Greetings and welcome to the Pinnacle West Capital Corporation 2018 Second 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 second 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' Executive Vice President of Public Policy, is also here with us. First, I need to review the details with you. The slides that we will be using are available on our Investor Relations Web-site, 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 second 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 identify risks and uncertainties that could cause actual results to materially differ from those contained in our disclosures. A replay of this call will be available shortly on our Web-site for the next 30 days. It will also be available by telephone through August 10th. I will now turn the call over to Don.

Thank you, Stefanie, and thank you all for joining us today. 2018 continues to be in line with our expectations and we remain well-positioned to meet our financial commitments this year. Before Jim discusses the details of our second quarter results, I'll provide a few updates on our recent regulatory and operational developments. The step increase request for the Selective Catalytic Reduction equipment at the Four Corners power plant is progressing. The Arizona Corporation Commission hearing is scheduled to begin on September 5th and we continue to expect the decision around the end of the year. As required by the 2017 Rate Review Order, all residential customers, except grandfathered solar customers were migrated to new rates, we successfully transitioned nearly 1 million residential customers to new rates in a few short months. Turning to our operations, on May 5, Palo Verde Generating Station completed its scheduled Unit 3 spring maintenance and refueling outage in a plant record 28 days and 13 hours. The team's collective performance resulted in the one of our best outages ever. Looking to our capital investment program, nearly 200 miles of transmission lines and 15 new substations supporting the additional capacity have been added in the past three years. In May, the last 110 mile section of a 500-kV loop around the northern part of the valley here known as Sun Valley to Morgan was commissioned. Notably, the Sun Valley to Morgan project has garnered national attention for its innovative design and permitting process and collaborative work with the Bureau of Land Management. The four 500-kV projects commissioned since 2015, including completion of this loop, provide added reliability, increased economic development opportunities, and enhanced import and export capabilities with neighboring states. It should come as no surprise that each year we go through extensive preparation and…

Thank you, Don, and thank you again everyone for joining us today. This morning we reported our financial results for the second quarter of 2018. As shown on Slide 3 of the materials, for the second quarter 2018 we earned $1.48 per share compared to $1.49 per share in the second quarter of 2017. Slide 3 also outlines the variances that drove the change in our quarterly earnings per share. I'll highlight a few of the key drivers. Adjusted gross margin was up $0.12 per share compared with the second quarter in 2017, supported primarily by the rate increase offset by the federal tax rate change, unfavorable weather, and lower retail sales. Although retail sales were lower this quarter versus the prior year quarter, weather-adjusted gross sales excluding the impacts of energy efficiency and distributed generation were up 1.2% in the quarter. I will discuss our sales trends in more detail in a moment. Continuing with the key drivers, refund to customers due to a lower federal corporate income tax rate decreased gross margin by $0.20 per share but were positively offset by the lower effective tax rate. The net impact of tax reform in the quarter was a $0.10 per share benefit to net income. As a reminder, the refund to customers through the Tax Expense Adjustor Mechanism or TEAM is based on a per kilowatt hour sales credit and will generally follow our seasonal kilowatt hour sales pattern. The impact on the lower federal income tax rate is based on pre-tax earnings and will more closely align with our quarterly pre-tax earnings pattern. Please see Slide 8 for more information related to the timing impacts of tax reform. Now, looking now to operating expense, higher adjusted operations and maintenance expense decreased earnings by $0.23 per share, primarily due…

[Operator Instructions] Our first question comes from the line of Michael Weinstein with Credit Suisse. Please proceed with your question.

So, you indicated that if the initiative passes that it would require over $10 billion of incremental capital investment by 2030 and that that can lead to substantial increase in customer bills. It is why you are opposing this method of getting to those kinds of goals. But I'm wondering, even if let's say the initiative doesn't pass and Commissioner Tobin's Energy Plan goes through and there is a more measured pace of renewable expansion for the next decade, how much incremental capital do you think would be possible for you to absorb or you to win as part of the rate base growth profile for the next decade?

