Good afternoon. My name is Jennifer, and I will be your conference operator today. At this time I would welcome everyone to the Pinnacle West Earnings Conference Call. [Operator Instructions].Thank you. Ms. Hickman you may begin your conference.

Thank you, Jennifer. I'd like to thank everyone for participating in this conference call to review our Second Quarter Earnings, recent developments and operating performance. Today I have with me Bill Post, our Chairman and CEO, Don Brandt, who is our President and Chief Operating Officer and also CEO and President Arizona Public Service, and Jim Hatfield, our new CFO. 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 to per share amounts today will be after income taxes and based on diluted shares outstanding. It is my responsibility 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 with the SEC 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. Also during the course of this call, we will be discussing our ongoing earnings, which is a non-GAAP financial measure as defined by the SEC. Our earnings release, which is available on our web site is accompanied by a reconciliation of our ongoing earnings to our net income. A replay of this call will be available on our web site www.PinnacleWest.com for the next 30 days. It will also be available by telephone through August 6th. Finally, this call and web cast 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's written consent is prohibited. At this point, I will turn the call over to Bill.

I would also like to thank you for taking your time to join us. As Becky mentioned, Jim Hatfield is with us today. Two weeks ago, Jim joined us as Senior Vice President as chief financial officer, bringing with him more than 28 years of electric and gas industry experience. He most recently served as CFO of OGE Energy, and we are very excited to have Jim on board. Don Brandt will discuss our financial results and operational highlights for the quarter, and then I will complete our remarks by discussing regulatory developments and our plans for the future. Don?

Thanks, Bill. Our consolidated ongoing earnings in the second quarter were $104 million, or $1.03 per share, compared with $85 million or $0.84 per share a year ago. The ongoing earnings exclude $0.30 per share of credits attributable to prior year tax issues resolved in the second quarter of this year. The increase in ongoing earnings of $0.19 per share was driven largely by improved results at our real estate subsidiary, SunCor. SunCor's second quarter earnings improved $0.14 per share because of the sale of a 12-story office building at its Hayden ferry lakeside development in Tempe, Arizona. I mentioned on our last conference call that SunCor had a large commercial transaction pending which was expected to close in the second quarter. This sale closed in June and contributed a $19 million after-tax gain. Excluding this one major real estate gain, our ongoing operating results were flat. Now, I will cover some detail in the other variances for the quarter. Rate increases improved earnings $0.15 per share. The retail base rate increase became effective last July, contributed $0.11 per share, while the whole sale and the retail transmission rate increases that became effective March 1st added $0.04 per share. Non cash mark-to-market valuations of APS's fuel and purchase power hedges net of related PSA deferrals increased as natural gas prices increased dramatically in the quarter. These increases added $0.10 per share. Higher retail sales related to customer growth contributed $0.04 per share. Increased margins related to long-term traditional wholesale contracts added $0.04 per share. These operating earnings improvements were substantially offset by cost increases and other factors. For example, milder weather reduced earnings $0.11 per share. The second quarter of this year was cooler than normal, while the second quarter of 2007 was hotter than normal. May of this year…

Thanks, Don. I would like to spend some time talking about our plans for the future and energy plan for Arizona. Although as Don described, we currently are experiencing a slowdown from our historical customer growth rates. Growth in Arizona will continue over the long term. Consequentially, we must aggressively address the future. Our customers growing energy needs and the financial strength that is vital to our success in serving those needs. Reliable, affordable electricity is the key energy cornerstone in our modern economy. Our employees focus every day on providing top quality customer service, service which has been recognized as Don said year-after-year by superior J.D. Power customer satisfaction rating. However, great customer service cannot be sustained without ongoing investments in our electric system, and a fair, timely return on those investments. The infrastructure investments we're making today and over the next decade will shape the future of our state's communities, its environment and its economy. We must invest in our electric system to provide reliable service and to serve our growing customer base. Growth in both customers and energy consumption means APS needs new energy resources, and we currently project needs for peaking resources within the next five to eight years, and new base load capacity shortly thereafter. We're exploring a variety of alternatives for both types of resources, renewable, gas, coal and nuclear as well as conservation, energy efficiency and demand response programs. However, the specifics of how we acquire and pay for this future will require decisions that will include the public, the Arizona Corporation Commission, and our company. In addition, I believe energy independence for Arizona is essential in order to ensure that APS is not forced to rely on power purchases in volatile and uncertain regional markets to meet the state's energy needs in…

[Operator Instructions]. We will pause for just a moment to compile the Q&A roster. Your first question comes from Dan Eggers with Credit Suisse.

