This past year has been one of virtually no customer growth in an economy that has been flat. We continue, however, to prepare for the resumption of sustained growth in advance of the inevitable turnaround. While gross revenues grew slightly, financial results were adversely affected by a new accounting standard and changes in fair value of fuel and purchased power contracts.

Precipitation on the watershed was sufficient to fill the reservoirs for the second straight year, and although the status of continued drought is still in question, our water shareholders can be assured we continue to have adequate supplies. With full reservoirs there has been no need for supplemental water purchases.

We are working to resolve issues related to the Verde River watershed that would infringe on the rights of SRP's shareholders. Efforts to implement terms of the settlement of claims of the White Mountain Apache Tribe, and efforts to provide water to the Town of Payson from C.C. Cragin Reservoir, are ongoing.

Discussions with Valley cities continue on a drought protection plan to refurbish existing wells and co-locate new wells. Also, we are identifying available water sources to provide for areas of growth within the boundaries of our electric service area, but outside SRP's traditional water service boundaries.

It is business as usual in the national energy policy arena, but the state regulatory policy debate about the resumption of competition remains unresolved. The issue has been further complicated by the intervention of renewable suppliers.

The issue of global climate change and the contribution of greenhouse gases from fossil fuel generation, as it did last year, dominates the public policy arena. SRP, concerned with both existing and new base-load generation, is an active participant in both regional and national debates as policy options emerge. We are also pursuing development of technologies to capture and sequester carbon dioxide emissions.

Plans by a number of utilities moved forward during the year to license new nuclear generating units. We are monitoring these activities and reviewing the nuclear option, but remain concerned with cost escalation, uncertainty of regulatory actions and lack of spent fuel management policy direction.

During the year we continued a program targeted outside of SRP's traditional water service area, in which a group of representative electric customers are helping review and comment on issues such as facility siting and pricing. Management's two-year pilot program is entering the final phase of evaluation.

Although growth in SRP's electric service territory is still off, it is expected the greater Phoenix metropolitan area will resume growth in 2011. Current trends indicate 0.5% growth in the coming year.

Natural gas, the pricing of which has been extremely volatile the last several years, remains the most significant electric production expense. Pricing adjustments reflecting such volatility continue, along with fuel hedging, which has worked well in mitigating customer impacts.

This year we have expanded the energy-efficiency programs we offer customers. This effort involves a comprehensive customer education program with various print and electronic communications which provide energy-saving information. We have added to programs for residential and commercial customers, as well as new programs, which incentivize purchases of energy-efficient equipment and products. These program offerings will expand over the next year.

SRP's energy-efficiency programs complement the changes made in the standard pricing plan design in FY08 to better reflect cost patterns during summer peak usage. They included the introduction of July–August peak period pricing and higher pricing for monthly usage in excess of 2,000 kilowatt hours during the six-month summer billing period. Our expectation is customers will alter consumption patterns in responding to these changes.

We have expanded our renewable portfolio. SRP is increasing the level of sustainable resources. Over the next 10 years, the portion of SRP's energy supplied by sustainable resources, including energy-efficiency and demand-response programs, is targeted to grow from about 7% today, to 15%. Our plans include new wind, geothermal, solar and distributed generation resources. This means a large portion of the expected growth in customer needs is planned to be met by increasing SRP's sustainable resources.

We continue to expand existing, and include new, value-added elements to our award-winning customer service programs. More than 84,000 customers currently participate in SRP M-Power®, the largest voluntary prepayment electric service program in North America. An in-home display, showing real-time power usage, helps customers lower power consumption by 12%, on average. There are 55 locations in our service territory where customers may purchase power from kiosks designed by SRP.

More than 222,000 customers have elected SRP's Time-of-Use™ pricing plan, the third-largest time-of-use initiative in the U.S. A typical customer on this program lowers their bill 7% by limiting power use during peak periods, thereby assisting in peak-load management.

In excess of 400,000 customers are currently served by a "smart meter," a technologically sophisticated meter capable of two-way communication with the potential to manage particular home electrical loads. Customers are able to view the prior day usage on the Internet and receive text messages and/or e-mails projecting monthly electric bills based upon consumption of electricity month-to-date.

J.D. Power and Associates has conducted surveys reporting that customer perceptions of SRP remain strong. We have received the highest score for residential customer satisfaction in the West in 10 of the last 11 years. And we have received the highest scores for business customer satisfaction in the West region in three of the six years that SRP has participated in the survey. Additionally, our residential and commercial call centers were certified by J.D. Power and Associates for the fourth consecutive year. Certification demonstrates SRP's commitment to delivering high-quality service to customers.

SRP understands the challenges of an aging workforce and recognizes how important it is to manage resulting personnel changes. Development initiatives, mentoring, apprenticeship opportunities and rotational programs continue to be top priorities for us.

Our workforce, in what has become a challenging environment, as in past years deserves full credit for successes this past fiscal year. SRP's elected officials, partnering with management, continue to supply the foundation for growth to continue and for ongoing improvement to occur.

Richard H. Silverman
General Manager