Feb 19, 2010
Executives
Becky Hickman – Director, IR Don Brandt – Chairman, President and CEO Jim Hatfield – SVP and CFO Don Robinson – President and COO, Arizona Public Service Company
Analysts
Daniel Eggers – Credit Suisse Paul Ridzon – KeyBanc Paul Patterson – Glenrock Associates Yiktat Fung – Zimmer Lucas Partners Daniele Seitz – Dudack Research Brian Chin – Citigroup Ali Agha – SunTrust Robinson Vedula Murti – CDP U.S. Edward Heyn – Catapult Capital Chris Sheraton [ph] – Millenium
Operator
Good morning. My name is Andrea and I will be you conference operator today.
At this time, I would like to welcome everyone to the Pinnacle West year end 2009 conference call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions).
Thank you. I would now like to turn the call over to our host, Ms.
Becky Hickman, Director of Investor Relations. Please go ahead.
Becky Hickman
Thank you, Andrea. I would like to thank everyone for participating in this conference call to review our fourth quarter earnings and full year earnings, recent developments and operating performance.
Our speakers’ today will be our Chairman and CEO, Don Brandt and our CFO, Jim Hatfield. Don Robinson, 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 earnings 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 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 advise you that this call and our slides contain forward-looking statements based on current expectations and the company assumes no obligations 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 the forward-looking statements contained in our 2009 Form 10-K which was filed with the SEC this morning as well as the MD&A and risk factors sections, each of which identify 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 and the slides accompanying this webcast which are posted on our Investor Relations website contain additional disclosures regarding these non-GAAP measures including reconciliation 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 February 26.
Finally, this call and webcast are the property of Pinnacle West Capital Corporation and any copying, transcription, redistribution, retransmission or –
Operator
What happened? You’re still on.
Becky Hickman
But I can’t hear anything.
Operator
Ladies and gentlemen, the conference will resume momentarily. Excuse me, ladies and gentlemen, this conference will resume momentarily.
Okay. Please go ahead.
Becky Hickman
Okay. Thank you, Andrea.
We understand that there were some audio difficulties with the call. So I will start with my comments about our non-GAAP financial measures.
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 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 website www.pinnaclewest.com for the next 30 days. It will also be available by telephone through February 26.
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 will turn the call over to Jim.
Jim Hatfield
Thank you, Becky and good morning everybody. We certainly apologize for the difficulty on the call this morning.
I am going to pick up on slide four which shows a topics that I would like to discuss today. First, the full-year and fourth quarter results for Pinnacle West as well as a primary variances from 2008's fourth quarter, the outlook for the Arizona economy, our earnings outlook for 2010 and 2011 and an update on our liquidity.
Beginning on slide five, with full-year results to provide an overall context for our financial performance, on a GAAP basis, we reported consolidated net income attributable to common shareholders of $68 million or $0.67 per share for 2009, compared with net income of $242 million or $2.40 per share for 2008. Consolidated ongoing earnings or non-GAAP measure.
For 2009, our ongoing earnings were $236 million or $2.33 per share compared with 238 million or $2.36 per share in 2008, which was in line with our expectation of a reasonable range around $3. A reconciliation of our full-year GAAP EPS to our ongoing EPS is shown on slide six.
These amounts exclude results from a real estate segment for both years, because of the major SunCor restructuring we launched in early 2009. Don will provide an update on SunCor in a few moments.
In 2008, ongoing earnings also exclude income tax credits related to prior years, severance costs related to an APS work force reduction and favorable resolution of a tax matter related to the 2005 sale of a power plant. Focusing on results for the fourth quarter as shown on slide seven.
For the fourth quarter of 2009 on a GAAP basis, we reported a consolidated net loss attributable to common shareholders of $30 million or $0.30 per share, compared with a net loss of $39 million or $0.39 per share for the prior year fourth quarter. From an ongoing perspective, we had consolidated net loss of 16 million or $0.16 per share for the 2009 fourth quarter, compared with a net loss of $9 million or $0.08 per share for the prior year fourth quarter.
A reconciliation of our fourth quarter GAAP EPS to our ongoing EPS is shown on slide eight. I will continue to focus my remarks on our ongoing results, which as I stated earlier exclude results from the real estate segment for both quarters as well as severance cost and a favorable tax matter resolution as I previously mentioned.
Moving to slide nine, in the variances that make up the change in quarterly ongoing earnings per share, first, an increase in our regulated electricity segment gross margin added $0.06 per share over the prior year fourth quarter. Several pluses and minuses comprise this net variances and I will cover those variances in more detail on the next slide.
Second, fourth quarter results benefited $0.02 per share from lower costs related to infrastructure investment. The major components of this positive change were lower property taxes, primarily related to lower assessed valuations, which produced an improvement of $0.05 per share.
The lower property tax were partially offset by higher depreciation and amortization expense of $0.02 per share and interest expense, net of capitalized financing costs of $0.01 per share. Third, an increase in O&M costs decreased earnings by $0.10 per share in the quarterly comparison.