Hi, good morning.

Hi, Dan.

And this first question, just on the… the no need for external funding in 2008, the no need for equity. How much flexibility is there between the four points as far as if you don't get your interim relief, are you still on a position where you can avoid issuing equity or does that change the conversation quickly?

Well Dan our primary focus and this is Don speaking. Our primary focus right now is getting that interim adjustment, as Bill said we are confident that we are going to carry that decision with the Arizona commission. I think they understand our situation, they have acted responsibly with the transmission cost adjusters and the substantial improvements they made a year ago and our fuel adjustment mechanism and I think they will understand that implementing this interim adjustment is the responsible thing to do at this point.

And I think the fact that they have scheduled this and have addressed issues dealing with our credit issues over the last year, year and half show that they have been very focused on this. They understand how important it is for us to be able to maintain the financial strength we've had and improve it and I think the key is that interim decision.

Okay, if I do my math right now, looks like you guys are earning in less under 7% ROE this year with the interim adjuster. Would that put you guys a lot closer, how close to your earn would you guys be at that point?

We will try make up a little better than half of that distance, it put us in the 9.

In the 9 range?

9 range.

Okay.

And maybe on an annualized basis, Dan…

Yeah. Yeah, right.

Remember that this year you only have two months in low sales months.

No, I mean on an annualized basis. Sorry, but thanks Becky and I guess this is kind of last question. And I don't know if you could walk through kind of some of the plusses and minuses from the old 250 guidance this year to the new 250 guidance since you guys were not stripping out the tax benefits from that number.

Yeah there actually aren't any very large ones. Dan, I'm looking at a reconciliation here… the mark-to-market it is a little under a dime. Actual realization on sales is around a nickel. It is split between commercial and residential. Higher volumes on our wholesale contracts is $0.03 to a nickel. Then we've got a multitude of other items and some of our cost reductions that we, Bill mentioned that we went through as a result of '07, some of those who have come in earlier and better than we had anticipated.

Okay. Thank you, guys.

Thanks, Dan.

Your next question comes from the line of Bill Atasoley [ph] from Citigroup

Actually, it's Greg Gordon. How are you doing?

Hey, Greg, how are you?

Hi, Greg.

Okay, so when you… Dan asked a big chunk of my question. When you look at the potential for interim rate relief and the improvement, the potential improvement in returns, does that pick-up, but you just articulated. Take into account the deceleration in customer growth and sales growth that you are looking at?

Short answer is yes.

Okay. And you are basically presuming, and we should be presuming going forward that your revenue growth rate is going to decline to about 1% a year?

Correct, and for the next several years. Yes let me respond a little broader to that. I think what we are saying is our customer growth rate is about 1% per year.

Right, I'm asking if we can extrapolate that constant usage, that would be about 1% or if we were to see some deceleration in usage that you could see top line revenue grow even slower.

Under current rates, you mean?

Yeah.

And so when you say revenue, you are talking about, kind of, projecting revenues under today's rate levels.

Right, all things equal, that's right.

Okay, all things equal. Yeah, that's in the ballpark.

Okay. And is the interim rate relief that you requested, is this an all or nothing number? Or is this similar to any other rates filing where the commission could hypothetically come up with a different, still grant you relief, but grant you a different number than you have requested?

The latter.

The latter, and at what point… you said basically that you are not planning on issuing equity now in '08. If you were to get a decision in the interim case that was… or how soon after you get a decision in the interim case would you make a final decision on that or is that basically already in the plan and you will reassess in '09, no matter what happens in '08 in the September decision?

That's essentially our plan going forward.

Right, so if you need equity, it is going to be an '09 event, irrespective of what happens to the interim case?

That's correct.

Thank you very much.

Thanks, Greg.

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

Good morning, guys…well, good morning over there, I guess. How are you?

Hi Paul, how are you doing?

All right. Just with the equity issuance, I mean assuming that everything works out with the interim increase and everything else, does that mean that the equity issuance is really eliminated for the foreseeable future or just simply postponed?

