Rebecca L. Hickman - Director of Investor Relations Donald E. Brandt - Chairman, Chief Executive Officer, President, Chairman of Arizona Public Service Company and Chief Executive Officer of Arizona Public Service Company James R. Hatfield - Chief Financial Officer, Senior Vice President, Chief Financial Officer of Arizona Public Service Company and Senior Vice President of Arizona Public Service Company Jeffrey B. Guldner - Vice President of Rates & Regulation - Aps, Chief Compliance Officer of Arizona Public Service Company and Vice President of Rates & Regulation

Kevin Cole - Crédit Suisse AG, Research Division Neil Mehta - Goldman Sachs Group Inc., Research Division Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division Sarah Akers - Wells Fargo Securities, LLC, Research Division Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division Christopher R. Ellinghaus - The Williams Capital Group, L.P., Research Division Charles J. Fishman - Morningstar Inc., Research Division Paul Patterson - Glenrock Associates LLC Kevin Fallon

Greetings, and welcome to the Pinnacle West Capital Corporation 2012 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rebecca Hickman, Director of Investor Relations for Pinnacle West Capital Corporation. Thank you. You may begin.

Thank you, Christine. I'd like to thank everyone for participating in this conference call or webcast to review our fourth quarter and full year 2012 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Jeff Guldner, who is APS Senior Vice President of Customers and Regulation, 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 to which we refer are available on our Investor Relations website, along with our earnings release and related information. Please note that the slides contain reconciliations of certain non-GAAP financial information. Also, all of our references to per-share amounts will be after income taxes and based on diluted shares outstanding. 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. Our 2012 Form 10-K 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 on our website for the next 30 days. It will also be available by telephone through March 1. At this point, I'll turn the call over to Don.

Thanks, Becky, and thank you, all, for joining us today. In 2012, we made progress in a number of key areas as we focused on our core electric utility business. This progress included demonstrating sustained improvement in Arizona's regulatory environment, making strategic capital investments, maintaining operational excellence, strengthening our financial profile and positioning ourselves to benefit from economic recovery in Arizona. Jim and I will provide more information on these areas through our remarks today. Looking first to Arizona regulation. Early last month, the composition of the Arizona Corporation Commission changed as the commissioners elected in November, Bob Stump, Susan Bitter Smith and Bob Burns, were sworn in, and Bob Stump was elected Chairman of the commission. With 2 new members and commissioners Stump, Brenda Burns and Gary Pierce continuing in office, the commission is now comprised of 5 Republicans. In January, the commissioners unanimously approved APS's 2013 Renewable Energy Standard implementation plan. The plan contains steps for continued compliance with the commission's Renewable Energy Standard and other APS commitments while balancing the need to moderate customers' bills and to support renewable energy. Given our history over the past several years, it is indeed a pleasant change for me not to be discussing a pending retail rate case. APS's retail regulatory settlement that became effective July 1, 2012, was progressive and contained broad-ranging benefits for our customers, the communities we serve and our shareholders. Among other things, it provides the financial support APS needs to meet our customers' energy needs while helping to achieve Arizona's energy goals. It also provides a measure of regulatory certainty for both customers and shareholders through at least mid-2016. Third, it allows retail rates to change gradually over time through a number of rate adjustment mechanisms. Moderating rates this way will avoid the need for…

Thank you, Don. Today, I will discuss the following topics: first, I will review our fourth quarter results, including the earnings and the primary variances from last year's corresponding quarter; second, I will discuss our 2012 full year results; third, I'll provide an update on the status and outlook for the Arizona economy; and fourth, I will review the recent upgrades of our credit ratings and our financing plans; and finally, I'll discuss our earnings guidance and our financial outlook for the next few years. Slide 6 summarizes our reported and ongoing earnings for the quarter. On a GAAP basis for 2012's fourth quarter, we reported consolidated net income attributable to common shareholders of $23 million or $0.20 per share compared with a net income of $13 million or $0.11 per share for the prior year's fourth quarter. Our ongoing earnings increased $0.13 per share. For the 2012 fourth quarter, we had consolidated ongoing earnings of $27 million or $0.24 per share versus ongoing earnings of $12 million or $0.11 per share, both for the same quarter a year ago. Slide 7 reconciles our fourth quarter GAAP earnings per share to our ongoing earnings per share. The amount for both quarters exclude results related to our previously discontinued operations. My remaining comments on the quarter will focus on ongoing results. Slide 8 displays the variances that drove the change in quarterly ongoing earnings per share. First, an increase in our gross margin added $0.22 per share compared with the prior year's fourth quarter. Several pluses and minuses comprised this positive net variance, and I will cover those items in more detail on the next slide. Second, lower infrastructure-related costs improved earnings by $0.06 per share, reflecting lower interest charges and lower depreciation and amortization associated with a 20-year license extension…

