Nuclear Regulatory Commission · I, REGULA'Y INFORf'fATION DISTRIBUTI SYSTEl'1 (R IDS) ACCESSION...

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

ACCESSION NBR: 8608050316 DOC. DATE: 86/08/02 NOTARIZED: NO DOCKETFACIL:STN-50-529 Palo Verde Nuclear Stations Uni t 2~ Arizona Pub 1 i 05000529

AUTH. NANE AUTHOR AFFILIATIONGEHRIG A. C. Arizona Nucleav'ouev Prospect ( fovmev lg Ar j, zona Public ServQEHR> A. C. Snel 1 Zc Mi lmer

RECXP. NAI'fE RECIPXENT AFFXLXATXGNKNXQHTON> Q. ll. PAR Pv object Div ectov ate 7

SUBJECT: For>ards "Addi Info v e Application in Respect of Sale 5Leaseback Tv ansactiorvs bg Av izona Public Svc Co>" including860724 opinion 5 ov dev'f State oF AZ CorporationCommxssion~ pev NRC v eques

+&acr'~DIBTRIBUTIQN CQDE AQOID CQPIEB RECEIVED: LTR I ENCL ( SIZE:TITLE: OR Submittal: Qeneral DistributionNOTES:Standav'dized plant. 0500052'P

REC IP IENTXD CODE/NANE

PlfR-8 EBPNR-8 FOBPWR-8 PD7 PD OiPl fR-B PE ICSB

COPIESLTTR ENCLi ii i5 5

RECIPIENTID CODE/NAiNE

PNR-B,PEI CSBPNR-8 PD7 LALICITR*~EPWR-8 RSB

COPIESLTTR ENCL

20

INTERNAL: ACRSF 8 RREQ l-ILE

09 6 60i

*Dl'1/LFNBNRR/GRASRQN5

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EXTERNAL: EQZ(Q BRUSf<E> SNRC PDR 02

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0305

Q5'OTAL

NUi~fBER OF COP IES REQUIRED: LTTR ~ ENCL

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FRANK L. SNCLLCOWARD JACOB50NJ 0 H N P. PH I LLI PSRICHARD MALLCRYJON 5 COHENOVY O. OELBRONOCOROC H. LYONSBRUCE 0. PINORCCMICHAEL D TERRYORCO R. NIELSENWILLIAM R HAYDCNOCRALO MORALCSROBERT J. OIBSONTHCRCSA A OABALDON~ ~

JAMCS R CONDOVAVOHH A CRAWFORDSV?AN N E MSCANNPETER O. SANTINSHIRLEY J. W*HLJAMCS P MUCHLBCROCRMAROARCT L ~ STCINCRWILLIAMA. CLARKEMATTHCW P, FCCNCYLOIS P. SAVAOCBRUCE P. WHITEOCOROC J COLCMANJEFFREY B ~ MESSINOYVCTTC E. COHENDOVOLAS H ALTSCHVLCRJEREMY D MUSSMANCHCRYL A IKCOAMITHOMAS R ~ HOECKCRDAVID E ~ VIEWEDROBERT J. ROSCPINKCONNIE R, OCARMONDSTCPHL'N M. HOPKINSTIMOTHY O. 0 ~ NEILLHCIOI L ~ MSNEIL

COF COUNSELCCON LCAYC OF APSCNCC

MARK WILMCR~FRCDCRICK K ~ STEIN CR, JR.ARTHUR C OCHRROBER'T 0 BATESTHOMAS J ~ RCILLYJ*Y 0. WILEYPCTCR J RATHWCLLSTEVEN M ~ WHEELERMARY J,LEADERROBERT J ~ DCCNYJAMCS W. RCYNOLDSMICHAEL 5 ~ MILROYBARRY 0 HALPCRNJOEL P HOXICLONNIC J WILLIAMS'R.RICHARD 0 ~ UNDERWOODWILLIAM Dr FCARNOWJOHN BERRYDAVID *. SPRCNTALLKIMBCRLYJ ORASCRSTEPHEN 0 ~ NCWMARKTIBOR NASTY JR.RCBCCCA WINTERSCHEIDTVICTOR SOTOMAYORJOSEPH A, KCNDHAMMERMARIAN C. WALKCROORDON M ~ WASSONMICHAEL L ~ RHEE5JODY K ~ TALKTERESA DAVID50NDAVID R BOSS EANNE L ~ LCARYERIC M ~ CASPERSTCPHCN 0 ~ SHYTHJANET E THOMASDARY L ~ JONESKEVIN J ~ PARKERJAMES H ~ MARBVROCR

JOSL'PH T MCLCT+g,JR.JOHN J ~ I(PUMAH WILLIAMFOXLORCN W. COVNCC ~ JRWARRCH C, PLATTWILLIAMA. HICKS, IIIDANIEL J MSAVLIFFCDONALD O.COLBURHOOVOLAS W. SCITCJOSEPH T MCLCCCR HIROBCRT B.HOFFMANLAWRCNCC F, WINTHROPCHARLES * BI5CHOFFCHARLES H, TRACOCR,HIRICHARD W. SHEFFICLOTHOMAS J KCNHL'DYARTHUR T ANDERSONJOYCE KLINC WRIOHTISABELLC T. MORRISROBERT H. OSERBILLIODORA THOMASJAMES 0. MILLCRJAMES J. SIENICKIJAMCS 0. CHINOEREILEEN J MOOREPATRICK C HOODBRYANT 0. BARBERC RAID K ~ WILLIAMSJAMES J OSBORNESCOTT A ~ HOLCOMBMARTHA C.OIBBSWILLIAMF. DCYOUNOROBCRT W. MASKINGJR.J STEPHEN HVFFORDMALA DAS OUPTAJOYCE A KRVCCCKDONALD H. SMI'THCAROL'YN C STOCKTON

August 2, 1986

LAW OFFICES

SNELL s WILMER

3IOO VALLEY BANK CENTERPHOENIXF ARIZONA 85073 3IOO

(602) 257-72II

TELEX I65066TELCCOPIERS:

MANUAL (602) 257 72IIAUTOMATIC (602) 256-2735

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Director of Nuclear Reactor RegulationAttention: Mr. George W. Knighton, Project. Director

PWR Project Directorate I7Division of Pressurized Water Reactor Licensing-B

Nuclear Regulatory CommissionWashington, DC 20555

Re: Application in Respect of Sale and Leaseback Transactions byArizona Public Service CompanyDated May 2, 1986—Palo Verde Nuclear Generating Station Unit 2(Docket No. STN 50-529)

Dear Mr. Knighton:

Arizona Public Service Company (APS) submits herewith threecopies of Additional Information with Respect to the Application inRespect of Sale and Leaseback Transactions by Arizona Public ServiceCompany, dated May 2, 1986. The Additional Information consists of

ItemNo. Descri tion

2 ~

3 ~

Additional Information Requested by NRC Staff

Report of AZP Group, Inc., for the First Quarter of 1986

Quarterly Report of APS (Form 10-Q)

4 ~ Opinion and Order of the Arizona Corporation Commission,dated July 24, 1986

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

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Ltr g eL 86080>pgih 860802FSl

~QSP I I PIIR *DOCK 05000529

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S NELL & Wl LMER

Director of Nuclear Reactor RegulationAugust 2> 1986Page Two

APS is continuing its efforts to secure"equity investors inaddition to those identified in Item 1 '(see questions 5 and 7).Upon receipt of a commitment from any additional equity investor,we promptly advise you and submit the required information.

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

Very truly yours,

SNELL 6 WILMER

Arthur C. G rACG/smp

Enclosures

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S NELL & WILMER

Copies with enclosure to:Edward S. Christenbury, Esq.'Assistant General Counsel for HearingsNuclear Regulatory Commission7735 Old Georgetown RoadBethesda, Maryland 20814

Mr. James C. PetersonNuclear Regulatory CommissionAir Rights XXX Building4550 Montgomery AvenueBethesda, Maryland 20814

Timothy Michael Toy, Esq.Mudge, Rose, Guthrie, Alexander a Ferdon180 Maiden LaneNew York, New York 10038

Mr. E. E. Van Brunt, Jr.Executive Vice PresidentArizona Nuclear Power ProjectArizona Public Service Company

Jaron Norberg, Esq.Executive Vice PresidentFinanceArizona Public Service Company

Mr. Paul WilliamsTreasurerArizona Public Service Company

.UNITED STATES OF AMERICA

NUCLEAR REGULATORY COMMISSION

In the matter of

ARIZONA PUBLIC SERVICECOMPANY, et al.,

(Palo Verde NuclearGenerating Station, Unit, 2)

DOCKET NO. STN 50-529

APPLICATION IN RESPECT OFSALE AND LEASEBACK TRANSACTIONS BY

ARIZONA PUBLIC SERVICE COMPANY

ITEM 1

ADDITIONAL INFORMATION REQUESTED BY NRC STAFF

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Arizona Public Service Company (APS) is currently required topay 29.1% of all Palo Verde unit 2 (PV2) operating costs and29.1% of future decommissioning costs to Arizona Nuclear Pow-er Project (ANPP). Pleas'e explain in detail the source ofthis 29.1%, share of total PV2 costs under the proposed refi-nancing arrangement. Include an explanation of the manner inwhich all increases in operating'and decommissioning costswill be covered following the refinancing'or the terms ofthe license.

RESPONSE:

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

The simple answer to the question posed above is that therewill be no change in the source of the 29.1% share of totalPV2 operating costs under the proposed refinancing arrange-ment. As indicated in Section 3.6 of the application filedwith the commission in this matter, the leases which will beentered into in connection with the refinancing will be "netleases." This means that APS will be responsible for payingall taxes, insurance premiums, operating and maintenance costsand all other similar costs associated with the leased faci-lities (including obligations as a participant under the ANPPparticipation agreement). As indicated in the application,the purpose of these provisions is to ensure that the lessorsare subject only to normal financing risks and not to opera-tional risks or responsibilities.The ultimate source of the funds for paying such costs willbe revenues from APS's customers. This is true both beforeand after the refinancing. The refinancing itself will notimpact operating and decommissioning costs. With respect toincreases in such costs which may otherwise occur, APS willbe liable for its share of all increases in operating and de-commissioning costs following the refinancing under the "netlease" concept-. The source of funds to pay for such increaseswill be the same sources as mentioned above.

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

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over responsibilities for decommissioning since a transfereewill require action from the NRC in the form, of a licensetransfer or amendment. Responsibility for decommissioningcosts would assuredly be a consideration by the NRC in suchaction.

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

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Please provide a detailed explanation of the expected finan-cial effects on APS resulting from the refinancing of itsPV2 interest. Include effects on its income statement and =

balance sheet and on its ability to fund its share of PV2operating and decommissioning costs including any future costincreases.

RESPONSE:

APS's proposed sale and leaseback financing of its share ofPV2 is expected to have substantial positive economic effectson the company and its customers. The proceeds of the sale .

will provide APS with funds which will allow APS to strengthenits balance sheet and to defer previously anticipated futurefinancings. In addition, the fixed costs to APS of its shareof PV2 will be reduced due to the lower cost of the leasefinancing. The net result is that APS's ability to fund itsshare of operating and decommissioning costs (including:anyfuture cost increases) can be expected to improve as a resultof the transaction.

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

In the absence of revenue adjustments, APS's income can beexpected to be improved because the lease costs are lower thanthe financing costs under ownership. The annual lease rentals($ 56 million) are accounted for as an operating expense. Thisis offset by reductions in interest expense ($ 48 million) anddepreciation expense (gll million).. The net income increaseis about $ 3.4 million as shown below. However, since thecompany is proposing to pass through this benefit to ratepayers, it will result in nearly $ 39 million first year re-venue savings to the rate payers of the company.

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Lease Ownershi Net

Expenses

0 & M

Depreciation

Operating Income

Interest Expense

Earnings Before Taxes

Income Taxes

Net Income

55,440

(55,440)

(48,400)

(7, 040)

(2, 175)

(4, 865)

S 11,429

(ll,429)

(11,429)

(3,190)

(8, 239)

55,440

(ll,429)

(44, Oll)

(48,400)

4,389

1,015

3,374

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. 3. Explain the ratemaking authority and responsibility of theArizona Corporation Commission as it will relate to provisionof revenues to cover PV2 operating and decommissioning costsapplicable to APS's refinanced ownership interest.RESPONSE''

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

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

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4. Provide copies of the most recent interim financial statements~

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and SEC Form 10-Q for APS and for the First National Bank ofBoston.

RESPONSE:

First quarter 1986 interim reports to shareholders for APS aswell as APS's report on Form 10-Q for the quarter ended March31, 1986 are attached hereto.

The 1985 Annual Report of the Bank of Boston Corporation andits Annual Report on Form 10-K for the fiscal year endedDecember 31, 1985 were included as a part of the Applicationin Respect of Sale and Leaseback Transactions by El Paso Elec-tric Company, dated April 15, 1986, filed in this Docket No.50-529 and are incorporated by reference. The Bank of BostonCorporation is the parent corporation of the First NationalBank of Boston.

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

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

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

RESPONSE:

Currently, the equity investors listed below are participatingfor a total ~ of $ 230 million. Their estimated equity and debtparticipation is also presented below.

Debt(5 in millions)

Exult Total

SPBB Leasing, Inc. $ 104 $ 26 $ 130

Emerson Finance Co. 80 20 100

APS is currently seeking additional equity commitments fromother potential investors. Information will be provided tothe NRC if and when any additional. equity commitments arereceived.

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

RESPONSE:

The sources of the equity investment, funds to be provided bySecurity and Emerson have not been made available to APS.The sources of such funds are not relevant since the purchaseprice will have been paid to APS at closing and APS will notbe looking to such investors for future funding. We can onlyassume that the source of funding for the investors'quityparticipation will be from general corporate funds. Eachequity investor's estimated dollar investment is detailedabove in response to question 5.

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

0RESPONSE

The equity investors identified in the answer to question 5,i.e., SPBB Leasing, Inc., and Emerson Finance Co., are subsi-diaries, of the Security Pacific Bank and Emerson Electric Co.,respectively. The 1985 Annual Report and Report on SEC Form10-Q for the quarter ended March 31, 1986 of Security PacificBank, are being transmitted under separate cover. The AnnualReport, Form 10-K, for the fiscal year ended September 30,1985, and the Quarterly Report, Form 10-Q, for the quarterended December 31, 1985, for Emerson Electric Co. were includedin the financial information (tabs 5 and 6) submitted on behalfof Public Service Company of New Mexico with the letter, datedJune 10, 1986 from T. M. Toy to G. W. Knighton, and are incor-porated herein by reference.

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

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

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UNITED STATES OF AMERICA


In the matter of


(Palo Verde NuclearGenerating Station, Unit 2)




ITEM 2

REPORT OF AZP GROUP g INC ~ g FOR THE FIRST QUARTER OF l98 6

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'RIZONA PUBLIC SERVICE COMPANY

GROUPINC.

PO BCX53900PHOENIX AZ85072-3900

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Summary report ofKeith L. %o'leyAZP and its predecessor companies-including

APS-have not missed paying a quarterly dividendsince our modern-day corporation was born in1920, said AZP Chairman and President KeithTurley during the April24 Annual Meeting ofShareholders in Phoenix.

11trley's comments followed an audio-visual pre-sentation which reviewed the company's 100-yearhistory, beginning with the granting of the com-pany's first gas and electric franchise on April29,1886 and leading to shareholder approval of theholding company, AZP Group, Inc., in April 1985.

