Good afternoon. My name is Andrea, and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Pinnacle West Third Quarter Earnings Conference Call. All lines have beenplaced on mute to prevent any background noise. After the speaker's remarksthere will be a question-and-answer session (Operator Instructions). Thank you. Ms. Hickman, you may begin your conference.

Thank you, Andrea. I would like to thank everyone forparticipating in this conference call to review our third quarter earnings,recent developments and operating performance. Today, I have with me Bill Post, our Chairman and CEO, JackDavis, who is our President and Chief Operating Officer, and also CEO ofArizona Public Service, and Don Brandt, who is Executive Vice President and CFOof Pinnacle West and also President of APS. Before I turn the call over to our speakers, I need to covera few details with you. First, I encourage you to check the quarterlystatistics section of our website. It contains extensive supplementalinformation on our earnings experiences and quarterly operating statistics. Second, please note that all of our references today to pershare amounts will be after income taxes and based on diluted sharesoutstanding. Is it my responsible to advise you that this call will containforward-looking statements based on current expectations and the companyassumes no obligations to update these statements. Because actual results may differ materially fromexpectations, we caution you not to place undue reliance on these statements. Please refer to the caption entitled forward-lookingstatements contained in the MD&A and our second quarter 2007 Form 10-Q andthe risk factors in our 2006 Form 10-K, each of which identifies some importantfactors that could cause actual results to differ materially from thosecontained in our forward-looking statements. A replay of this call will be available on our website www.pinnaclewest.com for the next 30 days.It will also be available by telephone through November 1st. Finally, this call and webcast are the property of PinnacleWest Capital Corporation and any copying, transcription, redistribution,retransmission or rebroadcast of this call in whole or in part without PinnacleWest written consent is prohibited. At this time, I will turn the call over to Bill.

Thank you. And I would like to thank you for taking yourtime to join us today. I’ll highlight several issues and then turn the callover to Don and Jack to discuss details of our financial results, ourregulatory developments and our operations. First, I would like to address our management changes. Lastweek Jack announced his plan to retire next March, completing a very successful35-year career with the company. Throughout his career, Jack has focused onmeeting the demands of the remarkable growth that our company, throughexcellence and resource additions, customer service and operations. Through his leadership Jack successfully maneuvered ourcompany through periods of record growth and significant industry turmoil,including the western energy crisis. Although we intend to take advantage of Jack's expertiseduring his remaining time with us, we know he has built a strong team that willcarry on his commitment to excellence. And since he is here with us today, Iwould like to say, publicly, Jack, thank you for all of your contributions. Youwill be missed. Our success in planning has been in place and as you knowDon Brandt was named President of APS last December. Upon Jack's retirementnext March, Don will take the helm as APS' President and CEO. Don's commitment to our customers and investors isexceptional. Further, he is keenly aware of APS' challenges and opportunitiesand we look to him to continue emphasizing excellence in customer service andall of our operations. As we described to you earlier, we have been taking a hardfocused look at our organization for opportunities to be more effective andefficient and maintain a steadfast focus on our customers and to ensure that wehave clear lines of accountability for results. With that in mind, we also recently made a number ofadditional internal management changes that we believe will streamline andstrengthen our organization, and Don Brandt will discuss…

Thanks, Bill. As Bill said, our consolidated earningsguidance is a reasonable range around $2.90 per share. As part of this guidancewe estimate the APS's earnings will be about $2.70 per share, which willproduce an earned rate return of about 8.25% for the year. SunCor's earnings are currently expected to be approximately$20 million for the year. The consolidated guidance we provided in July was anestimate of a reasonable range around $2.55 per share. The primary differences between our current guidance and theprevious guidance are as follows. First, hotter than normal weather during thisyear's third quarter improved our estimate by $0.14 per share and I will talk alittle more about the details of just how hot it was this summer in a fewminutes. Tax benefits related to prior years but resolved during 2007increased our estimate by about $0.13 per share. Deteriorating credit marketconditions in the second half of 2007 have lowered our earnings expectationsfor SunCor by about $0.10 per share. The decline at SunCor is essentially attributable to threerelatively large commercial and partial transactions that we do not now expectto close in 2007. The net effect of numerous relatively minor factors combinedimproved our estimate by $0.18 per share. These factors include such items as, lower effective incometax rate, higher than expected retail sales and lower than projected interestexpense. Let me emphasize that not one of these numerous items is notable on astand-alone basis and that some of them are clearly one-time items, whileothers are the result of our cost management efforts, and those efforts willcontinue. Turning to our third quarter results, for the third quarterof 2007 we reported consolidated net income of $209 million or $2.07 per share,compared with $184 million or $1.84 per share in the prior year quarter. Two factors dominated the quarter-to-quarter comparison.Extraordinarily hot weather in this year's third…