The higher O&M reflects an increase in generation costs including more planned maintenance as well as customer service and other costs. We had run substantially behind budget throughout the year and the increase in quarter represents a partial catch up of prior year short fall and is not representative of an annual run rate.
I will address costs in more detail in a moment. This change in O&M excludes expense related to the renewable energy standard or RES in our demand side management efficiency efforts because these costs are offset by a respective rate surcharges.
To help with the analysis, we have provided the amount of pretax RES and DSM revenues recorded by quarter over the last three years in the appendix to today's slides. There was no contribution from marketing and trading activities this quarter, which negatively impacted the quarter by $0.05 per share.
As we have stated before, this was due to our planned reduction of our unregulated activities. The last two major contracts which were negotiated earlier this decade rolled off in 2008 and were not repaid.
Other items net reduced results by $0.01 per share. Turning to slide 10, in the drivers of the net increase in regulated electricity gross margin, total regulated gross margin was up $0.06 per share compared with last year's fourth quarter.
The components of that increase are as follows. Retail rate increases favorably impacted our quarterly results by $0.10 per share.
Of this amount, $0.07 per share related to the interim rate increase that became effective at the beginning of January 2009. The remaining $0.03 per share r related to the 2009 transmission of rate increase that went into effect June 1 through our formula rates and August 1 through our retail transmission cost adjustor.
Turning to the volume metric effects related to weather and kilowatt-hour sale, weather variations approved our earnings by a penny a share as both fourth quarters were slightly milder normal. Our quarterly results were negatively impacted by $0.05 per share related to lower weather-normalized kilowatt-hour sales after netting the impacts of customer growth and customer usage.
In this year's fourth quarter, APS' customer base grew half of 1% compared with 1% in prior year's fourth quarter. Weather normalized retail sales however were down 2.4% for the year, as a whole.
These results mirror the consumer reaction seen in the broader economy, a corresponding increase in customer conservation and the effect of the ACC approved energy efficiency and demand-side management programs. I will provide more color on the state of our common -- economy momentarily.
The non-cash mark-to-market valuation of APS fuel and purchase power hedges, net of SA deferrals was better by $0.05 per share compared with a career ago. This variance was made up entirely of the reversal of a negative mark-to-market from last year's fourth quarter.
There was no meaningful mark to market in this year's fourth quarter, primarily reflecting stability and natural gas prices. For your reference, our mark-to-market amounts by quarter for the past three years are also shown on the appendix.
Lastly, the net effect of other miscellaneous factors reduced our gross margin by $0.05 per share. Looking at the Arizona economy in our fundamental growth outlook, we currently expect customer growth to average about 1% annually for 2010 through 2012.
Additionally, we expect our weather-normalized retail sales in kilowatt hours to be relatively flat from 2010 through 2012, because of the impact of the national economy, the housing situation in Arizona and APS energy efficiency programs. A quarter ago, I mentioned that the Arizona economy still has to deal with substantial excess inventory of homes and apartments.
This situation remains true today and is a principle reason for our moderate outlook for near-term growth. In to last year, the Phoenix metropolitan area continued to add housing supply in excess of demand.
At the end of the year, however, supply growth had fallen more in line with demand and 2010 represents the first year we are likely to start within away at the excess housing inventory. We continue to expect economy both nationally and locally to improve as we move into 2010.
Importantly, we expect consumer confidence to improve along with the rising economy which should allow for a modest recovery in residential usage patterns, ignoring weather effects and the impact of the energy efficiency programs. Usage by our commercial industrial customers, on the other hand, is likely to remain flat as office and retail properties struggle with high vacancy rates, we expect a peak in 2010.
Over the longer term, we remain confident of Arizona's fundamentals. We expect customer growth and usage to return to stronger levels as the national state economic environments improve.
Turning to our outlook on slide 11, we expect that our consolidated ongoing earnings for 2010 will be between $2.95 and $3.10 per share. For your reference, the assumptions and key factors underlying our 2010 estimate are listed in the appendix to today's slides and in our earnings release.
In addition, we estimate our 2011 ongoing consolidated earnings will be within the guidance range for 2010 ongoing consolidated earnings with some opportunity for modestly exceeding the range. On slide 12, I want to talk cost management as it is fundamental to our ability to improve our financial results.
First, I would like to congratulate the employees at APS on their relentless focus on costs in 2009. We came in on or under budget across the board in O&M costs in 2009.
Additionally, in terms of capital spending, we were able to defer our canceled projects as well. And as a result, we came in significantly below budget in capital expenditures.
We are keenly focused on managing our costs and identifying efficiencies and savings throughout the organization. Our cost management efforts will help improve our financial results beyond those achievable through the retail regulatory settlement which Don will address shortly.
I believe that 2009 sets the stage for the future. As we look to 2010, we expect operating expenses, less the cost of programs that are recovered through regulatory surcharges, to be comparable to 2009.
A major opportunity we have identified for generating significant cost savings while producing effective operating results is enterprise-wide supply chain management. This initiative involves collaboration between our supply chain group and the various business units.
