ML20062K504

1992 Annual Rept Arizona Public Svc Co

ML20062K504
Person / Time
Site:	Palo Verde
Issue date:	12/31/1992
From:	Demichele O, Snell R ARIZONA PUBLIC SERVICE CO. (FORMERLY ARIZONA NUCLEAR
To:
Shared Package
ML17310A857	List: ML17310A856 ML20062K504 ML20062K507 ML20062K510 ML20062K514 ML20062K519 ML20062K523 ML20062K530 ML20062K531
References
NUDOCS 9312220141
Download: ML20062K504 (36)

Text

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1992 ANNUAL REPORT ARIZONA PUBLIC l SERVICE COMPANY l

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CONTENTS -j Page Glossary . .. . ,,, ... .. ... ...... ... 1 General Information. . . . . .. .... . ............ . , ... 2 i Letter to Preferred Shareholders . . .. .. . .. .. 3 ,

l Selected Financial Data and Operating Statistics . .. .. ... .. . 5-Management's Discussion and Analysis of Financial Condition and Results of i' Operations . . .. . . .. . . .. 7 Report of Management. . . .. .. . . . . .. 11

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Financial Statements and Related Notes . . .. . . .. . . .. 13 1

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i Independent Auditors' Report. .. . .. .. . .. . ... 32.

1 APS Directors. . . . . .. . . . .. .. . . .. . 33 )

Shareholder Information . .. ,. . .. ... ..... . 34-1

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GLOSSARY ACC - Arizona Corporation Commission AFUDC - Allowance for funds used during construction ANPP - Arizona Nuclear Power Project, also known as Palo Verde 'i ANPP Participation Agreement - Arizona Nuclear Power Project Participation Agree-  !

ment, dated as of August 23,1973, as amended APS - Arizona Public Service Company i Cholla -~ Cholla Power Plant . j Cholla 4 - Unit 4 of the Cholla Power Plant ,

Amendments - Clean Air Act Amendments of 1990 .q Company - Arizona Public Service Company DOE - United States Department of Energy l EPA - Environmental Protection Agency 1

, EPEC - El Paso Electric Company )

EPEC Leases - leases pursuant to which EPEC has leased its leased interests in Palo Verde I Units 2 and 3 FASB - Financial Accounting Standards Board  ;

FERC - Federal Energy Regulatory Commission -

Four Corners - Four Corners Power Plant l ITC -- Investment Tax' Credit PacifiCorp - An Oregon-based utility company  ;

i Palo Verde - Palo Verde Nuclear Generating Station  :

Pinnacle West - Pinnacle West Capital Corporation, an Arizona corporation, the Company's parent l

SFAS No.106 - Statement of Financial Accounting Standards No.106, Employers' Account-'

. ing for Postretirement Benefits Other Than Pensions

' SFAS No.109 - Statement of Financial Accounting Standards No.109, Accounting for -

Income Taxes SFAS No.112 - Statement of Financial Accounting Standards No.112, Employers' Account- l ing for Postemployment Benefits

• SRP - Salt River Project Agricultural Improvement and Power District  :

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t ABOUT THE COMPANY 'f f Arizona Public Service Company is engaged principally in the generation and sale of electricity. .

APS, a successor to a series of small utility operations originating in 1886, was incorporated in 1920 under the laws of Arizona and has operated under its present name since 1952. The Company's electric service reaches approximately 1,736,000 people, or about 45 percent of the state's population, l in an area that includes all or part of 11 of Arizona's 15 counties. j All of the outstanding shares of common stock of the Company are owned by Pinnacle West. l Pursuant to a Pledge Agreement, dated as ofJanuary 31,1990 between Pinnacle West and Citibank,

N.A., as Collateral Agent (the " Pledge Agreement"), and as part of a restructuring of substantially all ofits outstanding indebtedness, Pinnacle West granted certain ofits lenders a security interest -

in all of the Company's outstanding common stock. Until the Collateral Agent and Pinnacle West receive notice of the occurrence and continuation of an Event of Default (as defined in the Pledge ,

Agreement), Pinnacle West is entitled to exercise or refrain from exercising any and all voting and ,

other consensual rights pertaining to the common stock. As to matters other than the election of l directors, Pinnacle West agreed not to exercise or refrain from exercising any such rights if, in the .l Collateral Agent'sjudgment, such action would have a material adverse effect on the value of the a common stock. After notice of an Event of Default, the Collateral Agent would have the right to vote the common stock.

MNUAL REPORT This report is published to provide general information concerning the Company'and not in connection with any sale, offer for sale, or solicitation of an offer to buy, any securities.

- ANNUAL MEETING OF SHAREHOLDERS All shareholders are invited to attend the Company's seventy-third annual meeting at 10:00 a.m. on Tuesday, April 20,1993, at the offices of the Company,400 North Fifth Street, Phoenix, Arizona.

APS OFFICERS l Jan H. Bennett, Vice President, Customer Servica William F. Conway, Executive Vice President, Nuclear  ;

O. Mark De Michele, President and Chief Executive Officer l Walter F. Ekstrom, Executive Vice President, Engineering, Operations and Construction Armando B. Flores, Vice President, Human Resources William J. Hemelt, Treasurer and Assistant Secretary ,

James M. Levine, Vice President, Nuclear Production Nancy C. Loftin, Secretary and Corporate Counsel Richard W. MacLean, Vice President, Environmental, Health and Safety Nancy E. Newquist, Assistant Treasurer .;

Jaron B. Norberg, Executive Vice President and Chief Financial Officer l William J. Post, Vice President, Finance and Rates j Shirley A. Richard, Executive Vice President, Customer Service, Marketing and Corporate l Relations l E, C. Simpson, Vice President, Nuclear Engineering and Projects  :

Richard Snell, Chairman of the Board  !

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. To Our APS Preferred Shareholders: _7

.in our message to you last year, we emphasized our focus on controlling costs to better meet I the increasing competition of the marketplace. That effort became even more important this year f with the passage of the National Energy Policy Act of 1992. The most significant legislation the J utility industry has seen, the bill injects a greater degree of competition into all phases of the utility market and re-emphasizes the need for strategic planning, cost management, and operational excellence.

1 We're pleased to report that APS cost management efforts last year were extremely successful l in virtually all areas of the Company. In 1992, APS costs were $11.2 million less than the previous  !

year's expenditures. Almost two-thirds of all work units were under budget for the year, demon-  !

strating the broad range of savings employees achieved in all areas, as well as the Company's success in transforming its culture to emphasize cost management, productivity and efficiency. '

Fuel expenditures for electric generation in 1992 reflect cost savings from newly negotiated ,

contracts for incremental purchases of coal. The lower average fuel cost reduced the expense of ,

producing power for our customers and enabled the Company to sell available power more com- j petitively. Interchange sales totaled $60 million, up 11% over 1991.

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The Company refmanced more than $1 billion of debt, which will generate $12 million ofinitial l annual interest savings. These refinancings were possible due to lower interest rates as well as  !

rating agency upgradings resulting from the Company's 1991 rate case settlement with the Arizona Corporation Commission. Total interest expense for 1992 was $37 million lower than the previous year due to lower outstanding debt balances and lower interest rates on both variable-rate debt  :

and refinancings. I As a result of all these savings, the Company was able to reduce the cost of producing a kilowatt l hour to 9.22 cents, down from 9.85 cents at the end of 1991. For the second year in a row, APS  ;

- financed all of its capital expenditures with internally-generated funds. And cash income as a '

percent of earnings was 71 A%, reflecting a significant improvement in the quality of earnings.

More importantly, even while the Company reduced costs, our power plant performance was outstanding, breaking several company and nationwide records. .

Palo Verde performed at its best ever, on both a single unit and station basis. The plant's gross capacity factor for 1992 of 79% again exceeded the industry average of 69% and broke the previous ,

Company record of 78% set in 1991. Palo Verde also set the United States continuous operation ~ j record for a three-unit nuclear plant, operating for 118 consecutive days. The plant's total gross l electrical production of about 27.3 million megawatt hours broke the 1991 national record of 26.7 .

million megawatt hours, also set by Palo Verde; and it represents the most electricity generated l by any U.S. nuclear, fossil or hydroelectric power plant in 1992. Palo Verde Units 2 and 3 finished -

among the top individual nuclear units in the world. And, very importantly, Palo Verde had a  !

record year for safety.

Our fossil-fuel plants demonstrated superior performance as well with some plants achieving I all-time records. The coal plants' combined equivalent availability factor (EAF) was 89%, placing them among the top five utilities with comparable units in the nation. The Cholla Plant set a new EAP record of 92%, and Four Corners showed the best performance in its history with an EAF of - l almost 891 ,

i Even as we continued to manage costs and improve performance in 1992, we focused on the  ;

strategy needed to become more market sensitive. We developed a new strategic marketing plan i to be cost competitive in fulfilling the individual needs of customers in order to maintain and expand our markets. Surveys reveal that our customer satisfaction rating was at an all-time high of 96%, .l with some business areas reporting 100% satisfaction.

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As part of our continuing commitment to preserve the environment and our nation's natural ..

resources, APS formed the Arizona Environmental Strategic Alliance with the U.S. Environmental '

Protection Agency The Alliance will develop and implement collaborative projects to strengthen the state's environmental efforts.

The key to our success, however, will be to continue improving our efficiency.and cost man .

agement efforts, as well as to strengthen our ability to take advantage ofcompetitive opportunities.

Our emphasis in 1993 will be to expand upon our current successes in those areas.

The extent to which we may be impacted by Presided Clinton's energy tax proposals remains to be seen. As matters develop we will seek to protect the intsrests of our shareholders through F- appropriate legislative and regulatory processes.

We invite you to review the detailed financial information in the following pages and to attend our Annual Meeting of Shareholders on April 20,1993, at our corporate offices in Phoenix, Arizona.

Sincerely,

, k 1 Richard Snell O. Mark De Michele Chairman of the Board President and Chief Executive Officer 4

I ARIZONA PUBLIC SERVICE COMPAhT  !

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SELECTED FINANCIAL DATA ~ ..

1992 1991 (a) 1990 1989 1988  ;

(Thousands of Dollars)

Electric Operating .

