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, 1997
                                       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)

                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 offices,     (Registrant's telephone number,
          including zip code)                       including area 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

Securities registered pursuant to Section 12(g) of the Act:
                           Cumulative Preferred Stock
                                (Title of class)
             (See Note 4 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 ]

                                                          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 March 11, 1998           March 11, 1998
--------------------------------------------------------------------------------
Cumulative Preferred Stock ........ 3,518,051                $147,000,000(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 March 11,  1998,  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 March 11, 1998, 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 19, 1998, are  incorporated by
reference into Part III hereof.
<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                       Page
                                                                                                       ----
<S>                                                                                                     <C>
GLOSSARY............................................................................................     1

PART I
     Item 1.  Business...............................................................................    3
     Item 2.  Properties.............................................................................   12
     Item 3.  Legal Proceedings......................................................................   15
     Item 4.  Submission of Matters to a Vote of Security Holders....................................   15
     Supplemental Item.
              Executive Officers of the Registrant...................................................   16

PART II
     Item 5.  Market for Registrant's Common Stock and Related Security Holder Matters...............   17
     Item 6.  Selected Financial Data................................................................   18
     Item 7.  Financial Review.......................................................................   19
     Item 8.  Financial Statements and Supplementary Data............................................   24
     Item 9.  Changes In and Disagreements with Accountants on Accounting
              and Financial Disclosure...............................................................   50

PART III
     Item 10. Directors and Executive Officers of the Registrant.....................................   50
     Item 11. Executive Compensation.................................................................   50
     Item 12. Security Ownership of Certain Beneficial Owners and Management.........................   50
     Item 13. Certain Relationships and Related Transactions.........................................   50

PART IV
     Item 14. Exhibits, Financial Statements, Financial Statement Schedules,
              and Reports on Form 8-K................................................................   51

SIGNATURES...........................................................................................   71
</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

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

EITF --- Emerging Issues Task Force

EITF 97-4 --- Emerging  Issues Task Force Issue No. 97-4,  "Deregulation  of the
Pricing of Electricity --- Issues Related to the Applications of FASB Statements
No. 71, Accounting for the Effects of Certain Types of Regulation,  and No. 101,
Regulated  Enterprises --- Accounting for the  Discontinuation of Application of
FASB Statement No. 71"

Energy Act --- National Energy Policy Act of 1992

EPA --- United States Environmental Protection Agency

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"
                                       1
<PAGE>
SFAS No. 130 --- Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income"

SFAS  No.  131  ---  Statement  of  Financial   Accounting  Standards  No.  131,
"Disclosures about Segments of an Enterprise and Related Information"

SFAS  No.  132  ---  Statement  of  Financial   Accounting  Standards  No.  132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"

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

USEC --- United States Enrichment Corporation

Waste Act --- Nuclear Waste Policy Act of 1982, as amended
                                       2
<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 767,000 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
1997, no single  purchaser or user of energy accounted for more than 2% of total
electric  revenues.  At December 31, 1997,  the Company  employed  5,981 people,
which includes employees assigned to joint projects where the Company is project
manager.

     This document  contains  forward-looking  statements that involve risks and
uncertainties.  Words such as "estimates,"  "expects,"  "anticipates,"  "plans,"
"believes,"   "projects,"  and  similar  expressions  identify   forward-looking
statements.  These risks and uncertainties  include, but are not limited to, the
ongoing  restructuring of the electric  industry;  the outcome of the regulatory
proceedings  relating to the  restructuring;  regulatory,  tax and environmental
legislation;  the ability of the  Company to  successfully  compete  outside its
traditional regulated markets; regional economic conditions,  which could affect
customer  growth;  the  cost of debt  and  equity  capital;  weather  variations
affecting  customer  usage;  and  technological  developments  in  the  electric
industry.  See  "Competition"  in this  Item for a  discussion  of some 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 December 1996, the ACC adopted rules that provide
a framework for the  introduction of retail  electric  competition in Arizona in
phases  from 1999 to 2003.  The ACC  ordered in the rules that  numerous  issues
require additional  consideration prior to the implementation of retail electric
competition in Arizona. During 1997, the ACC held workshops to gather input from
various constituencies with respect to those issues.
                                       3
<PAGE>
     The rules indicate that the ACC will allow recovery of unmitigated stranded
costs,  but do not set forth the mechanisms for  determining and recovering such
costs. In February 1998, the ACC completed a formal, generic hearing on stranded
cost  determination and recovery.  Based on various  assumptions,  estimates and
methodologies,  the Company  currently  estimates  that its stranded costs to be
recovered (excluding  regulatory assets which have already been addressed by the
ACC) will be less than $500  million.  The Company is seeking  full  recovery of
stranded costs during a transition period proposed to go through 2006. Decisions
by the ACC have not yet been made with respect to this issue.

     An Arizona joint  legislative  committee  studied electric utility industry
restructuring  issues in 1996 and 1997. In conjunction with that study,  Arizona
legislative  counsel  prepared  memoranda  in late  1997  related  to the  legal
authority of the ACC to deregulate the Arizona  electric utility  industry.  The
memoranda  raise a  question  as to the  degree to which the ACC may,  under the
Arizona  Constitution,  deregulate any portion of the electric  utility industry
and allow rates to be determined by market forces.  In February 1998, a bill was
introduced in the Arizona  legislature  to facilitate  implementation  of retail
electric  competition  in the state.  The bill has  progressed  through  several
stages to date. The bill includes,  among other things,  a proposal that the ACC
adopt provisions for public service corporations  substantially  consistent with
some  of  the  bill's  provisions  for  certain   government-operated   electric
utilities.  The  Company  continues  to believe  that  legislation  and  perhaps
amendments  to the Arizona  Constitution  will  ultimately  be  required  before
significant  implementation of retail electric competition can lawfully occur in
Arizona.

     See Note 3 of Notes to  Financial  Statements  for  additional  information
regarding  the rules and other  regulatory  and  legal  issues  relating  to the
electric industry restructuring.

     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  1997,
approximately  13% 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' access for wholesale transactions,  establishes information
requirements  and  provides for recovery of 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.
                                       4
<PAGE>
     Federal Regulation

     Several  electric  utility reform bills have been introduced  during recent
Congressional  sessions,  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 deferred income taxes and rate
synchronization  cost  deferrals.   These  items,  combined  with  miscellaneous
regulatory  assets and liabilities,  amounted to  approximately  $1.0 billion at
December 31, 1997.  In  accordance  with a 1996  regulatory  agreement,  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, 3 and 10 of Notes to Financial Statements in
Item 8 for additional information.

     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)  establishing  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
evaluate  strategies and alternatives  that will position the Company to compete
effectively in a more competitive, restructured industry.

Generating Fuel and Purchased Power

     1997 Energy Mix

     The Company's  sources of energy during 1997 were: coal - 36.5%;  nuclear -
28.2%; other - 3.1%; and purchased power - 32.2%.

     Coal Supply

     The Company believes that Cholla has sufficient reserves of low sulfur coal
committed  to the plant for the next two years,  the term of the  existing  coal
contract.  In 1997,  the current  supplier  experienced  production and delivery
problems that required Cholla to purchase coal from the spot market. The current
supplier is expected to continue to provide  substantially  all of Cholla's  low
sulfur coal requirements. Contract renegotiation with the current supplier is in
progress.  The  current  supplier  has  sufficient  reserves  of low sulfur coal
available to allow the  continued  operation of 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.
                                       5
<PAGE>
     The  current  sulfur  content of coal being used at Four  Corners,  NGS and
Cholla is approximately 0.78%, 0.55% and 0.44%,  respectively.  In 1997, average
prices paid for coal  supplied  from the reserves  dedicated  under the existing
contracts were comparable to 1996.  Escalation  components of existing long-term
coal contracts impact future coal prices.  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 the 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. Coal is supplied to 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 12 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 a number of natural gas operators
and marketers  which allow the Company to purchase  natural gas in the method it
determines to be most economic. The Company is currently purchasing the majority
of its natural gas requirements from twelve companies pursuant to contracts. 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  1998  and for up to 60%  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 (D.C.  Circuit) ruled that the DOE
has an obligation to start disposing of spent nuclear fuel no
                                       6
<PAGE>
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
repository or interim  storage  facility by January 31, 1998. In November  1997,
the D.C. Circuit issued a Writ of Mandamus  precluding DOE from excusing its own
delay on the grounds  that DOE has not yet  prepared a permanent  repository  or
interim  storage  facility.  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 297 MW
through May 1997, at which time the capacity  decreased to 292 MW. In 1997,  the
Company received approximately 610,400 MWh of energy under the contract and paid
approximately $37 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:  1998 (175  megawatt  firm  capacity  purchase,  converting  to  capacity
exchange in the summer of 1998; and 100 megawatt
                                       7
<PAGE>
capacity  exchange);  1999 and beyond (275 megawatt capacity  exchange;  and 205
megawatt  capacity  exchange  beginning  in the  summer of 1999).  In 1997,  the
generating  capacity  available to the Company from  PacifiCorp  was 175 MW. The
Company  received  approximately  486,000  MWh of energy and paid  approximately
$17.4 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 2001.

Construction Program

     During the years 1995 through 1997, the Company incurred approximately $824
million in capitalized  expenditures.  Utility capitalized  expenditures for the
years 1998 through 2000 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 1998 through
2000 have been estimated as follows:

                              (Millions of Dollars)

By Year                                 By Major Facilities
--------------------------------        ----------------------------------------
1998                        $323        Production                          $235
1999                         313        Transmission and Distribution        565
2000                         306        General                              119
                            ----        Other Projects                        23
                            $942                                            ----
                            ====                                            $942
                                                                            ====

     The amounts for 1998 through 2000 exclude  capitalized  interest  costs and
include  capitalized  property  taxes and about $30- $35  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 1997, the replacement  fund
requirement  amounted to approximately $134 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 1977  amendments  to the Clean Air Act, the
EPA  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  became
applicable  to one NGS unit in 1997 and becomes  applicable  to another  unit in
1998 and to the last unit in 1999. SRP, the NGS operating agent, has estimated a
capital cost of
                                       8
<PAGE>
$440 million 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.  Approximately 80% of these capital
costs have been incurred through 1997.

     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."  For Phase II plants,  which  includes  Company-owned  plants,
allowances will be required beginning in the year 2000 to operate the plants. On
March  5,  1993,  the  EPA  promulgated  rules  listing  allowance   allocations
applicable to Company-owned plants. 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
that 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
alleging that the EPA improperly  classified Four Corners Unit 4 in these rules,
thereby  subjecting  Unit 4 to a more  stringent  emission  limitation.  Arizona
Public Service Company v. United States  Environmental  Protection  Agency,  No.
97-1091.  In February 1998, the Court vacated the Unit 4 emission limitation and
remanded  the issue to EPA for  reconsideration.  The Company  cannot  currently
predict how the EPA will respond.

     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, which is expected by June 1998. 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.

