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UNITED STATES
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, 2005
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
PINNACLE WEST CAPITAL CORPORATION            Yes þ            No o
ARIZONA PUBLIC SERVICE COMPANY                      Yes o            No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
PINNACLE WEST CAPITAL CORPORATION            Yes o            No þ
ARIZONA PUBLIC SERVICE COMPANY                      Yes þ            No o
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
PINNACLE WEST CAPITAL CORPORATION            Yes þ            No o
ARIZONA PUBLIC SERVICE COMPANY                      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 the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
PINNACLE WEST CAPITAL CORPORATION
     Large accelerated filer þ            Accelerated filer o           Non-accelerated filer o
ARIZONA PUBLIC SERVICE COMPANY
     Large accelerated filer o            Accelerated filer o            Non-accelerated filer þ
     Indicate by check mark whether each registrant is a shell company (as defined in Exchange Act Rule 12b-2). 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 $4,359,721,018. as of June 30, 2005
ARIZONA PUBLIC SERVICE COMPANY        $0 as of June 30, 2005
     The number of shares outstanding of each registrant’s common stock as of March 7, 2006
 	 	 	
PINNACLE WEST CAPITAL CORPORATION	 	99,166,990 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 17, 2006 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 and, where required, its subsidiaries. Except as stated in the preceding sentence, 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	 	 	 	 	3	 	
 	 	Item 1.	 	Business	 	 	3	 	
 	 	Item 1A.	 	Risk Factors	 	 	16	 	
 	 	Item 1B.	 	Unresolved Staff Comments	 	 	22	 	
 	 	Item 2.	 	Properties	 	 	23	 	
 	 	Item 3.	 	Legal Proceedings	 	 	28	 	
 	 	Item 4.	 	Submission of Matters to a Vote of Security Holders	 	 	28	 	
 	 	Supplemental Item	 	 	 	 	
 	 	 	 	Executive Officers of Pinnacle West	 	 	29	 	
 	 	 	 	 	 	 	 	 	
PART II	 	 	 	 	31	 	
 	 	Item 5.	 	Market for Registrants’ Common Equity, Pinnacle West Related Stockholder Matters and Issuer Purchases of Equity Securities	 	 	31	 	
 	 	Item 6.	 	Selected Financial Data	 	 	32	 	
 	 	Item 7.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	34	 	
 	 	Item 7A.	 	Quantitative and Qualitative Disclosures about Market Risk	 	 	65	 	
 	 	Item 8.	 	Financial Statements and Supplementary Data	 	 	66	 	
 	 	Item 9.	 	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	 	 	145	 	
 	 	Item 9A.	 	Controls and Procedures	 	 	145	 	
 	 	Item 9B.	 	Other Information	 	 	146	 	
 	 	 	 	 	 	 	 	 	
PART III	 	 	 	 	146	 	
 	 	Item 10.	 	Directors and Executive Officers of Pinnacle West	 	 	146	 	
 	 	Item 11.	 	Executive Compensation	 	 	146	 	
 	 	Item 12.	 	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	 	 	146	 	
 	 	Item 13.	 	Certain Relationships and Related Transactions	 	 	149	 	
 	 	Item 14.	 	Principal Accountant Fees and Services	 	 	149	 	
 	 	 	 	 	 	 	 	 	
PART IV	 	 	 	 	150	 	
 	 	Item 15.	 	Exhibits and Financial Statement Schedules	 	 	150	 	
SIGNATURES	 	 	 	 	190 	 	
  Exhibit 10.48b	
  Exhibit 10.64b	
  Exhibit 10.77bd	
  Exhibit 10.91bd	
  Exhibit 10.92bd	
  Exhibit 10.95	
  Exhibit 10.96	
  Exhibit 10.97	
  Exhibit 10.107	
  Exhibit 10.108	
  Exhibit 12.1	
  Exhibit 12.2	
  Exhibit 12.3	
  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	
  EX-99.29	
  EX-99.30	
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GLOSSARY
ACC – Arizona Corporation Commission
ADEQ – Arizona Department of Environmental Quality
AFUDC – Allowance for Funds Used During Construction
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
Cholla – Cholla Power Plant
Clean Air Act – Clean Air Act, as amended
Company – Pinnacle West Capital Corporation
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 Number
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
kW – kilowatt, one thousand watts
kWh – kilowatt-hour, one thousand watts per hour
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

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Native Load – retail and wholesale sales supplied under traditional cost-based rate regulation
NPC – Nevada Power Company
NRC – United States Nuclear Regulatory Commission
OCI – other comprehensive income
Off-System Sales – sales of electricity from generation owned by the Company that is over and above the amount required to serve APS’ retail customers and traditional wholesale contracts
Palo Verde – Palo Verde Nuclear Generating Station, also known as ANPP
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 adjustor
PWEC Dedicated Assets – the following power plants, each of which was transferred by Pinnacle West Energy to APS on July 29, 2005: 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
Salt River Project – Salt River Project Agricultural Improvement and Power District
SEC – United States Securities and Exchange Commission
SFAS – Statement of Financial Accounting Standards
Silverhawk – Silverhawk Power Station
Standard & Poor’s – Standard & Poor’s Corporation
SunCor – SunCor Development Company, a subsidiary of the Company
Sundance Plant – 420 megawatt generating facility located approximately 55 miles southeast of Phoenix, Arizona
Superfund – Comprehensive Environmental Response, Compensation and Liability Act
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 was settled, as approved by the ACC in 2005
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.
          Pinnacle West’s other significant subsidiaries are SunCor, which is engaged in real estate development and investment activities, and APS Energy Services, which provides competitive energy services and products in the western United States. Pinnacle West Energy, which owned and operated unregulated generating plants, transferred the PWEC Dedicated Assets to APS on July 29, 2005 and sold its 75% ownership interest in Silverhawk to NPC on January 10, 2006. As a result, Pinnacle West Energy no longer owns any generating plants and has ceased operations. Each of these subsidiaries, and El Dorado Investment Company, another subsidiary, are discussed in greater detail below. See “Business of SunCor Development Company,” “Business of APS Energy Services
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Company, Inc.,” “Business of Pinnacle West Energy Corporation,” and “Business of El Dorado Investment Company,” in this Item 1.
Business Segments
          Pinnacle West has three principal business segments (determined by products, services and the regulatory environment):

 	•	 	the regulated electricity segment (75% of operating revenues in 2005), 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 real estate segment (11% of operating revenues in 2005), which consists of SunCor’s real estate development and investment activities; and	
 		
 	•	 	the marketing and trading segment (12% of operating revenues in 2005), which consists of competitive energy business activities, including wholesale marketing and trading and APS Energy Services’ commodity-related energy services.	
          See Note 17 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8 for financial information about the business segments.
APS Rate Proceedings
          The key issue affecting Pinnacle West’s and APS’ financial outlook is the satisfactory resolution of APS’ retail rate proceedings pending before the ACC. As discussed in greater detail in Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8, APS has pending before the ACC a general retail rate case, an application for an emergency interim rate increase, and an application for two separate surcharges under the PSA.
Employees
          At December 31, 2005, Pinnacle West employed approximately 7,300 people, including the employees of its subsidiaries. Of these employees, approximately 6,400 were employees of APS, including employees at jointly-owned generating facilities (approximately 3,000 employees) for which APS serves as the generating facility manager. Approximately 900 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, excluding exhibits, 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 Item 1A of this report, these factors include, but are not limited to:

 	•	 	state and federal regulatory and legislative decisions and actions, including the outcome and timing of APS’ retail rate proceedings pending before the ACC;	
 		
 	•	 	the timely recovery of PSA deferrals;	
 		
 	•	 	the ongoing restructuring of the electric industry, including the introduction of retail electric competition in Arizona and decisions impacting wholesale competition;	
 		
 	•	 	the outcome of regulatory, legislative and judicial proceedings, both current and future, relating to the restructuring;	
 		
 	•	 	market prices for electricity and natural gas;	
 		
 	•	 	power plant performance and outages;	
 		
 	•	 	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 fuel and	
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 	 	 	purchased power 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;	
 		
 	•	 	current credit ratings remaining 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.
          In 1999, the ACC approved rules for the introduction of retail electric competition in Arizona. As a result, 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. In 2000, an Arizona Superior Court found that the rules were unconstitutional, primarily on procedural grounds, and invalidated all ACC orders authorizing competitive electric services providers to operate in Arizona. In 2004, the Arizona Court of Appeals invalidated some, but not all of the rules. In 2005, the Arizona Supreme Court declined to review the Court of Appeals decision. To date, the ACC has taken no action on either the rules or the orders authorizing competitive electric service providers in response to the final Court of Appeals decision. As a result, at present only limited electric retail competition exists in Arizona and only with certain entities not regulated by the ACC. APS cannot predict when, and the extent to which, additional competitors will re-enter APS’ service territory.
          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
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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 2005, approximately 5.3% of APS’ electric operating revenues resulted from such sales and services. APS’ marketing and trading division focuses primarily on managing APS’ fuel and purchased power risks in connection with its costs of serving retail customer energy requirements. The division also sells, in the wholesale market, APS’ 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 principally in electricity and fuels.
           Regional Transmission Organizations
          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 non-discriminatory markets and exclusive authority to maintain short-term reliability. 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 United States. Since that time, APS and other supporters of the WestConnect efforts have been evaluating a phased approach to RTO implementation of regional structures in the desert Southwest.
BUSINESS OF ARIZONA PUBLIC SERVICE COMPANY
General
          APS was incorporated in 1920 under the laws of the state of Arizona and currently has approximately 1,033,500 customers. APS does not distribute any products. During 2005, no single purchaser or user of energy (other than Pinnacle West) accounted for more than 7.5% of electric revenues. See “Overview – General” and “Regulation and Competition” above for additional background information about APS’ business.
          At December 31, 2005, APS employed approximately 6,400 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).
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Purchased Power and Generating Fuel
          See “Properties – Capacity” in Item 2 for information about APS’ power plants by fuel types.
           2005 Energy Mix
          APS’ sources of energy during 2005 were: purchased power – 51.8%; coal – 26.3%; nuclear – 15.1%; and gas – 6.8%. 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 coal suppliers that mine all of the coal under a long-term lease of coal reserves with the Navajo Nation, the federal government and private landholders. 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. APS believes that the current fuel contracts and competitive fuel supply options ensure the continued operation of Cholla for its useful life. In addition, APS has a long-term coal transportation contract.
           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 December 31, 2005 closure of the Mohave Generating Station has not had a significant impact on the cost structure for the Black Mesa – Kayenta Mine complex. APS does not have an ownership interest in the Mohave Generating Station, but understands the plant could be restarted. However, if the Mohave Generating Station is permanently closed, there is a potential for increased costs to the Navajo Generating Station, which is served by the Kayenta Mine. APS does not currently expect this matter to have a material adverse effect on its financial position, results of operations, cash flows or liquidity.
          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.
          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
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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’ natural gas supply.
           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, 80% of enrichment services through 2013, and all of Palo Verde’s 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
          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 2005, APS received 552,014 MWh of energy under the contract and paid about $66.6 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 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
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of capacity and a related amount of energy available to it under the agreement for its respective seasons. In 2005, APS received 571,492 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 2005, PacifiCorp received offers of 1,090,700 MWh and purchased 372,473 MWh.
          APS continually assesses its need for additional capacity resources to assure system reliability. Under the terms of the 2004 Settlement Agreement, APS committed to seek proposals from the competitive wholesale market for filling its future resource needs. The current reliability RFP identifies the amount of capacity and energy needed to reliably meet expected customer demands and sought proposals for at least 1,000 MW of new generating capacity for 2007 and beyond. APS has entered into contracts for more than 650 MW of capacity and expects to finalize the remaining contract by the end of the first quarter of 2006.
          APS also has a renewable RFP seeking at least 100 MW of renewable capacity with a capability of producing at least 250,000 MWh annually. In accordance with the terms of the 2004 Settlement Agreement, power must be deliverable to the APS transmission system and its pricing must not exceed 125% of conventional resource alternatives. During 2005, APS conducted a competitive procurement process for renewable energy resources. The process resulted in the acquisition of approximately 145 MW of renewable energy resources via purchased power agreements. At an ACC Open Meeting on November 8, 2005, the ACC approved APS’ acquisition of out-of-state renewable resources. The ACC also ordered APS to work with the ACC staff to evaluate two in-state projects and report back within two months. APS has completed this evaluation process and has filed a report with the ACC. The ACC agreed with APS’ evaluation that the in-state projects were not economical.
Construction Program
          During the years 2003 through 2005, APS incurred approximately $1.7 billion in capital expenditures. APS’ capital expenditures for the years 2006 through 2008 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 $809 million in 2005. APS’ capital expenditures, including expenditures for environmental control facilities, for the years 2006 through 2008, net of contributions in aid of construction, have been estimated as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Estimate	 	
Major facilities:	 	2006	 	 	2007	 	 	2008	 	
Distribution	 	$	322	 	 	$	323	 	 	$	362	 	
Transmission	 	 	120	 	 	 	169	 	 	 	203	 	
Generation	 	 	184	 	 	 	207	 	 	 	279	 	
Other	 	 	23	 	 	 	16	 	 	 	13	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	649	 	 	$	715	 	 	$	857	 	
 	 	 	 	 	 	 	 	 	 	
          The above amounts exclude capitalized interest costs and include capitalized property taxes and approximately $35 million per year for nuclear fuel. APS conducts a continuing review of its construction program.
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          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.
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 state implementation plans by 2008 to make reasonable progress towards achieving natural visibility conditions 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). APS, Phelps Dodge Corporation, and the 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 emissions reductions than BART. On June 15, 2005, EPA issued the Clean Air Visibility Rule, which amends the 1999 regional haze rules by providing guidelines, known as the BART guidelines, for states to use in determining which facilities must install controls and the type of controls the facilities must use. On August 1, 2005, the EPA proposed a rule to, among other things, reconcile the Annex Rule with the CEED decision. We are currently evaluating the impact of this proposed rule. 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 and, as a result, cannot currently estimate the expenditures which may be required.
          By November 2006, the ADEQ will submit a state implementation plan to the EPA to implement the Clean Air Mercury Rule or an alternative mercury program, as authorized by the EPA. The mercury program for Four Corners will be implemented by EPA Region IX or, if it seeks and obtains program approval, by the Navajo Nation. APS is still evaluating the potential impacts of the state implementation plan on Cholla and of the Clean Air Mercury Rule on Cholla and Four Corners and cannot currently estimate the expenditures which may be required.
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           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, cash flows 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 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, cash flows 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 Acts as to Four Corners and the 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.
          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 operating permit regulations. Those proceedings have been stayed, pending the settlement negotiations mentioned above. APS cannot currently predict the outcome of this matter.
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          On May 18, 2005, APS, Salt River Project and the Navajo Nation executed a Voluntary Compliance Agreement (“VCA”) to resolve their disputes regarding the Navajo Nation Air Pollution Prevention and Control Act. The fundamental premise of the VCA is that the Navajo Nation EPA may regulate air issues for Four Corners and the Navajo Generating Station only because the participants have agreed to submit to such regulation for the term of the agreement and under certain circumstances. If the EPA approves the Navajo Nation’s air programs consistent with the VCA, APS would seek dismissal of the pending litigation in the Navajo Nation Supreme Court and the pending litigation in the Navajo Nation District Court to the extent the claims relate to the Clean Air Act. The agreement does not address or resolve any dispute relating to other Navajo Acts. APS cannot currently predict the outcome of this matter.
           West Phoenix Power Plant
          During the period from November 2004 through March 2005, the Maricopa County Air Quality Department (“MCAQD”) issued a series of Notices of Violation (“NOVs”) to APS’ West Phoenix Power Plant that generally allege that the plant failed to comply with applicable permit requirements. APS is currently engaged in discussions with MCAQD concerning the NOVs. We do not expect the resolution of these matters to have a material adverse effect on our financial position, results of operations, or cash flows.
Water Supply
          Assured supplies of water are important for APS’ generating plants. At the present time, APS has adequate water to meet its needs. However, conflicting claims to limited amounts of water in the southwestern United States have resulted in numerous court actions.
          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. 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 an 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. 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. Five of APS’ other 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 has continued in the trial court. In December 2005, APS and other parties filed a petition with the Arizona Supreme Court requesting
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interlocutory review of a September 2005 trial court order regarding procedures for determining whether groundwater pumping is affecting surface water rights. The Court has not yet ruled on the petition. 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. 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 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, neither APS nor Pinnacle West expects that the described litigation will have a material adverse impact on its financial position, results of operations, cash flows 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 2006 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.
Federal Energy Legislation
          On August 8, 2005, the President signed the Energy Policy Act of 2005 into law. The Company does not expect the Act to materially affect its operations.
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 700 employees at December 31, 2005.
          At December 31, 2005, SunCor had total assets of about $487 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. During the past several years, SunCor has focused its business strategy on real estate development and investment activities.
          SunCor projects under development include five master-planned communities and several commercial and residential projects. The commercial and residential projects and two 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.
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          SunCor’s operating revenues were approximately $338 million in 2005, $350 million in 2004 and $362 million in 2003. SunCor’s net income was approximately $56 million in 2005, $45 million in 2004 and $56 million in 2003. 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 PINNACLE WEST ENERGY CORPORATION
          Pinnacle West Energy was incorporated in 1999 under the laws of the State of Arizona and was formerly engaged principally in the operation of unregulated generating plants. Pinnacle West Energy had approximately 30 employees as of December 31, 2005. Pinnacle West Energy’s principal offices are located at 400 North Fifth Street, Phoenix, Arizona 85004 (telephone 602-250-4145).
          Pinnacle West Energy transferred the PWEC Dedicated Assets to APS on July 29, 2005 and sold its 75% interest in Silverhawk to NPC on January 10, 2006. As a result Pinnacle West Energy no longer owns any generating plants and has ceased operations. At December 31, 2005, Pinnacle West Energy had total assets of $217 million, substantially all of which were assets held for sale related to Silverhawk.
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 the western United States. APS Energy Services had approximately 80 employees as of December 31, 2005. APS Energy Services’ principal offices are located at 400 East Van Buren Street, Phoenix, Arizona 85004 (telephone 602-250-5000).
          APS Energy Services had a net loss of $6 million in 2005, and net income of $3 million in 2004 and $16 million in 2003. At December 31, 2005, APS Energy Services had total assets of $88 million.
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 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
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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 $4 million in 2005, $40 million in 2004 and $7 million in 2003. Income taxes related to El Dorado are recorded by Pinnacle West. At December 31, 2005, El Dorado had total assets of $38 million.
ITEM 1A. RISK FACTORS
          In addition to the factors affecting specific business operations identified in connection with the description of these operations contained elsewhere in this report, set forth below are risks and uncertainties that could affect our financial results.
           We are subject to comprehensive government regulation by several federal, state and local regulatory agencies that significantly affect our business and our results of operations.
          APS is subject to comprehensive regulation by several federal, state and local regulatory agencies that significantly influence its business and results of operations. The ACC regulates APS’ retail electric rates and APS’ 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 us, APS and our respective affiliates. Our financial condition and results of operations are dependent upon the satisfactory resolution of APS’ retail rate proceedings pending before the ACC. See Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.
          APS is required to have numerous permits, approvals and certificates from the agencies that regulate APS’ business. The FERC, the NRC, the EPA, and the ACC regulate many aspects of our utility operations, including siting and construction of facilities, customer service and, as noted in the preceding paragraph, 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 cannot predict the outcome of APS’ retail rate proceedings pending before the ACC.
          As noted above, our financial condition and results of operations are dependent upon the satisfactory resolution of APS’ retail rate proceedings pending before the ACC. These proceedings consist of a general retail rate case, an application for an emergency interim rate increase, and an application for two separate surcharges under the PSA. See Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8. We cannot predict the timing or the outcome of these proceedings or the resulting levels of regulated revenues.
           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
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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 financial position, results of operations or cash flows.
           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, 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.
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           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.
          In 1999, the ACC approved rules for the introduction of retail electric competition in Arizona. 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. Although some very limited retail competition existed in the service area of APS 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.
           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.
          The debt agreements of some of our subsidiaries may restrict their ability to pay dividends, make distributions or otherwise transfer funds to us. An ACC financing order requires APS to indefinitely 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, 2005, APS’ common equity ratio, as defined, was approximately 54%.
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           Our ability to meet our debt service obligations could be adversely affected because our debt securities are 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 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;	
 		
 	•	 	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.	
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           A further 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. 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 on variable-rate securities in 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. Declining interest rates impact the discount rate, and may 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 fixed income and 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
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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. A major component of our regulatory assets is the retail fuel and purchased power costs deferred under the PSA. APS defers for future rate recovery 90% of the difference between actual retail fuel and purchased power costs and the amount of such costs currently included in base rates. We had $324 million, including $173 million related to the PSA, of regulatory assets on the Consolidated Balance Sheets at December 31, 2005. Included in the $173 million is approximately $45 million related to the 2005 unplanned Palo Verde outages, which currently are the subject of inquiry by the ACC. Since December 25, 2005, Palo Verde Unit 1 has been operating at reduced power levels due to a non-safety related acoustic impact in one of the unit’s shutdown cooling lines. Unit 1 is currently operating at approximately 25% power. APS estimates that these reduced power levels and a planned Unit 1 outage to resolve the Unit 1 issue will result in additional PSA deferrals of approximately $85 million pretax in 2006. See Notes 1 and 3 for more information about regulatory assets and liabilities, APS’ pending retail rate proceedings, and the PSA.	
 		
 	•	 	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, the effective portion of changes in the fair value of the derivative are recognized in common stock	
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 	 	 	equity (as a component of other comprehensive income (loss)) and are recognized in earnings when the related transaction occurs.	
     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 sale 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.
           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, 2005, there were no material restrictions on our ability to pay dividends under any such agreement.
ITEM 1B. UNRESOLVED STAFF COMMENTS
          Neither Pinnacle West nor APS has received written comments regarding its periodic or current reports from the SEC staff that were issued 180 days or more preceding the end of its 2005 fiscal year and that remain unresolved .
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ITEM 2. PROPERTIES
Capacity
     APS’ present generating facilities have 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: 1	 	 	 	 	
Two steam units at Ocotillo and two steam units at Saguaro	 	 	430,000	 	
Twenty-two combustion turbine units	 	 	993,000	 	
Seven combined cycle units	 	 	1,965,000	 	

Subtotal	 	 	3,388,000	 	

Nuclear:	 	 	 	 	
29.1% owned or leased Units 1, 2, and 3 at Palo Verde	 	 	1,107,000	 	

Solar	 	 	5,715	 	

Total	 	 	6,212,715	 	

			
1	 	APS purchased a ten-unit (42,000 kW each) combustion turbine site (Sundance) on May 15, 2005.	
Reserve Margin
     APS’ 2005 peak one-hour demand on its electric system was recorded on July 18, 2005 at 6,999,600 kW, compared with the 2004 peak of 6,402,100 kW recorded on August 11, 2004. Taking into account additional capacity then available to APS under long-term purchase power contracts as well as APS’ generating capacity, APS’ capability of meeting system demand on July 18, 2005, amounted to 6,383,000 kW, for an installed reserve margin of negative 13.3%. 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 2005 peak amounted to 3,820,000 kW, for a margin of a negative 51.4%. Firm purchases totaling 4,653,000 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 19.3%.
     See “Business of Arizona Public Service Company – Purchased Power and Generating Fuel – Purchased Power” in Item 1 for information about certain of APS’ long-term power agreements.
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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.
     In 2004, the NRC determined that there had been a safety concern with Palo Verde’s procedures related to safety injection system piping. This led to a “yellow” finding under the NRC’s inspection criteria and put Palo Verde in the “degraded safety cornerstone” column of the NRC’s performance matrix, resulting in a supplemental NRC inspection. The NRC completed its supplemental inspection during 2005 and issued its report, closing one finding and indicating it would follow up on another finding at some later time upon notice from APS.
      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.
     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. Decommissioning costs are recoverable through a non-bypassable “system benefits” charge, which allows 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.
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      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. The following table shows APS’ interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2005:
 	 	 	 	 	
 	 	Percent Owned	
Generating facilities (a):	 	 	 	 	
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 (b)	 	 	62.6	%(c)	
Transmission facilities:	 	 	 	 	
ANPP 500KV System	 	 	35.8	%(c)	
Navajo Southern System	 	 	31.4	%(c)	
Palo Verde – Yuma 500KV System	 	 	23.9	%(c)	
Four Corners Switchyards	 	 	27.5	%(c)	
Phoenix – Mead System	 	 	17.1	%(c)	
Palo Verde – Estrella 500KV System	 	 	55.5	%(c)	
Harquahala	 	 	80.0	%(c)	

(a)	 	This table does not reflect Pinnacle West Energy’s 75% interest in Silverhawk at December 31, 2005. Pinnacle West Energy sold this interest to NPC on January 10, 2006.	
 		
(b)	 	PacifiCorp owns Cholla Unit 4 and APS operates the unit for PacifiCorp. The common facilities at Cholla are jointly-owned.	
 		
(c)	 	Weighted-average of interests.	
      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 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.
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Transmission Access
     APS’ transmission facilities consist of approximately 5,613 pole miles of overhead lines and approximately 42 miles of underground lines, 5,457 miles of which are located within the State of Arizona. APS’ distribution facilities consist of approximately 12,262 pole miles of overhead lines and approximately 14,430 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’ power plants.
     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” in Item 7 for a discussion of issues relating to Palo Verde Unit 1.
     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’ construction program.
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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APS Service Territory Map

 
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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 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, 2006	 	Position(s) at March 1, 2006	
William J. Post	 	 	55	 	 	Chairman of the Board and Chief Executive Officer (1)	
 	 	 	 	 	 	 	
Jack E. Davis	 	 	59	 	 	President and Chief Operating Officer, and President and Chief Executive Officer, APS (1)	
 	 	 	 	 	 	 	
Donald E. Brandt	 	 	51	 	 	Executive Vice President and Chief Financial Officer	
 	 	 	 	 	 	 	
Armando B. Flores	 	 	62	 	 	Executive Vice President, Corporate Business Services, APS	
 	 	 	 	 	 	 	
Chris N. Froggatt	 	 	48	 	 	Vice President and Controller, APS	
 	 	 	 	 	 	 	
Barbara M. Gomez	 	 	51	 	 	Vice President and Treasurer	
 	 	 	 	 	 	 	
James M. Levine	 	 	56	 	 	Executive Vice President, Generation, APS and President, Pinnacle West Energy	
 	 	 	 	 	 	 	
Nancy C. Loftin	 	 	52	 	 	Vice President, General Counsel and Secretary	
 	 	 	 	 	 	 	
Donald G. Robinson	 	 	52	 	 	Vice President, Planning, APS	
 	 	 	 	 	 	 	
Steven M. Wheeler	 	 	57	 	 	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 their 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 7, 2006, Pinnacle West’s common stock was held of record by approximately 32,846 shareholders.
QUARTERLY STOCK PRICES AND DIVIDENDS PAID PER SHARE STOCK SYMBOL: PNW
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Dividends	
2005	 	High	 	Low	 	Close	 	Per Share	
1st Quarter	 	$	44.87	 	 	$	40.99	 	 	$	42.51	 	 	$	0.475	 	
2nd Quarter	 	 	45.34	 	 	 	41.29	 	 	 	44.45	 	 	 	0.475	 	
3rd Quarter	 	 	46.68	 	 	 	43.13	 	 	 	44.08	 	 	 	0.475	 	
4th Quarter	 	 	44.97	 	 	 	39.81	 	 	 	41.35	 	 	 	0.500	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	Dividends	
2004	 	High	 	Low	 	Close	 	Per 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	 	
     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 2005 and 2004.
Common Stock Dividends
(Dollars in Thousands)
 	 	 	 	 	 	 	 	 	
Quarter	 	2005	 	2004	
1 st Quarter	 	$	42,500	 	 	$	42,500	 	
2 nd Quarter	 	 	—	 	 	 	42,500	 	
3 rd Quarter	 	 	—	 	 	 	42,500	 	
4 th Quarter	 	 	127,500	 	 	 	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, 2005, APS did not have any outstanding preferred stock.
     Pinnacle West did not purchase any of its common stock during the fourth quarter of 2005.
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ITEM 6. SELECTED FINANCIAL DATA
PINNACLE WEST CAPITAL CORPORATION SELECTED CONSOLIDATED FINANCIAL DATA
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	
 	 	(dollars in thousands, except per share amounts)	 	 	 	 	 	
OPERATING RESULTS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	2,237,145	 	 	$	2,035,247	 	 	$	1,978,075	 	 	$	1,890,391	 	 	$	1,984,305	 	
Marketing and trading segment (a)	 	 	351,558	 	 	 	400,628	 	 	 	391,196	 	 	 	286,879	 	 	 	469,784	 	
Real estate segment (a)	 	 	338,031	 	 	 	350,315	 	 	 	361,604	 	 	 	201,081	 	 	 	168,908	 	
Other revenues	 	 	61,221	 	 	 	42,816	 	 	 	27,929	 	 	 	26,899	 	 	 	11,771	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total operating revenues	 	$	2,987,955	 	 	$	2,829,006	 	 	$	2,758,804	 	 	$	2,405,250	 	 	$	2,634,768	 	
Income from continuing operations (b)	 	 	223,163	 	 	 	246,590	 	 	 	225,384	 	 	 	236,563	 	 	 	327,367	 	
Discontinued operations – net of income taxes (c)	 	 	(46,896	)	 	 	(3,395	)	 	 	15,195	 	 	 	(21,410	)	 	 	—	 	
Cumulative effect of change in accounting – net of income taxes (d) (e)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(65,745	)	 	 	(15,201	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	176,267	 	 	$	243,195	 	 	$	240,579	 	 	$	149,408	 	 	$	312,166	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
COMMON STOCK DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Book value per share – year-end	 	$	34.58	 	 	$	32.14	 	 	$	30.97	 	 	$	29.40	 	 	$	29.46	 	
Earnings (loss) per weighted average common share outstanding:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Continuing operations – basic	 	$	2.31	 	 	$	2.70	 	 	$	2.47	 	 	$	2.79	 	 	$	3.86	 	
Discontinued operations (c)	 	 	(0.48	)	 	 	(0.04	)	 	 	0.17	 	 	 	(0.26	)	 	 	—	 	
Cumulative effect of change in accounting (d) (e)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(0.77	)	 	 	(0.18	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income – basic	 	$	1.83	 	 	$	2.66	 	 	$	2.64	 	 	$	1.76	 	 	$	3.68	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Continuing operations – diluted	 	$	2.31	 	 	$	2.69	 	 	$	2.47	 	 	$	2.78	 	 	$	3.85	 	
Net income – diluted	 	$	1.82	 	 	$	2.66	 	 	$	2.63	 	 	$	1.76	 	 	$	3.68	 	
Dividends declared per share	 	$	1.925	 	 	$	1.825	 	 	$	1.725	 	 	$	1.625	 	 	$	1.525	 	
Indicated annual dividend rate per share – year-end	 	$	2.00	 	 	$	1.90	 	 	$	1.80	 	 	$	1.70	 	 	$	1.60	 	
Weighted-average common shares outstanding – basic	 	 	96,483,781	 	 	 	91,396,904	 	 	 	91,264,696	 	 	 	84,902,946	 	 	 	84,717,649	 	
Weighted-average common shares outstanding – diluted	 	 	96,589,949	 	 	 	91,532,473	 	 	 	91,405,134	 	 	 	84,963,921	 	 	 	84,930,140	 	
BALANCE SHEET DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	11,322,645	 	 	$	9,896,747	 	 	$	9,519,042	 	 	$	9,139,157	 	 	$	8,529,124	 	

Liabilities and equity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Long-term debt less current maturities	 	$	2,608,455	 	 	$	2,584,985	 	 	$	2,616,585	 	 	$	2,743,741	 	 	$	2,673,078	 	
Other liabilities	 	 	5,289,226	 	 	 	4,361,566	 	 	 	4,072,678	 	 	 	3,709,263	 	 	 	3,356,723	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	7,897,681	 	 	 	6,946,551	 	 	 	6,689,263	 	 	 	6,453,004	 	 	 	6,029,801	 	
Common stock equity	 	 	3,424,964	 	 	 	2,950,196	 	 	 	2,829,779	 	 	 	2,686,153	 	 	 	2,499,323	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and equity	 	$	11,322,645	 	 	$	9,896,747	 	 	$	9,519,042	 	 	$	9,139,157	 	 	$	8,529,124	 	

			
(a)	 	Includes reclassifications of revenue in 2004 and 2003 related to items accounted for as discontinued operations of SunCor and Silverhawk. See Note 22 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.	
 		
(b)	 	Includes regulatory disallowance of $84 million after tax in 2005. See Note 3 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.	
 		
(c)	 	Amounts related to Silverhawk, SunCor and NAC discontinued operations. Prior year amounts have been reclassified to discontinued operations to conform to current year presentation. See Note 22 of Notes to Pinnacle West’s Consolidated Financial Statements in Item 8.	
 		
(d)	 	Represents change in accounting standards related to energy trading activities in 2002.	
 		
(e)	 	Represents change in accounting standards related to derivatives in 2001.	
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SELECTED FINANCIAL DATA
ARIZONA PUBLIC SERVICE COMPANY
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	
 	 	(dollars in thousands)	 	
OPERATING RESULTS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electric operating revenues:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity	 	$	2,244,951	 	 	$	2,051,602	 	 	$	1,999,390	 	 	$	1,902,112	 	 	$	1,984,305	 	
Marketing and trading	 	 	25,842	 	 	 	145,519	 	 	 	105,541	 	 	 	34,054	 	 	 	367,793	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total electric operating revenues	 	 	2,270,793	 	 	 	2,197,121	 	 	 	2,104,931	 	 	 	1,936,166	 	 	 	2,352,098	 	
Fuel and purchased power costs:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity	 	 	656,654	 	 	 	612,300	 	 	 	606,251	 	 	 	438,141	 	 	 	649,405	 	
Marketing and trading	 	 	32,328	 	 	 	150,954	 	 	 	97,180	 	 	 	32,662	 	 	 	132,544	 	
Operating expenses	 	 	1,200,198	 	 	 	1,104,886	 	 	 	1,103,342	 	 	 	1,136,363	 	 	 	1,171,171	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income	 	 	381,613	 	 	 	328,981	 	 	 	298,158	 	 	 	329,000	 	 	 	398,978	 	
Other income (deductions)	 	 	(69,171	)	 	 	15,328	 	 	 	26,347	 	 	 	(8,041	)	 	 	(79	)	
Interest deductions – net	 	 	141,963	 	 	 	144,682	 	 	 	143,568	 	 	 	121,616	 	 	 	118,211	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before cumulative effect adjustment	 	 	170,479	 	 	 	199,627	 	 	 	180,937	 	 	 	199,343	 	 	 	280,688	 	
Cumulative effect of change in accounting – net of income taxes (a)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(15,201	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	170,479	 	 	$	199,627	 	 	$	180,937	 	 	$	199,343	 	 	$	265,487	 	

BALANCE SHEET DATA	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	9,707,441	 	 	$	8,098,552	 	 	$	7,722,533	 	 	$	7,122,238	 	 	$	6,815,458	 	

Capital structure:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common stock equity	 	$	2,985,225	 	 	$	2,232,402	 	 	$	2,203,630	 	 	$	2,159,312	 	 	$	2,150,690	 	
Long-term debt less current maturities	 	 	2,479,703	 	 	 	2,267,094	 	 	 	2,135,606	 	 	 	2,217,340	 	 	 	1,949,074	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total capitalization	 	 	5,464,928	 	 	 	4,499,496	 	 	 	4,339,236	 	 	 	4,376,652	 	 	 	4,099,764	 	
Commercial paper	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	171,162	 	
Current maturities of long-term debt	 	 	85,620	 	 	 	451,247	 	 	 	487,067	 	 	 	3,503	 	 	 	125,451	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	5,550,548	 	 	$	4,950,743	 	 	$	4,826,303	 	 	$	4,380,155	 	 	$	4,396,377	 	

			
(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 retail and 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. APS has historically accounted for a substantial part of our revenues and earnings, and is expected to continue to do so. Customer growth in APS’ service territory is about three times the national average and remains a fundamental driver of our revenues and earnings.
     The ACC regulates APS’ retail electric rates. The key issue affecting Pinnacle West’s and APS’ financial outlook is the satisfactory resolution of APS’ retail rate proceedings pending before the ACC. As discussed in greater detail in Note 3, APS has pending before the ACC:

 	•	 	a general retail rate case pursuant to which APS is requesting a 21.3%, or $453.9 million, increase in its annual retail electricity revenues effective no later than December 31, 2006;	
 		
 	•	 	an application for an emergency interim rate increase of $299 million, or approximately 14%, to be effective April 1, 2006 (the increase would accelerate recovery of the fuel and purchased power component of APS’ general rate case and is not an additional increase and would be subject to refund); and	
 		
 	•	 	an application for a temporary rate increase of approximately 2.6%, through two separate PSA surcharges, to recover $59.9 million in retail fuel and purchased power costs deferred by APS in 2005 under the PSA.	
     APS has been operating Palo Verde Unit 1 at reduced power levels since December 25, 2005 due to a non-safety related acoustic impact in one of the unit’s shutdown cooling lines. Unit 1 is currently operating at approximately 25% power. APS has concluded after comprehensive analysis that the preferred solution will require Unit 1 to undergo an outage of approximately five weeks in order for APS to effect the necessary modifications to the Unit. APS anticipates that Unit 1 will begin this outage in the June timeframe. In addition, an outage for preparatory work of approximately one week, beginning March 18, 2006, will take place prior to this outage. This preferred solution was initially planned for installation in the spring of 2007. APS estimates that, through February 28, 2006, Unit 1’s reduced power level has resulted in incremental replacement power costs of approximately $20 million after income taxes, approximately $18 million of which has been incurred since January 1, 2006. Based on current forward market energy prices, APS estimates that (a) operating Unit 1 at reduced power levels until the assumed outage in the June timeframe will result in additional incremental replacement power costs of approximately $25 million after income taxes and (b) the June Unit 1 outage will result in additional incremental replacement power costs of approximately $15 million after income taxes. APS estimates that these reduced power levels and the June Unit 1 outage will result in additional PSA deferrals of $50 million after tax ($85 million pretax) in 2006. See “Deferred Fuel and Purchased Power Costs” below.
     SunCor, our real estate development subsidiary, has been and is expected to be an important source of earnings and cash flow. Our subsidiary, APS Energy Services, provides competitive commodity-related energy services and energy-related products and services to commercial and
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industrial retail customers in the western United States. El Dorado, our investment subsidiary, owns minority interests in several energy-related investments and Arizona community-based ventures.
     Pinnacle West Energy is our subsidiary that previously owned and operated unregulated generating plants. Pursuant to the ACC’s April 7, 2005 order in APS’ 2003 rate case, on July 29, 2005, Pinnacle West Energy transferred the PWEC Dedicated Assets to APS. See “APS 2003 Rate Case” in Note 3. Pinnacle West Energy sold its 75% interest in Silverhawk to NPC on January 10, 2006. As a result Pinnacle West Energy no longer owns any generating plants and has ceased operations.
     We continue to focus on solid operational performance in our electricity generation and delivery activities. In the delivery area, we focus on superior reliability and customer satisfaction. We plan to expand long-term resources and our transmission and distribution systems to meet the electricity needs of our growing retail customers and sustain reliability.
     See “Pinnacle West Consolidated – Factors Affecting Our Financial Outlook” below for a discussion of several factors that could affect our future financial results.
PINNACLE WEST CONSOLIDATED –
EARNINGS CONTRIBUTION BY BUSINESS SEGMENT
     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 electric service to Native Load customers) and related activities and includes electricity generation, transmission and distribution;	
 		
 	•	 	our real estate segment, which consists of SunCor’s real estate development and investment activities; and	
 		
 	•	 	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.	
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     The following table summarizes net income for 2005, 2004 and 2003 (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	 	2003	 	
Regulated electricity	 	$	167	 	 	$	152	 	 	$	170	 	
Real estate	 	 	35	 	 	 	40	 	 	 	45	 	
Marketing and trading	 	 	16	 	 	 	29	 	 	 	8	 	
Other (a)	 	 	5	 	 	 	26	 	 	 	2	 	
 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	223	 	 	 	247	 	 	 	225	 	
Discontinued operations – net of tax:	 	 	 	 	 	 	 	 	 	 	 	 	
Real estate (b)	 	 	17	 	 	 	4	 	 	 	10	 	
Marketing and trading (c)	 	 	(67	)	 	 	(12	)	 	 	1	 	
Other (d)	 	 	3	 	 	 	4	 	 	 	5	 	
 	 	 	 	 	 	 	 	 	 	
Net income	 	$	176	 	 	$	243	 	 	$	241	 	

			
(a)	 	Includes a $21 million after-tax gain in 2004 related to the sale of a limited partnership interest in the Phoenix Suns.	
 		
(b)	 	Primarily relates to sales of commercial properties.	
 		
(c)	 	See “Sale of Silverhawk” below.	
 		
(d)	 	Relates to the 2004 sale of NAC.	
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 fuel and purchased power costs. “Gross margin” is a “non-GAAP financial measure,” as defined in accordance with Securities and Exchange Commission rules. Exhibit 99.29 reconciles this non-GAAP financial measure to operating income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. 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 year amounts to conform to our current-period presentation.
Sale of Silverhawk
     In June 2005, we entered into an agreement to sell our 75% interest in Silverhawk to NPC. As a result of the sale, we recorded an after-tax loss from discontinued operations of approximately $56 million in the second quarter of 2005. The marketing and trading segment discontinued operations in the chart above include this loss as well as revenues and expenses related to the operations of Silverhawk. The sale was completed on January 10, 2006.
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Deferred Fuel and Purchased Power Costs
     The settlement of APS’ 2003 general retail rate case became effective April 1, 2005. As part of the settlement, the ACC approved a 4.2% annual retail rate increase and the PSA, which provides mechanisms for adjusting rates to reflect variations in fuel and purchased power costs. In accordance with the PSA, APS defers for future rate recovery 90% of the difference between actual fuel and purchased power costs, net of Off-System Sales margins, and the amount for such costs currently included in base rates. The current base rate for fuel and purchased power costs is based on 2003 price levels and spot prices for natural gas and wholesale power have increased over 40% since then. Although APS defers actual fuel and purchased power costs on a current basis, APS’ recovery of the deferrals from its ratepayers is subject to annual PSA adjustments and ACC approval of periodic surcharge applications.
     Actual fuel and purchased power costs are higher than in prior periods primarily due to higher fuel prices and increased plant outage days.
     APS’ pretax PSA deferrals were approximately $173 million at December 31, 2005. Based on recent forward market prices for natural gas and purchased power (which are subject to change), and assuming no interim rate relief, APS estimates that its pretax PSA deferrals in 2006 will be approximately $240 million to $250 million. In January 2006, the ACC approved the first annual adjustment under the PSA mechanism, which is expected to recover approximately $110 million of the 2005 balance of $173 million from retail customers over twelve months beginning February 1, 2006. In this same order, the ACC granted APS the authority to continue to defer fuel costs in excess of the $776.2 million annual fuel cost cap established in the 2005 rate order and to seek recovery of those amounts in a future proceeding. On February 2, 2006, APS filed a request with the ACC to recover the remainder of the retail portion of the 2005 deferred fuel balance of $173 million — approximately $60 million — through two surcharges. The first surcharge is to recover $15 million over a twelve-month period proposed to begin with the date of the ACC’s decision in APS’ pending emergency interim rate case. The second surcharge is to recover approximately $45 million over a twelve-month period proposed to begin no later than the ACC’s completion of its inquiry regarding unplanned 2005 outages at Palo Verde. The $45 million of PSA deferrals represents additional replacement power costs associated with these outages. See Note 3. See “Overview” in this Item 7 for information about Palo Verde Unit 1 operating at reduced power levels and the related economic impact.
2005 Compared with 2004
     Our consolidated net income for 2005 was $176 million compared with $243 million for the prior year. The current-year net income included an after-tax net loss from discontinued operations of $47 million compared with a $4 million after-tax loss in the prior year, which for both years is related primarily to the sale and operations of Silverhawk (see “Sale of Silverhawk” above), partially offset by sales of commercial properties at SunCor. Income from continuing operations decreased $24 million in the period-to-period comparison, reflecting the following changes in earnings by segment:

 	•	 	Regulated Electricity Segment – Income from continuing operations increased approximately $15 million primarily due to deferred fuel and purchased power costs; a retail price increase effective April 1, 2005; higher retail sales volumes due to	
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 	 	 	customer growth; lower depreciation due to lower depreciation rates; lower regulatory asset amortization; and effects of weather on retail sales. These positive factors were partially offset by the regulatory disallowance of plant costs in accordance with the APS retail rate case settlement; higher fuel and purchased power costs primarily due to higher prices and more plant outage days; higher operations and maintenance expense related to generation and customer service; and higher property taxes due to increased plant in service.	
 	•	 	Real Estate Segment – Income from continuing operations decreased approximately $5 million primarily due to decreased parcel sales, partially offset by increased margins on home sales. Income from discontinued real estate operations increased $13 million due to higher commercial property sales.	
 		
 	•	 	Marketing and Trading Segment – Income from continuing operations decreased approximately $13 million primarily due to lower unit margins on competitive retail sales in California; the absence of Off-System Sales that we began reporting in the regulated electricity segment in April 2005; and lower mark-to-market gains on contracts for future delivery.	
 		
 	•	 	Other Segment – Income from continuing operations decreased approximately $21 million primarily due to an after-tax gain related to the sale of a limited partnership interest in the Phoenix Suns recorded in the prior year.	
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Additional details on the major factors that increased (decreased) net income are contained in the following table (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Increase (Decrease)	 	
 	 	Pretax	 	 	After Tax	 	
Regulated electricity segment gross margin:	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power costs (see discussion above)	 	$	171	 	 	$	104	 	
Retail price increase effective April 1, 2005	 	 	65	 	 	 	40	 	
Higher retail sales volumes due to customer growth, excluding weather effects	 	 	58	 	 	 	35	 	
Effects of weather on retail sales	 	 	14	 	 	 	9	 	
Higher fuel and purchased power costs primarily due to higher prices and more plant outage days	 	 	(126	)	 	 	(77	)	
Miscellaneous items, net	 	 	(8	)	 	 	(5	)	
 	 	 	 	 	 	 	
Net increase in regulated electricity segment gross margin	 	 	174	 	 	 	106	 	
 	 	 	 	 	 	 	
Marketing and trading segment gross margin:	 	 	 	 	 	 	 	 	
Lower unit margins on competitive retail sales in California	 	 	(13	)	 	 	(8	)	
Lower realized margins on wholesale sales primarily due to the absence of sales that we began reporting in the regulated segment in April 2005	 	 	(4	)	 	 	(3	)	
Lower mark-to-market gains on contracts for future delivery due to changes in forward prices	 	 	(4	)	 	 	(2	)	
 	 	 	 	 	 	 	
Net decrease in marketing and trading segment gross margin	 	 	(21	)	 	 	(13	)	
 	 	 	 	 	 	 	
Net increase in gross margin for regulated electricity and marketing and trading segments	 	 	153	 	 	 	93	 	
Regulatory disallowance, in accordance with the APS retail rate case settlement	 	 	(139	)	 	 	(84	)	
Lower real estate segment contribution primarily related to decreased parcel sales, partially offset by increased margins on home sales	 	 	(8	)	 	 	(5	)	
Lower other income primarily due to sale of limited partnership interest in Phoenix Suns recorded in the prior year, partially offset by higher interest income	 	 	(30	)	 	 	(18	)	
Operations and maintenance increases primarily due to:	 	 	 	 	 	 	 	 	
Generation costs, including maintenance and overhauls	 	 	(20	)	 	 	(12	)	
Customer service costs, including regulatory demand-side management programs and planned maintenance	 	 	(20	)	 	 	(12	)	
Miscellaneous items, net	 	 	(4	)	 	 	(2	)	
Depreciation and amortization decreases primarily due to:	 	 	 	 	 	 	 	 	
Lower regulatory asset amortization	 	 	22	 	 	 	13	 	
Lower depreciation rates, partially offset by increased depreciable assets	 	 	22	 	 	 	13	 	
Higher property taxes primarily due to increased plant in service	 	 	(11	)	 	 	(7	)	
Miscellaneous items, net	 	 	2	 	 	 	(3	)	
 	 	 	 	 	 	 	
Net decrease in income from continuing operations	 	$	(33	)	 	 	(24	)	
 	 	 	 	 	 	 	
Discontinued operations related to:	 	 	 	 	 	 	 	 	
Sale of Silverhawk (see discussion above)	 	 	 	 	 	 	(56	)	
Sales of real estate assets and other	 	 	 	 	 	 	13	 	
 	 	 	 	 	 	 	
Net decrease in net income	 	 	 	 	 	$	(67	)	
 	 	 	 	 	 	 	
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      Regulated Electricity Segment Revenues
     Regulated electricity segment revenues were $202 million higher for 2005 compared with the prior year primarily as a result of:

 	•	 	an $81 million increase in retail revenues related to customer growth, excluding weather effects;	
 		
 	•	 	a $65 million increase in retail revenues due to a price increase effective April 1, 2005;	
 		
 	•	 	a $40 million increase in Off-System Sales primarily resulting from sales previously reported in the marketing and trading segment that were classified beginning in April 2005 as sales in the regulated electricity segment in accordance with the APS retail rate case settlement;	
 		
 	•	 	an $11 million increase in retail revenues related to weather; and	
 		
 	•	 	a $5 million increase due to miscellaneous factors.	
      Marketing and Trading Segment Revenues
     Marketing and trading segment revenues were $49 million lower for 2005 compared with the prior year primarily as a result of:

 	•	 	a $40 million decrease in Off-System Sales due to the absence of sales previously reported in the marketing and trading segment that were classified beginning in April 2005 as sales in the regulated electricity segment in accordance with the APS retail rate case settlement;	
 		
 	•	 	a $4 million decrease in mark-to-market gains on contracts for future delivery due to changes in forward prices;	
 		
 	•	 	a $3 million decrease in marketing and trading revenues due to lower sales volumes; and	
 		
 	•	 	a $2 million decrease from lower volumes of competitive retail sales in California.	
      Real Estate Revenues
     Real estate revenues were $12 million lower for 2005 compared with the prior year primarily due to decreased parcel sales, partially offset by increased home sales at SunCor.
Other Revenues
     Other revenues were $18 million higher for 2005 compared with the prior year primarily due to increased sales of energy-related products and services by APS Energy Services.
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2004 Compared with 2003
     Our consolidated net income for 2004 was $243 million compared with $241 million for the prior year. 2004 net income included an after-tax net loss from discontinued operations of $4 million primarily related to Silverhawk. The 2003 net income included a $16 million after-tax gain from discontinued operations primarily related to sales of commercial properties at SunCor. Income from continuing operations increased $22 million in the period-to-period comparison, reflecting the following changes in earnings by segment:

 	•	 	Regulated Electricity Segment – Income from continuing operations decreased approximately $18 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.	
 		
 	•	 	Real Estate Segment – Income from continuing operations decreased approximately $5 million due to decreased asset sales, partially offset by increased land sales. Income from discontinued operations decreased $6 million primarily due to the 2003 gain on the sale of SunCor’s water utility company (see Note 22).	
 		
 	•	 	Marketing and Trading Segment – Income from continuing operations increased approximately $21 million primarily due to higher forward and realized prices for wholesale electricity, partially offset by lower margins in California by APS Energy Services. Income from discontinued operations decreased $13 million due to Silverhawk (see Note 22).	
 		
 	•	 	Other Segment – Income from continuing operations increased approximately $24 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 Off-System Sales due to higher sales volumes and higher unit margins	 	 	10	 	 	 	6	 	
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	 	 	34	 	 	 	21	 	
 	 	 	 	 	 	 	
Net increase in gross margin for regulated electricity and marketing and trading segments	 	 	41	 	 	 	25	 	
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	 	 	(44	)	 	 	(26	)	
Interest expense net of capitalized financing costs, decreases (increases):	 	 	 	 	 	 	 	 	
New power plants in service	 	 	(16	)	 	 	(10	)	
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	 	 	(4	)	 	 	(2	)	
Increased delivery and other assets	 	 	(20	)	 	 	(12	)	
Higher property taxes due to increased plant in service	 	 	(10	)	 	 	(6	)	
Lower income tax credits	 	 	—	 	 	 	(17	)	
Miscellaneous items, net	 	 	3	 	 	 	8	 	
 	 	 	 	 	 	 	
Net increase in income from continuing operations	 	$	55	 	 	 	22	 	
 	 	 	 	 	 	 	 	
Discontinued operations (see Note 22)	 	 	 	 	 	 	(20	)	
 	 	 	 	 	 	 	 	
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 2004 compared with the prior year.
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Regulated Electricity Segment Revenues
     Regulated electricity segment revenues were $57 million higher for 2004 compared with the prior year 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 $9 million higher for 2004 compared with the prior year primarily as a result of:

 	•	 	$28 million in higher mark-to-market gains for future-period deliveries primarily as a result of higher forward prices for wholesale electricity;	
 		
 	•	 	a $25 million decrease from lower competitive retail sales volumes in California by APS Energy Services;	
 		
 	•	 	$20 million of higher energy trading revenues on realized sales of electricity primarily due to higher electricity prices; and	
 		
 	•	 	a $14 million decrease in Off-System Sales primarily due to lower wholesale unit margins and lower sales volumes.	
Other Revenues
     Other revenues were $15 million higher for 2004 compared with the prior year primarily due to higher non-commodity revenues at APS Energy Services.
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 2005 and estimated capital expenditures for the next three years:
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CAPITAL EXPENDITURES
(dollars in millions)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Actual	 	 	Estimated	 	
 	 	2005	 	 	2006	 	 	2007	 	 	2008	 	
APS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Distribution	 	$	325	 	 	$	322	 	 	$	323	 	 	$	362	 	
Transmission	 	 	92	 	 	 	120	 	 	 	169	 	 	 	203	 	
Generation (a)	 	 	356	 	 	 	184	 	 	 	207	 	 	 	279	 	
Other (b)	 	 	36	 	 	 	23	 	 	 	16	 	 	 	13	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	809	 	 	 	649	 	 	 	715	 	 	 	857	 	
SunCor (c)	 	 	106	 	 	 	232	 	 	 	142	 	 	 	119	 	
Other	 	 	13	 	 	 	6	 	 	 	2	 	 	 	6	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	928	 	 	$	887	 	 	$	859	 	 	$	982	 	

			
(a)	 	Includes $185 million in 2005 for the acquisition of the Sundance Plant.	
 		
(b)	 	Primarily information systems and facilities projects.	
 		
(c)	 	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.	
     Distribution and transmission capital expenditures are comprised of 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 lines, 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.
     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 $35 million annually for 2006 through 2008.
     Replacement of the steam generators at Palo Verde Unit 1 was completed during the fall 2005 outage at a cost to APS of approximately $70 million. The Palo Verde owners have approved the manufacture of one additional set of steam generators. These generators will be installed in Unit 3 and are scheduled for completion in the fall of 2007 at an approximate cost of $75 million (APS’ share). Approximately $20 million of the Unit 3 steam generator costs have been incurred through 2005 with the remaining $55 million included in future years in the capital expenditure table above. Capital expenditures will be funded with internally generated cash or external financings.
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Contractual Obligations
     The following table summarizes Pinnacle West’s consolidated contractual requirements as of December 31, 2005 (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	2007-	 	 	2009-	 	 	 	 	 	 	 	
 	 	2006	 	 	2008	 	 	2010	 	 	Thereafter	 	 	Total	 	
Long-term debt payments, including interest: (a)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
APS	 	$	219	 	 	$	259	 	 	$	480	 	 	$	3,350	 	 	$	4,308	 	
Pinnacle West	 	 	312	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	312	 	
SunCor	 	 	9	 	 	 	143	 	 	 	—	 	 	 	—	 	 	 	152	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total long-term debt payments, including interest	 	 	540	 	 	 	402	 	 	 	480	 	 	 	3,350	 	 	 	4,772	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Short-term debt payments, including interest (b)	 	 	16	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	16	 	
Capital lease payments	 	 	2	 	 	 	2	 	 	 	2	 	 	 	2	 	 	 	8	 	
Operating lease payments	 	 	74	 	 	 	144	 	 	 	133	 	 	 	303	 	 	 	654	 	
Minimum pension funding requirement (c)	 	 	37	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	37	 	
Purchased power and fuel commitments (d)	 	 	316	 	 	 	419	 	 	 	256	 	 	 	908	 	 	 	1,899	 	
Purchase obligations (e)	 	 	25	 	 	 	9	 	 	 	—	 	 	 	75	 	 	 	109	 	
Nuclear decommissioning funding requirements	 	 	21	 	 	 	42	 	 	 	46	 	 	 	259	 	 	 	368	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total contractual commitments	 	$	1,031	 	 	$	1,018	 	 	$	917	 	 	$	4,897	 	 	$	7,863	 	

			
(a)	 	The long-term debt matures at various dates through 2035 and bears interest principally at fixed rates. Interest on variable-rate long-term debt is determined by using the rates at December 31, 2005 (see Note 6).	
 		
(b)	 	The short-term debt matures within 12 months and is primarily related to short-term loans at SunCor. These loans are made up of multiple notes primarily with variable interest rates based on prime plus 1.75% or LIBOR plus 2.25% and 2.50% at December 31, 2005 (see Note 5).	
 		
(c)	 	Future pension contributions are not determinable for time periods after 2006.	
 		
(d)	 	Our fuel and purchased power 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.	
      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. 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
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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, 2005, APS would have been required to assume approximately $234 million of debt and pay the equity participants approximately $185 million.
      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 agree to indemnification provisions 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 7, 2006 are shown below. 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 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	 	BB+	
Commercial paper	 	P	-2	 	 	 	A-3	 	
Outlook	 	Under Review for	 	Stable	
 	 	Possible Downgrade	 	 	 	 	
 	 	 	 	 	 	 	 	 	
APS	 	 	 	 	 	 	 	 	
Senior unsecured	 	Baa1	 	BBB-	
Secured lease obligation bonds	 	Baa1	 	BBB-	
Commercial paper	 	P	-2	 	 	 	A-3	 	
Outlook	 	Under Review for	 	Stable	
 	 	Possible Downgrade	 	 	 	 	
      Debt Provisions
     Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include a debt to capitalization ratio. Certain of APS’ bank financing arrangements also include 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. For each of
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Pinnacle West and APS, these covenants require that the ratio of consolidated debt to total consolidated capitalization cannot exceed 65%. At December 31, 2005, the ratio was approximately 49% for Pinnacle West and 47% for APS. The provisions regarding interest coverage require a minimum cash coverage of two times the interest requirements for APS. The interest coverage is approximately 4 times under APS’ bank financing agreements as of December 31, 2005. 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 and could cross-default other debt.
     Neither Pinnacle West’s nor APS’ financing agreements contain “rating triggers” that would result in an acceleration of the required interest and principal payments in the event of a rating downgrade. However, in the event of a further rating 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 certain other material 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 certain other material agreements. Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings.
     See Note 6 for further discussions.
Capital Needs and Resources
      Pinnacle West (Parent Company)
     Our primary cash needs are for dividends to our shareholders and principal and interest payments on our long-term debt. On October 19, 2005, our Board of Directors increased the common stock dividend to an indicated annual rate of $2.00 per share from $1.90 per share, effective with the December 1, 2005 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 2003 through 2005, total dividends from APS were $510 million and total cash contributions from SunCor were $243 million. For the year ended December 31, 2005 cash contributions from APS were approximately $170 million and distributions from SunCor were approximately $50 million. An ACC financing order requires APS to maintain a common equity ratio of at least 40% and prohibits APS from paying common stock dividends if the payment would reduce its common equity below that threshold. At December 31, 2005, APS’ common equity ratio, as defined, was approximately 54%.
     At December 31, 2005, Pinnacle West’s outstanding long-term debt, including current maturities, was $299 million. In December 2005, we replaced the existing revolving credit facility with a $300 million revolving credit facility that terminates in December 2010. 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 issuances of letters of credit. At December 31, 2005, we had no commercial paper or short-term borrowings outstanding. We ended 2005 in an invested position.
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     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. The assets in the plan are comprised of common stocks, bonds, common and collective trusts and short-term investments. Future year contribution amounts are dependent on fund performance and fund valuation assumptions. We contributed $53 million in 2005. The contribution to our pension plan in 2006 is estimated to be approximately $50 million. The expected contribution to our other postretirement benefit plans in 2006 is estimated to be approximately $29 million. APS and other subsidiaries fund their share of the contributions. APS’ share is approximately 96% of both plans.
     On May 2, 2005, Pinnacle West redeemed at par all of its $165 million Floating Rate Senior Notes due November 1, 2005. The Company used cash on hand to redeem the notes.
     On May 2, 2005, Pinnacle West issued 6,095,000 shares of its common stock at an offering price of $42 per share, resulting in net proceeds of approximately $248 million. Pinnacle West used the net proceeds for general corporate purposes, including making capital contributions to APS, which, in turn, used a portion of such funds to acquire the Sundance Plant and fund other capital expenditures to meet the growing needs of APS’ service territory.
     On February 28, 2006, Pinnacle West entered into an Uncommitted Master Shelf Agreement with Prudential Investment Management, Inc. (“Prudential”) and certain of its affiliates. The agreement provides the terms under which Pinnacle West may offer up to $200 million of its senior notes for purchase by Prudential affiliates at any time prior to December 31, 2007. The maturity of notes issued under the agreement cannot exceed five years. Pursuant to the agreement, on February 28, 2006, Pinnacle West issued and sold to Prudential affiliates $175 million aggregate principal amount of its 5.91% Senior Notes, Series A, due February 28, 2011 (the “Series A Notes”). Pinnacle West will use the proceeds of the Series A Notes to repay at maturity a portion of the $300 million aggregate principal amount of its 6.40% Senior Notes due April 1, 2006 or for other general corporate purposes.
     See “Equity Infusions” in Note 3 for information regarding the ACC approval of Pinnacle West’s infusion of more than $450 million of equity into APS, consisting of about $250 million of the proceeds of Pinnacle West’s common equity issuance and about $210 million of the proceeds from the sale of Silverhawk in January 2006.
      APS
     APS’ capital requirements consist primarily of capital expenditures and optional and mandatory redemptions of long-term debt. APS pays for its capital requirements with cash from operations and, to the extent necessary, external financings. APS has historically paid 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 January 15, 2005, APS repaid its $100 million 6.25% Notes due 2005. APS used cash on hand to redeem these notes.
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     On March 1, 2005, Maricopa County, Arizona Pollution Control Corporation issued $164 million of variable interest rate pollution control bonds, 2005 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 Balance Sheets.
     On May 12, 2003, APS issued $500 million of debt and made a $500 million loan to Pinnacle West Energy. Pinnacle West Energy distributed the net proceeds of that loan to Pinnacle West to fund the repayment of a portion of the debt incurred to finance the construction of the PWEC Dedicated Assets. On April 11, 2005, this loan was repaid with the proceeds of a new debt issuance by Pinnacle West Energy.
     On August 1, 2005, APS repaid $300 million of its 7.625% Notes due 2005. APS used cash on hand to repay these notes.
     On August 22, 2005, APS issued $250 million of 5.50% Senior Unsecured Notes due September 1, 2035. A portion of the net proceeds from the sale of the notes was used for general corporate purposes and, on October 3, 2005, APS used the balance of the proceeds, along with cash on hand, to fund the $500 million that it was obligated to transfer to Pinnacle West Energy in connection with APS’ acquisition of the PWEC Dedicated Assets. See “Related Party Transactions” in Note S-6 for information regarding the $500 million intercompany payable to Pinnacle West Energy. APS satisfied this obligation to Pinnacle West Energy on October 3, 2005.
     APS’ outstanding debt was approximately $2.6 billion at December 31, 2005. In December 2005, APS replaced its $325 million revolving credit facility that would have terminated in May 2007 with a $400 million revolving credit facility that terminates in December 2010. This line of credit is available either to support the issuance of up to $250 million in commercial paper or to be used for bank borrowings, including issuances of letters of credit. At December 31, 2005, APS had no outstanding commercial paper or bank borrowings. APS ended 2005 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.
     See “Deferred Fuel and Purchased Power Costs” above and “Power Supply Adjustor” in Note 3 for information regarding the PSA approved by the ACC. Although APS defers actual retail fuel and purchased power costs on a current basis, APS’ recovery of the deferrals from its ratepayers is subject to annual PSA adjustments and ACC approval of periodic surcharge applications.
     See “Cash Flow Hedges” in Note 18 for information related to increased collateral provided to us by counterparties.
Pinnacle West Energy
     On April 11, 2005, Pinnacle West Energy issued $500 million Floating Rate Senior Notes due April 1, 2007. Pinnacle West unconditionally guaranteed these notes. Pinnacle West Energy used the proceeds of this issuance to repay the $500 million loan from APS to Pinnacle West Energy described under “Capital Needs and Resources — APS” above. On October 3, 2005, Pinnacle West
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Energy repaid the Floating Rate Senior Notes due April 1, 2007 with $500 million received from APS in connection with the transfer of the PWEC Dedicated Assets.
     See Note 22 of Notes to Consolidated Financial Statements above for a discussion of the sale of our 75% ownership interest in Silverhawk.
      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 during 2005 and projected capital expenditures for the next three years. SunCor expects to fund its future capital requirements with cash from operations and external financings.
     SunCor’s total outstanding debt was approximately $145 million as of December 31, 2005, including $123 million of debt outstanding, which is classified as long-term debt, under a $150 million line of credit. SunCor’s total short-term debt was $16 million at December 31, 2005. SunCor’s long-term debt, including current maturities, totaled $129 million at December 31, 2005. See Note 6.
     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 expects minimal capital expenditures over the next three years.
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. A major component of our regulatory assets is the retail fuel and power costs deferred under the PSA. APS defers for future rate recovery 90% of the difference between actual retail fuel and power costs and the amount of such costs currently included in base rates. We had $324 million, including $173 million related to the PSA, of regulatory assets on the Consolidated Balance Sheets at December 31, 2005. Included in the $173 million is approximately $45 million related to the 2005 unplanned Palo Verde outages, which currently are the subject of inquiry by the ACC. In addition, we had $592 million of regulatory liabilities on the Consolidated Balance Sheets at December 31,
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2005, which primarily are related to removal costs. See Notes 1 and 3 for more information about regulatory assets, APS’ general rate case and power supply adjustor.
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.
     The following chart reflects the sensitivities that a change in certain actuarial assumptions would have had on the December 31, 2005 projected benefit obligation, our December 31, 2005 reported pension liability on the Consolidated Balance Sheets and our 2005 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%	 	$	(207	)	 	$	(170	)	 	$	(8	)	
Decrease 1%	 	 	237	 	 	 	195	 	 	 	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 December 31, 2005 accumulated other postretirement benefit obligation and our 2005 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):
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 	 	Increase(Decrease)	 	
 	 	Impact on Accumulated	 	 	Impact on Other	 	
 	 	Other Postretirement	 	 	Postretirement	 	
Actuarial Assumption (a)	 	Benefit Obligation	 	 	Benefit Expense	 	
Discount rate:	 	 	 	 	 	 	 	 	
Increase 1%	 	$	(84	)	 	$	(4	)	
Decrease 1%	 	 	106	 	 	 	5	 	
Health care cost trend rate (b):	 	 	 	 	 	 	 	 	
Increase 1%	 	 	100	 	 	 	7	 	
Decrease 1%	 	 	(79	)	 	 	(6	)	
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.	
 		
(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, determines 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, the effective portion of 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 judgment. 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.
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PINNACLE WEST CONSOLIDATED – FACTORS AFFECTING
OUR FINANCIAL OUTLOOK
Factors Affecting Operating Revenues, Fuel and Purchased Power 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 rates and tariffs and variations in weather from period to period. Competitive sales of energy and energy-related products and services are made by APS Energy Services in certain western states that have opened to competition.
      Retail Rate Proceedings The key issue affecting Pinnacle West’s and APS’ financial outlook is the satisfactory resolution of APS’ retail rate proceedings pending before the ACC. As discussed in greater detail in Note 3, APS has pending before the ACC a general retail rate case, an application for an emergency interim rate increase, and an application for two separate surcharges under the PSA.
      Fuel and Purchased Power Costs Fuel and purchased power 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, variances in deferrals and amortization of fuel and purchased power beginning on April 1, 2005 and our hedging program for managing such costs. See “Power Supply Adjustor” in Note 3 for information regarding the PSA approved by the ACC. See “Natural Gas Supply” in Note 11 for more information on fuel costs. See “Overview” in this Item 7 for information about Palo Verde Unit 1 operating at reduced power levels and the related economic impact.
      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 3.8% a year for the three years 2003 through 2005; we currently expect customer growth to average about 3.8% per year from 2006 to 2008. We currently estimate that total retail electricity sales in kilowatt-hours will grow 3.7% on average, from 2006 through 2008, before the effects of weather variations. Customer growth for 2005 was 4.3%.
     Actual sales growth, excluding weather-related variations, may differ from our projections as a result of numerous factors, such as economic conditions, customer growth, usage patterns and responses to retail price changes. 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.
      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.
      Wholesale Power Market Conditions The marketing and trading division focuses primarily on managing APS’ risks relating to fuel and purchased power costs in connection with its costs of serving Native Load customer demand. The marketing and trading division, subject to specified parameters, markets, hedges and trades in electricity, fuels and emission allowances and
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credits. Our future earnings will be affected by the strength or weakness of the wholesale power market.
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 include generation construction or acquisition, changes in depreciation and amortization rates (see Note 1), and changes in regulatory asset amortization. See Note 7 for information on APS’ acquisition of the Sundance Plant in 2005. See “Purchased Power” in Part I, Item 1 of this report, for more information on requests for proposal to acquire additional long-term resources in 2006 and 2007.
      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 2005 and 2004. We expect property taxes to increase as new power plants, the acquisition of the Sundance Plant and our additions to transmission and distribution facilities are included in the property tax base.
      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. Interest expense is also affected by interest rates on variable-rate debt.
      Retail Competition Although some very limited retail competition existed in Arizona 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.
      Subsidiaries SunCor’s net income was $56 million in 2003, $45 million in 2004 and $56 million in 2005. See Note 22 for further discussion.
     APS Energy Services’ and El Dorado’s historical results are not indicative of future performance.
      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.
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      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. The nuclear decommissioning fund also has risk associated with the changing market value of equity investments. Nuclear decommissioning costs are recovered in regulated electricity prices.
     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, 2005 and 2004. The interest rates presented in the tables below represent the weighted-average interest rates as of December 31, 2005 and 2004 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Variable-Rate	 	 	Fixed-Rate	 	
 	 	Short-Term Debt	 	 	Long-Term Debt	 	 	Long-Term Debt	 	
 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	
2005	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	
2006	 	 	7.11	%	 	$	15,673	 	 	 	5.38	%	 	$	350	 	 	 	6.47	%	 	$	386,624	 	
2007	 	 	—	 	 	 	—	 	 	 	5.38	%	 	 	350	 	 	 	5.90	%	 	 	1,271	 	
2008	 	 	—	 	 	 	—	 	 	 	5.93	%	 	 	128,178	 	 	 	5.85	%	 	 	1,318	 	
2009	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5.73	%	 	 	1,014	 	
2010	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5.69	%	 	 	1,077	 	
Years thereafter	 	 	—	 	 	 	—	 	 	 	3.25	%	 	 	565,855	 	 	 	5.79	%	 	 	1,918,026	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	 	 	$	15,673	 	 	 	 	 	 	$	694,733	 	 	 	 	 	 	$	2,309,330	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value	 	 	 	 	 	$	15,673	 	 	 	 	 	 	$	694,733	 	 	 	 	 	 	$	2,326,235	 	

 	 	 	 	 	 	 	 	 	 	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	 	 	 	1.99	%	 	$	165,447	 	 	 	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	 	 	—	 	 	 	—	 	 	 	1.89	%	 	 	565,860	 	 	 	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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     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, 2005 and 2004. The interest rates presented in the tables below represent the weighted-average interest rates as of December 31, 2005 and 2004 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Variable-Rate	 	 	Fixed-Rate	 	
 	 	Long-Term Debt	 	 	Long-Term Debt	 	
 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	
2005	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	
2006	 	 	—	 	 	$	—	 	 	 	6.71	%	 	$	86,165	 	
2007	 	 	—	 	 	 	—	 	 	 	5.76	%	 	 	1,075	 	
2008	 	 	—	 	 	 	—	 	 	 	5.74	%	 	 	1,271	 	
2009	 	 	—	 	 	 	—	 	 	 	5.70	%	 	 	1,005	 	
2010	 	 	—	 	 	 	—	 	 	 	5.69	%	 	 	1,077	 	
Years thereafter	 	 	3.25	%	 	 	565,855	 	 	 	5.79	%	 	 	1,918,026	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	 	 	$	565,855	 	 	 	 	 	 	$	2,008,619	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value	 	 	 	 	 	$	565,855	 	 	 	 	 	 	$	2,025,001	 	

 	 	Variable-Rate	 	 	Fixed-Rate	 	
 	 	Long-Term Debt	 	 	Long-Term Debt	 	
 	 	Interest	 	 	 	 	 	 	Interest	 	 	 	 	
2004	 	Rates	 	 	Amount	 	 	Rates	 	 	Amount	 	
2005	 	 	—	 	 	$	—	 	 	 	7.27	%	 	$	401,727	 	
2006	 	 	—	 	 	 	—	 	 	 	6.72	%	 	 	86,082	 	
2007	 	 	—	 	 	 	—	 	 	 	5.51	%	 	 	867	 	
2008	 	 	—	 	 	 	—	 	 	 	5.51	%	 	 	1,054	 	
2009	 	 	—	 	 	 	—	 	 	 	5.51	%	 	 	818	 	
Years thereafter	 	 	1.89	%	 	 	565,860	 	 	 	4.79	%	 	 	1,669,901	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	 	 	 	$	565,860	 	 	 	 	 	 	$	2,160,449	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value	 	 	 	 	 	$	565,799	 	 	 	 	 	 	$	2,254,061	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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.
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     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 2005 and 2004 (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	
 	 	Regulated	 	 	Marketing and	 	 	Regulated	 	 	Marketing and	 	
 	 	Electricity	 	 	Trading	 	 	Electricity	 	 	Trading	 	
Mark-to-market of net positions at beginning of period	 	$	33	 	 	$	107	 	 	$	—	 	 	$	69	 	
Recognized in earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in mark-to-market gains for future period deliveries	 	 	14	 	 	 	20	 	 	 	9	 	 	 	20	 	
Mark-to-market (gains) losses realized including ineffectiveness during the period	 	 	(8	)	 	 	(14	)	 	 	3	 	 	 	(15	)	
Deferred as a regulatory liability	 	 	31	 	 	 	—	 	 	 	—	 	 	 	—	 	
Recognized in OCI:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Change in mark-to-market gains for future period deliveries (a)	 	 	359	 	 	 	102	 	 	 	42	 	 	 	37	 	
Mark-to-market gains realized during the period	 	 	(94	)	 	 	(34	)	 	 	(21	)	 	 	(6	)	
Change in valuation techniques	 	 	—	 	 	 	—	 	 	 	—	 	 	 	2	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market of net positions at end of period	 	$	335	 	 	$	181	 	 	$	33	 	 	$	107	 	

			
(a)	 	The increase in regulated mark-to-market recorded in OCI is due primarily to increases in forward natural gas prices.	
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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, 2005 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	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Years	 	 	fair	 	
Source of Fair Value	 	2006	 	 	2007	 	 	2008	 	 	2009	 	 	2010	 	 	thereafter	 	 	value	 	
Prices actively quoted	 	$	162	 	 	$	58	 	 	$	39	 	 	$	7	 	 	$	—	 	 	$	—	 	 	$	266	 	
Prices provided by other external sources	 	 	21	 	 	 	61	 	 	 	1	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	83	 	
Prices based on models and other valuation methods	 	 	(3	)	 	 	(2	)	 	 	(1	)	 	 	(2	)	 	 	(1	)	 	 	(5	)	 	 	(14	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total by maturity	 	$	180	 	 	$	117	 	 	$	39	 	 	$	5	 	 	$	(1	)	 	$	(5	)	 	$	335	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Marketing and Trading
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Total	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Years	 	 	fair	 	
Source of Fair Value	 	2006	 	 	2007	 	 	2008	 	 	2009	 	 	2010	 	 	thereafter	 	 	value	 	
Prices actively quoted	 	$	22	 	 	$	—	 	 	$	—	 	 	$	(1	)	 	$	(1	)	 	$	—	 	 	$	20	 	
Prices provided by other external sources	 	 	76	 	 	 	87	 	 	 	20	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	183	 	
Prices based on models and other valuation methods	 	 	(26	)	 	 	(12	)	 	 	16	 	 	 	(1	)	 	 	(1	)	 	 	2	 	 	 	(22	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total by maturity	 	$	72	 	 	$	75	 	 	$	36	 	 	$	(2	)	 	$	(2	)	 	$	2	 	 	$	181	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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     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, 2005 and 2004 (dollars in millions).
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2005	 	 	December 31, 2004	 	
 	 	Gain (Loss)	 	 	Gain (Loss)	 	
 	 	Price Up 10%	 	 	Price Down 10%	 	 	Price Up 10%	 	 	Price Down 10%	 	
Mark-to-market changes reported in earnings (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electricity	 	$	—	 	 	$	—	 	 	$	(4	)	 	$	4	 	
Natural gas	 	 	—	 	 	 	—	 	 	 	2	 	 	 	(2	)	
Other	 	 	—	 	 	 	—	 	 	 	1	 	 	 	(1	)	
Mark-to-market changes reported in OCI (b):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Electricity	 	 	66	 	 	 	(66	)	 	 	35	 	 	 	(35	)	
Natural gas	 	 	103	 	 	 	(103	)	 	 	43	 	 	 	(43	)	

Total	 	$	169	 	 	$	(169	)	 	$	77	 	 	$	(77	)	

			
(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 non-performance or non-payment by counterparties. We have risk management and trading contracts with many counterparties. 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 our results of operations, we refer to “gross margin.” Gross margin refers to electric operating revenues less fuel and purchased power costs. Gross margin is a “non-GAAP financial measure,” as defined in accordance with SEC rules. Exhibit 99.30 reconciles this non-GAAP financial measure to operating income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. 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. 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.
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Deferred Fuel and Purchased Power Costs
     The settlement of APS’ 2003 general retail rate case became effective April 1, 2005. As part of the settlement, the ACC approved a 4.2% annual retail rate increase and the PSA, which provides mechanisms for adjusting rates to reflect variations in fuel and purchased power costs. In accordance with the PSA, APS defers for future rate recovery 90% of the difference between actual fuel and purchased power costs, net of Off-System Sales margins, and the amount for such costs currently included in base rates. The current base rate for fuel and purchased power costs is based on 2003 price levels and spot prices for natural gas and wholesale power have increased over 40% since then. Although APS defers actual fuel and purchased power costs on a current basis, APS’ recovery of the deferrals from its ratepayers is subject to annual PSA adjustments and ACC approval of periodic surcharge applications.
     Actual fuel and purchased power costs are higher than in prior periods primarily due to higher fuel prices and increased plant outage days.
     APS’ pretax PSA deferrals were approximately $173 million at December 31, 2005. Based on recent forward market prices for natural gas and purchased power (which are subject to change), and assuming no interim rate relief, APS estimates that its pretax PSA deferrals in 2006 will be approximately $240 million to $250 million. In January 2006, the ACC approved the first annual adjustment under the PSA mechanism, which is expected to recover approximately $110 million of the 2005 balance of $173 million from retail customers over twelve months beginning February 1, 2006. In this same order, the ACC granted APS the authority to continue to defer fuel costs in excess of the $776.2 million annual fuel cost cap established in the 2005 rate order and to seek recovery of those amounts in a future proceeding. On February 2, 2006, APS filed a request with the ACC to recover the remainder of the retail portion of the 2005 deferred fuel balance of $173 million — approximately $60 million — through two surcharges. The first surcharge is to recover $15 million over a twelve-month period proposed to begin with the date of the ACC’s decision in APS’ pending emergency interim rate case. The second surcharge is to recover approximately $45 million over a twelve-month period proposed to begin no later than the ACC’s completion of its inquiry regarding unplanned 2005 outages at Palo Verde. The $45 million of PSA deferrals represents additional replacement power costs associated with these outages. See Note 3. See “Overview” in this Item 7 for information about Palo Verde Unit 1 operating at reduced power levels and the related economic impact.
2005 Compared with 2004
     APS’ net income for 2005 was $170 million compared with $200 million for the prior year. The $30 million decrease was primarily due to the regulatory disallowance of plant costs in accordance with the APS retail rate case settlement; higher fuel and purchased power costs primarily due to higher prices and more plant outage days; higher operations and maintenance expense related to generation and customer service costs; and higher property taxes due to increased plant in service. These negative factors were partially offset by deferred fuel and purchased power costs; a retail price increase effective April 1, 2005; higher retail sales volumes due to customer growth; lower depreciation due to lower depreciation rates; lower regulatory asset amortization; and effects of weather on retail sales.
     Additional details on the major factors that increased (decreased) net income are contained in the following table (dollars in millions):
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 	 	Increase (Decrease)	 	
 	 	Pretax	 	 	After Tax	 	
Gross margin:	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power costs	 	$	171	 	 	$	104	 	
Retail price increase effective April 1, 2005	 	 	65	 	 	 	40	 	
Higher retail sales volumes due to customer growth, excluding weather effects	 	 	58	 	 	 	35	 	
Effects of weather on retail sales	 	 	14	 	 	 	9	 	
Higher fuel and purchased power costs primarily due to higher prices and more plant outage days	 	 	(146	)	 	 	(89	)	
Miscellaneous items, net	 	 	(14	)	 	 	(9	)	
 	 	 	 	 	 	 	
Net increase in gross margin	 	 	148	 	 	 	90	 	
Regulatory disallowance, in accordance with the retail rate settlement	 	 	(139	)	 	 	(84	)	
Operations and maintenance increases primarily due to:	 	 	 	 	 	 	 	 	
Customer service costs, including regulatory demand-side management programs and planned maintenance	 	 	(22	)	 	 	(13	)	
Generation costs, including planned maintenance and overhauls	 	 	(16	)	 	 	(10	)	
Costs of PWEC Dedicated Assets not included in prior year	 	 	(14	)	 	 	(9	)	
Depreciation and amortization decreases primarily due to:	 	 	 	 	 	 	 	 	
Lower regulatory asset amortization	 	 	22	 	 	 	13	 	
Higher depreciable assets due to transfer of PWEC	 	 	 	 	 	 	 	 	
Dedicated Assets, partially offset by lower depreciation rates	 	 	(11	)	 	 	(7	)	
Higher property taxes due to increased plant in service	 	 	(12	)	 	 	(7	)	
Miscellaneous items, net	 	 	(7	)	 	 	(3	)	
 	 	 	 	 	 	 	
Net decrease in net income	 	$	(51	)	 	$	(30	)	
 	 	 	 	 	 	 	
Regulated Electricity Revenues
     Regulated electricity revenues were $193 million higher for 2005 compared with the prior year primarily as a result of:

 	•	 	an $81 million increase in retail revenues related to customer growth, excluding weather effects;	
 		
 	•	 	a $65 million increase in retail revenues due to a price increase effective April 1, 2005;	
 		
 	•	 	a $40 million increase in Off-System Sales primarily resulting from sales previously reported in marketing and trading that were classified beginning in April 2005 as sales in regulated electricity in accordance with the APS retail rate case settlement;	
 		
 	•	 	an $11 million increase in retail revenues related to weather; and	
 		
 	•	 	a $4 million decrease due to miscellaneous factors.	
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      Marketing and Trading Revenues
     Marketing and trading revenues were $120 million lower for 2005 compared with the prior-year period primarily as a result of:

 	•	 	a $69 million decrease in energy trading revenues on realized sales of electricity primarily due to lower delivered electricity prices and lower volumes;	
 		
 	•	 	a $40 million decrease in Off-System Sales due to the absence of sales previously reported in marketing and trading that were classified beginning in April 2005 as sales in regulated electricity in accordance with the APS retail rate case settlement; and	
 		
 	•	 	an $11 million decrease on future mark-to-market gains due to higher prices.	
2004 Compared with 2003
     APS’ net income for 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.
     Additional details on the major factors that increased (decreased) net income for 2004 compared with the prior year are contained in the following table (dollars in millions).
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 	 	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 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 2004 compared with the prior year, primarily as a result of:

 	•	 	a $13 million decrease from Off-System Sales due to substantially lower sales volumes, resulting from lower market spark spreads;	
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 	•	 	$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.	
LIQUIDITY AND CAPITAL RESOURCES – ARIZONA PUBLIC SERVICE COMPANY
      Contractual Obligations
     The following table summarizes contractual requirements for APS as of December 31, 2005 (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	2007-	 	 	2009-	 	 	There-	 	 	 	 	
 	 	2006	 	 	2008	 	 	2010	 	 	after	 	 	Total	 	
Long-term debt payments, including interest (a)	 	$	219	 	 	$	259	 	 	$	480	 	 	$	3,350	 	 	$	4,308	 	
Capital lease payments	 	 	2	 	 	 	2	 	 	 	2	 	 	 	2	 	 	 	8	 	
Operating lease payments	 	 	66	 	 	 	129	 	 	 	122	 	 	 	288	 	 	 	605	 	
Purchase power and fuel commitments (b)	 	 	265	 	 	 	331	 	 	 	256	 	 	 	896	 	 	 	1,748	 	
Minimum pension funding requirement (c)	 	 	36	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	36	 	
Purchase obligations (d)	 	 	25	 	 	 	9	 	 	 	—	 	 	 	75	 	 	 	109	 	
Nuclear decommissioning funding requirements	 	 	21	 	 	 	42	 	 	 	46	 	 	 	259	 	 	 	368	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total contractual commitments	 	$	634	 	 	$	772	 	 	$	906	 	 	$	4,870	 	 	$	7,182	 	

			
(a)	 	The long-term debt matures at various dates through 2035 and bears interest principally at fixed rates. Interest on variable-rate long-term debt is determined by the rates at December 31, 2005.	
 		
(b)	 	APS’ purchase power and fuel commitments include purchases of coal, electricity, natural gas, and nuclear fuel (see Note 11).	
 		
(c)	 	Future pension contributions are not determinable for time periods after 2006.	
 		
(d)	 	These contractual obligations include commitments for capital expenditures and other obligations.	
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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)	 	 	67	 	
Report of Independent Registered Public Accounting Firm	 	 	68	 	
Pinnacle West Consolidated Statements of Income for 2005, 2004 and 2003	 	 	70	 	
Pinnacle West Consolidated Balance Sheets as of December 31, 2005 and 2004	 	 	71	 	
Pinnacle West Consolidated Statements of Cash Flows for 2005, 2004 and 2003	 	 	73	 	
Pinnacle West Consolidated Statements of Changes in Common Stock Equity for 2005, 2004 and 2003	 	 	74	 	
Notes to Pinnacle West’s Consolidated Financial Statements	 	 	75	 	
 	 	 	 	 	
Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company)	 	 	126	 	
Report of Independent Registered Public Accounting Firm	 	 	127	 	
APS Statements of Income for 2005, 2004 and 2003	 	 	129	 	
APS Balance Sheets as of December 31, 2005 and 2004	 	 	130	 	
APS Statements of Cash Flows for 2005, 2004 and 2003	 	 	132	 	
APS Statements of Changes in Common Stock Equity for 2005, 2004 and 2003	 	 	133	 	
Supplemental Notes to APS’ Financial Statements	 	 	135	 	
Financial Statement Schedule for 2005, 2004 and 2003	 	 	 	 	
Pinnacle West Schedule II – Valuation and Qualifying Accounts for 2005, 2004 and 2003	 	 	143	 	
APS Schedule II –Reserve for Uncollectibles for 2005, 2004 and 2003	 	 	144	 	
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), for Pinnacle West Capital Corporation. 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, 2005. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 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 8, 2006
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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, 2005 and 2004, 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, 2005. 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, 2005, 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, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, 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, 2005, 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, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 8, 2006
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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,	 	
 	 	2005	 	 	2004	 	 	2003	 	
OPERATING REVENUES	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment	 	$	2,237,145	 	 	$	2,035,247	 	 	$	1,978,075	 	
Marketing and trading segment	 	 	351,558	 	 	 	400,628	 	 	 	391,196	 	
Real estate segment	 	 	338,031	 	 	 	350,315	 	 	 	361,604	 	
Other revenues	 	 	61,221	 	 	 	42,816	 	 	 	27,929	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	2,987,955	 	 	 	2,829,006	 	 	 	2,758,804	 	
 	 	 	 	 	 	 	 	 	 	
OPERATING EXPENSES	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment fuel and purchased power	 	 	595,141	 	 	 	567,433	 	 	 	517,320	 	
Marketing and trading segment fuel and purchased power	 	 	293,091	 	 	 	320,667	 	 	 	344,862	 	
Operations and maintenance	 	 	635,827	 	 	 	592,320	 	 	 	548,732	 	
Real estate segment operations	 	 	278,366	 	 	 	284,194	 	 	 	305,974	 	
Depreciation and amortization	 	 	347,652	 	 	 	391,597	 	 	 	435,140	 	
Taxes other than income taxes	 	 	132,040	 	 	 	120,722	 	 	 	110,270	 	
Other expenses	 	 	51,987	 	 	 	34,108	 	 	 	23,254	 	
Regulatory disallowance (Note 3)	 	 	138,562	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	2,472,666	 	 	 	2,311,041	 	 	 	2,285,552	 	
 	 	 	 	 	 	 	 	 	 	
OPERATING INCOME	 	 	515,289	 	 	 	517,965	 	 	 	473,252	 	
 	 	 	 	 	 	 	 	 	 	
OTHER	 	 	 	 	 	 	 	 	 	 	 	 	
Allowance for equity funds used during construction	 	 	11,191	 	 	 	4,885	 	 	 	14,240	 	
Other income (Note 19)	 	 	23,360	 	 	 	53,289	 	 	 	35,563	 	
Other expense (Note 19)	 	 	(26,716	)	 	 	(21,340	)	 	 	(20,574	)	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	7,835	 	 	 	36,834	 	 	 	29,229	 	
 	 	 	 	 	 	 	 	 	 	
INTEREST EXPENSE	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	 	185,087	 	 	 	183,527	 	 	 	193,973	 	
Capitalized interest	 	 	(12,018	)	 	 	(11,460	)	 	 	(19,078	)	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	173,069	 	 	 	172,067	 	 	 	174,895	 	
 	 	 	 	 	 	 	 	 	 	
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	 	 	350,055	 	 	 	382,732	 	 	 	327,586	 	
INCOME TAXES	 	 	126,892	 	 	 	136,142	 	 	 	102,202	 	
 	 	 	 	 	 	 	 	 	 	
INCOME FROM CONTINUING OPERATIONS	 	 	223,163	 	 	 	246,590	 	 	 	225,384	 	
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	 	 	 	 	 	 	 	 	 	 	 	 	
Net of income tax expense (benefit) of ($29,797), ($1,805) and $9,887	 	 	(46,896	)	 	 	(3,395	)	 	 	15,195	 	
 	 	 	 	 	 	 	 	 	 	
NET INCOME	 	$	176,267	 	 	$	243,195	 	 	$	240,579	 	
 	 	 	 	 	 	 	 	 	 	
WEIGHTED-AVERAGE COMMON SHARES	 	 	 	 	 	 	 	 	 	 	 	 	
OUTSTANDING – BASIC	 	 	96,484	 	 	 	91,397	 	 	 	91,265	 	
WEIGHTED-AVERAGE COMMON SHARES	 	 	 	 	 	 	 	 	 	 	 	 	
OUTSTANDING DILUTED	 	 	96,590	 	 	 	91,532	 	 	 	91,405	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
EARNINGS PER WEIGHTED – AVERAGE COMMON SHARE OUTSTANDING	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations – basic	 	$	2.31	 	 	$	2.70	 	 	$	2.47	 	
Net income – basic	 	 	1.83	 	 	 	2.66	 	 	 	2.64	 	
Income from continuing operations – diluted	 	 	2.31	 	 	 	2.69	 	 	 	2.47	 	
Net income – diluted	 	 	1.82	 	 	 	2.66	 	 	 	2.63	 	
DIVIDENDS DECLARED PER SHARE	 	$	1.925	 	 	$	1.825	 	 	$	1.725	 	
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,	 	
 	 	2005	 	 	2004	 	
ASSETS	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
CURRENT ASSETS	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	154,003	 	 	$	163,366	 	
Investment in debt securities	 	 	—	 	 	 	181,175	 	
Customer and other receivables	 	 	502,681	 	 	 	461,090	 	
Allowance for doubtful accounts	 	 	(4,979	)	 	 	(4,896	)	
Materials and supplies (at average cost)	 	 	109,736	 	 	 	101,333	 	
Fossil fuel (at average cost)	 	 	23,658	 	 	 	20,512	 	
Assets from risk management and trading activities (Note 18)	 	 	827,779	 	 	 	166,896	 	
Assets held for sale (Note 22)	 	 	202,645	 	 	 	—	 	
Other current assets	 	 	75,869	 	 	 	47,654	 	
 	 	 	 	 	 	 	
Total current assets	 	 	1,891,392	 	 	 	1,137,130	 	

INVESTMENTS AND OTHER ASSETS	 	 	 	 	 	 	 	 	
Real estate investments – net (Notes 1 and 6)	 	 	390,702	 	 	 	382,398	 	
Assets from long-term risk management and trading activities (Note 18)	 	 	597,831	 	 	 	224,341	 	
Decommissioning trust accounts (Note 12)	 	 	293,943	 	 	 	267,700	 	
Other assets	 	 	111,931	 	 	 	107,212	 	
 	 	 	 	 	 	 	
Total investments and other assets	 	 	1,394,407	 	 	 	981,651	 	

PROPERTY, PLANT AND EQUIPMENT (Notes 1, 6, 9 and 10)	 	 	 	 	 	 	 	 	
Plant in service and held for future use	 	 	10,727,695	 	 	 	10,486,648	 	
Less accumulated depreciation and amortization	 	 	3,622,884	 	 	 	3,365,954	 	
 	 	 	 	 	 	 	
Total	 	 	7,104,811	 	 	 	7,120,694	 	
Construction work in progress	 	 	327,172	 	 	 	258,119	 	
Intangible assets, net of accumulated amortization of $182,576 and $158,584	 	 	90,916	 	 	 	105,486	 	
Nuclear fuel, net of accumulated amortization of $53,984 and $59,020	 	 	54,184	 	 	 	51,188	 	
 	 	 	 	 	 	 	
Net property, plant and equipment	 	 	7,577,083	 	 	 	7,535,487	 	

DEFERRED DEBITS	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power regulatory asset (Notes 1, 3 and 4)	 	 	172,756	 	 	 	—	 	
Other regulatory assets (Notes 1, 3 and 4)	 	 	151,123	 	 	 	135,051	 	
Other deferred debits	 	 	135,884	 	 	 	107,428	 	
 	 	 	 	 	 	 	
Total deferred debits	 	 	459,763	 	 	 	242,479	 	

TOTAL ASSETS	 	$	11,322,645	 	 	$	9,896,747	 	
 	 	 	 	 	 	 	
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,	 	
 	 	2005	 	 	2004	 	
LIABILITIES AND COMMON STOCK EQUITY	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
CURRENT LIABILITIES	 	 	 	 	 	 	 	 	
Accounts payable	 	$	377,107	 	 	$	373,526	 	
Accrued taxes	 	 	289,235	 	 	 	245,611	 	
Accrued interest	 	 	31,774	 	 	 	38,795	 	
Short-term borrowings (Note 5)	 	 	15,673	 	 	 	71,030	 	
Current maturities of long-term debt (Note 6)	 	 	384,947	 	 	 	617,165	 	
Customer deposits	 	 	60,509	 	 	 	55,558	 	
Deferred income taxes (Note 4)	 	 	94,710	 	 	 	9,057	 	
Liabilities from risk management and trading activities (Note 18)	 	 	720,693	 	 	 	113,406	 	
Other current liabilities	 	 	297,425	 	 	 	101,748	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	2,272,073	 	 	 	1,625,896	 	

LONG-TERM DEBT LESS CURRENT MATURITIES (Note 6)	 	 	2,608,455	 	 	 	2,584,985	 	

DEFERRED CREDITS AND OTHER	 	 	 	 	 	 	 	 	
Deferred income taxes (Note 4)	 	 	1,225,253	 	 	 	1,227,553	 	
Regulatory liabilities (Notes 1, 3 and 4)	 	 	592,494	 	 	 	506,646	 	
Liability for asset retirements (Note 12)	 	 	269,011	 	 	 	251,612	 	
Pension liability (Note 8)	 	 	264,476	 	 	 	234,445	 	
Liabilities from risk management and trading activities (Note 18)	 	 	256,413	 	 	 	156,262	 	
Unamortized gain – sale of utility plant (Note 9)	 	 	45,757	 	 	 	50,333	 	
Other	 	 	363,749	 	 	 	308,819	 	
 	 	 	 	 	 	 	
Total deferred credits and other	 	 	3,017,153	 	 	 	2,735,670	 	

COMMITMENTS AND CONTINGENCIES (Notes 3, 11, 12 and 21)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
COMMON STOCK EQUITY (Note 7)	 	 	 	 	 	 	 	 	
Common stock, no par value; authorized 150,000,000 shares; issued 99,077,133 at end of 2005 and 91,802,861 at end of 2004	 	 	2,067,377	 	 	 	1,769,047	 	
Treasury stock at cost; 20,058 shares at end of 2005 and 9,522 shares at end of 2004	 	 	(1,245	)	 	 	(428	)	
 	 	 	 	 	 	 	
Total common stock	 	 	2,066,132	 	 	 	1,768,619	 	
 	 	 	 	 	 	 	
Accumulated other comprehensive income (loss):	 	 	 	 	 	 	 	 	
Minimum pension liability adjustment	 	 	(97,277	)	 	 	(81,788	)	
Derivative instruments	 	 	262,397	 	 	 	59,243	 	
 	 	 	 	 	 	 	
Total accumulated other comprehensive income (loss)	 	 	165,120	 	 	 	(22,545	)	
 	 	 	 	 	 	 	
Retained earnings	 	 	1,193,712	 	 	 	1,204,122	 	
 	 	 	 	 	 	 	
Total common stock equity	 	 	3,424,964	 	 	 	2,950,196	 	

TOTAL LIABILITIES AND COMMON STOCK EQUITY	 	$	11,322,645	 	 	$	9,896,747	 	
 	 	 	 	 	 	 	
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,	 	
 	 	2005	 	 	2004 (a)	 	 	2003 (a)	 	
CASH FLOWS FROM OPERATING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	$	176,267	 	 	$	243,195	 	 	$	240,579	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Silverhawk impairment loss	 	 	91,025	 	 	 	—	 	 	 	—	 	
Regulatory disallowance	 	 	138,562	 	 	 	—	 	 	 	—	 	
Equity earnings in Phoenix Suns partnership	 	 	—	 	 	 	(34,594	)	 	 	—	 	
Depreciation and amortization including nuclear fuel	 	 	381,604	 	 	 	432,161	 	 	 	466,900	 	
Deferred fuel and purchased power	 	 	(172,756	)	 	 	—	 	 	 	—	 	
Allowance for equity funds used during construction	 	 	(11,191	)	 	 	(4,885	)	 	 	(14,240	)	
Deferred income taxes	 	 	(23,806	)	 	 	(113,850	)	 	 	85,462	 	
Change in mark-to-market valuations	 	 	(11,670	)	 	 	(18,915	)	 	 	17,410	 	
Changes in current assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Customer and other receivables	 	 	(38,763	)	 	 	(11,056	)	 	 	2,346	 	
Materials, supplies and fossil fuel	 	 	(16,836	)	 	 	2,621	 	 	 	(4,629	)	
Other current assets	 	 	(28,215	)	 	 	25,380	 	 	 	(6,646	)	
Accounts payable	 	 	(6,392	)	 	 	85,344	 	 	 	(34,303	)	
Accrued taxes	 	 	43,624	 	 	 	175,842	 	 	 	(1,338	)	
Other current liabilities	 	 	1,567	 	 	 	10,561	 	 	 	3,725	 	
Proceeds from the sale of real estate assets	 	 	16,218	 	 	 	80,035	 	 	 	130,597	 	
Real estate investments	 	 	(88,055	)	 	 	(62,812	)	 	 	(51,837	)	
Change in risk management and trading – assets	 	 	(62,100	)	 	 	(2,549	)	 	 	46,911	 	
Change in risk management and trading – liabilities	 	 	110,393	 	 	 	13,018	 	 	 	(11,613	)	
Collateral	 	 	192,040	 	 	 	12,619	 	 	 	(10,453	)	
Change in other long-term assets	 	 	(35,793	)	 	 	(36,666	)	 	 	(6,099	)	
Change in other long-term liabilities	 	 	74,573	 	 	 	55,443	 	 	 	49,251	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow provided by operating activities	 	 	730,296	 	 	 	850,892	 	 	 	902,023	 	

CASH FLOWS FROM INVESTING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	 	(633,532	)	 	 	(538,842	)	 	 	(713,256	)	
Purchase of Sundance Plant	 	 	(185,046	)	 	 	—	 	 	 	—	 	
Proceeds from sale of Silverhawk	 	 	—	 	 	 	90,967	 	 	 	—	 	
Capitalized interest	 	 	(12,018	)	 	 	(16,311	)	 	 	(29,444	)	
Proceeds from the sale of the Phoenix Suns partnership	 	 	—	 	 	 	23,101	 	 	 	—	 	
Purchases of investment securities	 	 	(2,962,278	)	 	 	(1,040,955	)	 	 	(877,660	)	
Proceeds from sale of investment securities	 	 	3,143,481	 	 	 	951,630	 	 	 	785,810	 	
Proceeds from nuclear decommissioning trust sales	 	 	186,215	 	 	 	123,795	 	 	 	168,874	 	
Investment in nuclear decommissioning trust	 	 	(204,633	)	 	 	(135,239	)	 	 	(180,319	)	
Proceeds from real estate investments	 	 	82,719	 	 	 	—	 	 	 	46,781	 	
Other	 	 	—	 	 	 	(3,072	)	 	 	(9,595	)	
 	 	 	 	 	 	 	 	 	 	
Net cash flow used for investing activities	 	 	(585,092	)	 	 	(544,926	)	 	 	(808,809	)	

CASH FLOWS FROM FINANCING ACTIVITIES	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of long-term debt	 	 	1,088,815	 	 	 	478,328	 	 	 	656,850	 	
Short-term borrowings and payments – net	 	 	(46,413	)	 	 	(15,051	)	 	 	(173,303	)	
Dividends paid on common stock	 	 	(186,677	)	 	 	(166,772	)	 	 	(157,417	)	
Repayment of long-term debt	 	 	(1,288,034	)	 	 	(604,015	)	 	 	(368,162	)	
Common stock equity issuance	 	 	298,168	 	 	 	18,291	 	 	 	—	 	
Other	 	 	(20,426	)	 	 	9,690	 	 	 	8,181	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow used for financing activities	 	 	(154,567	)	 	 	(279,529	)	 	 	(33,851	)	

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	 	 	(9,363	)	 	 	26,437	 	 	 	59,363	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR	 	 	163,366	 	 	 	136,929	 	 	 	77,566	 	

CASH AND CASH EQUIVALENTS AT END OF YEAR	 	$	154,003	 	 	$	163,366	 	 	$	136,929	 	

Supplemental disclosure of cash flow information	 	 	 	 	 	 	 	 	 	 	 	 	
Cash paid during the period for:	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes paid, net of refunds	 	$	86,711	 	 	$	66,447	 	 	$	32,816	 	
Interest paid, net of amounts capitalized	 	$	181,975	 	 	$	191,865	 	 	$	161,581	 	
See Notes to Pinnacle West’s Consolidated Financial Statements.

(a)	 	See “Cash and Cash Equivalents” in Note 1 for information regarding revisions and certain reclassifications of prior year amounts.	
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CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	
COMMON STOCK (Note 7)	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	$	1,769,047	 	 	$	1,744,354	 	 	$	1,737,258	 	
Issuance of common stock	 	 	298,330	 	 	 	18,291	 	 	 	—	 	
Other	 	 	—	 	 	 	6,402	 	 	 	7,096	 	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	2,067,377	 	 	 	1,769,047	 	 	 	1,744,354	 	

TREASURY STOCK (Note 7)	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	(428	)	 	 	(3,273	)	 	 	(4,358	)	
Purchase of treasury stock	 	 	(1,601	)	 	 	(2,986	)	 	 	—	 	
Reissuance of treasury stock used for stock compensation, net	 	 	784	 	 	 	5,831	 	 	 	1,085	 	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	(1,245	)	 	 	(428	)	 	 	(3,273	)	

RETAINED EARNINGS	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	1,204,122	 	 	 	1,127,699	 	 	 	1,044,537	 	
Net income	 	 	176,267	 	 	 	243,195	 	 	 	240,579	 	
Common stock dividends	 	 	(186,677	)	 	 	(166,772	)	 	 	(157,417	)	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	1,193,712	 	 	 	1,204,122	 	 	 	1,127,699	 	

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	(22,545	)	 	 	(39,001	)	 	 	(91,284	)	
Minimum pension liability adjustment, net of tax expense (benefit) of ($9,526), ($9,756) and $3,700	 	 	(15,489	)	 	 	(15,224	)	 	 	4,700	 	
Unrealized gain on derivative instruments, net of tax expense of $179,927, $31,117 and $33,298	 	 	281,019	 	 	 	48,226	 	 	 	51,089	 	
Reclassification of realized gain to income, net of tax benefit of ($50,056), ($10,695) and ($2,343)	 	 	(77,865	)	 	 	(16,546	)	 	 	(3,506	)	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	165,120	 	 	 	(22,545	)	 	 	(39,001	)	

TOTAL COMMON STOCK EQUITY	 	$	3,424,964	 	 	$	2,950,196	 	 	$	2,829,779	 	

COMPREHENSIVE INCOME	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	176,267	 	 	$	243,195	 	 	$	240,579	 	
Other comprehensive income	 	 	187,665	 	 	 	16,456	 	 	 	52,283	 	
 	 	 	 	 	 	 	 	 	 	
Comprehensive income	 	$	363,932	 	 	$	259,651	 	 	$	292,862	 	
 	 	 	 	 	 	 	 	 	 	
See Notes to Pinnacle West’s Consolidated Financial Statements.
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PINNACLE WEST CAPITAL CORPORATION
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. Pinnacle West Energy, which was formed in 1999, was the subsidiary through which we conducted our unregulated generation operations. See Note 3 for a discussion of the transfer of the PWEC Dedicated Assets from Pinnacle West Energy to APS. As of January 10, 2006, Pinnacle West Energy no longer owns any generating plants and has ceased 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, “Accounting for Derivative Instruments and Hedging Activities,” as amended. 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)). To the extent the amounts that would otherwise be
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PINNACLE WEST CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
recognized in income are eligible to be recovered through the PSA, the amounts will be recorded as either a regulatory asset or liability and have no effect on earnings. SFAS No. 133 provides a scope exception for contracts that meet the normal purchases and sales criteria specified in the standard. 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.
     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, 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 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
     A major component of our regulatory assets is the retail fuel and power costs deferred under the PSA. APS defers for future rate recovery 90% of the difference between actual retail fuel and power costs and the amount of such costs currently included in base rates.
     As part of a 1999 retail rate case settlement agreement, APS amortized certain regulatory assets over a period that ended June 30, 2004. Amortization was $18 million in 2004 and $86 million in 2003.
     The detail of regulatory assets is as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	December 31,	 	
 	 	2005	 	 	2004	 	
Deferred fuel and purchased power (Note 3)	 	$	173	 	 	$	—	 	
Competition rules compliance charge	 	 	42	 	 	 	50	 	
Deferred compensation	 	 	25	 	 	 	24	 	
Regulatory asset for deferred income taxes	 	 	19	 	 	 	12	 	
Loss on reacquired debt (a)	 	 	18	 	 	 	17	 	
Capital contributions on the Mead-Phoenix transmission line	 	 	14	 	 	 	13	 	
Coal reclamation	 	 	13	 	 	 	—	 	
Bark beetle remediation	 	 	6	 	 	 	—	 	
Spent nuclear fuel storage (Note 11)	 	 	6	 	 	 	11	 	
Other	 	 	8	 	 	 	8	 	
 	 	 	 	 	 	 	
Total regulatory assets	 	$	324	 	 	$	135	 	
 	 	 	 	 	 	 	
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     (a) See “Reacquired Debt Costs” below.
     The detail of regulatory liabilities is as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	December 31,	 	
 	 	2005	 	 	2004	 	
Removal costs (a)	 	$	385	 	 	$	376	 	
Regulatory liability related to asset retirement obligations	 	 	101	 	 	 	86	 	
Deferred fuel and purchased power – mark-to-market	 	 	31	 	 	 	—	 	
Regulatory liability for deferred income taxes	 	 	24	 	 	 	—	 	
Deferred interest income	 	 	22	 	 	 	22	 	
Deferred gains on utility property	 	 	20	 	 	 	20	 	
Demand-side management	 	 	7	 	 	 	—	 	
Other	 	 	2	 	 	 	3	 	
 	 	 	 	 	 	 	
Total regulatory liabilities	 	$	592	 	 	$	507	 	

			
(a)	 	In accordance with SFAS No. 71, APS accrues for removal costs for its regulated assets, even if there is no legal obligation for removal.	
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. Liabilities associated with the retirement of tangible long-lived assets are 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 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 “Accounting for Asset Obligations,” as interpreted by FIN 47. APS believes it can recover in regulated rates the costs calculated in accordance with SFAS No. 143.
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     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, 2005 were as follows:

 	•	 	Fossil plant – 19 years;	
 		
 	•	 	Nuclear plant – 20 years;	
 		
 	•	 	Other generation – 28 years;	
 		
 	•	 	Transmission – 40 years;	
 		
 	•	 	Distribution – 32 years; and	
 		
 	•	 	Other – 6 years.	
     For the years 2003 through 2005, the depreciation rates ranged from a low of 1.2% to a high of 11.43%. The weighted-average rate was 3.0% for 2005, 3.36% for 2004 and 3.35% for 2003. We depreciate non-utility property and equipment over the estimated useful lives of the related assets, ranging from 3 to 34 years. See “APS 2003 Rate Case” in Note 3 for a discussion of changes in depreciation rates.
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 are reviewed in accordance with EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”
Capitalized Interest
     Capitalized interest represents the cost of debt funds used to finance non-regulated construction projects. The rate used to calculate capitalized interest was a composite rate of 5.7% for 2005, 4.9% for 2004 and 4.7% for 2003. 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. APS’ allowance for borrowed funds is included in capitalized interest on the Consolidated Financial Statements. Plant construction costs, including AFUDC, are recovered in authorized rates through depreciation when completed projects are placed into commercial operation.
     AFUDC was calculated by using a composite rate of 7.7% for 2005, 8.4% for 2004 and 8.6% for 2003. APS compounds AFUDC monthly and ceases to accrue AFUDC when construction work is completed and the property is placed in service.
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
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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. Beginning April 2005 in accordance with the order in the APS 2003 Rate Case, we exclude city franchise fees from both electric revenues and operating expenses.
     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. 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.
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 addition, see Note 22 – Discontinued Operations.
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Cash and Cash Equivalents
     We consider all highly liquid investments 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 investment in debt securities on our Consolidated Balance Sheets.
     We have changed the presentation of our nuclear decommissioning trust investment in our Consolidated Statements of Cash Flows for the year ended December 31, 2005, to present investing cash outflows separately from investing cash inflows. Investing cash inflows and outflows in the nuclear decommissioning trust investment amounts were previously presented in Other within the investing section of the Consolidated Statements of Cash Flows. In addition, we changed the presentation of prior year amounts in order to be consistent with the 2005 presentation. There was no impact to net cash provided by (used in) operating, investing or financing activities as a result of this change in presentation.
     During 2005, we revised the presentation of our Consolidated Statements of Cash Flows to include the cash flows from discontinued operations within the categories of operating, investing, and financing activities. A summary of the effects of the change in presentation on the Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003, is as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2004	 	 	2003	 	
Net cash flows from operating activities as previously reported	 	$	842	 	 	$	901	 	
Change in net cash flows from discontinued operations	 	 	9	 	 	 	1	 	
 	 	 	 	 	 	 	
Net cash flows from operating activities as currently reported	 	$	851	 	 	$	902	 	
 	 	 	 	 	 	 	
Net cash flows used for investing activities as previously reported	 	$	(532	)	 	$	(815	)	
Change in net cash flows used for discontinued operations	 	 	(13	)	 	 	6	 	
 	 	 	 	 	 	 	
Net cash flows used for investing activities as currently reported	 	$	(545	)	 	$	(809	)	
 	 	 	 	 	 	 	
Net cash flows used for financing activities as previously reported	 	$	(278	)	 	$	(32	)	
Change in net cash flows used for discontinued operations	 	 	(2	)	 	 	(2	)	
 	 	 	 	 	 	 	
Net cash flows used for financing activities as currently reported	 	$	(280	)	 	$	(34	)	
 	 	 	 	 	 	 	
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.
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     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 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
     APS defers gains and losses incurred upon early retirement of debt. These costs are amortized equally on a monthly basis over the remaining life of the original debt consistent with its ratemaking treatment.
Stock-Based Compensation
     We apply 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.” In addition, SFAS No. 123R is effective for us as of January 1, 2006. We have evaluated the impacts of this new guidance and do not believe it will have a material impact on our financial statements.
     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 2005 (dollars in thousands, except per share amounts):
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 	 	2005	 	 	2004	 	 	2003	 	
Net Income as reported:	 	$	176,267	 	 	$	243,195	 	 	$	240,579	 	
Add: Stock compensation expense included in reported net income (net of tax)	 	 	3,738	 	 	 	4,690	 	 	 	3,514	 	
Deduct: Total stock compensation expense determined under fair value method (net of tax)	 	 	(3,738	)	 	 	(5,311	)	 	 	(5,220	)	
 	 	 	 	 	 	 	 	 	 	
Pro forma net income	 	$	176,267	 	 	$	242,574	 	 	$	238,873	 	

Earnings per share – basic:	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	1.83	 	 	$	2.66	 	 	$	2.64	 	
Pro forma (fair value method)	 	$	1.83	 	 	$	2.65	 	 	$	2.62	 	
Earnings per share – diluted:	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	1.82	 	 	$	2.66	 	 	$	2.63	 	
Pro forma (fair value method)	 	$	1.82	 	 	$	2.65	 	 	$	2.61	 	
     In order to calculate the fair value of the 2004 and 2003 stock option grants (no stock options were granted in 2005) and the pro forma information above, we calculated the fair value of each stock option granted under the incentive plans using the Black-Scholes option-pricing model. The fair value was calculated as of the date the option was granted. The following weighted-average assumptions were used to calculate the fair value of the stock options:
 	 	 	 	 	 	 	 	 	
 	 	2004	 	2003	
Risk-free interest rate	 	 	3.15	%	 	 	3.35	%	
Dividend yield	 	 	4.76	%	 	 	5.26	%	
Volatility	 	 	17.04	%	 	 	38.03	%	
Expected life (months)	 	 	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, primarily software, 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 $33 million in 2005, $34 million in 2004, and $25 million in 2003. Estimated amortization expense on existing intangible assets over the next five years is $31 million in 2006, $25 million in 2007, $14 million in 2008, $4 million in 2009, and $3 million in 2010. At December 31, 2005, the weighted average remaining amortization period for intangible assets is 3 years.
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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. In 2002, we began accounting for stock-based compensation using the fair value method. We adopted SFAS No. 123R on January 1, 2006. We believe the impacts of this new guidance on our financial statements will be immaterial.
     Effective December 31, 2005, we adopted FIN 47, “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143.” FIN 47 clarifies that an entity must record a liability for the fair value of an asset retirement obligation for which the timing and/or method of settlement are conditional on a future event if the liability’s fair value can be reasonably estimated. We have evaluated our asset retirement obligations under this new guidance and determined that no additional liabilities need to be recorded at this time.
3. Regulatory Matters
APS General Rate Case
     On January 31, 2006, APS filed with the ACC updated financial schedules, testimony and other data in the general rate case that APS originally filed on November 4, 2005. As requested by the ACC staff, the updated information uses the twelve months ended September 30, 2005 as the test period instead of the test year ended December 31, 2004 used in APS’ original filing. As a result of the updated filing, APS is requesting a 21.3%, or $453.9 million, increase in its annual retail electricity revenues effective no later than December 31, 2006. The original filing requested a 19.9%, or $409.1 million, retail rate increase.
     The updated requested rate increase is designed to recover the following (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Updated Filing	 	 	Original Filing	 	
 	 	(January 31, 2006)	 	 	(November 4, 2005)	 	
 	 	Annual	 	 	 	 	 	 	Annual	 	 	 	 	
 	 	Revenue	 	 	Percentage	 	 	Revenue	 	 	Percentage	 	
 	 	Increase	 	 	Increase	 	 	Increase	 	 	Increase	 	
Increased fuel and purchased power	 	$	299.0	 	 	 	14.0	%	 	$	246.8	 	 	 	12.0	%	
Capital structure update	 	 	98.3	 	 	 	4.6	%	 	 	96.8	 	 	 	4.7	%	
Rate base update, including acquisition of Sundance Plant	 	 	46.2	 	 	 	2.2	%	 	 	42.5	 	 	 	2.1	%	
Pension funding	 	 	41.3	 	 	 	1.9	%	 	 	41.2	 	 	 	2.0	%	
Other items	 	 	(30.9	)	 	 	(1.4	)%	 	 	(18.2	)	 	 	(0.9	)%	

Total increase	 	$	453.9	 	 	 	21.3	%	 	$	409.1	 	 	 	19.9	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     The request is based on (a) a rate base of $4.4 billion, which approximates the ACC-jurisdictional portion of the book value of utility plant, net of accumulated depreciation, as of
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September 30, 2005; (b) a base rate for fuel and purchased power costs of $0.031904 per kilowatt-hour based on estimated 2006 prices; and (c) a proposed capital structure of 45% long-term debt and 55% common stock equity, with a weighted-average cost of capital of 8.73% (5.41% for long-term debt and 11.50% for common stock equity). The requested increase in annual retail electricity revenues from the original filing is based solely on increased fuel and purchased power costs, slightly offset by other items (see the above chart). If the ACC approves the requested base rate increase for fuel and purchased power costs (see clause (b) of this paragraph), subsequent PSA rate adjustments and/or PSA surcharges would be reduced because such costs would otherwise be eligible for recovery in the future under APS’ PSA.
     The updated request does not include the PSA annual adjustor rate increase of approximately 5% that took effect February 1, 2006 or the application for two separate PSA surcharges that APS filed on February 2, 2006. See “Power Supply Adjustor” below.
Application for Emergency Interim Rate Increase
          On January 6, 2006, APS filed with the ACC an application requesting an emergency interim rate increase of $299 million, or approximately 14%, to be effective April 1, 2006. The purpose of the emergency interim rate increase is solely to address APS’ under-collection of higher annual fuel and purchased power costs. The increase would accelerate recovery of the fuel and purchased power component of APS’ general rate case and is not an additional increase and would be subject to refund. On February 28, 2006, several parties filed direct testimony in this matter. The ACC staff and the Residential Utility Consumer Office each recommended that the ACC deny APS’ request for emergency rate relief, and each cited the ACC’s January 25, 2006 modification of the PSA as a basis for its recommendation (see “Power Supply Adjustor” below). Because “concern continues to exist regarding the build-up of deferred fuel balances in 2006 and the uncertain time frame for recovery of prudently incurred fuel and purchased power costs,” the ACC staff also recommended, among other things, that the ACC allow APS to file for PSA surcharge requests in 2006 on a quarterly basis, with the first request to be filed no earlier than June 30, 2006. A business coalition that advocates on behalf of retail electric customers in Arizona and a major APS customer filed joint testimony recommending that the ACC approve an interim rate increase of $126 million in calendar-year 2006. Hearings on the emergency interim rate increase request are scheduled to begin on March 20, 2006. We cannot predict the outcome of this matter.
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Power Supply Adjustor
      PSA Provisions
     The PSA approved by the ACC in April 2005 as part of APS’ 2003 rate case provides for adjustment of retail rates to reflect variations in retail fuel and purchased power costs. On January 25, 2006, the ACC modified the PSA in certain respects. The PSA, as modified, is subject to specified parameters and procedures, including the following:

 	•	 	APS will record deferrals for recovery or refund to the extent actual retail fuel and purchased power costs vary from the base fuel amount (currently $0.020743 per kWh);	
 		
 	•	 	the deferrals are subject to a 90/10 sharing arrangement in which APS must absorb 10% of the retail fuel and purchased power costs above the base fuel amount and may retain 10% of the benefit from the retail fuel and purchased power costs that are below the base fuel amount;	
 		
 	•	 	amounts to be recovered or refunded through the annual PSA adjustment are limited to a cumulative plus or minus $0.004 per kWh over the life of the PSA;	
 		
 	•	 	the recoverable amount of annual retail fuel and purchased power costs through current base rates and the PSA was originally capped at $776.2 million; however, the ACC has removed the cap pending the ACC’s final ruling on APS’ pending request to have the cap eliminated or substantially raised;	
 		
 	•	 	the PSA will remain in effect for a minimum five-year period, but the ACC may eliminate the PSA at any time, if appropriate, in the event APS files a rate case before the expiration of the five-year period (which APS did by filing the general rate case noted above) or if APS does not comply with the terms of the PSA; and	
 		
 	•	 	APS is prohibited from requesting PSA surcharges until after the PSA annual adjustor rate has been set each year. The amount available for potential PSA surcharges will be limited to the amount of accumulated deferrals through the prior year-end which are not expected to be recovered through the annual adjustor or any PSA surcharges previously approved by the ACC.	
      2006 PSA Annual Adjustor The effective date of the PSA’s annual adjustor is February 1, and the adjustor rate was set at the maximum $0.004 per kilowatt-hour effective February 1, 2006. The change in the adjustor rate represents a retail rate increase of approximately 5% designed to recover $110 million of deferred fuel and purchased power costs over the twelve-month period beginning February 1, 2006.
      Application for PSA Surcharges On February 2, 2006, APS filed with the ACC an application for two separate surcharges under the PSA. The surcharges would recover approximately $60 million in retail fuel and purchased power costs deferred by APS in 2005 under the PSA. The combined surcharges would represent a temporary rate increase of approximately 2.6% during the overlapping portion of the twelve-month recovery periods for the two surcharges. The other component of the 2005 PSA deferrals is being recovered under the 2006 PSA annual adjustor
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discussed in the preceding paragraph. The first surcharge would recover approximately $15 million over a twelve-month period, representing a temporary rate increase of approximately 0.66%, proposed to begin with the date of the ACC’s decision in APS’ pending emergency interim rate case. The second requested surcharge would recover approximately $45 million over a twelve-month period, representing a temporary rate increase of approximately 1.9%, proposed to begin no later than the ACC’s completion of its inquiry regarding the unplanned 2005 Palo Verde outages. The $45 million of PSA deferrals represents replacement power costs associated with these outages.
      Proposed Modifications to PSA (Requested In General Rate Case)
     In its pending general rate case, APS has requested the following modifications to the PSA:

 	•	 	The $0.004 per kWh maximum adjustor rate over the life of the PSA would be eliminated, while the $0.004 per kWh maximum annual change in the adjustor rate would remain in effect;	
 		
 	•	 	The $776.2 million annual limit on the retail fuel and purchased power costs under APS’ current base rates and the PSA would be removed or increased (although APS may defer fuel and purchased power costs above $776.2 million per year pending the ACC’s final ruling on APS’ pending request to have the cap eliminated or substantially raised);	
 		
 	•	 	The current provision that APS is required to file a surcharge application with the ACC after accumulated pretax PSA deferrals equal $50 million and before they equal $100 million would be eliminated, thereby giving APS flexibility in determining when a surcharge filing should be made;	
 		
 	•	 	The costs of renewable energy and capacity costs attributable to purchased power obtained through competitive procurement would be excluded from the existing 90/10 sharing arrangement under which APS absorbs 10% of the retail fuel and purchased power costs above the base fuel amount and retains 10% of the benefit from retail fuel and purchased power costs that are below the base fuel amount; and	
 		
 	•	 	10% of any realized gains or losses resulting from APS’ hedges of Retail Fuel and Power Costs would be retained or absorbed by APS before being subject to the 90/10 sharing provision under the PSA.	
APS 2003 Rate Case
     On April 7, 2005, the ACC issued an order in the rate case that APS filed on June 27, 2003. In addition to the ACC’s approval of the PSA discussed under “Power Supply Adjustor” above, certain key financial components of the order include:

 	•	 	APS received an annual retail rate increase of approximately 4.2%, which was effective as of April 1, 2005. This increase does not include the impact of the PSA.	
 		
 	•	 	APS was authorized to acquire the PWEC Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and to rate base the	
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PWEC Dedicated Assets at a rate base value of $700 million, which resulted in a mandatory rate base disallowance of approximately $150 million. Due to depreciation and other miscellaneous factors, the actual disallowance was $139 million at December 31, 2005. This transfer was completed on July 29, 2005. As a result, for financial reporting purposes, APS recognized a one-time, after-tax net plant regulatory disallowance of approximately $84 million in 2005.

 	•	 	Effective April 1, 2005, APS adopted longer service lives for certain depreciable assets. This change is expected to have the effect of reducing annual depreciation expense for financial reporting purposes by approximately $30 million. APS also adopted longer service lives for the PWEC Dedicated Assets, which is expected to have the effect of reducing annual depreciation expense for financial reporting purposes by approximately $10 million.	
Equity Infusions
     On November 8, 2005, the ACC approved Pinnacle West’s request to infuse more than $450 million of equity into APS during 2005 or 2006. These infusions consist of about $250 million of the proceeds of Pinnacle West’s common equity issuance on May 2, 2005 and about $210 million of the proceeds from the sale of Silverhawk in January 2006 (see Note 22). Pinnacle West has made these equity infusions into APS.
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.
4. Income Taxes
     Certain assets and liabilities are reported differently for income tax purposes than they are for financial statements purposes. 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 and again in 2005, the current income tax liability was increased, with a
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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 or results of operations. We expect that it will have a negative impact on cash flows.
     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.
     The components of income tax expense are as follows (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	
Current:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	107,837	 	 	$	200,133	 	 	$	22,875	 	
State	 	 	13,064	 	 	 	48,054	 	 	 	3,752	 	
 	 	 	 	 	 	 	 	 	 	
Total current	 	 	120,901	 	 	 	248,187	 	 	 	26,627	 	
 	 	 	 	 	 	 	 	 	 	
Deferred:	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	11,930	 	 	 	(113,850	)	 	 	81,756	 	
Discontinued operations	 	 	(35,736	)	 	 	—	 	 	 	3,706	 	
 	 	 	 	 	 	 	 	 	 	
Total deferred	 	 	(23,806	)	 	 	(113,850	)	 	 	85,462	 	
 	 	 	 	 	 	 	 	 	 	
Total income tax expense	 	 	97,095	 	 	 	134,337	 	 	 	112,089	 	
Less: income tax expense (benefit) on discontinued operations	 	 	(29,797	)	 	 	(1,805	)	 	 	9,887	 	
 	 	 	 	 	 	 	 	 	 	
Income tax expense – continuing operations	 	$	126,892	 	 	$	136,142	 	 	$	102,202	 	
 	 	 	 	 	 	 	 	 	 	
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     The following chart compares pretax income from continuing operations at the 35% federal income tax rate to income tax expense – continuing operations (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Federal income tax expense at 35% statutory rate	 	$	122,519	 	 	$	133,956	 	 	$	114,655	 	
Increases (reductions) in tax expense resulting from:	 	 	 	 	 	 	 	 	 	 	 	 	
State income tax net of federal income tax benefit	 	 	11,981	 	 	 	14,460	 	 	 	11,493	 	
Credits and favorable adjustments related to prior years resolved in current year	 	 	—	 	 	 	(6,138	)	 	 	(17,944	)	
Medicare Subsidy Part-D (see Note 8)	 	 	(2,733	)	 	 	(1,778	)	 	 	—	 	
Allowance for equity funds used during construction (see Note 1)	 	 	(3,694	)	 	 	(1,547	)	 	 	(4,984	)	
Other	 	 	(1,181	)	 	 	(2,811	)	 	 	(1,018	)	
 	 	 	 	 	 	 	 	 	 	
Income tax expense – continuing operations	 	$	126,892	 	 	$	136,142	 	 	$	102,202	 	
 	 	 	 	 	 	 	 	 	 	
     The following table shows the net deferred income tax liability recognized on the Consolidated Balance Sheets (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	December 31,	 	
 	 	2005	 	 	2004	 	
Current liability	 	$	(94,710	)	 	$	(9,057	)	
Long term liability	 	 	(1,225,253	)	 	 	(1,227,553	)	
 	 	 	 	 	 	 	
Accumulated deferred income taxes – net	 	$	(1,319,963	)	 	$	(1,236,610	)	
 	 	 	 	 	 	 	
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     The components of the net deferred income tax liability were as follows (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	December 31,	 	
 	 	2005	 	 	2004	 	
DEFERRED TAX ASSETS	 	 	 	 	 	 	 	 	
Risk management and trading activities	 	$	323,696	 	 	$	91,021	 	
Regulatory liabilities:	 	 	 	 	 	 	 	 	
Asset retirement obligation	 	 	189,726	 	 	 	182,086	 	
Federal excess deferred income taxes	 	 	14,446	 	 	 	16,341	 	
Deferred fuel and purchased power – mark-to-market	 	 	11,923	 	 	 	—	 	
Other	 	 	29,720	 	 	 	8,282	 	
Pension liability	 	 	83,753	 	 	 	91,973	 	
Deferred gain on Palo Verde Unit 2 sale leaseback	 	 	17,868	 	 	 	19,816	 	
Other	 	 	91,015	 	 	 	70,849	 	
 	 	 	 	 	 	 	
Total deferred tax assets	 	 	762,147	 	 	 	480,368	 	
 	 	 	 	 	 	 	
DEFERRED TAX LIABILITIES	 	 	 	 	 	 	 	 	
Plant-related	 	 	(1,426,158	)	 	 	(1,516,174	)	
Risk management and trading activities	 	 	(524,940	)	 	 	(146,037	)	
Regulatory assets:	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power	 	 	(67,461	)	 	 	—	 	
Other	 	 	(63,551	)	 	 	(54,767	)	
 	 	 	 	 	 	 	
Total deferred tax liabilities	 	 	(2,082,110	)	 	 	(1,716,978	)	
 	 	 	 	 	 	 	
Accumulated deferred income taxes – net	 	$	(1,319,963	)	 	$	(1,236,610	)	
 	 	 	 	 	 	 	
5. Lines of Credit and Short-Term Borrowings
     Pinnacle West had committed lines of credit of $300 million at December 31, 2005 and December 31, 2004, 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 lines mature in December 2010. Pinnacle West had no outstanding borrowings at December 31, 2005 and December 31, 2004. Pinnacle West had approximately $11 million of letters of credit issued under the line at December 31, 2005 ($7 million of which terminated as a result of the sale of Silverhawk – see Note 22) and approximately $13 million of letters of credit issued under the line at December 31, 2004. The commitment fees were 0.15% in 2005 and 0.175% in 2004. Pinnacle West had no commercial paper borrowings outstanding at December 31, 2005 and 2004. All Pinnacle West and APS bank lines of credit and commercial paper agreements are unsecured.
     APS had committed lines of credit with various banks of $400 million at December 31, 2005 and $325 million at December 31, 2004, which were available either to support the issuance of up to $250 million in commercial paper or to be used for bank borrowings, including the issuance of letters of credit. The current line matures in December 2010. The commitment fees at December 31, 2005 and 2004 for these lines of credit were 0.11% and 0.15% per annum. APS had no bank borrowings
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outstanding under these lines of credit at December 31, 2005 and 2004. APS had approximately $4.8 million of letters of credit issued under the line at December 31, 2005.
     APS had no commercial paper borrowings outstanding at December 31, 2005 and 2004. By Arizona statute, APS’ short-term borrowings cannot exceed 7% of its total capitalization unless approved by the ACC.
     SunCor had revolving lines of credit totaling $150 million at December 31, 2005 and $90 million at December 31, 2004. The commitment fees were 0.125% in 2005 and 2004. SunCor had $123 million outstanding at December 31, 2005 and $35 million outstanding at December 31, 2004. The weighted-average interest rate was 5.93% at December 31, 2005 and 4.50% at December 31, 2004. Interest was based on LIBOR plus 1.5% for 2005 and LIBOR plus 2% or prime plus 0.5% for 2004. The balance is included in long-term debt on the Consolidated Balance Sheets at December 31, 2005 and it was in short-term debt on the Consolidated Balance Sheets at December 31, 2004. SunCor had other short-term loans in the amount of $16 million at December 31, 2005 and $36 million at December 31, 2004. These loans are made up of multiple notes primarily with variable interest rates based on LIBOR plus 2.25% and 2.50% or prime plus 1.75% at December 31, 2005 and LIBOR plus 2.5% at December 31, 2004.
6. Long-Term Debt
     Substantially all of APS’ debt is unsecured. 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, 2005 and 2004 (dollars in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	December 31,	 	
 	 	Maturity	 	 	Interest	 	 	 	 	 	 	 	
 	 	Dates (a)	 	 	Rates	 	 	2005	 	 	2004	 	
APS	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pollution control bonds (b)	 	 	2024-2034	 	 	 	(c	)	 	$	565,855	 	 	$	565,860	 	
Pollution control bonds with senior notes	 	 	2029	 	 	 	5.05	%	 	 	90,000	 	 	 	90,000	 	
Unsecured notes (d)	 	 	2005	 	 	 	6.25	%	 	 	—	 	 	 	100,000	 	
Unsecured notes (e)	 	 	2005	 	 	 	7.625	%	 	 	—	 	 	 	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 (e)	 	 	2014	 	 	 	5.80	%	 	 	300,000	 	 	 	300,000	 	
Secured note	 	 	2014	 	 	 	6.00	%	 	 	1,745	 	 	 	1,900	 	
Senior notes	 	 	2006	 	 	 	6.75	%	 	 	83,695	 	 	 	83,695	 	
Senior notes (f)	 	 	2035	 	 	 	5.50	%	 	 	250,000	 	 	 	—	 	
Unamortized discount and premium	 	 	 	 	 	 	 	 	 	 	(9,151	)	 	 	(7,968	)	
Capitalized lease obligations	 	 	2006-2012	 	 	 	(g	)	 	 	8,179	 	 	 	9,854	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	 	 	 	 	 	 	 	 	2,565,323	 	 	 	2,718,341	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SUNCOR	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Notes payable	 	 	2006-2008	 	 	 	(h	)	 	 	129,040	 	 	 	15,467	 	
Capitalized lease obligations	 	 	2005-2007	 	 	 	8.91	%	 	 	266	 	 	 	507	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	 	 	 	 	 	 	 	 	129,306	 	 	 	15,974	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
PINNACLE WEST	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Senior notes (i)	 	 	2006	 	 	 	6.40	%	 	 	298,518	 	 	 	302,589	 	
Unamortized discount and premium	 	 	 	 	 	 	 	 	 	 	(29	)	 	 	(143	)	
Floating rate senior notes	 	 	2005	 	 	 	(j	)	 	 	—	 	 	 	165,000	 	
Capitalized lease obligations	 	 	2005-2007	 	 	 	5.45	%	 	 	284	 	 	 	389	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	 	 	 	 	 	 	 	 	298,773	 	 	 	467,835	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total long-term debt	 	 	 	 	 	 	 	 	 	 	2,993,402	 	 	 	3,202,150	 	
Less current maturities	 	 	 	 	 	 	 	 	 	 	384,947	 	 	 	617,165	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
TOTAL LONG-TERM DEBT LESS CURRENT MATURITIES	 	 	 	 	 	 	 	 	 	$	2,608,455	 	 	$	2,584,985	 	

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

(b)	 	On March 1, 2005, Maricopa County Arizona Pollution Control Corporation issued $164 million of variable interest rate pollution control bonds, 2005 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.	