Revenues . . . . . . . ... $1,669,679 $1,515,289 $1,508,325 $1,447,154 $1,442,023 5 Refund Obligation . - (53,436) - -- -

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Net Operating -  !

Revenues. . ., 1,669,679 1,461,853 1,508,325 1,447,154 1,442,023  !

Electric Operating Expenses: I Operation and  ;

maintenance. . . . . . 677,713 675,507 697,395 641,702 594,041  ;

Depreciation and i amortization. . . . 219,118 217,198 211,727 202,409 194,334 i Taxes (b). . . ... . 380,590 310,778 303,694 296,887 318,047 Palo Verde cost i deferral. . . .. .

- (70,886) (64,379) (68,989) (67,479) l Total. .. . . 1,277,421 1,132,597 1,148,437 1_,072,009 1,038,943  !

Operating Income . . . 392,258 329,256 359,888 375,145 403,080 Other Income (Deductions)(b). .. 48,801 (324,922) 56,713 56,965 71,694  ;

Interest Deductions - ,

Net. . . .. 194,2f4 226,983 236,589 219,756 203,563  ;

Net Income (Loss) . . 246,805 :222,649) 180,012 212,354 271,211 Preferred Stock Dividend ll Requirements. . . 32,452 33,404 31,060 32,302 33,319 Earnings (Loss) for Common Stock. . . . $ 214,353 $ (256,053) $ 148,952 $ 180,052 $ 237,892 l Total Assets .. ... .. $5,814,947 $5,887,981 $6,402,680 $6,299,885 $5,990,964 l Long-Term Debt and Redeemable Preferred Stock ..... ... . $2,278,398 $2,412,641 $2,496,406 $2,510,360 $2,455,880 (a) See Note 2 of Notes to Financial Statements for a discussion of the Company's rate case settle-ment and disallowances of plant costs affecting 1991 financial results.

(b) Federal and state income taxes are included in Taxes and in Other Income. Total income tax-  ;

expense (benefit) was as follows: 1992, $181,355,000; 1991, $(94,750,000); 1990, $126,831,000; 1989, $145,678,000; and 1988, $183,897,000. Palo Verde cost deferral included in Other Income for 1991,1990,1989, and 1988 was $63,068,000, $71,404,000, $72,861,000, and $79,432,000, i respectively.

See " Management's Discus < on and Analysis of Financial Condition and Results of Operations" for a Miscussion of certain im: nation in the foregoing table.

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.s OTHER FINANCIAL AND OPERATING SYATISTICS 1992 1991 (a) 1990 1989 1988 f (Dollars in Thousands) -;

Capitalization:

Common equity . $ 1,476,390 $ 1,433,463 $ 1,860,110 $ 1,901,615 $ 1,932,419 -

Non-redeemable i preferred stock . . 168,561 168,561 168,561 168,561 168,561 Redeemable "

preferred stock . 225,635 227,278 192,453 204,021 212,948 '

.Long-term debt . 2.052,763: 2,185,363 2,303,953 2,306,339' 2,242,932 Total. .. .. $ 3,923.349 $ 4,014,665 $ 4,525,077 $ 4,580,536 $ 4,556,860  !

Utility plant - gross $ 6,497,496 $ 6,409,892 $ 6,796,688 $ 6,668,644 $ 6,414,655  ;

Utility plant - net. $ 4,523,797 $ 4,487,124 $ 5,126,461 $ 5,168,730 $ 5,112,648 i Number of employees  ;

at year-end 7,133 7,063 7,029 8,181 8,135 Electric resources ,

(kw)(b) . . . 4,509,000 4,401,800 4,626,800 4,575,300 4,319,200 -l Peak load - actual  !

(kw) . . . . ...... 3,796,400 3,532,000 3,679,700 3,645,600 3,371,600 Peak load - weather adjusted (kw) . . 3,767,000 3,628,000 3,544,000 3,473,000 3,428,000 Electric sales - total (mwh) . . 20,562,903 19,986,485 19,776,140 17,488,551 17,760,896 Number of customers at year-end .. 636,528 620,402 606,605 594,820 ' 582,003 l

OPERATING REVENUES 1992 1991 (a) 1990 1989 1988 (Thousands of Dollars)

Electric Residential. . . . . $ 648,567 $ 590,345 $ 579,556 $ 559,755 . $ 545,082 Commercial . . . . . . 631,796 585,952 571,806 521,665 501,666 Industrial. . . 178,585 165,822 160,913 172,556 166,346 Irrigation. . 10,295 12,398- 13,134 14,424 14,989 l Other. . .. . . 148,920 _ 138,182 146,740 112,613 114,180 -

Total. . . . 1,618,163 1,492,699 1,472,149 1,381,013- 1,342,263 Transmission for ]

others . . 7,658 7,871 9,321 14,117 17,187 i Miscellaneous services.. . 43,858 14,719 26.855 52,024 82,573  ;

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revenues . . 1,669,679 1,515,289 1,508,325 1,447,154 -1,442,023 Refund obligation. . - (53,436) - -- -

Net operating revenues. $ 1.669,679 $ 1,461,853 $ 1,508,325 $ 1,447,154 $ 1,442,023 (a) See Note 2 of Notes to Financial Statements for a discussion of the Company's rate case settle-ment and disallowances of plant costs affecting 1991 financial results.

(b) Includes capacity from the Company's owned and leased generating resources and purchased power contracts.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company's capital needs consist primarily of construction expenditures and the required repayments of long-term debt and preferred stock obligations. The capital resources available to meet these requirements include funds provided by operations and external financings.

Present construction plans exclude any major baseload generating plants for the next ten years.

In general, most of the construction expenditures are for updating and expanding transmission and distribution capabilities. The anticipated construction expenditures are $274 million, $285 million, and $281 million for 1993,1994, and 1995, respectively. These amounts include nuclear fuel expen-ditures, but exclude capitalized property taxes and capitalized interest costs.

In 1992 and 1991, the Company funded all ofits capital expenditures (construction expenditures and capitalized property taxes) with internally generated funds, after the payment of dividends, as compared to approximately 54% in 1990. The improvement in 1991 was due primarily to reduced construction expenditures and lower common stock dividend payments. The improvement in 1992 .

was due primarily to improved cash earnings resulting from the Company's December 1991 rate . ~j case settlement (see " Rate Case Settlement" in Note 2 of Notes to Financial Statements). The  :'

Compar:j currently estimates that it will fund substantially all of its capital expenditures with internally generated funds, after the payment of dividends,in the 1993-1995 period.

During 1992, the Company redeemed or repurchased approximately $1.041 billion, including  ;

premiums thereon, of long-term debt and preferred stock, of which approximately $862 million-were optional. Refunding obligations for preferred stock and long-term debt, a capitalized lease obligation, and certain anticipated early redemptions are expected to total up to approximately

$112 million, $204 million, and $152 million for the years 1993,1994, and 1995, respectively.  ;

.i On February 9,1993, the Company issued $150 million ofits First Mortgage Bonds,8% Series .;

due.2025, and applied the net proceeds to the repayment of short-term debt that had been incurred for the redemption of outstanding long-term debt and for working capital purposes. Although its plans are subject to change, in 1993 the Company does not intend to issue any additional long-term debt and mtends to issue approximately $50 million ofpreferred stock. The Company currently expects that m ostantially all of the net proceeds of the securities to be issued during 1993 will be .

used for tha redemption, repurchase, retirement, or repayment of outstanding debt and preferred stock.

Provisions in the Company's mortgage bond indenture and articles of incorporation restrict the Company from issuing additional first mortgage bonds or preferred stock, respectively, unless certain coverage ratios are met. In addition, the mortgage bond indenture limits the amount of additional bonds that may be issued to (i) a percentage of net property additions, (ii) the principal amount of certain redeemed or retired bonds and/or (iii) cash deposited with the mortgage bond indenture trustee. The coverage ratio contained in the Company's articles ofincorporation has at times limited the Company's ability to issue preferred stock.

As a result of the write-offs recorded by the Company in connection with the rate case settlement

-(see " Rate Case Settlement" in Note 2 of Notes to Financial Statements), the Company was not able to meet the required earnings coverage ratios for the issuance of additional first mortgage bonds or preferred stock from April 1,1992 through December 30,1992. Nevertheless, pursuant to the terms of the mortgage bond indenture and articles ofincorporation, the Company was able to issue first mortgage bonds and preferred stock for refunding and redemption purposes, respec-tively, during this period without the necessity of meeting the required earnings coverage ratios. j Assuming 9.5% as the rate of interest on bonds that might have been issued on December 31, 1992, the coverage afforded by earnings for the twelve months then ended would have allowed the 7

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issuance of approximately $2.1 billion in aggregr.te principal amount of additional first mortgage - -

bonds, as compared to approximately $210 million of bonds on the basis of property additions and ' i approximately $1.18 billion of bonds on the basis of redeemed or retired bonds, and approximately lt

$967 million of additional preferred stock.

The ACC has authority over the Company with respect to the issuance oflong-term debt and  ;

equity securities. Existing ACC orders allow the Company to have up to approximately $2.6 billion ..,

~l in long-term debt and approximately $501 million of preferred stock outstanding at any one time.'

The Company does not expect these ACC orders to limit the Company's ability to meet its capital;  ;

requirements.

At December 31,1992, the Company had credit commitments from various banks totalling g

$372 million which were available either to support the issuance of commercial paper or to be used '

for bank borrowings. Borrowings in the amount of $195 million were outstanding at year end.- .

See "EPEC Bankruptcy" in Note 10 of Notes to Financial Statements for a discussion of.the bankruptcy proceeding of EPEC, one of the participants in Palo Verde and in Four Conners.

