ML17297B655

Annual Financial Rept 1981

ML17297B655
Person / Time
Site:	Palo Verde
Issue date:	02/25/1982
From:	Turley K ARIZONA PUBLIC SERVICE CO. (FORMERLY ARIZONA NUCLEAR
To:
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ML17297B653	List: ML17297B651 ML17297B655 ML17297B656 ML17297B657 ML20063C817
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NUDOCS 8208270378
Download: ML17297B655 (36)

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Annual Report This report is published to provide general information con-cerning the company and not in connection with any sale, offer for sale, or solicitation of an offer to buy, any securities.

Annual Meeting of Stockholders All stockholders are invited to The year 1981 brought sober-attend the company's sixty-second ing reminders ofjust how impor-annual meeting. It will be held tant people are to the spirit and at 10 a.m. Thursday, April 22, in personality of an organization. In The Grand Ballroom of the April, Chairman Ralph M. Bllby.

Ramada Townehouse, 100 West succumbed to cancer. In October, Clarendon, Phoenix, Arizona. Vice President of Gas Operations Howard M. Hersey also passed away. These gentlemen were not only important members of our management team, but the char-acter of their leadership gave us reason to be proud of our asso-ciation with this industry and this company.

Arizona Public Service Company, 411 North Central Avenue, Phoenix, Arizona (602) 271-7900 Mailing address: P.O. Box 21666, Phoenix, AZ 85036

24 Highlights 1981 1981 1980 1979 Property and Plant; Total utilityplant, year end S3,688,270,000 S3,199,927,000 S2,735,073,000 Capital expenditures S 558,453,000 S 504,120,000 S 468,116,000 Sales and Customers:

Total operating revenues S 882,154,000 S 765,760,000 S 664,423,000 Total electric sales (mwh) 13,387,998 11,877,722 11,584,898 Electric customers, year end 438,853 421,803 401,983 Total gas sales (m therms) 412,846 432,277 467,088 Gas customers, year end 341,184 340,248 340,343 Income, Earnings, Dividends:

Net income S 197,434,000 S 143,290,000 S 121,578,000 Earnings for common stock S 170,648,000 S 118,228,000 S 99,696,000 Average common shares outstanding 52,289,259 42,960,655 34,426,346 Earnings (based on average shares outstanding) 3.26 S 2.75 S 2.90 Dividends paid per share of common stock 2.20 S 2.06 S 1.94 Shareholders; Common 119,825 110,416 92,396 Preferred 6,339 6,745 7,049 Employees, year end: 6,333 5,538 5,263 I

Contents Page To our shareholders 2 The year in review . 4, Financial data 14 Accountants'pinion 18

To Our Shareholders As consumers become increasingly discriminating and demanding, the intelligent direc-tion of corporate enterprise to meet rising expectations of quality and value in goods and services has never been more critical.

Investors in American busi-ness... those who provide its life blood... also have rising expectations. If they are to be the engine behind the renewal of a vigorous, growing economy, inves-tors must be offered an overall return that 1s competitive with that offered by an unprecedented number of investment alternatives.

Meeting the needs of these important groups presents a tremendous challenge. This is particularly true of the electric utility industry, which tradit1on-ally has been a prime mover of economic expansion and requires large quantities of capital to meet its service obligations.

Regulatory climate changing In recent years, our Industry's opportunity to perform up to expectation has been cir-cumscribed by restrictive policy positions and regulatory con-straints at the federal level, and by inadequate rate decisions by state regulatory commissions.

But things are changing.

Regulatory reform is on the way.

New tax laws provide incentives and financing opportunities.

And perhaps most significant of all, more and more state com-missions, including the Arizona Corporation Commission, are recognizing the problems faced by electric utilities and are more willing to take steps to restore the 1ndustry's financial health.

In short, the freedom to Customers were provided a and unique perspective of each perform in the balanced best major new rate option which member of the office provides interest of shareholders and cus- offers them the opportunity to an added dimension as we deal tomers is slowly being improved. hold down electric utility bills by with the present and plan for the Our performance in 1981 controlling their peak demand. future.

reflects a concerted effort to take Going beyond rate options, the Along with sound manage-advantage of this improved envi- company also put into effect ment. good employees are a vital ronment. But our effort must a program in January of 1982 ingredient of any successful busi-be sustained ifwe are to see addi- which provides a direct bill credit ness performance. And it is to tional financial improvement in to customers who install equip- our employees that this report is the years ahead. ment and materials that help dedicated, for without their reduce peak electric demand, thus hard work, clear thinking and Challenges met in 1981 helping to offset the cost of such dedication, the excellent year just improvements. Both of these past would not have been possi-We received major rate relief programs benefit customers by ble. In the following pages you'll in 1981 which, along with favor- providing the opportunity for both read what some of them have to able weather, produced record immediate and long-term savings. say about their jobs and the earnings, 83.26 per share. In our But the program also benefits challenges they are meeting.

rate case, we also sought and the company, by allowing us to Thank you for your invest-received a number of very signifi- reduce the amount of expensive ment in our company. We will cant accounting changes, detailed new power generation that would continue to merit your confidence in the following report, that will otherwise be required. and support.

improve the quality of our Rising to new challenges also earnings. means reacting forthrightly to In 1981, our power plants adverse developments. In 1981, it operated very economically became apparent that a problem indeed. Fully 89.2 percent of our may exist with a particular type of power generation was produced plastic pipe used in our gas by the burning of coal, the most distribution system. We quickly economical fuel currently used initiated an inspection program to Keith L. Turley in our system. The efficiency measure the dimensions of the Chairman and President of our coal-fired power plants, as problem and began replacing measured by capacity factor, services that could be susceptible February 25. 1982 was substantially better than the to failure. Our intent is to take industry average and nearly whatever action may be necessary three percentage points better to ensure the safety of our gas than our record mark for 1980. system.

This performance was directly responsible for holding down Management structure customer bills last summer improved through a reduction in our fuel adjustment clause. In 1981 we moved to improve We are pleased with progress the structure of our executive at the Palo Verde Nuclear Genera- management organization in tion Station, for which we have order to facilitate strategic plan-responsibility as operating agent ning and broaden participation in and project manager. Its record of executive decision-making. Three quality construction, smooth executive vice presidents have and expeditious licensing prog- joined me in a newly-created ress, effective cost control, and Office of the President. Together, adherence to schedule reflects the we have responsibility for all desire of all those who are a key areas of the company's opera-part of the project to make tions. The training, experience it the best in the nation.

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The year 1981 in review In which the company has Increased Its dividend on common of which became effective Nov-For Arizona Public Service stock. ember 1. The agreement also made Company, 1981 brought both permanent a $ 79.5 million. 14 per-encouraging financia success and ACC approves state' cent Interim electric rate Increase regulatory progress, improve- Qrst negotiated electric granted In February of 1981.

ments that give us reason to be As a part of the settlement, optimistic about the year ahead. and gas rate settlement the company agreed not to file for Approval of much-needed On October 27, 1981 the further general rate Increases increases In both electric and nat- Arizona Corporation Commission that would become effective before:

ural gas rates and a record hot approved a $ 78.9 million settle- January 1 of 1983.

Arizona summer combined to ment of our May 1 request for an produce record high earnings per increase In both electric and share. natural gas rates. Negotiated by the commission's staff, Interven-Common Stock Price Ranges ors and our own representatives, (Symbol: AZP) the settlement was either sup-DMdend ported or not opposed by the 1981 High Low Per Share negotiating parties and was a first 1st Quarter S18-7/8 S15-1/2 S .53 for Arizona.

2nd Quarter 18-1/8 15-1/8 .53 3rd Quarter 17-7/8 16-3/8 .57 Approved were a 10.4 percent 4th Quarter 19-5/8 16-5/8 .57 electric rate increase and a 6.9 percent overall gas increase, both 1980 1st Quarter S18-3/4 S14-5/8 S .50 earnings 2nd Quarter 19-5/8 15 .50 Earx11ngs, Dividends, and 3rd Quarter 19-3/8 17 .53 Reinvested Earnings 4th Quarter 18-3/8 15-1/2 .53 per Average Share of Common Stock Our year-end earnings In

$ 4-1981 were $ 3.26 per share, up substantially from $ 2.75 per share last year. This occurred "Long-term planning is imperatiue ifwe despite an Increase of over 9.8 are to meet our customers'eeds at the towest possfble cost. Faced with new million common shares. reinvested earnings power plant lead times of eight to ten Dividends paid per common gears, we must accurately anticipate share totaled $ 2.20 In 1981, future demands for electricity.

up from the $ 2.06 paid In 1980. fncorporatfng such varfables as expected The current annual dividend populatfon growth, conseruation leuels, technological advances and customer rate Is $ 2.28 per share and repre- tifestgle."

sents the sixth consecutive year BillPost, Manager

'77 '78 '79 '8 1 Budgets and Forecasts

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a+i The agreement also directed 4 '~M~/ m~cAI Aj an audit of management effective-ness. To be completed in 1982, average equity reached 15.1 per-the audit w111 include a review of cent, up from 12.5 percent over field operations and crew work the previous 12-month period.

practices.

A 1976 study gave the com- The foundation is laid increased cash flow and higher pany an overall favorable rating, for improved 1nterest coverages during 1982.

Specifically. the commission and a 1980 progress review showed that APS had responded performance in 1982 allowed the full normalization "expeditiously and with unusual The provisions of new tax of investment tax credits com-vigor" in its implementation legislation, coupled with account- mencing Janumy 1, 1982; full of the study's recommendations. ing changes allowed by the com- normalization of income tax bene-We believe that our upcoming mission in its rate decision, fits from liberalized depreciation audit will also be favorable while will provide us with both at statutory rates commencing identifying opportunities for January 1, 1982; and the amorti-improvement. Capitalization Ratio Trends zation of the present deferred As a result of an improving Stert 'Tbtb<<obbt income tax under-recovery over a financial picture, Duff & Phelps b~g~b~~~ b~ 12-year period.

upgraded the company's bond rat- Our projections indicate debt 1ng from 7 to 6, the equivalent coverage should increase to about of an 'A'ating by Moody's Inves- 2'i~ 1.0 Zo 2.75 t1mes, with 1nternal cash tors Service. Shortly thereafter, 48",~ generation approximating 20 Moody's upgraded our commercial percent of our 1982 capital paper rating from Prime 3 to requirements and return on Prime 2. average equity equaling or exceed-In granting the rate increase, ing 1981's level.

the commission indicated that the company could earn up to Rate action continues 16.5 percent on common equity. at the federal level

'For the 12-month period ending December of 1981, APS'eturn on While the company will not be involved in a full-scale Arizona

'77 '78 '79 '80 '81

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thereby exercise more control over their monthly energy bills.

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Moreover, such cuts also lessen

~(~-Wk- began hearings on a $ 14.6 million increase in electric wholesale rates which the company had our need for new generating resources, thus lowering our capi-tal requirements.

Additions to our program asked for ln December of 1980. focus on three specific areas:

Those rates became effective. ~ "Energy Control Credit," a subject to refund, for some APS plan under which the customers ln March of 1980. company will repay to cus-Final action by the commission Is tomers, as a bill credit, a rate hearing during 1982 (pur- pending. portion of the cost of suant to the rate settlement agree- The company also expects to installing hardware such ment), rate action will continue file with the Federal Energy Regu- as high-efficiency air condi-to be heavy at the federal level. latory Commission for an addi- tioning units and replace-In November, the Federal tional electric wholesale Increase ment compressors, and Energy Regulatory Commission ln March. load-control devices.

~ A new load-management Customer Cost per Programs give customers audit consultation program Kwh-Residential choices in controlling for small to medium-sized their energy bi11s commercial and industrial C/kilowatt hour customers.