     In July 1997,  the EPA proposed  regulations on regional haze. The proposal
would require states to submit plans to meet  "presumptive  reasonable  progress
targets" for achieving  perceptible  improvements  in  visibility  conditions in
Federal  Class I areas (e.g.,  national  parks) every 10-15 years.  The proposal
also calls for states to conduct three year "best available retrofit technology"
("BART") review on point sources which became operational  between 1962 and 1977
and which may normally be anticipated to contribute to regional haze  visibility
impairment. EPA is currently reviewing public comments and final regulations are
expected to be promulgated  by June 1998.  Because the actual level of emissions
controls,  if any, for any unit cannot be determined  at this time,  the Company
currently cannot estimate the capital  expenditures,  if any, which would result
from the final rules.

     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
                                       9
<PAGE>
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.

     Also, in July 1997,  EPA  promulgated  final  National  Ambient Air Quality
Standards for ozone and  particulate  matter.  Pursuant to the rules,  the ozone
standard is more  stringent and a new ambient  standard for very fine  particles
has been established.  The Company does not currently expect these rules to have
a material adverse effect 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  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.

     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
                                       10
<PAGE>
proceedings  pursuant to a request by the parties.  The Company cannot currently
predict the outcome of this matter.

     In  February  1998,  the  EPA  promulgated   regulations  specifying  those
provisions  of the  Clean Air Act for which it is  appropriate  to treat  Indian
tribes in the same manner as states. The EPA indicated that it believes that the
Clean Air Act generally would supersede pre-existing binding agreements that may
limit the scope of tribal authority over reservations.  The Company is reviewing
the  regulations to determine what effect they might have on the  application of
the Navajo Nation Air Pollution  Prevention  and Control Act on Four Corners and
NGS.

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 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.
                                       11
<PAGE>
                               ITEM 2. PROPERTIES

Accredited Capacity

     The Company's  present  generating  facilities have an accredited  capacity
aggregating 3,986,900 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 and two steam units at Saguaro, aggregating............    435,000(1)
     Eleven combustion turbine units, aggregating.......................................    493,000
     Three combined cycle units, aggregating............................................    255,000
                                                                                          ---------
                                                                                          1,183,000
                                                                                          =========
Nuclear:
     29.1% owned or leased Units 1, 2 and 3 at Palo Verde, representing.................  1,086,300
                                                                                          =========

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
August 22,  1997 at  4,608,600  kW,  compared to the 1996 peak of  4,574,700  kW
recorded on July 31. 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 August 22, 1997,  computed in
accordance with accepted  industry  practices,  amounted to 4,544,600 kW, for an
installed reserve margin of (1.5%).  The power actually available to the Company
from its resources  fluctuates  from time to time due in part to planned outages
and technical problems. The available capacity from sources actually operable at
the time of the 1997 peak amounted to 5,877,600  kW, for a margin of 9.1%.  Firm
purchases from neighboring  utilities totaling 1,603,000 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 and its fuel supplier pay certain taxes to
the Navajo  Nation.  In September  1997, a settlement  agreement  was  finalized
between the Company,  the coal supplier to Four  Corners,  and the Navajo Nation
which settled  certain issues in the Four Corners lease regarding the obligation
of the fuel  supplier  to pay taxes  prior to the  expiration  of tax waivers in
2001.  Pursuant to the  agreement,  the  Company  recognized  approximately  $14
million of pretax  earnings  related to a partial refund of possessory  interest
taxes paid by the fuel supplier. The parties also
                                       12
<PAGE>
agreed to renegotiate  their business  relationship  before 2001 in an effort to
permit the electricity generated at Four Corners to be priced competitively. The
Company  cannot  currently  predict the outcome of this  matter.  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 9 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 13 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 12 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 12 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  "Financial  Review --- Capital
Needs and  Resources" in Item 7 for a discussion  of the Company's  construction
plans.

     See  Notes  5, 8 and 9 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.
                                       13
<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.
                                       14
<PAGE>
                           ITEM 3. LEGAL PROCEEDINGS

Property Taxes

     See  "Environmental  Matters"  and  "Water  Supply"  in Item 1 in regard to
pending or threatened litigation and other disputes. See "Regulatory Matters" in
Note  3 of  Notes  to  Financial  Statements  in  Item  8  for a  discussion  of
competition  and  the  Rules  regarding  the  introduction  of  retail  electric
competition in Arizona. On February 28, 1997, a lawsuit was filed by the Company
to protect its legal rights regarding the Rules and in its complaint the Company
asked the Court for (i) a  judgment  vacating  the retail  electric  competition
rules, (ii) a declaratory  judgment that the rules are unlawful  because,  among
other things,  they were entered into without  proper legal  authorization,  and
(iii) a permanent  injunction barring the ACC from enforcing or implementing the
rules and from  promulgating  any other  regulations  without  lawful  authority
(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).  That lawsuit  is pending but two
related  cases  filed by other  utilities  have been  decided  adversely  to the
utilities' positions.

                       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.
                                       15
<PAGE>
                     SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS
                                OF THE REGISTRANT

The Company's executive officers are as follows:

<TABLE>
<CAPTION>
                              Age At
Name                       March 1, 1998      Position(s) At March 1, 1998
----                       -------------      ----------------------------
<S>                            <C>         <C>
Richard Snell                   67         Chairman of the Board of Directors(1)
William J. Post                 47         President and Chief Executive Officer(1)
Jack E. Davis                   51         Executive Vice President, Commercial Operations
George A. Schreiber, Jr.        49         Executive Vice President and Chief Financial Officer(1)
William L. Stewart              54         Executive Vice President, Generation
Armando B. Flores               54         Senior Vice President, Corporate Business Services
James M. Levine                 48         Senior Vice President, Nuclear
Jan H. Bennett                  50         Vice President, Customer Service
John G. Bohon                   52         Vice President, Procurement
John R. Denman                  55         Vice President, Fossil
Edward Z. Fox                   44         Vice President, Environmental/Health/Safety and
                                             New Technology Ventures
William E. Ide                  51         Vice President, Nuclear Engineering
Nancy C. Loftin                 44         Vice President, Chief Legal Counsel and Secretary
Gregg R. Overbeck               51         Vice President, Nuclear Production
Patricia K. Vincent             39         Vice President, Marketing and Sales
Chris N. Froggatt               40         Controller
Michael V. Palmeri              39         Treasurer
</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).

     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. Schreiber became Executive Vice President and Chief Financial Officer
of Pinnacle West in February 1997.
                                       16
<PAGE>
     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).

     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. Bohon was elected to his present  position in April 1997. Prior to that
time he was Director,  Corporate  Services of the Company  (December  1989-April
1997).

     Mr. Denman was elected to his present position in April 1997. Prior to that
time he was Director of Fossil Generation (since 1990).

     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.  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. Vincent was elected to her present  position in October 1997.  Prior to
that  time she was  Director,  Marketing  (August  1993-October  1997) and Group
Segment Manager (August 1992-August 1993) of the Company.

     Mr.  Froggatt  was elected to his present  position in July 1997.  Prior to
that time he was Director,  Accounting  Services  (since  December  1992) of the
Company.

     Mr. Palmeri was elected to his present position in July 1997. Prior to that
time he was Assistant Treasurer (February 1994-July 1997) and Manager of Finance
(June 1990-February 1994) of Pinnacle West. He also became Treasurer of Pinnacle
West in July 1997.


                                     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.
                                       17
<PAGE>
     The chart below sets forth the dividends  declared on the Company's  common
stock for each of the four quarters for 1997 and 1996.

                             Common Stock Dividends
                             (Thousands of Dollars)

--------------------------------------------------------------------------------
       Quarter                         1997                    1996
--------------------------------------------------------------------------------
     1st Quarter                     $42,500                 $42,500
     2nd Quarter                      42,500                  42,500
     3rd Quarter                      42,500                  42,500
     4th Quarter                      42,500                  42,500
--------------------------------------------------------------------------------

     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 4 and 5 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>
                                                 1997         1996       1995        1994        1993
                                              ----------  ----------  ----------  ----------  ----------
                                                               (Thousands of Dollars)

<S>                                           <C>         <C>         <C>         <C>         <C>
Electric Operating Revenues ................. $1,878,553  $1,718,272  $1,614,952  $1,626,168  $1,602,413
Fuel and Purchased Power ....................    436,627     325,523     269,798     300,689     300,546
Operating Expenses ..........................  1,070,101   1,027,541     963,400     957,046     929,379
                                              ----------  ----------  ----------  ----------  ----------
    Operating Income ........................    371,825     365,208     381,754     368,433     372,488
Other Income ................................     21,586      35,217      25,548      44,510      54,220
Interest Deductions --- Net .................    141,918     156,954     167,732     169,457     176,322
                                              ----------  ----------  ----------  ----------  ----------
    Net Income ..............................    251,493     243,471     239,570     243,486     250,386
    Preferred Dividends .....................     12,803      17,092      19,134      25,274      30,840
                                              ----------  ----------  ----------  ----------  ----------
    Earnings for Common Stock ............... $  238,690  $  226,379  $  220,436  $  218,212  $  219,546
                                              ==========  ==========  ==========  ==========  ==========

Total Assets ................................ $6,331,142  $6,423,222  $6,418,262  $6,348,261  $6,357,262
                                              ==========  ==========  ==========  ==========  ==========
Capital Structure:
    Common Stock Equity ..................... $1,849,324  $1,729,390  $1,621,555  $1,571,120  $1,522,941
    Non-Redeemable Preferred Stock ..........    142,051     165,673     193,561     193,561     193,561
    Redeemable Preferred Stock ..............     29,110      53,000      75,000      75,000     197,610
    Long-Term Debt Less Current Maturities ..  1,953,162   2,029,482   2,132,021   2,181,832   2,124,654
                                              ----------  ----------  ----------  ----------  ----------
        Total Capitalization ................  3,973,647   3,977,545   4,022,137   4,021,513   4,038,766
    Current Maturities of Long-Term Debt ....    104,068     153,780       3,512       3,428       3,179
    Commercial Paper ........................    130,750      16,900     177,800     131,500     148,000
                                              ----------  ----------  ----------  ----------  ----------
        Total ............................... $4,208,465  $4,148,225  $4,203,449  $4,156,441  $4,189,945
                                              ==========  ==========  ==========  ==========  ==========
</TABLE>

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

     See "Financial Review" in Item 7 for a discussion of certain information in
the foregoing table.
                                       18
<PAGE>
                            ITEM 7. FINANCIAL REVIEW


References  to "Notes" in the following  discussion  refer to Notes to Financial
Statements.

Results of Operations

1997  Compared with 1996 The Company's  1997  earnings  increased  $12.3 million
(5.4%) over 1996 earnings  primarily  because of customer  growth; a $32 million
pretax  charge  in 1996 for a  voluntary  severance  program;  two  fuel-related
settlements;  and lower financing costs. These positive factors more than offset
the effects of the  Company's  1996  regulatory  agreement  with the ACC,  which
during 1997 resulted in approximately $60 million of additional regulatory asset
amortization  and a $35  million  revenue  decrease  caused by two retail  price
reductions.  See Note 3 and "Results of Operations  ---  Regulatory  Agreements"
below for additional  information about the 1996 regulatory agreement.  In 1996,
the Company also  recognized $12 million of income tax benefits,  which were not
repeated in 1997.