The Clean Air Act Amendments of 1990 will be implemented through regulations to be devel-oped during the next decade by the EPA and state and local environmental regulatory authorities.  ; '

Therefore, it is not presently possible to precisely predict the impact of those regulations on the Company's operations. However, based on information currently available, the Company does not l expect its costs relating to the implementation of the Amendments to have a material impact on j its financial statements. .-

See " Tax Proposal" in Note 10 of Notes to Financial Statements for a discussion of President .I Clinton's tax proposals. l OPERATING RESULTS

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Summary Net income increased significantly in 1992 as compared to 1991'due largely to the'after tax write-offs of $407 million in 1991 resulting fro:n the rate case settlement (see " Rate Case Settlement" ,

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in Note 2 of Notes to Financial Statements). Excluding the' effects of the write-offs, net income in -

1992 as compared to 1991 increased $62.4. million as a result of several factors, including higher ,

revenues, lower interest costs, and lower operating expenses. Partially offsetting these factors were higher fuel and purchased power expenses and higher maintenance costs.

Excluding the effects of the write-offs, net income increased slightly in 1991 as compared to 1990 primarily due to fuel savings, lower operating expenses, and lower interest costs. Nearly offsetting these factors were higher property taxes, the write-off of costs associated with a proposed generating unit, and other miscellaneous cost increases.

The table below summarizes the Company's revenues and net income (loss) for 1992,1991, and 1990.

Year Ended December 31, 1992 1991 1990 (Thousands of Dollars)

Operating Revenues. . $1,669,679 $1,515,289 $1,508,325 Net income (Loss) $ 246,805 $ (222,649) . $ 180,012 1991 Net Income excluding the write-offs .. . . $ 184,380 '

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. Electric Operating Revenues 1 Changes in operating revenues include the effects of changes in both volume and price of unit sales. An analysis of the changes in 1992 and 1991 revenues, excluding the efTects of the refund .  ;;

obligation in 1991, follows:

1 Increase (Decrease)

From Previous Year 1 1992 ~1991-l (Thousands of Dollars) .!

Volume Variance , $ 48,635 $23,823 .j Price Variance . .. 85,905 (7,759)  !

Reversal of Refund - t Obligation (a). . . . 19,995 1,379 'i Change in Other  :

Operating l!

Revenues (b) . (145) (10,479) {

Total . . . . .. $154,390 $ 6,964 l

(a) See Note 2 of Notes to Financial Statements. l (b) Includes revenues for miscellaneous services and transmission for others.  !

The volume-related increase in 1992 was largely due to customer growth in residential and -?

business customer classes plus increased sales due to more normal weather. The 1991 volume- )

related increase resulted from customer growth in residential and business customer classes and increased sales per business customer, partially offset by decreases due to milder weather. The 3 price-related increase in 1992 was largely due to an increase in retail base rates and a higher  ;

average price for interchange sales. The decrease in 1991 in other operating revenues was primarily  :

due to the expiration in 1990 of a layoff power sales agreement covering Cholla 4.  !

. Operating Expenses 'l Fuel expenses increased in 1992 as a result ofincreased generation due to increased sales and :f interchange sales, and increased gas prices. These increases were partially offset by lower prices ,

for coal and uranium. Fuel expenses decreased in 1991 due to lower average fuel costs resulting l from increased nuclear generation. l Purchased power costs increased in 1992 due to favorable market prices relative to the cost of ,

gas generation. Increases in purchased power in 1991, primarily due to purchases from PacifiCorp, were nearly offset by a decrease in other interchange purchases.' .

Operations and maintenance costs were lower in 1992 primarily due to lower operating costs .

at Palo Verde, lower fossil plant overhaul costs, and other miscellaneous cost reductions. Partially l ofTsetting these lower costs were an obligation recorded for an employee " gain sharing" plan and  !

higher nuclear refueling outage costs. 1 Operations excluding fuel expenses were lower in 1991 primarily due to organizational restruc-turing costs incurred in 1990. Maintenance costs increased in 1991 primarily due to increased j overhaul costs at fossil plants, and property taxes increased as a result of higher tax rates.

• Interest costs were lower in 1992 reflecting lower average debt balances resulting from the -

redemptions of outstanding debt in 1991 with proceeds from the sale of Cholla 4 and lower interest .,

rates on both variable-rate debt and refinancings. Interest costs were lower in 1991 due primarily

• to lower interest rates.

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' Other Income  ;

i Net income reflects accounting practices unique to regulated public utilities and represents a .

composite of cash and noncash items, including AFUDC and the cost deferrals' associated with Palo r i Verde Unit 3. In addition', beginning on December 6,1991, the Company began recognizing accretion .  !

income on Unit 3, which has been discounted under the ACC's temporary excess capacity finding j (see " Statement of Cash Flows" and Note 2 of Notes to Financial Statements). The Company recorded _ j after tax accretion income of $3.2 million and $40.7 million in 1991 and 1992, respectively, and  :

will record after tax accretion income of $45.3 million and $20.3 million in 1993 and 1994, I respectively. j i

Accounting Issues .l In December 1990, the FASB issued SFAS No.106, " Employers' Accounting for Postretirement i Benefits Other Than Pensions" (see Note 9 of Notes to Financial Statements). This statement l requires accrual of postretirement benefits, such as health care benefits, during the years'an 1 employee provides services. This is a significant change from the current policy of recognizing the l costs of these benefits as they are paid. The Company will adopt the standard in January 1993 and plans to amortize the accumulated benefit obligation beginning at that' time over a twenty-year  ;

period. Based on an actuarial review of the current plans, the accumulated benefit obligation at  :

December 31,1992 is approximately $187 million. Based on current estimates, the adoption of the standard will result in an increase in 1993 annual postretirement benefit costs of approximately -l

$30 million, of which approximately $13 million will be charged to expense. Other increased costs I will generally be capitalized as a component of construction costs or billed to participants ofjointly-owned facilities. These estimates are subject to change based on a number of factors used in the  :) 4 calculations. !j i

In February 1992, the FASB issued SFAS No.109, " Accounting for Income Taxes" (see Note -  !

8 of Notes to Financial Statements). SFAS No.109 requires that the liability method be used in )

calculating deferred income taxes. The Company expects that when this statement is adopted in

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1993, it will increase assets and liabilities by approximately $560 million but 'will not have a  :!

material effect on net income.

In November 1992 the FASB issued SFAS No.112, " Employers' Accounting for Postemployment Benefits" which is effective in 1994 (see Note 9 of Notes to Financial Statements). The new standard .  ;

requires a change from a cash method to an accrual method in accounting for benefits (such as long-term disability) provided to former or inactive employees after employment but before retire-ment. The impact of this new standard has not been fully determined, but the change will result in earlier cost recognition for these benefits. The Company has not yet made a determination as-to the timing ofimplementation.

Effect ofInflation The rate ofinflation has been relatively low over the past several years. The Company believes that recent inflation rates do not materially affect its results of operations or financial condition. l However, the regulatory process introduces a time-lag during which increased costs oflabor, mate- :l rials, and services are not reflected in rates and recovered. In addition, regulation allows only the '

recovery of historical costs of plant assets through depreciation even though the costs to replace these assets would substantially exceed their historical costs in an inflationary economy. H l

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Report ofManagement .

The primary responsibility for the integrity of the Company's financialinformation rests with management. Accordingly, management has prepared the accompanying financial statements and related information in this Annual Report. Such information was prepared in accordance with generally accepted accounting principles appropriate in the circumstances, based on management's best estimates and judgments, and giving due consideration to materiality. These financial state-  :

ments have been audited by independent auditors and their report is included herein. l In recognition ofits responsibility for the fmancial statements, management maintains and relies upon systems ofinternal accounting controls. The systems are designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with man-  :

agement's authorization and properly recorded to permit preparation of reliable financial state-ments. A limiting factor inherent in all systems of internal accounting control is that the cost of  ;

the system should not exceed the benefits to be derived. Management believes that the Company's system provides the appropriate balance between such costs and benefits.

Periodically the internal accounting control system is reviewed by both the Company's internal auditors and its independent auditors to test for compliance. Reports issued by the internal auditors ,

are released to management, and such reports, or summaries thereof, are transmitted to the Audit j Committee of the Board of Directors and the independent auditors on a timely basis. Internal audit workpapers are readily available for inspection by the independent auditors. .

The Audit Committee, composed solely of outside directors, meets periodically with internal auditors and independent auditors (as well as management) to review the work of each and ensure '

that each is properly discharging its responsibilities. The internal auditors and independent auditors ,

have free access to the Audit Committee, without management present, to discuss the results of ,

their audit work and tLeir evaluations of the adequacy of internal controls and the quality of l financial reporting. ,

The Company maintains high standards when selecting, training, and developing personnel, wi+h a view toward maintaining strong, effective internal accounting controls and unbiased, uniform l reporting standards. Management believes that the Company's policies and procedures provide reasonable assurance that operations are conducted in conformity with the law and with manage-  ?

ment's commitment to a high standard of business conduct.

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O. Mark De Michele Jaron B. Norberg  :

President and Executive Vice President and +

Chief Executive Officer Chief Financial Officer  !

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ARIZONA PUBLIC SERVICE COMPANY STATEMENTS OF INCOME ' i f

Year Ended December 31, 1992 1991 1990 I (Thousands of Dollars) .

Electric Operating Revenues. .. . ... .. $1,669,679 $1,515,289 $1,508,325 Refund obligation (Note 2). . .. . - (53,433) - -

Net Operating Revenues . . . 1,669,679 1,461,853 1,508,325  ;

Fuel Expenses: '

Fuel for electric generation . . .. . 230,194. 223,983 242,676 Purchased power . . . . . . 57,007 49,788 46,372 Total. . . . . . . . . ... . . 287,201 273,771 289,048 Operating Revenues Less Fuel Expenses .... 1,382,478 1,188,082 1,219,277 Other Operating Expenses:

Operations excluding fuel expenses . . .. . 270,838 286,167 298,533 Maintenance ... ... . . . .. . .. 119,674 115,569 109,814 Depreciation and amortization. . ......... 219,118 217,198 211,727 Income taxes (Note 8) . . . . . . 164,620 96,273 106,044 Other taxes (Note 11) .. .. .. ... . 215,970 214,505 197,650 Palo Verde cost deferral (Notes 1 and 2) . . . .

