Feb 21, 2014
Executives
Paul J. Mountain - Director of Investor Relations Donald E.
Brandt - Chairman, Chief Executive Officer, President, Chairman of Arizona Public Service Company and Chief Executive Officer of Arizona Public Service Company James R. Hatfield - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Arizona Public Service Company and Executive Vice President of Arizona Public Service Company Jeff Guldner
Analysts
Julien Dumoulin-Smith - UBS Investment Bank, Research Division Kevin Cole - Crédit Suisse AG, Research Division Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division Neil Mehta - Goldman Sachs Group Inc., Research Division Brian Chin - BofA Merrill Lynch, Research Division Charles J. Fishman - Morningstar Inc., Research Division Rajeev Lalwani - Morgan Stanley, Research Division Kit Konolige - BGC Partners, Inc., Research Division James D.
von Riesemann - CRT Capital Group LLC, Research Division Andrew Levi Paul Patterson - Glenrock Associates LLC
Operator
Greetings, and welcome to the Pinnacle West Capital Corporation 2013 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Paul Mountain, Director of Investor Relations. Thank you, sir.
You may begin.
Paul J. Mountain
Thank you, Christine. I'd like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 2013 earnings, recent developments and operating performance.
Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Jeff Guldner, who is APS Senior Vice President of Public Policy is also here with us.
First, I need to cover a few details with you. The slides that we will be using are available on our Investor Relations website, along with our earnings release and related information.
Note that the slides contain reconciliations of certain non-GAAP financial information. Today's comments 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. Our 2013 Form 10-K was filed this morning.
Please refer to that document for forward-looking statements, cautionary language, as well as risk factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days.
It will also be available by telephone through February 28. I will now turn the call over to Don.
Donald E. Brandt
Thanks, Paul, and thank you, all, for joining us on the call today. My comments today will discuss our operations and the strategic investments we are making to reliably serve our customers.
I'll conclude with a few areas to watch in 2014, and then Jim will discuss 2013 results and update you on our economics and financial outlooks. Turning to our operations in 2013.
We delivered on our commitments and remained focused on operational excellence across the business, as demonstrated by our top-tier performance in safety and reliability. I'm proud to say that for the sixth consecutive year, we recorded the lowest number of recordable injuries in our company's history, moving closer to our goal of 0 recordable injuries.
The fossil and energy delivery teams, in particular, were instrumental in achieving this record performance. Similarly, providing a reliable electric service to our customers, despite the hottest summer on record, is our focus every single day and was demonstrated by top quartile performance, again, this year.
The Palo Verde Nuclear Generating Station had another outstanding year with a capacity factor of 91%. This represents the fourth consecutive year in which production exceeded 31 million megawatt hours, and the ninth year in which Palo Verde was the only U.S.
generating facility to produce more than 30 million megawatt hours. Unit 3 completed its planned outage in late November, after finalizing repairs we found early in the outage related to a very small water leak from an instrumentation tube that connects to the bottom of the reactor vessel.
Turning to capital investments. We expanded our generation portfolio by completing the Four Corners transaction, which I'll discuss in a moment, and also added over 400 megawatts of solar energy.
Key additions to the solar portfolio include the 250-megawatt Solana plant, which went into service in October of last year, as well as another 32 megawatts of AZ Sun, that went into service in December, at Hyder II in Foothills Phase 2. Over the next several years, we expect the solar generation portfolio to continue to grow, with 32 megawatts of AZ Sun going into service in mid-2014, and 20 megawatts of AZ Sun expected in 2015.
These additions, including the 20 megawatts recently approved by our commission, bring our owned utility scale solar commitment to 170 megawatts, or about $695 million. Let me to discuss the Four Corners in a bit more detail, as that transaction represents an important milestone.
First, I'd like to thank Dave Hansen, our Vice President of Fossil Generation, and the team that they've worked with that was involved for the commitment and patience in seeing this transaction through to its completion, despite a challenging set of circumstances. The transaction provides ongoing long-term benefit to the region, ranging from reduced emissions, additional low-cost generation for our customers and continued support of the Navajo Nation.
On December 30, APS notified the EPA that the Four Corners participants selected the BART alternative, which required APS to permanently retire the Four Corners Units 1, 2 and 3 by January 1, 2014, and install and operate selective catalytic reduction control technology on Units 4 and 5 by July 31, 2018. The environmental spend will be mostly in the period 2016 and 2017.
Units 1, 2 and 3 were retired on December 30. Decommissioning work began immediately and is expected to last about 3 years with the help of employees already dedicated to those units.
Also, on December 30, APS filed an application with the Arizona Corporation Commission to recover costs associated with purchase of Southern California Edison's interest in Four Corners. We expect a procedural order from the administrative law judge soon that will lay out the timeline, with the decision from the commission expected later this year.
