ML17300A301

Forwards Addl Info Re Application in Respect of Sale & Leaseback Transactions by Arizona Public Svc Co, Including 860724 Opinion & Order of State of Az Corporation Commission,Per NRC Request

ML17300A301
Person / Time
Site:	Palo Verde
Issue date:	08/02/1986
From:	Gehr A ARIZONA PUBLIC SERVICE CO. (FORMERLY ARIZONA NUCLEAR, SNELL & WILMER
To:	Knighton G Office of Nuclear Reactor Regulation
References
TAC-63145, NUDOCS 8608050316
Download: ML17300A301 (172)

Text

I, REGULA'Y INFORf'fATION DISTR IBUTI SYSTEl'1 (R IDS)

ACCESSION NBR: 8608050316 DOC. DATE: 86/08/02 NOTARIZED: NO DOCKET FACIL: STN-50-529 Palo Verde Nuclear Stations Uni t 2~ Arizona Pub 1 i 05000529 AUTH. NANE AUTHOR AFFILIATION GEHRIG A. C. Arizona Nucleav'ouev Prospect ( fovmev lg Ar j, zona Public Serv QEHR> A. C. Snel 1 Zc Mi lmer RECXP. NAI'fE RECIPXENT AFFXLXATXGN KNXQHTON> Q. ll. PAR Pv object Div ectov ate 7

SUBJECT:

For>ards "Addi Info v e Application in Respect of Sale 5 Leaseback Tv ansactiorvs bg Av izona Public Svc Co>" including 860724 opinion 5 ov dev'f State oF AZ Corporation Commxssion~ pev NRC v eques DIBTRIBUTIQN CQDE AQOID

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CQPIEB RECEIVED: LTR I ENCL SIZE:

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TITLE: OR Submittal: Qeneral Distribution NOTES:Standav'dized plant. 0500052'P I I REC P ENT COPIES RECIPIENT COPIES XD CODE/NANE LTTR ENCL ID CODE/NAiNE LTTR ENCL PlfR-8 EB i i PNR-B,PEI CSB 2 PNR-8 FOB i i PNR-8 PD7 LA 0 PWR-8 PD7 PD Oi 5 5 LICITR*~E I

Pl fR-B PE CSB PWR-8 RSB INTERNAL: ACRS 09 6 6 *Dl'1/LFNB i 0 F 8 R 0 NRR/GRAS 0 REQ l-ILE i RQN5 EXTERNAL: EQZ(Q BRUSf<E> S i i LPDR 03 NRC PDR 02 i NSlC 05 NUi~fBER OF COP IES REQUIRED: LTTR ~ ENCL Q5'OTAL

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F FRANK L. SNCLL MARK WILMCR ~ JOSL'PH T MCLCT+g,JR.

COWARD JACOB50N FRCDCRICK K ~ STEIN CR, JR. JOHN J ~ I(PUMA LAW OFFICES J 0 H N P. PH I LL I PS RICHARD MALLCRY JON 5 COHEN ARTHUR C OCHR ROBER'T 0 BATES THOMAS J ~ RCILLY H WILLIAM FOX LORCN W. COVNCC ~ JR WARRCH C, PLATT SNELL s WILMER OVY O. OELBRON J*Y 0. WILEY WILLIAM A. HICKS, III OCOROC H. LYONS PCTCR J RATHWCLL DANIEL J MSAVLIFFC BRUCE 0. PINORCC STEVEN M ~ WHEELER DONALD O.COLBURH MICHAEL D TERRY MARY J,LEADER OOVOLAS W. SCITC 3IOO VALLEY BANK CENTER ORCO R. NIELSEN ROBERT J ~ DCCNY JOSEPH T MCLCCCR HI WILLIAM R HAYDCN JAMCS W. RCYNOLDS ROBCRT B.HOFFMAN PHOENIXF ARIZONA 85073 3IOO OCRALO MORALCS MICHAEL 5 ~ MILROY LAWRCNCC F, WINTHROP ROBERT J. OIBSON BARRY 0 HALPCRN CHARLES

• BI5CHOFF (602) 257-72II THCRCSA A OABALDON ~ ~ JOEL P HOXIC CHARLES H, TRACOCR,HI JAMCS R CONDO LONNIC J WILLIAMS'R. RICHARD W. SHEFFICLO VAVOHH A CRAWFORD RICHARD 0 ~ UNDERWOOD THOMAS J KCNHL'DY SV?AN N E MSCANN WILLIAM Dr FCARNOW ARTHUR T ANDERSON PETER O. SANTIN JOHN BERRY JOYCE KLINC WRIOHT SHIRLEY J. W*HL DAVID *. SPRCNTALL ISABELLC T. MORRIS TELEX I65066 JAMCS P MUCHLBCROCR KIMBCRLY J ORASCR ROBERT H. OSERBILLIO MAROARCT L ~ STCINCR STEPHEN 0 ~ NCWMARK DORA THOMAS TELCCOPIERS:

WILLIAM A. CLARKE TIBOR NASTY JR. JAMES 0. MILLCR MANUAL (602) 257 72II MATTHCW P, FCCNCY RCBCCCA WINTERSCHEIDT JAMES J. SIENICKI LOIS P. SAVAOC VICTOR SOTOMAYOR JAMCS 0. CHINOER AUTOMATIC (602) 256-2735 BRUCE P. WHITE JOSEPH A, KCNDHAMMER EILEEN J MOORE OCOROC J COLCMAN MARIAN C. WALKCR PATRICK C HOOD JEFFREY B ~ MESSINO OORDON M ~ WASSON BRYANT 0. BARBER YVCTTC E. COHEN MICHAEL L ~ RHEE5 C RAID K ~ WILLIAMS DOVOLAS H ALTSCHVLCR JODY K ~ TALK JAMES J OSBORNE JEREMY D MUSSMAN TERESA DAVID50N SCOTT A ~ HOLCOMB CHCRYL A IKCOAMI DAVID R BOSS E MARTHA C.OIBBS THOMAS R ~ HOECKCR ANNE L ~ LCARY WILLIAM F. DCYOUNO DAVID E ~ VIEWED ERIC M ~ CASPER ROBCRT W. MASKING JR.

ROBERT J. ROSCPINK STCPHCN 0 ~ SHYTH J STEPHEN HVFFORD CONNIE R, OCARMOND JANET E THOMAS MALA DAS OUPTA STCPHL'N M. HOPKINS DARY L ~ JONES JOYCE A KRVCCCK TIMOTHY O. 0 ~ NEILL KEVIN J ~ PARKER DONALD H. SMI'TH HCIOI L ~ MSNEIL JAMES H ~ MARBVROCR CAROL'YN C STOCKTON COF COUNSEL CCON LCAYC OF APSCNCC August 2, 1986 r

Director of Nuclear Reactor Regulation Attention: Mr. George W. Knighton, Project. Director PWR Project Directorate I7 Division of Pressurized Water Reactor Licensing-B Nuclear Regulatory Commission Washington, DC 20555 Re: Application in Respect of Sale and Leaseback Transactions by Arizona Public Service Company Dated May 2, 1986 Palo Verde Nuclear Generating Station Unit 2 (Docket No. STN 50-529)

Dear Mr. Knighton:

Arizona Public Service Company (APS) submits herewith three copies of Additional Information with Respect to the Application in Respect of Sale and Leaseback Transactions by Arizona Public Service Company, dated May 2, 1986. The Additional Information consists of Item No. Descri tion Additional Information Requested by NRC Staff 2 ~ Report of AZP Group, Inc., for the First Quarter of 1986 3 ~ Quarterly Report of APS (Form 10-Q) 4 ~ Opinion and Order of the Arizona Corporation Commission, dated July 24, 1986

5. Application of PVNGS Funding Corporation for an Order under Section 6(c) of the Investment Company Act of 1940.

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S NELL & Wl LMER Director of Nuclear Reactor Regulation August 2> 1986 Page Two APS is continuing its efforts to secure"equity investors in addition to those identified in Item 1 '(see questions 5 and 7).

Upon receipt of a commitment from any additional equity investor, we promptly advise you and submit the required information.

If we can be of further assistance, please call me.

Very truly yours, SNELL 6 WILMER Arthur C. G r ACG/smp Enclosures

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S NELL & WILMER Copies with enclosure to:

Edward S. Christenbury, Esq.

'Assistant General Counsel for Hearings Nuclear Regulatory Commission 7735 Old Georgetown Road Bethesda, Maryland 20814 Mr. James C. Peterson Nuclear Regulatory Commission Air Rights XXX Building 4550 Montgomery Avenue Bethesda, Maryland 20814 Timothy Michael Toy, Esq.

Mudge, Rose, Guthrie, Alexander a Ferdon 180 Maiden Lane New York, New York 10038 Mr. E. E. Van Brunt, Jr.

Executive Vice President Arizona Nuclear Power Project Arizona Public Service Company Jaron Norberg, Esq.

Executive Vice President Finance Arizona Public Service Company Mr. Paul Williams Treasurer Arizona Public Service Company

.UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the matter of ARIZONA PUBLIC SERVICE COMPANY, et al., DOCKET NO. STN 50-529 (Palo Verde Nuclear Generating Station, Unit, 2)

APPLICATION IN RESPECT OF SALE AND LEASEBACK TRANSACTIONS BY ARIZONA PUBLIC SERVICE COMPANY ITEM 1 ADDITIONAL INFORMATION REQUESTED BY NRC STAFF

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Arizona Public Service Company (APS) is currently required to pay 29.1% of all Palo Verde unit 2 (PV2) operating costs and 29.1% of future decommissioning costs to Arizona Nuclear Pow-er Project (ANPP). Pleas'e explain in detail the source of this 29.1%, share of total PV2 costs under the proposed refi-nancing arrangement. Include an explanation of the manner in which all increases in operating'and decommissioning costs will be covered following the refinancing'or the terms of the license.

RESPONSE

As indicated in the question, APS is currently required to pay its share of PV2 operating costs and will be required to pay its share of future decommissioning costs under the terms of the ANPP participation agreement, as amended. This result flows from APS's status as a participant under the ANPP parti-cipation agreement.

The simple answer to the question posed above is that there will be no change in the source of the 29.1% share of total PV2 operating costs under the proposed refinancing arrange-ment. As indicated in Section 3.6 of the application filed with the commission in this matter, the leases which will be entered into in connection with the refinancing will be "net leases." This means that APS will be responsible for paying all taxes, insurance premiums, operating and maintenance costs and all other similar costs associated with the leased faci-lities (including obligations as a participant under the ANPP participation agreement). As indicated in the application, the purpose of these provisions is to ensure that the lessors are subject only to normal financing risks and not to opera-tional risks or responsibilities.

The ultimate source of the funds for paying such costs will be revenues from APS's customers. This is true both before and after the refinancing. The refinancing itself will not impact operating and decommissioning costs. With respect to increases in such costs which may otherwise occur, APS will be liable for its share of all increases in operating and de-commissioning costs following the refinancing under the "net lease" concept-. The source of funds to pay for such increases will be the same sources as mentioned above.

If APS's from the leases expire and APS does not purchase the facilities lessors by exercising its purchase option, APS will remain responsible under the ANPP participation agreement for operating and decommissioning costs until a transferee (a new lessee or a purchaser) from the lessor assumes such obli-gations and the other PV2 participants have consented to a release of APS from such liabilities. Under the lease trans-action, APS will retain ultimate responsibility for decommis-sioning costs although a transferee may in fact provide some funding for decommissioning. Also, the NRC will have control

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over responsibilities for decommissioning since a transferee will require action from the NRC in the form, of a license transfer or amendment. Responsibility for decommissioning costs would assuredly be a consideration by the NRC in such action.

Under the ANPP participation agreement, if APS (or the subse-quent transferee) should default in its obligations, then the nondefaulting participants are required to'ay a pro rata share of such defaulted amounts to assure that such costs will be paid. If a default continues for the period of time specified in the ANPP participation agreement, then the de-faulting participant may be required to lose its share of the power and energy from PV2 and also lose its representation on the project committees until the defaults are cured.

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Please provide a detailed explanation of the expected finan-cial effects on APS resulting from the refinancing of its PV2 interest. Include effects on its income statement and =

balance sheet and on its ability to fund its share of PV2 operating and decommissioning costs including any future cost increases.

RESPONSE

APS's proposed sale and leaseback financing of its share of PV2 is expected to have substantial positive economic effects on the company and its customers. The proceeds of the sale .

will provide APS with funds which will allow APS to strengthen its balance sheet and to defer previously anticipated future financings. In addition, the fixed costs to APS of its share of PV2 will be reduced due to the lower cost of the lease financing. The net result is that APS's ability to fund its share of operating and decommissioning costs (including:any future cost increases) can be expected to improve as a result of the transaction.

If 50% of APS's interest in the facility is sold in the trans-action, APS will have available net after-tax cash proceeds of approximately $ 484 million. This will allow APS to defer future financings, to reduce its level of short-term debt and to retire some outstanding debt capitalization. Because the transaction will be an operating lease, APS's balance sheet will be strengthened as the common equity ratio will increase with the retirement of debt and/or elimination of future debt issues. This will provide APS with greater future financing flexibility and should provide enhanced access to the finan-cial markets.

In the absence of revenue adjustments, APS's income can be expected to be improved because the lease costs are lower than the financing costs under ownership. The annual lease rentals

($ 56 million) are accounted for as an operating expense. This is offset by reductions in interest expense ($ 48 million) and depreciation expense (gll million).. The net income increase is about $ 3.4 million as shown below. However, since the company is proposing to pass through this benefit to rate payers, it will result in nearly $ 39 million first year re-venue savings to the rate payers of the company.

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Lease Ownershi Net Expenses 0 & M 55,440 55,440 Depreciation S 11,429 (ll, 429)

Operating Income (55,440) (ll, 429) (44, Oll)

Interest Expense (48,400) (48,400)

Earnings Before Taxes (7, 040) (11,429) 4,389 Income Taxes (2, 175) (3,190) 1,015 Net Income (4, 865) (8, 239) 3,374

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3. Explain the ratemaking authority and responsibility of the

. Arizona Corporation Commission as it will relate to provision of revenues to cover PV2 operating and decommissioning costs applicable to APS's refinanced ownership interest.

RESPONSE

The proposed refinancing will not result in any change in the existing ratemaking authority and responsibility of the Ari-zona Corporation Commission (the ACC) as it will relate to the provision of revenues for operating and decommissioning costs. APS will continue as the utility responsible for such costs and subject to the regulation of the ACC with respect to such costs.

With respect to the recovery of decommissioning costs, the company intends to recover these costs from its customers over the useful life of the facilities. Hearings on this topic will be the subject of a separate docket before the com-mission. However, the sale-leaseback of PV2 does not absolve the company from responsibility for funding the full cost of decommissioning regardless of whether or not it is in the possession of undivided interest.

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~ Provide copies of the most recent interim financial statements and SEC Form 10-Q for APS and for the First National Bank of Boston. ~

RESPONSE

First quarter 1986 interim reports to shareholders for APS as well as APS's report on Form 10-Q for the quarter ended March 31, 1986 are attached hereto.

The 1985 Annual Report of the Bank of Boston Corporation and its Annual Report on Form 10-K for the fiscal year ended December 31, 1985 were included as a part of the Application in Respect of Sale and Leaseback Transactions by El Paso Elec-tric Company, dated April 15, 1986, filed in this Docket No.

50-529 and are incorporated by reference. The Bank of Boston Corporation is the parent corporation of the First National Bank of Boston.

Of course, neither the Bank of Boston Corporation nor the First National Bank of Boston will have any responsibility whatso-ever with respect to operating and decommissioning costs or increases in such costs.

If additional financial statements for the Bank of Boston Cor-poration are required, they will be supplied.

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5. Indicate the total purchase price for the refinanced PV2 in-terest and a detailed dollar breakdown of the portions to be financed by debt and by investment of each equity investor.

RESPONSE

Currently, the equity investors listed below are participating for a total of $ 230 million. Their estimated equity and debt

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participation is also presented below.

(5 in millions)

Debt Exult Total SPBB Leasing, Inc. $ 104 $ 26 $ 130 Emerson Finance Co. 80 20 100 APS is currently seeking additional equity commitments from other potential investors. Information will be provided to the NRC received.

if and when any additional. equity commitments are

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6. Describe the sources of funds and amounts for each equity investor's investment in PV 2.

RESPONSE

The sources of the equity investment, funds to be provided by Security and Emerson have not been made available to APS.

The sources of such funds are not relevant since the purchase price will have been paid to APS at closing and APS will not be looking to such investors for future funding. We can only assume that the source of funding for the investors'quity participation will be from general corporate funds. Each equity investor's estimated dollar investment is detailed above in response to question 5.

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7. Provide copies of the most recent interim and annual financial statements for each equity investor.

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RESPONSE

The equity investors identified in the answer to question 5, i.e., SPBB Leasing, Inc., and Emerson Finance Co., are subsi-diaries, of the Security Pacific Bank and Emerson Electric Co.,

respectively. The 1985 Annual Report and Report on SEC Form 10-Q for the quarter ended March 31, 1986 of Security Pacific Bank, are being transmitted under separate cover. The Annual Report, Form 10-K, for the fiscal year ended September 30, 1985, and the Quarterly Report, Form 10-Q, for the quarter ended December 31, 1985, for Emerson Electric Co. were included in the financial information (tabs 5 and 6) submitted on behalf of Public Service Company of New Mexico with the letter, dated June 10, 1986 from T. M. Toy to G. W. Knighton, and are incor-porated herein by reference.

It should be emphasized that the equity investors will not, as a result of their interest in PV2, have any liability for payment of operating and decommissioning costs of the faci-lities. The leases which will be entered into in connection with the refinancing will be "net leases." This means that APS will be responsible for paying all taxes, insurance pre-miums, operating and maintenance costs and all other similar costs associated with the leased facilities (including obli-gations as a participant under the ANPP participation agree-ment) .

If additional equity commitments are received, similar infor-mation will be provided for the new equity investors.

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UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION In the matter of ARIZONA PUBLIC SERVICE COMPANY, et al., DOCKET NO. STN 50-529 (Palo Verde Nuclear Generating Station, Unit 2)

APPLICATION IN RESPECT OF SALE AND LEASEBACK TRANSACTIONS BY ARIZONA PUBLIC SERVICE COMPANY ITEM 2 REPORT OF AZP GROUP g INC ~ g FOR THE FIRST QUARTER OF l 98 6

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PHOENIX AZ 85072-3900

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Summary report of Keith L. %o'ley construction requirements; debt coverage was at AZP and its predecessor companies-including 2.3 times, excluding Allowance for Funds Used APS-have not missed paying a quarterly dividend During Construction; cash earnings were 31 per-since our modern-day corporation was born in cent; and return on equity was 15.9 percent. Turley added that, during recent weeks, AZP common 1920, said AZP Chairman and President Keith Turley during the April 24 Annual Meeting of stock had been selling at about 120 percent ofbook Shareholders in Phoenix. value, the highest level since 1967.