I think highly likely would be to eliminate clearly for 2008. It's out and for a good part of 2009. I think we would be comfortable move forward without equity.

Okay and then the $500 million capital reduction. I heard your prepared remarks and it wasn't completely clear as to, does this impact future growth or… I mean in other words, if growth comes back and what have you… I wasn't clear as to whether or not this does have the potential for affecting future growth or not?

Well, let me ask you to clarify your question, when you say future growth. Are you talking about the capital expenditures somehow stopping that growth level or... I am not sure if you…

You are reducing the capital, my understanding is that you guys are going to be reducing CapEx going forward over the next three years by about $500 million now. And I also heard in your prepared remarks that there was some issue with respect to having the right kind of spending longer-term set up to facilitate the growth for customers. And I was wondering just how does this capital reduction, I mean you guys are going through some pretty substantial realignments of the business plan and I guess what I am trying to understand is whether or not, this… you mentioned that there was some concern I thought that you were voicing about the ability to fund future growth for the state and I am just wondering how this capital, this CapEx reduction plays into that?

Great, okay, thanks. Thanks for clarifying that. As we said, the key for us, as we look to the future is we've got to be able to meet the energy requirements of the state, not only in the short term, but in the long term as well. And as we look to the future and we plan on filing with the commission in December of this year, a full resource plan that will deal with not only issues of renewables and purchase power, but also base load additions into the future. As we deal with that, we've got to improve our financial strength to be able to add in the next 10 to 20 year period base load additions. For example, if you look across the country, efforts that have been underway by various regulatory jurisdictions in Florida for example where the commission has evaluated the need for new nuclear and has granted mechanisms for recovery of those expenditures through that process. That's the type of thing that we could consider here as we deal with new construction for a base load. We would not make commitments in terms of new base load capacity of that substance without doing that. Therefore we would remove any projection if you will of base load expenditures for that today based upon the outcome of that resource filing that we're going to make later this year.

Okay.

Let me also say that it's very important for us to meet the reliability requirements of our customers and we haven't diminished that. It is the way we're going to finance to meet that reliability, not the fact that we're going to diminish it.

Okay and then with the $500 million, if I understood you guys correctly, that's mostly distribution and some transmission. What… could you just give us a feeling as to what that from a capital budget perspective, what percentage of that is, I mean how much you're reducing you a percentage?

The total?

Yeah, the percentage of distribution and transmission, how much of that CapEx is going to be? How much $500 million represents I guess of the total volume?

Well, the only thing we can do as of today is kind of, you can look at it compared to the total amount and you can see the $500 million against the $3 billion round numbers over that time period. As far as the individual specific programs and projects, that's something we're going to finalize in the next 60 days or 90 days.

Does the $3 billion include generation or anything like that?

It has generation expenditures in it, but no real significant new plants. As you know, it's got continuing nuclear fuel expenditures as well as capital expenditures in all of our generation plants.

Okay. Then just finally, you guys mentioned the long-term fundamentals with the close in the surface territory and the 0.5% weather normalized decrease in sales and you said say you expect that for a couple of quarters, but then things get back to normal. What recessions have there been in Arizona recently or how… what are you comparing that against, is that like the 1990 slowdown or?

Comparing… that was our experience in the 2001/2002 period. The '90/91 period also very similar type of a usage pattern.

So, you basically by 2009, you expect the weather normalized usage to be what it was historically?

Yes. Basically our growth is driven by the type and size of new homes. And the trend and even the continuing trend, obviously, home building has slowed down, but towards larger homes, higher ceilings, more cubic feet. That's what the primary driver of usage and growth.

Okay. Thank you very much.

Thanks, Paul.

Your next question comes from the line of Jonathan Arnold with Merrill Lynch.

Good morning, guys.

Hi, Jonathan.

A question on SunCor, you obviously have this gain in the quarter. You are talking about minimal contribution for the year which seems to imply you'd be losing money in the second half which seems to imply, you'd be losing money in the second half, can you give revisit, what, fundamentally, what's going on at this business outside of this big sale and any changes we should anticipate and maybe just an update on what the embedded book value is in this one?