As part of the application process, we have been conducting technical conferences in February to discuss the specifics of the filing with many of the interested stakeholders. Another plant that plays an important role in our fleet and in maintaining the values reliability is Ocotillo, a 330-megawatt, 4-unit gas plant in Tempe, Arizona.
We announced the Ocotillo modernization project earlier this month, which will involve retiring 2 110-megawatt steam units constructed in 1960, adding 5 102-megawatt combustion turbines to the site and maintaining the 2 existing 55-megawatt combustion turbines. In total, this will increase the capacity of the Ocotillo site to 620 megawatts, adding 290 megawatts to what is there today.
The project, targeted for completion by the summer of 2018, will represent an investment of between $600 million and $700 million to ensure the continued reliability of service in our Phoenix service area and allow our generation fleet to respond to increasing intermittent generation in the desert southwest. Construction will likely start in 2016.
In addition to these generation investments, we're making significant investments in the grid, much of which is to support renewable generation and key transmission infrastructure. On January 31, APS filed the annual 10-year plan for major transmission facilities.
Two projects of note include the Hassayampa to North Gila 2 project that is well underway and is still expected to be online in the second quarter of 2015, as well as a series of projects linking the Palo Verde power hub to a substation in Northeast Phoenix. These projects have been in our capital forecast.
The projects I highlighted are the key driver of our rate base growth. We have updated our estimates as we now expect rate base growth of 6% to 7% through the year 2018.
Looking ahead to 2014. We have included the slide to outline some of the key regulatory and political milestones for the year.
On the regulatory calendar, in addition to our annual filings related to the adjusters and compliance, we will be filing quarterly reports on distributed generation or roof-top solar installations. We will also participate in a series of commission-led workshops on distributed generation and other technological developments as they occur throughout the year.
Let me conclude with a comment on the November net metering decision. The commission made a significant first step in recognizing the cost shift embedded in the net metering construct.
The industry, generally, acknowledges this decision as the first significant advancement in the nation of the cost shift issues associated with distributed generation installations. The $0.70 per kilowatt charge took effect on January 1.
Also included in the order, in an effort to protect our customers, was a requirement that each residential customer owning or leasing a roof-top solar system sign a disclaimer as part of the interconnection process to heighten consumer awareness of the risk embedded in the agreement, as it relates to potential future rate changes. That net metering order also stated that APS shall file its next rate case in June 2015, for the provisions of the 2012 settlement to more fully analyze the cost shift issue.
We will work with the stakeholders and the commission through the workshops and other discussions before we determine how best to proceed. As always, we will continue to advocate for the best interests of our customers and for a sustainable solar policy for Arizona.
As you can see, we can anticipate another full year ahead, but our priorities are clear and the management team and I remain committed to that strategy. I'll now turn the call over to Jim.
James R. Hatfield
Thank you, Don. The topics I will discuss today are outlined on Slide 4.
I'll begin with the review of our 2013 full year results, followed by a discussion of our fourth quarter results, including earnings and the primary variances from last year's quarter. I'll then provide an update on the status and outlook for the Arizona economy.
Next, we'll review our balance sheet strength, including recent upgrades of our credit ratings and our financing activities. I'll conclude with the review of 2014 earnings guidance.
Slide 5 summarizes our ongoing and GAAP earnings for the quarter and full year. On a GAAP basis, for the fourth quarter of 2013, we reported consolidated net income attributable to common shareholders of $24 million, or $0.22 per share, compared with net income of $23 million, or $0.20 per share, for the prior year's fourth quarter.
On an ongoing basis, we reported consolidated ongoing earnings of $24 million, or $0.22 per share, for the 2013 fourth quarter versus ongoing earnings of $27 million, or $0.24 per share, for the same quarter a year ago. For the full year 2013, on a GAAP basis, we reported consolidated net income attributable to common shareholders of $406 million, or $3.60 per share, compared to net income of $382 million, or $3.45 per share, for 2012.
Our ongoing earnings for 2013 were also $3.66 per share, compared to $3.50 per share for 2012, and in the top half of our guidance range of $3.55 to $3.70. Pinnacle West earned a consolidated ROE of 9.9% in 2013, above our 9.5% goal.
Our remaining comments will focus on the fourth quarter ongoing and results. Slide 6 outlines the variances that drove the change in quarterly ongoing earnings per share.
Lower operations and maintenance expenses added $0.05 per share, largely driven by a lower employee benefit cost. Lower interest expense improved earnings by $0.01 per share, due to lower debt balances and lower interest rates.
The net impact of other items increased earnings by $0.06 per share, primarily tax-related items of $0.04 per share. Higher net operating expenses decreased earnings by $0.03 per share, mainly reflecting an increase in depreciation and amortization due to additional plant in service.
A decrease in our gross margin reduced earnings by $0.11 per share compared with the prior year fourth quarter period. I will cover the drivers of our gross margin variance on the next slide.