The Company's  operating  revenues  increased $160 million  primarily because of
increases in sales for resale ($128 million); customer growth ($58 million); and
weather  effects ($7 million).  As mentioned in the preceding  paragraph,  these
positive  factors were partially offset by a $35 million revenue decrease caused
by retail price reductions.  Sales for resale are wholesale electricity sales to
third parties who resell the  electricity  to their  customers.  The increase in
sales for resale was a result of increased  activity in  competitive  bulk power
markets.  The increase in sales for resale did not significantly affect earnings
because it was substantially offset by power purchases.

The two fuel-related settlements increased the Company's 1997 pretax earnings by
approximately  $21  million.  The  Company's  income  statement  reflects  these
settlements as reductions in fuel expense and as other income. Approximately $16
million  of these  settlements  related  to years  prior to 1997 and $5  million
related to 1997. For at least the next several  years,  the total annual savings
from the  settlements  are expected to be about $10 million before income taxes.
The Company  does not have a fuel  adjustment  clause as part of its retail rate
structure.  As a  result,  changes  in fuel and  purchased  power  expenses  are
reflected in current earnings.

Operations and maintenance expenses were lower in 1997 because of the charge for
the voluntary  severance  program  recorded in 1996 and related savings in 1997.
These  savings  were  partially  offset by  increased  expenses  for  marketing,
information technology and power plant maintenance.

The Company's financing costs decreased $12 million during 1997 because of lower
amounts of outstanding debt and preferred stock.

1996  Compared  with 1995 The Company's  1996  earnings  increased  $5.9 million
(2.7%)  over 1995  earnings  primarily  because  of  customer  growth and higher
residential usage;  weather effects; tax and interest savings; and a $21 million
pretax  write-down of certain assets in 1995.  These positive  factors more than
offset the earnings effects of the Company's 1996 regulatory  agreement with the
ACC,  which during 1996 resulted in $60 million of additional  regulatory  asset
amortization  and a $30  million  revenue  decrease  caused  by a  retail  price
reduction.  See Note 3 and "Results of  Operations  ---  Regulatory  Agreements"
below for additional information about the 1996 regulatory agreement.

Other  important  factors that made the  comparison  of 1996  earnings with 1995
earnings  less  favorable  were a $32  million  pretax  charge  for a  voluntary
severance program; the recognition in 1995 of a $5 million after-tax gain on the
sale of a small subsidiary; and increased fuel expenses of $56 million primarily
because of increased retail and wholesale  sales,  higher natural gas costs, and
higher coal prices.
                                       19
<PAGE>
The Company's  operating  revenues  increased $103 million  primarily because of
retail  customer  growth and higher  residential  usage ($75  million);  weather
effects ($40 million); increases in sales for resale ($9 million); and other ($9
million).  As mentioned above, these positive factors were partially offset by a
$30 million revenue decrease caused by a retail price reduction.

Other taxes decreased $21 million  primarily because of a change in property tax
law.  Income tax expense was lower because of the Company's  recognition  of $12
million of income tax benefits associated with capital loss carryforwards.

The Company's financing costs decreased $12 million during 1996 because of lower
average interest rates and lower amounts of outstanding debt.

Regulatory Agreements The Company's results of operations are affected, and will
be  affected,  by the  impacts of  existing  regulatory  agreements  between the
Company and the ACC.

As part of the 1996 regulatory agreement with the ACC, the Company is recovering
substantially  all  of  its  present   regulatory  assets  through   accelerated
amortization over an eight-year period that began July 1, 1996. See Note 3. This
accelerated  amortization increases annual amortization expense by approximately
$120 million ($72 million after taxes).

Also as part of the 1996  regulatory  agreement,  the Company agreed to decrease
retail prices  effective July 1, 1996 by  approximately  $48.5 million  annually
($29 million after income  taxes),  or 3.4%. In addition,  the Company agreed to
share future cost savings with its customers through potential additional retail
price reductions.  Pursuant to the agreed-upon price reduction formula,  on July
1, 1997, the Company  reduced its retail prices by  approximately  $17.6 million
annually  ($10.5 million after income taxes),  or 1.2%.  Additionally,  in March
1998,  the Company filed with the ACC its  calculation  of an additional  retail
price decrease of  approximately  $17 million annually ($10 million after income
taxes),  or 1%, to become  effective  July 1, 1998. The amount and timing of the
price decrease are subject to ACC approval.

The factors that offset the earnings impact of the accelerated  regulatory asset
amortization  and the 1997 and  1996  price  decreases  are  discussed  above in
"Results of Operations."

As  part of a 1994  rate  settlement  with  the  ACC,  the  Company  accelerated
amortization of substantially all deferred  investment tax credits (ITCs) over a
five-year  period that ends on December 31, 1999.  The  amortization  of ITCs is
shown on the  Company's  income  statement  as Other Income --- Income Taxes and
decreases annual income tax expense by approximately $28 million. See Note 10.

Capital Needs and Resources

The Company's capital requirements consist primarily of capital expenditures and
optional and mandatory  redemptions of long-term debt and preferred  stock.  The
Company funds its capital requirements from cash provided by operations,  annual
equity  infusions  from its parent company of $50 million from 1996 through 1999
(see Note 3),  and,  to the extent  necessary,  external  financing.  During the
period 1995 through  1997,  the Company  funded all of its capital  expenditures
from cash  provided by  operations  and expects to do so in 1998 through 2000 as
well.

During 1997, the Company redeemed  approximately  $240 million of long-term debt
and  $47  million  of  preferred  stock,  including  premiums,  with  cash  from
operations and long- and short-term debt.

The Company's projected capital expenditures for the next three years are: 1998,
$323 million;  1999, $313 million; and 2000, $306 million. These amounts include
about  $30-$35  million  each year for nuclear  fuel.  In  general,  most of the
projected capital  expenditures are for expanding  transmission and distribution
capabilities to
                                       20
<PAGE>
meet customer growth,  for upgrading  existing  facilities and for environmental
purposes.  In  addition,  the Company is  considering  expanding  certain of its
businesses  over  the  next  several  years,   which  may  result  in  increased
expenditures.  The  Company's  construction  plans  through the year 2007 do not
include any major baseload generating plants.

The Company's  long-term debt and preferred stock  redemption  requirements  and
payment  obligations on a capitalized  lease for the next three years are: 1998,
$114 million; 1999, $174 million; and 2000, $114 million. Based on cash provided
by  operations  and the  Company's  capital  requirements,  the Company may make
optional redemptions of long-term debt and preferred stock from time to time.

As of December 31, 1997, 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 1997,  there were  $130.8  million of  commercial  paper and $150
million of bank borrowings outstanding.

During 1997,  the Company  incurred  $60 million of long-term  debt under credit
agreements  and issued $50  million of its senior  notes.  Until the Company has
repaid all of its first  mortgage  bonds  (other than those that  secure  senior
notes),  the senior notes are secured by first mortgage bonds that have the same
interest rate, interest payment dates, maturity and redemption provisions as the
senior notes. See Note 5 for additional  information regarding the senior notes.
In January 1998, the Company issued $100 million of unsecured debt.

Although provisions in the Company's first mortgage 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.

Competition and Industry Restructuring

The  electric  industry  is  undergoing  significant  change  to a  competitive,
market-based structure from a highly-regulated,  cost-based environment in which
companies  have been entitled to recover their costs and to earn fair returns on
their invested capital in exchange for commitments to serve all customers within
designated  service  territories.  In December  1996, the ACC adopted rules that
provide a framework  for the  introduction  of retail  electric  competition  in
Arizona in phases from 1999 to 2003. See Note 3 for additional information about
these rules and other competitive developments.

The  ACC  ordered  in  the  rules  that  numerous   issues  require   additional
consideration  prior to the  implementation  of retail  electric  competition in
Arizona.  During  1997,  the ACC held  workshops  to gather  input from  various
constituencies with respect to those issues.

The rules  indicate  that the ACC will allow  recovery of  unmitigated  stranded
costs,  but do not set forth the mechanisms for  determining and recovering such
costs. In February 1998, the ACC completed a formal, generic hearing on stranded
cost  determination and recovery.  Based on various  assumptions,  estimates and
methodologies,  the Company  currently  estimates  that its stranded costs to be
recovered (excluding  regulatory assets which have already been addressed by the
ACC) will be less than $500  million.  The Company is seeking  full  recovery of
stranded costs during a transition period proposed to go through 2006. Decisions
by the ACC have not yet been made with respect to this issue.

An Arizona joint legislative  committee  studied electric utility  restructuring
issues in 1996 and 1997. In February  1998, a bill was introduced in the Arizona
legislature to facilitate  implementation of retail electric  competition in the
state.  The bill has progressed  through  several stages to date.  Additionally,
legislation  related to  electric  competition  has been  proposed in the United
States Congress. See Note 3 for a discussion of legislative developements.
                                       21
<PAGE>
The Company believes that further ACC decisions,  legislation at the Arizona and
federal  levels  and  perhaps  amendments  to  the  Arizona   Constitution  will
ultimately be required  before  significant  implementation  of retail  electric
competition  can lawfully  occur in Arizona.  Until it has been  determined  how
competition  will be  implemented  in  Arizona,  including  the  manner in which
stranded  costs will be addressed,  the Company  cannot  accurately  predict the
impact of full  retail  competition  on its  financial  position,  cash flows or
results of  operations.  As competition  in the electric  industry  continues to
evolve,  the Company will continue to evaluate  strategies and alternatives that
will position the Company to compete effectively in a restructured industry.

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  $1.0 billion at December 31, 1997.  In
accordance  with  the  1996  regulatory  agreement,   the  ACC  accelerated  the
amortization  of  substantially  all of the  Company's  regulatory  assets to an
eight-year  period  that  began  July  1,  1996.  If the  Company  ceases  to be
cost-based regulated, it 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 for additional information on
regulatory accounting.

Year 2000 Technology Issues

The Company has made, and will continue to make,  certain  modifications  to its
computer  hardware  and  software  systems and  applications  to ensure they are
capable of handling dates in the year 2000 and  thereafter.  The Company's major
computer  systems  have been  updated and other  systems are being  analyzed for
potential modifications.  The financial impact on the Company is not anticipated
to be material to is financial  position,  cash flows or results of  operations.
The  Company is in the  process of formal  communications  with its  significant
suppliers,  business  partners,  and large  customers to determine the extent to
which it may be affected by these third  parties'  plans to remediate  their own
year 2000 issues in a timely manner.

Accounting Matters

Note 2 describes three new accounting standards related to comprehensive income,
segment  disclosures  and  disclosures  about pensions and other  postretirement
benefits,  which are effective in 1998. These standards are not expected to have
a material effect on the Company's financial position,  cash flows or results of
operation.  Also,  see  Note 13 for a  description  of a  proposed  standard  on
accounting for certain  liabilities  related to closure or removal of long-lived
assets.

Risk Management

The Company's  operations  include  managing  market risks related to changes in
interest  rates,   commodity   prices  and  investments   held  by  the  nuclear
decommissioning trust fund.

