Good morning. My name is Alex and I’ll be your conference operator today. At this time I would like to welcome everyone to the Pinnacle West, year end 2008 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you Ms. Rebecca Hickman, you may begin your conference call ma’am.

Thank you, Alex. I’d like to thank everyone for participating in this conference call to review our fourth quarter earnings, recent developments, earnings outlook and operating performance. Today, I have with me Bill Post, our Chairman and CEO; Don Brandt, who is our President and Chief Operating Officer and also CEO of Arizona Public Service; and Jim Hatfield our CFO; these three will be the speakers. Also I have with me Don Robinson who is now President and Chief Operating Officer of APS Before I turn the call over to our speakers, I need to cover a few details with you. First, I encourage you to check the quarterly statistics section of our website. It contains extensive supplemental information on our earnings variances and quarterly operating statistics. Second, please note that all of our references today to per share amount will be after income taxes and based on diluted shares outstanding. It is my responsibility to advice you that this call will 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 caption entitled forward-looking statements contained in our 2008 Form 10-K filed with the SEC this morning, as well as the MD&A and risk factor section, each of which identifies some important factors that could cause actual results to differ materially from those contained in our forward-looking statements. Also, during the course of this call, we will refer to our ongoing earnings, which is a non-GAAP financial measure as defined by the SEC. Our website contains a reconciliation of our ongoing earnings to net income. A replay of this call will be available on our website www.pinnaclewest.com for the next 30 days. It will also be available by telephone through February 27. Finally, this call and webcast are the property of Pinnacle West Capital Corporation and any copying, transcription, redistribution, retransmission or rebroadcast of this call in whole or in part without Pinnacle West’s written consent is prohibited. At this point, I’ll turn the call over to Bill.

Good morning everybody and thank you for taking your time to join us today. Jim Hatfield’s going to update you on the quarter, our earnings outlook for 2009 and 2010 and our liquidity position, and Don Brandt’s going to discuss our regulatory and operational areas and then I’ll come back and close out the comments. Jim.

Thank you, Bill. For the fourth quarter, we reported on a GAAP basis, a consolidated net loss of $39 million or $0.39 per share compared with net income of $3 million or $0.03 per share in 2007’s fourth quarter. Net income was down most notably because of an impairment charge recorded at SunCor in this year’s fourth quarter and lower results at APS. Looking at earnings from our ongoing operations, we incurred a net loss of $10 million or $0.10 per share for the fourth quarter 2008 versus earnings of $9 million or $0.09 per share to the same quarter last year. For the year 2008, our ongoing earnings were $2.42 per share, compared with 2007 ongoing earnings of $3.06 per share. Reconciliations of our ongoing earnings to our net income on a GAAP basis are included on our website. Our 2008 ongoing earnings were with in our expectations of a reasonable range around $2.50. Now, I’ll provide more detail on the reconciliation items for the fourth quarter between GAAP and ongoing results. First, SunCor recorded an after tax impairment charge of $0.32 per share in 2008’s fourth quarter as compared to no impairment charge in 2007. As we discussed in November at EI, we review potential impairments quarterly to determine whether impairment should be taken. Before no,w impairments were not needed; however, three events came together in the fourth quarter to causes us to realize such a charge in the fourth quarter. First the continued deterioration in the real estate markets, which accelerated in the fourth quarter. A further of the credit crisis which continues to limit financing availability for potential purchasers, and finally the renewal of a SunCor revolving credit facility in which SunCor must sell assets to reduce available capacity. The facility was renewed yesterday on an…