[Operator Instructions] Our first question comes from the line of Kevin Cole with Crédit Suisse. Kevin Cole - Crédit Suisse AG, Research Division: [indiscernible] I guess a broad question about 2013 guidance. I just have a tough time keeping my numbers down towards the mid-point, given that I really only see upward movement given the rate case, the TCA, the LFCR true-up, Four Corners and the assumption of normal weather. Is there any unknown risk that maybe I'm just not seeing that could possibly get you towards the bottom end of your guidance range?

No. I think we've laid out our story pretty effectively. Just a couple points, Kevin. One, we performed very well in 2012 and was able to get to top end of our guidance. We set our guidance range last November, and we got a lot to execute throughout the year. And it's a little early to be changing guidance when we have all summer ahead of us, which is really where we make our money. Kevin Cole - Crédit Suisse AG, Research Division: So I guess weather aside, I should -- if I just assume normal weather, I should be towards the top end?

I always plan to be in the middle of the range.

Our next question comes from the line of Neil Mehta with Goldman Sachs.

So I'm taking a look at the appendices here, and there are some moving pieces in the guidance relative to the Analyst Day. Gross margin was down, but it looks like O&M operating expenses offset those, as well as interest. Can you talk about some of the assumptions that drove the changes to the appendix?

Yes, it's really just the delay in the Four Corners transaction. Assuming a mid-year close, in the 6-month or short rate cycle, as opposed to getting the rate increase July 1, '13, it will be more like January 1, '14. So it really reflects nothing but Four Corners. Nothing else has really changed.

Got it. And then I wanted to confirm. On bonus depreciation, the number, Jim, you cited was $400 million to $500 million?

Yes, it's -- impact this year of about somewhere between $50 million and $100 million.

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

The slide where you talked about dividend growth of about 4% expected over the next 3 years or so, Jim, should we assume that, that basically moves in line with EPS growth? Or how should we be thinking about that relative to EPS growth?

Well, what we've been talking about is rate base growth of 6% should lead to net income growth somewhere lower than 6%. And if you will, the dividend growth is sort of the floor, so to speak, on what we think is possible over the next few years.

Okay. Because, I mean, if EPS growth is any greater than that, then you're implying that your payout ratio would be coming down.

Slightly. Very slightly.

Okay. And more near term, coming back to '13, the Four Corners delay, the rate increase going into effect, let's say, beginning of '14, if my math is right, it's about $0.07 if you will delay in earnings in '13. And I'm wondering, is that a direct offset to that? Or is that within the band of the range that you've laid out? How should I think about that?

That's within the band of the range that we laid out.

Okay. But my math makes sense to you?

Yes, it makes sense.

Okay. And then my last question is, essentially, the load growth assumption that you've made out there, relatively flat going forward, can you remind us the earnings sensitivity to, let's say, a 1% change in load growth?

1% change in customer growth is about $0.10 per share, as a rule of thumb.

That's customer growth. Should I equate that to sales growth as well, weather-normalized?

Yes.

Our next question comes from the line of Sarah Akers with Wells Fargo.

With the new makeup of the commission, do you think there's any chance that the commission may reconsider the aggressive energy efficiency standards that are currently in place?

Sarah, this is Jeff Guldner. They are certainly asking questions about the standard. And so one of the discussions we've had at open meetings has been around how you do the performance or how you manage cost effectiveness. And so as they look at that, that has the potential to impact it. There's also some things they are looking at with respect to how large customers, like a mine, is impacted by energy efficiency. So there may be some changes from that, but there's certainly discussion going on.

Great. And then are there any other potential regulatory issues or regulatory initiatives on your part that we should keep an eye on over the next 9, 12 months or so?

No, I think probably the biggest thing is -- Sarah, is we have some technical workshops now on the impact of net metering, and that will be ongoing through the first half of the year. Other than that, they're like any commission who's looking at the impact to consumers of everything that's going on.

Our next question comes from the line of Paul Ridzon with KeyBanc Capital Markets.

Jim, could you just repeat something you said around the $1.1 billion of annual CapEx?

Sure.

