In the past year, there has been much discussion about the state of our nation's economy and the challenges it presents
to us all.

In Arizona, where the recession hit particularly hard, the housing market has suffered terribly, job losses continue and business has been difficult. For SRP, this means electric customer growth has slowed dramatically, impacting revenues and creating spending constraints. Fortunately, at SRP we have spent more than 100 years navigating changing service demands and infrastructure needs, as well as challenges presented during periods of economic uncertainty. That experience helps us chart a steady course now.

This year, we cut operating costs, reduced our workforce and continued to look for ways to hold expenses in check. We saved money by delaying several electric system capital projects, but with an eye on retaining the flexibility to embrace new technologies. At the same time, we adjusted projected electricity needs to reflect a more reasonable pace of growth. We are confident that this is a temporary slowdown and we will return to prior growth trends.

Our primary focus on infrastructure additions is the commercial operation of Unit 4 at Tucson Electric Power Co.'s Springerville Generating Station in eastern Arizona. Scheduled for the end of the calendar year, the aggressive construction program is moving forward. Construction of extra-high-voltage transmission lines, as well as sub-transmission and substation expansions, continues.

SRP has launched two new programs that reward customers for shifting electric use from more-expensive, on-peak to lower-cost, off-peak hours. By signing up for one of these plans and shifting the time of day power is used, customers can lower their electric costs and help SRP decrease the need to generate or buy higher-priced electricity. Our new residential customer SRP EZ-3™ plan, so named because it rewards customers who reduce electric use during three peak hours, will be available on request in January 2010. The second new plan is SRP Power Partner™, a demand-response program for commercial customers who can voluntarily reduce their usage when SRP needs power on short notice.

In managing the watersheds of the Salt and Verde rivers, we took an important step forward by finalizing an agreement with the White Mountain Apache Tribe to quantify the tribe's water rights at the headwaters of the Salt River, where a significant percentage of SRP water originates. This pact helps ensure certainty for SRP water shareholders and allows development of a reliable domestic surface water supply for tribal members. The groundbreaking 2004 Arizona Indian Water Rights Settlement Act served as the umbrella that made this possible.

We also formalized an agreement with the Town of Payson that will resolve long-standing issues over rights to water within and adjacent to the town. The arrangement will provide further certainty to Payson, and to SRP shareholders, with regard to water supplies in northern Gila County.

The Salt River Project Agricultural Improvement and Power District's latest bond sale, completed in January, caught the attention of both Wall Street and Main Street. In this new approach, SRP offered bonds first to retail buyers, who came out in good numbers, purchasing more than a third of the offering. Including premiums and discounts the total net proceeds were $764 million. About $480 million will fund electric system capital expenses, $180 million went into SRP's general fund to reimburse prior capital expenditures and $100 million will pay back short-term loans in SRP's commercial paper program.

Total operating revenues for the year were $2.76 billion, up slightly from the previous year. Combined net revenues, SRP's bottom line, were about $170 million before fair-value accounting adjustments. This is about the same as the prior fiscal year, and we consider that quite a good performance in such a tumultuous year. However, after fair-value adjustments (mark to market), SRP ended the year with a net loss of $247 million. The fair-value adjustments were driven in large part by the substantial declines in the stock market and the market for natural gas. Over the long term, we do not expect to "realize" these losses.

While SRP isn't immune to current events, our solid record of performance over time speaks for itself. Our philosophy of resource stewardship advocates a balance of sound science, customer value and resource preservation as a foundation for addressing emerging issues. Being flexible and adapting to changing conditions makes good business sense.

In recognition of the outstanding service our employees provide, SRP once again ranked "Highest for Residential Customer Satisfaction Among Large Utilities in the Western United States," according to a study by J.D. Power and Associates. It is the 8th year in a row SRP has received this top honor. We are well-positioned to make the most of opportunities as they present themselves, and we have confidence in what the future holds.

John M. Williams Jr.
President

David Rousseau
Vice President