Ted Geisler - Investor Relations Don Brandt - Chairman and Chief Executive Officer James Hatfield - Chief Financial Officer Jeff Guldner - SVP Public Policy, APS Mark Schiavoni - Chief Operating Officer, APS.

Greg Gordon - Evercore Julien Dumoulin-Smith - UBS Ali Agha - SunTrust Michael Weinstein - Credit Suisse Michael Lapides - Goldman Sachs Charles Fishman - Morningstar Paul Patterson - Glenrock Associates Steve Fleishman - Wolfe Research.

Greetings, and welcome to the Pinnacle West Capital Corporation 2016 Second Quarter Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Ted Geisler, 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 second quarter 2016 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 second 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 August 9. I will now turn the call over to Don..

Thanks, Ted, and thank you all for joining us today. 2016 continues to be inline 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.

On June 1st, APS filed its first rate review in 5 years. Our proposal moves Arizona forward with continued investments in a advanced energy grid, a cleaner energy mix and new technologies that will enable our customers to have more choices and control. Today, I’ll highlight the key requests of the filing and their benefits.

For your reference, those items as well as key underlying assumptions are summarized in the appendix to today’s presentation. The rate review provisions contain a number of benefits for our customers, the communities we serve and our shareholders.

The requested regulatory treatment will build upon the constructive regulatory framework established in the 2009 and 2012 settlements. Through this rate review, APS is asking for a change in the way customer rates are designed in an overall 5.74% bill increase or $166 million annually.

APS has asked for an effective date of the new rates of July 1st 2017. Many of the key provisions in our rate review proposal are focused on constructive regulatory treatment that mitigates regulatory lag. For example, we’re seeking post-test year plant additions for the period between the end of the test year and the date new rate take effect.

This process has been used to mitigate regulatory lag in our last 2 rate settlements in another’s case in Arizona.

APS is also requesting a deferral order for our investment in the Ocotillo modernization project which will come into service after the rate case and a deferral and step increase for the selective catalytic reduction technology equipment now being installed at the Four Corners Power Plant.

This type of step increase would be similar to the structure agreed to in our last rate settlement regarding the acquisition by APS of Southern California Edison’s interest in the four Corners Power Plant.

In addition, APS also proposed changes to the rate options it offers to customers ensuring that the price a customer more accurately reflects the way that customer uses the electric grid.

A three part bill with a demand component in addition to making the basic service charge itself more cost based will reduce inter-class subsidies that will reflect the actual costs to service and enable a sustainable deployment of new customer technology.

APS already has more than 120,000 residential customers on demand raised today and our proposal expands its redevelopment to most residential customers. Our proposal also benefits customers by reducing the subsidy currently paid to support the rooftop solar industry by the 96% of residential customers who do not have rooftop solar.

This change would not affect the 45,000 customers who already have rooftop solar. Our new solar customers who submit a completed interconnection application before July 1, 2017. We want to continue Arizona’s solar leadership the right way with more solar for more customers without driving off the energy bills paid by non-solar customers.

The administrative law judge has set a procedural schedule for the rate proceedings. The ACC staff and interveners will begin filling their direct testimony on December 21 and this hearing would commence on March 22, 2017. The commission’s staff supports completing the case within 12 months.

In addition to the APS rate review filing, the Arizona Corporation commission is managing a very full schedule. On June 13th, hearings concluded in the value and cost of solar generic docket. Final, legal pleas are due on August 5th and we expect a recommended opinion and order later this year.

While the initial round of testimony has recently been filed in the Tucson Electric rate case, hearings are now complete in the Unisource Electric case and a recommended opinion and order that was recently issued recommended 9.6% non-fuel rate increase.

Turning to operational developments, we concluded planned outages at the Palo Verde Nuclear Generating Station and both units at the Four Corners generating plant. Tim will discuss the financial impact but the extended duration of the Four Corners planned outages was a headwind in the second quarter results compared to the second quarter of 2015.

Palo Verde which is America’s largest carbon fee energy source had a solid first half for the year, including successfully completing the Unit-1 planned refueling outage in 35 days. On a related note, APS recently announced changes to its senior leadership team at Palo Verde.

Bob Bement who has been instrumental in Palo Verde’s success has been promoted to Executive Vice President, Nuclear.

Bob will continue reporting to Randy Edington, Executive Vice President and Chief Nuclear Officer until October 31st when Bob will then takeover as Chief Nuclear Officer while Randy transitions to Executive Vice President and Advisor to me.