(c)	 	The weighted-average rate was 3.25% at December 31, 2005 and 1.89% at December 31, 2004. Changes in short-term interest rates would affect the costs associated with this debt.	

(d)	 	On January 15, 2005, APS repaid its $100 million 6.25% notes due 2005. APS used cash on hand to repay these notes.	

(e)	 	On August 1, 2005, APS repaid $300 million of its 7.625% notes due 2005. APS used cash from the issuance of $300 million 5.8% senior unsecured notes due June 30, 2014.	
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(f)	 	On August 22, 2005, APS issued $250 million of 5.50% senior notes dues 2035. A portion of the proceeds from the sale of the notes was used for general corporate purposes and, on October 3, 2005, the balance of the proceeds, along with cash on hand, was used to fund the $500 million that APS was obligated to transfer to Pinnacle West Energy in connection with APS’ acquisition of the PWEC Dedicated Assets.	

(g)	 	The weighted-average rate was 5.81% at December 31, 2005 and 5.78% at December 31, 2004. Capital leases are included in property, plant and equipment on the Consolidated Balance Sheets for both December 31, 2005 and December 31, 2004.	

(h)	 	SunCor had $123 million outstanding at December 31, 2005 under its revolving line of credit. The weighted-average interest rate was 5.93% at December 31, 2005. The remaining amount of approximately $6 million at December 31, 2005 was made up of multiple notes with variable interest rates based on the lenders’ prime rates plus 0.25% or LIBOR plus 2.00%. There is also a note at a fixed rate of 4.25%.	

(i)	 	On January 29, 2004, we entered into a fixed-for-floating interest rate swap transaction related to the $300 million 6.40% senior note. The transaction qualifies as a fair value hedge under SFAS No. 133.	

(j)	 	The weighted-average rate was 2.06% at December 31, 2004.	
     On February 28, 2006, Pinnacle West entered into an Uncommitted Master Shelf Agreement with Prudential Investment Management, Inc. (“Prudential”) and certain of its affiliates. The agreement provides the terms under which Pinnacle West may offer up to $200 million of its senior notes for purchase by Prudential affiliates at any time prior to December 31, 2007. The maturity of notes issued under the agreement cannot exceed five years. Pursuant to the agreement, on February 28, 2006, Pinnacle West issued and sold to Prudential affiliates $175 million aggregate principal amount of its 5.91% Senior Notes, Series A, Due February 28, 2011 (the “Series A Notes”). Pinnacle West will use the proceeds of the Series A Notes to repay at maturity a portion of the $300 million aggregate principal amount of its 6.40% Senior Notes due April 1, 2006 or for other general corporate purposes.
     Pinnacle West’s and APS’ debt covenants related to their respective bank financing arrangements include a debt to capitalization ratio. Certain of APS’ bank financing arrangements also include 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. For each of Pinnacle West and APS, these covenants require that the ratio of consolidated debt to total consolidated capitalization cannot exceed 65%. At December 31, 2005, the ratio was approximately 49% for Pinnacle West and 47% for APS. The provisions regarding interest coverage require a minimum cash coverage of two times the interest requirements for APS. The interest coverage is approximately 4 times under APS’ bank financing agreements as of December 31, 2005. 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 and could cross-default other debt.
     Neither Pinnacle West’s nor APS’ financing agreements contain “rating triggers” that would result in an acceleration of the required interest and principal payments in the event of a rating downgrade. However, in the event of a further rating 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 certain other material 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 certain other material agreements. Pinnacle West and APS do not have a material adverse change restriction for revolver borrowings.
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     The following table shows principal payments due on Pinnacle West’s and APS’ total long-term debt and capitalized lease requirements (dollars in millions):
 	 	 	 	 	 	 	 	 	
Year	 	Pinnacle West	 	APS	
2006	 	$	387	 	 	$	86	 	
2007	 	 	1	 	 	 	1	 	
2008	 	 	129	 	 	 	1	 	
2009	 	 	1	 	 	 	1	 	
2010	 	 	224	 	 	 	224	 	
Thereafter	 	 	2,261	 	 	 	2,261	 	
7. Common Stock and Treasury Stock
     Our common stock and treasury stock activity during each of the three years 2005, 2004 and 2003 is as follows (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Common Stock	 	 	Treasury Stock	 	
 	 	Shares	 	 	Amount	 	 	Shares	 	 	Amount	 	
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	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common stock issuance (a)	 	 	7,274,272	 	 	 	298,330	 	 	 	—	 	 	 	—	 	
Purchase of treasury stock (b)	 	 	—	 	 	 	—	 	 	 	(28,124	)	 	 	(1,601	)	
Reissuance of treasury stock for stock compensation (net)	 	 	—	 	 	 	—	 	 	 	17,588	 	 	 	784	 	
Other	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at December 31, 2005	 	 	99,077,133	 	 	$	2,067,377	 	 	 	(20,058	)	 	$	(1,245	)	

(a)	 	On May 2, 2005, Pinnacle West issued 6,095,000 shares of its common stock at an offering price of $42 per share, resulting in net proceeds of approximately $248 million. Pinnacle West used the net proceeds for general corporate purposes, including making capital contributions to APS, which, in turn, used such funds to pay a portion of the approximately $190 million purchase price to acquire the Sundance Plant and for other capital expenditures incurred to meet the growing needs of APS’ service territory.	
 		
(b)	 	Represents shares of common stock withheld from certain stock awards for tax purposes.	
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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 its 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 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. The market-related value of our plan assets is their fair value at the measurement date.
     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. Pinnacle West adopted FSP 106-2 retroactive to the beginning of 2004. The effect of this was to reduce the accumulated postretirement benefit obligation (APBO) at January 1, 2004 by $66 million, and net periodic cost for 2004 by $11 million, as compared with the amount calculated without considering the effects of the subsidy.
     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):
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 	 	Pension	 	 	Other Benefits	 	
 	 	2005	 	 	2004	 	 	2003	 	 	2005	 	 	2004	 	 	2003	 	
Service cost-benefits earned during the period	 	$	45,027	 	 	$	41,207	 	 	$	37,662	 	 	$	20,913	 	 	$	17,557	 	 	$	15,858	 	
Interest cost on benefit obligation	 	 	87,189	 	 	 	81,873	 	 	 	76,951	 	 	 	34,223	 	 	 	29,488	 	 	 	30,163	 	
Expected return on plan assets	 	 	(88,403	)	 	 	(78,790	)	 	 	(65,046	)	 	 	(30,471	)	 	 	(24,773	)	 	 	(18,762	)	
Amortization of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Transition (asset) obligation	 	 	(3,227	)	 	 	(3,227	)	 	 	(3,227	)	 	 	3,005	 	 	 	3,005	 	 	 	3,005	 	
Prior service cost (credit)	 	 	2,401	 	 	 	2,401	 	 	 	2,401	 	 	 	(125	)	 	 	(125	)	 	 	(125	)	
Net actuarial loss	 	 	19,810	 	 	 	17,946	 	 	 	18,135	 	 	 	9,243	 	 	 	7,414	 	 	 	9,714	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net periodic benefit cost	 	$	62,797	 	 	$	61,410	 	 	$	66,876	 	 	$	36,788	 	 	$	32,566	 	 	$	39,853	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Portion of cost charged to expense	 	$	26,375	 	 	$	25,792	 	 	$	30,094	 	 	$	15,451	 	 	$	13,678	 	 	$	17,934	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
APS share of costs charged to expense	 	$	24,169	 	 	$	22,483	 	 	$	25,450	 	 	$	14,159	 	 	$	11,923	 	 	$	15,166	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     The following table shows the plans’ changes in the benefit obligations for the years 2005 and 2004 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Pension	 	 	Other Benefits	 	
 	 	2005	 	 	2004	 	 	2005	 	 	2004	 	
Benefit obligation at January 1	 	$	1,454,244	 	 	$	1,307,628	 	 	$	536,213	 	 	$	540,181	 	
Service cost	 	 	45,027	 	 	 	41,207	 	 	 	20,913	 	 	 	17,557	 	
Interest cost	 	 	87,189	 	 	 	81,873	 	 	 	34,223	 	 	 	29,488	 	
Benefit payments	 	 	(46,109	)	 	 	(45,195	)	 	 	(16,962	)	 	 	(14,332	)	
Actuarial losses (gains)	 	 	55,717	 	 	 	68,731	 	 	 	11,291	 	 	 	(36,681	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit obligation at December 31	 	$	1,596,068	 	 	$	1,454,244	 	 	$	585,678	 	 	$	536,213	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     The following table shows the qualified pension plan and other benefit plan changes in the fair value of plan assets for the years 2005 and 2004 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Pension	 	 	Other Benefits	 	
 	 	2005	 	 	2004	 	 	2005	 	 	2004	 	
Fair value of plan assets at January 1	 	$	982,282	 	 	$	887,311	 	 	$	352,084	 	 	$	294,051	 	
Actual return on plan assets	 	 	73,298	 	 	 	102,829	 	 	 	27,302	 	 	 	32,433	 	
Employer contributions	 	 	52,700	 	 	 	35,000	 	 	 	36,788	 	 	 	32,600	 	
Benefit payments	 	 	(43,432	)	 	 	(42,858	)	 	 	—	 	 	 	(7,000	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Fair value of plan assets at December 31	 	$	1,064,848	 	 	$	982,282	 	 	$	416,174	 	 	$	352,084	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
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     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, 2005 and 2004 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Pension	 	 	Other Benefits	 	
 	 	2005	 	 	2004	 	 	2005	 	 	2004	 	
Funded status at December 31	 	$	(531,220	)	 	$	(471,962	)	 	$	(169,504	)	 	$	(184,129	)	
Unrecognized net transition (asset) obligation	 	 	(645	)	 	 	(3,873	)	 	 	21,034	 	 	 	24,039	 	
Unrecognized prior service cost (credit)	 	 	11,833	 	 	 	14,234	 	 	 	(1,296	)	 	 	(1,422	)	
Unrecognized net actuarial losses	 	 	426,991	 	 	 	375,980	 	 	 	170,011	 	 	 	158,271	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Benefit (liability) asset recognized in the Consolidated Balance Sheets	 	$	(93,041	)	 	$	(85,621	)	 	$	20,245	 	 	$	(3,241	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
     The following table shows the projected benefit obligation and the accumulated benefit obligation for pension plans in excess of plan assets as of December 31, 2005 and 2004 (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	
Projected benefit obligation	 	$	1,596,068	 	 	$	1,454,244	 	

Accumulated benefit obligation	 	$	1,329,324	 	 	$	1,216,727	 	
Less fair value of plan assets	 	 	1,064,848	 	 	 	982,282	 	
 	 	 	 	 	 	 	
Pinnacle West pension liability	 	$	264,476	 	 	$	234,445	 	
 	 	 	 	 	 	 	
APS share of pension liability	 	$	233,342	 	 	$	203,668	 	
 	 	 	 	 	 	 	
     The following table shows the details related to benefits included on the Consolidated Balance Sheets as of December 31, 2005 and 2004 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Pension	 	 	Other Benefits	 	
 	 	2005	 	 	2004	 	 	2005	 	 	2004	 	
(Accrued) prepaid benefit cost	 	$	(93,041	)	 	$	(85,621	)	 	$	20,245	 	 	$	(3,241	)	
Additional minimum liability	 	 	(171,435	)	 	 	(148,824	)	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Total (liability) asset	 	 	(264,476	)	 	 	(234,445	)	 	 	20,245	 	 	 	(3,241	)	
Intangible asset	 	 	11,833	 	 	 	14,234	 	 	 	—	 	 	 	—	 	
Accumulated other comprehensive loss (pretax)	 	 	159,602	 	 	 	134,590	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Net amount recognized	 	$	(93,041	)	 	$	(85,621	)	 	$	20,245	 	 	$	(3,241	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
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     The following table shows the other comprehensive income (loss) arising from the change in additional minimum liability for the years ended December 31, 2005 and 2004 (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	
Increase in minimum liability included in other comprehensive income – net of tax:	 	 	 	 	 	 	 	 	
Pinnacle West consolidated	 	$	(15,489	)	 	$	(15,224	)	
APS share	 	$	(15,045	)	 	$	(13,929	)	
     The following table shows the weighted-average assumptions used for both the pension and other benefits to determine benefit obligations and net periodic benefit costs:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Benefit Costs	
 	 	Benefit Obligations	 	For the Years Ended	
 	 	As of December 31,	 	December 31,	
 	 	2005	 	2004	 	2005	 	2004	
Discount rate-pension	 	 	5.66	%	 	 	5.84	%	 	 	5.84	%	 	 	6.10	%	
Discount rate-other benefits	 	 	5.68	%	 	 	5.92	%	 	 	5.92	%	 	 	6.10	%	
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	 	 	2010	 	 	 	2009	 	 	 	2009	 	 	 	2008	 	
     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 2006, we are assuming a 9% long-term rate of return on plan assets, which we believe is reasonable given our asset allocation in relation to historical and expected 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):
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 	 	1% Increase	 	1% Decrease	
Effect on other postretirement benefits expense, after consideration of amounts capitalized or billed to electric plant participants	 	$	7	 	 	$	(6	)	
Effect on service and interest cost components of net periodic other postretirement benefit costs	 	$	11	 	 	$	(9	)	
Effect on the accumulated other postretirement benefit obligation	 	$	100	 	 	$	(79	)	
Plan Assets
     Pinnacle West’s qualified pension plan asset allocation at December 31, 2005 and 2004 is as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Percentage of Plan Assets	 	 	 	 	
 	 	at December 31,	 	 	Target Asset Allocation	 	
 	 	2005	 	 	2004	 	 	 	 	 	
Asset Category:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities	 	 	59	%	 	 	60	%	 	 	60	%	
Fixed income	 	 	26	 	 	 	27	 	 	 	30	%	
Other	 	 	15	 	 	 	13	 	 	 	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, 2005 and 2004, is as follows:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Percentage of Plan Assets	 	 	 	 	
 	 	at December 31,	 	 	Target Asset Allocation	 	
 	 	2005	 	 	2004	 	 	 	 	 	
Asset Category:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities	 	 	69	%	 	 	71	%	 	 	70	%	
Fixed income	 	 	26	 	 	 	23	 	 	 	27	%	
Other	 	 	5	 	 	 	6	 	 	 	3	%	
 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	100	%	 	 	100	%	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	
     The Investment Management Committee, described above, has also been delegated oversight of the plan assets for the other postretirement benefit plans. The investment policy for other postretirement benefit plans’ assets is similar to that of the pension plan assets described above.
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Contributions
     The contribution to our pension plan in 2006 is estimated to be approximately $50 million. The contribution to our other postretirement benefit plans in 2006 is estimated to be approximately $29 million. APS’ share is approximately 96% 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):
 	 	 	 	 	 	 	 	 	
Year	 	Pension	 	 	Other Benefits (a)	 	
2006	 	$	52,675	 	 	$	16,340	 	
2007	 	 	56,891	 	 	 	17,751	 	
2008	 	 	62,263	 	 	 	19,166	 	
2009	 	 	68,651	 	 	 	20,775	 	
2010	 	 	75,273	 	 	 	22,847	 	
Years 2011-2015	 	 	520,961	 	 	 	149,784	 	

(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 its subsidiaries. In 2005, costs related to APS’ employees represented 96% 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, 2005, approximately 22% of total plan assets were in Pinnacle West stock. Pinnacle West recorded expenses for this plan of approximately $6 million for 2005 and $5 million for each of the years 2004 and 2003. APS recorded expenses for this plan of approximately $6 million in 2005, $5 million in 2004 and $5 million in 2003.
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 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 VIE’s involved in the Palo Verde sale leaseback transactions.
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     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 $71 million in 2005, $69 million in 2004 and $67 million in 2003. APS’ lease expense was $58 million in 2005, $57 million in 2004 and $66 million in 2003.
     The amounts to be paid for the Palo Verde Unit 2 leases are approximately $49 million per year for the years 2006 to 2015.
     Estimated future minimum lease payments for Pinnacle West’s and APS’ operating leases are approximately as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	
  	 	Pinnacle West	 	 	 	 	
Year	 	Consolidated	 	 	APS	 	
2006	 	$	74	 	 	$	66	 	
2007	 	 	73	 	 	 	65	 	
2008	 	 	71	 	 	 	64	 	
2009	 	 	68	 	 	 	62	 	
2010	 	 	65	 	 	 	60	 	
Thereafter	 	 	303	 	 	 	288	 	
 	 	 	 	 	 	 	
Total future lease commitments	 	$	654	 	 	$	605	 	
 	 	 	 	 	 	 	
10. Jointly-Owned Facilities
     APS shares ownership of some of its generating and transmission facilities with other companies. Pinnacle West Energy shared ownership of Silverhawk, which was sold on January 10, 2006. See Note 22. Our share of operations and maintenance expense related to these facilities is included in the Consolidated Statements of Income. The following table shows APS’ interests in those jointly-owned facilities recorded on the Consolidated Balance Sheets at December 31, 2005 (dollars in thousands):
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 	 	 	 	 	 	 	 	 	 	 	 	 	 	Construction	
 	 	Percent	 	Plant in	 	Accumulated	 	Work in	
 	 	Owned	 	Service	 	Depreciation	 	Progress	
Generating facilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Palo Verde Units 1 and 3	 	 	29.1	%	 	$	1,931,736	 	 	$	923,052	 	 	$	41,391	 	
Palo Verde Unit 2 (see Note 9)	 	 	17.0	%	 	 	671,775	 	 	 	260,840	 	 	 	6,363	 	
Four Corners Units 4 and 5	 	 	15.0	%	 	 	158,129	 	 	 	78,588	 	 	 	317	 	
Navajo Generating Station Units 1, 2 and 3	 	 	14.0	%	 	 	252,348	 	 	 	108,182	 	 	 	3,963	 	
Cholla common facilities (a)	 	 	62.6	%(b)	 	 	87,165	 	 	 	38,832	 	 	 	2,109	 	
Transmission facilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ANPP 500KV System	 	 	35.8	%(b)	 	 	81,117	 	 	 	22,829	 	 	 	815	 	
Navajo Southern System	 	 	31.4	%(b)	 	 	29,809	 	 	 	13,273	 	 	 	6,813	 	
Palo Verde – Yuma 500KV System	 	 	23.9	%(b)	 	 	9,580	 	 	 	3,945	 	 	 	386	 	
Four Corners Switchyards	 	 	27.5	%(b)	 	 	3,120	 	 	 	1,267	 	 	 	—	 	
Phoenix – Mead System	 	 	17.1	%(b)	 	 	36,020	 	 	 	3,770	 	 	 	—	 	
Palo Verde – Estrella 500KV System	 	 	55.5	%(b)	 	 	74,243	 	 	 	2,023	 	 	 	—	 	
Harquahala	 	 	80.0	%(b)	 	 	—	 	 	 	—	 	 	 	112	 	

(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.	
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 Policy 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.
     APS has existing fuel storage pools at Palo Verde and is operating a 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.
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     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 $147 million (in 2005 dollars) over the life of Palo Verde for its share of the costs related to the on-site interim storage of spent nuclear fuel. At December 31, 2005, APS had a regulatory asset of $6 million that represents amounts spent for on-site interim spent fuel storage net of amounts recovered in rates per the ACC rate order that was effective April 1, 2005.
     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.
      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 $15 million per incident, to be periodically adjusted for inflation. 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 $13 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 accidental outage of any of the three units. The property damage, decontamination, and replacement power coverages are provided by Nuclear Electric Insurance Limited (NEIL). APS is subject to retrospective assessments under all NEIL policies if NEIL’s losses in any policy year exceed accumulated funds. The maximum amount of retrospective assessments APS could incur under the current NEIL policies totals $17.8 million. The insurance coverage discussed in this and the previous paragraph is subject to certain policy conditions and exclusions.
Fuel and Purchased Power Commitments
     Pinnacle West and APS are parties to various fuel and purchased power contracts with terms expiring between 2006 and 2025 that include required purchase provisions. Pinnacle West estimates the contract requirements to be approximately $316 million in 2006; $239 million
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in 2007; $180 million in 2008; $139 million in 2009; $117 million in 2010 and $908 million thereafter. APS estimates the contract requirements to be approximately $265 million in 2006; $179 million in 2007; $152 million in 2008; $139 million in 2009; $117 million in 2010 and $896 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 fuel and purchased power 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 2024.
     The following table summarizes our actual and estimated take-or-pay commitments (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Actual	 	Estimated (a)	
 	 	2003	 	2004	 	2005	 	2006	 	2007	 	2008	 	2009	 	2010	 	Thereafter	
Coal take-or-pay commitments	 	$	43	 	 	$	41	 	 	$	48	 	 	$	67	 	 	$	69	 	 	$	78	 	 	$	93	 	 	$	73	 	 	$	611	 	

(a)	 	Total take-or-pay commitments are approximately $991 million. The total net present value of these commitments is approximately $598 million.	
Coal Mine Reclamation Obligations
     APS must reimburse certain coal providers for amounts incurred for coal mine reclamation. APS’ coal mine reclamation obligation was $75 million at December 31, 2005 and $61 million at December 31, 2004 and is included in Deferred Credits and 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. However, on September 6, 2005, the Ninth Circuit issued a decision, concluding that the FERC may not order refunds from entities that are not within the FERC’s jurisdiction. Because a number of the entities owing refunds under the FERC’s calculations are not within the FERC’s jurisdiction, this order may affect the level of recovery of refunds due in this proceeding. In addition, on August 8, 2005, the FERC issued an order allowing sellers in the California markets to demonstrate that its refund methodology results in an overall revenue shortfall for their transactions in the relevant markets over a specified time frame. More than twenty sellers made such cost recovery filings on September 14, 2005. On January 26, 2006, the FERC conditionally accepted thirteen of these filings, reducing the refund liability for these sellers. Correspondingly, this will reduce the recovery of total refunds in the California markets. We currently believe the refund claims at FERC will have no material adverse impact on our financial position, results of operations, cash flow or liquidity.
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     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. 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. Several of the intervenors in this appeal filed a petition for rehearing of this decision on October 25, 2004. The petition for rehearing has not been acted upon, and 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 Ninth Circuit Court of Appeals. 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 cash flows.
     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 Independent System Operator 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.
      California Civil Energy Market Litigation
     APS has been 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. 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. 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, cash flow or liquidity.
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Construction Program
     Consolidated capital expenditures in 2006 are estimated to be (dollars in millions):
 	 	 	 	 	
APS	 	$	649	 	
SunCor	 	 	232	 	
Other	 	 	6	 	
 	 	 	 	
Total	 	$	887	 	
 	 	 	 	
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 were 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. On December 28, 2004, the D.C. Court of Appeals 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, for the period September 2003 through December 2005. This appeal has been stayed pending further consideration by the FERC.
     Consistent with its obligations under the 1996 settlement, El Paso filed a new rate case on June 30, 2005, which proposed new rates and new services to become effective on January 1, 2006. The FERC suspended the effectiveness of these new rates and services until January 1, 2006 and made the rates subject to refund pending the outcome of a hearing. As part of an ongoing technical conference and settlement discussions, El Paso has agreed to postpone the implementation and the associated cost impact of the new services until April 1, 2006. APS will be able to evaluate the cost impact of these new services once the FERC issues a final order on the technical conference. APS cannot currently predict the outcome of this matter.
Navajo Nation Litigation
     In June 1999, the Navajo Nation served Salt River Project with a lawsuit filed in the United States District Court for the District of Columbia (the “D.C. 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. 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
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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 filed in the Circuit Court for the City of St. Louis 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.” 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.
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 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.
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.
     Additionally, APS has aquifer protection permits for some of its generation sites that require the closure of certain facilities at those sites. The generation sites are strategically located to serve APS native load customers. Management expects to continuously use the sites and, thus, cannot estimate a potential closure date. 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 debt securities and domestic equity securities. APS applies the provisions of
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SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” in accounting for investments in decommissioning trust funds, and classifies these investments as available for sale. As a result, we record the decommissioning trust funds at their fair value on our Consolidated Balance Sheets. Because of the ability of APS to recover decommissioning costs in rates and in accordance with the regulatory treatment for decommissioning trust funds, APS has recorded the offsetting amount of unrealized gains (losses) on investment securities in other regulatory liabilities/assets . The following table summarizes the fair value of APS’ nuclear decommissioning trust fund assets at December 31, 2005 and December 31, 2004 (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Total	 	 	Total	 	
 	 	 	 	 	 	Unrealized	 	 	Unrealized	 	
 	 	Fair Value	 	 	Gains	 	 	Losses	 	
2005	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities	 	$	150	 	 	$	50	 	 	$	—	 	
Debt securities	 	 	144	 	 	 	3	 	 	 	1	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	294	 	 	$	53	 	 	$	1	 	

2004	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities	 	$	135	 	 	$	45	 	 	$	—	 	
Debt securities	 	 	133	 	 	 	6	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	268	 	 	$	51	 	 	$	—	 	
 	 	 	 	 	 	 	 	 	 	
     The costs of securities sold are determined on the basis of specific identification. The following table sets forth approximate gains and losses and proceeds from the sale of securities by the nuclear decommissioning trust funds (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	
 	 	2005	 	2004	 	2003	
Realized gains	 	$	6	 	 	$	1	 	 	$	2	 	
Realized losses	 	 	(6	)	 	 	(2	)	 	 	(1	)	
Proceeds from the sale of securities	 	 	186	 	 	 	124	 	 	 	169	 	
     The fair value of debt securities, summarized by contractual maturities, at December 31, 2005 is as follows:
 	 	 	 	 	
 	 	Fair Value	 	
 	 	(in millions)	 	
Less than one year	 	$	18	 	
1 year — 5 years	 	 	35	 	
5 years — 10 years	 	 	36	 	
Greater than 10 years	 	 	55	 	
 	 	 	 	
Total	 	$	144	 	
 	 	 	 	
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     The following schedule shows the change in our asset retirement obligations for 2005 and 2004 (dollars in millions):
 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	
Asset retirement obligation at the beginning of year	 	$	252	 	 	$	234	 	
Changes attributable to:	 	 	 	 	 	 	 	 	
Liabilities settled	 	 	(2	)	 	 	(1	)	
Accretion expense	 	 	17	 	 	 	17	 	
Estimated cash flow revisions	 	 	2	 	 	 	2	 	
 	 	 	 	 	 	 	
Asset retirement obligation at the end of year	 	$	269	 	 	$	252	 	
 	 	 	 	 	 	 	
     In accordance with SFAS No. 71, APS accrues for removal costs for its regulated utility assets, even if there is no legal obligation for removal. See detail of regulatory liabilities in Note 1.
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13. Selected Quarterly Financial Data (Unaudited)
     The following note presents quarterly financial information for 2005 and 2004. We are disclosing originally reported amounts and revised amounts in each period for the reclassification of certain commercial properties at SunCor and Silverhawk as discontinued operations (see Note 22).
     Consolidated quarterly financial information for 2005 and 2004 is as follows (dollars in thousands, except per share amounts):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005 Quarter Ended	 	2005	
 	 	March 31,	 	June 30,	 	September 30,	 	December 31,	 	Total	
As originally reported :	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues	 	$	615,087	 	 	$	755,836	 	 	$	955,583	 	 	 	 	 	 	 	 	 	
Operations and maintenance	 	 	156,496	 	 	 	153,097	 	 	 	158,940	 	 	 	 	 	 	 	 	 	
Operating income	 	 	85,256	 	 	 	178,627	 	 	 	162,113	 	 	 	 	 	 	 	 	 	
Income taxes	 	 	14,732	 	 	 	55,024	 	 	 	40,305	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	23,656	 	 	 	85,156	 	 	 	84,694	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SunCor reclassifications (see Note 22):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues	 	 	(2,120	)	 	 	(494	)	 	 	—	 	 	 	 	 	 	 	 	 	
Operating income	 	 	(529	)	 	 	205	 	 	 	(268	)	 	 	 	 	 	 	 	 	
Income taxes	 	 	(91	)	 	 	(36	)	 	 	—	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	(142	)	 	 	(55	)	 	 	—	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Silverhawk reclassifications (see Note 22):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues	 	 	(27,609	)	 	 	—	 	 	 	—	 	 	 	 	 	 	 	 	 	
Operations and maintenance	 	 	(1,412	)	 	 	—	 	 	 	—	 	 	 	 	 	 	 	 	 	
Operating income	 	 	7,098	 	 	 	—	 	 	 	—	 	 	 	 	 	 	 	 	 	
Income taxes	 	 	3,929	 	 	 	—	 	 	 	—	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	6,085	 	 	 	—	 	 	 	—	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
After SunCor and Silverhawk reclassifications:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues	 	$	585,358	 	 	$	755,342	 	 	$	955,583	 	 	$	691,672	 	 	$	2,987,955	 	
Operations and maintenance	 	 	155,084	 	 	 	153,097	 	 	 	158,940	 	 	 	168,706	 	 	 	635,827	 	
Operating income	 	 	91,825	 	 	 	178,832	 	 	 	161,845	 	 	 	82,787	 	 	 	515,289	 	
Income taxes	 	 	18,570	 	 	 	54,988	 	 	 	40,305	 	 	 	13,029	 	 	 	126,892	 	
Income from continuing operations	 	 	29,599	 	 	 	85,101	 	 	 	84,694	 	 	 	23,769	 	 	 	223,163	 	
Net income	 	 	24,448	 	 	 	26,735	 	 	 	103,737	 	 	 	21,347	 	 	 	176,267	 	
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 	 	2004 Quarter Ended	 	2004	
 	 	March 31,	 	June 30,	 	September 30,	 	December 31,	 	Total	
As originally reported:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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	 	 	31,426	 	 	 	72,640	 	 	 	105,400	 	 	 	33,729	 	 	 	243,195	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
SunCor reclassifications (see Note 22):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues	 	 	(2,293	)	 	 	(2,592	)	 	 	(2,318	)	 	 	(2,274	)	 	 	(9,477	)	
Operating income	 	 	(552	)	 	 	(625	)	 	 	(415	)	 	 	375	 	 	 	(1,217	)	
Income taxes	 	 	(26	)	 	 	(48	)	 	 	51	 	 	 	168	 	 	 	145	 	
Income from continuing operations	 	 	(41	)	 	 	(75	)	 	 	80	 	 	 	261	 	 	 	225	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Silverhawk reclassifications (See Note 22):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues	 	 	301	 	 	 	(5,084	)	 	 	(37,296	)	 	 	(19,163	)	 	 	(61,242	)	
Operations and maintenance	 	 	—	 	 	 	(380	)	 	 	(2,158	)	 	 	(1,699	)	 	 	(4,237	)	
Operating income	 	 	300	 	 	 	3,002	 	 	 	(1,065	)	 	 	10,686	 	 	 	12,923	 	
Income taxes	 	 	(108	)	 	 	1,801	 	 	 	232	 	 	 	5,215	 	 	 	7,140	 	
Income from continuing operations	 	 	(170	)	 	 	2,813	 	 	 	363	 	 	 	8,141	 	 	 	11,147	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
After SunCor and Silverhawk reclassifications:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating revenues	 	$	564,353	 	 	$	704,207	 	 	$	847,165	 	 	$	713,281	 	 	$	2,829,006	 	
Operations and maintenance	 	 	137,386	 	 	 	138,595	 	 	 	158,607	 	 	 	157,732	 	 	 	592,320	 	
Operating income	 	 	83,946	 	 	 	122,857	 	 	 	209,356	 	 	 	101,806	 	 	 	517,965	 	
Income taxes	 	 	15,334	 	 	 	44,959	 	 	 	59,183	 	 	 	16,666	 	 	 	136,142	 	
Income from continuing operations	 	 	30,580	 	 	 	73,961	 	 	 	104,329	 	 	 	37,720	 	 	 	246,590	 	
Net income	 	 	31,426	 	 	 	72,640	 	 	 	105,400	 	 	 	33,729	 	 	 	243,195	 	
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Earnings per share:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005 Quarter Ended	
 	 	March 31,	 	June 30,	 	September 30,	 	December 31,	
As originally reported — Basic earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	0.26	 	 	$	0.89	 	 	$	0.86	 	 	$	0.24	 	
Net income	 	 	0.27	 	 	 	0.28	 	 	 	1.05	 	 	 	0.22	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
After SunCor and Silverhawk reclassifications — Basic earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	0.32	 	 	 	0.88	 	 	 	0.86	 	 	 	0.24	 	
Net income	 	 	0.27	 	 	 	0.28	 	 	 	1.05	 	 	 	0.22	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As originally reported — Diluted earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	0.26	 	 	 	0.88	 	 	 	0.86	 	 	 	0.24	 	
Net income	 	 	0.27	 	 	 	0.28	 	 	 	1.05	 	 	 	0.22	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
After SunCor and Silverhawk reclassifications — Diluted earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	0.32	 	 	$	0.88	 	 	$	0.86	 	 	$	0.24	 	
Net income	 	 	0.27	 	 	 	0.28	 	 	 	1.05	 	 	 	0.22	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004 Quarter Ended	
 	 	March 31,	 	June 30,	 	September 30,	 	December 31,	
As originally reported — 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	 	
 		
After SunCor and Silverhawk reclassifications — Basic earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	0.33	 	 	 	0.81	 	 	 	1.14	 	 	 	0.41	 	
Net income	 	 	0.34	 	 	 	0.80	 	 	 	1.15	 	 	 	0.37	 	
 		
As originally reported — Diluted earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	0.34	 	 	 	0.78	 	 	 	1.14	 	 	 	0.32	 	
Net income	 	 	0.34	 	 	 	0.79	 	 	 	1.15	 	 	 	0.37	 	
 		
After SunCor and Silverhawk reclassifications — Diluted earnings per share (a):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	0.33	 	 	$	0.81	 	 	$	1.14	 	 	$	0.41	 	
Net income	 	 	0.34	 	 	 	0.79	 	 	 	1.15	 	 	 	0.37	 	

(a)	 	The difference between originally reported and revised basic and diluted earnings per share related to the sale of certain commercial properties at SunCor and the sale of Silverhawk (see Note 22), which changed reported amounts for the quarters in 2005 and 2004.	
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14. Fair Value of Financial Instruments
     Pinnacle West and APS believe that the carrying amounts of their cash equivalents are reasonable estimates of their fair values at December 31, 2005 and 2004 due to their short maturities.
     Pinnacle West and APS 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, 2005 and 2004 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, 2005 and 2004 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, 2005, the carrying value of our long-term debt for Pinnacle West, excluding capitalized lease obligations and interest rate swap (see “Fair Value Hedges” – Note 18), was $2.99 billion, with an estimated fair value of $3.00 billion. See Note 18 for fair value of the interest rate swap. The carrying value of our long-term debt for Pinnacle West (excluding capitalized lease obligations) was $3.19 billion on December 31, 2004, with an estimated fair value of $3.30 billion. On December 31, 2005, the carrying value of APS’ long-term debt (excluding capitalized lease obligations) was $2.56 billion, with an estimated fair value of $2.57 billion. The carrying value of APS’ long-term debt (excluding capital lease obligations) was $2.71 billion on December 31, 2004, with an estimated fair value of $2.81 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, 2005, 2004 and 2003:
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	 	2003	 	
Basic earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	2.31	 	 	$	2.70	 	 	$	2.47	 	
Income (loss) from discontinued operations	 	 	(0.48	)	 	 	(0.04	)	 	 	0.17	 	
 	 	 	 	 	 	 	 	 	 	
Earnings per share – basic	 	$	1.83	 	 	$	2.66	 	 	$	2.64	 	
 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	2.31	 	 	$	2.69	 	 	$	2.47	 	
Income (loss) from discontinued operations	 	 	(.49	)	 	 	(0.03	)	 	 	0.16	 	
 	 	 	 	 	 	 	 	 	 	
Earnings per share – diluted	 	$	1.82	 	 	$	2.66	 	 	$	2.63	 	
 	 	 	 	 	 	 	 	 	 	
     Dilutive stock options increased average common shares outstanding by approximately 106,000 shares in 2005, 135,000 shares in 2004 and 140,000 shares in 2003. Total average common shares outstanding for the purposes of calculating diluted earnings per share were 96,589,949 shares in 2005, 91,532,473 shares in 2004 and 91,405,134 shares in 2003.
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     Options to purchase 495,367 shares of common stock were outstanding at December 31, 2005 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 1,058,616 at December 31, 2004 and 2,291,646 at December 31, 2003.
16. Stock-Based Compensation
     Pinnacle West offers stock-based compensation plans for officers and key employees of Pinnacle West and our subsidiaries.
     The 2002 Long-Term Incentive Plan (2002 plan) allows Pinnacle West to grant performance shares, stock ownership incentive awards and non-qualified and performance-accelerated stock options to key employees. We have 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 Long-Term Incentive Plan (“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. 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 $6 million in 2005, $8 million in 2004 and $6 million in 2003 for Pinnacle West. APS’ share was $5 million in 2005, $6 million in 2004 and $3 million in 2003.
     The following table is a summary of the status of outstanding stock options under our equity incentive plans as of December 31, 2005, 2004 and 2003 and changes during the years ending on those dates:
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 	 	 	 	 	 	2005	 	 	 	 	 	2004	 	 	 	 	 	2003	
 	 	 	 	 	 	Weighted	 	 	 	 	 	Weighted	 	 	 	 	 	Weighted	
 	 	 	 	 	 	Average	 	 	 	 	 	Average	 	 	 	 	 	Average	
 	 	2005	 	Exercise	 	2004	 	Exercise	 	2003	 	Exercise	
 	 	Shares	 	Price	 	Shares	 	Price	 	Shares	 	Price	
Outstanding at beginning of year	 	 	2,276,123	 	 	$	39.14	 	 	 	2,698,246	 	 	$	38.56	 	 	 	2,185,129	 	 	$	39.96	 	
Granted	 	 	—	 	 	 	—	 	 	 	37,580	 	 	 	37.85	 	 	 	621,875	 	 	 	32.29	 	
Exercised	 	 	(478,851	)	 	 	36.54	 	 	 	(372,205	)	 	 	34.02	 	 	 	(62,366	)	 	 	26.09	 	
Forfeited	 	 	(101,500	)	 	 	43.04	 	 	 	(87,498	)	 	 	42.31	 	 	 	(46,392	)	 	 	37.61	 	

Outstanding at year-end	 	 	1,695,772	 	 	 	39.65	 	 	 	2,276,123	 	 	 	39.14	 	 	 	2,698,246	 	 	 	38.56	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Options exercisable at year-end	 	 	1,499,302	 	 	 	40.55	 	 	 	1,859,340	 	 	 	40.59	 	 	 	1,787,622	 	 	 	40.35	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted-average grant date fair
value of options granted during the year	 	 	 	 	 	 	—	 	 	 	 	 	 	$	3.53	 	 	 	 	 	 	$	7.37	 	
     The following table summarizes information about our stock options at December 31, 2005:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Weighted	 	 	 	 	 	 	
 	 	 	 	 	 	Weighted	 	Average	 	 	 	 	 	Weighted	
 	 	 	 	 	 	Average	 	Remaining	 	 	 	 	 	Average	
Exercise	 	Options	 	Exercise	 	Contract	 	Options	 	Exercise	
Prices Per Share	 	Outstanding	 	Price	 	Life (Years)	 	Exercisable	 	Price	
$28.07 — 32.75	 	 	341,902	 	 	$	32.24	 	 	 	6.6	 	 	 	160,372	 	 	$	32.18	 	
32.75 — 37.42	 	 	67,081	 	 	 	34.66	 	 	 	3.7	 	 	 	67,081	 	 	 	34.66	 	
37.42 — 42.10	 	 	540,855	 	 	 	38.89	 	 	 	5.2	 	 	 	525,915	 	 	 	38.92	 	
42.10 — 46.78	 	 	745,934	 	 	 	44.04	 	 	 	4.6	 	 	 	745,934	 	 	 	44.04	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	1,695,772	 	 	 	 	 	 	 	 	 	 	 	1,499,302	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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     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, 2005, 2004 and 2003:
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	2005 Grant	 	 	 	 	 	2004 Grant	 	 	 	 	 	2003 Grant	
 	 	2005	 	Date Fair	 	2004	 	Date Fair	 	2003	 	Date Fair	
 	 	Shares	 	Value	 	Shares	 	Value	 	Shares	 	Value	
Restricted stock	 	 	—	 	 	$	—	 	 	 	4,000	 	 	$	37.68	(a)	 	 	4,000	 	 	$	32.20	(a)	
Performance share awards	 	 	215,300	 	 	 	41.36	(b)	 	 	215,285	 	 	 	37.85	(b)	 	 	119,085	 	 	 	32.29	(b)	
Stock ownership incentive awards	 	 	11,322	 	 	 	44.13	(b)	 	 	9,015	 	 	 	40.29	(b)	 	 	—	 	 	 	—	 	

(a)	 	Restricted stock priced at the average of the high and low market price on the grant date.	
 		
(b)	 	Performance shares and stock ownership incentive awards priced at the closing market price on the grant date.	
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 real estate segment, which consists of SunCor’s real estate development and investment activities; and	
 		
 	•	 	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.	
     Financial data for 2005, 2004 and 2003 by business segments is provided as follows (dollars in millions):
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 	 	Business Segments for the Year Ended December 31, 2005	 	
 	 	Regulated	 	 	 	 	 	 	Marketing	 	 	 	 	 	 	 	
 	 	Electricity	 	 	Real Estate	 	 	and Trading	 	 	Other	 	 	Total	 	
Operating revenues (a)	 	$	2,237	 	 	$	338	 	 	$	352	 	 	$	61	 	 	$	2,988	 	
Purchased power and fuel costs	 	 	595	 	 	 	—	 	 	 	293	 	 	 	—	 	 	 	888	 	
Other operating expenses	 	 	740	 	 	 	278	 	 	 	28	 	 	 	52	 	 	 	1,098	 	
Regulatory disallowance (see Note 3)	 	 	139	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	139	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	 	 	763	 	 	 	60	 	 	 	31	 	 	 	9	 	 	 	863	 	
Depreciation and amortization	 	 	343	 	 	 	3	 	 	 	2	 	 	 	—	 	 	 	348	 	
Interest expense	 	 	169	 	 	 	2	 	 	 	2	 	 	 	—	 	 	 	173	 	
Other expense (income)	 	 	(6	)	 	 	(3	)	 	 	—	 	 	 	1	 	 	 	(8	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations before income taxes	 	 	257	 	 	 	58	 	 	 	27	 	 	 	8	 	 	 	350	 	
Income taxes	 	 	90	 	 	 	23	 	 	 	11	 	 	 	3	 	 	 	127	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	167	 	 	 	35	 	 	 	16	 	 	 	5	 	 	 	223	 	
Income (loss) from discontinued operations — net of income tax benefit of $(30) (see Note 22) (b)(c)	 	 	—	 	 	 	17	 	 	 	(67	)	 	 	3	 	 	 	(47	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	167	 	 	$	52	 	 	$	(51	)	 	$	8	 	 	$	176	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	9,732	 	 	$	483	 	 	$	1,070	 	 	$	38	 	 	$	11,323	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	811	 	 	$	106	 	 	$	11	 	 	$	—	 	 	$	928	 	

 	 	Business Segments for the Year Ended December 31, 2004	 	
 	 	Regulated	 	 	 	 	 	 	Marketing	 	 	 	 	 	 	 	
 	 	Electricity	 	 	Real Estate	 	 	and Trading	 	 	Other	 	 	Total	 	
Operating revenues	 	$	2,035	 	 	$	350	 	 	$	401	 	 	$	43	 	 	$	2,829	 	
Purchased power and fuel costs	 	 	567	 	 	 	—	 	 	 	321	 	 	 	—	 	 	 	888	 	
Other operating expenses	 	 	683	 	 	 	284	 	 	 	30	 	 	 	34	 	 	 	1,031	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	 	 	785	 	 	 	66	 	 	 	50	 	 	 	9	 	 	 	910	 	
Depreciation and amortization	 	 	384	 	 	 	4	 	 	 	4	 	 	 	—	 	 	 	392	 	
Interest expense	 	 	170	 	 	 	1	 	 	 	1	 	 	 	—	 	 	 	172	 	
Other expense (income) (d)	 	 	4	 	 	 	(6	)	 	 	(2	)	 	 	(33	)	 	 	(37	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations before income taxes	 	 	227	 	 	 	67	 	 	 	47	 	 	 	42	 	 	 	383	 	
Income taxes	 	 	75	 	 	 	27	 	 	 	18	 	 	 	16	 	 	 	136	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	152	 	 	 	40	 	 	 	29	 	 	 	26	 	 	 	247	 	
Income (loss) from discontinued operations — net of income tax benefit of $(2) (see Note 22) (b)(c)	 	 	—	 	 	 	4	 	 	 	(12	)	 	 	4	 	 	 	(4	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	152	 	 	$	44	 	 	$	17	 	 	$	30	 	 	$	243	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	8,674	 	 	$	454	 	 	$	746	 	 	$	23	 	 	$	9,897	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	483	 	 	$	81	 	 	$	34	 	 	$	—	 	 	$	598	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Business Segments for the Year Ended December 31, 2003	 	
 	 	Regulated	 	 	 	 	 	 	Marketing	 	 	 	 	 	 	 	
 	 	Electricity	 	 	Real Estate	 	 	and Trading	 	 	Other	 	 	Total	 	
Operating revenues	 	$	1,978	 	 	$	362	 	 	$	391	 	 	$	28	 	 	$	2,759	 	
Purchased power and fuel costs	 	 	517	 	 	 	—	 	 	 	345	 	 	 	—	 	 	 	862	 	
Other operating expenses	 	 	625	 	 	 	306	 	 	 	34	 	 	 	24	 	 	 	989	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	 	 	836	 	 	 	56	 	 	 	12	 	 	 	4	 	 	 	908	 	
Depreciation and amortization	 	 	428	 	 	 	6	 	 	 	1	 	 	 	—	 	 	 	435	 	
Interest expense	 	 	172	 	 	 	2	 	 	 	—	 	 	 	—	 	 	 	174	 	
Other expense (income)	 	 	(4	)	 	 	(25	)	 	 	—	 	 	 	—	 	 	 	(29	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations before income taxes	 	 	240	 	 	 	73	 	 	 	11	 	 	 	4	 	 	 	328	 	
Income taxes	 	 	70	 	 	 	28	 	 	 	3	 	 	 	2	 	 	 	103	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	 	170	 	 	 	45	 	 	 	8	 	 	 	2	 	 	 	225	 	
Income from discontinued operations — net of income taxes of $9 (see Note 22) (b)(c)	 	 	—	 	 	 	10	 	 	 	1	 	 	 	5	 	 	 	16	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	170	 	 	$	55	 	 	$	9	 	 	$	7	 	 	$	241	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	686	 	 	$	72	 	 	$	9	 	 	$	—	 	 	$	767	 	

			
(a)	 	Effective April 1, 2005, revenues of approximately $40 million from Off-System Sales, which were previously reported in the marketing and trading segment, began being reported in the regulated electricity segment in accordance with the retail rate case settlement.	
 		
(b)	 	The marketing and trading segment relates to the sale and operations of Silverhawk. See Note 22.	
 		
(c)	 	The other segment relates to the sale and operations of NAC. See Note 22.	
 		
(d)	 	The other segment includes a $35 million pre-tax ($21 million after-tax) gain related to the sale of a limited partnership interest in the Phoenix Suns in 2004.	
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, 2005, we hedged certain exposures to the price variability of commodities for a maximum of 3.25 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.
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     We recognize all derivatives, except those which qualify for 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 qualify for 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, the effective portion of 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.
     For its regulated operations, APS defers for future rate recovery 90% of gains and losses on derivatives that would otherwise be recognized in income. To the extent the amounts that would otherwise be recognized in income are eligible to be recovered through the PSA, the amounts will be recorded as either a regulatory asset or liability and have no effect on earnings.
     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 qualify for 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. Realized 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.
     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,
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which reduces both revenues and fuel and purchased power costs in our Consolidated Statement of Income, but this does not impact our financial condition, net income or cash flows.
Cash Flow Hedges
     The changes in the fair value of our hedged positions included in the Consolidated Statements of Income, after consideration of amounts deferred under the PSA, for the years ended December 31, 2005, 2004 and 2003 are comprised of the following (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	 	2003	 	
Gains (losses) on the ineffective portion of derivatives qualifying for hedge accounting	 	$	14,289	 	 	$	(1,568	)	 	$	8,237	 	
Gains from the change in options’ time value excluded from measurement of effectiveness	 	 	620	 	 	 	185	 	 	 	181	 	
Gains from the discontinuance of cash flow hedges	 	 	556	 	 	 	1,137	 	 	 	—	 	
     During 2006, we estimate that a net gain of $216 million before income taxes will be reclassified from accumulated other comprehensive income as an offset to the effect of market price changes for the related hedged transactions. To the extent the amounts are eligible for inclusion in the PSA, the amounts will be recorded as either a regulatory asset or liability and have no effect on earnings (see Note 3).
     Our assets and liabilities from risk management and trading activities are presented in two categories, consistent with our business segments.
     The following table summarizes our assets and liabilities from risk management and trading activities at December 31, 2005 and 2004 (dollars in thousands):
December 31, 2005
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	Net Asset	 	
 	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	(Liability)	 	
Regulated electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	$	516,399	 	 	$	228,873	 	 	$	(335,801	)	 	$	(74,787	)	 	$	334,684	 	
Margin account and options	 	 	1,814	 	 	 	—	 	 	 	(124,165	)	 	 	—	 	 	 	(122,351	)	
Marketing and trading:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	 	307,883	 	 	 	291,122	 	 	 	(236,922	)	 	 	(181,417	)	 	 	180,666	 	
Options and emission allowances – at cost	 	 	1,683	 	 	 	77,836	 	 	 	(23,805	)	 	 	(209	)	 	 	55,505	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	827,779	 	 	$	597,831	 	 	$	(720,693	)	 	$	(256,413	)	 	$	448,504	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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December 31, 2004
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	Net Asset	 	
 	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	(Liability)	 	
Regulated electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	$	45,220	 	 	$	19,417	 	 	$	(19,191	)	 	$	(12,000	)	 	$	33,446	 	
Margin account and options	 	 	18,821	 	 	 	118	 	 	 	(8,879	)	 	 	—	 	 	 	10,060	 	
Marketing and trading:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	 	102,855	 	 	 	204,512	 	 	 	(68,008	)	 	 	(132,683	)	 	 	106,676	 	
Options and emission allowances – at cost	 	 	—	 	 	 	294	 	 	 	(17,328	)	 	 	(11,579	)	 	 	(28,613	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	166,896	 	 	$	224,341	 	 	$	(113,406	)	 	$	(156,262	)	 	$	121,569	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     We maintain a margin account with a broker to support our risk management and trading activities. The margin account was a liability of $123 million at December 31, 2005 and $9 million at December 31, 2004 and is included in the margin account in the table above. Cash is deposited with the broker in this account at the time futures or options contracts are initiated. The change in market value of these contracts (reflected in mark-to-market) requires adjustment of the margin account balance.
     Cash or other assets may be required to serve as collateral against our open positions on certain energy-related contracts. Collateral provided to counterparties was $6 million at December 31, 2005 and $1 million at December 31, 2004, and is included in other current assets on the Consolidated Balance Sheets. Collateral provided to us by counterparties was $216 million at December 31, 2005 and $24 million at December 31, 2004, and is included in other current liabilities on the Consolidated Balance Sheets.
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 a loss of $1.5 million at December 31, 2005 and is included in other current liabilities with the corresponding offset in current maturities of long-term debt on the Consolidated Balance Sheets. 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 non-performance or non-payment by counterparties. We have risk management and trading contracts with many counterparties. Our risk management
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process assesses and monitors the financial exposure of all counterparties. Despite the fact that the great majority of counterparties are rated as investment grade by the credit rating agencies, 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 financial institutions, major energy companies, municipalities and local distribution companies. 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 Accounting” 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 2005, 2004 and 2003 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	 	2003	 	
Other income:	 	 	 	 	 	 	 	 	 	 	 	 	
Investment gains — net (a)	 	$	752	 	 	$	38,256	 	 	$	3,649	 	
Interest income	 	 	14,793	 	 	 	6,770	 	 	 	4,412	 	
SunCor (b)	 	 	2,623	 	 	 	4,458	 	 	 	24,740	 	
Asset sales	 	 	3,187	 	 	 	3,026	 	 	 	618	 	
Miscellaneous	 	 	2,005	 	 	 	779	 	 	 	2,144	 	
 	 	 	 	 	 	 	 	 	 	
Total other income	 	$	23,360	 	 	$	53,289	 	 	$	35,563	 	

Other expense:	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating costs (c)	 	$	(13,589	)	 	$	(15,524	)	 	$	(14,959	)	
Asset dispositions	 	 	(9,759	)	 	 	(1,212	)	 	 	(1,522	)	
Miscellaneous	 	 	(3,368	)	 	 	(4,604	)	 	 	(4,093	)	
 	 	 	 	 	 	 	 	 	 	
Total other expense	 	$	(26,716	)	 	$	(21,340	)	 	$	(20,574	)	

			
(a)	 	Includes a $35 million gain ($21 million after tax) related to the sale of a limited partnership interest in the Phoenix Suns in 2004.	
 		
(b)	 	Primarily related to the sale at SunCor of a land interest and profit participation agreement in 2003 for $18 million. Includes joint venture and other non-operating income.	
 		
(c)	 	As defined by the FERC, includes below-the-line non-operating utility costs (primarily community relations and other costs excluded from utility rate recovery).	
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.
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     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, 2005, APS would have been required to assume approximately $234 million of debt and pay the equity participants approximately $185 million.
     SunCor has certain land development arrangements that are required to be consolidated under FIN 46R, “Consolidation of Variable Interest Entities.” The assets and non-controlling interests reflected in our Consolidated Balance Sheets related to these arrangements were approximately $34 million at December 31, 2005 and 2004.
21. Guarantees
     We have issued parental guarantees and letters of credit and obtained surety bonds on behalf of our unregulated subsidiaries. Our parental guarantee for Pinnacle West Energy relates to a purchased power agreement. Our credit support instruments enable APS Energy Services to offer commodity energy and energy-related products. Non-performance or non-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, 2005 are as follows (dollars in millions):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Guarantees	 	 	Surety Bonds	 	
 	 	 	 	 	 	Term	 	 	 	 	 	 	Term	 	
 	 	Amount	 	 	(in years)	 	 	Amount	 	 	(in years)	 	
Parental:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West Energy	 	$	5	 	 	 	1	 	 	$	—	 	 	 	—	 	
APS Energy Services	 	 	20	 	 	 	1	 	 	 	65	 	 	 	1	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	25	 	 	 	 	 	 	$	65	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     At December 31, 2005, we had entered into approximately $37 million of letters of credit which supported transmission agreements related to Silverhawk. These letters of credit terminated as a result of the sale of Silverhawk. See Note 22 for a discussion of the sale of Silverhawk. At December 31, 2005, Pinnacle West had approximately $4 million of letters of credit related to workers’ compensation expiring in 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.
     APS has entered into various agreements that require letters of credit for financial assurance purposes. At December 31, 2005, 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 and expire in 2010. APS has also entered into approximately $98 million of letters of credit to support certain equity
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2010. 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 enter into agreements that include indemnification provisions relating to liabilities arising from or related to certain of our agreements. APS has agreed to indemnify 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 provisions and therefore, the overall maximum amount of the obligation under such indemnification provisions cannot be reasonably estimated. Based on historical experience and evaluation of the specific indemnities, we do not believe that any material loss related to such indemnification provisions is likely.
22. Discontinued Operations
      Silverhawk (marketing and trading segment) – In June 2005, we entered into an agreement to sell our 75% interest in Silverhawk to NPC. The sale was completed on January 10, 2006. As a result of this sale, we recorded a loss from discontinued operations of approximately $56 million ($91 million pretax) in the second quarter of 2005. The amounts in the chart below also include the revenues and expenses related to the operations of Silverhawk. The assets held for sale at December 31, 2005 were $203 million, of which property, plant and equipment accounted for approximately $197 million.
     Concurrent with the execution of the agreement to sell our interest in Silverhawk, GenWest and NPC also entered into a Purchase Power Agreement (“PPA”) providing for the sale of GenWest’s share of the capacity and output of Silverhawk to NPC. The PPA commenced on October 1, 2005 and was terminated on January 10, 2006, the date of the sale under the Purchase Agreement.
      SunCor (real estate segment) – In 2005, SunCor sold commercial properties, which are required to be reported as discontinued operations on Pinnacle West’s Consolidated Statements of Income in accordance with SFAS No. 144. As a result of the sales, we recorded a gain from discontinued operations of approximately $15 million ($25 million pretax) in the third quarter of 2005.
      NAC (other segment) – In 2004, we sold our investment in NAC, and in 2005 we recognized a gain of $4 million ($6 million pretax) in connection with the sale that had previously been subject to contingencies.
     The following table provides revenue, income (loss) before income taxes and after-tax income classified as discontinued operations in Pinnacle West’s Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 (dollars in millions):
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 	 	2005	 	 	2004	 	 	2003	 	
Revenue:	 	 	 	 	 	 	 	 	 	 	 	 	
Silverhawk	 	$	95	 	 	$	61	 	 	$	1	 	
SunCor – commercial operations	 	 	9	 	 	 	21	 	 	 	71	 	
NAC	 	 	—	 	 	 	34	 	 	 	58	 	
 	 	 	 	 	 	 	 	 	 	
Total revenue	 	$	104	 	 	$	116	 	 	$	130	 	

Income (loss) before taxes:	 	 	 	 	 	 	 	 	 	 	 	 	
Silverhawk (a)	 	$	(111	)	 	$	(18	)	 	$	—	 	
SunCor – commercial operations	 	 	28	 	 	 	6	 	 	 	17	 	
NAC	 	 	6	 	 	 	7	 	 	 	8	 	
 	 	 	 	 	 	 	 	 	 	
Total income (loss) before taxes	 	$	(77	)	 	$	(5	)	 	$	25	 	

Income (loss) after taxes:	 	 	 	 	 	 	 	 	 	 	 	 	
Silverhawk	 	$	(67	)	 	$	(12	)	 	$	1	 	
SunCor – commercial operations	 	 	17	 	 	 	4	 	 	 	10	 	
NAC	 	 	3	 	 	 	4	 	 	 	5	 	
 	 	 	 	 	 	 	 	 	 	
Total income (loss) after taxes	 	$	(47	)	 	$	(4	)	 	$	16	 	

			
(a)	 	Income before income taxes includes an interest expense allocation, net of capitalized amounts, of $13 million in 2005 and $6 million in 2004. The allocation was based on Pinnacle West’s weighted-average interest rate applied to the net property, plant and equipment.	
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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), for Arizona Public Service Company. 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, 2005. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 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 8, 2006
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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, 2005 and 2004, 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, 2005. 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, 2005, 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, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, 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, 2005, 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, 2005, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 8, 2006
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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	
Electric Operating Revenues:	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity	 	$	2,244,951	 	 	$	2,051,602	 	 	$	1,999,390	 	
Marketing and trading	 	 	25,842	 	 	 	145,519	 	 	 	105,541	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	2,270,793	 	 	 	2,197,121	 	 	 	2,104,931	 	

Operating Expenses:	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity fuel and purchased power	 	 	656,654	 	 	 	612,300	 	 	 	606,251	 	
Marketing and trading fuel and purchased power	 	 	32,328	 	 	 	150,954	 	 	 	97,180	 	
Operations and maintenance	 	 	591,941	 	 	 	540,277	 	 	 	513,604	 	
Depreciation and amortization	 	 	325,174	 	 	 	336,648	 	 	 	389,240	 	
Income taxes (Notes 4 and S-2)	 	 	157,273	 	 	 	113,696	 	 	 	91,646	 	
Other taxes	 	 	125,810	 	 	 	114,265	 	 	 	108,852	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	1,889,180	 	 	 	1,868,140	 	 	 	1,806,773	 	

Operating Income	 	 	381,613	 	 	 	328,981	 	 	 	298,158	 	

Other Income (Deductions):	 	 	 	 	 	 	 	 	 	 	 	 	
Regulatory disallowance (Note 3)	 	 	(138,562	)	 	 	—	 	 	 	—	 	
Income taxes (Notes 4 and S-2)	 	 	59,263	 	 	 	(6,334	)	 	 	4,792	 	
Allowance for equity funds used during construction	 	 	11,191	 	 	 	4,885	 	 	 	14,240	 	
Other income (Note S-5)	 	 	22,141	 	 	 	30,593	 	 	 	20,277	 	
Other expense (Note S-5)	 	 	(23,204	)	 	 	(13,816	)	 	 	(12,962	)	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	(69,171	)	 	 	15,328	 	 	 	26,347	 	

Interest Deductions:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on long-term debt	 	 	138,476	 	 	 	140,556	 	 	 	142,706	 	
Interest on short-term borrowings	 	 	7,026	 	 	 	6,427	 	 	 	4,904	 	
Debt discount, premium and expense	 	 	4,085	 	 	 	4,854	 	 	 	3,337	 	
Allowance for borrowed funds used during construction	 	 	(7,624	)	 	 	(7,155	)	 	 	(7,379	)	
 	 	 	 	 	 	 	 	 	 	
Total	 	 	141,963	 	 	 	144,682	 	 	 	143,568	 	

Net Income	 	$	170,479	 	 	$	199,627	 	 	$	180,937	 	
 	 	 	 	 	 	 	 	 	 	
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,	 	
 	 	2005	 	 	2004	 	
ASSETS	 	 	 	 	 	 	 	 	
Utility Plant (Notes 1, 6, 9 and 10)	 	 	 	 	 	 	 	 	
Electric plant in service and held for future use	 	$	10,682,999	 	 	$	9,120,407	 	
Less accumulated depreciation and amortization	 	 	3,616,886	 	 	 	3,266,181	 	
 	 	 	 	 	 	 	
Total	 	 	7,066,113	 	 	 	5,854,226	 	
 	 	 	 	 	 	 	 	 	
Construction work in progress	 	 	314,584	 	 	 	249,243	 	
Intangible assets, net of accumulated amortization of $181,046 and $154,843	 	 	90,327	 	 	 	103,701	 	
Nuclear fuel, net of accumulated amortization of $53,984 and $59,020	 	 	54,184	 	 	 	51,188	 	
 	 	 	 	 	 	 	
Utility plant – net	 	 	7,525,208	 	 	 	6,258,358	 	

Investments and Other Assets	 	 	 	 	 	 	 	 	
Note receivable from Pinnacle West Energy (Notes 1, 3 and S-6)	 	 	—	 	 	 	498,489	 	
Decommissioning trust accounts (Note 12)	 	 	293,943	 	 	 	267,700	 	
Assets from risk management and trading activities (Note S-4)	 	 	234,372	 	 	 	20,123	 	
Other assets	 	 	64,128	 	 	 	61,364	 	
 	 	 	 	 	 	 	
Total investments and other assets	 	 	592,443	 	 	 	847,676	 	

Current Assets:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	 	49,933	 	 	 	49,575	 	
Investment in debt securities	 	 	—	 	 	 	181,175	 	
Customer and other receivables	 	 	421,621	 	 	 	353,772	 	
Allowance for doubtful accounts	 	 	(3,568	)	 	 	(3,444	)	
Materials and supplies (at average cost)	 	 	109,736	 	 	 	83,893	 	
Fossil fuel (at average cost)	 	 	23,658	 	 	 	20,506	 	
Assets from risk management and trading activities (Note S-4)	 	 	532,923	 	 	 	70,430	 	
Other	 	 	14,639	 	 	 	10,187	 	
 	 	 	 	 	 	 	
Total current assets	 	 	1,148,942	 	 	 	766,094	 	

Deferred Debits:	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power regulatory asset (Notes 1, 3, 4 and S-2)	 	 	172,756	 	 	 	—	 	
Other regulatory assets (Notes 1, 3, 4 and S-2)	 	 	151,123	 	 	 	135,051	 	
Unamortized debt issue costs	 	 	25,279	 	 	 	21,832	 	
Other	 	 	91,690	 	 	 	69,541	 	

Total deferred debits	 	 	440,848	 	 	 	226,424	 	

Total Assets	 	$	9,707,441	 	 	$	8,098,552	 	
 	 	 	 	 	 	 	
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,	 	
 	 	2005	 	 	2004	 	
LIABILITIES AND EQUITY	 	 	 	 	 	 	 	 	
Capitalization:	 	 	 	 	 	 	 	 	
Common stock	 	$	178,162	 	 	$	178,162	 	
Additional paid-in capital (Note 3)	 	 	1,853,098	 	 	 	1,246,804	 	
Retained earnings	 	 	860,675	 	 	 	860,196	 	
Accumulated other comprehensive income (loss):	 	 	 	 	 	 	 	 	
Minimum pension liability adjustment	 	 	(86,132	)	 	 	(71,087	)	
Derivative instruments	 	 	179,422	 	 	 	18,327	 	
 	 	 	 	 	 	 	
Common stock equity	 	 	2,985,225	 	 	 	2,232,402	 	
Long-term debt less current maturities (Note 6)	 	 	2,479,703	 	 	 	2,267,094	 	
 	 	 	 	 	 	 	
Total capitalization	 	 	5,464,928	 	 	 	4,499,496	 	

Current Liabilities:	 	 	 	 	 	 	 	 	
Current maturities of long-term debt (Note 6)	 	 	85,620	 	 	 	451,247	 	
Accounts payable	 	 	215,384	 	 	 	215,076	 	
Accrued taxes	 	 	360,737	 	 	 	292,521	 	
Accrued interest	 	 	25,003	 	 	 	33,332	 	
Customer deposits	 	 	55,474	 	 	 	51,804	 	
Deferred income taxes (Notes 4 and S-2)	 	 	64,210	 	 	 	9,057	 	
Liabilities from risk management and trading activities (Note S-4)	 	 	480,138	 	 	 	34,292	 	
Other	 	 	227,398	 	 	 	91,441	 	
 	 	 	 	 	 	 	
Total current liabilities	 	 	1,513,964	 	 	 	1,178,770	 	

Deferred Credits and Other:	 	 	 	 	 	 	 	 	
Deferred income taxes (Notes 4 and S-2)	 	 	1,215,403	 	 	 	1,108,571	 	
Regulatory liabilities (Notes 1, 3, 4, and S-2)	 	 	592,494	 	 	 	506,646	 	
Liability for asset retirements (Note 12)	 	 	269,011	 	 	 	251,612	 	
Pension liability (Note 8)	 	 	233,342	 	 	 	203,668	 	
Customer advances for construction	 	 	60,287	 	 	 	59,185	 	
Unamortized gain — sale of utility plant (Note 9)	 	 	45,757	 	 	 	50,333	 	
Liabilities from risk management and trading activities (Note S-4)	 	 	83,774	 	 	 	13,124	 	
Other	 	 	228,481	 	 	 	227,147	 	
 	 	 	 	 	 	 	
Total deferred credits and other	 	 	2,728,549	 	 	 	2,420,286	 	

Commitments and Contingencies (Notes 3, 11, 12 and S-6)	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	
Total Liabilities and Equity	 	$	9,707,441	 	 	$	8,098,552	 	
 	 	 	 	 	 	 	
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,	 	
 	 	2005	 	 	2004 (a)	 	 	2003 (a)	 	
Cash Flows from Operating Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	170,479	 	 	$	199,627	 	 	$	180,937	 	
Adjustments to reconcile net income to net cash provided by operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Regulatory disallowance	 	 	138,562	 	 	 	—	 	 	 	—	 	
Depreciation and amortization including nuclear fuel	 	 	353,082	 	 	 	367,094	 	 	 	417,997	 	
Deferred fuel and purchased power	 	 	(172,756	)	 	 	—	 	 	 	—	 	
Allowance for equity funds used during construction	 	 	(11,191	)	 	 	(4,885	)	 	 	(14,240	)	
Deferred income taxes	 	 	9,659	 	 	 	(140,855	)	 	 	(1,087	)	
Change in derivative mark-to-market valuations	 	 	3,492	 	 	 	(15,807	)	 	 	2,339	 	
Changes in current assets and liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	
Customer and other receivables	 	 	(56,152	)	 	 	(24,146	)	 	 	85,106	 	
Materials, supplies and fossil fuel	 	 	(12,268	)	 	 	4,643	 	 	 	(872	)	
Other current assets	 	 	(2,592	)	 	 	(2,529	)	 	 	976	 	
Accounts payable	 	 	(12,372	)	 	 	88,937	 	 	 	17,961	 	
Accrued taxes	 	 	67,454	 	 	 	202,047	 	 	 	7,917	 	
Collateral	 	 	169,080	 	 	 	5,671	 	 	 	11,431	 	
Other current liabilities	 	 	(37,781	)	 	 	22,715	 	 	 	9,737	 	
Changes in risk management and trading – liabilities	 	 	115,495	 	 	 	8,879	 	 	 	—	 	
Change in other long-term assets	 	 	(9,303	)	 	 	(44,386	)	 	 	(2,072	)	
Change in other long-term liabilities	 	 	9,002	 	 	 	51,133	 	 	 	60,994	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow provided by operating activities	 	 	721,890	 	 	 	718,138	 	 	 	777,124	 	
 	 	 	 	 	 	 	 	 	 	
Cash Flows from Investing Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	 	(609,857	)	 	 	(513,677	)	 	 	(426,260	)	
Transfer of PWEC Dedicated Assets to APS	 	 	(500,000	)	 	 	—	 	 	 	—	 	
Purchase of Sundance Plant	 	 	(185,046	)	 	 	—	 	 	 	—	 	
Allowance for borrowed funds used during construction	 	 	(7,624	)	 	 	(7,155	)	 	 	(7,379	)	
Purchases of investment securities	 	 	(1,476,623	)	 	 	(871,610	)	 	 	(855,660	)	
Proceeds from sale of investment securities	 	 	1,657,798	 	 	 	760,285	 	 	 	785,810	 	
Proceeds from nuclear decommissioning trust sales	 	 	186,215	 	 	 	123,795	 	 	 	168,874	 	
Investment in nuclear decommissioning trust	 	 	(204,633	)	 	 	(135,239	)	 	 	(180,319	)	
Loan to Pinnacle West Energy	 	 	—	 	 	 	—	 	 	 	(497,865	)	
Repayment of loan by Pinnacle West Energy	 	 	500,000	 	 	 	—	 	 	 	—	 	
Other	 	 	(5,372	)	 	 	10,639	 	 	 	3,149	 	
 	 	 	 	 	 	 	 	 	 	
Net cash flow used for investing activities	 	 	(645,142	)	 	 	(632,962	)	 	 	(1,009,650	)	
 	 	 	 	 	 	 	 	 	 	
Cash Flows from Financing Activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Issuance of long-term debt	 	 	411,787	 	 	 	478,140	 	 	 	491,654	 	
Equity infusion	 	 	250,000	 	 	 	—	 	 	 	—	 	
Dividends paid on common stock	 	 	(170,000	)	 	 	(170,000	)	 	 	(170,000	)	
Repayment and reacquisition of long-term debt	 	 	(568,177	)	 	 	(385,893	)	 	 	(89,525	)	
 	 	 	 	 	 	 	 	 	 	
Net cash flow provided by (used for) financing activities	 	 	(76,390	)	 	 	(77,753	)	 	 	232,129	 	
 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash and cash equivalents	 	 	358	 	 	 	7,423	 	 	 	(397	)	
Cash and cash equivalents at beginning of year	 	 	49,575	 	 	 	42,152	 	 	 	42,549	 	
 	 	 	 	 	 	 	 	 	 	
Cash and cash equivalents at end of year	 	$	49,933	 	 	$	49,575	 	 	$	42,152	 	
 	 	 	 	 	 	 	 	 	 	
Supplemental disclosure of cash flow information:	 	 	 	 	 	 	 	 	 	 	 	 	
Cash paid during the year for:	 	 	 	 	 	 	 	 	 	 	 	 	
Income taxes, net of refunds	 	$	34,252	 	 	$	68,074	 	 	$	74,523	 	
Interest, net of amounts capitalized	 	$	146,207	 	 	$	149,148	 	 	$	140,010	 	
See Notes to Pinnacle West’s Consolidated Financial Statements and Supplemental Notes to Arizona Public Service Company’s Financial Statements.

(a)	 	See “Cash and Cash Equivalents” in Note 1 for information regarding reclassifications of prior year amounts.	
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ARIZONA PUBLIC SERVICE COMPANY
STATEMENTS OF CHANGES IN COMMON STOCK EQUITY
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Years Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	
COMMON STOCK	 	$	178,162	 	 	$	178,162	 	 	$	178,162	 	

ADDITIONAL PAID-IN CAPITAL	 	 	1,853,098	 	 	 	1,246,804	 	 	 	1,246,804	 	

RETAINED EARNINGS	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	860,196	 	 	 	830,569	 	 	 	819,632	 	
Net income	 	 	170,479	 	 	 	199,627	 	 	 	180,937	 	
Common stock dividends	 	 	(170,000	)	 	 	(170,000	)	 	 	(170,000	)	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	860,675	 	 	 	860,196	 	 	 	830,569	 	

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at beginning of year	 	 	(52,760	)	 	 	(51,905	)	 	 	(85,286	)	
Minimum pension liability adjustment, net of tax expense (benefit) of ($9,023), ($8,936) and $3,105	 	 	(15,045	)	 	 	(13,929	)	 	 	4,329	 	
Unrealized gain on derivative instruments, net of tax expense of $140,135, $16,824 and $15,824	 	 	218,656	 	 	 	25,892	 	 	 	24,135	 	
Reclassification of realized (gain) loss to income, net of tax expense (benefit) of ($37,082), ($8,344) and $3,207	 	 	(57,561	)	 	 	(12,818	)	 	 	4,917	 	
 	 	 	 	 	 	 	 	 	 	
Balance at end of year	 	 	93,290	 	 	 	(52,760	)	 	 	(51,905	)	

TOTAL COMMON STOCK EQUITY	 	$	2,985,225	 	 	$	2,232,402	 	 	$	2,203,630	 	

COMPREHENSIVE INCOME	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	170,479	 	 	$	199,627	 	 	$	180,937	 	
Other comprehensive income (loss)	 	 	146,050	 	 	 	(855	)	 	 	33,381	 	
 	 	 	 	 	 	 	 	 	 	
Total comprehensive income	 	$	316,529	 	 	$	198,772	 	 	$	214,318	 	
 	 	 	 	 	 	 	 	 	 	
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.
 	 	 	 	 	
 	 	 	 	APS’	
 	 	Consolidated	 	Supplemental	
 	 	Footnote	 	Footnote	
 	 	Reference	 	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	 	—	
Common Stock and Treasury Stock	 	Note 7	 	—	
Retirement Plans and Other Benefits	 	Note 8	 	—	
Leases	 	Note 9	 	—	
Jointly-Owned Facilities	 	Note 10	 	—	
Commitments and Contingencies	 	Note 11	 	—	
Asset Retirement Obligations	 	Note 12	 	—	
Selected Quarterly Financial Data (Unaudited)	 	Note 13	 	Note S-3	
Fair Value of Financial Instruments	 	Note 14	 	—	
Earnings Per Share	 	Note 15	 	—	
Stock-Based Compensation	 	Note 16	 	—	
Business Segments	 	Note 17	 	—	
Derivative and Energy Trading Activities	 	Note 18	 	Note S-4	
Other Income and Other Expense	 	Note 19	 	Note S-5	
Variable Interest Entities	 	Note 20	 	—	
Guarantees	 	Note 21	 	—	
Discontinued Operations	 	Note 22	 	—	
Related Party Transactions	 	—	 	Note S-6	
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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.” 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 2005 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	 	2004	 	 	2003	 	
Net income, as reported	 	$	170,479	 	 	$	199,627	 	 	$	180,937	 	
Add: Stock compensation expense included in reported net income (net of tax)	 	 	3,102	 	 	 	3,353	 	 	 	2,035	 	
Deduct: Total stock compensation expense determined under fair value method (net of tax)	 	 	(3,102	)	 	 	(3,713	)	 	 	(3,024	)	
 	 	 	 	 	 	 	 	 	 	
Pro forma net income	 	$	170,479	 	 	$	199,267	 	 	$	179,948	 	
 	 	 	 	 	 	 	 	 	 	
S-2. Income Taxes
     APS is included in Pinnacle West’s consolidated tax return. However, when Pinnacle West allocates income taxes to APS, it is done based on APS’ taxable income or loss alone.
     Certain assets and liabilities are reported differently for income tax purposes than they are for financial statements purposes. 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, Pinnacle West 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, Pinnacle West received an income tax refund of approximately $115 million related to our 2001 federal consolidated income tax
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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 and again in 2005, 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. APS does not expect the ultimate outcome of this examination to have a material adverse impact on its financial position or results of operations. We expect that it will have a negative impact on cash flows.
     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.
     The components of APS’ income tax expense are as follows (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	
Current:	 	 	 	 	 	 	 	 	 	 	 	 	
Federal	 	$	79,917	 	 	$	207,306	 	 	$	75,087	 	
State	 	 	8,434	 	 	 	53,579	 	 	 	12,854	 	
 	 	 	 	 	 	 	 	 	 	
Total current	 	 	88,351	 	 	 	260,885	 	 	 	87,941	 	
Deferred	 	 	9,659	 	 	 	(140,855	)	 	 	(1,087	)	
 	 	 	 	 	 	 	 	 	 	
Total income tax expense	 	$	98,010	 	 	$	120,030	 	 	$	86,854	 	
 	 	 	 	 	 	 	 	 	 	
     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,	 	
 	 	2005	 	 	2004	 	 	2003	 	
Federal income tax expense at 35% statutory rate	 	$	93,971	 	 	$	111,880	 	 	$	93,727	 	
Increases (reductions) in tax expense resulting from:	 	 	 	 	 	 	 	 	 	 	 	 	
State income tax net of federal income tax benefit	 	 	8,986	 	 	 	12,496	 	 	 	9,723	 	
Credits and favorable adjustments related to prior years resolved in current year	 	 	—	 	 	 	(315	)	 	 	(12,944	)	
Medicare Subsidy Part-D (see Note 8)	 	 	(2,465	)	 	 	(1,507	)	 	 	—	 	
Allowance for equity funds used during construction (see Note 1)	 	 	(3,694	)	 	 	(1,543	)	 	 	(4,984	)	
Other	 	 	1,212	 	 	 	(981	)	 	 	1,332	 	
 	 	 	 	 	 	 	 	 	 	
Income tax expense	 	$	98,010	 	 	$	120,030	 	 	$	86,854	 	
 	 	 	 	 	 	 	 	 	 	
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     The following table shows the net deferred income tax liability recognized on the APS Balance Sheets (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	December 31,	 	
 	 	2005	 	 	2004	 	
Current liability	 	$	(64,210	)	 	$	(9,057	)	
Long term liability	 	 	(1,215,403	)	 	 	(1,108,571	)	
 	 	 	 	 	 	 	
Accumulated deferred income taxes – net	 	$	(1,279,613	)	 	$	(1,117,628	)	
 	 	 	 	 	 	 	
     The components of the net deferred income tax liability were as follows (dollars in thousands):
 	 	 	 	 	 	 	 	 	
 	 	December 31,	 	
 	 	2005	 	 	2004	 	
DEFERRED TAX ASSETS	 	 	 	 	 	 	 	 	
Regulatory liabilities:	 	 	 	 	 	 	 	 	
Asset retirement obligation	 	$	189,726	 	 	$	182,086	 	
Federal excess deferred income tax	 	 	14,446	 	 	 	16,341	 	
Deferred fuel and purchased power – mark-to-market	 	 	11,923	 	 	 	—	 	
Other	 	 	29,720	 	 	 	8,282	 	
Risk management and trading activities	 	 	171,640	 	 	 	15,172	 	
Pension liability	 	 	72,376	 	 	 	80,184	 	
Deferred gain on Palo Verde Unit 2 sale-leaseback	 	 	17,868	 	 	 	19,816	 	
Other	 	 	71,567	 	 	 	73,925	 	
 	 	 	 	 	 	 	
Total deferred tax assets	 	 	579,266	 	 	 	395,806	 	
 	 	 	 	 	 	 	
DEFERRED TAX LIABILITIES	 	 	 	 	 	 	 	 	
Plant-related	 	 	(1,426,158	)	 	 	(1,424,859	)	
Risk management and trading activities	 	 	(301,709	)	 	 	(33,808	)	
Regulatory assets:	 	 	 	 	 	 	 	 	
Deferred fuel and purchased power	 	 	(67,461	)	 	 	—	 	
Other	 	 	(63,551	)	 	 	(54,767	)	
 	 	 	 	 	 	 	
Total deferred tax liabilities	 	 	(1,858,879	)	 	 	(1,513,434	)	
 	 	 	 	 	 	 	
Accumulated deferred income taxes – net	 	$	(1,279,613	)	 	$	(1,117,628	)	
 	 	 	 	 	 	 	
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S-3. Selected Quarterly Financial Data (Unaudited)
     Quarterly financial information for 2005 and 2004 is as follows (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005 Quarter Ended,	 	2005	
 	 	March 31,	 	June 30,	 	September 30,	 	December 31,	 	Total	
Operating revenues	 	$	441,292	 	 	$	588,757	 	 	$	748,348	 	 	$	492,396	 	 	$	2,270,793	 	
Operations and maintenance	 	 	142,294	 	 	 	138,314	 	 	 	149,198	 	 	 	162,135	 	 	 	591,941	 	
Operating income	 	 	58,743	 	 	 	95,321	 	 	 	174,415	 	 	 	53,134	 	 	 	381,613	 	
Net income	 	 	27,045	 	 	 	63,998	 	 	 	61,093	 	 	 	18,343	 	 	 	170,479	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2004 Quarter Ended,	 	2004	
 	 	March 31,	 	June 30,	 	September 30,	 	December 31,	 	Total	
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	 	
S-4. 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, 2005, APS hedged certain exposures to these risks for a maximum of 3.25 years.
Cash Flow Hedges
     The changes in the fair value of APS’ hedged positions included in the APS Statements of Income, after consideration of amounts deferred under the PSA, for the years ended December 31, 2005, 2004 and 2003 are comprised of the following (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	2005	 	2004	 	2003	
Gains (losses) on the ineffective portion of derivatives qualifying for hedge accounting	 	$	14,452	 	 	$	(1,570	)	 	$	7,033	 	
Gains from the change in options time value excluded from measurement of effectiveness	 	 	620	 	 	 	185	 	 	 	181	 	
Gains from the discontinuance of cash flow hedges	 	 	473	 	 	 	575	 	 	 	—	 	
     During 2006, APS estimates that a net gain of $158 million before income taxes will be reclassified from accumulated other comprehensive income as an offset to the effect of market price changes for the related hedged transactions. To the extent the amounts are eligible for inclusion in the PSA, the amounts will be recorded as either a regulatory asset or liability and have no effect on earnings (see Note 3).
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     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, 2005 and 2004 (dollars in thousands):
December 31, 2005
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	Net Asset	 	
 	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	(Liability)	 	
Regulated Electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	$	516,399	 	 	$	228,873	 	 	$	(335,801	)	 	$	(74,787	)	 	$	334,684	 	
Margin account and options	 	 	1,814	 	 	 	—	 	 	 	(124,165	)	 	 	—	 	 	 	(122,351	)	
Marketing & Trading:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	 	13,027	 	 	 	5,499	 	 	 	(20,172	)	 	 	(8,778	)	 	 	(10,424	)	
Options at cost	 	 	1,683	 	 	 	—	 	 	 	—	 	 	 	(209	)	 	 	1,474	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	532,923	 	 	$	234,372	 	 	$	(480,138	)	 	$	(83,774	)	 	$	203,383	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
December 31, 2004
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	Investments	 	 	 	 	 	 	Deferred	 	 	 	 	
 	 	Current	 	 	and Other	 	 	Current	 	 	Credits and	 	 	Net Asset	 	
 	 	Assets	 	 	Assets	 	 	Liabilities	 	 	Other	 	 	(Liability)	 	
Regulated Electricity:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	$	45,220	 	 	$	19,417	 	 	$	(19,191	)	 	$	(12,000	)	 	$	33,446	 	
Margin account and options	 	 	18,821	 	 	 	118	 	 	 	(8,879	)	 	 	—	 	 	 	10,060	 	
Marketing & Trading:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Mark-to-market	 	 	6,389	 	 	 	581	 	 	 	(6,222	)	 	 	(1,124	)	 	 	(376	)	
Options at cost	 	 	—	 	 	 	7	 	 	 	—	 	 	 	—	 	 	 	7	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	70,430	 	 	$	20,123	 	 	$	(34,292	)	 	$	(13,124	)	 	$	43,137	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
     We maintain a margin account with a broker to support our risk management and trading activities. The margin account was a liability of $123 million at December 31, 2005 and $9 million at December 31, 2004 and is included in the margin account in the table above. Cash is deposited with the broker in this account at the time futures or options contracts are initiated. The change in market value of these contracts (reflected in mark-to-market) requires adjustment of the margin account balance.
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     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, 2005 or at December 31, 2004. Collateral provided to us by counterparties was $175 million at December 31, 2005 and $6 million at December 31, 2004, and is included in other current liabilities on the Balance Sheets.
S-5. Other Income and Other Expense
     The following table provides detail of APS’ other income and other expense for the years ended December 31, 2005, 2004 and 2003 (dollars in thousands):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	
Other income:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	14,513	 	 	$	22,354	 	 	$	15,660	 	
Miscellaneous	 	 	2,736	 	 	 	2,021	 	 	 	1,892	 	
Investment gains – net	 	 	1,705	 	 	 	3,192	 	 	 	2,107	 	
Asset dispositions	 	 	3,187	 	 	 	3,026	 	 	 	618	 	
 	 	 	 	 	 	 	 	 	 	
Total other income	 	$	22,141	 	 	$	30,593	 	 	$	20,277	 	

Other expense:	 	 	 	 	 	 	 	 	 	 	 	 	
Non-operating costs (a)	 	$	(11,706	)	 	$	(8,923	)	 	$	(9,361	)	
Asset dispositions	 	 	(9,759	)	 	 	(1,212	)	 	 	(1,522	)	
Miscellaneous	 	 	(1,739	)	 	 	(3,681	)	 	 	(2,079	)	
 	 	 	 	 	 	 	 	 	 	
Total other expense	 	$	(23,204	)	 	$	(13,816	)	 	$	(12,962	)	

			
(a)	 	As defined by the FERC, includes below-the-line non-operating utility costs (primarily community relations and other costs excluded from utility rate recovery).	
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S-6. 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):
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	
Electric operating revenues:	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West – marketing and trading	 	$	6	 	 	$	13	 	 	$	12	 	
Pinnacle West Energy	 	 	2	 	 	 	3	 	 	 	9	 	
 	 	 	 	 	 	 	 	 	 	
Total	 	$	8	 	 	$	16	 	 	$	21	 	

Fuel and purchased power costs:	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West Energy	 	$	61	 	 	$	75	 	 	$	70	 	

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

Other:	 	 	 	 	 	 	 	 	 	 	 	 	
Pinnacle West Energy:	 	 	 	 	 	 	 	 	 	 	 	 	
Lease expense	 	$	—	 	 	$	—	 	 	$	10	 	
 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	7	 	 	$	19	 	 	$	12	 	
 	 	 	 	 	 	 	 	 	 	
Pinnacle West:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity infusion from Pinnacle West (see Note 3)	 	$	250	 	 	$	—	 	 	$	—	 	

 	 	As of December 31,	 	
 	 	2005	 	 	2004	 	
Net intercompany receivables (payables):	 	 	 	 	 	 	 	 	
Pinnacle West Energy	 	$	—	 	 	$	467	 	
Pinnacle West – marketing and trading	 	 	82	 	 	 	19	 	
APS Energy Services	 	 	2	 	 	 	9	 	
Pinnacle West	 	 	(2	)	 	 	(5	)	
 	 	 	 	 	 	 	
Total	 	$	82	 	 	$	490	 	
 	 	 	 	 	 	 	
     Electric revenues include sales of electricity to affiliated companies at contract prices. Purchased power includes purchases of electricity from affiliated companies at contract prices. APS 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 EITF Issue No. 2-3.”
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     Intercompany receivables primarily include amounts related to the 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.
     The December 31, 2004 intercompany receivable included a $500 million loan that APS made to Pinnacle West Energy. This loan was repaid in May 2005.
     APS was authorized to acquire the PWEC Dedicated Assets from Pinnacle West Energy, with a net carrying value of approximately $850 million, and to rate base the PWEC Dedicated Assets at a rate base value of $700 million, which resulted in a mandatory rate base disallowance of approximately $150 million. Due to depreciation and other miscellaneous factors, the actual disallowance was $139 million at December 31, 2005. This transfer was completed on July 29, 2005. As a result, for financial reporting purposes, APS recognized a one-time, after-tax net plant regulatory disallowance of approximately $84 million in 2005. In connection with the transfer, APS recorded a $500 million intercompany payable to Pinnacle West Energy. On October 3, 2005, APS settled the intercompany payable.
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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:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2005	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	
2004	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
2003	 	 	1,661	 	 	 	—	 	 	 	—	 	 	 	1,661	(a)	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Reserve for uncollectibles:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2005	 	$	4,896	 	 	$	2,638	 	 	$	—	 	 	$	2,555	 	 	$	4,979	 	
2004	 	 	9,223	 	 	 	2,868	 	 	 	—	 	 	 	7,195	 	 	 	4,896	 	
2003	 	 	9,607	 	 	 	3,715	 	 	 	—	 	 	 	4,099	 	 	 	9,223	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Reserve for contract losses:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2005	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	
2004	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
2003	 	 	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:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2005	 	$	3,444	 	 	$	2,638	 	 	$	—	 	 	$	2,514	 	 	$	3,568	 	
2004	 	 	3,743	 	 	 	2,446	 	 	 	—	 	 	 	2,745	 	 	 	3,444	 	
2003	 	 	1,341	 	 	 	5,716	 	 	 	—	 	 	 	3,314	 	 	 	3,743	 	
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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, 2005. 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, 2005. 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 67 of this report and “Management’s Report on Internal Control Over Financial Reporting (Arizona Public Service Company)” on page 126 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 68 of this report and “Report of Independent Registered Public Accounting Firm” on page 127 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
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financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
     No change in Pinnacle West’s or APS’ internal control over financial reporting occurred during the fiscal quarter ended December 31, 2005 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, 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 17, 2006 (the “2006 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, Its Committees and Our Corporate Governance — How are directors compensated?”; “Performance Graph”; and “Executive Compensation” in the 2006 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 2006 Proxy Statement.
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Securities Authorized For Issuance Under Equity Compensation Plans
     The following table sets forth information as of December 31, 2005 with respect to our compensation plans and individual compensation arrangements under which our equity securities were authorized for issuance.
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	 	
 	 	and rights	 	 	and rights	 	 	column (a))	 	
Plan category	 	(a)	 	 	(b)	 	 	(c)	 	
Equity compensation plans approved by security holders	 	 	1,695,772	 	 	$	39.65	 	 	 	4,245,671	 	
Equity compensation plans not approved by security holders	 	 	—	 	 	 	—	 	 	 	145,100	 	
 	 	 	 	 	 	 	 	 	 	 	
Total	 	 	1,695,772	 	 	$	39.65	 	 	 	4,390,771	 	
 	 	 	 	 	 	 	 	 	 	 	
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.
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      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 non-qualified stock options to eligible non-employee directors.
      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 1,100 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 1,100 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 1,100 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 1,100 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 1,100 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?”; “Does the Company Have Any Related Party Transactions to Disclose?”; “Executive Compensation — Human Resources Committee Interlocks and Insider Participation” and “What are the Company’s Defined Benefit Plans — Employment and Change-in-Control Agreement” in the 2006 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT
FEES AND SERVICES
Pinnacle West
     Reference is hereby made to “Audit Matters — What fees were paid to our independent registered public accountants in 2005 and 2004?” and “- What are the Audit Committee’s pre-approval policies?” in the 2006 Proxy Statement.
APS
     The following fees were paid to APS’ independent registered public accountants, Deloitte & Touche LLP, for the last two fiscal years:
 	 	 	 	 	 	 	 	 	
Type of Service	 	2004	 	 	2005	 	
Audit Fees (1)	 	$	1,910,089	 	 	$	2,167,319	 	
Audit-Related Fees (2)	 	 	318,750	 	 	 	33,899	 	
Tax Fees (3)	 	 	1,559,928	 	 	 	1,025	 	

(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 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.	
     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 December 14, 2005	 	3.1 to Pinnacle West/APS December 9, 2005 Form 8-K Report	 	12-15-05	
 	 	 	 	 	 	 	 	 	
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	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
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	 	12-21-00	
 	 	 	 	 	 	 	 	 	
4.20	 	Pinnacle West	 	First Supplemental Indenture dated as of March 15, 2001	 	4.1 to Pinnacle West’s Registration Statement No. 333-52476 by means of March 26, 2001 Form 8-K Report, 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	 	12-21-00	
 	 	 	 	 	 	 	 	 	
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	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
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	
 	 	 	 	 	 	 	 	 	
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	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
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	
 	 	 	 	 	 	 	 	 	
4.34	 	Pinnacle West
APS	 	Ninth Supplemental Indenture dated as of August 15, 2005	 	4.1 to APS’ Registration Statements Nos. 333-106772 and 333-121512 by means of August 17, 2005 Form 8-K Report, File No. 1-4473	 	8-22-05	
 	 	 	 	 	 	 	 	 	
4.35	 	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	
 	 	 	 	 	 	 	 	 	
4.36	 	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	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
4.37	 	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	 	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	
 	 	 	 	 	 	 	 	 	
10.2	 	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	
 	 	 	 	 	 	 	 	 	
10.3	 	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	
 	 	 	 	 	 	 	 	 	
10.4	 	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	
 	 	 	 	 	 	 	 	 	
10.5	 	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	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.6	 	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	
 	 	 	 	 	 	 	 	 	
10.7	 	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	
 	 	 	 	 	 	 	 	 	
10.8	 	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	
 	 	 	 	 	 	 	 	 	
10.9	 	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	
 	 	 	 	 	 	 	 	 	
10.10	 	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	
157

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.11	 	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	
 	 	 	 	 	 	 	 	 	
10.12	 	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	
 	 	 	 	 	 	 	 	 	
10.13	 	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	
 	 	 	 	 	 	 	 	 	
10.14	 	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	
158

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.15	 	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	
 	 	 	 	 	 	 	 	 	
10.16	 	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	
 	 	 	 	 	 	 	 	 	
10.17	 	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	
 	 	 	 	 	 	 	 	 	
10.18	 	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	
 	 	 	 	 	 	 	 	 	
10.19	 	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	
 	 	 	 	 	 	 	 	 	
10.20	 	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	
159

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.21	 	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	
 	 	 	 	 	 	 	 	 	
10.22	 	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	
 	 	 	 	 	 	 	 	 	
10.23	 	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	
 	 	 	 	 	 	 	 	 	
10.24	 	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	
 	 	 	 	 	 	 	 	 	
10.25	 	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	
160

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.26	 	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	
 	 	 	 	 	 	 	 	 	
10.27	 	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	
 	 	 	 	 	 	 	 	 	
10.28	 	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	
 	 	 	 	 	 	 	 	 	
10.29	 	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	
 	 	 	 	 	 	 	 	 	
10.30	 	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	
 	 	 	 	 	 	 	 	 	
10.31	 	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	
161

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.32	 	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	
 	 	 	 	 	 	 	 	 	
10.33	 	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	
 	 	 	 	 	 	 	 	 	
10.34	 	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	
 	 	 	 	 	 	 	 	 	
10.35	 	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	
 	 	 	 	 	 	 	 	 	
10.36	 	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	
 	 	 	 	 	 	 	 	 	
10.37	 	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	
162

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.38	 	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	
 	 	 	 	 	 	 	 	 	
10.39	 	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	
163

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.40	 	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	
 	 	 	 	 	 	 	 	 	
10.41 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	
 	 	 	 	 	 	 	 	 	
10.42 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	
164

Table of Contents

 	 	 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.43 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	
 	 	 	 	 	 	 	 	 	
10.44 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	
 	 	 	 	 	 	 	 	 	
10.45	 	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	
165

Table of Contents

 	 	 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.46	 	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	
 	 	 	 	 	 	 	 	 	
10.47	 	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	
 	 	 	 	 	 	 	 	 	
10.48 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan, as amended and restated, dated December 18, 2003	 	 	 	 	
 	 	 	 	 	 	 	 	 	
166

Table of Contents

 	 	 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.49 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	
 	 	 	 	 	 	 	 	 	
10.50 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	
 	 	 	 	 	 	 	 	 	
10.51 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	
 	 	 	 	 	 	 	 	 	
10.52 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	
 	 	 	 	 	 	 	 	 	
10.53 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	
167

Table of Contents

 	 	 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.54 b	 	Pinnacle West
APS	 	Fourth Amendment to the Arizona Public Service Company Directors Deferred Compensation Plan effective as of January 1, 1999	 	10.8 to Pinnacle West’s 1999 Form 10-K Report, File No. 1-8962	 	3-30-00	
 	 	 	 	 	 	 	 	 	
10.55 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	
 	 	 	 	 	 	 	 	 	
10.56 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	
 	 	 	 	 	 	 	 	 	
10.57 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	
 	 	 	 	 	 	 	 	 	
10.58 b	 	Pinnacle West
APS	 	Fifth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective January 1, 1997	 	10.3 to APS’ 1996 Form 10-K Report, File No. 1-4473	 	3-28-97	
 	 	 	 	 	 	 	 	 	
10.59 b	 	Pinnacle West
APS	 	Sixth Amendment to the Arizona Public Service Company Deferred Compensation Plan effective January 1, 2001	 	10.8 to Pinnacle West’s 2000 Form 10-K Report, File No. 1-8962	 	3-14-01	
 	 	 	 	 	 	 	 	 	
10.60 b	 	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	
168

Table of Contents

 	 	 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.61 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	
 	 	 	 	 	 	 	 	 	
10.62 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	
 	 	 	 	 	 	 	 	 	
10.63 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	
 	 	 	 	 	 	 	 	 	
10.64 b	 	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, effective January 1, 2003.	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.65 b	 	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	
169

Table of Contents

 	 	 	 	 	 	 	 	 	
Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.66 b	 	Pinnacle West
APS	 	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	
 	 	 	 	 	 	 	 	 	
10.67 b	 	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	
 	 	 	 	 	 	 	 	 	
10.68 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	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.69 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	
 	 	 	 	 	 	 	 	 	
10.70 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	
 	 	 	 	 	 	 	 	 	
10.71 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	
 	 	 	 	 	 	 	 	 	
10.72 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	
 	 	 	 	 	 	 	 	 	
10.73 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	
 	 	 	 	 	 	 	 	 	
10.74 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	
 	 	 	 	 	 	 	 	 	
10.75 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	
 	 	 	 	 	 	 	 	 	
10.75.1 b	 	Pinnacle West
APS	 	Amendment to Agreement between APS and James M. Levine effective October 11, 2002	 	10.2 to Pinnacle West’s September 2004 Form 10-Q Report, File No. 1-8962	 	11-8-04	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.75.2 b	 	Pinnacle West
APS	 	Amendment to Agreement between APS and James M. Levine effective as of 1-1-05	 	10.79.2 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
 	 	 	 	 	 	 	 	 	
10.76 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	
 	 	 	 	 	 	 	 	 	
10.77 bd	 	Pinnacle West
APS	 	Key Executive Employment and Severance Agreement between Pinnacle West and certain executive officers of Pinnacle West and its subsidiaries	 	 	 	 	

10.78 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	
 	 	 	 	 	 	 	 	 	
10.79 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	
172

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.80 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	
 	 	 	 	 	 	 	 	 	
10.81 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	
 	 	 	 	 	 	 	 	 	
10.82	 	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	
 	 	 	 	 	 	 	 	 	
10.83	 	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	
 	 	 	 	 	 	 	 	 	
10.84	 	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	
173

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.85	 	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	
 	 	 	 	 	 	 	 	 	
10.86	 	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	
 	 	 	 	 	 	 	 	 	
10.87 bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.1 to Pinnacle West/APS December 9, 2005 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	12-15-05	
 	 	 	 	 	 	 	 	 	
10.88 bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.1 to Pinnacle West/APS December 31, 2005 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	2-1-06	
 	 	 	 	 	 	 	 	 	
10.89 bd	 	Pinnacle West
APS	 	Performance Accelerated Stock Option Agreement under Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.98 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
174

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.90 bd	 	Pinnacle West
APS	 	Stock Ownership Incentive Agreement under Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	10.99 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
 	 	 	 	 	 	 	 	 	
10.91 bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.92 bd	 	Pinnacle West
APS	 	Summary of 2006 CEO Variable Incentive Plan and Officer Variable Incentive Plan	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.93	 	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	 	10.100 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
 	 	 	 	 	 	 	 	 	
10.94	 	Pinnacle West
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	 	10.101 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
 	 	 	 	 	 	 	 	 	
10.95	 	Pinnacle West
APS	 	Amended and Restated Five-Year Credit Agreement dated as of December 9, 2005 between APS, as Borrower, Citibank, N.A., as Agent, and the lenders and other parties thereto	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.96	 	Pinnacle West	 	$200,000,000 Senior Notes Uncommitted Master Shelf Agreement dated as of February 28, 2006	 	 	 	 	
175

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.97	 	Pinnacle West	 	Amended and Restated Credit Agreement dated as of December 9, 2005 among Pinnacle West Capital Corporation, as Borrower, JPMorgan Chase Bank, N.A., as Agent, and the other agent parties thereto	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.98	 	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	 	10.102 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
 	 	 	 	 	 	 	 	 	
10.99	 	Pinnacle West
APS	 	Agreement for the Transfer and Use of Wastewater and Effluent by and between APS, SRP and PWE dated June 1, 2001	 	10.103 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
 	 	 	 	 	 	 	 	 	
10.100	 	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	 	10.104 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
 	 	 	 	 	 	 	 	 	
10.101	 	Pinnacle West
APS	 	Operating Agreement for the Co-Ownership of Wastewater Effluent dated November 16, 2000 by and between APS and SRP	 	10.105 to Pinnacle West/APS 2004 Form 10-K Report, File Nos. 1-8962 and 1-4473	 	3-16-05	
176

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.102	 	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	
 	 	 	 	 	 	 	 	 	
10.102.1	 	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	
 	 	 	 	 	 	 	 	 	
10.103	 	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	
 	 	 	 	 	 	 	 	 	
10.104 b	 	Pinnacle West
APS	 	Pinnacle West 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	
 	 	 	 	 	 	 	 	 	
10.105 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	
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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
10.106	 	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	
 	 	 	 	 	 	 	 	 	
10.107	 	Pinnacle West
APS	 	Navajo Project Co-Tenancy Agreement dated as of March 23, 1976, and Supplement No. 1 thereto dated as of October 18, 1976, Amendment No. 1 dated as of July 5, 1988, and Amendment No. 2 dated as of June 14, 1996, Amendment No. 3 dated as of February 11, 1997; Amendment No. 4 dated as of January 21, 1997; Amendment No. 5 dated as of January 23, 1998; Amendment No. 6 dated as of July 31, 1998.	 	 	 	 	
 	 	 	 	 	 	 	 	 	
10.108	 	Pinnacle West
APS	 	Navajo Project Participation Agreement dated as of September 30, 1969, and Amendment and Supplement No. 1 dated as of January 16, 1970, and Coordinating Committee Agreement No. 1 dated as of September 31, 1971.	 	 	 	 	
 	 	 	 	 	 	 	 	 	
12.1	 	Pinnacle West	 	Ratio of Earnings to Fixed Charges	 	 	 	 	
 	 	 	 	 	 	 	 	 	
12.2	 	APS	 	Ratio of Earnings to Fixed Charges	 	 	 	 	
 	 	 	 	 	 	 	 	 	
12.3	 	Pinnacle West	 	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements	 	 	 	 	
 	 	 	 	 	 	 	 	 	
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	 	 	 	 	
179

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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	
184

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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	
187

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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	
188

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
99.22	 	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	
 	 	 	 	 	 	 	 	 	
99.23	 	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	
 	 	 	 	 	 	 	 	 	
99.24	 	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	
189

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
99.25	 	Pinnacle West
APS	 	Opinion and Order, ACC Decision No. 67744 dated April 7, 2005 (see Exhibit 99.24 herein for Attachment A to the Opinion and Order, the 2004 Settlement Agreement)	 	99.5 to Pinnacle West/APS March 2005 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	5-10-05	
 	 	 	 	 	 	 	 	 	
99.26	 	Pinnacle West	 	Purchase Agreement by and among Pinnacle West Energy Corporation and GenWest, L.L.C. and Nevada Power Company, dated June 21, 2005	 	99.5 to Pinnacle West/APS June 2005 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	8-9-05	
 	 	 	 	 	 	 	 	 	
99.27	 	Pinnacle West
APS	 	Amended and Restated Reimbursement Agreement among Arizona Public Service Company, The Banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Issuing Bank, and Barclays Bank PLC, as Syndication Agent, dated as of May 19, 2005	 	99.6 to PinnacleWest/APS June 2005 Form 10-Q Report, File Nos. 1-8962 and 1-4473	 	8-9-05	
 	 	 	 	 	 	 	 	 	
99.28	 	Pinnacle West
APS	 	Application for Emergency Interim Rate Increase and Interim Amendment to Decision No. 67744	 	99.1 to Pinnacle West/APS January 6, 2006 Form 8-K Report, File Nos. 1-8962 and 1-4473	 	1-9-06	
190

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Exhibit	 	 	 	 	 	 	 	Date	
No.	 	Registrant(s)	 	Description	 	Previously Filed as Exhibit: a	 	Effective	
99.29	 	Pinnacle West	 	Non-GAAP Financial Measure Reconciliation - Operating Income (GAAP measure) to Gross Margin (non-GAAP financial measure)	 	 	 	 	
 	 	 	 	 	 	 	 	 	
99.30	 	APS	 	Non-GAAP Financial Measure Reconciliation - Operating Income (GAAP measure) to Gross Margin (non-GAAP financial measure)	 	 	 	 	

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 10, 2006	 	 	 	 	 	 	
 	 	 	 	 	 	 	
 	 	 	 	/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	 	Principal Executive Officer and Director	 	March 10, 2006	
 
(William J. Post, Chairman of the Board of Directors and Chief Executive Officer)	 	 	 	 	
 	 	 	 	 	
/s/ Jack E. Davis	 	Director	 	March 10, 2006	
 
(Jack E. Davis, President and Chief Operating Officer)	 	 	 	 	
 	 	 	 	 	
/s/ Donald E. Brandt	 	Principal Accounting Officer and	 	March 10, 2006	
 
(Donald E. Brandt, Executive Vice President and Chief Financial Officer)	 	 Principal Financial Officer	 	 	
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Signature	 	Title	 	Date	
 	 	 	 	 	
/s/ Edward N. Basha, Jr.	 	Director	 	March 10, 2006	
 
(Edward N. Basha, Jr.)	 	 	 	 	
 	 	 	 	 	
/s/ Michael L. Gallagher	 	Director	 	March 10, 2006	
 
(Michael L. Gallagher)	 	 	 	 	
 	 	 	 	 	
/s/ Pamela Grant	 	Director	 	March 10, 2006	
 
(Pamela Grant)	 	 	 	 	
 	 	 	 	 	
/s/ Roy A. Herberger, Jr.	 	Director	 	March 10, 2006	
 
(Roy A. Herberger, Jr.)	 	 	 	 	
 	 	 	 	 	
/s/ Martha O. Hesse	 	Director	 	March 10, 2006	
 
(Martha O. Hesse)	 	 	 	 	
 	 	 	 	 	
/s/ William S. Jamieson, Jr.	 	Director	 	March 10, 2006	
 
(William S. Jamieson, Jr.)	 	 	 	 	
 	 	 	 	 	
/s/ Humberto S. Lopez	 	Director	 	March 10, 2006	
 
(Humberto S. Lopez)	 	 	 	 	
 	 	 	 	 	
/s/ Kathryn L. Munro	 	Director	 	March 10, 2006	
 
(Kathryn L. Munro)	 	 	 	 	
 	 	 	 	 	
/s/ Bruce J. Nordstrom	 	Director	 	March 10, 2006	
 
(Bruce J. Nordstrom)	 	 	 	 	
 	 	 	 	 	
/s/ William L. Stewart	 	Director	 	March 10, 2006	
 
(William L. Stewart)	 	 	 	 	
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Table of Contents

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 10, 2006	 	/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	 	Director	 	March 10, 2006	
 
(William J. Post, Chairman of the Board of Directors )	 	 	 	 	
 	 	 	 	 	
/s/ Jack E. Davis	 	Principal Executive Officer and Director	 	March 10, 2006	
 
(Jack E. Davis, President and Chief Executive Officer)	 	 	 	 	
 	 	 	 	 	
/s/ Donald E. Brandt	 	Principal Financial Officer	 	March 10, 2006	
 
(Donald E. Brandt, Executive Vice President, and Chief Financial Officer)	 	 	 	 	
 	 	 	 	 	
/s/ Chris N. Froggatt	 	Principal Accounting Officer	 	March 10, 2006	
 
(Chris N. Froggatt, Vice President and Controller)	 	 	 	 	
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Table of Contents

 	 	 	 	 	
Signature	 	Title	 	Date	
 	 	 	 	 	
/s/ Edward N. Basha, Jr.	 	Director	 	March 10, 2006	
 
(Edward N. Basha, Jr.)	 	 	 	 	
 	 	 	 	 	
/s/ Michael L. Gallagher	 	Director	 	March 10, 2006	
 
(Michael L. Gallagher)	 	 	 	 	
 	 	 	 	 	
/s/ Pamela Grant	 	Director	 	March 10, 2006	
 
(Pamela Grant)	 	 	 	 	
 	 	 	 	 	
/s/ Roy A. Herberger, Jr.	 	Director	 	March 10, 2006	
 
(Roy A. Herberger, Jr.)	 	 	 	 	
 	 	 	 	 	
/s/ Martha O. Hesse	 	Director	 	March 10, 2006	
 
(Martha O. Hesse)	 	 	 	 	
 	 	 	 	 	
/s/ William S. Jamieson, Jr.	 	Director	 	March 10, 2006	
 
(William S. Jamieson, Jr.)	 	 	 	 	
 	 	 	 	 	
/s/ Humberto S. Lopez	 	Director	 	March 10, 2006	
 
(Humberto S. Lopez)	 	 	 	 	
 	 	 	 	 	
/s/ Kathryn L. Munro	 	Director	 	March 10, 2006	
 
(Kathryn L. Munro)	 	 	 	 	
 	 	 	 	 	
/s/ Bruce J. Nordstrom	 	Director	 	March 10, 2006	
 
(Bruce J. Nordstrom)	 	 	 	 	
 	 	 	 	 	
/s/ William L. Stewart	 	Director	 	March 10, 2006	
 
(William L. Stewart)	 	 	 	 	
195

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Exhibit Index
 	 	 	 	 	
Exhibit	 	 	 	 	
No.	 	Registrant(s)	 	Description	
10.48 b	 	Pinnacle West
APS	 	Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan, as amended and restated, dated December 18, 2003	
 	 	 	 	 	
10.64 b	 	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, effective January 1, 2003.	
 	 	 	 	 	
10.77 bd	 	Pinnacle West
APS	 	Key Executive Employment and Severance Agreement between Pinnacle West and certain executive officers of Pinnacle West and its subsidiaries	
 	 	 	 	 	
10.91 bd	 	Pinnacle West
APS	 	Performance Share Agreement under the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan	
 	 	 	 	 	
10.92 bd	 	Pinnacle West
APS	 	Summary of 2006 CEO Variable Incentive Plan and Officer Variable Incentive Plan	
 	 	 	 	 	
10.95	 	Pinnacle West
APS	 	Amended and Restated Five-Year Credit Agreement dated as of December 9, 2005 between APS, as Borrower, Citibank, N.A., as Agent, and the lenders and other parties thereto	
 	 	 	 	 	
10.96	 	Pinnacle West	 	$200,000,000 Senior Notes Uncommitted Master Shelf Agreement dated as of February 28, 2006	
 	 	 	 	 	
10.97	 	Pinnacle West	 	Amended and Restated Credit Agreement dated as of December 9, 2005 among Pinnacle West Capital Corporation, as Borrower, JPMorgan Chase Bank, N.A., as Agent, and the other agent parties thereto	
 	 	 	 	 	
10.107	 	Pinnacle West
APS	 	Navajo Project Co-Tenancy Agreement dated as of March 23, 1976, and Supplement No. 1 thereto dated as of October 18, 1976, Amendment No. 1 dated as of July 5, 1988, and Amendment No. 2 dated as of June 14, 1996, Amendment No. 3 dated as of February 11, 1997; Amendment No. 4 dated as of January 21, 1997; Amendment No. 5 dated as of January 23, 1998; Amendment No. 6 dated as of July 31, 1998.	
 	 	 	 	 	
10.108	 	Pinnacle West
APS	 	Navajo Project Participation Agreement dated as of September 30, 1969, and Amendment and Supplement No. 1 dated as of January 16, 1970, and Coordinating Committee Agreement No. 1 dated as of September 31, 1971.	
 	 	 	 	 	
12.1	 	Pinnacle West	 	Ratio of Earnings to Fixed Charges	
 	 	 	 	 	
12.2	 	APS	 	Ratio of Earnings to Fixed Charges	
 	 	 	 	 	
12.3	 	Pinnacle West	 	Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements	
 	 	 	 	 	
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	
 	 	 	 	 	
99.29	 	Pinnacle West	 	Non-GAAP Financial Measure Reconciliation - Operating Income (GAAP measure) to Gross Margin (non-GAAP financial measure)	
 	 	 	 	 	
99.30	 	APS	 	Non-GAAP Financial Measure Reconciliation - Operating Income (GAAP measure) to Gross Margin (non-GAAP financial measure)	

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.	
 
Exhibit 10.48b
PINNACLE WEST CAPITAL CORPORATION
SUPPLEMENTAL EXCESS BENEFIT
RETIREMENT PLAN
.
.
.
TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
ARTICLE ONE - PREAMBLE.........................................................1

ARTICLE TWO - CONSTRUCTION.....................................................2

ARTICLE THREE - ELIGIBILITY AND PARTICIPATION..................................2

ARTICLE FOUR - BENEFITS........................................................4

ARTICLE FIVE - PAYMENT OF BENEFITS.............................................9

ARTICLE SIX - COORDINATION OF BENEFITS........................................10

ARTICLE SEVEN - FUNDING.......................................................11

ARTICLE EIGHT - ADMINISTRATION................................................12

ARTICLE NINE - AMENDMENT AND TERMINATION OF THE PLAN..........................12

ARTICLE TEN - ASSIGNMENT......................................................12

ARTICLE ELEVEN - WITHHOLDING..................................................13

ARTICLE TWELVE - OTHER BENEFIT PLANS OF THE COMPANY...........................13

ARTICLE THIRTEEN - MISCELLANEOUS..............................................13

ARTICLE FOURTEEN - EFFECTIVE DATE.............................................14	

i
PINNACLE WEST CAPITAL CORPORATION
SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN
ARTICLE ONE
PREAMBLE
Effective January 1, 1987, PINNACLE WEST CAPITAL CORPORATION (the
"Company") adopted the PINNACLE WEST CAPITAL CORPORATION SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN (the "Plan") for the purpose of paying retirement benefits to certain employees in excess of the benefits permitted to be paid under the Pinnacle West Capital Corporation Retirement Plan (the "Retirement Plan") by reason of Section 415 of the Internal Revenue Code (the "Code"). The Plan was thereafter amended several times to provide additional benefits, thereby changing the Plan from an "excess benefit plan" under the Employee Retirement Income Security Act of 1974, as amended (the "Act"), to a "top hat" plan under the Act.
Effective January 1, 1982, ARIZONA PUBLIC SERVICE COMPANY ("APS") adopted the ARIZONA PUBLIC SERVICE COMPANY SUPPLEMENTAL EXCESS BENEFIT RETIREMENT PLAN (the "APS Plan") for the purpose of paying retirement benefits to certain employees in excess of the benefits permitted to be paid under the Arizona Public Service Company Employees' Retirement Plan (the "APS Retirement Plan") by reason of Section 415 of the Code. The Plan was thereafter amended several times to provide additional benefits, thereby changing the Plan from an "excess benefit plan" under the Act to a "top hat" plan under the Act.
Effective January 1, 2000, the Company and APS amended and restated the Plan and the APS Plan to merge the APS Plan into this Plan and to make other technical changes. The Plan was amended several times thereafter. By this amendment and restatement, the Company intends to amend the Plan to add a new benefit structure.
1
ARTICLE TWO
CONSTRUCTION
Terms capitalized in this Plan shall have the meaning given in Article Two of the Retirement Plan, governing definitions and construction, except where such terms are otherwise defined in this Plan. If any provision of this Plan is determined to be invalid or unenforceable for any reason, the remaining provisions shall continue in full force and effect. All of the provisions of this Plan shall be construed and enforced according to the laws of the State of Arizona, and shall be administered according to the laws of such state, except as otherwise required by the Act, the Code or other applicable federal law. It is the intention of the Company that the Plan, as adopted by the Company, shall constitute an "unfunded plan of deferred compensation for a select group of management and highly compensated employees" within the meaning of Sections 201(2) and 301(3) of the Act. Benefits under this Plan shall be paid from the Company's general assets, and not from any trust fund or other segregated fund. This Plan shall be construed in a manner consistent with the Company's intention.
ARTICLE THREE
ELIGIBILITY AND PARTICIPATION
Employees of the Company or its Affiliates who are members of a select group of management or highly compensated employees, as determined by the Human Resources Committee of the Board of Directors of the Company, in its discretion, and from time to time, shall be eligible to participate in the Plan if they satisfy the eligibility requirements of Section 3(a) or Section 3(b).
(a) Eligible Employees who are officers of the Company or an Affiliate which is a participating employer under the Retirement Plan shall be entitled to the benefits described in Section 4(a).
2
(b) Eligible Employees of the Company or an Affiliate which is a participating employer under the Retirement Plan who are not officers, who are designated for participation by the Human Resources Committee of the Company's Board of Directors and who are participants in the Retirement Plan shall be entitled to the benefits described in Section 4(b). The Human Resources Committee may make its designations under this Section 3(b) by individual designation or by group designation.
A participant shall commence participation in this Plan as of the first day of the Plan Year in which he or she becomes a participant pursuant to this ARTICLE THREE or the first day of his or her employment with the Company or an Affiliate which is a participating employer under the Retirement Plan, whichever is later. Such participation shall continue until the earlier of the date on which the participant no longer satisfies the requirements for participation under Section 3(a) or Section 3(b) or the date on which the Human Resources Committee informs the participant in writing that he or she is no longer eligible to participate in this Plan.
Notwithstanding the foregoing, if the status of a participant changes for reasons other than termination of employment with the Company or an Affiliate which is a participating employer under the Retirement Plan, so that he or she no longer is eligible to participate in the Plan, his or her participation in the Plan shall cease but his or her benefit under this Plan as of the date of his or her change of status shall not be canceled or distributed, but shall be determined upon his or her termination of employment with the Company or an Affiliate.
3
ARTICLE FOUR
BENEFITS
(a) Section 3(a) Participants.
(1) Subject to ARTICLE SEVEN, a participant who is eligible under
Section 3(a) and who is a Group A Participant under the Retirement Plan shall be entitled to a monthly benefit equal to the lesser of (i) or (ii), reduced by
(iii), where
(i) Equals three percent (3%) of the participant's Average Monthly Compensation multiplied by the participant's Years of Service, not to exceed ten (10) Years of Service, plus two percent (2%) of the participant's Average Monthly Compensation multiplied by the participant's Years of Service in excess of ten (10) Years of Service,
(ii) Equals sixty percent (60%) of the participant's Average Monthly Compensation, and
(iii) Equals the amount of such participant's monthly benefit determined under the terms of the Retirement Plan and payable in accordance with Section 6.2 of the Retirement Plan.
(2) Subject to ARTICLE SEVEN, a participant who is eligible under
Section 3(a) and who is a Group B Participant under the Retirement Plan shall be entitled to a monthly benefit equal to the sum of (i) and (ii), where
(i) Equals the benefit determined under the formula set forth above in this Section 4(a)(1) for a Group A Participant in the Retirement Plan based on the participant's Years of Service as of March 31, 2003 and his or her Average Monthly Compensation as of the date of determination. Years of Service as of March 31, 2003 shall equal his or her full Years of Service as of such date plus a partial Year of Service equal to the lesser of one (1) or a fraction, the numerator of which is the participant's Hours of
4
Service earned during the period beginning on the day after the last day of his or her Computation Period ending prior to March 31, 2003 and ending on March 31, 2003, and the denominator of which is 1,000, and
(ii) Equals the monthly benefit for life payable at Normal Retirement Age which is the Actuarial Equivalent of a lump sum benefit equal to the participant's Supplemental Retirement Account Balance minus the participant's Retirement Account Balance under the Retirement Plan.
(3) Subject to ARTICLE SEVEN, a participant who is eligible under
Section 3(a) and who is a Group C Participant under the Retirement Plan shall be entitled to a monthly benefit equal to the Actuarial Equivalent of a lump sum benefit equal to (i) reduced by (ii), where
(i) Equals the participant's Supplemental Retirement Account Balance, and
(ii) Equals the participant's Retirement Account Balance under the Retirement Plan.
A participant's Supplemental Retirement Account Balance shall be a notional account credited with Monthly Retirement Account Balance Credits and Interest Credits. For purposes of this Plan, Monthly Retirement Account Balance Credits shall be determined under the general methodology set forth in the Retirement Plan based on the participant's Monthly Compensation for the month but using the following chart; provided that, except for a Group C Participant, a participant shall not receive a Monthly Retirement Account Balance Credit after he or she is credited with more than twenty-five (25) Years of Service, with twenty-five (25) Years of Service defined as twenty-five (25) full twelve
(12) months periods in duration:
5

                                  Percent of Monthly
Age at End of Plan Year in        Compensation Contribution
Which Month Occurs                Rate
------------------                ----
Less than 35                      12%
35-39                             14%
40-44                             16%
45-49                             20%
50-54                             24%
55 and over                       28%	

For purposes of this Section 4(a), Compensation and Monthly Compensation shall be determined without regard to the limitation set forth in
Section 401(a)(17) of the Code and shall be increased by any cash payments made to the participant pursuant to bonus or incentive plans maintained by the Company or an Affiliate which is a participating employer under the Retirement Plan for employees generally and by any amounts deferred by the participant under any of the Company's or such an Affiliate's deferred compensation plans for employees, provided that bonus or incentive payments made in a form other than cash, bonus or incentive payments which are not "year-end" bonus or incentive payments, bonus or incentive payments under individual agreements between the Company or such an Affiliate and a participant, and cash payments made under bonus or incentive plans maintained by the Company or such an Affiliate for employees generally which exceed the maximum amount that the Company's President or Chief Operating Officer determines, in his or her discretion, may be taken into account under this Plan shall not be taken into account as Compensation and Monthly Compensation for purposes of this Plan unless the Company's President or Chief Operating Officer determines, in his or her discretion, that such bonus or incentive payment shall be taken into account as Compensation and Monthly Compensation under this Plan. Eligible bonuses and incentive payments shall be taken into account as Compensation and Monthly Compensation in the year in which such amounts are paid rather than in the year in which they are earned, provided that the Company's President or Chief Operating Officer shall have the
6
authority to determine, in his or her discretion, that such bonus or incentive payment shall be taken into account in the year in which such amounts are earned rather than in the year in which they are paid. The Company's President or Chief Operating Officer shall have the sole and absolute discretion to determine whether a bonus or incentive payment made to a participant constitutes Compensation or Monthly Compensation for purposes of this Section 4(a) and may differentiate among individuals in establishing the bonus or incentive payments that may be taken into account under the Plan.
Notwithstanding anything herein to the contrary, the monthly benefit under this Section 4(a) of a participant who was eligible under Section 3(a) on December 31, 1999 shall not be less than such monthly benefit on such date, and the monthly benefit under this Section 4(a) of a participant who was eligible under Section 3(a) of the APS Plan on December 31, 1999 shall not be less than the monthly benefit of such participant under Section 4(a) of the APS Plan on such date, except to the extent attributable solely to an increase in any such participant's monthly benefit under the Retirement Plan due to an increase in the limitations under Sections 401(a)(17) and 415 of the Code.
(b) Section 3(b) Participants.
Subject to ARTICLE SIX and ARTICLE SEVEN, any participant who is designated for participation pursuant to Section 3(b) and who receives a benefit under the Retirement Plan, or such participant's surviving spouse or beneficiary in the event of the participant's death, shall be entitled to a monthly benefit payable in accordance with this ARTICLE FOUR and with ARTICLE FIVE equal to (i) reduced by (ii), where
(i) Equals the amount of such participant's or surviving spouse's or beneficiary's monthly benefit under the Retirement Plan computed under the provisions of the Retirement Plan but without regard to the cap on Compensation in Section 2.1(n) and
7
the limitations in Section 5.13 of the Retirement Plan and the provisions of Sections 401(a)(17) and 415 of the Code; and
(ii) Equals the amount of such participant's or surviving spouse's or beneficiary's monthly benefit actually payable under the terms of the Retirement Plan.
For purposes of this Section 4(b), Compensation shall include any amount of the participant's regular salary that the participant elects to defer under any deferred compensation plans for employees of the Company or an Affiliate which is a participating employer under the Retirement Plan and shall exclude all bonus or incentive payments paid to the participant. The Human Resources Committee shall have the sole and absolute discretion to determine a participant's Compensation for purposes of this Section 4(b).
Benefits payable under this Section 4(b) shall be payable to a Plan participant or his or her spouse or other beneficiary in the same manner and subject to all the same options, conditions, privileges and restrictions as are applicable to the benefits payable to the Plan participant, spouse or other beneficiary of a Participant under the Retirement Plan, as though such benefits were payable as a part of the benefits being paid under the Retirement Plan.
Notwithstanding anything herein to the contrary, the monthly benefit under this Section 4(b) of a participant who was eligible under Section 3(b) on December 31, 1999 shall not be less than such monthly benefit on such date, and the monthly benefit under this Section 4(b) of a participant who was eligible under Section 3(b) of the APS Plan on December 31, 1999 shall not be less than the monthly benefit of such participant under Section 4(b) of the APS Plan on such date, except to the extent attributable solely to an increase in any such participant's monthly benefit under the Retirement Plan due to an increase in the limitations under Sections 401(a)(17) and 415 of the Code.
8
ARTICLE FIVE
PAYMENT OF BENEFITS
(a) A participant entitled to benefits under Section 4(a) which are described in Section 4(a)(1) or 4(a)(2)(i) may elect to commence receiving such benefits unreduced on or after the date on which the participant attains the age of sixty-five (65) years or attains the age of sixty (60) years and is credited with at least twenty (20) Years of Service. A participant may elect to commence receiving benefits earlier if he or she has attained at least the age of fifty-five (55) years and is credited with at least ten (10) Years of Service, provided that the participant's benefit which represents the portion of his or her benefit calculated in accordance with Section 4(a)(1) or 4(a)(2)(i) shall be reduced by three percent (3%) for each year (or part thereof) by which the participant's retirement age precedes the date on which he or she would have attained the age of sixty (60) years if he or she is credited with at least twenty (20) Years of Service or the date on which he or she would have attained the age of sixty-five (65) years if credited with less than twenty (20) Years of Service.
Benefits payable to a participant under Section 4(a)(1) or Section 4(a)(2)(i) shall be payable in accordance with Section 6.2 of the Retirement Plan, and if married, shall provide a monthly payment to the participant for his or her life equal to the amount determined under Section 4(a)(1) or Section 4(a)(2)(i) and upon his or her death, shall provide monthly payments to the participant's spouse for life equal to fifty percent (50%) of the monthly payment being received by the participant at the time of his or her death.
If a participant entitled to benefits under Section 4(a)(1) or
Section 4(a)(2)(i) dies while still employed by the Company or an Affiliate, the participant's spouse shall be entitled to a survivor annuity equal to one hundred percent (100%) of the monthly benefit that the participant would have received under Section 4(a)(1) or Section 4(a)(2)(i) had he or she terminated employment on the day before he or she died,
9
survived to the age on which he or she would first be eligible to commence benefits under this Section 5(a), elected to retire and commence benefits under the Plan at that time and then died. Benefits payable to the surviving spouse shall commence on the first day of the month following the participant's date of death. The surviving spouse's monthly benefit shall be reduced by the monthly benefit that the spouse receives under Section 5.9 or Section 5.10 of the Retirement Plan, whichever is applicable. Benefits payable to a terminated participant entitled to benefits under Section 4(a)(1) or 4(a)(2)(i) who dies prior to commencing benefits shall be paid in the form of a survivor annuity equal to fifty percent (50%) of the monthly benefit which the participant would have received had he or she survived to the earliest date under this Section 5(a) upon which he or she could have commenced benefits. Such benefits shall commence on the earliest date under this Section 5(a) upon which the participant could have commenced benefits had he or she survived. The surviving spouse's monthly benefit shall be reduced by the monthly benefit that the spouse receives under Section 5.9 or Section 5.10 of the Retirement Plan, whichever is applicable.
(b) Benefits payable to a participant under Section 4(a)(2)(ii) or
Section 4(a)(3) shall become payable when a participant (or his or her spouse or beneficiary) begins to receive payment of his or her Retirement Account Balance under the Retirement Plan, and shall be subject to the same adjustments and shall be payable by the Company in the same manner and at the same time as the Plan participant's (or his or her spouse's or beneficiary's) Retirement Account Balance under the Retirement Plan is paid, as though such benefits were otherwise payable as a part of the benefits being paid under the Retirement Plan. An election or mode of payment under the Retirement Plan with respect to the participant's Retirement Account Balance shall constitute an election of a similar mode of payment under this Plan.
(c) Benefits payable to a participant under Section 4(b) shall become payable when a participant (or his or her spouse or beneficiary) begins to receive payments under the Retirement Plan, and shall be subject to the same adjustments and shall be payable by the Company in the same manner and at the same time as the Plan participant's (or his or her spouse's or beneficiary's) benefits under the Retirement Plan are paid, as though such benefits were otherwise payable as a part of the benefits being paid under the Retirement Plan, subject to ARTICLE SIX. Except as provided as in this Subsection(c) or Subsection(d) of this ARTICLE FIVE, an election or mode of payment under the Retirement Plan shall constitute an election of a similar mode of payment under this Plan. The form of payment under Section 6.6 of the Retirement Plan shall not be available under this Plan.
(d) If the present value of a Participant's vested benefits under the Plan is Five Thousand Dollars ($5,000.00), or less, at any time after the Participant's retirement or termination of employment and before his or her Annuity Starting Date, the Participant's vested benefits shall be distributed in a single lump sum. The benefits of a non-vested Participant shall automatically be deemed to be cashed out pursuant to this ARTICLE FIVE (d) upon such Participant's termination of employment. If the present value of a Participant's vested benefits is more than Five Thousand Dollars ($5,000.00) but not more than Ten Thousand Dollars ($10,000.00) at any time after the Participant's retirement or termination of employment and before his or her Annuity Starting Date, the Participant's vested benefits shall be distributed in a single lump sum if such distribution is requested in writing by the Participant and his spouse, if married, in accordance with the consent and waiver provisions of Section 6.2 of the Retirement Plan.
If the present value of the Spouse's Benefit or Vested Survivor's Benefit under the Plan, as applicable, is Five Thousand Dollars ($5,000.00), or less, at any time after the Participant's death and before the commencement of such benefit, the benefit shall be distributed in a single lump sum. If the present value of the Spouse's Benefit or Vested Survivor's Benefit is more than Five Thousand Dollars ($5,000.00) but not more than Ten Thousand Dollars ($10,000.00) at any time after the Participant's death and before the commencement of such benefit, the benefit shall be distributed in a single lump sum if such distribution is requested in writing by the Participant's surviving Spouse.
For purposes of calculating the present value of a Participant's vested benefits, the Spouse's Benefit or the Vested Survivor's Benefit, the actuarial assumptions incorporated by reference in Section 2.1(c) of the Retirement Plan shall be used, but in no event shall such present value be less than the present value calculated using the "applicable interest rate" and "applicable mortality table," as defined in Section 5.19 of the Retirement Plan.
ARTICLE SIX
COORDINATION OF BENEFITS
If an employee who was participating in a retirement plan sponsored by an Affiliate, which is not a participating employer in the Retirement Plan, becomes an employee of the Company or a participating Affiliate and a participant in the Plan under Section 4(b) and such employee's
10
accrued benefit under the retirement plan maintained by the Affiliate formerly employing him or her is transferred to the Retirement Plan, upon termination of employment, the employee's benefits, calculated in accordance with Section 4(b), will be payable in full from the Plan in accordance with Section 5(b). If an employee who was a participant in the retirement plan of an Affiliate, which is not a participating employer in the Retirement Plan, becomes an employee of the Company or a participating Affiliate and a participant in this Plan, and such employee's accrued benefit under the retirement plan maintained by his or her former employer is not transferred to the Retirement Plan, upon termination of employment, the employee's benefits, calculated in accordance with Section 4(b), will be payable from the Plan in accordance with Section 5(b) to the extent such benefits are attributable to the pension benefits payable to that employee under the Retirement Plan. The benefits calculated pursuant to Section 4(b) that are attributable to the pension benefits payable to the employee under the Retirement Plan are those benefits that bear the same ratio to the total benefits due to the employee, calculated pursuant to Section 4(b), as the benefit payable to the employee from the Retirement Plan bears to the total benefits payable to the employee under both the Retirement Plan and the retirement plan maintained by the Affiliate formerly employing that employee.
ARTICLE SEVEN
FUNDING
Benefits under this Plan shall be payable from the general assets of the Company and shall not be segregated in a trust fund or otherwise funded in any manner prior to the time of payment. No Plan participant shall have any vested rights hereunder nor any right hereunder to any specific assets of the Company.
11
ARTICLE EIGHT
ADMINISTRATION
The Plan will be administered by the Administrative Committee that administers the Retirement Plan. Except as otherwise expressly provided in this Plan, the Administrative Committee shall have the same powers and responsibilities as it has under Sections 10.4 and 12.2 of the Retirement Plan. Claims for benefits under the Plan shall be determined in the manner set forth in Article Eleven of the Retirement Plan.
ARTICLE NINE
AMENDMENT AND TERMINATION OF THE PLAN
The Plan may be amended in whole or in part, prospectively or retroactively, by action of the Company's Board of Directors, and may be terminated at any time by action of the Board of Directors; provided, however, that no such amendment or termination shall reduce any amount payable hereunder to the extent such amount accrued prior to the date of amendment or termination. All amendments shall be in writing, approved by the Company's Board of Directors and executed by a duly authorized officer of the Company.
ARTICLE TEN
ASSIGNMENT
No Plan participant or beneficiary of a Plan participant shall have any right to assign, pledge, hypothecate, anticipate or any way create a lien on any amounts payable hereunder. No amounts payable hereunder shall be subject to assignment or transfer or otherwise be alienable, either by voluntary or involuntary act, or by operation of law, or be subject to attachment, execution, garnishment, sequestration or other seizure under any legal, equitable or other process, or be liable in any way for the debts or defaults of Plan participants and their beneficiaries. Notwithstanding the foregoing, assignments of the benefits provided under this Plan shall be permitted for purposes of
12
satisfying family support obligations if such assignments are pursuant to a court order which satisfies the requirements for a "qualified domestic relations order" as defined in Section 206(d)(3) of the Act.
ARTICLE ELEVEN
WITHHOLDING
Any taxes required to be withheld from payments to the Plan participants hereunder shall be deducted and withheld by the Company.
ARTICLE TWELVE
OTHER BENEFIT PLANS OF THE COMPANY
Nothing contained in this Plan shall prevent a Plan participant prior to his or her death, or his or her spouse or other beneficiary after his or her death, from receiving, in addition to any payments provided for under this Plan, any payments provided for under the Retirement Plan or under The Pinnacle West Capital Corporation Savings Plan, or which would otherwise be payable or distributable to him or her, his or her surviving spouse or beneficiary under any plan or policy of the Company or otherwise. Nothing in this Plan shall be construed as preventing the Company or any of its subsidiaries from establishing any other or different plans providing for current or deferred compensation for employees.
ARTICLE THIRTEEN
MISCELLANEOUS
Nothing contained in this Plan shall be construed as a contract of employment between the Company and an employee, or as a right of any employee to be continued in the employment of the Company, or as a limitation of the right of the Company to discharge any of its employees, with or without cause.
13
All of the provisions of this Plan shall be binding upon all persons who shall be entitled to any benefit hereunder, their heirs and personal representatives.
ARTICLE FOURTEEN
EFFECTIVE DATE
The Plan, as amended and restated, shall be effective as of January 1, 2003.
IN WITNESS WHEREOF, the Company has caused this Pinnacle West Capital Corporation Supplemental Excess Benefit Retirement Plan, as amended and restated herein, to be executed by its duly authorized officer this 18th day of December ___, 2003.
PINNACLE WEST CAPITAL CORPORATION

