Paul Mountain - Director, IR Don Brandt - President and CEO James Hatfield - EVP and CFO Jeffrey Guldner - SVP, Public Policy for APS.

Ali Agha - SunTrust Paul Ridzon - Keybanc Michael Weinstein - UBS.

Greetings, and welcome to the Pinnacle West Capital Corporation 2014 Fourth Quarter and Full Year 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 would like to thank everyone for participating in this conference call and webcast to review our fourth quarter and full year 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, 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 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 2014 Form 10-K 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 February 27. I will now turn the call over to Don..

Thanks Paul and thank you all for joining us today. The fourth quarter wrapped up a productive year, and set the stage for further progress in the year ahead. Earnings finished the year in the middle of the range after adjusting for below normal weather. APS’s reliability and customer satisfaction remain in the top tier.

Safety had another solid year and Palo Verde set a record for power production. In fact Palo Verde Unit No. 3 produced the second highest electricity output of any nuclear unit in the world in 2014 and all three Palo Verde units individually ranked among the top six producers in the United States.

Jim will discuss the 2014 financial results but first I’ll update you on the regulatory progress and discuss a few significant projects. In December the Arizona Corporation commission voted on several key issues and we appreciate their commitment to resolve these items before the bench turned over.

I’ll provide an update on two key issues in a moment but I’d like to first thank commissioners Brenda Burns and Gary Pierce, whose terms ended in early January. We appreciate their commitment to the state over many years of public service and on driving the dialog on several complex regulatory issues.

Commissioners Doug Little and Tom Forese were sworn in on January 5th to four year terms. Commissioner Susan Bitter Smith was selected by her fellow commissioners as the next chair succeeding Commissioner Stump who did a tremendous job leading the Commission through a challenging period.

Governor Doug Ducey was also sworn in, leading a group of many new officials at the state level that are bringing a renewed focus to economic development in Arizona. We look forward to working Governor Ducey’s team. I’ll now provide an overview of the key dockets that were voted on in December at the commission.

The Four Corners rate tariff was approved with rates in effect as of January 1st of this year. The $57.1 million rate change was $8 million below our request, however it was in line with the commission staffs and administrative law judges recommended order. We were pleased to have a final order in this matter.

Separately the commission voted it had no objection for APS to build and own 10 megawatts of residential roof-top solar on approximately 1500 homes. Now titled the APS Solar Partner program, installations will be given a spring.

We’ve had a great deal of interest from our customers and initiated the first of three requests for proposals to qualify local Arizona based installers at the end of January.

We're in the process of determining the system feeders and customers to target, which will then be matched up with the selected installers who will inspect roofs and install the roof-top systems.

Putting this program in perspective, as of the end of 2014 APS has 30,000 residential roof-top installations, equating to about 200 megawatts of installed capacity.

In 2014 interconnection application volume was down slightly from the record setting 2013 numbers, but actual installations in 2014 of 7,800 systems was the highest ever showing a 10% increase over 2013. This robust level of growth causes the unfair cost shift to continue increase.

In addition the ACC initiated a generic docket in December titled in the matter of the inquiry in the solar DG business models and practices and their impacts on public service corporations and rate payers. Chairman Bitter Smith requested comments by February 13th. So the commission and staff are now reviewing the comments received last week.

The next steps in timeline for this docket are expected to be discussed at an upcoming commission meeting. We have included 2015 calendar in our presentation to highlight the key dockets and dates ahead of us this year, including the docket I just mentioned. Let me highlight a few other items.

Rate design discussions are surfacing after the initial discussion last fall. We're having discussions with several stakeholders to determine the best path forward. Late last year Salt River project proposed a broad rate restructuring and it is expected this will be voted on at their Board meeting on February 26.

SRP's proposal includes several rate design principles that we have been advocating, primarily better alignment of fixed and variable cost and revenue.

While each utility may have a different rate structure, it is clear from the national discussion and here in Arizona that appropriately addressing the unfair cost shift and aligning the fixed and variable discrepancy are a top priority. The Ocotillo modernization project has moved a year closer to beginning construction, which is expected in 2016.

