ML17297A651

Annual Financial Rept 1980

ML17297A651
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Site:	Palo Verde
Issue date:	02/19/1981
From:	ARIZONA PUBLIC SERVICE CO. (FORMERLY ARIZONA NUCLEAR
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1980 Arizona Public Service Company nnLia @port NOTICE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

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Annual Report This report is published to provide general information con-cerning the company and not in connection with any sale, offer for sale, or solicitation of an offer to buy. any securities.

Annual Meeting of Stockholders All stockholders are invited to attend the company's sixty-first annual meeting. It will be held at 10 a.m. Thursday, April 23, in The Grand Ballroom of Del Webb's Townehouse, 100 West Clarendon, Phoenix, Arizona.

Our Cover:

Pleasant Valley stretches south toward the Sierra Anchas from central Arizona's Mogollon Rim, where winter's storms have more than once bedeviled utilitylinemen.

APS Photographer Paul Escen's picture inspired retiree George Carlin to put his memories into words, on our back cover.

Arizona Public Service Company, 411 North Central Avenue, Phoenix, Arizona (602) 271-7900 Mailing address: P.O. Box 21666, Phoenix, AZ 85036

Highlights 1980 1980 1979 1978 Property and Plant:

Total utility plant, year end S3,199,927,000 S2,735,073,000 S2,288,604,000 Capital expenditures S 504,120,000 S 468,116,000 S 405,789,000 Sales and Customers:

Total operating revenues S 765,760,000 S 664,423,000 S 562,217,000 Total electric sales (mwh) 11,877,722 11,584,898 10,912,704 Electric customers, year end 421,803 401,983 378,553 Total gas sales (m therms) 432,277 467,088 449,451 Gas customers, year end 340.248 340,343 339,803 Income, Earnings, Dividends:

Net income S 143,290,000 S 121,578,000 S 106,759,000 Earnings for common stock S 118,228,000 S 99,696,000 S 89,288,000 Average common shares outstanding 42,960,655 34,426,346 28,363,223 Earnings (based on average shares outstanding) S 275 S 290 S 3.15 Dividends paid per share of common stock S 2.06 S 1.94 S 1.73 Shareholders:

Common 110.416 92,396 78,275 Preferred 6,745 7,049 7,158 Employees, year end: 5,538 5,263 4,951 Contents Page To our shareholders 2 The year in review . 4 Financial data . 14 Accountants'pinion 18 Legal matters . 31

To Our Shareholders In the following pages of this report you will find a detailed review of management's efforts to secure adequate rate relief dur-

'oal,. ing 1980 so that we could avoid selling a portion of our share of the Palo Verde Nuclear Generating I Station. Selling assets such as Palo Verde would have immedi-ately reduced financial pressures on the company, but would result in long-term adverse consequences for our customers and the state

~

j I J I of Arizona. As you know, without adequate earnings and sound credit. we would be unable to ll 1 finance the construction program

~l needed to meet Arizona's future l,

energy needs.

A May, 1980 rate decision by the Arizona Corporation Commis-sion granted only one-third of a requested two-step increase.

As a result of this decision, our r)M board of directors authorized man-agement to proceed with negotia-tions to sell 210 megawatts of our 1109-megawatt share of Palo Verde. An appeal of the May decision to the commission did not result in any additional rate relief during the year.

In contrast to our 1980 experience, 1981 began with a major step forward when, on February 2, the commission granted us a $ 79.5 million rate increase, the full amount of an emergency request made on Jan-uary 13. The commission's deci-Kclth L. 'Ibrlcy. Ralph M. Bllby sion relieved our need to continue negotiations for the sale of a por-tion of Palo Verde.

We see this most recent deci-On February 19, 1981. Ralph M. Bllbg. for health reasons. sub- sion as clear evidence that the com-mitted hts restgnat ton as chairman of the board of directors.

The board reluctantly accepted Mr. Bltbg's resignation, and mission intends to serve the best appointed him ulcc chairman of the board, egectiue March 19, interests of both investors and con-1981. The board also appointed Kelth L. Turteg to succeed sumers. Should the commission Mr. Bttbg as chairman. Mr. Il<r(eg continues as president make the interim increase perma-and chief execut tue oglcer. nent, and demonstrate its determi-nation to permit the company to earn adequate revenue levels in the future, our customers will be

assured of benefiting fully from try averages and surpassing Generic energy issues with the reliable, economic energy the a long-term corporate goal. national and statewide implica-Palo Verde plant will provide. Improved performance at tions touched nearly every area The adverse rate situation our Four Corners Plant, for of our business. These issues, that prevailed during 1980,coupled instance, directly benefits which will become even more with an increase in the number of both the company and our important in the years ahead, form shares outstanding, resulted in customers by saving millions the backdrop against which our earnings per share of $ 2.75, com- of dollars in annual fuel efforts to meet Arizona's energy pared to $ 2.90 per share the year costs. needs and protect the interests before. ~ The protracted discussion of our investors will be played out.

We were, however, able to between APS, the State of Through the text that follows, achieve a great deal of progress New Mexico and New Mexico we have included some cogent in many areas of our operations. environmental groups on observations by leading authorities These accomplishments, coupled the issue of sulfur dioxide on a variety of issues involving with several favorable external removal at Four Corners APS and the utility industry. We developments and an improving Units 4 and 5 was finally hope that these observations. as rate picture, offer opportunities settled when the parties well as our reactions to them, for us to better serve our customers reached a new agreement. will provide you with additional and achieve our financial goals. With the approval of the insights into the challenges before Here are some highlights of agreement by the Environ- us. We appreciate, and need, your the year: mental Protection Agency, understanding and support.

~ The Nuclear Regulatory a major uncertainty concern-Commission (NRC) docketed ing the future of these our application for an operat-ing license for Palo Verde Unit 1 and the review proc-ess has been underway since extremely important facili-ties will have been removed.

~ On the financial front, we were able to hold operating

~. 8 June 24, 1980. This docket- and maintenance budgets to Ralph M. Bilby ing was the first by the NRC single-digit percentage Chairman of the Board since Three Mile Island and increases in the face of double-we believe its acceptance digit inflation. We were also reflects the thoroughness of able to improve our capi-our preparation, particularly talization ratios by reducing considering the current the debt portion.

regulatory logjam. ~ At the national level, the Keith L. Turley

~ The Palo Verde Safety Evalu- change in the federal admin- President and ation Task Force completed istration should bring a Chief Executive Officer its exhaustive review and, measure of relief from some February 19, 1981 through its in-depth analy- of the regulatory and eco-sis, has provided us very nomic problems that plague positive direction as we work us all. We are optimistic toward the successful opera- that we willfind a more posi-tion of the state's first nuclear tive reception from the many power plant. governmental representa-

~ T~vo anti-nuclear ballot initi- tives we will be dealing with atives failed to make the in the months ahead.

November 1980 ballot All of these positive develop-because their backers were ments, as well as the improving unable to obtain the neces- rate situation, give us confidence sary number of signatures. that our financial performance

~ The capacity factor of our will improve in 1981 and the coal-fired generating plants years beyond.

reached an outstanding 73.6 percent, far exceeding indus-

"lfthe electric utility industry wants to emerge in reasonably good financiaL health, its managements and regulators willhave to exercise their stewardship more creatively and dynamically during the 1980's than at any previous time in the industry's history."

Walter G. French Vice President Argus Research The emergency request was construction program, we filed for The year in review .the culmination of nearly two a rehearing of our rate application.

Inadequate rate levels and the years of effort to obtain equitable That request was shortly denied need to increase the number of rate treatment. In May,1979 the and. in August, we appealed the shares outstanding during the year commission voted to deny hear- commission's decision to the Mar-combined to produce 1980 earn- ings on an electric and natural gas icopa County Superior Court.

ings per share which were lower increase, our first major rate in- In the meantime, Moody's than 1979 levels. Thus, while net crease request since 1976. Investors Service downgraded our income rose to $ 143 million, a Later the same year we filed . commercial paper rating (in Sep-

$ 21 million increase over 1979 again for rate relief, asking for a tember) from Prime 2 to Prime 3, totals, earnings per share of com- 19.2 percent, two-step electric rate though Standard and Poor's main-mon stock were down, to $ 2.75 in increase and a single 11.7 percent tained its previous A-2 rating.

1980, compared to $ 2.90 per share natural gas rate increase. Following a denial of our in 1979. Hearings on that request were appeal by the court, and faced The positive effects of our cost- held in February of 1980 and, on with further deterioration of our control programs and improved May 29, the commission granted operating efficiencies were offset a 5.6 percent combined electric Common Stock Price Ranges by our inability to receive adequate and gas rate increase that would (Symbol: AZP) rate increases during the year. produce revenues of $ 37.4 million. Dividend However a 14 percent emergency The electric increase granted was 1980 High Low Per Share increase in electric service rates, granted early in 1981, should pave the way for future improvements 6.5 percent, less than one-third of the requested amount.

In June, believing that the 2nd Quarter 19.5/8 15 3rd Quarter 19-3/8 17

'50 1st Quarter 818.3/4 S14.5/8 S .50

.53 4th Quarter 18-3/8 15-1/2 .53 in our financial performance. commission did not consider the Dividends paid per common full impact of its decision on the 1979 share totaled $ 2.06 in 1980, up company's ability to finance its 1st Quarter 821-3/8 S20 S .47 from the $ 1.94 paid in 1979. The 2nd Quarter 20.7/8 18-1/4 A7 current annual dividend rate is 3rd Quarter 20-3/8 18-3/4 .50 4th Quarter 19-1/2 16-7/8 .50

$ 2.12 per share and represents the Earnings, Dividends, and fifth consecutive year in which Reinvested Earnings the company has increased its per Average Share of financial position, we were forced dividend on common stock. Common Stock to file the emergency request, earnings which was granted subject to Rate relief long in $ 3-review in full-scale proceedings to be held later this year.

coming reinvested earnings The commission's approval On February 2, 1981 the Ari- relieved the company of the need zona Corporation Commission to sell 210 megawatts of capacity approved an emergency request from its portion of the Palo Verde for an immediate 14 percent Nuclear Generating Station now increase in electric service rates. dividends paid under construction. The sale was The increase will generate authorized by the board of direc-approximately $ 79.5 million in tors when the commission's inade-additional annual revenue. quate rate decision in May forced

'76 '77 '78 '79 '80

1 the company to seek ways to reduce its construction budget.

Such a sale would have a heavy, adverse impact on customers.

For instance, through a ten-year period beginning in 1983, the amount of additional oil that would have to be burned would add millions of dollars to custom-

"In order to maintain ers'nergy bills, as much as $ 50 our company's million in the highest year, 1989.

financial integrity and, at the same time, meet cus-tomer's energy Permanent rate demands, we must increases needed keep very tight Our need for permanent rate rate case decided by the commis-1I control of costs particularly con-relief continues, though our require- sion last May to determine how

~

struction outlays ments have been met, in part, by the increases will be allocated among customer classes began

~

improve our credit worthiness and find the commission's granting of our ways for our rates to keep pace with emergency request. We will resub- in January of this year. We have inflation. That's a tremendous chal- mit the filing originally made last filed several innovative rate pro-lenge, both to our management and to the regulatory system." November and ask that the interim posals which, if approved, would 14 percent rate increase be made benefit both APS and our Henry B. Sargent, Jr. permanent. In addition, we will customers.

Vice President, Finance ask that an additional increase The need for additional rate Capitalization ~ Long Term Debt c st~ sg ty be granted, sufficient to satisfy our revenue requirements at least through 1982.

increases continues because of the effect of unprecedented inflation on all our costs, as well as the need Ratio Trends Short Temt Debt Meanwhile, five-percent elec- to maintain and improve the com-

~2% ~2% ~1%

tric rate increases, implemented pany's financial condition. This 4%

14% 7% 8% in January of 1978 and 1979, improvement is vital if the neces-35+

1 1% 12% remain subject to refund pending sary capital is to be available, at 39% 38% 39%

further commission action. Details reasonable cost, to build the'acili-of this matter are included in the ties required by a growing Arizona.

financial section of this report. We recognize, of course, that In December, we filed with the our customers are concerned Federal Energy Regulatory Com- about the size of the rate increases mission for a $ 15 million increase we have been seeking and those in our wholesale electric sales to that will be required in the years non-residential customers. ahead.

The second phase of the

'76 '77 '78 '79 '80

"As oiL supplies diminish, electricity wilL take on an added share of US. energy output... coaL and nuclear fission are the only large-scale intermediate-term options for electricity generation."