12-It ls certain that our most ~ The EC-1 (energy capacity) 10- recent rate increases, which residential electric rate allowed the company to catch up that provides an Incentive 8- with the effects of Inflation on the In the form of potentially c! Jrreot t".o I j<>>

6- cost of providing service, will lower bills to customers produce substantially higher bills who effectively control peak for our customers. This ls one demand during the month.

of the reasons why we have Meanwhile, we'e exploring expanded an already extensive still other rate options. In Novem-load-management program. ber, the Arizona Corporation

'77 actual '81 forecast '87 We are offering our cus- Commission authorized the com-tomers several incentives to cut pany to offer two optional rates.

their peak electric energy use and on a trial basis. to 1,000 cus-

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<<o i tomers each. The first is a Financing highlights straight time-of-use consumption rate; the second combines The company was quick And with the sale of 5 million demand and time-of-use factors. to take advantage of new financ- shares of common stock at Our overall goal is to allow ing opportunities which emerged $ 16.75 per share last March. and customers to choose rates com- in 1981. Under new leasing provi- 4 million shares at $ 19.125 in patible with their lifestyles and sions of the Economic Recovery November, we improved our com-our overall load-management Tax Act of 1981, the company mon equity ratio to 41.1 percent.

goals. received $ 50.6 million from the The $ 155 million realized sale of tax benefits representing from these 1981 common stock Investment tax credits and accel- issues, and the $ 210 million from erated depreciation associated the 1981 and 1982 Eurodollar with the 350-megawatt Cholla debentures, were used primarily Unit 4. to reduce short-term borrowing To provide increased flexibil- In support of the company's ity in our financing program, construction program.

we turned to such options as the Additionally, last April, we issuance, through a subsidiary, of issued $ 19.5 million of privately-Eurodollar debentures ($ 50 mil- placed cumulative preferred stock.

lion at 16.25 percent in July; $ 60 The project financing liability million at 17.25 percent In Octo- relating to Unit 4 of the ber; and $ 75 million at 16.25 company's Cholla Power Plant was percent and $ 25 million at 16 per- restructured in May through the cent, both in February of this use of a five-year, tax-exempt year).

Sources Use of of Income 18C Income 1981 34C 1981 "Ftadbility is the key tofinancing our residential customers electric 27C gas 7C 100 Lg to common shareholders 12C dividends 6C retained earnings construction program in the volatile commercial customers electric 26C gas 4C llC interest, preferred dividends &

other cost net capital markets of the 1980s. Our ability industrial customers 30C income & other taxes to evaluate innouatiue financing

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electric 12C gas 3C wages, salaries techniques and to moue quickly to implement least-cost alternatives is others ~+~ & employee benefits paramount to minimhing the cost of 180 gas purchases

- financing, which is, after alL the common electricity purchases & fuel cost goal of the company, its stockholders 15C 100 other operating expenses and ratepayers." 80 depreciation

" 1?easurer Paul Williams

commercial paper pollution con-trol financing agreement ($ 55 million) and a three-year term loan agreement ($ 240 million). long-term debt, about $ 100 mil-One of our major financial lion in preferred stock and 4 Total electric sales increased goals has been to strengthen million shares of common stock, by 13 percent, though a part of capitalization ratios by reducing all of which were approved in this increase reflects a recovery the debt portion of total capitali- January by the Arizona Corpora- from depressed 1980 sales that zation. Long- and short-term tion Commission. If interest resulted from a copper industry debt now constitute about 49 per- rates decline to more normal lev- labor strike.

cent of total capitalization, with els and if common stock earnings Our system peak demand for preferred and common stock remain near today's levels, the electricity was 3,018,700 kilo-making up the balance. 1982 common stock issue could watts, up 8.9 percent from the Financing plans for 1982 be our last of the decade. previous year; again, due largely include up to $ 300 million in to extremely hot weather at the 1981 operations time of the peak and the addition of new customers.

While our growth is expected Electric resources in 1981 to continue, it has slowed consid- totaled 3,634,300 kilowatts, con-erably compared with past sisting of 3,340,700 kilowatts history. of our own generation plus In 1981 we added 17,050 293,600 kilowatts of power avail-new electric customers to our sys- able under firm purchase tem, a 4 percent gain from 1980's contracts.

year-end total. Average residential Our system's capacity was electric use rose slightly to 10.247 bolstered by the addition of kilowatthours, after dropping another new generating unit at in 1980 to just below the 10.000- the Cholla Power Plant. The kilowatthour mark. We attribute 350,000-kilowatt Cholla Unit 4 this primarily to 1981's record- began its commercial operation in setting hot weather. June and, for a while, will mean we have more generating capacity Total Electrical Sales than needed. Accordingly, we

-Actual/Forecast have arranged for temporary sales megawatt hours inmillions of from 50,000 kilowatts to 18- 350,000 kilowatts of the plant's "Thefact that our coal fired power plants generating capacity to other utili-are currently the most economical 16-generating resource in our system 14- ties for varying periods during emphasizes the fmportance of running the next eight years. Contracts these plants as much as possible. The 12- provide for the recapture of that remarkable capacity factor we attafned 10 capacity when it will be needed fn 1981 was due largely to an aggressive maintenance program along with 8 by our own customers.

operating innovations whfch originated 6 Taking into account antici-in partfrom employee fdeas." 4 pated population growth and Walt Ekstrom, Manager 2 other factors, we expect that our Fossil Generation peak demand will increase by

'77 actual '81 forecast '87 an estimated 4 percent annually

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during the next decade, sub-stantially below previous levels.

This estimate takes into account the effects of our load management program. Electric sales are also expected to grow at a similar rate over the same period, reaching approximately 20,500,000 mega- Not all the figures are up.

watthours in 1991, compared however. With 1981 producing pleased that this figure is only 39 to 13,387,998 megawatthours in Arizona's warmest weather on percent more than our original 1981. record, our natural gas sales baseline cost estimate made totaled 412,846,000 therms dur- in 1974. Our company's share of ing the year, a 4 percent decrease. this cost will be $ 1.12 billion.

We will continue to evaluate Palo Construction level high, Verde cost estimates as a part of our overall cost control effort.

but wi11 trend downward The first of Palo Verde's three We anticipate that our capital 1,270,000 kilowatt units was outlays in 1982 will reach approx- 95.3 percent complete at year end imately $390 million, about the 1981. Units 2 and 3 were 75.4 same as in 1981. Our capital and 30.4 percent complete, v- requirements should then steadily respectively.

/ decrease through at least 1986.

The largest outlay this year Capital Expenditures will again go to our share of Actual/Forecast Palo Verde construction costs, in millions approximately $ 161 million. Other S500-expenditures in connection with the plant include $ 29 million 400-for nuclear fuel and $ 35 million for a variety of other items includ-

"Taking into account the resources and ing staffing and training, startup upper management support that have expenses, power usage for startup 200" been committed, I am confident tve are and power credits.

constructing a nuclear plant of the The most recent estimates 1 highest quatlty. Our record in this regard, indicate the total construction as demonstrated in the results of NRC cost of the project wfll be approxi-inspections, has been recognized as one of the best fn the industry." mately $ 3.86 billion. In light of '77 actual '81 forecast '87 John Roedel, Manager inflation rates that have prevailed Nuclear Quality Assurance through the period, we are

road toward our operating license.

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>0 November of 1982.

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O iO Environmental improvement And in December, following projects underway at the Four an extensive evaluation of design, Corners Power Plant in New Mex-construction and operational ico are nearly half complete. In Cold hydrostatic testing, preparation of Palo Verde, the 1981 we spent $ 14.8 million which demonstrates the struc- Advisory Committee on Reactor on these projects, and another tural integrity of the reactor cool- Safeguards gave the plant's three outlay of $ 25 million will be made ant system, is scheduled to be units a positive review. The in 1982. The $ 490 million total completed on the first unit early committee's report to the NRC is cost of the projects fs divided this year. an important milestone on the among the six owners of Units 4 Our dedication to building and 5. APS'hare will be nearly the safest plant possible is paying Generation Fuel MixTrend $ 74 million.

off. The NRC's most recent Based on 1981 Long-Range appraisal, covering the year end- Forecast We'e achieved a more ing June 30, 1981, described Palo efficient operation Verde's overall construction megawatt hours in millions record as "above average," a rat- One of our goals for the 80's ing not easily earned. Receiving continues to be the structuring special notice were the areas 15- of a generation fuel mix that most of quality assurance and safety, gas &oil economically meets our cus-with special commendation given to the company's strong upper management involvement and the 10~ coal tomers'rowing energy needs, while introducing and applying programs that effectively reduce project's open lines of the rate of that growth.

communication. 5" At the end of 1981, 85.3 per-nuclear cent of our system load was met with coal generation. The balance

'77 actual '81 forecast '87 was met with gas, oil (less than 10

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] O~d>>w>>t Given first priority for g) 1 1 percent) and purchases. We replacement were about 4,000 anticipate that. in 1990, approxi- services previously repaired as a mately 62 percent of our system result of damage by dig-lns or load will be met with coal and other accidents. Additional testing 36 percent with nuclear fuel. will determine whether all of the the complexities of energy costs, Thanks in great part to the pipe in question about 40.000 supply and financing. The print efforts of our power production services w111 have to be and broadcast messages address employee team, our coal-fired replaced. our customers'oncerns about generating plants set new records their energy bills. They explain to for efficiency fn 1981. Exploration subsidiary customers the facts concerning electricity use and the costs inher-During the 12 months ended is sold December 31, APS coal-fired ent in ensuring a reliable future generators achieved a record Last year, we sold Bfxco, Inc.. energy supply.

capacity factor of 76.3 percent, our wholly-owned gas exploration thus easing fuel cost burdens on subsidiary. The exploration pro-our electric customers. This is gram was implemented in 1978 at significantly better than the a time when the company was industry average and results experiencing as much as 112 days primarily from a program begun per year of curtailment to major in 1976 to improve power plant industrial customers. Though the efficiency. Bixco program was successful in helping to relieve these curtail-Natural gas service ments, the rising costs of explora-replacement program tion and an improved supply forecast from our primary sup-launched plier triggered our decision to end An intensive inspection of the venture.

residential natural gas service The sale price of approxi-lines, prompted by two explosions mately $ 20 million leaves a short-that resulted from failures of fall in unrecovered investment j>>

gas services, was initiated ln late 1n Bixco of approximately $ 20 g 1981. As a result, a decision million. Under the terms of the I was made to begin replacement of Arizona Corporation Commission's ,)

a particular type of polyethylene 1978 order, we have been allowed "It's obvious that the comp/ex fssues and gas service pipe installed in the to recoup most of these costs, massive technofogfes related to nuclear 1970s. from certain customer categories, power are best understood when they can Although the pipe met all over a 10-year period. be examfned firsthand. We'ue been industry standards at the time of pmufdfng Arfzonans this opportunity, which is oneof the reasons our Palo Verde its manufacture, our testing of Communicating our plant enjoys greater public acceptance samples taken from serv1ce lines than do plants fn many other areas of suggests that ft may lose some Messages the country."

of its toughness with the passage We began an advertising Jane Brand, Manager of time. campaign in the spring of 1981 to Community Relations help our customers understand 11

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Other ads introduced the new our emergency plan for Palo lt is a necessary step in evaluating residential rate (EC-1), designed Verde. Designed to meet both the potential for such a power to help customers control the NRC and Federal Emergency producer in a conventional elec-amount of their monthly energy Management Agency regulations tric system.

bills through selective use of and guide11nes, the plan outlines Another solar energy system major energy-using equipment, actions to deal with any technical went into use in early May to and are promoting the new and operational problems. It cool our Paradise Valley service "Energy Control Credit" load man- also provides for meeting commu- center and provide excess electric-agement incentive program. nications requirements should ity to the company's grid system.

an emergency develop at Palo The $ 1.4 million fac111ty is part Communicating on Verde. of a joint international research nuclear power remains Special efforts have been venture between the United States a high-priority made to acquaint the people who and Saudi Arabia.

live or work near Palo Verde And research planning con-The Nuclear Regulatory Com- with the plant. An open house. tinues on another massive solar mission is currently reviewing personal visits to homes and project at our Saguaro Power a monthly newsletter have helped Plant near Tucson. where from 60 to keep the plant's neighbors to 100 megawatts of the plant's II R NI 0@I WOI

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informed. output could be provided by solar But the interest in Palo Verde

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energy instead of conventional fr extends throughout Arizona. firing by oil or natural gas.

