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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-K
(Mark One)

þ	 	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004	
OR

o	 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     	
 	 	 	 	 	
Commission	 	Registrants; State of Incorporation;	 	IRS Employer	
File Number	 	Addresses; and Telephone Number	 	Identification No.	
1-8962	 	PINNACLE WEST CAPITAL CORPORATION	 	86-0512431	
 	 	(An Arizona corporation)	 	 	
 	 	400 North Fifth Street, P.O. Box 53999	 	 	
 	 	Phoenix, Arizona 85072-3999	 	 	
 	 	(602) 250-1000	 	 	
1-4473	 	ARIZONA PUBLIC SERVICE COMPANY	 	86-0011170	
 	 	(An Arizona corporation)	 	 	
 	 	400 North Fifth Street, P.O. Box 53999	 	 	
 	 	Phoenix, Arizona 85072-3999	 	 	
 	 	(602) 250-1000	 	 	
Securities registered pursuant to Section 12(b) of the Act:

 	
 	 	Title Of Each Class	 	Name Of Each Exchange On Which Registered	

PINNACLE WEST CAPITAL CORPORATION	 	Common Stock,	 	New York Stock Exchange	
	 	No Par Value	 	Pacific Stock Exchange	
ARIZONA PUBLIC SERVICE COMPANY	 	None	 	None	
 	
Securities registered pursuant to Section 12(g) of the Act: None.
     Indicate by check mark whether each 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 þ No o
     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 in any amendment to this Form 10-K. o
     Indicate by check mark whether each registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

PINNACLE WEST CAPITAL CORPORATION	 	Yes x	 	No o	
ARIZONA PUBLIC SERVICE COMPANY	 	Yes o	 	No þ	
     State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of each registrant’s most recently completed second fiscal quarter: 

PINNACLE WEST CAPITAL CORPORATION	 	$3,673,440,593 as of June 30, 2004	
ARIZONA PUBLIC SERVICE COMPANY	 	$0 as of June 30, 2004	
The number of shares outstanding of each registrant’s common stock as of March 14, 2005

PINNACLE WEST CAPITAL CORPORATION	 	92,080,964 shares	
ARIZONA PUBLIC SERVICE COMPANY	 	Common Stock, $2.50 par value, 71,264,947 shares. Pinnacle West Capital Corporation is the sole holder of Arizona Public Service Company’s Common Stock.	
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Pinnacle West Capital Corporation’s definitive Proxy Statement relating to its Annual Meeting of Shareholders to be held on May 18, 2005 are incorporated by reference into Part III hereof.

      Arizona Public Service Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format allowed under that General Instruction.
     This combined Form 10-K is separately filed by Pinnacle West Capital Corporation and Arizona Public Service Company. Each registrant is filing on its own behalf all of the information contained in this Form 10-K that relates to such registrant. Neither registrant is filing any information that does not relate to such registrant, and therefore makes no representation as to any such information.

 

TABLE OF CONTENTS

 	 	 	 	 	 	Page	
GLOSSARY	 	1	
 	 	 	 	 	 	 	
PART I	 	4	
	 	Item 1.	 	Business	 	4	
	 	Item 2.	 	Properties	 	19	
	 	Item 3.	 	Legal Proceedings	 	24	
	 	Item 4.	 	Submission of Matters to a Vote of Security Holders	 	24	
 	 	Supplemental Item.	 	 	
	 	 	 	Executive Officers of Pinnacle West	 	25	
 	 	 	 	 	 	 	
PART II	 	27	
	 	Item 5.	 	Market for Registrants’ Common Equity, Pinnacle West Related Stockholder Matters and Issuer Purchases of Equity Securities	 	27	
	 	Item 6.	 	Selected Financial Data	 	28	
	 	Item 7.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	30	
	 	Item 7A.	 	Quantitative and Qualitative Disclosures about Market Risk.	 	62	
	 	Item 8.	 	Financial Statements and Supplementary Data	 	63	
	 	Item 9.	 	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	 	148	
	 	Item 9A.	 	Controls and Procedures	 	148	
	 	Item 9B.	 	Other Information	 	149	
 	 	 	 	 	 	 	
PART III	 	149	
	 	Item 10.	 	Directors and Executive Officers of Pinnacle West	 	149	
	 	Item 11.	 	Executive Compensation	 	149	
	 	Item 12.	 	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	 	149	
	 	Item 13.	 	Certain Relationships and Related Transactions	 	152	
	 	Item 14.	 	Principal Accountant Fees and Services	 	152	
 	 	 	 	 	 	 	
PART IV	 	153	
	 	Item 15.	 	Exhibits and Financial Statement Schedules	 	153	
 	 	 	 	 	 	 	
SIGNATURES	 	191	
  Exhibit 10.1	
  Exhibit 10.79.2	
  Exhibit 10.95	
  Exhibit 10.96	
  Exhibit 10.97	
  Exhibit 10.98	
  Exhibit 10.99	
  Exhibit 10.100	
  Exhibit 10.101	
  Exhibit 10.102	
  Exhibit 10.103	
  Exhibit 10.104	
  Exhibit 10.105	
  Exhibit 12.1	
  Exhibit 12.2	
  Exhibit 21.1	
  Exhibit 23.1	
  Exhibit 23.2	
  Exhibit 31.1	
  Exhibit 31.2	
  Exhibit 31.3	
  Exhibit 31.4	
  Exhibit 32.1	
  Exhibit 32.2	
  Exhibit 99.31	
  Exhibit 99.32	
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GLOSSARY
ACC – Arizona Corporation Commission
ADEQ – Arizona Department of Environmental Quality
AFUDC – allowance for funds used during construction
AISA – Arizona Independent Scheduling Administrator
ALJ – Administrative Law Judge
ANPP – Arizona Nuclear Power Project, also known as Palo Verde
APS – Arizona Public Service Company, a subsidiary of the Company
APS Energy Services – APS Energy Services Company, Inc., a subsidiary of the Company
CC&N – Certificate of Convenience and Necessity
Cholla – Cholla Power Plant
Citizens – Citizens Communications Company
Clean Air Act – Clean Air Act, as amended
Company – Pinnacle West Capital Corporation
CPUC – California Public Utility Commission
DOE – United States Department of Energy
EITF – FASB’s Emerging Issues Task Force
El Dorado – El Dorado Investment Company, a subsidiary of the Company
EPA – United States Environmental Protection Agency
ERMC – Energy Risk Management Committee
FASB – Financial Accounting Standards Board
FERC – United States Federal Energy Regulatory Commission
FIN – FASB Interpretation
Financing Order – ACC Order that authorized APS’ $500 million loan to Pinnacle West Energy in May 2003
FIP – Federal Implementation Plan
Four Corners – Four Corners Power Plant
FSP – FASB Staff Position
GAAP – accounting principles generally accepted in the United States of America
IRS – United States Internal Revenue Service
ISO – California Independent System Operator
kW – kilowatt, one thousand watts
kWh – kilowatt-hour, one thousand watts per hour

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Moody’s – Moody’s Investors Service
MW – megawatt, one million watts
MWh – megawatt-hours, one million watts per hour
NAC – collectively, NAC Holding Inc. and NAC International Inc., subsidiaries of El Dorado that were sold in November 2004
Native Load – retail and wholesale sales supplied under traditional cost-based rate regulation
1999 Settlement Agreement – comprehensive settlement agreement related to the implementation of retail electric competition
NRC – United States Nuclear Regulatory Commission
Nuclear Waste Act – Nuclear Waste Policy Act of 1982, as amended
OCI – other comprehensive income
Palo Verde – Palo Verde Nuclear Generating Station, also known as ANPP
PG&E – PG&E Corporation
Pinnacle West – Pinnacle West Capital Corporation, the Company
Pinnacle West Energy – Pinnacle West Energy Corporation, a subsidiary of the Company
PPL Sundance – PPL Sundance Energy, LLC
PRP – potentially responsible parties under the Superfund Act
PSA – power supply adjuster
PWEC Dedicated Assets – the following Pinnacle West Energy power plants, each of which is dedicated to serving APS’ customers: Redhawk Units 1 and 2, West Phoenix Units 4 and 5 and Saguaro Unit 3
PX – California Power Exchange
RFP – request for proposals
RTO – regional transmission organization
Rules – ACC retail electric competition rules
Salt River Project – Salt River Project Agricultural Improvement and Power District
SCE – Southern California Edison Company
SEC – United States Securities and Exchange Commission
SFAS – Statement of Financial Accounting Standards
SIP – State Implementation Plan
SNWA – Southern Nevada Water Authority
Spark Spread – Excess of market power price over market gas price at a specific location
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SPE – special-purpose entity
Standard & Poor’s – Standard & Poor’s Corporation
SunCor – SunCor Development Company, a subsidiary of the Company
Sundance Plant – PPL Sundance’s 450-megawatt generating facility located approximately 55 miles southeast of Phoenix, Arizona
Superfund – Comprehensive Environmental Response, Compensation and Liability Act
T&D – transmission and distribution
Track A Order – ACC order dated September 10, 2002 regarding generation asset transfers and related issues
Track B Order – ACC order dated March 14, 2003 regarding competitive solicitation requirements for power purchases by Arizona’s investor-owned electric utilities
Trading – energy-related activities entered into with the objective of generating profits on changes in market prices
2004 Settlement Agreement – an agreement proposing terms under which APS’ general rate case would be settled
VIE – variable interest entity
WestConnect – WestConnect RTO, LLC, a proposed RTO to be formed by owners of electric transmission lines in the southwestern United States
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INTRODUCTION
Filing Format
     This Annual Report on Form 10-K is a combined report being filed by two separate registrants: Pinnacle West and APS. The information required with respect to each company is set forth within the applicable items.
     The Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of this report is divided into the following two sections:

 	•  	Pinnacle West Consolidated —This section describes the financial condition and results of operations of Pinnacle West and its subsidiaries on a consolidated basis. It includes discussions of Pinnacle West’s regulated utility and non-utility operations. A substantial part of Pinnacle West’s revenues and earnings are derived from its regulated utility, APS.	
 	
 	•  	APS —This section includes a detailed description of the results of operations and contractual obligations of APS.	
 
     Item 8 of this report includes Consolidated Financial Statements of Pinnacle West and Financial Statements of APS. Item 8 also includes Notes to Pinnacle West’s Consolidated Financial Statements, the majority of which also relate to APS, and Supplemental Notes to APS’ Financial Statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
General
     Pinnacle West was incorporated in 1985 under the laws of the State of Arizona and owns all of the outstanding equity securities of APS, its major subsidiary. APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to most of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona. Through its marketing and trading division, APS also generates, sells and delivers electricity to wholesale customers in the western United States.
     Pinnacle West’s other significant subsidiaries are Pinnacle West Energy, which owns and operates unregulated generating plants; APS Energy Services, which provides competitive energy services and products in the western United States; and SunCor, which is engaged in real estate development activities. Each of these subsidiaries is discussed in greater detail below. See “Business of Pinnacle West Energy Corporation,” “Business of APS Energy Services Company, Inc.” and “Business of SunCor Development Company” in this Item 1.
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Business Segments
     Pinnacle West has three principal business segments (determined by products, services and the regulatory environment):

 	•  	the regulated electricity segment (70% of operating revenues in 2004), which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities, and includes electricity generation, transmission and distribution;	
 	
 	•  	the marketing and trading segment (16% of operating revenues in 2004), which consists of competitive energy business activities, including wholesale marketing and trading and APS Energy Services’ commodity-related energy services; and	
 	
 	•  	the real estate segment (12% of operating revenues in 2004), which consists of SunCor’s real estate development and investment activities.	
     See Note 17 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for financial information about the business segments.
APS General Rate Case
     APS’ general rate case pending before the ACC is the key issue affecting Pinnacle West’s and APS’ outlook. As discussed in greater detail in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8, on August 18, 2004, a substantial majority of the parties to the rate case, including APS, the ACC staff, the Arizona Residential Utility Consumer Office, other customer and advocacy groups, and merchant power plant intervenors entered into the 2004 Settlement Agreement, which proposes terms under which the rate case would be settled.
     On February 28, 2005, the administrative law judge issued a recommended order, proposing ACC approval of the 2004 Settlement Agreement with two changes related to the PSA. On March 14, 2005, the parties to the 2004 Settlement Agreement jointly filed suggested changes to the recommended order addressing, among other things, the recommended order’s proposed treatment of the PSA. The ACC has scheduled open meetings on March 25 and March 28, 2005 to consider the recommended order and suggested changes. APS cannot predict the outcome of this matter.
Employees
     At December 31, 2004, Pinnacle West employed about 7,200 people, including the employees of its subsidiaries. Of these employees, about 6,100 were employees of APS, including employees at jointly-owned generating facilities for which APS serves as the generating facility manager. About 1,100 people were employed by Pinnacle West and its other subsidiaries. Pinnacle West’s principal executive offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-1000).
Available Information
     Pinnacle West makes available free of charge on or through its internet site, ( www.pinnaclewest.com ) the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC: its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
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     Pinnacle West also has a Corporate Governance webpage. You can access Pinnacle West’s Corporate Governance webpage through its internet site, www.pinnaclewest.com, by clicking on the “About Us” link to the heading “Corporate Commitments.” Pinnacle West posts the following on its Corporate Governance webpage:

 	•  	Corporate Governance Guidelines;	
 	
 	•  	Board Committee Summary;	
 	
 	•  	Charters for Pinnacle West’s Audit Committee, Corporate Governance Committee, Finance and Operating Committee and Human Resources Committee;	
 	
 	•  	Code of Ethics for Financial Professionals; and	
 	
 	•  	Ethics Policy and Standards of Business Practices.	
     Pinnacle West will post any amendments to the Code of Ethics and Ethics Policy and Standards of Business Practices, and any waivers that are required to be disclosed by the rules of either the SEC or the New York Stock Exchange, on its internet site. The information on Pinnacle West’s internet site is not incorporated by reference into this report.
     You can request a copy of these documents by contacting Pinnacle West at the following address: Pinnacle West Capital Corporation, Office of the Secretary, Station 9068, P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-3252) .
Forward-Looking Statements
     This document contains forward-looking statements based on current expectations, and neither Pinnacle West nor APS assumes any obligation to update these statements or make any further statements on any of these issues, except as required by applicable law. These forward-looking statements are often identified by words such as “estimate,” “predict,” “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from results or outcomes currently expected or sought by Pinnacle West or APS. In addition to the “Risk Factors” described in Exhibits 99.31 and 99.32 to this report, these factors include, but are not limited to:

 	•  	state and federal regulatory and legislative decisions and actions, including the outcome of the rate case APS filed with the ACC on June 27, 2003 and the wholesale electric price mitigation plan adopted by the FERC;	
 	
 	•  	the outcome of regulatory, legislative and judicial proceedings relating to the restructuring;	
 	
 	•  	the ongoing restructuring of the electric industry, including the introduction of retail electric competition in Arizona and decisions impacting wholesale competition;	
 	
 	•  	market prices for electricity and natural gas;	
 	
 	•  	power plant performance and outages, including transmission outages and constraints;	
 	
 	•  	weather variations affecting local and regional customer energy usage;	
 	
 	•  	customer growth and energy usage;	
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 	•  	regional economic and market conditions, including the results of litigation and other proceedings resulting from the California energy situation, volatile purchased power and fuel costs and the completion of generation and transmission construction in the region, which could affect customer growth and the cost of power supplies;	
 	
 	•  	the cost of debt and equity capital and access to capital markets;	
 	
 	•  	the uncertainty that current credit ratings will remain in effect for any given period of time;	
 	
 	•  	our ability to compete successfully outside traditional regulated markets (including the wholesale market);	
 	
 	•  	the performance of our marketing and trading activities due to volatile market liquidity and any deteriorating counterparty credit and the use of derivative contracts in our business (including the interpretation of the subjective and complex accounting rules related to these contracts);	
 	
 	•  	changes in accounting principles generally accepted in the United States of America and the interpretation of those principles;	
 	
 	•  	the performance of the stock market and the changing interest rate environment, which affect the amount of required contributions to Pinnacle West’s pension plan and APS’ nuclear decommissioning trust funds, as well as the reported costs of providing pension and other postretirement benefits;	
 	
 	•  	technological developments in the electric industry;	
 	
 	•  	the strength of the real estate market in SunCor’s market areas, which include Arizona, Idaho, New Mexico and Utah; and	
 	
 	•  	other uncertainties, all of which are difficult to predict and many of which are beyond the control of Pinnacle West and APS.	
REGULATION AND COMPETITION
Retail
     The ACC regulates APS’ retail electric rates and its issuance of securities. The ACC must also approve any transfer of APS’ property used to provide retail electric service and approve or receive prior notification of certain transactions between Pinnacle West, APS and their respective affiliates. See Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of the status of electric industry restructuring in Arizona.
     The electric utility industry has undergone significant regulatory change in the last few years regarding competition in the sale of electricity and related services. However, many states, including Arizona, have reexamined retail electric competition.
     As of January 1, 2001, all of APS’ retail customers were eligible to choose alternate energy suppliers. However, there are currently no active retail competitors offering unbundled energy or other utility services to APS’ customers. As a result, APS cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory. Also, regulatory developments and legal challenges to the Rules have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. See “Retail Electric Competition Rules” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for additional information.
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     APS is subject to varying degrees of competition from other investor-owned utilities in Arizona (such as Tucson Electric Power Company and Southwest Gas Corporation) as well as cooperatives, municipalities, electrical districts and similar types of governmental or non-profit organizations (principally Salt River Project). APS also faces competition from low-cost, hydroelectric power and parties that have access to low-priced preferential, federal power and other governmental subsidies. In addition, some customers, particularly industrial and large commercial customers, may own and operate generation facilities to meet their own energy requirements.
Wholesale
      General
     The FERC regulates rates for wholesale power sales and transmission services. During 2004, approximately 9.4% of APS’ electric operating revenues resulted from such sales and services. In early 2003, Pinnacle West moved its marketing and trading division to APS for all future marketing and trading activities (existing wholesale contracts remained at Pinnacle West) as a result of the ACC’s Track A Order prohibiting the previously required transfer of APS’ generating assets to Pinnacle West Energy (see “Track A Order” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8).
     The marketing and trading division focuses primarily on managing APS’ purchased power and fuel risks in connection with its costs of serving retail customer energy requirements. The division also sells, in the wholesale market, APS and Pinnacle West Energy generation output that is not needed for APS’ Native Load and, in doing so, competes with other utilities, power marketers and independent power producers. Additionally, the marketing and trading division, subject to specified parameters, markets, hedges and trades in electricity, fuels and emissions allowances and credits.
      Market-Based Rate Proceeding
     On August 11, 2004, Pinnacle West, APS, Pinnacle West Energy and APS Energy Services (collectively, the “Pinnacle West Companies”) submitted to the FERC an update to their three-year market-based rate review, pursuant to the FERC’s order implementing a new generation market power analysis. On December 20, 2004, the FERC issued an order approving the Pinnacle West Companies’ market-based rates for control areas other than those of APS, Public Service Company of New Mexico and Tucson Electric Power Company. With respect to these three control areas, the FERC required that the Pinnacle West Companies submit additional data, and on February 18, 2005, the Pinnacle West Companies made such a filing. To the extent the FERC does not permit the Pinnacle West Companies to make sales at market-based rates in these control areas, the Pinnacle West Companies will still be permitted to make sales at cost-based rates in the three control areas. We cannot currently predict the outcome of this proceeding, but we do not believe that having such sales limited to cost-based rates will have a material adverse effect on our financial position, results of operations or liquidity.
      Regional Transmission Organizations
      Federal In a December 1999 order, the FERC established characteristics and functions that must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO include independence from market participants, operational control over a region large enough to
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support efficient and nondiscriminatory markets and exclusive authority to maintain short-term reliability. Additionally, in a pending notice of proposed rulemaking, the FERC is considering implementing a standard market design for wholesale markets.
     On October 16, 2001, APS and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that their proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. On October 10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address specified issues, could meet the FERC’s RTO requirements and provide the basic framework for a standard market design for the southwestern U.S. See Arizona Public Service Co ., 101 FERC ¶ 61,033, order on reh’g , 101 FERC ¶ 61,350, order on reh’g , 104 FERC ¶ 61,285 (2003). Since that time, APS has been evaluating a phased approach to RTO implementation in the desert Southwest. APS is currently participating with other entities in the southwestern U.S. in a cost/benefit analysis of implementing the WestConnect RTO, the results of which are expected to be completed in 2005.
     If APS ultimately joins an RTO, APS could incur increased transmission-related costs and receive reduced transmission service revenues; APS may be required to expand its transmission system according to decisions made by the RTO rather than its internal planning process; and APS may experience other impacts on its operations, cash flows or financial position that will not be quantifiable until the final tariffs and other material terms of the RTO are known.
      State The ACC’s retail electric competition Rules require the formation and implementation of an Arizona Independent Scheduling Administrator. The purpose of the AISA is to oversee the application of operating protocols to ensure statewide consistency for transmission access. The AISA is anticipated to be a temporary organization until the implementation of an independent system operator or RTO. APS participated in the creation of the AISA, a not-for-profit entity, and the filing at the FERC for approval of its operating protocols. An ACC proceeding reviewing the AISA is still pending.
BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
General
     APS was incorporated in 1920 under the laws of the State of Arizona and currently has more than 989,500 customers. APS does not distribute any products. During 2004, no single purchaser or user of energy (other than Pinnacle West) accounted for more than 6.2% of electric revenues. See “Overview – General” and “Regulation and Competition” above for additional background information about APS’ business.
     At December 31, 2004, APS employed approximately 6,100 people, including employees at jointly-owned generating facilities for which APS serves as the generating facility manager. APS’ principal executive offices are located at 400 North Fifth Street, P.O. Box 53999, Phoenix, Arizona 85072-3999 (telephone 602-250-1000).
Purchased Power and Generating Fuel
     See “Properties – Capacity” in Item 2 for information about APS’ and Pinnacle West’s power plants by fuel types.
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      2004 Energy Mix
     Pinnacle West’s consolidated sources of energy during 2004 were: purchased power – 56.9%; coal – 20.8%; nuclear – 13.5%; gas – 8.7%; and other (includes oil, hydro and solar) – 0.1%. In accordance with GAAP, a substantial portion of our purchased power contracts was netted against wholesale sales contracts on the Consolidated Statements of Income. See Note 18 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.
     APS’ sources of energy during 2004 were: purchased power – 62.9%; coal – 21.4%; nuclear – 13.9%; gas – 1.7%; and other (includes oil, hydro and solar) – 0.1%. In accordance with GAAP, a substantial portion of our purchased power contracts was netted against wholesale sales contracts on the Statements of Income. See Note 18 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.
      Coal Supply
      Cholla Cholla is a coal-fired power plant located in northeastern Arizona. It is a jointly-owned facility operated by APS. APS purchases most of Cholla’s coal requirements from a coal supplier that mines all of the coal under a long-term lease of coal reserves with the Navajo Nation, the federal government and private landholders. Cholla has sufficient coal under current contracts to ensure a reliable fuel supply through 2007. These contracts include expected requirements for low sulfur coal, which is required for certain limited operating conditions; however, if necessary, low sulfur coal may be purchased on the open market. APS may purchase a portion of Cholla’s coal requirements on the spot market to take advantage of competitive pricing options and to supplement coal required for increased operating capacity. Following expiration of current contracts, APS believes that competitive fuel supply options will exist to ensure the continued operation of Cholla for its useful life, and has evaluated the necessary plant modifications and operational requirements to convert to other fuel sources.
      Four Corners Four Corners is a coal-fired power plant located in the northwestern corner of New Mexico. It is a jointly-owned facility operated by APS. APS purchases all of Four Corners’ coal requirements from a supplier with a long-term lease of coal reserves with the Navajo Nation. The Four Corners coal contract runs through July 2016, with options to extend the contract for five to fifteen additional years beyond the current plant site lease expiration in 2017.
      Navajo Generating Station The Navajo Generating Station is a coal-fired power plant located in northern Arizona. It is a jointly-owned facility operated by Salt River Project. The Navajo Generating Station’s coal requirements are purchased from a supplier with long-term leases from the Navajo Nation and the Hopi Tribe. The Navajo Generating Station is under contract with its coal supplier through 2011, with options to extend through the current plant site lease expiration in 2019. The Navajo Generating Station lease waives certain taxes through the lease expiration in 2019. Items that may impact the fuel price include lease provisions that allow for a renegotiation of the coal royalty in 2007 and 2017 and a fuel contract requirement for a five-year price review in 2007. In addition, the potential closure of the Mohave Generating Station will impact the cost structure for the Black Mesa – Kayenta Mine complex, and may increase costs to the Navajo Generating Station, which is served by the Kayenta Mine.
     See “Legal Proceedings” in Item 3 for information about a lawsuit relating to royalties for coal paid by the participants at the Navajo Generating Station.
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     See “Properties – Capacity” in Item 2 for information about APS’ ownership interests in Cholla, Four Corners and the Navajo Generating Station. See Note 11 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for information regarding APS’ coal mine reclamation obligations.
      Natural Gas Supply
     See Note 11 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of APS’ and Pinnacle West’s natural gas requirements.
      Nuclear Fuel Supply
      Palo Verde Fuel Cycle Palo Verde is a nuclear power plant located about 50 miles west of Phoenix, Arizona. It is a jointly-owned facility operated by APS. The fuel cycle for Palo Verde is comprised of the following stages:

 	•  	mining and milling of uranium ore to produce uranium concentrates;	
 	
 	•  	conversion of uranium concentrates to uranium hexafluoride;	
 	
 	•  	enrichment of uranium hexafluoride;	
 	
 	•  	fabrication of fuel assemblies;	
 	
 	•  	utilization of fuel assemblies in reactors; and	
 	
 	•  	storage and disposal of spent nuclear fuel.	
     The Palo Verde participants have contracted for all of Palo Verde’s requirements for uranium concentrates and conversion services through 2008. The Palo Verde participants have also contracted for all of Palo Verde’s enrichment services through 2010 and fuel assembly fabrication services until at least 2015.
      Spent Nuclear Fuel and Waste Disposal See “Palo Verde Nuclear Generating Station” in Note 11 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of spent nuclear fuel and waste disposal.
     Purchased Power Agreements
     In addition to its own available generating capacity (see “Properties” in Item 2), APS purchases electricity under various arrangements. One of the most important of these is a long-term contract with Salt River Project. The amount of electricity available to APS is based in large part on customer demand within certain areas now served by APS pursuant to a related territorial agreement. The generating capacity available to APS pursuant to the contract is 350 MW. In 2004, APS received approximately 568,770 MWh of energy under the contract and paid about $54.9 million for capacity availability and energy received. This contract may be canceled by Salt River Project on three years’ notice. By letter dated June 7, 2004, Salt River Project gave notice to APS to reduce capacity by 150 MW effective June 16, 2007. To date, this letter is the only notice Salt River Project has given under the contract. APS may also cancel the contract on five years’ notice, which may be given no earlier than December 31, 2006.
     In September 1990, APS entered into a thirty-year seasonal capacity exchange agreement with PacifiCorp. Under this agreement, APS receives electricity from PacifiCorp during the summer
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peak season (from May 15 to September 15) and APS returns electricity to PacifiCorp during the winter season (from October 15 to February 15). Until 2020, APS and PacifiCorp each has 480 MW of capacity and a related amount of energy available to it under the agreement for its respective seasons. In 2004, APS received approximately 571,392 MWh of energy under the capacity exchange. APS must also make additional offers of energy to PacifiCorp each year through October 31, 2020. Pursuant to this requirement, during 2004, PacifiCorp received offers of 1,095,000 MWh and purchased about 246,275 MWh.
     Consistent with the ACC’s Track B Order, APS issued a request for proposals (“RFP”) in March 2003 and, as a result of that RFP, APS entered into contracts with three parties, including Pinnacle West Energy, to meet a portion of APS’ capacity and energy requirements for the years 2003 through 2006. See “Track B Order” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for additional information about the contracts and the Track B Order.
Construction Program
     During the years 2002 through 2004, APS incurred approximately $1.4 billion in capital expenditures. APS’ capital expenditures for the years 2005 through 2007 are expected to be primarily for expanding transmission and distribution capabilities to meet growing customer needs, for upgrading existing utility property and for environmental purposes. APS’ capital expenditures were approximately $484 million in 2004. APS’ capital expenditures, including expenditures for environmental control facilities, for the years 2005 through 2007 have been estimated as follows (dollars in millions): 

 	 	Estimate	 	
Major facilities:	 	2005	 	 	2006	 	 	2007	 	
 	 	 	 	 	 	 	 	 	 	
Delivery	 	$	390	 	 	$	395	 	 	$	440	 	
Generation	 	 	352	 	 	 	158	 	 	 	195	 	
Other	 	 	30	 	 	 	7	 	 	 	6	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	772	 	 	$	560	 	 	$	641	 	
 	 	 	 	 	 	 	 	 	 	
     The above amounts exclude capitalized interest costs and include capitalized property taxes and approximately $30 million per year for nuclear fuel. The estimate for 2005 includes about $190 million for APS’ planned acquisition of the Sundance Plant. See “Request for Proposals and Asset Purchase Agreement” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of the asset purchase agreement between APS and PPL Sundance. APS conducts a continuing review of its construction program.
     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Needs and Resources by Company” in Item 7 for additional information about APS’ construction programs.
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Environmental Matters
      EPA Environmental Regulation
      Regional Haze Rules On April 22, 1999, the EPA announced final regional haze rules. These regulations require states to submit implementation plans by 2008 to eliminate all man-made emissions causing visibility impairment in certain specified areas, including Class I Areas in the Colorado Plateau, and to consider and potentially apply the best available retrofit technology (“BART”) for major stationary sources.
     The rules allow nine western states and tribes to follow an alternate implementation plan and schedule for the Class I Areas. This alternate implementation plan is known as the Annex Rule. Five western states, including Arizona, have submitted proposed State Implementation Plans to the EPA to implement the Annex Rule.
     On February 18, 2005, the U.S. Court of Appeals for the District of Columbia granted a petition for review of the Annex Rule, filed by the Center for Energy and Economic Development (CEED). Center for Energy and Economic Development v. the EPA , No. 03-1222 (D.C. Cir.). APS, Phelps Dodge Corporation, and Environmental Defense were intervenors in the litigation in support of the EPA and the Annex Rule. Although the Court concluded that the EPA has the authority to promulgate a BART alternative, the Court ruled that the EPA must first conduct a BART analysis of eligible sources to demonstrate that the alternate plan would achieve greater reductions than BART. At this time, the EPA’s response to the CEED decision is uncertain. The Company cannot currently predict the outcome of this matter.
      Mercury On March 15, 2005, the EPA issued the Clean Air Mercury Rule to regulate mercury emissions from coal-fired power plants. This rule establishes performance standards limiting mercury emissions from coal-fired power plants and establishes a two phased market-based trading program. Under the trading program, the EPA has assigned each state a "budget" for reducing coal-fired power plant mercury emissions, and each state must submit to the EPA a plan detailing how it will meet its "budget." In the first phase of the program, beginning in 2010, mercury emissions will be reduced from a total of 48 tons per year to 38 tons. In 2018, mercury emissions will be further reduced to 15 tons. APS is currently evaluating the potential impact of this rule.
      Federal Implementation Plan In September 1999, the EPA proposed a FIP to set air quality standards at certain power plants, including the Navajo Generating Station and Four Corners. The FIP is similar to current Arizona regulation of the Navajo Generating Station and New Mexico regulation of Four Corners, with minor modifications. APS does not currently expect the FIP to have a material adverse effect on its financial position, results of operations or liquidity.
      Superfund 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 PRPs. PRPs may be strictly, and often jointly and severally, liable for clean-up. On September 3, 2003, the EPA advised APS that the EPA
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considers APS to be a PRP in the Motorola 52 nd Street Superfund Site, Operable Unit 3 (OU3) in Phoenix, Arizona. APS has facilities that are within this superfund site. APS and Pinnacle West have agreed with the EPA to perform certain investigative activities of the APS facilities within OU3. Because the investigation has not yet been completed and ultimate remediation requirements are not yet finalized, neither APS nor Pinnacle West can currently estimate the expenditures which may be required.
      Manufactured Gas Plant Sites APS is currently investigating properties, which it now owns or which were previously owned by it or its corporate predecessors, that were at one time sites of, or sites associated with, manufactured gas plants. APS is taking action to voluntarily remediate these sites. APS does not expect these matters to have a material adverse effect on its financial position, results of operations or liquidity.
      Navajo Nation Environmental Issues
     Four Corners and the Navajo Generating Station are located on the Navajo Reservation and are held under easements granted by the federal government as well as leases from the Navajo Nation. APS is the Four Corners operating agent. APS owns all of Four Corners Units 1, 2 and 3, and a 15% interest in Four Corners Units 4 and 5. APS owns a 14% interest in Navajo Generating Station 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 Navajo Acts). The Navajo Acts purport to give the Navajo Nation Environmental Protection Agency authority to promulgate regulations covering air quality, drinking water and pesticide activities, including those activities that occur at Four Corners and the Navajo Generating Station. On October 17, 1995, the Four Corners participants and the Navajo Generating Station participants each filed a lawsuit in the District Court of the Navajo Nation, Window Rock District, challenging the applicability of the Navajo Nation as to Four Corners and Navajo Generating Station. The Court has stayed these proceedings pursuant to a request by the parties, and the parties are seeking to negotiate a settlement. APS cannot currently predict the outcome of this matter.
     In February 1998, the EPA issued regulations identifying those Clean Air Act provisions for which it is appropriate to treat Indian tribes in the same manner as states. The EPA has announced that it has not yet determined whether the Clean Air Act would supersede pre-existing binding agreements between the Navajo Nation and the Four Corners participants and the Navajo Generating Station participants that limit the Navajo Nation’s environmental regulatory authority over the Navajo Generating Station and Four Corners. APS believes that the Clean Air Act does not supersede these pre-existing agreements. The parties have reached tentative agreement on a resolution of the Clean Air Act issues. If such an agreement is executed by the parties and approved by the EPA, APS would dismiss the pending litigation to the extent the claims relate to the Clean Air Act. APS cannot currently predict the outcome of this matter.
     In April 2000, the Navajo Tribal Council approved operating permit regulations under the Navajo Nation Air Pollution Prevention and Control Act. APS believes the regulations fail to recognize that the Navajo Nation did not intend to assert jurisdiction over Four Corners and the Navajo Generating Station. On July 12, 2000, the Four Corners participants and the Navajo Generating Station participants each filed a petition with the Navajo Supreme Court for review of the
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operating permit regulations. Those proceedings have been stayed, pending the settlement negotiations mentioned above. APS cannot currently predict the outcome of this matter.
Water Supply
     Assured supplies of water are important for APS’ and Pinnacle West Energy’s generating plants. At the present time, APS and Pinnacle West Energy have adequate water to meet their needs. However, conflicting claims to limited amounts of water in the southwestern United States have resulted in numerous court actions.
     Both groundwater and surface water in areas important to APS’ operations have been the subject of inquiries, claims and legal proceedings, which will require a number of years to resolve. APS 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 APS 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, Arizona, 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. APS’ rights and the rights of the Palo Verde participants to the use of groundwater and effluent at Palo Verde are potentially at issue in this action. As project manager of Palo Verde, APS 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. Alternatively, APS seeks confirmation of such rights. Three of APS’ other power plants and two of Pinnacle West Energy’s power plants are also located within the geographic area subject to the summons. APS’ claims dispute the court’s jurisdiction over its groundwater rights with respect to these plants. Alternatively, APS seeks confirmation of such rights. In November 1999, the Arizona Supreme Court issued a decision confirming that certain groundwater rights may be available to the federal government and Indian tribes. In addition, in September 2000, the Arizona Supreme Court issued a decision affirming the lower court’s criteria for resolving groundwater claims. Litigation on both of these issues will continue in the trial court. No trial date concerning APS’ water rights claims has been set in this matter.
     APS has also filed claims to water in the Little Colorado River Watershed in Arizona in an action pending in the Apache County, Arizona, 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). APS’ groundwater resource utilized at Cholla is within the geographic area subject to the adjudication and is therefore potentially at issue in the case. APS’ claims dispute the court’s jurisdiction over its groundwater rights. Alternatively, APS seeks confirmation of such rights. A number of parties are in the process of settlement negotiations with respect to certain claims in this matter. Other claims have been identified as ready for litigation in
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motions filed with the court. No trial date concerning APS’ water rights claims has been set in this matter.
     Although the above matters remain subject to further evaluation, Pinnacle West expects that the described litigation will not have a material adverse impact on its financial position, results of operations or liquidity.
     The Four Corners region, in which Four Corners is located, has been experiencing drought conditions that may affect the water supply for the plants if adequate moisture is not received in the watershed that supplies the area. APS is continuing to work with area stakeholders to implement agreements to minimize the effect, if any, on operations of the plant for 2005 and later years. The effect of the drought cannot be fully assessed at this time, and APS cannot predict the ultimate outcome, if any, of the drought or whether the drought will adversely affect the amount of power available, or the price thereof, from Four Corners.
BUSINESS OF PINNACLE WEST ENERGY CORPORATION
     Pinnacle West Energy was incorporated in 1999 under the laws of the State of Arizona and is engaged principally in the operation of unregulated generating plants. Pinnacle West Energy had approximately 100 employees as of December 31, 2004. Pinnacle West Energy’s principal offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-4145).
     See “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for a discussion of Pinnacle West Energy’s capital requirements.
     Pinnacle West Energy owns the PWEC Dedicated Assets as well as an interest in Silverhawk. The PWEC Dedicated Assets were built as a result of what APS believed was a regulatory restriction against APS’ construction of additional plants and based on the requirement in the 1999 Settlement Agreement that APS transfer its generation assets. As discussed under “APS General Rate Case; 2004 Settlement Agreement” in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8, as part of the proposed settlement of APS’ general rate case, APS would acquire the PWEC Dedicated Assets from Pinnacle West Energy. Silverhawk, which is Pinnacle West Energy’s only power plant not included in the PWEC Dedicated Assets, is a 570 MW combined cycle power plant located 20 miles north of Las Vegas, Nevada in which Pinnacle West Energy has a 75% ownership interest. See “Properties” in Item 2 for a summary of the generating plants owned by Pinnacle West Energy.
     At December 31, 2004, Pinnacle West Energy had total assets of $1.3 billion, of which $1.0 billion related to the PWEC Dedicated Assets. Pinnacle West Energy had a pretax loss of $47 million in 2004, a net loss of $1 million in 2003 and a net loss of $19 million in 2002. Income taxes related to Pinnacle West Energy were recorded by Pinnacle West in 2004.
BUSINESS OF APS ENERGY SERVICES COMPANY, INC.
     APS Energy Services was incorporated in 1998 under the laws of the State of Arizona and provides competitive commodity-related energy services (such as direct access commodity contracts, energy procurement and energy supply consultation) and energy-related products and services (such as energy master planning, energy use consultation and facility audits, cogeneration analysis and installation and project management) to commercial, industrial and institutional retail customers in
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the western United States. APS Energy Services had approximately 100 employees as of December 31, 2004. APS Energy Services’ principal offices are located at 400 East Van Buren Street, Phoenix, Arizona 85004 (telephone 602-250-5000).
     APS Energy Services had net income of $3 million in 2004, net income of $16 million in 2003, and pretax income of $28 million in 2002. Income taxes related to APS Energy Services were recorded by Pinnacle West prior to 2003. At December 31, 2004, APS Energy Services had total assets of $77 million.
BUSINESS OF SUNCOR DEVELOPMENT COMPANY
     SunCor was incorporated in 1965 under the laws of the State of Arizona and is a developer of residential, commercial and industrial real estate projects in Arizona, Idaho, New Mexico and Utah. The principal executive offices of SunCor are located at 80 East Rio Salado Parkway, Suite 410, Tempe, Arizona 85281 (telephone 480-317-6800). SunCor and its subsidiaries had approximately 800 employees at December 31, 2004.
     At December 31, 2004, SunCor had total assets of about $464 million. SunCor’s assets consist primarily of land with improvements, commercial buildings, golf courses and other real estate investments. SunCor intends to continue its focus on real estate development of master-planned communities, mixed-use residential, commercial, office and industrial projects.
     SunCor projects under development include seven master-planned communities and several commercial projects. The commercial projects and four of the master-planned communities are in Arizona. Other master-planned communities are located near St. George, Utah, Boise, Idaho and Santa Fe, New Mexico.
     SunCor has implemented an accelerated asset sales program for 2003 through 2005. As a result of this program, SunCor expects to have net income of approximately $50 million in 2005. SunCor also expects to make a cash distribution of approximately $80 million to $100 million to the parent in 2005.
     For the past three years, SunCor’s operating revenues were approximately: $360 million in 2004; $362 million in 2003; and $201 million in 2002. SunCor’s net income was approximately $45 million in 2004; $56 million in 2003; and $19 million in 2002. Certain components of SunCor’s real estate sales activities, which are included in the real estate segment, are required to be reported as discontinued operations on Pinnacle West’s Consolidated Statements of Income in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” See Note 22 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.
     See Note 6 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for information regarding SunCor’s long-term debt and “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for a discussion of SunCor’s capital requirements.
BUSINESS OF EL DORADO INVESTMENT COMPANY
     El Dorado was incorporated in 1983 under the laws of the State of Arizona. El Dorado owns minority interests in several energy-related investments and Arizona community-based ventures. El
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Dorado’s short-term goal is to prudently realize the value of its existing investments. On a long-term basis, Pinnacle West may use El Dorado, when appropriate, for investments that are strategic to the business of generating, distributing and marketing electricity. El Dorado’s offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-3517).
     El Dorado had pretax income of $40 million in 2004, pretax income of $7 million in 2003, and a pretax loss of $55 million in 2002. Pinnacle West records income taxes related to El Dorado. El Dorado sold its investment in NAC on November 18, 2004, which resulted in a pre-tax gain of $4 million and is classified as discontinued operations in 2004. All related revenue and expenses for NAC have been reclassified to discontinued operations for the years ended December 31, 2003 and 2002 (see Note 22 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8). In addition, the year ended 2004 includes a $35 million gain ($21 million after tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 for additional information. At December 31, 2004, El Dorado had total assets of $23 million.
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ITEM 2. PROPERTIES
Capacity
     APS’ and Pinnacle West Energy’s generating facilities are described below. For APS’ plants, the “net accredited capacities” are reported, consistent with industry practice for regulated utilities. For Pinnacle West Energy, the “permitted capacities” are reported, consistent with industry practice for unregulated plants. 
APS – Net Accredited Capacity
     APS’ present generating facilities have net accredited capacities as follows:

 	 	Capacity (kW)	 	
Coal:	 	 	 	 	
Units 1, 2 and 3 at Four Corners	 	 	560,000	 	
15% owned Units 4 and 5 at Four Corners	 	 	222,000	 	
Units 1, 2 and 3 at Cholla	 	 	615,000	 	
14% owned Units 1, 2 and 3 at the Navajo Generating Station	 	 	315,000	 	
 	 	 	 	
Subtotal	 	 	1,712,000	 	
 	 	 	 	
Gas or Oil:	 	 	 	 	
Two steam units at Ocotillo and two steam units at Saguaro	 	 	430,000	 	
Eleven combustion turbine units	 	 	493,000	 	
Three combined cycle units	 	 	255,000	 	
 	 	 	 	
Subtotal	 	 	1,178,000	 	
 	 	 	 	
Nuclear:	 	 	 	 	
29.1% owned or leased Units 1, 2, and 3 at Palo Verde	 	 	1,107,000	 	
 	 	 	 	
Hydro and Solar	 	 	9,510	 	
 	 	 	 	
Total APS facilities	 	 	4,006,510	 	
 	 	 	 	
Pinnacle West Energy – Permitted Capacities	 	 	 	 	
Pinnacle West Energy’s present generating facilities have permitted capacities as follows:	 	 	 	 	
Gas or Oil:	 	 	 	 	
Two combined cycle units at Redhawk, two combined cycle units at West Phoenix and 75% ownership of one combined cycle unit at Silverhawk	 	 	2,138,000	 	
One combustion turbine unit at Saguaro	 	 	80,000	 	
 	 	 	 	
Total Pinnacle West Energy facilities	 	 	2,218,000	 	
 	 	 	 	
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Reserve Margin
     APS’ 2004 peak one-hour demand on its electric system was recorded on August 11, 2004 at 6,402,100 kW, compared to the 2003 peak of 6,332,400 kW recorded on July 14, 2003. Taking into account additional capacity then available to APS under long-term purchase power contracts as well as APS’ and Pinnacle West Energy’s generating capacity, APS’ capability of meeting system demand on August 11, 2004, amounted to 6,388,600 kW, for an installed reserve margin of negative 0.3%. The power actually available to APS from its resources fluctuates from time to time due in part to planned and unplanned plant and transmission outages and technical problems. The available capacity from sources actually operable at the time of the 2004 peak amounted to 3,570,600 kW, for a margin of negative 52.6%. Firm purchases totaling 4,187,000 kW, including short-term seasonal purchases and unit contingent purchases, were in place at the time of the peak, ensuring the ability to meet the load requirement with an actual reserve margin of 6.9 %.
     See “Business of Arizona Public Service Company – Purchased Power and Generating Fuel – Purchased Power Agreements” in Item 1 for information about certain of APS’ long-term power agreements.
Plant Sites Leased from Navajo Nation
     The Navajo Generating Station and Four Corners are located on land held under easements from the federal government and also under leases from the Navajo Nation. These are long-term agreements with options to extend, and APS does not believe that the risks with respect to enforcement of these easements and leases are material. The majority of coal contracted for use in these plants and certain associated transmission lines are also located on Indian reservations. See “Business of Arizona Public Service Company – Purchased Power and Generating Fuel – Coal Supply” in Item 1.
Palo Verde Nuclear Generating Station
      Regulatory
     Operation of each of the three Palo Verde units requires an operating license from the NRC. The NRC issued full power operating licenses for Unit 1 in June 1985, Unit 2 in April 1986 and Unit 3 in November 1987. The full power operating licenses, each valid for a period of approximately 40 years, authorize APS, as operating agent for Palo Verde, to operate the three Palo Verde units at full power.
      Nuclear Decommissioning Costs
     The NRC rules on financial assurance requirements for the decommissioning of nuclear power plants provide that a licensee may use a trust as the exclusive financial assurance mechanism if the licensee recovers estimated total decommissioning costs through cost-of-service rates or through a “non-bypassable charge.” The “non-bypassable systems benefits” charge is the charge that the ACC has approved for APS’ recovery of certain types of costs, including costs for low income programs, demand side management, consumer education, environmental, renewables, etc. “Non-bypassable” means that if a customer chooses to take energy from an “energy service provider” other than APS, the customer will still have to pay this charge as part of the customer’s APS electric bill.
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     Other mechanisms are prescribed, including prepayment, if the requirements for exclusive reliance on an external sinking fund mechanism are not met. APS currently relies on an external sinking fund mechanism to meet the NRC financial assurance requirements for its interests in Palo Verde Units 1, 2 and 3. The decommissioning costs of Palo Verde Units 1, 2 and 3 are currently included in APS’ ACC jurisdictional rates. The Rules provide that decommissioning costs are recoverable through a non-bypassable “system benefits” charge, which would allow APS to maintain its external sinking fund mechanism. See Note 12 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for additional information about APS’ nuclear decommissioning costs.
      Palo Verde Liability and Insurance Matters
     See “Palo Verde Nuclear Generating Station” in Note 11 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of the insurance maintained by the Palo Verde participants, including APS, for Palo Verde.
Property Not Held in Fee or Subject to Encumbrances
      Jointly-Owned Facilities
     APS shares ownership of some of its generating and transmission facilities with other companies. Pinnacle West Energy shares ownership of its Silverhawk plant. The following table shows APS’ and Pinnacle West Energy’s interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2004: 

 	 	Percent Owned	 	
APS:	 	 	 	 	
Generating facilities:	 	 	 	 	
Palo Verde Units 1 and 3	 	 	29.1	%	
Palo Verde Unit 2 (see “Palo Verde Leases” below)	 	 	17.0	%	
Four Corners Units 4 and 5	 	 	15.0	%	
Navajo Generating Station Units 1, 2, and 3	 	 	14.0	%	
Cholla common facilities (a)	 	 	62.4	%(b)	
Transmission facilities:	 	 	 	 	
ANPP500KV System	 	 	35.8	%(b)	
Navajo Southern System	 	 	31.4	%(b)	
Palo Verde – Yuma 500KV System	 	 	23.9	%(b)	
Four Corners Switchyards	 	 	27.5	%(b)	
Phoenix – Mead System	 	 	17.1	%(b)	
Palo Verde – Estrella 500KV System	 	 	55.5	%(b)	
Palo Verde – Southeast Valley Project	 	 	15.0	%(b)	
Harquahala	 	 	80.0	%(b)	
Pinnacle West Energy:	 	 	 	 	
Generating facilities:	 	 	 	 	
Silverhawk	 	 	75.0	%	

(a)  	PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.	
(b)  	Weighted average of interests.	
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      Palo Verde Leases
     In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in three separate sale leaseback transactions. APS accounts for these leases as operating leases. The leases, which have terms of 29.5 years, contain options to renew the leases for two additional years and to purchase the property for fair market value at the end of the lease terms. See Notes 9 and 20 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for additional information regarding the Palo Verde Unit 2 sale leaseback transactions.
Transmission Access
     APS’ transmission facilities consist of approximately 5,589 pole miles of overhead lines and approximately 37 miles of underground lines, 5,457 miles of which are located within the State of Arizona. APS’ distribution facilities consist of approximately 12,211 pole miles of overhead lines and approximately 13,727 miles of underground lines, all of which are located within the State of Arizona.
Other Information Regarding Our Properties
     See “Business of Arizona Public Service Company – Environmental Matters” and “Water Supply” in Item 1 with respect to matters having a possible impact on the operation of certain of APS’ and Pinnacle West Energy’s power plants.
     See “Business of Arizona Public Service Company – Construction Program” in Item 1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in Item 7 for a discussion of APS’ and Pinnacle West Energy’s construction programs.
Information Regarding SunCor’s Properties
     See “Business of SunCor Development Company” in Item 1 for information regarding SunCor’s properties. Substantially all of SunCor’s debt is collateralized by interests in certain real property.
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ITEM 3. LEGAL PROCEEDINGS
     See “Business of Arizona Public Service Company – Environmental Matters” and “– Water Supply” in Item 1 with regard to pending or threatened litigation and other disputes. See Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for a discussion of the Rules, the Track A Order and related litigation.
     See Note 11 of Notes to the Pinnacle West Consolidated Financial Statements in Item 8 with regard to a lawsuit against APS and the other Navajo Generating Station participants and for information relating to the FERC proceedings on California energy market issues.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
     Not applicable.
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SUPPLEMENTAL ITEM.
EXECUTIVE OFFICERS OF PINNACLE WEST
Pinnacle West’s executive officers are as follows:

Name	 	Age at March 1, 2005	 	Position(s) at March 1, 2005	
William J. Post	 	 	54	 	 	Chairman of the Board and Chief Executive Officer (1)	
 	 	 	 	 	 	 	
Jack E. Davis	 	 	58	 	 	President and Chief Operating Officer, and President and Chief Executive Officer, APS (1)	
 	 	 	 	 	 	 	
Donald E. Brandt	 	 	50	 	 	Executive Vice President and Chief Financial Officer	
 	 	 	 	 	 	 	
Armando B. Flores	 	 	61	 	 	Executive Vice President,
Corporate Business Services,
APS	
 	 	 	 	 	 	 	
Chris N. Froggatt	 	 	47	 	 	Vice President and Controller, APS	
 	 	 	 	 	 	 	
Barbara M. Gomez	 	 	50	 	 	Vice President and Treasurer	
 	 	 	 	 	 	 	
James M. Levine	 	 	55	 	 	Executive Vice President, Generation, APS and President, Pinnacle West Energy	
 	 	 	 	 	 	 	
Nancy C. Loftin	 	 	51	 	 	Vice President, General Counsel and Secretary	
 	 	 	 	 	 	 	
Donald G. Robinson	 	 	51	 	 	Vice President, Planning, APS	
 	 	 	 	 	 	 	
Steven M. Wheeler	 	 	56	 	 	Executive Vice President, Customer Service and Regulation, APS	

(1)	 	Member of the Board of Directors.	
     The executive officers of Pinnacle West 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) of such officers for the past five years have been as follows:
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     Mr. Post was elected Chairman of the Board effective February 2001, and Chief Executive Officer effective February 1999. He has served as an officer of Pinnacle West since 1995 in the following capacities: from August 1999 to February 2001 as President; from February 1997 to February 1999 as President; and from June 1995 to February 1997 as Executive Vice President. Mr. Post is also Chairman of the Board (since February 2001) of APS. He was President of APS from February 1997 until October 1998 and he was Chief Executive Officer from February 1997 until October 2002. Mr. Post is also a director of APS, Pinnacle West Energy and Phelps Dodge Corporation.
     Mr. Davis was elected President effective February 2001 and Chief Operating Officer effective September 2003. Prior to that time he was Chief Operating Officer and Executive Vice President of Pinnacle West (April 2000 – February 2001) and Executive Vice President, Commercial Operations of APS (September 1996 – October 1998). Mr. Davis is also President of APS (since October 1998) and Chief Executive Officer of APS (since October 2002). He is a director of APS and Pinnacle West Energy.
     Mr. Brandt was elected to his present position in September 2003 and was Senior Vice President and Chief Financial Officer (December 2002 – September 2003). Prior to that time, he was Senior Vice President and Chief Financial Officer of Ameren Corporation (diversified energy services company). Mr. Brandt was elected Executive Vice President and Chief Financial Officer of APS in September 2003. He was also Senior Vice President and Chief Financial Officer of APS (January 2003 – September 2003).
     Mr. Flores was elected to his present position in September 2003. Prior to that time, he was Executive Vice President, Corporate Business Services of Pinnacle West (July 1999 – September 2003). He was also Executive Vice President, Corporate Business Services of APS (October 1998 – July 1999).
     Mr. Froggatt was elected to his present position in October 2002. Prior to that time, he was Vice President and Controller of Pinnacle West (August 1999 – October 2002), Controller of Pinnacle West (July 1999 – August 1999) and Controller of APS (July 1997 – July 1999).
     Ms. Gomez was elected to her present position in February 2004. Prior to that time, she was Treasurer (August 1999 – February 2004) and Manager, Treasury Operations of APS (1997 – 1999). She was also elected Treasurer of APS in October 1999 and Vice President of APS in February 2004.
     Mr. Levine was elected Executive Vice President of APS in July 1999 and President and Chief Executive Officer of Pinnacle West Energy in January 2003. Prior to that time, he was Senior Vice President, Nuclear Generation of APS (September 1996 – July 1999).
     Ms. Loftin was elected Vice President and General Counsel in July 1999 and Secretary in October 2002. She was also elected Vice President and General Counsel of APS in July 1999 and Secretary of APS in October 2002.
     Mr. Robinson was elected to his present position in September 2003. Prior to that time, he was Vice President, Finance and Planning of APS (October 2002 – September 2003), Vice President, Regulation and Planning of Pinnacle West (June 2001 – October 2002) and Director, Accounting, Regulation and Planning of Pinnacle West (prior to June 2001).
     Mr. Wheeler was elected to his present position in September 2003. Prior to that time, he was Senior Vice President, Regulation, System Planning and Operations of APS (October 2002 – September 2003) and Senior Vice President, Transmission, Regulation and Planning of Pinnacle West and APS (June 2001 – October 2002). Prior to that time he was a partner with Snell & Wilmer L.L.P.
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PART II
ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
     Pinnacle West’s common stock is publicly held and is traded on the New York and Pacific Stock Exchanges. At the close of business on March 14, 2005, Pinnacle West’s common stock was held of record by approximately 34,248 shareholders. 
QUARTERLY STOCK PRICES AND DIVIDENDS PAID PER SHARE
STOCK SYMBOL: PNW

 	 	 	 	 	 	 	 	 	 	 	 	 	 	Dividends	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Per	 	
2004	 	High	 	 	Low	 	 	Close	 	 	Share	 	
1st Quarter	 	$	40.81	 	 	$	36.90	 	 	$	39.35	 	 	$	0.450	 	
2nd Quarter	 	 	41.50	 	 	 	36.30	 	 	 	40.39	 	 	 	0.450	 	
3rd Quarter	 	 	42.99	 	 	 	39.63	 	 	 	41.50	 	 	 	0.450	 	
4th Quarter	 	 	45.84	 	 	 	41.61	 	 	 	44.41	 	 	 	0.475	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Dividends	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Per	 	
2003	 	High	 	 	Low	 	 	Close	 	 	Share	 	
1st Quarter	 	$	37.13	 	 	$	28.34	 	 	$	33.24	 	 	$	0.425	 	
2nd Quarter	 	 	39.59	 	 	 	31.35	 	 	 	37.45	 	 	 	0.425	 	
3rd Quarter	 	 	38.03	 	 	 	32.87	 	 	 	35.50	 	 	 	0.425	 	
4th Quarter	 	 	40.48	 	 	 	34.91	 	 	 	40.02	 	 	 	0.450	 	
     APS’ 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 APS’ common stock.
     The chart below sets forth the dividends declared on APS’ common stock for each of the four quarters for 2004 and 2003. 
Common Stock Dividends
(Dollars in Thousands)

Quarter	 	2004	 	 	2003	 	
1 st Quarter	 	$	42,500	 	 	$	42,500	 	
2 nd Quarter	 	 	42,500	 	 	 	42,500	 	
3 rd Quarter	 	 	42,500	 	 	 	42,500	 	
4 th Quarter	 	 	42,500	 	 	 	42,500	 	
     The sole holder of APS’ common stock, Pinnacle West, is entitled to dividends when and as declared out of funds legally available therefor. As of December 31, 2004, APS did not have any outstanding preferred stock.
     Pinnacle West did not purchase any of its common stock during the fourth quarter of 2004.
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ITEM 6. SELECTED FINANCIAL DATA 
PINNACLE WEST CAPITAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA

 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	 	2000	 	
 	 	(dollars in thousands, except per share amounts)	 	
OPERATING RESULTS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	2,035,247	 	 	$	1,978,075	 	 	$	1,890,391	 	 	$	1,984,305	 	 	$	2,538,752	 	
Marketing and trading segment	 	 	461,870	 	 	 	391,886	 	 	 	286,879	 	 	 	469,784	 	 	 	418,532	 	
Real estate segment	 	 	359,792	 	 	 	361,604	 	 	 	201,081	 	 	 	168,908	 	 	 	158,365	 	
Other revenues (a)	 	 	42,816	 	 	 	27,929	 	 	 	26,899	 	 	 	11,771	 	 	 	3,873	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating revenues	 	$	2,899,725	 	 	$	2,759,494	 	 	$	2,405,250	 	 	$	2,634,768	 	 	$	3,119,522	 	
Income from continuing operations	 	 	235,218	 	 	 	225,803	 	 	 	236,563	 	 	 	327,367	 	 	 	302,332	 	
Discontinued operations – net of income taxes (b)	 	 	7,977	 	 	 	14,776	 	 	 	(21,410	)	 	 	—	 	 	 	—	 	
Cumulative effect of change in accounting – net of income taxes (c) (d)	 	 	—	 	 	 	—	 	 	 	(65,745	)	 	 	(15,201	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	243,195	 	 	$	240,579	 	 	$	149,408	 	 	$	312,166	 	 	$	302,332	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
COMMON STOCK DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Book value per share – year-end	 	$	32.14	 	 	$	30.97	 	 	$	29.40	 	 	$	29.46	 	 	$	28.09	 	
Earnings (loss) per weighted average common share outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Continuing operations – basic	 	$	2.57	 	 	$	2.47	 	 	$	2.79	 	 	$	3.86	 	 	$	3.57	 	
Discontinued operations (b)	 	 	0.09	 	 	 	0.17	 	 	 	(0.26	)	 	 	—	 	 	 	—	 	
Cumulative effect of change in accounting (c) (d)	 	 	—	 	 	 	—	 	 	 	(0.77	)	 	 	(0.18	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income – basic	 	$	2.66	 	 	$	2.64	 	 	$	1.76	 	 	$	3.68	 	 	$	3.57	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Continuing operations – diluted	 	$	2.57	 	 	$	2.47	 	 	$	2.78	 	 	$	3.85	 	 	$	3.56	 	
Net income – diluted	 	$	2.66	 	 	$	2.63	 	 	$	1.76	 	 	$	3.68	 	 	$	3.56	 	
Dividends declared per share	 	$	1.825	 	 	$	1.725	 	 	$	1.625	 	 	$	1.525	 	 	$	1.425	 	
Indicated annual dividend rate per share – year-end	 	$	1.90	 	 	$	1.80	 	 	$	1.70	 	 	$	1.60	 	 	$	1.50	 	
Weighted-average common shares outstanding – basic	 	 	91,396,904	 	 	 	91,264,696	 	 	 	84,902,946	 	 	 	84,717,649	 	 	 	84,732,544	 	
Weighted-average common shares outstanding – diluted	 	 	91,532,473	 	 	 	91,405,134	 	 	 	84,963,921	 	 	 	84,930,140	 	 	 	84,935,282	 	
BALANCE SHEET DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	9,896,747	 	 	$	9,519,042	 	 	$	9,139,157	 	 	$	8,529,124	 	 	$	7,697,558	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities and equity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term debt less current maturities	 	$	2,584,985	 	 	$	2,616,585	 	 	$	2,743,741	 	 	$	2,673,078	 	 	$	1,955,083	 	
Other liabilities	 	 	4,361,566	 	 	 	4,072,678	 	 	 	3,709,263	 	 	 	3,356,723	 	 	 	3,359,761	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	6,946,551	 	 	 	6,689,263	 	 	 	6,453,004	 	 	 	6,029,801	 	 	 	5,314,844	 	
Common stock equity	 	 	2,950,196	 	 	 	2,829,779	 	 	 	2,686,153	 	 	 	2,499,323	 	 	 	2,382,714	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and equity	 	$	9,896,747	 	 	$	9,519,042	 	 	$	9,139,157	 	 	$	8,529,124	 	 	$	7,697,558	 	

(a)	 	Includes reclassifications of revenues in 2003 and 2002 related to the discontinued operations of NAC. See Note 22 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.	
 		
(b)	 	NAC and real estate discontinued operations. See Note 22 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.	
 		
(c)	 	Change in accounting standards related to energy trading activities in 2002. See Note 18 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.	
 		
(d)	 	Change in accounting standards related to derivatives in 2001.	

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SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY

 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	 	2000	 	
 	 	 	 	 	 	(dollars in thousands)	 	 	 	 	 	
OPERATING RESULTS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electric operating revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity	 	$	2,051,602	 	 	$	1,999,390	 	 	$	1,902,112	 	 	$	1,984,305	 	 	$	2,538,750	 	
Marketing and trading	 	 	145,519	 	 	 	105,541	 	 	 	34,054	 	 	 	367,793	 	 	 	395,392	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total electric operating revenues	 	$	2,197,121	 	 	$	2,104,931	 	 	$	1,936,166	 	 	$	2,352,098	 	 	$	2,934,142	 	
Purchased power and fuel costs:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity	 	 	612,300	 	 	 	606,251	 	 	 	438,141	 	 	 	649,405	 	 	 	1,065,596	 	
Marketing and trading	 	 	150,954	 	 	 	97,180	 	 	 	32,662	 	 	 	132,544	 	 	 	267,032	 	
Operating expenses	 	 	1,104,886	 	 	 	1,103,342	 	 	 	1,136,363	 	 	 	1,171,171	 	 	 	1,155,278	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	 	328,981	 	 	 	298,158	 	 	 	329,000	 	 	 	398,978	 	 	 	446,236	 	
Other income/(deductions)	 	 	15,328	 	 	 	26,347	 	 	 	(8,041	)	 	 	(79	)	 	 	(6,545	)	
Interest deductions – net	 	 	144,682	 	 	 	143,568	 	 	 	121,616	 	 	 	118,211	 	 	 	133,097	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before cumulative effect adjustment	 	 	199,627	 	 	 	180,937	 	 	 	199,343	 	 	 	280,688	 	 	 	306,594	 	
Cumulative effect of change in accounting – net of income taxes (a)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(15,201	)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	199,627	 	 	$	180,937	 	 	$	199,343	 	 	$	265,487	 	 	$	306,594	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
BALANCE SHEET DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	8,098,552	 	 	$	7,722,533	 	 	$	7,122,238	 	 	$	6,815,458	 	 	$	6,924,500	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capital structure:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common stock equity	 	$	2,232,402	 	 	$	2,203,630	 	 	$	2,159,312	 	 	$	2,150,690	 	 	$	2,119,768	 	
Long-term debt less current maturities	 	 	2,267,094	 	 	 	2,135,606	 	 	 	2,217,340	 	 	 	1,949,074	 	 	 	1,806,908	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total capitalization	 	 	4,499,496	 	 	 	4,339,236	 	 	 	4,376,652	 	 	 	4,099,764	 	 	 	3,926,676	 	
Commercial paper	 	 	—	 	 	 	—	 	 	 	—	 	 	 	171,162	 	 	 	82,100	 	
Current maturities of long-term debt	 	 	451,247	 	 	 	487,067	 	 	 	3,503	 	 	 	125,451	 	 	 	250,266	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	4,950,743	 	 	$	4,826,303	 	 	$	4,380,155	 	 	$	4,396,377	 	 	$	4,259,042	 	

(a)  	Change in accounting standards related to derivatives.	
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
     The following discussion should be read in conjunction with Pinnacle West’s Consolidated Financial Statements and Arizona Public Service Company’s Financial Statements and the related Notes that appear in Item 8 of this report.
OVERVIEW
     Pinnacle West owns all of the outstanding common stock of APS. APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to most of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave County in northwestern Arizona. Through its marketing and trading division, APS also generates, sells and delivers electricity to wholesale customers in the western United States. APS has historically accounted for a substantial part of our revenues and earnings. Customer growth in APS’ service territory is about three times the national average and remains a fundamental driver of our revenues and earnings.
     Pinnacle West Energy is our unregulated generation subsidiary. We formed Pinnacle West Energy in 1999 as a result of the ACC’s requirement that APS transfer all of its competitive assets and services to an affiliate or to a third party by the end of 2002. We planned to transfer APS’ generation assets to Pinnacle West Energy. Additionally, Pinnacle West Energy constructed several power plants to meet growing energy needs (1790 MW in Arizona and 570 MW in Nevada). In September 2002, the ACC issued the Track A Order, which prohibited APS from transferring its generation assets to Pinnacle West Energy. As a result of the Track A Order, APS, through its general rate case currently pending before the ACC, is seeking to transfer the plants built by Pinnacle West Energy in Arizona to APS to unite the Arizona generation under one common owner, as originally intended. We refer to these plants as the PWEC Dedicated Assets.
     SunCor, our real estate development subsidiary, has been and is expected to be an important source of earnings and cash flow, particularly during the years 2003 through 2005 due to accelerated asset sales activity.
     Our subsidiary, APS Energy Services, provides competitive commodity-related energy services and energy-related products and services to commercial and industrial retail customers in the western United States.
     El Dorado, our investment subsidiary, sold its investment in NAC on November 18, 2004, which resulted in a pretax gain of $4 million and the classification of NAC as discontinued operations in 2004. In addition, the year ended December 31, 2004 includes a $35 million gain ($21 million after tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns.
     We continue to focus on solid operational performance in our electricity generation and delivery activities. In the generation area, 2004 represented the thirteenth consecutive year Palo Verde was the largest power producer in the United States. In the delivery area, we focus on superior reliability and customer satisfaction while expanding our transmission and distribution system to
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meet growth and sustain reliability. We plan to expand long-term resources to meet our retail customers’ growing electricity needs.
     We believe APS’ general rate case pending before the ACC is the key issue affecting our outlook. As discussed in greater detail in Note 3, on August 18, 2004, a substantial majority of the parties to the rate case, including APS, the ACC staff, the Arizona Residential Utility Consumer Office, other customer and advocacy groups, and merchant power plant intervenors entered into the 2004 Settlement Agreement, which proposes terms under which the rate case would be settled. Neither Pinnacle West nor APS is able to predict whether the ACC will approve the 2004 Settlement Agreement as proposed.
     Other factors affecting our past and future financial results include customer growth; purchased power and fuel costs; operations and maintenance expenses, including those relating to plant and transmission outages; weather variations; depreciation and amortization expenses, which are affected by net additions to utility plant and other property and changes in regulatory asset amortization; and the performance of our subsidiaries.
EARNINGS CONTRIBUTIONS BY BUSINESS SEGMENTS
     We have three principal business segments (determined by services and the regulatory environment):

 	•  	our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electric service to Native Load customers) and related activities and includes electricity generation, transmission and distribution;	
 	
 	•  	our marketing and trading segment, which consists of our competitive energy business activities, including wholesale marketing and trading and APS Energy Services’ commodity-related energy services; and	
 	
 	•  	our real estate segment, which consists of SunCor’s real estate development and investment activities.	
     The following table summarizes income from continuing operations by segment and net income for the years ended December 31, 2004, 2003 and 2002 (dollars in millions): 

 	 	2004	 	 	2003	 	 	2002	 	
Regulated electricity (a)	 	$	151	 	 	$	170	 	 	$	170	 	
Marketing and trading	 	 	18	 	 	 	9	 	 	 	58	 	
Real estate	 	 	40	 	 	 	45	 	 	 	10	 	
Other (b)	 	 	26	 	 	 	2	 	 	 	(1	)	
 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	235	 	 	 	226	 	 	 	237	 	
Real estate discontinued operations – net of income taxes (c)	 	 	4	 	 	 	10	 	 	 	9	 	
Other discontinued operations – net of income taxes (c)	 	 	4	 	 	 	5	 	 	 	(31	)	
Cumulative effect of change in accounting – net of income taxes (d)	 	 	—	 	 	 	—	 	 	 	(66	)	
 	 	 	 	 	 	 	 	 	 	
Net income	 	$	243	 	 	$	241	 	 	$	149	 	
 	 	 	 	 	 	 	 	 	 	
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 	(a)  	In 2002, Pinnacle West Energy recorded a charge related to the cancellation of Redhawk Units 3 and 4 of approximately $30 million after income taxes ($49 million pretax).	
 	
 	(b)  	The year-ended 2004 includes a $35 million gain ($21 million after-tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns.	
 	
 	(c)  	Discontinued operations relate to NAC and real estate. See Note 22.	
 	
 	(d)  	Marketing and trading segment change in accounting for trading activities upon adoption of EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.” See Note 18.	
     See Note 17 for additional financial information regarding our business segments. 
PINNACLE WEST CONSOLIDATED – RESULTS OF OPERATIONS
General
      Throughout the following explanations of our results of operations, we refer to “gross margin.” With respect to our regulated electricity segment and our marketing and trading segment, gross margin refers to electric operating revenues less purchased power and fuel costs. “Gross margin” is a “non-GAAP financial measure,” as defined in accordance with SEC rules. “Operating margin” (a GAAP financial measure) plus “other operating expenses,” as disclosed in Note 17, is equal to gross margin. We view gross margin as an important performance measure of the core profitability of our operations. This measure is a key component of our internal financial reporting and is used by our management in analyzing our business segments. We believe that investors benefit from having access to the same financial measures that our management uses. In addition, we have reclassified certain prior period amounts to conform to our current period presentation.
2004 Compared with 2003
     Our consolidated net income for the twelve months ended December 31, 2004 was $243 million compared with $241 million for the prior-year period. The $2 million increase in the period-to-period comparison reflected the following changes in earnings by segment:

 	•  	Regulated Electricity Segment – Net income decreased approximately $19 million primarily due to higher costs (primarily interest expense, depreciation, operation and maintenance costs and property taxes, net of gross margin contributions) related to a new power plant placed in service in mid-2003; increased operations and maintenance costs primarily related to customer service and personnel costs; lower income tax credits; higher depreciation related to delivery and other assets; the effects of milder weather on retail sales; and a retail electricity rate decrease in mid-2003. These negative factors were partially offset by lower regulatory asset amortization, and higher retail sales volumes due to customer growth and usage.	
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 	•  	Marketing and Trading Segment – Net income increased approximately $9 million primarily due to higher forward and realized prices for wholesale electricity partially offset by lower margins in California by APS Energy Services and increased costs related to a new power plant placed in service in mid-2004.	

 	•  	Real Estate Segment – Net income decreased approximately $11 million primarily due to the 2003 gain on the sale of SunCor’s water utility company, which was reported as discontinued operations (see Note 22), and decreased asset sales partially offset by increased land sales.	

 	•  	Other Segment – Net income increased approximately $23 million primarily due to a $21 million after-tax gain related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns.	
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     Additional details on the major factors that increased (decreased) income from continuing operations and net income are contained in the following table (dollars in millions). 

 	 	Increase (Decrease)	
 	 	Pretax	 	 	After Tax	 	
 	 	 	
Regulated electricity segment gross margin:	 	 	 	 	 	 	 	 	
Higher retail sales volumes due to customer growth, excluding weather effects	 	$	43	 	 	$	26	 	
Lower replacement power costs due to fewer unplanned outages	 	 	6	 	 	 	4	 	
Effects of weather on retail sales	 	 	(17	)	 	 	(10	)	
Retail electricity price reduction effective July 1, 2003	 	 	(13	)	 	 	(8	)	
Increased purchased power and fuel costs due to higher fuel and power prices	 	 	(4	)	 	 	(2	)	
Miscellaneous factors, net	 	 	(8	)	 	 	(6	)	
 	 	 	 	 	 	 	
Net increase in regulated electricity segment gross margin	 	 	7	 	 	 	4	 	
 	 	 	 	 	 	 	
Marketing and trading segment gross margin:	 	 	 	 	 	 	 	 	
Higher mark-to-market gains on contracts for future delivery due to higher forward prices for wholesale electricity	 	 	28	 	 	 	17	 	
Higher realized margins on energy trading primarily due to higher electricity prices	 	 	18	 	 	 	11	 	
Increase in generation sales other than Native Load due to higher sales volumes and higher unit margins	 	 	9	 	 	 	5	 	
Lower unit margins and lower competitive retail sales volumes in California by APS Energy Services	 	 	(22	)	 	 	(13	)	
 	 	 	 	 	 	 	
Net increase in marketing and trading segment gross margin	 	 	33	 	 	 	20	 	
 	 	 	 	 	 	 	
Net increase in gross margin for regulated electricity and marketing and trading segments	 	 	40	 	 	 	24	 	
Lower real estate segment contributions primarily due to decreased asset sales, a portion of which was recorded in other income in the prior period, partially offset by higher land sales (see Note 22)	 	 	(7	)	 	 	(5	)	
Higher other income due to the sale of El Dorado’s limited partnership interest in the Phoenix Suns	 	 	35	 	 	 	21	 	
Higher operations and maintenance expense primarily related to customer service costs, new power plants in service and personnel costs	 	 	(48	)	 	 	(29	)	
Interest expense net of capitalized financing costs, decreases (increases):	 	 	 	 	 	 	 	 	
New power plants in service	 	 	(23	)	 	 	(14	)	
Lower other debt balances and rates partially offset by increased utility plant in service	 	 	9	 	 	 	5	 	
Depreciation and amortization decreases (increases):	 	 	 	 	 	 	 	 	
Lower regulatory asset amortization	 	 	68	 	 	 	41	 	
New power plants in service	 	 	(14	)	 	 	(8	)	
Increased delivery and other assets	 	 	(20	)	 	 	(12	)	
Higher property taxes due to increased plant in service	 	 	(12	)	 	 	(7	)	
Lower income tax credits	 	 	—	 	 	 	(17	)	
Miscellaneous items, net	 	 	8	 	 	 	10	 	
 	 	 	 	 	 	 	
Net increase in income from continuing operations	 	$	36	 	 	 	9	 	
 	 	 	 	 	 	 	 	
Discontinued operations (primarily real estate segment, see Note 22)	 	 	 	 	 	 	(7	)	
 	 	 	 	 	 	 	 	
Net increase in net income	 	 	 	 	 	$	2	 	
 	 	 	 	 	 	 	 	
     The increase in net costs (primarily interest expense, depreciation and operations and maintenance expense, net of gross margin contributions) related to new power plants placed in service in mid-2003 and mid-2004 by Pinnacle West Energy totaled approximately $26 million after income taxes in the twelve months ended December 31, 2004 compared with the prior-year period.
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Regulated Electricity Segment Revenues
     Regulated electricity segment revenues were $57 million higher for the twelve months ended December 31, 2004 compared with the prior-year period primarily as a result of:

 	•  	a $101 million increase in retail revenues related to customer growth and higher average usage, excluding weather effects;	
 	
 	•  	a $42 million decrease in retail revenues related to milder weather;	
 	
 	•  	a $13 million decrease in retail revenues related to a reduction in retail electricity prices; and	
 	
 	•  	an $11 million increase due to miscellaneous factors.	
Marketing and Trading Segment Revenues
     Marketing and trading segment revenues were $70 million higher for the twelve months ended December 31, 2004 compared with the prior-year period primarily as a result of:

 	•  	a $47 million increase from generation sales other than Native Load primarily due to higher wholesale market prices and higher sales volumes, including sales from the new power plants in service;	
 	
 	•  	$28 million in higher mark-to-market gains for future-period deliveries primarily as a result of higher forward prices for wholesale electricity;	
 	
 	•  	$20 million of higher energy trading revenues on realized sales of electricity primarily due to higher electricity prices; and	
 	
 	•  	a $25 million decrease from lower competitive retail sales volumes in California by APS Energy Services.	
Other Revenues
     Other revenues were $15 million higher for the twelve months ended December 31, 2004 compared with the prior-year period primarily due to higher non-commodity revenues at APS Energy Services.
2003 Compared with 2002
     Our consolidated net income for the year ended December 31, 2003 was $241 million compared with $149 million for the prior year. The 2003 net income included $15 million of after-tax income from discontinued operations related to NAC and SunCor. The 2002 net income included a $21 million after-tax loss from discontinued operations related to NAC and SunCor (see Note 22). The 2002 net income also included a $66 million after-tax charge for the cumulative effect of a change in accounting for trading activities due to the adoption of EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities” (see Note 18). Excluding the discontinued operations and
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the accounting change, the $11 million decrease in the period-to-period comparison reflects the following changes in earnings by segment:

 	•  	Regulated Electricity Segment – Income from continuing operations was flat when comparing the two years, due to offsetting factors. Net income in 2003 was negatively impacted by higher purchased power and fuel costs resulting from higher prices for hedged gas and purchased power; higher costs related to new power plants, net of purchased power savings; higher replacement power costs from plant outages due to higher market prices and more unplanned outages (Cholla Unit 3 experienced an unplanned outage from August 3, 2003 through November, 2003 and Units 1 and 2 of the Redhawk Power Plant were substantially restricted for almost one-half of the fourth quarter to correct an equipment design defect); higher operations and maintenance costs related to increased pension and other benefits; two retail electricity price reductions; and higher depreciation expense related to increased delivery and other assets. These negative factors were offset by higher retail sales primarily due to customer growth and favorable weather; the absence of the 2002 write-off of Redhawk Units 3 and 4; lower operating costs primarily related to severance costs recorded in 2002; lower regulatory asset amortization; tax credits and favorable income tax adjustments related to prior years resolved in 2003; and higher income related to APS’ return to the AFUDC method of capitalizing construction finance costs.	

 	•  	Marketing and Trading Segment – Income from continuing operations decreased approximately $49 million primarily due to lower market liquidity and deteriorating counterparty credit in the wholesale power markets in the western United States.	

 	•  	Real Estate Segment – Income from continuing operations improved approximately $35 million primarily due to increased asset, land and home sales.	

 	•  	Other Segment – Income from continuing operations increased approximately $3 million primarily due to El Dorado Investment losses recognized in 2002.	
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     Additional details on the major factors that increased (decreased) income from continuing operations and net income for the year ended December 31, 2003 compared with the prior year are contained in the following table (dollars in millions). 

 	 	Increase (Decrease)	
 	 	Pretax	 	 	After Tax	 	
 	 	 	
Regulated electricity segment gross margin:	 	 	 	 	 	 	 	 	
Increased purchased power and fuel costs primarily due to higher prices for hedged gas and purchased power	 	$	(60	)	 	$	(36	)	
Higher replacement power costs from plant outages due to higher market prices and more unplanned outages	 	 	(47	)	 	 	(28	)	
Retail electricity price reductions effective July 1, 2002 and July 1, 2003	 	 	(27	)	 	 	(16	)	
Higher retail sales volumes due to customer growth, excluding weather effects	 	 	48	 	 	 	29	 	
Decreased purchased power costs due to new power plants in service	 	 	16	 	 	 	10	 	
Effects of weather on retail sales	 	 	13	 	 	 	8	 	
Miscellaneous factors, net	 	 	5	 	 	 	2	 	
 	 	 	 	 	 	 	
Net decrease in regulated electricity segment gross margin	 	 	(52	)	 	 	(31	)	
 	 	 	 	 	 	 	
Marketing and trading segment gross margin:	 	 	 	 	 	 	 	 	
Lower mark-to-market gains for future delivery due to lower market liquidity and deteriorating counterparty credit	 	 	(59	)	 	 	(35	)	
Lower realized margins on wholesale sales primarily due to lower unit margins, partially offset by higher volumes	 	 	(32	)	 	 	(19	)	
Higher margin related to structured contracts originated in prior years	 	 	13	 	 	 	7	 	
Decrease in generation sales other than Native Load primarily due to lower unit margins partially offset by higher sales volumes, including sales from new power plants in service	 	 	(7	)	 	 	(4	)	
 	 	 	 	 	 	 	
Net decrease in marketing and trading segment gross margin	 	 	(85	)	 	 	(51	)	
 	 	 	 	 	 	 	
Net decrease in regulated electricity and marketing and trading segments’ gross margins	 	 	(137	)	 	 	(82	)	
Higher income primarily related to El Dorado Investment losses recognized in 2002	 	 	8	 	 	 	5	 	
Higher real estate segment contribution primarily due to higher asset, land and home sales	 	 	58	 	 	 	36	 	
Operations and maintenance expense decreases (increases):	 	 	 	 	 	 	 	 	
Write-off of Redhawk Units 3 and 4 in 2002	 	 	47	 	 	 	28	 	
Severance costs recorded in 2002	 	 	36	 	 	 	21	 	
Increased pension and other benefit costs	 	 	(28	)	 	 	(17	)	
Costs for new power plants in service	 	 	(20	)	 	 	(12	)	
Net other items	 	 	1	 	 	 	1	 	
Higher interest expense and lower capitalized interest primarily related to new power plants in service	 	 	(26	)	 	 	(16	)	
Depreciation and amortization decreases (increases):	 	 	 	 	 	 	 	 	
New power plants in service	 	 	(19	)	 	 	(11	)	
Increased delivery and other assets	 	 	(22	)	 	 	(13	)	
Decreased regulatory asset amortization	 	 	29	 	 	 	17	 	
APS’ return to the AFUDC method of capitalizing construction finance costs	 	 	8	 	 	 	11	 	
Miscellaneous items, net	 	 	5	 	 	 	4	 	
Tax credits and favorable income tax adjustments related to prior years resolved in 2003	 	 	—	 	 	 	17	 	
 	 	 	 	 	 	 	
Net decrease in income from continuing operations	 	$	(60	)	 	 	(11	)	
 	 	 	 	 	 	 	 	
Discontinued operations (primarily NAC, see Note 22)	 	 	 	 	 	 	37	 	
Increase due to 2002 cumulative effect of a change in accounting for trading activities	 	 	 	 	 	 	66	 	
 	 	 	 	 	 	 	 	
Net increase in net income	 	 	 	 	 	$	92	 	
 	 	 	 	 	 	 	 	
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     The increase in operating and interest costs related to new power plants placed in service by Pinnacle West Energy, net of purchased power savings and increased gross margin from generation sales other than Native Load, totaled approximately $30 million after income taxes in the year ended December 31, 2003 compared with the prior-year period.
Regulated Electricity Segment Revenues
     Regulated electricity segment revenues were $88 million higher in the year ended December 31, 2003 compared with the prior year, primarily as a result of:

 	•  	an $85 million increase in retail revenues related to customer growth and higher average usage, excluding weather effects;	

 	•  	a $21 million increase in retail revenues related to weather;	

 	•  	a $6 million increase related to traditional wholesale sales as a result of higher prices and higher sales volumes;	

 	•  	a $27 million decrease in retail revenues related to two reductions in retail electricity prices; and	

 	•  	a $3 million net increase due to miscellaneous factors.	
Marketing and Trading Segment Revenues
     Marketing and trading segment revenues were $105 million higher in the year ended December 31, 2003 compared with the prior year, primarily as a result of:

 	•  	$74 million of higher revenues related to the adoption of EITF 02-3 in the fourth quarter of 2002, primarily due to structured contracts that were reported gross in the current period and net in most of the prior period;	

 	•  	a $69 million increase from higher competitive retail sales in California by APS Energy Services;	

 	•  	a $38 million increase from generation sales other than Native Load primarily due to higher prices and sales volumes, including sales from new power plants in service;	

 	•  	$59 million in lower mark-to-market gains for future-period deliveries primarily as a result of lower market liquidity and lower price volatility; and	

 	•  	$17 million of lower realized wholesale revenues primarily due to lower unit margins on trading activities that are reported on a net basis.	
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Real Estate Segment Revenues
     Real estate segment revenues were $161 million higher in the year ended December 31, 2003 compared with the prior year primarily as a result of increased asset, land and home sales related to SunCor’s effort to accelerate asset sales. 
LIQUIDITY AND CAPITAL RESOURCES
Capital Needs and Resources – Pinnacle West Consolidated
      Capital Expenditure Requirements
     The following table summarizes the actual capital expenditures for the year ended December 31, 2004 and estimated capital expenditures for the next three years. 
CAPITAL EXPENDITURES
(dollars in millions)

 	 	Actual	 	 	Estimated	 	
 	 	2004	 	 	2005	 	 	2006	 	 	2007	 	
APS Delivery	 	$	342	 	 	$	390	 	 	$	395	 	 	$	440	 	
Generation (a) (b)	 	 	113	 	 	 	352	 	 	 	158	 	 	 	195	 	
Other (c)	 	 	29	 	 	 	30	 	 	 	7	 	 	 	6	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	484	 	 	 	772	 	 	 	560	 	 	 	641	 	
Pinnacle West Energy (a)	 	 	31	 	 	 	7	 	 	 	5	 	 	 	2	 	
SunCor (d)	 	 	81	 	 	 	114	 	 	 	61	 	 	 	63	 	
Other	 	 	2	 	 	 	8	 	 	 	7	 	 	 	4	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	598	 	 	$	901	 	 	$	633	 	 	$	710	 	

(a)	 	As discussed in Note 3 under “APS General Rate Case; 2004 Settlement Agreement,” as part of its general rate case, APS has requested rate base treatment of the PWEC Dedicated Assets. The estimated capital expenditures related to the PWEC Dedicated Assets are reflected in APS for the years 2005, 2006 and 2007.	
 		
(b)	 	The estimate for 2005 includes about $190 million for acquisition of the Sundance Plant. See “Request for Proposals and Asset Purchase Agreement” in Note 3 for a discussion of the asset purchase agreement between APS and PPL Sundance.	
 		
(c)	 	Primarily information systems and facilities projects.	
 		
(d)	 	Consists primarily of capital expenditures for land development and retail and office building construction reflected in “Real estate investments” on the Consolidated Statements of Cash Flows.	
     Delivery capital expenditures are comprised of T&D infrastructure additions and upgrades, capital replacements, new customer construction and related information systems and facility costs. Examples of the types of projects included in the forecast include T&D lines and substations, line extensions to new residential and commercial developments and upgrades to customer information systems. Major transmission projects are driven by strong regional customer growth.
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     Generation capital expenditures are comprised of various improvements to APS’ existing fossil and nuclear plants, the acquisition of the Sundance Plant and the replacement of Palo Verde steam generators (see below). Examples of the types of projects included in this category are additions, upgrades and capital replacements of various power plant equipment such as turbines, boilers and environmental equipment. Generation also includes nuclear fuel expenditures of approximately $30 million annually for 2005 to 2007.
     Replacement of the steam generators in Palo Verde Unit 2 was completed during the fall outage of 2003 at a cost to APS of approximately $70 million. The Palo Verde owners have approved the manufacture of two additional sets of steam generators. These generators will be installed in Unit 1 (scheduled completion in the fall of 2005) and Unit 3 (scheduled completion in the fall of 2007). Our portion of steam generator expenditures for Units 1 and 3 is approximately $140 million, which will be spent through 2008. In 2005 through 2007, approximately $95 million of the costs for steam generator replacements at Units 1 and 3 are included in the generation capital expenditures table above and will be funded with internally-generated cash or external financings. 
Contractual Obligations
     The following table summarizes Pinnacle West’s consolidated contractual requirements as of December 31, 2004 (dollars in millions):

 	 	 	 	 	 	2006-	 	 	2008-	 	 	 	 	 	 	 	
 	 	2005	 	 	2007	 	 	2009	 	 	Thereafter	 	 	Total	 	
Long-term debt payments, including interest: (a)	 	 		 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
APS	 	$	577	 	 	$	503	 	 	$	206	 	 	$	2,746	 	 	$	4,032	 	
Pinnacle West	 	 	189	 	 	 	305	 	 	 	—	 	 	 	—	 	 	 	494	 	
SunCor	 	 	2	 	 	 	9	 	 	 	6	 	 	 	—	 	 	 	17	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total long-term debt payments, including interest	 	 	768	 	 	 	817	 	 	 	212	 	 	 	2,746	 	 	 	4,543	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Short-term debt payments, including interest (b)	 	 	72	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	72	 	
Capital lease payments	 	 	2	 	 	 	3	 	 	 	2	 	 	 	3	 	 	 	10	 	
Operating lease payments	 	 	73	 	 	 	139	 	 	 	132	 	 	 	368	 	 	 	712	 	
Minimum pension funding requirement (c)	 	 	50	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	50	 	
Purchase power and fuel commitments (d)	 	 	187	 	 	 	171	 	 	 	134	 	 	 	363	 	 	 	855	 	
Purchase obligations (e)	 	 	272	 	 	 	16	 	 	 	—	 	 	 	68	 	 	 	356	 	
Nuclear decommissioning funding requirements	 	 	11	 	 	 	22	 	 	 	22	 	 	 	146	 	 	 	201	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total contractual commitments	 	$	1,435	 	 	$	1,168	 	 	$	502	 	 	$	3,694	 	 	$	6,799	 	

(a)	 	The long-term debt matures at various dates through 2034 and bears interest principally at fixed rates. Interest on variable-rate long-term debt is determined by using the rates at December 31, 2004.	
 		
(b)	 	The short-term debt matures within 12 months. The weighted-average interest rate used to determine interest payments on the short-term debt was 4.21% at December 31, 2004.	
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(c)	 	Future pension contributions are not determinable for time periods after 2005.	
 		
(d)	 	Our purchase power and fuel commitments include purchases of coal, electricity, natural gas and nuclear fuel (see Note 11).	
 		
(e)	 	These contractual obligations include commitments for capital expenditures and other obligations. Obligations for 2005 include about $190 million for acquisition of the Sundance Plant (see Note 3).	
      Off-Balance Sheet Arrangements
     In 1986, APS entered into agreements with three separate VIE lessors in order to sell and lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in accordance with GAAP. See Note 9 for further information about the sale leaseback transactions. We are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate them.
     APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assume the debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as of December 31, 2004, APS would have been required to assume approximately $250 million of debt and pay the equity participants approximately $192 million.
     In the first quarter of 2004, we adopted FIN No. 46R, “Consolidation of Variable Interest Entities” for all non-SPE contractual arrangements. SunCor has certain land development arrangements that are required to be consolidated under FIN No. 46R. The assets and non-controlling interests reflected in our Consolidated Balance Sheets related to these arrangements were approximately $34 million at December 31, 2004.
      Guarantees and Letters of Credit
     We and certain of our subsidiaries have issued guarantees and letters of credit in support of our unregulated businesses. We have also obtained surety bonds on behalf of APS Energy Services. We have not recorded any liability on our Consolidated Balance Sheets with respect to these obligations. We generally provide indemnifications related to liabilities arising from or related to certain of our agreements, with limited exceptions depending on the particular agreement. See Note 21 for additional information regarding guarantees and letters of credit.
      Credit Ratings
     The ratings of securities of Pinnacle West and APS as of March 15, 2005 are shown below and are considered to be “investment-grade” ratings. The ratings reflect the respective views of the rating agencies, from which an explanation of the significance of their ratings may be obtained. There is no assurance that these ratings will continue for any given period of time. The ratings may be revised or withdrawn entirely by the rating agencies, if, in their respective judgments, circumstances so warrant. Any downward revision or withdrawal may adversely affect the market price of Pinnacle West’s or APS’ securities and serve to increase those companies’ cost of and access
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to capital. It may also require additional collateral related to certain derivative instruments (see Note 18). 

 	 	Moody’s	 	Standard & Poor’s	
Pinnacle West	 	 	 	 	
Senior unsecured	 	Baa2	 	BBB-	
Commercial paper	 	P-2	 	A-2	
Outlook	 	Negative	 	Negative	
APS	 	 	 	 	
Senior unsecured	 	Baa1	 	BBB	
Secured lease obligation bonds	 	Baa2	 	BBB	
Commercial paper	 	P-2	 	A-2	
Outlook	 	Negative	 	Negative	
     APS no longer has any senior secured debt. See “Capital Needs and Resources – By Company – APS” below for a discussion of the termination of APS’ mortgage and deed of trust.
      Debt Provisions
     Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include a debt-to-total-capitalization ratio and an interest coverage test. Pinnacle West and APS comply with these covenants and each anticipates it will continue to meet these and other significant covenant requirements. These covenants require that the ratio of debt to total capitalization cannot exceed 65% for the Company and for APS. At December 31, 2004, the ratio was approximately 53% for Pinnacle West and 54% for APS. The provisions regarding interest coverage require a minimum cash coverage of two times the interest requirements for each of the Company and APS. Based on 2004 results, the coverages were approximately 4 times for the Company and 4 times for APS. Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants.
     Neither Pinnacle West’s nor APS’ financing agreements contain “ratings triggers” that would result in an acceleration of the required interest and principal payments in the event of a ratings downgrade. However, in the event of a ratings downgrade, Pinnacle West and/or APS may be subject to increased interest costs under certain financing agreements.
     All of Pinnacle West’s bank agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under other agreements. All of APS’ bank agreements contain cross-default provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under other agreements. Pinnacle West’s and APS’ credit agreements generally contain provisions under which the lenders could refuse to advance loans in the event of a material adverse change in financial condition or financial prospects, except that Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings equal to outstanding commercial paper amounts.
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     See Note 6 for further discussions.
Capital Needs and Resources — By Company
      Pinnacle West (Parent Company)
     Our primary cash needs are for dividends to our shareholders; interest payments and optional and mandatory repayments of principal on our long-term debt (see the table above for our contractual requirements, including our debt repayment obligations, but excluding optional repayments). On October 20, 2004, our Board of Directors increased the common stock dividend to an indicated annual rate of $1.90 per share from $1.80 per share, effective with the December 1, 2004 dividend payment. The level of our common dividends and future dividend growth will be dependent on a number of factors including, but not limited to, payout ratio trends, free cash flow and financial market conditions.
     Our primary sources of cash are dividends from APS, external financings and cash distributions from our other subsidiaries, primarily SunCor. For the years 2002 through 2004, total dividends from APS were $510 million and total cash distributions from SunCor were $206 million. For the year ended December 31, 2004, dividends from APS were approximately $170 million and distributions from SunCor were approximately $85 million. We expect SunCor to make cash distributions to the parent company of approximately $80 to $100 million in 2005 based on anticipated asset sales activities. As discussed in Note 3 under “ACC Financing Orders,” APS must maintain a common equity ratio of at least 40% and may not pay common dividends if the payment would reduce its common equity below that threshold. As defined in the Financing Order, common equity ratio is common equity divided by common equity plus long-term debt, including current maturities of long-term debt. At December 31, 2004, APS’ common equity ratio as defined was approximately 45%.
     On February 2, 2004, we used proceeds from the $165 million Floating Rate Notes issued on November 12, 2003 and short-term borrowings to pay down the maturing $215 million 4.5% Senior Notes due 2004.
     At December 31, 2004, the parent company’s outstanding long-term debt, including current maturities, was $468 million. In October 2004, we replaced two separate revolving credit facilities (with collective borrowing capacity of $275 million) with a $300 million revolving credit facility that terminates in October 2007. This line of credit is available to support the issuance of up to $250 million in commercial paper or to be used as bank borrowings, including up to $100 million for issuances of letters of credit. At December 31, 2004, we had no commercial paper or short-term borrowings outstanding. We ended 2004 in an invested position.
     Pinnacle West sponsors a qualified pension plan for the employees of Pinnacle West and our subsidiaries. We contribute at least the minimum amount required under IRS regulations, but no more than the maximum tax-deductible amount. The minimum required funding takes into consideration the value of the fund assets and our pension obligation. We contributed $35 million in 2004, $46 million in 2003, $27 million in 2002, $44 million in 2001 and $24 million in 2000. APS and other subsidiaries fund their share of the pension contribution, of which APS represents approximately 92% of the total funding amounts described above. The assets in the plan are comprised of common stocks, bonds and real estate. Future year contribution amounts are dependent
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on fund performance and fund valuation assumptions. The minimum required contribution to be made to our pension plan in 2005 is estimated to be approximately $50 million. The expected contribution to our other postretirement benefit plans in 2005 is estimated to be approximately $40 million.
      APS
     APS’ capital requirements consist primarily of capital expenditures and optional and mandatory redemptions of long-term debt. See “ACC Financing Order” in Note 3 for a discussion of the $500 million financing arrangement between APS and Pinnacle West Energy authorized by the ACC pursuant to the Financing Order.
     APS pays for its capital requirements with cash from operations and, to the extent necessary, external financings. APS has historically paid for its dividends to Pinnacle West with cash from operations. See “Pinnacle West (Parent Company)” above for a discussion of the common equity ratio that APS must maintain in order to pay dividends to Pinnacle West.
     On February 15, 2004, $125 million of APS’ 5.875% notes due 2004 were redeemed at maturity and on March 1, 2004, $80 million of APS’ First Mortgage Bonds, 6.625% Series due 2004 were redeemed at maturity. APS used cash from operations and short-term debt to redeem the maturing debt.
     On March 31, 2004, Navajo County, Arizona Pollution Control Corporation issued $166 million of variable interest rate pollution control bonds, 2004 Series A-E, due 2034. The bonds were issued to refinance $166 million of outstanding pollution control bonds. The refinanced bonds were all $25 million of the Navajo 5.50% bonds due 2028 and $141 million of the Navajo 5.875% bonds due 2028. The Series A-E bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Navajo County, Arizona Pollution Control Corporation. These bonds are classified as long-term debt on our Consolidated Balance Sheets. See Note 6.
     Also on March 31, 2004, Coconino County, Arizona Pollution Control Corporation issued $13 million of variable interest rate pollution control bonds, 2004 Series A, due 2034. The bonds were issued to refinance $13 million of outstanding pollution control bonds. The refinanced bonds were $13 million of the Coconino 5.875% bonds due 2028. The Series A bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Coconino County, Arizona Pollution Control Corporation. These bonds are classified as long-term debt on our Consolidated Balance Sheets. See Note 6.
     In May 2004, APS renewed its $250 million revolving credit facility, while increasing its size to $325 million and extending its term to three years. The revolver provides liquidity support for APS’ $250 million commercial paper program, as well as an additional $75 million for other liquidity needs and miscellaneous letters of credit.
     On June 29, 2004, APS issued $300 million of 5.80% senior unsecured notes due June 30, 2014. The proceeds from the sale of the notes were used to redeem $100 million in aggregate principal amount of APS’ 6.25% Notes due January 15, 2005 and a portion of $300 million in aggregate principal amount of APS’ 7.625% Notes due August 1, 2005.
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     On March 1, 2005, Maricopa County, Arizona Pollution Control Corporation issued $164 million of variable interest rate pollution control bonds, 2004 Series A-E, due 2029. The bonds were issued to refinance $164 million of outstanding pollution control bonds. The Series A-E bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Maricopa County, Arizona Pollution Control Corporation. These bonds are classified as long-term debt on our Consolidated Balance Sheets.
     APS has retired all first mortgage bonds issued by APS under its 1946 mortgage and deed of trust, including the first mortgage bonds securing APS senior notes. On April 30, 2004, APS terminated its mortgage and deed of trust and, as a result, is not able to issue any additional first mortgage bonds under that mortgage.
     APS’ outstanding debt was approximately $2.7 billion at December 31, 2004. APS had committed lines of credit with various banks of $325 million at December 31, 2004 which were available either to support the issuance of commercial paper or to be used for bank borrowings, including issuances of letters of credit. At December 31, 2004, APS had no outstanding commercial paper or bank borrowings. APS ended 2004 in an invested position.
     Although provisions in APS’ articles of incorporation and ACC financing orders establish maximum amounts of preferred stock and debt that APS may issue, APS does not expect any of these provisions to limit its ability to meet its capital requirements.
      Pinnacle West Energy
     Pinnacle West Energy’s capital requirements consist primarily of capital expenditures. In May 2004, SNWA paid Pinnacle West Energy approximately $91 million for a 25% interest in the 570 MW Silverhawk combined cycle plant. See the capital expenditures table above for actual capital expenditures for 2004 and projected capital expenditures for the next three years. Pinnacle West Energy’s sources of cash will be cash infusions from the parent and cash from operations.
     See “ACC Financing Order” in Note 3 for a discussion of the $500 million financing arrangement between APS and Pinnacle West Energy authorized by the ACC pursuant to the Financing Order.
      Other Subsidiaries
     During the past three years, SunCor funded its cash requirements with cash from operations and its own external financings. SunCor’s capital needs consist primarily of capital expenditures for land development and retail and office building construction. See the capital expenditures table above for actual capital expenditures in 2004 and projected capital expenditures for the next three years. SunCor expects to fund its capital requirements with cash from operations and external financings.
     In 2004, SunCor did not issue any long-term debt; and it redeemed, refinanced or repaid $2 million in long-term debt (see Note 6).
     SunCor’s total outstanding debt was approximately $87 million as of December 31, 2004. SunCor’s total short-term debt was $71 million at December 31, 2004, including $35 million of
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short-term borrowings outstanding under a $90 million line of credit. SunCor’s long-term debt, including current maturities, totaled $16 million at December 31, 2004.
     We expect SunCor to make cash distributions to the parent company of approximately $80 to $100 million in 2005 based on anticipated asset sales activities.
     El Dorado funded its cash requirements during the past three years, primarily for NAC in 2002, with cash infused by the parent company and with cash from operations. As described above, during 2004, El Dorado sold its limited partnership interest in the Phoenix Suns and its ownership interest in NAC. El Dorado expects minimal capital requirements over the next three years and intends to focus on prudently realizing the value of its existing investments.
     APS Energy Services’ cash requirements during the past three years were funded with cash infusions from the parent company and with cash from operations.
CRITICAL ACCOUNTING POLICIES
     In preparing the financial statements in accordance with GAAP, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.
Regulatory Accounting
     Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings. We had $135 million of regulatory assets on the Consolidated Balance Sheets at December 31, 2004. A component of the 2004 Settlement Agreement, which is subject to ACC approval, would allow APS to acquire the PWEC Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and rate base the PWEC Dedicated Assets at a rate base value of $700 million. This would result in a mandatory rate base disallowance of approximately $150 million. As a result, for financial reporting purposes, APS would recognize a one-time, after-tax net plant write-off of approximately $90 million in the period when the plant transfer to APS is completed and would reduce annual depreciation expense by approximately $5 million. See Notes 1 and 3 for more information about regulatory assets, APS’ general rate case and the 2004 Settlement Agreement.
Pensions and Other Postretirement Benefit Accounting
     Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate
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earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.
     The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the 2004 projected benefit obligation, our 2004 reported pension liability on the Consolidated Balance Sheets and our 2004 reported pension expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions): 

 	 	Increase/(Decrease)	 	
 	 	Impact on	 	 	 	 	 	 	 	
 	 	Projected	 	 	Impact on	 	 	Impact on	 	
 	 	Benefit	 	 	Pension	 	 	Pension	 	
Actuarial Assumption (a)	 	Obligation	 	 	Liability	 	 	Expense	 	
Discount rate:	 	 	 	 	 	 	 	 	 	 	 	 	
Increase 1%	 	$	(192	)	 	$	(159	)	 	$	(8	)	
Decrease 1%	 	 	220	 	 	 	184	 	 	 	8	 	
Expected long-term rate of return on plan assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Increase 1%	 	 	—	 	 	 	—	 	 	 	(4	)	
Decrease 1%	 	 	—	 	 	 	—	 	 	 	4	 	

(a)	 	Each fluctuation assumes that the other assumptions of the calculation are held constant.	
     The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the 2004 accumulated other postretirement benefit obligation and our 2004 reported other postretirement benefit expense, after consideration of amounts capitalized or billed to electric plant participants, on Pinnacle West’s Consolidated Statements of Income (dollars in millions): 

 	 	Increase/(Decrease)	 	
 	 	Impact on Accumulated	 	 	Impact on Other	 	
 	 	Other Postretirement	 	 	Postretirement	 	
Actuarial Assumption (a)	 	Benefit Obligation	 	 	Benefit Expense	 	
Discount rate:	 	 	 	 	 	 	 	 	
Increase 1%	 	$	(80	)	 	$	(4	)	
Decrease 1%	 	 	94	 	 	 	4	 	
Health care cost trend rate (b):	 	 	 	 	 	 	 	 	
Increase 1%	 	 	96	 	 	 	6	 	
Decrease 1%	 	 	(76	)	 	 	(5	)	
Expected long-term rate of return on plan assets – pretax:	 	 	 	 	 	 	 	 	
Increase 1%	 	 	—	 	 	 	(1	)	
Decrease 1%	 	 	—	 	 	 	1	 	

(a)	 	Each fluctuation assumes that the other assumptions of the calculation are held constant.	
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(b)	 	This assumes a 1% change in the initial and ultimate health care cost trend rate.	
     See Note 8 for further details about our pension and other postretirement benefit plans.
Derivative Accounting
     Derivative accounting requires evaluation of rules that are complex and subject to varying interpretations. Our evaluation of these rules, as they apply to our contracts, will determine whether we use accrual accounting (for contracts designated as normal) or fair value (mark-to-market) accounting. Mark-to-market accounting requires that changes in the fair value are recognized periodically in income unless certain hedge criteria are met. For fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item associated with the hedged risk are recognized in earnings. For cash flow hedges, changes in the fair value of the derivative are recognized in common stock equity (as a component of other comprehensive income (loss)).
     The fair value of our derivative contracts is not always readily determinable. In some cases, we use models and other valuation techniques to determine fair value. The use of these models and valuation techniques sometimes requires subjective and complex judgement. Actual results could differ from the results estimated through application of these methods. Our marketing and trading portfolio consists of structured activities hedged with a portfolio of forward purchases that protects the economic value of the sales transactions. See “Market Risks – Commodity Price Risk” below for quantitative analysis. See Note 1 for discussion on accounting policies and Note 18 for a further discussion on derivative and energy trading accounting.
OTHER ACCOUNTING MATTERS
Accounting for Derivative and Trading Activities
     We adopted EITF 02-3 in the fourth quarter of 2002. We recorded a $66 million after-tax charge in net income as a cumulative effect adjustment for the previously recorded accumulated unrealized mark-to-market on energy trading contracts that did not meet the accounting definition of a derivative. Our energy trading contracts that are derivatives are accounted for at fair value under SFAS No. 133. Contracts that do not meet the definition of a derivative are now accounted for on an accrual basis with the associated revenues and costs recorded at the time the contracted commodities are delivered or received.
     See Notes 1 and 18 for further information on accounting for derivatives.
Variable Interest Entities
     See “Liquidity and Capital Resources – Off-Balance Sheet Arrangements” and Note 20 for a discussion of VIEs.
PINNACLE WEST CONSOLIDATED – FACTORS AFFECTING OUR FINANCIAL OUTLOOK
APS General Rate Case
     We believe APS’ general rate case, including the proposed settlement pending before the ACC is the key issue affecting our outlook. See “APS General Rate Case; 2004 Settlement Agreement” in Note 3 for a detailed discussion of this rate case and proposed settlement.
Factors Affecting Operating Revenues, Purchased Power and Fuel Costs
      General Electric operating revenues are derived from sales of electricity in regulated retail markets in Arizona and from competitive retail and wholesale power markets in the western United States. These revenues are affected by electricity sales volumes related to customer mix, customer growth and average usage per customer as well as electricity prices and variations in weather from
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period to period. Competitive sales of energy and energy-related products and services are made by APS Energy Services in western states that have opened to competition.
      Customer and Sales Growth The customer and sales growth referred to in this paragraph applies to Native Load customers and sales to them. Customer growth in APS’ service territory averaged about 3.4% a year for the three years 2002 through 2004; we currently expect customer growth to average about 3.8% per year from 2005 to 2007. We currently estimate that total retail electricity sales in kilowatt-hours will grow 5.0% on average, from 2005 through 2007, before the effects of weather variations. Customer growth for the year ended December 31, 2004 compared with the prior year was 3.7%.
     Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors, such as economic conditions, customer growth and usage patterns. Our experience indicates that a reasonable range of variation in our kilowatt-hour sales projection attributable to such economic factors can result in increases or decreases in annual net income of up to $10 million.
      Retail Rate Changes APS has a rate settlement agreement pending before the ACC that includes, among other things, a proposed general rate increase of 4.21% and a power supply adjuster that would provide timely recovery of variations in purchased power and fuel prices. See “APS General Rate Case; 2004 Settlement Agreement” in Note 3. APS expects to file another general rate case in late 2005.
      Weather In forecasting retail sales growth, we assume normal weather patterns based on historical data. Historical extreme weather variations have resulted in annual variations in net income in excess of $20 million. However, our experience indicates that the more typical variations from normal weather can result in increases or decreases in annual net income of up to $10 million.
      Trading In accordance with GAAP, we adopted EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities,” in the fourth quarter of 2002. As a consequence, we are recording structured trading transactions completed prior to implementation of EITF 02-3 that do not qualify as derivatives for financial accounting purposes on the accrual method, recognizing the revenues and associated purchased power and fuel costs as the respective commodities are delivered. We expect the deliveries under these historical contracts to contribute the following amounts to net income: approximately $12 million each year in 2005 through 2007 and approximately $7 million in 2008.
      Purchased Power and Fuel Costs Purchased power and fuel costs are impacted by our electricity sales volumes, existing contracts for purchased power and generation fuel, our power plant performance, transmission availability or constraints, prevailing market prices, new generating plants being placed in service and our hedging program for managing such costs. See “Natural Gas Supply” in Note 11 for more information on fuel costs. See “APS General Rate Case; 2004 Settlement Agreement” in Note 3 for information regarding a power supply adjuster.
      Wholesale Power Market Conditions The marketing and trading division focuses primarily on managing APS’ purchased power and fuel risks in connection with its costs of serving retail customer demand. We moved this division to APS in early 2003 for future marketing and trading activities (existing wholesale contracts remained at Pinnacle West) as a result of the ACC’s
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Track A Order prohibiting APS’ transfer of generating assets to Pinnacle West Energy. Additionally, the marketing and trading division, subject to specified parameters, markets, hedges and trades in electricity, fuels and emission allowances and credits. Our future earnings will be affected by the strength or weakness of the wholesale power market. The market has suffered a substantial reduction in overall liquidity because there are fewer creditworthy counterparties and because several key participants have exited the market or scaled back their activities.
Other Factors Affecting Financial Results
      Operations and Maintenance Expenses Operations and maintenance expenses are impacted by growth, power plant additions and operations, inflation, outages, higher trending pension and other postretirement benefit costs and other factors.
      Depreciation and Amortization Expenses Depreciation and amortization expenses are impacted by net additions to utility plant and other property, which includes generation construction or acquisition, and changes in regulatory asset amortization. Silverhawk was placed in service in May 2004. APS plans to acquire the Sundance Plant in 2005 and, in accordance with the proposed rate settlement, to issue requests for proposals to acquire additional long-term resources in 2006 and 2007. As part of the 1999 Settlement Agreement, APS amortized certain regulatory assets over a period that ended June 30, 2004. Amortization in the last three years is as follows (dollars in millions):

2002	 	2003	 	2004	
 	 	 	 	 	
$115	 	$86	 	$18	
      Property Taxes Taxes other than income taxes consist primarily of property taxes, which are affected by tax rates and the value of property in-service and under construction. The average property tax rate for APS, which currently owns the majority of our property, was 9.2% of assessed value for 2004 and 9.3% for 2003. We expect property taxes to increase primarily due to our generation construction program, as the plants phase-in to the property tax base, the planned acquisition of the Sundance Plant and our additions to existing facilities.
      Interest Expense Interest expense is affected by the amount of debt outstanding and the interest rates on that debt. The primary factors affecting borrowing levels in the next several years are expected to be our capital requirements and our internally generated cash flow. Capitalized interest offsets a portion of interest expense while capital projects are under construction. We stop accruing capitalized interest on a project when it is placed in commercial operation. As noted above, we placed new power plants in commercial operation in 2001, 2002, 2003 and 2004. Interest expense is also affected by interest rates on variable-rate debt and interest rates on the refinancing of the Company’s future liquidity needs. In addition, see Note 1 for a discussion of AFUDC.
      Retail Competition The regulatory developments and legal challenges to the Rules discussed in Note 3 have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors providing unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.
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      Subsidiaries In the case of SunCor, efforts to accelerate asset sales activities in 2004 were successful. A portion of these sales have been, and additional amounts may be required to be, reported as discontinued operations on our Consolidated Statements of Income. SunCor’s net income was $45 million in 2004. See Note 22 for further discussion. We anticipate SunCor’s earnings contributions in 2005 to be approximately $50 million after income taxes.
     El Dorado’s historical results are not indicative of future performance. El Dorado’s income before taxes in 2004 was $40 million. Income taxes were recorded at the parent company. The year ended 2004 includes a $35 million gain ($21 million after tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns. El Dorado sold its investment in NAC on November 18, 2004, which resulted in a pretax gain of $4 million and is classified as discontinued operations in 2004 and prior years. See Note 22 for information regarding the sale of NAC.
      General Our financial results may be affected by a number of broad factors. See “Forward-Looking Statements” for further information on such factors, which may cause our actual future results to differ from those we currently seek or anticipate. 
Market Risks
     Our operations include managing market risks related to changes in interest rates, commodity prices and investments held by our nuclear decommissioning trust fund.
      Interest Rate and Equity Risk
     Our major financial market risk exposure is to changing interest rates. Changing interest rates will affect interest paid on variable-rate debt and interest earned by our nuclear decommissioning trust fund (see Note 12). Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt. On January 29, 2004, we entered into two fixed-for-floating interest rate swap transactions on our $300 million 6.4% senior note. These transactions qualify as fair value hedges under SFAS No 133. See Note 6.
     The tables below present contractual balances of our consolidated long-term and short-term debt at the expected maturity dates as well as the fair value of those instruments on December 31, 2004 and 2003. The interest rates presented in the tables below represent the weighted-average interest rates for the years ended December 31, 2004 and 2003 (dollars in thousands): 

 	 	 	 	 	 	 	 	 	 	Variable-Rate	 	 	Fixed-Rate	 	
 	 	Short-Term Debt	 	 	Long-Term Debt	 	 	Long-Term Debt	 	
 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	
2004	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	
2005	 	 	4.21	%	 	$	71,030	 	 	 	1.81	%	 	$	214,967	 	 	 	7.27	%	 	$	402,198	 	
2006	 	 	—	 	 	 	—	 	 	 	6.55	%	 	 	2,918	 	 	 	6.45	%	 	 	395,314	 	
2007	 	 	—	 	 	 	—	 	 	 	4.81	%	 	 	302	 	 	 	5.99	%	 	 	1,154	 	
2008	 	 	—	 	 	 	—	 	 	 	5.22	%	 	 	5,294	 	 	 	5.51	%	 	 	1,055	 	
2009	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5.51	%	 	 	818	 	
Years thereafter	 	 	—	 	 	 	—	 	 	 	1.31	%	 	 	516,340	 	 	 	4.79	%	 	 	1,669,901	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	 	 	$	71,030	 	 	 	 	 	 	$	739,821	 	 	 	 	 	 	$	2,470,440	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value	 	 	 	 	 	$	71,030	 	 	 	 	 	 	$	740,271	 	 	 	 	 	 	$	2,574,608	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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 	 	 	 	 	 	 	 	 	 	Variable-Rate	 	 	Fixed-Rate	 	
 	 	Short-Term Debt	 	 	Long-Term Debt	 	 	Long-Term Debt	 	
 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	
2003	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	
2004	 	 	4.26	%	 	$	86,081	 	 	 	1.57	%	 	$	280,749	 	 	 	5.33	%	 	$	424,165	 	
2005	 	 	—	 	 	 	—	 	 	 	1.99	%	 	 	165,469	 	 	 	7.27	%	 	 	403,204	 	
2006	 	 	—	 	 	 	—	 	 	 	6.55	%	 	 	2,937	 	 	 	6.49	%	 	 	391,585	 	
2007	 	 	—	 	 	 	—	 	 	 	4.99	%	 	 	373	 	 	 	5.54	%	 	 	1,256	 	
2008	 	 	—	 	 	 	—	 	 	 	5.19	%	 	 	5,269	 	 	 	5.55	%	 	 	1,098	 	
Years thereafter	 	 	—	 	 	 	—	 	 	 	1.84	%	 	 	106,520	 	 	 	5.83	%	 	 	1,547,775	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	 	 	$	86,081	 	 	 	 	 	 	$	561,317	 	 	 	 	 	 	$	2,769,083	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value	 	 	 	 	 	$	86,081	 	 	 	 	 	 	$	561,447	 	 	 	 	 	 	$	2,913,085	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     The tables below present contractual balances of APS’ long-term debt at the expected maturity dates as well as the fair value of those instruments on December 31, 2004 and 2003. The interest rates presented in the tables below represent the weighted-average interest rates for the years ended December 31, 2004 and 2003 (dollars in thousands): 

 	 	Variable-Rate	 	 	Fixed-Rate	 	
 	 	Long-Term Debt	 	 	Long-Term Debt	 	
 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	
2004	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	
2005	 	 	1.22	%	 	$	49,520	 	 	 	7.27	%	 	$	401,727	 	
2006	 	 	—	 	 	 	—	 	 	 	6.72	%	 	 	86,082	 	
2007	 	 	—	 	 	 	—	 	 	 	5.51	%	 	 	867	 	
2008	 	 	—	 	 	 	—	 	 	 	5.51	%	 	 	1,054	 	
2009	 	 	—	 	 	 	—	 	 	 	5.51	%	 	 	818	 	
Years thereafter	 	 	1.31	%	 	 	516,340	 	 	 	4.79	%	 	 	1,669,901	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	 	 	$	565,860	 	 	 	 	 	 	$	2,160,449	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value	 	 	 	 	 	$	565,799	 	 	 	 	 	 	$	2,254,061	 	

 	 	Variable-Rate	 	 	Fixed-Rate	 	
 	 	Long-Term Debt	 	 	Long-Term Debt	 	
 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	
2003	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	
2004	 	 	1.57	%	 	$	280,340	 	 	 	6.16	%	 	$	206,727	 	
2005	 	 	—	 	 	 	—	 	 	 	7.27	%	 	 	402,259	 	
2006	 	 	—	 	 	 	—	 	 	 	6.73	%	 	 	85,451	 	
2007	 	 	—	 	 	 	—	 	 	 	5.55	%	 	 	1,134	 	
2008	 	 	—	 	 	 	—	 	 	 	5.55	%	 	 	1,098	 	
Years thereafter	 	 	1.84	%	 	 	106,520	 	 	 	5.83	%	 	 	1,547,775	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	 	 	$	386,860	 	 	 	 	 	 	$	2,244,444	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value	 	 	 	 	 	$	386,906	 	 	 	 	 	 	$	2,365,821	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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Commodity Price Risk
     We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal and emissions allowances. We manage risks associated with these market fluctuations by utilizing various commodity instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. Our ERMC, consisting of officers and key management personnel, oversees company-wide energy risk management activities and monitors the results of marketing and trading activities to ensure compliance with our stated energy risk management and trading policies. As part of our risk management program, we use such instruments to hedge purchases and sales of electricity, fuels and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodities. In addition, subject to specified risk parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit from market price movements.
     The mark-to-market value of derivative instruments related to our risk management and trading activities are presented in two categories consistent with our business segments:

 	•  	Regulated Electricity – non-trading derivative instruments that hedge our purchases and sales of electricity and fuel for APS’ Native Load requirements of our regulated electricity business segment; and	
 	
 	•  	Marketing and Trading – non-trading and trading derivative instruments of our competitive business segment.	
     The following tables show the pretax changes in mark-to-market of our non-trading and trading derivative positions in 2004 and 2003 (dollars in millions): 

 	 	2004	 	 	2003	 	
 	 	Regulated	 	 	Marketing and	 	 	Regulated	 	 	Marketing and	 	
 	 	Electricity	 	 	Trading	 	 	Electricity	 	 	Trading	 	
Mark-to-market of net positions at beginning of year	 	$	—	 	 	$	69	 	 	$	(49	)	 	$	57	 	
Change in mark-to-market gains/(losses) for future period deliveries	 	 	11	 	 	 	21	 	 	 	(5	)	 	 	(7	)	
Changes in cash flow hedges recorded in OCI	 	 	43	 	 	 	37	 	 	 	41	 	 	 	44	 	
Ineffective portion of changes in fair value recorded in earnings	 	 	(2	)	 	 	1	 	 	 	8	 	 	 	—	 	
Mark-to-market losses/(gains) realized during the year	 	 	(18	)	 	 	(21	)	 	 	5	 	 	 	(25	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market of net positions at end of year	 	$	34	 	 	$	107	 	 	$	—	 	 	$	69	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
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     The tables below show the fair value of maturities of our non-trading and trading derivative contracts (dollars in millions) at December 31, 2004 by maturities and by the type of valuation that is performed to calculate the fair values. See Note 1, “Derivative Accounting,” for more discussion of our valuation methods. 
Regulated Electricity

 	 	 	 	 	 	 	 	 	 	 	 	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	fair	 	
Source of Fair Value	 	2005	 	 	2006	 	 	2007	 	 	value	 	
Prices actively quoted	 	$	27	 	 	$	10	 	 	$	(2	)	 	$	35	 	
Prices provided by other external sources	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
Prices based on models and other valuation methods	 	 	(1	)	 	 	—	 	 	 	—	 	 	 	(1	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total by maturity	 	$	26	 	 	$	10	 	 	$	(2	)	 	$	34	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Marketing and Trading

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Years	 	 	fair	 	
Source of Fair Value	 	2005	 	 	2006	 	 	2007	 	 	2008	 	 	2009	 	 	thereafter	 	 	value	 	
Prices actively quoted	 	$	44	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	44	 	
Prices provided by other external sources	 	 	1	 	 	 	32	 	 	 	42	 	 	 	24	 	 	 	(1	)	 	 	(2	)	 	 	96	 	
Prices based on models and other valuation methods	 	 	(9	)	 	 	(6	)	 	 	(13	)	 	 	(6	)	 	 	—	 	 	 	1	 	 	 	(33	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total by maturity	 	$	36	 	 	$	26	 	 	$	29	 	 	$	18	 	 	$	(1	)	 	$	(1	)	 	$	107	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     The table below shows the impact that hypothetical price movements of 10% would have on the market value of our risk management and trading assets and liabilities included on Pinnacle West’s Consolidated Balance Sheets at December 31, 2004 and 2003 (dollars in millions). 