- (70,886) (64,379)

Total. . . . .. . . . ..... 990,220 858,826 859,389  ;

Operating Income . . . . . . . . ..... 392,258 329,256 359,888 Other Income (Deductions):

Allowance for equity funds used during construction 3,103 3,902 4,042 ,

Palo Verde cost deferral (Notes 1 and 2) . .. . - 63,068 71,404 ,

Income taxes (Note 8) . .. .. . . .. .. .. (16,735) (11,393) (20,787)

Disallowed Palo Verde costs (Note 2). . . . . . - (577,145) -

Income taxes on disallowed Palo Verde costs (Note 8). .... . . ... . .. .... - 202,416 -

Palo Verde accretion income (Note 2) . . ....... . 67,421 5,306 -

Other - net. . . .... . ...... (4,988) ' (11,076) 2,054 Total. . .......... . . .. ... .... ... 48,801 (324,922) 56,713 Income Before Interest Deductions . .. . ... .. 441,059 4,334 416,601 Interest Deductions:

Interest on long-term debt. . . .. .... ... .. 186,915 217,261 226,258 Interest on short. term borrowings. . . .... 3,831 10,363 13,734 Debt discount, premium and expense .. ..... 8,000 5,995 5,302 Allowance for borrowed funds used during construction . . . .. .... .. .. .. (4,492) (6,636) (8,705) ,

Total. . . . .. . ... . 194,254 226,983 236,589 Net Income (Loss) . . . . ... 246,805 (222,649) 180,012 Preferred Stock Dividend Requirements . . ... 32,452 33,404 31,060 Earnings (Loss) for Common Stock . . .. . .. $ 214,353 $ (256,053) $ 148,952 See Notes to Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY IIAIANCE SIIEETS ASSETS December 31, 1992 1991

- (Thousands of Dollars) -

Utility Plant (Notes 4,6 and 7):

Electric plant in service and hem for future use . . ... . $6,197,459 $6,037,382 Less accumulated depreciation and amortization. . ..... 4. . 1,897,433 1,815,373-Total. . . . . . ... .. . . . .. ... .. 4,300,026 4,222,009 Construction work in progress. . .. . .. 162,168 197,643 Nuclear fuel, net of amortization of $76,266,000 and

$107,395,000. . .. . , . . . .. 61,603 67,472 Utility Plant - net. . ..... . . . . 4,523,797 4,487,124 Investments and Other Assets (at cost). . . . .. .. .. 58,702 54,603 Current Assets:

Cash and cash equivalents. . . .. . 1,152 139,085 Accounts receivable:

Service customers. . . . . . . . . . .. 120,109 .104,752 Other. .. . . . .. . .. . 34,203 17,080-Allowance for doubtful accounts. . . .. .. ..... (2,156) - (3,641)

Accrued utility revenues (Note 1) . ..... . . . 51,517 44,462 Materials and supplies (at average cost) .... ... . . . 95,978 107,225 Fossil fuel (at average cost) . . . .. .. . .... . -36,668 30,515 Other ,. .. .. . .. . . .... . .. 6,037 9,832 Total Current Assets .. . .... . .. 343,508 .449,310 Deferred Debits:

Deferred income taxes . . .. ..... . ... ... 223,417 267,289 Palo Verde Unit 3 cost deferral (Notes 1 and 2). . . .......... 310,908 320,070.

Palo Verde Unit 2 cost deferral (Note 1) . . . . .... . 184,061 100,123 Unamortized costs of reacquired debt ... .. . ... . 52,709 26,764 Unamortized debt issue costs. . . . ..... . .,. 17,107- 16,754-Other. .. .. . . . . .. . 100,738 75,944 Total Deferred Debits. .. . .. .. . ... . 888,940 896,944 Total. . . . . . . . $5 814,947 $5,887,981 See Notes to Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY .!

BALANCE SIIEETS .

F LIA.BILITIES .1

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December 31, ,

1992 1991 f (Thousands of Dollars) 1 Capitalization (Notes 3 and 4): ti Common Stock . ...... .. .. .. . . .. .... .. .... $ 178,162 $ 178,162

. Premiums and expenses - net. .. .... ... . ... .. 1,038,329- 1,039,327 .,

Retained earnings . .. . .. . . . ... .. .... ...... 259,899 215,974 t Common stock equity . ... . .. . . ... . . .. 1,476,390 1,433,463 i Non-redeemable preferred stock. . ....... .. .... 168,561 168,561 .

Redeemable preferred stock . . . ... .. .... ........ . 225,635 227,278 -l Long-term debt less current maturities . .. . .. ... .. .... 2,052,763 2,185,363 i Total Capitalization. . . ...... . .... . .. 3,923,349 4,014,665' Current Liabilities:

Notes payable to banks (Note 5). ... . . . .. . 130,000 -

l Commercial paper (Note 5). .... . . . 65,000 .-

Current maturities oflong-term debt (Note 4) . ... .. 94,217 299,550 i Accounts payable . .. . . . ..... .... 82,062 79,905 l Accrued taxes. . . ... . . .. . ...... 103,467 85,183 i

-Accrued interest. . .. . . . .. ... ... .. 44,842 59,941_ {

Other (Note 2) . .. . . . .. ... . . ..... 75,089 91,180 )

Total Current Liabilities . . . .... . . . 594,677 615,759

- Deferred Credits and Other:  :

Deferred income taxes (Note 8) . ... .. .. ... 897,493 ^ 857,268 '

Deferred investment tax credit. . . . . .... . ... . . . 156,767 163,571 Unamortized gain - sale of utility plant (Note 7) . .. . ..... 116,167 126,669 Customer advances for construction. . . . . . . . . . ........ 13,665 15,662 )

Other . . . . ... .... . . .... 112,829 - 94,387

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Total Deferred Credits and Other .. ............ . 1,296,921 1,257,557 Commitments and Contingencies (Notes 2 and 10)

Total'... . . . . .... . . . . . $5,814,947 $5,887,981 See Notes to Financial Statements. .

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ARIZONA PUBLIC SERVICE COMPANY ,

STATEMENTS OF RETAINED EARNINGS '

Year Ended December 31.  ;

1992 1991 1990 i (Thousands of Dollars) i Retained earnings at beginning of year . . . .... $215,974 $ 647,587 - $689,107 '

- Add: Net income (loss) . .. . .. . 246,805 (222,649) 180,012 Total . . . . . . ... .. . .. . . . .... 462,779 424,938 869,119 Deduct: f Dividends: l Common stock (Notes 3 and 4). .. . .. 170,000 170,000 190,472 ,

31,060 '

Preferred stock (see below). . ... .. .. . 32,452 33,404.

Premium paid on reacquisition of preferred stock. . . ... 428 5,560 -

Total deductions . . .. ... .. .. 202,880 208.964 221,532 '!

Retained earnings at end of year . . . .. . . . . $259,899 $ 215,974 $647,587 ,

l Dividends on preferred stock:

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

$2.50 preferred . .. .. . . ... 258 258 258 .]

$2.36 preferred .. ... . ... 94 94 94 ,

$4.35 preferred . . . . . . . 326 326 326  ;

Serial preferred:  ;

$2.40 Series A . . .. .. .. . . ... 576 576 576

$2.625 Series C . . .. . .. ..... ...... 630 630 630 '

$2.275 Series D .... . . .. .. ..... 455 455 455 l

$3.25 Series E . . . . . . . . . 1,040 1,040 1,040 - 4

$10.00 Series H . . . ...... 58 193 353-

$8.32 Series J. . . . .. . .... .. 4,160 4,160 4,160

$8.80 Series K . . .. . . . . 1,654- 1,794 2,042

$12.90 Series N . . ... .. . 1,196 2,994 3,291 Adjustable Rate Series Q . . . .. . 3,083 3,321 3,448 i

$11.50 Series R . . . . . ... . ... 4,081 - 4,720 5,725

$8.48 Series S. . . . .. .. . 4,240 4,240 4,240 .

$8.50 Series T , ,,. . . ... .. 4,250 4,250 4,250

$10.00 Series U . . . .. . . ... .. 5,000 4,181 -

$7.875 Series V . . . ... . . . ... .... 1,179 - -

Total . . .. .. $ 32,452 $ 33,404 $ 31,060 -

See Notes to Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY STATEMENTS OF CASII I' LOWS  !

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i Year Ended December 31.

1992 1991 1990  ;

(Thousands of Dollars)  ;{

t Cash Flows from Operations: .

, Net income Goss) . . ... . . . ..

$ 246,805 $(222,649) $ 180,012 ,

It. ems not requiring cash:

219,118 217,198 211,727  !

Depreciation and amortization . . . . ..

44,739

.36,605 43,930  ;

Nuclear fuel amortization ..... . . .

(3,902) (4,042)

Allowance for equity funds used during construction. . . (3,103) ,

84,097 (128,904) 82,008 Deferred income taxes - net . .. ... . . .

(7,012)

Deferred investment tax credit - net . .. .. . (6,804) (15,393)  ;

Palo Verde cost deferral . . .

- (133,954) (135,783)  !

Refund obligation - net. . . . (21,374) 52,057 -

Disallowed Palo Verde costs. . . ... .

- 577,145 -

Palo Verde accretion income. ........ . .. . (67,421) (5,306) -

Changes in certain current assets and liabilities:

(33,965) 19,757 (18,157)

' Accounts receivable - net . . . .. . . .

Accrued utility revenues ...... (7,055) 1,004 (3,048)

Materials, supplies and fossil fuel .. . 5,094 (8,490) (15,318)

Other current assets. . . . . . 3,795 (312) 5,147

- Accounts payable . . . ... ... . 7,172 10,317 (7,701)

Accrued taxes. . . . 18,284 (5,376) 14,475 Accrued interest. . . . . . . . . (16,131)- (4,358) 2,422 '

Other current liabilities . . . . . 5,405 3,175 - (8,758)

Other - net. . .. .. . ... . . . . . (2,386) 2,562 15.651 Net cash provided . .. .. . .... 468,136- 398,561 356,362 Cash Flows from Financing:

Preferred stock. . . . . .... .... . 24,781 49,375 -

Long-term debt . . .. . ... .. ... 643,360 ~ 319,463- 222,215 l Short-term borrowings - net . . . . . . . 195,000. (159,000) (81,000)

Dividends paid on common stock. . . . ... (170,000) (170,000) 0 90,472)

Dividends paid on preferred stock . . . . . . . (32,574) (33,127) (32,088)

Repayment of preferred stock . . . . ...... .. . (27,850) (15,175) (11,568).

