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. REMOVALOF ANY PAGE(S)

FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.

DEADLINERETURN DATE RECORDS FACILITYBRANCH

BdhamlA545szmthathe~qgsskgxthrfIyy RaSe

~

am6edhcOCsc484@am6RoSe gEic4HHQGM6KAQc0lilKkxi68gpHh KKGKB7QBSQKCBBC4KKlIIKNltCojH@NHRS

~

Ri)SeExig+ipMB

~

~

~

~ Ro9mmAx Se(hmecoSfhaua

'UOe

~

ecm@sCm6bqy8acfhdhmaS cvpnSc9%I e4BSRzmzAacom8imNfh K84KRH(6SEOaMAXSKKf46QCOC48fig

%'6Kk9zllgpeKe@ee

~

~

~

Qg%~X~D~

pBiMiE4cPKRKKOK%c0SeSN4

~

~

~

~

86lhBMMIEBKCBB

~

~ -

pfiacljy4 muxekedNaz arelhceAsa68NIMxdM]

Beers'

[NmcakbQaCK>G<'4 glhmasK>65%4K<L IK~IK Itch bib KKK th

~

~

~

66EKS Hcc84Q NES Rs

/elm aOgi) gkgb tjoimlig~i-g i'RjijSe

[igni ggj~i~ig)(iOSeQiigg@[giig gfgaOgpgljgggaO Nh~Rem8@S1hmn,

%09K@K6089gEIMt5kxOQBg6cQAABQHBBi68

'tttthlitKIVtthttltlltt BK IBVCdhKKlhlKKK KM8lthbtththhtlblhlh,IWKGhlhhh

CQIMYEIMTS Letter to Shareholders Business and Finance Earnings and Dividends, Revenues,

Expenses, Rate and Regulatory Matters, Financing, NYSE Audit Committee Policy, Common Stock Price Range Operations Electric and Gas Business, Construction, Energy Resources, Load Management, Solar Energy Activities, Community Support APS People Employees, Safety Performance, Management Changes, New Directors Legal Matters Directors and Officers 12 14 15 Lines of Business, Operating Revenue Analysis..

16 Financial Statements 17 Summary of Operations and Comments..... 27 Other Financial and Operating Statistics....28 Shareholder Information.... inside back cover 1976 1975

% Increase (Decrease)

Property and Plant:

Total utilityplant, year end Construction expenditures Sales and Customers:

Total operating revenues Total electric sales (mwh)

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

Gas customers, year end Income, Earnings, Dividends:

Net income Earnings available for common stock Average common shares outstanding Earnings per average share of common stock Dividends paid per share of common stock

$1,580,672,000

$1,368,370,000 194,266,000 167,912,000 394,779,000 9,606,571 342,059 491,007 339,265 359,747,000 8,892,570 331,382 526,659 336,839 2.47 2.60 1.39 1.36 60,479,000 56,496,000 47,168,000 46,074,000 19,105,191 17,739,726 15.5 15.7 9.7 8.0 3.2 (6.8)

.7 7.1 2.4 7.7 (5.0)

2.2 Shareholders

Common Preferred Employees, year end:

56,011 6,243 4,042 56,003 5,641 3,731 10.7 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 April23, 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 willadequately 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 willspur 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~irIlrIHIaHue 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 Chairman ol the Board KEITHL TURLEY President and Chiel Executive Oificer VX r

(center) willrise 187 feet abjure grade.

Framing for auxiliary buifding~~hppears in et foreground.

g

'l

- tihgstructfon progress at Palo Verde N cfha

" -r"aerating Station is viewed by Keith Ttkrley and W. P. Heilly. From the base tnerlow ground level, the containment b d

il ~ r )0

~

Y ~ ~ 001

~

~

U0

~ UU

~ UUY Yl' UUU~

ll

),ilt i

Earnings and Dividends Earnings per share on common stock amounted to $2.47 on 19,105,191 average shares outstanding in 1976. This compares with per share earnings of $2.60 in 1975, with 1,365,465 fewer average shares.

A Maricopa County Superior Court decision last spring was rejected later by the Arizona Supreme Couit, leading the Arizona Corporation Commission to disallow a 10.5%

retail rate increase and order a refund to customers. The refund, amounting to approximately $17 million in revenues collected over a five-month period, had a marked impact on 1976 earnings.

However, the Commission granted a 13.8% interim increase in retail rates effective October 1, 1976, and this action turned the earnings decline around. As a result, earnings for the last quarter of 1976 were 86 cents per share of common, versus 52 cents per share for the same quarter of 1975.

An increase to 37 cents per share in the quarterly dividend paid to holders of common stock December 1, 1976, brought the total for the year to $ 1.39 and raises the indicated annual dividend rate to $1.48. Quarterly dividends of 34 ceftts per share had been paid since December, 1973.

The company estimates that 17% of the common dividends for 1976 are nontaxable as SOURCES dividend income for shareholders'ederal income tax purposes.

However, preferred dividends remain fullytaxable as dividend income.

Revenues Operating revenues of $394.8 million were up 9.7% over 1975. Factors contributing principally to the gain were: increased electric general business; revenue from retail and wholesale customers from rate adjustment clauses to cover increases in power plant fuel, purchased power and natural gas costs; plus the interim rate increase effective since October. Additional rate matters are reviewed later..

Electric business produced $312 million or 79% of our 1976 total operating revenues, with the balance of $82.8 million coming from gas operations. Please refer to "Lines of Business" on page 16 for a five-year comparison of Operating Revenues and Operating Income Before Income Taxes.

Expenses Total operating expenses amounted to

$215.5 million, up 9.7% over 1975. Significant items among our operating and other expenses were:

~ Maintenance, up 24.3% due largely to increased plant, coupled with continued efforts to increase the availability of economical power from the coal-fired Four Corners Power Plant.