 	 	December 31, 2004	 	 	December 31, 2003	 	
 	 	Gain (Loss)	 	 	Gain (Loss)	 	
Commodity	 	Price Up	 	 	Price Down	 	 	Price Up	 	 	Price Down	 	
 	 	10%	 	 	10%	 	 	10%	 	 	10%	 	
Mark-to-market changes reported in earnings (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electricity	 	$	(4	)	 	$	4	 	 	$	(2	)	 	$	2	 	
Natural gas	 	 	2	 	 	 	(2	)	 	 	(1	)	 	 	1	 	
Other	 	 	1	 	 	 	(1	)	 	 	1	 	 	 	—	 	
Mark-to-market changes reported in OCI (b):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electricity	 	 	35	 	 	 	(35	)	 	 	36	 	 	 	(36	)	
Natural gas	 	 	43	 	 	 	(43	)	 	 	30	 	 	 	(30	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	77	 	 	$	(77	)	 	$	64	 	 	$	(63	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
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(a)	 	These contracts are primarily structured sales activities hedged with a portfolio of forward purchases that protects the economic value of the sales transactions.	
 		
(b)	 	These contracts are hedges of our forecasted purchases of natural gas and electricity. The impact of these hypothetical price movements would substantially offset the impact that these same price movements would have on the physical exposures being hedged.	
Credit Risk
     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management and trading contracts with many counterparties, including two counterparties for which a worst case exposure represents approximately 35% of Pinnacle West’s $391 million of risk management and trading assets as of December 31, 2004. See Note 1, “Derivative Accounting” for a discussion of our credit valuation adjustment policy. See Note 18 for further discussion of credit risk.
ARIZONA PUBLIC SERVICE COMPANY – RESULTS OF OPERATIONS
General
     Throughout the following explanations of APS’ results of operations, we refer to “gross margin.” Gross margin refers to electric operating revenues less purchased power and fuel costs. “Gross margin” is a “non-GAAP financial measure,” as defined in accordance with SEC rules. Operating income (a GAAP financial measure) plus specified operating expenses (operations and maintenance, depreciation and amortization, operating income taxes and other taxes), as disclosed on the Statements of Income, is equal to gross margin. We view gross margin as an important performance measure of the core profitability of our operations. This measure is a key component of our internal financial reporting and is used by our management in analyzing our business segments. We believe that investors benefit from having access to the same financial measures that our management uses. In addition, we have reclassified certain prior period amounts to conform to our current period presentation.
2004 Compared with 2003
     APS’ net income for the year ended December 31, 2004 was $200 million compared with $181 million for the prior year. The $19 million increase in the period-to-period comparison reflects lower regulatory asset amortization; the benefit of customer growth; decreased purchased power and fuel costs primarily due to lower prices for capacity purchases; increased interest income and lower replacement power costs due to fewer unplanned outages. These positive factors were partially offset by increased operations and maintenance costs related to increased generation, customer service and personnel costs; the effects of weather on retail sales; higher depreciation and amortization related to increased delivery and other assets; lower realized margins on energy trading due to higher wholesale electricity prices; a retail electricity price reduction; lower income tax credits; and higher interest expense primarily due to increased utility plant in service.
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     Additional details on the major factors that increased (decreased) net income for the year ended December 31, 2004 compared with the prior year are contained in the following table (dollars in millions). 

 	 	Increase (Decrease)	 	
 	 	Pretax	 	 	After Tax	 	
Gross margin:	 	 	 	 	 	 	 	 	
Higher retail sales volumes due to customer growth, excluding weather effects	 	$	43	 	 	$	26	 	
Decreased purchased power and fuel costs primarily due to lower prices for capacity purchases	 	 	30	 	 	 	18	 	
Lower replacement power costs due to fewer unplanned outages	 	 	6	 	 	 	4	 	
Effects of weather on retail sales	 	 	(17	)	 	 	(10	)	
Lower margins on energy trading primarily due to higher wholesale electricity prices	 	 	(14	)	 	 	(9	)	
Retail electricity price reduction effective July 1, 2003	 	 	(13	)	 	 	(8	)	
Miscellaneous factors, net	 	 	(3	)	 	 	(2	)	
 	 	 	 	 	 	 	
Net increase in gross margin	 	 	32	 	 	 	19	 	
Higher operations and maintenance expense primarily related to increased generation, customer service, and personnel costs	 	 	(27	)	 	 	(16	)	
Higher interest expense primarily due to increased utility plant in service	 	 	(10	)	 	 	(6	)	
Depreciation and amortization decreases (increases):	 	 	 	 	 	 	 	 	
Lower regulatory asset amortization	 	 	68	 	 	 	41	 	
Increased delivery and other assets	 	 	(16	)	 	 	(10	)	
Higher other income primarily due to increased interest income	 	 	10	 	 	 	6	 	
Lower income tax credits	 	 	—	 	 	 	(11	)	
Miscellaneous items, net	 	 	(6	)	 	 	(4	)	
 	 	 	 	 	 	 	
Net increase in net income	 	$	51	 	 	$	19	 	
 	 	 	 	 	 	 	
Regulated Electricity Revenues
     Regulated electricity revenues were $52 million higher in the year ended December 31, 2004 compared with the prior year, primarily as a result of:

 	•  	an $101 million increase in retail revenues related to customer growth and higher average usage, excluding weather effects;	
 	
 	•  	a $42 million decrease in retail revenues related to weather;	
 	
 	•  	a $13 million decrease in retail revenues related to a reduction in retail electricity prices; and	
 	
 	•  	a $6 million increase due to miscellaneous factors.	
Marketing and Trading Revenues
     Marketing and trading revenues were $40 million higher in the year ended December 31, 2004 compared with the prior year, primarily as a result of:
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 	•  	a $13 million decrease from generation sales other than Native Load due to substantially lower sales volumes, resulting from lower market spark spreads;	
 	
 	•  	$49 million of higher energy trading revenues on realized sales of electricity primarily due to higher electricity prices; and	
 	
 	•  	$4 million in higher mark-to-market gains for future-period deliveries primarily as a result of higher forward prices for wholesale electricity.	
2003 Compared with 2002
     APS’ net income for the year ended December 31, 2003 was $181 million compared with $199 million for the prior year. The $18 million decrease in the period-to-period comparison reflects higher purchased power and fuel costs resulting from higher prices for hedged gas and purchased power; higher replacement power costs from plant outages due to higher market prices and more unplanned outages (Cholla Unit 3 experienced an unplanned outage from August of 2003 through November of 2003); higher operations and maintenance costs related to increased pension and other benefits; two retail electricity price reductions; and higher depreciation expense related to increased delivery and other assets. These negative factors were partially offset by higher retail sales primarily due to customer growth and favorable weather; lower operating costs primarily related to severance costs recorded in 2002; lower regulatory asset amortization; tax credits and favorable income tax adjustments related to prior years resolved in 2003; higher income related to APS’ return to the AFUDC method of capitalizing construction finance costs; and increased generation sales other than Native Load primarily due to higher sales volumes, partially offset by lower unit margins.
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     Additional details on the major factors that increased (decreased) net income for the year ended December 31, 2003 compared with the prior year are contained in the following table (dollars in millions). 

 	 	Increase (Decrease)	 	
 	 	Pretax	 	 	After Tax	 	
Gross margin:	 	 	 	 	 	 	 	 	
Increased purchased power and fuel costs primarily due to higher prices for hedged gas and purchased power	 	$	(74	)	 	$	(45	)	
Higher replacement power costs from plant outages due to higher market prices and more unplanned outages	 	 	(47	)	 	 	(28	)	
Retail electricity price reductions effective July 1, 2002 and July 1, 2003	 	 	(27	)	 	 	(16	)	
Higher retail sales volumes due to customer growth, excluding weather effects	 	 	48	 	 	 	29	 	
Effects of weather on retail sales	 	 	13	 	 	 	8	 	
Increase in generation sales other than Native Load primarily due to higher sales volumes partially offset by lower unit margins	 	 	10	 	 	 	6	 	
Decreased purchased power costs due to new power plants in service	 	 	8	 	 	 	5	 	
Miscellaneous factors, net	 	 	5	 	 	 	2	 	
 	 	 	 	 	 	 	
Net decrease in gross margin	 	 	(64	)	 	 	(39	)	
Operations and maintenance expense decreases (increases):	 	 	 	 	 	 	 	 	
Severance costs recorded in 2002	 	 	34	 	 	 	20	 	
Increased pension and other benefit costs	 	 	(22	)	 	 	(13	)	
Increased costs related to customer growth and increased payroll	 	 	(15	)	 	 	(9	)	
Increased payroll cost related to transfer of power marketing division	 	 	(13	)	 	 	(8	)	
Net other items	 	 	(2	)	 	 	(1	)	
Higher interest expense due to higher debt balances	 	 	(14	)	 	 	(8	)	
Depreciation and amortization decreases (increases):	 	 	 	 	 	 	 	 	
Decreased regulatory asset amortization	 	 	29	 	 	 	18	 	
Increased delivery and other assets	 	 	(19	)	 	 	(12	)	
Our return to the AFUDC method of capitalizing construction finance costs	 	 	8	 	 	 	11	 	
Higher other income due to increased interest income and investment gains	 	 	15	 	 	 	9	 	
Miscellaneous items, net	 	 	5	 	 	 	3	 	
Tax credits and favorable income tax adjustments related to prior years resolved in 2003	 	 	—	 	 	 	11	 	
 	 	 	 	 	 	 	
Net decrease in net income	 	$	(58	)	 	$	(18	)	
 	 	 	 	 	 	 	
Regulated Electricity Revenues
     Regulated electricity revenues were $97 million higher in the year ended December 31, 2003 compared with the prior year, primarily as a result of:

 	•  	an $85 million increase in retail revenues related to customer growth and higher average usage, excluding weather effects;	
 	
 	•  	a $21 million increase in retail revenues related to weather;	
 	
 	•  	a $6 million increase related to traditional wholesale sales as a result of higher prices and higher sales volumes;	
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 	•  	a $27 million decrease in retail revenues related to two reductions in retail electricity prices; and	
 	
 	•  	a $12 million net increase due to miscellaneous factors.	
Marketing and Trading Revenues
     Marketing and trading revenues were $71 million higher in the year ended December 31, 2003 compared with the prior year, primarily as a result of:

 	•  	a $66 million increase from generation sales other than Native Load primarily due to higher prices and sales volumes, including sales from new power plants in service;	
 	
 	•  	a $5 million net increase due to miscellaneous factors.	
LIQUIDITY AND CAPITAL RESOURCES – ARIZONA PUBLIC SERVICE COMPANY
      Contractual Obligations
     The following table summarizes contractual requirements for APS as of December 31, 2004 (dollars in millions):

 	 	 	 	 	 	2006-	 	 	2008-	 	 	There-	 	 	 	 	
 	 	2005	 	 	2007	 	 	2009	 	 	after	 	 	Total	 	
Long-term debt payments, including interest (a)	 	$	577	 	 	$	503	 	 	$	206	 	 	$	2,746	 	 	$	4,032	 	
Capital lease payments	 	 	2	 	 	 	3	 	 	 	2	 	 	 	3	 	 	 	10	 	
Operating lease payments	 	 	65	 	 	 	127	 	 	 	122	 	 	 	352	 	 	 	666	 	
Purchase power and fuel commitments (b)	 	 	245	 	 	 	206	 	 	 	134	 	 	 	363	 	 	 	948	 	
Minimum pension funding requirement (c)	 	 	46	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	46	 	
Purchase obligations (d)	 	 	263	 	 	 	15	 	 	 	—	 	 	 	68	 	 	 	346	 	
Nuclear decommissioning funding requirements	 	 	11	 	 	 	22	 	 	 	22	 	 	 	146	 	 	 	201	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total contractual commitments	 	$	1,209	 	 	$	876	 	 	$	486	 	 	$	3,678	 	 	$	6,249	 	

(a)	 	The long-term debt matures at various dates through 2034 and bears interest principally at fixed rates. Interest on variable-rate long-term debt is determined by the rates at December 31, 2004.	
 		
(b)	 	APS’ purchase power and fuel commitments include purchases of coal, electricity, natural gas, and nuclear fuel (see Note S-5).	
 		
(c)	 	Future pension contributions are not determinable for time periods after 2005.	
 		
(d)	 	These contractual obligations include commitments for capital expenditures and other obligations. Obligations for 2005 include about $190 million for acquisition of the Sundance Plant (see Note 3).	
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RISK FACTORS
     Exhibit 99.31 and Exhibit 99.32, which are hereby incorporated by reference, contain a discussion of risk factors affecting Pinnacle West and APS, respectively.
FORWARD-LOOKING STATEMENTS
     This document contains forward-looking statements based on current expectations, and neither Pinnacle West nor APS assumes any obligation to update these statements or make any further statements on any of these issues, except as required by applicable law. These forward-looking statements are often identified by words such as “estimate,” “predict,” “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “require,” “intend,” “assume” and similar words. Because actual results may differ materially from expectations, we caution readers not to place undue reliance on these statements. A number of factors could cause future results to differ materially from historical results, or from results or outcomes currently expected or sought by Pinnacle West or APS. In addition to the “Risk Factors” described in Exhibits 99.31 and 99.32 to this report, these factors include, but are not limited to:

 	•  	state and federal regulatory and legislative decisions and actions, including the outcome of the rate case APS filed with the ACC on June 27, 2003 and the wholesale electric price mitigation plan adopted by the FERC;	
 	
 	•  	the outcome of regulatory, legislative and judicial proceedings relating to the restructuring;	
 	
 	•  	the ongoing restructuring of the electric industry, including the introduction of retail electric competition in Arizona and decisions impacting wholesale competition;	
 	
 	•  	market prices for electricity and natural gas;	
 	
 	•  	power plant performance and outages, including transmission outages and constraints;	
 	
 	•  	weather variations affecting local and regional customer energy usage;	
 	
 	•  	customer growth and energy usage;	
 	
 	•  	regional economic and market conditions, including the results of litigation and other proceedings resulting from the California energy situation, volatile purchased power and fuel costs and the completion of generation and transmission construction in the region, which could affect customer growth and the cost of power supplies;	
 	
 	•  	the cost of debt and equity capital and access to capital markets;	
 	
 	•  	the uncertainty that current credit ratings will remain in effect for any given period of time;	
 	
 	•  	our ability to compete successfully outside traditional regulated markets (including the wholesale market);	
 	
 	•  	the performance of our marketing and trading activities due to volatile market liquidity and any deteriorating counterparty credit and the use of derivative contracts in our business (including the interpretation of the subjective and complex accounting rules related to these contracts);	
 	
 	•  	changes in accounting principles generally accepted in the United States of America and the interpretation of those principles;	
 	
 	•  	the performance of the stock market and the changing interest rate environment, which affect the amount of required contributions to Pinnacle West’s pension plan	
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 	   	and APS’ nuclear decommissioning trust funds, as well as the reported costs of providing pension and other postretirement benefits;	
 	
 	•  	technological developments in the electric industry;	
 	
 	•  	the strength of the real estate market in SunCor’s market areas, which include Arizona, Idaho, New Mexico and Utah; and	
 	
 	•  	other uncertainties, all of which are difficult to predict and many of which are beyond the control of Pinnacle West and APS.	
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ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
     See “Pinnacle West Consolidated – Factors Affecting Our Financial Outlook” in Item 7 above for a discussion of quantitative and qualitative disclosures about market risk.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE

 	 	Page	
Management’s Report on Internal Control Over Financial Reporting (Pinnacle West Capital Corporation)	 	64	
Report of Independent Registered Public Accounting Firm	 	65	
Pinnacle West Consolidated Statements of Income for 2004, 2003 and 2002	 	67	
Pinnacle West Consolidated Balance Sheets as of December 31, 2004 and 2003	 	68	
Pinnacle West Consolidated Statements of Cash Flows for 2004, 2003 and 2002	 	70	
Pinnacle West Consolidated Statements of Changes in Common Stock Equity for 2004, 2003 and 2002	 	71	
Notes to Pinnacle West’s Consolidated Financial Statements	 	72	
Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company)	 	128	
Report of Independent Registered Public Accounting Firm	 	129	
APS Statements of Income for 2004, 2003 and 2002	 	131	
APS Balance Sheets as of December 31, 2004 and 2003	 	132	
APS Statements of Cash Flow for 2004, 2003 and 2002	 	134	
APS Statements of Changes in Common Stock Equity for 2004, 2003 and 2002	 	135	
Supplemental Notes to APS’ Financial Statements	 	137	
Financial Statement Schedule for 2004, 2003 and 2002	 	 	
Pinnacle West Schedule II – Valuation and Qualifying Accounts for 2004, 2003 and 2002	 	146	
APS Schedule II – Reserve for Uncollectibles for 2004, 2003 and 2002	 	147	
See Note 13 for the selected quarterly financial data required to be presented in this Item.
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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(PINNACLE WEST CAPITAL CORPORATION)
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13(a)-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein and relates also to the Company’s consolidated financial statements.
March 15, 2005
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Pinnacle West Capital Corporation
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Pinnacle West Capital Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in common stock equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 18 to the consolidated financial statements, in 2002 the Company changed its method for accounting for trading activities in order to comply with the provisions of Emerging Issues Task Force Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 15, 2005
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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollars and shares in thousands, except per share amounts)

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
OPERATING REVENUES	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	2,035,247	 	 	$	1,978,075	 	 	$	1,890,391	 	
Marketing and trading segment	 	 	461,870	 	 	 	391,886	 	 	 	286,879	 	
Real estate segment	 	 	359,792	 	 	 	361,604	 	 	 	201,081	 	
Other revenues	 	 	42,816	 	 	 	27,929	 	 	 	26,899	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	2,899,725	 	 	 	2,759,494	 	 	 	2,405,250	 	
 	 	 	 	 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment purchased power and fuel	 	 	567,433	 	 	 	517,320	 	 	 	376,911	 	
Marketing and trading segment purchased power and fuel	 	 	382,147	 	 	 	344,862	 	 	 	154,987	 	
Operations and maintenance	 	 	596,557	 	 	 	548,732	 	 	 	584,538	 	
Real estate operations segment	 	 	289,900	 	 	 	305,974	 	 	 	185,925	 	
Depreciation and amortization	 	 	401,105	 	 	 	435,140	 	 	 	422,299	 	
Taxes other than income taxes	 	 	122,216	 	 	 	110,270	 	 	 	107,952	 	
Other expenses	 	 	34,108	 	 	 	23,254	 	 	 	21,895	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	2,393,466	 	 	 	2,285,552	 	 	 	1,854,507	 	
 	 	 	 	 	 	 	 	 	 	
OPERATING INCOME	 	 	506,259	 	 	 	473,942	 	 	 	550,743	 	
 	 	 	 	 	 	 	 	 	 	
OTHER	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for equity funds used during construction	 	 	4,885	 	 	 	14,240	 	 	 	—	 	
Other income (Note 19)	 	 	53,989	 	 	 	35,563	 	 	 	14,910	 	
Other expenses (Note 19)	 	 	(21,510	)	 	 	(20,574	)	 	 	(33,655	)	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	37,364	 	 	 	29,229	 	 	 	(18,745	)	
 	 	 	 	 	 	 	 	 	 	
INTEREST EXPENSE	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	 	195,859	 	 	 	204,339	 	 	 	187,039	 	
Capitalized interest	 	 	(16,311	)	 	 	(29,444	)	 	 	(43,749	)	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	179,548	 	 	 	174,895	 	 	 	143,290	 	
 	 	 	 	 	 	 	 	 	 	
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	 	 	364,075	 	 	 	328,276	 	 	 	388,708	 	
INCOME TAXES	 	 	128,857	 	 	 	102,473	 	 	 	152,145	 	
 	 	 	 	 	 	 	 	 	 	
INCOME FROM CONTINUING OPERATIONS	 	 	235,218	 	 	 	225,803	 	 	 	236,563	 	
Income (loss) from discontinued operations – net of income tax expense (benefit) of $5,480, $9,616, and ($14,045)	 	 	7,977	 	 	 	14,776	 	 	 	(21,410	)	
Cumulative effect of a change in accounting for trading activities – net of income tax benefit of ($43,123)	 	 	—	 	 	 	—	 	 	 	(65,745	)	
 	 	 	 	 	 	 	 	 	 	
NET INCOME	 	$	243,195	 	 	$	240,579	 	 	$	149,408	 	
 	 	 	 	 	 	 	 	 	 	
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – BASIC	 	 	91,397	 	 	 	91,265	 	 	 	84,903	 	
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – DILUTED	 	 	91,532	 	 	 	91,405	 	 	 	84,964	 	
EARNINGS PER WEIGHTED – AVERAGE COMMON SHARE OUTSTANDING	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations – basic	 	$	2.57	 	 	$	2.47	 	 	$	2.79	 	
Net income – basic	 	 	2.66	 	 	 	2.64	 	 	 	1.76	 	
Income from continuing operations – diluted	 	 	2.57	 	 	 	2.47	 	 	 	2.78	 	
Net income – diluted	 	 	2.66	 	 	 	2.63	 	 	 	1.76	 	
DIVIDENDS DECLARED PER SHARE	 	$	1.825	 	 	$	1.725	 	 	$	1.625	 	
See Notes to Pinnacle West’s Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
ASSETS	 	 	 	 	 	 	 	 	
CURRENT ASSETS	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	163,366	 	 	$	131,062	 	
Investment in debt securities	 	 	181,175	 	 	 	91,850	 	
Customer and other receivables	 	 	367,863	 	 	 	354,666	 	
Allowance for doubtful accounts	 	 	(4,896	)	 	 	(9,223	)	
Accrued utility revenues	 	 	93,227	 	 	 	88,629	 	
Materials and supplies (at average cost)	 	 	101,333	 	 	 	96,099	 	
Fossil fuel (at average cost)	 	 	20,512	 	 	 	28,367	 	
Assets from risk management and trading activities (Note 18)	 	 	166,896	 	 	 	97,630	 	
Assets related to discontinued operations (Note 22)	 	 	—	 	 	 	23,065	 	
Other current assets	 	 	47,654	 	 	 	72,649	 	
 	 	 	 	 	 	 	
Total current assets	 	 	1,137,130	 	 	 	974,794	 	
 	 	 	 	 	 	 	
INVESTMENTS AND OTHER ASSETS	 	 	 	 	 	 	 	 	
Real estate investments – net (Notes 1 and 6)	 	 	382,398	 	 	 	358,441	 	
Assets from risk management and trading activities- long term (Note 18)	 	 	224,341	 	 	 	138,946	 	
Decommissioning trust accounts (Note 12)	 	 	267,700	 	 	 	240,645	 	
Other assets	 	 	107,212	 	 	 	88,473	 	
 	 	 	 	 	 	 	
Total investments and other assets	 	 	981,651	 	 	 	826,505	 	
 	 	 	 	 	 	 	
PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6, 9 and 10)	 	 	 	 	 	 	 	 	
Plant in service and held for future use	 	 	10,486,648	 	 	 	9,904,874	 	
Less accumulated depreciation and amortization	 	 	3,365,954	 	 	 	3,145,609	 	
 	 	 	 	 	 	 	
Total	 	 	7,120,694	 	 	 	6,759,265	 	
Construction work in progress	 	 	258,119	 	 	 	554,876	 	
Intangible assets, net of accumulated amortization of $158,584 and $128,126	 	 	105,486	 	 	 	108,534	 	
Nuclear fuel, net of accumulated amortization of $59,020 and $58,053	 	 	51,188	 	 	 	52,011	 	
 	 	 	 	 	 	 	
Net property, plant and equipment	 	 	7,535,487	 	 	 	7,474,686	 	
 	 	 	 	 	 	 	
DEFERRED DEBITS
Regulatory assets (Notes 1, 3 and 4)	 	 	135,051	 	 	 	132,349	 	
Other deferred debits	 	 	107,428	 	 	 	110,708	 	
 	 	 	 	 	 	 	
Total deferred debits	 	 	242,479	 	 	 	243,057	 	
 	 	 	 	 	 	 	
TOTAL ASSETS	 	$	9,896,747	 	 	$	9,519,042	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
LIABILITIES AND EQUITY	 	 	 	 	 	 	 	 	
CURRENT LIABILITIES	 	 	 	 	 	 	 	 	
Accounts payable	 	$	373,526	 	 	$	283,021	 	
Accrued taxes	 	 	245,611	 	 	 	69,769	 	
Accrued interest	 	 	38,795	 	 	 	51,825	 	
Short-term borrowings (Note 5)	 	 	71,030	 	 	 	86,081	 	
Current maturities of long-term debt (Note 6)	 	 	617,165	 	 	 	704,914	 	
Customer deposits	 	 	55,558	 	 	 	49,783	 	
Deferred income taxes (Note 4)	 	 	9,057	 	 	 	631	 	
Liabilities from risk management and trading activities (Note 18)	 	 	113,406	 	 	 	92,755	 	
Liabilities related to discontinued operations (Note 22)	 	 	—	 	 	 	16,427	 	
Other current liabilities	 	 	101,748	 	 	 	77,362	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	1,625,896	 	 	 	1,432,568	 	
 	 	 	 	 	 	 	
LONG-TERM DEBT LESS CURRENT MATURITIES (Note 6)	 	 	2,584,985	 	 	 	2,616,585	 	
DEFERRED CREDITS AND OTHER	 	 	 	 	 	 	 	 	
Deferred income taxes (Note 4)	 	 	1,227,553	 	 	 	1,338,527	 	
Regulatory liabilities (Notes 1, 3 and 4)	 	 	506,646	 	 	 	468,694	 	
Liability for asset retirements (Note 12)	 	 	251,612	 	 	 	234,440	 	
Pension liability (Note 8)	 	 	234,445	 	 	 	188,041	 	
Liabilities from risk management and trading activities-long term (Note 18)	 	 	156,262	 	 	 	82,730	 	
Unamortized gain – sale of utility plant (Note 9)	 	 	50,333	 	 	 	54,909	 	
Other	 	 	308,819	 	 	 	272,769	 	
 	 	 	 	 	 	 	
Total deferred credits and other	 	 	2,735,670	 	 	 	2,640,110	 	
 	 	 	 	 	 	 	
COMMITMENTS AND CONTINGENCIES (Notes 3, 11 and 12)	 	 	 	 	 	 	 	 	
COMMON STOCK EQUITY (Note 7)	 	 	 	 	 	 	 	 	
Common stock, no par value; authorized 150,000,000 shares; issued 91,802,861 at end of 2004 and 91,379,947 at end of 2003	 	 	1,769,047	 	 	 	1,744,354	 	
Treasury stock at cost; 9,522 shares at end of 2004 and 92,015 shares at end of 2003	 	 	(428	)	 	 	(3,273	)	
 	 	 	 	 	 	 	
Total common stock	 	 	1,768,619	 	 	 	1,741,081	 	
 	 	 	 	 	 	 	
Accumulated other comprehensive income (loss):	 	 	 	 	 	 	 	 	
Minimum pension liability adjustment	 	 	(81,788	)	 	 	(66,564	)	
Derivative instruments	 	 	59,243	 	 	 	27,563	 	
 	 	 	 	 	 	 	
Total accumulated other comprehensive loss	 	 	(22,545	)	 	 	(39,001	)	
 	 	 	 	 	 	 	
Retained earnings	 	 	1,204,122	 	 	 	1,127,699	 	
 	 	 	 	 	 	 	
Total common stock equity	 	 	2,950,196	 	 	 	2,829,779	 	
 	 	 	 	 	 	 	
TOTAL LIABILITIES AND EQUITY	 	$	9,896,747	 	 	$	9,519,042	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	$	243,195	 	 	$	240,579	 	 	$	149,408	 	
Adjustment to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Loss (income) from discontinued operations, net of tax	 	 	(7,977	)	 	 	(14,776	)	 	 	21,410	 	
Cumulative effect of accounting change, net of tax	 	 	—	 	 	 	—	 	 	 	65,745	 	
Equity earnings in Phoenix Suns partnership	 	 	(34,594	)	 	 	—	 	 	 	—	 	
Depreciation and amortization	 	 	401,105	 	 	 	435,140	 	 	 	422,299	 	
Nuclear fuel amortization	 	 	30,446	 	 	 	28,757	 	 	 	31,185	 	
Allowance for equity funds used during construction	 	 	(4,885	)	 	 	(14,240	)	 	 	—	 	
Deferred income taxes	 	 	(113,850	)	 	 	81,756	 	 	 	191,135	 	
Change in mark-to-market valuations	 	 	(18,915	)	 	 	17,410	 	 	 	(18,146	)	
Redhawk Units 3 and 4 cancellation charge	 	 	—	 	 	 	—	 	 	 	49,192	 	
Changes in current assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Customer and other receivables	 	 	(17,524	)	 	 	(12,456	)	 	 	60,336	 	
Accrued utility revenues	 	 	(4,598	)	 	 	5,875	 	 	 	(18,373	)	
Materials, supplies and fossil fuel	 	 	2,621	 	 	 	(4,629	)	 	 	(11,599	)	
Other current assets	 	 	24,995	 	 	 	(6,865	)	 	 	(6,643	)	
Accounts payable	 	 	98,001	 	 	 	(7,125	)	 	 	17,008	 	
Accrued taxes	 	 	175,842	 	 	 	(1,338	)	 	 	(36,041	)	
Accrued interest	 	 	(13,030	)	 	 	(1,193	)	 	 	4,212	 	
Other current liabilities	 	 	33,669	 	 	 	8,668	 	 	 	24,755	 	
Proceeds from the sale of real estate assets	 	 	80,035	 	 	 	130,597	 	 	 	47,906	 	
Real estate investments	 	 	(62,812	)	 	 	(51,837	)	 	 	(56,355	)	
Increase in regulatory assets	 	 	(2,702	)	 	 	(20,971	)	 	 	(11,029	)	
Change in risk management and trading – assets	 	 	(2,549	)	 	 	46,911	 	 	 	(11,700	)	
Change in risk management and trading – liabilities	 	 	13,018	 	 	 	(11,613	)	 	 	(22,783	)	
Change in customer advances	 	 	6,402	 	 	 	7,270	 	 	 	(23,780	)	
Change in pension liability	 	 	23,822	 	 	 	19,074	 	 	 	(3,009	)	
Change in other long-term assets	 	 	(39,710	)	 	 	13,124	 	 	 	(13,593	)	
Change in other long-term liabilities	 	 	32,075	 	 	 	12,635	 	 	 	9,785	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow provided by operating activities	 	 	842,080	 	 	 	900,753	 	 	 	861,325	 	
 	 	 	 	 	 	 	 	 	 	
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	 	 	(538,232	)	 	 	(713,256	)	 	 	(909,259	)	
Proceeds from sale of Silverhawk	 	 	90,967	 	 	 	—	 	 	 	—	 	
Capitalized interest	 	 	(16,311	)	 	 	(29,444	)	 	 	(43,749	)	
Discontinued operations – Real Estate	 	 	8,927	 	 	 	27,193	 	 	 	28,917	 	
Discontinued operations – NAC	 	 	8,499	 	 	 	(19,971	)	 	 	(12,259	)	
Proceeds from the sale of the Phoenix Suns partnership	 	 	23,101	 	 	 	—	 	 	 	—	 	
Purchases of investment securities	 	 	(1,040,955	)	 	 	(877,660	)	 	 	—	 	
Proceeds from sale of investment securities	 	 	951,630	 	 	 	785,810	 	 	 	—	 	
Proceeds from commercial real estate properties	 	 	—	 	 	 	33,297	 	 	 	9,272	 	
Other	 	 	(19,579	)	 	 	(21,040	)	 	 	36,635	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow used for investing activities	 	 	(531,953	)	 	 	(815,071	)	 	 	(890,443	)	
 	 	 	 	 	 	 	 	 	 	
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt	 	 	478,328	 	 	 	656,850	 	 	 	674,919	 	
Short-term borrowings and payments – net	 	 	(15,051	)	 	 	(173,303	)	 	 	(306,079	)	
Dividends paid on common stock	 	 	(166,772	)	 	 	(157,417	)	 	 	(137,721	)	
Repayment of long-term debt	 	 	(604,015	)	 	 	(366,497	)	 	 	(354,916	)	
Common stock equity issuance	 	 	18,291	 	 	 	—	 	 	 	199,238	 	
Other	 	 	11,396	 	 	 	8,181	 	 	 	2,624	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow (used for) provided by financing activities	 	 	(277,823	)	 	 	(32,186	)	 	 	78,065	 	
 	 	 	 	 	 	 	 	 	 	
NET INCREASE IN CASH AND CASH EQUIVALENTS	 	 	32,304	 	 	 	53,496	 	 	 	48,947	 	
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	 	 	131,062	 	 	 	77,566	 	 	 	28,619	 	
 	 	 	 	 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS AT END OF YEAR	 	$	163,366	 	 	$	131,062	 	 	$	77,566	 	
 	 	 	 	 	 	 	 	 	 	
Supplemental disclosure of cash flow information Cash paid during the period for:	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes paid/(refunded)	 	$	66,447	 	 	$	32,816	 	 	$	(17,918	)	
Interest paid, net of amounts capitalized	 	$	191,865	 	 	$	161,581	 	 	$	126,322	 	
See Notes to Pinnacle West’s Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
COMMON STOCK (Note 7)
Balance at beginning of year	 	$	1,744,354	 	 	$	1,737,258	 	 	$	1,536,924	 	
Issuance of common stock	 	 	18,291	 	 	 	—	 	 	 	199,238	 	
Other	 	 	6,402	 	 	 	7,096	 	 	 	1,096	 	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	1,769,047	 	 	 	1,744,354	 	 	 	1,737,258	 	
 	 	 	 	 	 	 	 	 	 	
TREASURY STOCK (Note 7)	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	(3,273	)	 	 	(4,358	)	 	 	(5,886	)	
Purchase of treasury stock	 	 	(2,986	)	 	 	—	 	 	 	(5,971	)	
Reissuance of treasury stock used for stock compensation, net	 	 	5,831	 	 	 	1,085	 	 	 	7,499	 	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	(428	)	 	 	(3,273	)	 	 	(4,358	)	
 	 	 	 	 	 	 	 	 	 	
RETAINED EARNINGS	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	1,127,699	 	 	 	1,044,537	 	 	 	1,032,850	 	
Net income	 	 	243,195	 	 	 	240,579	 	 	 	149,408	 	
Common stock dividends	 	 	(166,772	)	 	 	(157,417	)	 	 	(137,721	)	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	1,204,122	 	 	 	1,127,699	 	 	 	1,044,537	 	
 	 	 	 	 	 	 	 	 	 	
ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	(39,001	)	 	 	(91,284	)	 	 	(64,565	)	
Minimum pension liability adjustment, net of tax expense (benefit) of ($9,756), $3,700 and ($46,109)	 	 	(15,224	)	 	 	4,700	 	 	 	(70,298	)	
Unrealized gain on derivative instruments, net of tax expense of $31,117, $33,298 and $28,820	 	 	48,226	 	 	 	51,089	 	 	 	43,939	 	
Reclassification of realized gain to income, net of tax benefit of ($10,695), ($2,343) and ($237)	 	 	(16,546	)	 	 	(3,506	)	 	 	(360	)	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	(22,545	)	 	 	(39,001	)	 	 	(91,284	)	
 	 	 	 	 	 	 	 	 	 	
TOTAL COMMON STOCK EQUITY	 	$	2,950,196	 	 	$	2,829,779	 	 	$	2,686,153	 	
 	 	 	 	 	 	 	 	 	 	
COMPREHENSIVE INCOME (LOSS)
Net income	 	$	243,195	 	 	$	240,579	 	 	$	149,408	 	
Other comprehensive income (loss)	 	 	16,456	 	 	 	52,283	 	 	 	(26,719	)	
 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	$	259,651	 	 	$	292,862	 	 	$	122,689	 	
 	 	 	 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Consolidated Financial Statements.
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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Consolidation and Nature of Operations
     Pinnacle West’s Consolidated Financial Statements include the accounts of Pinnacle West and our subsidiaries: APS, Pinnacle West Energy, APS Energy Services, SunCor and El Dorado (principally NAC). See Note 22 for a discussion of the sale of NAC in November 2004. Significant intercompany accounts and transactions between the consolidated companies have been eliminated.
     APS is a vertically-integrated electric utility that provides either retail or wholesale electric service to substantially all of the state of Arizona, with the major exceptions of about one-half of the Phoenix metropolitan area, the Tucson metropolitan area and Mohave county in northwestern Arizona. Through its marketing and trading division, APS also generates, sells and delivers electricity to wholesale customers in the western United States. Pinnacle West Energy, which was formed in 1999, is the subsidiary through which we conduct our unregulated generation operations. APS Energy Services was formed in 1998 and provides competitive commodity energy and energy-related products to key customers in competitive markets in the western United States. SunCor is a developer of residential, commercial and industrial real estate projects in Arizona, New Mexico, Idaho and Utah. El Dorado is an investment firm.
Accounting Records and Use of Estimates
     Our accounting records are maintained in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have reclassified certain prior year amounts to conform to the current year presentation.
Derivative Accounting
     We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal and emissions allowances and in interest rates. We manage risks associated with these market fluctuations by utilizing various instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of our overall risk management program, we use such instruments to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. In addition, subject to specified risk parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit from market price movements.
     We account for our derivative contracts in accordance with SFAS No. 133, as amended by SFAS No. 149, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 requires that entities recognize all derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. Changes in the fair value of derivative instruments are either recognized periodically in income or, if certain hedge criteria are met, in common stock equity (as a component of other comprehensive income (loss)). SFAS No. 133 provides a scope exception for contracts that meet the normal purchases and sales criteria specified in the standard.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Prior to the fourth quarter of 2002, we accounted for our trading activity at fair value, with changes in fair value reported in earnings as required by EITF 98-10, “Accounting for Contracts Involved in Energy Trading and Risk Management Activities.” In the fourth quarter of 2002, we adopted EITF 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities,” which rescinded EITF 98-10. We recorded a $66 million after-tax charge in net income as a cumulative effect adjustment for the previously recorded accumulated unrealized mark-to-market on energy trading contracts that did not meet the accounting definition of a derivative. Our energy trading contracts that are derivatives are accounted for at fair value under SFAS No. 133, as amended. Energy trading contracts that do not meet the definition of a derivative are now accounted for on an accrual basis with the associated revenues and costs recorded at the time the contracted commodities are delivered or received.
     Under fair value (mark-to-market) accounting, derivative contracts for the purchase or sale of energy commodities are reflected at fair market value, net of valuation adjustments, with resulting unrealized gains and losses recorded as current or long-term assets and liabilities from risk management and trading activities on the Consolidated Balance Sheets.
     We determine fair market value using actively-quoted prices when available. We consider quotes for exchange-traded contracts and over-the-counter quotes obtained from independent brokers to be actively-quoted.
     When actively-quoted prices are not available, we use prices provided by other external sources. This includes quarterly and calendar year quotes from independent brokers, which we convert into monthly prices using historical relationships.
     For options, long-term contracts and other contracts for which price quotes are not available, we use models and other valuation methods. The valuation models we employ utilize spot prices, forward prices, historical market data and other factors to forecast future prices. The primary valuation technique we use to calculate the fair value of contracts where price quotes are not available is based on the extrapolation of forward pricing curves using observable market data for more liquid delivery points in the same region and actual transactions at the more illiquid delivery points. We also value option contracts using a variation of the Black-Scholes option-pricing model.
     For non-exchange traded contracts, we calculate fair market value based on the average of the bid and offer price, and we discount to reflect net present value. We maintain certain valuation adjustments for a number of risks associated with the valuation of future commitments. These include valuation adjustments for liquidity and credit risks based on the financial condition of counterparties. The liquidity valuation adjustment represents the cost that would be incurred if all unmatched positions were closed-out or hedged.
     The credit valuation adjustment represents estimated credit losses on our overall exposure to counterparties, taking into account netting arrangements, expected default experience for the credit rating of the counterparties and the overall diversification of the portfolio. Counterparties in the portfolio consist principally of major energy companies, municipalities, local distribution companies and financial institutions. We maintain credit policies that management believes minimize overall credit risk. Determination of the credit quality of counterparties is based upon a number of factors, including credit ratings, financial condition, project economics and collateral requirements. When
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
applicable, we employ standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty.
     The use of models and other valuation methods to determine fair market value often requires subjective and complex judgment. Actual results could differ from the results estimated through application of these methods. Our marketing and trading portfolio includes structured activities hedged with a portfolio of forward purchases that protects the economic value of the sales transactions. Our practice is to hedge within timeframes established by the ERMC.
     See Note 18 for additional information about our derivative and energy trading accounting policies.
Regulatory Accounting
     APS is regulated by the ACC and the FERC. The accompanying financial statements reflect the rate-making policies of these commissions. For regulated operations, we prepare our financial statements in accordance with 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. As a result, we capitalize certain costs that would be included as expense in the current period by unregulated companies. Regulatory assets represent incurred costs that have been deferred because they are probable of future recovery in customer rates. Regulatory liabilities generally represent expected future costs that have already been collected from customers.
     Management continually assesses whether our regulatory assets are probable of future recovery by considering factors such as applicable regulatory environment changes and recent rate orders to other regulated entities in the same jurisdiction. This determination reflects the current political and regulatory climate in the state and is subject to change in the future. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings.
     As part of the 1999 Settlement Agreement, APS amortized certain regulatory assets over a period that ended June 30, 2004. Amortization in the last three years is as follows (dollars in millions):

2002	 	2003	 	 	2004	 	
       $115	 	$	86	 	 	$	18	 	
     The detail of regulatory assets is as follows (dollars in millions):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
Electric industry restructuring transition costs (Note 3)	 	$	50	 	 	$	46	 	
Deferred compensation	 	 	24	 	 	 	24	 	
Loss on reacquired debt (a)	 	 	17	 	 	 	12	 	
Capital contributions on the Mead-Phoenix transmission line	 	 	13	 	 	 	11	 	
Regulatory asset for deferred income taxes	 	 	12	 	 	 	9	 	
Spent nuclear fuel storage (Note 11)	 	 	11	 	 	 	7	 	
Balance recoverable under the 1999 Settlement Agreement	 	 	—	 	 	 	18	 	
Other	 	 	8	 	 	 	5	 	
 	 	 	 	 	 	 	
Total regulatory assets	 	$	135	 	 	$	132	 	

(a)	 	See “Reacquired Debt Costs” below.	
     The detail of regulatory liabilities is as follows (dollars in millions): 

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
Removal costs (a)	 	$	462	 	 	$	439	 	
Deferred gains on utility property	 	 	20	 	 	 	20	 	
Deferred interest income (b)	 	 	22	 	 	 	8	 	
Other	 	 	3	 	 	 	2	 	
 	 	 	 	 	 	 	
Total regulatory liabilities	 	$	507	 	 	$	469	 	

(a)	 	See Note 12 for information on Asset Retirement Obligations.	
 		
(b)	 	See “ACC Financing Orders” in Note 3 for information on the “APS Loan”.	
Utility Plant and Depreciation
     Utility plant is the term we use to describe the business property and equipment that supports electric service, consisting primarily of generation, transmission and distribution facilities. We report utility plant at its original cost, which includes:

 	•  	material and labor;	
 	
 	•  	contractor costs;	
 	
 	•  	capitalized leases;	
 	
 	•  	construction overhead costs (where applicable); and	
 	
 	•  	capitalized interest or an allowance for funds used during construction.	
     We expense the costs of plant outages, major maintenance and routine maintenance as incurred. We charge retired utility plant to accumulated depreciation. Prior to 2003, we charged removal costs, less salvage, to accumulated depreciation. Effective January 1, 2003, we applied the provisions of SFAS No. 143. The standard requires that liabilities associated with the retirement of tangible long-lived assets be recognized at fair value as incurred and capitalized as part of the related tangible long-lived assets. Accretion of the liability due to the passage of time is an operating
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expense and the capitalized cost is depreciated over the useful life of the long-lived asset. See Note 12.
     APS records a regulatory liability for the asset retirement obligations related to its regulated assets. This regulatory liability represents the difference between the amount that has been recovered in regulated rates and the amount calculated under SFAS No. 143. APS believes it can recover in regulated rates the transition and ongoing current period costs calculated in accordance with SFAS No. 143.
     We record depreciation on utility plant on a straight-line basis over the remaining useful life of the related assets. The approximate remaining average useful lives of our utility property at December 31, 2004 were as follows:

 	•  	Fossil plant – 23 years;	
 	
 	•  	Nuclear plant – 18 years;	
 	
 	•  	Other generation – 26 years;	
 	
 	•  	Transmission – 36 years;	
 	
 	•  	Distribution – 23 years; and	
 	
 	•  	Other – 8 years.	
     For the years 2002 through 2004, the depreciation rates, as prescribed by our regulators, ranged from a low of 1.51% to a high of 12.5%. The weighted-average rate was 3.36% for 2004, 3.35% for 2003 and 3.35% for 2002. We depreciate non-utility property and equipment over the estimated useful lives of the related assets, ranging from 3 to 55 years.
Investments
     El Dorado accounts for its investments using the equity (if significant influence) and cost (less than 20% ownership) methods. See Note 22 for a discussion of the sale of NAC.
     The Company’s investments have been reviewed in accordance with EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” and no other-than-temporary impairments were identified.
Capitalized Interest
     Capitalized interest represents the cost of debt funds used to finance non-regulated construction projects. Plant construction costs, including capitalized interest, are expensed through depreciation when completed projects are placed into commercial operation. The rate used to calculate capitalized interest was a composite rate of 4.44% for 2004, 4.55% for 2003 and 4.80% for 2002. Capitalized interest ceases to accrue when construction is complete.
Allowance for Funds Used During Construction
     AFUDC represents the approximate net composite interest cost of borrowed funds and a reasonable return on the equity funds used for construction of regulated utility plant. Plant construction costs, including AFUDC, are recovered in authorized rates through depreciation when completed projects are placed into commercial operation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     AFUDC was calculated by using a composite rate of 8.42% for 2004 and 8.55% for 2003. APS compounds AFUDC monthly and ceases to accrue AFUDC when construction work is completed and the property is placed in service.
     In 2003, APS returned to the AFUDC method of capitalizing interest and equity costs associated with construction projects in a regulated utility. This is consistent with APS returning to a vertically-integrated utility, as evidenced by APS’ 2003 general rate case filing, which includes the request for rate recognition of generation assets. Prior to 2003, APS capitalized interest in accordance with SFAS No. 34, “Capitalization of Interest Cost.” Although AFUDC both increases the plant balance and results in higher current earnings during the construction period, AFUDC is realized in future revenues through depreciation provisions included in rates. This change increased earnings by $11 million in 2003 as compared to what it would have been under SFAS No. 34.
Electric Revenues
     We derive electric revenues from sales of electricity to our regulated Native Load customers and sales to other parties from our marketing and trading activities. Revenues related to the sale of electricity are generally recorded when service is rendered or electricity is delivered to customers. However, the determination and billing of electricity sales to individual Native Load customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of electricity delivered to customers since the date of the last meter reading and billing and the corresponding unbilled revenue are estimated. We exclude sales taxes on electric revenues from both revenue and taxes other than income taxes.
     Revenues from our Native Load customers and non-derivative instruments are reported on a gross basis on Pinnacle West’s Consolidated Statements of Income. In the electricity business, some contracts to purchase energy are netted against other contracts to sell energy. This is called “book-out” and usually occurs in contracts that have the same terms (quantities and delivery points) and for which power does not flow. We net these book-outs, which reduces both revenues and purchased power and fuel costs.
     All gains and losses (realized and unrealized) on energy trading contracts that qualify as derivatives are included in marketing and trading segment revenues on the Consolidated Statements of Income on a net basis.
Real Estate Revenues
     SunCor recognizes revenue from land, home and qualifying commercial operating assets sales in full, provided (a) the income is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will not be collectible can be estimated, and (b) the earnings process is virtually complete, that is, SunCor is not obligated to perform significant activities after the sale to earn the income. Unless both conditions exist, recognition of all or part of the income is postponed under the percentage of completion method per SFAS No. 66, “Accounting for Sales of Real Estate.” SunCor recognizes income only after the assets’ title has passed. A single method of recognizing income is applied to all sales transactions within an entire home, land or commercial development project. Commercial property and management revenues are recorded over the term of the lease or period in which services are provided. In addition, see Note 22 – Discontinued Operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Real Estate Investments
     Real estate investments primarily include SunCor’s land, home inventory and investments in joint ventures. Land includes acquisition costs, infrastructure costs, property taxes and capitalized interest directly associated with the acquisition and development of each project. Land under development and land held for future development are stated at accumulated cost, except that, to the extent that such land is believed to be impaired, it is written down to fair value. Land held for sale is stated at the lower of accumulated cost or estimated fair value less costs to sell. Home inventory consists of construction costs, improved lot costs, capitalized interest and property taxes on homes under construction. Home inventory is stated at the lower of accumulated cost or estimated fair value less costs to sell. Investments in joint ventures for which SunCor does not have a controlling financial interest are not consolidated but are accounted for using the equity method of accounting. In 2003, SunCor acquired two joint ventures for $10 million and consolidated $53 million of assets and $43 million of liabilities, which are included on the Consolidated Balance Sheets at December 31, 2003. The $10 million cash investment is included on the other investing line of the Consolidated Statements of Cash Flow at December 31, 2003. In addition, see Note 22 – Discontinued Operations.
Cash and Cash Equivalents
     We consider all highly liquid investments purchased with an initial maturity of three months or less to be cash equivalents.
     We have investments in auction rate securities in which interest rates are reset on a short-term basis; however, the underlying contract maturity dates extend beyond three months. We classify the investments in auction rate securities as investments in debt securities on our Consolidated Balance Sheets. We have reclassified cash at December 31, 2003 of $92 million to investment in debt securities. Included in that reclassification is $70 million related to APS. The purchase and sale activities related to these investments have also been reclassified on the Consolidated Statement of Cash Flows.
Nuclear Fuel
     APS charges nuclear fuel to fuel expense by using the unit-of-production method. The unit-of-production method is an amortization method based on actual physical usage. APS divides the cost of the fuel by the estimated number of thermal units it expects to produce with that fuel. APS then multiplies that rate by the number of thermal units produced within the current period. This calculation determines the current period nuclear fuel expense.
     APS also charges nuclear fuel expense for the permanent disposal of spent nuclear fuel. The DOE is responsible for the permanent disposal of spent nuclear fuel, and it charges APS $0.001 per kWh of nuclear generation. See Note 11 for information about spent nuclear fuel disposal and Note 12 for information on nuclear decommissioning costs.
Income Taxes
     Income taxes are provided using the asset and liability approach prescribed by SFAS No. 109, “Accounting for Income Taxes.” We file our federal income tax return on a consolidated basis and we file our state income tax returns on a consolidated or unitary basis. In accordance with our intercompany tax sharing agreement, federal and state income taxes are allocated to each subsidiary
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as though each subsidiary filed a separate income tax return. Any difference between that method and the consolidated (and unitary) income tax liability is attributed to the parent company. See Note 4.
Reacquired Debt Costs
     For reacquired debt costs related to the regulated portion of APS’ business, APS defers those gains and losses incurred upon early retirement and is seeking recovery of the net amount of losses in the APS general rate case (see Note 3).
Stock-Based Compensation
     In 2002, we began applying the fair value method of accounting for stock-based compensation, as provided for in SFAS No. 123, “Accounting for Stock-Based Compensation.” The fair value method of accounting is the preferred method. In accordance with the transition requirements of SFAS No. 123, we applied the fair value method prospectively, beginning with 2002 stock grants. In prior years, we recognized stock compensation expense based on the intrinsic value method allowed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”
     The following chart compares our net income, stock compensation expense and earnings per share to what those items would have been if we had recorded stock compensation expense based on the fair value method for all stock grants through 2004 (dollars in thousands, except per share amounts): 

 	 	2004	 	 	2003	 	 	2002	 	
Net Income as reported:	 	$	243,195	 	 	$	240,579	 	 	$	149,408	 	
Add: Stock compensation expense included in reported net income (net of tax)	 	 	4,690	 	 	 	3,514	 	 	 	2,347	 	
Deduct: Total stock compensation expense determined under fair value method (net of tax)	 	 	(5,311	)	 	 	(5,220	)	 	 	(3,742	)	
 	 	 	 	 	 	 	 	 	 	
Pro forma net income	 	$	242,574	 	 	$	238,873	 	 	$	148,013	 	
 	 	 	 	 	 	 	 	 	 	
Earnings per share – basic:	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	2.66	 	 	$	2.64	 	 	$	1.76	 	
Pro forma (fair value method)	 	$	2.65	 	 	$	2.62	 	 	$	1.74	 	
Earnings per share – diluted:	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	2.66	 	 	$	2.63	 	 	$	1.76	 	
Pro forma (fair value method)	 	$	2.65	 	 	$	2.61	 	 	$	1.74	 	
     In order to calculate the fair value of the 2004, 2003 and 2002 stock option grants and the pro forma information above, we calculated the fair value of each fixed stock option in the incentive plans using the Black-Scholes option-pricing model. The fair value was calculated based on the date
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the option was granted. The following weighted-average assumptions were also used in order to calculate the fair value of the stock options:

 	 	2004	 	 	2003	 	 	2002	 	
Risk-free interest rate	 	 	3.15	%	 	 	3.35	%	 	 	4.17	%	
Dividend yield	 	 	4.76	%	 	 	5.26	%	 	 	4.17	%	
Volatility	 	 	17.04	%	 	 	38.03	%	 	 	22.59	%	
Expected life (months)	 	 	60	 	 	 	60	 	 	 	60	 	
     See Note 16 for further discussion about our stock compensation plans.
Intangible Assets
     We have no goodwill recorded and have separately disclosed other intangible assets on Pinnacle West’s Consolidated Balance Sheets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The intangible assets are amortized over their finite useful lives. Amortization expense was $34 million in 2004, $25 million in 2003, and $21 million in 2002. Estimated amortization expense on existing intangible assets over the next five years is $33 million in 2005, $31 million in 2006, $25 million in 2007, $16 million in 2008, and $1 million in 2009. At December 31, 2004, the weighted average amortization period for intangible assets is 7 years.
2. New Accounting Standards
     In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment.” The standard establishes accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123R is effective as of the beginning of the first interim or annual period that begins after June 15, 2005. We are currently accounting for stock-based compensation using the fair value method and are evaluating the impacts of this new guidance, but we do not believe it will have a material impact on our financial statements.
     See the following Notes for information about new accounting standards and other accounting matters:

 	•  	Note 8 for FSP 106-2 regarding the Medicare Prescription Drug, Improvement and Modernization Act related to retirement plans and other benefits;	
 	
 	•  	Note 18 for EITF 02-3 and DIG Issue No. C15 related to accounting for derivatives and energy contracts; and	
 	
 	•  	Note 20 for FIN No. 46R related to variable interest entities.	
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3. Regulatory Matters
Electric Industry Restructuring
State
      APS General Rate Case; 2004 Settlement Agreement
     On June 27, 2003, APS filed a general rate case with the ACC and requested a $175.1 million, or 9.8%, increase in its annual retail electricity revenues, intended to become effective July 1, 2004. In this rate case, APS updated its cost of service and rate design.
     The general rate case also addresses the implementation of rate adjustment mechanisms that were the subject of ACC hearings in April 2003. The rate adjustment mechanisms, which were authorized as a result of the 1999 Settlement Agreement, would allow APS to recover several types of costs, the most significant of which are power supply costs (fuel and purchased power costs) and costs associated with complying with the Rules.
     On August 18, 2004, a substantial majority of the parties to the rate case, including APS, the ACC staff, the Arizona Residential Utility Consumer Office, other customer groups, and merchant power plant intervenors entered into an agreement that proposes terms under which the rate case would be settled (the “2004 Settlement Agreement”).
     Key financial components of the 2004 Settlement Agreement, which is subject to ACC approval, are as follows:

 	•  	APS would receive an annual retail rate increase of approximately $75.5 million, or 4.21%. The increase would consist of an increase in base rates of approximately 3.77% and an increase of approximately 0.44% for recovery over five years of the past costs of compliance with the ACC’s retail electric competition rules.	
 	
 	•  	APS would acquire the PWEC Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and rate base the PWEC Dedicated Assets at a rate base value of $700 million, which would result in a mandatory rate base disallowance of $150 million. As a result, for financial reporting purposes, APS would recognize a one-time, after-tax net plant write-off of approximately $90 million in the period when the plant transfer to APS is completed and would reduce annual depreciation expense by approximately $5 million.	
 	
 	•  	To bridge the time between the effective date of the rate increase and the actual date the PWEC Dedicated Assets transfer, APS and Pinnacle West Energy would enter into a cost-based purchase power agreement (the “Bridge PPA”), which would be based on the value of the PWEC Dedicated Assets described in the previous bullet point. The Bridge PPA would remain in effect until the FERC approves the transfer of the PWEC Dedicated Assets to APS and the transfer is completed.	

 	•  	If the FERC were to issue an order denying APS’ request to acquire the PWEC Dedicated Assets, the Bridge PPA would become a 30-year purchased power agreement, with prices reflecting cost-of-service as if APS had	
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acquired and rate-based the PWEC Dedicated Assets at the value described above.

 	•  	If the FERC were to issue an order (a) approving APS’ request to transfer the PWEC Dedicated Assets at a value materially less than $700 million, (b) approving the transfer of fewer than all of the PWEC Dedicated Assets, or (c) that was materially inconsistent with the 2004 Settlement Agreement, APS would file an appropriate application with the ACC so that rates could be adjusted. In these circumstances, the Bridge PPA would continue at least until the conclusion of the subsequent proceeding to consider any appropriate adjustment to APS’ rates.	

 	•  	A PSA would provide for the recovery of variations in fuel and purchased power costs, subject to specified parameters and procedures.	
 	
 	•  	APS would not restore and recover in rates the $234 million write-off recorded in 1999 as a result of the 1999 Settlement Agreement. As a result, annual amortization expense for financial reporting purposes would be approximately $16 million less than if the $234 million write-off had been restored and amortized over a 15-year period as originally requested.	
 	
 	•  	APS would adopt longer service lives than originally requested for certain depreciable assets, which would have the effect of reducing annual depreciation expense for financial reporting purposes by approximately $26 million.	
     On February 28, 2005, the administrative law judge in the general rate case issued a recommended order. The recommended order proposes ACC approval of the 2004 Settlement Agreement with two changes related to the PSA. First, the amount of gas costs that APS could recover under the annual PSA would be limited to $500 million per year. Second, although the 2004 Settlement Agreement provides that the PSA would remain in effect for a minimum five-year period, under the recommended order the ACC would be able to eliminate the PSA at any time, if appropriate, if APS files a rate case before the expiration of the five-year period or APS does not comply with the terms of the PSA. If APS exceeds the gas costs that could be recoverable under the PSA or if the ACC eliminates the PSA, APS would retain the right to file a rate case to reset its base rates.
     On March 14, 2005, the parties to the 2004 Settlement Agreement jointly filed suggested changes to the recommended order addressing, among other things, the recommended order’s proposed treatment of the PSA. The ACC has scheduled open meetings on March 25 and March 28, 2005 to consider the recommended order and suggested changes. APS cannot predict the outcome of this matter.
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      ACC Financing Order
     On May 12, 2003, APS issued $500 million of debt pursuant to the Financing Order and made a $500 million loan to Pinnacle West Energy. Pinnacle West Energy distributed the net proceeds of that loan to us to fund the repayment of a portion of the debt we incurred to finance the construction of the PWEC Dedicated Assets.
     The ACC granted the Financing Order subject to various conditions. One of these conditions is that APS must maintain a common equity ratio of at least forty percent and may not pay common dividends if such payment would reduce its common equity ratio below that threshold, unless otherwise waived by the ACC.
     In addition, the Financing Order required the ACC staff to conduct an inquiry into our and our affiliates’ compliance with the retail electric competition and related rules and decisions. On June 13, 2003, APS submitted its report on these matters to the ACC staff. As part of the 2004 Settlement Agreement, this inquiry would be concluded with no further action by the ACC.
      Retail Electric Competition Rules
     The Rules approved by the ACC include the following major provisions:

 	•  	They apply to virtually all Arizona electric utilities regulated by the ACC, including APS.	
 	
 	•  	Effective January 1, 2001, retail access became available to all APS retail electricity customers.	
 	
 	•  	Electric service providers that get CC&N’s from the ACC can supply only competitive services, including electric generation, but not electric transmission and distribution.	
 	
 	•  	Affected utilities must file ACC tariffs that unbundle rates for noncompetitive services.	
 	
 	•  	The ACC shall allow a reasonable opportunity for recovery of unmitigated stranded costs.	
 	
 	•  	Absent an ACC waiver, prior to January 1, 2001, each affected utility (except certain electric cooperatives) must transfer all competitive electric assets and services to an	
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unaffiliated party or parties or to a separate corporate affiliate or affiliates. Under the 1999 Settlement Agreement, APS received a waiver to allow transfer of its competitive electric assets and services to affiliates no later than December 31, 2002. However, as discussed below, in 2002 the ACC reversed its decision, as reflected in the Rules, to require APS to transfer its generation assets.
     Under the 1999 Settlement Agreement, the Rules are to be interpreted and applied, to the greatest extent possible, in a manner consistent with the 1999 Settlement Agreement. If the two cannot be reconciled, APS must seek, and the other parties to the 1999 Settlement Agreement must support, a waiver of the Rules in favor of the 1999 Settlement Agreement.
     On November 27, 2000, a Maricopa County, Arizona, Superior Court judge issued a final judgment holding that the Rules are unconstitutional and unlawful in their entirety due to failure to establish a fair value rate base for competitive electric service providers and because certain of the Rules were not submitted to the Arizona Attorney General for certification. The judgment also invalidates all ACC orders authorizing competitive electric service providers, including APS Energy Services, to operate in Arizona. We do not believe the ruling affected the 1999 Settlement Agreement. The 1999 Settlement Agreement was not at issue in the consolidated cases before the judge. Further, the ACC made findings related to the fair value of APS’ property in the order approving the 1999 Settlement Agreement. The ACC and other parties aligned with the ACC appealed the ruling to the Arizona Court of Appeals, and in January 2004, the Court invalidated some, but not all, of the Rules as either violative of Arizona’s constitutional requirement that the ACC consider the “fair value” of a utility’s property in setting rates or as being beyond the ACC’s constitutional and statutory powers. Other Rules were set aside for failure to submit such regulations to the Arizona Attorney General for approval as required by statute. A request for the Arizona Supreme Court to review the Court of Appeals decision was denied on January 4, 2005.
      Track A Order
     On September 10, 2002, the ACC issued the Track A Order, in which the ACC, among other things:

 	•  	reversed its decision, as reflected in the Rules, to require APS to transfer its generation assets either to an unrelated third party or to a separate corporate affiliate; and	
 	
 	•  	unilaterally modified the 1999 Settlement Agreement, which authorized APS’ transfer of its generating assets, and directed APS to cancel its activities to transfer its generation assets to Pinnacle West Energy.	
     On November 15, 2002, APS filed appeals of the Track A Order in the Maricopa County, Arizona Superior Court and in the Arizona Court of Appeals. Arizona Public Service Company vs. Arizona Corporation Commission , CV 2002-0222 32. Arizona Public Service Company vs. Arizona Corporation Commission , 1CA CC 02-0002. On December 13, 2002, APS and the ACC staff agreed to principles for resolving certain issues raised by APS in its appeals of the Track A Order. The major provisions of the principles include, among other things, the following:

 	•  	APS and the ACC staff agreed that it would be appropriate for the ACC to consider the following matters in APS’ general rate case, which was filed on June 27, 2003:	
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 	•  	the generating assets to be included in APS’ rate base, including the question of whether the PWEC Dedicated Assets should be included in APS’ rate base;	
 	
 	•  	the appropriate treatment of the $234 million pretax asset write-off agreed to by APS as part of the 1999 Settlement Agreement; and	
 	
 	•  	the appropriate treatment of costs incurred by APS in preparation for the previously anticipated transfer of generation assets to Pinnacle West Energy.	

 	•  	As a result of the ACC’s issuance of the Financing Order, APS’ appeals of the Track A Order are limited to the issues described in the preceding bullet points.	
     On August 27, 2003, APS, Pinnacle West and Pinnacle West Energy filed a lawsuit asserting damage claims relating to the Track A Order. Arizona Public Service Company et al. v. The State of Arizona ex rel. , Superior Court of the State of Arizona, County of Maricopa, No. CV2003-016372.
     Upon the ACC’s issuance of a final, non-appealable order approving the 2004 Settlement Agreement, APS, Pinnacle West, and Pinnacle West Energy will dismiss the litigation described under this “Track A” heading.
      Track B Order
     On March 14, 2003, the ACC issued the Track B Order, which required APS to solicit bids for certain estimated amounts of capacity and energy for periods beginning July 1, 2003. For 2003, APS was required to solicit competitive bids for about 2,500 MW of capacity and about 4,600 gigawatt-hours of energy, or approximately 20% of APS’ total retail energy requirements.
     APS issued requests for proposals in March 2003 and, by May 6, 2003, APS entered into contracts to meet all or a portion of its requirements for the years 2003 through 2006 as follows:

 	(1)  	Pinnacle West Energy agreed to provide 1,700 MW in July through September of 2003 and in June through September of 2004, 2005 and 2006, by means of a unit contingent contract.	
 	
 	(2)  	PPL EnergyPlus, LLC agreed to provide 112 MW in July through September of 2003 and 150 MW in June through September of 2004 and 2005, by means of a unit contingent contract.	
 	
 	(3)  	Panda Gila River LP agreed to provide 450 MW in October of 2003 and 2004 and May of 2004 and 2005, and 225 MW from November 2003 through April 2004 and from November 2004 through April 2005, by means of firm call options.	
     Effective upon final ACC approval of the 2004 Settlement Agreement and the closing of the purchase of the Sundance Plant discussed below, the Track B contracts with Pinnacle West Energy and PPL Energy Plus, LLC will be cancelled.
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      Request for Proposals and Asset Purchase Agreement
     In early December 2003, APS issued a request for proposals (“2003 RFP”) for long-term power supply resources. On June 1, 2004, APS and PPL Sundance, a wholly-owned subsidiary of PPL Corporation, entered into an asset purchase agreement by which APS agreed to purchase the Sundance Plant. The Sundance Plant, which began commercial operation in July 2002, would provide peaking generation support for APS’ system and reduce APS’ growing needs for new generation resources. The purchase price for the Sundance Plant is approximately $190 million.
     On June 1, 2004, APS and PPL Sundance filed a joint application with the ACC with respect to APS’ proposed acquisition of the Sundance Plant. On January 20, 2005, the ACC issued an order confirming APS’ authority to “self-build or buy new generation assets for native load” and stated that APS’ acquisition of the Sundance Plant would be a proper purpose under APS’ existing ACC financing authorizations. APS’ filings with the ACC also had requested that the ACC allow APS to defer for future recovery certain capital and operating costs (net of fuel and purchased power savings) associated with the Sundance Plant acquisition until rate treatment for the Sundance Plant could be considered in APS’ next general rate case. APS’ filings estimated that the deferrals would be approximately $10 million to $15 million before income taxes on an annualized basis. The order issued by the ACC allows APS to record the deferrals for up to 36 months, subject to a number of conditions. However, if APS has a general rate case pending at the end of the 36-month period, the deferral period could extend until the rate case had been decided. The conditions imposed by the order are expected to substantially limit the amount of deferrals that APS will be able to record.
     APS’ acquisition of the Sundance Plant is subject to FERC approval and to customary closing conditions. The transaction is targeted to close in the spring of 2005.
     APS does not expect to enter into any additional transactions as a result of the 2003 RFP.
      Provider of Last Resort Obligation
     Although the Rules allow retail customers to have access to competitive providers of energy and energy services, APS is, under the Rules, the “provider of last resort” for standard-offer, full-service customers under rates that have been approved by the ACC. In the event of shortfalls due to unforeseen increases in load demand or generation or transmission outages, APS may need to purchase additional supplemental power in the wholesale spot market. At various times, prices in the spot wholesale market have significantly exceeded the amount included in APS’ current retail rates. There can be no assurance that APS would be able to fully recover the costs of this power. The proposed settlement of APS’ general rate case, discussed above, would, among other things, allow APS to recover purchased power costs.
      1999 Settlement Agreement
     The following are the major provisions of a settlement agreement entered into in 1999, as approved by the ACC:

 	•  	APS has reduced rates for standard-offer service for customers with loads less than three MW in a series of annual retail electricity price reductions of 1.5% on July 1 for each of the years 1999 to 2003 for a total of 7.5%. Based on the price reductions authorized in the 1999 Settlement Agreement, there were retail price decreases of	
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approximately $24 million ($14 million after taxes), effective July 1, 1999; approximately $28 million ($17 million after taxes), effective July 1, 2000; approximately $27 million ($16 million after taxes), effective July 1, 2001; approximately $28 million ($17 million after taxes), effective July 1, 2002; and approximately $29 million ($18 million after taxes), effective July 1, 2003. For customers having loads of three MW or greater, standard-offer rates have been reduced in varying annual increments that total 5% in the years 1999 through 2002.

 	•  	Unbundled rates being charged by APS for competitive direct access service (for example, distribution services) became effective upon approval of the 1999 Settlement Agreement, retroactive to July 1, 1999, and also became subject to annual reductions beginning January 1, 2000, that vary by rate class, through January 1, 2004.	
 	
 	•  	There was a moratorium on retail price changes for standard-offer and unbundled competitive direct access services until July 1, 2004.	
 	
 	•  	APS is being permitted to defer for later recovery prudent and reasonable costs of complying with the Rules, system benefits costs in excess of the levels included in then-current (1999) rates, and costs associated with the “provider of last resort” and standard-offer obligations for service after July 1, 2004. These costs are to be recovered through an adjustment clause or clauses commencing on July 1, 2004, or when the rate case is decided. See “APS General Rate Case; 2004 Settlement Agreement” above.	
 	
 	•  	APS’ distribution system opened for retail access effective September 24, 1999. Customers were eligible for retail access in accordance with the phase-in adopted by the ACC under the Rules (see “Retail Electric Competition Rules” above), including an additional 140 MW being made available to eligible non-residential customers. APS opened its distribution system to retail access for all customers on January 1, 2001.	
 	
 	•  	Prior to the 1999 Settlement Agreement, APS was recovering substantially all of its regulatory assets through July 1, 2004, pursuant to a 1996 regulatory agreement. In addition, the 1999 Settlement Agreement stated that APS has demonstrated that its allowable stranded costs, after mitigation and exclusive of regulatory assets, are at least $533 million net present value (in 1999 dollars). The 1999 Settlement Agreement also stated that APS will not be allowed to recover $183 million net present value (in 1999 dollars) ($234 million pretax) of the $533 million. The 1999 Settlement Agreement provided that APS will have the opportunity to recover $350 million net present value (in 1999 dollars) through a competitive transition charge that will remain in effect through December 31, 2004, at which time it will terminate. The costs subject to recovery under the adjustment clause described above will be decreased or increased by any over/under-recovery of the $350 million due to sales volume variances. As part of its general rate case request, APS sought the recovery of amounts written off by APS as a result of the 1999 Settlement Agreement. That claim would be given up under the terms of the 2004 Settlement Agreement (see above).	
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 	•  	The 1999 Settlement Agreement required APS to form, or cause to be formed, a separate corporate affiliate or affiliates and transfer to such affiliate(s) its competitive electric assets and services no later than December 31, 2002. The 1999 Settlement Agreement provided that APS would be allowed to defer and later collect, beginning July 1, 2004, 67% of its costs to accomplish the required transfer of generation assets to an affiliate. However, as discussed above under “Track A Order,” in 2002 the ACC unilaterally modified this aspect of the 1999 Settlement Agreement by issuing an order preventing APS from transferring its generation assets. Under the 2004 Settlement Agreement, APS would recover all costs incurred by APS in preparation for the previously anticipated transfer of generation assets to Pinnacle West Energy. See “APS General Rate Case; 2004 Settlement Agreement” above. Such full recovery of divestiture costs would be allowed under the 2004 Settlement Agreement (see above).	
      General
     The regulatory developments and legal challenges to the Rules discussed in this Note have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors providing unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory. As competition in the electric industry continues to evolve, we will continue to evaluate strategies and alternatives that will position us to compete in the new regulatory environment.
Federal
     In July 2002, the FERC adopted a price mitigation plan that constrains the price of electricity in the wholesale spot electricity market in the western United States. The FERC adopted a price cap of $250 per MWh for the period subsequent to October 31, 2002. Sales at prices above the cap must be justified and are subject to potential refund.
     On July 31, 2002, the FERC issued a Notice of Proposed Rulemaking for Standard Market Design for wholesale electric markets. Voluminous comments and reply comments were filed on virtually every aspect of the proposed rule. On April 28, 2003, the FERC Staff issued an additional white paper on the proposed Standard Market Design. The white paper discusses several policy changes to the proposed Standard Market Design, including a greater emphasis on flexibility for regional needs. We cannot currently predict what, if any, impact there may be to the Company if the FERC adopts the proposed rule or any modifications proposed in the comments.
     The FERC has been, though its Office of Marker Oversight and Investigations (OMOI), in the process of auditing a number of electric utilities regarding compliance with its regulations. Such an audit of APS and its affiliates was recently completed, and the FERC has issued an order approving the OMOI audit report and directing certain compliance actions. Arizona Public Service Company , 109 FERC ¶ 61,271 (2004).
     Chief among the FERC’s findings, APS must pay $4 million for its use of unauthorized point-to-point transmission service. Of the $4 million, APS must distribute: (1) $2.75 million to upgrade the West Phoenix-Lincoln Street 230kV transmission line with high capacity composite
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conductors; and (2) $1.25 million as a contribution to established low income energy assistance programs in Arizona. APS must not recover these monies from any existing or future wholesale or retail rate recovery mechanism, nor may it announce the low income payment as a public interest contribution. APS must also take certain corrective actions and make quarterly filings detailing its progress in implementing these actions until all are completed.
     APS believes that the resolution of these matters will not have a material adverse effect on its financial position, results of operations or liquidity.
General
     The regulatory developments and legal challenges to the Rules discussed in this Note have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors providing unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory. As competition in the electric industry continues to evolve, we will continue to evaluate strategies and alternatives that will position us to compete in the new regulatory environment.
4. Income Taxes
     Certain assets and liabilities are reported differently for income tax purposes than they are for financial statements. The tax effect of these differences is recorded as deferred taxes. We calculate deferred taxes using the current income tax rates.
     APS has recorded a regulatory asset and a regulatory liability related to income taxes on its Balance Sheets in accordance with SFAS No. 71. The regulatory asset is for certain temporary differences, primarily the allowance for equity funds used during construction. The regulatory liability relates to excess deferred taxes resulting primarily from the reduction in federal income tax rates as part of the Tax Reform Act of 1986. APS amortizes this amount as the differences reverse.
      As a result of a change in IRS guidance, we claimed a tax deduction related to an APS tax accounting method change on the 2001 federal consolidated income tax return. The accelerated deduction resulted in a $200 million reduction in the current income tax liability and a corresponding increase in the plant-related deferred tax liability. In 2002, we received an income tax refund of approximately $115 million related to our 2001 federal consolidated income tax return. The 2001 federal consolidated income tax return is currently under examination by the IRS. As part of this ongoing examination, the IRS is reviewing this accounting method change and the resultant deduction. During 2004, the current income tax liability was increased, with a corresponding decrease to plant-related deferred tax liability, to reflect the expected outcome of this audit. We do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position, results of operations or liquidity.
     The income tax liability accounts reflect the tax and interest associated with the most probable resolution of all known and measurable tax exposures.
     In 2004 and 2003, we resolved certain prior-year issues with the taxing authorities and recorded tax benefits associated with tax credits and other reductions to income tax expense.
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     The components of income tax expense are as follows (dollars in thousands):

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Current:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	200,133	 	 	$	22,875	 	 	$	(43,492	)	
State	 	 	48,054	 	 	 	3,752	 	 	 	(14,732	)	
 	 	 	 	 	 	 	 	 	 	
Total current	 	 	248,187	 	 	 	26,627	 	 	 	(58,224	)	
 	 	 	 	 	 	 	 	 	 	
Deferred:	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	(113,850	)	 	 	81,756	 	 	 	191,135	 	
Discontinued operations	 	 	—	 	 	 	3,706	 	 	 	5,189	 	
Cumulative effect of accounting change	 	 	—	 	 	 	—	 	 	 	(43,123	)	
 	 	 	 	 	 	 	 	 	 	
Total deferred	 	 	(113,850	)	 	 	85,462	 	 	 	153,201	 	
 	 	 	 	 	 	 	 	 	 	
Total income tax expense	 	 	134,337	 	 	 	112,089	 	 	 	94,977	 	
Less: income tax expense/(benefit) on discontinued operations	 	 	5,480	 	 	 	9,616	 	 	 	(14,045	)	
Less: income tax benefit for cumulative effect of accounting change	 	 	—	 	 	 	—	 	 	 	(43,123	)	
 	 	 	 	 	 	 	 	 	 	
Total income tax expense for income from continuing operations	 	$	128,857	 	 	$	102,473	 	 	$	152,145	 	
 	 	 	 	 	 	 	 	 	 	
     The following chart compares pretax income from continuing operations at the 35% federal income tax rate to income tax expense (dollars in thousands): 

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Federal income tax expense at 35% statutory rate	 	$	127,426	 	 	$	114,897	 	 	$	136,048	 	
Increases (reductions) in tax expense resulting from:	 	 	 	 	 	 	 	 	 	 	 	 	
State income tax net of federal income tax benefit	 	 	13,705	 	 	 	11,522	 	 	 	18,114	 	
Credits and favorable adjustments related to prior years resolved in current year	 	 	(6,138	)	 	 	(17,944	)	 	 	—	 	
Medicare Subsidy Part-D (see Note 8)	 	 	(1,778	)	 	 	—	 	 	 	—	 	
Allowance for equity funds used during construction (see Note 1)	 	 	(1,547	)	 	 	(4,984	)	 	 	—	 	
Other	 	 	(2,811	)	 	 	(1,018	)	 	 	(2,017	)	
 	 	 	 	 	 	 	 	 	 	
Income tax expense	 	$	128,857	 	 	$	102,473	 	 	$	152,145	 	
 	 	 	 	 	 	 	 	 	 	
     The following table sets forth the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands):
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 	 	December 31,	 	
 	 	2004	 	 	2003	 	
Current liability	 	$	(9,057	)	 	$	(631	)	
Long term liability	 	 	(1,227,553	)	 	 	(1,338,527	)	
 	 	 	 	 	 	 	
Accumulated deferred income taxes – net	 	$	(1,236,610	)	 	$	(1,339,158	)	
 	 	 	 	 	 	 	
     The components of the net deferred income tax liability were as follows (dollars in thousands): 

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
DEFERRED TAX ASSETS	 	 	 	 	 	 	 	 	
Regulatory liabilities:	 	 	 	 	 	 	 	 	
Asset Retirement Obligation	 	$	182,086	 	 	$	169,322	 	
Federal excess deferred income taxes	 	 	16,341	 	 	 	18,936	 	
Other	 	 	8,282	 	 	 	8,302	 	
Pension liability	 	 	91,973	 	 	 	73,844	 	
Risk management and trading activities	 	 	91,021	 	 	 	59,293	 	
Deferred gain on Palo Verde Unit 2 sale leaseback	 	 	19,816	 	 	 	21,656	 	
Other	 	 	70,849	 	 	 	64,770	 	
 	 	 	 	 	 	 	
Total deferred tax assets	 	 	480,368	 	 	 	416,123	 	
 	 	 	 	 	 	 	
DEFERRED TAX LIABILITIES	 	 	 	 	 	 	 	 	
Plant-related	 	 	(1,516,174	)	 	 	(1,614,887	)	
Risk management and trading activities	 	 	(146,037	)	 	 	(84,124	)	
Regulatory assets	 	 	(54,767	)	 	 	(56,270	)	
 	 	 	 	 	 	 	
Total deferred tax liabilities	 	 	(1,716,978	)	 	 	(1,755,281	)	
 	 	 	 	 	 	 	
Accumulated deferred income taxes – net	 	$	(1,236,610	)	 	$	(1,339,158	)	
 	 	 	 	 	 	 	
5. Lines of Credit and Short-Term Borrowings
     APS had committed lines of credit with various banks of $325 million at December 31, 2004 and $250 million at December 31, 2003, which were available either to support the issuance of up to $250 million in commercial paper or to be used for bank borrowings, including issuance of letters of credit. The current line matures in May 2007. The commitment fees at December 31, 2004 and 2003 for these lines of credit were 0.15% and 0.175% per annum. APS had no bank borrowings outstanding under these lines of credit at December 31, 2004 and 2003. APS had approximately $4.8 million letters of credit issued under the line at December 31, 2004.
     APS had no commercial paper borrowings outstanding at December 31, 2004 and 2003. By Arizona statute, APS’ short-term borrowings cannot exceed 7% of its total capitalization unless approved by the ACC.
     Pinnacle West had committed lines of credit of $300 million at December 31, 2004 and $275 million at December 31, 2003, which were available either to support the issuance of up to $250
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million in commercial paper or to be used for bank borrowings, including issuance of letters of credit. The current lines mature in October 2007. Pinnacle West had no outstanding borrowings at December 31, 2004 and December 31, 2003. Pinnacle West had approximately $13 million of letters of credit issued under the line at December 31, 2004 and approximately $15 million of letters of credit issued under the line at December 31, 2003. The commitment fees were 0.175% in 2004 and ranged from 0.125% to 0.175% in 2003. Pinnacle West had no commercial paper borrowings outstanding at December 31, 2004 and 2003. All APS and Pinnacle West bank lines of credit and commercial paper agreements are unsecured.
     SunCor had revolving lines of credit totaling $90 million at December 31, 2004 and $120 million at December 31, 2003. The commitment fees were 0.125% in 2004 and 2003. SunCor had $35 million outstanding at December 31, 2004 and $50 million outstanding at December 31, 2003. The weighted-average interest rate was 4.50% at December 31, 2004 and 2003. Interest for 2004 and 2003 was based on LIBOR plus 2% or prime plus 0.5%. The balance is included in short-term debt on the Consolidated Balance Sheets. SunCor had other short-term loans in the amount of $36 million at December 31, 2004 and December 31, 2003. These loans are made up of multiple notes primarily with variable interest rates based on LIBOR plus 2.5% at December 31, 2004 and 2003.
6. Long-Term Debt
     APS has retired all first mortgage bonds issued under its 1946 mortgage and deed of trust, including the first mortgage bonds securing APS senior notes. On April 30, 2004, APS terminated its mortgage and deed of trust and, as a result, is not able to issue any additional first mortgage bonds under that mortgage. SunCor’s short and long-term debt is collateralized by interests in certain real property and Pinnacle West’s debt is unsecured. The following table presents the components of long-term debt on the Consolidated Balance Sheets outstanding at December 31, 2004 and 2003 (dollars in thousands):
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 	 	 	 	 	 	 	 	December 31,	 	
 	 	Maturity	 	Interest	 	 	 	 	 	 	 	
 	 	Dates (a)	 	Rates	 	 	2004	 	 	2003	 	
APS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
First mortgage bonds (b)	 	2004	 	 	6.625	%	 	$	—	 	 	$	80,000	 	
First mortgage bonds (c)	 	2028	 	 	5.50	%	 	 	—	 	 	 	25,000	 	
First mortgage bonds (d)	 	2028	 	 	5.875	%	 	 	—	 	 	 	154,000	 	
Unamortized discount and premium	 	 	 	 	 	 	 	 	(7,968	)	 	 	(8,631	)	
Pollution control bonds (e)	 	2024-2034	 	 	(f	)	 	 	565,860	 	 	 	386,860	 	
Pollution control bonds with senior notes	 	2029	 	 	5.05	%	 	 	90,000	 	 	 	90,000	 	
Unsecured notes (g)	 	2004	 	 	5.875	%	 	 	—	 	 	 	125,000	 	
Unsecured notes	 	2005	 	 	6.25	%	 	 	100,000	 	 	 	100,000	 	
Unsecured notes	 	2005	 	 	7.625	%	 	 	300,000	 	 	 	300,000	 	
Unsecured notes	 	2011	 	 	6.375	%	 	 	400,000	 	 	 	400,000	 	
Unsecured notes	 	2012	 	 	6.50	%	 	 	375,000	 	 	 	375,000	 	
Unsecured notes	 	2033	 	 	5.625	%	 	 	200,000	 	 	 	200,000	 	
Unsecured notes	 	2015	 	 	4.650	%	 	 	300,000	 	 	 	300,000	 	
Unsecured notes (h)	 	2014	 	 	5.80	%	 	 	300,000	 	 	 	—	 	
Secured note	 	2014	 	 	6.00	%	 	 	1,900	 	 	 	—	 	
Senior notes (i)	 	2006	 	 	6.75	%	 	 	83,695	 	 	 	83,695	 	
Capitalized lease obligations	 	2006-2012	 	 	(j	)	 	 	9,854	 	 	 	11,749	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	 	 	 	 	 	 	2,718,341	 	 	 	2,622,673	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SUNCOR	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Notes payable	 	2006-2008	 	 	(k	)	 	 	15,467	 	 	 	17,125	 	
Capitalized lease obligations	 	2005-2007	 	 	8.91	%	 	 	507	 	 	 	728	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	 	 	 	 	 	 	15,974	 	 	 	17,853	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
PINNACLE WEST	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Senior notes (l)	 	2006	 	 	6.40	%	 	 	302,589	 	 	 	515,000	 	
Unamortized discount and premium	 	 	 	 	 	 	 	 	(143	)	 	 	(270	)	
Floating rate senior notes	 	2005	 	 	(m	)	 	 	165,000	 	 	 	165,000	 	
Capitalized lease obligations	 	2005-2007	 	 	5.45	%	 	 	389	 	 	 	1,243	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	 	 	 	 	 	 	467,835	 	 	 	680,973	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total long-term debt (n)	 	 	 	 	 	 	 	 	3,202,150	 	 	 	3,321,499	 	
Less current maturities (n)	 	 	 	 	 	 	 	 	617,165	 	 	 	704,914	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES	 	 	 	 	 	 	 	$	2,584,985	 	 	$	2,616,585	 	

(a)  	This schedule does not reflect the timing of redemptions that may occur prior to maturity.	
 	
(b)  	On March 1, 2004, APS redeemed at maturity $80 million of its First Mortgage Bonds, 6.625% Series due 2004.	
 	
(c)  	On March 31, 2004, APS redeemed $25 million of its First Mortgage Bonds, 5.5% Series due 2028.	
 	
(d)  	On March 31, 2004, APS redeemed $154 million of its First Mortgage Bonds, 5.875% Series due 2028.	
 	
(e)  	On March 31, 2004, Navajo County, Arizona Pollution Control Corporation issued $166 million of variable interest rate pollution control bonds, 2004 Series A-E, due 2034. The bonds were issued to refinance $166 million of outstanding pollution control bonds. The refinanced bonds were all $25 million of the Navajo 5.50% bonds due 2028 (see (c) above) and $141 million of the Navajo 5.875% bonds due 2028 (see (d) above). The Series A-E	
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   	bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Navajo County, Arizona Pollution Control Corporation. Also on March 31, 2004, Coconino County, Arizona Pollution Control Corporation issued $13 million of variable interest rate pollution control bonds, 2004 Series A, due 2034. The bonds were issued to refinance $13 million of outstanding pollution control bonds. The refinanced bonds were $13 million of the Coconino 5.875% bonds due 2028 (see (d) above). The Series A bonds are payable solely from revenues obtained from APS pursuant to a loan agreement between APS and Coconino County, Arizona Pollution Control Corporation.	
 	
(f)  	The weighted-average rate was 1.89% at December 31, 2004 and 1.51% at December 31, 2003. Changes in short-term interest rates would affect the costs associated with this debt.	
 	
(g)  	On February 15, 2004, APS redeemed at maturity $125 million of its 5.875% Notes due 2004.	
 	
(h)  	On June 29, 2004, APS issued $300 million of 5.80% senior unsecured notes due June 30, 2014. The proceeds from the sale of the notes were used to redeem $100 million in aggregate principal amount of APS’ 6.25% Notes due January 15, 2005 and a portion of $300 million in aggregate principal amount of APS’ 7.625% Notes due August 1, 2005.	
 	
(i)  	Through April 30, 2004, APS had outstanding $84 million of first mortgage bonds (senior note mortgage bonds) issued to the senior note trustee as collateral for the senior notes, as well as the $90 million issue due in 2029. The senior note mortgage bonds had the same interest rate, interest payment dates, maturity and redemption provisions as the senior notes. As long as the senior note mortgage bonds secured the senior notes, the senior notes effectively ranked equally with the first mortgage bonds. On April 30, 2004, when APS repaid all of its first mortgage bonds, other than those that secure senior notes, the senior note mortgage bonds were released from the senior note indenture, resulting in their no longer securing the senior notes and ceasing to be outstanding.	
 	
(j)  	The weighted average rate was 5.78% at December 31, 2004 and 5.55% at December 31, 2003 . Capital leases are included in property, plant and equipment on the Consolidated Balance Sheets for both December 31, 2004 and December 31, 2003.	
 	
(k)  	Multiple notes with variable interest rates based on the lenders’ prime plus 0.25%, lenders’ prime plus 1.75% and LIBOR plus 2.50%. There are also two notes at fixed rates of 8.00% and 10.00%.	
 	
(l)  	On January 29, 2004, we entered into a fixed-for-floating interest rate swap transaction on the $300 million 6.40% senior note. The transaction qualifies as a fair value hedge under SFAS No. 133.	
 	
(m)  	The weighted average rate was 2.06% at December 31, 2004 and 1.98% at December 31, 2003.	
 	
(n)  	$281 million of pollution control bonds at December 31, 2003 have been reclassified from long-term to current maturities. The bond holders had the ability to put these bonds to APS in the short-term on the interest rate reset date. Without a demonstrated intent to finance on a long-term basis (by use of credit agreements that extend for more than one year, etc.), GAAP requires the classification of the obligations as current maturities.	
     Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include a debt-to-total-capitalization ratio and an interest coverage test. Pinnacle West and APS comply with these covenants and each anticipates it will continue to meet those and other significant covenant requirements. These covenants require that the ratio of debt to total capitalization cannot exceed 65% for the Company and for APS. At December 31, 2004, the ratio was approximately 53% for Pinnacle West and 54% for APS. The provisions regarding interest
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coverage require a minimum cash coverage of two times the interest requirements for each of the Company and APS. Based on 2004 results, the coverages were approximately 4 times for the Company and 4 times for APS. Failure to comply with such covenant levels would result in an event of default which, generally speaking, would require the immediate repayment of the debt subject to the covenants.
     Neither Pinnacle West’s nor APS’ financing agreements contain “ratings triggers” that would result in an acceleration of the required interest and principal payments in the event of a ratings downgrade. However, in the event of a ratings downgrade, Pinnacle West and/or APS may be subject to increased interest costs under certain financing agreements.
     All of Pinnacle West’s bank agreements contain “cross-default” provisions that would result in defaults and the potential acceleration of payment under these loan agreements if Pinnacle West or APS were to default under other agreements. All of APS’ bank agreements contain cross-default provisions that would result in defaults and the potential acceleration of payment under these bank agreements if APS were to default under other agreements. Pinnacle West’s and APS’ credit agreements generally contain provisions under which the lenders could refuse to advance loans in the event of a material adverse change in our financial condition or financial prospects, except that Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings equal to outstanding commercial paper amounts.
     The following is a list of principal payments due on Pinnacle West’s total long-term debt and capitalized lease requirements:

 	•  	$618 million in 2005;	
 	
 	•  	$398 million in 2006;	
 	
 	•  	$174 million in 2007;	
 	
 	•  	$7 million in 2008;	
 	
 	•  	$1 million in 2009; and	
 	
 	•  	$2,012 million, thereafter.	
7. Common Stock and Treasury Stock
     Our common stock and treasury stock activity during each of the three years 2004, 2003 and 2002 is as follows (dollars in thousands):
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 	 	Common Stock	 	 	Treasury Stock	 	
 	 	Shares	 	 	Amount	 	 	Shares	 	 	Amount	 	
Balance at December 31, 2001	 	 	84,824,947	 	 	$	1,536,924	 	 	 	(101,307	)	 	$	(5,886	)	
Common stock issuance	 	 	6,555,000	 	 	 	199,238	 	 	 	—	 	 	 	—	 	
Purchase of treasury stock	 	 	—	 	 	 	—	 	 	 	(150,500	)	 	 	(5,971	)	
Reissuance of treasury stock for stock compensation (net)	 	 	—	 	 	 	—	 	 	 	126,977	 	 	 	7,499	 	
Other	 	 	—	 	 	 	1,096	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2002	 	 	91,379,947	 	 	 	1,737,258	 	 	 	(124,830	)	 	 	(4,358	)	
Reissuance of treasury stock for stock compensation (net)	 	 	—	 	 	 	—	 	 	 	32,815	 	 	 	1,085	 	
Other	 	 	—	 	 	 	7,096	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2003	 	 	91,379,947	 	 	 	1,744,354	 	 	 	(92,015	)	 	 	(3,273	)	
Common stock issuance	 	 	422,914	 	 	 	18,291	 	 	 	—	 	 	 	—	 	
Purchase of treasury stock	 	 	—	 	 	 	—	 	 	 	(80,000	)	 	 	(2,986	)	
Reissuance of treasury stock for stock compensation (net)	 	 	—	 	 	 	—	 	 	 	162,493	 	 	 	5,831	 	
Other	 	 	—	 	 	 	6,402	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2004	 	 	91,802,861	 	 	$	1,769,047	 	 	 	(9,522	)	 	$	(428	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
8. Retirement Plans and Other Benefits
     Pinnacle West sponsors a qualified defined benefit and account balance pension plan and a non-qualified supplemental excess benefit retirement plan for the employees of Pinnacle West and our subsidiaries. Effective January 1, 2003, Pinnacle West sponsored a new account balance plan for all new employees in place of the defined benefit plan and, as of April 1, 2003, the plan was offered as an alternative to the defined benefit plan for all existing employees. A defined benefit plan specifies the amount of benefits a plan participant is to receive using information about the participant. The pension plan covers nearly all of our employees. The supplemental excess benefit retirement plan covers officers of the Company and highly compensated employees designated for participation by the Board of Directors. Our employees do not contribute to the plans. Generally, we calculate the benefits based on age, years of service and pay.
     Pinnacle West also sponsors other postretirement benefits for the employees of Pinnacle West and our subsidiaries. We provide medical and life insurance benefits to retired employees. Employees must retire to become eligible for these retirement benefits, which are based on years of service and age. For the medical insurance plans, retirees make contributions to cover a portion of the plan costs. For the life insurance plan, retirees do not make contributions. We retain the right to change or eliminate these benefits.
     Pinnacle West uses a December 31 measurement date for its pension and other postretirement benefit plans.
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     On December 8, 2003, the President signed the “Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the Act). One feature of the Act is a government subsidy of prescription drug cost. The FASB issued FSP 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” to address the accounting for the effects of the Act. During the third quarter of 2004, we retroactively adopted the provisions of FSP 106-2, resulting in the remeasurement of our postretirement benefit plans’ accumulated postretirement benefit obligation as of December 31, 2003. The impact of the subsidy is a decrease in the accumulated projected benefit obligation of approximately $65 million and a decrease of approximately $11 million in the net periodic postretirement benefit cost for 2004. The 2004 after-tax reduction to expense is approximately $5 million, excluding amounts capitalized as construction overhead or billed to electric plant participants .
     The following table provides details of the plans’ benefit costs. Also included is the portion of these costs charged to expense, including administrative costs and excluding amounts capitalized as overhead construction or billed to electric plant participants (dollars in thousands): 

 	 	Pension	 	 	Other Benefits	 	
 	 	2004	 	 	2003	 	 	2002	 	 	2004	 	 	2003	 	 	2002	 	
Service cost-benefits earned during the period	 	$	41,207	 	 	$	37,662	 	 	$	30,333	 	 	$	17,557	 	 	$	15,858	 	 	$	12,036	 	
Interest cost on benefit obligation	 	 	81,873	 	 	 	76,951	 	 	 	71,242	 	 	 	29,488	 	 	 	30,163	 	 	 	25,235	 	
Expected return on plan assets	 	 	(78,790	)	 	 	(65,046	)	 	 	(75,652	)	 	 	(24,773	)	 	 	(18,762	)	 	 	(21,116	)	
Amortization of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Transition (asset)/obligation	 	 	(3,227	)	 	 	(3,227	)	 	 	(3,227	)	 	 	3,005	 	 	 	3,005	 	 	 	4,001	 	
Prior service cost/(credit)	 	 	2,401	 	 	 	2,401	 	 	 	2,912	 	 	 	(125	)	 	 	(125	)	 	 	(75	)	
Net actuarial loss	 	 	17,946	 	 	 	18,135	 	 	 	1,846	 	 	 	7,414	 	 	 	9,714	 	 	 	3,072	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net periodic benefit cost	 	$	61,410	 	 	$	66,876	 	 	$	27,454	 	 	$	32,566	 	 	$	39,853	 	 	$	23,153	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Portion of cost charged to expense	 	$	25,792	 	 	$	30,094	 	 	$	13,727	 	 	$	13,678	 	 	$	17,934	 	 	$	11,577	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
APS share of costs charged to expense	 	$	22,483	 	 	$	25,450	 	 	$	10,947	 	 	$	11,923	 	 	$	15,166	 	 	$	9,232	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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     The following table sets forth the plans’ changes in the benefit obligations for the plan years 2004 and 2003 (dollars in thousands):

 	 	Pension	 	 	Other Benefits	 	
 	 	2004	 	 	2003	 	 	2004	 	 	2003	 	
Benefit obligation at January 1	 	$	1,307,628	 	 	$	1,069,577	 	 	$	540,181	 	 	$	409,874	 	
Service cost	 	 	41,207	 	 	 	37,662	 	 	 	17,557	 	 	 	15,858	 	
Interest cost	 	 	81,873	 	 	 	76,951	 	 	 	29,488	 	 	 	30,163	 	
Benefit payments	 	 	(45,195	)	 	 	(43,869	)	 	 	(14,332	)	 	 	(15,749	)	
Actuarial losses/(gains)	 	 	68,731	 	 	 	171,420	 	 	 	(36,681	)	 	 	106,475	 	
Plan amendments	 	 	—	 	 	 	(4,113	)	 	 	—	 	 	 	(6,440	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit obligation at December 31	 	$	1,454,244	 	 	$	1,307,628	 	 	$	536,213	 	 	$	540,181	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     The following table sets forth the qualified pension plan and other benefit plan changes in the fair value of plan assets for the years 2004 and 2003 (dollars in thousands): 

 	 	Pension	 	 	Other Benefits	 	
 	 	2004	 	 	2003	 	 	2004	 	 	2003	 	
Fair value of plan assets at January 1	 	$	887,311	 	 	$	720,807	 	 	$	294,051	 	 	$	223,474	 	
Actual return on plan assets	 	 	102,829	 	 	 	162,571	 	 	 	32,433	 	 	 	46,071	 	
Employer contributions	 	 	35,000	 	 	 	46,000	 	 	 	32,600	 	 	 	39,852	 	
Benefit payments	 	 	(42,858	)	 	 	(42,067	)	 	 	(7,000	)	 	 	(15,346	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of plan assets at December 31	 	$	982,282	 	 	$	887,311	 	 	$	352,084	 	 	$	294,051	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     The following table shows a reconciliation of the funded status of the plans to the amounts recognized on the Consolidated Balance Sheets as of December 31, 2004 and 2003 (dollars in thousands): 

 	 	Pension	 	 	Other Benefits	 	
 	 	2004	 	 	2003	 	 	2004	 	 	2003	 	
Funded status at December 31	 	$	(471,962	)	 	$	(420,317	)	 	$	(184,129	)	 	$	(246,130	)	
Unrecognized net transition (asset)/ obligation	 	 	(3,873	)	 	 	(7,099	)	 	 	24,039	 	 	 	27,044	 	
Unrecognized prior service cost/(credit)	 	 	14,234	 	 	 	16,634	 	 	 	(1,422	)	 	 	(1,547	)	
Unrecognized net actuarial losses	 	 	375,980	 	 	 	348,982	 	 	 	158,271	 	 	 	217,611	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit liability recognized in the Consolidated Balance Sheets	 	$	(85,621	)	 	$	(61,800	)	 	$	(3,241	)	 	$	(3,022	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
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     The following sets forth the details related to benefits included on the Consolidated Balance Sheets at December 31, 2004 and 2003 (dollars in thousands):

 	 	Pension	 	 	Other Benefits	 	
 	 	2004	 	 	2003	 	 	2004	 	 	2003	 	
Accrued benefit cost	 	$	(85,621	)	 	$	(61,800	)	 	$	(3,241	)	 	$	(3,022	)	
Additional minimum liability	 	 	(148,824	)	 	 	(126,241	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liability	 	 	(234,445	)	 	 	(188,041	)	 	 	(3,241	)	 	 	(3,022	)	
Intangible asset	 	 	14,234	 	 	 	16,634	 	 	 	—	 	 	 	—	 	
Accumulated other comprehensive loss (pretax)	 	 	134,590	 	 	 	109,607	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net amount recognized	 	$	(85,621	)	 	$	(61,800	)	 	$	(3,241	)	 	$	(3,022	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     The following table sets forth the other comprehensive income arising from the change in additional minimum liability for the years ended December 31, 2004 and 2003 (dollars in thousands): 

 	 	2004	 	 	2003	 	
Decrease (increase) in minimum liability included in other comprehensive income – net of tax:	 	 	 	 	 	 	 	 	
Pinnacle West consolidated	 	$	(15,225	)	 	$	4,700	 	
APS share	 	$	(13,930	)	 	$	4,329	 	
     The following table sets forth the projected benefit obligation and the accumulated benefit obligation for pension plans in excess of plan assets for the plan years 2004 and 2003 (dollars in thousands): 

 	 	2004	 	 	2003	 	
Projected benefit obligation	 	$	1,454,244	 	 	$	1,307,628	 	
 	 	 	 	 	 	 	
Accumulated benefit obligation	 	$	1,216,727	 	 	$	1,075,352	 	
Less fair value of plan assets	 	 	982,282	 	 	 	887,311	 	
 	 	 	 	 	 	 	
Pinnacle West pension liability	 	$	234,445	 	 	$	188,041	 	
 	 	 	 	 	 	 	
APS share of pension liability	 	$	203,668	 	 	$	160,639	 	
 	 	 	 	 	 	 	
     Below are the weighted-average assumptions for both the pension and other benefits used to determine each respective benefit obligation and net periodic benefit cost:
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 	 	 	 	 	 	 	 	 	 	Benefit Costs	 	
 	 	Benefit Obligations	 	 	For the Years Ended	 	
 	 	As of December 31,	 	 	December 31,	 	
 	 	2004	 	 	2003	 	 	2004	 	 	2003	 	
Discount rate-pension	 	 	5.84	%	 	 	6.10	%	 	 	6.10	%	 	 	6.75	%	
Discount rate-other benefits	 	 	5.92	%	 	 	6.10	%	 	 	6.10	%	 	 	6.75	%	
Rate of compensation increase	 	 	4.00	%	 	 	4.00	%	 	 	4.00	%	 	 	4.00	%	
Expected long-term return on plan assets	 	 	N/A	 	 	 	N/A	 	 	 	9.00	%	 	 	9.00	%	
Initial health care cost trend rate	 	 	8.00	%	 	 	8.00	%	 	 	8.00	%	 	 	8.00	%	
Ultimate health care cost trend rate	 	 	5.00	%	 	 	5.00	%	 	 	5.00	%	 	 	5.00	%	
Year ultimate health care trend rate is reached	 	 	2009	 	 	 	2008	 	 	 	2008	 	 	 	2007	 	
     In selecting the pretax expected long-term rate of return on plan assets we consider past performance and economic forecasts for the types of investments held by the plan. For the year 2005 we are assuming a 9% rate of return on plan assets. As recent history has demonstrated, markets may decline and increase dramatically. However, we believe the long-term rate of return on plan assets of 9% is reasonable given our asset allocation in relation to historical and expected future performance.
     Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in the assumed initial and ultimate health care cost trend rates would have the following effects (dollars in millions): 

 	 	1% Increase	 	 	1% Decrease	 	
Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric plant participants	 	$	6	 	 	 	($5	)	
Effect on service and interest cost components of net periodic other postretirement benefit costs	 	$	10	 	 	 	($8	)	
Effect on the accumulated other postretirement benefit obligation	 	$	96	 	 	 	($76	)	
Plan Assets
     Pinnacle West’s qualified pension plan asset allocation at December 31, 2004 and 2003 is as follows:
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 	 	Percentage of Plan Assets	 	 	 	 	
 	 	at December 31,	 	 	Target Asset Allocation	 	
Asset Category:	 	2004	 	 	2003	 	 	 	 	 	
Equity securities	 	 	60	%	 	 	65	%	 	 	60	%	
Fixed Income	 	 	27	 	 	 	23	 	 	 	30	%	
Other	 	 	13	 	 	 	12	 	 	 	10	%	
 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	100	%	 	 	100	%	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
     The Board of Directors has established an investment policy for the pension plan assets and has delegated oversight of the plan assets to an Investment Management Committee. The investment policy sets forth the objective of providing for future pension benefits by maximizing return consistent with acceptable levels of risk. The primary investment strategies are diversification of assets, stated asset allocation targets and ranges, prohibition of investments in Pinnacle West securities, and external management of plan assets.
     Pinnacle West’s other postretirement benefit plans’ asset allocation at December 31, 2004 and 2003, is as follows: 

 	 	Percentage of Plan Assets	 	 	 	 	
 	 	at December 31,	 	 	Target Asset Allocation	 	
Asset Category:	 	2004	 	 	2003	 	 	 	 	 	
Equity securities	 	 	71	%	 	 	71	%	 	 	70	%	
Fixed Income	 	 	23	 	 	 	25	 	 	 	27	%	
Other	 	 	6	 	 	 	4	 	 	 	3	%	
 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	100	%	 	 	100	%	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
     The Investment Management Committee, described above, has also been delegated oversight of the plan assets for the postretirement benefit plans. The investment policy for other postretirement benefit plans assets is similar to that of the pension plan assets described above.
Contributions
     The minimum required contribution to be made to our pension plan in 2005 is estimated to be approximately $50 million. The contribution to be made to other postretirement benefit plans in 2005 is estimated to be approximately $40 million. APS’ share is approximately 92% of both plans.
Estimated Future Benefit Payments
     Benefit payments, which reflect estimated future employee service, for the next five years and the succeeding five years thereafter are estimated to be as follows (dollars in thousands):
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 	 	Pension	 	 	Other Benefits (a)	 	
2005	 	$	47,365	 	 	$	15,595	 	
2006	 	 	50,848	 	 	 	15,470	 	
2007	 	 	54,381	 	 	 	16,947	 	
2008	 	 	59,021	 	 	 	18,404	 	
2009	 	 	64,858	 	 	 	20,095	 	
Years 2010-2014	 	 	443,578	 	 	 	139,329	 	

 	(a)  	The expected future other benefit payments take into account the Medicare Part D subsidy.	
Employee Savings Plan Benefits
     Pinnacle West sponsors a defined contribution savings plan for eligible employees of Pinnacle West and subsidiaries. In 2004 APS represented 91% of the total cost of this plan. In a defined contribution savings plan, the benefits a participant receives result from regular contributions participants make to their own individual account. Under this plan, the Company matches a percentage of the participants’ contributions in the form of Pinnacle West stock. After a five year vesting period, participants have an option to transfer the Company matching contributions out of the Pinnacle West Stock Fund to other investment funds within the plan. At December 31, 2004, approximately 22% of total plan assets were in Pinnacle West stock. Pinnacle West recorded expenses for this plan of approximately $5 million for each of the years 2004, 2003 and 2002. APS recorded expenses for this plan of approximately $5 million in 2004, $5 million in 2003 and $4 million in 2002.
9. Leases
     In 1986, APS sold about 42% of its share of Palo Verde Unit 2 and certain common facilities in three separate sale leaseback transactions. APS accounts for these leases as operating leases. The gain resulting from the transaction of approximately $140 million was deferred and is being amortized to operations and maintenance expense over 29.5 years, the original term of the leases. There are options to renew the leases for two additional years and to purchase the property for fair market value at the end of the lease terms. Rent expense is calculated on a straight-line basis. See Note 20 for a discussion of VIEs, including the SPEs involved in the Palo Verde sale leaseback transactions.
     In addition, we lease certain land, buildings, equipment, vehicles and miscellaneous other items through operating rental agreements with varying terms, provisions and expiration dates.
     Total lease expense recognized in the Consolidated Statements of Income was $69 million in 2004, $67 million in 2003 and $67 million in 2002.
     The amounts to be paid for the Palo Verde Unit 2 leases are approximately $49 million per year for the years 2005 to 2015.
     Estimated future minimum lease payments for Pinnacle West’s operating leases are approximately as follows (dollars in millions):
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Year	 	 	 	 	
2005	 	$	73	 	
2006	 	 	70	 	
2007	 	 	69	 	
2008	 	 	67	 	
2009	 	 	65	 	
Thereafter	 	 	368	 	
 	 	 	 	
Total future lease commitments	 	$	712	 	
 	 	 	 	
10. Jointly-Owned Facilities
     APS shares ownership of some of its generating and transmission facilities with other companies. Pinnacle West Energy shares ownership of its Silverhawk Plant. Our share of operating and maintaining these facilities is included in the Consolidated Statements of Income in operations and maintenance expense. The following table shows APS’ and Pinnacle West Energy’s interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2004 (dollars in thousands): 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	Construction	 	
 	 	Percent	 	 	Plant in	 	 	Accumulated	 	 	Work in	 	
 	 	Owned	 	 	Service	 	 	Depreciation	 	 	Progress	 	
APS:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Generating facilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Palo Verde Units 1 and 3	 	 	29.1	%	 	$	1,877,846	 	 	$	(915,611	)	 	$	51,914	 	
Palo Verde Unit 2 (see Note 9)	 	 	17.0	%	 	 	665,994	 	 	 	(253,083	)	 	 	15,816	 	
Four Corners Units 4 and 5	 	 	15.0	%	 	 	147,067	 	 	 	(83,525	)	 	 	457	 	
Navajo Generating Station Units 1, 2 and 3	 	 	14.0	%	 	 	248,509	 	 	 	(117,922	)	 	 	2,132	 	
Cholla common facilities (a)	 	 	62.4	%(b)	 	 	80,122	 	 	 	(47,134	)	 	 	1,553	 	
Transmission facilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ANPP500KV System	 	 	35.8	%(b)	 	 	67,762	 	 	 	(27,898	)	 	 	1,026	 	
Navajo Southern System	 	 	31.4	%(b)	 	 	27,044	 	 	 	(16,880	)	 	 	1,576	 	
Palo Verde – Yuma 500KV System	 	 	23.9	%(b)	 	 	10,347	 	 	 	(4,545	)	 	 	26	 	
Four Corners Switchyards	 	 	27.5	%(b)	 	 	2,852	 	 	 	(1,801	)	 	 	—	 	
Phoenix – Mead System	 	 	17.1	%(b)	 	 	36,418	 	 	 	(2,723	)	 	 	—	 	
Palo Verde – Estrella 500KV System	 	 	55.5	%(b)	 	 	72,613	 	 	 	(2,907	)	 	 	841	 	
Palo Verde – Southeast Valley Project	 	 	15.0	%(b)	 	 	—	 	 	 	—	 	 	 	1,136	 	
Harquahala	 	 	80.0	%(b)	 	 	—	 	 	 	—	 	 	 	10	 	
Pinnacle West Energy:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Generating Facilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Silverhawk	 	 	75.0	%	 	 	301,288	 	 	 	(6,954	)	 	 	21	 	

(a)	 	PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.	
 		
(b)	 	Weighted average of interests.	
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11. Commitments and Contingencies
Palo Verde Nuclear Generating Station
      Spent Nuclear Fuel and Waste Disposal
     Nuclear power plant operators are required to enter into spent fuel disposal contracts with the DOE, and the DOE is required to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by domestic power reactors. Although the Nuclear Waste Act required the DOE to develop a permanent repository for the storage and disposal of spent nuclear fuel by 1998, the DOE has announced that the repository cannot be completed before 2010 and it does not intend to begin accepting spent nuclear fuel prior to that date. In November 1997, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a decision preventing the DOE from excusing its own delay, but refused to order the DOE to begin accepting spent nuclear fuel. Based on this decision and the DOE’s delay, a number of utilities, including APS (on behalf of itself and the other Palo Verde owners), filed damages actions against the DOE in the Court of Federal Claims. Arizona Public Service Company v. United States of America , United States Court of Federal Claims, 03-2832C.
     In February 2002, the Secretary of Energy recommended to President Bush that the Yucca Mountain, Nevada site be developed as a permanent repository for spent nuclear fuel. The President transmitted this recommendation to Congress and the State of Nevada vetoed the President’s recommendation. Congress approved the Yucca Mountain site, overriding the Nevada veto. The State of Nevada has filed several lawsuits relating to the Yucca Mountain site. We cannot currently predict what further steps will be taken in this area.
     APS has existing fuel storage pools at Palo Verde and is operating a new facility for on-site dry storage of spent nuclear fuel. With the existing storage pools and the addition of the new facility, APS believes spent nuclear fuel storage or disposal methods will be available for use by Palo Verde to allow its continued operation through the term of the operating license for each Palo Verde unit.
     Although some low-level waste has been stored on-site in a low-level waste facility, APS is currently shipping low-level waste to off-site facilities. APS currently believes 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.
     APS currently estimates it will incur $115 million (in 2004 dollars) over the life of Palo Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel. As of December 31, 2004, APS had spent $11 million for on-site interim spent nuclear fuel storage. APS has recorded a regulatory asset of $11 million and is currently seeking recovery of these costs through future rates (see “APS General Rate Case; 2004 Settlement Agreement” in Note 3).
     APS believes that scientific and financial aspects of the issues of spent nuclear fuel and low-level waste storage and disposal can be resolved satisfactorily. However, APS acknowledges that their ultimate resolution in a timely fashion will require political resolve and action on national and regional scales which APS is less able to predict. APS expects to vigorously protect and pursue its rights related to this matter.
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      Nuclear Insurance
     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 $300 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, APS could be assessed retrospective premium adjustments. The maximum assessment per reactor under the program for each nuclear incident is approximately $101 million, subject to an annual limit of $10 million per incident. Based on APS’ interest in the three Palo Verde units, APS’ maximum potential assessment per incident for all three units is approximately $88 million, with an annual payment limitation of approximately $9 million.
     The Palo Verde participants maintain “all risk” (including nuclear hazards) insurance for property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $2.75 billion, a substantial portion of which must first be applied to stabilization and decontamination. APS 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.
      Purchased Power and Fuel Commitments
     APS and Pinnacle West are parties to various purchased power and fuel contracts with terms expiring from 2005 through 2025 that include required purchase provisions. We estimate the contract requirements to be approximately $187 million in 2005; $90 million in 2006; $81 million in 2007; $66 million in 2008; $68 million in 2009 and $363 million thereafter. However, these amounts may vary significantly pursuant to certain provisions in such contracts that permit us to decrease required purchases under certain circumstances.
     Of the various purchased power and fuel contracts mentioned above some of those contracts have take-or-pay provisions. The contracts APS has for the supply of its coal supply have take-or-pay provisions. The current take-or-pay coal contracts have terms that expire in 2016.
     The following table summarizes the estimated take-or-pay commitments for the existing terms (dollars in millions):

 	 	Estimated	 	
 	 	Years Ending December 31,	 	
 	 	2005	 	 	2006	 	 	2007	 	 	2008	 	 	2009	 	 	Thereafter	 	
Coal take-or-pay commitments (a)	 	$	48	 	 	$	48	 	 	$	49	 	 	$	42	 	 	$	44	 	 	$	311	 	

(a)	 	Total take-or-pay commitments are approximately $542 million. The total net present value of these commitments is approximately $389 million.	
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Coal Mine Reclamation Obligations
     APS must reimburse certain coal providers for amounts incurred for coal mine reclamation. APS’ coal mine reclamation obligation was $61 million at December 31, 2004 and $60 million at December 31, 2003 and is included in deferred credits-other on the Consolidated Balance Sheets.
California Energy Market Issues and Refunds in the Pacific Northwest
      FERC In July 2001, the FERC ordered an expedited fact-finding hearing to calculate refunds for spot market transactions in California during a specified time frame. APS was a seller and a purchaser in the California markets at issue, and to the extent that refunds are ordered, APS should be a recipient as well as a payor of such amounts. The FERC is still considering the evidence and refund amounts have not yet been finalized. APS does not anticipate material changes in its exposure and still believes, subject to the finalization of the revised proxy prices, that it will be entitled to a net refund.
     On March 19, 2002, the State of California filed a complaint with the FERC alleging that wholesale sellers of power and energy, including the Company, failed to properly file rate information at the FERC in connection with sales to California from 2000 to the present under market-based rates. State of California v. British Columbia Power Exchange et al. , Docket No. EL02-71-000. The complaint requests the FERC to require the wholesale sellers to refund any rates that are “found to exceed just and reasonable levels.” This complaint was dismissed by the FERC and the State of California appealed the matter to the Ninth Circuit Court of Appeals. In an order issued September 9, 2004, the Ninth Circuit upheld the FERC’s authority to permit market-based rates, but rejected the FERC’s claim that it was without authority to consider retroactive refunds when a utility has not strictly adhered to the quarterly reporting requirements of the market-based rate system. On September 9, 2004, the Ninth Circuit remanded the case to the FERC for further proceedings. State of California ex rel. Bill Lockyer, Attorney General v. FERC , No. 02-73093. Several of the intervenors in this appeal filed a petition for rehearing of this decision on October 25, 2004. The outcome of the further proceedings cannot be predicted at this time.
     The FERC also ordered an evidentiary proceeding to discuss and evaluate possible refunds for the Pacific Northwest. The FERC affirmed the ALJ’s conclusion that the prices in the Pacific Northwest were not unreasonable or unjust and refunds should not be ordered in this proceeding. This decision has now been appealed to the Court of Appeals (Ninth Circuit). Although the FERC ruling in the Pacific Northwest matter is being appealed and the FERC has not yet calculated the specific refund amounts due in California, we do not expect that the resolution of these issues, as to the amounts alleged in the proceedings, will have a material adverse impact on our financial position, results of operations or liquidity.
     On March 26, 2003, FERC made public a Final Report on Price Manipulation in Western Markets, prepared by its staff and covering spot markets in the West in 2000 and 2001. The report stated that a significant number of entities who participated in the California markets during the 2000-2001 time period, including APS, may potentially have been involved in arbitrage transactions that allegedly violated certain provisions of the ISO tariff. After reviewing the matter, along with the data supplied by APS, the FERC staff moved to dismiss the claims against APS and to dismiss the proceeding. The motion to dismiss was granted by the FERC on January 22, 2004. Certain parties have sought rehearing of this order, and that request is pending.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
      California Civil Energy Market Litigation The State of California and others have filed various claims, which have now been consolidated, against several power suppliers to California alleging antitrust violations. Wholesale Electricity Antitrust Cases I and II , Superior Court in and for the County of San Diego, Proceedings Nos. 4204-00005 and 4204-00006. Two of the suppliers who were named as defendants in those matters, Reliant Energy Services, Inc. (and other Reliant entities) and Duke Energy and Trading, LLP (and other Duke entities), filed cross-claims against various other participants in the PX and California independent system operator markets, including APS, attempting to expand those matters to such other participants. APS has not yet filed a responsive pleading in the matter, but APS believes the claims by Reliant and Duke as they relate to APS are without merit.
     APS was also named in a lawsuit regarding wholesale contracts in California, which, after moving to state court, has been removed to the federal court for a second time. James Millar, et al. v. Allegheny Energy Supply, et al. , San Francisco Superior Court, Case No. 407867, U.S. District Court (Northern District) C-04-0519 SBA. The First Amended Complaint alleges basically that the contracts entered into were the result of an unfair and unreasonable market, in violation of California unfair competition laws. The PX has filed a lawsuit against the State of California regarding the seizure of forward contracts and the State has filed a cross complaint against APS and numerous other PX participants. Cal PX v. The State of California , Superior Court in and for the County of Sacramento, JCCP No. 4203. Various motions continue to be filed, and we currently believe these claims will have no material adverse impact on our financial position, results of operations or liquidity. 
Construction Program
     Consolidated capital expenditures in 2005 are estimated to be (dollars in millions):

APS	 	$	772	 	
Pinnacle West Energy	 	 	7	 	
SunCor	 	 	114	 	
Other	 	 	8	 	
 	 	 	 	
Total	 	$	901	 	
 	 	 	 	
Natural Gas Supply
     Pursuant to the terms of a comprehensive settlement entered into in 1996 with El Paso Natural Gas Company, the rates charged for natural gas transportation are subject to a rate moratorium through December 31, 2005.
     On July 9, 2003 the FERC issued an order that altered the capacity rights of parties to the 1996 settlement but maintained the cost responsibility provisions agreed to by parties to that settlement. The D.C. Court of Appeals recently upheld the FERC’s authority to alter the capacity rights of parties to the settlement. With respect to the FERC’s authority to maintain the cost responsibility provisions of the settlement, a party has sought appellate review and is seeking to reallocate the costs responsibility associated with the changed contractual obligations in a way that would be less favorable to APS and Pinnacle West Energy than under the FERC’s July 9, 2003 order. Should this party prevail on this point, APS and Pinnacle West Energy’s annual capacity cost could be increased by approximately $3 million per year, from September 2003 through December 2005.
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     El Paso is required under the terms of the 1996 settlement to file a new rate case by July 1, 2005, with new rates to become effective on January 1, 2006. APS cannot currently assess the financial impact that El Paso’s filing could have on rates.
Navajo Nation Litigation
     In June 1999, the Navajo Nation served Salt River Project with a lawsuit naming Salt River Project, several Peabody Coal Company entities (collectively, “Peabody”), Southern California Edison Company and other defendants, and citing various claims in connection with the renegotiations of the coal royalty and lease agreements under which Peabody mines coal for the Navajo Generating Station and the Mohave Generating Station. The Navajo Nation v. Peabody Holding Company, Inc., et al. , United States District Court for the District of Columbia, CA-99-0469-EGS (the “D.C. Lawsuit”). APS is a 14% owner of the Navajo Generating Station, which Salt River Project operates. The D.C. Lawsuit alleges, among other things, that the defendants obtained a favorable coal royalty rate by improperly influencing the outcome of a federal administrative process under which the royalty rate was to be adjusted. The suit seeks $600 million in damages, treble damages, punitive damages of not less than $1 billion, and the ejection of defendants “from all possessory interests and Navajo Tribal lands arising out of the [primary coal lease]”. In July 2001, the court dismissed all claims against Salt River Project.
     In January, 2005, Peabody served APS with a lawsuit naming APS and the other Navajo Generating Station participants and seeking, among other things, a declaration that the participants “are obligated to reimburse Peabody for any royalty, tax, or other obligation arising out of the D.C. Lawsuit”. Peabody Western Coal Company v. Salt River Project Agricultural Improvement and Power District, et al. , Circuit Court for the City of St. Louis, Division No. 1, Cause No. 042-08561. Based on APS’ ownership interest in the Navajo Generating Station, APS could be liable for up to 14% of any such obligation. Because the litigation is in preliminary stages, APS cannot currently predict the outcome of this matter.
Litigation
     We are party to various other claims, legal actions and complaints arising in the ordinary course of business, including but not limited to environmental matters related to the Clean Air Act, Navajo Nation issues and EPA and ADEQ issues. In our opinion, the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or liquidity.
12. Asset Retirement Obligations
     APS has asset retirement obligations for its Palo Verde nuclear facilities and certain other generation, transmission and distribution assets. The Palo Verde asset retirement obligation primarily relates to final plant decommissioning. This obligation is based on the NRC’s requirements for disposal of radiated property or plant and agreements APS reached with the ACC for final decommissioning of the plant. The non-nuclear generation asset retirement obligations primarily relate to requirements for removing portions of those plants at the end of the plant life or lease term. Some of APS’ transmission and distribution assets have asset retirement obligations because they are subject to right of way and easement agreements that require final removal. These agreements have a history of uninterrupted renewal that APS expects to continue. As a result, APS cannot reasonably estimate the fair value of the asset retirement obligation related to such distribution and transmission assets. The asset retirement obligations associated with our non-regulated assets are immaterial.
     To fund the costs APS expects to incur to decommission Palo Verde, APS established external decommissioning trusts in accordance with NRC regulations. APS invests the trust funds in fixed income and domestic equity securities and classifies them as available for sale. The following table shows the cost and fair value of APS’ nuclear decommissioning trust fund assets which are on the Consolidated Balance Sheets at December 31, 2004 and December 31, 2003 (dollars in millions): 

 	 	December 31,	 	 	December 31,	 	
 	 	2004	 	 	2003	 	
Trust fund assets – at cost	 	 	 	 	 	 	 	 	
Fixed income securities	 	$	134	 	 	$	124	 	
Domestic stock	 	 	83	 	 	 	74	 	
 	 	 	 	 	 	 	
Total	 	$	217	 	 	$	198	 	

Trust fund assets – at fair value	 	 	 	 	 	 	 	 	
Fixed income securities	 	$	150	 	 	$	140	 	
Domestic stock	 	 	118	 	 	 	101	 	
 	 	 	 	 	 	 	
Total	 	$	268	 	 	$	241	 	
 	 	 	 	 	 	 	
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     The following schedule shows the change in our asset retirement obligations during the years ended December 31, 2004 and 2003 (dollars in millions):

 	 	2004	 	 	2003	 	
At beginning of year	 	$	234	 	 	$	219	 	
Changes attributable to:	 	 	 	 	 	 	 	 	
Liabilities incurred	 	 	—	 	 	 	—	 	
Liabilities settled	 	 	(1	)	 	 	—	 	
Accretion expense	 	 	17	 	 	 	15	 	
Estimated cash flow revisions	 	 	2	 	 	 	—	 	
 	 	 	 	 	 	 	
At end of year	 	$	252	 	 	$	234	 	
 	 	 	 	 	 	 	
     In accordance with SFAS No. 71, APS accrues for removal costs for its regulated assets, even if there is no legal obligation for removal. At December 31, 2004, regulatory liabilities shown on Pinnacle West’s Consolidated Balance Sheets included approximately $462 million of estimated future removal costs that are not considered legal obligations.
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13. Selected Quarterly Financial Data (Unaudited)
     The following note presents quarterly financial information for 2004 and 2003. We are disclosing originally reported amounts and revised amounts in the first and second quarters of 2004 due to the adoption of FSP 106-2, which was implemented on June 30, 2004 (see Note 8) and in each period for the reclassification of NAC as discontinued operations (see Note 22).
     Consolidated quarterly financial information for 2004 and 2003 is as follows (dollars in thousands, except per share amounts): 

 	 	2004 Quarter Ended	 	 	2004	 	
 	 	March 31,	 	 	June 30,	 	 	September 30,	 	 	December 31,	 	 	Total	 	
As originally reported:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	$	574,369	 	 	$	722,686	 	 	$	886,779	 	 	$	734,718	 	 	$	2,918,552	 	
Operations and Maintenance	 	 	138,656	 	 	 	140,245	 	 	 	160,765	 	 	 	159,431	 	 	 	599,097	 	
Operating Income	 	 	83,371	 	 	 	121,160	 	 	 	210,836	 	 	 	90,745	 	 	 	506,112	 	
Income Taxes	 	 	15,627	 	 	 	44,027	 	 	 	58,900	 	 	 	11,283	 	 	 	129,837	 	
Income From Continuing Operations	 	 	29,768	 	 	 	71,057	 	 	 	103,886	 	 	 	29,318	 	 	 	234,029	 	
Net Income (a)	 	 	30,156	 	 	 	71,370	 	 	 	105,400	 	 	 	33,729	 	 	 	240,655	 	
NAC Reclassifications (see Note 22):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	 	(8,024	)	 	 	(10,803	)	 	 	—	 	 	 	—	 	 	 	(18,827	)	
Operating Income	 	 	(443	)	 	 	(1,950	)	 	 	—	 	 	 	—	 	 	 	(2,393	)	
Income Taxes	 	 	(159	)	 	 	(821	)	 	 	—	 	 	 	—	 	 	 	(980	)	
Income From Continuing Operations	 	 	(247	)	 	 	(1,104	)	 	 	—	 	 	 	—	 	 	 	(1,351	)	
Medicare Subsidy Adoption (See Note 8):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operations and Maintenance	 	 	(1,270	)	 	 	(1,270	)	 	 	—	 	 	 	—	 	 	 	(2,540	)	
Operating Income	 	 	1,270	 	 	 	1,270	 	 	 	—	 	 	 	—	 	 	 	2,540	 	
Income from Continuing Operations	 	 	1,270	 	 	 	1,270	 	 	 	—	 	 	 	—	 	 	 	2,540	 	
Net Income	 	 	1,270	 	 	 	1,270	 	 	 	—	 	 	 	—	 	 	 	2,540	 	
After NAC Reclassifications and Medicare Subsidy Adoption:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	 	566,345	 	 	 	711,883	 	 	 	886,779	 	 	 	734,718	 	 	 	2,899,725	 	
Operations and Maintenance	 	 	137,386	 	 	 	138,975	 	 	 	160,765	 	 	 	159,431	 	 	 	596,557	 	
Operating Income	 	 	84,198	 	 	 	120,480	 	 	 	210,836	 	 	 	90,745	 	 	 	506,259	 	
Income Taxes	 	 	15,468	 	 	 	43,206	 	 	 	58,900	 	 	 	11,283	 	 	 	128,857	 	
Income From Continuing Operations	 	 	30,791	 	 	 	71,223	 	 	 	103,886	 	 	 	29,318	 	 	 	235,218	 	
Net Income (a) (b)	 	 	31,426	 	 	 	72,640	 	 	 	105,400	 	 	 	33,729	 	 	 	243,195	 	
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 	 	2003 Quarter Ended	 	 	2003	 	
 	 	March 31,	 	 	June 30,	 	 	September 30,	 	 	December 31,	 	 	Total	 	
As originally reported:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	$	552,643	 	 	$	683,302	 	 	$	847,703	 	 	$	734,204	 	 	$	2,817,852	 	
Operating Income	 	 	69,255	 	 	 	132,482	 	 	 	198,850	 	 	 	81,466	 	 	 	482,053	 	
Income Taxes	 	 	12,754	 	 	 	35,248	 	 	 	50,528	 	 	 	7,030	 	 	 	105,560	 	
Income From Continuing Operations	 	 	20,153	 	 	 	54,889	 	 	 	109,538	 	 	 	45,996	 	 	 	230,576	 	
Net Income (a)	 	 	25,298	 	 	 	56,142	 	 	 	110,048	 	 	 	49,091	 	 	 	240,579	 	
NAC reclassifications (see Note 22):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	 	(11,382	)	 	 	(19,637	)	 	 	(16,701	)	 	 	(10,638	)	 	 	(58,358	)	
Operating Income	 	 	(3,675	)	 	 	(1,347	)	 	 	(1,489	)	 	 	(1,600	)	 	 	(8,111	)	
Income Taxes	 	 	(1,402	)	 	 	(507	)	 	 	(567	)	 	 	(611	)	 	 	(3,087	)	
Income From Continuing Operations	 	 	(2,167	)	 	 	(783	)	 	 	(878	)	 	 	(945	)	 	 	(4,773	)	
Reclassified:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	 	541,261	 	 	 	663,665	 	 	 	831,002	 	 	 	723,566	 	 	 	2,759,494	 	
Operating Income	 	 	65,580	 	 	 	131,135	 	 	 	197,361	 	 	 	79,866	 	 	 	473,942	 	
Income Taxes	 	 	11,352	 	 	 	34,741	 	 	 	49,961	 	 	 	6,419	 	 	 	102,473	 	
Income From Continuing Operations	 	 	17,986	 	 	 	54,106	 	 	 	108,660	 	 	 	45,051	 	 	 	225,803	 	
Net Income (a) (b)	 	 	25,298	 	 	 	56,142	 	 	 	110,048	 	 	 	49,091	 	 	 	240,579	 	

(a)	 	Includes income from discontinued operations at SunCor (see Note 22).	
 		
