ML18192A379

Arizona Public Service Company 1977 Annual Report

ML18192A379
Person / Time
Site:	Palo Verde
Issue date:	04/21/1978
From:	Arizona Public Service Co
To:	Office of Nuclear Reactor Regulation
References
Download: ML18192A379 (36)

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HXGHLXGHTS19VV 1977 1976

% Increase Decrease Property and Plant:

Total utilityplant, year end Construction expenditures 81,889,320,000 81,580,672,000 284,610,000 8

194,266,000 19.5 46.5 Sales and Customers:

Total operating revenues Total electric sales (mwh)

Electric customers, year end Total gas sales (m therms)

Gas customers, year end 8 493,684,000 10,481,972 357,884 463,643 339,949 8 394,779,000 9,606,571 342,059 491,007 339,265 25.1 9.1 4.6 (5.6) 0.2 Income, Emmings, Dividends:

Net income Earnings available for common stock Average common shares outstanding Earnings per average share of common stock Dividends paid per share of common stock 22,970,741 19,105,191 3.02 S

2.47 153 8

1.39 S

84,011,000 8

60,479,000 8

69,383,000 8

47,168,000 38.9 47.1 20.2 22.3 10.1 Shareholders:

Common Preferred 66,358 7 232 56,011 6,243 18.5 15.8 Employees, year end:

4,570 4)042 13.1 Annual Report This report is published to provide general information concerning 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 fifty-eighth annual meeting. It willbe held at 10 a.m. Thursday, April20, in the Grand Ballroom ofthe Adams Hotel, Central Avenue at Adams, Phoenix,ArLona

IKTHIS REPORT:

Alongwith some good news about the compaxgr's financial progress, APS President Keith Turley expresses concern about the nation's energy future.

He calls for positive action, beginxiing on.. Page 2.

6-Efforts to strengthen the company's Qnancial posi-tion are grounded in the principle offollowinga course beneficial to both customer and investor.

It's a philosophy that paid offin good financial news for APS in 1977

. Page 4.

Investors, customers and taxpayers benefited from decisions by Arizona's rate-making body, while a variety ofQnancing methods met the company's capital needs. Begins on

. Page 6.

Arizona continues to grow and APS is growing with it. A challenge is to provide the energy needed, with the most economical fuels available........

Page 8.

APS continues to upgrade plants, improve mainte-nance, to squeeze the most from every generating fuel. Meanwhile, it's actively participating in studies leading to utilization oftomorrow's energy sources.

Page 10.

Arizona's first nuclear generating plant takes shape in the desert Page 11.

APS Asking customers to eliminate energy waste isn' enough. APS takes its story right into customers'omes, providing answers and dollar savings information.

Page 14.

A.board chairman resigns to take a major role in state government. Replacing him is the president of a northern-Arizona mercantile compaxiy.. Page 16.

Earnings P Dividends.......... Page 4.

Rates P Regulation.............

Page 6.

Common Stock Price Ranges....

Page V.

Legal Matters.......... Page 18.

Directors P OQicers.... Page 19.

Financial Statements.. Page 21.

Throughout this year's annual report you willfind highlights of my(or achievements. In many ways, 1977 was a good year for Arizona Public Service Company-

. a good year for investors and customers alike.

Perhaps you'e already noted some of the economic good news outlined on the preceding page.

In other sections ofthis report you'l read about:

~ a brightened financial picture that willprovide beneficial effects for years to come.

~ operations highlights that show the company is well ahead of national energy goals.

~ a comprehensive, economi-cally responsible program to provide customers with ways to cut energy waste, make the most efficient use of energy and.

minimize future construction costs by trirriming peak energy consumption.

~ positive results of the company's efforts to improve the public's awareness and acceptance ofthe economic and social realities about energy costs and supplies.

In other words, at Arizona Public Service, we'e on the right course in maintaining reliable customer service and a healthy financial proQle attractive to investors, and a balanced consideration of the needs ofboth customers and shareholders.

We can measure our efforts in any of the my(or areas analyzed on the following pages and find many positive signs and many opportunities for future progress.

Here are a few reasons why:

Underlying the earnings and dividend improvements in 197V is one important conclusion I feel deserves additional comment.

That is, the quality of the company's earnings should improve in the years to come.

Moor reasons are the Arizona Corporation Commission's decision to include substantial amounts of construction work in progress in the rate base as well as the commission's approval for normalization of liberalized tax depreciation.

The signiQcance is this: the commission's decision recognizes Arizona's unique energy needs.

It recognizes that the company's construction programs will require a higher proportion of earnings in the form of available cash rather than in the form of non~h accounting entries.

However, in order for the company to continue its financial progress and maintain good customer service, future rate increases willbe needed.

Another economic highlight was the restoration of the company's "A"bond rating by Moody's Investors Service. The improved rating makes it possible to Qnance needed new construc-tion at lower costs to our customers.

A company ahead. of national energy goals...

As you read about our present fuel mix and our continuing efforts to generate more electricity from the most economical sources available, you'l find we'e well ahead of many utilities in meeting national energy goals goals that stress increased reliance on coal and decreased reliance on expensive oil and scarce natural gas.

During 1977, V6 percent ofthe electricity we generated came from coal. By 1986, when all three units of the Palo Verde Nuclear Generating Station and all five units of the coal-fired Cholla plant are on line, we'l produce some 90 percent of our electricity from coal and nuclear fuels.

This fuel mix will provide beneficial financial results for our customers as we continue to decrease our reliance on expensive oil.

Other positive indicators for the future can be seen in the company's efforts to trim peak energy consumption while continuing to provide adequate energy supplies so vital to the economy of Arizona and the nation. You'l find several articles in this report about the compre-hensive load management program launched by APS in 1977.

The company has already been able to cut planned construction expenditures through 1987 from S4 billion to 83 billion, due in part to our load management efforts. The result: investment capital willbe more productive and customers willbeneQt as capital requirements are decreased.

Ifthis trend continues and we have every reason to believe it willwe can minimize the need to build power plants that would be little used other than during times of peak energy demand.

Effective load management is relevant to today's needs. It provides a way to help customers control energy use, to save money and to cut energy waste without imposing unnecessary economic and social hardships. It sets forth

vital conservation goals and at the same time continues to provide investors a fair return on their investments.

...with a positive story to tell The public's perceptions and understanding of the nation's complicated energy picture affect the company's operations in many ways. We'e been stressing the "why" and "how" as well as the "what" behind a wide variety of energy-related. questions in our stepped-up customer information program. We have a positive story to tell and we'e seeing positive results.

For example, recent surveys indicate a me]ority of our cus-tomers now understand that rate increases are part of the overall increase in living costs. There is also a growing confidence in the compaxly's ability to solve energy problems before they reach a critical stage.

There is increasing support for the development of nuclear energy and other new energy resources. And there is a greater public appreciation of the role such energy sources as solar, geothermal and wind play in the total energy timetable.

4

> <<4 Historically, the nation's utilities have faced energy chal-lenges head on, recognizing that desirable goals can be reached through responsible plarming and concrete problem-solving pro-'rams.

I am greatly disappointed at the chaotic path our nation is taking in its attempts 'to solve its energy problems, an effort that falls far short of the aggressive, economically responsible program we must have ifwe are to preserve our economic system.

...looRiag for action, not words In last year's report, I called for adoption of programs that would stimulate exploration and development of all of the nation.'s energy resources. I urged that red tape be cut to get nuclear plants on line as soon as possible; that needless government regulations be eliminated; that research and development be encouraged. In addition, I stressed the importance of striking a balance between environmental goals and the vital needs of our energy-based economy.

Although national energy legislation is still being debated in Congress and some small provi-

}

I 1 II sions have already become law, our nation's energy picture is not improving. Putting it bluntly, solving the energy crisis has become a game of political expedi-ency. We cannot continue to play a "game" with the very life blood of our economy energy.

Wishful thinking about alter-nate energy technologies that aie years away from commercial operation and economic feasibility won't get us on the road to energy stability. Neither willpassage of energy legislation aimed at halting our nation's growth; nor laws that espouse a do-nothing approach; laws that fail to consider that the desire to protect our environment must be carefully balanced against our need to produce the energy we need for more jobs and economic growth.

The nation can solve its energy problems. It must solve them iffuture generations are to have the homes, the jobs, the reasonable lifestyle that depends hm,,

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Solutions, however, demand more than discussion and debate. They require positive action based on the social and economic realities that underlie the whole spectrum of energy-related issues. The time for such action is now.

ki t

-kacy Ralph M. Bilby,Chairman ofthe Board; Eeith L Turley, President and Chief Executive OQlcer.

KEITHI TURLliY President and Chief Executive Officer February 23, l978

SU'SIMZSS O'INANCE 19VVwasa ood.year for a good. year forinvestorsand.

customers This was the year the whole spectrum of energy issues captured the spotlight ofnational debate. Itwas the year when Arizona Public Service Company made significant financial progress progress that can be shared by investors and cus-tomers in future years.

Itwas a year highlighted by improved earnings and higher dividends so vitalto the company's abilityto serve customers'nergy needs in our fast growing service area; the year the company's securities were upgraded by Moody's Investors Service; the year a landmark rate decision made by the Arizona Corporation Commission should continue to improve the quality of earnings and favorably affect customers and investors alike.

And itwas the year the company initiated a new market ing program to encourage customers to conserve energy in ways that willreduce the com-pany's peak demand and improve the load factor. This effort alone is expected to reduce capital require-ments over the next 10 years by an estimated S356 million. Such factors, combined with conserva-tion efforts and lower growth rates than previously forecast, wQ1 mean APS can cut approxi-mately Sl billionfrom its construction budget during the next decade.

E sup~

Livid.ends increased.

Earnings per share on common stock rose to S3.02 in 1977, an increase of 554 per share over 1976. Aquarterly dividend increase from 374 per share to 424 per share of common stock payable December 1 to share-holders of record November 1, brought total dividends paid per share for the year to S1.53, up from Sl.39 paid in 1976.

The indicated annual dividend becomes Sl.68. All 1977 dividends are considered fuHy taxable for income tax purposes.

Credit rating advances to "A" The company's mortgage and pollution control bonds and preferred stock were upgraded to "A"from "Baa" by Moody's Investors Service in August. At the same time, Moody's restored the rating on APS commercial paper to "P-2." This action restored ratings that had existed until changed by Moody's in early 1975.In addition, Standard P Poor's rated the company's com-mercial paper "A.-2"in May and maintained the "A-"rating on mortgage bonds.

APS expects the improved rating to result in the saving of millions of dollars in interest charges over the life offuture issues, bringing financial benefits to both investors and customers.

In addition, restoration of the company's "A."rating willhelp insure APS'bilityto finance new construction even during times of adverse market conditions.

Financial)y, 1977 was an eventfILiiyear for APS: a year when an upgraded securities rating, improved earnings, rate relief, and a dividend increase were all positive signs relating to the company's financial future.

