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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% Increase 1977 1976 Decrease Property and Plant:

Total utilityplant, year end 81,889,320,000 81,580,672,000 19.5 Construction expenditures 284,610,000 8 194,266,000 46.5 Sales and Customers:

Total operating revenues 8 493,684,000 8 394,779,000 25.1 Total electric sales (mwh) 10,481,972 9,606,571 9.1 Electric customers, year end 357,884 342,059 4.6 Total gas sales (m therms) 463,643 491,007 (5.6)

Gas customers, year end 339,949 339,265 0.2 Income, Emmings, Dividends:

Net income S 84,011,000 8 60,479,000 38.9 Earnings available for common stock 8 69,383,000 8 47,168,000 47.1 Average common shares outstanding 22,970,741 19,105,191 20.2 Earnings per average share of common stock 3.02 S 2.47 22.3 Dividends paid per share of common stock 153 8 1.39 10.1 Shareholders:

Common 66,358 56,011 18.5 Preferred 7 232 6,243 15.8 Employees, year end: 4,570 4)042 13.1 Annual Report Annual Meeting of Stockholders This report is published to provide general All stockholders are invited to attend the information concerning the company and company's fifty-eighth annual meeting. It not in connection with any sale, offer for will be held at 10 a.m. Thursday, April 20, sale, or solicitation of an offer to buy, any in the Grand Ballroom of the Adams Hotel, securities. Central Avenue at Adams, Phoenix,ArLona

IK THIS REPORT:

Along with 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 of following a course beneficial to both customer and investor.

It's a philosophy that paid off in 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 of Qnancing 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 of tomorrow's energy sources.

Page 10.

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

Asking customers to eliminate energy waste isn' enough. APS takes its story right into customers'omes, providing answers and dollar savings APS 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. Legal Matters.......... Page 18.

Rates P Regulation............. Page 6. Directors P OQicers.... Page 19.

Common Stock Price Ranges.... Page V. Financial Statements .. Page 21.

Throughout this year's annual Here are a few reasons why: coal and nuclear fuels.

report you will find highlights of Underlying the earnings and This fuel mix will provide my(or achievements. In many dividend improvements in 197V is beneficial financial results for our ways, 1977 was a good year for one important conclusion I feel customers as we continue to Arizona Public Service Company- deserves additional comment. decrease our reliance on

. a good year for investors and That is, the quality of the expensive oil.

customers alike. company's earnings should Other positive indicators for Perhaps you'e already noted improve in the years to come. the future can be seen in the some of the economic good news Moor reasons are the Arizona company's efforts to trim peak outlined on the preceding page. Corporation Commission's decision energy consumption while In other sections of this report to include substantial amounts of continuing to provide adequate you'l read about: construction work in progress in

~ a brightened financial the rate base as well as the picture that willprovide beneficial commission's approval for effects for years to come. normalization of liberalized tax

~ operations highlights that depreciation.

show the company is well ahead of The signiQcance is this: the national energy goals. commission's decision recognizes

~ a comprehensive, economi- Arizona's unique energy needs.

cally responsible program to It recognizes that the company's provide customers with ways to construction programs will cut energy waste, make the most require a higher proportion of efficient use of energy and. earnings in the form of available minimize future construction costs cash rather than in the form of by trirriming peak energy non~h accounting entries.

consumption. However, in order for the

~ positive results of the company to continue its financial company's efforts to improve the progress and maintain good public's awareness and acceptance customer service, future rate of the economic and social realities increases will be needed.

about energy costs and supplies. Another economic highlight In other words, at Arizona was the restoration of the energy supplies so vital to the Public Service, we'e on the right company's "A" bond rating by economy of Arizona and the course in maintaining reliable Moody's Investors Service. The nation. You'l find several articles customer service and a healthy improved rating makes it possible in this report about the compre-financial proQle attractive to to Qnance needed new construc- hensive load management program investors, and a balanced tion at lower costs to our launched by APS in 1977.

consideration of the needs of both customers. The company has already been able to cut planned construction A company ahead. of expenditures through 1987 from S4 billion to 83 billion, due in national energy goals... part to our load management As you read about our present efforts. The result: investment fuel mix and our continuing efforts capital will be more productive to generate more electricity from and customers will beneQt as the most economical sources capital requirements are available, you'l find we'e well decreased.

ahead of many utilities in meeting If this trend continues and national energy goals goals that we have every reason to believe it stress increased reliance on coal willwe can minimize the need and decreased reliance on to build power plants that would expensive oil and scarce be little used other than during natural gas. times of peak energy demand.

customers and shareholders. We Effective load management is can measure our efforts in any of During 1977, V6 percent of the electricity we generated came relevant to today's needs. It the my(or areas analyzed on the provides a way to help customers following pages and find many from coal. By 1986, when all three units of the Palo Verde Nuclear control energy use, to save money positive signs and many and to cut energy waste without opportunities for future progress. Generating Station and all five units of the coal-fired Cholla plant imposing unnecessary economic are on line, we'l produce some 90 and social hardships. It sets forth percent of our electricity from

vital conservation goals and at the Historically, the nation's sions have already become law, same time continues to provide utilities have faced energy chal- our nation's energy picture is not investors a fair return on their lenges head on, recognizing that improving. Putting it bluntly, investments. desirable goals can be reached solving the energy crisis has

...with a positive story through responsible plarming and become a game of political expedi-concrete problem-solving ency. We cannot continue to play a to tell I am greatly disappointed "game" with the very life blood of pro-'rams.

The public's perceptions and at the chaotic path our nation is our economy energy.

understanding of the nation's taking in its attempts 'to solve its Wishful thinking about alter-complicated energy picture affect energy problems, an effort that nate energy technologies that aie the company's operations in many falls far short of the aggressive, years away from commercial ways. We'e been stressing the economically responsible program operation and economic feasibility "why" and "how" as well as the we must have ifwe are to preserve won't get us on the road to energy "what" behind a wide variety of our economic system. stability. Neither will passage of energy-related. questions in our energy legislation aimed at halting stepped-up customer information ...looRiag for action, our nation's growth; nor laws that program. We have a positive story not words espouse a do-nothing approach; to tell and we'e seeing positive laws that fail to consider that the results. In last year's report, I called desire to protect our environment For example, recent surveys for adoption of programs that must be carefully balanced against indicate a me]ority of our cus- would stimulate exploration and our need to produce the energy we tomers now understand that rate development of all of the nation.'s need for more jobs and economic increases are part of the overall energy resources. I urged that red growth.

increase in living costs. There is tape be cut to get nuclear plants The nation can solve its also a growing confidence in the on line as soon as possible; that energy problems. It must solve compaxly's ability to solve energy needless government regulations them if future generations are to problems before they reach a be eliminated; that research and have the homes, the jobs, the critical stage. development be encouraged. In reasonable lifestyle that depends There is increasing support addition, I stressed the importance for the development of nuclear of striking a balance between energy and other new energy environmental goals and the vital resources. And there is a greater needs of our energy-based public appreciation of the role economy.

such energy sources as solar, Although national energy geothermal and wind play in the legislation is still being debated in hm,,

total energy timetable. Congress and some small provi-4 }

E.,,~ ( / ) ~ 1 1 II I ,",il "pl 1'n an adequate energy supply.

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

> <<4 for such action is now. ', "

ki t

KEITH I TURLliY President and Chief Executive

- kacy Officer February 23, l978 Ralph M. Bilby, Chairman of the Board; Eeith L Turley, President and Chief Executive OQlcer.

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

customers This was the year the whole spectrum of energy issues E sup~

issues, bringing financial benefits to both investors and customers.

captured the spotlight of national debate. It was the year when Livid.ends In addition, restoration of the company's "A." rating will help Arizona Public Service Company made significant financial increased. insure APS'bility to finance new construction even during times of progress progress that can be Earnings per share on common adverse market conditions.

shared by investors and cus- stock rose to S3.02 in 1977, an Financial)y, 1977 was an tomers in future years. increase of 554 per share over eventfILii year for APS: a year when It was a year highlighted by 1976. A quarterly dividend an upgraded securities rating, improved earnings and higher increase from 374 per share to improved earnings, rate relief, and dividends so vital to the company's 424 per share of common stock a dividend increase were all ability to serve customers'nergy payable December 1 to share- positive signs relating to the needs in our fast growing service holders of record November 1, company's financial future.

area; the year the company's brought total dividends paid per securities were upgraded by Moody's Investors Service; the share for the year to S1.53, up from Sl.39 paid in 1976.

Revenues yass year a landmark rate decision made by the Arizona Corporation The indicated annual dividend becomes Sl.68. All 1977 dividends

$ 498 'on.

Commission should continue to improve the quality of earnings are considered fuHy taxable for income tax purposes. expenses and favorably affect customers and investors alike. climb to $ 883 And it was the year the company initiated a new market Credit rating OXL ing program to encourage advances APS'otal revenues in 1977 to "A" customers to conserve energy in reached a record S493.7 million,up ways that will reduce the com- S99 million or 25 percent over pany's peak demand and improve 1976. Increases mainly resulted the load factor. This effort alone is The company's mortgage and expected to reduce capital require- pollution control bonds and from a 9.1 percent increase in ments over the next 10 years by preferred stock were upgraded to electric energy sales, inQuenced by "A" from "Baa" by Moody's the hottest summer in Arizona's an estimated S356 million. Such history, a 4.6 percent gain in factors, combined with conserva- Investors Service in August. At tion efforts and lower growth the same time, Moody's restored electric customers and the rate the rating on APS commercial increases discussed on page 6.

rates than previously forecast, The compaxiy's service terri-wQ1 mean APS can cut approxi- paper to "P-2." This action mately Sl billion from its restored ratings that had existed tory includes one of the fastest construction budget during the until changed by Moody's in early growing areas in the nation.

next decade. 1975. Electric sales are expected to In addition, Standard P continue upward despite conser-Poor's rated the company's com- vation efforts as Arizona's total mercial paper "A.-2" in May and population grows to a predicted maintained the "A-" rating on four million by the year 2000. The mortgage bonds.

