ML18192A396

Prospectus. Arizona Public Service Company, First Mortgage Bonds, 9.80% Series Due 1980

ML18192A396
Person / Time
Site:	Palo Verde
Issue date:	06/05/1975
From:	Arizona Public Service Co, Blyth Eastman Dillon & Co, Dean Witter & Co, First Boston Corp
To:	Office of Nuclear Reactor Regulation
References
Download: ML18192A396 (40)

Text

PROSPECTUS

$ 75,000,000 Arizona Public Service Company First Mortgage Bonds, 9.80% Series due 1980 Interest payable June 1 and December 1 Due June 1, 1980 The Bonds of the 980% Series due 1980 ("Netv Bonds") will not be redeemable prior to 'maturity.

Application has been made to list the New Bonds on the New Yorh Stoch Exchange.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PA'SSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-SENTATION TO THE CONTRARY IS A CRIMINALOFFENSE.

Underwriting Price to Discounts and Proceeds to Public(l J Commissions(2) Co>>tpany(l) and (3J Per Bond 100% 925% 99.075%

.al $ 75,000,000 $ 693,750 $ 74,306,250 Plus accrued interest from June 1, 1975.

(2) The Company has agreed to indemnify the several Underwriters against certain civil liabilities, in-cluding liabilities under the Securities Act of 1933.

(3) Before deduction of expenses payable by the Company estimated at $ 120,000.

The New Bonds are offered by the several Undenuriters when, as and if issued by the Company and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that the New Bonds, in definitive fully registered form, will be ready for delivery on or about June 12, 1975.

The First Boston Corporation I Blyth Eastman Dillon 8c Co.

incorporated Dean Witter & Co.

Incorporated The date of this Prospectus is June 5, (975.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUC STABILIZING,IF COMMENCED, MAYBE DISCONTINUED AT ANY TIME. I Arizona Public Service Company (the "Company" ) is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other informa-tion with the Securities and Exchange Commission. Information as of particular dates concerning directors and officers, their remuneration and any material interest of such persons in transactions with the Company is disclosed in proxy statements distributed to stockholders of the Company and filed with the Commission. Such reports, proxy statements and other information can be inspected at the Public Reference Room of the Commission, 1100 L Street, N. W., Washington;D.C., and co-pies of such material can be obtained from the Commission at prescribed rates. Securities of the Company are listed on the New York and Pacific Stock Exchanges and reports, proxy material and other information concerning the Company may be inspected at the offices of such Exchanges.

THE COMPANY The Company was incorporated in 1920 under the laws of Arizona and is principally engaged in the generation in Arizona and New Mexico, and the sale in Arizona, of electric energy, and in the purchase and sale in Arizona of natural gas. The principal executive offices of the Company are lo-cated at 411 North Central Avenue, Phoenix, Arizona 85004 (telephone 602 271-7900).

APPLICATION OF PROCEEDS The financing program contemplated herein consists of the Company's issuance on or abo~

June ll, 1975 of $ 75,000,000 in aggregate principal amount of its First Mortgage Bonds, 9.80% Se~

ries due 1980 ("New Bonds" ) and 2,000,000 additional shares of its Common Stock ("Additional Shares" ).

The net proceeds from the sale of the New Bonds (estimated at $ 74,186,250) and the Additional Shares will be applied to the reduction of short-term borrowings outstanding when the proceeds are received. Such borrowings have been and will be made for construction and other purposes. See "Fi-nancing Requirements and Construction Program".

While the contemplated financing program is herein presented as extending through the issu-ance of the Additional Shares, it should be noted that the. sale of the New Bonds will not be conditioned upon the issuance of the Additional Shares.

PROSPECTUS

SUMMARY

The following material is qualiTied in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus.

Operations Service Area All or part of 11 of Arizona's 14 counties Population Served 1,555,000 Customers (April 30, 1975) .. Electric 323,880 Gas 334,870 Net Capability to Meet 1974 Peak System Demand (KW) 2,343,600 Sales (Twelve Months Ended April 30, 1975) .................... ..... Electric (MWH) 8,943,488 Gas (M Therms) 542,111 Estimated Construction Expenditures (1975-77) $ 732,000,000 Financial Information Twelve Months Ended Dccembcr 31, April 30, 1974 1975 Income Statement Data:

Total Operating Revenues $ 273,599,000 $ 307,617,000 Net Income $ 36,957,000 $ 39,772,000 Earnings for Common Stock $ 30,699,000 $ 31,331,000 Average Common Shares Outstanding 13,102,740 14,204,110 Earnings Per Average Share of Common Stock ... $ 2.34 $ 2.21 Dividends Per Share of Common Stock . $ 1.36 $ 1.36 Ratio of Earnings to Fixed Charges 1.94 2.02 Pro Forma Ratio of Earnings to Fixed Charges ... 1.92 As Adjusted for Ncw Bonds and Additional Shares Outstanding April 30, Percent of 1975 Amount C~kaH* tio (Thousands of Dollars)

Capitalization:

Long-Term Debt (excluding current maturities) .. $ 442,484 $ 517,484 51.2%

Preferred Stock 138,561 138,561 13.7 Common Stock Equity. 326,544 ~ 354,544 35.1 Total Capitalization ..... $ 907,589 $ 1,010,589 100.0%

Short-Term Borrowings .. $ 105,600 $ 39,414*

• Estimated balance on June 12, 1975 after application of proceeds from the New Bonds and the Additional Shares.

INDUSTRY AND COMPANY PROBLEMS The utility industry is experiencing a number of problems affecting its business and financial condition. These include difficulty in obtaining an adequate return on invested capital, in obtaining sufficient capital on reasonable terms, in obtaining adequate supplies of oil and gas at reasonab prices and the increased costs and delays attributable to environmental considerations. The Com-pany has been confronted with such problems in varying degrees, the more acute of which are summarized below.

Financial A revision of the Company's short-term borrowing arrangements was necessitated by the with-drawal in January 1975 by Moody's Investors Service, Inc. of its rating of the Company's commercial paper. Future permanent financing of the Company's large capital requirements will depend upon its ability to provide adequate earnings coverages on its senior securities. See "Regula-tion and Rates" and "Financing Requirements and Construction Program".

Other The Company continues to experience increased operation and maintenance expenses, short supplies of gas (both for generating fuel and for distribution), high costs of oil fuel, and difficulties in meeting environmental standards and similar regulations. See "Management's Discussion and Analysis of Statement of Income" and "Business and Property".

REGULATION AND RATES State The Arizona Corporation Commission ("ACC") has regulatory authority over the Company in matters relating to determination of retail electric and gas rates as well as the issuance of securities.

The Company is currently engaged in a rate proceeding before the ACC relative to increased rates that have been in effect since January 16, 1975 on a interim basis, as well as to a further in-crease in retail rates proposed by the Company in subsequent filings. As applied to the 1974 test year, the interim increase would have produced approximately 844,701,000 of additional revenu~

and the further increase an additional 823,117,000. The interim increase (which is subject to refun~

depending upon the ACC's decision in the current, proceeding) accounted for approximately

$ 11,100,000 of revenue through April 30, 1975 and the preponderance of the Company's net income for the four months then ended. Appearing below is unaudited information for that four-month pe-riod and for the comparable period of 1974 (in thousands of dollars):

1974 1075 Operating Revenues .................................................................................... $ 79,761 $ 113,779 Operating Income ....................................... 14,216 18,908 Net Income .........................................................

Earnings Per Share of Common Stock..............

Based on its assessment of the probable timing of a decision in the current proceeding, the 8,663

$ 0.60 11,477

$ 0.51 Company expects to adopt new permanent rates on or about October 1, 1975.

The Company's last full rate proceeding was initiated in February 1973 and resulted in an or-der from the ACC approving new rates, effective October 15, 1973, designed to increase electric and gas revenues by approximately $ 8,970,000 for the 1972 test year, which was approximately 74% of the increase requested by the Company.

The Company's rate schedules contain provisions permitting adjustments for changes in the costs of generating fuel, purchased power, gas for resale.and the rates of excise taxes. Adjustments are reflected in billings to the Company's customers commencing 30 days after the adjustment cal-culations are filed with the ACC unless the ACC rules to the contrary in the intervening period.

~here are indications that the present adjustment provisions may be reviewed in the course of the rate proceeding now pending before the ACC.

Federal The Company is also subject to regulation by the Federal Power Commission ("F<PC") in cer-tain matters that include wholesale rates and transmission charges. For the twelve months ended April 30, 1975, it derived approximately 11% of its electric operating revenues from sales and charges regulated by the FPC.

The Company is currently operating under a fuel adjustment clause applicable to its wholesale sales which it was permitted to place in effect on April 2, 1974 subject to refund, depending upon final FPC action (revenue of approximately $ 4,300,000 subject to refund having been recorded'by the Company through April 30, 1975). This fuel adjustment clause is being contested before the FPC by two wholesale customers in a proceeding that involves the reasonableness of overall rates to these customers. In a separate action, the FPC is investigating the justness and reasonableness of rates and adjustment clauses (for certain expenses other than fuel) contained in various contracts from which the Company derives the preponderance of its FPC-regulated revenues; the parties are negotiating a settlement stipulation whereby the Company will be required in the future to submit cost-of-service filings prior to activating the adjustment clauses. The Company believes that it will not be adversely affected to any material degree by the ultimate disposition of the foregoing mat-ters.

FINANCING REQUIREMENTS AND CONSTRUCTION PROGRAM Over the past several years the Company has relied for a significant part of its construction funds upon short-term borrowings, which aggregated $ 126,600,000 on May 30, 1975 and are ex-pected to increase to approximately $ 141,600,000 by June ll, 1975, immediately before application f the proceeds from the New Bonds and the Additional Shares.

Included in such borrowings is $ 20,000,000 obtained under bank lines the Company had ar-ranged to support its commercial paper. After the rating of the Company's commercial paper was withdrawn by Moody's Investors Service, Inc. in January 1975, the Company resorted to the sup-porting bank lines, as well as its regular bank lines of credit, to replace borrowings that it otherwise would have obtained through the issuance of commercial paper or pursuant to arrangements with bank trust departments (the Company's ability to sell its commercial paper and to maintain such trust department arrangements having been terminated as a consequence of the withdrawal of the commercial paper rating).

The balance of the Company's current short-term borrowings is pursuant to regular'ank lines of credit, aggregating $ 106,600,000 for 1975, as augmented for the period up, to availability of the proceeds from the New'onds and the Additional Shares by $ 23,000,000 in temporar'y bank credits.

Interest on the supporting lines, the regular lines of credit and the temporary credits is generally at the prime rate. Unrestricted compensating balance requirements under the supporting and regular lines of credit are summarized in Note 5 of Notes to Financial Statements. In lieu of compensating balances, the temporary credits require commitment fees or interest in excess of the prime rate, but the cost to the Company is approximately the same.

Borrowings under the supporting lines and the temporary credits will be retired with a portion of the proc'eeds from the New Bonds and'the Additional Shares. A $ 7,250,000 long-term obligation will be paid when'due in July 1975 "(other such obligations maturing through the end of 1977 con-sisting of $ 8,500,000 in 1976 and $ 2,500,000 in 1977).

Plant expenditures for the years 1975 through 1977 are currently estimated at $ 732,000,000 in-cluding approximately $ 198,000,000 for 1975, $ 270,000,000 for 1976 and $ 264,000,000 for 1977. The plant expenditures by major facility groups during the period 1975-77 are currently estimated as follows:

Electric generation(1) .. . $ 527,000,000 Electric transmission. 105,000,000 Electric distribution................................................... ~

79,000,000 Gas distribution ........................................ 9,000,000 Common facilities . 12,000,000 Total(2) $ 732,000,000 (1) See the second table, and the paragraph that follows it, in "Business and Property Generation".