Thanks, Don. Today, I will update you on recent regulatorydevelopments and operational performance. Although this maybe one of theshortest regulatory updates I have given you in recent past, we continue to bevery focused on regulatory issues. On last quarter's call I outlined the key provisions of theACC June decision on APS -- on the APS rate case. That decision closed asignificant proceeding in our regulatory history. A preceding that lasted some20 months and resolved a number of significant issues. Principally timelyrecovery of our fuel and purchase power costs yet other issues continue. The formula for kilowatt hour PSA adjustment that tookeffect on February 1st of this year will remain in effect as long as necessaryafter January 31st of 2008 to collect an additional $46 million of 2007 costsdeferred under the PSA as a result of the mid-year implementation of the newbase fuel rate. We estimate this adjustment will remain in effect through mid2008. Effective July 1st, APS began collecting through a PSAsurcharge of approximately $34 million including a crude interest of PSA costdeferrals led to the 2005 replacement power cost for Palo Verde outages. Thistemporary rate increase will be in effect for a 12-month period. Regarding 2006 Palo Verde related PSA deferrals, APSdeferred $79 million under the PSA related to 2006 replacement power cost forPalo Verde outages. Virtually all of those referrals were associated with theunit one vibration issue. The ACC directed its staff to conduct a prudent review ofthe outage costs. Earlier this month the ACC staff filed a report with the ACCconcluding that the APS' response to the unit one vibration was reasonable andprudent. We have been recovering those referrals and will continue todo so through the PSA. On August 7, APS submitted to the ACC a plan to meetingthe five years -- a five-year plan of Arizona…

Thanks, Jack. In summary, we understand what it takes toserve the fastest growing state in the country. Over the years, we haveconsistently met our customer's growing energy needs and we will continue to doso. That concludes our prepared remarks and we would be very happy to answeryour questions.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster.Your first question comes from the line of John Kiani from Deutsche Bank.

Good morning. Can you talk a little bit more about thecomponents of the $0.35 per share guidance increase? I want to just get abetter sense for how much of the items that you highlighted in the 8K arerecurring or will continue beyond '07. If I look at some of the pieces to me itlooks like maybe a subset of the $0.18 other category and then perhaps thehigher retail sales is the portion that we could expect to see as a continuedbenefit. Am I think being that correctly?

John, this is Don here. To a degree, possibly yes. I hate tobe equivocating on that but some of that is potentially attributable to theweather extremes just how accurate splitting weather from growth might be. Onthat front, but it did surprise us. There was still strong growth there. In myprepared remarks, I just wanted to stress that there -- most of the itemsindividually are not of the recurring type nature. But some of it, about half,or 40% I would put in the category as a result of management efforts. And those will continue, whether the exact sameopportunities will present themselves again in the future periods. Those exactcircumstances probably won't be there. But our dedication to the minimizingcosts will be and we continue to focus on that. But some of them are reallyone-time quirks that came out --

That's helpful, Don. Just to be clear. When you say kind ofballpark 40%, do you mean 40% of the $0.18?

Yes, correct.

Not of the $0.35.

Hey, 40% of the $0.18.

Got it. Okay. That's helpful. And then just a quick questionon SunCor. If we were looking out kind of beyond '07, should we take what'skind of implied by the fourth quarter, which to me seems like about $4 millionor so, and extrapolate that and assume that that's sort of the new run rate? Orwill those parcel sales you mentioned that are going to get pushed off benefitabove and beyond what that math would show?