Repayment and reacquisition oflong. term debt ... . (1,013,371)- (314,457) (82,111)

Net cash used. . . . . .. .. . . ... (380,654) (322,921) (175,024)

Cash Flows from Investing-Capital expenditures . . .. . ..... ..... . (224,419) (182,687) (259,280)

Allowance for equity funds used during construction . .. 3,103 3,"')2 4,042 Sale of property (Note 2) . . . . . . ... ..

- 233,504 . 4,771 Other.... . . . ... . . .. . .. (4,099) (1,994) 5,926 Net cash provided (used) . . . . . ... (225,415) 52,725 (244,541)

Net increase (decrease) in cash and cash equivalents . . .. (137,933) 128,365 (63,203)

Cash and cash equivalents at beginning of period .. 139,085 10,720 73,923 Cash and cash equivalents at end of period . ......$ 1,152 $ 139,085 $ 10,720 Supplemental Disclosure of Cash Flow Information:

Cash paid during the year for: <

Interest (excluding capitalized interest) . . . ...$ 200,986 $ 220,908 $ 227,985 Income taxes. . . ... .. . . ... .$ 85,141 $ 63,104 $ 49,145 See Notes to Financial Statements.

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ARIZONA PUBLIC SERVICE COMPANY NOTES TO TINANCIAL STATEMENTS )

1. Summary of Significant Accounting Policies

a. Accounting Records - The accounting records are maintained in accordance with generally accepted accounting principles applicable to rate-regulated enterprises. The Company is regulat by theofACC policies these and the FERC commissions. and the accompanying financial statements reflect the rate-mak

b. Common by Pinnacle West. Stock - All of the outstanding shares of common stock of the Company are owned

c. Cash and Cash Equivalents - For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents.

d. Utility Plant and Depreciation - Utility plant represents the buildings, equipment and other facilities used to provide electric service. The cost of utility plant includes labor, enterials, contract services, other related items and an allowance for funds used during construction. The cost of retired accumulated depreciable utility plant, plus costs of removal minus salvage realized, is charged to depreciation.

Depreciation on utility property is recorded on a straight-line basis. The applicable ACC approved composite rates ratesoffor 1990 through 1992 ranged from 0.84% to 15.00% which resulted in annual 3.379.

e. Nuclear Decommissioning Costs - The Company estimates it will incur approximately $2.1 billion ($390 million in 1992 dollars), over a thirteen year period beginning in 2023, to decommission its 29.1% interest in the Palo Verde Nuclear Generating Station. This estimate is based on a 1992 site-specific study of costs to completely remove all facilities and would produce an annual cost requirement of approximately $11 million as compared to the $6.5 million currently approved b the ACC. As approved by the ACC, the cost is charged to expense over the respective uni license service. term and included in the accumulated depreciation balance until the station is retired from The Company deposits the latest ACC approved amount into external trust accounts. The trust accounts are included in " Investments and Other A.3 sets" on the Company's balance sheet and have accumulated a $33.5 million balance at December 31,1992.

f. Revenues - Revenues are recognized on the accrual basis and include estimated amounts for service rendered but unbilled at the end of each accountingperiod.

g. Allowance for Funds Used During Construction - AFUDC represents the cost of debt and equity funds used to finance construction of utility plant. Plant construction costs, including

! AFUDC, are recovered in authorized rates through related depreciation when completed pr are placed into commercial operation. AFUDC does not represent current cash earnings.

AFUDC has been calculated using composite rates of 10% for 1992; 10.15% for 1991; and 10%

for 1990. The Company compounds AFUDC semiannually and ceases to accrue AFUDC when construction is completed and the property is placed in service.

h. Reacquired Debt Costs - Gains and losses on reacquired debt are deferred and amortized over the remaining original life of the debt, consistent with ratemaking.

the quantity of heat produced in the current period to the total q produced over the remaining life <>f the fuel.

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ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (continued) l

.j Under Federal law, the DOE is responsible for the permanent disposal of spent nuclear fuel. I The DOE assesses $.001 per kilowatt-hour of nuclear generation. This amount is charged to nuclear  ;

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fuel expense and recovered through rates.

j. Palo Verde Cost Deferrals - As authorized by the ACC, the Company deferred operatmg costs (excluding fuel) and financing costs for Palo Verde Units 2 and 3 (including their share of  ;

facilities common to all units) from the commercial operation date (September 1986 and January 1988, respectively) until the date the units were included in a rate order (April 1988 and December i 1991, respectively). The deferrals are being amortized and recovered in rates over thirty-five year  !

periods.

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2. Regulatory Matters Rate Case Settlement i In December 1991, the Company and the ACC reached a settlement in a retail rate case that had been pending before the ACC since January 1990. The ACC authorized an annual net revenue increase of $66.5 million or approximately 5.27c. In turn, the Company wrote off $577.1 million of i costs associated with Palo Verde and recorded a refund obligation of $53.4 million. The after tax impact of these adjustments reduced 1991 net income by $407 million. A discussion of the com-ponents of the disallowance follows. ,

Prudence Audit -

The ACC closed its prudence audit of Palo Verde and the Company wrote off $142 million .f

($101.3 million after tax) of construction costs relating to Palo Verde Units 1,2, and 3 and $13.3 l million ($8.6 million after tax) of deferred costs relating to the prudence audit.

interim or Temporury Revenues The ACC removed the interim and temporary designation on $365 million of revenues collected l by the Company from 1986 through 1991 that had been previously authorized for Palo Verde Units  !

I and 2. The Company recorded a refund obligation to customers of $53.4 million ($32.3 million . ,

after tax) related to the Palo Verde write-off discussed above. The refund obligation has been used  ;

to reduce the amount of annual rate increase granted rather than require specific customer refunds and is being reversed over thirty months beginning December 1991. [

Temporary Excess Capacity - Palo Verde Unit 3 The ACC deemed a portion of Palo Verde Unit 3 to be excess capacity and, accordingly, did not recognize the related Unit 3 costs for ratemaking purposes. This action effectively disallows for l thirty months a return on approximately $475 million of the Company's investment in Unit 3. The Company recognized a charge of $181.2 million ($109.5 million after tax), representing the present value of the lost cash flow and to that extent temporarily discounted the carrying value of Unit 3.

In accordance with generally accepted accounting principles, the Company is recording over ' I the thirty-month period accretion income on Unit 3 in the aggregate amount of the discount. The  !

Company recorded after-tax accretion income of $3.2 million and $40.7 million in 1991, and 1992, respectively, and will record after-tax accretion income of $45.3 million, and $20.3 million in 1993,  :

and 1994, respectively.

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ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (continued)

In December 1991, the Company stopped deferring Unit 3 costs and recorded a $240.6 million

($155.3 million after tax) write +ff of Unit 3 cost deferrals due to Unit 3 being deemed excess capacity. At that time the Company began amortizing to expense and recovering in rates the remaining $320 million balance of deferrals over a thirty-five year period as approved by the ACC.

Future Retail Rate Increase The Company agreed not to file a new rate application before December 1993 and the ACC agreed to expedite the processing of that rate application. The Company and the ACC also agreed on an average unit sales price ceiling of 9.585 cents per kilowatt hour in this future rate application, which was based on the Company meeting certain cost targets established by management. The Company's 1992 average unit sales price was approximately 9 cents per kilowatt hour. This ceiling may be adjusted for the effects of significant changes in laws, regulatory requirements, or the Company's cost of equity capital. Management believes that the unit sales price ceiling will not adversely impact the Company's future earnings.

Dividend Payments The Company agreed to limit its annual common stock dividends to Pinnacle West to $170 million through December 1993.

Sale of Cholla Unit 4 -

In July 1991, the Company sold Cholla 4 to PacifiCorp for approximately $230 million. The resulting after tax gain of approximately $20 million was deferred and is being amortized as a reduction to operations expense over a four year period in accordance with an ACC order. The transaction also provides for transmission access and electrical energy sales and exchanges between the Company and PacifiCorp.

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ARIZONA PUBLIC SERVICE COMPANY I

NOTES TO FINANCIAL STATD1ENTS (continued)

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3. Common and Preferred Stocks  ;

Number of Shares Par Value Outstanding Per Outstanding Per ~

Authorized 1992 1991 Share 1992 1991 Share (a) - l (Thousands of Dollars) _ ~j Common Stock. . . . 100,000,000 71,264,947 71,264,947 $. 2.50 $178,162 $178,162 -

Preferred Stock (cumulative): f Non-redeemable:

$1,10 . , . . ., . 160,000 155,945 155,945 $ 25.00 $ 3,898 $ 3,898 $ 27.50

$2.50. . . 105,000 103,254 103,254 50.00 5,103 5,163 51.00  :

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

$4.35. . . . 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 50.50  !

$3.25 Series E . 320,000 320,000 50.00 16,000 16,000 51.00 Serial preferred. 4,000,000(b)

$8.22 Series J 500,000 500,000 100.00 50,000 50,000 101.00 ' >

Adjustable rate - i Series Q . . 500,000 500,000 100.00 50,000' 50,000 (c)

Serial preferred. . 10,000,000 - -

25.00 - - i Total . . 2,374,199 2.374,199 $168,5S1 $168.561 ..

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Redeemable: .;

Serial preferred:

$10.00 Series H . - 8,677 $100.00 $ - $ 868

$8.80 Series K . 187,100 191,825 100.00 18,710 19,182 (d)

$12.90 Series N . - 213,280 100.00 - 21,328  :

$11.50 Series R . 319,250 359,000 100.00 31,925 35,900 (e)

$8.48 Series S 500,000 500,000- 100.00 50,000 50,000 (f) L

$8.50 Series T . 500,000 500,000 100.00 50,000 50,000

$10.00 Series U . 500,000 500,000 100.00 50,000 50,000

$7.875 Series V . 250,000 -

100.00 25,000 - (g)

Total . . 2,256,350 2,272,782 $225,635 $227,278 Non-redeemable preferred stock is not redeemable except at the option of the Company. Redeemable preferred stock is redeemable through sinking fund obligations in addition to being callable by the Company.

