event-details

Remarks of Bill Post at the Pinnacle West Capital Corporation Annual Meeting

May 18, 2005 Time: 08:30 AM EST

Let me start by saying how nice it is to be here today, to see the familiar faces and shake the hands of so many friends, shareholders and colleagues.

As you could see in the video, your company is celebrating 118 years of service to the people of Arizona. Granted, our business and our state have changed a little. Back when the company, then named Phoenix Illuminating Gas and Electric Light Company, started delivering energy, the employees probably knew every customer by name. The entire population of Arizona was about 90,000, or roughly the number of new people APS expects to serve in the next year. The City of Phoenix was then about the same size as the vibrant mining towns Crown King and Globe. And pump prices…well they weren’t much of a concern since the automobile wouldn’t be popular for another two decades.

It is a fascinating history and one that is still being written. One only needs to walk here in downtown Phoenix to see the future of our economy, with our culture and quality of life becoming even more vibrant. A state-of-the-art Phoenix Civic Center is quickly taking shape. The T-Gen Building has opened across from our offices at the Arizona Center. Funding for a downtown medical school has been approved, and by 2008 a new 8,000-student Arizona State University campus is expected to bring students, faculty and excitement to Copper Square.

It is a bright future, and one we’re very excited to power.

This last year has been an excellent one for Pinnacle West. Since our last annual meeting we’ve been able to resolve many of the outstanding regulatory issues that have challenged our company over the last four years, while our daily operations have continued to perform above industry standards. We’ve met record customer growth. Our customer service ranks among the best in the industry and our safety performance last year set a new record for our company.

Our company has prospered through one of the most difficult times in our industry’s history, and is poised for continued success in the future.

It’s a future we’re excited to embrace. Instead of arguing over modifications to historical regulatory orders dealing with such issues as market structure, pricing incentives for competition, codes of conduct, and reopened but unresolved responsibilities as significant as resource acquisition and obligation to serve, we can now look to the future with our full force and attention focused on tomorrow.

Now that doesn’t mean we’re not going to perform every day. We have and we will. It also doesn’t mean that these historical issues did not contain a future component. They certainly did. In fact, it’s their future component that gives us the foundation today to tackle tomorrow. That’s why it was so important that the effort of the last four years be successful in establishing a regulatory and operating platform that would give us the opportunity to produce excellent long-term results for our customers and our investors.

It hasn’t been easy. And to some, these issues seem like old news. But it was only seven weeks ago that we received one of the most significant regulatory decisions in our history, resolving most of these important issues.

Our industry has been through an economic roller coaster. We’ve seen a regulatory restructuring in which stranded investment, new market entrants and pricing headroom to encourage competition has received more public attention than industry fundamentals. We were plunged into poorly designed and malfunctioning power markets, with a boom and bust in power prices made more volatile by the California deregulation debacle.

In Arizona, our company stayed the course. From the beginning we refused to sell our power plants. Although we saw the possibility of new competitive markets and modified our strategy accordingly, we maintained our flexibility. For those of you who attended our annual meetings in the late 90s and early 2000s, you’ll remember flexibility and agility as mainstays of our plan. Fortunately, we incorporated enough of these qualities in our plan to handle the shift we experienced – going from regulation to deregulation and then back to re-regulation.

When APS could not build new power plants because of the Arizona competition rules, we questioned the ability of the market to meet the needs of our rapid growth, so we built new plants for our Arizona customers through our unregulated subsidiary. We were right. Without those plants, we and Arizona would have seen very difficult days – as bad as those experienced in California.

We kept the lights on during the California energy crisis when nearly everyone around us experienced rolling outages. While other utilities had to dramatically raise prices in the aftermath of that crisis, we continued to give customers an unprecedented series of price decreases.

Through it all, our employees responded to challenges with a firm handle on strategy but an agile response to rapid shifts in the economy, markets and regulation. After Arizona regulators reversed course on deregulation at the end of 2002, we had many uncertainties to resolve. Turning on a dime is not simple, and our days as a small company had long since passed.

We maintained our customer and investor focus. In 2003, we filed our first major rate case in more than a decade as the final step in the four-year regulatory process to build a stable regulatory platform.

As you know, the ACC recently approved the settlement which evolved from our filed case. Our people did an excellent job in completing this long process successfully and I’m very proud of our accomplishments. But as with any successful business, we look to the past only as a way of getting a grip on the future – a future we see as very bright and full of opportunities.