That's a great question, Michael. We haven't really looked at it in terms of rate base growth. We know we're going to have to add over 3 gigawatts of gas in addition to additional renewable. So, our rate base outlook would have Commissioner Tobin's 80% by 2050 incremental to what we currently have today. So that would be positive. But [it'd keep Palo] [ph] running as well, which is the largest source of clean energy in the U.S.

Okay. And just to confirm, I guess with the grandfathering period now expired that you should be seeing maybe the benefits of higher customer growth starting next year. I mean, I noticed the three-year growth forecast did not change.

Probably. We're getting toward the end of the installations of the applications from the September 1 grandfather deadline. You have to remember that once the deadline passed, some of the national sellers pulled away from Arizona, so the installations are slower than they had been in the past, but we should see that in the second half of the year.

And also one last question, what is your latest thoughts on the next rate case filing in terms of timing and around the next election cycle?

We are still looking at that. As I've said, our desire would be pushing out a year, so we file in 2020, and the rate is effective 2021. So, we'll make a decision on that as we get through the next month or so. We are really looking at sales patterns based on the rate design and migration to new rates and we need to make sure we understand that profile.

Okay, great. Thank you.

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

So, just wanted to follow up on the last question a little bit more. Can you clarify just for us the timeline here? So the Secretary of State is going to come out on the ballot initiative, then what else? And then separately and perhaps more importantly, can you comment quickly on recourse, if it does actually succeed in terms of any appeals process or implementation? And especially even within that, to the extent we have both proposals move forward, how would you reconcile between the two? I mean, basically would the more stringent of the two basically apply, and if Tobin were to get his proposal going forward, would that basically be moot given the success of the ballot initiative?

Julien, I'm going to ask Jeff Guldner to kind of walk through the key dates well up to the litigation and what would happen with the Secretary of State. You might want to clarify your question, but I rather not, won't go into a lot of detail about what ifs. Right now we are focused on the litigation that's pending in the courts and we'll take it one step at a time. With that, Jeff?

Julien, so right now the signature review is in its normal process though the Secretary of State sent it to the counties. The county is doing their review. The lawsuit that was filed in superior court is proceeding kind of parallel with that. There has been motion practice, some motion practice out there. It's under a special procedure for elections cases, and so that involves expedited appeals from the superior court to the Supreme Court, including on issues that are decided before the actual trial begins. There is a pre-hearing, pre-trial conference on August 17th and then the trial would begin on August 20th, will likely go through that week and the judge would likely come out with a ruling pretty quickly after that, would expect that to then go through some expedited appeals to the Supreme Court, and all that is likely to be wrapped up by the end of the month. And that's when the secretary would normally certify.

Got it, all night, excellent. And then just coming back to the parallel pass here, I mean how would it work just in terms of the competing proposals here, if both were to move forward, just trying to understand? I mean how much input does the Commission have in ultimately implementing this?

Julien, I wouldn't characterize them as competing proposals. There are two different aspects. One is a constitutional amendment. The other is a plan or program that the Arizona Commission could implement and monitor and adjust accordingly on a year-by-year whatever frequency they wanted to do as opposed to a constitutional amendment that would lock something into the Arizona Constitution forevermore.

Got it. Actually maybe is there any mechanism to put in place to address stranded cost that you could see here just to kind of derisk the whole effort? I mean, is there something else?

Again, right now we are focused on observing what's happening in the courts with the litigation on the signatures that have been filed.

Understood. All right, we'll leave it there. Thank you very much.

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

First, I wanted to just clarify from your opening remarks, as you mentioned, if this initiative is happening, there could be premature retirement with two of your plants. I just wanted to be clear. So, is there a mechanism right now in Arizona, I mean presumably there would be a mechanism if plants retire early for companies to recover those costs, is there a set mechanism already in place?

This is Jeff. So, that would have to be addressed at the Commission. So, there is various ways. We've had stranded cost issues before. And so, those would be addressed at the Commission at the time.

So it's not formulaic, you would have to go through a proceeding?

That's right.

