Greetings. And welcome to the Pinnacle West Capital Corporation 2018 First 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 first quarter 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 Daniel Froetscher, APS’s Executive Vice President of operations 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 and our slides contain forward-looking statements based on our 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 first quarter 2018 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 will 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 May 9th. I will now turn the call over to Don.

Thanks, Stephanie, and thank you all for joining us today. In the first quarter of 2018 we executed on our priorities and remain well positioned for a solid year. Before Jim discusses the details of our first quarter results, I'll provide a few updates on our recent regulatory and operational developments. The installation of selective catalytic reduction or SDR emission control equipment at the Four Corners Power Plant was completed on April 24th on time and under budget. This project provides substantial environmental benefits, including a 90% reduction in nitrogen oxide emissions at the plant. On April 27th, we filed for a $67.5 million step increase to recover our investment in these improvements. The step increase is an effective tool that eliminates the need to file a full rate review immediately after the conclusion of our last rate review and provides rate gradualism for our customers. The commission previously approved the use of a step increase for the SCR installation. We've calculated that the step increase request would result in approximately a 2% customer bill increase, which will likely be offset by a reduction in customer bills from other adjustor mechanism decreases. We’ve requested the commission approve the rate increase effective January 1 of 2019. Turning to our operations, Palo Verde generating station had another successful quarter operating at full capacity. A planned refueling outage for Palo Verde unit 3 began on April 7th and is proceeding very well. Additionally construction activity is on track for our Ocotillo Modernization Project. The units at Ocotillo are expected to come online in the fall of 2008 18 and the spring of 2019 to meet our 2019 summer capacity needs. Technology continues to play an important role, excuse me, an important role in the efficiency of our operations. In 2012 APS became one…

Thank you, Don. And thank you again everyone for joining us today. This morning we reported our financial results for the first quarter of 2018 which were in line with our expectations. As shown on slide three of the materials for first quarter of 2018 we earned $0.03 per share compared to $0.21 per share in the first quarter of 2017. Slide three also outlines the variances that drove the change in our quarterly ongoing earnings per share. I’ll highlight a few of the key drivers. Adjusted gross margin was up $0.13 per share compared with the prior year first quarter period, supported by the rate increase, higher transmission revenues and higher sales related revenues. Deposit factors were partially offset by effect of the federal tax rate change and unfavorable weather. Specific to tax reform, the financial impact decreased gross margin by $0.20 per share in the first quarter of 2018, including a reduction in customer rates passed through our tax expense adjustor mechanism, or TEAM and estimate reductions was always a maintenance tax changes in our wholesale transmission rates. You will notice there is not offsetting effective tax rate driver initiative for the quarter. To refund the customers through their TEAM is based on a per kilowatt hour sales credit and will generally follow our seasonal kilowatt hour sales pattern. The impact of the lower federal income tax rate is based on pre-tax earnings and were more closely aligned with our quarterly pre-tax earnings pattern. As a result there will be timing difference throughout the year. Looking now to operating expenses, higher adjusted operations and maintenance expense decreased earnings by $0.18 per share, primarily due to higher planned outage costs related to the SCR installation at Four Corners Unit 4. Depreciation and amortization expenses were higher in the first…

Thank you. [Operator Instructions] Our first question comes from line of Julien Dumoulin-Smith with Bank of America.

Hi, good morning, good afternoon.

Hey, Julein.

Hey. So I just wanted to understand a little bit more about the O&M situation. As you roll forward in the ‘19 and ‘20 because I know that you've talked about before some of the other outages and upgrades that are going on. Can you just elaborate a little bit and perhaps give a little bit of a preview on how you're thinking about the cadence of the O&M normalizing off this, this higher figure if you will?

Go for it.

So we'll be done with major work in Four Corners and you know, we've gone through really two to three years here where we've had increased outages preparing for the SCRs, as well as the combined cycle. As we get beyond 2018, we would expect with Navajo closing for one thing next year and just more normal run rate on the coal units, you're going to see that more normalized outage O&M be in that 40 million, $45 million range, what we had prior to 2016.

Got it, right. So the normalized level being more than 13 to 15 range rather than 16, 17, 18 as you said.

Yes, right.

Got it. And actually you brought up another dynamic to keep Navajo open, there were some recent media indications that there was some potential hope there, but can you elaborate on that and obviously it seems like a small detail to you, but is there any interest in maintaining any megawatts on a contracted basis or otherwise and or would you receive proceeds if this were actually to happen?

Yes, Julien. Its Jeff. So the Navajo situation is obviously being led by SRP since they're the operator of the power plant and so there's been a lot of activity over the last year on that. But I don't think the current situation has changed. I think there's an effort going to see if they could continue to operate that plant after the other owners have left. But just watching that continue to develop. It's really in SRP hands.

I'll leave it there. Thank you very much.

