TO OUR SHAREHOLDERS

Your company is poised for a tremendous future.

In 2006, our people met Arizona’s rapid growth, improved electric reliability, provided superior service to our customers and continued to power our state’s modern economy. Today, we continue to work hard to provide ample power for Arizona’s future and ensure that future contains a robust economy, a healthy environۉment and strong local communities.

There is nowhere we’d rather do business.

Our major subsidiary, APS, is a vertically integrated electric company building a sustainable, hybrid reguۉlatory platform. It’s a hybrid structure because, while regulated, we participate in the Western regional competitive wholesale market. The West, although dominated by California, exhibits huge diversity in geography, energy demand and resources, and regulaۉtory structures. Unlike the eastern states, which often have close – knit transmission systems, the West is less “networked” among power plants, customers and other utilities.

Therefore, we rely mostly on our own generation, but we also make use of load diversity between the Northwest and Southwest, as well as other wholesale opportunities. We plan and operate our transmission system to provide cost – effective, reliable service to our customers. We use long – term contracts and fuel and purchased power hedging to stabilize our customers’ fuel prices.

Customer value is always the key. Providing reliable power at reasonable prices, whether from our own generation or from competitive wholesale markets, is a goal that will continue to drive us. We focus on value for the long-term; realizing intelligent investments today will make our company and our state stronger for decades to come.

Our Role in Arizona

We’ve served Arizona continuously since 1886 – a quarter-century before it became a state – and since then we’ve played a prominent role in shaping the state’s energy and its economy.

This is a responsibility we relish. We understand this region, its people, its environment and its challenges, and feel fortunate in our role of powering its growth. We are investing today to ensure our enviable Arizona lifestyle only gets better.

Planning for the future – to meet future load growth – is always challenging. Arizona is the fastest growing state in the country, and Phoenix is already the nation’s fifth largest city. Throughout the United States, electric utilities are entering a prolonged period of infrastrucۉture expansion. Perhaps nowhere is the need to expand more tangible than here in Arizona. For this reason, growth drives our strategies.

Over the next 10 years we plan to invest nearly $15 bilۉlion in electric infrastructure for Arizona. Many of the “bright ideas” we adopt today, and many decisions we will make in the next few years, will determine the kind of company we will be into the middle of this century.

We will increasingly employ new technology to meet the highest standards of reliability, while working hard to minimize our impact on the environment. At the same time, we will continue our focus on improving our local communities – providing resources where and when we can make a positive difference.

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