ML18192A396

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

ML18192A396
Person / Time
Site:	Palo Verde   (NPF-041, NPF-051, NPF-074)
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") willnot 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 ADEQUACYOF THIS PROSPECTUS. ANY REPRE-SENTATION TO THE CONTRARY IS A CRIMINALOFFENSE.

Per Bond

.al Price to Public(lJ 100%

$75,000,000 Underwriting Discounts and Commissions(2) 925%

$693,750 Proceeds to Co>>tpany(l) and (3J 99.075%

$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 ifissued 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 ofthis Prospectus is June 5, (975.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAYOVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAINTHE 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 ATANYTIME.

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).

APPLICATIONOF 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 willbe 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 Allor part of 11 of Arizona's 14 counties 1,555,000

.. Electric 323,880 Gas 334,870 2,343,600

..... Electric (MWH) 8,943,488 Gas (M Therms) 542,111

$732,000,000 Service Area Population Served Customers (April 30, 1975)

Estimated Construction Expenditures (1975-77)

Net Capability to Meet 1974 Peak System Demand (KW)

Sales (Twelve Months Ended April 30, 1975)....................

Financial Information Twelve Months Ended Income Statement Data:

Total Operating Revenues Net Income Earnings for Common Stock Average Common Shares Outstanding Earnings Per Average Share of Common Stock...

Dividends Per Share of Common Stock Ratio of Earnings to Fixed Charges Pro Forma Ratio of Earnings to Fixed Charges Dccembcr 31, 1974

$273,599,000

$ 36,957,000

$ 30,699,000 13,102,740

$2.34

$1.36 1.94 April 30, 1975

$307,617,000

$ 39,772,000

$ 31,331,000 14,204,110

$2.21

$1.36 2.02 1.92 As Adjusted for Ncw Bonds and Additional Shares Outstanding

April30, 1975 Amount (Thousands of Dollars)

Percent of C~kaH* tio Capitalization:

Long-Term Debt (excluding current maturities)

Preferred Stock Common Stock Equity.

Total Capitalization.....

Short-Term Borrowings..

$442,484 138,561 326,544

$907,589

$105,600 517,484 51.2%

138,561 13.7

~ 354,544 35.1

$1,010,589 100.0%

39,414*

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

INDUSTRYAND COMPANY PROBLEMS The utility industry is experiencing a number of problems affecting its business and financial condition. These include difficultyin 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".

REGULATIONAND 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.........................................................

8,663 11,477 Earnings Per Share of Common Stock..............

$0.60

$0.51 Based on its assessment of the probable timing of a decision in the current proceeding, the 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.

FINANCINGREQUIREMENTS 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 fthe 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.

CAPITALIZATION 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:

Long-Term Debt (1):

First mortgage bonds Notes payable Total long-term debt Preferred Stock, 3,535,000 shares authorized, 2,074,199 shares outst'anding (1)

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 Premiums and expenses.

Retained earnings (1)

Total common stock equity Total capitalization

April30,

~Ott dl ALP tlr (Thousands of Dollars) 138,561 138,561 13.7 42,500 177,777 106,267 326,544

$907,589 47,500 200,777

, 106,267 354,544 35.1

$1,010,589 100.0%

$392,484 467,484 50,000 50,000 442,484 517,484 51.2%

Short-Term Borrowingsas of April30, 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. Ifthe New Bonds are'sold and the Additional Shares are not, the Long-Term Debt willbe 52.7%, the Preferred Stock willbe 14.1% and the Common Stock Equity willbe 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

April30, 1975 Year Ended December 31, Operating Revenues (Note A):

Electric Gas Other Total Operating Expenses:

Operation and maintenance expenses:

Fuel for electric generation Purchased gas Purchased power and interchange-net Other production expenses',.

Transmission and distribution Maintenance Customers, sales, administrative and general Total Depreciation and amortization (Note 1)

Taxes other than income Income taxes (Notes B and 4)

Total Operating Income..

Other Income (Deductions):

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

Income taxes (Note 4)

Othernet.

Total Gross Income Interest Deductions:

Interest on long-term debt.

Interest on short-term borrowings Debt discount, premium and expense Total Net Income............

Preferred Dividend Requirements Earnings for Common Stock Average Common Shares Outstanding Per Share of Common Stock:

Earnings (based on average shares outstanding) (Note D)...

Dividends declared and paid.

Ratio of Earnings to Fixed Charges (Note E)..............................