Thanks, Jim. I’ll begin with regulatory matters. In January three new commissioners took office at the Arizona Corporation Commission. There were now three republicans and two democrats on the commission. The new commissioners are Sandra Kennedy and Paul Newman who are both democrats and Bob Stump a republican. Commissioners Chris Mayes and Gary Pierce continue on the ACC and in January commissioner Mayes was elected Chairman of the Commission. We believe the changes at the ACC provide opportunities for constructive dialogue and action, to insure that we meet Arizona’s future energy needs with revivable electricity and excellent customer service at reasonable prices, with appropriate consideration of renewable and other resources and the financial health of APS. We have made progress on the regulatory front in a number of areas. APS’s interim base rate surcharge request, the pending retail rate case, setting the 2009 PSA annual adjustor rate and finally APS’s resource plan and allow me to elaborate on each of these. On December 18, the ACC approved an interim base rate surcharge for APS. The surcharge is expected to increase annual free tax retail revenues by approximately $65 million. It became effective for customer bills issued after December 31, and will remain in effect until the decision in APS’s pending general rate case becomes effective. By authorizing the company to implement the interim surcharge, ACC provided a degree of financial stability for APS to help insure that we retain our investment grade credit ratings and to avoid the certain future cost increases that would otherwise result if APS’s credit ratings were down graded. As part of the interim rate decision, the ACC asked APS to target additional cost reductions of at least $20 million. We have assured the commissioners that the company will meet their target. We are completing that…

Thanks, Don. As this is my last earnings call, I would like to thank all of you for your interest in Pinnacle West and many of you for your investment in our company. I appreciate the opportunity I’ve had to work with all of you and with some of you it’s been a relationship that goes back several decades. My decision to retire was not an easy one, because it’s been my privilege to work with many wonderful people, in our industry and obviously with the dedicated people of Arizona Public Service Company and Pinnacle West. It’s also been an honor for me to serve the customers of our company, and the residents of my home state. We take our obligations to you, our customers and our employees, very seriously and I’m very confident that under Don Brandt’s strong leadership, we will continue to do so. He alone with Don Robinson and the entire management team are very focused on providing high performance and I have absolutely no doubt that Pinnacle West will continue to do so. Thank you for your time, thank you for your attention and we would now be happy to answer all of your questions.

(Operator Instructions) Your first question comes from the line of Paul Ridzon from Keybanc. Your line is open.

Good morning. I just had a couple of questions. How much equity is now left at SunCor?

SunCor’s equity now is $263 million.

Just a clarification here; your ’09 and ’10 guidance assumes that SunCor’s G&A losses are offset with some level of property sales?

That’s not what we’re seeing specifically. Right now as Don mentioned, reviewing SunCor’s operation, going forward, the impact to the P&L will be dependent upon the route that’s ultimately taken so with that sort of sort of still underway, we’re making no assumptions about SunCor and once that is done we’ll comeback and update SunCor’s impact for ’09 and ’10.

What was kind of the G&A run rate at SunCor at that 12/31/08?

The G&A run rate at 12/31 was about $44 million pretax.

$44 million?

Yes, for the year, pretax.

So about $0.25?

Roughly, yes.

Then the guidance does not include the forced $20 million of O&M savings, because that's still under review?

That’s correct and one thing I want to point out; it may not be totally O&M, it maybe part capital, maybe part working capital. So, instead of just assuming the impact to $20 million, we will update that. Once we’re through with our review and we reported at the commission which will be March 18.

On a percentage basis, what percent of that $20 million do you think is going to flow through the P&L?

I would say since we’ve already cut somewhere around $20 million net of capital, the large majority of it will flow through the P&L either as O&M or working capital would be my guess at this point.

This is Don, you used the term forced and they did order us to that, but we’ve had a long history of trimming expenses and you saw that last year in 2008 and 2007 and years before that and in my remarks to the commission at the opened hearing, I told them we would substantially exceed that $20 million. That’s part of the way we do business here. They wanted to see it. We were going to deliver it anyway.

Is it substantially exceeding incorporating guidance?

No.

So, it’s 230 plus something substantially more than $20 million. Is that the right way to look at it?

Yes, depending on your definition of substantial; but yes it will be more than $20 million.

Thank you very much for the clarification.

Your next question comes from the line of Andrew Levy from Incremental Capital. Your line is open.

Hello.

Good morning Andrew.

Hi, how are you doing? Sorry about that. Just going back on the dividend, I understand your commitment to it and I understand obviously your 2010 guidance incorporates the full amount of the rate increase right, if I read correctly in your statements as well?

The 230 incorporates only the interim…

The 2010 that $3 number incorporates?

That would include the full asset, yes.

Okay, which is like $200 million. What happens if you get half of it, which is actually fairly generous in the regulatory world in this aspect of what’s going on? Are your statements on the dividend still valid or your dividend is depended on revenue relief from the commission.

