SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                -----------------

                                    FORM 10-K
          (Mark One)
          |X|  ANNUAL  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES  EXCHANGE  ACT OF 1934 For the fiscal  year
               ended December 31, 1996
                                             OR
          |_|  TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF
               THE SECURITIES EXCHANGE ACT OF 1934 For the transition
               period from ______ to ______
                          Commission File Number 1-4473
          
               Arizona Public Service Company
             (Exact name of registrant as specified in its charter)
<TABLE>
<S>                                                                            <C>
               ARIZONA                                                                      86-0011170
     (State or other jurisdiction                                              (I.R.S. Employer Identification No.)
  of incorporation or organization)
400 North Fifth Street, P.O. Box 53999
     Phoenix, Arizona 85072-3999                                                          (602) 250-1000
   (Address of principal executive                                                (Registrant's telephone number,
               offices,                                                                including area code)
         including zip code)

------------------------------------------------------------------------------ --------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
                                                                                 Name of each exchange on
                  Title of each class                                                which registered
------------------------------------------------------------------------------ --------------------------------------
     Adjustable Rate Cumulative Preferred Stock,
       Series Q, $100 Par Value..............................................     New York Stock Exchange

     $1.8125 Cumulative Preferred Stock,
       Series W, $25 Par Value...............................................     New York Stock Exchange

     10% Junior Subordinated Deferrable Interest
       Debentures, Series A, Due 2025........................................     New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
                           Cumulative Preferred Stock
                                (Title of class)
                 (See Note 3 of Notes to Financial Statements in
               Item 8 for dividend rates, series designations (if
                              any), and par values)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X   No
                                             ---

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
<TABLE>
<CAPTION>
                                                                                      Aggregate Market Value
                                                                                      of Voting Stock Held by
                                                                                       Non-affiliates of the
         Title of Each Class                     Shares Outstanding                      registrant as of
           of Voting Stock                     as of February 26, 1997                   February 26, 1997
--------------------------------------- -------------------------------------- --------------------------------------
<S>                                                   <C>                                 <C>            
   Cumulative Preferred Stock........                 4,095,373                           $198,000,000(a)
--------------------------------------- -------------------------------------- --------------------------------------
(a) Computed,  with respect to shares listed on the New York Stock Exchange,  by reference to the closing price on the
composite tape on February 26, 1997, as reported by The Wall Street Journal, and with respect to non-listed shares, by
determining  the yield on listed shares and assuming a market value for  non-listed  shares which would result in that
same yield.

As of February 26, 1997, there were issued and outstanding  71,264,947 shares of the registrant's  common stock, $2.50
par value, all of which were held beneficially and of record by Pinnacle West Capital Corporation.

Documents  Incorporated by Reference  Portions of the registrant's  definitive proxy statement  relating to its annual
meeting of shareholders to be held on May 20, 1997, are incorporated by reference into Part III hereof.
</TABLE>
<PAGE>
                                                 TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
<S>       <C>                                                                                           <C>
GLOSSARY      .......................................................................................    1

PART I
     Item 1.  Business...............................................................................    2
     Item 2.  Properties.............................................................................   11
     Item 3.  Legal Proceedings......................................................................   14
     Item 4.  Submission of Matters to a Vote of Security Holders....................................   14
     Supplemental Item.
              Executive Officers of the Registrant...................................................   15

PART II
     Item 5.  Market for Registrant's Common Stock and Related Security Holder Matters...............   16
     Item 6.  Selected Financial Data................................................................   17
     Item 7.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations..............................................................   18
     Item 8.  Financial Statements and Supplementary Data............................................   21
     Item 9.  Changes In and Disagreements with Accountants on Accounting
              and Financial Disclosure...............................................................   46

PART III
     Item 10. Directors and Executive Officers of the Registrant.....................................   46
     Item 11. Executive Compensation.................................................................   46
     Item 12. Security Ownership of Certain Beneficial Owners and Management.........................   46
     Item 13. Certain Relationships and Related Transactions.........................................   46

PART IV
     Item 14. Exhibits, Financial Statements, Financial Statement Schedules,
              and Reports on Form 8-K................................................................   47

SIGNATURES    ..........................................................................................65
</TABLE>
                                        i
<PAGE>
                                    GLOSSARY

ACC --- Arizona Corporation Commission

ACC Staff --- Staff of the Arizona Corporation Commission

AFUDC --- Allowance for Funds Used During Construction

Amendments --- Clean Air Act Amendments of 1990

ANPP --- Arizona Nuclear Power Project, also known as Palo Verde

APB Opinion No. 25 --- Accounting Principles Board Opinion No. 25, "Accounting 
for Stock Issued to Employees"

APS --- Arizona Public Service Company

CC&N --- Certificate of convenience and necessity

Cholla --- Cholla Power Plant

Cholla 4 --- Unit 4 of the Cholla Power Plant

Company --- Arizona Public Service Company

CUC --- Citizens Utilities Company

DOE --- United States Department of Energy

EPA --- United States Environmental Protection Agency

Energy Act --- National Energy Policy Act of 1992

FASB --- Financial Accounting Standards Board

FERC --- Federal Energy Regulatory Commission

Four Corners --- Four Corners Power Plant

GAAP --- Generally accepted accounting principles

ITC --- Investment tax credit

kW --- Kilowatt, one thousand watts

kWh --- Kilowatt-hour, one thousand watts per hour

Mortgage --- Mortgage and Deed of Trust, dated as of July 1, 1946, as
supplemented and amended

MWh --- Megawatt hours, one million watts per hour

1935 Act --- Public Utility Holding Company Act of 1935

NGS --- Navajo Generating Station

NRC --- Nuclear Regulatory Commission

PacifiCorp --- An Oregon-based utility company

Palo Verde --- Palo Verde Nuclear Generating Station

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

SEC --- Securities and Exchange Commission

SFAS No. 34 --- Statement of Financial Accounting Standards No. 34, 
"Capitalization of Interest Cost"

SFAS No. 71 --- Statement of Financial Accounting Standards No. 71, 
"Accounting for the Effects of Certain Types of Regulation"

SFAS No. 123 --- Statement of Financial Accounting Standards No. 123, 
"Accounting for Stock-Based Compensation"

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

USEC --- United States Enrichment Corporation

Waste Act --- Nuclear Waste Policy Act of 1982, as amended
                                       1
<PAGE>
                                     PART I

                                ITEM 1. BUSINESS

The Company

     The  Company  was  incorporated  in 1920 under the laws of  Arizona  and is
engaged  principally  in  serving  electricity  in the  State  of  Arizona.  The
principal  executive  offices of the  Company  are  located  at 400 North  Fifth
Street, Phoenix, Arizona 85004 (telephone 602-250-1000).  Pinnacle West owns all
of the outstanding shares of the Company's common stock.

     The Company is Arizona's largest electric utility, with 738,000  customers,
and provides wholesale or retail electric service to the entire state of Arizona
with the  exception  of Tucson and about  one-half of the Phoenix  area.  During
1996, no single  purchaser or user of energy accounted for more than 3% of total
electric  revenues.  At December 31, 1996,  the Company  employed  6,365 people,
which includes employees assigned to joint projects where the Company is project
manager.

     This document may contain  "forward-looking  statements" that involve risks
and  uncertainties  which  could  cause  actual  results or  outcomes  to differ
materially  from  those  expressed  in  such  forward-looking   statements.  The
following  factors are among the  factors  that could  cause  actual  results to
differ materially from the forward-looking statements:  regulatory developments;
competitive  developments;  regional economic  conditions;  the cost of debt and
equity  capital;   regulatory,  tax  and  environmental   legislation;   weather
variations  affecting  customer  usage;  and  technological  developments in the
electricity industry. See "Competition" in this Item for a discussion of some of
these factors.  Any forward-looking  statements should be considered in light of
these factors.

Competition

     Retail

     General.  Under current law, the Company is not in direct  competition with
any other  regulated  electric  utility for  electric  service in the  Company's
retail  service  territory.  Nevertheless,  the  Company  is  subject to varying
degrees of competition in certain  territories  adjacent to or within areas that
it serves that are also currently  served by other utilities in its region (such
as Tucson  Electric  Power  Company,  Southwest  Gas  Corporation,  and Citizens
Utility Company) as well as cooperatives,  municipalities,  electrical districts
and similar types of governmental organizations (principally SRP).

     The Company faces competitive  challenges from low-cost hydroelectric power
and natural gas fuel,  as well as the access of some  utilities to  preferential
low-priced  federal  power and other  subsidies.  In addition,  some  customers,
particularly industrial and large commercial,  may own and operate facilities to
generate their own electric energy requirements. Such facilities may be operated
by the customers  themselves or by other entities engaged for such purpose.  The
legislatures and/or the regulatory commissions in most states have considered or
are  considering  "retail  wheeling." This  requirement to transmit  directly to
retail customers could have the result of allowing retail customers to choose to
purchase electric capacity and energy from the electric utility in whose service
area they are located or from other  electric  utilities  or  independent  power
producers or power marketers.

     ACC Rules Regarding Arizona Electric Industry Restructuring.  The ACC Staff
has been  conducting  an ongoing  investigation  into the  restructuring  of the
Arizona electric industry in an open competition  docket involving many parties.
In December  1996,  the ACC adopted rules for  introduction  of retail  electric
competition in Arizona in phases from 1999 through 2003.  The Rules  establish a
framework for introducing competition; however, with respect to certain matters,
they also contain requirements for further workshops and ACC consideration prior
to implementation. Recommendations to the ACC from the workshops are expected in
late 1997.  The Rules  indicate that the ACC will allow  recovery of unmitigated
stranded  costs,  but do  not  set  forth  the  mechanisms  for  determining  or
recovering  such  costs.  The  Company  believes  that  state  legislation  will
ultimately be
                                       2
<PAGE>
required before  significant  implementation of retail electric  competition can
lawfully occur in Arizona. See Note 2 of Notes to Financial Statements in Item 8
for further  discussion of these Rules and of the lawsuits  filed by the Company
challenging certain provisions of the Rules.

     Wholesale

     General.  The Company competes with other utilities,  power marketers,  and
independent  power producers in the sale of electric  capacity and energy in the
wholesale  market.  The Company  expects that  competition to sell capacity will
remain  vigorous,  and that wholesale  prices will remain depressed for at least
the next several years due to increased  competition and surplus capacity in the
western  United  States.  The  Company's  rates for  wholesale  power  sales and
transmission  services  are  subject to  regulation  by the FERC.  During  1996,
approximately 6% of the Company's electric operating revenues resulted from such
sales and charges.

     The  National  Energy  Policy Act of 1992 (the  "Energy  Act") has promoted
increased  competition in the wholesale  electric power markets.  The Energy Act
reformed provisions of the Public Utility Holding Company Act of 1935 (the "1935
Act") and the Federal Power Act to remove certain  barriers to  competition  for
the supply of electricity. For example, the Energy Act permits the FERC to order
transmission  access  for third  parties  to  transmission  facilities  owned by
another entity so that independent suppliers and other third parties can sell at
wholesale  to  customers  wherever  located.  The Energy Act does not,  however,
permit  the FERC to  issue an order  requiring  transmission  access  to  retail
customers.

     Effective  July 9, 1996, a FERC  decision  requires all electric  utilities
subject to the FERC's  jurisdiction to file  transmission  tariffs which provide
competitors   with  access  to   transmission   facilities   comparable  to  the
transmission   owners'  facilities  for  wholesale   transactions,   establishes
information  requirements and provides recovery for certain  wholesale  stranded
costs.   Retail  stranded  costs  resulting  from  a   state-authorized   retail
direct-access program are the responsibility of the states, unless a state lacks
authority to impose rates to recover such costs in which case FERC will consider
doing so. The  Company has filed its revised  open access  tariff in  accordance
with this decision.  The Company does not believe that this decision will have a
material adverse impact on its results of operations or financial position.

     Federal Regulation

     Several  electric  utility  reform  bills have been  introduced  during the
current legislative session,  which as currently written,  would allow consumers
to choose their electric supplier by 2000 or 2003. These bills, other bills that
are expected to be  introduced,  and ongoing  discussions  at the federal  level
suggest  a wide  range of  opinion  that  will need to be  narrowed  before  any
substantial restructuring of the electric utility industry can occur.

     Regulatory Assets

     The  Company's  major  regulatory  assets  are  rate  synchronization  cost
deferrals  and  deferred  taxes.   These  items,   combined  with  miscellaneous
regulatory  assets and liabilities,  amounted to  approximately  $1.1 billion at
December 31, 1996. In accordance  with a 1996 regulatory  agreement  between the
Company and the ACC Staff, the ACC accelerated the amortization of substantially
all of the Company's regulatory assets to an eight-year period beginning July 1,
1996.  The  Company's   existing   regulatory  orders  and  current   regulatory
environment  support its accounting  practices related to regulatory  assets. If
rate recovery of these assets is no longer probable,  whether due to competition
or  regulatory  action,  the  Company  would  no  longer  be able to  apply  the
provisions of SFAS No. 71 to all or some part of its operations which could have
a material impact on the Company's financial  statements.  See Notes 1, 2, and 9
of Notes to Financial Statements in Item 8 for additional information.
                                       3
<PAGE>
     Competitive Strategies

     The Company is pursuing  strategies to maintain and enhance its competitive
position. These strategies include (i) cost management,  with an emphasis on the
reduction of variable costs (fuel, operations,  and maintenance expenses) and on
increased productivity through technological  efficiencies;  (ii) a focus on the
Company's  core  business  through   customer   service,   distribution   system
reliability, business segmentation and the anticipation of market opportunities;
(iii) an  emphasis on good  regulatory  relationships;  (iv) asset  maximization
(e.g., higher capacity factors and lower forced outage rates); (v) strengthening
the Company's  capital structure and financial  condition;  (vi) leveraging core
competencies  into  related  areas,  such  as  energy  management  products  and
services;  and (vii) building a trading floor and implementing a risk management
program to provide  for more  stability  of prices and the  ability to retain or
grow incremental  margin through more  competitive  pricing and risk management.
Underpinning  the  Company's  competitive   strategies  are  the  strong  growth
characteristics  of the  Company's  service  territory.  As  competition  in the
electric  utility  industry  continues to evolve,  the Company will  continue to
pursue strategies to enhance its competitive position.

Generating Fuel and Purchased Power

     Generating Fuel and Purchased Power Costs

     Fuel and purchased power costs were approximately $326 million during 1996,
a 20.7%  increase  over 1995.  See  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations ___ Results of Operations" in Item
7 for a discussion of the factors contributing to this increase.

     1996 Energy Mix

     The Company's sources of energy during 1996 were: purchased  power - 17.1%;
coal - 43.9%; nuclear - 35.4%; and other - 3.6%.

     Generating Fuel Mix

     Coal,  nuclear,  gas and other  contributions  to total net  generation  of
electricity  by the Company in 1996,  1995 and 1994, and the average cost to the
Company of those fuels (in dollars per MWh), were as follows:
<TABLE>
<CAPTION>
                          Coal                 Nuclear                 Gas                  Other          All Fuels
                  -------------------   --------------------   -------------------  -------------------    ---------
                  Percent of  Average   Percent of   Average   Percent of  Average  Percent of  Average     Average
                  Generation    Cost    Generation    Cost     Generation   Cost    Generation    Cost       Cost
                  ----------    ----    ----------    ----     ----------   ----    ----------    ----       ----
<C>                  <C>       <C>         <C>        <C>         <C>      <C>          <C>      <C>        <C>   
1996 (estimate).     52.5%     $14.83      42.7%      $5.20       4.3%     $38.43       0.5%     $11.46     $11.72
1995............     54.7       13.83      40.1        5.21       5.0       19.52       0.2       11.84      10.66
1994............     59.7       13.84      33.8        6.09       6.3       24.64       0.2       16.26      11.90
</TABLE>

     Other includes oil and hydro generation.

     Coal Supply

     The Company believes that Cholla has sufficient reserves of low sulfur coal
committed to that plant for the next four years,  the term of the existing  coal
contract.  Sufficient  reserves  of low sulfur  coal are  available  to continue
operating  Cholla for its useful  life.  The  Company  also  believes  that Four
Corners and NGS have sufficient reserves of low sulfur coal available for use by
those  plants to continue  operating  them for their useful  lives.  The current
sulfur  content  of  coal  being  used  at  Four  Corners,  NGS  and  Cholla  is
approximately 0.73%, 0.60% and 0.44%, respectively. In 1996, average prices paid
for coal supplied from reserves dedicated under the 
                                       4
<PAGE>
existing contracts increased as a result of power market conditions that changed
the mix of coal.  In addition,  major price  adjustments  can occur from time to
time as a result of contract renegotiation.

     NGS and Four Corners are located on the Navajo  Reservation  and held under
easements  granted by the federal  government  as well as leases from the Navajo
Nation.  See  "Properties  ___ Plant Sites Leased from Navajo Nation" in Item 2.
The  Company  purchases  all of the coal which  fuels Four  Corners  from a coal
supplier with a long-term  lease of coal reserves owned by the Navajo Nation and
for NGS from a coal supplier  with a long-term  lease with the Navajo Nation and
the Hopi Tribe. The Company  purchases all of the coal which fuels Cholla from a
coal supplier who mines all of the coal under a long-term lease of coal reserves
owned by the Navajo Nation, the federal government, and private landholders. See
Note 11 of Notes to Financial Statements in Item 8 for information regarding the
Company's obligation for coal mine reclamation.

     Natural Gas Supply

     The Company is a party to contracts  with forty  natural gas  operators and
marketers  which  allow the  Company to  purchase  natural  gas in the method it
determines  to be most  economic.  During  1996,  the  principal  sources of the
Company's  natural  gas  generating  fuel were  twenty of these  companies.  The
Company is currently  purchasing  the  majority of its natural gas  requirements
from fifteen companies  pursuant to contracts.  During 1996 the price of natural
gas  increased  primarily due to a  significant  increase in the  transportation
costs as well as increased natural gas prices.  The Company's natural gas supply
is transported  pursuant to a firm  transportation  service contract between the
Company and El Paso  Natural Gas Company.  The Company  continues to analyze the
market  to  determine   the  source  and  method  of  meeting  its  natural  gas
requirements.

     Nuclear Fuel Supply

     The fuel cycle for Palo Verde is comprised of the following stages: (1) the
mining and  milling of uranium  ore to  produce  uranium  concentrates,  (2) the
conversion of uranium concentrates to uranium  hexafluoride,  (3) the enrichment
of  uranium  hexafluoride,  (4)  the  fabrication  of fuel  assemblies,  (5) the
utilization of fuel assemblies in reactors and (6) the storage of spent fuel and
the disposal thereof. The Palo Verde participants have made arrangements through
contract flexibilities to obtain quantities of uranium concentrates  anticipated
to be  sufficient  to  meet  operational  requirements  through  2000.  Existing
contracts  and  options  could  be  utilized  to  meet   approximately   80%  of
requirements  in 2001 and 2002 and 50% of  requirements  from 2003 through 2007.
Spot  purchases in the uranium market will be made, as  appropriate,  in lieu of
any uranium that might be obtained through contract  flexibilities  and options.
The Palo Verde participants have contracted for all conversion services required
through  2000  and with  options  for up to 70%  through  2002.  The Palo  Verde
participants,  including the Company,  have an enrichment services contract with
USEC  which  obligates  USEC to furnish  enrichment  services  required  for the
operation of the three Palo Verde units over a term expiring in September  2002,
with options to continue through September 2007. In addition, existing contracts
will provide fuel  assembly  fabrication  services  until at least 2003 for each
Palo Verde unit, and through contract options,  approximately fifteen additional
years are available.