I see. Okay. And then, Jim, I wanted to clarify your point, looking at sort of the delta between customer growth and at least the weather-normalized sales growth that we are getting from your data, which is showing that we've had three consecutive negative weather-normalized sales growth trends. And so, again just to be clear, are you suggesting that the energy efficiency and demand response are having a much larger impact which should mitigate? I just want to be clear I understand the trend. Should we now start to see those weather-normalized sales numbers start to turn positive or what's causing the three consecutive negative declines we have seen here?

You had grandfathering of the net metering September 1. We saw applications skyrocket June, July, August, as they were pulling things forward. All of those installations are now being installed and we believe the backlog is through us now, and so we'll see less of an impact as we move forward as we continue to add residential customers.

I see, okay. And then my last question, if I look at some of the dynamics that you all have already talked about, i.e., that your O&M costs are unusually high this year given the outage schedule, so they should come down to a more normalized level next year, and then you have the step up in rates coming from the Four Corners SCR investment, would that imply – I mean at least to me that would imply that the earned ROE next year should be higher than this year. Is that a fair way to be thinking about this or am I missing some other dynamic there?

I mean, those are two impacts to the financials in isolation. There is much other impacts as well. We'll come out with 2019 guidance later this year.

But both of those are accurate, right, in terms of helping your earned ROE next year?

In isolation, yes.

Thank you.

Our next question comes from the line of Andrew Levi with ExodusPoint. Please proceed with your question.

Just back on the ballot initiative, I don't know, I just feel there is like some investor confusion because kind of since this whole thing has come out the stock has on a relative basis hasn't done so well, and I understand the effects on the rate there if this were to go through and obviously it would be a several-year process, if it actually got on the ballot, it was approved, right, there would be some type of legal challenge to it? And then I have a follow up. Is that correct?

I think we have missed your question, Andy.

I'm sorry, you didn't hear me, okay. So basically, if it were to pass, it would be like a several year legal challenge to that, is that correct, if it actually got on the ballot and passed? That's my first question.

We are not to that point yet. We are, as I said earlier, we are observing the pending litigation in the Arizona courts. So the question is whether it gets on the ballot or not. We'll kind of take it one step at a time.

Okay. But I guess my point is, even if it were to pass and over a several year process was able to survive various legal challenges, as far as your earnings and your long-term kind of outlook, that would basically be unchanged because even with the stranded costs potential longer-term, though that rate base as you kind of outlined would be replaced by renewable rate base and the Company is kind of surrounding that, isn't that correct?

Again, I'll use Jim's words, in isolation that's correct, but it's still – there are so many variables to this situation. Until there is clarity around the results of this litigation, it's really hard to start predicting things that far out.

Okay, that's fair. I get it. Just that your stock has suffered quite a bit again on a relative basis because group has been going up since this initiative has been initiated. But I just feel there is kind of a misperception of the end result, but thank you very much.

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

Could you just revisit, as I recall, the legislature passed something regarding a fine that would happen if there was no compliance with the initiative, could you elaborate a little bit on that again or just remind us what that was?

There was a statute that was passed to address what you would do in a compliance situation of a statute amendment like the Steyer initiative. That's out there as something that the Commission would probably consider moving forward, but that's also likely to get challenged.

Okay. But the cost associated with that is quite low, correct? I mean the fine associated with non-compliance would be considered, as I recall, that was pretty nominal in the old scheme of things?

That's correct.

From a [indiscernible] perspective, is that correct? I mean, you know what I'm saying, I mean in other words if this initiative was going to cause rate payers a whole bunch of money, et cetera, the cost of non-compliance would seem to be considerably lower. Am I wrong?

Based on the reading of that, you're exactly correct on the reading of that legislation.

Okay. I guess the message today that was before we get down to all these hypotheticals of what may or may not happen, you'd rather just see what actually happens in the courts and [indiscernible]. Is that how I should think about it as opposed to pursuing a bunch of questions about what may or may not happen? Is that what you're basically suggesting we do?

Yes, exactly. We have a strategy. It's tied up in the courts right now and we are watching that very closely and we'll respond when the time comes.

Okay. My other questions were answered and I won't take any more of your time. Thanks so much.

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.

Thank you and 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.