(2) Including approximately $ 140,000,000 of expenditures for environmental purposes.

During the years 1972 through 1974 plant expenditures by the Company aggregated approximately

$ 440,000,000.

On the assumption that it will be able to meet the earnings coverage requirements discussed below, the Company is tentatively planning an additional debt issue and a preferred stock issue for late 1975 to provide an aggregate of approximately $ 90,000,000 of external capital for the foregoing purposes. In addition to further is'sues of senior securities consisting of long-term debt (including pollution control revenue bonds of various Arizona and New Mexico authorities to finance facilities to be constructed and owned by the Company) and preferred stock, permanent financing in the ensuing two years is expected to include common stock. The Company's ability to issue and success~

fully market senior securities through the 1975-77 period will depend in large part upon its ability~

to provide adequate earnings coverage for the rapidly expanding capital structure necessary to fi-nance its monetary needs.

Provisions in the Company's indenture and articles of incorporation restrict it from issuing new first mortgage bonds or preferred stock unless its earnings (as defined) cover by at least the're-scribed number of times the amount'of interest (as to bonds) and the amount of interest plus preferred stock dividend requirements (as to preferred stock) on the securities to be outstanding after completion of the new issue. As calculated in accordance with the indenture, the coverage af-forded by earnings for the twelve months ended April 30, 1975 would have allowed the issuance of approximately $ 156,000,000 in aggregate principal amount of new first mortgage bonds (including the New Bonds). The issuance of the New Bonds will in effect preclude an additional preferred stock issue at least until the Company's recent interim rate increase (See "Regulation and Rates" ) is sufficiently reflected in a 12-month earnings period.

C APITALIZATION The capitalization of the Company as of April 30, 1975, and as adjusted to reflect the issuance and sale of the New Bonds and the Additional Shares and the application of the proceeds thereof, is as follows:

April 30,

~Ott dl ALP (Thousands of Dollars) tlr Long-Term Debt (1):

First mortgage bonds . $ 392,484 $ 467,484 Notes payable 50,000 50,000 Total long-term debt 442,484 517,484 51.2%

Preferred Stock, 3,535,000 shares authorized, 2,074,199 shares outst'anding (1) 138,561 138,561 13.7 Common Stock Equity:

Common Stock, $ 2.50 par value, 30,000,000 shares authorized, 17,000,000 shares outstanding, 19,000,000 shares to be outstanding . 42,500 47,500 Premiums and expenses. 177,777 200,777 Retained earnings (1) . 106,267 , 106,267 Total common stock equity 326,544 354,544 35.1 Total capitalization . $ 907,589 $ 1,010,589 100.0%

Short-Term Borrowings as of April 30, 1975 for Outstanding; as of June 12, 1975 (estimated) for As Adjusted(2) $ 105,600 $ 39,414 l

(1) See Notes 2 and 3 of Notes to Financial Statements. Long-term debt excludes $ 8,250,000 of current maturities of which $ 1,000,000 was paid on May 1, 1975.

(2) See "Application of Proceeds", "Financing Requirements and Construction Program" and Note 5 of Notes to Financial Statements.

(3) The sale of the New Bonds is not conditioned on the sale of the Additional Shares. The ta-ble assumes that the Additional Shares are sold at a net price of $ 14 per share. If the New Bonds are'sold and the Additional Shares are not, the Long-Term Debt will be 52.7%, the Preferred Stock will be 14.1% and the Common Stock Equity will be 33.2% of the Company's capitalization.

STATEMENT OF INCOME-,

The statement of income for the five years ended December 31, 1974 has been examined by Haskins 5 Sells, independent certified public accountants, whose opinion with respect thereto appears elsewhere in this Prospectus. The state'ment for the twelve months ended April 30, 1975 has not been examined by indepe '

certiTied public accountants but, in the opinion of the Company, includes all adjustments (comprisin normal recurring accruals) necessary for a fair presentation of the results of operations, subject to the mat ers discussed in Note A. This statement should be considered in conjunction with the other financial statements and related notes and the information'referred to under "Industry and Company Problems" appearing else-where in this Prospectus. Twelve Months Ended April 30, Year Ended December 31, 1975 1970 1971 1972 1973 1974 (Unaudited)

(Thousands of Dollars)

Operating Revenues (Note A):

Electric $ 105,817 $ 117,399 $ 142,237 $ 171,025 $ 213,271 $ 238,510 Gas . 39,049 41,899 46,199 53,931 60,328 69,107 Other 7 7 Total 144,873 159.305 188 436 224 956 273 509 307 617 Operating Expenses:

Operation and maintenance expenses:

Fuel for electric generation 13,350 17,107 19,964 29,626 41,626 45,554 Purchased gas 16,692 19,812 19,963 22,258 '28,171 32,718 Purchased power and interchange-net ............................. 375 102 8,522 23,230 31,425 12,398',181 Other production expenses',. 2,600 3,002 3,427 5,181 5,646 Transmission and distribution 7,428 7,927 9,049 9,757 10,187 10,884 Maintenance 9,026 10,676 15,173 1G,869 20,078 21,224 Customers, sales, administrative and general .................... 14;?98 17 276 ~18 612 21 775 24 533 26 247 Total 64,269 75,902 94,710 110,864 '153,006 173,698 Depreciation and amortization (Note 1) 18,593 19,710 21,409 23,529 26,398 28,461 Taxes other than income 21,539 24,983 26,901 28,401 38,546 43,217 Income taxes (Notes B and 4) 8,524 6,118 4,452 5,631 (133) 1,767 Total 112 925 126,713 147,472 174,425 217 817 247,143 Operating Income .. 31 940 32,592 40,964 50 531 55 782 60,474 Other Income (Deductions):

Allowance for funds used during construction (Note C) .......

Income taxes (Note 4)

Other net .

568 180 (106) 1,535 594 86 3,840 1,169 6,227 2,117 753 11,888 2,531 2,646

2,669 Total 642 . 2,215 5 013 9 097 17,065 17,708 Gross Income 32,590 34,807 45977 59 628 72,847 78 102 Interest Deductions:

Interest on long-term debt. 11,632 12,326 17,941 22,390 20,929 23,012 Interest on short-term borrowings . 2,653 g,741 2,406 5,915 14,883 15,281 Debt discount, premium and expense 37 35 52 56 78 117 Total 14,322 15,102 20,399 28,361 35.890 38,410 Net Income ............ 18,268 19,705 25,578 31,267 36,957 39,772 Preferred Dividend Requirements 3,551 3,551 3,551 3,551 6,258 8,441 Earnings for Common Stock $ 14,717 S 16,154 S 22.027 S 27,716 $ 30,699 S 31,331 Average Common Shares Outstanding 8,500,000 9,272,603 9,612,022 101527,397 13,102,740 14,204,110 Per Share of Common Stock:

Earnings (based on average shares outstanding) (Note D) ... $ 1.73 $ 1.74 $ 2.29 $ 2.63 $ 2.34 $ 2.21 Dividends declared and paid . $ 1.08 $ 1.08 $ 1.12 $ 1.21 $ 1.3G $ 1.36 Ratio of Earnings to Fixed Charges (Note E) .............................. 2.76 2.59 2.37 2.20 1.94 2.02 Numerical note references relate to the Notes to Financial Statements located elsewhere in this Prospectus; see also Note 1 as to significant accounting policies.

8

Notes to Statement of Income (Information for the'Period Ended April 30, 1975 is Unaudited)

A. Revenues include amounts subject to refund (see "Regulation and Rates" ) as follows: for 974

$ 2,500,000, all wholesale; and for the twelve months ended April 30, 1975 $ 4,200,000, holesale, and $ 11,100,000, retail. In the opinion of the Company and its counsel any retail revenues reported for the twelve months ended April 30, 1975 that ultimately would be refunded are not material in relation to total revenues or net income for such twelve-month period. The Company and its counsel are of the same opinion in regard to the refundable wholesale revenues, both as to those included in 1974 and those included in the twelve months ended April 30, 1975.

Relative to wholesale revenues in the latter period, the Company is advised by its independent certified public accountants that if such accountants were otherwise'prepared to render an opinion as to whether the unaudited financial statements for the twelve months ended April 30, 1975 are fairly presented in accordance with generally accepted accounting principles (which such accoun-tants are not prepared to do, inasmuch as they have not examined such financial statements), their opinion would be subject to t'ne effects upon the Company, if any, of final FPC action on the fuel adjustment clause referred to in "Regulation and Rates Federal". Revenues collected pursuant to that clause made the following approximate contributions to total results for the twelve months ended April 30, 1975: 1.5% of operating revenues, 9.5% of net income and 12% of earnings per share of common stock.

B. Income tax reductions resulting from accelerated depreciation allowable for income tax pur-poses, from certain other timing differences and from investment tax credit are reflected in income currently. Reductions allowed relating to five-year amortization of certain facilities were deferred for later recognition in income. See Notes 1 and 4 of Notes to Financial Statements.

C. In accordance with the accounting practice described in Note 1 of Notes to Financial State-ments, the allowance for funds used during construction (AFC) has been calculated using the following composite rates: 1970 through 1973, 7%; 1974 and 1975, 8%. AFC is defined by the FPC Uniform Systems of Accounts as including the net cost for the period of construction of borrowed funds used for construction and a reasonable rate on other funds when so used. The determination f the components of the composite rate attributable to each source of funds is impracticable. How-ver, assuming that funds used to finance construction during the periods shown above were ob-tained from various sources of capital in the same proportion as the average capitalization during the period 1970 through 1974, that'is, 52% from debt,'13% from preferred stock, and 35% from common equity, and basing the AFG attributable to debt and preferred stock upon experienced in-cremental costs of such securities (excluding pollution control bonds) and. without giving effect to income taxes related to debt, the common equity component of AFC as related to earnings for common stock amounted to approximately 1%, 2%, 6%, 7%, 14% and 9% for the five years ended December 31, 1974 and twelve months ended April 30, 1975, respectively. Although AFC is included in Other Income (Deductions), it does not represent current cash earnings, D. On a pro forma basis, the issuance of the Additional Shares of common stock referred to herein assuming (1) application of the proceeds of 1,000,000 shares of common stock issued on May 29, 1974, 1,500,000 shares issued on December 30, 1974 and 2,000,000 shares issued on March 11, 1975 to retire the most recently issued short-term borrowings incurred prior to those dates, respectively; and (2) application of the proceeds of the Additional Shares of common stock referred to herein to retire short;-term borrowings expected to be incurred between April 30, 1975 and the June 11, 1975 anticipated time of the availability of such proceeds, would not'ave a ma-terial dilutive effect on earnings per share of common stock for the twelve months ended April 30, 1975.

E. "Earnings" used to compute this ratio represent the aggregate of net income, income taxes and fixed charges. "Fixed charges" represent interest, amortization of debt discount, premium and expense, and the estimated interest portion of annual rentals. The pro forma ratio of "earnings" to "fixed charges" for the twelve months ended April 30, 1975 would be 1.92 after giving effect (1) the annual interest requirements of the New Bonds, (2) the issuance of the Additional Shar~~

t~

referred to herein on or about June ll, 1975, (3) the issuance and retirement of indebtedness dur-ing the twelve months ended April 30 and through June 11, 1975, and (4) applicable adjustments for interest on indebtedness to be retired from the proceeds of the New Bonds and the Additional Shares. The sale of the New Bonds is not conditioned on the issuance of the Additional Shares; if the Additional Shares are not issued (assumption (2) above), the pro forma ratio would be 1.79.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF STATEMENT OF INCOME Operating. Revenues Increases in electric operating revenues and in total operation and maintenance expenses over the period covered by the Statement of Income reflect the increases in unit sales shown in "Business and Property Operating Statistics". Total operating revenues also reflect the interim rate increase effective January 16, 1975, the 1973 general rate increase (as well as an earlier general increase in May 1972) and effects of the adjustment clauses referred to in "Regulation and Rates".

