ML18192A385

Arizona Public Service Company 1976 Annual Report

ML18192A385
Person / Time
Site:	Palo Verde
Issue date:	02/24/1977
From:	Arizona Public Service Co
To:	Office of Nuclear Reactor Regulation
References
Download: ML18192A385 (32)

Text

NOTICE THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE RECORDS FACILITY BRANCH 016. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAlL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

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APS People . 12 CQIMYEIMTS Employees, Safety Performance, Management Changes, New Directors Letter to Shareholders Legal Matters 14 Business and Finance . Directors and Officers 15 Earnings and Dividends, Revenues, Expenses, Rate and Regulatory Matters, Lines of Business, Operating Revenue Financing, NYSE Audit Committee Policy, Analysis .. 16 Common Stock Price Range Financial Statements 17 Operations Summary of Operations and Comments..... 27 Electric and Gas Business, Construction, Energy Resources, Load Management, Other Financial and Operating Statistics ....28 Solar Energy Activities, Community Support Shareholder Information .... inside back cover

% Increase 1976 1975 (Decrease)

Property and Plant:

Total utility plant, year end $ 1,580,672,000 $ 1,368,370,000 15.5 Construction expenditures $ 194,266,000 $ 167,912,000 15.7 Sales and Customers:

Total operating revenues $ 394,779,000 $ 359,747,000 9.7 Total electric sales (mwh) 9,606,571 8,892,570 8.0 Electric customers, year end 342,059 331,382 3.2 Total gas sales (m therms) 491,007 526,659 (6.8)

Gas customers, year end 339,265 336,839 .7 Income, Earnings, Dividends:

Net income $ 60,479,000 $ 56,496,000 7.1 Earnings available for common stock $ 47,168,000 $ 46,074,000 2.4 Average common shares outstanding 19,105,191 17,739,726 7.7 Earnings per average share of common stock 2.47 $ 2.60 (5.0)

Dividends paid per share of common stock 1.39 $ 1.36 2.2 Shareholders:

Common 56,011 56,003 Preferred 6,243 5,641 10.7 Employees, year end: 4,042 3,731 8.3

'jj'Oo OOUR SRIEKRKHOOLDDKIM In reviewing your company's 1976 business highlights, you will note that earnings per share of common stock declined from $ 2.60 to $ 2.47. These lower than anticipated results were caused by rate case and judicial proceedings not being resolved as early as we had expected.

We have always contended that matters subsequent to the historical test year should be considered in rate proceedings and, last spring, found it necessary to take our position before the Maricopa County Superior Court. This court recognized the validity of the forward look, allowing the company to place increased rates into effect under bond April 23, 1976.

Other parties appealed the lower court action to the Arizona Supreme Court. This resulted in a decision last September in which the higher court agreed with the company's position, ruling that the Arizona Corporation Commission has the authority and discretion to consider matters subsequent to the test year in its rate deliberations. This ruling was part of a decision which held that the Superior Court should not have interfered with the Commission's.last permanent rate decision, and referred the question of rates back to the Commission.

The Commission ordered a" refund to customers of approximately $ 17 million collected under rates authorized by the Superior Court. The Commission also approved an overall 13.8'/0 interim rate increase effective October 1. The net effect was lower earnings for the year, with an improvement the fourth quarter when the interim increase applied.

Your company does not consider the 13.8'/o interim increase adequate. Consequently, we are currently before the Corporation Commission with a request that the interim increase be made permanent and that additional rate relief be granted in the form of a two-step increase. Step 1 seeks a 6.5'/0 increase effective June 1, 1977, and Step 2 asks for an 11.1'/o increase effective January 1, 1978.

In this request, we are urging the Commission to consider the forward look permitted in the Supreme Court ruling.

Despite the adverse decision related to the refund and towered earnings for the year, your company in 1976 continued to make progress toward a more conservative capital structure. Common equity increased to 35.4'/0, with debt at 51.7'/0 and the balance preferred. We hope to achieve our objective of at least 38'/0 common equity by 1978, and thereafter to minimize dilutions.

The Need for a National Energy Policy The severe shortage of natural gas suffered by much of the United States this past winter again emphasizes the need for a unified national energy policy a policy geared to provide energy supplies that will adequately support our nation's economic growth.

Even though the Arab oil embargo brought the energy dilemma to a head, such a policy has not been forthcoming. We hope the additional lessons learned from the natural gas crisis will spur Congress and the Administration into action.

A sound policy has to recognize that transportation takes about 60'/0 of our total energy output, and that most of our energy and fuel problems are man-made. Moreover, the policy must acknowledge that jobs and the economic health and growth of our nation depend upon adequate energy supplies.

Our country must adopt programs that will motivate consumers to eliminate wasteful uses of energy. Less dependence on foreign imports calls for legislation that stimulates the exploration and deVelopment of domestic oil and natural gas reserves. At the same time, our nation must establish environmental goals which strike a balance with the needs of an energy-based economy and encourage better utilization of our nation's abundant coal resources.

Streamlined procedures are needed to minimize delays in carrying out the nuclear energy program.

We must accelerate research and development of the breeder reactor, solar, geothermal and other yet-to-be-developed energy sources.

Finally, a national energy policy must assure the energy industry full opportunity to provide consumers'equirements, unfettered by unnecessary and ill-advised governmental regulations.

APS remains strongly committed to solar energy, but we realize that at best it can be relied upon for only a small portion of the total energy to be consumed by the end of the century. Fortunately, your company is embarked on a program of coal and nuclear power generation which, by the mid-1980's, will produce 90'/0 of the electricity our customers will need.

QIuil8GIAd ReIIAUeotMelnt eland Sttock PL!lli'cklase PIG!rI In response to many shareholder requests, we have initiated a dividend reinvestment and stock purchase plan, effective with dividends payable March 1, 1977. This plan provides holders of the company's common stock a convenient, economical means of systematically acquiring additional shares.

If you would like further information, please write to the company secretary at the address listed on the inside back cover.

ArItf-93uiclle~ir IlrIHIaHue Qetfeattedl One of the most serious challenges to confront your company in 1976 was the anti-nuclear initiative which appeared on the November general election ballot.

The measure was soundly defeated, thanks in large part to the voluntary support of our employee families in informing the public about the issue. We were tremendously gratified by the supportive response from throughout Arizona by labor, scientists, educators, business leaders, people from all walks of life. We also appreciate deeply the encouragement you, our shareholders, gave in the successful effort to keep nuclear energy in Arizona's future.

Sincerely, February 24, 1977 W. P. REILLY KEITH L TURLEY Chairman ol the Board President and Chiel Executive Oificer

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Earnings and Dividends dividend income for shareholders'ederal Earnings per share on common stock amounted income tax purposes. However, preferred to $ 2.47 on 19,105,191 average shares dividends remain fully taxable as dividend outstanding in 1976. This compares with per income.

share earnings of $ 2.60 in 1975, with 1,365,465 Revenues fewer average shares. Operating revenues of $ 394.8 million were up A Maricopa County Superior Court 9.7% over 1975. Factors contributing principally decision last spring was rejected later by the to the gain were: increased electric general Arizona Supreme Couit, leading the Arizona business; revenue from retail and wholesale Corporation Commission to disallow a 10.5% customers from rate adjustment clauses to retail rate increase and order a refund to cover increases in power plant fuel, purchased customers. The refund, amounting to power and natural gas costs; plus the interim approximately $ 17 million in revenues rate increase effective since October. Additional collected over a five-month period, had a rate matters are reviewed later..

marked impact on 1976 earnings. Electric business produced $ 312 million or However, the Commission granted a 79% of our 1976 total operating revenues, with 13.8% interim increase in retail rates effective the balance of $ 82.8 million coming from gas October 1, 1976, and this action turned the operations. Please refer to "Lines of Business" earnings decline around. As a result, earnings on page 16 for a five-year comparison of for the last quarter of 1976 were 86 cents per Operating Revenues and Operating Income share of common, versus 52 cents per share Before Income Taxes.

for the same quarter of 1975. Expenses An increase to 37 cents per share in the Total operating expenses amounted to quarterly dividend paid to holders of common $ 215.5 million, up 9.7% over 1975. Significant stock December 1, 1976, brought the total for items among our operating and other expenses the year to $ 1.39 and raises the indicated were:

annual dividend rate to $ 1.48. Quarterly ~ Maintenance, up 24.3% due largely to dividends of 34 ceftts per share had been paid increased plant, coupled with continued efforts since December, 1973. to increase the availability of economical power The company estimates that 17% of the from the coal-fired Four Corners Power Plant.