APS expects the improved rating to result in the saving of millions of dollars in interest charges over the life of future

a final decision from that agency, company's service area is.

expected to see proportional on permanent rates, in 1978. Investment yer growth. The Qnal decision by FERC will apply to customers already Electric Amtomer On the expense side of the $ 5,000 ledger: affected by the interim increase as

~ fuel for electric generation, well as to additional wholesale $ 4,784 purchased power and inter- customers.

change totaled 8118 mQlion; In addition, the company filed 4,000 requests for further rate increases

~ purchased gas amounted to totaling 810 million that wQl

$ 55.2 million; affect most wholesale customers.

~ taxes included in operating A large portion of these increases expenses totaled 871.9 million; willbe put into effect on July 1, 3,000

~ interest on long-term and short 1978.

term debt was 852.9 million. Other matters related to rate $ 2,514 a4justment clauses in existing lAThole sale wholesale contracts are pending before FERC. While the rates are 2,000

$ 1,964 rate uydate refundable, the compaxgr does not believe a refund of the revenues in question would significantly affect An interim, refundable rate 1,000 increase has been in effect for recorded common stock earnings.

most wholesale customers since May, 1976. Following a December, 1977 hearing, the admiinistrative law judge issued a report to the 1967 1972 1977 Federal Energy Regulatory Com-mission (FERC) recommending most of the increase. APS expects Cayitalization (millions of dollars)

Th.e 19VV Income Bolbar and. lhTh.ere it M'ent, $ 1,500 1,555 1,310

~

rs residential fuel for electric generation 16C 1,152 37%

customers 35%

35C electric 26C gas purchases 10C 1,000 982 gas 9C 33% 14%

electricity purchases 6C 801 wages, sa anes 31% 13%

& em lo ee benefits 32%

commercial 14 customers income & other taxes 14C Gpp 9 0 30c electric 26C 45'/e interest, preferred 35% 52%

gas 4C dividends 8 13C 46e/a other costs net 15C industrial customers to common s areholders 20%

electric12C gas 3C dividends 6C 13C 13%

retainedearnin s7C .. 1973 1974 1975 1976,1977 15C others electric gas 3C 12C depreciation 8C long-term debt

~

LJ common stock equity 5C other income other operating expenses 12C E3 preferred stock

~

H project 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 sion will minimize lengthy and On January 10, 1978 APS improving financial condition was costly hearings paid for by APS implemented the full Step 2 an innovative three-stage rate customers and state taxpayers. increase of five percent in electric decision by the Arizona Corpora- Also significant is the rates. The increase is suQect to tion Commission. In an August improved quality of earnings that approval by the commission in decision the commission recog- wQ1 result from the commission's hearings expected in March or nized earnings attrition by grant inclusion of substantial amounts April of 1978.

ing a 17.5 percent return on of construction work in progress A Step 3 mgustment of up to historical endwf-period common in the rate base and the approval five percent in electric rates is equity, so that the company might of the normalization of liberalized permitted in January, 1979, have the opportunity to earn as tax depreciation. The commission subject to conditions similar to much as 13.5 percent on its actual recognized that the compazgr's those for the Step 2 increase as year-end equity. In the decision, the large construction program defined by the commission.

commission: requires a higher proportion of o allowed the company an overall 8.27 percent rate of earnings in the form of available cash rather than non-cash 19VV return on fair value rate accounting entries. i'inamcing h.ighlighis base; The Step 2 and 3 augustments o made permanent a 13.8 depend upon whether the com-percent interim increase in pany's return on year-end effect since October, 1976; common equity is below 13.75 Two pollution control bond issues, o granted a Step 1 overall percent at the end of the year preferred. and common stock offer-revenue increase effective preceding the a+ustment and ings, and a project financing of Unit August 1, 1977 of 5.94 upon the amount of expenditures 4 at the Cholla Power Plant were percent based on the test for new plant. medor sources of capital raised 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 ) bl

/

January 1, 1977.

Particularly significant was the commission's decision allow- I~,'f', gj ..7) ing the company Step 2 and Step 3 rate adjustments of up to five percent on retail electric rates, subject to commission approval following hearings. The approach taken by the commis-Keith TurleJJ; Henry Sargent, vice president, Finance; George Toler, TreLsurer.

outside the company during 1977.

~ In April, 843 million was Puel cost Effective raised through the sale ofpollution control revenue bonds for the adjustments rate d.esign Navajo and Cholla plants. The bonds bear a coupon of 6.45 Hearings on fuel a+ustment clauses used by APS and 16 other is need.ed.

percent. An additional 834 million Arizona utilities took place in The company proposed, during rate pollution control issue was com- 1977 following an Arizona hearings in 1977, implementation pleted in January, 1978 for the Corporation Commission-ordered of an innovative Energy Capacity Cholla plant. These bonds bear an review. rate. Unlike many other rate pro-interest rate of 6 percent. The commission is currently posals, capacity rates tie directly to

~ A public offering of 850 mil- studying testimony presented by load factor. Basicaily, they measure lion of 88.32 cumulative preferred APS and other hearing demand as well as consumption, stock, Series J, 8100 par value, was participants. taking into account how energy is sold in September. Proceeds were Fuel cost adjustments are taken as well as the amount used.

used to finance APS'onstruction independent of basic rates. They Under such a rate, for example, program and to retire 842 million permit APS, with the commis- it would cost less for a customer to of short term debt. sion's approval, to adust custom- use dishwasher, clothes washer

~ Proceeds of 880 million from ers'ills (up or down) to reQect and dryer at different times, rather a common stock issue also were changes in fuel costs for electric than simultaneously.

earmarked primarQy for the con- generation and purchased power During the 1977 hearings, the struction program. The issue of not reQected in rate structures. Arizona Corporation Commission four million shares priced at Increases, or decreases, are also heard evidence on time-of-day 820.625 per share was sold in applied to customers'ills with no metering as well as various other November. profit to the company. concepts for cutting peaks and

~ A 8260 million project While subject to commission giving customers better control financing for Cholla Plant Unit 4 audit and approval, the ~ust over energy Mls.

was completed in July. APS sold the ments eliminate expensive, Any new concept in this area partially-constructed generating formal rate cases which are must be carefully analyzed and unit to a subsidiary of a non- costly to taxpayers and utility fairly adrndnistered. Whatever the profit foundation. When con- customers. Such clauses are not final choice, APS believes positive struction of Cholla 4 is com- unusual; some type of fuel adust. rate redesign is needed to benefit pleted, APS willrepurchase or- ment is currently being used by both company and customer. Such ifconditions then are favorable utilities in more than 40 states. a redesign should promote a may negotiate a leveraged

'n cooperative effort, giving both lease on the unit. Common Stock Price Ranges company and customer responsible The company has estimated (Symbol: AZP) roles and measurable returns.

savings of approximately 817 million in interest charges during Dividend the next 10 years as a result of the Cholla 4 financing plan.

1977 High Low per Share SSV6 Short term debt was zero at the end of 1977.

1st quarter 2nd quarter 20 21 18'/s 18s/s 80.37 0.3V for th.e year Cash generated internally contributed an additional 851 3rd quarter 4th quarlar 21'/>> 19'/>>

21s/s 19'/>>

0.37 0.42 ahead.

million to capital requirements, Construction requirements during representing 18 percent of the 1978 are estimated at 8376 mQlion, total for the year. Dividend including an estimated 860 million A successful common stock 1976 High Low per Share for environmental controls.

dividend reinvest ment plan was Tentative plans call for two used by 4,1VO stockholders for 1st quarter 17'/s 15'/>> 80 34 new common stock issues, totaling dividend and/or optional cash 2nd quarter 17 15 0.34 5 to 6 million shares, one preferred investments totaling 81.5 million. 3rd quarter 17~/s 15s/>> 0.34 stock issue, a possible additional 4th quarter 19~/s 16i/s 0.3V pollution control bond issue, and draw<owns of pollution 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 Cholla Plant willbe to climb. My(or reasons? the company's largest single source

~ The summer of 1977 was the of power, with a capacity of hottest on record in Arizona 1,31B,OOO kw.

according to the National Weather With the Cholla expansion, APS Service. Daytime temperatures is building a 500,000-volt trans-were about normpl, but desert mission line to carry electricity the areas just didn't cool off at night. lie-., 0 206 miles from the plant (at Joseph The result: energy-consuming cool- I City) to a switchyard at the com-ing systems worked around the pany's Saguaro Power Plant 30 clock most of the summer. Despite conservation efforts, average j expenditures miles north of Tucson. The 853-million line is due to be in service residential use in 1977 was in June of 1978.

APS'holly-owned 9,570 kwh, up 3.3 percent over 1976.

~ Electric service was extended Construction to a net increase of 15,825 new customers as the inQux of new residents to one of the fastest reach. record.

