ML18219A548
| ML18219A548 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 10/29/1975 |
| From: | Arizona Public Service Co |
| To: | Office of Nuclear Reactor Regulation |
| References | |
| Download: ML18219A548 (39) | |
Text
I PRELIMINARY PROSPECTUS DATED OCTOBER 29, 1975 i O O PROSPECTUS Ol 500,000 Shares ED ~
Al g 4> CI5 Arizona Public Service Company 8
OP o
g c8 Cumulative Preferred Stock, Series I
/// ($100 Par Value) og /
5 8 Zl The $ I Cumulative Preferred Stock, Series ("Nem Preferred" ) is not redeemable prior to Decem-os ber 1, 1985 through certain refunding operations; otherwise redeemable at the option of the
'er 4>
O ~+
Company at $ per share prior to December 1, 1980; at $ per share thereafter and Q prior to December 1, 1985; at $ share thereafter and prior to December 1, t
8 1990; and at $ per share thereafter; in each case plus dividends accrued 8O gc Cl' to the redemption date. See "Description of New Preferred" herein.
g) CO ol 8 A Sinking Fund requires the Company to redeem 15,000 shares at $ 100 per share on each December 1 beginning in 1981 and is calculated to retire 100% of theissue not later than December 1, 2000.
cH The Company may, but is not required to, redeem an additional 15,000 shares at $ 100 per es share on December 1 in any year beginning in 1981.
eB CIA Application will be made to list the New Preferred on the Netu York Stock Exchange.
B ~~
8 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES I ~ED O
ca AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
/
Q p THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-g CA SENTATION TO THE CONTRARY IS A CRIMINALOFFENSE.
4I I
Underwriting Price to Discounts and Proceeds lo Fll Public(l) Commissions(2/
8 Cotnpany(l J(3) 3 Per Share I 5 CI Total 4) 8 I C4~ct C/J
~
(1) Plus accrued diuidends, if any, from the date of original issue.
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8 (2) The Company has agreed to indemnify the several Underwriters against certain civil liabilities, including
>o cn 8 liabilities under the Securities Act of 1933.
~B (3) Before deduction of expenses payable by the Company estimated at $85,000.
~4>, ta 4l C/1 Cll The shares of New Preferred are offered by the seueral Underwriters when, as and ifissued by the Com-3
@ e/t pany and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is
/l 8 expected that the New Preferred mill be ready for delivery on or about December 2, 1975.
8 n c4 et et gp 5 The First Boston Corporation 4l Q D h 570 I,'w' 8 Blyth Eastman Dillon R Co.
Incorporated Dean Witter 8c Co.
Incorporated The date of this Prospectus is November,'1975.
CONTENTS Page The Company . 2 Application of Proceeds 2 Prospectus Summary.
Industry and Company Problems ......
3 4 Arizona Public Service Regulation and Rates 4 Financing Requirements and Company Construction Program 5 Capitalization . 7 Statement of Income . 8 300,000 Shares Management's Discussion and Analysis of Statement of Income . 10
$ Cumulative Preferred Stock, Business and Property 12 Series I Map ~ .. ........ 20 Description of New Preferred .......... 21 ($ 100 Par Value)
Experts 23 Opinion of Independent Certified Public Accountants 23 Financial Statements . Arhona pubac Saru1ca Company 24 Legal Opinions .
Registration Statement Underwriting of New Preferred .........
No dealer, salesman or other person 36 36 37 0wa carr c 8.
How YoU Uva 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 PROSPECTUS solicitation of an offer to buy, any of the securities offered hereby in any juris-diction to any person to whom it is unlawful to make such offer in such ju-risdiction.
1 IN CONNECTION WITH THIS OF<F<ERING, THE UNDERWRITERS MAY OVER-.
ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE'PEN MARKET. SUC~
STABILIZING,IF< COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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 Room 6101 of the office of the Commission, 1100 L Street, N. W., Washington, D.C., and copies of such material can be obtained from the Commission at prescribed rates. Securities of the Com-pany are listed on the New York and Pacific Stock Exchanges and reports, proxy material and other information concerning the Company may be inspected at the offices of such Exchanges.
THE COMPANY The Company was incorporated in 1920 under the laws of Arizona and is principally engaged in the generation in Arizona and New Mexico, and the sale in Arizona, of electric energy, and in the purchase and sale in Arizona of natural gas. The principal executive offices of the Company are lo-cated at 411 North Central Avenue, Phoenix, Arizona 85004 (telephone 602 271-7900).
APPLICATION OF PROCEEDS The financing program contemplated herein consists of the Company's issuance on or abo December 2, 1975 of 300,000 shares of its Cumulative Preferred Stock ("New Preferred" ), and its issuance on or about December 3, 1975 of $ 75,000,000 in aggregate principal amount of its First Mortgage Bonds, % Series due 2000 ("New Bonds" ) being offered by a separate prospectus.
The net proceeds from the sale of the New Preferred (estimated at 5 ) and the New Bonds (estimated at $ ) will be applied to payment of short-term borrowings outstanding when the proceeds are received. Such borrowings have been and will be made for construction and other pur-poses. See "Financing Requirements and Construction Program".
While the contemplated financing program is herein presented as extending through the issu-ance of the New Bonds, it should be noted that the issuance of the New Preferred will not be conditioned upon the sale of the New Bonds.
PROSPECTUS
SUMMARY
The following material is qualiTied in its entirety by the detailed information and financial statements appearing elsewhere in this Prospectus.
Operations Service Area .~ All or part of 11 of Arizona's 14 counties Population Served 1,586,000 Customers (September 30, 1975) . .. .
~~ Electric 323,689 Gas 329,104 Net Capability to Meet 1975 Peak System Demand (KW) ........................... 2,568,700 Sales (Twelve Months Ended September 30, 1975) .......... Electric (MWH) 8,855,996 Gas (M Therms) 530,624 Estimated Construction E<xpenditures (1975-77) . $ 692,000,000 Financial Information Twelve Months Ended Dceembcr 31, September 30, 1974 1976 Income Statement Data:
Total Operating Revenues $ 273,599,000 $ 346,516,000 Net Income . , $ 36,957,000 $ 54,475,000 Ratio of E<arnings to Fixed Charges and Preferred Stock Dividend Requirements Combined 1.66 1.91 Pro Forma Ratio of Earnings'o'Fixed Charges Pnd Preferred Stock Dividend Requirements Combined ......... 1.57 As Adjusted for Ncw Prcfcrred and Ncw Bonds Outstanding September 30, Pcrecnt of 1975 Amount C~it li* ti (Thousands of Dollars)
Capitalization:
Long-Term Debt (excluding current maturities) .. $ 538,988 $ 613,988 53.0%
Preferred Stock 138,561 168,561 14.5 Common Stock Equity 377,085 376,085 32.5 Total Capitalization . $ 1,054,634 $ 1,158,634 100.0%
Short-Term Borrowings $ 52,600 $ None *
- E<stimated balance on December 3, 1975 after application of proceeds from the New Preferred and the New Bonds.
INDUSTRY AND COMPANY PROBLEMS The utility industry is experiencing a number of problems affecting its business and financial condition. These include difficulty in obtaining an adequate return on invested capital, in obtaining sufficient capital on reasonable terms, in obtaining adequate supplies of oil and gas at reasonable~
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 The Company does not consider a permanent rate increase recently approved by the Arizona Corporation Commission to be adequate, and intends to apply to the courts for relief. If relief is not forthcoming at an early date, earnings coverages on the Company's senior securities will deteriorate.
Future financing of the Company's large capital requirements will depend upon the adequacy of such coverages at the time. See "Regulation and Rates" and "Financing Requirements and Con-struction Program".
Funds derived from a 1974 pollution control financing by the~Company have been temporarily invested until required for construction of the facilities financed. The investments include short-term notes issued by New York City (approximately $ 5 million) and New York State Housing Fi-nance Agency (approximately $ 20 million), with maturities from November 1975 through March 1976. The collection of these notes when due may be in question. If subsequent developments indi-cate the probability of any loss in an amount that can then be reasonably estimated, such amount will be reflected in the Company's statement of income. See Note 7 of Notes to Financial State-ments.
Other The Company continues to experience increased operation and maintenance expenses, short supplies of gas (both for generating fuel and for distribution), high costs of oil fuel, and difficulties in meeting environmental standards and similar regulations. See "Management's Discussion and Analysis of Statement of Income" and "Business and Property".
REGULATION AND RATES State The Arizona Corporation Commission ("ACC") has regulatory authority over the Company in matters relating to determination of retail electric and gas rates as well as the issuance of securities.
The Company recently concluded a rate proceeding in which the ACC made permanent an in-crease of approximately 17% that had been in effect on an interim basis since January 16, 1975; as applied to the 1974 test year this increase would have produced approximately $ 44,701,000 of addi-tional revenues. In'the same proceeding the ACC denied an additional 7% increase the Company had requested.
The Company will petition the ACC for a rehearing on its denial, failing which the Company intends to pursue the statutory procedure for obtaining judicial review of the ACC action by the courts of the State of Arizona. However, even if ultimately successful, that procedure is not ex-pected to afford prompt relief. Accordingly, the Company expects to file in the Federal District Court for Arizona an action seeking to enjoin the ACC from interferring with institution of reason-able rates (subject to refund) by the Company, pending the outcome of its proceedings on the State level. In both the federal and state actions, the Company expects to contend that the ACC's action amounts to confiscation of its property without adequate compensation in violation of its constitu-tional rights.
i The Company's rate schedules contain provisions permitting adjustments for changes in the projected costs of generating fuel, purchased power, gas for resale and the rates of excise taxes. Ad-justments are reflected in billings to the Company's customers commencing 30 days after the adjustment calculations are filed with the ACC. In its recent rate decision, the ACC modified the Company's adjustment clause to exclude certain items from fuel cost computations. In the Com-pany's opinion, such exclusions will not have a material effect on its future operations.