As a reminder, both the gross margin and O&M variances exclude expenses related to the Renewable Energy Standard, energy efficiency and similar regulatory programs, all of which are essentially offset by comparable revenue amounts under adjustment mechanisms. Also, the deferrals associated with the Four Corners transaction are treated in a similar manner, as the O&M and D&A drivers I discussed exclude deferrals as they had no impact on 2013 results.
Turning to Slide 7 and the components of the net decrease of $0.11 in our gross margin. The main component of this were as follows: the loss fixed cost recovery mechanism improved earnings by $0.02 per share, which as designed, largely offset lower customer usage; lower usage by APS as customers compared with the fourth quarter a year ago decreased our quarterly results by $0.03 per share; weather-normalized retail kilowatt hour sales were down 1.9% in the fourth quarter of 2013 versus 2012.
While our customer programs and conversation are the largest source of the reduction in sales, this variance also reflects a convergence back to more normal usage trend compared to last year's fourth quarter. This was in line with our expectations.
On a year-to-date basis, weather-normalized retail kilowatt hour sales were down 0.5%. Lower transmission revenues decreased earnings by $0.04 per share, due to the timing of the FERC formula rate true-up.
The effects of weather decreased earnings by $0.05 per share. During the fourth quarter, we record cooling degree days in October and heating degree days in November and December.
A negative quarter-over-quarter variance was driven almost entirely by unfavorable weather versus normal in October of 2013. In fact, in terms of the number of cooling degree days, last October recorded the fewest cooling degree days in the last 15 years.
The net effect of other miscellaneous items decreased gross margin by $0.01 per share. Slides 8, 9 and 10 look at the Arizona economy and our fundamental growth outlook.
Economic growth in Arizona continued its overall improvement in the fourth quarter of 2013, consistent with the prior 3 quarters, although growth remains modest, as has been the case for a year or so. Vacant housing in Metro Phoenix has fallen by more than half since its peak in early 2010, and is at the lowest levels in 6 years.
Housing prices have responded. On the upper left-hand side of Slide 8, you can see that prices on existing home sales are 18% -- are 17% higher than they were a year ago and up 45% from the bottom of the market in mid-2011.
Rising prices are providing more support to new home construction. Additionally, vacant rates have fallen in all nonresidential categories, as you can see in the upper right of Slide 8.
On the lower left-hand side of Slide 8 shows that permits for new housing increased 12% in 2013 over 2012, and more than 150% from the low point in early 2011. This activity, plus business investment in the region, has led to an 8% gain in construction jobs in just the last year alone, which is supporting total nonfarm drive growth, as seen in the lower right-hand side of Slide 8.
Consumers are also driving the recovery. For 2013, Arizona consumer spending reached record highs.
On balance, we see signs of sustained improvement in all economic indicators, which paint a picture of continuing steady recovery. Reflecting the steady improvement in economic conditions, APS' customer base grew 1.3% compared with the year ago.
Looking at the next several years, we expect annual customer growth to average about 2.5% for 2014 to 2016, with higher growth rates at the end of the period and in the near term for the reasons I've just discussed. This outlook is depicted on Slide 9.
Additionally, we expect our annual weather-normalized retail sales in kilowatt hours to increase by about 1% on average from 2014 through 2016, primarily due to improving customer growth being partially offset by our customer programs and conservation. The headwinds from the overbuilt housing market and associated construction job losses are largely behind us.
And the state is poised to embark on the next phase to sustain growth. Between 1970 and 2001, Arizona's economy joined the U.S.
economy on economic recession 5x. And each time, Arizona's recovery rebounded from recession at a rate 2 to 3x greater than the national average.
We expect that this pattern will repeat itself in this business cycle once the national economy returns to more stable and healthy growth rates. One of the key regions for this expectation is the attractiveness of Phoenix as a place to live and do business in.
Phoenix is the largest city in the Western U.S.A. -- Western United States outside of California and is almost 20% less expensive than living in California, which is the world's ninth largest economy.
As an example, the median single-family home in Phoenix is priced 54% lower than the median single-family home in San Diego, and almost 60% lower than in Los Angeles. These cost advantages are key to Phoenix-area businesses retaining a competitive edge in the California market, as well as globally.
This resurgence in growth is expected over the next few years. True to form, Arizona's population rate is growing at double the national average.
The exact timing of this growth trajectory depends on many factors, but the roots of our future growth are well anchored in fundamentals. Besides history, Slide 10 provides some anecdotal evidence of the economic outlook for Arizona.
Forbes project Arizona as the #1 state for job growth and ranked Phoenix third on their 2014 list of America's Fastest-Growing Cities. Forbes is not alone.
Moody's.com has an outlook for Arizona growth over the next 5 years that is more robust in our own internal forecast. Slide 11 outlines our investment-grade credit ratings and financing activities, as we continue to strengthen the balance sheet.