common dividends for 1976 are nontaxable as ~ Generating fuel and purchased gas, up 1976 APS INCOME SOURCES $ 421 NI0,000 DISBURSEMENTS Purchased Gas Purchased Power &

Net Interchange Other Production Electric Electric Expense 9 8% 8.4%, Fuel for Commercial Residential Electric 91 '3.4% Generation 25.8% 25 2%

Other

/

Expenses Other Income Earnings for Electric 11.2% Common Stock Industrial 6.2%

11.2% .+ Gas Other Depreciation & 8.7%

8 Electric Amortization 14 8%

Other Gas 14.2%

11 9% Residential 10.20/ Interest & Preferred Taxes Dividends More than one-half our income is derived production and purchases, plus the purchase from residential and commercial electric of natural gas, account for more than 40%

revenue. Expenses related directly to power of the outlays.

a combined 16.4% because of increased customers for whom the interim increase was electric sales and higher costs of fuel and denied; natural gas from our suppliers. The increase in (2) Other matters relating to fuel and other the outlay for these items did not materially adjustment clauses applicable to wholesale affect earnings because of the fuel adjustment electric customers since April, 1974.

clause. 1976 Financing

~ Interest, up 23.5% due to a greater Principal sources of funds secured from amount of outstanding long-term debt. outside the company during 1976 were: (1) an

~ Depreciation and amortization, up offering of 3.5 million shares of common stock, 11.7% as a result of continued additions to and (2) a sale-lease back financing negotiated plant in service. on the company's new combined cycle electric Rate and Regulatory Matters generating plant in Phoenix.

The Arizona Corporation Commission has The stock was offered to the public scheduled hearings to begin February 28, 1977, December 15 through an underwriting group.

on the company's request to make permanent Marketed at $ 18T/e per share, the offering the refundable interim increase of 13.8% produced net proceeds of $ 64.1 million.

instituted last October. At the same time, the The sale-lease back of the generating company is requesting additional retail rate facility produced approximately $ 55 million, increases designed to meet our revenue needs and an estimated savings of $ 1.5 million until 1979. annually in interest costs.

Our filing for additional rate relief seeks a Funds from these sources were applied to Step 1 increase of 6.5% effective June 1, 1977, the construction program and other purposes, and a Step 2 increase of 11.1% effective to retire short-term debt incurred for these January 1, 1978. Additional revenues from increased wholesale electric rates will be sought through a later filing with the Federal Power Commission.

$ 1,500 In applying for these retail increases, the company is requesting the Corporation Capitalization 310 Commission to consider matters subsequent to Millions of Dollars 1 the historic test year used in rate proceedings.

1,152 This is an effort to overcome regulatory lag 35%

problems and reduce the frequency of future rate increase filings. $ 1,000 982 33%

The Arizona Supreme Court decision, mentioned at the beginning of this section, 801 31%

included a ruling which permits the Commission 13%

to consider this forward approach to rate 678 32o/ 15%

making. 582 31%

14%

Matters pertaining to wholesale electric $ 500 30o/ 9 rates and adjustment clauses affecting our 10%

wholesale customers are pending final 12% 35%

decisions from the Federal Power Commission 46% 52% 52%

and related court proceedings. We do not 43%

56%

believe that any refund of the resulting revenues 20%

collected through December 31, 1976, would 15o/o I gogo 13%

be significant. 1971 1972 1973 1974 1975 1976 Awaiting court and FPC decisions are: (1) a February, 1976, filing with the FPC which led Common Stock Preferred Equity L Stock to an interim, refundable increase in wholesale Lon:Term Short-Term Debt electric rates for certain customers effective since last spring. The increase produces Q Long Debt rTerm (Incturtea Current Maturitiea ot Long-Term Debt) approximately $ 3.2 million annually.

The FPC action will consider not only the rates for customers to whom the interim Capitalization ratios are being strengthened increase has been applied, but also will by more common equity, less dependence on consider the rates for additional wholesale short-term debt.

purposes, and to meet the maturity of $ 8.5 million in first mortgage bonds. ODPIKRA'II'IjooHS The highest amount of short-term borrowings outstanding during 1976 was $ 59.5 million, substantially less than the high of $ 185 Electric million for 1975. Short-term debt was zero at For the first time in 21 years, APS served more the end of 1976. electric customers than natural gas customers Supplementing funds from the above during the past year. Two factors were largely sources, we utilized $ 17 million carried over responsible for this turnabout. One was the from financings the latter part of 1975 which continued steady population growth in our had been invested temporarily in bank service area; the other, a moratorium which has certificates of deposit. We also drew down an restricted gas connections the past two years additional $ 26.3 million from a 1974 Navajo because of declining gas supplies.

County Pollution Control bond issue. We extended electric service to a net total Internally-generated funds contributed an of 10,677 new customers, bringing the year end additional $ 35.9 million to our financial count to 342,059 or 3.2% over 1975. Electric requirements, representing 18% of the total sales increased to 9.6 million kilowatt-hours, up for 1976. 8%, while electric revenue of $ 312 million 1977 Financing Plans showed a gain of 11%.

Financing plans for 1977 are based on Residential sales increased 3% due mainly estimated capital requirements of $ 273 million, to customer growth. Average residential use and may be affected by the outcome of the amounted to 9,268 kwh, about the same as hearing on retail rates scheduled to begin 1975. This level reflects continued customer February 28 of this year. efforts to conserve energy, plus red'uced Tentative plans call for approximately $ 200 heating and cooling loads due to mild weather million of permanent financing. Included will be in both the winter and summer seasons.

one or more issues of common stock, totaling Sales to both commercial and industrial four to five million shares, and a pollution customer classifications were up 7.1%,

control revenue bond issue in the spring. The attributable for the most part to improved balance of permanent financing will include the economic conditions which were particularly sale of senior securities or a possible project evident the latter part of the year.

financing. Sales for resale, long term, increased Proceeds from these sources will be supplemented by'modest amounts each quarter Growth of Peak Load from the new common stock dividend and Electric Resources

-Megawatts-reinvestment plan mentioned in the Letter to Shareholders, page 3. 2,79 Additional cash funds will come from a nominal amount of short-term borrowings, and Resources (includes purchased, power) the balance of capital requirements will be + 2,19 obtained from internal cash generation.

2,000 NYSE Audit Committee Policy The New York Stock Exchange recently has 1,6 instituted a policy requiring listed companies to establish audit committees composed of 1,295 1,407 directors independent of management.

We are pleased to report that APS complies with this requirement, having followed this policy since 1972.

Peak Load Common Stock Price Range (symbol AZP)

Quarter 1976 1975 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 High Low High Low First 17'/e 15'/4 147/e 11 /e Growth of electric resources, up 116% over Second 17 15 16% 13s/e Third 17 /e 15% 16 /e 13'/2 the past 10 years, is keeping ahead of peak 14'/e load requirements.

Fourth 19% 16'/2 I 5 /e

32.6%. This reflects the addition of two including about 230,000 kw through purchased wholesale customers and greater sales to power contracts.

others. With new generating additions, our For an analysis of operating revenues by planned reserve margin amounted to 27.4%.

types of business, please see the table on However, the available reserve was but 6% at page 16. the time of peak demand last July, due to APS resources were called upon last unplanned repairs required on certain major summer to meet a peak electric load of generating units. Eventualities such as these 2,190,900 kilowatts, 5.9% over 1975. Resources point up the necessity for maintaining adequate available to meet the peak totaled 2,790,700 kw, reserve margins.

Construction expenditures during 1976 amounted to $ 194.3 million, an increase of Sources of Electric Energy $ 26.4 million over the previous year. Electric Thousands of MWH property and equipment, including environ-mental protection facilities, amounted to $ 187.3 8% million. Gas facilities required $ 1.8 million, 10,000 and the balance went for common properties.

9 Two additions totaling 330,000 kw were 12% made to the company's generating capacity in 1976.

11%

17% Our first combined cycle generating station, consisting of three units located at the 8,000 25%

West Phoenix Power Plant, added 225,000 kw 16% to the system last May. (See page 5 for 10%

7%

information about the sale-lease back financing.)