O perating Expenses In addition to volume increases, the cost of fuel for the generation of a given amount of electric-ity has risen sharply, as indicated in "Business and Property Energy Availability" and "Operating Statistics". A similar cost trend, starting in 1972, is reflected in the expense of purchased power and interchange (net), although dependence by the Company upon short-term power purchases from other utilities accounts for much of the increase in this item in recent years. Such purchases have increased greatly as the Company has sought alternatives, where available, to the high cost of oper-ating-its own generating facilities on fuel oil; however, an important temporary source of purchased power during 1974 is no longer available to the Company. Relative costs of fuel are discussed in "Business and Property Energy Availability", as are other reasons for the Company's dependence on purchased power and for the increase in maintenance expense.

I Operating expenses attributable to depreciation and amortization and to taxes other than in-come (primarily consisting of property taxes) increase with the size of the Company's utility plant.

Generally higher rates of depreciation effective January 1, 1975 (see Note 1 of Notes to Financial Statements) are reflected in results for the twelve months ended April 30, 1975. Much of the sharp increase in property taxes from 1973 to 1974 is due to a 25% increase in the assessed valuation of the Company's utility plant in Arizona pursuant to a change in applicable law. Fluctuations in in-come tax expense are shown in Note 4 of Notes to Financial Statements.

Other Income The allowance for funds used during construction is primarily a function of the amount of con-struction work in progress during a given period, but was also affected by a change in the composite rate used to calculate the allowance as discussed in Note C of Notes to Statement of Income; "In-come taxes" included in "Other Income" primarily reflects tax benefits from interest attributable to construction work in progress that is capitalized for reporting purposes (see Note 4 of Notes to Fi-nancial Statements). "Other net" for 1974 and the twelve months ended April 30, 1975 includes gains on the sale of non-utility assets.

10

Interest Deductions x s The substantial increases in interest on short-term borrowings since 1972 are due primarily to greater amounts outstanding; see Note 5 of Notes to Financial Statements for amounts borrowed nd interest rates thereon in 1974 and the twelve months ended April 30, 1975.

Outstanding Shares Recent issues of preferred stock (giving rise to the increased dividend requirements) and com-mon stock (giving rise to the increased average number of shares outstanding) are summarized in Note 2 of Notes to Financial Statements.

Earnings 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 (see Note C of Notes to Statement of Income and Note 1 of Notes to Financial Statements).

COMMON STOCK DIVIDENDS AND PRICE RANGE The Company has paid quarterly cash dividends on its Common Stock in each year since 1920.

A quarterly dividend of 340 per share (equivalent to an annual rate of $ 1.36) was paid June 1, 1975 to stockholders of record on May 5, 1975. Future dividends will depend on earnings and cash re-quirements of the Company and other factors. See Note 2 of Notes to Financial Statements for a restriction on retained earnings available for the payment of dividends.

The following table indicates the high and low sale prices of the Common Stock of the Com-pany on the New York Stock Exchange during the periods indicated, as reported in The Wall Street Journal.

t Year 1973:

First Quarter Second Quarter Third Quarter Fourth Quarter 11igh 24s/s 22s/s 21'/4 22'/s Low 19 Vs 19 Vs 18 Vs 16Vs .

Year 1974:

First Quarter ...........................

Second Quarter .......................

Third Quarter .........................

Fourth Quarter .......................

1975:

First Quarter ...........................

~11i 18Vs h

19s/s 15 Vs 14 Vs 14r/s

'Low 18 13s/s 12 11'/s 1 1 '/s Second Quarter (through June 4) .............................. 15 Vs 13s/s The reported last sale price on the New York Stock Exchange on June 4, 1975 was $ 15'/s.

At April 30, 1975 the book value per share of Common Stock then outstanding was $ 19.21.

Market conditions have been such that recent offerings of Common Stock have been made by the Company at per share prices below current book values. Because of the rapidly expanding capital structure necessary to finance its monetary needs (see "Financing Requirements and Construction Program" ), the Company has had little flexibility in timing its Common Stock offerings in reference to prevailing market conditions, and may have to continue selling its Common'tock below book value for an indeterminate period.

BUSINESS AND PROPERTY General The Company's service territory includes all or part of 11 of Arizona's 14 counties. The 1970 census recorded Arizona's population at 1,772,482 as against 1,302,161 in the 1960 census, an crease of 36.1%. It is estimated by the Company that one or both of its services of electricity in~

or~

natural gas reaches approximately 1,555,000 persons, or approximately 70% of the population of Arizona, which is currently estimated at over 2,222,000. During 1974 no single purchaser or user of energy accounted for more than 3.2% of total electric revenue or for more than 1.7% of total gas revenue.

Certain territory adjacent to or within areas served by the Company is served by other investor-owned utilities (notably Tucson Gas & Electric Company serving both electricity and gas in the Tucson area) and a number of cooperatives, municipalities, electric districts and similar types of governmental organizations (notably Salt River Project Agricultural Improvement and Power Dis-trict serving electricity in various areas in and around Phoenix).

Operating revenues, and operating income before income taxes, attributable to electric and gas operations of the Company during the five years ended December 31, 1974 and twelve months ended April 30, 1975 were as follows:

Operating Incomo 0 eratin ltcvcnucs Before Income Taxes il (Dollars in M lions) (Dollars in Millions)

Electric Gas Electric Gas Amount Percent Amount Pcrccnt Amount Perccht Amount Pcrccnt 1970 .............................. $ 105.9 73.1% $ 39.0 26.9% $ 35.5 87.7% $ 5.0 12.3%

197 1 .............................. 117.4 73.7 41.9 26.3 36.6 94.6 2.1 5.4 1972 ... 142.2 75.5 46.2 24.5 40.3 88.8 5.1 11.2 1973 .............................. 171.0 76.0 54.0 24.0 47.3 84.2 8.9 15.8 1974 .............................. 213.3 78.0 60.3 22.0 49.6 89.2 6.0 10.8 Twelve Months Ended 30, 1975 ........... 'pril 238.5 77.5 69.1 22.5 54.2 87.0 8.0 13.0 Generation The Company's present generating facilities have an accredited capacity aggregating 2,244,600 kw, comprised as follows:

Coal:

Units 1, 2 and 3 at Four Corners, aggregating . 572,000 kw 15% owned Units 4 and 5 at Four Corners, representing 240,000 Unit 1 at the Cholla Plant. 116,000 14% owned Units 1 and 2 at the Navajo Plant, representing ................................ 210,000 1,138,000 kw Gas or Oil:

Seven steam units divided among the West Phoenix,'Saguaro and Ocotillo Plants, aggregating . 540,700 kw Eleven turbine units, aggregating 536,000 1,076,700 kw Other 29,900 kw 12

The Company's peak one-hour demand, recorded on June 27, 1974, was 2,032,000 kw, com-t pared to a 1973 peak (recorded on August 15) of 1,812,700 kw. Taking into account additional capacity then available to it under power purchase contracts (including short-term arrangements) as well as its own generating capacity, the Company's capability of meeting system demand on June 27, 1974, computed in accordance with accepted industry practices, amounted to 2,343,600 kw.

The power actually available to the Company from its resources fluctuates from time to time due in part to operational problems of the nature discussed under "Energy Availability". The Company's ability to meet future system demand will, among other things, depend on its success in dealing with those problems and with the new-construction delays mentioned below.

The following table reflects the Company's plans and most recent estimates as of May 30, 1975 with respect to additional generating facilities now under construction or in planning stages:

Estimated Cost Type of Facility Nameplate Estimated of Construction and Scheduled Capacity Cost Pcr (Thousands of

~Ei I t ~Kit B1 Dollars)(1)

Coal:

14% owned Unit 3 (1976) at the Navajo Plant, representing... . ~ 105,000 kw $ 390 41,000 Units 2 (1977) and 3 (1978) at the Cholla Plant, aggregating 500,000 566 283,000 Unit 4 (1979) at the Cholla Plant .................. 350,000 637 223,000 18%owned Units 1 (1981), 2 (1982), 3 (1983) and 4 (1984) of the Kaiparowits Plant (southern Utah), representing ...~..... 540,000 726 392,000 Gas or Oil:

Three combined cycle units (1976),

t aggregating 246,000 224 55,000 Nuclear:

28.1% owned Units 1 (1982), 2 (1984) and 3 (1986) of the Palo Verde Nuclear Generating Station (west of Phoenix),

representing 1,070,600 725 776,000 Total 2,811,600 kw 81,770,000(2)

(1) Excluding costs of related transmission facilities, fuel or fuel sources and allowance for funds used during construction, but including costs of related pollution control facilities.

(2) Including approximately $ 147,000,000 expended through April 30, 1975.

The comparability of the foregoing estimates is affected by the status of the related projects and by the differing sources and review dates of the estimates. No significant contracts have been entered into for construction of Cholla Unit 4 or for any portion of the proposed Kaiparowits Plant (which is in preliminary planning stages only), and firm contracts exist for only portions of the Palo Verde Station. Estimates for the Navajo and Kaiparowits Plants emanate with project managers other than the Company. The Cholla Unit 4, Kaiparowits and Palo Verde estimates have recently been increased substantially, due primarily to cost escalations much larger than those previously forecasted. 4 13

Further inflationary pressures, the factors discussed in "Energy Availability" and "Environ-mental Matters" and changes in the Company's plans (and, in the case of certain projects, changes in the plans of other participants) could cause actual completion dates and construction costs to vary substantially from the foregoing estimates. In some cases, project feasibility could also be af-fected. Participation in the Kaiparowits Plant is currently under review by the Company. I addition to cost considerations, the site of the Kaiparowits Plant is uncertain, and inability to re-solve that issue with the Department, of the Interior (which disapproved the originally proposed site) could jeopardize the project. Both the Kaiparowits Plant and the Palo Verde Station are sub-ject to a number of regulatory approvals, and the feasibility, cost and timing of these projects is accordingly uncertain.

Energy Availability Coal, gas and oil contributions to total net generation of electricity by the Company during the five years ended December 31, 1974 and twelve months ended April 30, 1975, and the average cost to the Company of those fuels during the periods indicated (in cents per million BTU), were as fol-lows:

Coal Gas Oil All Fuels Percent of Averago Porccnt of Averago Percent of Average Avcragc Gcncration Cost Gen oration Cost Generation Cost Cost 1970 .................. 83.3% 15.408 16.7% 34.270 18.820 1971 .................. 76.1 16.15 23.5 38.45 0.4% 46.630 21.59 1972 .................. 66.5 16.66 31.6 38.08 1.9 91.31 25.18 1973 .................. 70.0 17.78 18.4 41.25 11.6 98.41 32.09 1974 .................. 72.5 20.47 13.7 53.23 13.8 152.83 44.82 Twelve Months Ended April 30, 1975 ........ 74.8 22.22 10.7 55.07 14.5 170.84 49.23 Average costs of the respective fuels in the periods covered by the foregoing table ranged from

$ 2.92 to $ 6.15 per ton of coal, $ 0.35 to $ 0.69 per mcf of gas and $ 4.82 to $ 13.34 per barrel of oil.

The Four Corners, Cholla and Navajo Plants have an ample supply of low sulfur coal (the sul~

fur content of which is currently running 0.7%, 0.6% and 0.5%, respectively) committed to those~

plants under long term contracts believed by the Company to provide sufficient coal for the antici-pated useful lives of the plants. Preliminary indications from independent tests on coal leases held by the plant participants in the vicinity of the proposed Kaiparowits Plant indicate the probable existence of sufficient quantities of low sulfur coal (approximately 0.5% sulfur) for the anticipated useful life of that plant; however, the degree to which such coal may be recoverable in commercial quantities is subject to additional mining engineering evaluations and plant site and transportation considerations.