Nearly 17,000 people visited the Meanwhile. data on perfor-site last year. mance of a fleet of 20 electric

/ vehicles has provided valuable and important information about the Research continues on maintenance, performance and alternative energy future use of electric vehicles. The U.S. Department of Energy is sources partially funding this three-year We broke ground last fall for study.

construction of the 225-kilowatt photovoltaic solar power plant at Long-Range Forecast Sky Harbor International Airport of Peak Load and in Phoenix. When completed Electric Resources in late 1982 the facility ls megawatts expected to supply about 440,000

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5,000-kilowatthours of energy annually resources "Utilities today arefacing the challenges to the APS power grid system of a rapidly-changing energy supply situation. Our R&D program is structured or enough to meet the annual 4,0CO-to provide us the greatest possible electric needs of about 40 average-ftexSttity fn meeting these challenges. size Phoenix area homes. 3.COO peak load tVe're ivorkfng not only to identifyfuture APS will operate the $ 3.93 needs, but to develop timely- and million facility, funded primarily 2,COO a+ordable- technical solutions." by the U.S. Department of Energy, Dr. Mexwln Brown, Manager to collect data on its performance. 1,COO" Research Programs While the Sky Harbor plant is experimental and not expected to be a producer of cheap electricity, '77 actual '81 forecast '87 f

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1 t Jt y I j~(+ l Employees'hills, desires are keys to mill-our success Our employees continue to in the seventh year of our hfghly-contribute their innovative ideas productive employee suggestion program, Idealfne. Their sugges-tions, which help us operate customer service representatives more efficiently and more produc- are smoothing the way for better tively, resulted fn record "first- customer relations in all our year" savings of more than $ 4 service areas.

ionn in 1981, savings which will Adequate compensation fs continue to accrue in the years not only a contributing factor to ahead. employee work satisfaction but of At Palo Verde, hundreds of significant value to the company's top-notch professionals are at effort to recruit and retain skilled work preparfng for the 1983 start- professionals. Thus it is our up of Unit 1. Their dedication policy to maintain an equitable, has resulted in the quality con- balanced program of wages and struction and smooth licensing benefits.

process we have experienced, and But we also recognize that will help assure the safe operation there are other needs to be met.

of the plant. Last year we expanded our Training of these high-quality employee services to include a employees continues at an inten- wide varfety of mental and physi-sive pace. We'e fortunate that our cal health-related programs. And original planning included acqui- employees have taken advantage "Our employees on the front line- those who come in contact each woridng day sition of Palo Verde's $ 5.6 million of a variety of education and with thousands of customers- simply on-site control room simulator, training programs, tuition reim-must haue the ability to communicate which fs already providing realis- bursement for job-related courses egectiuely. I belieue we haue one of the tic operational experience for taken outside the company, and most vigorous programs in the industry our operator trainees. a comprehensive program of to cul tiuate this ability among our career counseling.

customer contact people." Meanwhile, to meet cus-A. G. (Andy) Anderson tomers'eeds fn these difficult

~ General Manager, Central Region economic times, specially-trained 13

SELECTED FINANCIALDATA 1981 1980 1979 1978 1977 (Thousands of Dollars, Except Common Stock Data)

Operating Revenues S 882,154 S 765,760 S 664,423 S 562,217 S 493,684 Operating Expenses:

Operation and maintenance 445.111 432,886 371,983 291,908 269,581 Depreciation and amortization 76,178 64,412 57,021 48,295 40,370 ihxes 109,947 98,886 84,549 83,314 71,885 Total 631.236 596,184 513,553 423,517 381,836 Operating income 250,918 169,576 150,870 138,700 1 1 1,848 Other Income* 58,748 43,341 26,760 14,914 12,662 Interest Deductions-Net 112,232 69,627 56,052 46,855 40,499 Net Income 197,434 143,290 121,578 106,759 84,011 Preferred Dividend Requirements 26,786 25,062 21,882 17,471 14,628 Fmrnings for Common Stock S 170,648 S 118,228 S 99,696 S 89,288 S 69,383

'Ibtal Assets S 3,396,790 S 2,928,484 S 2,475,332 S 2,039,420 S 1,673,17.1 Long-term Obligations and Redeemable Preferred Stock S 1,618,048 S 1,455,286 S 1,180,120 S 991,173 S 855,534 Common Stock Data:

Book value per share S 22.13 S 21.97 S 22.75 S 22.56 S 21.83 Earnings per share (based on average shares outstanding) ' S 3.26 S 2.75 S 2.90 S 3.15 S 3.02 Dividends declared per share 2.20 S 2.06 $ 1.94 S 1.73 S 1.53 Shares of common year end 57,648,791 47,813,847 38,181,297 32,777,258 26,576,428

-average 52,289,259 42,960,655 34,426,346 28,363,223 22,970,741 Number of common shareholders 119,825 110,416 92,396 78,275 66,358

'Federal and State income taxes are included in 1hxes, Other Income and, in 1977, Interest Deductions.

Total income tax expense was as follows (in thousands): 1981, $ 19,638; 1980, S16,519; 1979, $ 14,422; 1978, $ 13,937; 1977, $ 6,265.

14

OTHER FINANCIALAl%3 OPERATING STATISTICS 1981 1980 1979 1978 1977 (Thousands of Dollars)

Capitalization:

Common equity S 1,275,623 S 1,050,651 S 868,658 S 739,349 S 580,170 Non-redeemable preferred stock 118,561 118,561 118,561 118,561 118,561 Redeemable preferred stock 199,280 185,280 156,000 100,000 100,000 Long-term debt 1,418,768 1,048,500 828,464 763,450 701,917 Project financing liabilty 221,506 195,656 127.723 53,617 Total S 3,012,232 S 2,624,498 S 2,167,339 S 1,849,083 S 1,554,265 UtilityPlant- Gross S 3,688,270 S 3,199.927 S 2,735,073 S 2,288.604 S 1.889,320 UtilityPlant- Net S 3,111,773 S 2,694,408 S 2,292,341 S 1,901,044 S 1,547.486 Number of Employees at Year End 6,333 5,538 5,263 4,951 4,570 Average Wage per Hour S 11.20 S 10.53 S 9.20 S 8.57 S 7.99 Electric:

Electric resources (tv) 3,634,300 3,307,200 3,077,200 3,061,600 2,872,500 Peak load (kw) 3.018.700 2.772,700 2,579,300 2.548.900 2,373.400 Electric sales total (mwh) 13,387,998 11,877,722 11.584,898 10,912,704 10,481,972 Number of customers at year end 438,853 421,803 401.983 378,553 357.884 Gas:

Total gas sales (m therms) 412,846 432,277 467,088 449,451 463,643 Number of customers at year end 341,184 340,248 340,343 339,803 339,949 UTAH COLORADO nr) ~ ~ Formtneton, NM

)rAY (J/0)

POUR CORNERS (J/0)

~ Ktntrmon Flat)staff About the Company Arizona Public Service is engaged principally in the generation and sale of electricity and in the Ptossott ~ purchase and sale of natural gas.

Successor to a series of small utilityoperations originating in 1886, the company was incorporated in 1920 under the laws of Arizona.

The company's service territory includes all or E

ll part of of Arizona's 14 counties. It is estimated PALO VFRD ) ~ (L that the company's electric and/or natural gas ser-vice reaches approximately 1,946,000 people, or Ii about 70%, of the state's population.

SF()UARO Arizona Public Service Company's principal Ttroson ~ o c executive offices are located at 411 North Central LRORND: Avenue, Phoenix, Arizona. Phone (602) 271-7900.

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~ h L Ma(or APS Power Plants(J/0 n Joint Ownership.

Prirchpat APS Transmhsshon L)nes 15

- Trans///rsshon Unes Operated for Others

BUSINESS SEGMENTS Operating revenues, and operating income before income taxes, attributable to electric and gas operations of the company for each of the five years in the period ended December 31, 1981 were as follows:

Operating Income Operating Revenues Before Income 'Ihxes (Millions of Dollars) (Millions of Dollars)

Electric Gas Electric Gas Year Ended December 31, Amount Percent Amount Percent Amount Percent Amount Percent 1981 $ 730.8 82.8'1.2 $ 151.4 17.2 $ 272.3 99.6 S 1.0 0.4 1980 621.9 143.9 18.8 180.5 96.6 6.3 3.4 1979 533.2 80.3 131.2 19.7 151.5 92.2 12.9 7.8 1978 452.4 80.5 109.8 19.5 141.0 92.4 1 1.6 7.6 1977 397.3 80.5 96.4 19.5 109.2 91.3 10.4 8.7 See note 12 of Notes to Financial Statements.

OPERATING REVENUES 1981 1980 1979 1978 1977 (Thousands of Dollars)

Electric:

Residential $ 252,907 $ 220,920 $ 191.066 $ 158,383 $ 135,274 Commercial 238,975 210,226 179,534 155,669 135,585 Industrial 113,736 95.644 86,563 72,677 61,617 Irrigation 22,916 19,215 14,193 12,252 13,512 Other 81,565 59,391 50,402 41,716 39,657 Total 710,099 605,396 521.758 440,697 385,645 Aansmission for others 9,173 8,817 8,731 9,021 9,328 Miscellaneous services 11,516 7,651 2,696 2,713 2,291

'Ibtal Electric Operating Revenue 730,788 621,864 533,185 452,431 397,264 Gas:

Residential 66,469 65,470 64,123 53,879 48.351 Commercial 34,307 31,727 29,371 24,223 20,779 Industrial 30,858 27,145 22,128 17,646 13.219 Irrigation 17,274 17,218 13,400 11,969 12,359 Other 1,653 1,510 1,324 1,169 860 Miscellaneous services 805 826 892 900 852

'Ibtal Gas Operating Revenue 151,366 143,896 131,238 109,786 96,420

'Ibtal Operating Revenues $ 882.154 $ 765,760 $ 664,423 $ 562,217 $ 493,684 16

MANAGEMENT'S DISCUSSION OF FIl%04CIAL CONSIDERATIONS Liquidity and Capital Resources The company needs large amounts of capital for its on. going construction (1) Derived by multiplying year-to-year increases in units sold by the program and for the refunding of maturing securities and is heavily reliant on weighted average of rate levels in effect ducing 1978.

external financing to meet these requirements as indicated earlier in this (2) Year.to-year increases in cevenues less the amounts shown for volume Annual Report and in Notes 3, 4 and 5 to the Financial Statements. As also increases. Relative contributions by rate increases and by effects of the indicated earlier, the company has a certain degree of flexibilityin adjusting its adjustment clauses vary according to the timing of general rate procedings construction program to its financing capability. However, that flexibility is and the extent to which accumulated etfects of the adjustment clauses limited, and the company's long-term liquidity will depend on its access to the are incorporated in new rates.

capital markets, which in turn will depend on sufficiency of the company's Electric sales were affected in all years shown, particularly 1981, by rates to provide adequate coverages on its senior securities and an adequate extraordinarily warm summers. Unit sales of electricity in 1980 were depressed rate of return on its common stock equity. Adequate earnings and coverages by effects of a copper industry labor strike. Conservation efforts by customers are critical to the maintenance(and hopefully the improvement) of credit ratings in response to higher energy costs have affected unit sales, are expected to on the company's senior securities and, as calculated in accordance with the continue to do so, and are being aidedby the Company's own load management governing instruments, are prerequisite to the company's legal ability to issue program. Unit sales of gas are affected substantially by weather conditions.