In December, Standard & Poor's announced its upgrade to APS' senior unsecured rating to A- from BBB+, a ratings level the company hasn't enjoyed since the mid-'80s, as well as similar upgrades to Pinnacle West in APS' corporate credit rating. Additionally, in January, Moody's upgraded APS' senior unsecured and corporate credit ratings to 83, and Pinnacle West corporate credit rating to Baa1.
These upgrades will allow our company to borrow at lower interest rates, reducing the financing costs from new infrastructure investment and system improvement projects, while lowering costs to customers. In connection with these ratings' actions, the ratings agencies decide that the company is improving financial condition and focus on core utility operations, as well as an improvement in the Arizona regulatory environment.
In terms of our financing. On January 10, APS issued $250 million of 30-year 4.7% senior unsecured notes.
The proceeds from the sale were used to fund the purchase price and certain costs associated with the acquisition of SoCal Edison's 48% ownership interest in each of Units 4 and 5 for Four Corners, and the replenished cash used to reacquire 2 series of tax exempt bonds in July and October of 2013. We also plan to refinance a $300 million maturity this year and raise up to an additional $250 million of new money debt, as we assumed in our guidance.
Overall, liquidity is very strong. At the end of the fourth quarter, the parent company had no short-term debt outstanding.
APS had $153 million of commercial paper outstanding temporarily used to fund the Four Corners transaction. We estimate we will not need to raise additional common equity until 2016.
The timing of our next general rate case will not necessarily drive the timing of our equity issuance. On Slide 12 are some of the details of our pension and other postretirement benefits.
This will be a favorable driver in 2014 results as compared to 2013. The 2 fundamental factors leading to lower expenses are a higher discount rate and improved funding status.
Our pension fund status is now 90% funded, up from 77% at year-end 2012, driven by higher interest rates, substantial equity returns and larger-than-assumed recent contributions. As you know, the impact of higher interest rates benefits a funded status and is supported by our liability driven investment strategy.
The higher funded status translates to lowering our long-term funding requirements. Please note that much of this expense reduction was captured in our original 2014 earnings guidance we issued on October 31.
Finally, I will discuss our earnings guidance. We continue to expect Pinnacle West consolidated ongoing earnings for 2014 will be in the range of $3.60 to $3.75 per share.
A complete list of factors and assumptions underlying our 2014 guidance is included in the appendix to our slides, which are mostly unchanged. One update I would like to mention is the status of the Delaney-Colorado River transmission project that you have heard us talk about.
The project reached a milestone on February 3, when the project was recommended for approval by the California Independent System Operator to the California Independent System Operator Board of Governors. The Board of Governors is expected to deliberate on this project after a March 20 meeting.
Keep in mind, even if approved, there will be a competitive solicitation process. So we will not know if we are successful until the fourth quarter of the year.
The capital expenditures for this project are not included in our projected CapEx at this time. We will continue to keep you updated in this regard.
That concludes our prepared remarks. Operator, we will now take questions.
Operator
[Operator Instructions] Our first question comes from the line of Michael Weinstein with UBS.
Julien Dumoulin-Smith - UBS Investment Bank, Research Division
It's Julien in here. So just quickly, could you just chat about the timing of issue, of equity issuance and the context on the rate case and putting that in?
I'm sorry if it wasn't exactly clear on the call.
James R. Hatfield
Well, I apologize if it wasn't clear on the call. The point we're making -- I guess, the only difference, we talked about 2016 not until that year for equity.
We're not necessarily looking at needing equity associated directly with the rate case. So even if it's pulled forward, for example, 2016 is still our year.
Julien Dumoulin-Smith - UBS Investment Bank, Research Division
Got you. And that would just subsequently be pulled into, in this further rate case?
There would be no way to put that into the '15 case, right? There's no true-up or anything?
James R. Hatfield
Well, they have historically done no measurable change when we issued equity for the capital structure. But our equity layer at APS for regulatory purposes right now is very strong, so.
Julien Dumoulin-Smith - UBS Investment Bank, Research Division
Great. And then, could you -- just quickly going back to that last transition project you were talking about, how much is that in terms of CapEx?
And how would that change? And perhaps if you could talk broadly speaking about FERC 1,000 in the context of your participation with CAISO projects?
James R. Hatfield
Well, as you know, we submitted this project as an economic project back in 2011. 2012, it was recommended by the Cal-ISO.
It was -- did pull between that time and the Board of Governors approving the plan for 2012. It's, again, been recommended by the -- to the Board of Governors.
It's about 3 -- it's a 115-mile transmission line, really, from the Palo Verde hub into the Colorado River substation across Colorado River, and it's about $325 million. We would do this in a partnership, so our share would be half of that.
And if approved, if the fourth -- if we win this competitive solicitation in the fourth quarter, this project wouldn't go into service until 2020. So we're still down the road, but as we've talked about before, I mean, these are things we'd be interested away from APS.
And Jeff, can you talk about 1000?
Jeff Guldner
Sure. Julien, Jeff Guldner.
