Apr 29, 2011
Executives
Rebecca L. Hickman – Director, Investor Relations James R.
Hatfield – Senior Vice President and Chief Financial Officer Donald E. Brandt – Chairman, President and Chief Executive Officer
Analysts
Dan Eggers – Credit Suisse Ali Agha – Suntrust Robinson Humphrey Stefka Gerova – JPMorgan Jim von Riesemann – UBS Securities Brian Chin – Citigroup Reza Hatefi – Decade Capital Management
Operator
Greetings and welcome to the Pinnacle West Capital Corporation 2011 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Becky Hickman, Director of Investor Relations. Thank you.
Ms. Hickman, you may now begin.
Rebecca L. Hickman
Thank you, Melissa. Good morning.
I'd like to thank everyone for participating in this conference call and webcast 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.
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, the slides we refer to today are available on our Investor Relations website along with our earnings release, supplemental information on our earnings variances and quarterly operating statistics, the webcast and the Form 8-K filed this morning. The slides contain reconciliations of certain non-GAAP financial information.
Please note that all of our references to per share amounts today will be after income taxes and based on diluted shares outstanding. Also, 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 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 contained in our 2010 Form 10-Q, which was filed this morning, as well as the MD&A section, which identifies risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements.
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 6.
At this point, I'll turn the call over to Jim.
James R. Hatfield
Thank you, Becky. The topics I will discuss today are outlined on slide four.
First, I'll review the consolidated first quarter results and discuss the main variances from last year’s corresponding quarter. Second, I'll provide a brief update on the status and outlook for the Arizona economy.
Third, I'll discuss our 2011 earnings guidance and lastly, I will close with brief comments on our financing activities in these. Slide five summarizes our reported and on-going earnings for the quarter.
On a GAAP basis for this year’s first quarter, we reported a consolidated net loss attributable to common shareholders of $15 million or $0.14 per share compared with a net loss of $6 million or $0.06 per share for the prior year's first quarter. Our on-going earnings decreased $0.21 per share for the 2011 first quarter.
We’ve consolidated on-going loss of $15 million or $0.14 per share versus on-going earnings of $7 million or $0.07 per share for the comparable quarter a year ago. Slide six contains a reconciliation of our first quarter GAAP EPS to our ongoing earnings.
The amounts for both quarters exclude the results related to our discontinued operations substantially comprised of the operations of our real estate business on core. My remaining comments on the quarter will focus on on-going results.
Moving to slide seven, you will see the variances that drove the change in quarterly on-going EPS. First, an increase in our regulated electricity segment gross margin added $0.04 per share compared with the prior year first quarter.
Several pluses and minuses comprise this net variance and I will cover those items in more detail on the next slide. Second, higher operations on maintenance expenses decreased earnings by $0.10 per share.
The increase largely reflects higher duration cost primarily due to the plan timing and scope of maintenance at two of our gas-fired, combined-cycle generation plants. I’ll give additional detail on the timing of O&M for our planned outages in a few moments.
This change in O&M excludes expenses related to the renewable energy standard or RES and similar regulatory programs, which are offset by comparable revenue amounts. Also we have excluded $0.16 per share of expenses related to settlement in this year’s first quarter of certain prior period transmission rights away associated with the Four Corners Power Plant.
These costs were offset by revenue to be received from Southern Calif. Edison with (inaudible) related transmission line from APS.
So there is no financial impact from the settlement. Third, favorable resolution of tax matters in a prior period, which did not recur in the first quarter of 2011 decreased earnings by $0.08 per share.
Fourth, higher infrastructure costs decreased earnings by $0.06 per share reflecting increases in property taxes and depreciation. Finally, the net impact of all other items decreased earnings by a $0.01 per share.
Turning to slide eight, composition of the net increase in our regulated electricity gross margin. Total regulated segment gross margin was up 4% per share compared with 2010 quarter.
The components of that increase were as follows. Higher usage by APS' customers compared with the first quarter a year ago increased our quarterly results by $0.03 per share.
