Greetings, and welcome to the Pinnacle West Capital Corporation Third Quarter 2018 Earnings Conference Call [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 earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Daniel Froetscher, APS' Executive Vice President of Operations; and Barbara Lockwood, APS’ Vice President of Regulation are also here with us. First, I need to cover a few details with you. The slides that we will be using our 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 third 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 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 15. I will now turn the call over to Don.

Thank you, Stefanie, and thank you all for joining us today. Throughout this year, our positive customer growth and disciplined cost management continue to support our ability to meet financial commitments. The Pinnacle West Board also displayed confidence in the company’s outlook by approving a 6.1% dividend increase, effective with the December 2018 payment. Before Jim discusses the detail of our third quarter results and guidance, I’ll provide several updates on recent operational and regulatory developments, including the ballot initiative and certain elections. Our operations team did an excellent job, maintaining the generating fleet and electrical grid again this summer. Our workforce quickly restored service to customers after several storms toppled a combined 451 poles, which is almost as many as the 2016 and 2017 summers combined. The Palo Verde generating station also performed well, with all 3 units operating at a combined 97.3% capacity. To meet customer demand and increase our clean energy mix, we issued 3 request for proposals this year. We’ve received bids on our request for forest, bioenergy solutions, peaking capacity and energy storage. Our energy storage RFP is particularly noteworthy because it will allow customers to use energy from our existing AZ Sun solar facilities during the peak period after the sun sets. We’re in the process of evaluating the bids and anticipate making our selection for each in the late 2018 or early 2019 timeframe. Our capital investment program continues to be robust, supporting investments in clean energy resources and maintaining safe and reliable service for our customers. Approximately 51% of our distribution capital investment from 2018 through 2020 will be driven by customer growth. For generation-related investments, the installation of 5 new fast-start flexible generating units at the Ocotillo power plant is on track to be completed in the second quarter 2019. Turning…

Thank you, Don, and thank you, again, everyone for joining us today. This morning, we reported our financial results for the third quarter of 2018. I’ll discuss the details of our financial results, provide an update on the Arizona economy and introduce 2019 guidance. As shown on Slide 3 of the materials, for the third quarter of 2018, we earned $2.80 per share compared to $2.46 per share in the third quarter of 2017. Slide 4 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 $0.04 per share compared with the third quarter in 2017, supported by favorable weather, the price increase from the 2017 rate review, higher sales and transformation revenue, sales net of energy efficiency and distributed generation were up 1.2% in the quarter, driven by strong commercial sales growth and robust residential customer growth. The strong commercial sales growth reflects the positive economic trends we have seen in the Metro Phoenix area. Offsetting drivers include the refunds to customers resulting from the federal tax reform, and a shift in the seasonality of revenue resulting from the residential rate design changes approved in the 2017 rate order review. As previously discussed, the 2017 rate review order established new rate options for customers. The new rate shifted a portion of the revenue previously collected during the summer to non-summer months, better aligning revenue collection with the cost to serve. Looking out to our operating expenses, higher adjusted operating and maintenance expense decreased earnings by $0.12 per share due to a higher cost at APS for transmission, distribution, customer service and information technology. And at the parent company level, for public outreach cost primarily associated with Prop 127. Depreciation and amortization expenses were…

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

Hi good morning guys. Hi I’m maybe we could just start and talk a bit about the process going forward now that Prop 127 is defeated. What can we expect to see going into next year and maybe then later this year in terms of kind of a collaborative process of some kind of stakeholder review of options going forward?

Well, I think, Michael, it remains to be seen exactly what that process looks like. As you know, and we’ve talked about Commissioner Tobin has a docket open on 80% claim by 2050. A lot of things are also been attached to the docket. And so the exact way forward is sort of unknown at the moment. It would be our intent to participate in that docket and all of those factors. But we’ll have to wait and see where it ultimately goes from a timing and outcome perspective.

Do you expect to have something, I guess, solidified by the time you file your next draft IRP?

Draft IRP is in April. So not sure we would be able to go fully through a process at that point. I think our – remains to be seen exactly how the RFP unfolds. That’s one of the sections in a 80 by 50 is reviewing how we go forward on the IRP. So again, it remains to be seen.

Yes, it’s Daniel. I think the timing of the informal docket on the energy modernization plan is a little bit ambiguous. And therefore, as it relates to flanging up with the preliminary IRP, we can’t make that call. I think Don put out a press release here a couple of days ago, post-127 bill indicating that we’re going to build on the coalition that works on Prop 127, in terms of trying to shape and formulate what a cleaner energy future looks like for Arizona. So we’ll continue to engage in that space.

Great. Just one final question, I’ll let other people get on. The weather-normalized retail electric sales volume that you’re assuming for 2019 guidance is still the 0 to 1% range. Now for the three-year period, it’s a little higher than that. I’m just wondering at what point does that three-year forecast kind of roll into those one-year forecasts?

Well, I think what we’re seeing is a continual gradual improvement in the overall economy. And exactly when our three-year period rolls into the higher remains to be seen. But I think we saw this quarter sort of the example of a improved economy, and we have a site to a pipeline of a lot of projects in West Phoenix as well, which will continue to build that momentum.

Okay thanks a lot nice job and guidance and congratulations on winning your argument against Prop 127. Thank you.

Thanks Michael.