Well, Jonathan, I think you are right in your assessment on the balance of the year and it will… earnings will be as essentially minimal for the year and we expect that for the next year or two. SunCor's actually gone through and continues to go through some cost management exercises. We've cut more than 33 positions this year, and that's on top of 21 last year. That's just under a half of the organization. We also see… we've been cutting back on G&A expense about $40 million in 2008. And also that's on top of a 21% decline last year. And basically, the home building business is flat, very low levels. And comparing the business to… and during the next two years but at the same point in time, looking opportunistically at what type of development opportunities there might be in these depressed market.

You know, Jonathan, you will remember our discussion back in 2002 about recasting and developing a different portfolio for SunCor which we achieved and one of the fundamental objectives of that process to recast that portfolio was for us to be able, as we had downturns like the one we are in right now, be able to adjust our expense to the downturn in revenues which is really, fundamentally a downturn in terms of volumes and opportunities. That was achieved and that's basically the mode that we're in.

You expect the business to be a negative contributor in 2009?

No. I think its going to be relatively flat. Minimal either direction.

And is there a sort of book value number you could give us?

Well, our book value is -- balance sheet is about $500 million, it's consistently stayed around that level, Jonathan.

Okay. I think all my other questions were answered I think. Thank you.

Thanks, Jonathan.

Your next question comes from line of Paul Ridzon of KeyBanc.

Just on top of Jonathan's question. I guess the implication is that, SunCor will have about a $0.15 loss in the back half of the year. How much of that is cash as opposed to just non-cash?

Majority of it will be cash.

And then, your decision -- driving your decision for the $500 million decrease in CapEx, I know it's a hard question to answer, but how much was driven by reduced food growth projections and how much was just, you had to draw a line in the sand where -- if you are not allowed to structurally earn your cost of capital, you can't continue to spending money?

They were both important themes, I am not sure I can give you percentage allocation between the two. As we've looked to that the, basically the analysis is going through our whole company and this isn't an estimate that, Don, and Jim and I put together, and okay now, go figure out how to do it. This is an estimate that we've been doing really from the bottom up, looking at every single project in the organization and evaluating it for a set of criteria of which, those are too important ones. But as I mentioned before, reliability is also important and it's not something that we want to see decline. And in fact, if you look at our history, we, over the last 10 years had a significant improvement in our staffing and reliability, and that something that takes years to do, and we fully appreciate that. So, it's not easy to answer that question because it's really a set of criteria that the entire management team looks at. But we're doing it very aggressively and we're doing with a perspective on the future that really requires a different method, and different approaches to be able to finance those capital expenditures.

And just -- I want to make sure I understood you. I think it was Greg's question that there's no equity coming at '08 regardless of the interim treatment?

That will be pushed into'09, but how late in '09 depends on the interim treatment.

It will depend on that and other events.

Okay, thank you.

Yes Sir.

Your next question comes from the line of Raymond Leung from Goldman Sachs.

Hey everyone. Couple of questions, one with respect to the CapEx, could you elaborate a little bit more, given that we are half way through the year, how much is savings of that half a billion is this -- can you sort of say, is it this year or is it mostly backend loaded given the time of the year? And then if you could also talk about some of your external financing needs on debt side to fund the capital program for this year?

Relative to I think Bill's comment earlier was, we'd be implementing these additional reductions later in 2008. We weren't finished with the internal process yet. So there will be relatively minimal amounts of impact on 2008 capital expenditures of this new 500 plus million dollars reduction. After that, it's probably going to be relatively evenly spread over the 2009 to 2011, maybe somewhat of a slight bias towards the front end loading.

Okay. And any debt financing plans for the balance to this year?

No.

Okay. And one other thing, given the softness of the economy -- on collectibles, delinquencies, can you talk a little bit about that, please?

We've seen an increase but nothing I'd put into the material category. Naturally with the downturn in the economy, and construction jobs being lost, and the overall impact of the housing market and mortgage market, naturally you are going to see uncollectible's go up and bad debt write-offs increase, but, like I said, an immaterial amount.

Alright, thank you guys.

Thanks.

Your next question comes from the line of Danielle Sweetz with Sweetz Research [ph].

I was wondering, assuming you'll resume normal growth in 2009/2010, when would you require new generation?

Well, Danielle, if you look out, in the next five to six years, it's basically peaking capacity. And then after that, it would be base load.

Okay

So as we said today, the picture would be peaking first, and then base load.

And because of the leap time for base load, you talk about -- you are talking about beginning the construction in five to six years for base load?