                                               By /s/ Jack Davis
                                                 -------------------------------
                                                     Its COO PNW/CEO & Pres. APS
                                                        ------------------------

Attest:
By /s/ Nancy C. Loftin
  -----------------------------
      Its VP, General Counsel and Secretary
         ----------------------------------	

14
 
Exhibit 10.64b
FOURTH AMENDMENT TO
THE PINNACLE WEST CAPITAL CORPORATION
ARIZONA PUBLIC SERVICE COMPANY
SUNCOR DEVELOPMENT COMPANY
AND EL DORADO INVESTMENT COMPANY
DEFERRED COMPENSATION PLAN
Effective January 1, 1992, Pinnacle West Capital Corporation (the "Company"), Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company adopted the Pinnacle West Capital Corporation, Arizona Public Service Company, SunCor Development Company and El Dorado Investment Company Deferred Compensation Plan (the "Plan"). The Plan was thereafter amended several times. The Plan was amended and restated in its entirety on December 1, 1995 and amended several times thereafter. The Plan was most recently amended on October 22, 2002 to increase the threshold for automatic cashout for terminated or retired Participants under certain circumstances and revise crediting of interest for certain Participants.
By this instrument, the Plan is being amended to revise its claims procedures.
1. This Amendment shall amend only those Sections set forth herein and those Sections not amended hereby shall remain in full force and effect.
2. Section 1.17 is hereby amended in its entirety to read as follows:
1.17 "Disability" shall mean (i) in the case of a Participant who is an employee of an Employer, a period of disability during which a participant qualifies for benefits under the Participant's Employer's long-term disability plan, or (ii) in the case of a Participant who is a Director, a period of disability during
which the Participant would have qualified for benefits under such a plan, as determined in the sole discretion of the Committee, had the Participant been an employee of an Employer.
3. Section 8.1(b) is hereby amended in its entirety to read as follows:
(b) Waiver of Deferral; Credit for Plan Year of Disability. A Participant who is determined to be suffering from a Disability shall be excused from fulfilling that portion of the Annual Deferral commitment that would otherwise have been withheld from a Participant's Base Annual Salary, Year-End Bonus and/or Directors Fees for the Plan Year during which the Participant first suffers a Disability. In addition, the Participant's Account Balance shall be credited with that portion of the Annual Deferral commitment that is excused in accordance with the preceding sentence, unless the Disability ceases in the Plan Year that it commences, in which case, the crediting shall apply only for the period of Disability.
4. Section 8.2 is hereby amended in its entirety to read as follows:
8.2 Disability Benefit. A Participant suffering a Disability shall, for benefit purposes under this Plan, continue to be considered to be employed and shall be eligible for the benefits provided for in Articles 4, 5, 6 or 7 in accordance with the provisions of those Articles. Notwithstanding the above, the Committee shall have the right, in its sole and absolute discretion and for purposes of this Plan only, to terminate a Participant's employment or service as a Director at any time after such Participant is determined to be suffering from a Disability. In determining the Participant's Account Balance for purposes of the Disability Benefit described in the previous sentence, the Preferred Rate shall be used in lieu of the rates specified in Section 7.1.
5. ARTICLE 14 is hereby amended in its entirety to read as follows:
ARTICLE 14
Claims Procedures
14.1 Claims. Any Participant, Beneficiary or any authorized representative acting on behalf of the Participant or Beneficiary
("Claimant")
2
claiming benefits, eligibility, participation or any other right or interest under this Plan may file a written claim setting forth the basis of the claim with the Employee Benefits Department. A written notice of the Employee Benefits Department's disposition of any such claim shall be furnished to the Claimant within a reasonable time (not to exceed ninety (90) days) after the claim is received by the Employee Benefits Department. Notwithstanding the foregoing, the Employee Benefits Department may have additional time (not to exceed ninety (90) days) to decide the claim if special circumstances exist, provided that it advises the Claimant, in writing and prior to the end of the initial ninety (90) day period, of the special circumstances giving rise to the need for additional time and the date on which it expects to decide the claim. If the claim is denied, in whole or in part, the notice of disposition shall include the specific reason for the denial, identify the specific provisions of the Plan upon which the denial is based, describe any additional material or information necessary to perfect the claim, explain why that material or information is necessary and describe the Plan's review procedures, including the timeframes thereunder for a Claimant to file a request for review and for the Committee to decide the claim. The notice shall also include a statement advising the claimant of his or her right to bring a civil action under Section 502(a) of the Employee Retirement Income Security Act of 1974, as amended, if his or her claim is denied, in whole or in part, upon review.
Within sixty (60) days after receiving the written notice of the Employee Benefits Department's disposition of the claim, the Claimant may request, in writing, review by the Committee of the Employee Benefits Department's decision regarding his or her claim. Upon written request, the Claimant shall be entitled to a review meeting with the Committee to present reasons why the claim should be allowed. The Claimant may submit a written statement in support of his or her claim, together with such comments, information and material relating to the claim, as he or she deems necessary or appropriate. The Claimant shall be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information which are relevant to the Claimant's claim and its review. If the Claimant does not request review within sixty (60) days after receiving written notice of the Employee Benefits Department's disposition of the claim, the Claimant shall be deemed to have accepted the Employee Benefits Department's written disposition.
The Committee shall make its decision on review and provide written notice thereof to the Claimant within a reasonable time (not to exceed sixty (60) days) after the claim is received by the Committee. Notwithstanding the foregoing, the Committee may have additional time (not to exceed sixty (60) days) to decide the claim if special circumstances exist provided that it advises the Claimant, in writing, prior to the end of the initial sixty (60) day period, of the special circumstances giving rise to the need for additional time and the date on which it expects to decide the claim. In no event shall the Committee have more than one hundred twenty (120) days following its receipt of the Claimant's request for review to provide the Claimant with written notice of its decision.
3
The Committee shall have the right to request of and receive from Claimant such additional information, documents or other evidence as the Committee may reasonably require. In the event that the Committee requests such additional information from the Claimant, the period for making the benefit determination on review shall not take into account the period beginning on the date on which the Committee notifies the Claimant in writing of the need for additional information and ending on the date on which the Claimant responds to the request for additional information.
If the claim is denied upon review, in whole or in part, the notice of disposition shall include the specific reason for the denial, identify the specific provision of the Plan upon which the denial is based, include a statement advising the Claimant of his or her right to receive, upon written request and free of charge, reasonable access to and copies of all documents, records and other information which are relevant to the Claimant's claim. The notice shall also include a statement advising the claimant of his or her right to bring a civil action under Section 502(a) of the Employee Retirement Income Security Act of 1974, as amended, if his or her claim is denied, in whole or in part, upon review.
For purposes of this Section 14.1, a document, record or information will be considered "relevant" if it (a) was relied upon by the Employee Benefits Department or Committee, as applicable, in making the benefit decision, (b) was submitted, considered or generated in the course of making such decisions, even if it was not relied upon in making those decisions, or (c) demonstrates compliance with the administrative processes and safeguards established by the Plan to insure that the terms of the Plan have been followed and applied consistently.
To the extent permitted by law, a decision on review by the Committee shall be binding and conclusive upon all persons whomsoever. Completion of the claims procedure described in this Section 14.1 shall be a mandatory precondition that must be complied with prior to commencement of a legal or equitable action in connection with the Plan by a person claiming rights under the Plan, or by another person claiming rights through such a person. The Committee may, in its sole discretion, waive these procedures as a mandatory precondition to such an action.
4
6. Except as otherwise expressly provided herein, this Amendment shall be effective January 1, 2003.
Except as amended hereby, the Company ratifies and confirms the Plan as amended and restated effective January 1, 1995, and as thereafter amended.
Date: December 18, 2003
PINNACLE WEST CAPITAL CORPORATION

By /s/ Jack Davis
  -------------------------------
  Its COO PNW/CEO APS & Pres
      ---------------------------	

5
 
EXHIBIT 10.77bd
KEY EXECUTIVE EMPLOYMENT AND SEVERANCE AGREEMENT
THIS AGREEMENT, made and entered into as of the _____ day of ____________, 2006, by and between Pinnacle West Capital Corporation, an Arizona corporation (hereinafter referred to as the "Company") and __________________ (hereinafter referred to as the "Executive"):
W I T N E S S E T H
WHEREAS, the Executive is employed by the Company, in an executive capacity, possesses intimate knowledge of the business and affairs of the Company, and has acquired certain confidential information and data with respect to the Company;
WHEREAS, the Company desires to insure, insofar as possible, that the Company will continue to have the benefit of the Executive's services and to protect the confidential information and goodwill of the Company; and
WHEREAS, the Company recognizes that circumstances may arise in which a change in the control of the Company or Arizona Public Service Company, a subsidiary of the Company, through acquisition or otherwise occurs thereby causing uncertainty of employment without regard to the Executive's competence or past contributions which uncertainty may result in the loss of valuable services of the Executive to the detriment of the Company and its shareholders, and the Company and the Executive wish to provide reasonable security to the Executive against changes in the Executive's relationship with the Company in the event of any such change in control; and
WHEREAS, both the Company and the Executive are desirous that a proposal for any change of control or acquisition will be considered by the Executive objectively and with reference only to the business interests of the Company and its shareholders;
WHEREAS, the Executive will be in a better position to consider the best interests of the Company if the Executive is afforded reasonable security, as provided in this Agreement, against altered conditions of employment which could result from any such change in control or acquisition; and
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements hereinafter set forth, the parties hereto mutually covenant and agree as follows:
1. Definitions.
(a) "Accrued Benefits" shall mean the benefits payable to the Executive as described in Section 6(a).
(b) "Act" shall mean the Securities Exchange Act of 1934.
(c) "Affiliate" shall mean (i) a corporation other than the Company that is a member of a "controlled group of corporations" (within the meaning of
Section 414(b) of the Code as modified by Section 415(h) of the Code) or (ii) a group of trades or businesses under common control (within the meaning of
Section 414(c) of the Code as modified by Section 415(h) of the Code) that also includes the Company as a member. For purposes of determining whether a transaction or event constitutes a Change of Control within the meaning of
Section 1(g), "Affiliate" status shall be determined on the day immediately preceding the date of the transaction or event.
(d) "APS" shall mean Arizona Public Service Company, a subsidiary of the Company.
(e) "Beneficial Owner" shall have the same meaning as given to that term in Rule 13d-3 of the General Rules and Regulations of the Act, provided that any pledgee of the voting securities of the Company or APS shall not be deemed to be the Beneficial Owner thereof prior to its disposition of, or acquisition of voting rights with respect to, such securities.
(f) "Cause" shall be limited to (i) the engaging by the Executive in conduct which has caused demonstrable and serious injury to the Employer, monetary or otherwise, as evidenced by a determination in a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, in an action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action, suit or proceeding, brought by the Company or an Affiliate, the purpose of which is to establish "Cause" under this Agreement; (ii) conviction of a felony, as evidenced by a binding and final judgment, order or decree of a court of competent jurisdiction, in effect after exhaustion or lapse of all rights of appeal, which the Employer determines has a significant adverse impact on it in the conduct of its business; or (iii) unreasonable neglect or refusal by the Executive to perform the Executive's duties or responsibilities (unless significantly changed without the Executive's consent).
(g) "Change of Control" shall mean one (1) or more of the following events:
(i) Any Person, other than an Affiliate, through a transaction or series of transactions, is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or APS representing twenty percent (20%) or more of the combined voting power of the then outstanding securities of the Company or APS, as the case may be; provided, however, that, for purposes of this Section 1(g), any acquisition directly from the Company shall not constitute a Change of Control;
(ii) A merger or consolidation of (A) the Company with any other corporation which would result in the voting securities of the Company out-
-2-
standing immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or an Affiliate, less than sixty percent (60%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) APS with any other corporation which would result in the voting securities of APS outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or an Affiliate, less than sixty percent (60%) of the combined voting power of the securities of APS or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation; provided that, for purposes of this subparagraph (ii), a merger or consolidation effected to implement a recapitalization of the Company or of APS (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or of APS representing twenty percent (20%) or more of the combined voting power of the then outstanding securities of the Company or of APS (excluding any securities acquired by that Person directly from the Company or an Affiliate) shall not result in a Change of Control; or
(iii) The sale, transfer or other disposition of all or substantially all of the assets of either the Company or APS to a Person other than the Company or an Affiliate
(iv) Individuals who, as of July 31, 2005, constitute the board of directors of the Company (the "Company Incumbent Board") or of APS (the "APS Incumbent Board") cease for any reason to constitute at least two-thirds (2/3) of the members of the Company or APS board of directors, as the case may be; provided, however, that for purposes of this subparagraph (iv), (A)(1) any person becoming a member of the Company board of directors after July 31, 2005 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds (2/3) of the members then comprising the Company Incumbent Board will be, considered as though such person were a member of the Company Incumbent Board and (2) the Company Incumbent Board shall not include a director whose initial assumption of office as a director was in connection with an actual or threatened election contest relating to the election of directors, and (B)(1) any person becoming a member of the APS board of directors after July 31, 2005 whose election, or nomination for election by APS' shareholder(s), was approved by a vote of at least two-thirds (2/3) of the members then comprising the APS Incumbent Board or by the Company, as a majority shareholder of APS, considered
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as though such person were a member of the APS Incumbent Board and (2) the APS Incumbent Board shall not include a director whose initial assumption of office as a director was in connection with an actual or threatened election contest relating to the election of directors.
(h) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time.
(i) "Disability" shall have the same meaning as given to that term in the applicable long-term disability plan maintained by the company or the Employer for employees.
(j) "Employer" shall mean the Company, and upon the transfer of the Executive to an Affiliate, "Employer" shall mean such Affiliate.
(k) "Employment Period" shall mean the period commencing on the date of a Change of Control and ending on the second anniversary of such date.
(l) "Excise Tax" shall mean the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.
(m) "Good Reason" shall mean:
(i) the required relocation of the Executive, without the Executive's consent, to an employment location which is more than seventy-five (75) miles from the Executive's employment location on the date of the Change of Control;
(ii) a significant reduction by the Employer in the compensation and/or benefits provided to the Executive as in effect on the date of the Change of Control (as the same may have been thereafter adjusted during the Employment Period), which reduction is not generally effective for all executives employed by the Employer (or its successor) in the Executive's class or category;
(iii) the removal of the Executive from or any failure to re-elect the Executive to any of the positions held by the Executive on the date of the Change of Control or any other positions to which the Executive shall thereafter be elected or assigned except in the event that such removal or failure to re-elect relates to the termination by the Employer of the Executive's employment for Cause or by reason of death, Disability or voluntary retirement;
(iv) a significant adverse change, without the Executive's written consent, in the nature or scope of the Executive's authority, powers, functions, duties or responsibilities, or a material reduction in the level of support services, staff, secretarial and other assistance and office space
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available to a level below that which was provided to the Executive on the date of the Change of Control and that which is necessary to perform any additional duties assigned to the Executive following the Change of Control, which change or reduction is not generally effective for all executives employed by the Employer (or its successor) in the Executive's class or category; or
(v) breach of any material provision of this Agreement by the Company.
(n) A "Payment" shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise.
(o) "Person" shall mean any individual, partnership, joint venture, association, trust, corporation or other entity (including a "group" as defined in Section 13(d)(3) of the Act), other than an employee benefit plan of the Company or an Affiliate or an entity organized, appointed or established pursuant to the terms of any such benefit plan.
(p) "Termination Date" shall mean, except as otherwise provided in
Section 12, (i) the Executive's date of death; (ii) the date of the Executive's voluntary early retirement as agreed upon in writing by the Employer and the Executive; (iii) sixty (60) days after the delivery of the Notice of Termination terminating the Executive's employment on account of Disability pursuant to
Section 9, unless the Executive returns full-time to the performance of his or her duties prior to the expiration of such period; (iv) the date of the Notice of Termination if the Executive's employment is terminated by the Executive voluntarily other than for Good Reason; and (v) sixty (60) days after the delivery of the Notice of Termination if the Executive's employment is terminated by the Employer (other than by reason of Disability) or by the Executive for Good Reason.
(q) "Termination Payment" shall mean the amount described in Section 6(b).
2. Impact on Employment. The Employer and the Executive shall retain the right to terminate the employment of the Executive at any time and for any reason prior to a Change of Control. If a Change of Control occurs when the Executive is employed by the Employer, the Employer will continue thereafter to employ the Executive during the Employment Period.
3. Duties. During the Employment Period, the Executive shall, in the same capacities and positions held by the Executive at the time of such Change of Control or in such other capacities and positions as may be agreed to by the Employer and the Executive in writing, devote the Executive's reasonable best efforts, attention and skill to the business and affairs of the Company, as such business and affairs now exist
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and as they may hereafter be conducted. The services which are to be performed by the Executive hereunder are to be rendered at an employment location which is not more than seventy-five (75) miles from the Executive's employment location on the date of the Change of Control, or in such other place or places as shall be mutually agreed upon in writing by the Executive and the Employer from time to time. The Executive shall not be required to be absent from such employment location for more than forty-five (45) consecutive days in any fiscal year without the Executive's consent.
4. Compensation. During the Employment Period, the Executive shall be compensated as follows:
(a) The Executive shall receive, at such intervals and in accordance with such standard policies as may be in effect on the date of the Change of Control, an annual salary not less than the Executive's annual salary as in effect as of the date of the Change of Control, subject to adjustment as provided in Section 5;
(b) The Executive shall be reimbursed, at such intervals and in accordance with such standard policies as may be in effect on the date of the Change of Control, for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive on behalf of the Employer, including travel expenses;
(c) The Executive shall be included to the extent eligible thereunder in any and all plans providing general benefits for the Employer's employees, including but not limited to, group life insurance, disability, medical, dental, pension, profit sharing, savings and stock bonus plans and be provided any and all other benefits and perquisites made available to other employees of comparable status and position, on the same terms and conditions as generally provided to employees of comparable status and position;
(d) The Executive shall receive annually not less than the amount of paid vacation and not fewer than the number of paid holidays received annually immediately prior to the Change of Control or such greater amount of paid vacation and number of paid holidays as may be made available annually to other employees of comparable status and position with the Employer; and
(e) The Executive shall be included in all plans providing special benefits to corporate officers, including but not limited to bonus, deferred compensation, incentive compensation, supplemental pension, stock option, stock appreciation, stock bonus and similar or comparable plans extended by the Company or the Employer from time to time to corporate officers, key employees and other employees of comparable status.
5. Annual Compensation Adjustments. During the Employment Period, the Board of Directors of the Employer, an appropriate committee of the Board or the President of the Employer, whichever is appropriate, shall consider and appraise, at
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least annually, the Executive's compensation. In determining such compensation, the Board, the appropriate committee thereof or the President, whichever is appropriate, shall consider the commensurate increases given to other corporate officers and key employees generally, the scope and success of the Employer's operations, the expansion of Executive's duties and the Executive's performance of his duties.
6. Payments Upon Termination.
(a) Accrued Benefits. For purposes of this Agreement, the Executive's Accrued Benefits shall include the following amounts: (i) all salary earned or accrued through the Termination Date; (ii) reimbursement for any and all monies advanced in connection with the Executive's employment for reasonable and necessary expenses incurred by the Executive through the Termination Date; (iii) a lump sum payment of the bonus or incentive compensation otherwise payable to the Executive under the terms of any bonus or incentive compensation plan or plans for the year in which termination occurs; and (iv) all other payments and benefits to which the Executive may be entitled under the terms of any benefit plan of the Company or the Employer. Payment of Accrued Benefits shall be made promptly in accordance with the Employer's prevailing practice and the terms of any applicable benefit plans, contracts or arrangements.
(b) Termination Payment. For purposes of this Agreement, the Executive's Termination Payment shall be an amount equal to (i) plus (ii), multiplied by (iii), where
(i) Equals the Executive's rate of annual salary, as in effect on the date of the Change of Control and as increased thereafter from time to time pursuant to Section 5;
(ii) Equals the amount of the average annual dollar award paid (or payable but deferred by the Executive) to the Executive pursuant to the Employer's regular annual bonus plan or arrangement with respect to the four (4) years (or for such lesser number of years prior for which the Executive was eligible to earn such a bonus, and annualized in the case of any bonus earned and payable for a partial fiscal year) preceding the Termination Date which shall be determined by dividing the total dollar amount paid (or payable but deferred by the Executive) to the Executive under such plan or arrangement with respect to such number of years by four (4) (or for such lesser number of years prior to which the Executive was eligible to earn such a bonus, and annualized in the case of any bonus earned and payable for a partial fiscal year); and
(iii) Equals three (3).
The Termination Payment shall be payable in a lump sum on the Executive's Termination Date. Such lump sum payment shall not be reduced by any present value or similar factor. The Executive shall not be required to mitigate
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the amount of such payment by securing other employment or otherwise and such payment shall not be reduced by reason of the Executive securing other employment or for any other reason, except as provided in Section 16.
7. Death. If the Executive shall die during the Employment Period, but after delivery of a Notice of Termination by the Company for reasons other than Cause or Disability or by the Executive for Good Reason, the Executive's employment shall terminate on his or her date of death and the Executive's estate shall be entitled to receive the Executive's Accrued Benefits as of the Termination Date and, subject to the provisions of this Agreement, to such Termination Payment as the Executive would have been entitled to had the Executive survived. All benefits payable on account of the Executive's employment or death under the Company's or Employer's employee benefits plans, programs or arrangements shall be paid or distributed in accordance with the terms of such plans, programs or arrangements. The Executive's death following delivery of the Notice of Termination shall not affect his or her Termination Date which shall be determined without regard to the Executive's death, subject to the provisions of Section 12.
If the Executive shall die during the Employment Period, but prior to the delivery of a Notice of Termination, the Executive's employment shall terminate and the Executive's estate, heirs and beneficiaries shall receive all the Executive's Accrued Benefits through the Termination Date and all benefits available to them under the Company's benefit plans as in effect on the Termination Date on account of the Executive's death.
8. Retirement. If, during the Employment Period, the Executive and the Employer shall execute an agreement providing for the voluntary retirement of the Executive from the Employer, the Executive shall receive only his or her Accrued Benefits through the Termination Date. Without limiting the generality of the foregoing, the Executive's resignation under this Agreement with or without Good Reason, shall in no way affect the Executive's ability to terminate employment by reason of the Executive's "retirement" under any of the Company's retirement or pension plans or to be eligible to receive benefits under any retirement or pension plan of the Company and its affiliates or substitute plans adopted by the Company or its successors, and any termination which otherwise qualifies as Good Reason shall be treated as such even if it is also a "retirement" for purposes of any such plan.
9. Termination for Disability. If the Executive has been absent from his or her duties hereunder on a full-time basis for five (5) consecutive months during the Employment Period on account of a Disability, the Employer may provide a Notice of Termination, which satisfies the requirements of Section 12, and the Executive's employment shall, for purposes of this Agreement, terminate sixty (60) days thereafter, unless the Executive returns to the performance of his or her duties on a full-time basis prior to the end of the sixty (60) day period. During the term of the Executive's Disability prior to his or her Termination Date, the Executive shall continue to participate in all compensation and benefit plans, programs and arrangements in which the Executive was entitled to participate immediately prior to his or her Disability in accordance with
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the terms and provisions of such plans, programs and arrangements. If the Executive's employment is terminated on account of the Executive's Disability, the Executive shall receive his or her Accrued Benefits in accordance with
Section 6(a) hereof, provided that the Executive's termination for purposes of this Agreement under this Section 9 shall not affect his or her entitlement to benefits on account of his or her Disability under any long-term disability programs of the Company or the Employer in effect at the time of such termination and in which the Executive participated immediately prior to his or her Disability.
10. Termination Not Giving Rise to a Termination Payment. If, during the Employment Period, the Executive's employment is terminated for Cause, or if the Executive voluntarily terminates his or her employment other than for Good Reason, subject to the procedures set forth in Section 12, the Executive shall be entitled to receive only his or her Accrued Benefits in accordance with
Section 6(a).
11. Termination Giving Rise to a Termination Payment. If, during the Employment Period, the Executive's employment is terminated by the Executive for Good Reason or by the Employer other than by reason of death, Disability pursuant to Section 9 or Cause, subject to the procedures set forth in Section 12,
(a) the Executive shall be entitled to receive and the Company or the Employer, as applicable, shall pay the Executive's Accrued Benefits in accordance with Section 6(a) and, in lieu of further salary payments for periods following the Termination Date, as severance pay, a Termination Payment;
(b) the Executive and his eligible dependents shall continue to be covered until the end of the second calendar year following the year in which the Termination Date occurs, under the same terms and conditions, by the medical plan, dental plan and/or group life insurance plan maintained by the Company or the Employer which covered that Executive and his eligible dependents prior to the Executive's Termination Date. Notwithstanding the foregoing, if the Company's or Employer's medical plan, dental plan and/or group life insurance plan covering the Executive on his or her Termination Date was amended, replaced or terminated on or after the Change of Control and such action would constitute Good Reason within the meaning of Section 1(l), the Executive and his or her eligible dependents shall be entitled to continued coverage for purposes of this Section 11(b) under the terms of the medical plan, dental plan and/or group life insurance plan which they participated in immediately prior to the Change of Control. If the affected plan is no longer available, the Company shall make arrangements to provide equivalent coverage to the Executive and his or her eligible dependents. For this purpose, "equivalent coverage" shall mean medical, dental and/or life insurance coverage, which, when added to the coverage provided to the Executive and his or her eligible dependents under the Company's or Employer's medical plan, dental plan and/or group life insurance plan in effect on the Executive's Termination Date, equals or exceeds the level of benefits provided under the medical plan, dental plan and/or group life insurance plan to the Executive and his or her eligible dependents on the day immediately preceding
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the Change of Control. The Executive and the Employer shall share the cost of the continued coverage under this Section 11(b) in the same proportions as the Employer and similarly situated active employees shared the cost of such coverage on the day preceding the Executive's Termination Date. For purposes of satisfying the Company's or Employer's obligation under the Consolidated Omnibus Budget Reconciliation Act ("COBRA") to continue group health care coverage to the Executive and his eligible dependents as a result of the Executive's termination of employment, the period during which the Executive is permitted to continue to participate in the Company's or Employer's medical plans and/or dental plans under this Section 11(b) shall not be taken into account and treated as part of the period during which the Executive and his eligible dependents are entitled to continued coverage under the Company's or Employer's group health plans under COBRA. Following the end of the continuation period specified in this Section 11(b), the Executive and his eligible dependents shall be covered under such plans and arrangements only as required under the provisions of COBRA;
(c) the Executive's termination shall be treated as a "Normal Termination" as defined in the Pinnacle West Capital Corporation Stock Option and Incentive Plan, as amended from time to time, or in the Pinnacle West Capital Corporation 2002 Long-Term Incentive Plan or in any successor plan thereto, which shall entitle the Executive to exercise any outstanding stock options during the three (3) month period beginning on the Executive's Termination Date, and any restrictions remaining on any "Restricted Stock" (as defined in such plan) awarded to the Executive shall lapse on his or her Termination Date; and
(d) "out-placement" services will be provided by the Company to the Executive for a period beginning on the Executive's Termination Date. Such services shall be provided for a period beginning on the Executive's Termination Date and ending on the earlier of the date on which the Executive becomes employed in a position commensurate with his or her current salary and responsibilities or the last day of the twelve (12) month period which began on the Executive's Termination Date. The "out-placement" services shall be provided by an out-placement company selected by the Company.
12. Termination Notice and Procedure. Any termination by the Employer or the Executive of the Executive's employment during the Employment Period shall be communicated by written Notice of Termination to the Executive if such Notice is delivered by the Company and to the Company if such Notice is delivered by the Executive, all in accordance with the following procedures:
(a) The Notice of Termination shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances alleged to provide a basis for termination.
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(b) Any Notice of Termination by the Company shall be approved by a resolution duly adopted by a majority of the members of the Company's board of directors then in office.
(c) If the Company shall give a Notice of Termination for Cause or by reason of Disability and the Executive in good faith notifies the Company that a dispute exists concerning such termination within the fifteen (15) day period following the Executive's receipt of such notice, the Executive may elect to continue his or her employment during such dispute. If it is thereafter determined that (i) the reason given by the Company for termination did exist, the Executive's Termination Date shall be the earlier of (A) the date on which the dispute is finally determined, either by mutual written agreement of the parties or pursuant to Section 14, (B) the date of the Company's Notice of Termination for Cause, (C) the date of the Executive's death, or (D) one day prior to the end of the Employment Period, and the Executive shall not be entitled to a Termination Payment based on events occurring after the Company delivered its Notice of Termination; or (ii) the reason given by the Company for termination did not exist, the employment of the Executive shall continue as if the Company had not delivered its Notice of Termination and there shall be no Termination Date arising out of such notice.
(d) If the Executive shall in good faith give a Notice of Termination for Good Reason and the Company notifies the Executive that a dispute exists concerning the termination within the fifteen (15) day period following the Company's receipt of such notice, the Executive may elect to continue his or her employment during such dispute. If it is thereafter determined that (i) Good Reason did exist, the Executive's Termination Date shall be the earlier of (A) the date on which the dispute is finally determined, either by mutual written agreement of the parties or pursuant to Section 14, (B) the date of the Executive's death, or (C) one day prior to the end of the Employment Period, and the Executive's Termination Payment shall reflect events occurring after the Executive delivered his or her Notice of Termination; or (ii) Good Reason did not exist, the employment of the Executive shall continue after such determination as if the Executive had not delivered the Notice of Termination asserting Good Reason.
(e) If the Executive does not elect to continue employment pending resolution of a dispute regarding a Notice of Termination under Sections 12(c) and (d), and it is finally determined that the reason for termination set forth in such Notice of Termination did not exist, if such notice was delivered by the Executive, the Executive will be deemed to have voluntarily terminated his or her employment and if delivered by the Company, the Company will be deemed to have terminated the Executive other than by reason of death, Disability or Cause.
13. Obligations of the Executive. The Executive covenants and agrees, during the Executive's employment with the Employer and following his or her Termination Date, to hold in strict confidence any and all information in the Executive's possession as a result of the Executive's employment with the Employer; provided that nothing in this Agreement shall be construed as prohibiting the Executive from reporting any
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suspected instance of illegal activity of any nature, any nuclear safety concern, any workplace safety concern or any public safety concern to the United States Nuclear Regulatory Commission, United States Department of Labor or any federal or state governmental agency or prohibiting the Executive from participating in any way in any state or federal administrative, judicial or legislative proceeding or investigation with respect to any such claims and matters.
14. Arbitration. All claims, disputes and other matters in question between the parties arising under this Agreement, other than Section 13, shall be decided by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association, unless the parties mutually agree otherwise. Any arbitration required under this Agreement shall be held in Phoenix, Arizona, unless the parties mutually agree otherwise. The Company shall pay the costs of any such arbitration. The award by the arbitrator shall be final, and judgment may be entered upon it in accordance with applicable law in any state or Federal court having jurisdiction thereof.
The Company shall not be required to arbitrate claims arising under
Section 13. The Company shall have the right to judicial enforcement of its rights under Section 13, including, but not limited to, injunctive relief.
15. Expenses and Interest. If, after a Change of Control a good faith dispute arises with respect to the enforcement of the Executive's rights under this Agreement or if any arbitration or legal proceeding shall be brought in good faith to enforce or interpret any provision contained herein, or to recover damages for breach hereof and the Executive is the prevailing party, the Executive shall recover from the Company any reasonable attorney's fees and necessary costs and disbursements incurred as a result of such dispute or legal proceeding, and prejudgment interest on any money judgment obtained by the Executive calculated at the rate of interest announced by JP Morgan Chase Bank N.A. (or any successor thereto) from time to time as its prime rate from the date that payments to the Executive should have been made under this Agreement. Any payment due under this section will be made on the fifth business day following the date the dispute is final.
16. Payment Obligations Absolute. The Company's obligation during and after the Employment Period to insure that the compensation and arrangements provided herein are provided to the Executive shall be absolute and unconditional and shall not be affected by any circumstances, provided that the Company may apply amounts payable under this Agreement to any loan or other debts then owed to the Company or an Affiliate by the Executive, the terms of which are reflected in a written document signed by the Executive. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or its Affiliates and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or its Affiliates. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any other contract or agreement with the Company or its Affiliates at or subsequent to the Termination Date shall be payable in accordance
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with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. Notwithstanding the foregoing, the amounts payable under this Agreement shall be in lieu of any amounts payable to the Executive under a separate severance plan, agreement or arrangement established by the Company. All amounts payable by the Company under this Agreement shall be paid without notice or demand. Each and every payment made under this Agreement by the Company shall be final. Notwithstanding the foregoing, in the event that the Company has paid an Executive more than the amount to which the Executive is entitled under this Agreement, the Company shall have the right to recover all or any part of such overpayment from the Executive or from whomsoever has received such amount.
17. Successors.
(a) If all or substantially all of the Company's business and assets are sold, assigned or transferred to any Person, or if the Company merges into or consolidates or otherwise combines with any Person which is a continuing or successor entity, then the Company shall assign all of its right, title and interest in this Agreement as of the date of such event to the Person which is either the acquiring or successor corporation, and such Person shall assume and perform from and after the date of such assignment the terms, conditions and, provisions imposed by this Agreement upon the Company. Failure of the Company to obtain such assignment shall be a breach of this Agreement. In case of such assignment by the Company and of assumption and agreement by such Person, all further rights as well as all other obligations of the Company under this Agreement thenceforth shall cease and terminate and thereafter the expression "the Company" wherever used herein shall be deemed to mean such Person(s).
(b) This Agreement and all rights of the Executive shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, estates, executors, administrators, heirs and beneficiaries. In the event of the Executive's death, all amounts payable to the Executive under this Agreement shall be paid to the Executive's estate. This Agreement shall inure to the benefit of, be binding upon and be enforceable by, any successor, surviving or resulting corporation or other entity to which all or substantially all of the Company's business and assets shall be transferred whether by merger, consolidation, transfer or sale. This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company.
18. Enforcement. The provisions of this Agreement shall be regarded as divisible, and if any of said provisions or any part hereof are declared invalid or unenforceable by a court of competent jurisdiction, the validity and enforceability of the remainder of such provisions or parts hereof and the applicability thereof shall not be affected thereby.
19. Amendment or Termination. The term of this Agreement shall run until December 31, 2007, and shall continue for additional one (1) year periods thereafter, unless the Company notifies the Executive in writing six (6) months prior to Decem-
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ber 31, 2007 (or the anniversary of that date in the event the Agreement continues beyond that date pursuant to the provisions of this Section 19) that it does not intend to continue the Agreement. Notwithstanding the foregoing, (i) if a Change of Control has occurred on or before the date on which the Agreement would be terminated by the Company in accordance with this Section 19, the Agreement shall not terminate with respect to that Change of Control until the end of the Employment Period, and (ii) this Agreement shall terminate if, prior to a Change in Control, the Executive ceases to be employed by the Employer as a corporate officer.
This Agreement sets forth the entire agreement between the Executive and the Company with respect to the subject matter hereof, and supersedes all prior oral or written negotiations, commitments, understandings and writings with respect thereto.
This Agreement may not be terminated, amended or modified during its term as specified above except by written instrument executed by the Company and the Executive.
20. Withholding. The Company and the Employer shall be entitled to withhold from amounts to be paid to the Executive under this Agreement any federal, state or local withholding or other taxes or charges which it is from time to time required to withhold. The Company and the Employer shall be entitled to rely on an opinion of counsel if any question as to the amount or requirement of any such withholding shall arise.
21. Venue; Governing Law. This Agreement and the Executive's and Company's respective rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Arizona. Any action concerning this Agreement shall be brought in the Federal or state courts located in the County of Maricopa, Arizona, and each party consents to the venue and jurisdiction of such courts.
22. Notice. Notices given pursuant to this Agreement shall be in writing and (a) if hand delivered, shall be deemed given when delivered, and (b) if mailed, shall be deemed delivered when placed in the United States mail, postage prepaid, addressed,
if to the Company, to
Board of Directors
Pinnacle West Capital Corporation 400 North Fifth Street Phoenix, Arizona 85004 Attention: Law Department
or if to the Executive, to

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or to such other addresses as the parties may provide written notice of to each other, from time to time, in accordance with this Section 22.
23. Funding. Benefits payable under this Agreement shall constitute an unfunded general obligation of the Company payable from its general assets, and the Company shall not be required to establish any special fund or trust for purposes of paying benefits under this Agreement. The Executive shall not have any vested right to any particular assets of the Company as a result of execution of this Agreement and shall be a general creditor of the Company.
24. No Waiver. No waiver by either party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by the other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same time or any prior or subsequent time.
25. Headings. The headings contained are for reference only and shall not affect the meaning or interpretation of any provision of this Agreement.
26. Additional Payment.
(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any Payment would be subject to the Excise Tax, then the Executive shall be entitled to receive an additional payment (the "Gross-Up Payment") in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. The Company's obligation to make Gross-Up Payments under this Section 26 shall not be conditioned upon the Executive's termination of employment.
(b) Subject to the provisions of Section 26(c), all determinations required to be made under this Section 26, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a nationally-recognized accounting firm appointed by the Company prior to a Change of Control (the "Accounting Firm"). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All
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fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 26, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm's determination, but in all events by the March 15 following the calendar year in which the event giving rise to payment occurs. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the "Underpayment"), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 26(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.
(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company relating to such claim,
(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-
-16-
tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 26(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the appropriate taxing authority on behalf of the Executive and direct the Executive to sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company pays such claim and directs the Executive to sue for a refund, the Company shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of a Gross-Up Payment or payment by the Company of an amount on the Executive's behalf pursuant to Section 26(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of
Section 26(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after payment by the Company of an amount on the Executive's behalf pursuant to Section 26(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
(e) Notwithstanding any other provision of this Section 26, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding.
27. Section 409A Savings Clause. If any compensation or benefits provided by this Agreement may result in the application of Section 409A of the Code, the
-17-
Company shall, in consultation with the Executive, modify the Agreement in the least restrictive manner necessary in order to exclude such compensation from the definition of "deferred compensation" within the meaning of such Section 409A or in order to comply with the provisions of Section 409A, other applicable provision(s) of the Code and/or any rules, regulations or other regulatory guidance issued under such statutory provisions and without any diminution in the value of the payments to the Executive. Notwithstanding any provision of this Agreement to the contrary, to the extent required in order to comply with
Section 409A of the Code, amounts to be paid under this Agreement upon the Executive's termination of employment shall be paid, with interest on any payment from the Termination Date until the first business day after the date that is six months following the Termination Date at the applicable federal rate provided in Section 7872(f)(2)(A) of the Code ("Interest"), to the Executive on the first business day after the date that is six months following the Termination Date.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and the Executive has executed this Agreement, on the date and year first above written.
Pinnacle West Capital Corporation
By

Its
ATTEST:
By
Its

Executive

-19-
 
EXHIBIT 10.91bd
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            THE NUMBER OF
 COMPOUND GROWTH RATE  OVER THE PERFORMANCE   PERFORMANCE SHARES WILL BE:
PERIOD AS COMPARED TO S&P ELECTRIC UTILITIES
                INDEX IS:

--------------------------------------------  ---------------------------
     ___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 10.92bd
Summary of 2006 CEO Variable Incentive Plan and Officer Variable Incentive Plan
On December 13, 2005, the Human Resources Committee (the "Committee") of the Company's Board of Directors approved the 2006 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 2006 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 2006 Company earnings to measure Mr. Post's performance.
On December 14, 2005, the Company's Board of Directors, acting on the recommendation of the Committee, approved the 2006 Officer Variable Incentive Plan (the "Officer Incentive Plan"). Each of the Company's officers, as well as the officers of APS, 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 18, 2005 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 2006 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 2006 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%)

James M. Levine              - Company Earnings (50%)                      - Company Earnings:
                             - Fossil Business Unit Results                Threshold (0%)
                             (Preventable Recordable Injuries; Coal        Midpoint (25%)
                             Production Cost; Gas and Coal Units'          Maximum (50%) - Business
                             Annual Equivalent Availability Factor;        Unit Results (up to 50%)
                             Coal Units' Capacity Factor; O&M and
                             Capital Costs; and Environmental) (25%)
                             - Palo Verde Business Unit Results
                             (Nuclear Safety; Preventable Recordable
                             Injuries; Human Performance Events; Plant
                             Improvement Plan Performances; Nuclear
                             Capacity Factor; Equipment Reliability;
                             and O&M and Capital Costs) (25%)

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

Donald E. Brandt             - Company Earnings (50%)                      - Company Earnings:
                             - Shared Services Business Unit               Threshold (0%)
                             Results (Combined Fossil Business Unit,       Midpoint (25%)
                             Palo Verde Business Unit, and Delivery        Maximum (50%) - Shared
                             Business Unit Performance; Meeting or         Services Business Unit
                             Exceeding Budget Targets; and Preventable     Results (up to  50%)
                             Recordable Injuries) (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 10.95
EXECUTION COPY
U.S. $400,000,000
AMENDED AND RESTATED FIVE-YEAR CREDIT AGREEMENT
Dated as of December 9, 2005
Among
ARIZONA PUBLIC SERVICE COMPANY
as Borrower
THE INITIAL LENDERS NAMED HEREIN
as Initial Lenders
CITIBANK, N.A.
as Administrative Agent
KEYBANK NATIONAL ASSOCIATION
as Syndication Agent and Issuing Bank
JPMORGAN CHASE BANK, N.A.
MIZUHO CORPORATE BANK, LTD.
 and
UNION BANK OF CALIFORNIA, N.A.
as 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                          12
   SECTION 2.02. Making the Advances                                         13
   SECTION 2.03. Issuance of and Drawings and Reimbursement Under Letters
                    of Credit                                                13
   SECTION 2.04. Fees                                                        15
   SECTION 2.05. Optional Termination or Reduction of the Commitments        15
   SECTION 2.06. Repayment of Advances and Letter of Credit Drawings         16
   SECTION 2.07. Interest on Advances                                        16
   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                                             18
   SECTION 2.12. Illegality                                                  19
   SECTION 2.13. Payments and Computations                                   20
   SECTION 2.14. Taxes                                                       20
   SECTION 2.15. Sharing of Payments, Etc.                                   22
   SECTION 2.16. Evidence of Debt                                            22
   SECTION 2.17. Use of Proceeds                                             23
   SECTION 2.18. Increase in the Aggregate Revolving Credit Commitments      23	

   SECTION 2.19. Extension of Termination Date                               24

ARTICLE III
   SECTION 3.01. Conditions Precedent to Effectiveness of Section 2.01       26
   SECTION 3.02. Conditions Precedent to Each Borrowing, Issuance,
                    Commitment Increase and Extension Date.                  27
   SECTION 3.03. Determinations Under Section 3.01                           28

ARTICLE IV
   SECTION 4.01. Representations and Warranties of the Borrower              28

ARTICLE V
   SECTION 5.01. Affirmative Covenants                                       30
   SECTION 5.02. Negative Covenants                                          32
   SECTION 5.03. Financial Covenant                                          33

ARTICLE VI
   SECTION 6.01. Events of Default                                           33
   SECTION 6.02. Actions in Respect of Letters of Credit upon Default        35

ARTICLE VII
   SECTION 7.01. Authorization and Action                                    35
   SECTION 7.02. Agent's Reliance, Etc.                                      36
   SECTION 7.03. Citibank and Affiliates                                     36
   SECTION 7.04. Lender Credit Decision                                      36
   SECTION 7.05. Indemnification                                             36
   SECTION 7.06. Successor Agent                                             37
   SECTION 7.07. Other Agents.                                               37

ARTICLE VIII
   SECTION 8.01. Amendments, Etc.                                            37	

SECTION 8.02. Notices, Etc.                                               38
SECTION 8.03. No Waiver; Remedies                                         39
SECTION 8.04. Costs and Expenses                                          39
SECTION 8.05. Right of Set-off                                            40
SECTION 8.06. Binding Effect                                              40
SECTION 8.07. Assignments and Participations                              40
SECTION 8.08. Confidentiality                                             42
SECTION 8.09. Governing Law                                               43
SECTION 8.10. Execution in Counterparts                                   43
SECTION 8.11. Jurisdiction, Etc.                                          43
SECTION 8.12. No Liability of the Issuing Banks                           43
SECTION 8.13. Patriot Act                                                 43
SECTION 8.14. Waiver of Jury Trial                                        45	

Schedules
Schedule I - List of Applicable Lending Offices Schedule 2.01(b) - Existing Letters of Credit Schedule 4.01(j) - Subsidiaries
Schedule 4.01(k) - Existing Indebtedness
Exhibits
Exhibit A - Form of Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Assignment and Acceptance
AMENDED AND RESTATED FIVE-YEAR CREDIT AGREEMENT
Dated as of December 9, 2005
ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation (the "Borrower"), the banks, financial institutions and other institutional lenders
(the "Initial Lenders") and initial issuing bank (the "Initial Issuing Bank")
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, JPMORGAN CHASE BANK, N.A., MIZUHO CORPORATE BANK, LTD. and UNION BANK OF CALIFORNIA, N.A., as documentation agents, and CITIBANK, N.A. ("Citibank"), as agent (the "Agent") for the Lenders (as hereinafter defined), agree as follows:
PRELIMINARY STATEMENT. The Borrower, the lenders parties thereto, Citibank, as agent, and the other agents parties thereto are parties to the Three-Year Credit Agreement dated as of May 21, 2004 (the "Existing Credit Agreement"). Subject to the satisfaction of the conditions set forth in Section 3.01, the Borrower, the parties hereto and Citibank, as Agent, desire to amend and restate the Existing Credit Agreement as herein set forth.
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%                    0.300%

Level 2
Lower than Level 1 but at least BBB+          0.000%                    0.400%
or Baa 1

Level 3
Lower than Levels 1 and 2 but at              0.000%                    0.500%
least BBB or Baa 2

Level 4
Lower than Levels 1, 2, and 3 but at          0.000%                    0.650%
least BBB- or Baa 3

Level 5
Lower than Levels 1, 2, 3 and 4 but           0.000%                    0.875%
at least BB+ or Ba 1

Level 6
Lower than Level 5                            0.000%                    1.000%	

"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                        0.080%

Level 2
Lower than Level 1 but at least BBB+     0.090%
or Baa1

Level 3
Lower than Levels 1 and 2 but at         0.110%
least BBB or Baa2

Level 4
Lower than Levels 1, 2, and 3 but at     0.150%
least BBB- or Baa3

Level 5
Lower than Levels 1, 2, 3 and 4 but      0.175%
at least BB+ or Ba1

Level 6
Lower than Level 5                       0.200%	

"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, 0.10% per annum.
"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.
"Assuming Lender" has the meaning specified in Section 2.18(d).
2
"Assumption Agreement" has the meaning specified in Section 2.18(d)(ii).
"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.
"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.
"Commitment" means a Revolving Credit Commitment or a Letter of Credit Commitment.
"Commitment Date" has the meaning specified in Section 2.18(b).
"Commitment Increase" has the meaning specified in Section 2.18(a).
"Consenting Lender" has the meaning specified in Section 2.19(b).
"Consolidated" refers to the consolidation of accounts in accordance with GAAP.
"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
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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 Assumption Agreement or the Assignment and 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
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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.
"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 Assumption Agreement or 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.
"Extension Date" has the meaning specified in Section 2.19(b).
"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.
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"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.
"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.
"Increase Date" has the meaning specified in Section 2.18(a).
"Increasing Lender" has the meaning specified in Section 2.18(b).
"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.
"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
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(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 the 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 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, each Assuming Lender that shall become a party hereto pursuant to Section 2.18 or 2.19 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) $100,000,000 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.
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"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.
"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.
"Non-Consenting Lender" has the meaning specified in Section 2.19(b).
"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;
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(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 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
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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.
"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, 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 below the higher 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, JPMorgan Chase Bank, N.A., KeyBank National Association, Mizuho Corporate Bank, Ltd., Union Bank of California, N.A. and any other Lender designated by the Borrower (and approved by the Agent) as such.
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"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) if such Lender is an Initial Lender, 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 become a Lender hereunder pursuant to an Assumption Agreement or 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 or increased pursuant to Section 2.18.
"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) 8.00% Secured Lease Obligation Bonds, Series 1993, due 2015; (ii) any other bonds issued by the Borrower in connection with a sale/leaseback transaction; and (iii) any refinancing or refunding of the obligations specified in subclauses (i) and (ii) above.
"SEC Reports" means the Borrower's (i) Form 10-K Report for the year ended December 31, 2004, (ii) Form 10-Q Reports for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005 and (iii) Form 8-K Reports filed on January 28, March 1, March 29, April 13, April 26, May 19, May 25, June 17, July 25, July 27, August 16, August 18, August 22, August 30, September 22, October 13, October 18, October 26, October 27, November 4, 2005 and December 6, 2005.
"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) December 9, 2010, subject to the extension thereof pursuant to Section 2.19 and (b) the date of termination in whole of the Commitments pursuant to Section 2.05 or 6.01; provided, however, that the Termination Date of any Lender that is a Non-Consenting Lender to any requested extension pursuant to Section 2.19 shall be the Termination Date in effect immediately prior to the applicable Extension Date for all purposes of this Agreement.
"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
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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 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; provided that no Letter of Credit may expire after the Termination Date of any Non-Consenting Lender if, after giving effect to such Letter of Credit, the aggregate Revolving Credit Commitments of the Consenting Lenders (including any replacement Lenders) for the period following such Termination Date would be less than the Available Amount of the Letters of Credit expiring after such 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) was issued under the Existing Credit Agreement and 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
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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 or as requested by the Borrower in the applicable Notice of Borrowing.
(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 fifteen different Interest Periods outstanding for Eurodollar Rate Advances.
(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.
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(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 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 increased pursuant to Section 2.18, reduced on a date prior to the date that the Termination Date may have been extended pursuant to Section 2.19, 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
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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 the account of such Issuing Bank. 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 effective date specified in the Assumption Agreement or 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 December 31, 2005, and on the Termination Date.
(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 December 31, 2005, 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 November 15, 2005, 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.
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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 applicable to such Lender the aggregate principal amount of the Advances made by such Lender and 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;
(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
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(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 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,
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(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 $10,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in the event of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to
Section 8.04(c).
(b) Mandatory. (i) 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 and (ii) on the Termination Date applicable to any Non-Consenting Lender, 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, in an amount equal to the excess of (x) the sum of the Available Amount of all Letters of Credit plus the aggregate principal amount of the Advances then outstanding over (y) the aggregate Commitments to be outstanding immediately after giving effect to such Termination Date.
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, within 30 days of 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
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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, within 30 days of 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:
(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 Margin for Eurodollar Rate Advances 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
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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 any Assuming Lender becoming a Lender hereunder as a result of a Commitment Increase pursuant to Section 2.18 or an extension of the Termination Date pursuant to Section 2.19, and upon the Agent's receipt of such Lender's Assumption Agreement and recording of the information contained therein in the Register, from and after the applicable Increase Date or Extension Date, as the case may be, the Agent shall make all payments hereunder and under any Notes issued in connection therewith in respect of the interest assumed thereby to the Assuming Lender. 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.
(d) 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 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
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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.
(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 Assumption Agreement or 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,
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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 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 Assumption Agreement and each Assignment and Acceptance delivered to and accepted by it, (iii) the amount of any principal or interest due and
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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.
SECTION 2.18. Increase in the Aggregate Revolving Credit Commitments.
(a) The Borrower may, at any time but in any event not more than once in any calendar year prior to the Termination Date, by notice to the Agent, request that the aggregate amount of the Revolving Credit Commitments be increased by an amount of $10,000,000 or an integral multiple thereof (each a "Commitment Increase") to be effective as of a date that is at least 90 days prior to the scheduled Termination Date then in effect (the "Increase Date") as specified in the related notice to the Agent; provided, however that (i) in no event shall the aggregate amount of the Revolving Credit Commitments at any time exceed $500,000,000 and (ii) on the date of any request by the Borrower for a Commitment Increase and on the related Increase Date, the applicable conditions set forth in this Section 2.18 shall be satisfied.
(b) The Agent shall promptly notify the Lenders of a request by the Borrower for a Commitment Increase, which notice shall include (i) the proposed amount of such requested Commitment Increase, (ii) the proposed Increase Date and (iii) the date by which Lenders wishing to participate in the Commitment Increase must commit to an increase in the amount of their respective Revolving Credit Commitments (the "Commitment Date"). Each Lender that is willing to participate in such requested Commitment Increase (each an "Increasing Lender") shall, in its sole discretion, give written notice to the Agent on or prior to the Commitment Date of the amount by which it is willing to increase its Revolving Credit Commitment. If the Lenders notify the Agent that they are willing to increase the amount of their respective Revolving Credit Commitments by an aggregate amount that exceeds the amount of the requested Commitment Increase, the requested Commitment Increase shall be allocated among the Lenders willing to participate therein in such amounts as are agreed between the Borrower and the Agent.
(c) Promptly following each Commitment Date, the Agent shall notify the Borrower as to the amount, if any, by which the Lenders are willing to participate in the requested Commitment Increase. If the aggregate amount by which the Lenders are willing to participate in any requested Commitment Increase on any such Commitment Date is less than the requested Commitment Increase, then the Borrower may extend offers to one or more Eligible Assignees to participate in any portion of the requested Commitment Increase that has not been committed to by the Lenders as of the applicable Commitment Date; provided, however, that the Revolving Credit Commitment of each such Eligible Assignee shall be in an amount of not less than $10,000,000.
(d) On each Increase Date, each Eligible Assignee that accepts an offer to participate in a requested Commitment Increase in accordance with
Section 2.18(b) (each such Eligible Assignee and each Eligible Assignee that agrees to an extension of the Termination Date in accordance with Section 2.19(c), an "Assuming Lender") shall become a Lender party to this Agreement as of such Increase Date and the Revolving Credit Commitment of each Increasing Lender for such requested Commitment Increase shall be so increased by the amount by which the Increasing Lender agreed to increase its Revolving Credit Commitment (or by the amount allocated to such Lender pursuant to the last sentence of Section 2.18(b)) as of such Increase Date; provided, however, that the Agent shall have received on or before such Increase Date the following, each dated such date:
(i) (A) certified copies of resolutions of the Board of Directors of the Borrower approving the Commitment Increase and the corresponding modifications to this Agreement, (B) an opinion of
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counsel for the Borrower (which may be in-house counsel), in form and substance reasonably acceptable to the Required Lenders and (C) a certificate from a duly authorized officer of the Borrower, stating that the conditions set forth in Section 3.02(a) and (b) are satisfied;
(ii) an assumption agreement from each Assuming Lender, if any, in form and substance satisfactory to the Borrower and the Agent (each an "Assumption Agreement"), duly executed by such Assuming Lender, the Agent and the Borrower; and
(iii) confirmation from each Increasing Lender of the increase in the amount of its Revolving Credit Commitment in a writing satisfactory to the Borrower and the Agent.
On each Increase Date, upon fulfillment of the conditions set forth in the immediately preceding sentence of this Section 2.18(d), the Agent shall notify the Lenders (including, without limitation, each Assuming Lender) and the Borrower, on or before 1:00 P.M. (New York City time), by telecopier, of the occurrence of the Commitment Increase to be effected on such Increase Date and shall record in the Register the relevant information with respect to each Increasing Lender and each Assuming Lender on such date. Each Increasing Lender and each Assuming Lender shall, before 2:00 P.M. (New York City time) on the Increase Date, make available for the account of its Applicable Lending Office to the Agent at the Agent's Account, in same day funds, in the case of such Assuming Lender, an amount equal to such Assuming Lender's ratable portion of the Borrowings then outstanding (calculated based on its Revolving Credit Commitment as a percentage of the aggregate Revolving Credit Commitments outstanding after giving effect to the relevant Commitment Increase) and, in the case of such Increasing Lender, an amount equal to the excess of (i) such Increasing Lender's ratable portion of the Borrowings then outstanding (calculated based on its Revolving Credit Commitment as a percentage of the aggregate Revolving Credit Commitments outstanding after giving effect to the relevant Commitment Increase) over (ii) such Increasing Lender's ratable portion of the Borrowings then outstanding (calculated based on its Revolving Credit Commitment (without giving effect to the relevant Commitment Increase) as a percentage of the aggregate Revolving Credit Commitments (without giving effect to the relevant Commitment Increase). After the Agent's receipt of such funds from each such Increasing Lender and each such Assuming Lender, the Agent will promptly thereafter cause to be distributed like funds to the other Lenders for the account of their respective Applicable Lending Offices in an amount to each other Lender such that the aggregate amount of the outstanding Advances owing to each Lender after giving effect to such distribution equals such Lender's ratable portion of the Borrowings then outstanding (calculated based on its Revolving Credit Commitment as a percentage of the aggregate Revolving Credit Commitments outstanding after giving effect to the relevant Commitment Increase).
SECTION 2.19. Extension of Termination Date. (a) At least 60 days but not more than 90 days prior to any anniversary of the Effective Date (but not more than twice), the Borrower, by written notice to the Agent, may request an extension of the Termination Date in effect at such time by one year from its then scheduled expiration. The Agent shall promptly notify each Lender of such request, and each Lender shall in turn, in its sole discretion, not later than 20 days prior to such anniversary date, notify the Borrower and the Agent in writing as to whether such Lender will consent to such extension. If any Lender shall fail to notify the Agent and the Borrower in writing of its consent to any such request for extension of the Termination Date at least 20 days prior to the applicable anniversary date, such Lender shall be deemed to be a Non-Consenting Lender with respect to such request. The Agent shall notify the Borrower not later than 15 days prior to the applicable anniversary date of the decision of the Lenders regarding the Borrower's request for an extension of the Termination Date.
(b) If all the Lenders consent in writing to any such request in accordance with subsection (a) of this Section 2.19, the Termination Date in effect at such time shall, effective as at the applicable anniversary date (the "Extension Date"), be extended for one year; provided that on each Extension Date the applicable conditions set forth in Article III shall be satisfied and on the Extension Date a duly authorized officer of the Borrower shall have delivered to the Agent a certificate stating that the conditions set forth in
Section 3.02(a) and (b) are satisfied. If less than all of the Lenders consent in writing to any such request in accordance with subsection (a) of this Section 2.19, the Termination Date in effect at such time shall, effective as at the applicable Extension Date and subject to subsection (d) of this Section 2.19, be extended as to those Lenders that so consented (each a "Consenting Lender") but shall not be extended as to any other Lender (each a "Non-Consenting Lender"). To the extent that the Termination Date is not extended as to any Lender pursuant to this Section 2.19 and the Revolving Credit
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Commitment of such Lender is not assumed in accordance with subsection (c) of this Section 2.19 on or prior to the applicable Extension Date, the Revolving Credit Commitment and Unissued Letter of Credit Commitment, if any, of such Non-Consenting Lender shall automatically terminate in whole on such unextended Termination Date without any further notice or other action by the Borrower, such Lender or any other Person; provided that such Non-Consenting Lender's rights under Sections 2.11, 2.14 and 8.04, and its obligations under Sections 7.05 and 8.08, shall survive the Termination Date for such Lender as to matters occurring prior to such date. It is understood and agreed that no Lender shall have any obligation whatsoever to agree to any request made by the Borrower for any requested extension of the Termination Date.
(c) If less than all of the Lenders consent to any such request pursuant to subsection (a) of this Section 2.19, the Agent shall promptly so notify the Consenting Lenders, and each Consenting Lender may, in its sole discretion, give written notice to the Agent not later than 10 days prior to the Extension Date of the amount of the Non-Consenting Lenders' Revolving Credit Commitments for which it is willing to accept an assignment in accordance with
Section 8.07(a). If the Consenting Lenders notify the Agent that they are willing to accept assignments of Revolving Credit Commitments in an aggregate amount that exceeds the amount of the Revolving Credit Commitments of the Non-Consenting Lenders, such Revolving Credit Commitments shall be allocated among the Consenting Lenders willing to accept such assignments in such amounts as are agreed between the Borrower and the Agent. If after giving effect to the assignments of Revolving Credit Commitments described above there remains any Revolving Credit Commitments of Non-Consenting Lenders, the Borrower may arrange for one or more Eligible Assignees as Assuming Lenders to assume, effective as of the Extension Date, any Non-Consenting Lender's Revolving Credit Commitment and all of the obligations of such Non-Consenting Lender under this Agreement thereafter arising, without recourse to or warranty by, or expense to, such Non-Consenting Lender; provided, however, that the amount of the Revolving Credit Commitment of any such Assuming Lender as a result of such substitution shall in no event be less than $10,000,000 unless the amount of the Revolving Credit Commitment of such Non-Consenting Lender is less than $10,000,000, in which case such Assuming Lender shall assume all of such lesser amount; and provided further that:
(i) any such Consenting Lender or Assuming Lender shall have paid to such Non-Consenting Lender (A) the aggregate principal amount of, and any interest accrued and unpaid to the effective date of the assignment on, the outstanding Advances, if any, of such Non-Consenting Lender plus (B) any accrued but unpaid facility fees owing to such Non-Consenting Lender as of the effective date of such assignment;
(ii) all additional cost reimbursements, expense reimbursements and indemnities then due and payable to such Non-Consenting Lender, and all other accrued and unpaid amounts owing to such Non-Consenting Lender hereunder, as of the effective date of such assignment shall have been paid to such Non-Consenting Lender; and
(iii) with respect to any such Assuming Lender, the applicable processing and recordation fee required under Section 8.07(a) for such assignment shall have been paid;
provided further that such Non-Consenting Lender's rights under Sections 2.11, 2.14 and 8.04, and its obligations under Sections 7.05 and 8.08, shall survive such substitution as to matters occurring prior to the date of substitution. At least three Business Days prior to any Extension Date, (A) each such Assuming Lender, if any, shall have delivered to the Borrower and the Agent an Assumption Agreement, duly executed by such Assuming Lender, such Non-Consenting Lender, the Borrower and the Agent, (B) any such Consenting Lender shall have delivered confirmation in writing satisfactory to the Borrower and the Agent as to the increase in the amount of its Revolving Credit Commitment and (C) each Non-Consenting Lender being replaced pursuant to this Section 2.19 shall have delivered to the Agent any Note or Notes held by such Non-Consenting Lender. Upon the payment of all amounts referred to in clauses (i), (ii) and (iii) of the immediately preceding sentence, each such Consenting Lender or Assuming Lender, as of the Extension Date, will be substituted for such Non-Consenting Lender under this Agreement and shall be a Lender for all purposes of this Agreement, without any further acknowledgment by or the consent of the other Lenders, and the obligations of each such Non-Consenting Lender hereunder arising after the Extension Date shall, by the provisions hereof, be released and discharged.
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(d) If (after giving effect to any assignments or assumptions pursuant to subsection (c) of this Section 2.19) Lenders having Revolving Credit Commitments equal to at least 50% of the Revolving Credit Commitments in effect immediately prior to the Extension Date consent in writing to a requested extension (whether by execution and delivery of an Assumption Agreement or otherwise) not later than one Business Day prior to such Extension Date, the Agent shall so notify the Borrower, and, subject to the satisfaction of the applicable conditions in Article III and the delivery to the Agent on the Extension Date of a certificate of a duly authorized officer of the Borrower stating that the conditions set forth in Section 3.02(a) and (b) are satisfied, the Termination Date then in effect shall be extended for the additional one-year period as described in subsection (a) of this Section 2.19, and all references in this Agreement, and in the Notes, if any, to the "Termination Date" shall, with respect to each Consenting Lender and each Assuming Lender for such Extension Date, refer to the Termination Date as so extended. Promptly following each Extension Date, the Agent shall notify the Lenders (including, without limitation, each Assuming Lender) of the extension of the scheduled Termination Date in effect immediately prior thereto and shall thereupon record in the Register the relevant information with respect to each such Consenting Lender and each such Assuming Lender.
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) 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
(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.
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(iv) A favorable opinion of Snell & Wilmer L.L.P., counsel for the Borrower, in form and substance reasonably acceptable to the Required Lenders.
(v) A favorable opinion of Shearman & Sterling LLP, counsel for the Arrangers, in form and substance satisfactory to the Arrangers.
SECTION 3.02. Conditions Precedent to Each Borrowing, Issuance, Commitment Increase and Extension Date. 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, the obligation of each Issuing Bank to issue a Letter of Credit, each Commitment Increase and each extension of Commitments pursuant to Section 2.19 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 applicable Increase Date or the applicable Extension Date, 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(k), and in the case of a Borrowing or issuance,
Section 4.01(e)(ii) and 4.01(f)(ii)) are correct on and as of such date, before and after giving effect to such Borrowing or issuance, such Commitment Increase or such Extension Date 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 issuance, such Commitment Increase or such Extension Date 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 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.
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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, if the failure to have any such license, authorization, consent or approval is 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 except that (A) 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, (B) from time to time communities served by the Borrower 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); 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 is reasonably likely to 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 (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, 2004, 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
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Deloitte & Touche LLP, independent public accountants, and the Consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as at September 30, 2005, and the related Consolidated statements of income and cash flows of the Borrower and its Consolidated Subsidiaries for the nine 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 September 30, 2005, and said statements of income and cash flows for the nine 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 September 30, 2005, 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 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 reasonably 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) Set forth on Schedule 4.01(j) 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.
(k) Set forth on Schedule 4.01(k) 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).
(l) 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.
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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, if the failure to so comply is reasonably likely to 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 reasonably 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.
(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, if the failure to maintain such rights or privileges is reasonably likely to 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,
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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), if the failure to do so is reasonably likely to have a Material Adverse Effect, 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;
(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;
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(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 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
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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 the most recent balance sheet of the Borrower provided pursuant to Section 4.01(e)(i) or 5.01(h)(ii) 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 30% of the total of all assets properly appearing on the most recent balance sheet of the Borrower provided pursuant to Section 4.01(e)(i) or 5.01(h)(ii) hereof. 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).
SECTION 5.03. Financial Covenant. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will maintain a ratio of (a) Consolidated Indebtedness to (b) the sum of Consolidated Indebtedness plus Consolidated Net Worth of not greater than 0.65 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
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(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 $25,000,000 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 $25,000,000 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
(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) Judgments or orders for the payment of money that exceeds any applicable insurance coverage (the insurer of which shall be rated at least "A" by A.M. Best Company) by more than $25,000,000 in the aggregate shall be rendered against the Borrower or any Material Subsidiary and such judgments or orders shall continue unsatisfied or unstayed for a period of 45 days; 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
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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 $25,000,000 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 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 the 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
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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 Assumption Agreement entered into by an Assuming Lender as provided in Section 2.18 or 2.19, as the case may be, or 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 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
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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 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 agents nor any other Lender designated as any "Agent" on the signature pages hereof has any rights, obligations or 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
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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 Assumption Agreement or 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 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 or any of its Subsidiaries and relating to this Agreement, the Notes or the transactions contemplated hereby, 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.
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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 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 which case any fees and expenses previously paid or advanced by the Borrower to such Indemnified Party in respect of such indemnified obligation will be returned by such Indemnified Party. 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 or against the Borrower and the Borrower prevails in a final, non-appealable judgment, in which case any fees or expenses previously paid or advanced by the Borrower to such Indemnified Party in respect of such indemnified obligation will be returned by such Indemnified Party, and whether or not the transactions contemplated hereby are consummated. Each party hereto also agrees not to assert any claim for special, indirect, consequential or punitive damages against the other parties hereto, 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.
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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 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
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extent any claim thereunder relates to an event arising prior to such assignment and under Section 8.08) 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 then 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.
(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 Assumption Agreement and 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.
41
(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 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
42
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. The obligations under this Section 8.08 shall survive for two calendar years after the date of the termination of this Agreement.
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 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. The Borrower shall provide, to the extent
43
commercially reasonable, such information and take such actions as are reasonably requested by the Agent or any Lender in order to assist the Agent and such Lender in maintaining compliance with the Act.
44
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/ Judith Green
                                           -------------------------------------
                                        Title: Vice President

Letter of Credit Commitment
$100,000,000                            KEYBANK NATIONAL ASSOCIATION

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

Revolving Credit Commitment

                              Joint Lead Arrangers

$38,571,500                             CITIBANK, N.A.

                                        By /s/ Judith Green
                                           -------------------------------------
                                        Title: Vice President

$38,571,500                             KEYBANK NATIONAL ASSOCIATION

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

                              Documentation Agents

$38,571,500                             JPMORGAN CHASE BANK, N.A.

                                        By /s/ Peter M. Ling
                                           -------------------------------------
                                        Title: Managing Director

$38,571,500                             UNION BANK OF CALIFORNIA, N.A.

                                        By /s/ Efrain Soto
                                           -------------------------------------
                                        Title: Vice President

$28, 571,000                            MIZUHO CORPORATE BANK, LTD.

                                        By /s/ Raymond Ventura
                                           -------------------------------------
                                        Title: Deputy General Manager	

45

                                     Lenders

$22,857,000                             BANK OF AMERICA, N.A.

                                        By /s/ Gabriela Millhorn
                                           -------------------------------------
                                        Title: Senior Vice President

$22,857,000                             THE BANK OF NEW YORK

                                        By /s/ John-Paul Marotta
                                           -------------------------------------
                                        Title: Managing Director

$22,857,000                             BARCLAYS BANK PLC

                                        By /s/ Alison McGuigan
                                           -------------------------------------
                                        Title: Associate Director

$22,857,000                             CREDIT SUISSE, CAYMAN ISLANDS BRANCH

                                        By /s/ Sarah Wu
                                           -------------------------------------
                                        Title: Director

                                        By /s/ Nupur Kymar
                                           -------------------------------------
                                        Title: Associate

$22,857,000                             LEHMAN BROTHERS BANK, FSB

                                        By /s/ Gary Taylor
                                           -------------------------------------
                                        Title: Senior Vice President

$22,857,000                             UBS LOAN FINANCE LLC

                                        By /s/ Richard L. Tavrow
                                           -------------------------------------
                                        Title: Director

                                        By /s/ Marie Haddad
                                           -------------------------------------
                                        Title: Associate Director

$22,857,000                             WELLS FARGO BANK

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

$17,143,000                             MELLON BANK, N.A.

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

$11,429,000                             THE NORTHERN TRUST COMPANY

                                        By /s/ Preeti Sullivan
                                           -------------------------------------
                                        Title: Vice President

$11,429,000                             UFJ BANK LIMITED

                                        By /s/ Toshiko Boyd
                                           -------------------------------------
                                        Title: Vice President	

46
$17,143,000 U.S. BANK NATIONAL ASSOCIATION

By    /s/ Scott Bell
   -------------------------------------
Title: Senior Vice President
       ---------------------------------	

$400,000,000 Total of the Revolving Credit Commitments
47
 
SCHEDULE I
ARIZONA PUBLIC SERVICE COMPANY
AMENDED AND RESTATED FIVE-YEAR CREDIT AGREEMENT
APPLICABLE LENDING OFFICES

Name of Initial Lender          Domestic Lending Office          Eurodollar Lending Office
----------------------          -----------------------          -------------------------
Bank of America, N.A.           901 Main Street                  901 Main Street
                                Dallas, TX 75202                 Dallas, TX 75202
                                Attn: Jacqueline Archuleta       Attn: Jacqueline Archuleta
                                T: 214 209-2135                  T: 214 209-2135
                                F: 214 290-8372                  F: 214 290-8372
The Bank of New York            One Wall Street                  One Wall Street
                                New York, NY 10019               New York, NY 10019
                                Attn: Frank Su                   Attn: Frank Su
                                T: 212 635-7532                  T: 212 635-7532
                                F: 212 635--7552                 F: 212 635--7552
Barclays Bank PLC               200 Cedar Knolls Road            200 Cedar Knolls Road
                                Whippany, NJ 07981               Whippany, NJ 07981
                                Attn: Jonathan Cohen             Attn: Jonathan Cohen
                                T: 973 576-3544                  T: 973 576-3544
                                F: 973 576-3014                  F: 973 576-3014
Citibank, N.A.                  Two Penns Way                    Two Penns Way
                                New Castle, DE 19720             New Castle, DE 19720
Credit Suisse, Cayman Islands   One Madison Avenue               One Madison Avenue
Branch                          New York, NY 10010               New York, NY 10010
                                Attn: Ed Markowski               Attn: Ed Markowski
                                T: 212 538-3380                  T: 212 538-3380
                                F: 212 538-6851                  F: 212 538-6851
JPMorgan Chase Bank, N.A.       1111 Fannin, 10th Floor          1111 Fannin, 10th Floor
                                Houston, TX 77002                Houston, TX 77002
                                Attn: Kelly Collins              Attn: Kelly Collins
                                T: 713 750-2530                  T: 713 750-2530
                                F: 713 427-6307                  F: 713 427-6307
KeyBank National Association    127 Public Square                127 Public Square
                                Cleveland, OH 44114              Cleveland, OH 44114
                                Attn: Yvette Dyson-Owens         Attn: Yvette Dyson-Owens
                                T: 216-689-4358                  T: 216-689-4358
                                F: 216-689-5962                  F: 216-689-5962
Lehman Brothers Bank, FSB       745 Seventh Avenue, 16th Floor   745 Seventh Avenue, 16th Floor
                                New York, NY 10019               New York, NY 10019
                                Attn: Joseph Lo                  Attn: Marie Cowell
                                T: 212 526-6560                  T: 212 526-6560
                                F: 212 220-9606                  F: 212 526-6653
Mellon Bank, N.A.               500 Ross Street                  500 Ross Street
                                Room 0865                        Room 0865
                                Pittsburgh, PA 15262             Pittsburgh, PA 15262
                                Attn: Paula Zawicki              Attn: Paula Zawicki
                                T: 412 234-3932                  T: 412 234-3932
                                F: 412 209-6141                  F: 412 209-6141	

Mizuho Corporate Bank, Ltd.     1800 Plaza Ten                   1800 Plaza Ten
                                Jersey City, NJ 07311            Jersey City, NJ  07311
                                Attn: Christopher Hahn           Attn: Christopher Hahn
                                T: 201 626-9274                  T: 201 626-9274
                                F: 201 626-9941                  F: 201 626-9941
The Northern Trust Company      50 South LaSalle Street          50 South LaSalle Street
                                Chicago, IL 60603                Chicago, IL 60603
                                Attn: Preeti Sullivan            Attn: Preeti Sullivan
                                T: 312 444-2376                  T: 312 444-2376
                                F: 312 444-4906                  F: 312 444-4906
UBS Loan Finance LLC            677 Washington Boulevard         677 Washington Boulevard
                                Stamford, CT 06901               Stamford, CT 06901
                                Attn: Marie Haddad               Attn: Marie Haddad
                                T: 203 719-5609                  T: 203 719-5609
                                F: 203 719-3888                  F: 203 719-3888
UFJ Bank Limited                55 East 52nd Street              55 East 52nd Street
                                New York, NY 10055               New York, NY 10055
                                Attn: Marlin Chin                Attn: Marlin Chin
                                T: 212 339-6392                  T: 212 339-6392
                                F: 212 754-2368                  F: 212 754-2368
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., 16th Floor   707 Wilshire Blvd., 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 2.01(B)
EXISTING LETTERS OF CREDIT
ARIZONA PUBLIC SERVICE COMPANY

LETTER OF CREDIT NO.       AMOUNT      BENEFICIARY
--------------------       ------      -----------
No. S309399 *          $1,300,000.00   California Independent System
                                       Operator

No. S309401 *          $3,500,000.00   The California Power Exchange
                                       Corporation	

* Issuing Bank: KeyBank National Association
SCHEDULE 4.01(j)
SUBSIDIARIES(1)
APS Foundation, Inc.
Bixco, Inc.
Axiom Power Solutions, Inc.
PWENewco, Inc.

(1) APS' three nuclear decommissioning trusts relating to the Palo Verde plant may also be deemed to be subsidiaries under a literal reading of the definition.
SCHEDULE 4.01(k)
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 Amended and Restated Five-Year Credit Agreement dated as of December 9, 2005 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, JPMorgan Chase Bank, N.A., Mizuho Corporate Bank, Ltd. and Union Bank of California, N.A., as 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 Amended and Restated Five-Year Credit Agreement, dated as of December 9, 2005 (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, JPMorgan Chase Bank, N.A., Mizuho Corporate Bank, Ltd. and Union Bank of California, N.A., as 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 Sections 4.01(k), 4.01(e)(ii) and 4.01(f)(ii)) 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 Amended and Restated Five-Year Credit Agreement dated as of December 9, 2005 (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, JPMorgan Chase Bank, N.A., Mizuho Corporate Bank, Ltd. and Union Bank of California, N.A., as 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 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".
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Exhibit 10.96
EXECUTION VERSION
PINNACLE WEST CAPITAL CORPORATION
$200,000,000
SENIOR NOTES
UNCOMMITTED MASTER SHELF AGREEMENT
Dated as of February 28, 2006
TABLE OF CONTENTS

1.  AUTHORIZATION OF ISSUE OF NOTES........................................    1

2.  PURCHASE AND SALE OF NOTES.............................................    1
    2A.  Facility..........................................................    1
    2B.  Issuance Period...................................................    2
    2C.  Periodic Spread Information.......................................    2
    2D.  Request for Purchase..............................................    2
    2E.  Rate Quotes.......................................................    3
    2F.  Acceptance........................................................    3
    2G.  Market Disruption.................................................    3
    2H.  Closing...........................................................    4
    2I.  Fees..............................................................    5

3.  CONDITIONS OF CLOSING..................................................    6
    3A.  Certain Documents.................................................    6
    3B.  Opinion of Purchaser's Special Counsel............................    7
    3C.  Representations and Warranties; No Default........................    7
    3D.  Purchase Permitted by Applicable Laws.............................    7
    3E.  Legal Matters.....................................................    8
    3F.  Payment of Fees...................................................    8
    3G.  Proceedings.......................................................    8
    3H.  Private Placement Numbers.........................................    8

4.  PREPAYMENTS............................................................    8
    4A.  Required Prepayments..............................................    8
    4B.  Optional Prepayment With Yield-Maintenance Amount.................    8
    4C.  Notice of Optional Prepayment.....................................    8
    4D.  Application of Prepayments........................................    9
    4E.  Retirement of Notes...............................................    9

5.  AFFIRMATIVE COVENANTS..................................................    9
    5A.  Financial Statements; Notice of Defaults..........................    9
    5B.  Information Required by Rule 144A.................................   11
    5C.  Inspection of Property............................................   11
    5D.  Maintenance of Property; Insurance................................   12
    5E.  Conduct of Business and Maintenance of Existence..................   12
    5F.  Compliance with Laws..............................................   13
    5G.  Covenant to Secure Notes Equally..................................   13
    5H.  Ownership of APS..................................................   13
    5I.  Additional Covenants and Additional Defaults......................   13

6.  NEGATIVE COVENANTS.....................................................   13
    6A.  Debt..............................................................   13
    6B.  Consolidations; Mergers and Sales of Assets.......................   13
    6C.  Terrorism Sanction Regulations....................................   14	

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7.  EVENTS OF DEFAULT......................................................   14
    7A.  Acceleration......................................................   14
    7B.  Rescission of Acceleration........................................   16
    7C.  Notice of Acceleration or Rescission..............................   17
    7D.  Other Remedies....................................................   17

8.  REPRESENTATIONS, COVENANTS AND WARRANTIES..............................   17
    8A.  Organization......................................................   17
    8B.  Financial Statements..............................................   17
    8C.  Actions Pending...................................................   18
    8D.  Outstanding Indebtedness..........................................   18
    8E.  Title to Properties...............................................   18
    8F.  Taxes.............................................................   19
    8G.  Conflicting Agreements and Other Matters..........................   19
    8H.  Offering of Notes.................................................   19
    8I.  Use of Proceeds...................................................   19
    8J.  ERISA.............................................................   20
    8K.  Governmental Consent..............................................   20
    8L.  Compliance with Environmental and Other Laws......................   20
    8M.  Foreign Assets Control Regulations, Etc...........................   21
    8N.  Permits and Other Operating Rights................................   21
    8O.  Utility Company Status............................................   21
    8P.  Investment Company Status.........................................   21
    8Q.  Disclosure........................................................   22
    8R.  Rule 144A.........................................................   22
    8S.  Hostile Tender Offers.............................................   22

9.  REPRESENTATIONS OF THE PURCHASERS......................................   22
    9A.  Nature of Purchase................................................   22
    9B.  Source of Funds...................................................   22
    9C.  Accredited Investor...............................................   24

10. DEFINITIONS; ACCOUNTING MATTERS........................................   24
    10A. Yield-Maintenance Terms...........................................   24
    10B. Other Terms.......................................................   25
    10C. Accounting Principles, Terms and Determinations...................   33

11. MISCELLANEOUS..........................................................   33
    11A. Note Payments.....................................................   33
    11B. Expenses..........................................................   34
    11C. Consent to Amendments.............................................   34
    11D. Form, Registration, Transfer and Exchange of Notes; Lost Notes....   35
    11E. Persons Deemed Owners; Participations.............................   36
    11F. Survival of Representations and Warranties; Entire Agreement......   36
    11G. Successors and Assigns............................................   36
    11H. Independence of Covenants.........................................   36
    11I. Notices...........................................................   37	

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11J. Payments Due on Non-Business Days.................................   37
11K. Severability......................................................   37
11L. Descriptive Headings..............................................   37
11M. Satisfaction Requirement..........................................   38
11N. Governing Law.....................................................   38
11O. Severalty of Obligations..........................................   38
11P. Counterparts......................................................   38
11Q. Binding Agreement.................................................   38
11R. Waiver of Jury Trial; Consent to Jurisdiction.....................   38
11S. Confidential Information..........................................   39	

PURCHASER SCHEDULE
SCHEDULE 8G - LIST OF AGREEMENTS RESTRICTING DEBT
EXHIBIT A-1 - FORM OF NOTE
EXHIBIT A-2 - FORM OF SERIES A NOTE

EXHIBIT B   - FORM OF REQUEST FOR PURCHASE

EXHIBIT C   - FORM OF CONFIRMATION OF ACCEPTANCE

EXHIBIT D   - FORM OF FUNDS DELIVERY INSTRUCTION LETTER	

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PINNACLE WEST CAPITAL CORPORATION
400 NORTH 5TH STREET, 19TH FLOOR
PHOENIX, ARIZONA 85004
As of February 28, 2006
To: Prudential Investment Management, Inc.

(herein called "PRUDENTIAL")
Each Prudential Affiliate (as hereinafter defined) which becomes bound by certain provisions of this Agreement as hereinafter provided (the "PURCHASERS")
c/o Prudential Capital Group
2200 Ross Avenue, Suite 4200E
Dallas, TX 75201
Ladies and Gentlemen:
The undersigned, Pinnacle West Capital Corporation (the "COMPANY"), hereby agrees with you as follows:
1. AUTHORIZATION OF ISSUE OF NOTES. The Company will authorize the issue of its senior promissory notes (the "NOTES") from time to time in accordance with the provisions of this Agreement in the aggregate principal amount of up to $200,000,000, to be dated the date of issue thereof; to mature, in the case of each Note so issued, no more than 5 years after the date of original issuance thereof; to bear interest on the unpaid balance thereof from the date thereof at the rate per annum, and to have such other particular terms, as shall be set forth, in the case of each Note so issued, in the Confirmation of Acceptance with respect to such Note delivered pursuant to paragraph 2F; and to be substantially in the form of Exhibit A-1 attached hereto. The term "NOTES" as used herein shall include each Note delivered pursuant to any provision of this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to any such provision. Notes which have (i) the same final maturity, (ii) the same principal prepayment dates, (iii) the same principal prepayment amounts (as a percentage of the original principal amount of each Note), (iv) the same interest rate, and (v) the same original date of issuance are herein called a "SERIES" of Notes. Capitalized terms used herein have the meanings specified in paragraph 10.
2. PURCHASE AND SALE OF NOTES.
2A. FACILITY. Prudential is willing to consider, in its sole discretion and within limits which may be authorized for purchase by Prudential Affiliates from time to time, the purchase of Notes pursuant to this Agreement. The willingness of Prudential to consider such purchase of Notes is herein called the "FACILITY". At any time, the aggregate principal amount of Notes stated in paragraph 1, minus the aggregate principal amount of Notes purchased and sold pursuant to this Agreement prior to such time, minus the aggregate principal amount of Accepted Notes (as hereinafter defined) which have not yet been purchased and sold hereunder prior to such time is herein called the "AVAILABLE FACILITY AMOUNT" at such time. NOTWITHSTANDING THE WILLINGNESS OF PRUDENTIAL TO CONSIDER
PURCHASES OF NOTES BY PRUDENTIAL AFFILIATES, THIS AGREEMENT IS ENTERED INTO ON THE EXPRESS UNDERSTANDING THAT NEITHER PRUDENTIAL NOR ANY PRUDENTIAL AFFILIATE SHALL BE OBLIGATED TO MAKE OR ACCEPT OFFERS TO PURCHASE NOTES, OR TO QUOTE RATES, SPREADS OR OTHER TERMS WITH RESPECT TO SPECIFIC PURCHASES OF NOTES, AND THE FACILITY SHALL IN NO WAY BE CONSTRUED AS A COMMITMENT BY PRUDENTIAL OR ANY PRUDENTIAL AFFILIATE.
2B. ISSUANCE PERIOD. Notes may be issued and sold pursuant to this Agreement until the earlier of (i) December 31, 2007 and (ii) the fifteenth day after Prudential shall have given to the Company, or the Company shall have given to Prudential, written notice stating that it elects to terminate the issuance and sale of Notes pursuant to this Agreement (or if such fifteenth day is not a Business Day, the Business Day next preceding such fifteenth day). The period during which Notes may be issued and sold pursuant to this Agreement is herein called the "ISSUANCE PERIOD".
2C. PERIODIC SPREAD INFORMATION. Provided no Default or Event of Default exists, not later than 9:30 A.M. (New York City local time) on a Business Day during the Issuance Period if there is an Available Facility Amount on such Business Day, the Company may request by telecopier or telephone, and Prudential will, to the extent reasonably practicable, provide to the Company on such Business Day (or, if such request is received after 9:30 A.M. (New York City local time) on such Business Day, on the following Business Day), information (by telecopier or telephone) with respect to various spreads at which Prudential Affiliates might be interested in purchasing Notes of different average lives; provided, however, that the Company may not make such requests more frequently than once in every five Business Days or such other period as shall be mutually agreed to by the Company and Prudential. The amount and content of information so provided shall be in the sole discretion of Prudential but it is the intent of Prudential to provide information which will be of use to the Company in determining whether to initiate procedures for use of the Facility. Information so provided shall not constitute an offer to purchase Notes, and neither Prudential nor any Prudential Affiliate shall be obligated to purchase Notes at the spreads specified. Information so provided shall be representative of potential interest only for the period commencing on the day such information is provided and ending on the earlier of the fifth Business Day after such day and the first day after such day on which further spread information is provided. Prudential may suspend or terminate providing information pursuant to this paragraph 2C for any reason, including its determination that the credit quality of the Company has declined since the date of this Agreement.
2D. REQUEST FOR PURCHASE. The Company may from time to time during the Issuance Period make requests for purchases of Notes (each such request being a "REQUEST FOR PURCHASE"). Each Request for Purchase shall be made to Prudential by telecopier or overnight delivery service, and shall (i) specify the aggregate principal amount of Notes covered thereby, which shall not be less than $5,000,000 and not be greater than the Available Facility Amount at the time such Request for Purchase is made, (ii) specify the principal amounts, final maturities, principal prepayment dates and amounts of the Notes covered thereby,
(iii) specify the use of proceeds of such Notes, (iv) specify the proposed day for the closing of the purchase and sale of such Notes, which, unless otherwise agreed by Prudential, shall be a Business Day during the
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Issuance Period not less than 10 days and not more than 25 days after the making of such Request for Purchase, (v) specify the number of the account and the name and address of the depository institution to which the purchase prices of such Notes are to be transferred on the Closing Day for such purchase and sale, (vi) certify that, except as specified in such Request for Purchase, the representations and warranties contained in paragraph 8 are true on and as of the date of such Request for Purchase and that there exists on the date of such Request for Purchase no Event of Default or Default, (vii) specify the Designated Spread for such Notes and (viii) be substantially in the form of Exhibit B attached hereto. Each Request for Purchase shall be in writing and shall be deemed made when received by Prudential.
2E. RATE QUOTES. Not later than five Business Days after the Company shall have given Prudential a Request for Purchase pursuant to paragraph 2D, Prudential may, but shall be under no obligation to, provide to the Company by telephone or telecopier, in each case between 9:30 A.M. and 1:30 P.M. New York City local time (or such later time as Prudential may elect) interest rate quotes for the several principal amounts, maturities and principal prepayment schedules of Notes specified in such Request for Purchase. Each quote shall represent the interest rate per annum payable on the outstanding principal balance of such Notes, at which a Prudential Affiliate would be willing to purchase such Notes at 100% of the principal amount thereof.
2F. ACCEPTANCE. Within 30 minutes after Prudential shall have provided any interest rate quotes pursuant to paragraph 2E or such shorter period as Prudential may specify to the Company (such period being the "ACCEPTANCE WINDOW"), the Company may, subject to paragraph 2G, elect to accept such interest rate quotes as to any portion not less than $5,000,000 aggregate principal amount of the Notes specified in the related Request for Purchase. Such election shall be made by an Authorized Officer of the Company notifying Prudential by telephone or telecopier within the Acceptance Window that the Company elects to accept such interest rate quotes, specifying the Notes (each such Note being an "ACCEPTED NOTE") as to which such acceptance (an "ACCEPTANCE") relates. The day the Company notifies an Acceptance with respect to any Accepted Notes is herein called the "ACCEPTANCE DAY" for such Accepted Notes. Any interest rate quotes as to which Prudential does not receive an Acceptance within the Acceptance Window shall expire, and no purchase or sale of Notes hereunder shall be made based on such expired interest rate quotes. Subject to paragraph 2G and the other terms and conditions hereof, the Company agrees to sell to a Prudential Affiliate, and Prudential agrees to cause the purchase by a Prudential Affiliate of, the Accepted Notes at 100% of the principal amount of such Notes. As soon as practicable following the Acceptance Day, the Company, Prudential and each Prudential Affiliate which is to purchase any such Accepted Notes will execute a confirmation of such Acceptance substantially in the form of Exhibit C attached hereto (a "CONFIRMATION OF ACCEPTANCE"). If the Company should fail to execute and return to Prudential within two Business Days following receipt thereof a Confirmation of Acceptance with respect to any Accepted Notes, Prudential may at its election at any time prior to its receipt thereof cancel the closing with respect to such Accepted Notes by so notifying the Company in writing.
2G. MARKET DISRUPTION. Notwithstanding the provisions of paragraph 2F, if Prudential shall have provided interest rate quotes pursuant to paragraph 2E and thereafter prior to the time an Acceptance with respect to such quotes shall have been notified to Prudential in
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accordance with paragraph 2F the domestic market for U.S. Treasury securities or derivatives shall have closed or there shall have occurred a general suspension, material limitation, or significant disruption of trading in securities generally on the New York Stock Exchange or in the domestic market for U.S. Treasury securities or derivatives, then such interest rate quotes shall expire, and no purchase or sale of Notes hereunder shall be made based on such expired interest rate quotes. If the Company thereafter notifies Prudential of the Acceptance of any such interest rate quotes, such Acceptance shall be ineffective for all purposes of this Agreement, and Prudential shall promptly notify the Company that the provisions of this paragraph 2G are applicable with respect to such Acceptance.
2H. CLOSING.
2H(1). SERIES A CLOSING. The Company hereby agrees to sell to the Purchasers and, subject to the terms and conditions set forth herein, each Purchaser agrees to purchase from the Company under the Facility 5.91% Senior Notes due February 28, 2011 (the "SERIES A NOTES") in the aggregate principal amount set forth opposite its name on the Purchaser Schedule attached hereto at 100% of such aggregate principal amount. The Series A Notes shall be substantially in the form of Exhibit A-2 attached hereto. The Company will deliver to Prudential, at the offices of Prudential Capital Group at 2200 Ross Avenue, Suite 4200E, Dallas, Texas, 75201 or, at the request of Prudential, at the offices of Baker Botts L.L.P. at 2001 Ross Avenue, Suite 600, Dallas, Texas 75201, one or more Notes registered in the name of the Purchasers, evidencing the aggregate principal amount of Series A Notes to be purchased by the Purchasers and in the denomination or denominations specified in the Purchaser Schedule attached hereto against payment of the purchase price thereof by transfer of immediately available funds to the credit of the Company's account at JPMorgan Chase AZ, Phoenix, Arizona, Account Number 22703938 (ABA No. 122100024) on the date of closing, which shall be February 28, 2006, or any other date upon which the Company and Prudential may mutually agree in writing (the "SERIES A CLOSING").
2H(2). SUBSEQUENT CLOSINGS. Not later than 11:30 A.M. (New York City local time) on the Closing Day for any Accepted Notes, the Company will deliver to each Purchaser listed in the Confirmation of Acceptance relating thereto at the offices of Prudential Capital Group at 2200 Ross Avenue, Suite 4200E, Dallas, Texas 75201 the Accepted Notes to be purchased by such Purchaser in the form of one or more Notes in authorized denominations as such Purchaser may request for each Series of Accepted Notes to be purchased on the Closing Day, dated the Closing Day and registered in such Purchaser's name (or in the name of its nominee), against payment of the purchase price thereof by transfer of immediately available funds for credit to the Company's account specified in the Request for Purchase of such Notes.
2H(3). RESCHEDULED CLOSINGS. If the Company fails to tender to any Purchaser the Accepted Notes to be purchased by such Purchaser on the scheduled Closing Day for such Accepted Notes as provided above in this paragraph 2H, or any of the conditions specified in paragraph 3 shall not have been fulfilled by the time required on such scheduled Closing Day, the Company shall, prior to 1:00 P.M., New York City local time, on such scheduled Closing Day notify Prudential (which notification shall be deemed received by each Purchaser) in writing whether (x) such closing is to be rescheduled (such rescheduled date to be a Business Day during the Issuance Period not less than one Business Day and not more than 30 Business Days after
4
such scheduled Closing Day (the "RESCHEDULED CLOSING DAY") and certify to Prudential (which certification shall be for the benefit of each Purchaser) that the Company reasonably believes that it will be able to comply with the conditions set forth in paragraph 3 on such Rescheduled Closing Day and that the Company will pay the Delayed Delivery Fee in accordance with paragraph 2I(2) or
(y) such closing is to be canceled as provided in paragraph 2I(3). In the event that the Company shall fail to give such notice referred to in the preceding sentence, Prudential (on behalf of each Purchaser) may at its election, at any time after 1:00 P.M., New York City local time, on such scheduled Closing Day, notify the Company in writing that such closing is to be canceled as provided in paragraph 2I(3). Notwithstanding anything to the contrary appearing in this Agreement, the Company may elect to reschedule a closing with respect to any given Accepted Notes on not more than one occasion, unless Prudential shall have otherwise consented in writing.
2I. FEES.
2I(1). ISSUANCE FEE. The Company will pay to Prudential in immediately available funds a fee (the "ISSUANCE FEE") on each Closing Day (other than the Series A Closing) in an amount equal to 0.125% of the aggregate principal amount of Notes sold on such Closing Day.
2I(2). DELAYED DELIVERY FEE. If the closing of the purchase and sale of any Accepted Note is delayed for any reason beyond the original Closing Day for such Accepted Note, the Company will pay to the Purchaser of such Accepted Note on the Cancellation Date or actual closing date of such purchase and sale a fee (the "DELAYED DELIVERY FEE") calculated as follows:
(BEY - MMY) X DTS/360 X PA
where "BEY" means Bond Equivalent Yield, i.e., the bond equivalent yield per annum of such Accepted Note, "MMY" means Money Market Yield, i.e., the yield per annum on a commercial paper investment of the highest quality selected by Prudential on the date Prudential receives notice of the delay in the closing for such Accepted Note having a maturity date or dates the same as, or closest to, the Rescheduled Closing Day or Rescheduled Closing Days (a new alternative investment being selected by Prudential each time such closing is delayed); "DTS" means Days to Settlement, i.e., the number of actual days elapsed from and including the original Closing Day with respect to such Accepted Note to but excluding the date of such payment; and "PA" means Principal Amount, i.e., the principal amount of the Accepted Note for which such calculation is being made. In no case shall the Delayed Delivery Fee be less than zero. Nothing contained herein shall obligate any Purchaser to purchase any Accepted Note on any day other than the Closing Day for such Accepted Note, as the same may be rescheduled from time to time in compliance with paragraph 2H.
2I(3). CANCELLATION FEE. If the Company at any time notifies Prudential in writing that the Company is canceling the closing of the purchase and sale of any Accepted Note, or if Prudential notifies the Company in writing under the circumstances set forth in the penultimate sentence of paragraph 2H(3) that the closing of the purchase and sale of such Accepted Note
5
is to be canceled, or if the closing of the purchase and sale of such Accepted Note is not consummated on or prior to the last day of the Issuance Period (the date of any such notification, or the last day of the Issuance Period, as the case may be, being the "CANCELLATION DATE"), the Company will pay the Purchasers in immediately available funds an amount (the "CANCELLATION FEE") calculated as follows:
PI X PA
where "PI" means Price Increase, i.e., the quotient (expressed in decimals) obtained by dividing (a) the excess of the ask price (as determined by Prudential) of the Hedge Treasury Note(s) on the Cancellation Date over the bid price (as determined by Prudential) of the Hedge Treasury Notes(s) on the Acceptance Day for such Accepted Note by (b) such bid price; and "PA" has the meaning specified in paragraph 2I(2). The foregoing bid and ask prices shall be as reported by TradeWeb LLC (or, if such data for any reason ceases to be available through TradeWeb LLC, any publicly available source of similar market data). Each price shall be rounded to the second decimal place. In no case shall the Cancellation Fee be less than zero.
3. CONDITIONS OF CLOSING. The obligation of any Purchaser to purchase and pay for any Notes is subject to the satisfaction, on or before the Closing Day for such Notes, of the following conditions:
3A. CERTAIN DOCUMENTS. Such Purchaser shall have received the following, each dated the date of the applicable Closing Day:
(i) The Note(s) to be purchased by such Purchaser.
(ii) Certified copies of the resolutions of the Board of Directors of the Company authorizing the execution and delivery of this Agreement and the issuance of the Notes, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and the Accepted Notes (provided, that for any Closing Day occurring after the Series A Closing, the Company may certify that there has been no change to any applicable authorization or approval since the date on which it was most recently delivered to such Purchaser under this paragraph 3A(ii), as an alternative to the further delivery thereof).
(iii) A certificate of the Secretary, an Assistant Secretary or an Associate Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder (provided, that for any Closing Day occurring after the Series A Closing, the Secretary, an Assistant Secretary or an Associate Secretary of the Company may certify that there has been no change to the officers of the Company authorized to sign Accepted Notes and other documents to be delivered therewith since the date on which a certificate setting forth the names and true signatures of such officers, as described above, was most recently delivered to such Purchaser under this paragraph 3A(iii), as an alternative to the further delivery thereof).
(iv) Certified copies of the Certificate of Incorporation and By-laws of the Company (provided, that for any Closing Day occurring after the Series A Closing, the Company may certify that there has been no change to any applicable constitutive
6
document since the date on which it was most recently delivered to such Purchaser under this paragraph 3A(iv), as an alternative to the further delivery thereof).
(v) Favorable opinions of (a) Snell & Wilmer, L.L.P. and (b) Morgan, Lewis & Bockius LLP, special counsel to the Company (or such other counsel designated by the Company and acceptable to the Purchaser(s)) satisfactory to such Purchaser and substantially in the forms provided on the Closing Day with respect to the Series A Notes and as to such other matters as such Purchaser may reasonably request. The Company hereby directs each such counsel to deliver such opinion, agrees that the issuance and sale of any Accepted Notes will constitute a reconfirmation of such direction, and understands and agrees that each Purchaser receiving such an opinion will and is hereby authorized to rely on such opinion.
(vi) A good standing certificate for the Company from the Arizona Corporation Commission dated a recent date and such other evidence of the status of the Company as such Purchaser may reasonably request.
(vii) Solely in connection with the Series A Closing, certified copies of Requests for Information or Copies (Form UCC-11) or equivalent reports listing all effective financing statements which name the Company (under its present name and previous names) as debtor and which are filed in the office of the Secretary of State of Arizona, together with copies of such financing statements.
(viii) Additional documents or certificates with respect to legal matters or corporate or other proceedings related to the transactions contemplated hereby as may be reasonably requested by such Purchaser at least five days in advance of the Closing Day.
(ix) Written instructions of the Company in the form of Exhibit D attached hereto.
3B. OPINION OF PURCHASER'S SPECIAL COUNSEL. Such Purchaser shall have received from Baker Botts, L.L.P., who is acting as special counsel for it in connection with this transaction, a favorable opinion satisfactory to such Purchaser as to such matters incident to the matters herein contemplated as it may reasonably request.
3C. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. Except as disclosed in the Officer's Certificate referenced herein, the representations and warranties contained in paragraph 8 shall be true on and as of such Closing Day, except to the extent of changes caused by the transactions herein contemplated; there shall exist on such Closing Day no Event of Default or Default; and the Company shall have delivered to such Purchaser an Officer's Certificate, dated such Closing Day, to both such effects.
3D. PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and payment for the Notes to be purchased by such Purchaser on the terms and conditions herein provided (including the use of the proceeds of such Notes by the Company) shall not violate any applicable law or governmental regulation (including, without limitation, Section 5 of the Securities Act or Regulation T, U or X of the Board of Governors of the Federal Reserve System) and shall not subject such Purchaser to any tax, penalty, liability or other onerous
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condition under or pursuant to any applicable law or governmental regulation, and such Purchaser shall have received such certificates or other evidence as it may reasonably request to establish compliance with this condition.
3E. LEGAL MATTERS. Counsel for such Purchaser, including any special counsel for the Purchasers retained in connection with the purchase and sale of such Accepted Notes, shall be satisfied as to all legal matters relating to such purchase and sale, and such Purchaser shall have received from such counsel favorable opinions as to such legal matters as it may reasonably request.
3F. PAYMENT OF FEES. The Company shall have paid to the Purchasers and Prudential any fees due them pursuant to or in connection with this Agreement, including any Issuance Fee due pursuant to paragraph 2I(1) and any Delayed Delivery Fee due pursuant to paragraph 2I(2). In addition, and without limiting the provisions of paragraph 11B, special counsel to the Purchasers shall have received its reasonable fees, charges and disbursements to the extent reflected in a statement of such special counsel rendered to the Company at least one Business Day prior to such Closing Day.
3G. PROCEEDINGS. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incident thereto shall be satisfactory in substance and form to such Purchaser, and it shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request.
3H. PRIVATE PLACEMENT NUMBERS. Private Placement numbers issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained by Prudential for the Notes.
4. PREPAYMENTS. The Notes shall be subject to prepayment with respect to any required prepayments set forth in such Notes as provided in paragraph 4A and with respect to the optional prepayments permitted by paragraph 4B.
4A. REQUIRED PREPAYMENTS. The Notes of each Series shall be subject to required prepayments, if any, set forth in the Notes of such Series.
4B. OPTIONAL PREPAYMENT WITH YIELD-MAINTENANCE AMOUNT. The Notes of each Series shall be subject to prepayment, in whole at any time or from time to time in part (in integral multiples of $1,000,000 and in a minimum amount of $1,000,000), at the option of the Company, at 100% of the principal amount so prepaid plus interest thereon to the prepayment date and the Yield-Maintenance Amount, if any, with respect to each such Note. Any partial prepayment of a Series of Notes pursuant to this paragraph 4B shall be applied in satisfaction of required payments of principal of the Notes in such Series in inverse order of their scheduled due dates.
4C. NOTICE OF OPTIONAL PREPAYMENT. The Company shall give the holder of each Note to be prepaid pursuant to paragraph 4B irrevocable written notice of such prepayment not less than 10 Business Days prior to the prepayment date, specifying such prepayment date, specifying the aggregate principal amount of the Notes to be prepaid on such date, identifying
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each Note held by such holder, and the principal amount of each such Note, to be prepaid on such date and stating that such prepayment is to be made pursuant to paragraph 4B. Notice of prepayment having been given as aforesaid, the principal amount of the Notes specified in such notice, together with interest thereon to the prepayment date and together with the Yield-Maintenance Amount, if any, herein provided, shall become due and payable on such prepayment date. The Company shall, on or before the day on which it gives written notice of any prepayment pursuant to paragraph 4B, give telephonic notice of the principal amount of the Notes to be prepaid and the prepayment date to each Significant Holder which shall have designated a recipient for such notices in the Purchaser Schedule attached hereto or by notice in writing to the Company.
4D. APPLICATION OF PREPAYMENTS. Upon any partial prepayment of the Notes of any Series pursuant to paragraph 4A or 4B, the amount so prepaid shall be allocated to all outstanding Notes of such Series (including, for the purpose of this paragraph 4D only, all Notes prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates other than by prepayment pursuant to paragraph 4A or 4B) in proportion to the respective outstanding principal amounts thereof.
4E. RETIREMENT OF NOTES. The Company shall not, and shall not permit any of its Subsidiaries or Affiliates to, prepay or otherwise retire in whole or in part prior to their stated final maturity (other than by prepayment pursuant to paragraph 4A or 4B or upon acceleration of such final maturity pursuant to paragraph 7A), or purchase or otherwise acquire, directly or indirectly, Notes of any Series held by any holder unless the Company or such Subsidiary or Affiliate shall have offered to prepay or otherwise retire or purchase or otherwise acquire, as the case may be, the same proportion of the aggregate principal amount of Notes of such Series held by each other holder of Notes of such Series at the time outstanding upon the same terms and conditions. Any Notes so prepaid or otherwise retired or purchased or otherwise acquired by the Company or any of its Subsidiaries or Affiliates shall not be deemed to be outstanding for any purpose under this Agreement, except as provided in paragraph 4D.
5. AFFIRMATIVE COVENANTS. During the Issuance Period, from and after the Business Day immediately preceding the Series A Closing, and so long thereafter as any Note is outstanding and unpaid, the Company covenants as follows:
5A. FINANCIAL STATEMENTS; NOTICE OF DEFAULTS. The Company will deliver to each Significant Holder in duplicate:
(i) as soon as practicable and in any event within 60 days after the end of each quarterly period (other than the last quarterly period) in each fiscal year, statements of income and cash flows of the Company and its Consolidated Subsidiaries for the period from the beginning of the current fiscal year to the end of such quarterly period, and a balance sheet of the Company and its Consolidated Subsidiaries as at the end of such quarterly period, setting forth in the case of statements of income and cash flows in comparative form figures for the corresponding period in the preceding fiscal year, and accompanied by a certificate of an authorized financial officer of the Company, which certificate shall state that said financial statements fairly present in all material respects the financial position and results of operation of the Company and its Consolidated
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Subsidiaries in accordance with GAAP, except as disclosed therein and subject to changes resulting from year-end audit adjustments; provided, however, that delivery pursuant to clause (iii) below of copies of the Quarterly Report on Form l0-Q of the Company for such quarterly period filed with the SEC shall be deemed to satisfy the requirements of this clause (i) with respect to consolidated financial statements so long as such Report on Form 10-Q includes the financial statements required by Form 10-Q;
(ii) as soon as practicable and in any event within 120 days after the end of each fiscal year, statements of income and cash flows of the Company and its Consolidated Subsidiaries for such year, and a balance sheet of the Company and its Consolidated Subsidiaries as at the end of such year, setting forth in each case in comparative form corresponding figures from the preceding fiscal year, and accompanied by a report thereon of independent public accountants of recognized national standing selected by the Company, whose report shall state that said financial statements fairly present in all material respects the financial position and results of operations of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with GAAP (except as disclosed therein); provided, however, that delivery pursuant to clause (iii) below of copies of the Annual Report on Form 10-K of the Company for such fiscal year filed with the SEC shall be deemed to satisfy the requirements of this clause (ii) with respect to consolidated financial statements and the auditor's report so long as such Annual Report on Form 10-K includes the financial statements required by Form 10-K;
(iii) promptly after transmission thereof, copies of all such financial statements, proxy statements, notices and reports as it shall send to its public stockholders and copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and all reports on Form 10-K, 10-Q and 8-K (or their equivalents) which it files with the SEC;
(iv) if and when any ERISA Affiliate (a) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (b) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (c) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (d) applies for a waiver of the minimum funding standard under Section 412 of the Code, a copy of such application; (e) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (f) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (g) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or is reasonably likely to result in the imposition of a Lien or the
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posting of a bond or other security under ERISA or the Code, a certificate of an Responsible Officer setting forth details as to such occurrence and action, if any, which the Company or applicable member of the ERISA Affiliate is required or proposes to take; and
(v) with reasonable promptness, such other information respecting the condition or operations, financial or otherwise, of the Company or any of its Subsidiaries as such Significant Holder may reasonably request.
Together with each delivery of financial statements required by clauses (i) and
(ii) above, the Company will deliver to each Significant Holder an Officer's Certificate demonstrating (with computations in reasonable detail) compliance by the Company with the provisions of paragraph 6A and stating that there exists no Event of Default or Default, or, if any Event of Default or Default exists, specifying the nature thereof and what action the Company proposes to take with respect thereto. Information required to be delivered pursuant to clauses (i),
(ii) and (iii) above shall be deemed to have been delivered on the date on which the Company provides notice to each Significant Holder that such information has been posted on the Company's website at www.pinnaclewest.com, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Significant Holders without charge; provided that (a) such notice may be included in any Officer's Certificate described in the foregoing sentence and (b) the Company shall deliver paper copies of the information referred to in clauses (i), (ii) or (iii) above to any Significant Holder which requests such delivery.
The Company also covenants that as soon as possible and in any event within five Business Days after any Responsible Officer obtains knowledge of an Event of Default or Default then continuing, it will deliver to each holder of any Notes an Officer's Certificate specifying the nature thereof and what action the Company proposes to take with respect thereto.
5B. INFORMATION REQUIRED BY RULE 144A. The Company will, upon the request of the holder of any Note, provide such holder, and any qualified institutional buyer designated by such holder, such financial and other information as such holder may reasonably determine to be necessary in order to permit compliance with the information requirements of Rule 144A under the Securities Act in connection with the resale of Notes, except at such times as the Company is subject to and in compliance with the reporting requirements of section 13 or 15(d) of the Exchange Act. For the purpose of this paragraph 5B, the term "QUALIFIED INSTITUTIONAL BUYER" shall have the meaning specified in Rule 144A under the Securities Act.
5C. INSPECTION OF PROPERTY. The Company will permit any Person designated by any Significant Holder in writing, at such Significant Holder's expense if no Default or Event of Default exists and at the Company's expense if a Default or Event of Default does exist, to visit and inspect any of the properties of the Company and its Subsidiaries, to examine the corporate books and financial records of the Company and its Subsidiaries and make copies thereof or extracts therefrom and to discuss the affairs, finances and accounts of any of such corporations with the principal officers of the Company and its independent public accountants, all at such reasonable times and as often as such Significant Holder may reasonably request; provided, however, that the Company and its Subsidiaries reserve the right to restrict access to any of their properties in accordance with reasonably adopted policies relating to safety; and,
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provided further, that such Significant Holder complies with reasonably adopted security policies.
5D. MAINTENANCE OF PROPERTY; INSURANCE.
(i) The Company will keep, and will cause each Significant Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted, if the failure to do so is reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, considered as a whole, 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.
(ii) The Company will maintain, and cause each Significant Subsidiary 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 Company or such Significant Subsidiary operates; provided, however, that the Company and APS 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 Company or such Significant Subsidiary operates.
5E. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE.
(i) Subject to paragraph 6B hereof, the Company will preserve and maintain, and will cause APS to preserve and maintain, its corporate existence and all rights and privileges (other than, in the case of APS, "franchises" as described in Arizona Revised Statutes, Section 40-283 or any successor provision) reasonably necessary in the normal conduct of its business, if the failure to maintain such rights or privileges is reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, considered as a whole, and will cause APS to use its commercially reasonable efforts to preserve and maintain such franchises reasonably necessary in the normal conduct of its business, except that (a) APS 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 APS 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) The Company will continue to conduct, directly or through its Subsidiaries, the same general type of business conducted by the Company and APS on the date hereof.
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5F. COMPLIANCE WITH LAWS. The Company will comply, and cause each of its Significant Subsidiaries to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, environmental laws and ERISA and the rules and regulations thereunder) except where (i) the necessity of compliance therewith is contested in good faith by appropriate proceedings or
(ii) the noncompliance with which is not reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, considered as a whole.
5G. COVENANT TO SECURE NOTES EQUALLY. The Company will not create, assume or suffer to exist any Lien on the capital stock of any Significant Subsidiary owned by the Company unless the holders of Notes are also granted a Lien thereon on a pari passu basis securing all of the Company's obligations under the Notes.
5H. OWNERSHIP OF APS. The Company will at all times continue to own directly at least 80% of the outstanding capital stock of APS.
5I. ADDITIONAL COVENANTS AND ADDITIONAL DEFAULTS. If, after the date hereof, the Company enters into, assumes or otherwise becomes bound or obligated under any agreement (including amendments of the Bank Agreement) evidencing, securing, guaranteeing or otherwise relating to the Bank Obligations that contains one or more Additional Covenants or Additional Defaults, the terms of this Agreement shall, without any further action on the part of the Company or any of the holders of the Notes, be deemed to be amended automatically to include each Additional Covenant and each Additional Default contained in such agreement. The Company further covenants to promptly execute and deliver at its expense (including the reasonable fees and expenses of counsel for the holders of the Notes) an amendment to this Agreement in form and substance satisfactory to the Required Holder(s) evidencing the amendment of this Agreement to include such Additional Covenants and Additional Defaults, provided that the execution and delivery of such amendment shall not be a precondition to the effectiveness of such amendment as provided for in this paragraph 5I, but shall merely be for the convenience of the parties hereto.
6. NEGATIVE COVENANTS. During the Issuance Period, from and after the Business Day immediately preceding the Series A Closing, and so long thereafter as any Note or other amount due hereunder is outstanding and unpaid, the Company covenants as follows:
6A. DEBT. Consolidated Debt will not exceed at any time an amount equal to 65% of Consolidated Capitalization.
6B. CONSOLIDATIONS; MERGERS AND SALES OF ASSETS. The Company will not, nor will it permit any Significant Subsidiary to, merge or consolidate with or into any other Person, except (i) any Significant Subsidiary may merge or consolidate with the Company if the Company is the corporation surviving such merger, (ii) any Significant Subsidiary may merge or consolidate with any other Subsidiary, provided that the Company's aggregate direct and indirect ownership interest in the survivor thereof shall not be less than the greater of the Company's direct and indirect ownership interest in such Subsidiaries prior to such merger, and (iii) the
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Company or any Significant Subsidiary may merge or consolidate with any other Person if (a) such Person was organized under the laws of the United States of America or one of its States and (b) the Company or such Significant Subsidiary is the corporation surviving such merger; provided that, in each case, after giving effect thereto, no Default or Event of Default will be in existence. The Company will not sell, lease, transfer, assign or otherwise dispose of all or substantially all of its assets, or permit any of its Significant Subsidiaries to sell, lease, transfer, assign or otherwise dispose of all or substantially all of its assets, except for sales, leases, transfers, assignments, and other dispositions of all or substantially all of the Company's or any such Significant Subsidiary's assets to the Company or any other Subsidiary of the Company, provided in each case that no Default or Event of Default shall have occurred and be continuing after giving effect thereto and provided further that
(i) in no case will the merger of PWEC into the Company with the Company surviving be governed or prohibited by this paragraph 6B, and (ii) this paragraph 6B will not govern or prohibit pledges or the grant of security interests, mortgages or other Liens on any assets.
6C. TERRORISM SANCTION REGULATIONS. The Company will not and will not permit any Subsidiary to (i) become a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order, unless such description or designation is then being contested in good faith by appropriate proceedings, or (ii) knowingly engage in any dealings or transactions, except to provide electricity to any APS customer, with any such Person.
7. EVENTS OF DEFAULT.
7A. ACCELERATION. If on or after the Series A Closing and so long thereafter as any Note is outstanding and unpaid, any of the following events shall occur and be continuing for any reason whatsoever (and whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise):
(i) the Company defaults in the payment of any principal of, or Yield-Maintenance Amount payable with respect to, any Note when the same shall become due, either by the terms thereof or otherwise as herein provided; or
(ii) the Company defaults in the payment of any interest on any Note for more than three Business Days after the date due; or
(iii) the Company or APS defaults in any payment of principal of or interest on any other Debt or any Derivative Obligation (in either case which is outstanding in a principal amount exceeding $25,000,000) and such default shall continue beyond any period of grace provided with respect thereto, or the Company or APS fails to perform or observe any other agreement, term or condition contained in any agreement under which any such Debt or Derivative Obligation is created and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument and the effect of such failure is to cause, or to permit the holder or holders of such Debt or Derivative Obligation (or a trustee on behalf of such holder or holders) to accelerate, or permit the acceleration of the maturity of, such Debt or Derivative Obligation; or
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(iv) any representation or warranty made by the Company herein or by the Company or any of its officers in any certificate furnished in connection with or pursuant to this Agreement shall be false in any material respect on the date as of which made; or
(v) the Company fails to perform or observe any term, covenant or agreement contained in paragraph 5G, 5H or 6; or
(vi) the Company fails to perform or observe any other term, covenant, agreement or condition contained herein (other than those covered by clauses (i) or (ii) above) and such failure shall not be remedied within 30 days after notice thereof has been given to the Company by the Required Holders; or
(vii) the Company or any Significant Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; or
(viii) an involuntary case or other proceeding shall be commenced against the Company or any Significant Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed or unstayed for a period of 60 days; or an order for relief shall be entered against the Company or any Significant Subsidiary under the federal bankruptcy laws as now or hereafter in effect; or
(ix) a final judgment in an amount in excess of $25,000,000 (excluding any such judgments to the extent a solvent insurer has acknowledged liability therefor in writing) is rendered against the Company or APS and, within 45 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 45 days after the expiration of any such stay, such judgment is not discharged; or
(x) any ERISA Affiliate shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any ERISA Affiliate, any plan administrator or any combination of the foregoing which could cause one or more ERISA Affiliates to incur a liability in excess of $25,000,000; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan which could cause one or more ERISA Affiliates to incur a liability in excess of $25,000,000 or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree
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adjudicating that any Material Plan must be terminated which could cause one or more ERISA Affiliates to incur a liability in excess of $25,000,000; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c) (5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more ERISA Affiliates to incur a current payment obligation in excess of $25,000,000; or
(xi) any Change in Control shall occur;
then (a) if such event is an Event of Default specified in clause (i) or (ii) of this paragraph 7A, any holder of any Note (other than the Company or any of its Subsidiaries or Affiliates) may at its option, by notice in writing to the Company, declare all of the Notes held by such holder to be, and all of the Notes held by such holder shall thereupon be and become, immediately due and payable at par together with interest accrued thereon, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, (b) if such event is an Event of Default specified in clause (vii) or
(viii) of this paragraph 7A with respect to the Company, all of the Notes at the time outstanding shall automatically become immediately due and payable at par together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company, and (c) if such event is any Event of Default other than as specified in preceding clause
(b), the Required Holder(s) of the Notes may at its or their option by notice in writing to the Company, declare all of the Notes to be, and all of the Notes shall thereupon be and become, immediately due and payable together with interest accrued thereon and together with the Yield-Maintenance Amount, if any, with respect to each Note, without presentment, demand, protest or notice of any kind, all of which are hereby waived by the Company.
The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of the Yield-Maintenance Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.
7B. RESCISSION OF ACCELERATION. At any time after any or all of the Notes shall have been declared immediately due and payable pursuant to paragraph 7A, the Required Holder(s) may, by notice in writing to the Company, rescind and annul such declaration and its consequences if (i) the Company shall have paid all overdue interest on the Notes, the principal of and Yield-Maintenance Amount, if any, payable with respect to any Notes which have become due otherwise than by reason of such declaration, and interest on such overdue interest and overdue principal and Yield Maintenance Amount at the rate specified in the Notes, (ii) the Company shall not have paid any amounts which have become due solely by reason of such declaration, (iii) all Events of Default and Defaults, other than non-payment of amounts which have become due solely by reason of such declaration, shall have been cured or waived pursuant to paragraph 11C, and (iv) no judgment or decree shall have been entered for the payment of any amounts due pursuant to the Notes or this Agreement. No such rescission or annulment shall
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extend to or affect any subsequent Event of Default or Default or impair any right arising therefrom.
7C. NOTICE OF ACCELERATION OR RESCISSION. Whenever any Note shall be declared immediately due and payable pursuant to paragraph 7A or any such declaration shall be rescinded and annulled pursuant to paragraph 7B, the Company shall forthwith give written notice thereof to the holder of each Note at the time outstanding.
7D. OTHER REMEDIES. If any Event of Default or Default shall occur and be continuing, the holder of any Note may proceed to protect and enforce its rights under this Agreement and such Note by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any covenant or other agreement contained in this Agreement or in aid of the exercise of any power granted in this Agreement. No remedy conferred in this Agreement upon the holder of any Note is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to every other remedy conferred herein or now or hereafter existing at law or in equity or by statute or otherwise.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES. Except as disclosed in the Officer's Certificate referred to in paragraph 3C, as of each Closing Day hereunder, the Company represents, covenants and warrants as follows (all references to "SUBSIDIARY" and "SUBSIDIARIES" in this paragraph 8 shall be deemed omitted if the Company has no Subsidiaries at the time the representations herein are made or repeated):
8A. ORGANIZATION. The Company is a corporation duly organized and validly existing in good standing under the laws of the State of Arizona and APS is a corporation duly organized and existing in good standing under the laws of the State of Arizona. Each of the Company and APS has the corporate power to own its respective property and to carry on its respective business as now being conducted. The execution, delivery and performance by the Company of this Agreement and the Notes are within the Company's corporate powers and have been duly authorized by all necessary corporate action.
8B. FINANCIAL STATEMENTS. The Company has furnished Prudential and each Purchaser with the following financial statements, identified by a principal financial officer of the Company or posted on the Company's website on the Internet at www.pinnaclewest.com or on sec.gov/edaux/searches.htm: (i) a balance sheet of the Company and its Consolidated Subsidiaries as at December 31, 2004 and the related statements of income and cash flows of the Company and its Consolidated Subsidiaries for the fiscal year then ended, all reported on by Deloitte & Touche LLP; and (ii) a balance sheet of the Company and its Consolidated Subsidiaries as at September 30, 2005 and the related statements of income and cash flows of the Company and its Consolidated Subsidiaries for the nine months then ended. Such financial statements (including any related schedules and/or notes) or the financial statements most recently provided pursuant to Section 5A(i) and (ii) of this Agreement as of the date this representation is made or repeated, fairly present in all material respects the financial position and results of operations of the Company and its Consolidated Subsidiaries as at the end of, and for, the applicable fiscal year or fiscal quarter, as the case may be, in accordance with GAAP, except as disclosed therein and subject, as to interim statements, to changes resulting from audits
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and year-end adjustments. Except as disclosed in the SEC Reports or by means of a letter delivered to Prudential and each Purchaser prior to any Closing Day, 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 since the end of the most recent fiscal quarter for which financial statements have been furnished at the time of an Acceptance relating to the Notes to be purchased.
8C. ACTIONS PENDING. Except as disclosed in the SEC Reports or by means of a letter delivered to the Purchasers prior to any Closing Day, there is no action, suit or proceeding pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries, by or before any court, arbitrator or administrative or governmental body in which there is a reasonable possibility of an adverse decision which is reasonably 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. There is no action, suit or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries which purports to affect the validity or enforceability of this Agreement or any Note.
8D. OUTSTANDING INDEBTEDNESS. Neither the Company nor any of its Subsidiaries has outstanding any Indebtedness except as permitted by paragraph 6A. There exists no default under the provisions of any instrument evidencing such Debt which is outstanding in a principal amount exceeding $25,000,000 or of any agreement relating thereto.
8E. TITLE TO PROPERTIES. The Company and APS have good and marketable title in fee simple to their respective properties and assets, including the properties and assets reflected in the most recent audited balance sheet referred to in paragraph 8B, except any such assets held pursuant to any arrangement accounted for as a capital lease or by any entity consolidated into such balance sheet as a variable interest entity, subject to (i) assets disposed of in the ordinary course of business since December 31, 2004; (ii) any defects in or encumbrances on title of the respective lessors or grantors of easements or rights-of-way pursuant to which APS has installed transmission and distribution lines; and (iii) other liens, encumbrances, or defects, none of which, individually or in the aggregate, materially interfere with the business or operations of the Company and its Subsidiaries taken as a whole. The representation in the foregoing sentence is subject to the following qualifications: (a) APS is the owner of the rights conferred upon it by the leases from the Navajo Tribe relating to the sites on which the Navajo Plant and the Four Corners Plant are situated and no representation is made with respect to the enforceability of such leases against the Navajo Tribe; and (b) certain defects in the leases of the Company and APS may exist which, together with the qualification referred to in clause (a), individually and in the aggregate, are not materially adverse to the financial condition or financial prospects of the Company and its Consolidated Subsidiaries taken as a whole. There are no outstanding shares or other securities convertible into or exchangeable for any shares of common stock of APS which are not held by the Company, nor any outstanding agreements, rights or options to acquire, subscribe for or purchase from APS any shares of its common stock or securities convertible into or exchangeable for shares of its common stock (other than agreements with or rights or options held by the Company). All leases necessary for the conduct of the respective businesses of the Company and APS are valid and subsisting and are in full force and effect, except to the extent qualified in this paragraph 8E and except to the extent that
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the failure of any such lease to be valid and subsisting and in full force and effect would not have a material adverse impact on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries, taken as a whole.
8F. TAXES. The Company and APS have filed all United States Federal income tax returns and all other 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 APS, except to the extent that (i) such taxes are being contested in good faith and by appropriate proceedings and that appropriate reserves for the payment thereof have been maintained by the Company and APS in accordance with GAAP or (ii) the failure to make such filings or such payments is not reasonably 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. The charges, accruals and reserves on the books of the Company and APS in respect of taxes or other governmental charges are, in the opinion of the Company, adequate.
8G. CONFLICTING AGREEMENTS AND OTHER MATTERS. Neither the execution nor delivery of this Agreement or the Notes, nor the offering, issuance and sale of the Notes, nor fulfillment of nor compliance with the terms and provisions hereof and of the Notes will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under, or result in any violation of, or (except as provided for or permitted herein) result in the creation of any Lien upon any of the properties or assets of the Company or any of its Significant Subsidiaries pursuant to, the charter or by-laws of the Company or any of its Significant Subsidiaries, any award of any arbitrator or any agreement (including any agreement with stockholders), instrument, order, judgment, decree, statute, law, rule or regulation to which the Company or any of its Significant Subsidiaries is subject. Neither the Company nor any of its Subsidiaries is a party to, or otherwise subject to any provision contained in, any instrument evidencing Indebtedness of the Company or such Subsidiary, any agreement relating thereto or any other contract or agreement (including its charter) which limits the amount of, or otherwise imposes restrictions on the incurring of, Debt of the Company of the type to be evidenced by the Notes except as set forth in the agreements listed in Schedule 8G attached hereto.
8H. OFFERING OF NOTES. Neither the Company nor any agent acting on its behalf has, directly or indirectly, offered the Notes for sale to, or solicited any offers to buy the Notes from, or otherwise approached or negotiated with respect thereto with, any Person other than institutional investors, and neither the Company nor any agent acting on its behalf has taken or will take any action which would subject the issuance or sale of the Notes to the provisions of
Section 5 of the Securities Act or to the provisions of any securities or Blue Sky law of any applicable jurisdiction.
8I. USE OF PROCEEDS. The proceeds of the Series A Notes will be used for general corporate purposes (which purposes will be for some lawful object within the corporate purposes of the Company, compatible with the public interest, and reasonably necessary or appropriate for such purposes), including the repayment at maturity of the $300,000,000 aggregate principal amount of 6.40% Notes due April 1, 2006. None of the proceeds of the sale of any Notes will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "MARGIN STOCK" as defined in Regulation U (12 CFR Part 221) of the Board of Governors of the Federal Reserve System ("margin stock") or for the
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purpose of maintaining, reducing or retiring any Indebtedness which was originally incurred to purchase or carry any stock that is then currently a margin stock or for any other purpose which might constitute the purchase of such Notes a "purpose credit" within the meaning of such Regulation U or Regulation T of the Board of Governors of the Federal Reserve System, unless the Company shall have delivered to the Purchaser which is purchasing such Notes, on the Closing Day for such Notes, an opinion of counsel satisfactory to such Purchaser stating that the purchase of such Notes does not constitute a violation of such Regulation U or Regulation T. Neither the Company nor any agent acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation T, Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Exchange Act, in each case as in effect now or as the same may hereafter be in effect.
8J. ERISA. No accumulated funding deficiency (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, exists with respect to any Plan (other than a Multiemployer Plan). No liability to the PBGC has been or is expected by the Company or any ERISA Affiliate to be incurred with respect to any Plan (other than a Multiemployer Plan) by the Company, any Subsidiary or any ERISA Affiliate which is or would be materially adverse to the financial condition or financial prospects of the Company and its Consolidated Subsidiaries taken as a whole. Neither the Company, any Subsidiary nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability under Title IV of ERISA with respect to any Multiemployer Plan which is or would be materially adverse to the financial condition or financial prospects of the Company and its Consolidated Subsidiaries taken as a whole. The execution and delivery of this Agreement and the issuance and sale of the Notes will be exempt from or will not involve any transaction which is subject to the prohibitions of section 406 of ERISA and will not involve any transaction in connection with which a penalty could be imposed under section 502(i) of ERISA or a tax could be imposed pursuant to section 4975 of the Code. The representation by the Company in the next preceding sentence is made in reliance upon and subject to the accuracy of the representation of each Purchaser in paragraph 9B as to the source of funds to be used by it to purchase any Notes.
8K. GOVERNMENTAL CONSENT. Neither the nature of the Company or of any Subsidiary, nor any of their respective businesses or properties, nor any relationship between the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offering, issuance, sale or delivery of the Notes is such as to require any authorization, consent, approval, exemption or any action by or notice to or filing with any court or administrative or governmental or regulatory body (other than routine filings after the Closing Day for any Notes with the Securities and Exchange Commission and/or state Blue Sky authorities) in connection with the execution and delivery of this Agreement, the offering, issuance, sale or delivery of the Notes or fulfillment of or compliance with the terms and provisions hereof or of the Notes.
8L. COMPLIANCE WITH ENVIRONMENTAL AND OTHER LAWS. Except as described in the SEC Reports or by means of a letter delivered to the Purchasers prior to any Closing Day, the Company and its Significant Subsidiaries and all of their respective properties and facilities comply in all respects with all federal, state, local and regional statutes, laws, ordinances and judicial or administrative orders, judgments, rulings and regulations, including those relating to protection of the environment except, in any such case, where (i) the necessity of compliance is being contested in good faith by appropriate proceedings or (ii) failure to comply is not
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reasonably likely to result in a material adverse effect on the financial condition or financial prospects of the Company and its Consolidated Subsidiaries taken as a whole.
8M. FOREIGN ASSETS CONTROL REGULATIONS, ETC. (i) Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.
(i) Neither the Company nor any Subsidiary (a) is a Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti Terrorism Order or (b) knowingly engages in any dealings or transactions with any such Person, except to provide electricity to any APS customer. The Company and its Subsidiaries are in compliance, in all material respects, with the USA Patriot Act.
(ii) No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977, as amended, assuming in all cases that such Act applies to the Company.
8N. PERMITS AND OTHER OPERATING RIGHTS. Except as described in the SEC Reports or by means of a letter delivered to the Purchasers prior to any Closing Day, each of the Company and APS has all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, if the failure to hold any such governmental licenses, authorizations, consents and approvals is reasonably 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.
8O. UTILITY COMPANY STATUS. The Company is a "holding company" as such term is defined in the Public Utility Holding Company Act of 2005 ("PUHCA 2005"). Pursuant to PUHCA 2005, the Company is subject to the limited jurisdiction of the Federal Energy Regulatory Commission ("FERC"), and any State commission with jurisdiction to regulate a public utility company in the Company's holding company system, with respect to access to books and records of the Company and its subsidiaries and affiliates. The Company is a "public utility", as such term is defined in the Federal Power Act, as amended ("FPA") and subject to FERC regulation under the FPA. The Company has obtained blanket authority from FERC under Section 204 of the FPA to issue securities and assume liabilities, and such authorization remains in full force and effect.
8P. INVESTMENT COMPANY STATUS. 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.
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8Q. DISCLOSURE. Neither this Agreement nor any other document, certificate or statement furnished to any Purchaser by or on behalf of the Company in connection herewith (including without limitation the Company's SEC Reports) contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. There is no fact peculiar to the Company or any of its Subsidiaries which materially adversely affects or in the future may (so far as the Company can now foresee) materially adversely affect the financial condition or financial prospects of the Company and its Consolidated Subsidiaries taken as a whole and which has not been set forth in this Agreement or in the other documents, certificates and statements furnished to each Purchaser by or on behalf of the Company prior to the date hereof or any Closing Day (including without limitation the Company's SEC Reports) in connection with the transactions contemplated hereby.
8R. RULE 144A. The Notes are not of the same class as securities of the Company, if any, listed on a national securities exchange, registered under
Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system.
8S. HOSTILE TENDER OFFERS. None of the proceeds of the sale of any Notes will be used to finance a Hostile Tender Offer.
9. REPRESENTATIONS OF THE PURCHASERS.
Each Purchaser represents as follows:
9A. NATURE OF PURCHASE. Such Purchaser is not acquiring the Notes purchased by it hereunder with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act, provided that the disposition of such Purchaser's property shall at all times be and remain within its control.
9B. SOURCE OF FUNDS. At least one of the following statements is an accurate representation as to each source of funds (the "SOURCE") to be used by such Purchaser to pay the purchase price of the Notes to be purchased by such Purchaser hereunder:
(i) the Source is an "insurance company general account" (as the term is defined in the United States Department of Labor's Prohibited Transaction Exemption ("PTE") 95-60) in respect of which the reserves and liabilities (as defined by the annual statement for life insurance companies approved by the National Association of Insurance Commissioners (the "NAIC ANNUAL STATEMENT")) for the general account contract(s) held by or on behalf of any employee benefit plan together with the amount of the reserves and liabilities for the general account contract(s) held by or on behalf of any other employee benefit plans maintained by the same employer (or affiliate thereof as defined in PTE 95-60) or by the same employee organization in the general account do not exceed 10% of the total reserves and liabilities of the general account (exclusive of separate account liabilities) plus surplus as set forth in the NAIC Annual Statement filed with such Purchaser's state of domicile; or
(ii) the Source is a separate account that is maintained solely in connection with such Purchaser's fixed contractual obligations under which the amounts payable, or
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credited, to any employee benefit plan (or its related trust) that has any interest in such separate account (or to any participant or beneficiary of such plan (including any annuitant)) are not affected in any manner by the investment performance of the separate account; or
(iii) the Source is either (a) an insurance company pooled separate account, within the meaning of PTE 90-1 or (b) a bank collective investment fund, within the meaning of the PTE 91-38 and, except as disclosed by such Purchaser to the Company in writing pursuant to this clause (iii), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or
(iv) the Source constitutes assets of an "investment fund" (within the meaning of Part V of PTE 84-14 (the "QPAM EXEMPTION")) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (a) the identity of such QPAM and (b) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this clause (iv); or
(v) the Source constitutes assets of a "plan(s)" (within the meaning of Section IV of PTE 96-23 (the "INHAM EXEMPTION")) managed by an "in-house asset manager" or "INHAM" (within the meaning of Part IV of the INHAM exemption), the conditions of Part I(a), (g) and (h) of the INHAM Exemption are satisfied, neither the INHAM nor a person controlling or controlled by the INHAM (applying the definition of "control" in Section IV(h) of the INHAM Exemption) owns a 5% or more interest in the Company and (a) the identity of such INHAM and (b) the name(s) of the employee benefit plan(s) whose assets constitute the Source have been disclosed to the Company in writing pursuant to this clause (v); or
(vi) the Source is a governmental plan; or
(vii) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this clause (vii) prior to the Acceptance Day for such Notes; or
(viii) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA.
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As used in this paragraph 9B, the terms "employee benefit plan," "governmental plan," and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA.
9C. ACCREDITED INVESTOR. Each Purchaser is an "accredited investor" (as such term is defined under Regulation D promulgated under the Securities Act, or any successor law, rule or regulation).
10. DEFINITIONS; ACCOUNTING MATTERS. For the purpose of this Agreement, the terms defined in paragraphs 10A and 10B (or within the text of any other paragraph) shall have the respective meanings specified therein and all accounting matters shall be subject to determination as provided in paragraph 10C.
10A. YIELD-MAINTENANCE TERMS.
"CALLED PRINCIPAL" shall mean, with respect to any Note, the principal of such Note that is to be prepaid pursuant to paragraph 4B or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires.
"DESIGNATED SPREAD" shall mean 0.50% in the case of each Series A Note and 0% in the case of each Note of any other Series unless the Confirmation of Acceptance with respect to the Notes of such Series specifies a different Designated Spread in which case it shall mean, with respect to each Note of such Series, the Designated Spread so specified.
"DISCOUNTED VALUE" shall mean, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (as converted to reflect the periodic basis on which interest on such Note is payable, if payable other than on a semi-annual basis) equal to the Reinvestment Yield with respect to such Called Principal.
"REINVESTMENT YIELD" shall mean, with respect to the Called Principal of any Note, the Designated Spread over the yield to maturity implied by (i) the yields reported as of 10:00 a.m. (New York City local time) on the Business Day next preceding the Settlement Date with respect to such Called Principal for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date on the Treasury Yield Monitor page of Standard & Poor's MMS - Treasury Market Insight (or, if Standard & Poor's shall cease to report such yields in MMS - Treasury Market Insight or shall cease to be Prudential Capital Group's customary source of information for calculating yield-maintenance amounts on privately placed notes, then such source as is then Prudential Capital Group's customary source of such information), or if such yields shall not be reported as of such time or the yields reported as of such time shall not be ascertainable, (ii) the Treasury Constant Maturity Series yields reported, for the latest day for which such yields shall have been so reported as of the Business Day next preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15(519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the
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Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield shall be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between yields reported for various maturities. The Reinvestment Yield shall be rounded to that number of decimal places as appears in the coupon of the applicable Note.
"REMAINING AVERAGE LIFE" shall mean, with respect to the Called Principal of any Note, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) each Remaining Scheduled Payment of such Called Principal (but not of interest thereon) by (b) the number of years (calculated to the nearest one-twelfth year) which will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.
"REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due on or after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date.
"SETTLEMENT DATE" shall mean, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to paragraph 4B or is declared to be immediately due and payable pursuant to paragraph 7A, as the context requires.
"YIELD-MAINTENANCE AMOUNT" shall mean, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Called Principal of such Note over the sum of (i) such Called Principal plus (ii) interest accrued thereon as of (including interest due on) the Settlement Date with respect to such Called Principal. The Yield-Maintenance Amount shall in no event be less than zero.
10B. OTHER TERMS.
"ACCEPTANCE" shall have the meaning specified in paragraph 2F.
"ACCEPTANCE DAY" shall have the meaning specified in paragraph 2F.
"ACCEPTANCE WINDOW" shall have the meaning specified in paragraph 2F.
"ACCEPTED NOTE" shall have the meaning specified in paragraph 2F.
"ADDITIONAL COVENANT" shall mean any affirmative or negative covenant or similar restriction applicable to the Company or any Subsidiary (regardless of whether such provision is labeled or otherwise characterized as a covenant) the subject matter of which either (i) is similar to that of any covenant in paragraph 5 or 6 of this Agreement, or related definitions in paragraph 10 of this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive than those set forth herein or more beneficial to the holder or holders of the Bank Obligations created or evidenced by the document in which such covenant or similar restriction is contained (and such covenant or similar restriction shall be deemed an Additional Covenant only to the extent that is more restrictive or more beneficial) or (ii) is different from
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the subject matter of any covenants in paragraph 5 or 6 of this Agreement, or related definitions in paragraph 10 of this Agreement.
"ADDITIONAL DEFAULT" shall mean any provision contained in any document or instrument creating or evidencing Bank Obligations which permits the holder or holders of any of the Bank Obligations to accelerate (with the passage of time or giving of notice or both) the maturity thereof or otherwise requires the Company or any Subsidiary to purchase such Bank Obligations prior to the stated maturity thereof and which either (i) is similar to any Default or Event of Default contained in paragraph 7 of this Agreement, or related definitions in paragraph 10 of this Agreement, but contains one or more percentages, amounts or formulas that is more restrictive or has a shorter grace period than those set forth herein or is more beneficial to the holders of such other Bank Obligations (and such provision shall be deemed an Additional Default only to the extent that it is more restrictive, has a shorter grace period or is more beneficial) or (ii) is different from the subject matter of any Default or Event of Default contained in paragraph 7 of this Agreement, or related definitions in paragraph 10 of this Agreement.
"AFFILIATE" shall mean any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the Company, except a Subsidiary. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise.
"ANTI-TERRORISM ORDER" shall mean Executive Order No. 13224 of September 24, 2001, Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit or Support Terrorism, 66 U.S. Fed. Reg. 49,079
(2001), as amended.
"APS" shall mean Arizona Public Service Company, an Arizona corporation.
"AUTHORIZED OFFICER" shall mean (i) in the case of the Company, its chief executive officer, its chief financial officer, its chief operating officer, president, any vice president, treasurer or controller of the Company designated as an "Authorized Officer" of the Company for the purpose of this Agreement in a certificate provided for in paragraph 3A(iii) or in an Officer's Certificate executed by any one of such officers and delivered to Prudential from time to time, and (ii) in the case of Prudential, any officer of Prudential designated as its "Authorized Officer" in the Purchaser Schedule or any officer of Prudential designated as its "Authorized Officer" for the purpose of this Agreement in a certificate executed by one of its Authorized Officers. Any action taken under this Agreement on behalf of the Company by any individual who on or after the date of this Agreement shall have been an Authorized Officer of the Company and whom Prudential in good faith believes to be an Authorized Officer of the Company at the time of such action shall be binding on the Company even though such individual shall have ceased to be an Authorized Officer of the Company, and any action taken under this Agreement on behalf of Prudential by any individual who on or after the date of this Agreement shall have been an Authorized Officer of Prudential and whom the Company in good faith believes to be an Authorized Officer of Prudential at the time of such action shall be binding on Prudential even though such individual shall have ceased to be an Authorized Officer of Prudential.
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"AVAILABLE FACILITY AMOUNT" shall have the meaning specified in paragraph 2A.
"BANK AGREEMENT" shall mean that certain Amended and Restated Credit Agreement dated as of December 9, 2005 among the Company, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents party thereto, as amended, restated, supplemented, modified, replaced or refinanced from time to time.
"BANK OBLIGATIONS" means the "Obligations," as such term is defined in the Bank Agreement on the date hereof.
"BENEFIT ARRANGEMENT" shall mean at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any ERISA Affiliate.
"BUSINESS DAY" shall mean any day other than (i) a Saturday or a Sunday, (ii) a day on which commercial banks in New York City or Phoenix, Arizona are required or authorized to be closed and (iii) for purposes of paragraph 2C hereof only, a day on which Prudential is not open for business.
"CANCELLATION DATE" shall have the meaning specified in paragraph 2I(3).
"CANCELLATION FEE" shall have the meaning specified in paragraph 2I(3).
"CAPITAL LEASE OBLIGATION" shall mean any rental obligation which, under GAAP, is required to be capitalized on the books of the Company or any Subsidiary, taken at the amount thereof accounted for as indebtedness (net of interest expenses) in accordance with such principles.
"CHANGE IN CONTROL" shall mean (i) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Exchange Act) of thirty percent (30%) or more of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Company; or (ii) the majority of the board of directors of the Company fails to consist of Continuing Directors (other than due to death or disability).
"CLOSING DAY" shall mean, with respect to the Series A Notes, the Series A Closing and, with respect to any Accepted Note, the Business Day specified for the closing of the purchase and sale of such Accepted Note in the Request for Purchase of such Accepted Note, provided that (i) if the Company and the Purchasers which are obligated to purchase such Note agree in writing on an earlier Business Day for such closing, the "CLOSING DAY" for such Accepted Note shall be such earlier Business Day, and (ii) if the closing of the purchase and sale of such Accepted Note is rescheduled pursuant to paragraph 2H, the Closing Day for such Accepted Note, for all purposes of this Agreement except references to "original Closing Day" in paragraph 2I(2), shall mean the Rescheduled Closing Day with respect to such Accepted Note.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
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"CONFIRMATION OF ACCEPTANCE" shall have the meaning specified in paragraph 2F.
"CONSOLIDATED CAPITALIZATION" means the sum of (i) Consolidated Debt and (ii) Consolidated Net Worth.
"CONSOLIDATED DEBT" means at any date the Debt of the Company and its Consolidated Subsidiaries determined on a consolidated basis as of such date.
"CONSOLIDATED NET WORTH" means the sum of (i) 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) (ii) the amount of the consolidated surplus, whether capital or earned, of the Company, determined in accordance with GAAP 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 FASB 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 FASB 133).
"CONSOLIDATED SUBSIDIARY" shall mean 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.
"CONTINUING DIRECTOR" shall mean, with respect to any Person as of any date of determination, any member of the board of directors of such Person who
(i) was a member of such board of directors on the date of this Agreement, or
(ii) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board at the time of such nomination or election.
"DEBT" shall mean 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 Debt secured by a Lien on any asset of such Person, to the extent such Debt 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 Debt.
"DEFAULT RATE" shall mean, for any Note at any time upon the occurrence of an Event of Default and until such Event of Default has been cured or waived in writing, a rate of interest per annum from time to time equal to the lesser of (i) the maximum rate permitted by applicable law and (ii) the greater of (a) 2% over the coupon rate for such Note in effect
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immediately prior to such Event of Default and (b) 2.0% over the rate of interest publicly announced by The Bank of New York from time to time in New York City as its Prime Rate.
"DELAYED DELIVERY FEE" shall have the meaning specified in paragraph 2I(2).
"DERIVATIVE OBLIGATIONS" of any Person shall mean all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. For the purposes of paragraph 7A(iii) hereof, the amount of any Derivative Obligation shall be the amount of the net termination liability of the Company or APS thereunder.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended.
"ERISA AFFILIATE" shall mean any corporation which is a member of the same controlled group of corporations as the Company within the meaning of section 414(b) of the Code, or any trade or business which is under common control with the Company within the meaning of section 414(c) of the Code.
"EVENT OF DEFAULT" shall mean any of the events specified in paragraph 7A, provided that there has been satisfied any requirement in connection with such event for the giving of notice, or the lapse of time, or the happening of any further condition, event or act, and "DEFAULT" shall mean an event which but for the lapse of time or the giving of notice, or both, would constitute an Event of Default.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"FACILITY" shall have the meaning specified in paragraph 2A.
"GAAP" shall have the meaning set forth in paragraph 10C.
"GUARANTEE" shall mean, as to any Person, any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person or in any manner providing for the payment of any Debt of any other Person or otherwise protecting the holder of such Debt 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.
"HEDGE TREASURY NOTE(S)" shall mean, with respect to any Accepted Note, the United States Treasury Note or Notes whose duration (as determined by Prudential) most closely matches the duration of such Accepted Note.
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"HOSTILE TENDER OFFER" shall mean, with respect to the use of proceeds of any Note, any offer to purchase, or any purchase of, shares of capital stock of any corporation or equity interests in any other entity, or securities convertible into or representing the beneficial ownership of, or rights to acquire, any such shares or equity interests, if such shares, equity interests, securities or rights are of a class which is publicly traded on any securities exchange or in any over-the-counter market, other than purchases of such shares, equity interests, securities or rights representing less than 5% of the equity interests or beneficial ownership of such corporation or other entity for portfolio investment purposes, and such offer or purchase has not been duly approved by the board of directors of such corporation or the equivalent governing body of such other entity prior to the date on which the Company makes the Request for Purchase of such Note.
"INCLUDING" shall mean, unless the context clearly requires otherwise, "including without limitation".
"INDEBTEDNESS" shall mean as to any Person at any date (without duplication) indebtedness created, issued, incurred or assumed by such Person for borrowed money or evidenced by bonds, debentures, notes or similar instruments.
"INHAM EXEMPTION" shall have the meaning set forth in paragraph 9B.
"INSTITUTIONAL INVESTOR" shall mean (i) any original purchaser of a Note, (ii) any holder of a Note holding more than 10% of the aggregate principal amount of the Notes then outstanding, and (iii) any bank, trust company, savings and loan association or other financial institution, any pension plan, any registered investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form.
"ISSUANCE FEE" shall have the meaning specified in paragraph 2I(1).
"ISSUANCE PERIOD" shall have the meaning specified in paragraph 2B.
"LIEN" shall mean, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest in respect of such asset. For purposes of this Agreement, the Company or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset.
"MATERIAL PLAN" shall mean at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $25,000,000.
"MULTIEMPLOYER PLAN" shall mean any Plan which is a "multiemployer plan" (as such term is defined in section 4001(a)(3) of ERISA).
"NAIC ANNUAL STATEMENT" shall have the meaning set forth in paragraph 9B.
"NOTES" shall have the meaning specified in paragraph 1.
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"OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of the Company by an Authorized Officer of the Company.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.
"PERSON" shall mean and include an individual, a partnership, a joint venture, a limited liability company, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.
"PLAN" shall mean any employee pension benefit plan (as such term is defined in section 3 of ERISA) which is or has been established or maintained, or to which contributions are or have been made, by the Company or any ERISA Affiliate.
"PRUDENTIAL" shall mean Prudential Investment Management, Inc.
"PRUDENTIAL AFFILIATE" shall mean (i) any corporation or other entity controlling, controlled by, or under common control with, Prudential either directly or through subsidiaries and (ii) any managed account or investment fund which is managed by Prudential or a Prudential Affiliate described in clause (i) of this definition. For purposes of this definition, the terms "control", "controlling" and "controlled" shall mean the ownership, directly or through subsidiaries, of a majority of a corporation's or other entity's Voting Stock or equivalent voting securities or interests.
"PURCHASERS" shall mean The Prudential Insurance Company of America, Pruco Life Insurance Company, American Skandia Life Assurance Corporation, Prudential Retirement Insurance and Annuity Company, RGA Reinsurance Company, Union Security Insurance Company and American Security Insurance Company with respect to the Series A Notes and, with respect to any other Accepted Notes, Prudential and/or the Prudential Affiliate(s), which are purchasing such Accepted Notes.
"PWEC" shall mean Pinnacle West Energy Corporation, an Arizona corporation, and its successors.
"QPAM EXEMPTION" shall have the meaning set forth in paragraph 9B.
"REQUEST FOR PURCHASE" shall have the meaning specified in paragraph 2D.
"REQUIRED HOLDER(S)" shall mean the holder or holders of at least 66-2/3% of the aggregate principal amount of the Notes outstanding at such time.
"RESCHEDULED CLOSING DAY" shall have the meaning specified in paragraph 2H(3).
"RESPONSIBLE OFFICER" shall mean the chief executive officer, chief operating officer, chief financial officer, chief accounting officer, controller or treasurer of the Company or any other officer of the Company involved principally in its financial administration or its controllership function.
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"SEC" shall mean the Securities and Exchange Commission (or any governmental body or agency succeeding to the function of the Securities and Exchange Commission.)
"SEC REPORTS" shall mean (i) the Company's Annual Report on Form 10-K for the year ended December 31, 2004; the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005; the Company's Current Reports on Form 8-K filed January 28, March 1, March 29, April 13, April 26, May 2, May 19, May 25, June 17, June 22, July 25, July 27, August 16, August 18, August 30, September 22, October 13, October 18, October 26, October 27, November 4, December 6, December 15, and December 22, 2005 and January 5, January 9, January 10, January 26, February 1, February 3, and February 24, 2006, and (ii) as to any Accepted Notes (other than the Series A Notes), any future filings made by the Company with the SEC under Section
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the Acceptance Day with respect to such Accepted Notes.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"SERIES" shall have the meaning specified in paragraph 1.
"SERIES A CLOSING" shall have the meaning specified in paragraph 2H(1).
"SERIES A NOTES" shall have the meaning specified in paragraph 2H(1).
"SIGNIFICANT HOLDER" shall mean (i) Prudential, so long as Prudential or any Prudential Affiliate shall hold (or be committed under this Agreement to purchase) any Note, or (ii) any other holder of at least 5% of the aggregate principal amount of the Notes from time to time outstanding.
"SIGNIFICANT SUBSIDIARY" shall mean means APS and each other Subsidiary of the Company (other than SunCor Development Company and any of its Subsidiaries) whose consolidated assets exceed 10% of the consolidated assets of the Company and its Consolidated Subsidiaries.
"SUBSIDIARY" shall mean, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Company.
"TRANSFEREE" shall mean any direct or indirect transferee of all or any part of any Note purchased by any Purchaser under this Agreement.
"UNFUNDED LIABILITIES" shall mean, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess
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represents a potential liability of an ERISA Affiliate to the PBGC or any other Person under Title IV of ERISA.
"USA PATRIOT ACT" shall mean United States Public Law 107-56, Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.
"VOTING STOCK" shall mean, with respect to any corporation, any shares of stock of such corporation whose holders are entitled under ordinary circumstances to vote for the election of directors of such corporation (irrespective of whether at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).
10C. ACCOUNTING PRINCIPLES, TERMS AND DETERMINATIONS. All references in this Agreement to "GAAP" shall be deemed to refer to generally accepted accounting principles in effect in the United States at the time of application thereof. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all determinations with respect to accounting matters hereunder shall be made, and all unaudited financial statements and certificates and reports as to financial matters required to be furnished hereunder shall be prepared, in accordance with GAAP applied on a basis consistent (except for changes concurred in by the Company's independent public accountants) with the most recent audited financial statements delivered pursuant to clause (ii) of paragraph 5A or, if no such statements have been so delivered, the most recent audited financial statements referred to in clause (i) of paragraph 8B.
11. MISCELLANEOUS.
11A. NOTE PAYMENTS. The Company agrees that, so long as any Purchaser shall hold any Note, it will make payments of principal of, interest on, and any Yield-Maintenance Amount payable with respect to, such Note, which comply with the terms of this Agreement, by wire transfer of immediately available funds for credit (not later than 11:00 a.m., New York City local time, on the date due) to the account or accounts of such Purchaser, if any, as are specified in the Purchaser Schedule attached hereto or to the applicable Confirmation of Acceptance, or, in the case of any Purchaser not named in such Purchaser Schedule or any Purchaser wishing to change the account specified for it in the Purchaser Schedule, such account or accounts in the United States as such Purchaser may from time to time designate in writing, notwithstanding any contrary provision herein or in any Note with respect to the place of payment. Each Purchaser agrees that, before disposing of any Note, it will make a notation thereon (or on a schedule attached thereto) of all principal payments previously made thereon and of the date to which interest thereon has been paid. The Company agrees to afford the benefits of this paragraph 11A to any Transferee which shall have made the same agreement as the Purchasers have made in this paragraph 11A. No holder shall be required to present or surrender any Note or make any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, the applicable holder shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office.
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11B. EXPENSES. The Company agrees, whether or not the transactions contemplated hereby shall be consummated, to pay, and save Prudential, each Purchaser and any Transferee harmless against liability for the payment of, all reasonable out-of-pocket expenses arising in connection with such transactions, consisting of the following:
(i) (A) all stamp and documentary taxes and similar charges and (B) costs of obtaining a private placement number from S&P for the Notes, in each case as a result of the execution and delivery of this Agreement or the issuance of the Notes;
(ii) reasonable document production and duplication charges and the fees and reasonable expenses of any special counsel engaged by Prudential or such Purchaser or such Transferee in connection with (A) the execution and delivery of this Agreement and the transactions contemplated hereby and each issuance of Notes hereunder and (B) any subsequent proposed waiver, amendment or modification of, or proposed consent under, this Agreement, whether or not such proposed action shall be effected or granted;
(iii) the costs and expenses, including attorneys' and financial advisory fees, incurred by Prudential or such Purchaser or such Transferee in enforcing (or determining whether or how to enforce) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the transactions contemplated hereby or by reason of Prudential or such Purchaser's or such Transferee's having acquired any Note, including without limitation costs and expenses incurred in any workout, restructuring or renegotiation proceeding or bankruptcy case; and
(iv) any judgment, liability, claim, order, decree, cost, fee, expense, action or obligation incurred in connection with any investigative, administrative or judicial proceeding brought or threatened relating to or resulting from the consummation of the transactions contemplated hereby, including the use of the proceeds of the Notes by the Company except to the extent resulting from the gross negligence or willful misconduct of the payee or any of its affiliates or agents as determined by a court of competent jurisdiction.
The Company will promptly pay or reimburse each Purchaser or holder of a Note (upon demand, in accordance with each such Purchaser's or holder's written instructions) for all fees and costs paid or payable by such Purchaser or holder to the Securities Valuation Office of the National Association of Insurance Commissioners ("SVO") in connection with the initial filing of this Agreement and all related documents and financial information, and all subsequent annual and interim filings of documents and financial information related to this Agreement, with the SVO or any successor organization acceding to the authority thereof.
The obligations of the Company under this paragraph 11B shall survive the transfer of any Note or portion thereof or interest therein by any Purchaser or Transferee and the payment of any Note.
11C. CONSENT TO AMENDMENTS. This Agreement may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be
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performed by it, if the Company shall obtain the written consent to such amendment, action or omission to act, of the Required Holder(s) except that, (i) with the written consent of the holders of all Notes of a particular Series, and if an Event of Default shall have occurred and be continuing, of the holders of all Notes of all Series, at the time outstanding (and not without such written consents), the Notes of such Series may be amended or the provisions thereof waived to change the maturity thereof, to change or affect the principal thereof, or to change or affect the time of payment of, or decrease the rate of, interest on or any Yield-Maintenance Amount payable with respect to the Notes of such Series, (ii) without the written consent of the holder or holders of all Notes at the time outstanding, no amendment to or waiver of the provisions of this Agreement shall change or affect the provisions of paragraph 7A or this paragraph 11C insofar as such provisions relate to proportions of the principal amount of the Notes of any Series, or the rights of any individual holder of Notes, required with respect to any declaration of Notes to be due and payable or with respect to any consent, amendment, waiver or declaration, (iii) with the written consent of Prudential (and not without the written consent of Prudential) the provisions of paragraph 2 may be amended or waived (except insofar as any such amendment or waiver would affect any rights or obligations with respect to the purchase and sale of Notes which shall have become Accepted Notes prior to such amendment or waiver), and (iv) with the written consent of all of the Purchasers which shall have become obligated to purchase Accepted Notes of any Series (and not without the written consent of all such Purchasers), any of the provisions of paragraphs 2 and 3 may be amended or waived insofar as such amendment or waiver would affect only rights or obligations with respect to the purchase and sale of the Accepted Notes of such Series or the terms and provisions of such Accepted Notes. Each holder of any Note at the time or thereafter outstanding shall be bound by any consent authorized by this paragraph 11C, whether or not such Note shall have been marked to indicate such consent, but any Notes issued thereafter may bear a notation referring to any such consent. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein and in the Notes, the term "THIS AGREEMENT" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.
11D. FORM, REGISTRATION, TRANSFER AND EXCHANGE OF NOTES; LOST NOTES. The Notes are issuable as registered notes without coupons in denominations of at least $2,500,000, except as may be necessary to reflect any principal amount not evenly divisible by $2,500,000. The Company shall keep at its principal office a register in which the Company shall provide for the registration of Notes and of transfers of Notes. Upon surrender for registration of transfer of any Note at the principal office of the Company, the Company shall, at its expense, execute and deliver one or more new Notes of like tenor and of a like aggregate principal amount, registered in the name of such transferee or transferees. At the option of the holder of any Note, such Note may be exchanged for other Notes of like tenor and of any authorized denominations, of a like aggregate principal amount, upon surrender of the Note to be exchanged at the principal office of the Company. Whenever any Notes are so surrendered for exchange, the Company shall, at its expense, execute and deliver the Notes which the holder making the exchange is entitled to receive. Each installment of principal payable on each installment date upon each new Note issued upon any such transfer or exchange shall be in the same proportion to the unpaid principal amount of such new Note as the installment of principal payable on such date on the Note surrendered for registration of transfer or exchange bore to the unpaid principal amount of such Note. No reference need be made in any such new Note to any installment or installments of
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principal previously due and paid upon the Note surrendered for registration of transfer or exchange. Every Note surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer duly executed, by the holder of such Note or such holder's attorney duly authorized in writing. Any Note or Notes issued in exchange for any Note or upon transfer thereof shall carry the rights to unpaid interest and interest to accrue which were carried by the Note so exchanged or transferred, so that neither gain nor loss of interest shall result from any such transfer or exchange. Upon receipt of written notice from the holder of any Note of the loss, theft, destruction or mutilation of such Note and, in the case of any such loss, theft or destruction, upon receipt of such holder's unsecured indemnity agreement, or in the case of any such mutilation upon surrender and cancellation of such Note, the Company will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note. Any sale of Notes by a holder will be made in accordance with applicable securities laws. No holder of a Note will sell or otherwise transfer any Note to any Person described or designated in the Specially Designated Nationals and Blocked Persons List of the Office of Foreign Assets Control or in Section 1 of the Anti-Terrorism Order.
11E. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due presentment for registration of transfer, the Company may treat the Person in whose name any Note is registered as the owner and holder of such Note for the purpose of receiving payment of principal of and interest on, and any Yield-Maintenance Amount payable with respect to, such Note and for all other purposes whatsoever, whether or not such Note shall be overdue, and the Company shall not be affected by notice to the contrary. Subject to the preceding sentence, the holder of any Note may from time to time grant participations in all or any part of such Note to any Person on such terms and conditions as may be determined by such holder in its sole and absolute discretion, provided that, the Company shall continue to deal solely and directly with such holder, such holder's rights and obligations hereunder shall remain unchanged, and such holder shall retain the sole right to approve any amendment, modification or waiver of any provision .
11F. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein or made in writing by or on behalf of the Company in connection herewith shall survive the execution and delivery of this Agreement and the Notes, the transfer by any Purchaser of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any Transferee, regardless of any investigation made at any time by or on behalf of any Purchaser or any Transferee. Subject to the preceding sentence, this Agreement, the Notes and each Confirmation of Acceptance embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter.
11G. SUCCESSORS AND ASSIGNS. All covenants and other agreements in this Agreement contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including, without limitation, any Transferee) whether so expressed or not.
11H. INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given independent effect so that if a particular action or condition is prohibited by any one of such covenants, the fact that it would be permitted by an exception to, or otherwise be in compliance
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within the limitations of, another covenant shall not avoid the occurrence of a Default or Event of Default if such action is taken or such condition exists.
11I. NOTICES. All written communications provided for hereunder (other than communications provided for under paragraph 2) shall be sent by first class mail or nationwide overnight delivery service (with charges prepaid) and (i) if to any Purchaser, addressed as specified for such communications in the Purchaser Schedule attached hereto or the Purchaser Schedule attached to the applicable Confirmation of Acceptance (in the case of any Notes issued after the date hereof) or at such other address as any such Purchaser shall have specified to the Company in writing, (ii) if to any other holder of any Note, addressed to it at such address as it shall have specified in writing to the Company, or, if any such holder shall not have so specified an address, then addressed to such holder in care of the last holder of such Note which shall have so specified an address to the Company and (iii) if to the Company, addressed to it at 400 North 5th Street, 19th Floor, Phoenix, Arizona 85004, Attention: Treasurer, provided, however, that any such communication may also, at the option of the Person sending such communication, be delivered by any other means at the applicable address specified above, addressed to the attention of the person designated to receive such notice as provided in this paragraph 11I. Any communication pursuant to paragraph 2 shall be made by the method specified for such communication in paragraph 2, and shall be effective to create any rights or obligations under this Agreement only if, in the case of a telephone communication, an Authorized Officer of the party conveying the information and of the party receiving the information are parties to the telephone call, and in the case of a telecopier communication, the communication is signed by an Authorized Officer of the party conveying the information, addressed to the attention of an Authorized Officer of the party receiving the information, and in fact received at the telecopier terminal the number of which is listed for the party receiving the communication in the Purchaser Schedule or at such other telecopier terminal as the party receiving the information shall have specified in writing to the party sending such information.
11J. PAYMENTS DUE ON NON-BUSINESS DAYS. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or interest on, or Yield-Maintenance Amount payable with respect to, any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day; provided that if the maturity date of any series of the Notes is a date other than a Business Day, then and in such event payment shall be made on the next succeeding Business Day, but shall include the additional days elapsed in the computation of interest payable on such next succeeding Business Day.
11K. SEVERABILITY. Any provision of this Agreement which 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, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
11L. DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Agreement are inserted for convenience only and do not constitute a part of this Agreement.
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11M. SATISFACTION REQUIREMENT. If any agreement, certificate or other writing, or any action taken or to be taken, is by the terms of this Agreement required to be satisfactory to Prudential, any Purchaser, to any holder of Notes or to the Required Holder(s), the determination of such satisfaction shall be made by Prudential, such Purchaser, such holder or the Required Holder(s), as the case may be, in the sole and exclusive judgment (exercised in good faith) of the Person or Persons making such determination.
11N. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF NEW YORK.
11O. SEVERALTY OF OBLIGATIONS. The sales of Notes to the Purchasers are to be several sales, and the obligations of Prudential and the Purchasers under this Agreement are several obligations. No failure by Prudential or any Purchaser to perform its obligations under this Agreement shall relieve any other Purchaser or the Company of any of its obligations hereunder, and neither Prudential nor any Purchaser nor the Company shall be responsible for the obligations of, or any action taken or omitted by, any other such Person hereunder.
11P. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.
11Q. BINDING AGREEMENT. When this Agreement is executed and delivered by the Company and Prudential, it shall become a binding agreement between the Company and Prudential. This Agreement shall also inure to the benefit of each Purchaser which shall have executed and delivered a Confirmation of Acceptance, and each such Purchaser shall be bound by this Agreement to the extent provided in such Confirmation of Acceptance.
11R. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION.
(i) THE COMPANY, PRUDENTIAL AND EACH HOLDER OF NOTES HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION OF ANY CLAIM WHICH IS BASED HEREON, OR ARISES OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR THE OTHER NOTE DOCUMENTS, OR ANY TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE COMPANY, PRUDENTIAL OR THE HOLDERS OF THE NOTES RELATING HERETO OR THERETO. THE COMPANY ACKNOWLEDGES THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR PRUDENTIAL AND EACH PURCHASER TO BECOME A PARTY TO THIS AGREEMENT AND TO PURCHASE NOTES HEREUNDER.
(ii) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT, THE NOTES, THE OTHER NOTE DOCUMENTS OR ANY TRANSACTIONS RELATING HERETO OR THERETO, OR ANY COURSE OF
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CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN), OR ACTIONS OF THE COMPANY, PRUDENTIAL OR THE HOLDERS OF NOTES RELATING HERETO OR THERETO MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND THE COMPANY HEREBY ACCEPTS FOR ITSELF, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY, PRUDENTIAL AND EACH HOLDER OF NOTES HEREBY IRREVOCABLY WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY OBJECTIONS, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS.
11S. CONFIDENTIAL INFORMATION. For the purposes of this paragraph 11S, "CONFIDENTIAL INFORMATION" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary or was obtained pursuant to paragraphs 5A(v) or 5C hereof, provided that such term does not include information that (i) was publicly known, (ii) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (iii) otherwise becomes known to you on a nonconfidential basis from a source other than the Company or any Subsidiary (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 Company or any other person with respect to such information) or (iv) constitutes financial statements delivered to you under paragraph 5A that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (a) your directors, officers, employees and attorneys (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (b) your agents, affiliates, financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this paragraph 11S, (c) any other holder of any Note, (d) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this paragraph 11S), (e) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this paragraph 11S), (f) any federal or state regulatory authority having jurisdiction over you, (g) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (h) any other Person to which such delivery or disclosure may be necessary or appropriate (1) to effect compliance with any law, rule, regulation or order applicable to you,
(2) in response to any subpoena or other legal process, (3) in connection with any litigation to which you are a party or (4) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such
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delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this paragraph 11S as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this paragraph 11S.
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40
\
If you are in agreement with the foregoing, please sign the form of acceptance on the enclosed counterpart of this letter and return the same to the Company, whereupon this letter shall become a binding agreement between the Company and you.
Very truly yours,
PINNACLE WEST CAPITAL
CORPORATION

