Looking at the Arizona economy and our fundamental growth outlook. We currently expect customer growth to average 1% annual through 2011.
Additionally, we expect our weather normalized retail sales and kilowatt hours to be relatively flat through 2011 due to the impacts of the national economy, the hosing situation in Arizona and the effects of APS’s energy efficiency programs. In the near term, the Arizona economy has to deal with the substantial excess inventory of unsold homes and apartments.
The excess at housing inventory must be reduced in order to allow a sustained recovery in the construction sector and the broader economy. This situation is a principle reason for our moderate outlook for near term growth.
Customer research we conducted this summer suggest that declines in residential usage this year over and above energy efficiency efforts were significantly tied to the recessionary economic conditions and the related uncertainty. That said, it does appear that the economy has stabilized.
We have seen some slight uptake in housing prices in metro Phoenix and projects of non-farm payroll growth in 2010 is suspected to flat to slightly positive. Over the long term, we remain confident of Arizona’s fundamentals.
Therefore, we have an expectation that customer growth and usage will return as (inaudible) levels as the national economic environment improves. Turning to our earnings outlook on Slide 8.
Our earnings guidance for 2009 and 2010 has not changed. We continue to expect that our ongoing earnings for 2009 will be within a reasonable range around $2.30 per share.
In 2010, we continue to estimate that our consolidated earnings will be within a reasonable range, around $3.00 per share. For your reference, the assumptions unlined our 2009 estimate are in the AK we filed this morning.
Before I turn the call over to Don Brandt, I want to give you a quick update on our liquidity, although I don’t have a slide on this topic. Simply stated, we have ample liquidity.
As of September 30th, Pinnacle West and APS collectively had about $1.1 billion of available liquidity after considering cash on hand and short term debt upstanding. We’ve completed our long term financing for 2009.
Additionally, we don’t have any long term debt maturities outside of SunCor until 2011. Our revolving lines of credit mature in late 2010 and 2011.
So liquidity remains very good. And with that, I have concluded my prepared remarks.
I’ll turn the call over to Don.
Donald E. Brandt
Thanks, Jim. I’ll cover several issues that are important to our investors.
Jim’s already touched on one of those issues, our growth in the Arizona economy. I’ll update you on a few more; pending regulatory settlement, our commitment to renewable resources, our recently operating performance in the SunCor restructuring.
Regarding our pending settlement, the proposed regulatory settlement before the Arizona Corporation Commission demonstrates positive movement in Arizona’s regulatory environment, a near unanimous settlement. It is supported by 22 of the 24 parties to APS’s retail rate case.
Only one party filed opposing testimony. And that testimony was limited to objections to the lack of a free footage allowance in APS’s line extension policy.
In addition to a very small net rate increase, the settlement offers a wide array of benefits for all our customers, our shareholders and other stake holders. The proposed settlement would only increase our average retail electricity prices by less than 1% over current rates, after reflecting an early reset under the power supply adjuster.
Beside the financial provisions, the settlement includes a number of provisions benefiting Arizonans including rates stability for APS customers, expanded renewable energy requirements for APS above the Arizona Corporation Commission’s current requirements and significantly expanded energy efficiency programs. It is critical, however, for the settlement to be approved as proposed so that our customers, investors and other stake holders may realize the diverse benefits intended by all the settling parties.
On our last two calls, we described the benefits and major financial provisions of the settlement. Rather than prepare remarks on those details again we’ve outline them on Slides 13-18 in the appendix section of our quarterly slides.
Of course, we’d be pleased to answer any questions during the Q&A session on those slides or any others. The hearing on the settlement was completed on September 18.
Going forward, we currently expect the administrative law judge to issue her recommend order in mid November. That timing would allow the five ACC commissions to consider and vote on the settlement in December.
Consequently, new rates could become effective on January 1, 2010 as the settlement proposes. Turning for a moment to renewable resources in operations.
Our commitment to renewable resources remains significant. In the pending regulatory settlement we have agreed to acquire an additional 1.7 million megawatt hours of new renewable energy researches to be in service by the end of 2015.
This increment will be above the resources and commitments we had at the end of 2008. With the new additions we estimate renewable resources will supply about 10% of APS’s retail sales by the end of 2015, which would be double the amount currently required under the ACC’s renewable energy standard.
We remain strongly committed to solar energy. Future projects likely will include various sized utility scale plans as well as distributed energy.