Weather-normalized retail kilowatt-hour sales were up 1.2% in the quarterly comparison after reflecting the effects of our ACC approved energy efficiency and demand-side management programs. This was the first time since the third quarter of 2008; we have had higher overall retail kilowatt-hour sales in the first time since the fourth quarter 2007 that our residential customer's average usage has increased.
Also we had 0.4% customer growth in the quarter in addition to higher usage per customer. I'll provide more on the State of the Arizona economy momentarily.
Weather effects improved earnings by $0.03 per share. This year's first quarter was cooler than normal with residential heating degree-days higher than normal by 17%.
Higher line extension fees recorded as revenues increased gross margin by $0.01 per share. The net effect of lower transmission rate and other items decreased our results by $0.03 per share.
Moving to slide nine, I want to discuss the timing on an annual basis for planned O&M for fossil generation outages for this year and last year. O&M as we indicated earlier was impacted primarily by planned outages at two of our gas-fired, combined-cycle power plants.
On the slide, you see the spread of our O&M expense for overall of the fossil fleet in 2010 as compared to the expected expense for 2011. We anticipate our spin on overalls in 2011 will be about the same as in 2010.
With that said, we plan and successfully executed on about half of our overall dollars in the first quarter of 2011, compared to 20% during the same period in 2010. So while the year-over-year comparison for the quarter get you one impression, we're actually on track with operating expenses for 2011 and we plan no change to guidance.
Turning to slide 10, and looking at our fundamental growth outlook in Arizona economy, in the first quarter of this year, we continue to see signs of stability in the Arizona economy. As shown on the side, month-over-month, non-farm job growth has continued at a slow positive pace.
On a more encouraging note, we have seen stronger consumer spending as reflected in an increased rate of growth for Arizona retail sales. While these trends indicate that the Arizona economy has headed in the right direction, we must remain cognizant of the significant headwinds that continue.
Unemployment remains high and they can see rates in housing and commercial real estate have only just begun to retreat from their peaks of last year. We believe the situation will continue to restrain new construction and higher levels of growth for at least two to three years.
Over the long-term though, we remain confident in Arizona’s fundamentals. We expect customer growth in usage to return to stronger levels as the national and state economic environments improve.
Although, we experienced growth in both customers and usage per customer in the first quarter, I will now not jump to any conclusions that we have started a significant upward growth trend. In 2011, we expect growth in customers in kilowatt-hour sales of about 1%.
Looking at the next several years, we expect annual customer growth to average about 1.7% for 2011 through 2013. Additionally, we expect our average annual weather normalized retail sales in kilowatt-hours to be relatively flat in 2011 through 2013, primarily due to APS’ energy efficiency programs offsetting a modest recovery in the economy.
So turning to our earnings outlook, I would point you to slide 11. In terms of results year-to-date, we are on track to meet and we are affirming our consolidated ongoing earnings guidance for 2011 of $3 to $3.15 per share.
For your reference, a list of key assumptions and factors underlying our 2011 outlook is included in the appendix in today’s slides. Additionally, as we stated in our prior call the 2011 outlook includes an expected contribution from our AZ Sun Program of about $0.03 to $0.04 per share.
In terms of 2011, we intend to share with you the major drivers for 2012 sometime after our general rate case is filed with the commission on June 1 of this year. However, we will not provide 2012 earnings guidance while the rate case is pending.
Before I turn the call over to Don, I want to comment on liquidity. APS in the first quarter with no short-term debt outstanding and has ample liquidity.
As a result, we are comfortable with our ability to plan APS’ capital expenditure program with no new equity until 2012 at the earliest. With that, I'll turn the call over to Don Brandt.
Don?
Donald E. Brandt
Thanks, Jim. Since our last earnings call we made distinct progress in key areas and continued our track record of operation excellence.
Today, I'll address four areas, one, our renewable and other generation investments; two, environmental compliance; three, rate regulation matters; and finally, four, recent operating performance. Beginning with renewable resources in our AZ Sun development activities, we are on track with plans to significantly increase the amount of renewable energy we provided our customers.
Investing in these resources make sense for our customers, their communities, the environment and our shareholders. We have a strong emphasis on a solar power because Arizona has some of the best solar conditions in the world.