This project's in Arizona so it's within the California planning process, and that process is evolving with Order 1000, but it's one of the things that we looked at as the strengths that we have within that region and understanding the transmission in the region. So it's folding that in with some of the Order 1000 developments.
Certainly we'd be looking within the footprint, but at projects that make sense for our skills.
Julien Dumoulin-Smith - UBS Investment Bank, Research Division
Got you. Excellent.
And then just lastly, could you just talk quickly, I mean, obviously, the -- you have the $0.70-kilowatt fixed charge now in place. What's the timing, at least, as you see the world in terms of getting step-ups in that rate?
Jeff Guldner
Julien, Jeff again. So we do quarterly reporting now in terms of what we're seeing with installations, and that's something that all of the parties have indicated that they want to watch.
They want to see how the $0.70 charge affects the installation pace. And so as those numbers start to come in, you'll have a number of parties who are looking at them, and then they may take action based on where we see that trajectory going, but nothing is specific yet.
We're very early in that process. We don't know exactly now what that trend's going to look like.
James R. Hatfield
And Julien, this is Jim here. I'll just remind you that even if they decide to step it up, it's no revenue impact to us.
It just goes offset to that -- to the LFCR.
Operator
Our next question comes from the line of Kevin Cole with Credit Suisse.
Kevin Cole - Crédit Suisse AG, Research Division
I guess, Jeff, while you're on the phone, can you talk a little bit more about the options available to you to avoid co-mingling of net metering with the potential 2015 rate case? Just a path and timing for visibility into resolution?
Jeff Guldner
Sure, Kevin. So we've got a couple of things going right now.
There's -- first, there's a distributed generation workshop. And so they're going to be looking at the cost and benefits distributed generation.
Obviously, that is occurring outside the rate case contacts. We'll also be looking at making a rate plan filing later in the year.
And so in the rate plan filing, we'll have some discussions. Obviously, something that we want to look at is how we make sure we have as constructive a discussion as we can in a generic sense, because it's not just an APS issue, this is a statewide issue.
And so have that discussion, and then as we move into the rate case, that's when you would implement some of the more rate-specific solutions.
Kevin Cole - Crédit Suisse AG, Research Division
I'm sorry, so are you saying that the net metering will be a part of the rate -- are you guys doing the 2015 rate case? Sorry if I misunderstood what you said.
James R. Hatfield
I just think it's too early, Kevin, to know what our filing's going to look like right now. I think the visibility on this will be later in the year, when we file our rate plan, which was a requirement of the last settlement.
Jeff Guldner
But you've got proceedings that are be -- going to be going on this year prior to any rate case.
Kevin Cole - Crédit Suisse AG, Research Division
When will those proceedings end?
Jeff Guldner
There isn't a docket -- there's a docket established, but there's not yet a timeline that's established for having those proceedings. So they're going to just continue under the schedule that's developed.
What we've proposed, so far, is a list of potential parties and experts and witnesses that can talk through those proceedings.
Kevin Cole - Crédit Suisse AG, Research Division
Okay. So I guess, the earliest we'll find out about if net metering can be separate from the rate case is the end of this year, and the latest is, if you file a rate case, middle of next year?
That's the timing?
James R. Hatfield
Yes.
Jeff Guldner
Yes, that's probably correct.
Operator
Our next question comes from the line of Ali Agha with SunTrust.
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
Jim, can you elaborate a little more about the visibility that you have on the sales growth and also, the customer growth trends that you're assuming for '14 through '16? If you look at the second half of last year, retail sales were down in both third and fourth quarter.
Customer growth has been running at about 1.3%. So the pickup in customer growth, but more importantly, retail sales, can you just remind us again on how that math works and how you're confident given the second half of last year?
James R. Hatfield
Well, as -- first of all, the fourth quarter was off 1.9% on sales. I'd point out that to comment on return to more normal, we were up 1% on usage per customer in the fourth quarter of 2012.
So again, you have sort of the one year up, one year down effect. And like I said in my comments, I mean, fundamentally, Arizona has demonstrated ability to grow 2 to 3x faster than the U.S.
And also, as I said in my comments, it's not clear when that will be, '14, '15, but we're confident in the long-term growth in the State of Arizona because the fundamentals have not changed.
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
Okay, okay. I get it.
And then, at the back -- in the appendix, you laid out a 5-year rate base growth trajectory, 6.6% average, I think, you -- 6% to 7%, as you talked about on the call as well. What's sort of the visibility or confidence level in that 5-year growth for rate base?
And what will that equate to from an earnings per share growth for the company?
James R. Hatfield
The visibility we have in -- through 2018 is -- I would say, I'm pretty confident. I mean, Ocotillo still needs approval and we have to get permitting and all of those things, but we've announced that project.
It's critical for reliability in the valley for both us and SRP. And then the other big driver, as we get into '17, '18 is going to be the SCRs at Four Corners 4 and 5, which the owners are committed to do.