Federal The Company is also subject to regulation by the Federal Power Commission ("FPC") in cer-tain matters that include wholesale rates and transmission charges. For the twelve months ended September 30, 1975, it derived approximately 10% 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. Through September 30, 1975, the Company recorded approximately $ 5,900,000 of revenues subject to refund, including insubstantial amounts currently being contested before the FPC by two wholesale customers. The Company is seeking rehearing or clarification of an order is-sued by the FPC in a separate action involving steps required to implement adjustment clauses for expenses other than fuel. The Company believes that it will not be adversely affected to any ma-terial degree by the ultimate disposition of the foregoing matters.
FINANCING REQUIREMENTS AND CONSTRUCTION PROGRAM Short-term borrowings obtained by the Company for construction purposes aggregated
$ 52,600,000 on September 30, 1975 and are expected to increase to approximately $ 91,000,000 by i
December 2, 1975, immediately before application of the proceeds from the New Preferred and the New Bonds.
Long-term debt obligations maturing through the end of 1977 consist of $ 8,500,000 in 1976 and
$ 2,500,000 in 1977. In addition, there is a possibility that the Company could be required to redeem p to $ 30,000,000 in aggregate par value of outstanding preferred stock in 1977 as discussed in Note 2 of Notes to Financial Statements.
Plant expenditures for the years 1975 through 1977 are currently estimated at $ 692,000,000, in-cluding approximately $ 171,000,000 for 1975 (of which $ 123,000,000 had been spent through September 30), $ 265,000,000 for 1976 and $ 256,000,000 for 1977. The plant expenditures by major facility groups during the period 1975-77 are currently estimated as follows:
Electric generation(1) . $ 505,000,000 Electric transmission 100,000,000 Electric distribution 64,000,000, Gas distribution . 9,000,000 Common facilities . 14,000,000 Total(2) . $ 692,000,000 (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 approxi-mately $ 440,000,000. Expenditures in years beyond 1977 are expected to be higher than those for the years 1975 through 1977, as the large generating facilities referred to in the second table in "Business and Property Generation" near completion.
In addition to further issues of long-term debt (in forms that may include pollution control rev-enue bonds of various Arizona and New Mexico authorities to finance facilities to be constructed and owned by the Company), permanent financing through the end of 1976 is expected to include Common Stock. The Company's ability to issue and successfully market its securities in the future will depend upon its ability to provide earnings adequate to support the rapidly expanding capital structure necessary to finance 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 pre-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 September 30, 1975 would have allowed the issuance of approximately $ 181,000,000 in aggregate principal amount of new first mortgage bonds (including the New Bonds). The issuance of the New Preferred and the New Bonds will preclude an additional preferred stock issue until future earnings provide sufficient coverage.
Ifthe Company should be unable to obtain the necessary financing, it would be forced to curtail its construction program to the extent it is free to do so in view of its contractual commitments (including those to its co-participants in certain projects) and its statutory duties to provide service.
Any substantial curtailment of the construction program would impair the quality and reliability of the Company's service to its customers. Whether, and to what extent, such impairment would in turn have a material adverse financial effect on the Company would depend on the circumstances of the particular case, including the degree and duration of, and the public and regulatory reaction, to, such impairment.
In recent years the Company has had substantial balances outstanding on short-term borrow-ings obtained for construction purposes (see, for example, Note 5 of Notes to Financial Statements).
The issuance of commercial paper and arrangements with bank trust departments were eliminated as sources of such borrowings after the withdrawal in January 1975 by Moody's Investors Service, Inc. of its rating of the Company's commercial paper. The Company also adopted a policy of placing less reliance on short-term borrowings in its financial program. Nevertheless, such borrowings re-main an important source of funds, particularly between permanent financings. In its recent rate proceeding the ACC expressed interest in imposing a limitation on the amount of short-term bor-rowings the Company may have outstanding. The Company does not presently believe that it would be adversely affected to a material degree by implementation of the limitation in a form similar to that believed by the Company to be under consideration by the ACC.
substan-'ially
CAPITALIZATION The capitalization of the Company as of September 30, 1975, and as adjusted to reflect the is-suance and sale of the New Preferred and the New Bonds and the application of the proceeds hereof, is as follows:
September 30, Outstanding Amount Percentage (Thousands of Dollars)
Long-Term Debt (1):
First mortgage bonds $ 488,988 $ 563,988 Notes payable 50,000 50,000 Total long-term debt 538,988 613,988 53.0%
Preferred Stock, 3,535,000 shares authorized, 2,074,199 shares outstanding, 2,374,199 shares to be outstanding (1) 138,561 168,561 14.5 Common Stock Equity:
Common Stock, $ 2.50 par value, 30,000,000 shares authorized, 19,000,000 shares outstanding(l) ............. 47,500 47,500 Premiums and expenses. 201,645 200,645(4)
Retained earnings (1) 127,940 127,940 Total common stock equity 377,085 376,085 32.5 Total capitalization . $ 1,054,634 $ 1,158,634 100.0%
Short-Term Borrowings as of September 30, 1975 for Outstanding; as of December 3, 1975 (estimated) for t
As Adjusted(2) . $ 52,600 $ None (1) See Notes 2 and 3 of Notes to Financial Statements. Long-term debt excludes $ 8,500,000 of current maturities.
(2) See "Application of Proceeds", "Financing Requirements and Construction Program" and Note 5 of Notes to Financial Statements.
(3) The sale of the New Preferred is not conditioned on the sale of the New Bonds. If the New Preferred is sold and the New Bonds are not, the Long-Term Debt would be 49.7%, the Preferred Stock would be 15.6% and the Common Stock Equity would be 34.7% of the Company's capitaliza-tion, and $ 62,000,000 of Short-Term Borrowings would remain outstanding.
(4) After giving effect to estimated underwriting discounts and commissions and expenses of the Company related to the New Preferred.
STATEMENT OF INCOME The statement of income for the five years ended December 31, 1974 has been examined by Haskins &
Sells, independent certified public accountants, whose opinion with respect thereto appears elsewhere in this Prospectus. The statement for the twelve months ended September 30, 1975 has not been examined by pendent certified public accountants but, in the opinion of the Company, includes all adjustments (comprise~
i~
only normal recurring accruals) necessary for a fair presentation of the results of operations, subject to the matter discussed in Note 7 of Notes to Financial Statements. This statement should be considered in conjunc-tion with the other financial statements and related notes and the information referred to under "Industry and Company Problems" appearing elsewhere in this Prospectus. Twclvc Illcnths Ended September 30.
Year Ended December 31, 1975 1970 1971 1972 1973 1974 (Unaudited)
'4 (Thousands of Dollars)
Operating Revenues (Note A):
Electric $ 105,817 $ 117,399 $ 142,237 $ 171,025 $ 213,271 $ 271,G95 39,049 41,899 46,199 53,931 60,328 74,821 Gas Other. 7 7 144,873 159,305 188 430 224 956 273.590 346,510 Total .
Operating Expenses:
Operation and maintenance expenses:
Fuel for electric generation . 13,350 17,107 19,964 29,626 41,626 47,512 Purchased gas . 16,692 19,812 19,963 22,258 28,171 35,829 Purchased power and interchange net .................................. 375 102 8,522 12,398 23,230 35,931 Other production expenses . 2,600 3,002 3,427 4,181 5,181 6,548 Transmission and distribution 7,428 7,927 9,049 9,757 10,187 11,021 Maintenance . 9,026 10,676 1S,173 16,869 20,078 23,129 Customers, sales, administrative and general ......................... 14 798 17 2'76 10 612 21 775 24,533 28 190 Total 64,269 75,902 94,710 116,864 153,006 188,166 18,593 19,710 21,409 23,529 26,398 31,312 Depreciation and amortization (Note 1) .
Taxes other than income. 21,539 24,983 26,901 28,401 38,546 47,373 8,524 6,118 4,452 5,631 (133) 4,988 Income taxes (Notes B and 4)
Total 112,925 126 713 147,472 174,425 217,817 271,839 31,948 32 592 40,964 50 531 55,782 Operating Income .
Other Income (Deductions):
Allowance for funds used during construction (Note C) ............ 568 1,535 3,840 6,227 11,888 180 594 1,169 2,117 2,531 3,314 Income taxes (Note 4)
Other net (106) 86 753 2,646 948 642 2 215 5 013 9,097 17 065 18,820 Total .
32,590 34 807 45,977 50 628 72,047 93 497 Gross Income .
Interest Deductions:
11,632 12,326 17,941 22,390 20,929 27,965 Interest on long-term debt (Note. D)
Interest on short-term borrowings .. 2,653 2,741 2,406 5,915 14,883 10,779 Debt discount, premium and expense 37 35 52 56 78 278 14,322 15 102 20,399 28 361 35,890 39,022 Total .
18,268 19,705 257578 31,267 36,957 54,475 Net Income .
Preferred Stock Dividend Requirements . 3,551 3,551 3,551 3,551 6,258 10 101 Earnings for Common Stock $ 14,717 $ 16,154 $ 22,027 $ 27,716 $ 30,G99 $ 44,374 8,500,000 9,272,603 9,G12,022 10,527,397 13,102,740 16,361,644 Average Common Shares Outstanding .