     Spent Nuclear Fuel and Waste Disposal. Pursuant to the Nuclear Waste Policy
Act of 1982,  as amended in 1987 (the "Waste  Act"),  DOE is obligated to accept
and dispose of all spent nuclear fuel and other  high-level  radioactive  wastes
generated by all domestic power  reactors.  The NRC,  pursuant to the Waste Act,
requires  operators of nuclear power  reactors to enter into spent fuel disposal
contracts  with DOE,  and the  Company,  on its own  behalf and on behalf of the
other  Palo Verde  participants,  has done so.  Under the Waste Act,  DOE was to
develop the  facilities  necessary for the storage and disposal of spent nuclear
fuel and to have the first such facility in operation by 1998. That facility was
to be a permanent  repository,  but DOE has announced that such a repository now
cannot be  completed  before  2010.  In July 1996,  the United  States  Court of
Appeals  for  the  District  of  Columbia  Circuit  ruled  that  the  DOE has an
obligation  to start  disposing of spent  nuclear fuel no later than January 31,
1998. By way of letter dated December 17, 1996, DOE informed  contract  holders,
including  the  Company,  that DOE  anticipates  that it will be unable to begin
acceptance of spent nuclear fuel for disposal in a 
                                       5
<PAGE>
repository or interim storage  facility by January 31, 1998.  Several bills have
been introduced in Congress  contemplating the construction of a central interim
storage  facility  which  could be  available  in the latter part of the current
decade;  however, there is resistance to certain features of these bills both in
Congress and the Administration.

     Facility funding is a further complication. While all nuclear utilities pay
into a so-called  nuclear  waste fund an amount  calculated  on the basis of the
output of their respective plants, the annual  Congressional  appropriations for
the permanent  repository  have been for amounts less than the amounts paid into
the waste  fund (the  balance of which is being  used for other  purposes)  and,
according  to DOE  spokespersons,  may now be at a level  less  than  needed  to
achieve a 2010 operational date for a permanent  repository.  No funding will be
available for a central interim facility until one is authorized by Congress.

     The Company has storage  capacity in existing  fuel  storage  pools at Palo
Verde which, with certain modifications,  could accommodate all fuel expected to
be  discharged  from normal  operation  of Palo Verde  through  about 2002,  and
believes it could augment that wet storage with new  facilities  for on-site dry
storage of spent fuel for an  indeterminate  period of  operation  beyond  2002,
subject to obtaining any required  governmental  approvals.  One way or another,
the Company currently  believes that spent fuel storage or disposal methods will
be available for use by Palo Verde to allow its continued operation beyond 2002.

     A new low-level  waste facility was built in 1995 on-site which could store
an amount of waste  equivalent  to ten years of normal  operation at Palo Verde.
Although some low-level waste has been stored on-site,  the Company is currently
shipping low-level waste to off-site facilities.  The Company currently believes
that interim low-level waste storage methods are or will be available for use by
Palo Verde to allow its continued  operation and to safely store low-level waste
until a permanent disposal facility is available.

     While  believing  that  scientific  and financial  aspects of the issues of
spent  fuel  and   low-level   waste   storage  and  disposal  can  be  resolved
satisfactorily,  the Company  acknowledges  that their ultimate  resolution in a
timely  fashion  will  require  political  resolve  and action on  national  and
regional scales which it is less able to predict.

Purchased Power Agreements

     In  addition  to that  available  from  its own  generating  capacity  (see
"Properties" in Item 2), the Company purchases  electricity from other utilities
under various  arrangements.  One of the most  important of these is a long-term
contract  with SRP which may be canceled by SRP on three years' notice and which
requires SRP to make available,  and the Company to pay for,  certain amounts of
electricity that are based in large part on customer demand within certain areas
now served by the  Company  pursuant  to a related  territorial  agreement.  The
generating capacity available to the Company pursuant to the contract was 305 MW
through May 1996, at which time the capacity  decreased to 297 MW. In 1996,  the
Company received approximately 557,998 MWh of energy under the contract and paid
approximately $35 million for capacity availability and energy received.

     In  September  1990,  the  Company  and  PacifiCorp  entered  into  certain
agreements  relating  principally  to sales and purchases of electric  power and
electric  utility  assets,  and in  July  1991  the  Company  sold  Cholla  4 to
PacifiCorp. As part of the transaction,  PacifiCorp agreed to make a firm system
sale to the Company for thirty years during the Company's  summer peak season in
the amount of 175 megawatts for the first five years, increasing thereafter,  at
the  Company's  option,  up to a maximum  amount equal to the rated  capacity of
Cholla 4 (380 megawatts).  The Company also had the option to convert these firm
system sales to one-for-one  seasonal  capacity  exchanges with PacifiCorp.  The
Company's agreements with PacifiCorp currently provide for the following Company
purchases  and  one-for-one  seasonal  capacity  exchanges  during the indicated
years:  1997 (175  megawatt firm capacity  purchase;  and 100 megawatt  capacity
exchange  effective  May 15, 1997);  1998 (175 megawatt firm capacity  purchase,
converting to capacity exchange in the summer of 1998; and 100 megawatt capacity
exchange);  1999 and beyond (275 megawatt  capacity  exchange;  and 205 megawatt
capacity  exchange  beginning in the summer of 1999).  In 1996,  the  generating
capacity  available  to the  Company  from  PacifiCorp  
                                       6
<PAGE>
was 175 MW. The Company  received  approximately  404,000 MWh of energy and paid
approximately $18.5 million for capacity availability and the energy received.

     During 1996, the Company entered into an agreement with Citizens  Utilities
Company to build,  own,  operate and maintain a combustion  turbine in northwest
Arizona.  Pursuant to a twenty-year  purchase power agreement,  the Company will
recover  the cost of the turbine  and CUC will pay for the output  requested  by
CUC. The Company has the right to  secondary  use of the output for cost of fuel
and variable operations and maintenance. The Company expects that the combustion
turbine will be in service during the first quarter of 1999.

Construction Program

     During the years 1994 through 1996, the Company incurred approximately $824
million in capitalized  expenditures.  Utility capitalized  expenditures for the
years 1997 through 1999 are expected to be primarily for expanding  transmission
and  distribution  capabilities  to meet  customer  growth,  upgrading  existing
facilities, and for environmental purposes. Capitalized expenditures,  including
expenditures for environmental  control  facilities,  for the years 1997 through
1999 have been estimated as follows:

                              (Millions of Dollars)
By Year                                               By Major Facilities
--------------------------------                -------------------------------
1997                       $296                Electric generation        $267
1998                        283                Electric transmission        64
1999                        262                Electric distribution       412
                           ----                General facilities           98 
                           $841                                           ---- 
                           ====                                           $841 
                                                                          ==== 

     The amounts for 1997 through 1999 exclude  capitalized  interest  costs and
include  capitalized  property taxes and about $30 million each year for nuclear
fuel. The Company conducts a continuing review of its construction program.

Mortgage Replacement Fund Requirements

     So long as any of the Company's first mortgage bonds are  outstanding,  the
Company is required for each calendar year to deposit with the trustee under its
Mortgage,  cash  in a  formularized  amount  related  to  net  additions  to the
Company's mortgaged utility plant;  however,  the Company may satisfy all or any
part of this  "replacement  fund"  requirement by utilizing  redeemed or retired
bonds,  net  property  additions,   or  property  retirements.   For  1996,  the
replacement fund requirement  amounted to approximately $129 million. All of the
bonds  issued by the Company  under the  Mortgage  which are  callable  prior to
maturity  are  redeemable  at their par value plus  accrued  interest  with cash
deposited  by the Company in the  replacement  fund,  subject in many cases to a
period of time after the  original  issuance of the bonds  during which they may
not be so redeemed and/or to other restrictions on any such redemption.

Environmental Matters

     EPA Environmental Regulation

     Clean  Air  Act.  Pursuant  to the  Clean  Air  Act,  the EPA  has  adopted
regulations that address  visibility  impairment in certain  federally-protected
areas which can be reasonably attributed to specific sources. In September 1991,
the EPA issued a final rule that would limit  sulfur  dioxide  emissions at NGS.
Compliance with the emission  limitation  becomes  applicable to NGS Units 3, 2,
and 1 in 1997, 1998 and 1999,  respectively.  SRP, the NGS operating  agent, has
estimated a capital cost of $470 million, most of which will be incurred through
1998, and annual  operations and maintenance  costs of approximately $14 million
for all three units, for NGS to meet these requirements. The Company is required
to fund 14% of these expenditures.
                                       7
<PAGE>
     The Clean Air Act  Amendments  of 1990 (the  "Amendments")  address,  among
other things,  "acid rain,"  visibility in certain  specified  areas,  toxic air
pollutants and the nonattainment of national ambient air quality standards. With
respect to "acid  rain," the  Amendments  establish  a system of sulfur  dioxide
emissions  "allowances."  Each existing utility unit is granted a certain number
of "allowances." On March 5, 1993, the EPA promulgated  rules listing  allowance
allocations  applicable to Company-owned plants, which allocations will begin in
the year 2000.  Based on those  allocations,  the Company  will have  sufficient
allowances to permit continued operation of its plants at current levels without
installing additional equipment.  In addition, the Amendments require the EPA to
set nitrogen oxides emissions  limitations which would require certain plants to
install additional pollution control equipment. In December 1996, the EPA issued
rules for nitrogen oxides emissions  limitations,  which may require the Company
to install additional  pollution control equipment at Four Corners by January 1,
2000.  Based on its initial  evaluation,  the Company  currently  estimates  its
capital cost of complying  with the rules may be  approximately  $4 million.  On
February 14, 1997,  the Company filed a Petition for Review in the United States
Court of Appeals for the District of Columbia  challenging the classification of
Four Corners Unit 4 in these rules.  Arizona  Public  Service  Company v. United
States Environmental Protection Agency, No.
97-1091.

     With respect to protection of visibility in certain  specified  areas,  the
Amendments require the EPA to conduct a study concerning  visibility  impairment
in those areas and  identification  of sources  contributing to such impairment.
Interim  findings of this study have  indicated  that any  beneficial  effect on
visibility as a result of the Amendments would be offset by expected  population
and  industry  growth.  The EPA  has  established  a  "Grand  Canyon  Visibility
Transport  Commission"  to  complete  a study on  visibility  impairment  in the
"Golden Circle of National Parks" in the Colorado Plateau.  NGS, Cholla and Four
Corners are located near the "Golden  Circle of National  Parks." The Commission
completed its study and on June 10, 1996 submitted its final  recommendations to
the EPA. The Commission  recommended  that,  beginning in 2000 and every 5 years
thereafter, if actual sulfur dioxide emissions from all stationary sources in an
eight-state region (including Arizona,  New Mexico, Utah, Nevada and California)
exceed the projected emissions, which are projected to decline under the current
regulatory  scheme, the projected total emissions will be changed to a "regional
emissions  cap" and an emissions  trading  program would be implemented to limit
total  sulfur  dioxide  emissions  in the region.  The EPA will  consider  these
recommendations  before  promulgating  final  requirements  on a  regional  haze
regulatory  program  which is under  EPA  review  (see "Air  Quality  Standards"
below),  which is expected by December 1997. If such a program were implemented,
industry,  including  the  Company's  coal  plants,  could be subject to further
emissions   limits.   The  Company   cannot   currently   estimate  the  capital
expenditures,  if any,  which may be required as a result of the EPA studies and
the Commission's recommendations.

     With respect to hazardous air pollutants  emitted by electric utility steam
generating units, the Amendments  require two studies.  The results of the first
study  indicated  an impact from  mercury  emissions  from such units in certain
unspecified areas;  however, the EPA has not yet stated whether or not emissions
limitations will be imposed. Next, the EPA will complete a general study by 1999
concerning the necessity of regulating such units under the  Amendments.  Due to
the lack of historical  data, and because the Company cannot speculate as to the
ultimate  requirements  by the EPA, the Company  cannot  currently  estimate the
capital  expenditures,  if any,  which  may be  required  as a  result  of these
studies.

     Certain aspects of the Amendments may require  related  expenditures by the
Company,  such as permit  fees,  none of which  the  Company  expects  to have a
material impact on its financial position or results of operations.

     Superfund.  The Comprehensive  Environmental  Response,  Compensation,  and
Liability Act ("Superfund")  establishes  liability for the cleanup of hazardous
substances  found  contaminating  the soil,  water or air.  Those who generated,
transported or disposed of hazardous substances at a contaminated site are among
those  who  are  potentially  responsible  parties  ("PRP's")  and  may be  each
strictly, and often jointly and severally,  liable for the cost of any necessary
remediation of the substances.  The EPA had previously  advised the Company that
the EPA  considers  the  Company to be a PRP in the Indian  Bend Wash  Superfund
Site,  South Area,  where the  Company's  
                                       8
<PAGE>
Ocotillo  Power Plant is located.  The Company is in the process of conducting a
voluntary  investigation  to determine the extent and scope of  contamination at
the plant site.  Based on the  information  to date, the Company does not expect
this matter to have a material  impact on its  financial  position or results of
operations.

     Air Quality Standards.  In December 1996, the EPA proposed revised National
Ambient Air Quality Standards  ("NAAQS") for ozone and particulate  matter,  and
related  implementing  regulations.  The comment  period for the proposed  NAAQS
rules ended on March 12,  1997,  and the final rules are  expected by July 1997.
The EPA is also  expected to propose  rules to deal with  regional  haze by June
1997, and final rules are expected by December 1997. Due to these  standards the
Company could be required to install  additional  pollution control equipment at
certain of its  plants.  The  Company  cannot  currently  estimate  the  capital
expenditures, if any, which may be required as a result of the final rules.

     MGP Sites.  The  Company  currently  is  investigating  properties,  either
presently or previously  owned by the Company,  which were at one time sites of,
or  sites  associated  with,  manufactured  gas  plants.  The  purpose  of  this
investigation is to determine if waste materials are present,  if such materials
constitute  an  environmental  or  health  risk,  and if  the  Company  has  any
responsibility  for remedial action.  Where  appropriate,  the Company has begun
remediation of certain of these sites. The Company does not expect these matters
to have a  material  adverse  effect on its  financial  position  or  results of
operations.

     Purported Navajo Environmental Regulation

     Four  Corners  and NGS are located on the Navajo  Reservation  and are held
under  easements  granted by the federal  government  as well as leases from the
Navajo Nation.  The Company is the Four Corners  operating agent and owns a 100%
interest in Four  Corners  Units 1, 2 and 3, and a 15%  interest in Four Corners
Units 4 and 5. The Company  owns a 14% interest in NGS Units 1, 2 and 3. In July
1995, the Navajo Nation  enacted the Navajo Nation Air Pollution  Prevention and
Control Act, the Navajo  Nation Safe  Drinking  Water Act, and the Navajo Nation
Pesticide Act (collectively, the "Acts").

     Pursuant to the Acts, the Navajo Nation Environmental  Protection Agency is
authorized to promulgate  regulations  covering air quality,  drinking water and
pesticide  activities,  including  those that occur at Four  Corners and NGS. By
separate  letters  dated  October 12 and  October  13,  1995,  the Four  Corners
participants and the NGS  participants  requested the United States Secretary of
the Interior to resolve their dispute with the Navajo Nation  regarding  whether
or not the Acts apply to  operations  of Four  Corners  and NGS.  On October 17,
1995,  the Four  Corners  participants  and the NGS  participants  each  filed a
lawsuit  in the  District  Court of the Navajo  Nation,  Window  Rock  District,
seeking,  among other things,  a declaratory  judgment that (i) their respective
leases  and  federal  easements  preclude  the  application  of the  Acts to the
operations  of Four Corners and NGS, and (ii) the Navajo Nation and its agencies
and courts lack adjudicatory jurisdiction to determine the enforceability of the
Acts as applied to Four Corners and NGS. On October 18, 1995,  the Navajo Nation
and the Four  Corners  and NGS  participants  agreed  to  indefinitely  stay the
proceedings  referenced  in the  preceding two sentences so that the parties may
attempt to resolve the dispute  without  litigation,  and the  Secretary and the
Court have stayed these  proceedings  pursuant to a request by the parties.  The
Company cannot currently predict the outcome of this matter.

Water Supply

     Assured  supplies  of water  are  important  both to the  Company  (for its
generating  plants) and to its customers  and, at the present time,  the Company
has adequate  water to meet its needs.  However,  conflicting  claims to limited
amounts of water in the  southwestern  United  States have  resulted in numerous
court actions in recent years.

     Both  groundwater  and surface  water in areas  important to the  Company's
operations  have been the  subject of  inquiries,  claims and legal  proceedings
which will require a number of years to resolve.  The Company is one of a number
of  parties in a  proceeding  before a state  court in New Mexico to  adjudicate
rights to a stream  system from 
                                       9
<PAGE>
which water for Four Corners is derived.  (State of New Mexico,  in the relation
of  S.E.  Reynolds,  State  Engineer  vs.  United  States  of  America,  City of
Farmington,  Utah  International,  Inc.,  et al., San Juan  County,  New Mexico,
District Court No. 75-184). An agreement reached with the Navajo Nation in 1985,
however,  provides  that if Four  Corners  loses a portion  of its rights in the
adjudication,  the Navajo  Nation will  provide,  for a  then-agreed  upon cost,
sufficient water from its allocation to offset the loss.

     A summons served on the Company in early 1986 required all water  claimants
in the Lower Gila River Watershed in Arizona to assert any claims to water on or
before January 20, 1987, in an action pending in Maricopa County Superior Court.
(In re The  General  Adjudication  of All  Rights to Use Water in the Gila River
System  and  Source,   Supreme   Court  Nos.   WC-79-0001   through  WC  79-0004
(Consolidated) [WC-1, WC-2, WC-3 and WC-4 (Consolidated)],  Maricopa County Nos.
W-1,  W-2,  W-3 and W-4  (Consolidated)).  Palo  Verde  is  located  within  the
geographic  area  subject  to the  summons,  and the  rights  of the Palo  Verde
participants,  including the Company,  to the use of groundwater and effluent at
Palo Verde is  potentially  at issue in this  action.  The  Company,  as project
manager of Palo Verde,  filed claims that dispute the court's  jurisdiction over
the Palo Verde participants'  groundwater rights and their contractual rights to
effluent  relating to Palo Verde and,  alternatively,  seek confirmation of such
rights.  Three of the  Company's  less-utilized  power  plants are also  located
within the geographic area subject to the summons.  The Company's claims dispute
the court's  jurisdiction over the Company's  groundwater rights with respect to
these plants and,  alternatively,  seek confirmation of such rights. On December
10, 1992,  the Arizona  Supreme Court heard oral  argument on certain  issues in
this matter which are pending on interlocutory  appeal.  Issues important to the
Company's  claims were  remanded  to the trial court for further  action and the
trial court  certified  its  decision  for  interlocutory  appeal to the Arizona
Supreme Court.  On September 28, 1994, the Arizona  Supreme Court granted review
of the trial court decision. No trial date concerning the water rights claims of
the Company has been set in this matter.

     The Company  has also filed  claims to water in the Little  Colorado  River
Watershed in Arizona in an action pending in the Apache County  Superior  Court.
(In re The  General  Adjudication  of All  Rights  to Use  Water  in the  Little
Colorado  River System and Source,  Supreme Court No.  WC-79-0006  WC-6,  Apache
County No.  6417).  The  Company's  groundwater  resource  utilized at Cholla is
within  the  geographic  area  subject  to the  adjudication  and  is  therefore
potentially  at issue in the case.  The  Company's  claims  dispute  the court's
jurisdiction  over the Company's  groundwater  rights and,  alternatively,  seek
confirmation  of such  rights.  The  parties  are in the  process of  settlement
negotiations  with respect to this matter.  No trial date  concerning  the water
rights claims of the Company has been set in this matter.

     Although the foregoing  matters remain subject to further  evaluation,  the
Company expects that the described  litigation will not have a material  adverse
impact on its financial position or results of operations.
                                       10
<PAGE>
                               ITEM 2. PROPERTIES

Accredited Capacity

     The Company's  present  generating  facilities have an accredited  capacity
aggregating 4,026,700 kW, comprised as follows:
<TABLE>
<CAPTION>
                                                                                                       Capacity(kW)
                                                                                                       ------------
<S>                                                                                                   <C>    
Coal:
     Units 1, 2 and 3 at Four Corners, aggregating...............................................        560,000
     15% owned Units 4 and 5 at Four Corners, representing.......................................        222,000
     Units 1, 2 and 3 at Cholla Plant, aggregating...............................................        615,000
     14% owned Units 1, 2 and 3 at the Navajo Plant, representing................................        315,000
                                                                                                       ---------
                                                                                                       1,712,000
                                                                                                       =========
Gas or Oil:
     Two steam units at Ocotillo, two steam units at Saguaro, and one
       steam unit at Yucca, aggregating..........................................................        463,400(1)
     Eleven combustion turbine units, aggregating................................................        500,600
     Three combined cycle units, aggregating.....................................................        253,500
                                                                                                       ---------
                                                                                                       1,217,500
                                                                                                       =========
Nuclear:
     29.1% owned or leased Units 1, 2 and 3 at Palo Verde, representing..........................      1,091,600
                                                                                                       =========

Other............................................................................................          5,600
                                                                                                       =========
</TABLE>
---------------

     (1) West Phoenix steam units (108,300 kW) are currently mothballed.

