Greetings and welcome to Pinnacle West’s Earnings Conference. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator instructions) As reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rebecca Hickman, Director of Investor Relations for Pinnacle West. Thank you, you may begin.

Thank you, Diego. Good morning. I'd like to thank everyone for participating in this conference call and webcast to review our fourth quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; our CFO, Jim Hatfield; and Don Robinson, President and Chief Operating Officer of APS is also here with us. Before I turn the call over to our speakers, I need to cover a few details with you. First, the slides we refer to today are available on our Investor Relations website along with our earnings release, supplemental information on our earnings variances and quarterly operating statistics, the webcast and the Form 8-K we filed this morning. The slides contain reconciliations of certain non-GAAP financial information. Please note that all of our references to per share amounts today will be after income taxes and based on diluted shares outstanding. Also, it is my responsibility to advise you that this call and our slides contain forward-looking statements based on current expectations and the company assumes no obligation to update these statements, because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. Please refer to the forward-looking statements language contained in our 2010 Form 10-K, which was filed with the SEC this morning, as well as the MD&A section which identifies risks and uncertainties that could cause actual results to differ materially from those contained in our forward-looking statements. A replay of this call will be available on our website, www.pinnaclewest.com, for the next 30 days. It will also be available by telephone through February 25. At this point, I’ll turn the call over to Jim.

Thank you, Becky. The topics I’ll discuss today are outlined on slide 4. First, I’ll review the consolidated fourth quarter results and discuss the main variances from last year’s corresponding quarter. Second, I will provide a brief update on the status and outlook for the Arizona economy. Then, I will discuss our full-year results and 2011 earnings guidance. And finally, I’ll close with brief comments on our liquidity and financing. Slide 5 summarizes our reported and ongoing earnings for the quarter. On a GAAP basis, this year’s fourth quarter, we reported consolidated net income attributable to common share holders of $7 million or $0.07 per share compared with a net loss of $30 million or $0.30 per share for the prior year’s fourth quarter. Our on going earnings increased $0.22 per share; for the 2010 fourth quarter we have consolidated ongoing earnings of $7 million or $0.06 per share versus an ongoing loss of $16 million or $0.16 per share for the comparable quarter year ago. A reconciliation of our fourth quarter GAAP earnings per share to our ongoing earnings per share is shown on slide 6. The amounts for both quarters exclude results related to our discontinued real estate operations. My remaining comments on the quarter will focus on our ongoing results. Turning your attention to slide 7, you will see the variances as that drove the change in quarterly ongoing earnings per share. First, an increase in our regulated electricity segment gross margin added $0.17 per share, compared with those in the prior year’s fourth quarter. Several pluses and minuses comprises that variance and I’ll cover those in detail on the next slide. Second, continuing favorable resolution of tax matters helped lower our effective tax rate in the fourth quarter, improving earnings by $0.06 per share. We added…

Thanks, Jim and thank you all for taking the time to join us this morning. Jim has touched on several issues important to our investors including our growth in the Arizona economy. Although the recession has slowed our historically robust growth patterns, Arizona retains many qualities that make it a desirable place to live and do business. Consequently, we believe that the state's strong growth should return which is an attractive distinguishing feature of our company. Since our last earnings call, we made distinct progress in some areas and continued our track record of operational excellence. Today I'll update you on the following items, our resource acquisition activities, Arizona regulatory developments, and our recent operating performance. Beginning with resource acquisition activities, I'll first review several renewable resource additions. As you know, renewable energy is a key part of our resource plan. It makes sense for our customers and their communities, the environment, and our shareholders. Arizona regulators are supportive of renewable energy in general and particularly solar. We are on track with plans to significantly increase the amount of renewable energy we provide our customers. We have a strong emphasis on solar power because Arizona has some of the best solar conditions in the world. Today I'll highlight progress on two major solar initiatives. First, the AZ Sun program. Through this program APS will develop and own 100 megawatts of photovoltaic utility scale solar plants in Arizona with the facilities being placed in service this year through 2014. The Arizona Corporation Commission has approved constructive rate recovery for the AZ Sun program plants. Since the program's approval last March, we have announced a portfolio of five generation facilities totaling 83 megawatts, with overall estimated capital expenditures of $377 million. This total includes our announcement earlier this week of the 17-megawatt…

(Operator Instructions) Our first question comes from Greg Gordon with Morgan Stanley. Please state your question.

Thanks, good morning, gentlemen.

Good morning, Greg.

And Becky.

Good morning.