Well, Danielle, we are on a path this year to go through really an evaluation that includes all of the parties in our state in dealing with future base load capacity. The need for that fits that schedule. To put it another way; as we go through the sessions that we have been having throughout the state, the filing that we expect to make later this year with the commission, there's sufficient time in there for us to be able to achieve a decision in the regulatory process, as well as the public process, consistent with our need.

Thank you.

You bet.

Your next question comes from the line of Edward Heine [ph] with Catapult.

Good afternoon. Cam you hear me?

Yes.

I had a quick question on the O&M side. I think, in the last call, you had been targeting about a $40 million increase for the entire year on O&M. It looks like, through the first half of the year, you are already there. I wanted to kind of talk about that, and is there timing issues there or is there revisions to kind of what you are seeing on the cost front?

Well, let me gather. I've got the information in front of me here. We're looking at -- still in that number for the year. Now, you've got the $5 million renewable energy standard factored into those numbers too which is offset on the revenue side.

Okay.

So, you need to back that out.

And then, would the rest, because you already got like 40, so that would bring it back down to 35 for the year so far, so the rest is more timing issues, then may be you had higher O&M last year than you will this year, just on that quarterly basis?

Yes.

Okay. And then, I think the base of '07 was like $735 million which kind of a $40 million number implies like a 5% kind of escalation in cost.

Yes.

Is there -- with your revenue line going down to the more 1% rate, do you -- how do you see the escalation of cost going and any impact from the reduction in the CapEx as well that may affect that?

Well, let me address the first part, I am not sure how the CapEx impacts on the L&M side, but whether the 5% rate you see in there, and that's about right, but when we look at certain segments of the business like particularly, just the other day, looking at our fossil generation folks, the chemical that they use that are petro based, they are seeing 20 and 30% increases in those, and not an insignificant number of dollars, and its just simply tightening down the belt in lot of other areas that's been able to reduce these very large inflation rates down to 4% to 5% overall range. You know, and about half O&M cost are labor, and that rate is less than 5% inflation, which moderates the overall somewhat.

Okay. So, as the revenue rate is declining, we're not going to see, you are still going to see pressure from the inflationary side?

Yes, unfortunately I think so. And when we see that, and I am not sure, was your point on the CapEx side?

Yes, I mean I guess you see lower depreciation rates from not spending that -- those dollars.

Correct.

So it's mostly there, so there is not as much on the O&M side from that.

Right.

Okay, okay that's helpful for some color, thank you.

Okay, thank you.

Your next question comes from the line of Yiktat Fung with Zimmer Lucas Partners.

Good morning.

Good morning.

First I would like to revisit Dan's first question regarding the flexibility of the plan to avoid the, to eliminate the equity issuance. Obviously you've laid out four points. One of them is, kind of them is kind of raised on the $200 million reduction of CapEx. I was wondering with regards to your other points, how much flexibility is there. For example, if you get only like a $50 million interim rate increase or even like a zero interim rate increase, would that revive the need for equity?

For 2008 it would not revise the need for equity.

But for 2009, it might?

It might, very well might, that and other factors that might change between now and then.

And I guess the same thing goes for the $500 million reduction in CapEx, correct? So for example, if you only find $200 million of CapEx reduction, then ?

That's not a possibility. It will be at least $500 million.

It will be at least $500 million

We have a very detailed process that Bill talked a little bit about, and we're not going to jump ahead of the team, because we've put a group of our best managers on this to go through the company in detail, and we're using the 500 number as a very preliminary number but it is a solid number. It will not be less than $500 million.

And when will you announce the finalized numbers. I think you said before that, the implementation plans would be finalized within the 60 to 90 days. Should we expect in like the third quarter conference call or?

That's very likely.

Okay and just one more question with regards to the second transmission rate adjustments. Does that change to the TCA require another approval from the Arizona Commission or does that flow automatically through?

That second one was approved by the Commission.

Okay. All right. Thank you so much.

You bet.

Your next question comes from the line of [inaudible] with Tyndall.

Hello, can you hear me?

Yes, good afternoon.

Hi, it's Yuvgeny [ph] from Tyndall. I just had a really quick questions. I believe at some point Arizona Public Service had some auction rate securities, and in the light of the disruptions in that market have you redeemed those securities or do you plan to redeem them at some point in the future?

We have not redeemed them and actually we have seen some of the results of those auctions stabilize at relatively attractive pricing.