In this particular circumstance I wouldn’t agree with your assertion that half is generous, but with that said, yes we believe going forward we are still comfortable with the dividend.

Based on full rate relief or based on partial rate relief?

Even based with partial rate relief

Okay, thank you very much.

Your next question comes from the line of Ed Heine from Catapult

I had a few quick question; first, just to clarify, sorry to be the dead horse on this, but on the SunCor are you excluding just the impairment charges from your guidance or are you excluding SunCor altogether because there maybe an operating loss for the next couple of years.

Well, that’s certainly not the case in ’10. I think in 2009 were excluding SunCor in totality at this point, because the P&L impact will be depended upon the ultimate course that’s chosen, as Don said it’ll restructure of the business. We continue to believe that 2010 will be a challenging year on the real estate and 2010 we assuming zero operating results from SunCor.

Okay, so in 2010 you’re assuming that it’s a breakeven business, ex any charges. Then does that relate to -- you mentioned that you finally got this refinancing and that there maybe some actual forced divestures; is that basically you are going to be forced to sell a portion of your assets this year at kind of prices you would rather not, just to meet the covenants in that renewal.

Well, the refinancing steps down the available capacity over time, and so in this environment the way to be able to achieve that is to divest itself of assets that they move throughout the year. That’s not to say that SunCor doesn’t have assets and the value today is greater than book, but obviously if you look at what’s happened in home building and raw land, we’ve seen a deterioration of that market value. So we’re taking the impact of that as well.

Then actually just a quick question on, just some details on this earning drivers that you gave out. On the 2008 to 2009 you are talking about a $0.35 to $0.45 step up from gross margin; could you give us a little color on what the break out is there. Because if I do the math on just the $62 million of interim, that gets you to kind of the full 45 and I think if you just look at the stub piece of the TCA charge or the transmission charges you have, that’s another $0.15 so. Can you give us a break out, give us a feeling and then why are purchase power costs going up, if gas is going down.

Sure, you’re right on the interim increase. The transmission revenue increase we have is about half of what you assumed and keep in mind we have significantly slowed transmission build because of the slowdown in customer growth. The other offset to that would be, as we look at where we’ve hedged and gas prices continuing to fall, we expect there will be some mark-to-market decline in 2009, reflecting the 10% of our non-detained sharing.

Okay, so you’re going to take a negative mark-to-market hit because you’re hedged at higher prices in the PSA and gas continues to fall.

That’s correct and that’s based on today. Obviously we’ve seen that turnaround throughout the year, so.

But that $0.35 to $0.45 includes that mark-to-market hit.

Correct

Okay and then, I’m sorry, just on the TCA, not to get in too much detail, but I think you got a $30 million increase in March of last year and then another $13 million halfway through July, so even just if you pro rata, shouldn’t there be just another $17 million from the full year effect of those.

Ed this Becky; you got most of it before they had a use period and the transmission rate increases actually seasonalize, so most of it was in effect for the summer last year. Ed Heine – Catapult: Okay, I got you. Thank you very much. I appreciate it. Congratulations, Bill.

Thank you.

Your next question comes from the line of Yiktat Fung from Zimmer Lucas Partners.

Good morning.

Good morning, Yiktat.

Hi, I’m just wondering if you could comment on your needs for any external equity within the next two years.

Well, as we said in prior calls, the equity we need will be depended upon really two key factors and one is the general rate case outcome, as well as our ability to reduce capital and O&M expenses. We’re not going to know, what equity we need if any, until we get to this regulatory cycle. So, to the extent we need any, I would think it’s a 2010 event and not a 2009 event.

Okay and do the sort of guidance numbers for 2010, assume any sort of equity issues?

Yes, they do.

Okay and how much is the impact of that?

The impact in 2010 is embedded in the $0.10 to $0.15 miscellaneous, other items net on your reconciliation.

So the $0.10 to $0.15 is the dilution.

Well, it’s not just that, there’s other items in there as well, but it’s embedded in there.

Okay, can you break out which part is dilution? Is it half of it or…

It’s about half of it, yes.