We are on track with our plans to significantly increase the amount of renewable energy we provide to our customers. And just yesterday at it’s conference in Anaheim California, the Solar Electric Power Association named me as the utility CEO of the year.
While it was my privilege to accept that award on behalf of all the employees at APS, it had very little to do with me personally. The award was recognition of the accomplishments and vision of the APS renewable energy team, which I think is one of the best in the industry.
Looking at our operating performance for a few moments, we’re focused on operational excellence. We are recognized for top notch customer service and fossil plant performance.
Further we continually strive to achieve top core cal performance throughout the organization, constantly seeking to improve performance in every facet of the company. On power plant operations, the Palo Verde units have been running well.
All three units ran at 100% full power for the entire third quarter. On October 3rd we started a unit two refueling and maintaining outage.
This is the first unit in which we will replace the reactor vessel head and install a rapid refueling package. The outage, which is expected to last about 60 days, is progressing well.
We plan to make similar reactor head replacements and refueling package installations during the unit 1 and unit 3 refueling outages in 2010. The Palo Verde team remains focused on achieving safe sustainable first (inaudible) performance in all aspects of the plant’s operations.
We are making progress and meeting our established long term targets to consistently achieve annual site average capacity factors of 88%. Refueling outages of 30 days or less and production costs below $0.02 per kilowatt hour.
Now I’ll turn to the SunCor restructuring for just a few moments. The plan announced earlier this year involves the sale of a substantial majority of SunCor’s properties.
Execution of that plan is underway. SunCor’s long term debt was reduced to $121 million as of September 30 from $175 million at the end of the first quarter this year.
SunCor continues to pursue the sale of its remaining properties. SunCor’s principle credit facility matures in January of 2010.
SunCor is current on all its debt payment obligations under that agreement. There are financial covenant defaults existing; as to it the banks have taken no enforcement action.
SunCor is in discussions with its lenders concerning a proposal SunCor has made for a replacement facility that would allow the company time to complete the restructuring plan. Looking ahead through focus strategies and sound execution will continue to move this company forward.
Additionally, we are committed to improving our earnings and financial metrics and thereby sustaining both our credit rating and our common dividend. We are keenly aware of the vital importance of the dividend to our investors and thus to our ability to attract equity capital in 2010 and future years.
That concludes our prepared remarks. Operator, at this time we’d be pleased to take any questions.
Operator
(Operator’s instructions) And your first question comes from the line of Daniel Eggers from Credit Suisse. Your line is now open.
Donald E. Brandt
Congratulations on the (inaudible)
Daniel Eggers - Credit Suisse
Thank you. On the quarter or I guess on the outlook on renewables, can you kind of talk a little bit thought process to hit the 15% target, how you guys, your ownership role going forward, I guess, given the most recent RFP cancellation by what seemed like a pretty credit worthy winner?
Donald E. Brandt
I’ll let Don Robertson expand on that a little bit. But first, we don’t really see that the Lockheed cancellation, it’s a bump in the road.
And in a matter of fact we’ve got a number of plans to back fill that. Just recently we filled with the commission as part of the renewable energy standard program we call Arizona Sun that would involve us investing $500 million in variety of different PV projects, going forward.
And that would involve an APS ownership structure.
Donald G. Robinson
And, Dan, this is Don Robinson. To add to what Don just said, we have had other RFPs on the street as part of this process.
And not surprisingly we have also heard from everybody and their brother after the Starwood cancellation announce who wants to talk to us about doing more projects. I think it is fair to say that as we go forward we will be looking at a number of different projects and a number of different ownership structures.
Because we don’t intend to just to PPAs on renewable projects as we go forward.
Daniel Eggers - Credit Suisse
Can you just give a little more color on the Arizona Sun project as far as what is going to be the approval process out the Commission to what you guys – or how do you guys spend that money and how do you envision recovery will be through traditional base rate cases or some other mechanism?
Donald E. Brandt
And Dan, we filed an application with the Commission asking for the approval. It would be the normal process.
They could either chose to have hearing on it. They could choose to make a decision based on just the filing of documents.
I doubt that would be the case. And then we do believe that we would recover the costs through any number of different recovery mechanisms.
We could have an adjuster but more likely we could also put it in base rates which I would think would be the more likely option.