National Academy of Sciences Committee on Nuclear and Alternative Energy Systems (CONAES)

The yearly-averaged Metro- million in 20-year, 12-7/8 percent, Debt and project financing (includ-politan Phoenix Consumer Price first mortgage bonds. ing short-term debt) constitute Index grew by 46 percent between One of our major financial about 48 percent of total capital, 1977 and 1980. In that same goals is to strengthen capitaliza- with preferred stock making up period, APS'esidential electric tion ratios by reducing the debt the balance.

rates rose 32 percent. portion of total capitalization. With The $ 141.5 million realized Our recent rate increase the sale of 4 million common from the 1980 common stock requests have exceeded the rate shares last March, and the issu- issues, and the $ 185 million from of inflation in Arizona because of ance of 5 million shares in Septem- the bond issue, were used to the long delays we have experi- ber, we improved our common reduce short- term borrowings enced in obtaining rate relief. equity ratio to 39 percent. in support of the company's However, if we are successful in construction program.

establishing proper rate levels this New permanent financing in year, we do not expect that our rate 1981 willtotal approximately $ 375 requirements will deviate sub- million and will be comprised stantially from the rate of inflation of two common stock issues, at over the next ten years. least one preferred stock issue, In all of our rate request and about $ 150 million in long-actions, we believe that we have "There's no question term debt.

taken a responsible position with ...in the years the Arizona Corporation Commis- ahead we willuse sion. In so doing, we have striven more coal and uran- Operations to make clear the critical connec- ium and less and In 1980 we added 19,820 new less scarce, more electric customers, a 5.7 percent tion between adequate revenues expensive fuel. That'sjust sound eco-and the prudent development of nomics. But we need more than eco- gain from a year ago. Average res-Arizona's energy supplies. nomic benejits to get the job done. My idential electric use was down In the November, 1980 elec- hope lies in renewed public confidence slightly, to 9,995 kilowatthours, in the safety of nuclear generation, and due primarily to unusually mild tions, two of the three members more public acceptance of the enuiron-of the commission stood for reelec- mental and social impacts of mining winter weather. Total electric sales tion. One retained his post while and burning coal." increased 2.5 percent, to 11,877,722 the other was replaced. We intend megawatthours. However, the sys-Russell Hulse tem peak demand for electricity to continue our efforts before the Vice President, Resources Planning commission to bring into balance the interests of our customers and our investors. 1980 Income Dollar Sources Uses Financing higMights To provide increased flexibility 15C to common shareholders 11C dividends 4C retained earnings.

in our financing program, the company turned to such options residential customers electric 28C gas BC 36C 12C interest, preferred dividends &

other cost- net as a two-year, $ 60 million Euro- 12C income & other taxes dollar revolving credit line. In wages, sataries

& empioyeo benefits addition, we issued $ 65 million commercial customers 30C eiectricity purchases in three-year, 6.60 percent pollution-control bonds to finance eiectric 26C gas 4C industrial customers 12C gas purchases equipment additions at the Four electric 12C gas 3C 15C 16C fuel for electric generation Corners Power Plant,'and com- others oiectric 12C gas 2C 14C other operating expenses pleted a private placement of,,$ 185 other income~ depreciation

was 2,772,700 kilowatts in 1980.

up 7.5 percent from the previous year, due largely to the addition of new customers and extremely hot weather at the time of the peak.

Electric resources in 1980 totaled 3.307,200 kilowatts, con-sisting of 3,040,700 kilowatts of our own generation, plus 266,500 modest 24 percent in the next 10 kilowatts of power available under years, although other forecasts firm purchase contracts. Our own project larger increases. to grow by 5.0 percent annually system's capacity was bolstered Raking into account popula- over the same period, reaching by the addition of the 250,000- tion growth and other factors, we approximately 19,417,840 mega-kilowatt Cholla Unit 3, which expect that our peak demand will watthours in 1990, compared to began commercial operation in increase by an estimated 4.3 per- 11,877,722 megawatthours in May. cent annually during the next dec- 1980.

APS'atural gas sales decreased ade. Electric sales are expected by 7.5 percent in 1980, totaling A more efficient 432,277 therms. The winter months of 1980 were among the Total Electrical Sales operation warmest on record, a major reason for the decrease.

Actual/Forecast Our planning for the 80s calls megawatt hours inmillions for a blending of several programs, The growth in Arizona gener- 16- each of which contributes to the ally reflected by the growth in cus- overall goal of meeting forecasted tomers and in peak demand is 14-energy needs.

expected to continue. Arizona's 12- The plan includes continua-population has grown 54 percent 10- tion of a comprehensive load over the past 10 years, according 8- management program to control to the 1980 Census. Arizona growth in peak demand, increased Department of Economic Security 6" reliance on the most economical projections, upon which our load fuels available, and development.

forecasts are based, indicate that 2>> where applicable, of alternative, population will grow by a more

'76 actual '80 forecast '87

"Traditionally, utilities have builtfor the future as a matter of sociaL responsibil-ity and business prudence, and wilL undoubtedly continue to do so. However, in the past it has been with public acceptance generaLLy taken for granted.

Obviously, this is not the case today. In today's emotionally-charged environment, ii would be easier for us to sit back and Let public pressures run their course. It wouldn't be pleasant for knowledgeable and responsible people to watch, but it would make our near-termjob of managing our company a great deaL easier."

Dr. Chauncey Starr, Vice Chairman Electric Power Research Institute renewable energy sources, such unit's 16 years of operation. The strated superior performance to as solar energy. unit's capacity factor the actual help raise the plant's overall pro-At the end of 1980 our energy generation produced by a unit ductivity mark to record levels.

mix consisted of 78.4 percent coal, matched against its rated output 12.4 percent gas and oil, with pur- reached 97.19 percent, a mark chases making up the balance. exceeded only once before and a Construction By the end of the new decade, we remarkable achievement consid- Expenditures for construction will have added the new units at ering the age of the unit and the projects will be slightly lower in Palo Verde, as well as additional presence of environmental equip- the coming year than they were coal-fired generating capacity to ment (scrubbers). The other in 1980. This follows a record-shore up our base-load generation. Four Corners units also demon- setting 12-month period in which We anticipate that fully 92 percent $ 387 million were expended, pri-of our forecasted 1990 load will marily on new generating facilities.

be met with coal and nuclear fuel. Construction expenditures in Even where higher-cost fuels 1981 willtotal $ 377 million, includ-must be used, we make every effort ing an outlay of $ 209 million for to achieve the most favorable "From the outse4 our new generating facilities. Approxi-economic advantage for our charter has dictated mately $ 188 million will go for our customers. that we meet the share of Palo Verde construction For example, in 1981 we will energy demands of costs. The first of three 1,270,000-begin a major improvement and our customers. This kilowatt units and its portion of expansion of our energy manage- is far more dificult common plant was 80.6 percent to do, today; but we ment system, an improvement have the job to do complete at year-end 1980. Palo which will provide even more and we mill do i4 with sensitivity to our Verde Units 2 and 3 were 50 and precise computerized control of customers and the public, and concern 15.6 percent complete, respectively.

electric generation and improved for the environmental and social Although the first unit won'

'onitoring and control of trans- impacts associated with our efforts." come into service until 1983, the mission and distribution systems. Tom Woods Palo Verde project continues to Executive Vice President This new, advanced electronic bring early economic benefits to system will provide better coordi- the state. The construction work nation of power generation with force topped 6,122 in 1980, result-other utilities and better account- Generation Fuel Mix Trend ing in a payroll of $ 135 million.

ing for power sales and purchases. Based on 1980 Long-Range Long-range. hundreds of millions Moreover, ongoing efficiency- Forecast. of dollars will accrue to Arizona improvement programs have 20 megawatt hours in millions through Palo Verde taxes and pay-raised our combined coal-fired roll. and services and materials power plant capacity factor in 1980 purchased during and after to 73.6 percent, well above the 15- construction.

most recently available national At the coal-fired Cholla Power average of 59.6 percent. 10- Plant, $ 16 million is budgeted ap At Four Corners, where Unit 2 in 1981 to complete Unit 4, generated 126,545 megawatthours scheduled for operation in May.

in August, the highest net gener- Completion of a 350,000-kilowatt ation for a month's period in the nudear fifth unit at Cholla on which preliminary work already had

'76 actual '80 forecast '87

started has been postponed until 1990 due to revised load forecasts and our desire to minimize con- on our system, thereby reducing struction budgets in the face of the need for costly new generating To help meet this goal, new tight money markets. The delay facilities and minimizing expendi- emphasis has been placed on pro-willreduce the company's con- tures on expensive fuels required viding economic incentives for struction costs by $ 315 million for peaking purposes. our customers to cut their peak over the next five years. These reductions, in turn, decrease electrical demands.

Meanwhile, to more closely the financial burden on both the Last November, the Arizona match the demand for energy with company and our customers. Corporation Commission approved generating resource development, Since the load-management a rate design which will provide portions of the output of Cholla program began in 1977. the cumu- these customer incentives and 4 will be sold to neighboring utili- lative reduction in the company's increase the potential for effective ties through mid-1989. Temporary electric peak load forecast totals load management.

sales of power from Palo Verde approximately 116 megawatts. The newly-approved rate, are also being planned. Today, the company's long-range called the EC-1 (energy-capacity)

These temporary sales, or lay- load management objective is a rate, is mandatory for all new elec-offs, of power provide immediate total reduction of 487 megawatts tric air conditioning customers financial benefits for both APS by 1990. and optional for existing custom-and its customers. The purchasing ers. Because the rate takes into utility bears all the costs of its account the level of demand, as share of the unit's output, includ- well as total consumption. cus-ing fixed charges, thereby lower- Capital Expenditures tomers are encouraged to control ing APS revenue'requirements. Actual/Forecast their peak energy use by avoiding The retrieval of this capacity at a in millions the simultaneous operation of later date means we will have eco- $ 600- large energy-consuming units nomical coal and nuclear genera- such as air conditioners, water tion tomorrow, completed at heaters. etc.

today's lower construction costs. 400- A number of readily available load control devices offer customers choices for taking advantage of Load management The major objective of our load management effort is to reduce sharp seasonal peak demands

'76 actual '80 forecast '87

"The issue is not whether Arizona grows, but how Arizona grows; and whether or not we can, through collective planning and decision-making, accommodate that growth without destroying all of the spectrum of values and attractions that caused the growth and sustained it."

Bruce Babbitt Governor of Arizona Arizona Town Hall October 27, 1980 the EC-1 rate. These range from to cutting peak energy use and, native energy sources which show very simple devices, such as inter- at the same time, controlling their real promise.

locks that prevent simultaneous monthly bills. We have completed successful operation of air conditioning and operational testing of a molten electric water heating, to more salt receiver. a critical step in con-sophisticated, microprocessor- Research verting Unit One of our Saguaro controlled load-management While we strive to get the most Power Plant near Tucson to solar devices that sense electric load out of today's energy technologies power. This testing is a major buildup and sequentially interrupt and fuels, we recognize the need step toward final design and con-appliance operation to keep the to research, develop and put to struction of the solar receiver, total load below a limit pre-set by use, where appropriate, those alter- which should provide heat suffi-the customer. cient to power from 60 to 100 Several additional rate pro- megawatts of the unit's 115-posals were also considered by megawatt output, the remainder the commission in January 1981. being fired conventionally by oil One is a residential rate which or natural gas.

would provide substantial saving At Saguaro, sunlight reflected opportunities for customers whose monthly summertime energy use e~).'Our toad forecasts from 10,000 computer-controlled mirrors will focus on the tower-center on two con-is consistently below 800 kilowatt- tradictory phenom. mounted receiver. From there, hours. These customers contrib- ena: conservation a molten salt solution will transfer ute substantially less to summer and Arizona's rapid the 1050'. heat to exchangers peak demand than those who use growth. As we pro- which will produce steam to drive mote the first and larger amounts of energy. plan for the second, the unit's turbine generators.

We also offer an array of cost- ft's vttat that our customers understand Costs of the project, which we effective load management pro- the welt-being of Arizona is first in our have planned for completion by grams, all of which can be carried minds. IVe live here, too." 1985, will be shared by the com-out with minimum effect on con- John Ogden, pany and the federal government.

sumers'ifestyles. Our Professional Vice President, Administration and Economic Planning Plans are also under way for Home Energy Analysis Program, construction of a solar power plant for example, continues to be highly at Sky Harbor International Air-effective. More than 2,000 home- port in Phoenix. This facility will owners asked for audits in 1980, Long-Range Forecast be one of the world's largest photo-with 60 percent indicating they of Peak Load and voltaic solar generation systems.

had taken some action to make Electric Resources converting sunlight directly to reductions in their energy use. megawatts electricity by means of photovoltaic In 1980, we introduced the 5,000- cell concentrator modules.

Computerized Commercial Energy When completed, the seven-Analysis Program, an onsite audit 4,000- resources acre installation will provide 225 for small to medium-sized bus- kilowatts of electric energy. While inesses. The program has the peak load this is only about 5 percent of the potential for reaching 40.000 such power needed for the East Terminal customers. 2,000 of the airport, the project will lay In total, we are offering custom- 1,000 the groundwork for potential future ers a variety of positive approaches solar installations.

'76 actual '80 forecast '87 10

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Research into other advanced energy sources is also undenvay.