Revenues yass

$498

'on.

expenses climb to $883 OXL APS'otal revenues in 1977 reached a record S493.7 million,up S99 millionor 25 percent over 1976. Increases mainly resulted from a 9.1 percent increase in electric energy sales, inQuenced by the hottest summer in Arizona's history, a 4.6 percent gain in electric customers and the rate increases discussed on page 6.

The compaxiy's service terri-tory includes one of the fastest growing areas in the nation.

Electric sales are expected to continue upward despite conser-vation efforts as Arizona's total population grows to a predicted four millionby the year 2000. The

company's service area is.

expected to see proportional growth.

On the expense side of the ledger:

~ fuel for electric generation, purchased power and inter-change totaled 8118 mQlion;

~ purchased gas amounted to

$55.2 million;

~ taxes included in operating expenses totaled 871.9 million;

~ interest on long-term and short term debt was 852.9 million.

lAThole sale rate uydate An interim, refundable rate increase has been in effect for most wholesale customers since May, 1976. Following a December, 1977 hearing, the admiinistrative lawjudge issued a report to the Federal Energy Regulatory Com-mission (FERC) recommending most of the increase. APS expects a final decision from that agency, on permanent rates, in 1978.

The Qnal decision by FERC willapply to customers already affected by the interim increase as well as to additional wholesale customers.

In addition, the company filed requests for further rate increases totaling 810 millionthat wQl affect most wholesale customers.

A large portion of these increases willbe put into effect on July 1, 1978.

Other matters related to rate a4justment clauses in existing wholesale contracts are pending before FERC. While the rates are refundable, the compaxgr does not believe a refund of the revenues in question would significantly affect recorded common stock earnings.

4,000 3,000

$2,514 2,000

$1,964 1,000 1967 1972 1977 Cayitalization (millions of dollars)

Investment yer Electric Amtomer

$5,000

$4,784 Th.e 19VV Income Bolbar and. lhTh.ere itM'ent,

$1,500 1,310 1,555 residential customers 35C electric 26C gas 9C commercial customers 30c electric 26C gas 4C

~ rs fuel for electric generation 16C gas purchases 10C electricity purchases 6C wages, sa anes

& em lo ee benefits income & other taxes 14C interest, preferred dividends 8 13C other costs net 1,000 801 32%

Gpp 9

0 46e/a 982 31%

14 35%

1,152 33%

35%

13%

52%

37%

14%

45'/e 15C industrial customers electric12C gas 3C 15C others electric 12C gas 3C 5C other income to common s areholders dividends 6C 13C retainedearnin s7C..

depreciation 8C other operating expenses 12C 13%

20%

1973 1974 1975 1976,1977 long-term

~ common stock debt LJ equity E3

.; preferred

~ project stock H financing short-term debt (Includes Current Maturitles ot Long-Term Oebs Capitalization ratios are being strength-ened by more common equity, less dependence on short term debt.

5

Investors nxstomers t

ayers'benefit from ovative rate-d.ecisions Contributing to the company's improving financial condition was an innovative three-stage rate decision by the Arizona Corpora-tion Commission. In an August decision the commission recog-nized earnings attrition by grant ing a 17.5 percent return on historical endwf-period common equity, so that the company might have the opportunity to earn as much as 13.5 percent on its actual year-end equity. In the decision, the commission:

o allowed the company an overall 8.27 percent rate of return on fair value rate base; o made permanent a 13.8 percent interim increase in effect since October, 1976; o granted a Step 1 overall revenue increase effective August 1, 1977 of 5.94 percent based on the test year; o made an allowance in the rate base for a portion of construction work in progress in the Step 1 increase; o approved the company's proposal to normalize the tax effect of liberalized depreciation, beginning with property additions after January 1, 1977.

Particularly significant was the commission's decision allow-ing the company Step 2 and Step 3 rate adjustments ofup to five percent on retail electric rates, subject to commission approval followinghearings. The approach taken by the commis-sion willminimize lengthy and costly hearings paid for by APS customers and state taxpayers.

Also significant is the improved quality of earnings that wQ1 result from the commission's inclusion of substantial amounts of construction work in progress in the rate base and the approval ofthe normalization of liberalized tax depreciation. The commission recognized that the compazgr's large construction program requires a higher proportion of earnings in the form ofavailable cash rather than non-cash accounting entries.

The Step 2 and 3 augustments depend upon whether the com-pany's return on year-end common equity is below 13.75 percent at the end of the year preceding the a+ustment and upon the amount of expenditures for new plant.

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On January 10, 1978 APS implemented the full Step 2 increase offive percent in electric rates. The increase is suQect to approval by the commission in hearings expected in March or Aprilof 1978.

A Step 3 mgustment ofup to five percent in electric rates is permitted in January, 1979, subject to conditions similar to those for the Step 2 increase as defined by the commission.

19VV i'inamcing h.ighlighis Two pollution control bond issues, preferred. and common stock offer-ings, and a project financing ofUnit 4 at the Cholla Power Plant were medor sources of capital raised Keith TurleJJ; Henry Sargent, vice president, Finance; George Toler, TreLsurer.

outside the company during 1977.

~ InApril, 843 millionwas raised through the sale ofpollution control revenue bonds for the Navajo and Cholla plants. The bonds bear a coupon of 6.45 percent. An additional 834 million pollution control issue was com-pleted in January, 1978 for the Cholla plant. These bonds bear an interest rate of 6 percent.

~ Apublic offering of 850 mil-lion of 88.32 cumulative preferred stock, Series J, 8100 par value, was sold in September. Proceeds were used to finance APS'onstruction program and to retire 842 million of short term debt.

~ Proceeds of 880 millionfrom a common stock issue also were earmarked primarQy for the con-struction program. The issue of four millionshares priced at 820.625 per share was sold in November.

~ A 8260 millionproject financing for Cholla Plant Unit 4 was completed inJuly. APS sold the partially-constructed generating unit to a subsidiary of a non-profit foundation. When con-struction of Cholla 4 is com-pleted, APS willrepurchase or-ifconditions then are favorable may negotiate a leveraged lease on the unit.

The company has estimated savings ofapproximately 817 millionin interest charges during the next 10 years as a result ofthe Cholla 4 financing plan.

Short term debt was zero at the end of 1977.

Cash generated internally contributed an additional 851 millionto capital requirements, representing 18 percent of the total for the year.

Asuccessful common stock dividend reinvest ment plan was used by 4,1VO stockholders for dividend and/or optional cash investments totaling 81.5 million.

Puel cost adjustments Hearings on fuel a+ustment clauses used by APS and 16 other Arizona utilities took place in 1977 followingan Arizona Corporation Commission-ordered review.

The commission is currently studying testimony presented by APS and other hearing participants.

Fuel cost adjustments are independent ofbasic rates. They permit APS, with the commis-sion's approval, to adust custom-ers'ills (up or down) to reQect changes in fuel costs for electric generation and purchased power not reQected in rate structures.

Increases, or decreases, are applied to customers'ills with no profit to the company.

While subject to commission audit and approval, the ~ust ments eliminate expensive, formal rate cases which are costly to taxpayers and utility customers. Such clauses are not unusual; some type offuel adust.

ment is currently being used by utilities in more than 40 states.

Common Stock Price Ranges (Symbol: AZP)

Dividend 1977 High Low per Share 1st quarter 20 18'/s 80.37 2nd quarter 21 18s/s 0.3V 3rd quarter 21'/>> 19'/>>

0.37 4th quarlar 21s/s 19'/>>

0.42 Dividend 1976 High Low per Share 1st quarter 17'/s 15'/>>

80 34 2nd quarter 17 15 0.34 3rd quarter 17~/s 15s/>>

0.34 4th quarter 19~/s 16i/s 0.3V Effective rate d.esign is need.ed.

The company proposed, during rate hearings in 1977, implementation ofan innovative Energy Capacity rate. Unlike many other rate pro-posals, capacity rates tie directly to load factor. Basicaily, they measure demand as well as consumption, taking into account how energy is taken as well as the amount used.

Under such a rate, forexample, itwould cost less for a customer to use dishwasher, clothes washer and dryer at different times, rather than simultaneously.

During the 1977 hearings, the Arizona Corporation Commission also heard evidence on time-of-day metering as well as various other concepts for cutting peaks and giving customers better control over energy Mls.

Any new concept in this area must be carefully analyzed and fairlyadrndnistered. Whatever the final choice, APS believes positive rate redesign is needed to benefit both company and customer. Such a redesign should promote a cooperative effort, giving both company and customer responsible roles and measurable returns.

SSV6 'n for th.e year ahead.

Construction requirements during 1978 are estimated at 8376 mQlion, including an estimated 860 million for environmental controls.

Tentative plans call for two new common stock issues, totaling 5 to 6 millionshares, one preferred stock issue, a possible additional pollution control bond issue, and draw<owns ofpollution control and proJect financing funds under existing arrangements.

OPERATIONS Electric revenues c

'b:

A h.ot s er more customers and. rate increases yrovid.ed. th.e yush.

Electric revenues have continued to climb. My(or reasons?

~ The summer of 1977 was the hottest on record in Arizona according to the National Weather Service. Daytime temperatures were about normpl, but desert areas just didn't cool offat night.

The result: energy-consuming cool-ing systems worked around the clock most of the summer. Despite conservation efforts, average residential use in 1977 was 9,570 kwh, up 3.3 percent over 1976.

~ Electric service was extended to a net increase of 15,825 new customers as the inQux of new residents to one ofthe fastest growing states continues.

~ Needed rate increases granted October 1, 1976 and August 1, 19VV also contributed to the 27 percent gain in electric revenues.

~ New customers were total-electric as the moratorium on new gas hookups continued.

The year-end count ofelectric customers was 357,884, up 4.6 per-cent over 1976. Electric sales to customers increased innearly all categories.

Revenues and sales for 197V were not significantly af'fected by the slow-down experienced by Arizona's copper industry.

Meeting th.e yeak The August peak electric load of 2,373,400 kilowatts was 8 percent above the peak of 1976.

APS'lectric resources consisted of 2,560,700 kw of generation plus 311,800 kw offirmpurchased lie-., 0 I

j The coal.fired Cholla Power Plant is on its wag to becoming APS'argest power generation source.

power for a total of 2,872,500 kw.

APS'lanned. reserve margin from these sources in 197V was 22 percent. However, at the time of the August peak, the generating resources were operating at 222,600 kw below their full capacity, leaving an actual reserve margin of 2V6,500 kw, or 12 percent.

No additions were made to the company's generating capacity in 1977. Atyear's end, however, start-up tests had begun on Unit 2 at the coal-fired Cholla Power Plant in northeastern Arizona. The new 250,000-kilowatt unit is scheduled to go into operation inJune. Unit3, also 250,000 kw, is slated to follow in 1979, and the 350,000-kw Unit4 is scheduled to go on line in 1980.