such securities. Increases in total operation andmaintenance expenses reflect the volume Seepage 15 with respect to the company's historical capital structure. Its inc~eases in unit sales discussed above. In addition, the cost of fuel for the target structure consists of no more than 50% debt (which, for comparison generation of a given amount of electricity has risen and is expected to rise purposes, would include current maturities and short. term obligations) and further. Exceptional fuel cost increases resulted in 1979 from high. priced 40% common stock equity, with the balance consisting of preferred stock. The purchases of boiler gas and from limited availability of purchased power from company does not contemplate any major "off-balance sheet" financing ar- hydroelectric sources and in 1981 from increased generation for sale to other rangements in the foreseeable future. The company cegards common stock utilities. Althoughunit fuel costs continued to rise in 1980 and 1981, increases equity as its most expensive form of permanent financing, but it intends to since 1979 in the Company's cost of fuel per kilowatt hour generated have maintain that category at approximately the 40% level in order to support the been relatively modest largely due to a favorable change in fuel mix resulting credit ratings on its senior securities. It appears to the company that pur- from the startup of coat. fired Cholla Units 3 and 4 in May 1980 and June 1981 ~

chasers of new issues of long term debt and preferred stock will continue to respectively, and improved capacity factors at the Company's coal. fired plants.

demand high interest and dividend rates for some time to come, and that its Any increased prices of gas (whether tor boiler fuel or for resale) or fuel oil embedded cost of capital will therefore rise rapidly as maturing securities, that may result from price deregulation would accelerate upward cost trends.

bearing relatively low rates, are refunded and the company's plant expands. Variations in purchased power and interchange-net retlect varying See Note 6 to the Financial Statements with respect to short-term degrees of availability of relativety low-priced power from other sources, the

~ borrowings available to the company (there being a statutory limitation on the needs of the Company to augment its own generating sources from time to time amount of such borrowings that can be outstanding without an order from the and the Company's ability to sell energy to neighboring utilities. However, the Arizona Corporation Commission). Funds from operations have contributed only substantial increase in 1980 was due instead to the accounting treatment for marginally to total sources of funds in the last few years(see the Statements of over-recovered fuel and purchased power expense which is discussed in Note Changes in Financial Position). That situation is expected to continue in some 1c of "Notes to Financial Statements". The marked decrease in 1981 resulted degree until Palo Verde Unit1is included in rate base so as to give rise to cash from the reversal of this treatment as well as from large interchange sales to earnings rather than the non.cash allowance for funds used during constcuc- other utilities.

tion. Another constraint on the company's retention of funds from operations See "Effects of Inflation" below in regard to maintenance expense which has been the necessity to increase common stock dividends periodically in is also a function of the size of the Company's utility plant and is affected ordec to cetain investor interest (see the Statements of Income). by the timing of major overhauls (as most notably occurred in 1981) and by other factors (including, in the 1981 period, an amount reserved for the gas line Operating Results inspection program). Other operating expenses and the "other" portion of other Total operating revenues reflect effects of rate increases and adjustment income (deductions) include amortization or write-offs of certain assets in clauses (see Note 1c to the Financial Statements) on prices of units sold. 1981, 1980 and 1979 in aggregate amounts of $ 10,349,000, $ 474,000 and Operating revenues also reflect the volume changes in unit sales shown on $ 2,161,000 respectively.

page 15. The foregoing factors contributed to annual increases (decreases) in Depreciation and amortization expenses increase with the size of the revenues over revenues for the preceding calendar year as follows: company's utility plant, as do ad valorem taxes which are also affected by 1981 1980 1979 growth in the company's operating income as used by the taxing authorities in computing assessed valuation. Offsetting factors in "taxes-other than in-(Thousands of Dollars) come" for 1979 resulted from a court decision invalidating a New Mexico Electric:

Volume increases (1) ............ $ 62,615 $ 12,140 $ 27,868 generating tax and the apparent exercise of restraint by several Arizona taxing authorities. See Note 11 to the Financial Statements for both ad valorem and Pcice increases (2). 46,309 76,539 52,886 sales taxes (the latter being a function of operating revenues) which are the Total increase... ............ $ 108,924 $ 88,679 $ 80,754 principal "taxes-other than income". Income tax details appear in Note 8 to Gas: the Financial Statements.

(1) ...

Volume increases(decreases) $ (4,746) $ (8,503) $ 4,308 The aggregate amount of the allowance for funds used during construction Price increases 121.............. 12,216 21,161 17,144 (AFC), divided between other income and a credit to interest deductions, is Neiincrease.......,........6 7,470 $ 12,658 $ 21,452

primarily a function of the amount of construction work in progress during any Effects of Inflation given period. See Note 1(d) to the Financial Statements for increased rates In contrast to the analysis of increases in operating revenues in the table of AFC and cessation of its accrual on those portions of construction work at the beginning of "Operating Results" above, it is sometimes difficult, in the in progress that are included in rate base. See "Liquidity and Capital case of operation and maintenance expenses, to distinguishbetween effects of Resources" above with respect to the non.cash aspect of AFC. volume increases and rises in unit costs (which, for purposes of this discus-The substantial increase in interest on long-term debt and liability since sion, are all attributed to inflationary pressures).

1979 reflects large amounts of new borrowings and increases in project Certaininflationary effects, such as those on costs of generating fuel, are financing liability at relatively high interest rates (see "Liquidity and Capital passed through to customers pursuant to the rate adjustment procedures Resources" above and Note 5 to the Financial Statements). The increase in summarized in Note 1c to the Financial Statements. Nevertheless, the company interest on short-termborrowings has resulted primarily fromlncreasedborrow- attempts to minimize such effects by means that include increasing the ings and interest rates (see Note 6 to the Financial Statements). availability of its coal. fired units to result in a more economical fuel mix; that Issues of preferred stock (giving rise to the increased dividend require- increase has been achieved by an intensive maintenance program, the cost of ments) and common stock (giving rise to the increased average number of which is not covered by the adjustment clauses. There are a number of other shares outstanding) are summarized in Notes 2 and 3 to the Financial State- major expense items that are also beyond the scope of the adjustment clauses.

ments. inflationary pressures on these items have given rise to a significant earnings The company's net income and its earnings for common stock represent attrition between general rate increases.

composites of cash and non.cash items (see the Statements of Changes in See Note14 to the Financial Statements for perspectives of other effects Financial Position) and, in part, reflect accounting practices unique to regulated of inflation.

public utilities (see Note 1 to the Financial Statements).

ACCOUNTANTS'PINION Arizona Public Service Company:

We have examined the balance sheets of Arizona Public Service subject to refund been known. As discussed in Note 10 of Notes to Company as of December 31, 1981 and 1980 and the related state- Financial Statements, this uncertainty was resolved in February 1982 ments of income, retained earnings and changes in financial position at no liability to the Company. Accordingly, our present opinion on for each of the three years in the period ended December 31, 1981. the 1980 and 1979 financial statements, expressed herein, is dif-Our examinations were made in accordance with generally accepted ferent from that expressed in our previous report.

auditing standards and, accordingly, included such tests of the ac- In our opinion, the accompanying financial statements present counting records and such other auditing procedures as we consid- fairly the financial position of the Company at December 31, 1981 ered necessary in the circumstances. and 1980 and the results of its operations and the changes in its In our report dated February 25,1981, our opinion on the1980 financial position for each of the three years in the period ended and 1979 financial statements was qualified as being subject to the December 31, 1981, in conformity with generally accepted accounting effects of such adjustments, if any, as might have been required had principles applied on a consistent basis.

the outcome of the uncertainty regarding certain retail revenues Phoenix, Arizona 85003 February 25, 1982

. STATEMENTS OF INCOME For the Three Years in the Period Ended December 31, 1981 1981 1980 1979 (Thousands of Dollars)

Operating Revenues:

Electric S 730.788 S 621,864 S 533,185 Gas 151,366, 143,896 131,238 Total 882.154 765,760 664,423 Operating Expenses:

Operation and maintenance:

Fuel for electric generation 168,227 133,557 128,472 Purchased gas 101,310 96,695 81,371 Purchased power and interchange net (823) 65,292 38,727 Other production expenses 18,414 14,831 12,622 Transmission and distribution 18,604 16,464 14,010 Maintenance 71,160 51,565 48,338 Other operating expenses 68,219 54,482 48,443 Total 445.111 432,886 371,983 Depreciation and amortization 76.178 64,412 57,021

'ihxes-other than income 87,566 81,677 70,993 Income taxes (Note 8) 22,381 17,209 13,556 Total 631.236 596,184 513,553 Operating Income 250,918 169,576 150,870 Other Income (Deductions):

Allowance for equity funds used during construction 57,421 39.076 24,696 Income taxes (Note 8) 2,743 690 (866)

Other net (1,416) 3,575 2,930 Total 58,748 43,341 26,760 Gross Income 309,666 212,917 177,630 Interest Deductions:

Interest on long-term debt and project financing 155.086 118,403 87,609 Interest on short-term borrowings 11,853 8,624 5,912 Debt discount, premium and expense 1,169 710 665 Allowance for borrowed funds used during construction credit (55,876) (58.110) (38,134)

Total 112,232 69,627 56,052 Net Income 197,434 143,290 121.578 Preferred Stock Dividend Requirements 26,786 25,062 21,882 Earnings for Common Stock S 170,648 S 118,228 S 99,696 Average Common Shares Outstanding 52,289,259 42,960,655 34,426,346 Per Share of Common Stock:

Earnings (based on average shares outstanding) $ 3.26 $ 2.75 $ 2.90 Dividends declared $ 2.20 $ 2.06 $ 1.94 See Notes to Financial Statements.

BALANCE SHEETS December 31, 1981 and 1980 Assets 1981 1980 (Thousands of Dollars)

UtilityPlant:

Plant in service (Notes 4 and 7):

Electric $ 2,261,437 $ 1,869,397 Gas 138,333 131,844 Common, used in all services 74,991 67,407 Total 2,474.761 2,068,648 Less accumulated depreciation and amortization 576.497 505.519 Plant in service- net 1,898,264 2,563,129 Construction work in progress (Note 5) 1,195,075 1,123,078 Plant held for future use 18,434 8,201 Utilityplant- net 3,111,773 2,694,408 Investments and Other Assets:

Investments in and receivables from subsidiaries 64,380 35,789 Other investments and notes receivable 2.846 2,540 Other physical property (less accumulated depreciation:

1981, $ 123,000; 1980, $ 71,000) 3,032 21,446 Total investments and other assets 70,258 59,775 Current Assets:

Cash (Note 6) 6,824 6,622 Special deposits and working funds (Note 6) 3,885 3,052 Accounts receivable:

Service customers 76,701 56,109 Miscellaneous 16,682 20.413 Allowance for doubtful accounts (1,922) (1,684)

Materials and supplies (at average cost) 39,484 32,147 Fuel (at average cost) 31,139 40,128 Deferred fuel costs and other 8,802 6,171 Total current assets 181,595 162,958 Deferred Debits:

Unamortized gas exploration cost 18,539 Unamortized debt issue costs 8,952 7,493 Other 5,673 3,850 Total deferred debits 33,164 11.343

'Ibtal $ 3,396,790 $ 2,928,484 20

Liabilities 1981 1980 (Thousands of Dollars)

Capitalization (Notes 2, 3, 4 and 5):

Common stock S 144,122 8 119,535 Premiums and expenses 783,868 639,794 Retained earnings 347,633 291,322 Common stock equity 1,275,623 1,050,651 Non-redeemable preferred stock 118,561 118,561 Redeemable preferred stock 199,280 185,280 Long-term debt less current maturities 1,418,768 1,048,500 Project financing liabilityless current maturities 221,506 Total capitalization 3,012,232 2,624,498 Current Liabilities:

Notes payable to banks (Note 6) 88,000 7,000 Commercial paper (Note 6) 26,000 Current maturities of long-term debt (Note 4) 4.062 3.688 Current maturities of project financing liability (Note 5) 45,001 Accounts payable 76,588 78,388 Accrued taxes 51,188 44,600 Accrued interest 40,177 20,953 Accrued dividends 2,270 2,119 Deferred fuel revenue and other 33,439 44,588 Total current liabilities 295,724 272,337 Deferred Credits and Other:

Unamortized credit related to sale of tax benefits ( Note 8) 50,395 Customers'dvances for construction 13,414 9,241 Deferred income taxes 17,934 12,985 Other 7,091 9,423 Total deferred credits and other 88,834 31,649 Commitments and Contingencies (Note 10)

$ 3,396,790 $ 2,928,484 See Notes to Financial Statements.