Let me address those two different ones. No, you shouldn'ttake that $4 million run rate and --

Okay.

Your next question comes from the line of Greg…

Wait, wait, wait. Andrea, we were still answering Mr.Kiani's question.

Mr. Kiani, please press star-one again.

John, John, are you still on?

I'm here. Okay. Thanks, Becky.

Good save, Becky. The $4 million for fourth quarter, you'reabout right. That's the way the math works. I would not take that as a run rategoing forward.

Okay.

And I will answer your question the second part a littledifferently than the way you asked it. But the three deals that failed to closethat we thought would close, it doesn't reflect the change in value. It waspurely the entities ran into financing problems.

Okay.

And it was very unexpected I'm sure on their behalf. Anybodywho was in the financial markets in early-to-mid August, even our owncommercial paper program was a little disruptive for a few weeks. And they puttogether. Some of them are looking to restructure those deals, take another runat it. But the issue is, one of these commercial deals falls apart, it's notsomething you put back together in two weeks. It's two to four months’ process.The value is still there for future years.

Got it. That's helpful, Don. Thank you.

Okay.

Your next question comes from the line of Greg Gordon.

Follow up on John's question and then one other question.Are we -- should we be comfortable that the underlying economic value of thosetransactions isn't in fact diminished when you come back to re-value thosetransactions in '08? To put another way, I think we leaned away from valuing thereal estate business on earnings and look at more as -- as an asset value play.What do you guys seeing in terms of asset value, and what are your accountantssort of do on a regular basis in terms of trying to assess impairments on thereal estate value?

No. Greg, one, no, we think the long-term value is stillthere. And relative to the impairment issue, we don't believe there is an issuethere. Actually on the parcels that didn't close, the basis is literally asmall fraction of the current market value. And even if you take plus or -- 20%plus or minus of those current market values, we are still substantially in themoney.

Okay. My second question goes to timing of regulatoryactivity. I know you guys are taking a hard look internally at both youroperating and capital costs. At what point will we see you approach thecommission again to get rate making treatment, either for the pass through ofthe transmission revenues that you require, or taking another look at theunderlying revenue requirement of the utility?

Greg, this is Bill. As far as dealing with the growthissues, we are going to be dealing with the commission on those growth issuesthrough the rest of this year and probably into next year. And then based uponall of the things I mentioned, we will be taking a look at some kind ofpotential filing. And it's hard to basically predict that at this point becauseit depends on several of the things between now and then next year.

Thanks.

Good.

Your next question comes from the line of Dan Eggers fromCredit Suisse.

Hello, Dan.

On your last comment to Greg, what would cause you not fileanother rate case, kind of given this 825 ROE type of level?

Well, it obviously comes down to our success in dealing withseveral of the issues that we're dealing with today. One is the growth issueand how the growth issue is dealt with and certainly that could have asubstantive impact. I don't believe as I have mentioned we've been goingthrough our expense reviews and I know as you know, Dan, when you benchmark ourcompany on expenses, we perform very, very well. So we are in a situation there where we are going to driveour costs down as I mentioned as low as we possibly can, but we aren't going togo below levels that have a negative effect on safety or customer service. Andcost savings alone will not offset the growth impacts that are placed upon usfrom new customer growth as we go forward. So savings alone will not offsetthat. Our transmission, as Jack mentioned, we filed a transmissionrate case, and we expect that to go into effect early next year in the firstquarter of next year, and so all those variables kind of come together. Butfrom our standpoint, the big issue's growth and dealing with that on a goingforward basis.

As you have the conversations with staff, with parties, withcommissioners about addressing growth, is it a bit of a challenge to get toofar down the path of the conversation given the fact that three of thecommission's seats will be different by the time you could actually get aneffective rate case done?

Well, our commission as you know, it's an elected commissionand every two years we will have either two or three seats up for election.That's been the case in terms of election for some time. And the timing ofthese decisions in my memory has never been affected by that. More specifically, as we have put forward rate cases thatwent as this one did over some months. It did not impact the new commissioner'sability to be able to engage on that and to deal with that issue. And I don'texpect it will going forward.