~ Generating fuel and purchased gas, up 1976 APS INCOME

$421 NI0,000 DISBURSEMENTS Electric Commercial 25.8%

Electric Industrial 11.2%.+

8 Electric Other 11 9%

Electric Residential 25 2%

Other Income 6.2%

Gas Other Gas Residential 10.20/

Purchased Gas Other Production 9 8%

Expense 91 Other Expenses Depreciation &

8.7%

Amortization 14.2%

Taxes 8.4%,

'3.4%

/

Fuel for Electric Generation 11.2%

Earnings for Common Stock 14 8%

Interest &Preferred Dividends Purchased Power &

Net Interchange More than one-half our income is derived from residential and commercial electric revenue. Expenses related directly to power production and purchases, plus the purchase of natural gas, account for more than 40%

of the outlays.

a combined 16.4% because of increased electric sales and higher costs of fuel and natural gas from our suppliers. The increase in the outlay for these items did not materially affect earnings because of the fuel adjustment clause.

~ Interest, up 23.5% due to a greater amount of outstanding long-term debt.

~ Depreciation and amortization, up 11.7% as a result of continued additions to plant in service.

Rate and Regulatory Matters The Arizona Corporation Commission has scheduled hearings to begin February 28, 1977, on the company's request to make permanent the refundable interim increase of 13.8%

instituted last October. At the same time, the company is requesting additional retail rate increases designed to meet our revenue needs until 1979.

Our filing for additional rate relief seeks a Step 1 increase of 6.5% effective June 1, 1977, and a Step 2 increase of 11.1% effective January 1, 1978. Additional revenues from increased wholesale electric rates will be sought through a later filingwith the Federal Power Commission.

In applying for these retail increases, the company is requesting the Corporation Commission to consider matters subsequent to the historic test year used in rate proceedings.

This is an effort to overcome regulatory lag problems and reduce the frequency of future rate increase filings.

The Arizona Supreme Court decision, mentioned at the beginning of this section, included a ruling which permits the Commission to consider this forward approach to rate making.

Matters pertaining to wholesale electric rates and adjustment clauses affecting our wholesale customers are pending final decisions from the Federal Power Commission and related court proceedings.

We do not believe that any refund of the resulting revenues collected through December 31, 1976, would be significant.

Awaiting court and FPC decisions are: (1) a February, 1976, filingwith the FPC which led to an interim, refundable increase in wholesale electric rates for certain customers effective since last spring. The increase produces approximately $3.2 million annually.

The FPC action willconsider not only the rates for customers to whom the interim increase has been applied, but also will consider the rates for additional wholesale

$1,500 Capitalization Millions of Dollars 1 310

$1,000 982 801 31%

678 32o/

1,152 33%

15%

35%

13%

582

$500 30o/

12%

43%

31%

10%

56%

9 46%

14%

35%

52%

52%

15o/o I gogo 13%

20%

1971 1972 1973 1974 1975 1976 Common Stock Preferred Equity L

Stock Q Lon:Term Short-Term Debt Long rTerm (Incturtea Current Maturitiea ot Debt Long-Term Debt)

Capitalization ratios are being strengthened by more common equity, less dependence on short-term debt.

customers for whom the interim increase was denied; (2) Other matters relating to fuel and other adjustment clauses applicable to wholesale electric customers since April, 1974.

1976 Financing Principal sources of funds secured from outside the company during 1976 were: (1) an offering of 3.5 million shares of common stock, and (2) a sale-lease back financing negotiated on the company's new combined cycle electric generating plant in Phoenix.

The stock was offered to the public December 15 through an underwriting group.

Marketed at $ 18T/e per share, the offering produced net proceeds of $64.1 million.

The sale-lease back of the generating facility produced approximately $55 million, and an estimated savings of $1.5 million annually in interest costs.

Funds from these sources were applied to the construction program and other purposes, to retire short-term debt incurred for these

Common Stock Price Range (symbol AZP)

Quarter 1976 1975 High Low High Low 17'/e 15'/4 147/e 11 /e 17 15 16%

13s/e 17 /e 15%

16 /e 13'/2 19%

16'/2 I 5 /e 14'/e First Second Third Fourth

purposes, and to meet the maturity of $8.5 million in first mortgage bonds.

The highest amount of short-term borrowings outstanding during 1976 was $59.5 million, substantially less than the high of $185 million for 1975. Short-term debt was zero at the end of 1976.

Supplementing funds from the above sources, we utilized $ 17 million carried over from financings the latter part of 1975 which had been invested temporarily in bank certificates of deposit. We also drew down an additional $26.3 million from a 1974 Navajo County Pollution Control bond issue.

Internally-generated funds contributed an additional $35.9 million to our financial requirements, representing 18% of the total for 1976.

1977 Financing Plans Financing plans for 1977 are based on estimated capital requirements of $273 million, and may be affected by the outcome of the hearing on retail rates scheduled to begin February 28 of this year.

Tentative plans call for approximately $200 million of permanent financing. Included will be one or more issues of common stock, totaling four to five million shares, and a pollution control revenue bond issue in the spring. The balance of permanent financing will include the sale of senior securities or a possible project financing.

Proceeds from these sources willbe supplemented by'modest amounts each quarter from the new common stock dividend reinvestment plan mentioned in the Letter to Shareholders, page 3.

Additional cash funds will come from a nominal amount of short-term borrowings, and the balance of capital requirements will be obtained from internal cash generation.

NYSE Audit Committee Policy The New York Stock Exchange recently has instituted a policy requiring listed companies to establish audit committees composed of directors independent of management.

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

ODPIKRA'II'IjooHS 2,000 Resources (includes purchased, power)+

1,6 2,19 1,295 1,407 Peak Load 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 Growth of electric resources, up 116% over the past 10 years, is keeping ahead of peak load requirements.

Electric For the first time in 21 years, APS served more electric customers than natural gas customers during the past year. Two factors were largely responsible for this turnabout. One was the continued steady population growth in our service area; the other, a moratorium which has restricted gas connections the past two years because of declining gas supplies.

We extended electric service to a net total of 10,677 new customers, bringing the year end count to 342,059 or 3.2% over 1975. Electric sales increased to 9.6 million kilowatt-hours, up 8%, while electric revenue of $312 million showed a gain of 11%.

Residential sales increased 3% due mainly to customer growth. Average residential use amounted to 9,268 kwh, about the same as 1975. This level reflects continued customer efforts to conserve energy, plus red'uced heating and cooling loads due to mild weather in both the winter and summer seasons.

Sales to both commercial and industrial customer classifications were up 7.1%,

attributable for the most part to improved economic conditions which were particularly evident the latter part of the year.

