Pinnacle West Capital Corporation (PNW) Q3 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Pinnacle West Capital Corporation 2014 Third Quarter 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.

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2014 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Jeff Guldner, APS's Senior Vice President of Public Policy; and Mark Schiavoni, APS's Chief Operating Officer, are 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 in 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 third quarter Form 10-Q was filed this morning. Please refer to that document for forward-looking statements cautionary language, as well as the 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 November 7. I will now turn the call over to Don.

Thank you, Paul, and thank you, all, for joining us today. The management team and our entire workforce continued to deliver solid operational and financial results. Our results this quarter provide one example of delivering solid results, although our focus is always on the long term. The track record of our improving financial strength and regulatory clarity are also why we recommended and the board approved a 5% dividend increase last week, effective with the December dividend payment. The 5% increase takes a measured step forward from the 4% increases in each of the last 2 years. Jim will discuss the dividend and the third quarter results in more detail. But first I'll update you on the regulatory progress and provide a few operational highlights. In that regard and building on the theme from the last few quarters, I will outline the progress that is being made in Arizona to address rate design. We continue to work with the Arizona Corporation Commission and other stakeholders to take positive steps forward and shape the conversation for the industry. At a July 22 meeting, the ACC voted for a limited reopening of the 2013 net metering decision to consider removing the requirement for APS to file a rate case in 2015 to allow for the possibility of developing rate design options in possible generic proceedings. The ACC took the next step in an August 12 meeting by voting 5 to 0 to lift the requirements that APS filed its next general rate case by June 2015. The commissioner has also agreed to discuss possible next steps for considering rate design issues in the September open meeting. As expected at the September 9 open meeting, the commission and staff outlined a conceptual proposal of how a company would proceed to address rate design. Commissioner has asked staff to provide additional details in writing to be discussed at a future open meeting. The staff submitted a draft outline to the docket on September 29, describing a potential procedural option that would allow interested parties to have the commission consider and vote on rate design issues prior to starting the rate case time clock in addressing revenue requirements. Several stakeholders submitted reply comments on October 20, which are now being reviewed. We agree with several facets of staffs rate design proposal and are working with staff and other stakeholders to make it more efficient. The staff's proposal was based on an assumed June 2016 revenue requirement filing. We will determine the exact timing of our filing as the process is finalized, but let me remind you of 2 drivers of how we are thinking about rate case timing. First, our priority is to deliver on our commitments to customers and shareholders by managing our cost and the rate gradualization, enabled by the adjustors we have in place. Second, we have a peak investment period from 2016 through 2018, driven by the Ocotillo plant modernization project and the environmental upgrades at Four Corners Units 4 and 5. So we will need to update our revenue to ensure we meet our commitments in 2017 and beyond. The ACC also has several resource related decisions pending in the coming months. The certificate of environmental compatibility for the Ocotillo modernization project received approval from the line siting committee last month, and now goes to the ACC for approval. Second, the ALJ is expected to issue her recommendation for the Four Corners rate rider. The ACC is expected to vote on this before the end of the year. Our third item in front of the ACC is the last 20 megawatts of AZ Sun. The staff is expected to issue their recommendation, then the ACC will review and vote on the need for the last 20 megawatts and whether the project should be utility scale or rooftop. We also announced, in September, our proposal to shut down the 260 megawatts of Cholla Power Plant Unit 2 by April 2016, and stop burning coal at Units 1 and 3 by the mid-2020s. If the EPA approves a compromised proposal offered by APS to meet required environmental and omission standards and rules. We've requested the ACC approve this plan as well. Turning to our operations, our fleet in electrical grid performed well this summer. Despite multiple extreme monsoon-related events, where we saw flooding in the Phoenix Valley, our generated units were not at risk, although we did have as many as 50,000 customers lose power at one point in time. We worked quickly and safely to get customers back online in the storm restoration efforts, especially our transmission and distribution and customer service teams. The Palo Verde Nuclear Generating Station had an excellent third quarter. The site capacity factor was in line with the third quarter of last year at 100%. Unit 1 entered its planned refueling outage on October 11. Also, in early October, 10 Japanese chief nuclear officers toured Palo Verde, as well as the nuclear industry's emergency response center located in the western suburb of Phoenix. This was the reciprocal visit following the U.S. chief nuclear officers' visit to Japan last September, continuing the dialogue of lessons learned in the nuclear industry. Lastly, the joint venture we formed with mid- American transmission in July trans-Canyon will be submitting a bid for the Delaney-Colorado River transmission project by the November 19 due date. There are a few key checkpoints over the next year, but the winning bidder is expected to be announced by the California ISO in the summer of 2015. Let me conclude where I started. We continue to meet or exceed our financial targets with the objective of growing the dividend each year. It's not by accident that we are on track to deliver on our targets again this year even as we have had several drivers work against us. Over the next few years, we see stronger economic recovery as an upside, but we are not relying on that upside to deliver on our goal of earning more than a 9.5% return on equity. Simply put, we make our numbers. As I mentioned earlier, the board and the management team focus on the long-term and creating a sustainable energy future for Arizona. I'll now turn the call over to Jim.