(b)	 	Includes income (loss) from NAC’s discontinued operations (see Note 22).	
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     Earnings per share:

 	 	2004 Quarter Ended	 	
 	 	March 31,	 	 	June 30,	 	 	September 30,	 	 	December 31,	 	
As originally reported – Basic earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income From Continuing Operations	 	$	0.33	 	 	$	0.78	 	 	$	1.14	 	 	$	0.32	 	
Net Income	 	 	0.33	 	 	 	0.78	 	 	 	1.15	 	 	 	0.37	 	
After NAC reclassification and Medicare subsidy adoption – Basic earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from Continuing Operations	 	 	0.34	 	 	 	0.78	 	 	 	1.14	 	 	 	0.32	 	
Net Income	 	 	0.34	 	 	 	0.80	 	 	 	1.15	 	 	 	0.37	 	
As originally reported – Diluted earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income From Continuing Operations	 	 	0.33	 	 	 	0.78	 	 	 	1.14	 	 	 	0.32	 	
Net Income	 	 	0.33	 	 	 	0.78	 	 	 	1.15	 	 	 	0.37	 	
After NAC reclassification and Medicare subsidy adoption – Diluted earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income From Continued Operations	 	 	0.34	 	 	 	0.78	 	 	 	1.14	 	 	 	0.32	 	
Net Income	 	 	0.34	 	 	 	0.79	 	 	 	1.15	 	 	 	0.37	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2003 Quarter Ended	 	
 	 	March 31,	 	 	June 30,	 	 	September 30,	 	 	December 31,	 	
As originally reported – Basic earnings per share (b):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income From Continuing Operations	 	$	0.22	 	 	$	0.60	 	 	$	1.20	 	 	$	0.50	 	
Net Income	 	 	0.28	 	 	 	0.62	 	 	 	1.21	 	 	 	0.54	 	
Reclassified – Basic earnings per share (b):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from Continuing Operations	 	 	0.20	 	 	 	0.59	 	 	 	1.19	 	 	 	0.49	 	
Net Income	 	 	0.28	 	 	 	0.62	 	 	 	1.21	 	 	 	0.54	 	
As originally reported – Diluted earnings per share (b):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income From Continuing Operations	 	 	0.22	 	 	 	0.60	 	 	 	1.20	 	 	 	0.50	 	
Net Income	 	 	0.28	 	 	 	0.61	 	 	 	1.20	 	 	 	0.54	 	
Reclassified – Diluted earnings per share (b):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income From Continued Operations	 	 	0.20	 	 	 	0.59	 	 	 	1.19	 	 	 	0.49	 	
Net Income	 	 	0.28	 	 	 	0.61	 	 	 	1.20	 	 	 	0.54	 	

(a)	 	The difference between originally reported and revised basic and diluted earnings per share related to the sale of NAC (see Note 22) and the adoption of the Medicare subsidy, which changed reported amounts for the first and second quarter of 2004 (See Note 8). The earnings per share impact from the sale of NAC or the adoption of the Medicare subsidy did not change earnings per share by more than $0.02 in any given quarter in 2004.	
 		
(b)	 	The difference between originally reported and reclassified basic and diluted earnings per share for income from continuing operations related to the sale of NAC (see Note 22). The earnings per share impact from the sale of NAC did not change earnings per share by more than $0.02 in any given quarter in 2003.	
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14. Fair Value of Financial Instruments
     We believe that the carrying amounts of our cash equivalents are reasonable estimates of their fair values at December 31, 2004 and 2003 due to their short maturities.
     We hold investments in debt securities for purposes other than trading. We believe that the carrying amounts of these investments represent reasonable estimates of their fair values at December 31, 2004 and 2003 due to the short-term reset of interest rates.
     We also hold investments in fixed income and domestic equity securities for purposes other than trading. The December 31, 2004 and 2003 fair values of such investments, which we determine by using quoted market prices, approximate their carrying amount. For further information, see disclosure of cost and fair value of APS’ nuclear decommissioning trust fund assets in Note 12.
     On December 31, 2004, the carrying value of our long-term debt (excluding capitalized lease obligations) was $3.19 billion, with an estimated fair value of $3.30 billion. The carrying value of our long-term debt (excluding capitalized lease obligations) was $3.31 billion on December 31, 2003, with an estimated fair value of $3.46 billion. The fair value estimates are based on quoted market prices of the same or similar issues.
15. Earnings Per Share
     The following table presents earnings per weighted average common share outstanding for the years ended December 31, 2004, 2003 and 2002: 

 	 	2004	 	 	2003	 	 	2002	 	
Basic earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	2.57	 	 	$	2.47	 	 	$	2.79	 	
Income (loss) from discontinued operations	 	 	0.09	 	 	 	0.17	 	 	 	(0.26	)	
Cumulative effect of change in accounting	 	 	—	 	 	 	—	 	 	 	(0.77	)	
 	 	 	 	 	 	 	 	 	 	
Earnings per share – basic	 	$	2.66	 	 	$	2.64	 	 	$	1.76	 	
 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	2.57	 	 	$	2.47	 	 	$	2.78	 	
Income (loss) from discontinued operations	 	 	0.09	 	 	 	0.16	 	 	 	(0.25	)	
Cumulative effect of change in accounting	 	 	—	 	 	 	—	 	 	 	(0.77	)	
 	 	 	 	 	 	 	 	 	 	
Earnings per share – diluted	 	$	2.66	 	 	$	2.63	 	 	$	1.76	 	
 	 	 	 	 	 	 	 	 	 	
     Dilutive stock options increased average common shares outstanding by approximately 135,000 shares in 2004, 140,000 shares in 2003 and 61,000 shares in 2002. Total average common shares outstanding for the purposes of calculating diluted earnings per share were 91,532,473 shares in 2004, 91,405,134 shares in 2003 and 84,963,921 shares in 2002.
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     Options to purchase 1,058,616 shares of common stock were outstanding at December 31, 2004 but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares. Options to purchase shares of common stock that were not included in the computation of diluted earnings per share were 2,291,646 at December 31, 2003 and 1,629,958 at December 31, 2002.
16. Stock-Based Compensation
     Pinnacle West offers stock-based compensation plans for officers and key employees of the Company and our subsidiaries.
     In May 2002, shareholders approved the 2002 Long-Term Incentive Plan (2002 plan), which allows Pinnacle West to grant performance shares, stock ownership incentive awards and non-qualified and performance-accelerated stock options to key employees. The Company has reserved 6 million shares of common stock for issuance under the 2002 plan. No more than 1.8 million shares may be issued in relation to performance share awards and stock ownership incentive awards. The plan also provides for the granting of new non-qualified stock options at a price per share not less than the fair market value of the common stock at the time of grant. The stock options vest over three years, unless certain performance criteria are met, which can accelerate the vesting period. The term of the option cannot be longer than 10 years and the option cannot be repriced during its term.
     The 1994 plan includes outstanding options but no new options will be granted under the plan. Options vested one-third of the grant per year beginning one year after the date the option is granted and expire ten years from the date of the grant. The 1994 plan also provided for the granting of any combination of shares of restricted stock, stock appreciation rights or dividend equivalents.
     In the third quarter of 2002, we began applying the fair value method of accounting for stock-based compensation, as provided for in SFAS No. 123. The fair value method of accounting is the preferred method. In accordance with the transition requirements of SFAS No. 123, we applied the fair value method prospectively, beginning with 2002 stock grants. In prior years, we recognized stock compensation expense based on the intrinsic value method allowed in APB No. 25.
     In addition, see Note 2 for discussion of a new standard on share based payments (SFAS No. 123R).
     Total stock-based compensation cost, including restricted stock, performance shares, stock options, and stock ownership incentives was $8 million in 2004, $6 million in 2003 and $5 million in 2002 for Pinnacle West, and $6 million in 2004, $3 million in 2003 and $3 million in 2002 for APS.
     The following table is a summary of the status of outstanding stock options under our equity incentive plans as of December 31, 2004, 2003 and 2002 and changes during the years ending on those dates:
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 	 	 	 	 	 	2004	 	 	 	 	 	 	2003	 	 	 	 	 	 	2002	 	
 	 	 	 	 	 	Weighted	 	 	 	 	 	 	Weighted	 	 	 	 	 	 	Weighted	 	
 	 	 	 	 	 	Average	 	 	 	 	 	 	Average	 	 	 	 	 	 	Average	 	
 	 	2004	 	 	Exercise	 	 	2003	 	 	Exercise	 	 	2002	 	 	Exercise	 	
 	 	Shares	 	 	Price	 	 	Shares	 	 	Price	 	 	Shares	 	 	Price	 	
Outstanding at beginning of year	 	 	2,698,246	 	 	$	38.56	 	 	 	2,185,129	 	 	$	39.96	 	 	 	1,832,725	 	 	$	39.52	 	
Granted	 	 	37,580	 	 	 	37.85	 	 	 	621,875	 	 	 	32.29	 	 	 	603,900	 	 	 	38.37	 	
Exercised	 	 	(372,205	)	 	 	34.02	 	 	 	(62,366	)	 	 	26.09	 	 	 	(163,381	)	 	 	28.25	 	
Forfeited	 	 	(87,498	)	 	 	42.31	 	 	 	(46,392	)	 	 	37.61	 	 	 	(88,115	)	 	 	41.54	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Outstanding at end of year	 	 	2,276,123	 	 	 	39.14	 	 	 	2,698,246	 	 	 	38.56	 	 	 	2,185,129	 	 	 	39.96	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Options exercisable at year-end	 	 	1,859,340	 	 	 	40.59	 	 	 	1,787,622	 	 	 	40.35	 	 	 	1,155,357	 	 	 	39.66	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average fair value of options granted during the year	 	 	 	 	 	$	3.53	 	 	 	 	 	 	$	7.37	 	 	 	 	 	 	$	6.16	 	
     The following table summarizes information about our stock options at December 31, 2004: 

 	 	 	 	 	 	 	 	 	 	Weighted	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Weighted	 	 	Average	 	 	 	 	 	 	Weighted	 	
 	 	 	 	 	 	Average	 	 	Remaining	 	 	 	 	 	 	Average	 	
Exercise	 	Options	 	 	Exercise	 	 	Contract	 	 	Options	 	 	Exercise	 	
Prices Per Share	 	Outstanding	 	 	Price	 	 	Life (Years)	 	 	Exercisable	 	 	Price	 	
$23.39 – 28.07	 	 	4,750	 	 	$	27.44	 	 	 	0.5	 	 	 	4,750	 	 	$	27.44	 	
28.07 – 32.75	 	 	515,344	 	 	 	32.24	 	 	 	7.8	 	 	 	129,706	 	 	 	32.10	 	
32.75 – 37.42	 	 	138,863	 	 	 	34.72	 	 	 	4.4	 	 	 	138,863	 	 	 	34.72	 	
37.42 – 42.10	 	 	693,482	 	 	 	38.83	 	 	 	5.9	 	 	 	662,337	 	 	 	38.87	 	
42.10 – 46.78	 	 	923,684	 	 	 	43.95	 	 	 	5.4	 	 	 	923,684	 	 	 	43.95	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	2,276,123	 	 	 	 	 	 	 	 	 	 	 	1,859,340	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     The following table is a summary of the amount and weighted-average grant date fair value of stock compensation awards granted, other than options, during the years ended December 31, 2004, 2003 and 2002: 

 	 	2004	 	 	2004 Grant	 	 	2003	 	 	2003 Grant	 	 	2002	 	 	2002 Grant	 	
 	 	Shares	 	 	Price	 	 	Shares	 	 	Price	 	 	Shares	 	 	Price	 	
Restricted stock	 	 	4,000	 	 	$	37.68	(a)	 	 	4,000	 	 	$	32.20	(a)	 	 	6,000	 	 	$	38.84	(a)	
Performance share awards	 	 	215,285	 	 	 	37.85	(b)	 	 	119,085	 	 	 	32.29	(b)	 	 	115,975	 	 	 	38.37	(b)	
Stock ownership incentive awards	 	 	9,015	 	 	 	40.29	(c)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	

(a)	 	Restricted stock priced at the average of the high and low market price on the grant date.	
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(b)	 	Performance shares priced at the closing market price on the grant date.	

(c)	 	Shares are based on estimated ownership of Pinnacle West common stock.	
17. Business Segments
     We have three principal business segments (determined by products, services and the regulatory environment):

 	•  	our regulated electricity segment, which consists of traditional regulated retail and wholesale electricity businesses (primarily electricity service to Native Load customers) and related activities and includes electricity generation, transmission and distribution;	

 	•  	our marketing and trading segment, which consists of our competitive energy business activities, including wholesale marketing and trading and APS Energy Services’ commodity-related energy services; and	

 	•  	our real estate segment, which consists of SunCor’s real estate development and investment activities.	
     In 2004, our other segment includes a $35 million gain ($21 million after-tax) related to the sale of El Dorado’s limited partnership interest in the Phoenix Suns. The other segment also includes activity related to APS Energy Services’ non-commodity trading activities, as well as the parent company and other subsidiaries.
     Financial data for the years ended December 31, 2004, 2003 and 2002 by business segments is provided as follows (dollars in millions): 

 	 	Business Segments for the Year Ended December 31, 2004	 	
 	 	 	 	 	 	Marketing	 	 	 	 	 	 	 	 	 	 	
 	 	Regulated	 	 	and	 	 	 	 	 	 	 	 	 	 	
 	 	Electricity	 	 	Trading	 	 	Real Estate	 	 	Other	 	 	Total	 	
Operating revenues	 	$	2,035	 	 	$	462	 	 	$	360	 	 	$	43	 	 	$	2,900	 	
Purchased power and fuel costs	 	 	568	 	 	 	382	 	 	 	—	 	 	 	—	 	 	 	950	 	
Other operating expenses	 	 	685	 	 	 	34	 	 	 	290	 	 	 	34	 	 	 	1,043	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	 	 	782	 	 	 	46	 	 	 	70	 	 	 	9	 	 	 	907	 	
Depreciation and amortization	 	 	384	 	 	 	11	 	 	 	6	 	 	 	—	 	 	 	401	 	
Interest expense	 	 	169	 	 	 	8	 	 	 	2	 	 	 	—	 	 	 	179	 	
Other expense/(income)	 	 	4	 	 	 	(2	)	 	 	(5	)	 	 	(34	)	 	 	(37	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pretax margin	 	 	225	 	 	 	29	 	 	 	67	 	 	 	43	 	 	 	364	 	
Income taxes	 	 	74	 	 	 	11	 	 	 	27	 	 	 	17	 	 	 	129	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	151	 	 	 	18	 	 	 	40	 	 	 	26	 	 	 	235	 	
Income from discontinued operations – net of income taxes of $5 (see Note 22)	 	 	—	 	 	 	—	 	 	 	4	 	 	 	4	 	 	 	8	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	151	 	 	$	18	 	 	$	44	 	 	$	30	 	 	$	243	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	8,674	 	 	$	746	 	 	$	454	 	 	$	23	 	 	$	9,897	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	483	 	 	$	34	 	 	$	81	 	 	$	—	 	 	$	598	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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 	 	Business Segments for the Year Ended December 31, 2003	 	
 	 	 	 	 	 	Marketing	 	 	 	 	 	 	 	
 	 	Regulated	 	 	and	 	 	 	 	 	 	 	
 	 	Electricity	 	 	Trading	 	 	Real Estate	 	 	Other	 	 	Total	 	
Operating revenues	 	$	1,978	 	 	$	392	 	 	$	362	 	 	$	27	 	 	$	2,759	 	
Purchased power and fuel costs	 	 	517	 	 	 	345	 	 	 	—	 	 	 	—	 	 	 	862	 	
Other operating expenses	 	 	625	 	 	 	34	 	 	 	306	 	 	 	23	 	 	 	988	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	 	 	836	 	 	 	13	 	 	 	56	 	 	 	4	 	 	 	909	 	
Depreciation and amortization	 	 	428	 	 	 	1	 	 	 	6	 	 	 	—	 	 	 	435	 	
Interest expense	 	 	172	 	 	 	—	 	 	 	2	 	 	 	1	 	 	 	175	 	
Other expense/(income)	 	 	(4	)	 	 	—	 	 	 	(25	)	 	 	—	 	 	 	(29	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pretax margin	 	 	240	 	 	 	12	 	 	 	73	 	 	 	3	 	 	 	328	 	
Income taxes	 	 	70	 	 	 	3	 	 	 	28	 	 	 	1	 	 	 	102	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	170	 	 	 	9	 	 	 	45	 	 	 	2	 	 	 	226	 	
Income from discontinued operations – net of income taxes of $10 (see Note 22)	 	 	—	 	 	 	—	 	 	 	10	 	 	 	5	 	 	 	15	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	170	 	 	$	9	 	 	$	55	 	 	$	7	 	 	$	241	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	8,373	 	 	$	680	 	 	$	439	 	 	$	27	 	 	$	9,519	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	686	 	 	$	9	 	 	$	72	 	 	$	—	 	 	$	767	 	

 	 	Business Segments for the Year Ended December 31, 2002	 	
 	 	 	 	 	 	Marketing	 	 	 	 	 	 	 	 	 	 	
 	 	Regulated	 	 	and	 	 	 	 	 	 	 	 	 	 	
 	 	Electricity	 	 	Trading	 	 	Real Estate	 	 	Other	 	 	Total	 	
Operating revenues	 	$	1,890	 	 	$	287	 	 	$	201	 	 	$	27	 	 	$	2,405	 	
Purchased power and fuel costs	 	 	377	 	 	 	155	 	 	 	—	 	 	 	—	 	 	 	532	 	
Other operating expenses	 	 	659	 	 	 	34	 	 	 	185	 	 	 	22	 	 	 	900	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	 	 	854	 	 	 	98	 	 	 	16	 	 	 	5	 	 	 	973	 	
Depreciation and amortization	 	 	416	 	 	 	2	 	 	 	4	 	 	 	—	 	 	 	422	 	
Interest expense	 	 	141	 	 	 	—	 	 	 	2	 	 	 	—	 	 	 	143	 	
Other expense/(income)	 	 	19	 	 	 	—	 	 	 	(7	)	 	 	7	 	 	 	19	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pretax margin	 	 	278	 	 	 	96	 	 	 	17	 	 	 	(2	)	 	 	389	 	
Income taxes	 	 	108	 	 	 	38	 	 	 	7	 	 	 	(1	)	 	 	152	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from continuing operations	 	 	170	 	 	 	58	 	 	 	10	 	 	 	(1	)	 	 	237	 	
Income (loss) from discontinued operations – net of income taxes of $14 (see Note 22)	 	 	—	 	 	 	—	 	 	 	9	 	 	 	(31	)	 	 	(22	)	
Cumulative effect of change in accounting for trading activities – net of income taxes of $43	 	 	—	 	 	 	(66	)	 	 	—	 	 	 	—	 	 	 	(66	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	170	 	 	$	(8	)	 	$	19	 	 	$	(32	)	 	$	149	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	893	 	 	$	19	 	 	$	72	 	 	$	—	 	 	$	984	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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18. Derivative and Energy Trading Accounting
     We are exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal, emissions allowances and in interest rates. We manage risks associated with these market fluctuations by utilizing various instruments that qualify as derivatives, including exchange-traded futures and options and over-the-counter forwards, options and swaps. As part of our overall risk management program, we use such instruments to hedge our exposure to changes in interest rates and to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. As of December 31, 2004, we hedged exposures to the price variability of the commodities for a maximum of eight years. The changes in market value of such contracts have a high correlation to price changes in the hedged transactions. In addition, subject to specified risk parameters monitored by the ERMC, we engage in marketing and trading activities intended to profit from market price movements.
     We recognize all derivatives, except those which receive a scope exception, as either assets or liabilities on the balance sheet and measure those instruments at fair value in accordance with SFAS No. 133, as amended by SFAS No. 149. Derivative commodity contracts for the physical delivery of purchase and sale quantities transacted in the normal course of business receive the normal purchase and sales exception and are accounted for under the accrual method of accounting. Changes in the fair value of derivative instruments are recognized periodically in income unless certain hedge criteria are met. For cash flow hedges, changes in the fair value of the derivative are recognized in common stock equity (as a component of other comprehensive income (loss)). For fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item associated with the hedged risk are recognized in earnings. We use cash flow hedges to limit our exposure to cash flow variability on forecasted transactions. We use fair value hedges to limit our exposure to changes in fair value of an asset or liability.
     We assess hedge effectiveness both at inception and on a continuing basis. Hedge effectiveness is related to the degree to which the derivative contract and the hedged item are correlated. It is measured based on the relative changes in fair value between the derivative contract and the hedged item over time. We exclude the time value of certain options from our assessment of hedge effectiveness. Any change in the fair value resulting from ineffectiveness, or the amount by which the derivative contract and the hedged commodity are not directly correlated, is recognized immediately in net income.
     Both non-trading and trading derivatives that do not receive a scope exception are classified as assets and liabilities from risk management and trading activities on the Consolidated Balance Sheets. Certain of our non-trading derivatives qualify for cash flow hedge accounting treatment. Non-trading derivatives, or any portion thereof that are not effective hedges, are adjusted to fair value through income. Gains and losses related to non-trading derivatives that qualify as cash flow hedges of expected transactions are recognized in revenue or purchased power and fuel expense as an offset to the related item being hedged when the underlying hedged physical transaction impacts earnings. If it becomes probable that a forecasted transaction will not occur, we discontinue the use of hedge accounting and recognize in income the unrealized gains and losses that were previously recorded in other comprehensive income (loss). In the event a non-trading derivative is terminated or settled, the unrealized gains and losses remain in other comprehensive income (loss), and are recognized in income when the underlying transaction impacts earnings.
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     All gains and losses (realized and unrealized) on trading contracts that qualify as derivatives are included in marketing and trading segment revenues on the Consolidated Statements of Income on a net basis. Trading contracts that do not meet the definition of a derivative are accounted for on an accrual basis with the associated revenues and costs recorded at the time the contracted commodities are delivered or received.
     In the electricity business, some contracts to purchase energy are netted against other contracts to sell energy. This is called “book-out” and usually occurs in contracts that have the same terms (quantities and delivery points) and for which power does not flow. We net these book-outs, which reduces both revenues and purchased power and fuel costs in our Consolidated Statement of Income, but this does not impact our financial condition, net income or cash flows.
     In November 2003, the FASB revised its derivative guidance in DIG Issue No. C15, “Normal Purchases and Normal Sales Exception for Option-Type Contracts and Forward Contracts in Electricity.” Effective January 1, 2004, the new guidance changed the criteria for the normal purchases and sales scope exception for electricity contracts. The implementation of this guidance did not have a material impact on our consolidated financial statements.
     During 2002, the EITF discussed EITF 02-3 and reached a consensus on certain issues. EITF 02-3 rescinded EITF 98-10 and was effective October 25, 2002 for any new contracts, and on January 1, 2003 for existing contracts, with early adoption permitted. We adopted the EITF 02-3 guidance for all contracts in the fourth quarter of 2002. We recorded a $66 million after-tax charge in net income as a cumulative effect adjustment for the previously recorded accumulated unrealized mark-to-market on energy trading contracts that did not meet the accounting definition of a derivative. 
Cash Flow Hedges
     The changes in the fair value of our hedged positions included in the Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 are comprised of the following (dollars in thousands):

 	 	2004	 	 	2003	 	 	2002	 	
Gains/(losses) on the ineffective portion of derivatives qualifying for hedge accounting	 	$	(1,568	)	 	$	8,237	 	 	$	9,763	 	
Gains/(losses) from the change in options’ time value excluded from measurement of effectiveness	 	 	185	 	 	 	181	 	 	 	(2,484	)	
Gains from the discontinuance of cash flow hedges	 	 	1,137	 	 	 	—	 	 	 	386	 	
     During the twelve months ending December 31, 2005, we estimate that a net gain of $44 million before income taxes will be reclassified from accumulated other comprehensive loss as an offset to the effect on earnings of market price changes for the related hedged transactions.
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     Our assets and liabilities from risk management and trading activities are presented in two categories, consistent with our business segments:

 	•  	Regulated Electricity – non-trading derivative instruments that hedge our purchases and sales of electricity and fuel for APS’ Native Load requirements of our regulated electricity business segment; and	

 	•  	Marketing and Trading – both non-trading and trading derivative instruments of our competitive business segment.	
     The following table summarizes our assets and liabilities from risk management and trading activities at December 31, 2004 and 2003 (dollars in thousands):
December 31, 2004 

 	 	Current	 	 	 	 	 	 	Current	 	 	Other	 	 	Net Asset/	 	
 	 	Assets	 	 	Investments	 	 	Liabilities	 	 	Liabilities	 	 	(Liability)	 	
Regulated electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	$	45,220	 	 	$	19,417	 	 	$	(19,191	)	 	$	(12,000	)	 	$	33,446	 	
Options and margin account	 	 	18,821	 	 	 	118	 	 	 	(8,879	)	 	 	—	 	 	 	10,060	 	
Marketing and trading:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	 	102,855	 	 	 	204,512	 	 	 	(68,008	)	 	 	(132,683	)	 	 	106,676	 	
Emission allowances – at cost and margin account	 	 	—	 	 	 	294	 	 	 	(17,328	)	 	 	(11,579	)	 	 	(28,613	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	166,896	 	 	$	224,341	 	 	$	(113,406	)	 	$	(156,262	)	 	$	121,569	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2003 

 	 	Current	 	 	 	 	 	 	Current	 	 	Other	 	 	Net Asset/	 	
 	 	Assets	 	 	Investments	 	 	Liabilities	 	 	Liabilities	 	 	(Liability)	 	
Regulated electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	$	44,079	 	 	$	5,900	 	 	$	(47,268	)	 	$	(3,028	)	 	$	(317	)	
Options	 	 	—	 	 	 	12,101	 	 	 	—	 	 	 	—	 	 	 	12,101	 	
Marketing and trading:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	 	53,551	 	 	 	116,363	 	 	 	(37,023	)	 	 	(63,398	)	 	 	69,493	 	
Emission allowances – at cost	 	 	—	 	 	 	4,582	 	 	 	(8,464	)	 	 	(16,304	)	 	 	(20,186	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	97,630	 	 	$	138,946	 	 	$	(92,755	)	 	$	(82,730	)	 	$	61,091	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Cash or other assets may be required to serve as collateral against our open positions on certain energy-related contracts. Collateral provided to counterparties is $1 million at December 31, 2004 and $1 million at December 31, 2003, and is included in other current assets on the Consolidated Balance Sheet. Collateral provided to us by counterparties is $18 million at
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and $12 million at December 31, 2003, and is included in other current liabilities on the Consolidated Balance Sheet.
Fair Value Hedges
     On January 29, 2004, we entered into two fixed-for-floating interest rate swap transactions on our $300 million 6.4% Senior Notes. The purpose of these hedges is to protect against significant fluctuations in the fair value of our debt. Our interest rate swaps are considered to be fully effective with any resulting gains or losses on the derivative offset by a similar loss or gain amount on the underlying fair value of debt. The fair value of the interest rate swaps was $2.6 million at December 31, 2004 and is included in investments and other assets with the corresponding offset in long-term debt less current maturities on the Consolidated Balance Sheets.
Credit Risk
     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We have risk management and trading contracts with many counterparties, including two counterparties for which a worst case exposure represents approximately 35% of Pinnacle West’s $391 million of risk management and trading assets as of December 31, 2004. Our risk management process assesses and monitors the financial exposure of these and all other counterparties. Despite the fact that the great majority of trading counterparties are rated as investment grade by the credit rating agencies, including the counterparties noted above, there is still a possibility that one or more of these companies could default, resulting in a material impact on consolidated earnings for a given period. Counterparties in the portfolio consist principally of major energy companies, municipalities, local distribution companies and financial institutions. We maintain credit policies that we believe minimize overall credit risk to within acceptable limits. Determination of the credit quality of our counterparties is based upon a number of factors, including credit ratings and our evaluation of their financial condition. In many contracts, we employ collateral requirements and standardized agreements that allow for the netting of positive and negative exposures associated with a single counterparty. Valuation adjustments are established representing our estimated credit losses on our overall exposure to counterparties. See Note 1 “Derivative” for a discussion of our credit valuation adjustment policy.
19. Other Income and Other Expense
     The following table provides detail of other income and other expense for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Other income:	 	 	 	 	 	 	 	 	 	 	 	 	
Investment gains (a)	 	$	38,256	 	 	$	3,649	 	 	$	—	 	
Interest income	 	 	7,470	 	 	 	4,412	 	 	 	4,332	 	
SunCor non-operating income (b)	 	 	4,458	 	 	 	24,740	 	 	 	7,355	 	
Asset sales	 	 	3,026	 	 	 	618	 	 	 	568	 	
Miscellaneous	 	 	779	 	 	 	2,144	 	 	 	2,655	 	
 	 	 	 	 	 	 	 	 	 	
Total other income	 	$	53,989	 	 	$	35,563	 	 	$	14,910	 	

Other expense:	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating costs (c)	 	$	(15,524	)	 	$	(14,959	)	 	$	(12,958	)	
Asset sales	 	 	(1,382	)	 	 	(1,522	)	 	 	(6,472	)	
Investment losses (d)	 	 	—	 	 	 	—	 	 	 	(10,439	)	
Miscellaneous	 	 	(4,604	)	 	 	(4,093	)	 	 	(3,786	)	
 	 	 	 	 	 	 	 	 	 	
Total other expense	 	$	(21,510	)	 	$	(20,574	)	 	$	(33,655	)	

(a)	 	Primarily related to the gain on the sale of El Dorado’s limited partnership interest in the Phoenix Suns in the second quarter of 2004 for $35 million ($21 million after tax).	
 		
(b)	 	Primarily related to the sale at SunCor of a land interest and profit participation agreement in the fourth quarter of 2003 for $18 million. In 2002, SunCor received $2.5 million for the profit participation.	
 		
(c)	 	As defined by the FERC, includes below-the-line non-operating utility costs (primarily community relations).	
 		
(d)	 	Primarily related to El Dorado’s investment losses in NAC prior to consolidation in the third quarter of 2002.	
20. Variable Interest Entities
     In 1986, APS entered into agreements with three separate VIE lessors in order to sell and lease back interests in Palo Verde Unit 2. The leases are accounted for as operating leases in accordance with GAAP. See Note 9 for further information about the sale leaseback transactions. We are not the primary beneficiary of the Palo Verde VIEs and, accordingly, do not consolidate them.
     APS is exposed to losses under the Palo Verde sale leaseback agreements upon the occurrence of certain events that APS does not consider to be reasonably likely to occur. Under certain circumstances (for example, the NRC issuing specified violation orders with respect to Palo Verde or the occurrence of specified nuclear events), APS would be required to assume the debt associated with the transactions, make specified payments to the equity participants, and take title to the leased Unit 2 interests, which, if appropriate, may be required to be written down in value. If such an event had occurred as of December 31, 2004, APS would have been required to assume approximately $250 million of debt and pay the equity participants approximately $192 million.
     In the first quarter of 2004, we adopted FIN No. 46R, “Consolidation of Variable Interest Entities” for all non-SPE contractual arrangements. SunCor has certain land development arrangements that are required to be consolidated under FIN No. 46R. The assets and non-controlling
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interests reflected in our Consolidated Balance Sheets related to these arrangements were approximately $34 million at December 31, 2004.
21. Guarantees
     We have issued parental guarantees and letters of credit and obtained surety bonds on behalf of our unregulated subsidiaries. Our parental guarantees related to Pinnacle West Energy consist of equipment and performance guarantees related to our generation construction program, and long-term service agreement guarantees for new power plants. Our credit support instruments enable APS Energy Services to offer commodity energy and energy-related products. Non-performance or payment under the original contract by our unregulated subsidiaries would require us to perform under the guarantee or surety bond. No liability is currently recorded on the Consolidated Balance Sheets related to Pinnacle West’s guarantees on behalf of its subsidiaries. Our guarantees have no recourse or collateral provisions to allow us to recover amounts paid under the guarantee. The amounts and approximate terms of our guarantees and surety bonds for each subsidiary at December 31, 2004 are as follows (dollars in millions): 

 	 	Guarantees	 	 	Surety Bonds	 	
 	 	 	 	 	 	Term	 	 	 	 	 	 	Term	 	
 	 	Amount	 	 	(in years)	 	 	Amount	 	 	(in years)	 	
Parental:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West Energy	 	$	25	 	 	 	1	 	 	$	—	 	 	 	—	 	
APS Energy Services	 	 	46	 	 	 	1	 	 	 	51	 	 	 	1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	71	 	 	 	 	 	 	$	51	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     At December 31, 2004, we had entered into approximately $39 million of letters of credit which support various transmission and construction agreements. These letters of credit expire in 2005 and 2006. We intend to provide from either existing or new facilities for the extension, renewal or substitution of the letters of credit to the extent required. At December 31, 2004, Pinnacle West has approximately $3 million of letters of credit related to workers’ compensation expiring in 2006.
     APS has entered into various agreements that require letters of credit for financial assurance purposes. At December 31, 2004, approximately $200 million of letters of credit were outstanding to support existing pollution control bonds of approximately $200 million. The letters of credit are available to fund the payment of principal and interest of such debt obligations. In July 2004, $150 million of these letters of credit were renewed for a three-year term and expire in 2007. The remainder expire in 2005. APS has also entered into approximately $102 million of letters of credit to support certain equity lessors in the Palo Verde sale leaseback transactions (see Note 9 for further details on the Palo Verde sale leaseback transactions). These letters of credit expire in 2005. Additionally, APS has approximately $5 million of letters of credit related to counterparty collateral requirements expiring in 2006. APS intends to provide from either existing or new facilities for the extension, renewal or substitution of the letters of credit to the extent required.
     We provide indemnifications relating to liabilities arising from or related to certain of our agreements. APS has provided indemnifications to the equity participants and other parties in the Palo Verde sale leaseback transactions with respect to certain tax matters. Generally, a maximum obligation is not explicitly stated in the indemnification and therefore, the overall maximum amount of the obligation under such indemnifications cannot be reasonably estimated. Based on historical
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnifications is likely.
22. Discontinued Operations
     The following table provides a summary of SunCor and NAC income (loss) from discontinued operations (after income taxes) for the years ended December 31, 2004, 2003 and 2002 (dollars in millions): 

 	 	2004	 	 	2003	 	 	2002	 	
SunCor	 	$	4	 	 	$	10	 	 	$	9	 	
NAC	 	 	4	 	 	 	5	 	 	 	(31	)	
 	 	 	 	 	 	 	 	 	 	
Total income (loss) from discontinued operations	 	$	8	 	 	$	15	 	 	$	(22	)	
 	 	 	 	 	 	 	 	 	 	
SunCor
     Certain components of SunCor’s real estate sales activities, which are included in the real estate segment, are required to be reported as discontinued operations on Pinnacle West’s Consolidated Statements of Income in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Among other guidance, SFAS No. 144 prescribes accounting for discontinued operations and defines certain activities as discontinued operations.
     In the second quarter of 2002, SunCor sold a retail center, but maintained a continuing involvement through a management contract. In the first quarter of 2003, this management contract was canceled. As a result, the after-tax gain of $6 million ($10 million pre-tax) recorded in operations in 2002 related to this property was reclassified as discontinued operations on our Consolidated Statements of Income. The income from discontinued operations in the year ended December 31, 2002 primarily reflects this sale.
     In 2003, SunCor sold its water utility company, which resulted in an after-tax gain of $8 million ($14 million pretax). The amounts of the gain on the sale and operating income of the water utility company in 2003 and 2002 are classified as discontinued operations on Pinnacle West’s Consolidated Statements of Income.
     In the fourth quarter of 2003, SunCor sold a retail center, which resulted in an after-tax gain of $2 million ($3 million pretax). The gain on the sale and the operating income related to this property in 2003 are classified as discontinued operations on Pinnacle West’s Consolidated Statements of Income. There were no prior-year operations related to this retail center.
     In 2004, SunCor sold commercial property, which resulted in an after-tax gain of $1 million ($2 million pretax). The gain on the sale and the operating income related to this property in 2004 are classified as discontinued operations on Pinnacle West’s Consolidated Statements of Income. There were no prior-year operations related to this property.
     The following table provides SunCor’s revenue and income before income taxes (including the gains on disposals as noted above) related to properties classified as discontinued operations on
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pinnacle West’s Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002 (dollars in millions):

 	 	2004	 	 	2003	 	 	2002	 	
Revenue	 	$	11	 	 	$	71	 	 	$	35	 	
Income before taxes	 	 	6	 	 	 	17	 	 	 	15	 	
NAC
     In July 2004, we entered into an agreement to sell our investment in NAC. The transaction closed on November 18, 2004 and resulted in a pre-tax gain of $4 million, which is classified as discontinued operations in 2004. El Dorado began consolidating the operations of NAC in the third quarter of 2002. All related revenues and expenses for NAC have been reclassified to discontinued operations for the years ended December 31, 2003 and 2002 on Pinnacle West’s Consolidated Statements of Income.
     The following table provides the revenue and income before taxes (including the gain on disposal as noted above) for El Dorado’s investment in NAC that was classified as discontinued operations for the years ended December 31, 2004, 2003 and 2002 (dollars in millions): 

 	 	2004	 	 	2003	 	 	2002	 	
Revenue	 	$	31	 	 	$	58	 	 	$	35	 	
Income (loss) before taxes	 	 	7	 	 	 	8	 	 	 	(50	)	
Percentage-of-Completion – NAC
     Certain NAC contract revenues are accounted for under the percentage-of-completion method. Revenues are recognized based upon total costs incurred to date compared to total costs expected to be incurred for each contract. Revisions in contract revenue and cost estimates are reflected in the accounting period when known. Provisions are made for the full amounts of anticipated losses in the periods in which they are first determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income, and are recognized in the period in which revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured.
     Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. General and administrative costs are charged to expense as incurred.
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Assets and Liabilities Related to Discontinued Operations
     Due to the sale of NAC, all NAC assets and liabilities have been reclassified to assets and liabilities related to discontinued operations on the Consolidated Balance Sheets at December 31, 2003 and are provided in the following table (dollars in thousands):

Cash	 	$	5,867	 	
Customer and other receivables	 	 	11,066	 	
Net property, plant and equipment	 	 	5,404	 	
Other	 	 	728	 	
 	 	 	 	
Assets related to discontinued operations	 	$	23,065	 	

Accounts payable	 	$	10,406	 	
Long-term debt less current maturities	 	 	800	 	
Other	 	 	5,221	 	
 	 	 	 	
Liabilities related to discontinued operations	 	$	16,427	 	
 	 	 	 	
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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
(ARIZONA PUBLIC SERVICE COMPANY)
     Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13(a)-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which is included herein and relates also to the Company’s financial statements.
March 15, 2005
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Arizona Public Service Company
Phoenix, Arizona
     We have audited the accompanying balance sheets of Arizona Public Service Company (the “Company”) as of December 31, 2004 and 2003, and the related statements of income, changes in common stock equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule, an opinion on management’s assessment, and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audits.
     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
     A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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     Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 15, 2005
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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(dollars in thousands)

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Electric Operating Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity	 	$	2,051,602	 	 	$	1,999,390	 	 	$	1,902,112	 	
Marketing and trading	 	 	145,519	 	 	 	105,541	 	 	 	34,054	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	2,197,121	 	 	 	2,104,931	 	 	 	1,936,166	 	

Operating Expenses:	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity purchased power and fuel	 	 	612,300	 	 	 	606,251	 	 	 	438,141	 	
Marketing and trading purchased power and fuel	 	 	150,954	 	 	 	97,180	 	 	 	32,662	 	
Operations and maintenance	 	 	540,277	 	 	 	513,604	 	 	 	495,845	 	
Depreciation and amortization	 	 	336,648	 	 	 	389,240	 	 	 	399,640	 	
Income taxes (Notes 4 and S-2)	 	 	113,696	 	 	 	91,646	 	 	 	132,953	 	
Other taxes	 	 	114,265	 	 	 	108,852	 	 	 	107,925	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	1,868,140	 	 	 	1,806,773	 	 	 	1,607,166	 	

Operating Income	 	 	328,981	 	 	 	298,158	 	 	 	329,000	 	

Other Income (Deductions):	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes (Notes 4 and S-2)	 	 	(6,334	)	 	 	4,792	 	 	 	6,148	 	
Allowance for equity funds used during construction	 	 	4,885	 	 	 	14,240	 	 	 	—	 	
Other income (Note S-9)	 	 	30,593	 	 	 	20,277	 	 	 	5,149	 	
Other expense (Note S-9)	 	 	(13,816	)	 	 	(12,962	)	 	 	(19,338	)	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	15,328	 	 	 	26,347	 	 	 	(8,041	)	

Interest Deductions:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on long-term debt	 	 	140,556	 	 	 	142,706	 	 	 	128,462	 	
Interest on short-term borrowings	 	 	6,427	 	 	 	4,904	 	 	 	5,416	 	
Debt discount, premium and expense	 	 	4,854	 	 	 	3,337	 	 	 	2,888	 	
Capitalized interest	 	 	(7,155	)	 	 	(7,379	)	 	 	(15,150	)	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	144,682	 	 	 	143,568	 	 	 	121,616	 	

Net Income	 	$	199,627	 	 	$	180,937	 	 	$	199,343	 	
 	 	 	 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
ASSETS	 	 	 	 	 	 	 	 	
Utility Plant (Notes 1, 6, 9 and 10)
Electric plant in service and held for future use	 	$	9,120,407	 	 	$	8,826,033	 	
Less accumulated depreciation and amortization	 	 	3,266,181	 	 	 	3,089,645	 	
 	 	 	 	 	 	 	
Total	 	 	5,854,226	 	 	 	5,736,388	 	
 	 	 	 	 	 	 	 	 	
Construction work in progress	 	 	249,243	 	 	 	187,478	 	
Intangible assets, net of accumulated amortization of $154,843 and $120,895	 	 	103,701	 	 	 	94,181	 	
Nuclear fuel, net of accumulated amortization of $59,020 and $58,053	 	 	51,188	 	 	 	52,011	 	
 	 	 	 	 	 	 	
Utility plant – net	 	 	6,258,358	 	 	 	6,070,058	 	

Investments and Other Assets	 	 	 	 	 	 	 	 	
Note receivable from Pinnacle West Energy (Notes 1, 3 and S-10)	 	 	498,489	 	 	 	497,865	 	
Decommissioning trust accounts (Note 12)	 	 	267,700	 	 	 	240,645	 	
Assets from risk management and trading activities – long-term (Note S-8)	 	 	20,123	 	 	 	18,001	 	
Other assets	 	 	61,364	 	 	 	64,119	 	
 	 	 	 	 	 	 	
Total investments and other assets	 	 	847,676	 	 	 	820,630	 	

Current Assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	 	49,575	 	 	 	42,152	 	
Investment in debt securities	 	 	181,175	 	 	 	69,850	 	
Accounts receivable:	 	 	 	 	 	 	 	 	
Service customers	 	 	214,487	 	 	 	190,884	 	
Other (Note 1)	 	 	63,131	 	 	 	67,540	 	
Allowance for doubtful accounts	 	 	(3,444	)	 	 	(3,743	)	
Accrued utility revenues	 	 	76,154	 	 	 	71,501	 	
Materials and supplies (at average cost)	 	 	83,893	 	 	 	80,682	 	
Fossil fuel (at average cost)	 	 	20,506	 	 	 	28,360	 	
Assets from risk management and trading activities (Note S-8)	 	 	70,430	 	 	 	52,448	 	
Other	 	 	10,187	 	 	 	6,969	 	
 	 	 	 	 	 	 	
Total current assets	 	 	766,094	 	 	 	606,643	 	

Deferred Debits:	 	 	 	 	 	 	 	 	
Regulatory assets (Notes 1, 3 and S-2)	 	 	135,051	 	 	 	132,349	 	
Unamortized debt issue costs	 	 	21,832	 	 	 	19,797	 	
Other	 	 	69,541	 	 	 	73,056	 	
 	 	 	 	 	 	 	
Total deferred debits	 	 	226,424	 	 	 	225,202	 	

Total Assets	 	$	8,098,552	 	 	$	7,722,533	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
BALANCE SHEETS
(dollars in thousands)

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
LIABILITIES AND EQUITY	 	 	 	 	 	 	 	 	
Capitalization:	 	 	 	 	 	 	 	 	
Common stock	 	$	178,162	 	 	$	178,162	 	
Additional paid-in capital	 	 	1,246,804	 	 	 	1,246,804	 	
Retained earnings	 	 	860,196	 	 	 	830,569	 	
Accumulated other comprehensive income (loss):	 	 	 	 	 	 	 	 	
Minimum pension liability adjustment	 	 	(71,087	)	 	 	(57,158	)	
Derivative instruments	 	 	18,327	 	 	 	5,253	 	
 	 	 	 	 	 	 	
Common stock equity	 	 	2,232,402	 	 	 	2,203,630	 	
Long-term debt less current maturities (Notes 6 and S-3)	 	 	2,267,094	 	 	 	2,135,606	 	
 	 	 	 	 	 	 	
Total capitalization	 	 	4,499,496	 	 	 	4,339,236	 	

Current Liabilities:	 	 	 	 	 	 	 	 	
Current maturities of long-term debt (Notes 6 and S-3)	 	 	451,247	 	 	 	487,067	 	
Accounts payable	 	 	215,076	 	 	 	131,383	 	
Accrued taxes	 	 	292,521	 	 	 	90,474	 	
Accrued interest	 	 	33,332	 	 	 	42,702	 	
Customer deposits	 	 	51,804	 	 	 	45,481	 	
Deferred income taxes (Notes 4 and S-2)	 	 	9,057	 	 	 	631	 	
Liabilities from risk management and trading activities (Note S-8)	 	 	34,292	 	 	 	58,138	 	
Other	 	 	91,441	 	 	 	60,008	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	1,178,770	 	 	 	915,884	 	

Deferred Credits and Other:	 	 	 	 	 	 	 	 	
Deferred income taxes (Notes 4 and S-2)	 	 	1,108,571	 	 	 	1,257,671	 	
Regulatory liabilities (Notes 1, 3, 4, and S-2)	 	 	506,646	 	 	 	468,694	 	
Liability for asset retirements and removals (Note 12)	 	 	251,612	 	 	 	234,440	 	
Pension liability (Note 8)	 	 	203,668	 	 	 	160,639	 	
Unamortized gain — sale of utility plant (Note 9)	 	 	50,333	 	 	 	54,909	 	
Customer advances for construction	 	 	59,185	 	 	 	52,783	 	
Liabilities from risk management and trading activities (Note S-8)	 	 	13,124	 	 	 	4,502	 	
Other	 	 	227,147	 	 	 	233,775	 	
 	 	 	 	 	 	 	
Total deferred credits and other	 	 	2,420,286	 	 	 	2,467,413	 	

Commitments and Contingencies (Notes 3, 11, 12 and S-10)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Total Liabilities and Equity	 	$	8,098,552	 	 	$	7,722,533	 	
 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(dollars in thousands)

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Cash Flows from Operating Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	199,627	 	 	$	180,937	 	 	$	199,343	 	
Items not requiring cash:	 	 	 	 	 	 	 	 	 	 	 	 	
Depreciation and amortization	 	 	336,648	 	 	 	389,240	 	 	 	399,640	 	
Nuclear fuel amortization	 	 	30,446	 	 	 	28,757	 	 	 	31,185	 	
Allowance for equity funds used during construction	 	 	(4,885	)	 	 	(14,240	)	 	 	—	 	
Deferred income taxes	 	 	(140,855	)	 	 	(1,087	)	 	 	206,767	 	
Change in derivative mark-to-market valuations	 	 	(15,807	)	 	 	2,339	 	 	 	2,957	 	
Changes in certain current assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Accounts receivable	 	 	(19,493	)	 	 	83,692	 	 	 	(102,450	)	
Accrued utility revenues	 	 	(4,653	)	 	 	1,414	 	 	 	3,216	 	
Materials, supplies and fossil fuel	 	 	4,643	 	 	 	(872	)	 	 	68	 	
Other current assets	 	 	(2,529	)	 	 	976	 	 	 	2,227	 	
Accounts payable	 	 	88,937	 	 	 	17,961	 	 	 	15,372	 	
Accrued taxes	 	 	202,047	 	 	 	7,917	 	 	 	(25,038	)	
Accrued interest	 	 	(9,370	)	 	 	94	 	 	 	1,565	 	
Other current liabilities	 	 	37,756	 	 	 	13,804	 	 	 	44,224	 	
Increase in regulatory assets	 	 	(2,702	)	 	 	(20,971	)	 	 	(11,029	)	
Change in risk management trading – assets	 	 	(6,845	)	 	 	12,551	 	 	 	(22,570	)	
Change in risk management trading – liabilities	 	 	8,879	 	 	 	—	 	 	 	—	 	
Change in customer advances	 	 	6,402	 	 	 	7,270	 	 	 	(23,780	)	
Change in pension liability	 	 	22,361	 	 	 	17,395	 	 	 	7,016	 	
Change in other long-term assets	 	 	(27,994	)	 	 	(5,349	)	 	 	(24,502	)	
Change in other long-term liabilities	 	 	15,525	 	 	 	55,296	 	 	 	301	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow provided by operating activities	 	 	718,138	 	 	 	777,124	 	 	 	704,512	 	

Cash Flows from Investing Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	 	(513,677	)	 	 	(426,260	)	 	 	(490,156	)	
Capitalized interest	 	 	(7,155	)	 	 	(7,379	)	 	 	(15,150	)	
Purchases of investment securities	 	 	(871,810	)	 	 	(855,660	)	 	 	—	 	
Proceeds from sale of investment securities	 	 	760,485	 	 	 	785,810	 	 	 	—	 	
Loan to Pinnacle West Energy	 	 	—	 	 	 	(497,865	)	 	 	—	 	
Other	 	 	(805	)	 	 	(8,296	)	 	 	44,918	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow used for investing activities	 	 	(632,962	)	 	 	(1,009,650	)	 	 	(460,388	)	

Cash Flows from Financing Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of long-term debt	 	 	478,140	 	 	 	491,654	 	 	 	459,926	 	
Short-term borrowings	 	 	—	 	 	 	—	 	 	 	(171,162	)	
Dividends paid on common stock	 	 	(170,000	)	 	 	(170,000	)	 	 	(170,000	)	
Repayment and reacquisition of long-term debt	 	 	(385,893	)	 	 	(89,525	)	 	 	(337,160	)	
 	 	 	 	 	 	 	 	 	 	
Net cash flow provided by (used for) financing activities	 	 	(77,753	)	 	 	232,129	 	 	 	(218,396	)	

Net increase/(decrease) in cash and cash equivalents	 	 	7,423	 	 	 	(397	)	 	 	25,728	 	
Cash and cash equivalents at beginning of year	 	 	42,152	 	 	 	42,549	 	 	 	16,821	 	
 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of year	 	$	49,575	 	 	$	42,152	 	 	$	42,549	 	

Supplemental disclosure of cash flow information:	 	 	 	 	 	 	 	 	 	 	 	 	
Cash paid during the year for:	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes paid/(refunded)	 	$	68,074	 	 	$	74,523	 	 	$	(54,283	)	
Interest, net of amounts capitalized	 	$	149,148	 	 	$	140,010	 	 	$	117,081	 	
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.
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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)

 	 	Years Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
COMMON STOCK	 	$	178,162	 	 	$	178,162	 	 	$	178,162	 	

ADDITIONAL PAID-IN CAPITAL	 	 	1,246,804	 	 	 	1,246,804	 	 	 	1,246,804	 	

RETAINED EARNINGS	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	830,569	 	 	 	819,632	 	 	 	790,289	 	
Net income	 	 	199,627	 	 	 	180,937	 	 	 	199,343	 	
Common stock dividends	 	 	(170,000	)	 	 	(170,000	)	 	 	(170,000	)	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	860,196	 	 	 	830,569	 	 	 	819,632	 	

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	(51,905	)	 	 	(85,286	)	 	 	(64,565	)	
Minimum pension liability adjustment, net of tax expense (benefit) of ($8,936), $3,105 and ($39,696)	 	 	(13,929	)	 	 	4,329	 	 	 	(60,521	)	
Unrealized gain on derivative instruments, net of tax expense of $16,824, $15,824 and $25,426	 	 	25,892	 	 	 	24,135	 	 	 	38,764	 	
Reclassification of realized (gain)/loss to income, net of tax expense (benefit) of ($8,344), $3,207 and $679	 	 	(12,818	)	 	 	4,917	 	 	 	1,036	 	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	(52,760	)	 	 	(51,905	)	 	 	(85,286	)	

TOTAL COMMON STOCK EQUITY	 	$	2,232,402	 	 	$	2,203,630	 	 	$	2,159,312	 	

COMPREHENSIVE INCOME	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	199,627	 	 	$	180,937	 	 	$	199,343	 	
Other comprehensive income (loss)	 	 	(855	)	 	 	33,381	 	 	 	(20,721	)	
 	 	 	 	 	 	 	 	 	 	
Total comprehensive income	 	$	198,772	 	 	$	214,318	 	 	$	178,622	 	
 	 	 	 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.
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     Certain notes to Arizona Public Service Company’s financial statements are combined with the notes to Pinnacle West Capital Corporation’s consolidated financial statements. Listed below are the consolidated notes to Pinnacle West Capital Corporation’s consolidated financial statements, the majority of which also relate to Arizona Public Service Company’s financial statements. In addition, listed below are the supplemental notes which are required disclosures for Arizona Public Service Company and should be read in conjunction with Pinnacle West Capital Corporation’s Consolidated Notes. 

 	 	Consolidated	 	APS’ Supplemental	
 	 	Footnote Reference	 	Footnote Reference	
Summary of Significant Accounting Policies	 	Note 1	 	Note S-1	
New Accounting Standards	 	Note 2	 	—	
Regulatory Matters	 	Note 3	 	—	
Income Taxes	 	Note 4	 	Note S-2	
Lines of Credit and Short-Term Borrowings	 	Note 5	 	—	
Long-Term Debt	 	Note 6	 	Note S-3	
Common Stock and Treasury Stock	 	Note 7	 	—	
Retirement Plans and Other Benefits	 	Note 8	 	—	
Leases	 	Note 9	 	Note S-4	
Jointly-Owned Facilities	 	Note 10	 	—	
Commitments and Contingencies	 	Note 11	 	Note S-5	
Asset Retirement Obligations	 	Note 12	 	—	
Selected Quarterly Financial Data (Unaudited)	 	Note 13	 	Note S-6	
Fair Value of Financial Instruments	 	Note 14	 	Note S-7	
Earnings Per Share	 	Note 15	 	—	
Stock-Based Compensation	 	Note 16	 	—	
Business Segments	 	Note 17	 	—	
Derivative and Energy Trading Activities	 	Note 18	 	Note S-8	
Other Income and Other Expense	 	Note 19	 	Note S-9	
Variable Interest Entities	 	Note 20	 	—	
Guarantees	 	Note 21	 	—	
Discontinued Operations	 	Note 22	 	—	
Related Party Transactions	 	—	 	Note S-10	
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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS
S-1. Summary of Significant Accounting Polices
Stock-Based Compensation
     Pinnacle West offers stock-based compensation plans for officers and key employees of APS. In 2002, APS began applying the fair value method of accounting for stock-based compensation, as provided for in SFAS No. 123, “Accounting for Stock-Based Compensation.” The fair value method of accounting is the preferred method. In accordance with the transition requirements of SFAS No. 123, APS applied the fair value method prospectively, beginning with 2002 stock grants. In prior years, APS recognized stock compensation expense based on the intrinsic value method allowed in Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees.”
     The following chart compares APS’ net income and stock compensation expense to what those items would have been if APS had recorded stock compensation expense based on the fair value method for all stock grants through 2004 (dollars in thousands): 

 	 	2004	 	 	2003	 	 	2002	 	
Net income, as reported	 	$	199,627	 	 	$	180,937	 	 	$	199,343	 	
Add: Stock compensation expense included in reported net income (net of tax)	 	 	3,353	 	 	 	2,035	 	 	 	1,493	 	
Deduct: Total stock compensation expense determined under fair value method (net of tax)	 	 	(3,713	)	 	 	(3,024	)	 	 	(2,455	)	
 	 	 	 	 	 	 	 	 	 	
Pro forma net income	 	$	199,267	 	 	$	179,948	 	 	$	198,381	 	
 	 	 	 	 	 	 	 	 	 	
S-2. Income Taxes
     APS is included in our consolidated tax return. However, when we allocate income taxes to APS, we do so based on APS’ taxable income or loss alone.
     As a result of a change in IRS guidance, we claimed a tax deduction related to an APS tax accounting method change on the 2001 federal consolidated income tax return. The accelerated deduction resulted in a $200 million reduction in the current income tax liability and a corresponding increase in the plant-related deferred tax liability. In 2002, we received an income tax refund of approximately $115 million related to our 2001 federal consolidated income tax return. The 2001 federal consolidated income tax return is currently under examination by the IRS. As part of this ongoing examination, the IRS is reviewing this accounting method change and the resultant deduction. During 2004, the current income tax liability was increased, with a corresponding decrease to plant-related deferred tax liability, to reflect the expected outcome of this audit. We do not expect the ultimate outcome of this examination to have a material adverse impact on our financial position, results of operations or liquidity.
     The income tax liability accounts reflect the tax and interest associated with the most probable resolution of all known and measurable tax exposures.
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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS
     The components of APS’ income tax expense are as follows (dollars in thousands):

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Current:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	207,306	 	 	$	75,087	 	 	$	(61,962	)	
State	 	 	53,579	 	 	 	12,854	 	 	 	(18,000	)	
 	 	 	 	 	 	 	 	 	 	
Total current	 	 	260,885	 	 	 	87,941	 	 	 	(79,962	)	
Deferred	 	 	(140,855	)	 	 	(1,087	)	 	 	206,767	 	
 	 	 	 	 	 	 	 	 	 	
Total income tax expense	 	$	120,030	 	 	$	86,854	 	 	$	126,805	 	
 	 	 	 	 	 	 	 	 	 	
     On the APS Statements of Income, federal and state income taxes are allocated between operating income and other income.
     The following chart compares APS’ pretax income at the 35% federal income tax rate to income tax expense (dollars in thousands): 

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Federal income tax expense at 35% statutory rate	 	$	111,880	 	 	$	93,727	 	 	$	114,152	 	
Increases (reductions) in tax expense resulting from:	 	 	 	 	 	 	 	 	 	 	 	 	
State income tax net of federal income tax benefit	 	 	12,496	 	 	 	9,723	 	 	 	15,036	 	
Credits and favorable adjustments related to prior years resolved in current year	 	 	(315	)	 	 	(12,944	)	 	 	—	 	
Medicare Subsidy Part-D (see Note 8)	 	 	(1,507	)	 	 	—	 	 	 	—	 	
Allowance for equity funds used during construction (see Note 1)	 	 	(1,543	)	 	 	(4,984	)	 	 	—	 	
Other	 	 	(981	)	 	 	1,332	 	 	 	(2,383	)	
 	 	 	 	 	 	 	 	 	 	
Income tax expense	 	$	120,030	 	 	$	86,854	 	 	$	126,805	 	
 	 	 	 	 	 	 	 	 	 	
     The following table sets forth the net deferred income tax liability recognized on the APS Balance Sheets (dollars in thousands): 

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
Current liability	 	$	(9,057	)	 	$	(631	)	
Long term liability	 	 	(1,108,571	)	 	 	(1,257,671	)	
 	 	 	 	 	 	 	
Accumulated deferred income taxes – net	 	$	(1,117,628	)	 	$	(1,258,302	)	
 	 	 	 	 	 	 	
     The components of the net deferred income tax liability were as follows (dollars in thousands):
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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

 	 	December 31,	 	
 	 	2004	 	 	2003	 	
DEFERRED TAX ASSETS	 	 	 	 	 	 	 	 	
Regulatory liabilities:	 	 	 	 	 	 	 	 	
Asset retirement obligation	 	$	182,086	 	 	$	169,322	 	
Federal excess deferred income tax	 	 	16,341	 	 	 	18,936	 	
Other	 	 	8,282	 	 	 	8,302	 	
Pension liability	 	 	80,184	 	 	 	63,356	 	
Deferred gain on Palo Verde Unit 2 sale-leaseback	 	 	19,816	 	 	 	21,656	 	
Risk management and trading activities	 	 	15,172	 	 	 	24,706	 	
Other	 	 	73,925	 	 	 	72,557	 	
 	 	 	 	 	 	 	
Total deferred tax assets	 	 	395,806	 	 	 	378,835	 	
 	 	 	 	 	 	 	
DEFERRED TAX LIABILITIES	 	 	 	 	 	 	 	 	
Plant-related	 	 	(1,424,859	)	 	 	(1,552,293	)	
Regulatory assets	 	 	(54,767	)	 	 	(56,270	)	
Risk management and trading activities	 	 	(33,808	)	 	 	(28,574	)	
 	 	 	 	 	 	 	
Total deferred tax liabilities	 	 	(1,513,434	)	 	 	(1,637,137	)	
 	 	 	 	 	 	 	
Accumulated deferred income taxes – net	 	$	(1,117,628	)	 	$	(1,258,302	)	
 	 	 	 	 	 	 	
S-3. Long-Term Debt Payments
     The following is a list of principal payments due on APS’ total long-term debt and capitalized lease requirements:

 	•  	$452 million in 2005;	
 	
 	•  	$86 million in 2006;	
 	
 	•  	$174 million in 2007;	
 	
 	•  	$1 million in 2008;	
 	
 	•  	$1 million in 2009; and	
 	
 	•  	$2,012 million, thereafter.	
S-4. Leases
     Total lease expense recognized in the APS Statements of Income was $57 million in 2004, $66 million in 2003 and $57 million in 2002.
     Estimated future minimum lease payments for APS’ operating leases are approximately as follows (dollars in millions):
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\
ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

Year	 	 	 	 	
2005	 	$	65	 	
2006	 	 	64	 	
2007	 	 	63	 	
2008	 	 	61	 	
2009	 	 	61	 	
Thereafter	 	 	352	 	
 	 	 	 	
Total future lease commitments	 	$	666	 	
 	 	 	 	
S-5. Commitments and Contingencies
Purchased Power and Fuel Commitments
     APS is party to various purchased power and fuel contracts with terms expiring from 2005 through 2025 that include required purchase provisions. APS estimates the contract requirements to be approximately $245 million in 2005; $125 million in 2006; $81 million in 2007; $66 million in 2008; $68 million in 2009 and $363 million thereafter. Included in these contract requirements is approximately $57 million in 2005 and $36 million in 2006 for related party purchases (see Note 3). However, these amounts may vary significantly pursuant to certain provisions in such contracts that permit us to decrease required purchases under certain circumstances.
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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS
S-6. Selected Quarterly Financial Data (Unaudited)
     The following note presents quarterly financial information for 2004 and 2003. APS is disclosing originally reported amounts and revised amounts in the first and second quarters of 2004 due to the adoption of FSP 106-2 (see Note 8). Quarterly financial information for 2004 and 2003 is as follows (dollars in thousands):

 	 	2004 Quarter Ended,	 	 	 	 	
 	 	March 31,	 	 	June 30,	 	 	September 30,	 	 	December 31,	 	 	Total	 	
As originally reported:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	$	441,102	 	 	$	569,658	 	 	$	700,512	 	 	$	485,849	 	 	$	2,197,121	 	
Operations and Maintenance	 	 	126,988	 	 	 	127,947	 	 	 	143,338	 	 	 	144,156	 	 	 	542,429	 	
Operating Income	 	 	65,974	 	 	 	82,528	 	 	 	129,682	 	 	 	48,645	 	 	 	326,829	 	
Net Income	 	 	33,353	 	 	 	53,858	 	 	 	95,192	 	 	 	15,072	 	 	 	197,475	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Medicare Subsidy Adoption (see Note 8):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operations and Maintenance	 	 	(1,076	)	 	 	(1,076	)	 	 	—	 	 	 	—	 	 	 	(2,152	)	
Operating Income	 	 	1,076	 	 	 	1,076	 	 	 	—	 	 	 	—	 	 	 	2,152	 	
Net Income	 	 	1,076	 	 	 	1,076	 	 	 	—	 	 	 	—	 	 	 	2,152	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
After Medicare Subsidy Adoption:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	 	441,102	 	 	 	569,658	 	 	 	700,512	 	 	 	485,849	 	 	 	2,197,121	 	
Operations and Maintenance	 	 	125,912	 	 	 	126,871	 	 	 	143,338	 	 	 	144,156	 	 	 	540,277	 	
Operating Income	 	 	67,050	 	 	 	83,604	 	 	 	129,682	 	 	 	48,645	 	 	 	328,981	 	
Net Income	 	 	34,429	 	 	 	54,934	 	 	 	95,192	 	 	 	15,072	 	 	 	199,627	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2003 Quarter Ended,	 	 	 	 	
 	 	March 31,	 	 	June 30,	 	 	September 30,	 	 	December 31,	 	 	Total	 	
As originally reported:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Revenues	 	$	431,937	 	 	$	533,322	 	 	$	682,616	 	 	$	457,056	 	 	$	2,104,931	 	
Operating Income	 	 	46,830	 	 	 	76,258	 	 	 	120,415	 	 	 	54,655	 	 	 	298,158	 	
Net Income	 	 	15,933	 	 	 	43,175	 	 	 	100,356	 	 	 	21,473	 	 	 	180,937	 	
S-7. Fair Value of Financial Instruments
     APS believes that the carrying amounts of its cash equivalents are reasonable estimates of their fair values at December 31, 2004 and 2003 due to their short maturities.
     We hold investments in debt securities for purposes other than trading. We believe that the carrying amounts of these investments represent reasonable estimates of their fair values at December 31, 2004 and 2003 due to the short-term reset of interest rates.
     APS holds investments in fixed income and domestic equity securities for purposes other than trading. The December 31, 2004 and 2003 fair values of such investments, which APS determines by using quoted market prices, approximate their carrying amount. For further information, see disclosure of cost and fair value of APS’ nuclear decommissioning trust fund assets in Note 12.
     On December 31, 2004, the carrying value of APS’ long-term debt (excluding capitalized lease obligations) was $2.71 billion, with an estimated fair value of $2.81 billion. The carrying value of APS’ long-term debt (excluding capital lease obligations) was $2.61 billion on December 31,
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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS
2003, with an estimated fair value of $2.74 billion. The fair value estimates are based on quoted market prices of the same or similar issues.
S-8. Derivative and Energy Trading Accounting
     APS is exposed to the impact of market fluctuations in the commodity price and transportation costs of electricity, natural gas, coal and emissions allowances. As part of its overall risk management program, APS uses various commodity instruments that qualify as derivatives to hedge purchases and sales of electricity, fuels and emissions allowances and credits. As of December 31, 2004, APS hedged exposures to these risks for a maximum of three years. 
Cash Flow Hedges
     The changes in the fair value of APS’ hedged positions included in the APS Statements of Income for the years ended December 31, 2004, 2003 and 2002 are comprised of the following (dollars in thousands):

 	 	2004	 	 	2003	 	 	2002	 	
Gains/(losses) on the ineffective portion of derivatives qualifying for hedge accounting	 	$	(1,570	)	 	$	7,033	 	 	$	9,091	 	
Gains/(losses) from the change in options time value excluded from measurement of effectiveness	 	 	185	 	 	 	181	 	 	 	(609	)	
Gains/(losses) from the discontinuance of cash flow hedges	 	 	575	 	 	 	—	 	 	 	(9,206	)	
     During the twelve months ending December 31, 2005, APS estimates that a net gain of $23 million before income taxes will be reclassified from accumulated other comprehensive loss as an offset to the effect on earnings of market price changes for the related hedged transactions.
     APS’ assets and liabilities from risk management and trading activities are presented in two categories:

 	•  	Regulated Electricity – non-trading derivative instruments that hedge APS’ purchases and sales of electricity and fuel for its Native Load requirements; and	
 	
 	•  	Marketing and Trading – both non-trading and trading derivative instruments.	
     The following table summarizes APS’ assets and liabilities from risk management and trading activities at December 31, 2004 and 2003 (dollars in thousands):
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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS
December 31, 2004

 	 	Current	 	 	 	 	 	 	Current	 	 	Other	 	 	Net Asset/	 	
 	 	Assets	 	 	Investments	 	 	Liabilities	 	 	Liabilities	 	 	(Liability)	 	
Regulated Electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-Market	 	$	45,220	 	 	$	19,417	 	 	$	(19,191	)	 	$	(12,000	)	 	$	33,446	 	
Options and margin account	 	 	18,821	 	 	 	118	 	 	 	(8,879	)	 	 	—	 	 	 	10,060	 	
Marketing & Trading:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-Market	 	 	6,389	 	 	 	581	 	 	 	(6,222	)	 	 	(1,124	)	 	 	(376	)	
Emissions Allowances at cost	 	 	—	 	 	 	7	 	 	 	—	 	 	 	—	 	 	 	7	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	70,430	 	 	$	20,123	 	 	$	(34,292	)	 	$	(13,124	)	 	$	43,137	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2003 

 	 	Current	 	 	 	 	 	 	Current	 	 	Other	 	 	Net Asset/	 	
 	 	Assets	 	 	Investments	 	 	Liabilities	 	 	Liabilities	 	 	(Liability)	 	
Regulated Electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-Market	 	$	44,079	 	 	$	5,900	 	 	$	(47,268	)	 	$	(3,028	)	 	$	(317	)	
Options	 	 	—	 	 	 	12,101	 	 	 	—	 	 	 	—	 	 	 	12,101	 	
Marketing & Trading:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-Market	 	 	8,369	 	 	 	—	 	 	 	(10,870	)	 	 	(1,474	)	 	 	(3,975	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	52,448	 	 	$	18,001	 	 	$	(58,138	)	 	$	(4,502	)	 	$	7,809	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     Cash or other assets may be required to serve as collateral against APS’ open positions on certain energy-related contracts. No collateral was provided to counterparties at December 31, 2004 or at December 31, 2003. Collateral provided to us by counterparties is $6 million at December 31, 2004 and $12 million at December 31, 2003, and is included in other current liabilities on the Balance Sheet.
S-9. Other Income and Other Expense
     The following table provides detail of APS’ other income and other expense for the years ended December 31, 2004, 2003 and 2002 (dollars in thousands):
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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Other income:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	22,354	 	 	$	15,660	 	 	$	3,455	 	
Miscellaneous	 	 	2,021	 	 	 	1,892	 	 	 	1,126	 	
Investment gains – net	 	 	3,192	 	 	 	2,107	 	 	 	—	 	
Asset sales	 	 	3,026	 	 	 	618	 	 	 	568	 	
 	 	 	 	 	 	 	 	 	 	
Total other income	 	$	30,593	 	 	$	20,277	 	 	$	5,149	 	

Other expense:	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating costs (a)	 	$	(8,923	)	 	$	(9,361	)	 	$	(9,952	)	
Asset sales	 	 	(1,212	)	 	 	(1,522	)	 	 	(6,472	)	
Miscellaneous	 	 	(3,681	)	 	 	(2,079	)	 	 	(1,783	)	
Equity losses – net	 	 	—	 	 	 	—	 	 	 	(1,131	)	
 	 	 	 	 	 	 	 	 	 	
Total other expense	 	$	(13,816	)	 	$	(12,962	)	 	$	(19,338	)	

(a)	 	As defined by the FERC, includes below-the-line non-operating utility costs (primarily community relations).	
S-10. Related Party Transactions
     From time to time, APS enters into transactions with Pinnacle West or Pinnacle West’s subsidiaries. The following table summarizes the amounts included in the APS Statements of Income and Balance Sheets related to transactions with affiliated companies (dollars in millions):
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ARIZONA PUBLIC SERVICE COMPANY
SUPPLEMENTAL NOTES TO THE FINANCIAL STATEMENTS

 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	
Electric operating revenues:	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West – marketing and trading	 	$	13	 	 	$	12	 	 	$	85	 	
Pinnacle West Energy	 	 	3	 	 	 	9	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	16	 	 	$	21	 	 	$	85	 	

Purchased power and fuel costs:	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West – marketing and trading	 	$	—	 	 	$	—	 	 	$	135	 	
Pinnacle West Energy	 	 	75	 	 	 	70	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	75	 	 	$	70	 	 	$	135	 	

Other:	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West Energy:	 	 	 	 	 	 	 	 	 	 	 	 	
Lease expense	 	$	—	 	 	$	10	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	19	 	 	$	12	 	 	$	—	 	

Capital expenditures:	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West — marketing and trading	 	$	11	 	 	$	—	 	 	$	—	 	
Pinnacle West	 	 	22	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	33	 	 	$	—	 	 	$	—	 	

 	 	As of December 31,	 	
 	 	2004	 	 	2003	 	
Net intercompany receivables/(payables):	 	 	 	 	 	 	 	 	
Pinnacle West Energy (a)	 	$	467	 	 	$	463	 	
Pinnacle West – marketing and trading	 	 	19	 	 	 	16	 	
APS Energy Services	 	 	9	 	 	 	10	 	
Pinnacle West	 	 	(5	)	 	 	(8	)	
 	 	 	 	 	 	 	
Total	 	$	490	 	 	$	481	 	

(a)  	This net intercompany receivable primarily consists of the $500 million of debt APS issued to Pinnacle West Energy pursuant to the Financing Order (see “ACC Financing Order” in Note 3).	
     Electric revenues include sales of electricity to affiliated companies at contract prices. Purchased power includes purchases of electricity from affiliated companies at contract prices. The Company purchases electricity from and sells electricity to APS Energy Services; however, these transactions are settled net and reported net in accordance with EITF 03-11, “Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not ‘Held for Trading Purposes’ As Defined in Issue No. 2-3.” See Note 18 for more information related to EITF 03-11. Intercompany receivables primarily include the amounts related to the loan APS made to Pinnacle West Energy and intercompany sales of electricity. Intercompany payables primarily include amounts related to the intercompany purchases of electricity. Intercompany receivables and payables are generally settled on a current basis in cash.
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PINNACLE WEST CAPITAL CORPORATION
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)

Column A	 	Column B	 	 	Column C	 	 	Column D	 	 	Column E	 	
 	 	 	 	 	Additions	 	 	 	 	 	 	 	
 	 	Balance at	 	 	Charged to	 	 	Charged	 	 	 	 	 	Balance	 	
 	 	beginning	 	 	cost and	 	 	to other	 	 	 	 	 	at end of	 	
Description	 	of period	 	 	expenses	 	 	accounts	 	 	Deductions	 	 	period	 	
Real estate valuation reserves:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2004	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	
2003	 	 	1,661	 	 	 	—	 	 	 	—	 	 	 	1,661	(a)	 	 	—	 	
2002	 	 	2,000	 	 	 	—	 	 	 	—	 	 	 	339	(a)	 	 	1,661	 	
Reserve for uncollectibles:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2004	 	$	9,223	 	 	$	2,868	 	 	$	—	 	 	$	7,195	 	 	$	4,896	 	
2003	 	 	9,607	 	 	 	3,715	 	 	 	—	 	 	 	4,099	 	 	 	9,223	 	
2002	 	 	14,334	 	 	 	(21	)	 	 	—	 	 	 	4,706	 	 	 	9,607	 	
Reserve for contract losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2004	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	
2003	 	 	13,000	 	 	 	—	 	 	 	—	 	 	 	13,000	 	 	 	—	 	
2002	 	 	—	 	 	 	13,000	(b)	 	 	—	 	 	 	—	 	 	 	13,000	 	

(a)	 	Represents pro-rata allocations for sale of land.	
 		
(b)	 	Contract losses related to NAC (see Note 22 – Discontinued Operations – NAC).	
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ARIZONA PUBLIC SERVICE COMPANY
SCHEDULE II – RESERVE FOR UNCOLLECTIBLES
(dollars in thousands)

Column A	 	Column B	 	 	Column C	 	 	Column D	 	 	Column E	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	Additions	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Balance at	 	 	Charged to	 	 	Charged	 	 	 	 	 	Balance	 	
 	 	beginning	 	 	cost and	 	 	to other	 	 	 	 	 	at end of	 	
Description	 	of period	 	 	expenses	 	 	accounts	 	 	Deductions	 	 	period	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Reserve for uncollectibles:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2004	 	$	3,743	 	 	$	2,446	 	 	$	—	 	 	$	2,745	 	 	$	3,444	 	
2003	 	 	1,341	 	 	 	5,716	 	 	 	—	 	 	 	3,314	 	 	 	3,743	 	
2002	 	 	3,349	 	 	 	2,680	 	 	 	—	 	 	 	4,688	 	 	 	1,341	 	
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
     None.
ITEM 9A. CONTROLS AND PROCEDURES
     (a) Disclosure Controls and Procedures
     The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C. 78a et seq .) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
     Pinnacle West’s management, with the participation of Pinnacle West’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of Pinnacle West’s disclosure controls and procedures as of December 31, 2004. Based on that evaluation, Pinnacle West’s Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, Pinnacle West’s disclosure controls and procedures were effective.
     APS’ management, with the participation of APS’ Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of APS’ disclosure controls and procedures as of December 31, 2004. Based on that evaluation, APS’ Chief Executive Officer and Chief Financial Officer have concluded that, as of that date, APS’ disclosure controls and procedures were effective.
     (b) Management’s Annual Reports on Internal Control Over Financial Reporting
     Reference is made to “Management’s Report on Internal Control Over Financial Reporting (Pinnacle West Capital Corporation)” on page 64 of this report and “Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company)” on page 128 of this report.
     (c) Attestation Reports of the Registered Public Accounting Firm
     Reference is made to “Report of Independent Registered Public Accounting Firm” on page 65 of this report and “Report of Independent Registered Public Accounting Firm” on page 129 of this report on the internal control over financial reporting of Pinnacle West and APS, respectively.
     (d) Changes In Internal Control Over Financial Reporting
     The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
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     No change in Pinnacle West’s or APS’ internal control over financial reporting occurred during the fiscal quarter ended December 31, 2004 that materially affected, or is reasonably likely to materially affect, Pinnacle West’s or APS’ internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
     None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS OF PINNACLE WEST
     Reference is hereby made to “Information About Our Board and Its Committees and Our Corporate Governance,” “Election of Directors” and to “Section 16(a) Beneficial Ownership Reporting Compliance” in the Pinnacle West Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 18, 2005 (the “2005 Proxy Statement”) and to the Supplemental Item – “Executive Officers of Pinnacle West” in Part I of this report.
     Pinnacle West has adopted a Code of Ethics for Financial Professionals that applies to professional employees in the areas of finance, accounting, internal audit, energy risk management, marketing and trading financial control, tax, investor relations, and treasury and also includes Pinnacle West’s Chief Executive Officer, Chief Financial Officer, Controller, Treasurer, and officers holding substantially equivalent positions at Pinnacle West’s subsidiaries. The Code of Ethics for Financial Professionals is posted on Pinnacle West’s website at www.pinnaclewest.com. Pinnacle West intends to satisfy the requirements under Item 5.05 of Form 8-K regarding disclosure of amendments to, or waivers from, provisions of the Code of Ethics for Financial Professionals by posting such information on Pinnacle West’s website.
ITEM 11. EXECUTIVE COMPENSATION
     Reference is hereby made to “Information About Our Board and Its Committees and Our Corporate Governance – How are Directors compensated?”; “Performance Graph”; and “Executive Compensation” in the 2005 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management
     Reference is hereby made to “How Many Shares of Pinnacle West Stock are Owned by Management and Large Shareholders?” in the 2005 Proxy Statement.
Securities Authorized For Issuance Under Equity Compensation Plans
     The following table sets forth information as of December 31, 2004 with respect to our compensation plans and individual compensation arrangements under which our equity securities were authorized for issuance.
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Equity Compensation Plan Information

 	 	 	 	 	 	 	 	 	 	Number of securities	 	
 	 	Number of	 	 	 	 	 	 	remaining available for	 	
 	 	securities to be	 	 	Weighted-average	 	 	future issuance under	 	
 	 	issued upon exercise	 	 	exercise price of	 	 	equity compensation	 	
 	 	of outstanding	 	 	outstanding	 	 	plans (excluding	 	
 	 	options, warrants	 	 	options, warrants	 	 	securities reflected in	 	
Plan category	 	and rights	 	 	and rights	 	 	column (a))	 	
 	 	(a)	 	 	(b)	 	 	(c)	 	
Equity compensation plans approved by security holders	 	 	2,276,123	 	 	$	39.14	 	 	 	4,393,196	 	
Equity compensation plans not approved by security holders	 	 	—	 	 	$	—	 	 	 	154,100	 	
 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	2,276,123	 	 	$	39.14	 	 	 	4,547,296	 	
 	 	 	 	 	 	 	 	 	 	 	
Equity Compensation Plans Approved By Security Holders
     The Company has four equity compensation plans that were approved by its shareholders: the Pinnacle West Capital Corporation Stock Option and Incentive Plan, under which no new options may be granted; the Pinnacle West Capital Corporation Directors Stock Option Plan, under which no new options may be granted; the Pinnacle West Capital Corporation 1994 Long-Term Incentive Plan, under which no stock awards may be granted; and the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan. See Note 16 for additional information regarding these plans.
Equity Compensation Plans Not Approved By Security Holders
     The Company has one equity compensation plan, the Pinnacle West Capital Corporation 2000 Director Equity Plan (the “2000 Plan”), for which the approval of shareholders was not required.
      Number of Shares Subject to the 2000 Plan . The total number of shares of the Company’s common stock granted under the 2000 Plan may not exceed 200,000. In the case of a significant corporate event, such as a reorganization, merger or consolidation, the 2000 Plan provides for adjustment of the above limit, the number of shares to be awarded automatically to eligible non-employee directors and the number of shares of the Company’s common stock non-employee directors are required to own to receive an annual grant of common stock under the 2000 Plan.
      Eligibility for Participation . Only non-employee directors may participate in the 2000 Plan. A non-employee director is an individual who is a director of the Company but who is not also an employee of the Company or any of its subsidiaries.
      Terms of Awards . The 2000 Plan provides for: (1) annual grants of common stock to eligible non-employee directors, (2) discretionary grants of common stock to eligible non-employee directors and (3) grants of nonqualified stock options to eligible non-employee directors.
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      Annual Grants of Stock
     Each individual who is a non-employee director as of July 1 of a calendar year, and who meets requirements of ownership of the Company’s common stock set forth below, will receive 900 shares of the Company’s common stock for such calendar year. In the first calendar year in which a non-employee director is eligible to participate in the 2000 Plan, he or she must own at least 900 shares of the Company’s common stock as of December 31 of the same calendar year to receive a grant of 900 shares of the Company’s common stock. If the non-employee director owns 900 shares of common stock as of June 30, he or she will receive a grant of 900 shares of common stock as of July 1 of the same calendar year. If the non-employee director does not own 900 shares of the Company’s common stock as of June 30, but acquires the necessary shares on or before December 31 of the same year, he or she will receive a grant of 900 shares of common stock within a reasonable time after the Company verifies that the requisite number of shares has been acquired. In each subsequent year, the number of shares of the Company’s common stock the non-employee director must own to receive a grant of 900 shares of common stock will increase by 900 shares, until reaching a maximum of 4,500 shares. In each of the subsequent years, the non-employee director must own the requisite number of shares of the Company’s common stock as of June 30 of the relevant calendar year.
      Discretionary Grants of Stock
     The Human Resources Committee of the Board of Directors administers the 2000 Plan and may grant shares of the Company’s common stock to non-employee directors in its discretion. No discretionary grants of common stock have been made under the 2000 Plan.
      Grants of Non-qualified Stock Options
     The Committee can grant non-qualified stock options under the 2000 Plan. The terms and the conditions of the option grant, including the exercise price per share, which may not be less than fair market value on the date of grant, will be set by the Committee in a written award agreement. The Committee will determine the time or times at which any such options may be exercised in whole or in part. The Committee will also determine the performance or other conditions, if any, that must be satisfied before all or part of an option may be exercised. Any such options granted to a participant will expire on the tenth anniversary date of the date of grant, unless the option is earlier terminated, forfeited or surrendered pursuant to a provision of the 2000 Plan or the applicable award agreement. Notwithstanding the foregoing, if a participant ceases to be a Company director for any reason, including death or disability, any such options held by that participant will expire on the second anniversary of the date on which the participant ceased to be a Company director, unless otherwise provided in the applicable award agreement. Unless the Committee provides otherwise, no such options may be sold, transferred, pledged, assigned or otherwise alienated, other than by will, the laws of descent and distribution, or under any other circumstances allowed by the Committee. No options have been granted under the 2000 Plan.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
     Reference is hereby made to “How Many Shares of Pinnacle West Stock are Owned by Management and Large Shareholders?”; “Executive Compensation – Human Resources Committee Interlocks and Insider Participation” and “What are the Company’s Executive Benefit Plans – Employment and Severance Agreements” in the 2005 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
Pinnacle West
     Reference is hereby made to “Audit Matters – What fees were paid to APS’ independent accountants in 2004 and 2003?” and “– What are the Audit Committee’s pre-approval policies?” in the 2005 Proxy Statement. 
APS
     The following fees were paid to our independent public accountants, Deloitte & Touche LLP, for the last two fiscal years:

Type of Service	 	2003	 	 	2004	 	
Audit Fees (1)	 	$	1,338,846	 	 	$	1,910,089	 	
Audit-Related Fees (2)	 	 	161,970	 	 	 	318,750	 	
Tax Fees (3)	 	 	1,677,474	 	 	 	1,559,928	 	
All Other Fees (4)	 	 	2,304	 	 	 	—	 	

(1)	 	The aggregate fees billed for services rendered for the audit of annual financial statements and for review of financial statements included in Forms 10-Q.	
 		
(2)	 	The aggregate fees billed for assurance and services that are reasonably related to the performance of the audit or review of the financial statements that are not included in Audit Fees reported above, which primarily consist of fees for Sarbanes-Oxley Section 404 readiness.	
 		
(3)	 	The aggregate fees billed primarily for investment tax credit services, tax compliance and tax planning.	
 		
(4)	 	The aggregate fees billed for services rendered for all services in 2003, other than the audit services described above, which for 2003 consisted of continuing professional education fees.	
     Pinnacle West’s Audit Committee pre-approves each audit service and non-audit service to be provided by APS’ independent public accountants. The Audit Committee has delegated to the Chairman of the Audit Committee the authority to pre-approve audit and non-audit services to be performed by the independent public accountants if the services are not expected to cost more than $50,000. The Chairman must report any pre-approval decisions to the Audit Committee at its next scheduled meeting. All of the services performed by Deloitte & Touche LLP for APS were pre-approved by the Audit Committee.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Financial Statement Schedules
     See the Index to Financial Statements and Financial Statement Schedule in Part II, Item 8. 
Exhibits Filed
     The documents listed below are being filed or have previously been filed on behalf of Pinnacle West or APS and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith.

Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit : a	 	Effective	
	 	 	 	 	 	 	 	 	
3.1	 	Pinnacle West	 	Articles of Incorporation, restated as of July 29, 1988	 	19.1 to Pinnacle West’s September 1988 Form 10-Q Report, File No. 1-8962	 	11-14-88	
	 	 	 	 	 	 	 	 	
3.2	 	Pinnacle West	 	Pinnacle West Capital Corporation Bylaws, amended as of June 23, 2004	 	3.1 to Pinnacle West’s June 30, 2004 Form 10-Q Report, File No. 1-8962	 	8-9-04	
	 	 	 	 	 	 	 	 	
3.3	 	APS	 	Articles of Incorporation, restated as of May 25, 1988	 	4.2 to APS’ Form S-3 Registration Nos. 33-33910 and 33-55248 by means of September 24, 1993 Form 8-K Report, File No. 1-4473	 	9-29-93	
	 	 	 	 	 	 	 	 	
3.4	 	APS	 	Arizona Public Service Company Bylaws, amended as of June 23, 2004	 	3.1 to APS’ June 30, 2004 Form 10-Q Report, File No. 1-4473	 	8-9-04	
	 	 	 	 	 	 	 	 	
4.12	 	Pinnacle West
APS	 	Agreement, dated March 21, 1994, relating to the filing of instruments defining the rights of holders of APS long-term debt not in excess of 10% of APS’ total assets	 	4.1 to APS’ 1993 Form 10-K Report, File No. 1-4473	 	3-30-94	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
4.13	 	Pinnacle West
APS	 	Indenture dated as of January 1, 1995 among APS and The Bank of New York, as Trustee	 	4.6 to APS’ Registration Statement Nos. 33-61228 and 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473	 	1-11-95	
	 	 	 	 	 	 	 	 	
4.14	 	Pinnacle West
APS	 	First Supplemental Indenture dated as of January 1, 1995	 	4.4 to APS’ Registration Statement Nos. 33-61228 and 33-55473 by means of January 1, 1995 Form 8-K Report, File No. 1-4473	 	1-11-95	
	 	 	 	 	 	 	 	 	
4.15	 	Pinnacle West
APS	 	Indenture dated as of November 15, 1996 among APS and The Bank of New York, as Trustee	 	4.5 to APS’ Registration Statements Nos. 33-61228, 33-55473, 33-64455 and 333- 15379 by means of November 19, 1996 Form 8-K Report, File No. 1-4473	 	11-22-96	
	 	 	 	 	 	 	 	 	
4.16	 	Pinnacle West
APS	 	First Supplemental Indenture	 	4.6 to APS’ Registration Statements Nos. 33-61228, 33-55473, 33-64455 and 333-15379 by means of November 19, 1996 Form 8-K Report, File No. 1-4473	 	11-22-96	
	 	 	 	 	 	 	 	 	
4.17	 	Pinnacle West
APS	 	Second Supplemental Indenture	 	4.10 to APS’ Registration Statement Nos. 33-55473, 33-64455 and 333-15379 by means of April 7, 1997 Form 8-K Report, File No. 1-4473	 	4-9-97	
	 	 	 	 	 	 	 	 	
4.18	 	Pinnacle West
APS	 	Third Supplemental Indenture	 	10.2 to Pinnacle West’s March 2003 Form 10-Q Report, File No. 1-8962	 	5-15-03	
	 	 	 	 	 	 	 	 	
4.19	 	Pinnacle West	 	Indenture dated as of December 1, 2000 between the Company and The Bank of New York, as Trustee, relating to Senior Debt Securities	 	4.1 to Pinnacle West’s Registration Statement No. 333-53150, File No. 1-8962	 	1-25-01	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
4.20	 	Pinnacle West	 	First Supplemental Indenture dated as of March 15, 2001	 	4.2 to Pinnacle West’s Registration Statement No. 333-52476, File No. 1-8962	 	3-26-01	
	 	 	 	 	 	 	 	 	
4.21	 	Pinnacle West	 	Second Supplemental Indenture dated as of November 1, 2003	 	4.20 to Pinnacle West’s Registration Statement No. 333-101457 by means of November 6, 2003 Form 8-K Report, File No. 1-8962	 	11-12-03	
	 	 	 	 	 	 	 	 	
4.22	 	Pinnacle West	 	Indenture dated as of December 1, 2000 between the Company and The Bank of New York, as Trustee, relating to subordinated Debt Securities	 	4.2 to Pinnacle West’s Registration Statement No. 333-53150, File No. 1-8962	 	1-25-01	
	 	 	 	 	 	 	 	 	
4.23	 	Pinnacle West	 	Specimen Certificate of Pinnacle West Capital Corporation Common Stock, no par value	 	4.2 to Pinnacle West’s 1988 Form 10-K Report, File No. 1-8962	 	3-31-89	
	 	 	 	 	 	 	 	 	
4.24	 	Pinnacle West	 	Agreement, dated March 29, 1988, relating to the filing of instruments defining the rights of holders of long-term debt not in excess of 10% of the Company’s total assets	 	4.1 to Pinnacle West’s 1987 Form 10-K Report, File No. 1-8962	 	3-30-88	
	 	 	 	 	 	 	 	 	
4.25	 	Pinnacle West
APS	 	Indenture dated as of January 15, 1998 among APS and The Chase Manhattan Bank, as Trustee	 	4.10 to APS’ Registration Statement Nos. 333-15379 and 333-27551 by means of January 13, 1998 Form 8-K Report, File No. 1-4473	 	1-16-98	
	 	 	 	 	 	 	 	 	
4.26	 	Pinnacle West
APS	 	First Supplemental Indenture dated as of January 15, 1998	 	4.3 to APS’ Registration Statement Nos. 333-15379 and 333-27551 by means of January 13, 1998 Form 8-K Report, File No. 1-4473	 	1-16-98	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
4.27	 	Pinnacle West
APS	 	Second Supplemental Indenture dated as of February 15, 1999	 	4.3 to APS’ Registration Statement Nos. 333-27551 and 333-58445 by means of February 18, 1999 Form 8-K Report, File No. 1-4473	 	2-22-99	
	 	 	 	 	 	 	 	 	
4.28	 	Pinnacle West
APS	 	Third Supplemental Indenture dated as of November 1, 1999	 	4.5 to APS’ Registration Statement Nos. 333-58445 by means of November 2, 1999 Form 8-K Report, File No. 1-4473	 	11-5-99	
	 	 	 	 	 	 	 	 	
4.29	 	Pinnacle West
APS	 	Fourth Supplemental Indenture dated as of August 1, 2000	 	4.1 to APS’ Registration Statement No. 333-58445 and 333-94277 by means of August 2, 2000 Form 8-K Report, File No. 1-4473	 	8-4-00	
	 	 	 	 	 	 	 	 	
4.30	 	Pinnacle West
APS	 	Fifth Supplemental Indenture dated as of October 1, 2001	 	4.1 to APS’ September 2001 Form 10-Q, File No. 1-4473	 	11-6-01	
	 	 	 	 	 	 	 	 	
4.31	 	Pinnacle West
APS	 	Sixth Supplemental Indenture dated as of March 1, 2002	 	4.1 to APS’ Registration Statement Nos. 333-63994 and 333-83398 by means of February 26, 2002 Form 8-K Report, File No. 1-4473	 	2-28-02	
	 	 	 	 	 	 	 	 	
4.32	 	Pinnacle West
APS	 	Seventh Supplemental Indenture dated as of May 1, 2003	 	4.1 to APS’ Registration Statement No. 333-90824 by means of May 7, 2003 Form 8-K Report, File No. 1-8962	 	5-9-03	
4.33	 	Pinnacle West
APS	 	Eighth Supplemental Indenture dated as of June 15, 2004	 	4.1 to APS’ Registration Statement No. 333-106772 by means of June 24, 2004 Form 8-K Report, File No. 1-4473	 	6-28-04	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
4.34	 	Pinnacle West	 	Amended and Restated Rights Agreement, dated as of March 26, 1999, between Pinnacle West Capital Corporation and BankBoston, N.A., as Rights Agent, including (i) as Exhibit A thereto the form of Amended Certificate of Designation of Series A Participating Preferred Stock of Pinnacle West Capital Corporation, (ii) as Exhibit B thereto the form of Rights Certificate and (iii) as Exhibit C thereto the Summary of Right to Purchase Preferred Shares	 	4.1 to Pinnacle West’s March 22, 1999 Form 8-K Report, File No. 1-8962	 	4-19-99	
	 	 	 	 	 	 	 	 	
4.35	 	Pinnacle West	 	Amendment to Rights Agreement, effective as of January 1, 2002	 	4.1 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	 	5-15-02	
	 	 	 	 	 	 	 	 	
4.36	 	Pinnacle West	 	Second Amended and Restated Investor’s Advantage Plan	 	4.4 to Pinnacle West’s June 23, 2004 Form 8-K Report, File No. 1-8962	 	8-9-04	
	 	 	 	 	 	 	 	 	
10.1 b	 	Pinnacle West
APS	 	2005 Officer and CEO Variable Incentive Plan	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.2	 	Pinnacle West
APS	 	Amendment No. 4 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of December 19, 2003	 	10.3 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3-15-04	
	 	 	 	 	 	 	 	 	
10.3	 	Pinnacle West
APS	 	Amendment No. 7 to the Decommissioning Trust Agreement (PVNGS Unit 2), dated as of December 19, 2003	 	10.4 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3-15-04	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.4	 	Pinnacle West
APS	 	Amendment No. 4 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of December 19, 2003	 	10.5 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3-15-04	
	 	 	 	 	 	 	 	 	
10.5	 	Pinnacle West
APS	 	Fourth Amendment to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan	 	10.6 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3-15-04	
	 	 	 	 	 	 	 	 	
10.6	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation Supplement Excess Benefit Retirement Plan, amended and restated as of January 1, 2003	 	10.7 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3-15-04	
	 	 	 	 	 	 	 	 	
10.7	 	Pinnacle West
APS	 	Two separate Decommissioning Trust Agreements (relating to PVNGS Units 1 and 3, respectively), each dated July 1, 1991, between APS and Mellon Bank, N.A., as Decommissioning Trustee	 	10.2 to APS’ September 1991 Form 10-Q Report, File No. 1-4473	 	11-14-91	
	 	 	 	 	 	 	 	 	
10.8	 	Pinnacle West
APS	 	Amendment No. 1 to Decommissioning Trust Agreement (PVNGS Unit 1), dated as of December 1, 1994	 	10.1 to APS’ 1994 Form 10- K Report, File No. 1-4473	 	3-30-95	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.9	 	Pinnacle West
APS	 	Amendment No. 1 to Decommissioning Trust Agreement (PVNGS Unit 3), dated as of December 1, 1994	 	10.2 to APS’ 1994 Form 10-K Report, File No. 1-4473	 	3-30-95	
	 	 	 	 	 	 	 	 	
10.10	 	Pinnacle West
APS	 	Amendment No. 2 to APS Decommissioning Trust Agreement (PVNGS Unit 1) dated as of July 1, 1991	 	10.4 to APS’ 1996 Form 10-K Report , File No. 1-4473	 	3-28-97	
	 	 	 	 	 	 	 	 	
10.11	 	Pinnacle West
APS	 	Amendment No. 2 to APS Decommissioning Trust Agreement (PVNGS Unit 3) dated as of July 1, 1991	 	10.6 to APS’ 1996 Form 10-K Report, File No. 1-4473	 	3-28-97	
	 	 	 	 	 	 	 	 	
10.12	 	Pinnacle West
APS	 	Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992, among APS, 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	 	10.1 to Pinnacle West’s 1991 Form 10-K Report, File No. 1-8962	 	3-26-92	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.13	 	Pinnacle West
APS	 	First Amendment to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1992	 	10.2 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
10.14	 	Pinnacle West
APS	 	Amendment No. 2 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of November 1, 1994	 	10.3 to APS’ 1994 Form 10-K Report, File No. 1-4473	 	3-30-95	
	 	 	 	 	 	 	 	 	
10.15	 	Pinnacle West
APS	 	Amendment No. 3 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of January 31, 1992	 	10.1 to APS’ June 1996 Form 10-Q Report, File No. 1-4473	 	8-9-96	
	 	 	 	 	 	 	 	 	
10.16	 	Pinnacle West
APS	 	Amendment No. 4 to Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992	 	APS 10.5 to APS’ 1996 Form 10-K Report, File No. 1-4473	 	3-28-97	
	 	 	 	 	 	 	 	 	
10.17	 	Pinnacle West
APS	 	Amendment No. 5 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of June 30, 2000	 	10.1 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	 	5-15-02	
	 	 	 	 	 	 	 	 	
10.18	 	Pinnacle West
APS	 	Amendment No. 3 to the Decommissioning Trust Agreement (PVNGS Unit 1), dated as of March 18, 2002	 	10.2 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	 	5-15-02	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.19	 	Pinnacle West
APS	 	Amendment No. 6 to the Amended and Restated Decommissioning Trust Agreement (PVNGS Unit 2), dated as of March 18, 2002	 	10.3 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	 	5-15-02	
	 	 	 	 	 	 	 	 	
10.20	 	Pinnacle West
APS	 	Amendment No. 3 to the Decommissioning Trust Agreement (PVNGS Unit 3), dated as of March 18, 2002	 	10.4 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	 	5-15-02	
	 	 	 	 	 	 	 	 	
10.21	 	Pinnacle West
APS	 	Asset Purchase and Power Exchange Agreement dated September 21, 1990 between APS and PacifiCorp, as amended as of October 11, 1990 and as of July 18, 1991	 	10.1 to APS’ June 1991 Form 10-Q Report, File No. 1-4473	 	8-8-91	
	 	 	 	 	 	 	 	 	
10.22	 	Pinnacle West
APS	 	Long-Term Power Transaction Agreement dated September 21, 1990 between APS and PacifiCorp, as amended as of October 11, 1990, and as of July 8, 1991	 	10.2 to APS’ June 1991 Form 10-Q Report, File No. 1-4473	 	8-8-91	
	 	 	 	 	 	 	 	 	
10.23	 	Pinnacle West
APS	 	Amendment No. 1 dated April 5, 1995 to the Long-Term Power Transaction Agreement and Asset Purchase and Power Exchange Agreement between PacifiCorp and APS	 	10.3 to APS’ 1995 Form 10-K Report, File No. 1-4473	 	3-29-96	
	 	 	 	 	 	 	 	 	
10.24	 	Pinnacle West
APS	 	Restated Transmission Agreement between PacifiCorp and APS dated April 5, 1995	 	10.4 to APS’ 1995 Form 10-K Report, File No. 1-4473	 	3-29-96	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.25	 	Pinnacle West
APS	 	Contract among PacifiCorp, APS and United States Department of Energy Western Area Power Administration, Salt Lake Area Integrated Projects for Firm Transmission Service dated May 5, 1995	 	10.5 to APS’ 1995 Form 10-K Report, File No. 1-4473	 	3-29-96	
	 	 	 	 	 	 	 	 	
10.26	 	Pinnacle West
APS	 	Reciprocal Transmission Service Agreement between APS and PacifiCorp dated as of March 2, 1994	 	10.6 to APS’ 1995 Form 10-K Report, File No. 1-4473	 	3-29-96	
	 	 	 	 	 	 	 	 	
10.27	 	Pinnacle West
APS	 	Contract, dated July 21, 1984, with DOE providing for the disposal of nuclear fuel and/or high -level radioactive waste, ANPP	 	10.31 to Pinnacle West’s Form S-14 Registration Statement, File No. 2-96386	 	3-13-85	
	 	 	 	 	 	 	 	 	
10.28	 	Pinnacle West
APS	 	Indenture of Lease with Navajo Tribe of Indians, Four Corners Plant	 	5.01 to APS’ Form S-7 Registration Statement, File No. 2-59644	 	9-1-77	
	 	 	 	 	 	 	 	 	
10.29	 	Pinnacle West
APS	 	Supplemental and Additional Indenture of Lease, including amendments and supplements to original lease with Navajo Tribe of Indians, Four Corners Plant	 	5.02 to APS’ Form S-7 Registration Statement, File No. 2-59644	 	9-1-77	
	 	 	 	 	 	 	 	 	
10.30	 	Pinnacle West
APS	 	Amendment and Supplement No. 1 to Supplemental and Additional Indenture of Lease Four Corners, dated April 25, 1985	 	10.36 to Pinnacle West’s Registration Statement on Form 8-B Report, File No. 1-8962	 	7-25-85	
161

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.31	 	Pinnacle West
APS	 	Application and Grant of multi-party rights-of-way and easements, Four Corners Plant Site	 	5.04 to APS’ Form S-7 Registration Statement, File No. 2-59644	 	9-1-77	
	 	 	 	 	 	 	 	 	
10.32	 	Pinnacle West
APS	 	Application and Amendment No. 1 to Grant of multi-party rights-of-way and easements, Four Corners Power Plant Site dated April 25, 1985	 	10.37 to Pinnacle West’s Registration Statement on Form 8-B, File No. 1-8962	 	7-25-85	
	 	 	 	 	 	 	 	 	
10.33	 	Pinnacle West
APS	 	Application and Grant of Arizona Public Service Company rights- of-way and easements, Four Corners Plant Site	 	5.05 to APS’ Form S-7 Registration Statement, File No. 2-59644	 	9-1-77	
	 	 	 	 	 	 	 	 	
10.34	 	Pinnacle West
APS	 	Four Corners Project Co-Tenancy Agreement Amendment No. 6	 	10.7 to Pinnacle West’s 2000 Form 10-K Report, File No. 1-8962	 	3-14-01	
	 	 	 	 	 	 	 	 	
10.35	 	Pinnacle West
APS	 	Application and Amendment No. 1 to Grant of Arizona Public Service Company rights-of-way and easements, Four Corners Power Plant Site dated April 25, 1985	 	10.38 to Pinnacle West’s Registration Statement on Form 8-B, File No. 1-8962	 	7-25-85	
	 	 	 	 	 	 	 	 	
10.36	 	Pinnacle West
APS	 	Indenture of Lease, Navajo Units 1, 2, and 3	 	5(g) to APS’ Form S-7 Registration Statement, File No. 2-36505	 	3-23-70	
	 	 	 	 	 	 	 	 	
10.37	 	Pinnacle West
APS	 	Application of Grant of rights-of-way and easements, Navajo Plant	 	5(h) to APS Form S-7 Registration Statement, File No. 2-36505	 	3-23-70	
162

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.38	 	Pinnacle West
APS	 	Water Service Contract Assignment with the United States Department of Interior, Bureau of Reclamation, Navajo Plant	 	5(l) to APS’ Form S-7 Registration Statement, File No. 2-394442	 	3-16-71	
	 	 	 	 	 	 	 	 	
10.39	 	Pinnacle West
APS	 	Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS 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. 1 to APS’ 1988 Form 10-K Report, File No. 1-4473	 	3-8-89	
163

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.40	 	Pinnacle West
APS	 	Amendment No. 13, dated as of April 22, 1991, to Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS, 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	 	10.1 to APS’ March 1991 Form 10-Q Report, File No. 1-4473	 	5-15-91	
	 	 	 	 	 	 	 	 	
10.41	 	Pinnacle West
APS	 	Amendment No. 14 to Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, among APS, 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	 	99.1 to Pinnacle West’s June 2000 Form 10-Q Report, File No. 1-8962	 	8-14-00	
164

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.42 c	 	Pinnacle West
APS	 	Facility Lease, dated as of August 1, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee	 	4.3 to APS’ Form S-3 Registration Statement, File No. 33-9480	 	10-24-86	
	 	 	 	 	 	 	 	 	
10.43 c	 	Pinnacle West
APS	 	Amendment No. 1, dated as of November 1, 1986, to Facility Lease, dated as of August 1, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee	 	10.5 to APS’ September 1986 Form 10-Q Report by means of Amendment No. 1 on December 3, 1986 Form 8, File No. 1-4473	 	12-4-86	
	 	 	 	 	 	 	 	 	
10.44 c	 	Pinnacle West
APS	 	Amendment No. 2 dated as of June 1, 1987 to 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 Lessor, and APS, as Lessee	 	10.3 to APS’ 1988 Form 10-K Report, File No. 1-4473	 	3-8-89	
	 	 	 	 	 	 	 	 	
10.45 c	 	Pinnacle West
APS	 	Amendment No. 3, dated as of March 17, 1993, to 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 Lessor, and APS, as Lessee	 	10.3 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
165

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.46	 	Pinnacle West
APS	 	Facility Lease, dated as of December 15, 1986, between State Street Bank and Trust Company, as successor to The First National Bank of Boston, in its capacity as Owner Trustee, as Lessor, and APS, as Lessee	 	10.1 to APS’ November 18, 1986 Form 8-K Report, File No. 1-4473	 	1-20-87	
	 	 	 	 	 	 	 	 	
10.47	 	Pinnacle West
APS	 	Amendment No. 1, dated as of August 1, 1987, to 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 Lessor, and APS, as Lessee	 	4.13 to APS’ Form S-3 Registration Statement No. 33-9480 by means of August 1, 1987 Form 8-K Report, File No. 1-4473	 	8-24-87	
	 	 	 	 	 	 	 	 	
10.48	 	Pinnacle West
APS	 	Amendment No. 2, dated as of March 17, 1993, to 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 Lessor, and APS, as Lessee	 	10.4 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
10.49 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan, as amended and restated, dated December 7, 1999	 	10.13 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
166

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.50 b	 	Pinnacle West
APS	 	First Amendment to the Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan	 	10.7 to Pinnacle West’s 2001 Form 10-K Report, File No. 1-8962	 	3-27-02	
	 	 	 	 	 	 	 	 	
10.51 b	 	Pinnacle West
APS	 	Second Amendment to the Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan	 	10.8 to Pinnacle West’s 2001 Form 10-K Report, File No. 1-8962	 	3-27-02	
	 	 	 	 	 	 	 	 	
10.52 b	 	Pinnacle West
APS	 	Trust for the Pinnacle West Capital Corporation, Arizona Public Service Company and SunCor Development Company Deferred Compensation Plans dated August 1, 1996	 	10.14 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.53 b	 	Pinnacle West
APS	 	First Amendment dated December 7, 1999 to the Trust for the Pinnacle West Capital Corporation, Arizona Public Service Company and SunCor Development Company Deferred Compensation Plans	 	10.15 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.54 b	 	Pinnacle West
APS	 	Directors’ Deferred Compensation Plan, as restated, effective January 1, 1986	 	10.1 to APS’ June 1986 Form 10-Q Report, File No. 1-4473	 	8-13-86	
	 	 	 	 	 	 	 	 	
10.55 b	 	Pinnacle West
APS	 	Second Amendment to the Arizona Public Service Company Deferred Compensation Plan, effective as of January 1, 1993	 	10.2 to APS’ 1993 Form 10-K Report, File No. 1-4473	 	3-30-94	
167

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.56 b	 	Pinnacle West
APS	 	Third Amendment to the Arizona Public Service Company Directors’ Deferred Compensation Plan, effective as of May 1, 1993	 	10.1 to APS’ September 1994 Form 10-Q Report, File No. 1-4473	 	11-10-94	
	 	 	 	 	 	 	 	 	
10.57 b	 	Pinnacle West
APS	 	Fourth Amendment dated December 28, 1999 to the Arizona Public Service Company Directors Deferred Compensation Plan	 	10.8 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.58 b	 	Pinnacle West
APS	 	Arizona Public Service Company Deferred Compensation Plan, as restated, effective January 1, 1984, and the second and third amendments thereto, dated December 22, 1986, and December 23, 1987 respectively	 	10.4 to APS’ 1988 Form 10-K Report, File No. 1-4473	 	3-8-89	
	 	 	 	 	 	 	 	 	
10.59 b	 	Pinnacle West
APS	 	Third Amendment to the Arizona Public Service Company Deferred Compensation Plan, effective as of January 1, 1993	 	10.3 to APS’ 1993 Form 10-K Report, File No. 1-4473	 	3-30-94	
	 	 	 	 	 	 	 	 	
10.60 b	 	Pinnacle West
APS	 	Fourth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective as of May 1, 1993	 	10.2 to APS’ September 1994 Form 10-Q Report, File No. 1-4473	 	11-10-94	
168

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.61 b	 	Pinnacle West
APS	 	Fifth Amendment to the Arizona Public Service Company Deferred Compensation Plan	 	10.3 to APS’ 1996 Form 10-K Report, File No. 1-4473	 	3-28-97	
	 	 	 	 	 	 	 	 	
10.62 b	 	Pinnacle West
APS	 	Sixth Amendment to Arizona Public Service Company Deferred Compensation Plan	 	10.8 to Pinnacle West’s 2000 Form 10-K Report, File No. 1-8962	 	3-14-01	
	 	 	 	 	 	 	 	 	
10.63 b	 	Pinnacle West
APS	 	First Amendment effective as of January 1, 1999, to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan	 	10.7 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.64 b	 	Pinnacle West
APS	 	Second Amendment effective January 1, 2000 to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan	 	10.10 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.65 b	 	Pinnacle West
APS	 	Third Amendment to the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan	 	10.3 to Pinnacle West’s March 2003 Form 10-Q Report, File No. 1-8962	 	5-15-03	
169

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Originally Filed as Exhibit: b	 	Effective	
	 	 	 	 	 	 	 	 	
10.66 a	 	Pinnacle West
APS	 	Schedules of William J. Post and Jack E. Davis to Arizona Public Service Company Deferred Compensation Plan, as amended	 	10.2 to Pinnacle West Form 10-K Report, File No. 1-8962	 	3-31-03	
	 	 	 	 	 	 	 	 	
10.67 a	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan as amended and restated effective January 1, 1996	 	10.10 to APS’ 1995 Form 10-K Report, File No. 1-4473	 	3-29-96	
	 	 	 	 	 	 	 	 	
10.68 a	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation and Arizona Public Service Company Directors’ Retirement Plan, effective as of January 1, 1995	 	10.7 to APS’ 1994 Form 10-K Report, File No. 1-4473	 	3-30-95	
	 	 	 	 	 	 	 	 	
10.69 a	 	Pinnacle West	 	Letter Agreement dated July 28, 1995 between Arizona Public Service Company and Armando B. Flores	 	10.16 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.70 a	 	Pinnacle West
APS	 	Letter Agreement dated as of January 1, 1996 between APS and Robert G. Matlock & Associates, Inc. for consulting services	 	10.8 to APS’ 1995 Form 10-K Report, File No. 1-4473	 	3-29-96	
	 	 	 	 	 	 	 	 	
10.71 a	 	Pinnacle West
APS	 	Letter Agreement dated December 21, 1993, between APS and William L. Stewart	 	10.7 to APS’ 1994 Form 10-K Report, File No. 1-4473	 	3-30-96	
170

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.72 b	 	Pinnacle West
APS	 	Letter Agreement dated August 16, 1996 between APS and William L. Stewart	 	10.8 to APS’ 1996 Form 10-K Report, File No. 1-4473	 	3-28-97	
	 	 	 	 	 	 	 	 	
10.73 b	 	Pinnacle West
APS	 	Letter Agreement between APS and William L. Stewart	 	10.2 to APS’ September 1997 Form 10-Q Report, File No. 1-4473	 	11-12-97	
	 	 	 	 	 	 	 	 	
10.74 b	 	Pinnacle West
APS	 	Letter Agreement dated December 13, 1999 between APS and William L. Stewart	 	10.9 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.75 b	 	Pinnacle West
APS	 	Amendment to Letter Agreement, effective as of January 1, 2002, between APS and William L. Stewart	 	10.1 to Pinnacle West’s June 2002 Form 10-Q Report, File No. 1-8962	 	8-13-02	
	 	 	 	 	 	 	 	 	
10.76 b	 	Pinnacle West
APS	 	Letter Agreement dated October 3, 1997 between Arizona Public Service Company and James M. Levine	 	10.17 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.77 b	 	Pinnacle West
APS	 	Employment Agreement dated February 27, 2003 between APS and James M. Levine	 	10.1 to Pinnacle West’s March 2003 Form 10-Q Report, File No. 1-8962	 	5-15-03	
	 	 	 	 	 	 	 	 	
10.78 b	 	Pinnacle West
APS	 	Summary of James M. Levine Retirement Benefits	 	10.2 to Pinnacle West’s March 2002 Form 10-Q Report, File No. 1-8962	 	5-15-02	
	 	 	 	 	 	 	 	 	
10.79 b	 	Pinnacle West
APS	 	Employment Agreement, effective as of October 1, 2002, between APS and James M. Levine	 	10.1 to Pinnacle West’s November 2002 Form 10-Q Report, File No. 1-8962	 	11-14-02	
	 	 	 	 	 	 	 	 	
10.79.1 b	 	Pinnacle West
APS	 	Amendment to Agreement between APS and James M. Levine	 	10.2 to Pinnacle West’s September 2004 Form 10-Q Report, File No. 1-8962	 	11-8-04	
171

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.79.2 b	 	Pinnacle West
APS	 	Amendment to Agreement between APS and James M. Levine effective as of 1-1-05	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.80 b	 	Pinnacle West
APS	 	Letter Agreement dated June 28, 2001 between Pinnacle West Capital Corporation and Steve Wheeler	 	10.4 to Pinnacle West’s 2002 Form 10-K Report, File No. 1-8962	 	3-31-03	
	 	 	 	 	 	 	 	 	
10.81 bd	 	Pinnacle West
APS	 	Key Executive Employment and Severance Agreement between Pinnacle West and certain executive officers of Pinnacle West and its subsidiaries	 	10.1 to Pinnacle West’s June 1999 Form 10-Q Report, File No. 1-8962	 	8-16-99	
	 	 	 	 	 	 	 	 	
10.82 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation Stock Option and Incentive Plan	 	10.1 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
10.83 b	 	Pinnacle West
APS	 	First Amendment dated December 7, 1999 to the Pinnacle West Capital Corporation Stock Option and Incentive Plan	 	10.11 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.84 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation 1994 Long- Term Incentive Plan, effective as of March 23, 1994	 	A to the Proxy Statement for the Plan Report for Pinnacle West’s 1994 Annual Meeting of Shareholders, File No. 1-8962	 	4-16-94	
	 	 	 	 	 	 	 	 	
10.85 b	 	Pinnacle West
APS	 	First Amendment dated December 7, 1999 to the Pinnacle West Capital Corporation 1994 Long-Term Incentive Plan	 	10.12 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
	 	 	 	 	 	 	 	 	
10.86 b	 	Pinnacle West
APS	 	Pinnacle West
Capital Corporation 2002 Long-Term Incentive Plan	 	10.5 to Pinnacle West’s 2002 Form 10-K Report	 	3-31-03	
172

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.87 b	 	Pinnacle West	 	Pinnacle West
Capital Corporation Director Equity Participation Plan	 	B to the Proxy Statement for the Plan Report for Pinnacle West’s 1994 Annual Meeting of Shareholders, File No. 1-8962	 	4-16-94	
	 	 	 	 	 	 	 	 	
10.88 b	 	Pinnacle West	 	Pinnacle West
Capital Corporation 2000 Director Equity Plan	 	99.1 to Pinnacle West’s Registration Statement on Form S-8 (No. 333-40796), File No. 1-8962	 	7-3-00	
	 	 	 	 	 	 	 	 	
10.89	 	Pinnacle West
APS	 	Agreement No. 13904 (Option and Purchase of Effluent) with Cities of Phoenix, Glendale, Mesa, Scottsdale, Tempe, Town of Youngtown, and Salt River Project Agricultural Improvement and Power District, dated April 23, 1973	 	10.3 to APS’ 1991 Form 10-K Report, File No. 1-4473	 	3-19-92	
	 	 	 	 	 	 	 	 	
10.90 b	 	Pinnacle West
APS	 	APS Director Equity Plan	 	10.1 to APS’ September 1997 Form 10-Q Report, File No. 1-4473	 	11-12-97	
	 	 	 	 	 	 	 	 	
10.91	 	Pinnacle West
APS	 	Territorial Agreement between the Company and Salt River Project	 	10.1 to APS’ March 1998 Form 10-Q Report, File No. 1-4473	 	5-15-98	
	 	 	 	 	 	 	 	 	
10.92	 	Pinnacle West
APS	 	Power Coordination Agreement between the Company and Salt River Project	 	10.2 to APS’ March 1998 Form 10-Q Report, File No. 1-4473	 	5-15-98	
	 	 	 	 	 	 	 	 	
10.93	 	Pinnacle West
APS	 	Memorandum of Agreement between the Company and Salt River Project	 	10.3 to APS’ March 1998 Form 10-Q Report, File No. 1-4473	 	5-15-98	
173

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.94	 	Pinnacle West
APS	 	Addendum to Memorandum of
Agreement between APS and Salt
River Project dated as of May 19,
1998	 	10.2 to APS’ May 19, 1998 Form 8-K Report, File No. 1-4473	 	6-26-98	
	 	 	 	 	 	 	 	 	
10.95 bd	 	Pinnacle West
APS	 	Performance Share Agreement
under the Pinnacle West
Capital Corporation 2002 Long-
Term Incentive Plan	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.96 bd	 	Pinnacle West
APS	 	Performance Share Agreement
under the Pinnacle West
Capital Corporation 2002 Long-
Term Incentive Plan	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.97 bd	 	Pinnacle West
APS	 	Performance Share Agreement
under the Pinnacle West
Capital Corporation 2002 Long-
Term Incentive Plan	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.98 bd	 	Pinnacle West
APS	 	Performance Accelerated Stock
Option Agreement under Pinnacle West
Capital Corporation 2002 Long-
Term Incentive Plan	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.99 bd	 	Pinnacle West
APS	 	Stock Ownership Incentive
Agreement under Pinnacle West
Capital Corporation 2002 Long-
Term Incentive Plan	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.100	 	Pinnacle West
APS	 	Amended and Restated Reimbursement Agreement among APS, the Banks party thereto, and JPMorgan Chase Bank, as Administrative Agent and Issuing Bank, dated as of July 22, 2002	 	 	 	 	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.101	 	APS	 	Three-Year Credit Agreement dated as of May 21, 2004 between APS as Borrower, and the banks, financial institutions and other institutional lenders and initial issuing banks listed on the signature pages thereof	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.102	 	Pinnacle West
APS	 	Agreement between Pinnacle West Energy Corporation and Arizona Public Service Company for Transportation and Treatment of Effluent by and between Pinnacle West Energy Corporation and APS dated as of the 10 th day of April, 2001	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.103	 	Pinnacle West
APS	 	Agreement for the Transfer and Use of Wastewater and Effluent by and between APS, SRP and PWE dated June 1, 2001	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.104	 	Pinnacle West
APS	 	Agreement for the Sale and Purchase of Wastewater Effluent dated November 13, 2000, by and between the City of Tolleson, Arizona, APS and SRP	 	 	 	 	
	 	 	 	 	 	 	 	 	
10.105	 	Pinnacle West
APS	 	Operating Agreement for the Co-Ownership of Wastewater Effluent dated November 16, 2000 by and between APS and SRP	 	 	 	 	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
10.106	 	Pinnacle West
APS	 	Asset Purchase Agreement by and between PPL Sundance Energy, LLC, as Seller, and APS, as Purchaser, dated as of June 1, 2004	 	10.1 to Pinnacle West’s June 2004 Form 10-Q Report, File No. 1-8962	 	8-9-04	
	 	 	 	 	 	 	 	 	
10.106.1	 	Pinnacle West
APS	 	Amendment to Asset Purchase Agreement	 	99.1 to Pinnacle West’s November 18, 2004 Form 8-K Report, File No. 1-8962	 	12-20-04	
	 	 	 	 	 	 	 	 	
10.107	 	Pinnacle West
APS	 	Credit Agreement dated as of October 19, 2004 among Pinnacle West, other lenders, and JPMorgan Chase Bank, as Administrative Agent	 	10.1 to Pinnacle West’s September 2004 Form 10-Q Report, File No. 1-8962	 	11-8-04	
	 	 	 	 	 	 	 	 	
10.108 b	 	Pinnacle West APS	 	Pinnacle West Capital
Capital Corporation
Supplemental Excess
Benefit Retirement Plan,
amended and restated
as of January 1, 2003	 	10.7 to Pinnacle West’s 2003 Form 10-K Report, File No. 1-8962	 	3-15-04	
	 	 	 	 	 	 	 	 	
10.109 b	 	Pinnacle West APS	 	Pinnacle West Capital
Corporation and Arizona
Public Service Company
Directors’ Retirement Plan, as
amended and restated
on June 21, 2000	 	99.2 to Pinnacle West’s Registration Statement on Form S-8 No. 333-40796, File No. 1-8962	 	7-3-00	
	 	 	 	 	 	 	 	 	
10.110	 	Pinnacle West APS	 	Agreement for the Sale and Purchase of Wastewater 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	 	10.4 to APS’ 1991 Form 10-K Report,
File 1-4473	 	3-19-92	
	 	 	 	 	 	 	 	 	
12.1	 	Pinnacle West	 	Ratio of Earnings to Fixed Charges	 	 	 	 	
	 	 	 	 	 	 	 	 	
12.2	 	APS	 	Ratio of Earnings to Fixed Charges	 	 	 	 	
	 	 	 	 	 	 	 	 	
21.1	 	Pinnacle West	 	Subsidiaries of Pinnacle West	 	 	 	 	
	 	 	 	 	 	 	 	 	
23.1	 	Pinnacle West	 	Consent of Deloitte & Touche LLP	 	 	 	 	
	 	 	 	 	 	 	 	 	
23.2	 	APS	 	Consent of Deloitte & Touche LLP	 	 	 	 	
	 	 	 	 	 	 	 	 	
31.1	 	Pinnacle West	 	Certificate of William J. Post, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	 	 	 	 	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
31.2	 	Pinnacle West	 	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	 	 	 	 	
	 	 	 	 	 	 	 	 	
31.3	 	APS	 	Certificate of Jack E. Davis, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	 	 	 	 	
	 	 	 	 	 	 	 	 	
31.4	 	APS	 	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	 	 	 	 	
	 	 	 	 	 	 	 	 	
32.1	 	Pinnacle West	 	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	 	 	 	 	
	 	 	 	 	 	 	 	 	
32.2	 	APS	 	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	 	 	 	 	
177

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.1	 	Pinnacle West
APS	 	Collateral Trust Indenture among PVNGS II Funding Corp., Inc., APS and Chemical Bank, as Trustee	 	4.2 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
99.2	 	Pinnacle West
APS	 	Supplemental Indenture to Collateral Trust Indenture among PVNGS II Funding Corp., Inc., APS and Chemical Bank, as Trustee	 	4.3 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
99.3 c	 	Pinnacle West
APS	 	Participation Agreement, dated as of August 1, 1986, 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, APS, and the Equity Participant named therein	 	28.1 to APS’ September 1992 Form 10-Q Report, File No. 1-4473	 	11-9-92	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.4 c	 	Pinnacle West
APS	 	Amendment No. 1 dated as of November 1, 1986, to Participation Agreement, dated as of August 1, 1986, 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, APS, and the Equity Participant named therein	 	10.8 to APS’ September 1986 Form 10-Q Report by means of Amendment No. 1, on December 3, 1986 Form 8, File No. 1-4473	 	12-4-86	
	 	 	 	 	 	 	 	 	
99.5 c	 	Pinnacle West
APS	 	Amendment No. 2, dated as of March 17, 1993, to 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, APS, and the Equity Participant named therein	 	28.4 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.6 c	 	Pinnacle West
APS	 	Trust Indenture, Mortgage, 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	 	4.5 to APS’ Form S-3 Registration Statement, File No. 33-9480	 	10-24-86	
	 	 	 	 	 	 	 	 	
99.7 c	 	Pinnacle West
APS	 	Supplemental Indenture No. 1, dated as of November 1, 1986 to Trust Indenture, Mortgage, 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	 	10.6 to APS’ September 1986 Form 10-Q Report by means of Amendment No. 1 on December 3, 1986 Form 8, File No. 1-4473	 	12-4-86	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.8 c	 	Pinnacle West
APS	 	Supplemental Indenture No. 2 to Trust Indenture, Mortgage, 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 Lease Indenture Trustee	 	4.4 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
99.9 c	 	Pinnacle West
APS	 	Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	28.3 to APS’ Form S-3 Registration Statement, File No. 33-9480	 	10-24-86	
	 	 	 	 	 	 	 	 	
99.10 c	 	Pinnacle West
APS	 	Amendment No. 1, dated as of November 1, 1986, to Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	10.10 to APS’ September 1986 Form 10-Q Report by means of Amendment No. l on December 3, 1986 Form 8, File No. 1-4473	 	12-4-86	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.11 c	 	Pinnacle West
APS	 	Amendment No. 2, dated as of March 17, 1993, to Assignment, Assumption and Further Agreement, dated as of August 1, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	28.6 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
99.12	 	Pinnacle West
APS	 	Participation Agreement, dated as of December 15, 1986, among PVNGS Funding Report 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, APS, and the Owner Participant named therein	 	28.2 to APS’ September 1992 Form 10-Q Report, File No. 1-4473	 	11-9-92	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.13	 	Pinnacle West
APS	 	Amendment No. 1, dated as of August 1, 1987, to Participation Agreement, dated as of December 15, 1986, among PVNGS Funding 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, APS, and the Owner Participant named therein	 	28.20 to APS’ Form S-3 Registration Statement No. 33-9480 by means of a November 6, 1986 Form 8-K Report, File No. 1-4473	 	8-10-87	
	 	 	 	 	 	 	 	 	
99.14	 	Pinnacle West
APS	 	Amendment No. 2, dated as of March 17, 1993, to 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, APS, and the Owner Participant named therein	 	28.5 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.15	 	Pinnacle West
APS	 	Trust Indenture, Mortgage 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	 	10.2 to APS’ November 18, 1986 Form 10-K Report, File No. 1-4473	 	1-20-87	
	 	 	 	 	 	 	 	 	
99.16	 	Pinnacle West
APS	 	Supplemental Indenture No. 1, dated as of August 1, 1987, to Trust Indenture, Mortgage, 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	 	4.13 to APS’ Form S-3 Registration Statement No. 33-9480 by means of August 1, 1987 Form 8-K Report, File No. 1-4473	 	8-24-87	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.17	 	Pinnacle West
APS	 	Supplemental Indenture No. 2 to Trust Indenture Mortgage, 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 Lease Indenture Trustee	 	4.5 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
99.18	 	Pinnacle West
APS	 	Assignment, Assumption and Further Agreement, dated as of December 15, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	10.5 to APS’ November 18, 1986 Form 8-K Report, File No. 1-4473	 	1-20-87	
	 	 	 	 	 	 	 	 	
99.19	 	Pinnacle West
APS	 	Amendment No. 1, dated as of March 17, 1993, to Assignment, Assumption and Further Agreement, dated as of December 15, 1986, between APS and State Street Bank and Trust Company, as successor to The First National Bank of Boston, as Owner Trustee	 	28.7 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
	 	 	 	 	 	 	 	 	
99.20 c	 	Pinnacle West
APS	 	Indemnity Agreement dated as of March 17, 1993 by APS	 	28.3 to APS’ 1992 Form 10-K Report, File No. 1-4473	 	3-30-93	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
	 	 	 	 	 	 	 	 	
99.21	 	Pinnacle West
APS	 	Extension Letter, dated as of August 13, 1987, from the signatories of the Participation Agreement to Chemical Bank	 	28.20 to APS’ Form S-3 Registration Statement No. 33-9480 by means of a November 6, 1986 Form 8-K Report, File No. 1-4473	 	8-10-87	
	 	 	 	 	 	 	 	 	
99.22	 	Pinnacle West
APS	 	Rate Reduction Agreement dated December 4, 1995 between APS and the ACC Staff	 	10.1 to APS’ December 4, 1995 Form 8-K Report, File No. 1-4473	 	12-14-95	
	 	 	 	 	 	 	 	 	
99.23	 	Pinnacle West
APS	 	ACC Order dated April 24, 1996	 	10.1 to APS’ March 1996 Form 10-Q Report, File No. 1-4473	 	5-14-96	
	 	 	 	 	 	 	 	 	
99.24	 	Pinnacle West
APS	 	Arizona Corporation Commission Order, Decision No. 59943, dated December 26, 1996, including the Rules regarding the introduction of retail competition in Arizona	 	99.1 to APS’ 1996 Form 10-K Report, File No. 1-4473	 	3-28-97	
	 	 	 	 	 	 	 	 	
99.25	 	Pinnacle West
APS	 	Arizona Corporation Commission Order, Decision No. 61973, dated October 6, 1999, approving APS’ Settlement Agreement	 	10.1 to APS’ September 1999 10-Q Report, File No. 1-4473	 	11-15-99	
	 	 	 	 	 	 	 	 	
99.26	 	Pinnacle West
APS	 	Addendum to Settlement Agreement	 	10.1 to Pinnacle West’s September 2000 Form 10-Q Report, File No. 1-8962	 	11-14-00	
	 	 	 	 	 	 	 	 	
99.27	 	Pinnacle West
APS	 	Arizona Corporation Commission Order, Decision No. 61969, dated September 29, 1999, including the Retail Electric Competition Rules	 	10.2 to APS’ September 1999 Form 10-Q Report, File No. 1-4473	 	11-15-99	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: 9 a	 	Effective	
	 	 	 	 	 	 	 	 	
99.28	 	Pinnacle West
APS	 	Track ‘A’ Appeals Issues – Principles for Resolution	 	99.1 to Pinnacle West’s November 15, 2002 Form 8-K, File No. 1-8962	 	12-16-02	
	 	 	 	 	 	 	 	 	
99.29	 	Pinnacle West
APS	 	ACC Opinion and Order dated September 10, 2002, Decision No. 65154 (Track A Order)	 	99.1 to Pinnacle West’s September 10, 2002 Form 8-K Report, File No. 1-8962	 	9-17-02	
	 	 	 	 	 	 	 	 	
99.30	 	Pinnacle West
APS	 	ACC Decision No. 65796 dated April 4, 2003 (Financing Order)	 	99.3 to Pinnacle West’s March 2003 Form 10-Q Report, File No. 1-8962	 	5-15-03	
	 	 	 	 	 	 	 	 	
99.31	 	Pinnacle West	 	Risk Factors	 	 	 	 	
	 	 	 	 	 	 	 	 	
99.32	 	APS	 	Risk Factors	 	 	 	 	
	 	 	 	 	 	 	 	 	
99.33	 	Pinnacle West
APS	 	Proposed Settlement of Docket E-01345A-03-0437, APS Request for Rate Adjustment, dated August 18, 2004	 	99.1 to Pinnacle West’s August 18, 2004 Form 8-K Report, File No. 1-8962	 	8-18-04	
	 	 	 	 	 	 	 	 	
99.34	 	Pinnacle West
APS	 	Retail Electric Competition Rules	 	10.1 to APS’ June 1998
Form 10-Q Report,
File No. 1-4473	 	8-14-98	
	 	 	 	 	 	 	 	 	
99.35	 	Pinnacle West
APS	 	Arizona Public Service Company Application filed with the Arizona Corporation Commission on September 16, 2002	 	99.2 to Pinnacle West’s September 10, 2002 Form 8-K Report, File No. 1-8962	 	9-17-02	

 	 	 	
      a Reports filed under File No. 1-4473 and 1-8962 were filed in the office of the Securities and Exchange Commission located in Washington, D.C.
      b Management contract or compensatory plan or arrangement to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
      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 persons. 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.
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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.