Planning and engineering will continue on Unit 5, also 350,000 kw, currently planned for opera-tion in 1983. When the expansion program is completed in 1983, APS'holly-owned Cholla Plant willbe the company's largest single source of power, with a capacity of 1,31B,OOO kw.

Withthe Cholla expansion, APS is building a 500,000-volt trans-mission line to carry electricity the 206 miles fromthe plant (at Joseph City) to a switchyard at the com-pany's Saguaro Power Plant 30 miles north ofTucson. The 853-millionline is due to be in service in June of 1978.

Construction expenditures reach. record.

$384 on Construction expenditures in 1977 reached a record 8284.6 million-up from 8194.3 millionin 1976.

Construction outlays at the Cholla Power Plant and APS'ortion of the Palo Verde Nuclear Generating Station totaled nearly 8192.5 mil-lion. The 500,000- volt transmis-sion line linking Cholla with the Saguaro Power Plant required 826.8 million. Total expenditures for electric property and equipment, including environmental protection facilities, amounted to 8277.8 mQlion. Gas facilities required only 8474,000 reQecting the moratorium on new gas construction. Some 8B.3 millionremaining went for common properties, including 85.V millionfor data processing services expanded to help cut operating and maintenance costs.

Fuel economics The Cholla expansion is part ofthe pioneer development oflow-sulfur southwestern coal for power generation begun by APS in the 1950s. This economical fuel has been producing energy forArizona electric customers since the early 60s at both the Cholla and Four Corners power plants. Thus APS is well ahead ofrecent efforts to meet a national energy goal ofswitching from oil and gas-fired electric generation to more plentiM and economical coal and nuclear fuels.

In 1977, coal was the fuel for 77 percent of the electricity gen-erated by APS. Even coupled with purchased power, coal still pro-vided 66 percent ofAPS'lectric energy requirements.

In 1986, when three Palo Verde Nuclear Generating Station units are inoperation(seepage 11),

the company willproduce about 90 percent of its electricity with a mix of coal and nuclear fuels.

Sources of Electric Energy (thousands of MWH) 13%

10,000 11%

81000 8%

16%

6,000 12%

9%

25%

5 t 8%1 7%

14 7

4,000 2,000 6

61%

61%

68%

66%

1973 1974 1975 1976 1977 t

o,i purchased Economical coal generation represents a

momtor part ofAPS'lectric resources, holding down the use of expensive ofl and scarce natural gas for power plant fuels.

$2.50 2.00 Generation Fuel Costs (cost per MM dtu)

. coal 0 gas oil Cl weighted average of ail fuels 1.50 1.00 0.75 0.50 0.25 1967 1971 1972 1973 1974 1975 1976 1977 The decision in the l950s to develop low-cost southwestern coal deposits has proved beneficial for customers whose energy bills reflec variations in fuel costs. Whfle generating fuel costs in all categories have risen in tho last 10 years, coal remains the most economical fuel source.

%PS searches for fl1el resources today to meet energy needs in th,e years

ahead, APS has stepped up its efforts to find its own fuel sources in an attempt to assure availability of reasonably-priced generating fuels for the future. As a part ofthis effort, APS geologists are probing for uranium in such places as the wide-open spaces ofWyoming and an ancient lake bed in Arizona.

Rock samples may provide enough evidence ofpotential fuel supplies to Just>fr exploratory drilling,as they did here, near Wtckenburg, Arizona.

Prospecting in Wyoming is for uranium to supplement fuelalready under contract for the Palo Verde Nuclear Generating Station. Engi-neers are drillingin Wyoming's Green Mountains where, early in 1977, APS and other Palo Verde participants purchased a half interest in uranium claims on a 26,000-acre area.

Meanwhile, exploratory drQ1-ing goes on in the Date Creek Basin northwest ofWickenburg, Arizona where APS has acquired leases on 40,000 acres of state land.

The company is also seeking additional supplies of coal and natural gas. Coal supplies, which could be required in the early 1990s, are being sought in several Rocky Mountain states. Goal ofthe gas acquisition program is to find supplies to make up for projected deficiencies in gas for resale to customers.

9

Pine-continues at coal-fired.

Pour Corners to imyrove efficiency; ad.d. to cus-tomer fuel savings Soaring oil prices that followed the 1975 embargo reinforced the idea that our customers'est interests would be served by our spending money on improvements that would keep our plants on line more ofthe time, burning more coal, less oil.

Thus the intensive preventive maintenance program under way at Four Corners, cornerstone ofthe APS generating system, continued through 1977, to improve the plant's generating reliability. More than 87.6 millionwas spent during the year by participants to increase the energy output of the five-unit, coal-Qred plant near Farmington, New Mexico.

Inutilityterminology, the object was to raise the plant's capacity factor, the measure of energy actually produced against the theoretical maximum possible.

The upgrading has increased APS'hare ofthe Four Corners capacity factor from 59.9 percent in 1975 to 65.4 percent in 1977.

For our customers, the upgrading has meant 811.8 millionin savings in 1977 due to increased use of coal and a resulting decrease inthe use of oil.

'F 4

1 3'he Four Corners Power Plant, burning southwestern coal since 1965.

Lengthy discussion and frequent hearings over air quality regula tions for the Four Corners Power Plant concluded in November. The New Mexico Environmental Improvement Board (EIB), ruled that 67.5 percent was an acceptable minimum figure for removal of sulfur dioxide (SOs) from plant emissions.

In addition to installing equip-ment to meet the 67.5 percent SOs regulation and particulate removal equipment at an estimated cost of 8235 millionto Four Corners participants six air monitoring stations must be installed on high terrain inthe area surrounding the Four Corners Plant. These will supplement monitoring stations already operating near the plant.

Ifmonitoring stations record.

violations of clean air standards, the EIB may raise the control per-centage in the regulation to cover additional removal up to V9percent.

APS has begun preliminary design work on the emission con-trol system to meet the agreed-upon air quality emission regulation.

Clean air standards set 10

Construction continues on the 3,810,000-kilowatt Palo Verde Nuclear Generating Station, 50 miles west ofPhoenix. Byyear end, Unit 1 was 21.9 percent complete and Unit 2 had reached 5.1 percent.

Construction on the third PVNGS unit began in December, 1977.

Moor pieces ofgenerating equipment willarrive at the plant site this year. Me]or components of the steam system fabricated in Tennessee willbe shipped by barge down the Ohio and Mississippi Rivers, through the Panama Canal, and up the Gulfof California to Puerto Penasco, Sonora, Mexico.

The heavy equipment then willbe trucked the final 225 miles to the nuclear plant site.

APS is project manager for the 82.8 billionPVNGS project. Other participants are El Paso Electric Company, Public Service Company of New Mexico, Salt River Project, and Southern California Edison Company.

On March 2, 1978 APS and 10 other western energy suppliers fHed an application with the U.S. Nuclear Regulatory Com-mission (NRC) for construction permits for two additional gener-ating units at the Palo Verde site.

The Qling was made in accordaxlce with the NRC's replication policy, which would result in significant savings to our customers as design, siting, and regulatory costs are reduced.

Additional savings for electric customers would accrue over the operational lifetime of the new units from savings in nuclear fuel costs as compared with fossil-fueled units.

Utilities announcing their intention to participate in the replication and feasibilityactivities related to the new units along with APS are Southern California Edison Company, the Los Angeles Depart ment ofWater P Power, San Diego Gas P Electric Company, El Paso Electric Company, Nevada Power Company, and five California municipalities: Anaheim, Burbank, Glendale, Pasadena and Riverside.

Steel rises from the desert flooras Arizona's first nuclear generating plant takes shape some 50 miles west of Phoenix.

Construction in h.i h.

ear at Palo V'erd.e for first nuclear Kilowatt in '83 Ch,olla S gets EPA go-ahead.

but neer lair SXfuture siting yroblexns The Environmental Protection Agency granted approval in February 1978 forconstruction of the 350,000-kw Unit 5 at the Cholla Power Plant.

An important addition to the company's generation resources, Cholla 5willprovide electric energy vital to meeting customers'eeds in the mid-1980s.

EPA. deterxnined that the new unit would meet emission limits which are representative of the "best avaQable control technology,"

and wQ1 otherwise meet stringent air~uality regulations, many only recently becoming law with passage in 1977 of amendments to the 1970 Clean AirAct.

The amendments willhave a moor economic impact on con-sumers as well as on the nation's utilities and industries whose future construction ofmy(or facilities could affect air quality.

For APS, the review and approval process required by the new laws could add at least two years to the lead time for building new generating units. In addition, the strict amendments also require use of the most advanced tech-nology to measure and control emissions.

At the locations ofcoal-Qred units now in operation or under construction, and at the logical locations offuture units, the rela-tively high quality ofthe air and proximityto large national parks, monuments, or wilderness areas as well as Indian reservations, will expose the company to particularly burdensome control standards.

RFSRARCH Id.ealine yroves th,ink-ing Xlays off Whether it's finding ways to cut downtime on power plant boQers or discovering quicker, cheaper methods ofpulling and replacing old utilitypoles, APS employees have contributed some remarkably valuable ideas.

n r

Journeymen Electricians Harry Wilson and Clem Arnold shared an award of more than $2400 when their transformer repair cradle design was accepted. It' expected to save company and customers about S97,000 a year in capital investment and man hours. Electric Operations Vice Pres. I@man Mundth watches the inventors put their cradle to work.

Employee ingenuity is paying offhandsomely in cash awards for ideas that are adopted. It's paying oifeven more for the compaily and its customers who willreap the benefits offirstyear savings of more than 81.3 mQlion in man-hours, materials, and fuel from employee suggestions put into effect through the Idealine produc-tivityincentive program, launched about two years ago. The savings already derived wQ1 accumulate from year to year and willincrease as new productivity improvement ideas are adopted.

The ratio of the suggestion program's cost to the resulting improvements brought APS a first place award for 1976 results from the National Association of Suggestion Systems.

The world's largest solar cell power plant willbe builtat Sky Harbor International Airport,the result ofajoint proposal to the Depart ment ofEnergy, filedbyAPS, Motorola and the Arizona Solar Energy Research Co~sion.

The project received federal approval early in March, 1978.

With some funding from DOE, APS willbuild, manage and operate the 500-kw experimental plant while Motorola willdesign and supply solar electric generating equip-ment. Arizona's Solar Energy Research Commission willspend

$100,000 for design and opera-tion, with the City of Phoenix providing the site.

Operation is scheduled for mid-1981.

The system, which willconvert sunlight directly to electricity, will have an annual energy output potential of two millionkwh-enough to supply the electricity needs of more than 200 average-size homes in our service area.

A second medor solar research project involves studying how an advanced solar thermal power plant might be integrated into a utilitysystem. APS was awarded a contract late in 1977 by Martin Marietta Aerospace of Denver to assist with design speciQcations and economic evaluations of the proposed plant.