About the same time, we began receiving 23% 16%

105,000 kw from our 14% joint ownership of 27% Unit 3 at the Navajo Power Plant. Installation of 6,000 this unit completes the development of this coal-fired plant near Page in northern Arizona.

With the continued expansion of coal-fueled power generation, we were able to produce 68% of our electric requirements from 77% 61% 65% 61% 61% 68% these sources in 1976. (Excluding power 4,000 purchases, coal produced 82.2% of our total generation.)

Economies of coal are shown by these comparative average fuel costs to the company, in cents per million Btu: coal, 32.694; gas, 80.87g; and oil, 251.185.

2,000 Purchased power supplied 12.1% of our electric needs last year, and the balance came about equally from company generation by gas and oil.

We were fortunate in being able to secure a sizable amount of excess power from other sources, as well as an unexpected supply of 1971 1972 1973 1974 1975 1976 natural gas for power plant fuel. These reduced the need for expensive generation by oil.

Because of recent drought conditions in hydroelectric areas of the Pacific Northwest, we Economical coal generation represents a cannot count on any excess power being major portion of APS electric resources, available in 1977, except through existing holding down the use of more expensive oil purchased power contracts. Consequently, we as gas becomes unavailable for power anticipate that more expensive generation will plant fuel. be required this year. This will have an impact

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on customers'nergy costs, but will not affect cancelled last year. This decision stemmed earnings significantly because of the fuel from several factors, including environmental.

adjustment clauses in company rates. road blocks, governmental indecision and To meet future load growth, APS has delay, which affected seriously the economics under construction or plans the following as well as the timing to meet forecast needs.

additions to generating resources over the APS and the other participants continue to next 10 years: hold leases on Kaiparowits coal reserves and Scheduled are now pursuing other alternatives to utilize Type of Nameplate Completion these resources.

Facility Capacity, kw The company's investment in the power Coal, all at Cholla Plant portion of the Kaiparowits project amounted to Unit 2 250,000 1978 $ 2.6 million. APS is amortizing this investment Unit 3 250,000 1979 over a'five-year period.

Unit 4 350,000 1980 The other project on which preliminary Unit 5 350,000 1982 planning has been suspended is the TOTAL 1,200,000 Montezuma Pumped Sto'rage facility. This joint Nuclear, all at Palo Verde, undertaking is being reassessed by the consisting of APS'9.1% participants, as they review the relative costs ownership and their individual financial/resource planning Unit 1 370,000 1982 schedules.

Unit 2 370,000 1984 Unit 3 370,000 1986 TOTAL 1,110,000 During 1976, construction began on Unit 4 Plant in Service at Cholla and continued on the earlier-started Except plant held for future Units 2 and 3. Unit 5 was announced late in the use & plant adjustments year, to fill a major portion of the void left by Millions of Dollars cancellation of the Kaiparowits project. 1,579 On completion of this expansion program, our.wholly-owned Cholla Plant located in $ 1,500 northeast Arizona will be the company's largest 1,367 single source of power, with a capacity of 1,316,000 kw. 1,190 Receipt of the Nuclear Regulatory l Commission's construction permit last May launched construction of the $ 2.8 billion Palo $ 1,000 Verde Nuclear Generating Station. APS is project manager for the four other participants in the project, being developed 50 miles west 741 of Phoenix.

The other participants are EI Paso Electric Company, Public Service Company of New Mexico, Salt River Project (Arizona) and Southern California Edison Company.

At year's end, the project was on schedule, having cleared the threat of an anti-nuclear power initiative measure that was defeated decisively in the November general election.

Reference was made in last year's Annual 1971 1972 1973 1974 1975 1976 Report to two additional planned power projects which have since been suspended.

After several years of planning and Common Q Gas Electric exploration of coal reserves by subsidiaries of APS and two other utilities, the proposed Increased customer energy needs have constructipn of a large generating plant on the required more than doubling our plant in Kaiparowits Plateau in southern Utah was service since 1971.

abnormally warm, to colder-than-normal, and kJlg,g back to abnormally warm in the 1975-76 II heating season.

I: The weather effect is measured by the number of heating degree days, up 34% in 1975, and down 32% in 1976. This fluctuation was reflected in the company's gas business.

Sales totaling 491 million therms declined 6.8% from 1975. However, revenues made a modest gain of 5.3% to $ 82.8 million, due mainly to the adjustment clause covering increases to the company in the cost of gas.

APS was able to supply industrial cus-tomers with more gas than had been expected.

They were curtailed 108 days during the 1975-76 heating season, compared with 160

<<r days of at least partial curtailment that had been forecast.

Anticipating a severe impact on jobs and industrial production because of industrial gas curtailment projections for early 1977, the com-pany contracted for a short-term emergency purchase from a Texas-based pipeline com-pany. The purchase, enabled by regulations of the Federal Power Commission, helped ease somewhat the gas supply situation during the early part of 1977. Arranged on a "best efforts Power flow through the company's major as available" basis, the deliveries fluctuated transmission substations around the system is due to extreme cold weather in other areas monitored and controlled from this dispatch- which limited the amount available to APS.

ing center in Phoenix. Here, operations Average residential use of gas, 631 therms supervisor Bill D. Ashworth uses a "light pen" in 1976, compared with 726 therms the previous to spot control point on substation diagram year. Customer conservation efforts contributed projected by cathode ray tube. to this reduction, along with lower heating needs.

Another potential for supplementing our Gas customer additions during 1976 were power resources, now being studied, is a made in accordance with a Corporation Com-possible exchange on a firm basis with mission-ordered moratorium on new connec-the Pacific Northwest. The arrangement would tions. Addition of 2,426 customers brought the make use of surplus power normally available at year end total to 339,265.

different times of the year in the Northwest and The moratorium took effect in mid-April, Southwest, because of the seasonal variation 1975, limiting gas connections to commitments in peak loads. made prior to that time. The Commission later Should the agreement become a reality, we established a deadline of year-end 1976 for have indicated our interest in as much as new connections on those commitments, except 200,000 kw initially (about 1984), increasing up mobile homes which can be connected through to 500,000 kw in later years. The feasibility of May, 1977. Connections beyond those dates the plan will depend primarily on whether will be limited to variances approved by the sufficient excess power from the Northwest can Commission.

be assured to support the investment in a large As noted in last year's Annual Report, a transmission intertie. Federal Power Commission order essentially Meanwhile, APS continues to seek and limits the gas supply available to APS from its utilize economical, excess power whenever it principal supplier. The company's connected is available from other utilities. load requirements as of October 31, 1974, are Natural Gas the benchmark for this order. Actions prohibiting From 1974 to 1976, winter weather in our new gas connections and restricting service gas service area completed a full circle from for certain new large loads on existing lines are

designed to protect the amount of gas available to generating capacity and associated financing for existing customers. requirements.

APS is continuing to seek supplemental These efforts have a long-range goal of gas supplies whenever they can be secured lowering peak load growth, building up to a within constraints of the FPC. Without additional 100,000-kilowatt reduction from the peak supplies, curtailments are expected to increase . forecast for 1985. This also will improve system for industrial customers, and extend to other load factor.

customer classes in the future. To further encourage customer load man-Load Management agement, the company early in 1977 filed a set Efforts to encourage more efficient use of of rate proposals which provide economic energy continued during 1976 and will be inten- incentives for customers to limit their demand sified through a broad-scale customer load during peak electric use periods and shift some management program in 1977. of their use into off-peak times. These pro-The main thrust of this program is directed posals will be considered by the Arizona Cor-toward lessening energy use at peak load poration Commission as part of the rate hearing periods, thereby holding down customer energy beginning February 28.

costs and minimizing the company's cost of One of Arizona's most abundant natural service. Reductions in the company's costs, resources is sunshine, a resource that creates ultimately benefiting the'customer, can be a unique potential for widespread use of solar realized from lower oil requirements for peaking energy within our service area.

generation, from reduced needs for additions APS took an active part last year in efforts to locate a demonstration solar electric generating facility in the state. We and two other Arizona utilities had committed $ 10 mil-lion toward this project. Our state was one of three finalists, from which a California location was selected early this year by the Energy Research and Development Administration.

Despite this disappointment, our company is continuing to aggressively pursue methods of utilizing solar energy. We are researching and testing solar energy applications wherever they can be adopted to supplement or replace other energy applications.

We are presently cooperating in a state effort to seek an Arizona location for the:

federal Solar Energy Research Institute. Arizona is among 19 areas being considered by the government.

