Ted Geisler - Director, Investor Relations Don Brandt - Chairman, President and CEO Jim Hatfield - EVP, CFO Jeff Guldner - SVP, Public Policy, Arizona Public Service Company.

Julien Dumoulin-Smith - UBS Michael Weinstein - Credit Suisse Ali Agha - SunTrust Robinson Humphrey Shahriar Pourreza - Guggenheim Partners Charles Fishman - Morningstar Paul Ridzon - KeyBanc Capital Markets Greg Gordon - Evercore ISI.

Greetings, and welcome to the Pinnacle West Capital Corporation Third Quarter 2016 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 third 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 our expectations, we caution you not to place undue reliance on these statements. Our third 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 November 10. I will now turn the call over to Don..

Thanks, Ted and thank you all for joining us today. This year continues to be in line with our expectation and keeping us on pace with our guidance for the year.

Although, we experienced mild weather during August and September our positive customer growth and disciplined cost management continue to support our ability to meet our financial commitments. Our board also approved 5% dividend increase affective with the December payment continuing the predictable return of capital to our shareholders.

Before Jim discusses the details of our third quarter results I’ll provide several updates on recent operational and regulatory developments. Our operations team did an excellent job maintaining the generating fleet and the electrical grid again this summer.

The Palo Verde Nuclear Generating Station performed and Unit-3 entered its planned refueling outage on October, 8. Although this summer was mild compared to last, temperature soared to 118 degrees on June 19 and demand for electricity peaked at 7,051 megawatts. On a weather normalized basis, this was the highest peak demand for APS in nine years.

Our growing customer demand further demonstrates the need to continue expanding the grid while adding peaking resources. One data point worth noting, is that when our customers were using the most energy at around 5:30 PM on June 19, rooftop solar on our system was producing only 28% of its capacity.

Meanwhile utility scale solar was producing 72% of its capacity because most utility scale panels are on trackers that move with the sun. A couple of hours later when our system demand was still above 7,000 megawatts essentially not changed rooftop solar production plummeted to zero.

This scenario is not unique to our peak day and highlights the importance of electric grid at all hours as a day. On average, our customers now reach their summer peak energy demand 45 minutes later in the day than they did four years ago. With customers using more energy in the evening hours, APS is on peak hours of noon to 7 PM are outdated.

This is why we have recently proposed to change on peak hours to 3 to 8 PM so on peak pricing is better aligned with customer demand.

As I discussed on our last call, APS filed a rate review on June 1, since the filing we have continued to communicate with the Arizona Corporation Commission staff and interveners regarding the details of the proposal and its intent.

The ACC staff and interveners will file their direct testimony on all matters except rate design on December 21 and the remaining direct testimony on January 27. Parties will have the opportunity to enter into formal settlement discussions before the hearing commences on March 22.

On a related matter a recommended opinion and order was issued by these administrative law judge on October 7 for the value and cost of distributed generation docket. The recommendation proposed progress on several key issues including the elimination of net metering to be replaced by new methodologies consistent with staff’s proposal.

These methodologies align the value of export energy from rooftop solar with either utilities avoided cost or a resourced comparison proxy, comprised of actual utility scale solar PPA cost.

The ALJ recommendation also concludes the rooftop solar customers, our partial requirements customers and suggest the determination for placing these customers in a separate class should be addressed in the rate review proceeding. This item is expected to be heard in the December 13 and 14 Commission Open Meeting.

On September 30th, APS filed its preliminary 2017 Integrated Resource Plan or IRP with the Corporation Commission. The plan addresses several key factors including our future resource needs as customer demand grows and power supply contracts expire. By 2022, our incremental resource requirement is forecasted to be in excess of 3,500 megawatts.

This resource gap will be fulfilled through a variety of sources including the Ocotillo Modernization Project which is on track for completion in 2019. Earlier this year, we issued an all source request for proposals seeking 400 to 600 megawatts of capacity by 2020 which will also contribute toward our future resource needs.

We have shortlisted proposals and will be finalizing a resource selection in the coming months. The remainder of our resource requirements will be evaluated as part of the IRP process which may include additional RFP’s in the future. On October 1, APS successfully began full participation in the Western Energy Imbalance Market.

This real-time wholesale power market enables APS to exchange energy with a variety of resources across eight western states reducing cost for our customers and improving the integration of renewable resources. This was a smooth transition and well managed by our operations teams.

Turning to our capital investment program, we continue making good progress on the installation of Selective Catalytic Reduction technology at the Four Corners Power Plant.