Interest Rate and Equity Risk The Company's major financial market risk exposure
is changing interest rates. Changing interest rates will affect interest paid on
variable  rate debt and  interest  earned by the nuclear  decommissioning  trust
fund.  The  Company's  policy is to manage  interest  rates through the use of a
combination  of fixed and floating rate debt. The nuclear  decommissioning  fund
also has risks  associated  with changing  market values of equity  investments.
Nuclear decommissioning costs are recovered in rates.
                                       22
<PAGE>
The table below presents  contractual  balances of the Company's  long-term debt
and commercial paper at the expected maturity dates as well as the fair value of
those  instruments on December 31, 1997. The weighted average interest rates for
the various debt presented are actual as of December 31, 1997.

Expected Maturity/Principal Repayment
December 31,
(Thousands of Dollars)

                                              Variable       Fixed
                                 Commercial     Long          Long
                                    Paper       Term          Term

Weighted Average Rates .......       6.27%       4.29%         7.69%

     1998 ....................    $130,750    $    ___    $  104,068
     1999 ....................         ___         ___       164,378
     2000 ....................         ___         ___       104,711
     2001 ....................         ___         ___         2,488
     2002 ....................         ___     150,000       125,000
     Years thereafter ........         ___     439,990       973,628
                                  --------    --------    ----------
     Total ...................    $130,750    $589,990    $1,474,273
                                  ========    ========    ==========
Fair Value ...................    $130,750    $589,990    $1,504,417
                                  ========    ========    ==========


Commodity Price Risk The Company enters into forwards, futures and other similar
contracts  to hedge the price  risks  associated  with a portion of  anticipated
future  electricity  production and gas purchases.  Most of these agreements are
settled in physical  delivery,  with the balance  settled in cash at or prior to
expiration.  Under certain of these  agreements,  payments are sometimes made or
received based on the differential between a fixed and a variable product price.
The Company does not obtain  collateral to support the agreements,  but monitors
the  financial  viability of  counterparties  and believes it has  minimized its
credit  risk  on  these   transactions.   In  the  event  of  nonperformance  by
counterparties,  the  Company  would be exposed to price  risk.  The Company may
recognize an accounting  gain or loss where actual delivery occurs and the price
in the contract may differ from the  prevailing  price at the delivery  point in
completing  the  transaction.  The  Company  defers the impact of changes in the
market value of contracts that serve as hedges until the related  transaction is
completed.

Forward-Looking Statements

The above discussion contains forward-looking  statements that involve risks and
uncertainties.  Words such as "estimates,"  "expects,"  "anticipates,"  "plans,"
"believes,"   "projects,"  and  similar  expressions  identify   forward-looking
statements.  These risks and uncertainties  include, but are not limited to, the
ongoing  restructuring of the electric  industry;  the outcome of the regulatory
proceedings  relating to the  restructuring;  regulatory,  tax and environmental
legislation;  the ability of the  Company to  successfully  compete  outside its
traditional regulated markets; regional economic conditions,  which could affect
customer  growth;  the  cost of debt  and  equity  capital;  weather  variations
affecting  customer  usage;  and  technological  developments  in  the  electric
industry.

These factors and the other matters  discussed above may cause future results to
differ materially from historical results, or from results or outcomes currently
expected or sought by the Company.
                                       23
<PAGE>
                          ITEM 8. FINANCIAL STATEMENTS
                             AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                                           Page
                                                                                                           ----

<S>                                                                                                         <C>
Report of Management........................................................................................25

Independent Auditors' Report................................................................................26

Statements of Income for each of the three years in the period ended December 31, 1997......................27

Balance Sheets --- December 31, 1997 and 1996...............................................................28

Statements of Cash Flows for each of the three years in the period ended December 31, 1997..................30

Statements of Retained Earnings for each of the three years in the period ended December 31, 1997...........31

Notes to Financial Statements...............................................................................31
</TABLE>

     See Note 14 of Notes to Financial  Statements  for the  selected  quarterly
financial data required to be presented in this Item.
                                       24
<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
                                       25
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


We have  audited  the  accompanying  balance  sheets of Arizona  Public  Service
Company as of December 31, 1997 and 1996 and the related  statements  of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1997.  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, 1997 and 1996
and the results of its operations and its cash flows for each of the three years
in the period ended  December 31, 1997 in  conformity  with  generally  accepted
accounting principles.


Deloitte & Touche LLP

Deloitte & Touche LLP
Phoenix, Arizona
March 4, 1998
                                       26
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                              STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                    ---------------------------------------------
                                                        1997             1996             1995
                                                    -----------      -----------      -----------
                                                                (Thousands of Dollars)
<S>                                                 <C>              <C>              <C>
Electric Operating Revenues ...................     $ 1,878,553      $ 1,718,272      $ 1,614,952
                                                    -----------      -----------      -----------
Fuel Expenses:
         Fuel for electric generation .........         201,341          230,393          208,928
         Purchased power ......................         235,286           95,130           60,870
                                                    -----------      -----------      -----------
                  Total .......................         436,627          325,523          269,798
                                                    -----------      -----------      -----------

Operating Revenues Less Fuel Expenses .........       1,441,926        1,392,749        1,345,154
                                                    -----------      -----------      -----------
Other Operating Expenses:
         Operations and maintenance excluding
           fuel expenses ......................         399,434          430,714          400,814
         Depreciation and amortization (Note 1)         365,671          297,210          242,098
         Income taxes (Note 10) ...............         184,737          178,513          178,865
         Other taxes ..........................         120,259          121,104          141,623
                                                    -----------      -----------      -----------
                  Total .......................       1,070,101        1,027,541          963,400
                                                    -----------      -----------      -----------

Operating Income ..............................         371,825          365,208          381,754
                                                    -----------      -----------      -----------

Other Income (Deductions):
         Allowance for equity funds used during
           construction .......................            --              5,209            4,982
         Income taxes (Note 10) ...............          31,413           45,552           37,598
         Other --- net ........................          (9,827)         (15,544)         (17,032)
                                                    -----------      -----------      -----------
                  Total .......................          21,586           35,217           25,548
                                                    -----------      -----------      -----------

Income Before Interest Deductions .............         393,411          400,425          407,302
                                                    -----------      -----------      -----------
Interest Deductions:
         Interest on long-term debt ...........         140,931          147,666          160,032
         Interest on short-term borrowings ....           9,404           10,621            8,143
         Debt discount, premium and expense ...           7,791            8,176            8,622
         Capitalized interest .................         (16,208)          (9,509)          (9,065)
                                                    -----------      -----------      -----------
                  Total .......................         141,918          156,954          167,732
                                                    -----------      -----------      -----------

Net Income ....................................         251,493          243,471          239,570
Preferred Stock Dividend Requirements .........          12,803           17,092           19,134
                                                    -----------      -----------      -----------

Earnings for Common Stock .....................     $   238,690      $   226,379      $   220,436
                                                    ===========      ===========      ===========
</TABLE>

See Notes to Financial Statements.
                                       27
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                                 BALANCE SHEETS
                                     ASSETS

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                          ----------------------------
                                                                              1997             1996
                                                                          -----------      -----------
                                                                             (Thousands of Dollars)
<S>                                                                       <C>              <C>
Utility Plant (Notes 5, 8 and 9):
         Electric plant in service and held for future use.............   $ 7,009,059      $ 6,803,211
         Less accumulated depreciation and amortization ...............     2,620,607        2,426,143
                                                                          -----------      -----------
           Total ......................................................     4,388,452        4,377,068
         Construction work in progress ................................       237,492          226,935
         Nuclear fuel, net of amortization of $66,081
           and $63,892 ................................................        51,624           51,137
                                                                          -----------      -----------
           Utility Plant --- net ......................................     4,677,568        4,655,140
                                                                          -----------      -----------

Investments and Other Assets (Note 13) ................................       164,906          113,666
                                                                          -----------      -----------

Current Assets:
         Cash and cash equivalents ....................................        12,552           12,521
         Accounts receivable:
           Service customers ..........................................       141,022          111,715
           Other ......................................................        31,313           49,898
           Allowance for doubtful accounts ............................        (1,338)          (1,685)
         Accrued utility revenues (Note 1) ............................        58,559           55,470
         Materials and supplies (at average cost) .....................        70,634           74,120
         Fossil fuel (at average cost) ................................         9,621           13,928
         Deferred income taxes (Note 10) ..............................         3,496            8,424
         Other ........................................................        24,529           22,767
                                                                          -----------      -----------
           Total Current Assets .......................................       350,388          347,158
                                                                          -----------      -----------

Deferred Debits:
         Regulatory asset for income taxes (Note 10) ..................       458,369          516,722
         Rate synchronization cost deferral (Note 1) ..................       358,871          414,082
         Unamortized costs of reacquired debt .........................        63,501           69,554
         Unamortized debt issue costs .................................        15,303           16,692
         Other ........................................................       242,236          290,208
                                                                          -----------      -----------
           Total Deferred Debits ......................................     1,138,280        1,307,258
                                                                          -----------      -----------
           Total ......................................................   $ 6,331,142      $ 6,423,222
                                                                          ===========      ===========
</TABLE>

See Notes to Financial Statements.
                                       28
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                                 BALANCE SHEETS
                                   LIABILITIES

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                                             -------------------------
                                                                                1997           1996
                                                                             ----------     ----------
                                                                               (Thousands of Dollars)
<S>                                                                          <C>            <C>
Capitalization (Notes 4 and 5):
         Common stock ..................................................     $  178,162     $  178,162
         Premiums and expenses --- net .................................      1,142,364      1,091,122
         Retained earnings .............................................        528,798        460,106
                                                                             ----------     ----------
                  Common stock equity ..................................      1,849,324      1,729,390
         Non-redeemable preferred stock ................................        142,051        165,673
         Redeemable preferred stock ....................................         29,110         53,000
         Long-term debt less current maturities ........................      1,953,162      2,029,482
                                                                             ----------     ----------
                  Total Capitalization .................................      3,973,647      3,977,545
                                                                             ----------     ----------

Current Liabilities:
         Commercial paper (Note 6) .....................................        130,750         16,900
         Current maturities of long-term debt (Note 5) .................        104,068        153,780
         Accounts payable ..............................................        107,423        174,394
         Accrued taxes .................................................         85,886         86,327
         Accrued interest ..............................................         31,660         39,115
         Customer deposits .............................................         29,116         32,137
         Other .........................................................         19,588         21,150
                                                                             ----------     ----------
                  Total Current Liabilities ............................        508,491        523,803
                                                                             ----------     ----------

Deferred Credits and Other:
         Deferred income taxes (Note 10) ...............................      1,345,177      1,414,242
         Deferred investment tax credit (Note 10) ......................         60,093         87,723
         Unamortized gain --- sale of utility plant (Note 9) ...........         82,363         86,939
         Customer advances for construction ............................         29,294         24,044
         Other .........................................................        332,077        308,926
                                                                             ----------     ----------
                  Total Deferred Credits and Other .....................      1,849,004      1,921,874
                                                                             ----------     ----------

Commitments and Contingencies (Note 12)