$ 384 on growing states continues. The coal.fired Cholla Power Plant is on its

~ Needed rate increases wag to becoming APS'argest power granted October 1, 1976 and August generation source. Construction expenditures in 1977 1, 19VV also contributed to the power for a total of 2,872,500 kw. reached a record 8284.6 million-27 percent gain in electric APS'lanned. reserve margin up from 8194.3 million in 1976.

revenues. from these sources in 197V was Construction outlays at the Cholla

~ New customers were total- 22 percent. However, at the time Power Plant and APS'ortion of electric as the moratorium on new of the August peak, the generating the Palo Verde Nuclear Generating gas hookups continued. resources were operating at Station totaled nearly 8192.5 mil-The year-end count of electric 222,600 kw below their full lion. The 500,000- volt transmis-customers was 357,884, up 4.6 per- capacity, leaving an actual reserve sion line linking Cholla with the cent over 1976. Electric sales to margin of 2V6,500 kw, or 12 Saguaro Power Plant required customers increased in nearly all percent. 826.8 million. Total expenditures categories. No additions were made to the for electric property and equipment, Revenues and sales for 197V company's generating capacity in including environmental protection were not significantly af'fected by 1977. At year's end, however, facilities, amounted to 8277.8 the slow-down experienced by start-up tests had begun on Unit 2 mQlion. Gas facilities required only Arizona's copper industry. at the coal-fired Cholla Power Plant 8474,000 reQecting the moratorium in northeastern Arizona. The new on new gas construction. Some 8B.3 Meeting th.e 250,000-kilowatt unit is scheduled to go into operation in June. Unit 3, million remaining went for common properties, including 85.V million for yeak also 250,000 kw, is slated to follow in 1979, and the 350,000-kw Unit 4 is scheduled to go on line in 1980.

data processing services expanded to help cut operating and The August peak electric load of maintenance costs.

2,373,400 kilowatts was 8 percent Planning and engineering will above the peak of 1976. continue on Unit 5, also 350,000 APS'lectric resources consisted kw, currently planned for opera-of 2,560,700 kw of generation plus tion in 1983. When the expansion 311,800 kw of firm purchased program is completed in 1983,

Fuel Sources of Electric

%PS searches economics (thousands of MWH)

Energy for fl1el The Cholla expansion is part of the pioneer development of low-sulfur t 8%1 13%

resources today to meet 10,000 southwestern coal for power 9%

14 generation begun by APS in the 12%

1950s. This economical fuel has 11%

energy needs been producing energy for Arizona electric customers since the early 60s at both the Cholla and Four 81000 8% 25%

7%

7 in th,e years Corners power plants. Thus APS is well ahead of recent efforts to meet 6,000 16%

5 ahead, APS has stepped up its efforts to a national energy goal of switching find its own fuel sources in an from oil and gas-fired electric attempt to assure availability of generation to more plentiM and 4,000 reasonably-priced generating fuels economical coal and nuclear fuels. for the future. As a part of this In 1977, coal was the fuel for 6 61% 61% 68% 66% effort, APS geologists are probing 77 percent of the electricity gen- for uranium in such places as the erated by APS. Even coupled with 2,000 wide-open spaces of Wyoming and purchased power, coal still pro- an ancient lake bed in Arizona.

vided 66 percent of APS'lectric energy requirements.

In 1986, when three Palo 1973 1974 1975 1976 1977 Verde Nuclear Generating Station o,i purchased t

units are in operation(seepage 11), Economical coal generation represents a the company will produce about momtor part of APS'lectric resources, 90 percent of its electricity with a holding down the use of expensive ofl and mix of coal and nuclear fuels. scarce natural gas for power plant fuels.

Generation MM Fuel Costs (cost per dtu) Rock samples may provide enough evidence of potential fuel supplies to Just>fr

$ 2.50 exploratory drilling, as they did here, near

. coal Wtckenburg, Arizona.

0 gas Prospecting in Wyoming is for oil uranium to supplement fuel already 2.00 Cl weighted average of ail fuels under contract for the Palo Verde Nuclear Generating Station. Engi-neers are drilling in Wyoming's Green Mountains where, early in 1977, APS and other Palo Verde 1.50 participants purchased a half interest in uranium claims on a 26,000-acre area.

Meanwhile, exploratory drQ1-1.00 ing goes on in the Date Creek Basin northwest of Wickenburg, Arizona 0.75 where APS has acquired leases on 40,000 acres of state land.

0.50 The company is also seeking additional supplies of coal and natural gas. Coal supplies, which 0.25 could be required in the early 1990s, are being sought in several 1967 1971 1972 1973 1974 1975 1976 1977 Rocky Mountain states. Goal of the gas acquisition program is to find The decision in the l950s to develop low-cost southwestern coal deposits has proved supplies to make up for projected 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 deficiencies in gas for resale to most economical fuel source. customers. 9

Pine-continues at coal-fired.

Pour Corners to imyrove efficiency; ad.d. to cus-tomer fuel savings 'F .

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 of the time, burning more coal, less oil.

Thus the intensive preventive maintenance program under way at Four Corners, cornerstone of the APS generating system, continued 4

through 1977, to improve the 1 3'he plant's generating reliability. More Four Corners Power Plant, burning southwestern coal since 1965.

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.

In utilityterminology, the Clean air standards Lengthy discussion and frequent set terrain in the area surrounding the object was to raise the plant's hearings over air quality regula Four Corners Plant. These will capacity factor, the measure of tions for the Four Corners Power supplement monitoring stations energy actually produced against Plant concluded in November. The already operating near the plant.

the theoretical maximum possible. New Mexico Environmental Ifmonitoring stations record.

The upgrading has increased Improvement Board (EIB), ruled violations of clean air standards, APS'hare of the Four Corners that 67.5 percent was an acceptable the EIB may raise the control per-capacity factor from 59.9 percent minimum figure for removal of centage in the regulation to cover in 1975 to 65.4 percent in 1977. sulfur dioxide (SOs) from plant additional removal up to V9 percent.

For our customers, the upgrading emissions. APS has begun preliminary has meant 811.8 million in savings In addition to installing equip- design work on the emission con-in 1977 due to increased use of ment to meet the 67.5 percent SOs trol system to meet the agreed-upon coal and a resulting decrease in the regulation and particulate removal air quality emission regulation.

use of oil. equipment at an estimated cost of 8235 million to Four Corners participants six air monitoring stations must be installed on high 10

Construction in Ch,olla EPA go-ahead.

S gets h.i h. ear at Palo but neer lair V'erd.e for first SX nuclear Kilowatt future siting in '83 Construction continues on the 3,810,000-kilowatt Palo Verde Utilities announcing their intention to participate in the yroblexns The Environmental Protection Agency granted approval in February 1978 for construction Nuclear Generating Station, 50 replication and feasibility activities of the 350,000-kw Unit 5 at the miles west of Phoenix. By year end, related to the new units along with Cholla Power Plant.

Unit 1 was 21.9 percent complete APS are Southern California Edison An important addition to the and Unit 2 had reached 5.1 percent. Company, the Los Angeles Depart company's generation resources, Construction on the third PVNGS ment of Water P Power, San Diego Cholla 5 willprovide electric energy unit began in December, 1977. Gas P Electric Company, El Paso vital to meeting customers'eeds Moor pieces of generating Electric Company, Nevada Power in the mid-1980s.

equipment will arrive at the plant Company, and five California EPA. deterxnined that the new site this year. Me]or components of municipalities: Anaheim, Burbank, unit would meet emission limits the steam system fabricated in Glendale, Pasadena and Riverside. which are representative of the Tennessee willbe shipped by barge "best avaQable control technology,"

down the Ohio and Mississippi and wQ1 otherwise meet stringent Rivers, through the Panama Canal, air~uality regulations, many only and up the Gulf of California to recently becoming law with Puerto Penasco, Sonora, Mexico. passage in 1977 of amendments The heavy equipment then willbe to the 1970 Clean Air Act.

trucked the final 225 miles to the The amendments will have a nuclear plant site. moor economic impact on con-APS is project manager for the sumers as well as on the nation's 82.8 billion PVNGS project. Other utilities and industries whose participants are El Paso Electric future construction of my(or Company, Public Service Company facilities could affect air quality.

of New Mexico, Salt River Project, For APS, the review and and Southern California Edison approval process required by the Company. new laws could add at least two On March 2, 1978 APS and 10 years to the lead time for building other western energy suppliers new generating units. In addition, fHed an application with the the strict amendments also require U.S. Nuclear Regulatory Com- use of the most advanced tech-mission (NRC) for construction nology to measure and control permits for two additional gener- emissions.

ating units at the Palo Verde site. At the locations of coal-Qred The Qling was made in units now in operation or under accordaxlce with the NRC's construction, and at the logical replication policy, which would locations of future units, the rela-result in significant savings to our tively high quality of the air and customers as design, siting, and proximity to large national parks, regulatory costs are reduced. monuments, or wilderness areas as Steel rises from the desert floor as Arizona's Additional savings for electric first nuclear generating plant takes shape well as Indian reservations, will customers would accrue over the some 50 miles west of Phoenix. expose the company to particularly operational lifetime of the new burdensome control standards.

units from savings in nuclear fuel costs as compared with fossil-fueled units.

RFSRARCH Id.ealine yroves th,ink- yut th,e ing Xlays off s'lm, to M'or% for Whether it's finding ways to cut downtime on power plant boQers or discovering quicker, cheaper methods of pulling and replacing fu e customers The world's largest solar cell power old utility poles, APS employees plant willbe built at Sky Harbor have contributed some remarkably International Airport, the result valuable ideas. of ajoint proposal to the Depart t / rr ment of Energy, filedbyAPS, Motorola and the Arizona Solar Energy Research Co~sion.

The project received federal n approval early in March, 1978.

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

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

Operation is scheduled for mid-1981. A proposed APS photovoltaic solar cell energy plant at Sky Harbor International Journeymen Electricians Harry Wilson The system, which willconvert Airport in Phoenix would use 20,000 of and Clem Arnold shared an award of more sunlight directly to electricity, will these Motorola Meinel opticai modules to than $ 2400 when their transformer have an annual energy output convert sunlight directly into electricity.

repair cradle design was accepted. It' potential of two million kwh-expected to save company and customers construction of a demonstration about S97,000 a year in capital investment enough to supply the electricity plant in the Southwest. Arizona is and man hours. Electric Operations Vice needs of more than 200 average- a possible site.