The capital cost of coal fired units is increasing substantially as environmental standards re-quire pollution control equipment to be added to existing units and included in new plants.

Operating costs also increase, since pollution control equipment lowers net plant output and entails high maintenance costs. Various technical problems, the more recent of which have been unrelated to the operation of pollution control equipment, have caused numerous service interruptions for unscheduled overhaul and maintenance at the Company's largest generating facility located at Four Corners. System operating expense increases substantially during these shutdowns, when the Com-pany must replace lost capacity with gas or oil fired generation or with purchased power. Although

attempting to reduce future operational problems with improved component equipment on certain t existing units and with improved design of additional or new equipment for other units now in oper-ation or under construction, the Company expects its coal fired generation to be increasingly costly to build and operate.

The F<our Corners and Navajo Plants are located on the Navajo Indian Reservation (see "De-scription of New Bonds Security" ), as are certain of the Company's transmission lines and related facilities. The Company is therefore dependent in some measure upon the willingness and ability of the Navajo Tribe to protect these properties and means of access thereto against at-tempted interference by others.

Gas and oil fuels are substantially more costly than coal. Only minor amounts of gas for gener-ating fuel are now available to the Company from its sole supplier, El Paso Natural Gas Company

("El Paso" ), because of declining gas supplies and curtailment priorities established by the FPC.

Accordingly, the Company has had to substitute higher cost oil as the primary fuel for those of its generating units that do not operate on-coal. Moreover, the Company may have to incur capital expenditures to accommodate the possible loss of gas for flame stabilization in coal as well as oil burning units.

The Company burned approximately 2,320,000 barrels of oil in 1974 and, based on a recent re-view, presently estimates its 1975 requirements at approximately 3,000,000 barrels. Since the federal allocation program has been in effect, the Company has from time to time experienced reduced de-liveries of residual oil (burned in its steam plants) under its contracts for that fuel, but to date has obtained sufficient quantities to meet its requirements. Based upon current projections, the Com-pany expects to have sufficient middle distillate fuel (required for oil fired operation of most of its turbine units) to meet its 1975 requirements, although it must depend upon the receipt of supple-mental allocations inasmuch as it used limited amounts of that fuel during the 1972 base period specified in the regulations. Allocations of any kind of oil made pursuant to governmental regula-ttions supersede contractual arrangements to the extent of inconsistencies between the two. The Company has residual oil contracts providing for-approximately 3,000,000 barrels in 1975. Other oil purchases are made by the Company on short-term bases as and when the fuel is available and the Company's storage capacity (scheduled to be increased from the present 1,325,000 barrels to 1,725,000 barrels by the end of 1975) and means of transport permit it to accept delivery.

The participants in the Palo Verde Nuclear Generating Station have contractual commitments for the supply of uranium and related fuel fabrication services required for approximately 20 of all three nuclear units, assuming the participants exercise all of the options available to years'peration them under such commitments. Contracts have also been entered into with the Nuclear Regulatory Commission for necessary uranium enrichment services required for the lifetime operation of the three units. The Company presently has no commitments for reprocessing or off-site storage of fuel discharged from reactors; the extent to which such services may be required, and will be available, cannot be predicted.

Natural gas for resale is purchased by the Company from EI Paso under a contract extending to 1984. Severe limitations of gas reserves available to El Paso have caused the Company to discourage growth of its gas distribution business and to obtain an ACC order pursuant to which it is now re-fusing requests for new gas service commitments. Curtailment plans affecting existing customers have also been adopted by both the FPC and the ACC. The Company curtailed gas service to larger industrial users for a total of 108 days in the 1974-75 heating season, and it expects such curtail-15

ments not only to increase, but in the future also to affect all industrial and irrigation customers, and to extend to commercial customers. Legal proceedings relating to priorities and procedures for curtailments of gas deliveries by El Paso are pending, both before the FPC and the appellate courts.

Environmental factors, attendant operational difficulties and the fuel shortages described herein may from time to time necessitate dependence by the Company upon short-term power pur-chases from other utilities. However, since most other major producers of electricity in the southwester'n United States face similar problems, the Company may encounter difficulty in finding signiTicant amounts of excess power available for purchase over an extended period of time. The Company's ability to avoid or minimize power shortages in its service area over the longer term will depend upon its success in meeting schedules for new coal fired and nuclear generation in the early 1980's. To meet those schedules, the Company will have to deal successfully and in a timely manner with a variety of environmental impact and siting studies and regulations and, in the case of the nuclear units, with licensing and operational requirements of the Nuclear Regulatory Commission.

Licensing proceedings now pending before that Commission have elicited petitions to intervene from parties desiring to raise environmental and safety questions. Based on that and other experi-ences, the Company anticipates opposition to many aspects of its planned facilities that may result in delay.

Environmental Matters The Company's present and future operations are subject to stringent environmental protection measures imposed under federal and state laws and regulations, including those administered by the federal Environmental Protection Agency ("EPA"). Pursuant to the Supreme Court's interpretation of the Clean Air Act in Sierra Club o. Ruckelshaus, the EPA on November 27, 1974 adopted regula-tions designed to prevent "significant deterioration" of air quality in areas where the air is already cleaner than required by existing federal standards. Although none of its generating units now in operation or under construction would be affected by these new regulations, the Company antici-pates that the regulations may have a substantial effect on the feasibility and cost of future coal fired plants, including the Kaiparowits Plant. Contending that the new regulations are inadequate, the Sierra Club has sought review thereof by the Court of Appeals for the District of Columbia, and the Company is among the intervenors in that review process. In addition, the Company and other utilities filed a petition seeking review of the new regulations with the Court of Appeals for the Ninth Circuit, from which it has been transferred to the Sixth Circuit.

The units now in operation or under construction remain subject to state and EPA air quality standards which require the design, installation, testing and operation by various compliance dates of new or additional pollution control equipment. Equipment for sulfur dioxide emission control and the augmentation of particulate emission control is in design stages for Four Corners Units 4 and 5, as is equipment to improve the sulfur dioxide control function of equipment now in operation at Four Corners Units 1, 2 and 3. Among the more stringent federal regulations relating to the Company's operations are those that prohibit the emission after July 31, 1977 of sulfur dioxide in an amount equivalent to 70% of the sulfur content of coal burned at the Four Corners and Navajo Plants. The Company's ability to meet compliance dates applicable to the installation and operation of control equipment and procedures, and in so doing to minimize the potential for future opera-tional problems in the nature ofthose now encountered at Four Corners, is not currently ascertainable, but in the case of the more stringent regulations may be doubtful. While technology appears to be available for the removal of particulate matter and sulfur dioxide to the extent pres-ently required by federal and state regulations applicable to the Company's operations, the reliability of such equipment over sustained periods of commercial operation and the reasonableness 16

Operating Statistics Twclv Month Year Ended Dcccmbcr 31 Ended April 30.

Electric Operations: 1970 1021 1972 1973 1974 1975 51; Number of Customers (end of period):

Residential . 213,179 228,G64 246,019 264,792 277,794 278,586 Commercial 34,571 3G,025 37,646 39,643 40,934 40,859 Industrial 1,798 1,852 1>974 2,057 2,061 2,057 Irrigation 1,127 1,183 1,239 1,309 1,444 1,454 Other 654 768 802 842 861 924 Total Customers . 251 329 Mn772777 30864$ 323 094 D827lm>

Electric Sales (MWH):

Residential . 1,496,869 1,693,119 2,032,040 2,336,173 2,540,177 2,640,620 Commercial 1,884,376 2,057,989 2,347,289 2,582,025 2,675,151 2,749,929 Industrial 1,290,646 1,381,371 1,659,667 1,791,392 1,780,488 1,777,206 Irrigation 241,382 255,200 298,370 287,344 379,215 393,258 Other 526,520 682,589 861,581 1.101,778 1,317,270 1,382,475 Total Electric Sales ... 5,439,793 6.070.D2~ I 7,198,947 8,098,712 8,692,301 8,943,488 Operating Revenues (000):

Residential $ 35,042 $ 39,244 $ 49,036 $ 59,852 $ 74,348 $ 83,080 Commercial ... 37,903 41,399 49,246 58,972 71,220 80,623 Industrial 16,263 17,519 21,011 25,502 31,502 35,947 Irrigation 2,758 2,950 3,647 4,066 6,387 7,518 Other 4,873 6,815 8,712 12,004 18,425 19,819 Total 96,839 107>927 131,652 160,396 201,882 226,987 Transmission for Others ............................... 7,583 7,947 8,649 8,640 9,216 9,450 Miscellaneous Services . 1,395 1,525 1,936 1,989 2,173 2,073 Total Electric Operating Revenues ... 24105 17 8117: 997 2142 237 2171,025 813 271 r2281510 Revenue Per KWH (Cents):

Residential 2.34c 2.32c 2.41c 2.56c 2.93c 3.15c Commercial 2.01 2.01 2. 10 2.28 2.66 2.93 Industrial . 1.2G 1.27 1.27 1.42 1.77 2.02 Costs Per KWH Generated (Cents):

Fuel 0.20c 0.23c 0.27c 0.36c 0.51c 0.56c Total Electric Operating Expense ....... 1.14 1.16 1.46 1.55 2.00 2.29 Gas Operations:

Number of Customers (end of period):

Residential 260,104 275,837 288,359 301,970 308,175 307,86~

Commercial 21,610 22,43G 23,1G3 23,935 24,236 24,482~

Industrial 922 965 999 1,048 1>071 1,057 Irrigation 1,390 1,412 1,406 1,452 1,425 1,465 Other 1 1 1 1 1 1 Total Customers . 284,027 300,651 813,m 3F(~40 334,908 38D4. 7 i Gas Sales (MTherms):

Residential 186,687 205,575 206,390 229,657 200,447 221,155 Commercial 105,719 117,110 121,307 133,076 119,937 129,050 Industrial 99,278 100,936 93,871 99,961 104,542 95,731 Irrigation . 75,514 76,339 76,990 75,920 87,816 88,738 Other 8,009 7,428 8,016 8,454 6,257 7,437 Total Gas Sales . 475,207 507,388 506,574 547,068 518,999 542,111 Operating Revenues (000):

Residential $ 21,936 $ 23,327 $ 26,082 $ 30,815 $ 32,058 $ 37,882 Commercial 6,877 7,785 8,627 10,304 11,412 13,610 Industrial 4,758 5,132 5,208 6,013 7,818 7,726 Irrigation . 4,771 4,895 5,314 5,637 7,877 8,581 Other 325 333 382 441 441 592 Miscellaneous services 382 427 586 721 722 716 Total Gas Operating Revenues ... 8 f9,049 $ 441, m99 8 40 199 8 53981 W8D82 7 W~if Revenue Per Therm (Cents):

Residential 11.75c 11.35c 12.64c 13.42c 15.99c 17.13c Commercial 6.50 G.G5 7.11 7.74 9.51 10.55 Industrial 4.79 5.08 5.55 6.02 7.48 8.07 18

of the ultimate cost of such technology remain highly questionable. The Company from time to time "is engaged in litigation and other proceedings involving the validity or interpretation of proposed or

,'" existing regulations.

The effects of federal and state water quality standards on the Company's generating plants are difficult to assess. While anticipating adequate incoming supplies of water needed for the operation of its present plants and those under construction, the Company could in the near future be re-quired to meet "zero discharge" standards, requiring significant and costly changes from its present methods of handling discharge water and other materials. Fuel costs of the Company's coal fired plants could also escalate by an indeterminate amount with enactment of strip mining legislation of or similar to that which Congress will apparently reconsider following the President's 'onsisting veto.