Sales for resale, long term, increased Growth of Peak Load and Electric Resources

-Megawatts-2,79

Sources of Electric Energy Thousands of MWH 10,000 8,000 10%

11%

12%

16%

9 25%

8%

17%

7%

6,000 23%

27%

16%

4,000 77%

61%

65%

61%

61%

68%

2,000 1971 1972 1973 1974 1975 1976 Economical coal generation represents a

major portion of APS electric resources, holding down the use of more expensive oil as gas becomes unavailable for power plant fuel.

32.6%. This reflects the addition of two wholesale customers and greater sales to others.

For an analysis of operating revenues by types of business, please see the table on page 16.

APS resources were called upon last summer to meet a peak electric load of 2,190,900 kilowatts, 5.9% over 1975. Resources available to meet the peak totaled 2,790,700 kw, including about 230,000 kw through purchased power contracts.

With new generating additions, our planned reserve margin amounted to 27.4%.

However, the available reserve was but 6% at the time of peak demand last July, due to unplanned repairs required on certain major generating units. Eventualities such as these point up the necessity for maintaining adequate reserve margins.

Construction expenditures during 1976 amounted to $194.3 million, an increase of

$26.4 million over the previous year. Electric property and equipment, including environ-mental protection facilities, amounted to $187.3 million. Gas facilities required $1.8 million, and the balance went for common properties.

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

Our first combined cycle generating station, consisting of three units located at the West Phoenix Power Plant, added 225,000 kw to the system last May. (See page 5 for information about the sale-lease back financing.)

About the same time, we began receiving 105,000 kw from our 14% joint ownership of Unit 3 at the Navajo Power Plant. Installation of 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 these sources in 1976. (Excluding power 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.

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 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 cannot count on any excess power being available in 1977, except through existing purchased power contracts. Consequently, we anticipate that more expensive generation will be required this year. This will have an impact

1

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

~

1982 1984 1986 on customers'nergy costs, but will not affect earnings significantly because of the fuel adjustment clauses in company rates.

To meet future load growth, APS has under construction or plans the following additions to generating resources over the next 10 years:

Type of Nameplate Scheduled Facility Capacity, kw Completion Coal, all at Cholla Plant Unit 2 250,000 1978 Unit 3 250,000 1979 Unit 4 350,000 1980 Unit 5 350,000 1982 TOTAL 1,200,000 Nuclear, all at Palo Verde, consisting of APS'9.1%

ownership Unit 1 370,000 Unit 2 370,000 Unit 3 370,000 TOTAL 1,110,000 During 1976, construction began on Unit 4 at Cholla and continued on the earlier-started Units 2 and 3. Unit 5 was announced late in the year, to filla major portion of the void left by cancellation of the Kaiparowits project.

On completion of this expansion program, our.wholly-owned Cholla Plant located in northeast Arizona will be the company's largest single source of power, with a capacity of 1,316,000 kw.

Receipt of the Nuclear Regulatory Commission's construction permit last May launched construction of the $2.8 billion Palo Verde Nuclear Generating Station. APS is project manager for the four other participants in the project, being developed 50 miles west 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 Report to two additional planned power projects which have since been suspended.

After several years of planning and exploration of coal reserves by subsidiaries of APS and two other utilities, the proposed constructipn of a large generating plant on the Kaiparowits Plateau in southern Utah was

$1,500 Plant in Service Except plant held for future use & plant adjustments Millions of Dollars 1,367 1,579 1,190 l

$1,000 741 1971 1972 1973 1974 1975 1976 Common Q Gas Electric Increased customer energy needs have required more than doubling our plant in service since 1971.

cancelled last year. This decision stemmed from several factors, including environmental.

road blocks, governmental indecision and delay, which affected seriously the economics as well as the timing to meet forecast needs.

APS and the other participants continue to hold leases on Kaiparowits coal reserves and are now pursuing other alternatives to utilize these resources.

The company's investment in the power portion of the Kaiparowits project amounted to

$2.6 million. APS is amortizing this investment over a'five-year period.

The other project on which preliminary planning has been suspended is the Montezuma Pumped Sto'rage facility. This joint undertaking is being reassessed by the participants, as they review the relative costs and their individual financial/resource planning schedules.

kJlg,g III:

<<r Power flowthrough the company's major transmission substations around the system is monitored and controlled from this dispatch-ing center in Phoenix. Here, operations supervisor Bill D. Ashworth uses a "light pen" to spot control point on substation diagram projected by cathode ray tube.

Another potential for supplementing our power resources, now being studied, is a possible exchange on a firm basis with the Pacific Northwest. The arrangement would make use of surplus power normally available at different times of the year in the Northwest and Southwest, because of the seasonal variation in peak loads.

Should the agreement become a reality, we have indicated our interest in as much as 200,000 kw initially(about 1984), increasing up to 500,000 kw in later years. The feasibility of the plan willdepend primarily on whether sufficient excess power from the Northwest can be assured to support the investment in a large transmission intertie.

Meanwhile, APS continues to seek and utilize economical, excess power whenever it is available from other utilities.

Natural Gas From 1974 to 1976, winter weather in our gas service area completed a full circle from abnormally warm, to colder-than-normal, and back to abnormally warm in the 1975-76 heating season.

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 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 as available" basis, the deliveries fluctuated due to extreme cold weather in other areas which limited the amount available to APS.

Average residential use of gas, 631 therms in 1976, compared with 726 therms the previous year. Customer conservation efforts contributed to this reduction, along with lower heating needs.

Gas customer additions during 1976 were made in accordance with a Corporation Com-mission-ordered moratorium on new connec-tions. Addition of 2,426 customers brought the year end total to 339,265.

The moratorium took effect in mid-April, 1975, limiting gas connections to commitments made prior to that time. The Commission later established a deadline of year-end 1976 for new connections on those commitments, except mobile homes which can be connected through May, 1977. Connections beyond those dates will be limited to variances approved by the Commission.

As noted in last year's Annual Report, a Federal Power Commission order essentially limits the gas supply available to APS from its principal supplier. The company's connected load requirements as of October 31, 1974, are the benchmark for this order. Actions prohibiting new gas connections and restricting service for certain new large loads on existing lines are

designed to protect the amount of gas available for existing customers.