You said 40% had rider recovery and 35% had what?

It's covered by cash from depreciation.

Our next question comes from the line of Chris Ellinghaus with Williams Capital.

Can you give us any detail on what the loss from discontinued operations was in the fourth quarter? That's kind of a more substantial number than normal.

Yes. It's specific to SunCor, and it really is part of the final wind-down through bankruptcy of SunCor.

Okay. And as far as the rating changes have transpired over the last couple of years, are you satisfied where you're at now? And I'm really thinking in terms of future equity needs. Do you have greater aspirations for credit ratings? Or can you just give a little color...

No. We obviously always have aspirations for higher credit ratings, but we're very happy the BBB level. It's probably at or slightly above average for the industry as a whole. And with the BBB+, we have more room, so to speak, than we had when we were BBB or BBB-. So certainly would not issue equity with the stated goal of trying to raise the credit rating.

[Operator Instructions] Our next question comes from the line of Charles Fishman with Morningstar.

You achieved 9.9% consolidated ROE in 2012. Can I assume that it is likely that will fall to the 9.5% range for '13? And is that -- can I equate that to about the mid-point of your guidance?

No -- Charles, Don Brandt here. No, I don't think you can equate that or assume that it will fall to 9.5%. As we've communicated in the past, we believe during this period of we're out of the regulatory environment or at least base rate cases, we're looking at greater than a 9.5% return.

Okay. And then declining as you get farther along in the stay-out or...

Well...

No, it's -- it will be more than 9.5% each of those years.

Okay. Okay. And then the -- on the financial outlook, the bullet points you list, I think the second last one with the -- for 2013, the decrease in interest expense, that is all due to the delay in Four Corners?

Yes, primarily.

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

The AZ Sun, I'm sorry if I missed this, how many megawatts did you put in 2012? And what's now the forecast for 2013 through 2015?

Well, we have 118 megawatts under development, 69 of which were in service at the end of the year. And we're in development currently of another 49 megawatts, as Don mentioned. And then beyond '13, we'll continue to work on the renewable energy plan, which needs to be approved by the commission.

Okay. And then on the -- the retail customer sales growth, it looks like it's 1.5%, and before, it was 1%. But the longer-term growth, you're still sort of projecting 2%.

That's right. And we expect that you'll get acceleration throughout the '13 to '15 period with higher growth at the end to get to an average.

That's right. You guys mentioned that last time. Just on the offset, the 2.5% growth offset that you guys are projecting, with renewables, how much is the distributor renewable element of that? I'm sorry. How much of -- I know it's energy conservation and efficiency. But what's the renewable sort of distributed impact on that?

It's about 1%.

Okay. And does anything, I mean -- I know that it's early and the previous question on what the ACC is looking into. But is there -- do you have any -- do you guys feel more or less confident about -- or let me put it this way, do you think that there's more upside potential in terms of sales growth, given the tone of conversation and discussion that you're seeing at the ACC versus perhaps last quarter?

No, not where we sit today.

Our next question comes from the line of Kevin Fallon with SIR Capital Management.

I just had a question on the Four Corners milestones to the transaction actually closing. What are the steps that need to occur between now and when it actually closes?

Primarily, the transaction between BHP and the Navajo Nation transferring the coal mine -- the coal mine operations.

And they have to reach an agreement first and then there needs to be a vote by the Navajo Nation. Is that correct?

Essentially. And then the Navajo Nation Council has to approve it.

And after that occurs, does the transaction just consummate at that point? Or is there an incremental step that needs to be done?

We'll need to sign a coal contract with the Nation now that they have the mine, and then it will be normal closing preparation and then closing.

Okay. And once the transaction is actually completed, what's the process that it moves into rate? And, in particular, is it purely a single issue of moving into the rates? Or is there any kind of a reopener or look at earned returns or anything like that?

Well, our settlement kept the docket open for the treatment of Four Corners upon acquisition, and that calls for the deferral during a period of time where we file and get rates into effect. I wouldn't call it a single issue rate case, but there's already been an adjudication of the Four Corners purchase prior to that. So, I mean, it'll be focused on just bringing Four Corners in.

Okay. So as long as your equity ratio and earned returns are in line with expectations, there's no reason to see those being revisited?

I would not think so.

Okay. And just the last thing. Any update on the potential for transmission investments?

Still working on it.

Ms. Hickman, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you, Christine. And thank you again for joining us today. As always, if you need further information about our earnings or other information about our company, please contact us. This 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.