This effort has been scoped and we will be implementing this transformation in phases over several years. Based on the results of our recent efforts, we project annual cost savings of approximately $20 million in 2010 increasing to approximately $30 million to $40 million in the future.
Of the annual savings, 40% will be attributable to O&M and 60% will be attributable to capital costs. Another cost saving opportunity is Palo Verde.
Following the plant's return last year to normal scrutiny by the U.S. nuclear regulatory agency, we believe we will be able to lower its annual operating costs, ultimately achieving by 2013 our goal of less than $0.02 per kWh in operating costs.
Although it's too early for me to affix a dollar amount, we do know we must insure that we balance cost savings with safe operations. We are creating a culture focused on cost effectiveness and operational excellence.
Management is encouraging innovation and rewarding success. We believe these efforts will continue to produce savings.
Now, I will give you a quick update on our liquidity. As shown on slide 13, we closed on two, new three-year revolvers on February 12th to replace facilities scheduled to mature in December of this year.
APS now has a $500 million revolver that replaced a $377 million facility. This new $500 million revolver is in addition to the $489 million facility that matures in 2011.
In addition, the parent company has a new $200 million revolver that replaced a $283 million facility. We don't have any long-term debt maturities outside of SunCor until 2011 and our liquidity remains very good.
We will continue to focus on increasing cash flow generation as a way to further reduce our need for external financing. And before I turn over to Don, I would just like to say, as it relates to equity, the need for us to issue equity in 2010 is quite clear.
First and foremost, we will issue to support our credit metrics to maintain the current rating. Additionally, as you recall, 2010 will be a test year for APS and we need to calibrate the capital structure back to our 53.8% equity component.
We will not discuss timing for obvious reasons. However, I would say this.
You saw on this liquidity slide, the ample amount of liquidity that APS has. Additionally, we will be pre-dividend cash flow neutral and with no short-term debt outstanding at APS at year-end, we enter 2010 with a great deal of financial flexibility which gives us a great deal of flexibility as to when we would access the market.
And with that, I would like to turn over to Don.
Don Brandt
Thanks, Jim. And thank you all for joining us on this call this morning.
Jim has already touched on two of the issues that are important to our investors, our growth and the Arizona economy. Although the recession has slowed our growth, Arizona's intrinsic economic strength is an attractive fundamental characteristic for our company.
During the fourth quarter, we made progress in key strategic areas and continued our record of excellence and operations. This morning, I will cover the following four topics.
One, APS' retail regulatory settlement and the constructive regulatory frame work provided by that settlement. Two, our strong commitment to strong renewable energy resources, particularly solar.
Three, our recent operating performance which demonstrates solid execution. And four, progress on the SunCor restructuring.
Regarding our regulatory settlement and the framework for the future, APS' retail regulatory settlement was approved by the Arizona Corporation Commission in December without material modification of the economics. Approval by the ACC commissioners was essential to allow our customers, investors and other stakeholders the opportunity to realize the diverse benefits intended by all of the settling parties.
The settlement terms became effective on January first of this year, with a net increase in APS' retail prices of about 0.5% after reflecting a concurrent reset of the power supply adjuster annual rate. In addition to the financial provisions, the settlement includes a number of provisions benefiting Arizonans including rate stability for APS customers and expanded renewable energy contribution for APS above the ACC's standard requirements and significantly expanded energy efficiency programs.
The settlement demonstrated remarkable cooperation among the commission and the parties to the rate case to achieve the constructive outcome. Looking ahead, APS and the various stakeholders have agreed to an expedited process for future general rate cases that should significantly reduce regulatory lag by allowing those cases to be processed in 12 months.
With the settlement behind us, we will continue working with the commission and various stakeholders to further enhance the regulatory framework and processes to benefit APS customers and all other stake holders. Now turning to renewable resources and operations, our commitment to renewables remains strong.
If you will turn to slide 15, I will review APS's latest major renewable resource initiatives. In the regulatory settlement, we agreed to acquire an additional 1.7 million megawatt hours of renewable energy resources, to be in service by the end of 2015.
With the new additions, we estimate renewable resources will supply about 10% of APS's retail sales by the end of 2015, which is double the amount required of the ACC's renewable energy standard for that year. Clearly, our plans are on track to significantly increase the amount of renewable energy we provide to our customers.
Arizona's solar potential is among the best in the world. And we will remain strongly committed to solar energy and to making our state the solar capital of the world.
Last fall, we filed an application with the Arizona Corporation Commission for approval of the AZ Sun Program. As proposed in the plan, APS would invest $500 million to develop and own at least 100 megawatts of Photovoltaic solar plants.
We currently anticipate the solar capacity will be placed into service in the 2011 to 2014 timeframe. However, the ultimate timing will depend on the outcome of current and future procurement processes.
Consistent with the provisions of the regulatory settlement, we have asked that the cost of the AZ Sun Program including debt and equity capital costs be recovered through the renewable energy surcharge, until such costs are included in base rates or other recovery mechanism. On February 10, the ACC staff issued its recommendation that the commission has approved the program as we requested.
We currently expect the commission to consider staff's recommended order during its regular open meeting scheduled for March 2 and 3. On January 27th, APS issued two requests for proposal for renewable resources.