We've been working on the necessary approvals and outreach to the surrounding community and are pleased with the reception we have received. The certificate of environmental compatibility was approved in November. The last milestone before construction will begin was raised during the commission's integrated resource planning meeting in the fall.

While there was clear support for the first two units which replaced the existing steam units, questions were raised on the cost effectiveness of the additional three units. We have maintained the importance of the five units to serve future load growth as well as improve the valley's reliability.

However, to address the concerns that were raised we issued an RFP in late January for the incremental capacity equivalent to three of the five units. This process is expected to conclude in the summer. One other item to watch is the Delaney-Colorado River transmission line decision; Trans-Canyon which is joint venture with BAG U.S.

Transmission, formerly named Mid-American Transmission submitted its bid to the California ISO on November 19. In January the bidder list was disclosed, six bidders in total. The Cal-ISO is working through its qualification and selection process and we expect a decision this summer. Lastly, I'll comment on a few recent environmental developments.

On December 19, U.S. EPA issued its final regulations governing coal ash, which regulates coal combustion residuals as non-hazardous. Our initial estimate, a portion of which is included in our capital forecast is that our incremental cost to comply will be approximately $100 million, mostly at our Cholla plant.

We're also working with the corporation commission, the Arizona Department of Environmental Quality known ADEQ and the Arizona Utilities to encourage the EPA to make revisions to Arizona's requirements under the clean power plan. Under the draft clean power plan, Arizona would be the second most impacted state in the nation.

While APS's diverse portfolio is a clear advantage, we are concerned about the impact on other utilities in the state, including the need for additional infrastructure and the cost to Arizonans associated with achieving the goals originally established.

We support the State's efforts to enact legislation that enables ADEQ to submit a state plan to U.S. EPA. This legislation is necessary to assure EPA does not issue a federal plan for the state of Arizona.

Let me conclude by saying I'm very proud of the leadership of our people again this year, ranging from the pursuit of excellence each day across our operations and the safety of our employees and in the discussion on the complex topic rate design.

I expect our team to again lead on these efforts in 2015 and that we will deliver on our commitments this year. I'll now turn the call over to Jim..

the lost fixed cost recovery mechanism improved earnings by $0.01 per share, which, as designed, offset some of the impact from energy efficiency programs and distributed energy. The Arizona Sun program benefited earnings by $0.01 per share, primarily driven by the 32 megawatt Gila Bend solar project that went into service.

The effect of weather variations increased earnings by $0.03 per share. Although weather in both 2014 and 2013 fourth quarters was less favorable than normal, fourth quarter 2014 benefited from warmer October compared to the same month in 2013.

Higher usage by APS's customers compared with the fourth quarter a year ago increased quarterly results by $0.01 per share. Weather-normalized retail kilowatt hour sales, after the effects of energy efficiency programs, customer conservation and distributed generation were up 1.9% in the fourth quarter of 2014 versus 2013.

The favorable variance was partly due to the low usage we saw in the fourth quarter in 2013 and was in line with our expectations of where we would end the year. The net impact of other miscellaneous items added $0.01 per share.

As a reminder, both the gross margin and O&M variances exclude expenses related to the Renewable Energy Standard, energy efficiency and similar regulatory programs, all of which are essentially offset by comparable revenue amounts under our adjustment mechanisms.

Also, the deferrals associated with the Four Corners transaction and the impacts to our non-controlling interest for the Palo Verde lease extension are treated in a similar manner. The drivers I discussed exclude these items as there was no net impact in 2014 results. Slide 8 presents the look at the Arizona economy in our fundamental growth outlook.

Arizona’s economy continued the steady improvement in the fourth quarter of 2014. Job growth in Arizona and in Phoenix Metro area picked up modestly at the end of the year and for the quarter. Arizona added jobs at a 2.6% rate as seen on the lower right hand side of slide 8.