Very comprehensive answer on the bonus depreciation, much appreciated. All things equal, is it going to have a demonstrable impact on the rate based calculation for your filing or because of the benefits are going to be coming in over a longer period of time due to your pre-existing tax position, do we not need to be concerned about a significant adjustment?

Greg, great question. No impact on the 2011 rate case for this reason. We are currently sitting with an NOL, so we cannot claim for tax purposes the bonus depreciation. As a result of that, and because we'll claim it in future years, we have an offsetting tax receivable which essentially wipes out the tax for rate based calculation.

Great. Second question in terms of equity financing needs, out sort of over the horizon as we look into late 2012 and 2013, I think it's been presumed that there would be financing needs but given this incremental cash in-flow, should we be more hopeful that equity could be minimized or eliminated?

Well, obviously the cash benefit's going to be very helpful from a need to raise capital perspective. I’d just point out that we've assumed 2012 because under the current schedule it's another test year and the equity would need to be injected to keep the capital structure fairly consistent. I'll point out, however, if for whatever reason that's not a test year, I would not see us issuing equity in 2012.

Under what circumstances would that not be a test year?

Well, I'll give you one scenario that's possible. Looking back on the last, let's say we settled the case and we stay out longer, maybe the test year is 2013. So my only point is, the premises are it’s really based on the regulatory capital structure, more so than a need to raise capital.

Great. Don, can I ask you one question, as I look at slide 18 of your release and look at the general framework of the proposed rate case filing. I think all of us that are recommending or are invested in your stock are there because we believe that over time you can drive the earned return on equity to something that is much more proximate to your authorized returns. Notwithstanding the challenges of having an historic test year and things like that. So what about the structure of this filing gets us there post 2011?

Well, Greg, you're exactly right. That's what we're driving towards is earning our allowed rate of return and as you point out, put aside the historic test year. What we're looking at here proposing are vehicles that help cure the regulatory lag and the impact of a historic test year from the infrastructure tracker to post test year plant additions which we were very successful with in the last settlement, 2009, and we see these as vehicles to help continue that trend.

Thank you.

Our next question comes from Dan Eggers with Credit Suisse. Please state your questions

Hey, good morning. Don, there's been a little bit of your activity at the commission as far as looking at some of the elements that where in the last rate case that we thought kind of been settled issues. Is there anything we should be looking into as far as potential trend of more involvement in the ACC looking to maybe re-evaluate either past settlements or precedent those for future settlements?

No, not necessarily. Dan, I think issues like the line extension policy, there's likely to be changes in that in the future, I think, as part of the rate case and we've clearly telegraphed that. I mean, after the revenue treatment that's currently in effect for related to line extensions, once that's completed its course with the conclusion in the next rate case, we're somewhat indifferent on line extension policy, but we also are in the position. We think the best position to give the Commission some pretty good advice what makes the most sense for our customers and the different constituencies, including the homebuilders and realtors that are very interested in it. And we're going to be coming forth with a pretty constructive solution that I think will address those matters.

Okay. And then on Four Corners, do you guys have book value in the plants you're going to close and what do you envision being the treatment for recovery of that money, if you do have some rate base risk?

Yeah, Dan, there is some book value. It was being depreciated to 2016 on one, two and three, and/or ask at the Commission is to recover those costs as part of this Four Corners acquisition. So if granted I wouldn't see an impact financially from closing those early.

Okay, and then just on O&M, I don't know if you want to give us a little more color kind of on what initiatives are going on to manage costs for 2011 and any insights you could share on where you're seeing better opportunities?

Sure. From a cost perspective, I mean, the initiatives going into ’11 are not different than initiatives coming into ’10. It continues to be supply chain where we had a very good performance in 2010 that positively impacted both O&M and capital and working capital. We continue with just improving the efficiency of our operating models and fossil IT, shared services and delivery and obviously, Palo Verde continues to perform very well from a cost perspective. So those are not different than we had in ’10 and those will be the same things we continue to focus on as we go beyond ’11.

Are you finding any surprise, do you guys go in as far as bigger savings than expected?

No, not really, Dan. I would couch our savings as inline with expectations. Again, it's not just slashing costs to the bone. It's really focusing on are we cost effective and how we're delivering our services to our customers.

Got it. Thank you.

Thank you. Next we have Brian Chin with Citigroup. Please state your question.

Asked and answered. Thank you.

Thanks, Brian.

Our next question comes from Neil Mehta with Goldman Sachs. Please state your question.