These RFPs are part of the process for procuring the additional renewable resources required under the settlement. The first RFP is for utility scale solar photovoltaic project ranging in size between 15 and 50 megawatts.
In total, APS expects to procure 22000 megawatts-hours annually from this solicitation. Assuming ACC approval of the AZ Sun Program, this RFP will serve as the initial procurement step for implementing that program.
The second RFP is for wind projects ranging in size between 15 and 100 megawatts, to be located entirely within the state of Arizona. Proposals under both of the RFPs are due in April, respondents are to provide proposals for long term purchase power agreements and/or “turn-key” agreements under which the projects would be approximate built by the developers and then purchased by APS upon completion.
The combination of these efforts with renewable initiatives we already have underway will be important steps toward advancing Arizona's sustainable energy future. Looking at our operating performance, we are focused on continuing operational excellence.
We have been recognized for top tier customer service and fossil plant performance. Further, we continually strive to maintain top quartile performance throughout the organization.
And we constantly seek to improve performance in every facet of the company. Our delivery business again had one of the best years ever from a reliability perspective.
Our retail customers experienced the lowest average outage time per customer we have ever recorded. Our 2009 performance ranked well above the industry average.
Strong customer satisfaction is critical to our success. Earlier this month, JD Power and Associates released the results of its 2010 business customer survey.
APS's rating placed us in the top ten nationally among the 47 large segment electric utilities included in the study. Turning to power plant operations, in the fourth quarter, we completed a planned Palo Verde Unit 2 refueling and maintenance outage.
During the outage, we replaced the unit two reactor vessel head and installed a rapid refueling package which will reduce the time required for future refuelings. Because of the extent of this planned additional work, the outage lasted 60 days which was in line with our schedule.
We plan to make similar reactor head replacements and refueling package installations during the Unit 3 and Unit 1 refueling outages in the spring and fall of 2010 respectively. In 2009, Palo Verde produced a site average capacity factor of 89%.
Even with the planned, extended Unit 2 outage, Palo Verde had its second best production year ever, generating 30.7 million megawatt-hours. Palo Verde is the only U.S.
generating facility of any type to ever exceed 30 million megawatt spot hours in a single year and it did so last year for the fifth time in its history. Looking ahead, the Palo Verde team remains focused on achieving safe, sustainable, top quartile performance in all aspects of the plant's operation.
We are making solid progress toward our established long-term targeting, including consistently achieving annual site average capacity factors of at least 90%, a goal we recently increased from 88% based on the plants performance successes. Our other goals include refueling outages averaging 30 days or less, O&M costs excluding fuel $0.02 per kilowatt-hour and top quartile industry safety metrics.
Our coal fired plants continued their run of top tier performance. In 2009, our coal fleet posted a capacity factor of 82%, which is well above the most recently available industry average of 73%.
Now I will turn to the SunCor restructuring for a few moments. The plan announced in early 2009 involves a sale of a substantial majority of SunCor's properties.
Execution of that plan made significant progress in 2009. SunCor's long-term debt was reduced to about $100 million as of December 31 from 175 million at the end of the first quarter of 2009.
SunCor continues to pursue the sale of its remaining properties. SunCor's principle credit facility matured at the end of January.
SunCor and its lenders are discussing an extension of the maturity to date to allow time for SunCor to continue discussions regarding the potential sale of certain properties. To wrap it up, 2009 was a year of incredible change and progress at our company.
Clearly, our team accomplished a lot and established a solid base for the future. I am excited and optimistic about the prospects for Pinnacle West and APS in the years ahead.
Through focused strategies and sound execution, we will continue to drive this company forward. Additionally, we are committed to improving our earnings and financial metrics and thereby sustaining our credit ratings and common dividends.
We are keenly aware of the vital importance of the dividend to our investors and thus to our ability to attract capital to fund Arizona's energy future. Operator, that concludes our prepared remarks.
At this time we would be pleased to take any questions.
Operator
(Operator Instructions) Your first question comes from line of Daniel Eggers from Credit Suisse. Your line is open.
Daniel Eggers – Credit Suisse
Hey, Good morning.
Don Brandt
Good morning, Dan.
Daniel Eggers – Credit Suisse
Don and Jim, I was wondering if you guys could share a little more thought process on the mover from 2010 earnings guidance to 2011 outlook. As we look at it, we see a few drivers that should put growth into '11 related to the FERC transmission rider, the TCA mechanism – some O&M cost savings opportunities and pension benefit.
What would be some of the positive and negative from the '10 to '11 number in your mind?
Don Brandt
Well, Dan, I think some of the optimism going into 2011 I have is, Jim referenced a couple and I will add to that. Maybe let him get into the detail, but some of the cost initiatives we have in place is one, the supply chain initiative we think will yield substantial benefits.
We are deploying a fleet model in your fossil generation business. And on the Palo Verde front, we think there are opportunities for future efficiencies to be had there.
But I will stipulate though for Palo Verde, we will, safely will always be first and we have to achieve our ultimate long-term goals of excellence at Palo Verde. But with that said, we see some significant opportunities for implementing efficiencies at Palo Verde as we are at the fossil fleet.