Coal will continue to be one of our IN g Pg /

major fuel sources, but we are looking for better ways to use this I

plentiful fuel in existing plants.

Through a proposal to the Depart- Safety and l ment of Energy, we have solicited a grant to perform a study to determine ifa coal-gasification environment Throughout our company's

'~

facility would be feasible in Arizona. operations, we take into consider-We also have confidence ation the impact our actions will that advanced nuclear energy have on the environment in which released its final report. The report systems offer great possibilities we live and serve and on public concludes that the plant "can be for the future. In cooperation with health and safety. operated safely and reliably if the Gas Cooled Reactor Associates In the fall of 1980, the Palo project is completed as planned and some 30 other utilities, we are Verde Safety Evaluation Task and commitments made by APS working toward final commercial- Force, established to conduct a are fulfilled." Our management ization of high temperature gas complete review and analysis of has committed itself to imple-cooled nuclear reactors. These the Three Mile Island accident mentation of the Task Force's reactors can operate on a range and it's implications for Palo Verde, recommendations.

of nuclear fuels and could accom- The Task Force itself, consist-modate changes in national fuel ing of executives from Palo Verde policIes. owner-companies, the construc-Looking toward the better use tion company and its suppliers, of our generation capability, "We'l see major two university-level educators we are gaining operating experi- changes in our pat- and legal counsel, devoted more ence and performance data on a terns of energy than 1,000 man-days to the 20-unit fleet of electric vehicles. production and use project. An additional 3,500 The fleet is the largest in the inter- ouer the next twen- man-days were absorbed by sup-ty gears. We'e mountain region of the West and atready developing porting studies in the massive is part of a three-year coopera- ways to burn coal review and analysis.

tive study with the U.S. Depart- more efficiently, We continue to work closely ment of Energy. The demonstration solving the puzztes with other study groups, including will provide valuable information ofadvanced nuclear technology, improuing our command the President's Nuclear Safety about the maintenance and opera- of emerging alternatiues such as solar Oversight Committee of which tion of electric vehicles which ...it witl be a vital...and Arizona Governor Bruce Babbitt displace petroleum fuel and, if challenging... transition." is chairman, to see that Palo widely used, can have a beneficial Bruce Broussard Verde is a safe, productive energy Vice President, effect on our electric system load Research and Development producer.

profile.

"To gain full value from the voice of the consumer, the company must mant io hear from him and must believe ihat he is right until proved otherwise.

This positive attitude... is a commitment we believe management must adopt ifit is to maximize itssuccess in the increasingly 'consumerist'usiness environment of the... 1980's."

Alan R. Andreasen and Arthur Best, Harvard Business Review In 1980 we reached agreement about new visibilityregulations ment and the methods and costs with environmental groups and proposed by the EPA, believing of protection.

the State of New Mexico on a new their enforcement could lock up sulfur dioxide (SO,) control regula- as much as 89 percent of the West Communicating our tion for the Four Corners Power from energy and resource develop-Plant. Accordingly, the New Mexico ment. We have joined with other messages Environmental Improvement western utilities in recommending Through our communications, Board adopted a 72 percent SO2 that the EPA adopt a program of public affairs, community relations removal requirement for Four study to resolve uncertainties and marketing activities, we are Corners Units 4 and 5, which is about the causes ofvisibilityimpair- dealing assertively and respon-4.5 percentage points higher than sibly with the groups whose actions was called for by the previous affect our business.

regulation. At the same time, the The issues are formidable:

board extended the date for final nuclear power, rates and rate compliance with the regulation "There's no question design, and the impact of laws to December 31, 1984. that our customers and regulations on the conduct of Equipment to meet the new find many facets of our business, to name a few.

our business d(ffi-regulation will be installed on cult to understand, In 1980, two propositions Units 4 and 5, in addition to a $ 180 or even irrelevant, which would have effectively elimi-million particulate-removal as they wage their nated the nuclear option in the own battle with state, failed to make the ballot.

baghouse system now under con- inflation. In fact, struction and scheduled for opera- their battle is our This failure was due, in part, to tion by December of 1982. battle... we must our efforts to bring home to Arizo-The $ 500 million cost of both make every effort to communicatethis nans the point that a secure energy the SO2 and particulate removal to them in ways they can understand future for the state is dependent and accept." on the availability of nuclear systems for Units 4 and 5 will be O. Mark DeMichele divided among the six owners of Vice President, Corporate Relations generation.

the units. APS'hare is approxi- This recognition was reflected mately $ 75 million. in a survey of public attitudes The new SO2 regulation is toward energy and nuclear issues, Customer Cost per subject to approval by the Environ- Kwh Residential taken in November of 1980, among residents of the state's most pop-mental Protection Agency (EPA).

I ailure to obtain that approval C/kilowatt hour ulous counties.

would entitle APS to terminate 10- The survey made clear that the agreement, but would also Arizonans recognize the key role expose the company, for some 8- of nuclear power and perceive a months, to the possibility of non- current dollars link between the completion compliance penalties or a unit 6- of Palo Verde and the state's energy shut-down period. future, supporting completion of We face still other areas the project by a two-to-one margin.

of environmental concern. For constant dollars instance, we are greatly concerned

'76 actual '80 forecast '87 12

We also made it clear, through our open and thorough Palo Verde safety evaluation, that APS is com-mitted, first and foremost, to safe nuclear operations.

In November, our belief in our right and need to speak out pub-licly was strengthened when the Arizona Corporation Commission decided that more restrictive poli-cies involving recovery of utility advertising expenses would "limit the right of a company to free expression." The commission expressed its concern that the right of free speech guaranteed under willbe determined largely by those the First Amendment of the Consti- "We have a great who speak out on the issues affect-tution "not be abridged or compro- need to attract and ing that future. We are speaking mised in any fashion." hire highly qualified out, reaching all those whose Innovative new rates, such as 1 1l./~ individuals. We'Ue actions have a bearing on the stepped up our recruiting and training the capacity-orIented EC-l, as well efforts, especially in the nuclear area. conduct of our business.

as governmental energy programs State-of-the-art control room simulators which may have to be imple- at our power plants are one indicator mented, will require substantial of the premium we place on training. Finally, about our Ourjob is getting tougher, but we'e customer education. We continue committed to getting it done." employees to be strongly committed to in- Joe Gelinas The decisions we make and forming our customers about all Vice President the actions which must be taken the rate options and conservation Employee Relations to enhance our company's Ilnan-incentives available to them. cial integrity have an impact, on While much of our activity every one of us. Yet in these trying is issue-oriented, we have not aspect of APS operations. The times, our employees have proved neglected our obligation to ensure program helps us evaluate overall their willingness and ability to that we are keeping faith with our customer attitudes, as well as contribute substantially to this basic service goals. For instance, follow up on specific service or effort. Our successes are directly we have instituted a customer billing problems. attributable to the men and women response program which encour- We recognize that the energy who make our company run.

ages customers to directly com- future of our state and the nation ment on their perceptions of any 13

SELECTED FINANCIM DATA 1980 1979 1978 1977 1976 (Thousands of Dollars, Except Per Share Data)

Operating Revenues $ 765,760 $ 664,423 $ 562,217 $ 493,684 $ 394,779 Operating Expenses:

Operation and maintenance 432.886 371,983 291,908 269,581 215,500 Depreciation and amortization 64.412 57,021 48.295 40,370 36,621 Taxes 98,886 84,549 =

83,314 71,885 59,617 Total ~, 596,184 '13;553 '23,517 '81.836 311,738 Operating income 169,576 150,870, '38,700 111,848 83,041 Other Income ~ 43,341 26,760 14.914 12.662 26,301 Interest Deductions Net 69,627 56,052 46.855 40.499 48,863 Net Incoine 143,290 121,578 106,759 84,011 60,479 Preferred Dividend Requirements 25,062. 21,882 17,471 14.628 13,311 for Common Stock

'arnings

$ 1 18,228 $ 99,696 $ 89.288 $ 69,383 $ 47. 168 Total Assets 2,928,484 2,475,332 2,039,420 1,673,171 1,402.990 Long-term Obligations and Redeemable Preferred Stock 1,455.286 1,180,120 991,173 855,534 773,639 Common Stock Data:

Book value per share $ 21 97 $ 22 75 $ 22 56 $ 21 83 $ 20 64 Earnings per share (based on average shares outstanding) $ 2.75 $ 2:90 $ , 3.15 $ 3.02 $ 2.47 Dividends declared per share $ 2.06 $ 1.94 $ , 1.73 $ 1.53 $ 1.39 Shares of common year end 47,813,847 38,181,297 32,777,258 26,576,428 22.500,000 average 42,960,655 34,426,346 28,363,223 22,970,741 19, 105, 191 Number of common shareholders 110,416 92,396 78,275 66,358 56,011

• Federal and State income taxes are included in Taxes, Other Income and, in 1977, Interest Deductions. Total income tax expense was as follows (in thousands): 1980, $ 16,519; 1979, $ 14,422; 1978, $ 13,937; 1977, $ 6,265; 1976, $ 1,554.

OTHER FINANCIALAl%3 OPERATING STATISTICS 1980 1979 1978 1977 1976 (Thousands of Dollars)

Capitalization:

Common equity S 1,050,651 S 868,658 S 739,349 S 580,170 S 464,410 Non-redeemable preferred stock 118,561 118,561 118,561 118,561 68,561 Redeemable preferred stock 185,280 156,000 100,000 100,000 100,000 Long-term debt 1,048,500 828,464 763,450 701,917 673,639 Project financing liability 221,506 195,656 127,723 53,617 Total S 2,624,498 S 2,167,339 S 1,849,083 S 1,554,265 S 1,306,610 UtilityPlant Gross S 3,199,927 S 2,735,073 S 2,288,604 S 1,889,320 S 1,580,672 UtilityPlant Depreciated S 2,694,408 S 2,292,341 S 1,901,044 S 1,547,486 S 1,279,533 Number of Employees at Year End 5,538 5,263 4,951 4,570 4,042 Average Wage per Hour S 10.53 S 920 S 857 S 799 S 7.44 Electric:

Electric resources (kw) 3,307,200 3,077,200 3,061,600 2,872.500 2,790,700 Peak load (kw) 2,772,700 2,579,300 2,548,900 2,373,400 2, 190,900 Electric sales total (mwh) 11,877,722 11,584,898 10,912,704 10,481,972 9,606,571 Number of customers at year end 421,803 401,983 378,553 357,884 342.059 Gas:

Total gas sales (m therms) 432,277 467,088 449,451 463,643 491,007 Number of customers at year end 340,248 340,343 339,803 339,949 339,265 UTAH COLORADO Psge ~ NAVAJO iJ/0) Fsrmington, N.M.

FOUR CORNERS iJ/Ol

~ Klngmsn 0 Winslow About the Company CHO LA Arizona Public Service is engaged principally in the generation and sale of electricity and in the Prescott ~

purchase and sale of natural gas.

Successor to a series of small utility operations originating in 1886, the company was incorporated in 1920 under the laws of Arizona.

W Si OCOT ILL/ ~ Oiobs The company's service territory includes all or PALO VERDE

)J/0)

~

PHOT+IX P

ll part of of Arizona's 14 counties. It is estimated that the company's electric and/or natural gas serv-YUCCA YUCCA ice reaches approximately 1,889,000 or about

)J/0) Ee Turns SAGUARO 70%, of the state's population.

Tucson 0 Arizona Public Service Company's principal executive offices are located at 411 North Central LEGEND: Ar

>/CO Avenue, Phoenix, Arizona. Phone (602) 271-7900.