              -----------------------------------------------------

Reserve Margin

     The Company's peak one-hour  demand on its electric  system was recorded on
July 31,  1996 at  4,574,700  kW,  compared  to the 1995  peak of  4,420,400  kW
recorded on July 28. Taking into account  additional  capacity then available to
it under purchase power  contracts as well as its own generating  capacity,  the
Company's  capability  of meeting  system  demand on July 31, 1996,  computed in
accordance with accepted  industry  practices,  amounted to 4,680,300 kW, for an
installed  reserve margin of 2.7%.  The power actually  available to the Company
from its resources  fluctuates from time to time due in part to planned outages,
technical problems and short-term purchases. The available capacity from sources
actually  operable at the time of the 1996 peak  amounted to 4,909,300 kW, for a
margin of 8.5%. Firm purchases from  neighboring  utilities  totaling 650,000 kW
were in  place at the time of the peak  ensuring  the  ability  to meet the load
requirement.

Plant Sites Leased from Navajo Nation

     NGS and Four  Corners  are  located on land held under  easements  from the
federal  government and also under leases from the Navajo Nation.  The risk with
respect  to  enforcement  of these  easements  and  leases is not  deemed by the
Company to be material.  The lease for Four Corners contains a waiver until 2001
of the requirement that the Company pay certain taxes to the Navajo Nation.  The
Company and the Navajo Nation are currently  negotiating an agreement that would
settle  certain issues  regarding  this waiver and other matters,  including the
computation of royalties due on the sales of coal and possessory  interest taxes
paid by the fuel supplier to Four Corners.  If this  settlement is  consummated,
the fuel  supplier,  the Navajo Nation and the Four Corners  participants
                                       11
<PAGE>
would agree as a part of their settlement to restructure their  relationships in
an effort to permit the power and energy  generated at Four Corners to be priced
competitively.  The  Company  cannot  currently  predict  the  outcome  of these
settlement negotiations.  Certain of the Company's transmission lines and almost
all of its contracted coal sources are also located on Indian reservations.  See
"Generating Fuel and Purchased Power --- Coal Supply" in Item 1.

Palo Verde Nuclear Generating Station

     Palo Verde Leases

     On August 18, 1986 and December 19, 1986, the Company  entered into a total
of three sale and  leaseback  transactions  under  which it sold and leased back
approximately  42% of its 29.1%  ownership  interest  in Palo  Verde Unit 2. The
leases under each of the sale and  leaseback  transactions  have  initial  lease
terms expiring on December 31, 2015.  Each of the leases also allows the Company
to extend the term of the lease and/or to repurchase  the leased Unit 2 interest
under certain  circumstances  at fair market value.  The leases in the aggregate
require annual payments of approximately $40 million through 1999, approximately
$46 million in 2000 and  approximately  $49 million  through 2015 (see Note 8 of
Notes to Financial Statements in Item 8).

     Regulatory

     Operation  of each of the three  Palo Verde  units  requires  an  operating
license from the NRC.  Full power  operating  licenses for Units 1, 2 and 3 were
issued by the NRC in June 1985, April 1986 and November 1987, respectively.  The
full  power  operating  licenses,  each valid for a period of  approximately  40
years,  authorize the Company, as operating agent for Palo Verde, to operate the
three Palo Verde units at full power.

     Nuclear Decommissioning Costs

     See Note 12 of Notes to Financial  Statements in Item 8 for a discussion of
the Company's nuclear decommissioning costs.

     Steam Generators

     See  "Palo  Verde  Nuclear  Generating  Station"  in  Note 11 of  Notes  to
Financial  Statements in Item 8 for a discussion of issues  relating to the Palo
Verde steam generators.

     Palo Verde Liability and Insurance Matters

     See  "Palo  Verde  Nuclear  Generating  Station"  in  Note 11 of  Notes  to
Financial  Statements in Item 8 for a discussion of the insurance  maintained by
the Palo Verde participants, including the Company, for Palo Verde.

Other Information Regarding the Company's Properties

     See  "Environmental  Matters" and "Water  Supply" in Item 1 with respect to
matters  having  possible  impact on the  operation of certain of the  Company's
power plants.

     See  "Construction  Program"  in Item 1 and  "Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations ___ Capital Needs and
Resources" in Item 7 for a discussion of the Company's construction plans.

     See  Notes  4, 7 and 8 of  Notes  to  Financial  Statements  in Item 8 with
respect to property of the Company not held in fee or held  subject to any major
encumbrance.
                                       12
<PAGE>
                                   [MAP PAGE]

     In accordance  with Item 304 of Regulation S-T of the  Securities  Exchange
Act of 1934, the Company's  Service Territory map contained in this Form 10-K is
a map of the State of Arizona  showing the Company's  service area, the location
of its major power plants and principal  transmission lines, and the location of
transmission  lines  operated by the Company for others.  The major power plants
shown on such map are the Navajo Generating  Station located in Coconino County,
Arizona; the Four Corners Power Plant located near Farmington,  New Mexico;  the
Cholla Power Plant,  located in Navajo County,  Arizona;  the Yucca Power Plant,
located  near Yuma,  Arizona;  and the Palo Verde  Nuclear  Generating  Station,
located  about 55 miles  west of  Phoenix,  Arizona  (each  of which  plants  is
reflected on such map as being jointly owned with other  utilities),  as well as
the  Ocotillo  Power Plant and West  Phoenix  Power  Plant,  each  located  near
Phoenix, Arizona, and the Saguaro Power Plant, located near Tucson, Arizona. The
Company's  major  transmission  lines shown on such map are reflected as running
between the power  plants  named above and certain  major cities in the State of
Arizona.  The  transmission  lines  operated  for  others  shown on such map are
reflected as running from the Four Corners  Plant  through a portion of northern
Arizona to the California border.


                                       13
<PAGE>
                            ITEM 3. LEGAL PROCEEDINGS

Property Taxes

     On June  29,  1990,  a new  Arizona  state  property  tax law was  enacted,
effective as of December  31,  1989,  which  adversely  impacted  the  Company's
earnings  before  income  taxes in tax years 1990  through  1995 by an aggregate
amount of  approximately  $21 million per year.  On December 20, 1990,  the Palo
Verde  participants,  including the Company,  filed a lawsuit in the Arizona Tax
Court, a division of the Maricopa  County  Superior  Court,  against the Arizona
Department  of  Revenue,  the  Treasurer  of the State of  Arizona,  and various
Arizona counties, claiming, among other things, that portions of the new tax law
are unconstitutional.  (Arizona Public Service Company, et al. v. Apache County,
et al., No. TX 90-01686 (Consol.), Maricopa County Superior Court). On April 23,
1996, the parties  reached an agreement to settle the litigation and on July 18,
1996,  the  Governor  signed a new  Arizona  property  tax law that  reduced the
aggregate  property  tax of the Company by  approximately  $18  million  (before
income  taxes) in 1996,  with slightly  lower amounts  expected in future years.
Under the  formula for  potential  future  rate  reduction  pursuant to the 1996
regulatory  agreement  (see "1996  Regulatory  Agreement"  in Note 2 of Notes to
Financial  Statements in Item 8 of this  report),  the property tax reduction is
expected to reduce  future  retail  rates.  The parties to the  litigation  have
reached a settlement  pursuant to which the Company will  relinquish  its claims
for  retrospective  relief provided that the prospective  relief provided by the
new  law is not  changed  (other  than by  changes  in law  affecting  taxpayers
generally) for a period of three years.

     See  "Environmental  Matters"  and  "Water  Supply"  in Item 1 in regard to
pending or threatened litigation and other disputes. See "Regulatory Matters" in
Note 2 of Notes to  Financial  Statements  in Item 8 for  information  regarding
lawsuits filed by the Company challenging certain provisions of rules adopted by
the ACC for the phased-in introduction of retail electric competition in Arizona
(Arizona Public Service Company v. The Arizona  Corporation  Commission,  in the
Superior  Court of the State of Arizona in and for the County of  Maricopa,  No.
CV97-03753,  and  Arizona  Public  Service  Company v. The  Arizona  Corporation
Commission,  in the Court of Appeals,  State of  Arizona,  Division  One,  No. 1
CA-CC-97-0002, ACC Docket No. R-0000-94-165).

                       ITEM 4. SUBMISSION OF MATTERS TO A
                            VOTE OF SECURITY HOLDERS

     No matter was  submitted  to a vote of security  holders  during the fourth
quarter of the fiscal year covered by this report,  through the  solicitation of
proxies or otherwise.
                                       14
<PAGE>
                      SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS
                                OF THE REGISTRANT

The Company's executive officers are as follows:

<TABLE>
<CAPTION>
                                  Age At
Name                          March 1, 1997            Position(s) At March 1, 1997
----                          -------------            ----------------------------
<S>                                 <C>          <C>
Richard Snell                       66            Chairman of the Board of Directors(1)
William J. Post                     46            President and Chief Executive Officer(1)
Jack E. Davis                       50            Executive Vice President, Commercial Operations
George A. Schreiber, Jr.            48            Executive Vice President and Chief Financial Officer(1)
William L. Stewart                  53            Executive Vice President, Generation
Armando B. Flores                   53            Senior Vice President, Human Resources and Corporate Services
James M. Levine                     47            Senior Vice President, Nuclear
Jan H. Bennett                      49            Vice President, Customer Service
Edward Z. Fox                       43            Vice President, Environmental, Health and Safety
William E. Ide                      50            Vice President, Nuclear Engineering
Nancy C. Loftin                     43            Vice President, Chief Legal Counsel and Secretary
Leslie M. Mesh                      50            Vice President, Marketing and Economic Development
Gregg R. Overbeck                   50            Vice President, Nuclear Production
Nancy E. Felker                     45            Treasurer
William J. Hemelt                   43            Controller

</TABLE>
---------------

     (1) Member of the Board of Directors.

     The  executive  officers  of the  Company  are  elected  no less often than
annually  and may be removed by the Board of  Directors  at any time.  The terms
served  by the named  officers  in their  current  positions  and the  principal
occupations  (in  addition  to  those  stated  in the  table  and  exclusive  of
directorships) of such officers for the past five years have been as follows:

     Mr. Snell was elected to his present  position as of February  1990. He was
also elected  Chairman of the Board,  President and Chief  Executive  Officer of
Pinnacle  West at that time,  and he  retired as  President  in  February  1997.
Previously, he was Chairman of the Board (1989-1992) and Chief Executive Officer
(1989-1990) of Aztar Corporation.

     Mr. Post assumed his present  position in February 1997. Prior to that time
he was Senior Vice President and Chief Operating Officer (since September 1994),
Senior Vice President,  Planning, Information and Financial Services (since June
1993), and Vice President, Finance & Rates (since April 1987). In February 1997,
Mr. Post became President of Pinnacle West.

     Mr. Davis was elected to his present  position in September 1996.  Prior to
that  time  he  was  Vice   President,   Generation   and   Transmission   (June
1993-September 1996);  Director,  Transmission Systems (January 1993-June 1993);
Director,  Fossil  Generation (June  1992-December  1992); and Director,  System
Development and Power Operations (May 1990-May 1992).

     Mr.  Schreiber was elected to his present  position in February 1997. Prior
to that time he was  Managing  Director at  PaineWebber,  Inc.  (since  February
1990).

     Mr. Stewart was elected to his present position in September 1996. Prior to
that time he was Executive Vice  President,  Nuclear (since May 1994) and Senior
Vice President --- Nuclear for Virginia Power (since 1989).
                                       15
<PAGE>
     Mr. Flores was elected to his present  position in September 1996. Prior to
that time, he was Vice President, Human Resources (1991-1996) of the Company.

     Mr. Levine was elected to his present  position in September 1996. Prior to
that time he was Vice President, Nuclear Production (since September 1989).

     Mr. Bennett was elected to his present position in May 1991.

     Mr. Fox was elected to his present  position in October 1995. Prior to that
time he was Director,  Arizona Department of Environmental Quality and Chairman,
Wastewater Management Authority of Arizona (July 1991-September 1995).

     Mr. Ide was elected to his present  position in  September  1996.  Prior to
that time he was Director, Palo Verde Operations (1994-1996) and Palo Verde Unit
1 Plant Manager (1988-1994).

     Ms. Loftin was elected to the  positions of Vice  President and Chief Legal
Counsel in September 1996 and has been Secretary since April 1987. Prior to that
time, in addition to Secretary, she was Corporate Counsel (since February 1989).

     Mr. Mesh was elected to his current position in October 1995. Prior to that
time he was Vice President, Marketing and Business Development,  Electronic Data
Systems (November 1993-October 1995) and Vice President,  Northern Telecom, Inc.
(April 1984-October 1993).

     Mr.  Overbeck  was elected to his current  position in July 1995.  Prior to
that time he was Assistant to Vice President of the Company  (January  1994-July
1995) and Director,  Nuclear  Production  Site Technical  Support of the Company
(January 1991-January 1994).

     Ms. Felker was elected to her present  position in June 1993. Prior to that
time she was Assistant  Treasurer  (since October  1992).  She is also Treasurer
(since June 1990) and Vice President (since February 1994) of Pinnacle West.

     Mr. Hemelt was elected to his present  position in June 1993. Prior to that
time he was Treasurer and Assistant Secretary (since April 1987).

                                     PART II

                     ITEM 5. MARKET FOR REGISTRANT'S COMMON
                    STOCK AND RELATED SECURITY HOLDER MATTERS

     The  Company's  common stock is  wholly-owned  by Pinnacle  West and is not
listed for trading on any stock exchange.  As a result,  there is no established
public trading market for the Company's common stock.
                                       16
<PAGE>
     The chart below sets forth the dividends  declared on the Company's  common
stock for each of the four quarters for 1996 and 1995.

                             Common Stock Dividends
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
--------------------------------------- -------------------------------------- --------------------------------------
               Quarter                                  1996                                   1995
--------------------------------------- -------------------------------------- --------------------------------------
<S>          <C>                                       <C>                                     <C>    
             1st Quarter                               $42,500                                 $42,500
             2nd Quarter                                42,500                                  42,500
             3rd Quarter                                42,500                                  42,500
             4th Quarter                                42,500                                  42,500
--------------------------------------- -------------------------------------- --------------------------------------
</TABLE>

     After  payment or setting  aside for payment of  cumulative  dividends  and
mandatory sinking fund requirements, where applicable, on all outstanding issues
of preferred  stock,  the holders of common stock are entitled to dividends when
and as declared out of funds legally  available  therefor.  See Notes 3 and 4 of
Notes to Financial  Statements in Item 8 for  restrictions on retained  earnings
available for the payment of common stock dividends.

                         ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                    1996           1995          1994          1993          1992
                                                  ----------    ----------    ----------    ----------    ----------
                                                                      (Thousands of Dollars)
<S>                                               <C>           <C>           <C>           <C>           <C>       
Electric Operating Revenues..................     $1,718,272    $1,614,952    $1,626,168    $1,602,413    $1,587,582
Fuel and Purchased Power.....................        325,523       269,798       300,689       300,546       287,201
Operating Expenses...........................      1,027,541       963,400       957,046       929,379       908,123
                                                  ----------    ----------    ----------    ----------    ----------
   Operating Income..........................        365,208       381,754       368,433       372,488       392,258
Other Income.................................         35,217        25,548        44,510        54,220        48,801
Interest Deductions --- Net..................        156,954       167,732       169,457       176,322       194,254
                                                  ----------    ----------    ----------    ----------    ----------
   Net Income................................        243,471       239,570       243,486       250,386       246,805
   Preferred Dividends.......................         17,092        19,134        25,274        30,840        32,452
                                                  ----------    ----------    ----------    ----------    ----------
   Earnings for Common Stock.................     $  226,379    $  220,436    $  218,212    $  219,546    $  214,353
                                                  ==========    ==========    ==========    ==========    ==========


Total Assets.................................     $6,423,222    $6,418,262    $6,348,261    $6,357,262    $5,629,432
                                                  ==========    ==========    ==========    ==========    ==========


Capital Structure:
   Common Stock Equity.......................     $1,729,390    $1,621,555    $1,571,120    $1,522,941    $1,476,390
   Non-Redeemable Preferred Stock............        165,673       193,561       193,561       193,561       168,561
   Redeemable Preferred Stock................         53,000        75,000        75,000       197,610       225,635
   Long-Term Debt Less Current Maturities....      2,029,482     2,132,021     2,181,832     2,124,654     2,052,763
                                                  ----------    ----------    ----------    ----------    ----------
     Total Capitalization....................      3,977,545     4,022,137     4,021,513     4,038,766     3,923,349
   Current Maturities of Long-Term Debt......        153,780         3,512         3,428         3,179        94,217
   Short-Term Debt...........................         16,900       177,800       131,500       148,000       195,000
                                                  ----------    ----------    ----------    ----------    ----------
     Total...................................     $4,148,225    $4,203,449    $4,156,441    $4,189,945    $4,212,566
                                                  ==========    ==========    ==========    ==========    ==========
</TABLE>
---------------

     See  "Management's  Discussion  and  Analysis of  Financial  Condition  and
     Results of Operations" in Item 7 for a discussion of certain information in
     the foregoing table.
                                       17
<PAGE>
            ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

Results of Operations

1996  Compared  with 1995  Earnings in 1996 were $226.4  million  compared  with
$220.4 million in 1995.  Earnings increased primarily due to increased operating
revenues,  lower property  taxes,  the  recognition of $12 million of income tax
benefits  associated with capital loss carryforwards and lower interest expense.
The comparison of 1996 to 1995 was also positively impacted by asset write-downs
of $21 million before income taxes in 1995.  Operating  revenues were higher due
to increased  sales resulting from customer  growth,  warmer weather in 1996 and
higher usage,  particularly by residential  customers.  Property taxes decreased
primarily  due to a change in tax law.  Interest  expense was lower due to lower
average interest rates and lower amounts of debt outstanding.

Partially  offsetting  these  positive  factors were $60 million of  accelerated
regulatory asset  amortization,  higher fuel expenses,  a pretax charge of $31.7
million for a voluntary  severance  program  and a retail rate  reduction.  Also
negatively  affecting the comparison of 1996 with 1995 was a gain on the sale of
a small subsidiary in 1995. The accelerated  regulatory  asset  amortization and
the rate reduction were part of a regulatory  agreement  which became  effective
July 1, 1996 (see Note 2 of Notes to Financial  Statements).  Fuel expenses were
up primarily due to higher natural gas costs,  increased retail sales and higher
coal prices.  The Company does not have a fuel adjustment  clause as part of its
retail rate structure;  therefore,  changes in fuel and purchased power expenses
are reflected currently in earnings.

1995  Compared  with 1994  Earnings in 1995 were $220.4  million  compared  with
$218.2 million in 1994.  Earnings  increased  primarily due to customer  growth,
lower fuel expenses,  accelerated  amortization of investment tax credits, lower
operations and maintenance expenses,  lower preferred stock dividends and a gain
recognized on the sale of a small  subsidiary.  Fuel  expenses  decreased due to
lower fuel prices and a more  favorable mix  resulting  from  increased  nuclear
generation.  The accelerated amortization of investment tax credits was a result
of a 1994 rate settlement  (see Note 2 of Notes to Financial  Statements) and is
reflected  as a $21  million  decrease  in income tax  expense.  Operations  and
maintenance  expense decreased as a result of lower fossil plant overhaul costs,
improved  nuclear  operations and severance  costs  incurred in 1994.  Preferred
stock dividends decreased due to less preferred stock outstanding.

Substantially  offsetting  these  positive  factors were the absence of non-cash
income related to a 1991 rate settlement,  milder weather,  the reversal in 1994
of certain  previously  recorded  depreciation,  a retail rate  reduction  which
became effective June 1, 1994 and in 1995 a $13 million pretax  write-down of an
office building and an $8 million pretax write-down of certain inventory.