 	PINNACLE WEST CAPITAL CORPORATION
(Registrant)
 	 	
Date: March 16, 2005 	/s/ William J. Post  	 	
 	(William J. Post, Chairman of the	 	
 	Board of Directors and Chief
Executive Officer) 	 	
 	
Power of Attorney
     We, the undersigned directors and executive officers of Pinnacle West Capital Corporation, hereby severally appoint Donald E. Brandt, Barbara M. Gomez and Nancy C. Loftin, and each of them, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
     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.

Signature	 	Title	 	Date	
/s/ William J. Post

(William J. Post, Chairman
of the Board of Directors and
Chief Executive Officer)	 	Principal Executive Officer and Director	 	March 16, 2005	
/s/ Jack E. Davis

(Jack E. Davis, President
and Chief Operating Officer)	 	Director	 	March 16, 2005	
/s/ Donald E. Brandt

(Donald E. Brandt,
Executive Vice President and
Chief Financial Officer)	 	Principal Accounting Officer and Principal Financial Officer	 	March 16, 2005	
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Signature	 	Title	 	Date	
/s/ Edward N. Basha, Jr.

(Edward N. Basha, Jr.)	 	Director	 	March 16, 2005	
/s/ Michael L. Gallagher

(Michael L. Gallagher)	 	Director	 	March 16, 2005	
/s/ Pamela Grant

(Pamela Grant)	 	Director	 	March 16, 2005	
/s/ Roy A. Herberger, Jr.

(Roy A. Herberger, Jr.)	 	Director	 	March 16, 2005	
/s/ Martha O. Hesse

(Martha O. Hesse)	 	Director	 	March 16, 2005	
/s/ William S. Jamieson, Jr.

(William S. Jamieson, Jr.)	 	Director	 	March 16, 2005	
/s/ Humberto S. Lopez

(Humberto S. Lopez)	 	Director	 	March 16, 2005	
/s/ Kathryn L. Munro

(Kathryn L. Munro)	 	Director	 	March 16, 2005	
/s/ Bruce J. Nordstrom

(Bruce J. Nordstrom)	 	Director	 	March 16, 2005	
/s/ William L. Stewart

(William L. Stewart)	 	Director	 	March 16, 2005	
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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 16, 2005 	/s/ Jack E. Davis  	 	
 	(Jack E. Davis, President and Chief 	 	
 	Executive Officer) 	 	
 	
Power of Attorney
     We, the undersigned directors and executive officers of Arizona Public Service Company, hereby severally appoint Donald E. Brandt, Barbara M. Gomez and Nancy C. Loftin, and each of them, our true and lawful attorneys with full power to them and each of them to sign for us, and in our names in the capacities indicated below, any and all amendments to this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
     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.

Signature	 	Title	 	Date	
/s/ William J. Post

(William J. Post, Chairman
of the Board of Directors )	 	Director	 	March 16, 2005	
/s/ Jack E. Davis

(Jack E. Davis, President
and Chief Executive Officer)	 	Principal Executive Officer and Director	 	March 16, 2005	
/s/ Donald E. Brandt

(Donald E. Brandt,
Executive Vice President,
and Chief Financial Officer)	 	Principal Financial Officer	 	March 16, 2005	
/s/ Chris N. Froggatt

(Chris N. Froggatt,
Vice President and Controller)	 	Principal Accounting Officer	 	March 16, 2005	
190

Table of Contents

 	 	 	 	 	
Signature	 	Title	 	Date	
/s/ Edward N. Basha, Jr.

(Edward N. Basha, Jr.)	 	Director	 	March 16, 2005	
/s/ Michael L. Gallagher

(Michael L. Gallagher)	 	Director	 	March 16, 2005	
/s/ Pamela Grant

(Pamela Grant)	 	Director	 	March 16, 2005	
/s/ Roy A. Herberger, Jr.

(Roy A. Herberger, Jr.)	 	Director	 	March 16, 2005	
/s/ Martha O. Hesse

(Martha O. Hesse)	 	Director	 	March 16, 2005	
/s/ William S. Jamieson, Jr.

(William S. Jamieson, Jr.)	 	Director	 	March 16, 2005	
/s/ Humberto S. Lopez

(Humberto S. Lopez)	 	Director	 	March 16, 2005	
/s/ Kathryn L. Munro

(Kathryn L. Munro)	 	Director	 	March 16, 2005	
/s/ Bruce J. Nordstrom

(Bruce J. Nordstrom)	 	Director	 	March 16, 2005	
/s/ William L. Stewart

(William L. Stewart)	 	Director	 	March 16, 2005	
191

Table of Contents
Exhibit Index 

Exhibit No.	 	Registrant(s)	 	Description	
10.1 b	 	Pinnacle West
APS	 	2005 Officer and CEO Variable Incentive Plan	
 	 	 	 	 	
10.79.2 b	 	Pinnacle West
APS	 	Amendment to Agreement between APS and James M. Levine effective as of 1-1-05	
 	 	 	 	 	
10.95 bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002
Long-Term Incentive Plan	
 	 	 	 	 	
10.96 bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	
 	 	 	 	 	
10.97 bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	
 	 	 	 	 	
10.98 bd	 	Pinnacle West
APS	 	Performance Accelerated Stock Option Agreement under Pinnacle West Capital
Corporation 2002 Long-Term Incentive Plan	
 	 	 	 	 	
10.99 bd	 	Pinnacle West
APS	 	Stock Ownership Incentive Agreement under Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	
 	 	 	 	 	
10.100	 	Pinnacle West
APS	 	Amended and Restated Reimbursement Agreement among APS, the Banks party thereto, and JPMorgan Chase Bank, as Administrative Agent and Issuing Bank, dated as of July 22, 2002	
 	 	 	 	 	
10.101	 	APS	 	Three-Year Credit Agreement dated as of May 21, 2004 between APS as Borrower, and the banks, financial institutions and other institutional lenders and initial issuing banks listed on the signature pages thereof	
 	 	 	 	 	
10.102	 	Pinnacle West
APS	 	Agreement between Pinnacle West Energy Corporation and Arizona Public Service Company for Transportation and Treatment of Effluent by and between Pinnacle West Energy Corporation and APS dated as of the 10 th day of April, 2001	
 	 	 	 	 	
10.103	 	Pinnacle West
APS	 	Agreement for the Transfer and Use of Wastewater and Effluent by and between APS, SRP and PWE dated June 1, 2001	
 	 	 	 	 	
10.104	 	Pinnacle West
APS	 	Agreement for the Sale and Purchase of Wastewater Effluent dated November 13, 2000, by and between the City of Tolleson, Arizona, APS and SRP	

Table of Contents

Exhibit No.	 	Registrant(s)	 	Description	
 	 	 	 	 	
10.105	 	Pinnacle West
APS	 	Operating Agreement for the Co-Ownership of Wastewater Effluent dated November 16, 2000 by and between APS and SRP	
 	 	 	 	 	
12.1	 	Pinnacle West	 	Ratio of Earnings to Fixed Charges	
 	 	 	 	 	
12.2	 	APS	 	Ratio of Earnings to Fixed Charges	
 	 	 	 	 	
21.1	 	Pinnacle West	 	Subsidiaries of Pinnacle West	
 	 	 	 	 	
23.1	 	Pinnacle West	 	Consent of Deloitte & Touche LLP	
 	 	 	 	 	
23.2	 	APS	 	Consent of Deloitte & Touche LLP	
 	 	 	 	 	
31.1	 	Pinnacle West	 	Certificate of William J. Post, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
 	 	 	 	 	
31.2	 	Pinnacle West	 	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
 	 	 	 	 	
31.3	 	APS	 	Certificate of Jack E. Davis, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
 	 	 	 	 	
31.4	 	APS	 	Certificate of Donald E. Brandt, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended	
 	 	 	 	 	
32.1	 	Pinnacle West	 	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	 	 	 	
32.2	 	APS	 	Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1850, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	 	 	 	
99.31	 	Pinnacle West	 	Risk Factors	
 	 	 	 	 	
99.32	 	APS	 	Risk Factors	

EXHIBIT 10.1
2005 OFFICER AND CEO VARIABLE INCENTIVE PLANS
On December 14, 2004, the Human Resources Committee (the "Committee") of the Pinnacle West Capital Corporation (the "Company") Board of Directors approved the Chairman and CEO Variable Incentive Plan (the "CEO Incentive Plan"). The Company's Chairman of the Board and CEO, William J. Post, is eligible to receive an incentive award under the CEO Incentive Plan. Incentive award funding under the CEO Incentive Plan is triggered by the attainment of specified 2005 Company earnings. The amount of the award to Mr. Post is in the sole discretion of the Committee. Accordingly, the Committee may consider factors other than 2005 Company earnings to measure Mr. Post's performance.
On December 15, 2004, the Company's Board of Directors, acting on the recommendation of the Committee, approved the 2005 Officer Variable Incentive Plan (the "Officer Incentive Plan"). Each of the Company's officers, as well as the officers of Arizona Public Service Company ("APS") (currently 19 officers), are eligible to participate in the Officer Incentive Plan, including the following four most highly-compensated current executive officers (excluding the CEO) named in the Company's proxy statement relating to its May 19, 2004 annual meeting: Jack E. Davis, President and Chief Operating Officer of the Company; Donald E. Brandt, Executive Vice President and Chief Financial Officer of the Company; James M. Levine, Executive Vice President, Generation of APS; and Steven M. Wheeler, Executive Vice President, Customer Service and Regulation of APS (the "Named Executive Officers").
The Officer Incentive Plan is composed of two components, one of which is based on the Company's 2005 earnings and the other on the achievement of specified business unit results. Once a specified earnings threshold is met, the achievement of the level of earnings and business unit results generally determines what award, if any, the officer receives. However, the amount of the award, if any, to each officer under the Officer Incentive Plan is in the sole discretion of the Committee. Accordingly, the Committee may consider factors other than Company earnings and the achievement of business unit results to measure performance, including input from the CEO about each officer's 2005 achievements.
Subject to the foregoing, award opportunities (expressed as a percentage of the officer's base salary) for the Chairman and CEO and the Named Executive Officers will be based on the following performance measures (weighted according to the indicated percentages):

   OFFICER                   PERFORMANCE MEASURE(S)                      AWARD OPPORTUNITY
   -------                   ----------------------                      -----------------
William J. Post     Company Earnings                             Threshold (63%)
                                                                 Midpoint (125%)
                                                                 Maximum (200%)

Jack E. Davis       Company Earnings                             Threshold (37.5%)
                                                                 Midpoint   (75%)
                                                                 Maximum  (150%)

Donald E. Brandt    -Company Earnings (50%)                      -Company Earnings:
                    -Shared Services Business Unit Results         Threshold (0%)
                    (Combined Generation Business Unit, Palo       Midpoint  (25%)
                    Verde Business Unit, and Delivery Business     Maximum (50%)
                    Unit Performance; Meeting or Exceeding       -Shared Services Business Unit
                    Budget Targets; and Preventable Recordable   Results (up to 50%)
                    Injuries) (50%)

James M. Levine     -Company Earnings (50%)                      -Company Earnings:
                    -Generation Business Unit Results              Threshold (0%)
                    (Preventable Recordable Injuries; Coal &       Midpoint  (25%)
                    Nuclear Production Cost; APS Gas Units'        Maximum (50%)
                    Annual Equivalent Availability Factor;       -Generation Business Unit Results
                    Coal and Nuclear Capacity Factor; and        (up to 50%)
                    Environmental) (50%)

Steven M. Wheeler   -Company Earnings (50%)                      -Company Earnings:
                    -Delivery Unit Results (Preventable            Threshold (0%)
                    Recordable Injuries; Customer                  Midpoint  (25%)
                    Satisfaction; Business Performance Trends;     Maximum (50%)
                    Customer Reliability; and Environmental      -Delivery Business Unit Results
                    Incidents) (50%)                             (up to 50%)	

Award opportunities for other executive vice presidents and senior vice presidents are up to 100% of base salary (up to 50% based on Company earnings and up to 50% based on the achievement of business unit results). Award opportunities for other officers are up to 70% of base salary (up to 35% based on Company earnings and up to 35% based on the achievement of business unit
results).
 
EXHIBIT 10.79.2
SECOND AMENDMENT TO AGREEMENT
THIS SECOND AMENDMENT is made and entered into by and between Arizona Public Service Company ("APS") and James M. Levine ("Employee").
WITNESSETH:
WHEREAS, APS and Employee entered into an Employment Agreement dated October 11, 2002 as amended by that certain Amendment to Agreement effective as of October 11, 2002 (collectively, the "Agreement");
WHEREAS, the parties desire to amend the provisions of the Agreement relating to incentive pay and the issuance of equity incentives to Employee;
NOW, THEREFORE, effective as of January 1, 2005, the Agreement is amended as follows:
1. Section 4(a) is deleted in its entirety and the following new Section 4(a) is inserted in lieu thereof:
(a) Incentive Pay. Employee will be allowed to participate in any annual officer incentive plan and to receive incentive payments thereunder based on Employee's position and the attainment of specified objectives (e.g., earnings, business unit, and individual objectives), all in accordance with the terms of any such plan.
2. Section 4(b) is deleted in its entirety and the following new Section 4(b) is inserted in lieu thereof:
(b) Equity Incentives. Employer agrees to request the Human Resources Committee (the "Committee") to grant Employee equity incentive awards under the 2002 Long-Term Incentive Plan (the "2002 Plan") in the same form as, and in an amount equivalent to 65% - 85% of, each of the annual base grants awarded to a member of the Office of the President (the "President") under the 2002 Plan. Any special awards granted to the President shall not be deemed subject to this provision.
3. Section 4(c) is deleted in its entirety and the following new Section 4(c) is inserted in lieu thereof:
(c) In addition to (b) above, Employer agrees to request the Committee to grant Employee 2000 performance shares each year under the 2002 Plan, all in accordance with the terms of the 2002 Plan and as otherwise agreed upon by the parties.
4. Except as otherwise set forth herein, the terms and conditions in the Agreement remain in full force and effect.

                                           Arizona Public Service Company

Date: 3-11-05                         By: /s/ Jack Davis
      ------------------                  ---------------------------------
                                          Jack Davis
                                          President and Chief Executive Officer

Date: 3-11-05                             /s/ James M. Levine
      ------------------                  ---------------------------------

                                          James M. Levine	

Exhibit 10.95
PERFORMANCE SHARE AGREEMENT
UNDER THE
PINNACLE WEST CAPITAL CORPORATION 2002
LONG-TERM INCENTIVE PLAN
THIS AWARD AGREEMENT is made and entered into as of __________ __, 20___ (the "Date of Grant"), by and between Pinnacle West Capital Corporation (the "Company"), and ______________ ("Employee").
BACKGROUND
A. The Board of Directors of the Company (the "Board of Directors") has adopted, and the Company's shareholders have approved, the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"), pursuant to which performance share incentive awards may be granted to employees of the Company and its subsidiaries and certain other individuals.
B. The Company desires to grant to Employee a performance share award under the terms of the Plan as described herein.
C. Pursuant to the Plan, the Company and Employee agree as follows:
AGREEMENT
1. GRANT OF AWARDS. The Company grants to Employee a performance share award of _________ performance shares, subject to the terms, conditions, and adjustments set forth in this Award Agreement.
2. AWARD SUBJECT TO PLAN. This award is granted under, and is expressly subject to, all of the terms and provisions of the Plan, which terms are incorporated herein by reference, and this Award Agreement. The committee referred to in Section 4 of the Plan (the "Committee") has been appointed by the Board of Directors, and designated by it, as the Committee to make awards.
3. PERFORMANCE PERIOD. The performance period for the award of _____ performance shares (the "Award") is the period beginning __________ __, 20___ and ending __________ __, 20___ (the "Performance Period").
4. PAYMENT.
(a) PERFORMANCE SHARES PAYABLE IN CAPITAL STOCK. Subject to early termination of this Award Agreement pursuant to
Section 5 below, if Employee remains employed by the
Company or any of its subsidiaries throughout the Performance Period, promptly following the Performance Period, but not later than __________ __, 20___ (the "Payment Date"), the Company will deliver to Employee one (1) share of Capital Stock for each then-outstanding performance share granted to Employee under the Award made pursuant to this Award Agreement.
(b) DIVIDEND EQUIVALENTS. No dividend equivalents are granted pursuant to this Award.
5. TERMINATION OF AWARD. This Award Agreement will terminate and be of no further force or effect on the date that Employee is no longer actively employed by the Company or any of its subsidiaries for any reason, including death, disability or retirement. Employee will, however, be entitled to receive any of the Capital Stock payable under Section 4 of this Award Agreement if Employee's employment terminates after the Performance Period but before Employee's receipt of the Capital Stock.
6. TAX WITHHOLDING. Employee must pay, or make arrangements acceptable to the Company for the payment of, any and all federal, state, and local income and payroll tax withholding that in the opinion of the Company is required by law. Unless Employee satisfies any such tax withholding obligation by paying the amount in cash or by check, the Company will withhold shares of Capital Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation.
7. NON-TRANSFERABILITY. Neither this award nor any rights under this Award Agreement may be assigned, transferred, or in any manner encumbered except by will or the laws of descent and distribution, and any attempted assignment, transfer, mortgage, pledge or encumbrance, except as herein authorized, will be void and of no effect.
8. DEFINITIONS: COPY OF PLAN AND PLAN PROSPECTUS. To the extent not specifically defined in this Award Agreement, all capitalized terms used in this Award Agreement will have the same meanings ascribed to them in the Plan. By signing this Award Agreement, Employee acknowledges receipt of a copy of the Plan and the related Plan Prospectus.
9. CHOICE OF LAW. This Agreement will be governed by the laws of the State of Arizona, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to another jurisdiction.
2
An authorized representative of the Company has signed this Award Agreement, and Employee has signed this Award Agreement to evidence Employee's acceptance of the award on the terms specified in this Award Agreement, all as of the Date of Grant.
PINNACLE WEST CAPITAL CORPORATION
By: _____________________________________
Its: ____________________________________

Employee

3
 
Exhibit 10.96
PERFORMANCE SHARE AGREEMENT
UNDER THE
PINNACLE WEST CAPITAL CORPORATION 2002
LONG-TERM INCENTIVE PLAN
THIS AWARD AGREEMENT is made and entered into as of __________ __, 20___ (the "Date of Grant"), by and between Pinnacle West Capital Corporation (the "Company"), and ______________ ("Employee").
BACKGROUND
A. The Board of Directors of the Company (the "Board of Directors") has adopted, and the Company's shareholders have approved, the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"), pursuant to which performance share incentive awards may be granted to employees of the Company and its subsidiaries and certain other individuals.
B. The Company desires to grant to Employee a performance share award under the terms of the Plan as described herein.
C. Pursuant to the Plan, the Company and Employee agree as follows:
AGREEMENT
1. GRANT OF AWARDS. The Company grants to Employee a performance share award of _____ performance shares, subject to the terms, conditions, and adjustments set forth in this Award Agreement.
2. AWARD SUBJECT TO PLAN. This award is granted under, and is expressly subject to, all of the terms and provisions of the Plan, which terms are incorporated herein by reference, and this Award Agreement. The committee referred to in Section 4 of the Plan (the "Committee") has been appointed by the Board of Directors, and designated by it, as the Committee to make awards.
3. PERFORMANCE PERIOD. The performance period for the award of _____ performance shares (the "Award") is the ____ (__) year period beginning __________ __, 20___ and ending __________ __, 20___ (the "Performance Period").
4. PAYMENT.
(a) PERFORMANCE SHARES PAYABLE IN CAPITAL STOCK. Subject to early termination of this Award Agreement pursuant to
Section 5 below, if Employee remains employed by the
Company or any of its subsidiaries throughout the Performance Period, promptly following the Performance Period but not later than __________ __, 20___ (the "Payment Date"), the Company will deliver to Employee one (1) share of Capital Stock for each then-outstanding performance share granted to Employee under the Award made pursuant to this Award Agreement.
(b) RETIREMENT, DEATH, OR DISABILITY. In the case of
Employee's Retirement (as defined herein), death or Disability (as defined herein), Employee shall be deemed to have been employed by the Company through the end of the 2005 Performance Period.
(i) "Retirement" means a termination of employment which constitutes an "Early Retirement" or a "Normal Retirement" under the Pinnacle West Capital Corporation Retirement Plan.
(ii) "Disability" means a period of disability during which Employee qualifies for benefits under Employee's employer's long-term disability plan, or, if Employee does not participate in such a plan, a period of disability during which Employee would have qualified for benefits under such a plan, as determined by the Committee, had Employee been a participant in such a plan. The Committee may require such medical or other evidence, as it deems necessary to judge the nature of Employee's condition.
(c) DIVIDEND EQUIVALENTS. At the time of the Company's delivery of its Capital Stock to Employee pursuant to
Section 4(a) above, the Company will also deliver to Employee a cash payment equal to the amount of dividends that Employee would have received if Employee had directly owned the Capital Stock received by Employee for the Award from the Date of Grant through the Payment Date, plus interest on such amount at the rate of _____ percent per annum, compounded quarterly.
5. TERMINATION OF AWARD. This Award Agreement will terminate and be of no further force or effect on the date that Employee is no longer actively employed by the Company or any of its subsidiaries, except as set forth in Section 4 above. Employee will, however, be entitled to receive any of the Capital Stock and dividend equivalents payable under Section 4 of this Award Agreement if Employee's
2
employment terminates after the Performance Period but before Employee's receipt of the Capital Stock and dividend equivalents.
6. TAX WITHHOLDING. Employee must pay, or make arrangements acceptable to the Company for the payment of, any and all federal, state, and local income and payroll tax withholding that in the opinion of the Company is required by law. Unless Employee satisfies any such tax withholding obligation by paying the amount in cash or by check, the Company will withhold shares of Capital Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation.
7. NON-TRANSFERABILITY. Neither this award nor any rights under this Award Agreement may be assigned, transferred, or in any manner encumbered except by will or the laws of descent and distribution, and any attempted assignment, transfer, mortgage, pledge or encumbrance, except as herein authorized, will be void and of no effect.
8. DEFINITIONS: COPY OF PLAN AND PLAN PROSPECTUS. To the extent not specifically defined in this Award Agreement, all capitalized terms used in this Award Agreement will have the same meanings ascribed to them in the Plan. By signing this Award Agreement, Employee acknowledges receipt of a copy of the Plan and the related Plan Prospectus.
9. CHOICE OF LAW. This Agreement will be governed by the laws of the State of Arizona, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to another jurisdiction.
An authorized representative of the Company has signed this Award Agreement, and Employee has signed this Award Agreement to evidence Employee's acceptance of the award on the terms specified in this Award Agreement, all as of the Date of Grant.
PINNACLE WEST CAPITAL CORPORATION
By: _________________________________________
Its: ________________________________________

Employee

3
 
EXHIBIT 10.97
PERFORMANCE SHARE AGREEMENT
UNDER THE
PINNACLE WEST CAPITAL CORPORATION 2002
LONG-TERM INCENTIVE PLAN
THIS AWARD AGREEMENT is made and entered into as of ___________, 200__ (the "Date of Grant"), by and between Pinnacle West Capital Corporation (the "Company"), and (Name) ("Employee").
BACKGROUND
A. The Board of Directors of the Company (the "Board of Directors") has adopted, and the Company's shareholders have approved, the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"), pursuant to which performance share incentive awards may be granted to employees of the Company and its subsidiaries and certain other individuals.
B. The Company desires to grant to Employee a performance share award under the terms of the Plan.
C. Pursuant to the Plan, the Company and Employee agree as follows:
AGREEMENT
1. GRANT OF AWARD. Pursuant to action of the Committee (as defined herein) which was taken on the Date of Grant, the Company grants to Employee (Shares) performance shares ("Performance Shares"), subject to the terms, conditions, and adjustments set forth in this Award Agreement. The Performance Shares granted under this Section 1 are referred to in this Award Agreement as the "Base Grant."
2. AWARD SUBJECT TO PLAN. This award is granted under and is expressly subject to, all of the terms and provisions of the Plan, which terms are incorporated herein by reference, and this Award Agreement. The Committee described in Section 4 of the Plan (the "Committee") has been appointed by the Board of Directors, and designated by it, as the Committee to make awards.
3. PERFORMANCE PERIOD. The performance period for this award begins _________ __, 20___, and ends _____________ __,
20___ (the "Performance Period").
4. PAYMENT.
(a) PERFORMANCE SHARES PAYABLE IN COMMON STOCK. Subject to early termination of this Award Agreement pursuant to
Section 7 below, as soon as practicable following the end of the Performance Period and the determination of the Company's Earnings Per Share Growth Rate (as defined herein) as compared to the Earnings Per Share Growth Rate of the S&P Electric Utilities Index over such Performance Period but in no event later than December 31, 20___, the Company will deliver to Employee one (1) share of the Company's Common Stock for each then-outstanding Performance Share under this Award Agreement. If the Employee terminates employment after the end of the Performance
Page 2
Performance Share Agreement
Period but before distribution of any shares pursuant to this Award Agreement, the distribution of the shares will not be made until six (6) months following the Employee's termination of employment if required by
Section 409A of the Code.
(b) DIVIDEND EQUIVALENTS. At the time of the Company's delivery of Common Stock to Employee pursuant to Subsection 4(a) above, the Company will also deliver to Employee a cash payment equal to the amount of dividends that Employee would have received if Employee had directly owned all of such Common Stock during the Performance Period, plus interest on such amount at the rate of _____ percent, compounded quarterly.
(c) MAXIMUM AWARD. Employee may not receive more than 120,000 shares of Common Stock under this Award Agreement.
5. PERFORMANCE CRITERIA AND ADJUSTMENTS.
ADJUSTMENT OF BASE GRANT. The Base Grant will increase or decrease based upon the Company's "Earnings Per Share Growth Rate" as compared to the Earnings Per Share Growth Rate of the S&P Electric Utilities Index during the Performance Period, as follows:

   IF THE COMPANY'S EARNINGS PER SHARE
 COMPOUND GROWTH RATE OVER THE PERFORMANCE
PERIOD AS COMPARED TO S&P ELECTRIC UTILITIES         THE NUMBER OF
                   INDEX IS:                   PERFORMANCE SHARES WILL BE:
--------------------------------------------   ---------------------------
         ___th Percentile or Greater                 ___ X Base Grant
               ___th Percentile                      ___ X Base Grant
               ___th Percentile                         Base Grant
               ___th Percentile                      ___ X Base Grant
          Less than ___th Percentile             [None / ___X Base Grant]	

If intermediate percentiles are achieved, the number of Performance Shares awarded will be prorated (partial shares will be rounded down to the nearest whole share when applicable). For example, if the Company's Earnings Per Share Growth Rate during the Performance Period places the Company's performance in the ___th percentile, then the number of Performance Shares would be increased to ______ multiplied by the Base Grant. In no event will Employee be entitled to receive a number of Performance Shares greater than ___ times the Base Grant, even if the Company's Earnings Per Share Growth Rate during the Performance Period places the Company's performance higher than the ____th percentile. Attachment A provides a generic example of the operation of an award granted under this Award Agreement.
6. EARNINGS PER SHARE GROWTH RATE. "Earnings Per Share Growth Rate" for the Performance Period is the compounded annual-growth rate (CAGR) of a company's earnings per share from continuing operations, on a fully diluted basis, during the Performance Period[; provided, however, that for purposes of calculating the Company's Earnings Per Share Growth Rate, SunCor Development Company's earnings from discontinued operations will be considered earnings from continuing operations for each fiscal year during the Performance Period.] Only those companies which were in the S&P Electric
Page 3
Performance Share Agreement
Utility Index at both the beginning and the ending of the Performance Period will be considered. The Earnings Per Share Growth Rate of the companies in the S&P Electric Utilities Index will be determined using the S&P Compustat system. If the S&P Compustat system is no longer in use, the Committee shall replace it with the most comparable third party data system then in use. If the S&P Electric Utilities Index is discontinued, the S&P comparable replacement index for the sector will be used for computing Earnings Per Share Growth Rate. If S&P no longer computes an index for the electric utility sector, the Committee shall select the most comparable index then in use for the sector comparison. In addition, if the sector comparison is no longer representative of the Company's industry or business, the Committee shall replace the index with the most representative index then in use. Once the CAGR of the Company and all relevant companies in the S&P Electric Utility Index have been determined, the member companies will be ranked from greatest to least CAGR. Percentiles will be calculated based on a company's relative ranking. For example, company 1 out of 26 companies is given a percentile of 96.2% (1.0 - 1/26). Percentiles will be carried out to one (1) decimal place. If the Company is not in the S&P Electric Utility Index, then its percentile will be interpolated between the companies listed in the relative ranking. These calculations will be verified by the Company's internal auditors.
7. TERMINATION OF AWARD. This Award Agreement will terminate and be of no further force or effect on the date that Employee is no longer actively employed by the Company or any of its subsidiaries, whether due to voluntary or involuntary termination, death, retirement, disability, or otherwise. Subject to Section 4, Employee will, however, be entitled to receive any Common Stock and dividend equivalents payable under Section 4 of this Award Agreement if Employee's employment terminates after the Performance Period but before Employee's receipt of such Common Stock and dividend equivalents. For avoidance of doubt, no acceleration of Performance Shares or the Performance Period will occur on a change of control of the Company.
8. TAX WITHHOLDING. Employee must pay, or make arrangements acceptable to the Company for the payment of any and all federal, state, and local income and payroll tax withholding that in the opinion of the Company is required by law. Unless Employee satisfies any such tax withholding obligation by paying the amount in cash or by check, the Company will withhold shares of Common Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation.
9. NON-TRANSFERABILITY. Neither this award nor any rights under this Award Agreement may be assigned, transferred, or in any manner encumbered except by will or the laws of descent and distribution, and any attempted assignment, transfer, mortgage, pledge or encumbrance except as herein authorized, will be void and of no effect.
10. DEFINITIONS: COPY OF PLAN AND PLAN PROSPECTUS. To the extent not specifically defined in this Award Agreement, all capitalized terms used in this Award Agreement will have the same meanings ascribed to them in the Plan. By signing this Award Agreement, Employee acknowledges receipt of a copy of the Plan and the related Plan Prospectus.
11. CHOICE OF LAW. This Agreement will be governed by the laws of the State of Arizona, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to another jurisdiction.
Page 4
Performance Share Agreement
An authorized representative of the Company has signed this Award Agreement, and Employee has signed this Award Agreement to evidence Employee's acceptance of the award on the terms specified in this Award Agreement, all as of the Date of Grant.
PINNACLE WEST CAPITAL CORPORATION
By: _________________________________________
Its: Vice President and Treasurer

Employee
Page 5
Performance Share Agreement
ATTACHMENT A
GENERIC EXAMPLE
 (PERFORMANCE SHARE AWARD)
ASSUMPTIONS:
- Employee is granted 500 Performance Shares, which constitutes Employee's "Base Grant".
- During the Performance Period, the Company's Earnings Per Share Growth Rate is in the 88.3 percentile compared to the S&P Electric Utilities Index.
CALCULATION OF EMPLOYEE'S COMMON STOCK PAYMENT:
- Based on the Company's achievement of the 88.3 Percentile during the Performance Period, in April of the fiscal year immediately following the end of the Performance Period, Employee will receive ____ shares of Common Stock, calculated as follows:
- ___ shares of Common Stock as a result of the Company's Earnings Per Share Growth Rate meeting at least the ___th Percentile (____ X Base Grant) plus
- ___ shares of Common Stock as a result of the Company's Earnings Per Share Growth Rate achieving ________ of the Percentile increase between the ___th and ___th Percentiles (________ X _______ shares, with the ___ shares representing the Common Stock opportunity between the ___th and ___th Percentiles). (Note: __________ X _________ shares = ______ shares and must be rounded down to ____
shares.)
 
EXHIBIT 10.98
PERFORMANCE ACCELERATED STOCK OPTION AGREEMENT
UNDER
PINNACLE WEST CAPITAL CORPORATION 2002
LONG-TERM INCENTIVE PLAN
THIS AWARD AGREEMENT is made and entered into as of _________ __, 20___ (the "Date of Grant"), by and between Pinnacle West Capital Corporation (the "Company"), and (Name) ("Employee").
BACKGROUND
A. The Board of Directors of the Company (the "Board of Directors") has adopted, and the Company's shareholders have approved, the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"), pursuant to which options to purchase shares of the common stock of the Company may be granted to employees of the Company and its subsidiaries and to certain other individuals.
B. The Company desires to grant to Employee the option to purchase certain shares of its stock under the terms of the Plan.
C. Pursuant to the Plan, the Company and Employee agree as follows:
AGREEMENT
1. GRANT OF OPTION. Pursuant to action of the Committee (as defined herein), which was taken on the Date of Grant, the Company grants to Employee the option (the "Option") to purchase all or any part of (Shares) shares of the Company's Common Stock. This Option is not intended as, nor will it be treated as, an "incentive stock option" under Section 422 of the Code.
2. GRANT SUBJECT TO PLAN. This Option is granted under and is expressly subject to, all the terms and provisions of the Plan, which terms are incorporated herein by reference, and this Award Agreement. The Committee referred to in Section 4 of the Plan (the "Committee") has been appointed by the Board of Directors, and designated by it, as the Committee to make grants of options.
3. PURCHASE PRICE. The price at which Employee will be entitled to purchase the Common Stock covered by the Option is $_________ per share.
4. VESTING OF OPTION. The Option will vest and become exercisable as follows:
(a) On or after the first anniversary of the Date of Grant, or _________ ___, 20___, Employee may purchase up to one-third (1/3) of the total number of shares of Common Stock subject to this Option.
(b) On or after the second anniversary of the Date of Grant, or _________ ___, 20___, Employee may purchase up to an additional one-third (1/3) of the total number of shares of Common Stock subject to this Option; provided, however, that if the Company has achieved the "First Year Target" (as defined in Section 5(a) below), Employee may purchase the shares of Common Stock described in this Section 4(b) on or after the date which is eighteen months after the Date of Grant, or _________ ___, 20___.
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Performance Accelerated Stock Option
(c) On or after the third anniversary of the Date of Grant, or _________ ___, 20___, Employee may purchase up to an additional one-third (1/3) of the total number of shares of Common Stock subject to this Option; provided, however, that:
(i) If the Company has achieved the First Year Target OR the "Second Year Target" (as defined in Section 5(b) below), Employee may purchase the shares of Common Stock described in this Section 4(c) on or after the date which is thirty months after the Date of Grant, or _________ ___, 20___; and
(ii) If the Company has achieved the First Year Target AND the Second Year Target, Employee may purchase the shares of Common Stock described in this
Section 4(c) on or after the second anniversary of the Date of Grant, or _________ ___, 20___.
(d) Notwithstanding the foregoing, if Employee has entered into a KEESA with the Company, Employee may purchase 100% of the number of shares subject to this Option at any time during the three (3) month period beginning on Employee's Termination Date, as defined in the KEESA, in the event the Employee's termination is described in
Section 11 of the KEESA.
(e) If any Option vesting date is not a business day on which the New York Stock Exchange ("NYSE") is open, such vesting date will be deemed to be the next succeeding business day on which the NYSE is open. In no event will this Option be re-priced, or deemed to be re-priced, as a result of any acceleration of vesting periods, as described in this Section 4.
(f) Attachment A provides generic examples of the operation of a performance accelerated stock option.
5. TARGETS.
(a) FIRST YEAR TARGET. For purposes of this Award Agreement, the Company will have achieved the "First Year Target" if its "Earnings Per Share Growth" (as defined in
Section 5(c)) equals or exceeds the Earnings Per Share Growth of the S&P Electric Utilities Index for the fiscal year which includes the Date of Grant, or 20___.
(b) SECOND YEAR TARGET. For purposes of this Award Agreement, the Company will have achieved the "Second Year Target" if its Earnings Per Share Growth equals or exceeds the Earnings Per Share Growth of the S&P Electric Utilities Index for the fiscal year immediately following the fiscal year which includes the Date of Grant, or 20___.
(c) EARNINGS PER SHARE GROWTH.
(i) "Earnings Per Share Growth" for a given fiscal year is the percentage increase, if any, of the Company's earnings per share from continuing operations, on a fully-diluted basis, as of the end of the relevant fiscal year, over the earnings per share from continuing operations, on a fully-diluted basis, as of the end of the immediately preceding fiscal year.
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Performance Accelerated Stock Option
(ii) The "Earnings Per Share Growth of the S&P Electric Utilities Index" for a given Fiscal Year is the percentage increase, if any, of the S&P Electric Utilities Index earnings per share, as of the end of the relevant fiscal year, over the earnings per share as of the end of the immediately preceding fiscal year. The Earnings Per Share Growth of the S&P Electric Utilities Index will be determined using the S&P Compustat system. The S&P Electric Utilities Index earnings per share is a weighted average number provided in the S&P Compustat system. If the S&P Compustat system is no longer in use, the Committee will replace it with the most comparable third party data system then in use. If the S&P Electric Utilities Index is discontinued, the S&P comparable replacement index for the sector will be used for computing Earnings Per Share Growth of the S&P Electric Utilities Index. If S&P no longer computes an index for the electric utility sector, the Committee shall select the most comparable index then in use for the sector comparison. In addition, if the sector comparison is no longer representative of the Company's industry or business, the Committee shall replace the index with the most representative index then in use.
(iii) All results will be verified by the Company's independent auditors using generally accepted accounting principles, consistently applied.
6. TERM OF OPTION. This Option will be in full force and effect for a period of ten (10) years from the Date of Grant, through and including the close of business of the Company on _________ ___, 20___; however, this Option will terminate earlier upon the occurrence of the events described in this
Section 6, with no continuation of vesting.
(a) TERMINATION-GENERAL. Any vested Option will terminate and be of no further force and effect ninety (90) days after the date that Employee is no longer actively employed by the Company or any of its subsidiaries (the "Termination Date") unless:
(i) The Termination Date results from Employee's Retirement, in which case this Option will terminate at the time described in Section 6(b) below;
(ii) The Termination Date results from Employee's Disability, in which case this Option will terminate at the time described in Section 6(c) below; or
(iii) The Termination Date results from Employee's death, in which case this Option will terminate at the time described in Section 6(d) below.
(b) RETIREMENT OF EMPLOYEE. If the Termination Date results from Employee's "Retirement" (as hereinafter defined), any vested Option will terminate fifteen (15) months after the Termination Date. Any options that have not vested will expire upon Retirement. If Employee's Retirement occurs on or after Employee's 60th birthday, this Option will also become fully vested, to the extent not already fully vested.
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Performance Accelerated Stock Option
(c) DISABILITY OF EMPLOYEE. If the Termination Date results from Employee's "Disability" (as hereinafter defined), any vested Option will terminate fifteen (15) months after the Termination Date. If the Termination Date results from Employee's Disability, and Employee dies within one (1) year of the Termination Date, this Option may be exercised, to the extent that Employee was entitled to exercise it at the date of Employee's death, by a legatee or legatees of Employee under Employee's last will, or by Employee's personal representatives or distributees (or by a transferee under Section 9), at any time within a period of fifteen (15) months after Employee's date of death.
(d) DEATH OF EMPLOYEE. If the Termination Date results from Employee's death, any vested Option may be exercised, to the extent that Employee was entitled to exercise it at the date of Employee's death, by a legatee or legatees of Employee under Employee's last will, or by Employee's personal representatives or distributees (or by a transferee under Section 9), at any time within a period of fifteen (15) months after the Termination Date. If Employee dies within ninety (90) days of Employee's Termination Date, this Option may be exercised, to the extent that Employee was entitled to exercise it at the date of Employee's death, by a legatee or legatees of Employee under Employee's last will, or by Employee's personal representatives or distributees (or by a transferee under Section 9), at any time within a period of fifteen (15) months after Employee's date of death.
(e) Notwithstanding the foregoing, (i) except as otherwise provided in Section 6(b) above, this Option will cease vesting as of the Termination Date and (ii) in no event may this Option be exercised after the tenth (10th) anniversary of the Date of Grant.
7. OPTION EXERCISE.
(a) NOTICE TO COMPANY OF OPTION EXERCISE. Employee may exercise this Option, in whole or in part, by providing written notice to the Company, accompanied by payment of the Option purchase price, as set forth below.
(b) PAYMENT OF OPTION PURCHASE PRICE. The price at which shares of Common Stock may be purchased under this Option will be paid in full in cash at the time of exercise or, if permitted by the Committee, by means of tendering Common Stock or surrendering another Award (as defined in the Plan), or any combination thereof, on such terms and conditions as the Committee deems appropriate. In addition, Employee may effect a "cashless exercise" of this Option in which all or a portion of the shares subject to this Option are sold through a broker and a portion of the proceeds to cover the exercise price is paid to the Company.
8. TAX WITHHOLDING. Employee must pay, or make arrangements acceptable to the Company for the payment of, any and all federal, state, and local income and payroll tax withholding that in the opinion of the Company is required by law. Unless Employee satisfies any such tax withholding obligation by paying the amount in cash or by check, the Company will withhold shares of Common Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation.
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Performance Accelerated Stock Option
9. NON-TRANSFERABILITY. Neither this Option nor any rights under this Award Agreement may be assigned, transferred or in any manner encumbered except by will or the laws of descent and distribution, and any attempted assignment, transfer, mortgage, pledge or encumbrance, except as herein authorized, will be void and of no effect. This Option may be exercised during Employee's lifetime only by Employee. Notwithstanding the foregoing, this Option may be transferred by gift or otherwise to a member of Employee's immediate family and/or trusts whose beneficiaries are members of Employee's immediate family, or to such other persons or entities as may be approved by the Committee.
10. DEFINITIONS: COPY OF PLAN AND PLAN PROSPECTUS. For the purposes of this Award Agreement, the following terms shall have the following meanings:
(a) "Disability" shall mean a period of disability during which Employee qualifies for benefits under employer's long-term disability plan, or, if Employee does not participate in such a plan, a period of disability during which Employee would have qualified for benefits under such a plan, as determined by the Committee, had Employee been a participant in such a plan. The Committee may require such medical or other evidence, as it deems necessary to judge the nature of Employee's condition.
(b) "KEESA" means the Key Executive Employment and Severance Agreement, as the same may be amended from time to time.
(c) "Retirement" means a termination of employment under which Employee is immediately eligible to receive payments under the Company's qualified pension plan.
To the extent not specifically defined in this Award Agreement, all capitalized terms used in this Award Agreement will have the same meanings ascribed to them in the Plan. By signing this Award Agreement, Employee acknowledges receipt of a copy of the Plan and the related Plan Prospectus.
11. CHOICE OF LAW. This Award Agreement will be governed by the laws of the State of Arizona, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to another jurisdiction.
An authorized representative of the Company has signed this Award Agreement, and Employee has signed this Award Agreement to evidence Employee's acceptance of the Option on the terms specified in this Award Agreement, all as of the Date of Grant.
PINNACLE WEST CAPITAL CORPORATION
By: _________________________________________
Its: Vice President and Treasurer

Employee
ATTACHMENT A
GENERIC EXAMPLE
 (PERFORMANCE ACCELERATED STOCK OPTION)
ASSUMPTION:
On _________ ___, 20___, Employee is granted an Option to purchase 750 shares of Common Stock. Unless accelerated, the option will vest in 1/3 increments over 3 separate 12-month periods:
- 250 shares will vest on _________ ___, 20___;
- 250 shares will vest on _________ ___, 20___; and
- 250 shares will vest on _________ ___, 20___.
SCENARIO #1:
- The Company's Earnings Per Share Growth for fiscal year 20___ is greater than the Earnings Per Share Growth of the S&P Electric Utilities Index for fiscal year 20___. (The First Year Target is met.)
- The Company's Earnings Per Share Growth for fiscal year 20___ is greater than the Earnings Per Share Growth of the S&P Electric Utilities Index for fiscal year 20___. (The Second Year Target is met.)
Vesting of Options under Scenario # 1:
- 1/3 of the Option (250 shares) vests on _________ ___, 20___.
- Based on the achievement of the First Year Target, the remaining Options vest on _________ ___, 20___ and _________ ___, 20___ (the achievement of the First Year Target accelerates the standard vesting period by 6 months).
- Based on the achievement of the Second Year Target, the remaining Options vest on _________ ___, 20___ (the achievement of the Second Year Target accelerates the vesting period by another 6 months).
SCENARIO #2:
- The Company's Earnings Per Share Growth for fiscal year 20___ is greater than the Earnings Per Share Growth of the S&P Electric Utilities Index for fiscal year 20___. (The First Year Target is met.)
- The Company's Earnings Per Share Growth for Fiscal Year 20___ is less than the Earnings Per Share Growth of the S&P Electric Utilities Index for fiscal year 20___. (The Second Year Target is not met.)
Vesting of Options Under Scenario #2:
- 1/3 of the Option (250 shares) vests on _________ ___, 20___.
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Performance Accelerated Stock Option
- Based on the achievement of the First Year Target, the remaining Options vest on _________ ___, 20___ and _________ ___, 20___ (the achievement of the First Year Target accelerates the standard vesting period by 6 months.)
- Based on the failure to achieve the Second Year Target, the remaining Options vest on _________ ___, 20___ (the failure to achieve the Second Year Target results in the remaining standard vesting period for the final 250 shares.)
SCENARIO #3:
- The Company's Earnings Per Share Growth for fiscal year 20___ is less than the Earnings Per Share Growth of the S&P Electric Utilities Index for fiscal year 20___. (The First Year Target is not met.)
- The Company's Earnings Per Share Growth for fiscal year 20___ is greater than the Earnings Per Share Growth of the S&P Electric Utilities Index for fiscal year 20___. (The Second Year Target is met.)
Vesting of Options Under Scenario #3:
- 1/3 of the Option (250 shares) vests on _________ ___, 20___.
- Based on the failure to achieve the First Year Target, the remaining Options vests on _________ ___, 20___ and _________ ___, 20___ (the failure to achieve the First Year Target results in a standard vesting period).
- Based on the achievement of the Second Year Target, the remaining Options (the final 250 shares) vest on _________ ___, 20___ (the achievement of the Second Year Target accelerates the standard vesting period and _________ ___, 20___ vesting date by 6 months).
W:/Performance Accelerated Stock Option
 
Exhibit 10.99
STOCK OWNERSHIP INCENTIVE AGREEMENT
UNDER
PINNACLE WEST CAPITAL CORPORATION
2002 LONG-TERM INCENTIVE PLAN
THIS AWARD AGREEMENT is made and entered into as of _________ ___, 20___ (the "Date of Grant"), by and between Pinnacle West Capital Corporation (the "Company"), and (FirstName) ("Employee").
BACKGROUND
A. The Board of Directors of the Company (the "Board of Directors") has adopted, and the Company's shareholders have approved, the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan (the "Plan"), pursuant to which stock ownership incentive awards may be granted to employees of the Company and its subsidiaries and to certain other individuals.
B. The Company desires to grant to Employee a stock ownership incentive award under the terms of the Plan.
C. Pursuant to the Plan, the Company and Employee agree as follows:
AGREEMENT
1. DEFINITIONS. For purposes of this Award Agreement, the following terms have the meanings specified in this Section 1:
(a) "AWARD PERIOD" means the period beginning _________ ___, 20___ and ending _________ ___, 20___.
(b) "AVERAGE NUMBER OF SHARES OWNED" means (i) the sum of the number of shares of Common Stock (as defined herein) owned by Employee at the _____________ during the Award Period divided by (ii) __________ (___), rounded down to the next whole share.
(c) "AVERAGE SHARE PRICE" means the average _____________ price of the Common Stock on the New York Stock Exchange during the Award Period.
(d) "BASE SALARY" means the base salary earned by Employee during the Award Period.
(e) "COMMON STOCK" means the common stock of the Company.
(f) "OWNERSHIP LEVEL" means the Stock Ownership Value (as defined herein) divided by Employee's Base Salary, expressed as a ratio, carried out to two decimal places and rounded down.
(g) "STOCK OWNERSHIP VALUE" means the Average Number of Shares Owned multiplied by the Average Share Price.
2. GRANT OF AWARD. Pursuant to action of the Committee (as defined herein), which was taken on the Date of Grant, the Company grants to Employee the stock ownership incentive award described in this Award Agreement.
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Stock Ownership Incentive
3. AWARD SUBJECT TO PLAN. This award is granted under and is expressly subject to, all the terms and provisions of the Plan, which terms are incorporated herein by reference, and this Award Agreement. The Committee referred to in Section 4 of the Plan ("Committee") has been appointed by the Board of Directors, and designated by it, as the Committee to make awards.
4. STOCK OWNERSHIP INCENTIVE AWARD.
(a) GENERAL. Upon satisfaction of the "Threshold Performance Goal" described in Section 4(b) below and the Ownership Level described in Section 4(c) below, the Company will deliver to Employee, as soon as practicable after the end of the Award Period, but no later than _________ ___, 20___, a number of shares of Common Stock equal to _____ percent (__%) of Employee's Average Number of Shares Owned, subject to the limitation described in Subsection 4(d) below. Partial shares will be rounded down to the nearest whole share, when applicable. Attachment A provides a generic example of the operation of a Stock Ownership Incentive Award.
(b) THRESHOLD PERFORMANCE GOAL. For purposes of this Award Agreement, the threshold performance goal for the Award Period will have been met if, during the Award Period, the Company's earnings from continuing operations[, excluding the effects of the rate case settlement, plus SunCor Development Company's earnings from discontinued operations] are at least $______ million.
(c) OWNERSHIP LEVEL. For purposes of this Agreement, the Common Stock ownership requirement will have been met if Employee's Ownership Level is at least ___ [insert number].
(d) MAXIMUM AWARD. If Employee's Ownership Level exceeds _______ (__), the number of shares of Common Stock awarded to Employee will be ____ percent (__%) of the number of shares represented by an Ownership Level of _________ (__) or _______________ shares maximum.
5. EVIDENCE OF OWNERSHIP.
(a) SHARES HELD IN COMPANY PLANS. Employee is not required to provide ownership evidence of shares of Common Stock owned by Employee and held in any Company-sponsored stock-based plan, such as the Pinnacle West Capital Corporation Investors Advantage Plan or the Pinnacle West Capital Corporation Savings Plan.
(b) SHARES HELD OUTSIDE COMPANY PLANS. Shares of Common Stock owned by Employee outside of Company-sponsored stock-based plans (for example, shares held in a brokerage account) will be included in Employee's Average Number of Shares Owned only if Employee provides the Company with written evidence of such ownership (for example, a copy of a brokerage account statement). Employee must provide the Company with evidence of such ownership no later than thirty (30) days following the end of the Award Period.
6. TERMINATION OF AWARD. This Award Agreement will terminate and be of no further force or effect as of the date during the Award Period that Employee is no
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Stock Ownership Incentive
longer employed by the Company or any of its subsidiaries, unless the termination of active employment is due to Employee's death or Disability (as defined herein). In the case of Employee's death or Disability, Employee will be deemed to have been employed by the Company through the end of the Award Period. No adjustment will be made to Employee's "Base Salary" calculation as a result of Employee's death or Disability (e.g., the base salary earned by Employee to the date of Employee's death or Disability will not be annualized over the Award Period). For avoidance of doubt, no acceleration of the Award Period will occur as a result of a change of control of the Company.
"Disability" shall mean a period of disability during which Employee qualifies for benefits under employer's long-term disability plan, or, if Employee does not participate in such a plan, a period of disability during which Employee would have qualified for benefits under such a plan, as determined by the Committee, had Employee been a participant in such a plan. The Committee may require such medical or other evidence, as it deems necessary to judge the nature of Employee's condition.
7. TAX WITHHOLDING. Employee must pay, or make arrangements acceptable to the Company for the payment of, any and all federal, state, and local income and payroll tax withholding that in the opinion of the Company is required by law. Unless Employee satisfies any such tax withholding obligation by paying the amount in cash or by check , the Company will withhold shares of Common Stock having a Fair Market Value on the date of withholding sufficient to cover the withholding obligation.
8. NON-TRANSFERABILITY. Neither this award nor any rights under this Award Agreement may be assigned, transferred or in any manner encumbered except by will or the laws of descent and distribution, and any attempted assignment, transfer, mortgage, pledge or encumbrance except as herein authorized, will be void and of no effect.
9. DEFINITIONS; COPY OF PLAN AND PLAN PROSPECTUS. To the extent not specifically defined in this Award Agreement, all capitalized terms used in this Award Agreement will have the same meanings ascribed to them in the Plan. By signing this Award Agreement, Employee acknowledges receipt of a copy of the Plan and the related Plan Prospectus.
10. CHOICE OF LAW. This Award Agreement will be governed by the laws of the State of Arizona excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to another jurisdiction.
An authorized representative of the Company has signed this Award Agreement, and Employee has signed this Award Agreement to evidence Employee's acceptance of the award on the terms specified in this Award Agreement, all as of the Date of Grant.
PINNACLE WEST CAPITAL CORPORATION
By: _________________________________________
Its: Vice President and Treasurer

Employee
W:/Stock Ownership Incentive
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Stock Ownership Incentive
ATTACHMENT A
GENERIC EXAMPLE
 (STOCK OWNERSHIP INCENTIVE AWARD)
ASSUMPTIONS:
- Earnings threshold is met.
- Employee's Base Salary is $100,000.
- Employee's Ownership Level must be at least two (2) (Employee's Ownership Level is based on Employee's title) and cannot exceed five (5).
- Grant of shares at four percent (4%) of Employee's Average Number of Shares Owned.
- Employee owns 5,800 shares of Common Stock at the end of each month during 20___, resulting in the Average Number of Shares Owned equaling 5,800.
- The Average Share Price for 20___ is $35.00 per share.
- Employee's Stock Ownership Value is $203,000 (5,800 shares X $35.00 per share)
- Employee's Ownership Level is $203,000 / $100,000, or 2.03.
- Employee meets the required Ownership Level of at least 2.
DELIVERY OF COMMON STOCK TO EMPLOYEE:
- Employee would receive 232 shares of Common Stock (4% of 5,800 shares, rounded down, which represents Employee's Average Number of Shares Owned)
APPLICATION OF THE MAXIMUM:
- Same assumptions, except Average Number of Shares Owned equals 15,000.
- Employee's Stock Ownership Value is $525,000 (15,000 shares X $35.00 per share)
- Employee's Ownership Level is 525,000 / 100,000, or 5.25.
- Shares are not awarded for Ownership Levels above 5, so five times Base Salary is $500,000 Stock Ownership Value, resulting in 14,285 shares ($500,000 / $35 per share). The 4% award would be based on 14,285 shares; as a result, Employee would receive 571 shares.
W:/Stock Ownership Incentive
 
Exhibit 10.100
AMENDED AND RESTATED
REIMBURSEMENT AGREEMENT
among
ARIZONA PUBLIC SERVICE COMPANY
THE BANKS PARTY HERETO
and
JPMORGAN CHASE BANK,
as Administrative Agent and Issuing Bank
dated as of July 22, 2002
TABLE OF CONTENTS

                                                                           PAGE
                                                                           ----
SECTION 1.  Definitions; Accounting Terms.................................  2
SECTION 2.  Reimbursement.................................................  14
SECTION 3.  Amendment and Restatement of Letter of Credit; Conditions to
       Effectiveness; Transitional Provisions.............................  18
SECTION 4.  Adjustment of Maximum Drawing Amount; Terms of Drawing........  20
SECTION 5.  Obligations Absolute..........................................  21
SECTION 6.  Representations and Warranties of the Company.................  21
SECTION 7.  Affirmative Covenants.........................................  24
SECTION 8.  Negative Covenants............................................  29
SECTION 9.  Reimbursement Events of Default...............................  31
SECTION 10.  Amendments and Waivers.......................................  34
SECTION 11.  Notices......................................................  34
SECTION 12.  No Waiver; Remedies..........................................  35
SECTION 13.  Waiver of Right of Setoff....................................  35
SECTION 14.  Participations of the Banks..................................  36
SECTION 15.  Assignees; Participants......................................  38
SECTION 16.  Continuing Obligation; Binding Effect........................  39
SECTION 17.  Extension of the Letter of Credit............................  40
SECTION 18.  Limited Liability of the Banks...............................  40
SECTION 19.  Cost, Expenses and Taxes.....................................  41
SECTION 20.  Administrative Agent; Issuing Bank...........................  41
SECTION 21.  Indemnification..............................................  42
SECTION 22.  Confidentiality..............................................  44
SECTION 23.  Severability.................................................  44
SECTION 24.  Governing Law................................................  44
SECTION 25.  Headings.....................................................  44
SECTION 26.  Counterparts; Integration....................................  44
SECTION 27.  WAIVER OF JURY TRIAL.........................................  45

SCHEDULE I - Letter of Credit Commission Rates
SCHEDULE II  - Participation Amounts and Participation Percentages
EXHIBIT A    - Form of Amended and Restated Letter of Credit
EXHIBIT B    - Form of Opinion of Special Counsel for the Company
EXHIBIT C    - Form of Opinion of Special Counsel for the Administrative Agent	

THE TABLE OF CONTENTS IS NOT A PART OF THIS AGREEMENT.
AMENDED AND RESTATED REIMBURSEMENT AGREEMENT
AMENDED AND RESTATED REIMBURSEMENT AGREEMENT among ARIZONA PUBLIC SERVICE COMPANY, JPMORGAN CHASE BANK (successor to Morgan Guaranty Trust Company of New York) ("MGT")), as Administrative Agent and as Issuing Bank, and the BANKS listed on the signature pages hereto, as amended and restated as of July 22, 2002. (Unless otherwise indicated, all capitalized terms used herein have the meanings referred to or set forth in Section 1(a).)
WHEREAS, the Company has entered into a Participation Agreement dated as of August 1, 1986 (as amended and in effect on July 11, 2002, the "PARTICIPATION AGREEMENT") among the Company, State Street Bank and Trust Company (as successor to The First National Bank of Boston), for itself and as Owner Trustee (together with its successors in such capacity, the "OWNER TRUSTEE"), JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank, as successor to Chemical Bank), for itself and as Indenture Trustee (together with its successors in such capacity, the "INDENTURE TRUSTEE"), PVNGS Funding Corp., Inc., PVNGS II Funding Corp., Inc. and Emerson Finance Co., as Equity Participant (together with its successors and assigns, the "EQUITY PARTICIPANT"), relating to the acquisition of an undivided interest in Unit 2 of the Palo Verde Nuclear Generating Station through a trust for the benefit of the Equity Participant which interest has been leased to the Company pursuant to a lease dated as of August 1, 1986 between the Owner Trustee and the Company (as amended and in effect on July 11, 2002, the "FACILITY LEASE");
WHEREAS, pursuant to Section 10(b)(3)(ix) of the Participation Agreement, the Company has agreed to maintain at all times during the Basic Lease Term (as defined in the Participation Agreement) an irrevocable letter of credit for the benefit of the Equity Participant;
WHEREAS, in order to comply with the requirements of Section 10(b)(3)(ix) of the Participation Agreement, the Company entered into a Reimbursement Agreement dated as of August 1, 1986 (as amended and restated thereafter from time to time prior to August 15, 1997, further amended and restated as of August 15, 1997 and in effect immediately prior to July 22, 2002, the "EXISTING REIMBURSEMENT AGREEMENT") between the Company and MGT, pursuant to which MGT issued to the Equity Participant its irrevocable transferable letter of credit (such letter of credit, as amended and restated and in effect from time to time before July 22, 2002, as further amended and restated as of July 22, 2002, and as the same may be amended in accordance with this Agreement and in effect from time to time thereafter, and any successor Letter of Credit as provided in such Letter of Credit, being referred to herein as the "LETTER OF CREDIT"), to secure the payment of Rent (as defined in the Participation Agreement) by the Company under the Facility Lease to the extent of the amount available to be drawn from time to time under the Letter of Credit;
WHEREAS, the Letter of Credit will expire on August 15, 2002, if not extended; and
WHEREAS, the Company has requested that the Banks become parties hereto, that the term of the Letter of Credit be extended for three years, and that certain provisions of the Existing Reimbursement Agreement be amended, and the Banks are willing to comply with such requests on the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the premises and in order to induce the Banks to enter into this Agreement, agree to the extension of the term of the Letter of Credit and amend certain provisions of the Existing Reimbursement Agreement, the parties hereto agree that, upon satisfaction of the conditions set forth in Section 3(b) below and subject to Section 3(c) below, the Existing Reimbursement Agreement will, without any further action by the parties hereto, be amended and restated to read in full as follows:
SECTION 1. Definitions; Accounting Terms. (a) Definitions. Capitalized terms used herein and not otherwise defined herein have the respective meanings assigned thereto in Appendix A to the Facility Lease. The following terms as used herein have the following respective meanings:
"ACC" means the Arizona Corporation Commission or any successor thereto.
"ADMINISTRATIVE AGENT" means JPMorgan Chase Bank, in its capacity as administrative agent for the Banks hereunder, and its successors in such capacity.
"ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Administrative Agent and submitted to the Administrative Agent (with a copy to the Company) duly completed by such Bank.
"AFFILIATE" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person.
"AGREEMENT" means, when used with reference to this Agreement, this Reimbursement Agreement as originally executed as of August 1, 1986, as amended or amended and restated from time to time before July 22, 2002, as amended and restated as of July 22, 2002, and as the same may be amended in accordance with its terms from time to time thereafter.
"AMENDED AND RESTATED LETTER OF CREDIT" means the Amended and Restated Letter of Credit dated as of July 22, 2002, amending and restating the Letter of Credit.
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"AMENDMENT AND RESTATEMENT" means the Amendment and Restatement dated as of July 22, 2002, amending and restating the Existing Reimbursement Agreement.
"APPLICABLE BOOKING OFFICE" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Applicable Booking Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Applicable Booking Office by notice to the Company and the Administrative Agent.
"ASSET TRANSFER" means the transfer by the Company to PWEC of all or any part of the Company's generating assets, except the Nuclear Transfer, in one or a series of transactions, which may occur on or prior to the Nuclear Transfer and which may involve one or more intermediate transfers to one or more wholly-owned subsidiaries of the Company formed to effect the transfer(s).
"ASSIGNEE" has the meaning set forth in Section 15(a).
"AUTHORIZED OFFICER" means the chairman of the board, chief executive officer, president, chief operating officer, treasurer, controller, any vice president or any assistant treasurer of the Company.
"BANK" means (i) each bank or financial institution listed on the signature pages hereof, each Assignee that becomes a Bank pursuant to Section
15(a), and their respective successors, and (ii) the Issuing Bank with respect to its Participation.
"BASE RATE" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York, Chicago, Illinois or the State of California or, for purposes of Sections 2(a), 2(g) and 9(i) only, Phoenix, Arizona, are authorized by law to close.
"CAPITAL LEASE OBLIGATIONS" means as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property, which obligations are required to be classified and accounted for as a capital lease on the balance sheet of such Person under generally accepted accounting principles and, for the purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles.
"CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute.
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"COMPANY" means Arizona Public Service Company, an Arizona corporation, and its successors and permitted assigns.
"COMPANY INDENTURE" means that certain Mortgage and Deed of Trust, dated as of July 1, 1946 from Central Arizona Light and Power Company (now the Company) to The Bank of New York, successor by assignment to Bank of America National Trust and Savings Association, successor to Security-First National Bank of Los Angeles, as trustee, or any supplemental indenture thereto, as the same shall have been, or may be, amended and supplemented from time to time.
"CONFIDENTIAL INFORMATION" means information that the Company furnishes to any other party hereto in a writing designated as confidential, or that such party obtains pursuant to its rights under Section 7(e), but does not include any such information that (a) is or becomes generally available to the public other than as a result of a breach by such party of its obligations hereunder,
(b) was available to such party on a nonconfidential basis prior to its disclosure to such party by the Company or any of its Affiliates or (c) is or becomes available to such party from a source other than the Company that is not, to the knowledge of such party, acting in violation of a confidentiality agreement with the Company.
"CONSOLIDATED CAPITALIZATION" has the meaning set forth in Section 8(e).
"CONSOLIDATED CASH COVERAGE RATIO" means, with respect to the Company and its Consolidated Subsidiaries, for each twelve-month period ending on the last day of each fiscal quarter (determined as of the last day of such fiscal quarter), the ratio of:
(a) an amount equal to:
(i) consolidated net income of the Company and its Consolidated Subsidiaries for such period, plus
(ii) all material non-recurring items which decreased said net income for such period, minus
(iii) all material non-recurring items which increased said net income for such period, plus
(iv) income taxes deducted in determining said net income for such period, plus
(v) total "Interest Charges", as defined in clause (b) below, of the Company and its Consolidated Subsidiaries for such period, plus
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(vi) depreciation and amortization, and nuclear fuel amortization for such period, minus
(vii) allowance for equity and borrowed funds used during construction for such period, minus
(viii) deferrals as described in Financial Accounting Standards Board Statement No. 71 for such period, plus or minus
(ix) other significant noncash items for such period as may be specified under Financial Accounting Standards Board Statements or other accounting guidelines, to
(b) without duplication of any item, an amount equal to the sum (such amount being the "INTEREST CHARGES") of:
(i) interest on long-term debt for such period as reported in the consolidated income statement for such period, plus
(ii) interest on short-term debt for such period as reported in the consolidated income statement for such period, plus
(iii) imputed interest on the Sale Leaseback Obligation Bonds for such period, such amount being equal to the product of (A) the principal amount of Sale Leaseback Obligation Bonds outstanding during such period and (B) the rate of interest applicable to such Sale Leaseback Obligation Bonds during such period, plus
(iv) all rental payments in respect of operating leases (excluding any portion of such rental payments attributable to operating expenses and excluding any payments in respect of Sale Leaseback Obligation Bonds) with respect to which the payment obligations of the Company or a Consolidated Subsidiary of the Company have a present value of at least $25,000,000.
"CONSOLIDATED INDEBTEDNESS" has the meaning set forth in Section 8(e).
"CONSOLIDATED NET WORTH" has the meaning set forth in Section 8(e).
"CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Company in its consolidated financial statements if such statements were prepared as of such date.
"DATE OF EARLY TERMINATION" has the meaning set forth in the Letter of Credit.
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"ELIGIBLE INSTITUTION" means (i) a commercial bank or a savings and loan association having a net worth in excess of $250,000,000 (or the equivalent in any other currency), (ii) a Bank or an affiliate of a Bank or (ii) any other Person which the Company designates as an Eligible Institution with the consent of the Administrative Agent.
"EQUITY PARTICIPANT" has the meaning set forth in the first recital hereto.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
"ERISA AFFILIATE" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as the Company or is under common control (within the meaning of Section 414(c) of the Code) with the Company.
"EXISTING LETTER OF CREDIT" means the Letter of Credit, as amended and in effect immediately prior to July 22, 2002.
"EXISTING REIMBURSEMENT AGREEMENT" has the meaning set forth in the third recital hereto.
"FACILITY LEASE" has the meaning set forth in the first recital hereto.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to JPMorgan Chase Bank on such day as determined by the Administrative Agent.
"FEE LETTER" means the Fee Letter dated as of May 21, 2002, from the Issuing Bank to the Company and accepted and agreed to by the Company on May 21, 2002.
"FINANCIAL INFORMATION" means (i) the annual report of the Company on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended,
(ii) the Company's quarterly report on Form 10-Q for the fiscal quarter of the Company ended March 31, 2002, as so filed, and (iii) the Company's current reports on Form 8-K dated
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December 14, 2001, February 8, 2002, February 26, 2002, April 19, 2002, April 26, 2002, May 22, 2002, June 5, 2002, and July 11, 2002, as so filed.
"GUARANTEE" means as to any Person, any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness of any other Person or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, agreements to keep well, to purchase assets, goods, securities or services, or to take-or-pay or otherwise), provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning.
"INDEBTEDNESS" means as to any Person at any date (without duplication):
(a) indebtedness created, issued, incurred or assumed by such Person for borrowed money or evidenced by bonds, debentures, notes or similar instruments;
(b) all obligations of such Person to pay the deferred purchase price of property or services, excluding, however, trade accounts payable (other than for borrowed money) arising in, and accrued expenses incurred in, the ordinary course of business of such Person so long as such trade accounts payable are paid within 180 days of the date incurred; (c) all Indebtedness secured by a lien on any asset of such Person, to the extent such Indebtedness has been assumed by, or is a recourse obligation of, such Person; (d) all Guarantees by such Person; (e) all Capital Lease Obligations of such Person; and (f) the amount of all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers' acceptances, surety or other bonds and similar instruments in support of Indebtedness.
"INDENTURE TRUSTEE" has the meaning set forth in the first recital hereto.
"ISSUING BANK" means JPMorgan Chase Bank and its successors in their capacity as issuer of the Letter of Credit.
"LETTER OF CREDIT" has the meaning set forth in the third recital hereto.
"LETTER OF CREDIT COMMISSION RATE" means a rate per annum determined in accordance with Schedule I hereto.
"LIEN" means any lien, security interest or other charge or encumbrance of any kind, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property.
"MATERIAL SUBSIDIARY" means, at any time, a Subsidiary of the Company which as of such time meets the definition of a "significant subsidiary" included as of July 22, 2002 in Regulation S-X of the Securities and Exchange Commission or whose assets at such time exceed 10% of the assets of the Company and the Subsidiaries (on a consolidated basis).
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"MAXIMUM CREDIT AMOUNT" means, at any date, the Maximum Credit Amount, as defined in the Letter of Credit.
"MAXIMUM DRAWING AMOUNT" means, at any date, the Maximum Drawing Amount, as defined in the Letter of Credit.
"MULTIEMPLOYER PLAN" means a plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate within any of the preceding five plan years and which is covered by Title IV of ERISA.
"1986 ORDER" means Decision No. 55120, dated July 24, 1986, of the ACC.
"NUCLEAR TRANSFER" means the transfer by the Company to PWEC of all or a portion of the Company's interests in PVNGS, in one or a series of transactions, including the assignment by the Company and assumption by PWEC of the Company's rights and obligations under the Facility Lease, Participation Agreement, and other Transaction Documents and Financing Documents, and which may involve one or more intermediate transfers to one or more wholly-owned subsidiaries of the Company formed to effect the transfer(s). The Nuclear Transfer will require the consent of the Equity Participant and the Owner Trustee, among others.
"OTHER TAXES" has the meaning set forth in Section 2(e).
"OWNER TRUSTEE" has the meaning set forth in the first recital hereto.
"PARENT" means, as to any Bank, any Person controlling such Bank.
"PARTICIPANT" has the meaning set forth in Section 15(b).
"PARTICIPATION" means a participating interest of a Bank in the credit represented by the Letter of Credit including, without limitation, the interest therein retained by the Issuing Bank after giving effect to all participating interests therein granted by it pursuant to Section 14(a), but prior to giving effect to any interest therein granted to any Participant pursuant to Section 15(b).
"PARTICIPATION AGREEMENT" has the meaning set forth in the first recital hereto.
"PARTICIPATION AMOUNT" means, with respect to any Bank, the amount set forth in Schedule II hereto opposite the name of such Bank therein, as such amount may be changed by reason of an assignment by or to such Bank in accordance with Section 15(a). Such amount shall be reduced from time to time by such Bank's ratable share of each reduction of the Maximum Credit Amount.
"PARTICIPATION PERCENTAGE" means, with respect to any Bank at any time, the percentage equivalent of a fraction (i) the numerator of which is the Participation Amount
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of such Bank at such time and (ii) the denominator of which is the Maximum Credit Amount at such time.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.
"PERMITTED LIEN" of the Company or any Material Subsidiary means any of the following:
(i) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with generally accepted accounting principles shall have been made;
(ii) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business, including, without limitation, landlord's liens arising under Arizona law under leases entered into by the Company in the 1986 sale and leaseback transactions with respect to Unit 2, including without limitation the Facility Lease, and securing the payment of rent under such leases, to the extent such leases are properly treated as operating leases, in each case, for sums not overdue or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with generally accepted accounting principles shall have been made;
(iii) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits or other similar statutory obligations;
(iv) Liens to secure obligations on surety or appeal bonds;
(v) rights of setoff and banker's Liens with respect to funds on deposit in a financial institution in the ordinary course of business;
(vi) easements, restrictions and other minor defects of title that are not, in the aggregate, material to the use of such property;
(vii) Liens securing claims against any Person other than the Company or any Subsidiary of the Company neither assumed nor guaranteed by the Company or any Subsidiary of the Company nor on which the Company or any Subsidiary of the Company customarily pays interest, existing upon real estate or rights in or relating to real estate acquired by the Company or any Subsidiary of the Company for substation, transmission line, transportation line, distribution line or right of way purposes;
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(viii) rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license or permit or by any provision of law, to terminate such right, power, franchise, grant, license or permit, or to purchase or recapture or to designate a purchaser of any of the property of the Company;
(ix) rights reserved to or vested in others to take or receive any part of the power pursuant to firm power commitment contracts, purchased power contracts and similar agreements, gas, oil or other minerals or timber generated, developed, manufactured or produced by, or grown on, or acquired with, any property of the Company;
(x) rights reserved to or vested in any municipality or public authority to control or regulate any property of the Company, or to use such property in a manner that does not materially impair the use of such property for the purposes for which it is held by the Company;
(xi) security interests granted in favor of the Unit 2 sale leaseback transaction lessors in the Company's Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992 (such agreement, as amended or otherwise modified from time to time, being the "UNIT 2 TRUST AGREEMENT") to secure the Company's obligations in respect of the decommissioning of Unit 2 or related facilities;
(xii) Liens that may exist with respect to the Unit 2 Trust Agreement (other than as described in clause (xi) above), or with respect to either of the Company's Decommissioning Trust Agreement (PVNGS Unit 1) or Decommissioning Trust Agreement (PVNGS Unit 3), each dated as of July 1, 1991, as amended or otherwise modified from time to time, relating to the Company's obligation to set aside funds for the decommissioning and retirement from service of such Units;
(xiii) pledges of pollution control bonds and related rights to secure the Company's reimbursement obligations in respect of letters of credit supporting pollution control bond transactions, provided that such pollution control bonds are not secured by any other assets of the Company or any Material Subsidiary;
(xiv) Liens established on specified bank accounts of the Company to secure the Company's reimbursement obligations in respect of letters of credit supporting commercial paper issued by the Company and similar arrangements for collateral security with respect to refinancings or replacements of the same; and
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(xv) any Liens securing a claim (other than in respect of Indebtedness) in an amount less than $10,000,000;
provided, however, that no Lien in favor of the PBGC shall, in any event, be a Permitted Lien.
"PERSON" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.
"PLAN" means an employee benefit plan within the meaning of Section 3(3) of ERISA established or maintained by the Company or any ERISA Affiliate which is covered by Title IV of ERISA, other than a Multiemployer Plan.
"PRIME RATE" means the rate of interest publicly announced by JPMorgan Chase Bank in New York City from time to time as its Prime Rate.
"PVNGS" means the Palo Verde Nuclear Generating Station.
"PWCC" means Pinnacle West Capital Corporation, an Arizona corporation and its successors.
"PWEC" means Pinnacle West Energy Corporation, an Arizona corporation and a subsidiary of PWCC, and its successors.
"REIMBURSEMENT DEFAULT" means any event or condition which constitutes a Reimbursement Event of Default or which with the giving of notice or the lapse of time or both would, unless cured or waived, become a Reimbursement Event of Default.
"REIMBURSEMENT EVENT OF DEFAULT" has the meaning set forth in Section 9.
"REQUIRED BANKS" means, at any time, Banks with Participation Percentages aggregating more than 50% at such time.
"RESTATEMENT EFFECTIVE DATE" has the meaning set forth in Section 3(b).
"SALE LEASEBACK OBLIGATION BONDS" means PVNGS II Funding Corp. Inc.'s (i) 7.39% Secured Lease Obligation Bonds, Series 1993, due 2005; (ii) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (iii) any other bonds issued by the Company in connection with a sale/leaseback transaction; and (iv) any refinancing or refunding of the obligations specified in clauses (i) through
(iii) above.
"STATED TERMINATION DATE" means July 22, 2005 or such later date to which such Stated Termination Date shall have been extended pursuant to Section 17.
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"SUBSEQUENT ORDER" means any decision, order or ruling of the ACC issued after July 22, 2002 that amends, supersedes or otherwise modifies the 1986 Order or any successor decision, order or ruling.
"SUBSIDIARY" of any Person means any corporation of which more than 50% of the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, such Person and one or more of its other Subsidiaries, or one or more of such Person's other Subsidiaries.
"TAXES" has the meaning set forth in Section 2(e).
"TERMINATING PARTICIPATION AGREEMENTS" means (i) the Participation Agreement between Mellon Bank, N.A. and Morgan Guaranty Trust Company of New York, dated as of August 15, 1997, (ii) the Participation Agreement between Union Bank of California, N.A. and Morgan Guaranty Trust Company of New York, dated as of August 15, 1997, (iii) the Participation Agreement between Barclays Bank PLC and Morgan Guaranty Trust Company of New York, dated as of August 15, 1997, and (iv) the Participation Agreement between Toronto Dominion (Texas), Inc. and Morgan Guaranty Trust Company of New York, dated as of August 15, 1997, as amended by the Assignment and Assumption Agreement dated as of August 31, 1999 between Toronto Dominion (Texas), Inc. and Bank Hapoalim B.M. and consented to by Morgan Guaranty Trust Company of New York and the Company, in each case relating to the sale and purchase of Participations (as defined in the Existing Reimbursement Agreement) in the drawings under the Existing Letter of Credit.
"TERMINATION DATE" means the earliest of (i) the date on which the Issuing Bank pays a drawing under the Letter of Credit for the lesser of the Maximum Drawing Amount and the Maximum Credit Amount, (ii) if a drawing is not requested by the Equity Participant after a notice of termination is given under the Letter of Credit, the Date of Early Termination, (iii) if a drawing is requested by the Equity Participant after a notice of termination is given under the Letter of Credit, the date on which the Issuing Bank pays such drawing, (iv) the date on which the Company delivers a certificate to the Issuing Bank certifying that the Company has paid the amounts due under Section 9(c) of the Facility Lease (so long as the Equity Participant shall have acknowledged such payment by its express confirmation thereof in, and its countersignature to, such certificate), (v) the date on which the Company delivers a certificate to the Issuing Bank certifying that the Company has paid the amounts due under Section 9(d) of the Facility Lease (so long as the Equity Participant shall have acknowledged such payment by its express confirmation thereof in, and its countersignature to, such certificate), (vi) the latest of (x) the Stated Termination Date, (y) if a draft and certificate all in strict conformity with the terms and conditions of the Letter of Credit are presented on the
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Stated Termination Date at such time and at such office as specified in the fifth paragraph of the Letter of Credit, the date on which the Issuing Bank is required to honor the draft in accordance with the provisions of such paragraph pursuant to such presentation, and (z) if a corrected draft and certificate all in strict conformity with the terms and conditions of the Letter of Credit are presented on the date specified in, and in accordance with, the provisions of the sixth paragraph of the Letter of Credit, the date on which the Issuing Bank is required to honor the draft in accordance with the provisions of such paragraph pursuant to such presentation, and (vii) the date on which the Company delivers a certificate to the Issuing Bank certifying that this Agreement has been terminated pursuant to Section 16(b) (so long as such certificate shall have been countersigned by the Equity Participant).
"TOTAL ASSETS" means the aggregate of all assets properly appearing on the most recent balance sheet of the Company and its Consolidated Subsidiaries furnished pursuant to Section 6(f) or Section 7(g).
"UNITED STATES" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions.
"WHOLLY-OWNED SUBSIDIARY" of any Person means any corporation of which all shares of the issued and outstanding capital stock (other than any director's qualifying shares) having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person, such Person and one or more of its other Subsidiaries, or one or more of such Person's other Subsidiaries.
(b) Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in the first sentence of Section 6(f).
SECTION 2. Reimbursement. (a) The Company agrees to pay to the Administrative Agent for the account of the Issuing Bank (i) not later than 2:00
p.m., New York City time, on the fifth Business Day after the Issuing Bank shall have paid any draft under the Letter of Credit a sum equal to the amount so paid under the Letter of Credit, (ii) interest on each amount paid by the Issuing Bank under the Letter of Credit from and including the date such amount is paid by the Issuing Bank under the Letter of Credit until but excluding the earlier of (x) the date the Issuing Bank shall have received from the Company the amounts due under clause (i) above and this clause (ii) and (y) the fifth Business Day after the Issuing Bank shall have paid the relevant draft, payable on demand, at a rate per annum equal to the Base Rate, and (iii) interest on any amount not paid by the Company when due under clauses (i) and (ii) above from and including the
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fifth Business Day after the relevant draft is paid by the Issuing Bank under the Letter of Credit until such overdue amount is paid in full, payable on demand, at a rate per annum equal to 2% per annum above the Base Rate; provided that such interest rate shall in no event be higher (with respect to each amount due and payable hereunder, from the date such amount is due and payable until the date such amount is paid in full) than the maximum rate permitted by applicable law.
(b) The Company agrees to pay to the Administrative Agent for the account of the Banks ratably in proportion to their Participation Percentages a letter of credit commission computed at the Letter of Credit Commission Rate on the Maximum Credit Amount of the Letter of Credit from and including the Restatement Effective Date to, but excluding, the Termination Date, payable quarterly in arrears on each January 22, April 22, July 22 and October 22 until the Termination Date, and on the Termination Date.
(c) The Company agrees to pay to the Administrative Agent for the account of the Issuing Bank a fronting fee at the rate per annum heretofore mutually agreed by the Company and the Issuing Bank pursuant to the Fee Letter, on the Maximum Credit Amount of the Letter of Credit from and including the Restatement Effective Date to, but excluding, the Termination Date, payable quarterly in arrears on each January 22, April 22, July 22 and October 22 until the Termination Date, and on the Termination Date.
(d) (i) If after July 22, 2002 the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) against letters of credit issued by or assets held by, deposits with or for the account of, or credit extended by, any Bank or shall impose on any Bank any other condition regarding this Agreement or the Letter of Credit or its Participation therein, and the result of any of the foregoing is to increase the cost to such Bank of the issuance or maintenance of the Letter of Credit or its Participation therein, or to reduce the amount of any sum received or receivable by such Bank under this Agreement with respect thereto, by an amount deemed by such Bank to be material, then within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Company shall pay to the Administrative Agent for the account of such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction.
(ii) If any Bank shall have determined that, after July 22, 2002, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the
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interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Administrative Agent), the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction.
(iii) Each Bank will notify the Company and the Administrative Agent of any event of which it has knowledge, occurring after July 22, 2002 which will entitle such Bank to compensation pursuant to clause (i) or (ii) of this Section 2(d) as promptly as practicable, but in any event within 90 days after such Bank obtains knowledge thereof; provided that, if such Bank fails to give such notice within 90 days after it obtains knowledge of such an event, such Bank shall, with respect to compensation payable in respect of any costs resulting from such event, only be entitled to payment for costs incurred on and after the date that such Bank does give such notice. A certificate of any Bank claiming compensation under this Section 2(d) and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of demonstrable error. In determining such amount, such Bank may use any reasonable averaging and attribution methods.
(e) (i) For the purposes of this Section 2(e), the following terms have the following meanings:
"TAXES" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Company pursuant to this Agreement, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Administrative Agent, taxes imposed on its net income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Administrative Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Booking Office is located and (ii) in the case of each Bank, any United States withholding tax imposed with respect to any payment by the Company pursuant to this Agreement, but only up to the rate (if any) at which United States withholding tax would apply to such payments to such Bank at the time such Bank first becomes a party to this Agreement.
"OTHER TAXES" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or from the execution or delivery of, or otherwise with respect to, this Agreement or the Letter of Credit.
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(ii) Any and all payments by the Company to or for the account of any Bank or the Administrative Agent hereunder shall be made without deduction for any Taxes or Other Taxes; provided that, if the Company shall be required by law to deduct any Taxes or Other Taxes from any such payments, (A) the sum payable shall be increased as necessary so that after making all required deductions for any Taxes or Other Taxes (including deductions applicable to additional sums payable under this Section) such Bank or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (B) the Company shall make such deductions, (C) the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law and (D) the Company shall furnish to the Administrative Agent the original or a certified copy of a receipt evidencing payment thereof.
(iii) The Company agrees to indemnify each Bank and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by such Bank or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 30 days after such Bank or the Administrative Agent (as the case may be) makes demand therefor. Such demand shall be made as promptly as practicable, but in any event within 90 days after such Bank obtains actual knowledge of such event; provided, however, that if any Bank fails to make such demand within 90 days after such Bank obtains knowledge of such event, such Bank shall, with respect to compensation payable in respect of such event, not be entitled to compensation in respect of the costs and losses incurred between the 90th day after such Bank obtains actual knowledge of such event and the date such Bank makes such demand.
(iv) Each Bank organized under the laws of a jurisdiction outside the United States shall provide the Company and the Administrative Agent with Internal Revenue Service Form W-8BEN, W-8ECI, or other type of W-8, as appropriate, or any successor form prescribed by the Internal Revenue Service:
(i) on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, (ii) before the end of each third calendar year thereafter, and (iii) at any time that a change of circumstances occurs that makes any information on the form so provided incorrect, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts such Bank from United States withholding tax or reduces the rate of withholding tax on payments under this Agreement or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States. Further, each such Bank that is not an exempt recipient listed in Section 6049(b)(4) of the Code shall provide the Company and the Administrative Agent with Internal Revenue Service Form W-8 or
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W-9, as appropriate, or other successor form prescribed by the Internal Revenue Service, certifying that it is exempt from United States back-up withholding.
(v) For any period with respect to which a Bank has failed to provide the Company or the Administrative Agent with the appropriate forms pursuant to
Section 2(e)(iv) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 2(e)(ii) or (iii) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Company shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes.
(vi) If the Company is required to pay additional amounts to or for the account of any Bank pursuant to this Section, then such Bank will change the jurisdiction of its Applicable Booking Office if, in the judgment of such Bank, such change (A) will eliminate or reduce any such additional payment which may thereafter accrue and (B) is not otherwise disadvantageous to such Bank.
(f) If the payments claimed by any such Bank pursuant to Section 2(d) or
Section 2(e) are substantially in excess, as reasonably determined by the Company, relative to the amount of such Bank's Participation, of the payments claimed by the other Banks pursuant to such Sections, the Company shall have the right, with the assistance of the Administrative Agent, to seek one or more mutually satisfactory substitute Eligible Institutions to assume all of the rights and obligations of such Bank in respect of its Participation pursuant to an assignment and assumption agreement in form and substance satisfactory to the Administrative Agent; provided that the aggregate amount of the Participation so assigned to each such Eligible Institution (together with any Participation then held by such Eligible Institution) shall not be less than $10,000,000.
(g) The Company shall make each payment hereunder to the Administrative Agent at 270 Park Avenue, New York, New York 10017, not later than 2:00 p.m. (New York City time) on the date when due in lawful money of the United States of America and in Federal or other funds immediately available in New York City. Whenever any payment under this Section 2 shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding day that is a Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time.
(h) Computations of the letter of credit commission, the fee referred to in Section 2(c), and interest based on the Prime Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days (including the first day but excluding the last day) elapsed. Computations of all other interest hereunder shall be made by the Administrative Agent on the basis of a year
17
of 360 days for the actual number of days (including the first day but excluding the last day) elapsed.
SECTION 3. Amendment and Restatement of Letter of Credit; Conditions to Effectiveness; Transitional Provisions. (a) On the terms and conditions herein set forth, the Issuing Bank agrees to execute and deliver to the Equity Participant on the Restatement Effective Date, or, if all of the conditions precedent to the effectiveness of this Amendment and Restatement shall not have been satisfied by 3:00 p.m., New York City time, on the Restatement Effective Date, on the next succeeding Business Day, an Amended and Restated Letter of Credit, substantially in the form of Exhibit A hereto, amending and restating the Existing Letter of Credit.
(b) This Amendment and Restatement shall become effective on the date (the "RESTATEMENT EFFECTIVE DATE") on which all of the following conditions shall have been satisfied (or waived in accordance with Section 10):
(i) receipt by the Administrative Agent of a counterpart of this Amendment and Restatement signed by each party hereto;
(ii) receipt by the Administrative Agent of fees payable by the Company on or before the Restatement Effective Date in such amounts and for the accounts of such parties as heretofore mutually agreed pursuant to the Fee Letter;
(iii) receipt by the Administrative Agent of evidence to its satisfaction that the Existing Letter of Credit has been (or will substantially simultaneously with the effectiveness hereof be) terminated without a drawing thereunder, and that all amounts payable by the Company under the Existing Reimbursement Agreement have been paid;
(iv) receipt by the Administrative Agent of an opinion of Snell & Wilmer, special counsel for the Company, dated the Restatement Effective Date, substantially in the form of Exhibit B hereto, and covering such additional matters relating to the transactions contemplated hereby as the Banks may reasonably request;
(v) receipt by the Administrative Agent of an opinion of Davis Polk & Wardwell, special counsel for the Administrative Agent, dated the Restatement Effective Date, substantially in the form of Exhibit C hereto, and covering such additional matters relating to the transactions contemplated hereby as the Administrative Agent may reasonably request;
(vi) receipt by the Administrative Agent of copies, certified by the Secretary, an Associate Secretary or an Assistant Secretary of the Company, of the resolutions of the Board of Directors of the Company authorizing the execution,
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delivery and performance of this Amendment and Restatement and the transactions contemplated hereby;
(vii) receipt by the Administrative Agent of a certificate of the Secretary, an Associate Secretary or an Assistant Secretary of the Company, dated the Restatement Effective Date, certifying the names and true signatures of the officers of the Company authorized to sign this Amendment and Restatement;
(viii) receipt by the Administrative Agent of evidence to its satisfaction that each of the Terminating Participation Agreements has been terminated, and that no amounts payable thereunder by any party thereto are outstanding;
(ix) receipt by the Administrative Agent of a certificate, dated the Restatement Effective Date, signed by the chief financial officer, vice president, finance, or treasurer of the Company to the effect that (x) (A) no Default or Event of Default; (B) no Reimbursement Default (as defined in the Existing Reimbursement Agreement) and (C) no Reimbursement Default (as defined in this Amendment and Restatement) shall have occurred and be continuing on the Restatement Effective Date or would result from the amendment and restatement of the Letter of Credit pursuant to subsection
(a) of this Section 3; and (y) that the representations and warranties of the Company set forth in Section 6 of this Amendment and Restatement shall be true and correct on and as of the Restatement Effective Date as though made on and as of such date;
(x) receipt by the Administrative Agent of certified copies of all approvals, authorizations, orders or consents of, or notices to or registrations with, any governmental body or agency, if any, required for the Company to enter into this Amendment and Restatement;
(xi) receipt by the Administrative Agent of such other approvals, opinions or documents as the Administrative Agent may reasonably request; and
(xii) receipt by the Administrative Agent of all documents the Administrative Agent may reasonably request relating to the existence of the Company, the corporate authority for and the validity of this Amendment and Restatement and any other matters relevant hereto;
provided that all documents (or copies thereof) to be delivered to the Administrative Agent on or before the Restatement Effective Date shall be provided to each Bank and shall be in form and substance satisfactory to the Required Banks. Each Bank which is a party to a Terminating Participation Agreement agrees with the Issuing Bank that, subject to the payment of all amounts accrued and unpaid thereunder to (but not including) the Restatement Effective Date payable by any party thereto, the Terminating Participation
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Agreement to which it is a party shall terminate automatically on the Restatement Effective Date without further action by any party thereto.
(c) Promptly after this Amendment and Restatement becomes effective, the Administrative Agent shall give notice thereof and of the Restatement Effective Date to each party hereto. Immediately upon the effectiveness of this Amendment and Restatement, the Issuing Bank will be obligated to extend the Letter of Credit as provided in subsection (a) of this Section 3 and each party hereto will be bound by the provisions of this subsection (c). The rights and obligations of the parties hereto on and after the Restatement Effective Date shall be governed by the provisions of this Amendment and Restatement and as the same may be further amended and in effect from time to time thereafter. The rights and obligations of the parties hereto with respect to the period prior to the Restatement Effective Date will continue to be governed by the provisions of this Agreement as in effect prior to the Restatement Effective Date.
SECTION 4. Adjustment of Maximum Drawing Amount; Terms of Drawing. The Maximum Drawing Amount shall be modified as specified in the third paragraph of the Letter of Credit and drawings under the Letter of Credit shall be subject to the other terms and conditions set forth in the Letter of Credit.
SECTION 5. Obligations Absolute. The payment obligations of the Company under this Agreement shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under all circumstances whatsoever, including, without limitation, the following circumstances:
(i) any lack of validity or enforceability of the Letter of Credit or any of the Transaction Documents or Financing Documents;
(ii) any amendment or waiver of or any consent to departure from all or any of the Transaction Documents or Financing Documents;
(iii) the existence of any claim, set-off, defense or other rights which the Company may have at any time against the Equity Participant, the Owner Trustee or any transferee of the Letter of Credit (or any persons or entities for whom any of the foregoing may be acting), the Administrative Agent, any Bank, any Participant or any other person or entity, whether in connection with this Agreement, the Transaction Documents or Financing Documents, the transactions contemplated hereby or thereby or any unrelated transaction; provided that nothing herein shall prevent the assertion of such claim by separate suit or compulsory counterclaim;
(iv) any statement or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever;
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(v) payment by the Issuing Bank under the Letter of Credit against presentation of a draft or certificate which does not comply with the terms of the Letter of Credit; or
(vi) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing.
SECTION 6. Representations and Warranties of the Company. The Company represents and warrants as follows:
(a) Corporate Existence. Each of the Company and each Material Subsidiary:
(i) is a corporation duly organized and validly existing under the laws of the jurisdiction of its incorporation; (ii) has all requisite corporate power necessary to own its assets and carry on its business as presently conducted;
(iii) has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as presently conducted, unless the failure to have any such license, authorization consent or approval would not have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole, except as disclosed in the Financial Information or by written notice delivered to the Banks more than 5 Business Days prior to the execution and delivery of this Amendment and Restatement; and (iv) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole. All of the issued and outstanding common stock of the Company is owned by PWCC.
(b) Noncontravention, Etc. The execution, delivery, and performance by the Company of this Agreement are within the Company's corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene the Company's charter or by-laws or (ii) contravene any Applicable Law or any contractual restriction (including, but not limited to, the Company Indenture) binding on or affecting the Company. The execution, delivery, and performance by the Company of this Agreement do not cause the creation or imposition of any Lien upon the assets of the Company or any Material Subsidiary, except as it may be necessary for the Company to grant a Lien to the Administrative Agent for the benefit of the Banks pursuant to Section 8(c).
(c) Approvals. No authorization or approval or other action by, and no notice to or filing or registration with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Company of this Agreement, except for (v) the 1986 Order which has been duly issued by the ACC and is in full force and effect in the form originally issued,
(w) such other Governmental Actions as have been duly obtained, given or accomplished, (x) the filing with the ACC of a copy of this Agreement within five days of the execution hereof, in accordance with the 1986 Order
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and (y) as may be required under Applicable Law not now in effect. The execution, delivery, and performance by the Company of this Agreement do not require the consent or approval of the Equity Participant or the Owner Trustee (except as specified in this Agreement) or PWCC or any trustee or holder of any indebtedness or other obligation of the Company, other than such consents and approvals as have been duly obtained, given or accomplished. No Governmental Action by any Federal, Arizona or New York Governmental Authority relating to the Securities Act, the Securities Exchange Act, the Trust Indenture Act, the Federal Power Act, the Atomic Energy Act, the Nuclear Waste Act, the Holding Company Act, the Arizona Public Utility Act, energy or nuclear matters, public utilities, the environment, health and safety or Unit 2 is or will be required in connection with the participation by the Administrative Agent, any Bank or any Participant in the consummation of the transactions contemplated by this Agreement, except such Governmental Actions (A) as have been, duly obtained, given or accomplished or (B) as may be required by Applicable Law not now in effect.
(d) Binding Agreement. This Agreement is a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject, however, to the application by a court of general principles of equity and to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally.
(e) Litigation. There is no pending or (to the knowledge of the Company) threatened action or proceeding affecting the Company or any of its Subsidiaries before any court, governmental agency or arbitrator, that, if adversely determined, could have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole, except as disclosed in the Financial Information or by written notice delivered to the Banks more than 5 Business Days prior to the execution and delivery of this Amendment and Restatement.
(f) Financial Statements. The balance sheet of the Company and its Consolidated Subsidiaries as of December 31, 2001 and the related statements of income and cash flows of the Company and its Consolidated Subsidiaries for the fiscal year then ended, copies of which have been furnished to the Banks, fairly present the financial condition of the Company and its Consolidated Subsidiaries as of such date and the results of operations and cash flows of the Company and its Consolidated Subsidiaries for such fiscal year, all in accordance with generally accepted accounting principles consistently applied (except as disclosed therein). The balance sheet of the Company and its Consolidated Subsidiaries as of March 31, 2002 and the related statements of income and cash flows of the Company and its Consolidated Subsidiaries for the quarter then ended, copies of which have been furnished to the Banks, fairly present the financial condition of the Company and its Consolidated Subsidiaries as of such date and the results of operations and cash flows of the Company and its Consolidated Subsidiaries for the quarter then ended, all in accordance with generally accepted accounting principles consistently applied (except as disclosed therein and subject to normal year-end audit
22
adjustments). Since March 31, 2002, there has been no material adverse change in the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole.
(g) ERISA. The Company and the ERISA Affiliates have fulfilled their respective obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and are in compliance in all material respects with the presently applicable provisions of ERISA and the Code, and have not incurred any liability to the PBGC or any Plan or Multiemployer Plan, other than liability to the PBGC for premiums prior to the due date for such premiums and liability to any Plan maintained by the Company or an ERISA Affiliate or to any Multiemployer Plan for contributions prior to the due date for such contributions which shall be paid in accordance with the provisions of the minimum funding standards of ERISA and the Code.
(h) Taxes. The Company and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Company or any of its Subsidiaries, except to the extent that (i) such taxes are being contested in good faith and by appropriate proceedings and appropriate reserves for the payment thereof have been maintained by the Company and its Subsidiaries in accordance with generally accepted accounting principles or (ii) the failure to make such filings or such payments is not likely to have a material adverse effect on the financial condition or the financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole. The charges, accruals and reserves on the books of the Company and its Material Subsidiaries as set forth in the most recent financial statements of the Company delivered to the Banks pursuant to Section 6(f) or Section 7(g)(i) or Section 7(g)(ii) hereof in respect of taxes and other governmental charges are, in the opinion of the Company, adequate.
(i) Environmental. The operations and properties of the Company and its Subsidiaries comply in all material respects with all environmental laws, the noncompliance with which would have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries taken as a whole, except as disclosed in the Financial Information or by written notice delivered to the Banks more than 5 Business Days prior to the execution and delivery of this Amendment and Restatement.
(j) Investment Company. The Company is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended.
(k) No Material Misstatements or Omissions. The Financial Information did not, and any documents filed with the Securities and Exchange Commission and delivered to the Banks pursuant to Section 7(g)(i) or Section 7(g)(ii) after December 31,
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2001 will not, as of the date furnished, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements made therein, in the light of the circumstances under which they were or shall be made, not misleading.
(l) No Amendments. Except as provided to the Banks prior to the Restatement Effective Date, there has been no amendment or waiver of, or consent with respect to, the payment obligations of the Company under any Transaction Document or Financing Document since March 17, 1993.
SECTION 7. Affirmative Covenants. So long as a drawing is available under the Letter of Credit or the Company shall have any obligation to pay any amount hereunder to or for the account of the Administrative Agent or any Bank, the Company will, unless the Required Banks shall otherwise consent in writing:
(a) Preservation of Corporate Existence, Business, Etc. (i) Preserve and maintain its corporate existence and all rights and privileges (other than "franchises" as described in Arizona Revised Statutes, Section 40-283 or any successor provision) reasonably necessary in the normal conduct of its business, unless the failure to maintain such rights and privileges would not have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries taken as a whole, and use its best efforts to preserve and maintain such franchises reasonably necessary in the normal conduct of its business, except that (A) the Company from time to time may make minor extensions of its lines, plants, services or systems prior to the time a related franchise, certificate of convenience and necessity, license or permit is procured, (B) from time to time communities served by the Company may become incorporated and considerable time may elapse before such a franchise is procured, (C) certain such franchises may have expired prior to the renegotiation thereof, (D) certain minor defects and exceptions may exist which, individually and in the aggregate, are not material and (E) certain franchises, certificates, licenses and permits may not be specific as to their geographical scope.
(ii) Continue to conduct the same general type of business conducted on July 22, 2002.
(iii) Notwithstanding paragraphs (i) and (ii) above, the Company may effect the Asset Transfer, whether or not the Nuclear Transfer occurs, and the Nuclear Transfer.
(b) Compliance with Laws, Etc. (i) Comply, and cause each Material Subsidiary to comply, in all material respects with all applicable laws, rules, regulations and orders of governmental or regulatory authorities if the failure to comply would have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole.
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(ii) Comply at all times with the 1986 Order and any Subsequent Order, unless the failure to so comply could not affect the validity or enforceability of the indebtedness of the Company pursuant to this Agreement.
(c) Payment of Taxes and Claims. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, all taxes, assessments and governmental charges or levies imposed on it or its property; provided that neither the Company nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or levy (i) that is being contested in good faith and by proper proceedings and as to which adequate reserves are being maintained in accordance with generally accepted accounting principles or (ii) if the failure to pay such tax, assessment, charge or levy is not likely to have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole.
(d) Maintenance of Insurance. Maintain, and cause each Material Subsidiary to maintain, insurance, either with responsible and reputable insurance companies or associations, or through its own program of self-insurance, in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company or such Material Subsidiary operates.
(e) Visitation Rights. Permit, and cause each of its Subsidiaries to permit, at any reasonable time and from time to time, any Bank or any of its agents or representatives to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Company and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Company and any of its Subsidiaries with any of their respective officers or directors; provided that the Company and its Subsidiaries reserve the right to restrict access to any of its properties in accordance with reasonably adopted procedures relating to safety and security; and provided further that the costs and expenses incurred by any Bank or its agents or representatives in connection with any such examinations, copies, abstracts, visits or discussions shall be, upon the occurrence and during the continuation of a Reimbursement Default, for the account of the Company and, in all other circumstances, for the account of such Bank.
(f) Maintenance of Property. Keep, and cause each Material Subsidiary to keep, all property useful and necessary in its business in good working order and condition (ordinary wear and tear excepted), it being understood that this covenant relates only to the working order and condition of such properties and shall not be construed as a covenant not to dispose of properties.
(g) Reporting Requirements. Furnish to each of the Banks:
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(i) as soon as available and in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, (A) for each such fiscal quarter of the Company, statements of income and cash flows of the Company and its Consolidated Subsidiaries for such fiscal quarter and the related balance sheet of the Company and its Consolidated Subsidiaries as at the end of such fiscal quarter, setting forth in each case in comparative form the corresponding figures for the corresponding fiscal quarter in the preceding fiscal year and (B) for the period commencing at the end of the previous fiscal year and ending with the end of such fiscal quarter, statements of income and cash flows of the Company and its Consolidated Subsidiaries for such period setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year; provided that so long as the Company remains subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Company may provide, in satisfaction of the requirements of this first sentence of this Section
7(g)(i), its report on Form 10-Q for such fiscal quarter. Each set of financial statements provided under this Section 7(g)(i) shall be accompanied by a certificate of an Authorized Officer, which certificate shall state that said financial statements fairly present the financial condition and results of operations and cash flows of the Company and its Consolidated Subsidiaries in accordance with generally accepted accounting principles, consistently applied (except as disclosed therein), as at the end of, and for, such period (subject to normal year-end audit adjustments);
(ii) as soon as available and in any event within 120 days after the end of each fiscal year of the Company, statements of income, retained earnings and cash flows of the Company and its Consolidated Subsidiaries for such year and the related balance sheets of the Company and its Consolidated Subsidiaries as at the end of such year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year; provided that, so long as the Company remains subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Company may provide, in satisfaction of the requirements of this first sentence of this Section 7(g)(ii), its report on Form 10-K for such fiscal year. Each set of financial statements provided pursuant to this Section 7(g)(ii) shall be accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that said financial statements fairly present the financial condition and results of operations and cash flows of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year, in accordance with generally accepted accounting principles consistently applied (except as disclosed therein);
(iii) as soon as possible and in any event within ten days after an Authorized Officer knows of the occurrence of any Reimbursement Default continuing on the date of such statement, a statement of an Authorized Officer
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setting forth details of such Reimbursement Default and the action which the Company has taken and proposes to take with respect thereto;
(iv) as soon as possible, and in any event within ten days after an Authorized Officer knows that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan have occurred or exist, a statement signed by an Authorized Officer setting forth details respecting such event or condition and the action, if any, which the Company or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to the PBGC by the Company or an ERISA Affiliate with respect to such event or condition):
(A) any reportable event, as defined in Section 4043 of ERISA and the regulations issued thereunder, with respect to a Plan, as to which the PBGC has not by regulation or other ruling or notice of general applicability waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code;
(B) the filing under Section 4041(c) of ERISA of a notice of intent to terminate any Plan in a distress termination or the termination of any Plan in a distress termination;
(C) the institution by the PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan:
(D) the complete or partial withdrawal by the Company or any ERISA Affiliate under Part 1 of Subtitle E of Title IV of ERISA from a Multiemployer Plan, or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under
Section 4041A of ERISA; and
(E) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within 45 days;
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(v) promptly after (A) any amendment or modification of the 1986 Order or (B) the promulgation, amendment or modification of any Subsequent Order by the ACC, a copy thereof;
(vi) promptly after the sending or filing thereof, copies of all reports which the Company sends to its security holders as a group, and copies of all reports and registration statements which the Company or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange;
(vii) as soon as practicable and in any event within 30 days after the execution thereof, a copy of each amendment, waiver or consent relating to the payment obligations of the Company under any Transaction Document or Financing Document; and
(viii) such other information respecting the condition or operations, financial or otherwise, of the Company or any of its Subsidiaries as the Administrative Agent at the request of any Bank may from time to time reasonably request.
The Company will furnish to the Banks, at the time it furnishes each set of financial statements pursuant to Section 7(g)(i) or 7(g)(ii) above, a certificate of an Authorized Officer (x) to the effect that no Reimbursement Default has occurred and is continuing (or, if any Reimbursement Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken and proposes to take with respect thereto) and (y) setting forth in reasonable detail the computations necessary to determine whether the Company is in compliance with Sections 7(h) and 8(e) as of the end of the relevant fiscal quarter or fiscal year.
(h) Consolidated Cash Coverage Ratio. Maintain for each twelve-month period ending on the last day of each fiscal quarter (determined as of the last day of such fiscal quarter) a Consolidated Cash Coverage Ratio of no less than 2.0:1.0.
(i) Filing with ACC. File a copy of this Amendment and Restatement, as executed by each of the parties hereto, with the ACC within five days of the execution hereof.
SECTION 8. Negative Covenants. So long as a drawing is available under the Letter of Credit or the Company shall have any obligation to pay any amount hereunder to or for the account of the Administrative Agent or any Bank, the Company will not, without the written consent of the Required Banks:
(a) Sale of Assets. Permit the Company nor any Material Subsidiary to, in one or a series of transactions after December 31, 2001, sell, lease, transfer or otherwise
28
dispose of assets to any Person other than the Company or any Subsidiary of the Company (excluding individual dispositions occurring in the ordinary course of business which involve assets with a book value not exceeding $5,000,000 and excluding the Asset Transfer and the Nuclear Transfer) if, immediately after giving effect to such transaction, the aggregate book value of the assets disposed of in all such transactions after December 31, 2001, other than excluded transactions, would equal or exceed 30% of the total of all assets properly appearing on the December 31, 2001 balance sheet of the Company and its Consolidated Subsidiaries included in its annual report on Form 10-K for the year ended December 31, 2001.
(b) Mergers, Etc. Merge or consolidate with or into any Person, or permit any Material Subsidiary to do so, except that:
(i) any Material Subsidiary may merge with any Wholly-Owned Subsidiary of the Company;
(ii) any Material Subsidiary may merge into the Company; and
(iii) the Company may merge with, and any Material Subsidiary may merge with, any other Person;
provided that, in each case, immediately after giving effect to such proposed transaction, no Reimbursement Default would exist; and provided further that, in the case of any such merger to which the Company is a party, the Company is the surviving corporation and in the case of any such merger to which any Material Subsidiary and any other Person are the parties (other than any such merger to effect the Asset Transfer or the Nuclear Transfer), such Material Subsidiary is the surviving corporation.
(c) Negative Pledge. Permit the aggregate amount of all claims secured by Liens (other than Permitted Liens) upon or with respect to any of its assets or the assets of any of its Material Subsidiaries, whether now owned or hereafter acquired, to exceed 55% of Total Assets, unless the Company shall simultaneously
(i) grant to the Administrative Agent, for the benefit of the Banks, Liens on its assets as collateral for its obligations under this Agreement in a form and on terms satisfactory to the Administrative Agent and the Required Banks in their sole and absolute discretion and (ii) obtain the consent of the Equity Participant thereto.
(d) Assignment of Transaction Documents or Financing Documents. Enter into any assignment of the Company's obligations under any of the Transaction Documents or Financing Documents, except pursuant to the Nuclear Transfer.
(e) Indebtedness. Permit Consolidated Indebtedness to exceed 65% of Consolidated Capitalization at any time.
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"CONSOLIDATED CAPITALIZATION" means, at any date, the sum as of such date of Consolidated Indebtedness and Consolidated Net Worth.
"CONSOLIDATED INDEBTEDNESS" means, at any date, the Indebtedness of the Company and its Consolidated Subsidiaries determined on a consolidated basis as of such date.
"CONSOLIDATED NET WORTH" means, at any date, the sum as of such date of
(a) the par value (or value stated on the books of the Company) of all classes of capital stock of the Company and its Subsidiaries, excluding the Company's capital stock owned by the Company and/or its Subsidiaries, plus (or minus in the case of a surplus deficit) (b) the amount of the consolidated surplus, whether capital or earned, of the Company, determined in accordance with generally accepted accounting principles as of the end of the most recent calendar month (excluding (x) cumulative charges of up to $300 million to consolidated surplus resulting from, or in anticipation of, discontinuation of Financial Accounting Standards Board Statement No. 71, accounting for all or part of the business and (y) the effect on the Company's accumulated other comprehensive income/loss of the ongoing application of Financial Accounting Standards Board Statement No. 133).
SECTION 9. Reimbursement Events of Default. If any of the following events ("REIMBURSEMENT EVENTS OF DEFAULT") shall occur and be continuing:
(i) The Company shall fail to pay when due any amount payable under
Section 2(a) or fail to pay any other amount payable under Section 2 within five Business Days after the same becomes due and payable; or
(ii) The Company shall fail to perform or observe (A) any term, covenant or agreement contained in Section 7(a)(ii), 7(g)(iv), 7(h), 8(a),
8(b), 8(c) or 8(e), or (B) any term, covenant or agreement contained in this Agreement (other than those covered by clause (i) above or subclause (A) of this clause (ii) or Section 7(e) or Section 19) on its part to be performed or observed if the failure to perform or observe such term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Company by the Administrative Agent; or
(iii) Any representation or warranty made by the Company herein or by the Company (or any of its officers) in any certificate delivered in connection with this Agreement shall prove to have been false or misleading in any material respect when made; or
(iv) Any material provision of this Agreement shall at any time for any reason cease to be valid and binding upon the Company, or shall be declared to be null and void, or the validity or enforceability thereof shall be contested by the
30
Company or any governmental agency or authority, or the Company shall deny that it has any or further liability or obligation under this Agreement; or
(v) The Company shall fail to pay any principal of or premium or interest on any Indebtedness which is outstanding in a principal amount of at least $5,000,000 (but excluding Indebtedness owing hereunder) of the Company, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or the Company shall fail to perform or comply with any other term or covenant in any agreement or instrument relating to any such Indebtedness and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such failure is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or
(vi) The Company shall fail to pay any principal of or premium or interest in respect of any operating lease in respect of which the payment obligations of the Company have a present value of at least $25,000,000, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in such operating lease, if the effect of such failure is to terminate, or to permit the termination of, such operating lease; or
(vii) The Company shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Company seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Company shall take any corporate action to authorize any of the actions set forth above in this clause (vii) or
(viii) Any Material Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally,
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or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property) shall occur; or any Material Subsidiary shall take any corporate action to authorize any of the actions set forth above in this clause (viii) and, in each case, the Required Banks determine that such circumstances could have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole; or
(ix) Any judgment or order for the payment of money that exceeds any applicable insurance coverage by more than $5,000,000 shall be rendered against the Company and such judgment or order shall remain unsatisfied or unstayed for a period of 30 days; or
(x) Any judgment or order for the payment of money that exceeds any applicable insurance coverage by more than $25,000,000 shall be rendered against any Material Subsidiary; such judgment or order shall remain unsatisfied or unstayed for 30 days; and the Required Banks determine that such judgment or order could have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole; or
(xi) An event or condition specified in Section 7(g)(iv) shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Required Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) which is, in the determination of the Required Banks, material in relation to the financial condition or the financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole; or
(xii) any change in Applicable Law or any Governmental Action shall occur which has the effect of making the transactions contemplated by the Transaction Documents unauthorized, illegal or otherwise contrary to Applicable Law; or
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(xiii) any event specified in subsection (vii), (viii) or (x) of
Section 15 of the Facility Lease shall occur; or
(xiv) the Company shall fail to make, or cause to be made, any payment specified in Section 15(i) of the Facility Lease equal to or exceeding $1,000,000 within the periods specified in that Section.
then, in every such event the Issuing Bank may, and if instructed to do so by the Required Banks the Issuing Bank shall, by notice to the Company and the Equity Participant, terminate the Letter of Credit as provided therein. The Administrative Agent shall give notice to the Company under Section 9(ii) promptly upon being requested to do so by the Required Banks and will promptly notify each Bank of any such notice given at the request of the Required Banks.
SECTION 10. Amendments and Waivers. No modification, amendment or waiver of any provision of this Agreement or the Letter of Credit or any consent to the assignment of the Company's obligations under any of the Transaction Documents or the Financing Documents (except as provided in Section 8(d)) shall be effective unless the same shall be in writing and signed by (or with the written consent of) the Company and the Required Banks (and, if the rights or duties of the Issuing Bank or the Administrative Agent are affected thereby, by it); provided that no such modification, amendment, waiver or consent shall, unless signed by (or with the written consent of) each Bank affected thereby, (i) increase the Maximum Credit Amount or Maximum Drawing Amount or subject any Bank to any additional obligation under this Agreement or the Letter of Credit, (ii) reduce the principal of or rate of interest on any reimbursement obligation or reduce the letter of credit commission payable under Section 2(b), (iii) postpone the date fixed for any payment of principal of or interest on any reimbursement obligation or any payment of such letter of credit commission,
(iv) extend the Stated Termination Date or the Termination Date or (v) change the definition of Required Banks or the provisions of this Section 10 or any provision of this Agreement that requires action by all the Banks. Any waiver of any provision of this Agreement or the Letter of Credit shall be effective only in the specific instance and for the specific purpose for which given.
SECTION 11. Notices. (a) All notices, requests, demands and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including facsimile transmission or similar transmission) and mailed, sent or delivered:
(i) if to the Company, in the case of deliveries, to its street address at 400 North Fifth Street, Phoenix, Arizona 85004; in the case of mailings, to its mailing address at P.O. Box 53999, Phoenix, Arizona 85072-3999; and in the case of facsimile transmission, to telecopy no.
(602) 250-5640; in each case to the attention of the Treasurer;
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(ii) if to the Administrative Agent, in the case of deliveries or mailings, to its address at 1 Chase Manhattan Plaza, 8th Floor, New York, New York, 10081, Attention: Maggie Swales; and in the case of facsimile transmission, to telecopy no. 212-552-5777; and
(iii) if to the Issuing Bank, in the case of deliveries or mailings, to its address at JPMorgan Chase Bank, c/o JPMorgan Treasury Services, Attention: Standby Letter of Credit Manager - Immediate Action Required, 4th Floor, 10420 Highland Manor Drive, Tampa, Florida 33610; and in the case of facsimile transmission, to telecopy no. 813-432-5161;
(iv) if to any other Bank, at such address or number as shall be designated by it in its Administrative Questionnaire;
or, as to each party, to such other person and/or to such other address or number as shall be designated by such party in a written notice to each other party. All such notices, requests, demands and other communications shall be effective when mailed or sent, addressed as aforesaid, except that notices to the Administrative Agent shall not be effective until received by the Administrative Agent and any notice to the Equity Participant pursuant to
Section 9 shall not be effective until received by the Equity Participant. Notices of any Reimbursement Default shall be sent by the Company to the Administrative Agent by facsimile transmission.
(b) As promptly as practicable after receipt by the Administrative Agent of any notice or other communication delivered hereunder by the Company, the Administrative Agent shall furnish a copy thereof to each Bank, to the extent such notice or other communication is not otherwise required by the terms thereof to be delivered by the Company to each Bank.
(c) Notices and other communications to the Banks hereunder may be delivered or furnished by electronic communications pursuant to procedures approved by the Administrative Agent; provided that the foregoing shall not apply to notices pursuant to Sections 2, 14 or 17 unless otherwise agreed by the Administrative Agent and the applicable Bank. The Administrative Agent and the Company may, each in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it; provided that approval of such procedures may be limited to particular notices or communications.
SECTION 12. No Waiver; Remedies. No failure on the part of the Administrative Agent or any Bank to exercise, and no delay in exercising, any right, power, or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other
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right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
SECTION 13. Waiver of Right of Setoff. The Administrative Agent and each Bank hereby waive any right to set off and apply any and all deposits (general or special, time or demand, provisional or final) and collateral at any time held and other indebtedness at any time owing by it to or for the credit or the account of the Company if there shall be a drawing under the Letter of Credit at any time during the pendency of any proceeding by or against the Company seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, custodian, trustee or other similar official for it or for any substantial part of its property (collectively the "BANKRUPTCY EVENTS"), against any and all of the obligations of the Company now or hereafter existing in respect of any reimbursement obligation of the Company set forth in
Section 2(a), provided that any such waiver shall be deemed ineffective as and to the extent that the Administrative Agent and each Bank receive, after any of the bankruptcy events occur, an unqualified opinion of nationally-recognized counsel with bankruptcy law experience, (which counsel shall be mutually satisfactory to the Administrative Agent and the Equity Participant, each of which shall use its best efforts to agree on such counsel), that non-waiver would not, as a result of the application of bankruptcy or similar laws as then in effect, lead to the Administrative Agent or any Bank being refused, prevented, permanently enjoined or restrained from or delayed in fulfilling its obligation under the Letter of Credit. This Section 13 shall not constitute a waiver of any right of setoff if there shall be a drawing under the Letter of Credit at any time other than that described in this Section 13.
SECTION 14. Participations of the Banks. (a) The Issuing Bank hereby sells to each other Bank, and each Bank hereby severally purchases from the Issuing Bank, as of the Restatement Effective Date, a Participation in an amount equal to such Bank's Participation Percentage of the Letter of Credit and in each drawing thereunder, all on the terms and conditions set forth herein.
(b) If at any time on or after the Restatement Effective Date the Company shall fail to reimburse a drawing under the Letter of Credit in accordance with
Section 2(a), the Administrative Agent shall promptly (but in any event no later than 1:00 p.m., New York City time, on the date payment is due from the Banks under this Section 14(b)) advise each Bank thereof and of the amount due from the Company and the amount of such Bank's Participation therein, and each Bank shall pay, no later than 4:00 p.m. (New York City time) on such date such Bank's Participation Percentage of such amount by transferring the same in immediately available funds to the Administrative Agent for the account of the Issuing Bank at the Administrative Agent's address specified in Section 11. With respect to any such drawing, each Bank agrees that the Issuing Bank shall have no responsibility to the Banks other than obtaining the draft and certificates referred to in
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the Letter of Credit and notifying each Bank thereof. The Administrative Agent shall promptly credit each Bank's account with such Bank's Participation Percentage of (i) all amounts representing principal of, or interest on, any reimbursement obligations, in each case in respect of drawings under the Letter of Credit of which such Bank has funded its Participation Percentage in accordance with the foregoing provisions of this Section 14(b) and (ii) letter of credit commissions payable to each Bank pursuant to Section 2(b) of this Agreement and accruing on and after the Restatement Effective Date, but, in the case of both clause (i) and clause (ii), only if, when and to the extent received by the Administrative Agent from the Company. All such payments shall be made if, when and to the extent the Administrative Agent receives payment from the Company in respect of reimbursement for drawings under the Letter of Credit and of the letter of credit commission pursuant to Section 2(b) of this Agreement, and in the same funds in which such amounts are received, by credit to an account at a bank located in the United States of America as each Bank shall designate in writing to the Administrative Agent.
(c) If the Administrative Agent should for any reason make any payment to any Bank in anticipation of the receipt of funds from the Company and such funds are not received by the Administrative Agent from the Company on the date payment is due, then such Bank shall, on demand by the Administrative Agent, forthwith return to the Administrative Agent any such amounts transferred to such Bank by the Administrative Agent in respect of such Bank's Participation plus interest thereon from the day such amounts were transferred by the Administrative Agent to such Bank to but not including the day such amounts are returned by such Bank at a rate per annum equal to the Federal Funds Rate. If the Administrative Agent is required at any time to return to the Company or to a trustee, receiver, liquidator, custodian or other similar official any portion of the payments made by the Company to the Administrative Agent for the account of any Bank, then such Bank shall, on demand by the Administrative Agent, forthwith return to the Administrative Agent any such payments transferred to such Bank by the Administrative Agent in respect of such Bank's Participation, but without interest on such payments (unless the Administrative Agent is required to pay interest on such amounts to the Person recovering such payments).
(d) Each Bank agrees that if it should receive any amount due to it under this Agreement in respect of its Participation other than from the Administrative Agent, such Bank will remit all of the same to the Administrative Agent to distribute to the Banks pursuant to this Agreement, and such Bank's Participation shall be adjusted to reflect such remittance. Each Bank further agrees to send the Administrative Agent a copy of any notice sent by such Bank to the Company hereunder.
(e) Each Bank acknowledges and represents that it has made its own independent appraisal of the Company, and the business, affairs and financial condition of the Company, based on such documents and information as such Bank has deemed appropriate, and each Bank will continue to be responsible for making its own independent appraisal of such matters, based on such documents and information as such
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Bank shall deem appropriate at the time, and has not relied upon and will not hereafter rely upon the Administrative Agent or any other Bank or any information prepared, distributed or otherwise made available by the Administrative Agent for such appraisal or other assessment or review of the Company. Each Bank represents, and in granting a Participation to such Bank it is specifically understood and agreed, that such Bank is acquiring its Participation in the Letter of Credit for its own account in the ordinary course of its commercial banking business and not with a view to, or for sale in connection with, any distribution thereof.
SECTION 15. Assignees; Participants. (a) Each Bank shall have the right, with the prior written consent of the Company (which shall not be unreasonably withheld, and shall not be required if a Reimbursement Event of Default has occurred and is continuing) and the prior written consent of the Administrative Agent, to assign all or a pro rata portion of all of its rights and obligations under its Participation at any time and from time to time to one or more Eligible Institutions (each an "ASSIGNEE"); provided that (i) each such Assignee shall assume such rights and obligations and agree, for the benefit of each other party hereto, to be bound by the provisions of, and perform the obligations of a Bank under, this Agreement, pursuant to an assignment and assumption agreement in form and substance satisfactory to the Administrative Agent and (ii) the aggregate amount of the Participation or Participations assigned to each such Assignee pursuant to this Section 15(a) shall not be less than $10,000,000. Each Bank shall give prompt notice to the Administrative Agent and the Company of each such assignment made by it.
(b) (i) Each Bank shall also have the right, without the consent of the Company, to grant participating interests in its Participation at any time and from time to time to one or more other financial institutions or other entities (each a "PARTICIPANT"); provided that (A) such Bank's obligations under this Agreement shall remain unchanged, (B) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Company, the Administrative Agent and the other Banks shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Each such participation granted by a Bank shall be evidenced by a participation agreement in form acceptable to such Bank. Each such participation agreement shall provide that such Bank shall retain the sole right to exercise its rights under this Agreement and to enforce the obligations owed to it hereunder pursuant to its Participation including, without limitation, the right to consent to any modification, amendment or waiver of any provision of this Agreement or the Letter of Credit or any assignment of the Company's obligations under any of the Transaction Documents or the Financing Documents, subject to Section 8(d); provided that any such participation agreement may provide that such Bank will not, without the consent of the Participant, consent to any modification, amendment or waiver of this Agreement or the Letter of Credit that (w) increases the Maximum Credit Amount or Maximum Drawing Amount or subjects such Bank to any additional obligation under this Agreement or the Letter of Credit, (x) reduces the principal of or rate of interest on any reimbursement obligation or reduces the letter of credit commission payable under
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Section 2(b), (y) postpones the date fixed for any payment of principal of or interest on any reimbursement obligation or any payment of such letter of credit commission or (z) extends the Stated Termination Date or the Termination Date.
(ii) Subject to clause (iii) below, the Company agrees that each Participant shall be entitled to the benefits of Sections 2(d) and 2(e) to the same extent as if it were a Bank and had acquired its interest by assignment pursuant to Section 15(a).
(iii) A Participant shall not be entitled to receive any greater payment under Section 2(d) or 2(e) than the applicable Bank would have been entitled to receive with respect to the participating interest granted to such Participant, unless the granting of such interest to such Participant is made with the Company's prior written consent. A Participant organized under the laws of a jurisdiction outside the United States shall not be entitled to the benefits of Section 2(d) or 2(e) unless the Company is notified of the participating interest granted to such Participant and such Participant agrees, for the benefit of the Company, to comply with Section 2(d) or 2(e) as though it were a Bank.
SECTION 16. Continuing Obligation; Binding Effect. (a) The obligations of the Company under this Agreement shall continue until the later of (i) the Termination Date and (ii) the date upon which all amounts due and owing to the Administrative Agent or any Bank hereunder shall have been paid in full. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors. Except as contemplated by Section 16(b), the Company shall not have the right to assign its rights hereunder or any interest herein to any Person without the prior written consent of the Issuing Bank and each Bank. The Issuing Bank shall not have the right to assign its rights as the Issuing Bank hereunder without the prior written consent of the Company (which shall not be unreasonably withheld) and each Bank.
(b) In connection with the Nuclear Transfer, the Company may, with the consent of the Equity Participant and the Owner Trustee, cause PWEC to assume the obligations of the Company under this Agreement. No such assumption by PWEC shall release the Company from any of its obligations hereunder, and as between the Company, on the one hand, and the Administrative Agent, the Issuing Bank and the other Banks, on the other hand, the Company shall be directly, primarily and unconditionally obligated to perform those obligations, unless and until all the Banks consent in writing to such release; provided, however, that if less than all the Banks consent to such release, the Company may, with the consent of the Equity Participant, upon 10 days' prior written notice to the Administrative Agent, terminate this Agreement, and this Agreement shall thereupon terminate, subject to (i) receipt by the Administrative Agent for the account of the Banks of all amounts representing principal of, or accrued interest on, any outstanding reimbursement obligation of the Company under Section 2(a) and all accrued fees and other amounts hereunder to (but not including) such date of termination, whether or not
38
such amounts are otherwise due or payable, and (ii) receipt by the Issuing Bank of the certificate specified in clause (vii) of the definition of "Termination Date".
SECTION 17. Extension of the Letter of Credit. At least 105 days but not more than 180 days before the Stated Termination Date, the Company may request the Administrative Agent in writing (each such request being irrevocable and binding), with a copy to each Bank, to extend for not less than three years, nor more than eight years, the Stated Termination Date, specifying the terms and conditions, including fees, to be applicable to such extension. Within 45 days after receiving such extension request (or such later date as the Company may authorize in writing, but in no event later than 60 days before the Stated Termination Date), each Bank shall notify the Company of its consent or nonconsent to such extension request, and if any Bank shall give no such notice, it shall be deemed not to have consented to such extension request. No such requested extension shall be effective without the consent of all the Banks. The consent of any Bank shall be in its sole discretion and shall be conditional upon the preparation, execution and delivery of legal documentation in form and substance satisfactory to such Bank and its counsel, incorporating substantially the terms and conditions contained in the extension request as the same may be modified by agreement among the Company, and the Banks, and evidence satisfactory to it of the due authorization and validity thereof.
SECTION 18. Limited Liability of the Banks. The Company assumes all risks of the acts or omissions of the Equity Participant and any beneficiary or transferee of the Letter of Credit with respect to its use of the Letter of Credit. None of the Administrative Agent and the Banks, nor their respective Affiliates nor any officer or director of any of the foregoing shall be liable or responsible for: (a) the use which may be made of the Letter of Credit or any acts or omissions of the Equity Participant or any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents shall prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing Bank against presentation of documents which do not comply with the terms of the Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under the Letter of Credit, except that the Company shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to the Company, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Company which the Company proves were caused by (i) the willful misconduct or gross negligence of the Issuing Bank in determining whether a draft or certificate presented under the Letter of Credit complied with the terms of the Letter of Credit or (ii) the Issuing Bank's willful failure to make lawful payment under the Letter of Credit after the presentation to it by the Equity Participant of a draft and certificate strictly complying with the terms and conditions of the Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of
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any notice or information to the contrary unless the Equity Participant and the Company have notified the Issuing Bank in writing prior to a drawing under the Letter of Credit that such documents do not comply with the Letter of Credit.
SECTION 19. Cost, Expenses and Taxes. The Company agrees to pay not later than 30 days after demand therefor all reasonable costs and expenses in connection with the preparation, execution, delivery, filing, recording and administration of this Agreement and any other documents which may be delivered in connection with this Agreement and any waiver or consent under, or amendment of, this Agreement or any of the Transaction Documents or Financing Documents, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent, and local counsel who may be retained by said counsel, with respect thereto and with respect to advising the Administrative Agent as to its rights and responsibilities under this Agreement; all costs and expenses (including counsel fees and expenses) in connection with
(i) the enforcement of this Agreement and such other documents which may be delivered in connection with this Agreement or (ii) any action or proceeding relating to a court order, injunction or other process or decree restraining or seeking to restrain the Issuing Bank from paying any amount under the Letter of Credit; and all costs and expenses (including reasonable counsel fees and expenses) in connection with each transfer of the Letter of Credit in accordance with its terms. In addition, the Company shall pay any and all stamp, documentary, filing, recording or other similar taxes and fees payable or determined to be payable in connection with the execution, delivery, filing and recording of this Agreement and such other documents, and agrees to save the Administrative Agent and each Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees, provided that the Administrative Agent and each Bank agree promptly to notify the Company of any such taxes and fees which are incurred by the Administrative Agent or such Bank.
SECTION 20. Administrative Agent; Issuing Bank. (a) Each Bank irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with all such powers as are reasonably incidental thereto.
(b) The Administrative Agent and its Affiliates may accept deposits from, make loans or otherwise extend credit to, and generally engage in any kind of business with, the Company, the Equity Participant and their respective Subsidiaries and Affiliates and receive payment on such loans or extensions of credit and otherwise act with respect thereto freely and without accountability in the same manner as if this Agreement and the transactions contemplated hereby were not in effect.
(c) The Administrative Agent may consult with legal counsel (who may be counsel for the Company), independent public accountants and other experts as it may
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select and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts.
(d) It is understood that the Issuing Bank will exercise and give the same care and attention to the Letter of Credit as it gives to its other letters of credit and loans for its own account and that the Issuing Bank shall have no obligation to the Company or any other Bank and no duty or responsibility with respect to this Agreement or the Letter of Credit, except as expressly provided herein and in the Letter of Credit. Without limiting the generality of the foregoing, neither the Administrative Agent nor the Issuing Bank shall be required to take any action with respect to any Reimbursement Default, except as expressly provided in Section 9 hereof. Neither the Administrative Agent nor the Issuing Bank shall be liable for any action taken or not taken at the request or with the approval of the Required Banks (or all the Banks, as applicable) or for the performance or non-performance of the obligations of any other party under this Agreement or any Transaction Document or Financing Document or any other document contemplated thereby. It is further understood that: (i) except as expressly limited by the provisions of this Agreement, the Issuing Bank retains the sole right to exercise its rights and enforce the obligations of the Company under this Agreement, and the Issuing Bank may use its sole discretion with respect to exercising or refraining from exercising any rights or taking or refraining from taking any actions which may be vested in it or which it may be entitled to take or assert under this Agreement or any of the Transaction Documents or Financing Documents (including, without limitation, the giving of any notice to any Person of any Reimbursement Event of Default under this Agreement except as provided in Section 9); and (ii) the Issuing Bank shall not, in the absence of gross negligence or willful misconduct, be under any liability to any other Bank with respect to anything which the Issuing Bank may do or refrain from doing in the exercise of its best judgment or which it may deem to be necessary or desirable. Neither the Administrative Agent nor the Issuing Bank shall incur any liability by acting in reliance upon any written communication or any telephone conversation which it reasonably believes to be genuine and correct or to have been signed, sent or made by the proper Person. Neither the Administrative Agent nor the Issuing Bank shall have any obligation to make any claim on, or assert any lien upon, or assert any setoff against, any property held by it and, if it elects to do so, it may in its discretion apply the same against indebtedness of the Company other than the Company's obligations under this Agreement; provided that, to the extent any funds received pursuant to any of the foregoing are applied to the obligations of the Company under Section 2(a) or 2(b) hereof, each Bank shall be entitled to receive its pro rata share thereof in accordance with Section 14(b) above. Any such setoff or other action in respect of any reimbursement obligation of the Company set forth in Section 2(a) will be subject to Section 13.
SECTION 21. Indemnification. (a) The Company indemnifies and holds harmless the Administrative Agent, each Bank, and their respective officers and directors from and against any and all claims, damages, losses, liabilities, costs or expenses whatsoever
41
which the Administrative Agent or such Bank may incur (or which may be claimed against the Administrative Agent or such Bank by any Person whatsoever):
(i) by reason of any inaccuracy in any material respect, or any untrue statement or alleged untrue statement of any material fact contained or incorporated by reference in any offering document distributed by or on behalf of the Company in connection with obtaining purchasers of the Company's undivided interest in Unit 2 of the Palo Verde Nuclear Generating Station, or in any supplement or amendment to either thereof, or by reason of the omission or alleged omission to state therein a material fact necessary to make such statements, in the light of the circumstances under which they are or were made, not misleading;
(ii) by reason of or in connection with the execution, delivery and performance of the Transaction Documents and Financing Documents, or any transaction contemplated by the Transaction Documents or the Financing Documents; or
(iii) by reason of or in connection with the execution and delivery or transfer of, or payment or failure to make lawful payment under, the Letter of Credit; provided that the Company shall not be required to indemnify the Administrative Agent or any Bank pursuant to this Section 21 for any claims, damages, losses, liabilities, costs or expenses to the extent, but only to the extent, caused by (A) the willful misconduct or gross negligence of the Issuing Bank in determining whether a draft or certificate presented under the Letter of Credit complied with the terms of the Letter of Credit or (B) the Issuing Bank's willful failure to make lawful payment under the Letter of Credit after the presentation to it by the Equity Participant of a draft and certificate strictly complying with the terms and conditions of the Letter of Credit.
Nothing in this Section 21(a) is intended to limit the Company's obligations contained in Section 2. Without prejudice to the survival of any other obligation of the Company hereunder, the indemnities and obligations of the Company contained in this Section 21(a) shall survive the payment in full of all amounts payable pursuant to Section 2 and the termination of the Letter of Credit.
(b) To the extent that the Administrative Agent or the Issuing Bank is not reimbursed and indemnified by the Company under this Agreement, each Bank will reimburse and indemnify the Administrative Agent and the Issuing Bank on demand for and against such Bank's Participation Percentage of any and all claims, demands, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements (including fees and disbursements of counsel) of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent or the Issuing Bank in any way relating to or arising out of this
42
Agreement, the Letter of Credit, or any of the Transaction Documents or Financing Documents or any action taken or omitted to be taken by the Administrative Agent or the Issuing Bank hereunder or thereunder, or the transactions contemplated hereby and thereby or the enforcement of any of the terms hereof and thereof; provided that such Bank shall not be liable for any portion of such claims, demands, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, out-of-pocket expenses or disbursements resulting from the gross negligence or willful misconduct of the Administrative Agent or the Issuing Bank or which are expressly excluded from the indemnification by the Company by the proviso to Section 21(a)(iii) of this Agreement. Each Bank's obligations under this Section 21(b) shall survive the termination of this Agreement and the Letter of Credit. If the Administrative Agent or the Issuing Bank is reimbursed by the Company for any amounts previously received from any Bank pursuant to this Section 21(b), it will promptly pay to such Bank its proportionate share of any amounts so received.
SECTION 22. Confidentiality. Neither the Administrative Agent nor any Bank shall disclose any Confidential Information to any Person without the consent of the Company, other than (a) to the Administrative Agent's or such Bank's respective Affiliates or any officer, director, employee, accountant and advisor of any of the foregoing, and to actual or prospective Assignees and Participants, and then only on a confidential basis, (b) as required by any law, rule or regulation or judicial process and (c) as requested or required by any state, federal or foreign authority or examiner regulating banks or banking or otherwise regulating the business of the Administrative Agent or such Bank, as the case may be.
SECTION 23. Severability. Any provision of this Agreement which is prohibited, unenforceable or not authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition, unenforceability or non-authorization without invalidating the remaining provisions hereof or affecting the validity, enforceability or legality of such provision in any other jurisdiction.
SECTION 24. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.
SECTION 25. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose.
SECTION 26. Counterparts; Integration. This Amendment and Restatement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement and that certain Letter Agreement dated as of July 22, 2002 between the Issuing Bank and the Company constitute the entire agreement and understanding among
43
the parties hereto and, subject to Section 3(c), supersede any and all prior agreements and understandings, oral or written, relating to the subject matter hereof.
SECTION 27. WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE BANKS AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
SIGNATURE PAGES FOLLOW
44
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Restatement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first above written.
ARIZONA PUBLIC SERVICE COMPANY