Martin Marietta's design will use molten salt to transfer heat from the plant's solar receiver to its boiler, whichwillproduce steam for the plant's turbine. Molten salt also would store heat and extend operation of the 100,000-kw plant beyond daylight hours.

The APS-Martin Marietta study is one offour solar thermal design projects now being sponsored by the Department ofEnergy. DOE is expected to choose at least one, for t

/ rr A proposed APS photovoltaic solar cell energy plant at Sky Harbor International Airportin Phoenix would use 20,000 of these Motorola Meinel opticai modules to convert sunlight directly into electricity.

construction of a demonstration plant in the Southwest. Arizona is a possible site.

In addition, during 1977, APS installed monitoring stations in GQa Bend and downtown Phoenix as part of a solar radiation stu+

sponsored by Western Energy Supply and Transmission Associ-ates, ofwhich APS is a member.

Instruments installed at 40 loca.

tions measure solar radiation to determine where the sun shines brightest and longest. Data will assist development ofsolar electric power generation, residential and commercial solar heating and cooling systems.

APS willalso continue its sup-port of research carried on by the Electric Power Research Institute (EPRI), as well as its stu+ ofitems such as coal gasification, Quidized-bed combustion, and geothermal energy sources.

yut th,e s'lm, to M'or% for fu e customers 12

LOAD To

h. test lies ahead. to slmye ye customers seen iny ersh.iy roles Construction schedules, financing plans, rates and to a growing extent earnings depend on the shape of the energy load on a utility's system as much or more as they do on the amount ofenergy generated. The practice of shaping the energy load is called load management.

The first goal of effective load management is to Qatten peak demands on the company's gener-ating system, to reduce the need for short term power generation by high-cost oil and diesel-fired plants.

Equal important are efforts to help customers trim energy waste, and to increase energy consump-tion during off-peak hours in order to improve the generation load factor, to make the most of more economical generating sources GIld fuels.

APS launched an intensified load management program in 1977, tailored specifically to Arizona's unique peak situation. In the state's population centers, air-conditioners draw millions of kilo-watt hours to cool homes, offices, and plants, peaking during hot summer afternoons in July and August when temperatures soar above 100 degrees and frequently stay in the 90s through the night.

With the state bracing itselffor a projected 82 percent population gain in the coming two decades (from 2.2 millionin 1975 to 4 millionby the year 2000, accord-ing to the state's Department of Economic Security), it is vital that the company's load management programs produce significant results.

Those results are already becoming evident. In 1977, APS Long Range Forecast of Peak Load and. Electric Resources 5,353 (megawatts) 5,000 4,000 3,000 4,74$

258 (without load management) w,g Mlitt 4,168~

~.. "

4 488

.r...'""

3,58M,o" J,,W 3,469

)load management resources at time of peak

? 873I (includes purchased power)~

2,000 1,310 2,045 1)659 1,000 900 peak load historical forecast 1967 1972 1977 1982 1987 APS has been able to cut planned construction expenditures through l987by an estimated 8l billion.Load management efforts willcontribute an estimated 6366millionofthe total.

reduced its peak load by 15.6 mega-in part, attributable to customer-watts, and an additional reduction initiated conservation efforts, the of 43.7 megawatts is projected for company's information programs 1978. Though the reductions are, have had measurable impact.

13

CATINGTHE MESSAGE Sh.ifting th.e energy load.

Another device, called "Hot.

Tap," uses expelled heat from air-conditioning units to heat house-hold water. APS willmarket the unit in 1978.

R Once customers understand the concept ofload management and its beneficial financial effects, they deserve concrete answers about how to shiit their energy demands.

The APS Answers program launched in 1977 provided a blue-print. Informative kits distributed to customers on request explain load management goals and offer examples ofways to cut energy waste in the home.

The Professional Home Energy Analysis helps homeowners cut energy losses and become aware of how to make the most efficient use of energy. At customers'equests, their homes are professionally inspected by APS specialists for potential energy inefficiency (attic insulation, window shading, etc.),

and customers are given suggested remedies, improvement cost and savings payback estimates.

Load shaping devices being investigated or promoted by the company include control devices, wired into a home's electrical system, which program appliance use to avoid peak hours.

APS tested radio remote control cut ops on air-conditioning com-pressors of customer volunteers in 1977. Load could thus be reduced without noticeable reduction of customer comfort. Response to the test was positive.

Helping customers find and correct energy wasting conditions in their homes is a part of the company's program to cut peaks and shape the energy load.

XiTewbill cletails energy costs In December, customers began receiving a newly-designed bill that gives detaQed information about energy use and where their costs originate. The new bill has been well received and, though itis more informative, it costs less to produce.

SyeaErers Bureau:

face-to-face COXHDIBXX11-cation Employees are encouraged to increase their knowledge and involvement in public communication.

Specially trained employee volunteers comprise the com-pany's Speakers Bureau. In 1978 the bureau willtravel system-wide, criss-crossing the company's service territory to share knowl-edge about everything fromnuclear and solar energy to wise energy management.

branch.ises ayyroved.

By wide margins, voters in Casa Grande, Chandler, Eloy, Gilbert, and Page approved agreements renewing 25-year electric service franchises for APS.

14

260 Income per capita (Maricopa County)~g 220 180 140 consumer price index

~0

~ ~

100

+ ~ ~ ~ ~ ~ eo ~ o ~ ~ ~ +04 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ y ~

~ ~ ~ ~ ~ ~

+ ~ ~

~ ~ ~ ~ ~ ~ ~ +

cost of residential kwh

~t 60 1960 1965 1970 1975 1977 Radio Energy Fo nxstomers taDt, APS listens APS President Keith Turley fielded customers'uestions about the energy situation ina series ofhour-long Radio Energy Forums that began in mid-February.

The forums helped identify moor energy concerns and pro-vided a cataiyst for launching comprehensive programs tailored especiaHy for APS customers, such as APS Answers and the Profes-sional Home Energy Analysis.

OyenLine laixn.ched.

A. group of employee volunteers now serve as two-way communi-cators. Nearly 70 Communication Aides form the backbone of a new OpenLine program. Aides help local

'anagers get information to employees; they help to educate employees on APS'verall goals; they help bring employee opinion back to management. Aides intro-duced and explained the company's marketing program to employees in 1977 and administered a com-panywide survey designed. to measure the pulse of employees, their view of the company, and its relationship with the public.

Cost ofAverage Residential Km'.Comyared.

to Xncome yer Capita (Maricoya County) and. Coxmmner Peices 300 index 1960 = 100 obtains ad.ditional gas for industrial customers To help Arizona industrial employers avoid layoffs andproduc-tion losses, APS bought temporary emergency natural gas on a "best efforts available" basis from a Texas pipeline company during the 1976-1977 winter. Severe cold weather in gas fields as well as in the South and East prevented delivery ofall the gas APS needed in early 1977. But the gas actually received, coupled withan unusually warm heating season, made less curtailment necessary than had been projected.

APS made additional emer-gency gas purchases for the 1977-1978 winter, though some curtailment was anticipated despite the added supply.

Natural gas sales were 463.6 milliontherms, down 5.6 percent from 1976, but gas revenues rose 16.4 percent to 896.4 million.An a4iustment clause covering increased gas costs to APS'and rite increases contributed to the higher revenues.

Due to a moratorium on new gas hook-ups, only 684 gas cus-tomers were added in 1977. Most additions were moMe homes, on which connections were allowed through May.

The company is searching for additional permanent supple-mental gas supplies to augment

, declining supplies from our tradi-..

""tional source El Paso Natur'al'.;";

-;Gas Company. The company, also is negotiating agreements to tx'ans-port supplemental gas.

Ifsuccessful, the company hopes to retain its present gas market for better utilization of existing gas plant and to prevent

,.erosion ofits gas business.

18

Bilby Schwada Woods Bilbyelected. board. c Eller to h,ead. executive comra~ttee; Woods and. Schvrada join'board.;

Toler becomes treasurer Flagstaff businessman Ralph M.

Bilbywas elected board chairman at the October meeting. Bilby, member of the board for 19 years, succeeds WilliamP. ReiHy, who announced his retirement to accept a post withArizona Governor Wesley Bolin. ReQly started with APS in 1948, and was scheduled to step down in AprQ, 1978 after reaching the board's mandatory retirement age.

Succeeding Bilbyas chairman of the executive committee is Earl Eller, Phoenix broadcast and outdoor advertising executive, and a director of the company five years.

Elected to the board during 1977 were Mrs. WQma Schwada, civic leader and homemaker; and Thomas G. Woods, Jr., APS execu-tive vice president, Operations.

In a management

change, George H. 'Ibler, previously manager of Finance, was elected treasurer.

Milestones Roilly William P. ReiHy, chairman of the board since 1974, retired from utilityservice in 1977 to become administrative assistant to the Governor ofArizona.

A native of New Jersey, ReiHy came to Arizona in 1948 as president and general manager of the Arizona Power Company in Prescott, following 18 years with Ebasco Services, Inc. With the formation ofAPS in 1963 he was named a vice president, then moved up to become president in 1969, CEO in 1970. Three years later he was elected vice chairman of the board, then chairman in 1974.

ReiHy's present post in the governor's oQice is a logical extension ofhis lifelong interest in and concern for his fellow man; it is an enthusiasm that has led him into innumerable areas of service to the community.

16

Xngenuity mmrlm safety yrograxns Employees in System Electric Equipment, a me(or operating department, reached a recor d one millionmanhours without a dis-abling iqjury. At the Cholla Plant switchyard, an innovative "blue hat" safety program helped crews there achieve a record two years without a disabling accident.

Switchyard employees take turns wearing an identifying blue safety hard hat. On their two-month blue-hat assignment, they tour the switchyard twice daily looking for safety hazards or rule violations.

Corrections can be ordered on the spot by the blue-hat employee whose interest is renewed in the company's safety rules.

The number of disabling iqjuries for 1977 was 4.8 per mil-lion manhours worked compared with the latest available national average of 8.6 for combination gas and electric utilities. However, the number of disabling injuries was up over the record low 3.4 per millionmanhours worked, a mark set in 1976, the best year for safety performance in the company's history.

Ahighlight of public safety efforts was an antenna safety program to inform Mountain Division customers about the dangers of erecting antenna masts where they could come in contact with power lines. Gas safety pro-grams reached customers system-wide as well as Arizona school children.

s, Vivid.ends, Reinvested. E s Per Average Share of Common StocR,

$3.02 earnings~

Average Interest Rates on Outstanding Securities KP 7.5%

0 average interest rate on first mortgage bonds a

average preferred dividend rate 5.4%.