Among our research projects are a solar energy facility designed to heat arid cool a

) company service building, a solar-assisted water heating installation, and another system which recaptures waste heat from air condi-tioners for use in preheating water and other purposes.

APS also has become an important source of solar energy information for customers and the general public, offering a variety of authori-c tative manuals and booklets on the subject.

Community;Support At Polls Parabolic solar concentrator atop company Customer'confidence in the company was service building casts reflection of Merwyn reflected in the outcome of several elections Brown, manager of APS research programs. related to APS operations last year.

Manufactured in Casa Grande, Az., the Arizonans demonstrated strong support for concentrator is part of a solar heating and the company's position against an anti-nuclear cooling test facility. initiative when, by a 7 to 3 margin, they voted

down the measure on the November general best year for safety performance in the com-election ballot. (Similar anti-nuclear issues were pany's history. The number of disabling injuries defeated during the year in six additional states dropped to 3.4 per million manhours worked, five on general election ballots and another 53% below 1975. This compares with the latest in the California primary election last June.) available national average of 7.05 for combina-At a special election in the City of Page, tion gas and electric utilities, published by the Arizona, voters rejected municipal ownership of National Safety Council through August, 1976.

electric facilities. The vote constituted approval Particularly impressive is the record of of continued service from APS, and an Four Corners Power Plant employees. They endorsement of a proposal for the company to compiled more than 1,090,000 manhours purchase the City's share of Glen Canyon Dam worked in 1976 without a disabling injury. This hydroelectric power. achievement earned plant personnel the top Agreements renewing 25-year electric company safety award as well as a citation from service franchises for APS were approved by the Edison Electric Institute.

wide margins by voters in the cities of Holbrook Due primarily to additions required for and Prescott. operation and maintenance of power plants, the number of APS employees increased 311 over the previous year, for a total of 4,042 at the end 8 tern P.KOoP.M of 1976. All employees laid off in 1975 have Employees played a key role in successful either been re-hired or have been given APS efforts to defeat the anti-nuclear initiative, men- job opportunities.

tioned elsewhere in this report. Contract negotiations last year resulted in Over a month-long period prior to the elec- a two-year wage agreement for employees in tion, employees and their families devoted job classifications represented by unions. The thousands of hours of personal time to inform settlement resulted in an 8.5% increase for the others about the issue. Their loyalty and con- first year ending April 1, 1977, and an 8%

cern, their willingness to act on this important increase the second year. Salary adjustments matter, point up why they are considered the for other employees are based on a perform-company's most valuable asset. ance review program.

lt is a pleasure to report that 1976 was the In a constant search for new and better Two of 24 employees compensated during equipment which will reduce drastically the 1976 for productivity suggestions valued at time otherwise needed for repairs. (right)

$ 827,000: (left) Curtis R. Fields of Four Richard J. Bartell of Navajo Division Corners Power Plant submitted idea with demonstrates metal wedge he designed to largest single savings, an estimated $ 735,000 speed pole removal, worth approximate annually. Here he explains to President Keith yearly savings of $ 9,270.

Turley his proposed modifications of plant

Two new directors were named to the 15 board late in 1976: Douglas J. Wall, partner in the law firm of Mangum, Wall, Stoops and Accident Frequency Rate Warden at Flagstaff, Arizona; and Leon Levy, prominent Tucson businessman and Millions of Manhours civic leader.

1.7 Due to the company's mandatory retire-ment age policy, Norman W. Fain, a director since 1965, will not stand for re-election at the 1977 Annual Meeting. His service to the com-pany as a member of the board, as Chairman of the Audit Review Committee and as a member of the Executive Committee is deeply appreciated.

1971 1972 1973 1974 1975 1976 Employees made company history last year when they reduced disabling injuries to the lowest rate in APS records.

ways of performing jobs, the company late in 1975 introduced a suggestion incentive plan Douglas J. Wall Leon Levy related to its existing productivity program.

Cash awards are offered for "Idealine" sug-gestions which cut expenses, improve produc-tivity, reduce maintenance and other costs of 22 I 2*

doing business. The plan is proving highly successful.

Management changes during 1976 included:

Thomas G. Woods, Jr., vice president of Operations, elected executive vice president.

Woods succeeds Max R. Liewellyn, who retired after 42 years in the utility industry of which the Woods Hersey Ca, Jarman last 29 were with APS. He had served as a company officer since 1961.

Two new vice presidents were named Howard F. Hersey, responsible for Gas Oper-ations, and Charles D. Jarman, in charge of Engineering Services. (

Additional responsibilities were assumed by Lyman K. Mundth, former vice president of Power Production now responsible for Electric Operations, and Edwin Van Brunt, Jr., former vice president of Nuclear Services now respon- 1'undth sible for Construction Projects. Van Brunt Van Brunt supervises all major construction projects, in addi)ion to having continued responsibility for nuclear construction and nuclear engineering.

The company expects that its fuel expense K.IMBL, MdbVYERS may ultimately increase as these matters are resolved, but expects to pass any such increases The company's present and future operations through to its customers under the fuel are subject to stringent environmental protec- adjustment clauses in its rate schedules. It is tion measures imposed under federal and state possible, however, that the pass-through of laws and regulations. Operations at the Four certain of these costs could be contested, Corners Plant, which is older than most of the particularly in the case of increased royalties company's other coal-fired units, are particu- to the Navajo Tribe.

larly affected by such measures. The plant is ~ A decrease ordered by the Arizona not in full compliance with New Mexico State Board of Tax Appeals in the 1974 restrictions on the emission of nitrogen oxides, assessed valuation of the company's properties and the acceptability of water discharges from in Arizona, which resulted in a $ 2.2 million the plant is in controversy at both state and reduction in 1974 Arizona property taxes, was federal levels. The applicability of certain appealed by the Arizona Department of existing air quality standards to operation of Revenue to the Superior Court of Maricopa the plant is unclear, and additional standards County. On dismissal of this action, the issue are anticipated by mid-1977. Problems of was taken to the Arizona Court of Appeals interpreting and complying with the various where the matter is now pending.

standards, and the evolution of new standards, ~ The State of New Mexico has enacted require continuing involvement of the company an "electrical generation tax," effective July 21, in proceedings before state legislatures, federal 1975. This excise tax applies to all electricity and state regulatory agencies and the courts. generated in New Mexico and consumed Future operations are subject to further outside the state. Believing that the tax is measures designed to prevent "significant unconstitutional and that it violates a provision deterioration" of air quality in areas where the of the Tax Reform Act of 1976 prohibiting state air is already cleaner than required by existing taxes which discriminate against out-of-state federal standards. The company conducts most producers of electricity, the company brought of its operations in such an area. Regulations an action in the state District Court of New promulgated to meet this objective were con- Mexico to have the tax set aside. That court tested by the company and other parties before dismissed the action, and a petition for review the U. S. Court of Appeals, where the regula- is being filed by the company with the New tions were affirmed. A petition for review is now Mexico Supreme Court. Notwithstanding the pending before the U. S. Supreme Court. lower court's decision, counsel to the company

~ Fuel costs of the company's coal-fired considers it probable that the company will plants could escalate by an indeterminate ultimately prevail in this matter.

amount if strip mining legislation similar to that ~ The company's entrance into a capi-previously passed by Congress, but vetoed, is talized lease of its new combined cycle plant enacted. In addition, the New Mexico legisla- required an order from the Arizona Corporation ture is considering a tax on the extraction of Commission, the granting of which was coal and other minerals, as well as a tax on the appealed by an intervenor in the proceeding to emission of sulphur into the atmosphere; the Maricopa County Superior Court, where the Navajo Tribal authorities are considering the matter is now pending. In the opinion of the institution of a tax system and are demanding company's legal counsel, there are no valid an increase in royalties for certain coal mined grounds for setting aside the Commission's

<4 on the Reservation; and the supplier of coal order.

to the Cholla Plant is seeking an upward adjust- (See page 5 for Information about legal ment in its price to compensate for company matters concerning the Federal Power delays in accepting deliveries. Commission.)