11trley's comments followed an audio-visual pre- Turley also lauded recent successes at the Palo sentation which reviewed the company's 100-year Yerde Nuclear Generating Station. Unit 1 began history, beginning with the granting of the com-commercial operation on February 13, 1986 and, pany's first gas and electric franchise on April 29, fContinued pg. 2) 1886 and leading to shareholder approval of the holding company, AZP Group, Inc., in April 1985. Quarterly dividends unchanged Turley told about 700 shareholders attending AZP's first annual meeting and APS'6th annual On April 24, the AZP board of directors approved a quarterly dividend of 68 cents per share meeting that the company's 100th year of operation on the company's common stock, which is was also one of its best. Among 1985's results: div-unchanged from the previous quarter. The divi-idends were $ 2.72 on an annualized basis; earnings dends are payable June 1, to shareholders of record per share were $ 3.88; cash flow was 22 percent of at the close of business May 5.

~)'i1< 4~~ + "iP ~a, < ~', < yet '.~i>l'&<.~<<':"~g> The board of directors of APS-a subsidiary of AZP-declared quarterly dividends at the regular rates on 18 outstanding issues of cumulative pre-

Geo'~p,'h'aZrj~tt ~t m

, Arhacui Paht!c Setjke (APS)."The New York and ferred stock. Additionally, a quarterly dividend of

$ 1.8375 was declared on the APS adjustable rate Eachangcittst'AZP o'oaaaoi sto'chas 'hZP, 'tttc

send APS prcferred aockas hRP. ~, ~"I<"~'<.<,'~,r ." cumulative preferred stock, Series Q. Preferred

.Q'lfyoa have a rtacstloa about your ladtvtdaal, I,,'< ',", dividends also are payable June 1, to shareholders of record at the close of business May 5.

12-month earnings increase 2973 '"<%404621-9t63; 1400-457-Zti83 g(g~jiho+~gia.<~Vjcg.'iic l,i<','e%/i <!"p a'y'<~jr'~r "i v AZP Group, Inc. (AZP) earnings for the first quarter ended March 31, 1986, were 65 cents per share, down from 67 cents per share for the same period in 1985. However, earnings for the 12 months ended March 31, 1986, increased to $ 3.84

~'.%ote! vih'ca wHthig, please lndide your ~>hoae per share of common stock, up from $ 3.70 (from I

"aubcattttng a change or address

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card or're<Iucsttng continuing operations) for the previous 12-month

'other changes whkhiftcct yoiiraccount, beiar'e to period. The improvement in 12-month earnings nde the'stgnahircs NaI! owners vrhose is due primarily to APS'igher revenues which appear oa the account 0< ~tiica ~ '~r<

f Y v ~ "i resulted from higher rates and increased elec-tric sales.

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Highlights March 31, 12 Months Ended March 31, 1986 1985 Increase Income, Earnings, Dividends Net income $ 280,955,000 $ 228,015,000 23.2 Average common shares outstanding 73,242,752 69,130,213 5.9 Earnings per share of common stock $ 3.84 $ 3.30 16.4 Dividends per share of common stock $ 2.72 $ 2.60 4.6 Electric Sales and Customers Operating revenues $ 1,205,480,000 $ 1,034,582,000 16.5 Sales (mwh) 13,843,090 13,412,880 3.2 Customers, end of period 529,661 505,634 4.8

'Ihrley summary report (Continued) increase for Unit 1 and a plan in place for the on April 23, 1986, Unit 2 received a Nuclear Regu- other two units."

latory Commission (NRC) license allowing it to While earnings per share were up from the same operate at full power. In granting the license, one period last year, Ibrley said they would begin to NRC official called Palo Verde "a show place" for deteriorate ifthe company is not granted a rate the industry, and said it has a good design, is well increase. "The costs of operating Palo Verde Unit 1 located and should be a point of pride. Unit 2 is for the benefit of our customers is approximately scheduled for full commercial operation by the end $ 9 million per month after taxes. Ifwe are unable of the third quarter of 1986, while Unit 3 is sched- to achieve sufficient rate increases in a timely fash-uled for commercial operation in late 1987. ion to cover these costs, we willhave to seek an Although Palo Verde is one of several nuclear interim increase subject to refund. Failing that, of projects undergoing prudency audits, Ibrley said course, we would be obligated to seek relief from that "any fair and objective audit will result in a the courts."

verdict that the project has been managed pru- 1brley said he was giving a worst-possible pic-dently." The audit was ordered by regulators from ture of the situation, and assured shareholders four states involved in Palo Verde and was to be that the company's ability to pay dividends in funded by all participants based on each utility's 1986 would not be impaired. He added that, once share of the project. However, 1brley pointed out all three units are fully reflected in rates, the that Public Service of New Mexico and El Paso company would see steady improvement in its Electric Company recently withdrew their fund- financial outlook.

ing because of concerns about the audit's necessity He also said that AZP has moved forward with a and objectivity. strategy for developing significant earnings from "While we share the concern, APS is bound by its non-regulated subsidiaries. El Dorado Invest-Commission order to continue to pay for 29. 1% of ment Company's most important project for 1986 is the audit's cost," Tbrley said. "Ofcourse, we do to form its own venture capital fund to which it has not know what the impact of the withdrawal of the committed $ 50 million over the next five to seven two companies will mean to the audit effort." years, and Energy Development Company has 1brley also discussed APS'fforts to achieve entered into a real estate partnership and changed rate increases to cover Palo Verde's costs. "We its name to SunCor Development Company. 'Ibrley are providing the Commission with all necessary said that as much as $50 million in equity capital information, so it should be clear to them that will be allocated to the new joint venture over the we are entitled to-and simply must have-a rate next five years. (Continued pg. 3)

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Vsrfey summary report (C0nfinued ) CONSOLIDATED BALANCESHEET ftlnahhCh'ted)

Meanwhile, Malapai Resources Company owns Mar. 31, Dec. 319 a ranch which has proven uranium reserves and has 1986 1985 an option to acquire an adjoining property. A dem- UtilityPlant fThousands of Doltars) onstration plant and cost analyses for both proj- Property. plant and equipment $ 5,845.048 $ 5,712,507 Less accumulated depreciation ects are expected to be completed within the next and amonizaiion 86!.810 838.684 eight to twelve months. Utilityplant-nci 4.983.238 4.873.823 Turley emphasized that the AZP Stock Purchase Investments and and Dividend Reinvestment Plan-not APS rate- Other Assets 116.544 90.257 payers-is financing these non-utility activities. He Current Assets also thanked shareholders for their continued par- Cash 13.304 7,338 Temporary cash invesimenis 1,000 5.100 ticipation in the plan and noted that, because of Accounts receivable-nei 107,454 126.395 their investment, AZP sees no need for additional Fuel and materials 91,145 71,95&

public offerings of common stock in the foresee- D femd fuei 68,749 74,335 Other 12.809 7.215 able future. 292.341 Total cunent assets 294.461 AXP forms new partnerships Deferred Debits Unamortized gas exploration Through its subsidiaries, AZP Group has costs 9,994 10,417 Unamortized debt issue costs 16,504 16.705 formed partnerships for both a joint real estate Other 67,263 41.402 venture and a venture capital fund. The real estate Total deferred debits 93,761 68.524 partnership was announced in March 1986, while 'IIAL $ 5.488.004 $ 5.324.945 the new venture fund was announced in early LIABILITIES May 1986.

Capitalization The real estate venture, known as SunCor Part- Common stock ners, is a partnership with Gerald Diddy, formerly (no par value) $ 1.322.252 $ 1.294.623 president of First Service Corporation, the devel- Retained earnings 588.203 590.872 opment subsidiary of MeraBank Inc. Diddy has Cominon stock equity 1,910,455 1,885,495 Non.redeemable been named managing partner of the new venture prcfcrred stock of APS 218.561 218,561 and AZP's existing real estate subsidiary, Energy Redeemable prefemd stock Development Company, has changed its name to of APS 209.821 219,421 Long. term debt less cumnt SunCor Development Company. maturilies 2,230.333 2.205.940 SunCor Partners recently acquired a large tract Total capitalization 4.569.170 4.529.417 of commercial property, suitable for a regional Current Liabilities shopping mall or other commercial development, Commercial paper II&,735 18,000 Cumni maiurities of long-in Tempe, Arizona. Diddy, an attorney with over 15 tcrm debt 17,456 17,456 years experience in real estate, said the new joint Accounts payable 80.077 87.12!

venture will continue to invest in a portfolio con- Accrued taxes 71,117 52,296 Accrued interest 59,733 72,678 sisting of a mix of development and income prop- Accrued dividends on erties. Under his leadership, First Service preferred stock 3,449 3,566 Corporation's real estate development portfolio Other 28.619 26.269 had a cumulative retail value of approximately Total current liabilities 379.186 277.386 Deferred Credits and Other

$ 1 billion. Deferred income taxes 257,748 230,553 The SunCor Development Company, mean- Deferred investment iax credit 177,859 174.503 while, is wrapping up an earlier joint venture Unainortized credit related io sale of tax benefits 43,224 43,645 involving the sale of a golf course and potential Other 60.817 69.441 resort property at Scottsdale Country Club. This Total defemd credits gr other $ 39.648 518 142 transaction is expected to produce profits of about 1M'AL $ 5,488.004 $ 5.324.945

$ 2,600,000 after income taxes. (Continued pg. 4)

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oyyf ~\M' tc would allow AZP to handle the sale of Plan shares for participants who wish to sell all or a portion of r their shares.

According to Corporate Secretary Faye Widen-mann, AZP will sell your requested number of Plan shares, then mail you the proceeds minus the brokerage fee. She added that, due to the large vol-rp c ume of sales which can be handled by AZP, broker-age fees will be less than on sales handled by an individual's broker. The company willonly sell shares held in Plan accounts and will not handle the sale of stock certificates.

That change, along with others approved during the April 24 board meeting, is described in a new Stock Purchase and Dividend Reinvestment Plan Prospectus to be mailed to Plan participants by C

June l, the date all changes become effective. The new prospectus has also been rewritten in a ques-tion/answer format to allow for easier reading.

Other changes described in the prospectus include the authorization of additional new shares for the Plan and a provision which would allow the o~kQ+d + company to acquire added Plan shares through SkorcAotdrr Alarp Ciodkort. 4 rccidccct o/Sort City, AZ., Actpcd AZP Ckoit open market purchases. AZP does not intend to ococc orcd Pyccidcrct Ãcitk Tsrtcy crd tAc coocpoopk ccrcfcrcrctot coko fottorriog tkr Aorcool klcctirrd. exercise the open-market option at this time.

AZP partnerships (Conrtnued)

PVNGS boasts safe technology El Dorado Investment Company has formed its partnership with Brent T. Rider, formerly president Responding to media inquiries after the Soviet nuclear accident in late April, Ed Van Brunt, exec-of Union Venture Capital Corporation, a subsidiary utive vice president of the Arizona Nuclear Power of Union Bank in Los Angeles. The new venture capital fund, known as El Dorado Ventures, will Project, said that "there is almost no similarity concentrate on investments in the Sun Belt region. between Palo Verde and the Chernobyl nuclear Rider, who earned his Masters of Business power plant near Kiev."

Administration at Harvard Business School, is a The Soviet reactor is based on a different tech-prominent leader in venture capital and has nology and used graphite in its design; Palo Verde does not, said Van Brunt. He added that the Sovi-invested in a variety of successful businesses. More et's nuclear system did not have a heavy-duty reac-information on both subsidiaries, including invest-ment commitments, is included in AZP Chairman tor vessel, as does Palo Verde, to contain the Keith 'Ibrley's annual meeting summary. radioactivity being released by damaged fuel.

In addition to the reactor vessel, Palo Verde, like all commercial nuclear plants in the U.S., has a large containment building that encloses all of the New dividend reinvestment provisions nuclear equipment. The containmerit structure is The AZP board of directors has approved several constructed to confine any of the harmful radioac-changes to the AZP Stock Purchase and Dividend tivity that would be produced by even the worst Reinvestment Plan, including a provision that nuclear accident possible.

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AZP GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIALPOSITION (Thousands ofDollars) Unaudited Three Months Twelve Months Ended March 31, Ended March 31, Source of Funds:

Fundsfrom ot3erafionsf 1985 1986 1985 Continuing Operations:

Income from continuing operations S 48,327 $ 46,921 $ 280,955 $ 255,915 Principal non-fund charges (credits) to income:

Depreciation and amortization 28,253 104,068 89,463 Allowance for equity funds used during construction (30,583) (37,213) (136,982) (138,690)

Deferred income taxes net 13,486 11,963 107,681 48,387 Deferred investment tax credit net 3,356 5,709 34,030 51,587 Other (7.972) 6,186 17.203 5,392 Total funds from continuing operations 54.867 56.972 406.955 311,854 Discontinued operations:

Income (loss) from discontinued operations (27,900)

Principal non-fund charges (credits) to income:

Loss on disposal of gas system-noncunent 19,513 Other net 821 Total funds from discontinued operations (7,566)

Total funds from operations 54.867 56.972 406,955 304,288 Funds/rom external sourcest Proceeds from saic of gas system 114,657 Common stock 27,629 14,772 116,971 64,003 Preferred stock of APS 50,000 Long-term debt 203,667 266,091 682,606 523,441 Other items net (7.473) (472) (8,617) (6,448)

Total funds from external sources 223.823 280.39i 790.960 745,653 Total source of funds $ 278.690 3 337.363 $ 1.197.915 $ 1,049,941 Application of Funds:

Funds used for capital expenditures:

Continuing operations S 112,107 . $ 106,823 $ 499,389 $ 396,370 Discontinued operations 23,536 Investments and other assets 26,287 (203) 49,466 (9,785)

Short. term bofrowings net (100,735) 139,977 (98,912) 96,994 Repayment of tong-term debt 179,380 61,400 393,401 320,233 Redemption of redeemable preferred stock of APS 9,600 34,262 38,657 38,718 Dividends on common stock 50,996 45,646 199,441 179,415 Increase (Dccrcasc) in working capital:u 1,055 (50.542) 116,473 4,460 Total application of funds $ 278,690 $ 337.363 $ 1,197,915 $ 1,049,941 Increase (Decrease) In Working Capltalo Current assets $ 2,120 $ (784) $ 99,818 $ (3,475)

Current liabilities (1.065) 449,758) 16,655 7,935 Net increase (decrease) $ 1.055 $ (50.542) $ 116.473 $ 4,460 uExcluding short-term bonowings net and current maturitics of long-term debt.

Nett: pursuant to orrporate rcsmicturing plan effective April 29, 19SS Apg became a subshliary of AZp. Additionally. effective Novemtur I. t9ge ApS sold iu ras distribution system. Accordingly. die Cenielidated Cinancul statements have been adjusted for thc effects of thcsc changes.

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Summa~ report of Mark De Michele show that we are saving our customers over $ 40 In his April 24 report, Mark De Michele, presi- million a year by operating our coal plants 15 per-dent and chief operating officer of APS and execu- cent better than the national average," De Michele tive vice president of AZP, said that, in addition to said. "Scheduling maintenance time properly and securing adequate rates, APS was committed to the ensuring the best mix of fuel for our entire system efficient operation of its plants, attention to safety, has provided additional savings."

cost effectiveness and concern for employees. De Michele reiterated APS'ommitment to After reviewing APS'hree-phase rate case (see avoid financing any major new power plants until related story), De Michele said that APS was the next century. He added that, although Arizona exploring the possibility of refinancing Palo Verde is experiencing rapid growth, APS could meet Unit 2 by selling all or a portion of the unit to increased electric needs through various load investors, then leasing it back as an operating management programs, power purchases from plant. "This is a financing technique that may or other utilities and continued upgrading of may not be feasible; but I want to emphasize that existing plants.

APS will still control the 29.1 percent interest in He also emphasized efforts to call the public's Palo Verde we have always had," he said. attention to the company's many positive stories De Michele noted that other measures, such as such as APS'nvolvement in and contributions to refinancing high coupon debt, have helped reduce the community, cost-saving measures, and pro-the company's interest costs by more than $ 20 grams to increase employee participation through million annually, and additional refundings are both quality circle and employee suggestion pro-also planned for 1986. APS has also frozen the grams. He noted that the company is planning to salaries of top-management, placed a partial freeze move its headquarters to a new, larger building, on hiring, and reduced marketing and advertising. also in downtown Phoenix. The new headquarters Operating costs are further being reduced by would bring employees, currently scattered in sev-keeping our plants at peak capacity and operating eral locations, together in one building, and serve them at their highest efficiency. "Recent studies as a focal point for downtown redevelopment.

Lower interest rates spur refundings On May 1, 1986, APS called $ 75 million in 12'/8 First Mortgage Bonds. On April 28, APS sold percent bonds at a price of 109. 15. The call was $ 125 million of 10-year, 9 percent First Mortgage part of a continuing program to refund APS'igh- Bonds. Proceeds of that issue will be applied to the coupon debt as interest rates and issuance terms of redemption of a 12'/e percent series of First Mort-securities permit. gage Bonds due 2009 and repayment of short-term Earlier this year, APS used proceeds from the debt incurred in connection with the company's January sale of $ 100 million in 30-year, ll percent construction programs. Proceeds from additional First Mortgage Bonds to refund $25 million of 7- sales will also be applied either to the redemption, year, 16 percent Eurobonds and $ 75 million of 7- repayment or retirement of the company's out-year, 16.25 percent Eurobonds, both at a premium standing indebtedness or to the financing of con-of 101 percent. Proceeds from the March sale of struction expenditures.

$ 100 million in 10-year, 9.25 percent First Mort- In other financing, APS plans the early redemp-gage Bonds were used to tender for $ 79.4 million tion of two preferred issues on June 2, 1986, of 15 percent series First Mortgage Bonds due in including $ 10.70 Series I at a price of $ 103 and 1994 at 123.228 percent. $ 11.95 Series M at a price of $ 101.99. APS has APS has also filed a shelf registration statement also doubled up-from $ 12.33 million to $ 24.66 with the Securities and Exchange Commission pro- million-on a regular sinking fund due May 15 on posing public sales of up to $350 million in its 12~/s percent series First Mortgage Bonds.