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

The foregoing Agreement is hereby accepted as of the date first above written.
PRUDENTIAL INVESTMENT
MANAGEMENT, INC.

By:  /s/ Ric E. Abel
    ------------------------------------
     Ric E. Abel
     Vice President	

THE PRUDENTIAL INSURANCE COMPANY
OF AMERICA

By:  /s/ Ric E. Abel
    ------------------------------------
     Ric E. Abel
     Vice President	

PRUCO LIFE INSURANCE COMPANY

By:  /s/ Ric E. Abel
    ------------------------------------
     Ric E. Abel
     Vice President	

SIGNATURE PAGE TO MASTER SHELF AGREEMENT
AMERICAN SKANDIA LIFE ASSURANCE
CORPORATION
By: Prudential Investment Management,
Inc., as investment manager

By: /s/ Ric E. Abel
    ------------------------------------
    Ric E. Abel
    Vice President	

PRUDENTIAL RETIREMENT INSURANCE
AND ANNUITY COMPANY
By: Prudential Investment Management,
Inc., as investment manager

By: /s/ Ric E. Abel
    ------------------------------------
    Ric E. Abel
    Vice President	

RGA REINSURANCE COMPANY
By: Prudential Private Placement
Investors, L.P. (as Investment
Advisor)
By: Prudential Private Placement
Investors, Inc. (as its General
Partner)

By: /s/ Ric E. Abel
    ------------------------------------
    Ric E. Abel
    Vice President	

2
UNION SECURITY INSURANCE COMPANY
By: Prudential Private Placement
Investors, L.P. (as Investment
Advisor)
By: Prudential Private Placement
Investors, Inc. (as its General
Partner)

By: /s/ Ric E. Abel
    ------------------------------------
    Ric E. Abel
    Vice President	

AMERICAN SECURITY INSURANCE
COMPANY
By: Prudential Private Placement
Investors, L.P. (as Investment
Advisor)
By: Prudential Private Placement
Investors, Inc. (as its General
Partner)

By: /s/ Ric E. Abel
    ------------------------------------
    Ric E. Abel
    Vice President	

3
 
PURCHASER SCHEDULE

                                                                                   AGGREGATE PRINCIPAL
                                                                                     AMOUNT OF NOTES           NOTE
                                                                                     TO BE PURCHASED     DENOMINATION(S)
                                                                                   -------------------   ---------------
     THE PRUDENTIAL INSURANCE COMPANY OF AMERICA                                       $105,200,000        $78,100,000
                                                                                                           $22,100,000
                                                                                                           $ 5,000,000

(1)  All payments on account of Notes held by such purchaser shall be
     made by wire transfer of immediately available funds for credit to:

     JPMorgan Chase Bank, N.A.
     New York, NY
     ABA No.: 021-000-021
     Account Name: Prudential Private Placement Servicing Account
     Account No.: 304617040

     Each such wire transfer shall set forth the name of the Company, a
     reference to "5.91% Senior Notes, Series A, due 2011, Security No.
     INV05539, PPN _____" and the due date and application (as among principal,
     interest and Yield-Maintenance Amount) of the payment being made.

(2)  Address for all notices relating to payments:

     The Prudential Insurance Company of America
     c/o Investment Operations Group
     Gateway Center Two, 10th Floor
     100 Mulberry Street
     Newark, NJ 07102-4077

     Attention: Manager, Billings and Collections

(3)  Address for all other communications and notices:

     The Prudential Insurance Company of America
     c/o Prudential Capital Group
     2200 Ross Avenue, Suite 4200E
     Dallas, TX 75201

     Attention: Managing Director

(4)  Recipient of telephonic prepayment notices:

     Manager, Trade Management Group

     Telephone: (973) 367-3141
     Facsimile: (888) 889-3832	

PS-1

(5)  Address for Delivery of Notes:

     Send physical security by nationwide overnight delivery service to:

     Prudential Capital Group
     2200 Ross Avenue, Suite 4200E
     Dallas, TX 75201

     Attention: William H. Bulmer
     Telephone: (214) 720-6204

(6)  Tax Identification No.: 22-1211670

(7)  Authorized Officers:

     Randall M. Kob
     Ric E. Abel
     Gwendolyn Foster
     Andy Williams	

PS-2
PURCHASER SCHEDULE

                                                                                   AGGREGATE PRINCIPAL
                                                                                     AMOUNT OF NOTES           NOTE
                                                                                     TO BE PURCHASED     DENOMINATION(S)
                                                                                   -------------------   ---------------
     PRUCO LIFE INSURANCE COMPANY                                                      $10,000,000         $10,000,000

(1)  All payments on account of Notes held by such purchaser shall be made by
     wire transfer of immediately available funds for credit to:

     JPMorgan Chase Bank, N.A.
     New York, NY
     ABA No.: 021-000-021
     Account Name: Prudential Private Placement Servicing Account
     Account No.: 304617040

     Each such wire transfer shall set forth the name of the Company, a
     reference to "5.91% Senior Notes, Series A, due 2011, Security No.
     INV05539, PPN _____", and the due date and application (as among principal,
     interest and Yield-Maintenance Amount) of the payment being made.

(2)  Address for all notices relating to payments:

     Pruco Life Insurance Company
     c/o The Prudential Insurance Company of America
     c/o Investment Operations Group
     Gateway Center Two, 10th Floor
     100 Mulberry Street
     Newark, NJ 07102-4077

     Attention: Manager, Billings and Collections

(3)  Address for all other communications and notices:

     Pruco Life Insurance Company
     c/o Prudential Capital Group
     2200 Ross Avenue, Suite 4200E
     Dallas, TX 75201

     Attention: Managing Director

(4)  Recipient of telephonic prepayment notices:

     Manager, Trade Management Group

     Telephone: (973) 367-3141
     Facsimile: (888) 889-3832	

PS-3

(5)  Address for Delivery of Notes:

     Send physical security by nationwide overnight delivery service to:

     Prudential Capital Group
     2200 Ross Avenue, Suite 4200E
     Dallas, TX 75201

     Attention: William H. Bulmer
     Telephone: (214) 720-6204

(6)  Tax Identification No.: 22-1944557

(7)  Authorized Officers:

     Randall M. Kob
     Ric E. Abel
     Gwendolyn Foster
     Andy Williams	

PS-4
PURCHASER SCHEDULE

                                                                             AGGREGATE
                                                                             PRINCIPAL
                                                                          AMOUNT OF NOTES         NOTE
                                                                          TO BE PURCHASED   DENOMINATION(S)
                                                                          ---------------   ---------------
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION                                  $1,900,000        $1,900,000

(1) All payments on account of Notes held by such purchaser shall be
    made by wire transfer of immediately available funds for credit to:

    JPMorgan Chase Bank, N.A.
    New York, NY
    ABA No.: 021-000-021
    Account Name: Prudential Private Placement Servicing Account
    Account No.: 304617040

    Each such wire transfer shall set forth the name of the Company, a
    reference to "5.91% Senior Notes, Series A, due 2011, Security No.
    INV05539, PPN _____" and the due date and application (as among
    principal, interest and Yield-Maintenance Amount) of the payment
    being made.

(2) Address for all notices relating to payments:

    The Prudential Insurance Company of America
    c/o Investment Operations Group
    Gateway Center Two, 10th Floor
    100 Mulberry Street
    Newark, NJ 07102-4077

    Attention: Manager, Billings and Collections

(3) Address for all other communications and notices:

    The Prudential Insurance Company of America
    c/o Prudential Capital Group
    2200 Ross Avenue, Suite 4200E
    Dallas, TX 75201

    Attention: Managing Director

(4) Recipient of telephonic prepayment notices:

    Manager, Trade Management Group

    Telephone: (973) 367-3141
    Facsimile: (888) 889-3832	

PS-5

(5) Address for Delivery of Notes:

    Send physical security by nationwide overnight delivery service to:

    Prudential Capital Group
    2200 Ross Avenue, Suite 4200E
    Dallas, TX 75201

    Attention: William H. Bulmer
    Telephone: (214) 720-6204

(6) Tax Identification No.: 06-1241288	

PS-6
PURCHASER SCHEDULE

                                                                             AGGREGATE
                                                                             PRINCIPAL
                                                                          AMOUNT OF NOTES         NOTE
                                                                          TO BE PURCHASED   DENOMINATION(S)
                                                                          ---------------   ---------------
    PRUDENTIAL RETIREMENT INSURANCE AND ANNUITY COMPANY                     $40,000,000       $40,000,000

(1) All payments on account of Notes held by such purchaser shall be
    made by wire transfer of immediately available funds for credit to:

    JPMorgan Chase Bank, N.A.
    New York, NY
    ABA No.: 021-000-021
    Account Name: Prudential Private Placement Servicing Account
    Account No.: 304617040

    Each such wire transfer shall set forth the name of the Company, a
    reference to "5.91% Senior Notes, Series A, due 2011, Security No.
    INV05539, PPN _____" and the due date and application (as among
    principal, interest and Yield-Maintenance Amount) of the payment
    being made.

(2) Address for all notices relating to payments:

    Prudential Retirement Insurance and Annuity Company
    c/o Prudential Investment Management, Inc.
    Private Placement Trade Management
    PRIAC Administration
    Gateway Center Four, 7th Floor
    100 Mulberry Street
    Newark, NJ 07102

    Telephone: (973) 802-8107
    Facsimile: (888) 889-3832

(3) Address for all other communications and notices:

    Prudential Retirement Insurance and Annuity Company
    c/o Prudential Capital Group
    2200 Ross Avenue, Suite 4200E
    Dallas, TX 75201

    Attention: Managing Director	

PS-7

(4) Address for Delivery of Notes:

    Send physical security by nationwide overnight delivery service to:

    Prudential Capital Group
    2200 Ross Avenue, Suite 4200E
    Dallas, TX 75201

    Attention: William H. Bulmer
    Telephone: (214) 720-6204

(5) Tax Identification No.: 06-1050034	

PS-8
PURCHASER SCHEDULE

                                                                             AGGREGATE
                                                                             PRINCIPAL
                                                                          AMOUNT OF NOTES         NOTE
                                                                          TO BE PURCHASED   DENOMINATION(S)
                                                                          ---------------   ---------------
    RGA REINSURANCE COMPANY                                                  $7,500,000        $7,500,000

    Notes/Certificates to be registered in the name of:
    HARE & CO.

(1) All payments on account of Notes held by such purchaser shall be
    made by wire transfer of immediately available funds for credit to:

    The Bank of New York
    ABA No.: 021-000-018
    BNF Account No. IOC566
    Credit to: Hare & Co

    Each such wire transfer shall set forth the name of the Company, a
    reference to "5.91% Senior Notes, Series A, due 2011, PPN ____"
    and the due date and application (as among principal, interest and
    Yield-Maintenance Amount) of the payment being made.

(2) All notices of payments and written confirmations of such wire
    transfers:

    RGA Reinsurance Company
    Attn: Banking Dept.
    1370 Timberlake Manor Parkway
    Chesterfield, MO 63017-6039

(3) Address for all other communications and notices:

    Prudential Private Placement Investors, L.P.
    c/o Prudential Capital Group
    2200 Ross Avenue, Suite 4200E
    Dallas, TX 75201

    Attention: Managing Director	

PS-9

(4) Address for Delivery of Notes:

    (a) Send physical security by nationwide overnight delivery service
        to:

        The Bank of New York
        Securities Department
        One Wall Street
        3rd Floor - "A"
        New York, NY 10286

        Attention: Lucille Del Terzo
        Telephone: (718) 315-3543
        Facsimile: (718) 623-7572 or (718) 623-7575
        E-mail: ldelterzo@bankofny.com

        Please include in the cover letter accompanying the
        Notes a reference to the Purchaser (RGA Private
        Placement Prudential Financial Account No. 128863).

    (b) Send copy by nationwide overnight delivery service to:

        Prudential Capital Group
        Gateway Center 4
        100 Mulberry, 7th Floor
        Newark, NJ 07102

        Attention: Trade Management, Manager
        Telephone: (973) 367-3141

(5) Tax Identification No.: 43-1235868	

PS-10
PURCHASER SCHEDULE

                                                                             AGGREGATE
                                                                             PRINCIPAL
                                                                          AMOUNT OF NOTES         NOTE
                                                                          TO BE PURCHASED   DENOMINATION(S)
                                                                          ---------------   ---------------
    UNION SECURITY INSURANCE COMPANY                                         $6,400,000        $6,400,000

(1) All payments on account of Notes held by such purchaser shall be
    made by wire transfer of immediately available funds for credit to:

    M&I Marshall & Ilsley Bank
    Milwaukee, WI
    ABA No.: 075000051
    DDA Account No.: 27006
    Account Name: General Trust Fund
    For further credit to Account No.: 89-0035-76-9
    Account Name:  Union Security Prudential Private Placements

    Each such wire transfer shall set forth the name of the Company, a
    reference to "5.91% Senior Notes, Series A, due 2011, PPN ____" and
    the due date and application (as among principal, interest and
    Yield-Maintenance Amount) of the payment being made.

(2) All notices of payments and written confirmations of such wire
    transfers:

    Marshall & Ilsley Trust Company
    Asset Booking Department
    11270 West Park Place, Suite 400
    Milwaukee, WI 53224

    Attention: Linda Harris-Murphy

    Telephone: (414) 815-3635
    Facsimile: (414) 815-3589

    AND

    Fortis, Inc.
    One Chase Manhattan Plaza
    New York, NY 10005

    Attention: Kevin P. Mahoney
               AVP, Investment Accounting & Treasury Operations

    Telephone: (212) 859-7184
    Facsimile: (212) 859-7043	

PS-11

(3) Address for all other communications and notices:

    Prudential Private Placement Investors, L.P.
    c/o Prudential Capital Group
    2200 Ross Avenue, Suite 4200E
    Dallas, TX 75201

    Attention: Managing Director

(4) Address for Delivery of Notes:

    (a) Send physical security by nationwide overnight delivery service
        to:

        Marshall & Ilsley Trust Company
        Asset Booking Department
        11270 West Park Place, Suite 400
        Milwaukee, WI 53224

        Attention:  Linda Harris-Murphy
        Phone: (414) 815-3635
        Facsimile: (414) 815-3589

        Please include in the cover letter accompanying the
        Notes a reference to the Purchaser's account number
        (Union Security - Prudential Private Placements;
        Account Number: 89 0035 76 9)

    (b) Send copy by nationwide overnight delivery service to:

        Prudential Capital Group
        Gateway Center 4
        100 Mulberry, 7th Floor
        Newark, NJ 07102

        Attention: Trade Management, Manager
        Telephone: (973) 367-3141

(5) Tax Identification No.: 81-0170040	

PS-12
PURCHASER SCHEDULE

                                                                             AGGREGATE
                                                                             PRINCIPAL
                                                                          AMOUNT OF NOTES         NOTE
                                                                          TO BE PURCHASED   DENOMINATION(S)
                                                                          ---------------   ---------------
    AMERICAN SECURITY INSURANCE COMPANY                                      $4,000,000        $4,000,000

(1) All payments on account of Notes held by such purchaser shall be
    made by wire transfer of immediately available funds for credit to:

    M&I Marshall & Ilsley Bank
    Milwaukee, WI
    ABA No.: 075000051
    DDA Account No.: 27006
    Account Name: General Trust Fund
    For further credit to Account No.: 89-0035-89-2
    Account Name: American Security Insurance Company Prudential

                               Private Placements

    Each such wire transfer shall set forth the name of the Company, a
    reference to "5.91% Senior Notes, Series A, due 2011, PPN ____"
    and the due date and application (as among principal, interest and
    Yield-Maintenance Amount) of the payment being made.

(2) All notices of payments and written confirmations of such wire
    transfers:

    Marshall & Ilsley Trust Company
    Asset Booking Department
    11270 West Park Place, Suite 400
    Milwaukee, WI 53224

    Attention: Linda Harris-Murphy

    Telephone: (414) 815-3635
    Facsimile: (414) 815-3589

    AND

    Fortis, Inc.
    One Chase Manhattan Plaza
    New York, NY 10005

    Attention: Kevin P. Mahoney
               AVP, Investment Accounting & Treasury Operations

    Telephone: (212) 859-7184
    Facsimile: (212) 859-7043	

PS-13

(3) Address for all other communications and notices:

    Prudential Private Placement Investors, L.P.
    c/o Prudential Capital Group
    2200 Ross Avenue, Suite 4200E
    Dallas, TX 75201

    Attention: Managing Director

(4) Address for Delivery Notes:

    (a) Send physical security by nationwide overnight delivery service
        to:

        Marshall & Ilsley Trust Company
        Asset Booking Department
        11270 West Park Place, Suite 400
        Milwaukee, WI 53224

        Attention:  Linda Harris-Murphy
        Phone: (414) 815-3635
        Facsimile: (414) 815-3589

        Please include in the cover letter accompanying the Notes a
        reference to the Purchaser's account number (American Security
        Insurance Company Prudential
        Private Placements; Account Number: 89 0035 89-2).

    (b) Send copy by nationwide overnight delivery service to:

        Prudential Capital Group
        Gateway Center 4
        100 Mulberry, 7th Floor
        Newark, NJ 07102

        Attention: Trade Management, Manager
        Telephone: (973) 367-3141

(5) Tax Identification No.: 58-1529575	

PS-14
SCHEDULE 8G
LIST OF AGREEMENTS RESTRICTING DEBT
- Amended and Restated Credit Agreement dated as of December 9, 2005 among Pinnacle West Capital Corporation, the Lenders party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent, and the other agents party thereto.
EXHIBIT A-1
[FORM OF NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED IN ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT.
PINNACLE WEST CAPITAL CORPORATION
% SENIOR NOTE, SERIES , DUE
No. R-
ORIGINAL PRINCIPAL AMOUNT:
ORIGINAL ISSUE DATE:
INTEREST RATE:
INTEREST PAYMENT DATES:
FINAL MATURITY DATE:
PRINCIPAL INSTALLMENT DATES AND AMOUNTS:
FOR VALUE RECEIVED, the undersigned, Pinnacle West Capital Corporation (herein called the "COMPANY"), a corporation organized and existing under the laws of the State of Arizona, hereby promises to pay to ______________, or registered assigns, the principal sum of ________________ DOLLARS [on the Final Maturity Date specified above] [, payable in installments on the Principal Installment Dates and in the amounts specified above, and on the Final Maturity Date specified above in an amount equal to the unpaid balance of the principal hereof,] with interest (computed on the basis of a 360-day year--30-day month)
(a) on the unpaid balance hereof from the date hereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on the occurrence and during the continuance of an Event of Default, at the Default Rate with respect to any outstanding principal hereof, any overdue payment of interest and any overdue payment of any Yield-Maintenance Amount, payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand).
Payments of principal of, interest on and any Yield-Maintenance Amount payable with respect to this Note are to be made at the main office of JPMorgan Chase Bank, N.A., in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America.
This Note is one of a series of Senior Notes (herein called the "NOTES") issued pursuant to an Uncommitted Master Shelf Agreement, dated as of February 28, 2006 (herein called the "AGREEMENT"), between the Company, Prudential Investment Management, Inc. and the Purchasers named therein and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to optional prepayment, in whole or from time to time in part on the terms specified in the Agreement. Capitalized terms used and not otherwise defined herein have the meanings specified in the Agreement.
A-1-1
This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary.
In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement.
THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF SUCH STATE.
PINNACLE WEST CAPITAL CORPORATION
By:
 [TITLE]
A-1-2
EXHIBIT A-2
[FORM OF SERIES A NOTE]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED IN ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT.
PINNACLE WEST CAPITAL CORPORATION
5.91% SENIOR NOTE, SERIES A, DUE FEBRUARY 28, 2011

No. R-A-__                   PPN: _________
ORIGINAL PRINCIPAL AMOUNT:   $_____________
ORIGINAL ISSUE DATE:         February 28, 2006
INTEREST RATE:               5.91%
INTEREST PAYMENT DATES:      March 31, June 30, September 30 and
                             December 31 of each year,
                             commencing on March 31, 2006
FINAL MATURITY DATE:         February 28, 2011	

FOR VALUE RECEIVED, the undersigned, Pinnacle West Capital Corporation (herein called the "COMPANY"), a corporation organized and existing under the laws of the State of Arizona, hereby promises to pay to _______________________________, or registered assigns, the principal sum of _______________________ AND NO/100'S DOLLARS ($________) on the Final Maturity Date specified above with interest (computed on the basis of a 360-day year--30-day month) (a) on the unpaid balance hereof from the date hereof at the Interest Rate per annum specified above, payable on each Interest Payment Date specified above and on the Final Maturity Date specified above, commencing with the Interest Payment Date next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) on the occurrence and during the continuance of an Event of Default, at the Default Rate with respect to any outstanding principal hereof, any overdue payment of interest and any overdue payment of any Yield-Maintenance Amount, payable quarterly as aforesaid (or, at the option of the registered holder hereof, on demand).
Payments of principal of, interest on and any Yield-Maintenance Amount payable with respect to this Note are to be made at the main office of JPMorgan Chase Bank, N.A., in New York City or at such other place as the holder hereof shall designate to the Company in writing, in lawful money of the United States of America.
This Note is one of a series of Senior Notes (herein called the "NOTES") issued pursuant to an Uncommitted Master Shelf Agreement, dated as of February 28, 2006 (herein called the "AGREEMENT"), between the Company, Prudential Investment Management, Inc. and the Purchasers named therein and is entitled to the benefits thereof. As provided in the Agreement, this Note is subject to optional prepayment, in whole or from time to time in part on the terms specified in the Agreement. Capitalized terms used and not otherwise defined herein have the meanings specified in the Agreement.
A-2-1
This Note is a registered Note and, as provided in the Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary.
In case an Event of Default, as defined in the Agreement, shall occur and be continuing, the principal of this Note may be declared or otherwise become due and payable in the manner and with the effect provided in the Agreement.
THIS NOTE IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF SUCH STATE.
PINNACLE WEST CAPITAL CORPORATION
By:

Name:
Title:
A-2-2
EXHIBIT B
[TO BE PLACED ON COMPANY LETTERHEAD]
[FORM OF REQUEST FOR PURCHASE]
PINNACLE WEST CAPITAL CORPORATION
Reference is made to the Master Shelf Agreement (the "AGREEMENT"), dated as of February 28, 2006, between Pinnacle West Capital Corporation (the "COMPANY"), Prudential Investment Management, Inc. and the Purchasers named therein. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement.
Pursuant to paragraph 2D of the Agreement, the Company hereby makes the following Request for Purchase:
1. Aggregate principal amount of the Notes covered hereby (the "Notes") $____________
2. Individual specifications of the Notes:

                                 Principal
Principal   Final Maturity   Installment Dates   Designated
  Amount         Date           and Amounts        Spread
---------   --------------   -----------------   ----------	

3. Use of proceeds of the Notes:
4. Proposed day for the closing of the purchase and sale of the Notes:
5. The purchase price of the Notes is to be transferred to:

                                               Name and Telephone No. of Bank
Name and Address of Bank   Number of Account               Officer
------------------------   -----------------   ------------------------------	

6. The Company certifies (a) that the representations and warranties contained in paragraph 8 of the Agreement are true on and as of the date of this Request for Purchase except to the extent of changes caused by the transactions contemplated in the Agreement and (b) that there exists on the date of this Request for Purchase no Event of Default or Default.
B-1
Dated:
PINNACLE WEST CAPITAL CORPORATION
By:
 Authorized Officer

B-2
EXHIBIT C
[FORM OF CONFIRMATION OF ACCEPTANCE]
PINNACLE WEST CAPITAL CORPORATION
Reference is made to the Master Shelf Agreement (the "Agreement"), dated as of February 28, 2006, between Pinnacle West Capital Corporation (the "Company"), Prudential Investment Management, Inc. and the Purchasers named therein. All terms used herein that are defined in the Agreement have the respective meanings specified in the Agreement.
Each of the undersigned institutions which is named below as a Purchaser of any Accepted Notes hereby confirms the representations as to such Accepted Notes set forth in paragraph 9 of the Agreement, and agrees to be bound by the provisions of paragraphs 2F and 2H of the Agreement relating to the purchase and sale of such Accepted Notes.
Pursuant to paragraph 2F of the Agreement, an Acceptance with respect to the following Accepted Notes is hereby confirmed:
I. Aggregate principal amount $ (A) (a) Name of Purchaser:
(b) Principal amount:
(c) Final maturity date:
(d) Principal installment dates and amounts:
(e) Interest rate:
(f) Payment and notice instructions: As set forth on attached Purchaser Schedule
(g) Designated spread:
(B) (a) Name of Purchaser:
(b) Principal amount:
(c) Final maturity date:
(d) Principal installment dates and amounts:
(e) Interest rate:
(f) Payment and notice instructions: As set forth on attached Purchaser Schedule
(g) Designated spread:
[(C),(D) ....: same information as to any other Purchaser
II. Closing Day:
III. Issuance Fee:
Dated:

C-1
PINNACLE WEST CAPITAL CORPORATION
By:

Name:
Title:
PRUDENTIAL INVESTMENT MANAGEMENT, INC.
By:
 Vice President
[Signature block for each named Purchaser other than Prudential]
C-2
EXHIBIT D
[FORM OF WRITTEN FUNDING INSTRUCTIONS]
[Company's Letterhead]
[NAMES AND ADDRESSES OF PURCHASERS]
Re: FUNDS DELIVERY INSTRUCTION
Ladies and Gentlemen:
As contemplated by paragraph 2 of the Uncommitted Master Shelf Agreement, dated as of February 28, 2006, among you, Prudential Investment Management, Inc. and the Purchasers named therein, the undersigned hereby instructs you to deliver, on the date of closing, the proceeds of the Notes in the manner required by paragraph 2 to the undersigned's account identified below:
Account Name: ______________________________________
Account No.: _______________________________________
Bank: ______________________________________________
Bank City & State: _________________________________
Bank ABA No.: ______________________________________
Reference: _________________________________________
This instruction has been executed and delivered by an authorized representative of the undersigned.
Very truly yours,
PINNACLE WEST CAPITAL CORPORATION
By:

Name:
Title:
  
Exhibit 10.97
EXECUTION COPY
AMENDED AND RESTATED CREDIT AGREEMENT
DATED AS OF DECEMBER 9, 2005
AMONG
PINNACLE WEST CAPITAL CORPORATION,
THE LENDERS FROM TIME TO TIME PARTIES HERETO,
JPMORGAN CHASE BANK, N.A.
 (FORMERLY KNOWN AS JPMORGAN CHASE BANK)

AS ADMINISTRATIVE AGENT
UNION BANK OF CALIFORNIA, N.A.,
AS SYNDICATION AGENT
AND
CITIBANK, N.A., KEYBANK NATIONAL ASSOCIATION AND
MIZUHO CORPORATE BANK, LTD.,
AS CO-DOCUMENTATION AGENTS
J.P. MORGAN SECURITIES INC. AND
UNION BANK OF CALIFORNIA, N.A.
AS CO-LEAD ARRANGERS AND CO-BOOK RUNNERS
TABLE OF CONTENTS

ARTICLE I DEFINITIONS......................................................    1
   1.1.     Definitions....................................................    1
   1.2.     Plural Forms...................................................   11

ARTICLE II THE CREDITS.....................................................   12
   2.1.     Commitment.....................................................   12
   2.2.     Required Payments; Termination.................................   12
   2.3.     Ratable Loans..................................................   12
   2.4.     Types of Advances..............................................   12
   2.5.     Commitment Fee; Utilization Margin; LC Fee; Reductions in
            Aggregate Commitment...........................................   12
   2.6.     Minimum Amount of Each Advance.................................   13
   2.7.     Optional Principal Payments....................................   14
   2.8.     Method of Selecting Types and Interest Periods for New
            Advances..............................                            14
   2.9.     Conversion and Continuation of Outstanding Advances............   14
   2.10.    Changes in Interest Rate, etc..................................   15
   2.11.    Rates Applicable After Default.................................   15
   2.12.    Method of Payment..............................................   16
   2.13.    Noteless Agreement; Evidence of Indebtedness...................   16
   2.14.    Telephonic Notices.............................................   16
   2.15.    Interest Payment Dates; Interest and Fee Basis; Regulation D
            Compensation...................................................   17
   2.16.    Notification of Advances, Interest Rates, Prepayments and
            Commitment Reductions..........................................   18
   2.17.    Lending Installations..........................................   18
   2.18.    Non-Receipt of Funds by the Agent..............................   18
   2.19.    Replacement of Lender..........................................   18
   2.20.    Letters of Credit..............................................   19
   2.21.    Expansion Option...............................................   24
   2.22.    Extension of Facility Termination Date.........................   25

ARTICLE III YIELD PROTECTION; TAXES........................................   27
   3.1.     Yield Protection...............................................   27
   3.2.     Changes in Capital Adequacy Regulations........................   28
   3.3.     Availability of Types of Advances..............................   29
   3.4.     Funding Indemnification........................................   29
   3.5.     Taxes..........................................................   29
   3.6.     Lender Statements; Survival of Indemnity.......................   31	

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ARTICLE IV CONDITIONS PRECEDENT............................................   32
   4.1.     Effectiveness of Agreement.....................................   32
   4.2.     Each Credit Extension..........................................   33

ARTICLE V REPRESENTATIONS AND WARRANTIES...................................   34
   5.1.     Existence and Standing.........................................   34
   5.2.     Corporate and Governmental Authorization; No Contravention.....   34
   5.3.     Binding Effect.................................................   34
   5.4.     Financial Information..........................................   34
   5.5.     Litigation.....................................................   35
   5.6.     Compliance with ERISA..........................................   35
   5.7.     Environmental Matters..........................................   35
   5.8.     Taxes..........................................................   35
   5.9.     Material Subsidiaries..........................................   36
   5.10.    Not an Investment Company......................................   36
   5.11.    Public Utility Holding Company Act, Etc........................   36

ARTICLE VI COVENANTS.......................................................   36
   6.1.     Information....................................................   36
   6.2.     Maintenance of Property; Insurance.............................   38
   6.3.     Conduct of Business and Maintenance of Existence...............   39
   6.4.     Compliance with Laws...........................................   39
   6.5.     Pari Passu.....................................................   39
   6.6.     Ownership of APS...............................................   40
   6.7.     Consolidations, Mergers and Sales of Assets....................   40
   6.8.     Use of Proceeds................................................   40
   6.9.     Indebtedness...................................................   40
   6.10.    Inspection of Property, Books and Records......................   41

ARTICLE VII DEFAULTS.......................................................   41

ARTICLE VIII ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES................   42
   8.1.     Acceleration...................................................   43
   8.2.     Amendments.....................................................   43
   8.3.     Preservation of Rights.........................................   44

ARTICLE IX GENERAL PROVISIONS..............................................   44
   9.1.     Survival of Representations....................................   44
   9.2.     Governmental Regulation........................................   44
   9.3.     Headings.......................................................   44	

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   9.4.     Entire Agreement...............................................   44
   9.5.     Several Obligations; Benefits of this Agreement................   44
   9.6.     Expenses; Indemnification......................................   45
   9.7.     Numbers of Documents...........................................   46
   9.8.     Accounting Terms and Determinations............................   46
   9.9.     Severability of Provisions.....................................   46
   9.10.    Nonliability of Lenders........................................   46
   9.11.    Confidentiality................................................   46
   9.12.    Nonreliance....................................................   47
   9.13.    Disclosure.....................................................   47
   9.14.    USA Patriot Act Notification...................................   47
   9.15.    Relations Among Lenders........................................   47

ARTICLE X THE AGENT........................................................   48
   10.1.    Appointment; Nature of Relationship............................   48
   10.2.    Powers.........................................................   48
   10.3.    General Immunity...............................................   48
   10.4.    No Responsibility for Loans, Recitals, etc.....................   48
   10.5.    Action on Instructions of Lenders..............................   49
   10.6.    Employment of Agents and Counsel...............................   49
   10.7.    Reliance on Documents; Counsel.................................   49
   10.8.    Agent's Reimbursement and Indemnification......................   49
   10.9.    Notice of Default..............................................   50
   10.10.   Rights as a Lender.............................................   50
   10.11.   Lender Credit Decision.........................................   50
   10.12.   Successor Agent................................................   51
   10.13.   Agent and Arranger Fees........................................   51
   10.14.   Delegation to Affiliates.......................................   51
   10.15.   Co-Agents, Managing Agent, Documentation Agent, Syndication
            Agent, etc.....................................................   51

ARTICLE XI SETOFF; RATABLE PAYMENTS........................................   52
   11.1.    Setoff.........................................................   52
   11.2.    Ratable Payments...............................................   52

ARTICLE XII BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS..............   52
   12.1.    Successors and Assigns.........................................   52
   12.2.    Participations.................................................   53
   12.3.    Assignments....................................................   54
   12.4.    Dissemination of Information...................................   55	

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   12.5.    Tax Treatment..................................................   55

ARTICLE XIII NOTICES.......................................................   55

ARTICLE XIV COUNTERPARTS; INTEGRATION; EFFECTIVENESS; ELECTRONIC
   EXECUTION...............................................................   56
   14.1.    Counterparts; Effectiveness....................................   56
   14.2.    Electronic Execution of Assignments............................   57

ARTICLE XV  CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL...   57
   15.1.    CHOICE OF LAW..................................................   57
   15.2.    CONSENT TO JURISDICTION........................................   57
   15.3.    WAIVER OF JURY TRIAL...........................................   58	

v
 
SCHEDULES AND EXHIBITS
PRICING SCHEDULE
COMMITMENT SCHEDULE
SCHEDULE 2.20 EXISTING LETTERS OF CREDIT

EXHIBIT A   ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT B   NOTE
EXHIBIT C   FORM OF INCREASING LENDER SUPPLEMENT
EXHIBIT D   FORM OF AUGMENTING LENDER SUPPLEMENT	

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AMENDED AND RESTATED CREDIT AGREEMENT
This Agreement, dated as of December 9, 2005, is among Pinnacle West Capital Corporation, as Borrower, the Lenders, JPMorgan Chase Bank, N.A., as Agent, and the other agents party hereto. The parties hereto (i) agree to amend and restate the Existing Credit Agreement pursuant hereto, and in connection therewith, each Departing Lender has agreed to execute and deliver a Departing Lender Signature Page pursuant to which such Departing Lender shall cease to be a party to the Existing Credit Agreement, and (ii) further agree as follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. As used in this Agreement:
"Advance" means a borrowing hereunder consisting of the aggregate amount of several Loans, (i) made by the Lenders on the same Borrowing Date, or (ii) converted or continued by the Lenders on the same date of conversion or continuation, consisting, in either case, of the aggregate amount of the several Loans of the same Type and, in the case of Eurodollar Loans, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of voting securities, by contract or otherwise.
"Agent" means JPMCB in its capacity as contractual representative of the Lenders pursuant to Article X, and not in its individual capacity as a Lender, and any successor Agent appointed pursuant to Article X.
"Aggregate Commitment" means the aggregate of the Commitments of all the Lenders, as reduced from time to time pursuant to the terms hereof.
"Aggregate Outstanding Credit Exposure" means, at any time, the aggregate of the Outstanding Credit Exposure of all the Lenders.
"Agreement" means this amended and restated credit agreement, as it may be amended, restated, supplemented or modified and in effect from time to time.
"Alternate Base Rate" means, for any day, a fluctuating rate of interest per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of (a) the Federal Funds Effective Rate for such day plus (b) 1/2% per annum.
"Applicable Commitment Fee Rate" means, at any time, the percentage rate per annum as set forth in the Pricing Schedule.
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"Applicable Margin" means, with respect to Advances of any Type at any time, the percentage rate per annum which is applicable at such time with respect to Advances of such Type as set forth in the Pricing Schedule.
"Applicable Percentage" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments.
"Applicable Utilization Margin" means, at any time, the percentage rate per annum at which utilization margins are accruing on the Aggregate Outstanding Credit Exposure at such time as set forth in the Pricing Schedule.
"Approved Fund" means any Fund that is administered or managed by (i) a Lender, (ii) an Affiliate of a Lender or (iii) an entity or an Affiliate of an entity that administers or manages a Lender.
"APS" means the Arizona Public Service Company, an Arizona corporation, and its successors.
"Arrangers" means, collectively, J.P. Morgan Securities Inc., and its successors, and Union Bank of California, N.A., and its successors, in their capacity as Co-Lead Arrangers and Co-Book Runners.
"Article" means an article of this Agreement unless another document is specifically referenced.
"Assuming Lender" has the meaning assigned to such term in Section 2.22.3.
"Augmenting Lender" has the meaning assigned to such term in Section 2.21.
"Authorized Officer" means the Chairman of the Board, Chief Executive Officer, Chief Financial Officer, President, Treasurer, Controller, Chief Operating Officer, any Vice President or any Assistant Treasurer of the Borrower.
"Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group.
"Borrower" means Pinnacle West Capital Corporation, an Arizona corporation, and its permitted successors and assigns (including, without limitation, a debtor in possession on its behalf).
"Borrower's 2004 Form 10-K" means the Borrower's annual report on Form 10-K for the fiscal year ended December 31, 2004, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934.
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"Borrower's Latest Form 10-Q" means the Borrower's quarterly report on Form 10-Q for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934.
"Borrower's SEC Reports" means the Borrower's 2004 Form 10-K; the Borrower's quarterly reports on Form 10-Q for the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005; and the Borrower's current reports on Form 8-K as filed with the Securities and Exchange Commission on January 28, March 1, March 29, April 13, April 26, May 2, May 19, May 25, June 17, June 22, July 25, July 27, August 16, August 18, August 30, September 22, October 13, October 18, October 26, October 27, November 4, and December 6, 2005.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.8.
"Business Day" means (i) with respect to any borrowing, payment or rate selection of Eurodollar Advances, a day (other than a Saturday or Sunday) on which banks generally are open in New York City and Phoenix, Arizona for the conduct of substantially all of their commercial lending activities, interbank wire transfers can be made on the Fedwire system and dealings in United States dollars are carried on in the London interbank market and (ii) for all other purposes, a day (other than a Saturday or Sunday) on which banks generally are open in New York City and Phoenix for the conduct of substantially all of their commercial lending activities and interbank wire transfers can be made on the Fedwire system.
"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.
"Change in Control" means (i) the acquisition by any Person, or two or more Persons acting in concert, of beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of thirty percent (30%) or more of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; or (ii) the majority of the board of directors of the Borrower fails to consist of Continuing Directors (other than due to death or disability).
"Closing Date" means October 19, 2004, the original effective date of the Existing Credit Agreement.
"Commitment" means, for each Lender, the obligation of such Lender to make Loans to, and participate in Letters of Credit issued upon the application of, the Borrower in an aggregate amount not exceeding the amount set forth opposite its name on the Commitment Schedule, as it may be modified as a result of any increase pursuant to Section 2.21, assignment that has become effective pursuant to Section 2.21, 2.22 or 12.3.3 or as otherwise modified from time to time pursuant to the terms hereof.
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"Commitment Schedule" means the Schedule identifying each Lender's Commitment attached hereto and identified as such, which Schedule may be modified from time to time after the Effective Date by the Agent (and the parties hereto hereby authorize the Agent to make such modifications) to reflect any assignment that has become effective pursuant to Section 12.3.3 or as otherwise modified from time to time pursuant to the terms hereof.
"Confidential Information" means information that the Borrower furnishes to any party hereto designated as confidential in writing or that any such party obtains pursuant to its rights under Section 6.1.9 or 6.10, 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 any party hereto of its obligations hereunder, (b) was available to such party on a nonconfidential basis prior to its disclosure to such party by the Borrower or any of its Affiliates or (c) is or becomes available to such party from a source other than the Borrower or any of its Affiliates that is not, to the knowledge of such party after inquiry, acting in violation of a confidentiality agreement with the Borrower or any other Person.
"Consenting Lender" has the meaning assigned to such term in Section 2.22.2.
"Consolidated Capitalization" means the sum of (i) Consolidated Debt and
(ii) Consolidated Net Worth.
"Consolidated Debt" means at any date the Debt of the Borrower and its Consolidated Subsidiaries determined on a consolidated basis as of such date.
"Consolidated Net Worth" means the sum of (i) 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) (ii) the amount of the consolidated surplus, whether capital or earned, of the Borrower, 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 FASB 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 FASB 133).
"Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date.
"Continuing Director" means, with respect to any Person as of any date of determination, any member of the board of directors of such Person who (i) was a member of such board of directors on the date of this Agreement, or (ii) was nominated for election or elected to such board of directors with the approval of a majority of the Continuing Directors who were members of such board at the time of such nomination or election.
"Conversion/Continuation Notice" is defined in Section 2.9.
"Credit Extension" means the making of an Advance or the issuance of a Letter of Credit hereunder.
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"Credit Extension Date" means the Borrowing Date for an Advance or the issuance date for a Letter of Credit.
"Debt" means as to any Person at any date (without duplication): (i) indebtedness created, issued, incurred or assumed by such Person for borrowed money or evidenced by bonds, debentures, notes or similar instruments; (ii) 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; (iii) all Debt secured by a lien on any asset of such Person, to the extent such Debt has been assumed by, or is a recourse obligation of, such Person; (iv) all Guarantees by such Person; (v) all Capital Lease Obligations of such Person; and (vi) 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 Debt.
"Default" means an event described in Article VII.
"Departing Lender" means each lender under the Existing Credit Agreement that executes and delivers to the Agent a Departing Lender Signature Page.
"Departing Lender Signature Page" means each signature page to this Agreement in which it is indicated that the Departing Lender executing the same shall cease to be a party to the Existing Credit Agreement on the Effective Date.
"Derivative Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions.
"Effective Date" means the date on which the conditions specified in
Section 4.1 are satisfied (or waived in accordance with Section 8.2).
"Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute and any rule or regulation issued thereunder.
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"ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary are treated as a single employer under Section 414 of the Internal Revenue Code.
"Eurodollar Advance" means an Advance which, except as otherwise provided in Section 2.11, bears interest at the applicable Eurodollar Rate.
"Eurodollar Loan" means a Loan which, except as otherwise provided in
Section 2.11, bears interest at the applicable Eurodollar Rate.
"Eurodollar Rate" means, with respect to a Eurodollar Advance for the relevant Interest Period, the sum of (i) the LIBO Rate applicable to such Interest Period, plus (ii) the then Applicable Margin, changing as and when the Applicable Margin changes.
"Excluded Taxes" means, in the case of each Lender, each Issuing Bank or applicable Lending Installation and the Agent, (A) taxes imposed on its overall net income, and franchise taxes imposed on it, by (i) the United States, (ii) any jurisdiction under the laws of which such Lender, such Issuing Bank or the Agent is incorporated, organized or doing business or (iii) any jurisdiction in which the Agent's, such Issuing Bank's or such Lender's principal executive office or such Lender's or Issuing Bank's applicable Lending Installation is located and (B) in the case of each Lender and Issuing Bank, any United States withholding tax imposed with respect to any payment by the Borrower 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 Lender or Issuing Bank, or applicable Lending Installation, at the time such Lender or Issuing Bank, as applicable, first becomes a party to this Agreement.
"Exhibit" refers to an exhibit to this Agreement, unless another document is specifically referenced.
"Existing Credit Agreement" means that certain Credit Agreement, dated as of the Closing Date, by and among the Borrower, the lenders parties thereto, JPMorgan Chase Bank, N.A. (formerly known as JPMorgan Chase Bank), as administrative agent, and the other agents party thereto, as the same has been amended, restated, supplemented or otherwise modified from time to time prior to the Effective Date.
"Extension Date" has the meaning assigned to such term in Section 2.22.2.
"Facility Termination Date" means December 9, 2010, subject to extension pursuant to Section 2.22, or any earlier date on which the Aggregate Commitment is reduced to zero or otherwise terminated pursuant to the terms hereof.
"Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding 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 (rounded upwards, if
6
necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it.
"Floating Rate" means, for any day, a rate per annum equal to (i) the Alternate Base Rate for such day plus (ii) the Applicable Margin, in each case changing when and as the Alternate Base Rate changes.
"Floating Rate Advance" means an Advance which, except as otherwise provided in Section 2.11, bears interest at the Floating Rate.
"Floating Rate Loan" means a Loan which, except as otherwise provided in
Section 2.11, bears interest at the Floating Rate.
"Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.
"Guarantee" means as to any Person, any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person or in any manner providing for the payment of any Debt of any other Person or otherwise protecting the holder of such Debt 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.
"Hazardous Substances" means (i) any toxic, radioactive, caustic or otherwise hazardous substance, as defined by any applicable Environmental Law;
(ii) petroleum, its derivatives, by-products and other hydrocarbons; or (iii) any substance having any constituent elements displaying any of the foregoing characteristics, as defined by any applicable Environmental Law.
"Increasing Lender" has the meaning assigned to such term in Section 2.21.
"Interest Period" means, with respect to a Eurodollar Advance, a period of one, two, three or six months commencing on a Business Day selected by the Borrower pursuant to this Agreement. Such Interest Period shall end on the day which corresponds numerically to such date one, two, three or six months thereafter, provided, however, that if there is no such numerically corresponding day in such next, second, third or sixth succeeding month, such Interest Period shall end on the last Business Day of such next, second, third or sixth succeeding month. If an Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next succeeding Business Day, provided, however, that if said next succeeding Business Day falls in a new calendar month, such Interest Period shall end on the immediately preceding Business Day.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute.
"Issuing Bank" means JPMCB or any other Lender (with such Lender's consent) satisfactory to the Agent and the Borrower in its capacity as issuer of Letters of Credit hereunder.
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"JPMCB" means JPMorgan Chase Bank, N.A., in its individual capacity, and its successors.
"LC Disbursement" means a payment made by an Issuing Bank pursuant to a Letter of Credit.
"LC Exposure" means, at any time, the sum of (i) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (ii) the aggregate unpaid amount of all Reimbursement Obligations at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time.
"LC Fee" is defined in Section 2.5.3.
"Lenders" means the lending institutions listed on the signature pages of this Agreement and their respective permitted successors and assigns.
"Lending Installation" means, with respect to a Lender, an Issuing Bank or the Agent, the office, branch, subsidiary or affiliate of such Lender, Issuing Bank or the Agent listed on the administrative information sheets provided to the Agent in connection herewith or on the signature pages hereof or on a Schedule or otherwise selected by such Lender, Issuing Bank or the Agent pursuant to Section 2.17.
"Letter of Credit" means any letter of credit issued pursuant to this Agreement, including, without limitation, each Letter of Credit deemed issued by JPMCB, as Issuing Bank, hereunder pursuant to Section 2.20.1(ii).
"Letter of Credit Application" is defined in Section 2.20.1(i).
"Letter of Credit Collateral Account" is defined in Section 2.20.10.
"LIBO Rate" means, with respect to any Eurodollar Advance for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Eurodollar Advance for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset
8
which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset.
"Loan" means, with respect to a Lender, such Lender's loan made pursuant to Article II (or any conversion or continuation thereof).
"Loan Documents" means this Agreement and any Notes issued pursuant to
Section 2.13.
"Material Debt" means Debt (other than the Credit Extensions) of the Borrower and/or one or more of its Material Subsidiaries in an aggregate principal amount exceeding $25,000,000.
"Material Derivative Obligations" means Derivative Obligations of the Borrower and/or one or more of its Material Subsidiaries with an aggregate mark-to-market termination amount exceeding $25,000,000.
"Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $25,000,000.
"Material Subsidiary" means APS and each other Subsidiary of the Borrower (other than SunCor Development Company and any of its Subsidiaries) whose consolidated assets exceed 10% of the consolidated assets of the Borrower and its Consolidated Subsidiaries.
"Modify" and "Modification" are defined in Section 2.20.1(i).
"Moody's" means Moody's Investors Service, Inc., and any successor thereto.
"Multiemployer Plan" means, at any time, an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period.
"Non-U.S. Lender" is defined in Section 3.5(iv).
"Note" is defined in Section 2.13.
"Obligations" means all unpaid principal of and accrued and unpaid interest on the Loans, all Reimbursement Obligations, all accrued and unpaid fees and all expenses, reimbursements, indemnities and other obligations of the Borrower to the Lenders or to any Lender, any Issuing Bank, the Agent or any indemnified party arising under the Loan Documents.
"Other Taxes" is defined in Section 3.5(ii).
"Outstanding Credit Exposure" means, as to any Lender at any time, the sum of (i) the aggregate principal amount of its Loans outstanding at such time, plus (ii) an amount equal to its Applicable Percentage of the LC Exposure at such time.
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"Participants" is defined in Section 12.2.1.
"Payment Date" means the last day of each of March, June, September and December and the Facility Termination Date.
"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 limited liability company, 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, at any time, an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group.
"Pricing Schedule" means the Schedule attached hereto identified as such.
"Prime Rate" means the rate of interest per annum publicly announced from time to time by JPMCB as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.
"Purchasers" is defined in Section 12.3.1.
"PWEC" means Pinnacle West Energy Corporation, an Arizona corporation, and its successors.
"Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks, non-banks and non-broker lenders for the purpose of purchasing or carrying margin stocks applicable to member banks of the Federal Reserve System.
"Reimbursement Obligations" means, at any time, the aggregate of all LC Disbursements and all other obligations of the Borrower then outstanding under
Section 2.20 to reimburse the applicable Issuing Bank for amounts paid by such Issuing Bank in respect of any one or more drawings under Letters of Credit issued by it, unless such obligation has become a Loan pursuant to the terms of this Agreement.
"Required Lenders" means Lenders in the aggregate having more than 50% of the Aggregate Commitment at such time or, if the Aggregate Commitment has been terminated, Lenders in the aggregate holding more than 50% of the Aggregate Outstanding Credit Exposure at such time.
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"S&P" means Standard and Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc., and any successor thereto.
"Schedule" refers to a specific schedule to this Agreement, unless another document is specifically referenced.
"Section" means a numbered section of this Agreement, unless another document is specifically referenced.
"Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person. Unless otherwise specified, "Subsidiary" means a Subsidiary of the Borrower.
"Syndication Agent" means Union Bank of California, N.A. and its successors and assigns.
"Taxes" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings, and any and all liabilities with respect to the foregoing, but excluding Excluded Taxes and Other Taxes.
"Transferee" is defined in Section 12.4.
"Type" means, with respect to any Advance, its nature as a Floating Rate Advance or a Eurodollar Advance and with respect to any Loan, its nature as a Floating Rate Loan or a Eurodollar Loan.
"Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA.
"Unmatured Default" means an event which but for the lapse of time or the giving of notice, or both, would constitute a Default.
1.2. Plural Forms. The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms.
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ARTICLE II
THE CREDITS
2.1. Commitment. From and including the date of this Agreement and prior to the Facility Termination Date, each Lender severally agrees, on the terms and conditions set forth in this Agreement, to (i) make Loans to the Borrower and
(ii) participate in Letters of Credit issued upon the request of the Borrower, provided that, after giving effect to the making of each such Loan and the issuance of each such Letter of Credit, such Lender's Outstanding Credit Exposure shall not exceed its Commitment. Subject to the terms of this Agreement, the Borrower may borrow, repay and reborrow at any time prior to the Facility Termination Date. The Commitments to extend credit hereunder shall expire on the Facility Termination Date. The Issuing Banks will issue Letters of Credit hereunder on the terms and conditions set forth in Section 2.20.
2.2. Required Payments; Termination. The Outstanding Credit Exposure of each Lender and all other unpaid Obligations of the Borrower to such Lender (other than contingent indemnity obligations and other expense reimbursement obligations not then due and payable) shall be payable on the Facility Termination Date applicable to such Lender. In addition, in the event and on the occasion that the Aggregate Outstanding Credit Exposure as of any Extension Date exceeds the aggregate Commitments of all Consenting Lenders and Assuming Lenders with respect to such Extension Date, the Borrower shall prepay the Advances on such Extension Date in an aggregate amount equal to such excess, together with accrued interest thereon and any amounts otherwise due pursuant to Section 3.4 in respect thereof.
2.3. Ratable Loans. Each Advance hereunder shall consist of Loans made from the several Lenders ratably in proportion to their Applicable Percentages.
2.4. Types of Advances. The Advances may be Floating Rate Advances or Eurodollar Advances, or a combination thereof, selected by the Borrower in accordance with Sections 2.8 and 2.9.
2.5. Commitment Fee; Utilization Margin; LC Fee; Reductions in Aggregate Commitment.
2.5.1 The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee at a per annum rate equal to the Applicable Commitment Fee Rate on the average daily unused amount of such Lender's Commitment from the date hereof to but excluding the date on which such Commitment terminates, payable in arrears on each Payment Date hereafter. For purposes of computing commitment fees, the Commitment of a Lender shall be deemed to be used to the extent of the Outstanding Credit Exposure of such Lender.
2.5.2 For each day from and after the date hereof to but not including the Facility Termination Date on which the Aggregate Outstanding Credit Exposure exceeds fifty percent (50%) of the Aggregate Commitment, the interest rate otherwise applicable to the Advances and the LC Fee, respectively, shall be increased by an amount equal to a
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utilization margin at a rate per annum equal to the Applicable Utilization Margin in effect from time to time, payable from the date hereof until the date on which this Agreement is terminated in full and the Aggregate Outstanding Credit Exposure has been paid in full pursuant to Section 2.2. Such utilization margin shall be payable in arrears on each Payment Date hereafter and on the date on which this Agreement is terminated in full and the Aggregate Outstanding Credit Exposure hereunder has been paid in full pursuant to Section 2.2.
2.5.3 The Borrower agrees to pay (i) to the Agent for the account of each Lender a participation fee with respect to its participations in Letters of Credit (the "LC Fee"), which shall accrue at the same Applicable Margin used to determine the interest rate applicable to Eurodollar Loans on the average daily amount of such Lender's LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to each Issuing Bank a fronting fee, which shall accrue at a per annum rate agreed upon between the Borrower and the applicable Issuing Bank on the average daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) related to Letters of Credit issued by it during the period from and including the Effective Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure, as well as such Issuing Bank's standard fees with respect to the issuance or Modification of any Letter of Credit issued by it or processing of drawings thereunder. Participation fees and fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on or before the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; provided that all such accrued and unpaid fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable either on demand, if such termination is due to a Default arising under Section 7.1, 7.6 or 7.7, or otherwise within 3 days after demand. Any other fees payable to the Issuing Banks pursuant to this
Section 2.5.3 shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).
2.5.4 The Borrower may permanently reduce the Aggregate Commitment in whole, or in part ratably among the Lenders in integral multiples of $1,000,000, upon at least three Business Days' prior written notice to the Agent, which notice shall specify the amount of any such reduction, provided, however, that the amount of the Aggregate Commitment may not be reduced below the Aggregate Outstanding Credit Exposure. All accrued commitment fees and utilization margin shall be payable on the effective date of any termination of the obligations of the Lenders to make Credit Extensions hereunder and on the final date upon which the Aggregate Outstanding Credit Exposure is repaid hereunder.
2.6. Minimum Amount of Each Advance. Each Eurodollar Advance shall be in the minimum amount of $5,000,000 (and in multiples of $1,000,000 if in excess thereof), and,
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except as provided in Section 2.20.5, each Floating Rate Advance shall be in the minimum amount of $5,000,000 (and in multiples of $1,000,000 if in excess thereof), provided, however, that any Floating Rate Advance may be in the amount of the unused Aggregate Commitment.
2.7. Optional Principal Payments. The Borrower may from time to time pay, without penalty or premium, all outstanding Floating Rate Advances, or, in a minimum aggregate amount of $1,000,000 or any integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Floating Rate Advances upon one Business Day's prior notice to the Agent. The Borrower may from time to time pay, subject to the payment of any funding indemnification amounts required by
Section 3.4 but without penalty or premium, all outstanding Eurodollar Advances, or, in a minimum aggregate amount of $5,000,000 or any integral multiple of $1,000,000 in excess thereof, any portion of the outstanding Eurodollar Advances upon three Business Days' prior notice to the Agent.
2.8. Method of Selecting Types and Interest Periods for New Advances. The Borrower shall select the Type of Advance and, in the case of each Eurodollar Advance, the Interest Period applicable thereto from time to time. The Borrower shall give the Agent irrevocable notice (a "Borrowing Notice") not later than 1:30 p.m. (New York time) on the Borrowing Date of each Floating Rate Advance and three Business Days before the Borrowing Date for each Eurodollar Advance, specifying:
(i) the Borrowing Date, which shall be a Business Day, of such Advance,
(ii) the aggregate amount of such Advance,
(iii) the Type of Advance selected, and
(iv) in the case of each Eurodollar Advance, the Interest Period applicable thereto.
The Agent will promptly send each Borrowing Notice to the Lenders. Not later than 3:30 p.m. (New York time) on each Borrowing Date, each Lender shall make available its Loan or Loans in funds immediately available in New York to the Agent at its address specified pursuant to Article XIII. The Agent will make the funds so received from the Lenders available to the Borrower at the Agent's aforesaid address or as otherwise provided in such Borrowing Notice.
2.9. Conversion and Continuation of Outstanding Advances. Floating Rate Advances shall continue as Floating Rate Advances unless and until such Floating Rate Advances are converted into Eurodollar Advances pursuant to this Section 2.9 or are repaid in accordance with Section 2.7. Each Eurodollar Advance shall continue as a Eurodollar Advance until the end of the then applicable Interest Period therefor, at which time such Eurodollar Advance shall be automatically converted into a Floating Rate Advance unless (x) such Eurodollar Advance is or was repaid in accordance with Section 2.7 or (y) the Borrower shall have given the Agent a Conversion/Continuation Notice (as defined below) requesting that, at the end of such Interest Period, such Eurodollar Advance continue as a Eurodollar Advance for the same or another Interest Period. Subject to the terms of Section 2.6, the Borrower may elect from time to time to convert all or any part of a Floating Rate Advance into a Eurodollar Advance. The Borrower shall give the Agent irrevocable notice (a "Conversion/Continuation Notice") of each conversion of a Floating Rate Advance into a Eurodollar Advance or continuation of a Eurodollar Advance
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not later than 11:00 a.m. (New York time) at least three Business Days prior to the date of the requested conversion or continuation, specifying:
(i) the requested date, which shall be a Business Day, of such conversion or continuation,
(ii) the aggregate amount and Type of the Advance which is to be converted or continued, and
(iii) in connection with the conversion or continuation of an Advance as a Eurodollar Advance, (a) the amount of such Advance which is to be converted or continued and (b) the duration of the Interest Period applicable thereto.
2.10. Changes in Interest Rate, etc. Each Floating Rate Advance shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Advance is made or is automatically converted from a Eurodollar Advance into a Floating Rate Advance pursuant to Section 2.9, to but excluding the date it is paid or is converted into a Eurodollar Advance pursuant to Section 2.9 hereof, at a rate per annum equal to the Floating Rate for such day. Changes in the rate of interest on that portion of any Advance maintained as a Floating Rate Advance will take effect simultaneously with each change in the Alternate Base Rate. Each Eurodollar Advance shall bear interest on the outstanding principal amount thereof from and including the first day of the Interest Period applicable thereto to (but not including) the last day of such Interest Period at the interest rate determined by the Agent as applicable to such Eurodollar Advance based upon the Borrower's selections under Sections 2.8 and 2.9 and otherwise in accordance with the terms hereof. No Interest Period may end after the Facility Termination Date. The Borrower shall select Interest Periods so that it is not necessary to repay any portion of a Eurodollar Advance prior to the last day of the applicable Interest Period in order to make a mandatory repayment required pursuant to Section 2.2.
2.11. Rates Applicable After Default. Notwithstanding anything to the contrary contained in Section 2.8, 2.9 or 2.10, during the continuance of a Default or Unmatured Default the Required Lenders may, at their option, by notice to the Borrower (which notice may be revoked at the option of the Required Lenders notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates), declare that no Advance may be made as, converted into or continued as a Eurodollar Advance. During the continuance of a Default under Section 7.1, 7.6 (relating to the Borrower) or 7.7 (relating to the Borrower) and without any election or action on the part of the Agent or any Lender, (i) each Eurodollar Advance shall bear interest for the remainder of the applicable Interest Period at the rate otherwise applicable to such Interest Period plus 2% per annum, (ii) each Floating Rate Advance shall bear interest at a rate per annum equal to the Floating Rate in effect from time to time plus 2% per annum and (iii) the LC Fee shall be increased to a rate per annum equal to the Applicable Margin used to determine the interest applicable to Eurodollar Loans in effect from time to time plus 2% per annum, provided that the Required Lenders may, at their option revoke such increase notwithstanding any provision of Section 8.2 requiring unanimous consent of the Lenders to changes in interest rates or the LC Fee.
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2.12. Method of Payment. All payments of the Obligations hereunder shall be made, without setoff, deduction, or counterclaim, in immediately available funds to the Agent at the Agent's address specified pursuant to Article XIII, or at any other Lending Installation of the Agent specified in writing by the Agent to the Borrower, by 1:00 p.m. (New York time) on the date when due and shall be applied ratably by the Agent among the Lenders in accordance with amounts then owing to such Lenders. Each payment delivered to the Agent for the account of any Lender shall be delivered promptly by the Agent to such Lender in the same type of funds that the Agent received at its address specified pursuant to Article XIII or at any Lending Installation specified in a notice received by the Agent from such Lender. Each reference to the Agent in this Section 2.12 shall also be deemed to refer, and shall apply equally, to the Issuing Banks, in the case of payments required to be made by the Borrower to the Issuing Banks pursuant to Section 2.20.5.
2.13. Noteless Agreement; Evidence of Indebtedness. (i) 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 Credit Extension made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.
(ii) The Agent shall also maintain accounts in which it will record (a) the amount of each Loan made hereunder, the Type thereof and the Interest Period with respect thereto, (b) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder, (c) the original stated amount of each Letter of Credit and the amount of LC Exposure outstanding at any time and (d) the amount of any sum received by the Agent hereunder from the Borrower and each Lender's share thereof.
(iii) The entries maintained in the accounts maintained pursuant to paragraphs (i) and (ii) above shall be prima facie evidence of the existence and amounts of the Obligations therein recorded; provided, however, that the failure of the Agent or any Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Obligations in accordance with their terms.
(iv) Any Lender may request that its Loans be evidenced by a promissory note in substantially the form of Exhibit B (a "Note"). In such event, the Borrower shall prepare, execute and deliver to such Lender such Note payable to the order of such Lender or its registered assigns. Thereafter, the Loans evidenced by such Note and interest thereon shall at all times (prior to any assignment pursuant to Section 12.3) be represented by one or more Notes payable to the order of the payee named therein, except to the extent that any such Lender subsequently returns any such Note for cancellation and requests that such Loans once again be evidenced as described in paragraphs (i) and (ii) above.
2.14. Telephonic Notices. The Borrower hereby authorizes the Lenders and the Agent to extend, convert or continue Advances, effect selections of Types of Advances and to transfer funds based on telephonic notices made by any person or persons the Agent or any Lender in
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good faith believes to be acting on behalf of the Borrower, it being understood that the foregoing authorization is specifically intended to allow Borrowing Notices and Conversion/Continuation Notices to be given telephonically. The Borrower agrees to deliver promptly to the Agent a written confirmation, if such confirmation is requested by the Agent or any Lender, of each telephonic notice signed by an Authorized Officer. If the written confirmation differs in any material respect from the action taken by the Agent and the Lenders, the records of the Agent and the Lenders shall govern absent manifest error.
2.15. Interest Payment Dates; Interest and Fee Basis; Regulation D Compensation.
2.15.1 Interest accrued on each Floating Rate Advance shall be payable on each Payment Date, commencing with the first such date to occur after the date hereof, on any date on which the Floating Rate Advance is prepaid, whether due to acceleration or otherwise, and at maturity. Interest accrued on that portion of the outstanding principal amount of any Floating Rate Advance converted into a Eurodollar Advance on a day other than a Payment Date shall be payable on the date of conversion. Interest accrued on each Eurodollar Advance shall be payable on the last day of its applicable Interest Period, on any date on which the Eurodollar Advance is prepaid, whether by acceleration or otherwise, and at maturity. Interest accrued on each Eurodollar Advance having an Interest Period longer than three months shall also be payable on the last day of each three-month interval during such Interest Period. Interest on Eurodollar Advances and fees shall be calculated for actual days elapsed on the basis of a 360-day year. Interest on Floating Rate Advances shall be calculated for actual days elapsed on the basis of a 365-/366-day year. Interest shall be payable for the day an Advance is made but not for the day of any payment on the amount paid if payment is received prior to 1:00 p.m. (New York time) at the place of payment. If any payment of principal of or interest on an Advance, any fees or any other amounts payable to the Agent or any Lender hereunder shall become due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and, in the case of a principal payment, such extension of time shall be included in computing interest, fees and commissions in connection with such payment.
2.15.2 Each Lender may require the Borrower to pay, contemporaneously with each payment of interest on such Lender's Eurodollar Loans, additional interest on the such Lender's Eurodollar Loan at a rate per annum determined by such Lender up to but not exceeding the excess of (i) (A) the applicable LIBO Rate divided by (B) one minus the "Eurodollar Reserve Percentage" (as defined below) over (ii) the applicable LIBO Rate. Any Lender wishing to require payment of such additional interest (x) shall so notify the Borrower and the Agent, in which case such additional interest on such Lender's Eurodollar Loans shall be payable to such Lender at the place indicated in such notice with respect to each Interest Period commencing at least three Business Days after the giving of such notice and
(y) shall notify the Borrower at least five Business Days prior to each date on which interest is payable on the Eurodollar Loans of the amount then due it under this Section 2.15.2. "Eurodollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve
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System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Eurodollar Advances is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Lender to United States residents).
2.16. Notification of Advances, Interest Rates, Prepayments and Commitment Reductions. Promptly after receipt thereof, the Agent will notify each Lender of the contents of each Aggregate Commitment reduction notice, Borrowing Notice, Conversion/Continuation Notice, and repayment notice received by it hereunder. The Agent will notify each Lender of the interest rate applicable to each Eurodollar Advance promptly upon determination of such interest rate and will give each Lender prompt notice of each change in the Alternate Base Rate.
2.17. Lending Installations. Each Lender may book its Loans and its participation in any LC Exposure and the Issuing Banks may book the Letters of Credit issued by it at any Lending Installation selected by such Lender or Issuing Bank, as the case may be, and may change its Lending Installation from time to time. All terms of this Agreement shall apply to any such Lending Installation and the Loans, Letters of Credit, participations in LC Exposure and any Notes issued hereunder shall be deemed held by each Lender or Issuing Bank, as the case may be, for the benefit of any such Lending Installation. Each Lender or Issuing Bank, as the case may be, may, by written notice to the Agent and the Borrower in accordance with Article XIII, designate replacement or additional Lending Installations through which Loans will be made by it or Letters of Credit will be issued by it and for whose account Loan payments or payments with respect to Letters of Credit are to be made.
2.18. Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender, as the case may be, notifies the Agent prior to 1:00 p.m. (New York time) on the date on which it is scheduled to make payment to the Agent of (i) in the case of a Lender, the proceeds of a Loan or (ii) in the case of the Borrower, a payment of principal, interest or fees to the Agent for the account of the Lenders, that it does not intend to make such payment, the Agent may assume that such payment has been made. The Agent may, but shall not be obligated to, make the amount of such payment available to the intended recipient in reliance upon such assumption. If such Lender or the Borrower, as the case may be, has not in fact made such payment to the Agent, the recipient of such payment shall, on or before the fifth Business Day after demand by the Agent, repay to the Agent the amount so made available together with interest thereon in respect of each day during the period commencing on the date such amount was so made available by the Agent until the date the Agent recovers such amount at a rate per annum equal to (x) in the case of payment by a Lender, the Federal Funds Effective Rate for such day for the first three days and, thereafter, the interest rate applicable to the relevant Loan or (y) in the case of payment by the Borrower, the interest rate applicable to the relevant Loan.
2.19. Replacement of Lender. If the Borrower is required pursuant to
Section 3.1, 3.2 or 3.5 to make any additional payment to any Lender or if any Lender's obligation to make or continue, or to convert Floating Rate Advances into, Eurodollar Advances shall be suspended pursuant to Section 3.3 (any Lender so affected an "Affected Lender"), the Borrower may elect to terminate or replace the Commitment and Outstanding Credit Exposure of such Affected Lender, provided that no Default shall have occurred and be continuing at the time of such
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termination or replacement, and provided further that, concurrently with such termination or replacement, (i) if the Affected Lender is being replaced, another bank or other entity which is reasonably satisfactory to the Borrower and the Agent shall agree, as of such date, to purchase for cash (to the extent of the principal amount of such Affected Lender's Loans and accrued interest and fees and other reimbursable amounts then due and payable) and otherwise assume the Outstanding Credit Exposure and other Obligations then due to the Affected Lender pursuant to an assignment substantially in the form of Exhibit A and to become a Lender for all purposes under this Agreement and to assume all obligations of the Affected Lender to be terminated as of such date and to comply with the requirements of Section 12.3 applicable to assignments, (ii) the Borrower shall pay to such Affected Lender in same day funds on the day of such replacement (A) all interest, fees and other amounts then accrued but unpaid to such Affected Lender by the Borrower hereunder to and including the date of termination, including without limitation payments due to such Affected Lender under Sections 3.1, 3.2 and 3.5, and (B) an amount, if any, equal to the payment which would have been due to such Lender on the day of such replacement under
Section 3.4 had the Outstanding Credit Exposure of such Affected Lender been prepaid on such date rather than sold to the replacement Lender, in each case to the extent not paid by the purchasing Lender and (iii) if the Affected Lender is being terminated, the Borrower shall pay to such Affected Lender all Obligations then due and payable to such Affected Lender (including the amounts described in the immediately preceding clauses (i) and (ii)) and (iv) concurrently with the effectiveness of such release or termination, such Affected Lender shall be released with respect to its Commitments and such Commitments shall be terminated, and, in the case of replacement, Outstanding Credit Exposure assigned by such Affected Lender, and shall cease to be a Lender hereunder but shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Documents which survive payment of the Obligations and termination of the applicable agreement.
2.20. Letters of Credit.
2.20.1 General; Existing Letters of Credit. (i) Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Letters of Credit for its own account, in a form reasonably acceptable to the Agent and the applicable Issuing Bank, and to renew, extend, increase, decrease or otherwise modify each Letter of Credit ("Modify," and each such action a "Modification"), from time to time from and including the date of this Agreement and prior to the date that is five Business Days prior to the Facility Termination Date. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the applicable Issuing Bank relating to any Letter of Credit (a "Letter of Credit Application"), the terms and conditions of this Agreement shall control. 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 or any Lender, other than as expressly stated in this Agreement.
(ii) Schedule 2.20 contains a schedule of certain letters of credit issued for the account of the Borrower prior to the Effective Date. Subject to the satisfaction of the conditions contained in Sections 4.1 and 4.2, from and after the Effective Date
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such letters of credit shall be deemed to be Letters of Credit issued pursuant to this Section 2.20.
2.20.2 Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the Modification of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the applicable Issuing Bank) to the applicable Issuing Bank and the Agent (reasonably in advance of the requested date of issuance or Modification) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be Modified, and specifying the date of issuance or Modification (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with Section 2.20.3), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare or Modify such Letter of Credit. If requested by the applicable Issuing Bank, but subject to Section 2.20.1(i) hereof, the Borrower also shall submit a Letter of Credit Application on such Issuing Bank's standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued or Modified only if (A) after giving effect to such issuance or Modification (and upon such issuance or Modification the Borrower shall be deemed to represent and warrant that) (i) the LC Exposure shall not exceed $100,000,000, (ii) the LC Exposure with respect to Letters of Credit having an expiration date that is after any applicable and effective Extension Date shall not exceed the aggregate Commitments of all Consenting Lenders and Assuming Lenders with respect to such Extension Date and (iii) the Aggregate Outstanding Credit Exposure shall not exceed the Aggregate Commitment and (B) the Issuing Bank has not received written notice from the Agent, the Required Lenders or the Borrower, at least one Business Day prior to the requested date of issuance or Modification of the applicable Letter of Credit, that one or more applicable conditions contained in
Section 4.2 shall not be satisfied.
2.20.3 Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date eighteen months after the date of the issuance or any renewal or extension of such Letter of Credit and (ii) the date that is five Business Days prior to the Facility Termination Date. A Letter of Credit may contain a provision pursuant to which it is deemed to be extended on an annual basis unless notice of termination is given by the Issuing Bank subject to clause (ii) in the immediately preceding sentence.
2.20.4 Participations. On the Effective Date with respect to the Letters of Credit identified on Schedule 2.20, and for all other Letters of Credit by the issuance of such Letter of Credit, or a Modification to a Letter of Credit increasing the amount thereof, and without any further action on the part of the Issuing Bank issuing such Letter of Credit 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 Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Agent, for the account of the applicable Issuing Bank, such Lender's Applicable Percentage of each LC
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Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in Section 2.20.5, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this Section 2.20.4 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 Unmatured Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.
2.20.5 Reimbursement. If any Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Agent an amount equal to such LC Disbursement not later than 2:30 p.m., New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 1:00 p.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 2:30 p.m., New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 1:00 p.m., New York City time, on the day of receipt, or
(ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that, if such LC Disbursement is not less than $1,000,000, the Borrower may request in accordance with Section 2.8 that such payment be financed with a Floating Rate Advance in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting Floating Rate Advance. If the Borrower fails to make such payment when due, the Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.12 with respect to Loans made by such Lender (and Section 2.12 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Agent shall promptly pay to the applicable Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Agent of any payment from the Borrower pursuant to this paragraph, the Agent shall distribute such payment to the applicable Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse such Issuing Bank, then to such Lenders and the applicable Issuing Bank as their interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse any Issuing Bank for any LC Disbursement (other than the funding of Floating Rate Advances as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement.
2.20.6 Obligations Absolute. The Borrower's obligation to reimburse LC Disbursements as provided in Section 2.20.5 shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or
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provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by any Issuing Bank under a Letter of Credit issued by it against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. Neither the Agent, the Lenders nor any Issuing Bank, nor any of their Affiliates, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank issuing such Letter of Credit; provided that the foregoing shall not be construed to excuse such Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by such Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit issued by it comply with the terms thereof or 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. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of an Issuing Bank (as finally determined by a court of competent jurisdiction), such Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the applicable Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.
2.20.7 Disbursement Procedures. Each Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit issued by it. Each Issuing Bank shall promptly notify the Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether such Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse such Issuing Bank and the Lenders with respect to any such LC Disbursement.
2.20.8 Interim Interest. If any Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such
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LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to Floating Rate Advances; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to Section 2.20.5, then Section 2.11 shall apply. Interest accrued pursuant to this Section 2.20.8 shall be for the account of the applicable Issuing Bank, except that interest accrued on and after the date of payment by any Lender pursuant to Section 2.20.5 to reimburse the applicable Issuing Bank shall be for the account of such Lender to the extent of such payment.
2.20.9 Replacement of any Issuing Bank. An Issuing Bank may be replaced at any time by written agreement among the Borrower, the Agent, the replaced Issuing Bank and the successor Issuing Bank. The Agent shall notify the Lenders of any such replacement of an Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.5.3. From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the replaced Issuing Bank under this Agreement with respect to Letters of Credit to be issued by it thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit.
2.20.10 Cash Collateralization. If any Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Lenders with LC Exposure representing greater than 50% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this Section 2.20.10, the Borrower shall deposit in an account with the Agent, in the name of the Agent and for the benefit of the Lenders (the "Letter of Credit Collateral Account"), an amount in cash which is free and clear of all rights and claims of third parties equal to the aggregate undrawn amount of all outstanding Letters of Credit as of such date plus any accrued and unpaid LC Fees thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Default with respect to the Borrower described in Section 7.6 or 7.7. If at any time while any Default is continuing, the Agent determines that the amount on deposit in the Letter of Credit Collateral Account shall be less than the aggregate undrawn amount of all outstanding Letters of Credit as of such date plus any accrued and unpaid LC Fees thereon, the Agent may make demand on the Borrower to pay, and the Borrower will, forthwith upon such demand and without any further notice or act, pay to the Agent an amount equal to such deficiency, which funds shall be deposited in the Letter of Credit Collateral Account. All deposits maintained in the Letter of Credit Collateral Account shall be held by the Agent as collateral for the payment and performance of the Reimbursement Obligations of the Borrower with
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respect to such undrawn amounts and as otherwise expressly set forth in this Section 2.20.10. The Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such Letter of Credit Collateral Account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Agent and at the Borrower's risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such Letter of Credit Collateral Account shall be applied by the Agent to reimburse each Issuing Bank for LC Disbursements with respect to such undrawn amounts for which it has not otherwise been reimbursed and, to the extent not so applied, shall be held for the satisfaction of additional Reimbursement Obligations arising in respect of undrawn amounts of outstanding Letters of Credit or, if the maturity of the Loans has been accelerated (but subject to the consent of Lenders with LC Exposure representing greater than 50% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of a Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Defaults have been cured or waived.
2.21. Expansion Option. The Borrower may from time to time elect to increase the Commitments in a minimum amount of $10,000,000 so long as, after giving effect thereto, the aggregate amount of the Commitments does not exceed $400,000,000. Upon the Borrower's request, such increase may be provided by one or more Lenders (each Lender so agreeing to an increase in its Commitment, an "Increasing Lender"), or by one or more new banks, financial institutions or other entities (each such new bank, financial institution or other entity, an "Augmenting Lender"), selected by the Arrangers, in consultation with the Borrower, and willing to increase their existing Commitments, or extend Commitments, as the case may be, provided that (i) each Augmenting Lender, shall be subject to the approval of the Agent and the Issuing Banks and (ii) (x) in the case of an Increasing Lender, the Borrower and such Increasing Lender execute an agreement substantially in the form of Exhibit C hereto, and (y) in the case of an Augmenting Lender, the Borrower and such Augmenting Lender execute an agreement substantially in the form of Exhibit D hereto. Increases and new Commitments created pursuant to this clause shall become effective on the date agreed by the Borrower, the Agent and the relevant Increasing Lenders or Augmenting Lenders and the Agent shall notify each Lender thereof. Notwithstanding the foregoing, no increase in the Commitments (or in the Commitment of any Lender), shall become effective under this paragraph unless,
(i) on the proposed date of the effectiveness of such increase, the conditions set forth in Sections 4.2.1 and 4.2.2 shall be satisfied or waived by Lenders holding more than 50% of the Commitments (inclusive of any increased or new Commitments under this Section 2.21) and the Agent shall have received a certificate to that effect dated such date and executed by an Authorized Officer of the Borrower and (ii) the Agent shall have received documents consistent with those delivered on the Effective Date as to the corporate power and authority of the Borrower to borrow hereunder after giving effect to such increase. On the effective date of any increase in the Commitments, (i) each relevant Increasing Lender and Augmenting Lender shall make available to the Agent such amounts in immediately available funds as the Agent shall determine, for the benefit of the other Lenders, as being required in order to cause, after giving effect to such increase and the use of such amounts to make payments to such other Lenders, each Lender's portion of the outstanding Loans of all the Lenders to equal its Applicable Percentage of such outstanding Loans, and (ii)
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the Borrower shall be deemed to have repaid and reborrowed all outstanding Loans as of the date of any increase in the Commitments (with such reborrowing to consist of the Types of Loans, with related Interest Periods if applicable, specified in a notice delivered by the Borrower in accordance with the requirements of Section 2.8). The deemed payments made pursuant to clause (ii) of the immediately preceding sentence shall be accompanied by payment of all accrued interest on the amount prepaid and, in respect of each Eurocurrency Loan, shall be subject to indemnification by the Borrower pursuant to the provisions of Section 3.4 if the deemed payment occurs other than on the last day of the related Interest Periods.
2.22. Extension of Facility Termination Date.
2.22.1 Extension Request. The Borrower may request, no more than twice during the term of this Agreement, a one-year extension of the Facility Termination Date by submitting a written request for an extension to the Agent (an "Extension Request") no earlier than 90 days but not later than 60 days prior to any anniversary of the Effective Date (such anniversary being an "Anniversary Date"). Promptly upon receipt of an Extension Request, the Agent shall notify each Lender thereof and shall request each Lender to approve the Extension Request. Each Lender approving the Extension Request shall deliver its written consent no earlier than 30 days but no later than 20 days prior to such Anniversary Date (it being understood and agreed that such consent may be given or withheld in such Lender's sole and absolute discretion). If any Lender shall fail to notify the Agent in writing of its consent to any such request for extension of the Facility Termination Date by the 20th day prior to such Anniversary Date, such Lender shall be deemed to be a Non-Consenting Lender (as defined below) with respect to such request. The election of any Lender to agree to an Extension Request shall not obligate any other Lender to so agree. The Agent shall deliver to the Borrower written notification of the Lenders' decisions no later than 15 days prior to such Anniversary Date.
2.22.2 Extension. If all of the Lenders consent in writing to any such request in accordance with Section 2.22.1, the Facility Termination Date in effect at such time shall, effective as at such next Anniversary Date (the "Extension Date"), be extended for one calendar year; provided that no such extension shall become effective under this sentence unless, (i) on the applicable Extension Date, the conditions set forth in Sections 4.2.1 and 4.2.2 shall be satisfied or waived by Lenders holding more than 50% of the Commitments and the Agent shall have received a certificate to that effect dated such date and executed by an Authorized Officer of the Borrower and
(ii) the Agent shall have received documents consistent with those delivered on the Effective Date as to the corporate power and authority of the Borrower to borrow hereunder after giving effect to such extension. If Lenders holding more than 50% of the Commitments, but less than all of the Lenders, consent in writing to any such request in accordance with Section 2.22.1, unless the Borrower shall deliver written notice to the Agent terminating such requested extension not less than ten Business Days prior to the proposed Extension Date (it being understood and agreed that any Extension Request issued in connection with any such terminated extension shall constitute an Extension Request for purposes of determining the then remaining available number of Extension Requests under Section 2.22.1), the Facility Termination Date in effect at such time shall, effective as at the applicable Extension Date, be extended as to those Lenders that so consented (each a "Consenting
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Lender") but shall not be extended as to any other Lender (each a "Non-Consenting Lender"). To the extent that the Facility Termination Date is not extended as to any Lender pursuant to this Section 2.22 and the Commitment of such Lender is not assumed in accordance with Section 2.22.3 on or prior to the applicable Extension Date, the Commitment of such Non-Consenting Lender shall automatically terminate in whole on such unextended Facility Termination Date without any further notice or other action by the Borrower, such Lender or any other Person; provided that such Non-Consenting Lender shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Documents which survive payment of the Obligations and termination of the applicable agreement. It is understood and agreed that no Lender shall have any obligation whatsoever to agree to any request made by the Borrower for any requested extension of the Facility Termination Date.
2.22.3 Assuming Lenders. If less than all of the Lenders consent to any such request pursuant to Section 2.22.1, the Borrower may arrange for one or more Persons (who may be Consenting Lenders) acceptable to the Agent and the Issuing Banks (each an "Assuming Lender") (x) to assume, effective as of the Extension Date or such other date as may be agreed among the Borrower, the Non-Consenting Lender, such Assuming Lender and the Agent, any Non-Consenting Lender's Commitment and all of the obligations of such Non-Consenting Lender under this Agreement thereafter arising, without recourse to or warranty by, or expense to, such Non-Consenting Lender and
(y) to accept, effective as of the Extension Date or such later date as any Assuming Lender executes and delivers an assignment substantially in the form of Exhibit A (an "Assumption Agreement"), the Facility Termination Date applicable to Consenting Lenders; provided, however, that the amount of the Commitment of any such Assuming Lender as a result of such substitution shall in no event be less than $10,000,000 unless the amount of the Commitment of such Non-Consenting Lender is less than $10,000,000, in which case such Assuming Lender shall assume all of such lesser amount; and provided further that:
(i) any such Assuming Lender shall have paid to such Non-Consenting Lender (A) the aggregate principal amount of, and any interest accrued and unpaid to the effective date of the assignment on, the outstanding Advances, if any, owing to such Non-Consenting Lender plus (B) any accrued but unpaid commitment fees owing to such Non-Consenting Lender as of the effective date of such assignment;
(ii) all additional accrued and unpaid cost reimbursements, expense reimbursements and indemnities payable to such Non-Consenting Lender, and all other accrued and unpaid amounts owing to such Non-Consenting Lender hereunder, as of the effective date of such assignment shall have been paid to such Non-Consenting Lender; and
(iii) with respect to any such Assuming Lender, the applicable processing and recordation fee required under Section 12.3.3 for such assignment shall have been paid;
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provided further that such Non-Consenting Lender shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Documents which survive payment of the Obligations and termination of the applicable agreement. At least three Business Days prior to any Extension Date, (A) each such Assuming Lender, if any, shall have delivered to the Borrower and the Agent an Assumption Agreement, duly executed by such Assuming Lender, such Non-Consenting Lender, the Borrower and the Agent, (B) any such Consenting Lender shall have delivered confirmation in writing satisfactory to the Borrower and the Agent (acting reasonably) as to the increase in the amount of its Commitment and (C) each Non-Consenting Lender being replaced pursuant to this Section 2.22 shall have delivered to the Agent any Note held by such Non-Consenting Lender. Upon the payment of all amounts referred to in clauses (i),
(ii) and (iii) of this Section 2.22.3, each such Assuming Lender, as of the Extension Date, will be substituted for such Non-Consenting Lender under this Agreement and shall be a Lender for all purposes of this Agreement, without any further acknowledgment by or the consent of the other Lenders, and the obligations of each such Non-Consenting Lender hereunder arising after the Extension Date shall, by the provisions hereof, be released and discharged.
2.22.4 Consent of Majority of Existing Lenders. If Lenders holding more than 50% of the Commitments (after giving effect to any assignments pursuant to Section 2.22.3) consent in a writing delivered to the Agent to a requested extension (whether by execution or delivery of an Assumption Agreement or otherwise) not later than one Business Day prior to such Extension Date, the Agent shall so notify the Borrower, and, so long as (i) on the Extension Date, the conditions set forth in Sections 4.2.1 and 4.2.2 shall be satisfied or waived by Lenders holding more than 50% of the Commitments (after giving effect to any assignments pursuant to Section 2.22.3) and the Agent shall have received a certificate to that effect dated such date and executed by an Authorized Officer of the Borrower and
(ii) the Agent shall have received documents consistent with those delivered on the Effective Date as to the corporate power and authority of the Borrower to borrow hereunder after giving effect to such extension, the Facility Termination Date then in effect shall be extended for the additional one-year period as described in Section 2.22.2, and all references in this Agreement, and in any Notes to the "Facility Termination Date" shall, with respect to each Consenting Lender and each Assuming Lender for such Extension Date, refer to the Facility Termination Date as so extended. Promptly following each Extension Date, the Agent shall notify the Lenders (including, without limitation, each Assuming Lender) of the extension of the scheduled Facility Termination Date in effect immediately prior thereto and shall thereupon record in the Register the relevant information with respect to each such Consenting Lender and each such Assuming Lender.
ARTICLE III
YIELD PROTECTION; TAXES
3.1. Yield Protection. If, on or after the date of this Agreement, the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive, or any change in the interpretation or administration thereof by any governmental or quasi-
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governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender or applicable Lending Installation or Issuing Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency:
(i) imposes or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or any applicable Lending Installation or any Issuing Bank (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System but excluding with respect to any Eurodollar Loans any such requirement with respect to which such Lender is entitled to compensation for the relevant Interest Period under Section 2.15.2), or
(ii) imposes any other condition the result of which is to increase the cost to any Lender, Issuing Bank or any applicable Lending Installation of making, funding or maintaining its Eurodollar Loans or Commitment, or of issuing or participating in any Letter of Credit, or reduces any amount receivable by any Lender, Issuing Bank or any applicable Lending Installation in connection with its Eurodollar Loans, Commitment, Letters of Credit or participations therein, by an amount deemed material by such Lender or Issuing Bank,
and the result of any of the foregoing is to increase the cost to such Lender, Issuing Bank or applicable Lending Installation of making or maintaining its Eurodollar Loans or Commitment or of issuing or participating in Letters of Credit or to reduce the return received by such Lender, Issuing Bank or applicable Lending Installation in connection with such Eurodollar Loans, Commitment, Letters of Credit or participations therein, then, within 30 days of demand by such Lender or Issuing Bank, the Borrower shall pay such Lender or Issuing Bank, as applicable, such additional amount or amounts as will compensate such Lender or Issuing Bank, as applicable, for such increased cost or reduction in amount received.
3.2. Changes in Capital Adequacy Regulations. If a Lender or Issuing Bank determines the amount of capital required or expected to be maintained by such Lender or Issuing Bank, any Lending Installation of such Lender or Issuing Bank or any corporation controlling such Lender or Issuing Bank is increased as a result of a Change, then, within 30 days of demand by such Lender or Issuing Bank, the Borrower shall pay such Lender or Issuing Bank, as applicable, the amount necessary to compensate for any shortfall in the rate of return on the portion of such increased capital which such Lender or Issuing Bank reasonably determines is attributable to this Agreement, its Outstanding Credit Exposure or its Commitment to make Loans, or issue or participate in Letters of Credit, hereunder (after taking into account such Lender or Issuing Bank's policies as to capital adequacy). "Change" means (i) any change after the date of this Agreement in the Risk-Based Capital Guidelines or (ii) any adoption of, or change in, or change in the interpretation or administration of, any other law, governmental or quasi-governmental rule, regulation, policy, guideline, interpretation, or directive (whether or not having the force of law) after the date of this Agreement which affects the amount of capital required or expected to be maintained by any Lender, Issuing Bank or any Lending Installation or any corporation controlling any Lender or Issuing Bank. "Risk-Based Capital Guidelines"
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means (i) the risk-based capital guidelines in effect in the United States on the date of this Agreement, including transition rules, and (ii) the corresponding capital regulations promulgated by regulatory authorities outside the United States implementing the July 1988 report of the Basle Committee on Banking Regulation and Supervisory Practices Entitled "International Convergence of Capital Measurements and Capital Standards," including transition rules, and any amendments to such regulations adopted prior to the date of this Agreement.
3.3. Availability of Types of Advances. If (i) any Lender determines that maintenance of its Eurodollar Loans at a suitable Lending Installation would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or (ii) the Required Lenders determine that (a) deposits of a type and maturity appropriate to match fund Eurodollar Advances are not available, (b) the interest rate applicable to Eurodollar Advances does not accurately reflect the cost of making or maintaining Eurodollar Advances or
(c) no reasonable basis exists for determining the LIBO Rate, then the Agent shall suspend the availability of Eurodollar Advances of each affected Lender and, on the date of such suspension in the case of an event described in clauses
(i) above or on the last day of the then current Interest Period applicable thereto in the case of an event described in clause (ii) above, require any affected Eurodollar Advances either to be repaid or, at the election of the Borrower, converted to Floating Rate Advances (on which interest and principal shall be payable contemporaneously with the related Eurodollar Loans of the other Lenders), subject to the payment of any funding indemnification amounts required by Section 3.4. If the applicable Lender in the case of clause (i) above, or the Required Lenders in the case of clause (ii) above, notify the Borrower that the circumstances giving rise to such suspension no longer apply, the principal amount of each such Floating Rate Advances shall be converted into Eurodollar Advances on the first day of the next such Interest Period applicable to the related Eurodollar Loan of the other Lenders.
3.4. Funding Indemnification. If any payment of a Eurodollar Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment or otherwise, or a Eurodollar Advance is not made or continued, or a Floating Rate Advance is not converted into a Eurodollar Advance, on the date specified by the Borrower for any reason other than default by the Lenders or any Lender, or a Eurodollar Advance is not prepaid on the date specified by the Borrower for any reason, the Borrower will indemnify each Lender for any loss or cost (excluding loss of anticipated profits) incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain such Eurodollar Advance.
3.5. Taxes. (i) All payments by the Borrower to or for the account of any Lender, Issuing Bank or the Agent hereunder or under any Note or Letter of Credit Application shall be made free and clear of and without deduction for any and all Taxes. If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to any Lender, Issuing Bank or the Agent, (a) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.5) such Lender, Issuing Bank 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, (b) the Borrower shall make such deductions, (c) the Borrower shall pay the full amount deducted to the relevant authority in accordance with applicable law and (d) the Borrower shall furnish to the
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Agent the original copy of a receipt evidencing payment thereof within 30 days after such payment is made.
(ii) In addition, the Borrower hereby agrees to pay any present or future stamp or documentary taxes and any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any Note or Letter of Credit Application or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note or any Letter of Credit Application ("Other Taxes").
(iii) The Borrower hereby agrees to indemnify the Agent, each Issuing Bank and each Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on amounts payable under this Section 3.5) paid by the Agent, such Issuing Bank or such Lender as a result of its Commitment, any Credit Extensions made by it hereunder, any Letter of Credit issued or participated in by it hereunder, or otherwise in connection with its participation in this Agreement and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. Payments due under this indemnification shall be made within 30 days of the date the Agent, such Issuing Bank or such Lender makes demand therefor pursuant to Section 3.6.
(iv) Each Lender that is not incorporated under the laws of the United States of America or a state thereof (each a "Non-U.S. Lender") agrees that it will, not more than ten Business Days after the date on which it becomes a party to this Agreement (but in any event before a payment is due to it hereunder), (i) deliver to the Agent two duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI or successor forms, certifying in either case that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, or
(ii) deliver to the Agent a United States Internal Revenue Service Form W-8IMY or successor form together with the applicable accompanying duly completed copies of United States Internal Revenue Service applicable Forms W-8 or W-9 or successor forms, as the case may be, and certify that it is entitled to an exemption from United States backup withholding tax. Each Non-U.S. Lender further undertakes to deliver to each of the Borrower and the Agent renewals or additional copies of such form (or any amendment thereto or successor form) (x) on or before the date that such form expires or becomes obsolete, (y) after the occurrence of any event requiring a change in the most recent forms so delivered by it and (z) from time to time upon reasonable request by the Borrower or the Agent. All forms or amendments described in the preceding sentence shall certify that such Lender is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form or amendment with respect to it and such Lender advises the Borrower and the Agent that it is not capable of receiving
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payments without any deduction or withholding of United States federal income tax.
(v) For any period during which a Non-U.S. Lender has failed to provide the Borrower with an appropriate form pursuant to clause (iv) above (unless such failure is due to a change in treaty, law or regulation, or any change in the interpretation or administration thereof by any governmental authority, occurring subsequent to the date on which a form originally was required to be provided), the Borrower shall not gross up the payments as provided under Section 3.5 with respect to such Non-U.S. Lender, and such Non-U.S. Lender shall not be entitled to indemnification under this Section 3.5 with respect to Taxes imposed by the United States; provided that, should a Non-U.S. Lender which is otherwise exempt from or subject to a reduced rate of withholding tax become subject to Taxes because of its failure to deliver a form required under clause (iv) above, the Borrower shall take such steps as such Non-U.S. Lender shall reasonably request to assist such Non-U.S. Lender to recover such Taxes.
(vi) Any Lender or Issuing Bank that is entitled to an exemption from or reduction of withholding tax with respect to payments under this Agreement or any Note pursuant to the law of any relevant jurisdiction or any treaty shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate.
(vii) If the U.S. Internal Revenue Service or any other governmental authority of the United States or any other country or any political subdivision thereof asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Lender or any Issuing Bank (because the appropriate form was not delivered or properly completed, because such Lender or Issuing Bank failed to notify the Agent of a change in circumstances which rendered its exemption from withholding ineffective, or for any other reason), such Lender or Issuing Bank, as applicable, shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax, withholding therefor, or otherwise, including penalties and interest, and including taxes imposed by any jurisdiction on amounts payable to the Agent under this subsection, together with all costs and expenses related thereto (including attorneys fees for the Agent, which attorneys may be employees of the Agent). The obligations of the Lenders and Issuing Banks under this Section 3.5(vii) shall survive the payment of the Obligations and termination of this Agreement.
3.6. Lender Statements; Survival of Indemnity. To the extent reasonably possible, each Lender shall designate an alternate Lending Installation with respect to its Eurodollar Loans and issuance or participation in Letters of Credit to reduce any liability of the Borrower to such Lender under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of Eurodollar Advances under
Section 3.3, so long as such designation is not, in the judgment of such Lender, disadvantageous to such Lender. The Borrower shall not be required to compensate a Lender
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pursuant to Section 3.1, 3.2 or 3.5 for any amounts incurred or arising thereunder more than 90 days prior to the date that such Lender notifies the Borrower of the event(s) giving rise to such amounts and of such Lender's intention to claim compensation therefor; provided that, if the adoption or change described in Section 3.1 or Change described in 3.2 or adoption or modification of any applicable law under Section 3.5 giving rise to such request for compensation is retroactive, then the 90 day period referred to above shall be extended to include the period of retroactive effect thereof. Each Lender shall deliver a written statement of such Lender to the Borrower (with a copy to the Agent) as to the amount due, if any, under Section 3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of manifest error. Determination of amounts payable under Sections 3.1, 3.2 or 3.4 in connection with a Eurodollar Loan shall be calculated as though each Lender funded its Eurodollar Loan through the purchase of a deposit of the type and maturity corresponding to the deposit used as a reference in determining the Eurodollar Rate applicable to such Loan, whether in fact that is the case or not. Unless otherwise provided herein, the amount specified in the written statement of any Lender shall be payable within 30 days after receipt by the Borrower of such written statement. The obligations of the Borrower under Sections 3.1, 3.2, 3.4 and 3.5 shall survive payment of the Obligations and termination of this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1. Effectiveness of Agreement. This Agreement shall become effective as of the Effective Date, provided that on or prior to the Effective Date the Borrower has (i) paid to the Agent for the ratable account of each of the lenders then party to the Existing Credit Agreement, the accrued and unpaid facility fees and other fees and expenses under the Existing Credit Agreement through the Effective Date and all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all reasonable out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder or pursuant to the terms of the fee letter and commitment letter described in Section 10.13, and (ii) furnished to the Agent with sufficient copies for the Lenders:
4.1.1 Copies of the articles of incorporation of the Borrower, together with all amendments, and a certificate of good standing, each certified by the appropriate governmental officer in its jurisdiction of incorporation, as well as any other information required by Section 326 of the USA Patriot Act or necessary for the Agent or any Lender to verify the identity of the Borrower as required by Section 326 of the USA Patriot Act.
4.1.2 Copies, certified by the Secretary, Assistant Secretary or an Associate Secretary of the Borrower, of its by-laws and of its Board of Directors' resolutions and of resolutions or actions of any other body authorizing the execution of the Loan Documents to which the Borrower is a party.
4.1.3 An incumbency certificate, executed by the Secretary, Assistant Secretary or an Associate Secretary of the Borrower, which shall identify by name and title and bear the signatures of the Authorized Officers and any other officers of the Borrower
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authorized to sign the Loan Documents to which the Borrower is a party, upon which certificate the Agent and the Lenders shall be entitled to rely until informed of any change in writing by the Borrower.
4.1.4 A certificate, signed by the chief financial officer or treasurer of the Borrower, stating that on the Effective Date no Default or Unmatured Default has occurred and is continuing, which certificate shall also set forth in reasonable detail the calculations required to establish that the Borrower was in compliance with the requirements of Section 6.9 as of the last day of the most recently completed fiscal quarter prior to the Effective Date in respect of which financial statements shall have been filed with the Securities and Exchange Commission, but including (without duplication of outstanding extensions of credit under the Existing Credit Agreement) any Credit Extensions made on the Effective Date.
4.1.5 Written opinion letters of the Borrower's counsel, addressed to the Lenders in form and substance reasonably acceptable to the Agent.
4.1.6 Written opinion of Sidley Austin Brown & Wood, LLP, counsel for the Agent, addressed to the Agent and the Lenders, with respect to the enforceability of this Agreement and the Notes issued on the Effective Date, in form and substance reasonably acceptable to the Agent.
4.1.7 Any Notes requested by a Lender pursuant to Section 2.13 payable to the order of each such requesting Lender.
4.2. Each Credit Extension. The Lenders shall not be required to make (i) the initial Credit Extension hereunder unless all of the conditions in Section 4.1 shall have been satisfied as of the Effective Date, and (ii) any Credit Extension (other than (x) a conversion or continuation of an outstanding Advance pursuant to Section 2.9 or (y) the financing of any payment under a Letter of Credit with a Floating Rate Advance made pursuant to Section 2.20.5) unless on the applicable Credit Extension Date:
4.2.1 There exists no Default or Unmatured Default.
4.2.2 The representations and warranties contained in Article V are true and correct in all material respects as of such Credit Extension Date except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct in all material respects on and as of such earlier date; provided that this requirement shall not apply to the representations and warranties set forth in Sections 5.4.3, 5.5 and 5.7 with respect to any Credit Extension after the Effective Date, but shall apply to the representations and warranties set forth in Sections 5.4.3, 5.5 and 5.7 with respect to (i) any increase of the aggregate Commitments under Section 2.21 and (ii) any extension of the Facility Termination Date under Section 2.22.
Each Borrowing Notice or request for issuance or Modification of a Letter of Credit with respect to each such Credit Extension shall constitute a representation and warranty by the Borrower that the conditions contained in Sections 4.2.1 and 4.2.2 have been satisfied.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1. Existence and Standing. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Arizona, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, if the failure to have any such license, authorization, consent or approval is reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries taken as a whole.
5.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any Material Subsidiary or result in the creation or imposition of any Lien on any asset of the Borrower or any Material Subsidiary except as otherwise permitted hereunder.
5.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable 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.
5.4. Financial Information.
5.4.1 The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 2004 and the related consolidated statements of income and of cash flow for the fiscal year then ended, reported on by Deloitte & Touche LLP and set forth in the Borrower's 2004 Form 10-K, fairly present in all material respects, in conformity with generally accepted accounting principles (except as disclosed therein), the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year.
5.4.2 The unaudited consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 2005 and the related unaudited consolidated statements of income and of cash flows for the nine months then ended, set forth in the Borrower's Latest Form 10-Q, fairly present in all material respects, in conformity with generally accepted accounting principles applied on a basis consistent with the financial statements referred to in Section 5.4.1 (except as disclosed therein), the
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consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine month period (subject to normal year-end adjustments).
5.4.3 Except as disclosed in the Borrower's SEC Reports, since September 30, 2005 there has been no material adverse change in the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole.
5.5. Litigation. Except as disclosed in the Borrower's SEC Reports, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which is reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of this Agreement or the Notes.
5.6. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or is reasonably likely to result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA.
5.7. Environmental Matters. Except as disclosed in the Borrower's SEC Reports, the operations and properties of the Borrower and its Material Subsidiaries comply in all material respects with all Environmental Laws, except where (i) the necessity of compliance therewith is being contested in good faith by appropriate proceedings or (ii) the failure to comply therewith is not reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries taken as a whole.
5.8. Taxes. The Borrower and its Material 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 them, except to the extent that (i) such taxes are being contested in good faith and by appropriate proceedings and that appropriate reserves for the payment thereof have been maintained by the Borrower or its Material Subsidiaries in accordance with generally accepted accounting principles or (ii) the failure to make such filings or such payments is not reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries taken as a whole. The charges, accruals and reserves on the books of the Borrower in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate.
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5.9. Material Subsidiaries. Each Material Subsidiary is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and, except as disclosed in the Borrower's SEC Reports, has all corporate and other legal powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted, if the failure to have any such license, authorization, consent or approval is reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries taken as a whole, and as to APS, except that (i) APS 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 APS 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.
5.10. Not an Investment Company. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended.
5.11. Public Utility Holding Company Act, Etc. The Borrower is a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended ("PUHCA"), and the Public Utility Holding Company Act of 2005 ("PUHCA 2005"). Pursuant to Section 3(a)(1) of PUHCA and Rule 2 promulgated thereunder, the Borrower is exempt from all provisions of PUHCA, other than Section 9(a)(2) thereof, until the effective date of the repeal of PUHCA on February 8, 2006. Thereafter, pursuant to PUHCA 2005, the Borrower will be subject to the limited jurisdiction of the Federal Energy Regulatory Commission ("FERC"), and any State commission with jurisdiction to regulate a public utility company in Borrower's holding company system, with respect to access to the books and records of the Borrower and its subsidiaries and affiliates. The Borrower is also a "public utility" within the meaning of the Federal Power Act, as amended ("FPA"), and subject to FERC regulation under the FPA. The Borrower has obtained blanket authority from FERC under Section 204 of the FPA to issue securities and assume liabilities, and such authorization remains in full force and effect.
ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Required Lenders shall otherwise consent in writing:
6.1. Information. The Borrower will deliver to each of the Lenders:
6.1.1 As soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and cash flow for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, accompanied by an opinion
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thereon of independent certified public accountants of nationally recognized public standing, which opinion shall state that said financial statements fairly present in all material respects the financial position and results of operations of the Borrower and its Consolidated Subsidiaries as at the end of, and for, such fiscal year, in conformity with generally accepted accounting principles (except as disclosed therein);
6.1.2 As soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of income and cash flow for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in the case of such statements of income and of cash flow in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, 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 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);
6.1.3 Simultaneously with the delivery of each set of financial statements referred to in Sections 6.1.1 and 6.1.2 above, a certificate of an Authorized Officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 6.6 and 6.9 on the date of such financial statements and (ii) stating whether any Default or Unmatured Default exists on the date of such certificate and, if any Default or Unmatured Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto;
6.1.4 As soon as possible and in any event within five Business Days after an Authorized Officer obtains knowledge of any Default or Unmatured Default, if such Default or Unmatured Default is then continuing, a certificate of an Authorized Officer setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto;
6.1.5 Promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed;
6.1.6 Promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission;
6.1.7 If and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is
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required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under
Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC;
(vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or is reasonably likely to result in the imposition of a Lien or the posting of a bond or other security under ERISA and the Internal Revenue Code, a certificate of an Authorized Officer setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; and
6.1.8 Promptly after an Authorized Officer becomes aware of the occurrence thereof, notice of any change by Moody's or S&P of their respective ratings referenced in the Pricing Schedule or of the cessation (or subsequent commencement) by Moody's or S&P of publication of their respective ratings referenced in the Pricing Schedule; and
6.1.9 From time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Agent, at the request of any Lender, may reasonably request.
Information required to be delivered pursuant to Sections 6.1.1, 6.1.2, 6.1.5 or 6.1.6 above shall be deemed to have been delivered on the date on which the Borrower provides notice to the Lenders that such information has been posted on the Borrower's website on the Internet at the website address listed on the signature pages hereof, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Lenders without charge; provided that (i) such notice may be included in a certificate delivered pursuant to
Section 6.1.3 and (ii) the Borrower shall deliver paper copies of the information referred to in Sections 6.1.1, 6.1.2, 6.1.5 or 6.1.6 to any Lender which requests such delivery.
6.2. Maintenance of Property; Insurance.
6.2.1 The Borrower will keep, and will 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, if the failure to do so is reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole, 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.
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6.2.2 The Borrower will maintain, and cause each Material Subsidiary 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 Material Subsidiary operates: provided, however, that the Borrower and each Material Subsidiary 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 Material Subsidiary operates.
6.3. Conduct of Business and Maintenance of Existence.
6.3.1 The Borrower (a) will preserve and maintain, and, except to the extent permitted under Section 6.7, will cause each Material Subsidiary to preserve and maintain, (i) its corporate existence and (ii) all rights and privileges (other than, in the case of APS, "franchises" as described in Arizona Revised Statutes, Section 40-283 or any successor provision) reasonably necessary in the normal conduct of its business, if the failure to maintain such rights or privileges is reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole, and (b) will cause APS to use its commercially reasonable efforts to preserve and maintain such franchises reasonably necessary in the normal conduct of its business, except that, in the case of clause (b) above, (i) APS 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 APS 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.
6.3.2 The Borrower will continue to conduct, directly or through its Subsidiaries, the same general type of business conducted by the Borrower and its Material Subsidiaries on the date hereof.
6.4. Compliance with Laws. The Borrower will comply, and cause each Material Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except where (i) the necessity of compliance therewith is contested in good faith by appropriate proceedings or (ii) the failure to comply therewith is not reasonably likely to have a material adverse effect on the financial condition or financial prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole.
6.5. Pari Passu. The Borrower will not create, assume or suffer to exist any Lien on any of the capital stock of any Material Subsidiary owned by the Borrower or on any Debt of a Material Subsidiary owed to the Borrower unless the Lenders are also granted a Lien thereon on a pari passu basis securing all of the Borrower's obligations under this Agreement and the Notes.
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6.6. Ownership of APS. Except to the extent permitted under Section 6.7, the Borrower will at all times continue to own directly at least 80% of the outstanding capital stock of APS.
6.7. Consolidations, Mergers and Sales of Assets.
6.7.1 The Borrower will not, nor will it permit any Material Subsidiary to, merge or consolidate with or into any other Person, except
(i) any Material Subsidiary may merge or consolidate with the Borrower if the Borrower is the corporation surviving such merger, (ii) any Material Subsidiary may merge or consolidate with any other Subsidiary, provided that the Borrower's aggregate direct and indirect ownership interest in the survivor thereof shall not be less than the greater of the Borrower's direct and indirect ownership interest in such Subsidiaries prior to such merger, and (iii) the Borrower or any Material Subsidiary may merge or consolidate with any other Person if (a) such Person was organized under the laws of the United States of America or one of its States and (b) the Borrower or such Material Subsidiary is the corporation surviving such merger; provided that, in each case, after giving effect thereto, no Default or Unmatured Default will be in existence.
6.7.2 The Borrower will not sell, lease, transfer, assign or otherwise dispose of all or substantially all of its assets, or permit any of its Material Subsidiaries to sell, lease, transfer, assign or otherwise dispose of all or substantially all of its assets, except for sales, leases, transfers, assignments, and other dispositions of all or substantially all of the Borrower's or any such Material Subsidiary's assets to the Borrower or any other Subsidiary of the Borrower, provided in each case that no Unmatured Default or Default shall have occurred and be continuing after giving effect thereto and provided further that (i) in no case will the sale, lease, transfer, assignment or other disposition by PWEC of the Silverhawk Power Plant or any interest therein be governed or prohibited by this Section 6.7.2, and (ii) this Section 6.7.2 will not govern or prohibit pledges or the grant of security interests, mortgages or other Liens on any assets.
6.8. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower to refinance indebtedness from time to time and for other general corporate purposes. All Letters of Credit issued under this Agreement will be used for general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental, or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U; provided, however, that the Borrower may use the proceeds of the Loans made under this Agreement for the purpose of repurchasing shares of the Borrower's common stock so long as such repurchases do not subject any of the Lenders to the requirements of Regulation U in respect of this Agreement. In accordance with applicable Federal Energy Regulatory Commission orders and precedent, each Credit Extension will be for some lawful object within the corporate purposes of the Borrower, compatible with the public interest, and reasonably necessary or appropriate for such purposes.
6.9. Indebtedness. Consolidated Debt will not exceed at any time an amount equal to 65% of Consolidated Capitalization.
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6.10. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Material Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Material Subsidiary to permit, representatives of any Lender at such Lender's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired; provided, however, that the Borrower and its Material Subsidiaries reserve the right to restrict access to any of its properties in accordance with reasonably adopted policies relating to safety and security.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall constitute a Default:
7.1. The Borrower shall fail to pay (i) when due, any principal of any Loan, (ii) any Reimbursement Obligation within one Business Day after the same becomes due or (iii) within three Business Days of the date when due, interest on any Loan, or any fees (including any LC Fee) payable hereunder.
7.2. The Borrower shall fail to observe or perform any covenant contained in Sections 6.1.4, 6.3.1(a)(i) (solely with respect to the Borrower) and 6.5 to 6.9, inclusive.
7.3. The Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by Section 7.1 or Section 7.2 above) for 30 days after notice thereof has been given to the Borrower by the Agent at the request of any Lender.
7.4. 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.
7.5. The Borrower or any Material Subsidiary shall fail to pay any principal of or premium or interest on any Material Debt or Material Derivative Obligation, 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 Material Debt or Material Derivative Obligation; or the Borrower or any Material Subsidiary shall fail to perform or comply with any other term or covenant in any agreement or instrument relating to such Material Debt or Material Derivative Obligation 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 Material Debt or Material Derivative Obligation.
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7.6. The Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing.
7.7. An involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed or unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect.
7.8. Any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $25,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $25,000,000.
7.9. Judgments or orders for the payment of money that exceeds any applicable insurance coverage by more than $25,000,000 in the aggregate shall be rendered against the Borrower or any Material Subsidiary and such judgments or orders shall continue unsatisfied or unstayed for a period of 45 days.
7.10. Any Change in Control shall occur.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. Acceleration. (i) If any Default described in Section 7.6 or 7.7 occurs with respect to the Borrower, the obligations of the Lenders to make Loans hereunder and the obligation and power of the Issuing Banks to issue Letters of Credit shall automatically terminate and the Obligations shall immediately become due and payable without any election or action on
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the part of the Agent, any Issuing Bank or any Lender. If any other Default occurs, the Required Lenders (or the Agent with the consent of the Required Lenders) may terminate or suspend the obligations of the Lenders to make Loans hereunder and the obligation and power of the Issuing Banks to issue Letters of Credit, or declare the Obligations to be due and payable, or both, whereupon the Obligations shall become immediately due and payable, without presentment, demand, protest or notice of any kind, all of which the Borrower hereby expressly waives.
(ii) If, within 30 days after acceleration of the maturity of the Obligations or termination of the obligations of the Lenders to make Loans and the obligation and power of the Issuing Banks to issue Letters of Credit hereunder as a result of any Default (other than any Default as described in
Section 7.6 or 7.7 with respect to the Borrower) and before any judgment or decree for the payment of the Obligations due shall have been obtained or entered, the Required Lenders (in their sole discretion) shall so direct, the Agent shall, by notice to the Borrower, rescind and annul such acceleration and/or termination.
8.2. Amendments. Subject to the provisions of this Section 8.2, the Required Lenders (or the Agent with the consent in writing of the Required Lenders) and the Borrower may enter into agreements supplemental hereto for the purpose of adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrower hereunder or waiving any Default hereunder; provided, however, that no such supplemental agreement shall, without the consent of each Lender adversely affected thereby:
8.2.1 Extend the final maturity of any Loan, or extend the expiry date of any Letter of Credit to a date after the Facility Termination Date or forgive all or any portion of the principal amount thereof or any Reimbursement Obligation related thereto, or reduce the rate or extend the time of payment of interest or fees thereon or any Reimbursement Obligation related thereto.
8.2.2 Reduce the percentage specified in the definition of Required Lenders.
8.2.3 Extend the Facility Termination Date, or reduce the amount or extend the payment date for, the mandatory payments required under Section 2.2, or increase the amount of the Commitment of any Lender hereunder or the commitment to issue Letters of Credit, or permit the Borrower to assign its rights under this Agreement.
8.2.4 Amend the definition of "Applicable Percentage", this Section 8.2 or any other provision of this Agreement regarding the percentage of Lenders required to effect an action under the Loan Documents.
8.2.5 Amend Section 11.2 of this Agreement in a manner that would alter the pro rata sharing of payments required thereby.
No amendment of any provision of this Agreement relating to the Agent shall be effective without the written consent of the Agent, and no amendment of any provision relating to any Issuing Bank shall be effective without the written consent of such Issuing Bank. The Agent may waive payment of the fee required under Section 12.3.3 without obtaining the consent of any other party to this Agreement.
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8.3. Preservation of Rights. No delay or omission of the Lenders, any Issuing Bank or the Agent to exercise any right under the Loan Documents shall impair such right or be construed to be a waiver of any Default or an acquiescence therein, and the making of a Credit Extension notwithstanding the existence of a Default or the inability of the Borrower to satisfy the conditions precedent to such Credit Extension shall not constitute any waiver or acquiescence. Any single or partial exercise of any such right shall not preclude other or further exercise thereof or the exercise of any other right, and no waiver, amendment or other variation of the terms, conditions or provisions of the Loan Documents whatsoever shall be valid unless in writing signed by, or by the Agent with the consent of, the requisite number of Lenders required pursuant to Section 8.2, and then only to the extent in such writing specifically set forth. All remedies contained in the Loan Documents or by law afforded shall be cumulative and all shall be available to the Agent, the Issuing Banks and the Lenders until the Obligations have been paid in full.
ARTICLE IX
GENERAL PROVISIONS
9.1. Survival of Representations. All representations and warranties of the Borrower contained in this Agreement shall survive the making of the Credit Extensions herein contemplated.
9.2. Governmental Regulation. Anything contained in this Agreement to the contrary notwithstanding, no Lender or Issuing Bank shall be obligated to extend credit to the Borrower in violation of any limitation or prohibition provided by any applicable statute or regulation.
9.3. Headings. Section headings in the Loan Documents are for convenience of reference only, and shall not govern the interpretation of any of the provisions of the Loan Documents.
9.4. Entire Agreement. The Loan Documents and the Letter of Credit Applications embody the entire agreement and understanding among the Borrower, the Agent, the Issuing Banks and the Lenders and supersede all prior agreements and understandings among the Borrower, the Agent, the Issuing Banks and the Lenders relating to the subject matter thereof other than those contained in the fee letter and, to the extent expressly set forth therein, the commitment letter, described in Section 10.13 which shall survive and remain in full force and effect during the term of this Agreement.
9.5. Several Obligations; Benefits of this Agreement. The respective obligations of the Lenders hereunder are several and not joint and no Lender shall be the partner, co-venturer or agent of any other (except to the extent to which the Agent is authorized to act as such). The failure of any Lender to perform any of its obligations hereunder shall not relieve any other Lender from any of its obligations hereunder. This Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement and their respective successors and assigns and as otherwise expressly stated herein.
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9.6. Expenses; Indemnification. (i) The Borrower shall reimburse the Agent and the Arrangers for any reasonable out-of-pocket costs and expenses (including reasonable attorneys' and paralegals' fees for one firm of attorneys for the Agent and Arrangers, and which attorneys may be employees of the Agent or either Arranger and expenses of and fees for other advisors and professionals engaged by the Agent or the Arrangers in consultation with the Borrower) paid or incurred by the Agent or the Arrangers in connection with the preparation, investigation, negotiation, documentation, execution, delivery, syndication, distribution (including, without limitation, via the internet), review, amendment, modification, and administration of the Loan Documents and incurred after the Closing Date. The Borrower also agrees to reimburse the Agent, the Arrangers, the Issuing Banks and the Lenders for any reasonable out-of-pocket costs and expenses (including reasonable attorneys' and paralegals' fees and out-of-pocket expenses of attorneys for the Agent, the Arrangers, the Issuing Banks and the Lenders, which attorneys may be employees of the Agent, the Arrangers, the Issuing Banks or the Lenders) paid or incurred by the Agent, the Arrangers, the Issuing Banks or any Lender in connection with the collection and enforcement of the Loan Documents.
(ii) The Borrower hereby further agrees to indemnify the Agent, each Arranger, each Issuing Bank, each Lender, their respective affiliates, and their respective directors, officers, employees, syndication consultants and agents (each, an "Indemnified Party") against all losses, claims, damages, penalties, judgments, liabilities and expenses (including, without limitation, all expenses of litigation or preparation therefor whether or not such Indemnified Party is a party thereto, and all reasonable outside attorneys' and paralegals' fees and expenses of outside attorneys and paralegals of the Indemnified Party) which any of them may pay or incur arising out of or relating to this Agreement, the other Loan Documents, the transactions contemplated hereby or the direct or indirect application or proposed application of the proceeds of any Credit Extension hereunder except to the extent that they are expressly stated in this Agreement to be payable by the Indemnified Party or one of its Affiliates, including, but not limited to, expenses payable under Sections 3.5(vii) and 6.10, or are determined in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnified Party or any of its Affiliates, in which case any fees and expenses previously paid or advanced by the Borrower to such Indemnified Party in respect of such indemnified obligation will be returned by such Indemnified Party. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.6(ii) 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 or against the Borrower and the Borrower prevails in a final, non-appealable judgment, in which case any fees or expenses previously paid or advanced by the Borrower to such Indemnified Party in respect of such indemnified obligation will be returned by such Indemnified Party, and whether or not the transactions contemplated hereby are consummated. The obligations of the Borrower under this Section 9.6 shall survive the termination of this Agreement.
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9.7. Numbers of Documents. All statements, notices, closing documents, and requests hereunder shall be furnished to the Agent with sufficient counterparts so that the Agent may furnish one to each of the Lenders.
9.8. Accounting Terms and Determinations. 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 independent public accountants) with the most recent audited consolidated financial statements of the Borrower delivered to the Agent; provided that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant in Article VI to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Lenders wish to amend Article VI for such purpose), then the Borrower's compliance with such covenant shall be applied on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Lenders.
9.9. Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or invalid without affecting the remaining provisions in that jurisdiction or the operation, enforceability, or validity of that provision in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable.
9.10. Nonliability of Lenders. The relationship between the Borrower on the one hand and the Lenders, the Issuing Banks and the Agent on the other hand shall be solely that of borrower and lender. Neither the Agent, any Arranger, any Issuing Bank nor any Lender shall have any fiduciary responsibilities to the Borrower. Neither the Agent, any Arranger, any Issuing Bank nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. No party hereto shall have any liability with respect to, and each party hereto hereby waives, releases and agrees not to sue for, any special, indirect, consequential or punitive damages suffered by such party in connection with, arising out of, or in any way related to the Loan Documents or the transactions contemplated thereby.
9.11. Confidentiality. Each Lender, each Issuing Bank and the Agent shall exercise the same degree of care that it exercises with respect to its own proprietary information of the same types to maintain the confidentiality of any Confidential Information received pursuant to this Agreement except that disclosure of such Confidential Information may be made (i) to the agents, employees, subsidiaries or affiliates of such Person in connection with its present or prospective business relations with the Borrower arising out of this Agreement, provided that such Person will cause such agents, employees, subsidiaries or affiliates to comply with the provisions of this Section 9.11 with respect to such Confidential Information, (ii) to prospective transferees or purchasers of any interest in the Outstanding Credit Exposure (including any Participant), provided that they have agreed to be bound by the provision of this Section 9.11, (iii) as required by law, regulations, rule, request or order, subpoena, judicial order or similar
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order and in connection with any litigation, (iv) as may be required in connection with the examination, audit or similar investigation of such Person,
(v) to its direct or indirect contractual counterparties in swap agreements or to legal counsel, accountants and other professional advisors to such counterparties, provided that such counterparties, legal counsel, accountants and other professional advisors shall agree to comply with the provisions of this Section 9.11 with respect to such Confidential Information, (vi) to rating agencies if requested or required by such agencies in connection with a rating relating to the Credit Extensions hereunder, and (vii) to the extent requested by any regulatory or governmental authority. Without limiting Section 9.4, the Borrower agrees that the terms of this Section 9.11 shall set forth the entire agreement between the Borrower and each Lender (including the Issuing Banks and the Agent) with respect to any confidential information previously or hereafter received by such Lender in connection with this Agreement, and this Section 9.11 shall supersede any and all prior confidentiality agreements entered into by such Lender with respect to such confidential information. The obligations under this Section 9.11 shall survive for a period of two calendar years after the date of the termination of this Agreement.
9.12. Nonreliance. Each Lender hereby represents that it is not relying on or looking to any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System) for the repayment of the Credit Extensions provided for herein.
9.13. Disclosure. The Borrower and each Lender hereby acknowledge and agree that JPMCB and/or its Affiliates from time to time may hold investments in, make other loans to or have other relationships with the Borrower and its Affiliates.
9.14. USA Patriot Act Notification. The following notification is provided to the Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31 U.S.C. Section 5318:
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person or entity that opens an account, including any deposit account, treasury management account, loan, other extension of credit, or other financial services product. What this means for the Borrower: When the Borrower opens an account, the Agent and the Lenders will ask for the Borrower's name, tax identification number, business address, and other information that will allow the Agent and the Lenders to identify the Borrower. The Agent and the Lenders may also ask to see the Borrower's legal organizational documents or other identifying documents.
9.15. Relations Among Lenders.
9.15.1 No Action Without Consent. Except with respect to the exercise of setoff rights of any Lender, in accordance with Section 11.1, the proceeds of which are applied in accordance with this Agreement, each Lender and each Issuing Bank agrees that it will not take any action, nor institute any actions or proceedings, against the Borrower or with respect to any Loan Document, without the prior written consent of the Required Lenders or, as may be provided in this Agreement or the other Loan Documents, with the consent of the Agent.
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9.15.2 No Liability. The Agent shall have the exclusive right on behalf of the Lenders to enforce the payment of the principal of and interest on, or LC Exposure in respect of, any Credit Extension after the date such principal or interest has become due and payable pursuant to the terms of this Agreement.
ARTICLE X
THE AGENT
10.1. Appointment; Nature of Relationship. JPMorgan Chase Bank, N.A. is hereby appointed by each of the Lenders and Issuing Banks as its contractual representative (herein referred to as the "Agent") hereunder and under each other Loan Document, and each of the Lenders and Issuing Banks irrevocably authorizes the Agent to act as the contractual representative of such Lender and Issuing Banks with the rights and duties expressly set forth herein and in the other Loan Documents. The Agent agrees to act as such contractual representative upon the express conditions contained in this Article X. Notwithstanding the use of the defined term "Agent," it is expressly understood and agreed that the Agent shall not have any fiduciary responsibilities to any Lender or any Issuing Bank by reason of this Agreement or any other Loan Document and that the Agent is merely acting as the contractual representative of the Lenders and the Issuing Banks with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' and Issuing Banks' contractual representative, the Agent (i) does not hereby assume any fiduciary duties to any of the Lenders or any Issuing Bank and (ii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders and the Issuing Banks, for itself and each of its Affiliates, hereby agrees to assert no claim against the Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender, each Issuing Bank and each Affiliate of each Lender and each Issuing Bank hereby waives.
10.2. Powers. The Agent shall have and may exercise such powers under the Loan Documents as are specifically delegated to the Agent by the terms of each thereof, together with such powers as are reasonably incidental thereto. The Agent shall have no implied duties to the Lenders, or any obligation to the Lenders to take any action thereunder except any action specifically provided by the Loan Documents to be taken by the Agent.
10.3. General Immunity. Neither the Agent nor any of its directors, officers, agents or employees shall be liable to any Lender for any action taken or omitted to be taken by it or them hereunder or under any other Loan Document or in connection herewith or therewith except to the extent such action or inaction is determined in a final non-appealable judgment by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Person.
10.4. No Responsibility for Loans, Recitals, etc. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into, or verify (a) any statement, warranty or representation made in connection with any Loan Document or any borrowing hereunder; (b) the performance or observance of any of the covenants or agreements of any obligor under any Loan Document, including, without limitation,
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any agreement by an obligor to furnish information directly to each Lender; (c) the satisfaction of any condition specified in Article IV, except receipt of items required to be delivered solely to the Agent; (d) the existence or possible existence of any Default or Unmatured Default; (e) the validity, enforceability, effectiveness, sufficiency or genuineness of any Loan Document or any other instrument or writing furnished in connection therewith; or (f) the financial condition of the Borrower or of any of the Borrower's Subsidiaries. The Agent shall have no duty to disclose to the Lenders information that is not required to be furnished by the Borrower to the Agent at the time so furnished, but is voluntarily furnished by the Borrower to the Agent (either in its capacity as Agent or in its individual capacity).
10.5. Action on Instructions of Lenders. The Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder and under any other Loan Document in accordance with written instructions signed by the Required Lenders (or all of the Lenders in the event that and to the extent that this Agreement expressly requires such approval), and such instructions and any action taken or failure to act pursuant thereto shall be binding on all of the Lenders. The Lenders hereby acknowledge that the Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders (or all of the Lenders in the event that and to the extent that this Agreement expressly requires such approval). The Agent shall be fully justified in failing or refusing to take any action hereunder and under any other Loan Document unless it shall first be indemnified to its satisfaction by the Lenders pro rata against any and all liability, cost and expense that it may incur by reason of taking or continuing to take any such action.
10.6. Employment of Agents and Counsel. The Agent may execute any of its duties as Agent hereunder and under any other Loan Document by or through employees, agents, and attorneys-in-fact and shall not be answerable to the Lenders, except as to money or securities received by it or its authorized agents, for the default or misconduct of any such agents or attorneys-in-fact selected by it with reasonable care. The Agent shall be entitled to advice of counsel concerning the contractual arrangement between the Agent and the Lenders and all matters pertaining to the Agent's duties hereunder and under any other Loan Document.
10.7. Reliance on Documents; Counsel. The Agent shall be entitled to rely upon any Note, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex, electronic mail message, statement, paper or document reasonably (but without any requirement of any additional diligence by the Agent with respect thereto) believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and, in respect to legal matters, upon the opinion of counsel selected by the Agent, which counsel may be employees of the Agent. For purposes of determining compliance with the conditions specified in Sections 4.1 and 4.2, each Lender that has signed this Agreement (or otherwise become party hereto pursuant to an assignment under
Section 12.3) 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 a Lender unless the Agent shall have received notice from such Lender prior to the applicable date specifying its objection thereto.
10.8. Agent's Reimbursement and Indemnification. The Lenders agree to reimburse and indemnify the Agent ratably in proportion to the Lenders' respective Applicable Percentages
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of the Aggregate Commitment (or, if the Aggregate Commitment has been terminated, of the Aggregate Outstanding Credit Exposure) to the extent not reimbursed by or on behalf of the Borrower and without limiting any obligation of the Borrower to do so (i) for any amounts not reimbursed by the Borrower for which the Agent is entitled to reimbursement by the Borrower under the Loan Documents, (ii) for any other expenses incurred by the Agent on behalf of the Lenders, in connection with the preparation, execution, delivery, administration and enforcement of the Loan Documents (including, without limitation, for any expenses incurred by the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders) and (iii) for any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other document delivered in connection therewith or the transactions contemplated thereby (including, without limitation, for any such amounts incurred by or asserted against the Agent in connection with any dispute between the Agent and any Lender or between two or more of the Lenders), or the enforcement of any of the terms of the Loan Documents or of any such other documents, provided that (i) no Lender shall be liable for any of the foregoing to the extent any of the foregoing is found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Agent and (ii) any indemnification required pursuant to Section 3.5(vii) shall, notwithstanding the provisions of this Section 10.8, be paid by the relevant Lender in accordance with the provisions thereof. The obligations of the Lenders under this Section 10.8 shall survive payment of the Obligations and termination of this Agreement.
10.9. Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Unmatured Default hereunder unless the Agent has received written notice from a Lender or the Borrower referring to this Agreement describing such Default or Unmatured Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders.
10.10. Rights as a Lender. In the event the Agent is a Lender, the Agent shall have the same rights and powers hereunder and under any other Loan Document with respect to its Commitment and its Outstanding Credit Exposure as any Lender and may exercise the same as though it were not the Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a Lender, unless the context otherwise indicates, include the Agent in its individual capacity. The Agent and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of trust, debt, equity or other transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Subsidiaries.
10.11. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent, any Arranger or any other Lender and based on the financial statements prepared by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and the other Loan Documents. Each Lender also acknowledges that it will, independently and without reliance upon the Agent, any Arranger 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 and the other Loan Documents.
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10.12. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower, such resignation to be effective upon the appointment of a successor Agent or, if no successor Agent has been appointed, forty-five days after the retiring Agent gives notice of its intention to resign. Upon any such resignation, the Required Lenders shall, with the prior written approval of the Borrower (which approval will not be unreasonably withheld or delayed and which shall be required only so long as no Default shall be continuing), have the right to appoint, on behalf of the Borrower and the Lenders, a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders within thirty days after the resigning Agent's giving notice of its intention to resign, then the resigning Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent. Notwithstanding the previous sentence, the Agent may at any time without the consent of the Borrower or any Lender, appoint any of its Affiliates which is a commercial bank as a successor Agent hereunder. If the Agent has resigned and no successor Agent has been appointed, the Lenders may perform all the duties of the Agent hereunder and the Borrower shall make all payments in respect of the Obligations to the applicable Lender and for all other purposes shall deal directly with the Lenders. No successor Agent shall be deemed to be appointed hereunder until such successor Agent has accepted the appointment. Any such successor Agent shall be a commercial bank having capital and retained earnings of at least $100,000,000. 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, privileges and duties of the resigning Agent. Upon the effectiveness of the resignation of the Agent, the resigning Agent shall be discharged from its duties and obligations hereunder and under the Loan Documents. After the effectiveness of the resignation of an Agent, the provisions of this Article X shall continue in effect for the benefit of such Agent in respect of any actions taken or omitted to be taken by it while it was acting as the Agent hereunder and under the other Loan Documents. In the event that there is a successor to the Agent by merger, or the Agent assigns its duties and obligations to an Affiliate or pursuant to this Section 10.12, then the term "Prime Rate" as used in this Agreement shall mean the prime rate, base rate or other analogous rate of the new Agent.
10.13. Agent and Arranger Fees. The Borrower agrees to pay to the Agent and the Arrangers, for their respective accounts, the fees agreed to by the Borrower, the Agent, the Syndication Agent and the Arrangers pursuant to that certain fee letter agreement dated November 15, 2005 entered into in connection with that certain commitment letter dated as of November 15, 2005 by and among the Agent, the Syndication Agent, the Arrangers and the Borrower, or as otherwise agreed from time to time.
10.14. Delegation to Affiliates. The Borrower and the Lenders agree that the Agent may delegate any of its duties under this Agreement to any of its Affiliates; provided that the Agent shall remain solely responsible to the other parties hereto for the performance of such duties. Any such Affiliate (and such Affiliate's directors, officers, agents and employees) which performs duties in connection with this Agreement shall be entitled to the same benefits of the indemnification, waiver and other protective provisions to which the Agent is entitled under Articles IX and X.
10.15. Co-Agents, Managing Agent, Documentation Agent, Syndication Agent, etc. None of the Lenders identified in this Agreement as a "Co-Agent", "Managing Agent", "Documentation Agent" or the Syndication Agent shall have any right, power, obligation,
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liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of such Lenders shall have or be deemed to have a fiduciary relationship with any Lender. Each Lender hereby makes the same acknowledgments with respect to such Lenders as it makes with respect to the Agent in Section 10.11.
ARTICLE XI
SETOFF; RATABLE PAYMENTS
11.1. Setoff. In addition to, and without limitation of, any rights of the Lenders under applicable law, if any Default occurs and is continuing, any and all deposits of the Borrower (including all account balances, whether provisional or final and whether or not collected or available) and any other Debt at any time held or owing by any Lender to or for the credit or account of the Borrower may be offset and applied toward the payment of the Obligations owing to such Lender, whether or not the Obligations, or any part thereof, shall then be due, and each Lender shall endeavor to give notice of any such set-off to the Borrower, provided that the failure of any Lender to give such notice shall not in any way limit any Lender's rights under this Section 11.1.
11.2. Ratable Payments. If any Lender, whether by setoff or otherwise, has payment made to it upon its Outstanding Credit Exposure (other than payments received pursuant to Section 3.1, 3.2, 3.4 or 3.5) in a greater proportion than that received by any other Lender, such Lender agrees, promptly upon demand, to purchase a portion of the Aggregate Outstanding Credit Exposure held by the other Lenders so that after such purchase each Lender will hold its Applicable Percentage of the Aggregate Outstanding Credit Exposure. In case any such payment is disturbed by legal process, or otherwise, appropriate further adjustments shall be made.
ARTICLE XII
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
12.1. Successors and Assigns. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns permitted hereby, except that (i) the Borrower shall not have the right to assign its rights or obligations under the Loan Documents without the prior written consent of each Lender, (ii) any assignment by any Lender must be made in compliance with
Section 12.3, and (iii) any transfer by participation must be made in compliance with Section 12.2. Any attempted assignment or transfer by any party not made in compliance with this Section 12.1 shall be null and void, unless such attempted assignment or transfer is treated as a participation in accordance with Section
12.3.3. The parties to this Agreement acknowledge that clause (ii) of this
Section 12.1 relates only to absolute assignments and this Section 12.1 does not prohibit assignments creating security interests, including, without limitation,
(x) any pledge or assignment by any Lender of all or any portion of its rights under this Agreement and any Note to a Federal Reserve Bank or (y) in the case of a Lender which is a Fund, any pledge or assignment of all or any portion of its rights under this Agreement and any Note to its trustee in support of its obligations to its trustee; provided, however, that no such pledge or assignment shall release the transferor Lender from its obligations hereunder unless and until the parties
52
thereto have complied with the provisions of Section 12.3. The Agent may treat the Person which made any Credit Extension or which holds any Note as the owner thereof for all purposes hereof unless and until such Person complies with
Section 12.3; provided, however, that the Agent may in its discretion (but shall not be required to) follow instructions from the Person which made any Credit Extension or which holds any Note to direct payments relating to such Credit Extension or Note to another Person. Any assignee of the rights to any Outstanding Credit Exposure or any Note agrees by acceptance of such assignment to be bound by all the terms and provisions of the Loan Documents. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the owner of the rights to any Outstanding Credit Exposure (whether or not a Note has been issued in evidence thereof), shall be conclusive and binding on any subsequent holder or assignee of the rights to such Outstanding Credit Exposure.
12.2. Participations.
12.2.1 Permitted Participants; Effect. Any Lender may at any time sell to one or more banks or other entities ("Participants") participating interests in any Outstanding Credit Exposure owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest or obligation of such Lender under the Loan Documents. In the event of any such sale by a Lender of participating interests or obligations to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the owner of its Outstanding Credit Exposure and the holder of any Note issued to it in evidence thereof for all purposes under the Loan Documents, all amounts payable by the Borrower under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents.
12.2.2 Voting Rights. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Outstanding Credit Exposure or Commitment in which such Participant has an interest which would require consent of all of the Lenders pursuant to the terms of
Section 8.2 or of any other Loan Document.
12.2.3 Benefit of Certain Provisions. The Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.1, 3.2, 3.4 and 3.5 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to Section 12.3, provided that (i) a Participant shall not be entitled to receive any greater payment under Section 3.1, 3.2 or 3.5 than the Lender who sold the participating interest to such Participant would have received had it retained such interest for its own account, unless the sale of such interest to such Participant is made with the prior written consent of the Borrower, and (ii) any Participant not incorporated under the laws of the United States of America or any State thereof agrees to comply with the provisions of Section 3.5 to the same extent as if it were a Lender.
53
12.3. Assignments.
12.3.1 Permitted Assignments. Any Lender may at any time assign to one or more banks or other entities ("Purchasers") all or any part of its rights and obligations under the Loan Documents. Such assignment shall be substantially in the form of Exhibit A or in such other form as may be agreed to by the parties thereto. Each such assignment with respect to a Purchaser which is not a Lender or an Affiliate of a Lender or an Approved Fund shall either be in an amount equal to the entire applicable Commitment and Outstanding Credit Exposure of the assigning Lender or (unless each of the Borrower and the Agent otherwise consents) be in an aggregate amount not less than $5,000,000. The amount of the assignment shall be based on the Commitment or Outstanding Credit Exposure (if the Commitment has been terminated) subject to the assignment, determined as of the date of such assignment or as of the "Trade Date," if the "Trade Date" is specified in the assignment.
12.3.2 Consents. The consent of the Borrower shall be required prior to an assignment becoming effective unless the Purchaser is a Lender, an Affiliate of a Lender or an Approved Fund, provided that the consent of the Borrower shall not be required if a Default has occurred and is continuing. The consent of the Agent shall be required prior to an assignment becoming effective unless the Purchaser is a Lender. The consent of each Issuing Bank shall be required prior to any assignment becoming effective. Any consent required under this Section 12.3.2 shall not be unreasonably withheld or delayed.
12.3.3 Effect; Effective Date. Upon (i) delivery to the Agent of an assignment, together with any consents required by Sections 12.3.1 and 12.3.2, and (ii) payment of a $3,500 fee by the transferor Lender or the Purchaser to the Agent for processing such assignment (unless such fee is waived by the Agent), (a) such assignment shall become effective on the effective date specified in such assignment and (b) the Agent shall give prompt notice thereof to the Borrower. The assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Outstanding Credit Exposure under the applicable assignment agreement constitutes "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser shall for all purposes be a Lender party to this Agreement and any other Loan Document executed by or on behalf of the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party thereto, and the transferor Lender shall be released with respect to the Commitment and Outstanding Credit Exposure assigned to such Purchaser without any further consent or action by the Borrower, the Lenders, the Agent or the Issuing Banks. In the case of an assignment covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a Lender hereunder but shall continue to be entitled to the benefits of, and subject to, those provisions of this Agreement and the other Loan Documents which survive payment of the Obligations and termination of the applicable agreement. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 12.3 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and
54
obligations in accordance with Section 12.2. Upon the consummation of any assignment to a Purchaser pursuant to this Section 12.3.3, the transferor Lender, the Agent and the Borrower shall, if the transferor Lender or the Purchaser desires that its Loans be evidenced by Notes, make appropriate arrangements so that new Notes or, as appropriate, replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their respective Commitments, as adjusted pursuant to such assignment.
12.3.4 Register. The Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices in New York, New York a copy of each assignment delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans owing to, and participations in Letters of Credit by, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower at any reasonable time and from time to time upon reasonable prior notice.
12.4. Dissemination of Information. The Borrower authorizes each Lender to disclose to any Participant or Purchaser or any other Person acquiring an interest in the Loan Documents by operation of law (each a "Transferee") and any prospective Transferee any and all information in such Lender's possession concerning the Borrower and its Subsidiaries; provided that each Transferee and prospective Transferee agrees to be bound by Section 9.11 of this Agreement.
12.5. Tax Treatment. If any interest in any Loan Document is transferred to any Transferee which is not incorporated under the laws of the United States or any State thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to comply with the provisions of Section 3.5(iv).
ARTICLE XIII
NOTICES
13.1. Notices; Effectiveness; Electronic Communication.
(a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows:
(i) if to the Borrower, at its address or telecopier number set forth on the signature page hereof;
55
(ii) if to the Agent or if the applicable Issuing Bank is JPMCB, at its address or telecopier number set forth on the signature page hereof;
(iii) if to a Lender or to any Issuing Bank other than JPMCB, to it at its address (or telecopier number) set forth in its administrative questionnaire delivered to the Agent.
Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next Business Day for the recipient). Notices delivered through electronic communications to the extent provided in paragraph (b) below, shall be effective as provided in said paragraph (b).
(b) Electronic Communications. Notices and other communications to the Lenders may be delivered or furnished by electronic communication (including e-mail and internet or intranet websites) pursuant to procedures approved by the Agent or as otherwise determined by the Agent and notified to the Lenders and the Borrower, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Agent and the Borrower that it is incapable of receiving notices under such Article by electronic communication. The Agent or the Borrower may, in its respective discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it or as it otherwise determines and notified to the other parties, provided that such determination or approval may be limited to particular notices or communications.
Unless the Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not given during the normal business hours of the recipient, such notice or communication shall be deemed to have been given at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
(c) Change of Address, Etc. Any party hereto may change its address or telecopier number for notices and other communications hereunder by notice to the other parties hereto.
ARTICLE XIV
COUNTERPARTS; INTEGRATION; EFFECTIVENESS; ELECTRONIC EXECUTION
14.1. Counterparts; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an
56
original, but all of which when taken together shall constitute a single contract. Except as provided in Article IV, this Agreement shall become effective when it shall have been executed by the Agent and when the Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or electronic PDF file shall be effective as delivery of a manually executed counterpart of this Agreement.
14.2. Electronic Execution of Assignments. The words "execution," "signed," "signature," and words of like import in any assignment and assumption agreement shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, or any other state laws based on the Uniform Electronic Transactions Act.
ARTICLE XV
CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL
15.1. CHOICE OF LAW. THE LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO BANKS.
15.2. CONSENT TO JURISDICTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO HEREBY TO THE FULLEST EXTENT ALLOWED BY LAW IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE OR, TO THE EXTENT PERMITTED BY LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT ANY PARTY MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT IN THE COURTS OF ANY JURISDICTION.
57
EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT IT MAY LEGALLY AND EFFECTIVELY DO SO, ANY OBJECTION WHICH 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 IN ANY COURT REFERRED TO IN THE IMMEDIATELY PRECEDING PARAGRAPH. 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.
15.3. WAIVER OF JURY TRIAL. THE BORROWER, THE AGENT, THE ISSUING BANKS AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
58
IN WITNESS WHEREOF, the Borrower, the Lenders and the Agent have executed this Agreement as of the date first above written.
PINNACLE WEST CAPITAL CORPORATION