Jack Cadogan, currently Vice President, Nuclear Engineering, has been named to replace Bob as Senior Vice President, Site Operations. And completing the leadership team at Palo Verde, Chuck Kharrl has been named Vice President, Site Operations & General Plant Manager and Mike McLaughlin has been named Vice President, Operations Support.

In addition, Bruce rash is joining Palo Verde from Exelon Corporation in the Position as Vice President of Nuclear engineering. These changes I’m sure Palo Verde will continue to have the strongest nuclear leadership team in the Industry.

Looking to our capital investment program, we continue making good progress on both the Ocotillo modernization project and the installation of selective catalytic reduction technology in Four Corners. Our 40 megawatt utility scale solar plant Red Rock is more than 50% complete and on schedule for completion later this year.

APS recently issued an all source request for proposals seeking 4 to 600 megawatt of capacity resources, it helped meet customer’s peak energy needs. We’re now evaluating the proposals with an expected decision later this year. Last May APS announced plans to participate in the energy imbalance market.

We’re currently performing parallel operations and expect to go live on October 1st. Participation I this 5 minute energy market is expected to offer economic savings to our customers and improve the integration of renewable resources.

Let me conclude by saying we’re excited about the opportunities ahead for customers, our employees and our shareholders. In April, APS celebrated 130 years of providing its customers with reliable electricity at an affordable cost. One month later, we filed a historic rate review which builds on the foundation established in previous rate reviews.

The investments and proposals discussed in this filings provide a clear and compelling vision for the future. In many respects, this case serves as a transition from the challenges of the present to the opportunities of the future. Meanwhile we are delivering on our commitments and continue to be well positioned for the balance of the year.

Now, I’ll turn the call over to Jim..

Thank you Don and thank you again everyone for joining us on the call. This morning, we reported our financial results for the second quarter of 2016 which were inline with our expectations. As summarized on slide 3 of the materials, for the second quarter 2016 we were at $1.08 per share comparing to a $1.10 per share in the second quarter of 2015.

Slide 4 outlines the variances in our quarterly ongoing earnings per share. The key drivers being higher growth margins which is primarily offset by higher operations and maintenance expenses. Looking at gross margin, there were several factors that contributed to the $0.21 increase including favorable weather.

Weather was a horizon record and when paired with the mild conditions in the second quarter of last year is a net effect of weather variations, increased earnings by $0.09 per share. Higher sales in the second quarter of this year compared to the second quarter in 2015 added $0.04 to gross margin.

In total, weather normalized retail sales were flat compared to last year but the sales trends by customer class was mixed ended up yielding a positive growth margin effect. More specifically, sales for higher margin residential customers increased 1.8% in the second quarter.

And this growth was partially offset by a 1.5% reduction in sales to lower margin business customers. Collectively, the adjustment mechanisms continue to add incremental growth to the gross margin as designed, contributing $0.04 per share.

A final comment on gross margin, in April APS completed the sale of a 50% ownership in an existing 230 KW transmission which is older than a $0.03 contribution to gross margin. Now turning to operating expenses. As I mentioned earlier, higher O&M was a primary offset to ongoing earnings per share in the second quarter.

Included in guidance and inline with our expectations, the major planned outages at Four Corners at four and five that concluded in the second quarter were a headwind to quarterly activity compared to 2015.

Another key factor that contributed to an increase in O&M in the second quarter of this year relative to last year was higher employee benefit costs including stock compensation costs. Higher D&A although increased earnings by $0.02 in the second quarter.

This variance includes higher expenses resulting from additional plant and service which were partially offset by lower depreciation related to the expense in the Palo Verde sale leaseback. The gross margin and D&A variances exclude operating revenues and expenses related to Palo Verde Unit-II decommissioning recover the system benefit charge.

The drivers that I discussed exclude these items as there was not net impact on second quarter results. As the Arizona economy continues to be an integral part of our business, I’ll highlight next the trends we are seeing in our local economy and in particular the Metro Phoenix area.

Job growth in the second quarter in the 2000 Metro Phoenix area remains at about double the natural average, continuing trend we have seen for nearly 5 years. As seen on the upper panel of slide 5, Metro Phoenix added jobs at 3.4% year-over-year rate.