Per Share of Common Stock:
Earnings (based on average shares outstanding) ......................... $ 1.73 $ 1.74 $ 2.29 $ 2.63 $ 2.34 $ 2.71 Dividends declared and paid $ 1.08 $ 1.08 $ 1.12 $ 1.21 $ 1.36 $ 1.3G Ratio of Earnings to Fixed Charges and Preferred Stock Dividend 2.06 2.02 1.99 1.93 1.66 1.91 Requirements Combined (Note D) .
Numerical note references relate to the Notes to Financial Statements located elsewhere in this Prospectus; see also Note 1 as to significant accounting policies.
Notes to Statement of Income t (Information for the Period Ended September 30, 1975 is Unaudited)
A. Revenues include wholesale amounts subject to refund (see "Regulation and Rates" ) as fol-lows: for 1974 $ 2,500,000; and for the twelve months ended September 30, 1975 $ 4,100,000, (aggregating $ 5,900,000 at September 30, 1975). Revenues collected subject to refund made the fol-contributions to income for the twelve months ended September 30, 1975: 1.2% of operating revenues, 6.8% of net income and 8.4% of earnings per share of common stock. In the opinion of the
'owing Company and its counsel any such wholesale revenues that ultimately would be refunded are not material in relation to total revenues or net income for such periods.
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 of the components of the composite rate attributable to each source of funds is impracticable. How-ever, 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 AFC attributable to debt and preferred stock upon experienced in- 1 l
cremental costs of such securities (excluding pollution control bonds) and without giving effect to l'
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 7% for the five years ended December 31, 1974 and twelve months ended September 30, 1975, respectively. Although AFC is included in Other Income, it does not represent current cash earnings.
D. "Earnings" used to compute this ratio represent the aggregate of net income, income taxes and fixed charges. "Fixed Charges" represent interest (adjusted to eliminate the excess of interest income over interest expense associated with pollution control bond funds on deposit with the trus-tee see Note 7 of Notes to Financial Statements), amortization of debt discount, premium and expense, and the estimated interest portion of annual rentals. "Preferred Stock Dividend Require-ments" represent the requirements for dividends on the Company's preferred stock multiplied by the ratio that pre-tax income bears to net income. The pro forma ratio of "earnings" to "fixed charges and preferred stock dividend requirements combined" for the twelve months ended Sep-tember 30, 1975, as defined, would be 1.57, after giving effect to (1) the issuance of the New Preferred at an assumed dividend rate of 10t/~%, (2) the annual interest requirements of the New Bonds at an assumed rate of 10~/~%, (3) the annual interest requirement on an additional
$ 33,515,000 of pollution control bond funds currently held by the trustee expected to be expended by September 30, 1976, (4) the issuance and retirement of long-term indebtedness during the twelve months ended September 30, 1975, (5) applicable adjustments for interest on indebtedness to be retired from the proceeds of the New Bonds and the Netv Preferred, and (6) the annual interest requirements on the estimated average short-term indebtedness of $ 10,000,000 expected to be out-.
standing during the twelve months ending September 30, 1976. A change of '/s of 1% in the assumed dividend rate would cause a change in the above ratio of .001. A change of '/s of 1% in the assumed interest rate would cause a change in the above ratio of .002. The sale of the New Preferred is not conditioned on the issuance of the New Bonds; if the New Bonds are not issued, the pro forma ratio would be 1.68.
The annual dividend requirement on the New Preferred will be $
MANAGEMENT'S DISCUSSION AND ANALYSIS OF STATEMENT OF INCOME Operating Revenues Increases in electric operating revenues and in total operation and maintenance expenses over the period covered by the Statement of Income reflect the increases in unit sales shown in "Business and Property Operating Statistics". Total operating revenues also reflect the rate increases and effects of the adjustment clauses referred to in "Regulation and Rates", as well as earlier general rate increases in May 1972 and October 1973. Effects of the foregoing factors in recent periods are summarized as follows:
Twelve itfonths Ended Year Ended Dcccmher 31, Septcmher 30, 1973 1974 1979 (Thousands of Dollars)
Electric:
Rate increases . $ 5,000 $ 6,377 $ 26,885 Fuel clause adjustments 10,000 21,615 24,816 Unit sales increases . 13,788 14,254 6,723 Total $ 28,788 $ 42,246 $ 58,424 Gas:
Rate increases.............................. $ 3,000 $ 1,904 $ 4,958 Fuel clause adjustments ... 2,000 6,352 6,943 Unit sales increases (decreases) ... 2 732 (1,859) 2,592 Total $ 7,732 $ 6,397 $ 14,493 The rate of increase in unit sales of electricity has slowed in recent months because of customer resistance to higher prices of energy and effects of adverse economic conditions, which are particu-larly evident in the case of the Company's industrial customers. Unit sales of gas are substantially affected by weather conditions, but generally may be expected to decline in future periods with in-creased service curtailments by the Company (see "Business and Property Energy Availability").
10
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 Property Energy Availability"and "Operating tatistics". A similar cost trend, starting in 1972, is reflected in the expense of purchased power and mterchange (net), although dependence by the Company upon short-term power purchases from other utilities accounts for much of the increase in this item in recent years. Such purchases have increased greatly as the Company has sought alternatives, where available, to the high cost of oper-ating its own generating facilities on fuel oil; however, an important temporary source of purchased power during 1974 is no longer available to the Company. Relative costs of fuel are discussed in "Business and Property Energy Availability", as are other reasons for the Company's dependence on purchased power and for the increase in maintenance expense.
Operating expenses attributable to depreciation and amortization and to taxes other than in-come (primarily consisting of property taxes) increase with the size of the Company's utility plant.
Generally higher rates of depreciation effective January 1, 1975 (see Note 1 of Notes to Financial Statements) are reflected in results for the twelve months ended September 30, 1975. Much
($ 5,368,000) 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 income tax expense are shown in Note 4 of Notes to Financial Statements.
Other Income The allowance for funds used during construction is primarily a function of the amount of con-struction work in progress during a given period, but was also affected by a change in the composite rate used to calculate the allowance as discussed in Note C of Notes to Statement of Income; "In-come taxes" included in "Other Income" primarily reflects tax benefits from interest attributable to construction work in progress that is capitalized for reporting purposes (see Note 4 of Notes to Fi-nancial Statements). "Other net" for 1974 and the twelve months ended September 30, 1975 includes gains ($ 1,039,000 and $ 951,000, respectively) on the sale of non-utility assets.
nterest Deductions The substantial increases in interest on short-term borrowings through 1974,are due primarily to greater amounts outstanding; the decline in the twelve months ended September 30, 1975 is a result of the elimination of certain borrowing sources and a policy change as discussed in "Financing Requirements and Construction Program." See Note 5 of Notes to Financial Statements for amounts borrowed and interest rates thereon in 1974 and the twelve months ended September 30, 1975.
Outstanding Shares Recent issues of preferred stock (giving rise to the increased dividend requirements) and com-mon stock (giving rise to the increased average number of shares outstanding) are summarized in Note 2 of Notes to Financial Statements.
Earnings The,Company's net income and its earnings for common stock represent composites of cash and non-cash items (see the Statement of Changes in Financial Position) and, in part, reflect accounting practices unique to regulated public utilities (see Note C of Notes to Statement of Income and Note 1 of Notes to Financial Statements).
11
BUSINESS AND PROPERTY General The Company's service territory includes all or part of 11 of Arizona's 14 counties. It is esti-mated by the Company that one or both of its services of electricity or natural gas reaches~
approximately 1,586,000 persons, or approximately 70% of the population of Arizona, which is cur-rently estimated at over 2,265,000 (as compared with 1,772,482 in 1970). 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 September 30, 1975 were as follows:
Ot1crating Income 0 crating Revenues Before Income Taxes (Dollars in Millions) (Dollars in Millions)
Electric Gas Electric Gas Amount Percent Amount Pcrccnt Amount Percent Amount Percent 1970 .............................. $ 105.9 73.1% $ 39.0 26.9% $ 35.5 87.7% $ 5.0 12.3%
1971 .............................. 117.4 73.7 41.9 26.3 36.6 94.6 2.1 5.4 1972 .............................. 142.2 75.5 46.2 24.5 40.3 88.8 5.1 11.2 1973 .............................. 171.0 76.0 54.0 24.0 47.3 84.2 8.9 15.8 1974 .............................. 213.3 78.0 60.3 22.0 49.6 89.2 6.0 10.8 Twelve Months Ended September 30, 1975 ...
Generation 271.7 78.4 74.8 21.6 70.6 88.6 9.1 11.4
~
The Company's present generating facilities have an accredited capacity aggregating 2,260,600 kw, comprised as follows:
Coal:
Units 1, 2 and 3 at Four Corners, aggregating 572,000 kw 15% owned Units 4 and 5 at Four Corners, representing 240,000 Unit 1 at the Cholla Plant 116,000 14% owned Units 1 and 2 at the Navajo Plant, representing ... 210,000 1,138,000 kw Gas or Oil:
Seven steam units divided among the West Phoenix, Saguaro and Ocotillo Plants, aggregating 556,700 kw Eleven turbine units, aggregating . 536,000 1,092,700 kw Other 29,900 kw 12
The Company's peak one-hour demand, recorded on August 6, 1975, was 2,068,300 kw, com-pared to a 1974 peak (recorded on June 27) of 2,032,000 kw. Taking into account additional capacity then available to it under power purchase contracts (including short-term arrangements) as veil as its own generating capacity, the Company's capability of meeting system demand on August 6, 1975, computed in accordance with accepted industry practices, amounted to 2,568,700 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 Com-pany's ability to meet future system demand will, among other things, depend on its success in dealing with those problems and with the new-construction delays mentioned below.