(a) In each case plus accrued dividends. .

(b) This authorization covers both outstanding non-redeemable and redeemable preferred stock. e (c) Dividend rate adjusted quarterly to 2% below that of certain United States Treasury securities, but in no event less than 6% or greater than 12% per annum. Redeemable at $103.00 through 1 February 28,1993 and at par thereafter.

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ARIZONA PUBLIC SERVICE COMPANY -  !

NOTES TO FINANCIAL STATEMENTS (continued) ,

. (d) Redeemable at $103.00 through February 28,1994 and at $101.00 thereafter.

(e) Redeemable after June 1,1994 at $105.45, declining by a predetermined amount each year to par after June 1, 2003.  ;

(f) Redeemable at $104.24 through May 31,1993, and thereafter declining by $2.12 each year to par .

after May 31,1994.- 'j (g) Redeemable at $107.88 through May 31,1993, and thereafter declining by a predetermined amount d each year to par after May 31, 2002.

If there were to be any arrearage in dividends on any of the Company's preferred stock or in the .i sinking fund requirements applicable to any ofits redeemable preferred stock, the Company could not pay 1 dividends on its common stock or acquire any shares thereof for consideration.  !

The combined aggregate amount of redemption requirements for the above issues for the next five .

s years are: 1993, $15,775,000; 1994, $65,775,000; 1995, $15,775,000; 1996, $15,775,000; and 1997,' l

$25,775,000. 1 Changes in redeemable preferred stock Number of Shares Par Value  !

Outstanding Outstanding -;

(Thousand of Dollars)

Description 1992 1991 1990 1992 1991 1990 Balance, January 1 2,272,782 1,924,532 2,040,213 $227,278 $192,453 $204,021 ,

Issuance:

$10.00 Series U . -

500,000 - -

50,000 .

$7.875 Series V , 250,000 - -- 25,000 -- -

Retirements:

$10.00 Series II . . (8,677) (16,000) (16,000) (868) (1,600) . (1,600) .!

$8.80 Series K. (4,725) (40,275) (1,036) (472) (4,027) (104) -

' $12.90 Serica N . . (213,280) (24,975) (28,145) (21,328) (2,498) (2,814) l

$11.50 Series R . . . (39,750) (70,500)- (70,500) (3,975) (7,050) - (7,050) - l Balance, December 31. 2,256.350 .2,272,782 1,924,532 $225,635 $227,278 L $192,453 'f l

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g ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (continued)

4. Long-Term Debt :

Year Ended December 31, Maturity Dates Interest Rates 1992 -1991 (Thousands of Dollars)

First mortgage bonds 1992-2024 4.4 %-13.25 % $1,015,602 - $1,844,917 -

Pollution control indebtedness 2009-2015 Adjustable (a) 424,330 424,330 Bank term loans 1992 LIBOR + .25%(b) - 36,000 Debentures 1992 12.5 % - -70,000-Ik volving Credit 1993 LIBOR + .30% to .45%(c) 75,000' 75,000 Capitalized lease obligation 1992-2001 7.48%(d) 32,048' 34,666.

Total long-term debt 2,146,980 2,484,913 Less current maturities 94,217 299,550 Total long-term debt less current maturities $2,052,763 ~ $2,185,363 -

(a) The interest rates at year-end varied from 3.20% to 4.40% for 1992 and from 4 90% to 7.25% for 1991.

(b) The weighted average interest rate on outstanding borrowings at year end for 1991 was 6.52%.

. (c) The weighted average interest rates on outstanding borrowings at year end for 1992 and 1991 were 4.41% and 6.82% respectively.

(d) Represents the present value of future lease payments (discounted at the interest rate of 7.48%)

on a combined cycle plant sold and. leased back from the independent owner-trustee formed to own the facility. See Note 7.

Aggregate annual payments due on long-term debt and for sinking fund requirements through 1997 are as follows: 1993, $94,217.000; 1994, $4,857,000; 1993, $5,088,000; 1996, $5,637,000; .and '1997,

$180,905,000.

On February 3,1993 the Company issued $150,000,000 of its First Mortgage Bonds,8% Series due February 1,2025.

The Company he d approximately $500 million of variable-rate long-term debt outstanding at December 31,1992. Changes in interest rates would affect the costs associated with this debt.

Substantially all utility plant (other than nuclear fuel, transportation equipment, and the combined cycle plant) is subject to the lien of the first mortgage bond indenture. The first mortgage bond indenture -

l includes provisions which would estrict the payment of common stock dividends under certain conditions -

which did not exist at December S1,1992.

' 5. Lines of Credit Per Annum Commitment Committed Lines of Credit 1992 1991 Fee (Thousands of Dollars)

Revolving credit facility . . . ... $300,000 $300,000 (a)-

Letter of credit commercial paper program . . . . . . 70,000 70,000 .30%

Other bank lines . . .. . . . . 2,000 2,000. -

Total . . . . . . .. . $372,000 $372,000 (a) ' .1875% through April 29,1992 and .25% thereafter through December 31,1992.

1 23

i ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIAL S.'ATEMENTS (continued)

By Arizona statute, the Company's short-term borrowings cannot exceed 7% of total capitalization .

without the consent of the ACC. At Deceniber 31,1992 the Company had short-term debt outstanding of

$195,000,000, including $130,000,000 under the $300,000,000 revohing credit facility, and $65,000,000 ,

under the $70,000,000 letter of credit commercial paper program. _l

6. Jointly-Owned Facilities -!

At December 31,1992, the Company owned interests in the following jointly-owned electric generating and transmission facilities. The Company's share of related operating and maintenance expenses is included in Operating Expenses.

Percent  !

Owned Construction by Plant in Accumulated Work in Company Service Depreciation Progress (Dollars in Thousands)

Generating Facilities:

Palo Verde Nuclear Generating Station -

Units 1 & 3 . . . . 29.1% $1,819,921 $317,704 $14,163 Palo Verde Nuclear Generating Station -

Unit 2 .. . . . 17.0 % 547,251 96,576 13,384 Four Corners Steam Generating Station -

Units 4 & 5 . . . . .. . 15.0% 139,333 42,597 718 Navajo Steam Generating Station -

Units 1,2 & 3 14.0 % 134,101 65,711 7,464 Cholla Steam

' Generating Station -

Common Facilities only(b). . . . . 62.8 % 68,509 28,130 1,461 Trnnsmission Facilities:

ANPP 500KV System . . . .. .. 35.8%(a) 62,557 12,356_ 848 Navajo Southern System. . 31.4%(a) 28,209 15,115 43 Palo Verde-Yuma 500KV System . 23.9%(a) 11,389 2,674 -

Four Corners Switchyards. . . 27.57c(a) 2,948 1,705 -

Phoenix-Mead System. 15.37c(a) - - 4,945 (a) Weighted average ofinterests.

(b) The Company is the operating agent for Cholla 4, which is owned by PacifiCorp. The common facilities at the Cholla Plant are jointly-owned.

7. Leases In 1986, the Company entered into sale and leaseback transactions resulting in the sale of approximately 42% ofits share of Palo Verde Unit 2 and net proceeds of $487,296,000. The leases are being accounted for as operating leases. The gain of approximately $140,220,000 has been deferred and is being amortized to operations expense over the original lease term. The leases require semiannual payments of approximately $22,061,000 through December 1996, $23,605,000 24

ARIZONA PUBLIC SERVICE COMPANY NOTES TO FLNANCIAL STATEMENTS (continaed) through Jime 1997 and $26,963,000 through December 2015. The leaser include options to renew the leases for +.wo additional years and to purchase the property at fah snarket value at the end of the lease terms. Lease expense for 1992,1991 and 1990 was $45,838,000, $45,633,000, and

$45,458,000, respectively.

In 1976, the Company solri and leased back a combined cycle plant from an independent owner-trustee formed to own the facility. The lease is being accounted for as a capital lease. This plant is included in plant in service at its original cost of $54,405,000; accumulated depreciation at December 31,1992 was $35,591,000. The lease requires semiannual payments of $2,582,000 through June, 2001 and includes renewal and purchase options based on fair market value.

In addition to the Palo Verde and combined cycle leases, the Company also leases certain land, buildings, equipment and miscellaneous other items through operating rental agreements with varying terms, provisions and expiration dates. Lease costs charged to expense for these other leases in 1992,1991, and 1990 were approximately $14,733,000, $16,046,000, and $13,605,000, respec-tively. Annual future minimum rental commi'ments, excluding the Palo Verde and combined cycle leases, for the period 1993 through 1997 range between $13 million and $15 million. These total rental commitments after 1997 are estimated at $115 million.

8. Income Taxes The Company is included in the consolidated income tax returns of Pinnacle West. Income taxes are allocated to the Company based on its separate company taxable income or loss. Income taxes paid to Pinnacle West amounted to $85,141,000, $58,264,000 and $49,145,000 in 1992,1991 and 1990, respectively. In 1991, income tax payments totaling $4,840,000 were made directly to Federal and State agencies.

The components ofincome tax expense (benefit) are:

Year Ended Decernber 31.

1992 1991 1990 (Thousands of Dollars)

Current:

Federal . . . . . . . . . $ 80,921 $ 39,446 $ 43,637 State. .. .. . . . . 23,141 11,010 9,827 Total current. . .. .. 104,062 50,456 53,464 Deferred:

Depreciation - net. . . 75,931 56,478 63,979 Palo Verde cost deferral . . . . (5,015) 46,004 46,681 Alternative minimum tax. . . . . . 7,732 (10,565) (8,873)

Employee severance plan . . . ... ... . 88 5,435 (5,538)

Disallowed Palo Verde costs (indading ITC). . . - (202,416) -

Refund obligation . . ,. . .... 8,454 (20,591) -

Palo Verde accretion income. . . . 26,668 2,099 -

Loss on reacquired debt . . . . 10,2G6 (1,032) 62 Palo Verde start-up costs . . .. (28,976) (1,337) (2,496)

Other - net ; . , . . .. . . . . . . (11,051) (8,164) (13,436)

Investment tax credit _- net. . ... . . ... (6.804) (11.ly) (7,012)

Total deferred . . . .. . . ... 77,293 (145,206) 73,367-Total . . . . .. $ 181,355 $ (94,750) $126,831 25

V ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (continued)

The difference between income tax expense (benefit) and the amount obtained by multiplying -

income before income taxes by the statutory federal income tax rate for each of the three years in the period ended December 31,1992 is as follows:

Year Ended December 31.