Oougtsett J

la PrindgslAps htejor power picots )J/0 Joint ownership)

APS Trsnsm)stion Lines Trerumiss)on Lines Opersted ior Others 15

LINFM OF BUSIIMXi&S Operating revenues, and operating income before income taxes, attributable to electric and gas operations of the company for the five years ended December 31, 1980 were as follows:

Operating Income Operating Revenues Before Income Taxes (Millions of Dollars) (Millions of Dollars)

Electric Gas Electric Gas Year Ended December 31, Amount Percent Amount Percent Amount Percent Amount Percent 1980 $ 621.9 81.2 $ 143.9 18.8 $ 180.5 96.6 $ 6.3 3.4 1979 533.2 80.3 131.2 19.7 151.5 92.2 12.9 7.8 1978 452.4 80.5 109.8 19.5 141.0 92.4 11.6 7.6 1977 397.3 80.5 96.4 19.5 109.2 91.3 10.4 8.7 1976 312.0 79.0 82.8 21.0 78.8 88.0 10.7 12.0 OPERATING BEVENtJFD 1980 1979 1978 1977 1976 (Thousands of Dollars)

Electric:

Residential $ 220,920 $ 191,066 $ 158,383 $ 135,274 $ 106,334 Commercial 210,226 179,534 155,669 135,585 108,506 Industrial 95,644 86,563 72,677 61,617 47,055 Irrigation 19,215 14,193 12,252 13,512 9.799 Other 59,391 50,402 41,716 39,657 28.565 Total 605,396 521,758 440,697 385,645 300,259 Transmission for others 8,817 8,731 9,021 9,328 9,591 Miscellaneous services 7,651 2,696 2,713 2,291 2,119 Total Electric Operating Revenue 621,864 533,185 452,431 397,264 311,969 Gas:

Residential 65,470 64,123 53,879 48,351 42,922 Commercial 31,727 29.371 24.223 20,779 17,156 Industrial 27,145 22,128 17,646 13,219 10,130 Irrigation 17,218 13,400 11,969 12,359 10,979 Other 1,510 1,324 1,169 860 830 Miscellaneous services 826 892 900 852 793 Total Gas Operating Revenue 143,896 131,238 109,786 96,420 82,810 Total Operating Revenues $ 765,760 $ 664,423 $ 562,217 $ 493,684 $ 394,779

MANAGEMENT'SDISCUSSION OF FINANCIALCONSIDERATIONS Liquidity and Captial Resources As indicated earlier in this Annual Report and in Notes 3, 4 and 5 to the (1) Derived by multiplying year-to-year increases in units sold by the Financial Statements, the company needs large amounts of capital for its weighted average of rate levels in effect during 1977.

ongoing construction program and for the refunding of maturing securities, (2) Year-to-year increases in revenues less the amounts shown for and it is heavily reliant on external financing to meet those requirements. volume increases. Relative contributions by rate Increases andby As also indicted earlier, the company has a degree of flexibilityin adjusting effects of the adjustment cfauses vary according to the timing of its construction program to its financing capability. However, that degree is general rate proceedings and the extent to which accumulated effects limited, and the company's long term liquidity will depend on its access to of the adjustment clauses are incorporated in new rates.

the capital markets, which in turn will depend on sufficiency of the com- The increase in unit sales of electricity was higher in 1979 than in other pany's rates to provide adequate coverages on its senior securities and an years because of a colder than normal winter. Electric safes were affected adequate rate of return on its common stock equity. Adequate earnings in all years by extraordinarily warm summers. Unit sales of electricity in coverages are critical to the maintenance (and hopefully the improvement) 1980 were depressed by effects of a copper industry labor strike. Conser-of credit ratings on the company's senior securities and, as calculated vation efforts by customers in reaction to higher energy costs have affected in accordance with the governing instruments, are prerequisite to the unit sales, are expected to continue to do so, and are being augmented by company's legal ability to issue such securities. the company's own load management program. Unit sales of gas are sub-See page 15 with respect to the company's historical capital struc- stantially affected by weather conditions; warmer than normal winters in ture. Its target structure would consist of no more than 50% debt 1978 and 1980 caused unit sales of gas to decrease from the prior year, (which, for comparison purposes, would include project financing liability whereas the colder than normal winter of 1979 caused the increase in plus current maturities and short-term obligations) and 40% common unit safes In that year.

stock equity, with the balance consisting of preferred stock. The company Increases in total operation and maintenance expenses reflect the does not contemplate any major "off-balance sheet" financing arrange- volume increases in unit sales discussed above. In addition, the cost of ments in the foreseeable future. The company regards common stock fuel for the generation of a given amount of electricity has risen and is equity as its most expensive form of permanent financing, but it recognizes expected to rise further. Cost Increases in 1979 resulted from high-priced the desirability of bringing that category to the 40% level In order to main- purchases of emergency boiler gas and from limited availability of pur-tain credit ratings on its senior securities, and it plans to achieve approxi ~ chased power from hydroelectric sources. Although unit fuel costs con-mately that level by the end of 1981. It appears to the company that tinued to rise in 1980, the company's cost of fuel per kilowatt hour remained purchasers of new issues of long-term debt and preferred stock will at 1979 levels largely due to a favorable change in fuel mix resulting from continue to demand highinterest and dividend rates for some time to come, the startup of coal-fired Cholla Unit 3 in May 1980 and significantly and that its embedded cost of capital will therefore rise rapidly as maturing improved capacity factors at the company's largest coal-fired plant. The securities, bearing relatively low rates, are refunded and the company's cost of gas for resale has been rising rapidly, and any increased prices of plant expands. gas (whether for boiler fuel or for resale) or fuel oil that may result from See Note 6 to the Financial Statements with respect to short-termbor- price deregulation would accelerate upward cost trends. See "Effects of rowings available to the company (there being a statutory limitation on the Inflation" below.

amount of such borrowings that can be outstanding without an order from Variations in purchased power and interchange-net reflect varying the Arizona Corporation Commission). Funds from operations have con- degrees of availability of relatively low-priced power from other sources tributed only marginally to total sources of funds in the last few years (see (as, for example, hydroelectric power from the Northwest) and varying the Statements of Changes in Financial Position). That situation is needs of the company to augment its own generating sources from time to expected to continue in some degree until Palo Verde Unit 1 is included in time. However, the substantial increase in 1980 was due instead to the rate base so as to give rise to cash earnings rather than the non-cash accounting treatment for over-recovered fuel and purchased power expense allowance for funds used during construction. Another constraint on the which is discussed in Note 1c to the Financial Statements.

company's retention of funds from operations has been the necessity to See "Effects of Inflation" below in regard to maintenance expense, increase common stock dividends periodically in order to retain investor which is also a function of the size of the company's utility plant. Other interest (see the Statements of Income). operating expenses and the "other" portion of other income (deductions) include amortization or write-off of certain assets (primarily consisting of Operating Results power projects in preliminary stages, including in 1979 Palo Verde Units Total operating revenues reflect effects of rate increases and adjust- 4 and 5, in aggregate amounts of $ 2,905,000 in 1978, $ 2,161,000 in ment clauses (see Note 1c to the Financial Statements) on prices of units 1979 and $ 474,000 in 1980). Other operating expenses reflect large sold. Operating revenues also reflect the volume changes in unit sales increases during 1980 in the company's insurance costs and franchise shown on page 15. The foregoing factors contributed to annual increases fees ($ 1,700,000 and $ 1,800,000, respectively).

(decreases) in revenues over revenues for the preceding calendar year as Depreciation and amortization expenses increase with the size of the follows: company's utility plant, as do ad valorem taxes which are also affected by 1980 1979 1978 growth in the company's operating income as used by the taxing author-ities in computing assessed valuation. Offsetting factors in "taxes-other (Thousands of Dollars) than income" for 1979 resulted from a court decision invalidating a New Electric: Mexico generating tax and the apparent exercise of restraint by several Volume increases (1)............ $ 11,098 $ 25,476 $ 16,325 Arizona taxing authorities. See Note 11 to the Financial Statements for both Price increases (2).............. 77,581 55,278 38,842 ad valorem and sales taxes (the latter being a function of operating reve-Total increase................ $ 88,679 $ 80,754 $ 55,167 nues) which are the principal "taxes-other than income". Income tax

~

details appear in Note 8 to the Financial Statements.

Gas:

The aggregate amount of the allowance for funds used during con-Volume increases (decreases) (1) .. $ (7,239) $ 3,668 $ (2,951) struction (AFC), divided between other income and a credit to interest Price increases (2).............. 19,897 17,784 16,317 Net increase................. $ 12,658 $ 21,452 $ 13,366 17

deductions, is primarily a function of the amount of construction work in Effects of Inflation progress during any given period. See Notes 1d and 10 to the Financial In contrast to the analysis of increases in operating revenues in the Statements for increased rates of AFC and cessation of its accrual on those table at the beginning of "Operating Results" above, it is sometimes diffi-portions of construction work in progress that are included In rate base. cult, in the case of operation and maintenance expenses, to distinguish See "Liquidityand Capital Resources" above with respect to the non.cash between effects of volume increases and rises in unit costs (which, for aspect of AFC. purposes of this discussion, are all attributed to inflationary pressures).

The substantial increase in interest on long-term debt and liability Certain inflationary effects, such as those on costs of generating fuel, since 1978 reflects large amounts of new borrowings and increases in are passed through to customers pursuant to the rate adjustment proce-project financing liability at relatively high interest rates (see "Liquidity dures summarized in Note 1c to the Financial Statements. Nevertheless, and Capital Resources" above and Note 5 to the Financial Statements). the company attempts to minimize such effects by means that include The increase In Interest on short-term borrowings has resulted primarily increasing the availability of its coal-fired units to result in a more econom-from increased borrowings and interest rates (see Note 6 to the Financial ical fuel mix; that increase has been achieved by an intensive maintenance Statements). program, the cost of which is not covered by the adjustment clauses.

Issues of preferred stock (giving rise to the increased dividend require- There are a number of other major expense items that are also beyond the ments) and common stock (giving rise to the increased average number of scope of the adjustment clauses. Inflationary pressures on these items shares outstanding) are summarizedin Notes 2 and 3 to the Financial have given rise to a significant earnings attrition between general rate Statements. increases which, in the company's judgment, has received inadequate The company's net income and its earnings for common stock repre- regulatory consideration and upon which it based its unsuccessful court sent composites of cash and non-cash items (see the Statements of appeal of the Arizona Corporation Commission's action in 1980 as dis-Changes in Financial Position) and, in part, reflect accounting practices cussed earlier in this Annual Report.

unique to regulated public utilities (see Note 1 to the Financial Statements). See Note 14 to the Financial Statements for perspectives of other Also see Note 10 to the Financial Statements in regard to possible effects effects of inflation.

of refundable rates on net income.

ACCOUNTANTS'PINION Deloitte Haskins 8 Sells, Certified Public Accountants Phoenix, Arizona 85003 Arizona Public Service Company:

We have examined the balance sheets of Arizona Public Serv- In our opinion, subject to the effects on the 1980 and 1979 ice Company as of December 31, 1980 and 1979 and the related financial statements of such adjustments, if any, as might have statements of income, retained earnings and changes in financial been required had the outcome of the uncertainty referred to in position for each of the three years in the period ended December the preceding paragraph been known, such financial statements 31, 1980. Our examinations were made in accordance with gen- present fairly the financial position of the company at December erally accepted auditing standards and, accordingly, included 31, 1980 and 1979 and the results of its operations and the such tests of the accounting records and such other auditing changes in its financial position for each of the three years in the procedures as we considered necessary in the circumstances. period ended December 31, 1980, in conformity with generally As described in Note 10 of Notes to Financial Statements, accepted accounting principles applied on a consistent basis.

retail revenues of the company include amounts which may be subject to refund. The ultimate outcome of this uncertainty cannot presently be determined, and no allowance for refunds, if any, I'S~~

that may result has been made in the financial statements. February 25, 1981 18

STATEMENTS OF INCOME For the Three Years Ended December 31, 1980 1980 1979 1978 (Thousands of Dollars)

Operating Revenues (Note 10):

Electric $ 621,864 $ 533,185 $ 452,431 Gas 143,896 131,238 109,786 Total 765,760 664,423 562,217 Operating Expenses:

Operation and maintenance:

Fuel for electric generation 133,557 128,472 88.426 Purchased gas 96,695 81,371 63,314 Purchased power and interchange net 65,292 38,727 31,218 Other production expenses 14,831 12,622 10,724 Transmission and distribution 16,464 14,010 12,985 Maintenance 51,565 48,338 41,845 Other operating expenses 54,482 48,443 43,396 Total 432,886 371,983 291,908 Depreciation and amortization 64,412 57,021 48,295 Taxes other than income 81,677 70,993 69,397 Income taxes (Note 8) 17,209 13,556 13,917 Total 596,184 513,553 423,517 Operating Income 169,576 150,870 138,700 Other Income (Deductions):

Allowance for equity funds used during construction 39.076 24,696 16,536 Income taxes (Note 8) 690 (866) (20)

Other net 3,575 2,930 (1,602)

Total 43,341 26,760 14,914 Gross Income 212,917 177,630 153,614 Interest Deductions:

Interest on long-term debt and liability 118,403 87,609 66,152 Interest on short-term borrowings 8,624 5,912 2,566 Debt discount, premium and expense 710 665 644 Allowance for borrowed funds used during construction credit (58,110) (38,134) (22,507)

Total 69,627 56,052 46,855 Net Income (Note 10) 143,290 121,578 106,759 Preferred Stock Dividend Requirements 25,062 21,882 17,471 Earnings for Common Stock $ 118,228 $ 99,696 $ 89,288 Average Common Shares Outstanding 42,960,655 34,426,346 28,363,223 Per Share of Common Stock:

Earnings (based on average shares outstanding) $ 2.75 $ 2.90 $ 3.15 Dividends declared $ 2.06 $ 1.94 $ 1.73 See Notes to Financial Statements.