5 2o/

4.8%

4.4

$1.50 reinvested earnings

$1.53 4

dividends paid 1967 1969 1971 1973 1975 1977 1967 1972 1977 17

Additional legal mmtters The previously mentioned Clean AirActAmendments of 1977 may require the addition ofcostly equip-ment to most generating units now in operation by the company, and the design of additional equipment for one or more ofthe units now under construction at the Cholla Plant. The regulations relating to new-source emissions and ambient air quality wiQ be much more onerous than the present ones, additional pollutants willbe cov-ered for the first time, and strict treatment willbe accorded air pollutants considered to be hazard-ous. Itappears to the company that its control ofthe emission ofnitro-gen oxides from new plants will require expenditures comparable to those made for SOa control.

Even before enactment of the 19VVAmendments and the recent New Mexico ruling with respect to SOa removal, the company's opera.

tions have been subject to stringent environmental protection mea sures. It has been necessazy to obtain variance permits or stipula tions for certain aspects of opera-tions at the Four Corners Plant; certain state permits, relating to the emission of nitrogen oxides at the plant, have expired or are about to, and the company is currently seeking extensions; and others, relating to surface and ground water standards applicable to the plant, contain various dates and schedules which now appear (though not beyond question) to be attainable. Problems ofinterpret-ing and complyingwiththe various measures, and the evolution ofnew measures, require continuing involvement ofthe company inpro-ceedings before state legislatures, federal and state regulatory agencies and the courts.

The Navajo Tribal Council has recently enacted two resolutions, one purporting to impose as of January 1, 1978 a "possessozy interest tax" on the value of leases granted by the Tribe, and the other (to be effective followingaQirma-tive action by the Secretary of the Interior) establishing a sulfur emission permit system and pur-porting to require payment of a "sulfur emission fee." These actions affect both the Four Corners and Navajo Plants, and are viewed by the company as contrary to provi-sions in the leases from the Navejo Tribe for those plants. The actions also raise questions concerning jurisdiction of the Tribe over the company and its operations. The company plans to seek an i@junc-tion against implementation ofthe possessory interest tax and, ifit becomes effective, the emission fee resolution.

Imposition by the Navejo Tribe of the possessory interest tax, or a "business activity tax" also reported to be under consideration by the Tribal Council, against the company's coal suppliers could increase its fuel costs. In addition, the Tribe is demanding an increase in royalties on coal mined on the reservation. The company expects to pass through to its customers, under its rate adjustment clauses, any resulting increase in fuel expense. However, the pass-through of certain of these increases could be contested and possibly be denied, particularly in the case of increased Tribal royalties.

The State of New Mexico enacted an "electrical generation tax," effective in 1975, on all electricity generated inNew Mexico and consumed outside the state.

The company brought an action to have the tax set aside. The trial court's dismissal of the action was appealed bythe comparjy to the New Mexico Supreme Court, where the case has been argued and is await-ing a decision.

Decreases ordered by the Arizona State Hoard ofTax Appeals inthe 1974 and 1977 assessed valuations ofthe company's properties inArizona, which resulted in Arizona property tax reductions of S2.2 millionin 1974 and $1.7 millionin 1977, were appealed by the Arizona Depart.

ment of Revenue. The 1974 reduc-tion is now pending before the Arizona Supreme Court and the 197V reduction before the Superior Court of Maricopa County.

Messrs. Snell P WQmer, counsel to the company, believe that the company should ulti-mately prevail in each ofthese generating and property tax actions.

18

BQh.'RD OF DIRECTORS DIRECTORS EMERXTI

'Ralph M.Bilby,60, Chairman ofthe Board, Flagstaff, Arizona

'KarlEller, 49, President, Combined Communications Corporation (broadcasting and outdoor advertising),

Phoenix, Arizona

'Del W.Fisher, 67, Chairman ofthe Board Fisher Contracting Co., Phoenix, Arizona

'WilliamT. Garland, 61, Chairman ofthe Board, Garland-Rhuart Development Corporation (land development),

Sedona, Arizona Leon Levy, 64, Honorary Chairman ofthe Board, First National Bank ofArizona Tucson, Arizona

'VictorK.Lytle, 66, Chartered LifeUnder-writer, Prescott, Arizona Marvtn R. Morrison, S4, Farmer and Cattle Feeder, Morrison Brothers Ranch, Higley,Arizona James B. Rolle, Jr., 69, Member ofthe Law FirmofRolle, Jones, Benton P Cole, Yuma, Arizona Henry B. Sargent, Jr., 43, Financial Vice President ofthe Company, Phoenix, Arizona WQma W. Schwada, Sl, homemaker, civicleader, Tempe, Arizona Richard, Snelly 47) Member ofSnell P Wtimer (general counsel to the Company), Phoenix, Arizona

'Donald K.Soldwedel, 83, President, Western Newspapers, Inc., Prescott, Arizona; Publisher and General Manager, Yuma DallySun, Yuma Yuma, Arizona

'Maurice R. Tanner, 86, Chairman ofthe Board, President and ChiefExecutive Officer,The Tanner Companies (construction and materials supply),

Phoenix, Arizona

'KeithL.Turley, 84, President and Chief Executive OQicer ofthe Company, Phoenix, Arizona tDouglas J. Wall, Sl, Member ofthe Law Firm ofMangum, Wall, Stoops snd Warden, Flagstaff, Arizona tMorrisonF. Warren, 84, Director of Experimental Programs, College of Education, Arizona State University, Tempe, Arizona tK.0.Wtlbanks, 86, President, First National Bank ofFarmington, Farmington, New Mexico tBen F. Williams,Jr., 48, Attorney at Law, Douglas, Arizona Thomas G. Woods, Jr., 81, Executive Vice President ofthe Company, Phoenix, Arizona E. Ray Cowden, President, Cowden Livestock Company, Phoenix, Arizona W.C. Quebedeaux, President, Quebedeaux Investment Company (personal investments), Phoenix, Arizona

'Member ofExecutive Committee tMember ofAuditBerlew Committee OFFXGERS Ralph, M. Bilby, 60, Chairman ofthe Board D.L.Broussard, 87, Vice President, Research and Development Karl Eller, 49, Chairman ofthe Executive Committee Gerald J. Griffin,87, Assistant Secretary Howard, F. Hersey, 49, Vice President, Gas Operations Russell D. Hulse, 80, Vice President, Resources Planning Jerry P. Kuman, 47, Vice President, Customer Services Charles D. Jarman, 42, Vice President, Engineering Services WilliamF. Lerch, 42, Vice President, Management Services Lyman K. Mundth, 61, Vice President, Electric Operations Wm.T. Quiasler, 83, Secretary and Assistant Treasurer Henry B. Sargent, Jr., 43, Financial Vice President George K. Toler, 39, Treasurer Keith L, Turley, 84, President and Chief Executive OtIlcer Edwin E. Van Brunt, Jr., 46, Vice President, Construction Projects Thomas G. Woodsf Jr f Slf Executive Vice President, Operations DIVISIONMANAGERS A. G. Anderson, 46, Western Division, Goodyear Glen D. Daly, 49, Cochise Division, Douglas Jack Duffy, 39, Navajo Division, Flagstaff Dave Ellis, 39, Metropolitan Division, Phoenix'ames C. Lauchner, S2, Pinal Division, Casa Grande Guy W. Lunt, 44, Mountain Division, Globe Don Roberts, 87, Yuma Division, Yuma Jesse F. Thomas, SS, Yavapai Division, Prescott (Numerals are ages at annual meeting date, AprilZO, l978)

LXMES OF SUSXMZSS Operating revenues, and operating income before income taxes, attributable to electric and gas operations of the company during the five years ended December 31, 1977 were as follows:

0 erat Revenues (MillionsofDollars)

Electric Gas Operating Income Before Income Taxes (MillionsofDollars)

Electric Gas Y'ear End.ed.

December 31, Amount 19 VV N97.3 1976 312.0 1975 281.1 1974 213.3 19 VS 171.0 Percent Amount 80.5 896.4 V9.0 82.8 78.1 V8.7 78.0 60.3 76.0 54.0 19.5 8109.2 21.0 78.8 21.9 V0.6 22.0 49.6 24.0 47.3 91.3

$10.4 8.7 88.0 10.7 12.0 87.2 10.4 12.8 89.2 6.0 10.8 84.2 8.9 15.8 Percent Amount Percent Amount Percent OPEKATXNG REVENUES Electric:

Residential Commercial Industrial Irrigation Other

'Ibtal Transmission for others Miscellaneous services Total Electric Operating Revenue Gas:

Residential Commercial Industrial Irrigation Other Miscellaneous services Total Gas Operating Revenue Total Operating Revenues 397@64 311,969 27.3 48,351 20,779 13,219 12,359 860 852 42,922 12.6 lV,156 21.1 10,130 30.5 10,979 12.6 830 3.6 V93 7.4 96,420 8493,684 82,810 16.4 8394,779 25.1

% Increase 1977 1976 Decrease (Thousands ofDollars)

S135@74 8106,334 27.2 135,585 108,506 25.0 61,617 47,055 30.9 13,512 9,799 37 9 39,657 28,565 38.8 385,645 SOO @59 28.4 9,328 9,591 (2.V) 2491 2,119 8.1

STATZMEMTS OF XICOME For the Years Ended December 31, 1977 and 1976 and Comparison Arizona Public Service Company Zinancial Statements for 197V 19VV 1976 Increase (Decrease)

(Thousands ofDollars)

Operating Revenues (Note 6):

Electric Gas Total Operating Expenses:

Operating and maintenance expenses:

Fuel for electric generation Purchased gas Purchased power and interchange net Other production expenses Transmission and distribution Maintenance Other operating expenses Total 8

397,264 96 420 493 684 85,575 53,232 32,431 9,434 12,224 36,660 40,025 269,581 8

311,969 82 810 394 VV9 56,362 41,474 35,249 7 377 11,782 31,129 32,127 215,500 8

85,295 13 610 98 905 29,213 11,758

( 2,818) 2,057 442 5,531 7 898 54,081 Depreciation and amortization Taxes other than income Income taxes (Note 3)

Total Operating Income 40,370 64,227 V,658 36,621 53,120 6,497 3,V49 11,107 1,161 111 848 83 041 28,807 381,836 311 V38 70 098 Other Income:

Allowance for funds used during construction:

Allfunds (through December 31, 1976)

Equity funds (from January 1, 1977)

Income taxes (Note 3)

Other net 15,891 (3V3)

(2,856) 21,478 4,943 (120)

(21,478) 15,891 (5,316)

(2,736) 12,662 Total Gross Income 124,510 Interest Deductions:

Interest on long-term debt 50,968 Interest on short-term borrowings 1,956 Amortization of debt discount, premium and expense 613 Allowance for borrowed funds used during construction credit

~13 038)

Total 40,499 Net Income 84,011 Preferred Dividend. Recpxirements

'14,628 Earnix@s for Common Stock 8

69 383 26,301 109,342 46,738 1,559 48,863 60,479 13,311 8

4V 168 13 639 15,168 4,230 397 13 038 23,532 1,317 8

22 215 22,9VO,V41 19,105,191 Average Common Shares Outstanding Per Share of Common Stock:

Earnings (based on average shares outstanding) 83.02,

~

82.47 Dividends declared and paid 81.53 81.39 3,865,550 8.55 8.14 See Notes to Financial Statements, including Note 1 as to significant accounting policies.