21

STATEMENTS OF CFGQUGES IN FINANCIALPOSITION For the Three Years in the Period Ended December 31. 1981 1981 1980 1979 (Thousands of Dollars)

Source of Funds:

Funds from operations:

Net income S 197,434 S 143,290 S 121,578 Principal non-fund charges (credits) to income:

Depreciation and amortization 76.178 64,412 57,021 Allowance for equity funds used during construction (57,421) (39,076) (24,696)

Deferred fnZome taxes 4,949 5,651 3,733 Other 4,143 2,241 3,336 Total funds from operations 225,283 176,518 160,972 Funds from external sources:

Common stock 169,017 152,332 97,061 Preferred stock 19,500 48,000 59,370 Long-term debt 426,687 223,905 152,005 Project financing liability 15.000 70.851 67,933 Short-term borrowings- net 55,000 (21,000) 15,000 Sale of tax benefits 50,625 Total funds from external sources 735,829 474,088 391,369 Other items- net 25.660 6,557 4,308 Decrease in working capital'otal 26,410 source of funds $ 986,772 S683.573 S556.649 Application of Funds:

Capital expenditures S 558,453 S504,120 S468,116 Allowance for equity funds used during construction (57,421) (39,076) (24,696)

Funds used for capital expenditures 501,032 465,044 443,420 Repayment of long-term debt 51,987 86,639 4,594 Redemption of redeemable preferred stock 5,500 18,720 4,000 Dividends on preferred and common stock 141,123 113.170 88,306 Repayment and assumption of project financing liability 281,507 Increase in working capital'otal 5,623 16,329 application of funds S986,772 S 683,573 S556.649 Increase (Decrease) in Working Capital*:

Cash and temporary cash investments S 1,035 S 781 S 1,718 Accounts receivable 16,623 9,408 4,876 Materials, supplies and fuel (1,652) 9,214 24,216 Deferred fuel costs and other 2.631 (3,186) 732 Accounts payable and accrued expenses (24,163) (8,124) (11,606)

Deferred fuel revenue and other 11,149 (34,503) (3,607)

Net increase (decrease) S 5,623 S (26,410) S 16,329

• Excluding short-term borrowings net and current maturitfes of long-term debt and project financing liability.

See Notes to Financial Statements.

22

STATEMENTS OF RETAINED EAIWINGS For the Three Years in the Period Ended December 31, 1981 1981 1980 1979 (Thousands of Dollars)

Retained earnings at heginning of year $ 291,322 S261,202 $ 227,930 Add- Net income 197,434 143,290 121,578 Total 488,756 404,492 349,508 Deduct- Dividends:

Preferred stock (see below) 26,786 25,062 21,882 Common stock (Notes 2, 3, 4 and 5) 114,337 88,108 66,424 Total 141,123 113,170 88,306 Retained earnings at end of year $ 347,633 $ 291,322 $ 261,202 Dividends on preferred stock:

$ 1.10 preferred S 172 S 172 S . 172

$ 2.50 preferred 258 258 258 S2.36 preferred 94 94 94 S4.35 preferred 326 326 326 Serial preferred:

S2.40 series A 576 576 576

$ 2.625 series C 630 630 630

$ 2.275 series D 455 455 455

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

$ 8.50 series F 201 614 1,737 S8.50 series G 622 683 745

$ 10 series H 3,627 3.787 3,947

$ 10.70 series I 3,116 3,210 3,210 S8.32 series J 4,160 4,160 4,160 S8.80 series K 5,280 5,280 4,532

$ 9.70 series L 4,656 3,777

$ 11.95 series M 1,573 Total S 26,786 S 25,062 S 21,882 See Statements of Income for dividends per share of common stock.

See Notes to Financial Statements.

NOTES TO FINANCL4L STATEMENTS For the Three Years in the Period Ended December 31, 1981

1. Summary of Significant Accounting Policies (a) System of accounts-The accounting records of the company are charged to accumulated depreciation. Contributions in aid of construction maintained in accordance with the uniform system of accounts prescribed are credited to plant cost.

by the Federal Energy Regulatory Commission (FERC) and used by the Depreciation is provided on a straight line basis at rates authorized by Arizona Corporation Commission (ACC). the ACC annually, which have ranged from 2.95% to 4.16% for electric plant, (b) Plant and depreciation-Property is stated at original cost as 3A9% for gas plant, and 2.86% to 12.50% for common and general plant.

defined for regulatory purposes. The cost of additions to utility plant and (c) Revenues and recognition of certain costs-Operating revenues replacements of retirement units is capitalized. Replacements of minor are recorded when billed on a monthly cycle billing basis. Adjustment items of property are charged to expense as incurred. In addition to direct clauses applicable to the recovery of fuel and purchased power expense costs, capitalized items include the present value of certain future lease through retail rates involve a hearing procedure that can give rise to payments (see Note 4), research and development expenditures pertaining appreciable timing differences. Under. recovered expense is deferred to to construction projects, indirect charges for engineering, supervision, be matched against revenues that will result from the procedure in the

~

transportation and similar costs, and an allowance for funds used during subsequent period. Over. recoveries are added to "Purchased power construction. Costs of depreciable units of plant retired are eliminated from and interchange net" as an expense item in the statement of income and plant accounts and such costs plus removal expenses less salvage are to "Deferred fuel revenue and other" as a liability item on the balance 23

sheet; when the over. recoveries diminish, such entry is reversed. Other pro- certain timing differences in the recording for income tax and financial cedures apply to the pass. through of fuel costs to wholesale customers, reporting purposes of depreciation of property placed in service after January resale gas costs and specified taxes. The estimated cost of gas purchased 1 1977. Income tax reductions arising from timing differences respecting

~

from the company's supplier, but not billed to gas customers, is deferred to certain other items of income and expense and from allowable investment be matched against revenues in the subsequent period. tax credits are reflected currently in income, in accordance with orders or (d) Allowance for funds used during construction-in accordance practices of the ACC for rate making purposes. Beginning in 1982, the Company, with the regulatory accounting practice prescribed by FERC and the ACC, in compliance with a rate making and accounting order, will defer amounts equal the company capitalizes an allowance for the cost of funds used to finance to the reduction in federal income taxes resulting from investment tax credits its construction program ("AFC"). AFC, which does not represent current and will amortize such amounts over the estimated life of the related assets.

cash earnings, is defined as the net cost during the period of construction In addition, the amount of such credits previously recognized as a reduction of of borrowed funds used for construction and a reasonable rate on equity deferredincome taxes(see Note 8) willbe recovered over atwelve year period.

funds so used. The calculated amount is capitalized as a part of the cost of (f) Investments in subsidiaries Investments in subsidiaries are utility plant. reported at equity.

AFC has been calculated using composite rates of 9% from January (g) Research and development costs-The company expenses 1, 1979 through June 30, 1979, 10% from July 1, 1979 through December research and development costs on a current basis, except that costs 31, 1979, 11% in 1980 and 12.25% in 1981 except for AFC related to project which may result in utility plant are deferred for subsequent inclusion in financing which was computed at the actual rate thereon. AFC ceases to plant or to be written off if the applicable project is abandoned.

accrue on those portions of construction work in progress included in rate base. (h) Gas exploration costs- The excess of costs over sales proceeds of (e) Income taxes-The company uses accelerated depreciation the company's discontinued gas exploration program has been deferred to methods for income tax purposes. As prescribed by the ACC for rate be recovered from certain classes of the company's customers and is being making and accounting purposes, deferred income taxes are provided for amortized over a ten-year period pursuant to an order of the ACC.

2. Common and Non-Redeemable Preferred Stock The balances at December 31, 1981 and 1980 of common stock, and of preferred stock which is not redeemable except pursuant to call by the company at its option, are shown below.

Number of Shares Par Value Per Call Price Authorized Outstanding Share Outstanding Per Share(b)

(Thousands of Dollars)

Decem- Decem- Decem- Decem.

ber 31, ber 31, ber 31, ber 31, 1981 1980 1981 1980 Common Stock... ... 100,000,000 57,648,791 47,813,847 $ 2.50 $ 144,122 $ 119,535 Non-redeemable Preferred Stock (cumulative)

S1.10 preferred........... 160,000 155,945 155,945 $ 25.00 $ 3,898 $ 3,898 S 27.50

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

$ 2.36 preferred........... 120,000 40,000 40,000 50.00 2,000 2,000 51,00

$ 4.35 preferred........... 150,000 75,000 75,000 100.00 7,500 7,500 102.00 Serial preferred........... 1,000,000

$ 240 series A.......... 240,000 240,000 50.00 12,000 12,000 50.50

$ 2.625 series C......... 240,000 240,000 50.00 12,000 12,000 51.00

$ 2.275 series O......... 200,000 200,000 50.00 10,000 10,000 50,50

$ 3.25 series E.......... 320,000 320,000 50.00 16,000 16,000 (c)

Serial preferred........... 4,000,000(a)

$ 8.32 series J.......... 500,000 500,000 100.00 50,000 50,000 (d)

Serial preferred........... 3,000,000 25.00 Total............. 1,874,199 1,874,199 $ 118,561 $ 118,561 (a) This authorization covers the outstanding redeemable preferred shares shown in Note 3, as well as the non-redeemable shares indicated above.

(b) In each case plus accrued dividends.

(c) From S51.50 through February 28, 1983; then to $ 51.00 thereafter.

(d) Not callable prior to September 1, 1982 through certain refunding operations that would result in a lower rate of cost to the company than the divi~

dend rate on the shares to be redeemed; otherwise at $ 108.32 through August 31, 1982 to $ 101.00 after August 31, 1992.

The holders of preferred stock are entitled to one vote for each share sions or exchanges of outstanding preferred stock, (ii) the authorization of held of record, as are holders of common stock. Special requirements for any stock ranking prior to the preferred stock, (iii) making any change in ~

favorable votes of holders of preferred stock, voting by the classes respec- the terms and provisions of preferred stock that would adversely affect the tively prescribed for the several purposes, pertain to (i) certain conver- rights and preferences of the holders thereof, (iv) the issuance of any addi ~

'4

tional shares of preferred stock except under prescribed circumstances or redeemable preferred stock, as do the rights that would arise out of divi~

(v) a merger, consolidation or sale of substantially all the assets of the dend arrearages as discussed in Note 3.

company. The foregoing voting rights attach to both redeemable and non-Common and non.redeemable preferred stock sales and changes in premiums and expenses during each of the three years in the period ended December31, 1981 were as follows (dollars in thousands):

Non.Redeemable Preferred Stock Premiums Common Stock (cumulative) and Number Par Value Number Par Value Expenses Description of Shares Amount of Shares Amount Net*

Balance, December 31, 1978... .. 32,777,258 $ 81,943 1,874,199 $ 118,561 $ 429,476 Common Stock. 5,404,039 13,510 82,527 Balance, December 31, 1979 38,181,297 95,453 1,874,199 118,561 512,003 Common Stock. 9,632,550 24,082 127,791 Balance, December 31, 1980... .. 47,813,847 119,535 1,874,199 118,561 639,794 Common Stock. 9,834,944 24,587 144,074 Balance, December 31, 1981... .. 57,648,791 $ 144,122 1,874,199 $ 118,561 $ 783,868

• Premiums and expenses-net include those of redeemable preferred stock issues (see Note 3).