Since the beginning of the year, our most noteworthy progress related to renewable energy has been on APS' AZ Sun Program. The company has planned to develop and own 100 megawatts of photovoltaic utility scale solar plants in Arizona.
The appendix to our slides today contains a summary of the AZ Sun Program and the projects committed today. We have announced projects with a total deliverable capacity of 83 megawatts and an estimated capital investment of $384 million.
Additional procurement initiatives are underway to fill out the remaining 17 megawatts of the program. Construction and other development activities are now under way and we expect to place the first 45 megawatts of the AZ Sun Program in service for customers later this year.
Turning to the status of our Four Corners plan and other environmental compliance matters, last quarter, I discussed our multi-part plant to address several challenges facing over Four Corners coal-fired plant in northwestern New Mexico. The plan presents a creative solution to address new environment regulations and maintains our well-balanced resource portfolio.
A summary of the plan is included in the appendix to our slides. To recap the plan, APS has agreed to buy Southern California Edison's 739 megawatt interest in units 4 and 5 of Four Corners.
This opportunity exists because So Calif. Edison has indicated it must exit its interest in the plant by 2016 to comply with California law.
The purchase price is $294 million. The parties target closing on the transaction in late 2012.
If the purchase transaction moves forward as planned, we intend to shutdown Four Corners units1, 2 and 3, which totaled 560 megawatts in size and are wholly owned by APS. These units are older and less efficient than units 4 and 5 in compliance with new regulations issued by the U.S.
Environmental Protection Agency would be very expensive for them. The net result of the anticipated acquisition and closure is 179 megawatt increase in APS' share with Four Corners.
We estimate that APS' capital expenditures for environmental compliance for our revised plant share will be about $300 million, cost primarily incurred to install selective catalytic reduction equipment or SCRs as they're called on units four and five as the EPA's proposed rules would require. These expenditures are far less in what APS would make if it were instead to bring our existing interest in all five of the plants units in the compliance with the proposed EPA rules.
An approach that would require capital investments (inaudible) an estimated $620 million. The acquisition requires approval by Arizona, California and federal regulators and other government agencies.
It is also contingent upon the extensions of the land lease with Navajo Nation and the coal supply contract. During the first quarter, we made progress towards such approvals on several fronts.
The land lease extension through 2041 was approved by the Navajo Nation and now awaits final approval by the U.S. Department of the Interior.
The deadline by which other participants must have exercised or write a first refusal to purchase a portion of Southern California Edison's share has passed and APS remains the one – excuse me, the only purchaser. The Arizona Corporation Commission has scheduled a hearing on the matter to begin on July 14 and coal contract negotiations also continue.
We believe our plan has substantial merits economically, environmentally and socially. Our proposal clearly provides significant savings, given that the purchase price plus environmental compliance cost combined for APS' revised share are less than the cost of environmental compliance for APS' existing ownership in the plant.
Our plan has substantial benefits in other important areas as well. We remain hopeful that APS in Southern California Edison will obtain the requisite approvals in a timely manner.
Now, let me touch for a few minutes on other EPA compliance developments. In March, the EPA proposed rules to regulate mercury and certain other air emissions at coal-fired power plants.
The proposed rules were inline with our expectations and we anticipate that they will be finalized in late 2011. All APS-owned plants except Four Corners units 1, 2 and 3 and one unit at Cholla power plant are equipped with scrubbers and bag houses and thus able to comply with the proposed rule.
We currently estimate that installation scrubbers at Cholla will cost about $89 million and will be completed by 2015. Also in March, the EPA proposed a rule on cooling water intake structures at existing power plants, which is sometimes referred to as the Section 316(b) rule.
The proposed rule is subject to a 90-day public comment period and we expect that a final rule will be issued in mid-2012 of APS' existing power plants only Four Corners and Navajo would be impacted by this rule, if finalized. And we are now analyzing the nature of the impacts on potential cost of compliance.
Turning to rate regulation matters now, we continue our work with the Arizona Corporation Commission and stakeholders in an effort to gain common understanding on various regulatory and operational issues and the fine solutions that balanced the interests of customers, shareholders and other stakeholders alike. We look forward to continuing this dialogue and making further progress with respect to our states regulatory environment.