Jim?
Jim Hatfield
Yeah. The only other thing I would add on the cost side, on that especially as it relates to '11, Dan, as we have the pension essentially capped under the settlement 2011.
And that is one of the big, if we look at the cost side of the equation -- O&M and pension are probably two bigger drivers. And with that capped, it will be our ability to execute on the cost savings and the timing of actually achieving those.
I would also add to what Don mentioned, just the fact that shared services, which includes accounting finance, HR, IT, are also -- we will be reviewing their efficiency as we get into 2010. In terms of drivers, '10 to '11, we are showing no retail sales growth in '11 over '10 or '10 over '09.
To the extent the economy comes back a little quicker that would be potentially a positive. And we have zero in there.
So it could still go negative and that would be the flip side of that. So I think we are a little optimistic at the -- here at the bottom.
I think you mentioned transmission, although I would just caution that if you look at our cost reductions on CapEx beginning in '08. A big piece of that capital was in transmission, as we pushed that out later.
And we do have the Qayak [ph] as revenue in 2011 at $25 million from the 23. Growth could impact that both ways as well.
I guess to the extent growth comes back a little earlier, we could see that go up. I think the other key piece and maybe the variable in here, is the timing of Arizona Sun getting into service.
We don't have a material contribution from Arizona Sun in our 2011 guidance. And to the extent, we get approval in the RFP process, our ability to put that in service earlier would be a positive contribution as well.
And then I will also point out the relentless focus on O&M. Also we are looking at CapEx and our ability to continue to defer or cancel projects should have a positive -- modest positive impact on cash flow.
Daniel Eggers – Credit Suisse
And I guess, Jim, if you could just talk to -- just for calibration's sake, what your earned ROEs are expected to be at APS in 2010 on the current guidance range?
Jim Hatfield
Yeah. We would expect to earn in 2010 around the 9% ROE, maybe high 8 from the 9 to mid-9 in 2010.
Daniel Eggers – Credit Suisse
Okay. Great.
Thank you.
Operator
Your next question comes from the line of Paul Ridzon from KeyBanc. Your line is open.
Paul Ridzon – KeyBanc
Jim, you said 20 million from supply chain management. Is that purely supply chain management?
Or are there other initiatives in there?
Jim Hatfield
That's purely supply chain management. And then again, keep in mind only 40% -- 40% of that hits the O&M line.
Paul Ridzon – KeyBanc
That grows 30 to 40 million, you said?
Jim Hatfield
Yes.
Paul Ridzon – KeyBanc
Over how long could that take?
Jim Hatfield
Well, we don't see full implementation of supply chain until end of 2011. So I wouldn't think you would start to see all of the comprehensive benefits until '12.
Paul Ridzon – KeyBanc
And then kind of right on the periphery about some wacky legislation to eliminate the Qayak. Is that going anywhere?
Don Brandt
There is some legislation pending in there. We are comfortable with the fact that ultimately, it will not impact how with we record Qayak and record those revenues as is set forth in the settlement.
Paul Ridzon – KeyBanc
That's just something that is coming from maybe one district that's most impacted by the lack of footage allowance?
Don Brandt
It’s coming from a few different sources, but it has been that topic that came up during the rate hearings and that. But as I said, we are comfortable where we are moving forward in this direction, Paul.
Paul Ridzon – KeyBanc
Sounds good. Thank you.
Operator
Your next question comes from the line of Paul Patterson from Glenrock Associates. Your line is open.
Paul Patterson – Glenrock Associates
Good morning, guys.
Jim Hatfield
Good morning.
Don Brandt
Good morning, Paul.
Paul Patterson – Glenrock Associates
Just the sales growth expectation? You expect it to be flat, if I understand correctly weather normalized compared to a customer growth of 1%, correct?
Jim Hatfield
Correct.
Paul Patterson – Glenrock Associates
Okay. And then when we are looking at last year, there was a 2.4% decline.
Now part of that has to do with energy efficiency?
Jim Hatfield
That's correct. Within that 2.4% residential was off 1.8%.
And our estimation and measurement is 0.6 of that was related to the energy efficiency and other programs in place, so about one third of the decline in 2009.
Paul Patterson – Glenrock Associates
And the other one third is what, would you say? I mean the other two thirds, excuse me.
I'm sorry.
Jim Hatfield
I think it's again, the conservation efforts people undertook with the economy and jobs the way they were. I think people were very careful in terms of all of their expenses.
And we did a survey in the third quarter, which really proved that to be the case. People were cautiously trying to conserve in that economic cycle.
Paul Patterson – Glenrock Associates
Okay. So when we look at 1% customer growth and I know it is not this simple to say, okay, sales growth could grow that much as well.
Is it energy efficiency? Or do you see continued conservation efforts as causing that?
Jim Hatfield
Well, I think there's a couple of things embedded in that, Paul. Certainly, we see energy efficiency and the other programs being a big part of offsetting any sales growth we get.
