Good afternoon. My name is Kanisha, and I will be your conference operator today. At this time I will like to welcome everyone to the Pinnacle West First Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Ms. Hickman you may begin your conference.

Thank you, Kanisha. I would like to thank everyone for participating in this conference call to review our First Quarter Earnings, recent development and operating performance. Today I have with me Bill Post, our Chairman and CEO and Don Brandt, who is our President and Chief Operating Officer and also President and CEO of Arizona Public Service. Before I turn the call over to our speakers I need to cover a few details with you. First, I encourage you to check the quarterly statistics section of our website. It contains extensive supplemental information on our earnings variances and quarterly operating statistics. Second, please note that all of our references today to per share amounts will be after income taxes and based on diluted shares outstanding. It is my responsible to advise you that this call will contain forward-looking statements, based on current expectations and the company assumes no obligations to update these statements. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. Please refer to the caption entitled forward-looking statements contained in the Form-8K we filed this morning as well as the MD&A and risk factor sections of our 2007 From-10K, each of which identifies some important factors that could cause actual results to differ materially from those contained 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 May 6th. Finally, this call and webcast are the property of Pinnacle West Capital Corporation and any copying, transcription, redistribution, retransmission or rebroadcast of this call, in whole or in part, without Pinnacle West written consent is prohibited. At this point, I will turn the call over to Bill.

Good afternoon. And I would also like to thank you for taking your time to join us today. Don will discuss our financial results along with regulatory and operational developments, but before I turn the call over to him, I would like to address a few items. Our service territory continues to grow, albeit at a slower rate than in recent years. This year our growth has continued the slowing trend we had in 2007 from the 4% plus pace experienced in 2005 and 2006. However, our growth still remains above the national average. As such growth is evident throughout our business and continues to dominate our operations and strategies. In the first quarter our customer base grew 2%, compared with 2.6% in the fourth quarter of last year and 3.8% in the first quarter a year ago. Based on today's economic outlook, we estimate that our customer account will grow about 1% by the end of 2008. Although we're currently experiencing a slowdown from our historical growth rates, growth in Arizona will continue over the long-term. Consequently, we're aggressively focused on the future, our customers' growing energy needs and the financial strength that is critical to our success. We continue to peruse solutions to reduce our future capital needs. Progress has been made on the regulatory treatment of growth and getting growth to help pay for itself. In February, the Arizona Corporation Commission approved amendments to APS's line extension schedule. These changes provide for timely collection of part of our distribution construction cost, and as a result, will reduce the amount of future rate increases for APS's existing customers, as well as reduce the amount of new capital we will need to meet customer growth. The new line extension payments will offset a portion of APS's expenditures to construct…

Thank you, Bill and good afternoon to all of you. As Bill said, we are reaffirming our consolidated earnings guidance for 2008. We continue to expect that consolidated earnings will be within a reasonable range of $2.50 per share. We currently estimate that APS will contribute substantially all of the earnings and that SunCor's contribution will be minimal. Our current estimate for APS is higher than our previous guidance for a number of reasons including improved wholesale revenues, the effects on retail sales in the first quarter of cooler than normal weather, favorable mark-to-market evaluations of our fuel hedges, favorable resolutions of various tax matters and a second transmission revenue increase that we assume will become effective in mid-2008. We expect these favorable factors to be partially offset by a lower expected customer growth, because of current economic conditions. We had previously expected SunCor's 2008 earnings to be approximately $20 million. However, as a result of weak real estate market, we currently estimate that SunCor's contribution to earnings will be minimal. Turning to earnings for the quarter, the first quarter of 2008, our earnings were down $0.20 per share versus the 2007 first quarter. We reported a consolidated net loss of $4 million or $0.04 per share compared with net income of $17 million or $0.16 per share in the prior year quarter. In summary, rising cost with APS more than offset contributions from increased retail sales due to growth. The decline in APS's earnings combined with lower results from SunCor's real estate operations decreased our first quarter earnings. Now I'll give you some additional details on these variances. Higher O&M cost decreased earnings $0.14 per share. Almost two-thirds of the increase was due to a greater number of power plant overhauls and system maintenance, as we prepare for our…

Thanks Don. As many of you know, Jack Davis retired March 1st. Effective upon Jack's retirement, our Board of Directors named Don Brandt to be President and Chief Operating Officer of Pinnacle West and Chief Executive Officer of APS. Don has been with APS for five years and President of APS since January 2007. He's done an excellent job and his financial focus will lead us well into the future. That concludes our prepared remarks, and we'd be very happy to answer your questions. Question and Answer

[Operator instructions]. Your first question comes from John Kiani.