1970 1971 1972 1973 (Thousands of Dollars) 1974 (Unaudited)

$105,817 39,049 7

144,873

$238,510 69,107 307 617 13,350 16,692 375 2,600 7,428 9,026 14;?98 64,269 18,593 21,539 8,524 112 925 31 940 568 180 (106) 642 32,590 11,632 2,653 37 14,322 18,268 3,551

$ 14,717 8,500,000 17,107 19,812 102 3,002 7,927 10,676 17 276 75,902 19,710 24,983 6,118 126,713 32,592 1,535 594 86

. 2,215 34,807 12,326 g,741 35 15,102 19,705 3,551 S 16,154 9,272,603 19,964 19,963 8,522 3,427 9,049 15,173

~18 612 94,710 21,409 26,901 4,452 147,472 40,964 3,840 1,169 5 013 45977 17,941 2,406 52 20,399 25,578 3,551 S 22.027 9,612,022 29,626 22,258 12,398',181 9,757 1G,869 21 775 110,864 23,529 28,401 5,631 174,425 50 531 6,227 2,117 753 9 097 59 628 22,390 5,915 56 28,361 31,267 3,551 S 27,716 101527,397 41,626

'28,171 23,230 5,181 10,187 20,078 24 533

'153,006 26,398 38,546 (133) 217 817 55 782 11,888 2,531 2,646 17,065 72,847 20,929 14,883 78 35.890 36,957 6,258

$ 30,699 13,102,740 45,554 32,718 31,425 5,646 10,884 21,224 26 247 173,698 28,461 43,217 1,767 247,143 60,474 2,669 17,708 78 102 23,012 15,281 117 38,410 39,772 8,441 S 31,331 14,204,110

$1.73

$1.74

$1.08

$1.08 2.76 2.59

$2.29

$2.63

$2.34

$2.21

$ 1.12

$1.21

$ 1.3G

$1.36 2.37 2.20 1.94 2.02

$117,399

$142,237

$171,025

$213,271 41,899 46,199 53,931 60,328 7

159.305 188 436 224 956 273 509 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 ifsuch 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, ifany, 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 t~

(1) the annual interest requirements of the New Bonds, (2) the issuance of the Additional Shar~~

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'SDISCUSSION 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 PropertyOperating 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".

Operating 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 PropertyEnergy 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 PropertyEnergy 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 utilityplant.

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).

"Othernet" 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 April30, 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 DIVIDENDSAND 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.

~11i h 'Low Low 11igh Year 1973:t First Quarter...

Second Quarter Third Quarter Fourth Quarter 18 13s/s 12 11'/s 19s/s 18Vs 15 Vs 14 Vs 14r/s 1 1 '/s 15 Vs 13s/s 1975 was $15'/s.

Year 1974:

24s/s 19 Vs First Quarter...........................

22s/s 19 Vs Second Quarter.......................

21'/4 18 Vs Third Quarter.........................

22'/s 16Vs Fourth Quarter.......................

1975:

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

Second Quarter (through June 4)..............................

The reported last sale price on the New York Stock Exchange on June 4, 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 flexibilityin 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 in~

crease of 36.1%. It is estimated by the Company that one or both of its services of electricity 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:

0 eratin ltcvcnucs Operating Incomo Before Income Taxes (Dollars in Electric Amount Percent Millions)

Gas Amount Pcrccnt (Dollars in Millions)

Electric Gas Amount Perccht Amount Pcrccnt

$ 105.9 73.1%

117.4 73.7 142.2 75.5 171.0 76.0 213.3 78.0

$35.5 87.7%

$5.0 12.3%

36.6 94.6 2.1 5.4 40.3 88.8 5.1 11.2 47.3 84.2 8.9 15.8 49.6 89.2 6.0 10.8

$39.0 26.9%

41.9 26.3 46.2 24.5 54.0 24.0 60.3 22.0 572,000 kw 240,000 116,000 210,000 1,138,000 kw 1970..............................

197 1..............................

1972 1973..............................

1974..............................

Twelve Months Ended

'pril 30, 1975...........

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 15% owned Units 4 and 5 at Four Corners, representing Unit 1 at the Cholla Plant.

14% owned Units 1 and 2 at the Navajo Plant, representing Gas or Oil:

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

The Company's peak one-hour demand, recorded on June 27, 1974, was 2,032,000 kw, com-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 t

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.

Nameplate Capacity

~Ei I

t Estimated Cost Pcr

~Kit B 1 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 of Construction and Scheduled (Thousands of Dollars)(1)

Coal:

14% owned Unit 3 (1976) at the Navajo Plant, representing...

~.

Units 2 (1977) and 3 (1978) at the Cholla Plant, aggregating Unit 4 (1979) at the Cholla Plant..................

18%owned Units 1 (1981), 2 (1982), 3 (1983) and 4 (1984) of the Kaiparowits Plant (southern Utah), representing

...~.....

Gas or Oil:

Three combined cycle units (1976),

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

representing Total 105,000 kw

$390 540,000 726 246,000 224 1,070,600 2,811,600 kw 725 500,000 566 350,000 637 41,000 283,000 223,000 392,000 55,000 776,000 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 April30, 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 Percent of Averago Gcncration Cost Gas Porccnt of Averago Gen oration Cost Percent of Generation Oil Average Cost AllFuels Avcragc Cost 1970..................