Thank you, Don. Slide 4 outlines the topics I will discuss today. I will begin with a review of our third quarter results, including earnings and the primary variances from last year's third quarter, followed by an update on the Arizona economy, and I will conclude with an update on the guidance and our financial outlook, including -- introducing 2015 guidance. Slide 5 summarizes our GAAP net income in ongoing earnings. As usual, my comments will refer to ongoing earnings. For the third quarter of 2014, we reported consolidated ongoing earnings of $244 million or $2.20 per share compared with ongoing earnings of $226 million or $2.04 per share for the third quarter of 2013. Moving to Slide 6. You see the variances drove the change in quarterly ongoing earnings per share, which were all positive. An increase in gross margin improved earnings by $0.01 per share compared with the prior year's third quarter. I will cover the drivers of our gross margin variance on the next slide. Lower operations and maintenance expense added $0.02 per share, largely driven by the favorable impact from lower pension and postretirement expense that has been positively impacted each quarter this year. Lower depreciation and amortization expenses increased earnings by $0.02 per share in part due to the Palo Verde Unit 2 lease extension we announced in July, offset by additional plant in service. Lower taxes, other than income taxes, contributed $0.02 per share due to lower property tax rates. We've generally been experiencing higher property taxes. However, the rates on the property bills we received in September were lower than we had estimated, resulting in a favorable adjustment. Lower interest expense, net of AFUDC, benefited earnings by $0.04 per share. The decrease largely reflects reduced interest charges resulting from refinancing long-term debt at a lower rate. A lower effective tax rate added $0.02 per share, primarily driven by tax credits related to our renewable facilities. The net impact of other items increased earnings by $0.03 per share. 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 adjusted mechanisms. Also, the deferrals associated with the Four Corners transaction and the impacts to our noncontrolling interest for the Palo Verde lease extension are treated in a similar manner. The drivers I discussed exclude these items as there was no net impact on the third quarter 2014 results. Turning to Slide 7 and the components of the net increase of $0.01 in our gross margin. The main components of this were as follows: the lost fixed cost recovery mechanism improved earnings by $0.02 per share, which, as designed, offset some of the impacts from energy efficiency programs and distributed energy; higher transmission revenue increased earnings by $0.01 per share. We continue to expect transmission revenue to be relatively flat on a full year basis compared to 2013. The Arizona Sun program benefited earnings by $0.03 per share, primarily driven by the Gila Bend project that went into service. The effects of weather variations decreased earnings by $0.03 per share. This year's third quarter was unfavorable versus normal, and milder than the third quarter of 2013. Cooling degree days were 8% below normal, and 6% lower than the comparable quarter a year ago. The net impact of other miscellaneous items reduced gross margin by $0.02 per share. Usage by APS customers compared to third quarter a year ago were flat. Weather-normalized retail kilowatt hour sales, after the effects of energy efficiency programs, customer conservation and distributed generation were on par in the third quarter of 2014 versus 2013. Beginning on Slide 8 is a look at Arizona economy and our fundamental growth outlook. Arizona's economy continued its steady improvement in the third quarter of 2014. Absorption of vacant housing in APS's Metro Phoenix territory is averaging between 3,000 units and 5,000 units per year and the number of vacant units is at it's lowest level in 7 years. The steady absorption is providing support to prices for retail homes, and we expect a normalization of this market to continue through the near future. As we indicated a quarter ago, overall housing demands continue to increase. Total housing permits and multifamily permits are expected to reach their highest activity levels in 2014 since 2007. The picture is similar for commercial buildings. Vacant space continues to be absorbed in the office and retail sectors, yielding steadily declining vacancy rates as shown in the upper right. Vacancy rates for industrial space reflects some sizable new developments, which have just recently come online. These trends are indicative of the steady job growth in the Phoenix Metropolitan area and Arizona have been experiencing for the last 3 years. Arizona has added jobs year-over-year on a very consistent 2% rate since the end of 2011 as seen on the lower right-hand side. Business services, tourism, healthcare, wholesale trade and financial activities have all been source of growth in recent quarters and highlight the sources for continued occupancy gains in the available commercial floor stock. On balance, we see signs of sustained improvement in our economic environment and a gradually steady recovery. As in past recoveries, it is likely that each successive year in the near term will be stronger as we go forward. Reflecting the steady improvement in economic conditions, APS's customer base grew 1.4% compared with the third quarter last year. We expect that this growth rate will gradually accelerate in response to the economic growth trends I just discussed. Importantly, the long-term fundamentals supporting future population and job growth in Arizona appear to be in place. Finally, I'll review our earnings guidance and the financial outlook on Slide 9. We continue to expect that Pinnacle West consolidated ongoing earnings for 2014 will be in the range of $3.60 to $3.75 per share, despite a headwind of $0.06 per weather year-to-date through September and load growth, somewhat slower than we expected. We are introducing 2015 ongoing guidance of $3.75 to $3.95 per share. Cost control and the rate adjustors remain important drivers. So let me highlight a few key assumptions in 2015 guidance. The impact of Four Corners expected in race, and therefore, no longer being deferred is a key driver on most line items. Depreciation and amortization, in particular, has a largest increase year-over-year, accounting for nearly all of the change in other operating expenses on the guidance slide. This is driven by the Four Corners deferral that occurred in 2014 along with ongoing plant additions in 2015. We continue to see customer growth. We are assuming 1.5% -- 2.5% in 2015 translating to flat -- to 1% sales growth. a complete list of factors and assumptions underlying our guidance is included in the appendix to our slides. On a related note, we have updated our 3-year customer growth and sales forecast, essentially pushing out the recovery a year. The company's goal continues to be an annualized consolidated earned return on average common equity of more than 9.5% through 2016. This is driven by our 6% to 7% rate-based growth outlook and the recovery due to adjustors for our capital investments in addition to ongoing cost management efforts. Lastly, as Don discussed, the Board of Directors increased the indicated annual dividend last week by $0.11 per share or approximately $0.05 -- 5% to $2.38 per share effective with the December payment. This concludes our prepared remarks. Operator, we'll now take questions.