Good morning.

Hi, John.

Hi, John.

Don, I know you touched on this in your opening remarks, but can you give a little bit more color around some of the benefits that APS is going to realize or do you now expect APS will realize, like for example how much earnings contribution is associated with the favorable mark on the fuel hedges maybe the wholesale revenues piece and also the tax pieces, as well please?

Sure. I will maybe go a little backwards here, John. The taxes are about $0.16 a share.

Okay.

The mark-to-market is about $0.04. And the improved wholesale revenues are about $0.04.

And what was the tax associated with, the tax benefit?

Just some resolutions of some outstanding tax matters, principally income tax.

Okay. And then, from a long term forecasting perspective, should we expect something like that to recur in '09 or that's just more of a near term benefit?

More of a near term benefit.

Okay. And then as far as SunCor is concerned, I mean, I think, you laid out pretty clearly your near term expectation for SunCor, how should we think about SunCor a little bit longer term from an earnings contribution perspective? Do you have a view on when you think that business will eventually turn around?

I think our sense is, at the earliest, towards the end of 2009.

So, then we should think then more about kind of the similar level of contribution perhaps into '09 and then maybe something better beyond that?

Well, we haven't gotten into that today, but we have within the level of earnings at SunCor, which I said is minimal.

Right.

We do have a number of transactions. Home sales are relatively low, almost half of what we thought going into the year. But on the commercial side, we've got one very large transaction that we expect to close in the second quarter of this year. And next year will be depended on, to some extend on our success at closing some of these commercial transactions. And the real estate market, both residential and commercial, is weak, but one of the issues we've run into that I know everyone has is the liquidity issue in the credit markets, and in trying to put financing packages together. There are buyers out there, they just can't finance or they are having a difficult time. So, well the real estate market per say, we don't expect that to turn around till at least towards the end of '09. Some improvement in the credit markets could provide some impetus but --

Yes, it's helpful Don. Thanks a lot.

Okay.

The next question comes from Paul Patterson.

Good afternoon guys. Can you hear me?

Hi, Paul.

Hi. On the mark-to-market change there, I know it's only $0.04, but how does that work, I mean when does that get realized, I guess?

How does it work? That's the, essentially --

How does it flow through, if you follow me? Right, I mean it's going to be recognized I guess when... I guess, is that the first quarter that you guys recognized it already or -- ?

Yes. To answer your question, we recognized it in the second quarter. And it relates to fuel price movements in the years beyond 2008. And what happens is, how we designate the hedges, cash flow hedges flow through as OCI, and the non-cash flow hedges, the 10% sharing mechanism, under the fuel clause, that is the portion that gets recognized currently in income or expense.

Okay. So, it will reverse itself past 2008?

Correct.

Okay. And then, some of the discussions with the rate proceeding, I know that the pervious rate cases is a little bit different and that it was… Had been some time and what have you. Do you think there is a greater possibility for settlement or I mean I know it's early in the process, but you know what I am saying?

Well it's very early in the process, and we are always open to settlement. And I think we will be exploring that, we are in the very first stage… Literally the first stage of the rate case. But I think generally settlements are good thing, and we will be approaching that subject further down the road.

And then along that line this case is much more straightforward. The last case we had was very complex, as it dealt with many more issues. This one is much more straightforward.

So, maybe it's more of a possibility to settle it sooner rather than what happened in the previous case?

I think that's true.

Okay. And then just finally, on SunCor. Is there a possibility or I mean what are the chances that things could be worse in 2009 than 2008, when you look out to that? I mean I understand you don't expect the situation to improve until late 2009, but is there anything that we might want to thing about with respect to 2009 and that outlook?

I don't think it can get much materially worse. We have got… We were coming off, if you back up a couple of years, the pace we were going on home building was close to 800 to a 1000, and we are looking at about a 150 homes this year. Condo sales were closer to 50 to 100, and we're looking at it, 25 or 30, and commercial transactions at a relative minimum.

Okay. Great, thanks for the color.

Thanks Paul.

Next question comes from Jonathan Arnold.

Good afternoon guys.

Good afternoon.

Follow-up on the SunCor question, I mean you said that, you expect minimum earnings in 2008 with a fairly sizeable commercial deal expected to close in the second quarter. So, as we look into kind of Q3 to Q4 and have some - the lumpy commercial transactions, do you think the run-rate of loss that we had in Q1 is about where it stabilizes or could the business slip to a larger loss assuming, or is that already reflecting I guess the current pace of slow sales you just referenced.

Yeah, I think that reflects the current pace, Jonathan.