Business services, healthcare, tourism and consumer services are each adding jobs in excess of 4% on a year-over-year basis and most other sectors continue to grow at more modest rates.

The job growth we’re seeing reflects the attractiveness of Metro Phoenix and Arizona is a great place to do business with excellent access to California and other markets, but with much lower cost structure.

This continued job growth is providing a stable pace of absorption in commercial, office and retail space yielding a continued decline in vacancy rate in those sectors. As these markets tighten up we expect to see disruption activity regain.

As an example Phoenix Metro area currently has 2.9 million square feet of office space currently under construction most which will be delivered this year. This is the highest amount of office construction since 2009.

Although the retail sector remains quite, investor space continues to be in high demand with 4 million square feet under construction, primarily in our West Valley territory. We are also seeing continual increases in Metro Phoenix housing demand although the increase in demand is presently being met largely with multi-family development.

Total housing permits and multi-family permits both at cycle highs in 2014 providing their best year since 2007 as you can see in the panel at lower left.

We expect 2015 to be better than 2014 in terms of job growth, income growth, consumer spending and absorption of residential and commercial vacancies and believe that these trends will translate into higher overall housing activity.

The future market share for apartments versus single-family homes remains a question and is largely dependent on the degree of strength in existing single-family home markets. As you can see in the panel at the upper left, existing home prices has recovered substantially from their recession lows and continue to increase year-on-year.

The recovery in prices reflects the continual absorption of vacant homes apartments in Metro Phoenix and the normalization of foreclosure sales activity.

While existing home prices may not have recovered enough yet to spur new single-family home construction, the apartment markets is enjoying the lowest vacancy rate it has seen in 15 years and we believe it is only a matter of time before our new single-family market moves more decidedly in the upward direction.

On balance, we see size of sustained improvement in our economic environment and a gradually steady recovery. As in past recoveries, it is likely the each successive year in the near term would be stronger as we go forward.

Reflecting the steady improvement and economic conditions, APS's customer base grew 1.4% compared with the fourth quarter last year, in line with our forecast. We expect that this growth rate will gradually accelerate in response to the economic growth trends I just discussed.

Importantly the long term fundamental supporting future population and job growth in Arizona appear to be in place. Slide 9 outlines our financing activities. Of January 12, APS achieved $250 million of five year 2.20% senior unsecured notes.

The proceeds from the sale were used to repay commercial paper borrowings and to replenish cash temporarily used to fund capital expenditures. We plan to refinance a $300 million maturity in 2015 and raise that to $275 million of additional long term debt as assumed in our guidance. Overall, liquidity remains strong.

At the end of the fourth quarter, the parent company had no short-term debt outstanding and APS had a $147 million of commercial paper outstanding. A quick note on pension. Our funded status remained strong at 90% as of year-end 2014 in line with year-end 2013.

This was due to largely to the continued implementation of our liability driven investment strategy. The higher funded status translates to lower long term funding requirements. Also in October, the Society of Actuaries issued its final report on mortality tables.

We have incorporated a modified version of a mortality assumptions in our pension calculation which we believe better reflects our employees' demographics. Additional detail is shown on the slide included in the appendix of today's presentation. Finally, I'll review our earnings guidance and the financial outlook on Slide 10.

We continue to expect Pinnacle West's consolidated ongoing earnings for 2015 will be in the range of $3.75 to $3.95 per share. The rate adjustments in cost management remain important drivers. A complete list with factors and assumptions underlying our guidance is included in the appendix to our slides which are unchanged.

This concludes our prepared remarks. Operator, we will now take questions..

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Dan Eggers with Credit Suisse. Please proceed with your question. Mr. Eggers your line is live, perhaps you have yourself on mute..

We can go to the next question, Dan can get back in the queue..

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

First question, I know you guys talked about the weather impact in 2014 on the earnings but as recently at the end of the Q3 results, or around EEI time, we were still looking at the 360 to 375 guidance range for the year.