[Operator Instructions] Our first question comes from the line of Dan Eggers with Crédit Suisse. Daniel L. Eggers - Crédit Suisse AG, Research Division: Can you just talk a little bit about kind of the what the response rate has been on your adapted Arizona Sun solar project? And do you think this is something get resolved with the current commissioner or do you think with the elections till the next year to get new the commissioner's sign off on it?

Well, I've got Jeff Guldner sitting next to me, I'll let him handle it.

Sure, Dan. We've had some interest from customers, and so obviously, there are 2 pieces to this program. One of it is to address some customer interest. The other is to give us some -- inform us on what happens when we put west-facing solar what happens when we take control of inverters on rooftop solar systems. And so all that's have generated a lot of discussion. I do expect the commission is likely to -- staff report will come out shortly and that's probably going to be on -- I would expect it to see on the December open meeting. Daniel L. Eggers - Crédit Suisse AG, Research Division: Okay. And then I guess, with the dividend increase, Don, kind of the 5% level on earnings growth, midpoint at 5% growth. How should we be thinking about the sustainability or trajectory of the dividend? Is there a room on the payout ratio or do you guys kind of keep things tamped down where they are?

Not quite sure of what you mean by tamped down, Dan, but let me comment, one, we think there's adequate payout ratio and just the improvements in our financial position and some of the regulatory certainty, we felt comfortable and the board agreed moving from a 4% to 5% growth rate. That's not necessarily locked in. We will look at it each year, but as we can -- continue to grow confidence and our ability to deliver our results, we'll take a look at that on a periodic basis. Daniel L. Eggers - Crédit Suisse AG, Research Division: And I guess just one last question. It wasn't in the slides, I don't think, but can you talk about where the residential solar permitting activity as in the installations are so far this year relative to last year?

