Video shown during 2007 Annual Meeting

Thank you again for attending our meeting today and thank you for your investment in our company and in Arizona. Now more than ever, an investment in Pinnacle West is an investment in the future of our unique state.

In 2006, your company focused on meeting Arizona’s phenomenal growth. We added new customers at a rate three times the national average while at the same time improving electric reliability and providing superior service to our customers.

This year we’re off to a good start and we’re working hard to make 2007 another outstanding year. Our role in Arizona is to build and invest today to create a better tomorrow. We’re committed to ensuring that Arizona’s future includes a robust economy, a healthy environment and strong local communities.

If you sense a tone of optimism in my voice, you’re right. Optimism blended with the challenge of meeting one of the highest growth rates in our country.

We’ve made real progress in the last few years, and this morning I would like to describe our performance from five different perspectives.

First, by comparison to the electric industry. In the last five years our annual sales growth has been 4 percent, compared to a 1 percent per year decline for electric companies nationwide. Last year our electric revenues grew 15 percent; while U.S. electric utilities grew 2.4 percent. Our company’s revenues grew six times the industry average, and most importantly we accomplished this while our customers’ prices fell below the industry average. Ten years ago our prices were 5 percent higher than the national average. Today they are 7 percent lower.

My second comparison is from your perspective, the perspective of our shareholders. Your total return last year was 28 percent, compared to an industry average of 21 percent.

We have been able to provide shareholders with steady dividend increases for the past 13 years. In the last five years alone we’ve increased the dividend by 31 percent from $1.60 to $2.10. We’re sure our strong dividend growth has helped bolster our stock price, smoothed the way to a solid reception for our past stock offerings and, as a result, lowered our overall cost of capital which benefited our customers. Future dividend growth will depend on a number of factors, including payout ratios, cash flow, regulatory decisions and market trends.

Investors can look back with satisfaction at the performance of SunCor, our real estate subsidiary. With record net income of $61 million in 2006, SunCor capped a five-year period in which it provided more than $266 million of cash to Pinnacle West. Though the housing market in the West isn’t as hot as it was a few years ago, SunCor is positioned to benefit from this region’s continued growth in the future.

As a Pinnacle West investor you should also know we’re accelerating our long tradition of environmental leadership. While we’ve been at the forefront in this arena, 2006 marked great progress, and 2007 is looking outstanding as well. For instance, last year we brought on line the Saguaro Solar Trough Plant, which was quickly named one of the top 12 power plants in the world by Power Magazine.

And, at the end of the year, we added our first wind-powered project, meaning that overall we expanded our renewable generation capacity by more than 100 megawatts. In the first three months of this year, we provided our customers with more than four times the renewable generation than in the same quarter of 2006. We have guidelines for renewables from the Arizona Corporation Commission, but our long-term goal is to surpass these mandates at the lowest possible cost as we step up our efforts to create a healthier environment and a more sustainable company for our customers and shareholders.

We continue to work with our Arizona regulators to build a solid regulatory platform. After finishing an unprecedented string of rate decreases over the previous decade, in 2005 we implemented our first base rate increase since the early 1990s, while putting in place a crucial fuel cost adjustor and reestablishing a regulatory market structure.

Today, we’re nearing completion of our current rate case. In late April, we received a recommended order from the administrative law judge, and though a final decision is still pending, the judge recommended a net 5.8 percent price increase. This is based in part on a 10.75 percent cost of common equity – at the top of the ACC staff’s recommended range but just below the lower end of our preferred range of 11 to 12 percent.

We have firmly restated our need for our full request and we remain hopeful that our views on the critical need for full cost recovery will lead to an improved result. It’s only with improved financial health and flexibility that we can continue to meet the challenges of Arizona’s growth. Our Arizona regulators recognized this need with decisions last year to improve our fuel cost recovery and strengthen our cash flow. Their decisions were fundamental to our financial strength and important to our continuing ability to finance future capital expenditures. These decisions show they understand just how important electric infrastructure is for our growing state.