21

CE SHEETS December 31, 1977 and 1976 1977 1976 UtilityPlant:

Plant in service Electric Gas Common, used in all services Total Less accumulated depreciation and amortization Plant in service depreciated Construction work in progress (Note 2)

Plant held for future use Utilityplant depreciated Investments and. Other Assets:

Investments in and receivables from subsidiaries Other investments and. notes receivable Other physical property (less accumulated depreciation: 1977 829,000; 1976 $24,000)

Total investments and other assets Current Assets:

Cash (Note 4)

Special deposits and working funds (Note 4)

Accounts receivable:

Service customers Miscellaneous Allowance for doubtful accounts Materials and supplies (at average cost)

Fuel (at average cost)

Prepayments and other Total current assets Deferred Debits:

Deferred interest Unamortized debt issue costs Other Total deferred debits Total (Thousands ofDollars)

M,099,932 123,407 42,868 1,266,207 341,834 924,3V3 619,147 3,966 1,54V,486 81,053,254 123 359 36,659 1,213,272 301,139 912,133 366,039 1,361 1,279,533 7,335 4,542 10,091 7,797 1,354 13,231 1,363 19,251 3,969 2,075 2,580 2,V16 36,V59 7,918 (1,293) 15,280 23,425 7,543 95,676 33,774 6,054 (1,236) 12,609 23,V97 7,902 88,196 4,486 5,472 6,820 16,V78 4,1V6 4,913 6,921 16,010 61 673, 171

$1,409,990 22

Liabilities 1977 1976 (Thousands ofDollars)

Capitalization:

Common stock Premiums and expenses Retained earnings Common stock equity Preferred stock Long-term debt, less current maturities Project financing (Note 2)

Total capitalization 8

66,441 326,V44 186,985 580,1VO 218,561 V01,917 53,617 1,554,265 8

56,250 256,091 152,069 464,410 168,561 673,639 1,306,610 Current Liabilities:

Current maturities oflong-term debt Accounts payable Advances from subsidiaries Accrued taxes Accrued interest Accrued dividends on preferred stock Customers'eposits, advances and other Total current liabilities 3,013 33,309 l.,100 28,966 10,063 1,109 10,949 552 47,410 2,194 39,739 11,106 1,456 7,544 110 001 88 509 Deferred, Credits and. Other:

Customers'dvances for construction Deferred income taxes accelerated depreciation and amortization Other Total deferred credits and other 5,733 1,000 2,172 8,905 5,488 973 1,410 V,871 Commitments ancl Contingencies (Note 6)

Total 81 573,171 81,409,990 See Notes to Financial Statements, including Note 1 as to significant accounting policies.

ST/hTEMEMTS OF C~hMGES XMFXXDGQ'CD'OSXTXOM For the Years Ended December 31, 1977 and 1976 1977 19V6 (Thousands ofDollars)

$536,718 Source of Funds:

Funds fr6m operations:

Net income S 84,011 Principal non-fund charges (credits) to income:

Depreciation and amortization 40,370 Equity in undistributed loss of unconsolidated subsidiaries 3,043 Deferred income taxes 27 Allowance for funds used during construction net oftax~t27,183)

Total funds from operations S100 288 Funds from external sources:

Common stock S 81,660 Preferred stock 49,425 Long-term debt 27,940 Project financing 53,617 Sale of investment 4,983 Total funds from external sources 217,625 Decrease in working capital*

16,473 Other items net 2,332 Total source offunds S 60,479 36,621 191 (210)

~21,478) 8 78603 64,243 81,001 145,244 22,740 S243,587 Application of Funds:

Plant additions and replacements, excluding allowance for funds used during construction capitalized Repayment of long-term debt Dividends on preferred and common stock Other items net Total application of funds Increase (Decrease) in Working Capital':

Cash Accounts receivable Materials, supplies and fuel Accounts payable and accrued expenses Customers'eposits, advances and other Other net Net decrease in working capital

'Excluding current maturities oflong-term debt.

$284,610 3,013 49,095

$336,718 S

1,389 4,792 2,299 (26,264) 3,405

~2,094)

~816,473)

$194,266 8,500 39,V21 1,100

$243,587

$ (15,591) 5,170 3,146 (9,686)

(7,V66) 1,987

~822 740)

SXATEMEMTS OF RETBZMZD For the Years Ended December 31, 1977 and 1976 1977 1976 (Thousands of Dollars)

$152,069

$131,311 84,011 60,479 236,080 191,790 Retained, earnings at beginning of year Add.Net income Total Deduct Dividends:

Preferred stock 14,628 13,311 Common stock 34,467 26,410 Total 49,095 39,721 Retainecl earnixgs at encl ofyear

$186,985

$152,069 See Notes to Financial Statements, including Note 1 as to significant accounting policies.

LONG-TERM DEBT December 31, 1977 and 1976 19VV 1976 (Thousands ofDollars) 8 2,500 4,000 5,000 V5,000 6,000 100,000 14,500 5,723 16,000 15,000 20,000 35,000 25,000 25,000 15,000 25,000 75,000 60,000 50,000 802 571,921 Unsecurecl Xfotes Payable:

Due September 1, 1979 (b) 50,000 50,000 Capitalized. Lease Obligation (cg..

54,218 Total Long-Term Debt.... 702,469 Less Current Maturities; 3~/8% series due December 1, 1977 Capitalized lease obligation....... ~559)

Total Long-Term Debt lass Current Maturities 9701 917 54,V31 676,652 (2,500)

~513 9673 639 First Mortgage-Bonds:

3'/8% series due December 1, 1977 3% series due AprQ 1, 1979.......8 4,000 2'/~% series due February 1, 1980 5,000 9.80% series due June 1, 1980....

V5,000 2~/s% series due December 1, 1980 6,000 9.50% series due February 15, 1982 100,000 3'k% series due February 1, 1983 14,600 3'/a% series due November 1, 1983 5,723 3'/4% series due March 1, 1984...

15,000 5'/8% series due October 1, 1987..

15,000 4.70% series due March 1, 1989...

20,000 4.80% series due November 1, 1991 35,000 4.45% series due June 1, 1992...

25,000 4.40% series due December 1, 1992 25,000 4.50% series due September 1, 1993 15,000 6.25% series due September 1, 1997 25,000 10.625% series due November 15, 2000.............

V5,000 7.45% series due March 15, 2002 60,000 6.20% series due April 1, 2004....

50,000 6.45% series due April 15, 2007...

43,000 Less securities held by trustee (a).

(14,039)

Unamortized discount and premium.

.~933)~

Total First Mortgage Bonds 598,251 (a) Representing pollution control funds deposited with a revenue bond trustee tobe disbursed as construction of the facilities being financed progresses.

(b) S30,000,000 bears interest at 114% ofprime rate plus 'k of leuc. S20,000,000 bears interest at a percentage of prime rate to September 1 in the year indicated as follows: 1978, 121%; 1979, 122%. The actual interest rate to final maturity ofthese loans is not to exceed 7'/a% per annum; payments in excess of this amount are carried as deferred interest.

(c) Hepresents the present value offuture lease payments (discounted at the interest rate of V.48%)

of 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 82,299,340 through June 1983 and then S2,581,850 through June 2001, and includes renewal and purchase options based on fair market value. This plant is included in plant in service at its original cost of 854,404,530; accumulated amortization at December 31, 1977 was 83,295,000.

Aggregate annual payments whichwillbe due on long-term debt and for sinldng fund requirements through 1982 are as follows: 1978, 8552,000; 1979, 854,594,000; 1980, 886,639,000; 1981, 83,688,000;

1982, 8103,740,000.

Other sinldng fund require-ments through 1982 for the outstanding First Mortgage Bonds (which may be met by property additions) willbe as follows: 1978, 82,702,230; 1979, 82,662,230; 1980 through 1982, 82,552,230. As allowed in the bond indentures, requirements ofthis type have in the past been satisQedby certification of property additions of 1-2/3 times the amount stated and the company expects to meet similar requirements in that manner in the future. For sinking fund payment requirements and redemptions at the option of the holders on cumulative preferred stock, see Capital Stock.

Substantially all utility plant, other than the combined cycle plant mentioned above and the construction work in progress for the Cholla Plant Unit 4 mentioned in Note 2, is subject to the lien of the First Mortgage Bonds. The indenture respecting the First Mortgage Bonds includes provisions which would restrict the payment ofdividends on Common Stock under certain conditions which did not exist at December 31, 1977.

On January 18, 1978 the company issued its First Mortgage Bond (6% series, due January 15, 2008) under an agreement associated with the sale of 834,000,000 pollution control bonds. Approxi-mately 817,000,000 of the proceeds were deposited with the trustee to be disbursed as construction of the facilities being financed progresses.

CARPI'TOCK December 31, 1977 and 197B CLASS Number of Shares Par V'alue Call Price Per Share Authorized Common Stock (ag.... 50 000 000 Cumulative Preferred.

Stock:

81.10 preferred...........

82.50 preferred...........

82.36 preferred...........

84.35 preferred...........

Serial preferred:..........

82.40 series A..........

82.625 series C.........

82.275 series D.........

83.25 series E..........

Serial preferred:.......... 2,000,000 88.50 series F..........

88.50 series G..........

810 series H...........

S10.70 series I.........

88.32 series J..........

Serial preferred.......... 3,000 000 155,945 103,254 40,000 V5,000 155,945 103,254 40,000 75,000 25.00 S

3,898 8

3,898 8 27.50 50.00 5,163 5,163 51.00 50.00 2,000 2,000 51.00 100.00 V,500 7,500 102.00 240,000 240,000 200,000 320,000 240,000 240,000 200,000 320,000 50.00 12,000 12,000 50.00 12,000 12,000 50.00 10,000 10,000 50.00 16,000 16,000 50.50 51.00 (b)

(c) 210,000 90,000 400,000 300,000 500,000 210,000 90,000 400,000 300,000 100.00 100.00 100.00 100.00 100.00 25.00 21,000 9,000 40,000 30,000 50,000 21,000 9,000 40,000 30,000 (d)

(d)

(e)

(f)

(g)

Per Outstanding (Before Outstanding Share (Thousands ofDollars)

Adding Accumulated 19VV 1976 26 5VB428 22 500 000 8

2.50 S 66 441 8 56 50 6,535,000 2,874,199 ',374,199 8218,561 8168,561 (a) On AprQ 21, 1977, the stockholders of the company approved an amendment to its Articles of Incorporation increasing its authorized Common Stock from 30,000,000 to 50,000,000 shares.