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slNC s APS rate hearings continue Hearings on the main portion of the company's per kilowatt-hour to seven mills, allowing the Palo Verde Unit I rate case began March 27 with recovery of approximately $ 74 million in the announcement that APS was reducing its rate uncollected fuel costs.

request from $ 78.2 million (8.6 percent) to $ 54.6 Phase III hearings-dealing with a proposed million (6 percent). accounting order for Palo Verde Unit 2-are The reduction was due to a decrease in the com- expected to begin immediately after completion of pany's requested return on equity from 16.5 per- Phase II hearings. The accounting order would cent to 15 percent. Henry Sargent, APS executive allow APS to defer Palo Verde Unit 2 costs until vice president and chief financial officer, said the 1987, thus allowing the company to phase-in rates lower return on equity reflects significant improve- to cover the unit's costs.

ments in the capital markets since the request was The phase-in plan is one of two alternatives pre-filed in May 1985. sented in the Palo Verde Unit 2 rate case which was The revised request would recover the remaining originally filed in December 1985 using a test year capital and operating costs of Palo Verde Unit l. ended May 1985. The ACC hearing officer ordered About half of the unit's construction costs are cur- APS to update the test year to include the remain-rently reflected in rates and the company had der of 1985, and refile the case by April 30, 1986.

hoped to have the remainder added when the unit The refiled case also includes two alternatives began commercial operation in February 1986. for bringing Palo Verde Unit 2 in rates: a traditional Phase Il rate hearings, expected to last through approach which asks for a single rate increase of mid-June, are part of a three-phase rate case. Hear- 20.1 percent, to take effect at the time Unit 2 goes ings on Phase I-dealing with a purchased power commercial in the third quarter 1986; and the and fuel adjustment clause-were completed March phase-in plan which asks for three smaller in-7, and the company is waiting for a proposed order creases of 6.4 percent each to take effect in Janu-from the ACC hearing officer. APS has requested'hat ary of 1987, 1988 and 1989. Hearings on the the fuel adjustor be increased from four mills request are scheduled to begin September 27.

Shareholders tour PVNGS NRC proposes civil penalty Efforts to keep shareholders informed about On May 6, 1986, just before Quarterly went to AZP Group, Inc. and their investment in the com- press, ANPP was notified by the NRC of a pro-pany are continuing this year with a series of posed.$ 100,000 civil penalty for violations involv-regional shareholder meetings and tours of the Palo ittg Palo Verde security. ANPP has 30 days in Verde Nuclear Generating Station. which to mitigate, appeal or pay the penalty.

"These meetings not only give shareholders a The proposed penalty resulted from an NRC better understanding of how we'e managing their inspection this spring which found ANPP failed to investment, but also give us a better insight into the comply with certain security guidelines. The items needs and concerns of our shareholders," AZP were corrected or compensated for at the time they Chairman and President Keith 11iriey said. Other were identified, and measures have been taken to members of senior management are also on hand ensure they do not reoccur.

during regional shareholder meetings. The next In releasing the inspection report, an NRC spo-meeting is planned for June 12 in Denver, Colo. kesperson said there was no violation that compro-The first tours of Palo Verde exclusively for mised the plant's overall safety. Information from shareholders began in December 1985. More than that report was apparently leaked to non-authorized 1,300 AZP shareholders from across Arizona have parties, prompting ANPP to initiate an investiga-participated. Other Arizona shareholders, or share- tion which included the use of polygraph tests.

holders who plan to visit Arizona, may still IfANPP is required to pay the penalty, the cost arrange tours by calling AZP's toll-free number. would be divided among all project participants.

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AZP GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands Ereept Per Share Amounts) Unaudited Three Months Twelve Months Ended March 31, Ended March 31, 1986 1985 1986 1985 Electric Operating Revenues S 274.530 S 243.552 S 1.205,480 $ 1,034.582 Fuel Ex pensesl Fuel for electric generation 41,495 44,904 216.166 191.560 Purchased power and interchange net IS.844 4.491 28.142 8,880 Total 57.339 49,395 244.308 200.440 Operating Revenues less Fuel Expenses 217.191 194.157 961,172 834,142 Other Operating Expenses:

Operations excluding fuel expenses 30.711 27.447 126,015 102.502 Maintenance 20.564 28,236 81,198 76,369 Depreciation and amortization 28.253 23,406 104,068 89,463 Income taxes current 4.571 11,598 13,938 43,404 Income taxes dcfcrred 44.428 29,790 209,709 156.192 Other taxes 27.430 24.228 107.478 95.631 Total 155.957 144,705 563.561 Operating Income 61.234 49.452 318.766 270,581 Other Income (Deductions):

Allowance for equity funds used during construction 30,583 37,213 136.982 138,690 Income taxes-current (425) (749) (1,412) 836 income taxes deferred 13.495 !2,164 54,743 53,732 Other net 525 132 (6.310) (772)

Ibtal 44.178 48.760 184.003 192,486 Income before Interest and Other Deductions 105.412 98.212 502.769 463,067 Interest and Other Deductions:

Interest on long-term debt 56,095 47,909 217,406 192,448 Interest on short. term borrowings 1.938 2,204 6,685 11,488 Debt discount. premium and expense 1,136 789 3,960 2,729 Allowance for borrowed funds used during construction credit (12,665) (11,709) (49,132) (48,863)

Preferred stock dividend requirements of APS 10.581 12.098 42.895 49.350 Total 57.085 51,291 221.814 207.152 Income From Continuing Operations 48.327 46.921 280,955 255.915 DLscontlnued Operatlonsl Income (loss) from operations of gas system net of tax (1,430)

Loss on disposal of gas system net ol'ax (26.470)

Income (Loss) from discontinued operations (27,900)

Net Income S 48.327 $ 46.921 S 280.955 $ 228.015 Average Common Shares Outstanding 74.887.388 70.360.843 73.242.752 69.130.213 Earnings (Loss) Per Average Share of Common Stock:

Continuing operations $ 0.65 S 0.67 $ 3.84 $ 3.70 Discontinued operations (0.40)

Total S 0.65 $ 0.67 S 3.84 S 3.30 Dividends Per Common Share $ 0.68 S 0.65 $ 2.72 $ 2.60 Note: pursuant to corrsvrate restructurins plan effective April 29. t9t5 Aps became a subsidiary of Azp Additionally. effective November I. f984 Aps sold its rar, distribution system. Accordingly. the comolrdatcd financial statements have been adjusted for thc effects of these chanrcs.

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UNITED STATES OF 'AMERICA NUCLEAR REGULATORY COMMISSION

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In the matter of )

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ARIZONA PUBLIC SERVICE )

COMPANY, et al., ) DOCKET NO. STN 50-529

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(Palo Verde Nuclear )

Generating Station, Unit 2) )

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APPLICATION IN RESPECT OF SALE AND LEASEBACK TRANSACTIONS BY ARIZONA PUBLIC SERVICE COMPANY ITEM 3 QUARTERLY REPORT OF APS <<(FORM 10-Q)

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.e SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10"Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31 1986 Commission file number 1-4473 ARIZONA PUBLIC SERVICE COMPANY (Exact name of registrant as specified in its charter Arizona 86-0011170 (State or other jurisdiction I.R.S. Employer of incorporation or organization) Identification No.)

411 North Central Avenue P. 0. Box 53999 Phoenix Arizona 85072-3999 (Address of principal executive offices) Zip Code Registrant's telephone number, including area code 602-250-1000 Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),

and (2) has been subject to the filing requirements for the past 90 days.

Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Number of shares of common stock, $ 2.50 par value, outstanding as of May 9, 1986: 71,264,947 0

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OellIiitlts Hlmkim+selllc Suite 1000 First Interstate Bank Plaza Phoenix. Arizona 85003-1893 (602) 257-8333 ITT Telex: 4995608 Arizona Public Service Company:

We have made a review of the consolidated balance sheet of Arizona Public Service Company (the "Company" ) and its subsidiaries as of March 31, 1986 and the related consolidated statements of income for the three-month and twelve-month periods ended March 31, 1986 and 1985 and of changes in financial position for the three-month periods ended March 31, 1986 and 1985, included in the Company's quarterly report on Form lO-Q, in accordance with standards established by the American Institute of Certified Public Accountants.

A review of interim financial information consists principally of obtainingan understanding of the system for the preparation of interim financial information, applying analytical review procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an examination in accordance with generally accepted auditing standards, the objective of'hich is the expression of an opinion regarding the financial statements taken as a whole.

Accordingly, we do not express such an opinion.

N Based on our review, we are not aware of any material modifi-cations that should be made to the above-mentioned consolidated financial statements for them to be in conformity with generally accepted accounting principles.

May 12, 1986

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F PART I FINANCIAL INFORMATION Item 1. Financial Statements Three Months ARIZONA PUBLIC SERVICE COMPANY Ended March 31 CONSOLIDATED STATEMENTS OF INCOME 1986 1985 Unaudited (Dollars in Thousands, Except Per Share Amounts)

ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . . $ 274 530 $ 243 552 FUEL EXPENSES:

Fuel for electric generation. 41,495 44,904

~ Purchased power and interchange net 15 844 4 491 Total 57 339 49 395 OPERATING REVENUES LESS FUEL EXPENSES . 217 191 194 157 OTHER OPERATING EXPENSES:

~ Operations excluding fuel expenses. 30,621 27,447 Maintenance . 20,564 28,236 Depreciation and amortization . 28,253 23,406

'ncome taxes curr ent 4,612 11,598 Income taxes deferred . 44,428 29,790 Other taxes . ~ ~ ~ 27 430 24 228 Total 155 908 144 705 OPERATING INCOME . 61 283 49 452 OTHER INCOME (DEDUCTIONS):

=Allowance for equity funds used during construction 30,583 37 213 Income taxes current (391) (749)

Income taxes - deferred . ~ ~ 13,495 12,164 Other net . 797 132 Total ~ ~ 44 484 48 760 INCOME BEFORE INTEREST DEDUCTIONS. 105 767 98 212 0

INTEREST DEDUCTIONS:

.,Interest on long-term debt 56,095 47,909 Interest on short-term borrowings . 1,938 2,204 Debt discount, premium and expense. 1,136 789 Allowance for borrowed funds used duri ng construction credit . 12 665 11 709 Total 46 504 39 193 NET INCOME . 59,263 59,019 PREFERRED STOCK DIVIDEND REQUIREMENTS. 10 581 12 098 0

EARNINGS FOR COMMON STOCK. 48,682 $ 46,921 AVERAGE COMMON SHARES OUTSTANDING. 71,264,947 70,360,843 PER SHARE OF COMMON STOCK:

~ Earnings (based on average common shares outstandi ng) 0.68 0.67 Dividends declared 0.72 0.65 e Notes to Consolidated Financial Statements

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-3" ARIZONA PUBLIC SERVICE COMPANY Twelve Months CONSOLIDATED STATEMENTS OF INCOME Ended March 31 Unaudited) 1986 1985 (Dollars in Thousands, Except Per Share Amounts)

CTRIC OPERATING REVENUES $ 1 205 480 $ 1 034 582 FUEL EXPENSES:

Fuel for electric generation. 216,166 191,560 Purchased power and interchange net 28 142 8 880 Total 244 308 200 440

~ OPERATING REVENUES LESS FUEL EXPENSES 961 172 834 142 OTHER OPERATING EXPENSES:

Operations excluding fuel expenses. 125,925 102,502

'aintenance . 81,198 76,369

'epreciation and amortization . 104,068 89,463 Income taxes current 13,979 43,404

~ 'ncome taxes - deferred . 209,709 156,192 Other taxes . 107 478 95 631 Total 642 357 563 561 OPERATING INCOME . 318 815 270 581 t

OTHER INCOME (DEDUCTIONS):

Allowance for equity funds used during construction 136,982 138,690 Income taxes - current (2,297) 836 Income taxes - deferred . 54,743 53,732 Other net . 3 657 772 Total 185 771 192 486 OME BEFORE INTEREST DEDUCTIONS. 504 586 463 067 INTEREST DEDUCTIONS:

Interest on long-term debt 217,406 192,448 Interest on short-term borrowings . 6,685 '1,488 Debt discount, premium and expense. 3,960 2,729 Allowance for borrowed funds used duri ng construction - credit . 49 132 48 863 Tot a 1 'o ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 178 919 157 802 INCOME FROM CONTINUING OPERATIONS 325 667 305 265 LOSS FROM DISPOSAL AND OPERATION OF DISCONTINUED GAS SYSTEM, NET OF TAX 27 900 NET INCOME . ~ ~ ~ 325,667 277,365 PREFERRED STOCK DIVIDEND REQUIREMENTS. ~ ~ ~ ~ 42 895 49 350 0 EARNINGS FOR COMMON STOCK. ~ ~ ~ ~ ~ 282,772 228,015 AVERAGE COMMON SHARES OUTSTANDING. 71,254,157 69,130,213 PER SHARE OF COMMON STOCK:

Earnings (loss) (based on average common shares outstanding):

Continuing operations 3.97 3.70 Discontinued operations ~ ~ ~ ~ 0.00 0.40 T otal ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 3.97 3.30 Dividends declared ~ ~ ~ ~ o $ 2.80 2.60 See Notes to Consolidated Financial Statements

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ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Unaudited Three Months Ended March 31 1986 1985 (Thousands of Dollars)

SOURCE OF FUNDS:

Funds from operations:

Net income $ 59,263 $ 59,019 Principal non-fund charges (credits) to income Depreciation and amortization 28,253 23,406 Allowance for equity funds used during construction . (30,583) (37,213)

Deferred income taxes net ~ 27,060 11,963

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Deferred investment tax credit net . ~ ~ 3,356 5,709 0 ther ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~7972 6 186 Total funds from operations 79 377 69 070 Funds from external sources:

Common stock . 14,772 Long-term debt . 203,667 266,091 Other items - net (21,047) (472)

Decrease in working capital* 71 50 542 Total funds from external sources 182 691 330 933 Total source of funds 6 262,068 6 400,003 APPLICATION OF FUNDS:

Funds used for capital expenditures . $ 112,107 $ 106,823 Investments and other assets 139 (203)

. Short-term borrowings net . (100,735) 139,977 Repayment of long-term debt . 179,380 61,400 Redemption of redeemable preferred stock 9,600 34,262 Dividends on preferred and common stock . 61 577 57 744 Total application of funds 6 262,068 $ 400,003 INCREASE (DECREASE) IN WORKING CAPITAL":

Current assets. $ 1,204 $ (784)

Current liabilities . 1 275 ~49 758 Net decrease 6 (71) $ (50,542)

• Excluding short-term borrowings - net and current maturities of long-term debt.

See Notes to Consolidated Financial Statements

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ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31,

'986 1985 (Unaudited)

(Thousands of Dollars)

UTILITY PLANT:

~ Electric utility plant in service and held for future use $ 4,173,661 $ 2,970,368 Less accumulated depreciation and amortization 861 810 838 684 Total ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 3,311,851 2,131,684 Construction work in progress . 1,628,997 2,742,139

'Nuclear fuel, net of amortization 42 390 Utility Plant net 4 983 238 4 873 823 INVESTMENTS AND OTHER ASSETS:

Investments in and receivables from affiliates 16,513 16,513 Other investments and notes receivable. 6 130 5 991 Total investments and other assets . 22 643 22 504 CURRENT ASSETS:

Cash and marketable securities 8,474 7,871 Special deposits and working funds. 3,397 3,342 Accounts receivable:

Service customers. ~ ~ 71,595 84,533 Other. 37,850 43,415 Allowance for doubtful accounts. ~ ~ ~ ~ ~ (1,486) (1,395)

Materials and supplies (at average cost). 55,676 41,525 Fuel (at average cost). 35,469 30,433 Deferred fuel 68,749 74,335 9 412 3 873 Total current assets . 289 136 287 932 DEFERRED DEBITS:

Unamortized gas exploration costs . 9,994 10,417 Unamortized debt issue costs. 16,504 16,705 Other . 65 807 39 946 Total deferred debits. 92 305 67 068 TOTAL. $ 5,387,322 $ 5,251,327 See Notes to Consolidated Financial Statements

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ARIZONA PUBLIC SERVICE COMPANY CONSOLIDATED BALANCE SHEETS LIABILITIES Mar ch 31, December 31, 1986 1985 (Unaudited)

(Thousands of Dollars)

CAPITALIZATION:

Common stock. $ 178,162 $ 178,162 Premiums and expenses net . 1,040,909 1,040,909 Retained earnings . 590 020 592 334 Common stock equity. 1,809,091 1,811,405 Non-redeemable preferred stock. ~ ~ 218,561 218,561 Redeemable preferred stock ~ ~ 209,821 219,421 Long-term debt 2 230 333 2 205 940 Total capitalization . 4 467 806 4 455 327 CURRENT LIABILITIES:

Commercial paper ~ ~ ~ 118,735 18,000 Current maturities of long-term debt. ~ ~ ~ 17,456 17,456 Accounts payable. 80,077 87,113 Accrued taxes . 71,117 52,976 Accrued interest. 60,401 72,678 Accrued dividends . 3,449 3,566 Other . 28 633 26 069 Total current liabilities. 379 868 277 858 DEFERRED CREDITS AND OTHER:

Deferred income taxes 257,748 230,553 Deferred investment tax credit. 177,859 174,503 Unamortized credit sale of tax benefits 43,224 43,645 Customer advances for construction 23,779 23,991 Other . 37 038 45 450 Total deferred credits and other . 539 648 518 142 TOTAL. $ 5,387,322 $ 5,251,327 See Notes to Consolidated Financial Statements e

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. The consolidated financial statements include the accounts of Arizona Public Service 'Company (the "Company" or "APS") and those of two of its wholly-owned subsidiaries, APS Finance Company N.V., organized to serve as a financing corporation to raise funds outside the United States of America, and APS Fuels Company, organized to manage investments in certain fuel resources. All significant intercompany, balances and transactions have been eliminated.

2. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (comprising only normal recurring accruals) necessary to present fairly the financial position of the Company and its subsidiaries as of March 31, 1986, the results of their operations for the three months and twelve months ended March 31, 1986 and 1985 and the changes in their financial position for the three months ended March 31, 1986 and 1985.

3. The Company's operations are subject to seasonal fluctua-tions with variations occur ring in energy usage by customers from season to season and from month to month within a season, primarily as a result of changing weather conditions. For this and for other reasons, the results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

4. The Company sold its gas distribution system effective November 1, 1984.

5. On April 18, 1985 the Company's shareholders approved a plan for corporate restructuring. Effective April 29, 1985, APS became a subsidiary of a holding company, AZP Group, Inc.

6. See "Construction and Financing Programs" under Part II, Item 5 for changes in capitalization since December 31, 1985.

7. See "Palo Verde Nuclear Generating Station" under Part II, Item 5 for discussion of the Prudency Audit.

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'ARIZONA PUBLIC SERYICE COMPANY Item 2. Mana ement's Discussion and Anal sis of Financial Condition and Results of 0 erations.

Operating Results for the Three Months and Twelve Months Ended March 31, 1986 as Com ared with Corres ondin Periods Ended March 31 1985.