Daniel Eggers - Credit Suisse
What is the timing do you suppose at this point for a Commission action on the application and realistically when do you guys envision the opportunity starts with any money?
Donald E. Brandt
Dan, that as you know -- that’s a really hard call with the Arizona Commission because this is a subject they’re very interested in but they don’t have the fine terms for how quickly they act on things. So I suspect this is something they would want to get involved in.
So I’d expect sooner rather than later. But I’d just be guessing on an actual date.
We haven’t heard anything from them that would indicate a specific time they were going to take it up.
Daniel Eggers - Credit Suisse
All right. And then on the 1% customer growth that you guys cited.
Is that with a, I guess, a population or housing inventory of about 30,000 homes in your service territory in the Phoenix area? Is that 1% growth effectively uptake of those empty homes, largely and then in new construction cycle or would that be added just to the takeup of new homes?
Donald E. Brandt
Well, the 1% customer growth I think it would be consistent with their growth for Arizona population and generally speaking. And while there may be some new construction it’s really going to be continued to absorb the current housing inventory over the next couple of years.
We don’t really see economic activity picking up until 2012.
Daniel Eggers - Credit Suisse
Are you seeing any uptick in new home construction right now?
Donald E. Brandt
No, not really. Permits are down, starts are down.
So, we’re not going to see an uptick in activity until you get a significant reduction in the inventory.
Daniel Eggers - Credit Suisse
Okay. Thank you guys.
Operator
Your next question comes from the line of Paul Patterson from Glenrock Associates, your line is now open.
Paul Patterson - Glenrock Associates
Good afternoon guys or good morning there. I just have a sort of a clarification question.
I’m looking at the data in you’re AK regarding electricity demand and growth. And it looks to me like you had an increase in customer growth of 0.6%.
It looks like the retail usage average per customer has increased, I’m talking about residential here. And yet the weather normalized retail sales are down for the residential customer class.
What am I –
James R. Hatfield
Well, Paul, I think it’s true use per customer went up on an actual basis. We – weather impact, that data, and if you look at use per customer for residential on a normalized basis, we do see a reduction in usage of about 1%.
Paul Patterson - Glenrock Associates
Okay. So the retail usage is not weather normalized.
I got you. The usage per customer isn’t weather normalized.
James R. Hatfield
Correct.
Paul Patterson - Glenrock Associates
Okay. That’s – okay.
And then back to sort of this question about, are you guys still seeing flat, like, literally you’re not seeing any significant growth at all through 2011. Is that still the forecast?
Donald E. Brandt
That’s correct. And that’s of course been incorporated in ‘09 and guidance as well.
I will say that while we see some customer growth pick up, we are seeing it, or expect it to be pretty much offset with the energy efficiency programs that we’ll continue to ramp up over the near term.
Paul Patterson - Glenrock Associates
You guys seem to be very successful in this. Is there a specific type of equipment that you’re using that’s causing this – what’s the big cause for the decrease in usage, with these efficiency programs?
I mean, is it CFLs is it – what is it that’s causing this to – because I mean, if you just think about the growth in customers and those vacant houses, you would think that the usage would go up significantly.
James R. Hatfield
No, we think there’s a fair amount of low hanging (inaudible) on the energy efficiency side, Paul. And really some of the initial programs aren’t that complex.
It’s weather-proofing homes, duct work, the ceiling. There are very few basements here.
Most of the heating and air conditioning duct work goes to the attic, sealing that up, replacing furnace filters. And the CFL program, I forget how many millions of CFLs have been deployed in our service territory over the last two years.
Paul Patterson - Glenrock Associates
Okay. So normal growth – so basically it’s the normal growth would be – without this program you would be seeing how much growth, I guess?
Donald E. Brandt
Well, typically we’d see about with 1% customer growth we’d see slightly less than 1% sales growth on a more normalized basis. I mean, the effective energy efficiency in the quarter was 0.6%.
So with the 0.8% usage reduction you’re still seeing a little bit of what we call the furor of the economy, which is consistent with the survey we did in the third quarter to customers.
Paul Patterson - Glenrock Associates
Okay. Thanks a lot guys.
Operator
Your next question comes from the line of Chris Ellinghaus from Shield & Company, your line is now open.
Chris Ellinghaus - Shield & Company
Don, can you give us any more color on what’s been achieved on SunCor’s asset sales at all?