(b) From 851.00 through February 29, 1980; then to 850.50 thereafter.

(c) From 852.50 through February 28, 1978; then to S51.50 through February 28, 1983; then to S51.00 thereafter.

(d) Redeemable at par after May 30, 1979 (series F) or May 30, 1982 (series G) at the option ofeither the company or the holders. Both series are also subject to redemption at par at the demand of the holders prior to the foregoing dates under certain conditions, which did not exist at December 31, 1977.

Sinking fund provisions applicable to the two series require the retirement of a total of 12,000 shares at par semiannually commencing June 1, 1979 (representing annual payments of 82,400,000).

(e) Not redeemable prior to September 1, 1984 through certain refunding operations; otherwise at 8108.95 through September 1, 1978 to par after September 1, 2002. Applicable sinking fund provisions require the retirement of16,000 shares at par annually commencing September 1, 19V9 (representing annual payments of 81,600,000).

(f) Not redeemable prior to December 1, 1985 through certain refunding operations; otherwise at 8110.70 through November 30; 1980 to $101.00 after November 30, 19/0. Applicable sinking fund provisions require the retirement of 15,000 shares at par annually commencing December 1, 1981 (representing annual payments of 81,500,000). The company may, but is not required to, redeem an additional 15,000 shares at par on December 1 inany year beginning in 1981.

(g) Not redeemable prior to September 1, 1982 through certain refunding operations; otherwise at 8108.32 through August 31, 1982 to 8101.00 after August 31, 1992.

In the opinion of counsel, amounts paid in any redemption of capital stock funded other than with the proceeds of a concurrent new issue of capital stock would reduce the amount of retained earnings available under Arizona law for the payment of dividends. Because of the option of the holders thereof to require redemption of the series F and G shares as indicated in note (d) above, the company considers that a portion of its retained earnings which is equal to the aggregate par value of such series (830,000,000) is unavailable for dividend payments.

Capital stock sales and changes inpremiums and expenses during the years ended December 31, 1977 and 1976 were as follows (dollars in thousands):

Description Number of Shares Par Value Amount Common Stoic Cumulative Premiums Preferred Stock 811C1 Number Par Value (Expenses) ofShares Amount Net Balance, December 31, 19VS Common Stock Balance, December 31, 1976 Common Stock Cumulative Preferred Stock, 88.32 Series J Balance, December 31, 1977

.. 19,000,000 3,500,000

.. 22,500,000 4,076,428

.. 26,576,428 847,500 8,V50 56,250 10,191 2,374,199 8168,561 8200,724 55,367 2,374,199 168,561 256,091 71,338 500,000 50,000 685 866,441 2,874,199 4218,561 8326,V44 NOTES TO PXXDGII'C&kLS55LTEMEMTS

1. Summary of Significant Accounting Policies (a) System ofaccounts The accounting records of the company are maintained in accordance with the uniform system of accounts prescribed by the Federal Energy Regulatory Commission (FERC) and used by the Arizona Corporation Commission (ACC).

(b) Plant and depreciation Property is stated at original cost as deQned for regulatory purposes.

The cost ofadditions toutilityplantandreplacements of retirement units is capitalized. Replacements of minor items of property are charged to expense as incurred. In addition to direct costs, capitalized items include the present value ofcertain future lease pay-ments (see Long-Term Debt), research and develop-ment expenditures pertaining to construction projects, indirect charges for engineering, super-vision, transportation, and similar costs, and an allowance forfunds used during construction(see (c) below). Costs ofdepreciable units ofplant retired are eliminated from plant accounts and such costs plus removal expense less salvage are charged to accumu-lated depreciation. Contzibutions in aid of construc-tion are credited to plant cost.

Depreciation is provided on a straight line basis at rates authorized by the ACC which are generally 2.85% to 4.16% for electric plant, 3.25% for gas plant, end 2.85% to 15.50% for common plant.

(c) Allowance for funds used during constzuc-tionIn accordance with the regulatory accounting practice prescribed by FERC and the ACC; the com-pany capitalizes an allowance for the cost of funds used to finance its constzuction program (AFC). AFC, which does not represent current cash e~fs, is defined as the net cost during the period ofconstruc-

'ion of borrowed funds used for construction, and a reasonable rate on funds obtained fromother sources.

AFC has been calculated using a composite rate of8%

in 1976 and 1977. This amount is capitalized as a part ofthe cost ofutilityplant, resulting (i)through December 31, 1976, ina corresponding credit to other income for the full amount of AFC, and (ii) from January 1, 1977, in a credit to other income for the portion ofAFCattributable to equity funds and a credit to interest deductions for the portion of AFC attributable to borrowed funds. This change in the method of reporting AFC and the rate used by the compKoy conform to an order issued by FERC in February 197V.

(d) Subsidiaries The company's investments in subsidiaries are stated at equity, less a provision to reQect such investments at estimated recoverable values. The subsidiaries are not consolidated inasmuch as they are not significant inrelation tothe financial statements of the company.

(e) Income taxes The company uses accelerated depreciation methods for income tax purposes. As prescribed by the ACC for rate making and accounting purposes, the company began providing deferred income taxes for the difference between accelerated and straight line tax depreciation of property, placed in service after January 1, 1977. Previously the difference was included currently inincome. The effect ofthis change is not material. Income tax reductions arising from timing differences respecting certain other items of income and expense reported dif'ferentiy for income tax and financial reporting purposes and from allowable investment tax credits are reflected currently in income, in accordance with orders or practices of the ACC for rate making purposes.

Income tax reductions relating to the Qve-year amortization ofemergency facilitiesinpreviousyears were deferred, with the deferred amount being restored to income over a twenty-year period.

Income taxes included in operating expenses are reported before tax benefits (computed at the statutory rate before January 1, 1977, and thereafter at the effective rate for the year) due to interest expense applicable to construction workinprogress.

Before January 1, 1977, such beneQts are shown in Other Income Income taxes, and thereafter are, in effect, included in the credit to interest deductions for the AFC attributable to borrowed funds.

(f) Employees'ension plan The company's policy is to accrue and fund the current and prior service costs of its pension plan. Prior service costs are amortized over a fifteen-year period.

(g) Revenues and recognition ofcertain costs Timing differences resulting from electric fuel adjustment clauses are reflected by deferring purchased power and fuel costs, or revenues, to be matched against revenues or costs in subsequent periods. The estimated cost for gas purchased from the company's supplier, but not billed to gas customers, is also deferred to be matched against revenues recorded in the subsequent period. Under its approved rate schedules, the company may pass on to its customer increases and decreases in specified.

taxes, purchased power and fuel costs, and resale gas costs.

(h) Research and development costs The company expenses research and development costs on a current basis, except that those costs which may result in utility plant are deferred for subsequent inclusion in plant or to be written offifthe applicable project is abandoned.

2. Project Financing On July 29, 1977 the company sold the construction work in progress forUnit4 ofits Cholla Plant to an unrelated corporation ("Owner"), which appointed the company as its agent to complete construction of the unit and agreed to resell itto the company. The company is unconditionally obligated to repurchase the unit at or about the time of its completion (presently scheduled for May 31, 1980),

and in no event later than July 31, 1981, for an amount equal to the owner's cost of acquiring, completing and Qnancing the unit.

Financing is to be provided to the owner bybank loans in two categories, the Qrst consisting ofup to 8218,500,000 to be disbursed as construction progresses, to bear interest at 115% ofprime and to become due on the date the company is obligated to repurchase the unit; such loans can then be refinanced by the compMiy (with interest thereon after a certain date increasing by '/a%) for payment in installments extending into 1984. Loans in the other category aggregate 841,500,000 of pollution control financing provided through a governmental authority to the owner (with funds not yet required for the pollution control facilities included in Unit 4 being held in an escrow for temporary investment, 838,581,000 being so held at December 31, 19VV);

these loans bear interest at V0% ofprime and are due in 1987, but in effect willbecome due when the company is obligated to repurchase Unit 4 unless assumed by the company at that time (which assumption willrequire the issuance of the company's first mortgage bonds in an amount equal to the balance of such pollution control loans).

So long as the owner remains the principal obligor thereon, both categories of loans willbe secured by Unit 4 and the company's repurchase obligation. The two categories are subject in varying degrees to cessation in funding or to acceleration, and interest on the pollution control loans is subject to increase, under certain conditions which did not exist at December 31, 197V. Pursuant to the loan documents, increases in common stock dividends are subject to certain restrictions related to current year earnings; for the year ended December 31, 1977, up to 858,976,000 could have been paid in common stock dividends compared to the 834,467,000 actually paid.

The company will continue to include costs of construction of Unit 4 in construction work in progress on its balance sheet. Net outstanding balances of the aforementioned bank loans, together with capitalized interest (7.93% for the period ended December 31, 1977) and related fees thereon, will appear as a liability.In addition to the construction costs financed by the owner through December 31, 1977, the compMiy had incurred construction costs of approximately 814,000,000, for which reimbursement willbe requested from the owner.

3. Income Tax Expense Details of factors related to income taxes were as follows (see Note 1):

Year Ended December 31, 19VV 19V6 (Thousands of Dollars)

Federal and state income tax expense at statutory rates 845,746 831,435 Increases (reductions) in taxes resulting from:

Timing differences:

Tax over book depreci-ation not deferred.....

(4,681)

(5,901)

Allowance for funds used during construction capitalized............

(13,V65)

(10,884)

Sale of combined cycle plant.................

3,4V8 Other principally taxes, pensions and other items capitalized......

(2,035)

(5,758)

Other items...............

(30) 194 Investment oredtt.........~18,997

~10,800 Taxes currently payable.....

Deferred taxes included in expenses:

Deferred 237 Restored.............~210

~210 Total deferred.......

6,238 1,764 27 (210)

Total federal and state income taxes.........

8 6265 8 1,654 Federal and state income taxes included in:

Operating expenses.......

Other income.............

Allowance forborrowed funds used during construction credit.................

(1,766) 8 V,658 8 6,497 373 (4,943)

Total..

Taxes currently payable (refundable):

Federal State Total..

8 6265 8 1,554 8 2,216 8 (965) 4,022 2,V29 8 6,258 8 1764 Deferred taxes Federal State (122) 8 (201) 149 ~9 Totet....,...........

8 27

~$

210 The company has approximately 82,500,000 of unused investment tax credit which can be carried forward through 1984.

4. Short-Term Borrowings ancl Compensating Balances The company had 8107,000,000 ofbank lines of credit (all unused) as'of December 31, 1977 and 1976.

Average aggregate'short-term borrowings outstanding during 1977 and 1976 were 820,195,000 and 816,133,000, respectively; weighted daily average interest rates on such amounts were 6.59%

and 6.75%, respectively. The maximum amount of short-term borrowings outstanding at any month end was 861,000,000 in 1977 and 846,000,000 in 1976.