In 2007, we expect to continue our forward-looking orientation with regulators. In the past, regulators looked at our investment in new generating resources after the fact. But with our new regulatory platform, regulators are beginning to get involved from the very earliest stages. This clearly will improve our regulatory risk and reduce our customers’ long term prices. Whether we acquire additional generating units or enter into long-term purchased power agreements, this kind of up front regulatory involvement will be crucial to our ability to finance new capacity on favorable terms.

Third, it’s important to gauge our performance from the perspective of our customers.

For the most part, our customers don’t spend much time thinking about their electric company. That’s because we’re doing our job and doing it very well.

Despite recent price increases, our product is more affordable, more reliable and increasingly sustainable. In 2006 our customers paid roughly the same for power as they did in 1992. That may take a moment to sink in, in fact, putting a little more perspective around that statement: in that same timeframe, Arizona median income has increased 55 percent and median home prices in Arizona have tripled. In particular, all other forms of energy and their prices have skyrocketed, while electricity has remained basically at the same price level, providing real value to our customers.

Our customers have experienced an unprecedented period of price stability. In the last ten years consumer costs rose nearly 30 percent, while our prices grew only 4 percent. That cost control didn’t happen by accident. In every area of our company, we rigorously analyzed, managed and reduced our costs. And over the same period, we reduced our average non-fuel costs by 4 percent, offsetting the huge increase in fuel prices.

With regard to fuel, everyone knows we’re now in an era of sharply higher energy costs. Our natural gas prices more than doubled in the last five years. As a result of these higher prices and increased gas generation due to customer growth our gas bill has gone up $250 million since 2002. But even with fuel, we squeezed every bit of customer value we could out of the energy markets. Over the last five years our hedging program saved customers $200 million in fuel costs. And we also managed the volatility – smoothed out the wild price swings – of our fuel costs.

We will continue to manage the volatility and cost of our fuel with prudent hedging. For 2007, we’ve hedged 85 percent of our natural gas and purchased power need with prices below current forward market prices. For 2008 we’re already 65 percent hedged and 45 percent for 2009.

In this era of rising fuel costs, our generation fleet is diverse and overall our performance continues to be strong. Although we’re working through issues at Palo Verde, in 2006 our coal units performed 15 percentage points better than the national average, achieving a combined capacity factor of 87 percent. And our new combined-cycle units powered by natural gas also made a strong contribution, producing about a quarter of our total generation for 2006.

Our foremost challenge is to return the Palo Verde Nuclear Generating Station to its previous position as the premier nuclear operating facility in the United States. To restore this incredible asset to world-class status, we’ve hired one of the nation’s top nuclear executives, Randy Edington. There is a lot of work to be done, yet while Randy has only been on site since the beginning of the year, we’re already seeing encouraging signs. During the first quarter of this year, Palo Verde turned in a solid 94 percent site capacity factor.

The reliability of our electric system has been outstanding. While we were reducing the length and frequency of outages by 30 to 40 percent over the last five years, we were also improving customer satisfaction in other ways, including providing customers with greater convenience. A good example is our Web site aps.com, where year-over-year we had 14 percent more customer account sign-ups and 41 percent more customer transactions.

The future for our customers will include more choices and a range of services that will make it easier for them to manage and monitor their energy use and their electric bills, even away from home.

More and more of our customers are stepping up and working with APS to move toward a renewable future. Participation in our program to expand solar generation, APS’ Solar Partners, nearly doubled last year.

And, as soon as the current rate case is resolved, we plan to offer more varied options for customers who want to go green. Soon customers will be able to choose to buy up to 100 percent of their power either from solar or from a bundle of renewable resources with prices that track costs.

For the customer who wants to do his or her share for the environment by actively reducing usage, we now offer a range of options from simply buying discounted energy-efficient lightbulbs to installing solar water heaters with substantial subsidies.

Buying a better, longer-lasting lightbulb is a great example of a small change that can add up to a big difference and that’s why we encourage their use. In just the last year, our customers bought more than two million bulbs saving $50 million in energy costs and reducing greenhouse emissions by 450 thousand tons over the life of the bulbs. These efforts earned APS an “Energy Star” Partner of the Year Award from the Environmental Protection Agency and the Department of Energy.