Don, do you happen to have right now where the equity ratiowas at APS at the end of third quarter?

No, I don't.

And I guess lastly just kind of as we think about -- startthinking about '08, more actively the drivers, some help from loads, some helpfrom cost savings, some help from implementation of this year's rate caseresolution, those will all be positives. The negatives are going to be a morenormalization of tax rate and higher financing expense. Is that fair?

Yes.

Is there anything else we should be thinking about rightnow?

Well, let me start by a couple of things. Relative to '07,is jumping back there. I said in the last call that we'd expect an increase inO&M expense pre-tax $10 million to $15 million a quarter. And whereas thethird and fourth quarter and I was doing simple math dividing by two and forthe third quarter we were up about $5 million pre-tax. So we still see that number on O&M coming to fruitionfor the year. In the fourth quarter we will see an increase pre-tax of -- inthe neighborhood of $25 million. In addition to that, something in the fourthquarter, and in future quarter’s kind of a run rate on capital-related expensesas I will categorize them, and there is depreciation property taxes andinterest expense is about a $0.10 per share quarterly impact going forward isthe cost of new plants going into service.

Okay. Thank you.

Your next question comes from the line of Paul Pattersonfrom Glenrock Associates.

Hello, Paul. How are you doing today?

All right. Just to clarify things here because I sort of --it was coming in, I don't know if it's on my phone, but I wasn't able to heareverything completely. It sounds to me like about 40% of the $0.18 is non-recurringin your estimation with respect to the guidance number that is sort ofmiscellaneous?

No, I think it was the opposite. I'm not sure I'd categorize40% of it as recurring, but it was attributable to our cost management efforts.And those efforts will continue, whether the exact same type items arerepeatable or not, in their entirety I doubt it. But the other 60% is clearlyone-time oddities that just came to fruition.

Okay. And then in terms of the real estate market there andwhat have you and what we are seeing just generally in the press, I think youindicated you saw no significant impairment at all in the business. And Iwanted to get a flavor for that. Is that because the market dynamics in --where you are operating, is that because of your low cost basis to begin with? Could you give us more flavor as to sort of the outlookthere? What you are seeing and whether or not -- what you see the trend goingforward into 2008 in terms of different markets. I know that the commercialmarket might be offsetting to a certain degree. But just in general, what theflavor there is if you could elaborate on that a little bit more?

Yes. First you mentioned the real estate market and I willaddress that two aspects. The commercial side and in commercial I'll throw inour potential parcel sales and then there is the residential home market andhome building market. And the commercial market we think is still very solid.And a combination of market dynamics here in the west valley of Phoenix, wherea good deal of our operations on the commercial side are centered. And we have an extremely low basis in the land we own in thewest valley. Now on the home building front, that has slowed dramatically, andin a solid year we would have expected home sales in the 800 to 900 unit. Andwe will do a little better than 200 units this year with a good part of thatoccurred in the first six months and it's dropped off dramatically in the fourthquarter. But with that said, we don't have much inventory in the waywe develop and do our home building with these planned unit developments. It'ssignificant, we just don't have a big inventory at risk.

Do you see the market improving or declining or staying thesame kind of six months out, or what do you think about -- I mean I know it'spredicting and not easy to do, but --

Well, based on the number of homes we expect to close in thenext quarter and it's hard for home building to go much lower. I don't thinkwe're going to see a significant turnaround until 2009 at the earliest.

Okay. And then on the power plant performance, Palo Verdeand what have you. How much -- I guess in terms of turning it around andgetting it back to the top tier, what would the financial impact of that be? I mean, obviously it's something you guys want to do and itobviously helps customers. But from a financial perspective, should we expect abenefit -- a financial benefit to come about as a result of that in anysignificant way?