I think you talked about before that you’re fairly comfortable with your dividend. What are your thoughts on your pay out ratio, given that you’re guiding to 2.30 in 2009?

Well, obviously we look at 2009 as an aberration really. When we say we’re strongly committed to dividend, we’re really looking at the growth potential of APS overtime. The one factor that goes into that obviously is getting substantial rate relief to compensate us for the capital that’s being put in the business. I think long term as you think about the growth that an APS has, we’ll be comfortable with ultimately a pay out of 60% to 65% of dividend to retain as much capital for growth, but still compensate investors in the yield and obviously that implies that we have ways to get to the next opportunity to increase dividends.

Regards to the renewed SunCor revolver, I think you mentioned that the capacity decreases overtime. Can you be a bit more specific on that?

Well, the capacity was 150, it’s 125. They are underneath that in terms of current borrowings and it steps down overtime to about $85 million at the end of 2010; it’s just had periodic step downs.

Okay and how much borrowings do you have under that revolver?

We have about $100 million at December 31.

Okay, so basically you just need to trim it by about $50 million to hit that lower capacity number of $85 million.

That’s correct.

Okay and as for the mark-to-market impact that you were talking about in the 2009 guidance, that’s embedded in the gross margin; how much is embedded in that figure?

Well, we have potentially within that range up to about $0.07 of higher mark-to-market, but obviously that’s going to be depended upon ultimately gas prices, which continue to fall today.

Okay and just one final question, you said you still expect about 1% customer growth in 2009 and 2010, is that correct?

Correct.

Is there any expectation for usage declines to offset that growth?

We have not seen that heretofore. If you look at residential, we’re not seeing usage increases at this point, but certainly not decreases; we’re seeing usage a pattern pretty flat in the C&I, especially the smaller customers in that category. So, at this point we’re just assuming no growths and usage per customer, but with continued smaller customer growth, I mean in the next couple of years anyway.

Okay so the usage decline that you saw in 2008 that’s mainly due to weather, is that correct?

Well, it’s weather and there is some in the fourth quarter, but keep in mind that in the third quarter we saw customers up seven tenths of 1% on a per customer basis, so that’s going to vary with a lot of factors and the weather is not a perfect number.

Okay, got it. Thank you so much.

Your next question comes from line of Paul Patterson from Glenrock Associates. Your line is open.

Hi, guys how are you?

Fine, Paul.

Congratulations Bill.

Thanks Paul.

On the expectation for trading and marketing in 2010, what are those? Are those just basically flat with the expectation 2009?

Yes. Marketing and trading here is not a significant line item.

Okay, and the $200 million plus of common equity or equity in the SunCor business. I believe the total assets in the 10-K were around $460 million, is that correct?

Yes, that’s $493 million.

Now, is the debt, I assume it’s a reason of that debt that’s offsetting the asset there, is that recourse back to Pinnacle?

No, there is no hook at all between SunCor and APS or Pinnacle West, either to recourse or cross defaults or any other mechanism.

Okay, and then just finally just if you could refresh and I apologize for this because I got slightly distracted. On the O&M that you guys are planning on reducing, but isn’t in guidance, could you just refresh what that amount is?

I’m sorry, would you say that again Paul.

I believe there was some O&M reductions that you guys are not including in guidance, correct?

Yes, we were referring to and responding to the commission request, but we continue to look at our operations and expenses with the goal to reduce that by $20 million.

Okay and that would be in what year?

2009.

Okay, and what would you think it would be in 2010 or would it be?

Well, what we intend to do is do sustainable cost reductions. So, for the most part we would expect anything we get in ’09 carries over.

Okay, but there wouldn’t be anything more, is that right?

We are not planning any. I will say this company has a culture of cost consciousness and we’re always looking at ways to improve productivity and become more efficient. So, that’s something that’s embedded in our core.

Sure. I guess what I’m wondering here is; now we’re in February, this is under review and apparently not in guidance, do I understand that correctly?

Correct.

Okay and that would indicate to me that it hasn’t been implemented yet. So I guess I’m just wondering whether or not, if you’re able to effectuate that in 2009, whatever those reductions would be, I’m just trying to figure out how we should think about (a) I guess the fact that it isn’t in guidance indicates you’re not putting it in there because it’s still under review and you’re not certain about it, but I guess I’m wondering, would there be any carry through from an annualized basis into 2010 or do you follow me?