By: /s/ Barbara M. Gomez
   ----------------------------------------
   Name:  Barbara M. Gomez
   Title: Treasurer	

JPMORGAN CHASE BANK,
as Administrative Agent and Issuing Bank

By: /s/ Peter M. Ling
   ----------------------------------------
   Name:  Peter M. Ling
   Title: Vice President	

BANK HAPOALIM B.M.

By: /s/ James P. Surless
   ----------------------------------------
   Name:  James P. Surless
   Title: Vice President

By: /s/ Laura Anne Raffa
   ----------------------------------------
   Name:  Laura Anne Raffa
   Title: Senior Vice President & Corporate
          Manager	

BARCLAYS BANK PLC

By: /s/ Sydney G. Dennis
   -------------------------------------
   Name:  Sydney G. Dennis
   Title: Director	

UNION BANK OF CALIFORNIA, N.A.

By: /s/ Robert J. Olson
   -------------------------------------
   Name:  Robert J. Olson
   Title: Senior Vice President	

BANK ONE, NA

By: /s/ Dawn M. Lawler
   -------------------------------------
   Name:  Dawn M. Lawler
   Title: Director	

SCHEDULE I
The "LETTER OF CREDIT COMMISSION RATE" for any day is the rate set forth below (in basis points per annum) under the column corresponding to the Status that exists on such day:

             STATUS                    LEVEL I        LEVEL II       LEVEL III        LEVEL IV        LEVEL V
--------------------------------       -------        --------       ---------        --------        -------
LETTER OF CREDIT COMMISSION RATE        87.5           100.0           112.5            137.5          162.5	

For purposes of this Schedule, the following terms have the following meanings:
"LEVEL I STATUS" exists at any date if, at such date, the Ratings are A- or higher by S&P or A3 or higher by Moody's.
"LEVEL II STATUS" exists at any date if, at such date, (i) Level I Status does not exist and (ii) the Ratings are BBB+ or higher by S&P or Baa1 or higher by Moody's.
"LEVEL III STATUS" exists at any date if, at such date, (i) neither Level I Status nor Level II Status exists and (ii) the Ratings are BBB or higher by S&P or Baa2 or higher by Moody's.
"LEVEL IV STATUS" exists at any date if, at such date, (i) none of Level I Status, Level II Status and Level III Status exists and (ii) the Ratings are BBB- or higher by S&P or Baa3 or higher by Moody's.
"LEVEL V STATUS" exists at any date if, at such date, no other Status exists.
"MOODY'S" means Moody's Investors Service, Inc.
"RATING AGENCIES" means Moody's and S&P.
"RATINGS" means the credit ratings assigned to the senior unsecured long-term debt securities of the Company without third-party credit enhancement by the Rating Agencies. If there is no rating assigned to debt securities, the corporate credit rating will be used. Any rating assigned to any other debt security of the Company shall be disregarded. The rating in effect at any date is that in effect at the close of business on such date. In the case of split ratings from S&P or Moody's, the rating to be used to determine which pricing level applies is the higher of the two (e.g., BBB+/Baa2 results in Level II Status); provided that if the split is more than one full rating category, the rating category immediately above the lower of the two rating categories will be used (e.g., BBB+/Baa3 results in Level III Status, as does A-/Baa3).
Schedule I-1
"S&P" means Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, Inc.
"STATUS" refers to the determination of which of Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status exists at any date.
Schedule I-2
SCHEDULE II

           BANK                 PARTICIPATION PERCENTAGE             PARTICIPATION AMOUNT
------------------------------  ------------------------             --------------------
JPMorgan Chase Bank                    27.8260870%                      $17,746,281.68

Bank Hapoalim B.M.                     24.3478261%                      $15,527,996.47

Barclays Bank PLC                      17.3913043%                      $11,091,426.05

Union Bank of California, N.A.         17.3913043%                      $11,091,426.05

Bank One, NA                           13.0434783%                      $ 8,318,569.54	

Schedule II
EXHIBIT A
AMENDED AND RESTATED
IRREVOCABLE TRANSFERABLE LETTER OF CREDIT
No. P-010152
 (formerly numbered as S-1002)
Originally Issued August 18, 1986
Reissued July 22, 2002
Emerson Finance Co.
8000 W. Florissant Avenue
P.O. Box 4100
St. Louis, Missouri 63136
Attn: President
Dear Sirs:
We hereby establish, at the request of Arizona Public Service Company (the "COMPANY"), in your favor, our Irrevocable Transferable Letter of Credit No. S-1002 (the "LETTER OF CREDIT"), in a maximum amount at any date (the "MAXIMUM CREDIT AMOUNT") equal to the amount shown opposite the period including such date in the Table of Maximum Credit Amounts attached hereto as Schedule II-A, effective immediately and expiring at 5:00 p.m. (New York City time) on the Termination Date. Capitalized terms used herein and in Schedules II-A, II-B and III and Exhibits 1, 2, 3 and 4 hereto shall have the meanings set forth in Schedule I hereto. This Letter of Credit is issued in connection with the leasing of an undivided interest in Unit 2 of the Palo Verde Nuclear Generating Station to the Company pursuant to a Facility Lease dated as of August 1, 1986 (the "FACILITY LEASE") as amended and in effect on the date hereof, between the Company and State Street Bank and Trust Company (as successor to The First National Bank of Boston), as Owner Trustee under a trust agreement with you.
We hereby irrevocably authorize you to draw on us, in accordance with the terms and conditions hereinafter set forth, an amount not in excess of the amount shown opposite the period including the date of such drawing (the "DATE OF DRAWING") in the Table of Maximum Drawing Amounts attached hereto as Schedule II-B as such amounts are modified from time to time in accordance with the next paragraph. Such amounts, as modified in accordance with the next paragraph, are hereinafter referred to collectively as the "MAXIMUM DRAWING AMOUNTS" and individually as the "MAXIMUM DRAWING
Exhibit A-1
AMOUNT". A drawing in respect of a payment hereunder honored by us shall not exceed the lesser of the Maximum Drawing Amount applicable on the Date of Drawing and the Maximum Credit Amount applicable on the Date of Drawing. All payments hereunder shall be made from our own general funds.
The Maximum Drawing Amounts shall be modified from time to time as follows:
(a) upon payment by the Issuing Bank of each drawing under the Letter of Credit, the Maximum Drawing Amounts applicable to each Date of Drawing subsequent to such payment shall be automatically reduced by an amount equal to the amount of the drawing so paid and shall not be reinstated; and
(b) if adjustments are made to Modified Special Casualty Values, corresponding adjustments shall be made to the Maximum Drawing Amounts shown in Schedule II-B, (as theretofore reduced pursuant to clause (a) above), provided that if any such adjustment of Modified Special Casualty Values would cause the Maximum Drawing Amount for any period to exceed the Maximum Credit Amount for such period, the Maximum Credit Amount shall apply for such period and provided further that adjustments pursuant to this clause (b) shall be effective automatically upon receipt by us of a notice from you in the form of Exhibit 1 hereto.
Upon surrender of this Letter of Credit together with a notice in the form of Exhibit 1 hereto, we will promptly issue an irrevocable transferable letter of credit containing a revised Schedule II-B reflecting the adjustments contained in such notice and in all other respects identical to this Letter of Credit.
Funds under this Letter of Credit are available to you against presentation on or prior to the Termination Date of (a) your draft in the form of Exhibit 2 attached hereto and (b) a completed certificate signed by you in the form of Exhibit 3 attached hereto. Such draft and certificate shall be dated the date of its presentation and shall be presented at our Tampa, Florida office specified below, or at our Brooklyn, New York office specified below (or at any other office in New York City which may be designated by us by written notice (given in the manner set forth in the next paragraph) delivered to you at least 15 days prior to the applicable Date of Drawing). If we receive such draft and certificate at our Tampa, Florida office specified below, all in strict conformity with the terms and conditions of this Letter of Credit, prior to 10:00 a.m. (New York City time) on any Business Day, we will honor the draft on the same Business Day. If we receive such draft and certificate at our Tampa, Florida office specified below on or after 10:00 a.m. and prior to 5:00 p.m. (New York City time) on any Business Day, or if we receive such draft and certificate at our Brooklyn, New York office specified below prior to 5:00 p.m. (New York City time) on any Business Day, in each case all in strict conformity with the terms and conditions of this Letter of Credit, we will honor the draft on the next Business Day. If requested by you, payment under this Letter of Credit may be made by wire transfer of federal funds to your account with any bank located in the United States of
Exhibit A-2
America or by deposit of immediately available funds into a designated account that you maintain with us.
Notwithstanding any provisions of Articles 13(b) and 14(d)(i) of the Uniform Customs and of Section 5-108(b) of the New York Uniform Commercial Code to the contrary, which provisions are hereby expressly waived, if the presentation of such draft and certificate are not in strict conformity with the terms and conditions of this Letter of Credit, we will give you prompt notice prior to the time we would have been obliged to make payment as set forth in the preceding paragraph by facsimile transmission addressed to you at the fax number set forth in the next succeeding paragraph, effective upon confirmation, that we have refused such non-conforming draft and certificate, and stating all discrepancies in respect of which the Issuing Bank refuses such non-conforming draft and certificate. If you correct such non-conforming demand by presentation of the draft and certificate corrected to be in strict conformity with the terms and conditions of the Letter of Credit within two Business Days of your receipt of our notice of refusal, then we will honor the draft and make payment in accordance with the terms provided herein based upon the time such corrected draft and certificate are presented, provided that you may make only one such corrected demand with respect to any such non-conforming demand, and provided further that for purposes of determining whether the draft and certificate have been timely presented, the corrected draft and certificate shall be deemed to have been presented on the date the non-conforming draft and certificate were presented.
Notwithstanding any other provision of this Letter of Credit, we shall have the right, upon the occurrence of any of the events listed in Schedule III hereto, to terminate this Letter of Credit by delivering to you a written notice indicating the date of such termination (the "DATE OF EARLY TERMINATION"), provided that on or before the Date of Early Termination you will have the right to draw once an amount not in excess of the lesser of the Maximum Credit Amount and the Maximum Drawing Amount in accordance with the procedures described herein. The written notice referred to in the preceding sentence shall be given by telex or facsimile transmission addressed to you at Emerson Finance Co., 8000 W. Florissant Avenue, P.O. Box 4100, St. Louis, Missouri 63136, Attention:
President, Fax: 314-553-2463 (or to such other address or telex number designated by you by written notice delivered to us at least 15 days prior to the notice of early termination) and shall be effective upon receipt of the appropriate answerback or confirmation of the facsimile transmission. We will also forward a copy of such notice by overnight delivery service to the address set forth above. The Date of Early Termination specified in such written notice shall be:
(a) in the case of events specified in paragraphs A and G of Schedule III, not earlier than ten days after such notice is given, and
(b) in the case of all other events specified in Schedule III, not earlier than 30 days after such notice is given.
Exhibit A-3
Except as set forth herein, this Letter of Credit shall be governed by the Uniform Customs and Practice for Documentary Credits (1993 Revision) International Chamber of Commerce Publication No. 500, other than the provisions of Article 48 thereof. This Letter of Credit shall be deemed to be a contract made under the laws of the State of New York and shall, as to matters not governed by the Uniform Customs, be governed by and construed in accordance with the laws of such State.
All demands for payment, notices and other communications to us in respect of this Letter of Credit shall be in writing, specifically referring to the number of this Letter of Credit, and addressed and presented to us (and all courier or physical deliveries should be addressed to us) at JPMorgan Chase Bank, c/o JP Morgan Treasury Services, Standby Letter of Credit Manager - Immediate Action Required, 4th Floor, 10240 Highland Manor Drive, Tampa, Florida 33610. Although we prefer physical presentations be made to our Tampa, Florida location, our location at 4 Chase Metrotech Center, 10th Floor, Brooklyn, New York 11245 is also available for your physical presentations. Should you use our 4 Chase Metrotech Center location for physical presentations, documents must be directed to: Governmental Agency Unit, Attention: Gamal Boulos.
Notwithstanding Article 48 of the Uniform Customs and Practice for Documentary Credits referred to above, this Letter of Credit may be transferred and assigned in its entirety more than once, but in each case only to the successor Equity Participant under the Trust Agreement dated as of August 1, 1986 between yourself and State Street Bank and Trust Company as successor to The First National Bank of Boston. Upon receipt by us at the address for presentation of documents set forth above of a copy of the instrument effecting such transfer and assignment, signed by the transferor and by the transferee, in the form of Exhibit 4 hereto (which shall be conclusive evidence of such assignee's authority without any inquiry by us into the terms of the Trust Agreement) then, in such case, we will, upon surrender of this Letter of Credit, issue an irrevocable transferable letter of credit in the name of the transferee and providing for notices to be sent to the transferee at the address set forth therein and in all other respects identical to this Letter of Credit and the transferee, instead of the transferor, shall, without necessity of further act, be entitled to all the benefits of, and rights under, this Letter of Credit in the transferor's place.
By your acceptance of this Letter of Credit, you hereby agree, and we hereby confirm our agreement, to the terms and conditions of Section 13 of the Reimbursement Agreement.
This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein, except only Schedules I, II-A, II-B and III and Exhibits 1, 2, 3 and 4 hereto and the notices referred to herein; and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except as set forth above.
Exhibit A-4
This Letter of Credit No. P-010152 (formerly numbered as S-1002) amends and restates our Letter of Credit No. S-1002 dated as of August 15, 1986, as heretofore amended.
Very truly yours,
JPMORGAN CHASE BANK
By _____________________________
Name:
Title:
Exhibit A-5
EXHIBIT 1
TO LETTER OF CREDIT
JPMorgan Chase Bank
[c/o JP Morgan Treasury Services
Standby Letter of Credit Manager -
Immediate Action Required
4th Floor
10240 Highland Manor Drive
Tampa, Florida 33610]
[Governmental Agency Unit
4 Chase Metrotech Center
10th Floor
Brooklyn, New York 11245
Attention: Gamal Boulos]
Dear Sirs:
Reference is made to that certain amended and restated irrevocable transferable Letter of Credit bearing Letter of Credit No. P-010152 (formerly numbered as S-1002) dated July 22, 2002, which has been established by you in favor of [name of Equity Participant] (the "EQUITY PARTICIPANT").
The undersigned, a duly authorized representative of the Equity Participant, hereby certifies that Modified Special Casualty Values have been adjusted and the amounts shown on Schedule II-B to the Letter of Credit should be modified, in accordance with the terms of clauses (a) and (b) of the third paragraph of the Letter of Credit, to the amounts shown in Appendix A hereto.
The Letter of Credit is returned herewith and we request that you issue an irrevocable transferable letter of credit with the revised Schedule II-B attached and in all other respects identical to the Letter of Credit.
Capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Letter of Credit.

[Name of Equity Participant]

[Name and Title of Authorized Representative of Equity Participant]
LC-Ex.1
EXHIBIT 2
TO LETTER OF CREDIT
[Place]
[Date], 20__
ON [Business Day on which payment is required in accordance with the provisions of the fifth paragraph of the Letter of Credit]

PAY TO                               U.S.$       [not to exceed the
      [Name of beneficiary]                      lesser of the Maximum Drawing
                                                 Amount or the Maximum
                                                 Credit Amount] DOLLARS,	

FOR VALUE RECEIVED AND CHARGE TO ACCOUNT OF LETTER OF
CREDIT NO. P-010152 (formerly numbered as S-1002) OF
JPMorgan Chase Bank
[c/o JP Morgan Treasury Services Standby Letter of Credit Manager - Immediate Action Required
4th Floor
10240 Highland Manor Drive
Tampa, Florida 33610]
[Governmental Agency Unit
4 Chase Metrotech Center
10th Floor
Brooklyn, New York 11245
Attention: Gamal Boulos]
[Name and address of Equity Participant]
By________________________________________
[Authorized Representative]
LC-Ex.2
EXHIBIT 3
TO LETTER OF CREDIT
CERTIFICATE
The undersigned, a duly authorized representative of [name of Equity Participant] (the "EQUITY PARTICIPANT"), as beneficiary under that certain amended and restated irrevocable transferable Letter of Credit No. P-010152 (formerly numbered as S-1002) dated July 22, 2002, established by JPMorgan Chase Bank (the "ISSUING BANK") and issued pursuant to that certain Amended and Restated Reimbursement Agreement dated as of July 22, 2002 between Arizona Public Service Company (the "COMPANY"), the Issuing Bank and the other Banks named therein, hereby certifies as follows:
1. An Event of Default under the Facility Lease has occurred and is continuing.
2. The amount of the accompanying draft does not exceed the Maximum Drawing Amount available under the Letter of Credit on the date hereof, as determined in accordance with the terms of the Letter of Credit.
Capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Letter of Credit.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of , 20__ .

[Name of Equity Participant]

[Name and title of authorized representative signing certificate]
LC-Ex.3
EXHIBIT 4
TO LETTER OF CREDIT
JPMorgan Chase Bank
[c/o JP Morgan Treasury Services
Standby Letter of Credit Manager -
Immediate Action Required
4th Floor
10240 Highland Manor Drive
Tampa, Florida 33610]
[Governmental Agency Unit
4 Chase Metrotech Center
10th Floor
Brooklyn, New York 11245
Attention: Gamal Boulos]
Dear Sirs:
Reference is made to the certain amended and restated irrevocable transferable Letter of Credit bearing Letter of Credit No. P-010152 (formerly numbered as S-1002) dated July 22, 2002, which has been established by you in favor of [name of Equity Participant (the "TRANSFEROR")].
The Transferor has transferred and assigned (and hereby confirms to you said transfer and assignment) all of its rights in and under said Letter of Credit to [name of Transferee (the "TRANSFEREE")] and confirms that the Transferor no longer has any rights under or interest in said Letter of Credit.
The Letter of Credit is returned herewith and we request that you issue an irrevocable transferable letter of credit in the name of the Transferee and providing for notices to be sent to the Transferee at the address set forth below and in all other respects identical to the Letter of Credit.
Transferee hereby certifies that it is a duly authorized transferee under the terms of said Letter of Credit and is accordingly entitled, upon presentation of the drafts and certificates called for therein, to receive payments thereunder. Notices under the Letter of Credit should be sent to us as follows: [Name], [Address], [Telex Number], Attention: o, [Answerback].

[Name of Transferor]
LC-Ex.4-1

[Name and Title of Authorized Representative of Transferor]

[Name of Transferee]

[Name and Title of Authorized Representative of Transferee]
LC-Ex.4-2
SCHEDULE I
TO LETTER OF CREDIT
The following terms have the following meanings for purposes of the Letter of Credit and the Schedules and Exhibits thereto. Terms defined in the Letter of Credit have the meanings given to them therein. Terms defined by reference to the Facility Lease have the meanings assigned to them therein from time to time.
"ADMINISTRATIVE AGENT" means JPMorgan Chase Bank, in its capacity as administrative agent for the Banks under the Reimbursement Agreement, and its successors in such capacity.
"APPLICABLE LAW" has the meaning assigned to it in the Facility Lease.
"BANK" means (i) each bank or financial institution listed on the signature pages of the Reimbursement Agreement, each Assignee that becomes a Bank pursuant to Section 15(a) of the Reimbursement Agreement, and their respective successors, and (ii) the Issuing Bank with respect to its Participation.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York, New York, Chicago, Illinois or the State of California are authorized by law to close.
"CAPITAL LEASE OBLIGATIONS" means as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property, which obligations are required to be classified and accounted for as a capital lease on the balance sheet of such Person under generally accepted accounting principles and, for the purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with generally accepted accounting principles.
"CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute.
"EQUITY PARTICIPANT" means Emerson Finance Co., as Equity Participant, and its successors and assigns.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
"ERISA AFFILIATE" means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of
Section 414(b) of the
LC-Sch.I-1
Code) as the Company or is under common control (within the meaning of Section 414(c) of the Code) with the Company.
"GOVERNMENTAL ACTION" has the meaning assigned to it in the Facility Lease.
"GUARANTEE" means as to any Person, any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Indebtedness of any other Person or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, agreements to keep well, to purchase assets, goods, securities or services, or to take-or-pay or otherwise), provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning.
"INDEBTEDNESS" means as to any Person at any date (without duplication):
(a) indebtedness created, issued, incurred or assumed by such Person for borrowed money or evidenced by bonds, debentures, notes or similar instruments;
(b) all obligations of such Person to pay the deferred purchase price of property or services, excluding, however, trade accounts payable (other than for borrowed money) arising in, and accrued expenses incurred in, the ordinary course of business of such Person so long as such trade accounts payable are paid within 180 days of the date incurred; (c) all Indebtedness secured by a lien on any asset of such Person, to the extent such Indebtedness has been assumed by, or is a recourse obligation of, such Person; (d) all Guarantees by such Person; (e) all Capital Lease Obligations of such Person; and (f) the amount of all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers' acceptances, surety or other bonds and similar instruments in support of Indebtedness.
"ISSUING BANK" means JPMorgan Chase Bank and its successors in their capacity as issuer of the Letter of Credit.
"MATERIAL SUBSIDIARY" means, at any time, a Subsidiary of the Company which as of such time meets the definition of a "significant subsidiary" included as of July 22, 2002 in Regulation S-X of the Securities and Exchange Commission or whose assets at such time exceed 10% of the assets of the Company and the Subsidiaries (on a consolidated basis).
"MODIFIED SPECIAL CASUALTY VALUE" has the meaning assigned to it in the Facility Lease.
"MULTIEMPLOYER PLAN" means a plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Company or any ERISA Affiliate within any of the preceding five plan years and which is covered by Title IV of ERISA.
"PARTICIPANT" has the meaning set forth in Section 15(b) of the Reimbursement Agreement.
LC-Sch.I-2
"PARTICIPATION" means a participating interest in the credit represented by the Letter of Credit including, without limitation, the interest therein retained by the Issuing Bank after giving effect to all participating interests therein granted by it pursuant to Section 14(a) of the Reimbursement Agreement, but prior to giving effect to any interest therein granted to any Participant pursuant to Section 15(b) of the Reimbursement Agreement.
"PARTICIPATION AMOUNT" means, with respect to any Bank, the amount set forth in Schedule II to the Reimbursement Agreement opposite the name of such Bank therein, as such amount may be changed by reason of an assignment by or to such Bank in accordance with Section 15(a). Such amount shall be reduced from time to time by such Bank's ratable share of each reduction of the Maximum Credit Amount.
"PARTICIPATION PERCENTAGE" means, with respect to any Bank at any time, the percentage equivalent of a fraction (i) the numerator of which is the Participation Amount of such Bank at such time and (ii) the denominator of which is the Maximum Credit Amount at such time.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.
"PERSON" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.
"PLAN" means an employee benefit plan within the meaning of Section 3(3) of ERISA established or maintained by the Company or any ERISA Affiliate which is covered by Title IV of ERISA, other than a Multiemployer Plan.
"REIMBURSEMENT AGREEMENT" means the Reimbursement Agreement as originally executed as of August 1, 1986, as amended or amended and restated from time to time before July 22, 2002, as amended and restated as of July 22, 2002 and as the same may be amended and restated from time to time thereafter.
"REQUIRED BANKS" means, at any time, Banks holding Participation Percentages aggregating more than 50% at such time.
"STATED TERMINATION DATE" means July 22, 2005 or such later date to which such Stated Termination Date shall have been extended pursuant to Section 17 of the Reimbursement Agreement.
"SUBSIDIARY" of any Person means any corporation of which more than 50% of the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power
LC-Sch.I-3
upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries.
"TERMINATION DATE" means the earliest of (i) the date on which the Issuing Bank pays a drawing under the Letter of Credit for the lesser of the Maximum Drawing Amount and the Maximum Credit Amount, (ii) if a drawing is not requested by the Equity Participant after a notice of termination is given under the Letter of Credit, the Date of Early Termination, (iii) if a drawing is requested by the Equity Participant after a notice of termination is given under the Letter of Credit, the date on which the Issuing Bank pays such drawing, (iv) the date on which the Company delivers a certificate to the Issuing Bank certifying that the Company has paid the amounts due under Section 9(c) of the Facility Lease (so long as the Equity Participant shall have acknowledged such payment by its express confirmation thereof in, and its countersignature to, such certificate), (v) the date on which the Company delivers a certificate to the Issuing Bank certifying that the Company has paid the amounts due under Section 9(d) of the Facility Lease (so long as the Equity Participant shall have acknowledged such payment by its express confirmation thereof in, and its countersignature to, such certificate), (vi) the latest of (x) the Stated Termination Date, (y) if a draft and certificate all in strict conformity with the terms and conditions of the Letter of Credit are presented on the Stated Termination Date at such time and at such office as specified in the fifth paragraph of the Letter of Credit, the date on which the Issuing Bank is required to honor the draft in accordance with the provisions of such paragraph pursuant to such presentation, and (z) if a corrected draft and certificate all in strict conformity with the terms and conditions of the Letter of Credit are presented on such date as specified in, and in accordance with the provisions of, the sixth paragraph of the Letter of Credit, the date on which the Issuing Bank is required to honor the draft in accordance with the provisions of such paragraph pursuant to such presentation, and (vii) the date on which the Company delivers a certificate to the Issuing Bank certifying that the Reimbursement Agreement has been terminated pursuant to Section 16(b) thereof (so long as such certificate shall have been countersigned by the Equity Participant).
"TRANSACTION DOCUMENTS" means the Participation Agreement, the Refinancing Agreement, the Indemnity Agreement, the Escrow Deposit Agreement, the Facility Lease, the Trust Agreement, the Indenture, the Decommissioning Trust Agreement, the Tax Indemnification Agreement, the Mortgage Release, the Assignment and Assumption, the Purchase Documents, any ground lease contemplated by Section 10(b)(3)(xvii) of the Participation Agreement and the Notes, each as defined in the Facility Lease.
LC-Sch.I-4

                                                                   SCHEDULE II-A
                                                             TO LETTER OF CREDIT

                         TABLE OF MAXIMUM CREDIT AMOUNTS
                               EMERSON FINANCE CO.

APPLICABLE PERIOD                         MAXIMUM CREDIT AMOUNT

From July 22, 2002 to and including              $63,775,699.77
January 10, 2003

From January 11, 2003 to and including           $61,992,600.93
July 10, 2003

From July 11, 2003 to and including              $60,512,412.71
January 10, 2004

From January 11, 2004 to and including           $58,584,204.49
July 10, 2004

From July 11, 2004 to and including              $56,998,753.97
January 10, 2005

From January 11, 2005 to and including           $55,207,639.45
July 10, 2005

From July 11, 2005 to and including              $54,073,073.44
July 22, 2005	

LC-Sch.II-A

                                                                   SCHEDULE II-B
                                                             TO LETTER OF CREDIT

                        TABLE OF MAXIMUM DRAWING AMOUNTS
                               EMERSON FINANCE CO.

APPLICABLE PERIOD                         MAXIMUM DRAWING AMOUNT

From July 22, 2002 to and including               $63,775,699.77
January 10, 2003

From January 11, 2003 to and including            $61,992,600.93
July 10, 2003

From July 11, 2003 to and including               $60,512,412.71
January 10, 2004

From January 11, 2004 to and including            $58,584,204.49
July 10, 2004

From July 11, 2004 to and including               $56,998,753.97
January 10, 2005

From January 11, 2005 to and including            $55,207,639.45
July 10, 2005

From July 11, 2005 to and including               $54,073,073.44
July 22, 2005	

LC-Sch.II-B
SCHEDULE III
TO LETTER OF CREDIT
The Issuing Bank shall have the right upon the occurrence of any of the events listed below to terminate the Letter of Credit in accordance with the terms of the Letter of Credit:
(A) The Company shall fail to pay when due any amount payable under Section 2(a) of the Reimbursement Agreement or fail to pay any other amount payable under Section 2 of the Reimbursement Agreement within five Business Days after the same becomes due and payable; or
(B) The Company shall fail to perform or observe (i) any term, covenant or agreement contained in Section 7(a)(ii), 7(g)(iv), 7(h),
8(a), 8(b), 8(c) or 8(e) of the Reimbursement Agreement, or (ii) any term, covenant or agreement contained in the Reimbursement Agreement (other than those covered by clause (A) above or subclause (i) of this clause (B) or Section 7(e) or Section 19 of the Reimbursement Agreement) on its part to be performed or observed if the failure to perform or observe such term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Company by the Administrative Agent; or
(C) Any representation or warranty made by the Company in the Reimbursement Agreement or by the Company (or any of its officers) in any certificate delivered in connection with the Reimbursement Agreement shall prove to have been false or misleading in any material respect when made; or
(D) Any material provision of the Reimbursement Agreement shall at any time for any reason cease to be valid and binding upon the Company, or shall be declared to be null and void, or the validity or enforceability thereof shall be contested by the Company or any governmental agency or authority, or the Company shall deny that it has any or further liability or obligation under the Reimbursement Agreement; or
(E) The Company shall fail to pay any principal of or premium or interest on any Indebtedness which is outstanding in a principal amount of at least $5,000,000 (but excluding Indebtedness owing under the Reimbursement Agreement) of the Company, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after
Sch.III-1
the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness; or the Company shall fail to perform or comply with any other term or covenant in any agreement or instrument relating to any such Indebtedness and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such failure is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or
(F) The Company shall fail to pay any principal of or premium or interest in respect of any operating lease in respect of which the payment obligations of the Company have a present value of at least $25,000,000, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in such operating lease, if the effect of such failure is to terminate, or to permit the termination of, such operating lease; or
(G) The Company shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Company seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Company shall take any corporate action to authorize any of the actions set forth above in this clause (G) or
(H) Any Material Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Material Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking
Sch.III-2
the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property) shall occur; or any Material Subsidiary shall take any corporate action to authorize any of the actions set forth above in this clause (H) and, in each case, the Required Banks determine that such circumstances could have a material adverse effect on the financial condition or financial prospects of the Company and its consolidated Subsidiaries, taken as a whole; or
(I) Any judgment or order for the payment of money that exceeds any applicable insurance coverage by more than $5,000,000 shall be rendered against the Company and such judgment or order shall remain unsatisfied or unstayed for a period of 30 days; or
(J) Any judgment or order for the payment of money that exceeds any applicable insurance coverage by more than $25,000,000 shall be rendered against any Material Subsidiary; such judgment or order shall remain unsatisfied or unstayed for 30 days; and the Required Banks determine that such judgment or order could have a material adverse effect on the financial condition or financial prospects of the Company and its consolidated Subsidiaries, taken as a whole; or
(K) An event or condition specified in Section 7(g)(iv) of the Reimbursement Agreement shall occur or exist with respect to any Plan or Multiemployer Plan and, as a result of such event or condition, together with all other such events or conditions, the Company or any ERISA Affiliate shall incur or in the opinion of the Required Banks shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan or the PBGC (or any combination of the foregoing) which is, in the determination of the Required Banks, material in relation to the financial condition or the financial prospects of the Company and its consolidated Subsidiaries, taken as a whole; or
(L) any change in Applicable Law or any Governmental Action shall occur which has the effect of making the transactions contemplated by the Transaction Documents unauthorized, illegal or otherwise contrary to Applicable Law; or
Sch.III-3
(M) any event specified in Sections 15(vii), (viii) or (x) of the Facility Lease shall occur; or
(N) the Company shall fail to make, or cause to be made, any payment specified in Section 15(i) of the Facility Lease equal to or exceeding $1,000,000 within the periods specified in that Section.
Capitalized terms used herein and not otherwise defined herein shall have the meanings given to them in the Letter of Credit.
LC-Sch.III-4
SCHEDULE OF OMITTED DOCUMENT
Pursuant to Instruction 2 to Item 601, the registrant is not filing the Amended and Restated Reimbursement Agreement among Arizona Public Service Company ("APS"), the Banks Party thereto and JPMorgan Chase Bank, as Administrative Agent and Issuing Bank, dated as of July 22, 2002 (the "Additional Reimbursement Agreement") and relating to a second sale and leaseback transaction entered into by APS in August of 1986. The Additional Reimbursement Agreement is virtually identical to the filed agreement except that the beneficiary of the letter of credit is a different equity participant and the drawing amounts under the letter of credit are different, ranging from a high of approximately $50.9 million beginning in July of 2002 to a low of
approximately $44.3 million ending in July of 2005.
 
Exhibit 10.101
THREE-YEAR CREDIT AGREEMENT
Dated as of May 21, 2004
ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (the "Borrower"), the banks, financial institutions and other institutional lenders
(the "Initial Lenders") and initial issuing banks (the "Initial Issuing Banks")
listed on the signature pages hereof, CITIGROUP GLOBAL MARKETS INC. and KEYBANK NATIONAL ASSOCIATION, as joint lead arrangers (the "Arrangers"), KEYBANK NATIONAL ASSOCIATION, as syndication agent, BANK OF AMERICA, N.A. and THE BANK OF NEW YORK, as co-documentation agents, and CITIBANK, N.A. ("Citibank"), as agent (the "Agent") for the Lenders (as hereinafter defined), agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
"Advance" means an advance by a Lender to the Borrower as part of a Borrowing or pursuant to Section 2.03(c) and refers to a Base Rate Advance or a Eurodollar Rate Advance (each of which shall be a "Type" of Advance).
"Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term "control" (including the terms "controlling", "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by contract or otherwise.
"Agent's Account" means the account of the Agent maintained by the Agent at Citibank at its office at 388 Greenwich Street, New York, New York 10013, Account No. 36852248, Attention: Bank Loan Syndications.
"Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance.
"Applicable Margin" means, as of any date, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below:

         Public Debt Rating            Applicable Margin for     Applicable Margin for
            S&P/Moody's                  Base Rate Advances    Eurodollar Rate Advances
         ------------------            ---------------------   ------------------------
Level 1
A- or A3 or above                              0.000%                   0.625%
Level 2
Lower than Level 1 but at least BBB+           0.000%                   0.750%
or Baa1
Level 3
Lower than Levels 1 and 2 but at               0.000%                   0.875%
least BBB or Baa2
Level 4
Lower than Levels 1, 2, and 3 but at           0.125%                   1.125%
least BBB- or Baa3
Level 5
Lower than Levels 1, 2, 3 and 4 but            0.500%                   1.500%
at least BB+ and Ba1
Level 6
Lower than Level 5                             0.750%                   1.750%	

"Applicable Percentage" means, as of any date, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below:

         Public Debt Rating            Applicable
             S&P/Moody's               Percentage
         ------------------            ----------
Level 1
A- or A3 or above                        0.125%
Level 2
Lower than Level 1 but at least BBB+     0.150%
or Baa1
Level 3
Lower than Levels 1 and 2 but at         0.175%
least BBB or Baa2
Level 4
Lower than Levels 1, 2, and 3 but at     0.200%
least BBB- or Baa3
Level 5
Lower than Levels 1, 2, 3 and 4 but      0.300%
at least BB+ and Ba1
Level 6
Lower than Level 5                       0.400%	

"Applicable Utilization Fee" means, as of any date that the sum of the aggregate Advances plus the Available Amount of all Letters of Credit exceed 50% of the aggregate Commitments, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below:

         Public Debt Rating               Applicable
             S&P/Moody's               Utilization Fee
         ------------------            ---------------
Level 1
A- or A3 or above                           0.125%
Level 2
Lower than Level 1 but at least BBB+        0.125%
or Baa1
Level 3
Lower than Levels 1 and 2 but at            0.125%
least BBB or Baa2
Level 4
Lower than Levels 1, 2, and 3 but at        0.125%
least BBB- or Baa3
Level 5
Lower than Levels 1, 2, 3 and 4 but         0.250%
at least BB+ and Ba1
Level 6
Lower than Level 5                          0.500%	

"Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit C hereto.
2
"Authorized Officer" means the chairman of the board, chief executive officer, chief operating officer, chief financial officer, president, any vice president, treasurer, controller or any assistant treasurer of the Borrower.
"Available Amount" of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time (assuming compliance at such time with all conditions to drawing).
"Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of:
(a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; and
(b) 1/2 of one percent per annum above the Federal Funds Rate.
"Base Rate Advance" means an Advance that bears interest as provided in Section 2.07(a)(i).
"Borrower Information" has the meaning specified in Section 8.08.
"Borrowing" means a borrowing consisting of simultaneous Advances of the same Type made by each of the Lenders pursuant to Section 2.01.
"Business Day" means a day of the year on which banks are not required or authorized by law to close in New York City or Phoenix, Arizona and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market.
"Commitment" means a Revolving Credit Commitment or a Letter of Credit Commitment.
"Consolidated" refers to the consolidation of accounts in accordance with GAAP.
"Consolidated Cash Coverage Ratio" means, with respect to the Borrower and its Consolidated Subsidiaries, for each twelve-month period ending on the last day of each fiscal quarter (determined as of the last day of such fiscal quarter), the ratio of:
(a) an amount equal to:
(i) Consolidated net income of the Borrower and its Consolidated Subsidiaries for such period, plus
(ii) all material non-recurring items which decreased said net income for such period, minus
(iii) all material non-recurring items which increased said net income for such period, plus
(iv) income taxes deducted in determining said net income for such period, plus
(v) total "Interest Charges", as defined in clause (b) below, of the Borrower and its Consolidated Subsidiaries for such period, plus
(vi) depreciation and amortization, and nuclear fuel amortization for such period, minus
3
(vii) allowance for equity and borrowed funds used during construction for such period, minus
(viii) deferrals as described in Financial Accounting Standards Board Statement No. 71 for such period, plus or minus
(ix) other significant noncash items for such period as may be specified under Financial Accounting Standards Board Statements or other accounting guidelines, to
(b) without duplication of any item, an amount equal to the sum (such amount being the "Interest Charges") of:
(i) interest on long-term debt for such period as reported in the consolidated income statement for such period, plus
(ii) interest on short-term debt for such period as reported in the consolidated income statement for such period, plus
(iii) imputed interest on the Sale Leaseback Obligation Bonds for such period, such amount being equal to the product of (A) the principal amount of Sale Leaseback Obligation Bonds outstanding during such period and (B) the rate of interest applicable to such Sale Leaseback Obligation Bonds during such period, plus
(iv) all rental payments in respect of operating leases (excluding any portion of such rental payments attributable to operating expenses and excluding any payments in respect of Sale Leaseback Obligation Bonds) with respect to which the payment obligations of the Borrower or a Consolidated Subsidiary of the Borrower have a present value of at least $25,000,000.
"Consolidated Indebtedness" means, at any date, the Indebtedness of the Borrower and its Consolidated Subsidiaries determined on a Consolidated basis as of such date.
"Consolidated Net Worth" means, at any date, the sum as of such date of (a) the par value (or value stated on the books of the Borrower) of all classes of capital stock of the Borrower and its Subsidiaries, excluding the Borrower's capital stock owned by the Borrower and/or its Subsidiaries, plus (or minus in the case of a surplus deficit) (b) the amount of the Consolidated surplus, whether capital or earned, of the Borrower, determined in accordance with GAAP as of the end of the most recent calendar month (excluding (x) cumulative charges of up to $300,000,000 to Consolidated surplus resulting from, or in anticipation of, discontinuation of Financial Accounting Standards Board Statement No. 71, accounting for all or part of the business and (y) the effect on the Borrower's accumulated other comprehensive income/loss of the ongoing application of Financial Accounting Standards Board Statement No. 133).
"Consolidated Subsidiary" means, at any date, any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower on its Consolidated financial statements if such financial statements were prepared as of such date.
"Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of the other Type pursuant to Section 2.08, 2.09 or 2.12.
"Default" means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both.
"Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and
4
Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent.
"Effective Date" has the meaning specified in Section 3.01.
"Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a Lender (that is not a natural person); and (iii) any other Person (that is not a natural person) approved by the Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 8.07, the Borrower, such approval not to be unreasonably withheld or delayed; provided, however, that neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee.
"Environmental Action" means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, Environmental Permit or Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment, including, without limitation,
(a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or any third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief.
"Environmental Law" means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials.
"Environmental Permit" means any permit, approval, identification number, license or other authorization required under any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
"ERISA Affiliate" means any Person that for purposes of Title IV of ERISA is a member of the Borrower's controlled group, or under common control with the Borrower, within the meaning of Section 414 of the Internal Revenue Code.
"ERISA Event" means (a) (i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC, or (ii) the requirements of subsection (1) of Section 4043(b) of ERISA (without regard to subsection (2) of such Section) are met with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an event described in paragraph (9), (10), (11),
(12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such Plan within the following 30 days; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of the Borrower or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e) the withdrawal by the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions for the imposition of a lien under Section 302(f) of ERISA shall have been met with respect to any Plan; (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; or
(h) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that constitutes grounds for the termination of, or the appointment of a trustee to administer, a Plan.
5
"Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.
"Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent.
"Eurodollar Rate" means, for any Interest Period for each Eurodollar Rate Advance comprising part of the same Borrowing, an interest rate per annum equal to the rate per annum (rounded upward to the nearest whole multiple of 1/16 of 1% per annum) appearing on Moneyline Telerate Markets Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period or, if for any reason such rate is not available, the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance comprising part of such Borrowing to be outstanding during such Interest Period and for a period equal to such Interest Period, subject, however, to the provisions of Section 2.08.
"Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.07(a)(ii).
"Events of Default" has the meaning specified in Section 6.01.
"Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it.
"GAAP" has the meaning specified in Section 1.03.
"Guaranteed Indebtedness" of any Person means, without duplication, all Indebtedness guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (i) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, or (ii) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness against loss, or (iii) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective to whether or not such property is received or such services are rendered), or (iv) otherwise to assure a creditor against loss.
"Hazardous Materials" means (a) petroleum and petroleum products, byproducts or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and
(b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law.
"Hedge Agreement" means any interest rate swap, cap or collar agreement, interest rate future or option contract, currency swap agreement, currency future or option contract or other similar agreement.
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"Indebtedness" of any Person means, without duplication, (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, excluding, however, trade accounts payable arising in, and accrued expenses incurred in, the ordinary course of business of such Person so long as such trade accounts payable are paid within 180 days of the date incurred, (ii) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iii) all obligations under leases which shall have been or should be, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable as lessee, (iv) all obligations of such Person upon which interest charges are customarily paid, (v) all liabilities of such Person in respect of unfunded vested benefits under plans covered by Title IV of ERISA, (vi) all Guaranteed Indebtedness, and (vii) all Indebtedness referred to in clause (i), (ii) or (iii) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any lien, security interest or other charge or encumbrance upon or in property (including, without limitation, accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness.
"Information Memorandum" means the information memorandum dated April 20, 2004 used by the Arrangers in connection with the syndication of the Commitments, as qualified in its entirety by the information provided in the SEC Reports.
"Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Borrowing, the period commencing on the date of such Eurodollar Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months, as the Borrower may, upon notice received by the Agent not later than 12:00 noon (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that:
(a) the Borrower may not select any Interest Period that ends after the Termination Date;
(b) Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Borrowing shall be of the same duration;
(c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and
(d) whenever the first day of any Interest Period occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
"Issuing Bank" means an Initial Issuing Bank or any other Lender approved by the Borrower that may agree to issue Letters of Credit pursuant to an Assignment and Acceptance or other agreement in form satisfactory to the Borrower and the Agent, so long as such Lender expressly agrees to perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be
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performed by it as an Issuing Bank and notifies the Agent of its Applicable Lending Office (which information shall be recorded by the Agent in the Register), for so long as such Initial Issuing Bank or Lender, as the case may be, shall have a Letter of Credit Commitment.
"L/C Cash Deposit Account" means an interest bearing cash deposit account to be established and maintained by the Agent, over which the Agent shall have sole dominion and control, upon terms as may be satisfactory to the Agent.
"L/C Related Documents" has the meaning specified in Section 2.06(b)(i).
"Lenders" means the Initial Lenders, each Issuing Bank and each Person that shall become a party hereto pursuant to Section 8.07.
"Letter of Credit" has the meaning specified in Section 2.01(b).
"Letter of Credit Application" has the meaning specified in Section 2.03(a).
"Letter of Credit Commitment" means, with respect to each Issuing Bank, the obligation of such Issuing Bank to issue Letters of Credit for the account of the Borrower from time to time in (a) the maximum aggregate amount at any time outstanding set forth opposite the Issuing Bank's name on the signature pages hereto under the caption "Letter of Credit Commitment" or (b) if such Issuing Bank has entered into one or more Assignments and Acceptances or other agreements pursuant to which it became an Issuing Bank, the amount set forth for such Issuing Bank in the Register maintained by the Agent pursuant to Section 8.07(d) as such Issuing Bank's "Letter of Credit Commitment", in each case as such amount may be reduced prior to such time pursuant to Section 2.05.
"Letter of Credit Facility" means, at any time, an amount equal to the least of (a) the aggregate amount of the Issuing Banks' Letter of Credit Commitments at such time, (b) $75,000,000 and (c) the aggregate amount of the Revolving Credit Commitments, as such amount may be reduced at or prior to such time pursuant to Section 2.05.
"Lien" means any lien, security interest or other encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property.
"Material Adverse Change" means any material adverse change in the financial condition or financial prospects of the Borrower and its Subsidiaries taken as a whole.
"Material Adverse Effect" means a material adverse effect on (a) the financial condition or financial prospects of the Borrower and its Subsidiaries taken as a whole, (b) the rights and remedies of the Agent or any Lender under this Agreement or any Note or (c) the ability of the Borrower to perform its obligations under this Agreement or any Note.
"Material Subsidiary" means, at any time, a Subsidiary of the Borrower which as of such time meets the definition of a "significant subsidiary" included as of the date hereof in Regulation S-X of the Securities and Exchange Commission or whose assets at such time exceed 10% of the assets of the Borrower and the Subsidiaries (on a consolidated basis).
"Moody's" means Moody's Investors Service, Inc.
"Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions.
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"Multiple Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any ERISA Affiliate and at least one Person other than the Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate could have liability under
Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated.
"1984 Order" means Decision No. 54230, dated November 8, 1984, of the Arizona Corporation Commission.
"1986 Order" means Decision No. 55017, dated May 6, 1986, of the Arizona Corporation Commission.
"Note" means a promissory note of the Borrower payable to the order of any Lender, delivered pursuant to a request made under Section 2.16 in substantially the form of Exhibit A hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Advances made by such Lender.
"Notice of Borrowing" has the meaning specified in Section 2.02(a).
"Notice of Issuance" has the meaning specified in Section 2.03(a).
"PBGC" means the Pension Benefit Guaranty Corporation (or any successor).
"Permitted Lien" of the Borrower or any Material Subsidiary means any of the following:
(i) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been made;
(ii) Liens imposed by or arising by operation of law, such as Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business, including, without limitation, landlord's liens arising under Arizona law under leases entered into by the Borrower in the 1986 sale and leaseback transactions with respect to Palo Verde Unit 2 and securing the payment of rent under such leases, in each case, for sums not overdue for a period of more than 30 days or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been made;
(iii) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits or other similar statutory obligations;
(iv) Liens to secure obligations on surety or appeal bonds;
(v) rights of setoff and banker's Liens with respect to funds on deposit in a financial institution in the ordinary course of business;
(vi) easements, restrictions, reservations, licenses, covenants, and other defects of title that are not, in the aggregate, materially adverse to the use of such property for the purpose for which it is used;
(vii) Liens securing claims against any Person other than the Borrower or any Subsidiary of the Borrower neither assumed nor guaranteed by the Borrower or any Subsidiary of the Borrower nor on which the Borrower or any Subsidiary of the Borrower customarily pays interest, existing upon real estate or rights in or relating to real estate acquired by the Borrower or
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any Subsidiary of the Borrower for substation, transmission line, transportation line, distribution line or right of way purposes;
(viii) rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license or permit, or by any provision of law, to terminate such right, power, franchise, grant, license or permit or to purchase or recapture or to designate a purchaser of any of the property of the Borrower;
(ix) rights reserved to or vested in others to take or receive any part of the power pursuant to firm power commitment contracts, purchased power contracts, tolling agreements and similar agreements, gas, oil or other minerals or timber generated, developed, manufactured or produced by, or grown on, or acquired with, any property of the Borrower;
(x) rights reserved to or vested in any municipality or public authority to control or regulate any property of the Borrower, or to use such property in a manner that does not materially impair the use of such property for the purposes for which it is held by the Borrower;
(xi) security interests granted in favor of the Unit 2 sale leaseback transaction lessors in the Borrower's Decommissioning Trust Agreement (PVNGS Unit 2) dated as of January 31, 1992 (such agreement, as amended or otherwise modified from time to time, being the "Unit 2 Trust Agreement") to secure the Borrower's obligations in respect of the decommissioning of PVNGS Unit 2 or related facilities;
(xii) Liens that may exist with respect to the Unit 2 Trust Agreement (other than as described in paragraph (xi) above) or with respect to either of the Borrower's Decommissioning Trust Agreement (PVNGS Unit 1) or Decommissioning Trust Agreement (PVNGS Unit 3), each dated as of July 1, 1991, as amended or otherwise modified from time to time, relating to the Borrower's obligation to set aside funds for the decommissioning and retirement from service of such Units;
(xiii) pledges of pollution control bonds and related rights to secure the Borrower's reimbursement obligations in respect of letters of credit, bond insurance, and other credit or liquidity enhancements supporting pollution control bond transactions, provided that such pollution control bonds are not secured by any other assets of the Borrower or any Material Subsidiary;
(xiv) interests of other participants under agreements governing jointly-owned electric generating facilities and transmission facilities and transfers of operational or other control of facilities to a regional transmission organization or other similar body and Liens on such facilities to cover expenses, fees and other costs of such an organization or body;
(xv) Liens established on specified bank accounts of the Borrower to secure the Borrower's reimbursement obligations in respect of letters of credit supporting commercial paper issued by the Borrower and similar arrangements for collateral security with respect to refinancings or replacements of the same;
(xvi) rights of transmission users or any regional transmission organizations or similar entities in transmission facilities; and
(xvii) Liens on property of the Borrower sold to another Person pursuant to a conditional sales agreement where the Borrower retains title;
provided, however, that no lien in favor of the PBGC shall, in any event, be a Permitted Lien.
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"Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof.
"Plan" means a Single Employer Plan or a Multiple Employer Plan.
"Public Debt Rating" means, as of any date, the rating that has been most recently announced by either S&P or Moody's, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Borrower or, if any such rating agency shall have issued more than one such rating, the lowest such rating issued by such rating agency. For purposes of the foregoing, (a) if only one of S&P and Moody's shall have in effect a Public Debt Rating, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee shall be determined by reference to the available rating; (b) if neither S&P nor Moody's shall have in effect a Public Debt Rating, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee will be set in accordance with Level 6 under the definition of "Applicable Margin", "Applicable Percentage" or "Applicable Utilization Fee", as the case may be; (c) if the ratings established by S&P and Moody's shall fall within different levels above Level 6, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee shall be based upon the higher rating unless the such ratings differ by two or more levels, in which case the applicable level will be deemed to be one level above the lower of such levels; (d) if any rating established by S&P or Moody's shall be changed, such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change; and (e) if S&P or Moody's shall change the basis on which ratings are established, each reference to the Public Debt Rating announced by S&P or Moody's, as the case may be, shall refer to the then equivalent rating by S&P or Moody's, as the case may be.
"PWCC" means Pinnacle West Capital Corporation.
"Ratable Share" of any amount means, with respect to any Lender at any time, the product of such amount times a fraction the numerator of which is the amount of such Lender's Revolving Credit Commitment at such time (or, if the Revolving Credit Commitments shall have been terminated pursuant to
Section 2.05 or 6.01, such Lender's Revolving Credit Commitment as in effect immediately prior to such termination) and the denominator of which is the aggregate amount of all Revolving Credit Commitments at such time (or, if the Revolving Credit Commitments shall have been terminated pursuant to Section 2.05 or 6.01, the aggregate amount of all Revolving Credit Commitments as in effect immediately prior to such termination).
"Reference Banks" means Citibank, KeyBank National Association, Bank of America, N.A. and The Bank of New York.
"Register" has the meaning specified in Section 8.07(d).
"Required Lenders" means at any time Lenders owed at least a majority in interest of the then aggregate unpaid principal amount of the Advances owing to Lenders, or, if no such principal amount is then outstanding, Lenders having at least a majority in interest of the Revolving Credit Commitments.
"Revolving Credit Commitment" means as to any Lender (a) the amount set forth opposite such Lender's name on the signature pages hereof as such Lender's "Revolving Credit Commitment" or (b) if such Lender has entered into any Assignment and Acceptance, the amount set forth for such Lender in the Register maintained by the Agent pursuant to Section 8.07(d), as such amount may be reduced pursuant to Section 2.05.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
"Sale Leaseback Obligation Bonds" means PVNGS II Funding Corp.'s (i) 7.39% Secured Lease Obligation Bonds, Series 1993, due 2005; (ii) 8.00% Secured Lease Obligation Bonds, Series 1993, due
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2015; (iii) any other bonds issued by the Borrower in connection with a sale/leaseback transaction; and (iv) any refinancing or refunding of the obligations specified in subclauses (i) through (iii) above.
"SEC Reports" means the Borrower's (i) Form 10-K Report for the year ended December 31, 2003, (ii) Form 10-Q Report for the quarter ended March 31, 2004 and (iii) Form 8-K Reports filed on January 9, January 28, January 29, February 4 and April 21, 2004.
"Single Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any ERISA Affiliate and no Person other than the Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated.
"Subsequent Order" means any decision, order or ruling of the Arizona Corporation Commission issued after the Effective Date relating to the incurrence or maintenance of Indebtedness by the Borrower and that amends, supersedes or otherwise modifies the 1984 Order, the 1986 Order or any successor decision, order or ruling.
"Subsidiary" of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such limited liability company, partnership or joint venture or
(c) the beneficial interest in such trust or estate, is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries.
"Termination Date" means the earlier of (a) May 21, 2007 and (b) the date of termination in whole of the Commitments pursuant to Section 2.05 or 6.01.
"Unissued Letter of Credit Commitment" means, with respect to any Issuing Bank, the obligation of such Issuing Bank to issue Letters of Credit for the account of the Borrower in an amount equal to the excess of
(a) the amount of its Letter of Credit Commitment over (b) the aggregate Available Amount of all Letters of Credit issued by such Issuing Bank.
"Unused Commitment" means, with respect to each Lender at any time,
(a) such Lender's Revolving Credit Commitment at such time minus (b) the sum of (i) the aggregate principal amount of all Advances made by such Lender (in its capacity as a Lender) and outstanding at such time, plus
(ii) such Lender's Ratable Share of (A) the aggregate Available Amount of all the Letters of Credit outstanding at such time and (B) the aggregate principal amount of all Advances made by each Issuing Bank pursuant to
Section 2.03(c) that have not been ratably funded by such Lender and outstanding at such time.
"Voting Stock" means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency.
SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding".
SECTION 1.03. Accounting Terms. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's
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independent public accountants) with the most recent audited Consolidated financial statements of the Borrower delivered to the Agent ("GAAP").
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES AND LETTERS OF CREDIT
SECTION 2.01. The Advances and Letters of Credit. (a) The Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Advances to the Borrower from time to time on any Business Day during the period from the Effective Date until the Termination Date in an amount not to exceed such Lender's Unused Commitment. Each Borrowing shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Advances of the same Type made on the same day by the Lenders ratably according to their respective Revolving Credit Commitments. Within the limits of each Lender's Revolving Credit Commitment, the Borrower may borrow under this Section 2.01(a), prepay pursuant to Section 2.10 and reborrow under this Section 2.01(a).
(b) Letters of Credit. Each Issuing Bank agrees, on the terms and conditions hereinafter set forth, in reliance upon the agreements of the other Lenders set forth in this Agreement, to issue letters of credit (each, a "Letter of Credit") for the account of the Borrower from time to time on any Business Day during the period from the Effective Date until 30 days before the Termination Date in an aggregate Available Amount (i) for all Letters of Credit issued by each Issuing Bank not to exceed at any time the lesser of (x) the Letter of Credit Facility at such time and (y) such Issuing Bank's Letter of Credit Commitment at such time and (ii) for each such Letter of Credit not to exceed an amount equal to the Unused Commitments of the Lenders at such time. No Letter of Credit shall have an expiration date (including all rights of the Borrower or the beneficiary to require renewal) later than five Business Days before the Termination Date. Within the limits referred to above, the Borrower may from time to time request the issuance of Letters of Credit under this
Section 2.01(b). Each letter of credit listed on Schedule 2.01(b) shall be deemed to constitute a Letter of Credit issued hereunder, and each Lender that is an issuer of such a Letter of Credit shall, for purposes of Section 2.03, be deemed to be an Issuing Bank for each such letter of credit, provided than any renewal or replacement of any such letter of credit shall be issued by an Issuing Bank pursuant to the terms of this Agreement. The terms "issue", "issued", "issuance" and all similar terms, when applied to a Letter of Credit, shall include any renewal, extension or amendment thereof.
SECTION 2.02. Making the Advances. (a) Except as otherwise provided in Section 2.03(c), each Borrowing shall be made on notice, given not later than
(x) 12:00 noon (New York City time) on the third Business Day prior to the date of the proposed Borrowing in the case of a Borrowing consisting of Eurodollar Rate Advances or (y) 12:00 noon (New York City time) on the date of the proposed Borrowing in the case of a Borrowing consisting of Base Rate Advances, by the Borrower to the Agent, which shall give to each Lender prompt notice thereof by facsimile. Each such notice of a Borrowing (a "Notice of Borrowing") shall be in writing or by facsimile in substantially the form of Exhibit B hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Borrowing, (iii) aggregate amount of such Borrowing, and (iv) in the case of a Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for each such Advance. Each Lender shall, in the case of a Borrowing consisting of Base Rate Advances, before 2:00 P.M. (New York City time) on the date of such Borrowing, and in the case of a Borrowing consisting of Eurodollar Rate Advances, before 11:00 A.M. (New York City time) on date of such Borrowing, make available for the account of its Applicable Lending Office to the Agent at the Agent's Account, in same day funds, such Lender's ratable portion of such Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such funds available to the Borrower at the Agent's address referred to in Section 8.02.
(b) Anything in subsection (a) above to the contrary notwithstanding,
(i) the Borrower may not select Eurodollar Rate Advances for any Borrowing if the aggregate amount of such Borrowing is less than $10,000,000 or if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.08 or 2.12 and (ii) at no time shall there be more than eight different Interest Periods outstanding for Eurodollar Rate Advances.
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(c) Each Notice of Borrowing shall be irrevocable and binding on the Borrower. In the case of any Borrowing that the related Notice of Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense reasonably incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Borrowing for such Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Advance to be made by such Lender as part of such Borrowing when such Advance, as a result of such failure, is not made on such date.
(d) Unless the Agent shall have received notice from a Lender prior to the time of any Borrowing that such Lender will not make available to the Agent such Lender's ratable portion of such Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent within one Business Day after demand for such Lender and within three Business Days after demand for the Borrower such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Advances comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's Advance as part of such Borrowing for purposes of this Agreement.
(e) The failure of any Lender to make the Advance to be made by it as part of any Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on the date of any Borrowing.
SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters of Credit. (a) Request for Issuance. (i) Each Letter of Credit shall be issued upon notice, given not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed issuance of such Letter of Credit (or on such shorter notice as the applicable Issuing Bank may agree), by the Borrower to any Issuing Bank, and such Issuing Bank shall give the Agent, prompt notice thereof. Each such notice by the Borrower of issuance of a Letter of Credit (a "Notice of Issuance") shall be by facsimile or telephone, confirmed immediately in writing, specifying therein the requested (A) date of such issuance (which shall be a Business Day), (B) Available Amount of such Letter of Credit, (C) expiration date of such Letter of Credit (which shall not be later than five Business Days before the Termination Date), (D) name and address of the beneficiary of such Letter of Credit and (E) form of such Letter of Credit. Each Letter of Credit shall be issued pursuant to such application for letter of credit as such Issuing Bank may specify to the Borrower for use in connection with such requested Letter of Credit (a "Letter of Credit Application"). If the requested form of such Letter of Credit is acceptable to such Issuing Bank in its sole discretion, such Issuing Bank will, upon fulfillment of the applicable conditions set forth in Article III, make such Letter of Credit available to the Borrower at its office referred to in Section 8.02 or as otherwise agreed with the Borrower in connection with such issuance. In the event and to the extent that the provisions of any Letter of Credit Application shall conflict with this Agreement, the provisions of this Agreement shall govern. Without limitation of the immediately preceding sentence, no such Letter of Credit Application may impose any additional conditions on the issuance of a Letter of Credit nor obligations of the Borrower to the Issuing Bank, other than as stated in this Agreement.
(b) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the applicable Issuing Bank or the Lenders, such Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from such Issuing Bank, a participation in such Letter of Credit equal to such Lender's Ratable Share of the Available Amount of such Letter of Credit. The Borrower hereby agrees to each such participation. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Agent, for the account of such Issuing Bank, such Lender's Ratable Share of each drawing made under a Letter of Credit funded by such Issuing Bank and not reimbursed by the Borrower on the date made, or of any reimbursement payment required to be refunded to the Borrower for any reason, which amount will be advanced, and deemed to be an Advance to the
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Borrower hereunder, regardless of the satisfaction of the conditions set forth in Section 3.02. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Revolving Credit Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Each Lender further acknowledges and agrees that its participation in each Letter of Credit will be automatically adjusted to reflect such Lender's Ratable Share of the Available Amount of such Letter of Credit at each time such Lender's Revolving Credit Commitment is amended pursuant to an assignment in accordance with Section 8.07 or otherwise pursuant to this Agreement.
(c) Drawing and Reimbursement. The payment by an Issuing Bank of a draft drawn under any Letter of Credit which is not reimbursed by the Borrower on the date made shall constitute for all purposes of this Agreement the making by any such Issuing Bank of an Advance regardless of the conditions set forth in
Section 3.02, which shall be a Base Rate Advance, in the amount of such draft, without regard to whether the making of such an Advance would exceed such Issuing Bank's Unused Commitment. Each Issuing Bank shall give prompt notice of each drawing under any Letter of Credit issued by it to the Borrower and the Agent. Upon written demand by such Issuing Bank, with a copy of such demand to the Agent and the Borrower, each Lender shall pay to the Agent such Lender's Ratable Share of such outstanding Advance pursuant to Section 2.03(b). Each Lender acknowledges and agrees that its obligation to make Advances pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Revolving Credit Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. Promptly after receipt thereof, the Agent shall transfer such funds to such Issuing Bank. Each Lender agrees to fund its Ratable Share of an outstanding Advance on (i) the Business Day on which demand therefor is made by such Issuing Bank, provided that notice of such demand is given not later than 11:00 A.M. (New York City time) on such Business Day, or
(ii) the first Business Day next succeeding such demand if notice of such demand is given after such time. If and to the extent that any Lender shall not have so made the amount of such Advance available to the Agent, such Lender agrees to pay to the Agent forthwith on demand such amount together with interest thereon, for each day from the date of demand by any such Issuing Bank until the date such amount is paid to the Agent, at the Federal Funds Rate for its account or the account of such Issuing Bank, as applicable. If a Lender shall pay to the Agent any amount for the account of any such Issuing Bank on any Business Day, such amount so paid in respect of principal shall constitute an Advance made by such Lender on such Business Day for purposes of this Agreement, and the outstanding principal amount of the Advance made by such Issuing Bank shall be reduced by such amount on such Business Day.
(d) Letter of Credit Reports. Each Issuing Bank shall furnish (A) to the Agent and each Lender on the first Business Day of each month a written report summarizing issuance and expiration dates of Letters of Credit issued by such Issuing Bank during the preceding month and drawings during such month under all such Letters of Credit and (B) to the Agent and each Lender on the first Business Day of each calendar quarter a written report setting forth the average daily aggregate Available Amount during the preceding calendar quarter of all Letters of Credit issued by such Issuing Bank.
(e) Failure to Make Advances. The failure of any Lender to make the Advance to be made by it on the date specified in Section 2.03(c) shall not relieve any other Lender of its obligation hereunder to make its Advance on such date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on such date.
SECTION 2.04. Fees. (a) Commitment Fee. The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee on such Lender's Unused Commitment from the Effective Date in the case of each Initial Lender and from the later of the Effective Date and the effective date specified in the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender until the Termination Date at a rate per annum equal to the Applicable Percentage in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December, commencing June 30, 2004, and on the Termination Date.
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(b) Letter of Credit Fees. (i) The Borrower shall pay to the Agent for the account of each Lender a commission on such Lender's Ratable Share of the average daily aggregate Available Amount of all Letters of Credit outstanding from time to time at a rate per annum equal to the Applicable Margin for Eurodollar Rate Advances in effect from time to time plus the Applicable Utilization Fee, if any, during such calendar quarter, payable in arrears quarterly on the last day of each March, June, September and December, commencing with the quarter ended June 30, 2004, and on the Termination Date; provided that the Applicable Margin shall be 2% above the Applicable Margin in effect upon the occurrence and during the continuation of an Event of Default if the Borrower is required to pay default interest pursuant to Section 2.07(b).
(ii) The Borrower shall pay to each Issuing Bank, for its own account, a fronting fee of 0.125% per annum on the Available Amount of each Letter of Credit issued by such Issuing Bank, payable in arrears quarterly on the last day of each March, June, September and December, commencing with the first such quarter in which any Letter of Credit is issued, and such other commissions, issuance fees, transfer fees and other fees and charges in connection with the issuance or administration of each Letter of Credit as the Borrower and such Issuing Bank shall agree promptly following receipt of an invoice therefor.
(c) Agent's Fees. The Borrower shall pay to the Agent for its own account such fees as are agreed between the Borrower and the Agent pursuant to the Fee Letter dated April 20, 2004, as amended from time to time.
SECTION 2.05. Optional Termination or Reduction of the Commitments. The Borrower shall have the right, upon at least three Business Days' notice to the Agent, to terminate in whole or permanently reduce ratably in part the Unused Commitments or the Unissued Letter of Credit Commitments of the Lenders, provided that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof.
SECTION 2.06. Repayment of Advances and Letter of Credit Drawings.
(a) The Borrower shall repay to the Agent for the ratable account of the Lenders on the Termination Date the aggregate principal amount of the Advances then outstanding.
(b) The obligations of the Borrower hereunder relating to any Letter of Credit shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances (it being understood that any such payment by the Borrower is without prejudice to, and does not constitute a waiver of, any rights the Borrower might have or might acquire as a result of the payment by any Lender of any draft or the reimbursement by the Borrower thereof):
(i) any lack of validity or enforceability of this Agreement, any Note, any Letter of Credit or any other agreement or instrument relating thereto (all of the foregoing being, collectively, the "L/C Related Documents");
(ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of the Borrower in respect of any L/C Related Document or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents;
(iii) the existence of any claim, set-off, defense or other right that the Borrower may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for which any such beneficiary or any such transferee may be acting), any Issuing Bank, any Agent, any Lender or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction;
(iv) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;
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(v) payment by any Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit;
(vi) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any guarantee, for all or any of the obligations of the Borrower in respect of the L/C Related Documents; or
(vii) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or a guarantor;
provided, however, that nothing in this Section 2.06 shall limit the rights of the Borrower under Section 8.12.
SECTION 2.07. Interest on Advances. (a) Scheduled Interest. The Borrower shall pay interest on the unpaid principal amount of each Advance owing to each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum:
(i) Base Rate Advances. During such periods as such Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the Applicable Margin in effect from time to time plus (z) the Applicable Utilization Fee, if any, in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full.
(ii) Eurodollar Rate Advances. During such periods as such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of (x) the Eurodollar Rate for such Interest Period for such Advance plus (y) the Applicable Margin in effect from time to time plus (z) the Applicable Utilization Fee, if any, in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full.
(b) Default Interest. Upon the occurrence and during the continuance of an Event of Default under Section 6.01(a), the Agent may, and upon the request of the Required Lenders shall, require the Borrower to pay interest ("Default Interest") on (i) the unpaid principal amount of each Advance owing to each Lender, payable in arrears on the dates referred to in clause (a)(i) or
(a)(ii) above, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Advance pursuant to clause (a)(i) or
(a)(ii) above and (ii) to the fullest extent permitted by law, the amount of any interest, fee or other amount payable hereunder that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on Base Rate Advances pursuant to clause (a)(i) above, provided, however, that following acceleration of the Advances pursuant to
Section 6.01, Default Interest shall accrue and be payable hereunder whether or not previously required by the Agent.
SECTION 2.08. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Agent timely information for the purpose of determining each Eurodollar Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Agent for the purpose of determining any such interest rate, the Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.07(a)(i) or (ii), and the rate, if any, furnished by each Reference Bank for the purpose of determining the interest rate under Section 2.07(a)(ii).
(b) If, with respect to any Eurodollar Rate Advances, the Required Lenders notify the Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Required Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest
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Period, the Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.
(c) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances.
(d) On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $10,000,000, such Advances shall automatically Convert into Base Rate Advances.
(e) Upon the occurrence and during the continuance of any Event of Default, (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and
(ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended.
(f) If Moneyline Telerate Markets Page 3750 is unavailable and fewer than two Reference Banks furnish timely information to the Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances,
(i) the Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances,
(ii) with respect to Eurodollar Rate Advances, each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and
(iii) the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.
SECTION 2.09. Optional Conversion of Advances. The Borrower may on any Business Day, upon notice given to the Agent not later than 12:00 noon (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.08 and 2.12, Convert all Advances of one Type comprising the same Borrowing into Advances of the other Type; provided, however, that any Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made only on the last day of an Interest Period for such Eurodollar Rate Advances, any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in an amount not less than the minimum amount specified in Section 2.02(b) and no Conversion of any Advances shall result in more separate Borrowings than permitted under Section 2.02(b). Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Advances to be Converted, and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for each such Advance. Each notice of Conversion shall be irrevocable and binding on the Borrower.
SECTION 2.10. Prepayments of Advances. (a) Optional. The Borrower may, upon notice at least two Business Days' prior to the date of such prepayment, in the case of Eurodollar Rate Advances, and not later than 11:00
A.M. (New York City time) on the date of such prepayment, in the case of Base Rate Advances, to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amount of the Advances comprising part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that
(x) each partial prepayment shall be in an aggregate principal amount of $5,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in the event of any such prepayment of a
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Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(c).
(b) Mandatory. The Borrower shall prepay the aggregate principal amount of the Advances, together with accrued interest to the date of prepayment on the principal amount prepaid, without requirement of demand therefor, or shall pay or prepay any other Indebtedness then outstanding at any time when and to the extent required to comply with applicable Arizona laws, rules or regulations, including the 1984 Order and the 1986 Order, or applicable resolutions of the Board of Directors of the Borrower.
SECTION 2.11. Increased Costs. (a) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any new guideline or unanticipated request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or agreeing to issue or of issuing or maintaining or participating in Letters of Credit (excluding for purposes of this Section 2.11 any such increased costs resulting from (i) Taxes or Other Taxes (as to which Section 2.14 shall govern),
(ii) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Lender is organized or has its Applicable Lending Office or any political subdivision thereof and (iii) reserve requirements included in the calculation required by Section 2.11(d)), then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender additional amounts that the Lender reasonably determines sufficient to compensate such Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower and the Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error.
(b) If any Lender determines that compliance with any new law or regulation or any new guideline or unanticipated request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend or to issue or participate in Letters of Credit hereunder and other commitments of this type, then, upon demand by such Lender (with a copy of such demand to the Agent), the Borrower shall pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts that the Lender reasonably determines sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend or to issue or participate in Letters of Credit hereunder. A certificate as to such amounts submitted to the Borrower and the Agent by such Lender shall be conclusive and binding for all purposes, absent manifest error.
(c) Each Lender will notify the Borrower of any change that will entitle such Lender to compensation under Section 2.11(a) or (b) as promptly as practicable, but in any event within 90 days after such Lender obtains knowledge thereof; provided, however, that, if any Lender fails to give such notice within 90 days after it obtains knowledge of such change, such Lender shall, with respect to compensation payable in respect of any costs resulting from such change, only be entitled to payment for costs incurred from and after the date that such Lender does give such notice plus, if such change shall have retroactive effect, costs resulting from such change during the period of retroactive effect thereof. Any Lender claiming any additional amounts payable pursuant to this Section agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Eurodollar Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender.
(d) The Borrower shall pay to the Agent for the account of each Lender that requests such a payment, so long as such Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to Eurocurrency Liabilities, an additional amount determined by such Lender up to but not exceeding an amount equal to the sum of the products of the following for each Eurodollar Rate Advance for each day during the applicable Interest Period therefor:
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(i) the principal amount of such Eurodollar Rate Advance outstanding on such day; multiplied by
(ii) the remainder of (x) a fraction the numerator of which is the rate (expressed as a decimal) at which interest accrues on such Eurodollar Rate Advance for such Interest Period as provided in this Agreement (less the Applicable Eurodollar Margin and any Applicable Utilization Fee), and the denominator of which is one minus the effective rate (expressed as a decimal) at which such reserve requirements are imposed on such Lender on such day, minus (y) such numerator; multiplied by
(iii) 1/360.
Such additional amount shall be determined by such Lender and notified to the Borrower through the Agent and shall be payable on each date on which interest is payable on such Eurodollar Rate Advance. Any such determination, when submitted by a Lender to the Borrower and accompanied by the calculations showing the basis for such determination, shall be conclusive and binding for all purposes absent manifest error.
SECTION 2.12. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (a) each Eurodollar Rate Advance will automatically, on the last day of the applicable Interest Period or, if required by applicable law, immediately upon such demand, Convert into a Base Rate Advance and (b) the obligation of the Lenders to make Eurodollar Rate Advances or to Convert Advances into Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist.
SECTION 2.13. Payments and Computations. (a) The Borrower shall make each payment hereunder, irrespective of any right of counterclaim or set-off, not later than 1:00 P.M. (New York City time) on the day when due in U.S. dollars to the Agent at the Agent's Account in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal, interest, fees or commissions ratably (other than amounts payable pursuant to Section 2.11, 2.14 or 8.04(c)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to
Section 8.07(c), from and after the effective date specified in such Assignment and Acceptance, the Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves.
(b) All computations of interest based on the Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate and of fees and Letter of Credit commissions shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, fees or commissions are payable. Each determination by the Agent of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error.
(c) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest, fees or commissions, as the case may be; provided, however, that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.
(e) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may
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assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate.
SECTION 2.14. Taxes. (a) Any and all payments by the Borrower to or for the account of any Lender or the Agent hereunder or under the Notes or any other documents to be delivered hereunder shall be made, in accordance with
Section 2.13 or the applicable provisions of such other documents, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it in lieu of net income taxes, by the United States and the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or does business or any political subdivision thereof and, in the case of each Lender, taxes imposed on its overall net income, and franchise taxes imposed on it in lieu of net income taxes, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note or any other documents to be delivered hereunder to any Lender or the Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.14) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under the Notes or any other documents to be delivered hereunder or from the execution, delivery or registration of, performing under, or otherwise with respect to, this Agreement or the Notes or any other documents to be delivered hereunder (hereinafter referred to as "Other Taxes").
(c) The Borrower shall indemnify each Lender and the Agent for and hold it harmless against the full amount of Taxes or Other Taxes (including, without limitation, taxes of any kind imposed or asserted by any jurisdiction on amounts payable under this Section 2.14) imposed on or paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Lender or the Agent (as the case may be) makes written demand therefor. Such demand shall be made as promptly as practicable, but in any event within 90 days after such Lender or the Agent (as the case may be) obtains actual knowledge of such event; provided, however, that if any Lender or the Agent fails to make such demand within 90 days after such Lender or the Agent (as the case may be) obtains knowledge of such event, such Lender or the Agent shall, with respect to compensation payable in respect of such event, not be entitled to compensation in respect of the costs and losses incurred between the 90th day after such Lender or the Agent (as the case may be) obtains actual knowledge of such event and the date such Lender or the Agent makes such demand.
(d) Within 30 days after the date of any payment of Taxes, the Borrower shall furnish to the Agent, at its address referred to in Section 8.02, the original or a certified copy of a receipt evidencing such payment to the extent such a receipt is issued therefor, or other written proof of payment thereof that is reasonably satisfactory to the Agent. In the case of any payment hereunder or under the Notes or any other documents to be delivered hereunder by or on behalf of the Borrower through an account or branch outside the United States or by or on behalf of the Borrower by a payor that is not a United States person, if the Borrower determines that no Taxes are payable in respect thereof, the Borrower shall furnish, or shall cause such payor to furnish, to the Agent, at such address, an opinion of counsel acceptable to the Agent stating that such payment is exempt from Taxes. For purposes of this subsection (d) and subsection
(e), the terms "United States" and "United States person" shall have the meanings specified in Section 7701 of the Internal Revenue Code.
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(e) Each Lender organized under the laws of a jurisdiction outside the United States (i) on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Lender and on the date of the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender, (ii) at any time that a change of circumstances occurs of which such Lender is aware that makes any information on the form so provided incorrect and
(iii) from time to time thereafter as reasonably requested in writing by the Borrower (but only so long as such Lender remains lawfully able to do so), shall provide each of the Agent and the Borrower with two original Internal Revenue Service Forms W-8BEN or W-8ECI or other relevant Form W-8, as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the Notes. Further, each such Lender that is not an exempt recipient listed in
Section 6049(b)(4) of the Internal Revenue Code shall provide the Borrower and the Agent with the appropriate Internal Revenue Service Form W-8 or Internal Revenue Service Form W-9, as appropriate, or other successor form prescribed by the Internal Revenue Service, certifying that it is exempt from United States back-up withholding. If the form provided by a Lender at the time such Lender first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such form; provided, however, that, if at the date of the Assignment and Acceptance pursuant to which a Lender assignee becomes a party to this Agreement, the Lender assignor was entitled to payments under subsection (a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Lender assignee on such date. If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service Form W-8BEN or W-8ECI, that the Lender reasonably considers to be confidential, the Lender shall give notice thereof to the Borrower and shall not be obligated to include in such form or document such confidential information.
(f) For any period with respect to which a Lender has failed to provide the Borrower with the appropriate form, certificate or other document described in Section 2.14(e) (other than if such failure is due to a change in law, or in the interpretation or application thereof, occurring subsequent to the date on which a form, certificate or other document originally was required to be provided, or if such form, certificate or other document otherwise is not required under subsection (e) above), such Lender shall not be entitled to gross up under Section 2.14(a) and shall not be entitled to indemnification under
Section 2.14(a) or (c) with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender become subject to Taxes because of its failure to deliver a form, certificate or other document required hereunder, the Borrower shall take such steps as the Lender shall reasonably request to assist the Lender to recover such Taxes.
(g) Any Lender claiming any additional amounts payable pursuant to this Section 2.14 agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Eurodollar Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender.
SECTION 2.15. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Advances owing to it (other than as payment of an Advance made by an Issuing Bank pursuant to the first sentence of
Section 2.03(c) or pursuant to Section 2.11, 2.14 or 8.04(c)) in excess of its Ratable Share of payments on account of the Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Advances owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise
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all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation.
SECTION 2.16. Evidence of Debt. (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Advance owing to such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder in respect of Advances. The Borrower agrees that upon notice by any Lender to the Borrower (with a copy of such notice to the Agent) to the effect that a Note is required or appropriate in order for such Lender to evidence (whether for purposes of pledge, enforcement or otherwise) the Advances owing to, or to be made by, such Lender, the Borrower shall promptly execute and deliver to such Lender a Note payable to the order of such Lender in a principal amount up to the Revolving Credit Commitment of such Lender.
(b) The Register maintained by the Agent pursuant to Section 8.07(d) shall include a control account, and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Borrowing made hereunder, the Type of Advances comprising such Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the terms of each Assignment and Acceptance delivered to and accepted by it, (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iv) the amount of any sum received by the Agent from the Borrower hereunder and each Lender's share thereof.
(c) Entries made in good faith by the Agent in the Register pursuant to subsection (b) above, and by each Lender in its account or accounts pursuant to subsection (a) above, shall be prima facie evidence of the amount of principal and interest due and payable or to become due and payable from the Borrower to, in the case of the Register, each Lender and, in the case of such account or accounts, such Lender, under this Agreement, absent manifest error; provided, however, that the failure of the Agent or such Lender to make an entry, or any finding that an entry is incorrect, in the Register or such account or accounts shall not limit or otherwise affect the obligations of the Borrower under this Agreement.
SECTION 2.17. Use of Proceeds. The proceeds of the Advances shall be available (and the Borrower agrees that it shall use such proceeds) solely for general corporate purposes of the Borrower.
ARTICLE III
CONDITIONS TO EFFECTIVENESS AND LENDING
SECTION 3.01. Conditions Precedent to Effectiveness of Section 2.01.
Section 2.01 of this Agreement shall become effective on and as of the first date (the "Effective Date") on which the following conditions precedent have been satisfied:
(a) Nothing shall have come to the attention of the Lenders during the course of their due diligence investigation to lead them to believe that the Information Memorandum was or has become misleading, incorrect or incomplete in any material respect; without limiting the generality of the foregoing, the Lenders shall have been given such access to the management, records, books of account, contracts and properties of the Borrower and its Subsidiaries as they shall have requested.
(b) The Borrower shall have paid all accrued fees and agreed expenses of the Agent and the Lenders and the reasonable accrued fees and expenses of counsel to the Agent that have been invoiced at least one Business Day prior to the Effective Date.
(c) On the Effective Date, the following statements shall be true and the Agent shall have received for the account of each Lender a certificate signed by a duly authorized officer of the Borrower, dated the Effective Date, stating that:
(i) The representations and warranties contained in Section 4.01 are correct on and as of the Effective Date, and
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(ii) No event has occurred and is continuing that constitutes a Default.
(d) The Agent shall have received on or before the Effective Date the following, each dated such day, in form and substance satisfactory to the Agent and (except for the Notes) in sufficient copies for each Lender:
(i) The Notes, payable to the order of the Lenders to the extent requested by any Lender pursuant to Section 2.16.
(ii) Certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Notes.
(iii) A certificate of the Secretary or an Associate Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder.
(iv) A favorable opinion of Snell & Wilmer L.L.P., counsel for the Borrower, substantially in the form of Exhibit D hereto and as to such other matters as any Lender through the Agent may reasonably request.
(v) A favorable opinion of Shearman & Sterling LLP, counsel for the Arrangers, in form and substance satisfactory to the Arrangers.
(e) The Borrower shall have terminated the commitments, and paid in full all advances, interest, fees and other amounts outstanding, under the 364-Day Credit Agreement dated as of May 30, 2003, as amended, among the Borrower, the lenders parties thereto and Citibank, as agent, and each of the Lenders that is a party to such credit facility hereby waives, upon execution of this Agreement, the three Business Days' notice required by
Section 2.04 of said Credit Agreement relating to the termination of commitments thereunder.
SECTION 3.02. Conditions Precedent to Each Borrowing and Issuance. The obligation of each Lender to make an Advance (other than an Advance made by any Issuing Bank or any Lender pursuant to Section 2.03(c)) on the occasion of each Borrowing and the obligation of each Issuing Bank to issue a Letter of Credit shall be subject to the conditions precedent that the Effective Date shall have occurred and on the date of such Borrowing or such issuance (as the case may be) the following statements shall be true (and each of the giving of the applicable Notice of Borrowing or Notice of Issuance, and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing or date of such issuance such statements are true):
(a) the representations and warranties contained in Section 4.01 (other than Section 4.01(l), and in the case of a Borrowing the proceeds of which are used to refund commercial paper, Sections 4.01(e)(ii), (f)(ii) and (j)) are correct on and as of such date, before and after giving effect to such Borrowing or issuance and to the application of the proceeds therefrom, as though made on and as of such date,
(b) no event has occurred and is continuing, or would result from such Borrowing or such issuance or from the application of the proceeds therefrom, that constitutes a Default,
(c) before and after giving effect to such Borrowing or such issuance and to the application of the proceeds therefrom, as though made on and as of such date, to the extent that the applicable Borrowings are required to be treated as short-term debt pursuant to the 1984 Order, the aggregate amount of Authorized Short Term Debt (as such term is defined in the 1984 Order) including the aggregate
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principal amount of all outstanding Advances that are required to be treated by the Borrower as short-term debt does not exceed 7% of the Borrower's total capitalization,
(d) to the extent that the applicable Borrowings or issuances are required to be treated as long-term debt pursuant to the 1986 Order, the aggregate amount of Continuing Debt (as such term is defined in the 1986 Order) including the aggregate principal amount of all outstanding Advances and Letters of Credit that are required to be treated by the Borrower as long-term debt has not exceeded, during any period of more than 30 days immediately prior to and including the date of the Borrowing or issuance, and will not exceed, during any period of more than 30 days at any time such Borrowing or Letter of Credit is outstanding, $2,698,917,000, and
(e) before and after giving effect to such Borrowing or such issuance and to the application of the proceeds therefrom, as though made on and as of such date, the Indebtedness of the Borrower does not exceed that permitted by (i) applicable resolutions of the Board of Directors of the Borrower or (ii) applicable Arizona laws, rules or regulations;
provided, however, that if the 1984 Order or the 1986 Order is superseded or modified by any Subsequent Order, the Borrower may, in consultation with the Lenders, revise the Notices of Borrowing or Notice of Issuance to the extent necessary to take into account any applicable limitations on the incurrence or maintenance of Indebtedness, so long as any revised Notice of Borrowing or Notice of Issuance (x) demonstrates that such Borrowing or issuance is authorized by the Subsequent Order and (y) is accompanied by a favorable opinion of Snell & Wilmer L.L.P. or such other counsel to the Borrower as the Borrower may select and the Agent and the Required Lenders may approve, concerning such Subsequent Order, in form and substance satisfactory to the Lenders.
SECTION 3.03. Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lenders unless an officer of the Agent responsible for the transactions contemplated by this Agreement shall have received notice from such Lender prior to the date that the Borrower designates as the proposed Effective Date, specifying its objection thereto. The Agent shall promptly notify the Lenders and the Borrower of the occurrence of the Effective Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows:
(a) Each of the Borrower and each Material Subsidiary: (i) is a corporation or other entity duly organized and validly existing under the laws of the jurisdiction of its incorporation or organization; (ii) has all requisite corporate or if the Material Subsidiary is not a corporation, other comparable power necessary to own its assets and carry on its business as presently conducted; (iii) has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as presently conducted, unless the failure to have any such license, authorization, consent or approval would not have a Material Adverse Effect and except as disclosed to the Lenders in the SEC Reports or by means of a letter from the Borrower to the Lenders delivered prior to the execution and delivery of this Agreement; and (iv) is qualified to do business in all jurisdictions in which the nature of the business conducted by it makes such qualification necessary and where failure so to qualify would have a Material Adverse Effect.
(b) The execution, delivery and performance by the Borrower of this Agreement and the Notes to be delivered by it, and the consummation of the transactions contemplated hereby, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not
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(i) contravene the Borrower's articles of incorporation or by-laws, (ii) contravene any law or any contractual restriction binding on or affecting the Borrower or (iii) cause the creation or imposition of any Lien upon the assets of the Borrower or any Material Subsidiary.
(c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes to be delivered by it, except for the 1984 Order and the 1986 Order, both of which have been duly obtained and are in full force and effect (except to the extent that the 1986 Order modifies or supersedes the 1984 Order with respect to long-term debt).
(d) This Agreement has been, and each of the Notes to be delivered by it when delivered hereunder will have been, duly executed and delivered by the Borrower. This Agreement is, and each of the Notes when delivered hereunder will be, the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms, subject, however, to the application by a court of general principles of equity and to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally.
(e) (i) The Consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at December 31, 2003, and the related Consolidated statements of income and cash flows of the Borrower and its Consolidated Subsidiaries for the fiscal year then ended, accompanied by an opinion thereon of Deloitte & Touche LLP, independent public accountants, and the Consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at March 31, 2004, and the related Consolidated statements of income and cash flows of the Borrower and its Consolidated Subsidiaries for the three months then ended, duly certified by the chief financial officer of the Borrower, copies of which have been furnished to each Lender, fairly present in all material respects, subject, in the case of said balance sheet at March 31, 2004, and said statements of income and cash flows for the three months then ended, to year-end audit adjustments, the Consolidated financial condition of the Borrower and its Consolidated Subsidiaries as at such dates and the Consolidated results of the operations of the Borrower and its Consolidated Subsidiaries for the periods ended on such dates, all in accordance with GAAP (except as disclosed therein). (ii) Except as disclosed in the SEC Reports or by means of a letter delivered to the Lenders prior to the execution and delivery of this Agreement, since December 31, 2003, there has been no Material Adverse Change.
(f) There is no pending or, to the knowledge of an Authorized Officer of the Borrower, threatened action, suit, investigation, litigation or proceeding, including, without limitation, any Environmental Action, affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that (i) purports to affect the legality, validity or enforceability of this Agreement or any Note or the consummation of the transactions contemplated hereby or (ii) would be reasonably likely to have a Material Adverse Effect (except as disclosed to the Lenders in the SEC Reports or by means of a letter from the Borrower to the Lenders delivered prior to the execution and delivery of this Agreement) and there has been no adverse change in the status, or financial effect on the Borrower or any of its Subsidiaries, of such disclosed litigation that would be reasonably likely to have a Material Adverse Effect.
(g) No proceeds of any Advance will be used to acquire any equity security not issued by the Borrower of a class that is registered pursuant to Section 12 of the Securities Exchange Act of 1934.
(h) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock.
(i) The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except to the extent that (i) such taxes are being contested in good faith and by appropriate proceedings and
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that appropriate reserves for the payment thereof have been maintained by the Borrower and its Subsidiaries in accordance with GAAP or (ii) the failure to make such filings or such payments is not likely to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Borrower and its Material Subsidiaries as set forth in the most recent financial statements of the Borrower delivered to the Lenders pursuant to
Section 4.01(e) or Section 5.01(h)(i) or (ii) hereof in respect of taxes and other governmental charges are, in the opinion of the Borrower, adequate.
(j) The operations and properties of the Borrower and its Subsidiaries comply in all material respects with all Environmental Laws, the noncompliance with which would have a Material Adverse Effect, except as set forth in the SEC Reports or by means of a letter from the Borrower to the Lenders delivered prior to the execution and delivery of this Agreement.
(k) Set forth on Schedule 4.01(k) hereto (as such schedule may be modified from time to time by the Borrower by written notice to the Agent) is a complete and accurate list of all the Subsidiaries of the Borrower and, as of the Effective Date, no such Subsidiary of the Borrower is a Material Subsidiary.
(l) Set forth on Schedule 4.01(l) hereto is a complete and accurate list identifying any Indebtedness of the Borrower outstanding in a principal amount equal to or exceeding $5,000,000 and which is not described in the financial statements referred to in Section 4.01(e).
(m) The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will:
(a) Compliance with Laws, Etc. (i) Comply, and cause each of its Material Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders of governmental or regulatory authorities, such compliance to include, without limitation, compliance with ERISA and Environmental Laws, unless the failure to so comply would not have a Material Adverse Effect and (ii) comply at all times with the 1984 Order, the 1986 Order, any Subsequent Order, Arizona Revised Statutes, Section 40-302 and all similar or comparable Arizona laws, rules or regulations relating to the incurrence or maintenance of Indebtedness by the Borrower, unless the failure to so comply could not affect the validity or enforceability of the indebtedness of the Borrower pursuant to this Agreement.
(b) Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, all taxes, assessments and governmental charges or levies imposed upon it or upon its property; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or levy (i) that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained in accordance with GAAP or (ii) if the failure to pay such tax, assessment, charge or levy is not likely to have a Material Adverse Effect.
(c) Maintenance of Insurance. Maintain, and cause each of its Material Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates; provided, however, that the Borrower and its Subsidiaries may self-insure to the same extent as other companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates and to the extent consistent with prudent business practice.
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(d) Preservation of Corporate Existence, Etc. Preserve and maintain, and cause each of its Material Subsidiaries to preserve and maintain, its corporate existence, rights (charter and statutory) and franchises (other than "franchises" as described in Arizona Revised Statutes, Section 40-283 or any successor provision) reasonably necessary in the normal conduct of its business, unless the failure to maintain such rights or privileges would not have a Material Adverse Effect, and use its commercially reasonable efforts to preserve and maintain such franchises reasonably necessary in the normal conduct of its business, except that (i) the Borrower from time to time may make minor extensions of its lines, plants, services or systems prior to the time a related franchise, certificate of convenience and necessity, license or permit is procured, (ii) from time to time communities served by the Borrower may become incorporated and considerable time may elapse before such a franchise is procured, (iii) certain such franchises may have expired prior to the renegotiation thereof, (iv) certain minor defects and exceptions may exist which, individually and in the aggregate, are not material and (v) certain franchises, certificates, licenses and permits may not be specific as to their geographical scope; provided, however, that the Borrower and its Subsidiaries may consummate any merger or consolidation permitted under
Section 5.02(b).
(e) Visitation Rights. At any reasonable time and from time to time, permit and cause each of its Subsidiaries to permit the Agent or any of the Lenders or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their officers or directors; provided, however, that the Borrower and its Subsidiaries reserve the right to restrict access to any of its properties in accordance with reasonably adopted procedures relating to safety and security; and provided further that the costs and expenses incurred by such Lender or agents or representatives in connection with any such examinations, copies, abstracts, visits or discussions shall be, upon the occurrence and during the continuation of a Default, for the account of the Borrower and, in all other circumstances, for the account of such Lender.
(f) Keeping of Books. Keep, and cause each of its Material Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and each such Subsidiary in accordance with GAAP.
(g) Maintenance of Properties, Etc. Keep, and cause each Material Subsidiary to keep, all property useful and necessary in its business in good working order and condition (ordinary wear and tear excepted), it being understood that this covenant relates only to the working order and condition of such properties and shall not be construed as a covenant not to dispose of properties.
(h) Reporting Requirements. Furnish to the Lenders:
(i) as soon as available and in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, (A) for each such fiscal quarter of the Borrower, statements of income and cash flows of the Borrower and its Consolidated Subsidiaries for such fiscal quarter setting forth in each case in comparative form the corresponding figures for the corresponding fiscal quarter in the preceding fiscal year and (B) for the period commencing at the end of the previous fiscal year and ending with the end of each fiscal quarter, statements of income and cash flows of the Borrower and its Consolidated Subsidiaries for such period setting forth in each case in comparative form the corresponding figures for the corresponding period in the preceding fiscal year; provided that so long as the Borrower remains subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Borrower may provide, in satisfaction of the requirements of this first sentence of this Section 5.01(h)(i), its report on Form 10-Q for such fiscal quarter. Each set of financial statements provided under this Section 5.01(h)(i) shall be accompanied by a certificate of an Authorized Officer, which certificate shall state that said financial statements fairly present in all material respects the financial condition and results of operations of the Borrower and its Consolidated Subsidiaries in accordance with GAAP (except as disclosed therein) as at the end of, and for, such period (subject to normal year-end audit adjustments) and shall set forth reasonably detailed calculations demonstrating compliance with Section 5.03;
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(ii) as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, statements of income and cash flows of the Borrower and its Consolidated Subsidiaries for such year and the related balance sheet of the Borrower and its Consolidated Subsidiaries as at the end of such year, setting forth in each case in comparative form the corresponding figures for the preceding fiscal year; provided that, so long as the Borrower remains subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Borrower may provide, in satisfaction of the requirements of this first sentence of this Section 5.01(h)(ii), its report on Form 10-K for such fiscal year. Each set of financial statements provided pursuant to this Section 5.01(h)(ii) shall be accompanied by (A) an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that said financial statements fairly present in all material respects the financial condition and results of operations of the Borrower and its Consolidated Subsidiaries as at the end of, and for, such fiscal year, in accordance with GAAP (except as disclosed therein) and (B) a certificate of an Authorized Officer, which certificate shall set forth reasonably detailed calculations demonstrating compliance with
Section 5.03;
(iii) as soon as possible and in any event within five days after any officer of the Borrower knows of the occurrence of each Default continuing on the date of such statement, a statement of an Authorized Officer of the Borrower setting forth details of such Default and the action that the Borrower has taken and proposes to take with respect thereto;
(iv) promptly after the sending or filing thereof, copies of all reports and registration statements that the Borrower or any Subsidiary files with the Securities and Exchange Commission;
(v) promptly after an Authorized Officer becomes aware of the commencement thereof, notice of all actions and proceedings before any court, governmental agency or arbitrator affecting the Borrower or any of its Subsidiaries of the type described in Section 4.01(f);
(vi) promptly after (A) any amendment or modification of the 1984 Order or the 1986 Order, (B) any amendment or modification of Arizona Revised Statutes, Section 40-302, or the promulgation, amendment or modification of any successor or similar statute, or (C) the promulgation, amendment or modification of any Subsequent Order by the Arizona Corporation Commission or any successor thereto, in any case if such amendment, modification or promulgation could affect the validity or enforceability of the indebtedness of the Borrower pursuant to this Agreement, a copy thereof; and
(vii) such other information respecting the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request.
(i) Change in Nature of Business. Conduct the same general type of business conducted on the date hereof.
SECTION 5.02. Negative Covenants. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will not:
(a) Liens, Etc. Create or suffer to exist, or permit any of its Material Subsidiaries to create or suffer to exist, any Lien on or with respect to any of its properties, whether now owned or hereafter acquired, or assign, or permit any of its Material Subsidiaries to assign, any right to receive income, other than:
(i) Permitted Liens,
(ii) Liens upon or in, or conditional sales agreements or other title retention agreements with respect to, any real or personal property acquired or held by the Borrower or any
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Subsidiary in the ordinary course of business to secure the purchase price of such property, or the construction of or improvements to such property, or to secure Indebtedness incurred solely for the purpose of financing the acquisition, construction or improvement of such property to be subject to such Liens (including any Liens placed on such property within 180 days after the latest of the acquisition, completion of construction or improvement of such property), or Liens existing on such property at the time of its acquisition (other than any such Liens created in contemplation of such acquisition that were not incurred to finance the acquisition of such property) or extensions, renewals, refundings or replacements of any of the foregoing for the same or a lesser amount, provided, however, that no such Lien shall extend to or cover any properties of any character other than the property being acquired, constructed or improved and proceeds, improvements and replacements thereof and no such extension, renewal, refunding or replacement shall extend to or cover any properties not theretofore subject to the Lien being extended, renewed, refunded or replaced,
(iii) assignments of the right to receive income, and Liens on property, of a Person existing at the time such Person is merged into or consolidated with the Borrower or any Subsidiary of the Borrower or becomes a Subsidiary of the Borrower,
(iv) Liens on the leased interests in Unit 2 of the Palo Verde Nuclear Generating Station and related rights if the Borrower reacquires ownership in any of those interests or acquires any of the equity or owner participants' interests in the trusts that hold title to such leased interests, whether or not it also directly assumes the Sale Leaseback Obligation Bonds, and Liens on the Borrower's interests in the trusts that hold title to such leased interests and related rights in the event that the Borrower acquires any of the equity or owner participants' interests in such trusts pursuant to a "special transfer" under the Borrower's existing Palo Verde Nuclear Generating Station Unit 2 sale and leaseback transactions and any Liens resulting or deemed to have resulted if the Unit 2 leases are required to be accounted for as capital leases in accordance with GAAP,
(v) other assignments of the right to receive income and Liens securing Indebtedness or claims in an aggregate principal amount not to exceed 20% of the Borrower's total assets as stated on its balance sheet for the year ended December 31, 2003 provided pursuant to
Section 4.01(e) hereof at any time outstanding, and
(vi) the replacement, extension or renewal of any Lien permitted by clause (iii) or (iv) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the Indebtedness secured thereby.
(b) Mergers, Etc. Merge or consolidate with or into any Person, or permit any of its Material Subsidiaries to do so, except that (i) any Material Subsidiary of the Borrower may merge or consolidate with or into any other Material Subsidiary of the Borrower, (ii) any Subsidiary of the Borrower may merge into the Borrower or any Material Subsidiary of the Borrower and (iii) the Borrower or any Material Subsidiary may merge with any other Person so long as the Borrower or such Material Subsidiary is the surviving corporation, provided, in each case, that no Default shall have occurred and be continuing at the time of such proposed transaction or would result therefrom.
(c) Sales, Etc. of Assets. Sell, lease, transfer or otherwise dispose of, or permit any of its Material Subsidiaries to sell, lease, transfer or otherwise dispose of, any assets, or grant any option or other right to purchase, lease or otherwise acquire any assets to any Person other than the Borrower or any Subsidiary of the Borrower, except (i) sales of inventory in the ordinary course of its business, (ii) in a transaction authorized by subsection (b) of this Section, (iii) individual dispositions occurring in the ordinary course of business which involve assets with a book value not exceeding $5,000,000 and (iv) sales of assets during the term of this Agreement having an aggregate book value not to exceed 20% of the total of all assets properly appearing on the December 31, 2003 balance sheet referred to in Section 4.01(e). No Lien on any asset will be considered a sale, lease, transfer or disposition under this provision, but will be governed exclusively under Section 5.02(a).
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SECTION 5.03. Financial Covenants. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will:
(a) Debt to Capitalization Ratio. Maintain a ratio of (i) Consolidated Indebtedness to (ii) the sum of Consolidated Indebtedness plus Consolidated Net Worth of not greater than 0.65 to 1.
(b) Consolidated Cash Coverage Ratio. Maintain for each twelve-month period ending on the last day of each fiscal quarter (determined as of the last day of such quarter) a Consolidated Cash Coverage Ratio of not less than 2.00 to 1.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any Advance when the same becomes due and payable; or the Borrower shall fail to pay any interest on any Advance or make any other payment of fees or other amounts payable under this Agreement or any Note within three Business Days after the same becomes due and payable; or
(b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in any certificate or other document delivered in connection with this Agreement shall prove to have been incorrect in any material respect when made or deemed made; or
(c) (i) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(d) (as to the corporate existence of the Borrower), (h)(iii) or (h)(vi), 5.02 or 5.03, or (ii) the Borrower shall fail to perform or observe any other term, covenant or agreement contained in Section 5.01(e) if such failure shall remain unremedied for 15 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender or (iii) the Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender; or
(d) (i) The Borrower or any of its Material Subsidiaries shall fail to pay any principal of or premium or interest on any Indebtedness that is outstanding in a principal or notional amount of at least $5,000,000 in the aggregate (but excluding Indebtedness outstanding hereunder), or fail to pay an amount, or post collateral as contractually required in an amount, of at least $5,000,000 in respect of any Hedge Agreement, of the Borrower or such Material Subsidiary (as the case may be), in each case, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness or Hedge Agreement;
(ii) any event of default shall exist under any agreement or instrument relating to any such Indebtedness and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or
(e) The Borrower shall fail to pay any principal of or premium or interest in respect of any operating lease in respect of which the payment obligations of the Borrower have a present value of at least $25,000,000, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in such operating lease, if the effect of such failure is to terminate, or to permit the termination of, such operating lease; or
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(f) The Borrower or any of its Material Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Material Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 30 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Borrower or any of its Material Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or
(g) Unsatisfied judgments or orders for the payment of money in excess of $5,000,000 in the aggregate shall be rendered against the Borrower or unsatisfied judgments or orders for the payment of money in excess of $25,000,000 in the aggregate shall be rendered against any of the Borrower's Material Subsidiaries and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; provided, however, that any such judgment or order shall not be an Event of Default under this Section 6.01(g) if and for so long as and to the extent that (i) the amount of such judgment or order is covered by a policy of insurance between the defendant and the insurer covering payment thereof and (ii) such insurer, which shall be rated at least "A" by A.M. Best Company, has been notified of, and has not disputed the claim made for payment of, the amount of such judgment or order; or
(h) (i) Any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Stock of PWCC (or other securities convertible into such Voting Stock) representing 30% or more of the combined voting power of all Voting Stock of PWCC; or (ii) during any period of up to 24 consecutive months, commencing after the date of this Agreement, individuals who at the beginning of such 24-month period were directors of PWCC shall cease for any reason (other than due to death or disability) to constitute a majority of the board of directors of PWCC (except to the extent that individuals who at the beginning of such 24-month period were replaced by individuals (x) elected by a majority of the remaining members of the board of directors of PWCC or (y) nominated for election by a majority of the remaining members of the board of directors of the PWCC and thereafter elected as directors by the shareholders of PWCC); or (iii) PWCC shall cease for any reason to own, directly or indirectly 80% of the Voting Stock of the Borrower; or
(i) The Borrower or any of its ERISA Affiliates shall incur, or, with respect to clause (i) of this Section 6.01(i), shall be reasonably likely to incur liability in excess of $5,000,000 in the aggregate as a result of one or more of the following: (i) the occurrence of any ERISA Event; (ii) the partial or complete withdrawal of the Borrower or any of its ERISA Affiliates from a Multiemployer Plan; or (iii) the reorganization or termination of a Multiemployer Plan; and, in any such case, such incurrence, in the determination of the Lenders, is material in relation to the financial condition or the financial prospects of the Borrower and its Subsidiaries, taken as a whole;
then, and in any such event, the Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the obligation of each Lender to make Advances (other than Advances by an Issuing Bank or a Lender pursuant to Section 2.03(c)) and of the Issuing Banks to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the Advances, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Advances, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances (other than Advances by an Issuing Bank or a Lender pursuant to
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Section 2.03(c)) and of the Issuing Banks to issue Letters of Credit shall automatically be terminated and (B) the Advances, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower.
SECTION 6.02. Actions in Respect of Letters of Credit upon Default. If any Event of Default shall have occurred and be continuing, the Agent may with 8the consent, or shall at the request, of the Required Lenders, irrespective of whether it is taking any of the actions described in Section 6.01 or otherwise, make demand upon the Borrower to, and forthwith upon such demand the Borrower will, (a) pay to the Agent for the benefit of the Lenders in same day funds at the Agent's office designated in such demand, for deposit in the L/C Cash Deposit Account, an amount equal to the aggregate Available Amount of all Letters of Credit then outstanding, provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, the Borrower will pay to the Agent on behalf of the Lenders in same day funds , for deposit to the L/C Cash Deposit Account, an amount equal to the aggregate Available Amount of all Letters of Credit then outstanding, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower, or (b) make such other arrangements in respect of the outstanding Letters of Credit as shall be acceptable to the Required Lenders. If at any time the Agent determines that any funds held in the L/C Cash Deposit Account are subject to any right or interest of any Person other than the Agent and the Lenders or that the total amount of such funds is less than the aggregate Available Amount of all Letters of Credit, the Borrower will, forthwith upon demand by the Agent, pay to the Agent, as additional funds to be deposited and held in the L/C Cash Deposit Account, an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, then held in the L/C Cash Deposit Account that are free and clear of any such right and interest. Upon the drawing of any Letter of Credit, to the extent funds are on deposit in the L/C Cash Deposit Account, such funds shall be applied to reimburse the Issuing Banks to the extent permitted by applicable law, and if so applied, then such reimbursement shall be deemed a repayment of the corresponding Advance in respect of such Letter of Credit. After all such Letters of Credit shall have expired or been fully drawn upon and all other obligations of the Borrower hereunder and under the Notes shall have been paid in full, the balance, if any, in such L/C Cash Deposit Account shall be promptly returned to the Borrower.
ARTICLE VII
THE AGENT
SECTION 7.01. Authorization and Action. Each Lender (in its capacities as a Lender and Issuing Bank, as applicable) hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Agent shall not be required to take any action that exposes the Agent to personal liability or that is contrary to this Agreement or applicable law. The Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement.
SECTION 7.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (i) may treat the Lender that made any Advance as the holder of the Indebtedness resulting therefrom until the Agent receives and accepts an Assignment and Acceptance entered into by such Lender, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance, observance or satisfaction of any of the terms, covenants or conditions of this Agreement on the part of the
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Borrower or the existence at any time of any Default or to inspect the property (including the books and records) of the Borrower; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, this Agreement or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by facsimile) believed by it to be genuine and signed or sent by the proper party or parties.
SECTION 7.03. Citibank and Affiliates. With respect to its Commitments, the Advances made by it and any Note issued to it, Citibank shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Citibank in its individual capacity. Citibank and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, the Borrower, any of its Subsidiaries and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if Citibank were not the Agent and without any duty to account therefor to the Lenders. The Agent shall have no duty to disclose any information obtained or received by it or any of its Affiliates relating to the Borrower or any of its Subsidiaries to the extent such information was obtained or received in any capacity other than as Agent.
SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement.
SECTION 7.05. Indemnification. (a) Each Lender severally agrees to indemnify the Agent (to the extent not promptly reimbursed by the Borrower) from and against such Lender's Ratable Share of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement (collectively, the "Indemnified Costs"), provided that no Lender shall be liable for any portion of the Indemnified Costs resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its Ratable Share of any out-of-pocket expenses (including counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower. In the case of any investigation, litigation or proceeding giving rise to any Indemnified Costs, this Section 7.05 applies whether any such investigation, litigation or proceeding is brought by the Agent, any Lender or a third party.
(b) Each Lender severally agrees to indemnify the Issuing Banks (to the extent not promptly reimbursed by the Borrower) from and against such Lender's Ratable Share of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against any such Issuing Bank in any way relating to or arising out of this Agreement or any action taken or omitted by such Issuing Bank hereunder or in connection herewith; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Issuing Bank's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse any such Issuing Bank promptly upon demand for its Ratable Share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Borrower under Section 8.04, to the extent that such Issuing Bank is not promptly reimbursed for such costs and expenses by the Borrower.
(c) The failure of any Lender to reimburse the Agent or any Issuing Bank promptly upon demand for its Ratable Share of any amount required to be paid by the Lenders to the Agent as provided herein shall
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not relieve any other Lender of its obligation hereunder to reimburse the Agent or any Issuing Bank for its Ratable Share of such amount, but no Lender shall be responsible for the failure of any other Lender to reimburse the Agent or any Issuing Bank for such other Lender's Ratable Share of such amount. Without prejudice to the survival of any other agreement of any Lender hereunder, the agreement and obligations of each Lender contained in this Section 7.05 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes. Each of the Agent and each Issuing Bank agrees to return to the Lenders their respective Ratable Shares of any amounts paid under this Section 7.05 that are subsequently reimbursed by the Borrower.
SECTION 7.06. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent approved, so long as no Event of Default has occurred and is continuing, by the Borrower, which consent shall not be unreasonably withheld or delayed. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement.
SECTION 7.07. Other Agents. Each Lender hereby acknowledges that neither the documentation agent nor any other Lender designated as any "Agent" on the signature pages hereof has any liability hereunder other than in its capacity as a Lender.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (a) waive any of the conditions specified in Section 3.01, (b) increase the Commitments of the Lenders, (c) reduce the principal of, or interest on, the Advances or any fees or other amounts payable hereunder due to such Lenders, (d) postpone any date fixed for any payment of principal of, or interest on, the Advances or any fees payable hereunder due to such Lenders, (e) change the percentage of the Revolving Credit Commitments or of the aggregate unpaid principal amount of the Advances, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder or (f) amend this Section 8.01; and provided further that (x) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement or any Note and (y) no amendment, waiver or consent shall, unless in writing and signed by the Issuing Banks in addition to the Lenders required above to take such action, adversely affect the rights or obligations of the Issuing Banks in their capacities as such under this Agreement.
SECTION 8.02. Notices, Etc. (a) All notices and other communications provided for hereunder shall be either (x) in writing (including facsimile communication) and mailed, faxed or delivered or (y) as and to the extent set forth in Section 8.02(b) and in the proviso to this Section 8.02(a), if to the Borrower, at its address at P.O. Box 53999, Phoenix, Arizona 85072-3999, Attention: Treasurer; if to any Initial Lender, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assignment and Acceptance pursuant to which it became a Lender; and if to the Agent, at its address at Two Penns Way, New Castle, Delaware 19720, Attention: Bank Loan Syndications Department; or, as to the Borrower or the Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to
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the Borrower and the Agent, provided that materials required to be delivered pursuant to Section 5.01(h)(i), (ii) and (iv) shall be delivered to the Agent as specified in Section 8.02(b). All such notices and communications shall, when mailed, faxed or e-mailed, be effective when deposited in the mails, faxed or confirmed by e-mail, respectively, except that notices and communications to the Agent pursuant to Article II, III or VII shall not be effective until received by the Agent. Delivery by facsimile of an executed counterpart of any amendment or waiver of any provision of this Agreement or the Notes or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof.
(b) So long as Citibank or any of its Affiliates is the Agent, materials required to be delivered pursuant to Section 5.01(h)(i), (ii) and (iv) shall be delivered to the Agent in an electronic medium in a format acceptable to the Agent and the Lenders by e-mail at oploanswebadmin@citigroup.com. The Borrower agrees that the Agent may make such materials, as well as any other written information, documents, instruments and other material relating to the Borrower, any of its Subsidiaries or any other materials or matters relating to this Agreement, the Notes or any of the transactions contemplated hereby (collectively, the "Communications") available to the Lenders by posting such notices on Intralinks or a substantially similar electronic system (the "Platform"). The Borrower acknowledges that (i) the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution, (ii) the Platform is provided "as is" and "as available" and (iii) neither the Agent nor any of its Affiliates warrants the accuracy, adequacy or completeness of the Communications or the Platform and each expressly disclaims liability for errors or omissions in the Communications or the Platform. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by the Agent or any of its Affiliates in connection with the Platform.
(c) Each Lender agrees that notice to it (as provided in the next sentence) (a "Notice") specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Agreement; provided that if requested by any Lender the Agent shall deliver a copy of the Communications to such Lender by email, facsimile or mail. Each Lender agrees (i) to notify the Agent in writing of such Lender's e-mail address to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Agent has on record an effective e-mail address for such Lender) and (ii) that any Notice may be sent to such e-mail address.
SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
SECTION 8.04. Costs and Expenses. (a) The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the administration, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, the reasonable fees and expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses of the Agent and the Lenders, if any (including, without limitation, reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable fees and expenses of counsel for the Agent and each Lender in connection with the enforcement of rights under this
Section 8.04(a).
(b) The Borrower agrees to indemnify and hold harmless the Agent and each Lender and each of their Affiliates and their officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) (i) the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances or (ii) the actual or alleged presence of Hazardous Materials on any property of the Borrower or any of its
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Subsidiaries or any Environmental Action relating in any way to the Borrower or any of its Subsidiaries, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 8.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, its directors, equityholders or creditors or an Indemnified Party or any other Person, whether or not any Indemnified Party is otherwise a party thereto, unless such litigation or proceeding is brought by the Borrower and the Borrower prevails, and whether or not the transactions contemplated hereby are consummated. The Borrower also agrees not to assert any claim for special, indirect, consequential or punitive damages against the Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys and agents, on any theory of liability, arising out of or otherwise relating to the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances.
(c) If any payment of principal of, or Conversion of, any Eurodollar Rate Advance is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.08(d) or (e), 2.10 or 2.12, acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, or by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Advance upon an assignment of rights and obligations under this Agreement pursuant to Section 8.07 as a result of a demand by the Borrower pursuant to Section 8.07(a), the Borrower shall, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance.
(d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in Sections 2.11, 2.14 and 8.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes.
SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and the Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have.
SECTION 8.06. Binding Effect. This Agreement shall become effective (other than Section 2.01, which shall only become effective upon satisfaction of the conditions precedent set forth in Section 3.01) when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified by each Initial Lender that such Initial Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders.
SECTION 8.07. Assignments and Participations. (a) Each Lender may and, if demanded by the Borrower (following a demand by such Lender pursuant to
Section 2.11 or 2.14) upon at least five Business Days' notice to such Lender and the Agent, will assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Revolving Credit Commitment, its Unissued Letter of Credit Commitment, the Advances owing to it, its participations in Letters of Credit and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement, (ii) except in the case of an assignment to a Person
37
that, immediately prior to such assignment, was a Lender or an assignment of all of a Lender's rights and obligations under this Agreement, the amount of the Revolving Credit Commitment or Unissued Letter of Credit Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof unless the Borrower and the Agent otherwise agree, (iii) each such assignment shall be to an Eligible Assignee, (iv) each such assignment made as a result of a demand by the Borrower pursuant to this Section 8.07(a) shall be arranged by the Borrower after consultation with the Agent and shall be either an assignment of all of the rights and obligations of the assigning Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Lender under this Agreement, (v) no Lender shall be obligated to make any such assignment as a result of a demand by the Borrower pursuant to this
Section 8.07(a) unless and until such Lender shall have received one or more payments from either the Borrower or one or more Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Lender under this Agreement, and (vi) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note subject to such assignment and a processing and recordation fee of $3,500 payable by the parties to each such assignment, provided, however, that in the case of each assignment made as a result of a demand by the Borrower, such recordation fee shall be payable by the Borrower except that no such recordation fee shall be payable in the case of an assignment made at the request of the Borrower to an Eligible Assignee that is an existing Lender, and (vii) any Lender may, without the approval of the Borrower and the Agent, assign all or a portion of its rights to any Lender or to any of its or their Affiliates that is not a natural person. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Sections 2.11, 2.14 and 8.04 to the extent any claim thereunder relates to an event arising prior to such assignment) and be released from its obligations (other than its obligations under Section 7.05 to the extent any claim thereunder relates to an event arising prior such assignment) under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). For the avoidance of doubt, no assignment by an Issuing Bank pursuant to this Section 8.07(a) shall affect its rights and obligations in its capacity as an Issuing Bank with respect to any Letters of Credit issued by it and than outstanding.
(b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender.
38
(c) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower.
(d) The Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice.
(e) Each Lender may sell participations to one or more banks or other entities (other than the Borrower or any of its Affiliates) in or to all or a portion of its rights and/or obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and any Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Note, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, in each case to the extent subject to such participation.
(f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Borrower Information relating to the Borrower received by it from such Lender as provided in Section 8.08.
(g) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Bank") may grant to a special purpose funding vehicle (a "SPC"), identified as such in writing from time to time by the Granting Bank to the Agent and the Borrower, the option to provide to the Borrower all or any part of any Advance that such Granting Bank would otherwise be obligated to make to the Borrower pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Advance, (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Advance, the Granting Bank shall be obligated, as a principal and not as a surety, to make such Advance pursuant to the terms hereof and (iii) all voting rights under this Agreement, except with respect to the consent contemplated in the last sentence of this Section 8.07(g), shall be exercised by the Granting Bank, all payments hereunder shall continue to be made to the Granting Bank as agent for its SPC and the Granting Bank will continue to be the sole Lender for all purposes of this Agreement except as expressly provided in this Section
8.07(g). The making of an Advance by an SPC hereunder shall utilize the Commitment of the Granting Bank to the same extent, and as if, such Advance were made by such Granting Bank. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Bank). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 8.07, any SPC may (i) with notice to, but without the prior written consent of, the Borrower
39
and the Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Advances to the Granting Bank or to any financial institutions (consented to by the Borrower and Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Advances and (ii) disclose on a confidential basis any non-public information relating to its Advances to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC. Notwithstanding the foregoing, neither such grant made hereunder nor the holding of interest hereunder by any SPC shall increase any of the Borrower's obligations and/or liabilities (including without limitation tax liabilities and other indemnities) which the Borrower has but for such grant or holding of interest ("SPC Liabilities") and the Granting Bank shall hold the Borrower harmless and indemnify the Borrower from and against any and all SPC Liabilities. This Section may not be amended without the written consent of each SPC affected thereby.
(h) Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it and any Note or Notes held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System.
SECTION 8.08. Confidentiality. Neither the Agent nor any Lender may disclose to any Person any confidential, proprietary or non-public information of the Borrower furnished to the Agent or the Lenders by the Borrower (such information being referred to collectively herein as the "Borrower Information"), except that each of the Agent and each of the Lenders may disclose Borrower Information (i) to its and its affiliates' employees, officers, directors, agents and advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Borrower Information and instructed to keep such Borrower Information confidential on substantially the same terms as provided herein), (ii) to the extent requested by any regulatory authority, (iii) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (iv) to any other party to this Agreement, (v) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (vi) subject to an agreement containing provisions substantially the same as those of this Section 8.08, to any assignee or participant or prospective assignee or participant, (vii) to the extent such Borrower Information (A) is or becomes generally available to the public on a non-confidential basis other than as a result of a breach of this Section 8.08 by the Agent or such Lender, or (B) is or becomes available to the Agent or such Lender on a nonconfidential basis from a source other than the Borrower (provided that the source of such information was not known by the recipient after inquiry to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the Borrower or any other Person with respect to such information) and (viii) with the consent of the Borrower.
SECTION 8.09. Governing Law. This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York.
SECTION 8.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile shall be effective as delivery of a manually executed counterpart of this Agreement.
SECTION 8.11. Jurisdiction, Etc. (a) Each of the parties hereto hereby submits to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the Notes, or for recognition or enforcement of any judgment, and each of the parties hereto hereby agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction.
(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Notes in any New York State or federal
40
court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
SECTION 8.12. No Liability of the Issuing Banks The Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither an Issuing Bank nor any of its officers or directors shall be liable or responsible for: (a) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by such Issuing Bank against presentation of documents that do not comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit, except that the Borrower shall have a claim against such Issuing Bank, and such Issuing Bank shall be liable to the Borrower, to the extent of any direct, but not consequential, damages suffered by the Borrower that the Borrower proves were caused by (i) such Issuing Bank's willful misconduct or gross negligence as determined in a final, non-appealable judgment by a court of competent jurisdiction in determining whether documents presented under any Letter of Credit comply with the terms of such Letter of Credit or (ii) such Issuing Bank's willful failure to make lawful payment under a Letter of Credit after the presentation to it of a draft and certificates strictly complying with the terms and conditions of the Letter of Credit. In furtherance and not in limitation of the foregoing, such Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary.
SECTION 8.13. Patriot Act. Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies each borrower, guarantor or grantor (the "Loan Parties"), which information includes the name and address of each Loan Party and other information that will allow such Lender to identify such Loan Party in accordance with the Act.
41
SECTION 8.14. Waiver of Jury Trial. Each of the Borrower, the Agent and the Lenders hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the Notes or the actions of the Borrower, the Agent or any Lender in the negotiation, administration, performance or enforcement thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.
ARIZONA PUBLIC SERVICE COMPANY