Turley told about 700 shareholders attendingAZP's first annual meeting and APS'6th annualmeeting that the company's 100th year ofoperationwas also one of its best. Among 1985's results: div-idends were $2.72 on an annualized basis; earningsper share were $3.88; cash flowwas 22 percent of

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'tttcEachangcittst'AZP o'oaaaoi sto'chas 'hZP,;send APS prcferred aockas hRP. ~, ~"I<"~'<.<,'~,r .".Q'lfyoa have a rtacstloa about your ladtvtdaal, I,,'< ',",

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"aubcattttng a change or address card or're<Iucsttng'other changes whkhiftcctyoiiraccount, beiar'e to

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construction requirements; debt coverage was at2.3 times, excluding Allowance for Funds UsedDuring Construction; cash earnings were 31 per-cent; and return on equity was 15.9 percent. Turleyadded that, during recent weeks, AZP commonstock had been selling at about 120 percent ofbookvalue, the highest level since 1967.

Turley also lauded recent successes at the PaloYerde Nuclear Generating Station. Unit 1 begancommercial operation on February 13, 1986 and,

fContinued pg. 2)

Quarterly dividends unchangedOn April24, the AZP board of directors

approved a quarterly dividend of 68 cents per shareon the company's common stock, which isunchanged from the previous quarter. The divi-dends are payable June 1, to shareholders of recordat the close ofbusiness May 5.

The board ofdirectors ofAPS-a subsidiary ofAZP-declared quarterly dividends at the regularrates on 18 outstanding issues ofcumulative pre-ferred stock. Additionally, a quarterly dividend of$ 1.8375 was declared on the APS adjustable ratecumulative preferred stock, Series Q. Preferreddividends also are payable June 1, to shareholdersof record at the close ofbusiness May 5.

12-month earnings increaseAZP Group, Inc. (AZP) earnings for the first

quarter ended March 31, 1986, were 65 cents pershare, down from 67 cents per share for the sameperiod in 1985. However, earnings for the 12

months ended March 31, 1986, increased to $3.84per share ofcommon stock, up from $3.70 (fromcontinuing operations) for the previous 12-monthperiod. The improvement in 12-month earningsis due primarily to APS'igher revenues whichresulted from higher rates and increased elec-tric sales.

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QRgCPC)UPi INC ~

Highlights

Income, Earnings, DividendsNet incomeAverage common shares outstandingEarnings per share of common stockDividends per share of common

stockElectric Sales and Customers

Operating revenuesSales (mwh)Customers, end ofperiod

12 Months EndedMarch 31, March 31,

1986 1985

$ 280,955,00073,242,752

$ 3.84

$ 228,015,00069,130,213

$ 3.30

$ 1,205,480,00013,843,090

529,661

$ 1,034,582,00013,412,880

505,634

$ 2.72 $ 2.60

Increase

23.25.9

16.4

4.6

16.53.24.8

'Ihrley summary report (Continued)on April23, 1986, Unit 2 received a Nuclear Regu-latory Commission (NRC) license allowing it tooperate at fullpower. In granting the license, oneNRC officialcalled Palo Verde "a show place" forthe industry, and said it has a good design, is welllocated and should be a point ofpride. Unit 2 isscheduled for fullcommercial operation by the endof the third quarter of 1986, while Unit 3 is sched-uled forcommercial operation in late 1987.

Although Palo Verde is one of several nuclearprojects undergoing prudency audits, Ibrley saidthat "any fair and objective audit willresult in averdict that the project has been managed pru-dently." The audit was ordered by regulators fromfour states involved in Palo Verde and was to befunded by all participants based on each utility'sshare of the project. However, 1brley pointed outthat Public Service ofNew Mexico and El PasoElectric Company recently withdrew their fund-ing because of concerns about the audit's necessityand objectivity.

"While we share the concern, APS is bound byCommission order to continue to pay for29. 1% ofthe audit's cost," Tbrley said. "Ofcourse, we donot know what the impact of the withdrawal of thetwo companies willmean to the audit effort."

1brley also discussed APS'fforts to achieverate increases to cover Palo Verde's costs. "Weare providing the Commission with all necessaryinformation, so it should be clear to them thatwe are entitled to-and simply must have-a rate

increase for Unit 1 and a plan in place for theother two units."

While earnings per share were up from the same

period last year, Ibrley said they would begin todeteriorate ifthe company is not granted a rateincrease. "The costs ofoperating Palo Verde Unit 1

for the benefit ofour customers is approximately$9 millionper month after taxes. Ifwe are unableto achieve sufficient rate increases in a timely fash-

ion to cover these costs, we willhave to seek an

interim increase subject to refund. Failing that, ofcourse, we would be obligated to seek relief fromthe courts."

1brley said he was giving a worst-possible pic-ture of the situation, and assured shareholdersthat the company's ability to pay dividends in1986 would not be impaired. He added that, once

all three units are fullyreflected in rates, thecompany would see steady improvement in itsfinancial outlook.

He also said that AZP has moved forward with a

strategy for developing significant earnings fromits non-regulated subsidiaries. El Dorado Invest-ment Company's most important project for 1986 isto form its own venture capital fund to which it has

committed $50 millionover the next five to seven

years, and Energy Development Company hasentered into a real estate partnership and changedits name to SunCor Development Company. 'Ibrleysaid that as much as $50 million in equity capitalwillbe allocated to the new joint venture over thenext five years. (Continued pg. 3)

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Vsrfey summary report (C0nfinued )Meanwhile, Malapai Resources Company owns

a ranch which has proven uranium reserves and hasan option to acquire an adjoining property. A dem-onstration plant and cost analyses for both proj-ects are expected to be completed within the nexteight to twelve months.

Turley emphasized that the AZP Stock Purchaseand Dividend Reinvestment Plan-not APS rate-payers-is financing these non-utilityactivities. Healso thanked shareholders for their continued par-ticipation in the plan and noted that, because oftheir investment, AZP sees no need for additionalpublic offerings ofcommon stock in the foresee-able future.

AXP forms new partnershipsThrough its subsidiaries, AZP Group has

formed partnerships for both a joint real estateventure and a venture capital fund. The real estatepartnership was announced in March 1986, whilethe new venture fund was announced in earlyMay 1986.

The real estate venture, known as SunCor Part-ners, is a partnership with Gerald Diddy, formerlypresident ofFirst Service Corporation, the devel-opment subsidiary ofMeraBank Inc. Diddy hasbeen named managing partner of the new ventureand AZP's existing real estate subsidiary, EnergyDevelopment Company, has changed its name toSunCor Development Company.

SunCor Partners recently acquired a large tractofcommercial property, suitable for a regionalshopping mall or other commercial development,in Tempe, Arizona. Diddy, an attorney with over 15

years experience in real estate, said the new jointventure willcontinue to invest in a portfolio con-sisting ofa mix ofdevelopment and income prop-erties. Under his leadership, First ServiceCorporation's real estate development portfoliohad a cumulative retail value ofapproximately$ 1 billion.

The SunCor Development Company, mean-while, is wrapping up an earlier joint ventureinvolving the sale ofa golfcourse and potentialresort property at Scottsdale Country Club. Thistransaction is expected to produce profits of about$2,600,000 after income taxes. (Continued pg. 4)

UtilityPlantProperty. plant and equipmentLess accumulated depreciation

and amonizaiion

Utilityplant-nciInvestments and

Other Assets

Current AssetsCashTemporary cash invesimenisAccounts receivable-neiFuel and materialsD femd fueiOther

Total cunent assets

Deferred DebitsUnamortized gas exploration

costsUnamortized debt issue costsOther

Total deferred debits'IIAL

LIABILITIESCapitalization

Common stock(no par value)

Retained earnings

Cominon stock equityNon.redeemable

prcfcrred stock of APSRedeemable prefemd stock

ofAPSLong.term debt less cumnt

maturiliesTotal capitalization

Current LiabilitiesCommercial paperCumni maiurities of long-

tcrm debtAccounts payableAccrued taxesAccrued interestAccrued dividends on

preferred stockOther

Total current liabilitiesDeferred Credits and Other

Deferred income taxesDeferred investment iax creditUnainortized credit related io

sale of tax benefitsOtherTotal defemd credits gr other

1M'AL

fThousands ofDoltars)$5,845.048 $5,712,507

86!.810 838.684

4.983.238 4.873.823

116.544 90.257

13.3041,000

107,45491,14568,74912.809

7,3385.100

126.39571,95&74,335

7.215

294.461 292.341

9,994 10,41716,504 16.70567,263 41.402

93,761 68.524

$5.488.004 $5.324.945

$ 1.322.252 $ 1.294.623588.203 590.872

1,910,455 1,885,495

218.561 218,561

209.821 219,421

2,230.333 2.205.9404.569.170 4.529.417

II&,735

17,45680.07771,11759,733

3,44928.619

18,000

17,45687.12!52,29672,678

3,56626.269

379.186 277.386

257,748177,859

43,22460.817

230,553174.503

43,64569.441

$39.648 518 142

$5,488.004 $5.324.945

AZP GROUP INC.CONSOLIDATED BALANCESHEET

ftlnahhCh'ted)Mar. 31, Dec. 319

1986 1985

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SkorcAotdrr Alarp Ciodkort. 4 rccidccct o/Sort City, AZ., Actpcd AZP Ckoitococc orcd Pyccidcrct Ãcitk Tsrtcy crd tAc coocpoopk ccrcfcrcrctot coko fottorriogtkr Aorcool klcctirrd.

would allow AZP to handle the sale ofPlan shares

for participants who wish to sell all or a portion oftheir shares.

According to Corporate Secretary Faye Widen-mann, AZP willsell your requested number ofPlan shares, then mail you the proceeds minus thebrokerage fee. She added that, due to the large vol-ume of sales which can be handled by AZP, broker-age fees willbe less than on sales handled by anindividual's broker. The company willonly sellshares held in Plan accounts and willnot handlethe sale ofstock certificates.

That change, along with others approved duringthe April24 board meeting, is described in a newStock Purchase and Dividend Reinvestment PlanProspectus to be mailed to Plan participants byJune l, the date all changes become effective. Thenew prospectus has also been rewritten in a ques-tion/answer format to allow for easier reading.

Other changes described in the prospectusinclude the authorization ofadditional new sharesfor the Plan and a provision which would allow thecompany to acquire added Plan shares throughopen market purchases. AZP does not intend toexercise the open-market option at this time.

AZP partnerships (Conrtnued)El Dorado Investment Company has formed its

partnership with Brent T. Rider, formerly presidentof Union Venture Capital Corporation, a subsidiaryof Union Bank in Los Angeles. The new venturecapital fund, known as El Dorado Ventures, willconcentrate on investments in the Sun Belt region.

Rider, who earned his Masters of BusinessAdministration at Harvard Business School, is aprominent leader in venture capital and hasinvested in a variety of successful businesses. Moreinformation on both subsidiaries, including invest-ment commitments, is included in AZP ChairmanKeith 'Ibrley's annual meeting summary.

New dividend reinvestment provisionsThe AZP board ofdirectors has approved several

changes to the AZP Stock Purchase and DividendReinvestment Plan, including a provision that

PVNGS boasts safe technologyResponding to media inquiries after the Soviet

nuclear accident in late April,Ed Van Brunt, exec-utive vice president of the Arizona Nuclear PowerProject, said that "there is almost no similaritybetween Palo Verde and the Chernobyl nuclearpower plant near Kiev."

The Soviet reactor is based on a different tech-nology and used graphite in its design; Palo Verdedoes not, said Van Brunt. He added that the Sovi-et's nuclear system did not have a heavy-duty reac-tor vessel, as does Palo Verde, to contain theradioactivity being released by damaged fuel.

In addition to the reactor vessel, Palo Verde, likeall commercial nuclear plants in the U.S., has alarge containment building that encloses all of thenuclear equipment. The containmerit structure isconstructed to confine any of the harmful radioac-tivitythat would be produced by even the worstnuclear accident possible.

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AZP GROUP, INC.CONSOLIDATEDSTATEMENTS OF CHANGES IN FINANCIALPOSITION (Thousands ofDollars) Unaudited

Source of Funds:Fundsfrom ot3erafionsf

Continuing Operations:Income from continuing operationsPrincipal non-fund charges (credits)

to income:Depreciation and amortizationAllowance for equity funds

used during constructionDeferred income taxes —netDeferred investment tax credit—netOther

Total funds from continuingoperations

Discontinued operations:Income (loss) from discontinued

operationsPrincipal non-fund charges (credits)

to income:Loss on disposal of gas system-

noncunentOther—net

Total funds from discontinuedoperations

Total funds from operationsFunds/rom external sourcest

Proceeds from saic of gas systemCommon stockPreferred stock of APSLong-term debtOther items—net

Total funds from external sources

Total source of funds

Application of Funds:Funds used for capital expenditures:

Continuing operationsDiscontinued operations

Investments and other assetsShort. term bofrowings—netRepayment of tong-term debtRedemption of redeemable preferred stock

of APSDividends on common stockIncrease (Dccrcasc) in working capital:u

Total application of funds

Increase (Decrease) In Working CapltaloCurrent assetsCurrent liabilities

Net increase (decrease)

S 48,327 $ 46,921

28,253

(30,583)13,4863,356

(7.972)

(37,213)11,9635,7096,186

54.867 56.972

54.867 56.972

27,629

203,667(7.473)

223.823

$ 278.690

14,772

266,091(472)

280.39i

3 337.363

S 112,107

26,287(100,735)179,380

. $ 106,823

(203)139,97761,400

9,60050,996

1,055

$ 278,690

34,26245,646

(50.542)

$ 337.363

$ 2,120(1.065)

$ 1.055

$ (784)449,758)

$ (50.542)

Three MonthsEnded March 31,

1985 1986 1985

$ 280,955 $ 255,915

104,068 89,463

(136,982)107,68134,03017.203

(138,690)48,38751,587

5,392

406.955 311,854

(27,900)

19,513821

406,955

(7,566)

304,288

116,971

682,606(8,617)

790.960

$ 1.197.915

114,65764,00350,000

523,441(6,448)

745,653

$ 1,049,941

$ 499,389

49,466(98,912)393,401

$ 396,37023,536(9,785)96,994

320,233

38,657199,441116,473

$ 1,197,915

38,718179,415

4,460

$ 1,049,941

$ 99,81816,655

$ 116.473

$ (3,475)7,935

$ 4,460

Twelve MonthsEnded March 31,

uExcluding short-term bonowings —net and current maturitics of long-term debt.Nett: pursuant to orrporate rcsmicturing plan effective April29, 19SS Apg became a subshliary of AZp. Additionally. effective Novemtur I. t9ge ApS sold iu ras distributionsystem. Accordingly. die Cenielidated Cinancul statements have been adjusted for thc effects of thcsc changes.

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Summa~ report ofMark De MicheleIn his April24 report, Mark De Michele, presi-

dent and chief operating officer of APS and execu-tive vice president of AZP, said that, in addition tosecuring adequate rates, APS was committed to theefficient operation of its plants, attention to safety,cost effectiveness and concern foremployees.

Afterreviewing APS'hree-phase rate case (seerelated story), De Michele said that APS wasexploring the possibility of refinancing Palo VerdeUnit 2 by selling all or a portion of the unit toinvestors, then leasing itback as an operatingplant. "This is a financing technique that may ormay not be feasible; but I want to emphasize thatAPS willstill control the 29.1 percent interest inPalo Verde we have always had," he said.

De Michele noted that other measures, such asrefinancing high coupon debt, have helped reducethe company's interest costs by more than $20millionannually, and additional refundings arealso planned for 1986. APS has also frozen thesalaries of top-management, placed a partial freezeon hiring, and reduced marketing and advertising.