Yes, Jeff, do you want to [indiscernible]?

Yes, we're monitoring it closely. We filed quarterly, so you can get copies of the quarterly filings. I think we're seeing installations coming in right now just a little bit below last year's trajectory, but we also had the highest months or the second highest months we've seen in September. And that's been increasing.

Our next question comes from the line of Greg Gordon with ISI.

Just a couple of questions guys. First, Jim, going back to your -- a couple of presentations ago, when you laid out your financial outlook. You said, you expected retail customer growth to get to about 1% in October sales growth, net of 2.5% customer growth by 2016. So based on your statement that you made at the end of your presentation, you basically -- you pushed that out to 2017, is that right?

Well, we sort of pushed the growth out a year. I would say that we continue to see positive signs of activity. As I look out of my window, there are 3 construction projects. The U of A cancer center is nearly complete. The bioscience center is undergoing expansion and ASU is moving their law school downtown, and we'll repurpose the current law school on their Tempe campus. We also saw, last week, the first major buying of land by a homebuilder by Shea homes with their intention in Northscott, They'll begin to sell houses at the end of 2015. So we're continuing to see that. It has been a little sluggish, but it's a matter of when, it's not a matter of if.

But your business plan for '15 and '16 doesn't presume a massive pickup in growth.

Correct.

That would just be gravy.

That would be upside.

The other thing I wanted to ask is I think you ended the third quarter with an equity ratio at APS still almost 57% and I know you carry minimal to no parent debt. So can you talk about what your financing plans are because as I look out to 2016, '17, that seems like the time frame when you might need to file a rate case because that's when you'll have a big CapEx plan, but on the other -- and then you usually issue equity to make sure your ratios are in-line with your regulatory capital structure around those times. But given that you are over equitized and given that you have practically no leverage at the parent, is it a foregone conclusion that you will need equity?

I don't think it's a foregone conclusion. In the interim, because we have such a strong equity ratio, we will finance through fixed income security. And so we'll evaluate that when we look to file a rate case what our capital structure is and how we finance that going forward.

All right. I would make the observation that a lot of your peers that have utility holding companies have used a little bit of that financing capability to fund their equity needs at their operating companies, and you guys have no -- have not demonstratively used that capacity. Is there any reason why we should presume you could not use that capacity?

There's no reason you should presume we couldn't use that capacity.

Our next question comes from the line of Michael Weinstein with UBS.

It's Julien here. So kind of following up on the tone of the last few questions here. In terms of keeping your earned ROE in line with your target, how much of this is dependent upon cost-cutting and ongoing O&M efforts versus just the sales targets holding itself up. And to that effect, can you maintain your earned ROE beyond just the current period with a slower growth that you are projecting now?

So let me answer that this way. One, it's not that dependant upon growth as we've seen in the last 2 or 3 years. It's really dependent upon the adjusters and our ability, I would say less cost-cutting and more cost containment as we move forward. And we entered this settlement in early 2012, late 2011, we looked at the sales outlook and really said, we can manage to the stay out period because we had the adjusters, which give us gross margin growth. And those adjusters continue to get bigger as we move forward. And we have to control costs and we've been able to do that.

Perhaps, as a follow up, you mentioned the adjusters here, is it your expectation at present that you would continue to hold onto those adjusters through the next rate case? Or is that something in your mind that's up for a review in the next case?

So, certainly, to the next rate case. At that point, and we'll have to look at our situation, do we keep the same adjusters, do we get different adjusters that'll all be part of conversations we'll have at that time.

Great. And then lastly here, energy storage, obviously, there has been a little bit of noise in the state around this of late, what's the opportunity for you all? Is there an opportunity in rate base or otherwise to invest and what's the time line there, if there is?

There is some discussion that's going to be held next week, I expect, at the open meeting around Ocotillo project where we've got a proposal to do some pilot work on energy storage in association with that. And obviously, if you look at our system and some of the changes we are expecting in the future with the need to have more fast ramp in the afternoon, that's going to be something that I think you're going to see a lot of discussion that in the southwest. So the proposal that we're talking about next week with Ocotillo would be a rate-based proposal.

Our next question comes from the line of Ali Agha with SunTrust.