So we're -- things move around every year as circumstances change, but I think we're pretty confident that, that is the trajectory of rate base growth. In terms of earnings, I think it really depends on a couple of factors.
What happens to sales, timing of rate case will be important. So as we've said, when we have 6% rate-base growth, you're going to see earnings per share growth, somewhere between rate base growth and the 4% dividend growth.
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
Okay, okay. Got it.
And lastly, more near term. If I recall correctly, you've assumed that new rates for Four Corners will go into effect July 1 onwards.
Is the current schedule keeping you on track? And is that what's embedded in the '14 guidance?
James R. Hatfield
'14 guidance has Four Corners July 1. I think we don't have a procedural schedule yet, so don't know when we'll get that.
But I think once we get the ALJ schedule, we'll have -- when those go into effect in the interim, we're deferring the cost with 1, 2 and 3 and 4 and 5 acquisition until the time they go into effect. So cash impact, but no book impact.
Operator
Our next question comes from the line of Neil Mehta with Goldman Sachs.
Neil Mehta - Goldman Sachs Group Inc., Research Division
Given the LFCR, what's the sensitivity to every 1% change in weather-normal demand in 2014?
James R. Hatfield
Well, 1% in weather demand?
Neil Mehta - Goldman Sachs Group Inc., Research Division
The weather-normal demand.
James R. Hatfield
Oh, weather-normal demand. Well, every -- generally speaking, every 1% customer growth is about $30 million of gross margin, about $10 million of net income.
Neil Mehta - Goldman Sachs Group Inc., Research Division
Okay. So as demand tracks below expectations, more like the second half of '13 type of run rate, do you think you have the O&M flexibility to still make the midpoint of guidance?
James R. Hatfield
We're confident in our guidance.
Neil Mehta - Goldman Sachs Group Inc., Research Division
Got it. And then last question on transmission adjustment clauses in 2014.
Approximately, what's the rate increase related to transmission...
James R. Hatfield
We haven't filed that yet, Neil. Part of our adjustment in the fourth quarter of '13 was a true-up to what we expect to file, but we have not worked through the Form 1 yet.
We expect to file that probably around April 1 would be a good time line.
Operator
Our next question comes from the line of Brian Chin with Merrill Lynch.
Brian Chin - BofA Merrill Lynch, Research Division
Just a question on Slide 12, your pension expenses. It looked as though there were some adjustments to the discount rate and the plan assets, and so it looks as though your pension expense will be a little bit lower in '14 and '15 than what it was in '13.
Given that the guidance for '14 didn't really change, can you just give a little bit more color as to what some of the offsets to that might be? Or has the retention of the guidance been just a little bit more of conservatism on your part or is it a little bit of mix of both?
Just a little bit of extra color there.
James R. Hatfield
Well, I think, a little bit of both. We -- when we came out with guidance on August 31, we had a fairly good view of interest rates.
So we knew we'd have some reduction -- or some increase in the discount rate. We factored that in.
We have a liability-funded pension strategy, which, the more we're funded, the more we go -- move toward fixed income. And so we do -- the long-term return on plan assets will drop as we get more funded.
So we made a educated guess at the end of October, and where we are now, that we have the assumptions nailed down is not materially different than what we had in October. And of course, it'd be, I think, for us, kind of silly to change our guidance based on truing up the pension from -- to, really, one month of the year.
So that's some conservatism in that regard.
Operator
Our next question comes from the line of Charles Fishman with MorningStar.
Charles J. Fishman - Morningstar Inc., Research Division
Ocotillo would not be covered by a tracker. I mean, that would have to wait for the rate case following 2016?
James R. Hatfield
Well, it could or could not. I mean, we haven't made any decisions on our rate strategy there.
We won't really begin spending any material money until 2016. So -- and I think what we try to do from a rate strategy also depends on the timing of the rate case.
Charles J. Fishman - Morningstar Inc., Research Division
Okay. But that's planned?
I mean, that's not considered an environmental thing or, I mean, it wouldn't be covered by any trackers, correct?
James R. Hatfield
No.
Charles J. Fishman - Morningstar Inc., Research Division
Okay, that's what I thought. And then just on the FERC true-up that caused the $0.04 in the recently ended quarter.
I always thought those FERC true-ups were like clockwork. What happened?
James R. Hatfield
Well, so we basically, when we're going to file next year, we've began to actually charge to revenue a portion of what we think we're going to do next year, because it's for this year, period. And that came out of our settlement when we had the actual date of June 1 in Arizona, as well as FERC.
And various things impact that. What goes into service, what expense levels are, what our wheeling revenue is.
And so as we go through the year, we just get a better view as to where we're going to end up the year, and -- I mean, we're talking $0.02 increase last in '12 and $0.02 down this year. So I'd say it is pretty close, actually.
Charles J. Fishman - Morningstar Inc., Research Division
So nobody really challenged the true-up. It was just a procedural thing?