I think people will still be cautious. However, as we said as the economy picks up and people's perception of the economic time picks up.
We will see probably less conservation on a personal level. Sales at the C&I level will continue to be flat in 2010.
We don't see any potential opportunity there.
Paul Patterson – Glenrock Associates
So it sounds like for 2010 and to 2011 you also expect to see flattish growth. I mean not really much.
Jim Hatfield
Yes.
Paul Patterson – Glenrock Associates
That's, okay.
Jim Hatfield
Yeah. And I would say sort of any customer growth or sales usage growth we get we expect to be offset with these other programs.
Paul Patterson – Glenrock Associates
Okay. To the equity ratio, you're recalibrating to get to the equity ratio for the test year 2010.
How should we think about that? I mean should we just simply, when we -- what should we think in terms of the size of the equity issuance?
Because there's some moving elements to this, so I know you don't want to talk about the timing? Can you give us a feel for the size of what you are expecting in 2010?
Jim Hatfield
Paul, consistent with timing, for obvious reasons we are not going to talk about size or how we would execute in the marketplace. Others say, obviously all options are on the table as it comes to execution.
Paul Patterson – Glenrock Associates
Okay. And then are there any mark-to-market impacts that you guys have in 2010 or 2011 guidance?
Jim Hatfield
We have no mark-to-market impact in 2010 or '11 at this point, Paul.
Paul Patterson – Glenrock Associates
Okay. Great.
Thanks a lot.
Operator
Your next question comes from the line of Yiktat Fung from Zimmer Lucas Partners. Your line is open.
Yiktat Fung – Zimmer Lucas Partners
Good morning. Congratulations on your achievements this year.
Jim Hatfield
Thank you, Yiktat.
Yiktat Fung – Zimmer Lucas Partners
First of all, I would just like to clarify the trajectory of O&M.
Jim Hatfield
Okay.
Yiktat Fung – Zimmer Lucas Partners
Going forward, given the reductions through the enterprise supply management program.
Jim Hatfield
Yes.
Yiktat Fung – Zimmer Lucas Partners
Should we expect O&M to be trending down over time? Or should we expect it to be flat?
Or should we expect it to still be going up somewhat, but offset by your efforts?
Jim Hatfield
Well, I think obviously, if you look at '10 over '09, we are expecting pretty flat '09 over '08, was actually flat as well. I think the way to look at it is embedded in guidance and 2010 is sort of flat O&M.
I think pretty much the same trajectory in '11. I would say these initiatives are going to offset other costs we still have to pay people.
And we have the -- as you know collected bargaining agreements that are contractually obligated. But we are using these to really achieve our goal, which is have the rate of growth of O&M to be equal to or less than the rate of kWh sales growth.
And certainly over this period of time in the near-term, when we are flat on the sales side. We have to have every effort we can to be flat on the O&M side as well.
Yiktat Fung – Zimmer Lucas Partners
I understand that you're not making very specific comments with regard to equity. But I was just wondering, do you have a dividend reinvestment program?
Jim Hatfield
There is a DRIP in place, yes.
Yiktat Fung – Zimmer Lucas Partners
Okay. How much is it?
Jim Hatfield
Well, I think last year, we brought in about $2 million or something in that DRIP so.
Yiktat Fung – Zimmer Lucas Partners
Is that going to be expanded through course?
Jim Hatfield
I won't -- I am not going to talk about execution.
Yiktat Fung – Zimmer Lucas Partners
Okay. Fair enough.
And finally, just to confirm on the marketing trading side, there's no more roll off of contracts at that segment?
Jim Hatfield
That's correct.
Yiktat Fung – Zimmer Lucas Partners
Okay.
Jim Hatfield
That's correct.
Yiktat Fung – Zimmer Lucas Partners
Thank you. Thank you very much.
Operator
Your next question comes from the line of Daniele Seitz from Dudack Research. Your line is open.
Daniele Seitz – Dudack Research
Thank you. I was just wondering, what sort of trend do you see for CapEx, at this point?
And would you ask for additional riders for any programs -- that are not mentioned in programs in the future similar to the AZ Sun?
Jim Hatfield
CapEx in the future, obviously, I think will pick up as we go through time just with the embedded growth in the system. And as I said earlier, a lot of what we were able to pull off the table is transmission, which is just deferred out to the later years.
I think -- If I look at '10 over '09, a big part of that are the reduction in CapEx we had in '09. And then the other part is assumption of Arizona Sun, which under the settlement is a mechanism that we would do those programs.
In terms of riders and things going forward, I would love to have near-term recovery of everything we do. But right now, we are living with the RES under the settlement.
And we will continue to try to improve our cost recovery and return on capital going forward.
Daniele Seitz – Dudack Research
And so in terms of CapEx, do you see pretty much of an increase sort of inflation increase over time?
Jim Hatfield
Well, I think over time -- I wasn't thinking as much inflation increase as much as just capital we will pick up at some point just for growth.
Daniele Seitz – Dudack Research
All right. And I was wondering also the part of these outages.
Do you anticipate them to be as lengthy as the first one? Or have you -- could you make it shorter?