Donald E. Brandt
Well, we closed earlier in the summer on the large condo building in the Tempe town lake project we call Haden Free Lake Side. Also we sold a large block of land late summer to the Arizona Department of Transportation for a major new interchange in the west valley.
And we’re in the negotiation process on several other large parcels of land. Actually the SunCor team in this process has exceed my expectations.
They’ve exceeded the plan we laid out for the bank group earlier this year. And there’s still a lot of work to be done in a very difficult market that’s clearly not getting any better.
But with that said, we’ve been producing results and I think we’ll continue to do so.
Chris Ellinghaus - Shield & Company
Has your expectation on reducing the debt by year end changed at all?
Donald E. Brandt
It’ll be contingent on what actually gets closed by year end. But I don’t think a year end date, December 31st in and of itself is of great significant other than it’s the end of the year.
But we are targeting to get a lot done by year end.
Chris Ellinghaus - Shield & Company
Okay, great. Thanks so much.
Operator
Your next question comes from the line of Danielle Seitz from Dudack Research, your line is now open.
Danielle
Thank you. I was wondering it seemed that the Commission was discussing or pondering on giving you some incentives regarding nuclear operations based on a certain level of capacity factor.
I was wondering if that was finalized and if you are getting positives added rewards for doing better than actually the threshold?
- Dudack Research
Thank you. I was wondering it seemed that the Commission was discussing or pondering on giving you some incentives regarding nuclear operations based on a certain level of capacity factor.
I was wondering if that was finalized and if you are getting positives added rewards for doing better than actually the threshold?
Donald E. Brandt
What the Commission actually did as the result of our last rate case, they were looking at doing nuclear performance standards at a meeting that they had earlier this week, the Commission approved an order that requires us to report standards. And it is strictly reporting.
There is no monitory penalties or rewards for performance. It is strictly a reporting requirement.
Danielle
Okay. And what was the threshold that you have to maintain?
I’m assuming it’s an average for the year?
- Dudack Research
Okay. And what was the threshold that you have to maintain?
I’m assuming it’s an average for the year?
Donald E. Brandt
Danielle, I don’t remember what that number is. But Becca can get to that.
Danielle
Okay. But it has no major impact.
I mean, it should not have an impact?
- Dudack Research
Okay. But it has no major impact.
I mean, it should not have an impact?
Donald E. Brandt
There’s not a monitory penalty or reward that goes with it.
Danielle
Okay. Great.
And I was wondering also I thought that you were contemplating a potential addition to the nuclear units. And I was wondering what is the long term scenario for that?
- Dudack Research
Okay. Great.
And I was wondering also I thought that you were contemplating a potential addition to the nuclear units. And I was wondering what is the long term scenario for that?
Donald G. Robinson
Danielle, all we have done is when we filed the resource plan at the beginning of the year, we identified that there was the potential that we might need additional base load capacity in the 2022 or 2023 or beyond time frame. And that all we said we were going to do was potentially keep the option open for doing nuclear.
We have no commitment of doing nuclear at this time, nor will we without the support of the Commission and everybody else who’s involved. The only thing we would be potentially doing is looking where we might site a plant.
And so there’s really nothing happening of substance in that arena.
Danielle
I mean, you will probably have partners in building the plant or this is too far away to even think about it?
- Dudack Research
I mean, you will probably have partners in building the plant or this is too far away to even think about it?
Donald E. Brandt
Yeah, Danielle, this is Don Brandt on it. I think it is too far away.
More is happening potentially in Washington regarding if there’s a nuclear renaissance and what’s happening here. And we have to see how it develops on a national basis before we can begin to treat it with any substance out here beyond just being apprized of developments.
Danielle
Thank you. I appreciate it.
- Dudack Research
Thank you. I appreciate it.
Operator
Your next question comes from the line of Brian Chin from Citigroup, your line is now open.
Brian Chin – Citigroup
When you had your guidance for ’09, did you include mark-to-market swings in that guidance? Because when I look at your Slide 12 there’s a big mark-to-market reduction in third quarter of ’08.
And so I’m wondering if whether you guys thought that that might reverse itself in ’09 and incorporated that into your guidance?
Donald E. Brandt
We, Brian, did include the mark-to-market swing in the gross margin outlook. And we did have slight mark-to-market gain in that number.
Which is mostly reversal of the second half of last year when prices were escalating and we were recording negative mark-to-market.
Brian Chin – Citigroup
Okay. Great.