By: /s/ Barbara M. Gomez
    ------------------------------------
Title: Vice President and Treasurer
       400 N. 5th Street
       Phoenix AZ, 85004
Attention: Ms. Barbara Gomez
           Telephone: (602) 250-5677
           FAX: (602) 250-5640
Website: www.pinnaclewest.com
FEIN: 86-0512431	

SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
JPMORGAN CHASE BANK, N.A.
 Individually, as an Issuing Bank and as
Administrative Agent

By: /s/ Peter M. Ling
    ------------------------------------
Title: Managing Director
       ---------------------------------
JPM Loan & Agency Services
1111 Fannin St 10th FL
Houston TX, 77002
Ph#: 713-750-2510
Fx#: 713-432-6307
email: sylvia.gutierrez@jpmorgan.com	

with a copy to:
JPMorgan Corporate Banking NA Power & Utilities 270 Park Ave 15 FL New York, NY 10017 Ph# 212-270-5801 Fx# 212-270-4392 email: maj.sayegh@jpmorgan.com
For Letters of Credit:
JPMorganChase LOC Tampa
10420 Highland Manor Dr-BL 2, FL 2
Tampa, FL 33610
Ph#: 813-432-6339
Fx#: 813-432-5161
email: james.alonzo@chase.com
with a copy to:
Global Trade Services
1 Chase Manhattan Plaza 9 FL
New York, NY 10081
Ph# 212-552-4475
Fx# 212-552-7819
email: olivera.mladenovic@chase.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
UNION BANK OF CALIFORNIA, N.A.
Individually and as Syndication Agent

By: /s/ Efrain Soto
    ------------------------------------
Name: Efrain Soto
Title: Vice President	

Energy Capital Services 445 S. Figueroa, 15th Floor Los Angeles, CA 90071 Attention: Efrain Soto Phone: (213) 236-5779 Fax: (213) 236-4096 E-mail: efrain.soto@uboc.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
CITIBANK, N.A.,
 Individually and as Co-Documentation
Agent

By: /s/ Oscar Cragwell
    ------------------------------------
Name: Oscar Cragwell
Title: Vice President	

Two Penns Way, Suite 110 New Castle, DE 19720 Attention: Nick Perazza Phone: (302) 894-6110 Fax: (212) 994-0847 E-mail: nicholas.j.perazz@citigroup.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
KEYBANK NATIONAL ASSOCIATION,
 Individually and as Co-Documentation
Agent

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

127 Public Square Cleveland, OH 44114 OH-01-27-0847 Attention: Yvett M. Dyson-Owen Phone: (216) 689-4358 Fax: (216) 689-5962 E-mail: yvette_dysou-owens@keybank.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
MIZUHO CORPORATE BANK, LTD.,
 Individually and as Co-Documentation
Agent

By: /s/ Raymond Ventura
    ------------------------------------
Name: Raymond Ventura
Title: Deputy General Manager	

1251 Avenue of the Americas 32nd Floor New York, NY 10020 Attention: Mr. Nelson Chang Phone: (212) 282-3465 Fax: (212) 282-4488 E-mail: nelson.chang@miuhocbus.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
BANK OF AMERICA, N.A.,
as a Lender

By:  /s/ Gabriela Millhorn
    ------------------------------------
Name: Gabriela Millhorn
Title: Senior Vice President	

100 N. Tryon St. NC1-007-13-13 Charlotte, NC 28255 Attention: Gabriela Millhorn Phone: (704) 388-4945 Fax: (704) 386-1319 E-mail: daryl.patterson @bankofamerica.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
THE BANK OF NEW YORK,
as a Lender

By:  /s/ John-Paul Marotta
    ------------------------------------
Name: John-Paul Marotta
Title: Managing Director	

One Wall Street, 19th Floor New York, NY 10286 Attention: John-Paul Marotta Phone: (212) 635-8204 Fax: (212) 635-7923 E-mail: jmarotta@bankofny.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
BARCLAYS BANK PLC,
as a Lender

By: /s/ Alison A. McGuigan
    ------------------------------------
Name: Alison A. McGuigan
Title: Associate Director	

200 Park Avenue New York, NY 10166 Attention: Alison McGuigan Phone: (212) 412-7672 Fax: (212) 412-7600 E-mail: Alison.mcguigan@barcap.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
CREDIT SUISSE, Cayman Islands Branch as a Lender

By: /s/ Sarah Wu
    ------------------------------------
Name: Sarah Wu
Title: Director

By: /s/ Nupur Kumar
    ------------------------------------
Name: Nupur Kumar
Title: Associate	

11 Madison Avenue New York, NY 10010 Attention: Sarah Wu Phone: (212) 325-5813 Fax: (212) 743-1804 E-mail: sarah.wu@csfb.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
LEHMAN BROTHERS COMMERCIAL BANK,
as a Lender

By: /s/ George Janes
    ------------------------------------
Name: George Janes
Title: Chief Credit Officer	

Attention: Janine Shugan Phone: (212) 526-8625 Fax: (917) 522-0139 E-mail: jshugan@lehman.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
UBS LOAN FINANCE LLC,
as a Lender

By: /s/ Richard L. Tavrow
    ------------------------------------
Name: Richard L. Tavrow
Title: Director

By: /s/ Marie Haddad
    ------------------------------------
Name: Marie Haddad
Title: Associate Director	

Attention: Marie Haddad Phone: (203) 719-5609 Fax: (203) 719-3888 E-mail: Marie.Haddad@ubs.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
WELLS FARGO BANK, N.A.
as a Lender

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

707 Wilshire Blvd. 16th Floor Los Angeles, CA 90017 Attention: Long Li Phone: 213-614-2253 Fax: 213-614-2569 E-mail: lilingf@wellsfargo.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
MELLON BANK, N.A.,
as a Lender

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

Attention: Mark W. Rogers Phone: 412-234-1888 Fax: 412-236-1840 E-mail: rogers.mw@mellon.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
U.S. BANK NATIONAL ASSOCIATION,
as a Lender

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

555 S.W. Oak Street, Suite 400 Portland, Oregon 97204 Attention: Scott J. Bell Phone: (503)275-4809 Fax: (503)275-5428 E-mail: scott.bell@usbank.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
THE NORTHERN TRUST COMPANY,
as a Lender

By: /s/ Preeti Sullivan
    ------------------------------------
Name: Preeti Sullivan
Title: Vice President	

50 South LaSalle Street, L8 Chicago, IL 60603 Attention: Preeti Sullivan Phone: 312.444.2376 Fax: 312.444.4906 E-mail: pj22@ntrs.com
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
UFJ BANK LIMITED,
as a Lender

By: /s/ Toshiko Boyd
    ------------------------------------
Name: Toshiko Boyd
Title: Vice President	

Los Angeles Branch 601 S. Figueroa St.
Los Angeles, CA 90017
Attention: Toshiko Boyd
Phone: (213) 533-7407
Fax: (213) 533-7495
E-mail: toshiko_boyd@ufjbank.co.jp
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
The undersigned Departing Lender hereby acknowledges and agrees that, from and after the Effective Date, it is no longer a party to the Existing Credit Agreement.
KBC BANK N.V.,
as a Departing Lender

By: /s/ Michael Curran
    ------------------------------------
Name: Michael Curran
      ----------------------------------
Title: First Vice President
       ---------------------------------

By: /s/ Diane M. Grimmig
    ------------------------------------
Name: Diane M. Grimmig
      ----------------------------------
Title: First Vice President
       ---------------------------------	

125 West 55th Street, 10th Floor New York, NY 10019 Attention: Credit department Phone: (212) 541-0657 Fax: (212) 956-5581 E-mail:-
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
The undersigned Departing Lender hereby acknowledges and agrees that, from and after the Effective Date, it is no longer a party to the Existing Credit Agreement.
BANCA DI ROMA,
as a Departing Lender

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

By: /s/ Luca Balestra
    ------------------------------------
Name: Luca Balestra
Title: SVP & Manager	

One Market Steuart Tower Suite 1000 San Francisco, CA 94105 Attention: T. Woodruff Phone: (415) 977-7308 Fax: (415) 357-9869 E-mail: bdrsf@sbcglobal.net
SIGNATURE PAGE TO AMENDED AND RESTATED CREDIT AGREEMENT
COMMITMENT SCHEDULE
COMMITMENTS

Lender                                 Amount of Commitment   % of Aggregate Commitment
------                                 --------------------   -------------------------
JPMorgan Chase Bank, N.A.                 $    28,928,500               9.643%
Union Bank of California, N.A.            $    28,928,500               9.643%
Citibank, N.A.                            $    28,928,500               9.643%
KeyBank National Association              $    28,928,500               9.643%
Mizuho Corporate Bank, Ltd.               $    21,429,000               7.143%
Bank of America, N.A.                     $    17,143,000               5.714%
The Bank of New York                      $    17,143,000               5.714%
Barclays Bank PLC                         $    17,143,000               5.714%
Credit Suisse, Cayman Islands Branch      $    17,143,000               5.714%
Lehman Brothers Commercial Bank           $    17,143,000               5.714%
UBS Loan Finance LLC                      $    17,143,000               5.714%
Wells Fargo Bank, N.A.                    $    17,143,000               5.714%
Mellon Bank, N.A.                         $    12,857,000               4.286%
U.S. Bank National Association            $    12,857,000               4.286%
The Northern Trust Company                $     8,571,000               2.857%
UFJ Bank Limited                          $     8,571,000               2.857%
TOTAL                                     $300,000,000.00              100.00%	

PRICING SCHEDULE

                      LEVEL I   LEVEL II   LEVEL III   LEVEL IV   LEVEL V   LEVEL VI
APPLICABLE MARGIN      STATUS    STATUS      STATUS     STATUS     STATUS    STATUS
-----------------     -------   --------   ---------   --------   -------   --------
Eurodollar Rate        0.30%      0.40%      0.50%       0.65%     0.875%     1.00%
Floating Rate           0.0%       0.0%       0.0%        0.0%       0.0%     0.00%	

                      LEVEL I   LEVEL II   LEVEL III   LEVEL IV   LEVEL V   LEVEL VI
APPLICABLE FEE RATE    STATUS    STATUS     STATUS      STATUS     STATUS    STATUS
-------------------   -------   --------   ---------   --------   -------   --------
Commitment Fee Rate    0.08%      0.09%      0.11%       0.15%     0.175%     0.20%
Utilization Margin     0.10%      0.10%      0.10%       0.10%      0.10%     0.10%	

For the purposes of this Schedule, the following terms have the following meanings, subject to the final paragraph of this Schedule:
"Level I Status" exists at any date if, on such date, the Borrower's Moody's Rating is A3 or better or the Borrower's S&P Rating is A- or better.
"Level II Status" exists at any date if, on such date, (i) the Borrower has not qualified for Level I Status and (ii) the Borrower's Moody's Rating is Baa1 or better or the Borrower's S&P Rating is BBB+ or better.
"Level III Status" exists at any date if, on such date, (i) the Borrower has not qualified for Level I Status or Level II Status and (ii) the Borrower's Moody's Rating is Baa2 or better or the Borrower's S&P Rating is BBB or better.
"Level IV Status" exists at any date if, on such date, (i) the Borrower has not qualified for Level I Status, Level II Status or Level III Status and (ii) the Borrower's Moody's Rating is Baa3 or better or the Borrower's S&P Rating is BBB- or better.
"Level V Status" exists at any date if, on such date, (i) the Borrower has not qualified for Level I Status, Level II Status, Level III Status or Level IV Status and (ii) the Borrower's Moody's Rating is Ba1 or better or the Borrower's S&P Rating is BB+ or better.
"Level VI Status" exists at any date if, on such date, the Borrower has not qualified for Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status.
"Moody's Rating" means, at any time, the Rating issued by Moody's and then in effect.
"Rating" means the credit ratings assigned to the senior unsecured long-term debt securities of the Borrower without third-party credit enhancement by the applicable rating
agencies. If there is no Rating assigned to debt securities, the corporate credit rating of the Borrower will be used. Any Rating assigned to any other debt security of the Borrower shall be disregarded. The Rating in effect at any date is that in effect at the close of business on such date.
"S&P Rating" means, at any time, the Rating issued by S&P and then in effect.
"Status" means Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status.
The Applicable Margin and the Applicable Commitment Fee Rate and the Applicable Utilization Margin shall be determined in accordance with the foregoing table based on the Borrower's Status as determined from its then-current Ratings. If at any time the Borrower has no Moody's Rating or no S&P Rating, Level VI Status shall exist.
In the case of split Ratings from S&P or Moody's, the Rating to be used to determine which Status 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 below the higher of the two rating categories will be used (e.g., BBB+/Baa3 results in Level III Status, as does BBB+/Ba1).
 
SCHEDULE 2.20
EXISTING LETTERS OF CREDIT

Letter of Credit No.       Amount                 Beneficiary
--------------------   -------------   ---------------------------------
No. P-240053 *         $  570,000.00   New Mexico Self-Insurer's
                                       Guarantee Fund C/O Director,
                                       New Mexico Worker's
                                       Compensation

No. P-226706 *         $3,840,438.00   Sierra Pacific Power Company/
                                       Nevada Power Company

No. P-243249 *         $1,311,298.00   Western Regional Required System
                                       Trust Account on behalf of Nevada
                                       Power Company

No. P-230876 *         $2,036,250.00   Nevada Power Company/
                                       Sierra Pacific Power Company

No. P-236181 *         $3,247,788.00   Industrial Commission of Arizona

*    Issuing Bank - JPMorgan Chase Bank, N.A.	

EXHIBIT A
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement (the "Assignment and Assumption") is dated as of the Effective Date set forth below and is entered into by and between [Insert name of Assignor] (the "Assignor") and [Insert name of Assignee] (the "Assignee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Amended and Restated Credit Agreement identified below (as amended, the "Credit Agreement"), receipt of a copy of which is hereby acknowledged by the Assignee. The Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Agent as contemplated below, the interest in and to all of the Assignor's rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto that represents the amount and percentage interest identified below of all of the Assignor's outstanding rights and obligations under the respective facilities identified below (including without limitation any guaranties included in such facilities and, to the extent permitted to be assigned under applicable law, all claims (including without limitation contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity), suits, causes of action and any other right of the Assignor against any Person whether known or unknown arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby) (the "Assigned Interest"). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.
1. Assignor: _________________________
2. Assignee: _________________________ [and is an Affiliate/Approved Fund of [identify Lender]](1)
3. Borrower: Pinnacle West Capital Corporation
4. Agent: JPMorgan Chase Bank, N.A., as agent under the Credit

(1) Select as applicable.
Agreement
5. Assignee: _________________________
6. Credit Agreement: The Amended and Restated Credit Agreement dated as of December 9, 2005 among Pinnacle West Capital Corporation, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Agent, and the other agents party thereto.
7. Assigned Interest:

                              Aggregate Amount of                             Percentage Assigned of
                            Commitment/ Outstanding   Amount of Commitment/   Commitment / Aggregate
                            Credit Exposure for all     Outstanding Credit      Outstanding Credit
Facility Assigned                   Lenders*            Exposure Assigned*          Exposure(2)
-----------------           -----------------------   ---------------------   ----------------------
Revolving Credit Facility   $                         $                       _______%	

8. Trade Date: ___________________________(3)
Effective Date: ____________________, 20__ [TO BE INSERTED BY AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER BY THE AGENT.]
The terms set forth in this Assignment and Assumption are hereby agreed to:
ASSIGNOR
[NAME OF ASSIGNOR]
By:

Title:
ASSIGNEE
[NAME OF ASSIGNEE]
By:

Title:

* Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.
(2) Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder.
(3) Insert if satisfaction of minimum amounts is to be determined as of the Trade Date.
[Consented to and](4) Accepted:
JPMORGAN CHASE BANK, N.A., as Agent
By:
Title:
[Consented to:](5)
PINNACLE WEST CAPITAL CORPORATION
By:
Title:

(4) To be added only if the consent of the Agent is required by the Credit Agreement.
(5) To be added only if the consent of the Borrower is required by the terms of the Credit Agreement.
ANNEX 1
TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION
1. Representations and Warranties.
1.1 Assignor. The Assignor represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby. Neither the Assignor nor any of its officers, directors, employees, agents or attorneys shall be responsible for (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency, perfection, priority, collectibility, or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document, (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Documents, (v) inspecting any of the property, books or records of the Borrower, or any guarantor, or (vi) any mistake, error of judgment, or action taken or omitted to be taken in connection with the Credit Extensions or the Loan Documents.
1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iii) agrees that its payment instructions and notice instructions are as set forth in Schedule 1 to this Assignment and Assumption, (iv) confirms that none of the funds, monies, assets or other consideration being used to make the purchase and assumption hereunder are "plan assets" as defined under ERISA and that its rights, benefits and interests in and under the Loan Documents will not be "plan assets" under ERISA,
(v) agrees to indemnify and hold the Assignor harmless against all losses, costs and expenses (including, without limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor in connection with or arising in any manner from the Assignee's non-performance of the obligations assumed under this Assignment and Assumption, (vi) it has received a copy of the Credit Agreement, together with copies of financial statements 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 Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Agent or any other Lender, and (vii) attached as Schedule 1 to this Assignment and Assumption is any documentation required to be delivered by the Assignee with respect to its tax status pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee and (b) agrees that (i) it will, independently and without reliance on 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 Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.
2. Payments. The Assignee shall pay the Assignor, on the Effective Date, the amount agreed to by the Assignor and the Assignee. From and after the Effective Date, the Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.
3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.
ADMINISTRATIVE QUESTIONNAIRE
US AND NON-US TAX INFORMATION REPORTING REQUIREMENTS
EXHIBIT B
NOTE
[Date]
PINNACLE WEST CAPITAL CORPORATION, an Arizona corporation (the "Borrower"), promises to pay to the order of ____________________________________ (the "Lender") the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to Article II of the Agreement (as hereinafter defined), in immediately available funds at the address of JPMorgan Chase Bank, N.A. in New York, New York, as Agent, specified pursuant to Section 2.12 of the Agreement, together with interest on the unpaid principal amount hereof at the rates and on the dates set forth in the Agreement. The Borrower shall pay the principal of and accrued and unpaid interest on the Loans in full on the Facility Termination Date, and the Borrower and shall make such mandatory payments as are required to be made under the terms of Article II of the Agreement.
The Lender shall, and is hereby authorized to, record on the schedule attached hereto, or to otherwise record in accordance with its usual practice, the date and amount of each Loan and the date and amount of each principal payment hereunder.
This Note is one of the Notes issued pursuant to, and is entitled to the benefits of, the Amended and Restated Credit Agreement dated as of December 9, 2005 (which, as it may be amended or modified and in effect from time to time, is herein called the "Agreement"), among the Borrower, the lenders party thereto, including the Lender, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents party thereto, to which Agreement reference is hereby made for a statement of the terms and conditions governing this Note, including the terms and conditions under which this Note may be prepaid or its maturity date accelerated. Capitalized terms used herein and not otherwise defined herein are used with the meanings attributed to them in the Agreement.
PINNACLE WEST CAPITAL CORPORATION
By:
 Print Name:

Title:
 
SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
TO
NOTE OF ______________________________,
DATED ______________________,

       Principal     Maturity    Principal
         Amount    of Interest     Amount     Unpaid
Date    of Loan       Period        Paid     Balance
----   ---------   -----------   ---------   -------	

EXHIBIT C
FORM OF INCREASING LENDER SUPPLEMENT
INCREASING LENDER SUPPLEMENT, dated __________, 20___ (this "Supplement"), by and among each of the signatories hereto, to the Amended and Restated Credit Agreement, dated as of December 9, 2005 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Pinnacle West Capital Corporation (the "Borrower"), the Lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the "Administrative Agent") and the other agents party thereto.
WITNESSETH
WHEREAS, pursuant to Section 2.21 of the Credit Agreement, the Borrower has the right, subject to the terms and conditions thereof, to effectuate from time to time an increase in the aggregate Commitments under the Credit Agreement by requesting one or more Lenders to increase the amount of its Commitment;
WHEREAS, the Borrower has given notice to the Administrative Agent of its intention to increase the aggregate Commitments pursuant to such Section 2.21; and
WHEREAS, pursuant to Section 2.21 of the Credit Agreement, the undersigned Increasing Lender now desires to increase the amount of its Commitment under the Credit Agreement by executing and delivering to the Borrower and the Administrative Agent this Supplement;
NOW, THEREFORE, each of the parties hereto hereby agrees as follows:
1. The undersigned Increasing Lender agrees, subject to the terms and conditions of the Credit Agreement, that on the date of this Supplement it shall have its Commitment increased by $[__________], thereby making the aggregate amount of its total Commitments equal to $[__________].
2. The Borrower hereby represents and warrants that no Default or Unmatured Default has occurred and is continuing on and as of the date hereof.
3. Terms defined in the Credit Agreement shall have their defined meanings when used herein.
4. This Supplement shall be governed by, and construed in accordance with, the laws of the State of New York.
5. This Supplement 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 document.
IN WITNESS WHEREOF, each of the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer as of the date first above written.
[INSERT NAME OF INCREASING LENDER]
By:

Name:
Title:
Accepted and agreed to as of the date first written above:
PINNACLE WEST CAPITAL CORPORATION
By:
Name:
Title:
Acknowledged as of the date first written above:
JPMORGAN CHASE BANK, N.A.
as Administrative Agent
By:
Name:
Title:
EXHIBIT D
FORM OF AUGMENTING LENDER SUPPLEMENT
AUGMENTING LENDER SUPPLEMENT, dated __________, 20___ (this
"Supplement"), to the Amended and Restated Credit Agreement, dated as of December 9, 2005 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), among Pinnacle West Capital Corporation (the "Borrower"), the Lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the "Administrative Agent") and the other agents party thereto.
WITNESSETH
WHEREAS, the Credit Agreement provides in Section 2.21 thereof that any bank, financial institution or other entity selected by the Administrative Agent in consultation with the Borrower may extend Commitments under the Credit Agreement, by executing and delivering to the Borrower and the Administrative Agent a supplement to the Credit Agreement in substantially the form of this Supplement; and
WHEREAS, the undersigned Augmenting Lender was not an original party to the Agreement but now desires to become a party thereto;
NOW, THEREFORE, each of the parties hereto hereby agrees as follows:
1. The undersigned Augmenting Lender agrees to be bound by the provisions of the Credit Agreement and agrees that it shall, on the date of this Supplement, become a Lender for all purposes of the Credit Agreement to the same extent as if originally a party thereto, with a Commitment of $[__________].
2. The undersigned Augmenting Lender (a) represents and warrants that it has full power and authority, and has taken all action necessary, to execute and deliver this Supplement and to consummate the transactions contemplated hereby and by the Credit Agreement and to become a Lender under the Credit Agreement; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 6.1 thereof, as applicable, and has reviewed such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Supplement; (c) agrees that it will, independently and without reliance upon the Administrative 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 the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; (e) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; and (f) if it is a Non-U.S. Lender,
attached to this Supplement is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the undersigned.
3. The undersigned's address for notices for the purposes of the Credit Agreement is as follows:
[___________]
4. The Borrower hereby represents and warrants that no Default or Unmatured Default has occurred and is continuing on and as of the date hereof.
5. Terms defined in the Credit Agreement shall have their defined meanings when used herein.
6. This Supplement shall be governed by, and construed in accordance with, the laws of the State of New York.
7. This Supplement 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 document.
IN WITNESS WHEREOF, each of the undersigned has caused this Supplement to be executed and delivered by a duly authorized officer as of the date first above written.
[INSERT NAME OF AUGMENTING LENDER]
By:

Name:
Title:
Accepted and agreed to as of the date first written above:
PINNACLE WEST CAPITAL CORPORATION
By:
Name:
Title:
Acknowledged as of the date first written above:
JPMORGAN CHASE BANK, N.A., as Administrative Agent
By:
Name:
Title:
 
Exhibit 10.107
NAVAJO PROJECT
CO-TENANCY AGREEMENT
AMONG
ARIZONA PUBLIC SERVICE COMPANY
DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
NEVADA POWER COMPANY
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT
TUCSON GAS & ELECTRIC COMPANY
THE UNITED STATES OF AMERICA
DWP No. 10498
NAVAJO PROJECT
CO-TENANCY AGREEMENT
TABLE OF CONTENTS

SECTION                               TITLE                                   PAGE
           1.       PARTIES                                                     1
           2.       RECITALS                                                    1
           3.       AGREEMENT                                                   4
           4.       EFFECTIVE DATE                                              4
           5.       DEFINITIONS                                                 4
                     5.1     Accounting Practice                                4
                     5.2     Arizona Water Permit                               4
                     5.3     Ash Disposal Area                                  5
                     5.4     Auditing Committee                                 5
                     5.5     Capacity                                           5
                     5.6     Capital Additions                                  5
                     5.7     Capital Betterments                                5
                     5.8     Capital  Improvements                              6
                     5.9     Capital Replacements                               6
                     5.10    Coal Supply Agreement                              6
                     5.11    Component of the Transmission System               6
                     5.12    Conditional Partial Assignment                     6
                     5.13    Contracting Officer                                6
                     5.14    Contracts  for Interim Sale of United
                              States' Entitlement                               7
                     5.15    Coordinating Committee                             8
                     5.16    Co-Tenants                                         8
                     5.17    Date of Firm Operation                             8
                     5.18    Energy                                             8
                     5.19    Generation Entitlement Share                       8
                     5.20    Incremental Series Capacitors                      9
                     5.21    Indenture of Lease                                 9
                     5.22    Memorandum Transmission Agreement                  9
                     5.23    Navajo Generating Station                          9
                     5.24    Navajo Plant Site                                  9
                     5.25    Navajo Project                                    10
                     5.26    Navajo Tribe                                      10
                     5.27    Net Effective Generating Capability               10
                     5.28    Operating Agent                                   10
                     5.29    Participants                                      10
                     5.30    Participation Agreement                           10
                     5.31    Power                                             10
                     5.32    Project Agreements                                10
                     5.33    Project Series Capacitors                         11
                     5.34    Project Manager                                   11
                     5.35    Pumping Plant Site                                12	

i
Navajo Project
Co-Tenancy Agreement
Table of Contents

SECTION                               TITLE                                   PAGE
                     5.36    Rail Loading Site                                 12
                     5.37    Railroad                                          12
                     5.38    Secretary                                         12
                     5.39    Section 323 Grants                                12
                     5.40    Southern Transmission System                      12
                     5.41    Station Engineering and Operating Committee       12
                     5.42    Station Work                                      12
                     5.43    Transmission System                               13
                     5.44    Transmission Engineering and Operating Committee  13
                     5.45    Transmission Work                                 13
                     5.46    Units of Property                                 13
                     5.47    Water Service Contract                            13
                     5.48    Water Service Contract Assignment                 13
                     5.49    Western Transmission System                       14
           6.       OWNERSHIPS AND TITLES                                      14
           7.       ENTITLEMENT TO NAVAJO GENERATING  STATION
                      CAPACITY AND ENERGY                                      19
           8.       USE OF THE TRANSMISSION SYSTEM                             19
           9.       ADMINISTRATION                                             23
          10.       NONPARTITIONMENT                                           28
          11.       MORTGAGE AND TRANSFER OF INTERESTS                         29
          12.       RIGHT OF FIRST REFUSAL                                     32
          13.       DESTRUCTION                                                36
          14.       SEVERANCE OF IMPROVEMENTS                                  38
          15.       CAPITAL IMPROVEMENTS                                       38
          16.       INTERESTS HELD FOR THE USE AND BENEFIT OF
                      THE UNITED STATES                                        39
          17.       REIMBURSEMENT FOR COSTS AND EXPENSES                       42
          18.       DEFAULTS AND COVENANTS REGARDING OTHER AGREEMENTS          42
          19.       ARBITRATION                                                48
          20.       ACTIONS PENDING RESOLUTION OF DISPUTES                     52
          21.       TERM AND RIGHTS OF CO-TENANTS UPON TERMINATION             53
          22.       COVENANTS RUNNING WITH THE LAND                            54
          23.       RELATIONSHIP OF PARTICIPANTS                               55
          24.       FEES                                                       56
          25.       UNCONTROLLABLE FORCES                                      56
          26.       GOVERNING LAW                                              57
          27.       BINDING OBLIGATIONS                                        57
          28.       NONDEDICATION OF FACILITIES                                58
          29.       ENVIRONMENTAL PROTECTION                                   58
          30.       ASSIGNMENT OF INTERESTS                                    62
          31.       USE OF FACILITIES OF LOS ANGELES                           62	

ii
Navajo Project
Co-Tenancy Agreement
Table of Contents

SECTION                               TITLE                                      PAGE
          32.       NOTICES                                                       63
          33.       MISCELLANEOUS PROVISIONS CONCERNING THE PROJECT AGREEMENTS    64
          34.       NAVAJO PROJECT GENERAL CONTRACT PROVISIONS                    67
          35.       COMPLIANCE WITH COMPACTS                                      67	

EXHIBITS

     A        NAVAJO GENERATING STATION

B & B-B       TRANSMISSION SYSTEM

     C        NAVAJO PROJECT GENERAL PROVISIONS	

iii
NAVAJO PROJECT
CO-TENANCY AGREEMENT
1. PARTIES: The parties to this Co-Tenancy Agreement are: THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States", acting through the Secretary of the Interior, his duly appointed successor or his duly authorized representative; ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, hereinafter referred to as "Arizona"; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of the City of Los Angeles, a municipal corporation of the State of California, hereinafter referred to as "Los Angeles"; NEVADA POWER COMPANY, a Nevada corporation, hereinafter referred to as "Nevada"; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona, hereinafter referred to as "Salt River Project"; and TUCSON GAS Section ELECTRIC COMPANY, an Arizona corporation, hereinafter referred to as "Tucson".
2. RECITALS: This Co-Tenancy Agreement is made with refer ence to the following facts, among others:
2.1 By the Colorado River Basin Project Act (82 Stat. 885) the Congress of the United States authorized the construction, operation and maintenance of the
1
Central Arizona Project. Pursuant to Section 303 of said Act, the Secretary is authorized to enter into agreements with non-Federal interests proposing to construct thermal generating Power plants whereby the United States shall acquire the right to such portions of their Capacity, including the delivery of Power and Energy over the appurtenant transmission facilities to mutually agreed upon delivery points, as he determines are required in connection with the operation of the Central Arizona Project.
2.2 The Secretary has determined that the acquisition of a right to a portion of the Capacity of the Navajo Project is the most feasible plan for supplying the Power requirements of the Central Arizona Project and augmenting the Lower Colorado River Basin Development Fund.
2.3 As of September 30, 1969, the Participants and Southern California Edison Company entered into the Memorandum Transmission Agreement (Contract No. 14-06-300-2140), which establishes the terms and conditions for the interconnection of the Transmission System at Moenkopi Switchyard with the existing 500 kv transmission line from the Four Corners Generating Station to the Eldorado Substation. These terms and conditions are to be the basis for a more definitive agreement.
2.4 As of September 29, 1969 the Co-Tenants and the Navajo Tribe entered into the Indenture of Lease
2
wherein the Co-Tenants leased the Navajo Plant Site, Pumping Plant Site, Ash Disposal Area, Rail Loading Site, and certain related rights on certain real property located within the Navajo Reservation.
2.5 By the provisions of said Indenture of Lease, approval was obtained from the Navajo Tribe for the grants by the Secretary of rights-of-way for a railroad, coal conveyor and portions of the Transmission System. Such approval was also obtained by way of a resolution from the Hopi Tribal Council.
2.6 The Participants entered into the Participation Agreement, which provides the basic principles for their participation in the Navajo Project. These principles are intended to be the basis of more definitive agreements, including this Co-Tenancy Agreement.
2.7 As of January 17, 1969, Salt River Project entered into a Water Service Contract with the United States (Contract No. 14-06-400-5033), relating to the diversion and consumptive use of specified amounts of water annually. In addition, the Arizona Water Permit was issued by the State Land Commissioner of the State of Arizona on September 4, 1969, granting to the Salt River Project a permit to appropriate and use a specified amount of water in conjunction with the operation of a thermal electric generating plant. By a Water Service Contract Assignment dated as of December 22, 1969, Salt
3
River Project assigned to the Co-Tenants undivided interests in the Water Service Contract and the Arizona Water Permit.
2.8 As of June 1, 1970, the Co-Tenants entered into the Coal Supply Agreement with Peabody Coal Company, relating to a supply of coal for the Navajo Generating Station.
2.9 The Participants desire by this Co-Tenancy Agreement to establish terms and conditions relating to their interests in and their ownership of the Navajo Project and to establish certain rights and obligations under the Project Agreements.
3. AGREEMENT: The Participants agree as follows:
4. EFFECTIVE DATE: This Co-Tenancy Agreement shall become effective when it has been duly executed and delivered on behalf of all the Participants.
5. DEFINITIONS: The following terms, when used herein, shall have the meanings specified:
5.1 ACCOUNTING PRACTICE: Generally accepted accounting principles, in accordance with the Federal Power Commission's "Uniform System of Accounts Prescribed for Public Utilities and Licensees (Class A and Class
B)", in effect on January 1, 1970, and as such system of accounts may be amended from time to time.
5.2 ARIZONA WATER PERMIT: Permit No. A-3244 issued by the State Land Commissioner of the State of
4
Arizona on September 4, 1969, granting to the Salt River Project a permit to appropriate and use water in conjunction with the operation of a thermal electric generating plant, which said permit has a priority date of December 18, 1964.
5.3 ASH DISPOSAL AREA: The area for the disposal of ash resulting from the operation of the Navajo Generating Station described on Exhibit 4 to the Indenture of Lease.
5.4 AUDITING COMMITTEE: A committee established pursuant to and which will exercise the functions described in the Project Agreements.
5.5 CAPACITY: Electrical rating expressed in megawatts (mw) or megavolt-amperes (mva).
5.6 CAPITAL ADDITIONS: Any Units of Property, land or land rights which are added to the Navajo Project and which do not substitute for any existing Units of Property, land or land rights constituting a part of the Navajo Project, and which in accordance with Accounting Practice would be capitalized.
5.7 CAPITAL BETTERMENTS: The improvement of land or land rights or the enlargement or improvement of any Units of Property constituting a part of the Navajo Project or the substitution thereof, where such substitution constitutes an enlargement or improvement as compared with that for which it is substituted, which
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in accordance with Accounting Practice would be capitalized.
5.8 CAPITAL IMPROVEMENTS: All or any Capital Additions, Capital Betterments, or Capital Replacements.
5.9 CAPITAL REPLACEMENTS: The substitution of any Units of Property for other Units of Property constituting a part of the Navajo Project, where such substitution does not constitute an enlargement or improvement of that for which it is substituted, which in accordance with Accounting Practice would be capitalized.
5.10 COAL SUPPLY AGREEMENT: The Navajo Station Coal Supply Agreement entered into as of June 1, 1970, by and between Peabody Coal Company and the Co-Tenants, relating to a supply of coal for the Navajo Generating Station.
5.11 COMPONENT OF THE TRANSMISSION SYSTEM: Any of the components of the Transmission System as described in Exhibit B hereto.
5.12 CONDITIONAL PARTIAL ASSIGNMENT: An assignment which the Co-Tenants may obtain from Peabody Coal Company covering the coal areas dedicated under the terms and conditions of the Coal Supply Agreement.
5.13 CONTRACTING OFFICER: The Secretary, his duly appointed successor or his duly authorized representative.
5.14 CONTRACTS FOR INTERIM SALE OF UNITED STATES'
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ENTITLEMENT: The contracts by which the United States has contracted with other Participants and Southern California Edison Company for the interim sale of United States' entitlement of Navajo Project until required for other purposes of the Colorado River Basin Project Act. These contracts are:
5.14.1 Contract with Department of Water and Power of the City of Los Angeles for Interim Sale of United States' Entitlement of Navajo Project, Contract No. 14-06-300-2133, dated as of September 30, 1969;
5.14.2 Contract with Nevada Power Company for Interim Sale of United States' Entitlement of Navajo Project, Contract No. 14-06-300-2134, dated as of September 30, 1969;
5.14.3 Contract with Southern California Edison Company for Interim Sale of United States' Entitlement of Navajo Project, Contract No. 14-06-300-2135, dated as of September 30, 1969;
5.14.4 Contract with Salt River Project Agricultural Improvement and Power District for Interim Sale of United States' Entitlement of Navajo Project, Contract No. 14-06-300-2136, dated as of September 30, 1969;
5.14.5 Contract with Arizona Public Service Company for Interim Sale of United States' Entitlement
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of Navajo Project, Contract No. 14-06-300-2137, dated as of September 30, 1969; and
5.14.6 Contract with Tucson Gas Electric Company for Interim Sale of United States' Entitlement of Navajo Project, Contract No. 14-06-300-2138, dated as of September 30, 1969.
5.15 COORDINATING COMMITTEE: A committee established pursuant to and which will exercise the functions described in the Project Agreements.
5.16 CO-TENANTS: Any one or all of the parties hereto, other than the United States.
5.17 DATE OF FIRM OPERATION: The date established in accordance with the Project Agreements on which each unit of the Navajo Generating Station is determined by the Station Engineering and Operating Committee to be reliable as a source of generation and on which that unit can reasonably be expected to operate continuously at its rated Capacity.
5.18 ENERGY: Kilowatt-hours (kwh).
5.19 GENERATION ENTITLEMENT SHARE. The percentage entitlement of each Participant in each unit of the Navajo Generating Station. Each Participant's percentage is as follows:

5.19.1      Arizona              = 14.0 percent.
5.19.2      Los Angeles          = 21.2 percent.
5.19.3      Nevada               = 11.3 percent.	

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5.19.4      Salt River Project   = 21.7 percent.
5.19.5      Tucson               =  7.5 percent.
5.19.6      United States        = 24.3 percent.	

5.20 INCREMENTAL SERIES CAPACITORS: Series capacitors described in the Memorandum Transmission Agreement and in any subsequent Project Agreement(s) superseding the Memorandum Transmission Agreement which will serve the purposes described therein for "incremental series capacitors".
5.21 INDENTURE OF LEASE: The Indenture of Lease dated as of the 29th day of September, 1969, by and between the Navajo Tribe and the Co-Tenants.
5.22 MEMORANDUM TRANSMISSION AGREEMENT: The Memorandum Transmission Agreement dated as of the 30th day of September, 1969 (Contract No. 14-06-300-2140), by and between Southern California Edison Company and the Participants.
5.23 NAVAJO GENERATING STATION: Three coal-fired steam electric generating units, to be constructed at the Navajo Plant Site, each having a nameplate rating of 750 mw and, subject to final design, an estimated Net Effective Generating Capability of 770 mw, and all facilities and structures used therewith or related thereto, all as described in Exhibit A hereto.
5.24 NAVAJO PLANT SITE: A parcel of land in Coconino County, Arizona, consisting of approximately
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1,020 acres, described in Exhibit 2 to the Indenture of Lease.
5.25 NAVAJO PROJECT: The Navajo Generating Station and the Transmission System.
5.26 NAVAJO TRIBE: The Navajo Tribe of Indians.
5.27 NET EFFECTIVE GENERATING CAPABILITY: The maximum continuous ability of each unit of the Navajo Generating Station to produce Power which is available to the Participants at the Navajo 500 kv Switchyard 500 kv bus.
5.28 OPERATING AGENT: A Co-Tenant responsible for the operation and maintenance of the Navajo Generating Station or a Component of the Transmission System in accordance with the Project Agreements.
5.29 PARTICIPANTS: Any one or more of the parties hereto, including the United States.
5.30 PARTICIPATION AGREEMENT: The Navajo Project Participation Agreement, dated as of September 30, 1969 (Contract No. 14-06-300-2131), and the Amendment and Supplement #1 thereto dated as of January 16, 1970, which provide the basic principles for the Participants' participation in the Navajo Project.
5.31 POWER: Kilowatts (kw) or megawatts (mw).
5.32 PROJECT AGREEMENTS: This Co-Tenancy Agreement, the Participation Agreement, the grants from the United States for rights-of-way across Indian lands pursuant
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to 2S U.S.C. Section 323, the Navajo Project Power Coordination Agreement, the Southern Transmission System, Western Transmission System and Navajo Generating Station Construction Agreements, the Southern Transmission System, Western Transmission System and Navajo Generating Station Operating Agreements, other grants of rights-of-way and easements for Navajo Project facilities, the Indenture of Lease, the Arizona Water Permit, the Water Service Contract, the Water Service Contract Assignment, the Coal Supply Agreement, the Conditional Partial Assignment, the Multi-Party Agreement, the Memorandum Transmission Agreement, and such other agreements as the Participants find necessary or desirable and designate as Project Agreements, as such Project Agreements are originally executed or as they may thereafter be supplemented, amended or superseded;
5.33 PROJECT SERIES CAPACITORS: Series capacitors described in the Memorandum Transmission Agreement and in any subsequent Project Agreement(s) superseding the Memorandum Transmission Agreement, which will serve the purposes described therein for "project series capacitors".
5.34 PROJECT MANAGER: A Co-Tenant responsible for the construction and completion of the Navajo Generating Station or a Component of the Transmission System in accordance with the Project Agreements.
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5.35 PUMPING PLANT SITE: The site for facilities to divert and pump water from Lake Powell, including water intake works, pumping station, water lines and related facilities, as described on Exhibit 2 to the Indenture of Lease.
5.36 RAIL LOADING SITE: The site for the conveyor termination and rail loading facilities, related facilities and equipment and coal storage as described on Exhibit 3 to the Indenture of Lease.
5.37 RAILROAD: The railroad described in Exhibit A hereto.
5.38 SECRETARY: The Secretary of the Interior.
5.39 Section 323 GRANTS: Grants of easements and rights-of-way by the United States to the Co-Tenants, covering the Navajo Plant Site, the Ash Disposal Area, the Pumping Plant Site, the Railroad right-of-way, the Rail Loading Site and related rights.
5.40 SOUTHERN TRANSMISSION SYSTEM: The Southern Transmission System as described in Exhibit B hereto.
5.41 STATION ENGINEERING AND OPERATING COMMITTEE: A committee established pursuant to and which will exercise the functions described in the Project Agreements.
5.42 STATION WORK: Engineering, design, contract preparation, purchasing, construction, supervision, expediting, inspection, accounting, testing, start-up, protection, operation, repair, maintenance, replacement, or
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reconstruction, of or for the Navajo Generating Station.
5.43 TRANSMISSION SYSTEM: The Transmission System as generally described in Exhibit B hereto.
5.44 TRANSMISSION ENGINEERING AND OPERATING COMMITTEE: A committee established pursuant to and which will exercise the functions described in the Project Agreements.
5.45 TRANSMISSION WORK: Engineering, design, contract preparation, purchasing, construction, supervision, expediting, inspection, accounting, testing, protection, operation, repair, maintenance, replacement, or reconstruction, of or for the Transmission System.
5.46 UNITS OF PROPERTY: Units of property as described in the Federal Power Commission's "List of Units of Property for Use in Connection with Uniform System of Accounts Prescribed for Public Utilities and Licensees," in effect on January 1, 1961, and as such list may be amended from time to time.
5.47 WATER SERVICE CONTRACT: The Water Service Contract dated the 17th day of January, 1969, between the United States and the Salt River Project (Contract No. 14-06-400-5033).
5.48 WATER SERVICE CONTRACT ASSIGNMENT: The Water Service Contract Assignment dated as of the 22nd day of December, 1969, between the Salt River Project and the other Co-Tenants whereby Salt River Project
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assigned undivided interests in the Water Service Contract and the Arizona Water Permit to the Co-Tenants.
5.49 WESTERN TRANSMISSION SYSTEM: The Western Transmission System as described in Exhibit B hereto.
6. OWNERSHIPS AND TITLES:
6.1 The Co-Tenants shall acquire and own undivided interests as tenants in common in the Navajo Generating Station, the Water Service Contract, the Arizona Water Permit, the Coal Supply Agreement, the Conditional Partial Assignment, and those Project Agreements relating to land and land rights for the Navajo Generating Station to which the United States is not a party in its capacity as a Participant, as follows:

6.1.1       Arizona         = 14.0%

6.1.2       Los Angeles     = 21.2%

6.1.3       Nevada          = 11.3%

6.1.4       Salt River
                 Project    = 21.7% for its own use and benefit

                         and  24.3% for the use and benefit of the
                                    United States in accordance with
                                    Project Agreements

6.1.5       Tucson          =  7.5%	

6.2 The Co-Tenants shall acquire and own undivided interests as tenants in common in the Components of the Transmission System as follows:
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6.2.1 Navajo 500 kv Switchyard
Navajo-Moenkopi 500 kv line

(i)   Arizona         = 14.0%

(ii)  Los Angeles     = 21.2%

(iii) Nevada          = 11.3%

(iv)  Salt River
           Project    = 21.7% for its own use and benefit and

                        24.3% for the use and benefit of the
                              United States in accordance with
                              Project Agreements.

(v)   Tucson          =  7.5%	

6.2.2 Navajo-Westwing 500 kv line
Moenkopi-Westwing 500 kv line
Westwing 500 kv Switchyard

(i)   Arizona         = 24.7%

(ii)  Salt River
           Project    = 38.3% for its own use and benefit and

                        23.7% for the use and benefit of the
                              United States in accordance with
                              Project Agreements.

(iii) Tucson          = 13.3%	

6.2.3 Westwing Substation 2-1332 MVA 500/230 kv transformer banks and transformer leads and spare 444 MVA 500/230 kv transformer and transformer leads
(i) Arizona = 28.5%
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(ii) Salt River Project = 44.2% for its own use and benefit and
27.3% for the use and benefit of the United States in accordance with Project Agreements.
6.2.4 Westwing Substation 600 MVA 500/345 kv transformer bank and transformer leads and spare 200 MVA 500/345 kv transformer and transformer leads
(i) Arizona = 19.5%
(ii) Tucson = 80.5%
6.2.5 Westwing 230 kv Switchyard

(i)   Arizona         = 39.9%

(ii)  Salt River
           Project    = 44.9% for its own use and benefit and

                        15.2% for the use and benefit of the
                              United States in accordance with
                              Project Agreements.	

Upon completion of the United States' two 230 kv lines to the reserved bay positions in the Westwing 230 kv Switchyard, (i) and (ii) of this Section 6.2.5 shall be as follows:

(i)   Arizona         = 32.1%

(ii)  Salt River
           Project    = 36.1% for its own use and benefit and

                        31.8% for the use and

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                              benefit of the United States in
                              accordance with Project
                              Agreements.	

6.2.6 Other Associated Components of the Southern Transmission System, as described in paragraph F of Exhibit B hereto, shall be solely owned by Arizona.
6.2.7 Navajo-McCullough 500 KV line and McCullough Line Compensation

(i)   Los Angeles     = 48.9%

(ii)  Nevada          = 26.1%

(iii) Salt River
           Project    = 25.0% for the use and benefit of the
                              United States in accordance with
                              Project Agreements.	

6.2.8 McCullough 500 kv Switchyard

(i)   Los Angeles     = 74.8%

(ii)  Nevada          = 19.0%

(iii) Salt River
           Project    =  6.2% for the use and benefit of the
                              United States in accordance with
                              Project Agreements.	

6.2.9 McCullough Substation Common Facilities, as described in Exhibit B hereto.
(i) Los Angeles = 67.9%
(ii) Nevada = 23.9%
(iii) Salt River Project = 8.2% for the use and
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benefit of the United States in
accordance with Project
Agreements.	

6.3 The ownerships and titles described in this Co-Tenancy Agreement shall be determined to have vested simultaneously in the Co-Tenants so that the estate of each shall be determined to be concurrent as to right and priority.
6.4 Within eighteen (18) months following the Date of Firm Operation of the final unit of the Navajo Generating Station placed in operation, the Participants shall jointly make, execute and deliver a supplement to this Co-Tenancy Agreement in recordable form which shall describe with particularity and detail the facilities and other property then constituting the Navajo Project not specifically described in the exhibits hereto, and such supplement, when recorded, shall be and become a part of this Co-Tenancy Agreement.
6.5 In the event any Participant transfers or assigns any of its rights, title or interest in and to the Navajo Project in accordance with the terms and conditions of this Co-Tenancy Agreement, the Participants and any successor shall jointly make, execute and deliver a supplement to this Co-Tenancy Agreement in recordable form which shall describe with particularity and detail the rights, titles and interests of each Participant and
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any successor following such transfer or assignment.
7. ENTITLEMENT TO NAVAJO GENERATING STATION CAPACITY AND ENERGY:
7.1 The Capacity entitlement of each Participant in each unit of the Navajo Generating Station shall be the product of its Generation Entitlement Share and the Net Effective Generating Capability of such unit.
7.2 Each Participant shall be entitled to schedule for its account Power and Energy from any generating unit up to the amount of its available Capacity entitlement in such unit.
8. USE OF THE TRANSMISSION SYSTEM:
8.1 Each Participant shall have the right to use the Transmission System to transmit to its designated delivery points under normal operating conditions Power in an amount equivalent to the sum of its Capacity entitlements in the Navajo Generating Station as provided in
Section 7 hereof or to reserve the Transmission System for such transmission without regard to the origin, source, ownership or type of generation used to produce such Power.
8.2 Any Participant may acquire firm entitlement in the Transmission System in addition to that provided for in Section 8.1 hereof upon the written agreement of all Participants having cost responsibility under the Project Agreements for the facilities over which such
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firm entitlement is sought, provided that said firm entitlement does not materially interfere with the right of any other Participant to utilize its entitlement as provided in Section 8.1 hereof. Such written agreement shall specify the amount of monetary compensation to be paid to and the allocation among the Participants for such firm entitlement.
8.3 Any Participant may make non-firm use of transmission Capacity in addition to its use under Section 8.1 hereof to the extent that transmission Capacity is determined to be available by the Operating Agent for that segment of the Transmission System over which the Capacity is desired in accordance with criteria to be developed by the Transmission Engineering and Operating Committee.
8.4 If two or more Participants concurrently desire to make non-firm use of transmission Capacity in the same segment of the Transmission System pursuant to Section 8.3 hereof and the available transmission Capacity in such segment is not adequate to satisfy all such requests, then, unless otherwise agreed, the available Capacity will be shared by those Participants concurrently requesting such Capacity in proportion to their cost responsibility in such segment as provided in the Project Agreements.
8.5 The Participants' designated points of
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delivery shall be as follows:

8.5.1 Arizona      =  Navajo 500 kv Switchyard and Westwing
                      Substation.

8.5.2 Los Angeles  =  Navajo 500 kv Switchyard and McCullough
                      500 kv Switchyard.

8.5.3 Nevada       =  Navajo 500 kv Switchyard and McCullough
                      500 kv Switchyard.

8.5.4 Salt River   =  Navajo 500 kv Switchyard and Westwing
           Project    Substation.

8.5.5 Tucson       =  Navajo 500 kv Switchyard and Westwing
                      Substation.

8.5.6 United       =  Navajo 500 kv Switchyard, McCullough
           States     500 kv Switchyard, Westwing Substation,
                      and the Moenkopi Switchyard during the
                      period in which the United States is
                      selling Power to Southern California
                      Edison Company pursuant to the Contract
                      With Southern California Edison Company
                      for Interim Sale of United States'
                      Entitlement of Navajo Project for
                      delivery at Moenkopi Switchyard.	

8.6 Each Participant shall be entitled to interconnect its transmission system with the Transmission System at its designated points of delivery, and the costs of such interconnection shall be paid by such Participant.
8.7 Upon agreement with all the other Partici-
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pants, a Participant may at its expense make interconnections to the Transmission System at points other than its designated points of delivery. Such agreement shall specify the terms and conditions under which such interconnections may be made, the charges, if any, to the interconnecting Participant, and the distribution of the proceeds therefrom to the other Participants.
8.8 Unless otherwise agreed by the Transmission Engineering and Operating Committee, when the Capacity available to the Participants in any segment of the Transmission System is insufficient to accommodate all of the firm use of the Transmission System pursuant to Section 8.1 hereof, then the use of the available Capacity of that segment of the Transmission System will be allocated in proportion to the Participants' cost responsibility in such segment. It is not the intention of the Participants to dedicate any Capacity in the Transmission System for use by other parties.
8.9 The Transmission System will be interconnected with the Four Corners-Eldorado 500 kv line at the Moenkopi Switchyard in accordance with the Memorandum Transmission Agreement, and as such agreement may hereafter be supplemented, amended or superseded.
8.10 For the purpose of this Section 8, any use of any section of line by the United States which is in excess of the greater of (i) the United States' percentage
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cost responsibility in such line times the capability of such line, or
(ii) the capability required to supply the Power requirements of the Central Arizona Project, shall be deemed to be non-firm use unless the right to such use shall have been acquired pursuant to Section 8.2 hereof.
8.11 Notwithstanding the provisions of this Section 8, Los Angeles shall have the right to use the McCullough Substation or to interconnect its transmission system therewith for purposes other than those of the Navajo Project established pursuant to the Project Agreements; provided, that such use or interconnection shall not unreasonably interfere with the rights, titles or interests of the other Participants in the Transmission System as established pursuant to Project Agreements.
9. ADMINISTRATION:
9.1 As a means of securing effective cooperation and interchange of information and of providing consultation on a prompt and orderly basis among the Participants in connection with various administrative and technical problems which may arise from time to time in connection with the terms and conditions of the Project Agreements, the Coordinating Committee, Auditing Committee, Transmission Engineering and Operating Committee and Station Engineering and Operating Committee, established under the provisions of Section 8 of the Participation Agreement, shall continue in existence and shall have the
-23-
responsibilities set forth in Sections 9.2 through 9.5 hereof.
9.2 The Coordinating Committee shall be composed of one (1) representative of each Participant, who shall be the Contracting Officer or an officer or general manager of a Participant or the designee of any of the foregoing and shall:
9.2.1 Provide liaison among the Participants at the management level.
9.2.2 Exercise general supervision over the Station Engineering and Operating Committee, the Transmission Engineering and Operating Committee, the Auditing Committee and other permanent or ad hoc committees established pursuant to Section 9.11 hereof.
9.2.3 Consider matters referred to it by another committee.
9.2.4 Perform such other functions and duties as may be assigned to it in the Project Agreements.
9.2.5 Review, discuss and act upon disputes among the Participants arising under the Project Agreements.
9.3 The Station Engineering and Operating Committee shall consist of two (2) representatives desig-
-24-
nated by each Participant, and each such representative shall be authorized by the Participant by which he is designated to act on its behalf with respect to those matters herein provided to be the responsibilities of the Station Engineering and Operating Committee. The Station Engineering and Operating Committee shall:
9.3.1 Provide liaison among the Participants and between them and the Project Manager and the Operating Agent for the Navajo Generating Station with respect to the engineering, construction, operation, maintenance, replacement and reconstruction of the Navajo Generating Station.
9.3.2 Perform such other functions and duties as may be assigned to it in the Project Agreements or by the Coordinating Committee.
9.4 The Transmission Engineering and Operating Committee shall consist of two (2) representatives designated by each Participant, and each such representative shall be authorized by the Participant by which he is designated to act on its behalf with respect to those matters herein provided to be the responsibilities of the Transmission Engineering and Operating Committee. The Transmission Engineering and Operating Committee shall:
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9.4.1 Provide liaison among the Participants and between them and the Project Managers and the Operating Agents for the Components of the Transmission System with respect to the engineering, construction, operation, maintenance, re- placement and reconstruction of the Transmission System.
9.4.2 Perform such other functions and duties as may be assigned to it in the Project Agreements or by the Coordinating Committee.
9.5 The Auditing Committee shall consist of two (2) representatives designated by each Participant, and each such representative shall be authorized by the Participant by which he is designated to act on its behalf with respect to those matters herein provided to be the responsibilities of the Auditing Committee. The Auditing Committee shall:
9.5.1 Develop procedures for proper accounting and financial liaison among the Participants in connection with the engineering, construction, operation, replacement, reconstruction and maintenance of the Navajo Project.
9.5.2 Review accounting and financial
-26-
aspects of the engineering, construction, operation, maintenance, replacement and reconstruction of the Navajo Project.
9.5.3 Advise and make recommendations to the Coordinating Committee, the Project Managers and the Operating Agents on matters involving auditing and financial transactions.
9.5.4 Perform such other functions and duties as may be assigned to it in the Project Agreements or by the Coordinating Committee.
9.6 Any action or determination of a committee must be unanimous.
9.7 All actions, agreements or determinations made by the committees shall be reduced to writing and any such action, agreement or determination shall become effective when signed by a representative of each Participant on the committee or an authorized alternate. The Station Engineering and Operating Committee, the Transmission Engineering and Operating Committee and the Auditing Committee shall keep written minutes and records of all meetings
9.8 The committees shall have no authority to modify any of the terms, covenants or conditions of the
-27-
Project Agreements.
9.9 If the Station Engineering and Operating Committee, Transmission Engineering and Operating Committee or the Auditing Committee fail to reach agreement while performing the respective functions and duties assigned to them in this Co-Tenancy Agreement or in the other Project Agreements, then such disagreement shall be referred to the Coordinating Committee.
9.10 Each Participant shall notify the other Participants promptly of any change in the designation of its representatives on the committees. A Participant may designate an alternate to act as its representative on any committee in the absence of the regular member or to act on specified occasions with respect to specified matters. Any alternate representative appearing at a committee meeting shall be deemed to have authority to act on behalf of the Participant he represents unless he furnishes written notice to the committee chairman to the contrary.
9.11 The Participants, acting through the Coordinating Committee, shall have the right to establish permanent or ad hoc committees. The authority and duties of any such committee shall be set forth in writing and shall be subject to the provisions of the Project Agreements.
10. NONPARTITIONMENT: The Co-Tenants and each of them accept title to the Navajo Project and their rights, titles and
-28-
interests in the Project Agreements as tenants in common. Each Co-Tenant agrees to waive any rights which it may have to partition the Navajo Project, or the Project Agreements, whether by partitionment in kind or by sale and division of the proceeds, and further agrees that it will not resort to any action in law or in equity to partition the Navajo Project, or the Project Agreements, and it waives the benefits of all laws that may now or hereafter authorize such partition for a term (i) which shall be co-terminus with this Co-Tenancy Agreement, or (ii) which shall be for such lesser period as may be required under applicable law.
11. MORTGAGE AND TRANSFER OF INTERESTS:
11.1 Except as provided in Section 11.6 hereof, each Co-Tenant shall have the right at any time and from time to time to mortgage, create or provide for a security interest in or convey in trust all or a part of its ownership share in the Navajo Project, together with an equal interest in the Project Agreements, to a trustee or trustees under a deed of trust, mortgage or indenture, or to a secured party or parties under a security agreement, as security for its present or future bonds or other obligations or securities, and to any successors or assigns thereof, without need for the prior written consent of any other Participant and without such mortgagee, trustee or secured party assuming or becoming in
-29-
any respect obligated to perform any of the obligations of the Participants.
11.2 Except as provided in Section 11.6 hereof, any mortgagee, trustee or secured party under present or future deeds of trust, mortgages, indentures or security agreements of any of the Co-Tenants and any successor or assign thereof, and any receiver, referee or trustee in bankruptcy or reorganization of any of the Co-Tenants, and any successor by action of law or otherwise, and any purchaser, transferee or assignee of any thereof may, without need for the prior written consent of any other Participant, succeed to and acquire all the rights, titles and interests of such Co-Tenant in the Navajo Project and the Project Agreements and may take over possession of or foreclose upon said rights, titles and interests of such Co-Tenant.
11.3 Except as provided in Section 11.6 hereof, each Co-Tenant shall have the right to transfer or assign all or part of its ownership share in the Navajo Project, together with an equal interest in the Project Agreements, to any of the following without the need for prior written consent of any other Participant:
11.3.1 To any entity acquiring all or substantially all of the property of such Co-Tenant ; or
11.3.2 To any entity merged or consolidated
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with such Co-Tenant; or
11.3.3 To any entity which is wholly-owned by a Co-Tenant; or
11.3.4 To the Salt River Valley Water Users' Association, an Arizona corporation, in the case of a transfer by Salt River Project.
11.4 Except as otherwise provided in Sections 11.1, 11.2 and 11.6 hereof, any successor to the rights, titles and interests of a Co-Tenant in the Navajo Project, together with an equal interest in the Project Agreements, shall assume and agree to fully perform and discharge all of the obligations hereunder of such Co-Tenant, and such successor shall notify each of the other Participants in writing of such transfer, assignment or merger, and shall furnish to each Participant evidence of such transfer, assignment or merger.
11.5 No Participant shall be relieved of any of its obligations under the Project Agreements by an assignment under this Section 11 without the express prior written consent of all of the remaining Participants.
11.6 The rights set forth in Sections 11.1, 11.2 and 11.3 hereof shall not apply to such interests of Salt River Project in the Navajo Project or in the Project Agreements as are held for the use and benefit of the United States, and Salt River Project shall transfer,
-31-
convey, mortgage, encumber or hypothecate any such interest only upon the prior written instruction of the United States.
12. RIGHT OF FIRST REFUSAL:
12.1 Except as provided in Section 11 hereof, should any Co-Tenant desire to transfer its ownership in the Navajo Project or any part thereof to any person, entity or another Co-Tenant, each remaining Co-Tenant shall have the right of first refusal to purchase such interest on the basis of the greater of the following amounts:
12.1.1 The amount of the bona fide written offer from the prospective buyer, or
12.1.2 The fair market value.
12.2 If more than one of the Co-Tenants desire to purchase such interest, unless otherwise agreed, it shall be transferred in the ratio that the Generation Entitlement Share of each Co-Tenant desiring to purchase bears to the total Generation Entitlement Shares of such Co- Tenants.
12.3 At least three (3) years prior to the date on which the intended transfer is to be consummated, the Co-Tenant desiring to transfer shall serve written notice of its intention to do so upon all of the Participants. Such notice shall contain the proposed date of transfer and the terms and conditions of the transfer.
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12.4 Each Co-Tenant shall have the option to purchase all or any part of the interest to be transferred and shall exercise said option by serving written notice of its intention upon the Co-Tenant desiring to transfer and on the remaining Participants within one hundred eighty (180) days after service of the written notice of intention to transfer given pursuant to Section 12.3 hereof. Failure by a Co-Tenant to exercise said option as provided herein within the time period specified shall be conclusively deemed to be an election not to exercise said option.
12.5 If the Co-Tenants fail to exercise their option to purchase the entire ownership interest to be transferred, then the Co-Tenant desiring to transfer shall serve written notice of this fact upon the remaining Participants within ten (10) days after its receipt of the last of the written notices given pursuant to Section 12.4 hereof, or after the expiration of the one hundred eighty (180) day period referred to in
Section 12.4 hereof, whichever is earlier.
12.6 The Co-Tenants who exercised their option to purchase less than the entire ownership interest to be transferred shall have the option to purchase the remaining ownership interest to be transferred, which such option shall be exercised by serving written notice of such election upon the Co-Tenant desiring to transfer
-33-
within thirty (30) days after the receipt of the notice given pursuant to
Section 12.5 hereof.
12.7 When the options to purchase all or any portion of said ownership interest have been exercised, the Co-Tenants shall thereby incur the following obligations:
12.7.1 The Co-Tenant desiring to transfer the ownership interest and the Co-Tenants having exercised the option to purchase all or any portion of such ownership interest shall be obligated to proceed in good faith and with due diligence to obtain all required authorizations and approvals for such purchase.
12.7.2 The Co-Tenant desiring to transfer such ownership interest shall be obligated to obtain the release of any lien en- cumbering the ownership interest which is the subject of the transfer at the earliest practicable date.
12.7.3 The Co-Tenants having exercised the option to purchase such ownership interest shall be obligated to perform all of the terms and conditions required of them to complete the purchase of said ownership interest.
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12.8 The purchase of the ownership interest by the Co-Tenants having elected to purchase the same shall be fully consummated within thirty (30) months following, the date upon which all notices required to be given under this Section 12 have been duly served, unless the Co-Tenants are then diligently pursuing applications for required authorizations or approvals to effect such transfer or are then diligently pursuing or defending appeals from orders entered or authorizations issued in connection with such applications, in which event the transfer shall be consummated within twelve (12) months following the date upon which the final order is entered or authorization issued in connection with such applications.
12.9 If the Co-Tenants fail to exercise their option to purchase all of the ownership interest to be transferred, the Co-Tenant desiring to transfer such interest shall be free to transfer all, but not less than all, of such interest to the party that made the offer to purchase referred to in Section 12.1 hereof upon the terms and conditions set forth in said bona fide written offer. If such transfer is not consummated by the proposed date of transfer referred to in Section 12.3 hereof, the Co-Tenant desiring to transfer said ownership interest must give another complete new right of first refusal to the remaining Co-Tenants pursuant to the
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provisions of this Section 12 before such Co-Tenant shall be free to transfer said ownership interest to another party.
12.10 The Co-Tenants who purchase the ownership interest pursuant to this Section 12 shall receive title to and shall own the interest as tenants in common, subject to the same rights, duties and obligations as are applied by the Project Agreements to the interest being transferred in the hands of the transferring Co-Tenant.
12.11 Any Co-Tenant transferring an ownership interest pursuant to the provisions of this Section 12 shall remain liable and obligated for the performance of all of the terms and conditions of the Project Agreements, unless otherwise agreed to by all of the remaining Participants.
12.12 Any party who may succeed to an ownership interest pursuant to this Section 12 shall specifically agree in writing with the remaining Participants at the time of such transfer that it will not transfer or assign all or any portion of such ownership interest without complying with the terms and conditions of this Section 12.
12.13 The provisions of this Section 12 shall not apply to any interest held by the Salt River Project for the use and benefit of the United States.
13. DESTRUCTION :
13.1 If a generating unit of the Navajo Generat-
36
ing Station should be destroyed to the extent that the cost of repairs or reconstruction is less than 60% of the original cost thereof, the Participants shall, unless otherwise agreed, repair or reconstruct such generating unit to substantially the same general character or use as the original. The Participants shall share the costs of such repair or reconstruction in proportion to their Generation Entitlement Shares in the generating unit so destroyed.
13.2 If a generating unit of the Navajo Generating Station should be destroyed to the extent that the cost of repairs or reconstruction is 60% or more of the original costs thereof, the Participants shall, upon agreement, restore or reconstruct, such unit to substantially the same general character or use as the original; provided, however, that should all of the Participants not agree to restore or reconstruct such unit, but some of the Participants nevertheless desire so to do, then the Participants who do not agree to restore or reconstruct shall sell their interests in such unit to the remaining Participants at a price equal to the salvage value of such interests. The Participants agreeing to restore or reconstruct such unit shall share the costs of restoration or reconstruction in the proportion that the Generation Entitlement Share of each bears to the total of Generation Entitlement Shares of such Participants.
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13.3 If any facilities of the Transmission System, the Railroad or the pumping plant should be destroyed, the Participants shall, unless otherwise agreed, repair or reconstruct such facilities. The Participants shall share the costs of such repair or reconstruction in proportion to their cost responsibility for the facilities so destroyed.
14. SEVERANCE OF IMPROVEMENTS: Except as provided in Section 12 of the Indenture of Lease, the Co-Tenants agree that all facilities, structures, improvements, equipment and property of whatever kind and nature constructed, placed or affixed on the rights-of-way, easements, patented and leased lands as part of or as a Capital Improvement to the Navajo Project, as against all parties and persons whomsoever (including without limitation any party acquiring any interest in the rights-of-way, easements, patented or leased lands or any interest in or lien, claim or encumbrance against any of such facilities, structures, improvements, equipment and property of whatever kind and nature), shall be deemed to be and remain personal property of the Co-Tenant(s), not affixed to the realty.
15. CAPITAL IMPROVEMENTS:
15.1 The Participants recognize that from time to time it may be necessary or desirable to make Capital Improvements or that Capital Improvements may be required
38
by laws and regulations applicable to the Navajo Project.
15.2 If requested by a Participant, any such Capital Improvement shall be described in a supplement to this Co-Tenancy Agreement executed in recordable form.
15.3 The rights, titles and interests, including undivided percentage ownership interests, of any Participant in and to any Capital Improvements to the Navajo Generating Station shall be held as provided in
Section 6.1 hereof.
15.4 Except as specifically provided in Section 6.2.5 hereof, Capital Improvements made to the Transmission System shall be owned by the Participant(s) in percentage ownership interest(s) in proportions equal to their construction cost responsibility (ies) for such Capital Improvements; provided, that title to the interest of the United States in any such Capital Improvements shall be held by the Salt River Project for the use and benefit of the United States.
16. INTERESTS HELD FOR THE USE AND BENEFIT OF THE UNITED STATES :
16.1 Salt River Project shall acquire and hold the interests acquired for the use and benefit of the United States so that the United States will realize the full use and benefit of its entitlement as provided for in the Project Agreements.
16.2 Salt River Project shall not execute any
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Project Agreement or any other agreement which purports to apply to the rights, titles or interests held for the use and benefit of the United States to which the United States is not a contracting party in its capacity as a Participant without the prior written consent of the United States. Except as otherwise provided in the Project Agreements, Salt River Project shall not exercise any rights, privileges or options in any such agreement for or on behalf of the United States without the prior written consent of the United States. With respect to any Project Agreement to which the United States is not a contracting party, except as otherwise provided in the Project Agreements, the United States shall have a right, co-equal with the rights of the Participants who are contracting parties to such Project Agreement, to participate in any decision or action taken under such Project Agreement which in any manner applies to or affects a right, title or interest held by Salt River Project for the use and benefit of the United States, to the same extent and to the same effect as though the United States were a contracting party to such Project Agreement.
16.3 Although it is the intention of the Participants that no Co-Tenant should incur any additional liability or burden by reason of the generating and transmission Capacity dedicated for the use and benefit of the United States, should any such liability or burden
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be imposed upon Salt River Project solely by reason of its holding legal title to any portion of the Navajo Project or holding an interest in the Project Agreements for the use and benefit of the United States, such liability or burden shall be shared by the Co-Tenants and allocated among them in the ratio that each Co-Tenant's Generation Entitlement Share bears to the total of the Generation Entitlement Shares of the Co-Tenants. To the extent any such liability or burden is remedied by money payment, performance or otherwise subsequent to its allocation to the Co-Tenants, Salt River Project shall reimburse or recompense the Co-Tenants in the same ratio as such liability or burden was shared among them.
16.4 All moneys paid to Salt River Project pursuant to the Project Agreements which are for the use and benefit of the United States shall be segregated from Salt River Project's general funds and, upon written request of the Contracting Officer, such funds will be invested by Salt River Project in the manner specified in such request. All interest earned and appreciation in value on such investments shall inure to the benefit of the United States and all losses on such investments shall be at the risk of the United States. If the proceeds exceed the amount of the obligation for which they are designated or held, then, upon written request of the Contracting Officer, Salt River Project shall pay such
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excess to the United States or its designee.
17. REIMBURSEMENT FOR COSTS AND EXPENSES: The United States shall reimburse Salt River Project for all costs and expenses not otherwise specifically provided for which are imposed upon, measured by or associated with the interests held by Salt River Project for the use and benefit of the United States in accordance with the Project Agreements.
18. DEFAULTS AND COVENANTS REGARDING OTHER AGREEMENTS:
18.1 Each Participant hereby agrees that it shall pay all monies and carry out all other duties and obligations agreed to be paid and/or performed by it pursuant to all of the terms and conditions set forth and contained in the Project Agreements, and a default by any Participant in the covenants and obligations to be kept and performed pursuant to the terms and conditions set forth and contained in any of the Project Agreements shall be an act of default under this Co-Tenancy Agreement.
18.2 In the event of a default by any Participant in any of the terms and conditions of the Project Agreements, then, within ten (10) days after written notice has been given by any non-defaulting Participant to all other Participants of the existence and nature of the default, the non-defaulting Participants shall remedy such default either by advancing the necessary funds
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and/or commencing to render the necessary performance, with each non-defaulting Participant contributing to such remedy in the ratio of its Generation Entitlement Share to the total of the Generation Entitlement Shares of all non-defaulting Participants.
18.3 In the event of a default by any Participant in any of the terms and conditions of the Project Agreements and the giving of notice as provided in Section 18.2 hereof, the defaulting Participant shall take all steps necessary to cure such default as promptly and completely as possible and shall pay promptly upon demand to each non-defaulting Participant the total amount of money and/or the reasonable equivalent in money of non-monetary performance, if any, paid and/or made by such non-defaulting Participant in order to cure any default by the defaulting Participant, together with interest on such money and/or the costs of non-monetary performance at the rate of ten per cent (10%) per annum, or the maximum rate of interest legally chargeable, whichever is the lesser, from the date of the expenditure of such money and/or the date of completion of such non-monetary performance by each such non-defaulting Participant to the date of such reimbursement by the defaulting Participant, or such greater amount as may be otherwise provided in the Project Agreements.
18.4 In the event that any Participant shall
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dispute an asserted default by it, then such Participant shall pay the disputed payment or perform the disputed obligation, but may do so under protest. The protest shall be in writing, shall accompany the disputed payment or precede the performance of the disputed obligation, and shall specify the reasons upon which the protest is based. Copies of such protest shall be mailed by such Participant to all other Participants. Payments not made under protest shall be deemed to be correct, except to the extent that periodic or annual audits may reveal over or under payments by Participants, necessitating adjustments. In the event it is determined by arbitration, pursuant to the provisions of this Co-Tenancy Agreement or otherwise, that a protesting Participant is entitled to a refund of all or any portion of a disputed payment or payments or is entitled to the reasonable equivalent in money of non-monetary performance of a disputed obligation theretofore made, then, upon such determination, the non-protesting Participants shall pay such amount to the protesting Participant, together with interest thereon at the rate of six per cent (6%) per annum from the date of payment or from the date of completion of performance of a disputed obligation to the date of reimbursement. Reimbursement of the amount so paid shall be made by the non-protesting Participants in the ratio of their respective Generation Entitlement Shares to
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the total of the Generation Entitlement Shares of all non-protesting Participants.
18.5 Unless otherwise determined by a board of arbitrators, in the event a default by any Co-Tenant in the payment or performance of any obligation under the Project Agreements shall continue for a period of six
(6) months or more without having been cured by the defaulting Co-Tenant or without such Co-Tenant having commenced or continued action in good faith to cure such default, or in the event the question of whether an act of default exists is the subject of arbitration and such default continues for a period of six (6) months following a final determination by a board of arbitrators or otherwise that an act of default exists and the defaulting Co-Tenant has failed to cure such default or to commence such action during said six (6) month period, then, at any time thereafter and while said default is continuing, all of the non-defaulting Co-Tenants may, by written notice to all Participants, suspend the right of the defaulting Co-Tenant to receive all or any part of its proportionate share of the Net Effective Generating Capability, in which event:
18.5.1 During the period that such suspension is in effect, the non-defaulting Participants shall bear all of the operation and maintenance costs, insurance costs and other expenses
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otherwise payable by the defaulting Co-Tenant under the Project Agreements in the ratio of their respective Generation Entitlement Shares to the total of the Generation Entitlement Shares of all non-defaulting Participants.
18.5.2 A defaulting Co-Tenant shall be liable to the non-defaulting Participants (in the proportion that the Generation Entitlement Share of each non-defaulting Participant bears to the total of the Generation Entitlement Shares of all non-defaulting Participants) for all costs incurred by such non-defaulting Participants pursuant to Section 18.5.1 hereof. The proceeds paid by any defaulting Co-Tenant to remedy any such default shall be distributed to the non-defaulting Participants in the ratio of their respective Generation Entitlement Shares to the total of the Generation Entitlement Shares of all non-defaulting Participants.
18.6 In addition to the remedies provided for in Section 18.5 of this Co-Tenancy Agreement, the non-defaulting Participants may, in submitting a dispute to arbitration in accordance with the provisions of
Section 19 hereof, request that the board of arbitrators determine what additional remedies may be reasonably necessary or
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required under the circumstances which give rise to the dispute. The board of arbitrators may determine what remedies are necessary or required in the premises, including but not limited to the conditions under which the Navajo Generating Station may be operated economically and efficiently during periods when the defaulting Co-Tenant's right to receive its proportionate share of the Net Effective Generating Capability is suspended.
18.7 The rights and remedies of the Participants set forth in this Co-Tenancy Agreement shall be in addition to the rights and remedies of the Participants set forth in any other of the Project Agreements.
18.8 Notwithstanding the provisions of Sections 18.3 and 18.4 hereof, the United States shall not pay or be held liable for any interest charges, except as otherwise provided in Section 18.9 hereof.
18.9 In the event a default by the United States in any of its obligations to advance funds in accordance with the provisions of the Project Agreements is remedied by the non-defaulting Participants as provided in Section 18.2 hereof, the United States will reimburse each contributing Participant for its costs of money thereby incurred if there is in effect at the time of such reimbursement an Act of Congress expressly authorizing such reimbursement to be made by the United States. For the purposes of this Section 18.9, "costs of money" shall
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mean the contributing Participant's average cost of borrowed capital during the period in which its funds are advanced to remedy a default by the United States.
19. ARBITRATION:
19.1 If a dispute between any of the Participants should arise under the Project Agreements which does not involve the legal rights of or which will not create a legal obligation upon the United States under the Project Agreements, or will not affect the interests or rights held for the use and benefit of the United States under the Project Agreements, any Participant(s) may call for submission of the dispute to arbitration, which call shall be binding upon all of the other Participants.
19.2 The Participant(s) calling for arbitration shall give written notice to all other Participants, setting forth in such notice in adequate detail the nature of the dispute, the amount or amounts, if any, involved in such dispute, and the remedy sought by such arbitration proceedings, and, within twenty (20) days from receipt of such notice, any other Participant(s) involved may, by written notice to the first Participant(s) and all other Participants, prepare its or their own statement of the matter at issue and set forth in adequate detail additional related matters or issues to be arbitrated. Thereafter, the Participant(s) first submitting its or their statement of the matter at issue shall have ten
(10)

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days in which to submit a rebuttal statement, copies of which shall be given to all other Participants.
19.3 Within ten (10) days following the submission of the rebuttal statement, the Participants, acting through their representatives on the Coordinating Committee, shall meet for the purpose of selecting arbitrators. Each Participant or group of Participants representing one side of the dispute shall designate an arbitrator. The arbitrators so selected shall meet within twenty (20) days following their selection and shall select additional arbitrators, the number of which shall be one (1) less than the number of arbitrators selected by the Participants. If the arbitrators selected by the Participants, as herein provided, shall fail to select such additional arbitrator(s) within said twenty (20) day period, then the arbitrators shall request from the American Arbitration Association (or a similar organization if the American Arbitration Association should not at that time exist) a list of arbitrators who are qualified and eligible to serve as hereinafter provided. The arbitrators selected by the Participants shall take turns striking names from the list of arbitrators furnished by the American Arbitration Association, and the last name(s) remaining on said list shall be the additional arbitrator(s). All arbitrators shall be persons skilled and experienced in the field which gives
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rise to the dispute, and no person shall be eligible for appointment as an arbitrator who is an officer or employee of any of the parties to the dispute or is otherwise interested in the matter to be arbitrated.
19.4 Except as otherwise provided in this Section 19, the arbitration shall be governed by the rules and practice of the American Arbitration Association (or the rules and practice of a similar organization if the American Arbitration Association should not at that time exist) from time to time in force, except that if such rules and practice, as modified herein, shall conflict with the Arizona Revised Statutes or any other provisions of Arizona law or Federal law, as the case may be, then in force which are specifically applicable to arbitration proceedings, such law shall govern.
19.5 Included in the issues which may be submitted to arbitration pursuant to this Section 19 is the issue of whether the right to arbitrate a particular dispute is permitted under the Project Agreements.
19.6 The arbitrators shall hear evidence submitted by the respective Participants and may call for additional information, which additional information shall be furnished by the Participant(s) having such information. The decision of a majority of the arbitrators shall be binding upon all the Participants.
19.7 The award of the arbitrators shall contain
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findings relative to the materiality of the default, the period of time within which the defaulting party must remedy the default or commence remedial action, and the remedies which may be exercised by the non-defaulting Participants in the event the default is not remedied within such period of time.
19.8 This agreement to arbitrate shall be specifically enforceable, and the award and findings of the arbitrators shall be final and binding upon the Participants to the extent permitted by applicable law. Any award may be filed with the clerk of any court having jurisdiction over the Participants, or any of them, against whom the award is rendered, and, upon such filing, such award, to the extent permitted by the laws of the jurisdiction in which said award is filed, shall be specifically enforceable or shall form the basis of a declaratory judgment or other similar relief.
19.9 The fees and expenses of the arbitrators shall be shared by the Participants equally, unless the decision of the arbitrators shall specify some other apportionment of such fees and expenses. All other expenses and costs of the arbitration shall be borne by the Participant incurring the same.
19.10 In the event that any Participant shall attempt to carry out the provisions herein set forth in regard to arbitration, and such Participant shall not be
51
able to obtain a valid and enforceable arbitration decree, such Participant shall be entitled to seek legal remedies in the courts having jurisdiction in the premises, and the provisions of the Project Agreements referring to decision of a board of arbitration shall be then deemed applicable to final decisions of such courts.
19.11 If a dispute arises between any of the Participants which does or may involve the legal rights of or which will or may create a legal obligation upon the United States under the Project Agreements, or which affects or may affect the interests or rights held for the use and benefit of the United States under the Project Agreements, then any Participant may call for submission to arbitration of any part of the dispute, which the United States may lawfully submit to arbitration. If the Contracting Officer agrees to such arbitration, or if the Contracting Officer refuses or fails to arbitrate and a court of competent jurisdiction thereafter finally decides that the United States may lawfully submit the matter in dispute to arbitration, it shall be conducted in the manner set forth in this Section 19 or in such other manner as may be provided for by Federal law.
20. ACTIONS PENDING RESOLUTION OF DISPUTES: If a dispute should arise which is not resolved by the Coordinating Committee, then, pending the resolution of the dispute by arbitration or judicial proceedings, the Project Managers
52
or Operating Agents shall proceed with Station Work and Transmission Work in a manner consistent with the Project Agreements and generally accepted practice in the electric utility industry, and the Participants shall advance the funds required to perform such Station Work and Transmission Work in accordance with the applicable provisions of the Project Agreements. The resolution of any dispute involving the failure of one of the committees to reach agreement upon matters involving future expenditures shall have prospective application from the date of final determination, and amounts advanced by the Participants pursuant to this
Section 20 during the pendency of such dispute shall not be subject to refund except upon a final determination that the expenditures were not made in a manner consistent with the Project Agreements and generally accepted practice in the electric utility industry.
21. TERM AND RIGHTS OF CO-TENANTS UPON TERMINATION:
21.1 This Co-Tenancy Agreement shall continue in force and effect for the term of the Indenture of Lease and any extension thereof, unless otherwise agreed.
21.2 Upon termination of this Co-Tenancy Agreement the facilities comprising the Navajo Project shall be disposed of in a manner to be mutually agreed upon by the Participants.
22. COVENANTS RUNNING WITH THE LAND:
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22.1 All of the respective covenants and obligations of each of the Co-Tenants set forth and contained in the Project Agreements shall bind and shall be and become the respective covenants and obligations of:
22.1.1 Each such Co-Tenant;
22.1.2 All mortgagees, trustees and secured parties under all present and future mortgages, indentures and deeds of trust, and security agreements which are or may become a lien upon any of the properties of such Co-Tenant;
22.1.3 All receivers, assignees for the benefit of creditors, bankruptcy trustees and referees of such Co-Tenant;
22.1.4 All other persons, firms, partnerships or corporations claiming through or under any of the foregoing; and
22.1.5 Any successors or assigns of any of those mentioned in Sections 22.1.1 through 22.1.4 hereof
and shall be covenants and obligations running with such Co-Tenant's respective rights, titles and interests in the Navajo Project and in, to and under the Project Agreements, and shall be for the benefit of the respective rights, titles and interests of the Participants and their
54
respective successors and assigns, in and to the Navajo Project. It is the specific intention of this provision that all such covenants and obligations shall be binding upon any party which acquires any of the rights, titles and interests of any such Co-Tenant in the Navajo Project or in, to and under the Project Agreements and that all of the above-described persons and groups shall be obligated to use such Co-Tenant's rights, titles and interests in the Navajo Project and/or in, to or under the Project Agreements for the purpose of discharging its covenants and obligations under the Project Agreements; except that in the case of a partial assignment the assignee shall only be required to share in the cost of fulfilling the covenants and obligations of the assigning Co-Tenant in, to and under the Project Agreements to an extent proportionate to such assignment.
23. RELATIONSHIP OF PARTICIPANTS:
23.1 The covenants, obligations and liabilities of the Participants are intended to be several and not joint or collective and, except as expressly provided in the Project Agreements, nothing herein contained shall ever be construed to create an association, joint venture, trust or partnership, or to impose a trust or partnership covenant, obligation or liability on or with regard to any one or more of the Participants. Each Participant shall be individually responsible for its own covenants,
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obligations and liabilities as herein provided. No Participant or group of Participants shall be under the control of or shall be deemed to control any other Participant or the Participants as a group. No Participant shall be the agent of or have a right or power to bind any other Participant without its express written consent, except as provided in the Project Agreements.
23.2 The Co-Tenants hereby elect to be excluded from the application of Subchapter "K" of Chapter 1 of Subtitle "A" of the Internal Revenue Code of 1954, or such portion or portions thereof as may be permitted or authorized by the Secretary of the Treasury or his delegate, insofar as such Subchapter, or any portion or portions thereof, may be applicable to the Co-Tenants under the Project Agreements.
24. FEES: No Project Manager or Operating Agent shall receive any fee or profit under the Project Agreements.
25. UNCONTROLLABLE FORCES: No Participant shall be considered to be in default in the performance of any of its obligations under the Project Agreements
(other than obligations of said Participant to pay costs and expenses) when a failure of performance shall be due to an uncontrollable force. The term "uncontrollable force" shall be any cause beyond the control of the Participant affected, including but not restricted to failure of or threat of failure of facilities, flood, earthquake, storm, fire,
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lightning, epidemic, war, riot, civil disturbance or disobedience, labor dispute, labor or material shortage, sabotage, restraint by court order or public authority, and action or non-action by or failure to obtain the necessary authorizations or approvals from any governmental agency or authority, which by exercise of due diligence such Participant 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 a Participant to settle any strike or labor dispute in which it may be involved. Any Participant rendered unable to fulfill any of its obligations under the Project Agreements by reason of an uncontrollable force shall give prompt written notice of such fact to the other Participants and shall exercise due diligence to remove such inability with all reasonable dispatch. The term "Participant" as used in this Section 25 shall include any Project Manager or Operating Agent, in its capacity as such.
26. GOVERNING LAW: This Co-Tenancy Agreement shall be governed by the laws of the State of Arizona, except insofar as the rights or obligations of the United States are concerned.
27. BINDING OBLIGATIONS: All of the obligations set forth in the Project Agreements shall bind the Participants and their successors and assigns, and such obligations shall
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run with the Participants' rights, titles and interests in the Navajo Project and with all of the interests of each Participant in the Project Agreements; provided that any mortgagee, trustee or secured party shall not be obligated for obligations arising prior to taking of possession or the initiation of remedial proceedings.
28. NONDEDICATION OF FACILITIES:
28.1 The Project Agreements shall not be construed to grant to any Co-Tenant any rights of ownership in, possession of or control over the electric system of the United States.
28.2 The Project Agreements shall not be construed to grant to the United States any rights of ownership in, possession of, or control over the electric system of any Co-Tenant.
28.3 The Co-Tenants do not intend to dedicate, and nothing in the Project Agreements shall be construed as constituting a dedication by any Co-Tenant of its properties or facilities, or any part thereof, to the United States or to any other Co-Tenant or to the customers of the United States or to the customers of any other Co-Tenant.
29. ENVIRONMENTAL PROTECTION:
29.1 The Participants will design, construct, operate and maintain the Navajo Project in a manner consistent with the Participants' objective of attaining the greatest
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feasible degree of environmental protection. In addition to fulfilling all obligations which have been assumed under provisions relating to protection of the environment which are contained in existing Project Agreements, the Participants affirm their continuing obligation to comply fully with applicable Federal, state and local laws, orders, regulations, rules and standards relating to environmental protection. The Participants shall to the extent practicable anticipate and make provision for the future installation of any systems required to comply with changes in said laws, orders, regulations, rules and standards.
29.2 The Participants shall install and diligently operate in the Navajo Generating Station the most effective commercially proven air quality control equipment available at the time of design of each unit of the Navajo Generating Station. Stack design, the designs of other plant systems related to air quality control, and plans for and design of systems for control and disposal of waste materials and residue from burned fuel shall be subject to such approval by the Secretary as required by Project Agreements and to review and comment by the Secretary in all other instances in advance of construction, installation, making a Capital Improvement thereto or the retirement of Units of Property thereof. The Secretary shall act or comment within 60 days after submission of a plan or design. From time to time, at the call of either the Secretary or the Coordinating
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Committee, but at least every five (5) years beginning in 1980, representatives of the Participants and the designated representative of the Secretary shall meet to review technological advances in air quality control equipment and shall formulate a recommendation to the Coordinating Committee as to the need for and feasibility of installing additional equipment or modifying existing equipment to improve air quality control. In the event agreement cannot be reached by the Coordinating Committee on any question regarding modification or supplementation of existing equipment, the matter shall be subject to arbitration as provided in
Section 19 hereof.
29.2.1 In the operation of the Navajo Generating Station the Participants will make such tests and measurements and keep such records as will enable them to make reports to the Secretary relating to the operation and efficiency of the air quality control equipment at such intervals as may be mutually agreed upon, but not less than once annually. The tests and measurements will be made in conformance with the latest American Society of Mechanical Engineers (ASME) test procedures for determining dust concentration in a gas stream and in conformance with other accepted procedures agreed upon by the Secretary and the Participants.
29.2.2 The Participants during normal working
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hours will permit representatives of the Secretary to have access to, and to inspect and copy, all records relating to air quality and will permit such representatives to inspect the air quality control systems.
29.3 The Participants shall install and diligently operate as part of the Navajo Generating Station such waste water, waste material, sewage control and disposal systems necessary to comply with and fulfill the objectives and obligations set forth in Section 29.1 hereof. Designs and plans for the water quality control systems, systems for the disposal of waste water, waste materials, and sewage, and any other plant systems related to control of water quality shall be subject to such approval by the Secretary as required by the Project Agreements and to review and comment by the Secretary in all other instances in advance of construction, installation, making a Capital Improvement or the retirement of Units of Property thereof. The Secretary shall act or comment within 60 days after submission of a plan or design.
29.3.1 The Participants during normal working hours will permit representatives of the Secretary to have access to, and to inspect and copy, all records relating to water quality control and will permit such representatives to inspect the water quality control systems.
29.4 The Participants shall take appropriate
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measures to harmonize the Navajo Project with the environment. The Participants shall exercise care to prevent any unnecessary destruction, scarring, or defacing of the natural surroundings in the vicinity of the Navajo Project work.
30. ASSIGNMENT OF INTERESTS: Any Participant who acquires in its name an interest in any real or personal property or contract which is part of the Navajo Project shall transfer and assign an undivided interest therein to the other Participants so that the ownership and rights of the Participants in such property or contract shall be as provided for in this Co-Tenancy Agreement.
31. USE OF FACILITIES OF LOS ANGELES:
31.1 The United States may use, for such period or periods of time as it desires, the 500 kv transmission line of Los Angeles between McCullough Substation and Eldorado Substation and associated terminal facilities to the extent of the right of Los Angeles to use such terminal facilities. Unless otherwise agreed, the United States' right to use the facilities of Los Angeles shall not exceed 250 megawatts. Payment shall be made annually by the United States to Los Angeles as provided in the Project Agreements.
31.2 The land presently held by Los Angeles under Bureau of Land Management Grant No. N-2763, dated January 23, 1969, which land comprises the site of McCullough
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Substation, may be utilized by Nevada, by the United States, and by the Salt River Project for the use and benefit of the United States, pursuant to the Project Agreements without charge other than as provided in the Project Agreements. If and when Los Angeles acquires fee title to such land, Nevada, the United States and the Salt River Project for the use and benefit of the United States shall each continue to have the right to use such lands pursuant to the Project Agreements, and for any period of such use Nevada and the United States shall pay Los Angeles as provided in the Project Agreements.
32. NOTICES
32.1 Except as set forth in Section 32.2 hereof, any notice, demand or request provided for in the Project Agreements shall be in writing and shall be deemed properly served, given or made if delivered in person or sent by registered or certified mail, postage prepaid, to the persons specified below:

32.1.1  Arizona Public Service Company
        c/o Secretary
        P.O. Box 21666
        Phoenix, Arizona 85036

32.1.2  Department of Water and Power of the
            City of Los Angeles
        c/o General Manager
        P.O. Box 111
        Los Angeles, California 90051

32.1.3  Nevada Power Company
        c/o Secretary
        P.O. Box 230
        Las Vegas, Nevada 89109

        -63-	

32.1.4  Salt River Project Agricultural
            Improvement and Power District
        c/o Secretary
        P.O.Box 1980
        Phoenix, Arizona 85001

32.1.5  Tucson Gas & Electric Company
        c/o Secretary
        P.O. Box 711
        Tucson, Arizona 85702

32.1.6  United States
        c/o Regional Director
        Bureau of Reclamation
        Boulder City, Nevada 89005	

32.2 Informal communications of a routine nature, including requests for funds and related matters, shall be given in such manner as the committees shall arrange.
32.3 Any Participant may, at any time, by written notice to all other Participants, designate different or additional persons or different addresses for the giving of notices hereunder.
33. MISCELLANEOUS PROVISIONS CONCERNING THE PROJECT AGREEMENTS:
33.1 Each Participant agrees to negotiate in good faith and to proceed with diligence upon request by any other Participants, to negotiate, make, execute and deliver any and all documents between such Participant and any other Participant or other parties reasonably required to implement the Project Agreements.
33.2 The captions and headings appearing in the Project Agreements are inserted merely to facilitate reference and shall have no bearing upon the interpretation thereof.
-64-
33.3 Each term, covenant and condition of the Project Agreements is deemed to be an independent term, covenant and condition, and the obligation of any Participant to perform any or all of the terms, covenants and conditions to be kept and performed by it is not dependent on the performance by the other Participants of any or all of the terms, covenants and conditions to be kept and performed by them.
33.4 In the event that any of the terms, covenants or conditions of any of the Project Agreements, or the application of any such term, covenant or condition, as to any person or circumstance shall be held invalid by any court of competent jurisdiction, such Project Agreement and the application of the remainder of its terms, covenants or conditions to such persons or circumstances shall not be affected thereby.
33.5 The Project Agreements shall be subject to filing with, and to such changes or modifications as may from time to time be directed by competent regulatory authority, if any, in the exercise of its jurisdiction.
33.6 Any waiver at any time by any Participant of its rights with respect to a default or any other matter arising in connection with any Project Agreement shall not be deemed a waiver with respect to any subsequent default or matter.
33.7 It is acknowledged by the Participants that
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certain provisions of this Co-Tenancy Agreement conflict with certain provisions of the Participation Agreement or cover certain matters also covered in the Participation Agreement. The provisions of this Co-Tenancy Agreement shall, to the extent of such conflicts or coverage, be deemed to supersede such provisions of the Participation Agreement.
33.8 Certain provisions of this Co-Tenancy Agreement pertaining to the Project Agreements may be reiterated in one or more subsequent Project Agreements solely as a convenient reference for those who will be using such Project Agreements. Any variations between such provisions as contained in this Co-Tenancy Agreement and as contained in such subsequent Project Agreements shall be resolved in favor of the provisions of this Co-Tenancy Agreement.
33.9 Costs to be borne by the United States under the Project Agreements for Station Work and Transmission Work shall not include any part of any other Participant's costs of interest and interest during construction, financing charges or franchise fees, nor any part of any other Participant's attorneys' fees other than fees incurred as a result of employing the services of an attorney in private practice in connection with the performance of Station Work or Transmission Work; provided, that nothing contained in this Section 33.9 shall be construed
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to relieve the United States from any obligation which may arise under the provisions of Section 18.9 hereof.
33.10 The Co-Tenants acknowledge that the United States has entered into the Project Agreements for the purpose of providing a Power supply in accordance with and for the purposes of the Colorado River Basin Project Act and that the United States has entered into Contracts for the Interim Sale of United States' Entitlement in reliance upon the performance of the obligations and duties of the Participants specified in the Project Agreements.
33.11 Except as otherwise specifically provided in the Project Agreements, the Participants do not intend to create rights in or to grant remedies to any third party as a beneficiary of the Project Agreements or of any duty, covenant, obligation or undertaking established therein.
34. NAVAJO PROJECT GENERAL CONTRACT PROVISIONS; the Navajo Project General Contract Provisions attached hereto as Exhibit C are hereby made a part of this Co-Tenancy Agreement.
35. COMPLIANCE WITH COMPACTS:
35.1 The Department of the Interior is the Federal department responsible for administering the terms of the Water Service Contract dated January 17, 1969, Contract No. 14-06-400-5033. The Department of the Interior also has been directed by P.L. 90-537 to comply with the terms
-67-
of the Colorado River Compact dated November 24, 1922 and the Upper Colorado River Basin Compact dated October 11, 1948. In compliance with that responsibility and those directives, the Secretary of the Interior hereby agrees to take any and all actions within the power and authority of the Department of the Interior which are necessary and required to prevent total depletions chargeable to the State of Arizona under the Upper Colorado River Basin Compact resulting from consumptive use of water from the Upper Colorado River System in the State of Arizona as measured at Lee Ferry in the manner provided for in Article VI of the Upper Colorado River Basin Compact from exceeding the 50,000 acre feet apportioned to the State of Arizona by the Upper Colorado River Basin Compact.
35.2 The Secretary of the Interior further agrees to make the reports required by Section 601 (b)(l) of P.L. 90-537 as they pertain to Arizona's Upper Basin uses annually rather than every five years. Within fifteen days following the completion of said reports, the Secretary of the Interior shall furnish copies of such reports to the Co-Tenants, the Navajo Tribe, each of the Upper Basin States, and the Upper Colorado River Commission .
35.3 It is the intention of the parties to this contract that each of the Upper Basin States shall be a third party beneficiary of the terms and conditions of
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third party beneficiary of the terms and conditions of this Section 35.
IN WITNESS WHEREOF, the Participants have caused this Co-Tenancy Agreement to be executed as of this 23rd, day of March, 1976.
UNITED STATES OF AMERICA

By /s/ Authorized Signatory
   ----------------------------------------------
   Assistant Secretary of the Interior	

ARIZONA PUBLIC SERVICE COMPANY

                               By /s/ M.C. Titus
                                  ----------------------------------------------
                                  Executive Vice President

ATTEST:

/s/ Gerald Griffin
-------------------------------
Assistant Secretary	

DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
by
BOARD OF WATER AND POWER COMMISSIONERS
OF THE CITY OF LOS ANGELES

By: /s/ Ralph Guy Wesson       By /s/ Louis H. Winnard
    ------------------------      ----------------------------------------------
        Ralph Guy Wesson              General Manager and Chief Engineer
    Assistant City Attorney

                                                     and

                               By /s/ Mary J. Born
                                  ----------------------------------------------
                                                  Secretary	

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NEVADA POWER COMPANY

                               By /s/ Harry Allen
                                  ----------------------------------------------
                                                  President

ATTEST:

/s/ W.E. Littler
-------------------------------
      ASSISTANT Secretary	

SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND
POWER DISTRICT

                               By /s/ Floyd N. Smith
                                  ----------------------------------------------
                                                  President

ATTEST:

/s/ Francis E. Smith
-------------------------------
           Secretary	

TUCSON GAS & ELECTRIC COMPANY

                               By /s/ Hamilton R. Catlin
                                  ----------------------------------------------

ATTEST:

/s/ R.N. Foster
-------------------------------
           Secretary	

District of           )
                      )  ss
Columbia              )	

On this the 25th day of March, 1972, before me, the undersigned officer, the Assistant Secretary of the Interior of the United States of America, known to me to be
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the person described in the foregoing instrument, personally appeared and acknowledged that he executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

                               /s/ Theodore M. Kilby
                               -------------------------------------------------
                               Notary Public

My commission expires:
Sept, 30, 1973	

State of Arizona      )
                      ) ss
County of Maricopa    )	

On this the 2nd day of March, 1972, before me, the undersigned officer, personally appeared M. C. TITUS, who acknowledged himself to be the Executive Vice President of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, and that he, as such Executive Vice President, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as Executive Vice President.
In witness whereof I hereunto set my hand and official seal.