         Total .........................................................     $6,331,142     $6,423,222
                                                                             ==========     ==========
</TABLE>
                                       29
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                          ---------------------------------------
                                                                             1997           1996           1995
                                                                          ---------      ---------      ---------
                                                                                      (Thousands of Dollars)
<S>                                                                       <C>            <C>            <C>
Cash Flows from Operations:
   Net income .........................................................  $ 251,493      $ 243,471      $ 239,570
   Items not requiring cash:
            Depreciation and amortization .............................    365,671        297,210        242,098
            Nuclear fuel amortization .................................     32,702         33,566         31,587
            Allowance for equity funds used during construction .......       --           (5,209)        (4,982)
            Deferred income taxes --- net .............................    (55,278)       (12,717)        15,344
            Deferred investment tax credit --- net ....................    (27,630)       (27,630)       (27,641)
   Changes in certain current assets and liabilities:
            Accounts receivable --- net ...............................    (11,069)       (33,044)         1,659
            Accrued utility revenues ..................................     (3,089)        (1,951)         1,913
            Materials, supplies and fossil fuel .......................      7,793         11,945         25,606
            Other current assets ......................................     (1,762)        (4,928)        (3,677)
            Accounts payable ..........................................    (56,710)        68,788          6,333
            Accrued taxes .............................................       (441)         3,500         (6,585)
            Accrued interest ..........................................     (7,455)        (2,565)        (3,621)
            Other current liabilities .................................     (3,997)          (522)         3,393
   Other --- net ......................................................     64,280         17,216         21,328
                                                                         ---------      ---------      ---------
            Net cash provided .........................................    554,508        587,130        542,325
                                                                         ---------      ---------      ---------
Cash Flows from Investing:
   Capital expenditures ...............................................   (307,876)      (258,598)      (295,772)
   Capitalized interest ...............................................    (16,208)        (9,509)        (9,065)
   Other ..............................................................    (33,637)        (9,702)       (22,645)
                                                                         ---------      ---------      ---------
            Net cash used .............................................   (357,721)      (277,809)      (327,482)
                                                                         ---------      ---------      ---------
Cash Flows from Financing:
   Long-term debt .....................................................    109,906        205,830         87,130
   Short-term borrowings --- net ......................................    113,850       (160,900)        46,300
   Common equity infusion from parent .................................     50,000         50,000           --
   Dividends paid on common stock .....................................   (170,000)      (170,000)      (170,000)
   Dividends paid on preferred stock ..................................    (13,307)       (17,416)       (19,134)
   Repayment of preferred stock .......................................    (47,201)       (50,360)          --
   Repayment and reacquisition of long-term debt ......................   (240,004)      (172,343)      (147,282)
                                                                         ---------      ---------      ---------
            Net cash used .............................................   (196,756)      (315,189)      (202,986)
                                                                         ---------      ---------      ---------

Net increase (decrease) in cash and cash equivalents ..................         31         (5,868)        11,857
Cash and cash equivalents at beginning of year ........................     12,521         18,389          6,532
                                                                         ---------      ---------      ---------

Cash and cash equivalents at end of year ..............................  $  12,552      $  12,521      $  18,389
                                                                         =========      =========      =========
Supplemental Disclosure of Cash Flow Information:
   Cash paid during the year for:
            Interest (excluding capitalized interest) .................  $ 141,991      $ 150,603      $ 163,592
            Income taxes ..............................................  $ 236,676      $ 158,553      $ 164,261
</TABLE>
See Notes to Financial Statements.
                                       30
<PAGE>
                         ARIZONA PUBLIC SERVICE COMPANY
                         STATEMENTS OF RETAINED EARNINGS

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                   ----------------------------------
                                                                     1997         1996         1995
                                                                   --------     --------     --------
                                                                         (Thousands of Dollars)

<S>                                                                <C>          <C>          <C>
Retained earnings at beginning of year .......................     $460,106     $403,843     $353,655
Add:  Net income .............................................      251,493      243,471      239,570
                                                                   --------     --------     --------
         Total ...............................................      711,599      647,314      593,225
                                                                   --------     --------     --------

Deduct:
         Dividends:
                  Common stock (Notes 4 and 5) ...............      170,000      170,000      170,000
                  Preferred stock (at required rates) (Note 4)       12,801       17,092       19,134
         Other ...............................................         --            116          248
                                                                   --------     --------     --------
                  Total deductions ...........................      182,801      187,208      189,382
                                                                   --------     --------     --------

Retained earnings at end of year .............................     $528,798     $460,106     $403,843
                                                                   ========     ========     ========
</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
767,000  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 deferred income taxes (see Note 10)
and  rate  synchronization  cost  deferrals  (see  "Rate   Synchronization  Cost
Deferrals" in this note). These items,  combined with  miscellaneous  regulatory
assets and liabilities,  amounted to approximately $1.0 billion and $1.1 billion
at  December  31,  1997 and 1996,  respectively,  most of which are  included in
"Deferred  Debits" on the Balance Sheets. In accordance with the 1996 regulatory
agreement (see Note 3), the ACC  accelerated the  amortization of  substantially
all of the Company's  regulatory  assets to an eight-year period that began July
1,  1996.  The  accelerated   portion  of  the  regulatory  asset  amortization,
approximately  $120 million  pretax in 1997 and $60 million  pretax in 1996,  is
included in depreciation and  amortization  expense on the Statements of Income.
                                       31
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS

During 1997, the Emerging  Issues Task Force (EITF) of the Financial  Accounting
Standards  Board (FASB)  issued EITF 97-4,  which  requires  that SFAS No. 71 be
discontinued no later than when  legislation is passed or a rate order is issued
that  contains  sufficient  detail to determine its effect on the portion of the
business being  deregulated,  which could result in write-downs or write-offs of
physical  and/or  regulatory  assets.  Additionally,  the EITF  determined  that
regulatory  assets should not be written off if they are to be recovered  from a
portion of the entity which continues to apply SFAS No. 71.

Although  the ACC has issued  rules for  transitioning  generation  services  to
competition,  there are many unresolved  issues.  The Company continues to apply
SFAS No. 71 to all of its operations.  If rate recovery of regulatory  assets is
no longer probable, whether due to competition or regulatory action, the Company
would be required to write off the remaining balance as an extraordinary  charge
to expense.

Common  Stock All of the  outstanding  shares of common stock of the Company are
owned by Pinnacle West. See Note 4.

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
capitalized  interest or 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 13 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 as prescribed by regulators  for 1995 through 1997 ranged from
1.51% to 20%,  which  resulted  in an annual  composite  rate of 3.35% for 1997.
Depreciation and amortization of non-utility property and equipment are provided
over the  estimated  useful  lives of the related  assets,  ranging from 3 to 50
years.

Capitalized  Interest  In  1997  the  Company  began  capitalizing  interest  in
accordance  with SFAS No. 34,  "Capitalization  of Interest  Cost."  Capitalized
interest  represents  the cost of debt  funds used to  finance  construction  of
utility plant. Plant construction costs,  including  capitalized  interest,  are
recovered in authorized rates through  depreciation when completed  projects are
placed  into  commercial  operation.  Capitalized  interest  does not  represent
current cash earnings.  The rate used to calculate capitalized interest for 1997
was 7.25%.

Prior  to  1997  the  Company   accrued  an  allowance  for  funds  used  during
construction  (AFUDC).  AFUDC represented the cost of debt and equity funds used
to finance  construction  of utility plant,  and did not represent  current cash
earnings.  AFUDC has been calculated using composite rates of 7.75% for 1996 and
8.52% for 1995.

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

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  dates   (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 3). Prior to July 1, 1996 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.
                                       32
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS

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.

Under federal law, the United States  Department of Energy (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 12
for  information  on spent fuel disposal and Note 13 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 3), the ACC accelerated
the Company's  amortization of the regulatory asset for reacquired debt costs to
an eight-year  period that began July 1, 1996.  The  accelerated  portion of the
regulatory  asset  amortization  is included in  depreciation  and  amortization
expense on the Statements of Income.

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 1997 presentation.

2.   Accounting Matters

The  Financial  Accounting  Standards  Board has issued SFAS No. 130  "Reporting
Comprehensive Income," SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" and SFAS No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits," all of which are effective in 1998.

SFAS No. 130 changes the  reporting of certain items  currently  reported in the
common stock equity  section of the balance  sheet and is not expected to have a
material effect on the Company's financial statements.

SFAS No. 131 requires that public  companies  report certain  information  about
operating segments in their financial  statements.  It also establishes  related
disclosures about products and services,  geographic areas, and major customers.
The Company is currently  evaluating  what impact this standard will have on its
disclosures.

SFAS No. 132  standardizes  the disclosure  requirements  for pensions and other
postretirement   benefits  to  provide  information  that  is  more  comparable,
understandable and concise.  It is not expected to have a material effect on the
Company's financial statement disclosures.

3.   Regulatory Matters

Electric Industry Restructuring

State  The  ACC  has  been   conducting  an  ongoing   investigation   into  the
restructuring  of the  Arizona  electric  industry.  In December  1996,  the ACC
adopted rules that provide a framework for the  introduction  of retail electric
competition. The ACC framework 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.
                                       33
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS

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

o    Electric  service  providers that obtain  Certificates  of Convenience  and
     Necessity (CC&Ns) 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 was required to file
     with the ACC  proposed  tariffs  for bundled  service,  if  different  than
     current  tariffs,  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 separately.

o    The rules indicate that the ACC will allow recovery of unmitigated stranded
     costs.  Stranded costs are the costs of generating plants, other assets and
     contract  commitments that were prudently incurred to serve power customers
     that could go unrecovered if these customers are allowed to use open access
     to move to another  supplier.  Each  affected  utility would be required to
     file with the ACC its  estimates of  unmitigated  stranded  costs.  The ACC
     would then, after hearing and  consideration of various factors,  determine
     the  magnitude of stranded  costs and  appropriate  stranded  cost recovery
     mechanisms and charges.

The ACC  ordered  in the rules  that  numerous  issues  (including  reliability;
stranded cost measurement and recovery; the phase-in process, bundled, unbundled
and metering  services;  legal issues;  and independent system operator and spot
market development) require additional  consideration prior to implementation of
retail electric competition.  During 1997, the ACC conducted workshops to gather
input from various constituencies with respect to those issues.

In February 1998, the ACC completed a formal,  generic  hearing on stranded cost
determination  and  recovery.  Based  on  various  assumptions,   estimates  and
methodologies,  the Company  currently  estimates  that its stranded costs to be
recovered (excluding  regulatory assets which have already been addressed by the
ACC) will be less than $500  million.  The Company is seeking  full  recovery of
stranded costs during a transition period proposed to go through 2006. Decisions
by the ACC have not yet been made with respect to this issue.

An  Arizona  joint  legislative  committee  studied  electric  utility  industry
restructuring  issues in 1996 and 1997. In conjunction with that study,  Arizona
legislative  counsel  prepared  memoranda  in late  1997  related  to the  legal
authority of the ACC to deregulate the Arizona  electric utility  industry.  The
memoranda  raise a  question  as to the  degree to which the ACC may,  under the
Arizona  Constitution,  deregulate any portion of the electric  utility industry
and allow rates to be determined by market forces.