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

Hey, guys. Just curious on some of the comments about the ballot initiative. I really don't really want to go into the ballot initiative, I'm going to go in the economics of renewables which is - do you see the addition of incremental renewables to your system using costs that are - that folks either bid into PPA, as raising or lowering the all-in cost to customers right now. And then if you could think about where you think this is going n over the few years, kind of give your view on how you think that plays out?

Well Michael, it depended on how one approaches it and one does it and if one does it in a constructive, deliberate fashion working with the company obviously and the commission towards a goal that's good for our customers and good for the environment it can integrate quite well. In this case 50% renewables by 2030 is relatively ridiculous and the costs are extreme and the impact on the rest of the company's operations would have a dramatic impact - dramatically negative impact on cost.

Got it. Thank you. Can you also talk about upcoming RFPs and supply needs and can you remind us there were some pieces of the last rate case settlement that kept Arizona Public Service from being able to self supply and then other aspects of that where you could actually be a supplier. And I'm thinking both for renewables and for conventional generation?

Michael, this is Jeff. So we've got RFPs out - we can get you the language in the last - in the last settlement. There are exceptions and provisions to that. So you know, we continue to move forward with RFPs and the timing of that is in the 2020, 2021 timeframe. To Don's point, you know, one of the things we do and when we do these RFPs is we're resource agnostic in some cases, so when we go out for a peaking capacity RFP we don't specify the resource and people have bid in. We saw that a bid that came back in our last RFP for that, that was actually a combination of renewables and batteries. And it came in as the most economic resource for the need that we were trying to fill. So to that point you can use these RFPs in a way to constructively build in the portfolio and to continue to develop renewables, but it's better to do it in a thoughtful way.

Got it. And then one for Jim, the increase in transmission revenues does that drop to the bottom line or is that just - and it looks like it does. And is that just to the higher transmission rate base year-over-year or some other factor?

So that is really third-party winning - or contract wins. These come off as a revenue credit when we do our next formula rate. So it has a benefit of the year when it happened, but it is a bottom line impact.

Got it. Thank you, guys. Much appreciated.

Our next question comes from the line of Insoo Kim with RBC. Please proceed with your question. : Insoo Kim: Hey, thank you. My first question is on the CapEx plan, especially in 2020. The current plan that you guys have in place, I assume, incorporates the replacement, I guess, generation that you guys were contemplating the previous RFP. Given the potential changes that you may make with regards to renewables and the more cleaner resources, could that number, all else being equal, trend up in the next revision?

I mean, it could - it turns out for several reasons, but we - as you can see on the chart we have new gas generation which is really Ocotillo, finishing up in the first quarter of '19, as Don alluded to and then we don't have anything in 2020. So obviously things have changed with battery storage and other things, but nothing currently contemplated. : Insoo Kim: Got it. And then in regards to whether normalized sales growth, I think year-over-year on the drivers tables you guys had a pretty meaningful increase. I was just looking at the appendix in the back and weather normalized retail sales were – it seems like it was down 24% percent, unless I'm reading something wrong, what’s the…

What you have is the same dynamic we really had in the fourth quarter last year, which is even though quantity is down slightly, you do have pricing, when people are using the power, benefiting. So put those together you do have revenue [growth based on sales]. But it's not quantity driven, its more price driven. : Insoo Kim: Got it. Okay, so the benefit was more price driven, okay.

Yeah.

Thank you very much.

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

Thank you. First question, as you pointed out the rate base growth you have is you know, 6% to 7% percent. Recently you also raised your dividend growth target to around 6%. So when we think about you know, your earnings outlook from the 2018 base with O&M with normalizing et cetera, as you mentioned going forward, is it fair to say that EPS growth will pretty much be in line with how you're looking at rate base and dividend growth going forward?

Yeah, we don’t give earnings growth targets, but we've always talked about the earnings growth over the long-term being sort of bracketed by rate base and obviously the board looked at earnings growth when they raised the dividend in October, so…

Yeah, okay. And then also you know, Jim one of the other things you also talk about is as you're thinking about ‘18 through ‘20 on a consolidated earned ROD basis. You know the plan is earn 9.5% or higher. I know there's no sort of ceiling per se on consolidated earned ROE, but how should we think about that realistically? Can you theoretically earn more than 10% on a consolidated basis or is that a good proxy to think about in terms of if things are going in your favor et cetera, as we think about 9.5% being really the target to be on the floor?

Well, we’re locked in at APS and Pinnacle relies on APS for most of its earnings. So let's say could we go above Pinnacle's consolidated level, we could, but that's not likely because the APS was going to be you know, on that – probably less than 10% ROE, so I don't know exactly how else you get there.

Got it. And the delta between, say, consolidated and EPS would be – is that good rule of thumb to think about?

What? I'm sorry, Ali?

Or on ROE, when we think about APS and consolidated is that a good rule of thumb to think about what the delta is?

Well, you have APS and you're going to have holding company debt and some other things. So yes, I think looking at APS as a starting point and then going from there is a fairly good way to construct that.