Operating  Revenues  Operating  revenues  reflect  changes in both the volume of
units sold and price per  kilowatt-hour  of electric  sales.  An analysis of the
increases (decreases) in 1996 and 1995 electric operating revenues compared with
the prior year follows (in millions of dollars):

                                                      1996              1995
                                                      ----              ----
                Volume variance:
                  Customer growth and usage          $ 75.1            $ 57.9
                  Weather                              40.1             (42.0)
                  Other                                ---               (1.7)
                Rate reductions                       (29.7)            (11.4)
                Interchange sales                       8.5              (7.2)
                Other                                   9.3              (6.8)
                                                     ------            ------

                  Total change                       $103.3            $(11.2)
                                       18
<PAGE>
Other Income Net income  reflects  accounting  practices  required for regulated
public  utilities  and  represents  a  composite  of cash  and  non-cash  items,
including  AFUDC and  accretion  income on Palo Verde Unit 3 (see  Statements of
Cash Flows and Note 1 of Notes to Financial Statements). The after-tax accretion
income  recorded  in  1994  was  $20.3  million.  Also in  1994  was a  one-time
depreciation reversal of $15 million,  after income taxes, which was included in
"Other ___ net" in the  Statements  of Income (see Note 2 of Notes to  Financial
Statements).

Capital Needs and Resources

During 1996, the Company redeemed  approximately  $223 million of long-term debt
and preferred  stock.  Required and optional  redemptions of preferred stock and
repayments of long-term debt,  including  premiums  thereon,  and payments for a
capitalized lease obligation are expected to total  approximately  $222 million,
$114 million and $114 million for the years 1997, 1998 and 1999, respectively.

The Company's capital requirements consist primarily of capital expenditures and
optional and mandatory  repayments of long-term  debt and preferred  stock.  The
resources  available  to meet  these  requirements  include  funds  provided  by
operations,  external  financings  and annual equity  infusions  from the parent
company of $50 million  from 1997 through 1999 (see Note 2 of Notes to Financial
Statements).

Present  construction  plans  through  the year  2006 do not  include  any major
baseload generating plants. In general, most of the capital expenditures are for
expanding  transmission and  distribution  capabilities to meet customer growth,
for  upgrading  existing  facilities  and for  environmental  purposes.  Capital
expenditures are anticipated to be approximately $296 million,  $283 million and
$262 million for 1997, 1998 and 1999, respectively.  These amounts include about
$30 million each year for nuclear fuel.

During the period 1994 through 1996, the Company funded all capital expenditures
with funds from  operations.  The Company expects to have adequate  resources to
meet its capital requirements for the period 1997 through 1999.

Although provisions in the Company's bond indenture,  articles of incorporation,
and ACC financing orders establish  maximum amounts of additional first mortgage
bonds and preferred stock that the Company may issue, management does not expect
any of these  provisions  to limit the  Company's  ability  to meet its  capital
requirements.

As of December 31, 1996, the Company had credit  commitments  from various banks
totaling  approximately $400 million, which were available either to support the
issuance of  commercial  paper or to be used as bank  borrowings.  At the end of
1996,  there were $16.9  million of  commercial  paper and $100  million of bank
borrowings outstanding.

Accounting Matters

See Note 12 of Notes to Financial  Statements  for a  description  of a proposed
standard on accounting for certain  liabilities related to closure or removal of
long-lived assets.

Current Issues

The Company's ability to maintain and improve its current level of earnings will
depend on several factors.  As the electric  industry becomes more  competitive,
the  Company's  ability  to reduce  costs and  increase  productivity  and asset
utilization will be an important factor in maintaining a price structure that is
both  attractive to customers and  profitable  to the Company.  Other  important
factors  that  could  affect  the  Company's  future  earnings  levels  and  any
forward-looking  statements  contained  in  this  "Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations"  include  regulatory
developments;  competitive developments;  regional economic conditions; 
                                       19
<PAGE>
the  cost  of  debt  and  equity  capital;  regulatory,  tax  and  environmental
legislation;  weather  variations  affecting  customer usage; and  technological
developments in the electricity industry.

Competition Competition continues to evolve in the electric utility industry. In
December 1996,  the ACC adopted rules for the  introduction  of retail  electric
competition in Arizona in phases from 1999 through 2003.  The Rules  establish a
framework for introducing competition; however, with respect to certain matters,
they also contain requirements for further workshops and ACC consideration prior
to implementation. Recommendations to the ACC from the workshops are expected in
late 1997.  The Rules  indicate that the ACC will allow  recovery of unmitigated
stranded  costs,  but do  not  set  forth  the  mechanisms  for  determining  or
recovering such costs.  Separately,  the Arizona legislature established a joint
legislative  committee to study retail electric competition and to report to the
legislature by the end of 1997. The Company believes that state legislation will
ultimately be required  before  significant  implementation  of retail  electric
competition can lawfully occur in Arizona. Additionally,  legislation related to
electric competition has been proposed in the U.S. Congress. See Note 2 of Notes
to Financial  Statements  for further  discussion of  competitive  developments.
Until it has been determined how competition will be implemented in Arizona, the
Company cannot accurately predict the impact of full retail electric competition
on its financial position or results of operations.

The Company prepares its financial  statements in accordance with the provisions
of Statement of Financial  Accounting  Standards (SFAS) No. 71,  "Accounting for
the Effects of Certain Types of Regulation."  SFAS No. 71 requires a cost-based,
rate-regulated  enterprise to reflect the impact of regulatory  decisions in its
financial  statements.  The  Company's  existing  regulatory  orders and current
regulatory  environment  support its accounting  practices related to regulatory
assets which  amounted to  approximately  $1.1 billion at December 31, 1996.  In
accordance  with  the  1996  regulatory  agreement,   the  ACC  accelerated  the
amortization of  substantially  all of the Company's  regulatory  assets over an
eight-year  period.  If rate  recovery  of these  assets is no longer  probable,
whether due to competition or regulatory  action, the Company would no longer be
able  to  apply  the  provisions  of  SFAS  No.  71 to all or  some  part of its
operations  which  could  have a  material  impact  on the  Company's  financial
statements.  See  Note  1  of  Notes  to  Financial  Statements  for  additional
information on regulatory accounting.

Rate  Matters  Pursuant to the price  reduction  formula in the 1996  regulatory
agreement  (see Note 2 of Notes to  Financial  Statements),  in March 1997,  the
Company filed with the ACC its calculation of an annual retail rate reduction of
approximately  $18 million ($11 million  after income  taxes) or 1.2%,to  become
effective July 1, 1997. The amount and timing of the rate decrease is subject to
ACC approval.
                                       20
<PAGE>
                          ITEM 8. FINANCIAL STATEMENTS
                             AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                                Page
                                                                                                                ----

<S>                                                                                                              <C>
Report of Management..........................................................................................   22

Independent Auditors' Report..................................................................................   23

Statements of Income for each of the three years in the period ended December 31, 1996........................   25

Balance Sheets --- December 31, 1996 and 1995.................................................................   26

Statements of Cash Flows for each of the three years in the period ended December 31, 1996....................   28

Statements of Retained Earnings for each of the three years in the period ended December 31, 1996.............   29

Notes to Financial Statements.................................................................................   29
</TABLE>

     See Note 13 of Notes to Financial  Statements  for the  selected  quarterly
financial data required to be presented in this Item.
                                       21
<PAGE>
                              REPORT OF MANAGEMENT


The  primary  responsibility  for  the  integrity  of  the  Company's  financial
information rests with management, which has prepared the accompanying financial
statements and related information.  Such information was prepared in accordance
with generally accepted accounting principles  appropriate in the circumstances,
based on management's  best estimates and judgments and giving due consideration
to  materiality.  These  financial  statements  have been audited by independent
auditors and their report is included.

Management  maintains and relies upon systems of internal accounting controls. A
limiting factor in all systems of internal  accounting  control is that the cost
of the system should not exceed the benefits to be derived.  Management believes
that the Company's  system provides the  appropriate  balance between such costs
and benefits.

Periodically  the  internal  accounting  control  system is reviewed by both the
Company's internal auditors and its independent auditors to test for compliance.
Reports  issued by the internal  auditors are released to  management,  and such
reports or summaries  thereof are  transmitted to the Audit Review  Committee of
the Board of Directors and the independent auditors on a timely basis.

The  Audit  Review  Committee,  composed  solely  of  outside  directors,  meets
periodically  with the internal  auditors and  independent  auditors (as well as
management)  to review the work of each. The internal  auditors and  independent
auditors  have free access to the Audit  Review  Committee,  without  management
present, to discuss the results of their audit work.

Management believes that the Company's systems,  policies and procedures provide
reasonable  assurance that  operations are conducted in conformity  with the law
and with management's commitment to a high standard of business conduct.





William J. Post                                   George A. Schreiber, Jr.

William J. Post                                   George A. Schreiber, Jr.
President and                                     Executive Vice President
Chief Executive Officer                           and Chief Financial Officer
                                       22
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


We have  audited  the  accompanying  balance  sheets of Arizona  Public  Service
Company as of December 31, 1996 and 1995 and the related  statements  of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1996.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our  opinion,  such  financial  statements  present  fairly,  in all material
respects,  the  financial  position of the Company at December 31, 1996 and 1995
and the results of its operations and its cash flows for each of the three years
in the period ended  December 31, 1996 in  conformity  with  generally  accepted
accounting principles.



Deloitte & Touche LLP

Deloitte & Touche LLP
Phoenix, Arizona
February 28, 1997
                                       23
<PAGE>
                      [THIS PAGE INTENTIONALLY LEFT BLANK]

                                       24
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                              STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                        ------------------------------------------------------------
                                                           1996                    1995                     1994
                                                        -----------             -----------              -----------
                                                                          (Thousands of Dollars)
<S>                                                     <C>                      <C>                     <C>        
Electric Operating Revenues.........................    $ 1,718,272              $ 1,614,952             $ 1,626,168
                                                        -----------              -----------             -----------


Fuel Expenses:
   Fuel for electric generation.....................        230,393                  208,928                 237,103
   Purchased power..................................         95,130                   60,870                  63,586
                                                        -----------              -----------             -----------
     Total..........................................        325,523                  269,798                 300,689
                                                        -----------              -----------             -----------

Operating Revenues Less Fuel Expenses...............      1,392,749                1,345,154               1,325,479
                                                        -----------              -----------             -----------

Other Operating Expenses:
   Operations excluding fuel expenses...............        321,959                  284,842                 292,292
   Maintenance......................................        108,755                  115,972                 119,629
   Depreciation and amortization (Note 1)...........        297,210                  242,098                 236,108
   Income taxes (Note 9)............................        178,513                  178,865                 168,202
   Other taxes......................................        121,104                  141,623                 140,815
                                                        -----------              -----------             -----------
     Total..........................................      1,027,541                  963,400                 957,046
                                                        -----------              -----------             -----------

Operating Income....................................        365,208                  381,754                 368,433
                                                        -----------              -----------             -----------

Other Income (Deductions):
   Allowance for equity funds used during
     construction...................................          5,209                    4,982                   3,941
   Income taxes (Note 9)............................         45,552                   37,598                  (9,042)
   Palo Verde accretion income (Note 1).............            ---                      ---                  33,596
   Other --- net....................................        (15,544)                 (17,032)                 16,015
                                                        -----------              -----------             -----------
     Total..........................................         35,217                   25,548                  44,510
                                                        -----------              -----------             -----------

Income Before Interest Deductions...................        400,425                  407,302                 412,943
                                                        -----------              -----------             -----------


Interest Deductions:
   Interest on long-term debt.......................        147,666                  160,032                 159,840
   Interest on short-term borrowings................         10,621                    8,143                   6,205
   Debt discount, premium and expense...............          8,176                    8,622                   8,854
   Allowance for borrowed funds used during
     construction...................................         (9,509)                  (9,065)                 (5,442)
                                                        -----------              -----------             -----------
     Total..........................................        156,954                  167,732                 169,457
                                                        -----------              -----------             -----------

Net Income..........................................        243,471                  239,570                 243,486
Preferred Stock Dividend Requirements...............         17,092                   19,134                  25,274
                                                        -----------              -----------             -----------

Earnings for Common Stock...........................   $    226,379             $    220,436            $    218,212
                                                       ============             ============            ============
</TABLE>
See Notes to Financial Statements.
                                       25
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                                 BALANCE SHEETS
                                     ASSETS

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                ------------------------------------
                                                                                   1996                     1995
                                                                                -----------              -----------
                                                                                       (Thousands of Dollars)
<S>                                                                              <C>                     <C>        
Utility Plant (Notes 4, 7 and 8):
   Electric plant in service and held for future use........................     $ 6,803,211             $ 6,544,860
   Less accumulated depreciation and amortization...........................       2,426,143               2,231,614
                                                                                 -----------             -----------
     Total..................................................................       4,377,068               4,313,246
   Construction work in progress............................................         226,935                 281,757
   Nuclear fuel, net of amortization of $63,892
     and $68,275............................................................          51,137                  52,084
                                                                                 -----------             -----------
     Utility Plant --- net..................................................       4,655,140               4,647,087
                                                                                 -----------             -----------

Investments and Other Assets (Note 12)......................................         113,666                  97,742
                                                                                 -----------             -----------

Current Assets:
   Cash and cash equivalents................................................          12,521                  18,389
   Accounts receivable:
     Service customers......................................................         111,715                 100,433
     Other..................................................................          49,898                  28,107
     Allowance for doubtful accounts........................................          (1,685)                 (1,656)
Accrued utility revenues (Note 1)...........................................          55,470                  53,519
Materials and supplies (at average cost)....................................          74,120                  78,271
Fossil fuel (at average cost)...............................................          13,928                  21,722
Deferred income taxes (Note 9)..............................................           8,424                   5,653
Other.......................................................................          22,767                  17,839
                                                                                 -----------             -----------
   Total Current Assets.....................................................         347,158                 322,277
                                                                                 -----------             -----------

Deferred Debits:
   Regulatory asset for income taxes (Note 9)...............................         516,722                 548,464
   Rate synchronization cost deferral (Note 1)..............................         414,082                 449,299
   Unamortized costs of reacquired debt.....................................          69,554                  63,518
   Unamortized debt issue costs.............................................          16,692                  17,772
   Other....................................................................         290,208                 272,103
                                                                                 -----------             -----------
     Total Deferred Debits..................................................       1,307,258               1,351,156
                                                                                 -----------             -----------
     Total..................................................................     $ 6,423,222             $ 6,418,262
                                                                                 ===========             ===========
</TABLE>
See Notes to Financial Statements.
                                       26
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                                 BALANCE SHEETS
                                   LIABILITIES

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                ------------------------------------
                                                                                   1996                     1995
                                                                                -----------              -----------
                                                                                       (Thousands of Dollars)
<S>                                                                             <C>                     <C>         
Capitalization (Notes 3 and 4):
   Common stock.............................................................    $    178,162            $    178,162
   Premiums and expenses --- net............................................       1,091,122               1,039,550
   Retained earnings........................................................         460,106                 403,843
                                                                                ------------            ------------
     Common stock equity....................................................       1,729,390               1,621,555
   Non-redeemable preferred stock...........................................         165,673                 193,561
   Redeemable preferred stock...............................................          53,000                  75,000
   Long-term debt less current maturities...................................       2,029,482               2,132,021
                                                                                ------------            ------------
     Total Capitalization...................................................       3,977,545               4,022,137
                                                                                ------------            ------------

Current Liabilities:
   Commercial paper (Note 5)................................................          16,900                 177,800
   Current maturities of long-term debt (Note 4)............................         153,780                   3,512
   Accounts payable.........................................................         174,394                 106,583
   Accrued taxes............................................................          86,327                  82,827
   Accrued interest.........................................................          39,115                  41,549
   Customer deposits........................................................          32,137                  32,746
   Other....................................................................          21,150                  21,134
                                                                                ------------            ------------
     Total Current Liabilities..............................................         523,803                 466,151
                                                                                ------------            ------------

Deferred Credits and Other:
   Deferred income taxes (Note 9)...........................................       1,414,242               1,429,482
   Deferred investment tax credit (Note 9)..................................          87,723                 115,353
   Unamortized gain ___ sale of utility plant (Note 8)......................          86,939                  91,514
   Customer advances for construction.......................................          24,044                  19,846
   Other....................................................................         308,926                 273,779
                                                                                ------------            ------------
     Total Deferred Credits and Other.......................................       1,921,874               1,929,974
                                                                                ------------            ------------

Commitments and Contingencies (Note 11)

   Total....................................................................     $ 6,423,222             $ 6,418,262
                                                                                 ===========             ===========
</TABLE>
                                       27
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                            STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                        --------------------------------------------
                                                                          1996             1995              1994
                                                                        ---------        ----------        ---------
                                                                                   (Thousands of Dollars)
<S>                                                                     <C>              <C>               <C>      
Cash Flows from Operations:
   Net income......................................................     $ 243,471        $ 239,570         $ 243,486
   Items not requiring cash:
     Depreciation and amortization.................................       297,210          242,098           236,108
     Nuclear fuel amortization.....................................        33,566           31,587            32,564
     Allowance for equity funds used during construction...........        (5,209)          (4,982)           (3,941)
     Deferred income taxes --- net.................................       (12,717)          15,344            83,249
     Deferred investment tax credit --- net........................       (27,630)         (27,641)           (6,825)
     Rate refund reversal..........................................            ---             ---            (9,308)
     Palo Verde accretion income...................................            ---             ---           (33,596)
Changes in certain current assets and liabilities:
     Accounts receivable --- net...................................       (33,044)           1,659            (7,276)
     Accrued utility revenues......................................        (1,951)           1,913             4,924
     Materials, supplies and fossil fuel...........................        11,945           25,606             4,795
     Other current assets..........................................        (4,928)          (3,677)           (1,509)
     Accounts payable..............................................        68,788            6,333            21,666
     Accrued taxes.................................................         3,500           (6,585)          (22,881)
     Accrued interest..............................................        (2,565)          (3,621)             (577)
     Other current liabilities.....................................          (522)           3,393                (9)
   Other --- net...................................................        17,216           21,328              (418)
                                                                        ---------        ---------         ---------
     Net cash provided.............................................       587,130          542,325           540,452
                                                                        ---------        ---------         ---------

Cash Flows from Investing:
   Capital expenditures............................................      (258,598)        (295,772)         (245,925)
   Allowance for borrowed funds used during construction...........        (9,509)          (9,065)           (5,442)
   Other...........................................................        (9,702)         (22,645)           (7,251)
                                                                        ---------        ---------         ---------
     Net cash used.................................................      (277,809)        (327,482)         (258,618)
                                                                        ---------        ---------         ---------

Cash Flows from Financing:
   Long-term debt..................................................       205,830           87,130           516,612
   Short-term borrowings --- net...................................      (160,900)          46,300           (16,500)
   Equity infusion.................................................        50,000               ---               ---
   Dividends paid on common stock..................................      (170,000)        (170,000)         (170,000)
   Dividends paid on preferred stock...............................       (17,416)         (19,134)          (26,232)
   Repayment of preferred stock....................................       (50,360)             ---          (124,096)
   Repayment and reacquisition of long-term debt...................      (172,343)        (147,282)         (462,643)
                                                                        ---------        ---------         ---------
     Net cash used.................................................      (315,189)        (202,986)         (282,859)
                                                                        ---------        ---------         ---------

Net increase (decrease) in cash and cash equivalents...............        (5,868)          11,857            (1,025)
Cash and cash equivalents at beginning of year.....................        18,389            6,532             7,557
                                                                        ---------        ---------         ---------

Cash and cash equivalents at end of year...........................    $   12,521       $   18,389       $     6,532
                                                                       ==========       ==========       ===========

Supplemental Disclosure of Cash Flow Information:
   Cash paid during the year for:
     Interest (excluding capitalized interest).....................     $ 150,603        $ 163,592         $ 161,294
     Income taxes..................................................     $ 158,553        $ 164,261         $ 121,578
</TABLE>
See Notes to Financial Statements.
                                       28
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                         STATEMENTS OF RETAINED EARNINGS

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                        --------------------------------------------
                                                                          1996             1995              1994
                                                                        ---------        ----------        ---------
                                                                                   (Thousands of Dollars)
<S>                                                                     <C>              <C>               <C>      
Retained earnings at beginning of year.............................     $ 403,843        $ 353,655         $ 307,098
Add:  Net income...................................................       243,471          239,570           243,486
                                                                        ---------        ---------         ---------
   Total...........................................................       647,314          593,225           550,584
                                                                        ---------        ---------         ---------

Deduct:
   Dividends:
     Common stock (Notes 3 and 4)..................................       170,000          170,000           170,000
     Preferred stock (at required rates) (Note 3)..................        17,092           19,134            25,274
   Other...........................................................           116              248             1,655
                                                                        ---------        ---------         ---------
     Total deductions..............................................       187,208          189,382           196,929
                                                                        ---------        ---------         ---------

Retained earnings at end of year...................................     $ 460,106        $ 403,843         $ 353,655
                                                                        =========        =========         =========
</TABLE>
See Notes to Financial Statements.