The following table reflects the Company's plans and most recent estimates as of September 30, 1975 with respect to additional generating facilities now under construction or in planning stages:
Estimated Cost Type of Facility Nameplate Estimated of Construction and Scheduled Capacity Cost Per (Thousands of Com Iction Date ~E E~il n 1 Dollars)(1)
Coal:
14% owned Unit 3 (1976) at the Navajo Plant, representing 105,000 kw $ 390 $ 41,000 Units 2 (1977) and 3 (1978) at the Cholla Plant, aggregating 500,000 566 283,000 Unit 4 (1980) at the Cholla Plant ...........~...... 350,000 637 223,000 18% owned Units 1 (1981), 2 (1982), 3 (1983) and 4 (1984) of the ICaiparowits Plant (southern Utah), representing ......... 540,000 726 392,000 Gas or Oil:
Three combined cycle units (1976),
aggregating . 225,000 220 54,000 umped Storage:
34% owned Montezuma Pumped Storage Plant (1981) (west of Phoenix),
representing. 170,000 353 60,000 Nuclear:
28.1% owned Units 1 (1982), 2 (1984) and 3 (1986) of the Palo Verde Nuclear Generating Station (west of Phoenix),
representing. 1,070,600 725 776,000 Total . 2,960,600 kw $ 1,829,000(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 $ 198,000,000 expended through September 30, 1975.
13
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 and Montezuma Plants (which are in preliminary planning stages only), and firm contracts exist for only~
portions of the Palo Verde Station. Estimates for the Navajo, Kaiparowits and Montezuma Plants~
emanate with project managers other than the Company.
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. In 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. The Kaiparowits and Montezuma Plants and the Palo Verde Sta-tion are subject 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 September 30, 1975, and the average cost to the Company of those fuels during the periods indicated (in cents per million BTU), were as follows:
Coal Gas Oil All Fuols Percent of Average Porcent of Average Pcrccnt of Average Average Generation Cost Generation Cost Gcnc ration Cost Cost 1970 .................. 83.3% 15.40c 16.7% 34.27< 18.82c 197 1 .................. 76.1 16.15 23.5 38.45 0.4% 46.634 21.59 1972 .................. 66.5 16.66 31.6 38.08 1.9 91.31 1973 .................. 70.0 17.78 18.4 41.25 11.6 98.41 32.09 1974 .................. 72.5 20.47 13.7 53.23 13.8 152.83 44.82 Twelve Months Ended Sep-tember 30, 1975 ........ 79.3 25.77 7.7 74.15 13.0 211.88 56.41 Monthly costs of the respective fuels in the periods covered by the foregoing table ranged from
$ 2.92 to $ 6.30 per ton of coal, $ 0.35 to $ 0.88 per mcf of gas and $ 4.82 to $ 16.32 per barrel of oil.
The Four Corners, Cholla and Navajo Plants have ample reserves of low sulfur coal (the sulfur 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 anticipated 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 (approxilnately 0.5% sulfur) for the anticipated useful life 14
of that plant; however, the degree to which such coal may be recoverable in commercial quantities is t
subject to additional mining engineering evaluations and plant site and transportation considera-tions.
Coal deliveries from the reserves dedicated to the Navajo Plant have been restricted over the last six months, primarily due to operational problems encountered by the contract supplier. In ad-dition, the railroad between the mine and the Plant, which is owned by the Plant participants, has been operating at reduced capacity and may ultimately require substantial modifications to improve its operation. Presently, railroad deliveries are being supplemented by truck deliveries from the Four Corners area.
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 to build and operate, The Four Corners and Navajo'Plants are located on the Navajo Indian Reservation, as are cer-tain 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 attempted 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 2,320,000 barrels of oil in 1974'and currently estimates its 1975 and 1976 requirements at 2,500,000 and 4,000,000 barrels, respectively. Since the federal oil allocation pro-gram has been in effect, the Company has from'time to time experienced reduced deliveries 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. There are continuing uncertainties regarding the fu-ture of the price control and allocation program. However, whether allocations are continued or not, the Company does not anticipate difficulties in obtaining sufficient quantities of both residual oil and middle distillate fuel (required for oil fired operation of most of its'turbine units) to meet re-quirements through 1976, unless a severe disruption in world supplies reoccurs. The Company has 15
residual oil contracts providing for approximately 2,300,000 barrels in 1976. Other purchases of oil, both residual and middle distillate, are made by the Company on short-term bases as and when the Company's storage capacity (scheduled to be increased from the present 1,525,000 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 G'enerating Station have contractual commitments from various parties for the supply of uranium and fuel fabrication services required for approxi-mately 20 years'peration of all three nuclear units, assuming that they exercise all of the options available to them under such commitments. In the case of the uranium supply for the last 18 years, the contracting party is Westinghouse Electric Corporation; the position taken by Westinghouse re-lative to its escalated firm-price contracts with others (to the effect that it is excused from performance thereunder) does not apply to the commitment made on a cost-plus basis by Westing-house in regard to the Palo Verde supply and has not been asserted by Westinghouse in that regard.
Contracts have been entered into with the Nuclear Regulatory Commission for necessary uranium enrichment services required for the lifetime operation of the three Palo Verde 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 El 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-ments not only to increase, but in the future also to affect other customer classes. 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 southwestern United States face similar problems, the Company may encounter difficulty in finding significant amounts of excess power available for purchase over an extended period of time. The Company's ability to avoid or minimize power shortages in its service area over the longer term will depend upon its success in meeting schedules for new coal fired and nuclear generation in the early 1980's. To meet those schedules, the Company will have to deal successfully and in a timely manner with a variety of environmental impact and siting studies and regulations and, in the case of the nuclear units, with licensing and operational requirements of the Nuclear Regulatory Commission.
Licensing proceedings now pending before that Commission have elicited petitions to intervene from parties desiring to raise environmental and safety questions. Based on that and other experi-ences, the Company anticipates opposition to many aspects of its planned facilities that may result in delay.
Environmental Matters The Company's present and future operations are subject to stringent environmental protection measures imposed under federal and state laws and regulations, including those administered by the federal Environmental Protection Agency ("EPA"). The area in which the Company operates ren-ders it particularly sensitive to new EPA regulations designed to prevent "significant deterioration" 16
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 anticipates 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 pro-cess. 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 was transferred to the District of Columbia 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 now in effect with respect to the Company's operations are those that prohibit the emission after July 31, 1977 of sul-fur dioxide in an amount equivalent to 70% of the sulfur content of coal burned at the Four Corners Plant. The State of New Mexico has adopted a regulation prohibiting the emission of sulfur dioxide in amounts equivalent to 85% of the sulfur content of coal burned at Four Corners Units 4 and 5 by July 31, 1977 and 90% of the sulfur content of such coal by 1979. The Company and other partici-pants in the Four Corners project have appealed these regulations to the New Mexico Court of Appeals. EPA is now proposing to adopt the more stringent New Mexico regulation, in substitution for its present prohibition at the 70% level.
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 operational problems is not currently ascertainable, but in the case of the more stringent regulations may be t doubtful. While technology appears to be available for the removal of particulate matter and sulfur dioxide to the extent presently required by federal and state regulations applicable to the Com-pany's operations, the reliability of such equipment over sustained periods of commercial operation and the reasonableness of the ultimate cost of such technology remain highly questionable. The Company from time to time is engaged in litigation and other proceedings involving the validity or interpretation of proposed or existing regulations.
The effects of federal and state water quality standards on the Company's generating plants are difficult to assess. While anticipating adequate incoming supplies of water needed for the operation of its present plants and those under construction, the Company could in the near future be re-quired to meet "zero discharge" standards, requiring significant and costly changes from its present methods of handling discharge water and other materials. Fuel costs of the Company's coal fired plants could also escalate by an indeterminate amount if strip mining legislation simila'r to that pre-viously passed by Congress and vetoed by the President is enacted.
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 17
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 Court of Appeals affirmed the judgment of the District Court and, on September 18,~
1975, denied the plaintiffs'otion for rehearing; they have 90 days after that date in which to ap-peal to the United States Supreme Court.
~
As a result of action instituted by the Company, the Arizona State Board of Tax Appeals re-duced the 1974 assessed valuation of the Company's properties in Arizona so as to result in a reduction of approximately $ 2,200,000 in 1974 Arizona property taxes. The Arizona Department of Revenue appealed that ruling to the Superior Court of Maricopa County, which dismissed the ap-peal on October 27, 1975. The Company does not know whether the Department of Revenue will attempt to proceed further in the matter. While the issues involved are not free from question, the Company and its counsel 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 has enacted an "electrical generation tax", effective July 1, 1975. This excise tax applies to all electricity generated in New Mexico and consumed outside that state. The Company and four other utilities have filed for a declaratory judgment in the state District Court of New Mexico seeking a declaration that the tax is unconstitutional. The State of Arizona has filed suit in the United States Supreme Court against the State of New Mexico, similarly seeking a decla-ration that the tax is unconstitutional. The Company is currently protesting the tax and not making payment, and the Tax Commissioner of New Mexico has informed the Company that no penalty will be assessed for late payment, pending the outcome of the litigation. However, the Company is including the amount of the tax (approximately $ 2,000,000 per year from July 1, 1975) in current expense in its financial statements, but is not collecting that amount from its customers pursuant to the adjustment clauses referred to in "Regulation and Rates" and does not know whether it will ever be permited to do so by the ACC.