BOARD OF DIRECTORS

'Ralph M. Bllby, 58, President, Babbitt 'onald N. Soldwedel, 52, President, Western Brothers Trading Co. (general mercan- Newspapers, Inc., Prescott, Arizona; tile), Flagstaff, Arizona Publisher and General Manager, Yuma t Karl Eller, 48, President, Combined Commu- Daily Sun, Yuma, Arizona nications Corporation (broadcasting and 'aurice R. Tanner, 55, Chairman of the outdoor advertising), Phoenix, Arizona Board, President and Chief Executive

't Norman W. Fain, 70, President, Fain Land Officer The Tanner Companies (con-

~

struction and materials supply), Phoe-and Cattle Co., Prescott, Arizona

'el W. Fisher, 66, Chairman of the Board,

'elth nix, Arizona L. Turley, 53, President and Chief Fisher Contracting Co., Phoenix, Arizona William T. Garland, 60, Chairman of the Executive Officer of the Company, Board, Garland-Rhuart Development Phoenix, Arizona Corporation (land development), Douglas J. Wall, 50, Member of the Law Firm Sedona, Arizona of Mangum, Wall, Stoops and Warden, Leon Levy, 63, Personal Investments; Con- Flagstaff, Arizona sultant to Federated Department Stores, t Morrison F. Warren, 53, Director of Experi-Inc. Tucson, Arizona

~

mental Programs, College of Education,

'ictor H. Lytle, 65, Chartered Life Under- Arizona State University, Tempe, Arizona writer, Prescott, Arizona t K. O. Wilbanks, 55, President, First National Marvln R. Morrison, 53, Farmer and Cattle Bank of Farmington, Farmington, New

'. Feeder, Higley, Arizona P. Rellly, 69, Chairman of the Board of the .

Company, Phoenix, Arizona t

Mexico Ben F. Williams, Jr., 47, Attorney at Law, Douglas, Arizona James B. Rolle, Jr., 68, Member of the Law 'ember ol Executive Committee Firm of Rolie, Jones, Benton & Cole, t Member ol Audit Review Committee Yuma, Arizona Henry B. Sargent, Jr., 42, Financial Vice DIRECTORS EMERITI President and Treasurer of the Com-E. Ray Cowden, President, Cowden Livestock pany, Phoenix, Arizona Company, Phoenix, Arizona Richard Snail, 46, Member of Snail 8 Wilmer W. C. Quebedeaux, President, Quebedeaux (general counsel to the Company),

Phoenix, Arizona Investment Company (personal invest-ments), Phoenix, Arizona OFFICERS Ralph M. Bllby, 59, Chairman of the Executive Lyman K. Mundth, 60, Vice President, Electric Committee Operations D. L. Broussard, 56, Vice President, Corporate Wm. T. Qulnsler, 52, Secretary and Assistant Planning and Control Treasurer Gerald J. Griffin, 56, Assistant Secretary W. P. Rellly, 69, Chairman of the Board Howard F. Hersey, 48, Vice President, Gas Henry B. Sargent, Jr., 42, Financial Vice Presi-Operations dent and Treasurer Russell D. Hulse, 49, Vice President, Resources Kelth L. Turley, 53, President and Chief Execu-Planning tive Officer Jerry P. Human, 46, Vice President, Customer Edwin E. Van Brunt, Jr., 45, Vice President, Services Construction Projects Charles D. Jarman, 41, Vice President, Engi- Thomas G. Woods, Jr., 50, Executive Vice neering Services President, Operations William F. Lerch, 41, Vice President, Manage-ment Services DIVISION MANAGERS James C. Lauchner, 51, Pinal Division, Casa A. G. Anderson, 45, Western Division, Goodyear Grande Glen D. Daly, 48, Cochise Division, Douglas Guy W. Lunt,'43, Mountain Division, Globe Jack Duffy, 38, Navajo Division, Flagstaff Don Roberts,'56, Yuma Division, Yuma Robert Haag, 45, Metropolitan Division, Phoenix Jesse F. Thomas, 54, Yavapai Division, Prescott (Numerals are ages al annual meeting date, April 21, 1977.)

[Lines ef Business Operating revenues, and operating income before income taxes, attributable to electric and gas operations of the Company during the five years ended December 31, 1976 were as follows:

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

Electric Gas Electric Gas Year Ended December 31, Amount Percent Amount Percent Amount Percent Amount Percent 1976 $ 312.0 79.0% $ 82.8 21.0% $ 78.8 88 0% $ 10.7 12.0%

1975 281.1 78.1 78.7 21.9 69.3 85.6 11.7 14.4 1974 213.3 78.0 60.3 22.0 49.6 89.2 6.0 10.8 1973 171.0 76.0 54.0 24.0 47.3 84.2 8.9 15.8 1972 142.2 75.5 46.2 24.5 40.3 88.8 5.1 11.2 Operating Revenues

% Increase 1976 1975 (Decrease)

(Thousands 'of Dollars)

Electric:

Residential $ 106,334 $ 98,420 8.0 Commercial 108,506 97,508 1 1.3 Industrial 47,055 40,737 15.5 Irrigation 9,799 9,669 1.3 Other 28,565 21,880 30.6 Total 300,259 268,214 11.9 Transmission for others 9,591 I0,598 (9.5)

Miscellaneous services 2,119 2,268 (6.6)

Total Electric Operating Revenue 311,969 281,080 11.0 16 Gas:

Residential 42,922 42,096 2.0 Commercial 17,156 15,761 8.9 Industrial 10,130 8,760 15.6 Irrigation 10,979 10,639 3.2 Other 830 652 27.3 Miscellaneous services 793 759 4.5 Total Gas Operating Revenue 82,810 78,667 5.3 Total Operating Revenues $ 394,779 $ 359,747 9.7

Arizona Public Service Company Financial Statements for 1976 Statement eV llncome For the Years Ended December 31, 1976 and 1975 and Comparison Increase 1976 1975 (Decrease)

(Thousands of Dollars)

Operating Revenues:

Electric $ 311,969 $ 281,080 $ 30,889 Gas 82,810 78,667 4,143 Total 394,779 359,747 35,032 Operating Expenses:

Operating and maintenance expenses:

Fuel for electric generation 56,362 46,557 9,805 Purchased gas 41,474 37,521 3,953 Purchased power and interchange net 35,249 42,335 (7,086)

Other production expenses 7,377 7,058 319 Transmission and distribution 11,782 10,961 821 Maintenance 31,129 25,044 6,085 Administrative, general and other 32,127 26,999 5,128 Total 215,500 196,475 19,025 Depreciation and amortization 36,621 32,793 3,828 Taxes other than income 53,120 49,523 3,597 Income taxes (Note 2) 6,497 6,891 (394)

Total 311,738 285,682 26,056 Operating Income 83,041 74,065 8,976 Other Income:

Allowance for funds used during construction 21,478 16,191 5,287 Income taxes (Note 2) 4,943 4,769 174 Other net (120) 1,043 (1,163)

Total 26,301 22,003 4,298 Gross Income 109,342 96,068 13,274 Interest Deductions:

Interest on long-term debt 46,738 32,215 14,523 Interest on short-term borrowings 1,559 6,964 (5,405)

Amortization of debt discount, premium and expense 566 393 173 Total 48,863 39,572 9,291 Net Income 60,479 56,496 3,983 Preferred Dividend Requirements 13,311 10,422 2,889 Earnings for Common Stock $ 47,168 $ 46,074 $ 1,094 Average Common Shares Outstanding 19,105,191 17,739,726 1,365,465 Per Share of Common Stock:

Earnings (based on average shares outstanding) $ 2.47 $ 2.60 $ (.13)

Dividends declared and paid $ 1.39 $ 1.36 $ .03 See Notes to Financial Statements, including Note 1 as.to significant accounting policies.

Salaii1lce Sheet Assets 1976 1976 (Thousands of Dollars)

Utility Plant:

Plant in service at original cost:

Electric $ 1,053,254 $ 902,660 Gas 123,359 122,204 Common, used in all services 36,659 33,138 Total 1,213,272 1,058,002 Less accumulated depreciation and amortization 301,139 264,802 Plant in service depreciated 912,133 793,200 Construction, work in progress 366,039 309,090 Plant held for future use 1,361 1,279 Utility plant depreciated 1,279,533 1,103,569 investments and Other Assets:

Investments (at equity) in and receivables from subsidiaries 10,091 10,032 Other investments and notes receivable 7,797 6,752 Other physical property (less accumulated depreciation: 1976 $ 24,000; 1975 $ 20,000) 1,363 1,088 Total investments and other assets 19,251 17,872 Current Assets:

Cash (Note 3) 2,580 1,171 Temporary cash investments 17,000 Special deposits and working funds (Note 3) 2,716 1,045 Accounts receivable:

Service customers 33,774 26,898 Miscellaneous 6,054 6,924 Allowance for doubtful accounts (1,236) (400)

Materials and supplies (at average cost) 12,609 11,824 Fuel (at average cost) 23,797 21,436 Prepayments and other 7,902 7,854 Total current assets 88,196 93,752 Deferred Debits:

Deferred interest 4,176 3,844 Unamortized debt issue costs 4,913 4,506 Other 6,921 5,315 Total deferred debits 16,010 13,665 Total $ 1,402,990 $ 1,228,858

Liabilities 1976 1975 (Thousand s of Dollars)

Capitalization: .