Throughout the coming months and years we will be expanding these energy conservation options and introducing new technologies to improve customer satisfaction. For example, in the future it will be likely that you will use your cell phone to adjust your air conditioning or turn off your lights from across the country.

Over our more than 120 years of history in Arizona, we have developed a strong connection with our customers. And I vow to you, the owners of this company, we will continue to work hard to ensure this relationship grows as our customer base does the same.

Fourth, from the perspective of our people, Pinnacle West employees are proud of their tradition of service to Arizona. We’ve played a prominent role in shaping our state’s energy resources, its communities and its economy. Indeed, our people relish this responsibility. They will continue investing their energy and passion to ensure the Arizona lifestyle we all love only gets better.

They understand this region, its culture and its environment. From Yuma to the Grand Canyon and most points in between, this company and our people are integral parts of our state’s big cities and small towns. They repair outages in a monsoon, they provide energy solutions for customers, they deftly navigate the intricacies of the Western wholesale power market.

We also meet Arizona’s growth. In the last five years, our growth spurred us to work even more efficiently. We put to work better technology and new methods to serve 180,000 additional customers with 40 new substations and 4,100 new miles of transmission and distribution wire while holding the cost of delivery constant.

Over those same five years our peak demand increased by 35 percent – and increased by 9 percent last year alone. We added more than 2,000 megawatts of generation capacity to serve that increased demand.

We take pride in delivering customer value. That’s always the key. How is value defined? Reliable power and friendly service at reasonable prices. That’s as simple as I can put it.

This is a dynamic time to be in the electricity business. Throughout our country, utilities are embarking on efforts to reestablish market cost and pricing structures to support electric infrastructure expansion. That’s something we’ve been doing in Arizona for several years in coordination with our state regulators. Our growth demands it, and meeting the load growth of the fastest growing state in the country provides our people with an ongoing challenge. But the way we see it, each challenge gives us an opportunity to come up with new solutions, employ new technology and put our experience to work to improve Arizona’s future.

It’s been a hallmark of our company to meet our state’s future electricity growth and we will continue to accept that responsibility. Think where we would be today if the previous leaders of our company had not built the Four Corners, Cholla and Palo Verde power plants. We will continue to pursue the resource plans necessary to meet our customers’ total electric needs.

Over the next 10 years, our company will invest nearly $15 billion in electric infrastructure for Arizona. These investments will help power a new era of Arizona’s growth, and will include a significant amount of renewable energy. However, while we are dedicated to being a leader in this area, we must balance the adoption of renewable technologies with the need to provide affordable and reliable energy as we make the transition from our current energy era to a newer, cleaner energy future.

Our people have never had more accountability or been more empowered to put their mark on the industry than they are today. We encourage a mindset of leadership here – not just from those of us in this room here today, but from everyone who gets a paycheck. We feel strongly that less bureaucracy leads to more creativity. And the ability to be creative leads to better job satisfaction, greater results, happier customers, satisfied shareholders and…ultimately…a stronger Arizona.

This widespread leadership has certainly paid dividends over the last decade. In just over ten years, our electric market has grown by 60 percent, without much change to our workforce. Now that’s a productivity improvement. To drive the point home, the same number of people have served 300,000 more customers, while improving reliability and customer satisfaction. And you can expect us to continue to aggressively improve our efficiency.

Finally, from the Arizona perspective. Your company has served Arizona since before it was a state. We’ve met our growth by focusing on the future and making the decisions necessary to build and finance the needed electric infrastructure.

Pinnacle West and APS are clearly, irrevocably committed to the future of our state. As I wrote in our current Annual Report, there is nowhere we’d rather do business.

The investments we’ve made and the expansion plans we’re executing will serve our customers, our employees and our shareholders well for decades to come.

For our employees, we’re committed to providing resources and opportunities for growth and leadership in every job. It’s only with individuals owning their roles that we can build a better, stronger and more sustainable electric company to power Arizona’s future.

For our customers, we will continue to provide electric service that is reliable and affordable. By constantly improving our efficiency and innovation, we will help build a better economy and a cleaner environment.

And for our shareholders, we are committed to managing the risks of our business and providing you a solid return on your investment.

With these commitments and this performance, it should be clear why I’m optimistic.

Thank you.