So, it sounds like as long as the prices are attractive, you will let them stay out there?

Yes.

Okay. Thank you.

You bet.

You have a follow-up question from Bill Atasoley [ph] with Citigroup.

Hi, guys. This is Greg again.

Hi, Greg.

So, I know that you have been asked this question several different ways. But, as we think about the capital formation plans, you're not going to issue equity in '08, and depending on the level of interim rates relief, and how you are feeling about the progress in the GRC, in conjunction with how well you do on meeting or beating your CapEx projected targets, equity may or may not actually be needed in '09? Is that the summary of the five different questions have you been asked and the answers to those?

Yes. Yes.

Okay. The second question is on the real estate. When we think about the book value, how much of that is sort of the raw land that was, sort of the initial Genesis of the real estate investments that the company made decades ago, and how much of that is relatively new stock, so we can get a sense of whether we ought to be thinking about the value of those assets at book value or discount the book value or premium book value, given the real estate market as it stand today.

Well, the -- as you know, we went through about a four to five year effort there in terms of re-posturing that portfolio. The land component declined over that period and, Greg, I don't have a number just off the top of my head of what proportion that is. We could get that for you, but I don't have it off the top of my head.

Okay. So qualitatively speaking, what makes up that portfolio today?

It's the land. It's the planned community investments particularly in infrastructure. Those planned communities are not basically recording significant amounts of land. If you take a look at their investment, it is mostly in infrastructure which turns fairly quickly, rather than long-term investments in land. We've got an investment in the golf courses that we've had fundamentally for the last decade plus, that stays in that category and then some commercial just like the building we just sold. But we'd be glad to give you a break out on those percentages.

Thank you very much.

You bet, Greg.

Your next question comes from the line of Jonathan Arnold with Merrill Lynch.

Just a couple of other things; how much is the mark-to-market gain you had would you anticipate reversing in the year, and what's embedded if your 250 number on that front?

Well, obviously some of that based on where gas prices go for the balance of the year, but actually a very small turnaround for the balance of the year.

And based on -- and that's what you've baked into guidance, as a small turnaround?

Yes.

And if gas prices stay where they are now, could we see something bigger than that?

I missed the last part of that question, John.

Well it is based of a view that gas prices at the end of the quarter or they stay where they are today, could the answer to that question change?

No, it is not. Actually it's driven by the level of our hedges and how they interact over the balance here more so than gas prices.

And one other thing, Bill, would be able to give us a quick update on the commission heading into the elections in November, and just latest thinking around candidate's etcetera?

Well, as much as I can, I mean that process is really just started, that election really doesn't get going, and really with a lot of attention to the candidates until almost the end of the summer, and just right before the election. There is 12 candidates that have been announced. Eight of them are Republicans and four of them are Democrats. They cover, all kinds of backgrounds, I would say probably the most common one has experience as legislators, but we've got business people consultants, engineer's etcetera through that process. It also is broad in terms of geography throughout the state. We got people from regions outside of Phoenix that are involved in that. This is in my experience the largest number of candidates that I have ever seen in the last 25 years, and so, there is a lot of attention in terms of the primary, and it will really depend upon the campaign and the primary actions. So, its one where there is quite a bit of attention in terms of candidates, and I don't know how to generalize it any more than that.

We are still a little early in the

It really is.

Okay.

They have had one big debate so far, and only one, and there is more scheduled and so, over the next couple of months, I think we will get a better feel for what their positions are.

Yes

Your next question comes from the line of Peter Hark with Talon Capital.

Hello, everyone.

Good afternoon.

Hi, Bill. First, I just want to congratulate you on the hiring of Jim Hatfield, he is a solid addition to your management team.

Thank you. We agree that, and we are glad he is sitting here.

Check in the mail, Peter.

Thanks Jim. Actually, I just have a host of clarification questions more than anything. First, when you filed the interim rate request, it was dovetail with the fall off of the PSA adjuster, and, so will the PSA go away as you recover those amounts in the next few days and thereby setting up what you wanted to avoid which was a step-up in rates when you do get interim rates in place.

Well as you know that's a fairly complex process as you deal with 21 cycles in the month, and you deal with this effort over the period as well as the variances in weather. If you look at the bill, which is what I think the customers care about, first and foremost is how much is the bill? And when you look at 4% variations given our weather, it's not quite as precise as the algebra might suggest. I think the key is that we are going to able to deal with this interim in an environment given that decrease that won't increase overall bills and I think that's the most significant piece.