Our next question comes from the line of Insoo Kim with Goldman Sachs. Please proceed with your question

Hai good morning guys. As you prepare for the 2020 rate case, would any potential equity issuance to boost the equity layer likely be done sometime in 2020 in the early half of the year? And have you also considered whether potentially a fuller sale was as an option given where your stock is trading at the current moment?

So last year, we injected $150 million from Pinnacle into APS. We expect to do some more here in 2019. Any additional equity that we’ll need can be handled through a draft type of program. And we’re not contemplating a fuller sale at the moment. It won’t – certainly won’t be a lot of additional equity, we’ll need to raise through a dividend or reinvestment.

Understood. And turning to the renewable discussions going forward. Given the uncertain timelines to when the final RPF standards or the IRP will take place. Do you not see any meaningful tick in renewable investments until maybe 2021 at the earliest? Or could you see some meaningful amounts in 2020, especially to take advantage of some tax benefits?

Well, look, we’re obviously cognizant of the ITC and the timetable there. I think from a renewable right now, nothing planned. Don referred to the battery IRP, which – how the prices tick out, and we’re on discussions now. It would be attached to our utility of solar, be able to – when we have the negative pricing peak the batteries, should be able to provide peaking power later in the day. I think we have to see how this conversation unfolds over the near term before we think about any large-scale renewable bill. At this time, that obviously continues to change as we talk to customers and other things.

Thanks a lot.

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

You touched on it earlier. But as you look at Tobin’s proposal of 80 by 50, is that workable? Or do we get into cost pressures under that plan?

Well, I – well, the – there’s a – Prop 127 was a constitutional amendment that was just a rigid. And it was irrespective of cost. I think the value of a commission-driven processes is, you think about claim, you think about reliability, but you also think about affordability. And so that will be a key gauging factor as we move forward will be what can customers afford. And we’re very cognizant of that from a – as we think about CapEx and other things. It’s always how much is this going to cost customers and we’re very mindful of that.

So this proposal has some off ramps?

Well, yes. The thing about it is, as you sort of bill as you go forward, and so they come up with a prescriptive plan today that says, this is what we’re going to do, and that’s a value of a more of a commission-driven process.

And Jim, just a clarification that the inter-quarter tax items will be net neutral from the calendar year?

Correct. But we haven’t applied in the appendix, it sort of shows how that’s been laid out over the course of the year.

Great thank you.

Thanks Paul.

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

Just two questions. One, just on the CapEx post-2020. This $1.2 billion level that you’ve kind of been averaging, should we just assume – you haven’t given guidance yet on that. That’s kind of like your sweet spot CapEx level, and then anything that would occur on the renewable side as far as any type of new initiatives would be incremental?

Well, certainly, as we look out over our CapEx forecast. I can’t. I won’t comment specifically about 2021 beyond. But as we look at things, for example, battery storage on our 6 megawatts, will that be supplemented in our base CapEx plan? And so don’t know how that takes out. That could be incremental, renewables could be incremental, electric vehicle infrastructure could be incremental. We filed four pilots in the 2018 DSM plan, and we’re waiting to get that from the commission. So how it plays out and when, it’s sort of TBD. But we feel good about our fundamental ability to continue to grow rate base and keep it cost affordable to customers.

That sounds good. And then when do we get a refresh on the CapEx?

We’ll do rate base in CapEx in our year-end call, and they’ll be – 2021 CapEx will be in the 10-K.

Got it. And then one last question just on the 2019 guidance because I think there was a little confusion. But I think if I heard you correctly, there was an offset. So the lower tax rate is offset by a customer credit? Is that what you were saying?

Yes.

Okay. And that’s why you have a lower tax rate, I guess, right?

Correct. Right.

Okay perfect thank you guys.

Thank you.

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

Hi good morning guys. So I just wanted to follow-up a little bit on the composition of the CapEx here quarter-over-quarter. Roughly the same magnitude of capital here, but just shifting around the bucket. Can you talk a little bit about the two buckets? The traditional gen and the clean gen? And what’s shifting that around? I suppose why – perhaps to start with the why, why the downtick in traditional gen?

Well – go ahead.

Excuse me, Julien, it’s Daniel. So the downtick in the traditional gen is reflective of the completion of the SCR projects, and a different outage plan for 2019 going forward in terms of number of majors and minors so on and so forth. The uptick in clean gen is a reflection of Palo Verde Generating Station fuel, the clean battery technologies that Jim mentioned, that won’t be determined, if you will, until we settle and make our decision relative to the three RFPs that are out there. But we certainly anticipate some level of investment in that space. And we’ve got a segment with our residential low and moderate income customer base, a program called community solar, within which we are installing and rate basing residential distributed generation rooftop solar on customer rooftops. That’s a multi-year program.

Got it. And maybe to clarify that. The traditional gen, is this the – probably a new lower level on a consistent basis? Or for the 2019 and 2020 this $100 million-ish type number, is that probably just a transient based on outages, et cetera?

No. It’s a – major outages at our power plants are cyclical in nature. Certain work is every 3 to 4 years. Certain work is every six to eight years. So this is just a reflection of the normal cyclical nature, if you will, of our major and minor outs.

Got it. Excellent. And just to clarify on the capital recovery piece or that the clean gen uptick, is that fairly straightforward in the context of the next case?

Well, we’re recovering the residential through the res surcharge currently. The rest will be just included for recovery on our next rate case.

Thank you very much all the best.

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

Thank you all for joining us today. 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.