Our 40 megawatt utility scale solar plant Red Rock is on schedule for completion later this year and our 4 megawatts of battery storage investments are also on track for completion this year as part of the solar partner program.

We completed three high voltage transmission lines this year to support our customer growth west of Phoenix which totaled $145 million of investment in the reliability of our transmission system.

And finally our innovative microgrid project for The Department of Navy will begin commercial operation next month at the Marine Corps Air Station in Yuma, Arizona. Let me conclude by saying that we remain focused on delivering our financial and operational commitments.

We have a busy calendar over the next year and while the Corporation Commission addresses rate design modernization and we engage with stakeholders on our rate review.

Our capital investment program continues to be robust and is focused on flexible generation, new grid technology and advancing our core utility operations to prepare for the changing needs of our customers. I’ll now 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 third quarter 2016 which excluding historically mild weather were in line with our expectation.

As summarised on Slide 3 of the materials for the third quarter of 2016, we earned $2.35 per share compared to $2.30 per share in the third quarter of 2015. Slide 4 outlines variances in our quarterly ongoing earnings per share.

Looking at gross margin, the largest single driver during the quarter was unfavourable weather which decreased earnings by $0.09.

In aggregate, this year’s third quarter was the mildest in the last 10 years where we experienced one of the hottest July’s on record followed by some of the mildest August and September conditions we’ve seen in the last 20 years. Sales in the third quarter of this year compared to the third in 2015 added $0.02 to gross margin.

In total, weather normalized retail kilowatt hour sales were essentially flat compared to last year but similar to the pattern we saw in the second quarter of this year, the sales trends by customer class were mixed and ending up yielding a positive gross margin effect.

And lastly our transmission and LFCR adjuster continued to add incremental growth to our gross margin as designed contributing $0.09 per share collectively. Now turning to operating expenses which combined contributed $0.02 per share. Lower depreciation and amortization expense and lower other taxes each contributed a $0.01 to earnings.

Lower D&A included higher expenses resulting from additional plans, which were offset by lower depreciation related to the extension of Palo Verde sale leaseback. In line with our expectations as we’ve previously indicated operations and maintenance expense were flat in the third quarter of this year relative to last year.

This also aligns with guidance with the projected increase in 2016 O&M over 2015 having been realized in the first half of the year. Interest expense, net of AFUDC was another positive driver to earnings during the third quarter of this year compared to the third quarter of 2015.

The net reduction included higher interest charges resulting from higher balance offset by higher construction work in progress benefiting AFUDC. As a reminder both the O&M and gross margin variances exclude amounts related to our renewable energy and demand side management programs.

Also note that the gross margin and D&A variances exclude operating revenues and expenses related to the Palo Verde Unit-2 decommissioning recovered to a system benefit charge. The drivers - I discussed exclude these items as there is no net impact on third quarter results.

As Arizona’s growing economy continues to be an integral part of our value proposition. I’ll highlight next the trends we were seeing our local economy and in particular the Metro Phoenix area. In the latest quarter, the Metro Phoenix region continued its trend of generating solid job and population growth at rates above the national average.

In fact, off the 15 largest metro areas across the country Metro Phoenix ranks at the third fastest growing area in population and the fourth fastest growing in jobs.

This above average job growth holds true of virtually every major industry sector as well although the most significant performance gains are seen in the construction, financial services and wholesale trade sectors. This strong job growth continues to have a positive effect on the Metro Phoenix areas commercial and residential real estate market.

Absorption of vacant commercial space remains steady in the third quarter with over 1 million square feet of office and retail space occupied by new tenants.

As seen on the upper panel of Slide 5, vacancy rates in both markets helped to fall to levels last seen in 2008 or earlier and almost 3 million square feet of new office and retail space was under construction at the end of the quarter.

We expect the continuation of business expansion and related job growth in the Phoenix market which will in turn support commercial development. The residential real estate market reflects these trends as well.

As you can see in the lower panel of Slide 5, housing construction is on pace to have its best year since 2007, driven primarily by the single family market and overall the amount of vacant housing in Phoenix is solidly back to pre-recession levels.

Record low apartment vacancies and absorption of available single family homes is providing meaningful support to home prices which have returned to levels lasting in early 2008.

We believe that solid job growth, low mortgage rates and the opening up of credit to the wave of households who separate from foreclosures during the recession should allow the Phoenix Metro housing market and the economy more generally to expand in a healthy phase over the next couple of years.

