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

May 17, 2006 Time: 08:30 AM EST

Video shown during 2006 Annual Meeting

Good morning.   Thank you for your attendance and thank you for your continued support of our company.

I’m very pleased to have the opportunity today to report to you on the progress we have made to re-position our company. As I look around the room, I see many familiar faces and you will recall that in last year’s Annual Meeting I described that we had just completed the most comprehensive rate proceeding in our company’s history.

It approved our request for a framework to re-align our company. A framework which when implemented would integrate all of our generating resources, establish new and important rate mechanisms, provide a resource acquisition process with regulatory involvement in the earliest stages and resolve old, inconsistent regulatory policies.

Our progress over the last year has been substantial. We consolidated all of our generation assets bringing the new capacity constructed since 1999 as a part of our Pinnacle West Energy generation expansion plan under APS’ full control.

We sold our Silverhawk plant in Nevada and acquired the new Sundance plant south of Coolidge. The net of this transaction was to exchange unneeded base load capacity for scarce peaking capacity, allowing us to better meet our system load requirements while reducing our overall cost.

We also expanded APS’ generation capacity through the new resource acquisition procedures approved by the Arizona Corporation Commission. We’ve added 1,300 megawatts of new generating capacity in the last year through agreements with other parties to meet expected load growth for the next three years. For the very first time our regulators are involved in new generation from the start, instead of just reviewing it after the fact.

We have also had our challenges.

Though eventually successful, the implementation of our new power supply adjustor has been difficult. Commonly called a fuel clause, it is a regulatory mechanism that recovers only fuel and purchased power expenses. The Arizona Corporation Commission approved a new fuel clause in April 2005; however its implementation over the last year has been compounded by many factors.

For a variety of reasons, natural gas has been the only new generating fuel of significance over the last two decades in our country. As a result, electric companies like ours, which must keep up with rapid customer growth, became more dependent on this fuel. We anticipated this natural gas risk back in 2003 when we requested the fuel adjustment clause approved as part of the 2005 rate decision. We knew our future would require both a fuel clause and a comprehensive power marketing program in order to meet the volatility inherent in a higher reliance on natural gas.

Our power marketing program has served our company well for more than 15 years without a fuel clause. Last year alone, our power marketing group using aggressive fuel hedging contracts saved our customers and our investors more than $130 million.

Domestic natural gas prices, propelled by two summer hurricanes and rapidly rising global energy costs, escalated at historic levels. Forward natural gas prices rose from $5 per mmbtu to $15 per mmbtu and even with the benefit of our hedging efforts, we still incurred natural gas costs of $190 million over our retail prices. This unprecedented increase in natural gas expense reduced our cash flow and as a result Standard and Poors reduced APS’ credit rating to Triple B minus late last year.

Also, in late 2005 our pending fuel request had not been decided, so we requested an interim decision to deal with our growing fuel expenses. After all these proceedings and regulatory filings, the Arizona Corporation Commission’s fuel recovery decision of two weeks ago now gives us a solid fuel clause with which to operate. Though it still needs some minor modifications which we plan to discuss with the Commission this fall, we believe it will provide the platform necessary to recover our fuel costs in the future.

We expect to collect more than $250 million of additional fuel revenue from our customers in 2006 through this new fuel clause. The impact of high natural gas costs and the implementation of this new regulatory mechanism have been challenging. But in the end, the Arizona Corporation Commission understood our need to recover fuel costs, and we have in place a fuel clause which will minimize expenses in the long term for our customers and reduce the investment risk to you, our shareholders.

Palo Verde did not perform up to our company’s historically high standards in 2005. Today, we’re completing work on the solution to a difficult technical problem with Palo Verde Unit 1 which requires the repositioning of a 7,000-pound valve. Through extensive testing and analysis, we found that the valve’s original design position from the 1970s contributed to an acoustical vibration exacerbated by flow conditions unique to this unit. We have fully evaluated all reasonable options and have concluded that moving the valve will resolve the problem. We expect this work to be completed by the end of June and in time for the hottest, most electrically demanding days this summer.