We've also been preparing for APS' 2011 retail rate case filing. As a noted on our last call APS filed a notice on February 1 with the Arizona Corporation Commission indicating that we intend to file our rate case on June 1.
The primary objectives of our rate case filings will be to recover costs in investments. We have made to serve our customers and to build upon the support of regulatory mechanisms established in APS' 2009 regulatory settlement.
Required by the settlement, the 120-day notice filing was design to inform stakeholders is a key proposal that APS likely will include in its upcoming rate case and to facilitate timely resolution of the proceeding. Some of the proposals in the notice include a decoupling mechanism, post test year plant additions to rate base and an infrastructure tracking adjusted mechanism to recover future generation and environmental capital cost.
For your convenience the summary of the proposals is provided in the appendix to our slides. Earlier this month, we made our 2011 filings for rate changes related to transmission services.
The total adjustments to our transmission rate will be $44 million calculated pestilence to the formal rate approved by the Federal Energy Regulatory Commission. Of these amounts, $6 million relates to wholesale transactions with other utilities and will become effective on June 1.
We have filed an application with the ACC requesting that the $38 million related to transmission services for APS’ retail customer that become effective on July 1. Looking at our operating performance, our base load coal and nuclear continues to perform well.
Our coal-fired plants continue their top tier performance. In the first quarter, our coal fleet posted a capacity factor of 78%, which is well above the most recently available industry average of 65%.
During the first quarter, our Palo Verde nuclear facility operated at a 99% capacity factor. Unit 2 is currently in a plan refuelling outage that began on April 2.
We plan two refuelling outages in 2011 to last 35 to 40 days each, a time frame that reflects sound, planning and execution as well as the benefits of our work over the past two years installing rapid refuelling packages and replacing reactor vessel heads. On April 21, the U.S.
Nuclear Regulatory Commission approved 20-year license extension for each of Palo Verde's three units. This was a major achievement that will result in significant cost savings and other benefits for APS' customers and the entire southwest from the United States over the extended lifetime of plant.
Obviously, the nuclear industry is at the top of many minds following the recent tragic events in Japan. So a few comments on this subject remitted today.
We strongly believe that Palo Verde is safe and that there are key differences between our plant and the Japanese situation, including less susceptibility to external events like earthquakes and Tsunamis. However, we and the rest of the U.S.
nuclear fleet have been carefully studying the developments in Japan. We’re keenly aware that there will be lessons learned from that event that will strengthen the safety of our nation's nuclear fleet.
As the operator of the largest nuclear plant in the United States our mission for Palo Verde is just operate safely and efficiently for the long-term. Turning to the quality of our customer service.
In February, J.D. Power and Associates released results of its 2010 business customer survey.
I'm pleased that APS continues its record of performance, excellence and overall customer satisfaction. In the most recent results, APS ranked fourth nationally among 45 large investor-owned electric utilities.
More specific to our region, we were rated second among 10 investor-owned utilities in the West. We also recently received recognition for achievements in other areas.
Specifically for the second consecutive year APS was awarded the EPA's highest honor for continued leadership and protect the environment through energy-efficiency programs. The energy stars sustained excellence award recognized two APS home programs for promoting energy efficiency and reducing greenhouse gas emissions.
In addition, Pinnacle West was ranked 15 in Corporate Responsibility magazine’s 2011 list of 100 Best Corporate Citizens. This award was especially meaningful to us because it recognized our performance in many environmental, social and governance areas.
To wrap it up, our company's goal is to achieve top-tier performance and we constantly work toward that objective in every facet of our business. Going-forward, we are committed to maintaining operational excellence in achieving superior financial results by concentrating on our core electric utility business.
That concludes our prepared remarks today. And operator at this time, we'd pleased to take any questions.
Operator
Thank you. We will now be conducting a question-and-answer session.
(Operator Instructions) Our first question is from Dan Eggers with Credit Suisse. Please proceed with your question.
Dan Eggers – Credit Suisse
On the Four Corners, upon approval when will the $294 million go into rate base, and then on the requisite compliance spending of $300 million, what is the timing of that and how will you see the recovery?
James R. Hatfield
Hey, Kevin, this is Jim. How are you?
