Greetings and welcome to the Pinnacle West Capital Corporation 2017 Third Quarter 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, Stefanie Layton, Director of Investor Relations. Thank you. You may begin.

Thank you, Christine. I would like to thank everyone for participating in this conference call and webcast to review our third quarter 2017 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Jeff Guldner, APS's Executive Vice President of Public Policy and General Counsel 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 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 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 third quarter Form 10-Q was filed this morning. Please refer to that document for forward-looking statements, cautionary language as well as the Risk Factors and MD&A sections, which identify risks and uncertainties that could cause actual results to differ materially from those contained in our disclosures. A replay of this call will be available shortly on our website for the next 30 days. It will also be available by telephone through November 10. I will now turn the call over to Don.

Thanks, Stefanie, and thank you all for joining us today. This year continued to be in line with our expectations and keeps on pace with our full-year guidance. Although we experienced milder weather compared to normal during September. Our positive customer growth, ample investment opportunities and disciplined cost management continued to support our ability to meet financial commitments. Just last month, our Board also approved a 6.1% dividend increase, demonstrating the confidence our Board and our management team have in our ability to maintain sustainable growth. Before Jim discusses the details of our third quarter results, I'll provide several updates on recent regulatory and operational developments. Our rate review concluded on August 15 with Arizona Corporation Commission voting to approve our settlement agreement without material modifications, including a 10% return on equity; and a $94.6 million base rate increase, which results in an overall 3.3% customer bill increase. New rates went into effect on August 19. The successful rate review outcome continues to demonstrate Arizona's constructive regulatory environment. On September 1, we filed our proposed 2018 Demand Site Management or DSM, plan with the Corporation Commission. The 2018 DSM plan shifts focus to better align with our changing resource needs. The plan moves away from incentives, where savings no longer aligned with the system needs. It also introduces new programs to shift customer usage to the middle of the day, when solar resources are abundant and energy is less expensive. For example, the 2018 DSM plan includes a pilot proposal to electrify school buses and provide charging infrastructure. We believe electrifying vehicle fleets is a win-win solution, utilizing excess power generated by solar during the middle of the day, while effectively reducing carbon emissions in a cost-efficient manner. To further address excess mid-day power, the 2018 DSM plan also includes…

Thank you, Don. And thank you again everyone for joining us on a call. Today I'll discuss the details of our third quarter financial results provide an update on Arizona economy and review our financial outlook, including introducing 2018 guidance. This morning, we've reported our financial results for the third quarter of 2017, which will in line with expectation. As summarized on Slide 3 of the materials, for the third quarter of 2017, we earned $2.46 per share, compared to $2.35 per share in the third quarter of 2016. Slide 4, outlines the vacancies that drove - the variances that drove the changes in our quarterly ongoing earnings per share. I'll highlight a few of the key drivers. Gross margin was up $0.22 per share in the third quarter of this year, compared to last year reported by several factors. The rate increase approved by the commission in ADS' rate case proceeding, which became effective August 19, improved gross margin in $0.13 per share. Higher sales in the third quarter of 2017, compared to the third quarter of 2016 increased earnings by $0.02 per share, driven by customer growth, partly offset by the effects of energy efficiency and the disputed generation, the net effect of weather variations $0.02 per share. Cooling degree-days were higher in the third quarter of this year, compared to last year, although whether in both 2016 and 2017 third quarters with less favorable the material averages. Higher operations and maintenance expenses decreased earnings by $0.02 per share in the third quarter of 2017, primarily due to an increase in employee benefit costs. We also have had higher plant outage cost related to the beginning stages of the SCR installation at Four Corners unit 5. Depreciation and amortization expenses were higher in the third quarter of 2017,…

Thank you. [Operator Instructions] Our first question comes from the line of Ali Agha with SunTrust. Please proceed with your question.

Thank you. Good morning.

Good morning, Ali.

Good morning. You mentioned pointed out in 2018, you will have higher than normal outages and so the O&M expense yes, it's lumpy and it's higher. As you look forward you may be the next couple of years. Can you remind us again when we should see that kind of lumpiness in the O&M expense, I am assuming 2019, 2020 perhaps return to normalized level so how should we think about that?

Well, I would say that, since we haven't gone beyond 2018, is our fossils - overall spend has always been lumpy. And you can see on Slide 14 and the appendix so to the historical pattern. This was an unusual year with the SCRs and scope of the work done to make that happen, along with gas plants as I said based on starting hours. So I'll just say it's a lumpy, but this year it's unusually high.

As would be next year as well.

Yes.

And then, the second question, in the slide deck, you laid out at least an aspiration of the plan for the dividend growth to continue at 6% beyond the current level. Should we use that as a good proxy of how you're thinking about EPS growth longer term as well?