To address -- this is Jack, to address the turnaround at theplant, I think as I said last time I don't think we mentioned this time and wedidn't see a large impact on our costs to return Palo Verde to its former topposition, mainly because the -- all the capital, the major capital costs werepart of our plan in the first place. And so we haven't identified large capital items especiallyupon completion of the steam generator replacements and low-pressure turbinesthat we're doing in unit three now, large capital items that would impact usnegatively in the future. In fact, just the opposite the -- we see that once we getthese capital items passed us, we don't see larger ones coming into the future.The other side of that is, as we seen a steadying increase operatingperformance at the plant and I'm going to give you a fact I didn't give in myprepared remarks. But for two months in the third quarter I had two plantsoperating at about 100% for that two-month period. So as we bring Palo Verdeback to its normal annual capacity factors of the 90% to 93% range that's boundto have a positive effect on our company.

Paul, if I could just add, this is Bill -- if I could addsomething to that. I think if you compare our capacity factors this year tolast year on average, I think we will be up in the range of about 10% to 15%improved performance. And that includes the fact that we are replacing that steamgenerator and the outage that Jack mentioned. As we finished that effort, thatwill be the completion of the replacement of all of our steam generators atPalo Verde. As we go forward we would expect to benefit from that as youcan see in the capacity factors.

Right. But in terms of the O&M and what have you and thescrutiny and what have you -- that we've had, this year and some of that goingaway, is that have any substantial impact or is that capitalized, I mean andjust as there is any sort of lift up from that, sort of going back to thehigher capacity factor and maybe having a little of the NRC review kind of,activity or is that significant at all?

Well, there are some significant dollars involved, Paul. Andlet me give you a little color on that. In the third quarter '07 compared tothird quarter '06, our share -- the APS share Palo Verde O&M is up $7.5million, and some of that is attributable improvement program that's going on. We expect a like amount in the fourth quarter this year. Andthe impact in next year is largely dependent on how the finalization of the NRCinspection and what tasks lay ahead of us. And we will likely see some costs next year. But the net-netbenefits of having Palo Verde up to its traditional industry-leadingperformance will be measurable for both shareholders and customers in thefuture.

Great. Thanks a lot.

Your next question comes from the line of David Thickensfrom Deephaven Capital Management.

Questions have been asked. Thank you.

Thank you. Do we have any other questions?

Your next question comes from the line of Andrew Levi fromBrencourt.

Hi, guys, how are you?

Good afternoon.

Just a question. Could you go over dividend policy for us,please?

I'm sorry I missed your question. Could you say that again?

Could you go over dividend policy for us, please?

Sure. As I mentioned, we look at that every single year.It's a function of basically all the financial statistics that we have. As Imentioned to you, we have had a history there of significant increases everysingle year, basically a flat number of $0.10. As we looked at the situation today, we concluded to holdour dividend at its current level.

I'm sorry I missed that. Thank you.

Your next question comes from the line of David Grumhausfrom Copia Capital.

Hi, David. How are you doing?

Good. Just two questions for you. One, Don, you talked aboutthe tax rate, what's a good effective tax rate to use going forward?

Incidentally, I happen to have something like to at myfingertips. Let see, somewhere around 32%, 33%.

Okay. That's helpful. And then second question, Don, youtalked a little bit about the O&M and this $10 million to $15 millionpre-tax per quarter. And I know when you gave it you were really referring toQ3 and Q4. Is that a decent number to be thinking about just given yourgrowth as we look to '08 and beyond? Or is that -- can that, will that numberchange significantly in your potentially change significantly?

David, that number I mentioned, the $0.10 that was relatedto the capital-driven expenses, depreciation property taxes and interest.

Okay.

That's a reasonable number for the next 12 to 18 months perquarter.

Okay. So when you say $0.10, is that $0.10 each quarter orthat's just a flat $0.10 we should put in and assume.

$0.10 each quarter.

Increase, just from adding the capital in front of yourgeneration and that type of thing. Okay, that's great. All right. Thanks forthe time.

Okay.

Your next question comes from the line of Shalini Mahajanfrom UBS.

Good afternoon.

Just had a few follow-up questions on what 2008 could looklike. If I just start with 2007, stripping out some of the one time items ofthat have -- that took revised that items of 200, I come to a recurring base ofbetween 260 to 265 for '07. And then it seems that it's large head winds for theinterest you mentioned that's $0.10 a quarter, probably about a $0.25 hit fromO&M. Some other impact, too, because the weather was favorable this year.Are we looking at best flat earnings in '08, or possibly a declining trend?

