HOW FOCUSING ON THE FUTURE LED TO SUCCESS: 1999 TO 2003

Our future focus is not a new concept. In fact, it has been a necessity. During the last five years, we honed the traits that allowed us to navigate previously unseen industry volatility.

It took agility and adaptability. In 1999, like now, there was conflict between federal and state regulators, not to mention the unfettered presence of public power in the West. We insisted on keeping our existing power plants, and we didn’t speculate in large merchant generation. We built much-needed new units to serve APS’ new customers.

It took the ability to manage risk. Upon approval of the 1999 Settlement Agreement, we embarked upon a two pronged approach to address customer reliability and price exposure. First, we announced the construction of 1,800 megawatts of new generation under Pinnacle West Energy to cover a portion of APS’ needed generation. Second, we immediately began a short-term electric and natural gas hedging program to cover the interim period. We didn’t panic and sign purchase power agreements at the peak of market prices, and our two-pronged approach allowed us to navigate the western fuel and power markets without harming customers or investors.

In the summer of 2000 and again in 2001, when wholesale power markets erupted, we were almost fully protected against price spikes with a combination of supply contracts, new generation and financial hedges. At no time did we dedicate the output of our new generation to anyone else.

It took commitment to meeting customer needs. We knew the generation capacity we would need wasn’t going to be found in the wholesale marketplace. We were wary of the California market structure, so we fought from the very beginning against the divestiture of APS generation to a third party. We had envisioned what a decent wholesale market should look like and we didn’t see one – and still don’t – anywhere in the western United States.

Under the electric competition rules adopted by the ACC in 1999, we could not build any new generation at APS, and without new plants under construction we would have been forced to enter the wholesale energy market at the worst possible time. As our requests for proposals from the wholesale market have shown, no one else could have supplied the power our customers needed last year – and will need in the future – as economically as our new plants.

It took a focus on creating customer value. While other utilities were going bankrupt or passing along unheard-of price increases, we lowered our rates by 16 percent over a 10-year period. We delivered these price decreases, as promised, and delivered the best customer satisfaction of any investor-owned utility in the West.

For the years 1999 through 2003, our peak demand grew nearly 25 percent. When combined with the 1,200- megawatt shortage APS had in 1999, APS’ shortage grew to 2,500 megawatts, approximately one-third of our total responsibility. We met that shortage. During that time, we didn’t have a single outage because of generation shortages or transmission congestion. We kept the lights on with outstanding operations – at our coal, nuclear and gas plants and throughout our "wires" organization.

It took a focus on creating shareholder value. We’ve proven adept at translating customer growth into financial results for our shareholders. While our market grew substantially, our workforce count remained flat. Since 1999, we’ve deployed more than $140 million of cash distributions from our real estate operations to improve liquidity and fund operating capital. Our common stock dividend growth over the last decade has been the best in our industry. And, the total return on our stock has consistently outpaced the S&P 500 Index.

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