Today, I’d like to give you a sense of our perspective on the future in four crucial areas – growth, excellence in operations, expanding our regulatory relationships and producing strong financial returns for our investors.

Growth
We are a company focused on growth. Clearly, and not too subtly, that was the theme of this year’s annual report.

Managing growth will remain among our top priorities. The reality is, we are growing at a relentless pace, giving us the opportunity to grow our company without merger or acquisition. We are uniquely positioned to grow internally if we manage our costs wisely and remain focused on our core business.

Since we began this annual meeting some thirty minutes ago, APS has connected another ten customers to our system. Think about that. That’s the equivalent of 20 new homes, or a new street every working hour.

Over the last decade we’ve added more than 300,000 new customers and improved service. Since 1996, with growth booming, we reduced our customers’ outage frequency by one third, and outage duration dropped by 44 percent. Other, more subjective measures like customer perception also showed steady improvement. In the latest J.D. Power survey we again ranked first in overall customer satisfaction among investor-owned utilities in the West and in the top 10 percent nationwide.

Our company recognizes the inherent challenges of growth, but our view emphasizes benefits for customers, shareholders and for the Arizona economy and environment. In short, growth is a good thing, and we will continue to turn it into customer and investor value.

Excellence in Operations
We can manage growth and make improvements in customer satisfaction because we know how to run our business. In 2004, we continued to excel in all facets of our operations.

Last year, Palo Verde Nuclear Generating Station was the top producing power station in the country for the 13th consecutive year. Outstanding performance has become a tradition at Palo Verde, where the ten-year average capacity factor exceeded the national average by five percentage points, and over the last three years the production cost was 27 percent below the national average for nuclear units. Higher capacity factors and lower costs – that’s a powerful combination that saves money for customers and provides positive earnings.

Our fossil power stations had among their best performance years ever. Our four units at Cholla combined to produce nearly seven million megawatt-hours of energy – a 6 percent increase over 2003. Units 1, 2 and 3 at our Four Corners plant combined for a record 4.3 million megawatt-hours of production.

These plants also continued a remarkable safety record. Our West Phoenix, Yucca and Ocotillo fossil plants have each gone more than 20 years without a single lost-time accident. And, our Wires group, with over 2,000 people, has also continued to set new safety performance standards, lowering their number of recordable injuries from 43 in 2003 to 35 last year – a new record. As I’ve said before, there is nothing more important to us than safety.

We could not hope to manage our kind of growth with business as usual. Over the last decade we have made some striking improvements in productivity. For example, ten years ago it took seven employees about 75 days to build an average substation. Now, through new work methods and techniques, three employees can build the same substation in about 20 days. Overall, we now serve 40 percent more customers per employee than we did a decade ago.

Our employees know how to work hard, but they also know how to work smart and solve problems. I can think of no better example than the response of APS employees to last year’s substation fires.

This past summer, our company experienced a once-in-a-career transmission event that, for a month or so, threatened our ability to meet peak demand in the Phoenix area. An insulator failure on a transmission line west of Phoenix, apparently the result of natural causes, initiated a cascade of failures. By acting quickly and decisively, our operators kept the fault isolated. They prevented a more serious failure that could have put a huge portion of the West in the dark.

A few weeks later, a transformer weakened by the earlier line failure caught on fire and damaged much of our Westwing substation, one of four major transmission substations serving the Phoenix metropolitan area. Every summer we bring extra power in from the Northwest to meet our peak demand in the Phoenix area, and within minutes we had lost 25 percent of our ability to import power.

Initially, we expected we would have to call for rolling outages during periods of peak demand to protect our overall system. But despite some tense times last summer, we completely avoided rotating outages.

How did we manage that? Our employees responded to this emergency situation with calm, professional determination. Our wires employees worked around the clock to restore the use of the undamaged transformers at Westwing. Our engineers came up with a unique way to reconfigure the circuits in Phoenix to provide an extra boost of capacity.

Our customer service and communications employees developed a plan to keep all customers informed about the situation. We issued reports every day about the narrow supply margins and urged conservation, especially during peak periods. Our customer response was exceptional. Without their help, we would have been forced to take more serious steps to protect the network.

Finally, once a replacement transformer arrived from half a continent away, our employees again worked around the clock to install it so we could breathe a sigh of relief.