                               /s/ Melba J. Andrews
                               -------------------------------------------------
                               Notary  Public

My commission expires:
March 30, 1973	

-71-

State of California     )
                        ) ss
County of Los Angeles   )	

On this the 23rd day of March, 1976, before me, the undersigned officer, personally appeared LOUIS H. WINNARD and MARY J. BQRN, who were on March 23, 1976, the General Manager and Chief Engineer and Board Secretary, respectively, of the DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of the City of Los Angeles, a municipal corporation of the State of California, known to me to be the persons described in the foregoing instrument, and acknowledged that they executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

/s/ Linda L. Newman
-------------------------------------------------
            Notary Public	

My commission expires:                                  OFFICIAL SEAL
   May 27, 1997                                       LINDA L. NEWMAN
                                        [SEAL]     NOTARY PUBLIC CALIFORNIA
                                                     PRINCIPAL OFFICE IN
                                                     LOS ANGELES COUNTY
                                        My Commission Expires May 27, 1977

State of Nevada    )
                   ) ss
County of Clark    )	

On this the 7th day of March, 1972, before me, the undersigned officer, personally appeared
-72-
Harry Allen, known to me to be the President of NEVADA POWER COMPANY, a Nevada corporation, and that he, as such, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as _____________.
In witness whereof, I hereunto set my hand and official seal.

/s/ Authorized Signatory
------------------------------------------------
                Notary Public	

My commission expires:

State of Arizona        )
                        )  ss
County of Maricopa      )	

On this the 6th day of March, 1972, before me, the undersigned officer, personally appeared FLOYD N. SMITH and FRANCIS E. SMITH, of SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an Arizona agricultural improvement district, known to me to be the persons described in the foregoing instrument, and acknowledged that they executed the same in the capacity therein stated and for the
-73-
purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

/s/ Authorized Signatory
-------------------------------------------------
                Notary Public	

My commission expires:
My Commission Expires July 11, 1972

State of Arizona   )
                   )  ss
County of Pima     )	

On this the 3rd day of March, 1972, before me, the undersigned officer, personally appeared Hamilton R. Catlin, who acknowledged himself to be the___________________________ of TUCSON GAS ELECTRIC COMPANY, an Arizona corporation, and that he, as such _____________________, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as such ____________________.
In witness whereof, I hereunto set my hand and official seal.

                               /s/ Diane Howland
                               -------------------------------------------------
                                              Notary Public

My commission expires:
December 8, 1972
----------------------	

-74-
EXHIBIT A
NAVAJO GENERATING STATION
The Navajo Generating Station shall consist of the following:
I. Three steam electric generating units (Unit 1, Unit 2 and Unit 3), each of which shall have a nameplate rating of 750,000 kw and shall be a tandem-compound, four flow, single reheat, turbine-generator unit with initial steam conditions of 3500 psig and 1000 degrees F and reheat to 1000 degrees F, including three pulverized coal-fired, supercritical steam generator units.
II. All auxiliary equipment associated with said units.
III. An administration building, machine shop and warehouse to be located adjacent to the powerplant.
IV. A pumping station and all associated equipment to be located on the Colorado River.
V. 500 kv step-up transformers and all equipment associated therewith up to the point where the leads from the said transformers terminate at the generator isolating 500 kv disconnect switch structures in the Navajo 500 kv Switchyard.
VI. Standby auxiliary Power transformation equipment and related facilities.
VII. Plant control and communication facilities and associated buildings or equipment.
VIII. Railroad approximately 80 miles in length extending from within the Rail Loading Site into the Navajo Plant Site, rolling stock, related facilities and equipment.
IX. All improvements owned by the Co-Tenants within the Ash Disposal Area, Pumping Plant Site and Rail Loading Site.
X. All land and land rights acquired under the Indenture of Lease, the
Section 323 Grants and the Contract and Grant of Easement from the United States for Water Intake and Discharge Facilities.
A-2
Exhibit B
TRANSMISSION SYSTEM*
I. The SOUTHERN TRANSMISSION SYSTEM shall consist of the following Components of the Transmission System:
A. NAVAJO 500 KV SWITCHYARD
The Navajo 500 kv Switchyard, a basic breaker-and-a-half scheme, comprising the termination facilities for the transmission lines and generator step-up transformer 500 kv leads including, but not limited to, the 500 kv busses, power circuit breakers, disconnect switches, control building and structures.
B. McCULLOUGH LINE COMPENSATION
The Project Series Capacitors, Incremental Series Capacitors and shunt reactors on the Navajo 500 kv Switchyard end of the Navajo-McCullough 500 kv line including, but not limited to, the capacitors, control equipment, reactors, lightning arrestors, hazard fencing, disconnects, structures and bus work from the switchyard side of the first 500 kv line dead-end tower located

* For details of ownership, see Exhibit B-B which is made a part hereof.

B-1
outside the switchyard to the attachment on the main switchyard structure.
C. NAVAJO-MOENKOPI 500 KV LINE
1. The Navajo-Moenkopi 500 kv line, from and including the first 500 kv line dead-end tower outside the Navajo 500 kv Switchyard to a similar tower location outside the Moenkopi Switchyard and the Navajo-Moenkopi 500 kv line right-of-way.
2. The Project Series Capacitors on the Navajo 500 kv Switchyard end of the Navajo-Moenkopi 500 kv line including, but not limited to, the capacitors, control equipment, lightning arrestors, hazard fencing, disconnects, structures and bus work from the switchyard side of the first 500 kv line dead-end tower located outside the switchyard to the attachment on the main switchyard structure.
D. NAVAJO-WESTWING 500 KV LINE
1. The Navajo-Westwing 500 kv line, from and including the first 500 kv line dead-end tower outside the Navajo 500 kv Switchyard to a similar tower location outside the Westwing Substation and the Navajo-Westwing 500 kv line right-of-way.
2. The Project Series Capacitors and shunt
B-2
reactors on the Navajo 500 kv Switchyard end of the Navajo-Westwing 500 kv line including, but not limited to, the capacitors, control equipment, reactors, lightning arrestors, hazard fencing, disconnects, structures and bus work from the switchyard side of the first 500 kv line dead-end tower located outside the switchyard to the attachment on the main switchyard structure.
3. The Project Series Capacitors and shunt reactors on the Westwing 500 kv Substation end of the Navajo-Westwing 500 kv line including, but not limited to, the capacitors, control equipment, reactors, lightning arrestors, hazard fencing, disconnects, structures and bus work from the substation side of the first 500 kv line dead-end tower located outside the substation to the attachment on the main substation structure.
E. MOENKOPI-WESTWING 500 KV LINE
1. The Moenkopi-Westwing 500 kv line, from and including the first 500 kv line dead-end tower outside the Moenkopi Switchyard to a similar tower location outside the Westwing Substation and the Moenkopi-Westwing 500 kv line right-of-way.
B-3
2. The Project Series Capacitors and shunt reactors on the Westwing 500 kv Substation end of the Moenkopi-Westwing 500 kv line including, but not limited to, the capacitors, control equipment, reactors, lightning arrestors, hazard fencing, disconnects, structures and bus work from the substation side of the first 500 kv line dead-end tower located outside the substations to the attachment on the main substation structure.
F. OTHER ASSOCIATED COMPONENTS
1. The additions to the Moenkopi Switchyard comprising the terminal facilities for the Navajo-Moenkopi and the Moenkopi-Westwing 500 kv lines and the additions to the terminal facilities for the Four Corners-Moenkopi and Moenkopi-Eldorado 500 kv lines including, but not limited to, the additional 500 kv busses, power circuit breakers, disconnect switches, and structures.
2. The Project Series Capacitors on the Moenkopi Switchyard end of the Navajo-Moenkopi 500 kv line including, but not limited to, the capacitors, control equipment, hazard fencing, disconnects, structures and bus work from the switchyard side of the first 500 kv line
B-4
dead-end tower located outside the switchyard to the attachment on the main switchyard structure.
3. The Project Series Capacitors and shunt reactors on the Moenkopi Switchyard end of the Moenkopi-Westwing 500 kv line including, but not limited to, the capacitors, control equipment, reactors, lightning arrestors, hazard fencing, disconnects, structures, and bus work from the switchyard side of the first 500 kv line dead-end tower located outside the switchyard to the attachment on the main switchyard structure.
4. The Project Series Capacitors and Incremental Series Capacitors on the Moenkopi Switchyard end of the Moenkopi-Eldorado 500 kv line including, but not limited to, the capacitors, control equipment and structures.
5. The Project Series Capacitors on the Moenkopi Switchyard end of the Four Corners-Moenkopi 500 kv line including, but not limited to, the capacitors, control equipment and structures.
6. The Project Series Capacitors on the Four Corners Switchyard end of the Four Corners-Moenkopi 500 kv line including, but not limited to, the capacitors, control equipment
B-5
and structures.
7. The four new series capacitor installations on both ends of both of Arizona's Cholla-Pinnacle Peak 345 kv lines including, but not limited to, the capacitors, control equipment, hazard fencing, disconnects, structures and bus work.
8. All the communications facilities necessary to control the Southern Transmission System including such facilities located at Navajo 500 kv Switchyard, Moenkopi Switchyard or Westwing Substation.
G. WESTWING SUBSTATION
1. The Westwing 500 kv Switchyard, a basic breaker-and-a-half scheme, comprising termination facilities for the Moenkopi-Westwing 500 kv line, Navajo-Westwing 500 kv line, 500/230 kv transformer banks, and 500/345 kv transformer bank including, but not limited to, the 500 kv busses, power circuit breakers, metering transformers, disconnect switches, control building, structures, and related land and land rights.
2. The Westwing Substation 2-1332 MVA 500/230 kv transformer banks and spare 444 MVA 500/230 kv transformer to be located within the
B-6
boundaries of the Westwing 500 kv Switchyard and the equipment associated therewith including, but not limited to, foundations, structures, insulators and hardware, transformer leads from 500 kv bushings to points of termination on the attachments to the 500 kv switchyard structure, and 230 kv leads up to the point of attachment where the 230 kv lines from adjacent facilities attach to the transformer dead-end tower.
3. The Westwing Substation 600 MVA 500/345 kv transformer bank and spare 200 MVA 500/345 kv transformer to be located within the boundaries of the Westwing 500 kv Switchyard and the equipment associated therewith including, but not limited to, foundations, structures, insulators and hardware, transformer leads from the 500 kv bushing to points of termination on the attachments to the 500 kv switchyard structure, and 345 kv leads up to the points of attachment where the 345 kv lines from adjacent facilities attach to the transformer dead-end towers.
4. The Westwing 230 kv Switchyard, a basic breaker-and-a-half scheme, comprising termination facilities for the two 500/230 kv
B-7
transformer banks,two Arizona 230 kv lines, two Salt River 230 kv lines, and two United States 230 kv lines to be installed at a later date (see Exhibit B-B, Sheet 2), including, but not limited to, the 230 kv busses, Power circuit breakers, metering transformers, disconnect switches, structures, insulators and hardware, 230 kv leads between points of attachment on the transformer dead-end towers to the main switchyard structures, and 230 kv leads up to the points of attachment where the 230 kv transmission lines attach to the main switchyard structures.
II. The WESTERN TRANSMISSION SYSTEM shall consist of the following Components of the Transmission System:
A. McCULLOUGH SUBSTATION
The McCullough Substation shall consist of the following components:
1. The 500 kv switchyard, a basic breaker-and-a-half scheme, comprising the termination facilities for the 500/287 kv transformer bank, the Navajo-McCullough 500 kv line, McCullough-Eldorado 500 kv line, and the McCullough-Victorville 500 kv line including, but not limited to, the 500 kv busses, power circuit breakers and disconnect switches and the structures therefor.
B-8
2. The common facilities including, but not limited to, control building, station communications equipment, protection equipment controls, batteries, auxiliary equipment, station grounding grid, lighting and yard improvements, but shall not include the related land and land rights.
B. NAVAJO-McCULLOUGH 500 KV LINE
1. The Navajo-McCullough 500 kv line, from and including the first 500 kv line dead-end tower located outside the Navajo 500 kv Switchyard to a similar tower location outside the McCullough Switchyard, including the Navajo-McCullough 500 kv line right-of-way and any midpoint Project Series Capacitors, Incremental Series Capacitors, shunt reactors and associated equipment as may be required.
2. The Project Series Capacitors and Incremental Series Capacitors and shunt reactors on the McCullough 500 kv Switchyard end of the Navajo-McCullough 500 kv line including, but not limited to, the capacitors, control equipment, reactors, lightning arrestors, hazard fencing, disconnects, structures and bus work from the switchyard side of the first 5.00 kv line dead-end tower located outside the switchyard to the attachment on the main switchyard structure.
B-9
C. WESTERN TRANSMISSION COMMUNICATIONS SYSTEM
All the communications facilities necessary to control the Western Transmission System. The ownership of these communications facilities shall be provided for in a separate communications facilities agreement.
B-10
EXHIBIT B B SHEET 1
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
[TRANSMISSION SYSTEM OWNERSHIP CHART]
 
EXHIBIT B-B SHEET 2
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
WESTWING 230 KV SWITCHYARD
[WESTWING 230 KV SWITCHYARD CRART]
OWNERSHIP

                                         Prior to
                                       utilization       After
                                        by the US     utilization
                                        of the US     by US of the
                                        Reserved       US Reserved
                                        Positions      Positions
                                       -----------    ------------
SRP for its own use and benefit               44.9%           36.1%

APS                                           39.9%           32.1%

SRP for use and benefit of US                 15.2%           31.8%
                                              ----            ----
                                               100%            100%	

United States shall have 100 percent cost responsibility for terminal facilities to be installed in the United States' Reserved Position. Such facilities shall be Capital Improvements and the installation thereof shall not require Transmission Engineering & Operating Committee approval.
Exhibit C
NAVAJO PROJECT
GENERAL CONTRACT PROVISIONS
1. OFFICIALS NOT TO BENEFIT: No Member of or Delegate to Congress or Resident Commissioner shall be admitted to any share or part of this agreement or to any benefit that may arise herefrom, but this restriction shall not be construed to extend to this agreement if made with a corporation or company for its general benefit.
2. COVENANT AGAINST CONTINGENT FEES: The non-Federal Participants warrant that no person or selling agency has been employed or retained to solicit or secure this agreement upon an agreement or understanding for a commission, percentage, brokerage, or contingent fee, excepting bonafide employees or bona fide established commercial or selling agencies maintained by a non-Federal Participant for the purpose of securing business. For breach or violation of this warranty the United States shall have the right to annul this agreement without liability or in its discretion to deduct from the payments to be made hereunder, or otherwise recover the full amount of such commission, percentage, brokerage or contingent fee.
3. EQUAL OPPORTUNITY CLAUSE:
3.1 Except as provided in Title 42 U.S.C. Section 2000-e-2(i) and in keeping with any obligation undertaken by any of the non-Federal Participants, in this section
C-1
referred to as the Contractor, or their assigns, pursuant to the terms of said Title 42 U.S.C. Section 2000-e-2(i) to give preference for employment to qualified Indians for work on or near an Indian Reservation, during the performance of this agreement, the Contractor agrees as follows:
3.1.1 The Contractor will not discriminate against any employee or applicant for employment because of race, color, religion, sex or national origin. The Contractor will take affirmative action to insure that applicants are employed, and that employees are treated during employment, without regard to their race, color, religion, sex or national origin. Such action shall include, but not be limited to the following: Employment, upgrading, demotion or transfer; recruitment or recruitment advertising; layoff or termination; rates of pay or other forms of compensation; and selection for training, including apprenticeship. The Contractor agrees to post in conspicuous places available to employees and applicants for employment, notices to be provided by the Contracting Officer setting forth the provisions of this equal opportunity clause.
3.1.2 The Contractor will, in all solicitations or advertisements for employees placed by or on behalf of the Contractor, state that all qualified applicants will receive consideration for employment without regard to race, color, religion, sex or national origin.
C-2
3.1.3 The Contractor will send to each labor union or representative of workers with which it has a collective bargaining agreement or other contract or understanding, a notice to be provided by the agency contracting officer advising the labor union or workers' representative of the Contractor's commitments under this equal opportunity clause, and shall post copies of the notice in conspicuous places available to employees and applicants for employment.
3.1.4 The Contractor will comply with all provisions of Executive Order No. 11246 of September 24, 1965, and of the rules, regulations and relevant orders of the Secretary of Labor.
3.1.5 The Contractor will furnish all information and reports required by Executive Order No. 11246 of September 24, 1965, and by the rules, regulations and orders of the Secretary of Labor, or pursuant thereto, and will permit access to its books, records and accounts by the contracting agency and the Secretary of Labor for purposes of investigation to ascertain compliance with such rules, regulations and orders.
3.1.6 In the event of the Contractor's non-compliance with this equal opportunity clause, or with any of the said rules, regulations or orders, this agreement may be cancelled, terminated or suspended in whole or in part and the Contractor may be declared
C-3
ineligible for further government contracts in accordance with procedures authorized in Executive Order No, 11246 of September 24, 1965, and such other sanctions may be imposed and remedies invoked as provided in Executive Order No. 11246 of September 24, 1965, or by rule, regulation or order of the Secretary of Labor, or as otherwise provided by law.
3.1.7 The Contractor will include the provisions of Sections 3.1.1 through 3.1.7 hereof in every subcontract or purchase order unless exempted by rules, regulations or orders of the Secretary of Labor issued pursuant to Section 204 of Executive Order No. 11246 of September 24, 1965, so that such provisions will be binding upon each subcontractor or vendor. The Contractor will take such action with respect to any subcontract or purchase order as the contracting agency may direct as a means of enforcing such provisions, including sanctions for non-compliance; provided, however, that in the event the Contractor becomes involved in, or is threatened with, litigation with a subcontractor or vendor as a result of such direction by the contracting agency, the Contractor may request the United States to enter into such litigation to protect the interests of the United States.
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4. WORK HOURS ACT OF 1962:
4.1 This agreement, to the extent that it is of a character specified in the Contract Work Hours Standards Act (Public Law 87-581, 76 Stat. 357) and is not covered by the Walsh-Healey Public Contracts Act (41 U.S.C. Sections 35-45), is subject to the following provisions and to all other provisions and exceptions of said Contract Work Hours Standards Act:
4.1.1 No Contractor or subcontractor contracting for any part of the contract work which may require or involve the employment of laborers or mechanics shall require or permit any laborer or mechanic in any workweek in which he is employed on such work, to work in excess of eight (8) hours in any calendar day or in excess of forty (40) hours in any workweek unless such laborer or mechanic receives compensation at a rate not less than one and one-half times his basic rate of pay for all hours worked in excess of eight (8) hours in any calendar day or in excess of forty (40) hours in such workweek, whichever is the greater number of overtime hours.
4.1.2 In the event of any violation of the provisions of
Section 4.1.1 hereof, the Contractor and any subcontractor responsible for such violation shall be liable to any affected employee for his unpaid wages. In addition, such Contractor or
C-5
subcontractor shall be liable to the United States for liquidated damages. Such liquidated damages shall be computed, with respect to each individual laborer or mechanic employed in violation of the provisions of Section 4.1.1 hereof, in the sum of Ten Dollars ($10.00) for each calendar day on which such employee was required or permitted to work in excess of eight (8) hours or in excess of forty (40) hours in a workweek without payment of the required overtime wages
4.1.3 The Secretary of Labor may withhold, or cause to be withheld, from any monies payable on account of work performed by the Contractor or subcontractor, the full amount of wages required by this agreement, and such sums as may administratively be determined to be necessary to satisfy any liabilities of such Contractor or subcontractor for liquidated damages as provided in
Section 4.1.2 hereof.
4.1.4 The Contractor shall require the foregoing Sections 4.1.1, 4.1.2, 4.1.3 and this 4.1.4 to be inserted in all subcontracts.
5. EXAMINATION OF RECORDS: The non-Federal Participants agree that the Comptroller General of the United States, or any of his duly authorized representatives, shall, until the expiration of three (3) years after final payment under the Project Agreements, have access to and the right to examine any directly pertinent books, documents,
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papers and records of the non-Federal Participants involving transactions related to this agreement.
6. ASSIGNMENT OF CLAIMS:
6.1 Pursuant to the provisions of the Assignment of Claims Act of 1940, as amended (31 U.S.C. Section 203, 41 U.S.C Section 15), if this agreement provides for payments aggregating $1,000 or more, claims for monies due or to become due any non-Federal Participant from the Government under this agreement may be assigned to a bank, trust company, or other financing institution, including any Federal lending agency, and may thereafter be further assigned and reassigned to any such institution. Any such assignment or reassignment shall cover all amounts payable under this agreement and not already paid, and shall not be made to more than one party, except that any such assignment or reassignment may be made to one party as agent or trustee for two or more parties participating in such financing. Unless otherwise provided in this agreement, payments to an assignee of any monies due or to become due under this agreement shall not, to the extent provided in said Act, as amended, be subject to reduction or setoff. (The preceding sentence applies only if this agreement is made in time of war or national emergency as defined in said Act and is with the Department of Defense, the General Services Administration, the Atomic Energy Commission, the National Aeronautics and Space Administration, the
C-7
Federal Aviation Agency, or any other department or agency of the United States designated by the President pursuant to Clause 4 of the proviso of
Section 1 of the Assignment of Claims Act of 1940, as amended by the Act of May 15, 1951, 65 Stat. 41.)
6.2 In no event shall copies of this agreement or of any plans, specifications, or other similar documents relating to work under this agreement, if marked "Top Secret," "Secret," or "Confidential," be furnished to any assignee of any claim arising under this agreement or to any other person not entitled to receive the same. However, a copy of any part or all of this agreement so marked may be furnished, or any information contained therein may be disclosed, to such assignee upon the prior written authorization of the Contracting Officer.
7. CONVICT LABOR: In connection with the performance of work under this agreement, the non-Federal Participants agree not to employ any person undergoing sentence of imprisonment at hard labor.
8. AGREEMENT SUBJECT TO COMPACTS, ACTS AND TREATY: This Agreement is made upon the express conditions and with the express understanding that all rights hereunder shall be subject to and controlled by the applicable provisions of the Colorado River Compact dated November 24, 1922, and proclaimed by the President of the United States June 25, 1929, the Boulder Canyon Project Act approved December 21,
C-8
1928, the Boulder Canyon Project Adjustment Act of July 19, 1940, the Upper Colorado River Basin Compact dated October 11, 1948, and the Mexican Water Treaty of February 3, 1944.
C-9
CERTIFICATE
I, GERALD J. GRIFFIN, certify that I am an Assistant Secretary of ARIZONA PUBLIC SERVICE COMPANY, the corporation named herein; that M. C. TITUS, who signed the attached contract on behalf of said corporation was then its Executive Vice President; that said contract was duly signed for and in behalf of said corporation by authority of its governing body and is within the scope of its corporate powers.

         /s/ Gerald J. Griffin
----------------------------------------
          Assistant Secretary	

CERTIFIED COPY OF RESOLUTION
I, GERALD J. GRIFFIN, Assistant Secretary of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, HEREBY CERTIFY that, at a meeting of the Board of Directors of said Company, duly convened and held on August 21, 1969, at which a quorum was present and acting throughout, the following resolution was adopted and is now in full force and effect:
RESOLVED, that the Board of Directors approves and ratifies the action of the officers in negotiating and carrying forward the proposal for the participation by the Company, along with others, in the so-called Navajo Project, involving the construction near Page, Arizona, of three generating units (presently estimated at 750 MW nameplate), with ownership being held as tenants in common in the following respective undivided interests:

Arizona Public Service Company                       14.0%
Tucson Gas & Electric Company                         7.5%
City of Los Angeles                                  21.2%
Nevada Power Company                                 11.3%
Salt River Project Agricultural Improvement
 and Power District
       (For ITSELF)                                  21.7%
       (As Agent for U.S.B.R.)                       24.3%	

the said Project to include certain transmission facilities to be located in Arizona, with APS to be the Project Manager and Operating Agent for said facilities, which are to be owned by APS and others as joint tenants in various percentages related to projected use, these facilities including a 500 kv line from the switchyard of the llavajo Plant near Page to the Moenkopi Switching Station and from there to the Westwing switchyard year Phoenix, and with another 500 kv line extending directly from the Navajo switchyard to West-wing, together with various related interconnections and switching facilities; and
FURTHER RESOLVED, that in connection with the Navajo Project, the appropriate officers of the Company be, and they are hereby authorized to negotiate and to execute and effectuate the necessary instruments and agreements, including among others, the following:
(1) Participation Agreement
(2) Coordination Agreement
(3) Interconnection Agreement
(4) Plant Site Lease
(5) Fuel Supply and Transportation Agreement
(6) Co-Tenancy Agreement
(7) Moenkopi Agreement
(8) Amendment to Navajo Wholesale Power Agreement
(9) Plant Construction Agreement
(10) Plant Operating Agreement
(11) Transmission Construction Agreement
(12) Transmission Operating Agreement
(13) Applications for Various Rights-of-Way and Easements
(14) Layoff Agreement
and
FURTHER RESOLVED, that the appropriate officers of the Company are authorized to take such actions and to execute such further agreements, instruments, applications, certificates, contracts or other documents as may be necessary or appropriate in connection with the foregoing to complete and effectuate the Company's proposed participation in the Navajo Project.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of said corporation this 1st day of March, 1972.

        /s/ Gerald J. Griffin
-----------------------------------
          Assistant Secretary	

CERTIFICATION
I, the undersigned, being the duly elected Assistant Secretary of Nevada Power Company, certify and declare that the following is a true and correct copy of a resolution adopted by the Executive Committee at its meeting held October 23, 1969 at which a quorum was present and acting throughout:
RESOLVED: That the officers of the Company are hereby authorized to sign all contracts necessary to proceed-with the Company's proposed participation in the Navajo Project, to take the necessary action to qualify to do business in the State of Arizona and to take any other steps necessary or incidental thereto.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of this corporation this 7th day of March, 1972.

/s/ W. E. Littler
-----------------------------
W. E. Littler
Assistant Secretary	

(SEAL)
CERTIFICATE
I, W. E. Littler, certify that I am the Assistant Secretary of the Nevada Power Company, a corporation named herein; that Harry Allen who signed the attached contract on behalf of said corporation was then its President; that said contract was duly signed for and in behalf of said corporation by authority of its governing body, as per certified copy of attached resolution, and is within the scope of its corporate powers.

/s/ W. E. Littler
-----------------------------------
W. E. Littler
Assistant Secretary	

RESOLUTION
WHEREAS, the SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT (herein called Salt River Project) has determined that it is in Salt River Project's best interest to participate with ARIZONA PUBLIC SERVICE COMPANY, DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, NEVADA POWER COMPANY, the UNITED STATES OF AMERICA, and TUCSON GAS AND ELECTRIC COMPANY (collectively herein called "Other Participants") in the Navajo Project consisting of three 750,000 kilowatt thermal electric generating units together with their Common and Related Facilities to be constructed near Page, Arizona, and the Navajo Transmission System, and
WHEREAS, Salt River Project and the Other Participants entered into the Navajo Project Participation Agreement on September 30, 1969, which provides the basic principles for their participation in the Navajo Project, and
WHEREAS, for Salt River Project to effect such participation must make, execute and deliver the Navajo Project Co-Tenancy Agreement, by and between Salt River Project and the Other Participants, pursuant to which the rights and interests of all the Participants in and to the Navajo Project shall be set forth and established.
NOW, THEREFORE, BE IT HEREBY RESOLVED that the Board of Directors of Salt River Project has and does hereby approve the Navajo Project Co-Tenancy Agreement and does hereby authorize, empower, and direct that the President or Vice President and Secretary or Assistant Secretary make, execute and deliver the Navajo Project Co-Tenancy Agreement for and on behalf of the Salt River Project.
CERTIFICATE
I, F. E. Smith, the duly appointed, qualified and acting Secretary of the Salt River Project Agricultural Improvement and Power District, HEREBY CERTIFY that the foregoing is a true and complete copy of a resolution adopted by the Board of Directors of said District at a meeting thereof duly held on the 6th day of March 1972, at which meeting a quorum was present and voted.
WITNESS my hand and seal of Salt River Project Agricultural Improvement and Power District this 6th day of March 1972.

/s/ F. E. Smith
----------------------------
F. E. Smith, Secretary	

TUCSON GAS & ELECTRIC COMPANY
Certified Copy of Resolutions
Adopted by the Board of Directors
RESOLVED, that the proper officers of the Company be, and they hereby are authorized to enter into a Participation Agreement between the United States of America, Arizona Public Service Company, Department of Water and Power of the City of Los Angeles, Nevada Power Company, Salt River Project Agricultural Improvement and Power District and Tucson Gas & Electric Company for the ownership of the Navajo Project wherein Tucson Gas & Electric Company shall own an undivided 7-1/2% interest in the Navajo Generating Station and varying percentage interests in the transmission system. The Agreement shall be substantially in the form of the draft filed with the Secretary of the Company marked "Filed September 23, 1969 with the Secretary of Tucson Gas & Electric Company", and be it
FURTHER RESOLVED, that the proper officers of the Company be, and they hereby are further authorized to execute and enter into on behalf of the Company the necessary Project Agreements contemplated by said Participation Agreement, and such other documents reasonably required to implement said Participation Agreement and Project Agreements.
* * * * * * * * * * * *
I, W. D. BROOKS, Assistant Secretary of TUCSON GAS & ELECTRIC COMPANY (hereinafter called the "Company"), DO HEREBY CERTIFY that the above and foregoing is a true and complete copy of resolutions duly adopted by the Board of Directors at the Regular Monthly Meeting held on the 23rd day of September, 1969, at which meeting a quorum was present and acted thereon; and
I DO FURTHER CERTIFY that said resolutions are in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 3rd day of March, 1972.

/s/ Authorized Signatory
------------------------	

RESOLUTION NO. 556
WHEREAS, Resolution No. 610 adopted by the Board on March 9, 1972, approved the transmittal of the following agreements to the City Council for approval by ordinance, which approval was subsequently withheld by the Council:

     Agreement Title                  DWP Number
-------------------------             ----------
Navajo Project Co-Tenancy
   Agreement                             10498

Navajo Generating Station
   Construction Agreement                10499

Navajo Project Western
   Transmission System
   Construction Agreement                10500

Navajo Project Southern
   Transmission System
   Construction Agreement                10501	

and WHEREAS, Resolution No. 978, adopted by this Board on May 31, 1973, transmitted the above-mentioned agreements to the City Council for approval by ordinance, which approval was adopted, and subsequently disapproved by Mayor Tom Bradley on July 26, 1973; and
WHEREAS, the agreements listed above involve: (1) a legal instrument, previously executed by the other Navajo Participants, to be recorded in the State of Arizona which sets forth the Department's ownership rights in the Navajo Project consisting of the Navajo Generating Station, the Southern Transmission System, and the Western Transmission System (No. 10498); (2) technical and financial provisions, previously executed by the other Navajo Participants, for the construction of the Navajo Generating Station (No. 10499);
(3) technical and financial documents, previously executed by the Navajo Participants, for the construction of the Southern and Western Transmission Systems (No. 10500 and No. 10501); and
WHEREAS, construction has been completed on Navajo Units 1 and 2, and these units are in commercial operation and have been carrying system load since February 1, 1974, and
December 2, 1974, respectively; and Navajo Unit 3 is scheduled to carry system load in December, 1975 and to begin commercial operation by April, 1976; and
WHEREAS, construction has been completed on the Southern Transmission System and it has been carrying Navajo power since February 1, 1974, and major construction has been completed on the Western Transmission System and it has been carrying Navajo Power since October 27, 1974; and
WHEREAS, the following agreement supplements the environmental protection section of the Navajo Project Co-Tenancy Agreement and requires: (1)an annual environmental report, to be prepared by the Department, which will include a review of advances in technology of equipment for the protection of the environment and an analysis of the performance of the existing air quality control equipment at the Navajo Generating Station; (2) such environmental report to be made available to the public for their comments and suggestions; and (3) the Navajo Participants to meet at least every three years to review technological advances in air quality control equipment and the annual environmental reports prepared by the Department including comments and suggestions received from the interested public:

     Agreement Title                  DWP Number
-------------------------             ----------
Supplement No. 1 to the Navajo
Project Co-Tenancy Agreement            10498S	

WHEREAS, this Department requested that certain practices relating to the use and occupancy of Navajo and Hopi Indian lands for mining be incorporated as obligations in the coal contracts, relating to compensation for displaced Navajo families, reclamation of leased premises, water monitoring program, and the water supply to Navajo families; and
WHEREAS, the Navajo Participants and Peabody Coal Company have agreed and incorporated such obligations in the Amended Navajo Coal Supply Agreement to be presented to this Board;
NOW, THEREFORE, BE IT RESOLVED the above agreements, approved as to form and legality by the City Attorney, and now on file with the Secretary of this Board, be and the same are
-2-
hereby approved; and that this Board requests the City Council of The City of Los Angeles, in accordance with Section 219.4 of the Charter of The City of Los Angeles, to approve by ordinance the agreements hereinabove referred to and identified, and to authorize this Board, in its discretion, to execute and enter into said agreements, all of which relate to the Navajo Project, and following such approval, the President or the Vice President or the General Manager and Chief Engineer and the Secretary, Assistant Secretary or the Acting Secretary of the Board be and they are hereby authorized and directed to execute said agreements for and on behalf of this Department.
I HEREBY CERTIFY that the foregoing is a full, true and correct copy of a resolution adopted by the Board of Water and Power Commissioners of The City of Los Angeles at its meeting held FEB-5 1976

/s/ Authorized Signatory
------------------------
        Secretary	

-3-
Ordinance No. 148,153
CERTIFICATION
STATE OF CALIFORNIA )
) ss.
COUNTY OF LOS ANGELES,)
I, REX E. LAYTON, City Clerk of the City of Los Angeles and ex-officio Clerk of the City Council of the City of Los Angeles, do hereby certify and attest the foregoing to be a full, true and correct copy of the original Ordinance No. 148,153

on file in my office, and that I have carefully compared the same with the original.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the City of Los Angeles, this 22nd day of March, 1976

/s/ Rex E. Layton
------------------------------------------
City Clerk of the City of Los Angeles

By  /s/ Judy Pentland
    --------------------------------------
                   Deputy
    Judy Pentland	

Form Clerk 22-5M-2-72 (R)
AMENDMENT NO. 1
TO THE
NAVAJO PROJECT CO-TENANCY AGREEMENT
TABLE OF CONTENTS

SECTION      TITLE                                               PAGE
-------      -----                                               ----
 1.          PARTIES                                               1
 2.          RECITALS                                              1
 3.          AGREEMENT                                             2
 4.          EFFECTIVE DATE                                        2
 5.          AMENDMENT TO SECTION 6.2.4                            2
 6.          AMENDMENT TO SECTION 8.5                              3
 7.          AMENDMENT TO EXHIBIT B-B                              4
 8.          CO-TENANCY AGREEMENT GOVERNS                          6
 9.          EXECUTION                                             6
10.          SIGNATURE CLAUSE                                      7	

-i-
AMENDMENT NO. 1
TO THE
NAVAJO PROJECT CO-TENANCY AGREEMENT
1. PARTIES:
The Parties ("Participants") to this Amendment No. 1 to the Navajo Project Co-Tenancy Agreement ("Amendment No. 1") are: THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States," acting through the Secretary of the Interior, his duly appointed successor or his duly authorized representative; ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, hereinafter referred to as "Arizona"; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of the City of Los Angeles, a municipal corporation of the State of California, hereinafter referred to as "Los Angeles"; NEVADA POWER COMPANY, a Nevada corporation, hereinafter referred to as "Nevada"; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona, hereinafter referred to as "Salt River Project"; and TUCSON ELECTRIC POWER COMPANY, formerly Tucson Gas & Electric Company, an Arizona corporation hereinafter referred to as "Tucson."
2. RECITALS:
This Amendment No. 1 is made with reference to the following facts, among others:
2.1 On March 23, 1976, the Parties entered into the Navajo Project Co-Tenancy Agreement ("Co-Tenancy Agreement"), which established certain terms and conditions relating to their
interest in and their ownership of the Navajo Project and which established certain rights and obligations under the Project Agreements.
2.2 By execution of this Amendment No. 1, the Parties desire to amend the Co-Tenancy Agreement to reflect the establishment of the Moenkopi Switchyard as a point of delivery for all Participants.
2.3 The Parties further desire to amend the Co-Tenancy Agreement to reflect the proposed sale of Arizona's share of its rights, title and ownership in the Westwing Substation 600 MVA 500/345 kV transformer bank to Tucson.
3. AGREEMENT:
In consideration of the mutual benefits to be derived from this Amendment No. 1, the Participants agree as follows:
4. EFFECTIVE DATE:
This Amendment No. 1 shall become effective when it has been duly executed by all Participants.
5. AMENDMENT TO SECTION 6.2.4:
Section 6.2.4 of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Section 6.2.4 is hereby substituted to read as follows:
"6.2.4 Westwing Substation 600 MVA 500/345 kV transformer bank and transformer leads and spare 200 MVA 500/345 kV transformer and leads.
(i) Tucson 100%"
-2-
 
6. AMENDMENT TO SECTION 8.5:
Section 8.5 of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Section 8.5 is hereby substituted to read as follows:
"8.5 The Participants' designated points of delivery shall be as follows:

8.5.1 Arizona            =  Navajo 500 kv Switchyard, Westwing
                            Substation and the Moenkopi Switchyard.

8.5.2 Los Angeles        =  Navajo 500 kV Switchyard, McCullough 500
                            kV Switchyard and the Moenkopi
                            Switchyard.

8.5.3 Nevada             =  Navajo 500 kV Switchyard, McCullough 500
                            kV Switchyard and the Moenkopi
                            Switchyard.

8.5.4 Salt River Project =  Navajo 500 kV Switchyard, Westwing
                            Substation and the Moenkopi Switchyard.

8.5.5 Tucson             =  Navajo 500 kV Switchyard, Westwing
                            Substation and the Moenkopi Switchyard.

8.5.6 United States      =  Navajo 500 kV Switchyard, McCullough 500
                            kV Switchyard, Westwing Substation and
                            the Moenkopi Switchyard."	

-3-
7. AMENDMENT TO EXHIBIT B-B:
Exhibit B-B Sheet 1 of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Exhibit B-B Sheet 1 is hereby substituted to read as follows:
-4-
EXHIBIT B B SHEET 1
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
[TRANSMISSION SYSTEM OWNERSHIP CHART]
-5-
8. CO-TENANCY AGREEMENT GOVERNS:
Except as provided in this Amendment No. 1, the provisions of the Co-Tenancy Agreement shall remain in full force and effect.
9. EXECUTION:
This Amendment No. 1 may be executed in any number of counterparts, and upon execution by all Participants, each executed counterpart shall have the same force and effect as an original instrument and as if all Participants had signed the same instrument. Any signature page of this Amendment No. 1 may be detached from any counterpart of this Amendment No. 1 without impairing the legal effect of any signatures thereon, and may be attached to another counterpart of this Amendment No. 1 identical in form thereto, but having attached to it one or more signature pages.
-6-
10. SIGNATURE CLAUSE:
The signatories hereto represent that they have been appropriately authorized to enter into this Amendment No. 1 on behalf of the Participants for whom they sign. This Amendment No. 1 is hereby executed as of the 5th day of July, 1988.
THE UNITED STATES OF AMERICA

                                     By:/s/ John D. Brown
                                        ----------------------------------------

Approved as to Form:                 ARIZONA PUBLIC SERVICE COMPANY

By /s/ T.E. Parrish                  By /s/ Russell D. Hulse
   -----------------                 ----------------------------------------
   Date 6-6-88

                                     DEPARTMENT OF WATER AND POWER 0F THE CITY
                                     OF LOS ANGELES

                                     By

                                     BOARD OF WATER AND POWER COMMISSIONERS OF
                                     THE CITY OF LOS ANGELES

[STAMP]                                    By /s/ Authorized Signatory
                                              ----------------------------------
                                              General Manager and Chief Engineer

                                     By /s/ Authorized Signatory
                                        ----------------------------------------
                                                        Secretary

                                     NEVADA  POWER COMPANY

                                     By /s/ Authorized Signatory
                                        ----------------------------------------
                                         Vice President
                                         Resource Planning and Power Dispatch

ATTEST AND                           SALT RIVER PROJECT AGRICULTURAL
COUNTERSIGN:                         IMPROVEMENT AND POWER  DISTRICT

/s/ Authorized Signatory             By /s/ Authorized Signatory
-------------------------------         ----------------------------------------
         SECRETARY                                      PRESIDENT

                                     TUCSON ELECTRIC POWER COMPANY

                                     By /s/ Authorized Signatory
                                        ----------------------------------------	

7
AMENDMENT NO. 2
TO THE
NAVAJO PROJECT CO-TENANCY AGREEMENT
1. PARTIES:
The parties to this AMENDMENT NO. 2 to the NAVAJO PROJECT CO-TENANCY AGREEMENT ("Amendment No. 2") are: THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States", acting through the Secretary of the Interior, his duly appointed successor or his duly authorized representative; ARIZONA PUBLIC SERVICE COMPANY, hereinafter referred to as "Arizona", an Arizona corporation; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, hereinafter referred to as "Los Angeles", a department organized and existing by virtue of and under the Charter of the City of Los Angeles, a municipal corporation of the State of California; NEVADA POWER COMPANY, hereinafter referred to as "Nevada", a Nevada corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, hereinafter referred to as "Salt River Project",an agricultural improvement district organized and existing under the laws of the State of Arizona;, and TUCSON ELECTRIC POWER COMPANY, hereinafter referred to as "Tucson", formerly known as Tucson Gas & Electric Company, an Arizona corporation; all of the foregoing are sometimes individually referred to as "Participant" and collectively as "Participants".
2. RECITALS:
This Amendment No. 2 is made with reference to the following facts, among others:
delivery in the Westwing Substation based on the results of technical studies performed by Western Area Power Administration.
2.6 On October 30, 1990, the Coordinating Committee, pursuant to Section 17[ILLEGIBLE] of the Southern Transmission System Operating Agreement, authorized the interconnection of the United States' Waddell 230kV transmission line at the Westwing Substation as a Capital Improvement to the Southern Transmission System.
2.7 In addition, the Participants have identified various sections of the Co-Tenancy Agreement that are either outdated or, for administrative convenience, should be revised.
2.8 Now, therefore, the Participants desire to further amend the Co-Tenancy Agreement as set forth herein to reflect: i) the interconnection of the United States' Waddell 230kV transmission line at the United States' designated point of delivery in the Westwing Substation;ii) the changes in transformer ratings at the Westwing Substation; iii) the interconnection of the United States' two (2) 230kV transmission lines to the bays reserved therefor in the Westwing 230kV Switchyard; iv) the removal of the series capacitors which were installed on Arizona's Cholla-Pinnacle Peak 345kV lines: and v) the deletion of certain Project Series Capacitors from the project description, as such capacitors were not installed as part of the Southern
(ii) Salt River Project - 36.1% for its own use and benefit; and
- 31.8% for the use and benefit of the United States in accordance with Project Agreements.
6.2.5.2 Waddell 230kV Interconnection

Salt River Project       - 100%   for the use and benefit of the
                                  United States in accordance with
                                  Project Agreements."	

3.2 Paragraphs 5, 6 and 7 of Section F, OTHER ASSOCIATED COMPONENTS, in
Section I. SOUTHERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement are hereby deleted in their entirety.
3.3 Paragraphs 2, 3, and 4 of Section G, WESTWING SUBSTATION, in Section I,
SOUTHERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement are hereby deleted in their entirety and new Paragraphs 2, 3, and 4 are hereby substituted to read in their entirety as follows:
"2. The two (2) Westwing Substation 149- MVA 500/230kV transformer banks and spare 498 MVA 500/230kV
one future Arizona 230kV line, two Salt River Project 230kV lines, and two United States 230kV lines, including, but not limited to, the 230kV busses, power circuit breakers, metering transformers, disconnect switches, structures, insulators and hardware, 230kV leads between points of attachment on the transformer dead-end towers to the main switchyard structures, 230kV leads up to the points of attachment where the 230kV transmission lines attach to the main switchyard structures, control building, and related land and land rights.
4.2 The Waddell 230kV Interconnection comprising termination facilities for the Waddell 230kV transmission line, including, but not limited to, power circuit breaker, metering transformers, disconnect switches, structures, turning tower, take-off structure, insulators and associated hardware, 230kV conductor from its point of attachment on the first transmission tower located outside the perimeter fence to the turning tower, 230kV leads between the turning tower and the take-off structure, and the fiber optic cable between its termination point at the patch
counterparts, and upon execution and delivery by each Participant, the executed and delivered counterparts together shall have the same force and effect as an original instrument as if all the Participants had signed the same instrument. Any signature page of this Amendment No. 2 may be detached from any counterpart of this Amendment No. 2 without impairing the legal effect of any signatures thereon, and may be attached to another counterpart of this Amendment No. 2 identical in form hereto, but having attached to it one or more signature pages.
5.2 When this Amendment No. 2 to the Co-Tenancy Agreement has been executed by, and delivered to, the duly authorized representative of each Participant, Arizona shall promptly file this Amendment No. 2 with FERC and, if accepted for filing by FERC without condition or modification, it shall be effective as of the 22nd day of November, 1991. In the event FERC conditions or modifies this Amendment No. 2, Arizona shall promptly notify all the other Participants and, upon written notice given not less than thirty (30) days from date of Arizona's notice to all the other Participants by any Participant that such condition or modification is objectionable, this Amendment No. 2 shall terminate and be of no further force or effect. If no written notice is given by any Participant that such condition or modification is objectionable within such thirty (30) day period, this Amendment No. 2 shall continue in full force and effect.
6. SIGNATURE CLAUSE:
The signatories hereto represent that they have been appropriately authorized to enter into this Amendment No. 2 on behalf of the Participants for whom they sign. This Amendment No. 2 is hereby executed as of the 14th day of June, 1996.
UNITED STATES OF AMERICA

SIGNATURE  /s/ Robert W. Johnson
          __________________________________

NAME  Robert W. Johnson
     _______________________________________	

Regional Director Lower Colorado Region TITLE U.S. Bureau of Reclamation
DATE SIGNED March 3, 1996
ARIZONA PUBLIC SERVICE COMPANY

                                    SIGNATURE /s/ Jack Davis
                                              ----------------------------------

Approved As To Form                 NAME          Jack Davis
/s/ TE Parrish                      TITLE         Vice President
Date 6-13-96
                                    DATE  SIGNED  June 14, 1996	

DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
By
BOARD OF WATER AND POWER COMMISSIONERS

By /s/ Stanton J. Snyder            OF THE CITY OF LOS ANCELES
  -----------------------
       Stanton J. Snyder            By  /s/ William R. Mc Carley
    Deputy City Attorney               _________________________________________
                                                  Gerneral Manager

                                    and  /s/ Irene N. Kiski
                                        ________________________________________
                                                    Secretary	

NEVADA POWER COMPANY

SIGNATURE  /s/ Steven V. Rigazio
          __________________________________

NAME Steven V. Rigazio	

TITLE Vice President, Finance and Planning, Treasurer and CFO
DATE SIGNED November 28, 1995
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT

SIGNATURE  /s/ Mark B. Bonsall
          __________________________________

NAME  Mark B. Bonsall
     _______________________________________	

TITLE Associate General Manager

DATE SIGNED August 22, 1995
TUCSON ELECTRIC POWER COMPANY
 (Formerly Tucson Gas & Electric Company)

SIGNATURE /s/ Steven J. Glaser
          ----------------------------------

NAME        Steven J. Glaser	

TITLE Vice President
DATE SIGNED July 31, 1995
 
EXHIBIT B-B SHEET 2
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
WESTWING 230kV SWITCHYARD CIRCUIT
[FLOW CHART]

                                   OWNERSHIP
-----------------------------------------------------------------------
   ORIGINAL WESTING 230kV SWITCHYARD(1)   WADDELL 230kV INTERCONNECTION
---------------------------------------   -----------------------------
SRP for its own use & benefit    36 1%                  0%
APS                              32 1%                  0%
SRP for use and benefit of US    31 8%                100%	

NOTES:
 EXCLUDES
 Waddell Interconnection
ANPP Interconnection
INCLUDES
Future Addition & Common Facilities
APS CONTRACT NO. 48178
 DWP No. 10498
AMENDMENT NO. 3
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
By Federal Energy Regulatory Commission ("FERC") order/notice of acceptance dated _____________ in FERC Docket No.______________, this Amendment No. 3 was accepted for filing and the rate schedules became effective on _______, 19____.
Execution Original
APS CONTRACT NO. 48178
AMENDMENT NO. 3
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
TABLE OF CONTENTS
1 PARTIES -------------------------------------------------------------------1
2 RECITALS:------------------------------------------------------------------1
3 AMENDMENTS:----------------------------------------------------------------3
4 EFFECT:--------------------------------------------------------------------8
5 EXECUTION AND EFFECTIVE DATE:----------------------------------------------9
6 SIGNATURE CLAUSE:---------------------------------------------------------10
i
APS CONTRACT NO. 48178
AMENDMENT NO. 3
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
1 PARTIES
1.1 The Parties to this AMENDMENT NO. 3 to the NAVAJO PROJECT CO-TENANCY
AGREEMENT ("Amendment No. 3") are: ARIZONA PUBLIC SERVICE COMPANY, hereinafter referred to as "Arizona", an Arizona corporation; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, hereinafter referred to as "Los Angeles", a department organized and existing by virtue of and under the Charter of the City of Los Angeles, a municipal corporation of the State of California; NEVADA POWER COMPANY, hereinafter referred to as "Nevada", a Nevada corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, hereinafter referred to as "Salt River Project", an agricultural improvement district organized and existing under the laws of the State of Arizona; TUCSON ELECTRIC POWER COMPANY, hereinafter referred to as "Tucson", formerly known as Tucson Gas & Electric Company, an Arizona corporation; and THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States", acting through the Secretary of the Interior, his duly appointed successor or his duly authorized representative; all of the foregoing are sometimes individually referred to as "Participant" and collectively as "Participants".
2 RECITALS:
This Amendment No. 3 is made with reference to the following facts, among others:
2.1 On March 23, 1976, the Participants entered into the NAVAJO PROJECT CO-TENANCY AGREEMENT ("Co-Tenancy Agreement"), which established certain terms and conditions relating to their interest in and their ownership of the Navajo Project and which established certain rights and obligations under the Project Agreements.
2.2 On October 18, 1976, the Participants entered into SUPPLEMENT NO.l to the Co-Tenancy
1
APS CONTRACT NO. 48178
Agreement to clarify their intent to preserve, protect, and enhance the environment as provided in Section 29, ENVIRONMENTAL PROTECTION, of the Co-Tenancy Agreement.
2.3 On July 5, 1988, the Participants entered into AMENDMENT NO. 1 to the Co-Tenancy Agreement: i) to establish the Moenkopi Switchyard as a point of delivery for all parties; and ii) to reflect the sale of Arizona's rights, title, and ownership in the Westwing Substation 600 MVA 500/345 kv transformer bank to Tucson.
2.4 On June 14, 1996, the Participants entered into AMENDMENT NO. 2 to the Co-Tenancy Agreement to reflect: i) the interconnection of the United States' Waddell 230 kv transmission line at the United States' designated point of delivery in the Westwing Substation; ii) the change in the transformer ratings at the Westwing Substation; iii) the interconnection of the United States' two 230 kv transmission lines in the Westwing 230 kv Switchyard; iv) the removal of the series capacitors installed on Arizona's Cholla-Pinnacle Peak 345 kv lines; and v) the deletion of certain project series capacitors from the project description.
2.5 On June 28, 1994, the Transmission Engineering and Operating Committee ("E&O Committee") approved the technical feasibility of the interconnection of the Yavapai Switchyard to the Navajo Project Southern Transmission System ("STS") Moenkopi- Westwing transmission line. This approval was based on the results of technical studies performed and presented by Arizona to the E&O Committee on March 3, 1994 and in a subsequent letter from Arizona dated April 12, 1994.
2.6 Now, therefore, the Participants desire to further amend the Co-Tenancy Agreement as set forth herein to reflect: i) the construction of the Yavapai Switchyard as a component of the STS; ii) new delivery points for Arizona, Salt River Project, Tucson, and the United States; and iii) the interconnection of Arizona's Yavapai 230 kv Substation at the applicable Participants' new delivery point in the Yavapai Switchyard.
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APS CONTRACT NO. 48178
3 AMENDMENTS:
3.1 Section 6.2.2 of Section 6, OWNERSHIPS AND TITLES, of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Section 6.2.2 is hereby substituted to read in its entirety as follows:
"6.2.2 Navajo Westwing 500 kv line
Moenkopi-Yavapai 500 kv line
Yavapai-Westwing 500 kv line
Westwing 500 kv Switchyard

(i)  Arizona              =      24.7%

(ii) Salt River Project   =      38.3%   for its own use and benefit and

                                 23.7%   for the use and benefit of the United
                                         states in accordance with Project
                                         Agreements.

(iii) Tucson              =      13.3%"	

3.2 A new Section 6.2.2A, Yavapai Switchyard, is hereby inserted after
Section 6.2.2 of the Co-Tenancy Agreement and a new Section 6.2.2A shall read in its entirety as follows:
"6.2.2A Yavapai Switchyard
Arizona = 100%"
3.3 Section 8.5 of Section 8, USE OF THE TRANSMISSION SYSTEM, of the Co-Tenancy Agreement is hereby deleted in its entirety and a new
Section 8.5 is hereby substituted to read in its entirety as follows:
"8.5 The Participants' designated points of delivery shall be as follows:

8.5.1     Arizona         =      Navajo 500 kv Switchyard, Westwing Substation,
                                 Moenkopi Switchyard and Yavapai Switchyard.

8.5.2     Los Angeles     =      Navajo 500 kv Switchyard, McCullough 500 kv
                                 Switchyard and Moenkopi Switchyard.	

3
 
APS CONTRACT NO. 48178

8.5.3     Nevada                   =       Navajo 500 kv Switchyard, McCullough 500 kv Switchyard and Moenkopi Switchyard.

8.5.4     Salt River Project       =       Navajo 500 kv Switchyard, Westwing Substation, Moenkopi Switchyard and Yavapai
                                           Switchyard.

8.5.5     Tucson                   =       Navajo 500 kv Switchyard, Westwing Substation, Moenkopi Switchyard and Yavapai
                                           Switchyard.

8.5.6     United States            =       Navajo 500 kv Switchyard, McCullough 500 kv Switchyard, Westwing Substation,
                                           Moenkopi Switchyard and Yavapai Switchyard."	

3.4 Section E, MOENKOPI-WESTWING 500 KV LINE, of Exhibit B, SOUTHERN TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Section E is hereby substituted to read in its entirety as follows:
"E. MOENKOPI-YAVAPAI 500 KV LINE
The Moenkopi-Yavapai 500 kv line from and including the first 500 kv line dead-end tower outside the Moenkopi Switchyard to a similar tower location outside the Yavapai Switchyard and the Moenkopi-Yavapai 500 kv line right-of-way."
3.5 Paragraph 1 of Section F, OTHER ASSOCIATED COMPONENTS, of EXHIBIT B, SOUTHERN TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new paragraph 1 is hereby substituted to read in its entirety as follows:
"1. The additions to the Moenkopi Switchyard comprising the terminal facilities for the Navajo-Moenkopi and the Moenkopi-Yavapai 500 kv lines and the additions to the terminal facilities for the Four Corners-Moenkopi and Moenkopi-Eldorado 500 kv lines including, but not limited to, the additional 500 kv busses, power circuit breakers, disconnect switches, relays, and structures."
3.6 Paragraph 3 of Section F, OTHER ASSOCIATED COMPONENTS, of EXHIBIT B, SOUTHERN TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted
4
APS CONTRACT NO. 48178
in its entirety and a new paragraph 3 is hereby substituted to read in its entirety as follows:
"3. The Project Series Capacitors and shunt reactors on the Moenkopi Switchyard end of the Moenkopi-Yavapai 500 kv line including, but not limited to, the capacitors, control equipment, reactors, lightning arresters, hazard fencing, disconnects, structures, and bus work from the switchyard side of the first 500 kv line dead-end tower located outside the switchyard to the attachment on the main switchyard structure."
3.7 Paragraph 8 of Section F, OTHER ASSOCIATED COMPONENTS, of EXHIBIT B, SOUTHERN TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new paragraph 5 is hereby substituted to read in its entirety as follows:
"5. All the communications facilities necessary to control the Southern Transmission System including such facilities located at Navajo 500 kv Switchyard, Moenkopi Switchyard, Yavapai Switchyard, or Westwing Substation."
3.8 Section G, WESTWING SUBSTATION, of Exhibit B, SOUTHERN TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Section G is hereby substituted to read in its entirety as follows:
"G. YAVAPAI SWITCHYARD
The Yavapai Switchyard, a basic ring bus scheme, comprising termination facilities for the Moenkopi-Yavapai 500 kv line, Yavapai-Westwing 500 kv line, and the 500/230 kv transformer bank including, but not limited to, 500 kv dead-end structures, 500 kv busses, power circuit breakers, disconnect switches, relays, common facilities, and other facilities up to, but excluding, the high-side bushings of the 500/230 kv transformer. The Yavapai Switchyard common facilities include, but are not limited to, roads, trenches and conduit for system control and power cables, station grounding grid, overhead static shield, fencing and gates, yard lighting, maintenance and control buildings, station batteries, chargers and
5
APS CONTRACT NO. 48178
distribution panels, station power transformers and distribution panels, remote terminal units, digital fault recorders, alarms, annunciators, public address system, communications equipment, and related land or land rights."
3.9 A new Section H is hereby inserted after Section G of EXHIBIT B. SOUTHERN TRANSMISSION SYSTEM, to the Co-Tenancy Agreement and the new Section H shall read in its entirety as follows:
"H. YAVAPAI-WESTWING 500 KV LINE
1. The Yavapai-Westwing 500 kv line; from and including the first 500 kv line dead-end tower outside the Yavapai Switchyard to a similar tower location outside the Westwing Substation and the Yavapai-Westwing 500 kv line right-of-way.
2. The Project Series Capacitors and shunt reactors on the Westwing 500 kv Substation end of the Yavapai-Westwing 500 kv line including, but not limited to, the capacitors, control equipment, reactors, lightning arresters, hazard fencing, disconnects, structures and bus work from the substation side of the first 500 kv line dead-end tower located outside the substation to the attachment on the main substation structure."
3.10 A new Section I is hereby inserted after Section H of EXHIBIT B, SOUTHERN TRANSMISSION SYSTEM to the Co-Tenancy Agreement and the new
Section I shall read in its entirety as follows:
"I. WESTWING SUBSTATION
1. The Westwing 500 kv Switchyard, a basic breaker-and-a-half scheme, comprising termination facilities for the Yavapai-Westwing 500 kv line, Navajo-Westwing 500 kv line, 500/230 kv transformers banks, and 500/345 kv transformer bank including, but not limited to, the 500 kv busses, power circuit breakers, metering transformers, disconnect switches, control building, structures, and related land and land rights.
6
APS CONTRACT NO. 48178
2. The two (2) Westwing Substation 1494 MVA 500/230 kv transformer banks and spare 498 MVA 500/230 kv transformer to be located within the boundaries of the Westwing 500 kv Switchyard and the equipment associated therewith including, but not limited to, foundations, structures, insulators and hardware, transformer leads from 500 kv bushings to points of termination on the attachments to the 500 kv switchyard structure, and 230 kv leads up to the points of attachment where the 230 kv lines from adjacent facilities attach to the transformer dead-end tower.
3. The Westwing Substation 672 MVA 500/345 kv transformer bank and spare 224 MVA 500/345 kv transformer to be located within the boundaries of the Westwing 500 kv Switchyard and the equipment associated therewith including, but not limited to, foundations, structures, insulators and hardware, transformer leads from the 500 kv bushings to points of termination on the attachments to the 500 kv switchyard structure, and 345 kv leads up to the points of attachment where the 345 kv lines from adjacent facilities attach to the transformer dead end towers.
4. Westwing 230 kv Switchyard
4.1 The original Westwing 230 kv Switchyard (including common facilities), a basic breaker-and-a-half scheme, comprising termination facilities for the two 500/230 kv transformer banks, one Arizona 230 kv line and one future Arizona 230 kv line, two Salt River Project 230 kv lines, and two United States 230 kv lines, including, but not limited to, the 230 kv busses, power circuit breakers, metering transformers, disconnect switches, structures, insulators and hardware, 230 kv leads between points of attachment on the transformer dead-end towers to the main switchyard structures, 230 kv leads up to the points of attachment where the 230 kv transmission lines attach to the main switchyard structures, control building, and related land
7
APS CONTRACT NO. 48178
and land rights.
4.2 The Waddell 230 kv Interconnection comprising termination facilities for the Waddell 230 kv transmission line, including, but not limited to, power circuit breakers, metering transformers, disconnect switches, structures, turning tower, take-off structure, insulators and associated hardware, 230 kv conductor from its point of attachment on the first tower located outside the perimeter fence to the turning tower, 230 kv leads between the turning tower and the take-off structure, and the fiber optic cable between its termination point at the patch panel on the turning tower to the control house. In addition, the termination facilities for the Waddell 230 kv Interconnection shall be deemed to include the remote terminal unit (RTU) installed pursuant to Letter Agreement No. 87-BCA-10084, dated September 3,1987 between the United States of America, acting by and through the Western Area Power Administration, and the Arizona Public Service Company."
3.11 Exhibit B-B, Sheet 1, NAVAJO PROJECT CO-TENANCY AGREEMENT, TRANSMISSION SYSTEM OWNERSHIP, to the Co-Tenancy Agreement is hereby deleted in its entirety and replaced by a new Exhibit B-B, Sheet 1, attached hereto and by this reference is incorporated herein.
4 EFFECT:
Except for the changes set forth in this Amendment No. 3, all provisions of the Co-Tenancy Agreement as amended by Amendments No. 1 and 2 shall remain in full force and effect to the extent that such provisions of the Co-Tenancy Agreement as amended by Amendments No. 1 and 2 are not in conflict or inconsistent with this Amendment No. 3.
8
APS CONTRACT NO. 48178
5 EXECUTION AND EFFECTIVE DATE:
5.1 This Amendment No. 3 may be executed in any number of counterparts and, upon execution and delivery by each Participant, the executed and delivered counterparts together shall have the same force and effect as an original instrument as if all the Participants had signed the same instrument. Any signature page of this Amendment No. 3 may be detached from any counterpart of this Amendment No. 3 without impairing the legal effect of any signatures thereon, and may be attached to another counterpart of this Amendment No. 3 identical in form hereto, but having attached to it one or more signature pages.
5.2 When this Amendment No. 3 to the Co-Tenancy Agreement has been executed by, and delivered to the duly authorized representative of each Participant, Arizona shall promptly file this Amendment No. 3 with FERC and, if accepted for filing by FERC without condition or modification, it shall be effective as of the day of such acceptance. In the event FERC conditions or modifies this Amendment No. 3, Arizona shall promptly notify all the other Participants. Upon written notice given not less than thirty (30) days from the date of Arizona's notice to all the other Participants by any Participant that such condition or modification is objectionable, this Amendment No. 3 shall terminate and be of no further force or effect. If no written notice is given by any Participant that such condition or modification is objectionable within such thirty (30) day period, this Amendment No. 3 shall become effective the day after such thirty (30) day period.
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APS CONTRACT NO. 48178
6 SIGNATURE CLAUSE:
The signatories hereto represent that they have been appropriately authorized to enter into this Amendment No. 3 on behalf of the Participants for whom they sign. This Amendment No. 3 is hereby executed as of the 11th day of February, 1997.
UNITED STATES OF AMERICA

SIGNATURE  /s/ Authorized Signatory
          -----------------------------

NAME___________________________________	

TITLE Regional Director Lower Colorado Region U.S. Bureau of Reclamation
DATE SIGNED____________________________
ARIZONA PUBLIC SERVICE COMPANY

                                      SIGNATURE  /s/ Authorized Signatory
[STAMP]                                        ------------------------------
                                      NAME___________________________________	

TITLE__________________________________
DATE SIGNED____________________________
10
APS CONTRACT NO. 48178
DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
By

[STAMP]                               BOARD OF WATER AND POWER COMMISSIONERS
                                      OF THE CITY OF LOS ANGELES

                                      By  /s/ Authorized Signatory
                                          ---------------------------------
                                                    GENERAL MANAGER

                                      and /s/ Authorized Signatory
                                          ---------------------------------
                                                        Secretary

                                      NEVADA POWER COMPANY

                                      SIGNATURE   /s/ Steven W. Rigazio
                                               -----------------------------

                                      NAME Steven W. Rigazio

                                      TITLE Vice President, Finance and
                                             Planning, Treasurer and CFO

                                      DATE SIGNED June 21, 1996

[STAMP]                               SALT RIVER PROJECT AGRICULTURAL
                                      IMPROVEMENT AND POWER DISTRICT

                                      SIGNATURE /s/ Mark B. Bonsall
                                               ------------------------------

                                      NAME Mark B. Bonsall

                                      TITLE Associate General Manager

                                      DATE SIGNED July 25, 1996	

11
APS CONTRACT NO. 48178
TUCSON ELECTRIC POWER COMPANY
 (Formerly Tucson Gas & Electric Company)

SIGNATURE:  /s/ Steven J.  Glaser
           -----------------------------

NAME        Steven J. Glaser	

TITLE       Vice President

DATE SIGNED  February 23, 1996	

12
EXHIBIT B-B SHEET 1
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
[TRANSMISSION SYSTEM OWNERSHIP CHART]
APS CONTRACT NO. 51763
 DWP No. 10498
AMENDMENT NO. 4
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
By Federal Energy Regulatory Commission ("FERC") order/ notice of acceptance dated _____ . in FERC Docket No. _________, this Amendment No. 4 was accepted for filing and the rate schedules became effective on __________________, 19_____.
Execution Original
APS CONTRACT NO. 51763
AMENDMENT NO. 4
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
TABLE OF CONTENTS

1 PARTIES: ..........................................................  1

2 RECITALS: .........................................................  1

3 AMENDMENTS: .......................................................  3

4 EFFECT: ...........................................................  4

5 EXECUTION AND EFFECTIVE DATE: .....................................  4

6 SIGNATURE CLAUSE: .................................................  6	

i
APS CONTRACT NO. 51763
AMENDMENT NO. 4
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
1. PARTIES
1.1 The Parties to this AMENDMENT NO. 4 to the NAVAJO PROJECT CO-TENANCY
AGREEMENT ("Amendment No. 4") are: ARIZONA PUBLIC SERVICE COMPANY, hereinafter referred to as "Arizona", an Arizona corporation; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, hereinafter referred to as "Los Angeles", a department organized and existing by virtue of and under the Charter of the City of Los Angeles, a municipal corporation of the State of California; NEVADA POWER COMPANY, hereinafter referred to as "Nevada", a Nevada corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, hereinafter referred to as "SRP", an agricultural improvement district organized and existing under the laws of the State of Arizona; TUCSON ELECTRIC POWER COMPANY, hereinafter referred to as "Tucson", formerly known as Tucson Gas & Electric Company, an Arizona corporation; and THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States", acting through the Secretary of the Interior, his duly appointed successor or his duly authorized representative; all of the foregoing are sometimes individually referred to as "Participant" and collectively as "Participants".
2 RECITALS
This Amendment No. 4 is made with reference to the following facts, among others:
2.1 On March 23, 1976, the Participants entered into the NAVAJO PROJECT CO-TENANCY AGREEMENT ("Co-Tenancy Agreement"), which established certain terms and conditions relating to their interest in and their ownership of the Navajo Project and which established certain rights and obligations under the Project
1
APS CONTRACT NO.51763
Agreements.
2.2 On October 18, 1976, the Participants entered into SUPPLEMENT NO. 1 to the Co-Tenancy Agreement to clarify their intent to preserve, protect, and enhance the environment as provided in Section 29, ENVIRONMENTAL PROTECTION, of the Co-Tenancy Agreement.
2.3 On July 5, 1988, the Participants entered into AMENDMENT NO. 1 to the Co-Tenancy Agreement: i) to establish the Moenkopi Switchyard as a point of delivery for all parties; and ii) to reflect the sale of Arizona's rights, title, and ownership in the Westwing Substation 600 MVA 500/345 kv transformer bank to Tucson.
2.4 On June 14, 1996, the Participants entered into AMENDMENT NO. 2 to the Co-Tenancy Agreement to reflect: i) the interconnection of the United States' Waddell 230 kv transmission line at the United States' designated point of delivery in the Westwing Substation; ii) the change in the transformer ratings at the Westwing Substation;
iii) the interconnection of the United States' two 230 kv transmission lines in the Westwing 230 kv Switchyard; iv) the removal of the series capacitors installed on Arizona's Cholla-Pinnacle Peak 345 kv lines; and v) the deletion of certain project series capacitors from the project description.
2.5 On February 11, 1997, the Participants entered into AMENDMENT NO. 3 to the Co-Tenancy Agreement to reflect: i) the construction of the Yavapai Switchyard as a component of the Southern Transmission System; ii) new delivery points for Arizona. SRP, Tucson, and the United States; and iii) the interconnection of Arizona's Yavapai 230 kv Substation at the applicable Participants new delivery point in the Yavapai Switchyard.
2.6 On October 29, 1996, the Transmission Engineering and Operating Committee (E&O Committee) agreed that the Co-Tenancy Agreement shall be modified to comply with FERC's ORDER NO. 888, FINAL RULE, issued April 24, 1996 ("FERC 888").
2
APS CONTRACT NO. 51763
2.7 In addition, the Participants desire to revise outdated language which limits the Participants' rights to fully utilize the Transmission System.
2.8 Now, therefore, the Participants desire to further amend the Co-Tenancy Agreement as set forth herein to reflect: i) the revision or deletion of existing language in order to comply with FERC 888; and ii) the revision of outdated language which limits the Participants' rights to fully utilize the Transmission System.
3 AMENDMENTS:
3.1 Section 8.1 of Section 8, USE OF THE TRANSMISSION SYSTEM, of the Co- Tenancy Agreement is hereby deleted in its entirety and a new
Section 8.1 is hereby substituted to read in its entirety as follows:
"8.1 Each Participant shall have the right to use the Transmission System to transmit to its designated delivery points under normal operating conditions Power in an amount equivalent to the product of its cost responsibility in each line segment of the Transmission System and the associated rating (WSCC approved or E&O Committee approved, as applicable), of such line segment or to reserve the Transmission System for such transmission without regard to the origin, source, ownership or type of generation used to produce such Power."
3.2 Section 8.8 of Section 8, USE OF THE TRANSMISSION SYSTEM, of the Co- Tenancy Agreement is hereby deleted in its entirety and a new
Section 8.8 is hereby substituted to read in its entirety as follows:
"8.8 Unless otherwise agreed by the Transmission Engineering and Operating Committee, when the Capacity available to the Participants in any segment of the Transmission System is insufficient to accommodate all the firm use of the Transmission System pursuant to
Section 8.1 hereof, then the use of the available Capacity of that segment of the Transmission System will be allocated in proportion to
3
APS CONTRACT NO. 51763
the Participants' cost responsibility in such segment."
4 EFFECT:
Except for the changes set forth in this Amendment No. 4, all provisions of the Co-Tenancy Agreement as amended by Amendments No. 1,2 and 3 shall remain in full force and effect to the extent that such provisions of the Co-Tenancy Agreement as amended by Amendments No. 1,2 and 3 are not in conflict or inconsistent with this Amendment No. 4. In the event of any conflict between the provisions of this Amendment No. 4 and the Co-Tenancy Agreement as amended, the provisions of Amendment No. 4 shall govern.
5 EXECUTION AND EFFECTIVE DATE
5.1 This Amendment No. 4 may be executed in any number of counterparts and, upon execution and delivery by each Participant, the executed and delivered counterparts together shall have the same force and effect as an original instrument as if all the Participants had signed the same instrument. Any signature page of this Amendment No. 4 may be detached from any counterpart of this Amendment No. 4 without impairing the legal effect of any signatures thereon, and may be attached to another counterpart of this Amendment No. 4 identical in form hereto, but having attached to it one or more signature pages.
5.2 When this Amendment No. 4 to the Co-Tenancy Agreement has been executed by, and delivered to, the duly authorized representative of each Participant, Arizona shall promptly file this Amendment No. 4 with FERC and, if accepted for filing by FERC without condition or modification, it shall be effective as of the day of such acceptance. In the event FERC conditions or modifies this Amendment No. 4, Arizona shall promptly notify all the other Participants. Upon written notice given not less than thirty (30) days from the date of Arizona's notice to all the other Participants by any
4
APS CONTRACT NO. 51763
Participant that such condition or modification is objectionable, this Amendment No. 4 shall terminate and be of no further force or effect. If no written notice is given by any Participant that such condition or modification is objectionable within such thirty (30) day period, this Amendment No. 4 shall become effective the day after such thirty (30) day period.
5
APS CONTRACT NO. 51763
SIGNATURE CLAUSE:
The signatories hereto represent that they have been appropriately authorized to enter into this Amendment No. 4 on behalf of the Participants for whom they sign. This Amendment No. 4 is hereby executed as of the 21st day of January, 1997.
UNITED STATES OF AMERICA

                   SIGNATURE /s/ Blaine D. Hamann
                             ----------------------------------------
                   NAME    Blaine D. Hamann
                           Regional Director
ACTING FOR                 Lower Colorado Region	

TITLE U.S. Bureau of Reclamation
DATE SIGNED [ILLEGIBLE]
ARIZONA PUBLIC SERVICE COMPANY

                              SIGNATURE /s/ CARY B. DEISE
[STAMP]                                 ----------------------------------------
                              NAME          CARY B. DEISE	

TITLE Director Transmission Operations & Planning
DATE SIGNED December 17, 1996
6
 
AUTHORIZED BY RES. 97 149 JAN 21, 1997
APS CONTRACT NO. 51763
DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES

                                        By

APPROVED AS TO FORM AND LEGALITY
  JAMES K. HAHN, CITY ATTORNEY          BOARD OF WATER AND POWER
                                        COMMISSIONERS
    JAN 02 1997                         OF THE CITY OF LOS ANGELES

By /s/ Richard M. Helgeson
   -----------------------------
       RICHARD M. HELGESON
       Assistant City Attorney
                                        By /s/ William R. McCarley
                                           ------------------------------------
                                           William R. McCarley, General  Manager

                                        and  Authorized Signatory
                                            -----------------------------------
                                                      Secretary

                                        NEVADA POWER COMPANY

                                        SIGNATURE /s/ Steven W. Rigazio
                                                  -----------------------------
                                        NAME  Steven W. Rigazio

                                        TITLE Vice President, Finance and

                                              Planning, Treasurer and CFO

                                        DATE SIGNED December 11, 1996

                                        SALT RIVER PROJECT AGRICULTURAL
                                        IMPROVEMENT AND POWER DISTRICT

                                        SIGNATURE /s/ Mark B.Bonsall
                                                  -----------------------------
                                        NAME  MARK B.BONSALL

                                        TITLE ASSOCIATE GENERAL MANAGER

                                        DATE SIGNED  DECEMBER 30, 1996	

7
APS CONTRACT NO. 51763
TUCSON ELECTRIC POWER COMPANY
 (Formerly Tucson Gas & Electric Company)

SIGNATURE /s/ Authorized Signatory
          --------------------------------
NAME	

TITLE Manager, System Control
DATE SIGNED December 20, 1996
8
AMENDMENT NO. 5
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
By FERC order/notice of acceptance dated ___________________ in FERC
Docket No. ______, this Amendment No. 5 was accepted for filing and the
rate schedules became effective on _____________________.
EXECUTION ORIGINAL
January 23, 1998
AMENDMENT NO. 5
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
TABLE OF CONTENTS

         SECTION                                                PAGE
         -----------------------------------------------        ----

1.       PARTIES .......................................         1

2.       RECITALS ................... ....... ... ......         1

3.       AGREEMENT ............ ..... .. .... ..........         3

4.       AGREEMENT MODIFICATIONS ................ ......         4

5.       EFFECT ........................ ...............        14

6.       EXECUTION AND EFFECTIVE DATE ..... .. . ......         15

7.       SIGNATURE CLAUSE ...................... .......        16	

EXHIBITS
--------
B-B             TRANSMISSION SYSTEM OWNERSHIP

 D              ORIGINAL WESTWING 230 KV SWITCHYARD OWNERSHIP PERCENTAGES

 E              McCULLOUGH 500 KV SWITCHYARD OWNERSHIP PERCENTAGES

 F              McCULLOUGH SUBSTATION COMMON FACILITIES OWNERSHIP PERCENTAGES
                (500 KV PORTION ONLY)	

i
AMENDMENT NO. 5
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
1. PARTIES: The parties to this AMENDMENT NO. 5 to the NAVAJO PROJECT CO-TENANCY AGREEMENT ("Amendment No. 5") are: THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States," acting through the Secretary of the Interior, a duly appointed successor or a duly authorized representative; ARIZONA PUBLIC SERVICE COMPANY, hereinafter referred to as "Arizona," an Arizona corporation; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, hereinafter referred to as "Los Angeles," a department organized and existing by virtue of and under the Charter of the City of Los Angeles, a municipal corporation of the State of California; NEVADA POWER COMPANY, hereinafter referred to as "Nevada," a Nevada corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, hereinafter referred to as "Salt River Project" or "SRP," an agricultural improvement district organized and existing under the laws of the State of Arizona; and TUCSON ELECTRIC POWER COMPANY, hereinafter referred to as "Tucson," formerly known as Tucson Gas & Electric Company, an Arizona corporation; all of the foregoing are sometimes individually referred to as "Participant" and collectively as "Participants."
2. RECITALS: This Amendment No. 5 is made with reference to the following facts, among others:
2.1 On March 23, 1976, the Participants entered into the NAVAJO PROJECT CO-TENANCY AGREEMENT ("Co-Tenancy Agreement") which established certain terms and conditions relating to their interest in and their ownership of the Navajo Project and which
1
established certain rights and obligations under the Project Agreements.
2.2 On October 18, 1976, the Participants entered into SUPPLEMENT NO. 1 to the Co-Tenancy Agreement ("Supplement No. 1") to clarify their intent to preserve, protect, and enhance the environment as provided in Section 29, ENVIRONMENTAL PROTECTION, of the Co-Tenancy Agreement.
2.3 On July 5, 1988, the Participants entered into AMENDMENT NO. 1 to the Co-Tenancy Agreement ("Amendment No. 1") to: (i) establish the Moenkopi Switchyard as a point of delivery for all Participants; and (ii) reflect the sale of Arizona's rights, title, and ownership in the Westwing Substation 600 MVA 500/345 kV transformer bank to Tucson.
2.4 On June 14, 1996, the Participants entered into AMENDMENT NO. 2 to the Co-Tenancy Agreement ("Amendment No. 2") to reflect:
(i) the interconnection of the United States' Waddell 230 kV transmission line at the United States' designated point of delivery in the Westwing Substation; (ii) the change in the transformer ratings at the Westwing Substation; (iii) the interconnection of the United States' two 230 kV transmission lines in the Westwing 230 kV Switchyard; (iv) the removal of the series capacitors installed on Arizona's Cholla-Pinnacle Peak 345 kV lines; and (v) the deletion of certain project series capacitors from the project description.
2.5 On February 11, 1997, the Participants entered into AMENDMENT NO. 3 to the Co-Tenancy Agreement ("Amendment No. 3") to reflect: (i) the construction of the Yavapai Switchyard as a component of the Southern Transmission System; (ii) new delivery points for
2
Arizona, SRP, Tucson, and the United States; and (iii) the interconnection of Arizona's Yavapai 230 kV Substation at the applicable Participant's new delivery point in the Yavapai Switchyard.
2.6 On January 21, 1997, the Participants entered into AMENDMENT NO. 4 to the Co-Tenancy Agreement ("Amendment No. 4") to reflect: (i) the revision/deletion of existing language in order to comply with FERC's Order No, 888, Final Rule, issued April 24, 1996; and (ii) the revision of outdated language which limited the ability of the Participants to fully utilize the Transmission System.
2.7 The Participants desire to enter into this Amendment No. 5 to reflect: (i) the change in the ownership interests, as tenants in common, for the McCullough 500 kV Switchyard and the McCullough Substation Common Facilities; (ii) the interconnection of the Marketplace 500 kV Tie-Line at the McCullough 500 kV Switchyard;
(iii) the interconnection of the Victorville Line 2 at the McCullough 500 kV Switchyard; (iv) the interconnection of the 500/230 kV transformer banks H and I at the McCullough 500 kV Switchyard; (v) the addition of a calculation of ownership percentages for the original Westwing 230 kV Switchyard, the McCullough 500 kV Switchyard and the McCullough Substation Common Facilities; and (vi) the clarification of descriptions for the McCullough 500 kV Switchyard, the Navajo 500 kV Switchyard, the Moenkopi Switchyard, the Yavapai Switchyard, the Westwing 500 kV Switchyard and the original Westwing 230 kV Switchyard.
3. AGREEMENT: In consideration of the mutual covenants and benefits to be derived from this Amendment No. 5, the Participants agree as follows:
3
4. AGREEMENT MODIFICATIONS:
4.1 The electric utility abbreviations "kv" and "KV" as used throughout the Co-Tenancy Agreement are hereby deleted and the new electric utility abbreviation "kV" is hereby substituted for each occurrence thereof.
4.2 The list of exhibits on page iii of the Table of Contents to the Co-Tenancy Agreement is hereby deleted in its entirety and a new list of exhibits is hereby substituted to read in its entirety as follows:
"EXHIBITS
A NAVAJO GENERATING STATION
B TRANSMISSION SYSTEM
B-B TRANSMISSION SYSTEM OWNERSHIP
C NAVAJO PROJECT GENERAL PROVISIONS
D ORIGINAL WESTWING 230 KV SWITCHYARD (INCLUDING COMMON FACILITIES) OWNERSHIP PERCENTAGES
E McCULLOUGH 500 KV SWITCHYARD OWNERSHIP PERCENTAGES
F McCULLOUGH SUBSTATION COMMON FACILITIES OWNERSHIP PERCENTAGES (500 KV PORTION ONLY)"
4.3 A new Subsection 5.15A is hereby inserted after Subsection 5.15 in
Section 5, DEFINITIONS, to the Co-Tenancy Agreement and the new Subsection 5.15A shall read in its entirety as follows:
"5.15A CO-TENANCY AGREEMENT: This Navajo Project Co-Tenancy Agreement."
4.4 A new Subsection 5.21A is hereby inserted after Subsection 5.21 in
Section 5, DEFINITIONS, to the Co-Tenancy Agreement and the new Subsection 5.21A shall read in its entirety as follows:
4
"5.21A McCULLOUGH SUBSTATION: An electrical substation (also referred to by the Operating Agent as the McCullough Switching Station), located in southern Nevada, consisting of the McCullough Facilities as defined in Exhibit B hereto, the McCullough 230 kV switchyard, and all appurtenant facilities thereto. The McCullough Substation shall not include the land held by Los Angeles under Bureau of Land Management Grant No. N-2763, dated January 23, 1969 and expiring on January 22, 2019, hereinafter referred to as the "McCullough Substation Site," which land comprises the site of such station."
4.5 Paragraph 6.2.5 of Section 6, OWNERSHIPS AND TITLES, of the Co- Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 6.2.5 is hereby substituted to read in its entirety as follows:
"6.2.5 Westwing 230 kV Switchyard
6.2.5.1 Original Westwing 230 kV Switchyard (including common facilities)
(i) Arizona = 32.1%
(ii) SRP = 36.1% for its own use and benefit; and
= 31.8% for the use and benefit of the United States in accordance with Project Agreements.
5
The calculation of ownership percentages for the original Westwing 230 kV Switchyard shall be as set forth in Exhibit D hereto.
6.2.5.2 Waddell 230 kV Interconnection

SRP   =  100.0% for the use and benefit of the
           United States in accordance with Project
           Agreements."	

4.6 Paragraph 6.2.8 of Section 6, OWNERSHIPS AND TITLES, of the Co- Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 6.2.8 is hereby substituted to read in its entirety as follows:
"6.2.8 McCullough 500 kV Switchyard
(i) Los Angeles = 70.1%
(ii) Nevada = 17.4%
(iii) SRP = 12.5% for the use and benefit of the United States in accordance with Project Agreements.
The calculation of ownership percentages for the McCullough 500 kV Switchyard shall be as set forth in Exhibit E hereto."
4.7 Paragraph 6.2.9 of Section 6, OWNERSHIPS AND TITLES, of the Co- Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 6.2.9 is hereby substituted to read in its entirety as follows:
6
"6.2.9 McCullough Substation Common Facilities (500 kV portion only)
(i) Los Angeles = 70.1%
(ii) Nevada = 17.4%
(iii) SRP = 12.5% for the use and benefit of the United States in accordance with Project Agreements
The calculation of ownership percentages for the McCullough Substation Common Facilities shall be as set forth in Exhibit F hereto."
4.8 Subsection 8.11 of Section 8, USE OF THE TRANSMISSION SYSTEM, of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Subsection 8.11 is hereby substituted to read in its entirety as follows:
"8.11 Notwithstanding the provisions of this Section 8, Los Angeles shall have the right to use the McCullough Facilities or to interconnect its transmission system therewith for purposes other than those of the Navajo Project established pursuant to the Project Agreements; provided, that such use or interconnection shall not unreasonably interfere with the rights, titles or interests of the other Participants in the Transmission System as established pursuant to the Project Agreements."
4.9 Subsection 15.4 of Section 15, CAPITAL IMPROVEMENTS, of the Co- Tenancy Agreement is hereby deleted in its entirety and a new
7
Subsection 15.4 is hereby substituted to read in its entirety as follows:
"15.4 Capital Improvements made to the Transmission System shall be owned by the Participants in percentage ownership interests in proportions equal to their construction cost responsibilities for such Capital Improvements; provided, that title to the interest of the United States in any such Capital Improvements shall be held by SRP for the use and benefit of the United States."
4.10 Subsection 35.3 of Section 35, COMPLIANCE WITH COMPACTS, of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Subsection 35.3 is hereby substituted to read in its entirety as follows:
"35.3 It is the intention of the Participants that each of the Upper Basin States shall be a third party beneficiary of the terms and conditions of this Section 35."
4.11 Subsection A, NAVAJO 500 KV SWITCHYARD, in Section I, SOUTHERN
TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co- Tenancy Agreement is hereby deleted in its entirety and a new Subsection A is hereby substituted to read in its entirety as follows:
"A. NAVAJO 500 KV SWITCHYARD
The Navajo 500 kV Switchyard, a basic breaker-and-a-half scheme, comprising: (i) the 500 kV busses and the structures therefor; (ii) the control building; (iii) the termination facilities for three (3) generator step-up
8
transformers, one (1) station service transformer, the Navajo-McCullough 500 kV line, the Navajo-Moenkopi 500 kV line, and the Navajo-Westwing 500 kV line including, but not limited to, power circuit breakers, disconnect switches, and the structures therefor; and (iv) relays."
4.12 Paragraph 1 of Subsection F, OTHER ASSOCIATED COMPONENTS, in Section
I, SOUTHERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 1 is hereby substituted to read in its entirety as follows:
"1. The additions to the Moenkopi Switchyard comprising: (i) the additional 500 kV busses and the structures therefor; (ii) the termination facilities for the Navajo-Moenkopi 500 kV line and the Moenkopi-Yavapai 500 kV line including, but not limited to, power circuit breakers, disconnect switches, and the structures therefor; (iii) the additions to the termination facilities for the Four Corners-Moenkopi 500 kV line and the Moenkopi-Eldorado 500 kV line including, but not limited to, power circuit breakers, disconnect switches, and the structures therefor; and (iv) relays."
4.13 Subsection G, YAVAPAI SWITCHYARD, in Section I, SOUTHERN
TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co- Tenancy Agreement is hereby deleted in its entirety and a new Subsection G is hereby substituted to read in its entirety as follows:
9
"G, YAVAPAI SWITCHYARD
The Yavapai Switchyard, a basic ring bus scheme, comprising:
(i) the 500 kV busses and the structures therefor; (ii) the termination facilities for a 500/230 kV transformer bank, the Moenkopi-Yavapai 500 kV line, and the Yavapai-Westwing 500 kV line including, but not limited to, power circuit breakers, disconnect switches, and the structures therefor; (iii) relays; (iv) common facilities; and (v) other facilities up to and including the connection to the high-side bushings of the 500/230 kV transformer bank. The Yavapai Switchyard common facilities include, but are not limited to, roads, trenches and conduit for system control and power cables, station grounding grid, overhead static shield, fencing and gates, yard lighting, maintenance and control buildings, station batteries, chargers and distribution panels, station power transformers and distribution panels, remote terminal units, digital fault recorders, alarms, annunciators, public address system, communications equipment, and related land or land rights."
4.14 Paragraph 1 of Subsection I, WESTWING SUBSTATION, in Section I,
SOUTHERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 1 is hereby substituted to read in its entirety as follows:
10
"1. The Westwing 500 kV Switchyard, a basic breaker-and-a-half scheme, comprising: (i) the 500 kV busses and the structures therefor; (ii) the termination facilities for two (2) 500/230 kV transformer banks, one (l) 500/345 kV transformer bank, the Yavapai-Westwing 500 kV line, and the Navajo-Westwing 500 kV line including, but not limited to, power circuit breakers, metering transformers, disconnect switches, and the structures therefor; (iii) relays; (iv) the control building; and (v) related land and land rights."
4.15 Subparagraph 4.1 of Paragraph 4, Westwing 230 kV Switchyard, of Subsection I, WESTWING SUBSTATION, in Section I, SOUTHERN
TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co- Tenancy Agreement is hereby deleted in its entirety and a new Subparagraph 4.1 is hereby substituted to read in its entirety as follows:
"4.1 The original Westwing 230 kV Switchyard (including common facilities), a basic breaker-and-a-half scheme, comprising:
(i) the 230 kV busses and the structures therefor; (ii) the termination facilities for two (2) 500/230 kV transformer banks, one Arizona 230 kV line and one future Arizona 230 kV line, two SRP 230 kV lines, and two United States 230 kV lines including, but not limited to, power circuit breakers, metering transformers, disconnect switches, insulators and hardware, the 230 kV leads between points of attachment on the transformer dead-end towers to the main switchyard structures, the
11
230 kv leads up to the points of attachment where the 230 kV transmission lines attach to the main switchyard structures, and the structures therefor; (iii) relays; (iv) the control building; and (v) related land or land rights."
4.16 Subsection A, McCULLOUGH SUBSTATION, in Section II, WESTERN
TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co- Tenancy Agreement is hereby deleted in its entirety and a new Subsection A is hereby substituted to read in its entirety as follows:
"A, McCOLLOUGH FACILITIES
The McCullough Facilities shall consist of the following components:
1. The McCullough 500 kv Switchyard, a basic breaker-and- a-half scheme, comprising: (i) the 500 kV busses and the structures therefor; (ii) the termination facilities for the 500/230 kV transformer banks H, I and J, the Navajo-McCullough 500 kv line, the McCullough-Eldorado 500 kV line, and the McCullough- Victorville 500 kV Line 1 and Line 2 including, but not limited to, power circuit breakers, disconnect switches, and the structures therefor; and (iii) other facilities up to and including the connection to the high-side bushings of the 500/230 kV transformer banks. The McCullough 500 kV Switchyard shall not include: (i) the McCullough Substation Site; (ii) any termination facilities associated with a third party
interconnection; (iii) any McCullough Substation Common Facilities; or (iv) any 500/230 kV transformer banks located at the McCullough Substation.
2. The McCullough Substation Common Facilities, all or part of those certain structures, improvements and facilities of the McCullough Substation, which include, but are not limited to: dikes, roadways, control building, communications building, ancillary buildings, trenches, conduits, control and power cables, control equipment, station communication equipment, protection equipment, batteries, auxiliary equipment, station grounding grid, fencing, lighting and yard improvements, and any other facilities that provide support for the McCullough Substation.
McCullough Substation Common Facilities shall not include: (i) the McCullough Substation Site; (ii) any termination facilities associated with any line or transformer termination at the McCullough Substation; or
(iii) any 500/230 kV transformer banks located at the McCullough Substation."
4.17 Paragraph 1 of Subsection B, NAVAJO-McCULLOUGH 500 KV LINE, in
Section II, WESTERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 1 is hereby substituted to read in its entirety as follows:
"1. The Navajo-McCullough 500 kV line, from and including the first 500 kV line dead-end tower located outside the Navajo
13
500 kV Switchyard to a similar tower location outside the McCullough 500 kV Switchyard, including the Patrol headquarters and the Navajo-McCullough 500 kV line right-of-way. "
4.18 Exhibit B-B, TRANSMISSION SYSTEM OWNERSHIP, to the Co-Tenancy Agreement is hereby deleted in its entirety and replaced by a new Exhibit B-B attached hereto and by this reference incorporated herein.
4.19 A new Exhibit D, ORIGINAL WESTWING 230 KV SWITCHYARD (INCLUDING COMMON FACILITIES) OWNERSHIP PERCENTAGES, attached hereto and by this reference incorporated herein, is hereby appended to the Co-Tenancy Agreement.
4.20 A new Exhibit E, McCULLOUGH 500 KV SWITCHYARD OWNERSHIP PERCENTAGES, attached hereto and by this reference incorporated herein, is hereby appended to the Co-Tenancy Agreement.
4.21 A new Exhibit F, McCULLOUGH SUBSTATION COMMON FACILITIES OWNERSHIP PERCENTAGES (500 KV PORTION ONLY), attached hereto and by this reference incorporated herein, is hereby appended to the Co-Tenancy Agreement.
5. EFFECT: Except for the changes set forth in this Amendment No. 5, all provisions of the Co-Tenancy Agreement as supplemented by Supplement No. 1 and as amended by Amendment Nos. 1, 2, 3 and 4 shall remain in full force and effect to the extent that such provisions are not in conflict or inconsistent with this Amendment No. 5. In the event of any conflict between the provisions of this Amendment No. 5 and the Co-Tenancy Agreement as supplemented by Supplement No. 1 and as amended by
14
Amendment Nos. 1, 2, 3 and 4, the provisions of this Amendment No. 5 shall govern.
6. EXECUTION AND EFFECTIVE DATE:
6.1 This Amendment No. 5 may be executed in any number of counterparts and, upon execution and delivery by each Participant, the executed and delivered counterparts together shall have the same force and effect as an original instrument as if all the Participants had signed the same instrument. Any signature page of this Amendment No. 5 may be detached from any counterpart of this Amendment No. 5 without impairing the legal effect of any signatures thereon, and may be attached to another counterpart of this Amendment No. 5 identical in form thereto, but having attached to it one or more signature pages.
6.2 When this Amendment No. 5 to the Co-Tenancy Agreement has been executed by, and delivered to, the duly authorized representative of each Participant, Nevada shall promptly file this Amendment No. 5 with the Federal Energy Regulatory Commission ("FERC") and, if accepted for filing by FERC without condition or modification, this Amendment No. 5 shall be effective as of the date specified by Nevada in the filing letter to FERC.
6.3 In the event FERC conditions or modifies this Amendment No. 5, Nevada shall promptly notify all the other Participants. Upon written notice given within thirty (30) days from the date of Nevada's notice to all other Participants by any Participant that such condition or modification is objectionable, this Amendment No. 5 shall terminate and be of no further force or effect. If no written notice is given by any Participant that such condition or
15
modification is objectionable within such thirty (30) day period, this Amendment No. 5 shall become effective the day after such thirty (30) day period.
7. SIGNATURE CLAUSE: Each Participant hereto represents and warrants that the person executing this Amendment No. 5 to the Navajo Project Co-Tenancy Agreement has been duly authorized to act on its behalf. This Amendment No. 5 to the Navajo Project Co-Tenancy Agreement is hereby executed as of the 4th day of September, 1998.
UNITED STATES OF AMERICA

Signature /s/ LeGrand Neilson
          ---------------------------------

Name      LeGrand Neilson	

Regional Director ACTING FOR Lower Colorado Region
Title U.S. Bureau of Reclamation
Date Signed September 4, 1998
ARIZONA PUBLIC SERVICE COMPANY

[STAMP]                           Signature /s/ Jack Davis
                                            ----------------------------------
                                  Name      Jack Davis	

Title Executive V. P.

Commercial Operation
Date Signed 3/16/98
16
[ILLEGIBLE]
DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
by
BOARD OF WATER AND POWER COMMISSIONERS
OF THE CITY OF LOS ANGELES

APPROVED AS TO FORM AND LEGALITY   By /s/ Authorized Signatory
   JAMES K. HAHN CITY ATTORNEY        -----------------------------------------
                                          S. DAVID FREEMAN, General Manager
      MAY 13 1998
                                   and /s/ Authorized Signatory
By   /s/ Kjehl T. Johansen             ----------------------------------------
  ---------------------------------               Secretary
        KJEHL T JOHANSEN
      DEPUTY CITY ATTORNEY         Date Signed    Jun 16 1998	

NEVADA POWER COMPANY

Signature /s/ Authorized Signatory
          ----------------------------------

Name      Authorized Signatory	

Title Vice President, Finance and Planning, Treasurer and CFO
Date Signed 2/26/98
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT

 APPROVED AS TO FORM            Signature  /s/ Mark B. Bonsall
 [ILLEGIBLE]                               ---------------------------------

By  /s/ Authorized Signatory    Name       Mark B. Bonsall
    ------------------------

DATE  2.13.98                   Title      Associate General Manager	

Date Signed 02/20/98
TUCSON ELECTRIC POWER COMPANY

Signature   /s/ Authorized Signatory
            --------------------------------

Name        T. A. Authorized Signatory	

Title       Vice President

Date Signed       3-20-98	

17
EXHIBIT B-B, SHEET 1
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
[TRANSMISSION SYSTEM OWNERSHIP CHART]
BB-1
EXHIBIT B-B, SHEET 2
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
NAVAJO GENERATING STATION
AND
NAVAJO 500 KV SWITCHYARD
[CIRCUIT DIAGRAM]
BB-2
EXHIBIT B-B, SHEET 3
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
MOENKOPI 500 KV SWITCHYARD
AND
YAVAPAI 500 KV SWITCHYARD
[CIRCUIT DIAGRAM]
BB-3
EXHIBIT B-B, SHEET 4
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
WESTWING SUBSTATION
[CIRCUIT DIAGRAM]
BB-4
EXHIBIT B-B, SHEET 5
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
McCULLOUGH SUBSTATION
[CIRCUIT DIAGRAM]
BB-5
EXHIBIT D
ORIGINAL WESTWING 230 KV SWITCHYARD (INCLUDING COMMON FACILITIES)
OWNERSHIP PERCENTAGES

                                                      OWNERSHIP (%)
                                        ----------------------------------------
                                                                 SRP FOR
DESCRIPTION OF TERMINATION              ARIZONA        SRP    UNITED STATES(1)
---------------------------------       -------       -----   ----------------
500/230 kV Transformer Bank T1(2)          28.5        44.2        27.3
500/230 kV Transformer Bank T4(2)          28.5        44.2        27.3
Westwing- Pinnacle Peak                     0.0       100.0         0.0
Westwing-Agua Fria                          0.0       100.0         0.0
Westwing- Pinnacle Peak                     0.0         0.0       100.0
Westwing- Liberty                           0.0         0.0       100.0
Westwing-Surprise                         100.0         0.0         0.0
Westwing-APS (future)                     100.0         0.0         0.0
                                        -------       -----   ---------
TOTAL                                     257.0       288.4       254.6	

Sum of Ownership Percentages:
Arizona + SRP + SRP for United States(1) = 257.0 + 288.4 + 254.6 = 800.0
Ownership percentages for the terminations in the original Westwing 230 kV Switchyard (including common facilities) are shown in the above table and are used below to determine the ownership percentages for the original Westwing 230 kV Switchyard (including common facilities) infrastructure facilities such as, but not limited to, the busses, bus protection and metering, steel switchracks and associated concrete works, cable trenches and grounding.
Arizona = (257.0/800.0) x 100% = 32.1% SRP = (288.4/800.0) x 100% = 36.1% SRP for United States(1) = (254.6/800.0) x 100% = 31.8%
(1) SRP holds title for the use and benefit of the United States, Department of the Interior (Bureau of Reclamation).
(2) Ownership percentages for the two Westwing 500/230 kV transformer banks are set forth in Paragraph 6.2.3 of Section 6, OWNERSHIPS AND TITLES, to the Navajo Project Co-Tenancy Agreement.
NOTE: The calculation of ownership percentages for the original Westwing 230 kV Switchyard (including common facilities) shall not include any third party terminations at such switchyard or the United States' Waddell 230 kV Interconnection.
D-1
 
EXHIBIT E
MCCULLOUGH 500 KV SWITCHYARD OWNERSHIP PERCENTAGES

                                                 OWNERSHIP (%)
                                        -------------------------------
                                                                SRP FOR
                                          LOS                    UNITED
DESCRIPTION OF TERMINATION              ANGELES     NEVADA      STATES*
------------------------------          -------     ------      -------
Banks H and I 500 kV                      0.00       50.00       50.00
Navajo-McCullough                        48.90       26.10       25.00
Bank J 500 kV                            71.67       28.33        0.00
McCullough-Victorville Line 1           100.00        0.00        0.00
McCullough-Eldorado                     100.00        0.00        0.00
McCullough-Victorville Line 2           100.00        0.00        0.00
                                        -------     ------      -------
TOTAL                                   420.57      104.43       75.00	

Sum of Ownership Percentages:

Los Angeles + Nevada + SRP for United States* = 420.57 + 104.43 + 75.00
                                              = 600.00	

Ownership percentages for the terminations in the McCullough 500 kV Switchyard are shown in the above table and are used below to determine the ownership percentages for the McCullough 500 kV Switchyard infrastructure facilities such as, but not limited to, the busses, bus protection and metering, steel switchracks and associated concrete works, cable trenches and grounding.

Los Angeles            = (420.57/600.00) x 100% = 70.1%
Nevada                 = (104.43/600.00) x 100% = 17.4%
SRP for United States* = ( 75.00/600.00) x 100% = 12.5%	

* SRP holds title for the use and benefit of the United States, Department of the Interior (Bureau of Reclamation).
NOTE: The calculation of ownership percentages for the McCullough 500 kV Switchyard shall not include any third party terminations at such switchyard.
Dated:[ILLEGIBLE]
E-1
EXHIBIT F
McCULLOUGH SUBSTATION COMMON FACILITIES OWNERSHIP PERCENTAGES
 (500 KV PORTION ONLY)
Ownership of the McCullough Substation Common Facilities shall be split between the McCullough 230 kV switchyard (currently 9 terminations) and the McCullough 500 kV Switchyard (currently 6 terminations) based on the ratio of the number of terminations in said switchyard to the total number of terminations in both switchyards (currently 15 terminations(1)).
McCullough 230 kV switchyard: 9/15 = 0.60 or 60%
McCullough 500 kV Switchyard: 6/15 = 0.40 or 40%

                          500 kV Ownership Percentages
                                       for
                    McCullough Substation Common Facilities

Los Angeles       (420.57(2)/600.00(2)) X 100% = 70.1%

Nevada            (104.43(2)/600.00(2)) X 100% = 17.4%

SRP for
United States(3)  ( 75.00(2)/600.00(2)) X 100% = 12.5%	

(1) The calculation of the 500 kV ownership percentages for the McCullough Substation Common Facilities shall not include any third party terminations at the McCullough 500 kV Switchyard.
(2) Numbers used in the calculation of the 500 kV ownership percentages are taken from Exhibit E hereto.
(3) SRP holds title for the use and benefit of the United States, Department of the Interior (Bureau of Reclamation).
F-1
[SEAL]
AMENDMENT NO. 6
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
By FERC order/notice of acceptance dated ______________ in FERC Docket No. ____________, this Amendment No. 6 was accepted for filing and the rate schedules became effective on _______________.
EXECUTION ORIGINAL
July 31, 1998
AMENDMENT NO. 6
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
TABLE OF CONTENTS

       SECTION                                                  PAGE
       -------                                                  ----
1.     PARTIES ............................................       1

2.     RECITALS ...........................................       1

3.     AGREEMENT ..........................................       5

4.     AGREEMENT MODIFICATIONS ............................       5

5.     EFFECT .............................................      13

6.     EXECUTION AND EFFECTIVE DATE .......................      14

7.     SIGNATURE CLAUSE ...................................      15	

EXHIBITS
--------
B-B, SHEET 1   TRANSMISSION SYSTEM OWNERSHIP

B-B, SHEET 2   TRANSMISSION SYSTEM OWNERSHIP - NAVAJO GENERATING STATION AND
               NAVAJO 500 KV  SWITCHYARD

B-B, SHEET 4   TRANSMISSION SYSTEM OWNERSHIP - WESTWING SUBSTATION

B-B, SHEET 5   TRANSMISSION SYSTEM OWNERSHIP - McCULLOUGH SUBSTATION

B-B, SHEET 6   TRANSMISSION SYSTEM OWNERSHIP - CRYSTAL SUBSTATION

 E             McCULLOUGH 500 KV SWITCHYARD OWNERSHIP PERCENTAGES

 G             CRYSTAL 500 KV SWITCHYARD OWNERSHIP PERCENTAGES

 H             CRYSTAL SUBSTATION COMMON FACILITIES OWNERSHIP PERCENTAGES	

AMENDMENT NO. 6
TO THE
NAVAJO PROJECT
CO-TENANCY AGREEMENT
1. PARTIES: The parties to this AMENDMENT NO. 6 to the NAVAJO PROJECT CO- TENANCY AGREEMENT ("Amendment No. 6") are: THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States," acting through the Secretary of the Interior, a duly appointed successor or a duly authorized representative; ARIZONA PUBLIC SERVICE COMPANY, hereinafter referred to as "Arizona," an Arizona corporation; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, hereinafter referred to as "Los Angeles," a department organized and existing by virtue of and under the Charter of the City of Los Angeles, a municipal corporation of the State of California; NEVADA POWER COMPANY, hereinafter referred to as "Nevada," a Nevada corporation; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, hereinafter referred to as "Salt River Project" or "SRP," an agricultural improvement district organized and existing under the laws of the State of Arizona; and TUCSON ELECTRIC POWER COMPANY, hereinafter referred to as "Tucson," formerly known as Tucson Gas & Electric Company, an Arizona corporation; all of the foregoing are sometimes individually referred to as "Participant" and collectively as "Participants."
2. RECITALS: This Amendment No. 6 is made with reference to the following facts, among others:
2.1 On March 23, 1976, the Participants entered into the NAVAJO PROJECT CO-TENANCY AGREEMENT ("Co-Tenancy Agreement") which established certain terms and conditions relating to their interest in and their ownership of the Navajo Project and which established certain rights and obligations under the Project Agreements.
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2.2 On October 18, 1976, the Participants entered into SUPPLEMENT NO. 1 to the Co-Tenancy Agreement ("Supplement No. 1") to clarify their intent to preserve, protect, and enhance the environment as provided in Section 29, ENVIRONMENTAL PROTECTION, of the Co-Tenancy Agreement.
2.3 On July 5, 1988, the Participants entered into AMENDMENT NO. 1 to the Co-Tenancy Agreement ("Amendment No. 1") to: (i) establish the Moenkopi Switchyard as a point of delivery for all Participants; and
(ii) reflect the sale of Arizona's rights, title, and ownership in the Westwing Substation 600 MVA 500/345 kV transformer bank to Tucson.
2.4 On June 14, 1996, the Participants entered into AMENDMENT NO. 2 to the Co-Tenancy Agreement ("Amendment No. 2") to reflect: (i) the interconnection of the United States' Waddell 230 kV transmission line at the United States' designated point of delivery in the Westwing Substation; (ii) the change in the transformer ratings at the Westwing Substation; (iii) the interconnection of the United States' two 230 kV transmission lines in the Westwing 230 kV Switchyard; (iv) the removal of the series capacitors installed on Arizona's Cholla-Pinnacle Peak 345 kV lines; and (v) the deletion of certain project series capacitors from the project description.
2.5 On February 11, 1997, the Participants entered into AMENDMENT NO. 3 to the Co-Tenancy Agreement ("Amendment No. 3") to reflect: (i) the construction of the Yavapai Switchyard as a component of the Southern Transmission System; (ii) new delivery points for Arizona, SRP, Tucson, and the United States; and (iii) the interconnection of Arizona's Yavapai 230 kV Substation at the applicable Participant's new delivery point in the Yavapai Switchyard.
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2.6 On January 21, 1997, the Participants entered into AMENDMENT NO. 4 to the Co-Tenancy Agreement ("Amendment No. 4") to reflect: (i) the revision/deletion of existing language in order to comply with the Federal Energy Regulatory Commission's (FERC) Order No. 888, Final Rule, issued April 24, 1996; and (ii) the revision of outdated language which limited the ability of the Participants to fully utilize the Transmission System.
2.7 On September 4, 1998, the Participants entered into Amendment No. 5 to the Co-Tenancy Agreement ("Amendment No. 5") to reflect: (i) the change in the ownership interests, as tenants in common, for the McCullough 500 kV Switchyard and the McCullough Substation Common Facilities; (ii) the interconnection of the Marketplace 500 kV Tie-Line at the McCullough 500 kV Switchyard; (iii) the interconnection of the Victorville Line 2 at the McCullough 500 kV Switchyard; (iv) the interconnection of the 500/230 kV transformer banks H and I at the McCullough 500 kV Switchyard; (v) the addition of a calculation of ownership percentages for the original Westwing 230 kV Switchyard, the McCullough 500 kV Switchyard and the McCullough Substation Common Facilities; and (vi) the clarification of descriptions for the McCullough 500 kV Switchyard, the Navajo 500 kV Switchyard, the Moenkopi Switchyard, the Yavapai Switchyard, the Westwing 500 kV Switchyard and the original Westwing 230 kV Switchyard.
2.8 In December 1995, the Project Series Capacitors and Incremental Series Capacitors on the Moenkopi Switchyard end of the Moenkopi-Eldorado 500 kV line (as described in Paragraph 4 of Subsection F, OTHER ASSOCIATED COMPONENTS, in Section I, SOUTHERN TRANSMISSION SYSTEM, of Exhibit B to the Co-Tenancy Agreement) were replaced by Arizona at the request and sole expense of Southern California Edison Company, a non-Navajo entity.
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2.9 Nevada plans to construct the Crystal 500 kV Switchyard as a component of the Western Transmission System and to loop in the Navajo-McCullough 500 kV line at such switchyard, thereby forming the Navajo-Crystal 500 kV line and the Crystal-McCullough 500 kV line.
2.10 Nevada plans to interconnect its Crystal 230 kV switchyard to the Navajo Project at its new delivery point in the Crystal 500 kV Switchyard.
2.11 On April 28, 1998, the Transmission Engineering and Operating Committee approved the technical feasibility of the loop-in of the Navajo-McCullough 500 kV line at the Crystal 500 kV Switchyard. This approval was based on the results of technical studies performed by Nevada and presented by Nevada to the Transmission Engineering and Operating Committee on May 6, 1997 and on the results of additional studies performed by Nevada which were requested by Los Angeles subsequent to May 6, 1997.
2.12 The Participants desire to enter into this Amendment No. 6 to reflect; (i) the deletion of the Project Series Capacitors and Incremental Series Capacitors on the Moenkopi Switchyard end of the Moenkopi-Eldorado 500 kV line from the description of the Navajo Project; (ii) the construction of the Crystal 500 kV Switchyard as a component of the Western Transmission System and the loop-in of the Navajo-McCullough 500 kV line at such switchyard, resulting in the formation of the Navajo-Crystal and Crystal-McCullough 500 kV line segments; (iii) new delivery points for Los Angeles, Nevada and the United States at the Crystal 500 kV Switchyard; (iv) the interconnection of Nevada's Crystal 230 kV switchyard at Nevada's new delivery point in the Crystal 500 kV Switchyard; and (v) the addition of a calculation of ownership
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percentages for the Crystal 500 kV Switchyard and the Crystal Substation Common Facilities.
3. AGREEMENT: In consideration of the mutual covenants and benefits to be derived from this Amendment No. 6, the Participants agree as follows:
4. AGREEMENT MODIFICATIONS:
4.1 A new Subsection 5.16A is hereby inserted after Subsection 5.16 in
Section 5, DEFINITIONS, of the Co-Tenancy Agreement and the new Subsection 5.16A shall read in its entirety as follows:
"5.16A CRYSTAL SUBSTATION: An electrical substation, located northeast of Las Vegas, Nevada, consisting of the Crystal Facilities as defined in Subsection C of Section II to Exhibit B hereto, the Crystal 230 kV switchyard, two (2) 500/230 kV transformer banks, and all appurtenant facilities thereto."
4.2 Paragraph 6.2.2A in Section 6, OWNERSHIPS AND TITLES, of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 6.2.2A is hereby substituted to read in its entirety as follows:
"6.2.2A Yavapai Switchyard

Arizona                    = 100.0% for the use and benefit
                                    of the Participants in
                                    accordance with Project
                                    Agreements."	

4.3 Paragraph 6.2.6 in Section 6, OWNERSHIPS AND TITLES, of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 6.2.6 is hereby substituted to read in its entirety as follows:
"6.2.6 Other Associated Components of the Southern Transmission System, as described in Subsection F of Section I of Exhibit B hereto, shall be solely owned by Arizona for
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the use and benefit of the Participants in accordance with Project Agreements."
4.4 Paragraph 6.2.7 in Section 6, OWNERSHIPS AND TITLES, of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 6.2.7 is hereby substituted to read in its entirety as follows:
"6.2.7 Navajo-Crystal 500 kV line Crystal-McCullough 500 kV line Navajo-Crystal Line Compensation (Navajo end) Crystal-McCullough Line Compensation (McCullough end) Western Transmission Communications System
(i) Los Angeles = 48.9%
(ii) Nevada = 26.1%
(iii) SRP = 25.0% for the use and benefit of the United States in accordance with Project Agreements."
4.5 A new Paragraph 6.2.7A is hereby inserted after Paragraph 6.2.7 in
Section 6, OWNERSHIPS AND TITLES, of the Co-Tenancy Agreement and the new Paragraph 6.2.7A shall read in its entirety as follows:
"6.2.7A Crystal Facilities

Nevada                    = 100.0% for the use and benefit
                                   of the Participants in
                                   accordance with Project
                                   Agreements."	

4.6 Subsection 8.5 in Section 8, USE OF THE TRANSMISSION SYSTEM, of the Co-Tenancy Agreement is hereby deleted in its entirety and a new Subsection 8.5 is hereby substituted to read in its entirety as follows:
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"8.5 The Participants' designated points of delivery shall be as follows:

8.5.1    Arizona       =  Navajo 500 kV Switchyard, Westwing
                          Substation, Moenkopi Switchyard
                          and Yavapai Switchyard.

8.5.2    Los Angeles   =  Navajo 500 kV Switchyard,
                          McCullough 500 kV Switchyard,
                          Moenkopi Switchyard and Crystal
                          500 kV Switchyard.

8.5.3    Nevada        =  Navajo 500 kV Switchyard,
                          McCullough 500 kV Switchyard,
                          Moenkopi Switchyard and Crystal
                          500 kV Switchyard.

8.5.4    SRP           =  Navajo 500 kV Switchyard, Westwing
                          Substation, Moenkopi Switchyard
                          and Yavapai Switchyard.

8.5.5    Tucson        =  Navajo 500 kV Switchyard, Westwing
                          Substation, Moenkopi Switchyard
                          and Yavapai Switchyard.

8.5.6    United States =  Navajo 500 kV Switchyard,
                          McCullough 500 kV Switchyard,
                          Westwing Substation, Moenkopi
                          Switchyard, Yavapai Switchyard and
                          Crystal 500 kV Switchyard."	

4.7 Subsection B, McCULLOUGH LINE COMPENSATION, in Section I, SOUTHERN
TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Subsection B is hereby substituted to read in its entirety as follows:
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"B. NAVAJO-CRYSTAL LINE COMPENSATION
The Project Series Capacitors, Incremental Series Capacitors and shunt reactors on the Navajo 500 kV Switchyard end of the Navajo-Crystal 500 kV line including, but not limited to, the capacitors, control equipment, reactors, lightning arrestors, hazard fencing, disconnects, structures and bus work from the switchyard side of the first 500 kV line dead-end tower located outside the switchyard to the attachment on the main switchyard structure."
4.8 Paragraph 4 of Subsection F, OTHER ASSOCIATED COMPONENTS, in Section
I, SOUTHERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety.
4.9 Paragraph 5 of Subsection F, OTHER ASSOCIATED COMPONENTS, in Section
I, SOUTHERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 4 is hereby substituted to read in its entirety as follows:
"4. All the communication facilities necessary to control the Southern Transmission System including such facilities located at the Navajo 500 kV Switchyard, the Moenkopi Switchyard, the Yavapai Switchyard, or the Westwing Substation."
4.10 Paragraph 1 of Subsection A, McCULLOUGH FACILITIES, in Section II,
WESTERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Paragraph 1 is hereby substituted to read in its entirety as follows:
"1. The McCullough 500 kV Switchyard, a basic breaker-and-a-half scheme, comprising: (i) the 500 kV busses and the structures
8
therefor; (ii) the termination facilities for the 500/230 kV transformer banks H, I and J, the Crystal-McCullough 500 kV line, the McCullough-Eldorado 500 kV line, and the McCullough-Victorville 500 kV Line 1 and Line 2 including, but not limited to, power circuit breakers, disconnect switches, and the structures therefor; and (iii) other facilities up to and including the connection to the high-side bushings of the 500/230 kV transformer banks. The McCullough 500 kV Switchyard shall not include: (i) the McCullough Substation Site; (ii) any termination facilities associated with a third party interconnection; (iii) any McCullough Substation Common Facilities; or (iv) any 500/230 kV transformer banks located at the McCullough Substation."
4.11 Subsection B, NAVAJO-McCULLOUGH 500 KV LINE, in Section II, WESTERN
TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Subsection B is hereby substituted to read in its entirety as follows:
"B. NAVAJO-CRYSTAL 500 KV LINE
The Navajo-Crystal 500 kV line, from and including the first 500 kV line dead-end tower located outside the Navajo 500 kV Switchyard to the first 500 kV transmission line tower located outside the Crystal 500 kV Switchyard, including the patrol headquarters and the Navajo-Crystal 500 kV line right-of-way."
4.12 Subsection C, WESTERN TRANSMISSION COMMUNICATIONS SYSTEM, in Section II, WESTERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement is hereby deleted in its entirety and a new Subsection C is hereby substituted to read in its entirety as follows:
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"C. CRYSTAL FACILITIES
1. The Crystal 500 kV Switchyard, a basic breaker-and-a- half scheme to be initially installed as a basic ring bus scheme, comprising: (i) the 500 kV busses and the structures therefor; (ii) the termination facilities for two (2) 500/230 kV transformer banks, the Navajo- Crystal 500 kV line, and the Crystal-McCullough 500 kV line including, but not limited to, power circuit breakers, disconnect switches, and the structures therefor; (iii) relays; and (iv) other facilities up to and including the connection to the high-side bushings of the 500/230 kV transformer banks. The Crystal 500 kV Switchyard shall not include: (i) any Crystal Substation Common Facilities; or (ii) any 500/230 kV transformer banks located at the Crystal Substation.
2. The Crystal Substation Common Facilities, all or part of those certain structures, improvements and facilities of the Crystal Substation, which include, but are not limited to: dikes, roadways, control building, communications building, ancillary buildings, trenches, conduits, remote terminal unit (RTU) and SCADA interface equipment, control and power cables, control equipment, batteries, auxiliary equipment, station grounding grid, fencing, lighting and yard improvements, and related land or land rights. Crystal Substation Common Facilities shall not include: (i) any termination facilities associated with any line or transformer termination at the
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Crystal Substation; or (ii) any 500/230 kV transformer banks located at the Crystal Substation.
3. The Project Series Capacitors and shunt reactors on the Crystal 500 kV Switchyard end of the Navajo-Crystal 500 kV line including, but not limited to, the capacitors, control equipment, reactors, power circuit breaker, lightning arrestors, hazard fencing, disconnects, structures and bus work from the switchyard side of the first 500 kV transmission line tower located outside the switchyard to the attachment on the main switchyard structure."
4.13 A new Subsection D is hereby inserted after Subsection C in Section II, WESTERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement and the new Subsection D shall read in its entirety as follows:
"D. CRYSTAL-McCULLOUGH 500 KV LINE
1. The Crystal-McCullough 500 kV line, from and including the first 500 kV transmission line tower located outside the Crystal 500 kV Switchyard to the first 500 kV line dead-end tower located outside the McCullough 500 kV Switchyard, including the Crystal-McCullough 500 kV line right-of-way.
2. The Project Series Capacitors, Incremental Series Capacitors and shunt reactors on the McCullough 500 kV Switchyard end of the Crystal-McCullough 500 kV line including, but not limited to, the capacitors, control equipment, reactors, power circuit breaker, lightning arrestors, hazard fencing, disconnects, structures and bus work from the switchyard side of the first 500 kV
11
line dead-end tower located outside the switchyard to the attachment on the main switchyard structure."
4.14 A new Subsection E is hereby inserted after Subsection D in Section II, WESTERN TRANSMISSION SYSTEM, of Exhibit B, TRANSMISSION SYSTEM, to the Co-Tenancy Agreement and the new Subsection E shall read in its entirety as follows:
"E. WESTERN TRANSMISSION COMMUNICATIONS SYSTEM
The microwave system from a terminal located at the Navajo 500 kV Switchyard carrier room to a terminal located at the Red Mountain Microwave Station near Boulder City, Nevada, more particularly described as follows:
1. EQUIPMENT AT NAVAJO 500 KV SWITCHYARD: The Backbone Radio Frequency (RF) System shall include the following:
(i) RF microwave equipment; (ii) the coaxial cable;
(iii) the antenna; and (iv) batteries and battery chargers. The antenna and the coaxial cable shall be located in the Navajo 500 kV Switchyard and mounted on a tower structure which is part of the Navajo 500 kV Switchyard. The microwave equipment shall be located in the carrier room.
2. EQUIPMENT AT REPEATER STATIONS: The Backbone RF System shall include the following: (i) RF microwave equipment (digital or analog); (ii) all baseband treatment, including but not limited to amplifiers, bridges, filters, pads, and power supplies; (iii) supervisory alarm and control system; (iv) auxiliary power units, generators, fuel tanks, batteries, battery chargers and associated equipment; (v) buildings and associated electrical wiring, lighting, and air conditioning equipment; (vi) all tower
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structures, antennas, coaxial cable, mounting brackets, and associated equipment; (vii) microwave site property including fencing and other required improvements; (viii) roads required for microwave site access; and (ix) any other material and/or equipment which may be required to implement the Backbone RF System.
3. EQUIPMENT AT RED MOUNTAIN: The Backbone RF System shall include the following: (i) RF microwave equipment; (ii) all baseband treatment; (iii) supervisory alarm and control system; (iv) the antenna; and (v) the coaxial cable."
4.15 Sheets 1, 2, 4 and 5 of Exhibit B-B, TRANSMISSION SYSTEM OWNERSHIP, to the Co-Tenancy Agreement are hereby deleted in their entirety and replaced by new Sheets 1, 2, 4, 5 and 6 attached hereto and by this reference incorporated herein.
4.16 Exhibit E, McCULLOUGH 500 KV SWITCHYARD OWNERSHIP PERCENTAGES, to the Co-Tenancy Agreement is hereby deleted in its entirety and replaced by a new Exhibit E attached hereto and by this reference incorporated herein.
4.17 A new Exhibit G, CRYSTAL 500 KV SWITCHYARD OWNERSHIP PERCENTAGES, attached hereto and by this reference incorporated herein, is hereby appended to the Co-Tenancy Agreement.
4.18 A new Exhibit H, CRYSTAL SUBSTATION COMMON FACILITIES OWNERSHIP PERCENTAGES (500 KV PORTION ONLY), attached hereto and by this reference incorporated herein, is hereby appended to the Co-Tenancy Agreement.
5. EFFECT: Except for the changes set forth in this Amendment No. 6, all provisions of the Co-Tenancy Agreement as supplemented by Supplement No. 1 and as amended by Amendment Nos. 1, 2, 3, 4 and 5 shall remain in full
13
force and effect to the extent that such provisions are not in conflict or inconsistent with this Amendment No. 6. In the event of any conflict between the provisions of this Amendment No. 6 and the Co-Tenancy Agreement as supplemented by Supplement No. 1 and as amended by Amendment Nos. 1, 2, 3, 4 and 5, the provisions of this Amendment No. 6 shall govern.
6. EXECUTION AND EFFECTIVE DATE:
6.1 This Amendment No. 6 may be executed in any number of counterparts and, upon execution and delivery by each Participant, the executed and delivered counterparts together shall have the same force and effect as an original instrument as if all the Participants had signed the same instrument. Any signature page of this Amendment No. 6 may be detached from any counterpart of this Amendment No. 6 without impairing the legal effect of any signatures thereon, and may be attached to another counterpart of this Amendment No. 6 identical in form thereto, but having attached to it one or more signature pages.
6.2 When this Amendment No. 6 to the Co-Tenancy Agreement has been executed by, and delivered to, the duly authorized representative of each Participant, Nevada shall promptly file this Amendment No. 6 with FERC and, if accepted for filing by FERC without condition or modification, this Amendment No. 6 shall be effective as of the date specified by Nevada in the filing letter to FERC.
6.3 In the event FERC conditions or modifies this Amendment No. 6, Nevada shall promptly notify all the other Participants. Upon written notice given within thirty (30) days from the date of Nevada's notice to all other Participants by any Participant that such condition or modification is objectionable, this Amendment No. 6 shall terminate and be of no further force or effect. If no written notice is given by any Participant that such condition or
14
modification is objectionable within such thirty (30) day period, this Amendment No. 6 shall become effective the day after such thirty (30) day period.
7. SIGNATURE CLAUSE: Each Participant hereto represents and warrants that the person executing this Amendment No. 6 to the Navajo Project Co-Tenancy Agreement has been duly authorized to act on its behalf. This Amendment No. 6 to the Navajo Project Co-Tenancy Agreement is hereby executed as of the 26th day of july, 1999.
UNITED STATES OF AMERICA

Signature /s/ Robert W. Johnson
          ----------------------------------

Name Robert W. Johnson	

Regional Director Lower Colorado Region Title U.S. Bureau of Reclamation
Date Signed Jul 26 1999
ARIZONA PUBLIC SERVICE COMPANY

                                    Signature /s/ Jack Davis
                                              ----------------------------------
[STAMP]
                                    Name Jack Davis	

Title Executive Vice President
Date Signed September 30, 1998
DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES

                                    by

APPROVED AS TO FORM AND LEGALITY    BOARD OF WATER AND POWER COMMISSIONERS
  JAMES K. HAHN CITY ATTORNEY       OF THE CITY OF LOS ANGELES
        MAY 07 1999

By /s/ Kjehl T. Johansen            By /s/ S. David Freeman
   -----------------------------       -----------------------------------------
   KJEHL T JOHANSEN                 S. DAVID FREEMAN, General Manager
   Deputy City Attorney

                                    and /s/ Authorized Signatory
                                        ----------------------------------------
                                                        Secretary

                                    Date Signed Authorized Signatory

                                       15	

                                    NEVADA POWER COMPANY

                                    Signature /s/ Steven W. Rigazio
                                              ----------------------------------

                                    Name Steven W. Rigazio

                                    Title Vice President, Finance and
                                          Planning, Treasurer and CFO

                                    Date Signed October 15, 1998

                                    SALT RIVER PROJECT AGRICULTURAL
                                    IMPROVEMENT AND POWER DISTRICT

                                    Signature /s/ Richard H. Silverman
                                              ----------------------------------

       APPROVED AS TO FORM          Name Richard H. Silverman
SALT RIVER PROJECT LEGAL SERVICES

 By /s/ Authorized Signatory        Title General Manager
    ------------------------------

DATE 10-29-98                       Date Signed December 18,1998

                                    TUCSON ELECTRIC POWER COMPANY

                                    Signature /s/ T.A. Delawdev
                                              ----------------------------------

                                    Name T.A. Delawdev

                                    Title Vice President

                                    Date Signed 12-22-98	

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EXHIBIT B-B, SHEET 1
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
[FLOW CHART]
[TRANSMISSION SYSTEM OWNERSHIP CHART]
*SRP holds title for the use and benefit of the United States, Department of the
Interior (Bureau of Reclamation).
Revised: 7/31/98 AutoCad
BB-1
EXHIBIT B-B, SHEET 2
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
NAVAJO GENERATING STATION
AND
NAVAJO 500 kV SWITCHYARD
[CIRCUIT DIAGRAM]
*SRP holds title for the use and benefit of the United States, Department of the
Interior (Bureau of Reclamation).
Revised: 7/31/98 AutoCad
BB-2
EXHIBIT B-B, SHEET 4
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
WESTWING SUBSTATION
[CIRCUIT DIAGRAM]
*SRP holds title for the use and benefit of the United States, Department of the
Interior (Bureau of Reclamation).
**Ownership percentage calculation shown in Exhibit D.
Revised: 7/31/98 AutoCad
BB-4
EXHIBIT B-B, SHEET 5
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
McCULLOUGH SUBSTATION
[CIRCUIT DIAGRAM]
*SRP holds title for the use and benefit of the United States, Department of the
Interior (Bureau of Reclamation).
**Ownership percentage calculation shown in Exhibit E.
***Ownership percentage calculation shown in Exhibit F.
Note: The McCullough 230 kV switchyard and transformer banks H.I and J are shown for information purposes only.
Revised: 7/31/98 AutoCad
BB-5
EXHIBIT B-B, SHEET 6
NAVAJO PROJECT CO-TENANCY AGREEMENT
TRANSMISSION SYSTEM OWNERSHIP
CRYSTAL SUBSTATION
[CIRCUIT DIAGRAM]
Legend:

          Termination

___  ___  Crystal 500 kV Switchyard

                                   Note: The Crystal 230 kV switchyard, the
                                   500/230 kV transformers banks, and the 230 kV
                                   phase-shifting transformers are shown for
                                   information purposes only.