In  February  1998,  a bill to  facilitate  implementation  of  retail  electric
competition in the state was introduced in the Arizona legislature. The bill has
progressed through several stages to date. The bill includes the following major
provisions:  (a) requirements that large government-operated  electric utilities
(i) enter into  intergovernmental  agreements with the ACC to promote consistent
statewide practices;  (ii) implement retail electric generation  competition for
20% of each  utility's  1995 retail peak demand by December 31, 1998 and for all
customers by December 31, 1999; (iii) decrease rates by at least 10% over a ten-
year period beginning as early as January 1, 1991; and (iv) recover  unmitigated
stranded costs through a surcharge on  distribution  prices;  and (b) a proposal
that  the ACC  adopt  provisions  for  public  service  corporations  (including
investor-owned  utilities  such  as APS)  consistent  with  some  of the  bill's
provisions  for certain  government-operated  electric  utilities  as  described
above.
                                       34
<PAGE>
                                       APS
                          NOTES TO FINANCIAL STATEMENTS

The Company  believes that certain  provisions  of the ACC  framework  rules are
deficient.  In February  1997, a lawsuit was filed by the Company to protect its
legal  rights  regarding  those  rules.  That lawsuit is pending but two related
cases filed by other  utilities  have been decided  adversely to the  utilities'
positions.

The Company believes that further ACC decisions,  legislation at the Arizona and
federal  levels  and  perhaps  amendments  to the  Arizona  Constitution  (which
amendments  would  require a vote of the  people)  will  ultimately  be required
before  significant  implementation of retail electric  competition can lawfully
occur in Arizona.  Until the manner of implementation of competition,  including
addressing stranded costs, is determined,  the Company cannot accurately predict
the impact of full retail competition on its financial  position,  cash flows or
results of  operation.  As  competition  in the electric  industry  continues to
evolve,  the Company will continue to evaluate  strategies and alternatives that
will position the Company to compete in the new regulatory environment.

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  recent
congressional  sessions,  which as currently  written,  would allow consumers to
choose their  electricity  suppliers 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 that began 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.

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 May 1997, the ACC approved a retail
price  decrease of  approximately  $17.6  million  ($10.5  million  after income
taxes),  or 1.2%,  effective July 1, 1997. In March 1998, the Company filed with
the ACC its  calculation  of an annual  price  reduction  of  approximately  $17
million ($10 million after income  taxes),  or 1%, to become  effective  July 1,
1998. The amount and timing of the price decrease are subject to ACC approval.
                                       35
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

4.   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. 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       1997        1996      Share      1997      1996     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       145,559     152,740  $ 25.00  $   3,639  $   3,818   $ 27.50
   $2.50 ................     105,000        97,252     102,532    50.00      4,863      5,127     51.00
   $2.36 ................     120,000        38,506      40,000    50.00      1,925      2,000     51.00
   $4.35 ................     150,000        68,386      75,000   100.00      6,839      7,500    102.00
   Serial preferred .....   1,000,000
     $2.40   Series A ...                   234,839     239,900    50.00     11,742     11,995     50.50
     $2.625  Series C ...                   231,572     240,000    50.00     11,579     12,000     51.00
     $2.275  Series D ...                   164,101     199,655    50.00      8,205      9,983     50.50
     $3.25   Series E ...                   312,991     320,000    50.00     15,649     16,000     51.00
   Serial preferred .....   4,000,000(b)
     Adjustable rate ---
       Series Q .........                   352,851     372,851   100.00     35,285     37,285      (c)
   Serial preferred .....  10,000,000
     $1.8125 Series W ...                 1,693,016   2,398,615    25.00     42,325     59,965      (d)
                                          ---------   ---------           ---------  ---------
       Total ............                 3,339,073   4,141,293           $ 142,051  $ 165,673
                                          =========   =========           =========  =========

   Redeemable:
   Serial preferred:
     $10.00    Series U .                   291,098     410,000  $100.00  $  29,110  $  41,000      --
     $7.875    Series V .                      --       120,000   100.00       --       12,000      --
                                            -------     -------           ---------  ---------
       Total ............                   291,098     530,000           $  29,110  $  53,000
                                            =======     =======           =========  =========
</TABLE>

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

(a)  The actual  call price per share is the  indicated  amount plus any 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.
                                       36
<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 three years are: 1998,  $10.0 million;  1999, $10.0 million;
and 2000, $9.1 million. There are no redemption requirements in 2001 and 2002.

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                        1997        1996      1995       1997        1996      1995
---------------------------------     ---------   ---------   -------   --------   ---------  --------
<S>                                   <C>         <C>         <C>       <C>        <C>        <C>
Balance, January 1 ..............      530,000     750,000    750,000   $ 53,000   $ 75,000   $ 75,000
   Retirements:
      $10.00 Series U ...........     (118,902)    (90,000)      --      (11,890)    (9,000)      --
      $7.875 Series V ...........     (120,000)   (130,000)      --      (12,000)   (13,000)      --
                                       -------     -------    -------   --------   --------   --------
Balance, December 31 ............      291,098     530,000    750,000   $ 29,110   $ 53,000   $ 75,000
                                       =======     =======    =======   ========   ========   ========
</TABLE>
                                       37
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

5.   Long-Term Debt

The following table presents long-term debt outstanding:

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                ----------------------
                                                           Maturity Dates (a)     1997          1996
                                                           ------------------   --------      --------
                                                                                (Thousands of Dollars)
<S>                                                            <C>              <C>           <C>
First Mortgage Bonds
         7.125%   Series ..................................      1997           $   --        $150,000
         7.625%   Series ..................................      1998            100,000       100,000
         7.625%   Series ..................................      1999            100,000       100,000
         5.75%    Series ..................................      2000            100,000       100,000
         8.125%   Series ..................................      2002            125,000       125,000
         6.625%   Series ..................................      2004             85,000       100,000
         10.25%   Series ..................................      2020            109,550       114,550
         9.5%     Series ..................................      2021             45,140        50,810
         9%       Series ..................................      2021             72,370        72,500
         7.25%    Series ..................................      2023             97,150       100,000
         8.75%    Series ..................................      2024            121,918       148,500
         8%       Series ..................................      2025             88,500       116,900
         5.5%     Series ..................................      2028             25,000        25,000
         5.875%   Series ..................................      2028            154,000       154,000
         Unamortized discount and premium .................                       (7,033)       (8,412)
Pollution control indebtedness, adjustable rate (b) .......    2024-2031         439,990       439,990
Collateralized Loan, 6.125% ...............................      1999             10,000          --
Senior notes, 6.75% (c) ...................................      2006            100,000       100,000
Senior notes, 6.72% (c) ...................................      1999             50,000          --
Debentures, 10% ...........................................      2025             75,000        75,000
Bank loans, adjustable rate (d) ...........................      2002            150,000       100,000
Capitalized lease obligation, 7.48% (e) ...................    1997-2001          15,645        19,424
                                                                              ----------    ----------
   Total long-term debt ...................................                    2,057,230     2,183,262
Less current maturities ...................................                      104,068       153,780
                                                                              ----------    ----------
   Total long-term debt less current maturities ...........                   $1,953,162    $2,029,482
                                                                              ==========    ==========
</TABLE>

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

(a)  This  schedule does not reflect the timing of  redemptions  which may occur
     prior to maturity.

(b)  The  weighted-average  rate for the years ended  December 31, 1997 and 1996
     was 3.62% and 3.40%,  respectively.  Changes in short-term  interest  rates
     would affect the costs associated with this debt.

(c)  The Company has issued $150 million of first  mortgage  bonds ("senior note
     mortgage  bonds") to the senior note trustee as  collateral  for the senior
     notes. The senior note mortgage bonds have the same interest rate, interest
     payment dates, maturity, and redemption provisions as the senior notes. The
     Company's  payments of principal,  premium,  and/or  interest on the senior
     notes satisfy the Company's corresponding payment obligations on the senior
     note mortgage  bonds.  As long as the senior note mortgage bonds secure the
     senior notes,  the senior notes will  effectively  rank pari passu with the
     first  mortgage  bonds.  On the date that the Company has repaid all of its
     first mortgage bonds, other than those that secure senior notes, the senior
     note  mortgage  bonds will no longer secure the senior notes and will cease
     to be outstanding.
                                       38
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

(d)  The  weighted-average  rate at  December  31,  1997 and 1996 was  6.25% and
     5.76%, respectively.  Changes in short-term interest rates would affect the
     costs associated with this debt.

(e)  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 9).


Aggregate annual principal  payments due on total long-term debt and for sinking
fund  requirements  through 2002 are as follows:  1998,  $104.1  million;  1999,
$164.4  million;  2000,  $104.7  million;  2001,  $2.5 million;  and 2002,  $275
million.  See Note 4 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, 1997.

6.   Lines of Credit

The Company had committed  lines of credit with various banks of $400 million at
December 31, 1997 and 1996,  which were available either to support the issuance
of commercial  paper or to be used for bank  borrowings.  The commitment fees at
December  31, 1997 and 1996 for these  lines of credit  ranged from .07% to .15%
per annum.  The Company had long-term  bank  borrowings of $150 million and $100
million  outstanding  at December 31, 1997 and 1996,  respectively,  under these
lines of credit.

The Company had commercial  paper  borrowings  outstanding of $130.8 million and
$16.9 million at December 31, 1997 and 1996, respectively.  The weighted average
interest rate on commercial paper borrowings was 6.27% and 6.40% on December 31,
1997 and 1996,  respectively.  By  Arizona  statute,  the  Company's  short-term
borrowings cannot exceed 7% of its total  capitalization  without the consent of
the ACC.

7.   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,
1997 and 1996 due to their  short  maturities.  Investments  in debt and  equity
securities are held for purposes  other than trading.  The December 31, 1997 and
1996 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, 1997 and 1996 was $2.04 billion and $2.16 billion, respectively,
and the estimated fair value was $2.08 billion and $2.13 billion,  respectively.
The fair  value  estimates  are  based on  quoted  market  prices of the same or
similar issues.
                                       39
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

8.   Jointly-Owned Facilities

At December 31, 1997, 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 utility  operations  and
maintenance.

<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%      $1,830,794     $  628,960   $   14,498
  Palo Verde Nuclear Generating Station
     Unit 2 (see Note 9)                            17.0%         572,054        213,717        9,338
  Four Corners Steam Generating Station
     Units 4 and 5                                  15.0%         148,342         66,470        1,369
  Navajo Steam Generating Station
     Units 1, 2 and 3                               14.0%         182,637         82,326       33,081(a)
  Cholla Steam Generating Station
     Common Facilities (b)                          62.8%(c)       66,106         34,551          580
Transmission Facilities:
  ANPP 500KV System                                 35.8%(c)       62,593         19,107        4,903
  Navajo Southern System                            31.4%(c)       27,159         16,710         --
  Palo Verde-Yuma 500KV System                      23.9%(c)       11,376          3,971         --
  Four Corners Switchyards                          27.5%(c)        3,071          1,707            1
  Phoenix-Mead System                               17.1%(c)       36,418         (2,169)         337
</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.

