Greetings, and welcome to the Pinnacle West Capital Corporation 2012 third quarter earnings conference call. (Operator Instructions) It is now my please to introduce your host, Becky Hickman, Director of Investor Relations.

I'd like to thank everyone for participating in this conference call and webcast to review our third quarter earnings, recent developments and operating performance. Our speakers today will be our Chairman and CEO, Don Brandt; and our CFO, Jim Hatfield. Jeff Guldner, who is APS Senior Vice President of Customers and Regulations is also here with us. Before I turn the call over to our speakers, I need to cover a few details with you. First, the slides to which we refer are available on our Investor Relations website along with our earnings release and related information. Please note that the slides contain reconciliations of certain non-GAAP financial information. Also, all of our references to per-share amounts will be after income taxes and based on diluted shares outstanding. It is my responsibility to advice you that this call and our slides contains forward-looking statements based on current expectations and the company assumes no obligation to update these statements. Because actual results may differ materially from expectations, we caution you not to place undue reliance on these statements. Our third quarter 2012 Form 10-Q was filed this morning. Please refer to that document for forward-looking statements cautionary language as well as the MDNA section, which identifies risks and uncertainties 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 for the next 30 days. It will also be available by telephone through November 9. At this point, I'll turn the call over to Don.

Thanks, Becky, and thank you all for joining us today. This year we've made progress in a number of key areas as we focus on our core electric utility business. This progress includes demonstrating sustained improvement in the regulatory environment in Arizona, making selective capital investments, maintaining operational excellence, strengthening our financial profile and positioning ourselves to benefit from economic recovery. Jim and I will provide more information on each of these areas throughout our remarks today. APS's retail rate settlement, which was approved earlier this year became effective on July 1. Details of the agreement as well as the key underlying assumptions are outlined in the appendix to our slides. The settlement demonstrates significant collaboration and cooperation among APS peers on a Corporation Commission and other stakeholders as well as a proven commitment to expedite the retail rate case process. The settlement contains a number of benefits for our customers, the communities we serve and our shareholders. Among other things, first, it provides a financial support APS needs to meet our customers' energy needs and to help achieve Arizona's energy goals. Second, the settlement provides measure of regulatory certainty for both customers and shareholders through at least mid-2016. Third, it provides rate gradualism through the use of a number of rate adjustment mechanisms. This process will void the need for base rate increases every several years, while allowing reasonable recovery that APS has prudently incurred expenditures in the interim. And fourth, it allows APS the opportunity to earn a reasonable return on equity. That said, we believe a number of factors will allow us to achieve competitive financial performance during this out-period. Aspects related to the settlement include, first, APS's rate adjustment mechanisms, which will continue to function throughout the stay-out period. Among others, these mechanism include preferred formula…

Thank you, Don. As Don said, we continue making progress, strengthening our financial profile. Today I'll discuss the following topics: first, I'll review our third quarter results, including earnings and the primary variances from last year's corresponding quarter; second, I'll provide an update on the status and outlook for the Arizona economy; and finally, I will discuss our earnings guidance and our financial outlook during the retail base rate stay-out period. Slide 6 summarizes our reported and ongoing earnings for the quarter. On a GAAP basis for this year's third quarter, we reported consolidated net income attributable to common shareholders of $245 million or $2.21 per share compared with net income of $255 million or $2.32 per share for last year's third quarter. Our ongoing earnings were comparable to last year's third quarter. For this year's quarter, we had consolidated ongoing earnings of $245 million or $2.21 per share versus ongoing earnings of $246 million or $2.24 per share for the same quarter a year ago. Slide 7 reconciliations our third quarter GAAP earnings per share to our ongoing earnings per share. The amounts for both quarters exclude results related to our discontinued energy services and real estate businesses. The most significant item excluded is a $10 million gain on the sale of our energy services business in last year's third quarter. My remaining comments on the quarter will focus on ongoing results. Slide 8 displays variances that drove the change in quarterly ongoing earnings per share. First, an increase in our gross margin added $0.16 per share compared with the prior-year third quarter. Several pluses and minuses comprised as positive net variance. And I'll cover those items in more detail on the next slide. Second, lower infrastructure-related cost improved earnings by $0.04 per share, reflecting both lower interest charges…

(Operator Instructions) Our first question is coming from Greg Gordon with ISI Group.

Don, can I ask you to maybe articulate a little bit what the mindset is of the board around the dividends, the $0.02 increase was much appreciated by your shareholders, but I've heard from, maybe a few of them that they had hoped for at least a modestly higher increase. So what was the mindset of the board around that decision? And then second question on that front is the board going to be addressing the dividend annually in December or would you plan on sort of moving that date prospectively and ask them to think about the dividend increases on a different timetable?