Litigation In 1971 an action was filed by certain individual Hopi Indians against the Secretary of the Inte-rior and Peabody Coal Company seeking to invalidate certain of the Peabody coal mining leases on deposits which supply coal for the Navajo Plant on the grounds that they were not validly granted by the Hopi Tribal Council in 1966, and that the Secretary of the Interior, in approving invalidly authorized leases, breached his fiduciary duties to the plaintiffs. Following intervention by the Company and the other participants in the Navajo Plant and dismissal of the complaint by the Dis-trict Court on various grounds (including lack of joinder of the Hopi Tribe as an indispensable party), the case was appealed to the Court of Appeals for the Ninth Circuit and is now pending there. In the opinion of Snell & Wilmer, counsel to the Company, the position of the Secretary of the Interior (and therefore of Peabody Coal Company, the Company and the other participants in the Navajo Plant) should ultimately be sustained.

l As a result of action instituted by the Company, the Arizona State Board of Tax Appeals re-duced the 1974 assessed valuation of the Company's properties in Arizona so as to result in a reduction of approximately $ 2,200,000 in 1974 Arizona property taxes. On October 81, 1974 the Ari-zona Department of Revenue filed an action in the Superior Court of Maricopa County appealing that ruling. While the issues involved are not free from question, the Company and Snell & Wilmer believe that the arguments for the Company's position are of greater merit and persuasion than those that may be advanced by the Department in support of its position.

The State of New Mexico recently enacted an excise tax, effective July 1, 1975, on the genera-tion of electricity within the State. The Company and other participants in the Four Corners Plant intend to contest the tax on constitutional grounds. If the contest is unsuccessful (and perhaps while it is pending), the Company's share of the tax, amounting to an estimated $ 2,000,000 per year, will be passed on to its customers (see "Regulation and Rates" ).

Also see "Regulation and Rates" and "Environmental Matters".

Labor Negotiations The Company and the union representing approximately 45% of its employees are currently operating under the provisions of a three-year contract that expired on April 1, 1975. Arbitration proceedings are currently in progress with respect to the economic aspects of a new contract.

17

CONTENTS

~Pa O The Company 2 Application of Proceeds .. 2 Prospectus Summary Industry and Company Problems ......

3 4

Arizona Public Service Regulation and Rates, . 4 Financing Requirements and Company Construction Program ..................... 5 Capitalization 7 Statement of Income . 8 $ 75,000,000 Management's Discussion and First Mortgage Bonds Analysis of Statement of Income ... 10 Common Stock Dividends and 9.80% Series due 1980 Price Range 11 Business and Property 12 Map. 19 Description of New Bonds .................. 20 Description of Common Stock ........... 22 Experts 23 Legal Opinions 24 Registration Statement .............. 24 Opinion of Independent Certified Public Accountants . 25 Aruonn Pubuc Service Company Financial Statements .

Underwriting No dealer, salesman or other person has been authorized to give any infor-26 38 a

WC CARC s.

HOW YOU LJVC mation or to make any representation not contained in this Prospectus and, if given or made, such information or rep-resentation must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell, or a PROSPECTUS solicitation of an offer to buy, any of the securities offered hereby in any juris-diction to any person to whom it is unlawful to make such offer in such ju-risdiction.

The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, and that the Underwriters will be obligated to purchase all of the New Bonds offered hereby if any are purchased.

The Company has been advised by The First Boston Corporation, Blyth Eastman Dillon 5 Co.

Incorporated and Dean Witter & Co. Incorporated, as Representatives of the Underwriters, that the Underwriters propose to offer the New Bonds to the public initially at the public offering price set forth on the cover page of this Prospectus and, through the Representatives, to certain "dealers at such price less a concession of .575% of the principal amount of the New Bonds; that the Under-writers and such dealers may allow a discount of .25% of such principal amount on sales to other dealers; and that the public offering price and concessions and discounts to dealers may be changed by the Representatives.

39

~

UNDERWRITING The Underwriters named below have severally agreed to purchase from the Company the fol-lowing respective principal amounts of the New Bonds.

Principal Principal Underwriter Amount Underwriter Amount The First Boston Corporation .............................. $ 7,700,000 Loeb, Rhoades & Co. 1,250,000 Blyth Eastman Dillon & Co. Incorporated ......... 7,700,000 Loewi & Co. Incorporated ..................................... 400,000 Dean tVitter & Co. Incorporated ......................... 7,700,000 McCormick & Co., Incorporated .......................... 125,000 Adams & Peck ......... 200,000 McDonald & Company. 400,000 Advest Co.. 400,000 Merrill Lynch, Pierce, Fenner &, Smith Bacon, Whipple & Co. 400,000 Incorporated 1,750,000 Robert W. Baird & Co. Incorporated .................. 400,000 The Milwaukee Company ..................................... 125,000 Bateman Eichler, Hill Richards, Incorporated .. 400,000 Mitchum, Jones & Templeton Incorporated ...... 200,000 Bear, Stearns & Co. 1,000,000 Morgan Stanley & Co. Incorporated ................... 1,750,000 Birr, Wilson & Co., Inc. 200,000 Moseley, Hallgarten & Estabrook Inc................. 800,000 William Blair & Company .................................... 400,000 Newhard, Cook & Co. Incorporated .................... 200,000 Blunt Ellis & Simmons Incorporated .................. 400,000 The Ohio Company . 400,000 Boettcher & Company. 400,000 Paine, IVebber, Jackson & Curtis Incorporated 1,250,000 Bosworth, Sullivan & Company, Incorporated .. 400,000 Piper, Jaffray & Hopwood Incorporated ............ 400,000 Alex. Brown &, Sons. 800,000 Prescott, Ball & Turben ........................................ 400,000 B. C. Christopher & Company ............................. 125,000 R. tV. Pressprich & Co. Incorporated ................. 800,000 Dain, Kalman & Quail, Incorporated .................. 400,000 Quinn &, Co., Inc. 200,000 Davis, Skaggs &, Co., Inc. 200,000 Rauscher Pierce Securities Corporation ............. 1,000,000 Dillon, Read & Co. Inc. 1,250,000 Reynolds Securities Inc. 1,250,000 Drexel Burnham & Co. Incorporated .................. 1,250,000 The Robinson-Humphrey Company, Inc........... 400,000 A. G. Edwards & Sons, Inc................................... 400,000 Rotan Mosle Inc 400,000 Elkins, Stroud, Suplee &; Co................................. 400,000 L. F. Rothschild & Co. 1,000,000 Equitable Securities Corporation ........................ 125,000 Salomon Brothers 1,750,000 First Southwest Company .................................... 400,000 Shearson Hayden Stone Inc................................. 1,000,000 Freeman Securities Company, Inc....................... 200,000 Shields Model Roland Securities Incorporated . 1,000,000 Goldman, Sachs & Co. 1,750,000 Shuman, Agnew & Co., Inc................................... 400,000 Halsey, Stuart & Co. Inc Harris, Upham & Co. Incorporated ......."..............

Hibbard & O'onnor Securities, Inc...................

Hornblower & Weeks-Hemphill, Noyes 1,250,000 800,000 200,000 Smith, Barney & Co. Incorporated ......................

Stern, Frank, Meyer & Fox, Incorporated ..........

Stone & Youngberg ...

Sutro & Co. Incorporated .....................................

1,250,000 200,000 400,000

~

~

400,000 Incorporated 1,250,000 Thomson & McKinnon Auchincloss Kohlmeyer Howard, Weil, Labouisse, Friedrichs Inc. 800,000 Incorporated 400,000 Spencer Trask & Co. Incorporated ...................... 800,000 E. F. Hutton & Company Inc............................... 1,250,000 Tucker, Anthony & R. L. Day .............................. 800,000 The Illinois Company Incorporated .................... 125,000 Underwood, Neuhaus & Co., Incorporated ........ 200,000 Josephthal & Co.. 200,000 Wagenseller & Durst, Inc...................................... 200,000 Keefe, Bruyette &, Woods, Inc............................. 400,000 Weeden &; Co. Incorporated ................................. 1,000,000 Paul Kendrick & Co., Inc...................................... 125,000 Wertheim &: Co., Inc. 1,250,000 Kidder, Peabody & Co. Incorporated ................. 1,250,000 lVheat, First Securities, Inc.................................. 400,000 Kuhn, Loeb & Co.. 1,250,000 , White, IVeld & Co. Incorporated ......................... 1,250,000 Lazard Freres & Co. 1,250,000 Wood, Struthers & Winthrop Inc........................ 800,000 Legg Mason/Wood Walker Young, Smith & Peacock, Inc.............................. 200,000 Div. of First Regional Securities, Inc.......... 400,000 Total ............................ $ 75,000,000 Lehman Brothers Incorporated .................,......... 1,250,000 38

ARIZONA PUBLIC SERVICE COMPANY t 7. Commitments and Contingencies.

NOTES TO FINANCIALSTATEMENTS (continued)

(Information for the Period Ended April 30, 1975 is Unaudited)

See Note A of Notes to Statement of Income relative to revenues subject to refund.

The $ 38,289,000 "deposit with trustee" appearing in Note 3 as a deduction from long-term debt outstanding at April 30, 1975 relates to those proceeds from a $ 50,000,000 issue in 1974 of pollution control revenue bonds (6.20% series due April 1, 2004) that were being retained by the revenue bond trustee pending application to the costs of a pollution control project being constructed by the Company over a period extending through 1977. As provided in the revenue bond indenture, the Company has directed the trustee temporarily to invest bond proceeds in certain securities. At April 30, 1975 these included the following securities of New York City: $ 8,450,000 of revenue anticipation notes maturing August 22, 1975; and $ 10,000,000 of bond anticipation notes, of which $ 5,000,000 matures September 11, 1975 and the remainder matures on March 12, 1976. The Company is ad-vised that because of recently publicized financial difficulties of the City, the City's ability to pay the notes when due may currently be in question. If the payments are not made by the time the funds are needed by the Company to finance the latter stages of its pollution control project, it would have to resort to other sources, while remaining obligated for the payment, when due, of the full principal and interest requirements of the revenue bonds. Based on information currently avail-able to the Company, it does not expect to incur any material loss on the notes; if, however, subsequent developments indicatethe probability of any loss in an amount that can then be reason-ably estimated, such amount will be reflected in the Company's statement of income.

Commitments under contracts for plant additions were approximately $ 255,000,000 at April 30, 1975. Annual rentals under noncancellable leases were not material.

8. Supplementary Income Statement Information.

General taxes and rents during the five years ended December 31, 1974 and twelve months ended April 30, 1975 were as follows:

Twelve Months Ended Year Ended December 31. "April30, 1970 1971 1973 1973 1974 1973 (Thousands of Dollars)

Taxes, other than income taxes:

Ad valorem ..................... $ 16,606 $ 19,488 $ 20,509 $ 20,461 $ 27,693 ~

$ 30,286, Sales ................................ 3,873 4,290 5,533 6,673 9,240 11,239 Rents 2,022 1,938 1,862 1,986 1,702 1,673 37

ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for tho Period Ended April 30, 1975 is Unaudited)

6. Short-Term Borrowings and Compensating Balances.

The Company had the following arrangements for short-term borrowings at the dates shown (see "Financing Requirements and Construction Program" for current short-term borrowing ar-rangements and the effects of loss of commercial paper rating):

Dcccmbcr 31, April 30, 1974 1976 Bank lines of credit (unused: December 31, $ 20,000,000; April 30, $ 21,000,000) ......................... $ 97,000,000 $ 106,600,000 Bank lines in support of commercial paper (unused:

December 31, $ 30,000,000; April 30, none) ..................... $ 30,000,000 $ 20,000,000 Bank trust department loans (borrowings: December 31,

$ 32,552,000) ................................................................. $ 35,000,000 Weighted average interest rates on short-term borrowings outstanding at December 31, 1974 and April 30, 1975 were: notes payable to banks, 10.82% and 7.49%, respectively; commercial pa-per, 10.60% at December 31 (no commercial paper being outstanding at April 30). Average aggre-gate short-term borrowings outstanding during 1974 and the twelve months ended April 30, 1975 were $ 140,569,000 and $ 145,038,000, respectively; weighted daily average interest rates on such amounts were 10.35% and 10.28%, respectively. Maximum amounts of short-term borrowings out-standing at any month end aggregated $ 165,497,000 in 1974 and $ 179,027,000 in the twelve months ended April 30, 1975.