Also see "Regulation and Rates" and "Environmental Matters". t 18
Operating Statistics Twelve t
4il on ths Year Ended December 31, Ended September Electric Operations: 1970 1971 1972 1973 '197t 30. 1975 Number of Customers (end of period):
Residential . 213,179 228,664 246,019 264,792 277,794 278,036 Commercial 34,571 36,025 37,646 39,643 40,934 41,200 Industrial 1,798 1,852 1,974 2,057 2,061 2,036 Irrigation 1,127 1,183 1,239 1,309 1,444 1,486
'ther G54 768 802 842 8G1 931 Total Customers . 5 Z~45 H~v,e 5 580843 323,094 223 689 Electric Sales (MWH):
Residential . 1,49G,869 1,G93,119 2,032,040 2,336,173 2,540,177 2,598,840 Commercial 1,884,37G 2,057,989 2,347,289 2,582,025 2,675,151 2,774,G58 Industrial 1,290,646 1,381,371 1,659,667 1,791,392 1,780,488 1,749,817 Irrigation 241,382 255,200 298,370 287,344 379,215 390,774 Other 526,520 682,589 861,581 1.101,778 1,317,270 1,341,907 Total Electric Sales .............................. 55A3.5,793 gVFÃ8 7,198,947 8,098,712 r697257 fHm96 Operating Revenues (000):
Residential 8 35,042 $ 39,244 $ 49,036 $ 59,852 8 74,348 $ 94,996 Commercial 37,903 41,399 49,24G 58,972 71,220 93,4G5 Industrial . 16,263 17,519 21,011 25,502 31,502 40,124 Irrigation 2,758 2,950 3,647 4,066 G,387 9,308 Other 4,873 6,815 8,712 12,004 18,425 21,323 Total 96,839 107,927 131,652 160,396 201,882 259,21G Transmission for Others ................................ 7,583 7,947 8,649 8,G40 9,216 10,301 Miscellaneous Services 1,395 I 525 1 936 1 989 2,173 2,178 Total Electric Operating Revenues .... ~205 17 M117,555 ~142,2 7 ~11 025 ~248 71 ~71 93 Revenue Per IOVH (Cents):
Residential 2.34C 2.32C 2.41C 2.56C 2.93c 3.GGC Commercial 2.01 2.01 2.10 2.28 2.66 3.37 Industrial 1.26 1.27 1.27 1.42 1.77 2.29 t
Costs Per IOVH Generated (Cents):
Fuel Total Electric Operating Expense ................
0.20c 1.14 0.23c 1.16 0.27c 146 0.36c 1.55 0.51c 2.00
'.63c 2.69 Gas Operations:
Number of Customers (end of period):
Residential . 2G0,104 275,837 288,359 301,970 308,175 302,588 Commercial 21,610 22,436 23,163 23,935 24,236 24,026 Industrial 922 965 999 1,048 1,071 1,035 Irrigation 1,390 1,412 1,406 1,452 1,425 1,454 Other 1 1 1 1 1 1 Total Customers 284,027 300,651 313,928 328,406 334,908 329,104 Gas Sales (MTherms):
Residential . 18G,G87 205,575 206,390 229,657 200,447 224,47G Commercial 105,719 117/110 121)307 133,07G 119,937 ~ 129,330 Industrial 99,278 100,936 93,871 99,961 104,542 84,G2G Irrigation 75,514 76,339 76,990 75,920 87,816 84,751 Other 8,009 7,428 8.016 8,454 6,257 7,441 Total Gas Sales . 475,207 507,388 506.574 547,068 518,999 530,624 Operating Revenues (000):
Residential . 8 21,936 8 23,327 $ 26,082 8 30,815 8 32,058 $ 40,299 Commercial 6,877 7,785 8,627 10,304 11,412 14,804 Industrial 4,758 5,132 5,208 6,013 7,818 8,073 Irrigation 4,771 4,895 5,314 5,637 7,877 10,281 Other . 325 333 382 441 441 632 Miscellaneous services 382 427 586 721 722 732 Total Gas Operating Revenues ........... ~3t,045 ~41,8 5 ~46,19 2 53.981 r 60,328 2 74,821 Revenue Per Therm (Cents):
Residential 11.75C 11.35C 12.64C 13.42C 15.99c 17.95c Commercial 6.50 6.65 7.11 7.74 9.51 11.45 Industrial .. 4.79 5.08 5.55 6.02 7.48 9.54
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LEGEND:
Area Served by APS 0 Electric 8 Gas D Combined 0 Major APS Power Plants (J / 0 = Joint Ownership)
Principal APS Transmission Lines ( -Operated for Others)
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Transmission Lines Owned By Others Interconnections With Out-of-State Utilities Selected Cities 20
DESCRIPTION OF'NEW PREFERRED General The information set forth below, is, with certain exceptions, summarized from the Articles of corporation of the Company, as amended, and the Certificate of the Company with respect to the New Preferred pursuant to Section 10-152.01, Arizona Revised Statutes, to which reference is hereby made for further information, the following being expressly qualified by such reference. Ref-erence is also made to Note 2 of the Financial Statements for information concerning the authorized and outstanding issues of cumulative preferred stock of the Company, including seven outstanding series of Serial Preferred Stock. The Board of Directors is authorized, within the limitations and restrictions set forth in the Articles, to issue Serial Preferred Stock from time to time in series and t to fix from time to time before issuance the designations, preferences, privileges and voting powers of each series and the restrictions or qualifications thereof.
Dividends The New Preferred, in preference to the Common Stock, but pari passu with the outstanding Preferred Stock, will be entitled to receive cumulative cash dividends at the annual rate per share per year appearing in the Series designation of the New Preferred as set forth on the cover of this Prospectus, payable quarterly on the first day of March, June, September and December of each year commencing March 1, 1976 when and as declared by the Board of Directors out of funds le-gally available for such payment. Dividends on the New Preferred will begin accruing on the date of original issue. I Redemption The New Preferred will not be refundable, directly or indirectly, prior to December 1, 1985 with the proceeds of borrowed funds, or of the issue of any stock ranking prior to or on a parity with the New Preferred, having a lower cost of money to the Company than the dividend rate on the New Preferred. It will otherwise be subject to redemption, at any time in whole or in part, on at least irty days prior written notice, at the applicable redemption price (as set forth on the cover page of this Prospectus) plus accrued dividends. Except for provisions requiring ratable dividend and liqui-dation payments on shares of Preferred Stock, there is no restriction on the repurchase or redemption of the New Preferred while there is any arrearage in the payment of dividends.
Sinking Fund Provisions The New Preferred will be entitled to a Sinking Fund which requires the Company to r'etire 15,000 shares of the New Preferred on December 1 in each year beginning in 1981. At its option, the Company may redeem through the Sinking Fund on December 1 in each such year not more than 15,000 additional shares. The right to redeem additional shares in any year is not.cumulative and does not reduce the Sinking Fund requirement of any subsequent year; provided, however, that if in any year the required number of shares shall not be redeemed because of a lack of legally available funds, or for any other reason, the amount required to be redeemed shall be carried forward until such obligation is fully discharged. The price at which shares will be called for redemption through the Sinking Fund is $ 100 per share, plus an amount equal to dividends accrued and unpaid to the date of redemption. However, the Sinking Fund may be satisfied in whole or in part by crediting 21
I shares of the New Preferred purchased or otherwise acquired by the Company. Shares of the New Preferred shall be selected for redemption pursuant to the Sinking Fund by lot in such manner as the Company shall determine.
Liquidation The New Preferred, in preference to the Common Stock but pari passu with the outstanding Preferred Stock, will be entitled to receive the then current redemption price in the event of volun-tary dissolution or liquidation of the Company, or the par value thereof in the event of involuntary dissolution or liquidation, plus accrued dividends in each case.
Voting So long as any shares of Serial Preferred Stock are outstanding, the Company may not, without the affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of Se-rial Preferred Stock:
(a) Authorize, by amendment of the Articles of Incorporation, any stock ranking prior in any respect to the Serial Preferred Stock; or (b) Make any change in the terms and provisions of the Serial Preferred Stock that would ad-versely affect the rights and preferences of the holders thereof (provided that if less than all series are affected, only the consent of the affected series is required); or (c) Issue any additional shares of Serial Preferred Stock or shares of any stock pari passu with the Serial Preferred, other than in exchange for, or for the purpose of effecting the redemp-tion or other retirement of, not less than an equal aggregate par value of shares of Serial Preferred Stock, or of any stock pari passu therewith, at the time outstanding, unless the t
net income available for fixed charges of the Company for a period preceding the first day of the month in which additional stock is issued is at least one and one-half times the sum (i) the interest requirements for one year on the long-term debt of the Company to be out-standing immediately after the date of issue of such additional shares and (ii) the dividend requirements for one year on all shares of Serial Preferred Stock and of all other classes of stock ranking on a parity with or prior to the Serial Preferred Stock in respect of dividends or assets, to be outstanding immediately after such proposed issue of additional shares.
Subject to the foregoing provisions, any class of the Company's stock may be increased at any time upon vote of the holders of a majority of the total number of shares issued and outstanding and entitled to vote thereon.
So long as any of the shares of Serial Preferred Stock are outstanding, the Company may not,
, without the affirmative vote of the holders of a majority of the shares of each series, merge or con-solidate with any other corporation or sell substantially all of the Company's property; these restrictions do not apply to a mortgage of all or substantially all of the Company's property or to the purchase by it of the assets or franchises of another corporation.
22
The holders of Serial Preferred Stock will be entitled to one vote for each share held and, vot-t ing as a class, to elect two directors if six or more quarterly dividends accrued thereon shall not have been paid. Votes may be cumulated in electing Directors.