The company has a dividend reinvestment and stock purchase plan employee savings plan under which its own periodic contributions probably whereby newly issued shares of its common stock may be purchased at would, and the investment of certain funds contributed by participating market on the applicable dates by any participant in the plan. It also has an employees could, involve its issuance of new shares of commmon stock.

3. Redeemable Preferred Stock The balances at December 31,1981 and 1980 of preferred stock which is redeemable at the option of the holders or pursuant to sinking fund obligations, in addition to being callable by the company, are shown below.

Number of Shares Par Value Outstanding at Outstanding at December 31, Per December 31, Call Price 1981 1980 Share 1981 1980 Per Share(b)

(Thousands of Dollars)

Redeemable Preferred Stock (cumulative)

Serial preferred (a)

$ 8.50 series F.... 12,400 29,200 $ 100.00 $ 1,240 $ 2,920 (c)

$ 8.50 series G.... 68,400 75,600 100.00 6,840 7,560 (c)

$ 10 series H..... 352,000 368,000 100.00 35,200 36,800 (d)

$ 10.70 series I ... 285,000 300,000 100.00 28,500 30,000 (e)

$ 8.80 series K.... 600,000 600,000 100.00 60,000 60,000 (I)

$ 9.70 series L.... 480,000 480,000 100.00 48,000 48,000 (g)

$ 11.95 series M... 195,000 100.00 19,500 (h)

Total......... . 1,992,800 1,852,800 $ 199,280 $ 185,280 (a) See Note 2 for authorized number of shares. require the redemption of 16,000 shares at par annually (representing (b) ln each case pIus accrued dividends. annual payments of $ 1,600,000).

(c) Redeemable at par at the option of either the company or the (e) Not callable by the company prior to December 1, 1985 through respective holders, in the case of series F at any time, or in the case of certain refunding operations that would result in a lower rate of cost to the series G after May 30, 1982, (or earlier under certain conditions that could company than the dividend rate on the shares to be redeemed; otherwise require the company to repurchase series G shares, which conditions did at $ 107 through November 30, 1985 to $ 101.00 after November 30, 1990.

not exist at December 31, 1981), in every case upon 120 days notice. Applicable sinking fund provisions require the redemption of 15,000 Sinking fund provisions applicable to series F require the redemption of a shares at par annually (representing annual payments of $ 1,500,000). The total of 8,400 shares at par semiannually (representing annual payments of company may, but is not required to, redeem an additional 15,000 shares

$ 1,680,000). Sinking fund provisions applicable to series G require the at par on December 1 in any year.

redemption of a total of 3,600 shares at par semiannually (representing (f) Not callable by the company prior to March 1, 1984 through certain annual payments of $ 720,000). refunding operations that would result in a lower rate of cost to the com-(d) Not callable by the company prior to September 1, 1984 through pany than the dividend rate on the shares to be redeemed; otherwise at

" $ 108.80 through February 28, 1984 to $ 101.00 after March 1, 1994.

certain refunding operations that would involve the issuance of common stock or result in a lower rate of cost to the company than the dividend rate Applicable sinking fund provisions require the redemption of 22,500 on the shares to be redeemed; otherwise at $ 107.55 through September 1, shares at par annually commencing March 1, 1986 (representing annual 1982 to par after September 1, 2002. Applicable sinking fund provisions payments of $ 2,250,000). The company may, but is not required to, 25

redeem an additional 22,500 shares at par on March 1 in ahy year begin- 4. Long-Term Debt ning in 1986. Details of long. term debt outstanding at December 31, 1981 and 1980 (g) Not callable by the company prior to March 1, 1983; thereafter at are as follows:

$ 106.47 through February 29, 1984 to $ 101.07 after March 1, 1989.

Applicable sinking fund provisions require the redemption of 96,000 1981 1980 shares at par annually commencing March 1, 1986 (representing annual (Thousands of Dollars) payments of $ 9,600,000).

First mortgage bonds:

(h) Redeemable on or after May 1, 1986 at the option of the Company 9.50% series due February 15, 1982 (i) .. $ 100,000 $ 100,000 at $ 101.99 until May 1, 1987; thereafter at par. All shares then outstanding are required to be redeemed on May 1, 1988 at par.

3+% series due February 1, 1983..... 14,500 14,500 3p%%d series due November 1, 1983.... 5,723 5,723 If there were to be any arrearage in dividends on any of its preferred 3~/~% series due March 1, 1984....... 15,000 15,000 stock or in the sinking fund requirements applicable to any of its redeem.

5~/e% series due October 1, 1987...... 15,000 15,000 able preferred stock (each such dividend being cumulative and of equal 4.70% series due March 1, 1989...... 20,000 20,000 ranking with other such dividends, and each such requirement being 4.80% series due November 1, 1991... 35,000 35,000 cumulative and of equal ranking with other such requirements), the 445% series due June1, 1992....... 25,000 25,000 company could not pay dividends on its common stock or acquire any shares thereof for consideration. If any such dividend arrearage were to 440% series due December 1 1992....

~ 25,000 25,000 4.50% series due September1, 1993.... 15,000 15,000 equal six or more quarterly dividends, the holders of preferred stock, 6.25% series due September 1, 1997.... 25,000 25,000 in addition to their other voting rights and voting by the classes prescribed 12.875% series due May 15, 2000..... 185,000 185,000 for this purpose, could elect a total of six directors (all series of serial 10.625% series due preferred stock, regardless of par value and whether redeemable or non-redeemable, comprising one such class and being entitled to elect November 15, 2000............. 72,000 75,000 7.45% series due March 15,2002...... 60,000 60,000 two of the six directors). See Note 2 in regard to other voting rights of 9.95% series due March 1, 2004...... 75,000 75,000 holders of preferred stock.

6.20% series due April 1, 2004....... 50,000 50,000 The combined aggregate amount of sinking fund requirements for 645% series due April 15,2007...... 43,000 43,000 the above issues each year for the next five years will be as follows:

6% series due January 15, 2008...... 34,000 34,000

$ 5,060,000 in 1982, $ 3,820,000 in 1983 through 1985 and $ 15,670,000 in 1986.

12+% series due October 15, 2009.... 75,000 75,000 Unamortized discount and premium..... (956) (1,082)

Redeemable preferred stock transactions during each of the three years in the period ended December 31, 1981 were as follows (dollars in thousands): Total first mortgage bonds...... 888,267 891,141 6.60% pollution control indebtedness Number Description of Shares Par Value Amount due October 1, 1983 (a)............. 65,000 65,000 Less securities held by trustee (b).... (12,109) (26,386)

Balance, December 31, 1978... 1,000,000 $ 100,000 Unsecured notes payable due 1983 Redeemable preferred stock and 1984 (c). 192,006

$ 8.80 series K......... 600,000 60,000 Pollution control indebtedness due Sinking fund retirements: April 1, 1986(d).................. 55,200

$ 8.50 series F......... (16,800) (1,680) 16)rz% unsecured note Payable due

$ 8.50 series G......... (7,200) (720) July 15, 1988 (e)................. 50,000

$ 10 series H.......... (16,000) (1,600) 17)rz% unsecured note payable due Balance, December 31, 1979... 1,560,000 156,000 October 15, 1986 (f)............... 60,000 Other. 3,425

$ 9.70 series L......... 480,000 48,000 Unsecured notes payable (g)........... 70,000 70,000 Sinking fund retirements:

F......... Capitalized lease obligation (h)......... 51,746 52,433

$ 8.50 series (164,000) (16,400) Unamortized discount................ (705)

$ 8.50 series G......... (7,200) (720) debt...........

$ 10 series H.......... (16,000) (1,600)

Total long. term Less current maturities (i):

1,422,830 1,052,188 Balance, December 31, 1980... 1,852,800 185,280 Sinking fund requirement on

$ 11.95 series M........ 195,000 19,500 10.625% series due November Sinking fund retirements: 15, 2000. (3000) (3000)

$ 8.50 series F......... (16,800) (1,680) Capitalized lease obligation.......... (740) (688)

$ 8.50 series G......... (7,200) (720) Other. (322)

$ 10 series H.......... (16,000) (1,600) Total long-term debt less

$ 10.70 series I......... (15,000) (1,500) current maturities.......... $ 1,418,768 $ 1,048,500 Balance, December 31, 1981... 1,992,800 $ 199,280 Premiums and expenses net of redeemable preferred stock issues (a) Secured by a long term letter of credit from a bank.

are included in the amounts presented in the second table in Note 2.

(b) Representing pollution control funds deposited with a revenue bond trustee and to be disbursed as construction progresses on the facilities financed.

(c) Consisting of $ 192,006,000 due in four installments, two each in 1983 and 1984, with interest at 105% of prime to December 31, 1983 and 107% of prime thereafter. As required by the note, the declaration by the company of any dividend on its Common Stock, if the per share dividend thus .

declared would exceed the previous per share dividend, is subject to certain restrictions related to earnings; for the year ended 1981 up to $ 145,051,000 26

could have been paid in dividends on Common Stock compared to the 5. Project Financing

$ 114,337,000 actually paid. In 1977 the company initiated, and in May 1981 concluded, a "project (d) Consisting of a borrowing from a governmental authority which is financing" of the cost of construction of Unit 4 of its Cholla Plant, which funding that amount with a series of commercial paper borrowings supportedby went into commercial operation in June 1981. The project financing involved irrevocable letters of credit from banks and with five year, revolving loan the interim ownership of the Unit by an independent corporation and a commit-commitments from the banks allowing the authority to obtain borrowings ment by the company to purchase the Unit shortly before its completion for thereunder in the event of disruptions in the commercial paper market; the cost an amount equal to the interim owner's cost of acquiring, completing and to the Company of its borrowings from the authority is equal to the latter's cost financing the Unit. Such financing was provided by bank loans in two categor-of money in the commercial paper market plus fees and interest payable to the ies consisting of conventional loans and pollution control financing provided banks. through a governmental authority.

(e) Representing an obligation to APS Finance Company N.V. (" Finance" ) The project financing had been accounted for by including the costs of to enable it to repay its 16~/~% Guaranteed Debentures Due 1988, together construction of the Unit in construction work in progress and net outstanding with annual interest payments thereon commencing July 15, 1982. Finance, balances of the bank loans as a liability in the balance sheet.

a Netherlands Antilles corporation, is a wholly owned subsidiary of the Com- The company funded its purchase of the Unit in May 1981 with an pany which serves as a financing corporation to raise funds outside the assumption and modification of the conventional portion of the former project United States for the Company and its subsidiaries. financing and with a new form of pollution control financing as described in (f) Representing an obligation to Finance to enable it to repay its 17~%%d% Notes 4(c) and (d).

Guaranteed Debentures Due 1986, together with interest payments thereon commencing October 15, 1982.

(g) Consisting of $ 30,000,000 payable in thirteen equal quarterly installments of $ 2,143,000 commencing June 1, 1983 and a final install ~ 6. Short-Term Borrowlngs and Compensating Balances ment on September 1, 1986 or, under certain conditions, in ten equal The Company had bank lines of credit of approximately $ 131,000,000 quarterly installments commencing June 1, 1984, with interest through at December 31, 1981 and 1980. Under the lines, no amounts were August 31, 1982 at 105% of prime (107% thereafter); and $ 40,000,000 outstanding at December 31, 1981, and $ 7,000,000 was outstanding at due February 1, 1985, with interest through December 31, 1981 at 105% December 31, 1980. The lines were segregated into working lines of (107% thereafter) of the higher of prime or )rz% above the current rate on $ 51,000,000 and commercial paper backup lines of approximately $ 80,000,000 90 to 119 day, dealer-placed commercial paper. for which commitment fees are payable primarily at Q% per annum.