I'll answer the last one first, probably we've continue to address it as the October board meeting. There is no reason that couldn't change but that's traditionally been the time, if there was a reason. But I don't think we've changed it just to change it. So that's about as best answer. I think I'd focus on October for future years following some other changes. Relative to how the management team and the board focused on the dividend, one is focus on what would we do to create the most long term value for shareholders. And in that regard, our philosophy was a change in the dividend that would appear to be the least risky, meaning, I believe and our board, the more secure that dividend of peers going forward, the more shareholder value will create with the absence of uncertainty around it. That certainly doesn't mean we're locked into this kind of an increase in the future. But I'm also not telegraphing there is any change. But as you know we've heard the stock over the last couple of years about our cost control initiatives and the projects that Jim Hatfield, Mark Schiavoni, our team helped for us over the stay-out period, and the fact that we have 200 to 300 employees retiring each year and we're going to try to take as much advantage of those potential cost savings as possible. And our forecast of sales is essentially flat. And it's still very early stages. There is some activity in the housing market. And as you know, we've got more than 25,000 empty homes in our service territory. And when the market starts to return to normal, whatever normal might it look like in future years, that would be potential upside to earnings, and obviously both the management team and board would take those potential positive developments in the consideration in future years.

On that front, Don, in talking to my housing analysts here, we've seen what you're seeing in Phoenix and if you could collaborate it or not? That would be helpful, as that there's been a slowdown in new home sales, because there is simply a lack of supply. And so do you think that that's true, have you seen the front end of permitting activity that might cause sort of a year down the line. A lot of the new homes to come on the market, and do you also think that that might lead to a quicker absorption of the 25,000 existing homes, because there's such lack of supply of new homes.

Yes. It's a broad question. I'll probably give you a broad answer too. I know from our folks who deal with developers, there is still continuing activity. One thing we have heard is there is a labor shortage right now, relative to what the severe downturn or basically the housing industry, all that's shutdown, the carpenters, masons, roofers, et cetera. But that's not the kind of thing, and people in the housing business I've talked to that takes a year to develop, that's where you recruit folks from other parts of the country and you might be talking a matter of months to solve some of the labor issues. But with that said, I guess we've got the 25,000 plus, I think it's 27,000 of empty homes that are ready, willing and able to be occupied at a very short notice. And the local print paper, you find online at azcentral.com, there has been a number of almost every other day another story about changing in house prices and while there is some volatility, the trend seems to be on the uptick.

Our next question is coming from Neil Mehta from Goldman Sachs.

Jim, I think last time when I was out there we were talking about O&M trends. And I got the sense that you're looking to keep O&M flat in 2013 and 2014, as you think about the expense pie, where are those costs reductions coming from?

Well, I think we've been flat since '08, so I think any sort of non-essential expense has been eliminated. I think Don alluded to this in his text, which is we're going to have significant retirements over the next few years, to consider that two-thirds of our people related costs that as we continue to improve our business processes in labor technology, our ability not to replace each individual that leaves will be where we'll have to drop them.

And then on AZ Sun, that's been a big success here and do you think that appetite to upsize the AZ Sun program?

At this point, I don't think so for a couple of reasons. This thing runs through '15, so we'll have to see. But from a capacity perspective we're in pretty good shape capacity-wise. We'll be doubled at 2015 renewable energy standard, so probably not near term and appetite to do anything more with utility scale.

Your next question is coming from Kevin Cole from Credit Suisse.

I guess, more on Greg's question on the dividend, is it your view, I guess, should I review that the 4% increase is a one-time up year-over-year or should I consider it to be stable through the stay-out or is it a stable longer term than that.

Well, it's something we'll look at each year. But I think our aspirations are to continue to grow the dividend. We feel very confident and we'll talking more about the future earnings in connection with EEI in the next week or so. And I think that would give you more insight into it.

Then I guess, this 4% dividend growth imply a similar annual EPS growth rate through the stay-out or is that's a point that's coming at your Analyst Day?

Yes, Kevin, we'll address that at the next Friday.

And then last question on leverage to an economic recovery, I guess under the current rates and the LFCR, what is your EPS leverage for every 1% move and in a lower order customer count?

1% move is about $10 million in net income, so probably $0.09 or so.

Your next question is coming from Paul Ridzon from KeyBanc.

Jim, you had mentioned, one federal tax credit that expired and might it ticking up again, would that apply retroactively?

Well, if it came back in or was extended in 2012 before the end of the year, it would be applied retroactively to the year. They could also extended in '13 and make a retroactive. We'll have to wait and see what happens with that. Our tax people feel like it's something that will be extended at some point.

And can you give more color on where the $0.09 from retail transmission came from that, it seems awful big?