Other The New Preferred will not have any conversion rights or any pre-emptive or other subscription rights. All of the shares of capital stock of the Company now outstanding are, and the New Pre-ferred will be, full paid and nonassessable.
EXPERTS The balance sheet as of December 31, 1974 and the related statements of income, retained earnings and changes in financial position for the five years then ended included in this Prospectus have been examined by Haskins & Sells, independent certified public accountants, as stated in their opinion appearing herein, and have been so included in reliance upon such opinion given upon* the authority of that firm as experts in accounting and auditing.
Statements made as to matters of law and legal conclusions under "Regulation and Rates", "Fi-nancing Requirements and Construction Program", "Business and Property", and "Description of New Preferred Stock" have been prepared under the supervision of, and reviewed by, Snell & Wil-mer, 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.
OPINION OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have examined the balance sheet of Arizona Public Service Company as of December 31, 1974 and the related statements of income, retained earnings and changes in financial position for the five years then ended. Our examination was made in accordance with generally accepted audit-ing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the above-mentioned financial statements present fairly the financial position of the Company at December 31, 1974 and the results of its operations and the changes in its financial position for the five years then ended, in conformity with generally accepted accounting principles applied on a consistent basis.
HASKINS EC SELLS Phoenix, Arizona February 11, 1975 23
ARIZONA PUBLIC SERVICE COMPANY BALANCE SHEET ASSETS Dcccmber 31, 1974 September 30, 1975 (Unaudited)
~
(Thousands of Dollars)
UtilityPlant:
Plant in service at original cost (Note 3):
Electric $ 821,020 $ 894,549 G as ~ ~~~ ~~~~ ao ~~~~~~~~~ 118,999 121,875 Common, used in all services 33,660 33,010 Total ............... 973,679 1,049,434 Less accumulated depreciation and amortization.~.............~...~...~... 235,000 257,435 Plant in service depreciated . 738,679 791,999 Construction work in progress . 214,567 270,668 Plant held for future use . 894 1,136 UtilityPlant Depreciated 954,140 1,063,803 Investments and Other Assets:
Investments (at equity) in and receivables from subsidiaries ...... 10,211 9,463 Tax exempt securities held by trustee (Note 7) .............................. 26,182 Other investments and funds 968 1,881 Other physical property (less accumulated depreciation:
1974, $23,000; September 30, 1975, $ 19,000) .........~...................... 1,296 Notes and contracts receivable Total Investments and Other Assets.
14,470',231 1,995 425 39,182 Current Assets:
Cash (Note 5) 2,345 1,989 Special deposits and working funds (Note 5) . 924 11134 Notes receivable Accounts receivable:
Service customers
.. ~ 1,151 22,593 156 28,732
~
Miscellaneous . 7,718 5,949 Allowance for doubtful accounts (400) (411)
Materials and supplies (at average cost) 27,497 32,471 Prepayments and other .............................................,..........., 7,489 6,723 Total Current Assets . 69,317 76,743 Deferred Debits:
Deferred interest (Note 3) 3,015 3,661 Unamortized debt issue costs 2,036 3,827 5,906 5,814 Total Deferred Debits . 10,957 13,302 Total $ 1,048,884 $ 1,193,030 The accompanying Notes to Financial Statements, including Note 1 as to significant accounting policies, are an integral part of this statement.
24
ARIZONA PUBLIC SERVICE COMPANY BALANCE SHEET LIABILITIES September 30, Dcccmber 31, 1075 1974 ~Udice d)
(Thousands or Dollars)
Capitalization:
Common stock (Note 2) $ 37,500 $ 47,500 Premiums and expenses (Note 2) ...... 155,472 201,645 Retained earnings (Note 2) . 109,037 127,940 Common stock equity 302,009 377,085 Preferred stock (Note 2) 138,561 138,561 Long-term debt (Note 3) . 340,976 538,988 Total Capitalization 781,546, 1,054,634 Current Liabilities:
Notes payable to banks (Note 5) . 109,552 52,600 Commercial paper (Note 5) . 52,550 Current maturities of long-term debt (Note 3) .... , 38,250 8,500 Accounts payable 28,938 23 372 Advances from subsidiary 1,244 18 Accrued taxes 16,627 32,939 Accrued interest. 8,382 8,955 Dividends accrued ... 842 842 Payable to employees'ension plan (Note 6) . 937 810 Customers'eposits . 1,852 2,040 Other 706 837 Total Current Liabilities .. 259,880 130,913 Other Non-Current Liabilities 566 633 Deferred Credits and Reserves:
Customers'dvances for construction ........ 4,517 4,542 Other deferred credits and reserves 982 1,073 Deferred income taxes accelerated amortization 1,393 1,235 Total Deferred Credits and Reserves. 6,892 6,850 Commitments and Contingencies (Note 7)
Total . $ 1,048,884 $ 1,193,030 The accompanying Notes to Financial Statements, including Note 1 as to significant accounting policies, are an integral part of this statement.
25
ARIZONA PUBLIC SERVICE COMPANY STATEMENT OF RETAINED EARNINGS Twelve Months
~~
Ended Year Ended December 31, September 30, 1975 1970 1971 1972 1973 1974 ~Udit d)
(Thousands of Dollars)
Retained earnings at beginning of period. $ 57,919 $ 63,456 $ 69,620 $ 81,007 $ 96,018 $ 105,496 Add Net income .......~........~............. 18,268 19,705 25,578 31,267 36,957 54,475 Total 76,187 83,161 95,198 112,274 132,975 159,971 Deduct Dividends:
Preferred stock (see below) ...... 3,551 3,551 3,551 3,551 6,258 10,101 Common stock 9,180 9,990 10,640 12,705 17,680 21,930 Total'2,731 13,541 14,191 16,256 23,938 32,031 Retained earnings at end of period (Note 2) $ 63,456 $ 69,620 $ 81,007 $ 96,018 $ 109,037 $ 127,940 Dividends on preferred stock:
$ 1.10 preferred ........................... $ 172 $ 172 $ 172 $ 172 $ 172 $ 172
$ 2.50 preferred ...... ~,................... 258 258 258 258 258 258
$ 2.36 preferred ...............,........... 94 94 94 94 94 94
$ 4.35 preferred ......................, 326 326 326 326 326 326 Serial preferred:
$ 2.40 series A ....... . ..~............
~ ~
$ 2.625 series C ........~..............
576 630 576 630 576 630 576 630 576 630 630
$ 2.275 series D .......... . . ~.......
~ ~ ~ 455 455 455 455 455 455
$ 3.25 series E ......................... 1,040 1,040 1,040 1,040 1,040 1,040
$ 8.50 series F .................,.... 923 1,785
$ 8.50 series G ......................... 395 765
$ 10 series H. 1,389 4,000 Total. $ 3,551 $ 3,551 $ 3,551 $ 3,551 $ 6,258 $ 10,101 The accompanying Notes to Financial Statements, including Note 1 as to significant accounting policies, are an integral part of this statement.
26
ARIZONA PUBLIC SERVICE COMPANY STATEMENT OF CHANGES IN FINANCIALPOSITION Twelve ilfonths Ended September 30, Year Ended December 31, 197f2 1970 1971 1972 1973 2U di4 d1 (Thousands of Dollars)
Source of Funds:
Funds from operations:
Net income . $ 18,268 S 19,705 $ 25,578 $ 31,267 $ 36,957 $ 54,475 Principal non.cash charges (credits) to income:
Depreciation and amortization ......... 18,593 19,710 21,409 23,529 26,398 31,312 Equity in undistributed (earnings) loss of unconsolidated subsidiaries 180 366 (95) (585) 671 Deferred income taxes ............,......,.. (210) (210) 405 490 (1,525) (539)
Allowance for funds used during construction ....................................... (568) (1,535) (3,840) (6,227) (11,888) (14,558)
Total funds from operations ..........,.. 36,083 37,850 43,918 48,964 49,357 71,361 Funds from external sources:
Common stock. 21,525 22,800 34,400 30,278 72,718 Preferred stock 69,755
= Long-term debt ........................................ 30,087 1,500 123,975 9,061 181,236 Notes payable to banks net ................. 31,545 45,925 63,627 Commercial paper-net .......................... 17 350 28 000 2550 Total funds from external sources .... 30,087 71,920 146,775 100,325 175,271 253,954 Other items net. 1>495 1,666 3,071 6,441 4,987 Decrease in working capital'..................... 4,374 1,113 5,006 Total source of funds .......................... $ 72 030 $ 111 436 $ 194,877 $ 163,730 $ 224 628 $ 335 308 Application of Funds:
Plant additions and replacements, excluding allowance for funds used during construction .................................... $ 46,237 $ 91,704 $ 117,016 $ 142,751 $ 182,969 $ 1'l8,533 1 Repayment of long-term debt .....................
Repayment of short-term borrowings net Dividends on preferred and common stock Investments in and receivables from 11,150 12,731 13,541 62,545 14,191 16,256 7,750 23,938 38,250 85,130 32,031 subsidiaries and other assets .................... 1,921 3,296 1,125 71 1,646 1,364 Other items net. 933 Increase in working capital'...................... 2,895 4 652 7 392 Total application of funds ................. $ 72,039 $ 111,436 $ 194,877 5163,730 $ 224,628 $ 335,308 Increase (Decrease) in KVorking Capital':
Cash $ (605) $ 1,205 S (699) $ 993 $ (408) $ (1,258)
Notes receivable . 5 (20) 43 91 847 (862)
Accounts receivable ...................................... 2,046 945 3,177 4,789 7,226'2,463 4,367 Materials and supplies ................................. 941 'l95 1,653 6,459 13 708 Accounts payable (2,666) (1,742) (3,865) (6,063) (9,427) (12,125)
Accrued expenses. (3,639) 609 (1,112) (1,451) (6,355) (11,825)
Other-net...,, (456) 1 103 (310) (166) 3 046 2,989 Net increase (decrease) ...................... S (4,374) 8 2895 $ 41 1137 $ 4,652 5 7,302 8 (5,006)
- 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.