Hey, guys. Michael Lapides here. Can we just kind of do timing real quick on Four Corners, if the acquisition were to close in the fourth quarter of 2012, when would you expect, given the infrastructure rider, to actually begin earning a return on and return of capital on for the Four Corners acquisition? And then if environmental spend starts in really ‘13, what's kind of the lag, if any, on return on and return of capital on the environmental spend?

Michael, if you assume an infrastructure adjustor in this rate case and you assume a fourth quarter closing of the acquisition, under the infrastructure adjustor as sort of envisioned, you would get recovery in 2013. There’d be a little bit of lag because you would have to close your books and true-up your rate base and those sort of things, but that would be sort of the timing of that. Environmentally, you’d have to put things into service and so we may start spend in ‘12, ‘13 and it would be a matter of getting into service the following year or sometime after that.

So in other words, if you start the spend in ‘13 and it takes 18, 24 months to actually put it in service, you have a little bit of lag on the spending on the environment, on putting on the pollution controls, but not dramatic?

That's correct.

Okay. Last question. I just want to make sure I understand. Would you ever consider utilizing a bit more back leverage at the holding company level versus at the operating company level?

It's not something we talk about, Michael. Obviously, with the Triple B minus credit rating we're really focused on improving FFO to debt and debt-to-capital from the rating agency perspective. I don't think on a long-term basis that would be something that would benefit shareholders.

Got it. Okay. Thank you very much, guys.

Thanks. Our next question is Ed Yuen with SunTrust. Please state your question.

It's actually Ali Agha here at SunTrust. Good morning.

Good morning.

Jim, I apologize if you may have addressed this I’ve got cut off for a little bit. But could you remind us, what was the actual 2010 ROE at the utility and what is sort of embedded in that ‘11 range that you've given us?

The ROE in 2010 was 9.2%, so low 9. The ROE range and the guidance in ’11 is just under 9. It's really reflective of two things, the continued growth to equity as we continue to retain earnings in the business.

Okay. And as far as the tax, favorable tax resolution you referred to, are those done, are there more tax issues out there that could further lower the tax rate going forward we should be aware of?

Nothing I envision at this point. Our audits are closed through 2007, only eight is outstanding at the moment. So, no, there's nothing I see that's going to drive it below the 34. On that subject, I will say on a go-forward basis, I would see our tax in the 34% to 35% effective tax rate being driven largely by the VIE inclusion in the balance sheet FAS 167, which effectively lowers our tax rate.

Okay. And then, the official ’11 guidance I guess technically you moved it up by $0.05, you've been talking about it very similar to your ’10 range and I’ve officially made it $0.05 greater up. Is that the AZ Sun or is that on the cost side being better? What drove it to be slightly better now?

Well, I see sort of several things, which are plus and minuses. Obviously, from a gross margin perspective, we were impacted by weather by about $8 million to the negative. We do see AZ Sun, which we said is about $0.03 or $0.04. We do see another TCA increase in the middle of the year. And customer growth and slightly more Schedule 3, we ended up with about $19 million Schedule 3 in 2010 and we see that slightly higher ‘11. On an operating expense perspective, I mean, O&M is essentially flat year-over-year, keep in mind, we have a pension deferral in 2011, which helps on that side of the ledger, offset by higher depreciation and property tax and then just a little lower effective tax rate.

Got it. Last question, with regards to the parameters you've made out in your notice of filing. Based on the conversations you've been having, et cetera, any sense of where the big pushback or what are the items that will be the focus, for example, I'm thinking the 11% ROE, I mean, any sense of where the focus may be as we move forward on this rate case?

Ali, this is Don Robinson. Yeah, all of the items that you saw on the slide have pretty much been discussed with the parties and the stakeholders of the case. I'm guessing ROE's always an issue in a rate case, so there's no surprise there. Probably the other potential one is an infrastructure tracker and how that plays out, although, it’s just an expansion of the environmental tracker we already have in place. So none of these are new issues or surprises to the parties with case.

Yeah, and Don, I just like to add to that, from a push back perspective the fact, you still have a pretty weak economy. You’re always going to get push back on raising prices, that's just the nature of the business.

Okay. Thank you.

Thank you very much.

Our next question comes from Paul Patterson with Glenrock Associates. Please state your question.

Good morning.

Hey Paul, how are you doing?

All right. Most of my questions have been answered. But just one quick one, on the energy efficiency impact here, you mentioned for your 2011 guidance, assuming sort of normal weather and like to see sales growth up about 1% along with customer growth, but that energy efficiencies will off the packages. Give us a little flavor to what it would be without your energy efficiency initiatives, and just any changes you’re seeing there in terms of your expectations on that stuff?

Energy efficiency?

Well, energy efficiency and its impact on sales growth and whatever?