                                       APS
                          NOTES TO FINANCIAL STATEMENTS


1.   Summary of Significant Accounting Policies

Nature of Operations The Company is Arizona's  largest  electric  utility,  with
738,000  customers,  and provides  wholesale or retail  electric  service to the
entire state of Arizona with the  exception of Tucson and about  one-half of the
Phoenix area.

Accounting  Records The  accounting  records are  maintained in accordance  with
generally  accepted  accounting  principles (GAAP). The preparation of financial
statements in accordance  with GAAP requires the use of estimates by management.
Actual results could differ from those estimates.

Regulatory  Accounting  The Company is regulated by the ACC and the FERC and the
accompanying  financial  statements  reflect the  rate-making  policies of these
commissions.  The Company  prepares its financial  statements in accordance with
the  provisions of Statement of Financial  Accounting  Standards  (SFAS) No. 71,
"Accounting  for the  Effects  of  Certain  Types of  Regulation."  SFAS No.  71
requires  a  cost-based,  rate-regulated  enterprise  to  reflect  the impact of
regulatory decisions in its financial statements.

The Company's major regulatory  assets are rate  synchronization  cost deferrals
(see "Rate Synchronization Cost Deferrals" in this note) and deferred taxes (see
Note  9).  These  items,  combined  with  miscellaneous  regulatory  assets  and
liabilities, amounted to approximately $1.1 billion and $1.2 billion at December
31, 1996 and 1995, respectively, most of which are included in "Deferred Debits"
on the Balance Sheets.  In accordance  with the 1996  regulatory  agreement (see
Note 2),  the ACC  accelerated  the  amortization  of  substantially  all of the
Company's  regulatory assets to an eight-year period beginning July 1, 1996. The
accelerated  portion of the regulatory  asset  amortization,  approximately  $60
million pretax in 1996, is included in depreciation and amortization  expense on
the Statements of Income.

The Company's  existing  regulatory  orders and current  regulatory  environment
support its accounting  practices related to regulatory assets. If rate recovery
of these assets is no longer probable,  whether due to competition or 
                                       29
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


regulatory  action,  the Company would no longer be able to apply the provisions
of SFAS No. 71 to all or some part of its operations which could have a material
impact on the Company's financial statements.

Common  Stock All of the  outstanding  shares of common stock of the Company are
owned by Pinnacle West. See Note 3.

Utility Plant and Depreciation Utility plant represents the buildings, equipment
and other facilities used to provide electric service. The cost of utility plant
includes  labor,  materials,  contract  services,  other  related  items  and an
allowance for funds used during  construction.  The cost of retired  depreciable
utility  plant,  plus  removal  costs  less  salvage  realized,  is  charged  to
accumulated  depreciation.  See Note 12 for information on a proposed accounting
standard which impacts accounting for removal costs.

Depreciation  on utility  property  is recorded on a  straight-line  basis.  The
applicable  rates for 1994 through 1996 ranged from 1.51% to 20%, which resulted
in an annual composite rate of 3.32% for 1996.

Allowance for Funds Used During  Construction  AFUDC represents the cost of debt
and  equity  funds  used  to  finance   construction  of  utility  plant.  Plant
construction  costs,  including AFUDC, are recovered in authorized rates through
depreciation when completed projects are placed into commercial operation. AFUDC
does not represent current cash earnings.

AFUDC has been calculated  using  composite  rates of 7.75% for 1996;  8.52% for
1995; and 7.70% for 1994. The Company compounds AFUDC semiannually and ceases to
accrue  AFUDC when  construction  is  completed  and the  property  is placed in
service. Effective in 1997, the Company will no longer accrue AFUDC. In place of
AFUDC,  the Company will  capitalize  interest in  accordance  with SFAS No. 34,
"Capitalization of Interest Cost."

Revenues  Operating  revenues are  recognized  on the accrual  basis and include
estimated  amounts  for  service  rendered  but  unbilled  at the  end  of  each
accounting period.

Palo Verde Accretion Income In 1991, the carrying value of Palo Verde Unit 3 was
discounted to reflect the present value of lost cash flows resulting from a 1991
rate settlement agreement deeming a portion of the unit to temporarily be excess
capacity. In accordance with generally accepted accounting principles, accretion
income was recorded over a  thirty-month  period ended May 1994 in the aggregate
amount of the original discount. The after-tax accretion income recorded in 1994
was $20.3 million.

Rate  Synchronization  Cost Deferrals As authorized by the ACC,  operating costs
(excluding  fuel) and financing  costs of Palo Verde Units 2 and 3 were deferred
from  the  commercial   operation  date   (September   1986  and  January  1988,
respectively) until the date the units were included in a rate order (April 1988
and December  1991,  respectively).  Beginning  July 1, 1996,  the deferrals are
being amortized over an eight-year period in accordance with the 1996 regulatory
agreement  (see Note 2).  Prior to July 1, the  deferrals  were  amortized  over
thirty-five  year  periods.   Amortization  of  the  deferrals  is  included  in
depreciation and amortization expense on the Statements of Income.

Nuclear   Fuel   Nuclear   fuel  is   charged   to  fuel   expense   using   the
unit-of-production  method  under  which the number of units of  thermal  energy
produced in the current period is related to the total thermal units expected to
be produced over the remaining life of the fuel.
                                       30
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


Under federal law, the DOE is  responsible  for the permanent  disposal of spent
nuclear fuel and assesses $0.001 per kWh of nuclear  generation.  This amount is
charged to  nuclear  fuel  expense.  See Note 11 for  information  on spent fuel
disposal and Note 12 for information on nuclear decommissioning costs.

Reacquired Debt Costs The Company  amortizes gains and losses on reacquired debt
over the remaining life of the original debt,  consistent  with  ratemaking.  In
accordance with the 1996 regulatory  agreement (see Note 2), the ACC accelerated
the Company's  amortization of the regulatory asset for reacquired debt costs to
an eight-year  period  beginning  July 1, 1996. The  accelerated  portion of the
regulatory  asset  amortization  is included in  depreciation  and  amortization
expense on the Statements of Income.

Stock-Based  Compensation  The FASB issued a new  statement on  "Accounting  for
Stock-Based Compensation" which was effective for 1996. The statement encourages
but does not require  companies to recognize  compensation  expense based on the
fair value  method.  The Company  continues  to recognize  expense  based on APB
Opinion  No. 25. The  effects on net income of  applying  the fair value  method
would not be material.

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

Reclassifications  Certain  prior year balances have been restated to conform to
the 1996 presentation.

2.   Regulatory Matters

Electric Industry Restructuring

State  The  ACC  has  been   conducting  an  ongoing   investigation   into  the
restructuring  of the Arizona electric  industry in an open  competition  docket
involving  many parties.  In December 1996, the ACC adopted rules that provide a
framework  for the  introduction  of retail  electric  competition.  The ACC has
ordered that  reliability,  stranded cost recovery,  the phase-in  process,  and
bundled,  unbundled and metering services, as well as legal issues, will require
additional  consideration  and will be addressed  through  workshops and working
groups  which  will issue  recommendations  to the ACC  during  1997.  The rules
include the following major provisions:

o    The Rules are  intended to apply to virtually  all of the Arizona  electric
     utilities regulated by the ACC, including the Company.

o    Each  affected  utility  would be  required to make  available  at least 20
     percent of its 1995 system  retail peak demand for  competitive  generation
     supply to all customer  classes not later than January 1, 1999; at least 50
     percent not later than  January 1, 2001;  and all of its retail  demand not
     later than January 1, 2003.

o    Electric  service  providers that obtain a Certificate  of Convenience  and
     Necessity  (CC&N) from the ACC would be allowed to supply,  market,  and/or
     broker specified electric services at retail.  These services would include
     electric generation but exclude electric transmission and distribution.

o    On or before December 31, 1997,  each affected  utility is required to file
     with the ACC proposed  tariffs for bundled  service and unbundled  service.
     Bundled  service  means  electric  service   elements  (i.e.,   generation,
     transmission,  distribution,  and ancillary services) provided as a package
     to consumers within an affected  utility's current service area.  Unbundled
     service means electric  service  elements  provided and priced  
                                       31
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


     separately.  Affected  utilities  would  be  required  to  provide  bundled
     service, as well as unbundled transmission,  distribution and miscellaneous
     other services, at regulated, cost-based rates.

o    The Rules indicate that the ACC will allow recovery of unmitigated stranded
     costs.  Each  affected  utility  would  be  required  to file  with the ACC
     estimates of unmitigated  stranded costs. The ACC would then, after hearing
     and  consideration of various factors,  determine the magnitude of stranded
     cost and appropriate stranded cost recovery mechanisms and charges.

The  Company  continues  to focus on working  with the ACC to bring  competitive
benefits  to Arizona  but  believes  that  certain  provisions  of the Rules are
deficient.  In February  1997,  the Company filed  lawsuits to protect its legal
rights regarding the Rules.

A joint  legislative  committee  has been  appointed to study  electric  utility
industry  restructuring  issues and report back to the legislature by the end of
1997. The Company  believes that  legislation will ultimately be required before
significant implementation of the Rules can lawfully occur.

Until it has been further  determined  how  competition  will be  implemented in
Arizona,  the  Company  cannot  accurately  predict  the  impact of full  retail
competition on its financial position or results of operations.

Federal  The  Energy  Policy  Act of 1992 and  recent  rulemakings  by FERC have
promoted  increased  competition in the wholesale  electric  power markets.  The
Company does not expect these rules to have a material  impact on its  financial
statements.

Several  electric  utility reform bills have been introduced  during the current
legislative session, which as currently written, would allow consumers to choose
their  electric  supplier  by 2000 or 2003.  These  bills,  other bills that are
expected to be introduced,  and ongoing discussions at the federal level suggest
a wide range of opinion  that will need to be  narrowed  before any  substantial
restructuring of the electric utility industry can occur.

1996 Regulatory Agreement

In April 1996, the ACC approved a regulatory  agreement  between the Company and
the ACC Staff. The major provisions of this agreement are:

o    An annual rate reduction of approximately  $48.5 million ($29 million after
     income taxes), or 3.4% on average for all customers except certain contract
     customers, effective July 1, 1996.

o    Recovery of substantially  all of the Company's  present  regulatory assets
     through  accelerated  amortization over an eight-year period beginning July
     1, 1996,  increasing annual amortization by approximately $120 million ($72
     million after income taxes). See Note 1.

o    A  formula  for  sharing   future  cost  savings   between   customers  and
     shareholders  (price reduction formula)  referencing a return on equity (as
     defined) of 11.25%.

o    A moratorium  on filing for  permanent  rate changes prior to July 2, 1999,
     except under the price  reduction  formula and under  certain other limited
     circumstances.
                                       32
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


o    Infusion  of $200  million of common  equity  into the  Company by Pinnacle
     West, in annual payments of $50 million starting in 1996.

Pursuant to the price  reduction  formula,  in March 1997 the Company filed with
the ACC its calculation of an annual retail rate reduction of approximately  $18
million ($11 million after income taxes),  or 1.2%, to become  effective July 1,
1997. The amount and timing of the rate decrease is subject to ACC approval.

1994 Settlement Agreement

In May 1994, the ACC approved a retail rate settlement  agreement which provided
for a net annual retail rate reduction of 2.2% on average,  or approximately $32
million ($19 million after income taxes), effective June 1, 1994. As part of the
settlement,   in  1994  the  Company  reversed   approximately  $20  million  of
depreciation  ($15  million  after  income  taxes)  related to a 1991 Palo Verde
write-off.  It also provided for the accelerated  amortization of  substantially
all deferred investment tax credits over a five-year period beginning in 1995.
                                       33
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


3.   Common and Preferred Stocks

Non-redeemable  preferred  stock is not  redeemable  except at the option of the
Company.   Redeemable   preferred  stock  is  redeemable  through  sinking  fund
obligations. In addition, Series V redeemable preferred stock is callable by the
Company. Common and preferred stock balances at December 31 are shown below:
<TABLE>
<CAPTION>
                                                        Number                                                   
                                                       of Shares             Par          Par Value          Call 
                                                       Outstanding          Value        Outstanding         Price
                                                       -----------           Per         -----------          Per
                                Authorized         1996          1995       Share      1996       1995      Share(a)
                               -----------       ----------    ----------  --------  ---------  ---------  ---------
                                                                                    (Thousands of Dollars)

<S>                            <C>               <C>           <C>         <C>       <C>        <C>         <C>   
Common Stock.................  100,000,000       71,264,947    71,264,947  $   2.50  $ 178,162  $ 178,162       ---
                                                 ==========    ==========            =========  =========          


Preferred Stock:
   Non-Redeemable:
   $1.10.....................      160,000          152,740       155,945   $ 25.00  $   3,818  $   3,898   $ 27.50
   $2.50.....................      105,000          102,532       103,254     50.00      5,127      5,163     51.00
   $2.36.....................      120,000           40,000        40,000     50.00      2,000      2,000     51.00
   $4.35.....................      150,000           75,000        75,000    100.00      7,500      7,500    102.00
   Serial preferred..........    1,000,000
     $2.40 Series A..........                       239,900       240,000     50.00     11,995     12,000     50.50
     $2.625 Series C.........                       240,000       240,000     50.00     12,000     12,000     51.00
     $2.275 Series D.........                       199,655       200,000     50.00      9,983     10,000     50.50
     $3.25 Series E..........                       320,000       320,000     50.00     16,000     16,000     51.00
   Serial preferred..........    4,000,000(b)
     Adjustable rate ---
       Series Q..............                       372,851       500,000    100.00     37,285     50,000       (c)
   Serial preferred..........   10,000,000
     $1.8125 Series W........                     2,398,615     3,000,000     25.00     59,965     75,000       (d)
                                                 ----------    ----------            ---------   --------          

       Total.................                     4,141,293     4,874,199            $ 165,673  $ 193,561
                                                 ==========    ==========            =========  =========          

   Redeemable:
   Serial preferred:
     $10.00 Series U.........                       410,000       500,000   $100.00  $  41,000  $  50,000       ---
     $7.875 Series V.........                       120,000       250,000    100.00     12,000     25,000       (e)
                                                 ----------    ----------            ---------   --------          
       Total.................                       530,000       750,000            $  53,000  $  75,000
                                                 ==========    ==========            =========  =========          
</TABLE>

---------------

(a)  In each case plus accrued dividends.

(b)  This authorization also covers all outstanding redeemable preferred stock.

(c)  Dividend rate adjusted  quarterly to 2% below that of certain United States
     Treasury  securities,  but in no event less than 6% or greater than 12% per
     annum. Redeemable at par.

(d)  Redeemable at par after December 1, 1998.

(e)  Redeemable at $104.73  through May 31, 1997, and thereafter  declining by a
     predetermined amount each year to par after May 31, 2002.
                                       34
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


If there were to be any arrearage in dividends on any of its preferred  stock or
in the sinking fund requirements  applicable to any of its redeemable  preferred
stock,  the Company  could not pay  dividends on its common stock or acquire any
shares  thereof for  consideration.  The redemption  requirements  for the above
issues  for the next five  years  are:  $10.0  million in each of the years 1997
through 2000, and $1.0 million in 2001.

Redeemable  preferred stock  transactions  during each of the three years in the
period ended December 31 are as follows:

<TABLE>
<CAPTION>
                                              Number of Shares                                Par Value
                                                Outstanding                                  Outstanding
                                     -----------------------------------          -----------------------------------
                                                                                       (Thousands of Dollars)
      Description                      1996         1995         1994               1996          1995         1994
--------------------------------     --------       -------    ---------          --------       -------    ---------

<S>                                  <C>           <C>        <C>                 <C>           <C>        <C>      
Balance, January 1..............      750,000       750,000    1,976,100           $75,000       $75,000    $ 197,610
   Retirements:
     $8.80 Series K.............          ---           ---     (142,100)              ---           ---      (14,210)
     $11.50 Series R............          ---           ---     (284,000)              ---           ---      (28,400)
     $8.48 Series S.............          ---           ---     (300,000)              ---           ---      (30,000)
     $8.50 Series T.............          ---           ---     (500,000)              ---           ---      (50,000)
     $10.00 Series U............      (90,000)          ---          ---            (9,000)          ---          ---
     $7.875 Series V............     (130,000)          ---          ---           (13,000)          ---          ---
                                     --------       -------    ---------          --------       -------    ---------

Balance, December 31............      530,000       750,000      750,000           $53,000       $75,000    $  75,000
                                      =======       =======      =======           =======       =======    =========
</TABLE>


4.   Long-Term Debt

The following table presents long-term debt outstanding:

<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                              ------------------------
                                                     Maturity Dates      Interest Rates          1996           1995
                                                     --------------      --------------       ----------    ----------
                                                                                               (Thousands of Dollars)

<S>                                                     <C>             <C>                   <C>           <C>       
First mortgage bonds                                    1997-2028       5.5%-10.25% (a)       $1,448,848    $1,604,317
Pollution control indebtedness                          2024-2031        Adjustable (b)          439,990       433,280
Senior notes                                              2006               6.75%               100,000           ---
Debentures                                                2025                10%                 75,000        75,000
Bank loans                                                2001           Adjustable (c)          100,000           ---
Capitalized lease obligation (d)                        1996-2001            7.48%                19,424        22,936
                                                                                              ----------    ----------
   Total long-term debt                                                                        2,183,262     2,135,533
Less current maturities                                                                          153,780         3,512
                                                                                              ----------    ----------
   Total long-term debt less current maturities                                               $2,029,482    $2,132,021
                                                                                              ==========    ==========
</TABLE>
---------------

(a)  The  weighted-average  rate at  December  31,  1996 and 1995 was  7.66% and
     7.79%, respectively. The weighted-average years to maturity at December 31,
     1996 and 1995 was 18 years and 19 years, respectively.

(b)  The  weighted-average  rates for the years ended December 31, 1996 and 1995
     were 3.40% and 4.31%,  respectively.  Changes in short-term  interest rates
     would affect the costs associated with this debt.

(c)  The  weighted-average  rate for the year ended December 31, 1996 was 5.76%.
     Changes in short-term interest rates would affect the costs associated with
     this debt.

(d)  Represents  the present value of future lease  payments  (discounted  at an
     interest rate of 7.48%) on a combined cycle plant sold and leased back from
     the independent owner-trustee formed to own the facility (see Note 8).
                                       35
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


Aggregate annual  principal  payments due on long-term debt and for sinking fund
requirements  through 2001 are as follows:  1997,  $153.8 million;  1998, $104.1
million;  1999, $104.4 million;  2000, $104.7 million; and 2001, $102.5 million.
See Note 3 for redemption and sinking fund requirements of redeemable  preferred
stock of the Company.

Substantially  all  utility  plant  (other  than  nuclear  fuel,  transportation
equipment  and the combined  cycle plant) is subject to the lien of the mortgage
bond  indenture.  The mortgage bond indenture  includes  provisions  which would
restrict the payment of common stock  dividends under certain  conditions  which
did not exist at December 31, 1996.