Compensating balances required at banks, but which were not legally restricted, were: for bank loans, generally 10% of the line plus 5% (10% in some instances) of borrowings; for lines in support of commercial paper, 10% of the line plus 5% of usage (4% of the line in 1974) as to $ 10,000,000 and 15% of usage plus a commitment fee of 9% of the prime rate calculated quarterly (15% plus a commitment fee of .5% of the line in 1974) as to $ 10,000,000 ($ 20,000,000 in 1974). The bank trust

~

~

department loans required no compensating balances. Substantially all cash shown in the balance sheet is considered compensating balances.

6. Pension Plan.

The Company's pension plan covers all employees. Contributions to the plan were as follows:

1970, $ 2,333,000; 1971, $ 2,866,000; 1972, $ 3,290,000; 1973, $ 3,993,000; 1974, $ 5,137,000; twelve months ended April 30, 1975, $ 5,465,000. The plan was amended in 1973 to eliminate in stages the social security offset from benefits provided under the plan. Anticipated changes in the plan to con-form to the 1974 Pension Reform Act will not have a significant effect on the Company's pension expense or funding. At December 31, 1974, after giving effect to the increased vesting requirements of the Reform Act, the estimated actuarial value of vested benefits ex'ceeded the estimated market value of the fund assets (including contribution receivable) by approximately $ 5,000,000. The liabil-ity for unfunded past service costs at June 30, 1974 was $ 2,678,000, which is expected to be completely funded by 1981.

ARIZONA"PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for tho Period Ended April 30, 1975 is Unaudited)

4. Income Tax Expense.

Details of factors related to income taxes during the five years ended December 31, 1974 and twelve months ended April 30, 1975 were as follows (see Note 1): II Twelve htonths Ended Year Ended December 31, April 30, 1970 1971 1972 1973 1974 1975 (Thousands of Dollars)

Computed "expected" income tax expense Federal and State ............................. $ 13,631 $ 12,642 $ 14,463 $ 17,428 $ 16,529 $ 19,392 Reductions in taxes resulting from:

Timing differences:

Tax over book depreciation ............................ (3,372) (3,642) (4,744) (6,352) (6,875) (6,729)

Allowance for funds used during I, construction capitalized ................................ (291) (769) (1,924) (3,120) (5,730) (6,462)

Other principally taxes, pensions and other items capitalized (617) (1,490) (2,582) (2,246) . (3,012) '3,666)

Other items (62) 12 133 (113) (1,004) (1,225)

Investment credits (735) (1,019) ~(2 468) ~(2 573) ~(1 047 ~(337 Taxes currently payable (refundable) ................ ~8554 ~5734 ~2878 ~3024 ~(1 139 973 Deferred taxes included in expenses:

Deferred. 615 700 (1,315) (877)

Restored (210) (210) (210) (210) (210) (210)

Total deferred t

Total Federal and State income taxes $ 8,344 $ 5,524 S 3,283 $ 3,514 $ (2,664) $ (114)

Federal and State income taxes included in:

Operating expenses (credit) .............................. $ 8,524 $ 6,118 $ 4,452 $ 5,631 S (133) S 1,767 Other income (credit) ~180) ~(594 ~(1 169) (2,117) (2,531) ~(1 881)

Total .. S 8,344 $ 5,524 $ 3,283 ~3514

$ ~$ (2 664) $~(114 Taxes currently payable (refundable):

Federal . $ 7,777 $ 5,133 S 2,280 $ 2,314 $ (1,190) $ 770 State . 777 601 598 710 51 203 Total .. $ 8,554 S 5,734 S 2,878 S 3,024 $ (1,139) $ 973 Deferred taxes:

Federal . S (201) $ (201) S 364 S 443 S(1,409) $ (1,007)

State . (9) (9) 41 47 (116) . (80)

Total $ (210) $ (210) $ 405 $ 490 $ (1,525) $ (1,087)

The Company anticipates that investment tax credit, applied in accordance with the 1975 Tax Re-duction Act, will eliminate all 1975 Federal income tax liability. Accordingly, income tax'expense for the last four months of the twelve-'inonth period ended April 30, 1975 represents solely an ac'crual for state income tax and certain Federal income tax adjustments.

The Company has approximately $ 6,000,000 of unused investment tax credit which can be car-ried forward=through 1981.

35

ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for the Period Ended April 30, 1975 is Unaudited)

Dcccmbcr 31, April 30, 1974 1975 (Thousands ol'ollars) 4.80% series due November 1, 1991 . 35,000 35,000 4.45% series due June 1, 1992 25,000 25,000 4.40% series due December 1, 1992 ......... 25,000 25,000 4.50% series due September 1, 1993. 15,000 15,000 6.25% series due September 1, 1997. 25,000 25,000 7.45% series due March 15, 2002 .... 60,000 60,000 6.20% series due April 1, 2004 50,000 50,000 Less deposit with trustee (see Note 7) . (40,314) (38,289)

Unamortized discount (498)

Unamortized premium . 67 48 Total First Mortgage Bonds 320,976 392,484 Less current maturities:

8.50% series due April 1, 1975. (30,000)

Remainder . 290,976 392,484 Unsecured Notes Payable:

6.375% to 6.50% due May and July 1975'. 8,250 8,250 Due September 1, 1979*. 50,000 50,000 Total Unsecured Notes Payable .. 58,250 58,250 Less current maturities:

6.375% to 6.50% due 1975 (8,250) (8,250)

Remainder . 50,000 50,000 Total Long-Term Debt $ 340,976 $ 442,484

• $30,000,000 bears interest at 114% of prime rate to September 1, 1975, then 114% of prime rate plus l/4 of 1% to September 1, 1977, then 114% of prime rate plus '/2 of 1% to September 1, 1979. $ 20,000,000 bears interest at 117% of prime rate to September 1, 1975, then at various per-centages of prime from 119% to 122%. The actual interest rate to final maturity of these loans is not to exceed 7'/1% per annum; payments in excess of this amount are carried as deferred interest.

Aggregate annual payments which will be due on long-term debt in 1975 (after April 30) through 1980 are as follows: 1975, $ 8,250,000; 1976, $ 8,500,000; 1977, $ 2,500,000; 1979, $ 54,000,000; 1980, $ 11,000,000. The annual sinking fund requirements for the outstanding First Mortgage Bonds in 1975 through 1980 will be as follows: 1975, $ 2,212,230; 1976, $ 2,127,230; 1977 and 1978,

$ 2,702,230; 1979, $ 2,662,230; 1980, $ 2,552,230. Sinking fund requirements as provided in the bond indentures have in the past been satisfied by certification of property additions of ls/s times the amount stated and the Company expects to meet future requirements in that manner.

Substantially all utility plant is subject to the lien of the First Mortgage Bonds. The indenture respecting the First. Mortgage Bonds includes provisions which would restrict the payment of divi-dends on Common Stock under certain conditions which did not exist at April 30, 1975..~i 34

ARIZONA PUBLIC SERVICE'OMPANY t

NOTES TO FINANCIALSTATEMENTS (continued)

(Information for the Period Ended April 30, 1976 is Unaudited)

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

Capital stock sales and changes in premiums and expenses during the five years ended December 31, 1974 and four months ended April 30, 1975 were as follows (dollars in thousands):

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

~D of Shares Amount oi'hares Amount Net Balance, December 31, 1969 and 1970 ............................. 8,500,000 $ 21,250 1,374,199 $ 68,561 $ 63,475 Common Stock ...... 1,000,000 2,500 18,932 Balance, December 31, 1971 9,500,000 23,750 1,374,199 68,561 82,407 Common Stock. 1,000,000 2,500 20 222 Balance, December 31, 1972 10,500,000 26,250 1,374,199 68,5G1 102,G29 Common Stock. 2,000,000 5,000 29,352 Balance, December 31, 1973 . 12,500,000 31,250 1,374,199 68,561 1311981 Common Stock 2,500,000 6,250 23,849 Cumulative Preferred Stock, $ 8.50 series F ................ 210,000 21,000 (111)

Cumulative Preferred Stock, $ 8.50 series G ............... 90,000 9,000 (47)

Cumulative Preferred Stock, $ 10 series H .................. 400,000 40 MO (200) t Balance, December 31, 1974 . 15,000,000 37,500 21074,199 138,561 155,472 Common Stock 2 000,000 ~5000 22,305 Balance, April 30,1975 17,000,000 $ 42,500 2,074,199 $ 138,561 $ 177,777

3. Long-Term Debt.

Details of long-term debt outstanding at December 31, 1974 and April 30, 1975 were as follows:

Deccmbcr 31, April 30, 1974 1975 (Thousands or Dollars)

First Mortgage Bonds:

8.50% series due April 1, 1975. $ 30,000 2% % series due July 1, 1976 8,500 8,500 3'/s% series due December 1, 1977 2,500 2,500 3% series due April 1, 1979 4,000 ,4,000 2s/4% series due February 1, 1980. 5,000 5,000 27/s% series due December 1980 6,000 6,000

" '.50% series due February 1, 1982 100,000 15, 3t/s% series due February 1;1983. 14,500 14,500 3'/s% series due November 1, 1983 5,723 5,723 3'/4 % series due Mare'h'1", 1984 15,000 15,000 5'/s% series due October 1, 1987 . '15,000 15,000'0,000 4.70% series due March 1; 1989 .:.. 20,000

ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS'(continued)

(Information for thc.Period Ended'April 30, 1975 is Unaudited)

2. Capital Stock.

Details of capital stock outstanding at December 31, 1974 and April 30, 1975 are shown below:

Number of Shares Par Value Call Price Per Share Outstanding Outstanding (Before Adding December 31, April 30, Per Deccmbcr 31, April 30, Accumulated Authorized 1974 1975 Sharc 1974 1975 Dividends)

(Thousands of Dollars)

Common Stock ... 30,000,000(a) 15,000,000 17,000,000 S 2.50 S 37.500 S 42,500 Cumulative Preferred Stock:

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

$ 2.275 series 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(a)

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

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

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

Total ................ 3,535,000 2 074,199 2,074,199 $ 138,561 (a) On April 24, 1975, the stockholders of the Company approved amendments to its Articles of Incorporation increasing its authorized Common Stock from 20,000,000 to 30,000,000 shares and increasing its authorized Serial Preferred Stock, $ 100 par value, from 1,000,000 shares to 2,000,000

~

~

shares.

(b) From $ 51.00 through February 29, 1980 to $ 50.50 after February 29, 1980.

(c) From $ 52.50 through February 28, 1978 to $ 51.00 after February 28, 1983.

(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 de-mand of the holders prior to the foregoing dates under certain conditions which are considered by the Company to be remote. Sinking fund provisions applicable to the two series require the retire-ment of a total of 12,000 shares at par semiannually commencing June 1, 1979.

I (e) From $ 110.00 through September 1, 1975 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.

32

ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for the Period Ended April 30, 1976 is Unaudited)

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 tax reductions relating to the five-year amortization of pollution control facilities which were deferred in 1972 were reclassified in 1973, and those deferred in 1973 were reclassified in 1974, as taxes currently payable, since the Company did not elect to certify the facilities to be eligible for five-year amortization.

