Greetings and welcome to the Pinnacle West Capital Corporation Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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'd like to thank everyone for participating in this conference call and webcast to review our second 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, our 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 second 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 in 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 August 7th. I will now turn the call over to Don.

Thanks, Paul and thank you all for joining us today. As Paul mentioned along with Jim and Jeff Guldner we have Mark Schiavoni with us here today. Mark was promoted to Chief Operating Officer last month. Mark overseas our non-nuclear operations while also helping us set the company’s strategy. He co-chairs our sustainable cost management initiative with Jim and is one of our most local champions on safety issues. Last quarter, I shared my view that Arizona's regulatory climate is stronger today, because APS and the Arizona Corporation Commission were among the first to address the fairness issues associated with distributed generation. And did so along before these rate design challenges became a significant financial issue for our customers. I'll update you on the regulatory progress as well as a few operational highlights. And then Jim will discuss the second quarter results and update you on our economic and financial outlook. The Arizona Corporation Commission has conducted two workshops in the value and cost of distributed generation series. The most recent on June 20th. On that date, APS along with Tucson Electric, the residential utility consumer office or RUCO and two Arizona solarcrete associations, Arizona Solar Deployment Alliance and the Arizona Solar Energy Industries Association filed a joint letter in the docket outlining three broad principals rate design to which all diverse signatories agree. These three principals are that rates need to be customer focused, forward thinking and affordable and fair. The workshops was constructive, in the end all parties agree that the voting time to address rate design was necessary. Following the work shop at the ACCs July 22nd staff meeting, the ACC voted four to one for a limited reopening of the 2013 net mitering decision to consider removing the requirement for APS to file a rate case…

Thank you, Don and welcome everybody to the second quarter call. The topics I will discuss today are outlined on slide four. I will begin with a review of our second quarter results including earnings and the primary variances from last year’s second quarter. I will follow with an update on the Arizona economy and I will conclude with a review of our financial outlook. Slide five summarizes our GAAP net income and ongoing earnings, which are the same this quarter. As usual, my comments will refer to ongoing earnings. For the second quarter of 2014, we reported consolidated ongoing earnings of $132 million or $1.19 per share, compared with ongoing earnings of $131 million, or $1.18 per share, for the first quarter of 2013. Slide six outlines the variances that drove the change in quarterly ongoing earnings per share. Lower operations and maintenance expenses added $0.03 per share largely driven by lower employee benefit cost including the favorable impact from lower pension and post retirement expense that is expected to positively impact each quarter this year. Lower interest expense net of AFUDC added $0.02 per share. Lower income tax expense added $0.02 per share, primarily driven by tax credits related to our renewable facilities and a slightly lower statutory state tax rate. The net impact of other items increased earnings by $0.02 per share. A decrease in our gross margin reduced earnings by $0.06 per share, compared with the prior year's second quarter period. I'll cover the drivers of our gross margin variance on the next slide. Higher depreciation and amortization expenses decreased earnings by $0.01 per share primarily due to additional plant and service. Higher taxes other than income taxes also reduced earnings by $0.01 per share. As a reminder, both the gross margin and O&M variances exclude…

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Dan Eggers with Credit Suisse. Please proceed with your question.

Good morning, guys.

Good morning Dan.

On the housing outlook, you said it was maybe a little bit slower right now than you had anticipated, but more optimism out of the home builders. Can you just maybe convert how we should think about that optimism really being real versus home builders being optimistic, because by nature they tend to be.

Sure. I had this, some of Jim's team do a little research and I personally called a few the CEO as I know got a perspective and I've got of several pages of note. So, I'm can't read them all, but let me hit couple of high points, so, it's virtually all were bullish on the Phoenix area, as you say those price there, their job to be bullish, but some of the observations. One they still see the labor markets being constrained. And that's a negative, but it's sort of a temporary to 6 month to 15 month phenomena, most of them cited 12 consecutive quarters of job increases and lower unemployment rates, personal income growth, a high jobs to permit, in building permit ratio and favorable long-term outlook with respectable population and job growth. Statistic that surprised me, but actually when we dug into it, it was validated by what we are seeing with their contacts to our folks that they reach out those 12 to 18 months, before they actually break ground to get the electric set up. But over the last 12 months, the number of builder communities in the area and they range in different size, but in absolute number, they have increased from 300 to 400. So, we have seen a 33% increase in the number of communities. Also, one specifically, I heard this reaction from several is they are not going to give these homes away, they see these ball ways of demand coming. And the one pointed to me that his to be that his average sale price increased 35% in the last 12 months, such as some of the commentary we saw. Also is the there is tremendous increase in multi-family construction and builder see that as where potential buyers are staging themselves now and they still talk about the amount of traffic at their display homes up substantially but the sales are not tracking the demand there and they attribute much of that to consumer confidence and concerns over job security. So hope that helps Dan.