Operating costs are further being reduced bykeeping our plants at peak capacity and operatingthem at their highest efficiency. "Recent studies

show that we are saving our customers over $40milliona year by operating our coal plants 15 per-cent better than the national average," De Michelesaid. "Scheduling maintenance time properly andensuring the best mix of fuel forour entire systemhas provided additional savings."

De Michele reiterated APS'ommitment toavoid financing any major new power plants untilthe next century. He added that, although Arizonais experiencing rapid growth, APS could meetincreased electric needs through various loadmanagement programs, power purchases fromother utilities and continued upgrading ofexisting plants.

He also emphasized efforts to call the public'sattention to the company's many positive storiessuch as APS'nvolvement in and contributions tothe community, cost-saving measures, and pro-grams to increase employee participation throughboth quality circle and employee suggestion pro-grams. He noted that the company is planning tomove its headquarters to a new, larger building,also in downtown Phoenix. The new headquarterswould bring employees, currently scattered in sev-eral locations, together in one building, and serveas a focal point fordowntown redevelopment.

Lower interest rates spur refundingsOn May 1, 1986, APS called $75 million in 12'/8

percent bonds at a price of 109. 15. The call waspart ofa continuing program to refund APS'igh-coupon debt as interest rates and issuance terms ofsecurities permit.

Earlier this year, APS used proceeds from theJanuary sale of$ 100 million in 30-year, ll percentFirst Mortgage Bonds to refund $25 millionof 7-

year, 16 percent Eurobonds and $75 millionof7-year, 16.25 percent Eurobonds, both at a premiumof 101 percent. Proceeds from the March sale of$ 100 million in 10-year, 9.25 percent First Mort-gage Bonds were used to tender for $79.4 millionof 15 percent series First Mortgage Bonds due in1994 at 123.228 percent.

APS has also filed a shelf registration statementwith the Securities and Exchange Commission pro-posing public sales ofup to $350 million in

First Mortgage Bonds. On April28, APS sold$ 125 millionof 10-year, 9 percent First MortgageBonds. Proceeds of that issue willbe applied to theredemption of a 12'/e percent series ofFirst Mort-gage Bonds due 2009 and repayment ofshort-termdebt incurred in connection with the company'sconstruction programs. Proceeds from additionalsales willalso be applied either to the redemption,repayment or retirement of the company's out-standing indebtedness or to the financing ofcon-struction expenditures.

In other financing, APS plans the early redemp-tion of two preferred issues on June 2, 1986,including $ 10.70 Series I at a price of$ 103 and$ 11.95 Series M at a price of$ 101.99. APS hasalso doubled up-from $ 12.33 million to $24.66million-on a regular sinking fund due May 15 onits 12~/s percent series First Mortgage Bonds.

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APS rate hearings continueHearings on the main portion of the company's

Palo Verde Unit I rate case began March 27 withthe announcement that APS was reducing its raterequest from $78.2 million (8.6 percent) to $54.6million (6 percent).

The reduction was due to a decrease in the com-pany's requested return on equity from 16.5 per-cent to 15 percent. Henry Sargent, APS executivevice president and chief financial officer, said thelower return on equity reflects significant improve-ments in the capital markets since the request wasfiled in May 1985.

The revised request would recover the remainingcapital and operating costs of Palo Verde Unit l.About half of the unit's construction costs are cur-rently reflected in rates and the company hadhoped to have the remainder added when the unitbegan commercial operation in February 1986.

Phase Il rate hearings, expected to last throughmid-June, are part ofa three-phase rate case. Hear-ings on Phase I-dealing with a purchased powerand fuel adjustment clause-were completed March7, and the company is waiting for a proposed orderfrom the ACC hearing officer. APS has

requested'hat

the fuel adjustor be increased from four mills

per kilowatt-hour to seven mills, allowing therecovery of approximately $74 million inuncollected fuel costs.

Phase IIIhearings-dealing with a proposedaccounting order for Palo Verde Unit 2-areexpected to begin immediately after completion ofPhase IIhearings. The accounting order wouldallow APS to defer Palo Verde Unit 2 costs until1987, thus allowing the company to phase-in ratesto cover the unit's costs.

The phase-in plan is one of two alternatives pre-sented in the Palo Verde Unit 2 rate case which wasoriginally filed in December 1985 using a test yearended May 1985. The ACC hearing officer orderedAPS to update the test year to include the remain-der of 1985, and refile the case by April30, 1986.

The refiled case also includes two alternativesfor bringing Palo Verde Unit 2 in rates: a traditionalapproach which asks for a single rate increase of20.1 percent, to take effect at the time Unit 2 goescommercial in the third quarter 1986; and thephase-in plan which asks for three smaller in-creases of6.4 percent each to take effect in Janu-ary of 1987, 1988 and 1989. Hearings on therequest are scheduled to begin September 27.

Shareholders tour PVNGSEfforts to keep shareholders informed about

AZP Group, Inc. and their investment in the com-pany are continuing this year with a series ofregional shareholder meetings and tours of the PaloVerde Nuclear Generating Station.

"These meetings not only give shareholders abetter understanding of how we'e managing theirinvestment, but also give us a better insight into theneeds and concerns ofour shareholders," AZPChairman and President Keith 11iriey said. Othermembers ofsenior management are also on handduring regional shareholder meetings. The nextmeeting is planned for June 12 in Denver, Colo.

The first tours ofPalo Verde exclusively forshareholders began in December 1985. More than1,300 AZP shareholders from across Arizona haveparticipated. Other Arizona shareholders, or share-holders who plan to visit Arizona, may stillarrange tours by calling AZP's toll-free number.

NRC proposes civilpenaltyOn May 6, 1986, just before Quarterly went to

press, ANPP was notified by the NRC ofa pro-posed.$ 100,000 civilpenalty for violations involv-ittg Palo Verde security. ANPP has 30 days inwhich to mitigate, appeal or pay the penalty.

The proposed penalty resulted from an NRCinspection this spring which found ANPP failed tocomply with certain security guidelines. The itemswere corrected or compensated for at the time theywere identified, and measures have been taken toensure they do not reoccur.

In releasing the inspection report, an NRC spo-kesperson said there was no violation that compro-mised the plant's overall safety. Information fromthat report was apparently leaked to non-authorizedparties, prompting ANPP to initiate an investiga-tion which included the use ofpolygraph tests.

IfANPP is required to pay the penalty, the costwould be divided among all project participants.

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AZP GROUP, INC.CONSOLIDATEDSTATEMENTS OF INCOME (Dollars in Thousands Ereept Per Share Amounts) Unaudited

Three MonthsEnded March 31,

Twelve MonthsEnded March 31,

1986 1985 1986 1985

Electric Operating Revenues

Fuel ExpenseslFuel for electric generationPurchased power and interchange —net

Total

Operating Revenues less Fuel ExpensesOther Operating Expenses:

Operations excluding fuel expensesMaintenanceDepreciation and amortizationIncome taxes —currentIncome taxes —dcfcrredOther taxes

Total

Operating IncomeOther Income (Deductions):

Allowance for equity funds used duringconstruction

Income taxes-currentincome taxes —deferredOther —net

IbtalIncome before Interest and OtherDeductionsInterest and Other Deductions:

Interest on long-term debtInterest on short. term borrowingsDebt discount. premium and expenseAllowance for borrowed funds used during

construction —creditPreferred stock dividend requirements

of APS

Total

Income From Continuing OperationsDLscontlnued Operatlonsl

Income (loss) from operations of gassystem —net of tax

Loss on disposal of gas system —net ol'axIncome (Loss) from discontinuedoperations

Net Income

Average Common Shares OutstandingEarnings (Loss) Per Average Share ofCommon Stock:

Continuing operationsDiscontinued operations

Total

Dividends Per Common Share

S 274.530 S 243.552

41,495IS.844

57.339

217.191

44,9044.491

49,395

194.157

30.71120.56428.253

4.57144.42827.430

155.957

61.234

27.44728,23623,40611,59829,79024.228

144,705

49.452

30,583(425)

13.495525

44.178

105.412

37,213(749)

!2,164132

48.760

98.212

56,0951.9381,136

(12,665)

10.581

57.085

48.327

47,9092,204

789

(11,709)

12.098

51,291

46.921

S 48.327

74.887.388

$ 46.921

70.360.843

$ 0.65 S 0.67

S 0.65 $ 0.67

$ 0.68 S 0.65

S 1.205,480

216.16628.142

244.308

961,172

$ 1,034.582

191.5608,880

200.440

834,142

126,01581,198

104,06813,938

209,709107.478

318.766

102.50276,36989,46343,404

156.19295.631

563.561

270,581

136.982(1,412)54,743(6.310)

184.003

138,690836

53,732(772)

192,486

502.769 463,067

217,4066,6853,960

(49,132)

42.895

221.814

280,955

192,44811,4882,729

(48,863)

49.350

207.152

255.915

S 280.955

73.242.752

(1,430)(26.470)

(27,900)

$ 228.015

69.130.213

$ 3.84 $ 3.70(0.40)

S 3.84 S 3.30

$ 2.72 $ 2.60

Note: pursuant to corrsvrate restructurins plan effective April 29. t9t5 Aps became a subsidiary of Azp Additionally. effective November I. f984 Aps sold its rar, distributionsystem. Accordingly. the comolrdatcd financial statements have been adjusted for thc effects of these chanrcs.

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UNITED STATES OF 'AMERICA


In the matter of


(Palo Verde NuclearGenerating Station, Unit

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ITEM 3

QUARTERLY REPORT OF APS «(FORM 10-Q)

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.e SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10"Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarter Ended March 31 1986

Commission file number 1-4473

ARIZONA PUBLIC SERVICE COMPANY(Exact name of registrant as specified in its charter

Arizona(State or other jurisdiction

of incorporation or organization)

86-0011170I.R.S. Employer

Identification No.)

411 North Central Avenue P. 0. Box 53999 Phoenix Arizona 85072-3999(Address of principal executive offices) Zip Code

Registrant's telephone number, including area code 602-250-1000

Former name, former address and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports),and (2) has been subject to the filing requirements for the past 90days.

Yes X No

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Indicate the number of shares outstanding of each of the issuer'sclasses of common stock, as of the latest practicable date.

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

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Suite 1000First Interstate Bank PlazaPhoenix. Arizona 85003-1893(602) 257-8333ITT Telex: 4995608

Arizona Public Service Company:

We have made a review of the consolidated balance sheet ofArizona Public Service Company (the "Company" ) and itssubsidiaries as of March 31, 1986 and the related consolidatedstatements of income for the three-month and twelve-monthperiods ended March 31, 1986 and 1985 and of changes infinancial position for the three-month periods ended March 31,1986 and 1985, included in the Company's quarterly report onForm lO-Q, in accordance with standards established by theAmerican Institute of Certified Public Accountants.

A review of interim financial information consists principallyof obtaining„an understanding of the system for thepreparation of interim financial information, applyinganalytical review procedures to financial data, and makinginquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than anexamination in accordance with generally accepted auditingstandards, the objective of'hich is the expression of anopinion regarding the financial statements taken as a whole.Accordingly, we do not express such an opinion.

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

May 12, 1986

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements Three MonthsARIZONA PUBLIC SERVICE COMPANY Ended March 31

CONSOLIDATED STATEMENTS OF INCOME 1986 1985Unaudited (Dollars in Thousands,

Except Per Share Amounts)ELECTRIC OPERATING REVENUES . . . . . . . . . . . . . . . . $ 274 530 $ 243 552

FUEL EXPENSES:Fuel for electric generation.

~ Purchased power and interchange — netTotal

OPERATING REVENUES LESS FUEL EXPENSES .

OTHER OPERATING EXPENSES:~ Operations excluding fuel expenses.

Maintenance .

Depreciation and amortization .'ncome taxes — curr ent

Income taxes — deferred .

Other taxes .

Total

OPERATING INCOME .

~ ~ ~

41,49515 84457 339

217 191

30,62120,56428,2534,612

44,42827 430

155 908

61 283

44,9044 491

49 395

194 157

27,44728,23623,40611,59829,79024 228

144 705

49 452

OTHER INCOME (DEDUCTIONS):=Allowance for equity funds usedIncome taxes — currentIncome taxes - deferred .Other — net .

Total

INCOME BEFORE INTEREST DEDUCTIONS.0

during construction

~ ~

~ ~

30,583(391)

13,495797

44 484

105 767

37 213(749)

12,164132

48 760

98 212

INTEREST DEDUCTIONS:.,Interest on long-term debtInterest on short-term borrowings .Debt discount, premium and expense.Allowance for borrowed funds used duri

construction — credit .

Total

NET INCOME .

PREFERRED STOCK DIVIDEND REQUIREMENTS.0

EARNINGS FOR COMMON STOCK.

ng

56,0951,9381,136

12 66546 504

59,263

10 581

47,9092,204

789

11 70939 193

59,019

12 098

48,682 $ 46,921

AVERAGE COMMON SHARES OUTSTANDING. 71,264,947 70,360,843

PER SHARE OF COMMON STOCK:~ Earnings (based on average common shares outstandi

Dividends declared

e Notes to Consolidated Financial Statements

ng) 0.680.72

0.670.65

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CONSOLIDATED STATEMENTS OF INCOME

Unaudited)

CTRIC OPERATING REVENUES

FUEL EXPENSES:Fuel for electric generation.Purchased power and interchange — net

Total

216,16628 142

244 308

191,5608 880

200 440

Twelve MonthsEnded March 31

1986 1985(Dollars in Thousands,

Except Per Share Amounts)$ 1 205 480 $ 1 034 582

OPERATING INCOME .t

'

OTHER INCOME (DEDUCTIONS):Allowance for equity funds usedIncome taxes - currentIncome taxes - deferred .

Other — net .

Total

OME BEFORE INTEREST DEDUCTIONS.

during construction

~ OPERATING REVENUES LESS FUEL EXPENSESOTHER OPERATING EXPENSES:

Operations excluding fuel expenses.'aintenance .

'epreciation and amortization .

Income taxes — current~ 'ncome taxes - deferred .

Other taxes .

Total

961 172

125,92581,198

104,06813,979

209,709107 478642 357

318 815

136,982(2,297)54,743

3 657185 771

504 586

834 142

102,50276,36989,46343,404

156,19295 631

563 561

270 581

138,690836

53,732772

192 486

463 067

INTEREST DEDUCTIONS:Interest on long-term debt

,Interest on short-term borrowings .

Debt discount, premium and expense.Allowance for borrowed funds used duri

construction - credit .

Tot a 1 'o ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

ng

217,4066,6853,960

49 132178 919

192,448'1,488

2,729

48 863157 802

INCOME FROM CONTINUING OPERATIONS

LOSS FROM DISPOSAL AND OPERATION OF DISCONTINUEDGAS SYSTEM, NET OF TAX

NET INCOME .

PREFERRED STOCK DIVIDEND REQUIREMENTS.0 EARNINGS FOR COMMON STOCK.

~ ~ ~

~ ~ ~ ~

~ ~ ~ ~ ~

325 667

325,66742 895

282,772

305 265

27 900

277,36549 350

228,015

AVERAGE COMMON SHARES OUTSTANDING.PER SHARE OF COMMON STOCK:

Earnings (loss) (based on average common sharesContinuing operationsDiscontinued operationsTotal ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

~ ~ ~ ~

~ ~ ~ ~ ~

3.970.003.97

3.700.403.30

71,254,157 69,130,213

outstanding):

Dividends declaredSee Notes to Consolidated Financial Statements

~ ~ ~ ~ o $ 2.80 2.60

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CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION(Unaudited

Three MonthsEnded March 31

SOURCE OF FUNDS:Funds from operations:

Net incomePrincipal non-fund charges (credits) to income

Depreciation and amortizationAllowance for equity funds used during

construction .