1992 1991 1990 (Thousands of Dollars)

Federal income tax expense (benefit) at statutory rate (34'k) . .. . . . $ 145,574 $(107,916) $104,327 '

Increase (reductions) in tax expense resulting from:

Tax under book depreciation . .... 17,465 21,776 18,402 Allowance for funds used during construction . (1,055) (1,326) . (1,374)

Palo Verde cost deferral. .. .

- (4,063) (4,281)

Investment tax credit amortization . . .. (7,036) (11,117) (7,353)

State income tax - net of federal income tax benefit - .. .. . . . . 27,036 (9,820) 19,003 ,

Disallowed Palo Verde costs (including ITC) . . - 22,236 -

Other. . .. . . . . . (629) (4,520) (1,893)  ;

Total . . .. . . . $ 181,355 $ (94,750) $126,831 j Deferred income tr.xes are provided for substantially all timing differences arising from the  ;

recognition of revenues and expenses in difTerent periods for tax and financial reporting purposes.

Prior to October 1983, the Company reflected the tax effects of certain timing differences in income in accordance with an ACC order. At December 31, 1992, the Company had flowed through to income approximately $115 million ofincome tax benefits arising from income tax timing differences j for which deferred taxes have not been provided.

Investment tax credits were deferred and are being amortized to other income over the esti-mated life of the related assets.

New Accounting Standard {

In February 1992, the FASB issued SFAS No.109, " Accounting for Income Taxes." This state-ment requires that the liability method be used in calculating deferred income taxes. When SFAS No.109 e sdopted in 1993, the Company will record deferred income tax liabilities related to the equity m.ponent of AFUDC, the debt component of AFUDC recorded net-of-tax, and other tem-j porary d'. brences for whict ed taxes have not been provided. Deferred income tax balances will also be adjusted fo- r ai s in tax rates and for the deferred tax efTects of unamortized investment tax credits. <* .s acted that the additional deferred income tax liabilities will be offset primarily by regu. , , sets representing the future revenue requirement impact of these '

adjustments. Adoption oi .s No.109 is expected to increase assets and liabilities by approxi-mately $560 million with no material effect on net income.

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ARIZONA PUBLIC SERVICE COMPANY  !

NOTES TO FINANCIAL STATEMENTS (continued) ,

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9. Pension Plan and Other Benefits  !

Pension Plan >

The Company has a defined benefit pension plan covering substantially all employees. Benefits are based on years of service and compensation using a final average pay plan benefit formula. 1 The plan is funded on a current basis to the extent deductible under existing tax regulation. Plan -

assets consist primarily of domestic and international common stocks and bonds, and real estate.

Pension cost, including administrative cost, for 1992,1991, and 1990 was approximately

$14,022,000, $10,590,000, and $14,781,000, respectively, of which approximately $3,917,000,

$4,939,000, and $7,742,000, respectively, was charged to expense; the remainder was either capi- 1 talized as a component of construction costs or billed to participants ofjointly-owned facilities. ,

In 1990 the Company implemented a voluntary work force reduction plan. As part of this plan,- -l the Company offered a special early retirement plan to employees who met certain eligibility I requirements. The Company also offered an enhanced severance plan to selected employees.' The l total pension cost recorded for these programs was $8,232,000, of which $5,152,000 was charged i to pension expense and the remainder was billed to participants ofjointly-owned facilities.  !

Excluding the costs of the early retirement program and the enhanced severar.ce plan, the l components of pension costs are as follows (in thousands of dollars). .;

1992 1991 1990 [

Service cost-benefits earned during the period $ 16,903 $ 14,559 $ 16,095 }

Interest cost on projected benefit obligation . . 33,333 30,964 '29,848  ;

Return on plan assets . ... . (23,058) (64,884) 9,467  ?

Net amortization and deferral. . . . (15,002) 28,747 (50,622)

Net periodic pension cost. . . . $ 12,176 $ 9,386 $ 4,788 A reconciliation of the funded status of the plan to the amounts recognized in the balance sheet is_ presented below (in thousands of dollarsh  ;

1992 1991 f Plan assets at fair value. . . .. . .... .... .. $388,790 $388,829 i Less actuarial present value of benefit obligation:

Accumulated benefit obligation, including vested benefits of

$286,588 and $278,060. . .. . . . .. . . ....... 307,003 296,712 i Effect of projected future compensation increases . . . . 105,027 103,485 Projected benefit obligation . . . . . . 412,030 400,197 .

Plan assets less than projected benefit obligation. . . . . .. (23,240) (11,368)

Unrecognized net loss from past experience different from that }

assumed . .. ..., .. .. . .. ..... 8,288 10,793 i Unrecognized prior service cost . _. ... . .. . .. .. .. 15,733 16,749 Unrecognized net asset at January 1,1986 being recognized over 20.2 years . . . .. .. ... ....... . ..... . .. (42.458) (45,675)-

Accrued pension liability included in other deferred credits. . . . $ (41,677) $ (29,501) [

Principal actuarial assumptions used were:

Discount rate. . . .. . . .. . ... . .. 8.25 % 8.25 % .;

Rate of increase in compensation levels. . . . . .. ... 5.0% 5.5% -l Expected long-term rate of return on assets - . . 9.5% 10.00%

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ARIZONA PUBLIC SERVICE COMPANY NOTES TO FLNANCIAL STATEMENTS (continued) l l

c Other Benefits In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for active and retired employees. All benefits are provided through a combination j

of insurance policies and self-insured plans. The cost of providing those benefits for both active and retired employees amounted to approximately $25,909,000, $27,254,000, and $28,236,000, of which  !

approximately $12,959,000, $11,826,000, and $12,503,000 was charged to expense in 1992,1991, j and 1990, respectively. Remaining amounts were either capitalized as a component of construction  ;

costs or billed to participants of jointly-owned facilities.- At December 31,1992 the Company was  !

providing these benefits to 6,726 active employees and 1,564 retirees.

New Accounting Standards In December 1990, the FASB issued SFAS No.106," Employers' Accounting for Postretirement .

Benefits Other Than Pensions." This statement requires accrual of postretirement benefits, such i as health care benefits, during the years an employee provides services. This is a significant change  ;

from the current policy of recognizing the costs of these benefits as they are paid. The Company  !

will adopt the standard in January 1993 and plans to amortize the accumulated benefit obligation beginning at that time over a twenty-year period. Based on an actuarial review of the current .

plans, the accumulated benefit obligation at December 31,1992 is approximately $187 million.  ;

Based on current estimates, the adoption of the standard will result in an increase in 1993 annual  ;

postretirement benefit costs of approximately $30 million, of which approximately $13 million will -

be charged to expense. Other increased costs will generally be capitalized as a component of con- i struction costs or billed to participants of jointly-owned facilities. These estimates are subject to j change based on a number of factors used in the calculations. 1 In November 1992 the FASB issued SFAS No.112, " Employers' Accounting for Postemployment'  :

l Benefits" which is effective in 1994. The new standard requires a change from a cash method to an accrual method in accounting for benefits (such as long-term disability) provided to former or '

inactive employees after employn ent but before retirement. The impact of this new standard has '

not been fully determined, but thc change will result in earlier cost recognition for these benefits.  !

The Company has not yet made a determination as to the timing ofimplementation. -;

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10. Commitments and Contingencies

. Nuclear Insurance The Palo Verde participants have insurance for public liability payments resulting from nuclear  ;

energy hazards to the full limit of liability under federal law. This potential liability is covered by prim ary liability insurance prov.ided by commercial insurance carriers in the amount of $200 million -i and the balance by an industrywide retrospective assessment program. The maximum assessment j per reactor under the retrospective rating program for each nuclear incident is approximately $66  ;

million, subject to an annual limit of $10 million per incident. Based upon the Company's 29.1% ']

interest in t'ae three Palo Verde units, the Company's maximum potential assessment per incident is approximately $58 million, with an annual payment limitation of $8.73 million. The insureds j under this liability insurance include the Palo Verde participants and "any other person or organ- l ization with respect to his legal responsibility for damage caused by the nuclear energy hazard." -l The Palo Verde participants maintain "all risk" (including nuclear hazards) insurance for '

property damage to, and decontamination of, property at Palo Verde in the aggregate amount of 28 l

.)

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i ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (continued)

$2.625 billion, a substantial portion of which must first be applied to stabilization and decontam- I ination. The Company has also secured insurance against portions of any increased cost of gen- l eration or purchased power and business interruption resulting from the accidental outage of any  ;

of the three units if the outage exceeds 21 weeks.  :

EPEC Bankruptcy The Company owns or leases a 29.1% interest in Palo Verde and owns a 15% interest in Four  :

Corners Units 4 and 5. El Paso Electric Company owns or leases a 15.8% interest in Palo Verde and owns a 7% interest in Four Corners Units 4 and 6. On January 8,1992, EPEC filed a voluntary i petition to reorganize under Chapter 11 of the Bankruptcy Code. Each Palo Verde and Four Corners ,

participant is required to fund its proportionate share of specified costs relating to Palo Verde and l Four Corners Units 4 and 5. respectively. The Company estimates EPEC's total monthly share of 4 these costs to be approximately $10 million, $9 million of which relates to its share of Palo Verde costs. If a participant fails to meet its payment obligations, each non-defaulting participant pays - l its proportionate share of payments owed by the defaulting participant. On February 13,1992, the bankruptcy court approved a stipulation between EPEC md the Company, as the operating agent  ;

of Palo Verde, pursuant to which EPEC agreed to pay its proportionate share of all Palo Verde {

invoices delivered to EPEC after February 6,1992. EPEC agreed to make these payments until i such time as an order is entered by the bankruptcy court, if ever, authorizing or directing EPEC's rejection of the ANPP Participation Agreement. The stipulation also specifies that approximately

$9.2 million of EPEC's Palo Verde payment obligations invoiced prior to February 7,1992 are to be considered " pre-petition" general unsecured claims of the other Palo Verde participants.