(h) Represents the present value of future lease payments (discounted Compensating balances required at banks for the working lines, but which at the interest rate of 7.48%) on a combined cycle plant sold and leased vrere not legally restricted, were generally 10% of the line plus 5% (10%

back from the independent owner-trustee formed to own the facility. The in some instances) of borrowings. Substantially all cash shmvn in the Balance lease requires semi-annual payments of $ 2,299,000 through June 1983 Sheets is considered compensating balances.

and then $ 2,582,000 through June 2001, and includes renewal and pur- The bank lines have been augmented by a $ 60,000,000 credit facility chase options based on fair market value. This plant is included in plant with foreign banks, of which $ 48,000,000 was outstanding at December 31,

't

~

in service at its original cost of $ 54,405,000; accumulated amortization December 31, 1981 was $ 12,160,000.

(i) The $ 100,000,000 of 9,50/o first mortgage bonds due February 15, 1981 at an effective rate of 14.69%. The commitment fee for such facility is 3/8% per annum, and the rate of interest fluctuates at 1/2% over the applicable London Interbank Offered Rate.

1982 were classified long term at December 31, 1981, as such debt was refi ~

At December 31, 1981, the company also had $ 40,000,000 ofborrowings nanced in February 1982 by the Company's borrowing the proceeds of from a foreign bank which is not a participant in the above mentioned

$ 100,000,000 of guaranteed debentures of Finance, due 1989 at interest rates credit facility.

ranging from 16/ % to 16)rz%.

Aggregate annual payments which will be due on long. term debt and for sinking fund requirements through 1986 are as follows: 1982,

$ 3,740,000; 1983, $ 191,734,000; 1984, $ 124,029,000; 1985,

$ 53,137,000; 1986, $ 138,645,000. Other sinking fund requirements for each year through 1986 for the outstanding first mortgage bonds will be as follows: 1982, $ 2,552,000; 1983, $ 2,350,000; 1984, 1985 and 1986,

$ 2,200,000; as allowed in the bond indenture, requirements of this type have in the past been satisfied by certification of property additions of 1% times the amount stated and the company expects to meet similar requirements in that manner in the future. For sinking fund requirements and redemptions at the option of the holders of redeemable preferred stock, see Note 3.

Substantially all utility plant, other than the combined cycle plant mentioned above, is subject to the lien of the first mortgage bonds. The indenture respecting the first mortgage bonds includes provisions which would restrict the payment of dividends on common stock under certain conditions which did not exist at December 31, 1981.

On February 18, 1982 the Company issued $ 60,250,000 of 10%a%

first mortgage bonds in connection with the borrowing of the proceeds of an equivalent amount of pollution control bonds.

27

7. Jointly Owned Facilities At December 31, 1981, the company owned the following interest in jointly-owned electric generating and transmission facilities:

Percent Net Construction owned by Plant in Accumulated Plant in Work in Company Service Depreciation Service Progress (Thousands of Dollars)

Navajo Plant. 14.0o/o $ 115,070 $ 22,800 $ 92,270 $ 1,139 Four Corners Units 4 and 5........... 15.0 32,535 11,075 21,460 29,771 Palo Verde Nuclear Generating Station Units 1, 2 and 3........... 29.1 1,025,404 Certain transmission lines from:

1) the Navajo Plant (the company's interest in which varies from 14% to 100%)................ 31.4 27,423 5,287 22,136 359

2) the Palo Verde Nuclear Generating Station (the company's interest in which varies from 11/o tO 100o/o). 29.7 27,134 Total. $ 175,028 $ 39,162 $ 135,866 $ 1,083,807 The foregoing dollar amounts correlate to the company's percentage company. Its share of related operating and maintenance expenses is interest in each facility. Financing for all such interests is provided by the included in its corresponding operating expenses.

8. Income Tax Expense The components of income tax expense for each of the three years in Year ended December 31, the period ended December 31, 1981 are as follows:

1981 1980 1979 1981 1980 1979 (Thousands of Dollars)

(Thousands of Dollars) Federal income tax at statutory rate..... $ 99,853 $ 73,512 $ 62,560 Currently payable: Increases (reductions) in taxes Federal. .. $ 8,206 $ 7,128 $ 6,751 resulting from:

State. 6,714 3,740 3,938 Tax under book Total current.. 14,920 10,868 10,689 depreciation............. 6,055 1,895 777 Allowance for funds used Deferred: during construction........ (42,067) (29,232) (19,420)

Federal. 2,410 3,630 2,452 Investment tax credit......... (43,969) (25,481) (24,944)

State. 2,308 2,021 1,281 Taxes, pension costs and Total deferred .. 4,718 5,651 3,733 other items capitalized...... (6,868) (6,202) (5,122)

State income tax- net of Total...... .. $ 19,638 $ 16,519 $ 14,422 federal income tax benefit.... 4,869 3,107 2,612 Other............... 1,765 (1,080) (2,041)

Deferred income tax expense results primarily from certain timing dif- Total provision for federal ferences in the depreciation of property placed in service after January 1, and state income tax... $ 19,638 $ 16,519 $ 14,422 1977, as prescribed by the ACC.

Federal and state income taxes are included in the components of net At December 31, 1981 the company had approximately $ 65,000,000 income as follows: of investment tax credit carryforwards which will expire through 1996. Of this amount, approximately $ 32,700,000 has been recognized as a reduc-1981 1980 1979 tion of deferred taxes.

(Thousands of Dollars)

Operating expenses ............... $ 22,381 $ 17,209 $ 13,556 On November 12, 1981 the Company consummated the sale to an.

Other income.... (2,743) (690) 866 other corporation of certain federal income tax benefits, $ 25,000,000 of Total. .......... $ 19,638 $ 16,519 $ 14,422 which represents investment tax credits which have been deducted in deriving the carryforward amounts referred to above, in exchange for cash. The Com.

pany has recorded the proceeds of the sale as a deferred credit and is amortizing Following is a summary of the difference between income tax expense the amount of such proceeds on a straight-line basis over approximately and the amount obtained by multiplying income before income taxes by the 30 years pursuant to an order of the ACC.

statutory federal income tax rate of 46%.

28

9. Pension Plan opinion of its counsel, Snell & Wilmer, the Company believes that the ultimate The company's pension plan, a defined benefit plan, covers virtually all resolution of this matter will not be material to its financial statements.

employees. Pension expenses for 1981, 1980 and 1979 were $ 10,019,000, At December 31, 1981, the Company had collected approximately

$ 10,434,000 and $ 9,567,000 respectively. The company makes annual contri- $ 18,500,000 of wholesale revenues subject to refund as a result of federal butions to the plan equal to the amounts allowed for pension expense. regulatory proceedings involving the Company. Legal counsel to the Company January 1, has assessedits contingent liabilitywithrespect to a substantial portion of that amount as remote.

1981 1980 The Four Corners and Navajo plants of the Company are located on the Actuarial present value of (Thousands of Dollars) Navajo Indian Reservation, as are certain of its transmission lines and all of its accumulated plan benefits contracted coal sources. The Tribal Council has adopted resolutions which Vested. . $ 62,959 $ 64,594 purport to impose taxes that, if valid, would cost the Company an estimated Non vested. 2,851 3,251 $ 2,000,000 per quarter. The Company has obtained an order from the ACC that should allow it to recover from its retail customers the amounts of such taxes Total . $ 65,810 $ 67,845 that are allocable to them if the payment thereof is ultimately required. Based on the opinion of Snell &Wilmer, the Company believes that the final determina-Net assets available for benefits........... $ 105,171 $ 84,187 tion of these matters would not be material to its financial statements.

The Company has significant purchase commitments in connection with The actuarial present value (assuming rates of return of 9.75/o and its continuing construction program. Construction expenditures in 1982 have 8.75% respectively) of accumulated plan benefits presented above has not been estimated at $ 390,000,000.

been calculated with reference to the effects of projected inflation, whereas such effects are considered by the company with reference to the adequacy 11. Supplementary Income Statement Information of plan assets; accordingly, the company considers the utilityof the comparison General taxes during each of the three years in the period ended suggested to be extremely limited. December 31, 1981 are as follows:

Year ended December 31,

10. Commitments and Contingencies 1981 1980 1979 On February 17, 1982 the ACC issued an order which held that the (Thousands of Dollars)

Company had no refund obligations with respect to $ 80,386,000 of retail revenues collected between January 1978 and May 1980. Such revenues were Taxes, other than income taxes:

Ad valorem. $49,457 $ 48,191 $ 45,084 collected pursuant to two 5% step increases authorized by a 1977 order of the Sales. 33,152 29,273 26,415 ACC, a portion of such order being subsequently invalidated by the Arizona

-Supreme Court(thereby giving rise to the potential refund obligation). Although the February 17 order may still be the subject of judicial action, based on the

12. Business Segments Listed below is selected information relating to the company's electric and gas operations:

Year Ended December 31, 1980 1979 Electric Gas Electric Gas Electric Gas (Thousands of Dollars)

Operating revenues. $ 730,788 $ 151,366 $ 621,864 $ 143,896 $ 533,185 $ 131,238 Operating income before income taxes...... 272,343 956 180,455 6,330 151,480 12,946 Utility plant. 3,532,518 155,752 3,055,697 144,230 2,597,139 137,934 Accumulated depreciation and amortization .. 510,585 65,912 444.537 60,982 386,503 56,229 Capital expenditures.................. 538,814 19,639 483,392 20,728 449,104 19,012

13. Selected Quarterly Financial Data (Unaudited)

Earnings per Operating Operating Net Earnings for Share Quarter Revenues Income Income Common Stock of Common Stock (Thousands of Dollars Except Per Share Data) 1981 First $ 191,582 $ 34,628 $ 26,015 $ 19,658 $ 0.41 Second 205,428 53,774 46,285 39,553 0.75 258,678 89,522 67,441 60,569 1.14 Third Fourth 226,466 72,994 57,693 50,868 0.93 1980 First 171,772 29,023 23,995 18,168 0.47 Second 174,208 26,370 19,801 13,349 0.31 Third 234,601 68,527 59,879 53,470 1.26 Fourth 185,179 45,656 39,615 33,241 0.70 29

14. Supplementary Information to Disclose the Effects of Changing Prices (Unaudited)

The following supplementary information is furnished pursuant to (referred to in the discussion below as "Utility Plant at Current Cost" ).

Statement No. 33 of the Financial Accounting Standards Board for the pur- The sum of the depreciation adjustment in the Constant Dollar column pose of illustrating the effects of changing prices in an inflationary environ. and the figure shown lower in that column as the "reduction to net recov-ment. It offers some perspectives of approximated effects of inflation, and erable cost" was derived through application of 1981 increases in the is not intended as precise measurements of those effects. Consumer Price Index to'historical costs of the company's utility plant.