This job growth is broad based with construction, business services, financial services and healthcare showing strong sectoral strength adding jobs at a clip above 4% year-over-year. While job growth continues to have a positive effect on Metro Phoenix areas commercial and residential real estate markets.

Absorption of vacant commercial space remains steady in the second quarter with combined 2 million square feet of office and retail space occupied by new tenants. Vacancy rates in both markets have gone onto levels last year in 2008 and almost 3 million square feet of new office and retail space was under construction at the end of the quarter.

We expect a continuation of business expansions and related job growth in the Phoenix market with flow and turn to continue commercial development. The residential real estate market reflects our strength as well.

As you can on the lower panel side 5, housing construction is on phase to have its best years since 2007 driven primarily by the single family market and overall the amount of vacant housing in Phoenix was solidly backed to pre-recession levels.

Record low apartment vacancies and absorption of available single family homes is providing meaningful support to home prices with return to levels last seen in early 2008.

We believe that we follow job growth, low mortgage rates and the opening up of credit to the wave of households to separate from foreclosures during the recession and it will allow the Metro Phoenix housing market an economy more generally to expand at a healthy pace over the next couple of years, reflecting a steady improvement in economic conditions APS’s retail customer base grew 1.4% compared with the second quarter last year.

We expect that this growth rate will continue to gradually to accelerate in response to economic growth trends that I just discussed. Importantly, the long-term fundamentals supporting teacher population, job growth and economic development in Arizona appeared to be in place. In closing, I will review our earnings guidance and financial outlook.

We continue to expect financial ways to consolidated ongoing earnings for 2016 will be in the range of $3.90 to $4.10 per share. We will provide a complete list of factors and assumptions underlying our guidance included on slide 6 which remain unchanged. In terms of recent financings on May 06 APS issued 350 million of 3.75% senior unsecured notes.

The proceeds from the sale were used for redeem and cancel certain pleas control box and to repay commercial payer and replenish cash temporarily used to fund capital expenses. Additionally on August 1st, APS repaid a maturity 250 million of 6.25% of senior unsecured notes.

We anticipate issuing up to 350 million of additional long-term debt this year. Overall, our balance sheet and liquidity continue to remain very strong. At the end of the quarter, Pinnacle West had no short-term borrowings and EPS at 64 million on commercial paper outstanding.

Finally our rate base growth outlook remains 6% to 7% to 2018 and our forecast does not include the need for additional equity. This concludes our prepared remarks. I’ll now turn the call back over to the operator for questions. .

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first quarter comes from the line of Greg Gordon with Evercore. Please proceed with your question..

Hey, hello guys. .

Hi..

Hey Greg..

If you look at the schedule for the rate case, I have a two part question. One is traditionally when do we get into the window where we can start to potentially settle certain items in the case or potentially get a global settlement, that’s a little bit harder obviously.

And two, what can we glean from the rate cases that have been going on in the Southern part of the state in terms of issues that have been settled or resolved that might be presidential for your case?.

Hey Greg, it’s Jeff Guldner. So on the scheduling and settlement, typically you would start looking at that after direct testimonies being filed by other parties and so that’s probably the time you’d first start to get really engaged in settlement discussions with both the staff.

I mean obviously you’ll be engaged in discussions along the way, we do and are doing right now technical conferences to help folks understand the filing itself. And so we’ll continue that through the testimony piece.

On the other issues obviously rate design have been a pretty major topic in most of the cases and while it’s certainly helpful in seeing what some of those issues are, one of the things I’d be cautious of is all the utilities in the state are coming from a slightly different position.

And so you’ve probably seen the UNS order, the recommended orders are out in the UNS case and is proposing a move to TLU rates. We have also suggested in our testimony in that case that they move more towards the demand rates which is similar to our proposal but they are not in the same position as we are.

And so one way that we’re viewing that case now is potentially good step in overall rate modernization because they are moving customers on a TLU. We are in a better position with that, that have the customers on TLU and about 11% of the customers on demand rates, residential demand rates today.

And so that’s helpful in seeing what are the issues and discussions are but the cases are all going to be different as they ultimately move forward..

Okay, remind me what you said date for direct testimony filings?.

Direct testimony on revenue requirement piece is December the 21st and then the rate design piece would be January 27, 2017..

Okay, great. Thanks guys. .

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

Hi, good morning. .

Good morning..

Good morning..

So I just wanted to ask how has the election strategy evolved off late, just a broad brush and let everything going on, perhaps comparing this cycle with the last if you will..