Although the Company has experienced increases and decreases in unit costs of generating fuel and purchased power, most of such changes are passed on to customers pursuant to the purchased power and fuel-adjustment mechanism in the Company's rate schedules. Accordingly, such changes are reflected in fuel revenues and do not materially affect earnings. See, however, "Retail Rates" in Part II, Item 5 of this Report for a discussion of the Arizona'orporation Commission (the "ACC")

hearings and other legal proceedings regarding the Company's purchased, power and fue'I adjustment mechanism.

The increases in electric operating revenues of 12.7% and 16.5%

in the three-month and twelve-month periods, respectively, were largely due to an increase in the portion of a coal-fired plant's capacity that is being temporarily sold and to a retail rate increase of 4.98% effective February 1, 1985. In addition, a 1.5% retail rate increase effective October 1, 1984 contributed to increased revenues in the twelve-month period. Increased revenues also reflect an increase in rates pursuant to operation of the Company's fuel adjustment clause and increased unit sales to residential, commercial and industrial customers in the 'twelve-month period. For the three-month and twelve-month periods, the average number of electric customers increased by 4.7% and 4.8%, respectively, with these increases occurring in the residential and commercial customer classes.

Unit sales declined by 4. 1% for the three-month period and increased by 3.2% for the twelve-month period. Unit sales in the three-month period declined primarily due to decreased residential usage which reflects warmer winter weather conditions, partially offset by the increase in residential customers. Unit sales increased for the twelve-month period largely due to an increase in customers, increased commercial usage, and increased industrial sa'les reflecting the impact of one mining customer.

Sales to resale customei s decreased in both periods largely due to curtailed purchases by two resale customers.

Fuel for electric generation expense decreased by 7.6% during the three-month period primarily due to decreased generation as a result of lower sales, partially offset by an increase in coal prices resulting from an increase in coal royalties. For the twelve-month period, the fuel for electric generation expense increased by 12.8% primarily due to the increased unit fuel price for coal resulting from a retroactive adjustment to 1981 for coal royalties that was recorded in June 1985.

Purchased power and interchange-net increased in both primary reason for. the increase in the three-month period is the periods'he operation of the Company's fuel adjustment clause partially offset by a decrease in the average price of purchased power resulting from the availability of test energy. The increase in the twelve-month period was

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largely due to increased purchase power requirements resulting from, increased sales as well as lower interchange sales to other utilities, partially offset by the operation of the Company's fuel adjustment clause.

'I Operations excluding fuel expenses increased in both periods due to increased customer service expenses associated with increased customers, increased insurance expenses resulting from rising premiums, and increased operations expenses associated with the start of commercial operation of a new generating unit.

Maintenance expenses were affected in both periods by the timing of scheduled power plant maintenance overhauls and by increased maintenance expenses associated with the start of commercial operation of

-a new generating unit.

Depreciation and amortization expenses increased in the three-month and twelve-month periods ended March 31 reflecting increases in the Company's utility plant in service including a new generating unit which started commercial operation in February 1986. Ad valorem taxes, a function of the size of the Company's utility plant, and sales taxes, a function of operating revenues, also increased in both periods. Sales taxes and ad valorem taxes are the principal components of other taxes.

The increases in income taxes in both periods were largely a result of increased income.

The aggregate amount of AFC, shown as other income and a credit to interest deductions, decreased in both the three-month and twelve-month periods. AFC is primarily a function of the amount of construction work in progress during any given period and ceases to accr ue on those portions of construction work in progress that are included in rate base or on those generating facilities transferred to plant in service including those portions of a new generating unit which started commercial operation in February 1986. See Note le of "Notes to Consolidated Financial Statements" in Part II, Item 8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1985 (the "1985 10-K").

Interest on long-term debt increased in the three-month and twelve-month periods ended March 31 due primarily to large amounts of new borrowings, partially offset by lower interest rates. The decrease in interest on short-term borrowings in the same periods resulted primarily from decreased borrowings and the effects of lower interest rates.

Consolidated net income represents a composite of cash and non-cash items and reflects accounting practices unique to regulated public utilities.

For additional information regarding the Company's sources of liquidity and commitments for capital expenditures, see "Construction and Financing Programs" in Part II, Item 5 of this Report, incorporated herein by this reference.

yt

10 I m her Inf rm in R il R In May 1985, the Company filed a request with the Arizona Corporation Commission (the "ACC") for a $ 78.2 million (8.6%)

increase in annual retail electric rates premised upon Palo Verde Unit 1 being fully included in the Company's rate base (the "Unit 1 Rate Case" ). See "Rates-State" in Part I, Item 1 of the Company's Annual Report on Form 10-K for the fiscal year ended 1985 (the "1985 Form 10-K"). On March 27, 1986, the Company lowered the request in the Unit 1 Rate Case to 454.6 million (a 6% increase), reflecting improvements in capital markets since the request was filed in May 1985.

On December 18, 1985, the Company filed an application with the ACC for a $ 193.9 million (19.36%) increase in,annual retail electric rates, to be effective on the date Palo Verde Unit 2 is placed in service (the "Unit 2 Rate Case" ). On December 30, 1985, the ACC instructed the Company to resubmit all schedules relating to the Unit 2 Rate Case on or before April 30, 1986, "Rates-State" so as to reflect a calendar 1985 test year. See in Part I, Item 1 of the 1985 10-K. On April 30, 1986, the Company resubmitted schedules based upon the 1985 test year, which resulted in a revision of the rate request from 4193.9 million to 4202.5 million (20.12%). Hearings concerning the Unit 2 Rate Case are scheduled to begin September 26, 1986.

Pal V r Nu 1 r n r in On April 24, 1986, the Nuclear Regulatory Commission (the "NRC") issued, subject to certain conditions, a full power operating license for Palo Verde Unit 2, thus removing the five percent restriction on generating capability contained in the Unit 2 operating license issued in December 1985. Unit 2 is scheduled to achieve commercial operation during the third quarter of 1986. See "Properties" in Part I, Item 2 of the 1985 Form 10-K.

The Company has been evaluating the use of long-term lease financing for its interest in Palo Verde Unit 2. On April 22, 1986, and May 2, 1986, the Company filed separate applications with the ACC and the NRC, respectively, seeking authorization to enter into one or more sale and leaseback transactions relating to all or a portion of the Company's 29.1% undivided

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ownership interest in Palo Verde Unit 2. Consummation of anY sale and leaseback transaction is subject to further evaluation, general market conditions, and the receipt of regulatory approvals from the ACC, the NRC, and the Securities and Exchange Commission.

By letter dated May 5, 1986, the NRC sent a Notice of Violation and Proposed Imposition of Civil Penalty (the "NRC Notice" ) notifying the Company, as operating agent at Palo Verde, that the NRC proposes to impose a $ 100,000 civil penalty for violations categorized in the aggregate as a "Severity Level lII" problem (on a scale of I to V in accordance with the "General Statement of Policy and Procedure for NRC Enforcement Actions" ). The NRC Notice relates to deficiencies noted by the NRC during security inspections at Palo Verde from February to March 13, 1986. The base civil penalty for a Severity Level ll III problem is $ 50,000. The NRC indicated that the proposed civil penalty was doubled because the Company had prior notice of similar problems and because several violations involved multiple examples. The NRC requires APS to respond and, among other things, either to pay or to protest the civil penalty within 30 days of the NRC Notice. The Company is currently evaluating its response to the NRC Notice.

'0 In 1984 the utility regulatory bodies of Arizona, California, New Mexico, and Texas formed the Four State Monitoring Committee to oversee an independent construction audit of Palo Verde. See "Rates-State" in Part I, Item 1 of the 1985 10-K. In April 1986, Public Service Company of New Mexico

("PNM") and El Paso Electric Company ("El Paso" ), two of the participants in Palo Verde, informed their respective regulatory commissions that they were withdrawing from, and would not fund, the audit because of concerns that the audit will not produce balanced and objective conclusions. The Company is under order by the ACC to pay for 29.1 percent (the Company's ownership interest in Palo Verde) of all costs incurred in conducting the audit.

n r in n F n n in Pr r For the three months ended March 31, 1986, the Company incurred approximately $ 99,000,000 in construction expenditures, accounting for approximately 26+ of the most recently estimated 1986 construction expenditures. The Company has estimated total construction expenditures for the years 1986, 1987, and 1988 at 4386,000,000, 4258,000,000, and 4226,000,000, respectively.

In addition to'unds required for capital expenditures, repayment or refunding obligations of senior securities and

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12 installment obligations, including certain anticipated early redemptions based upon current interest rates, are expected to total 4325,000,000, 4248,000,000, and $ 246,000,000 for the oryears 1986, 1987, and 1988, respectively. The Company refunded otherwise paid approximately 58< ($ 189,000,000) of the expected 1986 total during the three months ended March 31, 1986.

In January 1986, the Company issued $ 100 million in 30-year lib first mortgage bonds. The proceeds were applied to the redemption of outstanding European debentures issued by the Company's wholly-owned finance subsidiary. In March 1986, the Company issued $ 100 million in 10-year 9 1/4% first mortgage bonds. Substantially all of the proceeds were applied to purchase approximately $ 80 million of the Company's $ 100 million 15'eries First Mortgage Bonds due 1994 at 123.23% of their principal amount plus accrued interest. In May 1986, the Company issued $ 125 million in 10-year 9< first mortgage bonds, and applied a portion of the proceeds to redeem the Company's

$ 75 million 12 1/8% Series First Mortgage Bonds due 2009 at 109.15 percent of principal amount plus accrued interest.

Provisions in the Company's Mortgage Bond Indenture and Articles of Incorporation restrict it from issuing additional first mortgage bonds or preferred stock, respectively, unless its earnings (as defined) cover by at least the prescribed 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. Operation of the latter such provision has at times limited the Company's ability to issue preferred stock. As calculated in accordance with the applicable document, and assuming 10% as the rate of interest on new bonds or as the dividend requirement on new preferred stock that might have been issued on March 31, 1986, and treating the issuance of $ 125,000,000 of 9 percent series first mortgage bonds as though consummated on .that date, the coverage afforded by defined earnings for the twelve months ended on that date would have allowed the issuance of either $ 1,643,000,000 in aggregate principal amount of additional first mortgage bonds (as compared to approximately 41,072,000,000 in bonds issuable on the basis of net "property additions" to March 31, 1986), or 4598,000,000 in aggregate par value of additional preferred stock. Required coverages are 2.0 for bonds and 1.5 for preferred stock. Coverages afforded by defined earnings for the twelve-month period ended March 31, 1986 were 4.10 for bonds and 1.90 for preferred stock.

I m Exhi an R r n F rm (a) Exhibits

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13 Page Number in Manually Signed Original on g.'xhi~i Whi Exhi M F n 15.1 Letter Regarding Unaudited Interim 18 Financial Information In addition to the Exhibit shown above, the Company hereby incorporates the following Exhibits pursuant to Exchange Act Rule 12b-32 and Regulation g 201.24 by reference to the filings set forth below:

Exhil~ ri i Exhi lli Fil 4.1 Mortgage and 4.1 to Form S-3 2-84605 7-6-83 Deed of Trust Registration Relating to Statement the Company's First Mortgage Bonds, to-gether with twenty-seven indentures supplemental thereto e

Twenty-eighth 4.2 to Form S-3 1-4473 7-7-83 Supplemental Registration Indenture Statement No.

2-84605 by means of July 7, 1983 Form 8-K Report Twenty-ninth 4.2 to Form S-3 1-4473 10-14-83 Supplemental Registration Indenture Statement No.

2-86955 by means of October 13, 1983 Form 8-K Report Thirtieth 4.4 to Form S-3 1-4473 6-15-84 Supplemental Registration Indenture Statement No.

2-86955 by means of June 14, 1984 Form 8-K Report

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14 Thirty-first 4.4 to Form S-3 1-4473 1-25-85 Supplemental Registration Indenture Statements (Nos.

2-86955 and 2-95340) by means of January 24, "1985 Form 8-K Report Thirty-second 4.7 to Form S-3 2-97956 5-24-85 Supplemental Registration Indenture Statement Thirty-third 4. 5 to Form S-3 1-4473 6-7-85 Supplemental Registration Indenture Statement Nos.

2-95340 and 2-97956 by means of June 6, 1985 Form 8-K Report

4. 1 to Form S-3 2-99739 11-21-85 Thirty-fourth'upplemental Registration Indenture Statement by means "of Post-Effective Amendment No. 2 Thirty-fifth 4. 1 to Form S-3 1-4473 1-23-86 Supplemental Registration Indenture Statement No.

33-2297 by means of January 22, 1986 Form 8-K Report Thirty-sixth 4.1 to Form S-3 1-4473 2-25-86 Supplemental Registration Indenture Statement No.

33-3354 by means of February 24, 1986 Form 8-K Report Thirty-seventh 4.1 to Registration 1-4473 4-30-86 Supplemental Statement No.

Indenture 33-4306 by means of April 29, 1986 Form 8-K Report (b) During the quarter ended March 31, 1986, the Company filed, on the dates indicated, the following reports on Form 8-K:

Report filed January 20, 1986, relating to (1) delays

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15 in the projected commercial operation dates of Palo Verde Units 2 and 3, (2) the impact on the Company if the ACC does not grant the requested accounting/rate-making order relating to Unit 2,. (3) the court order upholding the ACC's order purporting to subject AZP and its subsidiaries, including the Company, to certain reporting requirements, (4) the ACC's refusal to grant a motion by RUCO involving the emergency rate reduction application filed by RUCO, and (5) the ACC's refusal to grant a motion by RUCO involving emergency adoption of a new ACC rule to require a'equested public service corporations to prove by a preponderance of the evidence that their investments were prudent.

Report filed January 23, 1986 comprised of exhibits to the Company's Registration Statement on Form S-3 (Registration No. 33-2297), relating to the Company's registration of 4100,000,000 in aggregate principal amount of the Company's First Mortgage Bonds.

filed February 24, 1986 comprised of exhibits to ll'eport the Company's Registration Statement on Form S-3 (Registration No. 33-3356), relating to the Company's registration of $ 100,000,000 in aggregate principal amount of the Company's First Mortgage Bonds.

Report filed February 25, 1986 comprised of exhibits to the Company's Registration Statement on Form S-3 (Registration No. 33-3356), relating to the Company's registration of $ 100,000,000 in aggregate principal amount of the Company's First Mortgage Bonds.

Report filed May 6, 1986 comprised of exhibits to the Company's Registration Statement on Form S-3 (Registration No. 33-4306), relating to the Company's registration of 4125,000,000 in aggregate principal amount of the Company's First Mortgage Bonds.

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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ARIZONA PUBLIC SERVICE COMPANY (Registrant)

Date Ma 9 1986 /s/ Henr B. Sar ent Jr Henry B. Sargent, Jr. Executive Vice President and Chief Financial Officer (Principal Financial Officer and Officer Duly Authorized to sign this Report)

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UNITED STATES OF AMERICA NUCLEAR REGULATORY COMMISSION

)

In the matter of )

)

ARIZONA PUBL'IC SERVICE )

COMPANY, et al.> ) DOCKET NO. STN 50-529

)

(Palo Verde Nuclear )

Generating Station, Unit 2) )

)

APPLICATION IN RESPECT OF SALE AND LEASEBACK TRANSACTIONS BY ARIZONA PUBLIC SERVICE COMPANY ITEM 4 OPINION AND ORDER OF THE ARIZONA CORPORATION COMMISSIONS DATED JULY 24',1986

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BEFORE THE ARIZONA CORPORATION COMMISSION RENZ D. JENNINGS CHAIRMAN MARCIA WEEKS COMMISSIONER SHARON B. MEGDAL COMMISSIONER IN THE MATTER OF THE APPLICATION OF ) DOCKET NO. U-1345-86-105 ARIZONA PUBLIC SERVICE COMPANY FOR AN )

ORDER OR ORDERS: (1) AUTHORIZING IT TO )

ENTER INTO VARIOUS TRANSACTIONS AND )

AGREEMENTS RELATING TO THE SALE AND )

OPERATING LEASE OF ALL OR A PORTION OF )

THE COMPANY' UNDIVIDED OWNERSHIP )

INTEREST IN UNIT 2 OF THE PALO VERDE )

NUCLEAR GENERATING STATION AND CERTAIN )

COMMON FACILITIES; (2) AUTHORIZING IT ) Arizona Corporation Commission 10 TO ISSUE OR INCUR EVIDENCES OF INDEBTED-) DOCKETED NESS IN CONNECTION THEREWITH; (3) CON- )

FIRMING THAT THE OWNER TRUSTEE AND THE )

EQUITY INVESTORS WILL NOT BE "PUBLIC )

JUL 24 1986 12 SERVICE CORPORATIONS"'4) CONFIRMING ) DOCKETf.D 5Y THAT THE LEASES WILL BE "OPERATING )

13 LEASES" FOR ACCOUNTING PURPOSES'ND, )

(5) DESCRIBING THE RATE-MAKING )

TREATMENT OF THE PROPOSED TRANSACTIONS. )

) OPINION AND ORDER 16 DATE OF HEARING: July 10, 1986 PLACE OF HEARING: Phoenix, Arizona PRESIDING OFFICER: Thomas L.Mumaw, Chief Hearing Officer 1g IN ATTENDANCE: Renz D. Jennings, Chairman Marcia Weeks, Commissioner 20 Sharon B. Megdal, Commissioner

21. APPEARANCES: Jaron B. Norberg, Senior Vice President and Corporate Counsel, Raymond Heyman, and Snell & Wilmer, 22 by Steven M. Wheeler, Attorneys for Arizona Public Service.

Elizabeth Kushibab, Attorney, Legal Division, for 24 the Arizona Corporation Commission Staff 25 Steven Avilla, Attorney, for the Residential Utility Consumer Office 26

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U-1345-Ub-xU>

BY THE COMMISSION:

a On April 22, 1986, Arizona Public Service Company ("APS" or "Company" )

filed an Application with the Commission requesting an Order authorizing the Company, among other things, to enter into various transactions and agreements relating to the sale and operating lease of all or a portion of the Company's undivided ownership interest in the Palo Verde Unit 2 Facilities as hereinafter defined.

On April 27, and May 21, 1986, the Coalition for Responsible Energy Education ("CREE" ) and the Resident'ial Utility Consumer Office ("RUCO") filed 10 Petitions to Intervene herein. Both said Petitions were granted by Procedural Order prior to the scheduled hearing on APS's Application.

12 Pursuant to Notice dated June 26, 1986, APS's Application came on for hearing before a duly authorized Hearing Officer of the Commission at its 14 offices in Phoenix, Arizona, on July 10, 1986 . APS, RUCO, and the I 16 Commission's each presented Utilities Division Staff {"Staff") appeared testimony and exhibits in support of APS's Application.

through counsel, and At the conclusion of a full public hearing, this matter was adj orned pending submission of a Recommende'd Opinion and Order by the Presiding Officer to the 19 Commission.