1971..................

1972..................

1973..................

1974..................

Twelve Months Ended April 30, 1975........

83.3%

15.408 76.1 16.15 66.5 16.66 70.0 17.78 72.5 20.47 16.7%

34.270 23.5 38.45 31.6 38.08 18.4 41.25 13.7 53.23 0.4%

46.630 1.9 91.31 11.6 98.41 13.8 152.83 18.820 21.59 25.18 32.09 44.82 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 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 t

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-tions 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 t

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 years'peration of all three nuclear units, assuming the participants exercise all of the options available to 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 difficultyin 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 willhave 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 AirAct 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 Electric Operations:

Number of Customers (end of period):

Residential Commercial Industrial Irrigation Other Total Customers 1970 213,179 34,571 1,798 1,127 654 251 329 1021 228,G64 3G,025 1,852 1,183 768 1972 246,019 37,646 1>974 1,239 802 Mn772777 1973 264,792 39,643 2,057 1,309 842 30864$

Year Ended Dcccmbcr 31 1974 277,794 40,934 2,061 1,444 861 323 094 Twclv Month Ended April30.

1975 51; 278,586 40,859 2,057 1,454 924 D827lm>

Electric Sales (MWH):

Residential Commercial Industrial Irrigation Other Total Electric Sales Operating Revenues (000):

Residential Commercial...

Industrial Irrigation Other Total Transmission for Others...............................

Miscellaneous Services Total Electric Operating Revenues Revenue Per KWH (Cents):

Residential Commercial Industrial.

1,496,869 1,884,376 1,290,646 241,382 526,520 5,439,793

$ 35,042 37,903 16,263 2,758 4,873 96,839 7,583 1,395 24105 17 2.34c 2.01 1.2G 1,693,119 2,057,989 1,381,371 255,200 682,589 6.070.D2~ I

$ 39,244 41,399 17,519 2,950 6,815 107>927 7,947 1,525 8117: 997 2.32c 2.01 1.27 2,032,040 2,347,289 1,659,667 298,370 861,581 7,198,947

$ 49,036 49,246 21,011 3,647 8,712 131,652 8,649 1,936 2142 237 2.41c

2. 10 1.27 2,336,173 2,582,025 1,791,392 287,344 1.101,778 8,098,712

$ 59,852 58,972 25,502 4,066 12,004 160,396 8,640 1,989 2171,025 2.56c 2.28 1.42 2,540,177 2,675,151 1,780,488 379,215 1,317,270 8,692,301

$ 74,348 71,220 31,502 6,387 18,425 201,882 9,216 2,173 813 271 2.93c 2.66 1.77 2,640,620 2,749,929 1,777,206 393,258 1,382,475 8,943,488

$ 83,080 80,623 35,947 7,518 19,819 226,987 9,450 2,073 r2281510 3.15c 2.93 2.02 Costs Per KWH Generated (Cents):

Fuel Total Electric Operating Expense.......

Gas Operations:

Number of Customers (end of period):

Residential Commercial Industrial Irrigation Other Total Customers 260,104 21,610 922 1,390 1

284,027 275,837 22,43G 965 1,412 1

300,651 0.20c 0.23c 1.14 1.16 0.27c 1.46 288,359 23,1G3 999 1,406 1

813,m 0.36c 1.55 301,970 23,935 1,048 1,452 1

3F(~40 0.51c 2.00 308,175 24,236 1>071 1,425 1

334,908 0.56c 2.29 307,86~

24,482~

1,057 1,465 1

38D4. 7 i Gas Sales (MTherms):

Residential Commercial Industrial Irrigation.

Other Total Gas Sales Operating Revenues (000):

Residential Commercial Industrial Irrigation.

Other Miscellaneous services Total Gas Operating Revenues Revenue Per Therm (Cents):

Residential Commercial Industrial 186,687 105,719 99,278 75,514 8,009 475,207

$ 21,936 6,877 4,758 4,771 325 382 8 f9,049 11.75c 6.50 4.79 18 205,575 117,110 100,936 76,339 7,428 507,388

$ 23,327 7,785 5,132 4,895 333 427 441, m99 11.35c G.G5 5.08 206,390 121,307 93,871 76,990 8,016 506,574

$ 26,082 8,627 5,208 5,314 382 586 8 40 199 12.64c 7.11 5.55 229,657 133,076 99,961 75,920 8,454 547,068

$ 30,815 10,304 6,013 5,637 441 721 8 53981 13.42c 7.74 6.02 200,447 119,937 104,542 87,816 6,257 518,999

$ 32,058 11,412 7,818 7,877 441 722 W8D82 7 15.99c 9.51 7.48 221,155 129,050 95,731 88,738 7,437 542,111

$ 37,882 13,610 7,726 8,581 592 716 W~if 17.13c 10.55 8.07

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 difficultto 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

'onsisting of or similar to that which Congress will apparently reconsider following the President's 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.

