That’s our company. The commitment and loyalty of our people inspire me every day. This video, and the individuals in it, describe all of the people who make up our company.
I’m very pleased to welcome everyone to the annual meeting of Pinnacle West Capital Corporation. It’s always a great pleasure to see the familiar faces of our long-term investors, and it’s equally satisfying to welcome those of you who are new to the Pinnacle West family.
Our major subsidiary, APS, has served Arizona continuously for 118 years. We’re justly proud of that heritage. It’s a story we all recognize immediately. And it’s a great success story. Over the vast portion of those 118 years, it’s a story of declining real prices and improving service; a story of our evolution hand-in-hand with the growth and progress of Arizona.
Our past has tracked the state’s history – from serving a frontier territory that was still part of the Wild West to providing a dynamic energy lifeline for a rapidly growing, modern and increasingly technology-centered economy.
When I reflect on the reasons for our success in recent years, I keep coming back to our Arizona roots. We protected our customers and our state from the blackouts, brownouts and price increases of the recent Western energy crisis.
Just as significant, by protecting our customers we also protected our shareholders. We avoided the severe financial problems of some neighboring utilities. We acted responsibly. We acted ethically. We acted on behalf of Arizona.
Again and again, when we weigh an important decision, we orient our plans and our actions using an Arizona compass. We’re a regional company, but we view the world with an Arizona perspective. That has served our company and our shareholders well.
Over the last 10 years we’ve grown in size and sophistication, just like our state and our major cities. Today Phoenix is estimated to be the fifth largest city in the U.S., and APS has grown by leaps and bounds along with our customer base. Within the next 12 months, we expect to exceed one million customers. Over the last decade we’ve added nearly 300,000 customers while actually reducing our overall workforce by nearly 1,000 employees.
During that time, we’ve always considered ourselves to be part of Arizona’s future. Our job was – and still is – to invest in the energy future of our customers and our state, not just build merchant generating plants to take advantage of short-term market opportunities. Instead, we built new generating plants – more than 1,700 megawatts in our unregulated subsidiary – to serve the regulated load of APS. We did not enter into discussions to divert that capacity to California, even when prices soared on the West Coast. APS needed the capacity then and APS’ customers need the capacity now. We’ve invested about $2 billion in generation and transmission infrastructure in the last few years and more is needed in the future.
During the last 10 years we’ve added more than 3,400 megawatts of distribution substation capacity, a 47 percent increase. We completed nearly 6,000 miles of distribution lines. Last year we added a new 500,000 volt transmission line from Palo Verde to the metropolitan Phoenix area that, along with our new generation, kept us from having delivery problems last summer. This year, our electric sales have grown 10.3 percent in the first quarter compared to the same period last year. Our growth continues.
We’ve responded to the challenges of that growth in an environmentally responsible manner. We’re leaders in the development and use of renewable energy resources, including solar, biomass and, most recently, wind energy. We emphasize this environmental commitment in every area of our business, from tree trimming to line siting to helping customers make wise energy conservation decisions. Our performance in these areas earned us a “Triple A” rating – the highest rating possible – from Innovest Strategic Value Advisors, an investment firm that analyzes business performance in environmental, social and strategic governance issues.
As we’ve invested in Arizona, we’ve gone beyond just infrastructures. We’ve built more than power stations and substations. We’ve built a lifetime of relationships in the cities and towns we serve. We’ve invested corporate funds in our communities; frequently providing the seed money or the initial gift to get the ball rolling on a new and worthy cause. But more than that, we’ve built a talented workforce that devotes its skills and energy every day to improving our communities.
To be truly successful, a regulated utility has to accept its special place and play a special role in the community. We’ve been the kind of company that accepted its responsibility to be more than a company, to go beyond the simple paradigm of the corporation.
To be more than a company, we’ve readily accepted our duty to the future. We’ve honored our duty to build a responsible energy infrastructure. Last summer we were reminded by the gas pipeline failure here in Arizona and by the massive power outage back East, just how important it is to build a solid infrastructure, just how vital to economic well-being and ultimately even to our health and safety, energy sufficiency really is.
And as a utility with a special role to play in our economy and in our communities, we’ve also honored our responsibility to do the right things the right way. In this regard, I note this fact: with all the trading shenanigans that tainted large segments of our industry in recent years, APS and Pinnacle West took special care to avoid even the appearance of improper dealing. We do business honestly or not at all.