DISCUSSION 20 21 As indicated above, both Staff and Intervenor RUCO supported the 22 Application. Staff did propose various reporting requirements which would keep the Commission informed as to the details of the sale and leaseback (as well as any material changes in the transaction both prior to and after closing), and 25 suggested that proceeds derived from such sale and leaseback be placed in a 26 separate interest bearing bank account. Staff and RUCO further recommended 0 that the Commission be circumspect in its language approving this matter so as as to retain its flexibility to disallow all or part of the operating lease Decision No. 3 D /20

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U-1345-86-105 payments from APS' cost of service in its pending rate proceeding (Docket No.

U-1345-85-367) . Finally, RUCO noted that recoverability of these lease payments in rates should be subject to performance criteria, and that it would be proposing such criteria in the aforementioned rate Docket.'s in Docket No. U-1933 86 036, decided this same day, we will adopt Staff's reporting requirements and will use the same language generally disclaiming any prior judgement on the recoverability through rates of these operating lease payments. We also agree that performance criteria for Palo 10 (Phase I), also decided this day. We will not require that APS separately deposit the funds received through the sale and leaseback transaction.

12 However, periodic reporting on APS's use of such proceeds will serve to 13 reassure the Commission that the limitations on their use both agreed to by APS 14 and ordered hereinafter are being properly observed.

16 Having considered the entire record herein and being fully advised in the 17 premises, the Commission finds, concludes and orders that:

18 FINDINGS OF FACT 19 1. APS is an Arizona corporation engaged in providing electric service 20 within various portions of Arizona pursuant to authority granted by this 21 Commission.

22 2. By its Application and testimony in this matter, the Company requests one or more orders granting the following:

24 (a) authorization to refinance its construction financing for 25 Unit 2 of the Palo Verde Nuclear Generating Station 26

("Palo Verde" ) by entering into one or more sale and leaseback 27 transactions (the "Lease Transactions" ) relating to (I) all or financing transactions.

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U-1345-86-105 1

a portion of the Company's 29.1X undivided ownership interest in Unit 2, including, without limitation, all or a portion of the Company's generation entitlement share in Unit 2 and (ii) certain real property interests in the Palo Verde plant site and related real property (such interest in Unit 2 and the real property interests being hereinafter collectively referred to as the "Unit 2 Facilities" );

(b) authorization for the Company to issue, assume, guarantee, or incur evidences of indebtedness in connection with the Lea'se Transactions; (c) confirmation that the Leases (as hereinafter defined) will be treated as "operating leases" for accounting and rate-m'aking 13 purposes; (d) conf ixmation of the rate-making treatment of the Lease

.~ Transactions; and, 16 (e) confirmation that the Lessors and the Equity Investors (as 17 hereinafter defined)'ill not be "public service corporations" 18 subject to regulation under Arizona law by reason of their holding title to, or possessing an interest in, the Unit 2 20 Facilities.

21 3 ~ The Lease Transactions will involve the Company' sale of the Unit 2 22 Facilities to, and then the lease of the Unit 2 Facilities back from, institutional investors ("Equity Investors" ).

24 4. Each of the Equity Investors will form a trust for the purpose of 25 holding title to its undivided interest in the Unit 2 Facilities, and the trustees under the trusts will act as lessors ("Lessors" ) of the Unit 2

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U-1345-86-105 Facilities and will lease the Unit 2 Facilities to APS under one or more leases

("Leases" ).

5. If the Lease Transactions are completed as to less than all of APS's interest in the Unit 2 Facilities, APS will retain an undivided ownership interest in the remainder of the Unit 2 Facilities,

6. The Unit 2 Facilities will be sold to the Lessors at a fair market price, and prior to the closing of the Lease Transactions, an appraisal will confirm that the purchase price is a reasonable estimate of fair market value in order to comply with certain Internal Revenue Service requirements to preserve certain tax benefits of the transactions.

7. APS's profit on the sale at fair market value of the Unit 2 Facilities (net of associated income tax) will be amortized as a credit against APS's operating lease expense over the term of the lease ~

8. Lessors will borrow approximately 70X to 80%%d of the purchase price

~ 15 from a funding corporation (the "Funding Corporation" ) formed for that purpose, 16 and the Funding Corporation, in turn, will borrow the debt portion of the purchase price by issuing debt that will be non-recourse to the Lessors and the Equity Investors.

9. The debt referred to in Finding of Fact No. 8, hereinabove, will be 20 indirectly secured by an assignment of the rentals and other payments due from 21 the Company under the Leases.

22 10. APS will be named the "Registrant" in any Registration Statement filed with the Securities and Exchange Commission in connection with the 24 issuance of such debt.

25 ll. Upon the occurrence of certain events to be described in the leases, APS will be required to assume the Lessors',debt to the Funding Corporation.

12. Throughout the terms of the Leases, APS may direct the Lessors to

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.8 refund the Lessors'ebt to the Funding Corporation at then prevailing interest Decision No. Q Q /QO I

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U-13 45-86-105 rates, with net benefits of such refunding to be reflected in the Company's rental payments under the Leases.

13 'inancial support in the form of letters of credit or financial guarantees will also be obtained to secure the Equity Investors for the payment of amounts by the Company under the leases and related documents, and APS may be required to issue or incur evidences of indebtedness in connection with such f inancial support.

14. Although the Lessors will be the owners of the Unit 2 Facilities, APS will remain responsible for all expenses of operation and maintenance.

15. The initial term of the Leases will be approximately 29 1/2 years, and the Company will have certain renewal options,

16. APS will have certain options to repurchase the Unit 2 Facilities.

17. The rent to be paid by APS over the term of the Leases will be a function of the interest rates payable on the debt issued by the Funding i4

~ Corporation, the purchase price, marginal tax rates, etc.

15

18. Throughout the term of the Leases, APS will be required with respect to the Unit 2 Facilities to be and to act 'as a "participant" under the ANPP 18 Participation Agreement, as amended, which governs the construction, operation, and maintenance of Palo Verde and the rights and duties of the joint owners of, and participants in Palo Verde.

19. The Company will also continue to serve as "Operating Agent" of Unit 22 2 responsible to the other Palo Verde participants, and as the sole licensee responsible to the Nuclear Regulatory Commission (the "NRC"), for the use and operation of Unit 2, including decommissioning.

25 20 'lthough APS will remain liable for its share of the decommissioning cost of Unit 2 under NRC regulations, the Lease Transactions may require the 26

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~ 2V Equity Investors to fund a portion of the estimated costs of decommissioning the portion of the Unit 2 Facilities acquired by the Equity Investors.

Decision No. S3 /ZQ

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U-1345-86-105

21. Any. addition, betterment, or enlargement of the Unit 2 Facilities, or replacement of units of the property within the Unit 2 Facilities ("Capital Improvements" ) will be APS's obligation under the Leases.

22.APS may, but will not be obligated to, request that the Lessors provide financing under the Leases ("Supplemental Financings") for their respective shares of Capital Improvements.

23 . The terms and conditions of Supplemental Financing will be subject to mutual agreement between the Company and each Equity Investor, and each Equity Investor will. have the option, but no obligation, to make additional equity investments in Capital Improvements that are the subject of Supplemental Financings.

12 24. If any such Capital Improvement is not funded by an Equity Investor, such Equity Investor will, subject to certain conditions, permit the Lessor to g4 borrow additional funds from the Funding Corporation in an amount sufficient to 15 fund such Equity Investor's share of the Capital Improvement.

16 25. Concurrently with any Supplemental Financings, the rent payments will be adjusted to support the amortization of the additional debt issued in connection with the Supplemental Financing and to preserve the Equity y9 Investors'et economic return.

20 26 'he Company and the Lessors will enter into support agreements that will provide the Lessors with such rights in parts of the company's interest in Palo Verde not constituting Unit 2 Facilities as may be necessary to enable the Lessors and their successors and assigns to realize the residual values of their interests under the Lease Transactions that may be consummated.

25 27 'he proposed Leases will be "operating leases" as defined in accordance with generally accepted accounting principles, and for rate"making will

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- of for by the purposes the aggregate amount Lease payments be accounted 27 Company as an operating and maintenance expense, with the recoverability of

U-13 45-86-10 5 such Lease payments through rates to be decided in Docket U-1345-85-367.

28. APS intends to use the net proceeds from the Lease Transactions for the redemption, retirement, or refunding of outstanding long-term debt and/or preferred stock that previously financed construction projects and, if necessary, the satisfaction of certain of the Company' working capital and other cash requirements, including the financing of APS's ongoing construction program.

29. The payments under the Leases will be chargeable to the Company's operative expenses or to income.

30. The issuance, assumption, guarantee, or incurrence of evidences of 10 indebtedness by the Company in connection with the lease Transactions will be for the purpose of allowing the company to perf orm its obligations and/or exercise its options under the Lease Transactions.

14

31. It has been estimated by Staff and APS that the expected present e 15 16 value savings to ratepayers resulting from the from roughly '$10,000,000 to 0128,000,000.

Lease Transactions will range

32. The above savings assume the subtraction from APS's rate base of all tax credits generated by the Lease Transactions and retained by APS, subject to 19 r atab 1 e rest or ation over a 35 year period .

20 33. The Lease Transactions and the issuance, assump't.'ion, guarantee, or incurrence of evidences of indebtedness in connection therewith are compatible with the public interest, with sound financial practices, and with the proper performance by the Company of sevice as a public service corporation and will not impart its ability to perform that service.

34. The Lease Transactions and the issuance, assumption, guarantee, or 25 incurrence of evidences of indebtedness in connection therewith are reasonably

~ 2) necessary or appropriate for the purposes set forth herein and, except as as otherwise set forth herein, are not, wholly or in part, reasonably chargeable

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U-1345-86-105 to the Company's'operative expenses or to income.

35. Performance criteria are specifically required in order to assure that ratepayers pay only the allowable costs under efficient operations. The Commission expects the parties to present such performance criteria in the rate case involving the sale and leaseback.

CONCLUSIONS OF LAW

l. APS is a public service corporation within the meaning of Article XV of the Arizona Constitution and A.R.S. $ 5 40-285 and 40-301, et seq.

2. The Commission has jurisdiction over APS and of the subject matter 9

of the Application.

10

3. The proposed Lease Transactions and the issuance, assumption, guarantee, or incurrence of evidences of indebtedness in connection therewith, 12 as well as the other matters set forth in the Application, exhibits, and testimony relating to this matter are for lawful purposes within the corporate 14

~ powers of APS and are compatible with the public interest.

15 4, APS s leasehold interest in the Unit 2 Facilities, including its 16 contractual rights under said Leases, shall be subject to the Commission' 17 authority under A.R.S. 3 40-285(A) ~

18 ORDER IT . IS THEREFORE ORDERED that Arizona Public Service- Company is hereby 20 authorized:

21 (a) to undertake and consummate the Lease Transactions and to take all such actions as may be necessary or appropriate in connection therewith; subject to the limitations and conditions 24 contained in this Decision; 25 (b) to issue, assume, guarantee, and incur evidences of indebtedness 26 in order to consummate, and to perform its obligations and exercise its options under, the Lease Transactions (including the issuance Decision No..5 D lAC

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U-13 45-86-105 or incurrence of evidences of indebtedness in connection with the

. financing of Capital Improvements terms of the Leases, as the costs of which required or permitted will be reflected in by an the adjustment to lease rentals) including, but not limited to, (i) the issuance or incurrence of evidences of indebtedness by the Funding Corporation, secured by the direct obligation of the Company; (ii) the issuance or- incurrence of evidences of indebtedness in connection with any letter of credit or financial guarantee securing the Equity Investors for the payment of amounts payable by the 10 Company under the Lease and related documents; (iii) the issuance or incurrence of evidences of indebtedness necessary for any 12 refunding of indebtedness; (iv) the assumption of indebtedness by the Company upon the occurrence of certain events as 13 required by the leases; (v) the adjustment of rents from time 14 to time as required by the Leases; and (vi) the execution of 15 supplements to the Lease as required or permitted by the 16 Leases; and 18 (c) to exercise its options to renew the Leases and to repurchase 19 all or any portion of the Unit 2 Facilities in accordance with the terms of the Leases. ~ p, 20 21 IT IS FURTHER ORDERED that the Leases will be treated as operating leases for both accounting and rate-making purposes and that the aggregate amount of Lease payments will be accounted for by the Company as an operating and aintenance expense.

24 25 IT IS FURTHER ORDERED that all prof it from the sale of the Unit 2 26 Facilities (less associated income tax) should be amortized over the initial 0- term of the lease as IT IS a

FURTHER ORDERED credit against such lease expense.

that Arizona Public Service Company shall treat any Decision No.WD lg,G

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U-13 45"86-105 ax credits generated by the sale of the Unit 2 Facilities and retained by the I

Company as an offset (deduction) against its "fair value" rate base, subject to ateable restoration over a 35 year period.

IT IS FURTHER ORDERED that approval of the requested Lease Transactions as set forth in the Application and authorized hereinabove does not constitute or imply approval or disapproval by the Commission of any particular expenditure 6

for purposes of establishing just and reasonable rates.

7 IT IS FURTHER ORDERED that Arizona Public Service Company shall f ile a Plan of Disposition with the Commission within thirty (30) days of the entry of 9

this Decision, which Plan shall indicate the use to be made of the proceeds 1Q derived from the transactions authorized herein over the succeeding twelve (12) onth period.

12 IT IS FURTHER ORDERED that Arizona Public Service Company shall thereafter 13 annually upda te such Plan and shall keep the Commission informed of any a ter ial change in said Plan.

0 15 IT IS FURTHER ORDERD that the purpo ses for which the propo sed Lease 16 Transactions are herein authorized are to redeem, retire, or refund outstanding long-term debt and/or preferred stock that previously financed construct:on 18 projects and, if necessary, to satisfy certain of the Company's working captial 20 and other cash requirements, including the f inancing of Arizona Public Service Company' ongoing construction program, regardless of the extent to which such purposes'ay be reasonably chargeable to operative expenses or income.

23 IT IS FURTHER ORDERED that the purpose for which the proposed issuance, assumption, guarantee, or incurrence of evidences of indebtedness in connection 24 25 ith the Lease Transactions i. s her ein authorized is to allow Arizona Public Service Company to perform its obligations and/or exercise its options under 26 the Lease Transactions, which purpose is hereby specifically authorized

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U-1345-86-105 expenses or to income.

IT IS FURTHER ORDERED that the terms of the Leases and other documents to be entered into in connection with the Lease Transactions are hereby approved for the specific purpose of enabling each of the Equity Investors and the Lessors to qualify for an exemption by the Securities and Exchange Commission from the Public Utility Holding Company Act of 1935, as amended.

IT IS FURTHER ORDERED tha t Arizona Public Service Company' as sump t ion, guarantee, and incurrence of evidences of indebtedness as herein authorized shall be separate and apart from, and not counted against, Arizona Public 10 Service Company' existing Debt limitation, or against such limitation as it may be hereafter modified by the Commission, that limitation presently being

$ 2,698,917,000, as approved in the Commission's Order in Decision No. 55017 12 (May 6, 1986) .

IT IS FURTHER ORDERED that the Commission hereby declares that the Lease 14

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cause "public service any of the Equity Investors corporation" subject or the Lessors to to the jurisdication, be.

control, or regulation of the Commission under current provisions of Article XV of the Arizona Constitution.

18 19 IT IS FURTHER ORDERED that Arizona Public Service Company shall file with 20 the Commission any and all documents executed pursuant to the authorizations granted hereinabove (including amendments to such documents executed subsequent 21 to closing) within five (5) business days of their execution, or with regard to 22 23 those documents executed prior to the effective date of this Decision,* within five (5) business days of such date.

24 IT IS FURTHER ORDERED that Arizona Public Service Company shall notify the 25 Commission of any material changes in the terms and conditions of the sale and 26 leaseback transaction authorized hereinabove as soon as is reasonably possible, Decision No.~d,,') /PM

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s but in any event, at least five (5) business days prior to the closing date.

IT IS FURTHER ORDERED that this Decision shall become ef f ective 2

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3 BY ORDER OF THE ARIZONA CORPORATION COMMISSION.

6 CHA RMAN COMMISSIONER COMMIS ONER IN WITNES S WHEREOF, I, JAME S MATTHEWS, Executive Secretary of the Arizona Corporation Commission, have hereunto set my hand and caused the official seal of this Commission to be affixed at the Capitol, in the City of Phoenix, this~2 day 10 of 1986.

12 MES MATTH S ecutive Secretary 14 DISSENT 15 j TLM/d p

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17 19 20 21 25 26 27 as Deci. sion No. 6 D /KC'

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UNITED STATES OF AMERXCA NUCLEAR REGULATORY COMMISSION

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In the matter of )

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ARIZONA PUBLIC SERVICE ) DOCKET NO. STN 50-529 COMPANY, et al., )

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(Palo Verde Nuclear )

Generating Station, Unit 2) )

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APPLICATION IN RESPECT OF SALE AND LEASEBACK TRANSACTXONS BY ARXZONA PUBLIC SERVICE COMPANY ITEM 5 APPLICATION OF PVNGS FUNDING CORPORATION a

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SECURITIES AND EXCHANGE COMMISSION Washington, D. C.

Application for an Order Under Section 6(c) of the Investment Company Act of 1940 Exempting PVNGS Funding Corp., Inc.

from all Provisions of such Act PVNGS Funding Corp., Inc.

(Name of Applicant) 1209 Orange Street Wilmington, Delaware 19801 (Address of Principal Office of Applicant)

May 13, 1986 Please send copies of all communications to:

Teresa Davidson Snell Ec Wilmer 3100 Valley Bank Center Phoenix, Arizona 85073 (602) 257-7290

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UNITED STATES OF AMERICA Before the Securities and Exchange Commission In the Matter of Application for an -Order Pursuant to Section 6(c)

PVNGS Fundiag of the Investment Company Corp., Inc. Act of 1940 Exempting Applicant from All Pro-visions of the Act The undersigned applicant, PVNGS Funding Corp.,

Inc. (the "Applicant" ), hereby applies, pursuant to Section 6(c) of the Investment Company Act of 1940 (the "Act"),- for an Order unconditionally exempting it from each and every provision of the Act on the ground that such exemption is appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. No form having been specifically prescribed for this Application, the Applicant proceeds under Rule 0-2 of the General Rules and Regulations of the Securities and Exchange Commission (the "Commission" ),

under the Act and pursuant to, Release No. IC-14492, dated April 30, 1985.

I. FACTUAL BASIS OF APPLICATION The documentation relating to the establishment of the Applicant and the structure and documentation of the transactions for which the Applicant has been formed (as hereinafter described) are not different in any manner mate-rial to the Commission' consideration of this Application from those presented to the Commission by First PV Funding Corporation in its application for an exemptive order under Section 6(c) of the Act (Application filed on September 20, 1985 and amended on November 8 and 20, 1985; Notice: Release No. 14833; Order dated December 31, 1985: Release No.