9.   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
                                       40
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

ratemaking  treatment,  an amount equal to the annual lease payments is included
in rent expense.  A regulatory  asset is recognized for the  difference  between
lease payments and rent expense calculated on a straight-line basis.

In  accordance  with  the  1996  regulatory  agreement  (see  Note  3),  the ACC
accelerated the Company's  amortization of the regulatory asset for leases to an
eight-year  period  that began 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, 1997 was $53.2  million.
Lease  expense was  approximately  $42 million in each of the years 1995 through
1997.

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, 1997 was $46.5 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 1997, 1996 and 1995 was
approximately $7.8 million, $9.7 million and $9.9 million, respectively.  Annual
future minimum rental  commitments,  excluding the Palo Verde and combined cycle
leases,  for the period  1998  through  2002 range  between  $13 million and $15
million.  Total  rental  commitments  after the year 2002 are  estimated  at $99
million.

10.  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 a 1994 rate settlement agreement.

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 3), 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.
                                       41
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

The components of income tax expense are as follows:
<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                               ---------------------------------------
                                                                  1997           1996           1995
                                                               ---------      ---------      ---------
                                                                        (Thousands of Dollars)
<S>                                                            <C>            <C>            <C>
Current:
   Federal .................................................   $ 187,701      $ 137,531      $ 120,196
   State ...................................................      48,531         35,777         33,368
                                                               ---------      ---------      ---------
                  Total current ............................     236,232        173,308        153,564

Deferred ...................................................     (55,278)          (869)        17,933
Change in valuation allowance ..............................        --          (11,848)        (2,589)
Investment tax credit amortization .........................     (27,630)       (27,630)       (27,641)
                                                               ---------      ---------      ---------
                  Total expense ............................   $ 153,324      $ 132,961      $ 141,267
                                                               =========      =========      =========
</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,
                                                                ---------------------------------------
                                                                   1997           1996           1995
                                                                ---------      ---------      ---------
                                                                        (Thousands of Dollars)
<S>                                                             <C>            <C>            <C>
Federal income tax expense at statutory rate, 35% ...........   $ 141,686      $ 131,751      $ 133,293
Increases (reductions) in tax expense resulting from:
   Tax under book depreciation ..............................      14,694         19,229         18,186
   Investment tax credit amortization .......................     (27,630)       (27,630)       (27,641)
   State income tax --- net of federal income tax benefit ...      23,160         20,790         21,770
   Change in valuation allowance ............................        --          (10,269)        (2,245)
   Other ....................................................       1,414           (910)        (2,096)
                                                                ---------      ---------      ---------
            Income tax expense ..............................   $ 153,324      $ 132,961      $ 141,267
                                                                =========      =========      =========
</TABLE>
                                       42
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

The components of the net deferred income tax liability were as follows:

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                               -------------------------
                                                                                  1997           1996
                                                                               ----------     ----------
                                                                                 (Thousands of Dollars)
<S>                                                                            <C>            <C>
Deferred tax assets:
  Deferred gain on Palo Verde Unit 2 sale/leaseback ........................   $   33,257     $   35,105
  Other ....................................................................       77,412         71,725
                                                                               ----------     ----------
    Total deferred tax assets ..............................................      110,669        106,830
                                                                               ----------     ----------

Deferred tax liabilities:
  Plant related ............................................................    1,096,222      1,104,902
  Regulatory asset for income taxes.........................................      185,084        208,647
  Rate synchronization deferrals ...........................................      144,908        167,202
  Other ....................................................................       26,136         31,897
                                                                               ----------     ----------
    Total deferred tax liabilities .........................................    1,452,350      1,512,648
                                                                               ----------     ----------

Deferred income taxes --- net ..............................................   $1,341,681     $1,405,818
                                                                               ==========     ==========
</TABLE>

11.  Retirement Plans and Other Benefits

Voluntary  Severance  Plan The Company  sponsored a voluntary  severance plan in
1996, which resulted in a pretax 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  in  1996  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  1997,  1996 and 1995 was
approximately $8.7 million, $14.9 million and $9.6 million, respectively.
                                       43
<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 are as follows:

<TABLE>
<CAPTION>
                                                                     1997          1996          1995
                                                                   --------      --------      --------
                                                                          (Thousands of Dollars)

<S>                                                                <C>           <C>           <C>
Service cost --- benefits earned during the period .............   $ 19,881      $ 22,861      $ 16,038
Interest cost on projected benefit obligation ..................     47,824        44,602        39,328
Return on plan assets ..........................................    (87,582)      (62,460)      (82,209)
Net amortization and deferral ..................................     39,007        19,734        45,976
                                                                   --------      --------      --------
Net periodic pension cost ......................................   $ 19,130      $ 24,737      $ 19,133
                                                                   ========      ========      ========
</TABLE>

A reconciliation  of the funded status of the plan to the amounts  recognized in
the balance sheets is presented below:

<TABLE>
<CAPTION>
                                                                                 1997            1996
                                                                              ---------       ---------
                                                                                (Thousands of Dollars)

<S>                                                                           <C>             <C>
Plan assets at fair value .................................................   $ 612,392       $ 533,444
                                                                              ---------       ---------
Less:
         Accumulated benefit obligation, including vested benefits
           of $493,838 and $413,004 in 1997 and 1996, respectively.........     552,391         467,037
         Effect of projected future compensation increases ................     147,209         134,057
                                                                              ---------       ---------
Total projected benefit obligation ........................................     699,600         601,094
                                                                              ---------       ---------
Plan assets less than projected benefit obligation ........................     (87,208)        (67,650)
Plus:
         Unrecognized net loss from past experience
           different from that assumed ....................................      16,989           2,818
         Unrecognized prior service cost ..................................      24,625          20,478
         Unrecognized net transition asset ................................     (26,376)        (29,593)
                                                                              ---------       ---------
Accrued pension liability .................................................   $ (71,970)      $ (73,947)
                                                                              =========       =========

Principal actuarial assumptions used were:
         Discount rate ....................................................        7.25%           7.75%
         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  1997,  1996 and 1995 were $3.7
million, $3.4 million and $3.1 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.
                                       44
<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  1997,  1996  and  1995  was
approximately $9.4 million, $15.8 million and $13.3 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>
                                                                     1997          1996          1995
                                                                   --------      --------      --------
                                                                          (Thousands of Dollars)

<S>                                                                <C>           <C>           <C>
Service cost --- benefits earned during the period..............   $  6,865      $  7,974      $  6,735
Interest cost on accumulated benefit obligation ................     14,315        13,395        13,743
Return on plan assets ..........................................    (30,846)      (12,550)      (15,133)
Net amortization and deferral ..................................     27,145        12,733        17,142
                                                                   --------      --------      --------
Net periodic postretirement benefit cost .......................   $ 17,479      $ 21,552      $ 22,487
                                                                   ========      ========      ========
</TABLE>

A reconciliation  of the funded status of the plan to the amounts  recognized in
the balance sheet is presented below:

<TABLE>
<CAPTION>
                                                                                 1997            1996
                                                                              ---------       ---------
                                                                                (Thousands of Dollars)
<S>                                                                             <C>           <C>
Plan assets at fair value ..................................................    151,146       $ 109,763
                                                                              ---------       ---------
Less accumulated postretirement benefit obligation:
         Retirees ..........................................................     94,839          86,747
         Fully eligible plan participants ..................................      5,927           3,351
         Other active plan participants ....................................     96,815          89,452
                                                                              ---------       ---------
                  Total accumulated postretirement benefit obligation ......    197,581         179,550
                                                                              ---------       ---------
Plan assets less than accumulated benefit obligation .......................    (46,435)        (69,787)
Plus:
         Unrecognized transition obligation ................................    114,787         122,439
         Unrecognized net gain from past experience different from that
           assumed .........................................................    (78,209)        (62,299)
                                                                              ---------       ---------
Accrued postretirement liability ...........................................  $  (9,857)      $  (9,647)
                                                                              =========       =========

Principal actuarial assumptions used were:
         Discount rate .....................................................       7.25%           7.75%
         Annual salary increases for life insurance obligation .............       4.50%           4.50%
         Expected long-term rate of return on assets --- after tax .........       7.75%           7.75%
         Initial health care cost trend rate --- under age 65 ..............       8.00%           9.00%
         Initial health care cost trend rate --- age 65 and over ...........       7.00%           8.00%
         Ultimate health care cost trend rate (reached in the year 2002)....       5.00%           5.50%
</TABLE>

Assuming a 1%  increase  in the health  care cost trend  rate,  the 1997 cost of
postretirement  benefits other than pensions would increase by  approximately $6
million and the  accumulated  benefit  obligation  as of December 31, 1997 would
increase by approximately $34 million.
                                       45
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

12.  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 1997 dollars and including  installation and
replacement power costs) will be approximately  $50 million,  most of which will
be incurred after the year 2000.

During the fourth  quarter of 1997, the Palo Verde  participants,  including the
Company,  entered into a contract for the fabrication of two  replacement  steam
generators.  The cost to the Company is estimated at approximately  $26 million.
These  generators  will be used  as  replacements  if  performance  of  existing
generators  deteriorates  to less than  acceptable  levels.  The  generators are
expected  on  site in  2002.  The  Company's  share  of  installation  costs  is
approximately $24 million.

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. In
November  1997 the Court of Appeals for the D.C.  Circuit  affirmed its previous
decision  that DOE must begin  accepting  spent fuel by 1998 and issued an order
precluding  DOE from  excusing its own delay on the grounds that DOE has not yet
prepared a permanent repository or interim storage facility.

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.
                                       46
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

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 1998  through  2020 that
include required  purchase  provisions.  The Company estimates its 1998 contract
requirements to be  approximately  $136 million.  However,  this amount may vary
significantly  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  $110  million.  The  portion  of  the  coal  mine
reclamation  obligation  related to coal  already  burned is  approximately  $66
million at December 31, 1997 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 3), 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,
1997 was approximately $60 million.

Construction  Program Total capital  expenditures  in 1998 are estimated at $323
million.

13.  Nuclear Decommissioning Costs

The Company  recorded $11.4 million for  decommissioning  expense in each of the
years 1997 and 1996.  The  Company  estimates  it will cost  approximately  $2.0
billion ($460 million in 1997 dollars), over a 14 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  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,
1997 and 1996,  the  Company had  deposited  a total of $79.5  million and $68.1
million, respectively. The trust accounts are included in "Investments and Other
Assets" on the  Balance  Sheets at a market  value of $124.6  million  and $95.5
million  on  December  31,  1997 and 1996,  respectively.  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 not determined when a revised  exposure draft or a final statement will
be issued.
                                       47
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

14.  Selected Quarterly Financial Data (Unaudited)

Quarterly financial information for 1997 and 1996 is as follows:


                    Electric                       Net        Earnings (Loss)
                    Operating     Operating      Income            for
Quarter             Revenues      Income(a)      (Loss)        Common Stock
-------             ---------     ---------      ------       ---------------
                                   (Thousands of Dollars)
1997
   First            $ 379,021     $  61,439     $  28,645      $  25,019
   Second             458,751        99,706        69,493         66,298
   Third              632,821       150,892       129,699        126,715
   Fourth             407,960        59,788        23,656         20,658
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)

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

(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 loss for the fourth  quarter of 1996  includes an  after-tax  charge of
     $18.9 million for a voluntary severance program.
                                       48
<PAGE>
                                      APS
                         NOTES TO FINANCIAL STATEMENTS

15.  Stock Options

Pinnacle  West,  the Company's  parent,  has incentive  plans under which it may
grant  non-qualified  stock options (NQSOs),  incentive stock options (ISOs) and
restricted  stock awards to Pinnacle  West and APS  officers and key  employees.