Well the most significant difference is there is three slots that are potentially open at the commission and Julien you know that alternates, every other year 2 versus 3 and we have five Republican candidates and two democratic candidates running and the primary is at end of this month..

But how is your strategy in terms of your approach to go?.

They are running their campaigns..

Got it. Okay, great. And then separately can you elaborate a little bit on demand charges especially versus fixed charges. Any commentary with respect to the ALJ that came out in the resource case and how does that differ from our own case, if you can comment. .

Sure Julien, this is Jeff. So one of the ways to think of the difference between demand rates and fixed charges is with the demand rate the customer can still control that. So one of the challenges if folks are just talking about mooting to higher fixed charges, that don’t vary with demand.

There is essentially nothing that a customer can do to manage that. And so what we’ve seen with our residential customers who are on a demand rate and particularly with customers who transitioned from a more traditional or a used demand rate is that they actually can do things both behaviorally and with technology that can manage demand.

And so there is a lot of value in moving to something that sends a better price signal that can actually sense some technology or some behavioral adaptation from customers that help us manage peak demand. And with all the solar we see in the Southwest, that’s the major transition that we’ve got to start looking at.

And so when you look at the other utilities, we have done more, I think we have more customers on residential demand rates than anyone in the U.S.

So we’re in a better position to understand the dynamics of those rates, how the rate design matters and make those changes but I don’t think there is a recognition of that from the folks that were involved in the hearings here, but overall in the Southwest, rate modernization is something that have to happen and so what you’re seeing in UNS is a transition at the time of use.

We’ve done the time of used rate for over 30 years. So we’re at a slightly different place, our metering technology is more advanced and so you have to be careful in looking at other cases for direct president, but they’re certainly instructive in what some of the issues are..

And how do you think about customer sort of education on demand charges that were raised..

Very important and so again what you want to do is make sure that customers understand the simple aspects.

We have proposed in our case and are working on a pretty aggressive customer agitation program but then also what are the tools that we can provide to customers, some of them are very simple from just understanding the timeframe and there are things that we can do in the rate design that helps soften the impact of the rate, make it different from a commercial demand rate.

But we also want to make sure that customers know of other things that they can do to take control of the rate. .

Got it, alright thank you. .

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

Thank you.

First question, when you look at the first half results Jim, you mentioned you’re on track but the weather has been better, the cost obviously you have budgeted but overall what you said that through the first half the results are right on plan and budget as you would have envisioned the year?.

As I said in my remarks Ali, we’re meeting our expectations based on where we completed the year. The O&M is mostly possible maintenance and it was front-end loaded and we know that. So we’re, no surprise here where we are today. .

Okay. Secondly, the budget is still for customer growth of 1.5 to 2.5% for the year, we’re running at about 1.4% and also I know the second quarter is the shoulder quarter but weather normalized that you said were flat, it was up over 1% of the first quarter.

So are those trends again pretty much as expected or is that giving you a better or a clearer picture on how the full year maybe shaping up based on how first half has shaped up so far. .

Yeah, we plan for gradually improving throughout the year and if you look at 2015, the first half we were 1.2 customer growth 2015, it will have 1.3 and now we are at 1.4. We thought for data gradual acceleration through time. So I think we’re right on track..

Also for the usage as well in terms of weather normalized here..

Yeah, we’re at 0.6% year-to-date, our plan this year is we’ve got one. So we’re deeply within that sort of range we expected..

And then lastly Jim as you mentioned your latest -- growth numbers call for 6% to 7% CAGR, they have actually gone up after you file the rate case and updated the numbers.

Can you remind me again why that doesn’t accelerate the earnings growth profile as well because rate base has gone up?.

Because we don’t have perfect regulations so we continue to have some regulatory lags as well as financing cost for every construction program or that earnings slightly.

As we’ve always said rate base growth is the sort of top and revenue growth is a bottom of sort of where we’re going to expect earnings to come in if we were going to project earnings which we don’t. .

Yeah, understood and what is the plan for dividend growth?.

The Board will look at it again in October. We’ve accelerated from when we’ve taken dividend growth again to 5 in 2014 and so we’ll have to see where we have all our things considered in October. .

Got it. Thank you..

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

With updates due for the preliminary IRP October 1st which is the same date you've begun energy in balanced market operations, so what extent do expect any incremental renewable opportunities at the utility that aren't already reflected in the preliminary IRP?.