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 l

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, willbe 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 The Company Application of Proceeds..

Prospectus Summary Industry and Company Problems......

Regulation and Rates, Financing Requirements and Construction Program.....................

Capitalization Statement of Income Management's Discussion and Analysis of Statement of Income...

Common Stock Dividends and Price Range Business and Property Map.

Description of New Bonds..................

Description of Common Stock...........

Experts Legal Opinions Registration Statement..............

Opinion of Independent Certified Public Accountants Financial Statements Underwriting

~Pa O

2 2

3 4

4 5

7 8

10 11 12 19 20 22 23 24 24 25 26 38 No dealer, salesman or other person has been authorized to give any infor-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 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.

Arizona Public Service Company

$75,000,000 First Mortgage Bonds 9.80% Series due 1980 Aruonn Pubuc Service Company a

s.

WC CARC HOW YOU LJVC PROSPECTUS

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 ifany 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 initiallyat 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.

Underwriter The First Boston Corporation..............................

Blyth Eastman Dillon& Co. Incorporated.........

Dean tVitter &Co. Incorporated.........................

Adams &Peck.........

Advest Co..

Bacon, Whipple & Co.

Robert W. Baird & Co. Incorporated..................

Bateman Eichler, HillRichards, Incorporated..

Bear, Stearns & Co.

Birr, Wilson &Co., Inc.

William Blair & Company....................................

Blunt Ellis &Simmons Incorporated..................

Boettcher & Company.

Bosworth, Sullivan & Company, Incorporated..

Alex. Brown &, Sons.

B. C. Christopher & Company.............................

Dain, Kalman & Quail, Incorporated..................

Davis, Skaggs &, Co., Inc.

Dillon, Read & Co. Inc.

Drexel Burnham & Co. Incorporated..................

A. G. Edwards &Sons, Inc...................................

Elkins, Stroud, Suplee &; Co.................................

Equitable Securities Corporation........................

First Southwest Company....................................

Freeman Securities Company, Inc.......................

Goldman, Sachs & Co.

Halsey, Stuart & Co. Inc Harris, Upham &Co. Incorporated......."..............

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

Hornblower &Weeks-Hemphill, Noyes Incorporated Howard, Weil, Labouisse, Friedrichs Incorporated E. F. Hutton & Company Inc...............................

The IllinoisCompany Incorporated....................

Josephthal &Co..

Keefe, Bruyette &, Woods, Inc.............................

Paul Kendrick & Co., Inc......................................

Kidder, Peabody & Co. Incorporated Kuhn, Loeb &Co..

Lazard Freres & Co.

Legg Mason/Wood Walker Div. of First Regional Securities, Inc..........

Lehman Brothers Incorporated.................,.........

Principal Amount

$7,700,000 7,700,000 7,700,000 200,000 400,000 400,000 400,000 400,000 1,000,000 200,000 400,000 400,000 400,000 400,000 800,000 125,000 400,000 200,000 1,250,000 1,250,000 400,000 400,000 125,000 400,000 200,000 1,750,000 1,250,000 800,000 200,000 1,250,000 400,000 1,250,000 125,000 200,000 400,000 125,000 1,250,000 1,250,000 1,250,000 400,000 1,250,000 Principal Amount 1,250,000 400,000 125,000 400,000 1,750,000 125,000 200,000 1,750,000 800,000 200,000 400,000 1,250,000 400,000 400,000 800,000 200,000 1,000,000 1,250,000 400,000 400,000 1,000,000 1,750,000 1,000,000 1,000,000 400,000 1,250,000 200,000~

400,000~

400,000 800,000 800,000 800,000 200,000 200,000 1,000,000 1,250,000 400,000 1,250,000 800,000 200,000

$75,000,000 Underwriter Loeb, Rhoades & Co.

Loewi & Co. Incorporated.....................................

McCormick & Co., Incorporated..........................

McDonald & Company.

MerrillLynch, Pierce, Fenner &, Smith Incorporated The Milwaukee Company.....................................

Mitchum, Jones &Templeton Incorporated......

Morgan Stanley &Co. Incorporated...................

Moseley, Hallgarten & Estabrook Inc.................

Newhard, Cook & Co. Incorporated....................

The Ohio Company Paine, IVebber, Jackson &Curtis Incorporated Piper, Jaffray & Hopwood Incorporated............

Prescott, Ball &Turben........................................

R. tV. Pressprich & Co. Incorporated Quinn &, Co., Inc.

Rauscher Pierce Securities Corporation.............

Reynolds Securities Inc.

The Robinson-Humphrey Company, Inc...........

Rotan Mosle Inc L. F. Rothschild &Co.

Salomon Brothers Shearson Hayden Stone Inc.................................

Shields Model Roland Securities Incorporated Shuman, Agnew & Co., Inc...................................