Right and then actually to follow-up on some of your comments earlier, though, you were talking about actually seeing rate decreases in the November timeframe, I think of around 14%. How do you get to those numbers? How is the decrease so pronounced?

Why is that? That's a good question. It goes back over years and years and years through rate cost allocation studies that allocate the costs between the summer and the winter and do that on a basis of fundamentally the drivers, the generation plant. And as you deal with Arizona, as you all know, we are summer peaking state driven largely by air conditioning load and as a result most of the costs that we have is… so in order to meet that large peak demand and therefore most of the costs are associated to that. So it is a cost allocation methodology that has been accepted and approved by this commission over decades and it has its foundation, kind of the fundamental driver that's contributing to those costs. So summer costs for us are actually more expensive in winter and that's the reason the prices are higher.

Okay, thanks. And when you made the filings, I guess even the GRC especially, you had asked that you could increase your equity investment in ATS to the 200 million to 400 million, but now that you are not issuing the equity currently, how will you make that equity investment?

Well, I'm not sure that $400 million was explicit in the general rate case. The general rate case is predicated basically on equity levels and we believe those equity levels are valid.

Okay, okay. Fair enough. And then just conceptually, so I have a clear… assuming you get something on the interim rates, would that be a net deduction from the GRC case?

In the most simplest form, yes, but I think a better way to look in it is it's embedded in it.

Right, okay.

So I think that's a better way to look at it.

Okay, great. And then somewhat at odds for what you are trying to accomplish in describing your financial situation. I guess a few days ago, Moody's had actually improved your outlook from negative to stable, citing what they're calling improving regulatory environment, I guess. And so I was hoping you could comment on that and what that might mean. Also given the continued efforts of Commissioner Maze [ph] to get you guys to comply with various mandates of the state including renewables, I think in most particular on the renewable side and coming up with a plan to address that. But just trying to get your position or your perspective on… what Moody's says is an improving situation, particularly on cash flow and some of the mechanisms the Commission has put in place to you and you continue to kind of describe a deteriorating financial situation.

Let me comment and then Don can as well. If you look at the last couple of years, we've had a large number of regulatory decisions. I don't think if there's any doubt about that, whether that covers everything from renewables to FERC transmissions revenue, to fuel adjustment clauses, to dealing with resource plans etcetera. So, we've had a lot of issues that this commission has addressed, and including as I mentioned in my prepared remarks, two interim emergency cases over that period. This is a commission that has had to deal with literally the reconstruction, the re-regulation of Arizona from decisions that were made now almost a decade ago. And then put into a situation where we had to come back and make decisions on fuel adjustments clauses, and various other things. The one that remains is the one that I mentioned in my prepared testimony which is, having sufficient financial strength to be able to finance Arizona's energy future. The commissions made a lot of tough decisions. And as we go forward, I think its going to be critical that we have the financial strength to be able to meet the requirements, not only in terms of our customers growth, but also to provide an energy platform for the economy, for the state of Arizona. So, just to put a kind of an overall broad picture on it, that's the way I look at it. And they've dealt with many things. As we have described today, one of the keys is our ability to be able to finance, and our ability to be able to meet those requirement. And with the plan that we've outlined, I think it's absolutely critical that we get to a point where we can finance that capital budget going forward on a basis…

Thank you for those comments, Bill. In addition to that I'd think, I had seen a letter, recently from Commissioner Maize, that actually asked, why won't you update your GRC through a more timely period? I think she was asking through June of '08, and you had updated your testimony, I think, through the end of '07. Will you continue to update the rate case stacks as you move through quarters or what can we use, I guess, as a -- the right rate base or test year for the case on its finality?

Well, it certainly is true that as we go forward, we'll get further and further distance from the test year, but I think it's also important to understand that just if you compare this test year to the previous test year, we have an additional $1.8 billion in capital expenditures that's in the current test year versus the one from the previous rate case, just for the ACC jurisdiction and not in FERC. So I think it's important to understand that this test year provides the foundation and the base for this interim decision and it's not required to update this every single month in order to deal with the interim decision. It is true we have to stay current, and as we go through the process, we provide ongoing information. But this test year, as I mentioned in my prepared remarks, this test year, if you use the methodology that staff used in the last rate case would produce the result of interim increase.