Deferred income taxes — netDeferred investment tax credit - net .

0 ther ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Total funds from operations

~ ~

~ ~

~ ~

1986(Thousands

1985of Dollars)

28,253 23,406

(30,583)27,060

3,356~7972

(37,213)11,9635,7096 186

79 377 69 070

$ 59,263 $ 59,019

Funds from external sources:Common stock .

Long-term debt .

Other items - netDecrease in working capital*

203,667(21,047)

71

14,772266,091

(472)50 542

Total funds from external sources

Total source of funds

182 691 330 933

6 262,068 6 400,003

APPLICATION OF FUNDS:Funds used for capital expenditures .

Investments and other assets. Short-term borrowings — net .

Repayment of long-term debt .

„ Redemption of redeemable preferred stockDividends on preferred and common stock .

Total application of funds

$ 112,107139

(100,735)179,380

9,60061 577

6 262,068

$ 106,823(203)

139,97761,40034,26257 744

$ 400,003

INCREASE (DECREASE) IN WORKING CAPITAL":Current assets.Current liabilities .

Net decrease

$ 1,2041 275

6 (71)

$ (784)~49 758

$ (50,542)

*Excluding short-term borrowings - net and current maturities of long-termSee Notes to Consolidated Financial Statements

debt.


CONSOLIDATED BALANCE SHEETS

ASSETS

March 31, December 31,'986 1985

(Unaudited)(Thousands of Dollars)

~ UTILITY PLANT:Electric utility plant in serviceLess accumulated depreciation and

TotalConstruction work in progress .

'Nuclear fuel, net of amortizationUtility Plant — net

and held for futureamortization~ ~ ~ ~ ~ ~ ~ ~ ~ ~

use $ 4,173,661861 810

3,311,8511,628,997

42 3904 983 238

$ 2,970,368838 684

2,131,6842,742,139

4 873 823

INVESTMENTS AND OTHER ASSETS:Investments in and receivables from affiliatesOther investments and notes receivable.

Total investments and other assets .

16,5136 130

16,5135 991

22 643 22 504

CURRENT ASSETS:Cash and marketable securitiesSpecial deposits and working funds.Accounts receivable:

Service customers.Other.Allowance for doubtful accounts.

Materials and supplies (at averageFuel (at average cost).Deferred fuel

Total current assets .

~ ~ ~

cost).

~ ~

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7,8713,342

8,4743,397

84,53343,415(1,395)41,52530,43374,335

3 873

71,59537,850(1,486)55,67635,46968,749

9 412289 136 287 932

DEFERRED DEBITS:Unamortized gas exploration costs .

Unamortized debt issue costs.Other .

Total deferred debits.

TOTAL.

9,99416,50465 807

10,41716,70539 946

92 305 67 068

$ 5,387,322 $ 5,251,327

See Notes to Consolidated Financial Statements

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CONSOLIDATED BALANCE SHEETS

LIABILITIES

CAPITALIZATION:Common stock.Premiums and expenses — net .

Retained earnings .

Common stock equity.Non-redeemable preferred stock.Redeemable preferred stockLong-term debt

Total capitalization .

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Mar ch 31,1986

(Unaudited)(Thousands

December 31,1985

of Dollars)

$ 178,1621,040,909

592 334

$ 178,1621,040,909

590 0201,809,091

218,561209,821

2 230 333

1,811,405218,561219,421

2 205 9404 467 806 4 455 327

CURRENT LIABILITIES:Commercial paperCurrent maturities of long-termAccounts payable.Accrued taxes .

Accrued interest.Accrued dividends .

Other .

Total current liabilities.

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debt. ~ ~ ~

118,73517,45680,07771,11760,4013,449

28 633

18,00017,45687,11352,97672,678

3,56626 069

379 868 277 858

DEFERRED CREDITS AND OTHER:Deferred income taxesDeferred investment tax credit.Unamortized credit — sale of tax benefitsCustomer advances for constructionOther .

Total deferred credits and other .

230,553174,50343,64523,99145 450

257,748177,85943,22423,77937 038

539 648 518 142

TOTAL. $ 5,387,322 $ 5,251,327

See Notes to Consolidated Financial Statements

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ARIZONA PUBLIC SERVICE COMPANY/

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2. In the opinion of the Company, the accompanying unauditedconsolidated financial statements contain all adjustments (comprisingonly normal recurring accruals) necessary to present fairly the financialposition of the Company and its subsidiaries as of March 31, 1986, theresults of their operations for the three months and twelve months endedMarch 31, 1986 and 1985 and the changes in their financial position forthe three months ended March 31, 1986 and 1985.

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

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

5. On April 18, 1985 the Company's shareholders approved a

plan for corporate restructuring. Effective April 29, 1985, APS became a

subsidiary of a holding company, AZP Group, Inc.

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

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

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'ARIZONA PUBLIC SERYICE COMPANY

Item 2. Mana ement's Discussion and Anal sis of Financial Condition andResults of 0 erations.

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

Although the Company has experienced increases and decreases inunit costs of generating fuel and purchased power, most of such changesare passed on to customers pursuant to the purchased power and fuel-adjustment mechanism in the Company's rate schedules. Accordingly, suchchanges are reflected in fuel revenues and do not materially affectearnings. See, however, "Retail Rates" in Part II, Item 5 of this Reportfor a discussion of the Arizona'orporation Commission (the "ACC")hearings and other legal proceedings regarding the Company's purchased,power and fue'I adjustment mechanism.

The increases in electric operating revenues of 12.7% and 16.5%in the three-month and twelve-month periods, respectively, were largelydue to an increase in the portion of a coal-fired plant's capacity that isbeing temporarily sold and to a retail rate increase of 4.98% effectiveFebruary 1, 1985. In addition, a 1.5% retail rate increase effectiveOctober 1, 1984 contributed to increased revenues in the twelve-monthperiod. Increased revenues also reflect an increase in rates pursuant tooperation of the Company's fuel adjustment clause and increased unit salesto residential, commercial and industrial customers in the 'twelve-monthperiod. For the three-month and twelve-month periods, the average numberof electric customers increased by 4.7% and 4.8%, respectively, with theseincreases occurring in the residential and commercial customer classes.Unit sales declined by 4. 1% for the three-month period and increased by3.2% for the twelve-month period. Unit sales in the three-month perioddeclined primarily due to decreased residential usage which reflectswarmer winter weather conditions, partially offset by the increase inresidential customers. Unit sales increased for the twelve-month periodlargely due to an increase in customers, increased commercial usage, andincreased industrial sa'les reflecting the impact of one mining customer.Sales to resale customei s decreased in both periods largely due tocurtailed purchases by two resale customers.

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

Purchased power and interchange-net increased in bothperiods'he

primary reason for. the increase in the three-month period is theoperation of the Company's fuel adjustment clause partially offset by adecrease in the average price of purchased power resulting from theavailability of test energy. The increase in the twelve-month period was

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

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Operations excluding fuel expenses increased in both periodsdue to increased customer service expenses associated with increasedcustomers, increased insurance expenses resulting from rising premiums,and increased operations expenses associated with the start of commercialoperation of a new generating unit.

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

-a new generating unit.

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

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

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

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

Consolidated net income represents a composite of cash andnon-cash items and reflects accounting practices unique to regulatedpublic utilities.

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

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I m her Inf rm i n

R il R

In May 1985, the Company filed a request with the ArizonaCorporation Commission (the "ACC") for a $ 78.2 million (8.6%)increase in annual retail electric rates premised upon PaloVerde Unit 1 being fully included in the Company's rate base(the "Unit 1 Rate Case" ). See "Rates-State" in Part I, Item 1

of the Company's Annual Report on Form 10-K for the fiscal yearended 1985 (the "1985 Form 10-K"). On March 27, 1986, theCompany lowered the request in the Unit 1 Rate Case to 454.6million (a 6% increase), reflecting improvements in capitalmarkets since the request was filed in May 1985.

On December 18, 1985, the Company filed an application withthe ACC for a $ 193.9 million (19.36%) increase in„,annual retailelectric rates, to be effective on the date Palo Verde Unit 2

is placed in service (the "Unit 2 Rate Case" ). On December 30,1985, the ACC instructed the Company to resubmit all schedulesrelating to the Unit 2 Rate Case on or before April 30, 1986,so as to reflect a calendar 1985 test year. See "Rates-State"in Part I, Item 1 of the 1985 10-K. On April 30, 1986, theCompany resubmitted schedules based upon the 1985 test year,which resulted in a revision of the rate request from 4193.9million to 4202.5 million (20.12%). Hearings concerning theUnit 2 Rate Case are scheduled to begin September 26, 1986.

Pal V r Nu 1 r n r inOn April 24, 1986, the Nuclear Regulatory Commission (the

"NRC") issued, subject to certain conditions, a full poweroperating license for Palo Verde Unit 2, thus removing the fivepercent restriction on generating capability contained in theUnit 2 operating license issued in December 1985. Unit 2 isscheduled to achieve commercial operation during the thirdquarter of 1986. See "Properties" in Part I, Item 2 of the1985 Form 10-K.

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

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ownership interest in Palo Verde Unit 2. Consummation of anYsale and leaseback transaction is subject to further evaluation,general market conditions, and the receipt of regulatoryapprovals from the ACC, the NRC, and the Securities and ExchangeCommission.

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By letter dated May 5, 1986, the NRC sent a Notice ofViolation and Proposed Imposition of Civil Penalty (the "NRCNotice" ) notifying the Company, as operating agent at PaloVerde, that the NRC proposes to impose a $ 100,000 civil penaltyfor violations categorized in the aggregate as a "Severity LevellII" problem (on a scale of I to V in accordance with the"General Statement of Policy and Procedure for NRC EnforcementActions" ). „ The NRC Notice relates to deficiencies noted by theNRC during security inspections at Palo Verde from February llto March 13, 1986. The base civil penalty for a Severity LevelIII problem is $ 50,000. The NRC indicated that the proposedcivil penalty was doubled because the Company had prior noticeof similar problems and because several violations involvedmultiple examples. The NRC requires APS to respond and, amongother things, either to pay or to protest the civil penaltywithin 30 days of the NRC Notice. The Company is currentlyevaluating its response to the NRC Notice.

In 1984 the utility regulatory bodies of Arizona,California, New Mexico, and Texas formed the Four StateMonitoring Committee to oversee an independent constructionaudit of Palo Verde. See "Rates-State" in Part I, Item 1 of the1985 10-K. In April 1986, Public Service Company of New Mexico("PNM") and El Paso Electric Company ("El Paso" ), two of theparticipants in Palo Verde, informed their respective regulatorycommissions that they were withdrawing from, and would not fund,the audit because of concerns that the audit will not producebalanced and objective conclusions. The Company is under orderby the ACC to pay for 29.1 percent (the Company's ownershipinterest in Palo Verde) of all costs incurred in conducting theaudit.

n r i n n F n n in Pr rFor the three months ended March 31, 1986, the Company

incurred approximately $ 99,000,000 in construction expenditures,accounting for approximately 26+ of the most recently estimated1986 construction expenditures. The Company has estimated totalconstruction expenditures for the years 1986, 1987, and 1988 at4386,000,000, 4258,000,000, and 4226,000,000, respectively.

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

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installment obligations, including certain anticipated earlyredemptions based upon current interest rates, are expected tototal 4325,000,000, 4248,000,000, and $246,000,000 for the years1986, 1987, and 1988, respectively. The Company refunded orotherwise paid approximately 58< ($ 189,000,000) of the expected1986 total during the three months ended March 31, 1986.

In January 1986, the Company issued $ 100 million in 30-yearlib first mortgage bonds. The proceeds were applied to theredemption of outstanding European debentures issued by theCompany's wholly-owned finance subsidiary. In March 1986, theCompany issued $ 100 million in 10-year 9 1/4% first mortgagebonds. Substantially all of the proceeds were applied topurchase approximately $ 80 million of the Company's $ 100 million15'eries First Mortgage Bonds due 1994 at 123.23% of theirprincipal amount plus accrued interest. In May 1986, theCompany issued $ 125 million in 10-year 9< first mortgage bonds,and applied a portion of the proceeds to redeem the Company's$ 75 million 12 1/8% Series First Mortgage Bonds due 2009 at109.15 percent of principal amount plus accrued interest.

Provisions in the Company's Mortgage Bond Indenture andArticles of Incorporation restrict it from issuing additionalfirst mortgage bonds or preferred stock, respectively, unlessits earnings (as defined) cover by at least the prescribednumber of times the amount of interest (as to bonds) and theamount of interest plus preferred stock dividend requirements(as to preferred stock) on the securities to be outstandingafter completion of the new issue. Operation of the latter suchprovision has at times limited the Company's ability to issuepreferred stock. As calculated in accordance with theapplicable document, and assuming 10% as the rate of interest onnew bonds or as the dividend requirement on new preferred stockthat might have been issued on March 31, 1986, and treating theissuance of $ 125,000,000 of 9 percent series first mortgagebonds as though consummated on .that date, the coverage affordedby defined earnings for the twelve months ended on that datewould have allowed the issuance of either $ 1,643,000,000 inaggregate principal amount of additional first mortgage bonds(as compared to approximately 41,072,000,000 in bonds issuableon the basis of net "property additions" to March 31, 1986), or4598,000,000 in aggregate par value of additional preferredstock. Required coverages are 2.0 for bonds and 1.5 forpreferred stock. Coverages afforded by defined earnings for thetwelve-month period ended March 31, 1986 were 4.10 for bonds and1.90 for preferred stock.

I m Exhi an R r n F rm

(a) Exhibits

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15.1 Letter RegardingUnaudited InterimFinancial Information

Page Number in ManuallySigned Original onWhi Exhi M F n

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In addition to the Exhibit shown above, the Company herebyincorporates the following Exhibits pursuant to Exchange ActRule 12b-32 and Regulation g 201.24 by reference to the filingsset forth below:

Exhil~ ri i ll FilExhi i

4.1 Mortgage andDeed of TrustRelating tothe Company'sFirst MortgageBonds, to-gether withtwenty-sevenindenturessupplementalthereto

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Twenty-eighthSupplementalIndenture

Twenty-ninthSupplementalIndenture

ThirtiethSupplementalIndenture

4.1 to Form S-3RegistrationStatement

4.2 to Form S-3RegistrationStatement No.2-84605 bymeans ofJuly 7, 1983Form 8-K Report

4.2 to Form S-3RegistrationStatement No.2-86955 by meansof October 13, 1983Form 8-K Report

4.4 to Form S-3RegistrationStatement No.2-86955 by meansof June 14, 1984Form 8-K Report

2-84605

1-4473

1-4473

1-4473

7-6-83

7-7-83

10-14-83

6-15-84

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Thirty-firstSupplementalIndenture

Thirty-secondSupplementalIndenture

Thirty-thirdSupplementalIndenture

4.4 to Form S-3RegistrationStatements (Nos.2-86955 and2-95340) by meansof January 24, "1985Form 8-K Report

4.7 to Form S-3RegistrationStatement

4. 5 to Form S-3RegistrationStatement Nos.2-95340 and2-97956 by meansof June 6, 1985Form 8-K Report

1-4473

2-97956

1-4473

1-25-85

5-24-85

6-7-85

Thirty-fourth'upplemental

Indenture

4. 1 to Form S-3RegistrationStatement by means

"of Post-EffectiveAmendment No. 2

2-99739 11-21-85

Thirty-fifthSupplementalIndenture

Thirty-sixthSupplementalIndenture

Thirty-seventhSupplementalIndenture

4. 1 to Form S-3RegistrationStatement No.33-2297 by means

„ of January 22, 1986Form 8-K Report

4.1 to Form S-3RegistrationStatement No.33-3354 by meansof February 24, 1986Form 8-K Report

4.1 to RegistrationStatement No.33-4306 by meansof April 29, 1986Form 8-K Report

1-4473

1-4473

1-4473

1-23-86

2-25-86

4-30-86

(b) During the quarter ended March 31, 1986, the Companyfiled, on the dates indicated, the following reports on Form 8-K:

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

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in the projected commercial operation dates of Palo VerdeUnits 2 and 3, (2) the impact on the Company if the ACC doesnot grant the requested accounting/rate-making orderrelating to Unit 2,. (3) the court order upholding the ACC'sorder purporting to subject AZP and its subsidiaries,including the Company, to certain reporting requirements,(4) the ACC's refusal to grant a motion by RUCO involvingthe emergency rate reduction application filed by RUCO, and(5) the ACC's refusal to grant a motion by RUCO involving

a'equestedemergency adoption of a new ACC rule to requirepublic service corporations to prove by a preponderance ofthe evidence that their investments were prudent.