No, I expect we’ll achieve the $20 million in calendar year 2009. Some of it’s already been implemented.

Okay, so it is already been implemented.

And some of it is being identified for implementation. So, I know its March, but I don’t think you can think of it as 9/12, so the number gets implemented in ‘09 and to carry over to ‘10, we are expecting the $20 million in ‘09.

And I’m sorry to be so slow, why is it not being included in guidance?

The $20 million has not been totally identified, nor have we reported it to the commission yet.

Okay, I appreciate it guys. Thanks a lot.

Thanks.

Your next question comes from the line of Jonathan Arnold from Merrill Lynch. Your line is opened.

Good morning guys. Just a few housekeeping type questions, just to ask you to refresh us on what level of CapEx we should be thinking about and then how much additional flexibility you feel you might have in that, given the kind of sales assumptions you are making?

Well, our CapEx in total is going to be about $900 million, which is consistent with what it was in 2008. I think $906 million total in ’08 and the same in 2009. APS is going to be the majority of that, about $883 million and in terms of flexibility we are always looking at our CapEx and obviously to the extent you see continued slowdown, that will drive that CapEx number down. We think we’ve done a pretty through job last year, when we did the review of CapEx that led to the $720 million gross, $520 million net, after the customer charge, but we will continue to spend money prudently, especially when we’re in a period of earning 8% of return on equity.

Thank you.

Your next question comes from line of Julian Dautremont-Smith from UBS.

Hi, good morning.

Good morning.

Good morning.

Would you mind running through the various scenarios that could play out with regard to the SunCor and the review and what are the possibilities, what are the timeframes we’re talking about there?

We’re in the process of the review. We’re not completed and there is nothing that’s not on the table.

Okay, I mean I was just looking as to are there potential scenarios that you could disclose? I mean what avenues, and maybe a second question unrelated would be in light of the continuing economic deterioration, has that affected your IRP that you filed recently and particularly with regard to your future needs for our base load nuclear or anything like that?

No, I think in developing our resource plan we’ve taken into the account the slowdown that’s in customer growth that’s occurred. It started last year in a significant way and is expected to continue for the next few years, so that was factored into the resource plan as we filed it at the end of the year.

Just one last detail, with regards to the base load nuclear that you alluded to in IRP, would it be possible to add another unit at Palo Verde or any preliminary thoughts in that regard?

Well, ours is a very high level look at nuclear as an option and again beyond the year 2020. Palo Verde was originally designed the site for five units and there are three there now, but that we’re not limiting our review to just a Palo Verde site.

All right great. Well, thanks again for the time this morning.

Thank you.

Your next question comes from Danielle Seitz from Seitz Research.

Thank you. I was wondering if the fuel reduction that you have mentioned in your rate case could be actually larger and therefore would help settlement discussions when you approach October.

Well, Danielle to the fuel cost reductions will effectively flow through to customers in the PSA. So, naturally any and all reductions to customer, the costs that are borne by customers, helps customers and it’s good for APS also.

I was just wondering if the settlement, if the new commission would actually favor a settlement of the case given the fact that they are like new to the system?

We already are very new and we’re pursuing this settlement and we think it’s a worth while endeavor at this point.

And you are actively optimistic it’ll be successful there?

Well, it’s still very early in the process. We wouldn’t be pursuing it if we didn’t think it will worth while and ever.

Great, my other questions have been answered and I just wanted to wish Bill, Bon Chance, it was a pleasure working with you.

Thank you, Danielle. I appreciate that and I enjoyed working with you, thanks.

Your next question comes from line of Rick Chauvin from GL Partners. Rick Chauvin – GL Partners: Hi, how are you?

I’m good. How are you? Rick Chauvin – GL Partners: Good, thanks. Thanks for taking it. I just wanted to ask a question with regard to the wholesale sales. I noticed that there was a big drop off in wholesale sales year-over-year and I was just wondering what that was attributed to and then also how it impacts the utility in anyway or even if there is an impact?