So when we look at the 358 that you reported, what were the big factors relative to your own assumptions in the fourth quarter that caused us to miss the lower end of guidance for the year?.

Well, we had negative weather in the fourth quarter as we talked about. We also had the extension of bonus depreciation which pushed out our ability to use production tax credits which had a negative impact of about $0.03 on the quarter as well. .

Got it, okay. And then secondly, looking at the dynamic between weather-normalized sales growth and customer growth, I know, quarterly numbers tend to gets queued, but your customer growth has been fairly steady, 1% and yet we saw the 1.9% weather-normalized sales number in the quarter.

Again anything to extrapolate from that and just remind us what the expectations are for customer growth and weather-normalized growth for 2015?.

Well, for customer growth we’re looking 1.5% to 2.5% for ‘15 with 1.4% fourth quarter of this year. Weather-normalized sales sort of flat to 1% range. I think it’s important in the fourth quarter of 2013 we had, I think a negative 2% sales growth and I would not look at the quarter in and of itself.

I would really look over the course of the year where we really had sort of flat sales and 1.4% customer growth. .

Got it. And my last question Jim, with regards to the current thinking in terms of the timing of the next rate case and the earliest need for equity, just remind us again where you stand today on both of those factors. .

No change really, we’re looking at not filling until at the earliest mid-16 at equity again no earlier than 2016 at the earliest..

[Operator Instructions] Our next question comes from the line of Paul Ridzon with Keybanc. Please proceed with your question..

Just real quickly, do you have any sizable maturities coming up and kind of how you’re thinking about the opportunities on the interest lend?.

While we have 300 million of debt maturing earlier this year -- later this year which we'll refinance. We also have maturities in 2016 and then our big maturity is on 2019. So we’ll look at all factors when we look at that in today’s interest rate environment.

We chose January to take advantage the short end of the curve due to demand but we still have historically low interest rates across the board and see that those refinancing got really an opportunity to incrementally provide some interest savings..

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

I was wondering if you can characterize how the discussions at the commission have been going with regard to rate design. I understand comments were was taken and is the process moving forward at a quick pace, regular place? Has it installed recently, and what kind of initiatives, what’s the involvement of the Company in those discussions..

Michael, this is Jeff Guldner.

So I think those discussions are moving forward at a normal pace and so what you’re seeing right now is comments from the parties here in Arizona, obviously folks are also paying attention on what’s happening on the national scene and there's a lot of discussions that are happening nationally and we're engaged in both of those.

So we're engaged at a state level. We're also participating in the national debate..

Right and would you say that the things are moving along at the pace you expected?.

Yes, I think what you'll see -- so you've got two new commissioners that have just taken their seats and so I think you'll see the discussions continue to accelerate here in the next few months..

And do you still expect that or -- do you have any expectation that rate design and metering, those types of issues be dealt with separately outside of the rate case or whether they'll be rolled into a rate case?.

Well, it's a state wide issue. So remember there's going to be a discussion on this, what it means from a state perspective, how the implementation happens as part of that discussion. And so we've got a mechanism right now that is the LFCR DG adjuster.

That's a component or that's one method of addressing really the cost shift issue, but structurally how do you the rate design changes. We know a lot of that's going to happen in a rate case..

Okay, I guess maybe the crux of the question is more like when do these, when does action have to be taken by the commission on this docket? How early does it have to happen? What's the latest that could happen before so that a separate process could occur or at some point I guess it's just too late, you've to roll it in into the rate case because the file is coming in mid '16?.

So, there is no time clock on the discussion. So the discussion -- I can't tell you when the discussion is going to -- how it's going to specifically unfold, but from a process standpoint, some rate design changes are going to have to happen in a rate case.

It's helpful to have the discussion of what that process should look like and what some of the issues are ahead of the rate case filing..

It appears we've no further questions at this time. I'd now like to turn the floor back over to management for closing comments..

All right, well, thanks everyone. I mean as you look at the 10-K and then materials please give us a call if you have any questions and we'll talk with you soon. Thank you..

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..