BALANCESHE&&

December 31, 1980 and 1979 Assets 1980 1979 (Thousands of Dollars)

UtilityPlant:

Plant in service (Notes 4 and 7):

Electric $ 1,869,397 $ 1,574,313 Gas 131,844 127.305 Common, used in all services 67,407 57,775 Total 2,068,648 1,759,393 Less accumulated depreciation and amortization 505,519 442,732 Plant in service depreciated 1,563,129 1,316,661 Construction work in progress (Note 5) 1,123,078 973,609 Plant held for future use 8,201 2,071 Utility plant depreciated 2,694,408 2,292,341 Investments and Other Assets:

Investments in and receivables from subsidiaries 35,789 22,560 Other investments and notes receivable 2,540 2,958 Other physical property (less accumulated depreciation:

1980, $ 71,000; 1979, $ 43,000) 21,446 906 Total investments and other assets 59,775 26,424 Current Assets:

Cash (Note 6) 6,622 5,819 Special deposits and working funds (Note 6) 3,052 3,074 Accounts receivable:

Service customers 56,109 54.761 Miscellaneous 20,413 12,387 Allowance for doubtful accounts (1,684) (1,718)

Materials and supplies (at average cost) 32,147 27,863 Fuel (at average cost) 40,128 35,198 Deferred fuel costs and prepayments 6,171 9,357 Total current assets 162,958 146,741 Deferred Debits:

Unamortized debt issue costs 7,493 5.970 Other 3,850 3,856 Total deferred debits 11,343 9.826 Total $ 2,928,484 $ 2,475,332 20

Liabilities 1980 1979 (Thousands of Dollars)

Capitalization (Notes 2, 3, 4 and 5):

Common stock $ 119,535 $ 95,453 Premiums and expenses 639,794 512,003 Retained earnings 291,322 261,202 Common stock equity 1,050,651 868,658 Non-redeemable preferred stock 118,561 118,561 Redeemable preferred stock 185.280 156,000 Long-term debt less current maturities 1,048,500 828,464 Project financing liability less current maturities 221,506 195,656 Total capitalization 2,624,498 2,167,339 Current Liabilities:

Notes payable to banks 7,000 Commercial paper (Note 6) 26,000 54,000 Current maturities of long-term debt (Note 4) 3,688 86,639 Current maturities or project financing liability (Note 5) 45,001 Accounts payable 78,388 79,342 Accrued taxes 44,600 39,471 Accrued interest 20,953 17,257 Accrued dividends 2,119 1,866 Deferred fuel revenue and other 44,588 10,085 Total current liabilities 272,337 288,660 Deferred Credits and Other:

Customers'dvances for construction 9,241 5,383 Deferred income taxes 12,985 7,334 Other 9,423 6,616 Total deferred credits and other 31,649 19,333 Commitments and Contingencies (Note 10)

Total $ 2,928,484 32,475,332 See Notes to Financial Statements.

STATEMENTS OF CHAIMGES IN FINANCIALPOSITION For the Three Years Ended December 31, 1980 1980 1979 1978 (Thousands of Dollars)

Source of Funds:

Funds from operations:

Net income $ 143,290 $ 121,578 $ 106,759 Principal non-fund charges (credits) to income:

Depreciation and amortization 64,412 57,021 48,295 Allowance for equity funds used during construction (39,076) (24,696) (16,536)

Deferred income taxes 5,651 3,733 2,601 Equity in undistributed (earnings) loss of unconsolidated subsidiaries (299) (196) 1,754 Total funds from operations 173,978 157,440 142,873 Funds from external sources:

Common stock 152,332 97,061 118,558 Preferred stock 48,000 59,370 Long-term debt 223,905 152,005 66,300 Project financing liability 70.851 67,933 74,106 Short-term borrowings net (21,000) 15,000 39,000 Total funds from external sources 474,088 391,369 297,964 Other items net 9,097 7,840 10,946 Decrease in working capital* 26,410 3,836 Total source of funds $ 683,573 $ 556,649 $ 455,619 Application of Funds:

Capital expenditures $ 504, 120 $ 468, 116 S405,789 Allowance for equity funds used during construction (39,076) (24,696) (16,536)

Funds used for capital expenditures 465,044 443,420 389,253 Repayment of long-term debt 86,639 4,594 552 Redemption of redeemable preferred stock 18,720 4,000 Dividends on preferred and common stock 113,170 88.306 65,814 Increase in working capital* 16,329 Total application of funds $ 683,573 $ 556,649 $ 455,619 Increase (Decrease) in Working Capital*:

Cash and temporary cash investments S 781 S 1,718 S 132 Accounts receivable 9.408 4,876 17,170 Materials, supplies and fuel 9,214 24,216 140 Deferred fuel costs and other (3,186) 732 2,081 Accounts payable and accrued expenses (8,124) (11,606) (26,619)

Deferred fuel revenue and other (34,503) (3,607) 3,260 Net increase (decrease) S (26,410) S 16,329 S (3,836)

'Excluding short-term borrowings net and current maturities of long-term debt and project financing liability.

See Notes to Financial Statements.

22

STATEMENTS OF RETAINED EARIMINGS I or the Three Years Ended December 31, 1980 1980 1979 1978 (Thousands of Dollars)

Retained earnings at beginning of year $ 261,202 $ 227,930 $ 186,985 Add Net income 143,290 121,578 106,759 Total 404,492 349,508 293,744 Deduct Dividends:

Preferred stock (see below) 25,062 21,882 17,471 Common stock (Notes 2, 3. 4 and 5) 88,108 66,424 48,343 Total 113,170 88,306 65,814 Retained earnings at end of year $ 291,322 $ 261,202 $ 227,930 Dividends on preferred stock:

S1.10 preferred S 172 S 172 S 172

$ 2.50 preferred 258 258 258 S2.36 preferred 94 94 94

$ 4.35 preferred 326 326 326 Serial preferred:

$ 2.40 series A 576 576 576

$ 2.625 series C 630 630 630 S2.275 series D 455 455 455

$ 3.25 series E 1,040 1,040 1,040

$ 8.50 series F 614 1,737 1,785

$ 8.50 series G 683 745 765

$ 10 series H 3,787 3,947 4,000

$ 10.70 series I 3,210 3,210 3,210

$ 8.32 series J 4,160 4,160 4,160

$ 8.80 series K 5,280 4,532

$ 9.70 series L 3,777 Total S 25,062 S 21,882 S 17471 See Statements of Income for dividends per share of common stock.

See Notes to Financial Statements.

NOTES TO FINANCE STATEMENTS For the Three Years Ended December 31, 1980

1. Summary of Significant Accounting Policies (a) System of accounts- The accounting records of the company are Oepreciation is provided on a straight-line basis at rates authorized by maintained in accordance with the uniform system of accounts prescribed the ACC annually, which have ranged from 2.95% to 4.16% for electric by the Federal Energy Regulatory Commission (FERC) and used by the plant, 3.25% to 3.49% for gas plant, and 2.85% to 15.50% for common Arizona Corporation Commission (ACC). and general plant.

(b) Plant and depreciation-Property is stated at original cost as (c) Revenues and recognition of certain costs-Operating revenues defined for regulatory purposes. The cost of additions to utility plant and are recorded when billed on a monthly cycle billing basis. Adjustment replacements of retirement units is capitalized. Replacements of minor clauses applicable to the recovery of fuel and purchased power expense items of property are charged to expense as incurred. In addition to direct through retail rates involve a hearing procedure that can give rise to costs, capitalized items include the present value of certain future lease appreciable timing differences-under-recovered expense is deterred to payments (see Note 4), research and development expenditures pertaining be matched against revenues that will result from the procedure in the to construction projects, indirect charges for engineering, supervision, subsequent period; and over-recoveries are added to "Purchased power transportation and similar costs, and an allowance for funds used during and interchange-net" as an expense item in the statement of income and construction. Costs of depreciable units of plant retired are eliminated from to "Deferred fuel revenue and other" as a liability item on the balance plant accounts and such costs plus removal expenses less salvage are sheet. Other procedures apply to the pass-through of tuel costs to charged to accumulated depreciation. Contributions in aid of construction wholesale customers, resale gas costs and specified taxes. The estimated are credited to plant cost. cost of gas purchased from the company's supplier, but not billed to gas 23

customers, is deferred to be matched against revenues, in the subse- mak/ng and accounting purposes, the company began providing deferred quent period. income taxes for the difference between acceterated and straight line tax (d) Allowance for funds used during construction In accordance (AOR) depreciation of property placed in service after January 1, 1977.

with the regulatory accounting practice prescribed by FERC and the ACC, Income tax reductions arising from timing differences respecting certain the company capitalizes an allowance for the cost ot funds used to finance other items of Income and expense reported differently for income tax and its construction program ("AFC"). AFC, which does not represent current financial reporting purposes and from allowable investment tax credits are cash earnings, is defined as the net cost during the period of construction reflected currently in income, in accordance with orders or practices of the of borrowed funds used for construction and a reasonable rate on equity ACC tor rate making purposes.

funds so used. The calculated amount is capitalized as a part of the cost of (f) Investments in subsidiaries Investments in subsidiaries are utility plant. reported at equity.

AFC has been calculated using composite rates of 9% in 1978 through (g) Research and development costs-The company expenses June 30, 1979, 10% from July 1, 1979 through December 31, 1979 research and development costs on a current basis, except that costs and 11% in 1980, except for AFC related to project financing which was which may result in utility plant are deferred for subsequent inclusion in computed at the actual rate thereon. AFC has ceased to accrue on those plant or to be written off if the applicable project is abandoned.

portions of construction work in progress included in rate base.

(e) Income taxes-The company uses accelerated depreciation methods for income tax purposes. As prescribed by the ACC for rate

2. Common and Non-Redeemable Preferred Stock The balances at December 31, 1980 and 1979 of common stock, and of preferred stock which is not redeemable except pursuant to call by the company at its option, are shown below.

Number of Shares Par Value Per Call Price Authorized Outstanding Share Outstanding Per Share(b)

(Thousands of Dollars)

Decem- Decem- Decem- Decem-ber 31, ber 31, ber 31, ber 31, 1980 1979 1980 1979 Common Stock .. .. 100,000,000 47,813,847 38,181,297 $ 2.50 $ 119,535 $ 95,453 Non-redeemable Preferred Stock (cumulative)

$ 1.10 preferred ........... 160,000 155,945 155,945 25.00 $ 3,898 $ 3,898 $ 27.50

$ 2.50 preferred ........... 105,000 103,254 103,254 50.00 5,163 5,163 51.00

$ 2.36 preferred ........... 120,000 40,000 40,000 50.00 2,000 2,000 51.00

$ 4.35 preferred ........... 150,000 75,000 75,000 100.00 7,500 7,500 102.00 Serial preferred............ 1,000,000

$ 2 40seriesA........... 240,000 240,000 50.00 12,000 12,000 50.50

$ 2.625 series C.......... 240,000 240,000 50.00 12,000 12,000 51.00

$ 2.275series 0......,... 200,000 200,000 50.00 10,000 10,000 50.50

$ 3.25 series E........, .. 320,000 320,000 50.00 16,000 16,000 (c)

Serial preferred........ 4,OOO,OOO(a)

$ 8.32 series J........... 500,000 500,000 100.00 50,000 50,000 (d)

Serial preferred............ 3,000,000 25.00 Total ................ 1,874,199 1,874,199 $ 118,561 $ 118,561 (a) This authorization covers the outstanding redeemable preferred shares shown in Note 3, as well as the non-redeemable shares indicated above.

(b) In each case plus accrued dividends.

(c) From $ 51.50 through February 28, 1983; then to $ 51.00 thereafter.

(d) Not callable prior to September 1, 1982 through certain refunding operations that would result in a lower rate of cost to the company than the divi-dend rate on the shares to be redeemed; otherwise at $ 108.32 through August 31, 1982 to $ 101.00 after August 31, 1992.

The holders of preferred stock are entitled to one vote for each share rights and preferences of the holders thereof, (iv) the issuance ot any addi-held of record, as are holders of common stock. Special requirements for tional shares of preterred stock except under prescribed circumstances or favorable votes ot holders of preferred stock, voting by the classes respec- (v) a merger, consolidation or sate of substantially all the assets ot the tively prescribed tor the several purposes, pertain to (i) certain conver- company. The foregoing voting rights attach to both redeemable and non-sions or exchanges of outstanding preferred stock, (ii) the authorization of redeemable preferred stock, as do the rights that would arise out of divi-any stock ranking prior to the preferred stock, (iii) making any change in dend arrearages as discussed in Note 3.

the terms and provisions of preferred stock that would adversely affect the 24

Common and non-redeemable preferred stock sales and changes in premiums and expenses during the three years ended December 31 1980 were ~

as follows (dollars in thousands):

Non-Redeemable Preferred Stock Premiums Common Stock (cumulative) and Number Par Value Number Par Value Expenses Description of Shares Amount of Shares Amount Net*

Balance, December 31, 1977 ... ...26,576,428 $ 66,441 1,874 199

~ $ 118,561 $ 326,744 Common Stock 6,200,830 15,502 102,732 Balance, December 31, 1978 ...32,777,258 81,943 1,874 199

~ 118,561 429,476 Common Stock 5,404,039 13,510 82,527 Balance, December 31 1979

~ .. .. 38,181,297 95,453 1,874,199 118,561 512,003 Common Stock . 9,632,550 24,082 127,791 Balance, December 31, 1980 .. .. 47,813,847 $ 119,535 1,874,199 $ 118,561 $ 639,794

• Premiums and expenses-net include those of the redeemable preferred stock issues shown in the second table in Note 3.