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

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

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

Report filed May 6, 1986 comprised of exhibits to theCompany's Registration Statement on Form S-3 (RegistrationNo. 33-4306), relating to the Company's registration of4125,000,000 in aggregate principal amount of the Company'sFirst Mortgage Bonds.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of1934, the Company has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.


(Registrant)

Date Ma 9 1986 /s/ Henr B. Sar ent JrHenry B. Sargent, Jr. Executive Vice

President and Chief Financial Officer(Principal Financial Officer andOfficer Duly Authorized to sign thisReport)

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In the matter of

ARIZONA PUBL'IC SERVICECOMPANY, et al.>


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ITEM 4

OPINION AND ORDER OF THE ARIZONA CORPORATIONCOMMISSIONS DATED JULY 24',1986

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BEFORE THE ARIZONA CORPORATION COMMISSION

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RENZ D. JENNINGSCHAIRMAN

MARCIA WEEKS

COMMISSIONERSHARON B. MEGDAL

COMMISSIONER

IN THE MATTER OF THE APPLICATION OF )ARIZONA PUBLIC SERVICE COMPANY FOR AN )ORDER OR ORDERS: (1) AUTHORIZING IT TO )ENTER INTO VARIOUS TRANSACTIONS AND )AGREEMENTS RELATING TO THE SALE AND )OPERATING LEASE OF ALL OR A PORTION OF )THE COMPANY' UNDIVIDED OWNERSHIP )INTEREST IN UNIT 2 OF THE PALO VERDE )NUCLEAR GENERATING STATION AND CERTAIN )COMMON FACILITIES; (2) AUTHORIZING IT )TO ISSUE OR INCUR EVIDENCES OF INDEBTED-)NESS IN CONNECTION THEREWITH; (3) CON- )FIRMING THAT THE OWNER TRUSTEE AND THE )EQUITY INVESTORS WILL NOT BE "PUBLIC )SERVICE CORPORATIONS"'4) CONFIRMING )THAT THE LEASES WILL BE "OPERATING )LEASES" FOR ACCOUNTING PURPOSES'ND, )(5) DESCRIBING THE RATE-MAKING )TREATMENT OF THE PROPOSED TRANSACTIONS. )

)

DOCKET NO. U-1345-86-105

Arizona Corporation Commission

DOCKETED

JUL 24 1986

DOCKETf.D 5Y

16 DATE OF HEARING:

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21. APPEARANCES:

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PLACE OF HEARING:

PRESIDING OFFICER:

1g IN ATTENDANCE:

OPINION AND ORDER

July 10, 1986

Phoenix, Arizona

Thomas L.Mumaw, Chief Hearing Officer

Renz D. Jennings, ChairmanMarcia Weeks, CommissionerSharon B. Megdal, Commissioner

Jaron B. Norberg, Senior Vice President and CorporateCounsel, Raymond Heyman, and Snell & Wilmer,by Steven M. Wheeler, Attorneys for Arizona PublicService.

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Elizabeth Kushibab, Attorney, Legal Division, forthe Arizona Corporation Commission Staff

Steven Avilla, Attorney, for the Residential UtilityConsumer Office

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U-1345-Ub-xU>

BY THE COMMISSION:

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

filed an Application with the Commission requesting an Order authorizing the

Company, among other things, to enter into various transactions and agreements

relating to the sale and operating lease of all or a portion of the Company's

undivided ownership interest in the Palo Verde Unit 2 Facilities as hereinafter

defined.

On April 27, and May 21, 1986, the Coalition for Responsible Energy

Education ("CREE" ) and the Resident'ial Utility Consumer Office ("RUCO") filed

10 Petitions to Intervene herein. Both said Petitions were granted by Procedural

Order prior to the scheduled hearing on APS's Application.

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Pursuant to Notice dated June 26, 1986, APS's Application came on for

hearing before a duly authorized Hearing Officer of the Commission at its

offices in Phoenix, Arizona, on July 10, 1986 . APS, RUCO, and the

Commission's Utilities Division Staff {"Staff") appeared through counsel, and

each presented testimony and exhibits in support of APS's Application. At the

conclusion of a full public hearing, this matter was adj orned pending

submission of a Recommende'd Opinion and Order by the Presiding Officer to the

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Commission.

DISCUSSION

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as

As indicated above, both Staff and Intervenor RUCO supported the

Application. Staff did propose various reporting requirements which would keep

the Commission informed as to the details of the sale and leaseback (as well as

any material changes in the transaction both prior to and after closing), and

suggested that proceeds derived from such sale and leaseback be placed in a

separate interest bearing bank account. Staff and RUCO further recommended

that the Commission be circumspect in its language approving this matter so as

to retain its flexibility to disallow all or part of the operating lease

Decision No. 3 D /20

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U-1345-86-105

payments from APS' cost of service in its pending rate proceeding (Docket No.

U-1345-85-367) . Finally, RUCO noted that recoverability of these lease

payments in rates should be subject to performance criteria, and that it would

be proposing such criteria in the aforementioned rateDocket.'s

in Docket No. U-1933 86 036, decided this same day, we will adopt

Staff's reporting requirements and will use the same language generally

disclaiming any prior judgement on the recoverability through rates of these

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operating lease payments. We also agree that performance criteria for Palo

(Phase I), also decided this day. We will not require that APS separately

deposit the funds received through the sale and leaseback transaction.

However, periodic reporting on APS's use of such proceeds will serve to

reassure the Commission that the limitations on their use both agreed to by APS

and ordered hereinafter are being properly observed.

Having considered the entire record herein and being fully advised in the

premises, the Commission finds, concludes and orders that:

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FINDINGS OF FACT

1. APS is an Arizona corporation engaged in providing electric service

within various portions of Arizona pursuant to authority granted by this

Commission.

2. By its Application and testimony in this matter, the Company

requests one or more orders granting the following:

(a) authorization to refinance its construction financing for

Unit 2 of the Palo Verde Nuclear Generating Station

("Palo Verde" ) by entering into one or more sale and leaseback

transactions (the "Lease Transactions" ) relating to (I) all or

financing transactions.

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U-1345-86-105

1 a portion of the Company's 29.1X undivided ownership interest

in Unit 2, including, without limitation, all or a portion

of the Company's generation entitlement share in Unit 2 and

(ii) certain real property interests in the Palo Verde plant

site and related real property (such interest in Unit 2

and the real property interests being hereinafter collectively

referred to as the "Unit 2 Facilities" );

(b) authorization for the Company to issue, assume, guarantee, or

incur evidences of indebtedness in connection with the Lea'se

Transactions;

(c) confirmation that the Leases (as hereinafter defined) will be

treated as "operating leases" for accounting and rate-m'aking

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purposes;

(d) conf ixmation of the rate-making treatment of the Lease

Transactions; and,

(e) confirmation that the Lessors and the Equity Investors (as

hereinafter defined)'ill not be "public service corporations"

subject to regulation under Arizona law by reason of their

holding title to, or possessing an interest in, the Unit 2

20 Facilities.

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3 ~ The Lease Transactions will involve the Company' sale of the Unit 2

Facilities to, and then the lease of the Unit 2 Facilities back from,

institutional investors ("Equity Investors" ).

24 4. Each of the Equity Investors will form a trust for the purpose of

25 holding title to its undivided interest in the Unit 2 Facilities, and the

trustees under the trusts will act as lessors ("Lessors" ) of the Unit 2

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Facilities and will lease the Unit 2 Facilities to APS under one or more leases

("Leases" ).

5. If the Lease Transactions are completed as to less than all of APS's

interest in the Unit 2 Facilities, APS will retain an undivided ownership

interest in the remainder of the Unit 2 Facilities,

6. The Unit 2 Facilities will be sold to the Lessors at a fair market

price, and prior to the closing of the Lease Transactions, an appraisal willconfirm that the purchase price is a reasonable estimate of fair market value

in order to comply with certain Internal Revenue Service requirements to

preserve certain tax benefits of the transactions.

7. APS's profit on the sale at fair market value of the Unit 2

Facilities (net of associated income tax) will be amortized as a credit against

APS's operating lease expense over the term of the lease ~

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

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from a funding corporation (the "Funding Corporation" ) formed for that purpose,

and the Funding Corporation, in turn, will borrow the debt portion of the

purchase price by issuing debt that will be non-recourse to the Lessors and the

Equity Investors.

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9. The debt referred to in Finding of Fact No. 8, hereinabove, will be

indirectly secured by an assignment of the rentals and other payments due from

the Company under the Leases.

10. APS will be named the "Registrant" in any Registration Statement

filed with the Securities and Exchange Commission in connection with the

issuance of such debt.

ll. Upon the occurrence of certain events to be described in the leases,

APS will be required to assume the Lessors',debt to the Funding Corporation.

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

refund the Lessors'ebt to the Funding Corporation at then prevailing interest

Decision No. Q Q /QOI

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rates, with net benefits of such refunding to be reflected in the Company's

rental payments under the Leases.

13 'inancial support in the form of letters of credit or financial

guarantees will also be obtained to secure the Equity Investors for the payment

of amounts by the Company under the leases and related documents, and APS may

be required to issue or incur evidences of indebtedness in connection with such

financial support.

14. Although the Lessors will be the owners of the Unit 2 Facilities,

APS will remain responsible for all expenses of operation and maintenance.

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15. The initial term of the Leases will be approximately 29 1/2 years,

and the Company will have certain renewal options,

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

17. The rent to be paid by APS over the term of the Leases will be a

function of the interest rates payable on the debt issued by the Funding

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

18. Throughout the term of the Leases, APS will be required with respect

to the Unit 2 Facilities to be and to act 'as a "participant" under the ANPP

Participation Agreement, as amended, which governs the construction, operation,

and maintenance of Palo Verde and the rights and duties of the joint owners of,

and participants in Palo Verde.

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19. The Company will also continue to serve as "Operating Agent" of Unit

2 responsible to the other Palo Verde participants, and as the sole licensee

responsible to the Nuclear Regulatory Commission (the "NRC"), for the use and

operation of Unit 2, including decommissioning.

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~ 2V~-20 'lthough APS will remain liable for its share of the decommissioning

cost of Unit 2 under NRC regulations, the Lease Transactions may require the

Equity Investors to fund a portion of the estimated costs of decommissioning

the portion of the Unit 2 Facilities acquired by the Equity Investors.

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21. Any. addition, betterment, or enlargement of the Unit 2 Facilities,

or replacement of units of the property within the Unit 2 Facilities ("Capital

Improvements" ) will be APS's obligation under the Leases.

22.APS may, but will not be obligated to, request that the Lessors provide

financing under the Leases ("Supplemental Financings") for their respective

shares of Capital Improvements.

23 . The terms and conditions of Supplemental Financing will be subject

to mutual agreement between the Company and each Equity Investor, and each

Equity Investor will. have the option, but no obligation, to make additional

equity investments in Capital Improvements that are the subject of Supplemental

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Financings.

24. If any such Capital Improvement is not funded by an Equity Investor,

such Equity Investor will, subject to certain conditions, permit the Lessor to

borrow additional funds from the Funding Corporation in an amount sufficient to

fund such Equity Investor's share of the Capital Improvement.

25. Concurrently with any Supplemental Financings, the rent payments

will be adjusted to support the amortization of the additional debt issued in

connection with the Supplemental Financing and to preserve the Equity

y9 Investors'et economic return.

20 26 'he Company and the Lessors will enter into support agreements that

will provide the Lessors with such rights in parts of the company's interest in

Palo Verde not constituting Unit 2 Facilities as may be necessary to enable the

Lessors and their successors and assigns to realize the residual values of

their interests under the Lease Transactions that may be consummated.

25 27 'he proposed Leases will be "operating leases" as defined in

accordance with generally accepted accounting principles, and for rate"making

~ 27- purposes the aggregate amount of Lease payments will be accounted for by the

Company as an operating and maintenance expense, with the recoverability of

U-13 45-86-10 5

such Lease payments through rates to be decided in Docket U-1345-85-367.

28. APS intends to use the net proceeds from the Lease Transactions for

the redemption, retirement, or refunding of outstanding long-term debt and/or

preferred stock that previously financed construction projects and, ifnecessary, the satisfaction of certain of the Company' working capital and

other cash requirements, including the financing of APS's ongoing construction

program.

29. The payments under the Leases will be chargeable to the Company's

operative expenses or to income.

10 30. The issuance, assumption, guarantee, or incurrence of evidences of

indebtedness by the Company in connection with the lease Transactions will be

for the purpose of allowing the company to perf orm its obligations and/or

exercise its options under the Lease Transactions.

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31. It has been estimated by Staff and APS that the expected present

value savings to ratepayers resulting from the Lease Transactions will range

from roughly '$10,000,000 to 0128,000,000.

32. The above savings assume the subtraction from APS's rate base of alltax credits generated by the Lease Transactions and retained by APS, subject to

1 9ratab 1 e rest or ation over a 3 5 year period .

20 33. The Lease Transactions and the issuance, assump't.'ion, guarantee, or

incurrence of evidences of indebtedness in connection therewith are compatible

with the public interest, with sound financial practices, and with the proper

performance by the Company of sevice as a public service corporation and willnot impart its ability to perform that service.

25 34. The Lease Transactions and the issuance, assumption, guarantee, or

incurrence of evidences of indebtedness in connection therewith are reasonably

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necessary or appropriate for the purposes set forth herein and, except as

otherwise set forth herein, are not, wholly or in part, reasonably chargeable

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to the Company's'operative expenses or to income.

35. Performance criteria are specifically required in order to assure

that ratepayers pay only the allowable costs under efficient operations. The

Commission expects the parties to present such performance criteria in the rate

case involving the sale and leaseback.

CONCLUSIONS OF LAW

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l. APS is a public service corporation within the meaning of Article XV

of the Arizona Constitution and A.R.S. $ 5 40-285 and 40-301, et seq.

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

of the Application.

3 . The proposed Lease Transactions and the issuance, assumption,

guarantee, or incurrence of evidences of indebtedness in connection therewith,

as well as the other matters set forth in the Application, exhibits, and

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powers of APS and are compatible with the public interest.