14880). See also the Application of El Paso Funding Corpora-tion for an Order Pursuant to Section 6(c) of the -Act filed on April 11, 1986.

First PV Funding Corporation was created for the sole purpose of assisting Public Service Company of New Mexi-co ("PNM") in financing and refinancing of property through leveraged lease financing transactions in which PNM is the lessee. El Paso Funding Corporation was created for the sole purpose of aiding El Paso Electric Company ("El Paso" ) in the financing and refinancing of property through leveraged lease

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financing transactions in which El Paso is the lessee. Simi-larly, the Applicant has been created for the sole purpose of assisting Arizona Public Service Company, an Arizona corpora-tion ("APS"), in the financing and refinancing of property through leveraged, lease financing transactions in which APS will be the lessee.

A statement of the facts relied on as a basis for the action of the Commission herein requested is as follows:

A. The Applicant and Summary of Transactions The Applicant is organized under the laws of the State of Delaware and will have nominal paid-in capital. A copy of its Certificate of Incorporation is included herewith as Exhibit A. The address of the Applicant is Corporation Trust Center, 1209 Orange Street, City of Wilmington, Dela-ware 19801.

All of the shares of Common Stock, $ 1.00 par val-ue, of the Applicant authorized to be issued under the terms of its Certificate of Incorporation will be issued to, and in the future all outstanding shares of such Common Stock are expected to be owned by, The Corporation Trust Company, a Delaware corporation, or a company controlled by it ("CT").

After such issuance, all of the directors and officers of the Applicant are expected to be officers or other employees of CT. The Applicant represents that there has been, and under-takes that in the future there will be, no public offering of the Applicant's Common Stock or of any other equity security of the Applicant. The Applicant represents that there is, and in the future there will be, no class of equity securi-ties of the Applicant authorized other than its Common Stock.

The Applicant has been created for the sole purpose of assisting APS in the refinancing, in whole or in part, of APS's 29.1% undivided ownership interest in the Palo Verde Nuclear Generating Station ("PVNGS"). PVNGS consists primar-ily of three 1,270 megawatt electric generating units, each containing a pressurized water reactor nuclear steam supply system, certain facilities the use of which is common to all three units, certain related transmission facilities, and pipeline, and of which, the latter three components may or may not be included in the refinancing. PVNGS is located approximately 55 miles west of downtown Phoenix, Arizona.

APS participates in with three other investor-owned utilities -- El Paso PVNGS (15.8%), Southern 'California Edison Company (15.8%) and PNM (10.2%) and three public utilities--

Salt River Agricultural Improvement and Power District (17.14%), Southern California Public Power Authority (5.91%),

and the Department of Water and Power of the City of Ios

0 Angeles (5.7%). Ownership of PVNGS is governed by the Arizo-na Nuclear Power Project Participation Agreement, dated August 23, 1973, as amended, among the owners of PVNGS. Un-der such Project Participation Agreement, APS is authorized to act as agent for the other owners of PVNGS, and has re-sponsibility and control over construction, operation and maintenance of PVNGS.

APS was incorporated in .1920 under the laws of Ari-zona and is engaged principally in providing electricity in all or a part of the 11 of the 15 counties of the State of Arizona. APS is subject to, and during the preceding 12 months has filed all documents required to.be filed pursuant to, the reporting requirements of Section 13 of the Securi-ties Exchange Act of 1934 (the "1934 Act") (See Commission File Number 1-4473), and has securities registered under Sec-tions 12 (b) and 12 (g) of the 1934 Act.

The Applicant will assist APS'inancing and refi-nancing'of APS'wnership interest in PVNGS by participating as lender in one or more leveraged lease transactions to be selected by APS in which APS is lessee (in such capacity, the "Lessee" ). APS will make an initial determination as to whether or not the financing or refinancing of any unit of PVNGS will be accomplished in whole or in part through one or more leveraged lease financing transactions and whether or not the debt portion of such transaction will be funded through the Applicant's sale of one or more series of its debt securities ("Debt Securities" ). With respect to PVNGS Unit 2, APS has determined to utilize such transactions and so to use the Applicant. Because significant capital im-provements (additions, betterments, enlargements of property in place, and replacements of such property with other prop-erty) will be required to be installed at PVNGS from time to time, each leveraged lease financing transaction may also provide for the financing thereunder (via lease supplements) of capital improvements relating to property subject to such transaction. Such leveraged lease financing transactions, including any applicable supplemental financings, are herein-after individually called a "Lease" and collectively the "Leases."

The participation of the Applicant as lender in the Leases will be limited to making loans to the lessors under such Leases which will be repayable from rentals and other payments by the Lessee pursuant to such Leases. It pected that such lessors (the "Lessors" ) will be grantor is ex-trusts formed exclusively for the purpose of the lease fi-nancing. The beneficiary of such a grantor trust may be an institutional or other investor or a direct or indirect sub-sidiary of APS. The loans to be made by the Applicant will

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be without recourse to the general credit of the Lessors or their respective beneficiaries and will be evidenced by non-recourse obligations of the respective Lessors (the "Les-sor Notes" ) which will be secured as more fully described herein. Each of the Leases will be required to provide for the payment of rentals and other. payments by the Lessee in amounts and at times sufficient to provide'or the payment and performance of all the obligations of the related Lessor under its Lessor Note. Such obligation of the Lessee will be required to be absolute and unconditional, without right of counterclaim, set off, deduction, or defense. In this re-gard, the terms of the Lessor Notes, the Leases, and the ob-ligations of the Lessee to make payments under the Leases will be typical of those in customary leveraged lease financ-ing transactions.

Neither APS nor its subsidiaries will have any right by 'stock ownership, contract, or otherwise to control the management or operation of the Applicant. It is expect-ed, however, that the Applicant will enter into a commitment agreement (the "Commitment Agreement" ) with APS pursuant to which the Applicant will agree to participate in one or more Leases relating to PVNGS. Such participation will be more specifically identified with respect to each Lease by the terms of a Participation Agreement relating to such Lease in which the Applicant will agree to make loans to the Lessor therein designated. Such loans will have interest rates, maturities, sinking fund provisions, and other terms as shall be approved by the Lessee and the Lessor to which the loan is to be made. The obligation of the Applicant to participate in such Leases and to make such loans will be subject to cer-tain terms and conditions, including (a) the ability of the Applicant to issue Debt; Securities on such terms and condi-tions as shall, in the opinion of the Applicant after consul-tation with its financial advisor, permit the Applicant to make such loans on a financially prudent basis, (b) the exe-cution and delivery by each Lessor to which a loan is 'to be made of a Lease Indenture (as defined below) or Lease Inden-ture supplement and one or more related Lessor Notes, (c) the receipt by the trustee (" Trustee" ) under the Collateral Trust Indenture (as defined below) of the original Lessor Note and copies of the agreements relating thereto, (d) the -receipt by the trustee under the Lease Indenture of the original execut-ed counterpart of the related Lease or Lease supplement, (e) the receipt by the Applicant of opinions of counsel for the Lessee, the related Lessor and/or its beneficiaries with re-spect to, among other things, the due authorization, execu-tion, delivery, and binding effect of agreements and documents and the priority of the assignment of rentals under the Lease Indenture and (f) such other matters as the Appli-cant may reasonably request.

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The Applicant intends to acquire the funds,neces-sary for the purchase of the Lessor Notes through the issu-ance of its Debt Securities which may or may not be secured on a parity basis by a first lien on, and security interest in, all of the assets of the Applicant, consisting primarily of the Lessor Notes so acquired and theretofore acquired (if so secured, the Debt Securities may be referred to as "Lease Obligation Bonds" ). Lessor Notes acquired and held by the Applicant may include only Lessor Notes issued in connection with any Leases to which APS is a party, as lessee, in con-nection with its ownership interest in PVNGS.

B. The Leases will be Ita bank is expected that the Lessor in each of the Leas-es or trust company acting as trustee for one or more beneficiaries pursuant to a trust agreement (a "Trust Agreement" ) entered into exclusively for the purpose of the particular lease financing. A portion of the purchase price of the property owned by the Lessor and leased to the Lessee pursuant to a Lease will be paid by the beneficiaries of the grantor trust that acts as Lessor as the beneficiaries'qui-ty investment in the property. The balance of the purchase price of such property will be borrowed from the Applicant by the Lessor, which borrowings will be evidenced by one or more Lessor Notes issued by such Lessor pursuant to either a loan and security agreement (" Loan and Security Agreement" ) or a trust indenture and security agreement (" Trust Indenture and Security Agreement" ) (in either case a "Lease Indenture" ).

It is expected that the Lessor Notes will be issued under circumstances making such transactions exempt from registra-tion under the Securities Act of 1933, as amended (the "Secu-rities Act") . The Applicant will receive assurances from each Lessor and each beneficiary thereof that at the time the Ap-plicant acquires Lessor Notes issued by such Lessor and so long as the Iessor Notes issued by such Lessor are outstand-ing (a) neither such Lessor nor any beneficiary thereof is or will be an investment company within the meaning of Section 3(a) of the Act or (b) such Lessor and any beneficiary there-of are and will be deemed to be excluded from the definition of an investment company by virtue of the provisions of Sec-tion 3(b) or Section 3(c) of the Act.

Each Iease will provide for the payment of rentals and other payments by the Lessee in amounts and at times suf-ficient to provide for the payment and performance of all of the obligations of the related Lessor under its Lessor Note or Notes and its Lease Indenture. Each Lease will be a net lease and the obligations and liabilities of the Lessee thereunder will be required to be absolute and unconditional without any right of counterclaim, setoff, deduction, or

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defense on the part, of the Lessee. Each Lease will include, without limitation, as events of default (a) failure by the Lessee to make payments customarily referred to as basic rent, stipulated loss value, or casualty value that are in-tended to be the source of payment of the related Lessor Notes, (b) failure by the Lessee to make payments customarily referred to as supplemental rent or other payments thereun-and (c) certa'in bankruptcy-related events involving the 'er, Lessee.

Under each Lease, the Lessee will be obligated to make rental payments sufficient to pay the principal of, the premium, if any, and the interest on the Lessor Notes issued in connection therewith and such rental payments are also anticipated to provide an investment return to the benefi-ciaries of the Lessor which provide equity financing for the property that is the subject of such Lease.

C. The Lease Indentures and the Lessor Notes Lessor Notes 'will be issued by the applicable Les-sor under and pursuant to the terms of separate but substan-tially identical Lease Indentures with the Applicant being the secured party thereunder if such Lease Indentures are Loan and Security Agreements or with a bank or trust company acting as trustee for the holder of the Lessor Notes issued thereunder if such Lease Indentures are Trust Indentures and Security Agreements. Each Lease Indenture will require the Lessor to grant to the Applicant or the trustee under the Lease Indenture, as the case may be, an assignment of rents, including basic rentals and certain other payments, to be made by the Lessee under the applicable Lease. The Applicant or the trustee under the Iease Indenture may have a lien on or security interest in the property which is the subject of the Lease (the "Leased Property" ). In the event that no such lien or security interest is created or granted will covenant that, so long as any Iessor Note is the Lessor outstand-ing, it will not create or permit the creation of a lien on or otherwise encumber its interest in the Leased Property (except for certain permitted encumbrances) The Applicant will be precluded from purchasing any Lessor Note unless

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such Lessor Note is issued in respect of Leased Property hav-(i) ing a fair market sales value at the time of purchase at least equal to 110% of the original principal amount of such Lessor Note or (ii) such Lessor Note and all other Lessor Notes (if any) of the relevant Iessor are issued in respect of Leased Property having an aggregate fair market value (measured, in each case, as of the date such Leased Property was first financed under the Lease) at least equal to 110% of the original principal amount of such Lessor Note and such other Lessor Notes. For example, if the initial financing

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under a particular Lease involved $ 100 million of Leased Property and the issuance of $ 85 million in Iessor Notes (117.6% coverage of the Lessor Notes by Leased Property) and one year later $ 10 million in capital improvements were to be financed under such Lease, the entire $ 10 million could with Lessor Notes and Debt Securities in accordance be'inanced with clause (ii) of the preceding sentence because the re-sulting percentage overall would be 115.8% ($ 95 million in Lessor Notes- secured by $ 110 million in Leased Property).

Each Lease Indenture will include as events of default, with-out limitation, payment defaults on the Lessor Notes issued thereunder and events of default under the related Lease.

The aggregate of the principal amount of all Lessor Notes issued pursuant to all Lease Indentures will be re-quired to be equal to the sum of the aggregate principal amount of the related Debt Securities issued to fund the loans evidenced by such Lessor Notes. The interest payable with respect to each Lessor Note will be the related Lessor's share of the Applicant's "Cost of Money" as of any interest payment date for such Lessor Notch The Applicant's "Cost of Money" in respect of any period will be equal to the total interest and other costs and expenses which the Applicant has incurred or accrued with respect to the Debt Securities and its obligations incurred in the performance of its agreements under the Lease Indenture, reduced by any income which it received or expects to receive on or prior to the next suc-has ceeding payment on the Debt Securities and not expended as of such date resulting from the temporary investment of payments made in respect of Lessor Notes prior to the date on which payments are required in respect of Debt Securities.

The Lessor Notes and the Lease Indentures will pro-vide that, upon the occurrence of certain casualty events, termination events, deemed loss events, and special loss events, either (i) APS shall assume the obligations repre-sented by the Lessor Notes or (ii) APS shall purchase from the beneficiaries the beneficial interest in the trusts cre-ated by the Trust Agreements and the Lessors will grant a lien and security interest in the Leased Property to the Ap-plicant (if the Iease Indentures are Zoan and Security Agree-ments) or the trustee under the Lease Indentures (if the Lease Indentures are Trust Indentures and Security Agree-ments) to secure the Lessor Notes. The assumption or pur-chase described in the preceding sentence will be in partial satisfaction of APS'bligation to make payments required of it upon early termination of the Leases in consequence of any such event.

In the event that the Lessor issuing a Lessor Note does not grant a lien on or security interest in the property

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purchased with the proceeds of such Note, the Lessor will covenant that (i) it will not incur any other debt not con-stituting Lessor Notes or otherwise in connection with the Leased Property and (ii) except for certain limited permitted liens, it will not create any lien on or security interest in such property. These two covenants, taken together, will insure that, upon a default by the*Lessor on its Lessor Note, the Leased Property will be available to satisfy the claims of the Collateral Trust Trustee as pledgee of the'essor Notes. The most significant difference under this structure is that, in order to receive the value of the Leased Proper-ty, the Collateral Trust Trustee would first have to cause the obligation on the Lessor Notes to be reduced to judgment and thereafter seek execution of such judgment, rather than proceeding directly against the Leased Property.

D. Debt Securities The various series of Debt Securities will have terms which may differ as to maturity dates, interest rates, sinking fund obligations of the Applicant, the right of the Applicant to redeem such Debt Securities, and other matters.

Such Debt Securities, which may include commercial paper and intermediate-term and long-term obligations, may be issued in the private or public markets in the United States, and in offerings outside the United States under circumstances re-sonably designed to assure that such Debt Securities are not offered or sold to citizens and/or residents of the United States. Individual series of Debt Securities may be supported by bank letters of credit, bank lines of credit, bonds of in-surance or other credit or liquidity support facilities. The terms and manner of offering of Debt Securities of a particular series will be determined by prevailing market conditions. The terms of the Lessor Notes held or to be plicant with the proceeds of such Debt acquired by the Ap-Securities will re-flect the terms of such Debt Securities, although there will be no requirement that the scheduled payment dates on the Debt Securities match the payment dates on the Lessor Notes.

In addition, the Applicant may engage in interest rate swaps with respect to one or more series or maturities of Debt Securities.

All Debt Securities will be issued under a common indenture and a separate supplemental indenture for each se-ries (other than the initial series) (collectively called the "Collateral Trust Indenture" ) which will establish the terms of the Debt Securities of that series. It is expected that the trustee under the Collateral Trust Indenture (hereinafter called the "Trustee') will be a bank or trust company not af-filiated with any of the Lessor and will not be a trustee under any indenture of APS or its subsidiaries. All series of Debt Securities of the Applicant will be issued the Collateral Trust Indenture and will be pari passu. under If the registration requirements of the Securities Act are

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applicable to a particular issuance of Debt Securities, APS will file a registration statement under the Securities Act covering such Debt Securities.

The Applicant proposes that the initial issuance of Debt Securities will be through an underwritten public offer-ing or private placement of one or more series having an ag-gregate* principal amount of approximately $ 1.1 billion (assuming a total sales price for APS'9.1% interest in PVNGS Unit 2 and the common facilities of $ 1.3 billion, how-ever, such amount may vary according to market conditions).

The initial series of Debt Securities may be registered under the Securities Act, and it is expected that the Collateral Trust Indenture will be qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"). Although APS will not be the actual obligor of the Debt Securities, it will be considered the issuer thereof for purposes of the Securities Act and the obligor with respect thereto for purposes of the 1939 Act. Any registration statement filed under the Securi-ties Act relating to the Debt Securities will name APS as the sole registrant and will be signed on behalf of APS, as the sole registrant, by such officers and directors of APS as may be required under the Securities Act and the rules, regula-tions and forms of the Commission thereunder, all in accor-dance with such practice and procedures as the Commission shall from time to time require or permit. The net proceeds to the Applicant from the initial issuance of Debt Securities will be used by the Applicant principally to purchase Lessor Notes issued by the Lessors in connection with the currently contemplated leveraged lease financings of PVNGS Unit 2.

The Applicant may seek approval for the listing of one or more series of Debt Securities on one or more national securities exchanges if the Applicant and such series of'ebt Securities meet the requirements of such an exchange for the listing of securities thereon. In connection with any such listing, such series of Debt Securities will be registered with the Commission pursuant to Section 12 of the 1934 Act.

As security for the due and punctual payment, of the principal of, premium, if any, and interest on all Debt Secu-rities, the Applicant will assign and pledge to the Trustee under the Collateral Trust Indenture, as security for the equal and ratable benefit of the holders from time to time of all Debt Securities, the Lessor Notes and any other assets held by the Applicant. Each such Lessor Note will in turn be secured by a security interest in the related Lease and an assignment of rentals arising under the related Lease and may be secured by the Leased Property thereunder.

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Except to the extent payable from the proceeds of refunding Debt Securities, the proceeds of Temporary Holdings (defined below) or the proceeds of the initial issuance of Debt Securities where the relevant closing date for a lever-aged lease financing transaction (the "Lease Closing Date )

does not occur as described below, due to the nonrecourse nature of the Lessor Notes and the limited scope of the Ap-plicant's activities, payment of the principal of, premium, if any, and interest on the .Debt Securities will be made ex-clusively from amounts paid by the Lessee under the Leases.