27
ARIZONA PUBLIC SERVICE COMPANY 1.
- a. System NOTES TO FINANCIALSTATEMENTS (Information for the Period Ended September 30, 1976 is Unaudited)
Summary of Significant Accounting Policies.
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.
t
- 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 September 30, 1975 was to increase depreciation expense and reduce net income by $ 2,105,000 ($ 0.13 per common share).
- c. Allowance for funds used during construction In accordance with the uniform system of accounts, an allowance for funds used during construction is included in construction work in prog-ress and credited to income using a composite rate (increased from 7% to 8% effective January 1, 1974), applied to construction work in progress, which assumes that funds used for construction were provided by borrowings, preferred stock and common equity. This accounting practice results in the inclusion in utility plant in service of amounts considered by regulatory authorities as an ap-propriate cost of funds for the purpose of establishing rates for charges to customers.
- d. Subsidiaries The Company's investment in its subsidiaries is stated at equity, starting in 1971. The subsidiaries are not consolidated inasmuch as their assets, revenues, net income and re-tained earnings are not significant in relation to those of the Company.
- e. Bond premium or discount and issue expenses Bond issuance premium or discount and related expenses are amortized over the lives of the issues to which they pertain.
- f. Income taxes The Company uses accelerated depreciation methods for income tax pur-poses. The reductions in income taxes resulting from this practice and from allowable investment tax credits are reflected currently in income, together with reductions arising from timing differ-ences respecting certain other items of income and expense reported differently for income tax and financial purposes. Such accounting methods are in accordance with orders or practices of the Ari-zona Corporation Commission.
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 28
ARIZONA PUBLIC SERVICE COMPANY t NOTES TO FINANCIALSTATEMENTS (continued)
(Information for thc Period Ended September 30, 1976 is Unaudited) 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. E'mployees'ension plan The Company's policy is to accrue and fund the current and prior service costs of its pension plan. Prior service costs are amortized over a fifteen-year period.
- h. Revenues and recognition of certain costs Operating revenues are recorded on a monthly cycle billing basis. Under its approved rate schedules, the Company may pass on to its customers increases in specified taxes, purchased power and fuel costs, and resale gas costs. Effective with the
. fourth quarter of the year ended December 31, 1974, such increases in purchased power and electric fuel costs chargeable to retail customers in the following period are deferred to be matched against t
revenue of such period. The Company defers the estimated cost of gas purchased from its supplier but not billed to its customers, a procedure adopted in 1972 and revised in 1973. None of the forego-ing changes materially affected income in these periods.
- i. Research and development costs The Company expenses research and development costs on a current basis, except that costs which may result in utility plant are deferred for subsequent inclusion in plant or to be written off if the applicable project is abandoned.
29
ARIZONA PUBLIC SERVICE COMPANY 2.
below:
Capital Stock.
NOTES TO FINANCIALSTATEMENTS (continued)
(Information for the Period Ended September 30, 1975 is Unaudited)
Details of capital stock outstanding at December 31, 1974 and September 30, 1975 are shown Number of Shares Par Value Call Price t
Pcr Sharo Outstanding Outstanding (Before Adding Dec. 31, Sept. 30, Per Dcc. 31, Sept. 30, Accumulated Authorized 1974 1975 Share 1974 1975 Dividends)
(Thousands of Dollars)
Common Stock ... 30,000,0M(a) 15.000 000 19,M0,000 $ 2.50 $ 37,500 $ 47,500 Cumulative Preferred Stock:
$ 1.10 preferred ......... 160,000 155,945 155,945 $ 25.00 $ 3,898 $ 3,898 $ 27.50
$ 2.50 preferred ......... 105,000 103,254 103,254 50.00 5,163 5,163 51.00
$ 2.36 preferred ......... 120,000 40,000 40,000 50.00 2,000 2,000 51.00
$ 4.35 preferred ......., 150,000 75,000 75,000 100.00 7,500 7,500 102.00 Serial preferred ........ 1,000,000
$ 2.40 series A ....... 240,000 240,000 50.00 12,000 12,000 50.50
$ 2.625 series C ..... 240,000 240,000 50.00 12,000 12,000 51.00
$ 2.275 series D .... 200,000 200,000 50.00 10,000 10,000 (b)
$ 3.25 series E ....... 320,000 320,000 50.00 16,000 16,000 (c)
Serial preferred ........ 2,000,000(a)
$ 8.50 series F ....... 210,000 210,000 100.00 21,000 21,000 (d)
$ 8.50 series G ...... 90,000 90,000 100.00 9,000 9,000 (d)
$ 10 series H ......... 4~00 000 400,000 100.00 ~40 000 40,000 (e)
Total ................ 3,535,000 2,074,199 2,074,199 $ 138,561 $ 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 an 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, including a condition that would occur if dividend payments on preferred stock (including series F and G) of the Company exceed its "earnings and profits" for federal income tax purposes; that condition could occur so as to require redemption as early as 1977 if the Company does not theretofore obtain adequate rate relief (see "Regulation and Rates" ). Sinking fund provisions applicable to the two series require the re-tirement of a total of 12,000 shares at par semiannually commencing June 1, 1979.
(e) From $ 109.65 through September 1, 1976 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.
30
ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
(Information for the Period Ended September 30, 1975 is Unaudited)
In the opinion of counsel, amounts paid in any redemption of capital stock funded other than ith 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 ($ 30,000,000) is unavailable for dividend payments.
Capital stock sales and changes in premiums and expenses during the five years ended December 31, 1974 and nine months ended September 30, 1975 were as follows (dollars in thou-sands):
Cumulatlvo Common Stock Preferred Stock Premiums and Number Par Value Number Par Valuo (Expenses)
~D* e 1 ll of Shares Amount of Shares Amount -Not Balance, December 31, 1969 and 1970 .............................. 8,500,000 $ 21,250 1,374,199 $ 68,561 $ 63,475 Common Stock 1,000,000 2,500 18,932 Balance, December 31, 1971 9,500,000 23,750 1,374,199 68,561 82,407 Common Stock 1 MO MO 2,500 20 222 Balance, December 31, 1972 10,500,MO 26,250 '>374,199 68,561 102,620 Common Stock 2.000,000 5,000 29,352 Balance, December 31, 1973 12,500,000 31,250 1,374,199 68,561 131,981 Common Stock 2,500,000 6,250 23,849 Cumulative Preferred Stock, $ 8.50 series F ................. 210,000 21,000 (111)
Cumulative Preferred Stock, $ 8.50 series G ................. 90,000 9,000 (47)
Cumulative Preferred Stock, $ 10 series H .................... 400,000 40,000 (200) t Balance, December 31, 1974 15,000,000 37,500 2,074,199 138,561 155,472 Common Stock. 4,000,000 10,000 46,173 Balance, September 30, 1975 . 19,000.000 $ 47,500 2,074,199 3136 561 $ 201,645
. Long-Term Debt.
Details of long-term debt outstanding at December 31, 1974 and September 30, 1975 were as follows:
December 31, Scptcmbcr 30, 1974 1975 (Thousands of Dollars)
First Mortgage Bonds:
8.50% series due April 1, 1975 $ 30,000 $
2%% series due July 1, 1976 8,500 8,500 3'/s% series due December 1, 1977 .............. 2,500 2,500 3% series due April 1, 1979 4,000 4,000 2s/4% series due February 1, 1980 5,000 5,000 9.80% series due June 1, 1980 75,000 27/s% series due December 1, 1980 . 6,000 6,000 9.50% series due February 15, 1982 100,000 3t/s% series due February 1, 1983 14,500 14,500 3t/s% series due November 1, 1983. 5,723 5,723 3'/4 % series due March 1, 1984 . 15,000 15,000 31
ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
(Information for the Period Ended September SO, 1975 is Unaudited)
December 31, September 30, I 1974 1975 (Thousands of Dollars) 5'/s% series due October 1, 1987 15,000 15,000 4.70% series due March 1, 1989 . 20,000 20,000 4.80% series due November 1, 1991 35,000 35,000 4.45% series due June 1, 1992 25,000 25,000 4.40% series due December 1, 1992 25,000 25,000 4.50% series due September 1, 1993. 15,000 '5,000 6.25% series due September 1, 1997 25,000 25,000 7.45% series due March 15, 2002 60,000 60,000 6.20% series due April 1, 2004 50,000 50,000 Less certain s ecurities held by trustee (40,314) (8,321)(a)
Unamortized dis count (458)
Unamortized pr emium . 67 44 Total First Mortgage Bonds 320,976 497,488 Less current maturities:
8.50% series due April 1, 1975. (30,000) 2s/~% series due July 1, 1976 (8,500)
Remainder 290,976 488,988 Unsecured Notes Payable:
6.375% to 6.50% due May and July 1975. 8,250 Due September 1, 1979(b) . 50,000 50,000 Total Unsecured Notes Payable 58,250 50,000 Less current maturities:
6.375% to 6.50% due 1975 (8,250)
Remainder 50,000 50,000 Total Long-Term Debt $ 340,976 $ 538,988 (a) Reflects a reclassification of certain securities acquired in 1975 see Note 7.