And lastly, just reconfirming, you were talking about the timing differences on how tax reform is, you know, given back to customers the impact, but on an annual basis just to be clear, it should merit itself out right, so the annual impact will still be neutral, is that right?

Yeah, it's the timing between quarters and we have a slide in the appendix on slide eight, that actually shows pre-tax earnings expected spread and sales expected spread across the quarter. So that gives a good look at sort of the mismatch.

Got it. Thank you.

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

Hi, guys. Can you talk about the energy efficiency and DSM filings that I think are still pending approval. My understanding is that the energy efficiency program you were looking at trying to attack more peak load reductions to ease the duck curve ramping and that might reduce some of lag that you experienced between customer growth and load growth?

Yeah, Michael. Its Jeff. It's really reflecting the change. The duck curve is part it, but it's the idea that you've got situations where you want to encourage load and consumption in the middle of the day. And so traditional programs like light lightbulbs that don't really look at the time difference aren't as effective in the environment that we're in. And so we've - we haven't looked at trying to shift that more in towards attacking the peak, which is really where you can grab more value out of the programs. So they’re still being reviewed by the by the commission. Not sure when that's going to work its way out, but that's probably the trend that's going. And you know, assume you have to assume some level of customer adoption for that to happen, so.

All right. And then you indicated that electric sales went to normalize or improving this quarter. And you know, how many quarters in a row do you think you'd need before you started - where it started to flow into long-term guidance?

I don't know that we would do much with guidance. At this point, we had fairly modest sales growth of near half or 1%, 1.5%. So you know, a little upside would be good. You know, I - based on where we are, I don't really see that happening right now. But we will take that - we'd go to update guidance later this year if it happens.

Is there a certain number of quarters you'd like to see to make sure the trend is shaping up?

No.

No, got it. Thank you.

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

In the first quarter rate relief was basically offset by tax reform timing impacts, the right way to think about this on that on an annual basis and that's about $20 million?

There should be no impact from income tax because…

But we though actually is income tax offsetting part of the rate increase and that delta is about $20 million?

Well, we had a rate increase of slightly less than $90 million and the rate reduction for the tax impact is 119, but 119 doesn't really impact the bottom line over the course of the year. So…

All right….

Yeah.

What was weather relative to normal?

So whether relative to normal is off about $0.09 or $13 million and it really relates to heating degree days that the residential side was way down year-over-year.

You also have year-over-year down $0.09, so last year was essentially normal is that…

Yes, that's correct.

Okay. Thank you very much.

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

Hi. I think that this question is for Jim, I just want to make sure I understand this. If I look at slide six, you’ve added this line under income, excuse me, $45 million to $55 million and that's primarily the new accounting for pension?

Correct.

Okay. And then on O&M, go ahead.

It was embedded in O&M previously.

It was included in O&M?

Yes.

Got it. Okay. That’s okay. But sort of that leads to another question. Now you have this other line to manage although it was included no O&M but the accounting is treated different. So you're going to have to manage that as part of your commitment which I respect and a lot of other people do that you know, to hit that 9.5% ROE, now you have this other line to manage. Is that going to be change the way you manage the pension fund?

No, and we had to manage it before. We feel good about our pension funding, 95% funded on a GAAP basis. OPEB is actually overfunded. So we feel good about the line - all the accounting treatment did is take - separate your service from non-service pension OPEB costs, that's all it did. So no difference in how we would approach the business.

Okay, got it. Thank you. That's all I had.

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

Good morning. How are you?

Good.

So just a few quick ones here. The Steyer initiative, you guys - do you have just any thoughts on how that might impact sort of broader turn out in the upcoming election? And just any other thoughts about how you see some of the things that we might think about, about sort of the local stuff down there that we should think about? I know it's always, away, I apologize for that. But just any thoughts that we should have in terms of the upcoming election?

So Paul, November is, in political talk, a light year away, so that can happen between now and then. The most critical aspect on this ballot initiative is a big if, whether it qualifies for the ballot or not. And we'll take a one step at a time. Going forward we are actively opposing it and pretty much universally across the business community people understand the implications that are all negative for Arizona, for our customers and basically all the residents of Arizona.

Okay. Fair enough. And then just we've seen some M&A activity out there, and I'm sure you guys have been watching this as well. Just any thoughts about what you're seeing there in terms of what some of these companies are going for? And - I don't know, so if the leverage, in some case, is deployed and just sort of your own balance sheet? How attractive you guys might be? And - I don't know, any thoughts that we might have or any thoughts you guys have - excuse me, in terms of how - what you're seeing out there? Any sort of - any insights you might have with respect to that?

Well, just as you do, we stay abreast of what's going on out there. And every transaction is unique to that – those companies involved in that particular transactions and – I’ll just leave it at that.

Okay. Thanks so much.

Okay.

Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments. Stefanie Layton Thank you for joining us today. This concludes our call.