Yes, thank you for that. And I guess if I look at slide 17, we should the PV applications to residential levels and those numbers are relatively consistent year-on-year a lot of additional upside. Can you just talk about where are you seeing those permits play so you’ve seen changes in demographics are you seeing more of a bias between existing homes and new homes or any kind of trends we can draw from that data?

No, real changes in the demographics that we’ve seen ‘14 compared to ‘13.

Okay. So, it looks the same. And then I guess the last question just because maybe I didn’t pay my attention to it 111D as it relates to four corners and kind of the different treatment for the tribal lands. What are the considerations the EPA is taking up relative to kind of a full national perspective and how do you see that prospectively effecting this investment?

Hey this is Mark Schiavoni. Quite frankly we don’t see any difference as the way they’re going to treat it. But we quite frankly don’t know much more of what they’re going to do with tribal lands we’ll know this fall and that’s when we expect to get the feedback for what will take place on tribal lands.

Okay. Thank you guys.

Our next question comes from the line of Greg Gordon with ISI Group. Please proceed with your question.

Thanks. Jim I want to believe that your longer term growth expectations are ultimately going to come to fruition and that there are just sort of trailing behind because of the slow start to recovery. But your year-to-date sales are tracking 200 basis point behind customer growth not the 150 that you articulated you see it's been a long term average. Am I just focusing in on two small of a data set and should we be waiting for a longer term trend look through the third quarter or the fourth quarter before we see how things play out?

Yes. That's said in my remarks Greg. I think it's easy to look at a quarter and extrapolate something. Last year if I look at three to six, trends we were up. And so there is a lot of volatility on these numbers today and I would third quarter is always big for us and the fourth quarter in terms of momentum into '15. So I am playing I am not worried about our long-term growth trend as I said we believe in the fundamentals in Arizona and Phoenix.

And if you look at the what is driving the delta between customer growth and sales growth, so still the impact of DG is still probably the smallest piece of that?

Yes. We are seeing a little usage per customer and that really relates to the consumer confidence in EE, DGs continue to be about 0.5% to 1% with really the EE and consumer confidence which is driven by job security or other things going underly being a bigger part of that.

How's July been in terms of underlying demand trends?

It’s being good. Whether it's going to come in pretty much close to normal and we've seen usage demand pretty much according to expectations.

Okay. Don, you made a pretty innovative filing with the commission to ask to participate in rooftop solar market in a pretty significant way. It would be 10% of the installs, if you were approved on a prospective basis. And that would be in rate base. What makes you think that the thought process of the ACC's evolved to a point where they think that the utility should be one of the service providers for rooftop solar, because historically, that has not been the case?

Well, it hasn't. we did the couple of years ago of pilot project that the commissions proved up in flags that community power project. And we have learned a lot from that experience. And in this case, when we're doing rooftop solar first there is no cost ship from let's say lower creditworthy the customers, the higher creditworthy customers as there is under the current, I will call it the lease structure that some solar companies are using, because credit score is not an issue, it's basically structurally sound roof and customers is good to go. There is no upfront investment. We handle the maintenance. We will use reputable Arizona based installer. So it's jobs in Arizona and the customers are guaranteed $30 a month bill credit for 20 years from a company that’s been around for 127 years and has AA credit rating and most of the others can’t claim that.