Well, I would just state it this way since we don't give earnings growth is, our rate base growth is 6% to 7%, the board and the management team is very comfortable of what we'd see through the next rate cycle. So you can imply anything you want on that.

Okay. Last question, year-to-date, weather-normalized sales growth has been essentially flat, I think like 0.1%. Is that in line with what you're thinking for this year? And any read-through on how you're expecting longer term? I know you're expecting it to go higher, but how would you rate sort of the year-to-date trends?

I would say that, year-to-date, of 0.1%. We saw a somewhat of the slowdown usages that came probably in October. Probably some impact in there, higher than the rate case. We had a weak fourth quarter of 2016, so I think sales are right in line with what we've forecasted throughout the year.

Thank you.

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

Thanks. Good morning, guys.

Hi, Greg.

I mean, I will frankly ask the key questions that I was focused on. But I'm looking through the slides here. I don't see any update on what rooftop solar penetration or rooftop solar sales have done since the rate case was resolved and the rate design has changed. Can you give us a sense of how the market has changed from what…

Yes. So the exact number will be in our EEI slide deck, which will be filed later today and we're just finalizing the number, but you did see a fall off on what we expected with the pull forward in 2018 to the grandfathering, but that number will be in slide that we'll follow later today.

Okay. Great. Thank you. And I know, Don, you talked about ample investment opportunities just around the economic growth and the monetization of your infrastructure. Your current 2017 to 2019 CapEx plan is reasonably significantly backward-dated. It goes from $1.3 billion to $1 billion per year. At what juncture should we expect or what milestones should we look for you to identify customer-friendly sort of customer necessary investments that might bring those numbers up?

Good question, Greg. We continue to look for those opportunities. And I think it's going to be largely driven by the kind of growth we're seeing, some of the things that Jim touched on, but an addition to that, Maricopa County, where Phoenix is at, the number one population growth center in the United States. We saw employment in Metro Phoenix increased 2% compared to 1.5% for the nation and realtor.com projects Phoenix to be the number one housing market in 2017. We've had the larger customer side, like Intel, which isn't the customer, but they announced a new fab facility in the Metro area, which the housing component has add in the service sector will bleed over into our service territory. And you used to get the card drive around and the card looks blinded block without multi-family project going up in the Downtown Phoenix is really taken off. So it's pretty bullish on our customer expectation over the next two to five years and I think that will drive a lot of our CapEx spending.

And Greg we will have a updated - we'll file all updated CapEx including 2020 in our 10-K in February, so that will give you all so outlook in the future.

That's was I thought. Thanks guys. Have a great day.

You too.

Our next question comes from line of Julien Dumoulin-Smith with Bank of America Merrill Lynch.

Hey good morning.

Good morning Julien.

Yes, thank you sir. Appreciate it. I wanted to follow-up a couple of questions real quickly, a little bit to the last one that Greg last one that Greg asked. You talked about future investments, given the acceleration here. Can you talk about the smart grid and reinvesting the grid from that perspective beyond kind of the near-term beyond 2019? Clearly it seems like that that's a trend in the industry and you all probably see that to a larger extent, perhaps, and others given the customer growth?

We have smart meters in across our system. So they are fully deployed. Don mentioned ADMS, which is really the grid, technology that allows us to get visibility into the grid and control. And I would say, our annual spend today on things like integrated greater more are probably $40 million to $50 million and that's really evolving at this point, so ample opportunity to continue to support the two way grid.

Got it, excellent and then separately, obviously, more of a few related question, but how do you think about the timeline to retirement in some of the units here. I mean could we see some of the accelerations out there. Just given average units costs structure et cetera, I mean could that be a mitigate to some of the future O&M growth or the current O&M growth your facing here.

So Navajo is closing in 2019. The way it stands today. We did an RFP last year for beyond 2020. We have one in store right now as well. So I think unless are talking about the successful sort of safety type, I would not put anything in near-term.

Got it. Fair enough, excellent. And then out of the RFP, any commentary in terms of your ability to own something. I mean obviously we saw last year's results turn out to be contracted gas. How are you thinking about that for yourselves under any number of potential outcomes including build, own, transfer, acquire, own the rate base is - any number scenario?

So the RFP's in process now. We're nearing the final stages at this point. We did not final stages at this point. We did not include in of build, own, transfer or sales build at this point. This is really for power blocks for day. It is what we're really looking for.

Got it, excellent. I'll leave it there. Thank you all very much and see you soon.

Thank you.

Our next question comes from the line of Michael Weinstein with Credit Suisse Securities. Please proceed with your question.

Hi, good afternoon. Just two follow-up on Julien's question, so would we see perhaps or replacement from Navajo being sought next year's RFP, is that the kind of timing that we would be thinking about

Last year's RFP was for 2020 and beyond, so we'll get through this RFP and see what our needs are at this point.