5.   Lines of Credit

The Company had committed  lines of credit with various banks of $400 million at
December 31, 1996 and $300 million at December  31, 1995,  which were  available
either  to  support  the  issuance  of  commercial  paper or to be used for bank
borrowings. The commitment fees at December 31, 1996 and 1995 for these lines of
credit  ranged  from .10% to .15% per annum.  The  Company  had  long-term  bank
borrowings of $100 million outstanding at December 31, 1996 and commercial paper
borrowings  outstanding of $16.9 million and $177.8 million at December 31, 1996
and 1995,  respectively,  under  these  lines of credit.  The  weighted  average
interest rate on commercial paper borrowings was 6.40% and 6.06% on December 31,
1996 and 1995,  respectively.  By  Arizona  statute,  the  Company's  short-term
borrowings cannot exceed 7% of its total  capitalization  without the consent of
the ACC.

6.   Fair Value of Financial Instruments

The Company  estimates  that the carrying  amounts of its cash  equivalents  and
commercial  paper are reasonable  estimates of their fair values at December 31,
1996 and 1995 due to their  short  maturities.  Investments  in debt and  equity
securities are held for purposes  other than trading.  The December 31, 1996 and
1995 fair values of such  investments,  determined by using quoted market values
or by  discounting  cash flows at rates equal to the Company's  cost of capital,
approximate their carrying amounts.

The carrying value of long-term debt (excluding a capitalized  lease obligation)
on December 31, 1996 and 1995 was $2.16 billion and $2.11 billion, respectively,
and the estimated fair value was $2.13 billion and $2.14 billion,  respectively.
The fair  value  estimates  are  based on  quoted  market  prices of the same or
similar issues.
                                       36
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


7.   Jointly-Owned Facilities

At December 31, 1996, the Company owned interests in the following jointly-owned
electric generating and transmission facilities.  The Company's share of related
operating and maintenance expenses is included in operating expenses.
<TABLE>
<CAPTION>
                                                       Percent                                        Construction
                                                      Owned by         Plant in       Accumulated        Work in
                                                       Company          Service      Depreciation       Progress
                                                     -----------      -----------    ------------     ------------
                                                                        (Thousands of Dollars)
<S>                                                   <C>            <C>                <C>             <C>    
Generating Facilities:
   Palo Verde Nuclear Generating Station
     Units 1 and 3                                     29.1%          $1,825,459         $547,750        $15,130
   Palo Verde Nuclear Generating Station
     Unit 2 (see Note 8)                               17.0%             568,647          175,926          7,109
   Four Corners Steam Generating Station
     Units 4 and 5                                     15.0%             144,080           58,447            674
   Navajo Steam Generating Station
     Units 1, 2 and 3                                  14.0%             141,178           82,430         61,289(a)
   Cholla Steam Generating Station
     Common Facilities (b)                             62.8%(c)           71,154           37,962            549
Transmission Facilities:
   ANPP 500KV System                                   35.8%(c)           62,593           17,848          1,469
   Navajo Southern System                              31.4%(c)           27,113           16,135             46
   Palo Verde-Yuma 500KV System                        23.9%(c)           11,376            3,727            ---
   Four Corners Switchyards                            27.5%(c)            3,068            1,634              3
   Phoenix-Mead System                                 17.1%(c)           36,089             (876)           325
</TABLE>

---------------

(a)  The construction  costs at Navajo are primarily related to the installation
     of scrubbers required by recent environmental legislation.

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

(c)  Weighted average of interests.


8.   Leases

In 1986, the Company entered into sale and leaseback transactions under which it
sold  approximately  42% of its share of Palo  Verde Unit 2 and  certain  common
facilities.  The gain of  approximately  $140.2 million has been deferred and is
being  amortized to operations  expense over the original lease term. The leases
are being  accounted for as operating  leases.  The amounts to be paid each year
approximate  $40.1 million through 1999, $46.3 million in 2000 and $49.0 million
through  2015.  Options to renew for two  additional  years and to purchase  the
property at fair market  value at the end of the lease terms are also  included.
Consistent  with the ratemaking  treatment,  an amount equal to the annual lease
payments is included in rent expense.  A regulatory  asset is recognized for the
                                       37
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


difference between lease payments and rent expense calculated on a straight-line
basis. In accordance  with the 1996  regulatory  agreement (see Note 2), the ACC
accelerated the Company's  amortization of the regulatory asset for leases to an
eight-year  period  beginning  July 1, 1996.  The  accelerated  amortization  is
included in depreciation and  amortization  expense on the Statements of Income.
The balance of this  regulatory  asset at December  31, 1996 was $57.3  million.
Lease expense for 1996, 1995 and 1994 was $41.8 million, $41.7 million and $42.2
million, respectively.

The  Company  has a capital  lease on a combined  cycle  plant which it sold and
leased back. The lease requires semiannual payments of $2.6 million through June
2001, and includes renewal and purchase options based on fair market value. This
plant is included  in plant in service at its  original  cost of $54.4  million;
accumulated amortization at December 31, 1996 was $44.6 million.

In  addition,  the  Company  leases  certain  land,  buildings,   equipment  and
miscellaneous  other items  through  operating  rental  agreements  with varying
terms, provisions and expiration dates. Rent expense for 1996, 1995 and 1994 was
approximately $9.7 million, $9.9 million and $10.1 million, respectively. Annual
future minimum rental  commitments,  excluding the Palo Verde and combined cycle
leases,  for the period  1997  through  2001 range  between  $12 million and $13
million.  Total  rental  commitments  after the year 2001 are  estimated at $107
million.

9.   Income Taxes

The Company is included in the consolidated income tax returns of Pinnacle West.
Income taxes are allocated to the Company based on its separate  company taxable
income or loss.  Beginning in 1995,  substantially  all ITCs are being amortized
over a five-year  period in accordance with the 1994 rate  settlement  agreement
(see Note 2). Prior to 1995,  ITCs were  deferred and  amortized to other income
over the estimated lives of the related assets as directed by the ACC.

The Company  follows the liability  method of accounting  for income taxes which
requires  that deferred  income taxes be recorded for all temporary  differences
between the tax bases of assets and liabilities  and the amounts  recognized for
financial  reporting.  Deferred taxes are recorded using  currently  enacted tax
rates. In accordance with SFAS No. 71, a regulatory  asset has been  established
for  certain  temporary  differences,  primarily  AFUDC  equity,  to reflect the
ratemaking  treatment.  This regulatory  asset is being amortized as the related
differences  reverse. In accordance with the 1996 regulatory agreement (see Note
2), the ACC accelerated the Company's  amortization of the regulatory  asset for
income taxes to an eight-year  period  beginning July 1, 1996.  The  accelerated
portion of the regulatory  asset  amortization is included in  depreciation  and
amortization expense on the Statements of Income.
                                       38
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


The components of income tax expense are as follows:
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                        --------------------------------------------
                                                                          1996             1995              1994
                                                                        ---------        ----------        ---------
                                                                                   (Thousands of Dollars)
<S>                                                                      <C>              <C>              <C>      
Current:
   Federal.........................................................      $137,531         $120,196         $  74,272
   State...........................................................        35,777           33,368            26,447
                                                                         --------         --------         ---------
     Total current.................................................       173,308          153,564           100,719

Deferred...........................................................          (869)          17,933            83,350
Change in valuation allowance......................................       (11,848)          (2,589)              ---
Investment tax credit amortization.................................       (27,630)         (27,641)           (6,825)
                                                                         --------         --------         ---------

     Total expense.................................................      $132,961         $141,267          $177,244
                                                                         ========         ========          ========
</TABLE>

Income tax  expense  differed  from the amount  computed by  multiplying  income
before  income  taxes  by the  statutory  federal  income  tax  rate  due to the
following:
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                        --------------------------------------------
                                                                          1996             1995              1994
                                                                        ---------        ----------        ---------
                                                                                   (Thousands of Dollars)
<S>                                                                      <C>              <C>               <C>     
Federal income tax expense at statutory rate, 35%..................      $131,751         $133,293          $147,256
Increases (reductions) in tax expense resulting from:
   Tax under book depreciation.....................................        19,229           18,186            17,236
   ITC amortization................................................       (27,630)         (27,641)           (6,825)
   State income tax ___ net of federal income tax benefit..........        20,790           21,770            24,947
   Change in valuation allowance...................................       (10,269)          (2,245)              ---
   Other...........................................................          (910)          (2,096)           (5,370)
                                                                         --------         --------         ---------
     Income tax expense............................................      $132,961         $141,267          $177,244
                                                                         ========         ========          ========
</TABLE>
                                       39
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


The components of the net deferred income tax liability were as follows:
<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                        -----------------------------
                                                                                           1996              1995
                                                                                        -----------       -----------
                                                                                           (Thousands of Dollars)

Deferred tax assets:
<S>                                                                                    <C>               <C>        
   Deferred gain on Palo Verde Unit 2 sale/leaseback................................   $    35,105       $    36,945
   Other............................................................................        71,725            77,539
   Valuation allowance..............................................................           ---           (12,483)
                                                                                       -----------       -----------
     Total deferred tax assets......................................................       106,830           102,001
                                                                                       -----------       -----------

Deferred tax liabilities:
   Plant related....................................................................     1,104,902         1,081,290
   Income taxes recoverable through future rates --- net............................       208,647           221,418
   Rate synchronization deferrals...................................................       167,202           181,384
   Other............................................................................        31,897            41,738
                                                                                       -----------       -----------
     Total deferred tax liabilities.................................................     1,512,648         1,525,830
                                                                                       -----------       -----------

Accumulated deferred income taxes --- net...........................................    $1,405,818        $1,423,829
                                                                                        ==========        ==========
</TABLE>

10.  Retirement Plans and Other Benefits

Voluntary  Severance  Plan The Company  sponsored a voluntary  severance plan in
1996 which  resulted in a before income tax charge of $31.7  million  (including
pension and postretirement benefit expense) recorded primarily as operations and
maintenance expense.  Employees  participating in the plan were credited with an
additional  year of age and service  for  purposes  of  calculating  pension and
postretirement benefits. The total additional pension and postretirement benefit
expense   recorded  for  this  program  was  $2.3  million  and  $5.4   million,
respectively.

Pension  Plan The  Company  sponsors a defined  benefit  pension  plan  covering
substantially  all  employees.  Benefits  are  based  on years  of  service  and
compensation utilizing a final average pay benefit formula. Company policy is to
fund not less  than the  minimum  required  contribution  nor  greater  than the
maximum tax-deductible  contribution.  Plan assets consist primarily of domestic
and  international  common  stocks and bonds and real estate.  Pension  expense,
including  administrative  and  severance  costs,  for  1996,  1995 and 1994 was
approximately $14.9 million, $9.6 million and $11.9 million, respectively.
                                       40
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


The  components of net periodic  pension costs before  consideration  of amounts
capitalized or billed to others and excluding severance costs of $2.9 million in
1996 and $1.4 million in 1994 are as follows:
<TABLE>
<CAPTION>
                                                                          1996             1995              1994
                                                                        ---------        ----------        ---------
                                                                                   (Thousands of Dollars)

<S>                                                                       <C>              <C>               <C>    
Service cost --- benefits earned during the period.................       $22,861          $16,038           $20,345
Interest cost on projected benefit obligation......................        44,602           39,328            39,377
Return on plan assets..............................................       (62,460)         (82,209)            6,105
Net amortization and deferral......................................        19,734           45,976           (44,000)
                                                                          -------          -------           -------
Net periodic pension cost..........................................       $24,737          $19,133           $21,827
                                                                          =======          =======           =======
</TABLE>


A reconciliation  of the funded status of the plan to the amounts  recognized in
the balance sheets is presented below:
<TABLE>
<CAPTION>
                                                                                           1996              1995
                                                                                        -----------       -----------
                                                                                           (Thousands of Dollars)

<S>                                                                                      <C>               <C>     
Plan assets at fair value...........................................................     $ 533,444         $ 469,820
                                                                                         ---------         --------- 
Less:
   Accumulated benefit obligation, including vested benefits
     of $413,004 and $396,138 in 1996 and 1995, respectively........................       467,037           428,258
   Effect of projected future compensation increases................................       134,057           149,836
                                                                                         ---------         --------- 
Total projected benefit obligation..................................................       601,094           578,094
                                                                                         ---------         --------- 
Plan assets less than projected benefit obligation..................................       (67,650)         (108,274)
Plus:
   Unrecognized net loss from past experience
     different from that assumed....................................................         2,818            44,614
   Unrecognized prior service cost..................................................        20,478            23,800
   Unrecognized net transition asset................................................       (29,593)          (32,809)
                                                                                         ---------         --------- 

Accrued pension liability...........................................................     $ (73,947)        $ (72,669)
                                                                                         =========         ========= 

Principal actuarial assumptions used were:
   Discount rate....................................................................         7.75%             7.25%
   Rate of increase in compensation levels..........................................         4.50%             4.50%
   Expected long-term rate of return on assets......................................         9.00%             9.00%
</TABLE>

In addition to the defined  benefit  pension  plan,  the Company  also  sponsors
qualified  defined   contribution   plans.   Collectively,   these  plans  cover
substantially  all employees.  The plans provide for employee  contributions and
partial employer matching  contributions after certain eligibility  requirements
are met.  Expenses  related  to these  plans for  1996,  1995 and 1994 were $3.4
million, $3.1 million and $3.2 million, respectively.

Postretirement Plans The Company provides medical and life insurance benefits to
its  retired  employees.  Employees  must  retire to become  eligible  for these
retirement  benefits  which are based on years of service  and age.  The retiree
medical insurance plans are  contributory;  the retiree life insurance plans are
noncontributory.  In accordance with the governing plan  documents,  the Company
retains the right to change or eliminate these benefits.
                                       41
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


Funding  is  based  upon  actuarially  determined  contributions  that  take tax
consequences into account.  Plan assets consist primarily of domestic stocks and
bonds.  The  postretirement   benefit  expense  for  1996,  1995  and  1994  was
approximately $16 million, $13 million and $13 million, respectively.

The components of net periodic postretirement benefit costs before consideration
of amounts capitalized or billed to others and excluding severance costs of $9.6
million in 1996 are as follows:

<TABLE>
<CAPTION>
                                                                          1996             1995              1994
                                                                        ---------        ----------        ---------
                                                                                   (Thousands of Dollars)

<S>                                                                      <C>              <C>               <C>     
Service cost --- benefits earned during the period.................      $  7,974         $  6,735          $  8,785
Interest cost on accumulated benefit obligation....................        13,395           13,743            14,026
Return on plan assets..............................................       (12,550)         (15,133)           (6,459)
Net amortization and deferral......................................        12,733           17,142            11,619
                                                                         --------         --------          --------
Net periodic postretirement benefit cost...........................      $ 21,552         $ 22,487          $ 27,971
                                                                         ========         ========          ========
</TABLE>

A reconciliation  of the funded status of the plan to the amounts  recognized in
the balance sheet is presented below:
<TABLE>
<CAPTION>
                                                                                           1996              1995
                                                                                        -----------       -----------
                                                                                           (Thousands of Dollars)

<S>                                                                                       <C>              <C>      
Plan assets at fair value...........................................................      $109,763         $  81,309
                                                                                          --------         ---------

Less accumulated postretirement benefit obligation:
   Retirees.........................................................................        86,747            90,222
   Fully eligible plan participants.................................................         3,351            15,497
   Other active plan participants...................................................        89,452           106,568
                                                                                          --------         ---------
     Total accumulated postretirement benefit obligation............................       179,550           212,287
                                                                                          --------         ---------
Plan assets less than accumulated benefit obligation................................       (69,787)         (130,978)
Plus:
   Unrecognized transition obligation...............................................       122,439           155,481
   Unrecognized net gain from past experience different from that
     assumed........................................................................       (62,299)          (24,561)
                                                                                          --------         ---------
Accrued postretirement liability....................................................      $ (9,647)        $     (58)
                                                                                          ========         ========= 

Principal actuarial assumptions used were:
   Discount rate....................................................................         7.75%             7.25%
   Annual salary increases for life insurance obligation............................         4.50%             4.50%
   Expected long-term rate of return on assets ___ after tax........................         7.75%             7.64%
   Initial health care cost trend rate ___ under age 65.............................         9.00%             9.50%
   Initial health care cost trend rate ___ age 65 and over..........................         8.00%             8.50%
   Ultimate health care cost trend rate (reached in the year 2002)..................         5.50%             5.50%
</TABLE>

Assuming a one percent  increase  in the health  care cost trend rate,  the 1996
cost  of   postretirement   benefits  other  than  pensions  would  increase  by
approximately $5 million and the accumulated  benefit  obligation as of December
31, 1996 would increase by approximately $31 million.
                                       42
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


11.  Commitments and Contingencies

Litigation  The  Company  is a  party  to  various  claims,  legal  actions  and
complaints  arising  in the  ordinary  course of  business.  In the  opinion  of
management,  the ultimate  resolution  of these matters will not have a material
adverse effect on the Company's financial statements.

Palo Verde Nuclear  Generating Station The Company has encountered tube cracking
in steam generators and has taken,  and will continue to take,  remedial actions
that it believes have slowed the rate of tube degradation. The projected service
life of the steam  generators  is  reassessed  periodically  and these  analyses
indicate that it will be  economically  desirable for the Company to replace the
Unit 2 steam  generators  between 2003 and 2008. The Company  estimates that its
share of the replacement  costs (in 1996 dollars and including  installation and
replacement power costs) will be approximately  $50 million,  most of which will
be incurred after the year 2000. Based on the latest available data, the Company
estimates  that the Unit 1 and Unit 3 steam  generators  should  operate for the
license periods (until 2025 and 2027,  respectively),  although the Company will
continue its normal periodic assessment of these steam generators.

Under the Nuclear Waste Policy Act, DOE was to develop the facilities  necessary
for the storage and  disposal of spent fuel and to have the first such  facility
in operation by 1998.  That facility was to be a permanent  repository,  but DOE
has announced  that such a repository  now cannot be completed  before 2010. The
Company has capacity in existing  fuel storage  pools at Palo Verde which,  with
certain modifications, could accommodate all fuel expected to be discharged from
normal operation of Palo Verde through about 2002, and believes it could augment
that wet storage with new  facilities  for on-site dry storage of spent fuel for
an  indeterminate  period of  operation  beyond 2002,  subject to obtaining  any
required governmental approvals.  The Company currently believes that spent fuel
storage or disposal methods will be available for use by Palo Verde to allow its
continued operation beyond 2002.

The Palo Verde  participants have insurance for public liability  resulting from
nuclear  energy  hazards to the full limit of liability  under federal law. This
potential  liability  is covered  by primary  liability  insurance  provided  by
commercial  insurance  carriers in the amount of $200 million and the balance by
an  industry-wide  retrospective  assessment  program.  If losses at any nuclear
power plant covered by the programs  exceed the accumulated  funds,  the Company
could be assessed retrospective premium adjustments.  The maximum assessment per
reactor  under the  program  for each  nuclear  incident  is  approximately  $79
million,  subject to an annual limit of $10 million per incident. Based upon the
Company's  29.1% interest in the three Palo Verde units,  the Company's  maximum
potential  assessment  per  incident  for all three units is  approximately  $69
million, with an annual payment limitation of approximately $9 million.

The Palo Verde  participants  maintain "all risk"  (including  nuclear  hazards)
insurance for property damage to, and decontamination of, property at Palo Verde
in the aggregate  amount of $2.75 billion,  a substantial  portion of which must
first be applied to  stabilization  and  decontamination.  The  Company has also
secured  insurance  against  portions of any  increased  cost of  generation  or
purchased power and business interruption resulting from a sudden and unforeseen
outage of any of the three units. The insurance  coverage  discussed in this and
the previous paragraph is subject to certain policy conditions and exclusions.

Fuel and Purchased Power  Commitments The Company is a party to various fuel and
purchased  power  contracts  with terms  expiring  from 1997  through  2020 that
include required  purchase  provisions.  The Company estimates its 1997 contract
requirements to be  approximately  $120 million.  However,  this amount may vary
significantly  
                                       43
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


pursuant to certain  provisions  in such  contracts  which permit the Company to
decrease its required purchases under certain circumstances.

The Company is contractually  obligated to reimburse  certain coal providers for
amounts  incurred for coal mine  reclamation.  The Company's  share of the total
obligation  is  estimated  at  $114  million.  The  portion  of  the  coal  mine
reclamation  obligation  related to coal  already  burned is  approximately  $68
million at December 31, 1996 and is included in "Deferred  Credits ___ Other" in
the Balance Sheet. A regulatory  asset has been  established for amounts not yet
recovered from ratepayers. In accordance with the 1996 regulatory agreement (see
Note 2), the ACC began  accelerated  amortization  of the  Company's  regulatory
asset for coal mine reclamation  costs over an eight-year  period beginning July
1, 1996.  Amortization is included in depreciation and  amortization  expense on
the Statements of Income.  The balance of the  regulatory  asset at December 31,
1996 was approximately $69 million.