Reflecting the steady improvement in economic conditions, APS’s retail customer base grew 1.4% compared to the third quarter of last year. We expect that this growth rate will continue to gradually accelerate in response to the economic growth trends I just discussed.

Importantly, the long-term fundamentals supporting future population, job growth and the economic development in Arizona appeared to be in place. In closing, I will review our recent financing activity earnings guidance and financial outlook. On September 20th, APS issued $250 million of 10-year 2.55% senior unsecured notes.

The proceeds from the sale were used to repay commercial paper borrowings and replenish cash temporarily using connection with the payment of APS’s August senior unsecured note maturity. On August 31st, Pinnacle West entered into a $75 million 364-day unsecured revolving credit facility.

At the end of the quarter Pinnacle West had $34 million outstanding under the facility and APS had $83 million of commercial paper outstanding. Overall, our balance sheet and liquidity continue to remain very strong.

As Don discussed, in October the Board of Directors increased the indicated annual dividend by $0.12 per share or approximately 5% to $2.62 per share effective with our December payment. Looking to guidance, we expect Pinnacle West consolidated ongoing earnings for 2016 will be in the range of $3.90 to $4.10 per share.

However, based on year-to-date results we expect to be in the lower half of the range. You’ll find a complete list of factors and assumptions underlying in our guidance included on Slide 6, which are unchanged.

Similar to prior years with rate case proceedings, we will evaluate the appropriate time to issue 2017 information and EPS guidance as the rate case progresses. In the meantime to assist with your estimates, we’ve updated our rate based forecast in 2019 which was included in the appendix of today’s slides.

The primary drivers have not changed and the trajectory of 6% to 7% growth off of 2015 continues. We will provide updates to our CapEx forecast and other drivers on our fourth quarter call as part of our 10-K update. This concludes our prepared remarks. I’ll now turn the call over to the operator for questions..

[Operator Instructions] our first question comes from the line of Julien Dumoulin-Smith with UBS. Please proceed with your question..

So quick first question, not sure if you can say too much. I think, if I saw right in the prepared remarks, you said you've shortlisted proposals, and will be finalizing a resource selection in the coming months..

That’s correct..

Can you confirm whether you guys have been shortlisted and/or discuss any proposals that you all are pursuing as part of this RFP had process, be it for thermal and/or any other kind of resource?.

No. At this point until we make a final selection, it’s a confidential process..

Got it, but coming months, any kind of better sense by year end or 1Q 2017?.

Yes, it will be by year end..

Got it. Okay great. Can you elaborate a little bit, and I know you started to in the commentary, but on the changes in the capital expenditures through the forecast period, I notice they've ticked up a little bit.

What drove that, if you will?.

So I think, we look at 2016, 2017, 2018 up around $30 million a year most of it is distribution spend..

Got it.

So nothing too remarkable?.

No, I think what you’ve seen the need to the cost to hook up commercial a little higher and it just, fine tuning our estimates as we get here unit the end of the year..

Got it. And just a follow-up on the last resource question.

Any implications and/or initial thought process around the proposed hike in the RPS?.

Nothing. I mean, we’ll see what happens it’s a proposal. Comments are due by the end of November and we’ll see ultimately where that goes, on that subject though obviously an increase and would give us more upside to CapEx which is not really baked into anything at this point..

Got it. Thank you very much..

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

Quick question about the economic conditions, that looks like they are steadily improving with each reporting period. I'm just wondering at what point do you think that translates into higher customer growth, higher load growth, and ultimately higher rate base, and everything else..

So as we continue to see a further solidification of the market incremental new business we expect to the 2016 through 2018 you’ll see a continual upward slope in customer growth resulting retail sales and what that means in terms of CapEx remains to be seen..

All right.

And can you comment at all on the headlines of late regarding the election, and everything else that might be happening out there?.

Michael there’s as you pointed out, there is a lot of headlines both local, national and industry media. It is what it is, the election is not over with. You can get some pretty good reliable information at the Federal Election Commission website. The Arizona Secretary of States website and at pinnaclewest.com our political participation policy..

Okay, thank you..

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

For the last two consecutive quarters, we've been seeing flat weather-normalized sales growth, customer growth has been pretty consistent, anything to read into that? Are we seeing more changes in usage patterns, or too early, or can you just comment on this trend here?.

We’re not really seeing anything different in usage [ph] patterns per customer obviously every residential that’s added from a new units going to use less synergy then equivalent one or 10 years ago that’s just the [indiscernible] world we’re in we’re 0.3% for the year and in line with guidance..