4, APS s leasehold interest in the Unit 2 Facilities, including itscontractual rights under said Leases, shall be subject to the Commission'

authority under A.R.S. 3 40-285(A) ~

ORDER

IT . IS THEREFORE ORDERED that Arizona Public Service- Company is hereby

authorized:

(a) to undertake and consummate the Lease Transactions and to

testimony relating to this matter are for lawful purposes within the corporate

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take all such actions as may be necessary or appropriate in

connection therewith; subject to the limitations and conditions

contained in this Decision;

(b) to issue, assume, guarantee, and incur evidences of indebtedness

in order to consummate, and to perform its obligations and exercise

its options under, the Lease Transactions (including the issuance

Decision No..5 D lAC

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.or incurrence of evidences of indebtedness in connection with the

financing of Capital Improvements as required or permitted by the

terms of the Leases, the costs of which will be reflected in an

adjustment to lease rentals) including, but not limited to, (i) the

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issuance or incurrence of evidences of indebtedness by the Funding

Corporation, secured by the direct obligation of the Company; (ii)the issuance or- incurrence of evidences of indebtedness in

connection with any letter of credit or financial guarantee securing

the Equity Investors for the payment of amounts payable by the

Company under the Lease and related documents; (iii) the issuance

or incurrence of evidences of indebtedness necessary for any

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refunding of indebtedness; (iv) the assumption of indebtedness

by the Company upon the occurrence of certain events as

required by the leases; (v) the adjustment of rents from time

to time as required by the Leases; and (vi) the execution of

supplements to the Lease as required or permitted by the

Leases; and

(c) to exercise its options to renew the Leases and to repurchase

all or any portion of the Unit 2 Facilities in accordance with

20the terms of the Leases. ~ p,

21IT IS FURTHER ORDERED that the Leases will be treated as operating leases

for both accounting and rate-making purposes and that the aggregate amount of

Lease payments will be accounted for by the Company as an operating and

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aintenance expense.

IT IS FURTHER ORDERED that all prof it from the sale of the Unit 2

26Facilities (less associated income tax) should be amortized over the initialterm of the lease as a credit against such lease expense.0- IT IS FURTHER ORDERED that Arizona Public Service Company shall treat any

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ax credits generated by the sale of the Unit 2 Facilities and retained by theI

Company as an offset (deduction) against its "fair value" rate base, subject to

ateable restoration over a 35 year period.

IT IS FURTHER ORDERED that approval of the requested Lease Transactions as

set forth in the Application and authorized hereinabove does not constitute or

imply approval or disapproval by the Commission of any particular expenditure6

for purposes of establishing just and reasonable rates.7

IT IS FURTHER ORDERED that Arizona Public Service Company shall file a

Plan of Disposition with the Commission within thirty (30) days of the entry of9

1Qthis Decision, which Plan shall indicate the use to be made of the proceeds

derived from the transactions authorized herein over the succeeding twelve (12)

onth period.12

13IT IS FURTHER ORDERED that Arizona Public Service Company shall thereafter

annually upda te such Plan and shall keep the Commission informed of any

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a ter ial change in said Plan.

IT IS FURTHER ORDERD that the purpo ses for which the propo sed Lease

Transactions are herein authorized are to redeem, retire, or refund outstanding

long-term debt and/or preferred stock that previously financed construct:on18

projects and, if necessary, to satisfy certain of the Company's working captial

and other cash requirements, including the financing of Arizona Public Service20

Company' ongoing construction program, regardless of the extent to which such

purposes'ay be reasonably chargeable to operative expenses or income.

23IT IS FURTHER ORDERED that the purpose for which the proposed issuance,

assumption, guarantee, or incurrence of evidences of indebtedness in connection24

25ith the Lease Transactions i. s her ein authorized is to allow Arizona Public

26Service Company to perform its obligations and/or exercise its options under

~ . 27the Lease Transactions, which purpose is hereby specifically authorized

Deci sion No..3 /cZ.P

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expenses or to income.

IT IS FURTHER ORDERED that the terms of the Leases and other documents to

be entered into in connection with the Lease Transactions are hereby approved

for the specific purpose of enabling each of the Equity Investors and the

Lessors to qualify for an exemption by the Securities and Exchange Commission

from the Public Utility Holding Company Act of 1935, as amended.

IT IS FURTHER ORDERED tha t Arizona Public Service Company' as sump tion,

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guarantee, and incurrence of evidences of indebtedness as herein authorized

shall be separate and apart from, and not counted against, Arizona Public

Service Company' existing Debt limitation, or against such limitation as itmay be hereafter modified by the Commission, that limitation presently being

12 $ 2,698,917,000, as approved in the Commission's Order in Decision No. 55017

(May 6, 1986) .

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

Transactions will not cause any of the Equity Investors or the Lessors to be.

1'6deemed to be a "public service corporation" subject to the jurisdication,

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

of the Arizona Constitution.

IT IS FURTHER ORDERED that Arizona Public Service Company shall file with

the Commission any and all documents executed pursuant to the authorizations

granted hereinabove (including amendments to such documents executed subsequent

to closing) within five (5) business days of their execution, or with regard to

those documents executed prior to the effective date of this Decision,* within

five (5) business days of such date.

IT IS FURTHER ORDERED that Arizona Public Service Company shall notify the

Commission of any material changes in the terms and conditions of the sale and

leaseback transaction authorized hereinabove as soon as is reasonably possible,

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

IT IS FURTHER ORDERED that this Decision shall become ef fective~

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2immediately.

3BY ORDER OF THE ARIZONA CORPORATION COMMISSION.

6 CHA RMAN COMMISSIONER COMMIS ONER

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IN WITNES S WHEREOF, I, JAME S MATTHEWS,Executive Secretary of the ArizonaCorporation Commission, have hereunto set myhand and caused the official seal of thisCommission to be affixed at the Capitol, inthe City of Phoenix, this~2 dayof 1986.

12 MES MATTH S

ecutive Secretary

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DISSENTTLM/djp

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-13- Deci. sion No. 6 D /KC'

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UNITED STATES OF AMERXCA


In the matter of



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APPLICATION IN RESPECT OFSALE AND LEASEBACK TRANSACTXONS BY

ARXZONA PUBLIC SERVICE COMPANY

ITEM 5

APPLICATION OF PVNGS FUNDING CORPORATION

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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.

Application for an Order UnderSection 6(c) of the Investment Company

Act of 1940 Exempting PVNGS Funding Corp., Inc.from all Provisions of such Act

PVNGS Funding Corp., Inc.(Name of Applicant)

1209 Orange StreetWilmington, Delaware 19801

(Address of Principal Office of Applicant)

May 13, 1986

Please send copies of all communications to:Teresa DavidsonSnell Ec Wilmer

3100 Valley Bank CenterPhoenix, Arizona 85073

(602) 257-7290

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Before the Securities and Exchange Commission

In the Matter of

PVNGS FundiagCorp., Inc.

Application for an -OrderPursuant to Section 6(c)of the Investment CompanyAct of 1940 ExemptingApplicant from All Pro-visions of the Act

The undersigned applicant, PVNGS Funding Corp.,Inc. (the "Applicant" ), hereby applies, pursuant to Section6(c) of the Investment Company Act of 1940 (the "Act"),- foran Order unconditionally exempting it from each and everyprovision of the Act on the ground that such exemption isappropriate in the public interest and consistent with theprotection of investors and the purposes fairly intended bythe policy and provisions of the Act. No form having beenspecifically prescribed for this Application, the Applicantproceeds under Rule 0-2 of the General Rules and Regulationsof the Securities and Exchange Commission (the "Commission" ),under the Act and pursuant to, Release No. IC-14492, datedApril 30, 1985.

I. FACTUAL BASIS OF APPLICATION

The documentation relating to the establishment ofthe Applicant and the structure and documentation of thetransactions for which the Applicant has been formed (ashereinafter described) are not different in any manner mate-rial to the Commission' consideration of this Applicationfrom those presented to the Commission by First PV FundingCorporation in its application for an exemptive order underSection 6(c) of the Act (Application filed on September 20,1985 and amended on November 8 and 20, 1985; Notice: ReleaseNo. 14833; Order dated December 31, 1985: Release No.14880). See also the Application of El Paso Funding Corpora-tion for an Order Pursuant to Section 6(c) of the -Act filedon April 11, 1986.

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

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

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

A. The Applicant and Summary of Transactions

The Applicant is organized under the laws of theState of Delaware and will have nominal paid-in capital. Acopy of its Certificate of Incorporation is included herewithas Exhibit A. The address of the Applicant is CorporationTrust Center, 1209 Orange Street, City of Wilmington, Dela-ware 19801.

All of the shares of Common Stock, $ 1.00 par val-ue, of the Applicant authorized to be issued under the termsof its Certificate of Incorporation will be issued to, and inthe future all outstanding shares of such Common Stock areexpected to be owned by, The Corporation Trust Company, aDelaware corporation, or a company controlled by it ("CT").After such issuance, all of the directors and officers of theApplicant are expected to be officers or other employees ofCT. The Applicant represents that there has been, and under-takes that in the future there will be, no public offering ofthe Applicant's Common Stock or of any other equity securityof the Applicant. The Applicant represents that there is,and in the future there will be, no class of equity securi-ties of the Applicant authorized other than its Common Stock.

The Applicant has been created for the sole purposeof assisting APS in the refinancing, in whole or in part, ofAPS's 29.1% undivided ownership interest in the Palo VerdeNuclear Generating Station ("PVNGS"). PVNGS consists primar-ily of three 1,270 megawatt electric generating units, eachcontaining a pressurized water reactor nuclear steam supplysystem, certain facilities the use of which is common to allthree units, certain related transmission facilities, andpipeline, and of which, the latter three components may ormay not be included in the refinancing. PVNGS is locatedapproximately 55 miles west of downtown Phoenix, Arizona.APS participates in PVNGS with three other investor-ownedutilities -- El Paso (15.8%), Southern 'California EdisonCompany (15.8%) and PNM (10.2%) and three public utilities--Salt River Agricultural Improvement and Power District(17.14%), Southern California Public Power Authority (5.91%),and the Department of Water and Power of the City of Ios

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

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

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

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

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

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

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

B. The Leases

It is expected that the Lessor in each of the Leas-es will be a bank or trust company acting as trustee for oneor more beneficiaries pursuant to a trust agreement (a "TrustAgreement" ) entered into exclusively for the purpose of theparticular lease financing. A portion of the purchase priceof the property owned by the Lessor and leased to the Lesseepursuant to a Lease will be paid by the beneficiaries of thegrantor trust that acts as Lessor as the beneficiaries'qui-ty investment in the property. The balance of the purchaseprice of such property will be borrowed from the Applicant bythe Lessor, which borrowings will be evidenced by one or moreLessor Notes issued by such Lessor pursuant to either a loanand security agreement ("Loan and Security Agreement" ) or atrust indenture and security agreement ("Trust Indenture andSecurity Agreement" ) (in either case a "Lease Indenture" ).It is expected that the Lessor Notes will be issued undercircumstances making such transactions exempt from registra-tion under the Securities Act of 1933, as amended (the "Secu-rities Act") . The Applicant will receive assurances from eachLessor and each beneficiary thereof that at the time the Ap-plicant acquires Lessor Notes issued by such Lessor and solong as the Iessor Notes issued by such Lessor are outstand-ing (a) neither such Lessor nor any beneficiary thereof is orwill be an investment company within the meaning of Section3(a) of the Act or (b) such Lessor and any beneficiary there-of are and will be deemed to be excluded from the definitionof an investment company by virtue of the provisions of Sec-tion 3(b) or Section 3(c) of the Act.

Each Iease will provide for the payment of rentalsand other payments by the Lessee in amounts and at times suf-ficient to provide for the payment and performance of all ofthe obligations of the related Lessor under its Lessor Noteor Notes and its Lease Indenture. Each Lease will be a netlease and the obligations and liabilities of the Lesseethereunder will be required to be absolute and unconditionalwithout any right of counterclaim, setoff, deduction, or

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defense on the part, of the Lessee. Each Lease will include,without limitation, as events of default (a) failure by theLessee to make payments customarily referred to as basicrent, stipulated loss value, or casualty value that are in-tended to be the source of payment of the related LessorNotes, (b) failure by the Lessee to make payments customarilyreferred to as supplemental rent or other payments thereun-

'er,and (c) certa'in bankruptcy-related events involving theLessee.

Under each Lease, the Lessee will be obligated tomake rental payments sufficient to pay the principal of, thepremium, if any, and the interest on the Lessor Notes issuedin connection therewith and such rental payments are alsoanticipated to provide an investment return to the benefi-ciaries of the Lessor which provide equity financing for theproperty that is the subject of such Lease.

C. The Lease Indentures and the Lessor Notes

Lessor Notes 'will be issued by the applicable Les-sor under and pursuant to the terms of separate but substan-tially identical Lease Indentures with the Applicant beingthe secured party thereunder if such Lease Indentures areLoan and Security Agreements or with a bank or trust companyacting as trustee for the holder of the Lessor Notes issuedthereunder if such Lease Indentures are Trust Indentures andSecurity Agreements. Each Lease Indenture will require theLessor to grant to the Applicant or the trustee under theLease Indenture, as the case may be, an assignment of rents,including basic rentals and certain other payments, to bemade by the Lessee under the applicable Lease. The Applicantor the trustee under the Iease Indenture may have a lien onor security interest in the property which is the subject ofthe Lease (the "Leased Property" ). In the event that no suchlien or security interest is created or granted the Lessorwill covenant that, so long as any Iessor Note is outstand-ing, it will not create or permit the creation of a lien onor otherwise encumber its interest in the Leased Property(except for certain permitted encumbrances) ~ The Applicantwill be precluded from purchasing any Lessor Note unless (i)such Lessor Note is issued in respect of Leased Property hav-ing a fair market sales value at the time of purchase atleast equal to 110% of the original principal amount of suchLessor Note or (ii) such Lessor Note and all other LessorNotes (if any) of the relevant Iessor are issued in respectof Leased Property having an aggregate fair market value(measured, in each case, as of the date such Leased Propertywas first financed under the Lease) at least equal to 110% ofthe original principal amount of such Lessor Note and suchother Lessor Notes. For example, if the initial financing

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under a particular Lease involved $ 100 million of LeasedProperty and the issuance of $ 85 million in Iessor Notes(117.6% coverage of the Lessor Notes by Leased Property) andone year later $ 10 million in capital improvements were to befinanced under such Lease, the entire $ 10 million could

be'inancedwith Lessor Notes and Debt Securities in accordancewith clause (ii) of the preceding sentence because the re-sulting percentage overall would be 115.8% ($ 95 million inLessor Notes- secured by $ 110 million in Leased Property).Each Lease Indenture will include as events of default, with-out limitation, payment defaults on the Lessor Notes issuedthereunder and events of default under the related Lease.

The aggregate of the principal amount of all LessorNotes issued pursuant to all Lease Indentures will be re-quired to be equal to the sum of the aggregate principalamount of the related Debt Securities issued to fund theloans evidenced by such Lessor Notes. The interest payablewith respect to each Lessor Note will be the related Lessor'sshare of the Applicant's "Cost of Money" as of any interestpayment date for such Lessor Notch The Applicant's "Cost ofMoney" in respect of any period will be equal to the totalinterest and other costs and expenses which the Applicant hasincurred or accrued with respect to the Debt Securities andits obligations incurred in the performance of its agreementsunder the Lease Indenture, reduced by any income which it hasreceived or expects to receive on or prior to the next suc-ceeding payment on the Debt Securities and not expended as ofsuch date resulting from the temporary investment of paymentsmade in respect of Lessor Notes prior to the date on whichpayments are required in respect of Debt Securities.

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

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

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purchased with the proceeds of such Note, the Lessor willcovenant that (i) it will not incur any other debt not con-stituting Lessor Notes or otherwise in connection with theLeased Property and (ii) except for certain limited permittedliens, it will not create any lien on or security interest insuch property. These two covenants, taken together, willinsure that, upon a default by the*Lessor on its Lessor Note,the Leased Property will be available to satisfy the claimsof the Collateral Trust Trustee as pledgee of the'essorNotes. The most significant difference under this structureis that, in order to receive the value of the Leased Proper-ty, the Collateral Trust Trustee would first have to causethe obligation on the Lessor Notes to be reduced to judgmentand thereafter seek execution of such judgment, rather thanproceeding directly against the Leased Property.