Okay, One final question. Jim, as you look at the financial model for the company and you look at the aspiration to earn at least 9.5% on ROE on the capital investment. With the capital investment growing, if we’re looking at least a short period where sales growth is stagnant, do you have a revenue model through the rate adjusters that you currently receive and your ability to control cost? Still allows you to hit your earnings targets in…

Yes Greg, I think it’s important remember while we are in a base rate stay out, we have mechanism Four Corners in ‘15, we have AZ Sun, we have the TCA, LFCR. So, the top line is not stagnant from that perspective.

Greg, this is Don. We are very confident we’ll make our numbers.

Thank you, guys. Have a good afternoon.

Our next question comes from the line of Julien Dumoulin-Smith with UBS. Please proceed with your question.

Good morning.

Hey Julien.

So first just picking up on Greg’s last question if you don't mind. On the solar rooftop program if you will, how do you ensure that you'll be competitive or how do you just think about competitiveness versus the broader marketplace, if you can elaborate a little bit.

Well because our program will apply to the broad market whereas the current programs are effectively discriminating against low income customers. To quality for credit score to qualify for lease arrangement or to purchase the solars come up alright and purchase it, basically skews that market to the higher end customers, where there is no credit score requirement, just a structurally sound roof. So, it's across the whole system and there is no subsidization from one credit category of customer to another.

Julien, this is Jeff Guldner. Just one thing to keep in mind to, this isn’t another option. So it doesn't displace the current folks that are out there, this is simply saying that we extend the program that's modeled like our Arizona Sun program or on utility ownership to a broader set of customers than probably could get it today.

Got you. So, could you extend a little bit about where and how big this program could get? I mean, I know it's a little early, but obviously this is the growth subject.

So, it's Paul right now. This is a compliance program; we've got a compliance requirement in our Arizona Sun settlement commitment for 20 megawatts of generation. If you convert that 20 megawatts, it's either 20 megawatt utility scale project or it's 3,000 smaller solar rooftops. So, that's how we are thinking about this program.

Got you. All right. Excellent. And then moving on, you talked here about creating a new transco, 50/50, but it was also in the context of a broader Western exploration from what I could tell, right?

That's correct.

In that vein, what other opportunities are you exploring outside of what you specifically called out?

Well, we're looking with our partner on several opportunities in the West, none are as far as long as DCR which is front center right now.

Got you. And then could you just elaborate a little bit more on the weather norm sales growth trends? How much of what we saw in the quarter is energy efficiency versus as you said consumer confidence what have you?

Well, energy efficiency, the consumer confidence roughly $0.06 per share offset by customer growth of $0.04 and then slightly lower usage about $0.03, so all together about $0.06.

Okay, all right. Well thank you very much.

Thanks Julien.

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

Thank you. Good morning.

Good morning.

Jim can you remind us in your forecast for weather normalized sales, what the assumptions are? If I recall for ‘14 you’d assumed about 0.5% and going forward about 1% a year is that right?

0.5% this year looking through ‘16 on average 1%.

Okay. And then how sensitive are your plans for the next rate case filing around where these sales numbers do come out? And if we don’t hit those targets and let’s say we’re flat to even down, how much capacity you have in terms of staying away from the rate case filing?

Well we’re confident even stressing sales under the model that we will hit above 9.5% in this out.

Okay. But just to give us some cushion around that would that be even a negative sales scenario or flattish sales scenario?

If you look the last -- I really think since ‘08 we’ve had negative sales every year including since the stay-out went to effect and we have a waiver from our commitment.

Okay. And then separately on the filing for the solar roof top option, does that sort of signal to us that you guys sort of the feedback you were getting from the commission would suggest that they will perhaps not supportive of the scale not a model. And so just this kind of gets down another option to look at or do you think you will scale 20 megawatt Redhawk is still a viable option in front of the commission.

This is Jeff this is simplified as an option so what the commission will do they are considering the application that we've made or considered both the 20 megawatt utility scale 1 and that's distributed alternative as an option.

And Ali, I'll add it wasn't an issue feedback from the commission it was listing to our customers. And there is a significant segment of our customers manufacture the majority that we're locked out of the solar route market because either lack of credit standing or a lack of upward cash to investment.

Okay. And last question as you look at your sales comparisons going forward, you want to run into some easier comparisons you had negative numbers you brought in the third and fourth quarter last year weather normalize can you just remind us what were factors there that perhaps still get repeated this year as we look at the second half numbers for our sales growth?