Rick, we had talked about for the last several years about a relatively large contract. Actually there were two to three of them, but the vast majority of it was is in one, then that contract rolled off last year and we don’t expect to have something to duplicate it and as Jim indicated, marketing, trading going forward would be relatively minor and flat. Rick Chauvin – GL Partners: Just a follow-up, how are the wholesale sales treated as part of like the rate setting mechanism; are they deducted from the fuel cost? I mean how does it work with regard to the utility?

It depends on the nature, but most of them are segregated. It’s as wholesale jurisdictional sales. Rick Chauvin – GL Partners: So those would go above and beyond the ROE of the utility, is that how we should look at it? I guess what I’m saying is, if you built more generation and you had a tremendous excess of power, would that be included as part of the ROE of the utility or would that be excess?

This is Don Robinson. The off system sales that we make are traditionally treated through the PSA. So, we get to keep the 10%, but the customers would get the other piece. Rick Chauvin – GL Partners: Okay, great thank you very much.

Thank you very much. What is the expected O&M growth in 2009 and 2010 as part your guidance?

That the guidance at this point for O&M is about a 4% increase, 5% increase year-over-year; you going to take out the rez and the other things when you look at O&M, because they tend to skew the number.

Okay and what is the tax basis on SunCor?

It’s relatively close to book value.

Okay great and you I know you have been asked this question a couple of times, but is the complete sale of SunCor on the table, is that one of the options?

We’re considering all alternatives.

You mentioned mark-to-market hurting your 2009 earnings guidance. Is that mark-to-market only associated with the 10% in the 9010 fuel cost or is it generally across the board mark-to-market head?

No, it’s the 10% piece of the fuel, that 90% flows through as a mechanism under the PSA.

Okay, so to confirm it’s just your exposure on the 10% of worth. I think you said like 7% or something?

Yes, that’s correct.

And then that goes away and there’s no mark-to-market in your 2010 guidance?

There is a slight mark-to-market decrease in ‘10, but keep in mind that’s based on a forward curve and if gas prices go the other direction, obviously those will evaporate. As we say in the first half and second half of the year, they swing from benefit to a loss.

Okay great, thank you very much.

Your next question comes from the line of Asses Liggleman , Millennium Partners. Your line is open.

Hi guys.

Good morning.

Good morning. I had just three quick questions. Can you breakout the write-downs relative to the housing units versus the commercial units that you guys have?

Yes. I’ll be going to do that. There were really two components to the impairment charge. Of the $53.3 million pretax, $23.8 million was the Bridgeview Condos part of the Hayden Ferry complex in Tempe. Because, they are condos and if you remember, this is the second condo building they built, the first one sold out relatively quickly. These are held for sale and under the held for sale accounting rules those for mark-to-market. It’s impacted by everything that’s going on the real estate market. The rest of it, the pretax charge which is equivalent to $29.5 million related to various residential and commercial, either home building, golf courses or just raw land or office building throughout SunCor territory that are held for sale, but failed the fair value test under144 and so they were written down as well.

Okay, what kind of cash burn do you think you guys are going through in SunCor to restructure the business?

Well, I think it depends on the ultimate path of restructuring. Obviously, status quo isn’t a sustainable business plan in this environment and so first and foremost we would look to minimize cash burn, because cash is king.

Okay and just last question, on the pension, you guys are doing a treasury swap. What kind of collateral do you guys need to put up against that? Who is the counterparty for the swap and considering the reversal that happened since the beginning of the year in the treasury markets, how does that affect your pension expenses going forward?

Well I guess, I’ll say three things: one is we unwound the swaps in January to preserve the gain. Second of all, there was no collateral involved, our investment manager just went out and executed swaps in the marketplace. So I mean we bought the swap instrument, there was no collateral need on our part and the counterparties, we don’t know exactly who they are because they were done through the investor manager just in the marketplace, but those swaps were now gone.

We have a $497 million gain that was locked in.

Okay. Thank you very much.

Thank you for your questions. Now I’d like to turn the call back to our host for closing remarks.

This is Becky. I want to thank all of you for being with us today and if you have any follow-up questions, please call me or Lisa Malagon. Thank you very much.

Thank you.

This concludes today’s conference call. You may know disconnect.