Right, and at some point, do you anticipate try to take advantage of some of the exceptions to this self-build moratoriums such renewable ownership and that kind of thing and maybe that would show up in the CapEx forecasts at some point?

Yes, we don't really need anything at the moment. But we'll evaluate ongoing whether we need something that or not so.

Is there any - I mean I know it hasn't put out the new presentation here for you, but what do you think are the expansion possibilities for battery storage at this point beyond the current programs that something that could take off and accelerate?

Well, I think we'll continue to play more battery storage as we move forward. I think we're taking a measured pace to make sure we're not in front of the cost curve. As Don said, we're putting in a couple of batteries in the rural area to in lieu of upgrading the circuit. And I think there will continue to be opportunities where we can sort of capital near-term few battery storage. But we're just getting started at battery storage at this point.

Okay. Thank you.

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

Hey, guys. If I just at look at your guidance for 2017 and your guidance for 2018 and take midpoint to midpoint. It implies about I mean back on the envelope, 3% EPS growth. Your rate base growth guidance is about 2x of that or double of that. I'm just curious, can you help me understand do you think 3% is kind of a normal EPS growth or there abnormal things that are happening in 2018 that make the EPS growth rate below average?

Obviously, we don't think 3% is normal or the board would normal rate the dividend of 6%. 2018, as it sits today as a test year. There's a lot of capital if that recovered in there you have the training of the - you have a deferral, but you are not earning on it. So now I think it's just on unusual year if you look back historically we've grown from 10% to 1.5% EPS and I wish desktop was leaner it makes it a lot easier but unfortunately it's not leaner. We're always have cycles through the rate cycle.

And I want to make sure I understand when I think about the rate case cycle. Will you be filing just add Four Corners in Ocotillo in the rates as follow-up bolt-on kind of mini-cases. Or you still planning to have a full blown GRC filing in 2019 with 2018 is the test year and 2020 is the implementation timeframe?

So the way it sits today, remember we have the step increase in the Four Corners which will be 1/1/2019. We currently have 2018 as a test year which would be - Ocotillo will be done in May of 2019 and then it will be the rest of the capital and with 2018 test year as it sits today.

But the case will be if you are using 2018 as a test year, it's not just the capital, it's the capital, it's the O&M, it's kind of all in.

It's not one issue for the rate case; it would be four rate case.

Got it. And when would that case get kind of I'm trying to think about the timing of it, when would that get implemented probably sometime in 2020?

So we cannot file the before moving on to 2019, so if you think about the last cycle we filed June 1, rate will to effect July 1, 2020 and that's as it's currently contemplated.

Got it. Thank you, Jim. Much appreciated.

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

Thank you. Just one quick one. Dividend growth guidance was 5% recently is after the August rate case discussion, now at 6%. Can you provide a little color, what was the board - what drove the board to increase the 1% payout ratio or how do they look at it?

They look at normal payout ratio per se, although, we look at payout ratio and credit metrics and everything. They use to look at our long-term future and see that we have a good plan in place with growth. We started the dividend increase as we drove that 4%, we raise it to 5% in 2015, so as far they are manually looking at our sustainable dividend growth.

Okay. Pretty good. Thank you. That's all I had.

Our next question comes from the line of Shar Pourreza with Guggenheim. Please proceed with your question.

Hey, guys. My questions are answered. Thanks.

Thanks, Shar.

Thank you.

Our next question is a follow-up from Greg Gordon with Evercore. Please proceed with your question.

Yes, I just wanted to be clear then this goes back to the first question that was asked, and then as it ties into 3% year-over-year growth, the midpoint of guidance. That's also clearly a function of the fact that you're - the timing of the maintenance the sort of $0.11 higher year-over-year, right and going back to…?

Well, that moving one piece of it Greg.

Yes, I mean I understand the other pieces that you articulated but that alone, if you look at Slide 14, you're looking at, over the last one, two, three - six years, you're at an all-time high on planned outage spending. So is it the right way to think about it without trying to tie you into a specific guidance format that you're not comfortable with, looking at sort of a long-term average and thinking about that as what a run rate should be in any given year?

I haven't calculated it, but certainly your $0.11 in 2018 over 2017 is part of that up and down that happens on a year-to-year basis.

Right, but even 2017 was - 2016 and 2017 were higher than the prior three years by the significant margin? I guess, what I'm trying to do is maybe at EEI you can decide to give people what you're thinking on average estimated cost would be through the cycle. So we could get a better sense of what it will look like out through time?

I'll say overall O&M and obviously this goes up and down, cents per kWh, O&M expense as a - cent per kWh whether normalized retail sales have been flat since 2010 at $0.275 of kWh. So we'll work hard that to keep O&M certainly over the timeframe based on kWh growth.

Great, thanks guys. See you soon.

Okay, yep.

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

Thank you for being on the call. We'll see you next week in Orlando.