By /s/ Barbara M. Gomez
   -------------------------------------
Title: Vice President and Treasurer	

CITIBANK, N.A.,
as Agent

                                        By /s/ Anita J. Brickell
                                           -------------------------------------
                                        Title: Vice President

Letter of Credit Commitment

$75,000,000                             KEYBANK NATIONAL ASSOCIATION

                                        By /s/ Keven D. Smith
                                           -------------------------------------
                                        Title: Vice President

$75,000,000                             CITIBANK, N.A.

                                        By /s/ Anita J. Brickell
                                           -------------------------------------
                                        Title: Vice President

Revolving Credit Commitment

                                        Joint Lead Arrangers

$37,500,000                             CITIBANK, N.A.

                                        By /s/ Anita J. Brickell
                                           -------------------------------------
                                        Title: Vice President

$37,500,000                             KEYBANK NATIONAL ASSOCIATION

                                        By /s/ Keven D. Smith
                                           -------------------------------------
                                        Title: Vice President

                                        Co-Documentation Agents

$30,000,000                             BANK OF AMERICA N.A.

                                        By /s/ Darryl Patterson
                                           -------------------------------------
                                        Title: Managing Director

$30,000,000                             THE BANK OF NEW YORK

                                        By /s/ Nathan S. Howard
                                           -------------------------------------
                                        Title: Vice President	

42

                                        Lenders

$20,000,000                             BANK ONE, NA

                                        By /s/ Jane Bek Keil
                                           -------------------------------------
                                        Title: Director

$20,000,000                             BARCLAYS BANK PLC

                                        By /s/ Sydney G. Dennis
                                           -------------------------------------
                                        Title: Director

$20,000,000                             CREDIT SUISSE FIRST BOSTON, acting
                                        through its Cayman Islands Branch

                                        By /s/ Phillip Ho
                                           -------------------------------------
                                        Title: Director

                                        By /s/ Denise L. Alvarez
                                           -------------------------------------
                                        Title: Associate

$20,000,000                             LEHMAN BROTHERS BANK, FSB.

                                        By /s/ Gary T. Taylor
                                           -------------------------------------
                                        Title:

$20,000,000                             MELLON BANK, N.A.

                                        By /s/ Mark W. Rogers
                                           -------------------------------------
                                        Title: Vice President

$20,000,000                             UBS LOAN FINANCE LLC

                                        By /s/ Doris Mesa
                                           -------------------------------------
                                        Title: Associate Director

                                        By /s/ Joselin Fernandes
                                           -------------------------------------
                                        Title: Associate Director

$20,000,000                             UNION BANK OF CALIFORNIA

                                        By /s/ Dennis Blank
                                           -------------------------------------
                                        Title: Vice President

$20,000,000                             WELLS FARGO BANK, N.A.

                                        By /s/ Ling Li
                                           -------------------------------------
                                        Title: Vice President

$15,000,000                             BANCA DI ROMA SPA

                                        By /s/ Thomas C. Woodruff
                                           -------------------------------------
                                        Title: Vice President

                                                  By /s/ Luca Balestra
                                                    ----------------------------
                                                    SVP & Manager	

43
$15,000,000 U.S. BANK NATIONAL ASSOCIATION

By      /s/ Scott J. Bell
   -------------------------------------
Title:  Vice President	

$325,000,000 Total of the Revolving Credit Commitments
44
 
SCHEDULE I
ARIZONA PUBLIC SERVICE COMPANY
THREE-YEAR CREDIT AGREEMENT
APPLICABLE LENDING OFFICES

   Name of Initial Lender       Domestic Lending Office    Eurodollar Lending Office
   ----------------------       -----------------------    -------------------------
Banca di Roma SpA

Bank of America, N.A.          901 Main Street             901 Main Street
                               TX1-492-14-05               TX1-492-14-05
                               Dallas, TX 75202            Dallas, TX 75202
                               Attn: Eldred Sholars        Attn: Eldred Sholars
                               T: 214 209-4111             T: 214 209-4111
                               F: 214 290-9422             F: 214 290-9422

The Bank of New York           One Wall Street             One Wall Street
                               New York, NY 10019          New York, NY 10019
                               Attn: Kathy D'Elena         Attn: Kathy D'Elena
                               T: 212 635-7550             T: 212 635-7550
                               F: 212 635--7923            F: 212 635--7923

Bank One, NA

Barclays Bank PLC              200 Park Avenue             200 Park Avenue
                               New York, NY 10163          New York, NY 10163
                               Attn:                       Attn:
                               T: 212 412-                 T: 212 412-
                               F: 212 412 5306             F: 212 412 5306

Citibank, N.A.                 Two Penns Way               Two Penns Way
                               New Castle, DE 19720        New Castle, DE 19720

Credit Suisse First Boston,    One Madison Avenue          One Madison Avenue
acting through its Cayman      New York, NY 10010          New York, NY 10010
Islands Branch                 Attn: Ed Markowski          Attn: Ed Markowski
                               T: 212 538-3380             T: 212 538-3380
                               F: 212 538-6851             F: 212 538-6851

KeyBank National Association   Attn: Vicky Heineck         Attn: Vicky Heineck
                               T: 425 709-4576             T: 425 709-4576
                               F: 425 709-4587             F: 425 709-4587

Lehman Brothers Bank, FSB      745 Seventh Avenue,         745 Seventh Avenue,
                               16th Floor                  16th Floor
                               New York, NY 10019          New York, NY 10019
                               Attn: Marie Cowell          Attn: Marie Cowell
                               T: 212 526-6560             T: 212 526-6560
                               F: 212 526-6653             F: 212 526-6653

Mellon Bank, N.A.              525 William Penn Place      525 William Penn Place
                               Room 153-103                Room 153-103
                               Pittsburgh, PA 15259        Pittsburgh, PA 15259
                               Attn: Barbara Gago          Attn: Barbara Gago
                               T: 412 234-4710             T: 412 234-4710
                               F: 412 209-6114             F: 412 209-6114

UBS Loan Finance LLC           677 Washington Boulevard    677 Washington Boulevard
                               Stamford, CT 06901          Stamford, CT 06901
                               Attn: Wilfred Saint         Attn: Wilfred Saint

Union Bank of California       445 S. Figueroa Street      445 S. Figueroa Street
                               Los Angeles, CA 90071       Los Angeles, CA 90071
                               Attn: Efrain Soto           Attn: Efrain Soto
                               T: 213 236-4222             T: 213 236-4222	

                               F: 213 236-4096             F: 213 236-4096

U.S. Bank National             555 S.W. Oak Street, PL-7   555 S.W. Oak Street, PL-7
Association                    Portland, OR  97204         Portland, OR  97204
                               Attn: Lennie Regalado       Attn: Lennie Regalado
                               T: 503 275-5960             T: 503 275-5960
                               F: 503 275-4600             F: 503 275-4600

Wells Fargo Bank, N.A.         707 Wilshire Blvd.,         707 Wilshire Blvd.,
                               16th Floor                  16th Floor
                               MAC E2818-163               MAC E2818-163
                               Los Angeles, CA 90017       Los Angeles, CA 90017
                               Attn: Vanessa Sheh Meyer    Attn: Vanessa Sheh Meyer
                               T: 213 614-3494             T: 213 614-3494
                               F: 213 614-5242             F: 213 614-5242	

2
SCHEDULE 4.01(k)
SUBSIDIARIES
APS Foundation, Inc.
Bixco, Inc.
Axiom Power Solutions, Inc.
PWENewco, Inc.
SCHEDULE 4.01(1)
INDEBTEDNESS
none
EXHIBIT A - FORM OF
PROMISSORY NOTE
U.S.$ _______________ Dated: __________, 200_
FOR VALUE RECEIVED, the undersigned, ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _________________________ (the "Lender") for the account of its Applicable Lending Office on the Termination Date (as defined in the Credit Agreement referred to below) the principal sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the Advances made by the Lender to the Borrower pursuant to the Three-Year Credit Agreement dated as of May 21, 2004 among the Borrower, the Lender and certain other lenders parties thereto, Citigroup Global Markets Inc. and KeyBank National Association, as joint lead arrangers, KeyBank National Association, as syndication agent, Bank of America, N.A. and The Bank of New York, as co-documentation agents, and Citibank, N.A. as Agent for the Lender and such other lenders (as amended or modified from time to time, the "Credit Agreement"; the terms defined therein being used herein as therein defined) outstanding on such date.
The Borrower promises to pay interest on the unpaid principal amount of each Advance from the date of such Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement.
Both principal and interest are payable in lawful money of the United States of America to Citibank, as Agent, at 388 Greenwich Street, New York, New York 10013, Account No. 36852248 in same day funds. Each Advance owing to the Lender by the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note.
This Promissory Note is one of the Notes referred to in, and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, (i) provides for the making of Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Advance being evidenced by this Promissory Note and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified.
ARIZONA PUBLIC SERVICE COMPANY
By

Title:
 
ADVANCES AND PAYMENTS OF PRINCIPAL

                      AMOUNT OF
       AMOUNT OF   PRINCIPAL PAID   UNPAID PRINCIPAL   NOTATION
DATE    ADVANCE      OR PREPAID          BALANCE        MADE BY
----   ---------   --------------   ----------------   --------

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

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

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

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

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

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

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

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

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

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

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

2
EXHIBIT B - FORM OF NOTICE OF
BORROWING
Citibank, N.A., as Agent
for the Lenders parties
to the Credit Agreement
referred to below
Two Penns Way
New Castle, Delaware 19720
[Date]
Attention: Bank Loan Syndications Department
Ladies and Gentlemen:
The undersigned, Arizona Public Service Company, refers to the Three-Year Credit Agreement, dated as of May 21, 2004 (as amended or modified from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto, Citigroup Global Markets Inc. and KeyBank National Association, as joint lead arrangers, KeyBank National Association, as syndication agent, Bank of America, N.A. and The Bank of New York, as co-documentation agents, and Citibank, N.A., as Agent for said Lenders, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 2.02(a) of the Credit Agreement:
(i) The Business Day of the Proposed Borrowing is __________, 200_.
(ii) The Type of Advances comprising the Proposed Borrowing is [Base Rate Advances] [Eurodollar Rate Advances].
(iii) The aggregate amount of the Proposed Borrowing is $_______________.
[(iv) The initial Interest Period for each Eurodollar Rate Advance made as part of the Proposed Borrowing is _____ month[s].]
The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing:
(A) the representations and warranties contained in Section 4.01 (other than Section 4.01(l) and, in the case of a Borrowing the proceeds of which are used to refund commercial paper, Sections 4.01(e)(ii), (f)(ii) and (j)) of the Credit Agreement are correct, before and after giving effect to the Proposed Borrowing and to the application of the proceeds therefrom, as though made on and as of such date;
(B) no event has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds therefrom, that constitutes a Default;
(C) after giving effect to the Proposed Borrowing, to the extent that the Proposed Borrowing is required to be treated as short-term debt pursuant to the 1984 Order, the aggregate amount of Authorized Short Term Debt (as such term is defined in the 1984 Order) including the aggregate principal amount of all outstanding Advances that are required to be treated by the Borrower as short-term debt pursuant to the 1984 Order does not exceed 7% of the Borrower's total capitalization,
(D) to the extent that the Proposed Borrowing is required to be treated as long-term debt pursuant to the 1986 Order, the aggregate amount of Continuing Debt (as such term is defined in the 1986 Order) including the aggregate principal amount of all outstanding Advances that are required to be treated by the Borrower as long-term debt pursuant to the 1986 Order has not exceeded, during any period of more
than 30 days immediately prior to and including the date of the Borrowing, and will not exceed, during any period of more than 30 days at any time such Borrowing is outstanding, $2,698,917,000, and
(E) after giving effect to the Proposed Borrowing, the Indebtedness of the Borrower does not exceed that permitted by (A) applicable resolutions of the Board of Directors of the Borrower or (B) applicable Arizona laws, rules or regulations.
Very truly yours,
ARIZONA PUBLIC SERVICE COMPANY
By

Title:.

2
EXHIBIT C - FORM OF
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Three-Year Credit Agreement dated as of May 21, 2004 (as amended or modified from time to time, the "Credit Agreement") among Arizona Public Service Company, an Arizona corporation (the "Borrower"), the Lenders (as defined in the Credit Agreement), Citigroup Global Markets Inc. and KeyBank National Association, as joint lead arrangers, KeyBank National Association, as syndication agent, Bank of America, N.A. and The Bank of New York, as co-documentation agents, and Citibank, N.A., as agent for the Lenders (the "Agent"). Terms defined in the Credit Agreement are used herein with the same meaning.
The "Assignor" and the "Assignee" referred to on Schedule I hereto agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under [the Credit Agreement as of the date hereof] [the Credit Agreement as it relates to the the Letter of Credit Facility] equal to the percentage interest specified on Schedule 1 hereto of
[all outstanding rights and obligations under the Credit Agreement together with participations in Letters of Credit held by the Assignor on the date hereof]
[such Assignor's Unissued Letter of Credit Commitment]. After giving effect to such sale and assignment, the Assignee's [Revolving Credit Commitment and the amount of the Advances owing to the Assignee] [Letter of Credit Commitment] will be as set forth on Schedule 1 hereto.
2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Note[, if any] held by the Assignor [and requests that the Agent exchange such Note for a new Note payable to the order of [the Assignee in an amount equal to the Revolving Credit Commitment assumed by the Assignee pursuant hereto or new Notes payable to the order of the Assignee in an amount equal to the Revolving Credit Commitment assumed by the Assignee pursuant hereto and] the Assignor in an amount equal to the Revolving Credit Commitment retained by the Assignor under the Credit Agreement, [respectively,] as specified on Schedule 1 hereto.
3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in
Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; and (vi) attaches any U.S. Internal Revenue Service forms required under Section 2.14 of the Credit Agreement.
4. Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for acceptance and recording by the Agent. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by the Agent, unless otherwise specified on Schedule 1 hereto.
5. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement.
6. Upon such acceptance and recording by the Agent, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest, fees and Letter of Credit commissions with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York.
8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by facsimile shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance.
IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule 1 to this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon.
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Schedule 1 to Assignment and Acceptance

Percentage interest assigned:                         _____%

[Assignee's Revolving Credit Commitment:        $__________]

Aggregate outstanding principal amount of
   Advances assigned:                           $__________

Principal amount of Note payable to Assignee:   $__________

Principal amount of Note payable to Assignor:   $__________

[Assignee's Letter of Credit Commitment:        $__________]	

Effective Date*: __________, 200_
[NAME OF ASSIGNOR], as Assignor
By
 Title:
Dated: __________, 200_
[NAME OF ASSIGNEE], as Assignee
By
 Title:
Dated: __________, 200_
Domestic Lending Office:

[Address]
Eurodollar Lending Office:
[Address]

* This date should be no earlier than five Business Days after the delivery of this Assignment and Acceptance to the Agent.

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Accepted [and Approved]** this
____ day of __________, 200_
CITIBANK, N.A., as Agent
By
 Title:
[Approved this _____ day
of __________, 200_
ARIZONA PUBLIC SERVICE COMPANY

By                                   ]*
   ----------------------------------
Title:

----------	

** Required if the Assignee is an Eligible Assignee solely by reason of clause
(iii) of the definition of "Eligible Assignee".
* Required if the Assignee is an Eligible Assignee solely by reason of clause
(iii) of the definition of "Eligible Assignee".
4
EXECUTION COPY
U.S. $325,000,000
THREE-YEAR CREDIT AGREEMENT
Dated as of May 21, 2004
Among
ARIZONA PUBLIC SERVICE COMPANY
as Borrower
THE INITIAL LENDERS NAMED HEREIN
as Initial Lenders
CITIBANK, N.A.
as Administrative Agent and Issuing Bank
KEYBANK NATIONAL ASSOCIATION
as Syndication Agent and Issuing Bank
BANK OF AMERICA, N.A. and THE BANK OF NEW YORK
as Co-Documentation Agents
and
CITIGROUP GLOBAL MARKETS INC. and KEYBANK NATIONAL ASSOCIATION
as Joint Lead Arrangers
 
TABLE OF CONTENTS

ARTICLE I
   SECTION 1.01. Certain Defined Terms                                         1
   SECTION 1.02. Computation of Time Periods                                  12
   SECTION 1.03. Accounting Terms                                             12

ARTICLE II
   SECTION 2.01. The Advances and Letters of Credit                           13
   SECTION 2.02. Making the Advances                                          13
   SECTION 2.03. Issuance of and Drawings and Reimbursement
                    Under Letters of Credit                                   14
   SECTION 2.04. Fees                                                         15
   SECTION 2.05. Optional Termination or Reduction of the Commitments         16
   SECTION 2.06. Repayment of Advances and Letter of Credit Drawings          16
   SECTION 2.07. Interest on Advances                                         17
   SECTION 2.08. Interest Rate Determination                                  17
   SECTION 2.09. Optional Conversion of Advances                              18
   SECTION 2.10. Prepayments of Advances                                      18
   SECTION 2.11. Increased Costs                                              19
   SECTION 2.12. Illegality                                                   20
   SECTION 2.13. Payments and Computations                                    20
   SECTION 2.14. Taxes                                                        21
   SECTION 2.15. Sharing of Payments, Etc.                                    22
   SECTION 2.16. Evidence of Debt                                             23
   SECTION 2.17. Use of Proceeds                                              23

ARTICLE III
   SECTION 3.01. Conditions Precedent to Effectiveness of Section 2.01        23	

To each of the Lenders party
to the Credit Agreement
May 21, 2004
Page 2

   SECTION 3.02. Conditions Precedent to Each Borrowing and Issuance.         24
   SECTION 3.03. Determinations Under Section 3.01                            25

ARTICLE IV
   SECTION 4.01. Representations and Warranties of the Borrower               25

ARTICLE V
   SECTION 5.01. Affirmative Covenants                                        27
   SECTION 5.02. Negative Covenants                                           29
   SECTION 5.03. Financial Covenants                                          31

ARTICLE VI
   SECTION 6.01. Events of Default                                            31
   SECTION 6.02. Actions in Respect of Letters of Credit upon Default         33

ARTICLE VII
   SECTION 7.01. Authorization and Action                                     33
   SECTION 7.02. Agent's Reliance, Etc.                                       33
   SECTION 7.03. Citibank and Affiliates                                      34
   SECTION 7.04. Lender Credit Decision                                       34
   SECTION 7.05. Indemnification                                              34
   SECTION 7.06. Successor Agent                                              35
   SECTION 7.07. Other Agents.                                                35

ARTICLE VIII
   SECTION 8.01. Amendments, Etc.                                             35	

To each of the Lenders party
to the Credit Agreement
May 21, 2004
Page 3

SECTION 8.02. Notices, Etc.                                                35
SECTION 8.03. No Waiver; Remedies                                          36
SECTION 8.04. Costs and Expenses                                           36
SECTION 8.05. Right of Set-off                                             37
SECTION 8.06. Binding Effect                                               37
SECTION 8.07. Assignments and Participations                               37
SECTION 8.08. Confidentiality                                              40
SECTION 8.09. Governing Law                                                40
SECTION 8.10. Execution in Counterparts                                    40
SECTION 8.11. Jurisdiction, Etc.                                           40
SECTION 8.12. No Liability of the Issuing Banks                            41
SECTION 8.13. Waiver of Jury Trial                                         42	

To each of the Lenders party
to the Credit Agreement
May 21, 2004
Page 4
Schedules
Schedule I - List of Applicable Lending Offices Schedule 2.01(b) - Existing Letters of Credit Schedule 4.01(k) - Subsidiaries
Schedule 4.01(1) - Existing Indebtedness
Exhibits
Exhibit A - Form of Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Assignment and Acceptance
Exhibit D - Form of Opinion of Counsel for the Borrower
 
EXHIBIT 10.102
AGREEMENT
BETWEEN
PINNACLE WEST ENERGY CORPORATION
AND
ARIZONA PUBLIC SERVICE COMPANY
FOR
TRANSPORTATION AND TREATMENT OF EFFLUENT
This Agreement is made and entered into by and between Pinnacle West Energy Corporation, an Arizona corporation, acting on its own behalf and on behalf of potential future owners of Redhawk (hereinafter defined), and Arizona Public Service Company, an Arizona corporation, acting solely as the Operating Agent on behalf of the Participants of Palo Verde Nuclear Generating Station ("PVNGS" or "Palo Verde").
RECITALS
A. PWE plans to construct a natural gas-fired combined cycle electrical generating facility ("Redhawk") on land located west of the City of Phoenix, near PVNGS. PWE's current plans call for Redhawk to be a (nominal) 2120 MW power generation facility, with four (nominal) 530 MW units to be phased in over several years.
B. Participants purchase Effluent for use at PVNGS and transport such Effluent through the WRF Pipeline. Participants further treat the Effluent at the WRF for use at PVNGS. There is excess capacity available from time to time in the WRF Pipeline for transporting Effluent and in the WRF for treating such Effluent for use by PWE at Redhawk.
C. PWE desires to purchase and Participants desire to provide to PWE transportation and treatment services for a certain amount of PWE's Effluent to be used at Redhawk.
NOW, THEREFORE, for good and valuable consideration, the Parties hereby agree as follows:
ARTICLE 1. DEFINITIONS
1.1 DEFINITIONS. In addition to certain terms specifically defined in the body of this Agreement, the following capitalized terms shall have the following meanings whenever used in this Agreement:
"APS" means Arizona Public Service Company and its permitted successors and assigns. Except where APS is identified individually in this Agreement, APS and any permitted successor or assign is acting solely in its capacity as Operating Agent on behalf of the Participants. If Pinnacle West Energy Corporation becomes the permitted successor to the rights and obligations of APS as a Participant and Operating Agent, all references in this Agreement to APS in its capacity as Operating Agent shall thereafter refer to Pinnacle West Energy Corporation solely in its capacity as Operating Agent.
"Commercially Reasonable Efforts" means those efforts and resources that a skilled, competent, experienced, and prudent Person would use to perform and complete the requirements of the Agreement in a timely manner, exercising the degree of skill and competence customarily required of a Person performing similar work for wastewater treatment facilities in the United States with similar technical specifications and capabilities as the WRF and the WRF Pipeline.
"Delivery Point" means the geographic location at which the Redhawk Delivery System crosses the exterior boundary of the real property owned by the Participants at PVNGS.
"Effective Date" means that date set forth in Section 7.14 below.
"Effluent" means treated wastewater effluent purchased by the Participants, APS, SRP or PWE pursuant to agreement(s) with any municipality, corporation or other entity now or hereafter producing treated wastewater effluent and making such effluent available for purchase by the Participants, APS, SRP or PWE.
"Environment" means soil, surface water, groundwater, land, stream sediments, surface or subsurface strata, ambient air, and any environmental medium.
"Environmental Law" means any environmental or health and safety-related law, regulation, rule, ordinance, court decree, administrative order or decree, bylaw or published governmental agency guideline at the federal, state or local level, whether existing as of the date hereof, previously enforced or subsequently enacted.
"Force Majeure" is an event not anticipated by any Party and not within the reasonable control of the Party claiming suspension or delay of its performance due to the event. Force Majeure includes an act or omission of government, act or omission of civil or military authority, strike, lockout, act of a public enemy, war, blockade, insurrection, riot, act of God, epidemic, landslide, earthquake, fire, storm, lightning, flood, unscheduled plant outage or breakdown, or other casualty. Force Majeure shall also include: (i) significant changes in Effluent quality before it is introduced into the WRF resulting in a violation of the Operating Parameters; (ii) major equipment failures, including WRF Pipeline ruptures or major breakdowns of a pumping station, WRF effluent treatment equipment, the Redhawk Delivery System, or the Redhawk storage reservoir; and (iii) other equipment failures that result in loss of production, treatment, or storage capability below that required to maintain the minimum reservoir level at Palo Verde specified in Section 2.1.5.
"Hazardous Material or Substance" means any petroleum, oil, gasoline, other petroleum derivative products, flammable substances, explosives, radioactive materials, dioxins, radon gas, urea formaldehyde foam insulation and any asbestos containing materials; any waste, substance, material, liquid, chemical substance or mixture, element, compound, or solution included (a) in the definition of "hazardous substance," "hazardous waste," "hazardous materials," "extremely hazardous wastes," "extremely hazardous substances," "restricted hazardous wastes," "toxic substances," "regulated
2
substances," "pollutant" or "contaminant" in any Environmental Law now in effect or hereinafter placed into effect, (b) with respect to which any remedial, removal or reclamation obligations may be imposed under any Environmental Law or
(c) exposure to which may pose a health or safety hazard.
"Non-Interested Participants" means all Participants (as defined below) except those Participants who hold any ownership interest in Redhawk, either directly or through a subsidiary or affiliated organization.
"Operating Agent" means the Participant responsible for the performance of operating work and making capital improvements at PVNGS under the Participation Agreement.
"Operating Parameters" means the specifications for Treated Effluent water quality set forth in the WRF Processing Operating Parameters, WRLA-8ZZ08 revision in effect when the Agreement is signed or as amended from time to time after notice to PWE pursuant to Section 2.1.7.
"Participants" means APS and the other entities having an ownership or leasehold interest in PVNGS and related facilities as Parties to the Participation Agreement, including El Paso Electric Company, Los Angeles Department of Water and Power, Public Service Company of New Mexico, Salt River Project Agricultural Improvement and Power District ("SRP"), Southern California Edison Company, Southern California Public Power Authority, and each additional entity that may succeed to any such interest in PVNGS and related facilities.
"Participation Agreement" means the Arizona Nuclear Power Project Participation Agreement, dated as of August 23, 1973, as amended now and in the future.
"Party" means either PWE, acting solely as an owner, and if there is more than one owner, as agent on behalf of all owners of Redhawk, or APS, acting solely in its capacity as Operating Agent on behalf of the Participants. "Parties" means PWE, acting solely as an owner, and if there is more than one owner, as agent on behalf of all owners of Redhawk, and APS, acting solely in its capacity as Operating Agent on behalf of the Participants.
"Per Unit Charge" means the cost per acre-foot for the transportation and treatment of Effluent, calculated in accordance with Section 2.3.1 of this Agreement.
"Permanent Cessation of Operation(s)" means, in the case of PVNGS, as currently defined in 10 CFR Section 50.2, "for a nuclear power reactor facility, a certification by a licensee to the NRC that it has permanently ceased or will permanently cease reactor operation(s), or a final legally effective order to permanently cease operation(s) has come into effect" or as may be later defined in 10 CFR Section 50.2 or its successor; this defined term does not refer to the operational status of the WRF or the WRF Pipeline. In the case of any electric generating unit at Redhawk, "Permanent Cessation of Operations" means: (i) initiation of physical decommissioning activities for that unit; (ii) written notice from PWE to Operating Agent confirming PWE's intention to permanently cease operation of
3
that unit; or (iii) failure to maintain for that unit all regulatory certifications and permits required for its operation and to keep such unit in such condition that it is capable of being restored to active power production in not more than a 270 day period (except in any circumstance that qualifies as a Force Majeure under Section 4.1).
"Person" means any individual, corporation, partnership, joint venture, limited liability company, firm, association, trust or other entity or organization.
"PWE" means Pinnacle West Energy Corporation and its permitted successors and assigns. For purposes of this Agreement PWE is acting solely as owner of Redhawk, and if there is more than one owner, as agent on behalf of the owners of Redhawk in all instances where this Agreement establishes rights or obligations applicable to PWE as owner of Redhawk, except to the extent that PWE becomes the permitted successor to the rights and obligations of APS as a Participant and Operating Agent, in which case: (i) PWE shall act in its capacity as an owner, and if there is more than one owner, as agent on behalf of the owners of Redhawk in all instances where this Agreement establishes rights or obligations applicable to PWE as owner of Redhawk; and (ii) PWE shall act in its capacity as Operating Agent in all instances where rights and obligations of the Operating Agent are established in this Agreement.
"Redhawk Delivery System" means the pipeline, and all associated valves, meters and other equipment required to measure, control and transport Treated Effluent from the WRF reservoir discharge header to the Redhawk reservoir, whether owned by the owners of Redhawk or by the Participants.
"Redhawk Isolation Valve" means the valve closest to WRF that isolates the flow of Effluent from WRF to Redhawk as depicted on the diagram attached as Attachment C.
"Release" means any releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing or dumping into the Environment (including the abandonment or discarding of barrels, containers, and other closed receptacles).
"Threat of Release" means a substantial likelihood of a Release that requires action to prevent or mitigate damage to the Environment that may result from such Release.
"Treated Effluent" means that water produced by transporting Effluent to and treating Effluent at the WRF in accordance with Operating Parameters.
"WRF" means the tertiary wastewater treatment facility at the PVNGS Water Reclamation Facility, together with all appurtenant equipment, facilities, easements and rights of way for treatment of Effluent.
"WRF Pipeline" means the WRF's associated Water Reclamation Supply System pipeline that conveys Effluent from the SROG 91st Avenue and Tolleson wastewater treatment plants, together with all appurtenant equipment, facilities, easements and rights of way.
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1.2 Rules of Construction. Unless the context or the provision in question requires otherwise, the following rules of construction shall apply to this Agreement: (i) a reference to an agreement, document or instrument includes all exhibits, schedules and attachments thereto and all amendments or replacements thereof; (ii) the singular includes the plural and the plural includes the singular; (iii) a reference to a Party or Person includes its permitted successors and permitted assigns; (iv) "include" and "including" are not limiting; (v) "or" means "one or the other or all" of the specifically enumerated things, states, or actions; (vi) "shall" or "will" means the listed duties or actions are mandatory; and (vii) "herein", "hereof", "hereunder" and similar words used in a document refer to the document as a whole. This Agreement is the product of negotiation between the Parties and no ambiguity will be construed in favor of or against any Party solely as the result of such Party having drafted or proposed the ambiguous provision.
ARTICLE 2. TRANSACTION
2.1 TRANSPORTATION AND TREATMENT OF EFFLUENT.
2.1.1 This Agreement does not establish, modify or abrogate any rights of any Person to the ownership or use of Effluent.
2.1.2 Operating Agent will transport and treat for use at Redhawk up to 7,500 acre-feet of Effluent annually for use at Redhawk Units 1 and 2, depending on the available capacity of the WRF and WRF Pipeline, provided that PWE has obtained rights to such amount of Effluent. Operating Agent shall provide transportation for Effluent acquired by PWE from the point of such Effluent's delivery into the WRF Pipeline, through the WRF, where tertiary treatment will be provided, and to the Delivery Point, consistent with all terms and conditions of this Agreement. PWE shall be responsible for obtaining rights to such Effluent; for ensuring that such Effluent satisfies the water quality standards specified in Attachment B for discharge into the WRF Pipeline including, at a minimum, primary and secondary treatment at a wastewater treatment facility; and for arranging for discharge of the Effluent into the WRF Pipeline. PWE shall also be responsible for ensuring that any Effluent discharged into the WRF Pipeline pursuant to PWE's contract rights may be utilized at PVNGS if and to the extent that PWE is unable to utilize said Effluent at Redhawk or Operating Agent is permitted to curtail deliveries to Redhawk pursuant to this Agreement. If PVNGS, in order to satisfy its own operating needs, curtails delivery to Redhawk of Effluent already purchased by PWE, PVNGS shall reimburse to PWE the price actually paid by PWE for all such Effluent used by PVNGS, provided, however, that if the seller of that Effluent accepts a lower price because the Effluent is used at PVNGS rather than at Redhawk, PVNGS shall reimburse PWE at the lower price applicable to use at PVNGS.
2.1.3 In order to reserve capacity in the WRF Pipeline and WRF for transportation and treatment of this initial 7,500 acre-feet of Effluent, from and after the Effective Date of this Agreement, PWE shall annually pay to Operating
5
Agent an "Initial Reserve Fee" in the amount of $75,000 (i.e., $10.00 per acre-foot of reserved capacity). The first annual installment of this Initial Reserve Fee, prorated for the year to the Effective Date of this Agreement, shall be paid by PWE within 30 days after the Effective Date of this Agreement. All subsequent installments shall be paid by PWE on or before January 31 of each year during which this Agreement is in effect. Beginning in the year PWE begins accepting deliveries of Treated Effluent pursuant to this Agreement, PWE shall be entitled to a credit of up to the full amount of the Initial Reserve Fee paid in that year, to be applied against Per Unit Charges assessed pursuant to Section 2.3 below, at a rate of $10.00 per acre-foot of Treated Effluent delivered to the Delivery Point for Redhawk Units 1 and 2.
2.1.4 Operating Agent shall also provide transportation and treatment of up to 7,500 acre feet of additional Effluent for use at Redhawk Units 3 and 4, depending on the available capacity of the WRF and WRF Pipeline, provided that (i) PWE has secured the rights to any additional Effluent it seeks to have transported and treated under this Agreement for use at Redhawk and (ii) on or before the following dates, PWE commits to take the following specified increments of additional Effluent for use at Redhawk:
September 1, 2005: Up to 3,750 acre-feet per year of additional Effluent.
September 1, 2007: Up to another 3,750 acre-feet per year of additional Effluent.
2.1.5 In order to reserve capacity in the WRF and WRF Pipeline for transportation and treatment of these additional increments of Effluent, from and after the Effective Date of this Agreement, PWE shall annually pay to Operating Agent an "Additional Reserve Fee" in the amount of $75,000 (i.e., $10.00 per acre-foot of additional capacity). The first annual installment of this Additional Reserve Fee, prorated for the year to the Effective Date of this Agreement, shall be paid by PWE within 30 days after the Effective Date of this Agreement. All subsequent installments shall be paid by PWE on or before January 31 of each year during which this Agreement is in effect, and the installment amount shall remain unchanged, unless PWE submits written notification to Operating Agent that PWE is relinquishing its right to have all or any remaining portion of the specified increments of additional Effluent transported and treated pursuant to this Agreement, provided, however, that if PWE relinquishes only a portion of its right to have the specified increments of additional Effluent transported and treated, PWE shall pay a reduced Additional Reserve Fee at a rate of $10.00 per acre-foot of additional capacity remaining subject to such right. If PWE fails to commit to take either of the additional increments of Effluent by the corresponding date specified for that increment, Operating Agent shall no longer provide transportation and treatment of that increment, and PWE's obligation to pay the Additional Reserve Fee shall terminate in proportion to the amount relinquished. If PWE commits to take either or both of the additional increments
6
of Effluent, then beginning in the year PWE begins accepting deliveries of the additional increment(s), PWE shall be entitled to a credit of up to the full amount of the Additional Reserve Fee paid in that year, to be applied against Per Unit Charges assessed pursuant to Section 2.3 below, at a rate of $10.00 per acre-foot of Treated Effluent delivered to the Delivery Point for Redhawk Units 3 and 4.
2.1.6 Effluent transported, treated and delivered pursuant to this Agreement shall be used only at Redhawk Units 1 through 4. Any additional units constructed at Redhawk beyond Units 1 through 4 shall not use Treated Effluent delivered pursuant to this Agreement unless this Agreement is amended, in conformity with Section 7.10, to allow use of Treated Effluent at additional Redhawk units. The restrictions of this
Section shall not be construed to prohibit the use of any other source of water at Redhawk units beyond Units 1 through 4. If any other source of water is commingled with Treated Effluent delivered to Redhawk pursuant to this Agreement, then: (i) that other source of water shall be discharged directly into the Redhawk storage reservoir and not into the Redhawk Delivery System; and (ii) appropriate administrative controls shall be in place to ensure that flow rates of Treated Effluent to Redhawk do not exceed demand rates for such Treated Effluent at Redhawk Units 1 through 4, including demand rates for Treated Effluent storage capacity in the Redhawk storage reservoir sufficient for Redhawk Units 1 through 4.
2.1.7 Notwithstanding the provisions in Sections 2.1.2 and 2.1.4 above, Operating Agent shall not deliver Treated Effluent to PWE for use at Redhawk while: (i) the Treated Effluent level in the WRF reservoir is below 948 feet above Mean Sea Level (equivalent to 90% reservoir capacity); (ii) the Treated Effluent level in the WRF reservoir is below 949.5 feet above Mean Sea Level (equivalent to 95% reservoir capacity) and the combined demand rate for Treated Effluent at PVNGS and Redhawk exceeds the maximum available Treated Effluent production rate of the WRF; or
(iii) if transportation and treatment of Effluent would pose a risk to the operation of the WRF, the WRF Pipeline or PVNGS, as determined in the sole and reasonable discretion of the Operating Agent, subject to Section
7.6.4. If delivery of Treated Effluent is interrupted pursuant to the preceding sentence, then as soon as the Treated Effluent level in the WRF reservoir exceeds 948 feet above Mean Sea Level, or 949.5 feet above Mean Sea Level when the combined demand rate for Treated Effluent at PVNGS and Redhawk exceeds the maximum available Treated Effluent production rate of WRF, and there is no longer a risk, as determined in the sole and reasonable discretion of the Operating Agent, to the operation of the WRF, the WRF Pipeline or PVNGS, Operating Agent shall resume delivery of Treated Effluent for use at Redhawk. A dispute over the amount set forth in any billing statement shall be resolved in accordance with Section 2.3.5 and Article 6 and shall not constitute a risk to the operation of the WRF, the WRF Pipeline or PVNGS.
2.1.8 The Parties acknowledge and agree that performance required by this Agreement may be subject to approvals or consents from third parties or from federal, state or local regulatory agencies with jurisdiction over the Parties. The
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Parties will proceed in a timely manner to obtain such approvals. All reasonable costs incurred by Operating Agent in obtaining such approvals will be paid by PWE. If, after exercising Commercially Reasonable Efforts, the Parties are unable to obtain all necessary approvals and consents by December 31, 2001, either Operating Agent, acting pursuant to written instructions unanimously approved by all Non-Interested Participants, or PWE may terminate this Agreement upon 30 days written notice to the other Party.
2.1.9 Operating Agent will exercise Commercially Reasonable Efforts to maintain both: (i) the reliability of the Treated Effluent supply to be provided under this Agreement to Redhawk, comparable to the reliability of the supply for Palo Verde; and (ii) the Treated Effluent quality for Redhawk, with such quality to be comparable to that provided to Palo Verde, provided, however, that PWE acknowledges and agrees that in the event of any conflict between the current or future demands of PVNGS
(including demands of any additional units constructed as part of PVNGS) and Redhawk, whether as the result of limited capacity or supply in the transportation or treatment system, or for any other reason, the water supply needs of PVNGS will be served before those of Redhawk. Operating Agent will provide thirty (30) days advance written notice to PWE before planned changes to the Operating Parameters (and therefore the quality of the water provided to Redhawk) in accordance with Attachment A. Notwithstanding anything in this Agreement providing or implying the contrary, PVNGS may, at any time, call for and make use of any Effluent to which PVNGS, Operating Agent or APS has contractual rights to the extent such Effluent is required for cooling water purposes at PVNGS.
2.1.10 Operating Agent shall construct, operate and maintain those portions of the Redhawk Delivery System located on PVNGS property. PWE shall construct, operate and maintain those portions of the Redhawk Delivery System not located on PVNGS property. PWE shall also construct, operate and maintain, at Redhawk, reservoir capacity to provide backup water for Redhawk for periodic production deficits. PWE shall be responsible for all costs, including capital costs, associated with the design, construction, operation and maintenance of the Redhawk Delivery System, Redhawk storage reservoir, any isolation valves on PVNGS property that are not included within the Redhawk Delivery System but which are required in the opinion of the Operating Agent to adequately protect PVNGS, and the flow control valves and orifice plates and any other equipment needed at PVNGS cooling tower makeup headers to provide sufficient system operating pressure to pump Treated Effluent to Redhawk.
2.1.11 PWE shall reimburse Operating Agent for all costs, including capital costs, incurred by Operating Agent that are associated with the design, construction, operation and maintenance of the Redhawk Delivery System, the Redhawk storage reservoir and any isolation valves on PVNGS property that are not included within the Redhawk Delivery System but which are required in the opinion of the Operating Agent to adequately protect PVNGS, and the flow control valves and orifice plates and any other equipment needed at PVNGS
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cooling tower makeup headers to provide sufficient system operating pressure to pump Treated Effluent to Redhawk. Whenever such costs are incurred, Operating Agent shall deliver an itemized invoice to PWE for payment. PWE shall pay any such invoice within 30 days after receipt. At Operating Agent's discretion such costs may be separately itemized on the invoices for Per Unit Charges delivered to PWE pursuant to Section 2.3.2.
2.1.12 PWE will obtain Operating Agent's prior review and concurrence on: (i) the design and engineering for the Redhawk Delivery System; (ii) the associated construction schedule and related WRF outage requirements for constructing the Redhawk Delivery System; and (iii) all plans for operation, maintenance, repair or replacement of any component of the Redhawk Delivery System. After construction of the Redhawk Delivery System is complete, Operating Agent shall inspect and approve final construction prior to initial use of the system. PWE shall reimburse Operating Agent for all of its reasonably incurred costs associated with review, inspection and approval of the Redhawk Delivery System pursuant to this Section. Operating Agent's review, inspection and approval of the Redhawk Delivery System will be performed solely for the protection of PVNGS. Operating Agent approval shall not be unreasonably withheld, and Operating Agent shall have no liability to PWE or any other Redhawk participant based on its review or approval of the design, engineering or construction of the Redhawk Delivery System. Design, construction and installation of the Redhawk Delivery System will be performed in accordance with the PVNGS design and configuration control program, which is inclusive of a 10 C.F.R. Section 50.59, Changes, Tests and Experiments evaluation and any required Updated Final Safety Analysis Report updates. PWE will be responsible for obtaining all necessary permits and approvals for the construction and operation of the Redhawk Delivery System, and for ensuring that construction and operation of the Redhawk Delivery System complies with all applicable federal, state and local laws and regulations.
2.1.13 Upon completion of construction of the Redhawk Delivery System, legal title in the PVNGS portions of the Redhawk Delivery System shall reside with the PVNGS Participants; provided, however, that: (i) as long as this Agreement is in effect, Operating Agent shall not use the PVNGS portions of the Redhawk Delivery System for any purpose other than delivery of Treated Effluent to PWE for use at Redhawk without the prior written consent of PWE; (ii) upon termination of this Agreement, PWE shall be relieved of any future indemnity obligation in relation to the PVNGS portions of the Redhawk Delivery System, except to the extent that a PVNGS Indemnitee (as defined in Section 3.1.1) receives a claim for any liability, damage, loss, or expense, which liability, damage, loss or expense was incurred prior to and including the date of termination and is subject to indemnity by PWE pursuant to Article 3; (iii) if the Participants sell the WRF and WRF Pipeline pursuant to Section 2.4, the Participants shall also transfer ownership of the PVNGS Portions of the Redhawk Delivery System; and (iv) PWE shall not pursue any claim against Operating Agent or the Participants for reimbursement of the cost of construction.
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2.1.14 Operating Agent shall operate and maintain all devices used to measure, regulate and isolate the flow of Treated Effluent from WRF, up to and including the downstream isolation valve depicted on the diagram attached as Attachment C. PWE shall operate and maintain all other portions of the Redhawk Delivery System. Operating Agent and PWE shall each designate a representative with relevant technical expertise to develop appropriate operating criteria for the future operation of the Redhawk Delivery System. The operating criteria shall be approved by Operating Agent and PWE and implemented prior to the initiation of delivery of Treated Effluent to Redhawk. Operating Agent shall not be liable for physical damages, if any, to equipment, pipelines, or other facilities downstream from the isolation valve operated by Operating Agent that result from action taken by Operating Agent at variance with the agreed-upon operating criteria for the Redhawk Delivery System when, in the sole and reasonable discretion of Operating Agent, such action is necessary to protect PVNGS from damage.
2.1.15 Except in cases of operational emergency, as determined in the sole and reasonable discretion of the Operating Agent, Operating Agent will give PWE reasonable notice, in accordance with Attachment A, of outages, including planned outages, that may partially or completely interrupt the flow of Treated Effluent into the Redhawk Delivery System. The Parties agree that planned outages normally will include: (i) clarifier cleaning and coating resulting in a reduced capacity (normally scheduled from November through March); (ii) planned full WRF maintenance outages (normally ten days in both April and October of each year, coincident with PVNGS refueling outages); (iii) planned outages for inspection, testing, repair, replacement or other maintenance activities associated with effluent pipelines or pumping systems; and (iv) any planned outages necessary to maintain the quality of Treated Effluent provided to PVNGS and Redhawk and to maintain the efficiency of the WRF. The Parties acknowledge that unplanned outages may also occur, including but not limited to any forced outages such as WRF Pipeline ruptures and leaks and outages to address water quality concerns, and all such unplanned outages shall be operational emergencies if deemed as such by the Operating Agent.
2.2 Measurement of Effluent. Operating Agent shall determine the amount of Treated Effluent delivered each month to Redhawk by metering the quantity of Treated Effluent discharged through the Redhawk Isolation Valve. Operating Agent shall not discharge through the Redhawk Isolation Valve during any given month any greater quantity of Treated Effluent than the quantity of such Effluent that is actually delivered pursuant to PWE's contractual rights into the WRF Pipeline during that same month (for transportation to and treatment at WRF).
2.3 PRICE AND BILLING.
2.3.1 PWE will pay a Per Unit Charge (as hereinafter defined) for the transportation and treatment costs for each acre-foot of Treated Effluent delivered by Operating Agent to PWE under this Agreement for use at Redhawk and that is of comparable quality to that provided to PVNGS. The Per Unit Charge shall be
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reviewed for adjustment annually and shall be calculated by the Operating Agent and provided to PWE on or before August 1 of each year for the following calendar year. (The Operating Agent shall reconcile the difference between estimated costs and actual expenses using the procedure set forth in Section 2.3.4 herein.) The Per Unit Charge to be assessed each year shall be calculated as follows (a sample calculation of the Per Unit Charge is attached as Attachment D):
First, the Operating Agent shall determine the sum of: (i) all of the Operating Agent's costs of labor attributable to the WRF and the WRF Pipeline, whether for direct, contract or matrixed sources of labor; (ii) all tertiary treatment and WRF Pipeline operation and maintenance costs, including the costs for chemicals, energy, maintenance materials, maintenance services (including maintenance services provided by outside consultants), and costs for WRF treatment equipment or repairs, incurred by Operating Agent after the Effective Date, (iii) all capital costs projected for the year for the WRF and the WRF Pipeline, and (iv) an allowance for the Operating Agent's administrative and general expenses attributable to the WRF and the WRF Pipeline and to administering this Agreement, including loads and overheads associated with the WRF and the WRF Pipeline for those categories of expense normally charged to the Participants, provided that there shall be no duplication of charges between items (i) through (iv) above.
Second, the Operating Agent shall divide the sum determined in the previous paragraph (First) by the total number of acre-feet of Treated Effluent generated by the WRF for use by the Participants at PVNGS and by PWE at Redhawk to determine the Per Unit Charge.
2.3.2 Prior to initiating delivery of Treated Effluent to Redhawk, Operating Agent shall establish an operating account to track deliveries of Treated Effluent, corresponding Per Unit Charges, and payments due from, and paid by, PWE pursuant to this Agreement. Thereafter, upon initiation of delivery of Treated Effluent pursuant to this Agreement, Operating Agent shall submit to PWE each month a fully itemized invoice, which shall reflect the application of the Per Unit Charge to the volume of Treated Effluent in acre feet provided to PWE during the previous month. Each invoice shall also reflect the amount of the credit, if any, due PWE pursuant to Sections 2.1.3 and 2.1.5 for its prior payment of the Initial and Additional Reserve Fees.
2.3.3 Prior to receiving any Treated Effluent pursuant to this Agreement, PWE shall pay to Operating Agent $200,000 as a security deposit. Operating Agent shall establish a separate interest-bearing security deposit account with an Arizona financial institution and shall deposit into that account the funds received from PWE pursuant to the immediately preceding sentence. All interest earned on this account shall be transferred to the operating account as a credit against amounts owed by PWE under invoices submitted pursuant to Section 2.3.2. Up to
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all of the principal balance in the security deposit account shall be transferred to the operating account to offset any unpaid balance owed by PWE under invoices submitted pursuant to Sections 2.3.2 and 2.3.4 if such invoices have not been paid by PWE within 30 days after receipt.
2.3.4 Not later than ninety (90) days following the end of a calendar year, the Operating Agent shall identify the estimated costs described in Section 2.3.1 which were used in calculating the Per Unit Charge for the prior year and compare said estimated costs to the actual costs incurred by the Operating Agent with respect to such items. The Operating Agent shall provide to PWE an invoice at such time reflecting a credit balance for payments in excess of actual costs or an additional charge in the amount of the deficit from underpayments.
2.3.5 PWE shall pay in full the amount stated in each invoice submitted by Operating Agent pursuant to Sections 2.3.2 and 2.3.4 within 30 days after receipt of the invoice. If PWE disputes the amount set forth in any invoice, PWE shall provide notice of such dispute at the time of payment, but may not withhold payment of the disputed amount. As long as the amount stated in each invoice is paid when due and a positive balance is maintained in the operating account, the Parties will resolve the dispute in accordance with the Dispute Resolution procedure set out in Article 6 below. If the Parties determine that the amount assessed was higher than the amount that should have been billed to PWE, PWE may either request a refund, which refund shall be paid by Operating Agent within thirty (30) days, or apply such amount toward future monthly billings. If PWE fails to pay the amount stated in any invoice within 30 days after receipt, and the security deposit account balance is zero, Operating Agent may, after providing 30 days written notice to PWE, cease delivering Treated Effluent into the Redhawk Delivery System until payment in full for any unpaid invoice(s) is received from PWE and a positive balance of no less than $200,000 is reestablished in the security deposit account.
2.3.6 Operating Agent shall maintain accurate and complete accounting records relating to its performance under this Agreement, including accounting records in support of all billings to PWE. Such records shall be retained by Operating Agent and be reasonably available for inspection and audit by PWE or any Participant for three (3) years after the close of each calendar year that the agreement is in effect. Operating Agent shall give PWE and the Participants prior written notice of its intention to destroy any records that are the subject of this Section, even if the retention period has passed. Operating Agent shall provide PWE and the Participants a reasonable opportunity, if requested, to inspect and copy any records prior to their destruction.
2.3.7 PWE will pay when due and indemnify and save harmless each Participant from all sales, excise, property, privilege, gross receipts, use, compensation and like taxes or assessments, now or hereafter imposed or levied by the United States, the State of Arizona or any other state, or any city, town, county or other division thereof, in connection with this Agreement. PWE shall
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be solely responsible for any income taxes imposed upon any or all PVNGS Participants with respect to any payments made by PWE for capital improvements (the "Income Tax Cost Component" or "ITCC"). The Parties understand and agree that: (i) PWE shall be treated for federal, state, and local income tax purposes as the owner of the PVNGS portion of the Redhawk Delivery System; and (ii) no Party shall take a position or action with respect to any tax return or in any filing by it for federal, state, or local income tax purposes that is inconsistent with such treatment.
2.3.8 At PWE's expense, PWE may seek a Private Letter Ruling ("PLR") from the Internal Revenue Service ("IRS") asking whether PWE will be treated as the tax owner of those portions of the Redhawk Delivery System located on PVNGS property. Operating Agent and the Participants shall cooperate and coordinate with PWE as necessary in the preparation of the application for the PLR. Upon issuance of a favorable PLR concluding that PWE is the tax owner of the PVNGS portions of the Redhawk Delivery System, the Operating Agent shall refund or credit to PWE all excess amounts of ITCC collected from PWE prior to the date of such PLR, and any payments of ITCC due thereafter by PWE to the Operating Agent will cease. If a final determination is made by the IRS that any of the sums paid by PWE to the Operating Agent under the terms of this Agreement are, for federal income tax purposes, taxable to the Participant(s) despite the issuance of a favorable PLR, PWE shall pay, to the extent such sums are deemed taxable, all related ITCC amounts (including interest if applicable) to the Operating Agent.
2.3.9 PWE shall have the right to request that Operating Agent or the Participants, at PWE's expense, contest, appeal, or seek abatement of any taxes asserted or assessed against any of the Participants for which PWE may be required to reimburse the Participants under this Agreement. If the Operating Agent or any Participant determines that it will contest, appeal, or seek abatement of any tax, then such party shall act in good faith to do so. PWE shall reimburse Operating Agent or Participant for any costs incurred in such contest, appeal or request for abatement of any tax. To the extent that any taxing authority concludes that any such tax is lower than previously assessed, the Operating Agent shall refund or credit to PWE an amount equal to that which PWE may have previously advanced to the Operating Agent for the payment of such tax.
2.4 OPERATION OR SALE OF WRF AND WRF PIPELINE FOLLOWING PERMANENT CESSATION OF OPERATIONS AT PVNGS.
2.4.1 If, during the term of this Agreement, PVNGS undergoes a Permanent Cessation of Operation, any continued operation of the WRF and WRF Pipeline shall be determined under the terms of the Participation Agreement or any subsequent agreement among the Participants concerning such continued operation of the WRF and WRF Pipeline. If the Participants continue to operate the WRF and WRF Pipeline, Operating Agent shall continue to satisfy its obligation to transport and treat Effluent for PWE for use at Redhawk consistent
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with all terms and conditions of this Agreement. If for any reason, the Participants do not continue to operate the WRF and the WRF Pipeline, then subject to any necessary notices, consents or approvals required to satisfy the terms of any existing sale/leaseback agreements, the Participants may dispose of the WRF and WRF Pipeline pursuant to any terms or procedures agreed upon by the Participants; provided that if the Participants agree to sell the WRF and WRF Pipeline, PWE shall be entitled to participate as a potential purchaser on an equal basis with any other potential purchasers.
2.4.2 If the Participants agree to sell the WRF and WRF Pipeline, the purchaser shall obtain all necessary permits, consents and regulatory approvals required for it to own and operate the WRF and WRF Pipeline and shall agree in writing to assume: (i) the Operating Agent's obligations set forth in this Agreement to transport and treat Effluent for PWE for use at Redhawk; (ii) any obligations established in any separate agreement then existing for transportation and treatment of Effluent through the WRF Pipeline and WRF; and (iii) any decommissioning obligation applicable to the WRF and WRF Pipeline. If all required permits, consents and regulatory approvals are obtained by the purchaser, that purchaser and the Operating Agent shall in good faith negotiate an agreement for the transfer and subsequent operation of the WRF and WRF Pipeline consistent with the terms of this Section, which agreement shall be presented to the Participants for approval in accordance with any applicable provisions of the Participation Agreement prior to execution by Operating Agent.
ARTICLE 3. INDEMNIFICATION AND LIMITATION OF LIABILITY
3.1 INDEMNIFICATION BY PWE AS OWNER OF REDHAWK.
3.1.1 PWE, as owner of Redhawk, shall indemnify, defend and hold harmless Participants and their officers, directors, employees, agents, successors and assigns (the "PVNGS Indemnitees") for, against and from any claim, liability, damage, loss, or expense of any kind or nature (including reasonable legal, accounting, consulting, engineering and other fees) for personal injury to or death of any person or for loss of or damage to property of any person or entity (collectively, "Damages"), in each instance to the extent determined to be resulting from any act or omission to act of PWE employees, agents or contractors (other than PVNGS employees, agents or contractors acting within the scope of their employment and for the sole benefit of PVNGS) arising in connection with performance under this Agreement by PWE acting as owner of Redhawk. The indemnity prescribed by the preceding sentence shall fully apply and not be extinguished even if and regardless of whether the damages are attributable to the joint or concurrent negligence, gross negligence, willful misconduct or strict liability in tort of a PVNGS Indemnitee.
3.1.2 PWE, as owner of Redhawk, shall indemnify, defend and hold harmless the PVNGS Indemnitees for, against and from any claim, liability, damage, loss, or expense of any kind or nature (including reasonable legal, accounting, consulting, engineering and other fees, as well as environmental remediation costs, fines and penalties) that may be imposed on, incurred by, or asserted against any of the PVNGS Indemnitees by any other party or parties (including a governmental entity) arising out of the receipt, transportation and use of Treated Effluent after discharge of the same into the Redhawk Delivery System, including but not limited to any Release or Threat of Release of Treated Effluent or a Hazardous Material or Substance, in connection with or resulting from activities pertaining to this Agreement, except to the extent such Release or Threat of Release is determined to be attributable to the gross negligence or willful misconduct of Operating Agent. PWE, in its capacity as owner of Redhawk, shall promptly notify Operating Agent of any such claim and of any Release or Threat of Release of Treated Effluent or a Hazardous Material or Substance, or violation of Environmental Law or permit condition.
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3.1.3 PWE, as owner of Redhawk, shall indemnify, defend and hold harmless the PVNGS Indemnitees for, against and from any claim, liability, damage, loss, or expense of any kind or nature (including reasonable legal, accounting, consulting, engineering and other fees, as well as environmental remediation costs, fines and penalties) that may be imposed upon, incurred by or asserted against any of the PVNGS Indemnitees by any supplier of Effluent to Redhawk arising out of, in connection with, or relating to any acquisition of Effluent by PWE from such suppliers for use at or for Redhawk, or arising out of, in connection with, or relating to any transportation to, treatment of, or use at Redhawk of such Effluent acquired by PWE in its capacity as owner of Redhawk.
3.2 PROPORTIONAL LIABILITY. Except for the indemnification provided in
Section 3.1, PWE's proportional share of liability, in its capacity as owner of Redhawk, for the acts or omissions of Operating Agent or its employees or contractors when Operating Agent or its employees or contractors are acting for the joint benefit of PVNGS and Redhawk and prior to discharge into the Redhawk Delivery System shall initially be set at 10% of the total claim, liability, damage, loss or expense at issue. PWE's proportional share of liability, in its capacity as owner of Redhawk, shall remain at 10% until such time as PWE commences taking the additional Effluent provided for in Section 2.1.4. If PWE commences taking the additional Effluent provided for in Section 2.1.4, PWE's proportional share of liability, in its capacity as owner of Redhawk, under this
Section shall be recalculated to reflect the relative quantity of Effluent being transported and treated through the WRF Pipeline and WRF for PWE's use at Redhawk in comparison to the total quantity of Effluent being transported and treated through the WRF Pipeline and WRF.
3.3 LIMITATIONS ON LIABILITY.
3.3.1 NEITHER OPERATING AGENT NOR ANY PVNGS PARTICIPANT (IN SUCH CAPACITY) SHALL BE LIABLE TO PWE OR ANY OTHER PARTICIPANT IN REDHAWK (IN SUCH CAPACITY) FOR ANY LOSS OR DAMAGE IN THE NATURE OF PARTIAL OR COMPLETE LOSS OF USE OF ANY GENERATING FACILITY, LOSS OF ELECTRIC
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POWER, COST OF REPLACEMENT OF ELECTRIC POWER, OR FOR ANY LOSS OF INTEREST, REVENUE, OR ANTICIPATED PROFITS FROM ACTIVITIES UNDER THIS AGREEMENT. NOR SHALL OPERATING AGENT OR ANY PVNGS PARTICIPANT BE LIABLE TO PWE OR ANY OTHER PARTICIPANT IN REDHAWK FOR ANY INDIRECT, SPECIAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS, ARISING OUT OF OR RELATED TO THIS AGREEMENT.
3.3.2 EXCEPT FOR CLAIMS FOR INDEMNITY UNDER SECTION 3.1 AND CLAIMS UNDER SECTION 3.2 ABOVE, AS TO EACH OF WHICH THE PROVISIONS AND LIMITATIONS OF THIS SECTION 3.3.2 SHALL NOT APPLY; (i) PWE AND ALL OTHER PARTICIPANTS IN REDHAWK COLLECTIVELY SHALL BE LIABLE TO OPERATING AGENT AND ANY PVNGS PARTICIPANT ONLY TO THE EXTENT ANY LOSS OR DAMAGE IS CAUSED BY OR ARISES OUT OF THE NEGLIGENCE, GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR STRICT LIABILITY IN TORT OF PWE OR ANY OTHER PARTICIPANT IN REDHAWK, EVEN IF AND REGARDLESS OF WHETHER THE LOSS OR DAMAGE IS ATTRIBUTABLE TO THE JOINT OR CONCURRENT NEGLIGENCE, GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR STRICT LIABILITY IN TORT OF OPERATING AGENT; AND (ii) IN NO EVENT SHALL THE LIABILITY OF PWE AND ANY OTHER PARTICIPANT IN REDHAWK PURSUANT TO THIS
SECTION 3.3.2 COLLECTIVELY EXCEED AN AGGREGATE AMOUNT OF FIVE MILLION DOLLARS ($5,000,000.00) PER OCCURANCE. THE LIMITATION OF LIABILITY SET FORTH IN THIS SECTION 3.3.2 SHALL NOT APPLY TO PAYMENT OF RESERVE CHARGES OWED BY PWE PURSUANT TO SECTION 2.1 AND PER UNIT CHARGES OWED BY PWE PURSUANT TO SECTION 2.3.
3.3.3 EXCEPT FOR CLAIMS FOR INDEMNITY UNDER SECTION 3.1, CLAIMS UNDER SECTION 3.2 AND CLAIMS UNDER SECTION 3.3.2, AS TO EACH OF WHICH THE PROVISIONS AND DISCLAIMERS OF THIS SECTION 3.3.3 SHALL NOT APPLY, NEITHER PWE NOR ANY OTHER PARTICIPANT IN REDHAWK SHALL BE LIABLE TO OPERATING AGENT OR ANY OTHER PVNGS PARTICIPANT FOR ANY INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS, ARISING OUT OF OR RELATED TO THIS AGREEMENT.
3.4 The provisions of this Article 3 shall not be construed so as to relieve any insurer of its obligation to pay any insurance proceeds in accordance with the terms and conditions of valid insurance policies.
3.5 SURVIVAL OF INDEMNIFICATION. The liability and Indemnification obligations set forth in this Agreement shall survive the expiration or termination of this Agreement.
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3.6 Except as otherwise specifically provided in this Agreement, any liability of Operating Agent to the Participants for the acts or omissions of Operating Agent or its employees or contractors shall be determined under the liability provisions of the Participation Agreement.
ARTICLE 4. FORCE MAJEURE; CONDITIONAL DUTY OF PERFORMANCE
4.1 FORCE MAJEURE; TIME FOR PERFORMANCE. A Party unable to perform its duties under this Agreement by reason of a Force Majeure (a "nonperforming Party") may request that its time for performance be extended for a period equal to the time performance is delayed by the Force Majeure, by giving written notice to the other Party within five (5) business days after commencement of the Force Majeure. The written notice shall include a detailed description of the event and an estimate of the length of the delay. The other Party shall agree to extend the time for performance, but it may evaluate its agreement on a continuing basis, reserving the right to terminate the Agreement as provided in this paragraph if it determines the delay has a significant adverse effect on its operations. The nonperforming Party shall use Commercially Reasonable Efforts to remedy the effects of the Force Majeure. Delay due to an event for which no notice has been given and the other Party's agreement has not been obtained shall be an unexcused delay. If a Party's excused delay continues for a period of more than 36 months, the other Party shall have the right to terminate this Agreement upon 90 days written notice. If PWE, as owner of Redhawk, receives a notice of termination from the Operating Agent pursuant to the preceding sentence, PWE may elect to begin paying an annual fee (the "Retention Fee") of $10 per acre-foot for each acre-foot of WRF and WRF Pipeline capacity that is then subject to PWE's transportation and treatment rights under this Agreement. As long as PWE continues paying the Retention Fee under this Section, this Agreement shall remain in full force and effect.
4.2 CONDITIONAL DUTY OF PERFORMANCE.
4.2.1 NOTWITHSTANDING THE PROVISIONS OF SECTION 5.2.2, PWE EXPRESSLY ACKNOWLEDGES THAT ITS RIGHT TO HAVE EFFLUENT TRANSPORTED AND TREATED THROUGH THE WRF PIPELINE AND WRF FOR USE AT REDHAWK PURSUANT TO THIS AGREEMENT SHALL AT ALL TIMES BE SUBORDINATE TO THE PARTICIPANTS' RIGHT TO RECEIVE AND HAVE EFFLUENT TRANSPORTED AND TREATED THROUGH THE WRF PIPELINE AND WRF FOR COOLING WATER USE AT PALO VERDE, AS PALO VERDE EXISTS TODAY OR AS IT MAY BE EXPANDED IN THE FUTURE, INCLUDING ANY ADDITIONAL UNITS.
4.2.2 THE PARTIES RECOGNIZE AND ACKNOWLEDGE THAT AT SOME TIME IN THE FUTURE, THE PARTICIPANTS MAY ELECT TO EXPAND PALO VERDE. IN THE EVENT OF SUCH AN EXPANSION, THE PARTIES RECOGNIZE AND ACKNOWLEDGE THAT THE QUANTITIES OF EFFLUENT THAT CAN BE TRANSPORTED AND TREATED FOR PWE FOR THE BENEFIT OF REDHAWK MAY NEED TO BE LIMITED OR
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RESTRICTED TO TAKE INTO ACCOUNT THE NEEDS OF THE PARTICIPANTS; PROVIDED, HOWEVER, THAT THE OPERATING AGENT SHALL GIVE PWE AT LEAST THREE YEARS PRIOR WRITTEN NOTICE OF THE AMOUNT OF ANY LIMITATION OR RESTRICTION ANTICIPATED TO RESULT FROM SUCH AN EXPANSION. IF THE OPERATING AGENT GIVES SUCH NOTICE TO PWE, THE PARTICIPANTS AND PWE SHALL NEGOTIATE IN GOOD FAITH REGARDING POTENTIAL PARTICIPATION BY PWE IN THE FUNDING OF ANY EXPANSION OF THE WRF PIPELINE AND/OR WRF REQUIRED TO SERVE THE PALO VERDE EXPANSION IN RETURN FOR RIGHTS TO HAVE EFFLUENT TRANSPORTED AND TREATED IN THE EXPANDED FACILITIES FOR SUBSEQUENT DELIVERY TO REDHAWK.
ARTICLE 5. TERM AND TERMINATION
5.1 TERM. This Agreement shall be effective as of the Effective Date and, unless otherwise terminated pursuant to the provisions of this Agreement, shall continue until the earlier of: (i) Permanent Cessation of Operation of PVNGS;
(ii) Permanent Cessation of Operation of all constructed units at Redhawk that are entitled to receive Treated Effluent under this Agreement; or (iii) December 31, 2027, unless the term of the Participation Agreement is extended beyond December 31, 2027, in which case this Agreement shall continue in effect for the extended term of the Participation Agreement unless terminated prior to the end of that term pursuant to clause (i) or clause (ii) of this Section or as otherwise provided under the provisions of this Agreement.
5.2 TERMINATION.
5.2.1 Either Operating Agent, acting pursuant to written instructions unanimously approved by all Non-Interested Participants, or PWE may terminate the Agreement by written notice to the other Party at any time, if any of the following occurs: (1) a defaulting Party fails to cure a material breach under the Agreement; (2) a material adverse change in the financial condition of either Party occurs, which affects or will adversely affect that Party's performance under the Agreement; or (3) proceedings are filed by or against a Party under federal bankruptcy or state insolvency statutes, or a Party makes an assignment for the benefit of creditors or takes advantage of any insolvency statute or similar statute, or a receiver or trustee is appointed for the property and assets of that Party and the receivership is not discharged within one hundred twenty (120) days of such appointment. If either Party gives a termination notice under this Section, the Parties shall cooperate to effect an efficient and smooth transition of responsibility with respect to all matters governed by the Agreement.
5.2.2 At any time after the tenth anniversary of the Effective Date, either Operating Agent, acting pursuant to instructions unanimously approved by all Non-Interested Participants, or PWE may submit notice to the other Party either terminating this Agreement, or reducing the quantity of Effluent that PWE will be entitled to have transported and treated pursuant to this Agreement, for any lawful
18
reason. The Agreement shall remain in effect for a period of thirty-six
(36) months after notice is submitted pursuant to this Section. The liability and indemnification obligations of this Agreement, as set forth in Article 3, shall survive termination of this Agreement. Operating Agent acknowledges that actual demand for Treated Effluent will vary from year to year during construction and operation of Redhawk, and any such variation will not be a basis, absent a breach of this Agreement, for limiting PWE's right to have up to 15,000 acre-feet of Effluent transported and treated by Operating Agent through the WRF Pipeline and WRF in any given year. If PWE permanently ceases operation of one or more Redhawk units, PWE's right to have Effluent treated and transported pursuant to this Agreement shall be reduced by 3,750 acre-feet per year for each Redhawk unit that undergoes such Permanent Cessation of Operations. The provisions of this Section 5.2.2 are not intended to, and shall not be construed to, limit or modify any right of Operating Agent to curtail or interrupt deliveries of Treated Effluent to Redhawk granted elsewhere in this Agreement.
5.2.3 All obligations and liabilities of the Parties under this Agreement shall cease upon termination except the obligations of PWE under
Section 2.3 regarding payment of invoiced amounts when due, the obligations of the Parties under Article 3 (Indemnification and Limitation of Liability), and the liabilities of any Party resulting from a default by such Party leading to termination of this Agreement, all of which shall survive termination. Upon the expiration or termination of this Agreement and upon the demand of all Non-Interested Participants, PWE shall pay Operating Agent to remove all distribution piping, and other parts of the Redhawk Delivery System from PVNGS, restoring said property to its prior condition within 180 days of the date of expiration or termination, all at PWE's own expense. If the Non-Interested Participants do not demand removal of the Redhawk Delivery System from PVNGS within six months of termination of this Agreement, the Participants may use the PVNGS portions of the Redhawk Delivery System for purposes other than delivery of Treated Effluent to Redhawk and thereafter PWE shall not be obligated to pay any costs associated with subsequent operation, maintenance or removal of the PVNGS portions of the Redhawk Delivery System.
ARTICLE 6. DISPUTE RESOLUTION
6.1 SETTLEMENT BY MUTUAL AGREEMENT. The Parties agree it is in their best interests to settle any dispute as expeditiously and economically as possible. Therefore, if a dispute arises between them regarding a Party's performance of its obligations or any other matter governed by the terms of the Agreement, the Parties shall attempt to resolve the dispute through mediation in the manner prescribed in this Section. Promptly upon the occurrence of a dispute, the aggrieved Party shall notify the other Party in writing (the "Claimant's Statement"), setting forth in reasonable detail the basis for the dispute, the aggrieved Party's position and its proposal for resolution of the dispute. Within ten (10) business days following receipt of the Claimant's Statement, the other Party shall respond in writing (the "Responsive Statement") setting forth in reasonable detail the respondent's
19
position and its proposal for resolution of the dispute. Within ten (10) business days after the aggrieved Party's receipt of the Responsive Statement, the Parties shall meet and attempt in good faith to expeditiously negotiate a resolution of the dispute. A representative or representatives of each Party who is authorized to act for the Party and resolve the dispute without resort to higher authority shall be in attendance at the opening session and throughout the dispute resolution procedure described in this Section.
6.2 MEDIATION. If a resolution of the dispute is not obtained within thirty (30) calendar days after the discussions begin, the Parties shall apply to the American Arbitration Association ("AAA") or other similar agreed-upon organization for appointment of a professional mediator who has not previously been employed by either Party (excluding employment as a mediator) and does not have a direct or indirect interest in either Party or the subject matter of the mediation. The mediator's role shall be to facilitate expeditious good faith negotiations between the Parties, in an effort to resolve the dispute. The cost of the mediation, including the mediator's fees and expenses, shall be borne equally by the Parties. The mediator shall not have the authority to impose a resolution on the Parties but shall serve only as a facilitator to attempt to reach a solution to the dispute. The Parties will be bound by any schedule set out by the mediator for continuing good faith negotiations aimed at resolving the dispute provided that such schedule shall not exceed 180 days. In establishing this schedule, the mediator shall be guided by the principle that it is the Parties' intention that disputes be resolved expeditiously, giving due consideration to reducing expense, minimizing delay and preserving the relationship of the Parties.
6.3 BINDING ARBITRATION. Any dispute that cannot be resolved under Section 6.2 shall be submitted to binding arbitration by one arbitrator who has not previously been employed by either Party (excluding employment as an arbitrator), and does not have a direct or indirect interest in either Party or the subject matter of the arbitration. The arbitrator shall either be an individual mutually agreed upon by the Parties within 15 days after mediation under Section 6.2 has ended, or failing agreement by the Parties, shall be selected under the rules of the AAA. The rules of the AAA, including the Optional Procedures for Large, Complex Commercial Disputes, shall apply to the arbitration proceedings to the extent not inconsistent with the rules specified in this section. The Parties shall divide equally the cost of the arbitrator and the hearing.
6.4 CONFIDENTIALITY. Negotiations undertaken pursuant to Section 6.1 and 6.2 shall be deemed confidential as settlement discussions. Nothing said by a Party, nor any position taken during the course of the negotiations shall be introduced as evidence by the opposing Party in any subsequent arbitration concerning the same or related transactions.
ARTICLE 7. GENERAL PROVISIONS
7.1 Entire Agreement; No Effect on Participation Agreement. This Agreement supersedes all prior and contemporaneous conduct and communications, whether written or oral, pertaining to the Parties' rights and obligations with respect to the Participants' granting to PWE use of the WRF and WRF Pipeline for transportation and treatment of Effluent for use at Redhawk. The Parties shall not be bound by or be liable for any statement or understanding of any kind not set forth in this Agreement.
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This Agreement may not be modified, changed or added to except in writing signed by all Parties hereto. This Agreement is not intended to, and shall not be construed to, amend, modify or abrogate any provision of the Participation Agreement.
7.2 LAWS AND REGULATIONS. The Parties and their employees, agents, and representatives shall at all times comply with all applicable federal, state, and local laws, ordinances, statutes, standards, rules, orders, and regulations.
7.3 DESIGNATED REPRESENTATIVE AND NOTICE.
7.3.1 Each Party shall advise the other Party of the name, address, and telephone number of a designated representative authorized to act on its behalf. All communications relating to the day-to-day activities under this Agreement shall be between the designated representatives.
7.3.2 All notices and communications required under this Agreement shall be in writing and may be delivered personally to a Party, may be delivered by facsimile or may be mailed by deposit in United States certified mail, return receipt requested, or by deposit with a reputable overnight delivery service. Notices shall be effective: (i) on the date delivered by personal delivery or facsimile; (ii) three (3) business days following the date deposited in the United States mail; or (iii) the next business day following delivery to a reputable overnight delivery service. Notices and communications shall be delivered or mailed to the Parties as follows:

      If to PWE:                          If to Operating Agent:
--------------------------------   --------------------------------------
Pinnacle West Energy Corp.                Arizona Public Service Company
Mail Station 8983                         Mail Station 6215
P.O. Box 53999                            P. O. Box 53999
Phoenix, Arizona 85072-3999               Phoenix, Arizona 85072-3999
Attention: Redhawk Plant Manager         Attention: WRF Department Leader
Telephone: 602-250-2575            Telephone: 623-393-3000
Facsimile: 602-250-2153            Facsimile: 623-393-1688	

7.4 WAIVER. Either Party's failure or delay in enforcing the terms and conditions of this Agreement or in insisting upon strict performance of any of the other Party's obligations shall not be interpreted as a waiver thereof. Waiver of any provision of this Agreement shall only be effective if in writing and shall not be interpreted as a waiver of any subsequent breach or failure under the same or any other provision of this Agreement. No conduct, statement, course of conduct, course of dealing, oral expression, or other action shall be construed as a waiver.
7.5 ASSIGNMENT. With the prior written consent of Operating Agent (such consent not to be unreasonably withheld, conditioned or delayed), PWE may assign, in whole or in part, its rights or delegate its duties under this Agreement at any time to any other Person now or hereafter participating in all or a portion of Redhawk, provided that
21
the assignee assumes in writing PWE's obligations. No assignment or delegation will release PWE from its obligations unless the Participants consent to a release. With the prior written consent of PWE (such consent not to be unreasonably withheld, conditioned or delayed), Operating Agent may assign, in whole or in part, its rights or delegate its duties under this Agreement at any time to any other Participant, provided that the assignee assumes in writing Operating Agent's obligations. No assignment or delegation will release Operating Agent from its obligations hereunder unless PWE consents to a release.
7.6 THIRD PARTY BENEFICIARIES; ENFORCEMENT OF PROVISIONS.
7.6.1 Any person or entity other than PWE acquiring an ownership interest in Redhawk, and any Participant not a Party to this Agreement is expressly intended as a third party beneficiary of this Agreement. Otherwise, this Agreement is not intended to and does not create any claims, rights, remedies, or benefits exercisable by a third party. The Parties agree that the Participants will have standing to enforce the provisions of this Agreement and to cure any material default under this Agreement by Operating Agent, in the manner described in this Section 7.6, if a majority of the Participants other than Operating Agent determine in good faith that Operating Agent is not enforcing the Agreement or has defaulted on any of its material obligations under the Agreement.
7.6.2 If any Participant is of the opinion that Operating Agent has, by either its actions or inaction, defaulted on any of its material obligations under this Agreement, that Participant may give written notice to Operating Agent and to the other Participants, together with a statement of the reasons for its opinion. The Operating Agent may thereafter prepare a statement of the reasons justifying its action or failure to take action. If agreement in settling the dispute is not reached between Operating Agent and the Participant that gave the notice, then, upon a majority (by number) decision of the Participants other than Operating Agent the matter shall be submitted to mediation in the manner provided for in Section 6.2 and, if necessary, to arbitration as provided for in Section 6.3 (as if those Participants were a Party). During the continuance of the mediation and, if necessary, the arbitration proceedings, Operating Agent may continue the action taken or not taken in the manner it deems most advisable and consistent with this Transportation and Treatment Agreement unless the complaining Participants have obtained a stay or other form of judicial relief requiring a discontinuance thereof.
7.6.3 If, through proceedings conducted under Section 6.3, it is determined that Operating Agent has defaulted on any of its material obligations under this Agreement, the Operating Agent shall promptly cure its default. For defaults by Operating Agent affecting its obligation to deliver Treated Effluent to the Delivery Point, Operating Agent shall employ commercially reasonable efforts to cure its default as soon as reasonably possible under the circumstances. For defaults by Operating Agent not affecting its obligation to deliver Treated
22
Effluent to the Delivery Point, Operating Agent shall commence to cure its default within 30 days after conclusion of the proceedings conducted pursuant to Section 6.3. If Operating Agent fails to cure, or in good faith to commence to cure, its default as provided in this Section, the other Participants may, by majority (by number) decision of the Participants other than Operating Agent, elect to take appropriate action to cure Operating Agent's default.
7.6.4 If any Participant is of the opinion that: (i) there exists a basis under Section 2.1.7 of this Agreement to shut off flow of Treated Effluent to Redhawk, and Operating Agent has not acted on that basis to shut off such flow; or (ii) Operating Agent has engaged in actions for its own benefit, or for the benefit of any owner of Redhawk, and those actions present a risk of harm to the WRF, WRF Pipeline or PVNGS; that Participant may notify Operating Agent and the other Participants of its opinion and request that the flow of Treated Effluent to Redhawk be shut off by Operating Agent, or that Operating Agent cease the actions that present a risk of harm to the WRF, WRF Pipeline or PVNGS. If Operating Agent fails or refuses to comply with the request within 24 hours after receipt of such notice, that Participant, and any other Participant that chooses to do so, may seek an injunction from a court of competent jurisdiction to require that Operating Agent shut off the flow or cease the specified actions for the reason(s) stated in the notice. Any Participant that does not seek an injunction pursuant to this Section shall not be liable to Operating Agent or PWE for any attorneys fees, costs and expenses of litigation and investigation awarded pursuant to Section 7.8 in the event the Participant(s) seeking the injunction is(are) unsuccessful in that effort. In the event the Participant(s) seeking the injunction is(are) successful, all other Participants shall be liable to the successful parties for reasonable attorneys fees, costs and expenses of litigation and investigation awarded pursuant to Section 7.8.
7.6.5 The terms of this Section 7.6 relate solely to enforcement of the provisions of this Agreement by the Participants. All other disputes between the Participants and Operating Agent concerning any aspect of the operation or management of PVNGS remain exclusively subject to the dispute resolution provisions of the Participation Agreement, which are not altered, abrogated or amended in any way by this Agreement.
7.7 GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Arizona and of the United States without giving effect to the doctrine of conflict of laws. The Agreement shall be deemed made and entered into in Maricopa County, Arizona.
7.8 ATTORNEY'S FEES. Except in case of mediation and/or arbitration conducted pursuant to Section 6.2 and/or 6.3, should any claim be brought by a Party or intended third party beneficiary (PVNGS Participant) against another Party or Parties arising out of this Agreement, including any action for declaratory or injunctive relief, the prevailing party or parties shall be entitled to reasonable attorney's fees, costs and expenses of litigation and investigation incurred in the proceedings, including appellate
23
proceedings or in any action or participation in, or in connection with, any case or proceeding under the United States or other bankruptcy laws, and any judgment or decree rendered in any such action or proceedings shall include an award thereof.
7.9 SEVERABILITY. If any term or condition of this Agreement is held to be invalid, void, or unenforceable by any court of competent jurisdiction, that holding shall not affect the validity or enforceability of any other term or condition of the Agreement, unless enforcing the balance of the Agreement would deprive either Party of a fundamental benefit of its bargain.
7.10 AMENDMENT. This Agreement may not be modified or amended except by an instrument in writing signed by authorized representatives of the Parties, and in the case of Operating Agent, pursuant to a resolution evidencing unanimous Participant approval of the amendment.
7.11 COUNTERPARTS. This Agreement may be executed by the Parties in any number of separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. All signatures need not be on the same counterpart.
7.12 SECTION HEADINGS. Article and Section headings in this Agreement are for convenience of reference only, and do not define, limit, or fully describe the scope or intent of these provisions. This Agreement and any other documents attached to or incorporated herein shall be interpreted according to their plain meaning and without regard to such factors as the Party who prepared them or the relative bargaining power of the Parties.
7.13 RELATIONSHIP OF THE PARTIES. The execution of this Agreement shall not create or constitute a partnership, joint venture, entity, or any form of business organization between the Parties.
7.14 EXECUTION AND EFFECTIVE DATE. Time is of the essence of the obligations under this Agreement. This Agreement has been executed by the duly authorized representatives of the Parties, and shall be effective as of the 10th day of April, 2001.
PINNACLE WEST ENERGY CORPORATION

SIGNATURE  /s/ Ajoy K. Banerjee
         _____________________________

NAME  Ajoy K. Banerjee
    __________________________________	

TITLE Vice President

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ARIZONA PUBLIC SERVICE COMPANY

SIGNATURE  /s/ James M. Levine
         __________________________________

NAME  James M. Levine
    _______________________________________	

TITLE  Executive Vice President, Generation
     ______________________________________

      On its own behalf and as agent for:
      El Paso Electric Company
      Los Angeles Department of Water and Power
      Public Service Company of New Mexico
      Salt River Project Agricultural Improvement and Power District
      Southern California Edison Company
      Southern California Public Power Authority	

25
ATTACHMENT A
DELIVERY SCHEDULE AND COMMUNICATIONS PROTOCOL
I. TARGET DELIVERY SCHEDULE:
In April of each year, PWE will provide a forecast schedule of water use for the Facility for the following year to Operating Agent in order for Operating Agent to comply with notification requirements contained in the Agreements with SROG and/or the City of Tolleson. In June of each year, Operating Agent will provide a planned schedule of Treated Effluent to be provided to PWE for use in the Facility.
II. COMMUNICATIONS PROTOCOL:
A. Operating Agent will provide the following notices to PWE:
1. Thirty (30) days prior notice before changing Operating Parameters.
2. Immediate notification for full or partial interruption of water production, with such notices to include an estimate of the forecast time to return to full production.
3. A daily update on return to full production forecast following notification under subparagraph A.2 above.
4. Notification at least 10 days in advance of any planned outage including both the start and planned completion times.
B. PWE WILL PROVIDE THE FOLLOWING NOTICES TO OPERATING AGENT:
1. Immediate notification for partial or full interruption of the ability to receive Treated Effluent.
2. A daily update on PWE's ability to receive Treated Effluent following notification under subparagraph B.1 above.
3. Notification at least 10 days in advance of any planned PWE equipment or system outage, including both the start and planned completion times, that may impact the transportation or receipt of Treated Effluent by Redhawk.
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'
ATTACHMENT B
WASTEWATER TREATMENT PLANT EFFLUENT QUALITY
REQUIREMENTS FOR THE PVNGS WATER RECLAMATION PLANT
At a minimum, all Effluent discharged into the WRF Pipeline pursuant to this Agreement shall have received, prior to such discharge, both primary and secondary wastewater treatment at a wastewater treatment facility. All such Effluent shall also meet the minimum water quality parameters specified in the following table:

   PARAMETER DESCRIPTION             SPECIFICATION               UNITS
----------------------------         -------------           --------------
          Ammonia                        < 15                 mg/l as NH(3)

          Calcium                        < 150               mg/l as CaCO(3)

         Magnesium                       < 110               mg/l as CaCO(3)

         Alkalinity                      < 200               mg/l as CaCO(3)

          Chloride                       < 250                mg/l as Cl-

          Fluoride                       < 1.0                mg/l as F-

          Nitrate                        < 5.0                 mg/l as N

         Phosphate                      < 10.0                mg/l as PO(4)

          Sulfate                        < 180                mg/l as SO(4)

           Silica                       < 20.0               mg/l as SiO(2)

             Ph                        7.0 - 7.8                  pH

        Conductivity                    < 1350                   Mhos

Total Dissolved Solids(TDS)             < 1000                   mg/l

         Turbidity                       < 15                   N.T.U.