Through one of the rockiest times in the history of our industry, our company performed remarkably – for customers, for investors and for the state of Arizona.
For customers, we’ve delivered an unparalleled record of price performance. While most western utilities raised their rates in recent years, we’ve lowered ours by 16 percent over the last ten years. It even surprises me to think that our prices are lower today than they were 20 years ago. Even with the 9.8 percent rate increase that we’ve requested, our prices will still be lower than they were in 1988.
How did our company achieve this? Again, through the hard work of our people. Unfortunately, we don’t have the benefit of the huge opportunity in technological improvements that you see in some other industries. Computer chip prices, cell phones which don’t require wires to every house and robotics have not transformed this industry as they have many others. Although we’ve aggressively focused on implementing new technologies, for the most part we must generate electricity the old-fashioned way – sending it over wires that run to every house. Our people have just figured out how to do it better…and less expensively.ـ
For investors, we’re the company that raised its dividend for ten consecutive years and leads the way in dividend growth among all utilities. Last year, SunCor alone provided more than $100 million in cash to the parent and had its best year ever in earnings performance. As to total return, we’ve delivered in both absolute and relative terms. The $100 you put into Pinnacle West stock in December of 1999 – assuming you reinvested the dividends – increased to $154 by the end of 2003. By comparison, the same amount invested in the S&P 500 would be about $80.
Our investment in transmission and distribution infrastructure has benefitted the entire state and region. Last July, through no fault of our company, a grounding error at a local transmission substation caused several power stations – nearly 3,000 megawatts of power, a huge amount – to suddenly “trip” or shut down automatically. The National Electric Reliability Council, which sets design standards for electric systems, typically specifies that a transmission system should withstand one large failure without crashing. This initiating event triggered five external and simultaneous event failures that we were able to manage without crashing our system. Unlike many other electric utilities throughout the country, our power dispatchers have the authority to make all reliability decisions on the spot, without checking with management.
This was the kind of incident that could have led to a catastrophic failure such as occurred in the Midwest and East last August. Instead, using an automated computer system, our control system operators were able to safely and quickly contain the event failure, and most of our affected customers had their power restored in half an hour. The protections and improvements we’ve made to our transmission and distribution system – and, more importantly, the quick action of our system operations team – prevented that series of failures from spreading throughout the state and region.
Our commitment to reliability is just part of our emphasis on constantly improving customer service. We’re very proud that our customer satisfaction ratings, as measured by J.D. Power, ranked higher than any other investor-owned utility in the West.
The last decade tested our industry and our company as never before. The report card on the industry as a whole – with its bankruptcies and scandals – is not very good. But our company met and mastered every challenge with integrity, establishing a high standard for today and tomorrow.
Today, our focus must be on the future.
Our current rate case is the most significant item on the horizon. We’re balancing conflicting agendas from state and federal regulators while managing the financial and operating demands of rapid growth.
What’s at stake in these discussions and in our current rate case? Nothing less than our ability to continue as the same kind of company that produced:
- a decade of unparalleled price reductions,
- continuously improving service to our customers,
- and strong returns for our investors.
The last decade brought a storm of deregulation and then re-regulation to the utility industry as a whole, potentially damaging our future ability to manage our business in the best interest of our customers. But the damage is avoidable. We’re working with our Arizona regulators and others to establish a set of market and operating policies and resolve the uncertainty that continues to impact us, our customers and the entire state. I believe they understand the importance of electric reliability, managing price volatility and the need for a financially sound utility.
So our current rate case is really about the future. The outcome will determine our ability to keep the lights on and the Arizona economy running.
Today I would like to highlight the critical issues at stake in the rate case which must be resolved now, and those areas where we must continue to perform, as we consider the future of APS and our customers – and ultimately, the state of Arizona.
We must be able to recover our costs of providing service and maintain our financial strength.