Common stock $ 56,250 $ 47,500 Premiums and expenses 256,091 200,724 Retained earnings 152,069 131,311 Common stock equity 464,410 379,535 Preferred stock 168,561 168,561 Long-term debt, less current maturities 673,639 595,569 Total capitalization 1,306,610 1,143,665 Current Liabilities:

Current maturities of long-term debt 3,013 8,500 Accounts payable 33,309 27,211 Advances from subsidiaries 1,100 1,368 Accrued taxes 28,966 25,318 Accrued interest 10,063 10,069 Accrued dividends on preferred stock 1,109 1,163 Customers'eposits, advances and other 10,949 3,183 Total current liabilities 88,509 76,812 Deferred Credits and Other:

Customers'dvances for construction 5,488 4,660 Deferred income taxes accelerated amortization 973 1,183 Other 1,410 2,538 Total deferred credits and other 7,871 8,381 Commitments and Contingencies (Note 5)

Total $ 1,402,990 $ 1,228,858 See Notes to Financial Statements, including Note 1 as to significant accounting policies.

State11raent of Ct1ielftic3les all1I Fana@caall Postittora For the Years Ended December 31, 1976 and 1975 1976 1975 (Thousands of Dollars)

Source of Funds:

Funds from operations:

Net income $ 60,479 $ 56,496 Principal non-fund charges (credits) to income:

Depreciation and amortization 36,621 32,793 Equity in unconsolidated subsidiaries 191 469 Deferred income taxes (210) (210)

Allowance for funds used during construction (21,478) (16,191)

Total funds from operations 75,603 73,357 Funds from external sources:

Long-term debt 81,001 255,687 Preferred stock 29,160 Common stock 64,243 56,390 Total funds from external sources 145,244 341,237 Decrease in working capital* 22,740 Other items net 4,802 Total source of funds $ 243,587 $ 419,396 Application of Funds:

Plant additions and replacements, excluding allowance for funds used during construction $ 194,266 $ 167,912 Repayment of short-term borrowings net 162,102 Repayment of long-term debt 8,500 38,250 Dividends on preferred and common stock 39,721 34,222 Other items net 1,100 Increase in working capital* 16,910 Total application of funds $ 243,587 $ 419,396 Increase (Decrease) in Working Capital*:

Cash and temporary cash investments $ (15,591) $ 15,826 Accounts receivable 5,170 3,512 Materials, supplies and fuel 3,146 5,763 Accounts payable and accrued expenses (9,686) (8,972)

Customers'eposits, advances and other (7,766) (625)

Other- net 1,987 1,406 20 Net increase (decrease) $ (22,740) $ 16,910

• Excluding notes payable to banks, commercial paper and current maturities of long-term debt.

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

StaiiennenfI: ef RefI:aiinedl Eall"@lings For the Years Ended December 31, 1976 and 1975 1976 1975 (Thousan ds of Dollars)

Retained earnings at beginning of year $ 131,311 $ 109,037 Add Net income 60,479 56,496 Total 191,790 165,533 Deduct Dividends:

Preferred stock 13,311 10,422 Common stock 26,410 23,800 Total 39,721 34,222 Retained earnings at end of year $ 152,069 $ 131,311 ILeit1ig-'reit I See Notes to Financial Statements, including Note delhi December 31, 1976 and 1975 1976 1 as to significant accounting policies.

1975 (a) $ 30,000,000 bears interest at 114% of prime rate plus '/4 of 1%

to September 1, 1977, then 114% of (Thousands of Dollars)

First Mortgage Bonds: prime rate plus h of 1%.

2%% series due July 1, 1976 $ 8,500 $ 20,000,000 bears interest at a 3~/e% series due December 1, 1977 2,500 2,500 percentage of prime rate to Septem-3% series due April 1, 1979 4,000 4,000 ber 1 in the year indicated as follows:

2%% series due February 1, 1980 5,000 5,000 1977, 120%; 1978, 121%; 1979, 9.80% series due June 1, 1980 75,000 75,000 122%. The actual interest rate to 2~/e% series due December 1, 1980 6,000 final maturity of these loans is not to 6,000 9.50% series due February 15, 1982 100,000 100,000 exceed 7~/e% per annum; payments 3~/e% series due February 1, 1983 14,500 in excess of this amount are carried 14,500 3'/2% series due November 1, 1983 5,723 5,723 as deferred interest.

3'/4% series due March 1, 1984 15,000 15,000 (b) Represents the present value 5~/e% series due October 1, 1987 151000 15,000 of future lease payments (discounted 4.70% series due March 1, 1989 20,000 at the interest rate of 7.48%) of a 20,000 4.80% series due November 1, 1991 35,000 35,000 combined cycle plant sold and 4.45% series due June 1, 1992 25,000 25,000 leased back from the independent owner-trustee formed'to own the 4.40% series due December 1, 1992 25,000 25,000 4.50% series due September 1, 1993 15,000 15,000 facility. The lease requires semi-6.25% series due September 1, 1997 25,000 25,000 annual payments of $ 2,299,340 10.625% series due November 15, 2000 75,000 75,000 through June 1983 and then 7.45% series due March 15, 2002 60,000 60,000 $ 2,581,850 through June 2001, and 6.20% series due April 1, 2004 50,000 50,000 includes renewal and purchase Less certain securities held by options based on fair market value.

This plant is included in plant in trustee (26,271) service at its original cost of Unamortized discount and premium (802) (883)

$ 54,404,530; accumulated amorti-Total First Mortgage Bonds 571,921 554,069 zation at December 31, 1976 was Unsecured Notes Payable: $ 1,082,762.

Due September 1, 1979 (a) 50,000 50,000 Aggregate annual payments which Capitalized Lease Obligation (b) 54,731 will be due on long-term debt and Total Long-Term Debt 676,652 604,069 for sinking fund requirements through 1981 are as follows: 1977, Less current maturities: $ 3,013,000; 1978, $ 552,000; 1979, 2'/4% series due July 1, 1976 (8,500) $ 54,594,000; 1980, $ 86,639,000; 3~/e% series due December 1, 1977 (2,500) 1981, $ 3,688,000. Other sinking Capitalized lease obligation (513) fund requirements through 1981 for Total Long-Term Debt Less the. outstanding First Mortgage Current Maturities $ 673,639 $ 595,569 (Notes continued next page)

Bonds (which may be met by prop- 1% times the amount stated and the subject to the lien of the First Mort-erty additions) will be as follows: Company expects to meet similar gage Bonds. The indenture respect-1977 and 1978, $ 2,702,230; 1979, requirements in that manner in the ing the First Mortgage Bonds

$ 2,662,230; 1980, $ 2,552,230; 1981, future. For sinking fund payment includes provisions which would

$ 2,552,230. As allowed in the bond requirements and redemptions at the restrict the payment of dividends on indentures, requirements of this type option of the holders on cumulative Common Stock under certain condi-have in the past been satisfied by preferred stock, see Capital Stock. tions which did not exist at certification of property additions of Substantially all utility plant is December 31, 1976.

Capital Stack December 31, 1976 and 1975 Call Price Class Number of Shares Par Value Per Share Per Outstanding (Before Authorized Outstanding Share (Thousands of Dollars) Adding Accumulated 1976 1975 1976 1975 Dividends)

Common Stock 30,000,000 22,500,000 19,000,000 $ 2.50 $ 56,250 $ 47,500 Cumulative Preferred Stock:

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

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

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

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

$ 2.40 series A 240,000 240,000 50.00 12,000 12,000 50.50

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

$ 2.275series D .. 200,000 200,000 50.00 10,000 10,000 (b)

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

Serial preferred:.... 2,000,000

$ 8.50 series F.... 210,000 210,000 100.00 21,000 21,000 (d)

$ 8.50series G ... 90,000 90,000 100.00 9,000 9,000 (d)

$ 10 series H ..... 400,000 400,000 100.00 40,000 40,000 (e)

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

Serial preferred(a) .. 3,000,000 25.00 Total ....... 6,535,000 I 2,374,199 I 2 374,199 $ 168,561 i $ 168,561 (a) On April 22, 1976, the stockholders of the Company approved amendments to its Articles of Incorpo-ration authorizing 3,000,000 shares of Serial Preferred Stock, $ 25 par value.