                                                                Revised: 7/31/98
                                                                AutoCad	

BB-6
EXHIBIT E
McCULLOUGH 500 KV SWITCHYARD OWNERSHIP PERCENTAGES

                                                      OWNERSHIP (%)
                                             ------------------------------
                                                                    SRP FOR
                                               LOS                   UNITED
DESCRIPTION OF TERMINATION                   ANGELES      NEVADA    STATES*
-----------------------------                -------     -------    -------
Banks H and I 500 kV                            0.00       50.00     50.00
Crystal-McCullough                             48.90       26.10     25.00
Bank J 500 kV                                  71.67       28.33      0.00
McCullough-Victorville Line 1                 100.00        0.00      0.00
McCullough-Eldorado                           100.00        0.00      0.00
McCullough-Victorville Line 2                 100.00        0.00      0.00
                                             -------     -------    ------
TOTAL                                         420.57      104.43     75.00	

Sum of Ownership Percentages:

Los Angeles + Nevada + SRP for United States* = 420.57 + 104.43 + 75.00
                                              = 600.00	

Ownership percentages for the terminations in the McCullough 500 kV Switchyard are shown in the above table and are used below to determine the ownership percentages for the McCullough 500 kV Switchyard infrastructure facilities such as, but not limited to, the busses, bus protection and metering, steel switchracks and associated concrete works, cable trenches and grounding.

Los Angeles            = (420.57/600.00) x 100% = 70.1%
Nevada                 = (104.43/600.00) x 100% = 17.4%
SRP for United States* = ( 75.00/600.00) x 100% = 12.5%	

* SRP holds title for the use and benefit of the United States, Department of the Interior (Bureau of Reclamation).
NOTE: The calculation of ownership percentages for the McCullough 500 kV Switchyard shall not include any third party terminations at such switchyard.
Dated: July 31, 1998
E-1
 
EXHIBIT G
CRYSTAL 500 KV SWITCHYARD OWNERSHIP PERCENTAGES

                                                      OWNERSHIP (%)
                                             ------------------------------
                                                                    SRP FOR
                                               LOS                   UNITED
DESCRIPTION OF TERMINATION                   ANGELES      NEVADA    STATES*
--------------------------                   --------     ------    -------
Bank No, 2 - 500 kV                            0.00       100.00      0.00
Bank No. 3 - 500 kV                            0.00       100.00      0.00
Navajo-Crystal                                 0.00       100.00      0.00
Crystal-McCullough                             0.00       100.00      0.00
                                              -----       ------      ----
TOTAL                                          0.00       400.00      0.00	

Sum of Ownership Percentages:
Los Angeles + Nevada + SRP for United States* = 0.00 + 400.00 + 0.00 = 400.00
Ownership percentages for the terminations in the Crystal 500 kV Switchyard are shown in the above table and are used below to determine the ownership percentages for the Crystal 500 kV Switchyard infrastructure facilities such as, but not limited to, the busses, bus protection and metering, steel switchracks and associated concrete works, cable trenches and grounding.
Los Angeles = ( 0.00/400.00) x 100% = 0.0% Nevada = (400.00/400.00) x 100% = 100.0% SRP for United States* = ( 0.00/400.00) x 100% = 0.0%
* SRP holds title for the use and benefit of the United States, Department of the Interior (Bureau of Reclamation).
Dated: July 31, 1988
G-1
EXHIBIT H
CRYSTAL SUBSTATION COMMON FACILITIES OWNERSHIP PERCENTAGES
 (500 KV PORTION ONLY)
Ownership of the Crystal Substation Common Facilities shall be split between the Crystal 230 kV switchyard (currently 4 terminations) and the Crystal 500 kV Switchyard (currently 4 terminations) based on the ratio of the number of terminations in said switchyard to the total number of terminations in both switchyards (currently 8 terminations).
Crystal 230 kV switchyard: 4/8 = 0.50 or 50%
Crystal 500 kV Switchyard: 4/8 = 0.50 or 50%
500 kV Ownership Percentages for Crystal Substation Common Facilities
Los Angeles ( 0.00(1)/400.00(1)) x 100% = 0.0%
Nevada (400.00(1)/400.00(1)) x 100% = 100.0%
SRP for United States(2) ( 0.00(1)/400.00(1)) x 100% = 0 0%
(1) Numbers used in the calculation of the 500 kV ownership percentages are taken from. Exhibit G hereto.
(2) SRP holds title for the use and benefit of the United States, Department of the Interior (Bureau of Reclamation).
Dated: July 31, 1998
H-1
SUPPLEMENT NO. 1
TO THE
NAVAJO PROJECT CO-TENANCY AGREEMENT
BETWEEN
THE NAVAJO PROJECT PARTICIPANTS
(DWP NO. 10498S)
DATED: FEB - 5 1976
SUPPLEMENT NO. 1
TO THE
NAVAJO PROJECT CO-TENANCY AGREEMENT
AMONG
THE UNITED STATE OF AMERICA
ARIZONA PUBLIC SERVICE COMPANY
DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
NEVADA POWER COMPANY
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT
TUCSON GAG & ELECTRIC COMPANY
DWP No. 104985
SUPPLEMENT NO. 1
TO THE
NAVAJO PROJECT CO-TENANCY AGREEMENT
1. PARTIES: The parties to this Supplement No. 1 to the Navajo Project Co-Tenancy Agreement hereinafter referred to as Supplement No. 1 are: THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States", acting through the Secretary of the Interior, his duly appointed successor or his duly authorized representative; ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, hereinafter referred to as "Arizona"; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter Of the City of Los Angeles, a municipal corporation of the State of California, hereinafter referred to as "Los Angeles"; NEVADA POWER COMPANY, a Nevada corporation, hereinafter referred to as "Nevada"; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona, hereinafter referred to as "Salt River Project"; and TUCSON GAS & ELECTRIC COMPANY, an Arizona corporation, hereinafter referred to as "Tucson".
2. RECITALS: This Supplement No. 1 is made with reference to the following facts, among others:
2.1 The Participants entered into the Participation Agreement, which provides the basic principles for
- 1 -
their participation in the Navajo Project. These principles are intended to be the basis of definitive agreements, included among which is the Navajo Project Co-Tenancy Agreement.
2.2 The Navajo Project Co-Tenancy Agreement, which supersedes in part the Navajo Project Participation Agreement, establishes terms and conditions relating to the Participants' interests in and ownership of the Navajo Project and establishes certain rights and obligations under the Project Agreements.
2.3 The Participants desire by this Supplement No. 1 to clarify their intent to preserve, protect and enhance the environment as provided in Section 29 (Environmental Protection) of the Co-Tenancy Agreement.
3. AGREEMENT: In consideration of the terms and conditions contained in this Supplement No. 1 to the Navajo Project Co-Tenancy Agreement, the Participants agree that Section 29 of the Co-Tenancy Agreement is hereby supplemented to read as follows:
29. ENVIRONMENTAL PROTECTION:
29.1 It is the intent of the Participants to comply with applicable ambient air standards in order to protect the public health and welfare from pollutants emitted from the Navajo Project.
29.2 On or before September 30 of each year, a report
- 2 -
shall be prepared by Los Angeles at its own expense for the fiscal year ending on June 30 preceding such date on environmental matters related to the operation and maintenance of the Navajo Generating Station and its associated transmission and other facilities and to the design and construction of such Navajo Generating Station and associated facilities as of such June 30.
29.2.1 The report shall include, but not be limited to, a review of any applicable or potentially applicable advances in technology of equipment and devices for the protection of the environment, an analysis of the performance and efficiency of existing air quality control equipment and devices at the Navajo Generating Station and its related facilities at the site, a review of new information concerning effects to health and welfare arising from the operation and maintenance of the Navajo Project and should furnish conclusions as to the environmental and economic desirability and feasibility of upgrading the level of protection against such effects.
29.2.2 A copy of each such report shall be transmitted by Los Angeles, at its expense,
- 3 -
promptly thereafter to each person or group who notifies Los Angeles in writing of a desire to receive a copy thereof. The notification shall be effective from year to year until such time as such person or group notifies Los Angeles in writing of its revocation or fails to provide a correct address for receipt of such report.
29.2.2.1 Such transmittal shall include, either by accompanying letter or statement on the inside front cover of such report, an indication that Los Angeles will, for a period of 60 days from the date of such report, receive and consider comments and suggestions on such report and the subject matters thereof. Los Angeles shall summarize the comments of the public and shall present the same annually to representatives of the Participants.
29.3 The Participants will design, construct, operate and maintain the Navajo Project in a manner consistent with the Participants' objective of attaining the greatest feasible degree of environmental
- 4 -
protection. In addition to fulfilling all obligations which have been assumed under provisions relating to protection of the environment which are contained in existing Project Agreements, the Participants affirm their continuing obligation to comply fully with applicable Federal, state and local laws, orders, regulations, rules and standards relating to environmental protection. The Participants shall to the extent practicable anticipate and make provision for the future installation of any systems required to comply with changes in said laws, orders, regulations, rules and standards.
29.4 The Participants shall install and diligently operate in the Navajo Generating Station the most effective commercially proven air quality control equipment for particulate control available at the time of design of each unit of the Navajo Generating Station. Stack design, the designs of other plant systems related to air quality control, and plans for and design of systems for control and disposal of waste materials and residue from burned fuel shall be subject to such approval by the Secretary as required by Project Agreements and to review and comment by the Secretary in all other instances in advance of construction, installation, making a
- 5 -
Capital Improvement thereto or the retirement of Units of Property thereof. The Secretary shall act or comment within 60 days after submission of a plan or design. From time to time, at the call of either the Secretary or the Coordinating Committee, but at least every three (3) years beginning in 1980, representatives of the Participants, and the designated representative of the Secretary, shall meet to review technological advances in air quality control equipment and such reports from Los Angeles set forth in Section 29.2 hereof, and all comments and suggestions thereof and, provided the representatives of the Participants and the designated representative of the Secretary agree, shall formulate a recommendation to the Coordinating Committee as to the need for and feasibility of Installing additional equipment or modifying existing equipment to improve air quality control. In the event agreement cannot be reached and a recommendation formulated by the designated representatives of the Participants and the designated representative of the Secretary, the failure to agree shall not be subject to arbitration as provided in Section 19 of the co-Tenancy Agreement.
29.4.1 In the operation of the Navajo Generating
- 6 -
Station, the Participants will make such tests and measurements and keep such records as will enable them to make reports to the Secretary relating to the operation and efficiency of the air quality control equipment at such intervals as may be mutually agreed upon, but not less than once annually. The tests and measurements will be made in conformance with the latest American Society of Mechanical Engineers (ASME) test procedures for determining dust concentration in a gas stream and in conformance with other accepted procedures agreed upon by the Secretary and the Participants.
29.4.2 The Participants during normal working hours will permit representatives of the Secretary to have access to, and to inspect and copy, all records relating to air quality and will permit such representatives to inspect the air quality control systems.
29.5 The Participants shall install and diligently operate as part of the Navajo Generating Station such wastewater, waste material, sewage control and disposal systems necessary to comply with and fulfill the objectives and obligations set forth in
- 7 -
Section 29.3 hereof. Designs and plans for the water quality control systems, systems for the disposal of wastewater, waste materials, and sewage, and any other plant systems related to control of water quality shall be subject to such approval by the Secretary as required by the Project Agreements and to review and comment by the Secretary in all other instances in advance of construction, installation, making a Capital Improvement or the retirement of Units of Property thereof. The Secretary shall act or comment within 60 days after submission of a plan or design.
29.5.1 The Participants during normal working hours will permit representatives of the Secretary to have access to, and to inspect and copy, all records relating to water quality control and will permit such representatives to inspect the water quality control systems.
29.6 The Participants shall take appropriate measures to harmonize the Navajo Project with the environment. The Participants shall exercise care to prevent any unnecessary destruction, scarring, or defacing of the natural surroundings in the vicinity of the Navajo Project work.
29.7 In any arbitration as to a dispute arising under the
- 8 -
provisions of this Section 29, the arbitrators shall consider the cost effectiveness of the course of action under dispute; Federal, state and local laws, orders, regulations, rules and standards; the ability to obtain appropriations from Congress for such purposes; and the ability of the Participants to obtain capital for such purposes.
4. Except as provided herein, the Navajo Project Co-Tenancy Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Supplement No. 1 to the Navajo Project Co-Tenancy Agreement to be executed as of the 18th day of October, 1976.
THE UNITED STATES OF AMERICA

By  /s/ Manuel Lopez, Jr. Regional Director
    ------------------------------------------
      Manuel Lopez. Jr. Regional Director
Lower Colorado Region, Bureau of  Reclamation
      for Secretary of the  Interior	

ARIZONA PUBLIC SERVICE COMPANY

ATTEST:                           By /s/ D.L. Broussard
/s/ Wm. T. Quinsllr                  ------------------------------------------
--------------------------------                  Vice President
  WM. T. QUINSLLR, SECRETARY	

NEVADA POWER COMPANY

ATTEST:                           By  /s/ A. E. Pearson
/s/ Authorized Signatory          ------------------------------------------
--------------------------------        President

                                  SALT RIVER PROJECT AGRICULTURAL	

IMPROVEMENT AND POWER DISTRICT

ATTEST AND COUNTERSIGN:           By  /s/ Authorized Signatory
/s/ Authorized Signatory              ------------------------------------------
--------------------------------                     President
          Secretary	

-9-
[STAMP]
TUCSON GAS & ELECTRIC COMPANY

ATTEST:                           By  /s/ Einar Creve
/s/ Authorized Signatory              ------------------------------------------
--------------------------------             EXECUTIVE VICE PRESIDENT
     ASSISTANT SECRETARY	

DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
[SEAL] by
BOARD OF WATER AND POWER COMMISSIONERS
OF THE CITY OF LOS ANGELES

BY:                               By  /s/ Louis H. Winnand
    /s/ Authorized Signatory          ------------------------------------------
--------------------------------        General Manager and Chief Engineer

                                                and

                                  By  /s/ Mary J. Born
                                      ------------------------------------------
                                                        Secretary	

-10-
[SEAL] [STAMP]
On this the 18th day of October, 1976, before me, the undersigned officer, personally appeared Manuel Lopez, Jr., Regional Director, Lower Colorado Region, Bureau of Reclamation, of the United States of America, known to me to be the person described in the foregoing instrument, and acknowledged that he executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

State of Arizona    )                                  /s/ Authorized Signatory
                    )ss                                ------------------------
County of Maricopa  )                                         Notary Public
                                                                 [STAMP]	

On this the 19th day of July, 1976, before me, the undersigned officer, personally appeared D. L. BROUSSARD, who acknowledged himself to be the Vice President of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, and that he, as such Vice President, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as Vice President.
In witness whereof I hereunto set my hand and official seal.

/s/ Authorized Signatory
------------------------------------------
            Notary Public	

My commission expires:
[SEAL]
My Commission Expires Jan. 22, 1979
State of California )
) ss
County of Los Angeles )
On this, the 5th day of February, 1976, before me, the undersigned officer, personally appeared Louis H. Winnand and Mary J. Born, the General Manager and Chief Engineer and Board Secretary, respectively, of the DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of the City of Los Angeles, a municipal corporation of the State of California, known to me to be the persons described in the foregoing instrument, and acknowledged that they executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

/S/ Authorized Signatory
------------------------------------------
        Notary Public	

My commission expires:

                                                                [STAMP]
    May 27, 1977

State of Nevada  )
                 ) ss
County of Clark  )	

On this the 7th day of July, 1976, before me, the undersigned officer, personally appeared A. E. Pearson, known to me to be the President of NEVADA POWER COMPANY, a Nevada corporation, and that he, as such President, being authorized so to do, executed the foregoing instrument for the purposes therein contained,
by signing the name of the corporation by himself as President.
In witness whereof, I hereunto set my hand and official seal.

/s/ Jane Williams
------------------------------------------
        Notary Public	

My commission expires:

                                                     [STAMP]
   July 7, 1979

State of Arizona   )
                   ) ss	

County of Maricopa )
On this the 16th day of April, 1976, before me, the undersigned officer, personally appeared ___________ and __________, the President and Secretary, respectively, of SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an Arizona agricultural improvement district, known to me to be the persons described in the foregoing instrument, and acknowledged that they executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

                                      /s/   Authorized Signatory
                                      ------------------------------------------
                                              Notary Public

My commission expires:

   MAY 3, 1979	

State of Arizona )
) ss
County of Pima )
On this the 12th day of July, 1976, before me, the undersigned officer, personally appeared EINAR CREVE, who acknowledged himself to be the EXECUTIVE VICE PRESIDENT of TUCSON GAS & ELECTRIC COMPANY, an Arizona corporation, and that he, as such EXECUTIVE VICE PRESIDENT, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as EXECUTIVE VICE PRESIDENT.
In witness whereof I hereunto set my hand and official seal.

/s/ Authorized Signatory
------------------------------------------
        Notary Public	

My commission expires:
My Commission Expires Sept. 1, 1976
 
RESOLUTION NO. 556
WHEREAS, Resolution No. 610 adopted by the Board ON March 9, 1972, approved the transmittal of the following agreements to the City Council for approval by ordinance, which approval was subsequently withheld by the Council:

                         Agreement Title                            DWP Number
------------------------------------------------------------------  ----------
Navajo Project Co-Tenancy Agreement                                   10498

Navajo Generating Station Construction Agreement                      10499

Navajo Project Western Transmission System Construction Agreement     10500

Navajo Project Southern Transmission System Construction Agreement    10501	

and WHEREAS, Resolution No. 978, adopted by this Board on May 31, 1973, transmitted the above-mentioned agreements to the City Council for approval by ordinance, which approval was adopted, and subsequently disapproved by Mayor Tom Bradley on July 26, 1973; and
WHEREAS, the agreements listed above involve: (1) a legal instrument, previously executed by the other Navajo Participants, to be recorded in the State of Arizona which sets forth the Department's ownership rights in the Navajo Project consisting of the Navajo Generating Station, the Southern Transmission System, and the Western Transmission System (No. 10498); (2) technical and financial provisions, previously executed by the other Navajo Participants, for the construction of the Navajo Generating Station (No. 10499);
(3) technical and financial documents, previously executed by the Navajo Participants, for the construction of the Southern and Western Transmission Systems (No. 10500 and No. 10501); and
WHEREAS, construction has been completed on Navajo Units 1 and 2, and these units are in commercial operation and have been carrying system load since February 1, 1974, and
December 2, 1974, respectively; and Navajo Unit 3 is scheduled to carry system load in December, 1975 and to begin commercial operation by April, 1976; and
WHEREAS, construction has been completed on the Southern Transmission System and it has been carrying Navajo power since February 1, 1974, and major construction has been completed on the Western Transmission System and it has been carrying Navajo Power since October 27, 1974; and
WHEREAS, the following agreement supplements the environmental protection section of the Navajo Project Co-Tenancy Agreement and requires: (1) an annual environmental report, to be prepared by the Department, which will include a review of advances in technology of equipment for the protection of the environment and an analysis of the performance of the existing air quality control equipment at the Navajo Generating Station; (2) such environmental report to be made available to the public for their comments and suggestions; and (3) the Navajo Participants to meet at least every three years to review technological advances in air quality control equipment and the annual environmental reports prepared by the Department including comments and suggestions received from the interested public:

                 Agreement Title                                 DWP Number
-----------------------------------------------------------      ----------
Supplement No. 1 to the Navajo Project Co-Tenancy Agreement        10498S	

WHEREAS, this Department requested that certain practices relating to the use and occupancy of Navajo and Hopi Indian lands for mining be incorporated as obligations in the coal contracts, relating to compensation for displaced Navajo families, reclamation of leased premises, water monitoring program, and the water supply to Navajo families; and
WHEREAS, the Navajo Participants and Peabody Coal Company have agreed and incorporated such obligations in the Amended Navajo Coal Supply Agreement to be presented to this Board;
NOW, THEREFORE, BE IT RESOLVED the above agreements, approved as to form and legality by the City Attorney, and now on file with the Secretary of this Board, be and the same are
-2-
hereby approved; and that this Board requests the City Council of The City of Los Angeles, in accordance with Section 219.4 of the Charter of The City of Los Angeles, to approve by ordinance the agreements hereinabove referred to and identified, and to authorize this Board, in its discretion, to execute and enter into said agreements, all of which relate to the Navajo Project, and following such approval, the President or the Vice President or the General Manager and Chief Engineer and the Secretary, Assistant Secretary or the Acting Secretary of the Board be and they are hereby authorized and directed to execute said agreements for and on behalf of this Department.
I HEREBY CERTIFY that the foregoing is a full, true and correct copy of a resolution adopted by the Board of Water and Power Commissioners of The City of Los Angeles at ITS meeting held [ILLEGIBLE]

/s/ Authorized Signatory
------------------------------------------
                          Secretary	

-3-
ORDINANCE NO. 148,153
AN ORDINANCE APPROVING
AGREEMENTS RELATING TO THE
NAVAJO PROJECT AND [ILLEGIBLE].
CERTIFICATION
STATE OF CALIFORNIA
} ss.
COUNTY OF LOS ANGELES,
I, REX E. LAYTON, City Clerk of the City of Los Angeles and ex-officio Clerk of the City Council of the City of Los Angeles, do hereby certify and attest the foregoing to be a full, true and correct copy of the original Ordinance No. 148,153

on file in my office, and that I have carefully compared the same with the original.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the City of Los Angeles, this 22nd day of March, 1976.

   /s/ Rex. E. Layton
   -----------------------------
       City Clerk of the City of Los Angeles

By /s/ Judy Pensland
   -----------------------------
              Deputy
           Judy Pensland	

Ordinance No. 118,153
 
Exhibit 10.108
Contract No. 14-06-300-2131
NAVAJO PROJECT
PARTICIPATION AGREEMENT
BETWEEN
THE UNITED STATES OF AMERICA
ARIZONA PUBLIC SERVICE COMPANY
DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
NEVADA POWER COMPANY
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT
TUCSON GAS & ELECTRIC COMPANY
NAVAJO PROJECT PARTICIPATION AGREEMENT
TABLE OF CONTENTS

SECTION                                                                        PAGE
-------                                                                        ----
      1     PARTIES                                                              1

      2     RECITALS                                                             1

      3     AGREEMENT                                                            2

      4     DEFINITIONS                                                          2

            4.1   CAPACITY                                                       2

            4.2   CONTRACTING OFFICER                                            2

            4.3   CO-TENANTS                                                     2

            4.4   ENERGY                                                         3

            4.5   FIRM OPERATION                                                 3

            4.6   GENERATION ENTITLEMENT SHARE                                   3

            4.7   NAVAJO GENERATING STATION                                      3

            4.8   NAVAJO PLANT SITE                                              4

            4.9   NAVAJO PROJECT                                                 4

            4.10  NET EFFECTIVE GENERATING CAPABILITY                            4

            4.11  OPERATING AGENT                                                4

            4.12  PARTICIPANTS                                                   4

            4.13  POWER                                                          4

            4.14  PROJECT AGREEMENTS                                             4

            4.15  PROJECT INSURANCE                                              5

            4.16  PROJECT MANAGER                                                5

            4.17  SECRETARY                                                      5

            4.18  STATION WORK                                                   5

            4.19  STATION WORK LIABILITY                                         5	

(i)

SECTION                                                                        PAGE
-------                                                                        ----
      4     DEFINITIONS (Continued)

            4.20  TRANSMISSION SYSTEM                                            6

            4.21  TRANSMISSION WORK                                              6

            4.22  TRANSMISSION WORK LIABILITY                                    6

            4.23  WILLFUL ACTION                                                 7

            4.24  ZERO NET LOAD                                                  9

      5     OWNERSHIP OF NAVAJO PROJECT                                          9

      6     GENERATING STATION CAPACITY AND ENERGY ENTITLEMENTS                 10

      7     TRANSMISSION SYSTEM                                                 11

      8     ADMINISTRATION                                                      15a

      9     OTHER COMMITTEES                                                    21

     10     PROJECT MANAGERS                                                    21

     11     OPERATING AGENTS                                                    23

     12     CONSTRUCTION SCHEDULES                                              24

     13     CONSTRUCTION COSTS                                                  24

     14     OPERATION AND MAINTENANCE COSTS                                     25

     15     ADVANCEMENT OF FUNDS                                                27

     16     TAXES                                                               29

     17     NONPARTITIONMENT                                                    30

     18     MORTGAGE AND TRANSFER OF INTERESTS                                  30

     19     RIGHT OF FIRST REFUSAL                                              33

     20     DESTRUCTION                                                         33

     21     INSURANCE                                                           35

     22     LIABILITY                                                           38	

(ii)

SECTION                                                                        PAGE
-------                                                                        ----
     23           INTERESTS HELD FOR THE USE AND BENEFIT OF UNITED STATES       41

     24           REIMBURSEMENT FOR COSTS AND EXPENSES                          43

     25           DEFAULTS                                                      43

     26           ARBITRATION                                                   45

     27           ACTIONS PENDING RESOLUTION OF DISPUTES                        46

     28           REMOVAL OF OPERATING AGENTS                                   47

     29           RELATIONSHIP OF PARTICIPANTS                                  47

     30           FEES                                                          48

     31           OFFICIALS NOT TO BENEFIT                                      48

     32           COVENANT AGAINST CONTINGENT FEES                              49

     33           EQUAL OPPORTUNITY                                             49

     34           WORK HOURS ACT OF 1962                                        54

     35           EXAMINATION OF RECORDS                                        56

     36           ASSIGNMENT OF CLAIMS                                          56

     37           CONVICT LABOR                                                 58

     38           UNCONTROLLABLE FORCES                                         58

     39           GOVERNING LAW                                                 59

     40           BINDING OBLIGATIONS                                           59

     41           NONDEDICATION OF FACILITIES                                   60

     42           PROJECT AGREEMENTS                                            60

     43           TERM                                                          61

     44           ASSIGNMENT OF INTERESTS                                       61

     45           NOTICES                                                       62

     46           MISCELLANEOUS PROVISIONS                                      63	

(iii)

SECTION                                                                        PAGE
-------                                                                        ----
     47     USE OF FACILITIES OF LOS ANGELES                                    65

     48     AGREEMENT SUBJECT TO COLORADO RIVER COMPACT                         66	

(iv)
NAVAJO PROJECT
PARTICIPATION AGREEMENT
1. PARTIES: The parties to this agreement are: THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States", acting through the Secretary of the Interior; ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, hereinafter referred to as "Arizona"; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of the City of Los Angeles, a municipal corporation of the State of California, hereinafter referred to as "Los Angeles"; NEVADA POWER COMPANY, a Nevada corporation, hereinafter referred to as "Nevada"; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona, hereinafter referred to as "Salt River Project"; and TUCSON GAS & ELECTRIC COMPANY, an Arizona corporation, hereinafter referred to as "Tucson".
2. RECITALS: This agreement is made with reference to the following facts, among others:
2.1 By the Colorado River Basin Project Act (82 Stat. 885) the Congress of the United States authorized the construction, operation and maintenance of the Central Arizona Project. Pursuant to Section 303 of said Act, the Secretary is authorized to enter into agreements
with non-Federal interests proposing to construct thermal generating powerplants whereby the United States shall acquire the right to such portions of their capacity, including delivery of power and energy over appurtenant transmission facilities to mutually agreed upon delivery points, as he determines is required in connection with the operation of the Central Arizona Project.
2.2 The Secretary has determined that the acquisition of a right to a portion of the capacity of the Navajo Project is the most feasible plan for supplying the power requirements of the Central Arizona Project and augmenting the Lower Colorado River Basin Development Fund.
2.3 The parties desire to participate in the construction, operation and maintenance of the Navajo Project in accordance with the provisions of this Participation Agreement and the other Project Agreements.
3. AGREEMENT: In consideration of the mutual covenants herein, the parties agree as follows:
4. DEFINITIONS: The following terms, when used herein, shall have the meanings specified:
4.1 CAPACITY: Electrical rating expressed in megawatts (mw) or megavolt-amperes (mva).
4.2 CONTRACTING OFFICER: The Secretary of the Interior or his duly authorized representative.
4.3 CO-TENANTS: Any one or all of the parties other
-2-
than the United States.
4.4 ENERGY: Kilowatt-hours (kwh).
4.5 FIRM OPERATION: The state of completion at which a component of the Navajo Project is determined by the appropriate engineering and operating committee to be reliable and at which that component can reasonably be expected to operate continuously at its rated Capacity.
4.6 GENERATION ENTITLEMENT SHARE: The percentage entitlement of each Participant in each unit of the Navajo Generating Station. Each Participant's percentage is as follows:

4.6.1     United States  =  24.3 per cent.

4.6.2     Arizona        =  14.0 per cent.

4.6.3     Los Angeles    =  21.2 per cent.

4.6.4     Nevada         =  11.3 per cent.

4.6.5     Salt River     =  21.7 per cent.
            Project

4.6.6     Tucson         =  7.5 per cent.	

4.7 NAVAJO GENERATING STATION: Three coal-fired steam electric generating units, each having a nameplate rating of 750 mw and an estimated Net Effective Generating Capability of 770 mw, and all facilities and structures used therewith or related thereto, to be constructed at or adjacent to the Navajo Plant Site. The Navajo Generating Station is generally described in
-3-
Exhibit A-1 hereto.
4.8 NAVAJO PLANT SITE: A parcel of land in Coconino County, Arizona, consisting of approximately 1,020 acres and being generally depicted on Exhibit B hereto.
4.9 NAVAJO PROJECT: The Navajo Project shall consist of the Navajo Generating Station and the Transmission System, all as generally described and depicted on Exhibit A hereto.
4.10 NET EFFECTIVE GENERATING CAPABILITY: The maximum continuous ability of each unit of the Navajo Generating Station to produce Power which is available to the Participants at the high voltage terminals of the generator step-up transformers.
4.11 OPERATING AGENT: A Co-Tenant responsible for the operation and maintenance of a component of the Navajo Project in accordance with the Project Agreements,
4.12 PARTICIPANTS: Any one or more of the parties, including the United States.
4.13 POWER: Kilowatts (kw) or megawatts (mw).
4.14 PROJECT AGREEMENTS: This Participation Agreement, the grants from the United States for use of Indian lands pursuant to 25 U.S.C.
Section 323 (Section 323 grants), the plant site lease, the co-tenancy agreements, the construction agreements, the operating agreements, other agreements for rights of way and easements for the Navajo Project facilities, the Navajo Station Coal
-4-
Supply Agreement, agreements related to the transportation of fuel, the Water Service Contract dated the 17th day of January, 1969 (Contract No. 14-06-400-5033), the agreements establishing the rights of the Participants in water rights or coal lands, the agreement between the Salt River Project and the United States concerning the capacity entitlements of the United States, as such agreements are originally executed or as they may thereafter be supplemented or amended.
4.15 PROJECT INSURANCE: Policies of insurance to be procured and maintained in accordance with Section 21 hereof.
4.16 PROJECT MANAGER: A Co-Tenant responsible for the construction and completion of a component of the Navajo Project in accordance with the Project Agreements.
4.17 SECRETARY: The Secretary of the Interior.
4.18 STATION WORK: Engineering, design, contract preparation, purchasing, construction, supervision, expediting, inspection, accounting, testing, protection, operation, repair, maintenance, replacement, reconstruction or use of and for the Navajo Generating Station.
4.19 STATION WORK LIABILITY: Liability of one or more Participants for damage suffered by anyone other than a Participant, whether or not resulting from the negligence of any Participant, its directors, officers,
-5-
employees or any other person or entity whose negligence would be imputed to such Participant, resulting from:
4.19.1 The performance or non-performance of Station Work.
4.19.2 The use or ownership of the Navajo Generating Station.
4.19.3 The past or future performance or non-performance of the obligations of any Participant under any of the Project Agreements, except obligations relating solely to the Transmission System.
4.20 TRANSMISSION SYSTEM: The Transmission System as generally described in Exhibit A-2 hereto.
4.21 TRANSMISSION WORK: Engineering, design, contract preparation, purchasing, construction, supervision, expediting, inspection, accounting, testing, protection, operation, repair, maintenance, replacement, reconstruction or use of and for the Transmission System.
4.22 TRANSMISSION WORK LIABILITY: Liability of one or more Participants for damage suffered by anyone other than a Participant, whether or not resulting from the negligence of any Participant, its directors, officers, employees or any other person or entity whose negligence would be imputed to such Participant,
-6-
resulting from:
4.22.1 The performance or non-performance of Transmission Work.
4.22.2 The use or ownership of the Transmission System or any component thereof.
4.22.3 The past or future performance or non-performance of the obligations of any Participant under any of the Project Agreements, except obligations relating solely to the Navajo Generating Station.
4.23 WILLFUL ACTION:
4.23.1 Action taken or not taken by a Participant at the direction of its directors, officers, Contracting Officer or employees having management or administrative responsibility affecting its performance under any of the Project Agreements, which action is knowingly or intentionally taken or failed to be taken with conscious indifference to the consequences thereof or with intent that injury or damage would result or would probably result therefrom.
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Willful Action does not include any act or failure to act which is merely involuntary, accidental or negligent.
4.23.2 Action taken or not taken by a Participant at the direction of its directors, officers, Contracting Officer or employees having management or administrative responsibility affecting its performance under any of the Project Agreements, which action has been determined by final arbitration award or final judgment or judicial decree to be a material default under any of the Project Agreements and which occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default or, if no time to cure is specified therein, occurs or continues thereafter beyond a reasonable time to cure such default.
4.23.3 Action taken or not taken by a Participant at the direction of its directors, officers, Contracting Officer or employees having management
-8-
or administrative responsibility affecting its performance under any of the Project Agreements, which action is knowingly or intentionally taken or failed to be taken with the knowledge that such action taken or failed to be taken is a material default under any Project Agreements.
4.23.4 The phrase "employees having management or administrative responsibility" as used in this Section 4.23 means employees of a Participant who are responsible for one or more of the executive functions of planning, organizing, coordinating, directing, controlling and supervising such Participant's performance under any of the Project Agreements.
4.24 ZERO NET LOAD: The load upon a generating unit when the generator gross output equals the total unit auxiliary consumption.
5. OWNERSHIP OF NAVAJO PROJECT:
5.1 The Co-Tenants shall acquire and own the Navajo Generating Station as tenants in common, as follows:

5.1.1  Arizona shall own an undivided 14.0 per cent interest
       therein.

                    -9-	

5.1.2  Los Angeles shall own an undivided 21.2 per cent
       interest therein.

5.1.3  Nevada shall own an undivided 11.3 per cent interest
       therein.

5.1.4  Salt River Project shall own:

            (i)   an undivided 21.7 per cent interest therein
                  for its own use and benefit, and

            (ii)  an undivided 24.3 per cent interest therein
                  for the use and benefit of the United States
                  in accordance with the Project Agreements.

5.1.5  Tucson shall own an undivided 7.5 per cent interest
       therein.	

5.2 The Co-Tenants shall acquire the ownership interests in the Transmission System components as described in Exhibit C hereto and shall own the same as tenants in common. Not every Co-Tenant will own an interest in every component of the Transmission System.
6. GENERATING STATION CAPACITY AND ENERGY ENTITLEMENTS:
6.1 The Capacity entitlement of each Participant in each unit of the Navajo Generating Station shall be the product of its Generation Entitlement Share and the Net Effective Generating Capability of such unit.
6.2 Each Participant shall be entitled to schedule
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for its account Power and Energy from any generating unit up to the amount of its available Capacity entitlement in such unit.
6.3 When a Participant requests operation of a unit, each Participant shall, unless otherwise mutually agreed, schedule for its account its share of minimum net generation which shall be the product of its Generation Entitlement Share and the minimum net generation established for such unit. At any time any Participant has scheduled from any unit an amount of Power in excess of its minimum net generation, then each of the other Participants shall only be obligated to schedule for its account an amount of Power equal to the product of its Generation Entitlement Share and the remaining amount of minimum net generation, provided that such reductions do not result in economic detriment to any Participant or the Operating Agent.
6.4 Operation of any unit by the Operating Agent shall be subject to scheduled outages or curtailments, operating emergencies and unscheduled outages or curtailments of such unit.
7. TRANSMISSION SYSTEM:
7.1 The Transmission System shall be designed, constructed and operated with the objective of permitting each Participant to transmit under normal operating conditions its share of entitlement in the Navajo
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Generating Station from the Navajo Generating Station to its designated points of delivery in a manner which will not, unreasonably affect the operation of the electric systems of the Participants, and, so that when operated in parallel with such systems, the loss of any one circuit will not cause any other circuit or element of and of the parallel transmission systems of a Participant to carry Power in excess of the short-time rating of such parallel transmission system as may be established by the owner of such system.
7.2 Each Participant shall have the right to use the Transmission System to transmit to its designated delivery points under normal operating conditions Power in an amount equivalent to its Capacity entitlement share in the Navajo Generating Station or to reserve the Transmission System for such transmission without regard to the origin, source, ownership or type of generation used to produce such Power.
7.3 Any Participant may acquire firm entitlement in the Transmission System, in addition to that provided for in Section 7.2 hereof upon the written agreement of all Participants having cost responsibility for the facilities over which such firm entitlement is sought, provided that said firm entitlement does not materially interfere with the right of any other Participant to transmit its entitlement as provided in Section 7.2
-12-
hereof. Such written agreement shall specify the amount of monetary compensation to be paid to and the allocation among the Participants for such firm entitlement.
7.4 Any Participant may make non-firm use of transmission Capacity in addition to its use under Section 7.2 hereof to the extent that transmission Capacity is determined to be available by the Operating Agents in accordance with criteria to be developed by the engineering and operating committee.
7.5 If two or more Participants concurrently desire to make non-firm use of transmission Capacity in the same segment of the Transmission System pursuant to Section 7.4 hereof, and the available transmission Capacity in such segment is not adequate to satisfy all such requests, then, unless otherwise agreed to, the available Capacity will be shared by those Participants concurrently requesting such Capacity in proportion to their cost responsibility in such segment.
7.6 The Participants' designated points of delivery shall be as follows:

7.6.1 Arizona     =  Navajo 500 KV Switchyard and Phoenix Area
                     Substation (s).

7.6.2 Los Angeles =  Navajo 500 KV Switchyard and McCullough
                     500 KV Switchyard.	

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7.6.3  Nevada     =  Navajo 500 KV Switchyard and McCullough
                     287 KV Switchyard.

7.6.4  Salt River =  Navajo 500 KV Switchyard
         Project     and Phoenix Area Substation (s).

7.6.5  Tucson     =  Navajo 500 KV Switchyard and Phoenix Area
                     Substation (s).

7.6.6  United     =  Navajo 500 KV Switchyard,
         States      McCullough 500 KV Switchyard, Phoenix
                     Area Substation (s), and the Moenkopi
                     Switchyard during the period in which the
                     United States is selling power to
                     Southern California Edison Company
                     pursuant to the Contract With Southern
                     California Edison Company For Interim
                     Sale Of United States' Entitlement In
                     Navajo Project for delivery at Moenkopi
                     switchyard.	

7.7 Each Participant shall be entitled to interconnect its transmission system with the Transmission System at its designated points of delivery, and the costs of such interconnection shall be paid by such Participant.
7.8 In the event of an outage or curtailment of any circuit or element of the Transmission System, the Operating Agents shall make every effort to furnish temporary alternate service through other circuits or elements of the Transmission System, and the Participants shall make every effort to furnish alternate
-14-
service to the other Participants over available parallel transmission systems, and, in the event of an outage or curtailment of any such parallel transmission system of a Participant, the Operating Agents shall make every effort to furnish temporary alternate service over the Transmission System. There will be no charge to any Participant for such service provided pursuant to this Section 7.8, except for compensation in Energy for additional losses that may be incurred as a result of providing such alternate service.
7.9 Upon agreement with all the other Participants, a Participant may at its expense make interconnections to the Transmission System at other points. Such agreement shall specify the terms and conditions under which such interconnections may be made and the charges to the interconnecting Participant, if any, and the distribution of such charges to the other Participants.
7.10 Unless otherwise agreed to by the engineering and operating committee, when the Capacity available to the Participants in any segment of the Transmission System is insufficient to accommodate all of the firm use of the Transmission System pursuant to Section 7.2 hereof, then the use of the available Capacity of that segment of the Transmission System will be allocated in proportion to the Participants' cost responsibility in such segment. It is not the intention of the Participants
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to dedicate any Capacity in the Transmission System for use by third parties.
7.11 The Transmission System will be interconnected with the Four Corners-Eldorado 500 KV transmission line at the Moenkopi Switchyard in accordance with the memorandum of intent attached as Exhibit H hereto.
7.12 For the purposes of Section 7, any use of any section of line by the United States which is in excess of the greater of (i) the United States' percentage cost responsibility in such line times the capability of such, or (ii) the capability required to supply the power requirements of the Central Arizona Project, shall be deemed to be non-firm use unless the right to such use shall have been acquired pursuant to Section 7.3 hereof.
8. ADMINISTRATION:
8.1 The Participants shall establish the following Committees, whose functions and shall be as described herein or in the subsequent Project Agreements:
-15a-
8.1.1 One coordinating committee for the Navajo Project, consisting of one representative from each Participant, who shall be an officer or general manager of a Participant or the designee of the Secretary, or his authorized alternates.
8.1.2 One engineering and operating committee for the Navajo Generating Station, consisting of two representatives from each Participant.
8.1.3 One engineering and operating committee for the Transmission System, consisting of two representatives from each Participant.
8.1.4 One auditing committee for the Navajo Project, consisting of two representatives from each Participant.
8.2 The coordinating committee shall have the following functions, among others:
8.2.1 To provide liaison among the Participants at the management level.
8.2.2 To exercise general supervision over the engineering and operating committees and the auditing committee.
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8.2.3 To consider matters referred to it by another committee.
8.2.4 To perform such other functions and duties as may be assigned to it in the Project Agreements.
8.3 The engineering and operating committees shall have the following functions, among others, at the construction stages:
8.3.1 To provide liaison among the Participants and between them and the respective Project Managers and Operating Agents with respect to the engineering, construction and start-up of the components of the Navajo Project.
8.3.2 To consider such matters and take such actions as are assigned to them in the Project Agreements.
8.3.3 To perform such other functions and duties as may be assigned to them by the coordinating committee.
8.4 The engineering and operating committee for the Navajo Generating Station shall have the following functions, among others, with respect to the operation of the Navajo Generating Station:
8.4.1 To provide liaison among the
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Participants and between them and the Operating Agent.
8.4.2 To review and act upon the Operating Agent's recommendations concerning:
Budgets for operation and maintenance and for capital expenditures
Manning tables
Operating and maintenance practices and procedures
Planned maintenance schedules
Policies for establishing inventories
Statistical and administrative reports, budgets and information and other similar records, and the form and preparation thereof, to be kept and performed by the Operating Agent
Procedures for determining Capacities of facilities
Procedures for capital expenditures
Procedures for performance and efficiency testing
Procedures for maintaining Power and Energy accounting
Procedures for dealing with operating emergencies or curtailed operations
Practices and procedures for scheduling Power and Energy
8.4.3 To perform such other functions and duties as may be assigned to it in the Project Agreements or by the coordinating committee.
8.5 The engineering and operating committee for the Transmission System shall have the following functions, among others, with respect to the operation of the Transmission System:
-18-
8.5.1 To provide liaison among the Participants and between them and the Operating Agents.
8.5.2 To review and act upon the Operating Agents' recommendations concerning:
Practices and procedures for accounting for transmission losses
Budgets for operation and maintenance and for capital expenditures
Operating and maintenance practices and procedures
Planned maintenance schedules
Policies for establishing inventories
Statistical and administrative reports, budgets and information and other similar records, and the form and preparation thereof, to be kept and performed by the Operating Agents
Procedures for determining Capacities of facilities
Procedures for capital expenditures
Procedures for performance testing
Procedures for maintaining Power and Energy accounting
Procedures for dealing with operating emergencies or curtailed operations
8.5.3 To perform such other functions and duties as may be assigned to it in the Project Agreements or by the coordinating committee.
8.6 The auditing committee shall have the following functions, among others:
8.6.1 To develop procedures for proper
-19-
accounting and financial liaison among the Participants in connection with the engineering, construction, operation, replacement and reconstruction of the Navajo Project.
8.6.2 To review accounting and financial aspects thereof.
8.6.3 To advise and make recommendations to the coordinating committee, the Project Managers and the Operating Agents on matters involving auditing and financial transactions.
8.6.4 To perform such other functions and duties as may be assigned to it in the Project Agreements or by the coordinating committee.
8.7 Within thirty (30) days after the execution of this agreement, each Participant shall designate its representatives on the committees hereby established. Such designation shall be in writing, with copies mailed to each of the Participants.
8.8 Any action or determination of a committee must be unanimous.
8.9 All actions, agreements or determinations made by the committees shall be reduced to writing. In addition, the engineering and operating committees and
-20-
the auditing committee shall keep written minutes and records of all meetings.
8.10 The committees shall have no authority to modify any of the terms, covenants or conditions of the Project Agreements.
8.11 If the engineering and operating committees or the auditing committee fail to agree while performing the functions and duties assigned to them in this agreement or in the other Project Agreements, then such disagreement shall be referred to the coordinating committee.
9. OTHER COMMITTEES:
9.1 Other committees may be established by the coordinating committee to perform such other functions and have such responsibility as may be assigned to them by the coordinating committee.
10. PROJECT MANAGERS:
10.1 The Project Managers shall be as follows:
10.1.1 Salt River Project shall be the Project Manager for the Navajo Generating Station.
10.1.2 Arizona shall be the Project Manager for the Transmission System, except for the Navajo-McCullough 500 KV line and the McCullough Substation.
-21-
10.1.3 Los Angeles shall be the Project Manager for the Navajo-McCullough 500 KV line and the McCullough Substation.
10.2 A Project Manager shall:
10.2.1 Provide for the engineering, design, contract preparation, purchasing, construction, supervision, expediting, inspection, accounting, testing and start-up of its designated component so as to complete such component for Firm Operation.
10.2.2 Promptly supply the Participants with information on major matters regarding its designated component and significant factors which affect construction schedules.
10.2.3 Provide the committees with all necessary records and information pertaining to matters within their designated responsibilities.
10.3 The Project Managers of the Transmission System shall optimize the design of the Transmission System. The Participants recognize that such optimization may result in modifications in the Transmission System as described in Exhibit A-2. In the event of such
-22-
modifications, the Participants shall agree on an equitable method of allocating the construction, operation and maintenance cost responsibilities.
11. OPERATING AGENTS:
11.1 The Operating Agents shall be as follows:
11.1.1 Salt River Project shall be the Operating Agent for the Navajo Generating Station.
11.1.2 Arizona shall be the Operating Agent for the Transmission System, except for the Navajo-McCullough 500 KV line and the McCullough Substation.
11.1.3 Los Angeles shall be the Operating Agent for the McCullough Substation.
11.1.4 Nevada shall be the Operating Agent for the Navajo-McCullough 500 KV line.
11.2 The Operating Agents shall be responsible for the operation and maintenance of their designated components of the Navajo Project, and in connection therewith shall:
11.2.1 Provide for engineering, contract preparation, purchasing, repair, supervision, training, expediting, inspection, testing, protection, operation, maintenance, retirement
-23-
and replacement.
11.2.2 Prepare recommendations covering the matters which are to be reviewed and acted upon by the engineering and operating committees.
11.2.3 Follow the practices and procedures which have been reviewed and approved by the engineering and operating committees and generally accepted practices in the electric utility industry.
11.2.4 Keep the Participants fully and promptly advised of material changes in conditions or other material developments affecting the performance of their designated responsibilities.
12. CONSTRUCTION SCHEDULES:
12.1 Construction of the Navajo Project has been planned with the objective of having each component available for start-up operation or energization for test date and for Firm Operation on the dates specified in Exhibit D hereto.
13. CONSTRUCTION COSTS:
13.1 Construction costs shall include all payments made and obligations incurred by the Project Managers for or in connection with the construction of the
-24-
Navajo Project, including but not limited to those costs specified in Exhibit E hereto.
13.2 The construction costs of the Navajo Generating Station shall be shared and paid for by the Participants in proportion to their Generation Entitlement Shares.
13.3 The construction costs of the Transmission System shall be shared and paid for by the Participants in the manner shown in Exhibit C hereto.
13.4 United States shall not bear any part of any other Participant's costs for interest, interest during construction, financing charges and franchise fees.
14. OPERATION AND MAINTENANCE COSTS:
14.1 Operation and maintenance costs of the Navajo Generating Station shall include all payments made and obligations incurred by the Operating Agent for or in connection with operation and maintenance, including but not limited to those costs specified in Exhibit F hereto.
14.2 The operation and maintenance costs of the Navajo Generating Station, including costs of water but excluding costs of fuel, shall be shared by the Participants in proportion to their Generation Entitlement Shares. The amount of fuel required for active storage and the initial emergency fuel storage, the rate of fuel consumption for Zero Net Load operation and the costs of start-up shall be determined in accordance with procedures to be established by the engineering and
-25-
operating committee, and the costs thereof and fixed fuel transportation charges, if any, shall be shared by the Participants in proportion to their Generation Entitlement Shares.
14.3 Except as provided in Section 14.2 hereof, the costs of fuel for each generating unit and the variable fuel transportation charges shall be shared by each Participant in the ratio that such Participant's monthly net energy generation scheduled from such unit bears to the total monthly net energy generation scheduled from such unit.
14.4 The costs of ash disposal shall be shared among the Participants in the same proportions as the monthly allocations of fuel costs among the Participants.
14.5 The operation and maintenance costs of the Transmission System shall include all payments made and obligations incurred by the Operating Agent for and in connection with such operation and maintenance, including but not limited to those costs specified in Exhibit G hereto.
14.6 The operation and maintenance costs of the Transmission System shall be shared and paid for by the Participants in the manner specified in Exhibit C hereto.
14.7 United States shall not bear any part of any other Participant's costs for interest, interest during
-26-
construction, financing charges and franchise fees.
15. ADVANCEMENT OF FUNDS:
15.1 Each Participant shall advance its share of construction costs and the operating and maintenance costs prior to the date when funds are required by the Project Managers or Operating Agents to pay such costs so that the Project Managers and Operating Agents in their capacity as such will not have to advance any funds on behalf of another Participant.
15.2 The Participants shall pay in advance all construction costs in accordance with cost estimates and payment schedules to be established by the Project Managers. The first such cost estimate and payment schedule shall be established not less than sixty (60) days following the execution of this agreement and shall be updated monthly thereafter. At least once each month following the initial payment of construction costs, as called for by such cost estimates and payment schedules, the Project Managers shall notify each Participant of the estimated weekly expenditures for the succeeding month, and each Participant shall pay to the Project Managers once each week its share of such estimate. Following completion of construction, each Project Manager shall compute the total costs of construction of its designated component of the Navajo Project and each Participant shall promptly settle any
-27-
balance of its indebtedness in accordance therewith. If at any time it is determined that a Participant has made advances which are greater or less than its share of the construction costs, the difference shall be paid, refunded or credited.
15.3 Each Participant shall pay its share of operating and maintenance costs in accordance with requests for funds submitted by the Operating Agents. Funds shall be requested as near to the date such funds are required by the Operating Agents as is practical under the circumstances, but a Participant shall have not less than three (3) business days advance notice prior to the due date for requested funds.
15.4 The United States shall be given appropriate credit for any interest in Federal lands, other than Indian lands, administered by the Department of the Interior which are made available for the Navajo Project. In instances where Federal laws or regulations prescribe fees or charges, or the basis or method for determining such fees or charges, for the use of Federal lands which are so administered and made available for the Navajo Project, the amount of such fees or charges or the provisions of such laws or regulations shall govern the determination of the credit to be given to the United States. In the absence of applicable Federal laws or regulations, the amount of the credit to be
-28-
given to the United States shall be as mutually agreed upon by the Participants or, failing such agreement, as conclusively determined by the Secretary.
16. TAXES:
16.1 The Participants shall use their best efforts to have any taxing authority imposing any taxes or assessments on the Navajo Project, or any interests or rights therein, assess and levy such taxes or assessments directly against the ownership or beneficial interest of each Participant.
16.2 All taxes or assessments levied against each Participant's ownership or beneficial interest in the Navajo Project, excepting those taxes or assessments levied against an individual Participant in behalf of any or all of the other Participants, shall be the sole responsibility of the Participant upon whose ownership or beneficial interest said taxes or assessments are levied.
16.3 If any property taxes or any other taxes or assessments are levied or assessed in a manner other than as specified in Section 16.1 hereof, it shall be the responsibility of the coordinating committee to establish equitable practices and procedures for the apportionment among the Participants of such taxes and assessments and the payment thereof.
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17. NONPARTITIONMENT:
17.1 Each Co-Tenant hereto agrees to waive any rights which it may have to partition any component of the Navajo Project, whether by partitionment in kind or by sale and division of the proceeds, and further agrees that it will not resort to any action in law or in equity to partition such component, and it waives the benefits of all laws that may now or hereafter authorize such partition for a term (i) which shall be co-terminus with the co-tenancy agreement for such component, or (ii) which shall be for such lesser period as may be required under applicable law.
18. MORTGAGE AND TRANSFER OF INTERESTS:
18.1 Except as provided in Section 18.6 hereof, each Co-Tenant shall have the right at any time and from time to time to mortgage, create or provide for a security interest in or convey in trust all or a part of its ownership share in the Navajo Project, together with an equal interest in the Project Agreements to a trustee or trustees under deeds of trust, mortgages or indentures, or to secured parties under a security agreement, as security for its present or future bonds or other obligations or securities, and to any successors or assigns thereof, without need for the prior written consent of any other Participant, and without such mortgagee, trustee or secured party assuming or becoming
-30-
in any respect obligated to perform any of the obligations of the Participants.
18.2 Except as provided in Section 18.6 hereof, any mortgagee, trustee or secured party under present or future deeds of trust, mortgages, indentures or security agreements of any of the Co-Tenants and any successor or assign thereof, and any receiver, referee or trustee in bankruptcy or reorganization of any of the Co-Tenants, and any successor by action of law or otherwise, and any purchaser, transferee or assignee of any thereof may, without need for the prior written consent of the other Participants, succeed to and acquire all the rights, titles and interests of such Co-Tenant in the Navajo Project and the Project Agreements, and may take over possession of or foreclose upon said property, rights, titles and interests of such Co-Tenant.
18.3 Except as provided in Section 18.6 hereof, each Co-Tenant shall have the right to transfer or assign all or part of its ownership share in the Navajo Project, together with an equal interest in the Project Agreements, to any of the following without the need for prior written consent of any other Participant:
18.3.1 To any entity acquiring all or substantially all of the property of such Co-Tenant; or
18.3.2 To any entity merged or consolidated
-31-
with such Co-Tenant; or
18.3.3 To any entity which is wholly-owned by a Co-Tenant; or
18.3.4 To the Salt River Valley Water Users' Association, an Arizona corporation, in the case of a transfer by Salt River Project.
18.4 Except as otherwise provided in Sections 18.1, 18.2, and 18.6 hereof, any successor to the rights, titles and interests of a Co-Tenant in the Navajo Project, together with an equal interest in the Project Agreements, shall assume and agree to fully perform and discharge all of the obligations hereunder of such Co-Tenant, and such successor shall notify each of the other Participants in writing of such transfer, assignment or merger, and shall furnish to each Participant evidence of such transfer, assignment or merger.
18.5 No Participant shall be relieved of any of its obligations under the Project Agreements by an assignment under this Section 18 without the express prior written consent of all of the remaining Participants.
18.6 The rights set forth in Sections 18.1, 18.2 and 18.3 hereof shall not apply to such interests of Salt River Project in the Navajo Project or in the Project Agreements as are held for the use and benefit of the United States, and Salt River Project shall transfer,
-32-
convey, mortgage, encumber or hypothecate any such interest only upon the prior written instruction of the United States.
19. RIGHT OF FIRST REFUSAL:
19.1 Except as provided in Section 18 hereof, should any Co-Tenant desire to transfer its ownership in the Navajo Project, or any portion thereof, to any person, entity or another Co-Tenant, each remaining Co-Tenant shall have the right of first refusal to purchase such interest on the basis of the greater of the following amounts:
19.1.1 The amount of the bona fide written offer from the buyers, or
19.1.2 The fair market value.
19.2 If more than one of the Co-Tenants desire to purchase such interest, it shall be transferred in the ratio that the Generation Entitlement Share of each Co-Tenant desiring to purchase bears to the total Generation Entitlement Shares of such Co-Tenants.
19.3 The provisions of this Section 1.9 shall not apply to any interest held by the Salt River Project for the use and benefit of the United States.
20. DESTRUCTION:
20.1 If a generating unit of the Navajo Generating Station should be destroyed to the extent that the cost of repairs or reconstruction is less than 60% of the
-33-
original cost thereof, the Participants shall, unless otherwise agreed, repair or reconstruct such generating unit to substantially the same general character or use as the original. The Participants shall share the costs of such repairs or reconstruction in proportion to their Generation Entitlement Shares in the generating unit so destroyed.
20.2 If a generating unit of the Navajo Generating Station should be destroyed to the extent that the cost of repairs or reconstruction is 60% or more of the original cost, the Participants shall, upon agreement, restore or reconstruct such unit to substantially the same general character or use as the original; provided, however, that should all of the Participants not agree to restore or reconstruct such unit, but some of the Participants nevertheless desire so to do, then the Participants who do not agree to restore or reconstruct shall sell their interests in such unit to the remaining Participants at their proportionate interests in the salvage value thereof. The Participants agreeing to repair or reconstruct such unit shall share the costs of repair or reconstruction in the proportion that the Generation Entitlement Share of each bears to the total Generation Entitlement Share of such Participants.
20.3 If any facilities of the Transmission System should be destroyed, the Participants shall, unless
-34-
otherwise agreed, repair or reconstruct such facilities to substantially the same general character or use as the original. The Participants shall share the costs of such repair or reconstruction in proportion to their original cost responsibility for the facilities so destroyed.
21. INSURANCE:
21.1 During the construction stage, each Project Manager shall procure or cause to be procured and maintain in force policies of comprehensive bodily injury and property damage liability insurance; all risk builder's risk insurance; contractor's equipment all risk floater insurance; employees' dishonesty bonds; automobile liability insurance; and workmen's compensation insurance covering employees of such Project Manager engaged in the performance of its responsibilities under the Project Agreements at the job site, and such other coverage as the Participants may agree is desirable.
21.2 During the operating stage, each Operating Agent shall procure or cause to be procured and maintain broad form steam turbine insurance, including reasonable expediting expenses; broad form boiler and pressure vessel insurance, including reasonable expediting expenses; work men's compensation insurance covering employees of the Operating Agent engaged in the performance of its responsibilities under the Project Agreements at the job site; physical damage insurance; comprehensive bodily
-35-
injury and property damage liability insurance; employees dishonesty bonds; and automobile liability insurance; and such other coverage as the Participants may agree is desirable.
21.3 Each Participant shall be named an insured, individually and jointly with the other Participants, on all insurance, and the comprehensive bodily injury and property damage liability insurance shall carry cross-liability endorsements.
21.4 Salt River Project shall be the loss payee for all property insurance covering such interests in the Navajo Project as it holds for the use and benefit of the United States. Any proceeds paid to Salt River Project by reason of the destruction or damage of such interests shall be held or disposed of by it pursuant to the terms of the Project Agreements.
21.5 The insurable values, limits, deductibles, retentions and other special terms of the Project Insurance shall be agreed upon by the Participants prior to the placement of such Project Insurance. Pending such agreement, the Project Managers or Operating Agents shall procure insurance binders providing such coverage as in their respective judgments is necessary. After such agreement, a policy of Project Insurance shall not be changed without the prior written consent of all of the Participants, except for minor changes and insurance
-36-
binders procured pursuant to this Section 21.5, as to which notification shall be given to the other Participants by the Project Manager or Operating Agent responsible for procuring such Project Insurance.
21.6 Each Participant shall be furnished with either a certified copy of each of the policies of the Project Insurance or a certified copy of each of the policy forms of Project Insurance, together with a line sheet therefor (and any subsequent amendments) naming the insurers and underwriters and the extent of their participation.
21.7 Each Co-Tenant shall have the right, by written notice to the party procuring the policy, to name any mortgagee, trustee or secured party on all or any of the Project Insurance policies as loss payees or additional insureds as their interests may appear.
21.8 Each of the Project Insurance policies shall be endorsed so as to provide that all additional named insureds shall be given the same advance notice of cancellation or material change as that required to be given to the party having procured the policy.
21.9 Project Insurance policies shall be primary insurance for all purposes and shall be so endorsed. Any insurance carried by a Participant individually shall not participate with the Project Insurance as respects any loss or claim for which valid and collectible Project Insurance shall apply and shall apply solely as respects
-37-
the individual interest of the Participant carrying such insurance.
21.10 In the event that any other Co-Tenant's insurance program affords equal or better coverage on a more favorable cost basis than that available to the Project Manager or Operating Agent responsible for procuring such Project Insurance, the Participants may agree by separate written agreement that such insurance program may be utilized to afford all or part of the Project Insurance coverage required by Sections 21.1 or 21.2 hereof.
22. LIABILITY:
22.1 Except for any damage resulting from Willful Action, and except to the extent of any damage covered by valid and collectible Project Insurance, liability on the part of any Participant (first Participant), or any of its directors, officers or employees, for any damage to any Participant (second Participant), whether or not caused by negligence, which occurs as the result of performance or non-performance of its responsibilities under the Project Agreements may not be collected from the Participant (first Participant), or any of its directors, officers or employees, by any action in law or equity by the Participant (second Participant).
22.2 In the event any insurer providing Project Insurance refuses to pay any judgment obtained by a Participant (second Participant) against another
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Participant (first Participant), or any of its directors, officers or employees, on account of liability referred to in Section 22.1 hereof, the Participant (first Participant), or any of its directors, officers or employees, against whom the judgment is obtained, shall, at the request of the prevailing Participant (second Participant) and in consideration for the release given in Section 22.1 hereof, execute such documents as may be necessary to effect an as assignment of its contractual rights against the non-paying insurer and thereby give the prevailing Participant (second Participant) the opportunity to enforce its judgment directly against such insurer.
22.3 Except for Station Work Liability resulting from Willful Action, and except as provided in Section 22.6 hereof, the costs and expenses of discharging all Station Work Liability imposed upon one or more of the Participants for which payment is not made by Project Insurance shall be allocated among the Participants in proportion to their Generation Entitlement Shares.
22.4 Except for Transmission Work Liability resulting from Willful Action, and except as provided in Section 22.6 hereof, the costs and expenses of discharging all Transmission Work Liability imposed upon one or more of the Participants for which payment is not made by the Project Insurance shall be allocated among the Participants in proportion to their cost responsibility in the
-39-
facilities involved in the operative facts which give rise to the Transmission Work Liability. However, if the proximate cause of such liability cannot be determined or is not related to any particular facilities, then such costs and expenses shall be allocated among the Participants in proportion to their Generation Entitlement Shares.
22.5 Each Participant shall be responsible for the consequences of its own Willful Action, and shall indemnify and hold harmless the other Participants from the consequences thereof.
22.6 Except for liability resulting from Willful Action, any Participant whose electric customer shall make a claim or bring an action for any death, injury, loss or damage arising out of electric service to such customer, shall indemnify and hold harmless all other Participants, their directors, officers and employees, from and against any liability for such death, injury, loss or damage. The term "electric customer" shall mean an electric consumer to whom no Power is delivered for resale.
22.7 The provisions of this Section 22 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 and collectible Project Insurance policies.
22.8 The terms "Participant" and "Participants",
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as used in this Section 22, shall include any Project Manager or Operating Agent, in its capacity as such.
23. INTERESTS HELD FOR THE USE AND BENEFIT OF UNITED STATES:
23.1 Salt River Project shall acquire and hold the interests acquired for the use and benefit of the United States so that the United States will realize the full use and benefit of its entitlement as provided for in the Project Agreements.
23.2 Salt River Project shall not execute any Project Agreement or any other agreement which purports to apply to the rights, titles or interests held for the use and benefit of the United States to which the United States is not a contracting party in its capacity as a Participant without the prior written consent of the United States. Except as otherwise provided in the Project Agreements, Salt River Project shall not exercise any rights, privileges or options in any such agreement for or on behalf of the United States without the prior written consent of the United States. With respect to any Project Agreement to which the United States is not a contracting party, except as otherwise provided in the Project Agreements, the United States shall have a right, co-equal with the rights of the Participants who are contracting parties to such Project Agreement, to participate in any decision or action taken under such Project Agreement which in any manner applies to or affects a right,
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title or interest held by Salt River Project for the use and benefit of the United States, to the same extent and to the same effect as though the United States were a contracting party to such Project Agreement.
23.3 Although it is the intention of the Participants that no Co-Tenant should incur any additional liability or burden by reason of the generating and transmission Capacity dedicated for the use and benefit of the United States,should any such liability or burden be imposed upon Salt River Project solely by reason of its holding legal title to any property or holding an interest in the Project Agreements for the use and benefit of the United States such liability or burden shall be shared by the Co-Tenants and allocated among them in the ratio that each Co-Tenant's Generation Entitlement Share bears to the total Generation Entitlement Shares of the Co-Tenants.
23.4 All moneys paid to Salt River Project pursuant to the Project Agreements which are for the use and benefit of the United States shall be segregated from its general funds and, upon written request of the Contracting Officer, such funds will be invested by Salt River Project in the manner specified in such request. All interest earned and appreciation in value on such investments shall inure to the benefit of the United States and all losses on such investments shall be at the risk of the United States. If the proceeds exceed the amount
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of the obligation for which they are designated or held, then, upon written request of the United States, Salt River Project shall pay such excess to the United States or its designee.
24. REIMBURSEMENT FOR COSTS AND EXPENSES:
24.1 The United States shall reimburse Salt River Project for all costs and expenses not otherwise specifically provided for in the Project Agreements but which are imposed upon, measured by and associated with the interests held by Salt River Project for the use and benefit of the United States.
25. DEFAULTS:
25.1 Unless otherwise provided in the Project Agreements, in the event of a default by any Participant under any of the Project Agreements:
25.1.1 The non-defaulting Participants, following receipt of reasonable notice, shall remedy the default, with the costs thereof allocated among and paid by each of the non-defaulting Participants in the ratio that their Generation Entitlement Shares bear to the total Generation Entitlement Shares of all non-defaulting Participants.
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25.1.2 The defaulting Participant shall remedy such default as soon as possible and shall pay upon demand to each non- defaulting Participant any amount paid by such non-defaulting Participant for the account of the defaulting Participant plus interest thereon at the rate of ten per cent (10%) per annum or the legal maximum rate of interest, whichever is the lesser, from the date of expenditure by the non-defaulting Participant.
25.1.3 If such default by a Co-Tenant shall continue for a period of six (6) months or more without having been remedied by the defaulting Co-Tenant, following a determination as a result of arbitration or judicial proceeding that an act of default exists, the matter may be re-submitted to arbitration as permitted by law, with a request that the arbitrators determine what additional remedies may be reasonably necessary or required under the circumstances.
25.1.4 The United States shall not be liable
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for any interest charges or attorneys' fees.
25.2 Any Participant may dispute an asserted default by it, provided that such Participant shall pay the disputed payment or perform the disputed obligation under written protest. Payments made without protest shall be deemed to be correct, except to the extent that audits may reveal the necessity for adjustments.
26 ARBITRATION:
26.1 If a dispute between any of the Participants should arise under the Project Agreements which does not involve the legal rights of or which will not create a legal obligation upon the United States under the Project Agreements, or will not affect the interests or rights held for the use and benefit of the United States under the Project Agreements, any Participant may call for submission of the dispute to arbitration, which call shall be binding upon all of the other Participants. Except as specifically provided in the Project Agreements, the arbitration shall be governed by the rules and practices of the American Arbitration Association. The award of the arbitrators shall be final and binding upon the Participants, and the costs and expenses of the arbitrators shall be shared equally by the Participants participating in the arbitration, unless otherwise decided by the arbitrators.
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26.2 If a dispute arises between any of the Participants which does or may involve the legal rights of or which will or may create a legal obligation upon the United States under the Project Agreements, or which affects or may affect the interests or rights held for the use and benefit of the United States under the Project Agreements, then any Participant may call for submission to arbitration of any part of the dispute, issue or action related thereto which the United States may lawfully submit to arbitration. If the Contracting Officer agrees to such arbitration, or if the Contracting Officer refuses or fails to arbitrate and a court of competent jurisdiction thereafter finally decides that the United States may lawfully submit the matter in dispute to arbitration, it shall be conducted in the manner set forth in Section 26.1 hereof, or in such other manner as may be provided for by Federal law.
27. ACTIONS PENDING RESOLUTION OF DISPUTES:
27.1 If a dispute should arise which is not resolved by the coordinating committee, then, pending the resolution of the dispute by arbitration or judicial proceedings, the Project Managers or Operating Agents shall proceed with the Station Work or Transmission Work in a manner consistent with the Project Agreements and generally accepted practice in the electric utility industry, and the Participants shall advance the funds required to
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perform such Station Work or Transmission Work in accordance with the applicable provisions of the Project Agreements. The resolution of any dispute involving the failure of one of the committees to reach agreement upon matters involving future expenditures shall have prospective application from the date of final determination, and amounts advanced by the Participants pursuant to this Section 27.1 during the pendency of such dispute shall not be subject to refund except upon a final determination that the expenditures were not made in a manner consistent with generally accepted practice in the electric utility industry.
28. REMOVAL OF OPERATING AGENTS:
28.1 If an Operating Agent shall fail to remedy any material act of default within a reasonable time following a final determination by a panel or arbitrators or judicial proceeding that the Operating Agent is in default, then any Participant may cause the Operating Agent to be removed by serving written notice of removal upon such Operating Agent and upon all of the other Participants.
29. RELATIONSHIP OF PARTICIPANTS:
29.1 The covenants, obligations and liabilities of the Participants are intended to be several and not joint or collective and, except as expressly provided in the Project Agreements, nothing herein contained shall ever
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be construed to create an association, joint venture, trust or partnership, or to impose a trust or partnership covenant, obligation or liability on or with regard to any one or more of the Participants. Each Participant shall be individually responsible for its own covenants, obligations and liabilities as herein provided. No Participant or group of Participants shall be under the control of or shall be deemed to control any other Participant or the Participants as a group. No Participant shall be the agent of or have a right or power to bind any other Participant without its express written consent, except as provided in the Project Agreements.
29.2 The Co-Tenants hereby elect to be excluded from the application of Subchapter "K" of Chapter 1 of Subtitle "A" of the Internal Revenue Code of 1954, or such portion or portions thereof as may be permitted or authorized by the Secretary of the Treasury or his delegate insofar as such Subchapter, or any portion or portions thereof, may be applicable to the Co-Tenants under the Project Agreements.
30. FEES:
30.1 No Project Manager or Operating Agent shall receive any fee or profit hereunder.
31. OFFICIALS NOT TO BENEFIT:
31.1 No Member of or Delegate to Congress or Resident Commissioner shall be admitted to any share or part of
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this agreement or to any benefit that may arise herefrom, but this restriction shall not be construed to extend to this agreement if made with a corporation or company for its general benefit.
32. COVENANT AGAINST CONTINGENT FEES:
32.1 The Co-Tenants warrant that no person or selling agency has been employed or retained to solicit or secure this agreement upon an agreement or understanding for a commission, percentage, brokerage or contingent fee, excepting bona fide employees or bona fide established commercial or selling agencies maintained by a Co-Tenant for the purpose of securing business. For breach or violation of this warranty the United States shall have the right to annul this agreement without liability or in its discretion to deduct from the payments to be made hereunder, or otherwise recover the full amount of such commission, percentage, brokerage or contingent fee.
33. EQUAL OPPORTUNITY:
33.1 Except as provided in Title.42 U.S.C. Section 2000-e-2(i) and in keeping with any obligation undertaken by any of the Co-Tenants, in this section referred to as the Contractor, or their assigns, pursuant to the terms of said Title 42 U.S.C. Section 2000-e-2(i) to give preference for employment to qualified Indians for work on or near an Indian Reservation, during the performance of this
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agreement, the Contractor agrees as follows:
33.1.1 The Contractor will not discriminate against any employee or applicant for employment because of race, color, religion, sex or national origin. The Contractor will take affirmative action to insure that applicants are employed, and that employees are treated during employment without regard to their race, color, religion, sex or national origin. Such action shall include, but not be limited to the following:
Employment, upgrading, demotion or transfer; recruitment or recruitment advertising; layoff or termination; rates of pay or other forms of compensation; and selection for training, including apprenticeship. The Contractor agrees to post in conspicuous places available to employees and applicants for employment, notices to be provided by the Contracting Officer setting forth the provisions of this equal
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opportunity clause.
33.1.2 The Contractor will, in all solicitations or advertisements for employees placed by or on behalf of the Contractor, state that all qualified applicants will receive consideration for employment without regard to race, color, religion, sex or national origin.
33.1.3 The Contractor will send to each labor union or representative of workers with which it has a collective bargaining agreement or other contract or understanding, a notice to be provided by the agency Contracting Officer advising the labor union or workers' representative of the Contractor's commitments under this equal opportunity clause, and shall post copies of the notice in conspicuous places available to employees and applicants for employment.
33.1.4 The Contractor will comply with all provisions of Executive Order No. 11246 of September 24, 1965, and of the rules, regulations and
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relevant orders of the Secretary of Labor.
33.1.5 The Contractor will furnish all information and reports required by Executive Order No. 11246 of September 24, 1965, and by the rules, regulations and orders of the Secretary of Labor, or pursuant thereto, and will permit access to its book, records and accounts by the contracting agency and the Secretary of Labor for purposes of investigation to ascertain compliance with such rules, regulations and orders.
33.1.6 In the event of the Contractor's non-compliance with this equal opportunity clause, or with any of the said rules, regulations or orders, this agreement may be cancelled, terminated or suspended in whole or in part, and the Contractor may be declared ineligible for further government contracts in accordance with procedures authorized in Executive Order
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No. 11246 of September 24, 1965, and such other sanctions may be imposed and remedies invoked as provided in Executive Order No. 11246 of September 24, 1965, or by rule, regulation or order of the Secretary of Labor, or as otherwise provided by law.
33.1.7 The Contractor will include the provisions Of Sections 33.1.1 through 33.1.7 hereof in every subcontract or purchase order unless exempted by rules, regulations or orders of the Secretary of Labor issued pursuant to
Section 204 of Executive Order No. 11246 of September 24, 1965, so that such provisions will be binding upon each subcontractor or vendor. The Contractor will take such action with respect to any subcontract or purchase order as the contracting agency may direct as a means of enforcing such provisions, including sanctions for non-compliance; provided, however, that, in the event the Contractor becomes involved in,
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or is threatened with, litigation with a subcontractor or vendor as a result of such direction by the contracting agency, the Contractor may request the United States to enter into such litigation to protect the interests of the United States.
34. WORK HOURS ACT OF 1962:
34.1 This agreement, to the extent that it is of a character. specified in the Contract Work Hours Standards Act (Public Law 87-581, 76 Stat. 357) and is not covered by the Walsh-Healey Public Contracts Act (41 U.S.C. Sections 35-45), is subject to the following provisions and to all other provisions and exceptions of said Contract Work Hours Standards Act:
34.1.1 No Contractor or subcontractor contracting for any part of the contract work which may require or involve the employment of laborers or mechanics shall require or permit any laborer or mechanic in any workweek in which he is employed on such work, to work in excess of eight (8) hours in any calendar day or in excess of forty (40) hours in any workweek unless such laborer or mechanic receives compensation at a
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rate not less than one and one-half times his basic rate of pay for all hours worked in excess of eight (8) hours in any calendar day or in excess of forty (40) hours in such workweek, whichever is the greater number of overtime hours.
34.1.2 In the event of any violation of the provisions of
Section 34.1.1 hereof, the Contractor and any subcontractor responsible for such violation shall be liable to any affected employee for his unpaid wages. In addition, such Contractor or subcontractor shall be liable to the United States for liquidated damages. Such liquidated damages shall be computed, with respect to each individual laborer or mechanic employed in violation of the provisions of Section 34.1.1 hereof, in the sum of Ten Dollars ($10.00) for each calendar day on which such employee was required or permitted to work in excess of eight (8) hours or in excess of forty
(40) hours in a workweek without payment of the required overtime wages.
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34.1.3 The Secretary may withhold, or cause to be withheld, from any monies payable on account of work performed by the Contractor or subcontractor, the full amount of wages required by this agreement, and such sums as may administratively be determined to be necessary to satisfy any liabilities of such Contractor or subcontractor for liquidated damages as provided in
Section 34.1.2 hereof.
34.1.4 The Contractor shall require the foregoing Sections 34.1.1, 34.1.2, 34.1.3 and this Section 34.1.4 to be inserted in all subcontracts.
35. EXAMINATION OF RECORDS:
35.1 The Co-Tenants agree that the Comptroller General of the United States, or any of his duly authorized representatives, shall, until the expiration of three (3) years after final payment under the Project Agreements, have access to and the right to examine any directly pertinent books, documents, papers and records of the Co-Tenants involving transactions related to this agreement.
36. ASSIGNMENT OF CLAIMS:
36.1 Pursuant to the provisions of the Assignment
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of Claims Act of 1940, as amended (31 U.S.C. Section 203, 41 U.S.C.
Section 15), if this agreement provides for payments aggregating $1,000 or more, claims for monies due or to become due any Co-Tenant from the Government under this agreement may be assigned to a bank, trust company, or other financing institution, including any Federal lending agency, and may thereafter be further assigned and reassigned to any such institution. Any such assignment or reassignment shall cover all amounts payable under this agreement and not already paid, and shall not be made to more than one party, except that any such assignment or reassignment may be made to one party as agent or trustee for two or more parties participating in such financing. Unless otherwise provided in this agreement, payments to an assignee of any monies due or to become due under this agreement shall not, to the extent provided in said Act, as amended, be subject to reduction or setoff. (The preceding sentence applies only if this agreement is made in time of war or national emergency as defined in said Act and is with the Department of Defense, the General Services Administration, the Atomic Energy Commission, the National Aeronautics and Space Administration, the Federal Aviation Agency, or any other department or agency of the United States designated by the President pursuant to Clause 4 of the proviso of Section 1 of the Assignment of Claims Act of 1940, as amended by the Act
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of May 15, 1951, 65 Stat. 41.)
36.2 In no event shall copies of this agreement or of any plans, specifications, or other similar documents relating to work under this agreement, if marked "Top Secret", "Secret", or "Confidential", be furnished to any assignee of any claim arising under this agreement or to any other person not entitled to receive the same. However, a copy of any part or all of this agreement so marked may be furnished, or any information contained therein may be disclosed, to such assignee upon the prior written authorization of the Contracting Officer.
37. CONVICT LABOR:
37.1 In connection with the performance of work under this agreement, the Contractor agrees not to employ any person undergoing sentence or imprisonment at hard labor.
38. UNCONTROLLABLE FORCES:
38.1 No Participant shall be considered to be in default in the performance of any of its obligations under the Project Agreements (other than obligations of said Participant to pay costs and expenses) when a failure of performance shall be due to uncontrollable forces. The term "uncontrollable forces" shall be any cause beyond the control of the Participant affected, including but not restricted to failure of or threat of failure of facilities, flood, earthquake, storm, fire, lightning,
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epidemic, war, riot, civil disturbance or disobedience, labor dispute, labor or material shortage, sabotage, restraint by court order or public authority, and action or non-action by or failure to obtain the necessary authorizations or approvals from any governmental agency or authority, which by exercise of due diligence such Participant 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 a Participant to settle any strike or labor dispute in which it may be involved. Any Participant rendered unable to fulfill any of its obligations under the Project Agreements by reason of uncontrollable forces shall exercise due diligence to remove such inability with all reasonable dispatch. The term "Participant" as used in this Section 38.1 shall include any Project Manager or Operating Agent, in its capacity as such.
39. GOVERNING LAW:
39.1 To the extent permitted by law, this agreement shall be governed by the laws of the State of Arizona, except insofar as controversies involving the rights of the United States are concerned.
40. BINDING OBLIGATIONS:
40.1 All of the obligations set forth in the Project Agreements shall bind the Participants and their
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successors and assigns, and such obligations shall run with the Co-Tenants' rights, titles and interests in the Navajo Project and with all of the interests of each Participant in the Project Agreements; provided that any mortgagee, trustee or secured party shall not be finally obligated for obligations arising prior to taking of possession or the initiation of remedial proceedings.
41. NONDEDICATION OF FACILITIES:
41.1 The Project Agreements shall not be construed to grant to any Co-Tenant any rights of ownership in, possession of or control over the electric system of the United States.
41.2 The Project Agreements shall not be construed to grant to the United States any rights of ownership in, possession of, or control over the electric system of any Co-Tenant.
41.3 The Co-Tenants do not intend to dedicate and nothing in the Project Agreements shall be construed as constituting a dedication by any Co-Tenant of its properties or facilities, or any part thereof, to the United States or to any other Co-Tenant or to the customers of the United States or to the customers of any other Co-Tenant.
42. PROJECT AGREEMENTS:
42.1 The Participants hereto agree to negotiate in good faith and to proceed with diligence to obtain all
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of the Project Agreements among the Participants and between the Participants and other entities.
42.2 It is acknowledged by the Participants that one or more of the Project Agreements may contain provisions which are in conflict with or contrary to the terms of this agreement, and any such provision in a Project Agreement executed subsequent to the execution of this agreement shall be deemed to supersede, amend or modify any conflicting or contrary provision herein. The mutual agreement of the Participants to supersede, amend or modify the terms hereof shall constitute the legal consideration to support such change in the legal rights and obligations of the Participants.
43. TERM:
43.1 This agreement shall become effective when it has been duly executed and delivered on behalf of all of the Participants and shall be effective during the interim between the date of execution thereof and the effective date of the last of the Project Agreements; provided if any of the Project Agreements shall fail to become effective, then this agreement shall have a term of fifty (50) years from its effective date.
44. ASSIGNMENT OF INTERESTS:
44.1 Any Co-Tenant who acquires in its name an interest in any real or personal property or contract which is part of the Navajo Project shall transfer and assign an
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undivided interest therein to the other Co-Tenants so that the ownership and rights of the Co-Tenants in such property or contract shall be as provided for in the Project Agreements.
45. NOTICES:
45.1 Any notice, demand or request provided for in the Project Agreements shall be deemed properly served, given or made if delivered in person or sent by registered or certified mail, postage prepaid, to the persons specified below:

45.1.1      United States of America
            c/o The Secretary of the Interior
            United States Department of the Interior
            Washington, D. C.  20240

45.1.2      Arizona Public Service Company
            c/o Secretary
            P. O. Box 21666
            Phoenix, Arizona  85036

45.1.3      Department of Water and Power of the City of
              Los Angeles
            c/o General Manager
            P. O. Box 111
            Los Angeles, California  90054

45.1.4      Nevada Power Company
            c/o President
            P. O. Box 230
            Las Vegas, Nevada  89109

45.1.5      Salt River Project Agricultural
              Improvement and Power District
            c/o Secretary
            P. O. Box 1980
            Phoenix, Arizona  85001

45.1.6      Tucson Gas & Electric Company
            c/o Secretary
            P. O. Box 711
            Tucson, Arizona  85702	

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45.2 Any Participant may, at any time, by written notice to all other Participants, designate different or additional persons or different addresses for the giving of notices hereunder.
45.3 Any Project Manager or Operating Agent shall provide to each Participant a copy of any notice, demand or request given or received by it in connection with any of the Project Agreements.
46. MISCELLANEOUS PROVISIONS:
46.1 Each Participant agrees, upon request by the other Participants, to make, execute and deliver any and all documents reasonably required to implement the Project Agreements,
46.2 The captions and headings appearing in the Project Agreements are inserted merely to facilitate reference and shall have no bearing upon the interpretation thereof.
46.3 Each term, covenant and condition of the Project Agreements is deemed to be an independent term, covenant and condition, and the obligation of any Participant to perform all of the terms, covenants and conditions to be kept and performed by it is not dependent on the performance by the other Participants of any or all of the terms, covenants and conditions to be kept and performed by them.
46.4 In the event that any of the terms, covenants or conditions of any of the Project Agreements, or the
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application of any such term, covenant or condition, shall be held invalid as to any person or circumstance by any court having jurisdiction in the premises, the remainder of such Project Agreement, and the application of its terms, covenants or conditions to such persons or circumstances shall not be affected thereby.
46.5 The Project Agreements shall be subject to filing with, and to such changes or modifications as may from time to time be directed by, competent regulatory authority, if any, in the exercise of its jurisdiction.
46.6 The Co-Tenants shall install and diligently operate in the Navajo Generating Station equipment offering the most effective commercially proven electrostatic concept, or other equally effective and acceptable equipment available under the technology known at the time of design, having a design efficiency for removal of particulate matter of 99.5% to minimize smoke, flyash and dust in stack emissions; provided that, except as amended in this Section 46.6, the provisions of Article 16 of the Water Service Contract dated January 17, 1969 (Contract No. 14-06-400-5033) shall remain in full force and effect.
46.7 Any waiver at any time by any Participant of its rights with respect to a default or any other matter arising in connection with this agreement shall not be deemed a waiver with respect to any subsequent default or matter.
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47. USE OF FACILITIES OF LOS ANGELES:
47.1 The United States may use, for such period or periods of time as it desires, the 500 KV transmission line of Los Angeles between McCullough Substation and Eldorado Substation and associated terminal facilities to the extent of the right of Los Angeles to use such terminal facilities. Unless otherwise agreed, the United States' right to use the facilities of Los Angeles shall not exceed 250 megawatts. Payment shall be made annually by the United States to Los Angeles for any period of such use at the rate of eight percent (8%) per annum of the capital cost of Los Angeles in such line and in switching facilities at Eldorado and McCullough Substations installed to terminate the line, as described in Exhibit C, times the ratio that the Capacity desired by the United States in megawatts in such line bears to 1,000 megawatts.
47.2 The land presently held by Los Angeles under Bureau of Land Management Grant No. N-2763, dated January 23, 1969, which land comprises the site of McCullough Substation, may be utilized by Nevada and United States without charge for such use other than as provided in Section 47.3. If and when Los Angeles acquires fee title to such land, Nevada and United States shall each continue to have the right to use such land, and for any period of such use the user shall pay
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Los Angeles annually at the rate of six percent (6%) of the investment of Los Angeles in such land times the user's Common Facilities cost responsibility percentage in McCullough Substation as provided for in Exhibit C.
47.3 During any period of use of land by Nevada or United States pursuant to Section 47.2, the user shall reimburse Los Angeles for all costs and expenses not otherwise specifically provided for in the Project Agreements but which are imposed upon Los Angeles by virtue of its holding interests in or owning the land comprising the site for the McCullough Substation in the amount determined by multiplying such costs and expenses by the user's Common Facilities cost responsibility percentage in McCullough Substation as provided in Exhibit C.
48. AGREEMENT SUBJECT TO COLORADO RIVER COMPACT:
48.1 This agreement is made upon the express condition and with the express understanding that all rights hereunder shall be subject to and controlled by the Colorado River Compact, being the compact or agreement signed at Santa Fe, New Mexico, November 24, 1922, pursuant to Act of Congress approved August 19, 1921, entitled "An Act to permit a compact or agreement between the States of Arizona, California, Colorado, Nevada, New Mexico, Utah and Wyoming respecting the disposition and apportionment of the waters of the Colorado River, and for other purposes", which Compact was approved in
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Section 13 (a) of the Boulder Canyon Project Act.
IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be executed as of the 30th day of September, 1969.
THE UNITED STATES OF AMERICA

By /s/ Walter J. Hickel
   --------------------------
   Secretary of the Interior	

ARIZONA PUBLIC SERVICE COMPANY

ATTEST:                              By /s/ M. C. Titus
/s/ Gerald Griffin                      -------------------------
---------------                         Executive VICE PRESIDENT
Assistant Secretary
                                     DEPARTMENT OF WATER AND POWER
                                     OF THE CITY OF LOS ANGELES	

by
BOARD OF WATER AND POWER COMMISSIONERS
OF THE CITY OF LOS ANGELES
ATTEST:

/s/ Mary J. Born                     By    /s/ Frank R. Palmieri
---------------                            ---------------------
SECRETARY                                   PRESIDENT	

NEVADA POWER COMPANY
ATTEST:

/s/ Authorized Signatory             By  /s/ Harry Allen
---------------                          ----------------
Secretary                                President

[STAMP]                                               [STAMP]	

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SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT
ATTEST:

/s/ F. E. Smith                      By /s/ V. I. Corbell
---------------                         ------------------
Secretary                               President

                                     TUCSON GAS & ELECTRIC COMPANY

ATTEST:
                                     By /s/ H. R. Catlin
/s/ W. D. Brooks                        ------------------
----------------                        VICE PRESIDENT	

ASSISTANT SECRETARY
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District of Columbia   )
                       ) ss.
City of Washington     )	

On this the 3rd day of November, 1970, before me, the undersigned officer, personally appeared Walter J. Hickel, Secretary of the Interior of the United States of America, known to me to be the person described in the foregoing Navajo Project Participation Agreement (Contract No. 14-06-300-2131), and acknowledged that he executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

                                     /s/ Kathy A. Willing
[SEAL]                               -------------------------------------
                                     My Commission Expires May 14, 1974	

State of Arizona     )
                     ) ss.
County of Maricopa   )	

On this the 16th day of March, 1970, before me, the undersigned officer, personally appeared M. C. Titus, who acknowledged himself to be the Executive Vice President of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, and that he, as such Executive Vice President, being authorized so
-69-
to do, executed the foregoing Navajo Project Participation Agreement (Contract No. 14-06-300-2131) for the purposes therein contained, by signing the name of the corporation by himself as such Executive Vice President.
In witness whereof I hereunto set my hand and official

[SEAL]                               /s/ Authorized Signatory
                                     ------------------------
                                     Notary Public	

My commission expires:
My Commission Expires Oct. 15, 1971

State of California    )
                       )  ss.
County of Los Angeles  )                See Page 74	

On this, the _______________ day of_____________________________, 1970, before me the undersigned officer, personally appeared Frank R. Palmieri, the President of the Board of Water and Power Commissioners of the DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of the City of Los Angeles, a municipal corporation of the State of California, known to me to be the person described in the foregoing Navajo Project Participation Agreement (Contract No. 14-06-300-2131), and acknowledged that he executed the same in the capacity therein stated and for the purposes therein contained.
-70-
In witness whereof I hereunto set my hand and official seal.

Notary Public My commission expires:

State of Nevada       )
                      ) ss.
County of Clark       )	

On this the 12th day of June, 1970, before me, the undersigned officer, personally appeared Harry Allen, known to me to be the President of NEVADA POWER COMPANY, a Nevada corporation, and that he, as such President, being authorized so to do, executed the foregoing Navajo Project Participation Agreement (Contract No. 14-06-300-2131) for the purposes therein contained, by signing the name of the corporation by himself as President.
In witness whereof, I hereunto set my hand and official seal.

                                                         /s/  Myrtice L. Carroll
                                                         -----------------------
                                                               Notary Public
My commission expires:	

[STAMP]
-71-

State of Arizona    )
                    ) ss.
County of Maricopa  )	

On this the 16th day of March, 1970, before me, the undersigned officer, personally appeared V. I. Corbell and F. E. Smith, the President and Secretary, respectively, of SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an Arizona agricultural improvement district, known to me to be the persons described in the foregoing Navajo Project Participation Agreement (Contract No. 14-06-300-2131), and acknowledged that they executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

 /s/ Joanne Claridge
--------------------     [SEAL]
   Notary Public	

My commission expires:
My Commission Expires July 11, 1972

State of Arizona       )
                       ) ss.
County of Pima         )	

On this the 11th day of June, 1970, before me, the undersigned officer, personally appeared H. R. Catlin, who acknowledged himself to be the Vice President of TUCSON GAS & ELECTRIC COMPANY, an Arizona corporation, and that he,
-72-
as such Vice President, being authorized so to do, executed the foregoing Navajo Project Participation Agreement (Contract No. 14-06-300-2131) for the purposes therein contained, by signing the name of the corporation by himself as Vice President.
In witness whereof I hereunto set my hand and official seal.

  /s/ Diana Howland
--------------------
   Notary Public	

My commission expires:
[SEAL]
My.Commission Expires Dec. 8, 1972

-73-

State of California     )
                        ) ss.
County of Los Angeles   )	

On this, the 1st day of October, 1970, before me, the undersigned officer, personally appeared Frank R. Palmieri and Mary J. Born, who were on November 20, 1969, the President and Secretary, respectively, of the Board of Water and Power Commissioners of the DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of The City of Los Angeles, a municipal corporation of the State of California, known to me to be the persons described in the foregoing Navajo Project Participation Agreement (Contract No. 14-06-300-2131; DWP No. 10334), and acknowledged that they executed the same on November 20, 1969, in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

/s/ Linda L. Newman
--------------------
 Notary Public	

My commission expires:
[STAMP]

-74-
EXHIBIT A
DESCRIPTION OF NAVAJO PROJECT
Exhibit A-l - Description of Navajo Generating Station
The Navajo Generating Station shall consist of the following:
I. Three steam electric generating units (Unit 1, Unit 2 and Unit
3), which shall have a nameplate rating of 750,000 KW and shall be tandem-compound, four flow, single reheat, turbine-generator units with initial steam conditions of 3500 psig and 1000 F. and reheat to 1000 F. and designed to take steam from three pulverized coal-fired super-critical steam generator units.
II. All auxiliary equipment associated with said units.
III. An administration building machine shop and warehouse to be located adjacent to the powerplant.
IV. A pumping station and all associated equipment to be located on the Colorado River.
V. 500 KV step-up transformers and all equipment associated therewith up to the point where the leads from the said transformers terminate at the dead-end structure in the Navajo 500 KV Switchyard.
VI. Standby auxiliary power transformation equipment and related facilities.
VII. Plant control and communication facilities and associated buildings or equipment.
Exhibit A-2 - Description of Transmission System
The Transmission System shall consist of the following:
I. Navajo 500 KV Switchyard
A. The Navajo 500 KV Switchyard shall be a basic breaker-and-a-half scheme providing termination for facilities as presently planned:
1. Navajo Generating Unit #1.
2. Navajo Generating Unit #2.
3. Navajo Generating Unit #3.
4. Navajo-McCullough 500 KV Line.
5. Navajo-Moenkopi 500 KV Line.
6. Navajo-Phoenix Area 500 KV Line.
B. The switchyard limits for purposes shown on Exhibit C will be the low voltage bushings of the generator step-up transformer and where the 500 KV leads from the series and shunt compensation attach to the switchyard structure. The switchyard limits for purposes of design, construction, operation and maintenance shall be the switchyard side of the first 500 KV transmission line dead-end tower located outside the switchyard or where the 500 KV leads from the generator step-up transformers attach to the switchyard structure. The switchyard will include the metering, protective equipment, communications equipment,
-2-
relaying and associated equipment, etc.
II. Navajo-McCullough 500 KV Line
The Navajo-McCullough 500 KV line for purposes shown on Exhibit C shall consist of approximately 250 miles of 500 KV line with associated series and shunt compensation, terminated at the appropriate 500 KV switchracks in the Navajo 500 KV Switchyard and McCullough 500 KV Switchyard.
III. Navajo-Moenkopi 500 KV Line
The Navajo-Moenkopi 500 KV line for purposes shown on Exhibit C shall consist of approximately 76 miles of 500 KV line with associated series and shunt compensation, terminated at the appropriate 500 KV switchracks in the Navajo 500 KV Switchyard and Moenkopi 500 KV Switchyard.
IV. Navajo-Phoenix Area 500 KV Line
The Navajo-Phoenix Area 500 KV line for purposes shown on Exhibit C shall consist of approximately 249 miles of 500 KV line with associated series and shunt compensation, terminated at the appropriate switchracks in the Navajo 500 KV Switchyard and Phoenix Area Substation(s).
V. Moenkopi-Phoenix Area 500 KV Line
The Moenkopi-Phoenix Area 500 KV line for purposes shown on Exhibit C shall consist of approximately 173 miles of 500 KV line with associated series and shunt compensation, terminated at the appropriate 500 KV switchracks in the Moenkopi 500 KV Switchyard and Phoenix Area
-3-
Substation(s).
VI. Other Associated Components
A. Moenkopi 500 KV Switchyard to be owned and expanded by Arizona Public Service Company in accordance with Section 7.11 and Exhibit H of this agreement.
B. Additions to series capacitors in the Moenkopi-Eldorado 500 KV line.
C. Additions to series capacitors in the Arizona Public Service Company Cholla-Pinnacle Peak 345 KV line.
D. Additions to series capacitors in the Arizona Public Service Company Four Corners-Moenkopi 500 KV line.
VII. McCullough Substation
The McCullough Substation shall consist of the following components:
A. The 500 KV switchyard comprising the termination facilities for the Navajo-McCullough 500 KV Line, McCullough-Victorville 500 KV Line, McCullough-Eldorado 500 KV Line and transformer bank, including but not limited to the 500 KV AC buses, power circuit breakers and disconnect switches and the structures therefor.
B. A 400 MVA 500/287 KV transformer bank and the equipment associated therewith, spare 133 MVA 500/287 KV transformer and the transformer leads from the high and low voltage transformer bushings to the points of
-4-
termination on the buses in the 500 KV and 287 KV switchyards.
C. The 287 KV switchyards comprising the termination facilities for two McCullough-Nevada 287 KV Lines, McCullough-Hoover 287 KV Line and transformer bank, including, but not limited to, the 287 KV buses, power circuit breakers, disconnect switches and the structures therefor.
D. The common facilities, which shall include, but not limited to, communications equipment, protection equipment controls, batteries, auxiliary equipment, station grounding grid, lighting and yard improvements, but shall not include the substation site.
E. The substation limits for the purposes shown on Exhibit C shall be where the leads from the series and shunt compensation for the Navajo-McCullough 500 KV Line and McCullough-Victorville 500 KV Line, from the McCullough-Eldorado 500 KV Line, from the two McCullough-Nevada 287 KV Lines, and from the McCullough-Hoover 287 KV Line attach to the substation structure. The substation limits for the purpose of design, construction, operation and maintenance shall be the substation side of the first 500 KV and 287 KV transmission line dead-end towers located outside the substation. The substation shall include the metering, protective equipment, communications equipment, relaying and associated equipment, etc.
-5-
VIII. Phoenix Area Substation(s)
A. The Phoenix Area Substation(s) shall be a basic breaker-and-a-half scheme providing termination for facilities presently planned:
1. Moenkopi-Phoenix Area 500 KV Line.
2. Navajo-Phoenix Area 500 KV Line.
3. A 500/230 KV step-down transformer #1.
4. A 500/230 KV step-down transformer #2.
5. A 500/345 KV step-down transformer.
B. The substation limits for purposes shown on Exhibit C will be where the 500 KV leads from the series and shunt compensation attach to the switchyard structure and where the 230 KV and 345 KV leads from the step-down transformer attach to the substation structure in the 230 KV and 345 KV substation. The substation limits for purposes of design, construction, operation and maintenance shall be the substation side of the first 500 KV transmission line dead-end tower located outside the switchyard or where the 230 KV and 345 KV leads from the step-down transformer attach to the substation structure in the 230 KV and 345 KV substation.
-6-
EXHIBIT B
Navajo Project
[MAP]
 
EXHIBIT C
TRANSMISSION ALLOCATION

                                                                                        CONSTRUCTION AND O&M COST
                                                      OWNERSHIP %                           RESPONSIBILITY %
                                       --------------------------------------     ----------------------------------
                                       SRP 1/   APS    TGE   NPC   L.A.  SRP 2/   SRP   APS   TGE    NPC  L.A.  U.S.
                                       ------  ------  ----  ----  ----  ----     ----  ----  ----  ----  ----  ----
  I.  Navajo 500 KV Switchyard         21.7    14.0     7.5  11.3  21.2  24.3     21.7  14.0   7.5  11.3  21.2  24.3
 II.  Navajo-McCullough 500 KV Line                          26.1  48.9  25.0                       26.1  48.9  25.0
III.  Navajo-Moenkopi 500 KV Line      21.7    14.0     7.5  11.3  21.2  24.3     21.7  14.0   7.5  11.3  21.2  24.3
 IV.  Navajo-Phoenix Area 500 KV Line  38.3    24.7    13.3              23.7     38.3  24.7  13.3              23.7
  V.  Moenkopi-Phoenix Area 500 KV
       Line                            38.3    24.7    13.3              23.7     38.3  24.7  13.3              23.7

 VI.  Other Associated Components 3/
      A. Moenkopi 500 KV Switchyard            100.00                             21.7  14.0   7.5  11.3  21.2  24.3
      B. Moenkopi-Eldorado 500 KV
         Series Capacitor Additions 4/                                                              26.1  48.9  25.0
      C. Cholla-Pinnacle Peak 345 KV
         Series Capacitor Additions            100.00                             38.3  24.7  13.3              23.7
      D. Four Corners-Moenkopi 500 KV
         Series Capacitor Additions            100.00                             38.3  24.7  13.3              23.7

VII.  McCullough Substation 5/

VIII. Phoenix Area 500 KV Substation(s)38.3    24.7    13.3              23.7     38.3  24.7  13.3              23.7	

1/ SRP's ownership for its own use and benefit
2/ SRP's ownership for the use and benefit of the United States.
3/ O&M cost responsibility applies only to the facilities added at these locations in conjunction with the Navajo Project.
4/ The capacitors on the Eldorado end of this line will be owned 100% by Southern California Edison Co. and those on the Moenkopi end will be owned 100% by APS.
5/ See Exhibit C-1A for details of ownership and cost responsibility. There is attached to this Exhibit C, Exhibits C-1, C-1A and C-1B, which by this reference are made a part of this Exhibit C.
EXHIBIT C-1
NAVAJO PROJECT [ILLEGIBLE] DIAGRAM OF
COST RESPONSIBILITY, PROJECT MANAGER & OPERATING AGENT
LIMITS FOR TRANSMISSION SYSTEM
[NAVAJO PROJECT PLAN]
 
EXHIBIT C-1A
NAVAJO PROJECT
MCCULLOUGH SUBSTATION
NEVADA POWER COMPANY
[NAVAJO PROJECT PLAN]

                                                            CONSTRUCTION AND MAINTENANCE
                                        OWNERSHIP %             COST RESPONSIBILITY %
                                --------------------------------------------------------
SUBSTATION COMPONENT             LA       NPC     SRP(1)      LA        NPC       U.S.
                                --------------------------------------------------------
500 kv Switchyard               77.4     16.4       6.2       77.4      16.4         6.2
287 kv Switchyard               40.1     59.9        --       40.1      59.9          --
500/287 kv Transformer Bank     60.5     39.5        --       60.5      39.5          --
Common Facilities               67.9     23.9       8.2       67.9      23.9         8.2	

(1) SRP's ownership for the use and benefit of the United States.
The cost responsibility percentage for each Participant in Common Facilities is the proportion that the investment of each Participant in line compensation within McCullough Substation and in the other components of McCullough Substation bears to the total investment of the Participants in such line compensation and components expressed as a percentage and the percentages for Common Facilities shown in the above table are to be recalculated using this method when actual cost determinations are made.
The ownership percentage for each Participant in Common Facilities shall be the same as the cost responsibility percentage in Common Facilities for such Participant, except that the ownership percentage in Common Facilities of Salt River Project shall be the same as the cost responsibility percentage in Common Facilities of United States.
The Substation operation cost responsibility percentage shall be the same as the construction and maintenance cost responsibility percentage Common Facilities.
Los Angeles shall construct, operate and maintain additional facilities
 
EXHIBIT C-1B
500 KV TRANSMISSION LINE OF LOS ANGELES BETWEEN McCULLOUGH SUBSTATION AND
ELDORADO SUBSTATION AND SWITCHING FACILITIES AT ELDORADO AND McCULLOUGH
SUBSTATIONS INSTALLED TO TERMINATE THE LINE.
[NAVAJO PROJECT FLOW CHART]
SWITCHING FACILITIES INSTALLED TO TERMINATE THE 500KV LINE BETWEEN McCULLOUGH SUBSTATION AND ELDORADO SUBSTATION ALLOCATED AS A PERCENTAGE OF SUBSTATION COMPONENTS.

McCullough Substation

25.0% of 500 kv Switchyard
 5.8% of Common Facilities         Note for Exhibit C:

Eldorado Substation                Exhibit C-1B by this
                                   [ILLEGIBLE] is made a
16.7% of 500 kv Switchyard         part of this Exhibit	

EXHIBIT D
SCHEDULE OF CONSTRUCTION DATES
NAVAJO PROJECT

                             SCHEDULED           SCHEDULED
      NAVAJO                  START UP             FIRM
GENERATING STATION             DATE              OPERATION
------------------           ---------           ---------
Unit #1                         3-1-74              6-1-74
Unit #2                         3-1-75              6-1-75
Unit #3                         3-1-76              6-1-76	

                                                     SCHEDULED
                                      ENERGIZATION     FIRM
TRANSMISSION SYSTEM                   FOR TEST DATE  OPERATION
------------------------------------  -------------  ---------
Navajo 500 KV Switchyard                 2-1-74        3-1-74
Navajo-McCullough 500 KV Line            2-1-74        3-1-74
Navajo-Moenkopi 500 KV Line              2-1-74        3-1-74
Navajo-Phoenix Area 500 KV Line          2-1-75        3-1-75
Moenkopi -Phoenix Area 500 KV Line       2-1-74        3-1-74
Moenkopi 500 KV Switchyard               2-1-74        3-1-74
Cholla-Pinnacle Peak 345 KV Line **      2-1-75        3-1-75
Four Corners-Moenkopi 500 KV Line **     2-1-74        3-1-74
Moenkopi-Eldorado 500 KV Line **         2-1-74        3-1-74
McCullough Substation                    2-1-74        3-1-74
Phoenix Area Substation (#1) *           2-1-74        3-1-74
Phoenix Area Substation (#2) *           2-1-75        3-1-75	

* Phoenix Area #2 Substation needed only if both Phoenix 500 KV lines are not terminated in same substation.
** Compensation only
EXHIBIT E
CONSTRUCTION COSTS OF THE NAVAJO PROJECT,
INCLUDING THE NAVAJO GENERATING STATION
AND THE TRANSMISSION SYSTEM
1.1 Construction costs shall consist of payments made and obligations incurred (other than obligations for interest during construction) for the account of Station Work or Transmission Work and shall consist of, but not be limited to, the following:
1.1.1 All costs of labor, services and studies performed in connection with Station Work or Transmission Work if authorized and approved by the Project Managers.
1.1.2 Payroll and other expenses of the Project Managers' engineering departments for their employees who perform Station Work or Transmission Work, including customary labor loading charges applicable thereto, such as department overheads, time-off allowances, payroll taxes, compensation insurance and employee benefits.
1.1.3 All components of the costs of construction, all overhead costs associated with construction (including the allowance for the Project Managers' administrative and
general expenses described in Exhibit E-l of this agreement), all temporary facilities, all land and land rights, all structures and improvements, and all equipment for the Navajo Project, as set forth in the Electric Plant Instructions of the FPC Accounts.
1.1.4 All costs and expenses, including those of outside consultants and attorneys, incurred by the Project Managers or other Parties in regard to the land and water rights and fuel requirements and supply for the Navajo Project and to the preparation of other agreements relating to Station Work or Transmission Work with entities other than (i) the United States acting in its capacity as a contractor for resources to supply Central Arizona Project pumping power requirements and
(ii) the Participants. All Parties anticipating such costs and expenses shall submit an estimate of such costs and expenses to the respective Project Managers for authorization and approval. Any Party incurring such costs and expenses shall bill the respective Project Manager therefor.
-2-
1.1.5 All costs, including any rental charges, of materials, supplies, tools, machinery, equipment, apparatus and construction power used in connection with Station Work or Transmission Work.
1.1.6 All costs of Project Insurance and all costs of any loss, damage or liability arising out of or caused by Station Work or Transmission Work which is not satisfied under the coverage of Project Insurance.
1.1.7 All federal, state or local taxes of any character imposed upon Station Work or Transmission Work, except any tax assessed directly against an individual Party, unless such tax was assessed to such individual Party in behalf of any or all of the other Parties.
1.1.8 Expenses of other Parties incurred in the performance of Station Work or Transmission Work, if authorized and approved by the respective Project Manager, and the expenses of the Operating Agents incurred during the engineering design period, the construction period and the testing, the start-up period of each unit of construction,
-3-
excluding any training expenses not properly chargeable to construction costs.
1.1.9 All costs of relocating existing facilities by Station Work or Transmission Work. Relocation of facilities and costs in connection therewith shall be subject to agreement between the Project Manager and the owners of the facilities involved.
1.2 In cases where the allocation of a cost item is made between Station Work or Transmission Work and other work, such allocation shall be made on a fair and equitable basis.
1.3 The Project Managers shall use the FPC Accounts to account for construction costs in the final completion report and any supplement thereto.
1.4 The Project Managers and the other Parties shall not be entitled to a fee, price, percentage or any other compensation over and above the costs of services rendered by them in the performance of Station Work or Transmission Work.
-4-
EXHIBIT E-1
ADMINISTRATIVE AND GENERAL EXPENSES APPLICABLE
TO CONSTRUCTION COSTS OF THE NAVAJO GENERATING
STATION AND THE TRANSMISSION SYSTEM
1.1 The allowance for the Project Manager's administrative and general expenses to cover the costs of services rendered by it in the performance of Station Work or Transmission Work shall be allocated monthly at the rate of one per cent (1%) of construction costs incurred during the preceding month, excluding from such construction costs:
1.1.1 Any allowance for administrative and general expenses provided for in this Section 1.1.
1.1.2 Expenses of other Participants incurred in the performance of Station Work or Transmission Work if authorized and approved by the Project Manager, and the expenses of the Operating Agent incurred during the engineering design period, the construction period and the start-up period of each unit, excluding any training expenses not charged to construction costs, but including expenses which are billed by the Operating Agent to the Project Manager pursuant to Section 1.1.3 of this Exhibit E-1.
1.1.3 All charges relating to the operation and maintenance of all units during the start-up period of each said unit. Charges shall include (a) the cost of fuel, (b) the cost of all operation and maintenance expenses (exclusive of the cost of maintenance performed by the engineer-constructor start-up crews), and (c) an allowance for the Operating Agent's payroll loading and administrative and general expenses.
1.1.4 Excepting only death, injury, loss or damage resulting from Willful Action, the Participants shall pay to the extent of their respective Generation Entitlement Shares for the costs of discharging all legal liability imposed upon a Participant for which payment shall not be made on account of valid and collectible Project Insurance, and the expenses incurred in settlement of injury and damage claims, including the costs of labor and related supplies and expenses incurred in injury and damage activities (all as referred to in FPC Account 925), because of any claim arising out of or attributable to the construction of the Navajo Project, the past
-2-
or future performance or non-performance of the obligations and duties of any Participant (including the Project Manager)or the past or future performance or non-performance of Station Work or Transmission Work, including but not limited to any claim resulting from death or injury to persons or damage to property.
1.2 The allowance for the Operating Agent's administrative and general expenses to cover the costs of services rendered by it in the performance of capital additions, capital betterments and capital replacements shall be derived in accordance with the procedure on Attachment No. 1 to this Exhibit E-1.
-3-
EXHIBIT E-1
ATTACHMENT NO. 1
CAPITAL ADMINISTRATIVE AND GENERAL RATIO
NAVAJO PROJECT
The rate to be applied to the Operating Agent's labor charges, which are included in expenses for capital additions, capital betterments, and capital replacements, to determine the Operating Agent's Administrative and General expenses applicable thereto shall be established annually on the basis of the Operating Agent's preceding year's construction expenses by the method set forth herein unless otherwise agreed to by the Participants. The Administrative and General Ratio will be adjusted to actual at year-end and the adjusted ratio used in preparation of a revised billing to the Participants. A percentage based on the Operating Agent's Administrative and General expenses shall be applied to total construction costs on the following basis:
I Administrative and General expenses shall include:
(a) Expenses in F.P.C. accounts 920 and 921 applicable to construction costs. The percentage for determining the amount of such expenses allocable to construction shall be determined as provided in Exhibit F-1, Attachment No. 1A.
(b) Payroll taxes applicable to the Administrative
and General salaries in F.P.C. accounts 920 and 921 allocable to construction, as provided in Exhibit F, Attachments Nos. 1 and 1A.
(c) Compensation insurance applicable to the Administrative and General salaries in F.P.C. accounts 920 and 921 allocable to construction, as provided in Exhibit F, Attachments Nos. 3 and 3A.
(d) Pensions and benefits applicable to the Administrative and General salaries in F.P.C. accounts 920 and 921 allocable to construction, as provided in Exhibit F, Attachments Nos. 2 and 2A.
II Total pensions and benefits expense allocable to to total labor charged to construction accounts at rate determined as provided in Exhibit F, Attachment No. 2A.
III Total Administrative and General expenses allocable to construction accounts shall be reduced by the amount of Administrative and General expenses allocable to contract construction.
The rate for application of Administrative and General expense to construction costs, hereinafter referred to as "Capital A & G Ratio", is expressed as percentage of total allocable Administrative and General expense to total direct
labor charged to construction.
A & G Rate = A / C
where
A = net allocable A & G expenses as set forth in I, II and III above
C = total direct labor charged to construction accounts
-3-
 
EXAMPLE
DEVELOPMENT OR CAPITAL A & G RATIO
FOR THE
NAVAJO GENERATING STATION

                                                      Nevada Power Company          Ariz Public Service Co.
                                                      ---------------------         -----------------------
                                                      (Based on 1968 Costs)          (Based on 1968 Costs)
                                                        Labor       Total             Labor        Total
                                                      ----------  ---------         ----------   ----------
Net Allocable A & G Expenses

  A & G salaries and expenses
  charged to F.P.C. Accounts
  920 and 921                                         $  422,728  $ 531,802         $1,363,877   $1,910,668
                                                      ==========  =========         ==========   ==========

  Percent (See Exh. F-1) allocable
  to construction                             29.74%  $  125,719  $158,158   37.14% $  506,544   $  709,622

  Add:
     Payroll Taxes on allocated
     labor (Exh. F, Attach. 1A)                3.83%                  4,815   3.78%                  19,147

     Compensation Ins. on allocated
     labor (Exh. F, Attach. 3A)                1.11%                 1,395    1.14%                   5,775

     Pensions & Benefits on allocated
     labor (Exh. F, Attach. 2A)                7.66%                  9,630  11.92%                  60,380
                                                                  ---------                      ----------

  Total A & G expense allocable
  to construction                                                 $ 173,998                      $  794,924

  Pensions & Benefits expense
  allocable to total labor charged
  to construction accounts
  (Exh. F, Attachment 2A)                      7.66%  $1,282,333  $  98,227  11.92% $4,879,188   $  581,600
                                                                  ---------                      ----------

  Total A & G expense plus pensions
  and benefits expenses
  allocable to construction                                       $ 272,225                      $1,376,524

  Less amount of A & G expenses
  allocable to contract construction.                                 2,580                         188,230
                                                                  ---------                      ----------

  Remainder of A & G plus benefits
  expense allocable to construction                               $ 269,645                      $1,188,294
                                                                  =========                      ==========

Total Direct labor Charged to
Construction Accounts                                             $ 933,695                      $4,293,248
                                                                  =========                      ==========

Capital A & G Ratio =                                 $  269,645                    $1,188,294
                                                      ----------  = 28.88%          ----------   = 27.68%
                                                      $  933,695    =====           $4,293,248     =====
                                                        Salt River Project                  L. A. DWP
                                                      -----------------------        ------------------------
                                                      (Based on 1969 Budget)         (Based on 68-69 Costs)
                                                         Labor       Total              Labor        Total
                                                      -----------  ----------        -----------  -----------
Net Allocable A & G Expenses

  A & G salaries and expenses
  charged to F.P.C. Accounts
  920 and 921                                         $1,730,086  $2,334,498          $ 3,412,254  $ 6,126,895
                                                      ==========  ==========          ===========  ===========

  Percent (See Exh. F-1) allocable
  to construction                             38.83%  $  671,792  $  906,486   49.50%  $1,689,066  $ 3,032,813

  Add:
     Payroll Taxes on allocated
     labor (Exh. F, Attach. 1A)                3.38%                  22,707    0.11%                    1,858

     Compensation Ins. on allocated
     labor (Exh. F, Attach. 3A)                2.90%                  19,482    0.94%                   15,877

     Pensions & Benefits on allocated
     labor (Exh. F, Attach. 2A)               12.56%                  84,377   13.66%                  230,726
                                                                  ----------                       -----------

  Total A & G expense allocable
  to construction                                                 $1,033,052                       $ 3,281,274

  Pensions & Benefits expense
  allocable to total labor charged
  to construction accounts
  (Exh. F, Attachment 2A)                     12.56%  $6,606,824  $  829,817   13.66% $43,581,981  $ 5,953,299
                                                                  ----------                       -----------

  Total A & G expense plus pensions
  and benefits expenses allocable to
  construction                                                    $1,862,869                       $ 9,234,573

  Less amount of A & G expenses
  allocable to contract construction.                                 33,806                           692,604
                                                                  ----------                       -----------

  Remainder of A & G plus benefits
  expense allocable to construction                               $1,829,063                       $ 8,541,969
                                                                  ==========                       ===========

Total Direct labor Charged to
Construction Accounts                                             $5,898,725                       $24,417,890
                                                                  ==========                       ===========

                                                      $1,829,063                      $ 8,541,969
Capital A & G Ratio =                                 ----------  = 31.00%            -----------  = 34.98%
                                                      $5,898,725    =====             $24,417,890    =====	

EXHIBIT F
OPERATION AND MAINTENANCE COSTS OF
THE NAVAJO GENERATING STATION
1. Generating Plant:
1.1 Operation and maintenance costs shall include the following expenses to the extent that they are charge-able to the Navajo Generating Station in accordance with sound accounting practice:
1.1.1 The operation expenses chargeable to FPC Accounts 500, 502, 503, 504, 505, 506, 507, 556, 557 and any costs in the following FPC Accounts pertaining to load dispatching:
1.1.1.1 560, 561, 562, 566 and 567.
1.1.2 The maintenance expenses chargeable to FPC Accounts 510 through 514, inclusive, and any costs in the following FPC Accounts pertaining to load dispatching:
1.1.2.1 568, 569, 570 and 573.
1.1.3 Overhead expenses included in Sections 1.1.1 and 1.1.2 of this Exhibit F incurred by the Operating Agent which are allocable to the operation and maintenance of the Navajo Generating Station.
Such overhead expenses shall be determined in accordance with the following allocation procedure:
1.1.3.1 Overhead expenses of the Operating Agent applicable to the Navajo Generating Station operation and maintenance expenses will be generated at two sources:
1.1.3.1.1 The salaries and expenses of the Operating Agent's functional area responsible for power supply and system operations, the supervisory, administrative and clerical staff, including members of the staff that perform system protection, operation and production functions, including appropriate system dispatching costs.
1.1.3.1.2 The salaries and expenses of the Operating Agent's supervisor of steam generation, if not included within Section 1.1.3.1.1 of
-2-
this Exhibit F, and his supervisory, administrative, engineering and clerical staff.
These overhead costs shall be applicable to the total payroll supervised by said functional areas of the Operating Agent, respectively. The Navajo Generating Station's share of such costs shall be equal to the sum of: (a) the Operating Agent's functional area overhead costs as described in Section 1.1.3.1.1 of this Exhibit F multiplied by a ratio, the numerator of which is the total Navajo Generating Station payroll and the denominator of which is the Operating Agent's total payroll supervised by said functional area, and (b) the Operating Agent's functional area overhead costs as described in Section 1.1.3.1.2 of this Exhibit F multiplied by a ratio, the numerator of which is the total Navajo Generating Station payroll and the denominator of which is the Operating
-3-
Agent's total payroll supervised by said functional area.
The total of the Navajo Generating Station overhead costs set forth herein shall be allocated to all direct labor charges at said Navajo Generating Station, which shall include operation and maintenance labor and work order labor charges. All such overhead charges shall be allocated to the appropriate FPC Account(s).
1.1.4 Applicable labor loading charges for Operating Agent's employees whose salaries and wages are charged to the operation and maintenance expense accounts. Such labor loading charges shall include but not be limited to time-off allowances employee payroll taxes chargeable to FPC Account 408 and employee benefits chargeable to FPC Accounts 925 and 926.
1.1.4.1 Payroll tax expenses incurred by the Operating Agent which are allocable to the Navajo Generating Station pursuant to Section 1.1.4 of this Exhibit F shall be
-4-
determined by multiplying the sum of the Operating Agent's total labor charges included in the expenses determined in accordance with Sections 1.1.1 and 1.1.2 of this Exhibit F by a decimal fraction, hereinafter referred to as the Payroll Tax Ratio. Such Payroll Tax Ratio shall be derived annually in accordance with the procedure and example shown on Attachment Nos. 1 and 1A to this Exhibit F.
1.1.4.2 Employee pensions and benefits expenses incurred by the Operating Agent which are allocable to the Navajo Generating Station pursuant to Section 1.1.4 of this Exhibit F shall be determined by multiplying the sum of the Operating Agent's total labor charges included in the expenses determined in accordance with Sections 1.1.1 and 1.1.2 of this Exhibit F by a decimal fraction, hereinafter
-5-
referred to as the Benefits Ratio. Such Benefits Ratio shall be derived annually in accordance with the procedure and example shown on Attachment Nos. 2 and 2A to this Exhibit F.
1.1.4.3 That portion of employee Workmen's Compensation Insurance expenses and the related administrative expenses incurred by the Operating Agent which are allocable to the Navajo Generating Station pursuant to Section 1.1.4 of this Exhibit F shall be determined by multiplying the sum of the Operating Agent's total labor charges included in the expenses determined in accordance with Sections 1.1.1 and 1.1.2 of this Exhibit F by a decimal fraction, hereinafter referred to as the Compensation Insurance Ratio. Such Compensation Insurance Ratio shall be derived annually in accordance with the procedure and example
-6-
shown on Attachment Nos. 3 and 3A to this Exhibit F.
1.1.5 Administrative and general expenses of the Operating Agent allocable to operation and maintenance of the Navajo Generating Station pursuant to Exhibit F-1 hereto.
1.1.6 The training expenses of operation and maintenance personnel for the Navajo Generating Station, including labor loading charges in accordance with Section 1.1.4 of this Exhibit F and applicable administrative and general expenses as computed in accordance with Exhibit F-1 hereto, which are incurred prior to the date of firm operation and not properly chargeable to the costs of construction of the Navajo Generating Station shall be accumulated by the Operating Agent and shall be apportioned to the Participants in accordance with their Generation Entitlement Shares and billed to the Participants.
1.1.7 All expenses of procuring and maintaining policies of Project Insurance.
1.1.8 All costs chargeable to FPC Account 501.
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EXHIBIT F
ATTACHMENT NO. 1
PAYROLL TAX RATIO
APPLICABLE TO OPERATING & MAINTENANCE EXPENSES
OF THE NAVAJO GENERATING STATION
The Payroll Tax Ratio to be applied to the labor expense portion of the Navajo Generating Station Operation & Maintenance Expenses shall be determined annually on the basis of the Operating Agent's preceding year's expenses as set forth herein unless otherwise agreed to by the Participants. The Payroll Tax Ratio will be adjusted to actual at year-end and the adjusted ratio used in preparation of a revised billing to Participants.

                              Payroll Tax Ratio =  T/P

Where:  T =           The Operating Agent's payroll tax expenses
                      chargeable to F.P.C. account 408 as applicable
                      to the labor expenses included in its total
                      system operation, maintenance, construction,
                      and general ledger accounts.

        P =           The Operating Agent's labor expenses as paid to
                      employees and distributed to total system operation,
                      maintenance, construction, and general ledger accounts.	

            The example in Exhibit F, Attachment No. 1A, sets forth the method	

to be employed by the Operating Agent to determine the Payroll Tax Ratio.
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EXHIBIT F
ATTACHMENT 1A
EXAMPLE
DEVELOPMENT OF PAYROLL TAX RATIO
APPLICABLE TO OPERATING & MAINTENANCE EXPENSES OF THE
NAVAJO GENERATING STATION

                                           N. P. Co.              A.P.S. Co.               S.R.P.                L.A. DWP
                                         ------------            ------------           -------------          -------------
                                         (1968 Costs)            (1968 Costs)           (1969 Budget)          (68-69 Costs)
                                         ------------            ------------           -------------          -------------
(T)  Total Payroll Taxes                 $    183,746            $    933,421           $     580,000          $     106,112*
                                         ============            ============           =============          =============

(P)  Labor Base

      Total labor charged
      to operation, maintenance,
      construction, and general
      ledger accounts                    $  4,797,468            $ 24,690,234           $  17,148,862          $  93,904,454
                                         ============            ============           =============          =============

                                         $    183,746            $    933,421           $     580,000          $     106,112
                                         ------------ = 3.83%    ------------ = 3.78%   ------------- = 3.38%  ------------- = 0.11%
Payroll Tax Ratio =                      $  4,797,468   ====     $ 24,690,234   ====    $  17,148,862   ====   $  93,904,454   ====	

* Yearly estimate on basis of payroll periods from 5/18/69 to 6/30/69.
EXHIBIT F
ATTACHMENT NO. 2
BENEFITS RATIO APPLICABLE TO
OPERATING & MAINTENANCE EXPENSES
OF THE NAVAJO GENERATING STATION
The Benefits Ratio to be applied to the labor expense portion of the Navajo Generating Station Operations and Maintenance Expenses shall be determined annually on the basis of the Operating Agent's preceding year's experience as set forth herein unless otherwise agreed to by the Participants. The Benefits Ratio will be adjusted to actual at year-end and the adjusted ratio used in preparation of a revised billing to Participants.

                       Benefits Ratio = B/L

Where:  B =  That portion of the Operating Agent's total system employee
             pensions and benefits chargeable to F.P.C. account 926, including
             payroll taxes and Employee Compensation Insurance Expense on labor
             charges to account 926.

        L =  The Operating Agent's labor expenses as paid to employees and
             distributed to its total system operation, maintenance,
             construction, and general ledger accounts less labor charges to
             F.P.C. account 926.	

The example in Exhibit F, Attachment No. 2A, sets forth the method to be employed by the Operating Agent to determine the Benefits Ratio.
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EXHIBIT F
Attachment 2A
EXAMPLE
DEVELOPMENT OF BENEFITS RATIO
APPLICABLE TO OPERATING & MAINTENANCE EXPENSES OF THE
NAVAJO GENERATING STATION

                          Nevada Power Company   Ariz. Public Service Co.   Salt River Project              L. A. DWP
                          --------------------   ------------------------ ----------------------   ------------------------
                          (based on 1968 Costs)  (Based on 1968 Costs)    (Based on 1969 budget)    (Based on 68-69 Costs)
                            Labor       Total      Labor         Total      Labor       Total        Labor         Total
                          ---------  ----------- ---------   ------------ ---------  ------------  ----------  ------------
Pensions & Benefits

  Employee
   Pensions
   & Benefits
   Charged to
   Account 926             $ 15,331  $   279,249 $ 216,978   $  2,905,654 $ 164,315  $  2,124,326  $  199,426  $ 12,802,019

  Add: Pensions &
       Benefits
       Capitalized                        86,488                       --                      --                        --
                                     -----------             ------------            ------------              ------------
  Subtotal                           $   365,737             $  2,905,654            $  2,124,326              $ 12,802,019

  Add:

       Payroll Taxes
       (Exh. F,
       Attach, 1A)        @ 3.83%                @ 3.78%                  @ 3.38%                  @ 0.11%
                          of labor = $       587 of labor =  $      8,202 of labor = $      5,554  of labor =  $        219

       Compensation Ins.
       (Exh. F,
       Attach, 3A)        @1.11%                 @ 1.14%                  @ 2.69%                  @ 0.94%
                          of labor = $       170 of labor =  $      2,474 of labor = $      4,421  of labor =  $      1,875
                                     -----------             ------------            ------------              ------------
  Total Pensions &
   Benefits Expense                  $   366,494             $  2,916,330            $  2,134,301              $ 12,804,113
                                     ===========             ============            ============              ============

Labor Base

  Total labor charged
  to Operation, Main-
  tenance, Construc-
  tion,  and General
  Ledger Accounts,
  exclusive of labor
  charged to Account 926.            $ 4,782,137             $ 24,473,256            $ 16,984,547              $ 93,705,028
                                     ===========             ============            ============              ============

Benefits Ratio =                     $   366,494             $  2,916,330            $  2,134,301              $ 12,804,113
                                     -----------  =  7.66%   ------------ = 11.92%   ------------ = 12.56%     ------------ = 13.66%
                                     $ 4,782,137    =====    $ 24,473,256   =====    $ 16,984,547   =====      $ 93,703,028   =====	

EXHIBIT F
ATTACHMENT NO. 3
COMPENSATION INSURANCE RATIO
FOR THE
NAVAJO GENERATING STATION
The Compensation Insurance Ratio to be applied to the labor expenses included in the Operating Agent's Administrative and General expense accounts shall be determined annually on the basis of the Operating Agent's preceding year's expenses as set forth herein unless otherwise agreed to by the Participants. The Compensation Insurance Ratio will be adjusted to actual at year-end and the adjusted ratio used in preparation of a revised billing to Participants.
Compensation Insurance Ratio = l/P

Where:   l =  The Operating Agent's total system Compensation Insurance
              premiums and accruals for self-insurance charges to F.P.C. Account
              925, less amounts billed to others under participation agreements.

         P =  The Operating Agent's labor expenses included in its total
              system operation, maintenance, construction, and general ledger
              accounts, less amounts for labor billed to others under joint
              participation project agreements.	