Pres. I@man Mundth watches the size homes in our service area. In addition, during 1977, APS inventors put their cradle to work. A second medor solar research installed monitoring stations in Employee ingenuity is paying project involves studying how an GQa Bend and downtown Phoenix off handsomely in cash awards for advanced solar thermal power as part of a solar radiation stu+

ideas that are adopted. It's paying plant might be integrated into a sponsored by Western Energy oif even more for the compaily utility system. APS was awarded a Supply and Transmission Associ-and its customers who will reap contract late in 1977 by Martin ates, of which APS is a member.

the benefits of first year savings of Marietta Aerospace of Denver to Instruments installed at 40 loca.

more than 81.3 mQlion in man- assist with design speciQcations tions measure solar radiation to hours, materials, and fuel from and economic evaluations of the determine where the sun shines employee suggestions put into proposed plant. brightest and longest. Data will effect through the Idealine produc- Martin Marietta's design will assist development of solar electric tivity incentive program, launched use molten salt to transfer heat power generation, residential and about two years ago. The savings from the plant's solar receiver to commercial solar heating and already derived wQ1 accumulate its boiler, which willproduce steam cooling systems.

from year to year and willincrease for the plant's turbine. Molten salt APS will also continue its sup-as new productivity improvement also would store heat and extend port of research carried on by the ideas are adopted. operation of the 100,000-kw plant Electric Power Research Institute The ratio of the suggestion beyond daylight hours. (EPRI), as well as its stu+ of items program's cost to the resulting The APS-Martin Marietta study such as coal gasification, Quidized-improvements brought APS a first is one of four solar thermal design bed combustion, and geothermal place award for 1976 results from projects now being sponsored by energy sources.

the National Association of the Department of Energy. DOE is Suggestion Systems. expected to choose at least one, for 12

LOAD To h. test lies ahead. to slmye ye customers seen in y ersh.iy roles Construction schedules, financing reduced its peak load by 15.6 mega- in part, attributable to customer-plans, rates and to a growing watts, and an additional reduction initiated conservation efforts, the extent earnings depend on the of 43.7 megawatts is projected for company's information programs shape of the energy load on a 1978. Though the reductions are, have had measurable impact.

utility's system as much or more as they do on the amount of energy generated. The practice of shaping the energy load is called load Long Range Forecast of Peak Load management.

The first goal of effective load and. Electric Resources 5,353 (megawatts) management is to Qatten peak 5,000 demands on the company's gener- 4,74$

ating system, to reduce the need for (without load management) 258 w,g Mlitt short term power generation by 4,168~ " 4 488 high-cost oil and diesel-fired plants. ~ ..

4,000 .r...'""

Equal important are efforts to help customers trim energy waste, 3,58M,o" and to increase energy consump-J,,W 3,469 tion during off-peak hours in order )load management to improve the generation load 3,000 resources at time of peak  ? 873I factor, to make the most of more (includes purchased power)~

economical generating sources GIld fuels.

APS launched an intensified 2,000 2,045 load management program in 1977, tailored specifically to Arizona's 1)659 unique peak situation. In the 1,310 state's population centers, air- peak load 1,000 conditioners draw millions of kilo- 900 watt hours to cool homes, offices, historical forecast and plants, peaking during hot summer afternoons in July and August when temperatures soar 1967 1972 1977 1982 1987 above 100 degrees and frequently stay in the 90s through the night. APS has been able to cut planned construction expenditures through l987by an estimated With the state bracing itself for 8l billion. Load management efforts willcontribute an estimated 6366million ofthe total.

a projected 82 percent population gain in the coming two decades (from 2.2 million in 1975 to 4 million by 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 13

CATING THE 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 will market the unit in 1978.

XiTew bill 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 it is more informative, it costs less to produce.

SyeaErers Bureau:

R face-to-face COXHDIBXX11-cation Employees are encouraged to Helping customers find and correct energy wasting conditions in their homes is a part of increase their knowledge and the company's program to cut peaks and shape the energy load. involvement in public Once customers understand the inspected by APS specialists for communication.

concept of load management and its potential energy inefficiency (attic Specially trained employee beneficial financial effects, they insulation, window shading, etc.), volunteers comprise the com-deserve concrete answers about and customers are given suggested pany's Speakers Bureau. In 1978 how to shiit their energy demands. remedies, improvement cost and the bureau will travel system-wide, The APS Answers program savings payback estimates. criss-crossing the company's launched in 1977 provided a blue- Load shaping devices being service territory to share knowl-print. Informative kits distributed investigated or promoted by the edge about everything from nuclear to customers on request explain company include control devices, and solar energy to wise energy load management goals and offer wired into a home's electrical management.

examples of ways to cut energy system, which program appliance waste in the home.

The Professional Home Energy use to avoid peak hours.

APS tested radio remote control branch.ises Analysis helps homeowners cut cut ops on air-conditioning com-energy losses and become aware of pressors of customer volunteers in ayyroved.

how to make the most efficient use 1977. Load could thus be reduced By wide margins, voters in Casa of energy. At customers'equests, without noticeable reduction of Grande, Chandler, Eloy, Gilbert, their homes are professionally customer comfort. Response to the and Page approved agreements test was positive. renewing 25-year electric service franchises for APS.

14

Cost of Average Residential Km'. Comyared.

to Xncome yer Capita (Maricoya County) and. Coxmmner Peices obtains 300 index 1960 = 100 ad.ditional gas for 260 Income per capita (Maricopa County)~g industrial 220 customers To help Arizona industrial employers avoid layoffs andproduc-180 tion losses, APS bought temporary consumer emergency natural gas on a "best price index efforts available" basis from a

~0 Texas pipeline company during

~ ~

140 the 1976-1977 winter. Severe cold weather in gas fields as well as in the South and East prevented 100 ~