APS is continuing to seek supplemental gas supplies whenever they can be secured within constraints of the FPC. Without additional supplies, curtailments are expected to increase for industrial customers, and extend to other customer classes in the future.

Load Management Efforts to encourage more efficient use of energy continued during 1976 and will be inten-sified through a broad-scale customer load management program in 1977.

The main thrust of this program is directed toward lessening energy use at peak load periods, thereby holding down customer energy costs and minimizing the company's cost of service. Reductions in the company's costs, ultimately benefiting the'customer, can be realized from lower oil requirements for peaking generation, from reduced needs for additions

)

c Parabolic solar concentrator atop company service building casts reflection of Merwyn Brown, manager of APS research programs.

Manufactured in Casa Grande, Az., the concentrator is part of a solar heating and cooling test facility.

to generating capacity and associated financing requirements.

These efforts have a long-range goal of lowering peak load growth, building up to a 100,000-kilowatt reduction from the peak forecast for 1985. This also will improve system load factor.

To further encourage customer load man-agement, the company early in 1977 filed a set of rate proposals which provide economic incentives for customers to limittheir demand during peak electric use periods and shift some of their use into off-peak times. These pro-posals will be considered by the Arizona Cor-poration Commission as part of the rate hearing beginning February 28.

One of Arizona's most abundant natural resources is sunshine, a resource that creates a unique potential for widespread use of solar energy within our service area.

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 facilitydesigned 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-tative manuals and booklets on the subject.

Community;Support At Polls Customer'confidence in the company was reflected in the outcome of several elections related to APS operations last year.

Arizonans demonstrated strong support for the company's position against an anti-nuclear initiative when, by a 7 to 3 margin, they voted

down the measure on the November general election ballot. (Similar anti-nuclear issues were defeated during the year in six additional states five on general election ballots and another in the California primary election last June.)

At a special election in the City of Page, Arizona, voters rejected municipal ownership of electric facilities. The vote constituted approval of continued service from APS, and an endorsement of a proposal for the company to purchase the City's share of Glen Canyon Dam hydroelectric power.

Agreements renewing 25-year electric service franchises for APS were approved by wide margins by voters in the cities of Holbrook and Prescott.

8 tern P.KOoP.M Employees played a key role in successful efforts to defeat the anti-nuclear initiative, men-tioned elsewhere in this report.

Over a month-long period prior to the elec-tion, employees and their families devoted thousands of hours of personal time to inform others about the issue. Their loyalty and con-cern, their willingness to act on this important matter, point up why they are considered the company's most valuable asset.

lt is a pleasure to report that 1976 was the best year for safety performance in the com-pany's history. The number of disabling injuries dropped to 3.4 per million manhours worked, 53% below 1975. This compares with the latest available national average of 7.05 for combina-tion gas and electric utilities, published by the National Safety Council through August, 1976.

Particularly impressive is the record of Four Corners Power Plant employees. They compiled more than 1,090,000 manhours worked in 1976 without a disabling injury. This achievement earned plant personnel the top company safety award as well as a citation from the Edison Electric Institute.

Due primarily to additions required for 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 of 1976. Allemployees laid off in 1975 have either been re-hired or have been given APS job opportunities.

Contract negotiations last year resulted in a two-year wage agreement for employees in job classifications represented by unions. The settlement resulted in an 8.5% increase for the first year ending April 1, 1977, and an 8%

increase the second year. Salary adjustments for other employees are based on a perform-ance review program.

In a constant search for new and better Two of 24 employees compensated during 1976 for productivity suggestions valued at

$827,000: (left) Curtis R. Fields of Four Corners Power Plant submitted idea with largest single savings, an estimated $735,000 annually. Here he explains to President Keith Turley his proposed modifications of plant equipment which willreduce drastically the time otherwise needed for repairs. (right)

Richard J. Bartell of Navajo Division demonstrates metal wedge he designed to speed pole removal, worth approximate yearly savings of $9,270.

15 Accident Frequency Rate Millions of Manhours 1.7 Two new directors were named to the board late in 1976: Douglas J. Wall, partner in the law firm of Mangum, Wall, Stoops and Warden at Flagstaff, Arizona; and Leon Levy, prominent Tucson businessman and civic leader.

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 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 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 utilityindustry of which the 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-sible for Construction Projects. Van Brunt supervises all major construction projects, in addi)ion to having continued responsibility for nuclear construction and nuclear engineering.

Woods Hersey

(

1'undth Van Brunt Douglas J. Wall Leon Levy 22 I 2*

Ca, Jarman

K.IMBL, MdbVYERS The company's present and future operations are subject to stringent environmental protec-tion measures imposed under federal and state laws and regulations. Operations at the Four Corners Plant, which is older than most of the company's other coal-fired units, are particu-larly affected by such measures.

The plant is not in full compliance with New Mexico restrictions on the emission of nitrogen oxides, and the acceptability of water discharges from the plant is in controversy at both state and federal levels. The applicability of certain existing air quality standards to operation of the plant is unclear, and additional standards are anticipated by mid-1977. Problems of interpreting and complying with the various standards, and the evolution of new standards, require continuing involvement of the company in proceedings before state legislatures, federal and state regulatory agencies and the courts.

Future operations are subject to further measures designed to prevent "significant deterioration" of air quality in areas where the air is already cleaner than required by existing federal standards. The company conducts most of its operations in such an area. Regulations promulgated to meet this objective were con-tested by the company and other parties before the U. S. Court of Appeals, where the regula-tions were affirmed. A petition for review is now pending before the U. S. Supreme Court.

~

Fuel costs of the company's coal-fired plants could escalate by an indeterminate amount if strip mining legislation similar to that previously passed by Congress, but vetoed, is enacted.

In addition, the New Mexico legisla-ture is considering a tax on the extraction of coal and other minerals, as well as a tax on the emission of sulphur into the atmosphere; Navajo Tribal authorities are considering the institution of a tax system and are demanding

<4 an increase in royalties for certain coal mined on the Reservation; and the supplier of coal to the Cholla Plant is seeking an upward adjust-ment in its price to compensate for company delays in accepting deliveries.