(b) From $ 51.00 through February 29, 1980; then to $ 50.50 thereafter.

(c) From $ 52.50 through February 28, 1978; then to $ 51.50 through February 28, 1983; then to $ 51.00 thereafter.

(d) Redeemable at par after May 30, 1979 (series F) or May 30, 1982 (series G) at the option of either the Company or the holders. Both series are also subject to redemption at par at the demand of the holders prior to the foregoing dates under certain conditions, including a condition that would occur if dividend payments on preferred stock (including series F and G) of the Company exceed its "earnings and profits" for federal income tax purposes (such condition not having existed on December 31, 1976). Sinking fund provisions appli-cable 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 $ 2,400,000).

(e) From $ 109.30 through September 1, 1977 to par after September 1, 2002. Not refundable at a lower cost of money through September 1, 1984. Applicable sinking fund provisions require the retirement of 16,000 shares at par annually commencing September 1, 1979 (representing annual payments of $ 1,600,000).

(f) Not redeemable prior to December 1, 1985 through certain refunding operations; otherwise at $ 110.70 through November 30, 1980 to $ 101.00 after November 30, 1990. Applicable sinking fund provisions require the

retirement of 15,000 shares at par annually commencing December 1, 1981 (representing annual payments of

$ 1,500,000). The Company may, but is not required to, redeem an additional 15,000 shares at par on December 1 in any year beginning in 1981.

In the opinion of counsel, amounts paid in any redemption of capital stock funded other than with the proceeds of a concurrent new issue of capital stock would reduce the amount of retained earnings available under Arizona law for the payment of dividends. Because of the option of the holders thereof to require redemp-tion of the series F and G shares as indicated in note (d) above, the Company considers that a portion of its retained earnings which is equal to the aggregate par value of such series ($ 30,000,000) is unavailable for dividend payments.

Capital stock sales and changes in premiums and expenses during the years ended December 31, 1976 and 1975 were as follows (dollars in thousands):

Cumulative Premiums Common Stock Preferred Stock and Number Par Value Number Par Value (Expenses)

Description of Shares Amount of Shares Amount Net Balance, December 31, 1974 15,000,000 $ 37,500 2,074,199 $ 138,561 $ 155,472 Common Stock 4,000,000 10,000 46,168 Cumulative Preferred Stock,

$ 10.70 series I 300,000 30,000 (916)

Balance, December 31, 1975 19,000,000 47,500 2,374,199 168,561 200,724 Common Stock 3,500,000 8,750 55,367 Balance, December 31, 1976 22,500,000 $ 56,250 2,374,199 $ 168,561 $ 256,091 NOTES TO FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

a. System of accounts The accounting records of the Company are maintained in accordance with the uniform system of accounts prescribed by the Federal Power Commission and used by the Arizona Corporation Commission.

b. Plant and depreciation Property is stated at original cost as defined for regulatory purposes.

The cost of additions to utility plant and replacements of retirement units is capitalized. Replacements of minor items of property are charged to expense as incurred. In addition to direct costs, capitalized items include the present value of certain future lease payments (see Long-Term Debt ), research and development expenditures pertaining to construction projects, indirect charges for engineering, supervision, transportation, and similar costs, and an allowance for funds used during construction (see c. below).

Costs of depreciable units of plant retired are eliminated from plant accounts and such costs plus removal expense less salvage are charged to accumulated depreciation. Contributions in aid of (Notes continued next page)

construction are credited to plant cost.

Depreciation is provided on a straight-line basis at rates authorized by the Arizona Corporation Commission effective January 1, 1975, generally 2.80'/o to 4.00'/o for electric plant, 3.25'/o for gas plant, and 3.00'/o to 15.50'/o for common plant.

c. Allowance for funds used during construction In accordance with the uniform system of accounts, an allowance for funds used during construction is included in construction work in progress and credited to income (but does not represent cash earnings) using a composite rate (8'/o in 1976 and 1975), applied to construction work in progress, which assumes that. funds used for construction were provided by borrowings, preferred stock and common equity. This accounting practice results in the inclusion in utility plant in service of a cost of funds used during construction as considered appropriate by regulatory authorities for rate making purposes.

d. Subsidiaries The Company's investment in its subsidiaries is stated at equity. The subsidiaries are not consolidated inasmuch as their assets, revenues, net income and retained earnings are not significant in relation to those of the Company.

e. Bond premium or discount and issue expenses Bond issuance premium or discount and related expenses are amortized over the lives of the issues to which they pertain.

f. Income taxes The Company uses accelerated depreciation methods for income tax purposes.

The reductions in income taxes resulting from this practice and from allowable investment.tax credits are reflected currently in income, together with reductions arising from timing differences respecting certain other items of income and expense reported differently for income tax and financial purposes. Such accounting methods are in accordance with orders or practices of the Arizona Corporation Commission for rate making purposes.

Income tax reductions relating to the five-year amortization of emergency facilities in previous years were deferred, with the deferred amount being restored to income over a twenty-year period.

Income taxes included in utility operating expenses are reported before tax reductions due to interest expense applicable to construction work'in progress; the effects of such reductions are included in other income since construction work in progress is not considered utility operating property until placed in service. Income taxes related, to non-utility operations are also reflected in other income.

The Company and its subsidiaries file consolidated tax returns, and income taxes are allocated to the several entities based on the taxable income or loss of each.

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

h. Revenues and recognition of certain costs Operating revenues are recorded on a monthly cycle billing basis. Timing differences resulting from fuel adjustment clauses are reflected by deferring purchased power and fuel costs, or revenues, to be matched against revenues or costs in the subsequent period. The estimated cost of gas purchased from the supplier but not billed to gas customers is similarly deferred.

Under its approved rate schedules, the Company may pass on to its customers increases in specified taxes, purchased power and fuel costs, and resale gas costs.

i. Research and development costs The Company expenses research and development costs on a current basis, except that those costs which may result in utility plant are deferred for subsequent inclusion in plant or to be written off if the applicable project is abandoned.

24 Certain reclassifications have been made to the prior year to conform to current year classifications.

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

Year Ended December 31, 1976 ~

1975 Federal and state income tax expense at (Thousands of Dollars) statutory rates $ 31,435 $ 29,704 Increases (reductions) in taxes resulting from:

Timing differences:

Tax over book depreciation (5,901) (7,163)

Allowance for funds used during construction capitalized (10,884) (8,205)

Sale of combined cycle plant 3,478 Other principally taxes, pensions and other items capitalized (5,758) (4,630)

Other items 194 (1,006)

Investment credit (10,800) (6,368)

Taxes currently payable 1,764 2,332 Deferred taxes restored (210) (2 IO)

Total federal and state income taxes $ 1,554 $ 2,122 Federal and state income taxes included in:

Operating expenses $ 6,497 $ 6,891 Other income (credit) (4,943) (4,769)

Total $ 1,554 $ 2,122 Taxes currently payable (refundable):

Federal $ (965) $ 762 State 2,729 1,570 Total $ 1,764 $ 2,332 Deferred taxes:

Federal $ (201) $ (201)

State (9) (9)

Total $ (210) $ (210)

The Company,has approximately $ 3,200,000 of unused investment tax credit which can be carried forward through 1983.

3. Short-Term Borrowings and Compensating Balances The Company had the following bank lines of credit (allunused)as of December 31: 1976,

$ 107,000,000; 1975, $ 106,600,000. Bank lines which expired at the end of 1976 were renewed or 25 replaced by new one-year arrangements at the same amounts.

Average aggregate short-term borrowings outstanding during 1976 and 1975 were $ 16,133,000 and

$ 80,838,000 resp'ectively; weighted daily average interest rates on such amounts were 6.75% and 8.35%

respectively. The maximum amount of short-term borrowings outstanding at any month end was

$ 46,000,000 in 1976 and $ 179,029,000 in 1975.