Ali, there are several trends go into that for example last year we had a very cold first quarter so customers got high bills. We had a very warm second quarter so they got a high builds. And that leads to lower levels of usage and we think a lot of the last '13 was really the impact a very strong first half of the year as a relates to sales and the impact of weather.

Okay. Fair enough. Thank you.

Our next question comes from the line of Michael Lapides with Goldman Sachs. Please proceed with your question.

Hey, guys. I'm just trying to think a little bit longer term about kind of where rate base is going. You obviously give your CapEx forecast in the appendices but also, things that could provide upside to that level. Could you just kind of summarize and it may be kind of a short list, what are things that could provide incremental upside to rate base or even capital spending levels that aren't necessarily in your current CapEx forecast through about 2018 or so?

Well, the upside would be certainly outside of rate based transformation, which currently as in. Our forecast $0.80 not in our forecast at this point, because it's just a proposal. I think reflecting customer growth in the base infrastructure and PND. So that sort of the two things I can play with some visibility.

Got it. Is Ocotillo currently in the forecast? I know it's not due online until '17, '18 time frame.

The bill was started in '16 and '17 for the most part saying with the SCR is four quarter is really '16, '17 CapEx period.

Got it. Thanks, guys. Much appreciated.

Our next question comes from the line of Kit Konolige with BGC. Please proceed with your question.

Good morning.

Hey Kit.

Just had a question about the political situation I believe there is a primary on, I think it’s August 26. Can you give us a sense of how that team of Parker and Mason is doing in the Republican primary?

Well the voting doesn’t start until I guess the end of this week the early voting and you are right the election the primary is August 26th.

Do you guys have any, I don’t know if there is any polling on an ACC race or do you guys have any sense of who's ahead? Maybe you can also give us a little background on how much of an issue DG has become in that race or solar in particular?

There is good poling of the both, and Kit I would suggest to each of the candidates their websites are kind of give you the inclination of their issues.

Okay. Fair enough. Thanks a lot, Don.

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

Does the DCR transmission line project, has FERC set the allowed ROE on that or is that also part of the competitive bid process?

It’s part of the competitive bid process like Don said in his remarks for selective we won’t know until early ‘15 and it’s 20-20 in services state so we have a lot ahead of us before we even count on DCR at this point.

Got it. That’s the only question I had, thank you.

Thank you.

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

Your O&M is tracking very well year-over-year which we look for the back half of the year to show?

Well, we do know that from an overall perspective we have more fall outages than we have in prior year. So that's probably going to put a little stress on O&M. But overall I would say that, the things Mark and I and the rest of the leadership team are doing around the sustainable cost is providing dividends now, and as we are implementing enterprise price process improvement, we think we'll keep that going for at least a couple of years. At some point we're going to get into wage inflation and that's just the way it's going to be. But right now we're still working at fairly flat O&M.

Do you have any favor on the 790 to 810 range?

We will look at that as we get into the third quarter and we plan our outages and we see how the summer goes, remember we have storms and we stretch an equipment in the third quarter's key in terms of what will be, so we'll update that in the third quarter.

And what's the status of the discussion around the tax position of leased solar?

Well, the position now, by the Department of Revenue, is they are subject to property tax. They will begin, they have been sending out assessments to be paid in 2015. Nothing's changed on ruling at this point from the Department of Revenue.

Okay. Thank you.

Our next question comes from the line of Jim von Riesemann with CRT Capital Group. Please proceed with your question.

Hey, Don. Hey Jim. How are you?

Hey how are you?

Hey, Jim, how are you?

Good. I want to just touch based on the solar topic a little bit. Is there anything unique in your proposal that’s different than say what the competitors are doing right now? I know one of the big hang ups is the lean that gets attached by the competitors; are you going to do something where you’re observing that cost or somebody tries to sell their house -- there is no $30,000 lean or so attached to the home?

You’re correct. There is no lean on the home; basically we’re renting for 20 years the roof space. And the customers are eligible to cancel it any point in time. So when they sell the home, if the new home owner doesn’t want to solar on his roof top, his or her roof top for whatever reason, we will remove it and put the roof back in the shape it was before the equipment was up there.