As I mentioned, we are going through several things rightnow as we deal with, for example, taking a look at our organization and ourexpenses. We would expect to provide guidance on '08 at the end of this year.

Okay. But did that need any color you could throw in. Andthe trend?

And we will provide that guidance as we complete theseefforts and we expect that to be as I said toward the end of the year.

Okay. Thank you.

Your next question comes from the line of Chris Turo (ph)from Dahlman Rose.

Good afternoon.

Hi. I think you just send me outside -- I just wanted to askyou in terms of the Palo Verde units, you are anticipating to be back to normalby the end of '08. Is that pretty much the NRC report sort of a final, final?Or do you just still not quite sure?

Danielle, as Jack mentioned to you we have a two fueloutages per year.

Right.

And we would expect as we complete the steam generatorreplacement, our last generator replacement in our current outage, that wewould be on that kind of a cycle going forward without extended outages like wehave had over the last three or four years as a result of the steam generatorreplacement. But from the standpoint of maintenance and plannedmaintenance, this outage would be very significant in terms of putting us onthat path of fuel outages that would deal for the most part with fuelreplacement. Obviously, you do a lot of other work while you are doing that.That would put us on a path that would be predicted going forward.

Okay. And it's the NRC inspection is more of a final aftereverything has been done. Is that all you see it?

I'm not sure, I understand your question, but let me explainwhere we are with that. This year we were going through the 95003 inspections.That process has been underway for sometime. And will be underway through the end of this year in termsof the inspection process and would continue through 2008. So we do expect tohave continued participation on the part of the NRC through the year 2008.

Okay. Great. Thanks a lot.

Your next question comes from the line of Reza Hatefi.

Good afternoon.

Yes. Just a little bit confused. Can you hear me now by theway?

Yes. That's fine.

I think, you mentioned that you are on pace to earn eight anquarter ROE at APS this year. Is that what the comment was?

That's correct.

And does that eight an quarter include the benefits of thegood weather as well as the tax benefits?

Yes. It does.

And so, I guess, if we were to sort of normalize that andstrip those one times out, certainly the ROE would be lower. So I don't knowwhat it would come out to calculation, but assuming it's 7% or something. I'm a little bit -- I guess going into next year and facingfurther rate base growth as well as O&M pressures can you expand a littlebit on the reason of not filing a case? And I guess -- because it looks like if you were to wait andfile one and let's just say mid 2008, it probably wouldn't be effective untilearly 2010. Just wanted to get a better feel for I guess what's going on.

Well, as Bill mentioned, a couple of times on the call hereas we got -- it's not just about a traditional rate case. We've -- we'reexploring other alternatives relative to addressing growth and we have beenencouraged by the commission to do so. They've expressed that in hearings in the past. And we aretaking their lead on this matter. And also relative to looking at the coststructure of the company we've just got a few other things that we have to bein place before we can address the timing and the extent of any rate caseneeds.

So, so to speak you are sort of have decided to sort of, Iguess for a lack of a better term take some pain in the early time frame to getinto positive benefits and a better relationship with the commission, once weget out a couple years from now.

Well, I wouldn't call it take the pain. I think we weredoing what makes the best business sense.

Great. Thank you very much.

(Operator Instructions) You have a follow-up question fromthe line of John Kiani of Deutsche Bank.

Hi, Don, just one more quick question. Thinking about therate base growth that Reza was just highlighting, and looking out into '08 andbeyond, and thinking about the sources of funding for that. Can you talk a little bit about how you intend to financethe rate base growth, and whether equity would potentially be a part of that?

Well, I can talk in terms of over longer period of time.We're going to have to rely on both the debt and equity capital markets.

Got it. Okay. Thank you.

Thank you.

At this time you have no further audio questions.

Well, I would say thank you for your time. We know it's verybusy, and we appreciate you giving us your time today. Thank you very much.

And if you have any questions following up, please call meor Lisa. Thank you very much.

This concludes today's conference call. You may nowdisconnect.