Well, I think there were a couple of things in there, Paul. First you had to switch gear at annual increase, which was $0.02. We also had about $0.04 to a catch-up adjustment last year which went against us. So we didn't have that this year, and that's another $0.04. And then, we begin booking in the third quarter, now, that we have a set schedule of June 1 every year through the 2012 settlement that we're sort of accruing next year's increase as we earn it throughout the year. It's a same concept we're doing with LFCR which will apply for our filing on application next year, but we're actually earning it this year.

Our next question is coming from Ali Agha from SunTrust.

In the appendix and the slides, et cetera, you guys talked about '12 through '15 a 6% annual growth in rate base. Does that bake in all the expenditures that will be spent at that time or is there a scenario that growth could be stronger than that?

That's our current plan, Ali. At this point absent something unforeseen like a quick recovery and growth next year sometime. I don't see that we would have a rate base growth that's greater than 6%.

And, Jim, to your point earlier apart from some equity issuance that will come into play maybe sometimes in '14, is that the biggest disconnect we should think about between the 6% rate base growth and what an EPS growth commensurate with that should look like, it's really some dilution at some point from equity, is that a fair way to think about it?

I think we have a couple of things, Ali, to think about. And again, we'll cover this more specifically Friday. But you don't have perfect regulation, so you're not going to get a dollar for dollar in that regard. And then, yes, at some point we'll have some dilution as we calibrate the capital structure assuming we are on a next rate case.

And last question, coming back to the dividend for a second. So given where you are right now, at least from a payout ratio perspective, are you guys now comfortable that you are where you need to be relative to your benchmark peer group or do you have any thoughts on the payout ratio?

I think we are comfortable where we are, Ali.

Our next question is coming from Charles Fishman from Morningstar.

Don, you brought up the fact that the election could change the composition of the Commission. Is there anything that because of a stay-out there is really nothing that the new commissioners would have to hit the ground running on, I mean there is no immediate decisions that would face. I mean it's just really all you have to do is get them up to speed between now and when you file in 2014?

Well, we have the ongoing riders in that, we'll continue communications. But to answer your question, Charles, directly, there aren't any big issues out there. But its continuing monthly, if not a weekly dialogue with the commissioners and their policy advisor's to keeping abreast to what's going on in the company, and just from a relationship standpoint.

And then, can I ask a question on Slide 26, the RES cost, demand side management cost?

Yes.

Quarter-over-quarter there is step down in the RES, but that was due to the transfer of those cost to rate base with the settlement earlier this year, is that correct?

Yes.

Our next question is a follow-up from Greg Gordon with ISI Group.

So just a sort of a follow-up on, I guess Ali's question. If I just look at your slides, and I know you'll probably be going to tell me, I'm front running your Analyst Day by asking you this. If I look at Slide 17, you say rate base is going to grow on average 6% annually. You're saying that you'll earn at least to 9.5% ROE over the forecast period. Jim, you've said, there's very little regulatory lag associated with your capital expenditures. So absent equity dilution, why wouldn't it be fair to presume that earning should grow in line with rate base growth?

Well, Greg, I think you'll need to come back Analyst Day to get that answer. How did that sound?

Our next question is coming from Paul Patterson with Glenrock Associates.

Just on the election is there any potential that there could be a change in policies like renewals or whatever that could impact to you. I know there's been sort of a back and forth between the Commission and the state legislature and what have you. I'm just wondering, if there is anything we should be thinking about in terms of what could happen there with respect to renewables or whether or not that could impact you guys?

Well, most of the issues were a year ago in the media between a legislature and Commission, if fairly well died down. And both parties in the year of the existing commissioners have been supportive over our past on renewable. So I certainly can't and won't predict the outcome of any election much less the Corporation Commission. But I don't foresee the need or the likelihood of any significant change.

And then, with respect to just a housekeeping I guess, I'm a little bit confused. When I read maybe I'm reading something incorrectly, but when I look at the press release on Page 2, it says that there was a decrease in retail sales, excluding the effects of weather variations, which reduced results by $0.02 a share?

That's correct.

And then, when I look at the statistical slides, and again, maybe I'm just misreading it. It looks like retail sales gigawatt hour weather normalized was actually up, on Page 4 and 5 in the statistical supplement? It does look like it's a lot. We're not talking about this, just sort of wondering about if I am reading it correctly, if there was something missing? I saw that, I just meant the total retail sales seem to, weather normally seem to go up, and if I was reading this it seemed like the effects of what you guys actually have seen it go down?

Yes, we did. I'll have to look into that.

I'll get back to you Paul.

Thank you. We have reached end of our question-and-answer session. I'll turn the floor back over to Ms. Hickman.

We thank you all for being with us. We know that you have a number of calls today. And if there is anything else that you need, please contact me or one of us. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.