Dan Eggers – Credit Suisse
Fine. Thanks.
James R. Hatfield
On the first question, what we've ask for in or will ask for in this rate case is an infrastructure adjust of whatever the time once have been, assuming we are successful on getting that and a late third quarter close Fore Corners in 2012, it would be relatively short timeframe from a regulatory lag perspective, half of the year or less depending upon the timing. So that would be a fairly quick recovery of the cost.
In terms of the $300 million an environmental, we would expect that we’ll begin spending that and planning for the 12, 13 timeframe and the spin would be sort of 14 to 16 timeframe.
Dan Eggers – Credit Suisse
Okay. Will that be the same for Tyra as well for spending?
James R. Hatfield
Well, the Tyra will be doing by, I think Don said 2015, so that would be in that. If 15, it’s complete you expect a couple of years of planning and few expenditure or so.
Dan Eggers – Credit Suisse
Okay. Then how economic are these plans to Arizona?
What is the net benefit for Pinnacle West, how important are these jobs to the Navajo tribe and how competitive are these plants versus lets say new gas plant?
Donald E. Brandt
We think the plants are very competitive and they are very critical from a job standpoint. Here in Arizona, the state as a whole and particularly to the Navajo Nation, the Four Corners plant and the coalmine adjacent to the plant generate about 60% of the revenues for the Navajo Nation's general fund.
James R. Hatfield
To give you a relative value Kevin, I think Four Coroners 4 and 5 from a cost per megawatt hour basis about 15% less what the comparable capacity factor. So, that's the magnitude.
Dan Eggers – Credit Suisse
Okay, thank you. I'm sorry, and then last question with regards to the timing of the rate case, stop me if I am being too curious here, but if I look forward to 2012 and the Arizona Commission reelection is somehow garners a ton of attention, do you see (inaudible) all going up for reelection.
And second of all, do you see any benefit to the commission perhaps this rate case is still going in early May in next year when the election starts?
Donald E. Brandt
Well, Kevin, I can't speak for whether the commissioner’s are going to see for the election, that's going to be up to them. I think the general consensus thought as they will.
And we've kind of give a lot of thought to the timing spent of this case and the accelerated nature of this compared to prior our cases, which we addressed as part of the settlement of the few years ago and I think that will be to our advantage going into this case.
Dan Eggers – Credit Suisse
Okay. Thanks guys.
Have a good day.
Operator
Thank you. Our next question is from Ali Agha with Suntrust.
Please proceed with your question.
Ali Agha – Suntrust Robinson Humphrey
Thank you. First question, I wanted to clarify Jim or Don, in some of your prior charts you've given us your rate-based growth numbers ’11 to ’13 I believe, but that 13 number include the purchase – the extra purchase of Four Corners in there?
James R. Hatfield
Hi, Ali, this is Jim. Yes it does.
Ali Agha – Suntrust Robinson Humphrey
It does. Okay.
James R. Hatfield
Yeah.
Ali Agha – Suntrust Robinson Humphrey
Okay. Second question, I recall 2010, your actual ROE was about 9.3% that about the numbers shows me right.
Can you also remind us what is the embedded ROE in that ’11 guidance?
James R. Hatfield
Well, Ali, you’re correct. It was 9.3% in 2010 and we're projecting at this point slightly under nine, high eight for 2011.
Ali Agha – Suntrust Robinson Humphrey
Okay. And the 2013, it's going to call the average rate-base it's about – is it 7.6 billion?
Donald E. Brandt
I'm sorry, what year?
Ali Agha – Suntrust Robinson Humphrey
2013.
James R. Hatfield
2013, it’s will going to be 5% annualized growth. So somewhere in the 7.35 billion range.
Ali Agha – Suntrust Robinson Humphrey
Okay. That's the year-end or the average?
James R. Hatfield
That's the year-end.
Ali Agha – Suntrust Robinson Humphrey
That's the year-end.
James R. Hatfield
Yeah.
Ali Agha – Suntrust Robinson Humphrey
And my last question Jim, from an equity issuance perspective, you said before the key for this equity issuance is to time it for the equity ratio for the next round of rate case increase. As you said on the call, is there a contract – with the Four Corners investment and the other CapEx that that you’re going to spend on environmental, will that require a separate meaningful external capital money or is that factored in your balances versus getting the equity ratio up for the next rate case?