The interest rates, maturities, principal amounts, and other terms of each series of Debt Securities will be established on the basis of prevailing market conditions and the Applicant expects to have the flexibility to take advan-tage of changing market conditions by issuing Debt Securities from time to time in such markets and on such terms as are required under the terms of the Commitment Agreement and are, in the judgment of the Applicant, after consultation with its financial advisor, financially prudent to the Applicant. Fur-thermore, as mentioned above, there will be no requirement that the payment dates on the Debt Securities correspond ex-actly to the scheduled payment dates on the Lessor Notes. As a consequence, the cash flow of the Applicant derived from payments of principal of and premium, if any, and interest on the Lessor Notes may from time to time exceed the cash re-quirements of the Applicant at such times for the payment of principal of, premium, if any, and interest on the Debt Secu-rities. Until such funds (" Temporary Funds" ) are required by the Applicant for the payment of principal of, premium, any, and interest on the Debt Securities, the Applicant will if be permitted to invest Temporary Funds in permitted invest-ments (" Permitted Investments" ) (the investment of Temporary Funds in Permitted Investments resulting in "Temporary Hold-ings"), in each case maturing at such times a's are required to pay the Applicant's obligations under the Debt Securities, after taking into account the then scheduled payments under the Lessor Notes. Permitted Investments will be defined un-der the Collateral Trust Indenture as follows:

(i) direct obligations of the United States of America, or (ii) obligations.

fully guaranteed by the United States of America, or (iii) certificates of deposit issued by, or bankers'cceptances of, or time deposits with, any bank, trust com-pany or national banking association in-corporated or doing business under the laws of the United States of America or one of the States thereof (but not ex-ceeding $ 15,000,000 in principal amount 0

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or in deposits at any given time for any one bank, trust company or national bank-ing association) having a combined capi-tal and surplus of at least $ 300,000,000 (including the Trustee, a trustee under any Lease Indenture, a Lessor and any paying agent if such conditions are met),

or (iv) commercial paper of companies incorporated or doing business under the laws of the United States of America or one of the States thereof (but not ex-ceeding $ 15,000,000 in principal amount at any given time for any one company) and in each case having a rating assigned to such commercial paper by Standard &

Poor's Corporation or Moody's Investors Service, Inc. (or, if neither such organ-ization shall rate such commercial paper at any time, by any nationally recognized rating organization in the United States of America) equal to the highest rating assigned by such organization, or (v) repurchase agreements fully collateral-ized by an obligation of the type de-scribed in clauses (i) through (iv) above, pursuant to which a bank, trust company or national banking association referred to in clause (iii) above or an-other financial institution having a net worth of at least $ 200,000,000 is obli-gated to repurchase any such obligation not later than 90 days after the purchase of any such obligation.

Temporary Funds of the Applicant may also be used to acquire all or a portion of the Debt Securities of any series in order to meet required sinking fund redemptions.

During any fiscal year of the Applicant, the average of the daily balance of the amount of the Temporary Holdings plus the amount of Temporary Funds will not exceed ten percent of the average of the daily balance of the aggregate principal amount of the Debt Securities outstanding during. such fiscal year. Temporary Funds and Temporary Holdings arising in con-nection with the issuance of Debt Securities prior to the acquisition of the related Iessor Notes as described in the preceding paragraph are to be disregarded for purposes of this ten percent limitation.

In order to provide flexibility so that the Appli-cant may be able to take advantage of market conditions with-out being tied to a particular Lease Closing Date, it is

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proposed that the issue, sale and deliver'y of a particular series of Debt Securities may take place up to two months prior to the Lease Closing Date applicable to the property being financed with the proceeds thereof. Pending the Lease Closing Date, the net proceeds from sale of the Debt Securi-ties would be held by the Trustee pursuant to the terms of the Collateral Trust Indenture, which would permit the in-vestment of such proceeds in Temporary Holdings.

If Debt Securities have been sold in advance of the Lease Closing Date for the property financed thereby, then, pending the Lease Closing Date, such Debt Securities, and any other Debt Securities theretofore issued, will be secured by (i) the pioceeds of the sale of such Debt Securities, (ii)

Temporary Holdings and Temporary Funds, if any, (iii) Lessor "Notes previously pledged to the Trustee under the Collateral Trust Indenture and (iv) with respect to the new series of Debt Securities only, an obligation of the Lessee which will expire on the related Lease Closing Date and which will 'pro-vide for the payment of amounts sufficient for the payment of such series of Debt Securities. On the applicable Lease Closing Date, APS will pay to the Trustee an amount equal to the difference between (i) the interest accrued on the new series of Debt Securities from the date of issuance to such Lease Closing Date and (ii) the income derived from Temporary Holdings, if any, through such Lease Closing Date. In the event that the Lease Closing Date does not occur by the date which is two months from issuance of such new series of Debt Securities, APS may at any time (but must by the date which is three months after the expiration of such two month peri-od) cause (and, if necessary, provide funds necessary for) the redemption of all Debt Securities of such series only.

On each Lease Closing Date, pursuant to a supple-ment to the Collateral Trust Indenture (Indenture Supple-ment), the Lessor Notes issued on such date will be subjected to the lien of the Collateral Trust Indenture (securing all outstanding Debt Securities, including the new series) and will serve as the basis for the release from such lien of the net cash proceeds held by the Trustee under the Collateral Trust Indenture which are necessary to purchase such Lessor Notes. The Indenture Supplement and the mechanics of this release will be in accordance with the 1939 Act and the terms of the Collateral Trust Indenture (which will have been qual-ified under such Act).

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E. Interrelation of the Lease Indentures and the Collateral Trust Indenture for the Protection of Holders of Debt Securities.

On each Lease Closing Date, the Lessor Notes will be pledged and assigned directly to the Trustee who will hold the Lessor Notes under. the terms of the Collateral Trust In-denture as security for the Debt Securities. As a holder of the Lessor Notes, the Trustee will have the right to exercise any voting powers and give consents and waivers in respect of such Lessor Notes and the Lease Indentures under which such Lessor Notes are issued and to exercise the rights and reme-dies afforded a holder of such Lessor Notes under the respec-tive Lease Indentures, including the right to exercise remedies under the Leases and with respect to the Lease ren-tals and other payments in lieu thereof securing such Lessor Notes, provided such Leases are then in default.

To the extent that the Trustee under the Collateral Trust Indenture has the right to exercise any voting powers in respect of the- Lessor Notes, to give any consents or waiv-ers with respect thereto, or to exercise any rights or reme-dies in respect thereof, the Trustee will be obligated to give immediate notice of such fact to the holders of the Debt Securities. The Collateral Trust Indenture under which the Debt Securities will be issued will authorize the holders of Debt Securities to direct by notice to the Trustee within a specific period of time that it take any action or cast any vote in its capacity as the holder of the Lessor Notes. As a result of this pass-through voting mechanism, the rights and remedies of the holders of the Lessor Notes will be exercis-able directly by the holders of Debt Securities through their fiduciary, the Trustee. The principal amount of the Lessor Notes directing any action or being voted for or against any proposal will be the principal amount of the Debt Securities taking the corresponding position. To the extent that the Trustee has not received any such instructions it would be required to take such action with respect to the Lessor Notes as a prudent man would take in respect of his own property.

Thus, if APS were to default in the payment of rent (or were otherwise in default under any Lease), the Applicant (if the Lease Ind'enture was a Loan Agreement and Security Agreement) or the trustee (if the Lease Indenture was a Trust Indenture and Security Agreement) under the related Lease Indenture would have the right, and, upon the direction of a majority in principal amount of the Lessor Notes relating to such Lease (which by virtue of the pass-through voting mecha-nism, would be a majority of the principal amount of the Debt Securities), would be required to declare all of such Lessor Notes to be due and payable and to exercise the remedies

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available under such Lease Indenture. These remedies include the right to demand after a specified grace period that APS pay all unpaid basic rent plus a stipulated amount which, in all cases, will be sufficient to pay the principal of, premi-um, if any, and interest on all such Lessor Notes. To the extent that the Trustee has not received any such instruc-tions in the event of a default in payment under any Lease, it would be required to cause such action to be taken by the Applicant or the trustee under the Lease Indenture with re-spect to assigned rentals and other assigned payments under such Lease as a prudent man would take in respect of his own property. The amounts payable by APS under the Leases, at least to the extent of the amount of the principal of, inter-est and premium, if any, on the related Lessor Notes, will be required to be pai'd directly to the Trustee for distribution to the holders of Debt Securities.

'he holders of Debt Securities would therefore have access under the Collateral Trust Indenture and the Lease Indentures to the credit of APS. In addition, by exer-cising such rights, holders of Debt Securities would be enti-tled to realize on the security afforded by the assignment of rentals up to the aggregate unpaid amount of the relevant Lessor Notes secured by such assignment of rentals, free of any rights of APS or any creditor thereof.

Based on the foregoing and the other information included in this Application, the Applicant believes that the combination of the Lessor Notes and the Leases ultimately constitutes an obligation of APS with respect to the debt service on the Debt Securities and serves as a functional equivalent of a guaranty by APS. In light of the nature of APS'bligations in this financing and the remedies available to the holders of Debt Securities, it is appropriate to view the Debt Securities as essentially the debt of APS for pur-poses of the Act.

II. ORDER REQUESTED The Applicant may be deemed to be an "investment company" as defined in either Section 3(a)(1) or 3(a)(3) of the Act (i) by reason of its proposed acquisition. of the Les-sor Notes, which will constitute substantially all of its assets and (ii) because the Debt Securities which to offer may be held by more than 100 persons.

it intends The Applicant respectfully requests that the Com-mission consider this Application and issue an Order pursuant to Section 6(c) of the Act unconditionally exempting each and every provision of the Act.

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III. REASONS FOR GRANTING THE ORDER REQUESTED Subsection 6(c) of the Act provides that the Com-mission upon application may by order conditionally or uncon-ditionally exempt any person from the provisions of the Act if the exemption would be (i) either necessary or appropriate in the public interest; (ii) consistent with the protection of investors; and (iii) consistent with the purposes fairly intended by the policy and provisions of the Act. On the basis of the facts stated in this Application and the reasons set forth below, Applicant believes that the exemption re-quested in this Application would conditions.

fulfill each of these three Because the Applicant will not be engaged in the business of issuing "redeemable securities", "face-amount certifica'tes of the installment type" or "periodic payment plan certificates" (as such terms are defined in the Act) and will be'rimarily engaged in purchasing the Lessor Notes which will represent a portion of the sales price of the property leased to the Lessee under the Leases, pursuant to the provisions of Section 3(c)(5) of the Act the Applicant would appear to be excluded from the definition of investment company. The activities of the Applicant are essentially those of a special purpose finance company which will advance funds to, or acquire notes of, the purchasers of property constituting merchandise, or which will purchase or otherwise acquire mortgages and other liens on and interests in real property, which merchandise and real property are to be leased to the Lessee such purchasers. The Lessor Notes will represent loans toby the Lessors, as purchasers, incurred to finance a portion of the purchase price of such property.

Notwithstanding the exemption provided by Section 3(c)(5) of the Act, because of the complexity of the structure of the proposed issuance of the Applicant's Debt Securities and in order to eliminate any uncertainty as to the status of the Applicant as an investment company under the Act, it seeks an exemption from all of the provisions of the Act pursuant to Section 6(c) thereof.

The Applicant believes that the response of the Commission to this Application should be governed by the po-sition taken by the Commission on December 31, 1985 (Invest-ment Company Act Release No. 14880) in granting the Order requested in the First PV Funding Corporation Application pursuant to Section 6(c) of the Act.

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A. Order is Necessary or Appropriate in the Pub-lic Interest and Consistent with the Purposes Fairly Intended by the Policy and Provisions of the Act The business in which the Applicant proposes to engage is not of the type intended to be regulated by the Act. The activities of the Applicant are similar to those of certain finance subsidiaries which the Commission has exempt-ed from the Act under Rule 3a-5 promulgated pursuant to the Act. 'lthough the Applicant is not a subsidiary of, or in any way affiliated with, APS or any of its subsidiaries and the Applicant's Debt Securities will not be guaranteed by APS or any of its subsidiaries, as a special purpose corporation engaged only in the business of the issuance of the Debt Se-curities, the Applicant and its activity come within the gen-eral policies expressed in Rule 3a-5. APS is obligated to make payments under the respective "come hell or high water" Leases. Although these Lease obligations are technically not a guarantee of the Debt Securities, the flow-through of such obligations under the related Lessor Notes and ultimately the Debt Securities makes such Lease obligations the functional equivalent of a guaranty by APS. The Leases, pursuant to which rental payments by APS will be applied to payment of the Lessor Notes and ultimately to payment of the Applicant's Debt Securities, provide the mechanism by means of which holders of the Applicant's Debt, Securities will look to APS for their assurance of repayment.

The grant to the Applicant of an exemption from all of the provisions of the Act is appropriate in the public interest. Leveraged leases are a widely accepted form of fi-nancing designed to provide business, financial, and other benefits to the lessees, lessors, and lenders involved. Such transactions provide companies such as'PS with a financially favorable method of acquiring the use of capital assets nec-essary to conduct their. businesses. Heretofore, parties to leveraged lease financings have faced a limited source of debt financing for the purchase of leased property, particu-larly when the term of -the debt is in excess of 20 years.

Such financing has been obtainable almost exclusively from the institutional private placement market. As -a conse-quence, lessees, whose rental payments must be sufficient to service the debt incurred by their lessors in connection with such financings, have been generally confined to structuring their financing transactions on the basis of the terms of-fered by the institutional private placement market. The proposed issuance of the Applicant's Debt Securities would provide a convenient mechanism for APS to obtain the benefits of access to public as well as other segments of the debt capital markets.

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B. Order is Consistent with the Protection of Investors The grant to the Applicant of an exemption from all of the provisions of 'the Act would also be consistent with the protection of investors and the purposes intended by the policy and provisions of the Act. The Applicant's operations do not lend themselves to the abuses against which the Act was directed--excessive management and brokerage fees, insid-er loans at highly favorable terms, investments in companies in which the managers of the investment company have a per-sonal interest, pyramiding of control, issuances of new secu-rities, reorganizations, and excessive borrowings in derogation of the rights of holders of existing securities, and operation without adequate assets or reserves. Because all of the securities issued by the Applicant, other than its outstanding Common Stock, 'will be pari passu secured debt securities, none of the inherent conflicts between holders of different classes of securities will exist. The debt securi-ties will not be redeemable at the option of the holder at a price based on the net asset value of the Applicant. Valua-tion questions and similar problems raised by such redeemable securities will not be present in respect of the Applicant's Debt Securities.

Similarly, the Applicant will not purchase or hold securities of other investment companies so there will be no pyramiding of control of investment companies or other ineq-uitable methods of control. The financial statements of the Applicant will be reported on by independent auditors. In the case of the Applicant's Debt Securities which may be pub-licly offered in the United States, disclosure with respect.

to the Applicant, the terms of such securities, the security therefor, and the underlying arrangements with the Lessors and with APS pursuant to the Leases will be made in a pro-spectus forming part of a registration statement that will have been declared effective under the Securities Act.

By virtue of the Collateral Trust Indenture, the Lease Indentures, the Lessor Notes, and the Leases, the pur-chasers of the Debt Securities will have access to the credit of APS. As the assignee of rentals and other payments under the Leases as security for payment of the Lessor Notes, the trustees under the Lease Indentures or the Applicant as se-cured party under the Lease Indentures directly will be enti-

• tied to exercise, subject to the provisions of the Lease Indentures, on behalf of and for the benefit of all holders of the Applicant's Debt Securities, all of the rights and remedies against APS provided in the Leases with respect to such assigned payments. The exercise of such rights and reme-dies will be at the direction of holders of the Debt 0

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Securities through the Trustee's instructions to the trustees under the Lease Indentures or as pledges of the Applicant's interest in the Lease Indentures. Purchasers of the Debt Se-curities will enjoy comparable assurances that the principal.

of, premium, if any, and interest on these obligations will be paid when due as purchasers of similar obligations issued directly by APS would have. Because investors will be well protected under the proposed arrangements which are indepen-dent of the applicability of the Act, the protection of in-vestors does not require subjecting the Applicant to the Act and, accordingly, exempted from the Act.

it is appropriate for the Applicant to be CONCLUSION The Applicant's proposed activities are necessary or appropriate in the public interest and are consistent with the protection of investors and the purposes of the Act.

Denial of this Application would advance no interests sought to be achieved by the Act.

WHEREFORE, the Applicant requests that the Commis-sion enter an order pursuant to Section 6(c) of the Act un-conditionally exempting the Applicant from all of the provisions of the Act.

AUTHORIZATION REQUIRED BY RULE 0-2 UNDER THE ACT Section 141(a) of the General Corporation Law of the State of Delaware provides in pertinent part that:

"The business and affairs of every Corpo-ration organized under this chapter shall be managed by or under the direction of a board of directors, except as may otherwise be pro-vided in this chapter or in its certificate of incorporation."

Section 1 of Article III of the By-Laws of the Ap-plicant provides in pertinent part that:

"The business and affairs of the Corpora-tion shall be managed by or under the direction of the Board of Directors."

The Board of'irectors of the Applicant duly adopt-ed on May 13, 1986 the following resolution authorizing the filing of this Application:

"RESOLVED, that the President, any Vice President or the Secretary of the O.

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Corporation and any Assistant Treasurer or Assistant Secretary -and each hereby is, authorized to take any action which such officer seems necessary or desirable on behalf of the Corporation in connec-tion with an application to be filed with the Securities and Exchange Commission for an Order under Section 6(c) of the Investment Company Act of 1940 exempting the Corporation from each and every pro-vision of said Act including, without limiting the generality of the foregoing, full power and authority to execute and deliver applications and documents, and any amendments thereto, and to make per-sonal appearance for and on behalf of the Corporation in connection therewith."

The Applicant therefore all the reauirements in Rule 0-2 ofrespectfully submit's that the General Rules and Regulations of the Commission under the Act have been com-plied with and that Secretary of the Applicant, who signed and filed this Application, is duly authorized to do so.

Pursuant to Rule 0-2(g) of the General Rules and Regulations of the Commission under the Act, the Applicant attaches hereto as Exhibit B a proposed Notice of Application For an Order Pursuant to Section 6(c) of the Act Exempting Applicant From All Provisions of the Act.

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. Please ZV. COMMUNICATIONS direct any questions and send all communica-tions relating to this Application to the following:

Teresa Davidson Snell 6 Wilmer 3100 Valley Bank Center Phoenix, Arizona 8S073

{602) 2S7>>7290 Dated: May 13, 1986 PVNGS FUNDING CORP.g INCA By Secretary STATE OF DE~K )

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MW CASILE COUNTY )

The undersigned, being duLy sworn deposes and says that he has duly executed the attached Application dated May 13, 1986, for and on behalf of PVNGS FUNDING CORP., INC., that he is Secretary. of such company; and that all actions by stock-holders, directors, and other bodies necessary to authorize deponent to execute and file such instrument has been taken.