The example in Exhibit F, Attachment No. 3A, sets forth the method to be employed by the Operating Agent to determine the Compensation Insurance Ratio.
-2-
 
EXHIBIT F
ATTACHMENT 3A
EXAMPLE
DEVELOPMENT OF COMPENSATION INSURANCE RATIO
APPLICABLE TO OPERATING & MAINTENANCE EXPENSES
OF THE
NAVAJO GENERATING STATION

                                              N.P. Co.              A.P.S. Co.             S.R.P.               L.A. DWP
                                            -----------            -----------          ------------          ------------
                                            (1968 Costs)           (1968 Costs)         (1969 Budget)         (68-69 Costs)
                                            -----------            -----------          ------------          ------------
(T) Total Compensation Insurance Cost

   Total Compensation Insurance             $   39,114             $   282,548          $   496,494           $    879,659
   Cost in Account 925                      ==========             ===========          ===========           ============

(P) Labor Base

   Total labor charged to operation,
   maintenance, and general ledger
   accounts                                 $3,515,135             $15,541,752          $11,250,137           $50,322,473

   Total labor charged to                   *(Not Applicable)      $ 9,148,482          $ 5,898,725           $43,581,981
   construction accounts                    ----------------       -----------          -----------           -----------

       Total Labor Expense                  $3,515,135             $24,690,234          $17,148,862           $93,904,454
                                            ==========             ===========          ===========           ===========

 Compensation Insurance Ratio =             $   39,114             $   282,548          $   496,494           $   879,659
                                            ---------- = 1.11%     ----------- = 1.14%  ----------- = 2 .90%  ----------- = 0.94%
                                            $3,515,135   ====      $24,690,234   ====   $17,148,862   =====   $93,904,454   ====	

* Nevada Power Company charges Compensation Insurance costs to plant labor from liability account 232.2.
EXHIBIT F-1
ADMINISTRATIVE AND GENERAL EXPENSES APPLICABLE
TO OPERATION AND MAINTENANCE OF
THE NAVAJO GENERATING STATION
1.1 The allowance for the Operating Agent's administrative and general expenses to cover the costs of services rendered by it in the performance of operation and maintenance of the Navajo Generating Station shall be derived in accordance with the procedure and examples shown on Attachment Nos. 1, 1A, 2 and 2A to this Exhibit F-1.
EXHIBIT F-1
ATTACHMENT NO. 1
DETERMINATION OF RATIO OF O & M LABOR AND
CONSTRUCTION LABOR TO TOTAL LABOR FOR THE
NAVAJO GENERATING STATION
I. Determination of the ratio of operating and maintenance labor to total labor shall be as follows:
O & M Ratio = O/L
where
O = total labor charged to operation and maintenance accounts less labor charged to A & G accounts 920 through 932 inclusive
L = total labor charged to operating and maintenance, construction, and general ledger accounts, less labor charged to A & G accounts 920 through 932 inclusive
II. Determination of the ratio of construction labor to total labor shall be as follows:
Construction Ratio = C/L
where
C = total labor in construction accounts
L = total labor charged to operation and maintenance, construction, and general ledger accounts, less labor charged to A & G accounts 920 through 932 inclusive
 
EXHIBIT F-1
ATTACHMENT 1A
EXAMPLE
DETERMINATION OF RATIO OF O & M LABOR AND CONSTRUCTION LABOR TO TOTAL LABOR
FOR THE
NAVAJO GENERATING STATION

                                                N. P. Co.           A.P.S. Co.               S.R.P.              L. A. DWP
                                              -----------          -----------           ------------          ------------
                                              (1968 Costs)         (1968 Costs)          (1969 Budget)         (68-69 Costs)
                                              -----------          -----------           ------------          ------------
(1) Total Labor in
    Operation and Maintenance Accounts        $ 3,290,399          $  9,663,668          $ 11,245,752          $ 50,300,847

    Less Labor charged to A &
    G Accounts 920, thru 932
    inclusive                                     485,437             1,405,923             1,958,894             5,863,153
                                              -----------          ------------          ------------          ------------

    Net Labor in O & M Accounts               $ 2,804,962          $  8,257,745          $  9,286,858          $ 44,437,694

    Total Labor charged to
      General Ledger Accounts                     224,736                     -                 4,385                21,626

    Total Labor in
      Construction Accounts                     1,282,333             4,879,188             5,898,725            43,581,981
                                              -----------          ------------          ------------          ------------

         Total Labor Base                     $ 4,312,031          $ 13,136,933          $ 15,189,968          $ 88,041,301
                                              ===========          ============          ============          ============

    Ratio of Net O & M Labor to Total         $ 2,804,962          $  8,257,745          $  9,286,858          $ 44,437,694
                                              ----------- = 65.05% ------------ = 62.86% ------------ = 61.14% ------------ = 50.47%
    Labor  =                                  $ 4,312,031   =====  $ 13,136,933   =====  $ 15,189,968   =====  $ 88,041,301   =====

(11) Ratio of Construction Labor to Total     $ 1,282,333          $  4,879,188          $  5,898,725          $ 43,581,981
                                              ----------- = 29.74% ------------ = 37.14% ------------ = 38.83% ------------ = 49.50%
     Labor =                                  $ 4,312,031   =====  $ 13,136,933   =====  $ 15,189,968   =====  $ 88,041,301   =====	

EXHIBIT F-1
ATTACHMENT NO. 2
ADMINISTRATIVE AND GENERAL EXPENSE
APPLICABLE TO OPERATION & MAINTENANCE
OF THE NAVAJO GENERATING STATION
That portion of the Operating Agent's administrative and general expenses which are allocable to operation and maintenance of the Navajo Generating Station shall be determined by multiplying the total operating and maintenance labor of the Navajo Generating Station by a decimal fraction hereinafter referred to as the "Administrative and General Expense Ratio." Such Administrative and General Ratio shall be derived annually based on the preceding year's expenses, as set forth herein unless otherwise agreed to by the participants. The Administrative and General Ratio will be adjusted to actual at year-end, and the adjusted ratio used in preparation of a revised billing to participants.
The Administrative and General expenses charged to F.P.C. accounts 920 and 921 shall be multiplied by a percentage representing the ratio of operation and maintenance labor to total labor. To the result shall be added the total in F.P.C. accounts 923 and 932 plus additives to labor in F.P.C. accounts 920, 921, and 932 as illustrated in Attachment No. 2A hereof. The resulting Administrative and General expenses applicable to Operating and Maintenance
expense shall be divided by the total Operating and Maintenance expense labor subject to Administrative and General expense allocation.
Administrative and General Expense Ratio = A/B
Where: A = Portion of Administrative and General Expenses charged to F.P.C.
accounts 920 and 921, plus total in F.P.C. accounts 923 and 932, plus additives to labor in F.P.C. account 932 and to a portion of the labor in F.P.C. accounts 920 and 921, as illustrated in Attachment No. 2A hereof.
B = Total operating and maintenance labor, less labor, less labor in Administrative and General expense accounts 920 thru 932 inclusive.
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EXHIBIT F-1
ATTACHMENT 2A
EXAMPLE
DEVELOPMENT OF ADMINISTRATIVE & GENERAL RATIO
APPLICABLE TO OPERATION & MAINTENANCE EXPENSE
OF THE
NAVAJO GENERATING STATION

                                         Nevada Power Company          Ariz. Public Service Co.        Salt River Project
                                        ---------------------          ------------------------       ---------------------
                                        (Based on 1968 Costs)           (Based on 1968 Costs)         (Based on 1969 Costs)
                                        Labor         Total             Labor        Total             Labor        Total
                                       -------      ---------           -------    --------           -------      -------
   Administrative & General
     Expenses

   Account 920 A & G Salaries          $   422,728  $  422,728         $1,363,877  $1,428,643         $1,647,490   $1,647,490
   Account 921 A & G
     Office Supplies &
     Expense                                           109,074                        482,025             82,596      687,008
                                       -----------  ----------         ----------  ----------         ----------   ----------

       Total Accounts 920
        and 921                        $   422,728  $  531,802         $1,363,877  $1,910,668         $1,730,086   $2,334,498
                                       ===========  ==========         ==========  ==========         ==========   ==========

   Percent Applicable to
     Operation and Maintenance
     (See Exh. F-1, Attach. 1A) 65.05% $   274,985  $  345,937 62.86%  $  857,333  $1,201,046 61.14%  $1,057,775   $1,427,312

   Account 923 Outside
     Services                                           31,247                        225,952                          93,356
           932 General Maintenance          28,161      65,978            264,235     456,799             64,493       94,263
                                       -----------  ----------         ----------  ----------         ----------   ----------

                  Subtotal             $   303,146  $ 443,162          $1,121,568  $1,883,797         $1,122,268   $1,614,931

   Payroll Taxes as a
     percentage of labor
     (Exh. F, Attach. 1A)        3.83%              $   11,610  3.78%              $   42,395  3.38%               $   37,933
   Compensation Ins. as a
     percentage of labor (Exh.
     F, Attach. 3A)              1.11%                   3,365  1.14%                  12,786  2.69%                   30,189
   Pensions & Benefits as a
     percentage of labor
    (Exh. F, Attach. 2A)         7.66%                  23,221 11.92%                 133,691 12.56%                  140,957
                                                    ----------                     ----------                      ----------
       Total A & G
       Expense allocable
       to Operation
       & Maintenance Accounts                       $  481,358                     $2,072,669                      $1,824,010
                                                    ==========                     ==========                      ==========
3) Net Labor Charged to
   Operation & Maintenance
   Accounts
   (Excluding labor in A & G
   Accounts 920 thru 932
   inclusive)                                       $2,804,962                     $8,257,745                      $9,286,858
                                                    ==========                     ==========                      ==========

   [ILLEGIBLE] & G Ratio =             $   481,358                     $2,072,669                      $1,824,010
                                       ----------- = 17.16%            ---------- = 25.10%             ---------- = 19.64%
                                       $ 2,804,962   ======            $8,257,745   =====              $9,286,858   =====

                                                   L.A. DWP
                                           ------------------------
                                           (Based on 60-69 Costs)
                                             Labor         Total
                                           -----------  -----------
    Administrative & General
      Expenses

    Account 920 A & G Salaries             $ 3,412,254  $ 3,412,254
    Account 921 A & G
      Office Supplies &
      Expense                                             2,714,641
                                           -----------  -----------

        Total Accounts 920
         and 921                           $ 3,412,254  $ 6,126,895
                                           ===========  ===========

    Percent Applicable to
      Operation and Maintenance (See
      Exh. F-1, Attach. 1A)            50.47%    $ 1,722,165  $ 3,092,244
    Account 923 Outside
      Services                                                    404,288
            932 General Maintenance                   77,719      471,040
                                                 -----------  -----------

                 Subtotal                        $ 1,799,884  $ 3,967,572

    Payroll Taxes as a
      percentage of labor
      (Exh. F, Attach. 1A)              0.11%                 $     1,980
    Compensation Ins. as a
      percentage of labor (Exh.
      F, Attach. 3A)                    0.94%                      16,919
    Pensions & Benefits as a
      percentage of labor (Exh, F.
      Attach. 2A)                      13.66%                     245,864
                                                              -----------

        Total A & G
        Expense allocable
        to Operation
        & Maintenance Accounts                          $ 4,232,335
                                                        ===========

3)  Net Labor Charged to
    Operation & maintenance
    Accounts
    (Excluding labor in A & G                           $44,437,694
                                                        ===========
    Accounts 920 thru 932
    inclusive)

    [ILLEGIBLE] & G Ratio =                $ 4,232,335
                                           ----------- = 9.52%
                                           $44,437,694   ====	

EXHIBIT G
OPERATION AND MAINTENANCE COSTS
OF THE TRANSMISSION SYSTEM
1.1 Operation and maintenance costs shall include the following expenses to the extent that they are chargeable to the Transmission System in accordance with sound accounting practice:
1.1.1 The Transmission System operation costs chargeable to FPC Accounts 560, 561, 562, 563, 566 and 567.
1.1.2 The Transmission System maintenance costs chargeable to FPC Accounts 568, 569, 570, 571 and 573.
1.1.3 The general plant maintenance costs chargeable to FPC Account 932 for maintenance of equipment, the book cost of which is includable in FPC Account 397, Communication Equipment, and FPC Account 398, Miscellaneous Equipment.
1.1.4 Overhead expenses included in Sections 1.1.1, 1.1.2 and 1.1.3 of this Exhibit G incurred by the Operating Agent which are allocable to the operation and maintenance of the Transmission System. Such overhead
expenses shall be determined in accordance with the following allocation procedure:
1.1.4.1 Overhead expenses of the Operating Agent applicable to Transmission System operation and maintenance expenses will be generated at various functional areas. The overhead costs of each functional area shall be applicable to the total payroll supervised by said functional areas of the Operating Agent. The Transmission System's share of such costs shall be equal to the sum of each applicable Operating Agent's functional area overhead costs multiplied by a ratio, the numerator of which is the total Transmission System payroll and the denominator of which is the Operating Agent's total payroll supervised by said functional area.
The total of the Transmission System overhead costs set forth herein shall be allocated to all direct labor charges at said Transmission System, which shall
-2-
include operation and maintenance labor and work order labor charges. All such overhead charges shall be allocated to the appropriate FPC Account(s).
1.1.5 Applicable labor loading charges for Operating Agent's employees whose salaries and wages are charged to the operation and maintenance expense accounts. Such labor loading charges shall include but not be limited to time-off allowances, employee payroll taxes chargeable to FPC Account 408 and employee benefits chargeable to FPC Accounts 925 and 926 as provided in Section 1.1.4 of Exhibit F hereto.
1.1.6 Administrative and general expenses of the Operating Agent allocable to operation and maintenance of the Transmission System pursuant to Exhibit G-1 hereto.
-3-
EXHIBIT G-1
ADMINISTRATIVE AND GENERAL EXPENSES APPLICABLE
TO OPERATION AND MAINTENANCE OF THE
TRANSMISSION SYSTEM
1.1 The allowance for the Operating Agent's administrative and general expenses to cover the costs of services rendered by it in the performance of operation and maintenance of the Transmission System shall be derived in accordance with the procedure and examples shown on Attachment Nos. 1, 1A, 2 and 2A to Exhibit F-1 hereto.
SALT RIVER PROJECT
RESOLUTION
WHEREAS, the Board of Directors of the Salt River Project Agricultural Improvement and Power District (herein called "Salt River Project") has determined that it is in Salt River Project's best interest to enter into various contracts relating to the construction, operation and maintenance of the proposed Navajo Project consisting of three 750 MW (nameplate rating) coal-fired steam electric generating units (herein called "Navajo Generating Station"), located on the Navajo Indian Reservation near Page, Arizona, and the related 500 KV transmission system (herein called "Navajo transmission system"), with ownership interests in the Navajo Generating Station to be as follows:

Arizona Public Service Co. (Arizona)         14.0%

City of Los Angeles, Department of
Water and Power (Los Angeles)                21.2%

Nevada Power Company (Nevada)                11.3%

Salt River Project Agricultural
Improvement and Power District
(Salt River Project)                         46.0%

Tucson Gas and Electric Company
(Tucson)                                      7.5%	

all of said entities referred to herein as the "Co-Owners," and
WHEREAS, Salt River Project shall own 21.7% of the Navajo Generating Station for its own use and benefit and shall own and hold the remaining 24.3% of its ownership interest in the Navajo Generating Station for the use and benefit of the United States, Department of Interior, Bureau of Reclamation for the United States' use to provide power and energy for Central Arizona Project pumping (the "United States" and the above listed companies being herein collectively called "Participants"), and
WHEREAS, the following described Agreements have been reviewed on this day with this Board and this Board has determined that it is in the best interest of Salt River Project to enter into said Agreements to effectuate the construction, operation and maintenance of the Navajo Project;
NOW, THEREFORE, BE IT HEREBY RESOLVED, That the Board of Directors of Salt River Project has and does hereby approve the Navajo Project Participation Agreement among the Participants, and has and does hereby empower and direct that the President or Vice President, and the
SALT RIVER PROJECT
Secretary or Assistant Secretary, make, execute and deliver said Participation Agreement for, and on behalf of, the Salt River Project with such minor changes or omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve the Indenture of Lease for Navajo Units 1, 2 and 3, and has and does hereby empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute, acknowledge and deliver said Indenture of Lease for Navajo Units 1, 2 and 3 for and on behalf of the Salt River Project with such minor changes or omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Federal Rights of Way, granted in conformity with the Act of February 15, 1901, between the Secretary of Interior and the Co-Owners as Grantees, and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute, acknowledge and deliver said Federal Rights of Way for, and on behalf of, Salt River Project with such minor changes or omissions therein as management may make in the premises, and this Board of Directors also authorizes, empowers and directs its officers and management to make and file an Application for Grant of Rights of Way under the Act of February 15, 1901, 31 Stat. 790, 43 U.S.C., Section 959, underlying any or all Project land rights, and to take and perform all necessary acts in making and filing such Application, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Federal Rights of Way and Easements, granted in conformity of February 5, 1948, by and between the Secretary of Interior and Salt River Project and the other Co-Owners as Grantees and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute, acknowledge and deliver said Federal Rights of Way and Easements for, and on behalf of, the Salt River Project with such minor changes and omissions therein as management may make in the premises, and does hereby authorize, empower and direct its officers and management to make and file an Application for the Grant of Rights of Way and Easements under the Act of February 5, 1948, 62 Stat. 17, 25 U.S.C. Section 323, underlying any or all Project land rights, and to take and perform all necessary acts in making and filing such Application, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve the Memorandum of Agreement
SALT RIVER PROJECT
providing for execution of Navajo Station Coal Supply Agreement among it, the other Co-Owners and Peabody Coal Company together with the Letter Agreement relating thereto which sets forth additional understandings and agreements concerning the Navajo Station Coal Supply Agreement, and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute, acknowledge and deliver said Memorandum of Agreement and said Letter of Understanding for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Power Coordination Contract between the Co-Owners and the United States and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said Power Coordination Contract for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that, the Board of Directors of Salt River Project has and does hereby approve the Principles of Interconnected Operation for the Navajo Project between the Co-Owners, the United States and the Southern California Edison Company (whether or not said Southern California Edison Company is party thereto), and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary make, execute and deliver said Principles of Interconnected Operation for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Contract for Interim Use of United States Entitlement in the Navajo Project (herein called "Layoff Contract") between it and the United States and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said Layoff Contract for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Memorandum Transmission Agreement between it, the other Participants, and the Southern California Edison Company, and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said
SALT RIVER PROJECT
Memorandum Transmission Agreement for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Agreement for Delivery of the United States Power and Energy for the McCullough Substation to the Mead Substation between it, the United States and the other Eldorado System Co-Owners (whether or not such entities become parties thereto), and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said Agreement for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Spinning Reserve Pooling Agreement between it, and the other Participants, excepting the City of Los Angeles, Department of Water and Power (whether or not all such other Participants become parties thereto), and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said Spinning Reserve Fueling Agreement for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises.
CERTIFICATE
I, F. E. Smith, the duly appointed, qualified and acting Secretary of the Salt River Project Agricultural Improvement and Power District, HEREBY CERTIFY that the foregoing is a true and complete copy of a resolution adopted by the Board of Directors of said District at a special meeting thereof duly held on the 25th day of August 1969, at which meeting a quorum was present and voted.
WITNESS my hand and seal of Salt River Project Agricultural Improvement and Power District this 19th day of November 1969.

/s/ F. E. Smith
-------------------------------
    F. E. Smith, Secretary	

CERTIFICATE
I, Samuel P. Cowley, certify that I am the Secretary of the Nevada Power Company, a corporation named herein; that Harry Allen who signed the above contract on behalf of said corporation was then its President; that said contract was duly signed for and in behalf of said corporation by authority of its governing body and is within the scope of its corporate powers.

/s/ Samuel P. Cowley
-------------------------------
Samuel P. Cowley, Secretary	

TUCSON GAS & ELECTRIC COMPANY
Certified Copy of Resolutions
Adopted by the Board of Directors
RESOLVED, that the proper officers of the Company be, and they hereby are authorized to enter into a Participation Agreement between the United States of America, Arizona Public Service Company, Department of Water and Power of the City of Los Angeles, Nevada Power Company, Salt River Project Agricultural Improvement and Power District and Tucson Gas & Electric Company for the ownership of the Navajo Project wherein Tucson Gas & Electric Company shall own an undivided 7-1/2% interest in the Navajo Generating Station and varying percentage interests in the transmission system. The Agreement shall be substantially in the form of the draft filed with the Secretary of the Company marked "Filed September 23, 1969 with the Secretary of Tucson Gas & Electric Company", and be it
FURTHER RESOLVED, that the proper officers of the Company be, and they hereby are further authorized to execute and enter into on behalf of the Company the necessary Project Agreements contemplated by said Participation Agreement, and such other documents reasonably required to implement said Participation Agreement and Project Agreements.
**************
I, P. L. ABBOTT, Secretary of TUCSON GAS & ELECTRIC COMPANY (hereinafter called the "Company"), DO HEREBY CERTIFY that the above and foregoing is a true and complete copy of resolutions duly adopted by the Board of Directors at the Regular Monthly Meeting held on the 23rd day of September, 1969, at which meeting a quorum was present and acted thereon; and
I DO FURTHER CERTIFY that said resolution is in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 29th day of September, 1969.

/s/ Authorized Signatory
------------------------	

CERTIFICATE
I, GERALD J. GRIFFIN, certify that I am an Assistant Secretary of ARIZONA PUBLIC SERVICE COMPANY, the corporation named herein; that M. C. TITUS, who signed the above contract on behalf of said Corporation was then its Executive Vice President; that said contract was duly signed for and in behalf of said Corporation by authority of its governing body and is within the scope of its corporate powers.

/s/ Gerald J. Griffin
---------------------------
Assistant Secretary	

CERTIFIED COPY OF RESOLUTION
I, GERALD J. GRIFFIN, Assistant Secretary of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, HEREBY CERTIFY that, at a meeting of the Board of Directors of said Company, duly convened and held on August 21, 1969, at which a quorum was present and acting throughout, the following resolution was adopted and is now in full force and effect:
RESOLVED, that the Board of Directors approves and ratifies the action of the officers in negotiating and carrying forward the proposal for the participation by the Company, along with others, in the so-called Navajo Project, involving the construction near Page, Arizona, of three generating units (presently estimated at 750 MW nameplate), with ownership being held as tenants in common in the following respective undivided interests:

Arizona Public Service Company               14.0%
Tucson Gas & Electric Company                 7.5%
City of Los Angeles                          21.2%
Nevada Power Company                         11.3%
Salt River Project Agricultural
   Improvement and Power District (For
   Itself)                                   21.7%
   (As Agent for U.S.B.R.)                   24.3%	

the said project to include certain transmission facilities to be located in Arizona, with APS to be the Project Manager and Operating Agent for said facilities, which are to be owned by APS and others as joint tenants in various percentages related to projected use, these facilities including a 500 kv line from the switchyard of the Navajo Plant near Page to the Moenkopi Switching Station and from there to the Westwing switchyard near Phoenix, and with another 500 kv line extending directly from the Navajo switchyard to Westwing, together with various related interconnections and switching facilities; and
FURTHER RESOLVED, that in connection with the Navajo Project, the appropriate officers of the Company be, and they are hereby authorized to negotiate and to execute and effectuate the necessary instruments and agreements, including among others, the following:
(1) Participation Agreement
(2) Coordination Agreement
(3) Interconnection Agreement
(4) Plant Site Lease
(5) Fuel Supply and Transportation Agreement
 
RESOLUTION NO. 416
BE IT RESOLVED by the Board of Water and Power Commissioners of The City of Los Angeles that the President and the Secretary of this Board be and they are hereby authorized to execute, on behalf of this Board, certain agreements relating to the construction, ownership, operation and maintenance of facilities for the generation of electrical power and energy and related facilities, including fuel supply, copies of which agreements are on file with the Secretary of this Board and which are identified as follows, that is:

Agreement Title                                                      DWP Number
---------------                                                      ----------
Navajo Project Participation Agreement                                 10334
Memorandum of Agreement Providing for Execution of Navajo              10335
  Station Coal Supply Agreement
Letter Agreement                                                       10336
Application for Federal Rights-of-Way and Easements                    10337
Application and Grant of Rights-of-Way and Easements (25 U.S.C.        10338
 Section 323)
United States, Department of the Interior, Power Coordination          10339
 Contract
Interim Arrangement for Interconnected Operations                      10340
Contract with Department of Water and Power of The City of             10341
 Los Angeles for Interim Sale of United States Entitlement of
 Navajo Project
Memorandum Transmission Agreement                                      10342
Victorville-Lugo Interconnection Agreement                             10343	

(6) Co-Tenancy Agreement
(7) Moenkopi Agreement
(8) Amendment to Navajo Wholesale Power Agreement
(9) Plant Construction Agreement
(10) Plant Operating Agreement
(11) Transmission Construction Agreement
(12) Transmission Operating Agreement
(13) Applications for Various Rights-of-Way and Easements
(14) Layoff Agreement
and
FURTHER RESOLVED, that the appropriate officers of the Company are authorized to take such actions and to execute such further agreements, instruments, applications, certificates, contracts or other documents as may be necessary or appropriate in connection with the foregoing to complete and effectuate the Company's proposed participation in the Navajo Project.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of said corporation this 3rd day of October, 1969.

/s/ Gerald J. Griffin
---------------------------
Assistant Secretary	

-2-

Agreement Title (Continued)              DWP Number
--------------------------               ----------
Indenture of Lease                        10344
Letter Agreement                          10350	

I HEREBY CERTIFY that the foregoingis a full, true and correct copy of a resolution adopted by the Board of Water and Power Commissioners of The City of Los Angeles at its meeting held NOV 20 1969

/s/ Mary J. Born
------------------------
       Secretary	

ORDINANCE NO. 139,629
AN ORDINANCE APPROVING AGREEMENTS RELATING TO PARTICIPATION BY THE
DEPARTMENT OF WATER AND POWER IN THE NAVAJO PROJECT
THE PEOPLE OF THE CITY OF LOS ANGELES DO ORDAIN AS FOLLOWS:
Section 1. That the Board of Water and Power Commissioners of The City of Los Angeles be and it is hereby authorized, in its discretion, to execute and enter into the following agreements, substantially in the form of those which are on file with the City Clerk and identified below, relating to the transmission and use of electrical Power and energy associated with the Navajo Project:

       AGREEMENT TITLE                                                  DWP NUMBER
----------------------------------------------------------------        ----------
Interim Arrangement for Interconnected                                       10340
  Operations
Contrast with Department of Water and Power of The City
  of Los Angeles for Interim Sale of United States, Entitle-
  ment of Navajo Project                                                     10341
Memorandum Transmission Agreement                                            10342
Victorville-Lugo Interconnection Agreement                                   10343
Letter Agreement                                                             10350	

Sec. 2. The City Clerk shall certify to the passage of this ordinance and cause the same to be published in some daily newspaper printed and published in the City of Los Angeles.
I hereby certify that the foregoing ordinance was introduced at the meeting of the Council of the City of Los Angeles of November 10, 1969 and was passed at its meeting of November 17, 1969.

                                                    REX E.  LAYTON.  City Clerk,
                                                        By M. B. Wilson, Deputy.
Approved November 18, 1969.
File No. 147173 Sup #1                                      SAM YORTY, Mayor.

                               (E54726) Nov 19 It	

CERTIFICATION
STATE OF CALIFORNIA,
} ss.
COUNTY OF LOS ANGELES,
I, REX E. LAYTON, City Clerk of the City of Los Angeles and ex-officio Clerk of the City Council of the City of Los Angeles, do hereby certify and attest the foregoing to be a full, true and correct copy of the original Ordinance No. 139,629 of the City of Los Angeles,

on file in my office, and that I have carefully compared the same with the original.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the City of Los Angeles, this 19th day of November, 1969

                                                 /s/ Rex E. Layton
                                        ----------------------------------------
                                        City Clerk of the City of  Los Angeles

                                     By /s/ Authorized Signatory
                                        ----------------------------------------
Form Clerk 22 -- 5M -- 11-68 (R)                          Deputy	

ORDINANCE NO. 139,630
AN ORDINANCE APPROVING AGREEMENTS RELATING TO PARTICIPATION BY THE
DEPARTMENT OF WATER AND POWER IN THE NAVAJO PROJECT
THE PEOPLE OF THE CITY OF LOS ANGELES DO ORDAIN AS FOLLOWS:
Section 1. That the Board of Water and Power Commissioners of The City of Los Angeles be and it is hereby authorized in its discription, to execute and enter into the following agreements, substantially in the form of those which are on file with the City Clerk and identified below, relating to the construction, ownership, operation and maintenance of facilities for generation of electrical power and energy and related facilities, including fuel supply:

       AGREEMENT TITLE                                                  DWP NUMBER
----------------------------------------------------------------        ----------
Navajo  Project Participation Agreement                                      10384
Memorandum of Agreement Providing for Execution of
Navajo Station Coal Supply Agreement                                         10385
Letter Agreement                                                             10386
Application for Federal Rights-of-Way and Easements                          10387
Grant of Federal Rights-of-Way and Eassements                                10388
United States Department of the Interlor, Power Coor-
 dination Contract                                                           10339
Indenture of Lease                                                           10344	

Sec. 2. The City Clerk shall certify to the passage of this ordinance and cause the same to be published in some daily newspaper printed and published in the City of LOS Angeles.
I hereby certify that the foregoing ordinance was introduced at the meeting of the Council of the City of Los Angeles, of November , 10, 1965 and was passed at its meeting of November 17, 1968.
REX E. LAYTEN City Clerk, By M. B. Wilson, Deputy. Approved November 18, 1969.
File No. 147178 SAM YORTY, Mayor.

(E54727) Nov 19 It
CERTIFICATION
STATE OF CALIFORNIA,
} ss.
COUNTY OF LOS ANGELES,
I, REX E. LAYTON, City Clerk of the City of Los Angeles and ex-officio Clerk of the City Council of the City of Los Angeles, do hereby certify and attest the foregoing to be a full, true and correct copy of the original Ordiance No. 139,630 of the City of Los Angeles,

on file in my office, and that I have carefully compared the same with the original.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the City of Los Angeles, this 19th day of November, 1969

                                               /s/ REX E. LAYTON
                                        --------------------------------------
                                        City Clerk of the City of  Los Angeles

                                       By  /s/ Authorized Signatory
                                           ------------------------------------
Form Clerk 22 -- 5M -- 11-68 (R)                     Deputy	

ORIGINAL
Southern California Edison Company
P. O. BOX 351
LOS ANGELES, CALIFORNIA 90053
October 3, 1969
ARIZONA PUBLIC SERVICE COMPANY
DEPARTMENT OF WATER AND POWER OF THE
CITY OF LOS ANGELES, BY THE BOARD
OF WATER AND POWER COMMISSIONERS
NEVADA POWER COMPANY
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT
TUCSON GAS & ELECTRIC COMPANY
Gentlemen:
This letter will confirm the agreement reached in. the course of negotiations of the Memorandum Transmission Agreement between the Participants in the Navajo Project and Southern California Edison Company, concerning the liability provisions to be agreed upon by the non-Federal parties to such Memorandum Transmission Agreement. These provisions are to be in effect among such non-Federal parties concerning the disposition of certain liabilities arising out of the operations of their respective electric systems. It is agreed that the following liability provisions will apply to the Memorandum Transmission Agreement and that the reference to "Party" and "Parties" therein shall mean a party or the parties to the Memorandum Transmission Agreement other than The United States of America.
6. LIABILITY
6.1 Except for any loss, damage, claim, cost, charge or expense resulting from Willful Action, no Party (First Party), its directors, officers, or employees, shall be liable to any other Party (Second Party) for any loss, damage, claim, cost, charge or expense of any kind or nature incurred by any Second Party (including direct, indirect,
- 2 -
or consequential loss, damage, claim, cost, charge or expense; and whether or not resulting from the negligence of any Party, its directors, officers, employees, or any other person or entity whose negligence would be imputed to such Party) from (i) engineering, repair, supervision, inspection, testing, protection, operation, maintenance, replacement, reconstruction, use or ownership of First Party's electric system,or (ii) the performance or non-performance of the obligations of any Party under this Memorandum Transmission Agreement. Except for any loss, damage, claim, cost, charge or expense resulting from Willful Action, each Second Party releases each other First Party, its directors, officers, and employees, from any such liability.
6.2 Except for liability resulting from Willful Action, any Party whose electric customer shall make a claim or bring an action for any death, injury, loss or damage arising out of electric service to such customer, shall indemnify and hold harmless all other Parties, their directors, officers, and employees, from and against any liability for such death, injury, loss or damage. The term "electric customer" shall mean an electric consumer to whom no power is delivered for resale.
6.3 Each Party shall be responsible for the consequences of
- 3 -
its Willful Action, and shall indemnify and save harmless the other Parties, their directors, officers, and employees, from the consequences thereof.
6.4 The term "Willful Action" as used in this Section 6 is defined as follows:
6.4.1 Action taken or not taken by a Party at the direction of its directors, officers, or employees, having management or administrative responsibility affecting its performance under the Memorandum Transmission Agreement, which action is knowingly or intentionally taken or failed to be taken with conscious indifference to the consequences thereof, or with intent that injury or damage would result or would probably result therefrom. Willful Action does not include any act or failure to act which is merely involuntary, accidental or negligent.
6.4.2 Action taken or not taken by a Party at the direction of its directors, officers, or employees, having management or administrative responsibility affecting its performance under the Memorandum Transmission Agreement, which action has been determined by final arbitration award or final judgment or judicial decree to be a material default under the Memorandum Transmission Agreement
- 4 -
and which occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default, or, if no time to cure is specified therein, occurs or continues thereafter beyond a reasonable time to cure such default.
6.4.3 Action taken or not taken by a Party at the direction of its directors, officers, or employees, having management or administrative responsibility affecting its performance under the Memorandum Transmission Agreement, which action is knowingly or intentionally taken or failed to be taken with the knowledge that such action taken or failed to be taken is a material default under any Project Agreements.
6.4.4 The phrase "employees having management or administrative, responsibility" as used in this Section 6.4 means employees of a Party who are responsible for one or more of the executive functions of planning, organizing, coordinating, directing, controlling and supervising such Party's performance under this Memorandum Transmission Agreement.
It is understood and agreed that as between The United States of America and one or more of the non-Federal parties, liabilities within the purview of
Section 6 of the Memorandum Transmission Agreement shall be governed by the provisions of Section 6 in such agreement, but that liability of one non-Federal party to one or more other non-Federal parties to the Memorandum Transmission
- 5 -
Agreement that are within the purview of Section 6 as set forth in this letter agreement shall be governed by the Section 6 herein.
Will you please signify your agreement to the terms and conditions of this letter by executing the appropriate acceptance provisions hereof.

                                             Very truly yours,

 APPROVED AS TO FORM:
ROLLIN E. WOODBURY                           SOUTHERN CALIFORNIA EDISON COMPANY
Vice President & General Counsel

By /s/ David Barry
   ----------------------------
        Assistant Counsel

   10-3, 1969

                                             By /s/ William R. Gould
                                                ----------------------------
                                                Senior Vice President	

The terms and conditions of this letter are agreed to this 31st day of October, 1969.
ARIZONA PUBLIC SERVICE COMPANY

By  /s/ MC Titus
    ----------------------------
Title   Executive Vice President	

DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, BY THE BOARD OF WATER AND POWER COMMISSIONERS OF THE CITY OF LOS ANGELES

/s/ Authorized Signatory
------------------------
                              By  /s/ Authorized Signatory
                                  ----------------------------
                                  President

                              And /s/ Authorized Signatory
                                  ----------------------------
                                           Secretary	

NEVADA POWER COMPANY

By  /s/ Authorized Signatory
    ----------------------------
Title President	

- 6 -
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT

By  /s/ Authorized Signatory
    --------------------------------
Title President	

TUCSON GAS & ELECTRIC COMPANY

By  /s/ J. Luther Davies
    --------------------------------
Title President	

Contract No. 14-06-300-2140
MEMORANDUM TRANSMISSION AGREEMENT
between
PARTICIPANTS IN THE NAVAJO PROJECT
and
SOUTHERN CALIFORNIA EDISON COMPANY
DWPNO. 10342
MEMORANDUM TRANSMISSION AGREEMENT
TABLE OF CONTENTS

SECTION                                                  PAGE
-------                                                  ----
1             PARTIES                                       1

2             RECITALS                                      1

3             AGREEMENT                                     3

4             TRANSMISSION PRINCIPLES                      14

5             SUBSEQUENT AGREEMENTS                        16

6             LIABILITY AND INSURANCE                      16

7             ARBITRATION                                  19

8             EFFECTIVE DATE                               21

9             REGULATORY APPROVAL                          21

10            AGREEMENT SUBJECT TO COLORADO
                RIVER COMPACT                              22

11            AUTHORIZED REPRESENTATIVES OF THE            22
                PARTIES

12            GENERAL POWER CONTRACT PROVISIONS            22	

MEMORANDUM TRANSMISSION AGREEMENT
1. PARTIES
The Parties to this Memorandum Transmission Agreement are: ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation ("Arizona"); DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the charter of the City of Los Angeles, a municipal corporation of the State of California ("Los Angeles"); NEVADA POWER COMPANY, a Nevada corporation ("Nevada"); SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona ("Salt River Project"); TUCSON GAS & ELECTRIC COMPANY, an Arizona corporation ("Tucson"); THE UNITED STATES OF AMERICA ("United States") represented by the officer executing this Memorandum Transmission Agreement, his duly appointed successor or duly authorized representative ("contracting officer"); all of the above collectively referred to as the "Participants"; and SOUTHERN CALIFORNIA EDISON COMPANY, a California corporation ("Edison").
2. RECITALS
This Memorandum Transmission Agreement is made with reference to the following facts, among others:
2.1 Edison and Arizona entered into the Edison-Arizona
Transmission Agreement dated July 20, 1966, and Amendment No. 1 thereto dated August 26, 1966, covering the terms and conditions of the construction, ownership, operation and maintenance of a 500-kv transmission line from the Four Corners Generating Station to the Eldorado Substation, and the Moenkopi Switchyard (hereinafter referred to as the "Edison-Arizona Transmission System").
2.2 The Participants have entered into the Navajo Project Participation Agreement, which provides for the construction, ownership, operation and maintenance of the Navajo Project, including the Transmission System.
2.3 The Transmission System will include the following transmission lines and related switchyard and substation facilities:

Navajo -        McCullough                     500-kv line
Navajo -        Moenkopi                       500-kv line
Navajo -        Phoenix Area                   500-kv line
Moenkopi -      Phoenix Area                   500-kv line	

2.4 The Transmission System will operate interconnected with the Edison-Arizona Transmission System.
2.5 The Parties desire to provide series capacitors ("Project Series Capacitors") in the Transmission System and the Edison-Arizona Transmission System, which will enable said systems to transmit power in an amount equivalent to the Participants' entitlements
-2-
in the Navajo Generating Station, including the Central Arizona Project pumping requirements, to their respective delivery points.
2.6 The Parties desire to provide series capacitors ("Incremental Series Capacitors"), in addition to those referred to in Section 2.5 above, which will provide an incremental amount of transmission capacity on both the Navajo-McCullough 500-kv line and the Moenkopi-Eldorado 500-kv line between Moenkopi Switchyard and Eldorado Substation equal to the Edison Moenkopi Delivery (defined in Section 2.7 hereof).
2.7 The United States desires to sell to Edison for delivery to Edison at Moenkopi Switchyard a portion of its entitlement to power from the Navajo Generating Station in accordance with provisions of the Contract with Edison of even date for Interim Sale of United States Entitlement in Navajo Project (such portion herein referred to as the "Edison Moenkopi Delivery").
3. AGREEMENT
The Parties agree as follows:
3.1 Arizona shall furnish, install, own, operate and maintain:
3.1.1 Project Series Capacitors and associated equipment located in the Moenkopi Switchyard
-3-
on the Moenkopi-Eldorado 500-kv line.
3.1.2 Incremental Series Capacitors and associated equipment located in the Moenkopi Switchyard on the Moenkopi-Eldorado 500-kv line.
3.2 Edison shall furnish, install, own, operate and maintain:
3.2.1 Project Series Capacitors and associated equipment in the Eldorado Substation on the Moenkopi-Eldorado 500-kv line.
3.2.2 Incremental Series Capacitors and associated equipment in the Eldorado Substation on the Moenkopi-Eldorado 500-kv line, and Edison shall assume the cost thereof.
3.3 Arizona shall furnish, install, own, operate and maintain Project Series Capacitors and associated equipment in the Moenkopi Switchyard on the Navajo-Moenkopi 500-kv line.
3.4 Arizona shall furnish, install, own, operate and maintain Project Series Capacitors, shunt reactors and associated equipment in the Moenkopi Switchyard on the Moenkopi-Phoenix Area 500-kv line.
3.5 Arizona shall furnish, install, own, operate and maintain Project Series Capacitors and associated equipment in both the Four Corners Switchyard and the Moenkopi Switchyard on the Four Corners-Moenkopi 500-kv line.
-4-
3.6 Arizona shall furnish, install, own, operate and maintain Project Series Capacitors and associated equipment in the Cholla Switchyard and Pinnacle Peak Substation on the Cholla-Pinnacle Peak 345-kv lines.
3.7 Arizona shall furnish, install, own, operate and maintain power circuit breakers and related equipment (excluding series capacitors, shunt reactors and associated equipment) in the Moenkopi Switchyard for the interconnection of the Transmission System and the Edison-Arizona Transmission System.
3.8 Participants in the Navajo-McCullough 500-kv line ("Navajo-McCullough Participants") shall furnish, install, operate and maintain at their cost Project Series Capacitors, shunt reactors and associated equipment at the terminals of the Navajo-McCullough 500-kv line, or at the midpoint of said line, or at all such locations.
3.9 The Navajo-McCullough Participants shall furnish, install, operate and maintain Incremental Series Capacitors and associated equipment at the terminals of the Navajo-McCullough 500-kv line, or at the mid-point of said line, or at all such locations.
3.10 The Navajo-McCullough Participants shall make appropriate financial arrangements with Edison to cover the costs incurred by Edison in complying with Section 3.2.1 hereof.
-5-
3.11 The Navajo-McCullough Participants shall make appropriate financial arrangements with Arizona to cover the costs incurred by Arizona in complying with Section 3.1.1 hereof.
3.12 The Participants shall make appropriate financial arrangements with Arizona to cover the costs incurred by Arizona in complying with Sections 3.3 and 3.7 hereof.
3.13 The Participants in Moenkopi-Phoenix Area 500-kv line (hereinafter referred to as the "Moenkopi-Phoenix Area Participants") shall make appropriate financial arrangements with Arizona to cover the costs incurred by Arizona in complying with Sections 3.4, 3.5 and 3.6 hereof.
3.14 Edison shall make appropriate financial arrangements with Arizona to cover the costs incurred by Arizona in complying with Section 3.1.2 hereof.
3.15 Edison shall make appropriate financial arrangements with the Participants to cover the costs incurred by the Participants in complying with Section 3.9 hereof.
3.16 The phrase "make appropriate financial arrangements" as used in Sections 3.10 through 3.15 hereof, shall mean one of two alternates:
3.16.1 A contribution in aid of construction for the equipment to be furnished and installed
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and a mutually agreed monthly payment to cover all costs other than depreciation and return on investment.
3.16.2 A monthly payment; substantially in accordance with present formula and schedules of the Edison-Arizona Transmission Agreement.
Within one year after the effective date of this Memorandum Transmission Agreement, each Participant with a financial obligation hereunder shall choose either of the above described alternates.
3.17 In lieu of the payment options provided in Section 3.16 hereof, the Parties may exchange obligations or property by mutual agreement of such Parties.
3.18 Arizona's charges to the Parties to cover all costs other than depreciation and return on investment incurred in connection with the Moenkopi Switchyard (including all series capacitors, shunt reactors and associated equipment) shall be billed in proportion to the initial gross investment in the Moenkopi Switchyard for which they are responsible under the provisions of the Edison-Arizona Transmission Agreement in the case of Edison and under the provisions of the Participation Agreement in the case of the Participants.
3.19 Edison and the Navajo-McCullough Participants shall each provide reciprocal emergency service rights in
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accordance with this Section 3.19 for which there shall be no charge made by Edison to the Navajo-McCullough Participants, or by the Navajo-McCullough Participants to Edison.
3.19.1 In the event of an outage of the Navajo-McCullough 500-kv line or associated terminal facilities, subject to Section 3.19.3 hereof,
(i) the Navajo-McCullough Participants shall be entitled to have an amount of power equivalent to their entitlement in the Navajo Generating Station, less transmission losses, transmitted between said station and McCullough Substation over the Moenkopi-Eldorado and Eldorado-McCullough 500-kv lines and associated terminal facilities; provided that, for the purposes of computing such entitlements, the entitlement of the United States shall be deemed to be 250/561 of the United States' entitlement in the Navajo Generating Station; and (ii) Edison shall be entitled to have an amount of power equivalent to its entitlement of 48% of the net effective generating capacity of Four Corners Units 4 and 5 plus an amount of power equal to the Edison Mocnkopi Delivery,
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less transmission losses, transmitted between the Moenkopi Switchyard and the Eldorado Substation over the Moenkopi-Eldorado 500-kv line and associated terminal facilities.
3.19.2 In the event of an outage of the Moenkopi-Eldorado 500-kv line or associated terminal facilities, subject to Section 3.19.3 hereof,
(i) Edison shall be entitled to have an amount of power equivalent to its entitlement of 48% of the net effective generating capacity of Four Corners Units 4 and 5 plus an amount of power equal to the Edison Moenkopi Delivery, less transmission losses, transmitted between the Moenkopi Switchyard and the Eldorado Substation over the Navajo-Moenkopi, Navajo-McCullough and Eldorado-McCullough 500-kv lines and associated terminal facilities; and (ii) the Navajo-McCullough Participants shall be entitled to have an amount of power equivalent to their entitlement in the Navajo Generating Station, less transmission losses, transmitted between said station and the McCullough Substation over the Navajo-McCullough 500-kv line and associated
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terminal facilities; provided, that, for the purposes of computing such entitlements, the entitlement of the United States shall be deemed to be 250/561 of the United States' entitlement in the Navajo Generating Station.
3.19.3 Unless otherwise agreed upon by the system dispatchers of Edison and the Navajo-McCullough Participants, in the event of an outage of the Navajo-McCullough 500-kv line or the Moenkopi-Eldorado 500-kv line, the Navajo-McCullough Participants and Edison shall reduce transmission of power and associated energy within one-half hour after the occurrence of such outage so that the scheduled delivery over the remaining in-service line does not exceed 1,000 megawatts. Said 1,000 megawatt limitation may be changed from time to time by mutual agreement of the authorized representatives of Edison and the Navajo-McCullough Participants. The entitlement of each Navajo-McCullough Participant to capacity in the remaining in-service transmission line shall be equal to the capacity of such remaining in-service line as established above times the ratio that such Participant's
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entitlement in the Navajo Generating Station bears to the total capability described in Section 3.26 hereof. Edison's entitlement to capacity in the remaining in-service transmission line shall be equal to the capacity of such remaining in-service line as established above times the ratio that Edison's entitlement of 48% of the net effective generating capacity of Four Corners Units 4 and 5 and the Edison-Moenkopi Delivery bears to the total capability described in Section 3.26 hereof. For the purposes of this Section 3.19.3, the entitlement of the United States in the Navajo Generating Station shall be deemed to be 250/561 of its entitlement in the Navajo Generating Station.
3.20 Equitable adjustment for transmission losses in the Edison-Arizona Transmission System and the Transmission System shall be agreed upon between Edison and the Participants.
3.21 Edison and the Participants shall coordinate the design of the Transmission System, the additions to the Edison-Arizona Transmission System, and any interconnections thereto, including criteria related to line loading, series capacitor ratings and similar matters.
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3.22 Arizona shall transmit for Edison between the Moenkopi Switchyard and the Colorado River over the Edison-Arizona Transmission System an amount of electric power equal to the Edison Moenkopi Delivery.
3.23 The ownership interests and cost responsibilities of the Participants for the facilities to be installed pursuant to this Memorandum Transmission Agreement shall be as provided in the Navajo Project Agreements.
3.24 The Participants shall have the right to transmit power in an amount equivalent to their entitlements in the Navajo Generating Station through the Moenkopi Switchyard.
3.25 The Navajo-McCullough 500-kv line and the Moenkopi-Eldorado 500-kv line will be interconnected at each end through other facilities, and under normal operating conditions said two lines will be operated in parallel as a system.
3.26 For the purposes of this Agreement, the total capability of the system described in Section 3.25 hereof shall be deemed to be an amount equivalent to the sum of: (i) the sum of the entitlements of Nevada and Los Angeles in the Navajo Generating Station and 250/561 of the entitlement of the United States in the Navajo Generating Station; (ii) the Edison entitlement in Four Corners Units 4 and 5,
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which is 48% of the net effective generating capacity of said units; and (iii) the Edison Moenkopi Delivery.
3.27 In the event that the Navajo-McCullough Participants desire to schedule delivery of power over the Navajo-McCullough 500-kv line in an aggregate amount in excess of the amount described in Section 3.26(i) hereof or Edison desires to schedule delivery of power over the Moenkopi-Eldorado 500-kv line in an amount in excess of the sum of the amounts described in Sections 3.26(ii) and 3.26(iii) hereof, the Navajo-McCullough Participants and Edison shall conduct engineering studies to determine the capability of the system described in Section 3.25 hereof to deliver such additional power. The deemed capability of said system as established in Section 3.26 hereof may be changed upon mutual agreement of all the Navajo-McCullough Participants and Edison.
3.28 Until such time as the United States recaptures all of the Edison Moenkopi Delivery, the Navajo-Phoenix Area Participants shall not schedule power over the Transmission System in an amount which is in excess of the sum of their entitlements in the Navajo Generating Station without the mutual agreement of the Navajo-Phoenix Area Participants and Edison.
3.29 The Participants shall have the right to interconnect
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their systems with the Transmission System at their designated points of delivery for the purpose of transmitting power in amounts equivalent to their entitlements in the Navajo Generating Station.
3.30 Except as provided in Section 3.29 hereof, the Participants shall not interconnect the Transmission System with their systems or permit any third party to interconnect the Transmission System with its system in a manner which would unreasonably jeopardize or unreasonably impair the operation by Edison and Arizona of the Edison-Arizona Transmission System.
3.31 Edison and Arizona shall not interconnect the Edison-Arizona Transmission System with their systems or permit any third party to interconnect the Edison-Arizona Transmission System with its system in a manner which would unreasonably jeopardize or unreasonably impair the operation of the Transmission System.
4. TRANSMISSION PRINCIPLES
4.1 Each Party shall, independently of the transmission capacity otherwise maintained by others, maintain in its system, or between its system and the system of other Parties or other entities, sufficient capacity, by ownership or contract, which will permit it to transmit all power and energy introduced
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into its system to meet its own commitments and to fulfill its written obligations, if any, to provide transmission service for other Parties or other entities, regardless of the origin, source, ownership or type of generation used to produce such power and energy.
4.2 It is recognized that flows of electric energy may occur through interconnections between the systems of the Parties as a result of parallel operation of the systems of the Parties with each other and with other entities. Each Party shall use its best efforts at all times to maintain as nearly as practicable the scheduled quantities of power and energy into and out of the control area containing its system.
4.3 The Parties agree that, should differences arise between them regarding the implementation of the foregoing principles, they will seek an equitable solution and, if necessary, will perform joint technical studies in an effort to agree upon (i) the amounts of power that can be scheduled and transmitted on their systems or between one Party's system and the systems of other Parties or other entities in accordance with the principles of Section 4.1 hereof, or
(ii) upon whether any Party has been in violation of Section 4.2 hereof. In
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the event such agreement cannot be reached, the matter shall be submitted to arbitration, subject to and in accordance with the provisions of Section 7 hereof, and in accordance with guidelines to be established by the Parties for purposes of determining each particular dispute.
5. SUBSEQUENT AGREEMENTS
5.1 The Parties intend that the obligations and principles of this Memorandum Transmission Agreement will be implemented by definitive agreements, including appropriate amendments to the Edison-Arizona Transmission Agreement, which will be negotiated in good faith and executed by the applicable Parties. In the event that all required definitive agreements are not consummated, the Parties agree that this Memorandum Transmission Agreement shall serve as the basis for requiring the performance of all obligations herein set forth, subject to the terms and conditions herein set forth.
6. LIABILITY AND INSURANCE
6.1 The Parties agree to use their best efforts to obtain a policy or policies of liability insurance with cross liability endorsements specifically limited to protecting the Parties from claims and liabilities inter se arising out of the interconnected operation provided for in the Memorandum
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Transmission Agreement.
6.2 Except for any damage resulting from Willful Action, and except to the extent of any damage covered by valid and collectible insurance, if any, described in Section 6.1 hereof, and as between the Participants, except to the extent of any damage covered by valid and collectible Project Insurance as defined in the Navajo Project Participation Agreement, liability on the part of any Party (First Party), or any of its directors, officers or employees, for any damage to any Party (Second Party) whether or not caused by negligence, which occurs as the result of performance or non-performance of its responsibilities under this Memorandum Transmission Agreement may not be collected from the Party (First Party), or any of its directors, officers or employees, by any action in law or equity by the Party (Second Party).
6.3 Except for liability resulting from Willful Action, any Party whose electric customer shall make a claim or bring an action for any death, injury, loss or damage arising out of electric service to such customer, shall indemnify and hold harmless all other Parties, their directors, officers and employees, from and against any liability for such death, injury, loss or damage. The term "electric
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customer" shall mean an electric customer to whom no power is delivered for resale.
6.4 Each Party shall be responsible for the consequences of its own Willful Action, and shall indemnify and save harmless the other Parties from the consequences thereof.
6.5 The term "Willful Action" as used in this Section 6 is defined as follows:
6.5.1 Action taken or not taken by a Party at the direction of its directors, officers, contracting officer, or employees, having management or administrative responsibility affecting its performance under the Memorandum Transmission Agreement, which action is knowingly or intentionally taken or failed to be taken with conscious indifference to the consequences thereof, or with intent that injury or damage would result or would probably result therefrom. Willful Action does not include any act or failure to act which is merely involuntary, accidental or negligent.
6.5.2 Action taken or not taken by a Party at the direction of its directors, officers, contracting officer, or employees, having management or administrative responsibility affecting its performance under the Memorandum
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Transmission Agreement, which action has been determined by final arbitration award or final judgment or judicial decree to be a material default under the Memorandum Transmission Agreement and which occurs or continues beyond the time specified in such arbitration award or judgment or judicial decree for curing such default, or, if no time to cure is specified therein, occurs or continues thereafter beyond a reasonable time to cure such default.
6.5.3 Action taken or not taken by a Party at the direction of its directors, officers, contracting officer, or employees, having management or administrative responsibility affecting its performance under the Memorandum Transmission Agreement, which action is knowingly or intentionally taken or failed to be taken with the knowledge that such action taken or failed to be taken is a material default under this agreement.
6.5.4 The phrase "employees having management or administrative responsibility" as used in this Section 6.5 means employees of a Party who are responsible for one or more of the executive functions of planning, organizing,
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coordinating, directing, controlling and supervising such Party's performance under this Memorandum Transmission Agreement.
7. ARBITRATION
7.1 If a dispute between any of the Parties should arise under this Memorandum Transmission Agreement which does not involve the legal rights of or which will not create a legal obligation upon the United States under this Memorandum Transmission Agreement, or will not affect the interests or rights held for the use and benefit of the United States under the applicable Navajo Project Agreements, any Party may call for submission of the dispute to arbitration, which call shall be binding upon all of the other Parties. Except as specifically provided in an applicable agreement, the arbitration shall be governed by the rules and practices of the American Arbitration Association. The award of the arbitrators shall be final and binding upon the Parties, and the costs and expenses of the arbitrators shall be shared equally by the Parties participating in the arbitration, unless otherwise decided by the arbitrators.
7.2 If a dispute arises between any of the Parties which does or may involve the legal rights of or which will or may create a legal obligation upon the United States under this Memorandum Transmission Agreement,
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or which affects or may affect the interests or rights held for the use and benefit of the United States under the applicable Navajo Project Agreements, then any Party may call for submission to arbitration of any part of the dispute, issue or action related thereto which the United States may lawfully submit to arbitration. If the contracting officer agrees to such arbitration, or if the contracting officer refuses or fails to arbitrate and a court of competent jurisdiction thereafter finally decides that the United States may lawfully submit the matter in dispute to arbitration, it shall be conducted in the manner set forth in this Section 7, or in such other manner as may be provided for by Federal law.
8. EFFECTIVE DATE
This Memorandum Transmission Agreement shall become effective when it has been duly executed and delivered on behalf of the Parties.
9. REGULATORY APPROVAL
9.1 This Memorandum Transmission Agreement shall be subject to filing with, and to such changes or modifications as may from time to time be directed by, competent regulatory authority, if any, in the exercise of its jurisdiction.
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10. AGREEMENT SUBJECT TO COLORADO RIVER COMPACT
10.1 This agreement is made upon the express condition and with the express understanding that all rights hereunder shall be subject to and controlled by the Colorado River Compact, being the compact or agreement signed at Santa Fe, New Mexico, November 24, 1922, pursuant to Act of Congress approved August 19, 1921, entitled "An Act to permit a compact or agreement between the States of Arizona, California, Colorado, Nevada, New Mexico, Utah and Wyoming respecting the disposition and apportionment of the waters of the Colorado River, and for other purposes", which Compact was approved in Section 13(a) of the Boulder Canyon Project Act.
11. AUTHORIZED REPRESENTATIVES OF THE PARTIES
11.1 Each Party and the contracting officer, by written notice to the other, shall designate the representative who is authorized to act in its and his behalf with respect to those matters contained herein which are the functions and responsibilities of the authorized representatives of the Parties. Each Party may change the designation of its authorized representative upon written notice to the other.
12. GENERAL POWER CONTRACT PROVISIONS
12.1 The General Power Contract Provisions effective
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April 27, 1961, with revised Page 2 dated August 7, 1968, revised Page 3 dated January 2, 1969, and revised Page 6 dated July 28, 1969, attached hereto are hereby made a part of this Memorandum Transmission Agreement; provided, however, that Provisions A through D, F through N, Q through S, V, Y, Z and AA through GG shall not apply to this Memorandum Transmission Agreement; and provided that, as to Provision P, since Title 42 U.S.C. 2000-e-2(i) provides for the giving of preference to Indians in employment on or near an Indian Reservation, the obligations of the non-federal Parties under Provision P shall be subject to any obligation undertaken by said non-federal Parties to give preference to Indians for employment on or near an Indian Reservation.
IN WITNESS WHEREOF, the Parties have caused this Memorandum Transmission Agreement to be executed as of this 30th day of September, 1969.
THE UNITED STATES OF AMERICA

By /s/ Walter J. Hickel
   --------------------------------
   Secretary of the Interior	

ARIZONA PUBLIC SERVICE COMPANY

ATTEST:                                    By  /s/ M.C. Titus
/s/ Gerald J. Griffin                          --------------------------------
----------------------                         EXECUTIVE VICE PRESIDENT
Assistant Secretary	

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DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
by

By /s/ Donald J. Reisner        Board of Water and Power Commissioners of
--------------------            the City of Los Angeles

ATTEST:                         By  /s/ Authorized Signatory
                                     -----------------------
/s/ Mary J. Born                     PRESIDENT
--------------------
Secretary                       NEVADA POWER COMPANY

ATTEST:                         By /s/ Harry Allen
                                   -----------------
/s/ Authorized Signatory           President
------------------------
Secretary
                                SALT RIVER PROJECT AGRICULTURAL
                                IMPROVEMENT AND POWER DISTRICT

                                By  /s/ Authorized Signatory
ATTEST:                             ------------------------
                                   President
/s/ Authorized Signatory
------------------------
Secretary                       TUSCON GAS AND ELECTRIC COMPANY

                                By  /s/ HR Catlin
                                    ---------------
ATTEST:                             VICE PRESIDENT

/s/ W.D. Brooks
------------------------        SOUTHERN CALIFORNIA EDISON COMPANY
ASSISTANT SECRETARY
                                By  /s/ William R. Gould
                                    ----------------------------
                                    SENIOR VICE PRESIDENT
ATTEST:

/s/ Authorized Signatory            [STAMP]
------------------------
ASSISTANT SECRETARY                 Approved as to form	

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Effective April 27, 1961
UNITED STATES DEPARTMENT OF THE INTERIOR
BUREAU OF RECLAMATION
GENERAL POWER CONTRACT PROVISIONS
A. Characteristics of Power and Energy.
Electric energy supplied hereunder will be three-phase, alternating current, at a nominal frequency of sixty (60) cycles per second.
B. Delivery of Energy in Excess of Contract Obligation.
The Contractor may from time to time, in the absence of objection by the contracting officer, use energy at rates of power delivery greater than the contract rate of delivery in effect for each type of service provided for in this contract, but such greater use shall not be deemed to establish in the Contractor any right thereto and the Contractor shall cease any such greater use whenever and for the periods of time requested by the contracting officer. Nothing in this contract contained shall obligate or be construed to obligate the United States to increase any contract rate of delivery hereunder. If additional power is not available from the United States, the responsibility for securing additional power shall rest wholly with the Contractor.
C. Continuity of Electric Service to be Furnished.
The electric service, unless otherwise specified, will be furnished continuously except (1) for interruptions or reductions due to uncontrollable forces, as defined herein; (2) for interruptions or reductions due to operation of devices installed for power system protection; and (3) for temporary interruptions or reductions, which, in the opinion of the contracting officer, are necessary or desirable for the purposes of maintenance, repairs, replacements, installation of equipment, or investigation and inspection. The United States, except in case of emergency as determined by the contracting officer, will give the Contractor reasonable advance notice of such temporary interruptions or reductions and will remove the cause thereof with diligence.
D. Multiple Points of Delivery.
When electric service is furnished at two or more points of delivery under the same schedule of rates, said schedule of rates shall apply separately to the service supplied at each point of delivery; Provided, That where the meter readings are considered separately and the Contractor's system may be interconnected between points of delivery during emergencies, the meter readings at any point of delivery will be adjusted when necessary to compensate for duplication of power demand recorded by meters at alternate points of delivery due to emergency conditions which are beyond the Contractor's control or temporary conditions caused by scheduled outages.
E. Uncontrollable Forces.
Neither party shall be considered to be in default in respect to any obligation hereunder, if prevented from fulfilling such obligation by reason of uncontrollable forces, the term uncontrollable forces being deemed for the purpose of this contract to mean any cause beyond the control of the party affected, including, but not limited to, failure of facilities, flood, earthquake, storm, lightning, fire, epidemic, war, riot, civil disturbance, labor disturbance, sabotage, and restraint by court or public authority, which by exercise of due diligence and foresight such party could not reasonably have been expected to avoid. Either party rendered unable to fulfill any obligation by reason of uncontrollable forces shall exercise due diligence to remove such inability with all reasonable dispatch.
F. Modification of Rates.
The rate schedule specified in this contract shall be subject to successive modification by the United States through the promulgation of superseding rate schedules. If at any time the United States promulgates a rate schedule superseding the rate schedule then in effect under this contract, it will promptly notify the Contractor thereof. Said superseding rate schedule, as of its effective date, shall become effective as to this contract unless the Contractor, by notice in writing given to the contracting officer within 180 days after notice to it by the United States of promulgation of said superseding rate schedule, shall elect to terminate this contract effective as of such date not more than three (3) years subsequent thereto as the Contractor shall therein specify. In the event of such termination, said superseding rate schedule shall not be effective during the period of the remaining unexpired term of this contract or during a period of two years from the date of notice to the Contractor of the promulgation of said superseding rate schedule, whichever period is shorter.
G. Minimum Annual Capacity Charge.
When the rate schedule in effect under this contract provides for a minimum annual capacity charge, a statement of the minimum annual capacity charge due, if any, shall be included in the bill rendered for electric service for the last billing period of each calendar year, appropriately adjusted on a pro rata basis if the full billing periods for the adjustable items (including increases or decreases in the contract rate of delivery) in the calendar year are less than 12. Fractional billing periods will not be considered in such determination. Where multiple points of delivery are involved and the contract rate of delivery is stated to be a maximum aggregate rate of delivery for all points, in determining the minimum annual capacity charge due, if any, the monthly capacity charges at the individual points of delivery shall be added together. If this contract represents a continuation of electric service to an existing customer, for the purpose of determining the minimum annual capacity charge, (1) the first 24 full billing periods shall begin with the date that electric service was first rendered under the same or a similar rate schedule in the expired or superseded contracts, and (2) for the calendar year in which electric service is begun under this contract, the minimum annual capacity charges under this contract and the contracts it succeeded or superseded shall be combined into one such charge due at the end of said calendar year and the monthly capacity charges during said entire calendar year shall be credited against said combined minimum annual capacity charge.
H. Billing and Payments.
The United States will submit bills to the Contractor on or before the tenth day of each month for electric service furnished during the preceding month, and payments will be due and payable by the Contractor on the first day of the month immediately succeeding the date each bill is submitted.
I. Nonpayment of Bills.
If the Contractor fails to pay any bill when due an interest charge of one per cent (1%) of the amount unpaid shall be added thereto as liquidated damages, and thereafter, as further liquidated damages, an additional interest charge of one-half of one per cent (1/2%) of the principal sum unpaid shall be added on the first day of each succeeding calendar month until the amount due, including interest, is paid in full. The United States shall have the right upon not less than fifteen (15) days' advance written notice to discontinue furnishing electric service to the Contractor for nonpayment of bills and to refuse to resume same so long as any part of the amount due remains unpaid. Such a discontinuance of electric service will
GENERAL POWER CONTRACT PROVISIONS
not relieve the Contractor of liability for the minimum charge during the time electric service is so discontinued. The rights given herein to the United States shall be in addition to all other remedies available to the United States, either at law or in equity, for the breach of any of the provisions hereof.
J. Adjustments for Fractional Billing Period.
(a) For a fractional part of a billing period at the beginning or end of service, and for fractional periods due to withdrawals of service, the demand or capacity charge, the kilowatthour blocks of the energy charge, and the minimum charge shall each be proportionately adjusted in the ratio that the number of hours that electric service is furnished to the Contractor in such fractional billing period bears to the total number of hours in the billing period involved.
(b) Whenever irrigation and/or drainage pumping service is supplied under this contract, adjustments in the demand or capacity charge and in the kilowatthour blocks of the energy charge as applicable, and in the minimum charge of the rate schedule under which service is supplied, shall be made for the fractional part of the billing period at the beginning and end of pumping service in each year in like manner as is provided for in section (a) of this article. If pumping service is supplied in conjunction with service for other purposes and is not metered separately, the billing demand for pumping service shall be considered to be the difference between the highest 30-minute integrated demand measured during the billing period and the contract rate of delivery for firm power.
K. Adjustments for Curtailments to Service.
Unless curtailment of service is due to a request by the customer, billing adjustments will be made if the delivery of electric energy is curtailed because of conditions on the power system of the United States, which system for the purpose of such adjustments hereunder shall include transmission facilities utilized but not owned by the United States, for periods of one (1) hour or longer in duration each. The total number of hours of curtailed service in any billing period shall be determined by adding (1) the sum of the number of hours of interrupted service to (2) the product of: the number of hours of reduced service multiplied by the percentage of said reduction below the lesser of (a) the contract rate of delivery, or (b) the obligation of the United States to deliver firm power and energy as established under the operating agreement entered into pursuant to the Auxiliary Power Service article hereof, or (c) the rate of delivery required by the Contractor at the time of such reduction. The demand or capacity charge, the kilowatthour blocks of the energy charge, and the minimum charge shall each be proportionately adjusted in the ratio that the total number of hours of such curtailed service as herein determined bears to the total number of hours in the billing period involved. The Contractor shall make written claim within thirty (30) days after receiving the monthly bill, for adjustment on account of any curtailment to service, for periods of one (1) hour or longer in duration each, alleged to have occurred and which is not reflected in such bill. Failure to make such written claim, within said thirty (30) day period, shall constitute a waiver thereof. All curtailments to service, which are due to conditions on the power system of the United States, shall be subject to the provisions of this article and the Contractor shall be limited in its remedy to the relief granted by this article; Provided, That withdrawal of power and energy under contract provisions shall not be deemed curtailments to service.
L. Metering.
(a) The total electric power and energy delivered to the Contractor will be measured by metering equipment to be furnished and maintained by the United States. Meters shall be sealed and the seals shall be broken only upon occasions when the meters are to be inspected, tested, or adjusted, and representatives of the Contractor shall be afforded reasonable opportunity to be present upon such occasions. Metering equipment shall be inspected and/or tested at least once each year by the United States and at any reasonable time upon request therefor by either party. Any metering equipment found to be defective or inaccurate shall be repaired and readjusted or replaced. Should any meter fail to register, the electric power and energy delivered during such period of failure to register shall, for billing purposes, be estimated by the contracting officer from the best information available.
(b) If any of the inspections and/or tests provided for herein disclose an error exceeding two per cent (2%), correction based upon the inaccuracy found shall be made of the records of electric service furnished since the beginning of the monthly billing period immediately preceding the billing period during which the test was made; Provided, That no correction shall be made for a longer period than such inaccuracy may be determined by the contracting officer to have existed. Any correction in billing resulting from such correction in meter records shall be made in the next monthly bill rendered by the United States to the Contractor, and such correction when made shall constitute full adjustment of any claim between the parties hereto arising out of such inaccuracy of metering equipment.
M. Resale of Electric Energy.
The Contractor shall not sell any of the electric energy delivered to it hereunder to any customer of the Contractor for resale by that customer.
N. Power Factor.
While the Contractor normally will be required to maintain the power factor as stated in the rate schedule then in effect under this contract, the Contractor will be permitted to operate at a lower power factor when conditions are such, as determined by the contracting officer, that a lower power factor will be mutually advantageous to the Contractor and to the United States.
O. Cooperation of Contracting Parties.
(a) If, in the maintenance of their respective power systems end/or electrical equipment and the utilization thereof for the purposes of this contract, it becomes necessary by reason of any emergency or extraordinary condition for either party to request the other to furnish personnel, materials, tools, and equipment For the accomplishment thereof, the party so requested shall cooperate with the other and render such assistance as the party so requested may determine to be available. The party making such request, upon receipt of properly itemized bills from the other party, shall reimburse the party rendering such assistance for all costs properly and reasonably incurred by it in such performance, including not to exceed fifteen percent (15%) thereof for administrative and general expenses, such costs to be determined on the basis of current charges or rates used in its own operations by the party rendering assistance.
2
GENERAL POWER CONTRACT PROVISIONS
(b) This contract shall be subject to all the provisions and conditions of the Act of Congress entitled the Work Hours Act of 1962, approved August 13, 1962 (76 Stat. 357), which establishes standards for hours of work and overtime pay of laborers and mechanics employed on work done under contract for, or with the financial aid of, the United States, the same as if that Act had been specifically set forth herein.
P. Provisions Relative to Employment
(1) During the performance of this contract, the Contractor agrees as follows:
(a) The Contractor will not discriminate against any employee or applicant for employment because of race, color, religion, sex, or national origin. The Contractor will take affirmative action to ensure that applicants are employed, and that employees are treated during employment, without regard to their race, color, religion, sex, or national origin. Such action shall include, but not be limited to, the following:
Employment, upgrading, demotion, or transfer; recruitment or recruitment advertising; layoff or termination; rates of pay or other forms of compensation; and selection for training, including apprenticeship. The Contractor agrees to post in conspicuous places, available to employees and applicants for employment, notices to be provided by the Contracting Officer setting forth the provisions of this Equal Opportunity clause.
(b) The Contractor will, in all solicitations or advertisements for employees placed by or on behalf of the Contractor, state that all qualified applicants will receive consideration for employment without regard to race, color, religion, sex, or national origin.
(c) The Contractor will send to each labor union or representative of workers with which he has a collective bargaining agreement or other contract or understanding, a notice, to be provided by the agency Contracting Officer, advising the labor union or workers' representative of the Contractor's commitments under this Equal Opportunity clause, and shall post copies of the notice in conspicuous places available to employees and applicants for employment.
(d) The Contractor will comply with all provisions of Executive Order No. 11246 of September 24, 1965, and of the rules, regulations, and relevant orders of the Secretary of Labor.
(e) The Contractor will furnish all information and reports required by Executive Order No. 11246 of September 24, 1965, and by the rules, regulations, and orders of the Secretary of Labor, or pursuant thereto, and will permit access to his books, records, and accounts by the contracting agency and the Secretary of Labor for purposes of investigation to ascertain compliance with such rules, regulations, and orders.
(f) In the event of the Contractor's noncompliance with the Equal Opportunity clause of this contract or with any of the said rules, regulations, or orders, this contract may be canceled, terminated, or suspended, in whole or in part, and the Contractor may be declared ineligible for further Government contracts in accordance with procedures authorized in Executive Order No. 11246 of September 24, 1965, and such other sanctions' may be imposed and remedies invoked as provided in Executive Order No. 11246 of September 24, 1965, or by rule, regulation, or order of the Secretary of Labor, or as otherwise provided by law.
(g) The Contractor will include the provisions of paragraphs (a) through (g) in every subcontract or purchase order unless exempted by rules, regulations, or orders of the Secretary of Labor issued pursuant to Section 204 of Executive Order No. 11246 of September 24, 1965, so that such provisions will be binding upon each subcontractor or vendor. The Contractor will take such action with respect to any subcontract or purchase order as the contracting agency may direct as a means of enforcing such provisions, including sanctions for noncompliance: Provided, however, That in the event the Contractor becomes involved in, or is threatened with, litigation with a subcontractor or vendor as a result of such direction by the contracting agency, the Contractor may request the United States to enter into such litigation to protect the interests of the United States.
(2) In the performance of any part of the work contemplated by this contract, the Contractor shall not employ any person undergoing sentence of imprisonment at hard labor.
Q. Transfer of Interest in Contract by Contractor
No voluntary transfer of this contract or of the rights of the Contractor hereunder shall be made without the written approval of the Secretary of the Interior; Provided, That if the Contractor operates a project financed in whole or in part by the Rural Electrification Administration, the Contractor may transfer or assign its interest in the contract to the Rural Electrification Administration or any other department or agency of the Federal Government without such written approval; Provided further, That any successor to or assignee of the rights of the Contractor, whether by voluntary transfer, judicial sale, foreclosure sale, or otherwise, shall be subject to all the provisions and conditions of this contract to the same extent as though such successor or assignee were the original Contractor hereunder; and, Provided further, That the execution of a mortgage or trust deed, or judicial or foreclosure sales made thereunder, shall not be deemed voluntary transfers within the meaning of this article.
3
GENERAL POWER CONTRACT PROVISION
R. License to the Contractor.
The United States hereby grants the Contractor a license to construct, install, operate, maintain, replace, or repair, either or all, upon property of the United States under the administrative control and jurisdiction of the Bureau of Reclamation such facilities as in the opinion of the contracting officer are necessary or desirable for the purposes of this contract. Said license shall remain in effect during the term of this contract and shall expire coincidently therewith. Any facilities so installed by the Contractor pursuant hereto shall be and remain the property of the Contractor, notwithstanding that the same may have been affixed to the promises, and the Contractor shall have a reasonable times after the expiration of said license in which to remove its facilities so installed.
S. License to the United States.
The Contractor, upon request from time to time by the contracting officer, will grant to the United States a license or licenses to construct, install, operate, maintain, replace, or repair, either or all, upon the property of the Contractor such facilities as in the opinion of the Contractor are necessary or desirable for the purposes of this contract. The license or licenses so granted shall be in form and of legal sufficiency acceptable to the contracting officer, shall be and remain in effect during the term of this contract, and shall expire coincidently therewith. Any facilities so installed by the United States pursuant to said license or licenses shall be and remain the property of the United States, notwithstanding that the same may have been affixed to the promises, and the United States shall have a reasonable times after the expiration of said license or licenses in which to remove the facilities so installed.
T. Waivers.
Any waiver at any time by either party hereto of its rights with respect to a default or any other matter arising in connection with this contract shall not be deemed to be a waiver with respect to any subsequent default or matter.
U. Notices.
Any notice, deemed or request required or authorized by this contract shall be deemed properly given if mailed, postage prepaid, to the contracting officer at the address shown on the signature page hereof, on behalf of the United States, except where otherwise herein specifically provided, and to the officer signing for the Contractor at the address shown on the signature page hereof, on behalf of the Contractor. The designation of the person to be notified or the address of such person may be changed at any time by similar notice.
V. Contingent Upon Appropriations.
Where the operations of this contract extend beyond the current fiscal year, the contract is made contingent upon Congress making the necessary appropriation for expenditures hereunder after such current year shall have expired. In such appropriation as may be all liability due to the failure of Congress to make such appropriation.
W. Officials Not to Benefit.
No Member of or Delegate to Congress or Resident Commissioner shall be admitted to any share or part of this contract or to any benefit that may arise herefrom, but this restriction shall not be construed to extend to this contract if made with a corporation or company for its general benefit.
X. Covenant Against Contingent Fees.
The Contractor warrants that no person or selling agency has been employed or retained to solicit or secure this contract upon an agreement or understanding for a commission, percentage, brokerage, or contingent fee, excepting bona fide employee or bona fide established commercial or selling agencies maintained by the Contractor for the purpose of securing business. For branch or violation of this warranty the United States shall have the right to annual this contract without liability or in its discretion to deduct from the contract price or consideration the full amount of such commission, percentage, brokerage, or contingent fee.
Y. Assignment of Industrial Contract by the United States.
When the Contractor hereunder is denominated an industrial customer, the United States may transfer and assign this contract at any time without the consent of the Contractor to any utility engaged in the business of distributing electric power and energy purchased at wholesale from the United States if such assignee agrees to take over and assume all the rights, duties, and obligations of the United States under this contract. Whenever a transfer or assignment of this contract is made by the United States to a utility pursuant hereto, such transfer or assignment shall be and constitute a novation and thereafter the United States shall be relieved of all liability under said contract and under said assignment and the Contractor shall look solely to the assignee for performance of this contract.
Z. Contract Subject to Colorado River Compact.
Where the energy sold hereunder is generated from waters of the Colorado River system, this contract is made upon the express condition and with the express covenant that all rights hereunder shall be subject to and controlled by the Colorado River Compact approved by section 13(a) of the Boulder Canyon Project Act of December 21, 1928, (45 Stat. 1057) and the parties hereto shall observe and be subject to and controlled by said Colorado River Compact in the construction, management, and operation of the dams, reservoirs, and powerplants from which electrical energy is to be furnished by the United States to the Contractor hereunder, and in the storage, diversion, delivery, and use of water for the generation of electrical energy to be delivered by the United States to the Contractor hereunder.
4
GENERAL POWER CONTRACT PROVISIONS
THE FOLLOWING PROVISIONS ARE APPLICABLE ONLY WHEN THE ELECTRIC SERVICE TO BE FURNISHED ARTICLE PROVIDES THAT SERVICE WILL BE FURNISHED OVER THE FACILITIES OF A THIRD PARTY:
AA. Existence of Transmission Service Contract.
In search as the electric service hereunder is to be supplied over facilities not owned by the United States, the obligation of the United States to furnish electric service hereunder shall at all times be subject to and contingent upon the existence of a transmission service contract granting the United States the right to use such facilities not owned by it as are necessary to the rendering of electric service hereunder; Provided, That, if the United States acquires or constructs facilities which would enable it to furnish direct service to the contractor, the United States, at its option, may furnish the electric service hereunder over its own facilities.
BB. Conditions of Transmission Service.
Anything to the contrary in this contract notwithstanding, when the electric service under this contract is furnished by the United States over the facilities of other by virtue of a transmission service arrangement, the electric power and energy will be furnished at the voltage available and under the conditions which exist from time to time on the transmission system over which the service is supplied. The United States will endeavor to inform the Contractor from time to time of any changes contemplated on the system over which the service is supplied but the costs of any changes made necessary in the Contractor's system because of changes or conditions on the system over which the service is supplied shall not be a charge against or a liability of the United States; Provided, That if the Contractor, because of changes or conditions on the system over which service hereunder is supplied, is subjected to the necessity of making changes on its system at its own expense in order to continue receiving service hereunder, then the Contractor may terminate this contract on not less than sixty (60) days' written notice given to the United States at any time prior to the making of said changes on its system, but not thereafter; Provided further. That if the electric service requirements of the Contractor, to the extent that the United States is obligated or determines that it can become obligated to furnish such requirements, are not being met or the United States advises the Contractor cannot be met because of an insufficiency of capacity available to the United States under its transmission service arrangement in the facilities of others over which service hereunder is supplied, than the contractor may terminate this contract on not less than sixty (60) days' written notice given to the United States at any time prior to the time that the United States advises the Contractor that the needed capacity is available, but not thereafter.
THE FOLLOWING PROVISIONS ARE APPLICABLE ONLY WHEN SERVICE IS RENDERED TO CONTRACTORS UNDER A "SCHEDULE OF RATES FOR WHOLESALE POWER SERVICE TO CUSTOMERS HAVING THEIR OWN GENERATING FACILITIES."
CC. Purchase of System Energy Requirements.
The Contractor agrees that it will, to the extent of the availability of secondary energy contracted for hereunder, purchase its system energy requirements in lieu of operating its own generating equipment except that this provision shall not be construed to prohibit the Contractor's use of by-product power and energy.
DD. Withdrawal of SecondaryEnergy.
The United States shall have the right, upon not less than 24 hours' advance notice from the contracting officer to the Contractor, to withdraw secondary energy by reducing, in whole or in part, the contract rate of delivery for secondary energy provided for herein for such period or period of time as the contracting officer deem necessary or advisable. The United States also shall have the right, upon not less than 90 days, advance written notice from the contracting officer to the Contractor, to terminate the obligation of the United States hereunder to deliver secondary energy. The maximum rate of delivery shall be appropriately adjusted to conform to changes under this section in the contract rate of delivery for secondary energy as of the effective dates thereof.
EE. Contractor's Capacity.
The Contractor's capacity as referred to herein is defined to be the sustained load carrying ability of the Contractor's electric generating plants, whether owned or leased, at system load factor, less station use, as limited by transmission and substation facilities. The Contractor's capacity, insofar as practicable, will be initially determined by a test jointly conducted by the parties hereto immediately prior to initial service hereunder. Therefore, the Contractor's capacity shall be redetermined from time to time upon the request of the contracting officer by additional jointly conducted tests to the extent practicable, but such tests shall not be required more frequently than once in each 12 months unless a permanent changed condition is known to exist. When tests are impracticable, the capacities shall be determined by the contracting officer from the best information available.
FF. Adjustments for Curtailments to service.
Adjustments for curtailments to service for periods of one (1) hour or longer in duration each because of conditions on the power system of the United States, which system for the purpose of such adjustments hereunder shall include transmission facilities utilized but not owned by the United States, shall be made in the following manner in lieu of the procedure set out in Article K hereof:
(1) Energy Charge and Monthly Minimum Bill Adjustment:
The total number of hours of curtailed service in any billing period shall be determined by adding (1) the sum of the hours of interrupted service to (2) the product of: the number of hours of reduced service multiplied by the percentage of said reduction below the lesser of (a) the maximum rate of delivery then in effect, or (b) the obligation of the United States to deliver firm power and energy and/or secondary energy as established under the operating agreement entered into pursuant to the Auxiliary Power Service article hereof, or
(c) the rate
5
GENERAL POWER CONTRACT PROVISIONS
of delivery required by the Contractor at the time of such reduction. The kilowatt-hour blocks of the energy charge and the monthly minimum bill shall each be proportionately adjusted in the ratio that the total number of hours of such curtailed service as herein determined bears to the total number of hours in the billing period involved.
(2) Demand or Capacity Charge and Minimum Annual Capacity Charge Adjustment:
The total number of hours of curtailed service in any billing period shall be determined by adding (1) the sum of the number of hours of interrupted service to (2) the product of: the number of hours of reduced service multiplied by the percentage of said reduction below the lesser of (a) the contract rate of delivery for firm power, or (b) the obligation of the United States to deliver firm power and energy as established under the operating agreement entered into pursuant to the Auxiliary Power Service article hereof, or (c) the rate of delivery required by the Contractor at the time of such reduction. The demand or capacity charge and the minimum annual capacity charge shall each be proportionately adjusted in the ratio that the total number of hours of such curtailed service as herein determined bears to the total number of hours in the billing period involved.
The Contractor shall make written claim, within thirty (30) days after receiving the monthly bill for adjustment on account of any curtailment to service as specified in subsections (1) and (2) of this article for periods of one (1) hour or longer in duration each, alledged to have occurred and which is not reflected in such bill. Failure to make such written claim, within said thirty (30) day period, shall constitute a waiver thereof. All curtailments to service, which are due to conditions on the power system of the United States, shall be subject to the provisions of this article and the Contractor shall be limited in its remedy therefor to the relief granted by this article; Provided. That withdrawal of power and energy under contract provisions shall not be deemed curtailments to service.
THE FOLLOWING PROVISION IS APPLICABLE ONLY WHEN ELECTRIC SERVICE
INVOLVES MULTIPLE POINTS OF DELIVERY FROM BOTH DIRECT AND WHEELED POINTS:
GG. Multiple Points of Delivery Involving Direct and Wheeled Deliveries
The United States has provided line and substation capacity under the terms of this contract for the purpose of delivering electric service directly to the Contractor at specific points of delivery. It also has agreed to absorb wheeling allowances and/or discounts up to a specified maximum amount for deliveries of power over other system(s). In the event the Contractor shifts any of its loads served hereunder from direct delivery to wheeled delivery, the United States will not absorb the wheeling costs on such shifted load until the unused capacity, as determined solely by the contracting officer, available at the direct delivery point(s) affected is fully utilized.
6
SALT RIVER PROJECT
RESOLUTION
WHEREAS, the Board of Directors of the Salt River Project Agricultural Improvement and Power District (herein called "Salt River Project") has determined that it is in Salt River Project's best interest to enter into various contracts relating to the construction, operation and maintenance of the proposed Navajo Project consisting of three 750 MW (nameplate rating) coal-fired steam electric generating units (herein called "Navajo Generating Station"), located on the Navajo Indian Reservation near Page, Arizona, and the related 500 KV transmission system (herein called "Navajo transmission system"), with ownership interests in the Navajo Generating Station to be as follows:

Arizona Public Service Co. (Arizona)                  14.0%

City of Los Angeles, Department of
Water and Power (Los Angeles)                         21.2%

Nevada Power Company (Nevada)                         11.3%

Salt River Project Agricultural
Improvement and Power District
(Salt River Project)                                  46.0%

Tucson Gas and Electric Company
(Tucson)                                               7.5%	

all of said entities referred to herein as the "Co-Owners," and
WHEREAS, Salt River Project shall own 21.7% of the Navajo Generating Station for its own use and benefit and shall own and hold the remaining 24.3% of its ownership interest in the Navajo Generating Station for the use and benefit of the United States, Department of Interior, Bureau of Reclamation for the United States' use to provide power and energy for Central Arizona Project pumping (the "United States" and the above listed companies being herein collectively called "Participants"), and
WHEREAS, the following described Agreements have been reviewed on this day with this Board and this Board has determined that it is in the best interest of Salt River Project to enter into said Agreements to effectuate the construction, operation and maintenance of the Navajo Project;
NOW, THEREFORE, BE IT HEREBY RESOLVED, That the Board of Directors of Salt River Project has and does hereby approve the Navajo Project Participation Agreement among the Participants, and has and does hereby empower and direct that the President or Vice President, and the
SALT RIVER PROJECT
Secretary or Assistant Secretary, make, execute and deliver said Participation Agreement for, and on behalf of, the Salt River Project with such minor changes or omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve the Indenture of Lease for Navajo Units 1, 2 and 3, and has and does hereby empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute, acknowledge and deliver said Indenture of Lease for Navajo Units 1, 2 and 3 for and on behalf of the Salt River Project with such minor changes or omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Federal Rights of Way, granted in conformity with the Act of February 15, 1901, between the Secretary of Interior and the Co-Owners as Grantees, and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute, acknowledge and deliver said Federal Rights of Way for, and on behalf of Salt River Project with such minor changes or omissions therein as management may make in the premises, and this Board of Directors also authorizes, empowers and directs its officers and management to make and file an Application for Grant of Rights of Way under the Act of February 15, 1901, 31 Stat. 790, 43 U.S.C., Section 959, underlying any or all Project land rights, and to take and perform all necessary acts in making and filing such Application, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Federal Rights of Way and Easements, granted in conformity of February 5, 1948, by and between the Secretary of Interior and Salt River Project and the other Co-Owners as Grantees and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute, acknowledge and deliver said Federal Rights of Way and Easements for, and on behalf of, the Salt River Project with such minor changes and omissions therein as management may make in the premises, and does hereby authorize, empower and direct its officers and management to make and file an Application for the Grant of Rights of Way and Easements under the Act of February 5, 1948, 62 Stat. 17, 25 U.S.C. Section 323, underlying any or all Project land rights, and to take and perform all necessary acts in making and filing such Application, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve the Memorandum of Agreement
SALT RIVER PROJECT
providing for execution of Navajo Station Coal Supply Agreement among it, the other Co-Owners and Peabody Coal Company together with the Letter Agreement relating thereto which sets forth additional understandings and agreements concerning the Navajo Station Coal Supply Agreement, and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute, acknowledge and deliver said Memorandum of Agreement and said Letter of Understanding for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Power Coordination Contract between the Co-Owners and the United States and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said Power Coordination Contract for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve the Principles of Inter connected Operation for the Navajo Project between the Co-Owners, the United States and the Southern California Edison Company (whether or not said Southern California Edison Company is party thereto), and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary make, execute and deliver said Principles of Interconnected Operation for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Contract for Interim Use of United States Entitlement in the Navajo Project (herein called "Layoff Contract") between it and the United States and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said Layoff Contract for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Memorandum Transmission Agreement between it, the other Participants, and the Southern California Edison Company, and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said
SALT RIVER PROJECT
Memorandum Transmission Agreement for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Agreement for Delivery of the United States Power and Energy for the McCullough Substation to the Mead Substation between it, the United States and the other Eldorado System Co-Owners (whether or not such entities become parties thereto), and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said Agreement for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises, and
BE IT HEREBY FURTHER RESOLVED that the Board of Directors of Salt River Project has and does hereby approve that certain Spinning Reserve pooling Agreement between it, and the other Participants, excepting the City of Los Angeles, Department of Water and Power (whether or not all such other Participants become parties thereto), and has and does hereby authorize, empower and direct that the President or Vice President, and the Secretary or Assistant Secretary, make, execute and deliver said Spinning Reserve Fueling Agreement for and on behalf of the Salt River Project with such minor changes and omissions therein as management may make in the premises.
CERTIFICATE
I,F.E, Smith, the duly appointed, qualified and acting Secretary of the Salt River Project Agricultural Improvement and Power District, HEREBY CERTIFY that the foregoing is a true and complete copy of a resolution adopted by the Board of Directors of said District at a special meeting thereof duly held on the 25th day of August 1969, at which meeting a quorum was present and voted.
WITNESS my hand and seal of Salt River Project Agricultural Improvement and Power District this 19th day of November 1969.

/s/ F. E. Smith
--------------------------
F. E. Smith, Secretary	

CERTIFICATE
I, Samuel P. Cowley, certify that I am the Secretary of the Nevada power Company, a corporation named herein; that Harry Allen who signed the above contract on behalf of said corporation was then its President that said contract was duly signed for and in behalf of said corporation by authority of its governing body and is within the scope of its corporate powers.

/s/ Samuel P. Cowley
---------------------------
Samuel P. Cowley, Secretary	

TUCSON GAS & ELECTRIC COMPANY
Certified Copy of Resolutions
Adopted by the Board of Directors
RESOLVED, that the proper officers of the Company be, and they hereby are authorized to enter into a Participation Agreement between the United States of America, Arizona Public Service Company, Department of Water and Power of the City of Los Angeles, Nevada Power Company, Salt River Project Agricultural Improvement and Power District and Tucson Gas & Electric Company for the ownership of the Navajo Project wherein Tucson Gas & Electric Company shall own an undivided 7-1/2% Interest in the Navajo Generating Station and varying percentage interests in the transmission system. The Agreement shall be substantially in the form of the draft filed with the Secretary of the Company marked "Filed September 23, 1969 with the Secretary of Tucson Gas & Electric Company", and be it
FURTHER RESOLVED, that the proper officers of the Company be, and they hereby are further authorized to execute and enter into on behalf of the Company the necessary Project Agreements contemplated by said Participation Agreement, and such other documents reasonably required to implement said Participation Agreement and Project Agreements.
* * * * * * * * * * * * * *
I, P. L. ABBOTT, Secretary of TUCSON GAS & ELECTRIC COMPANY (herein after called the "Company"), DO HEREBY CERTIFY that the above and foregoing is a true and complete copy of resolutions duly adopted by the Board of Directors at the Regular Monthly Meeting held on the 23rd day of September, 1969, at which meeting a quorum was present and acted thereon; and
I DO FURTHER CERTIFY that said resolution is in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 29th day of September, 1969.

/s/ P.L. Abbott
----------------------
Secretary	

CERTIFICATE
I, GERALD J. GRIFFIN, certify that I am an Assistant Secretary of ARIZONA PUBLIC SERVICE COMPANY, the corporation named herein; that M. C. TITUS, who signed the above contract on behalf of said Corporation was then its Executive Vice President; that said contract was duly signed for and in behalf of said Corporation by authority of its governing body and is within the scope of its corporate powers.

/s/ Gerald J. Griffin
-------------------------
Assistant Secretary	

(SEAL)
 
RESOLUTION NO. 416
BE IT RESOLVED by the Board of Water and Power Commissioners of The City of Los Angeles that the President and the Secretary of this Board be and they are hereby authorized to execute, on behalf of this Board, certain agreements relating to the construction, ownership, operation and maintenance of facilities for the generation of electrical power and energy and related facilities, including fuel supply, copies of which agreements are on file with the Secretary of this Board and which are identified as follows, that is:

         Agreement Title                                      DWP Number
         ---------------                                      ----------
Navajo Project Participation Agreement                          10334

Memorandum of Agreement Providing for
 Execution of Navajo Station Coal
 Supply Agreement                                               10335

Letter Agreement                                                10336

Application for Federal Rights-of-Way
 and Easements                                                  10337

Application and Grant of Rights-of-
 Way and Easements (25 U.S.C. Section 323)                      10338

United States, Department of the Interior,
 Power Coordination Contract                                    10339

Interim Arrangement for Interconnected
 Operations                                                     10340

Contract with Department of Water and
 Power of The City of Los Angeles for
 Interim Sale of United States
 Entitlement of Navajo Project                                  10341

Memorandum Transmission Agreement                               10342

Victorville-Lugo Interconnection
 Agreement                                                      10343	

         Agreement Title (Continued)                          DWP Number
         ---------------                                      ----------
Indenture of Lease                                              10344
Letter Agreement                                                10350	

I HEREBY CERTIFY that the foregoing is a full, true and correct copy of a resolution adopted by the Board of Water and Power Commissioners of The City of Los Angeles at its meeting held NOV 20 1969

/s/ Mary J. Born
---------------------
Secretary	

ORDINANCE NO. 139,629
AN ORDINANCE APPROVING AGREEMENTS RELATING TO PARTICIPATION BY THE DEPARTMENT OF
WATER AND POWER IN THE NAVAJO PROJECT
THE PEOPLE OF THE CITY OF LOS ANGELES
DO ORDAIN AS FOLLOWS:
Section 1. That the Board of Water and Power Commissioners of The City of Los Angeles be and it is hereby authorized in its discretion, to execute and enter into the following agreements, substantially in the form of those which are on file with the City Clerk and identified below, relating to the transmission and use of electrical power and energy associated with the Navajo Project:

                              AGREEMENT TITLE                                                DWP NUMBER
Interim Arrangement for Interconnected Operations                                               10310
Contract with Department of Water and Power of The City of Los
  Angeles for Interim Sale of United States Entitlement of Navajo Project                       10341
Memorandum Transmission Agreement                                                               10342
Victorville-Lugo Interconnection Agreement                                                      10343
[ILLEGIBLE] Agreement                                                                           10350	

Sec. 2. The City Clerk shall certify to the passage of this ordinance and cause the same to be published in some daily newspaper printed and published in the City of Los Angeles.
I hereby certify that the foregoing ordinance was introduced at the meeting of the Council of the City of Los Angeles of November 10, 1969 and was passed at its meeting of November 17, 1969.
REX E. LAYTON, City Clerk, By M. B. Wilson, Deputy.
Approved November 18, 1969.

File No. 147173 Sup #1                                    SAM YORTY, Mayor.
                               (E54726) Nov 19 1t

                                  CERTIFICATION

STATE OF CALIFORNIA,    )
                        )       ss.
COUNTY OF LOS ANGELES,  )	

I, REX E. LAYTON, City Clerk of the City of Los Angeles and ex-officio Clerk of the City Council of the City of Los Angeles, do hereby certify and attest the foregoing to be a full, true and correct copy of the original Ordinance No. 139,629 of the City of Los Angeles, on file in my office, and that I have carefully compared the same with the original.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the City of Los Angeles, this 19th day of November, 1969

        /s/ Rex E. Layton
        -------------------------------------
        City Clerk of the City of Los Angeles

By /s/ Authorized Signatory
   ------------------------------------
     Deputy	

Form Clerk 22-5M-11-68 (R)
ORDINANCE NO. 139,630
AN ORDINANCE APPROVING AGREEMENTS RELATING TO PARTICIPATION BY THE DEPARTMENT OF WATER AND POWER IN THE NAVAJO PROJECT
THE PEOPLE OF THE CITY OF LOS ANGELES
DO ORDAIN AS FOLLOWS:
Section 1. That the Board of Water and Power Commissioners of The City of Los Angeles be and it is hereby authorised in its directors, to execute and enter into the following agreements, substantially in the form of those which are on file with the City Clerk and identified below, relating to the construction, ownership, operation and maintenance of facilities for generation of electrical power and energy and related facilities, including fuel supply:

        AGREEMENT TITLE                                            DWP NUMBER
Navajo Project Participation Agreement                               10384
Memorandum of Agreement Providing for Execution of Navajo
 Station Coal Supply Agreement
Letter Agreement
Application for Federal Rights-of-Way and Easements                  10337
Grant of Federal Rights-of-Way and Easements                         10338
United States Department of the Interior, Power
 Coordination Contract                                               10339
Indenture of Lease                                                   10344	

Sec. 2. The City Clerk shall certify to the passage of this ordinance and cause the same to be published in some daily newspaper printed and published in the City of Los Angeles.
I hereby certify that the foregoing [ILLEGIBLE] was introduced at the meeting of the Council of the City of Los Angeles of November 10, 1969 and was passed at its meeting of November 17, 1969.
REX E. LAYTON, City Clerk, By M.B. Wilson, Deputy. Approved November 18, 1969.

File No. [ILLEGIBLE]                                            SAM YORTY Mayor.
                               (E54727) NOV 19 IT

                                  CERTIFICATION

STATE OF CALIFORNIA,    } ss.	

COUNTY OF LOS ANGELES,
I, REX E. LAYTON, City Clerk of the City of Los Angeles and ex-officio Clerk of the City Council of the City of Los Angeles, do hereby certify and attest the foregoing to be a full, true and correct copy of the original Ordinance No. 139,630 of the City of Los Angeles, on file in my office, and that I have carefully compared the same with the original.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Seal of the City of Los Angeles, this 19th day of November, 1969
REX E. LAYTON
City Clerk of the City of Los Angeles

By /s/ Authorized Signatory
   ------------------------
       Deputy	

Form Clerk 22-5M-11-68 (R)
RESOLUTION OF THE BOARD OF DIRECTORS
OF SOUTHERN CALIFORNIA EDISON COMPANY
ADOPTED NOVEMBER 20, 1969
RE: RATIFICATION OF EXECUTION OF
CONTRACTS WITH THE UNITED
STATES DEPARTMENT OF INTERIOR,
BUREAU OF RECLAMATION, AND OTHER
PARTICIPANTS IN THE NAVAJO
PROJECT, CONCERNING THE NAVAJO
PROJECT AND RELATED MATTERS
WHEREAS, this corporation has executed a contract with the United States of America, providing for the interim purchase of a portion of the United States' entitlement to capacity and energy in the Navajo Project, which portion shall amount to approximately 336 mw of capacity and associated energy from Units 1, 2 and 3 of the Navajo Generating Station, and will provide for the right to use part of the entitlement of the United States in the Navajo Project transmission system for the purpose of delivering such portion of capacity and associated energy from the Navajo Generating Station to this corporation's points of delivery at Moenkopi Switchyard in Arizona, and the Eldorado Substation in Nevada; and
WHEREAS, a copy of said contract, entitled Contract With Southern California Edison Company For Interim Sale Of United States' Entitlement Of Navajo Project and bearing the designation Contract No. 14-06-300-2135, has been presented to this meeting; and
WHEREAS, this corporation has executed a contract with the United States of America, Arizona Public Service Company, Department of water and power of the City Los Angeles,
Nevada Power Company, Salt River Project Agricultural Improvement and Power District, and Tucson Gas and Electric Company, providing certain principles related to the interconnection of the Navajo Project transmission system with the Edison-Arizona 500-kv transmission system at Moenkopi Switchyard, and for the parallel operation of the Moenkopi-Eldorado 500 kv line and the proposed Navajo-McCullough 500-kv line, and certain related matters, all of which principles are to be incorporated in a more definitive and complete agreement to be executed at a later time; and
WHEREAS, a copy of said contract, entitled Memorandum Transmission Agreement between Participants in the Navajo Project and Southern California Edison Company, dated September 30, 1969, and bearing the designation Contract No. 14-06-30-2140, has been presented to this meeting, and
WHEREAS, this corporation has executed a letter agreement with Arizona Public Service Company, Department of Water and Power of the City of Los Angeles, Nevada Power Company, Salt River Project Agricultural Improvement and Power District, Tucson Gas and Electric Company, and The United States of America, adopting certain principles for the interconnected operations of the respective electric systems of the parties, including establishment of principles with respect to forecast capacity resources margin, spinning reserve capacity, emergency service, interruptible load as a substitute for spinning reserve capacity and system operations, all of which principles are to be incorporated in a more definitive and complete
-2-
agreement to be executed at a later time; and
WHEREAS, a copy of said principles, entitled Principles of Interconnected Operation For The Navajo Interconnection Agreement, September 30, 1969, together with a covering execution letter agreement entitled Interim Arrangement For Interconnected Operations, dated September 30, 1969, and bearing the designation Contract No. 14-06-300-2139, has been presented to this meeting and;
WHEREAS, execution of said three documents has not been completed by all the other parties thereto.
NOW, THEREFORE, BE IT RESOLVED that the execution and delivery of the aforesaid three documents by and on behalf of this corporation is hereby ratified, confirmed and approved;
BE IT FURTHER RESOLVED, that the Chairman of the Board, the President, a Senior Vice President, a Vice President of this corporation, and any of them, is authorized hereby to execute and deliver in the name of and on behalf of this corporation, the definitive Navajo Interconnection Agreement and the definitive Transmission Agreement hereinabove described.
BE IT FURTHER RESOLVED, that the Secretary of this corporation is hereby directed to mark appropriately for Identification and to file with the records of this corporation the aforesaid copies of said documents presented to this meeting.
-3-
I, C. D. LESTER, Secretary of SOUTHERN CALIFORNIA EDISON COMPANY, do hereby certify that the foregoing is a full, true, and correct copy of a resolution of the Board of Directors of said corporation, adopted at a meeting of said Board of Directors duly held on November 20, 1969.
WITNESS my hand and the seal of said corporation this 20th day of November, 1969.

          /s/ C.D.LESTER
----------------------------------
            SECRETARY
SOUTHERN CALIFORNIA EDISON COMPANY	

COORDINATING COMMITTEE AGREEMENT
No. 1
SUBJECT: All Risk Insurance for Navajo-Mohave SO2 Removal Pilot Plant
The Coordinating Committee hereby directs the Navajo Generating Station Project Manager not to maintain all risk insurance insofar as the Navajo-Mohave S02 Removal Research Pilot Plant is concerned.
Section 21.1 of the Navajo Project Participation Agreement, as amended, provides that during the construction stage each Project Manager shall procure or cause to be procured and maintain in force certain insurance coverages, including all risk insurance.
The Generating Station Project Manager contemplates entering into an agreement with Southern California Edison Company (Edison) , as "project manager" and "operating agent" for the Mohave Project, pursuant to which Edison as "program manager" will provide for the design, engineering, construction and testing of an S02 removal pilot plant on behalf of the Navajo Project Participants and the Mohave Project Participants.
The pilot plant, to be constructed at the Mohave Plant Site, will be included within the existing Mohave Project insurance program. The applicable Mohave Project policy providing the all risk insurance coverage referred to in Section 21.1 of the Participation Agreement, as amended, for damage to the pilot plant, carries a deductible of
$200,000.00. Engineering and insurance personnel of the "program manager" have concluded the total potential loss upon the occurrence of any single event, in their opinion, as reflected in Attachment A hereto, does not exceed the Edison physical damage insurance deductible of $200,000.00. Therefore, any dollars paid toward premiums would be wasted as there is no foreseeable loss of that magnitude.
Notwithstanding this decision all contractors of the "program manager" performing work on the pilot plant will be required to maintain all risk coverages for any portion of work to be performed by them on the pilot plant.
Approved as of the 31 day of September, 1971.
SALT RIVER PROJECT AGRICULTURAL
IMPROVEMENT AND POWER DISTRICT

By    /s/ Authorized Signatory
  -------------------------------------
  Coordinating Committee Representative	

ARIZONA PUBLIC SERVICE COMPANY

By    /s/ Authorized Signatory
  -------------------------------------
  Coordinating Committee Representative	

TUCSON GAS & ELECTRIC COMPANY

By    /s/ Authorized Signatory
  -------------------------------------
  Coordinating Committee Representative	

DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES

By        /s/ Authorized Signatory
   ----------------------------------------
   Coordinating Committee Representative	

NEVADA POWER COMPANY

By        /s/ Authorized Signatory
   ----------------------------------------
   Coordinating Committee Representative	

UNITED STATES OF AMERICA

By        /s/ Authorized Signatory
   ----------------------------------------
   Coordinating Committee Representative	

AMENDMENT AND SUPPLEMENT #1
TO
NAVAJO PROJECT
PARTICIPATION AGREEMENT
1. PARTIES: The parties to this amendatory and supplemental agreement are:
THE UNITED STATES OF AMERICA, hereinafter referred to as the "United States", acting through the Secretary of the Interior; ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, hereinafter referred to as "Arizona"; DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of the City of Los Angeles, a municipal corporation of the State of California, hereinafter referred to as "Los Angeles"; NEVADA POWER COMPANY, a Nevada corporation, hereinafter referred to as "Nevada"; SALT RIVER PROJECT AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an agricultural improvement district organized and existing under the laws of the State of Arizona, hereinafter referred to as "Salt River Project"; and TUCSON GAS & ELECTRIC COMPANY, an Arizona corporation, hereinafter referred to as "Tucson".
2. RECITALS: This amendatory and supplemental agreement is made with reference to the following facts, among others:
2.1 By the Colorado River Basin Project Act (82 Stat. 885) the Congress of the United States authorized the construction, operation and maintenance of the Central Arizona Project. Pursuant to Section 303 of said Act, the Secretary is authorized to enter into agreements with
- 1 -
non-Federal interests proposing to construct thermal generating powerplants whereby the United States shall acquire the right to such portions of their capacity, including delivery of power and energy over appurtenant transmission facilities to mutually agreed upon delivery points, as he determines is required in connection with the operation of the Central Arizona Project.
2.2 The Secretary has determined that the acquisition of a right to a portion of the capacity of the Navajo Project is the most feasible plan for supplying the power requirements of the Central Arizona Project and augmenting the Lower Colorado River Basin Development Fund.
2.3 As of September 30, 1969, the parties entered into a Participation Agreement, to establish certain terms, covenants and conditions relating to participation in the construction, operation and maintenance of the Navajo Project in accordance with the provisions of the Participation Agreement and the other Project Agreements.
2.4 The parties desire, by this Amendment and Supplement #1 to Navajo Project Participation Agreement, to amend and supplement certain terms, covenants and conditions in the Participation Agreement relating to the Navajo Project.
3. AGREEMENT: In consideration of the mutual covenants herein, the parties agree as follows:
4. DEFINITIONS: The following terms, when used herein, shall
- 2 -
have the meanings specified:
4.1 AMENDMENT AND SUPPLEMENT #1 TO NAVAJO PROJECT PARTICIPATION AGREEMENT. This agreement.
5. Section 4 of the Participation Agreement is amended and supplemented by the addition of the following definitions:
"4.25 RAIL LOADING SITE: The site for the conveyor termination and rail loading facilities, related facilities and equipment and coal storage as described on Exhibit 3 to the Navajo Plant Site lease."
"4.26 RAILROAD: The railroad described in Exhibit A-1 hereto."
6. Section 18 of the Participation Agreement is amended and supplemented by the addition of the following section:
"18.7 The 11.3% undivided ownership interest of Nevada in the Railroad may be transferred to Arizona by Nevada and subsequently transferred to Nevada by Arizona, pursuant to any agreement between Arizona and Nevada presently or hereafter existing, without the prior written consent of any other Participant; provided, however, that in each instance the transferee shall (i) notify each of the other Participants in writing of such transfer, (ii) furnish to each Participant evidence of such transfer, and (iii) assume and agree to fully perform and discharge all of the obligations created by the Project Agreements which arise out of said 11.3% undivided ownership interest in the Railroad. Appropriate amendments to the Project Agreements will be adopted
- 3 -
recognizing any such transfer."
7. The Participation Agreement is supplemented by the addition of the following section:
"49. COMPLIANCE WITH UPPER COLORADO RIVER BASIN COMPACT:
49.1 The Department of the Interior is the federal department responsible for administering the terms of the Water Service Contract dated January 17, 1969, Contract No. 14-06-400-5033. The Department of the Interior also has been directed by P.L. 90-537 to comply with the terms of the Colorado River Compact dated November 24, 1922 and the Upper Colorado River Basin Compact dated October 11, 1948. In compliance with that responsibility and those directives, the Secretary of the Interior hereby agrees to take any and all actions within the power and authority of the Department of the Interior which are necessary and required to prevent total depletions chargeable to the State of Arizona under the Upper Colorado River Basin Compact resulting from consumptive use of water from the Upper Colorado River System in the State of Arizona as measured at Lee Ferry in the manner provided for in Article VI of the Upper Colorado River Basin Compact from exceeding the 50,000 acre feet apportioned to the State of Arizona by the Upper
- 4 -
Colorado River Basin Compact.
The Secretary of the Interior further agrees to make the reports required by Section 601 (b) (1) of P.L. 90-537 as they pertain to Arizona's Upper Basin uses annually rather than every five years. Within fifteen days following the completion of said reports, the Secretary of the Interior shall furnish copies of such reports to the Co-Tenants, the Navajo Tribe, each of the Upper Basin States, and the Upper Colorado River Commission.
It is the intention of the parties to this contract that each of the Upper Basin States shall be a third party beneficiary of the terms and conditions of this Section 49."
8. Exhibit A-1 to the Participation Agreement is amended and supplemented by the addition of the following:
"VIII. Railroad right-of-way and railroad approximately 80 miles in length extending from the Rail Loading Site into the Navajo Plant Site, engines, coal cars, related facilities and equipment.
9. Except as modified by this Amendment and Supplement #1 to Navajo Project Participation Agreement, the Navajo Project Participation Agreement dated as of September 30, 1969, shall remain in full force and effect in accordance with its terms.
- 5 -
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Supplement #1 to Navajo Project Participation Agreement to be executed as of the 16th day of January, 1970.
UNITED STATES OF AMERICA

                                     By /s/ Authorized Signatory
                                        ----------------------------------------

                                     ARIZONA PUBLIC SERVICE COMPANY

                                     By /s/ Keith L. Turkey
                                        ----------------------------------------
                                           Executive Vice President

[SEAL]

ATTEST:

/s/ Authorized Signatory
-------------------------
Assistant Secretary	

DEPARTMENT OF WATER AND POWER
OF THE CITY OF LOS ANGELES
by
BOARD OF WATER AND POWER COMMISSIONERS

[SEAL]

By /s/ Mary J. Born                   By /s/ John W. Luhring
   ----------------------                ---------------------------------------
         SECRETARY                                     PRESIDENT

                                     NEVADA POWER COMPANY

                                     By /s/ Harry Allen
                                        ----------------------------------------

ATTEST:

/s/ Authorized Signatory
-------------------------

                                     SALT RIVER PROJECT AGRICULTURAL
                                     IMPROVEMENT AND POWER DISTRICT

                                     By /s/ N. Clifford Dobson
                                        ----------------------------------------
                                                     President

[SEAL]

ATTEST AND COUNTERSIGN:

/s/ F.E. Smith
-----------------------
       Secretary

[STAMP]                                                                  [STAMP]

                                     - 6 -	

                                     TUCSON GAS & ELECTRIC COMPANY

                                     By /s/  H. R. Catlin
                                        ----------------------------------------
                                                SENIOR VICE PRESIDENT

[SEAL]

ATTEST:

/s/ Authorized Signatory
----------------------
ASSISTANT SECRETARY

                        )
                        )ss
                        )	

On this the 9th day of July, 1970, before me, the undersigned officer, personally appeared James R. Smith, of the United States of America, known to me to be the person described in the foregoing instrument, and acknowledged that he executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.
[SEAL]

My Commission expires                        /s/ Harold L. Carlson
November 14, 1973                       ----------------------------------------
                                                 Notary Public
State of Arizona      )
                      )ss
County of Maricopa    )	

On this the 11th day of June, 1970, before me, the undersigned officer, personally appeared KEITH L TURLEY, who acknowledged himself to be the Executive Vice President of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, and that he, as such Executive Vice President, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as
- 7 -
Executive Vice President.
In witness whereof I hereunto set my hand and official seal
[SEAL]

                                              /s/ Authorized Signatory
                                             -----------------------------------
                                                Notary Public

My commission expires:
March 30, 1973	

State of California       )
                          ) ss
County of Los Angeles     )	

On this, the 20 day of August, 1970, before me, the undersigned officer, personally appeared JOHN W. LUHRING and Mary J. Born, the PRESIDENT and SECRETARY, respectively, Board of Water & Power Commissioners of the DEPARTMENT OF WATER AND POWER OF THE CITY OF LOS ANGELES, a department organized and existing under the Charter of the City of Los Angeles, a municipal corporation of the State of California, known to me to be the persons described in the foregoing instrument, and acknowledged that they executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

/s/ Linda L. Newman
----------------------------------------
            Notary Public	

My commission expires: [STAMP]

- 8 -

State of Nevada       )
                      ) ss
County of Clark       )	

On this the 12th day of June, 1970, before me, the undersigned officer, personally appeared Harry Allen, known to me to be the President of NEVADA POWER COMPANY, a Nevada corporation, and that he, as such President, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as President.
In witness whereof, I hereunto set my hand and official seal.
MYRTICE L. CARROLL

/s/ MYRTICE L. CARROLL
----------------------------------------
           Notary Public	

My commission expires:                                   [STAMP]
______________________

State of Arizona        )
                        )ss
County of Maricopa      )	

On this the 11th day of June, 1970, before me, the undersigned officer, personally appeared N. CLIFFORD DOBSON and F.E. SMITH, The PRESIDENT and SECRETARY, respectively, of SALT RIVER PROJECT. AGRICULTURAL IMPROVEMENT AND POWER DISTRICT, an Arizona agricultural improvement district, known to me to be the persons described in the foregoing instrument, and acknowledged that
- 9 -
they executed the same in the capacity therein stated and for the purposes therein contained.
In witness whereof I hereunto set my hand and official seal.

 /s/ [ILLEGIBLE]
------------------------------------------
               Notary Public	

My commission expires:
My Commission Expires May 3, 1971

State of Arizona     )
                     )ss
County of Pima       )	

On this the 11th day of June, 1970, before me the undersigned officer, personally appeared H. R. Catlin who acknowledged himself to be the SENIOR VICE PRESIDENT of TUCSON GAS & ELECTRIC COMPANY, an Arizona corporation, and that he, as such SENIOR VICE PRESIDENT, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as SENIOR VICE PRESIDENT.

                                      /s/ Diane Howland
                                      ------------------------------------------
                                                     Notary Public
[SEAL]	

My commission expires:
My Commission Expires Dec. 8, 1972
- 10 -
CERTIFIED COPY OF RESOLUTION
I, GERALD J. GRIFFIN, Assistant Secretary of ARIZONA PUBLIC SERVICE COMPANY, an Arizona corporation, HEREBY CERTIFY that, at a meeting of the Board of Directors of said Company, duly convened and held on August 21, 1969, at which a quorum was present and acting throughout, the following resolution was adopted and is now in full force and effect:
RESOLVED, that the Board of Directors approves and ratifies the action of the officers in negotiating and carrying forward the proposal for the participation by the Company, along with others, in the so-called Navajo Project, involving the construction near Page, Arizona, of three generating units (presently estimated at 750 MW nameplate), with ownership being held as tenants in common in the following respective undivided interests:

Arizona Public Service Company                         14.0%
Tucson Gas & Electric Company                           7.5%
City of Los Angeles                                    21.2%
Nevada Power Company                                   11.3%
Salt River Project Agricultural Improvement
 and Power District
(For ITSELF)                                           21.7%
(As Agent for U.S.B.R.)                                24.3%	

the said Project to include certain transmission facilities to be located in Arizona, with APS to be the Project Manager and Operating Agent for said facilities, which are to be owned by APS and others as joint tenants in various percentages related to projected use, these facilities including a 500 kv line from the switchyard of the Navajo Plant near Page to the Moenkopi Switching Station and from there to the Westwing switchyard year Phoenix, and with another 500 kv line extending directly from the Navajo switchyard to Westwing, together with various related interconnections and switching facilities; and
FURTHER RESOLVED, that in connection with the Navajo Project, the appropriate officers of the Company be, and they are hereby authorized to negotiate and to execute and effectuate the necessary instruments and agreements, including among others, the following:
(1) Participation Agreement
(2) Coordination Agreement
(3) Interconnection Agreement
(4) Plant Site Lease
(5) Fuel Supply and Transportation Agreement
(6) Co-Tenancy Agreement
(7) Moenkopi Agreement
(8) Amendment to Navajo Wholesale Power Agreement
(9) Plant Construction Agreement
(10) Plant Operating Agreement
(11) Transmission Construction Agreement
(12) Transmission Operating Agreement
(13) Applications for Various Rights-of-Way and Easements
(14) Layoff Agreement
and
FURTHER RESOLVED, that the appropriate officers of the Company are authorized to take such actions and to execute such further agreements, instruments, applications, certificates, contracts or other documents as may be necessary or appropriate in connection with the foregoing to complete and effectuate the Company's proposed participation in the Navajo Project.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of said corporation this 26th day of August, 1970.

 /s/ Gerald J. Griffin
------------------------------------------
           Assistant Secretary	

-2-
RESOLUTION NO. 132
BE IT RESOLVED that upon approval by ordinance by the City Council of The City of Los Angeles of the Amendment and Supplement #1 to Navajo Project Participation Agreement (DWP No. 10334), the President or Vice President of the Board, or the General Manager and Chief Engineer or the Assistant General Manager and Chief Engineer of the Department of Water and Power, and the Secretary or Assistant Secretary of the Board be and they are hereby authorized and directed to execute said Amendment and Supplement #1 to Navajo Project Participation Agreement (DWP No. 10334) on behalf of this Department upon publication of the Ordinance.
I HEREBY CERTIFY that the foregoing is a full, true and correct copy of a resolution adopted by the Board of Water and Power Commissioners of The City of Los Angeles at its meeting held Aug 20 1970

/s/ Mary J. Born
----------------
     Secretary	

ORDINANCE NO. 119,849
CERTIFICATION
STATE OF CALIFORNIA,
} ss.
COUNTY OF LOS ANGELES,
I, REX E. LAYTON, City Clerk of the City of Los Angeles and ex-officio Clerk of the City Council of the City of Los Angeles, do hereby certify and attest the foregoing to be a full, true and correct copy of the original Ordinance No. 140,840, passed by the City Council of Los Angeles at its meeting of August 18, 1970, on file in my office, and that I have carefully compared the same with the original.
In Witness Whereof, I have hereunto set my hand and affixed the Seal of the City of Los Angles, this 20th day of August, 1970

   /s/ REX E. LAYTON

   City clerk or the City of Los Angeles

   /s/ Lee C. Gable
By -------------------------------------
                  Deputy	

CERTIFICATION
I, the undersigned, being the duly elected Secretary of Nevada Power Company, certify and declare that the following are true and correct copies of resolutions adopted by the Board of Directors at its meeting held September 19, 1969 and by the Executive Committee at its meeting held October 23, 1969, respectively:
RESOLVED: That the Executive Committee shall have the authority to authorize the signing of any and all contracts necessary to proceed with the Company's participation in the Navajo Project.
RESOLVED: That the officers of the Company are hereby authorized to sign all contracts necessary to proceed with the Company's proposed participation in the Navajo Project, to take the necessary action to qualify to do business in the State of Arizona and to take any other steps necessary or incidental thereto.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal of the corporation this 26th day of August, 1970.

/s/ Samuel P. Cowley
--------------------------------
Samuel P. Cowley, Secretary	

[SEAL]
RESOLUTION
WHEREAS, the Salt River Project Agricultural Improvement and Power District (Salt River Project) entered into a Participation Agreement dated September 30, 1969, to construct the Navajo Generating Project, and
WHEREAS, it is in the interest of the Salt River Project to amend and supplement said Participation Agreement to include necessary conditions for the efficient and successful construction and operation of said Navajo Project through an Amendment and Supplement No. 1;
NOW, THEREFORE, BE IT RESOLVED, That this Board hereby approves, ratifies and confirms entering into such Amendment and Supplement No. 1 and hereby directs, empowers, ratifies and confirms the execution and delivery of such document on behalf of the Salt River Project Agricultural Improvement and Power District by its President or Vice President and Secretary or Assistant Secretary.
CERTIFICATE
I, F. E. Smith, the duly appointed, qualified and acting Secretary of the Salt River Project Agricultural Improvement and Power District, HEREBY CERTIFY that the foregoing is a true and complete copy of a resolution adopted by the Board of Directors Of said District at a meeting thereof duly held on the 6th day of July 1970, at which meeting a quorum was present and voted.
WITNESS my hand and seal of Salt River Project Agricultural Improvement and Power District this 26th day of August 1970.

/s/ F.E. Smith
----------------------
F. E. Smith, Secretary	

TUCSON GAS & ELECTRIC COMPANY
Certified Copy of Resolutions
Adopted by the Board of Directors
RESOLVED, that the proper officers of the Company be, and they hereby are authorized to enter into a Participation Agreement between the United States of America, Arizona Public Service Company, Department of Water and Power of the City of Los Angeles, Nevada Power Company, Salt River Project Agricultural Improvement and Power District and Tucson Gas & Electric Company for the ownership of the Navajo Project wherein Tucson Gas & Electric Company shall own an undivided 7-1/2% interest in the Navajo Generating Station and varying percentage interests in the transmission system. The Agreement shall be substantially in the form of the draft filed with the Secretary of the Company marked "Filed September 23, 1969 with the Secretary of Tucson Gas & Electric Company, and be it
FURTHER RESOLVED, that the proper officers of the Company be, and they hereby are further authorized to execute and enter into on behalf of the Company the necessary Project Agreements contemplated by said Participation Agreement, and such other documents reasonably required to implement said Participation Agreement and Project Agreements.
* * * * * * * * * * * * *
I, P. L. ABBOTT, Secretary of TUCSON GAS & ELECTRIC COMPANY (hereinafter called the "Company"), DO HEREBY CERTIFY that the above and foregoing is a true and complete copy of resolutions duly adopted by the Board of Directors at the Regular Monthly Meeting held on the 23rd day of September, 1969, at which meeting a quorum was present and acted thereon; and
I DO FURTHER CERTIFY that said resolution is in full force and effect on the date hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this 20th day of August, 1970.

/s/ Authorized Signatory
------------------------
        Secretary	

 
Exhibit 12.1
PINNACLE WEST CAPITAL CORPORATION
COMPUTATION OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Twelve Months Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	223,163	 	 	$	246,590	 	 	$	225,384	 	 	$	236,563	 	 	$	327,367	 	
Income taxes	 	 	126,892	 	 	 	136,142	 	 	 	102,202	 	 	 	152,145	 	 	 	213,535	 	
Fixed charges	 	 	214,430	 	 	 	214,803	 	 	 	225,041	 	 	 	219,178	 	 	 	211,958	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total earnings	 	$	564,485	 	 	$	597,535	 	 	$	552,627	 	 	$	607,886	 	 	$	752,860	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	$	185,087	 	 	$	183,527	 	 	$	193,973	 	 	$	187,039	 	 	$	175,822	 	
Estimated interest portion of annual rents	 	 	29,343	 	 	 	31,276	 	 	 	31,068	 	 	 	32,139	 	 	 	36,136	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fixed charges	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	 	$	219,178	 	 	$	211,958	 	

Ratio of Earnings to Fixed Charges (rounded down)	 	 	2.63	 	 	 	2.78	 	 	 	2.45	 	 	 	2.77	 	 	 	3.55	 	

  
 
Exhibit 12.2
ARIZONA PUBLIC SERVICE COMPANY
COMPUTATION OF EARNINGS TO FIXED CHARGES
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Twelve Months Ended December 31,	 	
 	 	2005	 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	170,479	 	 	$	199,627	 	 	$	180,937	 	 	$	199,343	 	 	$	280,688	 	
Income taxes	 	 	98,010	 	 	 	120,030	 	 	 	86,854	 	 	 	126,805	 	 	 	183,136	 	
Fixed charges	 	 	178,437	 	 	 	181,372	 	 	 	181,793	 	 	 	168,985	 	 	 	166,939	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total earnings	 	$	446,926	 	 	$	501,029	 	 	$	449,584	 	 	$	495,133	 	 	$	630,763	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest charges	 	$	145,502	 	 	$	146,983	 	 	$	147,610	 	 	$	133,878	 	 	$	130,525	 	
Amortization of debt discount	 	 	4,085	 	 	 	4,854	 	 	 	3,337	 	 	 	2,888	 	 	 	2,650	 	
Estimated interest portion of annual rents	 	 	28,850	 	 	 	29,535	 	 	 	30,846	 	 	 	32,219	 	 	 	33,764	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fixed charges	 	$	178,437	 	 	$	181,372	 	 	$	181,793	 	 	$	168,985	 	 	$	166,939	 	

Ratio of Earnings to Fixed Charges (rounded down)	 	 	2.50	 	 	 	2.76	 	 	 	2.47	 	 	 	2.93	 	 	 	3.77	 	

  
 
EXHIBIT 12.3
PINNACLE WEST CAPITAL CORPORATION
COMPUTATION OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDEND REQUIREMENTS
(dollars in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Twelve Months Ended December 31	
 	 	2005	 	 	2004	 	 	2003	 	 	2002	 	 	2001	 	
Earnings:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income from continuing operations	 	$	223,163	 	 	$	246,590	 	 	$	225,384	 	 	$	236,563	 	 	$	327,367	 	
Income taxes	 	 	126,892	 	 	 	136,142	 	 	 	102,202	 	 	 	152,145	 	 	 	213,535	 	
Fixed charges	 	 	214,430	 	 	 	214,803	 	 	 	225,041	 	 	 	219,178	 	 	 	211,958	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	564,485	 	 	$	597,535	 	 	$	552,627	 	 	$	607,886	 	 	$	752,860	 	

Fixed Charges:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense	 	$	185,087	 	 	$	183,527	 	 	$	193,973	 	 	$	187,039	 	 	$	175,822	 	
Estimated interest portion of annual rents	 	 	29,343	 	 	 	31,276	 	 	 	31,068	 	 	 	32,139	 	 	 	36,136	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	 	$	219,178	 	 	$	211,958	 	

Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	 	$	350,055	 	 	$	382,732	 	 	$	327,586	 	 	$	388,708	 	 	$	540,902	 	
Net income from continuing operations	 	 	223,163	 	 	 	246,590	 	 	 	225,384	 	 	 	236,563	 	 	 	327,367	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Ratio of income before income taxes to net income	 	 	1.569	 	 	 	1.552	 	 	 	1.453	 	 	 	1.643	 	 	 	1.652	 	
Preferred stock dividends	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred stock dividend requirements — ratio (above) times preferred stock dividends	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	 	$	—	 	

Fixed Charges and Preferred Stock Dividend Requirements:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed charges	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	 	$	219,178	 	 	$	211,958	 	
Preferred stock dividend requirements	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	 	$	214,430	 	 	$	214,803	 	 	$	225,041	 	 	$	219,178	 	 	$	211,958	 	

Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements (rounded down)	 	 	2.63	 	 	 	2.78	 	 	 	2.45	 	 	 	2.77	 	 	 	3.55	 	

  

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.
Apex Power LLC
Northwind Phoenix LLC
Tucson District Energy LLC
Crest Power, LLC
SunCor Development Company
SunCor Golf, Inc.
Westworld Golf Course, L.L.C.
Golden Heritage Homes, Inc.
Golden Heritage Construction, Inc.
Golden Heritage Construction Nevada, LLC
HFS Mortgage, L.L.C. (formerly Heritage Financial Services, LLC)
SCM, Inc.
SunCor Realty & Management Company
Palm Valley Golf Club, Inc.
Rancho Viejo de Santa Fe, Inc.
Ranchland Utility Company
SunCor Idaho, Inc.
Avimor, LLC (formerly SunCor Idaho, LLC)
Type Two, Inc.
StoneRidge- Prescott Valley, L.L.C.
StoneRidge Golf Course, LLC
Hayden Ferry Lakeside East Joint Committee, Inc.
Hayden Ferry Lakeside II, L.L.C.
Hayden Ferry Lakeside III, L.L.C.
Hayden Ferry Lakeside, L.L.C.
Lakeside Residential Communities, L.L.C.
Edgewater at Hayden Ferry Lakeside, L.L.C.
BV at Hayden Ferry Lakeside, L.L.C.
Waterford at Hayden Ferry Lakeside, L.L.C.
Club West Golf Course LLC
SunRidge Canyon, L.L.C.
Sedona Golf Resort, L.C.
Kabuto SunCor Joint Venture
Centrepoint Associates, L.L.C.
Hidden Hills of Scottsdale, L.C.

 

Talavi Associates, L.L.C.
Coral Canyon Town Center, L.L.C.
Coral Canyon HD, L.L.C.
Foothills Sewer Company
Highland Water Company
Palm Valley Professional Plaza, LLC
Riverside Distribution Center, LLC
SDC Prescott Valley, LLC
SDC Prescott, LLC
StoneRidge Commercial, L.L.C.
SunCor New Mexico, Inc.
SunCor Albuquerque, LLC
SunCor Construction NM, LLC
El Dorado Investment Company
Aegis Technologies, Inc.
Underground Imaging Technologies, LLC
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 and 333-121510 on Form S-3; in Registration Statement Nos. 33-47534, 333-40796, 33-54307, 333-95035 and 333-91786 on Form S-8; and in Registration Statement No. 2-96386 on Form S-14 of our report dated March 8, 2006, 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, 2005.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 8, 2006

 

Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-121512 on Form S-3; and in Registration Statement No. 333-4616 on Form S-8 of our report dated March 8, 2006, 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, 2005.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 8, 2006

 

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 most recent 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 10, 2006.
 	 	 	
 	 	/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 most recent 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 10, 2006.
 	 	 	
 	 	/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 most recent 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 10, 2006.
 	 	 	
 	 	/s/  Jack E. Davis	
 	 	 	
 	 	Jack E. Davis	
 	 	President and Chief Executive Officer	

 

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 most recent 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 10, 2006.
 	 	 	
 	 	/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, 2005, 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 10, 2006.
 	 	 	
 	 	/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, 2005 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 10, 2006.
 	 	 	
 	 	/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, 2005 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 10, 2006.
 	 	 	
 	 	/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, 2005 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 10, 2006.
 	 	 	 	 	
 	 	/s/ Donald E. Brandt	 	 	
 	 	Donald E. Brandt	 	 	
 	 	Executive Vice President and	 	 	
 	 	Chief Financial Officer	 	 	

 

Exhibit 99.29
PINNACLE WEST CAPITAL CORPORATION
NON-GAAP FINANCIAL MEASURE RECONCILIATION — OPERATING INCOME
(GAAP MEASURE) TO GROSS MARGIN (NON-GAAP FINANCIAL MEASURE)
(in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	TWELVE MONTHS ENDED	 	 	 	 	
 	 	DECEMBER 31,	 	 	Increase (Decrease)	 	
 	 	2005	 	 	2004	 	 	Pretax	 	 	After Tax	 	
RECONCILIATION OF REGULATED ELECTRICITY SEGMENT GROSS MARGIN	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Income (closest GAAP measure)	 	$	515,289	 	 	$	517,965	 	 	$	(2,676	)	 	$	(1,632	)	
Plus:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operations and maintenance	 	 	635,827	 	 	 	592,320	 	 	 	43,507	 	 	 	26,526	 	
Real estate segment operations	 	 	278,366	 	 	 	284,194	 	 	 	(5,828	)	 	 	(3,553	)	
Depreciation and amortization	 	 	347,652	 	 	 	391,597	 	 	 	(43,945	)	 	 	(26,793	)	
Taxes other than income taxes	 	 	132,040	 	 	 	120,722	 	 	 	11,318	 	 	 	6,901	 	
Other expenses	 	 	51,987	 	 	 	34,108	 	 	 	17,879	 	 	 	10,901	 	
Regulatory disallowance	 	 	138,562	 	 	 	—	 	 	 	138,562	 	 	 	84,481	 	
Marketing and trading segment fuel and purchased power	 	 	293,091	 	 	 	320,667	 	 	 	(27,576	)	 	 	(16,813	)	
Less:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Real estate segment revenues	 	 	338,031	 	 	 	350,315	 	 	 	(12,284	)	 	 	(7,490	)	
Other revenues	 	 	61,221	 	 	 	42,816	 	 	 	18,405	 	 	 	11,222	 	
Marketing and trading segment revenues	 	 	351,558	 	 	 	400,628	 	 	 	(49,070	)	 	 	(29,918	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment gross margin	 	$	1,642,004	 	 	$	1,467,814	 	 	$	174,190	 	 	$	106,204	 	

RECONCILIATION OF MARKETING AND TRADING SEGMENT GROSS MARGIN	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Income (closest GAAP measure)	 	$	515,289	 	 	$	517,965	 	 	$	(2,676	)	 	$	(1,632	)	
Plus:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operations and maintenance	 	 	635,827	 	 	 	592,320	 	 	 	43,507	 	 	 	26,526	 	
Real estate segment operations	 	 	278,366	 	 	 	284,194	 	 	 	(5,828	)	 	 	(3,553	)	
Depreciation and amortization	 	 	347,652	 	 	 	391,597	 	 	 	(43,945	)	 	 	(26,793	)	
Taxes other than income taxes	 	 	132,040	 	 	 	120,722	 	 	 	11,318	 	 	 	6,901	 	
Other expenses	 	 	51,987	 	 	 	34,108	 	 	 	17,879	 	 	 	10,901	 	
Regulatory disallowance	 	 	138,562	 	 	 	—	 	 	 	138,562	 	 	 	84,481	 	
Regulated electricity segment fuel and purchased power	 	 	595,141	 	 	 	567,433	 	 	 	27,708	 	 	 	16,894	 	
Less:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Real estate segment revenues	 	 	338,031	 	 	 	350,315	 	 	 	(12,284	)	 	 	(7,490	)	
Other revenues	 	 	61,221	 	 	 	42,816	 	 	 	18,405	 	 	 	11,222	 	
Regulated electricity segment revenues	 	 	2,237,145	 	 	 	2,035,247	 	 	 	201,898	 	 	 	123,097	 	

Marketing and trading segment gross margin	 	$	58,467	 	 	$	79,961	 	 	$	(21,494	)	 	$	(13,104	)	

 

PINNACLE WEST CAPITAL CORPORATION
NON-GAAP FINANCIAL MEASURE RECONCILIATION — OPERATING INCOME
(GAAP MEASURE) TO GROSS MARGIN (NON-GAAP FINANCIAL MEASURE)
(in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	TWELVE MONTHS ENDED	 	 	 	 	
 	 	DECEMBER 31,	 	 	Increase (Decrease)	 	
 	 	2004	 	 	2003	 	 	Pretax	 	 	After Tax	 	
RECONCILIATION OF REGULATED ELECTRICITY SEGMENT GROSS MARGIN	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Income (closest GAAP measure)	 	$	517,965	 	 	$	473,252	 	 	$	44,713	 	 	$	27,262	 	
Plus:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operations and maintenance	 	 	592,320	 	 	 	548,732	 	 	 	43,588	 	 	 	26,576	 	
Real estate segment operations	 	 	284,194	 	 	 	305,974	 	 	 	(21,780	)	 	 	(13,279	)	
Depreciation and amortization	 	 	391,597	 	 	 	435,140	 	 	 	(43,543	)	 	 	(26,548	)	
Taxes other than income taxes	 	 	120,722	 	 	 	110,270	 	 	 	10,452	 	 	 	6,373	 	
Other expenses	 	 	34,108	 	 	 	23,254	 	 	 	10,854	 	 	 	6,618	 	
Marketing and trading segment fuel and purchased power	 	 	320,667	 	 	 	344,862	 	 	 	(24,195	)	 	 	(14,752	)	
Less:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Real estate segment revenues	 	 	350,315	 	 	 	361,604	 	 	 	(11,289	)	 	 	(6,883	)	
Other revenues	 	 	42,816	 	 	 	27,929	 	 	 	14,887	 	 	 	9,077	 	
Marketing and trading segment revenues	 	 	400,628	 	 	 	391,196	 	 	 	9,432	 	 	 	5,751	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
Regulated electricity segment gross margin	 	$	1,467,814	 	 	$	1,460,755	 	 	$	7,059	 	 	$	4,305	 	

RECONCILIATION OF MARKETING AND TRADING SEGMENT GROSS MARGIN	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Income (closest GAAP measure)	 	$	517,965	 	 	$	473,252	 	 	$	44,713	 	 	$	27,262	 	
Plus:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operations and maintenance	 	 	592,320	 	 	 	548,732	 	 	 	43,588	 	 	 	26,576	 	
Real estate segment operations	 	 	284,194	 	 	 	305,974	 	 	 	(21,780	)	 	 	(13,279	)	
Depreciation and amortization	 	 	391,597	 	 	 	435,140	 	 	 	(43,543	)	 	 	(26,548	)	
Taxes other than income taxes	 	 	120,722	 	 	 	110,270	 	 	 	10,452	 	 	 	6,373	 	
Other expenses	 	 	34,108	 	 	 	23,254	 	 	 	10,854	 	 	 	6,618	 	
Regulated electricity segment fuel and purchased power	 	 	567,433	 	 	 	517,320	 	 	 	50,113	 	 	 	30,554	 	
Less:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Real estate segment revenues	 	 	350,315	 	 	 	361,604	 	 	 	(11,289	)	 	 	(6,883	)	
Other revenues	 	 	42,816	 	 	 	27,929	 	 	 	14,887	 	 	 	9,077	 	
Regulated electricity segment revenues	 	 	2,035,247	 	 	 	1,978,075	 	 	 	57,172	 	 	 	34,858	 	

Marketing and trading segment gross margin	 	$	79,961	 	 	$	46,334	 	 	$	33,627	 	 	$	20,504	 	

  

Exhibit 99.30
ARIZONA PUBLIC SERVICE COMPANY
NON-GAAP FINANCIAL MEASURE RECONCILIATION — OPERATING INCOME
(GAAP MEASURE) TO GROSS MARGIN (NON-GAAP FINANCIAL MEASURE)
(in thousands)
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	TWELVE MONTHS ENDED	 	 	 	 	
 	 	DECEMBER 31,	 	 	Increase (Decrease)	 	
 	 	2005	 	 	2004	 	 	Pretax	 	 	After Tax	 	
RECONCILIATION OF GROSS MARGIN	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Income (closest GAAP measure)	 	$	381,613	 	 	$	328,981	 	 	$	52,632	 	 	$	32,079	 	
Plus:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operations and maintenance	 	 	591,941	 	 	 	540,277	 	 	 	51,664	 	 	 	31,489	 	
Depreciation and amortization	 	 	325,174	 	 	 	336,648	 	 	 	(11,474	)	 	 	(6,993	)	
Income taxes	 	 	157,273	 	 	 	113,696	 	 	 	43,577	 	 	 	26,560	 	
Other taxes	 	 	125,810	 	 	 	114,265	 	 	 	11,545	 	 	 	7,037	 	

Gross margin	 	$	1,581,811	 	 	$	1,433,867	 	 	$	147,944	 	 	$	90,172	 	

 	 	TWELVE MONTHS ENDED	 	 	 	 	
 	 	DECEMBER 31,	 	 	Increase (Decrease)	 	
 	 	2004	 	 	2003	 	 	Pretax	 	 	After Tax	 	
RECONCILIATION OF GROSS MARGIN	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating Income (closest GAAP measure)	 	$	328,981	 	 	$	298,158	 	 	$	30,823	 	 	$	18,787	 	
Plus:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operations and maintenance	 	 	540,277	 	 	 	513,604	 	 	 	26,673	 	 	 	16,257	 	
Depreciation and amortization	 	 	336,648	 	 	 	389,240	 	 	 	(52,592	)	 	 	(32,055	)	
Income taxes	 	 	113,696	 	 	 	91,646	 	 	 	22,050	 	 	 	13,439	 	
Other taxes	 	 	114,265	 	 	 	108,852	 	 	 	5,413	 	 	 	3,299	 	

Gross margin	 	$	1,433,867	 	 	$	1,401,500	 	 	$	32,367	 	 	$	19,727