The plans provide for the granting of new options or awards of up to 3.5 million
shares at a price per  option  not less than fair  market  value on the date the
option is granted. The plans also provide for the granting of any combination of
stock appreciation rights or dividend equivalents.  The awards outstanding under
the various  incentive plans at December 31, 1997  approximate  1,486,417 NQSOs,
183,190  restricted shares,  and no dividend  equivalent  shares,  ISOs or stock
appreciation rights.

The FASB issued SFAS No. 123 "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 Accounting  Principles Board Opinion No.
25. Had the  Company  determined  compensation  expense  based on the fair value
method,  the  Company's  net  income  would  have been  reduced to the pro forma
amounts indicated below:

                                 1997         1996         1995
                               --------     --------     --------
                                     (Thousands of Dollars)

Net income
     As reported ............  $251,493     $243,471     $239,570
     Pro forma ..............  $251,142     $243,291     $239,547


The fair  value of each fixed  stock  option is  estimated  on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:

                                  1997         1996       1995
                                 ------       ------     ------

Risk-free interest rate .......   5.66%        5.77%      5.43%
Dividend growth ...............   4.50%        4.50%      4.50%
Volatility ....................  15.63%       17.10%     12.60%
Expected life (months) ........     60           58         56


The effects of applying SFAS No. 123 for disclosing compensation cost may not be
representative  of the effects on reported net income for future  years  because
pro forma net income  does not  consider  compensation  costs for stock  options
granted prior to January 1, 1995.
                                       49
<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 19,
1998 (the "1998 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, sixth and seventh 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 1998 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  1998  Proxy
Statement.

             ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Reference is hereby made to the last two paragraphs  under the heading "The
Board and its  Committees"  and to "Executive  Benefit Plans ---  Employment and
Severance Agreements" in the 1998 Proxy Statement.
                                       50
<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 24.

Exhibits Filed

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

10.1(a) --- 1998 Management Variable Incentive Plan

10.2(a) --- 1998 Senior Management Variable Incentive Plan

10.3(a) --- 1998 Officers Variable Incentive Plan

23.1    --- Consent of Deloitte & Touche LLP

27.1    --- Financial Data Schedule


     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

  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
</TABLE>
                                       51
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  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         1-4473         9-27-93
               Indenture                          Form 8-K Report

  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

  4.8          Fifty-fifth Supplemental           4.8 to Registration           1-4473         4-9-97
               Indenture                          Statement Nos. 33-55473,
                                                  33-64455 and 333-15379
                                                  by means of April 7, 1997
                                                  Form 8-K Report

  4.9          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
</TABLE>
                                       52
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  4.10         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

  4.11         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

  4.12         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

  4.13         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

  4.14         Second Supplemental Indenture      4.10 to Registration          1-4473         4-9-97
               dated as of April 1, 1997          Statement Nos. 33-55473,
                                                  33-64455 and 333-15379
                                                  by means of April 7, 1997
                                                  Form 8-K Report

  4.15         Indenture dated as of January      4.10 to Registration          1-4473         1-16-98
               15, 1998 among the Company         Statement  Nos. 333-15379
               and The Chase  Manhattan           and  333-27551 by means
               Bank, as Trustee                   of January 13, 1998
                                                  Form 8-K Report

  4.16         First Supplemental Indenture       4.3 to Registration           1-4473         1-16-98
               dated as of January 15, 1998       Statement Nos. 333-15379
                                                  and 333-27551 by means
                                                  of January 13, 1998
                                                  Form 8-K Report
</TABLE>
                                       53
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  4.17         Agreement of Resignation,          4.1 to September 25, 1995     1-4473         10-24-95
               Appointment, Acceptance and        Form 8-K Report
               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

  10.4         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

  10.5         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

  10.6         Amendment No. 2 to                 10.4 to 1996 Form 10-K        1-4473         3-28-97
               Decommissioning Trust              Report
               Agreement (PVNGS Unit 1)
               dated as of July 1, 1991

  10.7         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

  10.8         Amendment No. 2 to                 10.6 to 1996 Form 10-K        1-4473         3-28-97
               Decommissioning Trust              Report
               Agreement (PVNGS Unit 3)
               dated as of July 1, 1991
</TABLE>
                                       54
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  10.9         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

  10.10        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

  10.11        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

  10.12        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

  10.13        Amendment No. 4 to Amended         10.5 to 1996 Form 10-K        1-4473         3-28-97
               and Restated                       Report
               Decommissioning Trust
               Agreement (PVNGS Unit 2)
               dated as of January 31, 1992

  10.14        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
</TABLE>
                                       55
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  10.15        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

  10.16        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

  10.17        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

  10.18        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

  10.19        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

  10.20        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

  10.21        Indenture of Lease with            5.01 to Form S-7              2-59644        9-1-77
               Navajo Tribe of Indians, Four      Registration Statement
               Corners Plant

  10.22        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
</TABLE>
                                       56
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  10.23        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

  10.24        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

  10.25        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

  10.26        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

  10.27        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

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

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

  10.30        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>
                                       57
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  10.31        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

  10.32        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

  10.33(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>
                                       58
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  10.34(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

  10.35(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

  10.36(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

  10.37        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

  10.38        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>
                                       59
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  10.39        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

  10.40(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

  10.41(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

  10.42(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

  10.43(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

  10.44(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

  10.45(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>
                                       60
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  10.46(a)     Fifth Amendment to the             10.3 to 1997 Form 10-K        1-4473         3-28-97
               Arizona Public Service             Report
               Company Deferred
               Compensation Plan

  10.47(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

  10.48(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

  10.49(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

  10.50(a)     Arizona Public Service             10.1 to September 1997        1-4473         11-12-97
               Company Director                   Form 10-K Report
               Equity Plan

  10.51(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

  10.52(a)     Letter Agreement dated             10.8 to 1996 Form 10-K        1-4473         3-28-97
               August 16, 1996 between            Report
               the Company and
               William L. Stewart

  10.53(a)     Letter Agreement between           10.2 to September 1997        1-4473         11-12-97
               the Company and                    Form 10-Q Report
               William L. Stewart
</TABLE>
                                       61
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  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             10.9 to 1996 Form 10-K        1-4473         3-28-97
               November 27, 1996 between          Report
               the Company and
               George A. Schreiber, Jr.

  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
</TABLE>
                                       62
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  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

  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

  99.1         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
</TABLE>
                                       63
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  99.2         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

  99.3(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

  99.4(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
</TABLE>
                                       64
<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. 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

  99.6(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

  99.7(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
</TABLE>
                                       65
<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. 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

  99.9(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

  99.10(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

  99.11(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
</TABLE>
                                       66
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  99.12        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

  99.13        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

  99.14        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
</TABLE>
                                       67
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  99.15        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

  99.16        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

  99.17        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

  99.18        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
</TABLE>
                                       68
<PAGE>
<TABLE>
<CAPTION>
Exhibit No.    Description                        Originally Filed as Exhibit:  File No.(b)    Date Effective
-----------    -----------                        ----------------------------  -----------    --------------
<S>            <C>                                <C>                           <C>            <C>
  99.19        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

  99.20(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

  99.21        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

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

  99.23        Arizona Corporation                10.1 to June Form 10-Q        1-4473         8-12-94
               Commission Order dated             Report
               June 1, 1994

  99.24        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

  99.25        Arizona Corporation                10.1 to March 1996            1-4473         5-14-96
               Commission Order                   Form 10-Q Report
               dated April 24, 1996

  99.26        Arizona Corporation                99.1 to 1996 Form 10-K        1-4473         3-28-97
               Commission Order,                  Report
               Decision No. 59943, dated
               December 26, 1996,
               including the Rules regarding
               the introduction of retail
               competition in Arizona
</TABLE>
                                       69
<PAGE>
------------------

     (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,
1998, the Company filed the following Report on Form 8-K:

          Report dated  January 13, 1998  comprised of Exhibits to the Company's
          Registration  Statements  (Registration  Nos. 333-15379 and 333-27551)
          relating to the Company's offering of $100 million of Notes.
                                       70
<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, 1998                         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, 1998
----------------------------------------------------                    and Director
           (William J. Post, President
           and Chief Executive Officer)

             GEORGE A. SCHREIBER, JR.                          Principal Accounting Officer,       March 27, 1998
----------------------------------------------------            Principal Financial Officer
            (George A. Schreiber, Jr.)                                  and Director


                O. MARK DEMICHELE                                         Director                 March 27, 1998
----------------------------------------------------
               (O. Mark DeMichele)

               MICHAEL L. GALLAGHER                                       Director                 March 27, 1998
----------------------------------------------------
              (Michael L. Gallagher)

                 MARTHA O. HESSE                                          Director                 March 27, 1998
----------------------------------------------------
                (Martha O. Hesse)

               MARIANNE M. JENNINGS                                       Director                 March 27, 1998
----------------------------------------------------
              (Marianne M. Jennings)

                 ROBERT E. KEEVER                                         Director                 March 27, 1998
----------------------------------------------------
                (Robert E. Keever)

                ROBERT G. MATLOCK                                         Director                 March 27, 1998
----------------------------------------------------
               (Robert G. Matlock)
</TABLE>
                                       71
<PAGE>
<TABLE>
<CAPTION>
                    Signature                                              Title                        Date
                    ---------                                              -----                        ----
<S>                                                            <C>                                <C>
                BRUCE J. NORDSTROM                                        Director                 March 27, 1998
----------------------------------------------------
               (Bruce J. Nordstrom)

                JOHN R. NORTON III                                        Director                 March 27, 1998
----------------------------------------------------
               (John R. Norton III)

                 DONALD M. RILEY                                          Director                 March 27, 1998
----------------------------------------------------
                (Donald M. Riley)

              QUENTIN P. SMITH, JR.                                       Director                 March 27, 1998
----------------------------------------------------
             (Quentin P. Smith, Jr.)

                                                                          Director
----------------------------------------------------
                 (Richard Snell)

                 DIANNE C. WALKER                                         Director                 March 27, 1998
----------------------------------------------------
                (Dianne C. Walker)

               BEN F. WILLIAMS, JR.                                       Director                 March 27, 1998
----------------------------------------------------
              (Ben F. Williams, Jr.)
</TABLE>
                                       72
<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, 1997

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

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












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



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

10.1a     ___    1998 Management Variable Incentive Plan

10.2a     ___    1998 Senior Management Variable Incentive Plan

10.3a     ___    1998 Officers Variable Incentive Plan

23.1      ___    Consent of Deloitte & Touche LLP

27.1      ___    Financial Data Schedule

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

         (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.