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

4. Pension Plan The Company's pension plan covers virtually all employees. Contributions to the plan were as follows: 1976, $ 6,086,000; 1975, $ 4,933,000. The liability for unfunded prior service costs at December 31, 1976 was $ 2,076,138 which is expected to be completely funded by 1981. (Notes continued next page)

5. Commitments and Contingencies The Company's 1976 and 1975 income includes revenues of approximately $ 9,300,000 and

$ 4,700,000, respectively, under a fuel adjustement clause and interim rate increase applicable to wholesale sales that may be refundable depending on the outcome of pending FPC proceedings. Total FPC revenues subject to refund at December 31, 1976, aggregated approximately $ 16,500,000.

The Company was granted an interim refundable rate increase effective October 1, 1976 by the Arizona Corporation Commission pending its decision in a new permanent rate hearing scheduled to begin in February, 1977. The Company's 1976 income includes revenues of approximately $ 9,300,000 relating to the interim increase.

The Company is involved in certain proceedings more fully described under "Legal Matters."

Based upon the opinion of its counsel, the Company does not believe that ultimate resolution of the above matters will have a material effect on the accompanying financial statements.

The Company has significant purchase commitments in connection with its continuing construction program. The construction program is currently estimated at $ 273,000,000 for 1977. Annual rentals under non-capitalized, non-cancellable leases were not material.

6. Replacement Cost Data (Unaudited)

The impact of the rate of inflation experienced in recent years and other factors have resulted in replacement costs of productive capacity that are significantly greater than the historical costs of such assets reported in the Company's financial statements. In compliance with reporting requirements, estimated replacement cost information will be disclosed in the Company's annual report to the Securities and Exchange Commission on Form 12-K.

7. Selected Quarterly Information (Unaudited)

A summary of 1976 quarterly financial data is as follows:

Three Months Ended March 31 June 30 Sept. 30 Dec. 31 (Thousands of Dollars)

Operating Revenues $ 88,675 $ 92,674 $ 111,630 $ 101,800 Operating Income 14,168 13,216 30,106 25,551 Net Income 10,641 6,169 23,722 19,947 Earnings for Common Stock 7,313 2,841 20,394 16,620 Earnings Per Average Share of Common Stock $ 038 $ 0.15 $ 1.07 $ 0.86 Accountants'pinion Haskins & Sells, Certified Public Accountants Phoenix, Arizona Arizona Public Service Company:

We have examined the balance sheets of In our opinion, the above-mentioned financial Arizona Public Service Company as of December 31, statements and schedules present fairly the financial 1976 and 1975 and the related statements of income, position of the Company at December 31, 1976 and retained earnings and changes in financial position, 1975 and the results of its operations and the and schedules of capital stock and long-term debt changes in its financial position for the years then for the years then ended. Our examinations were ended, in conformity with generally accepted made in accordance with generally accepted auditing accounting principles applied on a consistent basis.

standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the

+ ~x circumstances. February 11, 1977

Sttlmmal y eV QpeN'aliens 1976 1975 1974 1973 1972 (Thousands of Dollars)

Operating Revenues $ 394,779 $ 359,747 $ 273,599 $ 224,956 $ 188,436 Operating Expenses:

Operating and maintenance expenses 215,500 196,475 153,006 116,864 94,710 Depreciation and amortization 36,621 32,793 26,398 23,529 21,409 Taxes* 59,617 56,414 38,413 34,032 31,353 Total 311 738 I 285 682 217,817 174,425 147,472 Other income* 26,301 22,003 17,065 9,097 5,013 Interest Deductions  ! 48,863 39,572 35,890 28,361 20,399 Net Income  ! $ 60 479 I

$ 56 496 $ 36,957 $ 31,267 $ 25,578 Ratio of Earnings to Fixed Charges 2.25 2.45 1.94 2.20 2.37 Preferred Dividend Requirements $ 13,3'i1 $ 10,422 $ 6,258 $ 3,551 $ 3,551

• Federal and State income taxes are included in Other Income and in Taxes. Total income tax expense (credit) was as follows (in thousands): 1976, $ 1,554; 1975, $ 2,122; 1974, $ (2,664); 1973, $ 3,514; 1972, $ 3,283.

Common Stock Data:

Earnings for common stock, $ 47,168 $ 46,074 $ 30,699 $ 27,716 $ 22,027 Book value per share $ 20.64 $ 19.98 $ 20.13 $ 20.74 $ 19 99 Earnings per average share of common stock outstanding $ 2.47 $ 2.60 $ 2.34 $ 2.63 $ 229 Dividends paid per share $ 1.39 $ 1.36 $ 1.36 $ 1.21 $ 1.12 Shares of common year end 22,500,000 19,000,000 15,000,000 12,500,000 10,500,000 average 19,105,191 17,739,726 13,102,740, 10,527,397 9,612,022 Number of common shareholders 56,011 56,003 43,497 35,687 35,150 l

Comments on the Summary of Operations Increases in operating revenues and expenses reflect increases in uriit sales of electricity. Such increases have slowed in recent periods because of customer resistance to higher prices of energy and effects of adverse economic conditions. Unit sales of gas are substantially affected by weather conditions, but generally may be 27 expected to decline in future periods with increased service curtailments by the Company. Operating revenues also reflect rate increases (some of which are subject to refund) and effects of adjustment, clauses.

In addition to the effect of volume increases on operating expenses, the cost of fuel for the generation of a given amount of electricity has risen sharply, as indicated on pages 4, 5. Unit costs of purchased gas have increased significantly. Variations in purchased power and interchange (net) reflect varying degrees of availa-bility of power from other sources and varying needs of the Company to augment its own generating sources from time to time; large quantities of low-priced power became available and were purchased in 1975 by the Company in partial substitution for operation of its own generating facilities. The increase in maintenance expense is dis-cussed on page 4. The start of the five-year amortization of the Kaiparow'its power project (see page 9) and an expansion of the allowance for doubtful accounts receivable (see page 18) contributed to the increase in admin-istrative, general and other expense in 1976. (continued next page)

Operating expenses attributable to depreciation and amortization and to taxes other than income (primarily consisting of property taxes) increase with the size of the Company's utility plant. In addition, depreciation rates were increased as of January 1, 1975. Fluctuations in income tax expense are shown in Note 2 of Notes to Finan-cial Statements.

The allowance for funds used during construction included in Other Income is primarily a function of the amount of construction work in progress during a given period. Income taxes included in Other Income primarily reflects tax benefits from interest attributable to construction work in progress that is capitalized for reporting purposes.

The substantial increase in interest on long-term debt since 1974 reflects large amounts of new debt at relatively high interest rates. Recent issues of preferred stock (giving rise to the increased dividend requirements) and common stock (giving rise to the increased average number of shares outstanding) are summarized on page 23.

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

NOTE: A detailed Statistical Report for Financial Analysis 1966-1976is available on request. Direct inquiries to the company treasurer, P.O. Box 21666, Phoenix, Arizona 85036.

Otlheli'Fizali1ICiell and QPell"atilllig SRatiStiCS 1976 1975 1974 1973 1972 (Thousands of Dollars)

Capitalization:

Long-term debt $ 673,639 $ 595,569 $ 340,976 $ 369,609 $ 377,223 Preferred stock 168,561 168,561 138,561, 68,561 68,561 Common equity 464,410 379,535 302,009 259,249 209,886 Total $ 1 306 610 I $ 1,143,665 $ 781,546 $ 697,419 $ 655,670 Utility Plant Gross $ 1,580,672 $ 1,368,370 $ 1,190,399 $ 1,003,218 $ 856,827 UtilityPlant Depreciated 1,279,533 1,103,569'55,399 791,578 668,871 Number of Employees at Year End 4,042 3,731 3,898 3,899 3,545 Average Wage per Hour $ 7,44 $ 6.82 $ 6.16 $ 5.61 $ 5.32 28 Electric:

Electric resources (kw) 2,790,700 2,568,700 2,343,600 2,191,000 2,045,300 Peak load (kw) 2,190,900 2,068,300 2,032,000 1,812,700 1,658,600 Electric sales total (mwh) 9,606,571 . 8,892,570 8,692,304 8,098,712 7,198,947 Number of customers at year end 342,059 331,382 323,094 308,643 287,680 Gas:

Total gas sales (m therms) 491,007 526,659 ~ 518,999 547,068 506,574 Number of customers at year end 339,265 336,839 334,908 328,406 313,928

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