Sustainability is not just a word - it is a mindset, a culture, a call to action. 

For Pinnacle West and its family of companies, sustainability is a decision-making process that requires us to address current needs always in the context of how the decision can support long-term economic vitality, environmental health and strong communities. It is not an end-state to be achieved and victory declared; but rather, it is a continuous-improvement practice that challenges us to be successful today in ways that establish the foundation for a better tomorrow.

The challenge for Pinnacle West and its electric utility subsidiary, APS, is multiplied by the rapid growth in Arizona. With a population growth three times the national average and electricity consumption four times the national average, the challenge of making decisions that meet the reliability and affordability expectation of our community is made increasingly difficult by the potential environmental impacts of those decisions. But we are working to meet that challenge head on and measure our success by the results.

For example:

• Our voluntary emissions-reductions program will significantly reduce emissions at our coal plants sooner than would be required under regulations and at less cost. It achieves environmental benefit and reduces our regulatory risk. For example, at the Four Corners plant, our voluntary program was able to reduce SO2 by 55 percent. The EPA has agreed this will become the new regulatory standard.

• The voluntary decommissioning of the Childs and Irving Hydroelectric Power Plants, which will restore historic Fossil Creek to a pristine natural condition has clear benefits for biodiversity and the environment.

• The APS Solar Test and Research (STAR) Center which was built more than 30 years ago to facilitate the development of solar power and other renewable technologies. Not only is it a showcase for our work in renewables, but it has provided hands-on experience on how to reliably integrate these technologies into our operations and provided the basis for new intellectual property that create new revenue opportunities for the company.
   
• Our financial need for a rate increase in 2006 clearly presented potential financial impact on our low-income customers. Accordingly, the plan to implement the increase included a robust outreach program to these customers to help raise awareness and increase participation in our energy assistance (E-3) programs, through which low-income customers receive a discount on their electricity bills. These efforts resulted in an increase of approximately 32 percent of customers enrolled in the E-3 program, including a 135-percent increase for customers living on Tribal lands.

Throughout this report there are other examples of integrated decision making that reflect APS' commitment to sustainability. And, while it's not about accolades, we are proud that our efforts have received the following recognition:

• APS and its partner, GreenFuel Technologies, recently shared the Emissions Energy Project of the Year Award for our work using emissions (including CO2) from one of our natural gas combined-cycle power plants to grow algae and convert the algae into biodiesel and ethanol.  
• The Environmental Protection Agency and the Department of Energy named APS its 2007 ENERGY STAR Partner of the Year for its promotion of compact fluorescent lights (CFLs).
• In 2006, Pinnacle West was once again named one of the Global 100 Most Sustainable Corporations in the World by Corporate Knights.
• Pinnacle West has received the highest rating (AAA) by Innovest Strategic Value Advisors in a comprehensive analysis on the U.S. Electric Power Sector covering the environmental, social and governance factors of the largest publicly-traded utility companies.
• APS received the 2006 Climate Protection Award given to the company by the U.S. Environmental Protection Agency. This award recognizes exceptional leadership, dedication and technical achievements in protecting the earth's climate.
  
  But awards are not a prediction of future success. Our focus is on new opportunities, and to maintain our forward momentum we have:
  
  
• Created a new Eco-Efficiency and Technology Innovation Department to integrate and drive sustainability practices throughout the enterprise.
• Established a company goal to generate 15 percent of our energy sales from renewable resources by 2020, given adequate regulatory support and funding.
• Formed a consortium, including BHP and Liquid Air, with a Department of Energy grant to commercialize the "hydrogasification" of coal. Hydrogasification refers to gasification of coal in the presence of hydrogen to make methane for use in power plants.
• With Intel Corp. we founded Arizona Businesses Advancing Sustainability, an association dedicated to improving and promoting sustainable business practices in Arizona. Thirty companies have committed to participate in this  organization, which is the first of its kind in Arizona.

All these efforts support our goal of meeting the reliable affordable energy needs or our customers while building the foundation for a better tomorrow. A better tomorrow starts today, and we hope that this report gives you a better understanding of our commitment to that future and its new generations.

Thank you for your interest in our company and this report.

Jack E. Davis President  Pinnacle West Capital Corporation		Edward Z. Fox Vice President, EHS Arizona Public Service