The company has a dividend reinvestment and stock purchase plan On February 27, 1981, subsequent to the date of the accountants'pinion, whereby newly issued shares of its common stock may be purchased at the company filed a preliminary prospectus relating to the issu-market on the applicable dates by any participant in the plan. It also has an ance of 4,000,000 shares of its common stock. The proceeds are planned employee savings plan under which its own periodic contributions probably to be used to reduce or repay short-term borrowings primarily incurred for, would, and the investment of certain funds contributed by participating and temporary investment or deposit pending application to, the construc-employees could, involve its issuance of new shares of common stock. tion program.

3. Redeemable Preferred Stock The balances at December 31, 1980 and December 31 1979 of preferred stock which is redeemable at the option of the holders or pursuant to sink-

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ing fund obligations, in addition to being callable by the company, are shown below.

Number of Shares Par Value Outstanding at Outstanding at December 31, Per December 31, Call Price 1980 1979 Share 1980 1979 Per Share(b)

(Thousands of Dollars)

Redeemable Preferred Stock (cumulative) serial preferred (a)

$ 8.50 series F .... 29,200 193,200 $ 100.00 $ 2,920 $ 19,320 (c)

$ 8.50 series G .... 75,600 82,800 100.00 7,560 8,280 (c)

$ 10 series H ..... 368,000 384,000 100.00 36,800 38,400 (d)

$ 10.70 series I ... 300,000 300,000 100.00 30,000 30,000 (e)

$ 8.80 series K .... 600,000 600,000 100.00 60,000 60,000 (I)

$ 9.70 series L .... 480,000 100.00 48,000 (g)

Total .......... 1,852,800 1,560,000 $ 185,280 $ 156,000 (a) There is no specific authorized number of redeemable shares. See 1981 to par after September 1, 2002. Applicable sinking fund provisions Note 2. require the redemption of 16,000 shares at par annually (representing (b) In each case plus accrued dividends. annual payments of $ 1,600,000).

(c) Redeemable at par at the option of either the company or the (e) Not callable by the company prior to December 1, 1985, through respective holders, in the case of series F at any time, or in the case of certain refunding operations that would result in a lower rate of cost to the series G after May 30, 1982, (or earlier under certain conditions that could company than the dividend rate on the shares to be redeemed; otherwise require the company to repurchase series G shares, which conditions did at $ 107 through November 30, 1985 to $ 101.00 after November 30, 1990.

not exist at December 31, 1980), in every case upon 120 days notice. Applicable sinking fund provisions require the redemption of 15,000 Sinking fund provisions applicable to series F require the redemption of a shares at par annually commencing December 1, 1981 (representing total of 8,400 shares at par semiannually (representing annual payments of annual payments of $ 1,500,000). The company may, but is not required

$ 1,680,000). Sinking fund provisions applicable to series G require the to, redeem an additional 15,000 shares at par on December 1 in any year.

redemption of a total of 3,600 shares at par semiannually (representing (f) Not callable by the company prior to March 1, 1984 through certain annual payments of $ 720,000). refunding operations that would result in a lower rate of cost to the com-(d) Not callable by the company prior to September 1, 1984 through pany than the dividend rate on the shares to be redeemed; otherwise at certain refunding operations that would involve the issuance of common $ 108.80 through February 28, 1984 to $ 101.00 after March 1 ~, 1994.

stock or result in a lower rate of cost to the company than the dividend rate Applicable sinking fund provisions require the redemption of 22,500 on the shares to be redeemed; otherwise at $ 107.90 through September 1, shares at par annually commencing March 1, 1986 (representing annual 25

payments of $ 2,250,000). The company may, but is not required to, 4. Long-Term Debt redeem an additional 22,500 shares at par on March 1 in any year begin. Details of long-term debt outstanding at December 31, 1980 and ning in 1986. December 31, 1979 are as follows:

(g) Not callable by the company prior to March 1, 1983; thereafter at

$ 106.47 through February 29, 1984 to $ 101.07 after March 1, 1989. 1980 1979 Applicable sinking fund provisions require the redemption of 96,000 shares at par annually commencing March 1, 1986 (representing annual (Thousands of Dollars) payments of $ 9,600,000). First mortgage bonds:

If there were to be any arrearage in dividends on any of its preferred 2//o series due February 1 1980 ~

.... $ $ 5,000 stock or in the sinking fund requirements applicable to any of its redeem- 9.80/o series due June 1 1980 ~ ...... 75,000 able preferred stock (each such dividend being cumulative and of equal 2/,'/o series due December 1 1980....

~ 6,000 ranking with other such dividends, and each such requirement being 9.50'/o series due February 15, 1982 .. 100,000 100,000 cumulative and of equal ranking with other such requirements), the 3~/,~/o series due February 1 1983~

.... 14,500 14,500 company could not pay dividends on its common stock or acquire any 3'$/o series due November 1, 1983.... 5,723 5,723 shares thereof for consideration. If any such dividend arrearage were to 3/'/o series due March 1, 1984 ...... 15,000 15,000 equal six or more quarterly dividends, the holders of preferred stock, 5'/,~/o series due October 1, 1987 ..... 15,000 15,000 in addition to their other voting rights and voting by the classes prescribed 4.70/o series due March 1, 1989..... 20,000 20,000 for this purpose, could elect a total of six directors (all series of serial 4.80/o series due November 1, 1991 .. 35,000 35,000 preferred stock, regardless of par value and whether redeemable or 4.45/o series due June 1, 1992 ...... 25,000 25,000 non-redeemable, comprising one such class and being entitled to elect 4.40~/o series due December 1, 1992 .. 25,000 25,000 two of the six directors). See Note 2 in regard to other voting rights of 4.50/o series due September 1, 1993.. 15,000 15,000 holders of preferred stock. 6.25/o series due September 1, 1997.. 25,000 25,000 The combined aggregate amount of sinking fund requirements for 12.875/o series due May 15, 2000.... 185,000 the above issues each year for the next five years will be as follows: 10.625~/o series due

$ 5,500,000 in 1981, $ 5,060,000 in 1982 and $ 3,820,000 in 1983 November 15, 2000 .............. 75,000 75,000 through 1985. 7.45/o series due March 15, 2002.... 60,000 60,000 Redeemable preferred stock transactions during the three years 9.95~/o series due March 1, 2004 ..... 75,000 75,000 ended December 31, 1980 were as follows (dollars in thousands): 6.20~/o series due April 1, 2004 ...... 50,000 50,000 6.45/o series due April 15 2007......

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43,000 43,000 Number Par Value Amount 6/o series due January 15, 2008 ..... 34,000 34,000 Description of Shares 12/,~/o series due October 15, 2009 ... 75,000 75,000 Balance, December 31, 1977... 1,000,000 $ 100,000 Unamortized discount and premium.... (1,082) (1 192)

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Balance, December 31, 1978... 1,000,000 100,000 Total first mortgage bonds...... 891,141 792,031 Redeemable preferred stock 6.60'/o pollution control indebtedness

$ 8.80series K .......... 600,000 60,000 due October 1 1983~ (a)............. 65,000 Sinking fund retirements: Less securities held by trustee (b)..... (26,386)

$ 8.50seriesF .......... (16,800) (1,680) Unsecured notes payable (c)........... 70,000 70,000

$ 8.50series G .......... (7,200) (720) Capitalized lease obligation (d).......... 52,433 53,072

$ 10 series H............ (16,000) (1,600) Total long-term debt........... 1,052 188

~ 915,103 Balance, December 31, 1979... 1,560,000 $ 156,000 Less current maturities:

$ 9.70 series L .......... 480,000 48,000 2'/,'/o series due February 1, 1980.....

9.80/o series due June 1, 1980.......

(5,000)

(75,000)

Sinking fund retirements:

$ 8.50 series F .......... (164,000) (16,400) 2~/,~/o series due December 1, 1980.... (6,000)

$ 8.50seriesG .......... (7,200) (720) Sinking fund requirement on

$ 10 series H............ (16,000) (1,600) 10.625/o series due November 15, 2000 . (3000)

Balance, December 31, 1980, . 1,852,800 $ 185,280 Capitalized lease obligation........... (639)

(688)

Premiums and expenses-net of redeemable preferred stock issues Total long-term debt less are included in the amounts presented in the second table in Note 2. current maturities........... $ 1,048,500 $ 828,464 (a) Secured by a long-term letter of credit from a bank.

(b) Representing pollution control funds deposited with a revenue bond trustee and to be disbursed as construction progresses on the facil-ities financed.

(c) Consisting of $ 30,000,000 payable in thirteen equal quarterly installments of $ 2,143,000 commencing June 1, 1983 and a final install-ment on September 1, 1986 or, under certain conditions, in ten equal quarterly installments commencing June 1, 1984, with interest through August 31, 1982 at 105/o of prime (107/o thereafter); and $ 40,000,000 due February 1, 1985, with interest through December 31, 1981 at 105/o (107/o thereafter) of the higher of prime or 'h /o above the current rate on 90 to 119-day, dealer-placed commercial paper.

(d) Represents the present value of future lease payments (discounted at the interest rate of 7.48~/o) on a combined cycle plant sold and leased back from the independent owner-trustee formed to own the facility. The lease requires semi-annual payments of $ 2,299,000 through June 1983 and then $ 2,582,000 through June 2001, and includes renewal and pur-chase options based on fair market value. This plant is included in plant 26

in service at its original cost of $ 54,405,000; accumulated amortization five-year, tax exempt arrangement to be established pursuant to the terms at December 31, 1980 was $ 10,085,000. outlined in a letter of intent executed by the company and a certain bank in Aggregate annual payments which will be due on long-term debt and January 1981.

for sinking fund requirements through 1985 are as follows: 1981, Prior to the refinancing or repayment thereof, both categories of loans

$ 3,688,000; 1982, $ 103,740,000; 1983, $ 95,731,000; 1984, will be secured by Unit 4 and the company's repurchase obligation. The

$ 28,026,000; 1985, $ 53,137,000. Other sinking fund requirements two categories are subject in varying degrees to cessation in funding or to for each year through 1985 for the outstanding first mortgage bonds will be acceleration, and interest on the existing pollution control loans is subject as follows: 1981 and 1982, $ 2,552,000; 1983, $ 2,350,000; 1984 and to increase, under certain conditions which did not exist at December 31 ~

1985, $ 2,200,000; as allowed in the bond indenture, requirements of this 1980. Pursuant to the loan documents, the declaration of any dividend on type have in the past been satisfied by certification of property additions of common stock, if the per share dividend thus declared would exceed the 1~/ times the amount stated and the company expects to meet similar previous per share dividend, is subject to certain restrictions related to requirements in that manner in the future. For sinking fund requirements earnings; for the year ended December 31, 1980 up to $ 100,494,000 and redemptions at the option of the holders of redeemable preferred could have been paid in dividends on common stock compared to the stock, see Note 3; for requirements under the current project financing $ 88,108,000 actually paid.

arrangement and the anticipated refinancing thereof, see Note 5. The company includes costs of construction of Unit 4 in construction Substantially all utility plant, other than the combined cycle plant work in progress on its balance sheet. Net outstanding balances of the mentioned above and the construction work in progress for Cholla Unit 4 aforementioned bank loans, together with capitalized interest and related (see Note 5), is subject to the lien of the first mortgage bonds. The inden- fees thereon (totalling 13.3~/o for the year ended December 31, 1980 but ture respecting the first mortgage bonds includes provisions which would ceasing, in the case of capitalized interest, for the portion of construction restrict the payment of dividends on common stock under certain condi ~ costs included In the rate base) appear as a liability. In addition to the

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tions which did not exist at December 31, 1980. construction costs financed by the owner through December 31, 1980, the company incurred construction costs of approximately $ 14,358,000 which

5. Project Financing will be reimbursed by the owner.

In 1977 the company sold the construction work in progress for Unit 4 of its Cholla Plant to an unrelated corporation (" owner" ), which appointed 6. Short-Term Borrowlngs and Compensating Balances the company as its agent to complete construction of the unit and agreed The company had bank lines of credit of $ 120,605,000 at December to resell it to the company. The company is unconditionally obligated to 31, 1979, increasing to $ 1 30,705,000 in mid-1980 and remaining there at repurchase the unit at or about the time of its completion (presently sched- December 31, 1980. On December 31, 1979, all such lines were unused, uled for May 31, 1981), and in no event later than July 31, 1981, for an although the company regarded that portion of the line equal to the amount equal to the owner's cost of acquiring, completing and financing $ 54,000,000 of its then outstanding commercial paper to be committed the unit. as backup.