Smith, Barney & Co. Incorporated......................

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

Stone & Youngberg...

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

Thomson &McKinnon Auchincloss Kohlmeyer Inc.

Spencer Trask & Co. Incorporated......................

Tucker, Anthony &R. L. Day..............................

Underwood, Neuhaus & Co., Incorporated........

Wagenseller & Durst, Inc......................................

Weeden &; Co. Incorporated.................................

Wertheim &: Co., Inc.

lVheat, First Securities, Inc..................................

, White, IVeld &Co. Incorporated.........................

Wood, Struthers &Winthrop Inc........................

Young, Smith & Peacock, Inc..............................

Total............................

38

ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for the Period Ended April30, 1975 is Unaudited) t

7. Commitments and Contingencies.

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 followingsecurities 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:

1970 1971 1973 1973 (Thousands of Dollars)

Year Ended December 31.

1974 Twelve Months Ended "April30, 1973 Taxes, other than income taxes:

Ad valorem.....................

$16,606 Sales................................

3,873 Rents 2,022

$ 19,488 4,290 1,938

$20,509

$20,461 5,533 6,673 1,862 1,986

$27,693 9,240 1,702

~ $30,286, 11,239 1,673 37

ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for tho Period Ended April30, 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, 1974

April30, 1976

$ 106,600,000 Bank lines of credit (unused: December 31, $20,000,000; April30, $21,000,000)

$97,000,000 Bank lines in support of commercial paper (unused:

December 31, $30,000,000; April30, 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 April30, 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 1970 Year Ended December 31, 1971 1972 1973 (Thousands of Dollars) 1974 Twelve htonths Ended

April30, 1975 Computed "expected" income tax expense Federal and State.............................

Reductions in taxes resulting from:

Timing differences:

Tax over book depreciation............................

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

Otherprincipally taxes, pensions and other items capitalized Other items Investment credits Taxes currently payable (refundable)................

Deferred taxes included in expenses:

Deferred.

Restored Total deferred Total Federal and State income taxes t

Federal and State income taxes included in:

Operating expenses (credit)..............................

Other income (credit)

Total..

Taxes currently payable (refundable):

Federal State Total..

Deferred taxes:

Federal.

State Total

$13,631

$12,642

$14,463

$ 17,428

$ 16,529

$19,392 (3,372)

(3,642)

(4,744)

(6,352)

(6,875)

(6,729)

I, (291)

(769)

(1,924)

(3,120)

(5,730)

(6,462)

(617)

(1,490)

(2,582)

(62) 12 133 (735)

(1,019)

~(2 468)

~8554

~5734

~2878 (2,246).

(3,012) '3,666)

(113)

(1,004)

(1,225)

~(2 573)

~(1 047

~(337

~3024

~(1 139 973 615 700 (1,315)

(877)

(210)

(210)

(210)

(210)

(210)

(210)

$ 8,344

$ 5,524 S 3,283

$ 3,514

$(2,664)

(114)

$ 8,524

$ 6,118

$ 4,452

$ 5,631 S

(133)

S 1,767

~180)

~(594

~(1 169)

(2,117)

(2,531)

~(1 881)

S 8,344

$ 5,524

$ 3,283

$~3514

~$(2 664)

$~(114

$ 7,777 777

$ 8,554

$ 5,133 S 2,280

$ 2,314

$(1,190) 770 601 598 710 51 203 S 5,734 S 2,878 S 3,024

$(1,139) 973 S

(201)

(201)

S 364 S

443 S(1,409)

$ (1,007)

(9)

(9) 41 47 (116)

. (80)

(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, willeliminate 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

ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for the Period Ended April30, 1975 is Unaudited) 4.80% series due November 1, 1991 4.45% series due June 1, 1992 4.40% series due December 1, 1992.........

4.50% series due September 1, 1993.

6.25% series due September 1, 1997.

7.45% series due March 15, 2002....

6.20% series due April 1, 2004 Less deposit with trustee (see Note 7).

Unamortized discount Unamortized premium Total First Mortgage Bonds Less current maturities:

8.50% series due April 1, 1975.

Remainder Unsecured Notes Payable:

6.375% to 6.50% due May and July 1975'.

Due September 1, 1979*.

Total Unsecured Notes Payable..

Less current maturities:

6.375% to 6.50% due 1975 Remainder Total Long-Term Debt Dcccmbcr 31,

April30, 1974 1975 (Thousands ol'ollars) 35,000 35,000 25,000 25,000 25,000 25,000 15,000 15,000 25,000 25,000 60,000 60,000 50,000 50,000 (40,314)

(38,289)

(498) 67 48 320,976 392,484 (30,000) 290,976 392,484 8,250 8,250 50,000 50,000 58,250 58,250 (8,250)

(8,250) 50,000 50,000

$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 utilityplant 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

Premiums and (Expenses)

Net Par Value Amount Number oi'hares Par Value Amount Number of Shares

~D Balance, December 31, 1969 and 1970.............................