The challenges at Palo Verde meant the performances of our coal and gas units had to be stellar, and they were.

In fact, our coal plants set a record for the highest capacity factor in their history. Most of these units are over 30 years old, yet last year they operated at a combined 87 percent capacity factor. Our gas units were available 95 percent of the time.

This was outstanding performance at a critical time, because our customer and demand growth remain among the highest in the nation. Our peak demand grew 9.3 percent last year, to 7,000 megawatts. If we were to continue to grow at that rate, our company would double in just eight years. While we don’t expect that level of growth every year, we do realize we must be prepared for what lies ahead, just as we have done in the past. Without the Pinnacle West Energy generation expansion program I mentioned earlier, we would not have met our customers’ electric load last summer.

Growth has now pushed our company above one million customers. What’s even more important – and, I think, very impressive – is that while we’ve been able to meet that growth, we have also improved the overall satisfaction of our customers. We set an internal goal to be number one in this area, and last year, we achieved it. We ranked first in the West among investor-owned utilities and number three in the entire country in the 2005 J.D. Power residential customer survey.

As we grow, we are keenly aware of the potential impacts our actions have on the environment. We know that conventional generation resources, the construction of transmission and distribution lines, and even our customer service operations can cause harm if not managed properly. We are focused on operational excellence in this area, just like all the other strategic areas of our company. We received the top rating – Triple A – from Innovest Strategic Value Advisors for our environmental efforts, and earned a place on a list of the world’s 100 most sustainable corporations by Corporate Knights, a Canadian social responsibility magazine. This recognition reinforces our belief that a focus on the environment as a responsible member of the community is vital to our long-term success.

SunCor, our real estate company, continued its high performance for the third straight year. Contributing 30 percent of our total net income in 2005, SunCor recast its portfolio of properties to better meet the investment characteristics of our holding company investors. I expect SunCor will continue to make a contribution to our performance in the future.

Financially in 2005, we increased our dividend to two dollars per share and today our yield is approximately 5 percent. Although regulatory issues and high gas prices depressed our stock price, our earnings for 2005 were $3.26 per share excluding one-time write-offs, one of the highest in our company’s history.

Moving forward, on the regulatory front, we turn our attention to our base rate case, to be heard by the Arizona Corporation Commission beginning in October. We expect challenges. However, just as we were successful in our fuel proceedings, we expect the base rate case will produce a greater understanding of our business and operating issues by our regulators. We have many issues to debate, but our ability to put fuel recovery behind us will hopefully allow our debt ratings to remain stable and give us the necessary cash flow to focus on the future.

We also fully understand and appreciate the significance price increases have on our customers. We don’t like to increase prices; in fact, we strive to decrease them. However, while price increases are difficult, the prices we charge must reflect our costs.

Our recent increases follow several decreases we provided to our customers between 1994 and 2004, lowering the cost of a kilowatt hour by 16 percent. Today, our residential customers’ prices are less than they were in 1992. In fact, when adjusted for inflation, our real prices are lower than they were in 1974. While no one likes to see higher prices, there are very few goods or services consumers purchase every day that can meet our historical record.

This record of price stability was made possible through the dedicated efforts of all of our people. Today, our non-fuel expenses per kilowatt-hour are 12 percent less than they were 10 years ago, and 31 percent less if you adjust for inflation. And we’re not done. Our employees are dedicated to lowering our operating costs even further, and you will continue to see greater efficiency throughout our company.

In October, these and many other attributes will be presented to the Arizona Corporation Commission for the first time in over a decade, and I’m confident, as with the fuel proceedings, that we will achieve a positive regulatory result for our customers and our investors.

We’ve also made progress in our program to improve operations at Palo Verde. As I said, we expect to have Unit 1 back up and running before the summer peak and Units 2 and 3 continue to perform very well. We’ve just completed a successful planned fuel outage on Unit 3 and the capacity factor for these two units over the last six months has been 90 percent. If you adjust for the planned fuel outage, their combined capacity factor was 98 percent.