Deponent further states that he is familiar with such instrument, and the contents thereof, and that the facts set forth therein are true to the best of his knowledge, information, and belief.

Subscribed and sworn to before me, a notary public, this 13th day of May,'986.

No Public

[Notary Seal]

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CERTIFICATE OF INCORPORATION OF PVNGS FUNDING CORP., INC.

FIRST: The name of the corporation (hereinafter referred to as the Corporation) is:

PVNGS Funding Corp., Inc.

SECOND: The registered office of the Corporation is to be located at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. The name of its regis-tered agent at such address is The Corporation Trust Company.

THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation are:

(1) To lend funds on a non-recourse basis to each Owner Trust or corporation acting as lessor on one or more leveraged lease transactions in which Arizona Public Service Company, an Arizona corporation (APS), acts as lessee and which relates to any portion of APS's 29.1% undivided ownership interest in each of three 1,270 megawatt electric generating units, each containing a pressurized water reactor nuclear steam supply system, certain facilities the use of which is common to all such units, and certain related trans-mission facilities and pipeline, such units, facilities, transmission facilities and pipelines being known variously as Palo Verde Nuclear Generating Station and Arizona Nuclear Power Project in commercial operation or under construction at a site located approximately 55 miles west of downtown Phoenix, Arizona, and to acquire, own, hold, sell, transfer, assign, pledge, finance, exercise any and all rights with respect to and otherwise deal with such loans, including ex-ercising all rights and remedies upon the occurrence of a default with respect to any thereof, such rights and remedies to include the foreclosure upon or other acquisition of the collateral securing such loans.

(2) To authorize, issue, sell and deliver notes, bonds or other evidences of indebtedness (or warrants, options or other rights to purchase any such bonds, notes or other evidences of'ndebtedness) other than "redeemable secu-rities" (as that term is defined in the Investment Company Act of 1940, as amended) in order to provide funds for the purpose described in clause (1) of this Article THIRD; and (3) To engage in any activity permitted to corporations under the laws of the State of Delaware, but only to the extent that such activities are incidental to any

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of the foregoing or are necessary or convenient for the accomplishment of any of the foregoing.

FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is one thousand (1,000), all or which are to be of $ 1 par value per share and of one class, which class is hereby designated as Common Stock.

FIFTH: The name and mailing address of the sole incorporator is J. A. Barbera, 1209 Orange Street, Wilmington, Delaware 19801.

SIXTH: Notwithstanding any other provision of this Certificate and any provision of law that may otherwise so empower the Corporation, the Corporation shall not, without the prior written consent of each trustee from time to time under any'ndenture pursuant to which the Corporation shall issue and have outstanding notes, bonds or other evidences of indebtedness (which consent must be given in accordance with the terms of the applicable indenture), do any of the following:

(1) Dissolve or liquidate, in whole or in part; (2) Merge into or consolidate with, or sell all of any part of its assets to, any person, firm, corpora-tion, partnership or other entity unless, in the case of a merger or consolidation, the surviving corporation in such merger or the'orporation resulting from such consolidation shall have a certificate of incorporation containing provi-sions identical to the provisions of Article THIRD and this Article SIXTH and, in the case of a sale of assets, the. ac-quiring corporation shall have assumed all of the liabilities and obligations of the Corporation and shall have a certifi-cate of incorporation containing provisions identical to the provisions of Article THIRD and this Article SIXTH, provided that nothing herein contained shall prevent or restrict in any manner the Corporation from assigning or pledging its assets to secure its outstanding indebtedness; (3) Declare or pay any dividend on any of the Corporation's stock; or (4) Amend this Certificate to alter in any manner or to delete Article THIRD or this Article SIXTH.

SEVENTH: Subject to the limitation provided in Article SIXTH of this Certificate, the Corporation reserves the right to amend the provisions contained in this A-2

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Certificate and in any certificate amendatory hereof in the manner now or hereafter prescribed by law, and all rights conferred on stockholders or other hereunder of thereunder are granted subject to such reservation.

IN WITNESS WHEREOF, the undersigned, the incorpo-rator hereinbefore named, does hereby certify that the facts herein stated are true, and has accordingly hereunto set his name the 13th day of May, 1986.

/s/ J. A. Barbera J. A. Barbera A-3

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UNITED STATES OF AMERICA BEFORE THE SECURITIES AND EXCHANGE COMMISSION INVESTMENT COMPANY ACT OF 1940 Release No. 1986 In the Matter of PVNGS FUNDING CORP., INC.

(File No. 812-NOTICE OF APPLICATION FOR AN ORDER PURSUANT TO SECTION 6(c) OF THE ACT FOR EXEMPTION FROM ALL PROVISIONS OF THE ACT NOTICE IS HEREBY GIVEN that, PVNGS Funding Corp.,

Inc. (Applicant), a Delaware corporation, filed an applica-tion on May 16, 1986, for an order of the Commission pursuant to Section 6(c) of the Investment Company Act of 1940 (the "Act"), exempting Applicant from all provisions of the Act.

All interested persons are referred to the application on file with the Commission for a statement of the representa-tions made therein, which are summarized below, and to the Act for the text of its relevant provisions.

According to the application, Applicant is a Delaware corporation and expects to have all of its shares of common stock owned by The Corporation Trust Company, or a company controlled by it. Applicant represents that there has been, and undertakes that in the future there will be, no public offering or Applicant's common stock or of any other equity security. Applicant further represents that there is, and in the future will be, no class of equity securities of Appli-cant other than its common stock. Applicant has been created to participate as lender in one or more leveraged lease transactions. (" Leases" ), in which Arizona Public Service Company, an Arizona corporation ("APS"), is the lessee

(" Lessee" ).

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Applicant's sole purpose is to assist APS in the financing and refinancing, in whole or in part, of APS's 29.1% undivided ownership interest in the Palo Verde Nuclear Generating Station ('PVNGS'). PVNGS, located near Phoenix, Arizona, consists primarily of three 1,270 megawatt electric generating units, e'ach containing a pressurized water nuclear steam supply system, certain related common facilities, cer-tain transmission facilities, and pipeline, and of which, the latter three components may or may not be included in such financings. Ownership of PVNGS is governed by the Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, as amended, and pursuant thereto, Arizona Public Service Company, an Arizona utility, is authorized to act as agent for the owners of PVNGS, and has responsibility and control over construction, operation and maintenance of PVNGS.

'pplicant states that its participation as lender in the Leases will be limited to making loans pursuant to a loan and security agreement (" Loan and Security Agreement,")

or a trust indenture and security agreement (" Trust Indenture and Security Agreement" (in either case, a "Lease Inden-ture") to certain lessors ) (" Lessors" ) under such Leases which will be payable primarily from rentals and other payments by the Lessee. Applicant expects that the Lessors will be a bank or trust company acting as trustee for one or more bene-ficiaries pursuant to a trust agreement, formed exclusively for the purpose of the lease financing. Applicant states that a portion of the purchase price of the property owned by the Lessors and leased to the Lessee (" Leased Property" ) will be paid by the beneficiaries of the grantor trust that acts as Lessor and that amount will constitute their equity in-vestment in the Leased Property. The loans by Applicant will be without recourse to the general credit of the Iessors of their respective beneficiaries, and will be evidenced by non-recourse obligations or the respective Lessors (" Lessor Notes" ). Applicant states that under each Lease, the Lessee will be obligated to make rental payments sufficient to pay principal of and premiums, if any, and interest on the Lessor notes issued in connection therewith. Applicant further states that such obligations or the Lessee will be required to be absolute and unconditional, without right .of counter-claim, setoff, deduction or defenses Applicant expects to enter into'n agreement (the "Commitment Agreement" ) with APS pursuant to which Applicant will agree to make loans to one or more Lessors designated by APS from time to time.

Applicant intends to acquire the funds necessary for the purchase of the Lessor Notes through the issuance of its debt securities in one or more series with differing ma-turities ("Debt Securities" ) which may or may not be secured B-2

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on a parity basis by a first lien on, and a security interest in, all of the assets of the Applicant, consisting primarily of the Lessor Notes so acquired and previously acquired and which may included a lien on or security interest in the Leased Property (if so secured, the Debt Securities may be referred to as "Lease Obligation Bonds" ). Lessor Notes held by Applicant may only consist of Lessor Notes issued in con-nection with any Leases to which APS is a party, as lessee, in conjunction with its ownership interest in PVNGS.

Applicant states that the Debt Securities will be issued under a common indenture and a separate supplemental

'ndenture for each series other than the initial series (col-lectively, the 'Collateral Trust Indenture') which will estab-lish the terms of the Debt Securities of that series. It is expected that the trustee under the Collateral Trust Inden-ture (,"Trustee" ) will be a bank or trust company not affili-ated with'ny of the Lessors and will not be a trustee under any indenture of APS or its subsidiaries. At each Lease closing'the Lessor Notes will be pledged and assigned direct-ly to the Trustee. Applicant expects that the Lessor Notes will be issued under circumstances making such transactions exempt from the registration requirements under the Securi-ties Act of 1933 (" Securities Act").

Applicant states that the Lease Indentures will set, forth the terms and conditions under which the Lessor Notes will be issued. Applicant represents that each Lease Inden-ture will require the Lessor to grant to the Applicant (if the Lease Indenture is a Loan and Security Agreement) or (a trustee under the Lease Indenture (" Lease Indenture Trustee" )

if the Lease Indenture is a Trustee Indenture and Security Agreement), an assignment of rents, including basic rentals and certain other payments, to be made by the Lessee under the applicable Lease. The Lease Indenture Trustee or the Applicant may have a lien on or security interest in, the Leased Property. In the event no such lien or security in-terest is created, the Lessor will covenant that, so long as any Lessor Note is outstanding, it will not incur any other debt constituting Lessor Notes or otherwise in connection with the Leased Property, and except for certain limited per-mitted liens, it will not create any lien or security inter-est in such property. Thus, Applicant states, these two covenants combined ensure that if a Lessor defaults on a Les-sor Note, the Leased Property will be available to satisfy the claims or the Trustee, acting for the benefit of 'holders of Debt securities. Applicant states that it will be precluded from purchasing any Lessor Note unless (i) such Lessor Note is issued in respect of Leased Property having a fair market sales value at the time of purchase at least equal to 110% of the original principal amount of such Lessor B-3

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Note or, (ii ) such Lessor Note and all other Lessor Notes (if any) issued by the relevant Lessor are issued in respect of Leased Property having an aggregate fair market, value (mea-sured, in each case, as of the date such Leased Property was first financed under the Lease) at least equal to 110% of the original principal'amount of such Lessor Note and such other Lessor Notes. Further, Applicant states that each Lease In-denture will include as events of default, without, limita-tion: (a) payment defaults on the Lessor Notes issued thereunder and (b) events of default under the related Lease.

According to the Application, the various series of Debt Securities will have terms which may differ as to inter-est rates, sinking fund obligations of Applicant, the right of Applicant to redeem such Debt Securities, and other mat-ters. The interest rates, maturities and principal amounts of each series of Debt Securities will be established based on prevailing market conditions, thereby giving Applicant flexibility to take advantage of changing market conditions.

If the maturity dates and cash flow of the Lessor Notes ex-ceed the cash requirements of Applicant's obligations under the Debt Securities, the resulting funds (-"Temporary Funds" )

will be invested by Applicant in certain investments ('ermit-ted Investments"~, in each case maturing at such time as nec-essary to pay Applicant's obligations under the Debt Securities. Applicant states that Debt Securities, which may include commercial paper and intermediate-term and long-term obligations, will be issued in the private or public markets in the United States,'nd in offerings outside the United States under circumstances reasonably designed to assure that such Debt Securities are not offered or sold to citizens and/or residents of the United States.

Applicant proposes that the initial issuance of Debt Securities willibe through an underwritten public offer-ing or private placement of one or more series having an ag-gregate principal amount of approximately $ 1.1 billion (assuming a total sales price for APS's 29.1% interest in PVNGS Unit 2 and the common facilities of $ 1.3 billion).

Applicant represents that, although APS will not be the actu-al issuer of the Debt Securities, it will be considered the "issuer" thereof for purposes of the Securities Act. Any registration statement filed under the Securities Act relat-ing to the Debt Securities will name APS as the sole regis-trant and will be signed on behalf of APS as the sole registrant by such officers and directors of APS as may be required under the Securities Act and the rules, regulations and forms of the Commission thereunder.

Applicant represents that it will assign and pledge to the Trustee under the Collateral Trust Indenture, as B-4

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security for the payment of the principal of and premium, any, and interest on all Debt Securities, the Lessor Notes if and other assets held by the Applicant including any lien or security interest it may have in the Leased Property. Each such Lessor Note will. in turn be secured by the assigned ren-tals and other assigned payments under such Lease and may be secured by a lien or security interest in the Leased Proper-ty. Applicant states that the Trustee will give immediate notice to the Debt Securities holders of any rights granted by the Collateral Trust Indenture to it, which will include the right to exercise voting powers in respect of the Lessor Notes, to give any consents or waivers with respect thereto or to exercise any rights and remedies in respect thereof.

The Collateral Trust Indenture will authorize the Debt Secu-rities holders to direct by notice to the Trustee within a specific period of time, that it take any action or cast any vote in its capacity as a holder of the Lessor, Notes. As a result of this pass-through voting mechanism, the rights and remedies of Lessor Noteholders will be exercisable directly by the Debt Securities holders through their fiduciary, the Trustee. The principal amount of Lessor Notes directing any action or being voted for or against any proposal will be the principal amount of the Debt Securities holders taking the corresponding position. To the extent the Trustee does re-ceive instruction, it will take such action with respect to the Lessor Notes as a prudent man would in the care of his own pr'operty.

Applicant states that in the event APS defaults in the payment of rent or otherwise under any Lease Indenture, the Applicant or the Lease Indenture Trustee, as the case may be, would have the right to exercise, subject to the provi-sions of the Lease Indenture, all of the rights and remedies against APS provided in the related Lease. The exercise of such rights and remedies would be at the direction of the holders of the Debt Securities through the Trustee's instruc-tions to the Lease Indenture Trustee or as pledgee of the Applicant's interest in such Lease Indenture.

Applicant states that among the rights and remedies of a holder of Lessor Notes included under the Lease Inden-ture is the right to demand, after a specified grace period, that APS pay all unpaid basic rent plus a stipulated amount which, in all cases, will be sufficient to pay the principal of, premium, if any, and interest on the related Lessor Notes. Amounts payable by APS under the Leases, to the ex-tent of the amount of the principal, interest, and premium, if any, on the relevant Lessor Notes, will be paid directly to the Trustee for distribution to the holders of the Debt Securities. Applicant thus asserts that holders of the Debt Securities will have access under the Collateral Trust B-5

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Indenture and the Lease Indentures to the credit of APS.

Moreover, Applicant asserts that holders of the Debt Securi-ties will be entitled to realize on the security afforded by the assignment of rentals to realize to the aggregate unpaid amount of the relevant Lessor Notes and. the obligation of APS under the Leases, Applicant asserts, grants holders of Debt Securities access to'he general credit of APS and is thus the equivalent of a general unsecured obligation of APS with-out limitation as to source of payment. The Lessor Notes and the Lease Indenture will provide that, upon the occurrence of certain casualty events, and certain other events which re-quire the collapsing of the lease transaction, either (i) APS shall assume the obligations represented by the Lessor Notes or (ii) APS shall purchase from the beneficiaries or the trusts issuing the Lessor Notes the beneficial interest in such trusts and the Lessors will grant a lien and security interest in the Leased Property to secure the Lessor Notes.

The assumption'r purchase described in the preceding sen-tence will be in partial satisfaction of APS's obligation to make payments required of it upon early termination of the Leases in consequence of any such event. Applicant asserts that in circumstances where the Lessor Notes are not secured by the Leased Property, there will be no need to prepay the Lessor Notes in the event of a casualty. The preservation of a right for APS to assume the Lessor Notes in certain circum-stances assure that APS will not be faced with an accelerated obligation to prepay the Lessor Notes under the provisions of the Leases.

Applicant states that the issue, sale and delivery of a particular series of Debt Securities may be effected, at maximum, two months prior to the date for the consummation of the Leases (" Lease Closing Date" ) applicable to the Leased Property financed with the Debt Securities proceeds. Pending the Lease Closing Date, the net proceeds of the Debt Securi-ties will be held by the Trustee, pursuant to the terms of the Collateral Trust Indenture. The Trustee may invest pro-ceeds in Permitted Investments, which include direct obliga-tions of the United States or obligations fully guaranteed by the United States, certificates of deposit issued by or bank-ers'cceptances or, time deposits with, banks organized un-der United States law and limited to amounts of less than $ 15 million in principal at any one time and from any one bank, or commercial paper of companies incorporated in or doing business under the laws of the United States or one State, in an amount not exceeding $ 15 million in principal amount at any one time from any one company. The co'mmercial paper will also have the highest rating by a nationally recognized rat-ing organization. Permitted Investments, Applicant states, also include repurchase agreements, fully collateralized by the Permitted investments, pursuant to which a United States B-6

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bank, trust company or national banking association having a net worth or at least $ 200 million is obligated to repurchase the obligation not later than 90 days after its purchase.

Except to the extent payable from the proceeds of refunding Debt Securities, proceeds of Temporary Investments or the proceeds of the initial issuance of the Debt Securi-ties, where the relevant Lease Closing Date does not occur simultaneously, due to the nonrecourse nature of Lessor Notes and the limited scope of Applicant's activities, payment of the principal of, premium, if any, and interest on the Debt Securities will be made exclusively from amounts paid by the Lessee under the asserts that its proposed activities are Leases'pplicant appropriate in the public interest because the proposed issu-ance of Debt Securities would provide a convenient mechanism for APS tb obtain access to segments of the debt capital mar-ket other than the institutional private placement market.

Applicant further asserts that an exemption would be consis-tent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act because, among other things, investors will be protected under the proposed arrangements to the same extent as under equivalent arrangements where the Act is inapplicable.

NOTICE IS FURTHER GIVEN that any interested person wishing to request a hearing on the application may, not lat-er than 1986, at 5:30 p.m., do so by submit-ting a written request setting forth the nature of his/her interest, the reasons 'for the request, and the specific is-sues of fact or law that are disputed, to the Secretary, Se-curities and Exchange of Commission, Washington, D.C. 20549.

A copy of the request should be served personally or by mail upon Applicant at the address stated above with a copy to Teresa Davidson, Snell 6 Wilmer, 3100 Valley Bank Center, Phoenix, Arizona 85073. Proof of service (by affidavit or, in the case of an attorney-at-law, by certificate shall be filed with the request. After said date, an order disposing of the application will .be issued unless the Commission or-ders a hearing upon request or upon its own motion.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

John Wheeler Secretary 04TDD1045 B-7

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