D. Debt SecuritiesThe various series of Debt Securities will have

terms which may differ as to maturity dates, interest rates,sinking fund obligations of the Applicant, the right of theApplicant to redeem such Debt Securities, and other matters.Such Debt Securities, which may include commercial paper andintermediate-term and long-term obligations, may be issued inthe private or public markets in the United States, and inofferings outside the United States under circumstances re-sonably designed to assure that such Debt Securities are notoffered or sold to citizens and/or residents of the UnitedStates. Individual series of Debt Securities may be supportedby bank letters of credit, bank lines of credit, bonds of in-surance or other credit or liquidity support facilities. Theterms and manner of offering of Debt Securities of a particularseries will be determined by prevailing market conditions. Theterms of the Lessor Notes held or to be acquired by the Ap-plicant with the proceeds of such Debt Securities will re-flect the terms of such Debt Securities, although there willbe no requirement that the scheduled payment dates on theDebt Securities match the payment dates on the Lessor Notes.In addition, the Applicant may engage in interest rate swapswith respect to one or more series or maturities of DebtSecurities.

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

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applicable to a particular issuance of Debt Securities, APSwill file a registration statement under the Securities Actcovering such Debt Securities.

The Applicant proposes that the initial issuance ofDebt Securities will be through an underwritten public offer-ing or private placement of one or more series having an ag-gregate* principal amount of approximately $ 1.1 billion(assuming a total sales price for APS'9.1% interest inPVNGS Unit 2 and the common facilities of $ 1.3 billion, how-ever, such amount may vary according to market conditions).The initial series of Debt Securities may be registered underthe Securities Act, and it is expected that the CollateralTrust Indenture will be qualified under the Trust IndentureAct of 1939, as amended (the "1939 Act"). Although APS willnot be the actual obligor of the Debt Securities, it will beconsidered the issuer thereof for purposes of the SecuritiesAct and the obligor with respect thereto for purposes of the1939 Act. Any registration statement filed under the Securi-ties Act relating to the Debt Securities will name APS as thesole registrant and will be signed on behalf of APS, as thesole registrant, by such officers and directors of APS as maybe required under the Securities Act and the rules, regula-tions and forms of the Commission thereunder, all in accor-dance with such practice and procedures as the Commissionshall from time to time require or permit. The net proceedsto the Applicant from the initial issuance of Debt Securitieswill be used by the Applicant principally to purchase LessorNotes issued by the Lessors in connection with the currentlycontemplated leveraged lease financings of PVNGS Unit 2.

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

As security for the due and punctual payment, of theprincipal of, premium, if any, and interest on all Debt Secu-rities, the Applicant will assign and pledge to the Trusteeunder the Collateral Trust Indenture, as security for theequal and ratable benefit of the holders from time to time ofall Debt Securities, the Lessor Notes and any other assetsheld by the Applicant. Each such Lessor Note will in turn besecured by a security interest in the related Lease and anassignment of rentals arising under the related Lease and maybe secured by the Leased Property thereunder.

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Except to the extent payable from the proceeds ofrefunding Debt Securities, the proceeds of Temporary Holdings(defined below) or the proceeds of the initial issuance ofDebt Securities where the relevant closing date for a lever-aged lease financing transaction (the "Lease Closing Date )does not occur as described below, due to the nonrecoursenature of the Lessor Notes and the limited scope of the Ap-plicant's activities, payment of the principal of, premium,if any, and interest on the .Debt Securities will be made ex-clusively from amounts paid by the Lessee under the Leases.

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

(i) direct obligations of the UnitedStates of America, or (ii) obligations.fully guaranteed by the United States ofAmerica, or (iii) certificates of depositissued by, or bankers'cceptances of, ortime deposits with, any bank, trust com-pany or national banking association in-corporated or doing business under thelaws of the United States of America orone of the States thereof (but not ex-ceeding $ 15,000,000 in principal amount

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or in deposits at any given time for anyone bank, trust company or national bank-ing association) having a combined capi-tal and surplus of at least $ 300,000,000(including the Trustee, a trustee underany Lease Indenture, a Lessor and anypaying agent if such conditions are met),or (iv) commercial paper of companiesincorporated or doing business under thelaws of the United States of America orone of the States thereof (but not ex-ceeding $ 15,000,000 in principal amountat any given time for any one company)and in each case having a rating assignedto such commercial paper by Standard &Poor's Corporation or Moody's InvestorsService, Inc. (or, if neither such organ-ization shall rate such commercial paperat any time, by any nationally recognizedrating organization in the United Statesof America) equal to the highest ratingassigned by such organization, or (v)repurchase agreements fully collateral-ized by an obligation of the type de-scribed in clauses (i) through (iv)above, pursuant to which a bank, trustcompany or national banking associationreferred to in clause (iii) above or an-other financial institution having a networth of at least $ 200,000,000 is obli-gated to repurchase any such obligationnot later than 90 days after the purchaseof any such obligation.Temporary Funds of the Applicant may also be usedto acquire all or a portion of the Debt Securities of anyseries in order to meet required sinking fund redemptions.

During any fiscal year of the Applicant, the average of thedaily balance of the amount of the Temporary Holdings plusthe amount of Temporary Funds will not exceed ten percent ofthe average of the daily balance of the aggregate principalamount of the Debt Securities outstanding during. such fiscalyear. Temporary Funds and Temporary Holdings arising in con-nection with the issuance of Debt Securities prior to theacquisition of the related Iessor Notes as described in thepreceding paragraph are to be disregarded for purposes ofthis ten percent limitation.

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

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

If Debt Securities have been sold in advance of theLease Closing Date for the property financed thereby, then,pending the Lease Closing Date, such Debt Securities, and anyother Debt Securities theretofore issued, will be secured by(i) the pioceeds of the sale of such Debt Securities, (ii)Temporary Holdings and Temporary Funds, if any, (iii) Lessor"Notes previously pledged to the Trustee under the CollateralTrust Indenture and (iv) with respect to the new series ofDebt Securities only, an obligation of the Lessee which willexpire on the related Lease Closing Date and which will 'pro-vide for the payment of amounts sufficient for the payment ofsuch series of Debt Securities. On the applicable LeaseClosing Date, APS will pay to the Trustee an amount equal tothe difference between (i) the interest accrued on the newseries of Debt Securities from the date of issuance to suchLease Closing Date and (ii) the income derived from TemporaryHoldings, if any, through such Lease Closing Date. In theevent that the Lease Closing Date does not occur by the datewhich is two months from issuance of such new series of DebtSecurities, APS may at any time (but must by the date whichis three months after the expiration of such two month peri-od) cause (and, if necessary, provide funds necessary for)the redemption of all Debt Securities of such series only.

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

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E. Interrelation of the Lease Indentures and theCollateral Trust Indenture for the Protectionof Holders of Debt Securities.

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

To the extent that the Trustee under the CollateralTrust Indenture has the right to exercise any voting powersin respect of the- Lessor Notes, to give any consents or waiv-ers with respect thereto, or to exercise any rights or reme-dies in respect thereof, the Trustee will be obligated togive immediate notice of such fact to the holders of the DebtSecurities. The Collateral Trust Indenture under which theDebt Securities will be issued will authorize the holders ofDebt Securities to direct by notice to the Trustee within aspecific period of time that it take any action or cast anyvote in its capacity as the holder of the Lessor Notes. As aresult of this pass-through voting mechanism, the rights andremedies of the holders of the Lessor Notes will be exercis-able directly by the holders of Debt Securities through theirfiduciary, the Trustee. The principal amount of the LessorNotes directing any action or being voted for or against anyproposal will be the principal amount of the Debt Securitiestaking the corresponding position. To the extent that theTrustee has not received any such instructions it would berequired to take such action with respect to the Lessor Notesas a prudent man would take in respect of his own property.

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

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

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

Based on the foregoing and the other informationincluded in this Application, the Applicant believes that thecombination of the Lessor Notes and the Leases ultimatelyconstitutes an obligation of APS with respect to the debtservice on the Debt Securities and serves as a functionalequivalent of a guaranty by APS. In light of the nature ofAPS'bligations in this financing and the remedies availableto the holders of Debt Securities, it is appropriate to viewthe Debt Securities as essentially the debt of APS for pur-poses of the Act.

II. ORDER REQUESTED

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

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

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III. REASONS FOR GRANTING THE ORDERREQUESTED

Subsection 6(c) of the Act provides that the Com-mission upon application may by order conditionally or uncon-ditionally exempt any person from the provisions of the Actif the exemption would be (i) either necessary or appropriatein the public interest; (ii) consistent with the protectionof investors; and (iii) consistent with the purposes fairlyintended by the policy and provisions of the Act. On thebasis of the facts stated in this Application and the reasonsset forth below, Applicant believes that the exemption re-quested in this Application would fulfilleach of these threeconditions.

Because the Applicant will not be engaged in thebusiness of issuing "redeemable securities", "face-amountcertifica'tes of the installment type" or "periodic paymentplan certificates" (as such terms are defined in the Act) andwill be'rimarily engaged in purchasing the Lessor Noteswhich will represent a portion of the sales price of theproperty leased to the Lessee under the Leases, pursuant tothe provisions of Section 3(c)(5) of the Act the Applicantwould appear to be excluded from the definition of investmentcompany. The activities of the Applicant are essentiallythose of a special purpose finance company which will advancefunds to, or acquire notes of, the purchasers of propertyconstituting merchandise, or which will purchase or otherwiseacquire mortgages and other liens on and interests in realproperty, which merchandise and real property are to beleased to the Lessee by such purchasers. The Lessor Noteswill represent loans to the Lessors, as purchasers, incurredto finance a portion of the purchase price of such property.Notwithstanding the exemption provided by Section 3(c)(5) ofthe Act, because of the complexity of the structure of theproposed issuance of the Applicant's Debt Securities and inorder to eliminate any uncertainty as to the status of theApplicant as an investment company under the Act, it seeks anexemption from all of the provisions of the Act pursuant toSection 6(c) thereof.

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

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A. Order is Necessary or Appropriate in the Pub-lic Interest and Consistent with the PurposesFairly Intended by the Policy and Provisionsof the Act

The business in which the Applicant proposes toengage is not of the type intended to be regulated by theAct. The activities of the Applicant are similar to those ofcertain finance subsidiaries which the Commission has exempt-ed from the Act under Rule 3a-5 promulgated pursuant to theAct. 'lthough the Applicant is not a subsidiary of, or inany way affiliated with, APS or any of its subsidiaries andthe Applicant's Debt Securities will not be guaranteed by APSor any of its subsidiaries, as a special purpose corporationengaged only in the business of the issuance of the Debt Se-curities, the Applicant and its activity come within the gen-eral policies expressed in Rule 3a-5. APS is obligated tomake payments under the respective "come hell or high water"Leases. Although these Lease obligations are technically nota guarantee of the Debt Securities, the flow-through of suchobligations under the related Lessor Notes and ultimately theDebt Securities makes such Lease obligations the functionalequivalent of a guaranty by APS. The Leases, pursuant towhich rental payments by APS will be applied to payment ofthe Lessor Notes and ultimately to payment of the Applicant'sDebt Securities, provide the mechanism by means of whichholders of the Applicant's Debt, Securities will look to APSfor their assurance of repayment.

The grant to the Applicant of an exemption from allof the provisions of the Act is appropriate in the publicinterest. Leveraged leases are a widely accepted form of fi-nancing designed to provide business, financial, and otherbenefits to the lessees, lessors, and lenders involved. Suchtransactions provide companies such as'PS with a financiallyfavorable method of acquiring the use of capital assets nec-essary to conduct their. businesses. Heretofore, parties toleveraged lease financings have faced a limited source ofdebt financing for the purchase of leased property, particu-larly when the term of -the debt is in excess of 20 years.Such financing has been obtainable almost exclusively fromthe institutional private placement market. As -a conse-quence, lessees, whose rental payments must be sufficient toservice the debt incurred by their lessors in connection withsuch financings, have been generally confined to structuringtheir financing transactions on the basis of the terms of-fered by the institutional private placement market. Theproposed issuance of the Applicant's Debt Securities wouldprovide a convenient mechanism for APS to obtain the benefitsof access to public as well as other segments of the debtcapital markets.

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B. Order is Consistent with the Protection ofInvestors

The grant to the Applicant of an exemption from allof the provisions of 'the Act would also be consistent withthe protection of investors and the purposes intended by thepolicy and provisions of the Act. The Applicant's operationsdo not lend themselves to the abuses against which the Actwas directed--excessive management and brokerage fees, insid-er loans at highly favorable terms, investments in companiesin which the managers of the investment company have a per-sonal interest, pyramiding of control, issuances of new secu-rities, reorganizations, and excessive borrowings inderogation of the rights of holders of existing securities,and operation without adequate assets or reserves. Becauseall of the securities issued by the Applicant, other than itsoutstanding Common Stock, 'will be pari passu secured debtsecurities, none of the inherent conflicts between holders ofdifferent classes of securities will exist. The debt securi-ties will not be redeemable at the option of the holder at aprice based on the net asset value of the Applicant. Valua-tion questions and similar problems raised by such redeemablesecurities will not be present in respect of the Applicant'sDebt Securities.

Similarly, the Applicant will not purchase or holdsecurities of other investment companies so there will be nopyramiding of control of investment companies or other ineq-uitable methods of control. The financial statements of theApplicant will be reported on by independent auditors. Inthe case of the Applicant's Debt Securities which may be pub-licly offered in the United States, disclosure with respect.to the Applicant, the terms of such securities, the securitytherefor, and the underlying arrangements with the Lessorsand with APS pursuant to the Leases will be made in a pro-spectus forming part of a registration statement that willhave been declared effective under the Securities Act.

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

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

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Securities through the Trustee's instructions to the trusteesunder the Lease Indentures or as pledges of the Applicant'sinterest in the Lease Indentures. Purchasers of the Debt Se-curities will enjoy comparable assurances that the principal.of, premium, if any, and interest on these obligations willbe paid when due as purchasers of similar obligations issueddirectly by APS would have. Because investors will be wellprotected under the proposed arrangements which are indepen-dent of the applicability of the Act, the protection of in-vestors does not require subjecting the Applicant to the Actand, accordingly, it is appropriate for the Applicant to beexempted from the Act.

CONCLUSION

The Applicant's proposed activities are necessaryor appropriate in the public interest and are consistent withthe protection of investors and the purposes of the Act.Denial of this Application would advance no interests soughtto be achieved by the Act.

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

AUTHORIZATION REQUIRED BY RULE 0-2 UNDER THE ACT

Section 141(a) of the General Corporation Law ofthe State of Delaware provides in pertinent part that:

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

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

"The business and affairs of the Corpora-tion shall be managed by or under thedirection of the Board of Directors."The Board of'irectors of the Applicant duly adopt-

ed on May 13, 1986 the following resolution authorizing thefiling of this Application:

"RESOLVED, that the President, any VicePresident or the Secretary of the

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Corporation and any Assistant Treasureror Assistant Secretary -and each herebyis, authorized to take any action whichsuch officer seems necessary or desirableon behalf of the Corporation in connec-tion with an application to be filed withthe Securities and Exchange Commissionfor an Order under Section 6(c) of theInvestment Company Act of 1940 exemptingthe Corporation from each and every pro-vision of said Act including, withoutlimiting the generality of the foregoing,full power and authority to execute anddeliver applications and documents, andany amendments thereto, and to make per-sonal appearance for and on behalf of theCorporation in connection therewith."