Financing of the unit has been provided to the owner by bank loans In 1980, the company's lines of credit were segregated into commer-in two categories. The first consists of up to $ 263,500,000 to be dis- cial paper backup lines of $ 79,705,000, for which commitment fees (at bursed as construction progresses, $ 218,500,000 of which is to bear rates ranging from Ya~/o per annum to 5/o of prime) totalling $ 344,000 interest at 105/o of prime and $ 45,000,000 of which is to bear interest at were paid, and working lines of $ 51,000,000. On December 31 1980, the

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prime, and all of which is to become due on the date the company is obli- company had outstanding $ 26,000,000 of commercial paper (at an effec-gated to repurchase the unit; such loans can then be refinanced by the tive rate of 21.01~/o) and $ 7,000,000 of borrowings (at an effective rate company (with interest on $ 45,000,000 thereof remaining at prime until of 20.17/o) under the working lines.

increasing to 105~/o of prime on December 31, 1981, there to remain Compensating balances required at banks for the working lines in until increasing, together with interest on the remaining $ 218,500,000 to 1980, and for all lines in 1979, but which were not legally restricted, were 107/o of prime on December 31, 1983) for payment in five equal install- generally 10/o of the line plus 5'/o (104/o in some instances) of borrowings.

ments (one in 1981, and two each in1983 and1984). Loans in the second Substantially all cash shown in the Balance Sheets is considered compen-category aggregate $ 41,500,000 of pollution control financing provided sating baTances.

through a governmental authority to the owner; these loans currently bear The December 31, 1980 arrangements referred to above have been interest at 70~/o of prime and are due in 1987, but in effect would become left in place and augmented by a $ 60,000,000 credit facility with foreign due when the company is obligated to repurchase Unit 4 unless assumed banks. The commitment fee for the facility is /,/o per annum, and the by the company at that time. However, it now appears that the pollution rate of interest payable for borrowings thereunder is to fluctuate at 'h~/o control loans will be prepaid with a portion of the proceeds of a $ 57,000,000, over the London Interbank Offering Pate.

7. Jointly-Owned Facilities At December 31, 1980, the company owned the following interest in jointly-owned electric generating and transmission facilities:

Percent Net Construction owned by Plant in Accumulated Plant in Work in Company Service Depreciation Service Progress (Thousands of Dollars)

Navajo Plant $ 112,768 $ 16,937 $ 95,831 $ 1,587 Four Corners Units 4 and 5 ....... 30,622 10,016 20,606 12,092 Palo Verde Nuclear Generating Station Units 1, 2 and 3 ........ 29.1 733,136 Certain transmission lines from the Navajo Plant (the company's interest in which varies from 14o/o to 100o/o) 31.4 27,955 4,654 23,301 58 Total $ 171,345 $ 31,607 $ 139,738 $ 746,873 The foregoing dollar amounts correlate to the company's percentage company. Its share of related operating and maintenance expenses is interest in each facility. Financing for all such interests is provided by the included in its corresponding operating expenses.

27

8. Income Tax Expense 9. Pension Plan The components of income tax expense for each of the three years The company's pension plan covers virtually all employees. Pension ended December 31, 1980 are as follows: expense for 1980, 1979 and 1978 was $ 10,434,000, $ 9,567,000 and 1980 1979 1978 $ 8,318,000 respectively. The company makes annual contributions to the plan equal to the amounts allowed for pension expense. The accumu-Currently payable: lated plan benefits and plan net assets for the company's defined benefit Federal $ 7,128 $ 6,751 S 5,816 plan as of January 1, 1980, the date of the most recent actuarial valuation, State 3,740 3,938 5,520 are as follows:

Total current .. 10,868 10,689 11,336 Deferred: Actuarial present value (assuming an 8.75% rate of return) of ac-Federal 3,630 2,452 1,249 cumulated plan benefits:

State . 2,021 1,281 1,352 Vested $ 64,594,000 Total deferred .. 5,651 3,733 2,601 Non-vested 3,251,000 Total . $ 16,519 $ 14,422 $ 13,937 Total $ 67,845,000 Net assets available for benefits $ 84 184,000

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Deferred income tax expense results from the difference between accelerated depreciation used for income tax purposes and straight-line The actuarial present value of accumulated plan benefits presented tax (ADR) depreciation, as prescribed by the ACC.

above has not been calculated with reference to the effects of projected Federal and state income taxes are included in the components of net inflation, whereas such effects are considered by the company with refer-income as follows: ence to the adequacy of plan assets; accordingly, the company considers the utility of the comparison suggested to be extremely limited.

1980 1979 1978 Operating expenses .. .. $ 17,209 $ 13,556 $ 13,917 Other income . (690) 866 20 10. Commitments and Contingencies Total $ 16,519 $ 14,422 $ 13,937 Operating revenues for 1980, 1979 and 1978 include a total of

$ 80,386,000 collected prior to May 29, 1980 pursuant to the 1978 and 1979 step increases discussed in "Legal Matters" which may be subject to refund if ordered by the ACC. These increases were premised in part Following is a summary of the difference between income tax expense upon the addition to rate base of certain construction work In progressand and the amount obtained by multiplying income before income taxes by the the concurrent cessation of the allowance for funds used therefore; had statutory federal income tax rate of 46% in1980and1979 and 48% in 1978. such allowance not ceased, it would have contributed $ 10,925,000 to net income during the period in which the related revenues were collected.

Year ended December 31, Giving pro forma effect to a refund of such revenues, assuming that such 1980 1979 1978 a refund, with interest, is ultimately required and deducting the amount of the allowance that presumably would be restored and the tax benefits the Federal Income tax at statutory rate .. $ 73,512 $ 62,560 $ 57,934 company would derive in the event of a refund, pro forma net income for Increases (reductions) in taxes resulting from: 1980, 1979 and 1978 would respectively be $ 18,306,000, $ 28,871,000 and $ 10,337,000 less than the net income shown for those periods in the Tax (over) under book depreciation ............. 1,895 777 (3,260)

Statements of Income.

Operating revenues for the three year period ended December 31 Allowance for funds used ~

1980 include approximately $ 13,800,000 in dispute with a wholesale cus-during construction........ (29,232) (19,420) (13529)

Investment tax credit ........ (25,481) (24,944) (28,986) tomer, as well as approximately $ 3,400,000 subject to refund, as dis-cussed in "Legal Matters;" also see "Legal Matters" in regard to certain Taxes, pension costs and other items capitalized ..... (6,202) (5,122) (4,935) other legal and regulatory proceedings involving the company. Based upon the opinion of its counsel, Snell 8 Wilmer, the company believes that the State income tax-net of ultimate resolution of these matters would not be material In relation to its federal income tax benefit... 3,107 2,612 3,569 Other 1980, 1979 or 1978 operating results or its financial position at December (1,080) (2,041) 3,144 31, 1980 or 1979.

Total provision for federal The company has significant purchase commitments in connection and state income tax ... $ 16,519 $ 14,422 $ 13,937 with its continuing construction program. Construction expenditures in 1981 have been estimated at $ 377,000,000.

At December 31, 1980 the company had approximately $ 60,000,000 of investment tax credit carryforwards which will expire through 1987. Of 11. Supplementary Income Statement Information this amount, approximately $ 22,000,000 has been recognized as a reduc- General taxes and rents during the three years ended December 31 ~

tion of deferred taxes. 1980 are as follows:

Year ended December 31, 1980 1979 1978 (Thousands of Dollars)

Taxes, other than income taxes:

Ad valorem ............... $ 48,191 $ 45,084 $ 43 239

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Sales 29,273 26,415 21,860 Rents 3,325 2,330 2,368 28

12. Business Segments Listed below is selected information relating to the company's electric and gas operations:

Year Ended or as of December 31, 1979 1978 Electric Gas Electric Gas Electric Gas (Thousands of Dollars)

Operating revenues $ 621,864 $ 143,896 $ 533,185 $ 131,238 $ 452,431 $ 109,786 Operating income before income taxes .. 180,455 6,330 151,480 12,946 141,043 11,574 Utilityplant 3,055,697 144,230 2,597,139 137,934 2,152,937 135,667 Accumulated depreciation ........... 444,537 60,982 386,503 56,229 335,533 52,027 Capital expenditures 483,392 20,728 449,104 19,012 401,475 4,314

13. Selected Quarterly Financial Data (Unaudited)

Earnings per Operating Operating Net Earnings for Share Guarter Revenues Income Income Common Stock of Common Stock (Thousands of Dollars Except Per Share Data) 1980 First $ 171,772 $ 29,023 $ 23,995 $ 18,168 $ 0.47 Second 174,208 26,370 19,801 13,349 0.31 Third 234,601 68,527 59,879 53,470 1.26 Fourth 185,179 45,656 39,615 33,241 0.70 1979 First 154,440 24,663 17,277 12,337 0.38 Second 145,921 27,347 19,719 14,040 0.43 Third 192,943 56,505 49,142 43,493 1.23 Fourth 171,119 42,355 35,440 29,826 0.82 See Note 10 of Notes to Financial Statements for revenues which may be subject to refund.

14. Supplementary Information to Disclose the Effects of Changing Prices (Unaudited)

The following supplementary information is furnished pursuant to the Current Cost presentation, certain appraised values thereof in 1969)

Statement No. 33 of the Financial Accounting Standards Board for the pur- from the times of construction (or appraisal). The amount by which the pose of illustrating the effects of changing prices in an inflationary environ- expense so recalculated exceeds that shown on the company's1980 State-ment. It offers some perspectives of approximated effects of inflation, and ment of Income appears as an adjustment to income from operations. The is not intended as precise measurements of those effects. Current Cost adjustment is the larger of the two because the accumulated The company and other public utilities similarly situated are subject to Handy Whitman rise through 1980 exceeded the rise in the Consumer rate-making procedures which, by law and practice, in large part utilize Price Index in the same period, thus producing a greater depreciable base the historical cost of utility plant in the determination of the allowed (referred to in the discussion below as "Utility Plant at Current Cost" ).

recovery (through depreciation) of the investment therein and return The sum of the depreciation adjustment in the Constant Dollar column thereon. This precludes or restricts a rate-making response to the effects and the figure shown lower in that column as the "reduction to net recov-of realizing such recovery and return in inflated dollars, compared to those erable cost" was derived through application of 1980 increases in the in which the investment was made. The first table below presents two Consumer Price Index to historical costs of the company's utility plant.

approximate measurements of those effects from the perspective of that The comparable sum in the Current Cost column, again consisting of the portion of the investment, restated on alternative bases to reflect interven- depreciation adjustment plus the "reduction to net recoverable cost",

ing cost escalation, which was not reflected in 1980 depreciation or in the reflects the larger depreciation adjustment referred to above, which is company's return, and which is therefore not "recoverable." more than offset by the diiference between the two measurements of cost For these presentations, "constant dollar" and "current cost" (or price) escalation in 1980 which are described in the next paragraph.

amounts were calculated by applying certain indices (or ratios derived The first such measurement is that of a hypothetical increase in the therefrom) to certain historical or other amounts. In the case of constant dollar value of the company's utility plant, and was derived by applying dollars, the index was the Consumer Price Index for All Urban Consumers, 1980 index rises (primarily in the Handy Whitman Index) to the Utility which approximates the upward trend of prices in general during the indi ~ Plant at Current Cost, and subtracting the depreciation adjustmenl shown cated periods. In the case of current costs, the primary index was the in the column. The second measurement is that of an assumed, unrecov-Handy Whitman Index of Public Utility Construction Costs (an estimate of erable dollar amount computed by applying the 1980 rise in the Consumer which was used for the last half of 1980), although the Consumer Price Price Index (which exceeded the corresponding rise in the Handy Whitman Index was used for construction work in progress. The company believes Index) to the Utility Plant at Current Cost.

that the Handy Whitman Index is the more accurate of the two in estimating In neither measurement did the company make any adjustments to the prices it would incur to duplicate at various times its utility plant in asset values, or related income statement amounts, other than those dis-service at the indicated dates. Over the period up to 1979 which is relevant cussed above in regard to utility plant and depreciation thereon. Fuel to the information presented below, that index rose faster than the Con- fnventories and fuel and purchased gas expenses are, in effect, monetary sumer Price Index, but the reverse occurred in 1979 and 1980. items, due to applicable rate-making procedures which include adjust-Depreciation expense for 1980 was recalculated by applying the com- ment clauses. In accordance with Statement No. 33, income taxes were pany's composite depreciation rate to depreciable base determined by not adjusted.

indexing the historical cost of the company's utility plant (or, in the case of 29

As contrasted to the assumed net value losses which, in the presen- information in the nature of that presented below as to the adequacy of tation below, are associated with the holding of assets committed to a future cash flows in relation to future plant replacement requirements are regulated business, there is an assumed "holding gain" associated with believed by the company to be less valid in the case of public utilities borrowings that will be repaid with inflated dollars. The 1980 decline in which, like itself, should be ab! e to establish rates to cover increased costs the purchasing power of net amounts owed by the company (measured by of new plant. However, the information may provide some indication of the the Consumer Price Index) appears in both columns, to result in a "net" expanded capital structure that will be required for making plant replace-difference between the assumed holding losses and gain. ments and additions with inflated dollars.