The company and other public utilities similarly situated are subject to The comparable sum in the Current Cost column, again consisting of the rate-making procedures which, by law and practice, in large part utilize depreciation adjustment plus the "reduction to net recoverable cost",

the historical cost of utility plant in the determination of the allowed reflects the larger depreciation adjustment referred to above, which is recovery (through depreciation) of the investment therein and return more than offset by the difference between the two measurements of cost thereon. This precludes or restricts a rate. making response to the effects (or price) escalation in 1981 which are described in the next paragraph.

of realizing such recovery and return in inflated dollars, compared to those The first such measurement is that of a hypothetical increase in the in which the investment was made. The first table below presents two dollar value of the company's utility plant, and was derived by applying approximate measurements of those effects from the perspective of that 1981 index rises (primarily in the Handy Whitman Index) to the Utility portion of the investment, restated on alternative bases to reflect interven. Plant at Current Cost, and subtracting the depreciation adjustment shown ing cost escalation, which was not reflected in 1981 depreciation or in the in the column. The second measurement is that of an assumed, unrecov-company's return, and which is therefore not "recoverable." erable dollar amount computed by applying the 1981 rise in the Consumer For these presentations, "constant dollar" and "current cost" Price Index (which exceeded the corresponding rise in the Handy Whitman amounts were calculated by applying certain indices (or ratios derived Index) to the Utility Plant at Current Cost.

therefrom) to certain historical or other amounts. In the case of constant In neither measurement did the company make any adjustments to dollars, the index was the Consumer Price Index for All Urban Consumers, asset values, or related income statement amounts, other than those dis-which approximates the upward trend of prices in general during the indi ~ cussed above in regard to utility plant and depreciation thereon. Fuel cated periods. In the case of current costs, the primary index was the inventories and fuel and purchased gas expenses are, in effect, monetary Handy Whitman Index of Public Utility Construction Costs (an estimate of items, due to applicable rate-making procedures which include adjust-which was used for the last half of 1981), although the Consumer Price ment clauses. In accordance with Statement No. 33, income taxes were Index was used for construction work in progress. The company believes not adjusted.

that the Handy Whitman Index is the more accurate of the two in estimating As contrasted to the assumed net value losses which, in the presen.

the prices it would incur to duplicate at various times its utility plant in tation below, are associated with the holding of assets committed to a service at the indicated dates. Over the period up to 1979 which is relevant regulated business, there is an assumed "holding gain" associated with to the information presented below, that index rose faster than the Con- borrowings that will be repaid with inflated dollars. The 1981 decline in-sumer Price Index, but the reverse occurred in 1979, 1980 and 1981. the purchasing power of net amounts owed by the company (measured by Depreciation expense for 1981 was recalculated by applying the com- the Consumer Price Index) appears in both columns, to result in a "net" pany's composite depreciation rate to depreciable base determined by difference between the assumed holding losses and gain indexing the historical cost of the company's utility plant (or, in the case of Inferences which, in the case of some industries, may be drawn from the Current Cost presentation, certain appraised values thereof in 1969) information in the nature of that presented below as to the adequacy of from the times of construction (or appraisal). The amount by which the future cash flows in relation to future plant replacement requirements are expense so recalculated exceeds that shown on the company's 1981 State- believed by the company to be less valid in the case of public utilities ment of Income appears as an adjustment to income from operations. The which, like itself, should be able to establish rates to cover increased costs Current Cost adjustment is the larger of the two because the accumulated of new plant. However, the information may provide some indication of the Handy Whitman rise through 1981 exceeded the rise in the Consumer expanded capital structure that will be required for making plant replace.

Price Index in the same period, thus producing a greater depreciable base ments and additions with inflated dollars.

Income from Operations Adjusted for Changing Prices for the Year Ended December 31, 1981 Constant Dollar Current Cost Average Average 1981 Dollars 1981 Dollars (Thousands of Dollars, Except Per Share Amounts)

Net income, as reported in Statements of Income . $ 197,434 $ 197,434 Adjustment to restate depreciation expense. (63 468) (73,040)

Income from operations (excluding reduction to net recoverable cost). $ 133,966(a) $ 124,394 Income per common share (after preferred stock dividend requirements and excluding reduction to net recoverable cost) $ 2.05 $ 1.87 Increase in specific prices (current cost) of utility plant held during the year (b) . $ $ 358,542 Reduction to net recoverable cost. (183,108) (125,842)

Effect of increase in general price level. (406,236)

Excess of increase in general price level over increase in specific prices after reduction to net recoverable cost. (173,536)

Gain from decline in purchasing power of net amounts owed. 144,614 144,614 Net. $ (38,494) $ (28,922)

(a) Including the reduction to recoverable net cost, operations on a constant dollar basis would have resulted in a loss of $ 49,142,000 for 1981.

(b) At December 31, 1981 Utility Plant at Current Cost was $ 5,136,242,000 while historical cost, or net cost recoverable through depreciation, was $ 3,111,773,000.

30

Five-Year Comparison of Selected Supplementary Financial Data Adjusted for Effect of Changing Prices Year Ended December 31, 1981 1980 1979 1978 1977 (Average 1981 Dollars in Thousands, Except for Per Share Amounts)

Operating revenues. .. $ 882,154 S 845,191 S 832,515 $ 783,766 $ 740,934 Historical cost information adjusted for general Inflation (1)

Income from operations (excluding reduction to net recoverable cost). .S 133,966 $ 102,253 $ 103,873 Income per common share (after dividend requirements on preferred stock and excluding reduction to net recoverable cost). . S 2.05 $ 1.73 S 2.22 Net assets at year.end at net recoverable cost (2) $ 1,349,114 $ 1,232,559 $ 1,169,716 Reduction to net recoverable cost. .S 183,108 S 263,591 S 277,933 Current cost information (1)

Income from operations (excluding reduction to net recoverable cost). . $ 124,394 $ 89,258 S 87,252 income per common share (after dividend requirements on preferred stock and excluding reduction to net recoverable cost). .S 1.87 S 1 43 $ 1.74 Excess of increase in general price level over increase in specific prices after reduction to net recoverable cost. S (173,536) S (250,597) S (261,312)

Net assets at year-end at net recoverable cost (2) . $ 1,349,114 $ 1,232,559 $ 1,169,716 Reduction to net recoverable cost. .S 125,842 S 151,781 S 95,056 General information Gain from decline in purchasing power of net amounts owed (1)........... .S 144,614 S 188,245 S 191,900 Cash dividends declared per common share........................ . S 2.20 $ 2.27 S 2.43 $ 2.41 S 2.30 Market price per common share at year.end.... S 18.75 $ 18.58 S 20.44 $ 27.35 S 31.10 Average consumer price index 272.4 246.8 217.4 195.4 181.5 (1) Not required for years prior to 1979.

(2) Consisting of common stock equity and non.redeemable preferred stock.

Board of Directors tJoeAcosta, Acosta, 58, President, Cordova & Pit tman, CPAs,

• Kelth L. 'Iltrley, 58, Chairman.

President, and Chief Executive P.A. Phoenix. Arizona ONcer of the Company, Phoenix, Dlno DeConclnl, 48, Attorney Arizona at Law, of counsel to DeConcinl douglas J. Wall, 55, Member of the McDonald Brammer Yetwin &. Law Firm of Mangum. Wall, Lacy, PC. Phoenix, Arizona Stoops &Warden, Fiagsta(f, Arizona

~Karl Eller, 63, President. tMorrlson F. Warren, 58, Professor Columbia Pictures of School Administration and Communications, Phoenix, Supervision and Director of the Arizona I.D. Payne Laboratory for

• WilliamT. Garland, 65, Multicultural Education at Arizona Chairman of the Board State University, Tempe. Arizona Garland-Rhuart Development /Ben F. Williams, Jr., 62, Mayor of Corporation (land development) City of Douglas and Attorney at Sedona, Arizona Law. Douglas, Arizona

$ Pamela Grant Korf, 42, Chairman 'Ihomas G. Woods, Jr55, Executive

& Chief Executive ONcer, Vice President and Chief Operating Goldwatets, Division of Associated ONcer of the Company, Phoenix, Dry Goods (general mercantile) Arizona Scottsdale, Arizona New Director 'Victor H. Lytle, 70, Chartered 'Member of Execute Committee A prominent New Mexico Life Underwriter fMember ofAudit Review Committee state senator joined the Prescott. Arizona company's board of directors Jack M. Morgan, 58, Attorney in 1981. at Law and State Senator Farmington, New Mexico Director Emeritus Jack M. Morgan, a Marvtn R. Morrison, 58, Farmer, E. Ray Cowden, 90, Cattle Feeding Far mington attorney, has Cattle Feeder and Dairyman and Investments, Phoenix. Arizona been a state legislator since Morrison Brothers Ranch, 1973. He serves on the New Higley, Arizona Mexico Senate's conservation Henry B. Sargent, Jr., 47, and finance committees and Executive Vice President and Chief Financial ONcer of the is a past chairman of the Company, Phoenix, Arizona Southwest Regional Energy Wllma W. Schwada, 55, Civic Council. Leader and Homemaker Mr. Morgan received his Tempe, Arizona business and law degrees James P. Simmons, 57, from the University of Texas. Chairman of the Board, United Bank of Arizona. Phoenix.

He is a member of the Arizona Farmington Chamber of Richard Snell, 51, Chairman, Commerce, the New Mexico President and Chief Executive State Bar Association, the ONcer, Ramada Inns, Inc.,

San Juan County Republican Phoenix. Arizona Party and the State Central 'Donald N. Soldwedel, 57, Publisher and General Manager, Yuma Daily Committee. Sun. Yuma. Arizona He is a native of Portales, *Maurice Tanner, 60, Chairman of New Mexico. the Board and Chief Executive ONcer, The Tanner Companies (construction and materials supply) Phoenix, Arizona

OfBcers Shareholder Information G. Carl Andognini, 46, Vice Stockiisti g President, Electric Operations (Symbol: AZP)

D. Louis Broussard, 61, Vice Common stock of the company and President. Research and the 810.70 cumulative preferred Development stock. Series I, are listed for trading O. Mark DeMichele, 48, Executive on the Nmv York Stock Exchange.

Vice President. Customer. Common stock is also listed on the Employee and Corporate Relations Pacific Stock Exchange.

Karl Eller, 53, Chairman of Transfer Agent Executive Committee First Interstate Bank of Arizona, N.A.

Joseph A. Gelinas, 37, Vice PhoenlX, Arizona President, Employee Relations The First National Bank of Boston.

Gerald J. GrifBn, 61, Boston. MA (common stock only)

Assistant Secretary Registrars Russell D, Hulse, 54, Vice The Valley National Bank of Arizona, President. Resources Planning Phoenix. Arizona.

Jerry Human, 51, Vlcc The First National Bank of Boston, President, Customer Services Boston, MA (common stock only)

Charles D. Jarman, 46, Vice General Counsel President, Engineering and Snell & Wilmer, Phoenix, Arizona Construction Auditors John C. Ogden, 36, Vice Deloitte Hasklns & Sells, Phoenix, President and Controller. Economic Arizona Planning and Control Dividend Reinvestment and Wm. T. Quinsler, 57, Secretary Stock Purchase Plan and Assistant Amsurer A Prospectus describing this plan H. B. Sargent, Jr., 47, Executive for holders of the company's com-Vice President and Chief Financial mon stock is available to share-ONccr, Corporate Finance, holders upon request. Write: ONce Planning and Control of the Secretary, Sta. 1892, at the address below.

~ *Keith L. 'Ihrley, 58, Chairman. Form 10-K President and Chief Executive ONcer A copy of our Annual Report to the E. E. Van Brunt, Jr., 50, Vice Securities and Exchange Commis-President. Nuclear Project sion, Form 10-K will be available Management after March 31, 1982 without Paul A. Williams, 36, Treasurer, charge, upon written request of Finance and Tax Accounting shareholders. Write: Office of the T, G. Woods, Jr., 55, Executive Secretary, Sta. 1892, at the address Vice President and Chief below.

Operating ONcer, Operations Statistical Report A detailed Statistical Report for t Birthdate ages at Annual Meet tng date Financial Analysis 1971-1981 will Aprtl 22. 1982) be available by mid-April on request.

Write: ONce of the'Azasurcr, Sta.

1820, at the address below.

Regional General MAILINGADDRESS:

Managers P. O. Box 21666 Phoenix, Arizona 85036 A. G. (Andy) Anderson, 50, Central Region Jack E. DuKy, 44, Northern Region Guy W. Lunt, 48, Southern Region

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