Construction  Program Total capital  expenditures  in 1997 are estimated at $296
million.

12.  Nuclear Decommissioning Costs

In 1996, the Company  recorded $11.4 million for  decommissioning  expense.  The
Company estimates it will cost  approximately $2.0 billion ($440 million in 1996
dollars),  over a fourteen year period  beginning in 2024, to  decommission  its
29.1% interest in the three Palo Verde units.  Decommissioning costs are charged
to expense over the respective unit's operating license term and are included in
the  accumulated  depreciation  balance  until  each  unit is  retired.  Nuclear
decommissioning costs are currently recovered in rates.

The Company is utilizing a 1995 site-specific study for Palo Verde, prepared for
the   Company  by  an   independent   consultant,   that   assumes   the  prompt
removal/dismantlement  method of  decommissioning.  The  Company is  required to
update the study every three years.

As required by regulation,  the Company has established  external trust accounts
into which quarterly deposits are made for  decommissioning.  As of December 31,
1996, the Company had deposited a total of $68.1 million. The trust accounts are
included in  "Investments  and Other  Assets" on the Balance  Sheets at a market
value of $95.5  million on  December  31,  1996.  The trust  funds are  invested
primarily in  fixed-income  securities  and domestic stock and are classified as
available for sale.  Realized and  unrealized  gains and losses are reflected in
accumulated depreciation.

In February  1996,  the FASB issued an exposure  draft  "Accounting  for Certain
Liabilities  Related to Closure or Removal of  Long-Lived  Assets"  which  would
require the estimated present value of the cost of  decommissioning  and certain
other  removal  costs to be recorded as a  liability,  along with an  offsetting
plant asset when a decommissioning or other removal obligation is incurred.  The
FASB has indicated a revised  exposure draft or a final statement will be issued
in the second quarter of 1997.
                                       44
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS


13.  Selected Quarterly Financial Data (Unaudited)

Quarterly financial information for 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
                                             Electric
                                             Operating         Operating           Net         Earnings for
Quarter                                      Revenues          Income(a)         Income        Common Stock
-------                                      --------          ---------         ------        ------------
                                                                (Thousands of Dollars)
<S>                                          <C>               <C>              <C>               <C>     
1996
   First                                     $345,261          $ 77,522         $ 45,606          $ 41,129
   Second                                     426,658           102,978           70,440            66,114
   Third                                      566,899           152,307          128,484           124,331
   Fourth (b)                                 379,454            32,401           (1,059)           (5,195)
1995
   First                                     $336,968          $ 73,214         $ 37,832          $ 33,025
   Second                                     380,178            88,719           53,452            48,676
   Third                                      549,082           162,602          128,345           123,570
   Fourth                                     348,724            57,219           19,941            15,165
</TABLE>

---------------

(a)  The Company's operations are subject to seasonal fluctuations  primarily as
     a result of weather  conditions.  The  results of  operations  for  interim
     periods are not  necessarily  indicative  of the results to be expected for
     the full year.

(b)  Net income for the fourth  quarter of 1996 includes an after-tax  charge of
     $18.9 million for a voluntary severance program.
                                       45
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                            AND FINANCIAL DISCLOSURE

     None.

                                    PART III

                        ITEM 10. DIRECTORS AND EXECUTIVE
                           OFFICERS OF THE REGISTRANT

     Reference is hereby made to "Election of Directors" in the Company's  Proxy
Statement  relating to the annual meeting of  shareholders to be held on May 20,
1997 (the "1997 Proxy  Statement") and to the  Supplemental  Item --- "Executive
Officers of the Registrant" in Part I of this report.

                         ITEM 11. EXECUTIVE COMPENSATION

     Reference is hereby made to the fourth,  fifth and sixth  paragraphs  under
the heading "The Board and its  Committees,"  to  "Executive  Compensation,"  to
"Report  of the  Human  Resources  Committee,"  to  "Performance  Graph"  and to
"Executive Benefit Plans" in the 1997 Proxy Statement.

                         ITEM 12. SECURITY OWNERSHIP OF
                    CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Reference is hereby made to "Principal  Holders of Voting  Securities"  and
"Ownership  of  Pinnacle  West  Securities  by  Management"  in the  1997  Proxy
Statement.

             ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Reference is hereby made to the last paragraph under the heading "The Board
and its Committees" and to "Executive Benefit Plans --- Employment and Severance
Agreements" in the 1997 Proxy Statement.
                                       46
<PAGE>
                                     PART IV

          ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
                       SCHEDULES, AND REPORTS ON FORM 8-K

Financial Statements

     See the Index to Financial Statements in Part II, Item 8 on page 21.

Exhibits Filed

Exhibit No.                                           Description
-----------                                           -----------

10.1(a)   ---    1997 Senior Management Variable Pay Plan

10.2(a)   ---    1997 Officers Variable Pay Plan

10.3(a)   ---    Fifth Amendment to the Arizona Public Service Company Deferred 
                 Compensation Plan

10.4      ---    Amendment No. 2 to Decommissioning Trust Agreement (PVNGS 
                 Unit 1) dated as of July 1, 1991

10.5      ---    Amendment No. 4 to Amended and Restated Decommissioning Trust 
                 Agreement (PVNGS Unit 2) dated as of January 31, 1992

10.6      ---    Amendment No. 2 to Decommissioning Trust Agreement (PVNGS 
                 Unit 3) dated as of July 1, 1991

10.7      ---    Letter Agreement dated October 9, 1996 between the Company and 
                 Jaron B. Norberg

10.8      ---    Letter Agreement dated August 16, 1996 between the Company and 
                 William L. Stewart

10.9      ---    Letter Agreement dated November 27, 1996 between the Company 
                 and George A. Schreiber, Jr.

23.1      ---    Consent of Deloitte & Touche LLP

27.1      ---    Financial Data Schedule

99.1      ---    Arizona Corporation  Commission Order,  Decision No. 59943, 
                 dated December 26, 1996, including the Rules regarding the 
                 introduction of retail competition in Arizona


     In addition to those Exhibits shown above, the Company hereby  incorporates
the  following  Exhibits  pursuant  to Exchange  Act Rule 12b-32 and  Regulation
ss.229.10(d) by reference to the filings set forth below:
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>
  3.1           Bylaws, amended as of              3.1 to 1995 Form 10-K             1-4473            3-29-96
                February 20, 1996                  Report

  3.2           Resolution of Board of             3.2 to 1994 Form 10-K             1-4473            3-30-95
                Directors temporarily              Report
                suspending Bylaws in part
</TABLE>
                                       47
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

  3.3           Articles of Incorporation,         4.2 to Form S-3                   1-4473            9-29-93
                restated as of May 25, 1988        Registration Nos.
                                                   33-33910 and 33-55248 by
                                                   means of September 24,
                                                   1993 Form 8-K Report

  3.4           Certificates pursuant to           4.3 to Form S-3                   1-4473            9-29-93
                Sections 10-152.01 and             Registration Nos.
                10-016, Arizona Revised            33-33910 and 33-55248 by
                Statutes, establishing Series A    means of September 24, 
                through V of the Company's         1993 Form 8-K Report 
                Serial Preferred Stock

  3.5           Certificate pursuant to            4.4 to Form S-3                   1-4473            9-29-93
                Section 10-016, Arizona            Registration Nos.
                Revised Statutes, establishing     33-33910 and 33-55248 by
                Series W of the Company's          means of September 24,
                Serial Preferred Stock             1993 Form 8-K Report

  4.1           Mortgage and Deed of Trust         4.1 to September 1992             1-4473            11-9-92
                Relating to the Company's          Form 10-Q Report
                First Mortgage Bonds,
                together with forty-eight
                indentures supplemental
                thereto

  4.2           Forty-ninth Supplemental           4.1 to 1992 Form 10-K             1-4473            3-30-93
                Indenture                          Report

  4.3           Fiftieth Supplemental              4.2 to 1993 Form 10-K             1-4473            3-30-94
                Indenture                          Report

  4.4           Fifty-first Supplemental           4.1 to August 1, 1993
                Indenture                          Form 8-K Report                   1-4473            9-27-93

  4.5           Fifty-second Supplemental          4.1 to September 30, 1993         1-4473            11-15-93
                Indenture                          Form 10-Q Report

  4.6           Fifty-third Supplemental           4.5 to Registration               1-4473            3-1-94
                Indenture                          Statement No. 33-61228
                                                   by means of February 23,
                                                   1994 Form 8-K Report

  4.7           Fifty-fourth Supplemental          4.1 to Registration               1-4473            11-22-96
                Indenture                          Statements Nos. 33-61228,
                                                   33-55473, 33-64455 and
                                                   333-15379 by means of
                                                   November 19, 1996
                                                   Form 8-K Report
</TABLE>
                                       48
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

  4.8           Agreement, dated March 21,         4.1 to 1993 Form 10-K             1-4473            3-30-94
                1994, relating to the filing of    Report
                instruments defining the
                rights of holders of long-term
                debt not in excess of 10% of
                the Company's total assets

  4.9           Indenture dated as of January      4.6 to Registration               1-4473            1-11-95
                1, 1995 among the Company          Statement Nos. 33-61228
                and The Bank of New York,          and 33-55473 by means of
                as Trustee                         January 1, 1995 Form 8-K
                                                   Report

  4.10          First Supplemental Indenture       4.4 to Registration               1-4473            1-11-95
                dated as of January 1, 1995        Statement Nos. 33-61228
                                                   and 33-55473 by means of
                                                   January 1, 1995 Form 8-K
                                                   Report

  4.11          Indenture dated as of              4.5 to Registration               1-4473            11-22-96
                November 15, 1996 among            Statements Nos. 33-61228,
                the Company and The Bank           33-55473, 33-64455 and
                of New York, as Trustee            333-15379 by means of
                                                   November 19, 1996
                                                   Form 8-K Report

  4.12          First Supplemental Indenture       4.6 to Registration               1-4473            11-22-96
                                                   Statements Nos. 33-61228,
                                                   33-55473, 33-64455 and
                                                   333-15379 by means of
                                                   November 19, 1996
                                                   Form 8-K Report

  4.13          Agreement of Resignation,          4.1 to September 25, 1995
                Appointment, Acceptance and        Form 8-K Report                   1-4473            10-24-95
                Assignment dated as of
                August 18, 1995 by and
                among the Company, Bank of
                America National Trust and
                Savings Association and The
                Bank of New York

10.10           Two separate                       10.2 to September 1991            1-4473            11-14-91
                Decommissioning Trust              Form 10-Q
                Agreements (relating to
                PVNGS  Units 1 and 3,  
                respectively), each dated July 
                1, 1991, between the Company 
                and Mellon Bank, N.A., as
                Decommissioning Trustee
</TABLE>
                                       49
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.11           Amendment No. 1 to                 10.1 to 1994 Form 10-K            1-4473            3-30-95
                Decommissioning Trust              Report
                Agreement (PVNGS Unit 1)
                dated as of December 1, 1994

10.12           Amendment No. 1 to                 10.2 to 1994 Form 10-K            1-4473            3-30-95
                Decommissioning Trust              Report
                Agreement (PVNGS Unit 3)
                dated as of December 1, 1994

10.13           Amended and Restated               10.1 to Pinnacle West             1-8962            3-26-92
                Decommissioning Trust              1991 Form 10-K Report
                Agreement (PVNGS Unit 2) 
                dated as of January 31, 1992,
                among the Company, Mellon 
                Bank, N.A., as 
                Decommissioning Trustee, and
                State Street Bank and Trust 
                Company, as successor to The 
                First National Bank of 
                Boston, as Owner Trustee  
                under two separate Trust 
                Agreements, each with a 
                separate Equity Participant,  
                and as Lessor under two 
                separate Facility Leases, each 
                relating to an undivided 
                interest in PVNGS Unit 2

10.14           First Amendment to Amended         10.2 to 1992 Form 10-K            1-4473            3-30-93
                and Restated                       Report
                Decommissioning Trust
                Agreement (PVNGS Unit 2),
                dated as of November 1, 1992

10.15           Amendment No. 2 to Amended         10.3 to 1994 Form 10-K            1-4473            3-30-95
                and Restated                       Report
                Decommissioning Trust
                Agreement (PVNGS Unit 2)
                dated as of November 1, 1994

10.16           Amendment No. 3 to Amended         10.1 to June 1996 Form            1-4473            8-9-96
                and Restated                       10-Q Report
                Decommissioning Trust
                Agreement (PVNGS Unit 2)
                dated as of January 31, 1992
</TABLE>
                                       50
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.17           Asset Purchase and Power           10.1 to June 1991 Form            1-4473            8-8-91
                Exchange Agreement dated           10-Q Report
                September 21, 1990 between
                the Company and PacifiCorp,
                as amended as of October 11,
                1990 and as of July 18, 1991

10.18           Long-Term Power                    10.2 to June 1991 Form            1-4473            8-8-91
                Transactions Agreement dated       10-Q Report
                September 21, 1990 between
                the Company and PacifiCorp,
                as amended as of October 11,
                1990 and as of July 8, 1991

10.19           Contract, dated July 21, 1984,     10.31 to Pinnacle West's          2-96386           3-13-85
                with DOE providing for the         Form S-14 Registration
                disposal of nuclear fuel and/or    Statement
                high-level radioactive waste,
                ANPP

10.20           Amendment No. 1 dated              10.3 to 1995 Form 10-K            1-4473            3-29-96
                April 5, 1995 to the Long-Term     Report
                Power Transactions Agreement
                and Asset Purchase and Power
                Exchange Agreement between
                PacifiCorp and the Company

10.21           Restated Transmission              10.4 to 1995 Form 10-K            1-4473            3-29-96
                Agreement between PacifiCorp       Report
                and the Company dated
                April 5, 1995

10.22           Contract among PacifiCorp,         10.5 to 1995 Form 10-K            1-4473            3-29-96
                the Company and United             Report
                States Department of Energy
                Western Area Power
                Administration, Salt Lake
                Area Integrated Projects
                for Firm Transmission
                Service dated May 5, 1995

10.23           Reciprocal Transmission            10.6 to 1995 Form 10-K            1-4473            3-29-96
                Service Agreement between          Report
                the Company and PacifiCorp
                dated as of March 2, 1994

10.24           Indenture of Lease with            5.01 to Form S-7                  2-59644           9-1-77
                Navajo Tribe of Indians, Four      Registration Statement
                Corners Plant
</TABLE>
                                       51
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.25           Supplemental and Additional        5.02 to Form S-7                  2-59644           9-1-77
                Indenture of Lease, including      Registration Statement
                amendments and supplements
                to original lease with Navajo
                Tribe of Indians, Four Corners
                Plant

10.26           Amendment and Supplement           10.36 to Registration             1-8962            7-25-85
                No. 1 to Supplemental and          Statement on Form 8-B of
                Additional Indenture of Lease,     Pinnacle West
                Four Corners, dated April 25,
                1985

10.27           Application and Grant of           5.04 to Form S-7                  2-59644           9-1-77
                multi-party rights-of-way and      Registration Statement
                easements, Four Corners
                Plant Site

10.28           Application and Amendment          10.37 to Registration             1-8962            7-25-85
                No. 1 to Grant of multi-party      Statement on Form 8-B of
                rights-of-way and easements,       Pinnacle West
                Four Corners Power Plant
                Site, dated April 25, 1985

10.29           Application and Grant of           5.05 to Form S-7                  2-59644           9-1-77
                Arizona Public Service             Registration Statement
                Company rights-of-way and
                easements, Four Corners
                Plant Site

10.30           Application and Amendment          10.38 to Registration             1-8962            7-25-85
                No. 1 to Grant of Arizona          Statement on Form 8-B of
                Public Service Company             Pinnacle West
                rights-of-way and easements,
                Four Corners Power Plant
                Site, dated April 25, 1985

10.31           Indenture of Lease, Navajo         5(g) to Form S-7                  2-36505           3-23-70
                Units 1, 2, and 3                  Registration Statement

10.32           Application and Grant of           5(h) to Form S-7                  2-36505           3-23-70
                rights-of-way and easements,       Registration Statement
                Navajo Plant

10.33           Water Service Contract             5(l) to Form S-7                  2-39442           3-16-71
                Assignment with the United         Registration Statement
                States Department of Interior,
                Bureau of Reclamation,
                Navajo Plant
</TABLE>
                                       52
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.34           Arizona Nuclear Power              10.1 to 1988 Form 10-K            1-4473            3-8-89
                Project Participation              Report
                Agreement, dated August 23, 
                1973, among the Company, 
                Salt River Project Agricultural  
                Improvement and Power 
                District, Southern California 
                Edison Company, Public 
                Service Company of New
                Mexico, El Paso Electric 
                Company, Southern California  
                Public Power Authority, and 
                Department of Water and 
                Power of the City of Los
                Angeles, and amendments 
                1-12 thereto

10.35           Amendment No. 13 dated as          10.1 to March 1991 Form           1-4473            5-15-91
                of April 22, 1991, to Arizona      10-Q Report
                Nuclear Power Project
                Participation Agreement,
                dated August 23, 1973, among  
                the Company, Salt River 
                Project Agricultural  
                Improvement and Power
                District, Southern California  
                Edison Company, Public 
                Service Company of New  
                Mexico, El Paso Electric  
                Company, Southern California  
                Public Power Authority, and 
                Department of Water and
                Power of the City of Los 
                Angeles

10.36(c)        Facility Lease, dated as of        4.3 to Form S-3                   33-9480           10-24-86
                August 1, 1986, between            Registration Statement
                State Street Bank and Trust
                Company, as successor to The
                First National Bank of
                Boston, in its capacity as
                Owner Trustee, as Lessor, and
                the Company, as Lessee
</TABLE>
                                       53
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.37(c)        Amendment No. 1, dated as of       10.5 to September 1986            1-4473            12-4-86
                November 1, 1986, to Facility      Form 10-Q Report by
                Lease, dated as of August 1,       means of Amendment No.
                1986, between State Street         1 on December 3, 1986
                Bank and Trust Company, as         Form 8
                successor to The First
                National Bank of Boston, in
                its capacity as Owner Trustee,
                as Lessor, and the Company,
                as Lessee

10.38(c)        Amendment No. 2 dated as of        10.3 to 1988 Form 10-K            1-4473            3-8-89
                June 1, 1987 to Facility Lease     Report
                dated as of August 1, 1986
                between State Street Bank
                and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Lessor, and APS, as Lessee

10.39(c)        Amendment No. 3, dated as of       10.3 to 1992 Form 10-K            1-4473            3-30-93
                March 17, 1993, to Facility        Report
                Lease, dated as of August 1,
                1986, between State Street
                Bank and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Lessor, and the Company, as
                Lessee

10.40           Facility Lease, dated as of        10.1 to November 18, 1986         1-4473            1-20-87
                December 15, 1986, between         Form 8-K Report
                State Street Bank and Trust
                Company, as successor to The
                First National Bank of
                Boston, in its capacity as
                Owner Trustee, as Lessor, and
                the Company, as Lessee

10.41           Amendment No. 1, dated as of       4.13 to Form S-3                  1-4473            8-24-87
                August 1, 1987, to Facility        Registration Statement
                Lease, dated as of December        No. 33-9480 by means of
                15, 1986, between State Street     August 1, 1987 Form 8-K
                Bank and Trust Company, as         Report
                successor to The First
                National Bank of Boston, as
                Lessor, and the Company, as
                Lessee
</TABLE>
                                       54
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.42           Amendment No. 2, dated as of       10.4 to 1992 Form 10-K            1-4473            3-30-93
                March 17, 1993, to Facility        Report
                Lease, dated as of December
                15, 1986, between State Street
                Bank and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Lessor, and the Company, as
                Lessee

10.43(a)        Directors' Deferred                10.1 to June 1986 Form            1-4473            8-13-86
                Compensation Plan, as              10-Q Report
                restated, effective January 1,
                1986