Inferences which, in the case of some industries, may be drawn from Income from Operations Adjusted for Changing Prices for the Year Ended December 31, 1980 Constant Dollar Current Cost Average Average 1980 Dollars 1980 Dollars (Thousands of Dollars, Except Per Share Amounts)

Net Income, as reported in Statements of Income . $ 143,290 $ 143,290 Adjustment to restate depreciation expense . (50,647) (62,420)

Income from operations (excluding reduction to net recoverable cost) S 92,643(a) S 80,870 Income per common share (after preferred stock dividend requirements and excluding reduction to net recoverable cost). $ 1.57 $ 1.30 Increase in specific prices (current cost) of ulility plant held during the year (b) $ $ 377,812 Reduction to net recoverable cost . (238,819) (137,517)

Effect of increase in general price level. (467,341)

Excess of increase in general price level over increase in specific prices after reduction to net recoverable cost... (227,046)

Gain from decline in purchasing power of net amounts owed 170,554 170,554 Net $ (68,265) $ (56,492)

(a) Including the reduction to recoverable net cost, operations on a constant dollar basis would have resulted in a loss of $ 146,176,000 for 1980.

(b) At December 31, 1980 Utility Plant at Current Cost was $ 4,392,511,000 while historical cost, or net cost recoverable through depreciation, was $ 2,694,408,000.

Five-Year Comparison of Selected Supplementary Financial Data Adjusted for Effect of Changing Prices Year Ended December 31, 1980 1979 1978 1977 1976 (Average 1980 Dollars in Thousands, Except for Per Share Amounts)

Operating revenues . S 765,760 S 754,276 $ 710,108 $ 671,301 $ 571,445 Historical cost information adjusted for general inflation (1)

Income from operations (excluding reduction to net recoverable cost) . S 92,643 $ 94,111 Income per common share (after dividend requirements on preferred stock and excluding reduction to net recoverable cost) $ 1.57 $ 2.01 Net assets at year-end at net recoverable cost (2) . $ 1,116,724 $ 1,059,787 Reduction to net recoverable cost $ 238,819 $ 251,813 Current cost information (1)

Income from operations (excluding reduction to net recoverable cost) . S 80,870 $ 79,052 Income per common share (after dividend requirements on preferred stock and excluding reduction to net recoverable cost). S 1 30 $ 1 58 Excess of increase in general price level over increase in specific prices after reduction to net recoverable cost. S (227,046) $ (236,754)

Net assets at year-end at net recoverable cost (2) . $ 1 116,724

~ $ 1,059,789 Reduction to net recoverable cost . $ 137,517 $ 86,123 General Information Gain from decline in purchasing power of net amounts owed(1)........... $ 170,554 $ 173,865 Cash dividends declared per common share . S 2.06 S 2.20 S 2.19 S 2.08 S 2.01 Market price per common share at year-end . S 16.83 S 18.52 S 24.78 S 28.18 S 27.79 Average consumer price index 246.8 217.4 195.4 181.5 170.5 (1) Not required for years prior to 1979.

(2) Consisting of common stock equity and non-redeemable preferred stock.

30

LEGAL MATTERS Note 10 to the Financial Statements refers to two pending rate matters.

The first arises out of two 5% step increases in retail rates that went into effect in January 1978 and January 1979 pursuant to a 1977 order of the Arizona Corporation Commission. On appeal of that order by intervenors, the Arizona Supreme Court disapproved and remanded for further pro-ceedings those aspects of the order dealing with the step increases. In May 1980 the commission approved future collections pursuant to the two increases, but reserved for later review the refundability of the

$ 80,386,000 of collections made prior to the May order. Such a review has not yet occurred. The possibility and legality of a refund order by the com-mission are presently unclear to APS and its counsel, although it does appear clear that the commission could reexamine the propriety of the two step increases and confirm all or any portion thereof which it finds to be justified.

The second matter arises out of the assertion by a large wholesale customer of contract rights which allegedly preclude the collection of rate increases from it before they have been fully approved by the Federal Energy Regulatory Commission. Legal counsel to the company has assessed its contingent liability for approximately one-half of the $ 13,800,000 in dispute at December 31, 1980 as remote and for the remaining compon-ents as substantially less than probable.

As discussed on page 12 the necessity for EPA approval of the new

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sulfur dioxide regulation agreed upon by APS, environmental groups and the State of New Mexico results in some continuing uncertainty with res-pect to Four Corners Units 4 and 5. Additional uncertainty with respect to those units arises out of 1978 EPA citations alleging excess emissions of particulate matter and breach of opacity standards, by virtue of which the EPA might attempt to exact fines from participants in the units of up to

$ 25,000 per pollutant per day in which past violations have occurred.

The EPA also might attempt to impose non-compliance penalties on future operation of the units pending completion of their pollution control equip-ment {now scheduled for the end of 1982), the company's share of which penalties could be several million dollars a day.

The Four Corners and Navajo plants of the company are located on the Navajo Indian Reservation, as are certain of its transmission lines and all of its contracted coal sources. The Tribal Council has adopted three resolu-tions, two of which purport to impose taxes that, if valid, would cost APS an estimated $ 2,000,000 per quarter. The company has obtained an order from the Arizona Corporation Commission that should allow it to recover from its retail customers the amounts of such taxes that are allocable to them if the payment thereof is ultimately required.

The third Tribal resolution, which becomes effective only if and when certain action is taken by the Secretary of the Interior, purports to regulate sulfur emissions through a permit and fee system; if validly imposed, the fee would appear to be in an amount that would make it less costly {but nevertheless extremely expensive) to attempt to remove more sulfur dioxide from plant emissions than is required by federal and state law, so as to minimize the fee. AII three Navajo resolutions are being contested in court.

jI i~

L I

New Directors Four prominent Arizonans Joined the company's board ofdirec-tors during 1980.

Joe Acosta is president and senior executive in the Phoenix accounting firm of Acosta. Cordova and Pittman.

James P. Simmons is chairman of the board of United Bank of Arizona, Phoenix.

Dino DeConcini is managing partner of the Phoenix law office of DeConcini, McDonald, Brammer, J

Yetwin and Lacy.

Pamela Grant Korf is president jjil' and chief executive officer of Gold-waters. Scottsdale.

Acosta and DeConcini are natives of Arizona; all four new ItitIIf members are active in a variety of t~ business and civic activities both locally and nationally.

Acosta, Simmons, DeConcinl. Korf Officer Named G. Carl Andognini Joined the w

company in September of 1980 as a vice president in electric operation.

focusing on nuclear matters and has since assumed responsibility for all electric operations, including power production. Andognini was manager of nuclear operations for Boston Edison Company for five years. Prior to that service he was assistant to the vice presi-dent for operations at Yankee Atomic Electric Company, where he was responsible for a variety of nuclear operations and engineer-ing functions.

32

BOARD OF DIRECTORS t Joe Acosta, 57, President, tMorrison F. Warren, 57, Director Shareholder Information Acosta, Cordova & Pittman, P.A., of Experimental Programs.

Phoenix, Arizona College of Education, Arizona Stocklisting

<<Ralph M. Bilby, 63, Chairman of State University. Tempe, Arizona (Symbol: AZP) the Board of the company. tBen F. Williams, Jr., 51, Attorney Common stock of the company and Phoenix, Arizona at Law, Douglas, Arizona the 810.70 cumulative preferred Dino DeConcini, 47, Member of Thomas G. Woods, Jr., 54, stock. Series I, are listed for trading Law Firm of DeConcinl, Executive Vice President of thc on the New York Stock Exchange.

McDonald, Brammer, Yetwin company. Phoenix, Arizona Common stock is also listed on

& Lacy, P.C.. Phoenix, Arizona the Pacific Stock Exchange.

• Karl Eller, 52, President, Member ol Exeeuuvc Commatcc Transfer Agents Columbia Pictures f member of Auda Review Commatcc First Natfonal Bank of Arizona.

Communications, Phoenix, Phoenix. Arizona Arizona DIRECTOR EMERITUS Thc First National Bank of Boston.

Boston, MA (common stock only)

'William T. Garland, 64, E. Ray Cowden, Cattle Feeding Chairman of the Board. and Investments, Phoenix. Registrars Garland-Rhuart Development Arizona The Valley National Bank of Corporation (land development), Arizona. Phoenix, Arizona Sedona, Arizona The First National Bank of Boston, Pamela Grant Korf, 42, President OFFICERS Boston, MA (common stock only)

& Chief Executive Officer, General Counsel Goldwaters (General Mercantile). G. Carl Andognini, 45, Vice Snell &. Wilmer, Phoenix, Arizona Scot tsdale, Arizona President, Electric Operations Auditors

• VictorH. Lytle, 69, Chartered Ralph M. Bilby, 63, Chairman of Deloltte Haskins & Sells, Phoenix, Life Undcnvritcr, Prescott. the Board Arizona Arizona D.L. Broussard, 60, Vice President, Dividend Reinvestment and Marvin R. Morrison, 57, Farmer Research and Development Stock Purchase Plan and Cattle Feeder, Morrison O. Mark De Michele, 47, Vice A Prospectus describing this plan Brothers Ranch, Higley, Arizona Prcsidcnt. Corporate Relations for holders of the company's corn.

Henry B. Sargent, Jr., 46, Karl Eller, 52, Chairman ol'he mon stock is available to sharehold-Financial Vice President of thc Executive Commlttcc ers upon request. Write: Office of company, Phoenix, Arizona Joseph A. Gelinas, 36, Vice the Secretary, Sta. 1892, at the Wilma W. Schwada, 54, Civic President, Employee Relations address below.

Leader, Homemaker, Tempe, Gerald J. Griffin, 60, Assistant Form 10-K Arizona Secretary A copy of our Annual Rcport to thc James P. Simmons, 56, Howard F. Hersey, 52, Vice Securities and Exchange Commis-Chairman of the Board, United President. Gas Operations sion, Form IO-IC, will bc available Bank of Arizona, Phoenix. Russell D. Hulse, 53, Vice after March 31 1981 without

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Arizona President. Rcsourccs Planning charge. upon written request of Richard Snell, 50, Member of sharcholdcrs. Write: Oflice of the Jerry P. Human, 50, Vlcc Secretary, Sta. 1892. at the address Snell & Wilmer (general counsel President. Customer Services to the company) Phoenix, below.

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Charles D. Jarman, 45, Vice Arizona President. Enginccring and Statistical Report

<<Donald N. Soldwedel, 56, Construction A detailed Statistical Report for President, Western Newspapers, Financial Analysis 1970-1980 Inc.. Prcscott, Arizona: Publisher Lyman K. Mundth, 63, Vlcc will bc available by mid-April on and General Manager, Yuma President. Electric Operations. request. Write: Omce of the liea-Daily Sun, Yuma. Arizona (Rct.. 1-30-81) surer, Sta. 1820. at the address below.

'Maurice R. 'Ihnner, 59, John C. Ogden, 35, Vice Prcsfdcnt. MAILINGADDRESS:

Chairman of the Board and Chief Administration and Economic P.O. Box 21666.

Executive OAiccr, The Tanner Planning Phoenix. Arizona 85036 Companies (construction and Wm. T. Quinsler, 56, Secretary materials supply), Phoenix, and Assistant Treasurer Arizona Henry B. Sargent, Jr., 46,

• Keith L. Turley, 57, President Financial Vlcc President and Chief Executive Officer of Keith L. Turley, 57, President and the company, Phoenix. Arizona Chief Executive Omccr tDouglas J. Wall, 54, Member of Edwin E. Van Brunt, Jr., 49, Vice the Law Firm of Mangum, Wall, Prcsidcnt. Nuclear Project Stoops and Warden, Flagstaff, Management Arizona Thomas G. Woods, Jr., 54, Executive Vice Prcsidcnt, Operations (Numerals arc ages at annual mecung da(c.

April 23. 198l l

The Legacy Below the Rim, where Warm valley air holds back The winter storm, the lines Sweep down in the sun. But here, Unseen midst fir and pine, ice grips the wires.

The lineman walks the snow on Webbed feet and curses the cold. Ears stinging, He feels the fool and prays his son won't follow his way.

No man should work in this frozen place, he mutters, Where mud turns to rock and hands freeze to wire. Then the sun breaks through!

No words can describe it...when wires squirm like snakes on the run And ice falls in a shower of silver. Each crewman's voice Rises in a cheer... then speaks softly, "How lucky I am to witness this beauty So few may see. I'l work the lines, by heaven. 'til I retire, And then I'l leave my hat and tools right here to mark this spot for those Who follow. Perhaps my son will come this way."

George Carlin Retired Arizona Public Service Company P.O. Box 21666 Phoenix, Arizona 85036 Do Not Return