WE ARE FOCUSED ON DELIVERING VALUE

For our shareholders, our performance is judged by the delivery of returns in the form of share appreciation and dividends over time. In 2002, the convergence of regulatory change, financial and credit market fears, a weak economy, wholesale electric market declines and our own non-recurring charges contributed to a lower stock price. Although our stock performance for the year mirrored the industry, we are not satisfied with relative industry performance, let alone a decline.

Steps taken in 2002 to reposition our regulatory structure, improve efficiency, reduce staffing, realign our generation portfolio and improve our liquidity, place us well for the future. Although 2003 continues to be a transition year as we work through regulatory and other issues, our operations and market base are strong. We expect debt ratios to improve as we complete our current power plant projects, and even now we have a sound liquidity position, significantly exceeding our cash requirements. The growth of APS customers – both in number and energy usage – implies a strong core business that will drive future financial performance. Meanwhile, we will continue to emphasize dividends for our shareholders tied to factors such as our cash flow, dividend payout trends and financial market conditions.

Our company, and others in our industry, moved in one direction for nearly a decade – toward a new competitive industry. In 2002, that direction reversed. Such sudden change is not easy, and it caused disruptions. But everything that makes us a good company and a good investment remains intact. Our customer growth is powerful and customer satisfaction has never been higher. Our power plants and wires networks are operating beyond our previous high performance. We know this region and the opportunities it holds.

Our course is set. Arizona – with its intense climate, aesthetic beauty and nearly limitless potential – has never seemed more attractive. This is our home. This is our future. This is our element.

William J. Post

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