As for the rest of our company, our fossil performance continues at high levels, the most recent J.D. Power business survey completed two months ago confirmed our earlier high customer satisfaction results and we remain focused on serving the second-fastest growing service territory in the country.

Your company has done an excellent job of meeting the energy needs of our state for over 120 years. Arizona, and the unique spirit of our state, is embedded in our history, our work ethic and everything we do. From community service to building a diverse portfolio of generating resources and everything in between, our experience in, and passion for, our state has protected customers from both energy shortages and high prices.

Our focus will not waver.

Over the next 10 years, we estimate our customers’ electric demand will grow by about 3,000 megawatts. To put that in perspective, it’s equivalent to three times our share of Palo Verde. Now, we do not plan to build three more Palo Verdes, however we are having initial discussions to determine the feasibility of expanding the site to its original design for five units. Moving beyond nuclear and natural gas, we expect to meet our growth in four ways:

First, expansion of our conservation programs. Shortly, you will see and hear more communication in this area. We are expanding our demand-side management programs, offering new pricing tools to increase our Time-of-Use pricing options, and promoting more direct messages to encourage conservation in all areas.

Second, renewable energy. We lead the industry in solar applications as shown by our most recent installation of a large solar trough facility. Not only is it the first such facility in Arizona, it’s the first in our country in 17 years. Biomass and wind are also important, and we recently signed contracts to increase our generation in these areas. With these acquisitions, the renewables portion of our generation portfolio will increase to 5 percent by 2015 and possibly sooner, thus meeting or exceeding any expected state or federal standards.

Third, new coal technology. We are voluntarily installing new state-of-the-art environmental controls on our existing coal plants to ensure these low-cost resources remain environmentally compatible and a viable part of our generation mix. Coal is plentiful in the West, and by using new technologies we will responsibly expand our coal fleet to diversify our fuel resources for the benefit of our customers.

Fourth, a new transmission line to southwestern Wyoming. Last fall, we announced a new proposed line called TransWest Express, designed to access low-cost coal and wind resources in the West, expand our ability to diversify our load base by marrying both winter and summer loads, and strengthen the reliability of the western grid.

These four steps will help diversify our fuel and financial risks, and with the continued expansion of our existing transmission system they will allow us to meet future customer demands.

Existing transmission corridors must also grow. Last month, a new transmission line from southern California to Palo Verde was announced that has the potential to expand our wholesale power markets. I believe California’s electric prices will always exceed ours and therefore, the California market offers important business opportunities. Greater access into those markets will give us the opportunity to reduce our customers’ costs with additional sales while increasing our own profitability through higher margins.

Growth also requires new capital. We expect to invest almost $5 billion over the next five years to meet the future needs of our customers. In our company, we invest more than three times our annual earnings in capital expenditures every year in order to build the capacity needed to serve our customers. This investment in electric infrastructure is required to provide the basis for economic growth in our state. We’ve met this demand in the past and we expect to continue to do so.

Although growth means investment, it also provides the opportunity for us to improve our profitability and minimize customer prices. This is only possible through the dedicated efforts of our people. Through their hard work, we have been able to reduce our costs per kilowatt-hour by applying new technologies and using improved work methods. Although contrary to local news reports, we are very focused on controlling costs. And cost management goes way beyond budgets. It’s the personal accountability of every employee, applied every day, to increase performance while improving customer service.

We’ve continued to decentralize our company, placing more responsibility and accountability on each employee. In just over a decade our market has grown by 60 percent, yet we’ve actually reduced our workforce by 7 percent. That’s an improvement in employee productivity of over 30 percent. Today, our people are more productive and they provide a higher level of customer service than ever before – the highest in our company’s history.

A unique mindset of dedication and achievement runs throughout our entire company. The people of Palo Verde are dedicated to restoring operating excellence and they have my full support. Our fossil plant workers are performing at the highest levels in their APS careers, and our customer services group continues to meet challenges with innovative solutions and a customers-first mindset.

We are making significant progress in repositioning our company, and with the personal dedication of our people, we are committed to producing excellent results for you, our shareholders.

Please watch this short video, and I’m confident you will see what I mean.

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