Common Stock......

Balance, December 31, 1971 Common Stock.

Balance, December 31, 1972 Common Stock.

Balance, December 31, 1973 Common Stock Cumulative Preferred Stock, $8.50 series F................

Cumulative Preferred Stock, $8.50 series G...............

Cumulative Preferred Stock, $ 10 series H..................

Balance, December 31, 1974 Common Stock t

Balance, April 30,1975

3. Long-Term Debt.

Details of long-term debt outstanding

$ 68,561 68,561 68,5G1

$21,250 2,500 23,750 2,500 26,250 5,000 31,250 6,250 1,374,199 8,500,000 1,000,000

$ 63,475 18,932 82,407 20 222 102,G29 29,352 1311981 23,849 (111)

(47)

(200) 155,472 22,305

$ 177,777 1,374,199 9,500,000 1,000,000 1,374,199 10,500,000 2,000,000 12,500,000 2,500,000 68,561 21,000 9,000 40 MO 138,561 1,374,199 210,000 90,000 400,000 21074,199 15,000,000 2 000,000 37,500

~5000

$42,500 2,074,199

$138,561 17,000,000 at December 31, 1974 and April 30, 1975 were as follows:

Deccmbcr 31,

April30, 1974 1975 (Thousands or Dollars)

ARIZONAPUBLIC SERVICE'OMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for the Period Ended April30, 1976 is Unaudited) t 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 First Mortgage Bonds:

8.50% series due April 1, 1975.

2% % series due July 1, 1976 3'/s% series due December 1, 1977 3% series due April 1, 1979 2s/4% series due February 1, 1980.

27/s% series due December 1, 1980

" '.50% series due February 15, 1982 3t/s% series due February 1;1983.

3'/s% series due November 1, 1983 3'/4 % series due Mare'h'1", 1984 5'/s% series due October 1, 1987 4.70% series due March 1; 1989.:..

$ 30,000 8,500 2,500 4,000 5,000 6,000 14,500 5,723 15,000

'15,000 20,000 8,500 2,500

,4,000 5,000 6,000 100,000 14,500 5,723 15,000 15,000'0,000

ARIZONAPUBLIC 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:

Common Stock...

Number of Shares Outstanding December 31, April30, Authorized 1974 1975 Per Sharc 30,000,000(a) 15,000,000 17,000,000 S

2.50 Par Value Outstanding Deccmbcr 31,

April30, 1974 1975 (Thousands of Dollars)

S 37.500 S 42,500 Call Price Per Share (Before Adding Accumulated Dividends)

Stock:

Cumulative Preferred

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

$2.50 preferred.........

$2.36 preferred.........

$4.35 preferred.........

Serial preferred........

$2.40 series A.......

$2.625 series C.....

$2.275 series D....

$3.25 series E.......

Serial preferred........

$8.50 series F.......

$8.50 series G......

$ 10 series H.........

Total................

160,000 105,000 120,000 150,000 1,000,000 2,000,000(a) 3,535,000 155,945 103,254 40,000 75,000 240,000 240,000 200,000 320,000 210,000 90,000 400,000 2 074,199 155,945 103,254 40,000 75,000 240,000 240,000 200,000 320,000 210,000 90,000 400,000 2,074,199

$ 25.00 50.00 50.00 100.00 50.00 50.00 50.00 50.00 3,898 5,163 2,000 7,500 12,000 12,000 10,000 16,000 S

3,898 5,163 2,000 7,500 12,000 12,000 10,000 16,000 S 27.50 51.00 51.00 102.00 50.50 51.00 (b)

(c) 100.00 21,000 (d) 100.00 9,000 (d) 100.00 40,000 (e)

$ 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

ARIZONAPUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)

(Information for the Period Ended April30, 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 planThe 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 offifthe applicable project is abandoned.

31

ARIZONAPUBLIC 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 utilityplant 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 taxesThe 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

ARIZONAPUBLIC SERVICE COMPANY STATEMENTOF CHANGES IN FINANCIALPOSITION 1970 Year Ended December 31, 1971 1972 1973 (Thousands of Dollars) 1974 Twelve Months Ended

April30, 1975 3U dll dl Source of Funds:

Funds from operations:

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

Depreciation and amortization.........

Equity in undistributed (earnings) loss of unconsolidated subsidiaries Deferred income taxes........................

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

Total funds from operations Funds from external sources:

Common stock.

Preferred Stock........................................

Long-term debt........................................

Notes payable to banks net.................

Commercial papernet.......,......,......,

Total funds from external sources....

Other itemsnet.

Decrease in working capital'.....................

Total source of funds..........................

Application of Funds:

Plant additions and replacements, excluding allowance for funds used during construction....................................

Repayment of long-term debt.....................