(b) $ 30,000,000 bears interest at 114% of prime rate plus l/4 of 1% to September 1, 1977, then 114% of prime rate plus ~/>> of 1% to September 1, 1979. $ 20,000,000 bears interest at 119% of prime rate to September 1, 1976, then at various percentages of prime from 120% to 122%. The actual interest rate to final maturity of these loans is not to exceed 7'/2% per annum; payments in excess of this amount are carried as deferred interest.
Aggregate annual payments which will be due on long-term debt through '1980 are as follows:
1976, $ 8,500,000; 1977, $ 2,500,000; 1979, $ 54,000,000; 1980, $ 86,000,000. 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 on presently outstanding bonds, as provided in the bond indentures, have in the past been satisfied by certification of property additions of ls/3 times the amount stated and the Company expects to meet future requirements on such bonds in that manner.
32
ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
(Information for thc Period Ended September 30, 1975 is Unaudited)
Substantially all utility plant is subject to the lien of the First Mortgage Bonds. The indenture respecting the First Mortgage Bonds includes provisions which would restrict the payment of divi-dends on Common Stock under certain conditions which did not exist at September 30, 1975.
- 4. Income Tax Expense.
Details of factors related to income taxes during the five years ended December 31, 1974 and twelve months ended September 30, 1975 were as follows (see Note 1):
Twclvo Months Ended Year Ended Dcccmbcr 31, Scptcmbor 30, 1970 1971 1972 1973 1974 1975 (Thousands of Dollars)
Computed "expected" income tax expense Federal and State ............................. $ 13,631 $ 12,642 $ 14,463 $ 17,428 $ 16,529 $ 28,199 Reductions in taxes resulting from:
Timing differences:
Tax over book depreciation ............................ (3,372) (3,642) (4,744) (6,352) (6,875) (6,392)
Allowance for funds used during construction capitalized ................................ (291) (769) (1,924) (3,120) (5,730) (7,296)
Other principally taxes, pensions and other items capitalized (617) (1,490) (2,582) (2,246) (3,012) (4,507)
Other items (62) 12 133 (113) (1,004) (1,035)
Investment credits (735) (1,019) (2.468) (2,573) (1,047) (6,756)
Taxes currently payable (refundable) .....
I 8,554 5,734 2,878 3,024 (1,139) 2,213 Deferred taxes included in expenses:
Deferred . 615 700 (1,315) (329)
Restored (210) (210) (210) (210) (210) (210)
Total deferred (210) (210) 405 490 (1,525) (539)
Total Federal and State income taxes ......................... $ 8,344 $ 5,524 $ 3,283 S 3,514 $ (2,664) $ 1,674 Federrl and State income taxes included in:
Operating expenses (credit) ............................ S 8,524 $ 6,118 S 4,452 $ 5,631 S (133) $ 4,988 Other income (credit) (180) (594) (1,169) (2,117) (2,531) (3,314)
Total $ 8,344 $ 5,524 $ 3,283 $ 3,514 $ (2,664) S 1,674 Taxes currently payable (refundable):
Federal . $ 7,777 S 5,133 $ 2,280 S 2,314 $ (1,190) $ 523 State . 777 601 598 710 51 1,690 Total $ 8,554 8 5,734 $ 2,878 S 3,024 $ (1,139) S 2,213 Deferred taxes:
Federal . S (201) S (201) $ 364 $ 443 $ (1,409) $ (503)
State . (9) (9) 41 47 (116) (36)
Total S (210) $ (210) $ 405 $ 490 $ (1,525) S (539)
The Company anticipates that investment tax credit, applied in accordance with the 1975 Tax Re-duction Act, will eliminate substantially all 1975 Federal income tax liability.
33
ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
(Information for the Period Ended September 30, 1975 is Unaudited)
As of September 30,1975 the Company had approximately $ 2,000,000 of unused investment ta credit which can be carried forward through 1981.
- 5. 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):
December 31, Scptembcr 30, 1974 1975 Bank lines of credit (unused: December 31, $ 20,000,000; September 30, $ 54,000,000)..................... $ 97,000,000 $ 106,600,000 Bank lines in support of commercial paper (unused:
December 31, $ 30,000,000) ................................ $ 30,000,000 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 September 30, 1975 were: notes payable to banks, 10.82% and 7.49%, respectively; commercial paper, 10.60% at December 31 (no commercial paper being outstanding at September 30). Average aggregate short-term borrowings outstanding during 1974 and the twelve months ended Sep-tember 30, 1975 were $ 140,569,000 and $ 112,464,000, respectively; weighted daily average interest rates on such amounts were 10.35% and 9.35%, respectively. Maximum amounts of short-term bor-rowings outstanding at any month end aggregated $ 165,497,000 in 1974 and $ 179,027,000 in the twelve months ended September 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 in 1974, 4% of the line as to $ 10,000,000 and 15% plus a commitment fee of 0.5% of the line as to $ 20,000,000. The bank trust department loans required no compensating bal-ances. 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 September 30, 1975, $ 5,874,000. 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 conform to the 1974 Pension Reform Act will not have a significant effect on the Company's pension expense or funding. The liability for unfunded past service costs at June 30, 1975 was $ 2,421,000 which is expected to be completely funded by 1981.
34
ARIZONA PUBLIC SERVICE COMPANY t NOTES TO FINANCIALSTATEMENTS (continued)
(Information for the Period Ended September 30, 1975 is Unaudited)
Commitments and Contingencies.
"Tax exempt securities held by trustee" of $ 26,182,000 represent certain short-term notes, and related accrued interest of $ 988,000, purchased from those proceeds of a 1974 issue of pollution con-trol revenue bonds (6.20% Series Due April 1, 2004) that were 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. These notes, which were acquired in March 1975, are
$ 20,176,000 New York State Housing Finance Agency Notes ($ 4,568,000 maturing November 14, 1975 and $ 15,608,000 maturing February 17, 1976) and $ 5,018,000 New York City Bond Anticipa-tion Notes maturing March 12, 1976. The collection of these notes when due is currently in question. If the notes are not paid by the time the funds are needed by the Company it would have to resort to other sources for funding the pollution control facilities, while remaining obligated for the payment, when due, of.the full principal and interest requirements of the revenue bonds. Pend-ing determination of their collectibility, these notes have been reclassified in the September 30, 1975 balance sheet as investments and are not shown as a reduction of long-term debt. Other investments held by the trustee, amounting to $ 40,314,000 at December 31, 1974 and $ 8,321,000 at Septem-ber 30, 1975, the collectibility of which was not in question, have been reported as a reduction of long-term debt.
The Company is advised by its independent certified public accountants that if such accoun-tants were otherwise prepared to render an opinion as to whether the unaudited financial statements for the twelve months ended September 30, 1975 are fairly presented in accordance with generally accepted accounting principles (which such accountants are not prepared to do, inasmuch as they have not examined such financial statements), their opinion would be subject to the effects of the determination of the collectibility of the aforementioned notes upon the Company. If subse-quent developments indicate the probability of any loss in an amount that can then be reasonably imated, such amount will be reflected in the Company's statement of income.
Commitments under contracts for plant additions were approximately $ 213,000,000 at September 30, 1975, Annual rentals under noncancellable leases were not material.
The Company is involved in certain litigation (see "Business and Property Litigation").
35
ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIALSTATEMENTS (continued)
(Information for tho Period Ended September 30, 1075 is Unaudited)
- 8. Supplementary Income Statement Information.
General taxes and rents during the five years ended December 31, 1974 and twelve'onths ended September 30, 1975 were as follows:
Twelve illonths Ended Year Ended December 31, Sept. 30, 1070 1071 1972 1973 1971 1073 (Thousands of Dollars)
Taxes, other than income taxes:
Ad valorem ..................... $ 16,606 $ 19,488 $ 20,509 $ 20,461 $ 27,693 $ 31,886 Sales ................................ 3,873 4,290 5,533 6,673 9,240 13,168 Rents.................... 2,022 1,938 1,862 1,986 1,702 1,776 LEGAL OPINIONS The validity of the New Preferred will be passed upon for the Company by Snell & Wilmer, and for the Underwriters by Sullivan & Cromwell, 48 Wall Street, New York, New York 10005. In giving their opinions, Sullivan & Cromwell may rely as to all matters of Arizona law upon the opin-ion 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 opin-ion of Keleher & McLeod.
Mr. Richard Snell, a director of the Company, is a member of the firm of Snell & Wilmer.
September 25, 1975, attorneys in that firm were the beneficial owners, directly or indirectly, of ap-proximately 14,300 shares of the Company's common stock, 465 shares of its preferred 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 and the New Preferred.
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UNDERWRITING OF NEW PREFERRED t The Underwriters named below have severally agreed to purchase from the Company the fol-lowing respective numbers of shares of New Preferred.
Underwriter The First Boston Corporation .............
Blyth Eastman Dillon & Co.
Incorporated Num her of Shares underwriter Number or Shares Dean Witter & Co. Incorporated ........
Total ... 300,000 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 shares of New Preferred if any are purchased.
The Company has been advised by The First Boston Corporation, Blyth Eastman Dillon & Co.
Incorporated and Dean Witter & Co. Incorporated, as Representatives of the Underwriters, that the Underwriters propose to offer the New Preferred to the public initially at the public offering price set forth on the cover page of this Prospectus and, through the Representatives, to certain dealers at such price less a concessi'on of c per share; that the Underwriters and such dealers may allow a discount of c per share on sales to other dealers; and that the public offering price and conces-sions and discounts to dealers may be changed by the Representatives.
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