James R. Hatfield
It's an internal thing.
Jeff Guldner
This is Jeff. It's the way the formula works.
And so everything that's happening in the true-up is normal formula adjustments, and they just become clearer as you work through the formula year.
Operator
Our next question comes from the line of Rajeev Lalwani with Morgan Stanley.
Rajeev Lalwani - Morgan Stanley, Research Division
Can you just walk through the timeline and approval process for the Ocotillo project? And then I have a follow-up.
James R. Hatfield
I can only tell you that we're -- we have to get permitting -- we have to get approval from the city of Tempe.
Jeff Guldner
Yes, this is Jeff. There's about a year-long certificate of environmental compliance or compatibility process that takes place.
And so that would go before the Arizona Commission. Ultimately, they are the ones who approves the certificate of environmental compatibility.
And then once that's approved, you've got your other normal air permitting and the other things that would go forward. But that initial regulatory approval is about a 12-month process.
Rajeev Lalwani - Morgan Stanley, Research Division
And then a clarification of a question earlier or an answer earlier. The 1% sales growth that you noted from '14 to '16, does that include any benefit from the LFCR?
And if it doesn't, what would the benefit of the LFCR be on top of the 1%, if that make sense?
James R. Hatfield
Yes. So obviously, as customer growth increases from where we are today, at 2.5%, we're going to begin to see a sales growth increase as well.
On top of that 1% would be some benefit of the LFCR or whatever else happens out of net metering in the rate case. That would be consistent with what we're doing today from an LFCR perspective.
It's like $0.01 to $0.02 a quarter basically.
Rajeev Lalwani - Morgan Stanley, Research Division
Okay. And on a percentage basis, where does that come out to?
Like 0.5% or so?
James R. Hatfield
I think this year's filing was like 0.7% or something like that. It started at 0.2%.
It's capped at 1% rate increase. So that would be your top end.
Jeff Guldner
Yes, we're about 0.75% rate on this year's.
Rajeev Lalwani - Morgan Stanley, Research Division
Okay. So going forward, from a modeling standpoint, weather-normalized sales growth should be something like 1.5%, 1.7% or so?
Jeff Guldner
Well, you need to separate sales from revenue, because we think sales gross can be about 1%, and then you have some of your adjusters that you would include on top of that like TTA, RES, LFCR, EIS, when we get later into the period.
Operator
[Operator Instructions] Our next question comes from the line of Kit Konolige with BGC.
Kit Konolige - BGC Partners, Inc., Research Division
On the $0.70 per net metering, obviously, it has not been in place very long, but I'm sure you guys are watching it closely. Do you have any early returns or even anecdotal kinds of feedback on whether it's having any impact one way or the other?
Donald E. Brandt
Kit, this is Don. No, we're just a month or so into it.
To draw any conclusions from the statistics would be pure speculation.
Kit Konolige - BGC Partners, Inc., Research Division
And if I understood your correctly, basically, your strategy towards any further proposed alteration in, let's say, the level of that charge, would, you want to gather evidence and go through these workshops and it may or may not be something that is part of the next rate case?
Donald E. Brandt
I think you're correct.
Operator
Our next question comes from the line of Jim von Riesemann with CRT Capital.
James D. von Riesemann - CRT Capital Group LLC, Research Division
Chairman Stump was in New York last month and made a couple comments about some of the regulatory policies that the ACC is going to be examining, and then he also brought up the topic of ballot initiatives. And at that time, he had mentioned the possibility of a retail competition ballot initiative going into Arizona.
I know, judging currently, it's not on the ballot, but can you just give an update with that and some of the dynamic pricing and some of the other things that they were talking about?
Jeff Guldner
Jim, this is Jeff. The -- we don't know of any ballot initiative right now.
There's legislation that's out there right now, and I think there is one bill that was introduced that had a competition, kind of broadly defined competition, language in it. But that hasn't -- I don't believe that's moved right now, and so, obviously, we'd be watching that, but [indiscernible] there yet.
James D. von Riesemann - CRT Capital Group LLC, Research Division
Okay. And then I have just one nit question, if you don't mind.
Sorry to do this on a call. The CapEx from the slide deck doesn't match your cash flow CapEx in the 10-K.
It's off by about $152 million. Am I missing something there?
James R. Hatfield
I'll have to look -- we'll have to look into that. We also have -- we also accrued CapEx at -- in December, but I -- we'll have to look into that.
Operator
Our next question is from Ali Agha with SunTrust.
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
Jim, just a follow-up. Wanted to be clear I was understanding you right on your thoughts on equity needs and so on.
So what would be the trigger for the equity offering? I guess, you're looking at that in 2016.
Is it to true-up the balance sheet for the rate case, even though you may have filed earlier? Or is it more to look at your CapEx forecast next 3 years and look at funding needs?
What would be that sort of triggering element for you in terms of when you end up raising equity?