The company expects that its fuel expense may ultimately increase as these matters are resolved, but expects to pass any such increases through to its customers under the fuel adjustment clauses in its rate schedules.

It is possible, however, that the pass-through of certain of these costs could be contested, particularly in the case of increased royalties to the Navajo Tribe.

~ A decrease ordered by the Arizona State Board of Tax Appeals in the 1974 assessed valuation of the company's properties in Arizona, which resulted in a $2.2 million reduction in 1974 Arizona property taxes, was appealed by the Arizona Department of Revenue to the Superior Court of Maricopa County. On dismissal of this action, the issue was taken to the Arizona Court of Appeals where the matter is now pending.

~ The State of New Mexico has enacted an "electrical generation tax," effective July 21, 1975. This excise tax applies to all electricity generated in New Mexico and consumed outside the state. Believing that the tax is unconstitutional and that it violates a provision of the Tax Reform Act of 1976 prohibiting state taxes which discriminate against out-of-state producers of electricity, the company brought an action in the state District Court of New Mexico to have the tax set aside. That court dismissed the action, and a petition for review is being filed by the company with the New Mexico Supreme Court. Notwithstanding the lower court's decision, counsel to the company considers it probable that the company will ultimately prevail in this matter.

~ The company's entrance into a capi-talized lease of its new combined cycle plant required an order from the Arizona Corporation Commission, the granting of which was appealed by an intervenor in the proceeding to the Maricopa County Superior Court, where the matter is now pending. In the opinion of the company's legal counsel, there are no valid grounds for setting aside the Commission's order.

(See page 5 for Information about legal matters concerning the Federal Power Commission.)

BOARD OF DIRECTORS

'Ralph M. Bllby, 58, President, Babbitt Brothers Trading Co. (general mercan-tile), Flagstaff, Arizona t Karl Eller, 48, President, Combined Commu-nications Corporation (broadcasting and outdoor advertising), Phoenix, Arizona

't Norman W. Fain, 70, President, Fain Land and Cattle Co., Prescott, Arizona

'el W. Fisher, 66, Chairman of the Board, Fisher Contracting Co., Phoenix, Arizona William T. Garland, 60, Chairman of the Board, Garland-Rhuart Development Corporation (land development),

Sedona, Arizona Leon Levy, 63, Personal Investments; Con-sultant to Federated Department Stores, Inc. ~ Tucson, Arizona

'ictor H. Lytle, 65, Chartered Life Under-writer, Prescott, Arizona Marvln R. Morrison, 53, Farmer and Cattle

Feeder, Higley, Arizona

'. P. Rellly, 69, Chairman of the Board of the.

Company, Phoenix, Arizona James B. Rolle, Jr., 68, Member of the Law Firm of Rolie, Jones, Benton & Cole, Yuma, Arizona Henry B. Sargent, Jr., 42, Financial Vice President and Treasurer of the Com-pany, Phoenix, Arizona Richard Snail, 46, Member of Snail 8 Wilmer (general counsel to the Company),

Phoenix, Arizona

'onald N. Soldwedel, 52, President, Western Newspapers, Inc., Prescott, Arizona; Publisher and General Manager, Yuma Daily Sun, Yuma, Arizona

'aurice R. Tanner, 55, Chairman of the Board, President and Chief Executive Officer~ The Tanner Companies (con-struction and materials supply), Phoe-nix, Arizona

'elth L. Turley, 53, President and Chief Executive Officer of the Company, Phoenix, Arizona Douglas J. Wall, 50, Member of the Law Firm of Mangum, Wall, Stoops and Warden, Flagstaff, Arizona t Morrison F. Warren, 53, Director of Experi-mental Programs, College of Education, Arizona State University, Tempe, Arizona t K. O. Wilbanks, 55, President, First National Bank of Farmington, Farmington, New Mexico t Ben F. Williams, Jr., 47, Attorney at Law, Douglas, Arizona

'ember ol Executive Committee t Member ol Audit Review Committee DIRECTORS EMERITI E. Ray Cowden, President, Cowden Livestock Company, Phoenix, Arizona W. C. Quebedeaux, President, Quebedeaux Investment Company (personal invest-ments), Phoenix, Arizona OFFICERS Ralph M. Bllby, 59, Chairman of the Executive Committee D. L. Broussard, 56, Vice President, Corporate Planning and Control Gerald J. Griffin, 56, Assistant Secretary Howard F. Hersey, 48, Vice President, Gas Operations Russell D. Hulse, 49, Vice President, Resources Planning Jerry P. Human, 46, Vice President, Customer Services Charles D. Jarman, 41, Vice President, Engi-neering Services William F. Lerch, 41, Vice President, Manage-ment Services Lyman K. Mundth, 60, Vice President, Electric Operations Wm. T. Qulnsler, 52, Secretary and Assistant Treasurer W. P. Rellly, 69, Chairman of the Board Henry B. Sargent, Jr., 42, Financial Vice Presi-dent and Treasurer Kelth L. Turley, 53, President and Chief Execu-tive Officer Edwin E. Van Brunt, Jr., 45, Vice President, Construction Projects Thomas G. Woods, Jr., 50, Executive Vice President, Operations DIVISION MANAGERS A. G. Anderson, 45, Western Division, Goodyear Glen D. Daly, 48, Cochise Division, Douglas Jack Duffy, 38, Navajo Division, Flagstaff Robert Haag, 45, Metropolitan Division, Phoenix James C. Lauchner, 51, Pinal Division, Casa Grande Guy W. Lunt,'43, Mountain Division, Globe Don Roberts,'56, Yuma Division, Yuma Jesse F. Thomas, 54, Yavapai Division, Prescott (Numerals are ages al annual meeting date, April21, 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 Revenues (Millionsof Dollars)

Electric Gas Operating Income Before Income Taxes (Millionsof Dollars)

Electric Gas Year Ended December 31, Amount Percent Amount Percent Amount Percent Amount Percent 1976 1975 1974 1973 1972

$312.0 281.1 213.3 171.0 142.2 79.0%

78.1 78.0 76.0 75.5

$ 82.8 78.7 60.3 54.0 46.2 21.0%

21.9 22.0 24.0 24.5

$ 78.8 69.3 49.6 47.3 40.3 88 0%

85.6 89.2 84.2 88.8

$ 10.7 12.0%

11.7 14.4 6.0 10.8 8.9 15.8 5.1 11.2 Operating Revenues

% Increase 1976 1975 (Decrease) 16 Electric:

Residential Commercial Industrial Irrigation Other Total Transmission for others Miscellaneous services Total Electric Operating Revenue Gas:

Residential Commercial Industrial

Irrigation Other Miscellaneous services Total Gas Operating Revenue Total Operating Revenues (Thousands

$106,334 108,506 47,055 9,799 28,565 300,259 9,591 2,119 311,969 42,922 17,156 10,130 10,979 830 793 82,810

$394,779

'of Dollars)

$ 98,420 97,508 40,737 9,669 21,880 268,214 I0,598 2,268 8.0 1 1.3 15.5 1.3 30.6 11.9 (9.5)

(6.6) 281,080 11.0 42,096 2.0 15,761 8.9 8,760 15.6 10,639 3.2 652 27.3 759 4.5 78,667 5.3

$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 1976 Increase 1975 (Decrease)

(Thousands of Dollars)

Operating Revenues:

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

Operating and maintenance expenses:

Fuel for electric generation Purchased gas Purchased power and interchange net Other production expenses Transmission and distribution Maintenance Administrative, general and other Total Depreciation and amortization Taxes other than income Income taxes (Note 2)

Total Operating Income Other Income:

Allowance for funds used during construction Income taxes (Note 2)

Other net Total Gross Income Interest Deductions:

Interest on long-term debt Interest on short-term borrowings Amortization of debt discount, premium and expense Total 56,362 41,474 35,249 7,377 11,782 31,129 32,127 215,500 36,621 53,120 6,497 311,738 83,041 21,478 4,943 (120) 26,301 109,342 46,738 1,559 566 48,863 46,557 37,521 42,335 7,058 10,961 25,044 26,999 196,475 32,793 49,523 6,891 285,682 74,065 16,191 4,769 1,043 22,003 96,068 32,215 6,964 393 39,572 9,805 3,953 (7,086) 319 821 6,085 5,128 19,025 3,828 3,597 (394) 26,056 8,976 5,287 174 (1,163) 4,298 13,274 14,523 (5,405) 173 9,291 Net Income Preferred Dividend Requirements Earnings for Common Stock 60,479 13,311 47,168 56,496 3,983 10,422 2,889 46,074 1,094 Average Common Shares Outstanding Per Share of Common Stock:

Earnings (based on average shares outstanding)

Dividends declared and paid 19,105,191

$2.47

$1.39 17,739,726 1,365,465

$2.60

$ (.13)

$ 1.36

$.03 See Notes to Financial Statements, including Note 1 as.to significant accounting policies.

Salaii1lce Sheet Assets 1976 1976 (Thousands of Dollars)

UtilityPlant:

Plant in service at original cost:

Electric Gas Common, used in all services Total Less accumulated depreciation and amortization Plant in service depreciated Construction, work in progress Plant held for future use Utilityplant depreciated investments and Other Assets:

Investments (at equity) in and receivables from subsidiaries Other investments and notes receivable Other physical property (less accumulated depreciation: 1976 $24,000; 1975 $20,000)

Total investments and other assets Current Assets:

Cash (Note 3)

Temporary cash investments Special deposits and working funds (Note 3)

Accounts receivable:

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

Fuel (at average cost)

Prepayments and other Total current assets Deferred Debits:

Deferred interest Unamortized debt issue costs Other

$1,053,254 123,359 36,659 1,213,272 301,139 912,133 366,039 1,361 1,279,533 10,091 7,797 1,363 19,251 2,580 2,716 33,774 6,054 (1,236) 12,609 23,797 7,902 88,196 4,176 4,913 6,921 902,660 122,204 33,138 1,058,002 264,802 793,200 309,090 1,279 1,103,569 10,032 6,752 1,088 17,872 1,171 17,000 1,045 26,898 6,924 (400) 11,824 21,436 7,854 93,752 3,844 4,506 5,315 Total deferred debits Total 13,665 16,010

$ 1,402,990

$1,228,858

Liabilities 1976 1975 (Thousand s of Dollars)

Capitalization:

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

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

Customers'dvances for construction Deferred income taxes accelerated amortization Other Total deferred credits and other Commitments and Contingencies (Note 5)

Total 5,488 973 1,410 7,871

$1,402,990 4,660 1,183 2,538 8,381

$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 (Thousands 1975 of Dollars) 20 Source of Funds:

Funds from operations:

Net income Principal non-fund charges (credits) to income:

Depreciation and amortization Equity in unconsolidated subsidiaries Deferred income taxes Allowance for funds used during construction Total funds from operations Funds from external sources:

Long-term debt Preferred stock Common stock Total funds from external sources Decrease in working capital*

Other items net Total source of funds Application of Funds:

Plant additions and replacements, excluding allowance for funds used during construction Repayment of short-term borrowings net Repayment of long-term debt Dividends on preferred and common stock Other items net Increase in working capital*

Total application of funds Increase (Decrease) in Working Capital*:

Cash and temporary cash investments Accounts receivable Materials, supplies and fuel Accounts payable and accrued expenses Customers'eposits, advances and other Other-net Net increase (decrease)

$ 60,479 36,621 191 (210)

(21,478) 75,603 81,001 64,243 145,244 22,740

$243,587

$194,266 8,500 39,721 1,100

$243,587

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

(7,766) 1,987

$ (22,740)

$ 56,496 32,793 469 (210)

(16,191) 73,357 255,687 29,160 56,390 341,237 4,802

$419,396

$167,912 162,102 38,250 34,222 16,910

$419,396

$ 15,826 3,512 5,763 (8,972)

(625) 1,406

$ 16,910

• Excluding notes payable to banks, commercial paper and term debt.

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

current maturities of long-significant accounting

StaiiennenfI: ef RefI:aiinedl Eall"@lings For the Years Ended December 31, 1976 and 1975 Retained earnings at beginning of year AddNet income Total Deduct Dividends:

Preferred stock Common stock Total Retained earnings at end of year (Thousan

$131,311 60,479 191,790 ds of Dollars)

$109,037 56,496 165,533 13,311 26,410 39,721

$152,069 10,422 23,800 34,222

$131,311 1976 1975 See Notes to Financial Statements, including Note 1 as to significant accounting policies.