In the quarter-on-quarter we saw about 1.1%, which pretty much mirrored the reduction in sells generally, and so as we go forward what we expect, usage to be written to more normalized levels from a per customer basis, but increased in energy efficiency is going to totally offset that.

Okay. Just to get a flavor, what is the usage expectation that would've been happening absent this energy efficiency initiatives on your part?

It’s somewhere in the 1.5% range in 2010.

1.5%?

Yes.

Okay. So you would have grown 1.5% or wasn’t for the energy efficiency or you would have grown 2.5%?

1.5%.

Okay. So about 0.5% is being taken off because of energy efficiency, is that right?

1.5% has been take off through energy efficiency. We’re seeing any sort of usage for customer offset totally by the energy efficiency programs.

Okay. So, I mean, just to make sure, I'm sorry, this was low, but once again expecting 1% increase in sales growth?

That’s right.

And it would have been 2.5% without the energy efficiency initiatives, is that right?

That's correct.

And then going past that, you're going to have decoupling I guess hopefully, coming up here pretty quickly and what have you, any change in your long-term outlook in terms of what we might see in terms of the long-term growth rate for sales growth?

First, we get out there on 12, we obviously see growth rates improving, we are more of historical layers on that sort of economy, but we also see energy efficiency increasing as well. So we’ll positive sales growth, but it’s going to be offset to a large degree by these programs. So we do see positive growth going forward beyond ‘12.

Okay. But it sounds like it would be pretty modest and with decoupling I guess it doesn't matter that much either I guess from a financial perspective, is that right?

Yeah, that's correct.

Okay. Thanks a lot.

Our next question comes from Edward Heyn with Catapult. Please state your question.

Good morning.

Good morning.

I guess my first question was on Four Corners four and five. Just what’s the game plan if you were not to get an infrastructure tracker in the rate case? I guess what kind of lag issues may crop up? And then I guess in the same vein, does that purchase hurt your chances of reaching a settlement because I would think that not getting an infrastructure tracker would be kind of a needed thing for a settlement.

I guess I’d couch it this way. Based on our current schedule, ‘12 is a test year so if I close this in late ‘12 when we don't have the infrastructure tracker, it would be lag based on just whatever time frame it takes to adjudicate a case if it goes that route. I don’t think four and five impacts are ask in anyway because our ask was going to be the same without Four Corners four and five.

Okay. So basically hopefully you'll that the commission will be constructive or a settlement will be constructive and you'll get some sort of tracking mechanism. If not, there maybe some lag in ‘13 but that should be picked up in the next rate case.

That's correct.

Okay. And then Jim, just separately, can you walk me through with gas prices being around $4, and you still getting 10% sharing on your fuel mechanism. Can you walk me through kind of where, what's embedded in rates in your current PSA, where have you hedged out gas for this year and kind of what sort of savings or benefit are you getting from that?

Well, the fuel rate embedded in the 2009 settlement is $3.76 and our gas hedges, since they’re longer term hedges, continue to fall from an average price going forward. The benefit we received in the fourth quarter on lower fuel is about $0.02. So we’re getting some benefit but not a significant benefit from a fuel perspective.

Okay. The $3.76, that's on a kilowatt hour basis?

Yes, sorry?

So what's implied from that, from a kind of an MMBtu basis?

I don't have the answer to that off the top of my head.

Okay.

But, we can get you that information.

Okay. Fair enough. So, but I guess just to pull that through, in ’11 you’re assuming maybe a modest benefit from that savings, but not material and then obviously, in your next rate case you're asking just to go back to 100% PSA to kind of get rid of any of that mismatch.

That would be correct.

Okay. Thanks a lot.

(Operator Instructions) Our next question comes from Daniele Seitz with Dudack Research. Please state your question.

Thank you. Most of my questions have been answered. But one I was wondering about is how much more solar generation do you have to build to come up to the mandate and also do you sense that you have to do it 50/50 bout the rest of it will be built by your company, how does it work?

Daniele, this is Don Robinson. We have more than enough already in place to meet the settlement requirements that we have and we're well on track to exceed the requirement of the rules themself. We will continue to try and have primarily ownership interest in new plants as we go forward. The initial plan is to continue to finish out the rest of Arizona Sun and then we'll see what the market is out there and what our needs are.

Okay, So I just – from here on, it is more on an economic basis that you are going to be choosing solar power and obviously with the Commission's authorization?

Absolutely. We're going to be working with the Commission and with our customers to see how far they want to go with solar.

And at this point, you think that it's wide open, there is no mandate on their part or no plans on your part to extend further your plans regarding solar?