t delivery of all the gas APS needed

+~ ~ ~ ~ ~ eo ~o~~ ~

+04 ~ ~ ~~~ ~ ~ ~~

~y

~

+ ~ ~~~~ ~~+~

~~~

~~ in early 1977. But the gas actually

~ ~

received, coupled with an unusually cost of residential kwh warm heating season, made less 60 1960 curtailment necessary than had 1965 1970 1975 1977 been projected.

APS made additional emer-Radio Energy OyenLine gency gas purchases for the 1977-1978 winter, though some curtailment was anticipated Fo laixn.ched. despite the added supply.

Natural gas sales were 463.6 nxstomers A.

now group of serve as employee volunteers two-way communi-million therms, down 5.6 percent from 1976, but gas revenues rose taDt, APS cators. Nearly Aides form the 70 Communication backbone of new a

16.4 percent to 896.4 million. An a4iustment clause covering listens OpenLine program. Aides help local get information to 'anagers increased gas costs to APS'and rite increases contributed to the higher employees; they help to educate revenues.

APS President Keith Turley fielded employees on APS'verall goals; Due to a moratorium on new customers'uestions about the they help bring employee opinion gas hook-ups, only 684 gas cus-energy situation in a series ofhour- back to management. Aides intro- tomers were added in 1977. Most long Radio Energy Forums that duced and explained the company's additions were moMe homes, on began in mid-February. marketing program to employees which connections were allowed The forums helped identify in 1977 and administered a com- through May.

moor energy concerns and pro- panywide survey designed. to The company is searching for vided a cataiyst for launching measure the pulse of employees, additional permanent supple-comprehensive programs tailored their view of the company, and its mental gas supplies to augment especiaHy for APS customers, such relationship with the public. , declining supplies from our tradi-..

as APS Answers and the Profes- ,

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

sional Home Energy Analysis. -;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 of its gas business.

18

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

Toler becomes treasurer Flagstaff businessman Ralph M. scheduled to step down in AprQ, Elected to the board during Bilby was elected board chairman 1978 after reaching the board's 1977 were Mrs. WQma Schwada, at the October meeting. Bilby, mandatory retirement age. civic leader and homemaker; and member of the board for 19 years, Succeeding Bilby as chairman Thomas G. Woods, Jr., APS execu-succeeds William P. ReiHy, who of the executive committee is Earl tive vice president, Operations.

announced his retirement to Eller, Phoenix broadcast and In a management change, accept a post with Arizona outdoor advertising executive, and George H. 'Ibler, previously Governor Wesley Bolin. ReQly a director of the company five manager of Finance, was elected started with APS in 1948, and was years. treasurer.

Milestones William P. ReiHy, chairman of moved up to become president in the board since 1974, retired from 1969, CEO in 1970. Three years utility service in 1977 to become later he was elected vice administrative assistant to the chairman of the board, then Governor of Arizona. chairman in 1974.

A native of New Jersey, ReiHy ReiHy's present post in the came to Arizona in 1948 as governor's oQice is a logical president and general manager extension of his lifelong interest of the Arizona Power Company in in and concern for his fellow man; Prescott, following 18 years with it is an enthusiasm that has led Ebasco Services, Inc. With the him into innumerable areas of formation of APS in 1963 he was service to the community.

Roilly named a vice president, then 16

Xngenuity mmrlm safety yrograxns Employees in System Electric safety hazards or rule violations. set in 1976, the best year for safety Equipment, a me(or operating Corrections can be ordered on the performance in the company's department, reached a recor d one spot by the blue-hat employee history.

million manhours without a dis- whose interest is renewed in the A highlight of public safety abling iqjury. At the Cholla Plant company's safety rules. efforts was an antenna safety switchyard, an innovative "blue The number of disabling program to inform Mountain hat" safety program helped crews iqjuries for 1977 was 4.8 per mil- Division customers about the there achieve a record two years lion manhours worked compared dangers of erecting antenna masts without a disabling accident. with the latest available national where they could come in contact Switchyard employees take average of 8.6 for combination gas with power lines. Gas safety pro-turns wearing an identifying blue and electric utilities. However, the grams reached customers system-safety hard hat. On their two-month number of disabling injuries was wide as well as Arizona school blue-hat assignment, they tour the up over the record low 3.4 per children.

switchyard twice daily looking for million manhours worked, a mark

' s, Vivid.ends, Average Interest Rates on Reinvested. E s Per Outstanding Securities Average Share of KP Common StocR, 7.5%

$ 3.02 0 average interest rate on first mortgage bonds earnings~

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 plant, contain various dates and schedules which now appear the Tribe is demanding an increase in royalties on coal mined on the legal mmtters (though not beyond question) to be attainable. Problems of interpret-reservation. The company expects to pass through to its customers, The previously mentioned Clean ing and complying with the various under its rate adjustment clauses, AirAct Amendments of 1977 may measures, and the evolution of new any resulting increase in fuel require the addition of costly equip- measures, require continuing expense. However, the pass-ment to most generating units now involvement of the company in pro- through of certain of these in operation by the company, and ceedings before state legislatures, increases could be contested and the design of additional equipment federal and state regulatory possibly be denied, particularly in for one or more of the units now agencies and the courts. the case of increased Tribal under construction at the Cholla The Navajo Tribal Council has royalties.

Plant. The regulations relating to recently enacted two resolutions, The State of New Mexico new-source emissions and ambient one purporting to impose as of enacted an "electrical generation air quality wiQ be much more January 1, 1978 a "possessozy tax," effective in 1975, on all onerous than the present ones, interest tax" on the value of leases electricity generated in New Mexico additional pollutants willbe cov- granted by the Tribe, and the other and consumed outside the state.

ered for the first time, and strict (to be effective following aQirma- The company brought an action to treatment willbe accorded air tive action by the Secretary of the have the tax set aside. The trial pollutants considered to be hazard- Interior) establishing a sulfur court's dismissal of the action was ous. It appears to the company that emission permit system and pur- appealed by the comparjy to the New its control of the emission of nitro- porting to require payment of a Mexico Supreme Court, where the gen oxides from new plants will "sulfur emission fee." These actions case has been argued and is await-require expenditures comparable affect both the Four Corners and ing a decision.

to those made for SOa control. Navajo Plants, and are viewed by Decreases ordered by the Even before enactment of the the company as contrary to provi- Arizona State Hoard of Tax Appeals 19VV Amendments and the recent sions in the leases from the Navejo in the 1974 and 1977 assessed New Mexico ruling with respect to Tribe for those plants. The actions valuations of the company's SOa removal, the company's opera. also raise questions concerning properties in Arizona, which tions have been subject to stringent jurisdiction of the Tribe over the resulted in Arizona property tax environmental protection mea company and its operations. The reductions of S2.2 million in 1974 sures. It has been necessazy to company plans to seek an i@junc- and $ 1.7 million in 1977, were obtain variance permits or stipula tion against implementation of the appealed by the Arizona Depart.

tions for certain aspects of opera- possessory interest tax and, if it ment of Revenue. The 1974 reduc-tions at the Four Corners Plant; becomes effective, the emission fee tion is now pending before the certain state permits, relating to resolution. Arizona Supreme Court and the the emission of nitrogen oxides at Imposition by the Navejo Tribe 197V reduction before the Superior the plant, have expired or are about of the possessory interest tax, or a Court of Maricopa County.

to, and the company is currently "business activity tax" also Messrs. Snell P WQmer, seeking extensions; and others, reported to be under consideration counsel to the company, believe relating to surface and ground by the Tribal Council, against the that the company should ulti-water standards applicable to the company's coal suppliers could mately prevail in each of these increase its fuel costs. In addition, generating and property tax actions.

18

BQh.'RD OF DIRECTORS DIRECTORS EMERXTI

'Ralph M. Bilby, 60, Chairman of the E. Ray Cowden, President, Cowden Board, Flagstaff, Arizona Livestock Company, Phoenix, Arizona

'Karl Eller, 49, President, Combined W.C. Quebedeaux, President, Quebedeaux Communications Corporation Investment Company (personal (broadcasting and outdoor advertising), investments), Phoenix, Arizona Phoenix, Arizona 'Member of Executive Committee

'Del W. Fisher, 67, Chairman of the Board t Member ofAudit Berlew Committee Fisher Contracting Co., Phoenix, Arizona OFFXGERS

'WilliamT. Garland, 61, Chairman of the Board, Garland-Rhuart Development Ralph, M. Bilby, 60, Chairman of the Corporation (land development), Board Sedona, Arizona D.L. Broussard, 87, Vice President, Leon Levy, 64, Honorary Chairman of the Research and Development Board, First National Bank ofArizona Karl Eller, 49, Chairman of the Executive Tucson, Arizona Committee

'Victor K. Lytle, 66, Chartered Life Under- Gerald J. Griffin, 87, Assistant Secretary writer, Prescott, Arizona Howard, F. Hersey, 49, Vice President, Marvtn R. Morrison, S4, Farmer and Gas Operations Cattle Feeder, Morrison Brothers Russell D. Hulse, 80, Vice President, Ranch, Higley, Arizona Resources Planning James B. Rolle, Jr., 69, Member ofthe Law Jerry P. Kuman, 47, Vice President, Firm of Rolle, Jones, Benton P Cole, Customer Services Yuma, Arizona Charles D. Jarman, 42, Vice President, Henry B. Sargent, Jr., 43, Financial Engineering Services Vice President of the Company, William F. Lerch, 42, Vice President, Phoenix, Arizona Management Services WQma W. Schwada, Sl, homemaker, Lyman K. Mundth, 61, Vice President, civic leader, Tempe, Arizona Electric Operations Richard, Snelly 47) Member of Snell P Wm.T. Quiasler, 83, Secretary Wtimer (general counsel to the and Assistant Treasurer Company), Phoenix, Arizona Henry B. Sargent, Jr., 43, Financial

'Donald K. Soldwedel, 83, President, Vice President Western Newspapers, Inc., Prescott, George K. Toler, 39, Treasurer Arizona; Publisher and General Keith L, Turley, 84, President and Chief Manager, Yuma Dally Sun, Yuma Executive OtIlcer Yuma, Arizona Edwin E. Van Brunt, Jr., 46,