First question, Jim, just to benchmark this goal that you have of earning 9.5% or higher ROE. And I know you folks calculate that a little different because you look at book numbers, not just at the utility numbers. So can you just let us know on a, let's say, an LTM basis, what is that earned ROE, the way you guys are calculating it right now?

Well, at the middle of our guidance, I believe the ROE is about 9.7% or so roughly.

That's the middle of the '14 guidance?

Correct.

Okay. And then secondly, I think you also alluded to the fact that in the quarter-over-quarter pickup, I think there was about $0.02 benefit on DNA from the nuclear lease extensions.

Correct.

Can just remind us, as I recall from your 8-K filing, the lease expense has cut in half about $28 million or so. And as long as your out of rate case, starting in '16, does that all fall to the bottom line? Is that the way that we should be thinking about that?

So all of the lease reduction will fall to bottom line until the next rate case, in which case we'll get that back as a part of our rate, which is not necessarily a bad thing since it reduces our ask to customers. That will hit in '16. But you have to also remember, that would be a positive change. It will be offsetting other drivers that will go to offset that. So I wouldn't look at it necessarily as indicative of in and of itself being a big item.

Right. But the other item and another cost pressures and so on, right. But that on a stand-alone basis is a positive for your bottom line?

That's a positive. That would be one of the many items that would go plus and minus as we go year-over-year.

Right, right, understood. And my last question. If you look at your relationship between customer growth and weather-normalized sales growth, are you seeing any differences there? I mean it's been a little difficult to benchmark as you've been hitting that 1.4% growth on customers and yet weather-normalized sales were negative second quarter or flat right now. Can you give us some more insight on how we should be thinking about that relationship and what's -- is that a consistent rule of thumb looking forward there?

So DE is about 0.5%, and then EE is about 1% roughly. So we would think that as growth accelerates, that would be positive for sales growth. And then the interim, also keep in mind, we have a LFCR, which, as designed, is offsetting some of that reduction.

But that relationship of DE and EE, has that been consistent throughout or is that ...

It's been fairly consistent.

Our next question comes from the line of Charles Fishman with Morningstar.

As I compare your new capital expenditure plans with previous, there is an increase in traditional generation. Does that still over the end of the plant?

Excuse me. Charles, we...

Increase in generation, just traditional generation of CapEx, just approval.

Charles, just changing cash flows as it relates to Ocotillo. It's been accelerated a little bit.

Okay. And I'm sorry for butchering the name of the plant. Then my second question is on the mid-America proposal on joint venture with the transmission, is that just one of its news put 1000 programs?

Essentially, it's a network resource to Cal-ISO under their Cal-ISO tarrifs. So it's a competitive bid project that we intend to bid on.

We have seen other projects like this, we're certainly an incumbent and it's right away has a leg up. Is there anything that you confidence, you and your partner, that won't be the case here?

Well, it's a 116-mile line with 98 miles of it in Arizona. So we know the terrain, we know the governing bodies, great relationship. So we think that gives us a leg up.

[Operator Instructions] Our next question comes from the line of Shahriar Pourreza with Citi.

On the 20 megawatts that's remaining under AZ Sun, whether the commission goes utility scale or DG, is it fair to assume or is it a possibility that the commission is in favor of you doing distributed generation in the lieu of utility scale that they could potentially open the door for you to take on more DG?

This is Jeff. So one of the things just to keep in mind, let's say, on this program is this was a compliance program. So we had a 200-megawatt target with AZ Sun project. We've got 170 megawatts of it built-out. And so we're really looking at filling this niche and looking at what we could get from a pilot. Some advantages or some information we can get from pilot standpoint. So we're not really looking at this as an expansion project at this point.

Okay. So that's that I'm trying to get out. So if you do the distributed generation, it can be seen as a way for you to eventually expand and compete with some of the leasing models in the state?

I wouldn't say it competes with those. I think it's just another alternative for customers to consider, and in the case of our proposal, virtually, any customer relative to economic or credit standards can avail themselves, do it all that they need as a structurally sound route. And while we haven't promoted it yet because we haven't received approval. We last heard and this is 10 days old like 1,300, 1400 customers have called to sign up for it. So I think there is a lot of interest from our customers.

If you look at multifamily right now, there's not really an opportunity for a multifamily unit to move to solar. And so some of this is looking at how do you feel some of those gaps.