So, that sounds like the unique proposition that could actually improve the penetration rates pretty high and maybe…

Very customer friendly.

And then they get a credit worth counterparty and somebody who is not going to, who will actually answer the phone calls right?

Exactly.

Okay. I got it.

Stand behind it.

Second thing is I know we’ve talked a lot about the housing market and some of the disconnects there. But can you talk a little bit about what’s going on and call it wager income growth in Arizona, I mean is that flat or is that kind of rising?

No, in terms of wages we see, wages grow 3.1% year-over-year so we’re having strong wage growth. Personal incomes are up almost 3%. So, it’s really a lot around a couple things that Don mentioned, I mean certainly credit is tighter today you need to bigger down payment. And just confidence in the economy is still not where it was I don't think and I think all these things are impacting.

Okay. I forgot to ask the second part of my question on the solar thing, so I apologize for jumping around but with the solar proposal that you are doing, is that going to go into rate base or that going to go outside of the utility?

If it's approved by the commission it would be a rate based item.

Okay. And what would be your initial investment out of all this?

We think it's 60 million to 65 million roughly to a lot of that would depend on the size of the installations and number and so on so forth.

Great, sounds good. That's all I need guys. Thank you.

Thanks.

Our next question comes from the line of Rajeev Lalwani with Morgan Stanley. Please proceed with your question.

Hi, thanks for taking my question. I wanted to come back to just the confidence in hitting some of your targets and numbers coming forward. Can you talk more about the specific leverage you have in O&M CapEx equity that will help you get the numbers. And then second relating to that to the extent that you can't hit your numbers for whatever reason, couldn’t you just go ahead and file a rate case? And obviously this is all assuming that the commission approves your request.

Well, so levers we have we don't plan on achieving equity till 2016 at the earliest. You saw the numbers flat O&M with benefits down. That continues to be lever, I would say overall cost control is a focus of this company and we’re more managing cost well. And we have the mechanism that I talked about. So we've said we do want to file in ‘15, so we'll see how that goes we have large CapEx going in ‘16, ‘17 and ‘18. So moving the right case back certainly lines up better with our CapEx spend. So we're highly confident, we're going to hit our numbers during this period.

Okay. And then are you envisioning or does your request for the commission to have some sort of stay out period or would they just potentially remove the requirement to file a rate case and you can come in at any time?

Remember, under the settlement, we could not file until May 31, 2015. The net meter in May order that sort of coming on that date, if they remove that, it's open in after May 31st we could follow last half of '15, '16, '17. There is no requirement at that point.

Great. That was it. Thank you, sir.

Our next question is a follow-up question from Julien Dumoulin-Smith with UBS. Please proceed with your question.

Hey, one more time here. I just wanted to get some clarity, if you wouldn't mind, about when you would expect to see new solar tariffs in place coming out of both these workshops and revisiting the broader subject of solar tariffs? And then secondly, just to be very clear about it, when would you expect to file another rate case, given your commitment to continue earnings your ROE irrespective?

So on the first side, if you not ask or do we expect any change in the $5 tariff at this point. And remember that tariff those to offset the LFCR. So there is no income impact ATS. Second of all, we wouldn't follow-up to at least 2016 at the earliest and that would be dependent upon earnings and allowed ROEs around the country and some of the other things.

And just to be clear, in theory, when would that $5 tariff at least be revisited, just procedurally speaking.

That would be, if you do a rate design change or a change like that that would happen in the next rate case.

Got you. In some sense you would be revisiting that here in the near term, subsequently implementing whatever changes came out of that at the conclusion of a rate case in 2016?

Yes conceptually that the commission right now is talking about going some generic rate design discussions that would benefit from having our rate case come after those discussion have occurred which is part of the desire to move that out to 2016. Once you get through those discussions then you could begin to implement those in that subsequent rate case.

And there would be no requirement, even in 2016, for you to file, right? That's just your, that would be subject to your decision.

The proposal right now is they are talking about is to lift the requirement that we file in 2015 it was in the net mitering decision if you look that back you would go back to the underlying settlement which had a no earlier than requirement.

Right, great. Thank you.

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

That concludes our call. Thanks, everybody.

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.