James R. Hatfield
What would -- what we'll be looking at is our credit metrics to protect our A- credit rating.
Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division
Okay. So that's looking at your funding needs, et cetera.
But to be clear, given your equity layered at APS right now, you're fairly comfortable that you will be at your threshold through the rate case process?
James R. Hatfield
Yes, I'm very comfortable.
Operator
Our next question comes from the line of Andy Levi with Avon Capital Advisers.
Andrew Levi
I just wanted to shake out a little bit more just to make sure I understood it. So just back on the sales, can you just explain a little bit in more detail, I guess, from what you were saying that the third quarter and particularly, the fourth quarter of 2012, was unusually high, and that is what's making the fourth quarter of 2013 look uglier than it really is, and really, is not something that we should focus on going forward.
So can you maybe just talk about that?
James R. Hatfield
Yes. Well, usually...
Andrew Levi
Because the reason I say that is I kind of look at how your stock's trading, and I think that may be affecting it today.
James R. Hatfield
Well, if you look at fourth quarter of 2012, usage per customer was up 1% from what we'd consider normal customer usage and customer growth. And it was lower in the fourth quarter of 2013 by 1.9%, with 1% of that being the offset of last year.
I will point out this, and you have a quarter where -- and the first quarter was like this as well. Any anomaly in weather can really skew sort of usage just based on weather patterns.
So we're not worried about it. We see it a lot in the first and fourth quarters, just because of the very low usage.
We're still confident in our projections going forward.
Andrew Levi
So I guess what's the fourth quarter, just in general, is that your lowest earnings quarter?
James R. Hatfield
First quarter would be.
Andrew Levi
First quarter, and then second -- then it comes fourth quarter, then you really make your money in the second and third quarter. So I guess that what you're saying is, just to paraphrase, is because of weather and because of low usage, it's very hard to kind of use that number as some type of trend?
James R. Hatfield
I would say that despite my team's best assertations, weather is an art not a science, when it comes to exactly what's weather-driven and what's not weather-driven.
Andrew Levi
And the other thing is, I kind of wanted, I guess, give you an opportunity for a better way to put it, is you kind of look at how the stock's done, particularly since the last 5 or 6 months, and you went from trading at a pretty nice premium to the group, and then kind of after EEI and the things that kind of happened with rooftop solar and the -- kind of the ruling there, which obviously didn't really affect your earnings, your trading gives you the third cheapest stock in the group on the regulated side. So how do you kind of turn that around?
And why, if you had to kind of just talk about a few things, why it shouldn't be justified? And maybe address kind of the regulatory atmosphere in Arizona, which is probably not as bad as what's being portrayed in the stock.
Donald E. Brandt
Andy, first, I'll say the regulatory atmosphere, I think, is very positive. There was a lot of relatively ugly media coverage generated by certain parties, in particularly the second -- excuse me, third and fourth quarter last year.
That's probably got some impact, a fair amount of notoriety. I think a number of other states around the country are going to take up the cause, and we'll see where it goes.
But coming back to, I think, the intrinsic value that Pinnacle West has to offer is, first, as a lot of the charts and numbers Jim went over, is the intrinsic growth that's inherent in our service territory, the level of rate base growth we've got. We are very successful, I think one of the best operators in the nation, and that all adds up to the creation of shareholder value over a longer period of time.
One little nit on, to add to Jim's comments about the fourth quarter, we did have an October -- month of October, where heating-degree days were all but nonexistent. So I won't get into the statistics of it, but the weather-normalizing model is a statistical model.
And when you get a few standard deviations off of a normal weather pattern in one of the weakest -- traditionally weakest quarters of the year, I wouldn't use the fourth quarter of '13 to predict any kind of a future trend.
Andrew Levi
All right. And then the last question I have is just, can you just remind us of dividend policy going forward?
James R. Hatfield
Current intention of the board is to grow the dividend approximately 4% a year, and they'll look at that every October and make a determination. But certainly, with rate-base growth and the adjusters and our ability to earn, we'd expect that to continue, something to board annual action.
Operator
Due to time constraints, our final question comes from the line of Paul Patterson with Glenrock Associates.
Paul Patterson - Glenrock Associates LLC
Just very quickly on the 1% sales growth. Does that anticipate any change in the impact from solar installations?
James R. Hatfield
No, it's really at a projection of continued rooftop solar.
Paul Patterson - Glenrock Associates LLC
Okay. So in other words, the changes that we've seen so far, which is, you guys have indicated, is too early to really sort of measure what the impact will be from the recent regulatory decision.
As far as your -- the numbers that you have at the 1%, you guys are not baking in any significant change as a result of that regulatory decision?
James R. Hatfield
Correct.
Operator
We have reached the end of the question-and-answer session, and I would now like to turn the floor back over to management for closing comments.
Paul J. Mountain
That concludes the call. Thanks, everybody.
Operator
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time.
Thank you for your participation, and have a wonderful day.