Repayment of short-term borrowingsnet Dividends on preferred and common stock Investments in and receivables from subsidiaries and other assets Other itemsnet.

Increase in working capital'......................

Total application of funds.................

Increase (Decrease) in tVorking Capital':

Cash.

Notes receivable Accounts receivable......................................

Materials and supplies.................................

Accounts payable Accrued expenses.

Othernet.

Net increase (decrease)

S 39,772 18,593 (210)

(568) 36,083 19,710 180 (210)

(1,535) 37,850 21,409 366 405 (3,840) 43,918 23,529 (95) 490 (6,227) 48,964 26,398 (585)

(1,525)

(11,888) 49,357 28,461 (348)

(1,087)

(13,158) 33 640 30,087 30,087 1,495 4,374

$72,039 21,525 1,500 31,545 17,350 71 920 1,666 S 111,436 22,800 123,975 146,775 3,071 1,113

$194,877 34,400 45,925 28,000 108.325 6,441 30,278 69,755 9,061 63,627 2,550 175,271 57,628 69,755 103,377 230,760 1,972

$163,730

$224,628

$286,372

$46,237 11,150 12,731 1,921 372 039

$ 91,704 13,541 3,296 2,895 S111430

$117,016 62,545 141191 11125

$ 194,877

$142,751 16,256 71 4,652 3103 730

$182,969 7,750 23,938 1,646 933 7 392 3224 628

$182,563 37,750 34,392 28,501 1,231 1,935 S280 372 (605) 5 2,046 941 (2,666)

(3,639)

(456)

S (4,374) 1,205 (20) 945 795 (1,742) 609 1,103 S

2,895 (699) 43 3,177 1,653 (3,865)

(1,112)

(310)

(1,113) 993 91 4,789 6,459 (6,063)

(1,451)

(166) 4,652 (408) 847 7,226 12,463 (9,427)

(6,355) 3,046 7,392 5,413 624 8,648 12,370 (6,317)

(11,346)

(7,457) 1,935

$18,268 S 19,705

$ 25,578

$ 31,267 S 36,957

• 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

ARIZONAPUBLIC SERVICE COMPANY STATEMENT OF RETAINEDEARNINGS Year Ended December 31 1970 1971 1972 1973 1974 (Thousands of Dollars)

Twelve.

Months Ended

April30, 1975 (Unaudited)

Retained earnings at beginning of period

$57,919

$63,456

$69,620

$ 81,007

$ 96,018

$ 94,99G AddNet income...............................

18,268 19,705 25,578 31,267 36,957 39,772 Total.

DeductDividends:

Preferred stock (see below)............

Common stock 76,187 83,161 95,198 112,274 132,975 134,768 3,551 3,551 3,551 3,551 6,258 8,441 9,180 9,990 10,640 12,705 17,680 20,060 Total...

Retained earnings at end of period (Note 2)

Dividends on preferred stock:

$1.10 preferred.

$2.50 preferred

$2.36 preferred

$4.35 preferred Serial preferred:

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

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

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

$3.25 series E......,................

$8.50 series F........................

$8.50 series G.......................

$10 series H Total.

12,731 13,541 14,191 16,256 23,938 28,501 172 172 172 172 172 172 258 258 258 258 258 258 94 94 94 94 94 94 326 326 32G 326 326 326 576 630 455 1,040 576 630 455 1,040 576 630 455 1,040 576 630 455 1,040 576 576 630 630 455 455 1,040 1,040 993 1,518 395 650 1,389 2,722

$ 3,551

$ 3,551

$ 3,551 3,551 6,258 8,441

$63,456

$69,620

$81,007

$ 96,018

$109,037

$106,267 The accompanying Notes to Financial Statements, including Note 1 as to significant accounting policies, are an integral part of this statement.

28

ARIZONAPUBLIC SERVICE COMPANY BALANCESHEET LIABILITIES

April30, Dcccmbcr 31, 1926 1974

~Udil d)

(Thousands of Dollars)

Capitalization:

Common stock (Note 2)

Premiums and expenses (Note 2)

Retained earnings (Note 2)

Common stock equity Preferred stock (Note 2).

Long-term debt (Note 3) 37,500 155,472 109,037 302,009 138,561 340,976 42,500 177,777 106,267 326,544 138,561 442,484 Total Capitalization 781,546 907,589 Current Liabilities:

Notes payable to banks (Note 5)

Commercial paper (Note 5)

Current maturities of long-term debt (Note 3)...

Accounts payable Advances from subsidiary Accrued taxes.........................................................

Accrued interest...................--"-.--.-...-.-------

Dividends declared or accrued Payable to employees'ension plan (Note 6)

Customers'eposits Gas cost refund to be passed on to customers.