'Maurice R. Tanner, 86, Chairman of the Vice President, Construction Projects Board, President and Chief Executive Officer, The Tanner Companies Thomas G. Woodsf Jr f Slf Executive Vice (construction and materials supply), President, Operations Phoenix, Arizona

'Keith L. Turley, 84, President and Chief DIVISIONMANAGERS Executive OQicer of the Company, Phoenix, Arizona A. G. Anderson, 46, Western Division, tDouglas J. Wall, Sl, Member of the Law Goodyear Firm of Mangum, Wall, Stoops snd Glen D. Daly, 49, Cochise Division, Warden, Flagstaff, Arizona Douglas tMorrison F. Warren, 84, Director of Jack Duffy, 39, Navajo Division, Flagstaff Experimental Programs, College of Dave Ellis, 39, Metropolitan Division, Education, Arizona State University, Tempe, Arizona Phoenix'ames C. Lauchner, S2, Pinal Division, tK.0. Wtlbanks, 86, President, First Casa Grande National Bank of Farmington, Guy W. Lunt, 44, Mountain Division, Farmington, New Mexico Globe tBen F. Williams, Jr., 48, Attorney at Law, Don Roberts, 87, Yuma Division, Yuma Douglas, Arizona Jesse F. Thomas, SS, Yavapai Division, Thomas G. Woods, Jr., 81, Executive Prescott Vice President of the Company, Phoenix, Arizona (Numerals are ages at annual meeting date, April ZO, 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:

Operating Income 0 erat Revenues Before Income Taxes (Millions of Dollars) (Millions of Dollars)

Electric Gas Electric Gas Y'ear End.ed.

December 31, Amount Percent Amount Percent Amount Percent Amount Percent 19 VV N97.3 80.5 896.4 19.5 8109.2 91.3 $ 10.4 8.7 1976 312.0 V9.0 82.8 21.0 78.8 88.0 10.7 12.0 1975 281.1 78.1 V8.7 21.9 V0.6 87.2 10.4 12.8 1974 213.3 78.0 60.3 22.0 49.6 89.2 6.0 10.8 19 VS 171.0 76.0 54.0 24.0 47.3 84.2 8.9 15.8 OPEKA TXNG REVENUES

% Increase 1977 1976 Decrease Electric: (Thousands of Dollars)

Residential S135@74 8106,334 27.2 Commercial 135,585 108,506 25.0 Industrial 61,617 47,055 30.9 Irrigation 13,512 9,799 37 9 Other 39,657 28,565 38.8

'Ibtal 385,645 SOO @59 28.4 Transmission for others 9,328 9,591 (2.V)

Miscellaneous services 2491 2,119 8.1 Total Electric Operating Revenue 397@64 311,969 27.3 Gas:

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

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

(Thousands of Dollars)

Operating Revenues (Note 6):

Electric 8 397,264 8 311,969 8 85,295 Gas 96 420 82 810 13 610 Total 493 684 394 VV9 98 905 Operating Expenses:

Operating and maintenance expenses:

Fuel for electric generation 85,575 56,362 29,213 Purchased gas 53,232 41,474 11,758 Purchased power and interchange net 32,431 35,249 ( 2,818)

Other production expenses 9,434 7 377 2,057 Transmission and distribution 12,224 11,782 442 Maintenance 36,660 31,129 5,531 Other operating expenses 40,025 32,127 7 898 Total 269,581 215,500 54,081 Depreciation and amortization 40,370 36,621 3,V49 Taxes other than income 64,227 53,120 11,107 Income taxes (Note 3) V,658 6,497 1,161 Total 381,836 311 V38 70 098 Operating Income 111 848 83 041 28,807 Other Income:

Allowance for funds used during construction:

Allfunds (through December 31, 1976) 21,478 (21,478)

Equity funds (from January 1, 1977) 15,891 15,891 Income taxes (Note 3) (3V3) 4,943 (5,316)

Other net (2,856) (120) (2,736)

Total 12,662 26,301 13 639 Gross Income 124,510 109,342 15,168 Interest Deductions:

Interest on long-term debt 50,968 46,738 4,230 Interest on short-term borrowings 1,956 1,559 397 Amortization of debt discount, premium and expense 613 Allowance for borrowed funds used during construction credit ~13 038) 13 038 Total 40,499 48,863 Net Income 84,011 60,479 23,532 Preferred Dividend. Recpxirements '14,628 13,311 1,317 Earnix@s for Common Stock 8 69 383 8 4V 168 8 22 215 Average Common Shares Outstanding 22,9VO,V41 19,105,191 3,865,550 Per Share of Common Stock:

Earnings (based on average shares outstanding) 83.02, . ~

82.47 8.55 Dividends declared and paid 81.53 81.39 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 (Thousands of Dollars)

UtilityPlant:

Plant in service Electric M,099,932 81,053,254 Gas 123,407 123 359 Common, used in all services 42,868 36,659 Total 1,266,207 1,213,272 Less accumulated depreciation and amortization 341,834 301,139 Plant in service depreciated 924,3V3 912,133 Construction work in progress (Note 2) 619,147 366,039 Plant held for future use 3,966 1,361 Utilityplant depreciated 1,54 V,486 1,279,533 Investments and. Other Assets:

Investments in and receivables from subsidiaries 7,335 10,091 Other investments and. notes receivable 4,542 7,797 Other physical property (less accumulated depreciation: 1977 829,000; 1976 $ 24,000) 1,354 1,363 Total investments and other assets 13,231 19,251 Current Assets:

Cash (Note 4) 3,969 2,580 Special deposits and working funds (Note 4) 2,075 2,V16 Accounts receivable:

Service customers 36,V59 33,774 Miscellaneous 7,918 6,054 Allowance for doubtful accounts (1,293) (1,236)

Materials and supplies (at average cost) 15,280 12,609 Fuel (at average cost) 23,425 23,V97 Prepayments and other 7,543 7,902 Total current assets 95,676 88,196 Deferred Debits:

Deferred interest 4,486 4,1V6 Unamortized debt issue costs 5,472 4,913 Other 6,820 6,921 Total deferred debits 16,V78 16,010 Total 61 673, 171 $ 1,409,990 22

Liabilities 1977 1976 (Thousands of Dollars)

Capitalization:

Common stock 8 66,441 8 56,250 Premiums and expenses 326,V44 256,091 Retained earnings 186,985 152,069 Common stock equity 580,1VO 464,410 Preferred stock 218,561 168,561 Long-term debt, less current maturities V01,917 673,639 Project financing (Note 2) 53,617 Total capitalization 1,554,265 1,306,610 Current Liabilities:

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

Customers'dvances for construction 5,733 5,488 Deferred income taxes accelerated depreciation and amortization 1,000 973 Other 2,172 1,410 Total deferred credits and other 8,905 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 XM FXXDGQ'CD'OSXTXOM For the Years Ended December 31, 1977 and 1976 1977 19V6 (Thousands of Dollars)

Source of Funds:

Funds fr6m operations:

Net income S 84,011 S 60,479 Principal non-fund charges (credits) to income:

Depreciation and amortization 40,370 36,621 Equity in undistributed loss of unconsolidated subsidiaries 3,043 191 Deferred income taxes 27 (210)

Allowance for funds used during construction net of tax~t27,183) ~21,478)

Total funds from operations S100 288 8 78603 Funds from external sources:

Common stock S 81,660 64,243 Preferred stock 49,425 Long-term debt 27,940 81,001 Project financing 53,617 Sale of investment 4,983 Total funds from external sources 217,625 145,244 Decrease in working capital* 16,473 22,740 Other items net 2,332 Total source of funds $ 536,718 S243,587 Application of Funds:

Plant additions and replacements, excluding allowance for funds used during construction capitalized $ 284,610 $ 194,266 Repayment of long-term debt 3,013 8,500 Dividends on preferred and common stock 49,095 39,V21 Other items net 1,100 Total application of funds $ 336,718 $ 243,587 Increase (Decrease) in Working Capital':

Cash S 1,389 $ (15,591)

Accounts receivable 4,792 5,170 Materials, supplies and fuel 2,299 3,146 Accounts payable and accrued expenses (26,264) (9,686)

Customers'eposits, advances and other 3,405 (7,V66)

Other net ~2,094) 1,987 Net decrease in working capital ~816,473) ~822 740)

'Excluding current maturities of long-term debt.

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

Retained, earnings at beginning of year $ 152,069 $ 131,311 Add.Net income 84,011 60,479 Total 236,080 191,790 Deduct Dividends:

Preferred stock 14,628 13,311 Common stock 34,467 26,410 Total 49,095 39,721 Retainecl earnixgs at encl of year $ 186,985 $ 152,069 See Notes to Financial Statements, including Note 1 as to significant accounting policies.

LONG-TERM DEBT (a) Representing pollution control funds December 31, 1977 and 1976 deposited with a revenue bond trustee tobe disbursed 19VV 1976 as construction of the facilities being financed progresses.

(Thousands of Dollars)

(b) S30,000,000 bears interest at 114% of prime First Mortgage-Bonds: rate plus 'k of leuc. S20,000,000 bears interest at a 3'/8% series due December 1, 1977 8 2,500 percentage of prime rate to September 1 in the year 3% series due AprQ 1, 1979.......8 4,000 4,000 indicated as follows: 1978, 121%; 1979, 122%. The 2'/~% series due February 1, 1980 5,000 5,000 actual interest rate to final maturity of these loans is 9.80% series due June 1, 1980 .... V5,000 V5,000 not to exceed 7'/a% per annum; payments in excess of 2~/s% series due December 1, 1980 6,000 6,000 this amount are carried as deferred interest.

9.50% series due February 15, 1982 100,000 100,000 (c) Hepresents the present value of future lease 3'k% series due February 1, 1983 14,600 14,500 payments (discounted at the interest rate of V.48%)

3'/a% series due November 1, 1983 5,723 5,723 of a combined cycle plant sold and leased back from 3'/4% series due March 1, 1984 ... 15,000 16,000 the independent owner-trustee formed to own the 5'/8% series due October 1, 1987 .. 15,000 15,000 facility. The lease requires semi-annual payments of 4.70% series due March 1, 1989... 20,000 20,000 82,299,340 through June 1983 and then S2,581,850 4.80% series due November 1, 1991 35,000 35,000 through June 2001, and includes renewal and 4.45% series due June 1, 1992 ... 25,000 25,000 purchase options based on fair market value. This 4.40% series due December 1, 1992 25,000 25,000 plant is included in plant in service at its original 4.50% series due September 1, 1993 15,000 15,000 cost of 854,404,530; accumulated amortization at 6.25% series due September 1, 1997 25,000 25,000 December 31, 1977 was 83,295,000.

10.625% series due November 15, 2000............. V5,000 75,000 Aggregate annual payments which willbe due on 7.45% series due March 15, 2002 60,000 60,000 long-term debt and for sinldng fund requirements 6.20% series due April 1, 2004.... 50,000 50,000 through 1982 are as follows: 1978, 8552,000; 1979, 6.45% series due April 15, 2007... 43,000 854,594,000; 1980, 886,639,000; 1981, 83,688,000; Less securities held by trustee (a) .

Unamortized discount and premium.

(14,039)

.~933)

Total First Mortgage Bonds 598,251 Unsecurecl Xfotes Payable:

Due September 1, 1979

~ 802 571,921 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 of this type have in the past been satisQedby certification of (b) 50,000 50,000 property additions of 1-2/3 times the amount stated Capitalized. Lease Obligation (cg .. 54,218 54,V31 and the company expects to meet similar Total Long-Term Debt .... 702,469 requirements in that manner in the future. For 676,652 sinking fund payment requirements and Less Current Maturities; redemptions at the option of the holders on 3~/8% series due December 1, 1977 (2,500) cumulative preferred stock, see Capital Stock.

Capitalized lease obligation....... ~559) ~513 Substantially all utility plant, other than the Total Long-Term Debt combined cycle plant mentioned above and the lass Current Maturities 9701 917 9673 639 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 of dividends 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 Call Price CLASS Number of Shares Par V'alue Per Share Per Outstanding (Before Authorized Outstanding Share (Thousands ofDollars) Adding Accumulated 19VV 1976 Common Stock (ag .... 50 000 000 26 5VB 428 22 500 000 8 2.50 S 66 441 8 56 50 Cumulative Preferred.

Stock:

81.10 preferred........... 155,945 155,945 25.00 S 3,898 8 3,898 8 27.50 82.50 preferred........... 103,254 103,254 50.00 5,163 5,163 51.00 82.36 preferred........... 40,000 40,000 50.00 2,000 2,000 51.00 84.35 preferred........... V5,000 75,000 100.00 V,500 7,500 102.00 Serial preferred:..........

82.40 series A.......... 240,000 240,000 50.00 12,000 12,000 50.50 82.625 series C......... 240,000 240,000 50.00 12,000 12,000 51.00 82.275 series D......... 200,000 200,000 50.00 10,000 10,000 (b) 83.25 series E.......... 320,000 320,000 50.00 16,000 16,000 (c)

Serial preferred:.......... 2,000,000 88.50 series F.......... 210,000 210,000 100.00 21,000 21,000 (d) 88.50 series G.......... 90,000 90,000 100.00 9,000 9,000 (d) 810 series H ........... 400,000 400,000 100.00 40,000 40,000 (e)

S10.70 series I ......... 300,000 300,000 100.00 30,000 30,000 (f) 88.32 series J.......... 500,000 100.00 50,000 (g)

Serial preferred .......... 3,000 000 25.00 6,535,000 2,874,199 ',374,199 8218,561 8168,561 (a) On AprQ 21, 1977, the stockholders of the (f) Not redeemable prior to December 1, 1985 company approved an amendment to its Articles of through certain refunding operations; otherwise at Incorporation increasing its authorized Common 8110.70 through November 30; 1980 to $ 101.00 after Stock from 30,000,000 to 50,000,000 shares. November 30, 19/0. Applicable sinking fund (b) From 851.00 through February 29, 1980; then provisions require the retirement of 15,000 shares at to 850.50 thereafter. par annually commencing December 1, 1981 (representing annual payments of 81,500,000). The (c) From 852.50 through February 28, 1978; then company may, but is not required to, redeem an to S51.50 through February 28, 1983; then to S51.00 additional 15,000 shares at par on December 1 in any thereafter. year beginning in 1981.

(d) Redeemable at par after May 30, 1979 (series F) or May 30, 1982 (series G) at the option of either (g) Not redeemable prior to September 1, 1982 the company or the holders. Both series are also through certain refunding operations; otherwise at 8108.32 through August 31, 1982 to 8101.00 after subject to redemption at par at the demand of the holders prior to the foregoing dates under certain August 31, 1992.

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 of 16,000 shares at par annually commencing September 1, 19V9 (representing annual payments of 81,600,000).

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

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

Cumulative Premiums Common Stoic Preferred Stock 811C1 Number Par Value Number Par Value (Expenses)

Description of Shares Amount of Shares Amount Net Balance, December 31, 19VS . .. 19,000,000 847,500 2,374,199 8168,561 8200,724 Common Stock 3,500,000 8,V50 55,367 Balance, December 31, 1976 . .. 22,500,000 56,250 2,374,199 168,561 256,091 Common Stock 4,076,428 10,191 71,338 Cumulative Preferred Stock, 88.32 Series J 500,000 50,000 685 Balance, December 31, 1977 . .. 26,576,428 866,441 2,874,199 4218,561 8326,V44 NOTES TO PXXDGII'C&kLS55LTEMEMTS

1. Summary of Significant Accounting Policies (c) Allowance for funds used during constzuc-(a) System of accounts The accounting records tion In accordance with the regulatory accounting of the company are maintained in accordance with practice prescribed by FERC and the ACC; the com-the uniform system of accounts prescribed by the pany capitalizes an allowance for the cost of funds Federal Energy Regulatory Commission (FERC) and used to finance its constzuction program (AFC). AFC, used by the Arizona Corporation Commission (ACC). which does not represent current cash e~fs, is (b) Plant and depreciation Property is stated defined as the net cost during the period of construc-

'ion at original cost as deQned for regulatory purposes. of borrowed funds used for construction, and a The cost of additions toutilityplantandreplacements reasonable rate on funds obtained from other sources.

of retirement units is capitalized. Replacements of AFC has been calculated using a composite rate of 8%

minor items of property are charged to expense as in 1976 and 1977. This amount is capitalized as a incurred. In addition to direct costs, capitalized items part of the cost of utilityplant, resulting (i) through include the present value of certain future lease pay- December 31, 1976, in a corresponding credit to other ments (see Long-Term Debt), research and develop- income for the full amount of AFC, and (ii) from ment expenditures pertaining to construction January 1, 1977, in a credit to other income for the projects, indirect charges for engineering, super- portion ofAFC attributable to equity funds and a credit vision, transportation, and similar costs, and an to interest deductions for the portion of AFC allowance for funds used during construction(see (c) attributable to borrowed funds. This change in the below). Costs of depreciable units of plant retired are method of reporting AFC and the rate used by the eliminated from plant accounts and such costs plus compKoy conform to an order issued by FERC in removal expense less salvage are charged to accumu- February 197V.

lated depreciation. Contzibutions in aid of construc- (d) Subsidiaries The company's investments in tion are credited to plant cost. subsidiaries are stated at equity, less a provision to Depreciation is provided on a straight line basis reQect such investments at estimated recoverable at rates authorized by the ACC which are generally values. The subsidiaries are not consolidated 2.85% to 4.16% for electric plant, 3.25% for gas plant, inasmuch as they are not significant in relation to the end 2.85% to 15.50% for common plant. financial statements of the company.

(e) Income taxes The company uses Plant to an unrelated corporation ("Owner" ), which accelerated depreciation methods for income tax appointed the company as its agent to complete purposes. As prescribed by the ACC for rate making construction of the unit and agreed to resell it to the and accounting purposes, the company began company. The company is unconditionally obligated providing deferred income taxes for the difference to repurchase the unit at or about the time of its between accelerated and straight line tax completion (presently scheduled for May 31, 1980),

depreciation of property, placed in service after and in no event later than July 31, 1981, for an January 1, 1977. Previously the difference was amount equal to the owner's cost of acquiring, included currently in income. The effect ofthis change completing and Qnancing the unit.

is not material. Income tax reductions arising from Financing is to be provided to the owner by bank timing differences respecting certain other items of loans in two categories, the Qrst consisting of up to income and expense reported dif'ferentiy for income 8218,500,000 to be disbursed as construction tax and financial reporting purposes and from progresses, to bear interest at 115% of prime and to allowable investment tax credits are reflected become due on the date the company is obligated to currently in income, in accordance with orders or repurchase the unit; such loans can then be practices of the ACC for rate making purposes. refinanced by the compMiy (with interest thereon Income tax reductions relating to the Qve-year after a certain date increasing by '/a%) for payment amortization of emergency facilities inpreviousyears in installments extending into 1984. Loans in the were deferred, with the deferred amount being other category aggregate 841,500,000 of pollution restored to income over a twenty-year period. control financing provided through a governmental Income taxes included in operating expenses are authority to the owner (with funds not yet required reported before tax benefits (computed at the for the pollution control facilities included in Unit 4 statutory rate before January 1, 1977, and thereafter being held in an escrow for temporary investment, at the effective rate for the year) due to interest 838,581,000 being so held at December 31, 19VV);

expense applicable to construction work in progress. these loans bear interest at V0% of prime and are due Before January 1, 1977, such beneQts are shown in in 1987, but in effect will become due when the Other Income Income taxes, and thereafter are, in company is obligated to repurchase Unit 4 unless effect, included in the credit to interest deductions for assumed by the company at that time (which the AFC attributable to borrowed funds. assumption will require the issuance of the (f) Employees'ension plan The company's company's first mortgage bonds in an amount equal policy is to accrue and fund the current and prior to the balance of such pollution control loans).

service costs of its pension plan. Prior service costs So long as the owner remains the principal are amortized over a fifteen-year period. obligor thereon, both categories of loans will be (g) Revenues and recognition of certain costs secured by Unit 4 and the company's repurchase Timing differences resulting from electric fuel obligation. The two categories are subject in varying adjustment clauses are reflected by deferring degrees to cessation in funding or to acceleration, purchased power and fuel costs, or revenues, to be and interest on the pollution control loans is subject matched against revenues or costs in subsequent to increase, under certain conditions which did not periods. The estimated cost for gas purchased from exist at December 31, 197V. Pursuant to the loan the company's supplier, but not billed to gas documents, increases in common stock dividends are customers, is also deferred to be matched against subject to certain restrictions related to current year revenues recorded in the subsequent period. Under its earnings; for the year ended December 31, 1977, up approved rate schedules, the company may pass on to to 858,976,000 could have been paid in common its customer increases and decreases in specified. stock dividends compared to the 834,467,000 taxes, purchased power and fuel costs, and resale gas actually paid.

costs. The company will continue to include costs of (h) Research and development costs The construction of Unit 4 in construction work in company expenses research and development costs progress on its balance sheet. Net outstanding on a current basis, except that those costs which may balances of the aforementioned bank loans, together result in utility plant are deferred for subsequent with capitalized interest (7.93% for the period ended inclusion in plant or to be written offifthe applicable December 31, 1977) and related fees thereon, will project is abandoned. appear as a liability. In addition to the construction

2. Project Financing costs financed by the owner through December 31, On July 29, 1977 the company sold the 1977, the compMiy had incurred construction costs construction work in progress for Unit 4 of its Cholla of approximately 814,000,000, for which reimbursement will be requested from the owner.

3. Income Tax Expense 4. Short-Term Borrowings ancl Compensating Details of factors related to income taxes were Balances as follows (see Note 1): The company had 8107,000,000 of bank lines of Year Ended December 31, credit (all unused) as'of December 31, 1977 and 19VV 19V6 1976.

Average aggregate'short-term borrowings (Thousands of Dollars) outstanding during 1977 and 1976 were 820,195,000 Federal and state income tax and 816,133,000, respectively; weighted daily expense at statutory rates 845,746 831,435 average interest rates on such amounts were 6.59%