Income taxes included in utility operating expenses, starting in 1971, 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. 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. Effective with the fourth quarter of the year ended December 31, 1974, such increases in purchased power and electric fuel costs chargeable to retail customers in the following period are deferred to be matched against revenue of such period. The Company defers the estimated cost of gas purchased from its supplier but not billed to its customers, a procedure adopted in 1972 and revised in 1973. None of the forego-ing changes materially affected income in these periods.

i. Research and development costs The Company expenses research and development costs on a current basis, except that 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.

31

ARIZONA PUBLIC SERVICE COMPANY

,<<NOTES TO FINANCIALSTATEMENTS (Information for the Period Ended April 30, 19ZG is Unaudited)

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 pur-poses. 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 research and development expenditures pertaining to construction projects, indirect charges for engineering, supervision, transportation, and similar costs, and an al-lowance for funds used during construction (see c. below). Costs of depreciable units of plant retired are eliminated from utility plant accounts and such costs plus removal expenses less salvage are charged to accumulated depreciation. Contributions in aid of construction are credited to plant cost.

Depreciation is provided on a straight-line basis at rates authorized by the Arizona Corporation Commission as follows: through December 31, 1974, composite of 3.25%; beginning January 1, 1975, generally 2.80% to 4.00% for electric plant, 3.25% for gas plant, and 3.00% to 15.50% for common plant. The effect of this change in depreciation rates made as of January 1, 1975 on the results of operations for the twelve months ended April 30, 1975 was to increase depreciation expense and reduce net income by $ 922,000 ($ 0.06 per common share).

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 prog-ress and credited to income using a composite rate (increased from 7% to 8% effective January 1, 1974), 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 amounts considered by regulatory authorities as an ap-propriate cost of funds for the purpose of establishing rates for charges to customers.

d. Subsidiaries The Company's investment in its subsidiaries is stated at equity, starting in 1971. The subsidiaries are not consolidated inasmuch as their assets, revenues, net income and re-tained 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 pur-poses. 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 differ-ences 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 Ari-zona Corporation Commission.

30

ARIZONA PUBLIC SERVICE COMPANY STATEMENT OF CHANGES IN FINANCIALPOSITION Twelve Months Ended April 30, Year Ended December 31, 1975 1970 1971 1972 1973 1974 3U dll dl (Thousands of Dollars)

Source of Funds:

Funds from operations:

Net income . $ 18,268 S 19,705 $ 25,578 $ 31,267 S 36,957 S 39,772 Principal non-cash charges (credits) to income:

Depreciation and amortization ......... 18,593 19,710 21,409 23,529 26,398 28,461 Equity in undistributed (earnings) loss of unconsolidated subsidiaries 180 366 (95) (585) (348)

Deferred income taxes ........................ (210) (210) 405 490 (1,525) (1,087)

Allowance for funds used during construction ....................................... (568) (1,535) (3,840) (6,227) (11,888) (13,158)

Total funds from operations ............. 36,083 37,850 43,918 48,964 49,357 33 640 Funds from external sources:

Common stock. 21,525 22,800 34,400 30,278 57,628 Preferred Stock ........................................ 69,755 69,755 Long-term debt ........................................ 30,087 1,500 123,975 9,061 103,377 Notes payable to banks net ................. 31,545 45,925 63,627 Commercial paper net .......,......,......, 17,350 28,000 2,550 Total funds from external sources .... 30,087 71 920 146,775 108.325 175,271 230,760 Other items net . 1,495 1,666 3,071 6,441 1,972 Decrease in working capital'..................... 4,374 1,113 Total source of funds .......................... $ 72,039 S 111,436 $ 194,877 $ 163,730 $ 224,628 $ 286,372 Application of Funds:

Plant additions and replacements, excluding allowance for funds used during construction .................................... $ 46,237 $ 91,704 $ 117,016 $ 142,751 $ 182,969 $ 182,563 Repayment of long-term debt ..................... 7,750 37,750 Repayment of short-term borrowings net 11,150 62,545 34,392 Dividends on preferred and common stock 12,731 13,541 141191 16,256 23,938 28,501 Investments in and receivables from subsidiaries and other assets .................... 1,921 3,296 11125 71 1,646 1,231 Other items net. 933 Increase in working capital'...................... 2,895 4,652 7 392 1,935 Total application of funds ................. 372 039 S111430 $ 194,877 3103 730 3224 628 S280 372 Increase (Decrease) in tVorking Capital':

Cash. $ (605) $ 1,205 $ (699) $ 993 $ (408) $ 5,413 Notes receivable 5 (20) 43 91 847 624 Accounts receivable ...................................... 2,046 945 3,177 4,789 7,226 8,648 Materials and supplies ................................. 941 795 1,653 6,459 12,463 12,370 Accounts payable (2,666) (1,742) (3,865) (6,063) (9,427) (6,317)

Accrued expenses. (3,639) 609 (1,112) (1,451) (6,355) (11,346)

Other net. (456) 1,103 (310) (166) 3,046 (7,457)

Net increase (decrease) ...................... S (4,374) S 2,895 $ (1,113) $ 4,652 $ 7,392 $ 1,935

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

The accompanying Notes to Financial Statements, including Note I as to significant accounting policies, are an integral part of this statement.

29

ARIZONA PUBLIC SERVICE COMPANY STATEMENT OF RETAINED EARNINGS Twelve.

Months Ended Year Ended December 31 April 30, 1975 1970 1971 1972 1973 1974 (Unaudited)

(Thousands of Dollars)

Retained earnings at beginning of period $ 57,919 $ 63,456 $ 69,620 $ 81,007 $ 96,018 $ 94,99G Add Net income ............................... 18,268 19,705 25,578 31,267 36,957 39,772 Total . 76,187 83,161 95,198 112,274 132,975 134,768 Deduct Dividends:

Preferred stock (see below) ............ 3,551 3,551 3,551 3,551 6,258 8,441 Common stock .. 9,180 9,990 10,640 12,705 17,680 20,060 Total ... 12,731 13,541 14,191 16,256 23,938 28,501 Retained earnings at end of period (Note 2) $ 63,456 $ 69,620 $ 81,007 $ 96,018 $ 109,037 $ 106,267 Dividends on preferred stock:

$ 1.10 preferred. 172 $ 172 $ 172 $ 172 $ 172 $ 172

$ 2.50 preferred . 258 258 258 258 258 258

$ 2.36 preferred . 94 94 94 94 94 94

$ 4.35 preferred . 326 326 32G 326 326 326 Serial preferred:

$ 2.40 series A ....................... 576 576 576 576 576 576

$ 2.625 series C ..................... 630 630 630 630 630 630

$ 2.275 series D ..................... 455 455 455 455 455 455

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

$ 8.50 series F ........................ 993 1,518

$ 8.50 series G ....................... 395 650

$ 10 series H 1,389 2,722 Total . $ 3,551 $ 3,551 $ 3,551 $ 3,551 $ 6,258 $ 8,441 The accompanying Notes to Financial Statements, including Note 1 as to significant accounting policies, are an integral part of this statement.

28

ARIZONA PUBLIC SERVICE COMPANY BALANCESHEET LIABILITIES April 30, Dcccmbcr 31, 1926 1974 ~Udil d)

(Thousands of Dollars)

Capitalization:

Common stock (Note 2) $ 37,500 $ 42,500 Premiums and expenses (Note 2) 155,472 177,777 Retained earnings (Note 2) 109,037 106,267 Common stock equity . 302,009 326,544 Preferred stock (Note 2) . 138,561 138,561 Long-term debt (Note 3) 340,976 442,484 Total Capitalization 781,546 907,589 Current Liabilities:

Notes payable to banks (Note 5) 109,552 105,600 Commercial paper (Note 5) 52,550 Current maturities of long-term debt (Note 3) ... 38,250 8,250 Accounts payable 28,938 13,780 Advances from subsidiary . 1,244 1,080 Accrued taxes ......................................................... 16,627 29,032 Accrued interest ...................--"-.--.-...-.------- 8,382 7,556 Dividends declared or accrued 842 8,305 Payable to employees'ension plan (Note 6) . 937 960 Customers'eposits 1,852 1,981 Gas cost refund to be passed on to customers. 4,916 Other 706 726 Total Current Liabilities 259,880 182,186 Other Non-Current Liabilities 566 679 Deferred Credits and Reserves:

Customers'dvances for construction . 4,517 4,554 Other deferred credits and reserves 982 952 Deferred income taxes accelerated amortization 1,393 1,323 Total Deferred Credits and Reserves 6,892 6,829 Commitments and Contingencies (Note 7)

Total . $ 1,048,884 $ 1,097,283 The accompanying Notes to Financial Statements, including Note 1 as to significant accounting policies, are an integral part of this statement.

27

ARIZONA PUBLIC SERVICE COMPANY BALANCESEkEET ASSETS April 30, December 31, 1976 1&74 ~Udice di (Thousands of Dollars)

UtilityPlant:

Plant in service at original cost (Note 3):

Electric 821,020 $ 877,685 Gas 118,999 120,908 Common, used in all services . 33,660 32,714 Total 973,679 1,031,307 Less accumulated depreciation and amortization ....................... 235,000 244,141 Plant in service depreciated . 738,679 787,166 Construction work in progress . 214,567 207,698 Plant held for future use 894 897 UtilityPlant Depreciated 954,140 995,761 Investments and Other Assets:

Investments (at equity) in and receivables from subsidiaries ... 10,211 10,072 Other investments and funds . 968 1,142 Other physical property (less accumulated depreciation:

1974, $ 23,000; April 30, 1975, $ 23,000) . 1,296 1,274 Notes and contracts receivable .... 1,995 1,817 Total Investments and Other Assets. 14,470 14,305 Current Assets:

Cash (Note 5) 2,345 8,901 Special deposits and working funds (Note 5) 924 838 Notes receivable 1,151 763 Accounts receivable:

Service customers . 22,593 24,747 Miscellaneous 7,718 5,786 Allowance for doubtful accounts . (400) (290)

Materials and supplies (at average cost) . 27,497 28,475 Prepayments and other . 7,489 4,611 Total Current Assets . 69,317 73,831 Deferred Debits:

Deferred interest (Note 3) 3,015, 3,438 Unamortized debt issue costs 2,036 3,138 Other . 5,906 6,810 Total Deferred Debits 10,957 13,386 Total . $ 1,048,884 $ 1,097,283 The accompanying Notes to Financial Statements, including Note 1 as to significant accounting policies, are an integral part of this statement.

26

OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Arizona Public Service Company:

We have examined the balance sheet of Arizona Public Service Company as of December 31, 1974 and the related statements of income, retained earnings and changes in financial position for the five years then ended. Our examination was made in accordance with generally accepted audit-ing 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 present fairly the financial position of the Company at December 31, 1974 and the results of its operations and the changes in its financial position for the five years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.

HAsKINs & SELLs Phoenix, Arizona February 11, 1975 I

~

I 25

reviewed by, Snell & Wilmer, 3100 Valley Center, Phoenix, Arizona 85073, counsel for the Company, and, insofar as the laws of New Mexico are concerned, have been reviewed by Keleher & McLeod, Public Service Building, Albuquerque, New Mexico 87101. All of such statements are set forth herein in reliance upon the opinions of such firms.

LEGAL OPINIONS The validity of the New Bonds and the Additional Shares will be passed upon for the Company by Snell & Wilmer, and for the Underwriters by Sullivan & Cromwell, 48 Wall Street, New York, New York 10005. In giving their opinions, Sullivan & Cromwell may rely as to all matters of Arizona law upon the opinion of Snell & Wilmer, and as to matters of New Mexico law covered thereby, upon the opinion of Keleher & McLeod. Snell & Wilmer may also rely as to matters of New Mexico law upon the opinion of Keleher & McLeod.