For the next one, yes, the special outage?
Don Brandt
The next two outages, it is units one and three.
Daniele Seitz – Dudack Research
Yeah.
Don Brandt
So we would expect those to be a comparable length.
Daniele Seitz – Dudack Research
Okay.
Don Brandt
As the most recent outage because we are changing out reactor heads on both of those and the refueling packages.
Daniele Seitz – Dudack Research
Okay. Thank you very much.
Operator
Your next question comes from the line of Brian Chin with Citigroup. Your line is open.
Brian Chin – Citigroup
I know you guys kept your load forecast largely intact but any updated commentary from Freeport-McMoRan?
Jim Hatfield
No. We don't have any updated commentary at this point.
Brian Chin – Citigroup
Or no incremental inklings from them with regard to their load forecast and how it is may have shaped your thought on the outlook?
Jim Hatfield
No. No update on where they are.
Brian Chin – Citigroup
Great. Thanks a lot.
Operator
Your next question comes from the line of Ali Agha from SunTrust Robinson. Your line is open.
Ali Agha – SunTrust Robinson
Thank you. Good morning.
Jim Hatfield
Hey, Good morning.
Ali Agha – SunTrust Robinson
Jim, I just wanted to clarify the earnings per share guidance that you have for 2010 and so the range for '11. Does that assume a higher share count base assuming some equity issuance?
Jim Hatfield
Well, we have assumed an equity issuance in 2010, yes.
Ali Agha – SunTrust Robinson
Okay. And then secondly, the next rate case that you will file won't be before June one of '11.
Could you just remind us between now and then, what would be the key changes that you would be working on with the regulators so that the next rate case that you file you may have some different parameters which is what happened in the settlement.
Don Robinson
Sure. This is Don Robinson.
What we will be doing is we will be working with the staff and the other parties to expedite the process. Part of that is giving them pre-notice of the filing of a rate case so that they can start the process of hiring consultants and doing some of the preliminary work which should hopefully take six or more months out of the process.
We are going to be working with them at looking at our plant additions and how to effectively deal with plant additions going forward and to deal with the additional growth that we are going to have on the system. We are going to look at different processes of providing them some discovery on the front end of the rate cases as opposed to waiting for them to ask for it.
So we are really going to be looking for process improvements that we believe will be the intention of all the parties to want us to get through because having long drawn-out cases doesn't help anybody.
Ali Agha – SunTrust Robinson
Right. My last question, Don or Jim, just to clarify the Qayak currently is for 2010, '11 and '12.
Is it currently contemplated to go back to the previous regime beyond '12 or what is the current status of that after '12?
Don Brandt
That will be decided in the next case.
Ali Agha – SunTrust Robinson
I see. So it's not firmed up yet?
Don Brandt
It's not.
Ali Agha – SunTrust Robinson
Okay. Thank you.
Don Brandt
Thank you.
Operator
And your next question comes from the line of Vedula Murti from CDP U.S. your line is now open
Vedula Murti – CDP U.S.
Good morning.
Don Brandt
Good morning, Vidula.
Vedula Murti – CDP U.S.
A couple of things. One with the capital structure based on 12, 31, ‘10, will the test year rate base also be 12-31, 2010 or given that the filing is not going to happen for a while with rates not going into effect until mid-2012, will there be an opportunity to update plant and service.
Jim Hatfield
Well, I think currently, we have an historic test year. So that would imply 2010 cost, capital structure and plant service.
I would just remind you in this last case, we got about 18 months opposed test year plan. Which I think is a good model.
But we will have to see in the filing what develops.
Vedula Murti – CDP U.S.
Okay. And my recollection is in the past and I may be incorrect that, the amount of plant that is currently in service or would be anticipated to be in service.
That's not reflected in rates that you will have the opportunity to update. Probably approaches the neighborhood of about $1 billion of rate base.
Is that approximately correct or can you help us a little bit as to think about how much incremental plant and service will be there -- that needs to get reflected?
Don Brandt
Vidula. I think your number is high, particularly based on the experience in the last case.
That as Jim referenced that effectively the last case picked up 18 months of capital expenditures that have been placed in service post the end of the test year.
Vedula Murti – CDP U.S.
So then, what would you say would be the -- what is then the date from which you feel like you got trued up for from which we can look at CapEx less depreciation.
Jim Hatfield
Last six months of '09 and then, our projection for 2010.
Vedula Murti – CDP U.S.
So June 30, '09 is basically the update.
Jim Hatfield
Right. And you have to, of course, remember in the '09, 54, 2010, you have Arizona Sun which we recovered under a different mechanism.
As well as half of a year of depreciation and a full year of depreciation in 2010.
Vedula Murti – CDP U.S.
And my last question. Palo Verde, license extension, there will be about six months in 2012 before the rates go into effect.
Can you remind us your current estimate on that benefit for the half year of '12?
Jim Hatfield
Yes. It’s $34 million annually.
So half a year would, say, $17 million.
Vedula Murti – CDP U.S.
Pre-tax?
Jim Hatfield
Yes.
Vedula Murti – CDP U.S.
Thank you.