James R. Hatfield
Well, I think you're exactly right Ali and that we – the purposes of our equity issuance are to calibrate the capital structure for ratemaking purposes. When we look at the Four Corners transaction, these are the other sort of requirements for capital, it’s just an incremental capital requirements.
So we would not do two transactions to satisfy that, we'd look at, sort of just incremental on top of what was planned.
Ali Agha – Suntrust Robinson Humphrey
I see, okay. Thank you.
James R. Hatfield
Okay.
Operator
Thank you. Our next question comes from Stefka Gerova with JPMorgan.
Please proceed with your question.
Stefka Gerova – JPMorgan
Thank you. I have two unrelated questions for you today.
First, have you had any feedback from various stakeholders on your pre-filing notice in the APS rate case and do you have a view on what may be the more challenging issues in the case?
James R. Hatfield
Hey, Stefka, this is Jim. How are you?
Stefka Gerova – JPMorgan
Good, how are you
James R. Hatfield
Fine, thank. We've had ongoing dialogue with the stakeholders since probably middle of last year in terms of coming up to this case, filing this case is no secret.
It was really contemplated by all the parties in my opinion from the last settlement. The feedback we've gotten has been consistent throughout the process, we've been talking about decoupling, we've been talking about some sort of mechanism, that recover cost in the years were not in a rate case.
So, I think we've had very good dialogue with the stakeholders at this point. As I go into the case, I think you're probably, any time in go-forward rating, base rate increase, there is always some...
[Technical Difficulty]
Operator
Miss. Hickman.
Rebecca L. Hickman
Yes, ma'am.
Operator
Your line is back in life.
Rebecca L. Hickman
Thank you. We apologize for the technical difficulty.
Stefka?
Stefka Gerova – JPMorgan
I guess I missed the part of answer, I'm not sure if everybody did. But I'll move on to my second question, which relates to slide nine, I was wondering if you could quantify the plants fossil fleet outage O&M that you expect for 2011?
James R. Hatfield
On slide 9, so dollar magnitude, they are both in the – about $40 million range.
Stefka Gerova – JPMorgan
And that's consistent with what you had seen in 2010?
James R. Hatfield
Correct. It's really stepping just the timing of the plant outages and based on the plant life cycle.
Stefka Gerova – JPMorgan
Sure. Completely understood.
Thank you very much.
Donald E. Brandt
Thank you.
Operator
Thank you. Our next question is from Jim von Riesemann with UBS.
Please proceed with your question.
Jim von Riesemann – UBS Securities
Thank you. Hey, Don.
Hey, Jim. How are you?
James R. Hatfield
Good. How are you doing?
Jim von Riesemann – UBS Securities
I am doing okay. Could you guys just help me out with bridging your earnings expectations for the balance of the year, I look at a 12 months earnings figure and if I take like the last three quarters of 2010 its 297 and then with this quarter its 283, but can you just refresh our memories with what the major drivers are to get to your 323 ’15 because I'm sitting at a trailing ’12 283 right now?
Donald E. Brandt
Sure, you have obviously the first quarter of this year significantly impacted by the fossil timing. So you really get the last three months of last year – half of this year has been in the first quarter.
Obviously, the difference from last year and this year would be retail sales growth of about 1% net of the EE and DE impact we see a little bit more in terms of line extension revenue we saw that in the first quarter. And we also have a transmission rate increase later this year, expenses are fairly flat, we’ll see some increase and obviously depreciation on property tax.
Those are really the major drivers on a year-to-year basis impacting 2011.
Jim von Riesemann – UBS Securities
Do you care to give any guidance on a quarterly basis, I know that’s not your practice but?
James R. Hatfield
We don't do that Jim and I'll tell you why and the first quarter was a great demonstration of that. In the first and fourth quarters of the year with timing of outages and things like and it materially skews these quarters.
Jim von Riesemann – UBS Securities
Right.
James R. Hatfield
So we just look at our annual basis.
Jim von Riesemann – UBS Securities
I understand. And then just one modeling type question.