At May 5, 1975, attorneys in the firm of Snell & Wilmer were the beneficial owners, directly or indirectly, of approximately 15,822 shares of the Company's common stock, 465 shares of its pre-ferred stock and $ 145,000 in principal amount of pollution control revenue bonds secured by a first mortgage bond of the Company's issue.

REGISTRATION STATEMENT This Prospectus omits certain information contained in the Registration Statement which the Company has filed with the Securities and Exchange Commission under the Securities Act of 1933, and to which reference is hereby made for further information with respect to the Company, the New Bonds and the Additional Shares.

24

2 of Notes to Financial Statements for a restriction on reta'ined earnin s available for the payment of dividends. The indenture res ecting re respec ing the Companys outstanding first mortgage bonds includes provisions that would restrict the payment of dividen s on t e ommon certain conditions which are considered by the Company to be remote.

Voting Rights Except as otherwise specific d b e 1 ow, h o ld ers o Preferred Stock and Common Stock are enti rs of e, ntitled, to one vote for each share held of record. Votes may be cumulated in electing directors.

d'd If six or more quarterly ivi en d s accrue rued thereon shall not have been paid with respect to the Preferred Stock, the holders thereof, voting by the prescribed classes for suc purpose, wi tied to elect a total of six directors, in addition to their other voting rights.

Special voting requirements are established li hed for or (i) certain conversions or exchanges of out-k (ii) the authorization of any stock ranking prior to t e re erre oc, kin an chan e in the terms and provisions off P re ferre d Stooc k that a o ld ad sely affect the rights and preferences of the holders th ereo, reof (iv) iv thee is issuance of any additional shares of Pre-ferred Stock except under prescribed circumstances, or (v) a merger, conso i ation or sa e substantially all the assets of the Company.

Pre-emptive Rights The holders of the Common Stock 'have no pre-emptive rights to subscribe for other shares ex-bl'f cept with respect to a non-pu ic o ering orr money of additional Common Stock or any security convertible into Common Stock.

Liquidation Rights Subject to the payment of all prior claims and the rights of all a issues of Preferred Stock, the Common Stock is entitled to receive all net assets in liquidation.

t Miscellaneous The Common Stock has no conversion rights and is not subje shares of Common Stock are, and nonassessable.

Transfer Agents and Registrars an d th e Additional Shares when ub'ect to redemption. The outstanding full pai issued and paid for will be, fully aid sfer A ents for the Common Stock are First National Bank of Arizona, Phoenix, Ari-a and Irving Trust C~mp~~y, New York, York New ew York,or, and the Registrars are The Valley National Bank of Arizona, Phoenix, Arizona and Bankers Trust Company, New Yor, ew or .

II EXPERTS The balance sheet as of December m er 313, 1974 an and the related statements '

of income, retained ed earnings and changes in financial position r for the five y ears then ende inc u e in is r een examined by Haskins & Sells, independent certified public accountants, as s a e i opi i appearing herein, and have been opinion b so inc u ded e in rreliance upon such opinion given upon the authority of that firm as experts in accounting and auditing.

Stat ts de as to matters of law and legal conclusions u nder "Re g ulation and Rates", "Fi-Re uirements and Construction Program",

I> 44 Business andd Pr

" ""Description o Prop ert y",

Common Stock" and "Description of New N B onnds" s haveave beene n prepared under the supervision of, and 23

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DESCRIPTION OF NEW BONDS The New Bonds will be issued as a new series under a Mortgage and Deed of Trust dated as of July 1, 1946 between the Company and Security Pacific National Bank, as Trustee ("Trustee" which as heretofore amended and supplemented is herein referred to as the "Mortgage", and which~

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is to be further amended and supplemented by a Supplemental Indenture dated as of June 1, 1975

("Supplemental Indenture" ). The statements herein concerning the New Bonds, the Mortgage and the Supplemental Indenture are a summary and do not purport to be complete. They make use of terms defined in the Mortgage and are qualified in their entirety by reference to such documents.

The New Bonds will bear interest from June 1, 1975 at the rate of 9.80% per annum, payable semi-annually on June 1 and December 1, will mature June 1, 1980, and will be limited to a princi-pal amount of $ 75,000,000. Interest will be paid to the persons in whose name the New Bonds are registered at the close of business on the record date, as established in the Supplemental Indenture, preceding the interest payment date in respect thereof. The New Bonds will be issued as fully regis-tered bonds, without coupons, in denominations of $ 1,000 and multiples thereof. The New Bonds will be transferable at any time without any service or other charge, except transfer taxes and other governmental charges, if any (Article I of the Supplemental Indenture).

The New Bonds will not be redeemable prior to maturity.

Security The New Bonds will rank pari passu, except as to any sinking fund or similar fund provided for a particular series, with all bonds at any time outstanding under the Mortgage. In the opinion of counsel for the Company, the Mortgage constitutes a first mortgage lien on substantially all the fixed property owned by the Company, other than property specifically excepted. Such lien and the .

Company's title to certain of its properties are subject to Excepted Encumbrances as defined in the Mortgage, to minor leases, defects, irregularities and deficiencies, and to the considerations cussed below with respect to the Four Corners and Navajo Plant locatioris. It is also the opinion dis-~

counsel that the lien of the Mortgage will extend to all after-acquired property (other than of~~'uch classes) located in the jurisdictions in which the necessary recordations or filings the,'xcepted have'een accomplished, subject to Excepted Encumbrances and to liens existing or placed on such prop-erty at the time of its acquisition by the Company.

Both the Four Corners and the Navajo Plants are located on property held under leases from the Navajo Tribe and easements from the Secretary of the Interior by electric distributors serv"ing portions of Arizona, California, Nevada, New Mexico and Texas. The leases extend from their re-spective effective dates in 1966 and 1969 for terms of 50 years with rights of renewal for-up to 25 additional years. The easements are for 50-year, renewable terms from the same effective dates.

While being of the opinion that the Company owns the rights conferred upon it by the leases from the Navajo Tribe, counsel for the Company does not express any opinion with respect to the title of the Navajo Tribe to the lands leased (but is not aware of any assertion of a contesting claim to such lands) or with respect to the enforceability of the leases against the Navajo Tribe. The leases pro-vide that in the event any dispute arising thereunder is not resolved, it may be submitted by either party to the Secretary of the Interior for decision.

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Issuance of Additional Bonds Additional bonds may be issued under the Mortgage in a principal amount equal to (a) 60% of net Property Additions (as defined in the Mortgage), (b) the principal amount of certain retired bonds previously issued and (c) deposited cash, provided that the Company's Adjusted Net Earn-ings (as defined in the Mortgage) over a 12-month period are at least two times the annual interest on all bonds, including the bonds applied for, and indebtedness secured by prior liens. Exceptions to the earnings requirement apply to bonds issued on the basis of retired bonds where those retired bore a higher rate of interest or where certain other conditions exist (Articles V, VI and VII of the Mortgage).

The amount of net Property Additions to April 30, 1975 available for use in the issuance of bonds was approximately $ 337,000,000, permitting the issuance pursuant to clause (a) above of ap-proximately $ 202,000,000 in additional bonds inclusive of the New Bonds; see "Financing Requirements and Construction Program" in regard to the lesser amount issuable pursuant to t e foregoing earnings requirement. Property Additions, as well as deposited cash, may be used for cer-tain alternative purposes under the Mortgage, including the release of property from the lien thereof or the satisfaction of sinking or replacement fund requirements. The Mortgage contains re-strictions on the issuance of bonds, withdrawal of cash or release of property on the basis of property subject to prior lien. Property located on leaseholds or easements (as, for example, the Four Corners and Navajo Plants) will constitute fundable Property Additions if the leasehold or easement has an unexpired term of, or the term is extendible at the Company's option for, at least 30 years after the time of funding, or if the property may be removed by the Company without compensation (Section 28 of the Mortgage).

Replacement Fund t So long as any of the New Bonds are outstanding, the Company is required for each calendar year to deposit cash with the Trustee to the extent that $ 340,000 plus 2% of the net additions after December 31, 1945 to its depreciable, mortgaged property used primarily and principally in the electric, gas, steam and/or water utility business exceeds credits (to the extent not previous y uti-lized) for funded property previously retired and for gross additions previously made to automotive equipment used by the Company in its utility business. However, the Company may satisfy all or any part of the foregoing requirement by utilizing as an additional credit net Property Additions which might otherwise be made the basis for the issuance of bonds. If not withdrawn against Prop-erty Additions or retired bonds within five years, any such deposited cash is required to be app ie to the purchase or redemption of bonds (Section 39 of the Mortgage).

I Mo'dification of the Mortgage The Mortgage and the rights of bondholders may be modified with the consent of the Com-pany, and of the Trustee if deemed affected, and the vote or assent of the holders of not less than 70% in principal amount of the bonds then outstanding, and of not less than 70% in principa amount of the outstanding bonds of any one or more series (less than all) affected by any such mod-iTication; except that the bondholders, without the consent of the holder of each bond affected, have no power to (a) reduce the premium, if any, or the rate of interest thereon or otherwise modify t e terms of payment of principal, premium or interest, or extend the maturity of any bonds, ( ) permit 21

the creation of any lien ranking prior to or on a parity with the lien of the Mortgage with respect to any of the mortgaged property, (c) deprive any nonassenting bondholder of a lien upon the mort-gaged property for the security of his bonds, or (d) reduce the percentage of bondholders authorized to effect any such modification (Article XIX of the Mortgage).

Two modifications of the Mortgage have recently been approved by the requisite vote of bond-holders and by the Company and will be included in the Supplemental Indenture.

Events of Default The following are defaults under the Mortgage: (a) failure to pay the principal of any bond out-standing under the Mortgage when due and payable; (b) failure to pay interest on any bond outstanding under the Mortgage within 60 days after the same is due and payable; (c) failure to pay any instalment of any fund required to be applied to the purchase or redemption of bonds outstand-ing under the Mortgage within 60 days after the same is due and payable; (d) certain events in bankruptcy, insolvency or reorganization; and (e) failure to perform any other covenant of the Mort-gage continued for 90 days after notice by the Trustee or holders of 15% in principal amount of the bonds oustanding under the Mortgage (Section 65 of the Mortgage).

The holders of not less than a majority in principal amount of Eligible bonds (as defined in the Mortgage) may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee under the Mortgage; provided, however, that the Trustee may decline to follow any such direction under certain circumstances, including a determination made in good faith by the Trustee that it will not be sufficiently indemnified for any expenditures, including its own charges, in any action or proceeding so directed (Section 71 of the Mortgage). The Company is re-quired to file with the Trustee, on or before July 1 of each year, a certificate to the effect that, except as otherwise stated therein, the Company has complied with all of the provisions of the Mortgage and is not then in default thereunder (Section 44 of the Mortgage).

DESCRIPTION OFi COMMON STOCK General The information set forth below is, with certain exceptions, summarized from the Articles of Incorporation of the Company, as amended, to which reference is hereby made for further informa-tion, the following being expressly qualified by such reference.

The term "Preferred Stock" refers to the eleven outstanding issues of cumulative preferred stock itemized in Note 2 of Notes to Financial Statements, including serial preferred stock which the Board of Directors is authorized, within the limitations and restrictions set forth in the Articles of Incorporation, to issue from time to time in series with designations, preferences, privileges, vot-ing powers, restrictions and qualifications applicable to each such series as fixed by the Board before the issuance thereof.

Dividends After payment or setting aside for payment of cumulative dividends and mandatory sinking fund requirements, where applicable, on all outstanding issues of Preferred Stock, the holders of Common Stock are entitled to dividends when and as declared out of funds legally available there-22