Right. And that's what I'm trying to get out is the proposal that you have in front has a very strong value proposition for rate pair. So the question is, could you leverage this and increase the program and compete with some of the leasing models or provide an alternative beyond the 20 megawatts?

Maybe, a big maybe is the -- what we're looking at now is part of the compliance program. And obviously, we and our regulators and our customers will learn a lot from that experience, and I think based on that, we've always done a good job of listening to our customers and what they want.

Okay, perfect. And then just one last question on the 1% -- 0% to 1% growth assumption for next year. Is that net of energy efficiency in DSM?

Yes.

Our next question comes from the line of Paul Patterson with Glenrock Associates.

Just I want to follow up on Greg Gordon's question regarding leverage of the parent. If I understood the Q&A there, I mean it got interrupted, I apologize. But it sounds to me like you guys were indicating that there was some flexibility that you saw there in terms of perhaps some -- funding some -- using some leverage of the parent. And I guess what I was wondering is, any sense as to when one hears that one thing of all sorts of opportunities financially speaking, given your situation, your metrics and what have you. And I was just wondering, can you quantify as to what maybe potentially you guys might be contemplating on that?

No, I would just say that it's an A- credit rating. We feel very good about our financial strength, and we're pretty conservative management team as well. Anything is possible, but we're not out to the lever of the holding company with just APS as a sole provider of dividends to the parent.

Our next question comes from the line of Jim von Riesemann with CRT Capital.

I want to follow up on Paul's question and Greg. It's more of a cousin question to it. If I look at your cash flow statement, there is a mismatch of about $60 million in deferred taxes this year between the consolidated parent versus what you did -- or the consolidated numbers versus what you did at APS. How should I think about, one, deferred taxes on a go-forward basis? And two, what's your view of bonus depreciation if Congress will actually extend? And if so, what's the cash benefit to you on an annual basis, given your slightly revised CapEx guidance that you provided?

View on bonus appreciation is, it's not going to change our view on our CapEx program. I mean we have obligation to serve and what we spend is required to serve. We have not been a taxpayer. Well, that will turn around in the fourth quarter of '14. We'll begin to pay taxes. And if bonus appreciation is not continued, we'll begin to turn around that deferred tax balance and begin to pay taxes again.

Okay. So then -- but if it is continued what's the cash impact to you in the event that it is continued?

The cash impact for us will be -- will push off the ITC been able to realize that from 2015 to 2016. And depending on what they do on bonus appreciation, it could be $50 million to $125 million, whether they do $50 million or $100 million.

Our next question is a follow-up question from Michael Weinstein with UBS.

It's Julien here again. I just wanted to tie things back together, if you will. You've talked about a 4-ish percent EPS growth previously, I'm noticing in the slides here kind of an acceleration, I think in the dividend growth. You're now saying kind of an approximate growth rate of 5%. How are you thinking at EPS trajectory, especially given your ability to continue to earn your ROE? Is that itself accelerating here as we look at the step-up in CapEx in '16 and '18? What are the potential offsets, if you will? I mean how are you thinking about it?

We always describe it as rate based growth of 6% to 7%. Before dividend growth of 4% and earnings somewhere in between, and I think the 4% to 5% just represents our confidence and our ability to execute. Those would still be your bookends from a financial performance perspective.

Got you. But from actually materializing that earnings trajectory, do you think there is an ability to continue to spend at an accelerated rate beyond kind of that '16 through '18? Or is that kind of a one-time bump? Any of....

With our outlook, Phoenix and Arizona continue to be a growth state and provide appropriate regulatory recovery. I think we'll have continued opportunity.

All right, got you. I mean, in fact, could we hassle a little bit what is the discrepancy between that higher rate base and the lower EPS trajectory, if you could kind of talk to that a little bit?

It's just a little bit of a regulatory lag. I think we have about 80% of our CapEx is through some sort of an adjustor -- 40% through an adjustor -- roughly 40% through depreciation. And so we are losing recovery on about 20% of our rate base growth and that sort of your lag going forward, as well as test year expenses versus current year expenses, which represent primarily the increase in DNA property tax and things of that nature.

We have reached the end of the question-and-answer session. I would now like to turn the floor back over to management for closing comments.

All right. Thanks, everyone. We look forward to seeing you [indiscernible]. That concludes our call.

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.