Total Suspended Solids(TSS)              < 15                    mg/l

 Biochemical Oxygen Demand               < 15                  mg/l BOD(5)	

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ATTACHMENT C
[DIAGRAM OF REDHAWK DELIVERY SYSTEM]
In accordance with Item 304 of
Regulation S-T of the Securities
Exchange Act of 1934, Attachment C
to this Agreement is a diagram of
the Redhawk delivery system.
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ATTACHMENT D
SAMPLE CALCULATION OF PER UNIT CHARGES
Redhawk Monthly Bill Calculation for
Transportation and Treatment
(Example)

(Based on Estimates for Calendar Year 2003)

Manpower                             $     91.00

Maintenance Materials                $     14.00

Contract Service & Labor             $     23.00

Capital Expenses                     $     94.00

A & G/Loads                          $     42.00

Chemicals                            $     49.00

Electricity                          $     14.00

  Total/Unit Cost                    $    327.00

Acre Feet Delivered                       822.00

  Total Charge                       $268,794.00	

29
 
Exhibit 10.103
AGREEMENT FOR THE TRANSFER AND USE
OF WASTEWATER EFFLUENT
This Agreement (the "Agreement") is made and entered into this 1st day of June , 2001 (the "Effective Date"), by and between Arizona Public Service Company, an Arizona corporation ("APS"), the Salt River Project Agricultural Improvement and Power District, an agricultural improvement district organized pursuant to the laws of the State of Arizona ("SRP"), and Pinnacle West Energy Corporation, an Arizona Corporation ("PWE"). APS, SRP and PWE are collectively referred to as the "Parties"; each is individually a "Party" to this Agreement.
RECITALS:
A. APS, SRP, and the City of Tolleson have executed an "Agreement for the Sale and Purchase of Wastewater Effluent," dated November 13, 2000 (the "Tolleson Agreement"), which is attached hereto as Attachment 1;
B. APS and SRP have entered into a related contract, the "Operating Agreement for the Co-Ownership of Wastewater Effluent" (the "Co-Ownership Agreement"), dated November 16, 2000, which is attached hereto as Attachment 2. The Co-Ownership Agreement sets forth the relative rights and obligations of APS and SRP in relation to their joint interest in the Tolleson Effluent purchased pursuant to the Tolleson Agreement;
C. The primary use of the Tolleson Effluent is intended to be for cooling water at Palo Verde Nuclear Generating Station ("PVNGS"); the secondary use of the Tolleson Effluent will be its use at "Other Electric Generating Facilities" (as defined by the Tolleson Agreement);
D. To the extent Tolleson Effluent is not used at PVNGS, the Tolleson Effluent may be used at or for the benefit of Other Electric Generating Facilities;
E. PWE, as an affiliate of APS, desires to make use of a portion of the Tolleson Effluent purchased by APS and SRP at Units 1 and 2 of PWE's Other Electric Generating Facility commonly referred to as "Redhawk";
F. APS and SRP are willing to transfer a portion of the Tolleson Effluent to PWE for use at Redhawk Units 1 and 2 upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the agreements and promises set forth below, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS AND USAGE
1.1 Definitions. As used in this Agreement, the following capitalized terms shall have the same meaning as they are given by definition in the Tolleson Agreement: Effluent
Pipeline, Notice of Commitment, Other Electric Generating Facility, Outages, Surplus Effluent, and Uncontrollable Forces; and the following capitalized terms shall have the same meaning as they are given in the Co-Ownership Agreement:
Claim, Coordinating Committee, Governmental Authority, Persons, PVNGS Participants and Tolleson Effluent. All such definitions from the Tolleson Agreement and the Co-Ownership Agreement are specifically incorporated in this Agreement by this reference. In addition, the following terms shall have the specified meanings:
"ANPP Participation Agreement" means the Arizona Nuclear Power Project Participation Agreement, dated August 23, 1973, as amended now and in the future.
"PVNGS Operating Agent" means the PVNGS Participant responsible for the performance of operating work and making capital improvements at PVNGS under the ANPP Participation Agreement.
"PVNGS Participant" means APS, SRP and the other entities having an ownership or leasehold interest in PVNGS and related facilities as parties to the ANPP Participation Agreement, including El Paso Electric Company, the Los Angeles Department of Water and Power, Public Service Company of New Mexico, Southern California Edison Company, Southern California Public Power Authority, and each additional entity that may succeed to any such interest in PVNGS and related facilities.
"Redhawk" means the proposed gas-fired electric generating station to be constructed by PWE on land located west of the City of Phoenix, near PVNGS. PWE's current plans call for construction of a (nominal) 2120 MW power generation facility, with four (nominal) 530 MW units to be phased in over several years.
"Redhawk Delivery Point" means the Delivery Point specified in the Transportation and Treatment Agreement for delivery of treated effluent to PWE for use at Redhawk.
"Redhawk Delivery System" means the pipeline, and all associated valves, meters and other equipment, facilities, easements and rights of way required to measure, control and transport effluent from the WRF (as hereafter defined) to Redhawk, such system to be more precisely described and defined in the Transportation and Treatment Agreement.
"Transportation and Treatment Agreement" means the agreement between PWE, as owner of Redhawk, and APS, as PVNGS Operating Agent, to provide transportation and treatment services through PVNGS facilities for effluent to be used by PWE at Redhawk.
"WRF" means the tertiary wastewater treatment facility at PVNGS, together with all appurtenant equipment, facilities, easements and rights of way for treatment of effluent.
"WRF Pipeline" means the WRF's associated Water Reclamation Supply System pipeline that conveys effluent from the SROG 91st Avenue and Tolleson wastewater treatment plants to the WRF, together with all appurtenant equipment, facilities, easements and rights of way.
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1.2 Certain Principles of Interpretation. In this Agreement, unless otherwise indicated or the context otherwise requires:
(i) the singular includes the plural and plural the singular when the context requires;
(ii) words importing any gender include the other gender;
(iii) references to "writing" include printing, typing, lithography, and other means of reproducing words in a tangible visible form;
(iv) the words "including," "includes," and "include" shall be deemed to be followed in each instance by the words, "without limitation";
(v) references to articles, sections, paragraphs, recitals, and exhibits are to this Agreement unless otherwise stated;
(vi) references to contracts and related instruments shall be deemed to include all subsequent amendments, extensions, and other modifications to such instruments (without, however, limiting any prohibition on any such amendments, extensions and other modifications by the terms of this Agreement);
(vii) references to Persons include their respective permitted successors and assigns and, in the case of Governmental Authorities, persons succeeding to their respective functions and capacities;
(viii) the words "hereof," "herein," "hereunder," and words of similar import shall refer to this Agreement as a whole and not to any particular provision thereof;
(ix) both Parties and their counsel participated extensively in the preparation and drafting of this Agreement; no rule of construction shall apply that would cause the interpretation of any claimed ambiguity in this Agreement against a Party determined to be the drafting Party;
(x) captions and headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose;
(xi) any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction and the provision that is prohibited or unenforceable shall be reformed or modified to reflect the parties' intent to the maximum extent permitted by applicable law; and
-3-
(xii) references to a "day," "week," "month," or "year" shall be construed as a calendar day, week, month, or year.
ARTICLE 2
PURPOSE AND SCOPE OF AGREEMENT; CAPACITY OF PARTIES
2.1 Purpose. The purpose of this Agreement is to transfer to PWE, for use at Redhawk Units 1 and 2, a portion of the Tolleson Effluent purchased by APS and SRP, to establish the terms upon which PWE may make use of the transferred Tolleson Effluent, and to provide for the payment by PWE of the purchase price of transferred Tolleson Effluent, as well as a fee to APS and SRP.
2.2 Scope. This Agreement relates solely to the business, activities and purposes set forth herein and, except as otherwise expressly provided herein, does not apply to any other activities, transactions, relationships, contracts, projects, or work of the Parties. Except to the extent expressly limited by the terms of this Agreement, no Party shall be restricted in any way from engaging in any activity or business falling outside the scope of this Agreement.
2.3 Capacity of Parties.
2.3.1 Capacity of PWE. For purposes of this Agreement, PWE is acting solely as an owner, and if there is more than one owner, as agent on behalf of all owners of Redhawk. PWE may in the future also assume the rights and obligations of APS under this Agreement as provided in Section 10.3.1, and it may assume the rights and obligations of APS as a Participant and Operating Agent of PVNGS pursuant to the terms of the ANPP Participation Agreement. If PWE assumes the rights and obligations of APS under this Agreement and the rights and obligations of APS as Operating Agent under the ANPP Participation Agreement then: (i) PWE shall act solely in its capacity as an owner, and if there is more than one owner, as agent on behalf of the owners of Redhawk in all instances where this Agreement establishes rights or obligations applicable to PWE as owner of Redhawk; (ii) PWE shall act solely in its capacity as successor to the rights and obligations of APS under this Agreement in all instances where rights and obligations are established by this Agreement for APS in its individual capacity; and (iii) PWE shall act solely in its capacity as Operating Agent in all instances where rights and obligations of the Operating Agent, or APS acting as Operating Agent, are established by this Agreement.
2.3.2 Capacity of APS. For purposes of this Agreement, APS is acting solely in its capacity as an individual party to this Agreement, except for the specific obligations established in Section 3.5 for APS acting as the Operating Agent. For purposes of satisfying its obligations under Section 3.5 APS will act solely in its capacity as Operating Agent for the limited purpose of satisfying those specific obligations.
2.3.3 Capacity of SRP. For purposes of this Agreement, SRP is acting solely in its capacity as an individual party to this Agreement.
-4-
ARTICLE 3
TRANSFER AND USE OF TOLLESON EFFLUENT
3.1 Transfer of Tolleson Effluent to PWE. APS and SRP hereby transfer to PWE, in one or more increments, up to 7,500 acre-feet per year of Tolleson Effluent, conditioned upon the existence of the following circumstances at the time of each transfer:
3.1.1 PVNGS has available, from all sources other than any emergency supplies not intended for use during normal operations, sufficient supplies of treated wastewater to satisfy all of its cooling water needs. Notwithstanding the transfer of Tolleson Effluent to PWE pursuant to this Agreement, PVNGS may, at any time, call for and make use of Tolleson Effluent to the extent such Tolleson Effluent is required for cooling water purposes at PVNGS. Except in cases of operational emergency, APS, as Operating Agent of PVNGS, shall provide PWE reasonable notice of any need to begin using Tolleson Effluent at PVNGS that would otherwise have been available for use at Redhawk.
3.1.2 PWE provides written notice, on or before the dates specified in this Section, to APS and SRP of its need for a specified quantity, up to 7,500 acre-feet per year, of Tolleson Effluent to be used at Redhawk Units 1 and
2. PWE may submit one or more notices pursuant to this Section, each specifying the quantity of Tolleson Effluent required for operation of Redhawk Units 1 and
2. PWE shall provide the notice or notices required by this Section no later than September 1, 2002 and, in any event, prior to use of any water for cooling purposes at Redhawk Units 1 and 2. If any of the 7,500 acre-feet of Tolleson Effluent subject to this Agreement is not specified for use at Redhawk Units 1 and 2 in a notice or notices submitted by PWE to APS and SRP no later than September 1, 2002, that quantity shall no longer be available to PWE pursuant to this Agreement after that date.
3.1.3 The Transportation and Treatment Agreement is in effect and no uncured default thereunder exists.
3.1.4 PWE employs commercially reasonable efforts to complete construction and have Redhawk Units 1 and 2 operational by December 31, 2002, and thereafter begins to take Tolleson Effluent for use at Redhawk Units 1 and 2 consistent with the terms and conditions of this Agreement and the Transportation and Treatment Agreement.
3.1.5 The Tolleson Agreement is in effect, and no uncured default thereunder exists.
3.2 Submittal of Notices of Commitment to Tolleson. Upon receipt of a notice from PWE pursuant to Section 3.1.2, and confirmation of the existence of the conditions stated in Sections 3.1.1, 3.1.3, 3.1.4 and 3.1.5, APS and SRP shall promptly submit a Notice of Commitment to Tolleson pursuant to Section 8.2 of the Tolleson Agreement, confirming a commitment to transfer to PWE, for use at Redhawk Units 1 and 2, the quantity of Tolleson Effluent specified by PWE.
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3.3 Use of Tolleson Effluent at Redhawk. Upon satisfaction of the conditions set forth in Section 3.1, and subject to the terms and conditions of the executed Transportation and Treatment Agreement, PWE shall begin to take Tolleson Effluent for use at Redhawk Units 1 and 2 when those units are capable of taking Tolleson Effluent. Use of Tolleson Effluent by PWE pursuant to this Agreement shall be limited to all or any of the following: (i) direct use for cooling at Redhawk Units 1 and 2; (ii) incidental, on-site, non-commercial uses at Redhawk Units 1 and 2; (iii) use in a water exchange by which PWE obtains other sources of water for direct use for cooling and incidental, on-site, non-commercial uses at Redhawk Units 1 and 2; (iv) underground storage and recovery of the Tolleson Effluent, as permitted by state law, for cooling water use and incidental on-site, non-commercial uses at Redhawk Units 1 and 2. No other use of Tolleson Effluent transferred pursuant to this Agreement shall be permitted unless and until the Coordinating Committee established by Article 4 of the Co-Ownership Agreement separately approves such use. Notwithstanding anything in this Section 3.3 to the contrary, all uses of Tolleson Effluent shall be consistent with and not in violation of the Tolleson Agreement.
3.4 PWE Commitment to Use Tolleson Effluent at Redhawk Units 1 and 2. During the term of this Agreement, PWE shall take Tolleson Effluent made available to it at the Redhawk Delivery Point, and shall use such Tolleson Effluent to satisfy all of its cooling water requirements at Redhawk Units 1 and 2 up to the full quantity of Tolleson Effluent made available at the Redhawk Delivery Point on a daily basis. Only after taking all Tolleson Effluent made available on a daily basis at the Redhawk Delivery Point may PWE make use of any other source of treated wastewater or groundwater for cooling water purposes at Redhawk Units 1 and 2. In addition, subject to the last sentence in this Section 3.4, PWE may pump groundwater at Redhawk for purposes of: (i) providing cooling water for use at Redhawk Units 1 and 2 to the extent that and during the time that demand for cooling water at Redhawk Units 1 and 2 exceeds the amount of Tolleson Effluent made available to PWE at the Redhawk Delivery Point; (ii) keeping the Redhawk Storage Reservoir full; and (iii) uses at Redhawk other than cooling water for Redhawk Units 1 and 2. All groundwater pumping and use pursuant to this Section 3.4 shall be conducted in a manner which does not interfere with PWE's ability to comply with its obligation to take Tolleson Effluent made available at the Redhawk Delivery Point on a daily basis for cooling water purposes at Redhawk Units 1 and 2.
3.5 Requirement to Withhold Delivery. APS, as PVNGS Operating Agent, shall stop delivery to Redhawk of Tolleson Effluent whenever PWE is in breach of its obligations under Section 3.4 herein; provided, however, that upon curing any breach of its obligations under Section 3.4, PWE shall be entitled to have delivery to Redhawk restored for Tolleson Effluent to which it has contractual rights, so long as such deliveries are consistent with the terms of this Agreement, the Transportation and Treatment Agreement and the Tolleson Agreement.
3.6 Enforcement by SRP. Notwithstanding the notice provisions under
Section 7.1, any breach by PWE of its obligations under Sections 3.3 or 3.4, or any breach by APS of its obligations under Section 3.5, shall entitle SRP to pursue any available remedies at law or in equity against the breaching Party, upon five (5) days prior notice to that Party.
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ARTICLE 4
PAYMENT FOR TOLLESON EFFLUENT TRANSFERRED TO PWE
4.1 Operating Account. APS shall establish an operating account to track quantities of Tolleson Effluent delivered to PWE for use at Redhawk Units 1 and 2; corresponding charges to be paid by, and payments received from PWE pursuant to this Article; and disbursements made by APS pursuant to Section 4.4. Prior to the initiation of deliveries of Tolleson Effluent to PWE pursuant to this Agreement, PWE shall pay to APS the sum of $60,000 to establish an initial balance for this operating account. Thereafter, PWE shall pay such sums to APS as are necessary to maintain a minimum balance in the operating account equal to the greater of $60,000 or the amount of the largest monthly invoice delivered to PWE pursuant to this Agreement during the previous twelve month period (the "Minimum Balance").
4.2 Submittal and Payment of Invoices. APS shall, on a monthly basis, present invoices to PWE for payment of amounts owed by PWE as provided in this Article. PWE shall submit payment to APS within 30 days after receipt of each invoice. If PWE disputes the amount set forth in any billing statement, PWE will provide notice of such dispute at the time of payment, but may not withhold payment of the disputed amount. The Parties shall attempt to resolve the dispute through informal consultation as provided in Section 7.2 before resorting to litigation to resolve the dispute. So long as PWE actually pays the invoiced amount when due: (i) the act of doing so under protest shall not constitute a default under this Agreement; and (ii) APS and SRP shall not refuse, based solely on the protest, to deliver Tolleson Effluent while the protest is being resolved. If PWE fails to pay the amount stated in any invoice within 30 days after receipt and the operating account balance is below the minimum balance established pursuant to Section 4.1, APS shall, after providing ten (10) days written notice to PWE, cease delivering Treated Effluent into the Redhawk Delivery System until payment in full for any unpaid invoice(s) is received from PWE and a positive balance of not less than the Minimum Balance is reestablished in the operating account. If all amounts due under invoices issued by APS are not paid in full and the operating account is not reestablished to a positive balance of not less than the Minimum Balance within ten (10) days after written notice to PWE pursuant to the immediately preceding sentence, PWE shall be liable for late payment fees equal to the lesser of 1.5% per month or the highest amount allowed by law, applied to the amounts due under the unpaid invoice(s). If PWE's failure to pay amounts due under any invoice continues for a period of six months after receipt of written notice of default pursuant to this Section, this Agreement shall automatically terminate, subject to survival of the payment obligations of this Article 4 and the indemnification provisions of Article 9.
4.3 Content of Invoices. Invoices presented to PWE pursuant to this Article shall itemize charges in the following categories:
4.3.1 The purchase price payable to Tolleson, as specified in
Section 2.2 of the Tolleson Agreement, for each acre-foot of Tolleson Effluent actually delivered to PWE at the Redhawk Delivery Point.
4.3.2 The "take or pay" price payable to Tolleson, as specified in
Section 2.5 of the Tolleson Agreement, for any Surplus Effluent that:
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(i) PWE is committed to purchase by virtue of the notice(s) issued pursuant to Section 3.1;
(ii) meets the water quality requirements of Section 3 of the Tolleson Agreement; and
(iii) is not actually used at either Redhawk Units 1 and 2 or at PVNGS.
During the term of this Agreement, PWE shall be obligated to pay any applicable "take or pay" charges for Tolleson Effluent PWE is committed to purchase by virtue of the notices issued pursuant to Section 3.1 regardless of whether Redhawk Units 1 and 2 are capable of taking that Tolleson Effluent.
4.3.3 An annual fee of $22,600 payable to APS and SRP, such fee to be assessed in a separate invoice submitted to PWE no later than January 31 each year during the term of this Agreement. The first installment of this fee shall be prorated for the year to the Effective Date of this Agreement and shall be invoiced by APS to PWE within 30 days after the Effective Date. The final installment shall also be prorated for the year in which this Agreement is terminated, up to and including the date of termination. If the fee already has been paid by PWE during the year of termination, any amount paid in excess of the prorated amount owed by PWE through the date of termination shall be refunded by APS and SRP. This fee shall be adjusted for inflation in the same manner as provided for adjustments to the purchase prices paid to Tolleson for Tolleson Effluent under Sections 2.1 and 2.2 of the Tolleson Agreement, using the formula set forth in Exhibit A to the Tolleson Agreement.
4.4 Processing of Payments Through Operating Account. APS shall promptly process payments through the operating account in the following manner:
4.4.1 Payments received from PWE pursuant to invoices submitted under Section 4.2 shall be deposited into the operating account created pursuant to Section 4.1.
4.4.2 The purchase price for Tolleson Effluent used at Redhawk Units 1 and 2 shall be paid to Tolleson as provided in Section 2.3 of the Tolleson Agreement.
4.4.3 Any "take or pay" amount owed by PWE, as determined under
Section 4.3.2 of this Agreement, shall be paid to Tolleson as provided in
Section 2.5 of the Tolleson Agreement.
4.4.4 The fee assessed pursuant to Section 4.3.3 shall be divided evenly between APS and SRP. APS, in its sole discretion, may choose to forego payment of its one-half of this fee; in which case, it shall so state in the invoices submitted to PWE, and thereafter shall disburse the entire remainder of the fee to SRP.
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ARTICLE 5
POTENTIAL TRANSFERS OF ADDITIONAL TOLLESON
EFFLUENT TO REDHAWK OR OTHER ELECTRIC GENERATING FACILITIES
Any transfers of additional Tolleson Effluent, for use at Redhawk or any Other Electric Generating Facility other than Redhawk, will be subject to the negotiation of a separate agreement between APS and SRP, and confirmation by the Coordinating Committee. The terms and conditions of any transfer of additional Tolleson Effluent to Redhawk or Other Electric Generating Facilities shall be substantially the same as those contained in this Agreement. If APS and SRP enter into a separate agreement for the transfer of Tolleson Effluent for use at an Other Electric Generating Facility other than Redhawk and that separate agreement contains terms and conditions more favorable to the owner(s) of the Other Electric Generating Facility than are contained in this Agreement, PWE shall be entitled to have this Agreement modified to incorporate those more favorable terms and conditions.
ARTICLE 6
TERM
6.1 Term. This Agreement shall commence on the Effective Date and shall terminate upon the expiration or termination of the Tolleson Agreement, unless earlier terminated pursuant to Section 6.2 or 6.3 below.
6.2 Permanent Cessation of Operations. This Agreement shall terminate sixty days after permanent cessation of operations of Redhawk Units 1 and 2 unless APS and SRP, acting through the Coordinating Committee, and PWE, as owner of Redhawk, specifically agree to continue this Agreement in effect within that sixty day period. For purposes of this Agreement, a permanent cessation of operations for Redhawk Units 1 and 2 shall mean: (i) initiation of physical decommissioning activities at both units; (ii) written notice from PWE to APS and SRP confirming PWE's intention to permanently cease operation of both units; or (iii) failure to maintain all regulatory certifications and permits required for operation of at least one of Redhawk Units 1 and 2 and to keep at least one of Redhawk Units 1 and 2 in such condition that it is capable of being restored to active power production in not more than a 270 day period. If PWE permanently ceases operation of only one of Redhawk Units 1 and 2, this Agreement shall not terminate, but PWE's rights to Tolleson Effluent transferred under this Agreement shall be reduced to a quantity of 3,750 acre-feet per year, which shall thereafter be limited to use at the Redhawk unit (of Units 1 and 2) that has not permanently ceased operation.
6.3 Temporary Cessation of Operations. If PWE temporarily ceases operation of Redhawk Units 1 and 2 (for reasons other than because PVNGS is using Tolleson Effluent to the extent that there is insufficient Tolleson Effluent available for PWE to operate Redhawk Units 1 and 2), and as a result PWE does not take any Tolleson Effluent under this Agreement for a period in excess of three years, APS and SRP shall provide PWE notice of their intention to terminate this Agreement. Within sixty days after receipt of such notice, PWE may elect to begin paying a "Holding Fee" to APS and SRP in the amount of $10 per acre-foot per year for each acre-foot of Tolleson Effluent to which PWE desires to retain its rights under this Agreement. As long as PWE continues paying the Holding Fee to APS and SRP, this Agreement
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shall remain in full force and effect, provided, however, that an election to pay the Holding Fee (i) shall not release PWE from its obligation to satisfy the "take or pay" obligations required by Article 4 herein and by the Tolleson Agreement, and (ii) shall obligate PWE to pay the annual fee in Section 4.3.3 in addition to the Holding Fee. If PWE fails to make the first annual Holding Fee payment within sixty days after receiving notice from APS and SRP as provided in this Section, this Agreement shall terminate on the sixty-first day after that notice is received by PWE.
6.4 Continued Use of Tolleson Effluent if Transportation and Treatment Agreement Terminates. If the Transportation and Treatment Agreement is terminated for any reason during the term of this Agreement, this Agreement shall remain in effect provided that: (i) within one year of the date of termination of the Transportation and Treatment Agreement, PWE shall submit to the Coordinating Committee a plan for construction of an alternative means of direct Tolleson Effluent deliveries to Redhawk, implementation of a water exchange, or implementation of an underground storage and recovery project pursuant to which PWE will be able to continue to use Tolleson Effluent at Redhawk Units 1 and 2; (ii) within five years of the date of Termination of the Transportation and Treatment Agreement, PWE shall have obtained all necessary permits, approvals, consents and agreements required to construct and operate the alternative means of direct Tolleson Effluent deliveries or implement the plan for water exchange or underground storage and recovery project, and shall resume taking Tolleson Effluent; and (iii) within 60 days after termination of the Transportation and Treatment Agreement, PWE shall begin paying an annual "Interim Fee" to APS and SRP in the amount of $10 per acre-foot per year for each acre-foot of Tolleson Effluent to which PWE desires to retain its rights under this Agreement. PWE shall continue to pay the Interim Fee until it resumes taking Tolleson Effluent for use at Redhawk Units 1 and 2. If PWE fails to satisfy all requirements of this section within the specified periods of time after termination of the Transportation and Treatment Agreement, this Agreement shall thereafter terminate.
6.5 No Termination or Material Breach of Tolleson Agreement. During the term of this Agreement, neither APS nor SRP shall materially breach the Tolleson Agreement, and, except as provided below in this Section 6.5, they shall exercise commercially reasonable efforts to maintain their right to purchase Tolleson Effluent from the City of Tolleson pursuant to that agreement. Notwithstanding anything in this Agreement to the contrary, APS and SRP may terminate the Tolleson Agreement to the extent permitted under Sections 2.1 and 12.3.1 of the Tolleson Agreement, as limited by Section 2.5 of the Tolleson Agreement. Notwithstanding the notice provisions under Section 7.1, any breach by APS or SRP of their obligations under this Section shall entitle PWE to pursue any available remedies at law or in equity against a breaching Party, upon five (5) days prior notice, and to take any action that PWE may be entitled to take to cure a material breach of the Tolleson Agreement.
6.6 Survival. All obligations and liabilities of the Parties under this Agreement shall cease upon termination except the obligations of the Parties under Article 4 and under Article 9, and the liabilities of any Party resulting from a default by such Party leading to such termination.
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ARTICLE 7
DEFAULT AND DISPUTE RESOLUTION
7.1 Events of Default. A Party shall be in default under this Agreement upon the occurrence of the following ("Event of Default"): if it fails to render performance required under any material provision of this Agreement when due and such failure continues unremedied for thirty (30) days following written notice to the Party in default given by any other Party. No Party shall be in default under this Agreement due to Uncontrollable Forces or Outages as identified in
Section 9.1 of the Tolleson Agreement. It shall also be an Event of Default if a Party shall have commenced any insolvency, receivership, bankruptcy, liquidation, or similar proceedings and (i) one hundred twenty (120) days shall have expired from the commencement of any one or more of such proceedings, and
(ii) a petition commencing the proceeding has not been dismissed or stayed within that time.
7.2 Dispute Resolution. In the event of any dispute between the Parties concerning the rights and obligations created by this Agreement, or concerning any Event of Default, the Parties shall first confer in an attempt to informally resolve such dispute without need to resort to arbitration or litigation. Except in the case of: (i) a material breach by PWE of its obligations under Section 3.3 or 3.4; (ii) a material breach by APS of its obligations under Section 3.5; or (iii) a material breach by APS or SRP of their obligations under Section 6.5; the Parties shall not resort to arbitration or litigation to enforce their rights under this Agreement until 15 days after they begin to confer in good faith to informally resolve their dispute. If the Parties are unable to resolve their dispute after conferring as required in the preceding sentence, then during the period that any Event of Default continues, the non-defaulting Party or Parties may, without prejudice to any other available rights or remedies under this Agreement or at law or in equity, and without constituting an election of an exclusive remedy for an Event of Default, initiate non-binding arbitration by one arbitrator who has not previously been employed by any Party (excluding employment as an arbitrator), and does not have a direct or indirect interest in any Party or the subject matter of the arbitration. The arbitrator shall either be as mutually agreed by the Parties within fifteen (15) calendar days after submission of the matter to arbitration, or failing agreement shall be selected under the expedited rules of the American Arbitration Association ("AAA"). The rules of AAA shall apply to the extent not inconsistent with the provisions in this Section. Arbitration shall be conducted according to the following: (a) not later than seven (7) days prior to the hearing date set by the arbitrator, each Party shall submit a brief with a single proposal for settlement; (b) the hearing shall be conducted on a confidential basis without continuance or adjournment; and (c) the Parties shall divide equally the cost of the arbitrator and the hearing, and each Party shall be responsible for its own expenses, including its counsel and representatives.
ARTICLE 8
NOTICES
8.1 Notice Provision. All notices, demands, consents, invoices or other communications required under this Agreement shall be in writing and may be delivered personally to a Party, may be delivered by facsimile providing written confirmation of successful
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transmission, or may be mailed by deposit in the United States Certified Mail, return receipt requested, or by deposit with a reputable overnight delivery service. Notices shall be effective:
(i) on the date delivered by personal delivery or facsimile;
(ii) three (3) business days following the date deposited in the United States mail; or
(iii) the next business day following delivery to a reputable overnight delivery service.
8.1.1 Notices or communications shall be delivered and mailed to the Parties at the following addresses, or at any other address substituted by a Party from time to time by written notice to the other Parties:

To APS:   Arizona Public Service Company
          Palo Verde Nuclear Generating Station
          WRF Manager
          Mail Station 6215
          P.O. Box 52034
          Phoenix, Arizona 85072-2034
          Telephone: 623-393-3000
          Facsimile: 623-393-1688

To SRP:   Salt River Project Agricultural
          Improvement and Power District
          c/o Secretary
          P.O. Box 52025
          Phoenix, Arizona 85072-2025
          Telephone: 602-236-5005
          Facsimile: 602-236-2188

To PWE:   Pinnacle West Energy Corp.
          Mail Station 8983
          P.O. Box 53999
          Phoenix, Arizona 85072-3999
          Attention: Redhawk Plant Manager
          Telephone: 602-250-2575
          Facsimile: 602-250-2153

                        ARTICLE 9
                        LIABILITY	

9.1 Limitation of Liability. The liability of a Party to any other Party under this Agreement shall be limited to the direct damages actually sustained by the other Party or Parties. NO PARTY SHALL BE LIABLE TO THE OTHER PARTIES FOR
ANY LOSS OR
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DAMAGE IN THE NATURE OF PARTIAL OR COMPLETE LOSS OF USE OF ANY GENERATING FACILITY, LOSS OF ELECTRIC POWER, COST OF REPLACEMENT OF ELECTRIC POWER, OR FOR ANY LOSS OF INTEREST, REVENUE OR ANTICIPATED PROFITS FROM ACTIVITIES UNDER THIS AGREEMENT. NO PARTY SHALL BE LIABLE TO THE OTHER PARTIES FOR ANY INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS (OTHER THAN ANY UNPAID FEE OWED TO APS AND SRP PURSUANT TO SECTION 4.3.3), ARISING OUT OF OR RELATED TO THIS AGREEMENT. (The limitations in this Section 9.1 shall not apply to losses in tort to third parties or to Claims against which a Party is entitled to indemnitee protection under Section 9.2.)
9.2 Indemnity For Claims Asserted by Third Parties.
9.2.1 APS and SRP (each an "Indemnifying Party") shall defend, indemnify, and hold harmless PWE and its respective affiliates, directors, officers, partners, members, employees, agents, and representatives (each a "PWE Indemnitee") from and against any and all Claims, liability, cost, loss or expense of any kind (including reasonable legal, accounting, consulting, engineering and other fees) that may be imposed on, incurred by, or asserted against the PWE Indemnitees by any other party or parties (including a governmental entity) arising out of the fraud, or a negligent or intentional act or omission, of the Indemnifying Party or its agents or representatives in connection with this Agreement. In this obligation APS and SRP shall not be jointly and severally liable, but each shall be responsible to the PWE Indemnitees for the claims allegedly arising out if its own fraud, negligent or intentional act or omission. In the event any such Claim, liability, cost, loss or expense asserted by a person not a Party to this Agreement is caused by an alleged joint or concurrent fraud, or negligent or intentional act or omission, the Parties at fault shall bear liability in proportion to their own degrees of culpability.
9.2.2 PWE shall defend, indemnify, and hold harmless APS and SRP and their respective affiliates, directors, officers, partners, members, employees, agents, and representatives (each an "APS/SRP Indemnitee") from and against any and all Claims, liability, cost, loss or expense of any kind (including reasonable legal, accounting, consulting, engineering and other fees) that may be imposed on incurred by, or asserted against the APS/SRP Indemnitees by any other party or parties (including a governmental entity) arising out of the fraud, or a negligent or intentional act or omission, of PWE or its agents or representatives in connection with this Agreement.
9.2.3 PWE shall defend, indemnify, and hold harmless the APS/SRP Indemnitees from and against any and all Claims, liability, cost, loss or expense of any kind (including reasonable legal, accounting, consulting, engineering and other fees) that may be imposed on, incurred by, or asserted against the APS/SRP Indemnitees by any other party or parties (including a governmental entity) arising out of the receipt, transportation and use of Tolleson Effluent after discharge of the same at the Redhawk Delivery Point, including but not limited to any Release or Threat of Release of a Hazardous Material or Substance (as defined in the Treatment and Transportation Agreement) in connection with or resulting from its activities pertaining to this Agreement or in connection with or resulting from the use by PWE of Tolleson Effluent after delivery to PWE at the Redhawk Delivery Point. PWE shall promptly notify APS
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and SRP of any such claim and of any Release or Threatened Release of a Hazardous Material or Substance, or violation of Environmental Law or permit condition.
9.2.4 PWE shall defend, indemnify, and hold harmless the APS/SRP Indemnitees from and against any and all Claims, liability, cost, loss or expense of any kind (including reasonable legal, accounting, consulting, engineering and other fees) that may be imposed on, incurred by, or asserted against the APS/SRP Indemnitees by any other party or parties (including a governmental entity) arising out of PWE's withdrawal and use of groundwater at Redhawk.
9.3 Responsibility For and Risk Associated With Transferred Tolleson Effluent.
9.3.1 All risks associated with the transportation, treatment, use, disposal and payment for the Tolleson Effluent transferred to PWE pursuant to this Agreement, shall be the responsibility of PWE from and after discharge of that Tolleson Effluent into the WRF Pipeline at the Delivery Point specified in the Tolleson Agreement; provided, however, that: (i) ownership of the Tolleson Effluent shall not transfer to PWE until it is discharged into the Redhawk Delivery System as specified in the Transportation and Treatment Agreement; and
(ii) APS, as Operating Agent of PVNGS, shall remain responsible for physical transportation and treatment of the Tolleson Effluent through the WRF Pipeline and WRF until the point of discharge into the Redhawk Delivery System, consistent with the terms and conditions of the Transportation and Treatment Agreement.
9.3.2 During such times as Tolleson Effluent is being transported through the WRF Pipeline and treated in the WRF, PWE, as owner of Redhawk, shall share proportionally in all risks and liability, if any, associated with or arising from the transportation, treatment, disposal and other management of the Tolleson Effluent. Regardless of any allocation or limitation of liabilities and indemnification under the Transportation and Treatment Agreement, PWE's proportional share under the preceding sentence shall initially be set at 50% of the total liability, if any, that is unrelated to the transportation, treatment, disposal and other management of the Tolleson Effluent (and no other source of effluent) prior to delivery to PWE at the Redhawk Delivery Point. If the amount of Tolleson Effluent transferred to PWE for use at Redhawk either materially increases or materially decreases during the term of this Agreement, or if PVNGS materially reduces or ceases the delivery of Tolleson Effluent into the Redhawk Delivery System for a period of time exceeding six months, any Party may request that PWE's share of potential liability under this Section be adjusted to a proportion that accurately reflects the percentage of Tolleson Effluent being transported and treated through the WRF Pipeline and WRF on an annual basis for PWE's use at Redhawk, in comparison to the percentage of Tolleson Effluent being transported and treated through the WRF Pipeline and WRF on an annual basis for other purposes. Upon being notified of a Party's request for such an adjustment, the Parties shall meet to negotiate in good faith and establish a new proportional share of PWE's potential liability consistent with the terms of this Section.
9.3.3 If Tolleson Effluent transferred pursuant to this Agreement is delivered or made available to PWE for use at Redhawk by means other than discharge into the WRF Pipeline for transportation to and treatment at the WRF, then PWE shall bear all risks associated
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with receipt, management, use, disposal and payment for such Tolleson Effluent from and after its delivery by Tolleson to or for the benefit of PWE.
9.4 Claims by Tolleson for Higher Price for Effluent. As provided in
Section 4.3.1 of this Agreement, APS shall bill PWE, as owner of Redhawk, the price specified in Section 2.2 of the Tolleson Agreement only for that quantity of Tolleson Effluent actually delivered to PWE at the Redhawk Delivery Point. If the City of Tolleson claims entitlement to the price specified in Section 2.2 of the Tolleson Agreement for the full quantity of 7,500 acre-feet being transferred to PWE pursuant to this Agreement, regardless of whether that full quantity is actually delivered to PWE for use at Redhawk, PWE shall defend, indemnify, and hold harmless APS, SRP and the other PVNGS Participants, as well as their respective affiliates, directors, officers, partners, members, employees, agents, and representatives from and against any and all Claims, liability, cost, loss or expense of any kind arising out of Tolleson's claim to such entitlement. PWE may, in its sole discretion and after 10 days' prior notice to APS and SRP, choose to pay or settle any such claim without prior approval by APS or SRP; provided, however, that PWE shall not be entitled to act as agent for APS and SRP for purposes of amending the Tolleson Agreement or affecting APS and SRP's rights and obligations thereunder.
9.5 Survival of Indemnification Obligations. The payment obligations of PWE set forth in Article 4, and the indemnification obligations of the Parties set forth in this Article 9 shall survive the termination or expiration of this Agreement.
9.6 Liability of PVNGS Operating Agent. Any liability of the PVNGS Operating Agent to the PVNGS Participants for the acts or omissions of the PVNGS Operating Agent or its employees or contractors shall be determined under the provisions of the ANPP Participation Agreement.
ARTICLE 10
GENERAL
10.1 Entire Agreement. This Agreement supersedes all prior and contemporaneous conduct and communications, whether written or oral, pertaining to the transfer of 7,500 acre-feet per year of Tolleson Effluent from APS and SRP to PWE for use at Redhawk Units 1 and 2. Notwithstanding the foregoing, this Agreement shall be read together with the November 13, 2000 Tolleson Agreement, the November 16, 2000 Co-Ownership Agreement, and the Transportation and Treatment Agreement to obtain necessary definitions and to otherwise determine the intention of the Parties. This Agreement may not be modified, changed or added to except in writing signed by all Parties hereto.
10.2 Waiver. Each Party's failure or delay in enforcing the terms and conditions of this Agreement or insisting upon strict performance of any of the other Parties' obligations shall not be interpreted as a waiver thereof. Waiver of any provision of this Agreement shall only be effective if in writing and shall not be interpreted as a waiver of any subsequent breach or failure under the same or any other provision of this Agreement. No conduct, statement, course of conduct, course of dealing, oral expression or other action shall be construed as a waiver.
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10.3 Assignment.
10.3.1 Assignment by APS to PWE. APS may assign its rights and delegate its duties under this Agreement at any time to PWE, provided that APS assigns its entire interest in this Agreement and that PWE assumes in writing all of the APS obligations under this Agreement, and provided further that such assignment shall not become effective until and unless PWE has become a party to the ANPP Participation Agreement. No assignment or delegation under this Section 10.3.1 will release APS from its obligations under this Agreement unless SRP consents to a release (such consent not to be unreasonably withheld, conditioned or delayed). Any subsequent assignment of the Operating Agent's obligations under this Agreement may only be made in conjunction with a corresponding assignment of the Operating Agent's rights and obligations under the ANPP Participation Agreement, and such assignment also shall be subject to all terms and conditions of this Agreement, including the restrictions of Section 10.3.2.
10.3.2 Assignment to Others. With the prior written consent of the other Parties (such consent not to be unreasonably withheld, conditioned or delayed), a Party may assign its rights and delegate its duties under this Agreement at any time to any other PVNGS Participant or, in the case of PWE as owner of Redhawk and transferee of the right to use Tolleson Effluent, to any other owner of Redhawk, provided that such Party's assignee assumes in writing all of such Party's obligations under this Agreement. No assignment or delegation under this Section 10.3.2 will release the assigning Party from its financial and indemnification obligations under this Agreement unless the other Party or Parties consent to a release (such consent not to be unreasonably withheld, conditioned or delayed). Any assignee to whom the rights and obligations of this Agreement are assigned pursuant to this Section 10.3.2 shall thereafter be subject to all terms and conditions of this Agreement, including the restrictions of this Section 10.3.2.
10.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Arizona.
10.5 Attorneys' Fees. Except in case of arbitration conducted pursuant to
Section 7.2, should any Claim be brought by a Party against another Party or Parties arising out of this Agreement, including any action for declaratory or injunctive relief, the prevailing Party or Parties shall be entitled to reasonable attorneys' fees and costs and expenses of litigation and investigation, all as actually incurred, including attorneys' fees, costs and expenses of litigation and investigation incurred in the proceedings, including appellate proceedings, or in any action or participation in, or in connection with, any case or proceeding under the United States or other bankruptcy laws, and any judgment or decree rendered in any such action or proceedings shall include an award thereof.
10.6 Counterparts. This Agreement may be executed by the Parties in any number of separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. All signatures need not be on the same counterpart.
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10.7 Relationship of the Parties. The execution of this Agreement shall not create or constitute a partnership, joint venture, entity or any form of business organization between the Parties.
IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of the Effective Date.
ARIZONA PUBLIC SERVICE COMPANY,
 an Arizona corporation,

By /s/ James M. Levine
  __________________________________________________
         Its Executive Vice President, Generation
            ________________________________________	

SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT,
an Arizona Agricultural Improvement District

By /s/ William P. Schrader
  __________________________________________________
         Its President
            ________________________________________	

Approved as to form:

By /s/ Richard N. Morrison
  __________________________________________________

PINNACLE WEST ENERGY CORPORATION,
an Arizona Corporation

By /s/ Ajoy K. Banerjee
  __________________________________________________
         Its Vice President
            ________________________________________	

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ATTACHMENT 1
AGREEMENT FOR THE SALE AND PURCHASE
OF WASTEWATER EFFLUENT
THIS AGREEMENT, is made and entered into this 13th day of November 2000, by and between the City of Tolleson, a municipal corporation organized and existing under and by virtue of the laws of the State of Arizona ("Tolleson" or "City"), and Arizona Public Service Company, a corporation organized and existing under and by virtue of the laws of the State of Arizona ("APS") and Salt River Project Agricultural Improvement and Power District, an agricultural improvement district organized and existing under and by virtue of the laws of the State of Arizona ("SRP"). The City, APS and SRP are collectively referred to herein as the "Parties." APS and SRP are collectively referred to herein as "The Companies." All references to "The Companies" in this Agreement shall include APS or SRP, or both APS and SRP, or any affiliated or successor entity to either SRP or APS, including but not limited to Pinnacle West Energy Corporation, an affiliate of APS.
WITNESSETH:
WHEREAS, Tolleson owns, operates and maintains a wastewater treatment plant (hereinafter the "Plant") situated approximately 1/4 mile south of State Route 85 and approximately 1/4 mile west of 91st Avenue at which Tolleson treats raw sewage collected from sources within and outside of the corporate boundaries of Tolleson and produces treated wastewater effluent which, unless used by Tolleson for other purposes, is discharged into the Salt River in accordance with the laws of the United States and the State of Arizona (hereinafter "Effluent" or "Tolleson Effluent");
WHEREAS, the rated treatment capacity of the Plant, assuming typical influent quality, is currently approximately 17.5 million gallons per day (hereinafter "M.G.D.") of influent;
WHEREAS, Tolleson is evaluating the possibility of having the existing Plant re-rated to a capacity of greater than 17.5 M.G.D. of influent, and Tolleson may in the future expand Tolleson's capacity in the Plant to create capacity beyond 17.5 M.G.D.;
WHEREAS, Tolleson desires to reserve for its use and disposition as it may in its own discretion elect, 10% of the amount of Effluent produced at the Plant (hereinafter "Reserved Effluent");
WHEREAS, Reserved Effluent may be used, sold or otherwise disposed of by Tolleson for any lawful purpose, including delivery and sale to The Companies consistent with the terms of this Agreement;
WHEREAS, Tolleson desires to sell and The Companies desire to purchase all available "Surplus Effluent," which for the purposes hereof shall be all of the Effluent produced through the operation of the Plant in excess of the Reserved Effluent, but not to exceed the maximum capacity of the current interconnection (the "Interconnection Facilities") between the Plant and the pipeline (the "Effluent Pipeline") that supplies effluent to the Palo Verde Nuclear Generating Station ("Palo Verde"), and, when operational, the maximum capacity of the modified Interconnection Facilities provided for in Section 5.2 below;
WHEREAS, additional wastewater treatment is provided at Palo Verde's "Water Reclamation Facility" located at the northern end of the Palo Verde property and the western terminus of the Effluent Pipeline;
WHEREAS, the Parties previously entered into an Agreement for the Sale and Purchase of Effluent dated June 12, 1981 (the "Previous Agreement");
WHEREAS this Agreement is intended to replace the Previous Agreement, which will be of no further effect upon execution of this Agreement; and
WHEREAS, the sale and purchase of the Surplus Effluent will result in its beneficial use and in the reduction in the demand for the limited supplies of unused surface waters and groundwaters;
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NOW THEREFORE, for and in consideration of the mutual covenants, terms and conditions hereinafter stated, the Parties agree as follows:
SECTION 1. SALE AND PURCHASE OF SURPLUS EFFLUENT.
1.1 Except as provided in other Sections of this Agreement, Tolleson shall sell and deliver to The Companies, and The Companies shall purchase and accept, all of the Surplus Effluent produced through the operation of the Plant during the term of this Agreement. In addition, Tolleson may sell and deliver to The Companies, and The Companies may purchase and accept any or all of the Reserved Effluent not used, sold or otherwise disposed of by Tolleson. Nothing in this Agreement shall impair the right of Tolleson to use, sell or otherwise dispose of any and all of the Reserved Effluent and any Surplus Effluent that The Companies do not purchase and receive under this Agreement pursuant to Sections 2.1, 3.3 or 9.2. The Companies' right to receive Surplus Effluent shall have priority over Tolleson's use, sale or other disposition of any Surplus Effluent except under conditions specified in Section 9.2.
1.2 This Agreement contains no requirement that Tolleson produce any certain amount of Effluent at the Plant but merely that it deliver to The Companies whatever amount of Surplus Effluent is produced, except as provided elsewhere in this Agreement. However, the Parties understand and acknowledge that since at least 1994 Tolleson has produced between 12,000 and 15,000 acre-feet of Effluent per year. Tolleson agrees that it will undertake all reasonable, good faith efforts to maintain all existing contracts, operations and facilities necessary to sustain discharges of Surplus Effluent meeting the water quality standards of Section 3 at or above the level of 13,000 acre-feet per year. Tolleson further agrees that it will not construct additional wastewater treatment facilities at locations other than the current location of the Plant if such facilities would adversely affect Tolleson's ability to sustain discharges of Surplus Effluent meeting the water quality standards of
Section 3 at or above the level of 13,000 acre-feet per year. Tolleson further agrees that it will notify The Companies, as soon as reasonably possible, of any development or change in circumstances that may adversely affect
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Tolleson's ability to continue producing at least 13,000 acre-feet of Surplus Effluent per year that meets the water quality standards of Section 3.
SECTION 2. PRICE AND PAYMENT.
2.1 The Companies shall pay to Tolleson, for all Effluent that is sold and delivered hereunder for use at or for the benefit of Palo Verde, a price of Thirty Dollars ($30.00) per acre-foot for calendar years 2000 through 2002. Beginning with calendar year 2003 and throughout the remaining term of this Agreement, the price to be paid in all subsequent years during the term of this Agreement for all Effluent that is sold and delivered hereunder for use at or for the benefit of Palo Verde shall be determined by multiplying the previous year's price by the average annual percentage increase in the Consumer Price Index ("CPI") during the immediately preceding five years. Exhibit A to this Agreement, which is specifically incorporated herein by this reference, states the formula, and provides an example, for making the CPI-based price adjustments required by this Section. If, in the sole judgement of The Companies, the price to be paid to Tolleson for Effluent to be delivered and sold for use at or for the benefit of Palo Verde, after application of the CPI-based price adjustment mechanism set forth in this Section, becomes too high in comparison to the price of treated wastewater effluent available to Palo Verde from sources other than Tolleson, The Companies may elect to terminate their obligation to accept and pay for Surplus Effluent for use at or for the benefit of Palo Verde. If The Companies elect to terminate their obligation to accept and pay for Surplus Effluent for use at or for the benefit of Palo Verde pursuant to this Section, they shall provide Tolleson one year's advance written notice of such election to terminate. Provided, however, that upon receipt of written notice of The Companies' election to terminate pursuant to this Section, Tolleson may elect to sell Surplus Effluent to The Companies for use at or for the benefit of Palo Verde at the same price then being paid by The Companies for treated wastewater effluent used at or for the benefit of Palo Verde and sold by sources other than Tolleson (the "New Price"). Tolleson shall provide written notice to The Companies of its election to begin selling Surplus Effluent at the
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New Price within 180 days after Tolleson receives notice of The Companies' election to terminate pursuant to this Section. If Tolleson provides such written notice within the required 180 day period, The Companies shall continue to accept and pay for Surplus Effluent used at or for the benefit of Palo Verde at the New Price, consistent with all other terms of this Agreement. If Tolleson does not provide such written notice within the said 180 days, any obligation of Tolleson to supply Surplus Effluent for use at Palo Verde shall be permanently terminated.
2.2 If Effluent is used at or for the benefit of the proposed electric generating facility commonly referred to as "Redhawk" or any electric generating facilities other than Palo Verde that are owned (in whole or in part) or operated by The Companies (collectively referred to as "Other Electric Generating Facilities") pursuant to Section 4.1, the price to be paid for all such Effluent shall be Seventy Five Dollars ($75.00) per acre-foot during calendar years 2000 through 2002. Beginning with calendar year 2003 and throughout the remaining term of this Agreement, the price to be paid by The Companies for Effluent delivered into the Pipeline and used at or for the benefit of Other Electric Generating Facilities shall be determined by multiplying the previous year's price by the average annual percentage increase in the CPI during the immediately preceding five years. The formula to be used for making this adjustment, and an example of its application, are contained in Exhibit A. The Companies shall measure, keep records of, and report to Tolleson on a monthly basis the quantity, if any, of Effluent used at or for the benefit of such Other Electric Generating Facilities.
2.3 The Companies shall pay Tolleson monthly an amount equal to the price determined pursuant to Section 2.1 and/or 2.2 hereof, as applicable, multiplied by the number of acre-feet of Effluent that were delivered and accepted for use at or for the benefit of the respective facilities (Palo Verde or Other Electric Generating Facilities) during the prior month. Such monthly payments shall be due and payable 30 days after receipt of the invoice therefor rendered by Tolleson.
2.4 In the event of a dispute concerning the quantity of Effluent delivered and accepted in any month, The Companies shall pay the invoiced amount, but may do
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so under written protest. If any protested amount shall subsequently be determined to have been excessive, the excessive amount thereof shall be refunded to The Companies. Any dispute or protest shall be resolved in the manner provided by Section 12.7 hereof.
2.5 The Companies shall pay Tolleson the price determined pursuant to Section 2.1 for each acre-foot of Surplus Effluent made available by Tolleson for delivery under this Agreement and meeting the water quality standards of
Section 3 that is not accepted by The Companies, up to the then-operational maximum capacity of the Interconnection Facilities, except during any Uncontrollable Force event as defined in Section 9.1. Payments under this
Section shall be made to Tolleson monthly in an amount equal to the price determined pursuant to Section 2.1 multiplied by the number of acre-feet of Surplus Effluent meeting the water quality standards of Section 3 made available by Tolleson for delivery, but not accepted by The Companies, during the prior month. Such monthly payments shall be due and payable 30 days after receipt of the invoice therefor rendered by Tolleson. The Companies shall have no obligation to pay for Reserved Effluent not actually accepted into the Effluent Pipeline for use at or for the benefit of Palo Verde or Other Electric Generating Facilities. If The Companies elect to terminate their obligation to accept and pay for Surplus Effluent for use at or for the benefit of Palo Verde pursuant to Section 2.1, the obligation to pay for Surplus Effluent, whether taken or not, under this Section shall remain in effect for any Other Electric Generating Facility for which one or more Notices of Commitment have been submitted to Tolleson pursuant to Section 8.2. Provided, however, that if The Companies terminate their obligation as to Palo Verde, the number of acre-feet thereafter subject to the payment obligation imposed by this Section shall be the number of acre-feet specified in the Notice(s) of Commitment previously submitted to Tolleson. Provided further that, if The Companies terminate their obligation as to Palo Verde, the Parties shall meet to determine, based on actual operating history and projected future needs, the number of acre-feet of Surplus Effluent that will remain committed to such Other Electric Generating Facilities. Such remaining committed Surplus Effluent shall be used only at or for the benefit of such Other Electric Generating Facilities.
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2.6 The methods identified in Paragraphs 2.1 and 2.2 above for determining the price to be paid by The Companies pursuant to this Agreement for each acre-foot of Effluent delivered into the Effluent Pipeline by Tolleson and accepted by The Companies for use at Palo Verde or Other Electric Generating Facilities, and the resulting prices established by those methods, shall remain in effect throughout the term of this Agreement. Provided, however, that: (i) if The Companies enter into a new contract, or amend an existing contract, for supplying treated wastewater effluent to Palo Verde or Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline; and (ii) that new contract or amendment of that existing contract provides for a higher price, or a different method of determining the price, of treated wastewater effluent supplied to Palo Verde or Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline; then (iii) Sections 2.1 and/or 2.2 of this Agreement, as applicable, shall be revised to incorporate that higher price or new method of determining the price. The application of any different method of determining the price of effluent under this Section 2.6 shall not result in a lower price being paid to Tolleson than if such different method were not used. The provisions of this Section shall not apply to any contract entered into by The Companies for a backup supply of treated wastewater effluent that allows The Companies to purchase such effluent when Tolleson is unable to deliver into the Pipeline at least 13,000 acre-feet per year of Surplus Effluent meeting the water quality standards of Section 3. The price benefits afforded to Tolleson by this Section shall apply if The Companies purchase another source of treated wastewater effluent, other than a backup supply pursuant to the immediately preceding sentence, for use at or for the benefit of any Other Electric Generating Facility physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, whether or not the other source of treated wastewater effluent is delivered into the Effluent Pipeline. For purposes of this Agreement, the phrase "physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline" shall apply only to any Other Electric Generating Facilities located within: (i) the area described in the legal
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description and accompanying map attached to this Agreement as Exhibit B, which exhibit is specifically incorporated herein by this reference; or (ii) within one mile north or two miles south of any portion of the Effluent Pipeline. The Companies agree, as a covenant of good faith, to comply with the requirements of this Section and Section 4.2 by refraining from constructing or acquiring Other Electric Generating Facilities in locations immediately outside the area defined in the preceding sentence as subject to the "physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline" standard if such construction or acquisition is intended to avoid the requirements of this Section or Section 4.2.
2.7 In addition to any amounts The Companies are required to pay under paragraphs 2.3 and 2.5 of this Agreement, The Companies shall also pay Tolleson monthly, from the date of execution of this Agreement until June 30, 2002, an amount equal to the difference between: (1) the sum of the amounts paid under paragraphs 2.3 and 2.5 of this Agreement; and (2) the amount that The Companies would have been required to pay Tolleson for an equal quantity of Effluent under the Previous Agreement among APS, SRP and Tolleson dated June 12, 1981.
2.8 If at any time The Companies fail to pay to Tolleson the amounts they are obligated to pay under Sections 2.3 and 2.5 within the 30 days provided for such payment, Tolleson may, after providing 10 days advance written notice, cease delivering Surplus Effluent into the Effluent Pipeline until all past due amounts are paid in full.
SECTION 3. QUALITY OF THE SURPLUS EFFLUENT.
3.1 All Effluent sold and delivered hereunder shall have received wastewater treatment, and shall meet the standards required by law and specified in Permit No. AZ0020338 issued to Tolleson by the Environmental Protection Agency (hereinafter "EPA"), including any amendments or replacements thereof as may be made from time to time and/or in any other required permit or authorization as may hereafter be issued by the Arizona Department of Environmental Quality (hereinafter "ADEQ"), or any other federal or state agency having
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jurisdiction respecting the treatment and/or discharge of wastewater effluent, except that disinfection (by chlorination or otherwise) of such Effluent sold and delivered hereunder shall be required and performed only upon the terms and conditions hereinafter provided.
3.2 In addition to meeting the permit-based water quality requirements specified in Section 3.1, Tolleson shall use its best efforts to operate and maintain its existing Plant in a manner that will treat Effluent such that the Effluent does not exceed: (i) 30 milligrams per liter (mg/l) of Biological Oxygen Demand ("BOD") for any period of time; (ii) 25 mg/l BOD for any period longer than two consecutive days; (iii) 20 mg/l BOD for any period longer than one week; or (iv) 15 mg/l BOD for any period longer than one month. Nothing contained in this Section 3.2 shall require Tolleson to upgrade or improve the Plant or otherwise compel Tolleson to incur any additional expense in the operation of the Plant.
3.3 The Companies shall not be required to purchase, accept or pay for any Effluent that does not meet the water quality standards set forth in Sections 3.1 and 3.2 hereof. The Companies' sole remedy for breach of Tolleson's obligation to meet the water quality standards of Sections 3.1 and 3.2 shall be the right to refuse to purchase, accept or pay for any Effluent that does not meet those standards.
3.4 Tolleson, on the written request of The Companies, shall disinfect the surplus Effluent to be delivered to The Companies, provided that The Companies shall reimburse Tolleson for its direct costs associated with such disinfection.
3.5 Tolleson shall promptly notify APS by telephone, and in writing as soon as reasonable thereafter, of any changes in wastewater treatment processes or operational anomalies at the Plant that have the potential to significantly change the composition of the Effluent delivered to The Companies, including, but not limited to, changes that would affect compliance with the water quality standards addressed in this Section 3. The Companies acknowledge that the Plant has exceeded, and will exceed the foregoing BOD levels, and Tolleson acknowledges that The Companies will not be obligated to purchase any Effluent produced by Tolleson that exceeds the foregoing BOD levels.
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SECTION 4. USE OF EFFLUENT.
4.1 The primary use of the Effluent purchased and accepted by The Companies under this Agreement is for cooling required for generation of electric power at Palo Verde. The Companies may also use, transfer or execute a water exchange for any or all of the Effluent made available under this Agreement for use at or for the benefit of any Other Electric Generating Facilities that The Companies may now or in the future develop, own (in whole or in part) or operate. All such Effluent used at or for the benefit of Other Electric Generating Facilities shall be subject to the price established in
Section 2.2.
4.2 If at any time The Companies use any treated wastewater effluent at or for the benefit of Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, Tolleson shall have the first right to sell to The Companies, and The Companies shall have the obligation to purchase from Tolleson, all such treated wastewater effluent, up to the then-operational maximum capacity of the Interconnection Facilities, provided that:
(a) the treated wastewater effluent requirements of Palo Verde are being fully satisfied, whether by Tolleson Effluent or by effluent from other sources;
(b) the Participants in Palo Verde consent to the use of the Effluent Pipeline, Water Reclamation Facility and any other property or facilities owned by such Participants for transportation and treatment of Effluent for use at or for Other Electric Generating Facilities (provided, however, that if such consent is not obtained from the Palo Verde Participants by December 31, 2001, Tolleson may elect to terminate its obligation under this Agreement to deliver and sell Surplus Effluent to the Companies); by its execution of this Agreement, APS confirms its consent, as a Palo Verde Participant, to the use of the Effluent Pipeline, Water Reclamation Facility and any other Palo Verde property or facilities required for transportation and treatment of Effluent for use at or for Other Electric Generating Facilities; and
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(c) Tolleson produces the lesser of 12,000 acre feet per year of Effluent or sufficient Surplus Effluent meeting the water quality standards of Section 3 to satisfy the quantity specified in any Notices of Commitment delivered to Tolleson by The Companies pursuant to Section 8.2.
To the extent that all of the preceding requirements are satisfied, Tolleson shall have the first right to sell to The Companies, and The Companies shall be obligated to purchase from Tolleson, treated wastewater effluent for use at or for the benefit of Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, up to the lesser of: (i) the maximum quantity of effluent used at or for the benefit of such Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline; or (ii) the then-operational maximum capacity of the Interconnection Facilities. For the purpose of determining the times when The Companies must take Surplus Effluent first at Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, The Companies shall allocate all treated wastewater effluent that The Companies acquire, other than Surplus Effluent, first for use at Palo Verde. Only after purchasing all available Surplus Effluent meeting the water quality standards of Section 3 may The Companies purchase treated wastewater effluent from another source for use at or for the benefit of such Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, or use groundwater for condenser cooling in lieu of such Surplus Effluent, except to the extent that groundwater is necessary to make up any shortfall in cooling water requirements resulting from physical constraints in the Effluent Pipeline, Water Reclamation Facility or other Palo Verde facilities. Nothing in this Agreement shall prohibit or limit the right of The Companies to enter into additional contracts with other parties for the sale and purchase of wastewater effluent to be used at Palo Verde or Other Electric Generating Facilities, provided that such contracts do not limit Tolleson's rights under this Agreement. To the extent that any amount of Surplus Effluent is used at or for the benefit of Other Electric
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Generating Facilities, Tolleson shall be relieved of any obligation it may have under this Agreement to supply that quantity of Surplus Effluent for use at or for the benefit of Palo Verde.
SECTION 5. DELIVERY POINT AND METERING.
5.1 Effluent sold and purchased hereunder shall be delivered by Tolleson and accepted by The Companies at the valve that controls the flow of Effluent into the Effluent Pipeline (hereinafter the "Delivery Point") at the interconnection between the two outfall wastewater lines from the Plant to the Salt River (hereinafter the "Outfall Lines") and the Effluent Pipeline. Such Effluent delivered by Tolleson and accepted by The Companies at the Delivery Point shall be deemed "delivered into the Effluent Pipeline" as that phrase is used in this Agreement.
5.2 Within one year after the execution of this contract, The Companies shall design and construct a modification to the existing Interconnection Facilities between the Outfall Lines and the Effluent Pipeline to allow delivery by Tolleson into the Effluent Pipeline of at least 21 M.G.D. of Surplus Effluent. All costs associated with the design, construction, operation and maintenance of this modification shall be borne by The Companies, and title to the modified Interconnection Facilities shall be vested consistent with the provisions of Exhibit C, which identifies specific components of the Interconnection Facilities and the Party or Parties in which title to each such component is vested. The Companies shall be responsible for, and the Parties shall cooperate as necessary, to ensure the timely design, construction, operation and maintenance of the existing and modified Interconnection Facilities required by this Section and to ensure that such activities do not interfere with the operation of the Plant or the Effluent Pipeline. If The Companies cease using the Interconnection Facilities for acceptance of Effluent from Tolleson, The Companies shall either continue to operate and maintain the Interconnection Facilities to ensure that operation of the Plant will not be adversely affected, or shall offer to transfer to Tolleson title over any portion of the Interconnection Facilities that is necessary to the operation of the Plant, provided, however, that if Tolleson refuses to accept such
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title, The Companies shall have no obligation to continue to operate or maintain the Interconnection Facilities.
5.3 The quantity of Effluent delivered by Tolleson and accepted by The Companies at the Delivery Point shall be measured by metering devices installed by The Companies as close to the Delivery Point as practicable. The quantity of Effluent supplied by Tolleson and accepted by The Companies for use at or for the benefit of Other Electrical Generating Facilities shall be measured by a metering device installed by The Companies at a point which will measure the amount of Effluent that is used at or for the benefit of Other Electrical Generating Facilities. Such metering devices shall be of a design and type acceptable to Tolleson and The Companies. The costs of such devices and their installation, operation, maintenance, replacements, repair, betterments and calibration shall be borne by The Companies, except as otherwise provided in
Section 7.2 hereof, and the title thereto shall be vested in The Companies. Provisions shall be made to permit flow meter information to be continuously displayed in a panel or panels at the Plant utilizing facilities and equipment as Tolleson may, at its own expense provide, title to which shall be vested in Tolleson.
5.4 In the event that the flow metering device measuring flows of Tolleson Effluent into the Effluent Pipeline shall fail or be inoperative, Tolleson shall have the right to use other in-Plant flow metering equipment to determine the volume of Effluent delivered for billing purposes.
5.5 If Tolleson concludes that increases in capacity of the Plant beyond 21 M.G.D. are necessary or desirable, the Parties shall meet, upon request by Tolleson, to discuss potential additional modifications of the Interconnection Facilities beyond those required by Section 5.2 above. Any terms for the design and construction of, and payment for, additional modifications, and any terms for the purchase and sale of any Effluent made available by an increase in the capacity of the Interconnection Facilities beyond 21 M.G.D., shall be established by mutual agreement of the Parties at that time.
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SECTION 6. PERMITS AND AUTHORIZATIONS.
6.1 Tolleson shall be solely responsible for securing and maintaining in force and effect any and all permits and authorizations required by law for the delivery of Effluent to The Companies at the Delivery Point and for the discharge into the Salt River or other disposal of Effluent which is not delivered to and accepted by The Companies.
6.2 The Companies shall be solely responsible for securing and maintaining in force and effect any and all permits and authorizations required by law for the transportation of the Effluent from the Delivery Point to Palo Verde or to any other points and for any uses of the Effluent that are allowed by Section 4 of this Agreement. Such responsibility of The Companies may be delegated to others, but as between the Parties the responsibility rests solely upon The Companies.
6.3 Each of the Parties shall cooperate with the other Parties in securing and maintaining in force and effect the permits and authorizations required in accordance with this Agreement or by local, state or federal laws and regulations and shall render such assistance to the other Parties as it or they may reasonably request. Each Party shall furnish to the other Parties a copy of each permit and authorization obtained pursuant to Sections 6.1 and 6.2 hereof.
6.4 Should Tolleson be required by law to treat the Effluent in a manner that results in increased expenses to Tolleson because it is delivering the Effluent to The Companies under this Agreement, which expense it would not have incurred if the Effluent was disposed by Tolleson into the Salt River, then The Companies shall have the right to require Tolleson to so treat the Effluent and shall reimburse Tolleson for all reasonable expenses (including without limitation any costs of plant additions or improvements) incurred by Tolleson in providing such treatment. If The Companies, in their sole discretion, decide not to exercise their right under this Section to require additional treatment, they may take other action, including terminating this Agreement, to ensure continuing compliance with applicable law. However, prior to terminating this Agreement as allowed in the previous sentence, The
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Companies shall meet with Tolleson to discuss any alternatives to termination that may be available to ensure compliance with applicable law.
SECTION 7. IMPLEMENTATION OF THE AGREEMENT.
7.1 Within 30 days after the effective date of this Agreement, Tolleson shall designate a representative and The Companies shall jointly designate a representative for the purposes of: (i) implementing this Agreement in accordance with its terms, (ii) coordinating the design and construction by The Companies of the modifications to the Interconnection Facilities required by
Section 5.2 above, (iii) ensuring the continued satisfactory operation and maintenance of the Interconnection Facilities, and (iv) discussing any issues of interest or concern to either or both Parties relating to this Agreement. Either Tolleson or The Companies may from time to time designate a substitute or successor authorized representative by giving written notice of such designation to the other party.
7.2 The metering devices used to measure the quantity of Effluent delivered and accepted hereunder, and the quantity of Effluent used at or for the benefit of Other Electrical Generating Facilities, shall be calibrated in a manner acceptable to the authorized representatives prior to the date when such devices are placed in service and thereafter not less frequently than once every six months. The costs of such scheduled calibrations shall be borne by The Companies. The authorized representative for Tolleson may request in writing such additional calibrations as he in his sole discretion deems appropriate; provided that the cost incurred by The Companies for each such additional calibration shall be reimbursed by Tolleson unless any such additional calibration reveals that the inaccuracy of the metering devices is greater than (plus/minus) 2% in which case the cost of such additional calibration shall be borne by The Companies. Copies of all records showing calibration of meters shall be delivered to Tolleson after each calibration, and copies of all records of measurements of Effluent supplied to or for the benefit of Palo Verde or Other Electrical Generating Facilities shall be delivered to Tolleson monthly, with cover letters acknowledging the records to be true copies.
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SECTION 8. DELIVERY AND ACCEPTANCE OF EFFLUENT.
8.1 The obligation of Tolleson to sell and deliver Surplus Effluent under this Agreement shall commence on the date this Agreement is executed and shall continue throughout the term of this Agreement, except as otherwise provided in this Agreement.
8.2 At any time after the effective date of this Agreement, provided that the treated wastewater effluent requirements of Palo Verde are being fully satisfied, The Companies may deliver to Tolleson one or more written notices of The Companies' commitment ("Notice of Commitment") to purchase up to 13,000 acre-feet of Surplus Effluent for use at or for the benefit of Other Electric Generating Facilities. The Companies may specify any quantity of Surplus Effluent in any individual Notice of Commitment, up to the then-operational maximum capacity of the Interconnection Facilities. The price to be paid for any Effluent specified in a Notice of Commitment that is actually taken into the Effluent Pipeline and used at or for the benefit of Other Electric Generating Facilities shall be as specified in Section 2.2. The price to be paid for any Effluent specified in a Notice of Commitment that is not actually taken into the Effluent Pipeline and used at or for the benefit of Other Electric Generating Facilities shall be as specified in Section 2.5.
8.3 If The Companies have not delivered one or more Notices of Commitment to purchase at least the following Minimum Quantities of Surplus Effluent for use at or for the benefit of Other Electric Generating Facilities on or before the Commitment Dates identified in the following table, Tolleson may elect to terminate its continuing obligation to sell and deliver any portion of the corresponding Minimum Quantity of Surplus Effluent for use at or for the benefit of Palo Verde or Other Electric Generating Facilities that is not yet subject to a Notice of Commitment:
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 COMMITMENT DATE                MINIMUM QUANTITY
-----------------           --------------------------------------
December 31, 2002           At least 3,000 acre-feet
December 31, 2003           At least an additional 3,000 acre-feet
December 31, 2005           At least an additional 3,000 acre-feet
December 31, 2007           At least an additional 4,000 acre-feet	

For a period of one year following each specified Commitment Date, Tolleson may terminate its obligation to sell and deliver any portion of the corresponding Minimum Quantity not yet subject to a Notice of Commitment by delivering to The Companies one or more written Notices of Intent to Terminate. Each Notice of Intent to Terminate shall specify the quantity of Surplus Effluent for which Tolleson has elected to terminate its obligation to sell and deliver to the Companies for use at or for the benefit of Palo Verde or Other Electric Generating Facilities. Upon receipt of a Notice of Intent to Terminate, The Companies shall have ninety days thereafter within which to submit a Notice of Commitment to Tolleson for the quantity of Surplus Effluent for use at or for the benefit of Other Electric Generating Facilities specified in the Notice of Intent to Terminate. If The Companies submit a Notice of Commitment within this ninety-day period, Tolleson's continuing obligation to sell and deliver Surplus Effluent to The Companies for use at or for the benefit of Palo Verde or Other Electric Generating Facilities shall not be terminated. If The Companies do not submit a Notice of Commitment within this ninety day period, Tolleson's obligation to sell and deliver the specified quantity of Surplus Effluent for use at or for the benefit of Palo Verde or Other Electric Generating Facilities shall be terminated, the specified quantity of Surplus Effluent shall no longer be eligible for price adjustments pursuant to Sections 2.1, 2.2 or 2.6, and The Companies shall no longer be obligated to pay, pursuant to Section 2.5, for any of the specified Surplus Effluent not actually taken into the Pipeline. Notwithstanding the previous sentence, The Companies may continue to accept into the Pipeline any or all of the Surplus Effluent specified in the Notice of Intent to Terminate provided Tolleson desires to continue delivering such Surplus Effluent, in which event, The Companies shall pay
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Tolleson the price for such Surplus Effluent specified in Section 2.1 or Section 2.2, as appropriate.
8.4 Nothing in Sections 8.2 and 8.3 is intended to limit Tolleson's first right to deliver into the Effluent Pipeline and sell to The Companies treated wastewater effluent for use at or for the benefit of Other Electric Generating Facilities as provided in Section 4.2 or to limit the obligation of The Companies to purchase and accept all of the Surplus Effluent produced through the operation of the Plant as provided in Section 1.1. To the extent that The Companies purchase treated wastewater effluent delivered into the Effluent Pipeline for use at or for the benefit of Other Electric Generating Facilities, Tolleson shall have the first right to sell such treated wastewater effluent consistent with the terms of Section 4.2, regardless of whether The Companies have submitted one or more Notices of Commitment for that amount of Surplus Effluent.
8.5 The Companies shall have the right to refuse delivery of Effluent whenever, in their sole and reasonable discretion, use of Effluent would cause significant operational problems in the Effluent Pipeline, Water Reclamation Facility or other Palo Verde facilities. However, other than during an Uncontrollable Force event, as defined in Section 9.1, The Companies shall pay the price established in Section 2.5 for any Surplus Effluent refused pursuant to this Section 8.5 that is actually available for delivery to the Delivery Point and meets the water quality standards of Section 3 of this Agreement.
SECTION 9. UNCONTROLLABLE FORCE AND OUTAGES.
9.1 Neither Tolleson nor The Companies shall be considered to be in default in the performance of any of the obligations hereunder if failure of performance shall be due to an Uncontrollable Force. The term "Uncontrollable Force" shall mean any cause beyond the control of the Party affected, including, but not limited to, failure of facilities, flood, earthquake, tornado, storm, fire, lightning, epidemic, war, riot, civil disturbance or disobedience, labor dispute, and action or nonaction by or failure to obtain or revocation of the necessary
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authorizations or approvals from any governmental agency or authority or the electorate, labor or material shortage, sabotage and restraint by Court order or public authority, which by exercise of due diligence and foresight such Party could not reasonably have been expected to avoid and which by exercise of due diligence it shall be unable to overcome. Nothing contained herein shall be construed so as to require any Party to settle any strike or labor dispute in which it may be involved. Any Party rendered unable to fulfill any obligation by reason of any Uncontrollable Force shall exercise due diligence to remove such inability with all reasonable dispatch.
9.2 Whenever an Uncontrollable Force as defined in Section 9.1 prevents The Companies from being able to accept or use the Surplus Effluent, then Tolleson may enter into temporary contracts with any other parties for sale of the Surplus Effluent. If Tolleson has entered into such a temporary contract, Tolleson shall be allowed up to 30 days to begin delivery of the Surplus Effluent to The Companies after receiving written notice from The Companies that the disability has been removed.
9.3 Notwithstanding the provisions of Sections 9.1 and 9.2, if, after the exercise of due diligence, the Party rendered unable to fulfill an obligation remains unable to remove such inability for one full year, the other Party may elect to terminate this Agreement anytime thereafter by tendering 90 days written notice of its intention to terminate. However, if The Companies receive a written termination notice from Tolleson pursuant to the preceding sentence, The Companies may elect, at any time prior to the expiration of the 90 days, to begin paying the price established in Section 2.5 for any Surplus Effluent available for delivery and meeting the water quality standards of
Section 3 of this Agreement, up to the then-operational maximum capacity of the Interconnection Facilities. As long as The Companies continue the payments required under this paragraph, this Agreement shall remain in full force and effect.
9.4 If an Uncontrollable Force or malfunction of any component or system of the Effluent Pipeline or the Water Reclamation Facility at Palo Verde, restricts the capability of either of such facilities to transport or treat wastewater effluent from all sources for a period of one full year or less, then The Companies may refuse to accept delivery of the Surplus
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Effluent and shall not be required to pay therefor. It is understood, however, that the Surplus Effluent from Tolleson's Plant shall be the last source of effluent that The Companies cut back on during such Uncontrollable Force or malfunction and that The Companies shall not refuse to accept and pay for Tolleson's Surplus Effluent to the extent that they are accepting and paying for effluent from any other source.
9.5 If The Companies initiate a Scheduled Outage of Palo Verde, the Effluent Pipeline or the Water Reclamation Facility, The Companies shall pay the price established in Section 2.5 for any Surplus Effluent available for delivery and meeting the water quality standards of Section 3 of this Agreement, up to the then-operational maximum capacity of the Interconnection Facilities. As long as The Companies continue the payments required under this Section, this Agreement shall remain in full force and effect. If Tolleson initiates a Scheduled Outage of the Plant, any obligation that Tolleson may have to supply Effluent, and the obligation of The Companies to pay the price established under
Section 2.5, shall be suspended during such Scheduled Outage. "Scheduled Outage" shall mean any temporary cessation of operations that is planned and controlled by the Party initiating the Scheduled Outage.
9.6 Except in emergencies, The Companies shall give 30 days written notice in advance of any discontinuation of acceptance of Surplus Effluent under the provisions of this Section 9. Except in emergencies, Tolleson shall give 30 days written notice in advance of any Scheduled Outage that will limit Tolleson's ability to supply at least 13,000 acre-feet per year of Surplus Effluent to The Companies. Tolleson shall use its best efforts to minimize the duration of any Scheduled Outage that will limit Tolleson's ability to supply at least 13,000 acre-feet per year of Surplus Effluent to The Companies.
SECTION 10. LIABILITY AND INSURANCE.
10.1 Except for the negligent or intentional acts of The Companies, their officers, directors, employees and agents, Tolleson shall, to the extent permitted by law, indemnify and hold The Companies and their officers, directors, employees and agents harmless
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for any physical damage to property, or death of, or personal injury to, any person, and from any cost, expense, claim or loss from such damage, injury or death arising out of the ownership, use, occupancy, operation, maintenance, repair, replacement and reconstruction of the Plant and the Outfall Lines and that portion of the Interconnection Facilities owned by Tolleson as specified in Exhibit B.
10.2 Except for the negligent or intentional acts of Tolleson, its officers, managers, employees or agents, The Companies shall indemnify and hold Tolleson and its officers, managers, employees and agents harmless for any physical damage to property, or death of, or personal injury to, any person, and from any cost, expense, claim or loss from such damage, injury or death arising out of the construction, ownership, use, occupancy, operation, maintenance, repair, replacement and reconstruction of the delivery facilities at the Delivery Point, that portion of the Interconnection Facilities owned by the Companies as specified in Exhibit C, the Effluent Pipeline, the facilities at Palo Verde, or the transportation, use, resale or disposal of Surplus Effluent delivered and accepted hereunder.
10.3 Tolleson shall procure and maintain insurance against physical damage to property, or death of, or personal injury to, any persons, of the kind and with coverages normally carried by entities operating properties similar to the Plant and the Outfall Lines. Upon request, Tolleson shall furnish to The Companies certificates of insurance demonstrating compliance with this Section 10.3.
10.4 The Companies shall procure and maintain insurance against physical damage to property, or death of, or personal injury to, any persons, of the kind and with coverages normally carried by entities operating properties similar to the Effluent Pipeline and Palo Verde. Upon request, The Companies shall furnish to Tolleson certificates of insurance demonstrating compliance with this Section 10.4.
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SECTION 11. INSPECTIONS AND ACCESS TO RECORDS.
11.1 Each of the Parties shall have the right, during reasonable hours, of access to and inspection of the facilities and operations of the other Parties which are associated with the treatment, delivery, measurement, transportation and use of Effluent sold and purchased hereunder.
11.2 Each of the Parties shall have the right, during reasonable hours, of access to the records of the other Parties which are relevant for proving compliance or noncompliance of each of the Parties with any of the terms of this Agreement.
SECTION 12. GENERAL.
12.1 Effective Date and Term. This Agreement shall be effective from and after the date of its execution by the parties and shall expire on December 31, 2050, unless partially or fully terminated before that date under the provisions of Sections 2.1, 6.4, 8.3, 9.3 or 12.3.1.
12.2 Assignment of Agreement or Transfer of Facilities.
12.2.1 Neither Tolleson nor The Companies shall transfer or assign any of their respective rights, titles and interests in and to this Agreement without the prior written consent of the other Parties, except that: (i) The Companies and any of their affiliates, successors or assigns shall each have the right to transfer and assign all or any portion of its right, title and interest in this Agreement to the other, to any related corporate entity, or to any other entity now or hereafter participating in Palo Verde or any Other Electric Generating Facilities which utilize the Surplus Effluent sold hereunder, provided that such entity expressly assumes the obligations of the respective Company, as applicable, under this Agreement; and (ii) either Company, and any of its respective affiliates, successors or assigns shall have the right to transfer its right, title and interest in this Agreement to any mortgagee, trustee or secured party under present or future deeds of trust, mortgages, indentures or security agreements. A transfer or assignment by any Party shall not release that party from its obligations as the primary obligor under the Agreement
- 22 -
without the written consent of the other Parties. In the event of any transfer or assignment of this Agreement by either Tolleson or The Companies, the terms, covenants and conditions of this Agreement shall be binding upon and inure to the benefit of and shall apply to the respective transferees, successors and assigns of Tolleson and The Companies.
12.2.2 The Companies shall not convey Palo Verde or any interest therein without the grantee of such conveyance expressly agreeing to be bound by all terms of this Agreement, unless The Company that conveys its interest in Palo Verde expressly agrees to continue to be bound by all terms of this Agreement. Tolleson shall not convey the Plant or any interest therein, without the grantee of such conveyance expressly agreeing to be bound by all terms of this Agreement.
12.3 Compliance with Laws.
12.3.1 The Companies shall use the Effluent delivered hereunder in accordance with the applicable laws of the United States of America, the applicable laws of the State of Arizona and the rules and regulations of federal, state and local agencies; provided, however, that in the event any such laws or regulations shall be amended in the future so as to make it impossible or uneconomical to use the Effluent for the purposes specified in this Agreement, The Companies shall, at their option, have the right to cancel and terminate this Agreement upon giving 90 days notice in writing to Tolleson. In the event Tolleson is prohibited by any state or federal laws or regulations from selling Effluent for the uses contemplated herein, Tolleson shall have the right to cancel and terminate this Agreement upon giving 90 days notice in writing to The Companies. Until the notice period runs and the termination becomes effective, The Companies shall continue to pay for the Surplus Effluent pursuant to Section 2.5, except as otherwise specified in this Agreement.
12.3.2 If any proceeding in law or equity is instituted challenging the authority and power of Tolleson and/or The Companies to make, execute and deliver this Agreement and/or to perform its terms, covenants and conditions, or relating to the rights, title and interest of Tolleson or The Companies in and to the Effluent, then Tolleson and The
- 23 -
Companies shall jointly and cooperatively defend the validity of this Agreement and the sale, delivery and uses of Effluent contemplated herein.
12.3.3 The Parties acknowledge that this Agreement is subject to the provisions of Arizona Revised Statutes Section 38-511, and can be cancelled within three years after its execution by Tolleson if any person significantly involved in initiating, negotiating, securing, drafting or creating this Agreement on behalf of Tolleson is, while this Agreement is in effect during that three year period, an employee or agent of or consultant to any other Party to this Agreement.
12.4 Notices. All notices, demands, consents or other writings given or made pursuant to this Agreement shall be in writing and, unless otherwise specified herein, shall be deemed to have been duly given when made and deposited in the United States mail by registered or certified mail with postage prepaid and addressed as follows:

To Tolleson:      City Manager
                  9555 West Van Buren
                  Tolleson, Arizona 85353

To APS:           Arizona Public Service Company
                  Palo Verde Nuclear Generating Station
                  WRF Manager
                  Mail Station 6215
                  P. O. Box 52034
                  Phoenix, Arizona 85072-2034

To SRP:           Salt River Project Agricultural
                  Improvement and Power District
                  c/o Secretary
                  P. O. Box 52025
                  Phoenix, Arizona 85072-2025	

The address to which any notice, demand, consent or other writing shall be given to any Party may be changed from time to time by written notice of such Party to the other Parties as above provided.
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12.5 Relative Responsibilities and Authority of The Companies.
12.5.1 APS, or any of its affiliates, successors or assigns acting as Operating Agent of Palo Verde, is authorized to act for and on behalf of SRP in all matters affecting the implementation and performance of this Agreement for the use of Effluent at Palo Verde, and all actions and representations taken or made by APS in the implementation and performance of this Agreement shall be binding upon SRP.
12.5.2 In the event all or part of the Effluent is used other than at Palo Verde, The Companies shall be jointly responsible for implementation and performance of this Agreement.
12.5.3 The Companies shall be jointly and severally liable to perform the obligations to Tolleson that are imposed by this Agreement.
12.5.4 The Companies represent that they have the authority to enter into and carry out all obligations to Tolleson under this Agreement.
12.6 Waivers. The waiver by either Tolleson or The Companies of any breach of any term, covenant or condition of this Agreement shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach thereof or a subsequent breach of any other term, covenant or condition in this Agreement.
12.7 Resolution of Conflicts and Disputes. Any conflict or disputes in: (i) the implementation of this Agreement provided in Section 7, or (ii) the quantity or quality of Surplus Effluent delivered as discussed in Section 2.4, shall be resolved by arbitration in accord with the rules of the American Arbitration Association. No other conflicts or disputes arising out of the Agreement shall be subject to mandatory arbitration. In all cases, the Agreement shall be interpreted according to the laws of the State of Arizona.
12.8 Sales and Use Taxes. In the event the State of Arizona, County of Maricopa or the federal government should require that Tolleson pay a tax resulting from the sale of Effluent to The Companies, then the price for the Effluent shall be increased by the amount of such tax. In the event Tolleson shall levy a tax on the sale or use of the Effluent, then the
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amounts of any such tax paid by The Companies shall be deducted from the amounts payable under Sections 2.1 or 2.2 hereof.
12.9 Section Headings. Section headings in this Agreement are for convenience only and do not purport to describe accurately or completely the contents of any section. Such headings are not to be construed as a part of this Agreement or as in any way defining, limiting or amplifying the provisions hereof.
12.10 Severability. If any term or provision of this Agreement is held to be void, invalid or unenforceable by a court of competent jurisdiction, that term or provision shall be severable from the remainder of this Agreement and shall not affect or render invalid, void or unenforceable any other provision or term of this Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed and attested by their respective duly authorized officers as of the date first above written.

ATTEST:                                       CITY OF TOLLESON

/s/ Rosemarie Martinez Booth        By /s/ Adolfo F. Gamez
_______________________________     ____________________________________
City Clerk                                         Mayor

                                        Reviewed By

                                        /s/ Ralph Velez
                                        _________________________________
                                        City Manager

                                        Approved as to Form

                                        /s/ Scott W. Ruby
                                        _________________________________
                                        City Attorney

                                     - 26 -	

ATTEST:                                 ARIZONA PUBLIC SERVICE COMPANY

/s/ Betsy A. Pregulman              By /s/ James M. Levine
_______________________________     ____________________________________
       (Title)                                  (Title)
Associate Secretary                     Executive Vice President,
                                            Generation

ATTEST & COUNTERSIGN.                       SALT RIVER PROJECT
                                            AGRICULTURAL IMPROVEMENT
                                            AND POWER DISTRICT

/s/ Terri A. Lonon                  By William P. Schrader
_______________________________     ____________________________________
         (Title)                                    (Title)
   Corporate Secretary                             President	

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EXHIBIT A
The following formula shall be used to adjust the prices of Effluent established in Sections 2.1 and 2.2 of the Agreement:

Formula:    Pp (1 + A) = Pc

Where:      Pp Previous year's price

            A= The average of the previous 5 years' annual
            percent change (ending in Dec) of the Consumer
            Price Index for Urban Consumers (CPI-U),
            Expenditure Category "All Items" (as published
            by the Bureau of Labor Statistics).	

Pc = New or Current year's price
This adjustment to the prices paid to the City for Effluent will be made each calendar year, effective in January, using the most recent CPI-U data available. This method of price adjustment will be used throughout the term of this Agreement.
Example of price adjustment using the above formula:

            Pp (1 +A) = Pc

Where:      Pp = $30/AF (previous year's price)
            A = 2.5%(1995 CPI)+3.3%(1996)+1.7%(1997)+1.6%(1998)+2.7%(1999)
                ----------------------------------------------------------
                                            5

            A = 11.8%
                -----
                  5

            A = 2.4% (most recent 5 year CPI-U average)

            $30.00 (1 +.024) = Pc = $30.72 (New or Current Year Price)	

Each subsequent year, Pc will become the most recent previous year's price (Pp) for calculating the next year's price. "A", which is a "rolling five-year average", will be comprised of the average of the most recent five-years' annual CPI-U percentage changes.
Example for year #2:

            Pp (1+A) = Pc

Where:      Pp = $30.72
            A = 3.3% + 1.7% + 1.6% + 2.7% + 3.0% [assumed]
                --------------------------------
                               5

            A = 2.5%

            $30.72 (1.025) = Pc = $31.49 (New or Current Year Price)	

EXHIBIT B
The following legal description, as depicted on the attached map, describes the area within which Other Electric Generating Facilities are subject to the "physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline" standard established in Sections 2.6 and 4.2 of the "Agreement for the Sale and Purchase of Wastewater Effluent" to which this Exhibit B is attached:
BEGINNING AT THE NORTH QUARTER CORNER OF SECTION 24, TOWNSHIP 1 NORTH, RANGE 6 WEST;
THENCE WEST ALONG THE NORTH LINE OF SAID SECTION 24 AND ALONG THE NORTH LINE OF SECTIONS 23, 22 AND 21, TOWNSHIP 1 NORTH, RANGE 6 WEST APPROXIMATELY THREE MILES TO THE NORTH QUARTER CORNER OF SAID SECTION 21;
THENCE SOUTH ALONG THE NORTH SOUTH MID-SECTION LINE OF SAID SECTION 21 APPROXIMATELY ONE HALF MILE TO THE APPROXIMATE CENTER OF SAID SECTION 21;
THENCE WEST ALONG THE EAST WEST MID-SECTION LINE OF SAID SECTION 21 AND SECTION 20, TOWNSHIP 1 NORTH, RANGE 6 WEST, APPROXIMATELY ONE MILE TO THE APPROXIMATE CENTER OF SAID SECTION 20;
THENCE SOUTH ALONG THE NORTH-SOUTH MID-SECTION LINE OF SECTIONS 20, 29 AND 32, TOWNSHIP 1 NORTH, RANGE 6 WEST APPROXIMATELY TWO AND ONE HALF MILES TO THE SOUTH QUARTER CORNER OF SAID SECTION 32, WHICH IS COINCIDENT WITH THE NORTH QUARTER CORNER OF SECTION 5, TOWNSHIP 1 SOUTH, RANGE 6 WEST;
THENCE WEST ALONG THE NORTH LINE OF SECTIONS 5 AND 6, TOWNSHIP 1 SOUTH, RANGE 6 WEST, AND ALONG THE NORTH LINE OF SECTION 1, TOWNSHIP 1 SOUTH, RANGE 7 WEST APPROXIMATELY TWO AND ONE HALF MILES TO THE NORTHWEST CORNER OF SECTION 1, TOWNSHIP 1 SOUTH, RANGE 7 WEST;
THENCE SOUTH ALONG THE WEST LINE OF SAID SECTION 1, APPROXIMATELY ONE MILE TO THE SOUTHWEST CORNER OF SAID SECTION 1 WHICH IS COINCIDENT WITH THE NORTHEAST CORNER OF SECTION 11, TOWNSHIP I SOUTH RANGE 7 WEST;
THENCE WEST ALONG THE NORTH LINE OF SAID SECTION 11 APPROXIMATELY ONE MILE TO THE NORTHWEST CORNER OF SECTION 11, TOWNSHIP 1 SOUTH, RANGE 7 WEST;
THENCE SOUTH APPROXIMATELY 4 MILES ALONG THE WEST LINE OF SAID SECTION 11 AND THE WEST LINE OF SECTIONS 14, 23, AND 26, TOWNSHIP 1 SOUTH, RANGE 7 WEST TO THE SOUTHWEST CORNER OF SAID SECTION 26;
THENCE EAST APPROXIMATELY ONE AND ONE HALF MILES ALONG THE SOUTH LINE OF SAID
SECTION 26 AND THE SOUTH LINE OF SECTION 25, TOWNSHIP 1 SOUTH, RANGE 7 WEST TO THE SOUTH QUARTER CORNER OF SAID SECTION 25, WHICH IS COINCIDENT WITH THE NORTH QUARTER CORNER OF SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST;
THENCE SOUTH ALONG THE NORTH SOUTH MID-SECTION LINE OF SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST APPROXIMATELY ONE MILE TO THE SOUTH QUARTER CORNER OF SAID
SECTION 36;
THENCE EAST APPROXIMATELY 4 AND ONE HALF MILES ALONG THE SOUTH LINE OF SAID
SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST AND THE SOUTH LINE OF SECTIONS 31, 32, 33 AND 34, TOWNSHIP 1 SOUTH, RANGE 6 WEST TO THE SOUTHEAST CORNER OF SAID
SECTION 34, WHICH IS COINCIDENT WITH THE NORTHWEST CORNER OF SECTION 2, TOWNSHIP 2 SOUTH, RANGE 6 WEST; THENCE SOUTH ALONG THE WEST LINE OF SAID SECTION 2 APPROXIMATELY ONE HALF MILE TO THE WEST QUARTER CORNER OF SAID SECTION 2;
THENCE EAST APPROXIMATELY ONE MILE ALONG THE EAST WEST MIDSECTION LINE OF SAID
SECTION 2 TO THE EAST QUARTER CORNER OF SAID SECTION 2, WHICH IS COINCIDENT WITH THE WEST QUARTER CORNER OF SECTION 1, TOWNSHIP 2 SOUTH, RANGE 6 WEST;
THENCE SOUTH APPROXIMATELY ONE HALF MILE ALONG THE WEST LINE OF SAID SECTION 1 TO THE SOUTHWEST CORNER OF SAID SECTION 1;
THENCE EAST ALONG THE SOUTH LINE OF SAID SECTION 1 AND THE SOUTH LINE OF SECTION 6, TOWNSHIP 2 SOUTH, RANGE 5 WEST, APPROXIMATELY 2 MILES TO THE SOUTHEAST CORNER OF SAID SECTION 6;
THENCE NORTH APPROXIMATELY THREE MILES ALONG THE EAST LINE OF SAID SECTION 6 AND THE EAST LINE OF SECTIONS 31 AND 30, TOWNSHIP 1 SOUTH, RANGE 5 WEST TO THE NORTHEAST CORNER OF SAID SECTION 30;
THENCE WEST APPROXIMATELY ONE HALF MILE ALONG THE NORTH LINE OF SAID SECTION 30 TO THE NORTH QUARTER CORNER OF SAID SECTION 30, WHICH IS COINCIDENT WITH THE SOUTH QUARTER CORNER OF SECTION 19, TOWNSHIP 1 SOUTH, RANGE 5 WEST;
THENCE NORTH APPROXIMATELY ONE MILE ALONG THE NORTH SOUTH MID-SECTION LINE OF SAID SECTION 19 TO THE NORTH QUARTER CORNER OF SAID SECTION 19;
THENCE WEST APPROXIMATELY ONE HALF MILE ALONG THE NORTH LINE OF SAID SECTION 19 TO THE NORTHWEST CORNER OF SAID SECTION 19, WHICH IS COINCIDENT WITH THE SOUTHEAST CORNER OF SECTION 13, TOWNSHIP 1 SOUTH, RANGE 6 WEST;
THENCE NORTH APPROXIMATELY TWO MILES ALONG THE EAST LINE OF SECTIONS 13 AND 12 TOWNSHIP 1 SOUTH, RANGE 6 WEST TO THE NORTHEAST CORNER OF SAID SECTION 12;
THENCE WEST APPROXIMATELY ONE HALF MILE TO THE NORTH QUARTER CORNER OF SAID
SECTION 12, WHICH IS COINCIDENT WITH THE SOUTH QUARTER CORNER OF SECTION 1, TOWNSHIP 1 SOUTH, RANGE 6 WEST;
THENCE NORTH APPROXIMATELY FOUR MILES ALONG THE NORTH SOUTH MID-SECTION LINE OF SAID SECTION 1 AND THE NORTH SOUTH MIDSECTION LINE OF SECTIONS 36, 25 AND 24, TOWNSHIP 1 NORTH, RANGE 6 WEST TO THE POINT OF BEGINNING.
ALL LYING WITHIN THE GILA AND SALT RIVER BASE AND MERIDIAN, MARICOPA COUNTY, ARIZONA
In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, the map on this page of this Agreement shows the Other Electric Generating Facilities that could be served by Tolleson Effluent under this Agreement.
EXHIBIT C
The following components of the Interconnection Facilities, as depicted on drawing Numbers AO-W-Z1C-150, Rev. 7, and AO-W-Z1C-151, Rev. 3 (both drawings attached), are the property of the City of Tolleson:
1. The Tolleson Junction Box and the weir and three manual sluice gates located within that Junction Box.
2. The anchor block adjacent to the Tolleson Junction Box.
3. 18 feet of 48-inch pipe connected to the inlet side of the Tolleson Junction Box.
4. Approximately 15 feet of 42-inch pipe connected to the outlet side of the Tolleson Junction Box.
5. The manhole and stub pipe required to connect the 42-inch pipes connected to the inlet and outlet sides of the manhole.
6. The Tolleson Junction Structure Box.
7. All other portions of the "new" Tolleson Outfall Line.
8. The portion of the existing Tolleson Outfall Line (30-inch) within the Tolleson Junction Box.
9. All other portions of the existing Tolleson Outfall Line.
The following components of the Interconnection Facilities, as depicted on drawing Numbers AO-W-Z1C-150, Rev. 7, and AO-W-Z1C-151, Rev. 3 (both drawings attached), are the property of APS, SRP and the other owners of Palo Verde Nuclear Generating Station:
1. The ANPP Effluent Pipeline Junction Box and all facilities and equipment located within that Junction Box.
2. The 30-inch pipe between the Palo Verde Effluent Pipeline Junction Box and the Tolleson Junction Box.
3. The motorized sluice gate (valve) situated in the Tolleson Junction Box.
4. The flow metering equipment, including without limitations such devices as may be necessary for transmission of flow meter data to the control panels in the Plant.
5. The RTU Building and all facilities and equipment located within that building.
In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, the drawings on these two pages of this Agreement show the Interconnection Facilities owned by Palo Verde and the City of Tolleson.
Attachment 2
OPERATING AGREEMENT FOR THE
CO-OWNERSHIP OF WASTEWATER EFFLUENT
This Agreement (the "Agreement") is made and entered into this 16th day of November, 2000 (the "Effective Date"), by and between Arizona Public Service Company, a corporation organized and existing under and by virtue of the laws of the State of Arizona ("APS") and Salt River Project Agricultural Improvement and Power District, an agricultural improvement district organized and existing under and by virtue of the laws of the State of Arizona ("SRP"). SRP and APS are collectively referred to herein as the "Parties"; each is individually a "Party" to this Agreement.
RECITALS:
A. APS, SRP, and the City of Tolleson have executed an "Agreement for the Sale and Purchase of Wastewater Effluent," dated November 13, 2000 (the "Tolleson Agreement"), and each Party to this Agreement desires to more particularly describe its rights and responsibilities vis-a-vis the other Party as a co-owner of Tolleson Effluent;
B. The primary use of the Tolleson Effluent is intended to be for cooling water at Palo Verde Nuclear Generating Station ("PVNGS"); the secondary use of the Tolleson Effluent will be its use at "Other Electric Generating Facilities" (as defined by the Tolleson Agreement);
C. To the extent Tolleson Effluent is not used at PVNGS, the Tolleson Effluent may be used at or for the benefit of Other Electric Generating Facilities;
D. It is appropriate to establish terms and conditions on which APS, SRP, and their respective affiliates, including Pinnacle West Energy Corporation ("PWE"), will make use of the Tolleson Effluent and make decisions regarding the use of same in the future;
E. The Parties desire to enter into this Agreement to set forth their respective rights and obligations pertaining to the co-ownership of the Tolleson Effluent. Accordingly, this Agreement is an ancillary document or companion agreement in relation to the Tolleson Agreement.
NOW, THEREFORE, in consideration of the agreements and promises set forth below, and, other good and valuable considerations, the receipt and sufficiency of which are acknowledged, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS AND USAGE
1.1 Definitions. As used herein, the following capitalized terms shall have the same meaning as they are given by definition in the Tolleson Agreement:
Delivery Point, Effluent, Effluent Pipeline, Notice of Commitment, Other Electric Generating Facilities, Outages, Reserved Effluent, Surplus Effluent, Tolleson, and Uncontrollable Forces. All such definitions from the Tolleson Agreement are specifically incorporated in this
Agreement by this reference. In addition, the following terms shall have the specified meanings:
"Claim" means any demand, claim, cause of action, lawsuit, or proceeding of any kind or character, including investigation or audit by a Governmental Authority.
"Coordinating Committee" has the meaning specified in Article 4.
"Effective Date" has the meaning specified in the introductory paragraph.
"Event of Default" has the meaning specified in Section 7.1.
"Governmental Authority" means a federal, state, local or foreign governmental authority or body politic; a state, province, commonwealth, territory or district; a county; a city, town, township, village or other municipality; a district or other subdivision or any of the foregoing; any executive, legislative or other governing body of any of the foregoing; any agency, authority, board, department, system, service, office, commission, committee, council, or other administrative body of any of the foregoing; any court or other judicial body; a legally recognized tribal authority; and any officer, official or other representative of any of the foregoing when acting in their official capacity. For purposes of this Agreement, neither SRP nor APS shall be considered a Governmental Authority.
"Legal Requirement" means any statute, law, regulation, ordinance, rule, judgment, order, decree, constitution, Permit, concession, grant, franchise, agreement, directive or common law, or any requirement of, or other governmental restriction or any similar form of decision by, or interpretation or administration of any of the foregoing by, any Governmental Authority of competent jurisdiction (or by an arbitrator in a forum involving binding arbitration to which one of the parties or its business or assets is subject or bound).
"Palo Verde Nuclear Generating Station" or "PVNGS" means the Arizona Nuclear Power Project, as defined in the Arizona Nuclear Power Project Participation Agreement (including amendments 1-13) among APS, SRP, Southern California Edison, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and the Department of Water and Power of the City of Los Angeles (collectively, the "PVNGS Participants").
"Party" or "Parties" has the meaning specified in the introductory paragraph and shall include permitted successors and assigns.
"Permit" means any permit, consent, license, rezoning, variance, use permit, certification, notice, filing, approval, or authorization of any kind required to be issued by a Governmental Authority and any necessary consent or approval required to be granted by any non-Governmental Authority, other than a Party, in order to develop, construct, own, or operate any facility that is contemplated or required because of decisions made pursuant to this Agreement.
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"Person" means any natural person, corporation, limited liability company, partnership, business trust, Governmental Authority or other entity.
"PWE" means Pinnacle West Energy Corporation, an Arizona Corporation and an affiliate of APS.
"Tolleson Effluent" means all Effluent purchased by APS and SRP from the City of Tolleson pursuant to the Tolleson Agreement, whether such Effluent is Surplus Effluent or Reserved Effluent, as those terms are defined in the Tolleson Agreement.
1.2 Certain Principles of Interpretation. In this Agreement, unless otherwise indicated or the context otherwise requires:
(i) the singular includes the plural and plural the singular when the context requires;
(ii) words importing any gender include the other gender;
(iii) references to "writing" include printing, typing, lithography, and other means of reproducing words in a tangible visible form;
(iv) the words "including," "includes," and "include" shall be deemed to be followed in each instance by the words, "without limitation";
(v) references to articles, sections, paragraphs, recitals, and exhibits are to this Agreement unless otherwise stated;
(vi) references to contracts and related instruments shall be deemed to include all subsequent amendments, extensions, and other modifications to such instruments (without, however, limiting any prohibition on any such amendments, extensions and other modifications by the terms of this Agreement);
(vii) references to Persons include their respective permitted successors and assigns and, in the case of Governmental Authorities, persons succeeding to their respective functions and capacities;
(viii) the words "hereof," "herein," "hereunder," and words of similar import shall refer to this Agreement as a whole and not to any particular provision thereof;
(ix) both Parties and their counsel participated extensively in the preparation and drafting of this Agreement; no rule of construction shall apply that would cause the interpretation of any claimed ambiguity in this Agreement against a Party determined to be the drafting Party;
(x) captions and headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose;
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(xi) any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction and the provision that is prohibited or unenforceable shall be reformed or modified to reflect the parties' intent to the maximum extent permitted by applicable law; and
(xii) references to a "day," "week," "month," or "year" shall be construed as a calendar day, week, month, or year.
ARTICLE 2
PURPOSE AND SCOPE
The purpose of this Agreement is to set forth certain agreements and understandings between the Parties concerning the ownership and use of the Tolleson Effluent, the allocation of costs incurred in connection with the Tolleson Agreement and this Agreement, and the responsibilities and obligations of each Party. This Agreement relates solely to the business, activities, and purposes set forth herein and, except as otherwise expressly provided herein, does not apply to any other activities, transactions, relationships, contracts, projects, or work of the Parties. Subject to Article 4, no Party shall be restricted in any way from engaging in any activity or business falling outside the scope of this Agreement.
ARTICLE 3
OWNERSHIP AND USE OF TOLLESON EFFLUENT
3.1 Co-Ownership and Use of Effluent Purchased from Tolleson. APS and SRP agree that they are and shall be co-owners, as tenants in common, of all Tolleson Effluent purchased pursuant to the Tolleson Agreement, each Party possessing a 50% undivided interest in all such Tolleson Effluent. Consistent with the Tolleson Agreement, the Parties agree that the primary use of the Tolleson Effluent shall be for cooling water for PVNGS and that PVNGS shall have a priority right to the use of any or all of the Tolleson Effluent to satisfy such requirements for cooling water at PVNGS as are not fully satisfied using effluent from non-emergency sources other than Tolleson. To the extent that Tolleson Effluent is available for use at Other Electric Generating Facilities, the allocation of and the benefit from any such Effluent shall be divided between APS and SRP (or their permitted assigns) in the manner determined by the Coordinating Committee pursuant to Article 4. Any use of Tolleson Effluent at or for the benefit of Other Electric Generating Facilities shall be consistent with the terms of both this Agreement and the Tolleson Agreement.
3.2 Use of Tolleson Effluent at PVNGS. The Parties hereby agree that all Tolleson Effluent used at PVNGS shall be transferred to the PVNGS Participants at the Delivery Point specified in the Tolleson Agreement. All aspects of transportation, treatment, use, disposal and payment for any Tolleson Effluent so transferred and used at PVNGS shall be the responsibility of APS, as the Operating Agent of PVNGS, upon discharge of that Effluent into the Effluent Pipeline, and commencing upon such discharge, APS's rights and obligations with respect to such Tolleson Effluent shall be those of the
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Operating Agent under the terms of the Arizona Nuclear Power Project Participation Agreement, including but not limited to the liability provisions set forth in that Participation Agreement. The Parties to this Agreement shall not receive any fee or other compensation for transfer to the PVNGS Participants of Tolleson Effluent used at PVNGS.
3.3 Use of Tolleson Effluent at or For the Benefit of Other Electric Generating Facilities. Tolleson Effluent, if not required for cooling water purposes at PVNGS, may be used at or for the benefit of Other Electric Generating Facilities upon such terms and conditions as the Parties may separately agree, or as determined by the Coordinating Committee pursuant to Article 4. In this regard, the Parties contemplate that up to 6,500 acre-feet per year of available Tolleson Effluent will be transferred to PWE for use at the proposed electric generating facility commonly referred to as "Redhawk" pursuant to separate terms and conditions to be negotiated by the Parties, including, without limitation, payment of a fee by PWE to SRP and APS. Depending upon circumstances at the time, additional quantities of Tolleson Effluent may be approved for use at Redhawk after negotiation by the Parties and appropriate review and approval by the Coordinating Committee of any agreement that may be negotiated, including, without limitation, payment of a fee by PWE to SRP and APS.
ARTICLE 4
COORDINATING COMMITTEE
4.1 Coordinating Committee. Each Party shall designate one (1.) representative ("Representative") to serve on the Coordinating Committee and one
(1) alternate ("Alternate"), each having an appropriate level of technical expertise and familiarity with the policies of its executive management. The Parties; hereby form the Coordinating Committee, the initial Representatives and Alternates of which are as follows:

Party                       Representative              Alternate
------------------------    ------------------------    ------------------------
SRP                         David Areghini              Gary Harper
APS                         James M. Levine             Richard Gouge	

A Party may change its Representative or Alternate upon notice to the other Party. (The term "Representative" shall include the designated Representative or any Alternate that is actually performing the duties of the Representative.)
4.2 Coordinating Committee Authority. The Coordinating Committee shall have the following responsibilities and authority, subject to and consistent with the other terms of this Agreement and any separate agreement between the Parties that allocates any portion of Tolleson Effluent for a specific use:
(i) monitoring, directing, coordinating, and managing the activities of the Parties undertaken pursuant to this Agreement and, except as provided in
Section 5.1 hereof, allocating the costs and benefits thereof between the Parties in equal shares;
(ii) determining whether to issue a Notice of Commitment pursuant to paragraph 8.2 of the Tolleson Agreement, and approving all proposed uses of Tolleson Effluent, except to the extent that such issues are determined by the terms of any separate
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agreement between the Parties that allocates any portion of Tolleson Effluent for a specific use;
(iii) authorizing negotiations and approving all other contracts or commissioning such studies, investigations, or reports as the Coordinating Committee deems desirable or necessary;
(iv) determining the agenda, scope, participants and attendees at meetings of, and other matters relating to, the Coordinating Committee; and
(v) performing any other responsibility, duty, or authority granted from time to time to the Coordinating Committee by amendment of this Agreement.
4.3 Actions of the Coordinating Committee. No Party shall take any action with respect to allocation of Tolleson Effluent to any Other Electric Generating Facility except as may be specifically authorized by this Agreement or as agreed to and approved by the Coordinating Committee. No action of the Coordinating Committee shall be binding unless and until: (i) such action has been set forth in a writing submitted to the Representatives; (ii) the Representatives have had ten days after receipt of the writing to review it; and (iii) the action has been approved in writing by the Representative of each of the Parties. Failure to approve an action within such ten day period shall not constitute approval; provided, however, that each Party shall make good faith efforts to review and approve or reject each action within the ten day period. Approval of or failure to object to the minutes of a meeting of the Coordinating Committee shall not be deemed to constitute written approval of any action taken thereat. All actions approved by the Coordinating Committee shall be carried out by one or more of the Parties, as specified in the written approval of such action; any approval which does not specify the responsible party for the action shall be carried out by the Party having principal responsibility, as set forth in. Article 5.
4.4 Term. The Coordinating Committee shall dissolve and have no further authority upon (i) the due termination of this Agreement pursuant to any provision hereof, except to the extent it is expressly agreed in writing that the Coordinating Committee is needed to manage those matters that survive termination; or (ii) the unanimous agreement of the Parties to dissolve the Coordinating Committee.
4.5 Meetings.
A. Time and Conduct of Meetings: Quorum. The Coordinating Committee shall meet during the term of this Agreement, on an "as needed" basis or at the request of either Representative, at such times and at such places as the Representatives may from time to time agree. Meetings of the Coordinating Committee may be held in person or by telephone, video conference, or other agreed means. Each Representative shall be given reasonable advance notice of all Coordinating Committee meetings and all matters to be voted on by the Coordinating Committee. A quorum for a meeting of the Coordinating Committee shall consist of one representative of each Party. Any substantive decisions of the Coordinating Committee shall be documented in writing and approved by both Representatives.
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B. Attendance. Each Party shall use reasonable efforts to cause its Representative to be present at each meeting of the Coordinating Committee and no Party shall withhold the presence or participation of its Representative to forestall decisions on any matter pertaining to this Agreement. A Party may, without notice, cause any of its employees or its legal counsel to attend any meeting of the Coordinating Committee. In addition, a Party may, upon reasonable notice to the Coordinating Committee, request that individuals other than its employees and legal counsel be allowed to attend a meeting of the Coordinating Committee. No individuals other than the Representatives shall be permitted to vote on behalf of a Party. The Coordinating Committee may require the execution of a confidentiality agreement by any individual other than the Representatives, Alternates, employees, and legal counsel of the Parties as a condition to approving such individual's attendance at a Coordinating Committee meeting.
ARTICLE 5
PRINCIPAL RESPONSIBILITY
5.1 Implementing Decisions of Coordinating Committee. APS shall have principal responsibility for carrying out the actions of the Coordinating Committee, and implementing decisions of the Coordinating Committee, unless otherwise specified pursuant to Section 4.3 or 5.2 hereof. In addition, as set forth in paragraph 12.5.1 of the Tolleson Agreement, APS is authorized to act for and on behalf of SRP in all matters affecting the implementation and performance of the Tolleson Agreement when the performance in question involves transportation and use of Tolleson Effluent at PVNGS. The intent of said paragraph 12.5.1 is to authorize APS to act both as the Party with principal responsibility under this Agreement and as Operating Agent for PVNGS in managing all Tolleson Effluent to be used at PVNGS. Notwithstanding the provisions of this Section, either Party may take any appropriate, lawful action to cure a breach of the Tolleson Agreement caused by the other Party.
5.2 Responsibility for Transferred Tolleson Effluent.
5.2.1 Transfers for Use at PVNGS. Consistent with Section 3.2 above, APS and SRP shall request acceptance by the PVNGS Participants of responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for all Tolleson Effluent to be used at PVNGS. Responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for Tolleson Effluent to be used at PVNGS, shall be transferred to the PVNGS Participants at the Delivery Point specified in the Tolleson Agreement. Acceptance by the PVNGS Participants of the transfer of Tolleson Effluent, and responsibility for, and risks associated with, its transportation, treatment, use disposal and payment, shall be documented in the minutes of the Administrative Committee established pursuant to Section 6.1.1 of the Arizona Nuclear Power Project Participation Agreement.
5.2.2 Transfers for Use at Other Electric Generating Facilities. As between the Parties to this Agreement and the party or parties owning or operating a specific Other Electric Generating Facility, responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for Tolleson Effluent to be used at the Other Electric Generating Facility shall be transferred to the party or parties owning an
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interest in or operating the Other Electric Generating Facility, such transfer to occur at the Delivery Point specified in the Tolleson Agreement. Acceptance of this transfer of responsibility for, and risks associated with, Tolleson Effluent to be used at Other Electric Generating Facilities shall be documented in the agreement(s) by which the Tolleson Effluent is transferred to the party owning or operating the Other Electric Generating Facility. Notwithstanding the transfer of responsibility and risk to the party or parties owning or operating the Other Electric Generating Facility, ownership of the Tolleson Effluent shall not transfer until physical delivery of the Tolleson Effluent to that party or parties at the delivery point specified in the agreement transferring the Tolleson Effluent.
5.3 Permitting. APS shall have principal responsibility to ensure compliance with any Legal Requirement applicable to the actions of the Coordinating Committee and to ensure that any Person using Tolleson Effluent purchased by the Parties secures any Permit and otherwise satisfies any Legal Requirement applicable to the transportation and delivery of Tolleson Effluent to the point of delivery agreed upon by the Parties; provided, however, that in any case where SRP will make use of Tolleson Effluent at or for the benefit of Other Electric Generating Facilities operated or solely owned by SRP or any affiliated or successor entity, then from and after the delivery point agreed upon by the Parties, SRP shall have principal responsibility to ensure compliance with any Legal Requirement, and to secure any Permit, applicable to its intended use of the Tolleson Effluent.
ARTICLE 6
TERM
6.1 Term. This Agreement shall commence on the Effective Date and shall terminate upon the expiration or termination of the Tolleson Agreement.
6.2 Survival. All obligations and liabilities of the Parties under this Agreement shall cease upon termination except the obligation of the Parties under Article 9, obligations assigned pursuant to this Agreement to the Coordinating Committee with the expressed, written intent that they survive this Agreement, and the liabilities of any Party resulting from a default by such Party leading to such termination.
ARTICLE 7
DEFAULT
7.1 Events of Default. A Party shall be in default under this Agreement upon the occurrence of the following ("Event of Default"): if it fails to render performance required under any material provision of this Agreement when due and such failure continues unremedied for thirty (30) days following written notice to the Party in default given by the other Party. Neither APS nor SRP shall be in default under this Agreement due to Uncontrollable Forces and Outages as identified in Section 9.1 of the Tolleson Agreement. It shall also be an Event of Default if a Party shall have commenced any insolvency, receivership, bankruptcy, liquidation, or similar proceedings and (i) one hundred twenty (120) days shall have expired from the commencement of any one or more of such proceedings, and (ii) a petition commencing the proceeding has not been dismissed or stayed within that time.
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7.2 Actions upon Event of Default. In the event of any dispute between the Parties concerning the rights and obligations created by this Agreement, or concerning any Event of Default, the Parties shall first confer in an attempt to informally resolve such dispute without need to resort to arbitration or litigation. The Parties shall not resort to arbitration or litigation to enforce their rights under this Agreement until they have conferred in good faith over a period of not less than fifteen days in an attempt to informally resolve their dispute. If the Parties are unable to resolve their dispute after conferring as required in the preceding sentence, then during the period that any Event of Default continues, the non-defaulting Party may, without prejudice to any other available rights or remedies under this Agreement or at law or in equity, and without constituting an election of an exclusive remedy for an Event of Default, initiate either or both of the following: (i) proceedings to partition the Tolleson Effluent and thereby terminate the co-tenancy of the Parties in the Tolleson Effluent, or (ii) non-binding arbitration by one arbitrator who has not previously been employed by either party (excluding employment as an arbitrator), and does not have a direct or indirect interest in either Party or the subject matter of the arbitration. The arbitrator shall either be as mutually agreed by the Parties within fifteen (15) calendar days after submission of the matter to arbitration, or failing agreement shall be selected under the expedited rules of the American Arbitration Association ("AAA"). The rules of AAA shall apply to the extent not inconsistent with the provisions in this Section. Arbitration shall be conducted according to the following: (a) not later than seven (7) days prior to the hearing date set by the arbitrator, each party shall submit a brief with a single proposal for settlement; (b) the hearing shall be conducted on a confidential basis without continuance or adjournment; and (c) the Parties shall divide equally the cost of the arbitrator and the hearing, and each Party shall be responsible for its own expenses, including its counsel and representatives.
ARTICLE 8
NOTICES
8.1 Notice Provision. All notices, demands, consents or other communications required under this Agreement shall be in writing and may be delivered personally to a Party, may be delivered by facsimile providing written confirmation of successful transmission, or may be mailed by deposit in the United States Certified Mail, return receipt requested, or by deposit with a reputable overnight delivery service. Notices shall be effective:
(i) on the date delivered by personal delivery or facsimile;
(ii) three (3) business days following the date deposited in the United States mail; or
(iii) the next business day following delivery to a reputable overnight delivery service.
Notices or communications shall be delivered and mailed to the Parties at the addresses set forth in paragraph 12.4 of the Tolleson Agreement, or to any address of a Party which is substituted from time to time by written notice of such Party pursuant to paragraph 12.4 of the Tolleson Agreement.
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ARTICLE 9
LIABILITY
9.1 Limitation of Liability. The liability of a Party to the other Party under this Agreement shall be limited to the direct damages actually sustained by the other Party. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY LOSS OR DAMAGE IN THE NATURE OF PARTIAL OR COMPLETE LOSS OF USE OF ANY GENERATING FACILITY, LOSS OF ELECTRIC POWER, COST OF REPLACEMENT OF ELECTRIC POWER, OR FOR ANY LOSS OF INTEREST, REVENUE OR ANTICIPATED PROFITS FROM ACTIVITIES UNDER THIS AGREEMENT. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS, ARISING OUT OF OR RELATED TO THIS AGREEMENT. (The limitations in this Section 9.1 shall not apply to losses in tort to third parties or to Claims against which a Party is entitled to indemnitee protection under Section 9.2.)
9.2 Indemnity. Except as otherwise provided in any subsequent agreement between the Parties (or between the Parties and other entities), each Party ("Indemnifying Party") shall defend, indemnify, and hold harmless the other Party and its respective affiliates, directors, officers, partners, members, employees, agents, and representatives (each an "Indemnitee") from and against any and all Claims, liability, cost, loss or expense of any kind incurred by the Indemnitees arising out of the fraud or willful misconduct of the Indemnifying Party or its agents or representatives in connection with this Agreement, or arising out of a material breach of the Tolleson Agreement by the Indemnifying Party. Except as limited by any separate agreement between the Parties, each Party shall also indemnify and hold harmless the other Party against any and all Claims, liability, cost, loss or expense of any kind resulting from the Indemnifying Party's control, transportation, use or disposal of Tolleson Effluent at or for the benefit of any of the Indemnifying Party's Other Electric Generating Facilities In the event any such Claim, liability, cost, loss or expense asserted by a person not a Party to this Agreement is caused by an alleged joint or concurrent fraud, negligence or willful misconduct, the Parties at fault shall bear liability in proportion to their own degrees of culpability. Each Indemnitee is an intended beneficiary of this Section 9.2. The indemnification obligation of the parties set forth in this Section shall survive the termination or expiration of this Agreement.
ARTICLE 10
GENERAL
10.1 Entire Agreement. This Agreement supersedes all prior and contemporaneous conduct and communications between the Parties pertaining to co-ownership of the Tolleson Effluent, whether written or oral. Notwithstanding the foregoing, this Agreement shall be read together with the Tolleson Agreement, and any agreement by which APS and SRP transfer any portion of the Tolleson Effluent for use at or for the benefit of Other Electric Generating Facilities, to obtain necessary definitions and to otherwise determine the intention of the Parties. This Agreement is not intended to modify or abrogate either the Tolleson Agreement or any subsequent agreement by which APS and SRP transfer any portion of the Tolleson Effluent for use at or for the benefit of Other Electric Generating
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Facilities. This Agreement may not be modified, changed or added to except in writing signed by all Parties hereto.
10.2 Waiver. Each Party's failure or delay in enforcing the terms and conditions of this Agreement or insisting upon strict performance of any of the other Party's obligations shall not be interpreted as a waiver thereof. Waiver of any provision of this Agreement shall only be effective if in writing and shall not be interpreted as a waiver of any subsequent breach or failure under the same or any other provision of this Agreement. No conduct, statement, course of conduct, course of dealing, oral expression or other action shall be construed as a waiver.
10.3. Assignment.
10.3.1 Assignment by APS to PWE. APS may assign its rights and delegate its duties under this Agreement at any time to PWE, provided that: (i) APS assigns' its entire interest in this Agreement; (ii) PWE assumes in writing all of the APS obligations under this Agreement; (iii) APS also assigns all of its rights and obligations under the Tolleson Agreement to PWE at the same time as its assignment of this Agreement; and (iv) such assignment shall not become effective until and unless PWE has become a party to the Arizona Nuclear Power Project Participation Agreement. No assignment or delegation under this Section 10.3.1 will release the assigning Party from its obligations under this Agreement unless the other Party consents to a release (such consent not to be unreasonably withheld, conditioned or delayed). Any subsequent assignee of PWE's rights and obligations under this Agreement shall be subject to all terms and conditions of this Agreement, including, without limitation, the restrictions of this Section 10.3.1.
10.3.2 Assignment to Others. With the prior written consent of the other Party (such consent not to be unreasonably withheld, conditioned or delayed), a Party may assign its rights or delegate its duties under this Agreement at any time to any other PVNGS Participant, provided that such Party assigns its entire interest in this Agreement and that its assignee assumes in writing all of such Party's obligations under this Agreement. No assignment or delegation under this Section 10.3.2 will release the assigning Party from its obligations under this Agreement unless the other Party consents to a release (such consent not to be unreasonably withheld, conditioned or delayed). Any assignee to whom the rights and obligations of this Agreement are assigned pursuant to this Section 10.3.2 shall thereafter be subject to all terms and conditions of this Agreement, including, without limitation, the restrictions of this Section 10.3.2.
10.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Arizona.
10.5 Attorneys' Fees. Each Party shall bear its own attorneys' fees, costs, and expenses in case of a partition action or arbitration initiated under the provisions of Section 7.2. Should any Claim be brought by a Party against another Party arising out of this Agreement, including any action for declaratory or injunctive relief, the prevailing Party shall be entitled to reasonable. attorneys' fees and costs and expenses of litigation and investigation, all as actually incurred, including attorneys' fees, costs and expenses of litigation and investigation incurred in appellate proceedings or in any action or participation
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in, or in connection with, any case or proceeding under the United States or other bankruptcy laws, and any judgment or decree rendered in any such action or proceedings shall include an award thereof.
10.6 Counterparts. This Agreement may be executed by the Parties in any number of separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. All signatures need not be on the same counterpart.
10.7 Relationship of the Parties. The execution of this Agreement shall not create or constitute a partnership, joint venture, entity or any form of business organization between the Parties.
IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of the Effective Date.
ARIZONA PUBLIC SERVICE COMPANY, an
 Arizona corporation,

By       /s/ James M. Levine
  ---------------------------------------
         Its Exec. VP, Generation	

Approved as to form:

By       /s/ Karilee S. Ramaley
  ---------------------------------------

SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT, an
Arizona agricultural improvement district

By       /s/ William P. Schrader
  ---------------------------------------
         Its President	

Approved as to form:

By       /s/ Richard N. Morrison
  ---------------------------------------	

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EXHIBIT 10.104
AGREEMENT FOR THE SALE AND PURCHASE
OF WASTEWATER EFFLUENT
THIS AGREEMENT, is made and entered into this 13th day of November 2000, by and between the City of Tolleson, a municipal corporation organized and existing under and by virtue of the laws of the State of Arizona ("Tolleson" or "City"), and Arizona Public Service Company, a corporation organized and existing under and by virtue of the laws of the State of Arizona ("APS") and Salt River Project Agricultural Improvement and Power District, an agricultural improvement district organized and existing under and by virtue of the laws of the State of Arizona ("SRP"). The City, APS and SRP are collectively referred to herein as the "Parties." APS and SRP are collectively referred to herein as "The Companies." All references to "The Companies" in this Agreement shall include APS or SRP, or both APS and SRP, or any affiliated or successor entity to either SRP or APS, including but not limited to Pinnacle West Energy Corporation, an affiliate of APS.
WITNESSETH:
WHEREAS, Tolleson owns, operates and maintains a wastewater treatment plant (hereinafter the "Plant") situated approximately 1/4 mile south of State Route 85 and approximately 1/4 mile west of 91st Avenue at which Tolleson treats raw sewage collected from sources within and outside of the corporate boundaries of Tolleson and produces treated wastewater effluent which, unless used by Tolleson for other purposes, is discharged into the Salt River in accordance with the laws of the United States and the State of Arizona (hereinafter "Effluent" or "Tolleson Effluent");
WHEREAS, the rated treatment capacity of the Plant, assuming typical influent quality, is currently approximately 17.5 million gallons per day (hereinafter "M.G.D.") of influent;
WHEREAS, Tolleson is evaluating the possibility of having the existing Plant re-rated to a capacity of greater than 17.5 M.G.D. of influent, and Tolleson may in the future expand Tolleson's capacity in the Plant to create capacity beyond 17.5 M.G.D.;
WHEREAS, Tolleson desires to reserve for its use and disposition as it may in its own discretion elect, 10% of the amount of Effluent produced at the Plant (hereinafter "Reserved Effluent");
WHEREAS, Reserved Effluent may be used, sold or otherwise disposed of by Tolleson for any lawful purpose, including delivery and sale to The Companies consistent with the terms of this Agreement;
WHEREAS, Tolleson desires to sell and The Companies desire to purchase all available "Surplus Effluent," which for the purposes hereof shall be all of the Effluent produced through the operation of the Plant in excess of the Reserved Effluent, but not to exceed the maximum capacity of the current interconnection (the "Interconnection Facilities") between the Plant and the pipeline (the "Effluent Pipeline") that supplies effluent to the Palo Verde Nuclear Generating Station ("Palo Verde"), and, when operational, the maximum capacity of the modified Interconnection Facilities provided for in Section 5.2 below;
WHEREAS, additional wastewater treatment is provided at Palo Verde's "Water Reclamation Facility" located at the northern end of the Palo Verde property and the western terminus of the Effluent Pipeline;
WHEREAS, the Parties previously entered into an Agreement for the Sale and Purchase of Effluent dated June 12, 1981 (the "Previous Agreement");
WHEREAS this Agreement is intended to replace the Previous Agreement, which will be of no further effect upon execution of this Agreement; and
WHEREAS, the sale and purchase of the Surplus Effluent will result in its beneficial use and in the reduction in the demand for the limited supplies of unused surface waters and groundwaters;
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NOW THEREFORE, for and in consideration of the mutual covenants, terms and conditions hereinafter stated, the Parties agree as follows:
SECTION 1. SALE AND PURCHASE OF SURPLUS EFFLUENT.
1.1 Except as provided in other Sections of this Agreement, Tolleson shall sell and deliver to The Companies, and The Companies shall purchase and accept, all of the Surplus Effluent produced through the operation of the Plant during the term of this Agreement. In addition, Tolleson may sell and deliver to The Companies, and The Companies may purchase and accept any or all of the Reserved Effluent not used, sold or otherwise disposed of by Tolleson. Nothing in this Agreement shall impair the right of Tolleson to use, sell or otherwise dispose of any and all of the Reserved Effluent and any Surplus Effluent that The Companies do not purchase and receive under this Agreement pursuant to Sections 2.1, 3.3 or 9.2. The Companies' right to receive Surplus Effluent shall have priority over Tolleson's use, sale or other disposition of any Surplus Effluent except under conditions specified in Section 9.2.
1.2 This Agreement contains no requirement that Tolleson produce any certain amount of Effluent at the Plant but merely that it deliver to The Companies whatever amount of Surplus Effluent is produced, except as provided elsewhere in this Agreement. However, the Parties understand and acknowledge that since at least 1994 Tolleson has produced between 12,000 and 15,000 acre-feet of Effluent per year. Tolleson agrees that it will undertake all reasonable, good faith efforts to maintain all existing contracts, operations and facilities necessary to sustain discharges of Surplus Effluent meeting the water quality standards of Section 3 at or above the level of 13,000 acre-feet per year. Tolleson further agrees that it will not construct additional wastewater treatment facilities at locations other than the current location of the Plant if such facilities would adversely affect Tolleson's ability to sustain discharges of Surplus Effluent meeting the water quality standards of
Section 3 at or above the level of 13,000 acre-feet per year. Tolleson further agrees that it will notify The Companies, as soon as reasonably possible, of any development or change in circumstances that may adversely affect
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Tolleson's ability to continue producing at least 13,000 acre-feet of Surplus Effluent per year that meets the water quality standards of Section 3.
SECTION 2. PRICE AND PAYMENT.
2.1 The Companies shall pay to Tolleson, for all Effluent that is sold and delivered hereunder for use at or for the benefit of Palo Verde, a price of Thirty Dollars ($30.00) per acre-foot for calendar years 2000 through 2002. Beginning with calendar year 2003 and throughout the remaining term of this Agreement, the price to be paid in all subsequent years during the term of this Agreement for all Effluent that is sold and delivered hereunder for use at or for the benefit of Palo Verde shall be determined by multiplying the previous year's price by the average annual percentage increase in the Consumer Price Index ("CPI") during the immediately preceding five years. Exhibit A to this Agreement, which is specifically incorporated herein by this reference, states the formula, and provides an example, for making the CPI-based price adjustments required by this Section. If, in the sole judgement of The Companies, the price to be paid to Tolleson for Effluent to be delivered and sold for use at or for the benefit of Palo Verde, after application of the CPI-based price adjustment mechanism set forth in this Section, becomes too high in comparison to the price of treated wastewater effluent available to Palo Verde from sources other than Tolleson, The Companies may elect to terminate their obligation to accept and pay for Surplus Effluent for use at or for the benefit of Palo Verde. If The Companies elect to terminate their obligation to accept and pay for Surplus Effluent for use at or for the benefit of Palo Verde pursuant to this Section, they shall provide Tolleson one year's advance written notice of such election to terminate. Provided, however, that upon receipt of written notice of The Companies' election to terminate pursuant to this Section, Tolleson may elect to sell Surplus Effluent to The Companies for use at or for the benefit of Palo Verde at the same price then being paid by The Companies for treated wastewater effluent used at or for the benefit of Palo Verde and sold by sources other than Tolleson (the "New Price"). Tolleson shall provide written notice to The Companies of its election to begin selling Surplus Effluent at the
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New Price within 180 days after Tolleson receives notice of The Companies' election to terminate pursuant to this Section. If Tolleson provides such written notice within the required 180 day period, The Companies shall continue to accept and pay for Surplus Effluent used at or for the benefit of Palo Verde at the New Price, consistent with all other terms of this Agreement. If Tolleson does not provide such written notice within the said 180 days, any obligation of Tolleson to supply Surplus Effluent for use at Palo Verde shall be permanently terminated.
2.2 If Effluent is used at or for the benefit of the proposed electric generating facility commonly referred to as "Redhawk" or any electric generating facilities other than Palo Verde that are owned (in whole or in part) or operated by The Companies (collectively referred to as "Other Electric Generating Facilities") pursuant to Section 4.1, the price to be paid for all such Effluent shall be Seventy Five Dollars ($75.00) per acre-foot during calendar years 2000 through 2002. Beginning with calendar year 2003 and throughout the remaining term of this Agreement, the price to be paid by The Companies for Effluent delivered into the Pipeline and used at or for the benefit of Other Electric Generating Facilities shall be determined by multiplying the previous year's price by the average annual percentage increase in the CPI during the immediately preceding five years. The formula to be used for making this adjustment, and an example of its application, are contained in Exhibit A. The Companies shall measure, keep records of, and report to Tolleson on a monthly basis the quantity, if any, of Effluent used at or for the benefit of such Other Electric Generating Facilities.
2.3 The Companies shall pay Tolleson monthly an amount equal to the price determined pursuant to Section 2.1 and/or 2.2 hereof, as applicable, multiplied by the number of acre-feet of Effluent that were delivered and accepted for use at or for the benefit of the respective facilities (Palo Verde or Other Electric Generating Facilities) during the prior month. Such monthly payments shall be due and payable 30 days after receipt of the invoice therefor rendered by Tolleson.
2.4 In the event of a dispute concerning the quantity of Effluent delivered and accepted in any month, The Companies shall pay the invoiced amount, but may do
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so under written protest. If any protested amount shall subsequently be determined to have been excessive, the excessive amount thereof shall be refunded to The Companies. Any dispute or protest shall be resolved in the manner provided by Section 12.7 hereof.
2.5 The Companies shall pay Tolleson the price determined pursuant to Section 2.1 for each acre-foot of Surplus Effluent made available by Tolleson for delivery under this Agreement and meeting the water quality standards of
Section 3 that is not accepted by The Companies, up to the then-operational maximum capacity of the Interconnection Facilities, except during any Uncontrollable Force event as defined in Section 9.1. Payments under this
Section shall be made to Tolleson monthly in an amount equal to the price determined pursuant to Section 2.1 multiplied by the number of acre-feet of Surplus Effluent meeting the water quality standards of Section 3 made available by Tolleson for delivery, but not accepted by The Companies, during the prior month. Such monthly payments shall be due and payable 30 days after receipt of the invoice therefor rendered by Tolleson. The Companies shall have no obligation to pay for Reserved Effluent not actually accepted into the Effluent Pipeline for use at or for the benefit of Palo Verde or Other Electric Generating Facilities. If The Companies elect to terminate their obligation to accept and pay for Surplus Effluent for use at or for the benefit of Palo Verde pursuant to Section 2.1, the obligation to pay for Surplus Effluent, whether taken or not, under this Section shall remain in effect for any Other Electric Generating Facility for which one or more Notices of Commitment have been submitted to Tolleson pursuant to Section 8.2. Provided, however, that if The Companies terminate their obligation as to Palo Verde, the number of acre-feet thereafter subject to the payment obligation imposed by this Section shall be the number of acre-feet specified in the Notice(s) of Commitment previously submitted to Tolleson. Provided further that, if The Companies terminate their obligation as to Palo Verde, the Parties shall meet to determine, based on actual operating history and projected future needs, the number of acre-feet of Surplus Effluent that will remain committed to such Other Electric Generating Facilities. Such remaining committed Surplus Effluent shall be used only at or for the benefit of such Other Electric Generating Facilities.
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2.6 The methods identified in Paragraphs 2.1 and 2.2 above for determining the price to be paid by The Companies pursuant to this Agreement for each acre-foot of Effluent delivered into the Effluent Pipeline by Tolleson and accepted by The Companies for use at Palo Verde or Other Electric Generating Facilities, and the resulting prices established by those methods, shall remain in effect throughout the term of this Agreement. Provided, however, that: (i) if The Companies enter into a new contract, or amend an existing contract, for supplying treated wastewater effluent to Palo Verde or Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline; and (ii) that new contract or amendment of that existing contract provides for a higher price, or a different method of determining the price, of treated wastewater effluent supplied to Palo Verde or Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline; then (iii) Sections 2.1 and/or 2.2 of this Agreement, as applicable, shall be revised to incorporate that higher price or new method of determining the price. The application of any different method of determining the price of effluent under this Section 2.6 shall not result in a lower price being paid to Tolleson than if such different method were not used. The provisions of this Section shall not apply to any contract entered into by The Companies for a backup supply of treated wastewater effluent that allows The Companies to purchase such effluent when Tolleson is unable to deliver into the Pipeline at least 13,000 acre-feet per year of Surplus Effluent meeting the water quality standards of Section 3. The price benefits afforded to Tolleson by this Section shall apply if The Companies purchase another source of treated wastewater effluent, other than a backup supply pursuant to the immediately preceding sentence, for use at or for the benefit of any Other Electric Generating Facility physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, whether or not the other source of treated wastewater effluent is delivered into the Effluent Pipeline. For purposes of this Agreement, the phrase "physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline" shall apply only to any Other Electric Generating Facilities located within: (i) the area described in the legal
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description and accompanying map attached to this Agreement as Exhibit B, which exhibit is specifically incorporated herein by this reference; or (ii) within one mile north or two miles south of any portion of the Effluent Pipeline. The Companies agree, as a covenant of good faith, to comply with the requirements of this Section and Section 4.2 by refraining from constructing or acquiring Other Electric Generating Facilities in locations immediately outside the area defined in the preceding sentence as subject to the "physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline" standard if such construction or acquisition is intended to avoid the requirements of this Section or Section 4.2.
2.7 In addition to any amounts The Companies are required to pay under paragraphs 2.3 and 2.5 of this Agreement, The Companies shall also pay Tolleson monthly, from the date of execution of this Agreement until June 30, 2002, an amount equal to the difference between: (1) the sum of the amounts paid under paragraphs 2.3 and 2.5 of this Agreement; and (2) the amount that The Companies would have been required to pay Tolleson for an equal quantity of Effluent under the Previous Agreement among APS, SRP and Tolleson dated June 12, 1981.
2.8 If at any time The Companies fail to pay to Tolleson the amounts they are obligated to pay under Sections 2.3 and 2.5 within the 30 days provided for such payment, Tolleson may, after providing 10 days advance written notice, cease delivering Surplus Effluent into the Effluent Pipeline until all past due amounts are paid in full.
SECTION 3. QUALITY OF THE SURPLUS EFFLUENT.
3.1 All Effluent sold and delivered hereunder shall have received wastewater treatment, and shall meet the standards required by law and specified in Permit No. AZ0020338 issued to Tolleson by the Environmental Protection Agency (hereinafter "EPA"), including any amendments or replacements thereof as may be made from time to time and/or in any other required permit or authorization as may hereafter be issued by the Arizona Department of Environmental Quality (hereinafter "ADEQ"), or any other federal or state agency having
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jurisdiction respecting the treatment and/or discharge of wastewater effluent, except that disinfection (by chlorination or otherwise) of such Effluent sold and delivered hereunder shall be required and performed only upon the terms and conditions hereinafter provided.
3.2 In addition to meeting the permit-based water quality requirements specified in Section 3.1, Tolleson shall use its best efforts to operate and maintain its existing Plant in a manner that will treat Effluent such that the Effluent does not exceed: (i) 30 milligrams per liter (mg/l) of Biological Oxygen Demand ("BOD") for any period of time; (ii) 25 mg/l BOD for any period longer than two consecutive days; (iii) 20 mg/l BOD for any period longer than one week; or (iv) 15 mg/l BOD for any period longer than one month. Nothing contained in this Section 3.2 shall require Tolleson to upgrade or improve the Plant or otherwise compel Tolleson to incur any additional expense in the operation of the Plant.
3.3 The Companies shall not be required to purchase, accept or pay for any Effluent that does not meet the water quality standards set forth in Sections 3.1 and 3.2 hereof. The Companies' sole remedy for breach of Tolleson's obligation to meet the water quality standards of Sections 3.1 and 3.2 shall be the right to refuse to purchase, accept or pay for any Effluent that does not meet those standards.
3.4 Tolleson, on the written request of The Companies, shall disinfect the surplus Effluent to be delivered to The Companies, provided that The Companies shall reimburse Tolleson for its direct costs associated with such disinfection.
3.5 Tolleson shall promptly notify APS by telephone, and in writing as soon as reasonable thereafter, of any changes in wastewater treatment processes or operational anomalies at the Plant that have the potential to significantly change the composition of the Effluent delivered to The Companies, including, but not limited to, changes that would affect compliance with the water quality standards addressed in this Section 3. The Companies acknowledge that the Plant has exceeded, and will exceed the foregoing BOD levels, and Tolleson acknowledges that The Companies will not be obligated to purchase any Effluent produced by Tolleson that exceeds the foregoing BOD levels.
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SECTION 4. USE OF EFFLUENT.
4.1 The primary use of the Effluent purchased and accepted by The Companies under this Agreement is for cooling required for generation of electric power at Palo Verde. The Companies may also use, transfer or execute a water exchange for any or all of the Effluent made available under this Agreement for use at or for the benefit of any Other Electric Generating Facilities that The Companies may now or in the future develop, own (in whole or in part) or operate. All such Effluent used at or for the benefit of Other Electric Generating Facilities shall be subject to the price established in
Section 2.2.
4.2 If at any time The Companies use any treated wastewater effluent at or for the benefit of Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, Tolleson shall have the first right to sell to The Companies, and The Companies shall have the obligation to purchase from Tolleson, all such treated wastewater effluent, up to the then-operational maximum capacity of the Interconnection Facilities, provided that:
(a) the treated wastewater effluent requirements of Palo Verde are being fully satisfied, whether by Tolleson Effluent or by effluent from other sources;
(b) the Participants in Palo Verde consent to the use of the Effluent Pipeline, Water Reclamation Facility and any other property or facilities owned by such Participants for transportation and treatment of Effluent for use at or for Other Electric Generating Facilities (provided, however, that if such consent is not obtained from the Palo Verde Participants by December 31, 2001, Tolleson may elect to terminate its obligation under this Agreement to deliver and sell Surplus Effluent to the Companies); by its execution of this Agreement, APS confirms its consent, as a Palo Verde Participant, to the use of the Effluent Pipeline, Water Reclamation Facility and any other Palo Verde property or facilities required for transportation and treatment of Effluent for use at or for Other Electric Generating Facilities; and
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(c) Tolleson produces the lesser of 12,000 acre feet per year of Effluent or sufficient Surplus Effluent meeting the water quality standards of Section 3 to satisfy the quantity specified in any Notices of Commitment delivered to Tolleson by The Companies pursuant to Section 8.2.
To the extent that all of the preceding requirements are satisfied, Tolleson shall have the first right to sell to The Companies, and The Companies shall be obligated to purchase from Tolleson, treated wastewater effluent for use at or for the benefit of Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, up to the lesser of: (i) the maximum quantity of effluent used at or for the benefit of such Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline; or (ii) the then-operational maximum capacity of the Interconnection Facilities. For the purpose of determining the times when The Companies must take Surplus Effluent first at Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, The Companies shall allocate all treated wastewater effluent that The Companies acquire, other than Surplus Effluent, first for use at Palo Verde. Only after purchasing all available Surplus Effluent meeting the water quality standards of Section 3 may The Companies purchase treated wastewater effluent from another source for use at or for the benefit of such Other Electric Generating Facilities physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline, or use groundwater for condenser cooling in lieu of such Surplus Effluent, except to the extent that groundwater is necessary to make up any shortfall in cooling water requirements resulting from physical constraints in the Effluent Pipeline, Water Reclamation Facility or other Palo Verde facilities. Nothing in this Agreement shall prohibit or limit the right of The Companies to enter into additional contracts with other parties for the sale and purchase of wastewater effluent to be used at Palo Verde or Other Electric Generating Facilities, provided that such contracts do not limit Tolleson's rights under this Agreement. To the extent that any amount of Surplus Effluent is used at or for the benefit of Other Electric
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Generating Facilities, Tolleson shall be relieved of any obligation it may have under this Agreement to supply that quantity of Surplus Effluent for use at or for the benefit of Palo Verde.
SECTION 5. DELIVERY POINT AND METERING.
5.1 Effluent sold and purchased hereunder shall be delivered by Tolleson and accepted by The Companies at the valve that controls the flow of Effluent into the Effluent Pipeline (hereinafter the "Delivery Point") at the interconnection between the two outfall wastewater lines from the Plant to the Salt River (hereinafter the "Outfall Lines") and the Effluent Pipeline. Such Effluent delivered by Tolleson and accepted by The Companies at the Delivery Point shall be deemed "delivered into the Effluent Pipeline" as that phrase is used in this Agreement.
5.2 Within one year after the execution of this contract, The Companies shall design and construct a modification to the existing Interconnection Facilities between the Outfall Lines and the Effluent Pipeline to allow delivery by Tolleson into the Effluent Pipeline of at least 21 M.G.D. of Surplus Effluent. All costs associated with the design, construction, operation and maintenance of this modification shall be borne by The Companies, and title to the modified Interconnection Facilities shall be vested consistent with the provisions of Exhibit C, which identifies specific components of the Interconnection Facilities and the Party or Parties in which title to each such component is vested. The Companies shall be responsible for, and the Parties shall cooperate as necessary, to ensure the timely design, construction, operation and maintenance of the existing and modified Interconnection Facilities required by this Section and to ensure that such activities do not interfere with the operation of the Plant or the Effluent Pipeline. If The Companies cease using the Interconnection Facilities for acceptance of Effluent from Tolleson, The Companies shall either continue to operate and maintain the Interconnection Facilities to ensure that operation of the Plant will not be adversely affected, or shall offer to transfer to Tolleson title over any portion of the Interconnection Facilities that is necessary to the operation of the Plant, provided, however, that if Tolleson refuses to accept such
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title, The Companies shall have no obligation to continue to operate or maintain the Interconnection Facilities.
5.3 The quantity of Effluent delivered by Tolleson and accepted by The Companies at the Delivery Point shall be measured by metering devices installed by The Companies as close to the Delivery Point as practicable. The quantity of Effluent supplied by Tolleson and accepted by The Companies for use at or for the benefit of Other Electrical Generating Facilities shall be measured by a metering device installed by The Companies at a point which will measure the amount of Effluent that is used at or for the benefit of Other Electrical Generating Facilities. Such metering devices shall be of a design and type acceptable to Tolleson and The Companies. The costs of such devices and their installation, operation, maintenance, replacements, repair, betterments and calibration shall be borne by The Companies, except as otherwise provided in
Section 7.2 hereof, and the title thereto shall be vested in The Companies. Provisions shall be made to permit flow meter information to be continuously displayed in a panel or panels at the Plant utilizing facilities and equipment as Tolleson may, at its own expense provide, title to which shall be vested in Tolleson.
5.4 In the event that the flow metering device measuring flows of Tolleson Effluent into the Effluent Pipeline shall fail or be inoperative, Tolleson shall have the right to use other in-Plant flow metering equipment to determine the volume of Effluent delivered for billing purposes.
5.5 If Tolleson concludes that increases in capacity of the Plant beyond 21 M.G.D. are necessary or desirable, the Parties shall meet, upon request by Tolleson, to discuss potential additional modifications of the Interconnection Facilities beyond those required by Section 5.2 above. Any terms for the design and construction of, and payment for, additional modifications, and any terms for the purchase and sale of any Effluent made available by an increase in the capacity of the Interconnection Facilities beyond 21 M.G.D., shall be established by mutual agreement of the Parties at that time.
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SECTION 6. PERMITS AND AUTHORIZATIONS.
6.1 Tolleson shall be solely responsible for securing and maintaining in force and effect any and all permits and authorizations required by law for the delivery of Effluent to The Companies at the Delivery Point and for the discharge into the Salt River or other disposal of Effluent which is not delivered to and accepted by The Companies.
6.2 The Companies shall be solely responsible for securing and maintaining in force and effect any and all permits and authorizations required by law for the transportation of the Effluent from the Delivery Point to Palo Verde or to any other points and for any uses of the Effluent that are allowed by Section 4 of this Agreement. Such responsibility of The Companies may be delegated to others, but as between the Parties the responsibility rests solely upon The Companies.
6.3 Each of the Parties shall cooperate with the other Parties in securing and maintaining in force and effect the permits and authorizations required in accordance with this Agreement or by local, state or federal laws and regulations and shall render such assistance to the other Parties as it or they may reasonably request. Each Party shall furnish to the other Parties a copy of each permit and authorization obtained pursuant to Sections 6.1 and 6.2 hereof.
6.4 Should Tolleson be required by law to treat the Effluent in a manner that results in increased expenses to Tolleson because it is delivering the Effluent to The Companies under this Agreement, which expense it would not have incurred if the Effluent was disposed by Tolleson into the Salt River, then The Companies shall have the right to require Tolleson to so treat the Effluent and shall reimburse Tolleson for all reasonable expenses (including without limitation any costs of plant additions or improvements) incurred by Tolleson in providing such treatment. If The Companies, in their sole discretion, decide not to exercise their right under this Section to require additional treatment, they may take other action, including terminating this Agreement, to ensure continuing compliance with applicable law. However, prior to terminating this Agreement as allowed in the previous sentence, The
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Companies shall meet with Tolleson to discuss any alternatives to termination that may be available to ensure compliance with applicable law.
SECTION 7. IMPLEMENTATION OF THE AGREEMENT.
7.1 Within 30 days after the effective date of this Agreement, Tolleson shall designate a representative and The Companies shall jointly designate a representative for the purposes of: (i) implementing this Agreement in accordance with its terms, (ii) coordinating the design and construction by The Companies of the modifications to the Interconnection Facilities required by
Section 5.2 above, (iii) ensuring the continued satisfactory operation and maintenance of the Interconnection Facilities, and (iv) discussing any issues of interest or concern to either or both Parties relating to this Agreement. Either Tolleson or The Companies may from time to time designate a substitute or successor authorized representative by giving written notice of such designation to the other party.
7.2 The metering devices used to measure the quantity of Effluent delivered and accepted hereunder, and the quantity of Effluent used at or for the benefit of Other Electrical Generating Facilities, shall be calibrated in a manner acceptable to the authorized representatives prior to the date when such devices are placed in service and thereafter not less frequently than once every six months. The costs of such scheduled calibrations shall be borne by The Companies. The authorized representative for Tolleson may request in writing such additional calibrations as he in his sole discretion deems appropriate; provided that the cost incurred by The Companies for each such additional calibration shall be reimbursed by Tolleson unless any such additional calibration reveals that the inaccuracy of the metering devices is greater than (plus/minus) 2% in which case the cost of such additional calibration shall be borne by The Companies. Copies of all records showing calibration of meters shall be delivered to Tolleson after each calibration, and copies of all records of measurements of Effluent supplied to or for the benefit of Palo Verde or Other Electrical Generating Facilities shall be delivered to Tolleson monthly, with cover letters acknowledging the records to be true copies.
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SECTION 8. DELIVERY AND ACCEPTANCE OF EFFLUENT.
8.1 The obligation of Tolleson to sell and deliver Surplus Effluent under this Agreement shall commence on the date this Agreement is executed and shall continue throughout the term of this Agreement, except as otherwise provided in this Agreement.
8.2 At any time after the effective date of this Agreement, provided that the treated wastewater effluent requirements of Palo Verde are being fully satisfied, The Companies may deliver to Tolleson one or more written notices of The Companies' commitment ("Notice of Commitment") to purchase up to 13,000 acre-feet of Surplus Effluent for use at or for the benefit of Other Electric Generating Facilities. The Companies may specify any quantity of Surplus Effluent in any individual Notice of Commitment, up to the then-operational maximum capacity of the Interconnection Facilities. The price to be paid for any Effluent specified in a Notice of Commitment that is actually taken into the Effluent Pipeline and used at or for the benefit of Other Electric Generating Facilities shall be as specified in Section 2.2. The price to be paid for any Effluent specified in a Notice of Commitment that is not actually taken into the Effluent Pipeline and used at or for the benefit of Other Electric Generating Facilities shall be as specified in Section 2.5.
8.3 If The Companies have not delivered one or more Notices of Commitment to purchase at least the following Minimum Quantities of Surplus Effluent for use at or for the benefit of Other Electric Generating Facilities on or before the Commitment Dates identified in the following table, Tolleson may elect to terminate its continuing obligation to sell and deliver any portion of the corresponding Minimum Quantity of Surplus Effluent for use at or for the benefit of Palo Verde or Other Electric Generating Facilities that is not yet subject to a Notice of Commitment:
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 COMMITMENT DATE                MINIMUM QUANTITY
-----------------           --------------------------------------
December 31, 2002           At least 3,000 acre-feet
December 31, 2003           At least an additional 3,000 acre-feet
December 31, 2005           At least an additional 3,000 acre-feet
December 31, 2007           At least an additional 4,000 acre-feet	

For a period of one year following each specified Commitment Date, Tolleson may terminate its obligation to sell and deliver any portion of the corresponding Minimum Quantity not yet subject to a Notice of Commitment by delivering to The Companies one or more written Notices of Intent to Terminate. Each Notice of Intent to Terminate shall specify the quantity of Surplus Effluent for which Tolleson has elected to terminate its obligation to sell and deliver to the Companies for use at or for the benefit of Palo Verde or Other Electric Generating Facilities. Upon receipt of a Notice of Intent to Terminate, The Companies shall have ninety days thereafter within which to submit a Notice of Commitment to Tolleson for the quantity of Surplus Effluent for use at or for the benefit of Other Electric Generating Facilities specified in the Notice of Intent to Terminate. If The Companies submit a Notice of Commitment within this ninety-day period, Tolleson's continuing obligation to sell and deliver Surplus Effluent to The Companies for use at or for the benefit of Palo Verde or Other Electric Generating Facilities shall not be terminated. If The Companies do not submit a Notice of Commitment within this ninety day period, Tolleson's obligation to sell and deliver the specified quantity of Surplus Effluent for use at or for the benefit of Palo Verde or Other Electric Generating Facilities shall be terminated, the specified quantity of Surplus Effluent shall no longer be eligible for price adjustments pursuant to Sections 2.1, 2.2 or 2.6, and The Companies shall no longer be obligated to pay, pursuant to Section 2.5, for any of the specified Surplus Effluent not actually taken into the Pipeline. Notwithstanding the previous sentence, The Companies may continue to accept into the Pipeline any or all of the Surplus Effluent specified in the Notice of Intent to Terminate provided Tolleson desires to continue delivering such Surplus Effluent, in which event, The Companies shall pay
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Tolleson the price for such Surplus Effluent specified in Section 2.1 or Section 2.2, as appropriate.
8.4 Nothing in Sections 8.2 and 8.3 is intended to limit Tolleson's first right to deliver into the Effluent Pipeline and sell to The Companies treated wastewater effluent for use at or for the benefit of Other Electric Generating Facilities as provided in Section 4.2 or to limit the obligation of The Companies to purchase and accept all of the Surplus Effluent produced through the operation of the Plant as provided in Section 1.1. To the extent that The Companies purchase treated wastewater effluent delivered into the Effluent Pipeline for use at or for the benefit of Other Electric Generating Facilities, Tolleson shall have the first right to sell such treated wastewater effluent consistent with the terms of Section 4.2, regardless of whether The Companies have submitted one or more Notices of Commitment for that amount of Surplus Effluent.
8.5 The Companies shall have the right to refuse delivery of Effluent whenever, in their sole and reasonable discretion, use of Effluent would cause significant operational problems in the Effluent Pipeline, Water Reclamation Facility or other Palo Verde facilities. However, other than during an Uncontrollable Force event, as defined in Section 9.1, The Companies shall pay the price established in Section 2.5 for any Surplus Effluent refused pursuant to this Section 8.5 that is actually available for delivery to the Delivery Point and meets the water quality standards of Section 3 of this Agreement.
SECTION 9. UNCONTROLLABLE FORCE AND OUTAGES.
9.1 Neither Tolleson nor The Companies shall be considered to be in default in the performance of any of the obligations hereunder if failure of performance shall be due to an Uncontrollable Force. The term "Uncontrollable Force" shall mean any cause beyond the control of the Party affected, including, but not limited to, failure of facilities, flood, earthquake, tornado, storm, fire, lightning, epidemic, war, riot, civil disturbance or disobedience, labor dispute, and action or nonaction by or failure to obtain or revocation of the necessary
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authorizations or approvals from any governmental agency or authority or the electorate, labor or material shortage, sabotage and restraint by Court order or public authority, which by exercise of due diligence and foresight such Party could not reasonably have been expected to avoid and which by exercise of due diligence it shall be unable to overcome. Nothing contained herein shall be construed so as to require any Party to settle any strike or labor dispute in which it may be involved. Any Party rendered unable to fulfill any obligation by reason of any Uncontrollable Force shall exercise due diligence to remove such inability with all reasonable dispatch.
9.2 Whenever an Uncontrollable Force as defined in Section 9.1 prevents The Companies from being able to accept or use the Surplus Effluent, then Tolleson may enter into temporary contracts with any other parties for sale of the Surplus Effluent. If Tolleson has entered into such a temporary contract, Tolleson shall be allowed up to 30 days to begin delivery of the Surplus Effluent to The Companies after receiving written notice from The Companies that the disability has been removed.
9.3 Notwithstanding the provisions of Sections 9.1 and 9.2, if, after the exercise of due diligence, the Party rendered unable to fulfill an obligation remains unable to remove such inability for one full year, the other Party may elect to terminate this Agreement anytime thereafter by tendering 90 days written notice of its intention to terminate. However, if The Companies receive a written termination notice from Tolleson pursuant to the preceding sentence, The Companies may elect, at any time prior to the expiration of the 90 days, to begin paying the price established in Section 2.5 for any Surplus Effluent available for delivery and meeting the water quality standards of
Section 3 of this Agreement, up to the then-operational maximum capacity of the Interconnection Facilities. As long as The Companies continue the payments required under this paragraph, this Agreement shall remain in full force and effect.
9.4 If an Uncontrollable Force or malfunction of any component or system of the Effluent Pipeline or the Water Reclamation Facility at Palo Verde, restricts the capability of either of such facilities to transport or treat wastewater effluent from all sources for a period of one full year or less, then The Companies may refuse to accept delivery of the Surplus
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Effluent and shall not be required to pay therefor. It is understood, however, that the Surplus Effluent from Tolleson's Plant shall be the last source of effluent that The Companies cut back on during such Uncontrollable Force or malfunction and that The Companies shall not refuse to accept and pay for Tolleson's Surplus Effluent to the extent that they are accepting and paying for effluent from any other source.
9.5 If The Companies initiate a Scheduled Outage of Palo Verde, the Effluent Pipeline or the Water Reclamation Facility, The Companies shall pay the price established in Section 2.5 for any Surplus Effluent available for delivery and meeting the water quality standards of Section 3 of this Agreement, up to the then-operational maximum capacity of the Interconnection Facilities. As long as The Companies continue the payments required under this Section, this Agreement shall remain in full force and effect. If Tolleson initiates a Scheduled Outage of the Plant, any obligation that Tolleson may have to supply Effluent, and the obligation of The Companies to pay the price established under
Section 2.5, shall be suspended during such Scheduled Outage. "Scheduled Outage" shall mean any temporary cessation of operations that is planned and controlled by the Party initiating the Scheduled Outage.
9.6 Except in emergencies, The Companies shall give 30 days written notice in advance of any discontinuation of acceptance of Surplus Effluent under the provisions of this Section 9. Except in emergencies, Tolleson shall give 30 days written notice in advance of any Scheduled Outage that will limit Tolleson's ability to supply at least 13,000 acre-feet per year of Surplus Effluent to The Companies. Tolleson shall use its best efforts to minimize the duration of any Scheduled Outage that will limit Tolleson's ability to supply at least 13,000 acre-feet per year of Surplus Effluent to The Companies.
SECTION 10. LIABILITY AND INSURANCE.
10.1 Except for the negligent or intentional acts of The Companies, their officers, directors, employees and agents, Tolleson shall, to the extent permitted by law, indemnify and hold The Companies and their officers, directors, employees and agents harmless
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for any physical damage to property, or death of, or personal injury to, any person, and from any cost, expense, claim or loss from such damage, injury or death arising out of the ownership, use, occupancy, operation, maintenance, repair, replacement and reconstruction of the Plant and the Outfall Lines and that portion of the Interconnection Facilities owned by Tolleson as specified in Exhibit B.
10.2 Except for the negligent or intentional acts of Tolleson, its officers, managers, employees or agents, The Companies shall indemnify and hold Tolleson and its officers, managers, employees and agents harmless for any physical damage to property, or death of, or personal injury to, any person, and from any cost, expense, claim or loss from such damage, injury or death arising out of the construction, ownership, use, occupancy, operation, maintenance, repair, replacement and reconstruction of the delivery facilities at the Delivery Point, that portion of the Interconnection Facilities owned by the Companies as specified in Exhibit C, the Effluent Pipeline, the facilities at Palo Verde, or the transportation, use, resale or disposal of Surplus Effluent delivered and accepted hereunder.
10.3 Tolleson shall procure and maintain insurance against physical damage to property, or death of, or personal injury to, any persons, of the kind and with coverages normally carried by entities operating properties similar to the Plant and the Outfall Lines. Upon request, Tolleson shall furnish to The Companies certificates of insurance demonstrating compliance with this Section 10.3.
10.4 The Companies shall procure and maintain insurance against physical damage to property, or death of, or personal injury to, any persons, of the kind and with coverages normally carried by entities operating properties similar to the Effluent Pipeline and Palo Verde. Upon request, The Companies shall furnish to Tolleson certificates of insurance demonstrating compliance with this Section 10.4.
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SECTION 11. INSPECTIONS AND ACCESS TO RECORDS.
11.1 Each of the Parties shall have the right, during reasonable hours, of access to and inspection of the facilities and operations of the other Parties which are associated with the treatment, delivery, measurement, transportation and use of Effluent sold and purchased hereunder.
11.2 Each of the Parties shall have the right, during reasonable hours, of access to the records of the other Parties which are relevant for proving compliance or noncompliance of each of the Parties with any of the terms of this Agreement.
SECTION 12. GENERAL.
12.1 Effective Date and Term. This Agreement shall be effective from and after the date of its execution by the parties and shall expire on December 31, 2050, unless partially or fully terminated before that date under the provisions of Sections 2.1, 6.4, 8.3, 9.3 or 12.3.1.
12.2 Assignment of Agreement or Transfer of Facilities.
12.2.1 Neither Tolleson nor The Companies shall transfer or assign any of their respective rights, titles and interests in and to this Agreement without the prior written consent of the other Parties, except that: (i) The Companies and any of their affiliates, successors or assigns shall each have the right to transfer and assign all or any portion of its right, title and interest in this Agreement to the other, to any related corporate entity, or to any other entity now or hereafter participating in Palo Verde or any Other Electric Generating Facilities which utilize the Surplus Effluent sold hereunder, provided that such entity expressly assumes the obligations of the respective Company, as applicable, under this Agreement; and (ii) either Company, and any of its respective affiliates, successors or assigns shall have the right to transfer its right, title and interest in this Agreement to any mortgagee, trustee or secured party under present or future deeds of trust, mortgages, indentures or security agreements. A transfer or assignment by any Party shall not release that party from its obligations as the primary obligor under the Agreement
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without the written consent of the other Parties. In the event of any transfer or assignment of this Agreement by either Tolleson or The Companies, the terms, covenants and conditions of this Agreement shall be binding upon and inure to the benefit of and shall apply to the respective transferees, successors and assigns of Tolleson and The Companies.
12.2.2 The Companies shall not convey Palo Verde or any interest therein without the grantee of such conveyance expressly agreeing to be bound by all terms of this Agreement, unless The Company that conveys its interest in Palo Verde expressly agrees to continue to be bound by all terms of this Agreement. Tolleson shall not convey the Plant or any interest therein, without the grantee of such conveyance expressly agreeing to be bound by all terms of this Agreement.
12.3 Compliance with Laws.
12.3.1 The Companies shall use the Effluent delivered hereunder in accordance with the applicable laws of the United States of America, the applicable laws of the State of Arizona and the rules and regulations of federal, state and local agencies; provided, however, that in the event any such laws or regulations shall be amended in the future so as to make it impossible or uneconomical to use the Effluent for the purposes specified in this Agreement, The Companies shall, at their option, have the right to cancel and terminate this Agreement upon giving 90 days notice in writing to Tolleson. In the event Tolleson is prohibited by any state or federal laws or regulations from selling Effluent for the uses contemplated herein, Tolleson shall have the right to cancel and terminate this Agreement upon giving 90 days notice in writing to The Companies. Until the notice period runs and the termination becomes effective, The Companies shall continue to pay for the Surplus Effluent pursuant to Section 2.5, except as otherwise specified in this Agreement.
12.3.2 If any proceeding in law or equity is instituted challenging the authority and power of Tolleson and/or The Companies to make, execute and deliver this Agreement and/or to perform its terms, covenants and conditions, or relating to the rights, title and interest of Tolleson or The Companies in and to the Effluent, then Tolleson and The
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Companies shall jointly and cooperatively defend the validity of this Agreement and the sale, delivery and uses of Effluent contemplated herein.
12.3.3 The Parties acknowledge that this Agreement is subject to the provisions of Arizona Revised Statutes Section 38-511, and can be cancelled within three years after its execution by Tolleson if any person significantly involved in initiating, negotiating, securing, drafting or creating this Agreement on behalf of Tolleson is, while this Agreement is in effect during that three year period, an employee or agent of or consultant to any other Party to this Agreement.
12.4 Notices. All notices, demands, consents or other writings given or made pursuant to this Agreement shall be in writing and, unless otherwise specified herein, shall be deemed to have been duly given when made and deposited in the United States mail by registered or certified mail with postage prepaid and addressed as follows:

To Tolleson:      City Manager
                  9555 West Van Buren
                  Tolleson, Arizona 85353

To APS:           Arizona Public Service Company
                  Palo Verde Nuclear Generating Station
                  WRF Manager
                  Mail Station 6215
                  P. O. Box 52034
                  Phoenix, Arizona 85072-2034

To SRP:           Salt River Project Agricultural
                  Improvement and Power District
                  c/o Secretary
                  P. O. Box 52025
                  Phoenix, Arizona 85072-2025	

The address to which any notice, demand, consent or other writing shall be given to any Party may be changed from time to time by written notice of such Party to the other Parties as above provided.
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12.5 Relative Responsibilities and Authority of The Companies.
12.5.1 APS, or any of its affiliates, successors or assigns acting as Operating Agent of Palo Verde, is authorized to act for and on behalf of SRP in all matters affecting the implementation and performance of this Agreement for the use of Effluent at Palo Verde, and all actions and representations taken or made by APS in the implementation and performance of this Agreement shall be binding upon SRP.
12.5.2 In the event all or part of the Effluent is used other than at Palo Verde, The Companies shall be jointly responsible for implementation and performance of this Agreement.
12.5.3 The Companies shall be jointly and severally liable to perform the obligations to Tolleson that are imposed by this Agreement.
12.5.4 The Companies represent that they have the authority to enter into and carry out all obligations to Tolleson under this Agreement.
12.6 Waivers. The waiver by either Tolleson or The Companies of any breach of any term, covenant or condition of this Agreement shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach thereof or a subsequent breach of any other term, covenant or condition in this Agreement.
12.7 Resolution of Conflicts and Disputes. Any conflict or disputes in: (i) the implementation of this Agreement provided in Section 7, or (ii) the quantity or quality of Surplus Effluent delivered as discussed in Section 2.4, shall be resolved by arbitration in accord with the rules of the American Arbitration Association. No other conflicts or disputes arising out of the Agreement shall be subject to mandatory arbitration. In all cases, the Agreement shall be interpreted according to the laws of the State of Arizona.
12.8 Sales and Use Taxes. In the event the State of Arizona, County of Maricopa or the federal government should require that Tolleson pay a tax resulting from the sale of Effluent to The Companies, then the price for the Effluent shall be increased by the amount of such tax. In the event Tolleson shall levy a tax on the sale or use of the Effluent, then the
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amounts of any such tax paid by The Companies shall be deducted from the amounts payable under Sections 2.1 or 2.2 hereof.
12.9 Section Headings. Section headings in this Agreement are for convenience only and do not purport to describe accurately or completely the contents of any section. Such headings are not to be construed as a part of this Agreement or as in any way defining, limiting or amplifying the provisions hereof.
12.10 Severability. If any term or provision of this Agreement is held to be void, invalid or unenforceable by a court of competent jurisdiction, that term or provision shall be severable from the remainder of this Agreement and shall not affect or render invalid, void or unenforceable any other provision or term of this Agreement.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed and attested by their respective duly authorized officers as of the date first above written.

ATTEST:                                       CITY OF TOLLESON

/s/ Rosemarie Martinez Booth        By /s/ Adolfo F. Gamez
_______________________________     ____________________________________
City Clerk                                         Mayor

                                        Reviewed By

                                        /s/ Ralph Velez
                                        _________________________________
                                        City Manager

                                        Approved as to Form

                                        /s/ Scott W. Ruby
                                        _________________________________
                                        City Attorney

                                     - 26 -	

ATTEST:                                 ARIZONA PUBLIC SERVICE COMPANY

/s/ Betsy A. Pregulman              By /s/ James M. Levine
_______________________________     ____________________________________
       (Title)                                  (Title)
Associate Secretary                     Executive Vice President,
                                            Generation

ATTEST & COUNTERSIGN.                       SALT RIVER PROJECT
                                            AGRICULTURAL IMPROVEMENT
                                            AND POWER DISTRICT

/s/ Terri A. Lonon                  By William P. Schrader
_______________________________     ____________________________________
         (Title)                                    (Title)
   Corporate Secretary                             President	

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EXHIBIT A
The following formula shall be used to adjust the prices of Effluent established in Sections 2.1 and 2.2 of the Agreement:

Formula:    Pp (1 + A) = Pc

Where:      Pp Previous year's price

            A= The average of the previous 5 years' annual
            percent change (ending in Dec) of the Consumer
            Price Index for Urban Consumers (CPI-U),
            Expenditure Category "All Items" (as published
            by the Bureau of Labor Statistics).	

Pc = New or Current year's price
This adjustment to the prices paid to the City for Effluent will be made each calendar year, effective in January, using the most recent CPI-U data available. This method of price adjustment will be used throughout the term of this Agreement.
Example of price adjustment using the above formula:

            Pp (1 +A) = Pc

Where:      Pp = $30/AF (previous year's price)
            A = 2.5%(1995 CPI)+3.3%(1996)+1.7%(1997)+1.6%(1998)+2.7%(1999)
                ----------------------------------------------------------
                                            5

            A = 11.8%
                -----
                  5

            A = 2.4% (most recent 5 year CPI-U average)

            $30.00 (1 +.024) = Pc = $30.72 (New or Current Year Price)	

Each subsequent year, Pc will become the most recent previous year's price (Pp) for calculating the next year's price. "A", which is a "rolling five-year average", will be comprised of the average of the most recent five-years' annual CPI-U percentage changes.
Example for year #2:

            Pp (1+A) = Pc

Where:      Pp = $30.72
            A = 3.3% + 1.7% + 1.6% + 2.7% + 3.0% [assumed]
                --------------------------------
                               5

            A = 2.5%

            $30.72 (1.025) = Pc = $31.49 (New or Current Year Price)	

EXHIBIT B
The following legal description, as depicted on the attached map, describes the area within which Other Electric Generating Facilities are subject to the "physically capable of being economically served by Tolleson Effluent delivered into the Effluent Pipeline" standard established in Sections 2.6 and 4.2 of the "Agreement for the Sale and Purchase of Wastewater Effluent" to which this Exhibit B is attached:
BEGINNING AT THE NORTH QUARTER CORNER OF SECTION 24, TOWNSHIP 1 NORTH, RANGE 6 WEST;
THENCE WEST ALONG THE NORTH LINE OF SAID SECTION 24 AND ALONG THE NORTH LINE OF SECTIONS 23, 22 AND 21, TOWNSHIP 1 NORTH, RANGE 6 WEST APPROXIMATELY THREE MILES TO THE NORTH QUARTER CORNER OF SAID SECTION 21;
THENCE SOUTH ALONG THE NORTH SOUTH MID-SECTION LINE OF SAID SECTION 21 APPROXIMATELY ONE HALF MILE TO THE APPROXIMATE CENTER OF SAID SECTION 21;
THENCE WEST ALONG THE EAST WEST MID-SECTION LINE OF SAID SECTION 21 AND SECTION 20, TOWNSHIP 1 NORTH, RANGE 6 WEST, APPROXIMATELY ONE MILE TO THE APPROXIMATE CENTER OF SAID SECTION 20;
THENCE SOUTH ALONG THE NORTH-SOUTH MID-SECTION LINE OF SECTIONS 20, 29 AND 32, TOWNSHIP 1 NORTH, RANGE 6 WEST APPROXIMATELY TWO AND ONE HALF MILES TO THE SOUTH QUARTER CORNER OF SAID SECTION 32, WHICH IS COINCIDENT WITH THE NORTH QUARTER CORNER OF SECTION 5, TOWNSHIP 1 SOUTH, RANGE 6 WEST;
THENCE WEST ALONG THE NORTH LINE OF SECTIONS 5 AND 6, TOWNSHIP 1 SOUTH, RANGE 6 WEST, AND ALONG THE NORTH LINE OF SECTION 1, TOWNSHIP 1 SOUTH, RANGE 7 WEST APPROXIMATELY TWO AND ONE HALF MILES TO THE NORTHWEST CORNER OF SECTION 1, TOWNSHIP 1 SOUTH, RANGE 7 WEST;
THENCE SOUTH ALONG THE WEST LINE OF SAID SECTION 1, APPROXIMATELY ONE MILE TO THE SOUTHWEST CORNER OF SAID SECTION 1 WHICH IS COINCIDENT WITH THE NORTHEAST CORNER OF SECTION 11, TOWNSHIP I SOUTH RANGE 7 WEST;
THENCE WEST ALONG THE NORTH LINE OF SAID SECTION 11 APPROXIMATELY ONE MILE TO THE NORTHWEST CORNER OF SECTION 11, TOWNSHIP 1 SOUTH, RANGE 7 WEST;
THENCE SOUTH APPROXIMATELY 4 MILES ALONG THE WEST LINE OF SAID SECTION 11 AND THE WEST LINE OF SECTIONS 14, 23, AND 26, TOWNSHIP 1 SOUTH, RANGE 7 WEST TO THE SOUTHWEST CORNER OF SAID SECTION 26;
THENCE EAST APPROXIMATELY ONE AND ONE HALF MILES ALONG THE SOUTH LINE OF SAID
SECTION 26 AND THE SOUTH LINE OF SECTION 25, TOWNSHIP 1 SOUTH, RANGE 7 WEST TO THE SOUTH QUARTER CORNER OF SAID SECTION 25, WHICH IS COINCIDENT WITH THE NORTH QUARTER CORNER OF SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST;
THENCE SOUTH ALONG THE NORTH SOUTH MID-SECTION LINE OF SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST APPROXIMATELY ONE MILE TO THE SOUTH QUARTER CORNER OF SAID
SECTION 36;
THENCE EAST APPROXIMATELY 4 AND ONE HALF MILES ALONG THE SOUTH LINE OF SAID
SECTION 36, TOWNSHIP 1 SOUTH, RANGE 7 WEST AND THE SOUTH LINE OF SECTIONS 31, 32, 33 AND 34, TOWNSHIP 1 SOUTH, RANGE 6 WEST TO THE SOUTHEAST CORNER OF SAID
SECTION 34, WHICH IS COINCIDENT WITH THE NORTHWEST CORNER OF SECTION 2, TOWNSHIP 2 SOUTH, RANGE 6 WEST; THENCE SOUTH ALONG THE WEST LINE OF SAID SECTION 2 APPROXIMATELY ONE HALF MILE TO THE WEST QUARTER CORNER OF SAID SECTION 2;
THENCE EAST APPROXIMATELY ONE MILE ALONG THE EAST WEST MIDSECTION LINE OF SAID
SECTION 2 TO THE EAST QUARTER CORNER OF SAID SECTION 2, WHICH IS COINCIDENT WITH THE WEST QUARTER CORNER OF SECTION 1, TOWNSHIP 2 SOUTH, RANGE 6 WEST;
THENCE SOUTH APPROXIMATELY ONE HALF MILE ALONG THE WEST LINE OF SAID SECTION 1 TO THE SOUTHWEST CORNER OF SAID SECTION 1;
THENCE EAST ALONG THE SOUTH LINE OF SAID SECTION 1 AND THE SOUTH LINE OF SECTION 6, TOWNSHIP 2 SOUTH, RANGE 5 WEST, APPROXIMATELY 2 MILES TO THE SOUTHEAST CORNER OF SAID SECTION 6;
THENCE NORTH APPROXIMATELY THREE MILES ALONG THE EAST LINE OF SAID SECTION 6 AND THE EAST LINE OF SECTIONS 31 AND 30, TOWNSHIP 1 SOUTH, RANGE 5 WEST TO THE NORTHEAST CORNER OF SAID SECTION 30;
THENCE WEST APPROXIMATELY ONE HALF MILE ALONG THE NORTH LINE OF SAID SECTION 30 TO THE NORTH QUARTER CORNER OF SAID SECTION 30, WHICH IS COINCIDENT WITH THE SOUTH QUARTER CORNER OF SECTION 19, TOWNSHIP 1 SOUTH, RANGE 5 WEST;
THENCE NORTH APPROXIMATELY ONE MILE ALONG THE NORTH SOUTH MID-SECTION LINE OF SAID SECTION 19 TO THE NORTH QUARTER CORNER OF SAID SECTION 19;
THENCE WEST APPROXIMATELY ONE HALF MILE ALONG THE NORTH LINE OF SAID SECTION 19 TO THE NORTHWEST CORNER OF SAID SECTION 19, WHICH IS COINCIDENT WITH THE SOUTHEAST CORNER OF SECTION 13, TOWNSHIP 1 SOUTH, RANGE 6 WEST;
THENCE NORTH APPROXIMATELY TWO MILES ALONG THE EAST LINE OF SECTIONS 13 AND 12 TOWNSHIP 1 SOUTH, RANGE 6 WEST TO THE NORTHEAST CORNER OF SAID SECTION 12;
THENCE WEST APPROXIMATELY ONE HALF MILE TO THE NORTH QUARTER CORNER OF SAID
SECTION 12, WHICH IS COINCIDENT WITH THE SOUTH QUARTER CORNER OF SECTION 1, TOWNSHIP 1 SOUTH, RANGE 6 WEST;
THENCE NORTH APPROXIMATELY FOUR MILES ALONG THE NORTH SOUTH MID-SECTION LINE OF SAID SECTION 1 AND THE NORTH SOUTH MIDSECTION LINE OF SECTIONS 36, 25 AND 24, TOWNSHIP 1 NORTH, RANGE 6 WEST TO THE POINT OF BEGINNING.
ALL LYING WITHIN THE GILA AND SALT RIVER BASE AND MERIDIAN, MARICOPA COUNTY, ARIZONA
In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, the map on this page of this Agreement shows the Other Electric Generating Facilities that could be served by Tolleson Effluent under this Agreement.
EXHIBIT C
The following components of the Interconnection Facilities, as depicted on drawing Numbers AO-W-Z1C-150, Rev. 7, and AO-W-Z1C-151, Rev. 3 (both drawings attached), are the property of the City of Tolleson:
1. The Tolleson Junction Box and the weir and three manual sluice gates located within that Junction Box.
2. The anchor block adjacent to the Tolleson Junction Box.
3. 18 feet of 48-inch pipe connected to the inlet side of the Tolleson Junction Box.
4. Approximately 15 feet of 42-inch pipe connected to the outlet side of the Tolleson Junction Box.
5. The manhole and stub pipe required to connect the 42-inch pipes connected to the inlet and outlet sides of the manhole.
6. The Tolleson Junction Structure Box.
7. All other portions of the "new" Tolleson Outfall Line.
8. The portion of the existing Tolleson Outfall Line (30-inch) within the Tolleson Junction Box.
9. All other portions of the existing Tolleson Outfall Line.
The following components of the Interconnection Facilities, as depicted on drawing Numbers AO-W-Z1C-150, Rev. 7, and AO-W-Z1C-151, Rev. 3 (both drawings attached), are the property of APS, SRP and the other owners of Palo Verde Nuclear Generating Station:
1. The ANPP Effluent Pipeline Junction Box and all facilities and equipment located within that Junction Box.
2. The 30-inch pipe between the Palo Verde Effluent Pipeline Junction Box and the Tolleson Junction Box.
3. The motorized sluice gate (valve) situated in the Tolleson Junction Box.
4. The flow metering equipment, including without limitations such devices as may be necessary for transmission of flow meter data to the control panels in the Plant.
5. The RTU Building and all facilities and equipment located within that building.
In accordance with Item 304 of Regulation S-T of the Securities Exchange Act of 1934, the drawings on these two pages of this Agreement show the
Interconnection Facilities owned by Palo Verde and the City of Tolleson.

Exhibit 10.105
OPERATING AGREEMENT FOR THE
CO-OWNERSHIP OF WASTEWATER EFFLUENT
     This Agreement (the “Agreement”) is made and entered into this 16 th day of November, 2000 (the “Effective Date”), by and between Arizona Public Service Company, a corporation organized and existing under and by virtue of the laws of the State of Arizona (“APS”) and Salt River Project Agricultural Improvement and Power District, an agricultural improvement district organized and existing under and by virtue of the laws of the State of Arizona (“SRP”). SRP and APS are collectively referred to herein as the “Parties”; each is individually a “Party” to this Agreement.
RECITALS:
     A. APS, SRP, and the City of Tolleson have executed an “Agreement for the Sale and Purchase of Wastewater Effluent,” dated November 13, 2000 (the “Tolleson Agreement”), and each Party to this Agreement desires to more particularly describe its rights and responsibilities vis-a-vis the other Party as a co-owner of Tolleson Effluent;
     B. The primary use of the Tolleson Effluent is intended to be for cooling water at Palo Verde Nuclear Generating Station (“PVNGS”); the secondary use of the Tolleson Effluent will be its use at “Other Electric Generating Facilities” (as defined by the Tolleson Agreement);
     C. To the extent Tolleson Effluent is not used at PVNGS, the Tolleson Effluent may be used at or for the benefit of Other Electric Generating Facilities;
     D. It is appropriate to establish terms and conditions on which APS, SRP, and their respective affiliates, including Pinnacle West Energy Corporation (“PWE”), will make use of the Tolleson Effluent and make decisions regarding the use of same in the future;
     E. The Parties desire to enter into this Agreement to set forth their respective rights and obligations pertaining to the co-ownership of the Tolleson Effluent. Accordingly, this Agreement is an ancillary document or companion agreement in relation to the Tolleson Agreement.
     NOW, THEREFORE, in consideration of the agreements and promises set forth below, and, other good and valuable considerations, the receipt and sufficiency of which are acknowledged, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS AND USAGE
     1.1 Definitions. As used herein, the following capitalized terms shall have the same meaning as they are given by definition in the Tolleson Agreement: Delivery Point, Effluent, Effluent Pipeline, Notice of Commitment, Other Electric Generating Facilities, Outages, Reserved Effluent, Surplus Effluent, Tolleson, and Uncontrollable Forces. All such definitions from the Tolleson Agreement are specifically incorporated in this

 

Agreement by this reference. In addition, the following terms shall have the specified meanings:
           “Claim” means any demand, claim, cause of action, lawsuit, or proceeding of any kind or character, including investigation or audit by a Governmental Authority.
           “Coordinating Committee” has the meaning specified in Article 4.
           “Effective Date” has the meaning specified in the introductory paragraph.
           “Event of Default” has the meaning specified in Section 7.1.
           “Governmental Authority” means a federal, state, local or foreign governmental authority or body politic; a state, province, commonwealth, territory or district; a county; a city, town, township, village or other municipality; a district or other subdivision or any of the foregoing; any executive, legislative or other governing body of any of the foregoing; any agency, authority, board, department, system, service, office, commission, committee, council, or other administrative body of any of the foregoing; any court or other judicial body; a legally recognized tribal authority; and any officer, official or other representative of any of the foregoing when acting in their official capacity. For purposes of this Agreement, neither SRP nor APS shall be considered a Governmental Authority.
           “Legal Requirement” means any statute, law, regulation, ordinance, rule, judgment, order, decree, constitution, Permit, concession, grant, franchise, agreement, directive or common law, or any requirement of, or other governmental restriction or any similar form of decision by, or interpretation or administration of any of the foregoing by, any Governmental Authority of competent jurisdiction (or by an arbitrator in a forum involving binding arbitration to which one of the parties or its business or assets is subject or bound).
           “Palo Verde Nuclear Generating Station” or “PVNGS” means the Arizona Nuclear Power Project, as defined in the Arizona Nuclear Power Project Participation Agreement (including amendments 1-13) among APS, SRP, Southern California Edison, Public Service Company of New Mexico, El Paso Electric Company, Southern California Public Power Authority, and the Department of Water and Power of the City of Los Angeles (collectively, the “PVNGS Participants”).
           “Party” or “Parties” has the meaning specified in the introductory paragraph and shall include permitted successors and assigns.
           “Permit” means any permit, consent, license, rezoning, variance, use permit, certification, notice, filing, approval, or authorization of any kind required to be issued by a Governmental Authority and any necessary consent or approval required to be granted by any non-Governmental Authority, other than a Party, in order to develop, construct, own, or operate any facility that is contemplated or required because of decisions made pursuant to this Agreement.
2

 

           “Person” means any natural person, corporation, limited liability company, partnership, business trust, Governmental Authority or other entity.
           “PWE” means Pinnacle West Energy Corporation, an Arizona Corporation and an affiliate of APS.
           “Tolleson Effluent” means all Effluent purchased by APS and SRP from the City of Tolleson pursuant to the Tolleson Agreement, whether such Effluent is Surplus Effluent or Reserved Effluent, as those terms are defined in the Tolleson Agreement.
     1.2 Certain Principles of Interpretation. In this Agreement, unless otherwise indicated or the context otherwise requires:
          (i) the singular includes the plural and plural the singular when the context requires;
          (ii) words importing any gender include the other gender;
          (iii) references to “writing” include printing, typing, lithography, and other means of reproducing words in a tangible visible form;
          (iv) the words “including,” “includes,” and “include” shall be deemed to be followed in each instance by the words, “without limitation”;
          (v) references to articles, sections, paragraphs, recitals, and exhibits are to this Agreement unless otherwise stated;
          (vi) references to contracts and related instruments shall be deemed to include all subsequent amendments, extensions, and other modifications to such instruments (without, however, limiting any prohibition on any such amendments, extensions and other modifications by the terms of this Agreement);
          (vii) references to Persons include their respective permitted successors and assigns and, in the case of Governmental Authorities, persons succeeding to their respective functions and capacities;
          (viii) the words “hereof,” “herein,” “hereunder,” and words of similar import shall refer to this Agreement as a whole and not to any particular provision thereof;
          (ix) both Parties and their counsel participated extensively in the preparation and drafting of this Agreement; no rule of construction shall apply that would cause the interpretation of any claimed ambiguity in this Agreement against a Party determined to be the drafting Party;
          (x) captions and headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose;
3

 

          (xi) any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction and the provision that is prohibited or unenforceable shall be reformed or modified to reflect the parties’ intent to the maximum extent permitted by applicable law; and
          (xii) references to a “day,” “week,” “month,” or “year” shall be construed as a calendar day, week, month, or year.
ARTICLE 2
PURPOSE AND SCOPE
     The purpose of this Agreement is to set forth certain agreements and understandings between the Parties concerning the ownership and use of the Tolleson Effluent, the allocation of costs incurred in connection with the Tolleson Agreement and this Agreement, and the responsibilities and obligations of each Party. This Agreement relates solely to the business, activities, and purposes set forth herein and, except as otherwise expressly provided herein, does not apply to any other activities, transactions, relationships, contracts, projects, or work of the Parties. Subject to Article 4, no Party shall be restricted in any way from engaging in any activity or business falling outside the scope of this Agreement.
ARTICLE 3
OWNERSHIP AND USE OF TOLLESON EFFLUENT
     3.1 Co-Ownership and Use of Effluent Purchased from Tolleson. APS and SRP agree that they are and shall be co-owners, as tenants in common, of all Tolleson Effluent purchased pursuant to the Tolleson Agreement, each Party possessing a 50% undivided interest in all such Tolleson Effluent. Consistent with the Tolleson Agreement, the Parties agree that the primary use of the Tolleson Effluent shall be for cooling water for PVNGS and that PVNGS shall have a priority right to the use of any or all of the Tolleson Effluent to satisfy such requirements for cooling water at PVNGS as are not fully satisfied using effluent from non-emergency sources other than Tolleson. To the extent that Tolleson Effluent is available for use at Other Electric Generating Facilities, the allocation of and the benefit from any such Effluent shall be divided between APS and SRP (or their permitted assigns) in the manner determined by the Coordinating Committee pursuant to Article 4. Any use of Tolleson Effluent at or for the benefit of Other Electric Generating Facilities shall be consistent with the terms of both this Agreement and the Tolleson Agreement.
     3.2 Use of Tolleson Effluent at PVNGS. The Parties hereby agree that all Tolleson Effluent used at PVNGS shall be transferred to the PVNGS Participants at the Delivery Point specified in the Tolleson Agreement. All aspects of transportation, treatment, use, disposal and payment for any Tolleson Effluent so transferred and used at PVNGS shall be the responsibility of APS, as the Operating Agent of PVNGS, upon discharge of that Effluent into the Effluent Pipeline, and commencing upon such discharge, APS’s rights and obligations with respect to such Tolleson Effluent shall be those of the
4

 

Operating Agent under the terms of the Arizona Nuclear Power Project Participation Agreement, including but not limited to the liability provisions set forth in that Participation Agreement. The Parties to this Agreement shall not receive any fee or other compensation for transfer to the PVNGS Participants of Tolleson Effluent used at PVNGS.
     3.3 Use of Tolleson Effluent at or For the Benefit of Other Electric Generating Facilities. Tolleson Effluent, if not required for cooling water purposes at PVNGS, may be used at or for the benefit of Other Electric Generating Facilities upon such terms and conditions as the Parties may separately agree, or as determined by the Coordinating Committee pursuant to Article 4. In this regard, the Parties contemplate that up to 6,500 acre-feet per year of available Tolleson Effluent will be transferred to PWE for use at the proposed electric generating facility commonly referred to as “Redhawk” pursuant to separate terms and conditions to be negotiated by the Parties, including, without limitation, payment of a fee by PWE to SRP and APS. Depending upon circumstances at the time, additional quantities of Tolleson Effluent may be approved for use at Redhawk after negotiation by the Parties and appropriate review and approval by the Coordinating Committee of any agreement that may be negotiated, including, without limitation, payment of a fee by PWE to SRP and APS. 
ARTICLE 4
COORDINATING COMMITTEE
     4.1 Coordinating Committee. Each Party shall designate one (1 . ) representative (“Representative”) to serve on the Coordinating Committee and one (1) alternate (“Alternate”), each having an appropriate level of technical expertise and familiarity with the policies of its executive management. The Parties; hereby form the Coordinating Committee, the initial Representatives and Alternates of which are as follows:

Party	 	Representative	 	Alternate	
SRP	 	David Areghini	 	Gary Harper	
APS	 	James M. Levine	 	Richard Gouge	
     A Party may change its Representative or Alternate upon notice to the other Party. (The term “Representative” shall include the designated Representative or any Alternate that is actually performing the duties of the Representative.)
     4.2 Coordinating Committee Authority. The Coordinating Committee shall have the following responsibilities and authority, subject to and consistent with the other terms of this Agreement and any separate agreement between the Parties that allocates any portion of Tolleson Effluent for a specific use:
          (i) monitoring, directing, coordinating, and managing the activities of the Parties undertaken pursuant to this Agreement and, except as provided in Section 5.1 hereof, allocating the costs and benefits thereof between the Parties in equal shares;
          (ii) determining whether to issue a Notice of Commitment pursuant to paragraph 8.2 of the Tolleson Agreement, and approving all proposed uses of Tolleson Effluent, except to the extent that such issues are determined by the terms of any separate
5

 

agreement between the Parties that allocates any portion of Tolleson Effluent for a specific use;
          (iii) authorizing negotiations and approving all other contracts or commissioning such studies, investigations, or reports as the Coordinating Committee deems desirable or necessary;
          (iv) determining the agenda, scope, participants and attendees at meetings of, and other matters relating to, the Coordinating Committee; and
          (v) performing any other responsibility, duty, or authority granted from time to time to the Coordinating Committee by amendment of this Agreement.
     4.3 Actions of the Coordinating Committee. No Party shall take any action with respect to allocation of Tolleson Effluent to any Other Electric Generating Facility except as may be specifically authorized by this Agreement or as agreed to and approved by the Coordinating Committee. No action of the Coordinating Committee shall be binding unless and until: (i) such action has been set forth in a writing submitted to the Representatives; (ii) the Representatives have had ten days after receipt of the writing to review it; and (iii) the action has been approved in writing by the Representative of each of the Parties. Failure to approve an action within such ten day period shall not constitute approval; provided, however, that each Party shall make good faith efforts to review and approve or reject each action within the ten day period. Approval of or failure to object to the minutes of a meeting of the Coordinating Committee shall not be deemed to constitute written approval of any action taken thereat. All actions approved by the Coordinating Committee shall be carried out by one or more of the Parties, as specified in the written approval of such action; any approval which does not specify the responsible party for the action shall be carried out by the Party having principal responsibility, as set forth in. Article 5.
     4.4 Term. The Coordinating Committee shall dissolve and have no further authority upon (i) the due termination of this Agreement pursuant to any provision hereof, except to the extent it is expressly agreed in writing that the Coordinating Committee is needed to manage those matters that survive termination; or (ii) the unanimous agreement of the Parties to dissolve the Coordinating Committee.
     4.5 Meetings.
          A.  Time and Conduct of Meetings: Quorum. The Coordinating Committee shall meet during the term of this Agreement, on an “as needed” basis or at the request of either Representative, at such times and at such places as the Representatives may from time to time agree. Meetings of the Coordinating Committee may be held in person or by telephone, video conference, or other agreed means. Each Representative shall be given reasonable advance notice of all Coordinating Committee meetings and all matters to be voted on by the Coordinating Committee. A quorum for a meeting of the Coordinating Committee shall consist of one representative of each Party. Any substantive decisions of the Coordinating Committee shall be documented in writing and approved by both Representatives.
6

 

          B.  Attendance. Each Party shall use reasonable efforts to cause its Representative to be present at each meeting of the Coordinating Committee and no Party shall withhold the presence or participation of its Representative to forestall decisions on any matter pertaining to this Agreement. A Party may, without notice, cause any of its employees or its legal counsel to attend any meeting of the Coordinating Committee. In addition, a Party may, upon reasonable notice to the Coordinating Committee, request that individuals other than its employees and legal counsel be allowed to attend a meeting of the Coordinating Committee. No individuals other than the Representatives shall be permitted to vote on behalf of a Party. The Coordinating Committee may require the execution of a confidentiality agreement by any individual other than the Representatives, Alternates, employees, and legal counsel of the Parties as a condition to approving such individual’s attendance at a Coordinating Committee meeting.
ARTICLE 5
PRINCIPAL RESPONSIBILITY
     5.1 Implementing Decisions of Coordinating Committee. APS shall have principal responsibility for carrying out the actions of the Coordinating Committee, and implementing decisions of the Coordinating Committee, unless otherwise specified pursuant to Section 4.3 or 5.2 hereof. In addition, as set forth in paragraph 12.5.1 of the Tolleson Agreement, APS is authorized to act for and on behalf of SRP in all matters affecting the implementation and performance of the Tolleson Agreement when the performance in question involves transportation and use of Tolleson Effluent at PVNGS. The intent of said paragraph 12.5.1 is to authorize APS to act both as the Party with principal responsibility under this Agreement and as Operating Agent for PVNGS in managing all Tolleson Effluent to be used at PVNGS. Notwithstanding the provisions of this Section, either Party may take any appropriate, lawful action to cure a breach of the Tolleson Agreement caused by the other Party.
     5.2 Responsibility for Transferred Tolleson Effluent.
          5.2.1 Transfers for Use at PVNGS. Consistent with Section 3.2 above, APS and SRP shall request acceptance by the PVNGS Participants of responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for all Tolleson Effluent to be used at PVNGS. Responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for Tolleson Effluent to be used at PVNGS, shall be transferred to the PVNGS Participants at the Delivery Point specified in the Tolleson Agreement. Acceptance by the PVNGS Participants of the transfer of Tolleson Effluent, and responsibility for, and risks associated with, its transportation, treatment, use disposal and payment, shall be documented in the minutes of the Administrative Committee established pursuant to Section 6.1.1 of the Arizona Nuclear Power Project Participation Agreement.
          5.2.2 Transfers for Use at Other Electric Generating Facilities. As between the Parties to this Agreement and the party or parties owning or operating a specific Other Electric Generating Facility, responsibility for, and risks associated with, transportation, treatment, use, disposal and payment for Tolleson Effluent to be used at the Other Electric Generating Facility shall be transferred to the party or parties owning an
7

 

interest in or operating the Other Electric Generating Facility, such transfer to occur at the Delivery Point specified in the Tolleson Agreement. Acceptance of this transfer of responsibility for, and risks associated with, Tolleson Effluent to be used at Other Electric Generating Facilities shall be documented in the agreement(s) by which the Tolleson Effluent is transferred to the party owning or operating the Other Electric Generating Facility. Notwithstanding the transfer of responsibility and risk to the party or parties owning or operating the Other Electric Generating Facility, ownership of the Tolleson Effluent shall not transfer until physical delivery of the Tolleson Effluent to that party or parties at the delivery point specified in the agreement transferring the Tolleson Effluent.
     5.3 Permitting. APS shall have principal responsibility to ensure compliance with any Legal Requirement applicable to the actions of the Coordinating Committee and to ensure that any Person using Tolleson Effluent purchased by the Parties secures any Permit and otherwise satisfies any Legal Requirement applicable to the transportation and delivery of Tolleson Effluent to the point of delivery agreed upon by the Parties; provided, however, that in any case where SRP will make use of Tolleson Effluent at or for the benefit of Other Electric Generating Facilities operated or solely owned by SRP or any affiliated or successor entity, then from and after the delivery point agreed upon by the Parties, SRP shall have principal responsibility to ensure compliance with any Legal Requirement, and to secure any Permit, applicable to its intended use of the Tolleson Effluent.
ARTICLE 6
TERM
     6.1 Term. This Agreement shall commence on the Effective Date and shall terminate upon the expiration or termination of the Tolleson Agreement.
     6.2 Survival. All obligations and liabilities of the Parties under this Agreement shall cease upon termination except the obligation of the Parties under Article 9, obligations assigned pursuant to this Agreement to the Coordinating Committee with the expressed, written intent that they survive this Agreement, and the liabilities of any Party resulting from a default by such Party leading to such termination.
ARTICLE 7
DEFAULT
     7.1 Events of Default. A Party shall be in default under this Agreement upon the occurrence of the following (“Event of Default”): if it fails to render performance required under any material provision of this Agreement when due and such failure continues unremedied for thirty (30) days following written notice to the Party in default given by the other Party. Neither APS nor SRP shall be in default under this Agreement due to Uncontrollable Forces and Outages as identified in Section 9.1 of the Tolleson Agreement. It shall also be an Event of Default if a Party shall have commenced any insolvency, receivership, bankruptcy, liquidation, or similar proceedings and (i) one hundred twenty (120) days shall have expired from the commencement of any one or more of such proceedings, and (ii) a petition commencing the proceeding has not been dismissed or stayed within that time.
8

 

     7.2 Actions upon Event of Default. In the event of any dispute between the Parties concerning the rights and obligations created by this Agreement, or concerning any Event of Default, the Parties shall first confer in an attempt to informally resolve such dispute without need to resort to arbitration or litigation. The Parties shall not resort to arbitration or litigation to enforce their rights under this Agreement until they have conferred in good faith over a period of not less than fifteen days in an attempt to informally resolve their dispute. If the Parties are unable to resolve their dispute after conferring as required in the preceding sentence, then during the period that any Event of Default continues, the non-defaulting Party may, without prejudice to any other available rights or remedies under this Agreement or at law or in equity, and without constituting an election of an exclusive remedy for an Event of Default, initiate either or both of the following: (i) proceedings to partition the Tolleson Effluent and thereby terminate the co-tenancy of the Parties in the Tolleson Effluent, or (ii) non-binding arbitration by one arbitrator who has not previously been employed by either party (excluding employment as an arbitrator), and does not have a direct or indirect interest in either Party or the subject matter of the arbitration. The arbitrator shall either be as mutually agreed by the Parties within fifteen (15) calendar days after submission of the matter to arbitration, or failing agreement shall be selected under the expedited rules of the American Arbitration Association (“AAA”). The rules of AAA shall apply to the extent not inconsistent with the provisions in this Section. Arbitration shall be conducted according to the following: (a) not later than seven (7) days prior to the hearing date set by the arbitrator, each party shall submit a brief with a single proposal for settlement; (b) the hearing shall be conducted on a confidential basis without continuance or adjournment; and (c) the Parties shall divide equally the cost of the arbitrator and the hearing, and each Party shall be responsible for its own expenses, including its counsel and representatives.
ARTICLE 8
NOTICES
     8.1 Notice Provision. All notices, demands, consents or other communications required under this Agreement shall be in writing and may be delivered personally to a Party, may be delivered by facsimile providing written confirmation of successful transmission, or may be mailed by deposit in the United States Certified Mail, return receipt requested, or by deposit with a reputable overnight delivery service. Notices shall be effective:
          (i) on the date delivered by personal delivery or facsimile;
          (ii) three (3) business days following the date deposited in the United States mail; or
          (iii) the next business day following delivery to a reputable overnight delivery service.
Notices or communications shall be delivered and mailed to the Parties at the addresses set forth in paragraph 12.4 of the Tolleson Agreement, or to any address of a Party which is substituted from time to time by written notice of such Party pursuant to paragraph 12.4 of the Tolleson Agreement.
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ARTICLE 9
LIABILITY
     9.1 Limitation of Liability. The liability of a Party to the other Party under this Agreement shall be limited to the direct damages actually sustained by the other Party. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY LOSS OR DAMAGE IN THE NATURE OF PARTIAL OR COMPLETE LOSS OF USE OF ANY GENERATING FACILITY, LOSS OF ELECTRIC POWER, COST OF REPLACEMENT OF ELECTRIC POWER, OR FOR ANY LOSS OF INTEREST, REVENUE OR ANTICIPATED PROFITS FROM ACTIVITIES UNDER THIS AGREEMENT. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, OR LOST PROFITS, ARISING OUT OF OR RELATED TO THIS AGREEMENT. (The limitations in this Section 9.1 shall not apply to losses in tort to third parties or to Claims against which a Party is entitled to indemnitee protection under Section 9.2.)
     9.2 Indemnity. Except as otherwise provided in any subsequent agreement between the Parties (or between the Parties and other entities), each Party (“Indemnifying Party”) shall defend, indemnify, and hold harmless the other Party and its respective affiliates, directors, officers, partners, members, employees, agents, and representatives (each an “Indemnitee”) from and against any and all Claims, liability, cost, loss or expense of any kind incurred by the Indemnitees arising out of the fraud or willful misconduct of the Indemnifying Party or its agents or representatives in connection with this Agreement, or arising out of a material breach of the Tolleson Agreement by the Indemnifying Party. Except as limited by any separate agreement between the Parties, each Party shall also indemnify and hold harmless the other Party against any and all Claims, liability, cost, loss or expense of any kind resulting from the Indemnifying Party’s control, transportation, use or disposal of Tolleson Effluent at or for the benefit of any of the Indemnifying Party’s Other Electric Generating Facilities In the event any such Claim, liability, cost, loss or expense asserted by a person not a Party to this Agreement is caused by an alleged joint or concurrent fraud, negligence or willful misconduct, the Parties at fault shall bear liability in proportion to their own degrees of culpability. Each Indemnitee is an intended beneficiary of this Section 9.2. The indemnification obligation of the parties set forth in this Section shall survive the termination or expiration of this Agreement.
ARTICLE 10
GENERAL
     10.1 Entire Agreement. This Agreement supersedes all prior and contemporaneous conduct and communications between the Parties pertaining to co-ownership of the Tolleson Effluent, whether written or oral. Notwithstanding the foregoing, this Agreement shall be read together with the Tolleson Agreement, and any agreement by which APS and SRP transfer any portion of the Tolleson Effluent for use at or for the benefit of Other Electric Generating Facilities, to obtain necessary definitions and to otherwise determine the intention of the Parties. This Agreement is not intended to modify or abrogate either the Tolleson Agreement or any subsequent agreement by which APS and SRP transfer any portion of the Tolleson Effluent for use at or for the benefit of Other Electric Generating
10

 

Facilities. This Agreement may not be modified, changed or added to except in writing signed by all Parties hereto.
     10.2 Waiver. Each Party’s failure or delay in enforcing the terms and conditions of this Agreement or insisting upon strict performance of any of the other Party’s obligations shall not be interpreted as a waiver thereof. Waiver of any provision of this Agreement shall only be effective if in writing and shall not be interpreted as a waiver of any subsequent breach or failure under the same or any other provision of this Agreement. No conduct, statement, course of conduct, course of dealing, oral expression or other action shall be construed as a waiver.
     10.3. Assignment.
          10.3.1 Assignment by APS to PWE. APS may assign its rights and delegate its duties under this Agreement at any time to PWE, provided that: (i) APS assigns’ its entire interest in this Agreement; (ii) PWE assumes in writing all of the APS obligations under this Agreement; (iii) APS also assigns all of its rights and obligations under the Tolleson Agreement to PWE at the same time as its assignment of this Agreement; and (iv) such assignment shall not become effective until and unless PWE has become a party to the Arizona Nuclear Power Project Participation Agreement. No assignment or delegation under this Section 10.3.1 will release the assigning Party from its obligations under this Agreement unless the other Party consents to a release (such consent not to be unreasonably withheld, conditioned or delayed). Any subsequent assignee of PWE’s rights and obligations under this Agreement shall be subject to all terms and conditions of this Agreement, including, without limitation, the restrictions of this Section 10.3.1.
          10.3.2 Assignment to Others. With the prior written consent of the other Party (such consent not to be unreasonably withheld, conditioned or delayed), a Party may assign its rights or delegate its duties under this Agreement at any time to any other PVNGS Participant, provided that such Party assigns its entire interest in this Agreement and that its assignee assumes in writing all of such Party’s obligations under this Agreement. No assignment or delegation under this Section 10.3.2 will release the assigning Party from its obligations under this Agreement unless the other Party consents to a release (such consent not to be unreasonably withheld, conditioned or delayed). Any assignee to whom the rights and obligations of this Agreement are assigned pursuant to this Section 10.3.2 shall thereafter be subject to all terms and conditions of this Agreement, including, without limitation, the restrictions of this Section 10.3.2.
     10.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Arizona.
     10.5 Attorneys’ Fees. Each Party shall bear its own attorneys’ fees, costs, and expenses in case of a partition action or arbitration initiated under the provisions of Section 7.2. Should any Claim be brought by a Party against another Party arising out of this Agreement, including any action for declaratory or injunctive relief, the prevailing Party shall be entitled to reasonable. attorneys’ fees and costs and expenses of litigation and investigation, all as actually incurred, including attorneys’ fees, costs and expenses of litigation and investigation incurred in appellate proceedings or in any action or participation
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in, or in connection with, any case or proceeding under the United States or other bankruptcy laws, and any judgment or decree rendered in any such action or proceedings shall include an award thereof.
     10.6 Counterparts. This Agreement may be executed by the Parties in any number of separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts shall together constitute one and the same agreement. All signatures need not be on the same counterpart.
     10.7 Relationship of the Parties. The execution of this Agreement shall not create or constitute a partnership, joint venture, entity or any form of business organization between the Parties.
     IN WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of the Effective Date.

 	 	ARIZONA PUBLIC SERVICE COMPANY, an	
 	 	Arizona corporation,	
 	 	 	 	 	
	 	By	 	     /s/ James M. Levine	
	 	 	 	 	
	 	 	 	     Its Exec. VP, Generation	
 	 	 	 	 	
 	 	Approved as to form:	
 	 	 	 	 	
	 	By	 	     /s/ Karilee S. Ramaley	

 	 	SALT RIVER PROJECT AGRICULTURAL	
 	 	IMPROVEMENT AND POWER DISTRICT, an	
 	 	Arizona agricultural improvement district	
 	 	 	 	 	
	 	By	 	     /s/ William P. Schrader	
	 	 	 	 	
	 	 	 	     Its President	
 	 	 	 	 	
 	 	Approved as to form:	
 	 	 	 	 	
	 	By	 	     /s/ Richard N. Morrison	
	 	 	 	 	
12

Exhibit 12.1
PINNACLE WEST CAPITAL CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
(Thousands of Dollars)

 	 	Twelve Months Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	 	2000	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing Operations	 	$	235,218	 	 	$	225,803	 	 	$	236,563	 	 	$	327,367	 	 	$	302,332	 	
Income Taxes	 	 	128,857	 	 	 	102,473	 	 	 	152,145	 	 	 	213,535	 	 	 	194,200	 	
Fixed Charges	 	 	227,135	 	 	 	235,407	 	 	 	219,178	 	 	 	211,958	 	 	 	202,804	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	591,210	 	 	$	563,683	 	 	$	607,886	 	 	$	752,860	 	 	$	699,336	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Expense	 	$	195,859	 	 	$	204,339	 	 	$	187,039	 	 	$	175,822	 	 	$	166,447	 	
Estimated Interest Portion of Annual Rents	 	 	31,276	 	 	 	31,068	 	 	 	32,139	 	 	 	36,136	 	 	 	36,357	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Fixed Charges	 	$	227,135	 	 	$	235,407	 	 	$	219,178	 	 	$	211,958	 	 	$	202,804	 	

Ratio of Earnings to Fixed Charges (rounded down)	 	 	2.60	 	 	 	2.39	 	 	 	2.77	 	 	 	3.55	 	 	 	3.44	 	

  
 
Exhibit 12.2
ARIZONA PUBLIC SERVICE COMPANY
COMPUTATION OF EARNINGS TO FIXED CHARGES
($000’s)

 	 	Twelve Months Ended December 31,	 	
 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	 	2000	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	199,627	 	 	$	180,937	 	 	$	199,343	 	 	$	280,688	 	 	$	306,594	 	
Income taxes	 	 	120,030	 	 	 	86,854	 	 	 	126,805	 	 	 	183,136	 	 	 	195,665	 	
Fixed charges	 	 	181,372	 	 	 	181,793	 	 	 	168,985	 	 	 	166,939	 	 	 	179,381	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total earnings	 	$	501,029	 	 	$	449,584	 	 	$	495,133	 	 	$	630,763	 	 	$	681,640	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	146,983	 	 	$	147,610	 	 	$	133,878	 	 	$	130,525	 	 	$	141,886	 	
Amortization of debt discount	 	 	4,854	 	 	 	3,337	 	 	 	2,888	 	 	 	2,650	 	 	 	2,105	 	
Estimated interest portion of annual rents	 	 	29,535	 	 	 	30,846	 	 	 	32,219	 	 	 	33,764	 	 	 	35,390	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fixed charges	 	$	181,372	 	 	$	181,793	 	 	$	168,985	 	 	$	166,939	 	 	$	179,381	 	

Ratio of Earnings to Fixed Charges (rounded down)	 	 	2.76	 	 	 	2.47	 	 	 	2.93	 	 	 	3.77	 	 	 	3.79	 	

  

Exhibit 21.1
SUBSIDIARIES OF THE COMPANY

Arizona Public Service Company	
APS Foundation, Inc.	
AXIOM Power Solutions, Inc.	
Bixco, Inc.	
Powertree Carbon Company, LLC	
PWENewco, Inc.	
APSES Holdings, Inc.	
APS Energy L.P.	
APS Energy Services Company, Inc.	
Northwind Phoenix LLC	
Tucson District Energy LLC	
SunCor Development Company	
SunCor Golf, Inc.	
Westworld Golf Course LLC	
Golden Heritage Homes, Inc.	
Golden Heritage Construction, Inc.	
Golden Heritage Construction Nevada, LLC	
Heritage Financial Services, LLC	
SCM, Inc.	
SunCor Realty & Management Company	
Palm Valley Golf Club, Inc.	
Rancho Viejo de Santa Fe, Inc.	
Ranchland Utility Company	
Rancho Viejo Village Center, LLC	
SunCor Idaho, LLC	
Golf de Mexico, S.A. de C.V.	
Type Two, Inc.	
Stone Ridge- Prescott Valley LLC	
Stone Ridge Golf Course LLC	
StoneRidge Commercial, L.L.C.	
Hayden Ferry Lakeside LLC	
Lakeside Residential Communities, L.L.C.	
Edgewater at Hayden Ferry Lakeside, L.L.C.	
BV at Hayden Ferry Lakeside, L.L.C.	
Club West Golf Course LLC	
Scottsdale Mountain LLP	
SunRidge Canyon LLC	
Sedona Golf Resort LLC	
Kabuto/SunCor Joint Venture	
Centrepoint Associates LLC	
Hidden Hills of Scottsdale LLC	
Talavi Associates LLC	
Coral Canyon Town Center LLC	

 

 	
Coral Canyon HD, L.L.C.	
Foothills Sewer Company, Inc.	
Highland Water Company, Inc.	
Palm Valley Professional Plaza, LLC	
Riverside Distribution Center, LLC	
SDC Prescott Valley LLC	
SDC Prescott LLC	
El Dorado Investment Company	
Underground Imaging Technologies, LLC	
NAC Holding Inc.	
NAC International Inc.	
Phoenix Suns Limited Partnership	
AZ PB Partnership	
El Dorado Ventures III	
Phoenix Downtown Theater LLC	
Nxt Phase Corporation	
Acoustic Locating Services, LLC	
Arizona Business Accelerator	
PowerOneData, Inc.	
Severon Corporation	
Pinnacle West Energy Corporation	
GenWest, LLC	
APACS Holdings LLC	

 

Exhibit 23.1 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 33-15190, 333-101457, 333-53150, and 333-121510 on Form S-3; in Registration Statement Nos. 33-47534, 333-40796, 33-54307, 333-95035, 333-91786 and 33-1720 on Form S-8; and in Registration Statement No. 2-96386 on Form S-14 of our report dated March 15, 2005 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the change in 2002 in the method of accounting for trading activities), relating to the consolidated financial statements and financial statement schedule of Pinnacle West Capital Corporation and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Pinnacle West Capital Corporation for the year ended December 31, 2004.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 15, 2005

 

Exhibit 23.2 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-106772 and 333-121512 on Form S-3, and in Registration Statement No. 333-4616 on Form S-8 of our report dated March 15, 2005, relating to the financial statements and financial statement schedule of Arizona Public Service Company and management’s report on the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Arizona Public Service Company for the year ended December 31, 2004.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 15, 2005

 

Exhibit 31.1 
CERTIFICATION
I, William J. Post, certify that:

1.  	I have reviewed this Annual Report on Form 10-K of Pinnacle West Capital Corporation;	
 	
2.  	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 	
3.  	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 	
4.  	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a)  	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	
 	b)  	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	
 	c)  	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	
 	d)  	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

 

5.  	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a)  	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	
 	b)  	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: March 16, 2005.

	 	/s/ William J. Post	
	 	 	
	 	William J. Post	
	 	Chairman and Chief Executive Officer	
2

Exhibit 31.2 
CERTIFICATION
I, Donald E. Brandt, certify that:

1.  	I have reviewed this Annual Report on Form 10-K of Pinnacle West Capital Corporation;	

2.  	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.  	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.  	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a)  	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	
 	b)  	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	
 	c)  	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	

 	d)  	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

 

5.  	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a)  	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	
 	b)  	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: March 16, 2005.

	 	/s/ Donald E. Brandt	
	 	Donald E. Brandt	
	 	Executive Vice President &	
	 	Chief Financial Officer	

 

Exhibit 31.3 
CERTIFICATION
I, Jack E. Davis, certify that:

1.  	I have reviewed this Annual Report on Form 10-K of Arizona Public Service Company;	

2.  	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.  	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.  	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a)  	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	
 	b)  	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	
 	c)  	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	
 	d)  	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

 

5.  	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a)  	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	
 	b)  	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: March 16, 2005.

	 	/s/ Jack E. Davis	
	 	Jack E. Davis	
	 	President and Chief Executive Officer	
2

Exhibit 31.4 
CERTIFICATION
I, Donald E. Brandt, certify that:

1.  	I have reviewed this Annual Report on Form 10-K of Arizona Public Service Company;	

2.  	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	

3.  	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	

4.  	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	

 	a)  	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 	
 	b)  	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 	
 	c)  	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 	
 	d)  	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	

 

5.  	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	

 	a)  	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 	
 	b)  	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: March 16, 2005.

		
	 	/s/ Donald E. Brandt

Donald E. Brandt
Executive Vice President &
Chief Financial Officer	

 

Exhibit 32.1 
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     I, William J. Post, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Pinnacle West Capital Corporation for the fiscal year ended December 31, 2004, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.
Date: March 16, 2005.

	 	/s/ William J. Post	
	 	 	
	 	William J. Post
Chairman and Chief Executive Officer	
     I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Pinnacle West Capital Corporation for the fiscal year ended December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Pinnacle West Capital Corporation.
Date: March 16, 2005.

	 	/s/ Donald E. Brandt	
	 	 	
	 	Donald E. Brandt	
	 	Executive Vice President and	
	 	Chief Financial Officer	

 

Exhibit 32.2 
CERTIFICATION
OF
CHIEF EXECUTIVE OFFICER
AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     I, Jack E. Davis, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Arizona Public Service Company for the fiscal year ended December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.
Date: March 16, 2005.

	 	/s/ Jack E. Davis	
	 	Jack E. Davis
President and Chief Executive Officer	
     I, Donald E. Brandt, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report on Form 10-K of Arizona Public Service Company for the fiscal year ended December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Arizona Public Service Company.
Date: March 16, 2005.

	 	/s/ Donald E. Brandt	
	 	Donald E. Brandt
Executive Vice President and	
	 	Chief Financial Officer	

 

EXHIBIT 99.31
PINNACLE WEST RISK FACTORS
(Report on Form 10-K for the fiscal year ended December 31, 2004)
     Set forth below and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could affect our financial results.
      We cannot predict the outcome of the general rate case of Arizona Public Service Company (“APS”), our principal subsidiary, pending before the Arizona Corporation Commission (the “ACC”).
     On June 27, 2003, APS filed a request with the ACC to increase its annual retail electricity revenues by approximately $175.1 million, or 9.8%, effective July 1, 2004. On August 18, 2004, a substantial majority of the parties to the rate case, including APS, the ACC staff, the Residential Utility Consumer Office, other customer groups, and merchant power plant intervenors entered into an agreement that proposes terms under which the rate case would be settled (the “2004 Settlement Agreement”). The 2004 Settlement Agreement is subject to ACC approval. Key financial components of the 2004 Settlement Agreement are as follows:

 	•  	APS would receive an annual retail rate increase of approximately $75.5 million, or 4.21%. The increase would consist of an increase in base rates of approximately 3.77% and an increase of approximately 0.44% for recovery over five years of the past costs of APS’ compliance with the ACC’s retail electric competition rules (the “Rules”).	
 	
 	•  	APS would acquire from Pinnacle West Energy Corporation (“Pinnacle West Energy”) Redhawk Combined Cycle Units 1 and 2, West Phoenix Combined Cycle Units 4 and 5, and Saguaro Combustion Turbine Unit 3 (collectively, the “Dedicated Assets”), with a net carrying value of approximately $850 million, and rate base the Dedicated Assets at a rate base value of $700 million, which would result in a regulatory rate base disallowance of $148 million. As a result, for financial reporting purposes, we would recognize a one-time, after-tax net plant write-off of approximately $88 million in the period when the plant transfer to APS is completed, and would reduce annual depreciation expense by approximately $5 million.	
 	
 	•  	To bridge the time between the effective date of the rate increase and the actual date the Dedicated Assets transfer, APS and Pinnacle West Energy would enter into a cost-based purchase power agreement (the “Bridge PPA”), which would be based on the value of the Dedicated Assets described in the previous bullet point. The Bridge PPA would remain in effect until the Federal Energy Regulatory Commission (the “FERC”) approves the transfer of the Dedicated Assets to APS and the transfer is completed.	
 	
 	•  	If the FERC were to issue an order denying APS’ request to acquire the Dedicated Assets, the Bridge PPA would become a 30-year purchased power agreement, with prices reflecting cost-of-service as if APS had acquired and rate-based the Dedicated Assets at the value described above.	
 	
 	•  	If the FERC were to issue an order (a) approving APS’ request to transfer the Dedicated Assets at a value materially less than $700 million, (b) approving the transfer of fewer than all of the Dedicated Assets, or (c) that was materially inconsistent with the 2004 Settlement Agreement, APS would file an appropriate application with the ACC so that rates could be adjusted. In these circumstances, the Bridge PPA would continue at least until the conclusion of the subsequent proceeding to consider any appropriate adjustment to APS’ rates.	
 	
 	•  	A power supply adjuster (“PSA”) would provide for the recovery of fuel and purchased power costs, subject to specified parameters and procedures.	
 	
 	•  	APS would not restore and recover in rates the $234 million write-off recorded in 1999 as a result of a 1999 settlement agreement approved by the ACC related to the implementation of retail electric competition in Arizona (the “1999 Settlement Agreement”).	
 	
 	•  	APS would adopt longer service lives than originally requested for certain depreciable assets.	

 

     On February 28, 2005, the administrative law judge in the general rate case issued a recommended order. The recommended order proposes ACC approval of the 2004 Settlement Agreement with two changes related to the PSA. First, the amount of gas costs that APS could recover under the annual PSA would be limited to $500 million per year. Second, although the 2004 Settlement Agreement provides that the PSA would remain in effect for a minimum five-year period, under the recommended order the ACC would be able to eliminate the PSA at any time, if appropriate, if APS files a rate case before the expiration of the five-year period or APS does not comply with the terms of the PSA. If APS exceeds the gas costs that could be recoverable under the PSA or if the ACC eliminates the PSA, APS would retain the right to file a rate case to reset its base rates. We cannot predict the outcome of this matter.
      The procurement of wholesale power by APS without the ability to adjust retail rates could have an adverse impact on our business and financial results.
     Although the Rules allow retail customers to have access to competitive providers of energy and energy services, under the Rules, APS is the “provider of last resort” for standard-offer, full-service customers under rates that have been approved by the ACC. In the event of shortfalls of electricity due to unforeseen increases in load demand or generation or transmission outages, APS may need to purchase additional supplemental power in the wholesale spot market. At various times, prices in the spot wholesale market have significantly exceeded the amount included in APS’ current retail rates. There can be no assurance that APS would be able to fully recover the costs of this power. Although the proposed settlement of APS’ general rate case would, among other things, allow APS to recover purchased power costs, there can be no assurance that the 2004 Settlement Agreement will be approved by the ACC as proposed.
      Deregulation or restructuring of the electric industry may result in increased competition, which could have a significant adverse impact on our business and our financial results.
     Retail competition could have a significant adverse financial impact on us due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Under the Rules, as modified by the 1999 Settlement Agreement, APS was required to transfer all of its competitive electric assets and services to an unaffiliated party or parties or to a separate corporate affiliate or affiliates no later than December 31, 2002. To satisfy this requirement, APS had planned to transfer its generation assets to Pinnacle West Energy. Pursuant to an ACC order dated September 10, 2002, the ACC unilaterally modified the 1999 Settlement Agreement and directed APS to cancel any plans to divest interests in any of its generating assets. The ACC further established a requirement that APS solicit bids for certain estimated amounts of capacity and energy for periods beginning July 1, 2003. Pinnacle West Energy bid on and entered into contracts to supply most of APS’ requirements in the summer months through September 2006. In addition, as discussed above, a proposed settlement of APS’ general rate case would result in Pinnacle West Energy transferring a significant amount of generation assets to APS. These regulatory developments and legal challenges to the Rules have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in APS’ service area in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to APS’ customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.
     As a result of changes in federal law and regulatory policy, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, and wholesale power marketers and brokers. This increased competition could affect our load forecasts, plans for power supply and wholesale energy sales and related revenues. As a result of the changing regulatory environment and the relatively low barriers to entry, we expect wholesale competition to increase. As competition continues to increase, our financial position and results of operations could be adversely affected.
      We are subject to complex government regulation that may have a negative impact on our business and our results of operations.
     We are, directly and through our subsidiaries, subject to governmental regulation that may have a negative impact on our business and results of operations. We are a “holding company” within the meaning of the Public Utility Holding Company Act of 1935 (“PUHCA”); however, we are exempt from the provisions of PUHCA (except Section 9(a)(2) thereof) by virtue of our filing of an annual exemption statement with the Securities and Exchange Commission (the “SEC”).

 

     APS is subject to comprehensive regulation by several federal, state and local regulatory agencies, which significantly influence its operating environment and may affect its ability to recover costs from utility customers. APS is required to have numerous permits, approvals and certificates from the agencies that regulate APS’ business. The FERC, the Nuclear Regulatory Commission (“NRC”), the Environmental Protection Agency (“EPA”), and the ACC regulate many aspects of our utility operations, including siting and construction of facilities, customer service and the rates that APS can charge customers. We believe the necessary permits, approvals and certificates have been obtained for APS’ existing operations. However, changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations. We are also unable to predict the impact on our business and operating results from pending or future regulatory activities of any of these agencies.
      We are subject to numerous environmental laws and regulations that may increase our cost of operations, impact our business plans, or expose us to environmental liabilities.
     We are subject to numerous environmental laws and regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the outcome (financial or operational) of any related litigation that may arise.
     In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.
     We cannot be sure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from APS’ customers, could have a material adverse effect on our results of operations.
      There are inherent risks in the operation of nuclear facilities, such as environmental, health and financial risks and the risk of terrorist attack.
     Through APS, we have an ownership interest in and operate, on behalf of a group of owners, the Palo Verde Nuclear Generating Station (“Palo Verde”), which is the largest nuclear electric generating facility in the United States. Palo Verde is subject to environmental, health and financial risks such as the ability to dispose of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities, and the costs of securing the facilities against possible terrorist attacks and unscheduled outages due to equipment and other problems. We maintain nuclear decommissioning trust funds and external insurance coverage to minimize our financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage.
     The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. In addition, although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially and adversely affect our results of operations or financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.
     The operation of Palo Verde requires licenses that need to be periodically renewed and/or extended. We do not anticipate any problems renewing these licenses. However, as a result of potential terrorist threats and increased public scrutiny of utilities, the licensing process could result in increased licensing or compliance costs that are difficult or impossible to predict.
      The uncertain outcome regarding the creation of regional transmission organizations, or RTOs, and implementation of the FERC’s standard market design may materially impact our operations, cash flows or financial position.

 

     In a December 1999 order, the FERC established characteristics and functions that must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO include independence from market participants, operational control over a region large enough to support efficient and nondiscriminatory markets and exclusive authority to maintain short-term reliability. Additionally, in a pending notice of proposed rulemaking, the FERC is considering implementing a standard market design for wholesale markets. On October 16, 2001, APS and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that their proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. On October 10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address specified issues, could meet the FERC’s RTO requirements and provide the basic framework for a standard market design for the southwestern U.S. Since that time, APS has been evaluating a phased approach to RTO implementation in the desert Southwest. APS is currently participating with other entities in the southwestern U.S. in a cost/benefit analysis of implementing the WestConnect RTO, the results of which are expected to be completed in 2005.
     If APS ultimately joins an RTO, APS could incur increased transmission-related costs and receive reduced transmission service revenues; APS may be required to expand its transmission system according to decisions made by the RTO rather than its internal planning process; and APS may experience other impacts on its operations, cash flows or financial position that will not be quantifiable until the final tariffs and other material terms of the RTO are known.
      Recent events in the energy markets that are beyond our control may have negative impacts on our business.
     As a result of the energy crisis in California during the summer of 2001, the recent volatility of natural gas prices in North America, the filing of bankruptcy by the Enron Corporation, and investigations by governmental authorities into energy trading activities, companies generally in the regulated and unregulated utility businesses have been under an increased amount of public and regulatory scrutiny. The capital markets and rating agencies also have increased their level of scrutiny. We believe that we are in material compliance with all applicable laws, but it is difficult or impossible to predict or control what effect these or related issues may have on our business or our access to the capital markets.
      Our results of operations can be adversely affected by milder weather.
     Weather conditions directly influence the demand for electricity and affect the price of energy commodities. Electric power demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time. As a result, our overall operating results fluctuate substantially on a seasonal basis. In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder. As a result, unusually mild weather could diminish our results of operations and harm our financial condition.
      Our cash flow largely depends on the performance of our subsidiaries.
     We conduct our operations primarily through subsidiaries. Substantially all of our consolidated assets are held by such subsidiaries. Accordingly, our cash flow is dependent upon the earnings and cash flows of these subsidiaries and their distributions to us. The subsidiaries are separate and distinct legal entities and have no obligation to make distributions to us.
     As part of the ACC’s approval of a $500 million financing arrangement between APS and Pinnacle West Energy, an ACC order requires APS to maintain a common equity ratio of at least 40% and does not allow APS to pay common dividends if the payment would reduce its common equity below that threshold. As defined in the ACC financing order approving the arrangement, common equity ratio is common equity divided by common equity plus long-term debt, including current maturities of long-term debt. At December 31, 2004, APS’ common equity ratio, as defined, was approximately 45%.
      Our debt securities will be structurally subordinated to the debt securities and other obligations of our subsidiaries.
     Because we are structured as a holding company, all existing and future debt and other liabilities of our subsidiaries will be effectively senior in right of payment to our debt securities. None of the indentures under which we or our subsidiaries may issue debt securities limits our ability or the ability of our subsidiaries to incur additional

 

debt in the future. The assets and cash flows of our subsidiaries will be available, in the first instance, to service their own debt and other obligations. Our ability to have the benefit of their assets and cash flows, particularly in the case of any insolvency or financial distress affecting our subsidiaries, would arise only through our equity ownership interests in our subsidiaries and only after their creditors have been satisfied.
      If we are not able to access capital at competitive rates, our ability to implement our financial strategy will be adversely affected.
     We rely on access to short-term money markets, longer-term capital markets and the bank markets as a significant source of liquidity and for capital requirements not satisfied by the cash flow from our operations. We believe that we will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of our credit ratings may increase our cost of borrowing or adversely affect our ability to access one or more financial markets. Such disruptions could include:

 	•  	an economic downturn;	
 	
 	•  	capital market conditions generally;	
 	
 	•  	the bankruptcy of an unrelated energy company;	
 	
 	•  	increased market prices for electricity and gas;	
 	
 	•  	terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies; or	
 	
 	•  	the overall health of the utility industry.	
     Changes in economic conditions could result in higher interest rates, which would increase our interest expense on our debt and reduce funds available to us for our current plans. Additionally, an increase in our leverage could adversely affect us by:

 	•  	increasing the cost of future debt financing;	
 	
 	•  	increasing our vulnerability to adverse economic and industry conditions;	
 	
 	•  	requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future business opportunities or other purposes; and	
 	
 	•  	placing us at a competitive disadvantage compared to our competitors that have less debt.	
      A significant reduction in our credit ratings could materially and adversely affect our business, financial condition and results of operations.
     We cannot be sure that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any downgrade could increase our borrowing costs, which would diminish our financial results. We would likely be required to pay a higher interest rate in future financings, and our potential pool of investors and funding sources could decrease. In addition, borrowing costs under certain of our existing credit facilities depend on our credit ratings. A downgrade could also require us to provide additional support in the form of letters of credit or cash or other collateral to various counterparties. If our short-term ratings were to be lowered, it could limit our access to the commercial paper market. We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating.
      The use of derivative contracts in the normal course of our business and changing interest rates and market conditions could result in financial losses that negatively impact our results of operations.
     Our operations include managing market risks related to commodity prices and, subject to specified risk parameters, engaging in marketing and trading activities intended to profit from market price movements. We are exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas, coal, and emissions allowances and credits. We have established procedures to manage risks associated with these market fluctuations by utilizing various commodity derivatives, including exchange-traded futures and options and over-

 

the-counter forwards, options, and swaps. As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodity.
     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We use a risk management process to assess and monitor the financial exposure of all counterparties. Despite the fact that the majority of trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material adverse impact on our earnings for a given period.
     Changing interest rates will affect interest paid on variable-rate debt and interest earned by our pension plan and nuclear decommissioning trust funds. Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt. The pension plan is also impacted by the discount rate, which is the interest rate used to discount future pension obligations. Continuation of recent decreases in the discount rate would result in increases in pension costs, cash contributions, and charges to other comprehensive income. The pension plan and nuclear decommissioning trust funds also have risks associated with changing market values of equity investments. A significant portion of the pension costs and all of the nuclear decommissioning costs are recovered in regulated electricity prices.
      Actual results could differ from estimates used to prepare our financial statements.
     In preparing our financial statements in accordance with accounting principles generally accepted in the United States of America, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.

 	•  	Regulatory Accounting - Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. If future recovery of costs ceases to be probable, the assets would be written off as a charge in current period earnings. We had $135 million of regulatory assets on the Consolidated Balance Sheets at December 31, 2004. A component of the 2004 Settlement Agreement, which is subject to ACC approval, would allow APS to acquire the Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and rate base the Dedicated Assets at a rate base value of $700 million. This would result in a mandatory rate base disallowance of approximately $150 million. As a result, for financial reporting purposes, APS would recognize a one-time, after-tax net plant write-off of approximately $90 million in the period when the plant transfer to APS is completed and would reduce annual depreciation expense by approximately $5 million.	
 	
 	•  	Pensions and Other Postretirement Benefit Accounting - Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.	
 	
 	•  	Derivative Accounting - Derivative accounting requires evaluation of rules that are complex and subject to varying interpretations. Our evaluation of these rules, as they apply to our contracts, will determine whether we use accrual accounting (for contracts designated as normal) or fair value (mark-to-market) accounting. Mark-to-market accounting requires that changes in the fair value are recognized periodically in income unless certain hedge criteria are met. For fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item associated with the hedged risk are recognized in earnings. For cash flow hedges, changes in the fair value of the derivative are recognized in common stock equity (as a component of other comprehensive income (loss)). The fair value of our derivative contracts is not always readily determinable. In some cases, we use models and other valuation techniques to determine fair value. The use of these models and valuation techniques sometimes requires subjective and complex judgement. Actual results could differ from the results estimated through application of these methods. Our marketing and trading portfolio consists of structured activities hedged with a portfolio of forward purchases that protects the economic value of the sales transactions.	

 

      The market price of our common stock may be volatile.
     The market price of our common stock could be subject to significant fluctuations in response to factors such as the following, some of which are beyond our control:

 	•  	variations in our quarterly operating results;	
 	
 	•  	operating results that vary from the expectations of management, securities analysts and investors;	
 	
 	•  	changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;	
 	
 	•  	developments generally affecting industries in which we operate, particularly the energy distribution and energy generation industries;	
 	
 	•  	announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;	
 	
 	•  	announcements by third parties of significant claims or proceedings against us;	
 	
 	•  	favorable or adverse regulatory developments;	
 	
 	•  	our dividend policy;	
 	
 	•  	future sales of our equity or equity-linked securities; and	
 	
 	•  	general domestic and international economic conditions.	
     In addition, the stock market in general has experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.
      Our common stock price could be affected because a substantial number of our shares could be available for sale in the future.
     Sales in the public market of a substantial number of shares of common stock could depress the market price of the common stock and could impair our ability to raise capital through the sale of additional equity securities. Because of the number of shares of our common stock that we are authorized to issue under our articles of incorporation, a substantial number of shares of our common stock could be available for future sale.
      We may enter into credit and other agreements from time to time that restrict our ability to pay dividends.
     Payment of dividends on our common stock may be restricted by credit and other agreements entered into by us from time to time. At December 31, 2004, there were no material restrictions on our ability to pay dividends under any such agreement.
      Certain provisions of our articles of incorporation and bylaws and of Arizona law make it more difficult for shareholders to change the composition of our board and may discourage takeover attempts that could be beneficial to us and our shareholders.
     Certain provisions of our articles of incorporation and bylaws and of Arizona law make it more difficult for shareholders to change the composition of our board and may discourage unsolicited attempts to acquire us, which could preclude our shareholders from receiving a change of control premium. These provisions include the following:

 	•  	provisions of our bylaws and Arizona law that restrict our ability to engage in a wide range of “business combination” transactions with an “interested shareholder” (generally, any person who owns 10% or more of our outstanding voting power or any of our affiliates or associates) or any affiliate or associate of an interested shareholder, unless specific conditions are met;	

 

 	•  	anti-greenmail provisions of Arizona law and our bylaws that prohibit us from purchasing shares of our voting stock from beneficial owners of more than 5% of our outstanding shares unless specified conditions are satisfied;	
 	
 	•  	provisions of our bylaws and Arizona law that provide that shareholder action may be taken only at an annual or special meeting or by unanimous written consent, and provisions of our bylaws that provide that a special meeting of shareholders may only be called by a majority of our Board of Directors, the Chairman of our Board of Directors, or our President;	
 	
 	•  	advance notice procedures for nominating candidates to our Board of Directors or presenting matters at shareholder meetings;	
 	
 	•  	provisions of our articles and bylaws that provide for a staggered Board of Directors;	
 	
 	•  	provisions of our bylaws that provide that shareholders may only remove a director with or without cause if the votes cast in favor of such removal exceed the votes cast against such removal (with special requirements, based on cumulative voting rights, if less than the entire board is to be removed); and	
 	
 	•  	the ability of our Board of Directors to issue additional shares of common stock and shares of preferred stock and to determine the price and, with respect to preferred stock, the other terms, including preferences and voting rights, of those shares without shareholder approval.	
     In addition, we have adopted a shareholder rights plan that may have the effect of discouraging unsolicited takeover proposals, including takeover proposals that could result in a premium over the market price of our common stock.
     While these provisions have the effect of encouraging persons seeking to acquire control of us to negotiate with our Board of Directors, they could enable the board to hinder or frustrate a transaction that some, or a majority, of our shareholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors.

 

EXHIBIT 99.32
APS RISK FACTORS
(Report on Form 10-K for the fiscal year ended December 31, 2004)
     Set forth below and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could affect our financial results.
      We cannot predict the outcome of our general rate case pending before the Arizona Corporation Commission (the “ACC”).
     On June 27, 2003, we filed a request with the ACC to increase annual retail electricity revenues by approximately $175.1 million, or 9.8%, effective July 1, 2004. On August 18, 2004, a substantial majority of the parties to the rate case, including us, the ACC staff, the Residential Utility Consumer Office, other customer groups, and merchant power plant intervenors entered into an agreement that proposes terms under which the rate case would be settled (the “2004 Settlement Agreement”). The 2004 Settlement Agreement is subject to ACC approval. Key financial components of the 2004 Settlement Agreement are as follows:

 	•  	We would receive an annual retail rate increase of approximately $75.5 million, or 4.21%. The increase would consist of an increase in base rates of approximately 3.77% and an increase of approximately 0.44% for recovery over five years of the past costs of our compliance with the ACC’s retail electric competition rules (the “Rules”).	
 	
 	•  	We would acquire from Pinnacle West Energy Corporation (“Pinnacle West Energy”) Redhawk Combined Cycle Units 1 and 2, West Phoenix Combined Cycle Units 4 and 5, and Saguaro Combustion Turbine Unit 3 (collectively, the “Dedicated Assets”), with a net carrying value of approximately $850 million, and rate base the Dedicated Assets at a rate base value of $700 million, which would result in a regulatory rate base disallowance of $148 million. As a result, for financial reporting purposes, we would recognize a one-time, after-tax net plant write-off of approximately $88 million in the period when the plant transfer to us is completed, and would reduce annual depreciation expense by approximately $5 million.	
 	
 	•  	To bridge the time between the effective date of the rate increase and the actual date the Dedicated Assets transfer, we and Pinnacle West Energy would enter into a cost-based purchase power agreement (the “Bridge PPA”), which would be based on the value of the Dedicated Assets described in the previous bullet point. The Bridge PPA would remain in effect until the Federal Energy Regulatory Commission (the “FERC”) approves the transfer of the Dedicated Assets to us and the transfer is completed.	
 	
 	•  	If the FERC were to issue an order denying our request to acquire the Dedicated Assets, the Bridge PPA would become a 30-year purchased power agreement, with prices reflecting cost-of-service as if we had acquired and rate-based the Dedicated Assets at the value described above.	
 	
 	•  	If the FERC were to issue an order (a) approving our request to transfer the Dedicated Assets at a value materially less than $700 million, (b) approving the transfer of fewer than all of the Dedicated Assets, or (c) that was materially inconsistent with the 2004 Settlement Agreement, we would file an appropriate application with the ACC so that rates could be adjusted. In these circumstances, the Bridge PPA would continue at least until the conclusion of the subsequent proceeding to consider any appropriate adjustment to our rates.	
 	
 	•  	A power supply adjuster (“PSA”) would provide for the recovery of fuel and purchased power costs, subject to specified parameters and procedures.	
 	
 	•  	We would not restore and recover in rates the $234 million write-off recorded in 1999 as a result of a 1999 settlement agreement approved by the ACC related to the implementation of retail electric competition in Arizona (the “1999 Settlement Agreement”).	
 	
 	•  	We would adopt longer service lives than originally requested for certain depreciable assets.	
     On February 28, 2005, the administrative law judge in the general rate case issued a recommended order. The recommended order proposes ACC approval of the 2004 Settlement Agreement with two changes related to the

 

PSA. First, the amount of gas costs that we could recover under the annual PSA would be limited to $500 million per year. Second, although the 2004 Settlement Agreement provides that the PSA would remain in effect for a minimum five-year period, under the recommended order the ACC would be able to eliminate the PSA at any time, if appropriate, if we file a rate case before the expiration of the five-year period or if we do not comply with the terms of the PSA. If we exceed the gas costs that could be recoverable under the PSA or if the ACC eliminates the PSA, we would retain the right to file a rate case to reset our base rates. We cannot predict the outcome of this matter.
      The procurement of wholesale power by us without the ability to adjust retail rates could have an adverse impact on our business and financial results.
     Although the Rules allow retail customers to have access to competitive providers of energy and energy services, under the Rules, we are the “provider of last resort” for standard-offer, full-service customers under rates that have been approved by the ACC. In the event of shortfalls of electricity due to unforeseen increases in load demand or generation or transmission outages, we may need to purchase additional supplemental power in the wholesale spot market. At various times, prices in the spot wholesale market have significantly exceeded the amount included in our current retail rates. There can be no assurance that we would be able to fully recover the costs of this power. Although the proposed settlement of our general rate case would, among other things, allow us to recover purchased power costs, there can be no assurance that the 2004 Settlement Agreement will be approved by the ACC as proposed.
      Deregulation or restructuring of the electric industry may result in increased competition, which could have a significant adverse impact on our business and our financial results.
     Retail competition could have a significant adverse financial impact on us due to an impairment of assets, a loss of retail customers, lower profit margins or increased costs of capital. Under the Rules, as modified by the 1999 Settlement Agreement, we were required to transfer all of our competitive electric assets and services to an unaffiliated party or parties or to a separate corporate affiliate or affiliates no later than December 31, 2002. To satisfy this requirement, we had planned to transfer our generation assets to Pinnacle West Energy. Pursuant to an ACC order dated September 10, 2002, the ACC unilaterally modified the 1999 Settlement Agreement and directed us to cancel any plans to divest interests in any of our generating assets. The ACC further established a requirement that we solicit bids for certain estimated amounts of capacity and energy for periods beginning July 1, 2003. Pinnacle West Energy bid on and entered into contracts to supply most of our requirements in the summer months through September 2006. In addition, as discussed above, a proposed settlement of our general rate case would result in Pinnacle West Energy transferring a significant amount of generation assets to us. These regulatory developments and legal challenges to the Rules have raised considerable uncertainty about the status and pace of retail electric competition and of electric restructuring in Arizona. Although some very limited retail competition existed in our service area in 1999 and 2000, there are currently no active retail competitors offering unbundled energy or other utility services to our customers. As a result, we cannot predict when, and the extent to which, additional competitors will re-enter our service territory.
     As a result of changes in federal law and regulatory policy, competition in the wholesale electricity market has greatly increased due to a greater participation by traditional electricity suppliers, non-utility generators, independent power producers, and wholesale power marketers and brokers. This increased competition could affect our load forecasts, plans for power supply and wholesale energy sales and related revenues. As a result of the changing regulatory environment and the relatively low barriers to entry, we expect wholesale competition to increase. As competition continues to increase, our financial position and results of operations could be adversely affected.
      We are subject to complex government regulation that may have a negative impact on our business and our results of operations.
     We are subject to governmental regulation that may have a negative impact on our business and results of operations. We are a “subsidiary company” of a “holding company” within the meaning of the Public Utility Holding Company Act of 1935 (“PUHCA”); however, we are exempt from the provisions of PUHCA (except Section 9(a)(2) thereof) by virtue of the filing of an annual exemption statement with the Securities and Exchange Commission (the “SEC”) by our parent company, Pinnacle West Capital Corporation (“Pinnacle West”).
     We are subject to comprehensive regulation by several federal, state and local regulatory agencies, which significantly influence our operating environment and may affect our ability to recover costs from utility customers. We are required to have numerous permits, approvals and certificates from the agencies that regulate our business.

 

The FERC, the Nuclear Regulatory Commission (“NRC”), the Environmental Protection Agency (“EPA”), and the ACC regulate many aspects of our utility operations, including siting and construction of facilities, customer service and the rates that we can charge customers. We believe the necessary permits, approvals and certificates have been obtained for our existing operations. However, changes in regulations or the imposition of additional regulations could have an adverse impact on our results of operations. We are also unable to predict the impact on our business and operating results from pending or future regulatory activities of any of these agencies.
      We are subject to numerous environmental laws and regulations that may increase our cost of operations, impact our business plans, or expose us to environmental liabilities.
     We are subject to numerous environmental laws and regulations affecting many aspects of our present and future operations, including air emissions, water quality, wastewater discharges, solid waste, and hazardous waste. These laws and regulations can result in increased capital, operating, and other costs, particularly with regard to enforcement efforts focused on power plant emissions obligations. These laws and regulations generally require us to obtain and comply with a wide variety of environmental licenses, permits, inspections and other approvals. Both public officials and private individuals may seek to enforce applicable environmental laws and regulations. We cannot predict the outcome (financial or operational) of any related litigation that may arise.
     In addition, we may be a responsible party for environmental clean up at sites identified by a regulatory body. We cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up costs. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.
     We cannot be sure that existing environmental regulations will not be revised or that new regulations seeking to protect the environment will not be adopted or become applicable to us. Revised or additional regulations that result in increased compliance costs or additional operating restrictions, particularly if those costs are not fully recoverable from our customers, could have a material adverse effect on our results of operations.
      There are inherent risks in the operation of nuclear facilities, such as environmental, health and financial risks and the risk of terrorist attack.
     We have an ownership interest in and operate, on behalf of a group of owners, the Palo Verde Nuclear Generating Station (“Palo Verde”), which is the largest nuclear electric generating facility in the United States. Palo Verde is subject to environmental, health and financial risks such as the ability to dispose of spent nuclear fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising out of the operation of these facilities, and the costs of securing the facilities against possible terrorist attacks and unscheduled outages due to equipment and other problems. We maintain nuclear decommissioning trust funds and external insurance coverage to minimize our financial exposure to some of these risks; however, it is possible that damages could exceed the amount of insurance coverage.
     The NRC has broad authority under federal law to impose licensing and safety-related requirements for the operation of nuclear generation facilities. In the event of noncompliance, the NRC has the authority to impose fines or shut down a unit, or both, depending upon its assessment of the severity of the situation, until compliance is achieved. In addition, although we have no reason to anticipate a serious nuclear incident at Palo Verde, if an incident did occur, it could materially and adversely affect our results of operations or financial condition. A major incident at a nuclear facility anywhere in the world could cause the NRC to limit or prohibit the operation or licensing of any domestic nuclear unit.
     The operation of Palo Verde requires licenses that need to be periodically renewed and/or extended. We do not anticipate any problems renewing these licenses. However, as a result of potential terrorist threats and increased public scrutiny of utilities, the licensing process could result in increased licensing or compliance costs that are difficult or impossible to predict.
      The uncertain outcome regarding the creation of regional transmission organizations, or RTOs, and implementation of the FERC’s standard market design may materially impact our operations, cash flows or financial position.
     In a December 1999 order, the FERC established characteristics and functions that must be met by utilities in forming and operating RTOs. The characteristics for an acceptable RTO include independence from market participants, operational control over a region large enough to support efficient and nondiscriminatory markets and exclusive authority to maintain short-term reliability. Additionally, in a pending notice of proposed rulemaking, the

 

FERC is considering implementing a standard market design for wholesale markets. On October 16, 2001, we and other owners of electric transmission lines in the southwestern U.S. filed with the FERC a request for a declaratory order confirming that our proposal to form WestConnect RTO, LLC would satisfy the FERC’s requirements for the formation of an RTO. On October 10, 2002, the FERC issued an order finding that the WestConnect proposal, if modified to address specified issues, could meet the FERC’s RTO requirements and provide the basic framework for a standard market design for the southwestern U.S. Since that time, we have been evaluating a phased approach to RTO implementation in the desert Southwest. We are currently participating with other entities in the southwestern U.S. in a cost/benefit analysis of implementing the WestConnect RTO, the results of which are expected to be completed in 2005.
     If we ultimately join an RTO, we could incur increased transmission-related costs and receive reduced transmission service revenues; we may be required to expand our transmission system according to decisions made by the RTO rather than our internal planning process; and we may experience other impacts on our operations, cash flows or financial position that will not be quantifiable until the final tariffs and other material terms of the RTO are known.
      Recent events in the energy markets that are beyond our control may have negative impacts on our business.
     As a result of the energy crisis in California during the summer of 2001, the recent volatility of natural gas prices in North America, the filing of bankruptcy by the Enron Corporation, and investigations by governmental authorities into energy trading activities, companies generally in the regulated and unregulated utility businesses have been under an increased amount of public and regulatory scrutiny. The capital markets and rating agencies also have increased their level of scrutiny. We believe that we are in material compliance with all applicable laws, but it is difficult or impossible to predict or control what effect these or related issues may have on our business or our access to the capital markets.
Our results of operations can be adversely affected by milder weather.
     Weather conditions directly influence the demand for electricity and affect the price of energy commodities. Electric power demand is generally a seasonal business. In Arizona, demand for power peaks during the hot summer months, with market prices also peaking at that time. As a result, our overall operating results fluctuate substantially on a seasonal basis. In addition, we have historically sold less power, and consequently earned less income, when weather conditions are milder. As a result, unusually mild weather could diminish our results of operations and harm our financial condition.
      If we are not able to access capital at competitive rates, our ability to implement our financial strategy will be adversely affected.
     We rely on access to short-term money markets, longer-term capital markets and the bank markets as a significant source of liquidity and for capital requirements not satisfied by the cash flow from our operations. We believe that we will maintain sufficient access to these financial markets based upon current credit ratings. However, certain market disruptions or a downgrade of our credit ratings may increase our cost of borrowing or adversely affect our ability to access one or more financial markets. Such disruptions could include:

 	•  	an economic downturn;	
 	
 	•  	capital market conditions generally;	
 	
 	•  	the bankruptcy of an unrelated energy company;	
 	
 	•  	increased market prices for electricity and gas;	
 	
 	•  	terrorist attacks or threatened attacks on our facilities or those of unrelated energy companies; or	
 	
 	•  	the overall health of the utility industry.	
     Changes in economic conditions could result in higher interest rates, which would increase our interest expense on our debt and reduce funds available to us for our current plans. Additionally, an increase in our leverage could adversely affect us by:

 

 	•  	increasing the cost of future debt financing;	
 	
 	•  	increasing our vulnerability to adverse economic and industry conditions;	
 	
 	•  	requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce funds available to us for operations, future business opportunities or other purposes; and	
 	
 	•  	placing us at a competitive disadvantage compared to our competitors that have less debt.	
      A significant reduction in our credit ratings could materially and adversely affect our business, financial condition and results of operations.
     We cannot be sure that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances in the future so warrant. Any downgrade could increase our borrowing costs, which would diminish our financial results. We would likely be required to pay a higher interest rate in future financings, and our potential pool of investors and funding sources could decrease. In addition, borrowing costs under certain of our existing credit facilities depend on our credit ratings. A downgrade could also require us to provide additional support in the form of letters of credit or cash or other collateral to various counterparties. If our short-term ratings were to be lowered, it could limit our access to the commercial paper market. We note that the ratings from rating agencies are not recommendations to buy, sell or hold our securities and that each rating should be evaluated independently of any other rating.
      The use of derivative contracts in the normal course of our business and changing interest rates and market conditions could result in financial losses that negatively impact our results of operations.
     Our operations include managing market risks related to commodity prices and, subject to specified risk parameters, engaging in marketing and trading activities intended to profit from market price movements. We are exposed to the impact of market fluctuations in the price and transportation costs of electricity, natural gas, coal, and emissions allowances and credits. We have established procedures to manage risks associated with these market fluctuations by utilizing various commodity derivatives, including exchange-traded futures and options and over-the-counter forwards, options, and swaps. As part of our overall risk management program, we enter into derivative transactions to hedge purchases and sales of electricity, fuels, and emissions allowances and credits. The changes in market value of such contracts have a high correlation to price changes in the hedged commodity.
     We are exposed to losses in the event of nonperformance or nonpayment by counterparties. We use a risk management process to assess and monitor the financial exposure of all counterparties. Despite the fact that the majority of trading counterparties are rated as investment grade by the rating agencies, there is still a possibility that one or more of these companies could default, resulting in a material adverse impact on our earnings for a given period.
     Changing interest rates will affect interest paid on variable-rate debt and interest earned by our pension plan and nuclear decommissioning trust funds. Our policy is to manage interest rates through the use of a combination of fixed-rate and floating-rate debt. The pension plan is also impacted by the discount rate, which is the interest rate used to discount future pension obligations. Continuation of recent decreases in the discount rate would result in increases in pension costs, cash contributions, and charges to other comprehensive income. The pension plan and nuclear decommissioning trust funds also have risks associated with changing market values of equity investments. A significant portion of the pension costs and all of the nuclear decommissioning costs are recovered in regulated electricity prices.
      Actual results could differ from estimates used to prepare our financial statements.
     In preparing our financial statements in accordance with accounting principles generally accepted in the United States of America, management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could differ from those estimates. We consider the following accounting policies to be our most critical because of the uncertainties, judgments and complexities of the underlying accounting standards and operations involved.

 	•  	Regulatory Accounting - Regulatory accounting allows for the actions of regulators, such as the ACC and the FERC, to be reflected in our financial statements. Their actions may cause us to capitalize costs that would otherwise be included as an expense in the current period by unregulated companies. If future recovery of	

 

costs ceases to be probable, the assets would be written off as a charge in current period earnings. We had $135 million of regulatory assets on our balance sheet at December 31, 2004. A component of the 2004 Settlement Agreement, which is subject to ACC approval, would allow us to acquire the Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and rate base the Dedicated Assets at a rate base value of $700 million. This would result in a mandatory rate base disallowance of approximately $150 million. As a result, for financial reporting purposes, we would recognize a one-time, after-tax net plant write-off of approximately $90 million in the period when the plant transfer to us is completed and would reduce annual depreciation expense by approximately $5 million.

 	•  	Pensions and Other Postretirement Benefit Accounting - Changes in our actuarial assumptions used in calculating our pension and other postretirement benefit liability and expense can have a significant impact on our earnings and financial position. The most relevant actuarial assumptions are the discount rate used to measure our liability and net periodic cost, the expected long-term rate of return on plan assets used to estimate earnings on invested funds over the long-term, and the assumed healthcare cost trend rates. We review these assumptions on an annual basis and adjust them as necessary.	
 	
 	•  	Derivative Accounting - Derivative accounting requires evaluation of rules that are complex and subject to varying interpretations. Our evaluation of these rules, as they apply to our contracts, will determine whether we use accrual accounting (for contracts designated as normal) or fair value (mark-to-market) accounting. Mark-to-market accounting requires that changes in the fair value are recognized periodically in income unless certain hedge criteria are met. For fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item associated with the hedged risk are recognized in earnings. For cash flow hedges, changes in the fair value of the derivative are recognized in common stock equity (as a component of other comprehensive income (loss)).