Compensating balances r~uired at banks, but which were not legally restricted, were generally 10% of the line plus 5% (10% in some instances) of borrowings. Substantially all cash shown in the balance sheet is considered compensating balances.

S. Pension Plan The comp~'s pension plan covers virtuallyall employees. Contributions to the plan were as follows:

1977, 87,042,000; 1976, 86,086,000. The liabilityfor unfunded prior service costs at July 1, 1977 was 81,846,000 which is expected to be completely fUnded by 1981.

6. Commitments and Contingencies The company's 1977 and 1976 income includes revenues of approximately 815,265,000 and 89,220,000, respectively, under a fuel adjustment clause and interim rate increase applicable to wholesale sales that may be refUndable depending on the outcome of pending FERC proceedings.

Total FERC revenues subject to refund at December 31, 1977, aggregated approximately 831,650,000.

The company is involved in certain other legal and environmental proceedings.

Based upon the opinion of its counsel, the company believes that the ultimate resolution ofthe above matters willnot have a material effect on the accompanying financial statements.

The company has significant purchase commitments in connection with its continuing construction program. The construction program is currently estimated at 8376,000,000 for 1978.

Annual rentals under non-capitalized, non-cancellable leases were not material.

Operating revenues......

Operating income before income taxes..........

Utilityplant.............

Accumulated depreciation and amortization......

Capital expenditures.....

(Thousands of Dollars)

S 397,264 8 96,420 109,154 1,753,809 10,352 135,511 292,969 282,625 48,865 1,985

7. Lines of Business Listed below is selected information relating to the company's electric and gas operations as of December 31, 197V and for the year then ended:

Electric Gas

8. Replacement Cost Data (Unaudited)

The impact of the rate of inQation experienced in recent years and other factors have resulted in replacement costs of productive capacity that are significantly greater than the historical costs ofsuch assets reported in the company's financial state-ments. In compliance with reporting requirements, estimated replacement cost information willbe dis-closed in the compaay's annual report to the Securi-ties and Exchange Commision on Form 10-K

9. Selected. Quarterly Financial Data (Unaudited):

Earning~ Per Operating Operating Net Earnings for Average Share Quarter Revenues Income Income Common StocR ofCommonStock (Thousands of Dollars) 1976 First 8 88,675 Second 92,6V4 Third 111,630 Fourth 101,800 814,168 13,216 30,106 25,551 810,641 6,169 23 722 19,947 8 V313 2,841 20,394 16,620 80.38 0.15 1.07 0.86 197V First Second Third Fourth 109,676 113,638 157~0 113,130 21,402 19>679 42,845 27,922 15,342 13,733 32,813 22,123 12,014 10,405 29,220 17,V44 0.53 0.46 1.30 O.V3 ACCO Sl OPXMXOM Haskins P Sells, Certified Public Accountants Phoenix, Arizona 85003 Arizona Public Service Company:

We have examined the balance sheets ofArizona Public Service Company as of December 31, 197V and 1976 and the related. statements of income, retained earnings and changes in financial position, and schedules ofcapital stock and long-term debt for the years then ended. Our exandna tions were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the above-mentioned financial state-ments and schedules present fairly the Qnanciai position of the company at December 31, 1977 and 1976 and the results of its operations and the changes in its Qnancial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

Februaxy 7, 1978 30

1977 1976 1978 1974 1973 Operating Revenues (Thousands ofDollars) 8 493,684 8

394,779 8

359,74V 8

273,599 S

224,956 Operating Expenses:

Operating and maintenance expenses Depreciation and.

amortization Taxes 269,581 40,370 71,885 215,500 36,621 59,617 196,475 32,V93 56,414 153,006 26,398 38 413 116,864 23,529 34,032 Total 381,836 311,738 285,682 21V,817 1V4 425 Other Income'nterest Deductions 12,662 40 499 26,301 48 863 22,003 39 572 17,065 35,890 9,097 28,361 Net Income Preferred Dividend Requirements 8

84,011 8

60,479 8

56,496 8

36,957 8

31267 S

14,628 8

13,311 8

10,422 8

6,258 8

3,551

• Federal and State income taxes are included in Taxes, Other Income, and,begimningin197V, Interest Deductions. Total income tax expense (credit) was as follows (in thousands):

1977, 86,265; 1976, Sl,554; 1975, 82,122; 1974, 8(2,664); 1973, 83,514, Common Stock Data:

Earnings for common stock S

Book value per share 8

Earnings per average share of common stock outstanding 8

Dividends paid per share 8

Shares of common year end average Number of common shareholders 69,383 47,168 S

46,074 8

21.83 8

20.64 8

19.98 S

30,699 8

20.13 8

27,V16 20.74 26,576,428 22,970,741 66 358 22,500,000 19,105,191 56,011 19,000,000 17,739,726 56 003 15,000,000 13,102,V40 43 497 12,500,000 10,527,397 35 687 3.02 8 2.4V 8 2.60 2.34 2.63 1.53 S

1.39 1.36 8

1.36 8

1.21 Comments on the of Oyerations Increases in operating revenues and expenses reQect increases in unit sales of electricity. Operating revenues also reQect rate increases (some ofwhich are subject to refund) and effects of a@ustment clauses.

The rate of increase in unit sales of electricity declined in 1975 because of customer resistance to sharply higher prices ofenergy and effects ofadverse economic conditions, and customer resistance is expected to continue to affect unit sales. Offsetting factors resulted in1976 and 1977 from a signiQcant increase in wholesale sales and in 1977 from an extraordinarily warm summer. Unit sales ofgas are substantially affected by weather conditions, but generally may be expected to decline in future periods with increased service cur~ments by the company.

In addition to the effect of volume increases on operating

expenses, the cost of fuel used for the generation ofa given amount ofelectricity has risen and is expected to rise further. The rise was par-ticularly acute in 1977 due to renegotiated coal contracts, higher gas costs and the necessity for burning more oil to meet demand growth and to replace hydroelectric power formerly available from other sources that were affected by drought conditions in 1977. Increased maintenance expense is discussed on page 10.

Depreciation and amortization (at rates which increased as of January 1, 1975) and taxes (pri-31

marily property taxes) increase with the size ofthe company's utilityplant and, in the case ofproperty taxes, with the amount of the company's operating income as used by the taxing authorities in comput ing assessed valuation.

The principal component ofother income is the allowance for funds used during construction, the total amount ofwhich is primarilya function ofcon-struction work in progress during a given period.

Starting January 1, 1977, a significant portion ofthe allowance, and related income tax benefits, is reQected.

as a credit to interest deductions as dis-cussed in Note 1 of Notes to Financial Statements.

Interest deductions (before such credit) have in-creased substantially with the issuance of large amounts of new long-term debt. Fluctuations in income tax expense are shown in Mote 3 ofNotes to Financial Statements.

Recent issues of preferred stock (increasing the dividend requirement) and common stock (increas-ing the average number of shares outstanding) are summarized on pages 26 and 27.

The company's net income and its earnings for common stock represent composites of cash and non-cash items (see the Statement of Changes in Financial Position) and, in part, reQect accounting practices unique to regulated public utilities.

NOTE: A detailed Statistical Report for Financial Analysis 1967-1977 is available on request.

Direct inquiries to George H. Toler, Treasurer, P. 0. Box 21666, Phoenix, Arizona 85036.

OTHER PXNMDQ'CMJ A1>TD OPEKATXMGSTATISTICS 1977 1976 1975 1974 1973 Capitalization:

Common equity Preferred stock Long-term debt Project Qnancing Total UtilityPlant Gross UtilityPlant Depreciated.

Number of Employees at Y'ear End.

Average Wage per Hour Electric:

Electric resources (kw)

Peak load (kw)

Electric sales total (mwh)

Number of customers at year end Gas:

Total gas sales (m therms)

Number of customers at year end S

580,170 218,561 V01,91 V 53617 (Thousands of Dollars)

S 464,410 S

379,535 S

302,009 S

259/49 168,5Bl 168,561 138,561 68,561 673,639 595,569 340,976 369,B09 S 1,889320 S 1 547,48B S 1,580,672 S 1,368,370 S 1,190,399 S 1,003,218 1+79,533 1,103,569 955,399 V91,578 4,570 V.99 S

4,042 3,731 7.44 S

6.82 S

3,898 616 S

3,899 5.61 2,872,500 2,373,400 10,481,972 2,790,VOO 2,190,900 9,606,571 2,568,700 2,068,300 8,892,570 2 343,600 2,032,000 8,692,304 2,191,000 1,812,VOO 8,098,712 357,884 342 059 331,382 323,094 308,643 463,643 339,949 491,007 339,265 526,659 336,839 518,999 334,908 547,068 328,406 S

1 554,265 S 1,306610 S

1 143,665 S

781 546 S

697,419 32

Shaxehold.er XIlfOZIRckCXOXl Nhv (J/0)

IIQ4 P

ram

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FHO

~gL C3 Electric Hoss

&Combed La Ma)or APS Power Plants (J/0 ~ Joint Ownership)

Principal APE Transndssion Uncs

-- -Transmission L1nes Operated for Ot'ners About the Company Arizona Public Service is engaged princi-pallyinthe generation andsale ofelectricity and inthe purchase and sale ofnatural gas.

Successor to a series of small utility operations originating in 1886, the com-pany was incorporated in 1920 under the laws ofArizona.

The company's service territory includes all or part of ll of Arizona's 14 counties. Itis estimated that the company's electric and/or natural gas service reaches approximately 1,646,000 persons, or about 70% of the state's population.

Arizona Public Service Company's principal executive oiIices are located at 411 North Central Avenue, Phoenix, A.rizona. Phone (602) 2V1-7900.

otfJI, r~ Nss.

Fccr Comers Stock Listing (Symbol: AZP)

Common stock of the company and the 810.70 cumulative preferred stock, Series I, are listed for trading on the New York Stock Exchange.

Common stock is also listed on the Pacific Stock Exchange.

Transfer Agents First National Bank ofArizona, Phoenix, Arizona Irving Trust Company, New York, N.Y.

(Common stock only)

Registrars The Valley National Bank of Arizona Phoenix, Arizona IrvingTrust Company, New York, N.Y.

(Common stock only)

General Counsel Snell P WQmer, Phoenix, Arizona Auditors Haskins P Sells, Phoenix, Arizona Dividend. Reinvestment and. Stock Purchase Plan AProspectus describing this plan for holders of the company's Common stock is avaQable to shareholders upon request. Write:

OQice of the Secretary, Sta. 1240, at the address below.

Form 10-K A copy ofour Annual Report to the the Securities and Exchange Commission, Form 10-E, willbe available after March 31, 1978 without charge, upon written request of shareholders. Write:

OfXice of the Secretary, Sta. 1245, at the address below.

Maxlzmg Ad.dress.

P.O. Box 21666 Phoenix, Arizona 85036

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