ILeit1ig-'reitIdelhi December 31, 1976 and 1975 First Mortgage Bonds:

2%% series due July 1, 1976 3~/e% series due December 1, 1977 3% series due April 1, 1979 2%% series due February 1, 1980 9.80% series due June 1, 1980 2~/e% series due December 1, 1980 9.50% series due February 15, 1982 3~/e% series due February 1, 1983 3'/2% series due November 1, 1983 3'/4% series due March 1, 1984 5~/e% series due October 1, 1987 4.70% series due March 1, 1989 4.80% series due November 1, 1991 4.45% series due June 1, 1992 4.40% series due December 1, 1992 4.50% series due September 1, 1993 6.25% series due September 1, 1997 10.625% series due November 15, 2000 7.45% series due March 15, 2002 6.20% series due April 1, 2004 Less certain securities held by trustee Unamortized discount and premium Total First Mortgage Bonds Unsecured Notes Payable:

Due September 1, 1979 (a)

Capitalized Lease Obligation (b)

Total Long-Term Debt Less current maturities:

2'/4% series due July 1, 1976 3~/e% series due December 1, 1977 Capitalized lease obligation Total Long-Term Debt Less Current Maturities 1976 (Thousands 2,500 4,000 5,000 75,000 6,000 100,000 14,500 5,723 15,000 151000 20,000 35,000 25,000 25,000 15,000 25,000 75,000 60,000 50,000 (802) 571,921 50,000 54,731 676,652 (2,500)

(513)

$673,639 1975 of Dollars) 8,500 2,500 4,000 5,000 75,000 6,000 100,000 14,500 5,723 15,000 15,000 20,000 35,000 25,000 25,000 15,000 25,000 75,000 60,000 50,000 (26,271)

(883) 554,069 50,000 604,069 (8,500)

$595,569 (a) $30,000,000 bears interest at 114% of prime rate plus '/4 of 1%

to September 1, 1977, then 114% of prime rate plus h of 1%.

$20,000,000 bears interest at a percentage of prime rate to Septem-ber 1 in the year indicated as follows:

1977, 120%; 1978, 121%; 1979, 122%. The actual interest rate to final maturity of these loans is not to exceed 7~/e% per annum; payments in excess of this amount are carried as deferred interest.

(b) Represents the present value of future lease payments (discounted at the interest rate of 7.48%) of a combined cycle plant sold and leased back from the independent owner-trustee formed'to own the facility. The lease requires semi-annual payments of $2,299,340 through June 1983 and then

$2,581,850 through June 2001, and includes renewal and purchase options based on fair market value.

This plant is included in plant in service at its original cost of

$54,404,530; accumulated amorti-zation at December 31, 1976 was

$1,082,762.

Aggregate annual payments which will be due on long-term debt and for sinking fund requirements through 1981 are as follows: 1977,

$3,013,000; 1978, $552,000; 1979,

$54,594,000; 1980, $86,639,000; 1981, $3,688,000. Other sinking fund requirements through 1981 for the. outstanding First Mortgage (Notes continued next page)

Bonds (which may be met by prop-erty additions) willbe as follows:

1977 and 1978, $2,702,230; 1979,

$2,662,230; 1980, $2,552,230; 1981,

$2,552,230. As allowed in the bond indentures, requirements of this type have in the past been satisfied by certification of property additions of 1% times the amount stated and the Company expects to meet similar requirements in that manner in the future. For sinking fund payment requirements and redemptions at the option of the holders on cumulative preferred stock, see Capital Stock.

Substantially all utilityplant is subject to the lien of the First Mort-gage Bonds. The indenture respect-ing the First Mortgage Bonds includes provisions which would restrict the payment of dividends on Common Stock under certain condi-tions which did not exist at December 31, 1976.

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

Adding Accumulated 1976 1975 1976 1975 Dividends)

Common Stock Cumulative Preferred Stock:

$1.10 preferred

$2.50 preferred

$2.36 preferred

$4.35 preferred....

Serial preferred:....

$2.40 series A

$2.625 series C..

$2.275series D..

$3.25 series E Serial preferred:....

$8.50 series F....

$8.50series G...

$10 series H.....

$10.70 series I...

Serial preferred(a)..

Total.......

30,000,000 22,500,000 19,000,000 2.50 155,945 103,254 40,000 75,000 155,945

$ 25.00 103,254 50.00 40,000 50.00 75,000 100.00 160,000 105,000 120,000 150,000 1,000,000 50.00 50.00 50.00 50.00 240,000 240,000 200,000 320,000 240,000 240,000 200,000 320,000 2,000,000 210,000 90,000 400,000 300,000 210,000 90,000 400,000 300,000 100.00 100.00 100.00 100.00 25.00 3,000,000 6,535,000 I

2,374,199 I

2 374,199 3,898 5,163 2,000 7,500 12,000 12,000 10,000 16,000 21,000 9,000 40,000 30,000 3,898 5,163 2,000 7,500 12,000 12,000 10,000 16,000 21,000 9,000 40,000 30,000

$ 168,561 i $168,561

$ 56,250

$ 47,500

$ 27.50 51.00 51.00 102.00 50.50 51.00 (b)

(c)

(d)

(d)

(e)

(f)

(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):

Description Balance, December 31, 1974 Common Stock Cumulative Preferred Stock,

$10.70 series I

Balance, December 31, 1975 Common Stock Balance, December 31, 1976 Number of Shares 15,000,000 4,000,000 Par Value Amount

$37,500 10,000 19,000,000 3,500,000 22,500,000 47,500 8,750

$56,250 Common Stock Cumulative Preferred Stock Number of Shares Par Value Amount Premiums and (Expenses)

Net 300,000 2,374,199 2,374,199 30,000 168,561

$168,561 (916) 200,724 55,367

$256,091 2,074,199

$ 138,561

$ 155,472 46,168 NOTES TO FINANCIALSTATEMENTS

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 utilityplant 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 utilityoperating 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 utilityplant 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 statutory rates Increases (reductions) in taxes resulting from:

Timing differences:

Tax over book depreciation Allowance for funds used during construction capitalized Sale of combined cycle plant Other principally taxes, pensions and other items capitalized Other items Investment credit

$31,435

$29,704 (5,901)

(10,884) 3,478 (7,163)

(8,205)

(5,758) 194 (10,800)

(4,630)

(1,006)

(6,368)

(Thousands of Dollars)

Taxes currently payable Deferred taxes restored Total federal and state income taxes Federal and state income taxes included in:

Operating expenses Other income (credit)

Total Taxes currently payable (refundable):

Federal State Total Deferred taxes:

Federal State Total 1,764 (210)

$ 1,554

$ 6,497 (4,943)

$ 1,554 (965) 2,729

$ 1,764 (201)

(9)

(210) 2,332 (2 IO)

$ 2,122

$ 6,891 (4,769)

$ 2,122 762 1,570

$ 2,332 (201)

(9)

(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 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 liabilityfor 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) 25

Dec. 31 Operating Revenues Operating Income Net Income Earnings for Common Stock Earnings Per Average Share of Common Stock

$101,800 25,551 19,947 16,620 038 0.15 1.07 0.86

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 (Thousands of Dollars)

$88,675

$92,674

$111,630 14,168 13,216 30,106 10,641 6,169 23,722 7,313 2,841 20,394 Accountants'pinion Arizona Public Service Company:

Haskins & Sells, Certified Public Accountants Phoenix, Arizona We have examined the balance sheets of Arizona Public Service Company as of December 31, 1976 and 1975 and the related statements of income, retained earnings and changes in financial position, and schedules of capital stock and long-term debt for the years then ended. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the above-mentioned financial statements and schedules present fairlythe financial position of the Company at December 31, 1976 and 1975 and the results of its operations and the changes in its financial position for the years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

+ ~x February 11, 1977

Sttlmmal y eV QpeN'aliens 1976 1975 1974 1973 1972 Operating Revenues 394,779 (Thousands of Dollars) 359,747 273,599 224,956 188,436 Operating Expenses:

Operating and maintenance expenses Depreciation and amortization Taxes*

215,500 36,621 59,617 196,475 32,793 56,414 153,006 26,398 38,413 116,864 23,529 34,032 94,710 21,409 31,353 Total 311 738 I

285 682 217,817 174,425 147,472 Other income*

Interest Deductions 26,301 48,863 22,003 39,572 17,065 35,890 9,097 28,361 5,013 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.

47,168 20.64 2.47 1.39 22,500,000 19,105,191 56,011 l

Common Stock Data:

Earnings for common stock, Book value per share Earnings per average share of common stock outstanding Dividends paid per share Shares of common year end average Number of common shareholders 46,074 19.98 2.60 1.36 19,000,000 17,739,726 56,003 30,699 20.13 2.34 1.36 15,000,000 13,102,740, 43,497 27,716 20.74 2.63 1.21 12,500,000 10,527,397 35,687 22,027 19 99 229 1.12 10,500,000 9,612,022 35,150 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-bilityof 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 utilityplant. 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 (Thousands of Dollars) 1973 1972 Capitalization:

Long-term debt Preferred stock Common equity Total 673,639 168,561 464,410 595,569 340,976 369,609 377,223 168,561 138,561, 68,561 68,561 379,535 302,009 259,249 209,886 1 306 610 I

$ 1,143,665 781,546 697,419 655,670 UtilityPlant Gross UtilityPlant Depreciated Number of Employees at Year End Average Wage per Hour 28 Electric:

Electric resources (kw)

Peak load (kw)

Electric sales total (mwh)

Number of customers at year end

$ 1,580,672 1,279,533 4,042 7,44 2,790,700 2,190,900 9,606,571 342,059 3,731 3,898 3,899 3,545 6.82 6.16 5.61 5.32 2,568,700 2,068,300

. 8,892,570 2,343,600 2,032,000 8,692,304 2,191,000 1,812,700 8,098,712 2,045,300 1,658,600 7,198,947 331,382 323,094 308,643 287,680

$ 1,368,370

$ 1,190,399

$ 1,003,218 856,827 1,103,569'55,399 791,578 668,871 Gas:

Total gas sales (m therms)

Number of customers at year end 491,007 339,265 526,659

~

336,839 518,999 334,908 547,068 328,406 506,574 313,928

~

V gigoOog

~~

OoOII]glQoQ~o(@(oog gIQ OoO.~o. Qg ~o ftm$0 W~ ttEEEWE

~o(@o )II g Qjg(]~o goop gpss](oOIggo (oa) Nl)ES (jQ goO@ ~o(@,

o-XR9KS QRX~588 CAK8&UK'(oo0%iS Q=.CofgS oX(@

I

~ (jggjoSRg QHQgE Cog Q+KoN5)

C9$8ifk48(8K~9m

()pgggo Qgg.g oORpog]Q@

gggip moOf@)~ g)

(ggogggoa) Q~o (oON QRB g

+Kg}3og9$ QNfg(oOIQ+CoOmo gggoog@Q) Qgr~om Xgo@8RQ o5~o.

9@ gQM'moOo g.'L g@oojJlglQolI) +go(@(ooo if.

OiegI~QSg) (gGo5+3g Q6~o9)

LgggggI:g@)

PgjLoXIigg)QgtXoOIR)

Qf o

o -

o -

o o (gg@(oO goop (goOog j(og QQ o

o.

OoOIQQoQ EWWEsmEEWIE~

~oo gggoOQ QjQg QO)ILog (ogIlg ea@key.@n SQa6%e(N(nmeX QOOoCN goOo)jQ'Q (oOg~o Q,(goao (os(oO'Qg[grgg Qq~oo Ago)@g IQ(jgQ ~o @g@gggoQ oollJI]~

~o

~o6iB 'tIN=IO5gj (oOS QRggdogS gggj'oa@

gQO IPP Qgjj~oO (Qgg~o

~WE IEEIWEWEttdl~

QQg (OOQ (ooIQ

@Q(<g@g@)

05-'X5, a68hsINSzKNlh@m t

'tf, t,l Q)'I) Q)(oO@0Igg[jggg j)(gQ)

[gKo3QgQ, QO~o.) gg~o P.

Qxe$(NI

0 0