Okay. Perfect, perfect. And the last two, I promise, a real quick. What your expectations are, I think there was earlier question on O&M expenses? And in particular, I'm interested in what the Palo Verde O&M line is going to look like in '08? There was some -- there was heightened NRC involvement and there were some additional costs associated with that. But I was just trying to gauge what direction Palo Verde expenses will be going on a going-forward basis, have we picked or do you expect that to continue to escalate or actually could it even begin to start falling off? And then the second question is, just a more of a final breakout. I think somebody asked you early what the book value was of SunCor, but if you have the current book value of all of the subsidiaries, the APS, SunCor, and then kind of adding up to that $37 per share for that consolidated company? And thanks for all of your time and answers. Thank you.

Sure. First on your question on Palo Verde, we are going through a very aggressive performance improvement plans at Palo Verde and we have been doing that for some 18 months. There is approximately 2,300 items in that performance improvement plan and we expect, by end of this year, to have complete over 90% of those .So I think the bulk of the expenses associated with performance improvement plan will have been incurred as we deal with the obviously fairly a long list of issues that we have chosen to address and in terms of -- that's a list much, much longer than the ones that are included in the request from the Nuclear Regulatory Commission. However, it's premature for us to start talking about cost at Palo Verde RQ [ph]. Palo Verde, as Don mentioned to you, is we want Palo Verde to be in the top quartile performance of this industry and that's our goal and that's the goal we're going to achieve. And as we look to the future, it's not an issue where we're going to see significant cost increases to be able to do that, and it's really premature to talk about cost decreases. On your second issue on book value, you may have to refresh us a little on that question.

Oh just, if you can separate out on a subsidiary basis, what the book values are of each subsidiary that add up I think the reported book value at June 30th, '08 was around $37 a share, just didn't know if you have that broken out across the subs?

I know we do but not handy Peter. I know Becky would be happy to walk you through that later if anybody else is interested. I might just couple of things and the risk of going back to few of your questions. On the Moody's, stable rating 1 as you might expect, we expect Moody's has access and we've previewed virtually all of this and then some with them and our expectations and they are well aware of the commissions improvement in the fuel cost a year ago and the transmission cost adjusters, which contributed I believe to their statement about improving regulatory environment. But in reading there is it, it would be only erroneous to overlook their language that their stable rating is based on a continuing regulatory recovery of cost and promised on continuing support of regulation that we've had in the past going forward and I interpret that as being the addressing, the general rate case, and the interim adjuster which is part of the plan Bill laid out and part of the plan we laid out to Moody's when we talk to them shortly before they issued that last publication. Also in one of your questions, you had a tail end about commissioner May is trying to get us to comply with the renewable energy standard. The renewable energy standard is a promulgation of the entire commission. Commissioner May is no doubt a very strong supporter as our other commissioners. But, we are complying with it. We are actually going to over comply with it and I had the opportunity to speak with commissioner May just two weeks ago about the renewable energy standard and our commitment. We've come out vocally both myself and key representatives of the company that are more independently involved with the details and I put -- essentially put my discussion with her in the form of a letter which again if you or anyone else is interested, if you just ping Becky, she can send you a copy of that.

That's great, Don. Thanks for that clarification and keep up the good fight. Thank you for your time.

Thank you.

Our next question comes from Paul Ridzon, KeyBanc.

You have a large wholesale contract, I think it just recently expired and you had hedged that out with a strip. Can you talk about what we should expect for the balance of the year from that?

We will continue to generate some earnings over the balance of the year as that strip runs out.

How much of that strip have you sold?

Basically, all of it. But it's relatively complicated transaction will generate $3 million to $5 million a quarter off of that structure for the balance of the year.

You've already sold that or you have just booked the earnings as it's delivered?

Like I said, it's a complicated transaction. It's not as simple as we just sold off to that part of the strip.

Okay, thank you.

Okay.

At this time, there are no further questions. Do you have any closing remarks?

I would just like to thank all of you for your time and any further questions that you have, don't hesitate to talk with Becky. We know this is a busy time and we appreciate your attention. Thank you very much.

We do appreciate you being on the call. Please do call me or Lisa Malagon if you have any questions. Thanks.

This concludes today's conference. You may now disconnect