In connection with the bankruptcy proceedings, EPEC has previously indicated that th'e EPEC Leases may be rejected.. Although the Company cannot currently predict the outcome of this issue, the ANPP Participation Agreement provides that EPEC may not be released from the leased portion of its 15.8% proportionate share of Palo Verde costs without the consent of the other Palo Verde participants, even if the EPEC Leases are rejected in the bankruptcy proceeding or a lessor under an EPEC Lease seeks to transfer the lessor's Palo Verde interest to a transferee engaged in the distribution of energy.

As part of the EPEC bankruptcy proceeding, EPEC has indicated that it is evaluating potential claims against the Company arising out of the Company's role as Palo Verde operating agent. EPEC has stated that it is specifically evaluating claims against the Company as a result of the 1989-90 Palo Verde outages. The Company cannot predict whether EPEC will bring a claim against the Company, nor can the Corrpany predict the amount of damages that EPEC would assert if EPEC -

brings such a claim.

Litigation The Company is a party to various claims, legal actions, and complaints arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the operations or fmancial position of the Company.

Construction Program Expenditures in 1993 for the Company's continuing construction program have been estimated at $274 million, excluding capitalized property taxes and capitalized interest.

Fuel and Purchased Powe Commitments The Company is a party to various fuel and purchased power contracts with terms expiring from 1993 through 2020 hat include required purchase provisions. The Company estimates that the amount of fuel and purchased power that it is required to purchase pursuant to such provisions 29

AllIZONA PUBLIC SEllVICE COMPANY NOTES TO FINANCIAI, STATEMENTS (continued) during 1993 totals approximately $150 million. IIowever, this amount may vary significantly pur-suant to certain provisions in such contracts which permit the Company to decrease its required purchases under certain events and circumstances.

Tax Proposal In February 1993 President Clinton announced a tax proposal, including an increased corporate income tax and an energy consumption tax. The Company will continue to evaluate the impact of this proposal on its financial statements as more information becomes available.

11. Supplementary Income Statement Information Other taxes charged to operations during each of the three years in the period ended December 31,1992 are as follows:

Year Ended December 31, 1992 1991 1990 (Thousands of Dollars)

Property . . , .. . $118,080 $120,900 $112,270 Sales . . . 83,185 80,815 74,015 Other. . . . 14,705 12,790 11,365 Total other taxes . ,. . $215,970 $214,505 $197,650

12. Selected Quarterly Financial Data (Unaudited)

Electric Operating Operating Net Earnings (Loss) for Quarter (at Itevenues Income Income (Lons) Common Stock

,. (Thousands of Dollars) 1992 First $344,947 $ 70,867 $ 30,911 $ 22,587 Second - 409,012 101,222 62,773 54,680 Third 516,960 138,947 108,158 100,048 .

Fourth 398,760 81,222 44,963 37,038 1991 First $330,646 $ 74,586 $ 29,330 . $ 21,391 Second 358,245 88,648 39,312 30,650 Third 471,384 137,371 102,943 94,498 Fourth 355,014 28,651 (394,234)(b) (402,592)(b)

(a) The Company's operations are subject to seasonal fluctuations with variations occurring in energy usage by customers from season to season and from month to month within a season, primarily as a result of vienther conditions. For this and other reasons, the results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

(b) Includes rate case settlement write-offs of approximately $407 million - see Note 2.

30

ARIZONA PUBLIC SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (continued)

13. Fair Value of Financial Instruments The following disclosure of the estimated fair value of fmancial instruments is made in accor-dance with the requirements of SFAS No.107, " Disclosure About Fair Value of Financial Instru-ments." The estimated fair value amounts have been determined by the Company using independent sources, available market information, and valuation methodologies described below, llowever, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair' value amounts.

The carrying amounts and estime%d fair values of the Company's financial instruments at December 31,1992 are as follows:

Carrying Estimated Amount Fair Value

- (Thousands of Dol'ars)

Assets:

Cash and Cash Equivalents . .. . . . . $ 1,152 $ 1,152 Equity and Debt Investments (a) . .. . . .. .. . . . 44,539 44,220 Liabilities:

Notes Payable to Banks . . . . . . 130,000 130,000 Commercial Paper . . . .. .. . . . 65,000 65,000 Long Term Debt (b) . . . .. . . 2,126,905 2,226,046 (a) Equity and debt investmehts are classified as Investments and Other Assets on the Company's Balance Sheet.

(b)The carrying value of debt excludes $32 million of obligations under capital leases and the ,

unamortized balance of debt discounts classified as debt on the balance sheet. l

- Cash and cash equiealents. The carrying amounts of these items are a reasonable estimate of I their fair value. .j Equity and Debt Incestments. The fair value of equity investments was established by dis- 'I counting future cash flows using the Company's cost of capital. The fair value of debt investments I was estimated using quoted market values from an independent source.

Notes payable to banks and commericalpaper. The carrying values of notes payable and com-mercial paper borrowings were assumed to approximate fair values due to their short maturities.

]

Long-term debt. The fair value of fixed-rate long-term debt was estimated by independent sources using quoted market prices where available. Where market prices were not available, the fair value was established by discounting future cash flows using rates currently available for debt

. of similar terms and remaining maturities. The carrying value of long-term debt bearing interest -

at variable rates tied to broad market rates was assumed to approximate fair market value.

The fair value estimates presented herein are based on information available as of December 31,1992. Although management is not aware of any factors that would significantly affect the-estimated fair value amounts, such amounts have not been revalued since December 31,1992 for -

purposes of these financial statements and, therefore, current estimates of fair value 'may differ significantly from the amounts presented.

31

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INDEPENDENT AUDITORS' REPORT l

Arizona Public Service Company:

We have audited the accompanying balance sheets of Arizona Public Service Company as of December 31,1992 and 1991 and the related statements ofincome, retained earnings and cash flows for each of the three years in the period ended December 31,1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion -

on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the' audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test j basis, evidence supporting the amounts and disclosures in the financial statements. An audit also ,

includes assessing the accounting principles used and significant estimates made by management, j as well as evaluating the overall financial statement presentation. We believe that our audits l provide a reasonable basis for our opinion.

]

In our opinion, such financial statements present fairly, in all material respects, the financial' position of the Company at December 31,1992 and 1991 and the results of its operations and its  !

cash flows for each of the three years in the period ended December 31,1992 in conformity with I generally accepted accounting principles.

i N M I i

Phoenix, Arizona February 18,1993 1

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3 APS DIRECTORS Kenneth M. Ca'r r, formerly Commissioner (1986-1991) and Chairman (1989-1991) oithe Nuclear l Regulatory Commission (retired August 1991); Vice Admiral, United States Navy (retired 1985) j O. Mark De Michele, president and chief executive officer of the Company, Phoenix,' Arizona i 1

Martha O. Hesse, president, Hesse Gas Company, Houston, Texas, and Dolan Energy Corporation -r and Sierra Blanca Gas Company, Chicago, Illinois .

Marianne Moody Jennings, professor of legal and ethical studies in business, College of Business, ,

Arizona State University, Tempe, Arizona ,

Jack M. Morgan, adorney at law, Farmington, New Mexico Marvin R. Morrison, farmer, cattle feeder and dairyman, Morrison Brothers Ranch, Higley, Arizona Jaron B. Norberg, executive vice president and chief financial officer of the Company, Phoenix, Arizona John R. Norton III, chairman and chief executive officer, J. R. Norton Company (agricu'taral i production), Phoenix, Arizona '

Donald M. Riley, president and general manager, Gilpin's Construction Co., Inc. (general contr setor), .

Yuma, Arizona

• Henry B. Sargent, executive vice president and chief financial officer, Pinnacle West Capital Cor- r poration, Phoenix, Arizona Wilma W. Schwada, civic leader and homemaker, Phoenix, Arizona Verne D. Seidel, managing partner of HMS Properties (property management), Flagstaff, Arizona i Richard Snell, chairman of the board of the Company, Phoenix, Arizona; chairman of the board, .

president and chief executive officer, Pinnacle West Capital Corporation, Phoenix, Arizona l'

Morrison F. Warren, formerly professor emeritus of education (retired June 1988), Arizona State University, Tempe, Arizona Ben F. Williams, Jr., attorney at law, Tucson, Arizona Thomas G. Woods, Jr., formerly consultant to the Company; formerly executive vice president of  ;

.the Company for the Arizona Nuclear Power Project (retired February 1985), Phaanix, Arizona  :!

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SIIAREllOLDER INFORMATION '

Stock Listing The Adjustable Rate Cumulative Preferred Stock, Series Q (Symbol ARPQ) is listed for trading on the New York Stock Exchange. The common stock of the Company is wholly-owned by Pinnacle West and as a result is not listed for trading on any stock exchange.

The chart below sets forth the dividend amount declared on the Company's common stock for each of the four quarters of1992 and 1991.

Common Stock Dividends (Thousands of Dollars)

Quarter 1992 1991 1st Quarter $42,500 $42,500 2nd Quarter 42,500 42,500 3rd Quarter 42,500 42,500 4th Quarter 42,500 42,500 Transfer Agent and Registrar Pinnacle West Capital Corporation Stock Transfer Department P.O. Box 52134 Phoenix, Arizona 85072-2134 (602) 379-2519 The First National Bank of Boston Transfer Processing Mail Stop: 45-01-05 P.O. Box 644 Boston, Massachusetts 02102-0644 (617) 575-2900 (common stock only)

General Counsel Snell & Wilmer Phoenix, Arizona Auditors Deloitte & Touche Phoenix, Arizona Pinnacle West Capital Corporation Stock Purchase and Dividend Reinvestment Plan A Prospectus describing this plan is available upon request. Write: Office of the Secretary, Station 9068, at the address below.

Form 10-K A copy of our Annual Report to the Securities and Exchange Commission, Form 10-K, will be available after April 1,1993, without charge, upon written request of shareholders.

Write: Office of the Secretary, Station 9068, at the address below.

MAILING ADDRESS:

P.O. Box 53999 Phoenix, Arizona 85072-3999 34

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