Okay. And then secondly just wondering, Bill you mentioned that large number of candidates running for the ACC election, any that we should be particularly focused on that could have the most traction of seem to be front runners out there. Any color you could add around that would help.

Sure Jonathan, I really don't have much, as it's very early in the process. And as I mentioned that it's still opened in terms of new candidates and their entry into the process. I would say this; I don't think we've ever had at least in my experience recalling back in terms of the elections, we've never had as many candidates as are interested in the Commission as we have today, approximately half of them or so maybe a little bit more are either current legislators or ex-legislators. And I think the interest in terms of the Commission is positive thing. But as far as individual candidates, I don't have comments on that.

How does the Chairman do…who was the eligible for its Chairmanship. How about that one?

Well, there isn't a formal process that, and so, there isn't a set time nor a set term in terms of the Commission or the Chair. So, I would expect to… my guess is that it would probably stay the way it is. But that's literally a guess.

Okay, thank you.

Your next question comes from David Thickens.

Good morning. Most of my questions about SunCor have been asked, but I am just going to beat this horse, a touch more. Just trying to focus on what the earnings drag could get to if the remaining sales that are on the table fall off, or maybe put another way. What is kind of the minimum earnings burn level you can maintain SunCor at to keep the human capital in place that would allow you to ramp thing up, if and when the real estate markets turned. Does that make sense?

I will try.

I mean no one knows really how bad this real estate market is going to get. So, what I am trying to figure out is, if its worst than expected, what kind of ongoing loss are we going to see out of SunCor until thing get better.

Okay. Even this year, let me trying it this way. If we pull the commercial transaction the one large commercial transaction out of the, that I was talking about in the second quarter, that's roughly about $15 million. Going forward we've reduced staffing levels substantially, by about… they weren't large but somewhere in the range of 30% to 40%. And to keep folks relative to on the residential side, the plant unit development, the management teams in place it was principally the sales force, because home just aren't selling. That's not a difficult proposition to bring that back up to levels when the market comes back. So I think going forward, we've really cut our expenses back and we'll continue to look at that to keep the number…I don't see if there is a likelihood of it getting measurably worse than it is this year.

Yeah, if I could add something to that. As many of you know, we were on a program for four years to change the portfolio of SunCor, and we were successful at that. And as result, it has really given us an opportunity to deal with this kind of a swing in a much, much more positive way. Now certainly not positive in terms of decline of the residential market, but our capability to be able to manage this process has improved very significantly. And even at the current levels or even at levels that we see that could potentially worse, we don't see any impairment in the assets at SunCor.

Okay. And one question, just kind of following up on the filing with… comparing the fuel increase of roughly $13 million. Am I correct, and that that presumes you get the 100 and some odd million from new connections to offset that and you're presenting the two together to the Commission [ph]?

Those are really not related. We gave you the impression those were related, they're really not related.

Okay. So I mean, if you don't get the connections that doesn't change the fuel increase?

Not, necessarily.

Okay. Thank you very much.

Thank you.

Your next question comes from Edward Hinds [ph].

Good afternoon.

Good afternoon.

I had one quick question, you mentioned just… Just a little color on the transmission writer. It sounds like you're going to file for another rate increase with that this summer, and is that in addition to I think the $37 million that you have already announced that is going to be the revenue increase that you filed with FERC?

You are correct.

Okay. And have you quantified how much you expect that part of the portion that's offsetting some of the SunCor weakness?

No, we have not.

Okay. And I guess the other question Don, was just on the O&M. I think on the last call you talked about O&M being about $40 million for the year.

That's correct.

And it looks like there was a big chunk in this quarter. And is that really just related to timing, I think it was up $23 million this quarter, is that still a good $40 million.--

Yes, it is. Plus or minus of $1 million or $2 million, we just looked at that again yesterday. And yes, it was very much skewed. Typically the O&M would be skewed towards the first and fourth quarter of the year, because of the maintenance activities. And with the large overhauls going on at units at Four Corners and Cholla, it's a little more exacerbated towards the first quarter. So, the answer to your question the $40 million plus or minus of couple million is still good.

Great. Okay. And just lastly just on, can you give us some updated thoughts on the financing in particularly, and with regards to equity needs in this current market environment?

Well, as I said in the past, a number of times, as over the intermediate term we'll have to access both the debt and equity markets. And we really haven't talked about the timing specifically of either one yet.

Okay. Good enough. Thanks a lot.

Okay. Thank you.

There are no further questions at this time.

All right. Well thank you very much for taking your time. We know it's a very, very busy time and we thank you for your attendance.

And as always, if you have any follow-up questions please give me or Lisa Malagon a call. Thank you very much.

This concludes today's teleconference. You may now disconnect.