In 2003, our fuel costs to serve our regulated customers increased $140 million – that’s an increase of $150 per customer, in just one year. This component alone comprises approximately two-thirds of our rate request. Although we’ve been able to decrease electric prices to our customers in the past, we unfortunately cannot do it forever. Even with our extraordinary efforts to reduce costs, natural gas prices alone have more than doubled since our last rate agreement. Without recovery of these costs, our credit quality and financial strength will deteriorate. Although in the past we were able to decrease prices as a result of our efficiency gains, we must now increase prices to preserve our financial strength. Although no one wants to see higher prices, I believe we will be able to show the Commission that a decline in our financial strength will impair our ability to meet the future energy needs of our customers and Arizona.
We will continue to manage price stability for our customers.
We avoided the severe price increases that plagued other neighboring states in recent years by effectively managing fuel and market risk. If we had not taken the financial positions we did prior to the California energy debacle, and instead charged our customers for the higher prices we had to pay, our customers would have seen increases like those experienced elsewhere in the West – between 20 and 30 percent. Instead, we offset the high energy prices we had to pay with the gains made on our financial positions and trounced the consumer price index. While the CPI increased by 27 percent since 1993, APS retail prices have decreased by 16 percent over the same period, producing a reduction of 43 percent in real prices.
We will continue to use every tool we possess to head off the ill-effects of any future boom-bust generation cycle and protect our customers from price spikes. But right now, our authority to choose between buying power on the wholesale market or building new plants is in doubt and the ability to deal with fuel costs is in question. Clearly, this must be resolved, and we are working aggressively to do so.
We will continue to relentlessly pursue reliability.
Our forecast shows we’ll need about 1,800 more megawatts of generating capacity by 2008 and a total of more than 3,000 by 2012. To serve future customers reliably, we must take action now. Our actions in 1999 and 2000 kept the lights on in 2003. We must make capacity decisions today for 2007 and 2008.
We are finalizing the results of our recent public bid for new capacity and we expect to present our plan to the Commission for their approval in the coming weeks.
We must be able to operate as one company.
We’re stuck in a fabricated bubble. We cannot run our business in an optimal fashion because we’re partially regulated and partially deregulated. We must be able to manage our business as one company. Right now, even though deregulation has been reversed for nearly two years, we are still trying to run two companies based on a regulatory agreement that is no longer operative.
Our company was split in two several years ago by deregulation. For many years we had prepared for deregulation, forming an unregulated subsidiary that would include our low-cost coal and nuclear units in one consolidated generating company. We built new gas-fired plants needed for APS customers in Arizona, expecting those plants would be part of the same unregulated subsidiary.
But the reversal of deregulation changed everything. We now have five generating units built to serve APS customers in a deregulated subsidiary. Deregulation was reversed two years ago, yet we remain split in two parts with one serving the other. This dual arrangement cannot be sustained.
We will continue to creatively drive our costs as low as reasonably possible while improving customer satisfaction.
Our power plant operations have been nothing less than outstanding, and our transmission and distribution group has met the demands of rapid growth while producing the highest customer satisfaction ratings in our history. For that to continue, we must continue to hire and train skilled employees. We must continue to practice preventive maintenance instead of waiting for components to fail. We must continue to refine our construction practices. We must continue to invest in information technology to improve work management and customer satisfaction. That kind of planning and execution require commitment and confidence in the future.
We will continue to build on our stellar environmental performance of the last decade.
We will remain a leader in the testing and use of renewable resources. Our investment in solar energy facilities has grown to seven communities throughout the state and we will expand further. Our efforts in biomass generation are helping to restore our forests. And our efforts to control generation emissions continue to exceed all legal requirements.
We must operate safely.
Though this business demands attention to diverse and various details, our focus will never stray from the importance of safety. This is an area that will always receive constant attention from me and the entire management team. Whatever our financial condition or regulatory structure, there can be no compromise on safety.
We will continue to become a new kind of integrated utility.
We’re poised to combine the best of the new competitive world with the best of the familiar traditional utility, combining our competitive knowledge and lean structure with a relentless emphasis on reliability and price stability. We’ve shown we have the skills to navigate complex energy markets for the benefit of both customers and investors.
Over the last ten years, we have produced solid shareholder returns by capturing our region’s growth and emphasizing our dividend. We’ll continue to do that, given a regulatory structure that recognizes the importance of aligning investor expectations with potential return.
We will continue to go beyond the simple paradigm of the corporation. To become a better company, a safer company, a more efficient company, a more environmentally focused company and – yes – a more profitable company.
Thank you very much.