No, we have plans continuing to expand our solar interest. It's as we continue to look – go forward, we'll be looking at them on an individual case-by-case assumption. We'll be including them as part of our renewable plan that we file with the commission each year.

And the fact that you are going to add coal capacity, do you have to compensate that with additional renewable capacity, assuming you continue to expand your coal generation?

Now, we're expanding the coal generation by 179 megawatts of base load. Coal is base load, renewables are not. They're intermittent, so they are not a trade-off and they’re not going to change our overall sales, it’s just going to change where the generation is coming from.

Okay. Okay. Thank you.

Our next question comes from with Reza Hatefi with Decade Capital. Please state your question.

Thank you very much. Just going back to the bonus tax question, I guess you guys annually just based on your pretax income couple hundred million of tax, I guess taxes that you have to pay. Does that mean that you'll essentially pay very little if no taxes for the next couple years?

We will pay, based on the current forecast, zero income tax for the next two years.

Okay. Great. And then if I look at slide 19, just adding up these income statement items gets me to earnings of above $320, just if I take the mid-points of the margin, the O&M, interest and I tax it, so forth. Is there anything else that’s kind of missing here that kind of gets you back down to your guidance?

No. I would just point out that the ranges are just ranges around a current point forecast that are there to provide leeway one way or the other. We may hit the top end of one line item and the lower end of the other line item throughout the year. So that’s how we approach sort of the ranges.

Okay. And then lastly, one question on load growth again. I guess also on slide 19, part of your guidance is 1% volume growth but then in your 10-K that just got published I guess you’re guiding to flat kilowatt hour sales growth on average from ‘11 to ‘13. Does that mean ‘12 or ‘13 actually has negative growth that offsets this 1% positive growth?

That's correct. We see a slight rebound in ‘11 just based on the fact that the, we've had a very weak economy and we’ve seen consumer conservation top of mind because of the economy. So you get somewhat of a rebound effect, so-to-speak, in ‘11. But beyond that, we expect that usage is going to be slightly negative.

And is that negative mainly because of the energy efficiency programs or is it more the economy?

No, it's really the impact of energy efficiency offsetting any sort of customer growth that you get on the system.

Okay. Thank you.

Our next question comes from Neil Mehta with Goldman Sachs. Please state your question.

Hi, guys, this is Michael Lapides, asked and answered. Much appreciate it.

Thank you, Michael.

Thank you.

Our next question comes from Greg Gordon with Morgan Stanley.

Hi, Jim, It’s Greg, a follow-up on Reza’s question. I'm curious as to your confidence in your ability to accurately forecast out that far and sort of relative to just your willingness or necessity to be fundamentally conservative in your outlook, when we look – back at sort of January of last year, the EIA said sales growth in the U.S. would be 0.8% and every CFO I talked to said model zero and we had a 4% year.

Well, I mean, I'm not trying to be critical. I'm just wondering how you get your mind around a set of variables and sort of scenario analysis and get comfortable with that and is that a conservative baseline, are you really comfortable that's sort of the most likely outcome.

Well, Greg, I would approach the answer in this way. As a utility we're generally conservative in nature. We do have history with rebounds. I mean if you look at the Arizona economy historically we go through these cycles. So we can go back and look at what's happened generally speaking. And on the energy efficiency, we can only assume what's in the energy efficiency standard comes to provision and we put these all together and that becomes our forecast going forward. I mean, I wish, I could say it's going to be stronger, but the economy's still weak here and that's sort of what we're seeing.

Okay. Well, we'll plan for the worst and hope for the best. Thank you.

Greg, Don Brandt here. I'll add to Jim's comment there on energy efficiency. At least in the first few years, it's I think relatively easy to predict it. There's a lot of low-hanging fruit. As we get further out on that time spectrum, it becomes a little less of the low-hanging fruit and more complicated and revolves around customers changing usage and habits and that as Jim says we essentially are forecasting what the models say will happen, whether in fact it does is something that probably has a significantly greater margin of error in bottom line, we want to do what's most cost effective for our customers as we proceed down the energy efficiency path.

Well, Jim, you're on my panel on economic growth prospects at my conference in a few weeks. So we'll discuss it further then.

Look forward to it, Greg.

Take care.

There are no more further questions at this time. I'll now turn the conference back over to management for closing remarks. Thank you.

Thank you all for joining us today. Obviously, if you have any questions, please let us know and we’ll be happy to talk with you. Thank you for your interest in Pinnacle West.

This concludes today's conference. All parties may now disconnect. Thank you.