Other 109,552 52,550 38,250 28,938 1,244 16,627 8,382 842 937 1,852 706 105,600 8,250 13,780 1,080 29,032 7,556 8,305 960 1,981 4,916 726 Total Current Liabilities Other Non-Current Liabilities 259,880 566 182,186 679 Deferred Credits and Reserves:

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

ARIZONAPUBLIC SERVICE COMPANY BALANCESEkEET ASSETS

April30, UtilityPlant:

Plant in service at original cost (Note 3):

Electric Gas Common, used in all services Total Less accumulated depreciation and amortization.......................

Plant in service depreciated Construction work in progress Plant held for future use UtilityPlantDepreciated Investments and Other Assets:

Investments (at equity) in and receivables from subsidiaries Other investments and funds Other physical property (less accumulated depreciation:

1974, $23,000; April 30, 1975, $23,000)

Notes and contracts receivable....

Total Investments and Other Assets.

Current Assets:

Cash (Note 5)

Special deposits and working funds (Note 5)

Notes receivable Accounts receivable:

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

Prepayments and other Total Current Assets Deferred Debits:

Deferred interest (Note 3)

Unamortized debt issue costs Other Total Deferred Debits Total.

821,020 118,999 33,660 973,679 235,000 738,679 214,567 894 954,140 877,685 120,908 32,714 1,031,307 244,141 787,166 207,698 897 995,761 10,211 968 10,072 1,142 1,296 1,995 14,470 1,274 1,817 14,305 2,345 924 1,151 8,901 838 763 22,593 7,718 (400) 27,497 7,489 69,317 24,747 5,786 (290) 28,475 4,611 73,831 3,015, 2,036 5,906 10,957 3,438 3,138 6,810 13,386

$1,048,884

$1,097,283 December 31, 1976 1&74

~Udice di (Thousands of Dollars)

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.

Phoenix, Arizona February 11, 1975 HAsKINs & SELLs 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.

LEGALOPINIONS The validity of the New Bonds and the Additional Shares willbe 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 re res ecting the Companys outstanding first mortgage the payment of dividends. The indenture respec ing 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 rs o

ntitled, Except as otherwise specific e ow, o

ers o d b 1

h ld rs of Preferred Stock and Common Stock are enti e, to one vote for each share held of record. Votes may be cumulated in electing directors.

d'd d

rued thereon shall not have been paid with respect to the Ifsix or more quarterly ivi en s accrue 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.

li hed for (i) certain conversions or exchanges of out-Special voting requirements are established or (i) k (ii) the authorization of any stock ranking prior to t e re erre oc, f P f d Sto k that o ld ad sely affect kin an chan e in the terms and provisions of re erre oc a

h reof (iv) the issuance of any additional shares of Pre-the rights and preferences of the holders t ereo, iv e is 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-cept with respect to a non-pu ic o ering or bl'f r 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 a of all issues of Preferred Stock, the Common Stock is entitled to receive all net assets in liquidation.

Miscellaneous t

The Common Stock has no conversion rights and is not subje ub'ect to redemption. The outstanding full aid d th Additional Shares when issued and paid for will be, fully pai shares of Common Stock are, an e

and nonassessable.

Transfer Agents and Registrars sfer A ents for the Common Stock are First National Bank of Arizona, Phoenix, Ari-York New York, and the Registrars are The Valley National a and Irving Trust C~mp~~y, New York, ew or, Bank of Arizona, Phoenix, Arizona and Bankers Trust Company, New Yor, ew or II EXPERTS m er 31 1974 and the related statements of income, retained The balance sheet as of December 3, an ed earnings and changes in financial position r

y for the five 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 b

ded in reliance upon such opinion given upon the opinion appearing herein, and have been so inc u e

in r authority of that firm as experts in accounting and auditing.

Stat ts de as to matters of law and legal conclusions u g

nder "Re ulation and Rates", "Fi-Re uirements and Construction Program",

Business and Prop y", "

I>

44 d Pr ert " "Description o

N B nds" have been prepared under the supervision of, and Common Stock" and "Description of New on s

ave e n 23

~

~

~ ~,

~

~

gal[~i!!.a,"@I'

...S

~

~

ll

~

~

~

~

~ ~ -

- ~

~

~

~

- ~

s

~

~

o

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~

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, willmature June 1, 1980, and willbe 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 fullyregis-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, ifany (Article I of the Supplemental Indenture).

The New Bonds willnot be redeemable prior to maturity.

Security The New Bonds willrank 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 dis-~

cussed below with respect to the Four Corners and Navajo Plant locatioris. It is also the opinion of~~'uch counsel that the lien of the Mortgage willextend to all after-acquired property (other than the,'xcepted classes) located in the jurisdictions in which the necessary recordations or filings 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.

20

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 VIIof 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 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 t

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. Ifnot 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 ifdeemed 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, ifany, 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 (ArticleXIXof the Mortgage).

Two modifications of the Mortgage have recently been approved by the requisite vote of bond-holders and by the Company and willbe 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 followany 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