What was the quarter end rate base? You guys are handy.
James R. Hatfield
I haven't looked at that, but my guess would be that it’s about 6.5 billion roughly.
Jim von Riesemann – UBS Securities
Thanks. That's all I have.
Donald E. Brandt
Jim. I might, its Don, I might add for the first quarter, we're dead on with our plan and I don't know if that will help you, but, Jim, when he referenced slide nine, you want to make sure your – for Q2 and Q3 particularly that differential between the fossil O&M in 2010 compared to the projected levels in 2011.
Jim von Riesemann – UBS Securities
That I figured out, but appreciate the color.
James R. Hatfield
Okay.
Jim von Riesemann – UBS Securities
Okay. Thanks.
Operator
Thank you. Our next question comes from Brian Chin of Citigroup.
Please proceed with your question.
Brian Chin – Citigroup
Hi, good morning.
James R. Hatfield
Good morning, Brian.
Brian Chin – Citigroup
I think you Jim you cut out right as you're beginning to respond to the earlier question about, just sort of the interactions you had with interveners in the rate case in some of these proposed mechanisms, I think to ask you to sort of repeat what you said, I think that’s right when you start off the cut offs, if you could just sort of add a little more color one more time?
James R. Hatfield
Brian, we’ve had ongoing dialogue as you know since middle of last year with the stakeholders and in fact filing on June 1 like we planned to do, its not a surprise to anybody and it was contemplated coming out in the settlement in 2009. Since middle of last year, we’ve been talking to the parties about the need of decoupling, and in fact we got our commission files in December 5.
We’ve talked about our need to whether its infrastructure tracker whatever you want to call, the ability to collect additional revenue in the – when we are in for a rate case, I will say the significant infrastructure spend. We talked about line extension and the things we have to do there and change of policy and we had 18 months post issuer plan and I think everybody sort of assumed that model works for purposes of the settlement.
So I think all along, the dialogue has been very constructive, very healthy, nothing new to anybody in this case. So all in all I would say the dialogue has been very positive.
Brian Chin – Citigroup
Very good. Thank you.
Operator: Thank you. (Operator Instructions) Our next question comes from Reza Hatefi with Decade Capital Management.
Please proceed with your question.
Reza Hatefi – Decade Capital Management
Thank you very much. Could you – I guess you mentioned earlier your customer gross guidance is 1.7% from ’11 to ’13, but load growth is kind of flattish.
Could you talk about – I guess I just thinking about from a earnings driver how that's going to work along with the energy efficiency, I guess energy efficiency is rate based, so you get a return on that, but then you have customers gross but no-load gross, so does that mean that gross in essence doesn't at earnings because there is no load or somehow because I just seeing some clarification on that?
James R. Hatfield
Sure. I would be glad to answer that.
This is Jim. You have our assumptions correct and the driver is of course the energy-efficiency standard in distributed energy standard in Arizona as we see it is offsetting kilowatt-hour sales growth in inherent and the customer growth rate.
We do not rate base energy efficiency cost those are a total pasture from an O&M perspective. And so yeah, I think sales growth is really flat going forward and that’s why and I think all the parties agree the decoupling policy is the right policy for Arizona.
Reza Hatefi with Decade Capital Management
And then when you say it's in your O&M do you sort of get one-to-one recovery on that and so excluding this extra O&M sort of speak that gets recovered. What should we assume is underlying O&M growth over this timeframe?
James R. Hatfield
Well, we haven't talked about 2012 at this point and so I'm going to hold on from that. I'll will just point back to – we've been fairly flat from an operating cost perspective over the last couple of years and our goal is to continue to focus on cost efficiency.
Reza Hatefi with Decade Capital Management
Okay. Okay.
Thank you very much.
Operator
Thank you. We have no further questions at this time.
I’d like to turn the floor back over to management for closing comments.
Rebecca L. Hickman
Thank you, Melissa, and thank you everyone for joining us today. Meanwhile, if we have further detail or questions that you need answered about the company, please call me or Geoff Wendt.
Thank you.
Operator
Thank you. This concludes today teleconference.
You may disconnect your line at this time. Thank you for your participation.