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

Pursuant to Rule 0-2(g) of the General Rules andRegulations of the Commission under the Act, the Applicantattaches hereto as Exhibit B a proposed Notice of ApplicationFor an Order Pursuant to Section 6(c) of the Act ExemptingApplicant From All Provisions of the Act.

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. ZV. COMMUNICATIONS

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

Dated: May 13, 1986

Teresa DavidsonSnell 6 Wilmer3100 Valley Bank CenterPhoenix, Arizona 8S073{602) 2S7»7290

PVNGS FUNDING CORP.g INCA

BySecretary

STATE OF DE~K )) ss.

MW CASILE COUNTY )

The undersigned, being duLy sworn deposes and saysthat he has duly executed the attached Application dated May13, 1986, for and on behalf of PVNGS FUNDING CORP., INC., thathe is Secretary. of such company; and that all actions by stock-holders, directors, and other bodies necessary to authorizedeponent to execute and file such instrument has been taken.Deponent further states that he is familiar with such instrument,and the contents thereof, and that the facts set forth thereinare true to the best of his knowledge, information, and belief.

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

PublicNo

[Notary Seal]

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CERTIFICATE OF INCORPORATIONOF

PVNGS FUNDING CORP., INC.

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

PVNGS Funding Corp., Inc.

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

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

(1) To lend funds on a non-recourse basis toeach Owner Trust or corporation acting as lessor on one ormore leveraged lease transactions in which Arizona PublicService Company, an Arizona corporation (APS), acts as lesseeand which relates to any portion of APS's 29.1% undividedownership interest in each of three 1,270 megawatt electricgenerating units, each containing a pressurized water reactornuclear steam supply system, certain facilities the use ofwhich is common to all such units, and certain related trans-mission facilities and pipeline, such units, facilities,transmission facilities and pipelines being known variouslyas Palo Verde Nuclear Generating Station and Arizona NuclearPower Project in commercial operation or under constructionat a site located approximately 55 miles west of downtownPhoenix, Arizona, and to acquire, own, hold, sell, transfer,assign, pledge, finance, exercise any and all rights withrespect to and otherwise deal with such loans, including ex-ercising all rights and remedies upon the occurrence of adefault with respect to any thereof, such rights and remediesto include the foreclosure upon or other acquisition of thecollateral securing such loans.

(2) To authorize, issue, sell and delivernotes, bonds or other evidences of indebtedness (or warrants,options or other rights to purchase any such bonds, notes orother evidences of'ndebtedness) other than "redeemable secu-rities" (as that term is defined in the Investment CompanyAct of 1940, as amended) in order to provide funds for thepurpose described in clause (1) of this Article THIRD; and

(3) To engage in any activity permitted tocorporations under the laws of the State of Delaware, butonly to the extent that such activities are incidental to any

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

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

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

SIXTH: Notwithstanding any other provision of thisCertificate and any provision of law that may otherwise soempower the Corporation, the Corporation shall not, withoutthe prior written consent of each trustee from time to timeunder any'ndenture pursuant to which the Corporation shallissue and have outstanding notes, bonds or other evidences ofindebtedness (which consent must be given in accordance withthe terms of the applicable indenture), do any of thefollowing:

part;(1) Dissolve or liquidate, in whole or in

(2) Merge into or consolidate with, or sellall of any part of its assets to, any person, firm, corpora-tion, partnership or other entity unless, in the case of amerger or consolidation, the surviving corporation in suchmerger or the'orporation resulting from such consolidationshall have a certificate of incorporation containing provi-sions identical to the provisions of Article THIRD and thisArticle SIXTH and, in the case of a sale of assets, the. ac-quiring corporation shall have assumed all of the liabilitiesand obligations of the Corporation and shall have a certifi-cate of incorporation containing provisions identical to theprovisions of Article THIRD and this Article SIXTH, providedthat nothing herein contained shall prevent or restrict inany manner the Corporation from assigning or pledging itsassets to secure its outstanding indebtedness;

(3) Declare or pay any dividend on any of theCorporation's stock; or

(4) Amend this Certificate to alter in anymanner or to delete Article THIRD or this Article SIXTH.

SEVENTH: Subject to the limitation provided inArticle SIXTH of this Certificate, the Corporation reservesthe right to amend the provisions contained in this

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Certificate and in any certificate amendatory hereof in themanner now or hereafter prescribed by law, and all rightsconferred on stockholders or other hereunder of thereunderare granted subject to such reservation.

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

/s/ J. A. BarberaJ. A. Barbera

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BEFORE THE

SECURITIES AND EXCHANGE COMMISSION

INVESTMENT COMPANY ACT OF 1940

Release No. 1986

In the Matter of

PVNGS FUNDING CORP., INC.

(File No. 812-

NOTICE OF APPLICATION FOR AN ORDER PURSUANT TOSECTION 6(c) OF THE ACT FOR EXEMPTION FROM ALLPROVISIONS OF THE ACT

NOTICE IS HEREBY GIVEN that, PVNGS Funding Corp.,Inc. (Applicant), a Delaware corporation, filed an applica-tion on May 16, 1986, for an order of the Commission pursuantto Section 6(c) of the Investment Company Act of 1940 (the"Act"), exempting Applicant from all provisions of the Act.All interested persons are referred to the application onfile with the Commission for a statement of the representa-tions made therein, which are summarized below, and to theAct for the text of its relevant provisions.

According to the application, Applicant is a Delawarecorporation and expects to have all of its shares of commonstock owned by The Corporation Trust Company, or a companycontrolled by it. Applicant represents that there has been,and undertakes that in the future there will be, no publicoffering or Applicant's common stock or of any other equitysecurity. Applicant further represents that there is, and inthe future will be, no class of equity securities of Appli-cant other than its common stock. Applicant has been createdto participate as lender in one or more leveraged leasetransactions. ("Leases" ), in which Arizona Public ServiceCompany, an Arizona corporation ("APS"), is the lessee("Lessee" ).

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Applicant's sole purpose is to assist APS in thefinancing and refinancing, in whole or in part, of APS's29.1% undivided ownership interest in the Palo Verde NuclearGenerating Station ('PVNGS'). PVNGS, located near Phoenix,Arizona, consists primarily of three 1,270 megawatt electricgenerating units, e'ach containing a pressurized water nuclearsteam supply system, certain related common facilities, cer-tain transmission facilities, and pipeline, and of which, thelatter three components may or may not be included in suchfinancings. Ownership of PVNGS is governed by the ArizonaNuclear Power Project Participation Agreement, dated August23, 1973, as amended, and pursuant thereto, Arizona PublicService Company, an Arizona utility, is authorized to act asagent for the owners of PVNGS, and has responsibility andcontrol over construction, operation and maintenance ofPVNGS.

'pplicant states that its participation as lenderin the Leases will be limited to making loans pursuant to aloan and security agreement ("Loan and Security Agreement,")or a trust indenture and security agreement ("Trust Indentureand Security Agreement" ) (in either case, a "Lease Inden-ture") to certain lessors ("Lessors" ) under such Leases whichwill be payable primarily from rentals and other payments bythe Lessee. Applicant expects that the Lessors will be abank or trust company acting as trustee for one or more bene-ficiaries pursuant to a trust agreement, formed exclusivelyfor the purpose of the lease financing. Applicant statesthat a portion of the purchase price of the property owned bythe Lessors and leased to the Lessee ("Leased Property" ) willbe paid by the beneficiaries of the grantor trust that actsas Lessor and that amount will constitute their equity in-vestment in the Leased Property. The loans by Applicant willbe without recourse to the general credit of the Iessors oftheir respective beneficiaries, and will be evidenced by non-recourse obligations or the respective Lessors ("LessorNotes" ). Applicant states that under each Lease, the Lesseewill be obligated to make rental payments sufficient to payprincipal of and premiums, if any, and interest on the Lessornotes issued in connection therewith. Applicant furtherstates that such obligations or the Lessee will be requiredto be absolute and unconditional, without right .of counter-claim, setoff, deduction or defenses Applicant expects toenter into'n agreement (the "Commitment Agreement" ) with APSpursuant to which Applicant will agree to make loans to oneor more Lessors designated by APS from time to time.

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

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

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

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

Applicant states that the Lease Indentures will set,forth the terms and conditions under which the Lessor Noteswill be issued. Applicant represents that each Lease Inden-ture will require the Lessor to grant to the Applicant (ifthe Lease Indenture is a Loan and Security Agreement) or (atrustee under the Lease Indenture ("Lease Indenture Trustee" )if the Lease Indenture is a Trustee Indenture and SecurityAgreement), an assignment of rents, including basic rentalsand certain other payments, to be made by the Lessee underthe applicable Lease. The Lease Indenture Trustee or theApplicant may have a lien on or security interest in, theLeased Property. In the event no such lien or security in-terest is created, the Lessor will covenant that, so long asany Lessor Note is outstanding, it will not incur any otherdebt constituting Lessor Notes or otherwise in connectionwith the Leased Property, and except for certain limited per-mitted liens, it will not create any lien or security inter-est in such property. Thus, Applicant states, these twocovenants combined ensure that if a Lessor defaults on a Les-sor Note, the Leased Property will be available to satisfythe claims or the Trustee, acting for the benefit of 'holdersof Debt securities. Applicant states that it will beprecluded from purchasing any Lessor Note unless (i) suchLessor Note is issued in respect of Leased Property having afair market sales value at the time of purchase at leastequal to 110% of the original principal amount of such Lessor

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

According to the Application, the various series ofDebt Securities will have terms which may differ as to inter-est rates, sinking fund obligations of Applicant, the rightof Applicant to redeem such Debt Securities, and other mat-ters. The interest rates, maturities and principal amountsof each series of Debt Securities will be established basedon prevailing market conditions, thereby giving Applicantflexibility to take advantage of changing market conditions.If the maturity dates and cash flow of the Lessor Notes ex-ceed the cash requirements of Applicant's obligations underthe Debt Securities, the resulting funds (-"Temporary Funds" )will be invested by Applicant in certain investments ('ermit-ted Investments"~, in each case maturing at such time as nec-essary to pay Applicant's obligations under the DebtSecurities. Applicant states that Debt Securities, which mayinclude commercial paper and intermediate-term and long-termobligations, will be issued in the private or public marketsin the United States,'nd in offerings outside the UnitedStates under circumstances reasonably designed to assure thatsuch Debt Securities are not offered or sold to citizensand/or residents of the United States.

Applicant proposes that the initial issuance ofDebt Securities willibe through an underwritten public offer-ing or private placement of one or more series having an ag-gregate principal amount of approximately $ 1.1 billion(assuming a total sales price for APS's 29.1% interest inPVNGS Unit 2 and the common facilities of $ 1.3 billion).Applicant represents that, although APS will not be the actu-al issuer of the Debt Securities, it will be considered the"issuer" thereof for purposes of the Securities Act. Anyregistration statement filed under the Securities Act relat-ing to the Debt Securities will name APS as the sole regis-trant and will be signed on behalf of APS as the soleregistrant by such officers and directors of APS as may berequired under the Securities Act and the rules, regulationsand forms of the Commission thereunder.

Applicant represents that it will assign and pledgeto the Trustee under the Collateral Trust Indenture, as

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security for the payment of the principal of and premium, ifany, and interest on all Debt Securities, the Lessor Notesand other assets held by the Applicant including any lien orsecurity interest it may have in the Leased Property. Eachsuch Lessor Note will. in turn be secured by the assigned ren-tals and other assigned payments under such Lease and may besecured by a lien or security interest in the Leased Proper-ty. Applicant states that the Trustee will give immediatenotice to the Debt Securities holders of any rights grantedby the Collateral Trust Indenture to it, which will includethe right to exercise voting powers in respect of the LessorNotes, to give any consents or waivers with respect theretoor to exercise any rights and remedies in respect thereof.The Collateral Trust Indenture will authorize the Debt Secu-rities holders to direct by notice to the Trustee within aspecific period of time, that it take any action or cast anyvote in its capacity as a holder of the Lessor, Notes. As aresult of this pass-through voting mechanism, the rights andremedies of Lessor Noteholders will be exercisable directlyby the Debt Securities holders through their fiduciary, theTrustee. The principal amount of Lessor Notes directing anyaction or being voted for or against any proposal will be theprincipal amount of the Debt Securities holders taking thecorresponding position. To the extent the Trustee does re-ceive instruction, it will take such action with respect tothe Lessor Notes as a prudent man would in the care of hisown pr'operty.

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

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

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Indenture and the Lease Indentures to the credit of APS.Moreover, Applicant asserts that holders of the Debt Securi-ties will be entitled to realize on the security afforded bythe assignment of rentals to realize to the aggregate unpaidamount of the relevant Lessor Notes and. the obligation of APSunder the Leases, Applicant asserts, grants holders of DebtSecurities access to'he general credit of APS and is thusthe equivalent of a general unsecured obligation of APS with-out limitation as to source of payment. The Lessor Notes andthe Lease Indenture will provide that, upon the occurrence ofcertain casualty events, and certain other events which re-quire the collapsing of the lease transaction, either (i) APSshall assume the obligations represented by the Lessor Notesor (ii) APS shall purchase from the beneficiaries or thetrusts issuing the Lessor Notes the beneficial interest insuch trusts and the Lessors will grant a lien and securityinterest in the Leased Property to secure the Lessor Notes.The assumption'r purchase described in the preceding sen-tence will be in partial satisfaction of APS's obligation tomake payments required of it upon early termination of theLeases in consequence of any such event. Applicant assertsthat in circumstances where the Lessor Notes are not securedby the Leased Property, there will be no need to prepay theLessor Notes in the event of a casualty. The preservation ofa right for APS to assume the Lessor Notes in certain circum-stances assure that APS will not be faced with an acceleratedobligation to prepay the Lessor Notes under the provisions ofthe Leases.

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

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

Except to the extent payable from the proceeds ofrefunding Debt Securities, proceeds of Temporary Investmentsor the proceeds of the initial issuance of the Debt Securi-ties, where the relevant Lease Closing Date does not occursimultaneously, due to the nonrecourse nature of Lessor Notesand the limited scope of Applicant's activities, payment ofthe principal of, premium, if any, and interest on the DebtSecurities will be made exclusively from amounts paid by theLessee under the

Leases'pplicant

asserts that its proposed activities areappropriate in the public interest because the proposed issu-ance of Debt Securities would provide a convenient mechanismfor APS tb obtain access to segments of the debt capital mar-ket other than the institutional private placement market.Applicant further asserts that an exemption would be consis-tent with the protection of investors and the purposes fairlyintended by the policy and provisions of the Act because,among other things, investors will be protected under theproposed arrangements to the same extent as under equivalentarrangements where the Act is inapplicable.

NOTICE IS FURTHER GIVEN that any interested personwishing to request a hearing on the application may, not lat-er than 1986, at 5:30 p.m., do so by submit-ting a written request setting forth the nature of his/herinterest, the reasons 'for the request, and the specific is-sues of fact or law that are disputed, to the Secretary, Se-curities and Exchange of Commission, Washington, D.C. 20549.A copy of the request should be served personally or by mailupon Applicant at the address stated above with a copy toTeresa Davidson, Snell 6 Wilmer, 3100 Valley Bank Center,Phoenix, Arizona 85073. Proof of service (by affidavit or,in the case of an attorney-at-law, by certificate shall befiled with the request. After said date, an order disposingof the application will.be issued unless the Commission or-ders a hearing upon request or upon its own motion.

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

John WheelerSecretary

04TDD1045

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Nuclear Regulatory Commission · I, REGULA'Y INFORf'fATION DISTRIBUTI SYSTEl'1 (R IDS) ACCESSION...

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