It’s remarkable that, during this entire four week period, we never had to call for rolling outages. Once again, our employees demonstrated resourcefulness, stamina and flexibility – and I might add, met these incredible demands without a single injury.

We weren’t perfect, and as we look back we’ve learned from our mistakes and our experience. However, other than the outage of a few hours associated with the original line failure, our customers did not suffer any unplanned outages as a result of the Westwing event. That’s a real credit to our dedicated customer service employees.

With Westwing soon to be back to full strength, and our recent purchase of the 450-megawatt Sundance Generating Station outside of Coolidge, we’re expecting a demanding but much smoother summer. And, by the end of this month, we will seek another 1,000-megawatts of capacity through a competitive market bid to meet our expected resource needs through 2007.

Expanding Regulatory Relationships
Clearly, meeting the demands of record-level growth requires commitment, resources and cooperation from our regulators. Our strategies link growth to improvements in reliability and advances in alternative energy and the environment. This will necessitate significant investment in the future, which in turn will require regulatory involvement and approval. Completing these programs requires a financially strong utility that can access capital markets on favorable terms.

We’ve done our part to maintain an attractive investment profile. SunCor has been very successful in improving both their earnings and cash flow. By the end of 2005, SunCor will have provided dividends to Pinnacle West of over $250 million dollars in the last three years. As you are likely aware, we are in discussions to sell our share of the Silverhawk Power Plant in Nevada. As I discussed earlier, agility is an important attribute and as we anticipate future markets changing, we adjust our strategies. This sale will help build a stronger balance sheet and decrease our financial leverage.

But we must look beyond today’s requirements.

New technology to build self-healing electrical grids, smart metering, new generating capacity from solar and other renewable sources, improvements in work methods made possible by cutting-edge computer technologies, and new communication opportunities are all critical to our future ability to continue to drive costs down and service up. Just last month we issued a competitive market bid for 100-megawatts of renewable energy. This must all be accomplished working with our regulators to ensure our financial strength while providing you, our investors, a reasonable return.

We must aggressively work with all of our regulators to build strong and honest relationships where communication and the exchange of information is open and direct. The recently enacted Sarbanes-Oxley legislation and related regulations have significantly increased the exchange of data, but we must be vigilant, and remember that procedure and data are no substitute for doing the right thing. That’s a responsibility we all share and all take very seriously.

Producing Strong Financial Returns for Investors
Of course, the key purpose of our strategy is to capture the benefits of growth for our customers and shareholders.

Last year, we delivered those benefits. As 2005 began, prices paid by our customers were lower than they were 20 years ago, and 44 percent lower on an inflation-adjusted basis. And, after a decade of price decreases that ended in 2003, nominal prices were 16 percent lower than they were in 1993.

Pinnacle West shareholders, through all the turmoil of regulatory reversals and economic challenges, have seen a market-beating total return, including a steady increase in our dividends. Over the last five years we’ve performed above the Dow Jones Utility Index. We’ve also beaten the broader market. If you had put $100 into the S&P 500 Index Fund in 1999, you would have about $85 now. That same $100 put in Pinnacle West stock, with dividends reinvested, is now worth double that, $173.

Our past performance offers strong evidence that we can continue to manage growth for the benefit of customers and investors.

We believe it’s important to keep our financing costs low by maintaining solid investment-grade ratings on all our corporate level debt. Recent actions by Moody’s Investor services moving us to a stable outlook are evidence of our efforts in this area.

Our recent stock offering also will keep our financing costs low by contributing to a favorable debt-equity ratio. We obtained a very good price in the market, and in the long run, shareholders will benefit as much as customers by keeping our financing costs low.

Finally, we will continue to place importance on our dividend. Our below industry payout ratio places us in the enviable spot to be able to increase our dividend without stressing our earnings. We’ve done that, year after year, as we’ve lead our industry in dividend growth.

Overall, we have positioned our company for the future. Although some additional regulatory decisions are still needed at FERC, we’ve resolved most of our structural regulatory issues. We’re effectively managing our rapid growth, our operations are outstanding, our shareholder return outpaces the market and financially we’re growing stronger every day.

We will continue to work to achieve sustained cooperation from our regulators and continue to improve our customer satisfaction levels. All this in order to provide you, our shareholders, a strong return on your investment in our company.

The people of Pinnacle West are committed to doing so – now, then and in the future.

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