Increases (reductions) in and 6.75%, respectively. The maximum amount of taxes resulting from: short-term borrowings outstanding at any month Timing differences: end was 861,000,000 in 1977 and 846,000,000 in Tax over book depreci- 1976.

ation not deferred..... (4,681) (5,901) r~uired at banks, but Allowance for funds used Compensating balances during construction which were not legally restricted, were generally 10% of the line plus 5% (10% in some instances) of capitalized ............ (13,V65) (10,884)

Sale of combined cycle borrowings. Substantially all cash shown in the plant ................. balance sheet is considered compensating balances.

3,4V8 Other principally taxes, S. Pension Plan pensions and other The comp~'s pension plan covers virtually all items capitalized ...... (2,035) (5,758) employees. Contributions to the plan were as follows:

Other items ............... (30) 194 1977, 87,042,000; 1976, 86,086,000. The liabilityfor Investment oredtt.........~18,997 ~10,800 unfunded prior service costs at July 1, 1977 was Taxes currently payable ..... 6,238 1,764 81,846,000 which is expected to be completely fUnded Deferred taxes included in by 1981.

expenses: 6. Commitments and Contingencies Deferred .......... 237 The company's 1977 and 1976 income includes Restored .............~210 ~210 revenues of approximately 815,265,000 and Total deferred ....... 27 (210) 89,220,000, respectively, under a fuel adjustment clause and interim rate increase applicable to Total federal and wholesale sales that may be refUndable depending on state income taxes .........

the outcome of pending FERC proceedings. Total 8 6265 8 1,654 FERC revenues subject to refund at December 31, Federal and state income taxes 1977, aggregated approximately 831,650,000.

included in: The company is involved in certain other legal Operating expenses ....... 8 V,658 8 6,497 and environmental proceedings.

Other income ............. 373 (4,943) Based upon the opinion of its counsel, the Allowance for borrowed funds company believes that the ultimate resolution of the used during construction above matters will not have a material effect on the credit................. (1,766) accompanying financial statements.

The company has significant purchase Total .. 8 6265 8 1,554 commitments in connection with its continuing construction program. The construction program is Taxes currently payable (refundable):

currently estimated at 8376,000,000 for 1978.

Federal Annual rentals under non-capitalized, non-8 2,216 8 (965) cancellable leases were not material.

State 4,022 2,V29 Total .. 8 6,258 8 1764 Deferred taxes Federal .

State Totet....,........... 8 (122) 149 27

~9 8

~$

(201) 210 The company has approximately 82,500,000 of unused investment tax credit which can be carried forward through 1984.

7. Lines of Business 8. Replacement Cost Data (Unaudited)

Listed below is selected information relating to The impact of the rate of inQation experienced the company's electric and gas operations as of in recent years and other factors have resulted in December 31, 197V and for the year then ended: replacement costs of productive capacity that are significantly greater than the historical costs of such Electric Gas assets reported in the company's financial state-(Thousands of Dollars) ments. In compliance with reporting requirements, Operating revenues ...... S 397,264 8 96,420 estimated replacement cost information will be dis-Operating income before closed in the compaay's annual report to the Securi-income taxes .......... 109,154 10,352 ties and Exchange Commision on Form 10-K Utility plant ............. 1,753,809 135,511 Accumulated depreciation and amortization ...... 292,969 48,865 Capital expenditures ..... 282,625 1,985

9. Selected. Quarterly Financial Data (Unaudited):

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

We have examined the balance sheets of Arizona Public Service Company as of December 31, 197V and 1976 and the related. statements of income, retained earnings and Sl changes in financial position, and schedules of capital stock ACCO and long-term debt for the years then ended. Our exandna OPXMXOM tions were made in accordance with generally accepted Haskins P Sells, auditing standards and, accordingly, included such tests of Certified Public Accountants the accounting records and such other auditing procedures Phoenix, Arizona 85003 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 (Thousands of Dollars)

Operating Revenues 8 493,684 8 394,779 8 359,74V 8 273,599 S 224,956 Operating Expenses:

Operating and maintenance expenses 269,581 215,500 196,475 153,006 116,864 Depreciation and.

amortization 40,370 36,621 32,V93 26,398 23,529 Taxes 71,885 59,617 56,414 38 413 34,032 Total 381,836 311,738 285,682 21V,817 1V4 425 Other 12,662 26,301 22,003 17,065 9,097 Deductions 40 499 48 863 39 572 Income'nterest 35,890 28,361 Net Income 8 84,011 8 60,479 8 56,496 8 36,957 8 31267 Preferred Dividend Requirements 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 69,383 $ 47,168 S 46,074 8 30,699 8 27,V16 Book value per share 8 21.83 8 20.64 8 19.98 S 20.13 8 20.74 Earnings per average share of common stock outstanding 8 3.02 8 2.4V 8 2.60 $ 2.34 $ 2.63 Dividends paid per share 8 1.53 S 1.39 $ 1.36 8 1.36 8 1.21 Shares of common year end 26,576,428 22,500,000 19,000,000 15,000,000 12,500,000 average 22,970,741 19,105,191 17,739,726 13,102,V40 10,527,397 Number of common shareholders 66 358 56,011 56 003 43 497 35 687 Comments on the of Oyerations Increases in operating revenues and expenses reQect periods with increased service cur~ments by the increases in unit sales of electricity. Operating company.

revenues also reQect rate increases (some of which In addition to the effect of volume increases on are subject to refund) and effects of a@ustment operating expenses, the cost of fuel used for the clauses. generation of a given amount of electricity has risen The rate of increase in unit sales of electricity and is expected to rise further. The rise was par-declined in 1975 because of customer resistance to ticularly acute in 1977 due to renegotiated coal sharply higher prices of energy and effects of adverse contracts, higher gas costs and the necessity for economic conditions, and customer resistance is burning more oil to meet demand growth and to expected to continue to affect unit sales. Offsetting replace hydroelectric power formerly available factors resulted in 1976 and 1977 from a signiQcant from other sources that were affected by drought increase in wholesale sales and in 1977 from an conditions in 1977. Increased maintenance expense extraordinarily warm summer. Unit sales of gas are is discussed on page 10.

substantially affected by weather conditions, but Depreciation and amortization (at rates which generally may be expected to decline in future increased as of January 1, 1975) and taxes (pri-31

marily property taxes) increase with the size of the Recent issues of preferred stock (increasing the company's utility plant and, in the case of property dividend requirement) and common stock (increas-taxes, with the amount of the company's operating ing the average number of shares outstanding) are income as used by the taxing authorities in comput summarized on pages 26 and 27.

ing assessed valuation. The company's net income and its earnings for The principal component of other income is the common stock represent composites of cash and allowance for funds used during construction, the non-cash items (see the Statement of Changes in total amount of which is primarily a function of con- Financial Position) and, in part, reQect accounting struction work in progress during a given period. practices unique to regulated public utilities.

Starting January 1, 1977, a significant portion of the allowance, and related income tax benefits, is NOTE: A detailed Statistical Report for Financial reQected. as a credit to interest deductions as dis- Analysis 1967-1977 is available on request.

cussed in Note 1 of Notes to Financial Statements. Direct inquiries to George H. Toler, Treasurer, Interest deductions (before such credit) have in- P. 0. Box 21666, Phoenix, Arizona 85036.

creased substantially with the issuance of large amounts of new long-term debt. Fluctuations in income tax expense are shown in Mote 3 of Notes to Financial Statements.

OTHER PXNMDQ'CMJ A1>TD OPEKATXMG STATISTICS 1977 1976 1975 1974 1973 (Thousands of Dollars)

Capitalization:

Common equity S 580,170 S 464,410 S 379,535 S 302,009 S 259/49 Preferred stock 218,561 168,5Bl 168,561 138,561 68,561 Long-term debt V01,91 V 673,639 595,569 340,976 369,B09 Project Qnancing 53617 Total S 1 554,265 S 1,306610 S 1 143,665 S 781 546 S 697,419 UtilityPlant Gross S 1,889320 S 1,580,672 S 1,368,370 S 1,190,399 S 1,003,218 UtilityPlant Depreciated. S 1 547,48B 1+79,533 1,103,569 955,399 V91,578 Number of Employees at Y'ear End. 4,570 4,042 3,731 3,898 3,899 Average Wage per Hour V.99 S 7.44 S 6.82 S 616 S 5.61 Electric:

Electric resources (kw) 2,872,500 2,790,VOO 2,568,700 2 343,600 2,191,000 Peak load (kw) 2,373,400 2,190,900 2,068,300 2,032,000 1,812,VOO Electric sales total (mwh) 10,481,972 9,606,571 8,892,570 8,692,304 8,098,712 Number of customers at year end 357,884 342 059 331,382 323,094 308,643 Gas:

Total gas sales (m therms) 463,643 491,007 526,659 518,999 547,068 Number of customers at year end 339,949 339,265 336,839 334,908 328,406 32

Shaxehold.er XIlfOZIRckCXOXl Stock Listing Nhv (J/0) r~ Nss.

Fccr Comers (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.

IIQ4 P Transfer Agents otfJI, First National Bank of Arizona, Phoenix, Arizona Irving Trust Company, New York, N.Y.

(Common stock only)

FHO Registrars ram ~ The Valley National Bank of Arizona Phoenix, Arizona

~gL Irving Trust Company, New York, N.Y.

(Common stock only)

C3 Electric Hoss General Counsel

&Combed Snell P WQmer, Phoenix, Arizona La Ma)or APS Power Plants (J/0 Joint Ownership)

~ Auditors Principal APE Transndssion Uncs Haskins P Sells, Phoenix, Arizona Transmission L1nes Operated for Ot'ners Dividend. Reinvestment and. Stock Purchase Plan A Prospectus describing this plan for holders of the company's Common stock is avaQable to shareholders upon request. Write:

About the Company OQice of the Secretary, Sta. 1240, Arizona Public Service is engaged princi- at the address below.

pally in the generation andsale ofelectricity Form 10-K and in the purchase and sale of natural gas.

Successor to a series of small utility A copy of our Annual Report to the the Securities and Exchange operations originating in 1886, the com-Commission, Form 10-E, willbe pany was incorporated in 1920 under the available after March 31, 1978 laws of Arizona. without charge, upon written The company's service territory includes all or part of ll of Arizona's 14 request of shareholders. Write:

OfXice of the Secretary, Sta. 1245, counties. It is estimated that the company's at the address below.

electric and/or natural gas service reaches approximately 1,646,000 persons, or about Maxlzmg Ad.dress.

70% of the state's population. P.O. Box 21666 Arizona Public Service Company's Phoenix, Arizona 85036 principal executive oiIices are located at 411 North Central Avenue, Phoenix, A.rizona. Phone (602) 2V1-7900.

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