10.44(a)        Second Amendment to the            10.2 to 1993 Form 10-K            1-4473            3-30-94
                Arizona Public Service             Report
                Company Directors' Deferred
                Compensation Plan, effective
                as of January 1, 1993

10.45(a)        Third Amendment to the             10.1 to September 1994            1-4473            11-10-94
                Arizona Public Service             Form 10-Q
                Company Directors' Deferred
                Compensation Plan effective
                as of May 1, 1993

10.46(a)        Arizona Public Service             10.4 to 1988 Form 10-K            1-4473            3-8-89
                Company Deferred                   Report
                Compensation Plan, as
                restated, effective January 1,
                1984, and the second and
                third amendments thereto,
                dated December 22, 1986, and
                December 23, 1987,
                respectively

10.47(a)        Third Amendment to the             10.3 to 1993 Form 10-K            1-4473            3-30-94
                Arizona Public Service             Report
                Company Deferred
                Compensation Plan, effective
                as of January 1, 1993

10.48(a)        Fourth Amendment to the            10.2 to September 1994            1-4473            11-10-94
                Arizona Public Service             Form 10-Q Report
                Company Deferred
                Compensation Plan effective
                as of May 1, 1993
</TABLE>
                                       55
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.49(a)        Pinnacle West Capital              10.10 to 1995 Form 10-K           1-4473            3-29-96
                Corporation, Arizona Public        Report
                Service Company, SunCor
                Development Company
                and El Dorado Investment
                Company Deferred
                Compensation Plan as
                amended and restated
                effective January 1, 1996

10.50(a)        Arizona Public Service             10.11 to 1995 Form 10-K           1-4473            3-29-96
                Company Supplemental               Report
                Excess Benefit Retirement
                Plan as amended and
                restated on December 20, 1995

10.51(a)        Pinnacle West Capital              10.7 to 1994 Form 10-K            1-4473            3-30-95
                Corporation and Arizona            Report
                Public Service Company
                Directors' Retirement Plan
                effective as of January 1, 1995

10.52(a)        Letter Agreement dated             10.6 to 1994 Form 10-K            1-4473            3-30-95
                December 21, 1993, between         Report
                the Company and William L.
                Stewart

10.53(a)        Agreement for Utility              10.6 to 1988 Form 10-K            1-4473            3-8-89
                Consulting Services, dated         Report
                March 1, 1985, between the
                Company and Thomas G.
                Woods, Jr., and Amendment
                No. 1 thereto, dated January
                6, 1986

10.54(a)        Letter Agreement, dated April      10.7 to 1988 Form 10-K            1-4473            3-8-89
                3, 1978, between the Company       Report
                and O. Mark DeMichele,
                regarding certain retirement
                benefits granted to Mr.
                DeMichele

10.55(a)        Letter Agreement dated July        10.1 to September 1995            1-4473            11-14-95
                28, 1995, between the              10-Q Report
                Company and Jaron B.
                Norberg regarding certain of
                Mr. Norberg's retirement
                benefits
</TABLE>
                                       56
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.56(a)        Letter Agreement dated as          10.8 to 1995 Form 10-K            1-4473            3-29-96
                of January 1, 1996 between         Report
                the Company and Robert G.
                Matlock & Associates, Inc.
                for consulting services

10.57(a)(d)     Key Executive Employment           10.3 to 1989 Form 10-K            1-4473            3-8-90
                and Severance Agreement            Report
                between the Company and
                certain executive officers of
                the Company

10.58(a)(d)     Revised form of Key Executive      10.5 to 1993 Form 10-K            1-4473            3-30-94
                Employment and Severance           Report
                Agreement between the
                Company and certain
                executive officers of the
                Company

10.59(a)(d)     Second revised form of Key         10.9 to 1994 Form 10-K            1-4473            3-30-95
                Executive Employment and           Report
                Severance Agreement between
                the Company and certain
                executive officers of the
                Company

10.60(a)(d)     Key Executive Employment           10.4 to 1989 Form 10-K            1-4473            3-8-90
                and Severance Agreement            Report
                between the Company and
                certain managers of the
                Company

10.61(a)(d)     Revised form of Key Executive      10.4 to 1993 Form 10-K            1-4473            3-30-94
                Employment and Severance           Report
                Agreement between the
                Company and certain key
                employees of the Company

10.62(a)(d)     Second revised form of Key         10.8 to 1994 Form 10-K            1-4473            3-30-95
                Executive Employment and           Report
                Severance Agreement between
                the Company and certain key
                employees of the Company

10.63(a)        Pinnacle West Capital              10.1 to 1992 Form 10-K            1-4473            3-30-93
                Corporation Stock Option and       Report
                Incentive Plan
</TABLE>
                                       57
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

10.64(a)        Pinnacle West Capital              A to the Proxy Statement          1-8962            4-16-94
                Corporation 1994 Long-Term         for the Plan Report
                Incentive Plan effective as of     Pinnacle West 1994
                March 23, 1994                     Annual Meeting of
                                                   Shareholders

10.65           Agreement No. 13904 (Option        10.3 to 1991 Form 10-K            1-4473            3-19-92
                and Purchase of Effluent)          Report
                with Cities of Phoenix,
                Glendale, Mesa, Scottsdale,
                Tempe, Town of Youngtown,
                and Salt River Project
                Agricultural Improvement and
                Power District, dated April 23,
                1973

10.66           Agreement for the Sale and         10.4 to 1991 Form 10-K            1-4473            3-19-92
                Purchase of Wastewater             Report
                Effluent with City of Tolleson
                and Salt River Agricultural
                Improvement and Power
                District, dated June 12, 1981,
                including Amendment No. 1
                dated as of November 12,
                1981 and Amendment No. 2
                dated as of June 4, 1986

99.2            Collateral Trust Indenture         4.2 to 1992 Form 10-K             1-4473            3-30-93
                among PVNGS II Funding             Report
                Corp., Inc., the Company and
                Chemical Bank, as Trustee

99.3            Supplemental Indenture to          4.3 to 1992 Form 10-K             1-4473            3-30-93
                Collateral Trust Indenture         Report
                among PVNGS II Funding
                Corp., Inc., the Company and
                Chemical Bank, as Trustee

99.4(c)         Participation Agreement,           28.1 to September 1992            1-4473            11-9-92
                dated as of August 1, 1986,        Form 10-Q Report
                among PVNGS Funding
                Corp., Inc., Bank of America
                National Trust and Savings
                Association, State Street Bank
                and Trust Company, as
                successor to The First
                National Bank of Boston, in
                its individual capacity and as
                Owner Trustee, Chemical
                Bank, in its individual
                capacity and as Indenture
                Trustee, the Company, and
                the Equity Participant named
                therein
</TABLE>
                                       58
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

99.5(c)         Amendment No. 1 dated as of        10.8 to September 1986            1-4473            12-4-86
                November 1, 1986, to               Form 10-Q Report by
                Participation Agreement,           means of Amendment No.
                dated as of August 1,1986,         1, on December 3, 1986
                among PVNGS Funding                Form 8
                Corp., Inc., Bank of America
                National Trust and Savings
                Association, State Street Bank
                and Trust Company, as
                successor to The First
                National Bank of Boston, in
                its individual capacity and as
                Owner Trustee, Chemical
                Bank, in its individual
                capacity and as Indenture
                Trustee, the Company, and
                the Equity Participant named
                therein

99.6(c)         Amendment No. 2, dated as of       28.4 to 1992 Form 10-K            1-4473            3-30-93
                March 17, 1993, to                 Report
                Participation Agreement, 
                dated as of August 1, 1986, 
                among PVNGS Funding 
                Corp., Inc., PVNGS II 
                Funding Corp., Inc., State 
                Street Bank and Trust 
                Company, as successor to The 
                First National Bank of 
                Boston, in its individual  
                capacity and as Owner 
                Trustee, Chemical  Bank, in its  
                individual capacity and as  
                Indenture Trustee, the 
                Company, and the Equity 
                Participant named therein

99.7(c)         Trust Indenture, Mortgage,         4.5 to Form S-3                   33-9480           10-24-86
                Security Agreement and             Registration Statement
                Assignment of Facility Lease,  
                dated as of August 1, 1986,
                between State Street Bank 
                and Trust Company, as 
                successor to The First 
                National Bank of Boston, as 
                Owner Trustee, and Chemical
                Bank, as Indenture Trustee
</TABLE>
                                       59
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

99.8(c)         Supplemental Indenture No.         10.6 to September 1986            1-4473            12-4-86
                1, dated as of November 1,         Form 10-Q Report by
                1986 to Trust Indenture,           means of Amendment No.
                Mortgage, Security Agreement       1 on December 3, 1986
                and Assignment of Facility         Form 8
                Lease, dated as of August 1,
                1986, between State Street
                Bank and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Owner Trustee, and Chemical
                Bank, as Indenture Trustee

99.9(c)         Supplemental Indenture No. 2       4.4 to 1992 Form 10-K             1-4473            3-30-93
                to Trust Indenture, Mortgage,      Report
                Security Agreement and
                Assignment of Facility Lease,  
                dated as of August 1, 1986,
                between State Street Bank 
                and Trust Company, as 
                successor to The First 
                National Bank of Boston, as 
                Owner Trustee, and Chemical
                Bank, as Indenture Trustee

99.10(c)        Assignment, Assumption and         28.3 to Form S-3                  33-9480           10-24-86
                Further Agreement, dated as        Registration Statement
                of August 1, 1986, between
                the Company and State Street
                Bank and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Owner Trustee

99.11(c)        Amendment No. 1, dated as of       10.10 to September 1986           1-4473            12-4-86
                November 1, 1986, to               Form 10-Q Report by
                Assignment, Assumption and         means of Amendment No.
                Further Agreement, dated as        1 on December 3, 1986
                of August 1, 1986, between         Form 8
                the Company and State Street
                Bank and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Owner Trustee
</TABLE>
                                       60
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

99.12(c)        Amendment No. 2, dated as of       28.6 to 1992 Form 10-K            1-4473            3-30-93
                March 17, 1993, to                 Report
                Assignment, Assumption and
                Further Agreement, dated as
                of August 1, 1986, between
                the Company and State Street
                Bank and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Owner Trustee

99.13           Participation Agreement,           28.2 to September 1992            1-4473            11-9-92
                dated as of December 15,           Form 10-Q Report
                1986, among PVNGS Funding
                Corp., Inc., State Street Bank
                and Trust Company, as
                successor to The First
                National Bank of Boston, in
                its individual capacity and as
                Owner Trustee, Chemical
                Bank, in its individual
                capacity and as Indenture
                Trustee under a Trust
                Indenture, the Company, and
                the Owner Participant named
                therein

99.14           Amendment No. 1, dated as of       28.20 to Form S-3                 1-4473            8-10-87
                August 1, 1987, to                 Registration Statement
                Participation Agreement,           No. 33-9480 by means of a
                dated as of December 15,           November 6, 1986 Form
                1986, among PVNGS Funding          8-K Report
                Corp., Inc. as Funding
                Corporation, State Street
                Bank and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Owner Trustee, Chemical
                Bank, as Indenture Trustee,
                the Company, and the Owner
                Participant named therein
</TABLE>
                                       61
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

99.15           Amendment No. 2, dated as of       28.5 to 1992 Form 10-K            1-4473            3-30-93
                March 17, 1993, to                 Report
                Participation  Agreement,  
                dated as of December 15, 
                1986, among PVNGS Funding 
                Corp., Inc., PVNGS II 
                Funding Corp.,  Inc., State
                Street Bank and Trust  
                Company, as successor to The  
                First National Bank of 
                Boston, in its individual 
                capacity and as Owner
                Trustee, Chemical Bank, in its  
                individual capacity and as
                Indenture Trustee, the 
                Company, and the Owner 
                Participant named therein

99.16           Trust Indenture, Mortgage,         10.2 to November 18, 1986         1-4473            1-20-87
                Security Agreement and             Form 8-K Report
                Assignment of Facility Lease,  
                dated as of December 15, 
                1986, between State Street 
                Bank and Trust Company, as 
                successor to The First 
                National Bank of Boston, as 
                Owner Trustee, and Chemical
                Bank, as Indenture Trustee

99.17           Supplemental Indenture No.         4.13 to Form S-3                  1-4473            8-24-87
                1, dated as of August 1, 1987,     Registration Statement
                to Trust Indenture, Mortgage,      No. 33-9480 by means of
                Security Agreement and             August 1, 1987 Form 8-K
                Assignment of Facility Lease,      Report
                dated as of December 15,
                1986, between State Street
                Bank and Trust Company, as
                successor to The First
                National Bank of Boston, as
                Owner Trustee, and Chemical
                Bank, as Indenture Trustee
</TABLE>
                                       62
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

99.18           Supplemental Indenture No. 2       4.5 to 1992 Form 10-K             1-4473            3-30-93
                to Trust Indenture, Mortgage,      Report
                Security Agreement and
                Assignment of Facility Lease,  
                dated as of December 15, 
                1986, between State Street 
                Bank and Trust Company, as 
                successor to The First 
                National Bank of Boston, as 
                Owner Trustee, and Chemical
                Bank, as Indenture Trustee

99.19           Assignment, Assumption and         10.5 to November 18, 1986         1-4473            1-20-87
                Further Agreement, dated as        Form 8-K Report
                of December 15, 1986,
                between the Company and
                State Street Bank and Trust
                Company, as successor to The
                First National Bank of
                Boston, as Owner Trustee

99.20           Amendment No. 1, dated as of       28.7 to 1992 Form 10-K            1-4473            3-30-93
                March 17, 1993, to                 Report
                Assignment, Assumption and
                Further Agreement, dated as
                of December 15, 1986,
                between the Company and
                State Street Bank and Trust
                Company, as successor to The
                First National Bank of
                Boston, as Owner Trustee

99.21(c)        Indemnity Agreement dated          28.3 to 1992 Form 10-K            1-4473            3-30-93
                as of March 17, 1993 by the        Report
                Company

99.22           Extension Letter, dated as of      28.20 to Form S-3                 1-4473            8-10-87
                August 13, 1987, from the          Registration Statement
                signatories of the                 No. 33-9480 by means of a
                Participation Agreement to         November 6, 1986 Form
                Chemical Bank                      8-K Report

99.23           Arizona Corporation                28.1 to 1991 Form 10-K            1-4473            3-19-92
                Commission Order dated             Report
                December 6, 1991

99.24           Arizona Corporation                10.1 to June Form 10-Q            1-4473            8-12-94
                Commission Order dated             Report
                June 1, 1994
</TABLE>
                                       63
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.     Description                        Originally Filed as Exhibit:      File No.(b)   Date Effective
-----------     -----------                        ----------------------------      -----------   --------------

<S>            <C>                                <C>                               <C>              <C>

99.25           Rate Reduction Agreement           10.1 to December 4, 1995          1-4473            12-14-95
                dated December 4, 1995             Form 8-K Report
                between the Company and the
                ACC Staff

99.26           Arizona Corporation Commission     10.1 to March 1996 Form           1-4473             5-14-96
                Order dated April 24, 1996         10-Q Report
</TABLE>

---------------

     (a)Management  contract or compensatory  plan or arrangement to be filed as
an exhibit pursuant to Item 14(c) of Form 10-K.

     (b)Reports  filed  under  File No.  1-4473  were filed in the office of the
Securities and Exchange Commission located in Washington, D.C.

     (c)An additional document, substantially identical in all material respects
to this  Exhibit,  has been  entered  into,  relating  to an  additional  Equity
Participant.  Although  such  additional  document may differ in other  respects
(such as  dollar  amounts,  percentages,  tax  indemnity  matters,  and dates of
execution),  there are no material  details in which such document  differs from
this Exhibit.

     (d)Additional agreements,  substantially identical in all material respects
to this  Exhibit  have  been  entered  into  with  additional  officers  and key
employees of the Company. Although such additional documents may differ in other
respects (such as dollar amounts and dates of execution),  there are no material
details in which such agreements differ from this Exhibit.


Reports on Form 8-K

     During the quarter ended  December 31, 1996, and the period ended March 27,
1997, the Company did not file any Reports on Form 8-K.
                                       64
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                  ARIZONA PUBLIC SERVICE COMPANY
                                                           (Registrant)


Date:  March 27, 1997                                   William J. Post
                                                  ------------------------------
                                                    (William J. Post, President
                                                    and Chief Executive Officer)


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                    Signature                                        Title                              Date
                    ---------                                        -----                              ----
<S>                                                       <C>                                     <C> 
                   William J. Post                        Principal Executive Officer              March 27, 1997
--------------------------------------------------                and Director 
           (William J. Post, President                            
          and Chief Executive Officer)


              George A. Schreiber, Jr.                   Principal Accounting Officer,             March 27, 1997
--------------------------------------------------        Principal Financial Officer 
           (George A. Schreiber, Jr.)                             and Director        
                                                          

                  O. Mark DeMichele                                 Director                       March 27, 1997
--------------------------------------------------
               (O. Mark DeMichele)


                   Martha O. Hesse                                  Director                       March 27, 1997
--------------------------------------------------
                (Martha O. Hesse)


               Marianne Moody Jennings                              Director                       March 27, 1997
--------------------------------------------------
            (Marianne Moody Jennings)


                  Robert G. Matlock                                 Director                       March 27, 1997
--------------------------------------------------
               (Robert G. Matlock)


                  Jaron B. Norberg                                  Director                       March 27, 1997
--------------------------------------------------
               (Jaron B. Norberg)
</TABLE>
                                       65
<PAGE>
<TABLE>
<CAPTION>
                    Signature                                        Title                              Date
                    ---------                                        -----                              ----
<S>                                                               <C>                             <C> 


                 John R. Norton III                                 Director                       March 27, 1997
--------------------------------------------------
              (John R. Norton III)


                   Donald M. Riley                                  Director                       March 27, 1997
--------------------------------------------------
                (Donald M. Riley)


                  Wilma W. Schwada                                  Director                       March 27, 1997
--------------------------------------------------
               (Wilma W. Schwada)


                    Richard Snell                                   Director                       March 27, 1997
--------------------------------------------------
                 (Richard Snell)


                  Dianne C. Walker                                  Director                       March 27, 1997
--------------------------------------------------
               (Dianne C. Walker)


                Ben F. Williams, Jr.                                Director                       March 27, 1997
--------------------------------------------------
             (Ben F. Williams, Jr.)


                Thomas G. Woods, Jr.                                Director                       March 27, 1997
--------------------------------------------------
             (Thomas G. Woods, Jr.)
</TABLE>
                                       66
<PAGE>
                                                   Commission File Number 1-4473
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------








                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                -----------------

                                   EXHIBITS TO

                                    FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1996

                                -----------------

                         Arizona Public Service Company
               (Exact name of registrant as specified in charter)






--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                                INDEX TO EXHIBITS



Exhibit No.                               Description
-----------                               -----------

10.1(a)   ---    1997 Senior Management Variable Pay Plan

10.2(a)   ---    1997 Officers Variable Pay Plan

10.3(a)   ---    Fifth Amendment to the Arizona Public Service Company Deferred 
                 Compensation Plan

10.4      ---    Amendment No. 2 to Decommissioning Trust Agreement (PVNGS 
                 Unit 1) dated as of July 1, 1991

10.5      ---    Amendment No. 4 to Amended and Restated Decommissioning Trust 
                 Agreement (PVNGS Unit 2) dated as of January 31, 1992

10.6      ---    Amendment No. 2 to Decommissioning Trust Agreement (PVNGS 
                 Unit 3) dated as of July 1, 1991

10.7      ---    Letter Agreement dated October 9, 1996 between the Company and 
                 Jaron B. Norberg

10.8      ---    Letter Agreement dated August 16, 1996 between the Company and 
                 William L. Stewart

10.9      ---    Letter Agreement dated November 27, 1996 between the Company 
                 and George A. Schreiber, Jr.

23.1      ---    Consent of Deloitte & Touche LLP

27.1      ---    Financial Data Schedule

99.1      ---    Arizona Corporation Commission Order, Decision No. 59943, dated
                 December 26, 1996, including the Rules regarding the 
                 introduction of retail competition in Arizona

---------------

         (a)Management  contract or compensatory plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.

         For a  description  of the  Exhibits  incorporated  in this  filing  by
reference, see Part IV, Item 14.