Okay.

And then if I look at the timeline on the rate case process, as you laid out, it looks like if there is to be a settlement, that January through March period would most likely be the time period before hearing but after all of the staff intervener testimony comes in?.

Yes. Rate design January 27 hearing March 22 that would be a window, where a settlement could occur..

Got it.

And then this target that you guys have been working on that, at a minimum, you target to earn this 9.5% ROE, should we assume that continues through this next two or three-year cycle of CapEx that you have laid out for us? Is that still a good benchmark to think about going forward?.

Well, we file for a rate case with 10.5% ROE. So assuming we get decent outcome in the rate case that supports the longer term growth Ocotillo, Four Corners, SCR’s [ph] deferrals and so on, yes that would be a good benchmark to think about..

Thank you..

Our next question comes from the line of Shahriar Pourreza with Guggenheim. Please proceed with our question..

Let me just ask Mike's question slightly differently. It’s been quarter after quarter, you've seen an improvement in the economic indicators, and the jobs and the housing.

So the question is really when do you think that will transpire into your guidance, into your customer growth assumptions? Because right now, you're still at 50 basis points to 150 basis points of growth, but what's the lag between what you're seeing from an economic standpoint, to what you're seeing in your guidance?.

Well our guidance 2016 through 2018 from a sales growth perspective is a half of 1% sales on low end to 1.5% on the top end and I think as history has shown us in the last couple of years, slightly better improvement in customer growth and sales as we move through the timeframe.

As I referenced earlier, with the low vacancy rates in apartments and low mortgage rates, you’re seeing household formation 25 to 34 begin to increase across the country and that’s holds true for the Metro Phoenix are as well. So it’s going to be better in 2018 than it is this year. 2017 should be better than 2016.

Exactly what that means, think you’ll have to look to our guidance..

Okay, great. Thanks guys..

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

Don, I just wanted you to clarify something that I'm confused about.

You said the staff is recommended a new customer category, or that rooftop solar customers should be in a partial requirements class? Is that correct?.

Yes. I’ll turn to Jeff to comment on that..

Charles, so one of the findings that’s right now in the recommended or opinion or is recognized as the residential customers or the rooftop solar are partial requirement customer.

So it’s somewhere to what we’ve seen on a commercial side where you got a customer brings their own generation and we treat those folks differently on the commercial side than a customer that’s the full requirements customer and so that’s a helpful finding in that recommended opinion order because it reflects the nature of that customers use..

So Jeff that would lead you then, I mean essentially what the staff is saying is consistent with your proposal of having this demand piece for the rooftop solar people, correct?.

That’s the argument we’ve made, is that these folks still use the demand side of the grid and so if you look at a commercial customer that’s basically how we set the rates, is to recover the demand, the cost to service that reflects the fact that they bring their own generation and so again, this is going to be subject to discussion at the Open Meeting in December and we’re obviously getting ready for that conversations, but it’s the helpful finding that just reflects the facts of the system..

Okay, thanks a lot Jeff. Appreciated. That’s it..

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

Just as a follow-up, is it been determined that they are going to be treated with demand charts or is that still open to discussion?.

That’s still open to discussion..

And back to usage, sometimes we've seen extreme weather things mess with people's weather norm [ph] models, could that be going on here?.

I mean it’s possible but really what we have is stronger commercial growth than we’re seeing on the residential side which is sort of supporting the sales growth as we sit here today. I always say weather is an art, not a science, but it wasn’t so extreme like you would see in the solar [ph] month, you sort of tend to skew your degree days..

Okay, thanks for the color..

Our next question comes from the line of Greg Gordon with Evercore. Please proceed you’re your question..

Sorry, I joined the call late.

Have you commented on the integrated resource plan, and can you comment on it any further detail? And as a part of the shortfall, would one of the potential solutions be to acquire some of the power blocks out there? There's a lot of gas combined cycle sitting there underutilized, and I know you probably don't need base load generation.

But at the values you might be able to pay to get some of those power blocks, even if they were used for intermediate or peaking, could that be a potentially good value proposition to solve that shortfall?.

Greg, I did cover in my remarks and we’ve had a couple of questions on it, but we’ve shortlisted a number of resources, we expect to resolve it by the end of the year and announce our plan going forward and beyond that we’re not going to - we’d prefer not to get in any detail of where we’re at now in the process, it’s confidential..

Okay, thanks. I’ll see you in a few days..

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, Christine. Thank you all for joining us today. This concludes our call..