And then secondly, on the solar announcement that you guys had just in the last few days, which I think was 400 megawatts. The contract that was cancelled was for 300 megawatts, the Lockheed contract.
So if I recall correctly, that PPA that was cancelled was necessary to get your RES standard, sort of requirement, met. Would it be fair to say that since the most recent announcement is 100 megawatts that we’ll probably hear more announcements from you guys, over say the next year or so?
Is that sort of the right way to think about that?
Donald G. Robinson
Brian, first, this is Don Robinson. Let me correct that.
The contract that was cancelled of Lockheed would have put us well above the standard that we were required to meet. It has been our intention all along to greatly exceed that standard.
Having said that, we are continuing to evaluate every day potential new opportunities in the renewable arena. So new announcements over the foreseeable future are certainly likely because as Don said in his remarks, we definitely committed to renewables.
And solar is our renewable option.
Brian Chin – Citigroup
Great. Appreciate that.
Thank you.
Operator
Our next question comes from the line of Scott Senjac from Decade Capital, your line is now open.
Scott Senjac - Decade Capital
I’m just trying to get a sense of 2011 earnings, directly from 2010. And with the sales growth flat, I guess, you get a little help from pension in the land extension fees from the settlement.
I’m just wondering if there’s anything else that helps you overcome higher DNA, the O&M and the dilution to kind of keep earnings flat or drive them higher?
Donald E. Brandt
Scott, this is Don Brandt, we’re not going to touch on 2011 earnings today.
Scott Senjac - Decade Capital
Okay. Are there any other things in the settlement that I’m missing because in the settlement you’ve laid out that, right?
Donald G. Robinson
See, that would be incorporated in the settlement, yes.
Scott Senjac - Decade Capital
Okay. Thank you very much.
Operator
(Operator’s instruction) Your next question comes from the line of Kevin Fallon from Blenheim Capital, your line is now open.
Kevin Fallon – Blenheim Capital Management
I wanted to get some clarification on the requirements under the settlement for issuing equity. The $700 million, are you required to put $700 million of new equity down into APS by 2014 under the settlement?
Or do you guys have discretionary along those lines?
Donald G. Robinson
The settlement calls from $700 million of new equity and to APS by 2014.
Kevin Fallon – Blenheim Capital Management
Okay. So you would have to put $700 new equity down there?
Donald G. Robinson
Correct.
Kevin Fallon – Blenheim Capital Management
And just conceptually, with the renewables program, if this goes – are there limits on what you guys are willing to do from investing your own money in this stuff along the lines of resolving the regulatory lag issues? In other words, if you have to go to base rate case type situations, will you still make those investments?
Donald E. Brandt
Well, obviously Kevin, we’d have to evaluate the impact of potential regulatory lag to the extent you recover it in other mechanisms along the way would certainly help that. I think from a rate based perspective, we have a significant negative impact on PPAs on our financial metrics with the rate agencies.
So I think we’ve been fairly clear with that. The PPA model is not sustainable for us going forward with our credit rating.
So would welcome the opportunity to rate base renewable projects if the project is right.
Kevin Fallon – Blenheim Capital Management
But do you think that the state is likely to step up and give you some more of a forward-looking type of mechanism so you’re not going to be in the same type of situation you are with your existing investments?
Donald E. Brandt
I can’t really project what the state’s going to do. I think if you look at the settlement there’s a lot of positives in that.
We’re certainly going to try to do that at some point. But at this point that’s an unknown here in Arizona.
James R. Hatfield
Well, Kevin, let me add to his – it is somewhat pointless to speculate on what mechanisms might be employed in the future from a rate making relative to the renewables or solar energy. We at APS are committed toward that.
Is it a policy objective of the Arizona Corporation Commission. And so both APS, our customers and the Commissioner headed in the same direction, we’ll work together to resolve the tactical issues involved with the deploying solar.
Kevin Fallon – Blenheim Capital Management
Okay. Thank you.
Operator
(Operator’s instruction) And there are no further questions at this time. Ms.
Hickman, I turn the call back over to you.
Donald E. Brandt
This is Don Brandt, let me wrap it up and thank you all for taking your time. I’m sure a busy afternoon or morning wherever you might be.
And we look forward to seeing many of you next week at EEI. And travel safe to Florida.
Thank you.
Operator
This concludes today’s conference call. You may now disconnect.