I would not connect the EIM and IRP, I think modestly as we look at additional renewals will be based on specific need and specific talk..

It's just that one of the justification things for joining EIM was to benefit to give more opportunities for renewable, I am wondering to what extent was your decision to join the EIM?.

EIM was really a customer benefit proposition that will allow integration of renewable more but that won't provide customer savings which is our motivation..

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

Question on O&M a little bit, can you kind of bridge us O&Ms are -- and if include the energy efficiency and DSM charges roughly about 60 million on a year-to-date basis last year and the second half of the year, I think O&M was right around $440 million to $445 million, are expecting O&M to be down year-over-year in the second half of the 2016 more flattish, I am just trying to get a feel directionally for where you think is just given the kind of sizable uptake in the first half of the year due to the outages?.

So if you look at the sort of middle of the range from 15 to 16 it's about 63 million of which 50 million of that is related to outages so that would apply to your comparisons moving forward will be fairly comparable?.

Should we assume 2017 has a sizable roll-off or how much of O&M that you're incurring in 16 as kind of recurring longer term versus what kind of fall of when we get to next year?.

We have overall schedules that are based on O&M run rates and how we use they and they are lumpy, but we're not really here to talk about 17 at this point..

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

I only one question left, this transition line sale was that just too bit of deal pay outside versus we'll read something more into that as well a strategy change?.

No this was transmission line that 355 partnership band there have been discussions in prior years about the partner Washington that sub-points particularly that old matt lying and so posted about potential transaction it was favorable to use and so did that a consent with commission.

We've been taking percentage of proceeds of a book value went back to customers than shareholders got 330%..

Okay so don't anything in direction, got it that's all I have..

Our next question comes from the line of Paul Ridzon with Key Back Capital market, please proceed with your question..

Could just kind of give 10,000 feet view kind of high point of what came out of the value of solar discussion in how you expect that to interplay with your pending case?.

So the briefing still on0going so you've replayed bridge actually coming in on Friday and what will happen that has been ALG will business treat like put a recommender roader out.

The commission will give that open leading and right now the only Teeda [ph] sort of concurrently what as being an escape so one of the questions will be then whatever comes of the value and cost for solar.

Docket remember that docket was focused on two things, first how do you look at the cost to service so sit with solar to cost dollar and then what other ways that you guys are export energy and so that's been having to integrated into the rate cases and first question that is could be up without as you and us.

Again our teaming a tiny is a litter better because we're in the process.

[Indiscernible] There is no debt but scrip co in august so typically see that in month or after afer rethinking assistant?.

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

There is a workshop later this year on reducing peak demand cost and you were just talking about TOU and which you guys have done what have you and I was just wondering, could you elaborate a little bit on what sort of driving this workshop and this looked that the commission having on it?.

Paul, this is Jeff, one of the challenges that we're seeing up here on the wholesale market is that we've got a lot of solar when that solar production is on particularly in the spring and the fall, what it's doing as this creating a negative prices in the middle of the day and then shifting the peak out later in the day and so it means there is a very heavy focus on the peak demand part of the day and less on that overall energy consumption.

And so folks are trying figure out in both rate design and use of technology and how we design the system, so things like the Okoteo modernization project how we deal with peak demand, this increasingly the challenge in running the system that workshop is I think positive sign this is where we're looking at how all of these play in, what role of technology has, what rate designs will have and so it's a constructive conversation..

And then on the value of solar I've seen some of the brief and there has been some sort of issue regarding the models and what have on, I am just wondering whether there is a potential for a settlement with some of the parties perhaps amongst some of the parties with respect to the distribute generation value proceeding or we should just expect to be kind of dually litigated.

I am getting where out of the proceeding right now..

Our next question comes from the line Steve Fleishman with Wolfe Research. Please proceed with your question..

Just quickly the Bloomberg grabbed a story from our 10 -Q about the subpoena you got for the 2014 guidance I just wanted to clarify that is related to the predications [Indiscernible] [0:37:09.8] the subpoena to anything that we're investing at the Company..

We'll see just to reiterate in June, the Company received two subpoena issues and connecting with investigation by the U.S.

attorney office pertaining to the 2014 statewide election raises in Horizontal, were quite at the same we would cooperate fully and that's stilt the case and we're not able to comment further on the investigation while it's going..

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

Thanks Christine. 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 participation and have a wonderful….