Operator
Your next question comes from the line of Edward Heyn from Catapult Capital. Your line is open.
Edward Heyn – Catapult Capital
Good morning.
Jim Hatfield
Good morning.
Edward Heyn – Catapult Capital
Most of my questions have been answered but just had a quick one on the Palo Verde O&M. You talked about, I think, that your target is $20 a megawatt hour to get the non-fuel O&M down to?
Could you give us a sense of where that is -- where it was in 2009 so we can gauge what sort of dollar amount that would be if you got to those levels?
Jim Hatfield
Yes. In 2009, it is about $23.
Keep in mind, cost is one side is of the equation. The other side of the equation is increasing capacity factors to 90% or better and reducing the outage time to 30 days or less.
And obviously, you reduce the outage times, you are going to increase the capacity factor and driving costs down will be the other side of the equation.
Edward Heyn – Catapult Capital
Okay. So the costs will be coming down.
The numerator will be coming down but the plants will be running more so that the denominator will be bigger and that will drive both of those. Correct.
Jim Hatfield
It is going to be a combination of both.
Edward Heyn – Catapult Capital
Okay. So that $23 you are giving us, just to double-check -- it excludes fuel and it excludes the PV two sale lease back?
Jim Hatfield
That would be correct.
Edward Heyn – Catapult Capital
Okay. Thank you very much.
Operator
(Operator Instructions) Your next question comes from the line of Chris Sheraton [ph] from Millenium. Your line is open.
Chris Sheraton – Millenium
Good morning.
Jim Hatfield
Hey, Chris. How are you doing?
Chris Sheraton – Millenium
All right. Quick question on the Arizona Sun hearing or open meeting, you are expecting either some decision from the Commission on that or could the decision be pushed beyond that date?
Don Robinson
This is Don Robinson. It could be pushed beyond that date.
Right now, we have no reason to believe they're not going to deal with it on the open meeting on the second and third of March. Although they clearly have the ability to do whatever they choose.
Chris Sheraton – Millenium
Right. So, I guess if you get approval, let's assume for a second you get approval March second or third.
How does that sort of change, does that significantly change your CapEx plans I guess for 2010 at this point?
Don Robinson
Not significantly, no. I mean, we would be doing an RFP for additional solar resources that we would expect to have something online, as Don previously said, in 2011.
Chris Sheraton – Millenium
Okay. And then the other RFPs you were mentioning in the opening remarks.
Are those -- do we know when those would come online yet or you have to see how the RFP comes on?
Don Robinson
We would have to see how the RFP comes on. One of those is for photovoltaic solar.
So that could be relatively quick. The other is for wind which would potentially take a little longer.
So part of it will be how long it takes to process the RFPs which we are doing as quickly as we can. What kind of response we get and then what type of timeframe it would actually take to put those facilities into service.
Chris Sheraton – Millenium
Is it too ambitious to think it could follow similar timeline to the Arizona Sun project in '12 or not?
Don Robinson
The solar could do that timeframe. And the wind it would depend on whether they have land, whether they have equipment ordered, what the construction leads are for that -- that sort of thing.
Chris Sheraton – Millenium
Okay. And do you have preference whether you have a utility-owned project versus an RFP?
Now that you have Arizona Sun, hopefully, coming into the utility-owned portion.
Jim Hatfield
Well, Chris. Obviously my preference is to have it in rate-based.
We have been clear with the Commission in terms of relying on a PPA model and then PTA data [ph] is not a sustainable model for us. But I'll just point out, too, that while Chairman may have said, she was fine with owning solar, we are going to continue to do a mix going forward.
So it could be a combination of ownership or PPA.
Chris Sheraton – Millenium
Okay. And then, I just wanted to confirm -- I will take a shot at the equity question.
I think last when you initiated 2010 guidance and this is last year. There was some assumption that there was $0.07 of dilution included in the former $3 range that you had.
Is that now defunct or can we still rely on that number?
Jim Hatfield
Well, that was our assumption based on the mid-year offering. So, that assumption based on timing and amount would still be valid as we go forward.
Chris Sheraton – Millenium
Okay. So there is $0.07 -- is it too far to go to say there's $0.07 of dilution included in the current range for 2010?
Jim Hatfield
I would say that's too far to go Chris.
Chris Sheraton – Millenium
Okay. Fair enough.
Thanks a lot. I appreciate it.
Operator
Your final question comes from the line of Daniele Seitz from Dudack Research. Your line is open.
Daniele Seitz – Dudack Research
Yes. I was just wondering, does the AZ Sun -- could apply for the stimulus money or because it is regulated, you will not apply?
Jim Hatfield
Daniele Seitz – Dudack Research
Okay. I just was curious.
Thank you.
Operator
There are no further questions in the queue. Please go ahead, Ms.
Hickman.
Becky Hickman
Thank you for joining us today. Again, we apologize for the audio difficulties earlier in the call.
If you have any further details that you need about earnings or anything else about our company, please call me. Again, thank you for calling in today.
Don Brandt
Thank you.
Operator
This concludes today's conference call. You may now disconnect.